M/s Electronics for Imaging India Pvt Ltd, Bangalore V. Assistant Commissioner of Income Tax, Circle-2(1)(2), Bangalore

CO 38/BANG/2018

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4170 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 24 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 31-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 06-04-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 1725/BANG/2017 ASSESSMENT YEAR : 2006 - 07 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(2), BANGALORE. VS. M/S. ELECTRONICS FOR IMAGING INDIA PVT. LTD., KALYANI PLATINA, 4 TH FLOOR, BLOCK 1, NO.24-EPIP ZONES PHASE II, WHITEFIELD, BENGALURU 560 066. PAN: AAACG 6053E APP ELL ANT RESPONDENT CO NO.38/BANG/2018 [IN IT (TP) A NO.172 5/BANG/2017] ASSESSMENT YEAR : 2006 - 07 M/S. ELECTRONICS FOR IMAGING INDIA PVT. LTD., BENGALURU 560 066. PAN: AAACG 6053E VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(2), BANGALORE. CROSS OBJECTOR RESPONDENT REVENUE BY : SMT. SRE E NANDINI DAS, ADDL.CIT(DR)(ITAT), BENGALURU. ASSESSEE BY : SHRI NARENDRA JAIN, CA DATE OF HEARING : 04.10 .201 8 DATE OF PRONOUNCEMENT : 31 .10 .201 8 IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 2 OF 19 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA 1725/BANG/2017 IS AN APPEAL BY THE REVENUE A GAINST THE ORDER DATED 15.5.2017 OF CIT(A)-BENGALURU-2, BENGALURU, R ELATING TO ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS FILED CO 38/BANG/2 018 AGAINST THE VERY SAME ORDER OF THE CIT(A). 2. THE ONLY ISSUE THAT REQUIRES DETERMINATION IN TH IS APPEAL AND CO IS THE CORRECTNESS OF THE DETERMINATION OF ARMS LENGT H PRICE (ALP) IN RESPECT OF AN INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE (AE). THE FACTS AND CIRCUMST ANCES UNDER WHICH THE PRESENT APPEAL AND THE CO ARISE FOR CONSIDERATION A RE AS FOLLOWS:- THE ASSESSEE IS COMPANY ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES) TO ITS ASSOCIATED ENTERPRISE (AE). THE TRANSACTION OF PROVIDING SWD SERVICES TO ITS AE BY THE ASSESSEE WAS AN INTERNATIONAL TRANSACTION. THE CONSIDERATION RECEIVED BY THE ASSESSEE FOR SERVICES SO RENDERED HAD TO BE AT ARMS LENGTH PRICE (ALP) AS LAID DOWN IN SEC.92 OF THE INCOME TAX ACT, 1961 (ACT). IN AN ORDER OF ASSESSMENT DATED 26.11.2009, THE AO ADDED A SUM OF RS.1,85,04,721 AS SHORTFALL IN THE PRICE RECEIVED I N THE INTERNATIONAL TRANSACTION PURSUANT TO AN ORDER PASSED U/S.92CA OF THE ACT BY THE TRANSFER PRICING OFFICER (TPO). THE ASSESSEE FILED OBJECTIONS AGAINST THE PROPOSED ADDITION BEFORE THE DISPUTES RESOLUTION PA NEL (DRP), WHO BY THEIR ORDER DATED 29.12.2009 UPHELD THE ADDITIONAL MADE BY THE AO EXCEPT FOR A SMALL RELIEF IN THE MATTER OF DETERMINATION O F PROFIT MARGIN OF ONE COMPARABLE COMPANY MEGASOFT LTD. CONSEQUENT TO THE RELIEF ALLOWED BY IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 3 OF 19 THE DRP, THE ADDITION MADE STOOD REDUCED TO RS.1,84 ,11,998. ON APPEAL BY THE ASSESSEE TO THE TRIBUNAL, THE TRIBUNAL IN IT A NO.1171/BANG/2010 VIDE ITS ORDER DATED 31.10.2012 REMANDED TO THE TPO FOR FRESH CONSIDERATION THE DETERMINATION OF ALP WITH THE FOL LOWING DIRECTIONS:- A) THE OPERATING REVENUE AND OPERATING COST OF THE TRANSACTIONS RELATING TO ASSOCIATED ENTERPRISE ONLY SHALL BE CON SIDERED. B) THE COMPARABLES HAVING THE TURNOVER OF MORE THAN 1 CRORE BUT LESS THAN 200 CRORES ONLY SHALL BE TAKEN INTO CONSIDERATION. C) ALL THE INFORMATION RELATING TO COMPARABLES WHIC H ARE SOUGHT TO BE USED AGAINST THE ASSESSEE SHALL BE FURNISHED TO THE ASSESSEE. D) THE ASSESSEE SHALL BE GIVEN AN OPPORTUNITY OF C ROSS EXAMINING THE PARTIES WHOSE REPLIES ARE SOUGHT TO B E USED AGAINST THE ASSESSEE. E) TO CONSIDER THE OBJECTIONS OF THE ASSESSEE THAT RELATE TO ADDITIONAL COMPARABLES SOUGHT TO BE ADOPTED BY THE TPO AND PASS A DETAILED ORDER. F) TO GIVE THE STANDARD DEDUCTION OF 5% UNDER THE PROVISO TO SEC. 92C(2) OF THE ACT. G) TO REDUCE TELECOMMUNICATION CHARGES AND FOREIGN EXCHANGE LOSS FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER . 3. THE TPO PASSED ORDER PURSUANT TO THE ORDER OF TH E TRIBUNAL DATED 28.1.2013 WHEREIN HE APPLIED TURNOVER FILTER AND EX CLUDED 6 COMPANIES OUT OF THE 20 COMPARABLE COMPANIES WHICH HE HAD SELECTE D ORIGINALLY FOR COMPARISON OF THEIR PROFIT MARGINS WITH THAT OF THE ASSESSEE, WHOSE TURNOVER WAS MORE THAN RS.200 CRORES. HE RETAINED THE REMAINING 14 IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 4 OF 19 COMPANIES. CONSEQUENTLY, THE ADDITION ON ACCOUNT O F DETERMINATION OF ALP STOOD REDUCED TO RS.1,68,35,720. THE ASSESSEE FILE D APPEAL AGAINST THE ORDER OF THE AO INCORPORATING THE DIRECTIONS OF THE TPO BEFORE CIT(A). THE CIT(A) PASSED AN ORDER DATED 13.9.2013. THE ASSESS EE FILED APPEAL BEFORE TRIBUNAL AGAINST THE SAID ORDER. THE TRIBUN AL VIDE ITS ORDER DATED 29.7.2016 IN APPEAL IT(TP) A.NO.1535/BANG/2013 SET ASIDE THE ORDER OF CIT(A) HOLDING IT TO BE A NON-SPEAKING ORDER AND DI RECTING THE CIT(A) TO PASS SPEAKING ORDER. PURSUANT TO THE AFORESAID ORDE R OF THE TRIBUNAL, THE CIT(A) PASSED THE IMPUGNED ORDER IN WHICH HE EXCLUD ED TWO OUT OF THE 14 COMPANIES WHICH WERE RETAINED BY THE TPO FOR THE PU RPOSE OF COMPARABILITY OF PROFIT MARGIN, VIZ., M/S.KALS INFO RMATION SYSTEMS LTD., AND M/S. ACCEL TRANSMATICS LTD. 4. AGGRIEVED BY THE SAID ACTION OF THE CIT(A), THE REVENUE HAS PREFERRED APPEAL BEFORE THE TRIBUNAL. THE ASSESSEE IN ITS CO HAS CHALLENGED THE ORDER OF THE CIT(A) WHEREBY THE CIT( A) RETAINED THE COMPANIES SET OUT IN GR.NO.2(A) OF THE GROUNDS OF C O AS COMPARABLE COMPANIES. 5. THE GROUNDS OF APPEAL OF THE REVENUE READS AS FO LLOWS:- GROUNDS OF APPEAL IN THE CASE OF M/S. ELECTRONICS F OR IMAGING FOR THE A.Y. 2006-07 WITH RESPECT TO REJECTION OF M/S. KALS INFORMATION SYSTEMS LTD AS A COMPARABLE. (A) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E CIT(A) HAS ERRED IN HOLDING THAT THE, M/S. KALS INFORMATION SY STEMS LTD., CANNOT BE TAKEN AS COMPARABLE, BEING FUNCTION ALLY DIFFERENT WHEN IT SATISFIES ALL THE QUALITATIVE AND QUANTITIES FILTERS ADOPTED BY THE TPO. IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 5 OF 19 (B) THE CIT(A) HAS ERRED IN FACT AND IN LAW IN NOT ACKNOWLEDGING THAT DETERMINATION OF ALP BY CARRYING OUT COMPARABI LITY ANALYSIS THE SAME? C) THE CIT(A) ERRED IN IMPOSING THE DECISIONS RENDE RED IN OTHER CASES TO THE FACTS OF THE TAXPAYER WITHOUT DOING AN Y FAR ANALYSIS OF THE TAXPAYER WITH THOSE OTHER CASES. WITH RESPECT OF REJECTION OF M/S. ACCEL TRANSMATIC LTD AS A COMPARABLE. (A) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN HOLDING THAT THE, M/S. ACCEL TRANSMATIC LT D., CANNOT BE TAKEN AS COMPARABLE, BEING FUNCTIONALLY DIFFEREN T THOUGH IT SATISFIES ALL THE QUALITATIVE AND QUANTITIES FILTER S ADOPTED BY THE TPO. (B) THE CIT(A) HAS ERRED IN FACT AND IN LAW IN NOT ACKNOWLEDGING THAT DETERMINATION OF ALP BY CARRYING OUT COMPARABI LITY ANALYSIS OF THE COMPARABLE COMPANIES IS AN ART AND NOT EXACT SCIENCE AS NO TWO COMPANIES ARE EXACTLY THE SAME. (C) THE CIT(A), BANGALORE, HAS ERRED IN NOT CONSIDE RING THE FACTS BROUGHT ON RECORD BY THE TPO & INSTEAD RELYING ON T HE DECISION OF OTHER BENCHES OF ITAT TO DIFFERENT AYS. 6. THE GROUNDS OF CO READS AS FOLLOWS:- GENERAL GROUNDS 1. THE ORDER OF THE LEARNED CIT(A)-2, BANGALORE TO THE EXTENT PREJUDICIAL TO THE RESPONDENT IS BAD IN LAW. GROUNDS RELATING TO COMPARABLES 2 . THE CIT(A)-2, BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN; IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 6 OF 19 (A) TRANSFER PRICING OFFICER IN ADOPTING AZTEC SOF TWARE LIMITED, GEOMETRIC SOFTWARE LIMITED (SEG), TATA ELXSI LTD (S EG), LUCID SOFTWARE LTD, BODHTREE CONSULTING LIMITED AND MEGAS OFT LTD) AS COMPARABLES EVEN THOUGH THEY ARE NOT COMPARABLE IN RESPECT OF FUNCTIONS PERFORMED, RISKS ASSUMED, ASSETS UTILI ZED, SIZE, TURNOVER, UNUSUAL BUSINESS CIRCUMSTANCES AND HIGH R PT.; (B) ADOPTING INAPPROPRIATE FILTERS LIKE 25% RPT FIL TER ETC. IN THE PROCESS SELECTING COMPARABLES; AND (C) WITHOUT PREJUDICE CONSIDERING ENTITY LEVEL DATA IN THE CASE OF MEGASOFT LIMITED FOR COMPUTING ALP INSTEAD OF SOFTW ARE SERVICES SEGMENT WITHOUT APPRECIATING THAT MEGASOFT LIMITED HAS TWO SEGMENTS NAMELY SOFTWARE SERVICES SEGMENT A ND SOFTWARE PRODUCT SEGMENT, AND ONLY SOFTWARE SERVICE SEGMENT IS COMPARABLE TO APPELLANT. 3. THE CIT(A)-2, BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER AND TRANSFER PRICING OFFICER IN:- A. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVE L AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE RESPOND ENT AND THE COMPARABLE COMPANIES; AND B. NOT RECOGNIZING THAT THE RESPONDENT COMPANY WAS INSULATED FROM RISKS, AS AGAINST COMPARABLES, WHICH ASSUME TH ESE RISKS AND THEREFORE HAVE TO BE CREDITED WITH A RISK PREMI UM ON THIS ACCOUNT. 7. AT THE TIME OF HEARING IT WAS AGREED BY THE PART IES THAT THE COMPARABILITY OF TWO OF THE COMPARABLE COMPANIES EX CLUDED BY THE CIT(A) FROM THE LIST OF COMPARABLE COMPANIES WHICH ARE CHA LLENGED BY THE REVENUE IN ITS APPEAL, WERE ALREADY CONSIDERED AND DECIDED BY THE ITAT IN THE CASE OF COMPANY WHICH WAS ALSO ENGAGED IN PROVI DING SWD SERVICES TO ITS AE IN RELATION TO AY 2006-07. A COPY OF THE ORDER OF THE TRIBUNAL IN THE CASE OF JDA SOFTWARE PRIVATE LIMITED VS. ACIT IT(TP) IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 7 OF 19 A.NO.1428/BANG/2010 FOR AY 2006-07 DATED 17.6.2018 WAS FILED BY THE LEARNED AR BEFORE US (WHICH IS PLACED AT PAGE-221 O F ASSESSEES PAPER BOOK). THE LEARNED DR HOWEVER PLACED HER RELIANCE ON THE ORDER OF THE TPO ON THE INCLUSION OF THESE TWO COMPANIES IN THE LIST OF COMPARABLE COMPANIES. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE RE LEVANT OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF JDA SOF TWARE PRIVATE LTD. (SUPRA) FOR EXCLUSION OF THE TWO COMPANIES SOUGHT T O BE INCLUDED BY THE REVENUE WERE AS FOLLOWS:- 9. IMPROPER SELECTION OF COMPARABLES: IT WAS SU BMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FOLLOWING COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE. A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED 10. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE D ECISION OF THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) WHEREIN THESE COMP ARABLES WERE HELD TO BE NOT FUNCTIONALLY COMPARABLE WITH THAT OF A PU RE SOFTWARE DEVELOPER LIKE THE ASSESSEE. 11. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF T RILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA). (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTE NTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED I N PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPORT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTW ARE IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 8 OF 19 SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNA LS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCIT, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT O F IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARAB LES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WI TH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND I S NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDE D BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRAC T ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDIN G OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASP ECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCC EEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND N OT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE T HEREFORE IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 9 OF 19 ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY I S NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOP MENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THA T ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RE LEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THA T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEME NT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS)- TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTER PRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2 D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE T HAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASS ESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FO RM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 10 OF 19 COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DR P THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THI S COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T HE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARA BILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABL E. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE T PO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID CO MPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRI BUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFE RRED TO BY THE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS CO MPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGU MENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFORESAI D COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 12. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANIES WERE CONSIDERED AS COMPARABLE ARE IDENTICAL IN THE CASE OF ASSESSEE AS WELL AS IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA). RESPECTFULLY FOLLOWING THE DECISION OF TH E TRIBUNAL REFERRED TO ABOVE IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE IN DIA PVT. LTD. (SUPRA) WE DIRECT THAT KALS INFORMATION SYSTEMS AND ACCEL TRANSMATICS LTD., BE EXCLUDED FROM THE LIST OF 22 C OMPARABLE ARRIVED AT BY THE TPO. 9. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL, WE UPHOLD THE ORDER OF THE CIT(A) EXCLUDING THE AFORESAID TWO COM PANIES AND DISMISS THE APPEAL OF THE REVENUE. 10. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 11 OF 19 11. AS FAR AS THE CO OF THE ASSESSEE IS CONCERNED, THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS FOR EXCLUSION OF M/S . AZTEC SOFTWARE LTD. AND M/S. GEOMETRIC SOFTWARE LTD. IN RESPECT OF THE OTHER COMPARABLE COMPANIES WHICH WERE SOUGHT TO BE EXCLUDED BY THE A SSESSEE IN ITS CO, AT THE TIME OF HEARING IT WAS AGREED BY THE PARTIES THAT THE COMPARABILITY OF THE REMAINING 4 COMPANIES VIZ., TATA ELXSI LTD., LU CID SOFTWARE LTD., BODHTREE CONSULTING LTD. AND MEGASOFT LTD., DESERV ES TO BE EXCLUDED FROM THE LIST OF COMPARABLE AS THE COMPARABILITY O F THESE 4 COMPANIES WERE ALREADY CONSIDERED AND DECIDED BY THE ITAT IN THE CASE OF COMPANY WHICH WAS ALSO ENGAGED IN PROVIDING SWD SERVICES TO ITS AE IN RELATION TO AY 2006-07. A COPY OF THE ORDERS OF THE TRIBUNAL IN THE CASE OF JDA SOFTWARE PRIVATE LIMITED VS. ACIT IT(TP) A.NO.1428/ BANG/2010 FOR AY 2006-07 DATED 17.6.2018 AND IN THE CASE OF M/S. VAL TECH INDIA SYSTEMS PVT.LTD. VS. DCIT IT(TP) A.NO.1469/BANG/2010 ORDER DATED 13/.1/2017 WAS FILED BY THE LEARNED AR BEFORE US (WHICH IS PLACED AT PAGE-221 & 248 OF ASSESSEES PAPER BOOK). THE LEARNED DR HOWEVER PLA CED HER RELIANCE ON THE ORDER OF THE TPO ON THE INCLUSION OF THESE TWO COMPANIES IN THE LIST OF COMPARABLE COMPANIES. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN THE CASE OF M/S. JDA SOFTWARE PRIVATE LIMITED (SUPRA) , THIS TRIBUNAL IN THE CASE OF ASSESSEE ENGAGED IN PROVIDING SWD SERVICES SUCH AS THE ASSES SEE FOR AY 2006-07 CONSIDERED THE COMPARABILITY OF THE FOLLOWING TWO C OMPANIES VIZ., TATA ELXSI LTD., LUCID SOFTWARE LTD. AND HELD THAT THESE THREE COMPANIES WERE NOT COMPARABLE WITH A SWD SERVICE PROVIDER SUCH AS THE ASSESSEE. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS:- 13. AS FAR AS COMPARABLE TATA ELXSI LTD., IS CONCER NED, THE COMPARABILITY OF THIS COMPANY WITH THAT OF THE SOFT WARE SERVICE PROVIDER WAS CONSIDERED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN THE IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 12 OF 19 CASE OF LOGICA PVT. LTD. IT(TP) 1129/BANG/2011 (AY 07-08) WHEREIN ON THE AFORESAID TWO COMPANIES, THE TRIBUNAL HELD A S FOLLOWS:- 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 ARE CONCER NED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH T HAT OF THE SOFTWARE SERVICE PROVIDER WAS CONSIDERED BY THE MUM BAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. (SUPRA) WHEREIN ON THE AFORESAID TWO COMPANIES , THE TRIBUNAL HELD AS FOLLOWS:- 7.6 FLEXTRONICS SOFTWARE SYSTEMS LTD.: . 7.7 TATA ELXSI LIMITED.: FROM THE FACTS AND MATERIA L ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NI CHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PROD UCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED I N PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE S ALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO F ROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSI S FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PART IES. 15. IN VIEW OF THE ABOVE, THE LD. COUNSEL FOR THE A SSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY AT SL.NO.6 VIZ., F LEXTRONICS SOFTWARE SYSTEMS PVT. LTD. SHOULD BE TAKEN AS A COM PARABLE, WHILE COMPARABLE AT SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A COMPARABLE. 14. IN VIEW OF THE AFORESAID DECISION, WE HOLD THAT TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE CHOSEN BY T HE TPO. 13. AS FAR AS LUCID SOFTWARE IS CONCERNED, THE TRIB UNAL IN PARAGRAPH-20 OF THE AFORESAID ORDER HELD THAT THIS COMPANY WAS N OT COMPARABLE WITH A IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 13 OF 19 SWD SERVICE PROVIDER SUCH AS THE ASSESSEE BY FOLLOW ING A DECISION OF ITAT BANGALORE WHEREIN IT WAS HELD THAT SEGMENTAL D ETAILS OF THIS COMPANY WITH REGARD TO SWD SERVICES AND SOFTWARE PRODUCTS W ERE NOT AVAILABLE AND THEREFORE THE CORRECT MARGIN OF THE SWD SERVICES SE GMENT COULD NOT BE DETERMINED. 14. IN THE CASE OF M/S. VALTECH INDIA SYSTEMS PVT.LTD. (SUPRA) , THIS TRIBUNAL IN THE CASE OF ASSESSEE ENGAGED IN PROVIDI NG SWD SERVICES SUCH AS THE ASSESSEE FOR AY 2006-07 CONSIDERED THE COMPA RABILITY OF BODHTREE CONSULTING LTD., AND HELD THAT THIS COMPANY CANNOT BE REGARDED AS COMPARABLE WITH A SWD SERVICE PROVIDER SUCH AS THE ASSESSEE. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS:- 12. AS REGARDS BODHTREE CONSULTING LTD., WE FIND TH AT THE CO-ORDINATE CONSULTING LTD. WAS FUNCTIONALLY DIFFERENT TO BE SE LECTED AS COMPARABLE BY THE TPO. HE REFERRED TO THE DECISION OF ITAT, B ANGALORE BENCH IN THE CASE OF MINDTECK (INDIA) LTD. IN IT(TP)A 70/BANG/2014, WHEREIN IT HAS BEEN HELD AS FOLLOWS: 1. BODHTREE CONSULTING LTD : AS FAR AS THIS COMPANY IS CONCERNED, THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THIS COMPANY MADE EXTRA ORDINARY PROFITS DURING THE PREVIOUS YEAR. OUR ATTENTION WA S DRAWN TO THE FACT THAT THE OPERATING PROFIT / OPERATING COST OF THIS COMPANY JUMPED FROM 17% FOR F Y 2007-08 TO 56% IN FY 2008-0 9. IT DIPPED IN FY 2009-10 TO 40% AND IN FY 2010-11 IT BE CAME (-) 2% AND 5% IN FY 2011-12 AND FINALLY TOUCHED (-) 9% IN FY 2012-13. OUR ATTENTION WAS DRAWN TO THE FACT THAT THE SPECIA L BENCH OF THE TRIBUNAL, MUMBAI, IN THE CASE OF MAERSK GLOBAL CENT RES (INDIA) P. LTD., IN ITA.7466/MUM/2012, DT 07.03.2014 FOR AY 20 08-09 HAD AN OCCASION TO CONSIDER THE QUESTION AS TO WHETHER COMPANIES HAVING ABNORMAL PROFITS SHOULD BE EXCLUDED AS A COM PARABLE. THE SPECIAL BENCH TOOK THE VIEW THAT IT HAS TO BE SHOWN THAT THE HIGH PROFIT MARGIN DOES NOT REFLECT THE NORMAL BUSINESS CONDITIONS AND IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 14 OF 19 ONLY IN SUCH CIRCUMSTANCES, HIGH PROFIT MARGIN COMP ANIES CAN BE EXCLUDED. OUR ATTENTION WAS DRAWN TO THE DRP'S OBS ERVATION 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: 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 REV ENUE RECOGNITION, SOME PART OF THE EXPENDITURE MAY BE BO OKED IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 15 OF 19 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.' 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 HIM THIS CIR CUMSTANCE WOULD BE SUFFICIENT TO SHOW THAT THE MARGIN REFLECT ED OF THIS COMPANY DOES NOT REFLECT THE NORMAL BUSINESS CONDIT ION. 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 GLO BAL CENTRES (SUPRA) HAD AN OCCASION TO DEAL WITH THE QU ESTION AS TO WHETHER HIGH PROFIT MARGIN MAKING COMPANIES SHOULD BE EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH AFTER CONSIDERING SEVERAL ASPECTS HELD IN PARA 88 OF ITS ORDER THAT THE POTENTIAL COMPARABLE COMPANIES CANNOT BE EXCLUDED M ERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. THE SPECIAL BENCH HELD THAT IN SUCH CASES IT WOULD REQU IRE FURTHER INVESTIGATION TO ASCERTAIN THE REASONS FOR UNUSUALL Y HIGH PROFIT AND IN ORDER TO ESTABLISH 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 ASSESSEE FOLLOWS FIXED P RICE PROJECT MODEL WHERE REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOPED AND BILLED T O CLIENTS, THERE IS A POSSIBILITY OF THE EXPENDITURE IN RELATI ON TO THE IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 16 OF 19 REVENUE BEING BOOKED IN THE EARLIER YEAR. THE RESU LTS OF BODHTREE FROM FY 2003 TO 2008 EXCLUDING FY 2007 AS GIVEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WERE ALSO P ERUSED. 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 ORDER. IT APPEARS TO US THAT THE REVENUE RECOGNITION METHOD F OLLOWED BY THE ASSESSEE IS THE REASON FOR THE DRASTIC VARIATIO N IN THE PROFIT MARGINS OF THIS COMPANY. IN THE GIVEN CIRCUMSTANCE S, WE ARE OF THE VIEW THAT IT WOULD BE SAFE TO EXCLUDE BODHTR EE CONSULTING FROM THE FINAL LIST OF COMPARABLES CHOSE N BY THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. 19. FOLLOWING THE AFRORESAID DECISION OF THE CO-ORD INATE BENCH OF THIS TRIBUNAL (SUPRA), WE DIRECT THE TPO/A.O. TO EXCLUDE THESE COMPANIES FROM THE SET OF COMPANIES. SINCE WE HAVE DIRECTED THE TPO/A.O. TO EXCLUDE 12 COMPANIES FROM THE SET OF 20 COMPARABLES AND THEREFORE THE ALP HAS TO BE RECOMPUTED ON THE B ASIS OF THE REMAINING COMPANIES. 15. IN THE CASE OF M/S. JDA SOFTWARE PRIVATE LIMITED (SUPRA) , THIS TRIBUNAL IN THE CASE OF ASSESSEE ENGAGED IN PROVIDI NG SWD SERVICES SUCH AS THE ASSESSEE FOR AY 2006-07 CONSIDERED THE COMPA RABILITY OF MEGASOFT LTD. AND HELD THAT ONLY THE SOFTWARE SERVICES SEGME NT MARGINS SHOULD BE TAKEN FOR COMPARABILITY PURPOSES. THE FOLLOWING W ERE THE RELEVANT OBSERVATIONS:- 23. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VIZ ., MEGASOFT LTD. IN THE LIST OF FINAL COMPARABLES CHOS EN BY THE TPO IS CONCERNED, THIS TRIBUNAL IN THE CASE OF TRILOGY E-B USINESS SOFTWARE INDIA PVT. LTD. (SUPRA) HAS HELD THAT ONLY SEGMENTA L DATA OF THE SAID COMPANY SHOULD BE TAKEN FOR THE PURPOSE OF COMPARIS ON. FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 17 OF 19 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT ALL THIS COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGMENTAL MA RGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SE GMENT) ALONE SHOULD BE CONSIDERED FOR COMPARABILITY. ON THE AB OVE SUBMISSION, WE FIND THAT THE TPO CONSIDERED THE SEGMENTAL MARGI N (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GEOMETRIC, KALS INF O SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND TATA ELXSI. BEFO RE DRP THE ASSESSEE POINTED OUT THAT THE SEGMENTAL MARGIN OF 2 3.11% ALONE SHOULD BE TAKEN FOR COMPARABILITY. THE DRP HAS NOT GIVEN ANY SPECIFIC FINDING ON THE ABOVE PLEA OF THE ASSESSEE. PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO RELIED ON INFOR MATION WHICH WAS GIVEN BY THIS COMPANY IN WHICH THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ., BLUEALLY DIVISION A ND XIUS- BCGI DIVISION. XIUS-BCGI DIVISION DOES THE BUSINE SS OF PRODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPA NY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT T ELECOM INDUSTRY. THESE PRODUCTS ARE SOLD AS PACKAGED PROD UCTS TO CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZED P RODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PROD UCTS OR RECONFIGURE PRODUCTS TO FIT INTO THEIR BUSINESS ENV IRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZI NG THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (SOFTWARE DEVELOPED) WOULD CON STITUTE PACKAGED PRODUCT AND AROUND 50% TO 60% WOULD CONSTI TUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRA VELLING, BOARDING AND LODGING EXPENSE. BASED ON THE ABOVE R EPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY WAS M AINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO SOFTWARE DEVELOPMENT) INTERNALLY AND THAT THE PORTI ON OF THE REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% OF THE OVERALL REVE NUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE REVENU ES OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HAVING DRAWN T HE ABOVE CONCLUSION, THE TPO DID NOT BOTHER TO QUANTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUCT DEVELOPMENT A ND SOFTWARE DEVELOPMENT SERVICE BUT ADOPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TERMS OF RULE 10B(3)(B) OF THE RU LES, AN IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 18 OF 19 UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS 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, SUCH TRANSA CTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 38. NEITHER THE TPO NOR THE DRP HAVE NOTICED THAT T HERE IS BOUND TO BE A DIFFERENCE BETWEEN THE ASSESSEE AND M EGASOFT AND THE PROFIT ARISING TO THE MEGASOFT AS A RESULT OF T HE EXISTENCE OF THE SOFTWARE PRODUCT SEGMENT AND NO FINDING HAS BEEN GI VEN THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FOR THIS RE ASON, WE ARE INCLINED TO HOLD THAT THE PROFIT MARGIN OF 23.11% W HICH IS THE MARGIN OF THE SOFTWARE SERVICE SEGMENT BE TAKEN FOR COMPARABILITY. IN VIEW OF THE ABOVE CONCLUSION, WE DO NOT WISH TO GO INTO THE QUESTION AS TO WHETHER LESS THAN 25% OF THE REVENUE S OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. 24. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUN AL, SEGMENTAL MARGINS IN SO FAR AS IT RELATES TO PROVIDING SOFTWA RE SERVICES BY MEGASOFT ALONE SHOULD BE TAKEN FOR THE PURPOSE OF C OMPARISON. 16. IN THE LIGHT OF THE ABOVE DECISIONS OF THE TRIB UNAL, WE DIRECT THAT THE FOLLOWING COMPANIES BE EXCLUDED FROM THE LIST OF CO MPARABLE COMPANIES, VIZ., TATA ELXSI LTD., LUCID SOFTWARE LTD., BODHTRE E CONSULTING LTD. AND MEGASOFT LTD. 17. THE OTHER GROUNDS IN CO WERE NOT PRESSED. IT(TP)A NO.1725/BANG/2017 & CO NO.38/BANG/2018 PAGE 19 OF 19 18. IN THE RESULT, THE CO IS PARTLY ALLOWED. 19. IN THE RESULT, THE APPEAL IS DISMISSED WHILE TH E CO IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER, 2018. SD/- SD/- ( INTURI RAMA RAO ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 31 ST OCTOBER, 2018. / D ESAI S MURTHY / COPY TO: 1. APP ELL ANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.