M/s Cypress Semiconductor Technology India Private Limited, Bangalore V. DCIT, Bangalore

ITA 1002/BANG/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89909 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 04-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAYAN
• Keywords: Related party transaction; Transfer pricing; International transaction; Revenue expenditure
• Section: 143(3); 92D; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI.N. V. VASUDEVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P.GEORGE, ACCOUNTANT MEMBER I.T(TP).A NO.1002/BANG/2011 (ASSESSMENT YEAR : 2007-08) M/S.CYPRESS SEMICONDUCTOR TECHNOLOGY INDIA PRIVATE LIMITED # 65/2, LAUREL, BAGMANE TECH PARK, BLOCK C, C.V.RAMAN NAGAR, BANGALORE 560 093. APPELLANT PAN : AABCC 2470Q VS. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(2), BANGALORE RESPONDENT APPELLANT BY : SHRI. T.SURYANARAYAN, ADVOCATE RESPONDENT BY : SHRI.CH.SUNDAR RAO, CIT-D.R. HEARD ON : 29.04.2015 PRONOUNCED ON : 08.05.2015 O R D E R PER N. V. VASUDEVAN, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 19.09.2011 OF THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE11( 2), BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE ACT RELATING TO AY 0 6-07. 2. THE ASSESSEE IS A LEADING SUPPLIER OF HIGH-PERFO RMANCE SOLUTIONS FOR PERSONAL, NETWORK ACCESS, ENTERPRISE, METRO SWITCH AND CORE- IT(TP)A NO.1002/BANG/2011 PAGE 2 OF 30 COMMUNICATIONS SYSTEM APPLICATIONS. IT DESIGNS, MA NUFACTURES AND MARKETS SILICON-BASED PRODUCTS AND SOLUTIONS FOR A RANGE OF MARKETS. THE ASSESSEE, IS A SUBSIDIARY OF CYPRESS SEMICONDUCTOR TECHNOLOGY LTD., CAYMAN ISLAND AND IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT AND TESTING SERVICES TO ITS ASSOCIATED ENTERPRISES (AES ) AS A CAPTIVE SERVICE PROVIDER IN THE AREAS OF INTEGRATED CIRCUITS FOR ME MORY, INTERFACE AND DATA COMMUNICATION APPLICATIONS. THE ABOVE TRANSACTION WAS AN INTERNATIONAL TRANSACTIONS WITH AN ASSOCIATED ENTERPRISE (AE) AND HAVE TO PASS THE ARMS LENGTH PRICE (ALP) TEST AS PROVIDED U/S.92 OF THE INCOME TAX ACT, 1961 (ACT). IN THIS APPEAL THE DISPUTE IS WITH REG ARD TO ADDITION MADE CONSEQUENT TO DETERMINATION OF ALP AND CONSEQUENT U PWARD REVISION AND ADJUSTMENT MADE TO THE PRICE AT WHICH INTERNATIONAL TRANSACTIONS WERE CARRIED OUT BY THE ASSESSEE WITH ITS AE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. FINANCIAL RESULTS OF THE ASSESSEE FOR THE F Y 200 5-06 DESCRIPTION AMOUNT OPERATING REVENUE RS.65,18,83,190 OPERATING COST . . . . RS.58,92,08,728 OPERATING PROFIT (PBIT) RS. 6,26,74,462 OPERATING PROFIT TO COST RATIO 10.64 % IT(TP)A NO.1002/BANG/2011 PAGE 3 OF 30 COMPARABLE ULTIMATELY SELECTED BY TPO AND THEIR ARI THMETIC MEAN : SL. NO NAME OF COMPANY OP / TC (FY 2006 - 07) REMARKS 1 ACCEL TRANSMATIC LTD (SEG.) 21.11% NEW COMPARABLE 2 AVANI CIMCON TECHNOLOGIES LTD 52.59% NEW COMPARABLE 3 CELESTIAL LABS LTD 58.35% NEW COMPARABLE 4 DATAMATICS LTD 1.38% NEW COMPARABLE 5 E-ZEST SOLUTIONS LTD 36.12% NEW COMPARABLE 6 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 25.31% NEW COMPARABLE 7 GEOMETRIC LTD (SEG.) 10.71% NEW COMPARABLE 8 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 36.63% COMMON 9 IGATE GLOBAL SOLUTIONS LTD 7.49% NEW COMPARABLE 10 INFOSYS TECHNOLOGIES LTD 40.30% COMMON 11 ISHIR INFOTECH LTD 30.12% NEW COMPARABLE 12 KALS INFORMATION SYSTEMS LTD (SEG.) 30.55% NEW COMPARABLE 13 LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 15.75% NEW COMPARABLE 14 LUCID SOFTWARE LTD 19.37% NEW COMPARABLE 15 MEDIASOFT SOLUTIONS LTD 3.66% NEW COMPARABLE 16 MEGASOFT LTD 60.23% NEW COMPARABLE 17 MINDTREE LTD 16.90% COMMON IT(TP)A NO.1002/BANG/2011 PAGE 4 OF 30 18 PERSISTENT SYSTEMS LTD 24.52% NEW COMPARABLE 19 QUINTEGRA SOLUTIONS LTD 12.56% COMMON 20 R S SOFTWARE (INDIA) LTD 13.47% COMMON 21 R SYSTEMS INTERNATIONAL LTD (SEG.) 15.07% NEW COMPARABLE 22 S I P TECHNOLOGIES & EXPORTS LTD 13.90% COMMON 23 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG.) 22.16% COMMON 24 TATA ELXSI LTD (SEG.) 26.51% NEW COMPARABLE 25 THIRDWARE SOLUTIONS LTD 25.12% NEW COMPARABLE 26 WIPRO LTD (SEG.) 33.65% NEW COMPARABLE ARITHMETIC MEAN 25.14% 3. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE COMPARABLES SET OUT ABOVE, ARRIVED AT ARITHMETIC MEAN OF 25.14%. AFTER FACTORING NEGATIVE WORKING CAPITAL A DJUSTMENT OF 1.32%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 23.82%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 20.6 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: IT(TP)A NO.1002/BANG/2011 PAGE 5 OF 30 ARITHMETIC MEAN PLI 25.14% LESS: WORKING CAPITAL ADJUSTMENT(ANNEXURE-C) 1.32 % ADJ.ARITHMETIC MEAN PLI 23.82 % ARMS LENGTH PRICE: OPERATING COST RS.61,81,75,144 ARMS LENGTH MARGIN 23.82% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 123.82% OF OPERATING COST RS.76,54,24,463 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 123.82% OF OPERATING COST RS.76,54,24,463 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.68,08.,49,606 SHORTFALL BEING ADJUSTMENT U/S.92CA RS.8,45,74,857 THE ABOVE SHORTFALL OF RS.8,45,74,857/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 4. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE IT(TP)A NO.1002/BANG/2011 PAGE 6 OF 30 ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. GR.NO.1 TO 5 IN THE GROUNDS O F APPEAL IS IN RELATION TO THE ISSUE OF ADDITION ON ACCOUNT OF ADJUSTMENT IN A LP. THE ASSESSEE HAS ALSO FILED AN APPLICATION FOR RAISING AN ADDITIONAL GROUND OF APPEAL. IN THE TP STUDY OF THE ASSESSEE, THE ASSESSEE HAD CHOSEN M INDTREE LTD., AS A COMPARABLE COMPANY. IN THE PROCEEDINGS BEFORE THE TRIBUNAL, THE ASSESSEE IS SEEKING EXCLUSION OF THE SAID COMPANY F ROM THE LIST OF COMPARABLE COMPANIES AS ITS TURNOVER WAS MORE THAN RS.200 CRORES. IT IS THE STAND OF THE ASSESSEE THAT THE FILTER OF EXCLUD ING COMPANIES BASED ON TURNOVER WAS A RECENT DEVELOPMENT IN THE LAW AND TH EREFORE THE ASSESSEE IN LINE WITH THE LAW ON THE ISSUE IS ONLY SEEKING E XCLUSION OF THE SAID COMPANY FROM THE LIST OF COMPARABLE COMPANIES. IN OUR VIEW THE STAND TAKEN BY THE ASSESSEE HAS TO BE ACCEPTED AS THE LAW ON TRANSFER PRICING IS EVOLVING AND THE ASSESSEE SHOULD NOT BE DENIED THE BENEFIT OF A RELIEF WHICH HE IS OTHERWISE ENTITLED TO IN LAW BUT FOR HI S ADMISSION WHICH WAS ERRONEOUS. THE ADDITIONAL GROUND IS THEREFORE ADMI TTED FOR ADJUDICATION. 5. THE ASSESSEE FILED A CHART SHOWING HOW THE TPO H AS NOT GIVEN WORKING CAPITAL ADJUSTMENT AS PRAYED FOR BY THE ASS ESSEE, THE TURNOVER AND THE MARGINS OF THE 26 COMPARABLE COMPANIES FINA LLY CHOSEN BY THE TPO AFTER GIVING EFFECT TO ADJUSTMENT TOWARDS WORKI NG CAPITAL AS ALLOWED BY THE TPO AND ALSO AS CLAIMED BY THE ASSESSEE. THE CHART ALSO EXPLAINS AS TO HOW SOME OF THE COMPARABLE COMPANIES CHOSEN BY T HE TPO ARE NOT IT(TP)A NO.1002/BANG/2011 PAGE 7 OF 30 COMPARABLE FOR THE REASON THAT THESE COMPANIES WERE NOT FUNCTIONALLY COMPARABLE. THE CHART ALSO GIVES THE CASES DECIDED BY VARIOUS BENCHES OF THE ITAT WHERE THE COMPARABLE COMPANIES HAVE BEE N HELD TO BE NOT COMPARABLE WITH THAT OF AN ASSESSEE PROVIDING IT SO FTWARE DEVELOPMENT SERVICES. THE LEARNED DR PLACED RELIANCE ON THE O RDER OF THE TPO/DRP. WE WILL PROCEED TO CONSIDER THE COMPARABILITY OF CO MPANIES CHOSEN BY THE TPO AND LISTED IN PARA- 4 OF THIS ORDER. 6. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 26 COMPARABLE COMPANIES CHOSEN BY THE TPO, 8 COMPAR ABLE COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF COMPARABL E COMPANIES CHOSEN BY THE TPO, AS HAS BEEN HELD BY THIS TRIBUNAL IN THE C ASE OF LOGICA PVT.LTD. VS. ACIT IT (TP) A.NO.1129/BANG/2011 FOR AY 07-08 O RDER DATED 28.2.2013. THE FOLLOWING WERE THE RELEVANT OBSERVA TIONS OF THE TRIBUNAL ON THE FOLLOWING 8 COMPARABLE COMPANIES WHICH WERE OUT OF THE SAME 26 SET OF COMPARABLE COMPANIES CHOSEN IN THE PRESENT CASE AS WELL AS IN THE CASE OF LOGICAL PVT.LTD. (SUPRA). 12. THE NEXT ASPECT WHICH WAS HIGHLIGHTED BY THE L D. COUNSEL FOR THE ASSESSEE WAS THAT OUT OF THE 26 COMPARABLES, CO MPARABLES AT SL.NO.1, 2, 3 & 12 HAVE TO BE REJECTED AS THEY WERE HELD TO BE FUNCTIONALLY NOT SIMILAR TO A SOFTWARE SERVICES PRO VIDER AS HELD BY THIS TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD., IT NO.1054/BANG/2011 . THE RELEVANT PARAGRAPHS 39 TO 50 OF THE AFORESAID ORDER OF THE TRIBUNAL ARE AS FO LLOWS:- (B) AVANI CIMCON TECHNOLOGIES LTD. 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA O F THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FR OM THE IT(TP)A NO.1002/BANG/2011 PAGE 8 OF 30 ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN TH E COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELO PED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITT ED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODU CT SALES APART FROM RENDERING OF SOFTWARE SERVICES AND THERE FORE IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS F URTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISI ON IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/2011 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTW ARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAI LS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPARABLE TO THE AS SESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY AN D IT WAS HELD AS FOLLOWS:- 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCOM) : HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPE RATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PRO FIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATI ON FOR COMPARING THE CASE THAT OF ASSESSEE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNA BLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE P ARTY. 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 PERCENTAG E OF EXPORT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INT O CONSIDERATION FOR COMPARABILITY ANALYSIS. IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS COM PANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS . THE FOLLOWING FIGURES WERE PLACED BEFORE US:- PARTICULARS FYS 05-06 06-07 07-0 8 08-09 OPERATING REVENUE 21761611 35477523 29342809 280398 51 OPERATING EXPNS. 16417661 23249646 23359186 3110894 9 OPERATING PROFIT 5343950 12227877 5983623 (306909 8) OPERATING MARGIN 32.55% 52.59% 25.62% - 9.87% IT(TP)A NO.1002/BANG/2011 PAGE 9 OF 30 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UN USUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06-07. THE OPERAT ING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXT RAORDINARY YEAR FOR THIS COMPANY. EVEN THE GROWTH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR AS PER NASSCOM WAS 32%. THE GROWTH RATE OF TH IS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW OF THE AB OVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJECTED AS A COMPARABLE. 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSIONS 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 COMP ANY AS A COMPARABLE. (C) CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAN D OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVELOPMENT COMP ANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- IN THE DIRECTORS REPORT (PAGE 20 OF PB-IL), IT IS STATED THAT THE COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR I N-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2A B) OF THE INCOME TAX ACT. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UNDER DEFERRED REVENUE EXPENDITURE (PAGE 31 OF PB-II), IT IS MENT IONED THAT, EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT O F NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPEN DITURE AND THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARL Y 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 (PAG E 30 OF PB- II). THIS AMOUNTS TO NEARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SOFT WARE 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 IT(TP)A NO.1002/BANG/2011 PAGE 10 OF 30 COMPARABILITY OF THIS COMPANY FOR CLINICAL TRIAL RE SEARCH SEGMENT. THE RELEVANT EXTRACT OF DISCUSSION REGARDING THIS COMPA NY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAG E-389 OF THE PAPER BOOK WHICH IS AN EXTRACT FROM THE DIRECTO RS REPORT WHICH READS AS FOLLOWS: THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TOOL CELSUITE TO DRUG DISCOVERY IN, FINDING THE LEAD M OLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT ACT. (APPRISED AND FU NDED BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BAS ED ON OUR INSILICO EXPERTISE (APPLYING BIO-INFORMATICS TO OLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE BEEN DISCUSSED WITH PATENT OFFI CIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFIC ATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLL ABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY, OSMANIA UNIV ERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, TH E COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMENT WITH I MTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS. THE CO MPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANU FACTURE INDUSTRIAL ENZYMES. THIS FACILITY WOULD ALSO INCLUD E THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOB E. THE PROPOSED FACILITY WILL BE SET UP IN GENOME VALLEY A T HYDERABAD IN ANDHRA PRADESH. ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALS O IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AND SHOULD BE C ONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELATION TO A SOF TWARE DISCOVERY OF NEW DRUGS. MOREOVER THE COMPANY ALSO IS OWNER OF THE IPR. THERE IS HOWEVER A REFERENCE TO DEVELOPMENT OF A MO LECULE TO TREAT CANCER USING BIO-INFORMATICS TOOLS FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. AS EXPLAINED EARLIER IT IS A DIVERSIFIED COMPANY AND THEREFORE CANNOT BE CONSIDE RED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTI ONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCE SS OF MAKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NO T QUALIFYING IT(TP)A NO.1002/BANG/2011 PAGE 11 OF 30 FOR COMPARABILITY. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE AB OVE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARC H IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT TH IS 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 COMPANY AS A COMPARABLE IN CL INICAL TRIAL SEGMENT, FOR THE REASON THAT THIS COMPANY HAS DIVER SE 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 FU NCTIONALLY DIFFERENT. 45. FROM THE MATERIAL AVAILABLE ON RECORD, IT TRAN SPIRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY W AS CLASSIFIED AS A RESEARCH AND DEVELOPMENT COMPANY. ACCORDING TO T HE 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 DE VELOPMENT SERVICES. THE ASSESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREAT THIS AS A COMPARABLE HAS POINTED OUT THAT THIS COMPANY PROVID ES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOINFORMATICS SERVICE S AND THAT THE SEGMENTAL DATA FOR EACH ACTIVITY IS NOT AVAILABLE A ND THEREFORE THIS COMPANY SHOULD NOT BE TREATED AS COMPARABLE. BESID ES THE ABOVE, THE ASSESSEE HAS POINT OUT TO SEVERAL REFERENCES IN THE ANNUAL REPORT FOR 31.3.2007 HIGHLIGHTING THE FACT THAT THIS COMPANY W AS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PROVIDES RELATED SOFTWAR E 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 DETA ILS 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 TPOS ORDER AS TO THE NATURE OF SOFTW ARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISS UED 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 SOF TWARE DEVELOPMENT SERVICES AS INDICATED IN THE ANNUAL REPORT FOR FY 0 6-07 OR 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 IT(TP)A NO.1002/BANG/2011 PAGE 12 OF 30 THE ABOVE CLARIFICATION OF THE TPO. THE TPO WITHO UT ANY BASIS HAS HOWEVER CONCLUDED THAT THE BUSINESS MENTIONED IN TH E DRHP ARE THE SERVICES OR BUSINESSES THAT WOULD BE STARTED BY UTI LIZING THE FUNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN NO WAY CONNECTED WITH BUSINESS OPERATIONS OF THE COMPANY D URING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISS IONS MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICAL LY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS A ND OTHER PRODUCTS, THERE IS NO CLEAR BASIS ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DE VELOPMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSE SSEE THAT THIS COMPANY OUGHT NOT TO HAVE BEEN CONSIDERED AS COMPAR ABLE. (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABO VE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDI NG TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPOT, THE SA LARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45 ,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REV ENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. RE FERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE C ASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCIT, ITA NO. ITA NO 138 6/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON A CCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIE S. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES 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 DEVEL OPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPAR ABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSES SEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185 -186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T EN ABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPM ENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCE RN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARA BLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. IT(TP)A NO.1002/BANG/2011 PAGE 13 OF 30 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 SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HA S 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 HI GHLIGHTED 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 T HE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOPMEN T 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 COMPARABLE. THE RELEVANT OBSERVATION S OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE S UBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005- 06 FROM WHICH THE DRP NOTED THAT THE BUSINESS ACTIV ITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MAN UFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, T ICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOL OGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYS TEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEV ELOPMENT. IT(TP)A NO.1002/BANG/2011 PAGE 14 OF 30 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSE E COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF AC CEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AN D THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FU NCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE F INAL 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 THE P ERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARABILITY PUR POSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. TH E 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 TRIBUN AL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE L D. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WAS NOT CO MPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPME NT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNS EL FOR THE ASSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUD ED AS COMPARABLES. 13. SO ALSO, THE COMPARABLES LISTED AT SL.NOS. 10 , 14 AND 26 HAVE TO BE REJECTED AS FUNCTIONALLY NOT COMPARABLE WITH THAT OF THE ASS ESSEE IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. IN ITA NO.7821/MUM/2011 , WHEREIN IT WAS HELD AS UNDER:- 7.2 LUCID SOFTWARE LIMITED IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY , BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALSO INVOLV ED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HAS TRIED TO DI STINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMENT EXPENDITURE I N THIS CASE IS AROUND 39% OF THE CAPITAL EMPLOYED BY THE SAID COMP ANY, AND, THEREFORE, SUCH A COMPANY CANNOT BE CONSIDERED AS T ESTED PARTY. EVEN AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTI CE UNDER SECTION 133(6), THE COMPANY HAS DESCRIBED ITS BUSINESS AS S OFTWARE DEVELOPMENT COMPANY OR PURE SOFTWARE DEVELOPMENT SE RVICE PROVIDER. IT(TP)A NO.1002/BANG/2011 PAGE 15 OF 30 THIS INFORMATION ITSELF IS VERY VAGUE AS THE SEGMEN TAL DETAILS OF OPERATING REVENUE HAS NOT BEEN MADE AVAILABLE TO EX AMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWARE PRODUCT AND SALE OF SOFTWARE SERVICE AND DEVELOPMENT. LOOKING TO THE FACT THAT IT HAS DE VELOPED A SOFTWARE PRODUCT NAMED AS MUULAM WHICH IS USED FOR CIVIL E NGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS-A-VIS THE CAPITAL EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENTIAL THAT THE CH ARACTERISTICS AND THE FUNCTIONS ARE BY AND LARGE SIMILAR AS THAT OF THE A SSESSEE COMPANY AND T.P. ANALYSIS/STUDY CAN BE MADE WITH FEWEST AND MOS T RELIABLE ADJUSTMENT. IF A COMPANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN THE SALE OF PROD UCT WOULD BE ENTIRELY DIFFERENT FROM THE COMPANY, WHO IS INVOLVED IN SERV ICE SECTOR. THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILITY RATIO. IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFORM ATION ABOUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE SALE OF PRODUCT AND HOW MUCH IS FROM THE SERVICES, THEREFORE, THIS ENTITY C ANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. 7.4 INFOSYS TECHNOLOGIES LTD .: THE PARAMETER FOR IDENTIFYING COMPARABLE ENTITY HA S TO BE SEEN FROM THE ANGLE OF FUNCTIONS FORMED BY THE COMPANY, SIZE OF THE COMPANY IN TERMS OF THE SALE REVENUE, STAGE OF BUSI NESS CYCLE AND COMPANYS GROWTH CYCLE. IN THE CASE OF INFOSYS, TH ERE ARE HUGE INTANGIBLE ASSETS WHICH AS PER THE INFORMATION PROV IDED BY THE LEARNED AR ARE VALUED AT RS.69,522 CRORES, WHICH COMPRISES OF BRAND VALUE ITSELF AT RS.22,915 CRORES. BASED ON SUCH FUND VAL UATION, THE PROFIT OF INFOSYS IS PREDOMINANTLY DUE TO ITS PREMIUM BRANDIN G. IT IS INDIAS NO.2 SOFTWARE SERVICE EXPORTER AND THIRD IN THE WOR LD AS AN IT SERVICE COMPANY. IT IS A GIANT COMPANY WHICH IS EVIDENT F ROM ITS REVENUE FUND FROM THE SALES WHICH ITSELF IS MORE THAN RS.13 145 CRORES AND EXPENDITURE ON ADVERTISEMENT/SALES PROMOTION AND EX PENDITURE ON R&D IS AT RS.69 CRORES AND RS.167 CRORES RESPECTIVE LY, WHEREAS IN THE CASE OF THE ASSESSEE THE REVENUE IS ONLY 10.7 CRORE S WITH NO EXPENDITURE ON ADVERTISEMENT, SALES AND PROMOTION E TC., WHICH ARE BORNE BY THE ASSOCIATED ENTERPRISES. EVEN FROM THE TEST OF FAR IE. FUNCTION PERFORMED, ASSETS EMPLOYED AND RISK ASSUME D, COMPARABILITY ANALYSIS MISERABLY FAILS IN THIS CASE. THE COMPARIS ON OF FUNCTION AND IT(TP)A NO.1002/BANG/2011 PAGE 16 OF 30 PROFILE AS HAS BEEN REPRODUCED IN PARA 6(IV) ABOVE, MOSTLY SHOWS THAT THE PROFIT LEVEL INDICATORS IN RELATION TO RETURN O F COST, RETURN OF SALES AND RETURN OF ASSETS ARE HUGE BETWEEN INFOSYS AND T HE ASSESSEE COMPANY AND THEREFORE, THE INFOSYS CANNOT BE TREATE D AS COMPARABLE ENTITY FOR MAKING COMPARABILITY ANALYSIS WITH THE A SSESSEE COMPANY. THE COMPARABILITY OF LNFOSYS TECHNOLOGY OF THE COMP ANY AS THAT OF AN ASSESSEE HAS BEEN DEALT WITH ITAT DELHI BENCH IN TH E CASE OF AGNITY INDIA TECHNOLOGIES PRIVATE LIMITED (ITA NO.3856/DE LHI/2010), WHEREIN IT WAS HELD THAT LNFOSYS IS A GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHE R PROFIT AND CANNOT BE COMPARED WITH THE COMPANY WHICH IS A CAPTIVE UNIT O F ITS PARENT COMPANY ASSUMING ONLY LIMITED CURRENCY RISK. IN VIE W OF THE ABOVE FINDING, WE HOLD THAT THE INFOSYS CANNOT BE TAKEN A S A COMPARABLE FOR DETERMINING THE ARMS LENGTH PRICE IN THE CASE OF TH E ASSESSEE. 7.5 WIPRO LTD.-IT SERVICES SEQMENT(WIPRO) : THIS COMPANY IS ALSO A GLOBAL IT COMPANY HAVING VAR IETIES OF SERVICE AND PRODUCTS AND LOOKING TO THE MAGNITUDE O F ITS OPERATIONS, SALES AND EXPENSES, THE SAME CANNOT BE TAKEN INTO CONSIDERATION FOR COMPARABILITY ANALYSIS. MOREOVER, 67% OF ITS SALES RELATES TO ITS PRODUCT WHICH ARE SOLD ON PREM IUM RESULTING INTO HIGHER PROFITABILITY, THEREFORE, CANNOT BE COM PARED WITH THE ASSESSEE COMPANY AT ALL. THERE ARE SEVERAL JUDGMENT S OF ITAT WHICH HAVE BEEN REFERRED IN PARA 6.5 ABOVE, THAT WI PRO CANNOT BE TAKEN AS COMPARABLE CASE FOR COMPARABLE CASE WITH T HE COMPANY LIKE ASSESSEE. IN VIEW OF THESE FACTS AND THE REASO NING GIVEN IN THE CASE OF LNFOSYS, WE HOLD THAT WIPRO ALSO CANNOT BE CONSIDERED AS A COMPARABILITY ANALYSIS, HENCE, WOULD NOT BE INCLU DED IN THE LIST OF THE COMPARABLE ENTITIES AS IDENTIFIED BY THE TPO . 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 ARE CONCE RNED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH THAT OF THE SOFTWA RE SERVICE PROVIDER WAS CONSIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN T HE 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.: AS PER THE STATEMENT OF THE LEARNED AR, THIS COMPAN Y IS ALSO INVOLVED IN THE DEVELOPMENT OF THE SOFTWARE PRODUCT AND IS ALSO INVOLVED IN BPO SERVICES, BESIDES JOINT SOFTWARE CO NSULTANCIES FOR THE USE IN TELECOMMUNICATION INDUSTRIES. THUS, BEING PR ODUCT AND SERVICE COMPANY, IT CANNOT BE TAKEN AS COMPARABLE. HOWEVER, THE LEARNED CIT IT(TP)A NO.1002/BANG/2011 PAGE 17 OF 30 DR HAS AMPLY CONTROVERTED THE SAID CONTENTION OF TH E LEARNED AR BY SUBMITTING BEFORE US A COPY OF PROFIT AND LOSS ACCO UNT OF THE COMPANY FOR THE RELEVANT ASSESSMENT YEAR, OBTAINED FROM THE PUBLIC DOMAIN. FROM THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE SAID COMPANY, IT IS SEEN THAT THE REVENUE SALES FROM SER VICES CONSTITUTES ALMOST 90% AND THE PRODUCT SALES IS ONLY 10%. THUS, IN THIS CASE ALSO NOT MUCH ADJUSTMENT IS REQUIRED TO BE MADE FOR TAKI NG THE PROFIT RATIO FOR COMPARING IT WITH THE ASSESSEE IN DETERMINING T HE ARMS LENGTH PRICE. IN VIEW OF THE ABOVE, WE HOLD THAT TPO HAS RIGHTLY INCLUDED THE SAID COMPANY AS COMPARABLE CASE WHICH CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE PROFIT RATIO. 7.7 TATA ELXSI LIMITED.: FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIO NS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS E NGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTEN TION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR R EVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT A S A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT A ND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS 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 ASSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY AT SL.NO.6 VIZ., FLEXTRONICS SOF TWARE SYSTEMS PVT. LTD. SHOULD BE TAKEN AS A COMPARABLE, WHILE COMPARABLE A T SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A COMPARABLE. 16. ON THE ABOVE SUBMISSIONS OF THE LD. COUNSEL FO R THE ASSESSEE, THE LD. DR SUBMITTED THAT AS FAR AS FUNCTIONAL COMPARABILITY I S CONCERNED, IT IS NOT ENOUGH ONLY TO LOOK AT THE FACT THAT IN THE DECISIONS RELI ED UPON BY THE LD. COUNSEL FOR THE ASSESSEE, ALSO DEALT WITH THE CASE OF SOFTWARE DEVE LOPMENT AND THE ASSESSEE IS ALSO A SOFTWARE DEVELOPER RENDERING SOFTWARE DEVELO PMENT SERVICES. IT WAS HIS SUBMISSION THAT THE AFORESAID COMPANIES EVEN IF THE Y ARE ENGAGED IN PROVIDING SOFTWARE SERVICES, CAN BE ENGAGED IN DIFFERENT SECT ORS TO WHICH THEY CATER, LIKE SOFTWARE DEVELOPMENT IN TELECOMMUNICATION, AUTOMOBI LE MANUFACTURING SECTOR, ETC. IT WAS HIS SUBMISSION THAT IT WAS ALSO NECESS ARY TO CONSIDER AS TO WHETHER THE SECTORS IN WHICH THE COMPARABLE CHOSEN BY THE T PO BELONG AND THE SECTOR TO WHICH THE ASSESSEE CATERS. IT(TP)A NO.1002/BANG/2011 PAGE 18 OF 30 17. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR. WE ARE OF THE VIEW THAT THE COMPARABLE S WHICH ARE SOUGHT TO BE EXCLUDED BY THE LD. COUNSEL FOR THE ASSESSEE HAVE B EEN HELD TO BE NOT COMPARABLE WITH THE CASE OF SOFTWARE SERVICE PROVID ER, IN AS MUCH AS THESE COMPANIES DID NOT SATISFY THE FUNCTIONAL SIMILARITY TEST. E.G., IN THE CASE OF COMPANY AT SL.NO.2 OF THE LIST OF COMPARABLES CHOSE N BY THE TPO VIZ., AVANI CINCOM TECHNOLOGIES LTD., THIS TRIBUNAL HAD TAKEN A VIEW THAT INCOME OF THIS COMPANY FROM RENDERING SOFTWARE SERVICES AND SALE O F SOFTWARE WAS NOT AVAILABLE AND THEREFORE THIS WAS REJECTED AS A COMP ARABLE COMPANY. SIMILARLY, IN THE CASE OF CELESTIAL LABS LTD., THE TRIBUNAL TO OK A VIEW THAT THIS COMPANY WAS ENGAGED IN R&D ACTIVITY AND CANNOT BE COMPARED WITH A SOFTWARE SERVICE PROVIDER. IT IS THUS CLEAR THAT THE REASON GIVEN B Y THE TRIBUNAL IN THE CASES REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE WIL L EQUALLY APPLY TO THE PRESENT CASE ALSO. WE THEREFORE ACCEPT THE SUBMISSIONS MAD E ON BEHALF OF THE ASSESSEE AND HOLD THAT COMPANIES AT SL.NO.1, 2, 3, 10, 12, 1 4, 24 & 26 BE EXCLUDED FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO WHILE COM PUTING THE ALP. 7. IN VIEW OF THE ABOVE DECISION OF THE TRIBUNAL, W E DIRECT THAT COMPARABLES AT SL.NO.1, 2, 3, 10, 12, 14, 24 & 26 O F THE LIST OF COMPARABLES SET OUT IN TABLE GIVEN IN PARA-4 OF THIS ORDER WHIC H IS THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO, BE EXCLUDED FOR THE PURPOSE OF COMPARABILITY. 8. AS FAR AS COMPARABLE COMPANIES THIRDWARE SOLUTIO NS LTD., AND HELIO & MATHERSON INFORMATION TECHNOLOGY LTD., WHICH WERE CHOSEN AS COMPARABLE BY THE TPO, THIS TRIBUNAL IN THE CASE OF M/S. HUAWEI TECHNOLOGIES VS. ITO IT(TP) NO.583/BANG/2012 FOR AY 07-08 ORDER DATED 18.7.2014 HELD TO BE NOT COMPARABLE COMPANIES. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: 24. AS FAR AS COMPARABLE COMPANY LISTED AS SL.NO. 20 IN THE CHART OF COMPARABLE COMPANIES CHOSEN BY THE TPO AT PARA-12 OF IT(TP)A NO.1002/BANG/2011 PAGE 19 OF 30 THIS ORDER VIZ., M/S.THIRDWARE SOLUTIONS LTD. IS CO NCERNED, THE SAME HAS BEEN HELD TO BE FUNCTIONALLY NOT COMPARABL E WITH A PURE SOFTWARE SERVICE PROVIDER LIKE THAT OF THE ASSESSEE BY THE HYDERABAD BENCH OF ITAT IN THE CASE OF INTOTO SOFTW ARE INDIA PRIVATE LTD. VS. ACIT ITA NO.2102/HYD/2011 FOR AY 0 7-08. IN VIEW OF THE AFORESAID DECISION, WE DIRECT THAT THE COMPARABLE COMPANY AT S.NO.20 OF THE LIST OF COMPARABLE COMPAN Y CHOSEN BY TPO BE EXCLUDED FROM THE COMPARABLE COMPANIES. 25. AS FAR AS COMPANIES AT SL.NO.10 OF THE LIST O F COMPARABLE CHOSEN BY THE TPO GIVE IN PARA-12 OF THIS ORDER IS CONCERNED VIZ., M/S.HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., THE EXPORT REVENUE IS LESS THAN 75% AND THEREFORE APPLYING THE FILTER OF EXPORT TURNOVER OF LESS THAN 75% OF THE TOTAL REVEN UE, THIS COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARA BLE COMPANIES. THIS FILTER IS AN ACCEPTED FILTER IN TH E MATTER OF CHOOSING COMPARABLE COMPANIES. 9. IN VIEW OF THE ABOVE DECISION OF THE TRIBUNAL, W E DIRECT THAT THE AFORESAID COMPARABLE COMPANIES IN THE LIST OF COMPA RABLES SET OUT IN TABLE GIVEN IN PARA-4 OF THIS ORDER WHICH IS THE FINAL LI ST OF COMPARABLE COMPANIES CHOSEN BY THE TPO, BE EXCLUDED FOR THE PURPOSE OF C OMPARABILITY. 10. AS FAR AS COMPARABLES AT SL.NO.7 & 11 OF THE LIST OF COMPARABLE CHOSEN BY THE TPO LISTED AT PARA-4 OF THIS ORDER, A RE CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THE RELATED PARTY TRANSACTIO N IN THE CASE OF COMPANIES EXCEED 15% AND IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF 24 X 7 CUSTOMER.COM PVT. LTD. IN ITA NO.227 /BANG/2010, THAT WHERE THE RPT EXCEEDS 15%, SUCH COMPANIES SHOULD NO T BE TAKEN AS COMPARABLES, WE HOLD THAT COMPANIES AT SL.NOS. 7 AN D 11 OF THE LIST OF THE IT(TP)A NO.1002/BANG/2011 PAGE 20 OF 30 COMPARABLES CHOSEN BY THE TPO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES WHILE WORKING OUT THE ALP. 11. AS FAR AS COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., IGATE GLOBAL SOLUTIONS LTD., MINDTREE CONSULTING LTD., SA SKEN COMMUNICATIONS LTD., PERSISTENT SYSTEMS LTD., AND FLEXTRONICS SOFT WARE SYSTEMS LTD., ARE CONCERNED, THIS TRIBUNAL IN THE CASE OF TRILOGY E-B USINESS SOFTWARE INDIA PVT.LTD. VS. DCIT IT(TP) A.NO.1054/BANG/2011 AY 07- 08 ORDER DATED 23.11.2012 HAS BY APPLYING TURNOVER FILTER HELD THA T WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY ANALYSIS TUR NOVER WILL BE A RELEVANT CRITERIA AND HELD AS FOLLOWS: (1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT TH E TPO HAS APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE, BUT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMI TTED BY HIM THAT UNDER RULE 10B(3) TO THE INCOME-TAX RULES, IT WAS NECESSA RY FOR COMPARING AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMP ARED OR THE ENTERPRISES ENTERING INTO SUCH TRANSACTION, WHICH A RE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT WHEREVER THERE ARE SOME DIFFERENCES SUCH DIFFERENCE S SHOULD BE CAPABLE OF REASONABLE ACCURATE ADJUSTMENT IN MONETARY TERMS TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES. IT WAS HIS SUBMISSION THAT SI ZE WAS AN IMPORTANT FACET OF THE COMPARABILITY EXERCISE. IT WAS SUBMITTED TH AT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WOULD IMPACT C OMPARABILITY. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECISION OF T HE 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 I S IMPROPER TO PROCEED ON THE BASIS OF LOWER LIMIT OF 1 CRORE T URNOVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASONABLE C LASSIFICATION. SEVERAL OTHER DECISIONS WERE REFERRED TO IN THIS REGARD LAY ING DOWN IDENTICAL PROPOSITION. WE ARE NOT REFERRING TO THOSE DECISIO NS AS THE DECISION OF THE SPECIAL BENCH ON THIS ASPECT WOULD HOLD THE FIELD. REFERENCE WAS ALSO IT(TP)A NO.1002/BANG/2011 PAGE 21 OF 30 MADE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERVED AS FOLLOWS:- SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PARTIES MIGHT A FFECT THE RELATIVE COMPETITIVE POSITIONS OF THE BUYER AND SEL LER AND THEREFORE COMPARABILITY. THE ICAI TP GUIDELINES NOTE ON THIS ASPECT LAY DOWN IN PARA 15.4 THAT A TRANSACTION ENTERED INTO BY A RS. 1,000 CROR E COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INT O BY A RS. 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIES OF SCALE U NDER WHICH THEY OPERATE. THE FACT THAT THEY OPERATE IN THE SA ME MARKET MAY NOT MAKE THEM COMPARABLE ENTERPRISES. THE RELEVANT EXTRACT IS AS FOLLOWS [ON RULE 10B(3)]: CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE N OT MATERIAL, THE TRANSACTIONS WOULD BE COMPARABLE. THE SE DIFFERENCES COULD EITHER BE WITH REFERENCE TO THE TRANSACTION OR WITH REFERENCE TO THE ENTERPRISE. FO R INSTANCE, A TRANSACTION ENTERED INTO BY A RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES A ND THE RELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. IT WAS FURTHER SUBMITTED THAT THE TPOS RANGE (RS. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COMPANIES LI KE 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 SHOUL D BE APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPANIES. REFERENCE WAS MADE TO THE DECISION OF THE ITAT BAN GALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , WHEREIN RELYING ON DUN AND BRADSTREETS ANALYSIS, THE TURNOVER OF Q 1 CRORE TO Q 200 CRORES WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSE RVATIONS WERE BROUGHT TO OUR NOTICE:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPA NIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPA RABLES. IN IT(TP)A NO.1002/BANG/2011 PAGE 22 OF 30 SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE U PPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SI ZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO B ARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALS O HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIV E BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCI NG PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED F ROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRA DSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THA T THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUI TABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE T URNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOV ER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A P ARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING T URNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATI ON FOR THE PURPOSE OF MAKING TP STUDY. IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PROPOSI TION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN T HE FOLLOWING CASES: 1. M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO.1413/BANG/2010) 2. M/S GENESIS MICROCHIP (I) PRIVATE LIMITED VS. D CIT (ITA NO.1254/BANG/20L0). 3. ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (I TA NO. 1171/BANG/2010). IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURN OVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COMPARABLE W ITH THE ASSESSEE. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HAVING TURNOVE R OF MORE THAN Q 200 CRORES AS COMPARABLES. IN THESE CIRCUMS TANCES, IT WAS SUBMITTED BY HIM THAT THE ASSESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROV ISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECIDING TH E ISSUE HAVE TO IT(TP)A NO.1002/BANG/2011 PAGE 23 OF 30 BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDE S THAT INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN 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 L ENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRIS ES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORT IONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED O R TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY P ROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. S EC.92-A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT C ASE THERE IS NO DISPUTE THAT THE TRANSACTION BETWEEN THE ASSESSEE A ND ITS AE WAS AN INTERNATIONAL TRANSACTION ATTRACTING THE PROVISI ONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATIO N OF ARMS LENGTH PRICE IN AN INTERNATIONAL TRANSACTION AND IT PROVIDES:- (1) THAT THE ARMS LENGTH PRICE IN RELATION TO AN I NTERNATIONAL 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 FU NCTIONS 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 DETERMINATION OF ARMS LENGTH PRICE, I N THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNAT IONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER C ENT OF THE LATTER, THE IT(TP)A NO.1002/BANG/2011 PAGE 24 OF 30 PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS AC TUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF M ATERIAL 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 W ITH SUB- SECTIONS (1) AND (2); OR ( B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MA INTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS C ONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE I N THIS BEHALF; OR ( C ) THE INFORMATION OR DATA USED IN COMPUTATION OF TH E ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ( D ) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SP ECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQU IRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION I N ACCORDANCE WITH SUB- SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FO R DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92C:- 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APP ROPRIATE 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 A SSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT B ASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROL LED IT(TP)A NO.1002/BANG/2011 PAGE 25 OF 30 TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COM PUTED 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, BETWE EN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT 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 TA KEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRAN SFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSE TS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INC LUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAP ITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE O R RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRAN SACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR IT(TP)A NO.1002/BANG/2011 PAGE 26 OF 30 ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANS ACTION 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 DETERMIN ATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPAR ED. A READING OF THE PROVISIONS OF RULE 10B(2) OF THE R ULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPARED WITH IN TERNATIONAL TRANSACTION HAVING REGARD TO THE FACTORS SET OUT TH EREIN. BEFORE US THERE IS NO DISPUTE THAT THE TNMM IS THE MOST APPRO PRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSA CTION. THE DISPUTES ARE WITH REGARD TO THE COMPARABILITY OF TH E COMPARABLE RELIED UPON BY THE TPO. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIO NS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOWN T HE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHO OSING THE COMPARABLES. THE ASSESSEES TURNOVER IS Q 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 DO WN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DC IT, ITA 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 TH E 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 CR ORES (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 C RORES. IT(TP)A NO.1002/BANG/2011 PAGE 27 OF 30 . 12. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), WE HOLD THAT THE FOLLOWING COMPANIES SHOULD BE EXCLUDED FROM THE LIS T OF COMPARABLE COMPANIES. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CRO RES (2) IGATE GLOBAL SOLUTIONS LTD. 527.91 CRORES (3) MINDTREE LTD. 448.79 CRORES (4) SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 240.03 CRORES (5) PERSISTENT SYSTEMS LIMITED 209.18 CRORES. 13. AFTER EXCLUDING THE AFORESAID COMPARABLE FROM T HE LIST OF COMPARABLE CHOSEN BY THE TPO, THE ARITHMETIC MEAN OF PROFIT MA RGIN OF THE REMAINING 9 COMPARABLE WOULD BE 15% (UNADJUSTED) AND 13.33% AFT ER WORKING CAPITAL ADJUSTMENT. THE ASSESSEES PROFIT MARGIN OPERATIN G PROFIT ON COST IS 10.64% WHICH IS WITHIN THE + / - 5% RANGE PERMITTED UNDER SECOND PROVISO TO SEC.92CA(2) OF THE ACT AND THEREFORE THE ADDITIO N MADE BY THE TPO AND CONFIRMED BY THE DRP NEEDS TO BE DELETED. ACCORDIN GLY THE SAME IS DELETED. THE RELEVANT GROUNDS OF APPEAL OF THE ASS ESSEE ARE ALLOWED. THE OTHER ISSUES RAISED ON TRANSFER PRICING ISSUES WERE NOT ARGUED AND HENCE DOES NOT REQUIRE ADJUDICATION. IT(TP)A NO.1002/BANG/2011 PAGE 28 OF 30 14. THE NEXT ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL BY THE ASSESSEE IS WITH REGARD TO DISALLOWANCE OF DEDUCTIO N CLAIMED U/S.10A OF THE ACT IN RESPECT OF PROFITS OF THE ASSESSEES BAN GALORE UNIT OF RS.4,08,29,786/-. THE ASSESSEE HAS THREE UNITS THR OUGH WHICH IT CONDUCTS ITS BUSINESS. OUT OF THE THREE UNITS 2 ARE STP UNI TS ENTITLED TO DEDUCTION U/S.10A OF THE ACT. IN SO FAR AS ONE OF THE STP UN ITS AT BANGALORE, WHICH WAS TAKEN OVER FROM LARA NETWORKS, IT CLAIMED A DED UCTION OF RS.4,08,29,786/- U/S.10A OF THE ACT. THE SAID DEDU CTION WAS HOWEVER DISALLOWED BY THE AO ON THE GROUND THAT THE SAID UN IT WAS FORMED BY RECONSTRUCTION OF AN EXISTING UNIT AND THAT THE BUS INESS OF THE SAID UNIT HAD COMMENCED PRIOR TO REGISTRATION WITH THE STPI. IN DOING SO, HE RELIED ON THE ASSESSMENT ORDERS FOR THE ASSESSMENT YEARS 2002 -03 TO 2004-05. THE SAID ASSESSMENT ORDERS FOR AY 02-03 TO 04-05 WAS SU BJECT MATTER OF APPEAL BEFORE THIS TRIBUNAL IN ITA NOS. 748, 852 AND 819/B ANG/2007 AND THIS TRIBUNAL BY ITS ORDER DATED 21.6.2008 WAS PLEASED T O HOLD THAT THE BANGALORE UNIT WAS NOT FORMED BY RECONSTRUCTION OF AN EXISTING UNIT OR THE BUSINESS OF THE NEW UNIT HAD NOT COMMENCED PRIOR TO REGISTRATION WITH THE STPI AND THEREFORE DEDUCTION U/S.10A OF THE ACT OUG HT NOT TO HAVE BEEN DENIED ON THE PROFITS OF THE BANGALORE UNIT. THE S AID DECISION OF THE TRIBUNAL HAS SINCE BEEN CONFIRMED BY THE HONBLE KA RNATAKA HIGH COURT IN ITA NOS.1013 TO 1015/2008 DATED 7.11.2014. COPIES OF THE ORDER OF THE TRIBUNAL AND THE HONBLE HIGH COURT WERE FILED BEFO RE US. IN VIEW OF THE SAID DECISION OF THE TRIBUNAL ON IDENTICAL FACTS, W E ARE OF THE VIEW THAT THE IT(TP)A NO.1002/BANG/2011 PAGE 29 OF 30 BANGALORE UNIT WAS NOT FORMED BY RECONSTRUCTION OF AN EXISTING UNIT OR THE BUSINESS OF THE NEW UNIT HAD NOT COMMENCED PRIOR TO REGISTRATION WITH THE STPI AND THEREFORE DEDUCTION U/S.10A OF THE ACT OUG HT NOT TO HAVE BEEN DENIED ON THE PROFITS OF THE BANGALORE UNIT. THE D EDUCTION CLAIMED BY THE ASSESSEE IS DIRECTED TO BE ALLOWED. THE RELEVANT G ROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED. 15. THE ASSESSEE IN THE GROUNDS OF APPEAL BEFORE TH E TRIBUNAL HAS ALSO PROJECTED ITS GRIEVANCE REGARDING THE ACTION OF THE LEARNED ASSESSING OFFICER AND HONORABLE DISPUTE RESOLUTION PANEL IN E XCLUDING FROM THE EXPORT TURNOVER, WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT DATA LINK EXPENSES OF RS.1,20,339 AND FOREIGN TRAVEL EXPENSES OF RS.9,28,494 ON THE GROUND THAT THESE EXPENSES ARE ATTRIBUTABLE TO DELIVERY OF SOFTWARE OUTSIDE INDIA. WITHOUT PREJUDICE TO ITS CONTENTION THAT THE AFORESAID SUMS SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER WHI LE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE ASSESSEE HAS ALSO MADE AN A LTERNATE PRAYER THAT EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER AND IN THIS REGARD HAS PLAC ED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) . 16. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN THIS REGARD. TAKING INTO CONS IDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA IT(TP)A NO.1002/BANG/2011 PAGE 30 OF 30 ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE ASSESSING OFFICER TO EXCLUDE TELECOMMUNICATION CHARGES AND INSURANCE CHARGES INC URRED BE EXCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER, AS HA S BEEN PRAYED FOR BY THE ASSESSEE IN THE ALTERNATIVE. IN VIEW OF THE ACCEPT ANCE OF THE ALTERNATIVE PRAYER, WE ARE OF THE VIEW THAT NO ADJUDICATION IS REQUIRED ON THE GROUND WHETHER THE AFORESAID SUMS ARE REQUIRED TO BE EXCLU DED FROM THE EXPORT TURNOVER. 17. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF MAY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 8 TH MAY, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.