M/s Kodiak Networks India Pvt. Ltd., Bangalore V. DCIT, Bangalore

CO 119/BANG/2015

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 0958 (ITAT-BANGALORE)
• Duration Of Justice: 1 month(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 30-07-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 08-07-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 30-06-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR SHANKAR PRASAD K J
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 92D; 92E; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT (TP) A NO.532/BANG/2013 ASSESSMENT YEAR : 2005- 06 DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(5), BANGALORE 560 001. VS. M/S. KODIAK NETWORKS INDIA PVT.LTD., 401, 4 TH FLOOR, PRESTIGE SIGMA, 3, VITTAL MALLYA ROAD, BANGALORE -560 001. PAN: AACCK 0978 J APPELLANT RESPONDENT C.O.NO.119/BANG/2015 [IN IT (TP) A NO.532/BANG/2013] ASSESSMENT YEAR : 2005-06 M/S. KODIAK NETWORKS INDIA BANGALORE -560 001. PAN: AACCK 0978 J VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 11(5), 14/3, 5TH FLOOR, BANGALORE 560 001. CROSS-OBJECTOR / ASSESSEE RESPONDENT REVENUE BY : SHRI DR. SHANKAR PRASAD, K., JCIT(DR) ASSESSEE BY : SHRI PADAMCHAND KHINCHA, C.A. DATE OF HEARING : 08.07.2015 DATE OF PRONOUNCEMENT : 30.07 .2015 IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 2 OF 38 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER IT(TP)A.NO.532/BANG/2013 IS AN APPEAL BY THE REVEN UE AGAINST THE ORDER DATED 09.01.2009 OF CIT(A)-LTU, BANGALORE, RE LATING TO AY 2005-06. THE ASSESSEE HAS FILED CROSS-OBJECTION, C.O.NO.119/ BANG/2015, AGAINST THE VERY SAME ORDER OF THE CIT(A). 2. THE ISSUE THAT ARISES FOR CONSIDERATION IN THE APPEAL BY THE REVENUE AND THE C.O. BY THE ASSESSEE ARE RELATING T O THE ADDITION MADE TO THE TOTAL INCOME CONSEQUENT TO DETERMINATION OF ARM S LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INT O BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE) U/S.92 OF THE INCOME TA X ACT, 1961 (ACT). THE ADDITION MADE CONSEQUENT TO DETERMINATION OF ALP BY THE TPO AND ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT WAS A SUM OF RS.2,12,76,048. THE CIT(A) GAVE PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE RELIEF ALLOWED BY THE CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. AGGRIEVED BY THE ORDER OF CIT(A) IN NOT APPLYING CERTAIN FILTERS WHILE CHOOSING COMPARABLE COMPANIES THE ASSESSEE HA S FILED C.O. 3. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF KO DIAK, US. AND IT PROVIDES SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO ITS AE. THE ASSESSEE IS A ROUTINE SERVICE PROVIDER FOR THE GR OUP. WORKS AS A CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER. DURING THE FINANCIAL YEAR 2004-05 IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 3 OF 38 RELEVANT TO THE ASSESSMENT YEAR 2005- 06, ONE OF TH E INTERNATIONAL TRANSACTION THAT TOOK PLACE BETWEEN THE ASSESSEE AN D ITS AES WAS PROVISION OF SOFTWARE DEVELOPMENT AND SUPPORT SERVI CES AT A PRICE OF RS. 16,23,64,188/-. 4. IN SUPPORT OF THE ASSESSEES CLAIM THAT THE PRIC E CHARGED BY IT FOR SERVICES RENDERED TO ITS AE WAS AT ARMS LENGTH, TH E ASSESSEE FILED A REPORT AS REQUIRED BY THE PROVISIONS OF SECTION 92E OF THE ACT IN FORM 3EB TOGETHER WITH DETAILED ANALYSIS. THE ASSESSEE ADOP TED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. OPERATING PROFITS TO COST WAS ADOPTED AS THE PROFIT LEVEL INDICATOR ( PLI ). THE PLI OF THE ASSESSEE WAS ARRIVED AT AS FO LLOWS: REVENUE RS.16,23,64,188 PBIT OPERATING PROFIT (OP.INCOME OP.EXPENSES) RS. 1,48,73,837 PBIT ON COST OP.PROFIT/TOTAL COST (OP/TC) 10.08% 5. THE ASSESSEE SELECTED A SET OF 45 COMPARABLE CO MPANIES AND ARRIVED AT AN ARITHMETIC PROFIT MEAN MARGIN OF 9.97 % OF THOSE COMPARABLES AND COMPARED THE SAME WITH THE ASSESSEES PROFIT MA RGIN OF 10.08% AND CLAIMED THAT THE PRICE PAID IN THE INTERNATIONAL TR ANSACTION WITH AE WAS AT ARMS LENGTH. THE TRANSFER PRICING OFFICER ( TPO ) REJECTED THE TP STUDY AS ABOVE DONE BY THE ASSESSEE. HE ARRIVED AT A FINAL SET OF 17 COMPARABLE COMPANIES IN WHICH 10 COMPANIES CHOSEN BY THE ASSES SEE IN ITS TP STUDY IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 4 OF 38 WERE ALSO INCLUDED. THE SET OF 17 COMPARABLE COMPA NIES IS GIVEN AS ANNEXURE-I TO THIS ORDER . 6. THE ASSESSEE RAISED VARIOUS OBJECTIONS TO THE M ETHODOLOGY ADOPTED AND THE REASONS ASSIGNED BY THE TPO FOR REJ ECTING THE COMPARABLE CHOSEN BY THE ASSESSEE IN ITS TP STUDY. THE TPO F INALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE PROFIT MARGINS OF COMPARABLE COMPANIES SET OUT IN ANNEXURE-I TO THIS ORDER , ARRIVED AT ARITHMETIC MEAN OF 24.51% AFTER WORKING CAPITAL ADJUSTMENT AND 26.59% BEFORE WORKING CAPITAL ADJUSTMENT. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 17.6 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 26.59% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) 2.08% ADJ.ARITHMETIC MEAN PLU 24.51% ARMS LENGTH PRICE: OPERATING COST RS.14,74,90,531*/- ARMS LENGTH MARGIN 24.51% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 125.53% OF OPERATING COST RS.18,36,40,236/- *AFTER EXCLUDING THE ADVANCES WRITTEN OFF. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 5 OF 38 17.7 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRIC E: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 124.51% OF OPERATING COST RS.18,36,40,236 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.16,23,64,188 SHORTFALL BEING ADJUSTMENT U/S.92CA RS. 2,12,76,048 . 7. ON APPEAL BY THE ASSESSEE, THE CIT(A) PARTLY AL LOWED THE APPEAL OF THE ASSESSEE. THE FOLLOWING WERE THE KEY FINDINGS OF THE CIT(A):- (I) OUT OF THE 17 COMPANIES CHOSEN BY THE TPO AS T HE FINAL SET OF COMPARABLE COMPANIES, THE CIT(A) EXCLUDED 2 COMPANI ES FOR THE REASON THAT THESE COMPANIES HAD RELATED PARTY TRANS ACTION OF MORE THAN 10%. THE CIT(A) APPLIED THE FILTER OF RELATE D PARTY TRANSACTION BY HOLDING THAT TO BE CHOSEN AS A COMPARABLE COMPAN Y, THE COMPARABLE COMPANIES SHOULD NOT HAVE RELATED PARTY TRANSACTION OF MORE THAN 10% OF ITS TURNOVER. BY DOING SO, THE CI T(A) EXCLUDED GEOMETRIC SOFTWARE SOLUTIONS CO. LTD., AND FOURSOFT LTD. FROM THE FINAL LIST OF 17 COMPARABLE COMPANIES CHOSEN BY THE TPO AS THE RPT IN THESE TWO COMPANIES ACCORDING TO THE CIT(A) WAS MORE THAN 10% OF ITS TURNOVER. IN COMING TO THE ABOVE CONCLU SION, THE CIT(A) FOLLOWED THE DECISIONS OF THIS HONBLE TRIBUNAL IN THE CASE OF SONY IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 6 OF 38 INDIA PVT. LTD. VS. DCIT ITA NO.1189/DEL/2005, 819/ DEL/2007 & 820/DEL/2007 & MENTOR GRAPHICS (NOIDA) (P.) LTD. VS DCIT (2007] 109 LTD 101 (DEL). (II) TWO COMPANIES, EXENSYS SOFTWARE SOLUTIONS LT D., AND THIRDWARE SOLUTIONS LTD., WERE EXCLUDED BECAUSE THEY WERE FUN CTIONALLY NOT COMPARABLE AND WERE ALSO HAVING ABNORMAL PROFITS. IN COMING TO THE ABOVE CONCLUSION, THE CIT(A) FOLLOWED THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF SAP INDIA PVT. LTD V . ITO [ITA NO. 398/8/2008 AND E-GAIN COMMUNICATIONS (P) LTD. VS. I TO WARD 1(4), PUNE (2008) (23) SOT- 385 (PUNE-TRIB.). (III) THE CIT(A) HELD THAT SATYAM COMPUTER SERVICE S LTD.,, L & T INFOTECH LTD., INFOSYS LTD., FLEXOTRONICS SOFTWARE SYSTEM (SEG) AND I GATE GLOBAL SOLUTIONS (SEG.) HAVE TO BE EXCLUDED F ROM COMPARABLE COMPANIES BECAUSE THESE COMPANIES HAD TURNOVER OF M ORE THAN RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSES SEE WHOSE TURNOVER IS ONLY RS.16.24 CRORES (APPROX.). IN COM ING TO THE ABOVE CONCLUSION, THE CIT(A) PLACED RELIANCE ON THE DECIS ION OF THE ITAT BANGALORE IN THE CASE OF M/S.GENESYS INTEGRATING SY STEMS (I) PVT.LTD. VS. DCIT ITA NO.1231/BANG/2010 WHEREIN IT WAS HELD THAT COMPANIES HAVING HIGH TURNOVER CANNOT BE COMPARED W ITH COMPANIES HAVE LOW TURNOVER. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 7 OF 38 IV) TATA ELXSI LTD. WAS EXCLUDED BY THE CIT(A) ON THE GROUND IT WAS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE WHICH IS A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER WHEREAS TATA ELXSI LTD., WAS ENGAGED IN DEVELOPMENT OF NICHE PRODUCTS AND SERVIC ES, WHICH WAS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. IN C OMING TO THE ABOVE CONCLUSION, THE CIT(A) PLACED RELIANCE ON THE DECIS ION OF THE ITAT MUMBAI IN THE CASE TELCORDIA TECHNOLOGIES PVT.LTD. VS. ACIT ITA NO.7821/MUM/2011. 8. THE CIT(A) ALSO HELD THAT THE ASSESSEE WOULD BE ENTITLED TO 5% STANDARD DEDUCTION UNDER THE PROVISO TO SEC.92CA(2) OF THE ACT. AFTER GIVING EFFECT TO THE FINDINGS GIVEN ABOVE, THE ARIT HMETIC MEAN OF THE PROFIT MARGINS OF THE SEVEN REMAINING COMPARABLE COMPANIES VIZ., BODHTREE CONSULTING LTD., LANCO GLOBAL SOLUTIONS LTD., SANKH YA INFOTECH LTD., SASKEN NETWORK SYSTEMS LTD., R.S.SOFTWARE (INDIA) L TD., SASKEN COMMUNICATION LTD., AND M/S. VISUAL SOFT TECHNOLOGI ES LTD., WOULD BE 15.91% AFTER WORKING CAPITAL ADJUSTMENT. AFTER 5% STANDARD DEDUCTION UNDER PROVISO TO SEC.92CA(2) ALLOWED BY THE CIT(A), THE ARITHMETIC MEAN WOULD BE 10.91% AS AGAINST THE ASSESSEES PROFIT MA RGIN OF 10.08%. THEREFORE THERE WOULD STILL BE A VERY NEGLIGIBLE AD DITION THAT WILL BE SUSTAINED EVEN AFTER THE CIT(A)S ORDER. 9. THE REVENUE IS IN APPEAL BEFORE AGAINST THE ORD ER OF THE CIT(A). THE ASSESSEE HAS FILED CROSS OBJECTION BEFORE THE T RIBUNAL TO EMPHASIS THE IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 8 OF 38 STAND OF THE ASSESSEE THAT SOME OF THE FILTERS WHIC H THE ASSESSEE SUBMITTED SHOULD BE APPLIED IN CHOOSING SOME COMPAR ABLE COMPANIES HAVE NOT BEEN ACCEPTED BY THE CIT(A). 10. THE REVENUE IS IN APPEAL ON THE FOLLOWING GROU NDS (RELEVANT GROUNDS RELATING TO TP ADJUSTMENT) 1. THE ORDER OF THE LEARNED CIT (APPEALS), IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE, IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE SI ZE AND TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TR EATING A COMPANY AS A COMPARABLE AND ACCORDINGLY ERRED IN EX CLUDING M/S. SATYAM COMPUTER SERVICES LTD , M/S. FLEXTRONIC S SOFTWARE SERVICES LTD, IGATE GLOBAL SOLUTIONS LTD, INFOSYS T ECHNOLOGIES LTD. M/S. L & T INFOTECH LTD, AS COMPARABLES. 3. THE LD. CIT(A) ERRED IN REJECTING THE DIMINISHI NG REVENUE FILTER USED BY THE TPO TO EXCLUDE COMPANIES THAT DO NOT REFLECT THE NORMAL INDUSTRY TREND. 4. THE LD. CIT(A), IN FACTS AND CIRCUMSTANCES OF T HE CASE, ERRED IN HOLDING THAT M/S. EXENSYS SOFTWARE SOLUTIO NS LTD. CANNOT BE TAKEN AS A COMPARABLE BEING FUNCTIONALLY DIFFERENT. 5. THE LD. CIT(A), IN FACTS AND CIRCUMSTANCES OF T HE CASE, ERRED IN HOLDING THAT M/S. EXENSYS SOFTWARE SOLUTIO NS LTD. AND M/S THIRDWARE SOLUTIONS LTD. CANNOT BE TAKEN AS A C OMPARABLES, BEING FUNCTIONALLY DIFFERENT. 6. THE LD. CIT(A), IN FACTS AND CIRCUMSTANCES OF T HE CASE, ERRED IN HOLDING THAT M/S. GEOMETRIC SOFTWARE SOLUT ION LTD. BEING FUNCTIONALLY DIFFERENT, CANNOT BE TAKEN AS A COMPARABLES. 7. THE LD. CIT(A), IN FACTS AND CIRCUMSTANCES OF T HE CASE, ERRED IN HOLDING THAT M/S. TATA ELXSI LTD. BEING FU NCTIONALLY DIFFERENT, CANNOT BE TAKEN AS A COMPARABLE. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 9 OF 38 8. THE LD. CIT(A), IN FACTS AND CIRCUMSTANCES OF T HE CASE, ERRED IN HOLDING THAT THE TPO OUGHT TO HAVE EXCLUDE D COMPARABLES HAVING ANY RELATED PARTY TRANSACTIONS A ND NOT JUST ONLY THOSE WITH MORE THAT 25% RELATED PARTY TRANSAC TIONS ON SALES. 9. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE AS SESSEE IS ELIGIBLE FOR A STANDARD DEDUCTION OF 5% FROM THE AR MS LENGTH PRICE (ALP) UNDER THE PROVISO OF SECTION 92C(2) OF THE INCOME- TAX ACT. 10. THE CIT(A) ERRED IN NOT APPRECIATING THAT IF A NY FILTER OR CRITERIA APPLIED BY THE TAXPAYER FOR SEARCH OF COMP ARABLES IS ACCEPTED OR ANY FILTER OR CRITERIA APPLIED BY THE T PO IS RELAXED, THE ENTIRE ACCEPT / REJECT MATRIX CHANGES RESULTING IN A NEW COMPARABLE SET INCLUDING THOSE COMPANIES WHICH ARE NOT TAKEN EITHER BY THE TAXPAYER OR BY THE TPO IN ITS FINAL C OMPARABLE SET AND WHICH MAY NOT BE FINDING PLACE IN THE TP ORDER U/S 92CA(1). 11. THE CIT(A) ERRED IN NOT APPRECIATING THAT, IN ESSENCE, ANY DISTURBANCE IN ANY ONE OF THE CRITERIA OF THE TAXPA YER OR THE TPO RESULTS IN FRESH COMPARABILITY ANALYSIS AND THEREFO RE A PIECEMEAL APPROACH NEGATES THE WHOLE CONCEPT OF COMPARABILITY ANALYSIS. 12. THE CIT(A) ERRED IN NOT APPRECIATING THAT THE ENTIRE SET OF TPOS COMPARABLES NEEDED TO CONSIDERED IN TOTO. 11. THE GROUNDS RAISED BY THE ASSESSEE IN THE CROSS OBJECTION ARE AS FOLLOWS: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOM E TAX (APPEALS) LARGE TAX PAYERS UNIT, BANGALORE [CIT ( APPEALS)], TO THE EXTENT PREJUDICIAL TO THE RESPONDENT IS BAD IN LAW. 2. THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMI NG THE ACTION OF THE ASSESSING OFFICER IN MAKING A REFEREN CE TO TRANSFER PRICING OFFICER FOR DETERMINING THE ARMS LENGTH PR ICE WITHOUT DEMONSTRATING AS TO HOW OR WHY IT WAS NECESSARY AND EXPEDIENT TO DO SO. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 10 OF 38 3. THE LEARNED CIT(APPEALS), HAS ERRED IN CONFIRMI NG THE ACTION OF THE ASSESSING OFFICER AND TRANSFER PRICIN G OFFICER IN: A. PASSING THE ORDER WITHOUT DEMONSTRATING THAT TH E RESPONDENT HAD MOTIVE OF TAX EVASION; B. RELYING UPON REPLY RECEIVED UNDER SECTION 133(6) WITHOUT GIVING AN OPPORTUNITY TO COMMENT ON SUCH REPLIES OR CROSS EXAMINE THE PARTIES INVOLVED, THUS VIOLATING THE PR INCIPLES OF NATURAL JUSTICE; AND C. NOT APPRECIATING THAT THE CHARGING OR COMPUTATIO N PROVISION RELATING TO INCOME UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE THE ADDITION MADE UNDER CHAPTER X IS BAD IN LAW. 4. THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMIN G THE ACTION OF THE ASSESSING OFFICER AND TRANSFER PRICIN G OFFICER IN: A. REJECTING THE TRANSFER PRICING ANALYSIS UNDERTAK EN BY THE RESPONDENT ON UNJUSTIFIABLE GROUNDS; B. REJECTING THE COMPARABLES SELECTED BY THE RESPO NDENT UNDER TNMM ON UNJUSTIFIABLE GROUNDS; C. REJECTING ORIENT INFORMATION TECHNOLOGY LTD., GO LDSTONE TECHNOLOGIES LTD AND AKSHAY SOFTWARE TECHNOLOGIES L TD ON THE GROUND THAT THEY ARE PREDOMINANTLY ONSITE SOFTW ARE DEVELOPMENT COMPANIES; AND D. REJECTING VJIL CONSULTING LTD ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT. 5. THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMIN G THE ACTION OF THE ASSESSING OFFICER AND TRANSFER PRICIN G OFFICER IN: A. CONDUCTING A FRESH TRANSFER PRICING ANALYSIS DE SPITE ABSENCE OF ANY DEFECTS IN THE TRANSFER PRICING ANALYSIS SUB MITTED BY THE RESPONDENT; B. COMPUTING THE ARMS LENGTH PRICE BASED ON THE D ATA FOR THE FINANCIAL YEAR 2004-05 OF THE COMPARABLES, WHICH WA S NOT IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 11 OF 38 AVAILABLE WHEN THE RESPONDENT UNDERTOOK TRANSFER PR ICING DOCUMENTATION AND REPORTING OBLIGATIONS; C. ADOPTING ONSITE IN THE PROCESS OF SELECTING COM PARABLES; AND D. ADOPTING COMPANIES LIKE BODHTREE CONSULTING LTD. , SANKHYA INFOTECH LTD. AS COMPARABLES EVEN THOUGH THEY ARE N OT COMPARABLE IN TERMS OF FUNCTIONS PERFORMED, RISKS A SSUMED, ASSETS UTILIZED, SIZE, ETC. 6. THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMIN G THE ACTION OF THE ASSESSING OFFICER AND TRANSFER PRICIN G OFFICER IN: A. NOT MAKING APPROPRIATE ADJUSTMENTS FOR QUALITATI VE AND QUANTITATIVE DIFFERENCE BETWEEN THE BUSINESS OF THE RESPONDENT AND THOSE OF THE COMPARABLE COMPANIES; A ND B. NOT APPRECIATING THAT THE RESPONDENT IS INSULATE D FROM CERTAIN RISKS, AS AGAINST COMPARABLES, WHICH ASSUME THESE R ISKS AND THEREFORE HAVE TO BE CREDITED WITH A RISK PREMIUM O N THIS ACCOUNT. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS. AS FAR AS THE GROUNDS OF APPEAL OF THE REVENUE ARE CONCERNED, GROUND NO.8 WI TH REGARD TO IMPROPER APPLICATION OF THE RPT FILTER BY THE CIT(A), IT IS NOT IN DISPUTE BEFORE US THAT THIS TRIBUNAL, IN THE CASES OF 24/7 CUSTOMER PVT. LTD. (ITA NO.227/BANG/2010), SONY INDIA PRIVATE LTD. REPORTED IN (2009) 315 ITR (80) 150 (DEL.) AND VARIOUS OTHER CASES HAS TAKEN A VIEW THAT COMPA RABLE COMPANIES HAVING RPT OF UPTO 15% OF TOTAL REVENUES CAN BE CONSIDERED. IN VIEW THEREOF, THE REVENUES GRIEVANCE ON THIS IS SUE AS PROJECTED IN GROUND NO.8 HAS TO BE PARTLY ALLOWED. BY APPLYING RPT FILTER AT 10% OF THE SALES, THE CIT(A) EXCLUDED FOUR SOFT LTD., AND GEOM ETRIC SOFTWARE SOLUTIONS CO. LTD. AS FAR AS FOUR SOFT LTD. IS CO NCERNED, THE RPT % TO IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 12 OF 38 SALES IS 19.89 AND EVEN IF RPT FILTER OF 15% OF THE SALES IS APPLIED, THE SAME WILL GET EXCLUDED. HOWEVER GEOMETRIC SOFTWARE SOLUTIONS CO. LTD., AS PER THE TPO HAS RPT OF 11.49% OF SALES AND THERE FORE IT WOULD GET INCLUDED IN THE LIST OF COMPARABLE COMPANIES. 13. THE LEARNED COUNSEL FOR THE ASSESSEE FILED BEFO RE US A CHART SHOWING THE PERCENT OF RPT TO SALES IN THE CASE OF GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. ACCORDING TO HIM THE RPT TRANSA CTIONS TO SALES IN THE CASE OF THIS COMPANY WAS 22.52% AND THE PERCENTAGE OF RPT TO SALES AS GIVEN IN THE ORDER OF THE TPO IN THE CHART ANNEXED TO THIS ORDER IS WRONG. TO SUPPORT HIS CONTENTION, THE LEARNED COUNSEL FOR THE ASSESSEE HAS FILED PROFIT AND LOSS ACCOUNT OF AND SCHEDULES FORMING PA RT OF THE PROFIT & LOSS ACCOUNT TO SUBSTANTIATE HIS CONTENTION AS ABOVE. W E ARE OF THE VIEW THAT THIS ASPECT WAS NEVER RAISED OR CONSIDERED BY THE T PO/DRP AND THEREFORE THE CLAIM MADE BY THE ASSESSEE HAS TO BE EXAMINED B Y THE TPO/AO. ACCORDINGLY THE ISSUE TO DETERMINE THE CORRECT RPT PERCENTAGE TO SALES OF THIS COMPANY IS REMANDED TO THE AO/TPO. IF THE RPT IS FOUND TO BE MORE THAN 15% OF SALES THAN THIS COMPANY HAS TO BE EXCLU DED FROM THE LIST OF COMPARABLE COMPANIES. IT IS HELD THAT THE CIT(A) O UGHT TO HAVE ADOPTED A THRESHOLD LIMIT OF 15% OF THE TOTAL REVENUE ATTRIBU TABLE TO RELATED PARTY TRANSACTION AS GROUND FOR REJECTING COMPARABLE COMP ANIES. CONSEQUENTLY IT IS HELD THAT COMPARABLE COMPANIES HAVING RPT UPT O 15% OF THE TOTAL REVENUES CAN BE EXCLUDED. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 13 OF 38 14. AS REGARDS GROUND NO.1 RAISED BY THE REVENUE TH E SAME IS GENERAL AND CALLS FOR NO SPECIFIC ADJUDICATION. AS REGARDS GROUND NO.2 RAISED BY THE REVENUE IS CONCERNED, THE CIT(A) FOLLOWED THE DECISION OF THE ITAT BANGALORE IN THE CASE OF GENESYS INTEGRATING SYSTEMS INDIA PVT. LTD. (SUPRA) IN COMING TO THE CONCLUSION THAT SIZE AND TURNOVER OF A COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPAR ABLE. THE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS (ITA NO.1338/BANG/2010) FOR ASSESSMENT YEAR (07-08) ON T HE APPLICATION OF TURNOVER FILTER FOLLOWING THE DECISION RENDERED IN THE CASE OF GENESIS (SUPRA) HAVE APPLIED TURNOVER FILTER AND EXCLUDED COMPARAB LE COMPANIES FROM THE FINAL LIST OF COMPARABLE SELECTED BY THE TPO. IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P) LTD. (SUPRA), THIS TRIBUNAL ON APPLICATION OF THE TURNOVER-FILTER WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY ANALYSIS HELD AS FOLLOWS: (1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT TH E TPO HAS APPLIED A LOWER TURNOVER FILTER OF Q 1 CRORE, B UT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCO ME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLL ED TRANSACTION WITH AN INTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMPARED OR THE ENTERPRISES ENTERING INTO SUCH TRANSACTION, WHICH A RE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT WHEREVER THERE ARE SOME DIFFERENCES SUCH DIFFERENCES SHOULD BE CAPABLE OF REASONABLE AC CURATE IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 14 OF 38 ADJUSTMENT IN MONETARY TERMS TO ELIMINATE THE EFFEC T OF SUCH DIFFERENCES. IT WAS HIS SUBMISSION THAT SIZE WAS A N IMPORTANT FACET OF THE COMPARABILITY EXERCISE. IT WAS SUBMIT TED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WO ULD IMPACT COMPARABILITY. IN THIS REGARD OUR ATTENTION WAS DR AWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGAR H BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 , WHEREIN THE SPECIAL BENCH HAD LAID DOWN THAT IT IS IMPROPER TO PROCEED ON THE BASIS OF LOWER LIMIT OF 1 CRORE TURN OVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASO NABLE CLASSIFICATION. SEVERAL OTHER DECISIONS WERE REFER RED TO IN THIS REGARD LAYING DOWN IDENTICAL PROPOSITION. WE ARE N OT REFERRING TO THOSE DECISIONS AS THE DECISION OF THE SPECIAL B ENCH ON THIS ASPECT WOULD HOLD THE FIELD. REFERENCE WAS ALSO MA DE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERV ED AS FOLLOWS:- SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PARTIES MIGHT AFFECT THE RELA TIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COM PARABILITY. 12. THE ICAI TP GUIDELINES NOTE ON THIS ASPECT LAY DOWN IN PARA 15.4 THAT A TRANSACTION ENTERED INTO BY A RS. 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENT ERED INTO BY A RS. 10 CRORE COMPANY. THE TWO MOST OBVIOUS REA SONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECON OMIES OF SCALE UNDER WHICH THEY OPERATE. THE FACT THAT THEY OPERATE IN THE SAME MARKET MAY NOT MAKE THEM COMPARABLE ENTERP RISES. THE RELEVANT EXTRACT IS AS FOLLOWS [ON RULE 10B(3)] : CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE N OT MATERIAL, THE TRANSACTIONS WOULD BE COMPARABLE. THESE DIFFERENCES COULD EITHER BE WITH REFERENCE TO THE TRANSACTION OR WITH REFERENCE TO THE ENTERPRISE. FO R INSTANCE, A TRANSACTION ENTERED INTO BY A RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENT ERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE R ELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 15 OF 38 13. IT WAS FURTHER SUBMITTED THAT THE TPOS RANGE ( RS. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COM PANIES LIKE INFOSYS WHICH IS 277 TIMES BIGGER THAN THE ASSESSEE (TURNOVER OF RS. 13,149 CRORES AS COMPARED TO RS. 47.47 CRORES O F ASSESSEE). IT WAS SUBMITTED THAT AN APPROPRIATE TURNOVER RANG E SHOULD BE APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPAN IES. 14. REFERENCE WAS MADE TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , WHEREIN RELYING ON DUN AND BRADSTREETS ANALYSIS, THE TURNO VER OF Q 1 CRORE TO Q 200 CRORES WAS HELD TO BE PROPER. THE F OLLOWING RELEVANT OBSERVATIONS WERE BROUGHT TO OUR NOTICE:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDE NTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTE D THE COMPANIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARA BLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, W E ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANO THER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTI ON OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO B ARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE TH ESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COM E DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE V ARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC L OSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPE R PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FO R THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSI FICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT TH E IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 16 OF 38 CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUI TABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT T HE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO B E TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THA T RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 15. IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PRO POSITION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN THE FOLLOWING CASES: 1. M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO.1413/BANG/2010) 2. M/S GENESIS MICROCHIP (I) PRIVATE LIMITED VS. DC IT (ITA NO.1254/BANG/20L0). 3. ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (IT A NO. 1171/BANG/2010). 16. IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURNOVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NO T COMPARABLE WITH THE ASSESSEE. 17. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HA VING TURNOVER OF MORE THAN Q 200 CRORES AS COMPARABLES. IN THESE CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASS ESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECI DING THE ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDES THAT INTERNATIONAL TRANSACTION MEANS A T RANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 17 OF 38 WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTIO N HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT O R ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BEN EFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR M ORE OF SUCH ENTERPRISES. SEC.92-A DEFINES WHAT IS AN ASSOCIATE D ENTERPRISE. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE TR ANSACTION BETWEEN THE ASSESSEE AND ITS AE WAS AN INTERNATIONA L TRANSACTION ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATION OF ARMS LENGTH PRICE IN AN INTERNATIONAL TRANSACTION AND IT PROVID ES:- (1) THAT THE ARMS LENGTH PRICE IN RELATION TO AN I NTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR S UCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : ( A )COMPARABLE UNCONTROLLED PRICE METHOD; ( B )RESALE PRICE METHOD; ( C )COST PLUS METHOD; ( D )PROFIT SPLIT METHOD; ( E )TRANSACTIONAL NET MARGIN METHOD; ( F )SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOAR D. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHA LL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 18 OF 38 PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNAT IONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT E XCEED FIVE PER CENT OF THE LATTER, THE PRICE AT WHICH THE INTE RNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE D EEMED TO BE THE ARMS LENGTH PRICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSI ON, OF THE OPINION THAT ( A ) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRA NSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR ( B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTER NATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY TH E ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SEC TION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR ( C ) THE INFORMATION OR DATA USED IN COMPUTATION OF TH E ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ( D ) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SP ECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED T O FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSAC TION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BA SIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C:- 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEIN G THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A). TO (D).. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 19 OF 38 (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TA KEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRAN SFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSE TS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 20 OF 38 ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH TH E RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND W HETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR ( II)R EASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMI NATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONS IDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. A READING OF THE PROVISIONS OF RULE 10B(2) OF THE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPARED WI TH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACT ORS SET OUT IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 21 OF 38 THEREIN. BEFORE US THERE IS NO DISPUTE THAT THE TN MM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. THE DISPUTES ARE WITH R EGARD TO THE COMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DEC ISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSEES TURNOVER I S Q 47,46,66,638. IT WOULD THEREFORE FALL WITHIN THE C ATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES H AVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOW N IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE AS SESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY T HE TPO VIZ., TURNOVER Q (1)FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 34 3.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES 15. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), WE HOLD THAT IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 22 OF 38 THE CIT(A) WAS JUSTIFIED IN APPLYING THE TURNOVER F ILTER AND EXCLUDING COMPANIES WHOSE TURNOVER WAS BEYOND RS.200 CRORES. 16. AS FAR AS GROUND NO.3 IS CONCERNED THERE IS NO COMPANY WHICH WAS INCLUDED BY THE CIT(A) ON THE BASIS OF THE FILTER OF DIMINISHING REVENUE AND THEREFORE THE GRIEVANCE PROJECTED BY THE REVENUE IN GROUND NO.3 IS FOUND TO BE WITHOUT ANY BASIS AND HENCE DISMISSED. 17. AS REGARDS GROUND NO.9, THE STANDARD DEDUCTION OF 5% OF THE ARMS LENGTH PRICE ALLOWED TO THE APPELLANT BY THE CIT(A) , WHICH IS CHALLENGED IN GROUND NO.5 BY THE REVENUE BEFORE THE TRIBUNAL, IT IS NOT IN DISPUTE BEFORE US THAT IN VIEW OF THE SUBSTITUTION OF THE SECOND P ROVISO TO SECTION 92C(2) OF THE INCOME-TAX ACT BY THE FINANCE (NO.2) ACT, 20 09, THE SECOND GROUND OF APPEAL (GROUND NO.3 IN THE APPEAL FILED BY THE R EVENUE) MAY HAVE TO BE ALLOWED. CONSEQUENTLY IT IS HELD THAT IF THE DIFFE RENCE BETWEEN THE ARITHMETIC MEAN OF THE PROFIT MARGINS COMPARABLE CO MPANIES ULTIMATELY RETAINED AND THE PROFIT MARGIN OF THE ASSESSEE IS M ORE THAN 5% THAN NO DEDUCTION UNDER THE PROVISO TO SEC.92C(2) OF THE AC T COULD BE ALLOWED TO AN ASSESSEE. 18. AS REGARDS GROUND NO.7, TATA ELXSI LTD., HAS TO BE EXCLUDED AS THIS COMPANY WAS HELD TO BE NOT COMPARABLE WITH AN ASSES SEE SUCH AS THE ASSESSEE IN THE PRESENT CASE PROVIDING SOFTWARE DEV ELOPMENT SERVICES BY THE ITAT HYDERABAD BENCH IN THE CASE OF CNO IT SERV ICES (INDIA) PVT. LTD. (FORMERLY KNOWN AS CONSECO DATA SERVICES (INDIA) PV T. LTD.) HYDERABAD IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 23 OF 38 VS. DCIT, CIRCLE 1(2) HYDERABAD, IN ITA.NO.1280/HYD /2010 ASSESSMENT YEAR 2005-2006 ORDER DATED 12.2.2014. THE ITAT HYD ERABAD BENCH ON IDENTICAL FACTS, HELD ON COMPARABILITY OF TATA ELXS I LTD. AS FOLLOWS: 15.7. TATA ELXSI LIMITED : THE OBJECTION OF THE ASSESSEE IS THAT TATA ELXSI OPERATING TWO SEGMENTS SYSTEM COMMUNICATION SERVICES AND SOFTWARE DEVELOPM ENT SERVICES. THE TPO ACCEPTED THE SOFTWARE DEVELOPMENT SERVICES SEGMENT IN HIS T.P. ANALYSIS AND ASSESSEE S OBJECTION IS THAT THE SOFTWARE DEVELOPMENT SERVICES SEGMENT ITSELF COMPRISES OF THREE SUB-SERVICES NAME LY (A) PRODUCT DESIGN SERVICES (B)DESIGN ENGINEERING SERVI CES AND (C) VISUAL COMPUTING LABS. IT WAS SUBMITTED THAT TH ESE SERVICES ARE NOT AKIN TO ASSESSEE SOFTWARE SERVICES AND SEGMENTAL INFORMATION OF ONLY PRODUCT DESIGN SERVIC ES COULD HAVE BEEN ACCEPTED BY THE TPO AS A COMPARABLE BUT NOT THE ENTIRE SOFTWARE DEVELOPMENT SERVICE. SINCE COMPANYS OPERATIONS ARE FUNCTIONALLY DIFFERENT AS SUCH, THE SAME IS NOT COMPARABLE. FURTHER, ASSESSEE IS ALSO OBJECTING ON THE BASIS OF INTANGIBLE SCALE OF OPERA TIONS. THE COORDINATE BENCH IN THE CASE OF INTOTO (SUPRA) CONS IDERED THE ISSUE AS UNDER IN PARA 22: '22 TATA ELXSI LIMITED : AS REGARDS THIS COMPANY, T HE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE , FILED BEFORE US THE REPLY OF TATA ELXSI LIMITED TO THE AD DL. CIT (TRANSFER PRICING), HYDERABAD, WHEREIN THE CONCERNE D OFFICER HAS BEEN INFORMED THAT TATA ELXSI LIMITED I S SPECIALISED EMBEDDED SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THAT IT CANNOT BE COMPARED WITH ANY OT HER SOFTWARE DEVELOPMENT COMPANY. IT WAS SUBMITTED THAT BECAUSE OF THE SPECIALISATION AND ALSO BECAUSE OF D IVERSE NATURE OF ITS BUSINESS, IT IS VERY DIFFICULT TO SCA LE-UP THE OPERATIONS OF TATA ELXSI LIMITED. IN VIEW OF THIS, TATA ELXSI LIMITED HAS INFORMED THAT IT IS NOT FAIR TO USE ITS FINANCIAL NUMBERS TO COMPARE IT WITH ANY OTHER COMPANY. THE COMMUNICATION DATED 25TH AUGUST, 2009 TO THE TPO IS PLACED BEFORE US. AS THIS COMMUNICATION WAS NOT BEF ORE THE TPO AT THE TIME OF TRANSFER PRICING ADJUSTMENT WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE ALSO TO THE FILE OF THE TPO TO RECONSIDER ADOPTING THIS COMPANY AS T HE COMPARABLE IN THE LIGHT OF OBSERVATIONS OF THIS COM PANY TO IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 24 OF 38 THE TPO IN THE CASE OF ANOTHER ASSESSEE. IN THE RES ULT, THE ASSESSING OFFICER/TPO IS DIRECTED TO RECONSIDER THE ISSUE IN ACCORDANCE WITH LAW, AFTER AFFORDING A REASONABL E OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. KEEPING THE ASSESSEES OBJECTIONS AND THE DECISIONS OF THE COORDINATE BENCH, PRIMA FACIE, WE ARE OF THE VIEW T HAT TATA ELXSI LIMITED IS FUNCTIONALLY DIFFERENT AND HA S INCOMPARABLE SIZE TO THAT OF THE ASSESSEE. FURTHER, WE ARE UNABLE TO VERIFY WHETHER THE SEGMENTAL PROFITS ADOP TED BY THE TPO PERTAIN TO ENTIRE SOFTWARE DEVELOPMENT SERV ICES OR PERTAIN TO LIMITED SERVICE AKIN TO ASSESSEE SERVICE S. SINCE, THESE ASPECTS ARE NOT CLEAR FROM THE DATA FURNISHED BEFORE US, WE DIRECT THE TPO TO EXAMINE AND IN CASE, THE SEGMENTAL PROFITS OF A PARTICULAR SERVICE IS NOT AV AILABLE, THEN, TO EXCLUDE THE TATA ELXSI LIMITED FROM THE LI ST OF COMPARABLES. ACCORDINGLY, THIS ISSUE IS RESTORED TO THE FILE OF TPO FOR EXAMINATION AND TO DECIDE IN ACCORDANCE WITH LAW AND FACTS, AFTER AFFORDING REASONABLE OPPORTUNI TY OF BEING HEARD TO ASSESSEE. 19. IN VIEW OF THE AFORESAID DECISION RENDERED ON I DENTICAL FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT TATA ELXSI L TD., WAS RIGHTLY EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 20. AS REGARDS GROUNDS NO. 3 TO 6 ARE CONCERNED, TH IRDWARE SOLUTIONS LTD., AND GEOMETRIC SOFTWARE SOLUTIONS LTD., ARE CO NCERNED, WERE HELD TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY RENDERING SOFTWARE DEVELOPMENT SERVICES SUCH AS THE ASSESSEE IN THE CASE OF SUNQUE ST INFORMATION SYSTEMS (I) PVT.LTD. BY THE ITAT BANGALORE ITA NO.1 302/BNG/2011 FOR AY 05-06 ORDER DATED 11.6.2015. THE FOLLOWING WERE TH E RELEVANT OBSERVATIONS OF THE TRIBUNAL. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 25 OF 38 22. WE HAVE CONSIDERED HIS SUBMISSION AND FIND T HAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS, HELD THAT THE A FORESAID TWO COMPANIES VIZ., FOUR SOFT LTD., AND THIRDWARE SOLU TIONS LTD., ARE NOT COMPARABLE COMPANIES IN SOFTWARE DEVELOPMENT SE RVICES COMPANIES. THE FOLLOWING WERE THE RELEVANT OBSERVAT IONS:- 15.4. FOURSOFT LIMITED : THIS COMPARABLE IS OBJECTED ON THE SAME REASON AS THIS COMPANY IS INVO LVED IN PRODUCT DEVELOPMENT AND OWNS PRODUCTS NAMELY 4S ETRANS AND 4S ELOG. THESE PRODUCTS ARE USED IN SUN MICROSYSTEMS INC, IN AN APPLICATION VERIFICATION KI T CERTIFIED FOR ENTERPRISES AND ASSESSEE HAVE BEEN IN VESTING CONTINUOUSLY ON PRODUCT DEVELOPMENTS. SINCE ASSESSE E IS IN THE PRODUCT DEVELOPMENT, HAVING I.P. RIGHTS, THE SAME IS NOT COMPARABLE. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : THIS COMPANY IS OBJECTED TO BY THE ASSESSEE ON THE REASON THAT THE SAID THIRDWARE SOFTWARE SOLUTIONS LTD. IS ENGAGED IN SALE OF SOFTWARE LICENCE AND RELATED SERVICES AN D NOT A SERVICE PROVIDER. REFERRING TO THE ANNUAL REPORT, I T WAS SUBMITTED THAT THIS COMPARABLE WAS REJECTED BY THE ITAT, PUNE IN THE CASE OF EGAIN COMMUNICATIONS LTD. THIS COMPANY HAVING REVENUE FROM PRODUCT LICENSE AND EAR NING EXTRAORDINARY PROFIT DUE TO INTANGIBLE OWNS. 15.6. THESE THREE COMPARABLE ABOVE FLEXTRONICS SOFT WARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SOLUTION LIMITED WERE ANALYSED BY THE COORDINATE BE NCH OF THE TRIBUNAL IN THE CASE OF INTOTO SOFTWARE SOLU TIONS PVT. LTD. (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER : '23. THE OTHER COMPANIES WHICH ARE OBJECTED TO BY THE ASSESSEE ARE FLEXTRONICS SOFTWARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SOLUTION LIMITED. AS FAR AS THESE THREE COMPANIES ARE CONCERNED, THE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THEY ARE INTO BOTH SOFTWARE AS WELL AS PRODUCT DEVELOPMENT. HE SUBMITTED THAT THE TPO HAS TAKEN NOTE OF THE FACT THESE COMPANIES ARE ALSO INTO PRODUCT DEVELOPMENT BUT HAS SELECTED THESE COMPANIES AS COMPARABLES IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 26 OF 38 BY APPLYING THE FILTER OF MORE THAN 70% OF ITS REVENUE BEING FROM SOFTWARE DEVELOPMENT SERVICES. THE LEARNED COUNSEL SUBMITTED THAT THE FUNCTIONS OF THESE COMPANIES ARE DIFFERENT FROM THE ASSESSEE WHO WAS INTO SOLE ACTIVITY OF SOFTWARE DEVELOPMENT FOR ITS ASSOCIATED ENTERPRISE. HE SUBMITTED THAT TH E TPO HAS ALLOCATED THE EXPENDITURE IN THE PROPORTION OF THE REVENUE OF THESE COMPANIES FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS AND HAS ADOPTED THE FIGURE AS SEGMENTAL MARGIN OF THE COMPANY AND HAS TAKEN THESE COMPANIES AS COMPARABLES. HE SUBMITTED THAT BY TAKING THE PROPORTIONATE EXPENDITURE, THE CORRECT FINANCIAL RESULTS WOULD NOT EMERGE. HE SUBMITTED THAT NOTHING PREVENTED THE ASSESSING OFFICER/TPO FROM OBTAINING THE SEGMENTAL DETAILS FROM THE RESPECTIVE COMPARABLE COMPANIES BEFORE ADOPTING THEM AS COMPARABLE COMPANIES AND BEFORE TAKING THE OPERATING MARGIN FOR ARRIVING AT THE ARMS LENGTH PRICE. HE SUBMITTED THAT WHEREVER THE SEGMENTAL DETAILS ARE NOT AVAILABLE, THEN THE SAID COMPANIES SHOULD NOT BE TAKEN AS COMPARABLES. FOR THIS PURPOSE, HE PLACED RELIANCE UPON THE DECISION OF THE BANGALORE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. VS. THE DCIT IN ITA.NO.1252/BANG/2010 WHEREIN THESE COMPANIES WERE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 21. THE LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 22. HAVING HEARD BOTH THE PARTIES AND HAVING GONE THROUGH THE MATERIAL ON RECORD, WE FIND THAT THE TPO AT PAGE 37OF HIS OR DER HAS BROUGHT OUT THE DIFFERENCES BETWEEN A PRODUCT COMPANY AND A SOFTWAR E DEVELOPMENT SERVICES PROVIDER. THUS, IT IS CLEAR THAT HE IS AWA RE OF THE FUNCTIONAL DISSIMILARITY BETWEEN A PRODUCT COMPANY AND A SOFTW ARE DEVELOPMENT IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 27 OF 38 SERVICE PROVIDER. HAVING TAKEN NOTE OF THE DIFFEREN CE BETWEEN THE TWO FUNCTIONS, THE ASSESSING OFFICER OUGHT NOT TO HAVE TAKEN THE COMPANIES WHICH ARE INTO BOTH THE PRODUCT DEVELOPMENT AS WELL AS SOFTWARE DEVELOPMENT SERVICE PROVIDER AS COMPARABLES UNLESS THE SEGMENTAL DETAILS ARE AVAILABLE. EVEN IF HE HAS ADOPTED THE FILTER OF MORE THAN 75% OF THE REVENUE FROM THE SOFTWARE SERVICES FOR SELECTING A COMPARABLE COMPANY, HE OUGHT TO HAVE TAKEN THE SEGMENTAL RESULTS OF THE SOFTWARE SERVICES ONLY. THE PERCENTAGE OF EXPENDITURE TOWARDS THE DEVELOPME NT OF SOFTWARE PRODUCTS MAY DIFFER FROM COMPANY TO COMPANY AND ALS O IT MAY NOT BE PROPORTIONATE TO THE SALES FROM THE SALE OF SOFTWAR E PRODUCTS. UNDER SECTION 133(6) OF THE I.T. ACT, THE TPO HAS THE POWER TO CA LL FOR THE NECESSARY DETAILS FROM THE COMPARABLE COMPANIES. IT IS SEEN T HAT THE ASSESSING OFFICER/TPO AS EXERCISED THIS POWER TO CALL FOR DET AILS WITH REGARD TO THE VARIOUS COMPANIES. AS SEEN FROM THE ANNUAL REPORT O F FOURSOFT LIMITED WHICH IS REPRODUCED AT PAGE 7 OF THE TPOS ORDER, T HE SAID COMPANY HAS DERIVED INCOME FROM SOFTWARE LICENCE ALSO AND AMCS. 23. AS FAR AS THIRDWARE SOFTWARE SOLUTION LIMITED IS CONCERNED, WE FIND FROM THE INFORMATION FURNISHED BY THE SAID COMPANY THAT THOUGH THE SAID COMPANY IS ALSO INTO PRODUCT DEVELOPMENT, THERE ARE NO SOFTWARE PRODUCTS THAT THE COMPANY INVOICED DURING THE RELEVANT FINAN CIAL YEAR AND THE FINANCIAL RESULTS ARE IN RESPECT OF SERVICES ONLY. THUS, IT IS CLEAR THAT THERE IS NO SALE OF SOFTWARE PRODUCTS DURING THE YEAR BUT TH E SAID COMPANY MIGHT IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 28 OF 38 HAVE INCURRED EXPENDITURE TOWARDS THE DEVELOPMENT O F THE SOFTWARE PRODUCTS. 24. IN VIEW OF THE AFORESAID DECISION, WE DO NOT FI ND ANY INFIRMITY IN THE ACTION OF THE CIT(A) IN EXCLUDING THE AFORESAID TWO COMPANIES FROM THE LIST OF COMPARABLE COMPANIES FOR DETERMINING ALP. 25. AS FAR AS THE COMPARABLE COMPANY M/S.EXENSYS SO FTWARE SOLUTIONS LTD., IS CONCERNED, THIS TRIBUNAL IN THE CASE OF M/ S.VENDIO TECHNOLOGIES (I) PVT.LTD. IT (TP) A.NO.1374/BANG/2011 FOR AY 05-06 V IDE PARA 11.8 OF ITS ORDER DATED 19.9.2014 HELD THAT THIS COMPANY HAS TO BE EXCLUDED FOR THE REASON THAT IT IS FUNCTIONALLY DIFFERENT FROM A SOF TWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE BECAUSE IT OPERATES T HREE BUSINESS SEGMENTS VIZ., PROVISION OF SOFTWARE SERVICES, BPO SERVICES AND SOFTWARE PRODUCTS. 26. FOR THE REASONS GIVEN ABOVE, WE DO NOT FIND ANY MERIT IN GROUNDS NO.4 TO 6 RAISED BY THE REVENUE IN ITS APPEAL. 27. AS FAR GROUND NO.10 TO 12 ARE CONCERNED, WE ARE OF THE VIEW THAT THE GROUND IS VAGUE AND DOES NOT PROJECT ANY REAL GRIEV ANCE. NEITHER THE TPO OR THE CIT(A) HAVE CARRIED OUT ANY NEW ANALYSIS AND THE EXERCISE IS RESTRICTED ONLY TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE AND THE TPO. THE GROUND OF APPEAL IS A GENERAL STATEMENT W ITH NO REFERENCE TO ANY PARTICULAR ASPECT WHICH CHANGES AND RESULTS IN ANY PREJUDICE TO THE IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 29 OF 38 REVENUE. THEREFORE THIS GROUND IS DISMISSED AS NOT CALLING FOR ANY SPECIFIC ADJUDICATION. 28. AS FAR AS THE CROSS OBJECTION FILED BY THE ASSE SSEE IS CONCERNED, THE LEARNED COUNSEL FOR THE ASSESSEE SEEKS EXCLUSION OF ONE COMPARABLE CHOSEN BY THE TPO AS A COMPARABLE VIZ., SANKHYA LNF OTECH LIMITED. SANKHYA INFOTECH LIMITED (SANKHYA) 29. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT SANKHYA IS ENGAGED IN THE BUSINESS OF DEVELOPMENT O F SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE COMPANY FOCUSES ON THE D EVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORT AND AVIATION INDUSTRY. H OWEVER, SEGMENTAL INFORMATION IN RELATION TO THE ABOVE MENTIONED ACTI VITIES IS NOT AVAILABLE IN PUBLIC DOMAIN. THEREFORE, AS SANKHYA ENGAGES ITSELF IN PRODUCTS AND SERVICES AS WELL AS SOFTWARE TRAINING, IT CANNOT BE CONSIDERED AS A COMPARABLE OF THE APPELLANT. THE PRODUCTS DEVELOPE D AND OWNED BY SANKHYA ARE LISTED BELOW: (1) SILICONTM TRAINING SUITE OF PRODUCTS: THE P RODUCTS ARE A COMPREHENSIVE ENTERPRISE WIDE TRAINING PLATFO RM THAT COVERS THE ENTIRE SPECTRUM OF TRAINING IN A PAPERLESS ENVI RONMENT. IT COMPRISES OF FOUR PRODUCTS:- - SILICONTM LMS (TRAINING MANAGEMENT INFORMATION - SILICONTM QT (ONLINE ASSESSMENT SYSTEM) - SILICONTM LCMS (LEARNING CONTENT MANAGEMENT SYST EM) IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 30 OF 38 - IRMAQTM : THIS IS AN INTEGRATED RESOURCE PLANN ING, MANAGEMENT TRACKING SYSTEM EXCLUSIVELY DEVELOPED FO R AIRLINE OPERATIONS. IT IS AN END-TO-END SOLUTION FOR ALL FL IGHT OPERATIONS. - SAKAI CLE : THIS IS A WIDELY USED AND POPULAR O PEN SOURCE LMS USED IN MANY LEADING EDUCATIONAL INSTITUTIONS A ND CORPORATE. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT SUBSTAN TIATING THAT THE COMPANY ALSO ENGAGES IN DIFFERENT ACTIVITIES IS REPRODUCED BELOW: 2. ACTIVITIES THE COMPANY AS ENGAGED IN THE BUSINESS OF DEVELOPME NT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE PROD UCTION OF SOFTWARE IS NOT CAPABLE OF BEING EXPRESSED IN ANY G ENERIC UNIT AND HENCE 11 IS RIOT POSSIBLE TO GIVE THE INFORMATION A S REQUIRED BY CERTAIN CLAUSES OF PARAGRAPHS 3.4C AND 4 D OF PART II OF SCHEDULE VI OF THE COMPANIES ACT, 1956. 30. IT WAS ALSO BROUGHT TO OUR NOTICE THAT THE DELH I TRIBUNAL IN ITO V. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (JUDGMENT DATED 23.10.2012 IN ITA NO. 609I/DEL/2011 FOR THE ASSESSMENT YEAR 2005-06) HAS HELD THAT THE SAID COMPANY IS NOT A COMPARABLE TO THE ASSESSEE THEREIN WHICH WAS ALSO IN THE BUSINESS OF SOFTWARE DEVELOPMENT. 31. THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE CONSIDERED. THE ACTIVITIES SET OUT ABOVE AND THE D ECISION OF THE DELHI ITAT RENDERED IN THE CONTEXT OF A SOFTWARE DEVELOPMENT C OMPANY SUCH AS THE ASSESSEE MAKES IT AMPLY CLEAR THAT THIS COMPANY SAN KHYA CANNOT BE REGARDED AS A COMPARABLE. THE SAME IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 31 OF 38 32. IN THE C.O. THE ASSESSEE HAS ALSO PRAYED FOR EX CLUSION OF BODHTREE CONSULTING LTD., WHICH WAS CONSIDERED AS A COMPARAB LE COMPANY BY THE TPO/DRP. BODHTREE CONSULTING LTD. WAS CHOSEN AS A COMPARABLE COMPANY BY THE ASSESSEE IN ITS TP STUDY AND SAME WA S ACCEPTED AS A COMPARABLE BY THE TPO ALSO. EVEN BEFORE THE DRP, T HE ASSESSEE DID NOT CHALLENGE THE INCLUSION OF THIS COMPANY AS A COMPAR ABLE. HOWEVER, IN THE CO FILED BEFORE THE TRIBUNAL, THE ASSESSEE HAS SOUG HT TO CHALLENGE THE INCLUSION OF THIS COMPANY AS A COMPARABLE IN GROUND NO.5(D). THE LAW BY NOW IS WELL SETTLED THAT ASSESSEE IS ENTITLED TO RA ISE AN OBJECTION REGARDING COMPARABILITY AT ANY STAGE OF PROCEEDINGS AND EVEN IN A CASE WHERE THE ASSESSEE HAS NOT RAISED OBJECTION FOR INCLUDING THE SAME AS A COMPARABLE BEFORE THE LOWER AUTHORITIES, OR THE ASSESSEE HAD C HOSEN IN ITS TP STUDY A COMPANY WHICH IT SEEKS TO EXCLUDE AS A COMPARABLE. THE SPECIAL BENCH OF CHANDIGARH TRIBUNAL IN DCIT V. QUARK SYSTEMS P. LTD. (2010) 38 SOT 307 HAS HELD THAT THE TRIBUNAL IS A FACT FINDING BODY A ND THEREFORE HAS TO TAKE INTO ACCOUNT ALL THE RELEVANT MATERIAL AND DETERMIN E THE QUESTION AS PER THE STATUTORY REGULATIONS AND THAT TAX PAYER IS NOT EST OPPED FROM POINTING OUT A MISTAKE IN THE ASSESSMENT, THOUGH SUCH MISTAKE IS A RESULT OF EVIDENCE ADDUCED BY THE TAX PAYER. WE THEREFORE PROCEED TO DETERMINE THE COMPARABILITY OF BODHTREE CONSULTING LTD. IN THIS REGARD, WE FIND THAT ITAT HYDERABAD BENCH IN IVY COMPUTECH (P) LTD. V. ACIT, (2014) 43 TAXMAN.COM 183 (HYD) TRIB. HAS TAKEN THE VIEW THAT BODHTREE CONSULTING IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 32 OF 38 LTD. SHOULD NOT BE REGARDED AS A COMPARABLE IN THE CASE OF SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE LD. COUNSEL FOR THE ASSESSEE ALSO BROUGHT TO OUR NOTICE THAT COMPARABILITY OF THIS CO MPANY WITH SOFTWARE DEVELOPMENT PROVIDER WAS CONSIDERED BY THIS TRIBUNA L IN MINDTECH INDIA LTD. V. DCIT, ITA NO.70/B/2014 FOR AY 2009-10, ORDE R DATED 21.8.2014 AND IT WAS HELD AS UNDER:- 14. THE NEXT ASPECT THAT WAS CANVASSED BY THE LEAR NED COUNSEL FOR THE ASSESSEE WAS WITH REGARD TO THE EXCLUSION O F THE FOLLOWING COMPARABLES FROM THE LIST OF FINAL COMPARABLES CHOS EN BY THE TPO : 1. BODHTREE CONSULTING LTD : AS FAR AS THIS COMPANY IS CONCERNED, THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THIS COMP ANY MADE EXTRA ORDINARY PROFITS DURING THE PREVIOUS YEAR. O UR ATTENTION WAS DRAWN TO THE FACT THAT THE OPERATING PROFIT / OPERA TING COST OF THIS COMPANY JUMPED FROM 17% FOR F Y 2007-08 TO 56% IN F Y 2008- 09. IT DIPPED IN FY 2009-10 TO 40% AND IN FY 2010- 11 IT BECAME (-) 2% AND 5% IN FY 2011-12 AND FINALLY TOUC HED (-) 9% IN FY 2012-13. OUR ATTENTION WAS DRAWN TO THE FACT THAT THE SPECIAL BENCH OF THE TRIBUNAL, MUMBAI, IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) P. LTD., IN ITA.7466/MUM/201 2, DT 07.03.2014 FOR AY 2008-09 HAD AN OCCASION TO CONSID ER THE QUESTION AS TO WHETHER COMPANIES HAVING ABNORMAL PR OFITS SHOULD BE EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH TOO K THE VIEW THAT IT HAS TO BE SHOWN THAT THE HIGH PROFIT MARGIN DOES NOT REFLECT THE NORMAL BUSINESS CONDITIONS AND ONLY IN SUCH CIR CUMSTANCES, HIGH PROFIT MARGIN COMPANIES CAN BE EXCLUDED. OUR ATTENTION WAS DRAWN TO THE DRP'S OBSERVATION IN ITS ORDER ON THE ISSUE WHICH IS AS FOLLOWS : 'BODHTREE : THE ASSESSEE HAS OBJECTED TO SELECTION OF THIS ENTI TY ON THE BASIS OF FOLLOWING OBJECTIONS: IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 33 OF 38 THE ENTITY HAS FLUCTUATING MARGINS THE COMPANY IS MORE OF A PRODUCT COMPANY RATHER T HAN SOFTWARE SERVICE COMPANY. THE PANEL HAS CONSIDERED THE OBJECTIONS OF THE ASSE SSEE. INSOFAR AS THE CONTENTION REGARDING THE REJECTION O F THIS ENTITY ON THE BASIS OF FLUCTUATING MARGIN IS CONCER NED, IN ORDER TO APPRECIATE THE COMPATIBILITY OR OTHERWISE OF THIS ENTITY, IT IS IMPORTANT TO FIRST NOTE THAT THE INDI AN SOFTWARE INDUSTRY USES TWO DIFFERENT MODELS FOR REVENUE RECOGNITION. THE FIRST IS THE TIME AND MATERIAL (T& M) CONTRACTS MODEL IN WHICH CUSTOMER ARE BILLED ON THE BASIS OF HOURS WORKED BY THE EMPLOYEES OF SUPPLIER SOFTWA RE COMPANIES. HOURLY RATES ARE AGREED ON BY BOTH PARTI ES AND ARE APPLIED TO THE TOTAL HOURS WORKED TO ARRIVE AT THE REVENUE THAT IS TO BE RECOGNIZED. THE SECOND IS THE FIXED PRICE PROJECT MODEL (FPP). UNDER THE FIXED PRICE PR OJECT MODEL, THE TOTAL CONTRACT PRICE IS AGREED UPON BETW EEN THE PARTIES. BILLING MAY BE DONE EITHER AT THE END OF T HE CONTRACT OR OVER THE PERIOD OF THE CONTRACT ON THE BASIS OF THE AGREED MILESTONE FOR BILLING. IN THIS RESPECT, THE BASIS OF REVENUE RECOGNITION BY THIS ENTITY CAN BE SEEN F ROM THE ANNUAL REPORT AS BELOW: 3. REVENUE RECOGNITION : REVENUE FROM SOFTWARE DEVELOPMENT IS RECOGNISED BAS ED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS. FROM PERUSAL OF THE ABOVE, IT IS SEEN THAT THIS EN TITY IS ENGAGED IN BUILDING REVENUES THROUGH FIXED PRICE PR OJECT MODEL. AS IS A NATURAL COROLLARY IN SUCH TYPE OF RE VENUE RECOGNITION, SOME PART OF THE EXPENDITURE MAY BE BO OKED IN ONE YEAR, FOR WHICH THE REVENUE MAY HAVE BEEN RECOGNISED IN THE EARLIER OR SUBSEQUENT YEAR. THERE FORE, IT IS BUT NATURAL THAT THERE IS SOME FLUCTUATION IN TH E PROFITABILITY MARGIN OF SUCH ENTITY. MERELY BECAUSE OF SUCH FLUCTUATIONS, AN ENTITY ENGAGED IN THE DEVELOPMENT OF SOFTWARE, BEING FUNCTIONALLY COMPARABLE TO THE ASSE SSEE, CANNOT BE REJECTED ONLY ON THIS GROUND.' IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 34 OF 38 14. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR A TTENTION TO THE FACT THAT BODHTREE CONSULTING ADMITTEDLY FOLLOW S A FIXED PRICE PROJECT MODEL WHEREBY REVENUES FROM SOFTWARE DEVELO PMENT IS RECOGNIZED BASED ON SOFTWARE AND BILLED TO CLIENTS. IN SUCH BUSINESS MODEL EXPENDITURE FOR DEVELOPING SOFTWARE WOULD BE BILLED IN AN EARLIER YEAR BUT THE REVENUE WOULD BE RECOGNIZED IN A SUBSEQUENT YEAR. IT WAS HIS SUBMISSION THAT THIS F ACT IS RECOGNIZED BY THE DRP IN ITS ORDER. ACCORDING TO H IM THIS CIRCUMSTANCE WOULD BE SUFFICIENT TO SHOW THAT THE M ARGIN REFLECTED OF THIS COMPANY DOES NOT REFLECT THE NORM AL BUSINESS CONDITION. 15. THE LEARNED DR PLACED RELIANCE ON THE REASON GI VEN BY THE DRP IN ITS ORDER. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENT RES (SUPRA) HAD AN OCCASION TO DEAL WITH THE QUESTION AS TO WHE THER HIGH PROFIT MARGIN MAKING COMPANIES SHOULD BE EXCLUDED A S A COMPARABLE. THE SPECIAL BENCH AFTER CONSIDERING SE VERAL ASPECTS HELD IN PARA 88 OF ITS ORDER THAT THE POTENTIAL COM PARABLE COMPANIES CANNOT BE EXCLUDED MERELY ON THE GROUND T HAT THEIR PROFIT IS ABNORMALLY HIGH. THE SPECIAL BENCH HELD THAT IN SUCH CASES IT WOULD REQUIRE FURTHER INVESTIGATION TO ASC ERTAIN THE REASONS FOR UNUSUALLY HIGH PROFIT AND IN ORDER TO E STABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COMPARABLE OR NOT. IN THE LIGHT OF THE AFORESAID DECISION OF THE SPECIAL BENCH AND IN VIEW OF THE ADMITTED POSITION THAT THE ASSES SEE FOLLOWS FIXED PRICE PROJECT MODEL WHERE REVENUES FROM SOFTW ARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOP ED AND BILLED TO CLIENTS, THERE IS A POSSIBILITY OF THE EX PENDITURE IN RELATION TO THE REVENUE BEING BOOKED IN THE EARLIER YEAR. THE RESULTS OF BODHTREE FROM FY 2003 TO 2008 EXCLUDING FY 2007 AS GIVEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WERE ALSO PERUSED. PERUSAL OF THE SAME SHOWS, THAT THERE HAS BEEN A CO NSISTENT CHANGE IN THE OPERATING MARGINS. THE CHART FILED B Y THE ASSESSEE IN THIS REGARD IS GIVEN AS AN ANNEXURE TO THIS ORDE R. IT APPEARS TO US THAT THE REVENUE RECOGNITION METHOD FOLLOWED BY THE ASSESSEE IS THE REASON FOR THE DRASTIC VARIATION IN THE PROF IT MARGINS OF THIS COMPANY. IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT WOULD BE SAFE TO EXCLUDE BODHTREE CONSULTING FROM T HE FINAL LIST IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 35 OF 38 OF COMPARABLES CHOSEN BY THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. 33. THE LD. COUNSEL FOR THE ASSESSEE FILED BEFORE U S A CHART SHOWING THE FLUCTUATION MARGINS OF BODHTREE CONSULTING LTD., WH ICH ARE AS FOLLOWS:- 34. AS CAN BE SEEN FROM THE ABOVE ANALYSIS, THIS CO MPANY HAS ERRATIC MARGINS AND GROWTH OVER THE YEARS. THE MARGINS OF B ODHTREE ARE CONSISTENTLY CHANGING. THIS REFLECTS THAT THE REVEN UE RECOGNITION POLICY FOLLOWED BY BODHTREE IS NOT PROPER AND IS RESULTING IN CONSISTENT CHANGE IN MARGINS. FURTHER, THE GROWTH RATE OVER THE YEARS IS ALSO FLUCTUATING TO EXTREMES. FURTHER, GROWTH IN REVENUES IS NOT SUPPOR TED BY GROWTH IN EXPENSES. IN SOME CASES, EXPENSE GROWTH IS HIGHER T HAN THE REVENUE GROWTH. ALSO SALARY COST RATIO IS WIDELY FLUCTUATIN G. THESE CIRCUMSTANCES ARE PECULIAR IN NATURE AND REQUIRE FURTHER ANALYSIS, WI THOUT WHICH THIS COMPANY SHOULD BE REJECTED AS A COMPARABLE. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 36 OF 38 35. WE ARE OF THE VIEW THAT THE BASIS ON WHICH THE ASSESSEE SEEKS TO EXCLUDE BODHTREE CONSULTING LTD. IN THIS YEAR IS AC CEPTABLE AND ACCORDINGLY BODHTREE CONSULTING LTD. IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. WE HOLD ACCORDINGLY. 36. THE AO IS DIRECTED TO COMPUTE THE ARITHMETIC ME AN BY EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. A CCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, IF THE SUBMISSIONS OF THE ASSESSEE ARE ACCEPTED, THEN THE ARITHMETIC MEAN OF THE COMPARABLES RETAINE D WOULD BE WITHIN THE RANGE OF +/- 5% OF THE ASSESSEES NET MARGIN. THERE FORE, THE OTHER GROUNDS RAISED IN THE CROSS OBJECTION NOT PRESSED A T THIS STAGE. HE HAS HOWEVER SOUGHT LIBERTY TO URGE THE SAID GROUNDS IN ANY FUTURE PROCEEDING, APPELLATE OR OTHERWISE, AND IN THESE PROCEEDINGS AT A FUTURE POINT IN TIME. THE PRAYER SOUGHT BY THE LEARNED COUNSEL FOR THE AS SESSEE IN THIS REGARD IS ACCEPTED. 37. GROUND NO.13 TO 15 RAISED BY THE REVENUE IN IT S APPEAL IS WITH REGARD TO METHOD OF COMPUTATION OF DEDUCTION U/S.10 A OF THE ACT. THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/S.10A OF THE ACT. WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE AO EXCL UDED TELECOMMUNICATION EXPENSES FROM EXPORT TURNOVER ON THE GROUND THAT THESE EXPENSES ARE INCURRED IN DELIVERY OF COMPUTER SOFTW ARE OUTSIDE INDIA AND THEREFORE TO BE EXCLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 37 OF 38 DEDUCTION UNDER SECTION 10A. THE ASSESSEE PRAYED T HAT THE AFORESAID EXPENDITURE ARE NOT OF THE NATURE SET OUT IN EXPLAN ATION 2(IV) TO SEC.10A OF THE ACT WHICH DEFINES EXPORT TURNOVER. THE ASSES SEE ALSO MADE AN ALTERNATE PRAYER THAT EXPENSES THAT ARE REDUCED FRO M THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER AND IN THIS REGARD HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE KARN ATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) WHEREIN THE HONBLE COURT HELD THAT WHATEVER IS EXCLUDED FROM T HE EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S.10A OF THE ACT. THE MAIN P RAYER AS WELL AS THE ALTERNATE PRAYER WAS REJECTED BY THE AO BUT THE ALT ERNATIVE PRAYER WAS ALLOWED BY THE CIT(A). 38. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN GROUND NO.13 TO 15 RAISED BY T HE REVENUE. TAKING INTO CONSIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) IS JUST AND PROPER AND CALLS FOR NO INTERFERENCE. CONSEQUENTLY GROUND NO.13 TO 1 5 ARE DISMISSED. IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 PAGE 38 OF 38 39. IN THE RESULT, THE APPEAL BY THE REVENUE AND CR OSS-OBJECTION BY THE ASSESSEE ARE PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF JULY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER ENCL: ANNEXURE-I BANGALORE, DATED, THE 30 TH JULY, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.