COMMISSIONER OF INCOME TAX-III V. WITTNESS SYSTEM

ITA/347/2013

AI Insights

The case involves an appeal by the Income Tax Department against Wittness System Software India Private Ltd. concerning the determination of ALP for the assessment year 2007-08. The appeal challenged the decision of the Income Tax Appellate Tribunal, which had excluded certain companies as comparables for ALP determination based on their size and turnover. The Tribunal's decision was influenced by various factors including the functional and financial differences between the companies. The High Court of Karnataka dismissed the appeal, stating that the questions raised did not constitute substantial questions of law as required under Section 260-A of the Income Tax Act.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 728449 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 11-07-2018
• Assessment Year: misc
• Other Referred Cases: CIT vs Tata Elxsi Ltd., Commissioner of Income-tax, Central \\u2013 III vs. HCL Technologies Ltd., DCIT vs. Quark Systems Pvt. Ltd., Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, Kodiak Networks (India) Private Limited Vs. ACIT, Genesis Microchip (I) Private Limited Vs. DCIT, Electronic for Imaging India Private Limited, Telcordia Technologies Pvt. Ltd. v. ACIT, Capgemini India (F) Ltd v Ad. CIT, Teva Pharma Private Ltd. v. Addl. CIT, M/s.Tata Elxsi Ltd. vs. Asst. Commissioner of Income Tax
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: BALRAM RAO
• Assessee Lawyers: E I SANMATHI
• Keywords: Arm's Length Price; Comparable Uncontrolled Price Method; Export Turnover; Income Tax; Insurance charges; Total Turnover; Transfer pricing; Reimbursement of Telecommunication Expenses
• Section: 92; 92B; 10B; 92C; 92D; 10A; 260-A

Judgement Text

" 1/38 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 11TH DAY OF JULY 2018 PRESENT THE HON’BLE DR.JUSTICE VINEET KOTHARI AND THE HON’BLE MRS.JUSTICE S.SUJATHA I.T.A. No.347/2013 BETWEEN : 1. COMMISSIONER OF INCOME TAX-III CENTRAL REVENUE BUILDINGS QUEENS ROAD BANGALORE – 560 001 2. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE – 11 (I) BANGALORE ... APPELLANTS (BY SRI.E I SANMATHI, ADV.) AND: WITTNESS SYSTEM SOFTWARE INDIA PRIVATE LTD NO.58, 6TH FLOOR BRIGADE ROAD BANGALORE – 560 001 .. RESPONDENT (BY SRI.BALRAM R RAO, ADV. (ABSENT)) THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 22/02/2013 PASSED IN IT (TP) A NO.1366/BANG/2011, FOR THE ASSESSMENT YEAR 2007-08 ANNEXURE – A, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. SET ASIDE THE Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 2/38 ORDER PASSED BY THE ITAT, 'B' BENCH, BANGALORE IN IT (TP)A. NO.1366/BANG/2011 DATED 22/02/2013 ANNEXURE – A. THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING: J U D G M E N T Mr. E.I. Sanmathi, Adv. for Appellants – Revenue. This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’, in IT [TP]A No.1366/Bang/2011 dated 22.02.2013, relating to the Assessment Year 2007-08. 2. This Appeal has been admitted on 17.12.2013 to consider the following substantial questions of law as framed by the Revenue in the Memorandum of Appeal. (1) “Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 3/38 accordingly directing the assessing authority/TPO not to include cases of M/s Flextronics Software Systems Ltd., M/s iGate Global Solutions Ltd., M/s.Mindtree Ltd., M/s.Persistent System Ltd., M/s.Sasken Communication Technologies Ltd., M/s Tata Elxsi Ltd., M/s Persistent Systems Ltd., M/s.Sasken Communication Technologies Ltd., M/s Tata Elxsi Ltd., M/s. Wipro Ltd., and M/s. Infosys Ltd., as comparables for determining ALP in the case of the assessee? (2) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in super imposing the decision of other benches of the Tribunal in the case of the assessee to reject the six cases of comparables namely M/s.Megasoft Ltd., M/s.Avani Cimcon technology Ltd., M/s Kals Information Systems Ltd., M/s.Accel Transmatics Ltd.,M/s.Celestial Labs Ltd and M/s Lucid Software Ltd. when selection of comparables in a case for determining ALP depends on assessee specific FAR analysis? Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 4/38 (3) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in relying on the decision of other benches of the Tribunal to reject the six cases of comparables namely, M/s.Megasoft Ltd., M/s.Avani Cimcon Technology Ltd., M/s.Kals Information Systems Ltd., M/s. Accel Transmatics Ltd., M/s Celestial Labs Ltd and M/s. Lucid Software Ltd. without considering the specific facts brought on record by the TPO in the case of assessee for deciding the comparability of the above companies? (4) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in fixing the RPT filter at 15% of total revenue and deleting M/s.Ishir Infotech and Geometric Ltd as comparables, by superimposing the decisions of tribunal in other cases, including those of other benches of tribunal, without going into specific facts in the case of the assessee and without adducing the basis for arriving at the 15% cut off for RPT filter, in the case of the assessee? Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 5/38 (5) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the reimbursement of telecommunication expenses & insurance charges incurred in foreign currency are to be excluded both from total turnover as well as from export turnover for computation of deduction u/s.10A whereas such exclusion is permitted to arrive at export turnover only as per the definitions given in Sec.10A of the IT Act and total turnover has not been defined in the Section? (6) Whether the Tribunal is correct in law in holding that the deduction u/s.10A should be computed in the above manner following the judgment of jurisdictional High Court in the case of CIT vs Tata Elxsi Ltd., which has not become final since the same has not been accepted by the department and SLP’s filed by the revenue of this issue are pending before the Hon’ble Supreme Court?” Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 6/38 Regarding Substantial Question Nos. 5 & 6: 3. The controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst. Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar), which has been affirmed by Hon’ble Supreme Court in the case of Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC). 4. The relevant portion of the judgment of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra), is quoted below for ready reference:- “17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 7/38 Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total turnover’ is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible. 18. XXXXXX 19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 8/38 illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well”. Regarding Substantial Question Nos.1 & 4: 5. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under: \"(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs.1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 9/38 under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 10/38 turnover, as the same was not reasonable classification. Several other decisions were IT(TP)A No.1366/Bang/2011 referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- xxxx xxxx xxxx 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: xxxx xxxx xxxx Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 11/38 13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of Rs. 1 crore to Rs.200 crores was held to be proper. The following relevant observations were brought to our notice:- xxxx xxxx xxxx 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 12/38 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Rs.200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 13/38 international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that \"international transaction\" means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92- A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 14/38 length price in an international transaction and it provides:- (1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :-- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub- section (1) shall be applied, for Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 15/38 determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that-- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 16/38 (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:- Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 17/38 \"10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :-- (a)....... to (d)........ (e) transactional net margin method, by which,-- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 18/38 number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub- clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 19/38 judged with reference to the following, namely:-- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 20/38 (3) An uncontrolled transaction shall be comparable to an international transaction if-- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 21/38 prices in relation to the transactions being compared.\" 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 22/38 No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores.\" 12. Respectfully following the decision of the Tribunal referred to above, we hold that the comparables chosen by the TPO at Sl. Nos. 6,9,10,17,18, 22, 24 & 26 have to be excluded as comparables for the purpose of Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 23/38 determining the ALP of the impugned transaction in this appeal.” Regarding Substantial Question No.2: \"(b) Avani Cimcon Technologies Ltd. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name \"DXchange\", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 24/38 who was rendering software development services only and it was held as follows:- \"7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis.\" It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- xxx xxx xxx Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 25/38 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 26/38 (c) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- • In the Director's Report (page 20 of PB-Il), it is stated that \"the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act.\" • As per the Notes to Accounts - Schedule 15, under \"Deferred Revenue Expenditure\" (page 31 of PB-II), it is mentioned that, \"Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred.\" • An amount of Rs. 11,692,020/- has been debited to the Profit and Loss Account as \"Deferred Revenue Expenditure\" (page 30 of Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 27/38 PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R&D activities is bad in law. 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: xxxxxxxxxxx 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 28/38 company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 29/38 available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a IT(TP)A No.1366/Bang/2011 public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 30/38 clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 31/38 aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs.45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: xxxxxxxxxxxxx Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 32/38 Assessee. We find that the TPO 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 company 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 not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is 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 development 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 that Accel Transmatic should be rejected as Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 33/38 comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: xxxxxxxxxx 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 34/38 business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables.\" Regarding Substantial Question No.3: “19. As far as Sl.No.16 viz., Megasoft Ltd. of the list of comparables chosen by the TPO is concerned, this Tribunal in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) had held that only segmental data should be taken for the purpose of comparison. Following are the relevant observations of the Tribunal:- xxxx xxxxxx” 6. The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 c/w 537/2015 dated 25.06.2018 [Prl. Commissioner of Income Tax & Anr. V/s. M/s.Softbrands India Pvt. Ltd.,] wherein it has been Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 35/38 observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: 55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 36/38 hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed. 57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 37/38 and findings has found certain comparables to be good comparables to arrive at an ‘Arm’s Length Price’ in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.” 7. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the considered opinion that no substantial question of law arises for consideration in the present case. 8. Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs. Date of Judgment 11-07-2018, ITA No.347/2013 Commissioner Of Income Tax-III & another Vs. Wittness System Software India Private Ltd. 38/38 Copy of this order be sent to the Respondent- Assessee forthwith. Sd/- JUDGE Sd/- JUDGE AN/- "