Sharp Software Development India Private Limited, Bangalore V. DCIT, Bangalore

CO 13/BANG/2012

• Counselvise Citation: [2017] 123 COUNSELVISE.COM (IT) 2677 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 8 month(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 25-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-11-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 25-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHERI M K BIJU CIT ITAT
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Cost of acquisition
• Section: 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER IT(TP)A NO.1109/BANG/2011 ASSESSMENT YEAR : 2005-06 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. VS. M/S. SHARP SOFTWARE DEVELOPMENT (INDIA) PVT. LTD., UNIT-5, LEVEL-3, INNOVATOR BLOCK, INTERNATIONAL TECH PARK, WHITE FIELD ROAD, BANGALORE 560 066. PAN: AAECS 0269E APPELLANT RESPONDENT CO NO.13/BANG/2012 [IN IT(TP)A NO.1109/BANG/2011 ] ASSESSMENT YEAR : 2005-06 M/S. SHARP SOFTWARE DEVELOPMENT (INDIA) PVT. LTD., BANGALORE 560 066. PAN: AAECS 0269E VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. CROSS OBJECTOR RESPONDENT REVENUE BY : SHERI M.K. BIJU, ADDL. CIT (ITAT)-3, DR ASSESSEE BY : SHRI CHAVALI NARAYAN, CA DATE OF HEARING : 23.11.2016 DATE OF PRONOUNCEMENT : 25.01.2017 IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 2 OF 33 O R D E R PER SUNIL KUMAR YADAV, JUDICIAL MEMBER THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST T HE ORDER OF CIT(APPEALS) INTER ALIA ON THE FOLLOWING GROUNDS:- 1. THE ORDER OF THE LEARNED CIT(A) IN SO FAR AS I T RELATES TO THE FOLLOWING GROUNDS IS OPPOSED TO LAW AND FACTS OF TH E CASE. 2. THE CIT(A) ERRED IN HOLDING THAT EXPENDITURE TRA VELING AND COMMUNICATION EXPENSES OF RS.87,69,553/- ARE TO BE EXCLUDED FROM TOTAL TURNOVER AS WELL FOR THE PURPOSE OF COMPUTAT ION OF DEDUCTION U/S 10A WHILE SUCH EXCLUSION IS PERMITTED TO ARRIVE AT THE EXPORT TURNOVER ONLY AS PER THE DEFINITIONS GIVEN IN SEC.10A OF THE I.T. ACT, 1961 AND TOTAL TURNOVER HAS NOT BEEN DEFINED IN THE SECTION. 3. THE LEARNED CIT(A) ERRED IN HOLDING THAT PROFIT ON COST OF MORE THAN 50% OF THE COMPARABLE COMPANY(IES) IS ABNORMAL WITHOUT GIVING REASONS HOW FUNCTIONS DISCHARGED, ASSETS DEPLOYED A ND RISKS ASSUMED OF SUCH COMPANIES WERE DIFFERENT FROM THE APPELLANT COMPANY. 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE TPO ERRED IN NOT EXCLUDIN G COMPARABLES HAVING ANY RELATED PARTY TRANSACTIONS, EVEN IF THE RELATED PARTY TRANSACTIONS ARE LESS THAN 25% OF THE REVENUES. 5. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE AS SESSEE IS ELIGIBLE FOR A STANDARD DEDUCTION OF 5% FROM THE ARM'S LENGT H PRICE (ALP) UNDER THE PROVISO TO SECTION 92C(2) OF THE INCOME T AX ACT. 6. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE SIZ E, TURNOVER AND BRAND OF THE COMPANY ARE DECIDING FACTORS FOR TREAT ING A COMPANY AS A COMPARABLE, AND ACCORDINGLY ERRED IN EXCLUDING M/S INFOSYS TECHNOLOGIES LTD. AS A COMPARABLE. 7. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF TH E ASSESSING OFFICER MAY BE RESTORED. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 3 OF 33 8. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 2. THE ASSESSEE HAS FILED CROSS OBJECTION ASSAILING THE ORDER OF CIT(APPEALS) INTER ALIA ON THE FOLLOWING GROUNDS:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW: 1. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS , BY NOT ACCEPTING THE RESPONDENT'S PLEA IN ENTIRETY AND CON FIRMING WITH THE LEARNED ASSESSING OFFICER ('AO)/ TRANSFER PRICING O FFICER ('TPO') ON NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN B Y THE RESPONDENT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ W ITH THE INCOME TAX RULES, 1962 AND CONDUCTING A FRESH ECONOMIC ANA LYSIS FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE IN CONNECTI ON WITH THE IMPUGNED INTERNATIONAL TRANSACTION AND HOLDING THAT THE RESPONDENT'S INTERNATIONAL TRANSACTION IS NOT AT ARM'S LENGTH. 2. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS , IN NOT ACCEPTING THE RESPONDENT'S PLEA AND CONFIRMING WITH THE LEARNED AO/TPO BY DETERMINING THE ARM'S LENGTH MARGIN/ PRIC E USING FINANCIAL YEAR 2004-2005 DATA WHICH WAS NOT AVAILAB LE TO THE RESPONDENT AT THE TIME OF COMPLYING WITH THE TRANSF ER PRICING DOCUMENTATION REQUIREMENTS. 3. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS , BY REJECTING COMPANIES BY APPLYING DIFFERENT QUANTITATIVE AND QU ALITATIVE FILTERS: A. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY NO T ACCEPTING THE RESPONDENT'S PLEA THAT 'ONSITE REVENUES GREATER THAN 75% OF THE REVENUES' SHOULD NOT BE USED AS A COMPARABILITY CRITERION. B. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS, BY N OT ACCEPTING RESPONDENT'S PLEA THAT COMPANIES HAVING ECONOMIC PE RFORMANCE CONTRARY TO THE INDUSTRY BEHAVIOUR (E.G. COMPANIES WHICH SHOWED A DIMINISHING REVENUE TREND AND OR UNDER-UTI LISATION OF ASSETS, ETC) SHOULD NOT BE REJECTED. C. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS, BY N OT ACCEPTING THE RESPONDENT'S PLEA THAT CERTAIN COMPARABLE COMPA NIES IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 4 OF 33 IDENTIFIED IN THE TRANSFER PRICING DOCUMENTATION, W HERE CONSOLIDATED RESULTS HAD BEEN USED FOR ANALYSIS SHO ULD NOT BE REJECTED. THE RESPONDENT HAD CONSIDERED THE CONSOLI DATED RESULTS IN ONLY THOSE CASES WHERE THE INCOME OF THE INDIAN COMPANY CONSTITUTED MORE THAN 75% OF THE CONSOLIDAT ED COMPANY-WIDE/ SEGMENTAL REVENUES. D. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS, BY N OT ACCEPTING THE RESPONDENT'S PLEA THAT COMPANIES HAVING DIFFERE NT ACCOUNTING YEAR (I.E. COMPANIES HAVING ACCOUNTING Y EAR OTHER THAN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMEN TS WERE FOR A PERIOD OTHER THAN 12 MONTHS) SHOULD NOT BE RE JECTED. 4. THE LEARNED CIT(A) HAS ERRED IN LAW BY UPHOLDING THE TPO'S APPROACH OF EXERCISING HIS POWERS UNDER SECTION 133 (6) OF THE ACT TO OBTAIN INFORMATION WHICH WAS NOT AVAILABLE IN PUBLI C DOMAIN AND RELYING ON THE SAME FOR COMPARABILITY PURPOSES. 5. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS , BY ACCEPTING CERTAIN COMPARABLE COMPANIES USING UNREASONABLE COM PARABILITY CRITERIA. 6. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, B Y NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE RESPONDENT VIS-A-VIS THE COMPARABLES. 7. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS , BY IGNORING THE FACT THAT SINCE THE RESPONDENT IS AVAILING TAX HOLI DAY U/S 10A OF THE ACT, THERE IS NO MOTIVE OR REASON TO SHIFT PROFITS OUT OF INDIA, CURBING WHICH IS THE BASIC INTENTION OF INTRODUCING THE TRA NSFER PRICING PROVISIONS. 8. THE LEARNED CIT(A) ERRED IN CONFIRMING THE IMPOSI TION OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT; THE RESPONDENT SUBMITS THAT EACH OF THE ABOVE GROUN DS IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE RESPONDENT CRAVES LEAVE TO ADD, ALTER, VARY, OM IT, AMEND OR DELETE ONE OR MORE OF THE ABOVE GROUNDS OF CROSS-OB JECTIONS AT ANY TIME BEFORE, OR AT THE TIME OF, HEARING OF THE APPE AL, SO AS TO ENABLE THE APPELLATE TRIBUNAL TO DECIDE THIS RESPONSE ACCO RDING TO LAW. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 5 OF 33 3. SINCE THE APPEAL AND THE CROSS OBJECTIONS WERE H EARD TOGETHER, THEY ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FO R THE SAKE OF CONVENIENCE. 4. THROUGH GROUND NO.2 IN REVENUES APPEAL, THE REV ENUE HAS ASSAILED THE ORDER OF CIT(APPEALS) FOR THE EXCLUSION OF EXPE NDITURE ON TRAVELLING AND COMMUNICATION FROM THE TOTAL TURNOVER AS WELL AS TH E EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 10A OF THE INCOME-TAX ACT, 1961 [THE ACT]. 5. DURING THE COURSE OF HEARING, OUR ATTENTION WAS INVITED THAT CIT(APPEALS) ADJUDICATED THE ISSUE IN THE LIGHT OF THE ORDER OF THE TRIBUNAL IN THE CASE OF TATA ELXSI LTD. V. ACIT, ITA NO.315/BANG/2006 AND THIS ORDER OF THE TRIBUNAL WAS APPROVED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD., 349 ITR 98 (KARN) . THEREFORE, THE FINDING OF THE CIT(APPEALS) IS IN CONSISTENCE WITH THE FINDING OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD. (SUPRA) . THUS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). WE ACCORDING LY CONFIRM THE SAME AND REJECT THIS GROUND OF THE REVENUE. 6. SO FAR AS THE REMAINING GROUNDS IN REVENUES APP EAL AND THE GROUNDS RAISED IN THE CO OF THE ASSESSEE ARE CONCER NED, THEY ALL RELATE TO THE INCLUSION/EXCLUSION OF THE COMPARABLES TAKEN BY THE TPO FOR COMPUTING THE ALP WITH RESPECT TO INTERNATIONAL TRANSACTIONS. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 6 OF 33 7. DURING THE COURSE OF HEARING, THE LD. COUNSEL FO R THE ASSESSEE HAS FILED A CHART DETAILING THE PROFILE, RELATED PARTY TRANSACTIONS (RPT), TURNOVER, ETC. OF THE COMPARABLES. 8. THE FACTS IN BRIEF BORNE OUT FROM THE RECORD ARE THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER ENGAGED IN THE BUSINESS OF DEVELOPING, TESTING, CUSTOMIZING AND MAINTAINING HIGH QUALITY SOFTWARE F OR ITS ASSOCIATED ENTERPRISES (AE). THE ASSESSEE COMPANY FILED ITS R ETURN OF INCOME ON 28.10.2005 DECLARING A TAXABLE INCOME OF RS.97,52,8 62 US. 10A OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, HAVING NOTED THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE, THE AO MADE A REFERENCE U/S. 92CA OF THE ACT TO THE TPO FOR DETER MINATION OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION S OF THE ASSESSEE COMPANY. FOR THE PURPOSE OF ESTABLISHING THE ALP OF ITS INTERNATIONAL TRANSACTIONS WITH ITS AES, THE ASSESSEE HAD UNDERTA KEN TP STUDY, CARRIED OUT BY AN INDEPENDENT EXTERNAL CONSULTANT IN ACCORD ANCE WITH THE PROVISIONS OF THE ACT READ WITH INCOME-TAX RULES. THE DETAILED ANALYSIS WAS UNDERTAKEN TO DETERMINE THE FUNCTIONS PERFORMED , RISKS ASSUMED AND ASSETS UTILIZED BY THE ASSESSEE COMPANY AND ITS AES IN RESPECT OF THE INTERNATIONAL TRANSACTIONS BETWEEN THEM. THE ASSES SEE HAS ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST AP PROPRIATE METHOD TO DETERMINE THE ALP AND A SEARCH WAS CONDUCTED ON PROWESS DATABASE AND CAPITALINE DATABASE UPDATED TILL 05.08.2005 AND 12.08.2005 RESPECTIVELY TO SELECT THE COMPARABLE COMPANIES. T HE SEARCHES ON THE IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 7 OF 33 DATABASES YIELDED A SET OF 45 COMPARABLES FOR SOFTW ARE DEVELOPMENT SERVICES WITH WEIGHTED AVERAGE OPERATING PROFIT/OPE RATING PROFIT COST OF 9.97%. AS THE OPERATING MARGIN OF THE COMPANY OF 5 .15% WAS WITHIN THE +/- 5% RANGE OF THE ARMS LENGTH MARGIN, THE PRICE CHARGED BY THE COMPANY TO ITS AES IN RESPECT OF THE SAID INTERNATIONAL TRA NSACTIONS WAS FOUND TO BE AT ARMS LENGTH AND ACCORDING TO THE INDIAN TP REGU LATIONS. 9. THE TPO EXAMINED THE TP STUDY MADE BY THE ASSESS EE AND FINALLY HAS TAKEN 17 COMPARABLES TO DETERMINE THE ALP. 10. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE CIT(APPEALS) AND THE CIT(APPEALS) HAS EXCLUDED CERT AIN COMPARABLES ON THE GROUND THAT PERCENTAGE OF RPT OR TURNOVER FILTE R OR FOR SUPER PROFITS OF THE COMPARABLES. 11. BEING AGGRIEVED WITH THE COMPUTATION OF ALP MAD E BY THE CIT(APPEALS), THE REVENUE HAS FILED AN APPEAL BEFOR E THE TRIBUNAL AND THE ASSESSEE HAS FILED THE CO CLAIMING EXCLUSION OF CER TAIN MORE COMPARABLES WHICH FIND PLACE IN THE TP STUDY OF THE ASSESSEE BY RAISING ADDITIONAL GROUNDS. FOR THE SAKE OF REFERENCE, WE EXTRACT THE ADDITIONAL GROUND RAISED IN THE CO AS UNDER:- ADDITIONAL GROUNDS OF CROSS OBJECTION IN ADDITION TO THE GROUNDS OF CROSS OBJECTIONS RAIS ED BEFORE THE HON'BLE BENCH, THE PETITIONER HEREBY WISHES TO SUBM IT THE FOLLOWING ADDITIONAL GROUNDS: IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 8 OF 33 9. THE LEARNED TPO HAS ERRED IN LAW AND ON FACTS B Y SELECTING THE FOLLOWING COMPANIES AS COMPARABLE WHICH WERE FUNCTI ONALLY DIFFERENT FROM THE ASSESSEE: A. VISUAL SOFT TECH LIMITED B. FOUR SOFT LIMITED THE PETITIONER SUBMITS THAT THE ABOVE ADDITIONAL GR OUND IS BEING RAISED BY WAY OF ABUNDANT CAUTION. THE ADDITIONAL G ROUND RAISE ISSUE WHICH IS FUNDAMENTAL TO THE APPEAL AND THE NON-ADMI SSION AND NON- ADJUDICATION OF THE SAME WOULD RESULT IN AN INCOMPL ETE APPRECIATION AND ADJUDICATION OF THE MATTER. THE PETITIONER SUBM ITS THAT THE FAILURE TO RAISE THESE GROUNDS AT AN EARLIER STAGE IS NEITH ER WILFUL NOR WANTON BUT DUE TO THE REASONS STATED ABOVE. FURTHER THE AB OVE GROUND HAS BEEN RAISED BASED ON THE FOLLOWING RULINGS: DCIT VS. TEXTRON GLOBAL TECHNOLOGY CENTRE PRIVATE L IMITED (IT(TP)A NO. 29/BANG/12) ITO VS. COLT TECHNOLOGY SERVICES INDIA PRIVATE LIMI TED (IT(TP)A NO. 609/DEL/2011 ) ITO VS SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED (ITA NO. 1 032/BANG/ 2011) THE HON'BLE ITAT HAD REJECTED CERTAIN COMPANIES AS COMPARABLES IN THE AFOREMENTIONED RULINGS. NO PREJUDICE WOULD BE C AUSED TO THE APPELLANT BY REASON OF THE ABOVE ADDITIONAL GROUNDS BEING ADMITTED AND ADJUDICATED AND ACCORDINGLY THE BALANCE OF CONV ENIENCE IS IN FAVOUR OF SUCH AN ORDER BEING PASSED BY THIS HON'BL E TRIBUNAL. THE PETITIONER STATES AND SUBMITS THAT THE ISSUES R AISED IN THE ADDITIONAL GROUND ABOVE ARE LEGAL ISSUES AND ARISE OUT OF THE ORDER OF THE LOWER AUTHORITIES. RELIANCE IS BASED ON THE DEC ISIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF JUTE CORPORATI ON OF INDIA VS. C.I.T. (187 ITR 688) AND NATIONAL THERMAL POWER COR PORATION VS. C.I.T. (229 ITR 383) AS WELL AS THE FULL BENCH OF T HE BOMBAY HIGH COURT IN THE CASE OF AHMADABAD ELECTRICITY CO. LTD. (199 ITR 351) AND THE DECISION OF CHANDIGARH SPECIAL BENCH IN THE CASE OF DCIT VS. QUARK SYSTEMS (P.) LTD. (IT APPEAL NO.100(CHD.) OF 2009). IN THE ABOVE CIRCUMSTANCES THE PETITIONER PRAYS THA T THIS HON'BLE TRIBUNAL BE PLEASED TO; IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 9 OF 33 (I) ADMIT AND ADJUDICATE THE ABOVE ADDITIONAL GROU ND, (II) PASS ANY OTHER ORDER THAT MAY BE REQUIRED IN THE CIRCUMSTANCES OF THE CASE AND RENDER JUSTICE. 12. WE HAVE HEARD THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE ADDL. CIT(DR). DURING THE COURSE OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE HAS INVITED OUR ATTENT ION TO THE FACT THAT OUT OF 17 COMPARABLES TAKEN BY THE TPO, THE CIT(APPEALS) H AS EXCLUDED 13 COMPARABLES AND HAS FINALLY TAKEN ONLY 4 COMPARABLE S FOR DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTIONS. OUT OF THE FINALLY SET OF COMPARABLES TAKEN BY THE CIT(A), THE ASSESSEE FURTHER SEEKS THE EXCLUSION OF VISUAL SOFT TECH LTD. ON THE GROUND OF TURNOVER FILTER AS THE TURNOVER O F THE ASSESSEE IS RS.14.41 CRORES AND TURNOVER OF THIS CO MPARABLE IS 185.43 CRORES. SINCE IT IS MORE THAN 10 TIMES OF THE TURN OVER OF THE ASSESSEE COMPANY, THIS COMPARABLE HAS TO BE EXCLUDED. IN SU PPORT OF THIS CONTENTION, HE PLACED RELIANCE UPON THE ORDER OF TH E TRIBUNAL IN THE CASE OF ITO V. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. IN ITA NO.609/DEL/2011 AND CO NO.81/DEL/2011. BESIDES, HE HAS ALSO SUPPORTED THE EXCLUSION OF THE COMPARABLES MADE BY THE CIT(APPEALS) ON DIFFERENT G ROUNDS. 13. DURING THE COURSE OF HEARING, THE LD. COUNSEL F OR THE ASSESSEE HAS CONTENDED THAT ALL THESE 17 COMPARABLES TAKEN BY TH E TPO WERE EXAMINED BY THE TRIBUNAL IN THE CASE OF ACIT V. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP)A NOS. 04/BANG/2012 & 1338/BANG/2011 AND THE TRIBUNAL HAS IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 10 OF 33 APPROVED THE EXCLUSION OF THE COMPARABLES MADE BY T HE CIT(APPEALS). A COPY OF THE ORDER OF THE TRIBUNAL IS PLACED ON RECO RD AT PAGES 566 TO 586 OF THE COMPILATION OF THE ASSESSEE. 14. OUT OF THE FINAL SET OF COMPARABLES TAKEN BY TH E CIT(APPEALS), THE ASSESSEE HAS ALSO DISPUTED THE INCLUSION OF THE COM PARABLES VIZ., BODHTREE CONSULTING LTD. AND SANKHYA INFOTECH LTD. ON THE GROUND THAT THESE COMPARABLES ARE FUNCTIONALLY DIFFERENT, THEREFORE T HEY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. IN SUPPORT OF THESE CONTENTIONS, HE RELIED UPON THE ORDER OF THE TRIBUNAL IN THE CASE OF ACIT V. MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA) . 15. THE LD. DR, ON THE OTHER HAND, HAS PLACED HEAVY RELIANCE UPON THE ORDER OF TPO WITH THE SUBMISSION THAT THE TPO HAS R IGHTLY TAKEN 17 COMPARABLES FOR DETERMINATION OF THE ALP WITH RESPE CT TO INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS AE . 16. IT WAS ALSO CONTENDED ON BEHALF OF THE LD. DR T HAT THE PROFILE OF MCAFEE SOFTWARE (INDIA) PVT. LTD. IS DIFFERENT FROM THE ASSESSEE, THEREFORE RELIANCE CANNOT BE PLACED UPON THE ORDER OF THE TRI BUNAL, WHILE APPROVING EXCLUSION OF THE COMPARABLES MADE BY THE CIT(APPEAL S). 17. HAVING CAREFULLY EXAMINED THE ORDERS OF LOWER A UTHORITIES IN THE LIGHT OF THE ORDER OF THE TRIBUNAL AND THE CHART FILED BE FORE US, WE FIND THAT THE TPO HAS TAKEN THE FOLLOWING 17 COMPARABLES:- IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 11 OF 33 1. BODHTREE CONSULTING LTD. 2. SANKHYA INFOTECH LTD. 3. VISUAL SOFT TECHNOLOGIES LIMITED (SEG) 4. LGS GLOBAL LTD. (LANCO GLOBAL SOLUTIONS LTD.) 5. R S SOFTWARE (INDIA) LTD. 6. SASKEN COMMUNICATION TECHNOLOGIES LTD. 7. SASKEN NETWORK SYSTEMS LTD. 8. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. 9. FOUR SOFT LIMITED 10. TATA ELXSI LTD. (SEG.) 11. INFOSYS TECHNOLOGIES LTD. 12. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 13. SATYAM COMPUTER SERVICES 14. L & T INFOTECH LTD. 15. IGATE GLOBAL SOLUTIONS LTD. 16. THIRDWARE SOLUTIONS LTD. 17. EXENSYS SOFTWARE SOLUTIONS LTD. 18. OUT OF 17 COMPARABLES, THE CIT(APPEALS) HAD EXC LUDED 6 COMPARABLES I.E., R.S. SOFTWARE (INDIA) LTD., SASKE N COMMUNICATION TECHNOLOGIES LTD., SASKEN NETWORK SYSTEMS LTD., GEO METRIC SOFTWARE SOLUTIONS CO. LTD., FOUR SOFT LIMITED AND TATA ELXSI LTD. (SEG.) ON THE GROUND THAT THEY HAVE RELATED PARTY TRANSACTIONS. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 12 OF 33 19. THE CIT(APPEALS) HAD ALSO EXCLUDED 5 COMPARABLE S I.E., INFOSYS TECHNOLOGIES LTD., SATYAM COMPUTER SERVICES AND FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) ON THE GROUND OF HAVING RELATED PARTY TRANSACTIONS AND L & T INFOTECH LTD . AND IGATE GLOBAL SOLUTIONS LTD. HAVING APPLIED THE TURNOVER FILTER. HE ALSO EXCLUDED TWO COMPARABLES I.E., THIRDWARE SOLUTIONS LTD. AND EXENSYS SOFTWARE SOLUTIONS LTD. ON THE GROUND OF SUPER PROFITS. 20. THE LD. DR DISPUTED EXCLUSION OF THESE COMPARAB LES FROM THE LIST OF COMPARABLES, WHEREAS THE LD. COUNSEL FOR THE ASSESS EE SOUGHT EXCLUSION OF BODHTREE CONSULTING LTD., SANKHYA INFOTECH LTD., V ISUAL SOFT TECHNOLOGIES LIMITED (SEG), GEOMETRIC SOFTWARE SOLUTIONS CO. LT D., FOUR SOFT LIMITED AND TATA ELXSI LTD. (SEG.) ON THE GROUND THAT THESE COMPARABLES ARE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY. THEREFORE, THEY CANNOT BE TAKEN AS GOOD COMPARABLES. HE PLACED HEAVY RELIA NCE UPON THE ORDER OF THE TRIBUNAL IN THE CASE OF ACIT V. MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA) . BESIDES, HE CLAIMS EXCLUSION OF INFOSYS TECHNOLO GIES LTD. ON THE GROUND THAT THIS COMPANY HAS HUGE TURNOVER, HIGH RI SK PROFILE, OWNS SIGNIFICANT INTANGIBLES AND HUGE BRAND NAME. EXCLU SION OF FLEXTRONICS SOFTWARE SYSTEMS LTD. WAS SOUGHT ON THE GROUND THAT IT INCURRED EXPENDITURE FOR SELLING PRODUCTS AND R&D EXPENSES F OR PRODUCT DEVELOPMENT. THE SEGMENT INCLUDES INCOME FROM SOFTW ARE DEVELOPMENT AND PRODUCT DEVELOPMENT. THE EXCLUSION OF SATYAM C OMPUTER SERVICES WAS CLAIMED ON THE GROUND THAT IT HAD UNRELIABLE FI NANCIAL DATA DUE TO FINANCIAL SCAM. THE EXCLUSION OF THIRDWARE SOLUTIO NS LTD. , EXENSYS IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 13 OF 33 SOFTWARE SOLUTIONS LTD. WAS CLAIMED ON THE GROUND THAT THESE COMPARABLES ARE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPAN Y, AS THIRDWARE SOLUTIONS LTD. IS ENGAGED IN DEVELOPMENT OF SOFTWAR E PRODUCTS AND HAS ALSO REVENUE FROM SALE OF SOFTWARE LICENSE. BESIDE S IT EARNS EXTRA-ORDINARY PROFITS DUE TO OWNERSHIP OF SIGNIFICANT INTANGIBLES . WITH REGARD TO EXENSYS SOFTWARE SOLUTIONS LTD., IT WAS CONTENDED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AND DEALS IN SOFTWARE PRODUCTS AND EXTRA ORDINARY EVENTS OF AMALGAMATION. IT OWNS BRAND WORTH 5 CRORES AND ENG AGED IN R&D AND OWNS SOFTWARE PRODUCTS. 21. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTEN DED THAT THESE COMPARABLES WERE EXAMINED BY THE TRIBUNAL IN THE CA SE OF ACIT V. MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA) . COPY OF THE ORDER OF THE TRIBUNAL IS AVAILABLE AT PAGES 566 TO 586 OF THE COMPILATION. 22. FROM A PERUSAL OF THE TRIBUNAL ORDERS, WE FIND THAT THE TPO HAS TAKEN SIMILAR 17 COMPARABLES AND HAD DISCUSSED ALL THESE COMPARABLES WHICH WERE SOUGHT TO BE EXCLUDED BY THE ASSESSEE. THE ASSESSEE ALSO CLAIMS INCLUSION OF LGS GLOBAL LTD. (LANCO GLOBAL S OLUTIONS LTD.), R S SOFTWARE (INDIA ) LTD. , SASKEN COMMUNICATION TECHNOLOGIES LTD. , SASKEN NETWORK SYSTEMS LTD. , L&T INFOTECH LTD. IGATE GLOBAL SOLUTIONS LTD. WHICH WERE EXCLUDED BY THE CIT(APPEALS). THE CIT(A) HAS EXCLUDED THE SAME BY APPLYING THE RPT FILTER AT 0%, WHEREAS THE TRIBU NAL HAS REPEATEDLY HELD THAT RPT FILTER HAS TO BE APPLIED BETWEEN THE RANGE OF 15% TO 25%. THE INCLUSION/EXCLUSION OF THESE COMPARABLES WERE EXAMI NED BY THE TRIBUNAL IN IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 14 OF 33 THE CASE OF ACIT V. MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA) FOR THE SAME ASSESSMENT YEAR, I.E., AY 2005-06. FOR THE SAKE OF REFERENCE, WE EXTRACT THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL A S UNDER:- 10. THE FINAL LIST OF 17 COMPANIES SELECTED BY TPO ARE AS UNDER: SL NO. COMPARABLES SELECTED BY TPO NCP MARGINS AS PER TPO ORDER (%) (WC-UNADJ) NCP MARGINS AS PER TPO ORDER (%) (WC ADJ) 1. BODHTREE CONSULTING LTD., 24.85 22.35 2. LANCO GLOBAL SYSTEMS LTD., 13.65 9.51 3. EXENSYS SOFTWARE SOLUTIONS LTD., 70.68 62.85 4. SANKHYA INFOTECH LTD., 27.39 21.14 5. SASKEN NETWORK SYSTEMS LTD., 16.64 14.02 6. FOUR SOFT LTD., 22.98 21.35 7. THIRDWARE SOLUTION LTD., 66.09 63.97 8. R S SOFTWARE (INDIA) LTD., 8.07 6.79 9. GEOMETRIC SOFTWARE SOLUTIONS COMPANY LTD., 20.34 17.75 10. TATA ELXSI LTD., 24.35 22.77 11. VISUALSOFT TECHNOLOGIES LTD., 23.52 20.10 12. SASKEN COMMUNICATION TECHNOLOGIES LTD., 14.42 13.24 13. IGATE GLOBAL SOLUTIONS LTD., 4.32 2.43 14. FLEXTRONICS SOFTWARE SYSTEMS LTD 32.19 29.42 15. L&T INFOTECH LTD., 10.33 8.56 16. SATYAM COMPUTER SERVICES LTD 29.44 26.94 17. INFOSYS TECHNOLOGIES LTD., 42.83 4.96 ARITHMETICAL MEAN 26.59 23.74 THE ANALYSIS OF EACH OF THE COMPARABLE COMPANY IS A S UNDER. SATYAM COMPUTERS LTD: 10.1. OUT OF THE ABOVE COMPARABLES, SATYAM COMPUTER SERVICES LTD., WAS EXCLUDED BY CIT(A) ON THE BASIS OF NON-RE LIABILITY OF IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 15 OF 33 FINANCIAL DATA. REVENUE HAS ACCEPTED THE SAME AND HAS NOT CONTESTED. SO, THE SAID COMPANY HAS BEEN RIGHTLY EXCLUDED. INFOSYS TECHNOLOGIES LTD., EXENSYS SOFTWARE SO LUTIONS LTD 10.2. LD.CIT(A) HAS EXCLUDED INFOSYS AND EXENSYS, O N THE BASIS OF FUNCTIONAL DISSIMILARITY AND HAVING EXTRAORDINAR Y EVENT DURING THE YEAR. EXENSYS WAS HAVING EXTRAORDINARY PROFITS BY WAY OF AMALGAMATION OF COMPANIES DURING THE YEAR. INFOSYS WAS EXCLUDED HAVING DIFFERENT FUNCTIONALITY OF PRODUCTS, HAVING HIGH TURNOVER AND BRAND NAME. FOLLOWING THE DECISION OF AGNITY TECHN OLOGIES VS. ITO OF ITAT AS APPROVED BY THE HON'BLE DELHI HIGH COURT , INFOSYS CANNOT BE CONSIDERED AS COMPARABLE. THE SAME VIEW WAS HELD BY CO- ORDINATE BENCH IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT(TP)A NO. 130 2/BANG/2011 DT. 11-06-2015 (SUPRA). SINCE THE ORDERS OF LD.CIT(A) IS IN AGREEMENT WITH THE DECISION ON THESE TWO COMPARABLES BY VARIO US CO-ORDINATE BENCHES, WE UPHOLD THE SAME. BODHTREE CONSULTING LTD.,: 10.3. THIS COMPANY WAS RETAINED BY LD.CIT(A) BUT AS SESSEE OBJECTS ON THE BASIS OF FUNCTIONALITY. HOWEVER, AS SEEN FROM THE ORDERS OF CO-ORDINATE BENCHES IN THE CASE OF ITO VS . M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT( TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA) AS WELL AS DCIT VS. TOSHIBA EMBEDDED SOFTWARE (I) PVT. LTD., IN IT(TP)A NO. 1/B ANG/2012 DT. 10- 05-2013, BODHTREE CONSULTING LTD., WAS ACCEPTED AS A COMPARABLE. HOWEVER, IN THE CASE OF CORDYS SOFTWARE INDIA P. LT D., IN ITA NO. 1451/HYD/2010 DT. 13-06-2014 (WHERE ONE OF US, AM I S THE AUTHOR) HAS CONSIDERED IN DETAIL AND EXCLUDED THE SAME FOR THE FOLLOWING REASONS: 1. BODHTREE CONSULTING LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHO ULD BE REJECTED UNDER THE FOLLOWING TPOS FILTERS: RELATED PARTY TRANSACTIONS FILTER: AS PER SCHEDUL E 4 OF THE BALANCE SHEET, THE COMPANY HAS INVESTMENTS IN PERIG ON, LIC, USA AND AS PER THE RESPONSE U/S 133(6); THE COMPANY HAS EXPORT SALES TO PERIGON LIC, USA OF RS. 133.90 LAKHS, BEIN G 34.68% OF THE TOTAL TURNOVER. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 16 OF 33 FUNCTIONALLY DIFFERENT FILTER: THE COMPANY IN ITS RESPONSE TO NOTICE U/S 133(6) HAS STATED THAT IT PROVIDES E-PAP ER SOLUTIONS, DATA CLEANSING SOFTWARE, WEBSITE DEVELOPMENT AND OT HER CUSTOMIZED SOFTWARE AND ALSO STATE THAT THE E-PAPER SOLUTIONS AND DATA CLEANSING SERVICES WOULD COME UNDER THE CATEGO RY OF IT ENABLED SERVICES. CONSIDERING THE ABOVE, WE DIRECT THAT THE ABOVE COM PANY HAS TO BE EXCLUDED ON THE REASON OF RPT OF MORE THAN 25% AND FUNCTIONALITY. LANCO GLOBAL SYSTEMS LTD., : 10.4. THIS COMPANY EVEN THOUGH INCLUDED BY TPO AND HAS NOT BEEN OBJECTED TO BY ASSESSEE, WAS REJECTED BY THE C IT(A) ON THE REASON OF LOW PROFIT MARGIN. THIS IS NOT A VALID G ROUND. ONLY CONTINUOUS LOSS MAKING COMPANIES ARE BEING EXCLUDED FROM THE COMPARABILITY. IF THIS ARGUMENT WAS ACCEPTED, THE HIGH PROFIT MAKING COMPANIES ARE ALSO TO BE EXCLUDED. THIS IS NOT THE PURPOSE FOR WHICH TP ANALYSIS IS BEING UNDERTAKEN. THEREFORE, KEEPIN G THE PRINCIPLES LAID DOWN BY THE SPECIAL BENCH OF ITAT IN THE CASE OF MAERSK GLOBAL CENTERS (INDIA) P.LTD 43 TAXMANN.COM 100 MUMBAI(SB) , WE, CONSIDER THE SAME AS COMPARABLE AND RETAIN IT IN TH E LIST. SANKHYA INFOTECH LTD., THIRDWARE SOLUTION LTD., & TATA ELXSI LTD., : 10.5. THESE THREE COMPANIES ARE REJECTED AS COMPARA BLES ON FUNCTIONALITY IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT(TP)A NO. 130 2/BANG/2011 DT. 11-06-2015 (SUPRA) (PARAS 19-20, 22-26, 27-30 RESTI VELY) AND IN THE CASE OF CORDYS SOFTWARE INDIA P. LTD., IN ITA NO. 1451/HYD/ 2010 DT. 13-06-2014 (SUPRA) AT PARA NO. 13. THE ANALYSIS BY THE CO-ORDINATE BENCHES IS AS UNDER: SANKHYA INFOTECH LIMITED (SANKHYA) 19. 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 FOCUS ES ON THE DEVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORT AND AVIATION INDUSTRY. HOWEVER, SEGMENTAL INFORMATION IN RELATIO N TO THE ABOVE MENTIONED ACTIVITIES IS NOT AVAILABLE IN PUBL IC DOMAIN. THEREFORE, AS SANKHYA ENGAGES ITSELF IN PRODUCTS AN D SERVICES AS WELL AS SOFTWARE TRAINING, IT CANNOT BE CONSIDERED AS A COMPARABLE IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 17 OF 33 OF THE APPELLANT. THE PRODUCTS DEVELOPED AND OWNED BY SANKHYA ARE LISTED BELOW: (1) SILICONTM TRAINING SUITE OF PRODUCTS: THE PRODU CTS ARE A COMPREHENSIVE ENTERPRISE WIDE TRAINING PLATFORM THA T COVERS THE ENTIRE SPECTRUM OF TRAINING IN A PAPERLESS ENVIRONM ENT. IT COMPRISES OF FOUR PRODUCTS:- - SILICONTM LMS (TRAINING MANAGEMENT INFORMATION - SILICONTM QT (ONLINE ASSESSMENT SYSTEM) - SILICONTM LCMS (LEARNING CONTENT MANAGEMENT SYSTE M) - IRMAQTM : THIS IS AN INTEGRATED RESOURCE PLANNING , 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 OPE N 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 PRODUCTION OF SOFTWARE IS NOT CAPABLE OF BEING EXPR ESSED IN ANY GENERIC UNIT AND HENCE 11 IS RIOT POSSIBLE T O GIVE THE INFORMATION AS REQUIRED BY CERTAIN CLAUSES OF PARAG RAPHS 3.4C AND 4 D OF PART II OF SCHEDULE VI OF THE COMPA NIES ACT, 1956. THE DELHI TRIBUNAL IN ITO V. COLT TECHNOLOGY SERVIC ES INDIA PVT. LTD. (JUDGMENT DATED 23.10.2012 IN ITA NO. 609 I/DEL/2011 FOR THE ASSESSMENT YEAR 2005-06) HAS HELD THAT THE SAID COMPANY IS NOT A COMPARABLE TO THE ASSESSEE THEREIN WHICH W AS ALSO IN THE BUSINESS OF SOFTWARE DEVELOPMENT. 20. THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE CONSIDERED. THE ACTIVITIES SET OUT ABO VE AND THE DECISION OF THE DELHI ITAT RENDERED IN THE CONTEXT OF A SOFTWARE DEVELOPMENT COMPANY SUCH AS THE ASSESSEE MAKES IT A MPLY CLEAR THAT THIS COMPANY SANKHYA CANNOT BE REGARDED AS A C OMPARABLE. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 18 OF 33 THE SAME IS DIRECTED TO BE EXCLUDED FROM THE LIST O F COMPARABLE COMPANIES. 22. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS, HELD THAT THE A FORESAID TWO COMPANIES VIZ., FOUR SOFT LTD., AND THIRDWARE SOLUT IONS 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 OBJECT ED ON THE SAME REASON AS THIS COMPANY IS INVOLVED IN PROD UCT DEVELOPMENT AND OWNS PRODUCTS NAMELY 4S ETRANS AND 4S ELOG. THESE PRODUCTS ARE USED IN SUN MICROSYSTEMS INC, IN AN APPLICATION VERIFICATION KIT CERTIFIED FOR ENTERPRI SES AND ASSESSEE HAVE BEEN INVESTING CONTINUOUSLY ON PRODUC T DEVELOPMENTS. SINCE ASSESSEE IS IN THE PRODUCT DEVE LOPMENT, 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 ENGAG ED IN SALE OF SOFTWARE LICENCE AND RELATED SERVICES AND NOT A SER VICE PROVIDER. REFERRING TO THE ANNUAL REPORT, IT WAS SUBMITTED TH AT THIS COMPARABLE WAS REJECTED BY THE ITAT, PUNE IN THE CA SE OF EGAIN COMMUNICATIONS LTD. THIS COMPANY HAVING REVENUE FRO M PRODUCT LICENSE AND EARNING EXTRAORDINARY PROFIT DU E TO INTANGIBLE OWNS. 15.6. THESE THREE COMPARABLE ABOVE FLEXTRONICS SOFT WARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SO LUTION LIMITED WERE ANALYSED BY THE COORDINATE BENCH OF TH E TRIBUNAL IN THE CASE OF INTOTO SOFTWARE SOLUTIONS PVT. LTD. (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER : '23. THE OTHER COMPANIES WHICH ARE OBJECTED TO BY T HE 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 SUBMITTE D THAT THEY ARE INTO BOTH SOFTWARE AS WELL AS PRODUCT DEVELOPMENT. HE SUBMITTED THAT THE TPO HAS TAKEN NO TE OF THE FACT THESE COMPANIES ARE ALSO INTO PRODUCT DEVELOPMENT BUT HAS SELECTED THESE COMPANIES AS IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 19 OF 33 COMPARABLES BY APPLYING THE FILTER OF MORE THAN 70% OF ITS REVENUE BEING FROM SOFTWARE DEVELOPMENT SERVICES. T HE LEARNED COUNSEL SUBMITTED THAT THE FUNCTIONS OF THE SE COMPANIES ARE DIFFERENT FROM THE ASSESSEE WHO WAS IN TO SOLE ACTIVITY OF SOFTWARE DEVELOPMENT FOR ITS ASSOC IATED ENTERPRISE. HE SUBMITTED THAT THE TPO HAS ALLOCATED THE EXPENDITURE IN THE PROPORTION OF THE REVENUE OF THE SE COMPANIES FROM SOFTWARE SERVICES AND SOFTWARE PRODU CTS AND HAS ADOPTED THE FIGURE AS SEGMENTAL MARGIN OF T HE COMPANY AND HAS TAKEN THESE COMPANIES AS COMPARABLE S. HE SUBMITTED THAT BY TAKING THE PROPORTIONATE EXPENDITURE, THE CORRECT FINANCIAL RESULTS WOULD NO T EMERGE. HE SUBMITTED THAT NOTHING PREVENTED THE ASSESSING OFFICER/TPO FROM OBTAINING THE SEGMENTAL DETAILS FROM THE RESPECTIVE COMPARABLE COMPANIES BE FORE ADOPTING THEM AS COMPARABLE COMPANIES AND BEFORE TAKING THE OPERATING MARGIN FOR ARRIVING AT THE ARM S LENGTH PRICE. HE SUBMITTED THAT WHEREVER THE SEGMEN TAL DETAILS ARE NOT AVAILABLE, THEN THE SAID COMPANIES SHOULD NOT BE TAKEN AS COMPARABLES. FOR THIS PURPOSE, HE P LACED RELIANCE UPON THE DECISION OF THE BANGALORE TRIBUNA L IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. L TD. VS. THE DCIT IN ITA.NO.1252/BANG/2010 WHEREIN THESE COMPANIES WERE DIRECTED TO BE EXCLUDED FROM THE LIS T OF COMPARABLES. 23. THE LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 24. HAVING HEARD BOTH THE PARTIES AND HAVING GONE T HROUGH THE MATERIAL ON RECORD, WE FIND THAT THE TPO AT PAGE 37 OF HIS ORDER HAS BROUGHT OUT THE DIFFERENCES BETWEEN A PRODUCT C OMPANY AND A SOFTWARE DEVELOPMENT SERVICES PROVIDER. THUS, IT IS CLEAR THAT HE IS AWARE OF THE FUNCTIONAL DISSIMILARITY BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICE PROVIDER . HAVING TAKEN NOTE OF THE DIFFERENCE BETWEEN THE TWO FUNCTI ONS, THE ASSESSING OFFICER OUGHT NOT TO HAVE TAKEN THE COMPA NIES WHICH ARE INTO BOTH THE PRODUCT DEVELOPMENT AS WELL AS SO FTWARE DEVELOPMENT SERVICE PROVIDER AS COMPARABLES UNLESS THE SEGMENTAL DETAILS ARE AVAILABLE. EVEN IF HE HAS ADO PTED THE FILTER OF MORE THAN 75% OF THE REVENUE FROM THE SOFTWARE S ERVICES FOR SELECTING A COMPARABLE COMPANY, HE OUGHT TO HAVE TA KEN THE SEGMENTAL RESULTS OF THE SOFTWARE SERVICES ONLY. TH E PERCENTAGE OF EXPENDITURE TOWARDS THE DEVELOPMENT OF SOFTWARE PRO DUCTS MAY DIFFER FROM COMPANY TO COMPANY AND ALSO IT MAY NOT BE IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 20 OF 33 PROPORTIONATE TO THE SALES FROM THE SALE OF SOFTWAR E PRODUCTS. UNDER SECTION 133(6) OF THE I.T. ACT, THE TPO HAS T HE POWER TO CALL FOR THE NECESSARY DETAILS FROM THE COMPARABLE COMPANIES. IT IS SEEN THAT THE ASSESSING OFFICER/TPO AS EXERCISED THIS POWER TO CALL FOR DETAILS WITH REGARD TO THE VARIOUS COMPANI ES. AS SEEN FROM THE ANNUAL REPORT OF FOURSOFT LIMITED WHICH IS REPRODUCED AT PAGE 7 OF THE TPOS ORDER, THE SAID COMPANY HAS DERIVED INCOME FROM SOFTWARE LICENCE ALSO AND AMCS. 25. AS FAR AS THIRDWARE SOFTWARE SOLUTION LIMITED I S CONCERNED, WE FIND FROM THE INFORMATION FURNISHED BY THE SAID COMPANY THAT THOUGH THE SAID COMPANY IS ALSO INTO PRODUCT DEVELO PMENT, THERE ARE NO SOFTWARE PRODUCTS THAT THE COMPANY INVOICED DURING THE RELEVANT FINANCIAL YEAR AND THE FINANCIAL RESULTS A RE IN RESPECT OF SERVICES ONLY. THUS, IT IS CLEAR THAT THERE IS NO S ALE OF SOFTWARE PRODUCTS DURING THE YEAR BUT THE SAID COMPANY MIGHT HAVE INCURRED EXPENDITURE TOWARDS THE DEVELOPMENT OF THE SOFTWARE PRODUCTS. 26. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CONCE RNED, WE FIND THAT AT PAGE 90 OF HIS ORDER, THE TPO HAS ALSO OBSE RVED THAT THE SAID COMPANY HAS INCURRED EXPENDITURE FOR SELLING O F PRODUCTS AND HAS INCURRED R & D EXPENDITURE FOR DEVELOPMENT OF THE PRODUCTS. THE ABOVE FACTS CLEARLY DEMONSTRATE THAT THERE IS FUNCTIONAL DISSIMILARITY BETWEEN THE ASSESSEE AND T HESE COMPANIES AND WITHOUT MAKING ADJUSTMENT FOR THE DIS SIMILARITIES BROUGHT OUT BY THE TPO HIMSELF, THESE COMPANIES CAN NOT BE TAKEN AS COMPARABLE COMPANIES. THE METHOD ADOPTED BY THE TPO TO ALLOCATE EXPENDITURE PROPORTIONATELY TO THE SOFTWAR E DEVELOPMENT SERVICES AND SOFTWARE PRODUCT ACTIVITY CANNOT BE SA ID TO BE CORRECT AND REASONABLE. WHEREVER, THE ASSESSING OFFICER/TPO CANNOT MAKE SUITABLE ADJUSTMENT TO THE FINANCIAL RESULTS O F THE COMPARABLE COMPANIES WITH THE ASSESSEE COMPANY TO B RING THEM ON PAR WITH THE ASSESSEE, THESE COMPANIES ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THEREFORE, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE THREE COMPANIES FROM T HE LIST OF COMPARABLES. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 21 OF 33 27. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT TATA ELXSI LTD., A COMPARABLE COMPANY OUT OF THE 10 EXCLUDED BY THE CIT(A) BY APPLYING RPT FILTER AND WHICH GETS INCLUDED IN THE COMPARABLE COMPANIES BECAUSE OF 15% RPT BEING A DOPTED AS THRESHOLD LIMIT FOR EXCLUDING COMPANIES FOR THE PUR POSE OF COMPARABILITY. IT WAS HIS SUBMISSION THAT THIS COMP ANY WILL HOWEVER, HAVE TO BE EXCLUDED AS THIS COMPANY WAS HE LD TO BE NOT COMPARABLE WITH AN ASSESSEE SUCH AS THE ASSESSEE IN THE PRESENT CASE PROVIDING SOFTWARE DEVELOPMENT SERVICES BY THE ITAT HYDERABAD BENCH IN THE CASE OF CNO IT SERVICES (IND IA) PVT. LTD. (FORMERLY KNOWN AS CONSECO DATA SERVICES (INDI A) PVT. LTD.) HYDERABAD VS. DCIT, CIRCLE 1(2) HYDERABAD, IN ITA.NO.1280/HYD/2010 ASSESSMENT YEAR 2005-2006 ORDE R DATED 12.2.2014. 28. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS, HELD ON COMPARA BILITY OF TATA ELXSI 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 DEVELOPMENT SERVICES. THE TPO ACCEPTED THE SOFTWARE DEVELOPMENT SERVICES SEGMENT IN HIS T.P. ANALYSIS A ND ASSESSEES OBJECTION IS THAT THE SOFTWARE DEVELOPMEN T SERVICES SEGMENT ITSELF COMPRISES OF THREE SUBSERVI CES NAMELY (A) PRODUCT DESIGN SERVICES (B)DESIGN ENGINE ERING SERVICES AND (C) VISUAL COMPUTING LABS. IT WAS SUBM ITTED THAT THESE SERVICES ARE NOT AKIN TO ASSESSEE SOFTWAR E SERVICES AND SEGMENTAL INFORMATION OF ONLY PRODUCT DESIGN SERVICES COULD HAVE BEEN ACCEPTED BY THE TPO AS A COMPARABLE BUT NOT THE ENTIRE SOFTWARE DEVELOPMENT SERVICE. SINCE COMPANYS OPERATIONS ARE FUNCTIONALL Y DIFFERENT AS SUCH, THE SAME IS NOT COMPARABLE. FURT HER, ASSESSEE IS ALSO OBJECTING ON THE BASIS OF INTANGIBL E SCALE OF OPERATIONS. THE COORDINATE BENCH IN THE CASE OF INTOTO (SUPRA) CONSIDERED 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 ADDL. CIT (TRANSFER PRICING), HYDERABAD, WHEREIN TH E CONCERNED OFFICER HAS BEEN INFORMED THAT TATA ELXSI LIMITED IS SPECIALISED EMBEDDED SOFTWARE IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 22 OF 33 DEVELOPMENT SERVICE PROVIDER AND THAT IT CANNOT BE COMPARED WITH ANY OTHER SOFTWARE DEVELOPMENT COMPANY. IT WAS SUBMITTED THAT BECAUSE OF THE SPECIALISATION AND ALSO BECAUSE OF DIVERSE NATURE O F ITS BUSINESS, IT IS VERY DIFFICULT TO SCALE-UP THE OPERATIONS OF TATA ELXSI LIMITED. IN VIEW OF THIS, TATA ELXSI LIMITED HAS INFORMED THAT IT IS NOT FAIR TO U SE 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 BEFORE 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 THE COMPARABLE IN THE LIGHT OF OBSERVATIONS OF THIS COMPANY TO THE TPO IN THE CASE OF ANOTHER ASSESSEE. IN THE RESULT, THE ASSESSING OFFICER/TPO IS DIRECTE D TO RECONSIDER THE ISSUE IN ACCORDANCE WITH LAW, AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD T O 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 HAS 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 SERVI CES. SINCE, THESE ASPECTS ARE NOT CLEAR FROM THE DATA FU RNISHED 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 LIST 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. 29. THOUGH THE ISSUE HAS BEEN SET ASIDE TO THE AO I N THE AFORESAID DECISION, THE ITAT HYDERABAD IN THE CASE OF NTT DAT A INDIA ENTERPRISE APPLICATION SERVICES PVT.LTD., ITA NO.16 12/HYD/2010 ORDER DATED 23.10.2013 AND IN A SUBSEQUENT RULING I N THE CASE OF INVENSYS DEVELOPMENT CENTRE (INDIA) PVT.LTD., ITA NO.1256/HYD/2010 ORDER DATED 28.2.2014, HELD THAT T ATA ELXSI IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 23 OF 33 IS NOT FUNCTIONALLY COMPARABLE WITH THAT OF A SOFTW ARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. 30. IN VIEW OF THE AFORESAID DECISION RENDERED ON I DENTICAL FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT TATA ELX SI LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMP ANIES. 13. SIMILARLY, THE OTHER CASES, BODHTREE CONSULTIN G LTD, FOUR SOFT LTD, INFOSYS,., SANKHYA INFOTECH LTD., THIRDWA RE SOLUTIONS LTD, TATA ELEXI (SEG) ETC, ARE ALSO TO BE EXCLUDED AS THEY ARE CONSIDERED AND ANALYSED IN VARIOUS CASES RELIED ON ABOUT FUNCTIONALITY AND WHY THE SAME ARE NOT COMPARABLE T O THE COMPANIES LIKE ASSESSEE. BODHTREE CONSULTING LTD AL SO FAILS RPT FILTER AS CONTENDED. IN VIEW OF THIS, WE ARE NOT DI SCUSSING ABOVE COMPARABLES IN DETAIL, BUT, SUFFICE TO SAY THAT ASS ESSEES SUBMISSIONS ARE VALID. THE AO IS DIRECTED TO EXCLUD E THE ABOVE COMPARABLES AND RE-WORK OUT THE ARMS LENGTH MARGIN ACCORDINGLY. THE GROUND NO.8 AND ADDITIONAL GROUND RAISED BY ASSESSEE ARE CONSIDERED AS ALLOWED. IN VIEW OF THE ABOVE, THE ABOVE THREE COMPANIES ARE TO BE EXCLUDED. SASKEN NETWORK SYSTEMS LTD., R S SOFTWARE (INDIA) LTD., VISUALSOFT TECHNOLOGIES LTD., AND SASKEN COMMUNICATION TECHNOLOGIES LTD., 10.6 SINCE THERE IS NO OBJECTION FROM ASSESS EE AND WAS SELECTED BY TPO, THE ABOVE COMPANIES ARE RETAINED. FOUR SOFT LTD., 10.7. THE OBJECTION BY ASSESSEE IS THAT THIS COMPAN Y IS A PRODUCT COMPANY. WAS ANALYSED AND ACCEPTED IN THE C ASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE L IMITED, IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA) P ARA 22. IT WAS HELD THAT THE SAID COMPANY AHS DERIVED INCOME FROM SOFTWARE LICENSE AND AMCS. SINCE FUNCTIONALITY WAS ALREADY ANALYSED , RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCHES ALSO, THE SAME WA S TO BE EXCLUDED. I. INTOTO SOFTWARE INDIA PVT. LTD., ITA NO. 1196/H YD/2010; II. CORDYS SOFTWARE INDIA P. LTD., ITA NO. 1451/HY D/2010 IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 24 OF 33 GEOMETRIC SOFTWARE SOLUTIONS COMPANY LTD., : 10.8. EVEN THOUGH THIS COMPANY WAS ACCEPTED AS COMP ARABLE IN ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) P RIVATE LIMITED, IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPR A) AND CORDYS SOFTWARE INDIA P. LTD., IN ITA NO. 1451/HYD/2010 DT . 13-06-2014 (SUPRA) AND WAS NOT OBJECTED TO, WE FIND THAT THE C O-ORDINATE BENCH AT BANALORE IN THE CASE OF DCIT VS. TOSHIBA EMBEDDED S OFTWARE (I) PVT. LTD., IN IT(TP)A NO. 1/BANG/2012 DT. 10-05-201 3 HAS CONSIDERED THAT THIS IS IN PRODUCT DEVELOPMENT. WE HAVE PERUS ED THE TPOS ORDER. IN PAGE 85 AND 86 OF THE ORDER, THIS COMPAR ABLE WAS ANALYSED. TPO RECORDS THAT THERE ARE PRODUCT SALES TO THE E XTENT OF 18%. SEGMENTAL PROFITS ARE NOT AVAILABLE. ON ASSUMPTION S, THIS COMPANY WAS RETAINED. WE ARE OF THE OPINION THAT BEING A P RODUCT BASED COMPANY, THE SAME IS NOT STRICTLY COMPARABLE TO A S ERVICE COMPANY LIKE ASSESSEE. IN THE ABSENCE OF SEGMENTAL PROFIT OF SERVICE INCOME, WE HAVE TO EXCLUDE THE SAME. FOLLOWING THE DECISION IN THE CASE OF DCIT VS. TOSHIBA EMBEDDED SOFTWARE (I) PVT. LTD., I N IT(TP)A NO. 1/BANG/2012 DT. 10-05-2013 (SUPRA), THIS COMPANY IS ACCORDINGLY EXCLUDED. IGATE GLOBAL SOLUTIONS LTD., & L&T INFOTECH: 10.9. THESE TWO COMPANIES ARE FOUND COMPARABLE IN M ANY ORDERS OF THE CO-ORDINATE BENCHES, BUT EXCLUDED ON THE BASIS OF TURNOVER FILTER OF RS. 200 CRORES LIMIT IN ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT( TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA), WE HAVE CONS IDERED THE SAME. ASSESSEES TURNOVER IS ABOUT 63 CRORES. THE TURNOVER OF IGATE GLOBAL SOLUTIONS LTD., (SEG) IS ABOUT 405 CRORES AND L & T INFOTECH LTD IS OF 562 CRORES. THIS IS WITH THE RANGE OF TE N TIMES THE UPPER LIMIT. MOREOVER, ASSESSEE COUNSEL HAS NOT PRESSED ON TURNOVER FILTER OF RS. 200 CRORES. THEREFORE, THESE TWO ARE RETAIN ED. FLEXTRONICS SOFTWARE SYSTEMS LTD.,: 10.10. THIS COMPANY WAS OBJECTED TO ON FUNCTION AL DISSIMILARITY. THIS WAS CONSIDERED IN ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT( TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA) AS UNDER: 26. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CON CERNED, WE FIND THAT AT PAGE 90 OF HIS ORDER, THE TPO HAS ALSO OBSERVED THAT IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 25 OF 33 THE SAID COMPANY HAS INCURRED EXPENDITURE FOR SELLI NG OF PRODUCTS AND HAS INCURRED R & D EXPENDITURE FOR DEVELOPMENT OF THE PRODUCTS. THE ABOVE FACTS CLEARLY DEMONSTRATE THAT THERE IS FUNCTIONAL DISSIMILARITY BETWEEN THE ASSESSEE AND T HESE COMPANIES AND WITHOUT MAKING ADJUSTMENT FOR THE DIS SIMILARITIES BROUGHT OUT BY THE TPO HIMSELF, THESE COMPANIES CAN NOT BE TAKEN AS COMPARABLE COMPANIES. THE METHOD ADOPTED BY THE TPO TO ALLOCATE EXPENDITURE PROPORTIONATELY TO THE SOFTWAR E DEVELOPMENT SERVICES AND SOFTWARE PRODUCT ACTIVITY CANNOT BE SA ID TO BE CORRECT AND REASONABLE. WHEREVER, THE ASSESSING OFFICER/TPO CANNOT MAKE SUITABLE ADJUSTMENT TO THE FINANCIAL RESULTS O F THE COMPARABLE COMPANIES WITH THE ASSESSEE COMPANY TO B RING THEM ON PAR WITH THE ASSESSEE, THESE COMPANIES ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THEREFORE, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE THREE COMPANIES FROM T HE LIST OF COMPARABLES. RESPECTFULLY FOLLOWING, WE EXCLUDE THE SAME. 11. THAT LEAVES US WITH ANOTHER GROUND IN REVENUES APPEAL ABOUT GRANTING DEDUCTION (+) OR (-) 5% AS A STANDARD DEDU CTION. CONSEQUENT TO THE AMENDMENT BROUGHT OUT TO THE PROVISO TO SECT ION 92C(2), THE REVENUE CONTENDS THAT THE DEDUCTION IS NOT PERMISSI BLE. IT RELIES ON CO-ORDINATE BENCH DECISION IN ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT(TP)A NO. 130 2/BANG/2011 DT. 11-06-2015 (SUPRA) (AT PARA 16)]. LEARNED COUNSEL CONTENDS THAT THE STANDARD DEDUCTION WAS GRANTED CORRECTLY AS THE AME NDMENTS WILL APPLY TO THE CASES PENDING AS ON 01-04-2009 AND THI S ORDER WAS PASSED BY AO ON 28-11-2008. EVEN THE EXPLANATION B ROUGHT IN LATER ALSO DOES NOT APPLY TO THE CASE. HE RELIED ON THE PRINCIPLES LAID DOWN IN SAP LABS INDIA PVT. LTD., VS. ACIT [6 ITR (TRIB) 81 (ITAT), (BANG)] AND DCIT VS. SYNOPSIS INDIA P. LTD., IN IT( TP)A NO. 1107 & 1093/BANG/2011 DT. 08-10-2015 IN SUPPORT. 11.1. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. TH E ORDER OF LD.CIT(A) IS IN ACCORDANCE WITH THE PROVISONS. THE ISSUE WAS ANALYSED BY THE CO-ORDINATE BENCH IN THE CASE OF SA P LABS INDIA PVT. LTD., VS. ACIT [6 ITR (TRIB) 81 (ITAT), (BANG)] (SUPRA) AT PARAS 61, 62, 63 & 64 AS UNDER: 61. THE CENTRAL BOARD OF DIRECT TAXES IN ITS CIRC ULAR NO. 5 OF 2010 DATED JUNE 3, 2010 [(2010) 324 ITR (ST.) 293] HAS CLARIFIED THAT THESE NEW PROVISOS ARE EFFECTIVE FROM APRIL 1, 2009 ONWARDS. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 26 OF 33 IN FACT THESE PROVISOS HAVE BEEN BROUGHT INTO THE A CT BY THE FINANCE (NO.2) ACT, 2009. SO, IT WILL BE APPLICABL E TO THE ASSESSMENT YEAR 2009-10 AND ONWARDS. 62. IN THE PRESENT CASE, THE ASSESSMENT YEAR IS 200 3-04. THEREFORE, THE AMENDED PROVISO AS EXPLAINED ABOVE I S NOT APPLICABLE TO THE PRESENT CASE IN HAND. THE PROVIS O APPLICABLE TO THE PRESENT CASE IS THE ONE WHICH STOOD BEFORE THE SUBSTITUTION BROUGHT IN BY THE FINANCE (NO.2) ACT, 2009 WITH EFF ECT FROM OCTOBER 1, 2009. THE EARLIER PROVISO IS EXTRACTED BELOW: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDI NG FIVE PER CENT OF SUCH ARITHMETICAL MEAN. 63. THE FIRST LIMB OF THE OLD PROVISO AND THE FIRST LIMB OF THE PRESENT PROVISO IS REGARDING ARRIVING AT THE ARITHM ETICAL MEAN WHICH IS THE SAME. THERE IS NO CHANGE WITH REGARD TO THAT. THE CHANGE IS WITH REFERENCE TO THE SECOND LIMB. THE O LD PROVISO SAYS THAT AT THE OPTION OF THE ASSESSEE, THE ASSESSEE MA Y ADOPT A PRICE DIFFERENT FROM THE ARITHMETICAL MEAN BY AN AMOUNT N OT EXCEEDING 5 PER CENT OF SUCH ARITHMETICAL MEAN, IE.., THE ASS ESSEE HAS AN OPTION TO CLAIM THE TAX PAYERS MARGINAL RELIEF AT 5 PER CENT WITH REFERENCE TO THE ARITHMETICAL MEAN IRRESPECTIVE OF THE RANGE OF ACTUAL DEVIATION BETWEEN THE MARGIN DISCLOSED BY TH E ASSESSEE AND THE AVERAGE MEAN MARGIN. THEREFORE, IN EFFECT, THIS MARGINAL RELIEF TAKES THE CHARACTER OF A STANDARD DEDUCTION OF 5 PER CENT. FOR E.G., IN A CASE, AVERAGE MEAN OF THE ARMS LENG TH PRICE DETERMINED BY THE TRANSFER PRICING OFFICER/ASSESSIN G OFFICER IS 20 PER CENT AND THAT ONE DISCLOSED BY THE ASSESSEE IS 10 PER CENT. THE ASSESSEE WILL GET A STANDARD DEDUCTION OF 5 PER CENT AND THE ASSESSEES ARMS LENGTH PRICE WILL BE INCREASED TO 15 PER CENT AND THEREAFTER THE DIFFERENCE OF 5 PER CENT BETWEEN 20 PER CENT AND 15 PER CENT ALONE SHALL BE ADDED AS ARMS LENGTH PRICE ADJUSTMENT. THIS IS THE THEME OF THE OLD PROVISO. BUT UNDER TH E NEWLY SUBSTITUTED PROVISO, THE MARGINAL RELIEF OF 5 PER C ENT WILL NOT ACT AS STANDARD DEDUCTION. IF THE PRICE DETERMINED BY THE AVERAGE MEAN PRICE IS 20 PER CENT AND THAT OF THE ASSESSEE IS 10 PER CENT., THEN THE DIFFERENCE OF 10 PER CENT IS MORE THAN 5 P ER CENT AND THEREFORE, THE ASSESSEE WILL NOT GET THE MARGINAL R ELIEF AND THE IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 27 OF 33 ENTIRE DIFFERENCE OF 10 PER CENT WILL BE ADDED AS T HE ARMS LENGTH PRICE ADJUSTMENT. IF THE ARMS LENGTH PRICE DETERM INED BY THE TRANSFER PRICING OFFICER/ASSESSING OFFICER IS 15 PE R CENT AND THAT OF THE ASSESSEE IS 11 PER CENT., THE DIFFERENCE OF 4 PER CENT IS LESS THAN 5 PER CENT AND IN THAT CASE, THE RATE DISCLOSE D BY THE ASSESSEE AT 11 PER CENT SHALL BE TAKEN AS THE ARMS LENGTH P RICE. THIS IS THE POSITION AFTER THE AMENDMENT. 64. IN VIEW OF THE ABOVE DISCUSSION, WE FIND THAT T HE SECOND LIMB OF THE PROVISO TO SECTION 92C(2) GIVEN AN OPTI ON TO THE ASSESSEE TO CLAIM A MARGINAL VARIANCE OF 5 PER CENT AS STANDARD DEDUCTION. THIS GROUND OF THE ASSESSEE IS ACCEPTED AND WE HOLD THAT THIS BENEFIT OF DEDUCTION OF 5 PER CENT HAS TO BE GIVEN TO THE ASSESSEE, IF THE CIRCUMSTANCES, SO WARRANT. 11.2. NOT ONLY THAT, THE EXPLANATION BROUGHT IN BY FINANCE ACT, 2014 W.E.F. 01-04-2015 ALSO SPECIFIES THAT THE PROV ISIONS OF SECOND PROVISO SHALL ALSO BE APPLICABLE TO ALL ASSESSMENTS OR REASSESSMENTS PROCEEDINGS PENDING BEFORE THE AO AS ON THE FIRST D AY OF OCTOBER, 2009. THE PRESENT PROCEEDINGS WERE CONCLUDED BEFOR E THAT DAY. SO, THE SECOND PROVISO TO SECTION 92C(2) DOES NOT APPLY TO THE IMPUGNED ORDER. THE PRE-AMENDED PROVISO, AS INTERPRETED BY VARIOUS AUTHORITIES DOES PERMIT STANDARD DEDUCTION OF (+) OR (-) 5% TO ASSESSEE. THE ORDER OF LD.CIT(A) IS CONFIRMED. THE REVENUES GRO UND IS REJECTED ACCORDINGLY. 23. OUR ATTENTION WAS ALSO INVITED TO THE ORDER OF THE TRIBUNAL IN THE CASE OF ITO V. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. IN ITA NO.609/BANG/2011 IN WHICH THESE COMPARABLES WERE ALSO EXAMINED BY TH E TRIBUNAL AND VISUAL SOFT TECHNOLOGIES LTD. WAS EXCLUDED FROM THE LIST OF COMPARABLES. THE RELEVANT PORTION OF THE TRIBUNALS ORDER IS EXTRACT ED HEREUNDER FOR THE SAKE OF REFERENCE:- IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 28 OF 33 14. WE FIND THE SUBMISSIONS OF THE ASSESSEE DIFFER ENTIATING ITS CASE WITH THE CLAIMED COMPARABLES (I) EXENSYS SOFTWARE S OLUTIONS LTD. 2) SANKHYA INFOTECH LTD. 3) THIRD WARE SOLUTION LTD. A ND 4) VISUAL SOFT TECHNOLOGIES LTD. (SEG) SEARCHED BY TPO, WHICH HAVE BEEN ACCEPTED BY THE LD. CIT(A), HAVE NOT BEEN SUCCESSFU LLY REBUTTED BY THE DEPARTMENT BEFORE US. REGARDING EXENSYS SOFTWAR E SOLUTIONS LTD. THE SUBMISSION OF THE ASSESSEE REMAINED THAT THE SA ID COMPANY OWNS BRANDS WORTH RS. 5 CRORES AS AGAINST ITS TURNOVER O F RS. 7.37 CRORES DURING THE FINANCIAL YEAR 2004-05, HENCE THE COMPAN Y IS A BRAND OWNER OF THE PRODUCTS DEVELOPED BY IT. THE SAID COM PANY IS ALSO ENGAGED IN SECTION R & D AND OWNS SEVERAL SOFTWARE PRODUCTS SUCH AS X MIGRATE, INTEGRATION WORKBENCH, AND REPORT DESIGN ER ETC. REGARDING SANKHYA INFOTECH LTD., IT WAS SUBMITTED THAT THEY O WN THE INTELLECTUAL PROPERTY RIGHTS IN THE FORM OF SOFTWARE PRODUCTS DE VELOPED BY IT AND BEARS SUBSTANTIAL RISK ASSOCIATED WITH THE SUCCESS / FAILURE OF THESE PRODUCTS IN THE MARKET. THESE SUBMISSIONS WERE MADE ON THE BASIS OF ITS ANNUAL REPORT FOR THE RELEVANT FINANCIAL YEAR. IT WAS ALSO SUBMITTED THAT AS A PART OF ITS BUSINESS OPERATIONS THE SAID COMPANY IS ENGAGED IN AND FOCUSES ON DEVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORTATION AND AVIATION INDUSTRY AND ACCORDINGL Y SPENDS HEAVILY ON DEVELOPMENT OF SOFTWARE PRODUCTS. IT WAS ALSO SU BMITTED THAT THE SAID COMPANY OWNS SOFTWARE PRODUCTS. THIS INFORMATI ON WAS BASED ON A REVIEW OF THE SCHEDULE 4 OF ITS BOOKS OF ACCOU NTS ON FIXED ASSETS. REGARDING THIRDWARE SOLUTIONS LTD. IT WAS SUBMITTED THAT THE SAID COMPANY HAS A DIVERSIFIED FUNCTIONAL PROFESSIONAL P ROFILE AND IS ALSO ENGAGED IN SALE OF SOFTWARE LICENSES. THEY INVEST I N R&D AND ALSO PROVIDES / SELLS SOFTWARE LICENSES AND THERE ARE NO SEGMENTAL RESULTS AVAILABLE IN ITS AUDITED FINANCIALS TO SEGREGATE PR OFITABILITY FROM PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND FROM SALE OF SOFTWARE LICENCES. THESE INFORMATIONS WERE SUPPORTED BY THE ANNUAL REPORT FOR FINANCIAL YEAR 2004-05 OF THE SAID COMPANY. IN ITS ANNUAL REPORT A GENERIC DISCLOSURE WAS MADE THAT THE COMPANY IS INV OLVED IN TRADING OF SOFTWARE AND PROVISION OF IT SERVICES. SCHEDULE 14 OF THE FINANCIAL STATEMENT OF THE SAID COMPANY PROVIDE INFORMATION O N DETAILS OF PURCHASES AS PER WHICH THE TOTAL PURCHASE COST INCU RRED BY THE COMPANY WAS ABOUT RS. 56871743/- AS AGAINST THE TOT AL COST OF RS. 175527264/- WHICH IS ABOUT 32% OF THE TOTAL COST. B ESIDES THE SAID COMPANY EARNED ABNORMALLY HIGH OP / TC MARGIN OF 66 .11% DURING FINANCIAL YEAR 2004-05 INDICATING RISK DISSIMILARIT Y VIS A VIS THE ASSESSEE WHICH CLAIMED TO BE A COST PLUS LOW RISK C APTIVE WHICH CANNOT BE EXPECTED TO EARN SUCH HIGH PROFITABILITY. REGARDING VISUAL SOFT TECHLTD. (SEG) IT WAS SUBMITTED THAT COMPANY I S ENGAGED IN IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 29 OF 33 UNDERTAKING SUBSTANTIAL R & D ACTIVITIES AND HENCE SHOULD BE EXCLUDED FROM THE FINAL SET OF COMPARABLES SINCE IT S RETURN INCLUDES A RETURN ON ACCOUNT OF THE R & D FUNCTION. IT WAS DEM ONSTRATED BY THE FACT THAT DURING FINANCIAL YEAR 2004-05, THE SAID C OMPANY WAS HAVING A HIGH R & D / SALES SPEND OF 4.5% (FAILS TH E R /& D FILTER OF 3%AS APPLIED BY THE ASSESSEE). THE LD. CIT(A) ON TH E BASIS OF INDIAN TP REGULATIONS, OECD GUIDELINES AND JUDICIAL DECISI ONS CAME TO THE CONCLUSION THAT IN MUCH AS THESE COMPANIES OWNING S OFTWARE PRODUCTS AND UNDERTAKING R & D COMMAND A PREMIUM RE TURN COMPARED TO ANY ROUTINE CONTRACT SOFTWARE DEVELOPME NT SERVICE PROVIDER, THEY SHOULD NOT BE TAKEN AS COMPARABLE FO R A CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE A SSESSEE. AFTER EXCLUSION OF THE ABOVE COMPANIES FROM THE COMPARABL ES THE LD. CIT(A) HAS WORKED OUT THE FOLLOWING RESULT :- IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 30 OF 33 15. IN CONCLUSION THE LD. CIT(A) IN PARA 47 OF THE FIRST APPELLATE ORDER HAS HELD THAT WITH THE MEAN OP / TC MARGIN OF 14.04%, AFTER AVAILING THE BENEFIT OF THE (+/-) 5 PERCENT RANGE, THE ASSESSEES INTERNATIONAL TRANSACTIONS ARE PROVED TO BE AT ARM S LENGTH. 16. THE DECISIONS RELIED UPON BY THE LD. DR HAVING DISTINGUISHABLE FACTS ARE NOT HELPFUL TO THE REVENUE. IN THE CASE O F ST MICROELCTRONICS PVT. LTD. (SUPRA) THE ASSESSEE TRIED TO ESTABLISH T HAT THE ROLE OF THE ASSESSEE IN PRODUCING SEMICONDUCTOR (IC) WAS LIMITE D QUA THE ROLE PERFORMED BY ST GROUP WHICH WAS NOT ACCEPTED BY THE TRIBUNAL WITH THIS OBSERVATION THAT THE ASSESSEE HAD EMPLOYED MOR E THAN 1600 PERSONS AND IT WAS HAVING ONE OF THE LARGEST DESIGN CENTRES OUT OF THE EUROPE AND THUS THE OPERATIONS CARRIED OUT BY THE A SSESEE WITHIN INDIA WERE TO BE COMPARED WITH OTHER ASSESSES AND NOT WIT H ST GROUP. THUS THE ASSESSEE FAILED TO ESTABLISH THAT THIS CASE WAS NOT COMPARABLE WITH THE ST GROUP. THE TRIBUNAL OBSERVED FURTHER THAT TH E ASSESSEE COULD HAVE PRODUCED THE REPORT OF AN EXPERT INDICATING TH E WORK PERFORMED BY IT WAS NEGLIGIBLE IN COMPARISON TO OTHER SOFTWAR E DEVELOPMENT COMPANIES. SIMILARLY IN THE CASE OF SYMANTEC SOFTW ARE SOLUTIONS PVT. LTD. (SUPRA) RELIED UPON BY THE LD. DR THE TRI BUNAL DID NOT FIND ANY MERIT AND SUBSTANCE IN THE SUBMISSION OF THE AS SESSEE FOR ADJUSTMENT IN RESPECT OF RISK AND FUNCTIONAL DIFFER ENCES. THE TRIBUNAL HELD THAT WHAT IS RELEVANT IS THE MARGIN/PROFIT THE ASSESSEE EARNED FROM INTERNATIONAL TRANSACTION AND COMPARISON OF TH E SAME WITH THE UNCONTROLLED TRANSACTIONS. THE TRIBUNAL HELD THAT I F NET REVENUE OF THE AE IS NEGATIVE THEN THE ASSESSEE WOULD GET NO REMUN ERATION, WHICH IS IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 31 OF 33 HOWEVER IRRELEVANT FOR THE PURPOSE OF ALP DETERMINA TION. ACTUALLY THIS DECISION OF MUMBAI BENCH RELIED UPON BY THE LD . DR IS HELPFUL TO OPPOSE THE CONTENTION OF THE LD. AR THAT THE LOA NS ARE NORMALLY PART OF BUSINESS AND THE LOSS MAKING COMPANIES SHOU LD HAVE ALSO BEEN CONSIDERED AS COMPARABLES BY THE TPO. 17. WE THUS IN ABSENCE OF A SUCCESSFUL REBUTTAL BY THE DEPARTMENT THAT AFORESAID FOUR COMPARABLES SEARCHED BY THE TPO WERE NOT COMPARABLE WITH THE ASSESSEE, ARE NOT INCLINED TO I NTERFERE WITH THE ABOVE FINDING OF THE LD. CIT(A) ON THE ISSUE. THE S AME IS UPHELD. THE GROUND IS THUS REJECTED. 24. HAVING CAREFULLY EXAMINED THE AFORESAID ORDERS OF THE TRIBUNAL IN THE LIGHT OF ASSESSEES CONTENTIONS, WE FIND THAT EXCLU SION OF GEOMETRIC SOFTWARE SOLUTIONS CO. LTD., FOUR SOFT LIMITED, TATA ELXSI LTD. (SEG.) , INFOSYS TECHNOLOGIES LTD. , FLEXTRONICS SOFTWARE SYSTEMS LTD. , SATYAM COMPUTER SERVICES , THIRDWARE SOLUTIONS LTD. , AND EXENSYS SOFTWARE SOLUTIONS LTD. MADE BY THE CIT(APPEALS) IS CORRECT AS THESE COMPA NIES ARE EITHER FUNCTIONALLY DIFFERENT OR HAVING HUGE TURNOV ER OR INCURRED EXPENDITURE FOR SELLING PRODUCTS OR HAVING UNRELIABLE FINANCIAL DATAS DUE TO FINANCIAL SCAM. EXCLUSION OF THESE COMPANIES ARE ALSO APPROV ED BY THE TRIBUNAL IN THE AFORESAID CASES. 25. BODHTREE CONSULTING LTD. , SANKHYA INFOTECH LTD. AND VISUAL SOFT TECHNOLOGIES LTD. , THOUGH TAKEN AS COMPARABLES BY THE CIT(APPEALS), BUT THESE COMPANIES ARE ALSO FUNCTIONALLY DIFFERENT WIT H THE ASSESSEE COMPANY AND THIS ASPECT WAS EXAMINED BY THE TRIBUNAL IN THE AFORESAID ORDERS. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 32 OF 33 THEREFORE, WE ARE OF THE VIEW THAT THESE COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. 26. SO FAR AS THE OTHER COMPANIES I.E., LGS GLOBAL LTD. , R S SOFTWARE (INDIA) LTD. , SASKEN COMMUNICATION TECHNOLOGIES LTD. , SASKEN NETWORK SYSTEMS LTD. , L & T INFOTECH LTD. , AND IGATE GLOBAL SOLUTIONS LTD. ARE CONCERNED, THOUGH ASSESSEE HAS CLAIMED THE INCLUSIO N OF ALL THESE COMPANIES, BUT 3 COMPANIES I.E., SASKEN COMMUNICATI ON TECHNOLOGIES LTD. , L&T INFOTECH LTD. AND IGATE GLOBAL SOLUTIONS LTD. CAN ALSO BE EXCLUDED BY APPLYING THE TURNOVER FILTER AS THE TUR NOVER OF THE ASSESSEE COMPANY IS RS.14.4 CRORES AND TURNOVER OF THESE COM PANIES IS IN THE RANGE OF RS.189.05 CRORES TO RS.562.45 CRORES. SINCE THE TURNOVER OF THESE COMPANIES ARE MORE THAN 10 TIMES THE TURNOVER OF TH E ASSESSEE COMPANY, THESE COMPANIES SHALL ALSO BE EXCLUDED FROM THE LIS T OF COMPARABLES AND WE ORDER ACCORDINGLY. 27. SO NOW THE COMPANIES WHICH SHOULD BE CONSIDERED AS GOOD COMPARABLES ARE ONLY 3 COMPANIES VIZ., LGS GLOBAL L TD. , R S SOFTWARE (INDIA) LTD. AND SASKEN NETWORK SYSTEMS LTD. WE ACCORDINGLY DIRECT THE TPO/AO TO DETERMINE THE ALP AFTER TAKING INTO ACCOU NT THESE COMPARABLES. ACCORDINGLY THE APPEAL OF THE REVENUE AND CO OF THE ASSESSEE ARE DISPOSED OF. IT(TP)A NO.1109/BANG/2011 & CO 13/BANG/2012 PAGE 33 OF 33 28. IN THE RESULT, THE APPEAL OF THE REVENUE AND CO OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 25 TH DAY OF JANUARY, 2017. SD/- SD/- ( A.K. GARODIA ) (SUNIL KUMAR YA DAV ) ACCOUNTANT MEMBER JUDIC IAL MEMBER BANGALORE, DATED, THE 25 TH JANUARY, 2017. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.