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This appeal by the assessee is directed against the final assessment order passed on 17.10.2012 by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2008-09.

2. First issue raised in this appeal is against the making of addition towards transfer pricing adjustment amounting to Rs.15,41,06,180/-.

3. Briefly stated, the facts of the case are that the assessee is a 100% subsidiary of Headstrong Services LLC. The assessee is a 100% export oriented unit (EOU) for manufacture and export of computer software. It is engaged in the provision of Software development services and IT enabled services (ITES) to its AEs. The assessee reported two international transactions, namely, Provision of software services and Provision of IT enabled services. The AO made reference to the Transfer Pricing Officer (TPO) for determination of the ALP of these international transactions. The TPO made transfer pricing adjustment amounting to Rs.60,39,585/- for the international transaction of ITES. He also took up the international transaction of 'Software services' with transacted value of Rs.128,96,15,682/-. It was noticed that the assessee selected itself as a Tested party by choosing the Transactional Net Margin Method (TNMM) as the most appropriate method. The assessee used Operating Profit/Total Cost (OP/TC) as its Profit Level Indicator (PLI) which was shown at 16.53%, calculated by taking weighted average margin of four years, being the actual figures for the financial year 2007-08 plus projected figures for the coming three years. The assessee chose 23 companies as comparable, with their average PLI at 14.43%. Thus it was demonstrated that this international transaction was at arm's length price (ALP). The TPO accepted the assessee as a tested party and also the TNMM as the most appropriate method. However, the assessee's PLI, computed on the basis of profit of four years including projected profit of three years, was rejected. The TPO considered the operating profit margin of the assessee for the current year alone, calculated on the basis of actual figures. He made certain amendments in the list of comparables in the sense that some of the comparables chosen by the assessee were removed while a few new were introduced. Average PLI of comparables, being OP/OC computed at 23.82%, was applied as a benchmark for working out the transfer pricing adjustment amounting to Rs.20,18,08,602/- for this international transaction. The assessee challenged the draft order before the Dispute Resolution Panel (DRP). The TPO in his order giving effect to directions given by the DRP, did not make any adjustment in relation to the international transaction of ITES. As regards the other international transaction of `Software development services', he recomputed the profit margin of comparables at 19.73%. By applying the same to the total operating cost incurred by the assessee, the TPO downscaled transfer pricing adjustment to Rs.15,41,06,180/-. It is this amount which was added by the AO in the final assessment order, which is subject matter of the instant appeal.

(i) Avani Cimcon Ltd.

14.1. This company was not chosen by the assessee as a comparable for the international transaction of Software development services. The TPO included it by observing that it was also engaged into software development consulting company with client base in Australia, US, UK, Africa and the European Union with major focus on the travel and insurance industry. The DRP also rejected the assessee's contention against the inclusion of this company.

14.2. We have perused the Annual accounts of this company available in the assessee's paper book. Apart from its Balance sheet, Profit & loss account and some Schedules, the Director's Report and Auditor's Report, etc. of this company are not available. The ld. AR contended that the information of this company available in the public domain for the year under consideration has been downloaded and placed before us and except for these documents, no other reports etc., constituting part of Annual report for the year ending 31.3.2008, are available. However, our attention was drawn towards certain Tribunal orders which have considered the functional profile of this company on the basis of information available on its website. First is Tribunal order in Agnity India Technologies Pvt. Ltd. Vs. DCIT (ITA No.6485/Del/2012). Vide its order dated 20.9.2013, the tribunal considered the functional profile of this company by noticing it to be a Product company owning software products like Dxchange, Travel Solutions, Insurance Solutions, Customer Appreciation, etc. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. Vs. ITO (ITA No.7633/N/2012). Vide its order dated 6.11.2013, the Tribunal for the assessment year 2008-09 has noticed Avani Cimcon Ltd. to be a Product company. No contrary material has been placed before us by the ld. DR to show the functional profile of this company matching with the assessee. When contrasted with the assessee company, which is engaged in providing software development services to its group concerns, we fail to see as to how a software product company like Avani Cimcon Ltd., having intellectual property rights over some of the products developed by it, can be compared with the assessee on an entity level. We, therefore, order for the elimination of this company from the list of comparables.

(v) KALS Information Systems Ltd. (Seg.) 18.1. This company was not chosen by the assessee as a comparable. However, the TPO included it in the final list. The sum and substance of the reasoning adopted by the TPO for considering this company as comparable is that it is also a software development and consulting company, meeting the filters adopted by him.

18.2. We have gone through the Annual accounts of this company, a copy of which is available in the paper book. Schedule no. 16 comprising Notes to the Financial Statements gives background of this company to be 'engaged in development of software and software products since its inception.' This company consists of STPI unit engaged in development of software and software products. Segmental information of this company is available in the paper book which has been divided into two parts, namely, `Application software segment' and `Training segment'. It is the `Application software segment' of this company, which has been adopted by the TPO. The development of software and all software products have been clubbed under the 'Application software' segment. Since the figures of this company taken by the TPO for making comparison with the assessee include the effect of software products as well, apart from software development services, the same cannot be considered as comparable. It is obvious that a product company cannot be compared with a company engaged in providing software development services because of difference in the inherent characteristics of both. We, therefore, order for the removal of this company from the set of comparables.

(vi) Wipro Ltd. (Seg.) 19.1. The TPO included this company in the list of comparables by overruling the assessee's objections about the super normal profits earned by this company; very high turnover; owning significant IPRS in the form of patents; and engaged in R& D activity. The assessee failed to persuade the DRP to fall in line with its reasoning for the exclusion of this company from the final set of comparables. That is how, the assessee is before us.

19.2. We have heard the rival submissions and perused the relevant material on record. It is noticed that the TPO has taken 'Software development' segment of this company on standalone basis. We agree with the TPO that super normal profits or very high turnover cannot be criterion for treating an otherwise functionally comparable company as incomparable. However, the fact remains that this company own significant IPRS in the form of patents which are obviously used in the rendering software development services. Apart from that, this company is engaged in R&D activity. Per contra, the assessee in question is only a captive software development service provider not owning any IPRS. Owning or not owning IPRS in the form of patents in software developed by a company, has an important bearing on the profits earned by it from the 'Software development services' segment. A company which does not own any IPRS and carries on the activity of rendering software development services at its own, cannot be compared with a company which provides software development services by using its own IPRS in the form of patents of software. Under such circumstances, we hold that this company cannot be considered as comparable at segmental level. The same is ex consequenti directed to expelled from the set of comparables.