Magic Software Enterprises India Pvt. ltd., Pune V. Income-tax Officer,

CO 98/PUN/2014

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 4008 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 9 month(s) 17 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 18-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 29-05-2018
• Assessment Year: 2008-2009
• Appeal Filed On: 01-10-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SHILPA S
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Advance ruling
• Section: 92A; 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE . , , BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1802/PUN/2013 ! '! / ASSESSMENT YEAR : 2008-09 ITO, WARD-11(1), PUNE . /APPELLANT VS. MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., 9/12, TARA ICON, MUMBAI PUNE ROAD, WAKADEWADI, PUNE 411 003 PAN : AABCM2443B . / RESPONDENT C.O.NO.98/PUN/2014 (ARISING OUT OF ITA NO.1802/PUN/2013 A.Y. 2008-09 MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., 9/12, TARA ICON, MUMBAI PUNE ROAD, WAKADEWADI, PUNE 411 003 PAN : AABCM2443B . CROSS OBJECTOR VS. ITO, WARD-11(1), PUNE . APPELLANT IN THE APPEAL ASSESSEE BY : SHRI ARUN CHHABRA & MS. SHILPA S. REVENUE BY : SHRI ACHAL SHARMA ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 2 / DATE OF HEARING : 29.05.2018 / DATE OF PRONOUNCEMENT: 18.07.2018 # / ORDER PER D. KARUNAKARA RAO, AM : THE REVENUE FILED THE APPEAL AGAINST THE ORDER OF CIT(A)-I T/TP, PUNE DATED 31-07-2013 FOR THE ASSESSMENT YEAR 2008-09. A SSESSEE ALSO FILED THE CROSS OBJECTION IN CONNECTION WITH THE SAID APPEAL OF THE REVENUE . 2. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE THAT TH E ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELO PMENT. ASSESSEE FILED THE RETURN OF INCOME DECLARING INCOME OF NIL. ON FINDING THE INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES , THE CASE WAS REFERRED U/S.92CA(1) OF THE ACT TO THE TPO. THE TPO PASS ED THE ORDER DATED 31-10-2011 U/S.92CA(3) OF THE ACT AND THE ADJUSTMENTS ON ACCOUNT OF ALP OF THE INTERNATIONAL TRANSACTIONS AMOUNTS TO RS.1,64,23,243/-. 3. AS PER THE TPOS ORDER, ASSESSEE REPORTED THE INTE RNATIONAL TRANSACTIONS AMOUNTING TO RS.5,22,96,342/- AND THE SAME W ERE SUBJECTED TO TP STUDY BY THE ASSESSEE USING COST PRICE METHOD (CPM) AS MOST APPROPRIATE METHOD. DURING THE PROCEEDINGS BEFORE THE TPO, CERTAIN COMPARABLES WERE IDENTIFIED FROM THE DATABASE AND TPO ISSUED A SHOW CAUSE NOTICE PROPOSING TO FINALIZE THE SET OF 11 COMPARABLES WITH THE OP/OC RATIO WITH THE ARITHMETIC MEAN 31.95% (PARA 13 OF THE TPOS ORDER). AFTER CONSIDERING THE OBJECTIONS RAISED BY THE ASSESSEE, THE TPO EXCLUDED FEW OF THE COMPARABLES AND DETERMINED THE FINAL SET OF 8 COMPARABLES AS PER THE TABLE GIVEN IN PARA NO.15 OF HIS ORDER. IT REFLECTS THE ARITHMETIC MEAN OF 31.95 % OP/OC. EVENTUALLY; THE TPO QUANTIFIED THE ADJUSTMENT AS PER TH E DETAILS IN PARA ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 3 NO.19 OF HIS ORDER. THE DETAILS OF THE COMPARABLES, OP/OC R ATIO AND THE MANNER OF ARRIVING AT ADJUSTMENT OF RS.1.64 CRORES ARE GIV EN IN PARA NO.15 AND THE SAME IS EXTRACTED AS UNDER : SR.NO. NAME OF THE COMPARABLE S OP/OC (%) 1 BODHTREE CONSULTING LTD. 19.14 2 E - INFOCHIP LTD. 30.32 3 EZEST SOLUTIONS LTD. 28.58 4 F.C.S. SOFTWARE SOLUTION LTD. 57.02 5 GOLDSTONE TECHNOLOGIES LTD. 27.06 6 HELLOS & MATHESON INFORMATION TECHNOLOGY LTD. 36.05 7 KALS INFORMATION SY STEMS LTD. (APPLICATION SOFTWARE SEG.) 41.94 8 L.G.S. GLOBAL LTD. 26.33 ARITHMETIC MEAN 31.93 AO INCORPORATED THE SAME IN HIS ORDER DATED 29-02-2012 AND COMPLETED THE ASSESSMENT DETERMINING THE ASSESSED INCOM E AT NIL AFTER GIVING SET OFF OF BROUGHT FORWARD LOSSES. 4. AGGRIEVED WITH THE SAME, ASSESSEE FILED THE APPEAL BEFOR E THE CIT(A) AND RAISED VARIOUS OBJECTIONS WITH REGARD TO COMPARABLES INTRODUCED BY THE TPO IN THE FINAL LIST OF COMPARABLES. ASSESSEE IS ALSO AGGRIEV ED FOR REJECTING THE ARGUMENTS OF THE ASSESSEE WITH REGARD TO COUPLE OF COMPARABLES NAMELY (1) THINKSOFT GLOBAL SERVICES LTD.; AND (2) R. SYSTEMS INTER NATIONAL LTD., EVENTUALLY, THE CIT(A) PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. 5. AGGRIEVED WITH THE RELIEF GRANTED BY THE CIT(A), THE RE VENUE IS IN APPEAL WITH THE GROUNDS THAT REVOLVE AROUND THE RELIEF GR ANTED BY THE CIT(A). FURTHER, AGGRIEVED WITH CONFIRMING OF CERTAIN ISSUES AND ON CERTAIN DIR ECTIONS OF THE CIT(A), THE ASSESSEE FILED THE CROSS OBJECTION. ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 4 WE SHALL TAKE THE REVENUES APPEAL FIRST. ITA NO.1802/PUN/2013 BY REVENUE A.Y. 2008-09 6. IN THIS REGARD, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CIT(A) PASSED COMPOSITE ORDER INVOLVING BOTH THE ASSESSMENT YE ARS 2007-08 AND 2008-09. THE APPEAL FOR A.Y. 2007-08 WAS ALREADY HEARD A ND ADJUDICATED BY THE TRIBUNAL. FOR THE A.Y.2007-08, IN CONNECTION WITH TECHNICAL GROUND RAISED BY T HE ASSESSEE RELATING TO VALIDITY OF REOPENING OF THE ASSESSMEN T WITHOUT NOTICE U/S.143(2) OF THE ACT, THE CROSS OBJECTION RAISED BY THE A SSESSEE IN THIS REGARD WAS ALLOWED AND THE APPEAL OF THE REVENUE WAS D ISMISSED. IN EFFECT, THERE IS NO ADJUDICATION ON MERITS RELATING TO THE GROUN DS BY THE REVENUE IN THE SAID APPEAL ITA NO.1801/PUN/2013 DATED 31-01-2017 WHICH IS ON RECORD. 7. FURTHER, IN CONNECTION WITH THE APPEAL OF THE REVENUE FOR THE A.Y. 2008-09, LD. COUNSEL FOR THE ASSESSEE FILED A CHART MENTION ING THE RELIEF GRANTED BY THE CIT(A) WITH REFERENCE TO 4 OF THE COMPARA BLES, I.E. (1) KALS INFORMATION SYSTEMS LTD.; (2) E-INFOCHIP SOLUTIONS LTD.; (3) F.C.S . SOFTWARE SOLUTION LTD.; AND (4) L.G.S. GLOBAL LTD. AS PER THE CIT(A) TH ESE 4 COMPARABLES DO NOT CONSTITUTE GOOD COMPARABLES. IN THIS REGARD, DEFENDING THE DECISION OF CIT(A), LD. COUNSEL FOR THE ASSESSEE JUSTIFIED THE REASONS GIVEN BY THE CIT(A) IN GRANTING THE RELIEF. FURTHER, BRINGING O UR ATTENTION TO THE ARGUMENTS, DETAILS FILED BY THE ASSESSEE IN SUPPORT OF THE ARGUMENTS OF CIT(A), WHO GRANTED RELIEF, LD. COUNSEL READ OUT THE SAID RE ASONS. HE ALSO MENTIONED VARIOUS REASONS SUPPORTING THE ARGUMENTS OF THE LD. COU NSEL. ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 5 8. ON HEARING THE LD. DR FOR THE REVENUE AS WELL AS ON PERUSAL OF THE ORDER OF CIT(A), WE SHALL NOW TAKE UP THE EACH COMPARABLE- WISE ADJUDICATION OF THE ISSUES RAISED IN THE APPEAL OF THE REVENUE. (1) KALS INFORMATION SYSTEMS LTD.: IN THIS REGARD, CIT(A)S FINDING IS THAT THE SAID COMPANY IS ENGAGED IN THE DEVELOPMENT OF P RODUCTS AND IS ALSO INTO THE PROVISIONS OF ITES AND THIS COMPARABLE CANNOT CO NSTITUTE A GOOD COMPARABLE CONSIDERING THE FAR ANALYSIS OF THE ASSESSEE UNDER CONSIDERATION. IN THIS REGARD, WE HAVE ALSO CONSIDERED THE CONTEN TIONS RAISED BY THE ASSESSEE AND THE SAME ARE EXTRACTED AS UNDER: FINDINGS OF CIT(A) : 1. RESPONDENT HAS RAISED DETAILED CONTENTIONS BEFO RE THE LD.CIT(A) IN RESPECT OF REJECTION OF COMPARABLE ON GROUND OF FUN CTIONAL NON COMPATIBILITY. 2. LD. CIT(A) HAS RULED AFTER ANALYSING DETAILED CO NTENTIONS RAISED BY THE RESPONDENT 3. THE LD. TPO HAS ACCEPTED THE APPLICATION SOFTWA RE SEGMENT OF KALS AS COMPARABLE TO THE RESPONDENT. HOWEVER, ON PERUSA L OF THE ANNUAL REPORT (REFER PARA 1 AND 2(B), PAGE 824 AND PARA 7 ON PAGE 825 OF PAPER BOOK PAGE 18 AND 19 OF ANNUAL REPORT FOR F.Y 2007-08), IT IS OBSERVED THAT THE SEGMENT ALSO INCLUDES REVENUE FROM SOFWARE PRODUCTS. FURTHE RMORE, THE COMPANY ALSO HOLDS INVENTORIES OF SUCH SOFTWARE PRODUCTS AS EVID ENT FROM PAGE 822 AND 823 OF PAPER BOOK- PAGE 13 AND 16 OF THE ANNUAL REPORT. ) ASSESSEES CONTENTIONS : THE CONTENTION OF THE APPELLANT IS DEVOID OF MERIT SINCE THE POWERS OF CIT(A) HAVE BEEN HELD TO BE COTERMINOUS WITH THAT OF THE A SSESSING OFFICER, THUS, IT WAS WELL WITHIN THE POWERS OF CIT(A) TO CONSIDER TH OSE OBJECTIONS IN RELATION TO EXCLUSION OF KALS FROM THE FINAL SET OF COMPARABLE COMPANIES WHICH WERE NOT RAISED BEFORE THE ASSESSING OFFICER. IN THE LIGHT OF THE JUDICIAL PRECEDENTS RELIED, IT CAN BE CONSIDERED THAT IT WAS WELL WITHIN THE POWERS OF CIT(A) TO CONSIDER THE OB JECTIONS RAISED BY THE RESPONDENT BEFORE THE CIT(A), HENCE THE GROUND OF O BJECTION RAISED BY THE APPELLANT CANNOT BE MAINTAINED. WITHOUT PREJUDICE TO THE ABOVE, THE RESPONDENT WOUL D LIKE TO HUMBLY SUBMIT THAT IT HAD RAISED ARGUMENTS AGAINST INCLUSION OF K ALS AS A COMPARABLE COMPANY BEFORE LD. TPO AS WELL THUS, THE CONTENTION RAISED BY THE APPELLANT ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 6 UNDER GROUND NO.3 ABOVE IS NOT JUST DEVOID OF MERIT BUT IS ALSO FACTUALLY INCORRECT AND THUS SHOULD NOT BE ENTERTAINED. FURTHERMORE, WITHOUT PREJUDICE TO THE ABOVE THE HON 'BLE HIGH COURT OF PUNJAB AND HARYANA IN THE CASE OF CIT VS. QUARK SYSTEMS IN DIA (P) LTD. ( ITA NO.594/2010) (REFER PAGE 590 OF THE PAPER BOOK) HAS UPHELD THE VIEW TAKEN BY THE SPECIAL BENCH OF TRIBUNAL THAT THE TAXPAYER CANNOT BE STOPPED FROM RAISING OBJECTIONS TO REJECT A COMPANY WHICH WAS SE LECTED BY THE TAXPAYER ITSELF IN THE TRANSFER PRICING STUDY. CONSIDERING T HE RATIO OF THE SAID DECISION, IN THE PRESENT CASE THE TAXPAYER CANNOT BE STOPPED FRO M RAISING OBJECTIONS TO REJECT A COMPANY AT THE CIT(A) OR TRIBUNAL LEVEL EV EN IF NO OBJECTION WAS RAISED AT THE ASSESSMENT LEVEL. CIT(A) RELIED ON SERIES OF DECISIONS TO HOLD THAT THE CASE OF M/S. KALS INFORMATION SYSTEMS LTD. WITH PRODUCT DEVELOPMENT AND IT ES SERVICES, IS NOT A GOOD COMPARABLE TO THE ASSESSEE, WHO IS ENGAGED IN T HE SOFTWARE DEVELOPMENT ACTIVITIES. ASSESSEE IS NEITHER A PRODUCT- ORIE NTED COMPANY NOR A ITES COMPANY. 9. IN THE FIRST APPELLATE PROCEEDINGS, THE CIT(A) DIRECTED TPO TO EXCLUDE KALS AS NOT GOOD COMPARABLE AND THE SAME IS ENGAGED IN PRODUCT DEVELOPMENT ACTIVITIES AND ALSO ENGAGED IN ITES SERVICES( P ARA 2.3.2.3 OF THE ORDER OF CIT(A)). THE CIT(A) RELIED ON THE DECISION OF PUNE BE NCH OF TRIBUNAL IN THE CASE OF BIND VIEW INDIA PRIVATE LIMITED VS. DCIT REP ORTED IN ITA NO. 1386/PUN/2010 FOR THE ASSESSMENT YEAR 2006-07. 10. AGGRIEVED WITH THE SAME, THE REVENUE IS IN APPEAL BEFO RE US ON THE DECISION OF CIT(A). FINDINGS OF THE TRIBUNAL WITH REGARD TO KALS INFORM ATION SYSTEM PVT. LTD : 11. BEFORE US, THE CASE OF THE REVENUE IS THAT THE CIT(A ) DID NOT EXAMINE MERITS OF THE CASE OF BIND VIEW INDIA PRIVATE LIMITED VS. D CIT (SUPRA.) BEFORE APPLYING THE SAME IN THE PRESENT CASE AND ALSO BEFORE CONCLUDING THAT THE ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 7 KALS IS NOT A GOOD COMPARABLE. FURTHER, THE REVENUE IS O F THE OPINION THAT KALS WAS INCLUDED AS GOOD COMPARABLE WITH THE CONSENT OF THE ASSESSEE DURING TP PROCEEDINGS. THE ASSESSEE HAS NO OBJECTION FO R SUCH INCLUSION. THE ASSESSEE NOW ARGUED FOR EXCLUSION OF THE SAME. THE REVENUE ALSO ARGUED THAT THE KALS IS A FUNCTIONALLY COMPARABLE SO FAR AS ITES SERVICES ARE CONCERNED. 12. PER CONTRA, THE CASE OF THE ASSESSEE IS THAT FUNCTIO N OF PRODUCT DEVELOPMENT AND ITES SERVICES, KALS IS NOT A FUNCTIONALLY GOOD COMPARABLE WITH THE ASSESSEE. THE ASSESSEE ALSO OBJECTED TO THE A LLEGATION OF CONSENT GIVEN BY ASSESSEE BEFORE TP PROCEEDINGS. JUSTIFYING THE D ECISION OF THE CIT(A), ASSESSEE CONTENDS BEFORE US THAT THE CIT(A) HAS C O-TERMINUS POWER AND THEREFORE, CIT(A) IS JUSTIFIED IN CONSIDERING THE CLAIM OF AS SESSEE FOR EXCLUSION OF THE KALS FROM LIST OF COMPARABLES AND ORDERED FOR EXCLUSION. IN THIS REGARD, THE ASSESSEE RELIED ON THE VARIOUS DECISIONS. FURTHER, ON THE FUNCTIONAL INCOMPARABILITY, THE ASSESSEE REFERRED TO THE CON TENTS OF VARIOUS DECISIONS OF TRIBUNAL JUSTIFYING THE DECISION OF EXCLUSION BY T HE CIT(A). THE ASSESSEE MADE ELABORATE SUBMISSIONS AND FOR THE SAKE OF COMPLETENESS, THE SAME ARE REPRODUCED HERE AS UNDER: IN RELATION TO THE CONTENTION RAISED BY THE APPELLA N T UNDER GROUND 2 , THE RESPO N DE N T WOULD L I KE TO HUMBLY SUBMIT THAT THE LD . C I T ( A) HAS NOT MERELY RELIED ON THE DEC I SION O F BINDVIEW I NDIA PVT , L TD . (VIDE ORDER I N I TA NO . 1386/PN/2010 FOR AY 2 006-07 ) BUT HAS ALSO CONSIDERED THE FUNCTIONAL DIFFERE N CES OF KALS V I S - A-VIS THE RESPONDENT B EFORE REJECT I NG KALS . SAME CAN ALSO BE VERIFIED FROM THE ORDER OF THE LD. CIT(A) (PARA 2.3.2.1- 2.3.2.4, PAGE 8 OF THE CIT(A)'S ORDER, PAGE 250 - 251 OF THE PAPER BOOK AND PARA 3.4.4.2, PAGE 31 OF THE CIT(A)'S ORDER, PAGE 273 OF THE PAPER BOOK). THE LD. CIT(A) HAS NOT MERELY RELIED ON THE AFOREME NTIONED DECISION BUT HAS ALSO CONSIDERED THE EVIDENCES PRES ENTED BEFORE HIM (REFER PAGES 231 AND 309-311 OF THE PAPER BOOK) IN THE FORM OF ANNUAL REPORT EXTRACTS AND EXTRACTS FROM THE WEBSITE OF THE COMPA NY TO CONCLUDE THAT KALS IS ALSO ENGAGED IN PRODUCT DEVELOPMENT AND IS THUS, NOT FUNCTIONALLY COMPARABLE TO THE RESPONDENT. IN RELATION TO THE CONTENTION RAISED BY THE APPELLA NT UNDER GROUND NO.4, THE RESPONDENT RESPECTFULLY SUBMITS THAT FOR KALS, LD. TPO HAS ACCEPTED THE 'APPLICATION SOFTWARE' SEGMENT OF KALS AS COMPA RABLE TO THE RESPONDENT. HOWEVER, ON PERUSAL OF THE ANNUAL REPOR T (REFER PARA 1 AND ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 8 2(B), PAGE 824 AND PARA 7 ON PAGE 825 OF PAPER BOOK - PAGE 18 AND 19 OF ANNUAL REPORT FOR FY 2007-08), IT IS OBSERVED THAT THE SEGMENT ALSO INCLUDES REVENUE FROM SOFTWARE PRODUCTS. FURTHER, THE COMPANY ALSO HOLDS INVENTORIES OF SUCH SOFTWARE PRODUCTS AS IS EVIDENT FROM THE PAGES 822 AND 823 OF PAPER BOOK -PAGES 13 AND 16 OF THE ANNUAL REPORT. SINCE THE RESPONDENT IS NOT ENGAGED IN SELLING ANY SOFTWARE PRODUCTS , THE RESPONDENT HUMBLY REQUESTS THAT THE ACTION OF THE L D . CIT ( A ) ORDERING EXCLUSION OF THE SAID COMPANY FROM THE FINAL SET OF COMPARABLE COMPANIES SHOULD BE SUSTAINED. IN THIS REGARD , THE RESPONDENT WOULD LIKE TO DRAW YOUR HONOURS ' KIND ATTENTION TO THE RULING GIVEN BY HON ' BLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS . PTC SOFTWARE (I) PVT . LTD. (ITA NO . 732 OF 2014) [PARA 10 , PAGE 594-596 OF PAPER BOOK] AND PR CIT VS . PTC SOFTWARE (I) PVT . LTD. (ITA NO . 598 OF 2016) [PARA 3, PAGE599-600 OF PAPER BOOK], WHEREIN THE EXCLUSION OF KALS WAS UPHELD . FROM THE ABOVE, IT IS EVIDENT THAT THE FUNCTION OF KALS IS UNDISPUTEDLY A PRODUCT DEVELOPMENT ON ONE SIDE AND ITES SERVICES ON THE OTHER SIDE. THESE FUNCTIONS ARE NO WAY COMPARABLE WITH THAT OF THE A SSESSEE, WHICH, OTHERWISE, IS ENGAGED IN THE SOFTWARE DEVELOPMENT SERVICES (PAGE 52 OF THE PAPER BOOK). THIS FUNCTIONAL TEST WAS APPROVED BY VARIOUS BENCHES OF THE TRIBUNAL INCLUDING THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS. PTC SOFTWARE (I) PVT. LTD., IN ITA NO.337 OF 2014 DATED 10.10.2016. 13. CONSIDERING THE ABOVE DISCUSSIONS AS WELL AS SUBMISSION S MADE BY THE LD. AR FOR THE ASSESSEE, WE ARE OF THE OPINION THAT THE ORDER OF CIT(A) IS FAIR AND REASONABLE ON THE EXCLUSION OF KALS AND DOES NOT CALL FOR ANY INTERFERENCE. WE ALSO APPROVE THE ARGUMENTS RELATING TO C O-TERMINUS POWER OF THE CIT(A) CONSIDERING THE SETTLED NATURE OF THIS ISSUE. ACCORDINGLY, RELEVANT GROUND RAISED BY THE REVENUE IN THIS REGAR D IS DISMISSED. (2) E-INFOCHIP SOLUTIONS LTD. : CIT(A) WHILE GRANTING RELIEF TO THE ASSESSEE HAS ATTACHED CERTAIN CONDITIONS IGNORING THE FACT THAT CI T(A) POWERS ARE CO- TERMINUS WITH THAT OF THE AO. AGGRIEVED WITH THE CONDITIO NS ATTACHED, ASSESSEE FILED THE CROSS OBJECTION. REVENUE IS IN APPEAL A GAINST DELETION OF ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 9 THIS COMPARABLE AS A GOOD COMPARABLE. RELEVANT FINDING OF T HE CIT(A) IN THIS REGARD AS WELL AS THE CONTENTIONS OF THE ASSESSEES COU NSEL BEFORE THE TRIBUNAL ARE EXTRACTED AS FOLLOWS : FINDINGS OF CIT(A) : RESPONDENT 1. ANNUAL REPORT FOR FY 2007-08 NOT AVA ILABLE IN PUBLIC DOMAIN. 2. COMPANY IS IN DECLINING PHASE-TURNOVER IN FY 200 8-09 IS INR 148,674,474 AS COMPARED TO INR 240,278,099 IN FY 2007-08. HELD BY CIT(A) :1 COMPANY TO BE EXCLUDED IF CONTENT ION OF NON AVAILABILITY OF ANNUAL REPORT WAS RAISED BEFORE TPO. 2. REJECTED ARGUMENT OF DIMINISHING REVENUE SINCE I T PERTAINS TO USE OF FUTURE YEAR DATA WHICH IS NOT PERMITTED UNDER RULE 10B(4) OF THE INCOME TAX RULES, 1962 (THE RULES) 3.UPHELD APPLICATION OF 25% RPT FILTER APPLIED BY T HE TPO ASSESSEES CONTENTIONS : 1. CIT(A) HAD ALSO EXCLUDED A COMPARABLE SELECTED BY R ESPONDENT (THINKSOFT) ON THE BASIS OF NON AVAILABILITY OF DATA. 2. THE CONDITION IMPOSED BY CIT(A) THAT THE COMPARABLE WILL BE EXCLUDED ONLY IF SUCH CONTENTION HAD BEEN TAKEN BEFORE TPO IS DEV OID OF ANY MERIT AS POWERS OF CIT(A) HAVE BEEN HELD TO BE COTERMINOUS WITH THAT OF THE ASSESSING OFFICER, THUS, IT WAS WELL WITHIN THE POW ERS OF CIT(A) TO CONSIDER THOSE OBJECTIONS WHICH WERE NOT RAISED BEFORE THE A SSESSING OFFICER. 3. E-INFOCHIPS HAS BEEN HELD AS NOT BEING COMPARABLE T O A SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE MATTER MAY ACCOR DINGLY BE SENT BACK FOR VERIFICATION AND EXCLUSION. ALSO, INCLUSION OF THIN KSOFT MAY ALSO KINDLY DIRECTED, POST VERIFICATION. FINDINGS OF THE TRIBUNAL WITH REGARD TO E-INFOCHIP SOLUTIONS LTD : 14. FROM THE ABOVE, IT IS SUBMITTED BY THE ASSESSEE THA T E-INFOCHIPS STANDS EXCLUDED BY THE REVENUE ON THE GROUND OF NON-A VAILABILITY OF DATA AT THE RELEVANT POINT OF TIME. THIS ISSUE IS DIRECTLY CONNECTE D WITH THE CROSS OBJECTION NO.3 RAISED BY THE ASSESSEE. THE SAID CROSS OB JECTION OF THE ASSESSEE STANDS REMANDED TO THE FILE OF CIT(A) FOR WANT OF SPEAKING ORDER AND AFTER CONSIDERING THE DECISIONS CITED BY THE ASSESSEE BEFO RE US AS PER DISCUSSION GIVEN IN PARA 27 & 28 OF THIS ORDER. HENCE, GRO UND NO.5 RAISED BY ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 10 REVENUE STANDS REMANDED TO THE FILE OF CIT(A) WITH THE DIR ECTION TO ADJUDICATE THE ISSUE AFTER GIVING REASONABLE OPPORTUNITY O F BEING HEARD TO THE ASSESSEE AND THE OBJECTION, IF ANY, IN ACCORDANCE WITH SET PRINCIPLES OF NATURAL JUSTICE. ACCORDINGLY, GROUND NO. 5 RAISED IN APPEAL BY ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE . (3) F.C.S. SOFTWARE SOLUTIONS LTD. (FCS IN SHORT) : CIT(A) GRANTED RELIEF TO THE ASSESSEE WITH REGARD TO THIS COMPARABLE HOLDING T HAT THE F.C.S. IS PREDOMINANTLY ITES COMPANY AND NOT A SOFTWARE DEVELOPM ENT COMPANY. RELEVANT FINDING OF THE CIT(A) AS WELL AS THE CONTENTIONS OF L D. COUNSEL BEFORE US ARE EXTRACTED AS UNDER : FINDINGS OF CIT(A) : RESPONDENT : 1 THE COMPANY IS INTO PROVISION OF VAR IOUS SERVICES NAMELY, IT CONSULTING SERVICES E-LEARNING AND DIGITAL CONSULTATION APPLICATION SUPPORT 24/7 INFRASTRUCTURE MANAGEMENT SERVICES NONE OF THE ABOVE COMPARABLE TO THE SOFTWARE DEVELO PMENT SERVICES AND ARE IN THE NATURE OF ITES. FURTHERMORE, THE COMPANY IS NOT REPORTING ANY RELEVANT SEGMENTAL DATA FOR DIFFERENT SERVICES AND IS ONLY P ROVIDING GEOGRAPHICAL SEGMENTS. 2. COMPANY HAS EARNED SUPER-NORMAL PROFITS. HELD BY CIT(A) : TO BE EXCLUDED BASED ON PROVISION OF ITES SERVICES . ASSESSEES CONTENTIONS : 1. FCS IS ENGAGED IN DIVERSE SERVICES AND IT A PRODUCT COMPANY AND NOT IN SOFTWARE DEVELOPMENT. 2. DUE TO DIVERSE NATURE OF SERVICES, BEING A SOFTWARE PRODUCT COMPANY, AND LACK OF RELEVANT SEGMENTAL FINANCIAL DATA, THE COMP ANY IS OUGHT TO BE REJECTED. IT HA ALSO BEEN HELD TO BE A PRODUCT COMP ANY IN A COORDINATE PUNE BENCH RULING. 3. NONE OF THE ABOVE ARE COMPARABLE TO THE SOFTWARE DE VELOPMENT SERVICES AND ARE IN THE NATURE OF ITES. FURTHERMORE, THE COM PANY IS NOT REPORTING ANY RELEVANT SEGMENTAL DATA FOR DIFFERENT SERVICES AND IS ONLY PROVIDING GEOGRAPHICAL SEGMENTS. ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 11 IT FAILS THE FILTER OF 75% INCOME FROM SOFTWARE DEV ELOPMENT SERVICES . FINDINGS OF THE TRIBUNAL WITH REGARD TO FCS SOFTWA RE SOLUTIONS LTD : 15. THE TPO INCLUDED FCS AS COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. THE CIT(A) ORDERED FOR EXCLUSION ON FINDING THE FCS AS AGAIN A SOFTWARE DEVELOPMENT AS WELL AS ITES SERV ICES COMPANY AND IS NOT A GOOD COMPARABLE. THE RELEVANT CONTENTIONS OF THE LD. AR FOR THE ASSESSEE IN THIS REGARD ARE EXTRACTED AS FOLLOWS: (II) CONTENTIONS IN RELATION TO EXCLUSION OF FCS SOFTWAR E SOLUTIONS LIMITED ('FCS SOFTWARE') IN RELATION TO THE CONTENTION OF THE APPELLANT UNDE R GROUND NO.6, WHEREIN THE APPELLANT CONTENDS THAT THE LD. CIT(A) ERRED IN HOLDING THAT FCS SOFTWARE IS NOT COMPARABLE TO THE RESPONDENT, T HE RESPONDENT WOULD LIKE TO HUMBLY SUBMIT AS UNDER: THE LD. CIT(A) HAS GIVEN A VERY DETAILED REASONING IN HIS ORDER, WHILE ACCEPTING THE RESPONDENT'S PLEA THAT FCS SOFT WARE IS INTO ITES, AND IS NOT COMPARABLE TO THE RESPONDENT (AS IS EVIDENT FROM PAGE 27-29 OF THE CIT(A)'S ORDER - PAGE 269-271 OF THE PAPER BOOK). AS PER THE RELEVANT EXTRACT OF ANNUAL REPORT OF FCS SOFTWARE (REFER PAGE 236 - 239 OF THE PAPER BOOK AND PAGE 827 OF THE PAPER BOOK), THE COMPANY IS ENGAGED IN ITES AND NOT IN SOFTWARE DEVELOPMENT SERVICES. THE BUSINESS OF THE COMPANY C OMPRISES OF APPLICATION SUPPORT, E-IEARNING, DIGITAL CONSULTING AND IT CONSULTING. ALL THESE SERVICES ARE IN THE NATURE OF ITES, AND C ANNOT THUS BE COMPARED WITH THE SOFTWARE DEVELOPMENT SERVICES PRO VIDED BY THE RESPONDENT TO ITS ASSOCIATED ENTERPRISE ('AE'). BASED ON THE ABOVE EXTRACTS SUBMITTED BY THE RESPON DENT, IT IS CLEARLY EVIDENT THAT THE COMPANY DOES NOT CLEAR THE QUANTITATIVE FILTER OF AT LEAST 75% INCOME FROM SOFTWARE DEVELOP MENT SERVICES APPLIED BY THE LD. TPO (FOR DETAILS OF FILTERS APPLIED BY THE LD. TPO, REFER PAGE 75 OF THE PAPER BOOK). FURTHERMORE, FCS SOFTWARE HAS BEEN HELD TO BE FUNCT IONALLY NON- COMPARABLE TO A SOFTWARE DEVELOPMENT SERVICE PROVID ER IN THE FOLLOWING DECISIONS: TIBCO SOFTWARE INDIA PVT. LTD. VS. DCIT (ITA NO. 2536/PN/2012) (REFER PARA 23, PAGE 463-465 OF THE PAPER BOOK) JOHN DEERE INDIA PVT. LTD. VS. ACIT (ITA NO. 2236/P N/2012) (REFER PARA 20.6, PAGE 630-634 OF THE PAPER BOOK) ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 12 FURTHER, FCS SOFTWARE HAS BEEN HELD TO BE A PRODUCT COMPANY AND THEREBY INCOMPARABLE BY THE HON'BLE PUNE BENCH OF ITAT IN CASE OF SYNECHRON TECHNOLOGIES PVT. LTD (ITA NO. 5361PUN12015 & 622/PUN/2015) (REFER PARA 12, PAGE 683- 684 OF THE PAPER BOOK). THE ABOVE CONTENTIONS OF THE RESPONDENT ARE ALSO SU PPORTED BY THE RULING GIVEN BY THE HON'BLE PUNE BENCH OF THE T RIBUNAL IN THE CASE OF TIBCO SOFTWARE INDIA PVT. LTD VS. DCIT (ITA NO. 94/PN/2014) (REFER PARA 14-16, PAGE 574-576 OF THE PAPER BOOK). BASED ON THE ABOVE, THE RESPONDENT WOULD LIKE TO SU BMIT THAT THE LD. CIT(A)S ACTION WAS CORRECT IN EXCLUDI NG FCS SOFTWARE FROM THE FINAL SET OF COMPARABLES. 16. THE LD. DR FOR THE REVENUE DID NOT BRING ANY OTHE R DECISION TO SUPPORT FCS AS SOLELY ENGAGED IN THE SOFTWARE DEVELO PMENT ACTIVITIES AND NOT IN THE PRODUCT DEVELOPMENT AS WELL AS ITES SERVICES. 17. ON HEARING BOTH THE SIDES, WE ARE OF THE OPINION THAT THE ORDER OF CIT(A) IS FAIR AND REASONABLE AND DOES NOT CALL FOR ANY INTER FERENCE. ACCORDINGLY, RELEVANT GROUND RAISED BY THE REVENUE IN THIS REGAR D IS DISMISSED. (4) L.G.S. LTD. : CIT(A) GRANTED RELIEF WITH REGARD TO THIS COMPARABLE AS IT FAILED IN EXPORT TURNOVER FILTER. TPO CONSIDERED ONLY TOTA L EXPORT OF 14% OF THE TOTAL TURNOVER FILTER. WITH 91.76% L.G.S. GLOBAL LTD. FAILS TO MEET THE SAID FILTER REQUIREMENT SET BY THE TPO. THEREFORE, CIT(A) GRA NTED RELIEF. RELEVANT FINDING OF THE CIT(A) AS WELL AS THE CONTENTIONS OF THE LD. COUNSEL BEFORE THE TRIBUNAL ARE EXTRACTED AS UNDER : FINDINGS OF CIT(A) : 1. COMPANYS WAGES TO TOTAL COST RATIO IS OF 91.76% WH ICH IS ABNORMAL AND CANNOT BE COMPARED WITH THE RESPONDENT, PLACING REL IANCE ON THE RULING GIVEN BY HON'BLE ITAT IN THE CASE OF AVAYA INDIA P. LTD. ( ITA NO.5150/DEL/2010). ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 13 2. COMPANY FAILS THE EXPORT TURNOVER FILTER AS APPLIED BY THE LD. TPO ( TOTAL EXPORTS ARE ONLY 14% OF THE TOTAL TURNOVER). 3. COMPANY IS ENGAGED INTO PROVISIONS OF ITES. HELD BY CIT(A): COMPANY IS TO BE EXCLUDED AS IT FAI LS EXPORT TURNOVER FILTER. ASSESSEES CONTENTIONS : COMPANY IS FAILING THE EXPORT TURNOVER FILTER APPLI ED BY THE LD. TPO AND THEREFORE, OUGHT TO BE REJECTED. FINDINGS OF THE TRIBUNAL WITH REGARD TO LANCO GLOB AL SYSTEMS LTD: 18. THE LD. AR FOR THE ASSESSEE ARGUED VEHEMENTLY STATING THAT THE SAID COMPARABLE FAILS TO MEET THE REQUIREMENT OF EXPORT TURNOV ER OF 14%. LD. AR HAS FILED WRITTEN SUBMISSION AND CONTENTS OF THE SAME READ AS UNDER: (III) CONTENTIONS IN RELATION TO EXCLUSION OF LAN CO GLOBAL SYSTEMS LTD. IN RELATION TO EXCLUSION OF LANCO FROM THE FINAL SE T OF COMPARABLES , THE RESPONDENT WOULD LIKE TO HUMBLY SUBMIT THAT THE SAI D COMPANY DOES NOT CLEAR THE 75% EXPORT TURNOVER FILTER AS APPLIED BY THE LD . TPO (FOR DETAILS OF FILTERS APPLIED BY THE LD. TPO, REFER PAGE 75 OF THE PAPER BOOK) . CALCULATIONS IN THIS REGARD FOR THIS FILTER WERE SUBMITTED BEFORE THE LD . CIT(A) (REFER PAGE 242 OF THE PAPER BOOK) AND THE LD . CIT(A) AFTER FACTORING IN SUCH CALCULATIONS , EXCLUDED LANCO FOR FAIL I NG THE EXPORT FILTER APPLIED BY THE LD . TPO (REFER PARA 3.4.5.1 AND 3.4.5.2, PAGE 32 OF THE CIT(A)'S ORDER- PAGE 274 OF THE PAPER BOOK). BASED ON THE AFORESAID , THE RESPONDENT PRAYS THAT THE SAID COMPANY OUGHT TO BE EXCLUDED AS IT DID NOT MEET THE COMPARABILITY CRITE RIA APPLIED BY THE LD . TPO . 19. CONSIDERING THE ABOVE, WE ARE OF THE CONSIDERED VIEW T HAT THE LANCO FAILS IN MEETING THRESHOLD REQUIREMENT OF EXPORT TURNOVER FILTER. THEREFORE, IN OUR VIEW, LGS FAILED TO BE A GOOD COMPARABLE IN THIS REGAR D. THEREFORE, WE ARE OF THE OPINION THAT THE ORDER OF CIT(A) IS FAIR AND REAS ONABLE AND DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, RELEVANT GROUND RAISED BY THE REVENUE IS DISMISSED . 20. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED AS ABOVE . CO.NO.98/PUN/2014 BY ASSESSEE ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 14 21. THE ASSESSEE FILED CROSS OBJECTION IN CONNECTION WITH T HE IMPUGNED ORDER OF CIT(A) DATED 31.07.2013. 22. AT THE OUTSET, BRINGING OUR ATTENTION TO THE CROSS OBJECTIONS, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT BARRING THE CRO SS OBJECTIONS AT SL.NO.1,3 & 6 ALL OTHER CROSS OBJECTIONS ARE NOT PRESSED. WE ACCORDINGLY DISMISS THE SAME. THE REST OF THE CROSS OBJECTIONS, I.E. 1 , 3 & 6 RAISED BY THE ASSESSEE ARE EXTRACTED AS UNDER: 1. ACCEPTING ADJUSTMENT ON THE ENTIRE OPERATING COS T OF MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD. (MAGIC INDIA) WHICH I NCLUDES COST INCURRED FOR PROVIDING SERVICES TO THIRD PARTY (NON ASSOCIATED E NTERPRISE) (AE) AND TRADING OF LICENSES. 3. ACCEPTING TO REJECT E-INFOCHIPS LIMITED, ONLY IF THE ARGUMENT OF NON- AVAILABILITY OF ANNUAL REPORT IN THE PUBLIC DOMAIN WAS RAISED BEFORE THE LEARNED TRANSFER PRICING OFFICER (TPO). 6. CONSIDERING CARPRO NETHERLANDS (A THIRD PARTY) AS A N ASSOCIATED ENTERPRISE OF THE TESTED PARTY, RESULTING INTO CORR ECT INTERPRETATION OF THE PROVISIONS OF THE ACT. GROUND WISE ADJUDICATION OF THE CROSS OBJECTION ARE TAK EN UP IN THE FOLLOWING PARAGRAPHS. CROSS OBJECTION NO. 1 : 23. REFERRING TO THE CROSS OBJECTION NO. 1, THE LD. COUNS EL FOR THE ASSESSEE SUBMITTED THAT THE TPO/AO QUANTIFIED THE ADJUSTMENT ON THE ENTIRE OPERATING COST WHICH ALSO INCLUDES THE COST INCURRED IN PR OVIDING SERVICES TO THE THIRD PARTIES I.E. NON-AES AND THE TRADING LICENSE. IN T HIS REGARD, HE BROUGHT OUR ATTENTION TO THE CONTENTS OF PAGE 15 OF THE PAPER BOOK WHERE COMPUTATION OF ARMS LENGTH PRICE IS GIVEN SHOWING THE W ORKING QUANTIFYING ADJUSTMENT CONSIDERING TOTAL OPERATING COST OF RS.6,11,70,28 9/-. THE CIT(A) DID NOT DISTURB THE ABOVE MANNER OF QUANTIFYING THE ADJU STMENT. THE CIT(A) IS OF THE OPINION THAT THE ADJUSTMENT MADE BY TPO IS SU STAINABLE AS THE ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 15 ASSESSEE USED THE ENTITY LEVEL NET MARGIN WHILE PREPARING HIS TP STUDY. HOWEVER, HE DID NOT REFER OR DISTINGUISHED THE CASE LAWS C ITED BY THE ASSESSEE BEFORE HIM. THEREFORE, THE ASSESSEE RAISED CROS S OBJECTION ASKING FOR RELIEF IN THIS REGARD. 24. BEFORE US, ASSESSEE FILED WRITTEN SUBMISSIONS AND RELIED O N VARIOUS DECISIONS OF THE TRIBUNAL AS WELL AS JUDGMENT OF HON'BLE HIGH COURT TO MAKE OUT THE CASE FOR RESTRICTING QUANTIFICATION ADJUSTMENT TO THE PORTION OF INTERNATIONAL TRANSACTION WITH AES. FOR THE SAKE OF COMPLET ENESS, THE CONTENTS OF THE WRITTEN SUBMISSIONS ARE EXTRACTED AS UNDER: ASSESSEES CONTENTIONS WITH REGARD TO GROUND NO.1 : WHILE COMPUTING THE TRANSFER PRICING ADJUSTMENT, THE TPO HAS CONSIDERED THE TOTAL COST INCURRED BY MAGIC INDIA FOR THE PURPOSE OF COMPUTING THE ARM'S LENGTH PRICE. THE TOTAL COST INCURRED BY RESPONDENT CONSIS TS OF COST INCURRED FOR PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO INDEP ENDENT THIRD PARTIES AS WELL AS COST FOR TRADING OF LICENSES WHICH ARE NOT IN AN Y WAY RELATED TO THE INTERNATIONAL TRANSACTIONS OF THE RESPONDENT. THE RESPONDENT WOULD LIKE TO PLACE ITS RELIANCE ON JUDGMENTS OF MUMBAI HIGH COURT IN CASE OF CIT VS. BHANSALI & CO. (ITA 1066 O F 2014) (REFER PARA 3 AND 5, PAGE 719-720 OF THE PAPER BOOK) AND RATILAL BECHARL AL & SONS ([2016J 65 TAXMANN.COM 155 (BOMBAY)) (REFER PARA 3(D) AND 3(E) , PAGE 724 OF THE PAPER BOOK) AND DELHI HIGH COURT IN CASE OF CIT VS. KEIHI N PANALFA LTD (ITA NO. 11 OF 2015) (REFER PARA 12, PAGE 734-735 OF THE PAPER BOO K) STATING THAT WHILE DETERMINATION OF ARM'S LENGTH PRICE UNDER TNMM, ADJUSTMENT CAN BE MADE ONLY ON TRANSACTIONS UNDERTAKEN WITH THE AE NOT WIT H THE THIRD PARTY. ACCORDINGLY, IN RESPONDENT'S CASE, COST INCURRED FO R RENDERING SERVICES TO THIRD PARTY SHOULD BE EXCLUDED FOR DETERMINATION OF ARM'S LENGTH PRICING. THE RESPONDENT WOULD LIKE TO PLACE RELIANCE ON THE FOLLOWING CASES IN SUPPORT OF THE ABOVE ARGUMENT: CIT VS. TARA JEWELS EXPORTS PVT. LTD [ITA NO. 1814/ 2013] HUNTSMAN ADVANCED MATERIALS (I) PVT. LTD VS. DCIT [ ITA NO. 8237/MUM/2010] M/S STARLITE VS DCIT [2010] 40 SOT 421 (MUM ACIT V/S MS TEJ DIAM [I.TA. NO. 5034/MUM/2007] IL JIN ELECTRONICS (I) (P) LTD V/S ACIT [(2010) 36 SOT 227 (DELHI)] CHIRON BEHRING VACCINES PVT LTD VS ASST CIT, MUMBAI ITAT 2011 THE LD. CIT(A) WAS PRINCIPALLY IN FAVOR OF THE ABOV E ARGUMENT RAISED BY THE RESPONDENT THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE MADE ONLY IN RELATION TO THE INTERNATIONAL TRANSACTION (REFER PARA 2.2.3 PAGE 247 OF THE PAPER BOOK). HOWEVER, HE REJECTED THE ABOVE GROUND OF THE RESPONDENT ON ACCOUNT OF TWO REASONS. FIRST OF ALL, THE LD. CIT(A ) HAS OPINED THAT MAKING ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 16 TRANSFER PRICING ADJUSTMENT TO THE VALUE OF INTERNA TIONAL TRANSACTIONS ALONE WOULD CONSTITUTE AS FURTHER ADJUSTMENT TO AN ADJUST MENT WHICH IS OPPOSED TO THE PROVISIONS OF LAW. FURTHERMORE, THE LD. CIT(A) WAS OF THE OPINION THAT THE RESPONDENT HAD USED THE ENTITY LEVEL NET MARGINS WH ILE PREPARATION OF TRANSFER PRICING STUDY WHICH WAS ACCEPTED BY THE TPO AT THE ASSESSMENT LEVEL. THUS, THE SAME SHOULD NOT BE COVERED BY THE CIT(A). IN RELATION TO THE ABOVE CONTENTIONS OF THE CIT(A), THE RESPONDENT WOULD LIKE TO HUMBLY SUBMIT AS UNDER: THE RESPONDENT IS NOT PROPOSING TO MAKE ADJUSTMENTS TO THE TRANSFER PRICING ADJUSTMENT MADE. THE RESPONDENT IS PROPOSING TO USE THE SEGMENT COST AND REVENUE FOR COMPUTING THE AMOUNT OF ADJUSTMENT. MAKING AN ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTION BY USING THE SEGMENTAL COST INCURRED BY THE ENTITY IN RELATION T O THE INTERNATIONAL TRANSACTION WOULD NOT AMOUNT TO MAKING FURTHER ADJU STMENT TO THE TRANSFER PRICING ADJUSTMENT. FURTHERMORE, IN RELATION TO THE CONTENTION THAT THE RESPONDENT HAD SELECTED ENTITY LEVEL NET MARGINS AT THE TIME OF TRANSFER PR ICING STUDY AND THE SAME WAS ACCEPTED BY THE TPO, THE RESPONDENT WOULD LIKE TO H UMBLY SUBMIT AS UNDER: LD. CIT(A) HAS HIMSELF OPINED THAT CONDUCT OR ERROR ON PART OF THE TPO CANNOT STOP OPERATION OF LAW THAT NET MARGIN HAS TO BE WOR KED OUT ON INTERNATIONAL TRANSACTION (PARA 2.2.7, PAGE 249 OF THE PAPER BOOK ) LD. CIT(A) HAS HIMSELF AGREED TO THE FACT THAT AN E RROR ON PART OF THE TAX PAYER WHICH IS NOT IN ACCORDANCE WITH LEGAL PROVISIONS CA NNOT BECOME LEGALLY VALID BECAUSE THE TPO ACCEPTED IT. (PARA 2.2.8, PAGE 249 OF THE PAPER BOOK) THE POWERS OF CIT(A) ARE CO TERMINUS WITH THE POWER S OF THE AO, THUS, EVEN IF THE RESPONDENT FAILED TO RAISE THE GROUND BEFORE TH E TPO OR THE AO, THE SAME CANNOT BE CONSIDERED AS THE BASIS FOR NOT ALLOWING THE OBJECTION RAISED BY THE RESPONDENT IF IT IS ACCEPTABLE AS LEGALLY SOUND. THE HON'BLE HIGH COURT OF PUNJAB AND HARYANA IN THE CASE OF CIT VS. QUARK SYSTEMS INDIA (P) LTD. (ITA NO. 594/2010) (REFER PA GE 590 OF THE PAPER BOOK) HAS UPHELD THE VIEW TAKEN BY THE SPECIAL BENCH OF T RIBUNAL THAT THE TAXPAYER CANNOT BE ESTOPPED FROM RAISING OBJECTIONS TO REJEC T A COMPANY WHICH WAS SELECTED BY THE TAXPAYER ITSELF I N THE TRANSFER PRICING STUDY. THE SAME PRINCIPLE APPLIED IN THE PRESENT CA SE. WITHOUT PREJUDICE TO THE ABOVE, THE RESPONDENT WOUL D LIKE TO HUMBLY SUBMIT THAT THE RESPONDENT HAD ALSO SUBMITTED DETAILED SEG MENTAL PROFITABILITY TO THE TPO VIDE SUBMISSIONS DATED 26 TH OCTOBER 2010 AND 14TH OCTOBER 2011 (PAGE 57 AND 103 OF PAPER BOOK). THUS, THE ABOVE CONTENTI ON OF LD. CIT(A) IS DEVOID OF ANY FACTUAL OR LEGAL SUPPORT. FROM THE ABOVE IT IS EVIDENT, THE ASSESSEE SUMMED UP TH E OBJECTION OF THE CIT(A) AND CONTENDED THAT IT IS NOT A CASE OF MAKING ADJUSTMENT TO THE ADJUSTMENT IN OPPOSITION TO THE PROVISIONS OF LAW. FURTHER , ASSESSEE ADOPTED ENTITY LEVEL NET MARGIN IN HIS TP STUDY AND THERE IS NO EN TITY SEGREGATING THE OPERATING COST RELATABLE TO THE INTERNATIONAL TRANSACTIONS AND THEN QUANTIFIED ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 17 THE ADJUSTMENT. IN THIS REGARD, ASSESSEE SUBMITTED THAT THE CIT(A) IS EMPOWERED AND IS FREE TO MAKE CORRECTION AND REMOVE E RRORS IN THE MANNER OF DETERMINING ALP. REFERRING THE SCHEDULE OF CO-TERMINUS P OWER OF CIT(A), LD. COUNSEL RELIED ON THE JUDGMENT OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. QUARK SYSTEMS INDIA (P) LTD. (SUPRA.) WHICH UPHELD THE SPECIAL BENCH DECISION OF THE TRIBUNAL HOLDING THAT THE TAXP AYER CANNOT BE STOPPED FROM RAISING OBJECTION. 25. LD. DR FOR THE REVENUE RELIED HEAVILY ON THE ORDER OF CIT(A). 26. ON HEARING BOTH THE PARTIES ON THIS ISSUE, WE ARE OF T HE OPINION THAT THE ISSUE OF RESTRICTING THE ADJUSTMENT, IF ANY, TO THE INTE RNATIONAL TRANSACTIONS UNDERTAKEN WITH AES ONLY AND NOT WITH THE THIRD PARTY, IS ALREADY DECIDED IN FAVOUR OF THE ASSESSEE. THE JUDGMENT IN THE CASE OF RATILAL BECHARLAL & SONS (SUPRA.) AND THE DELHI HIGH COURTS JUDGM ENT IN THE CASE OF CIT VS. KEIHIN PANALFA LTD. (SUPRA.) ARE RELEVANT IN THIS REGAR D. REVENUE HAS NOT FILED ANY CASE LAW IN SUPPORT OF THEIR DECISIONS. THERE FORE, WE ARE OF THE OPINION THAT THE ISSUE UNDER CONSIDERATION NEEDS, TO BE R EMANDED BACK TO THE FILE OF CIT(A) TO ADJUDICATE THE ISSUE FRESH AFTER CONSID ERING THE CITED DECISIONS (SUPRA.). THE CIT(A) SHALL GRANT REASONABLE OPPORTU NITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH THE SET PRINC IPLES OF NATURAL JUSTICE. ACCORDINGLY, CROSS OBJECTION NO.1 RAISED BY ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE . CROSS OBJECTION NOS. 3 & 6 27. OTHER CROSS OBJECTIONS I.E CROSS OBJECTION NO. 3 AND 6 EXTRACTED IN PARA 21 OF THIS ORDER RELATES TO REJECTION OF E-INFOCHIPS LIMITED ON ONE SIDE AND CONSIDERING CARPRO NETHERLANDS AS AN AE OF THE TESTED P ARTY ON THE OTHER. ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 18 LD. AR FOR THE ASSESSEE FILED THE FOLLOWING WRITTEN SUBMISSION S. CROSS OBJECTION WISE WRITE UP IS EXTRACTED AS UNDER: ASSESSEES CONTENTIONS WITH REGARD TO GROUND NO.3 : THE ORDER OF LD. CIT(A) SO FAR AS IT RELATED TO THE CONDITION IMPOSED FOR REJECTION OF E-INFOCHIPS LIMITED IS DEVOID OF ANY MERIT. THE POWERS OF CIT(A) HAVE BEEN HELD TO BE CO-TERMINUS WITH THAT OF THE ASSESSING O FFICER, THUS, IT WAS WELL WITHIN THE POWERS OF CIT(A) TO CONSIDER THOSE OBJEC TIONS WHICH WERE NOT RAISED BEFORE THE ASSESSING OFFICER. THE RESPONDENT WOULD LIKE REITERATE THE DECISIONS ON WHICH IT WOULD LIKE TO PLACE RELIANCE ON IN SUPP ORT OF THIS CONTENTION: COMMISSIONER OF INCOME TAX VS. NIRBHERAM DALURAM [(1 997)139 CTR (SC) 484] JUTE OF CORPORATION OF INDIA LTD. VS. COMMISSIONER OF INCOME TAX AND ANOTHER [(1990)88CTR(SC)66] INVENTORS INDUSTRIAL CORP. LTD. VS. COMMISSIONER OF INCOME TAX (1992)194 ITR 548 (BOM.)] CIT VS. KANPUR COAL SYNDICATE [( 1964) 53 ITR 225 ( SC)] CIT VS. MOTOR INDUSTRIES CO. LTD. (1998] 97 TAXMAN 7 (KARNATAKA)) INDU ARTS VS. ACIT ([2017] 88 TAXMANN.COM 182 (DELH I - TRIB.)) IN THE LIGHT OF ABOVE JUDICIAL PRECEDENTS, THE RESP ONDENT HUMBLY REQUESTS THE HON'BLE BENCH TO REJECT E- INFOCHIPS LIMITED FROM T HE FINAL SET OF COMPARABLE COMPANIES WITHOUT THE CONDITION IMPOSED BY THE LD. CIT (A) . FURTHERMORE, WITHOUT PREJUDICE TO THE ABOVE, THE RE SPONDENT WOULD LIKE TO HUMBLY SUBMIT THAT THE HON'BLE HIGH COURT OF PUNJAB AND HARYANA IN THE CASE OF CIT VS. QUARK SYSTEMS INDIA (P) LTD. (ITA NO. 59 4/2010) (REFER PAGE 590 OF THE PAPER BOOK) HAS UPHELD THE VIEW TAKEN BY THE SP ECIAL BENCH OF TRIBUNAL THAT THE TAXPAYER CANNOT BE ESTOPPED FROM RAISING O BJECTIONS TO REJECT A COMPANY WHICH WAS SELECTED BY THE TAXPAYER ITSELF I N THE TRANSFER PRICING STUDY. CONSIDERING THE RATIO OF THE SAID DECISION, IN THE PRESENT CASE THE TAXPAYER CANNOT BE ESTOPPED FROM RAISING OBJECTIONS TO REJECT A COMPANY AT THE CIT(A) OR TRIBUNAL LEVEL EVEN IF NO OBJECTION WAS R AISED AT THE ASSESSMENT LEVEL. FURTHER, THE WRITE UP RELATING TO THE CARPRO NETHERLANDS WRONGLY CONSIDERED AS AE:- ASSESSEES CONTENTIONS WITH REGARD TO GROUND NO.6 : THE RESPONDENT IS A SUBSIDIARY OF MAGIC SOFTWARE EN TERPRISES LIMITED, ISRAEL (,MSE ISRAEL'). CARPRO SYSTEMS LIMITED, ISRAEL ('CAR PRO ISRAEL') WAS A SUBSIDIARY OF MSE LSAREL. CARPRO ISRAEL DEVELOPED A SOFTWARE S OLUTION 'CARPRO' FOR LEASING, RENTING, FLEET CONTROL AND GARAGE MANAGEMENT FUNCTI ONS OF CAR RENTAL COMPANIES. THIS SOLUTION WAS SOLD IN VARIOUS PARTS OF THE WORLD INCLUDING EUROPE AND MIDDLE EAST. RENTAL TECHNOLOGIES BENELUX BV, NETHERLANDS WAS AN ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 19 INDEPENDENT THIRD PARTY DISTRIBUTOR FOR SELLING AND SUPPORTING THE SAID SOFTWARE SOLUTION, ESPECIALLY IN THE MIDDLE EAST. CARPRO ISRAEL SOLD ITS WHOLE BUSINESS, INCLUDING TH E RIGHTS OF CARPRO SOFTWARE AND ITS ACCESS TO THE EXISTING CUSTOMER BASE, TO RE NTAL TECHNOLOGIES BENELUX BV ('RENTAL NETHERLANDS'), AND INDEPENDENT ENTITY O WNED BY MR. ROB TERPSTRA AND MRS. MARIA TERPERSTRA, IN YEAR DECEMBER 2006. RENTAL TECHNOLOGIES BENELUX BV INCORPORATED A NEW C OMPANY I.E.,CARPRO SYSTEMS INTERNATIONAL B.V, NETHERLANDS ('CARPRO NET HERLANDS'), OWNED BY MR. ROB TERPERSTRA, FOR DEVELOPMENT AND DISTRIBUTION OF CARPRO PRODUCT. CARPRO NETHERLANDS IS AN INDEPENDENT ENTITY AND MSE ISRAEL OR ITS SUBSIDIARY CARPRO ISRAEL DO NOT DIRECTLY OR INDIRECTLY OWN MANAGE OR CONTROL CARPRO NETHERLANDS. THE RESPONDENT PROVIDED SERVICES TO CARPRO NETHERLA NDS DURING THE FY 2007- 08 IN PURSUANCE OF THE SERVICE AGREEMENT WHICH WAS ENTERED BETWEEN THE RESPONDENT AND CARPRO NETHERLANDS IN DECEMBER 2006 (REFER PAGE 352-355 OF THE PAPER BOOK) I.E, AFTER THE BUSINESS WAS TRANSFE RRED BY CARPRO ISRAEL TO RENTAL TECHNOLOGIES BENELUX BV LD. CIT(A) HAS CONTE NDED THAT CARPRO NETHERLANDS IS AN AE OF ESPONDENT UNDER SECTION 92A (2)(G) OF THE ACT (REFER PARA 2.5.5, PAGE 256 OF THE PAPER BOOK). AS PER SAI D SECTION, AN ENTERPRISE CAN BE CONSIDERED TO BE THE AE OF THE TAXPAYER IF THE B USINESS OF THE TAX PAYER IS WHOLLY DEPENDENT UPON THE USE OF KNOW-HOW, PATENTS, COPYRIGHTS TRADEMARKS ETC. OWNED BY THE OTHER. LD. CIT(A) HAS OPINED THAT THE SOFTWARE FOR CARPRO NETHERLANDS IS DEVELOPED ON THE PLATFORMS WHICH ARE OWNED BY CARPRO NETHERLANDS AND WITHOUT THE PLATFORMS, THE SOFTWARE CANNOT BE DEVELOPED. THUS, THE BUSINESS OF RESPONDENT IS DEPENDENT ON TH E SOFTWARE OWNED BY CARPRO NETHERLANDS WHICH MAKES CARPRO NETHERLANDS A S ITS AE. THE RATIONALE GIVEN BY THE LD. CIT(A) IS DEVOID OF MERIT FOR ALL THE FOLLOWING REASONS: EXPORT OF SOFTWARE DEVELOPMENT SERVICES TO CARPRO N ETHERLANDS IS NOT THE ONLY BUSINESS OF RESPONDENT. IT IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO MAGIC ISRAEL AS WELL AS TRADING OF SOFT WARE LICENSES IN LOCAL MARKET. THUS, THE BUSINESS OF THE RESPONDENT IS NOT WHOLLY DEPENDENT ON THE KNOW- HOW OWNED BY CARPRO NETHERLANDS. THE EXPORT OF SOF TWARE DEVELOPMENT SERVICES TO CARPRO NETHERLANDS CONSTITUTES ONLY 20% THE REVENUE OF THE RESPONDENT FOR FY 2007-08. IN THIS REGARD, THE RES PONDENT WOULD LIKE TO PLACE RELIANCE ON THE RULING GIVEN BY AUTHORITY FOR ADVANCE RULING IN THE CASE OF SPECIALITY MAGAZINES (P) LTD. (2005) 274 ITR 310 (AAR); WHEREIN IT WAS HELD THAT THE WORD WHOLLY MEANS ENTIRELY, COMPLETELY, FULLY, TOTALLY ALMOST WHOLLY WOULD MEAN VERY NEAR TO WHOLLY, A LITTLE LE SS THAN WHOLE. IN TERMS OF PERCENTAGE ALMOST WHOLLY WOULD MEAN ANYTHING LESS THAN 90 PER CENT. FURTHERMORE, THE RESPONDENT WOULD LIKE TO PLACE ITS RELIANCE ON THE JUDGMENT OF HON'BLE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S.PAGE INDUSTRIES LTD. VS. DCIT (IT(TP)A NO. 1631/BANG/2015) (REFER P ARA 10,11 AND 11.1, PAGE 710-715 OF THE PAPER BOOK) WHEREIN THE TRIBUNAL WHI LE ANALYZING THE EXISTENCE OF AE RELATIONSHIP WITHIN THE MEANING OF SECTION 92 A OF THE ACT, HELD THAT THE ASSESSEE-COMPANY AND FOREIGN COMPANY WERE NOT 'AES' DUE TO ABSENCE OF DE- FACTO CONTROL IN THE BUSINESS OF THE ASSESSEE COMPA NY, EVEN THOUGH ASSESSEE WAS A LICENSE OF THE 'BRAND-NAME' OF THE FOREIGN CO MPANY FOR EXCLUSIVE MANUFACTURE AND MARKETING OF GOODS UNDER SAID LICEN SING ARRANGEMENT. BASED ON THE ABOVE, THE RESPONDENT WOULD LIKE TO SU BMIT THAT THERE IS NO ALLEGATION THAT CARPRO NETHERLANDS IS CONTROLLING T HE RESPONDENT, EITHER THROUGH PARTICIPATION IN CAPITAL OR MANAGEMENT OR T HROUGH THE BUSINESS TRANSACTED BETWEEN THEM AND CONSIDERING THE FACT TH AT THE BUSINESS OF THE RESPONDENT WAS NOT 'WHOLLY DEPENDENT' ON CARPRO NET HERLANDS, IT COULD NOT BE ALLEGED THAT RESPONDENT AND CARPRO NETHERLANDS A RE AES WITHIN THE MEANING OF SECTION 92A(2)(G) OF THE ACT. APART FROM THE ABOVE, IT IS PERTINENT TO NOTE THAT THE RESPONDENT'S BUSINESS IS ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 20 THAT OF PROVIDING SOFTWARE SERVICES. THE MERE FACT THAT IN PROVISION OF SUCH SERVICES, IT USES THE PLATFORM PROVIDED BY THE CUST OMER DOES NOT LEAD TO AN INFERENCE THAT THE BUSINESS OF THE RESPONDENT IS DE PENDENT ON THE KNOW-HOW OF THE CUSTOMER. IT IS A GENERAL INDUSTRY PRACTICE TO SHARE THE PLATFORMS ON WHICH SOFTWARE IS TO BE DEVELOPED WITH THE PARTIES WHO HAVE BEEN APPOINTED TO DEVELOP SOFTWARE. ACCORDINGLY, THE RESPONDENT'S BUSINESS IS NOT DEPENDENT ON THE EXPLOITATION OF THE PLATFORMS OF CARPRO NETH ERLANDS. LD. CIT(A) HAS OBSERVED THAT THE TPO HELD CARPRO NE THERLANDS TO BE AN AE OF THE RESPONDENT (REFER PARA 2.5.3, PAGE 255 OF THE P APER BOOK) - THE SAID OBSERVATION IS FACTUALLY INCORRECT AS THE TPO HAD O NLY HELD THAT THE TRANSACTIONS BETWEEN APPELLANT AND CARPRO NETHERLAN DS ARE NOT CONTROLLED - HOWEVER, NO AE RELATIONSHIP WITHIN THE MEANING OF S ECTION 92A OF THE ACT WAS ESTABLISHED/ IDENTIFIED BY THE TPO. THUS, ON THE BASIS OF ABOVE REASONS, IT CAN BE CONT ENDED THAT CARPRO NETHERLANDS IS NOT AN AE OF THE RESPONDENT UNDER SE CTION 92A(2)(G) OF THE ACT. ON THE BASIS OF ABOVE CONTENTIONS, THE RESPONDENT H UMBLY SUBMITS THAT THE TRANSACTION WITH CARPRO NETHERLANDS SHOULD BE CONSI DERED AS AN INDEPENDENT THIRD PARTY TRANSACTION. 28. AFTER HEARING BOTH THE PARTIES ON THIS ISSUE AND ON P ERUSAL OF THE ORDER OF CIT(A) ON ONE SIDE AND THE WRITTEN SUBMISSIONS MADE BY THE ASSESSEE BEFORE US ON THE OTHER SIDE, WE FIND THE ORDER OF CIT(A) IN THIS REGARD FALLS SHORT OF THE LEGAL REQUIREMENTS OF THE DEFINITION OF SPEAKING ORDER. WE FIND THE REVENUE AUTHORITIES FAILED TO CONSIDER CERTAIN RELEVAN T FACTS WITH RESPECT TO THE ALP DETERMINATION. IT IS SETTLED LAW THAT EVERY JU DICIAL ORDER PASSED BY THE CIT(A) IS REQUIRED TO BE SPEAKING ORDER IN ACCORDANCE WITH PRINCIPLES LAID DOWN SUB SECTION (6) OF SECTION 250 OF THE ACT. CIT(A) SHOU LD NOTE THAT THE CARPRO CANNOT BE CONSIDERED AS AE FOR THE ALP PURPOSE . THEREFORE, WE ARE OF THE OPINION THAT THE ISSUE UNDER CONSIDERATION NEEDS TO B E REMANDED BACK TO THE FILE OF CIT(A) TO ADJUDICATE THE ISSUE AFTER CONSIDERING T HE CITED DECISIONS (SUPRA.). THE CIT(A) SHALL GRANT REASONABLE OPPORTUNITY OF BEIN G HEARD TO THE ASSESSEE IN ACCORDANCE WITH THE SET PRINCIPLES OF NATURAL JUSTICE. ACCORDINGLY, CROSS OBJECTIONS NO. 3 AND 6 RAISED BY ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSE . ITA NO.1802/PUN/2013 CO NO.98/PUN/2014 21 29. IN THE RESULT, CROSS OBJECTION FILED BY ASSESSEE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSE. 30. TO SUM UP, THE APPEAL OF THE REVENUE IS DISMISSED AN D CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF JULY, 2018. SD/- SD/- (VIKAS AWASTHY) (D. K ARUNAKARA RAO) /JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 18 TH JULY, 2018 /SB # $ %&' ('& / COPY OF THE ORDER FORWARDED TO : // TRUE COPY // # / BY ORDER, //TRUE COPY// //TRUE COPY// SENIOR PRIVATE SECRETARY ! '# , / ITAT, PUNE 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A ) IT/TP, PUNE 4. THE CIT (A) - 13, PUNE 5. $% '# , ! '# , A BENCH PUNE; 6. %&' ( / GUARD FILE.