Appeal Details
Counselvise Citation
[2017] 127 COUNSELVISE.COM (IT) 7475 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 2 month(s) 12 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
13-10-2017
Appeal Filed By
Department
Order Result
Allowed
Bench Allotted
B
Next Hearing Date
21-06-2017
Assessment Year
2005-2006
Appeal Filed On
01-08-2014
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER IT(TP)A NO.85/BANG/2014 & CO NO.21/BANG/2016 [IN IT(TP)A NO.1838/BANG/2013] ASSESSMENT YEAR : 2005-06 DELL INTERNATIONAL SERVICES INDIA PRIVATE LTD., DIVYASHREE GREENS, NO.12/1, 12/2A & 13/1A, CHALLAGHATTA VILLAGE, VARTHUR HOBLI, BANGALORE 560 071. PAN: AABCD 1741M VS. THE DEPUTY COMMISSIONER OF INCOME TAX, LTU, BANGALORE. APPELLANT / CROSS OBJECTOR RESPONDENT IT(TP)A NOS.1838/BANG/2013 & 1026/BANG/2014 ASSESSMENT YEAR : 2005-06 THE JOINT COMMISSIONER OF INCOME TAX, LTU, BANGALORE. VS. DELL INTERNATIONAL SERVICES INDIA PRIVATE LTD., BANGALORE 560 071. PAN: AABCD 1741M APPELLANT RESPONDENT ASSESSEE BY : SHRI K.R. VASUDEVAN, ADVOCATE & SHRI SHARATH RAO, CA RESPONDENT BY : MS. NEERA MALHOTRA, CIT(DR), ITAT, BENGALURU DATE OF HEARING : 03.10.2017 DATE OF PRONOUNCEMENT : 13.10.2017 IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 2 OF 36 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.85/BANG/2014 IS AN APPEAL FILED BY THE ASSES SEE, WHILE ITA 1838/B/13 IS AN APPEAL FILED BY THE REVENUE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 20.9.2013 OF THE C IT(APPEALS), LTU, BANGALORE RELATING TO AY 2005-06. THE ASSESSEE HAS ALSO FILED CROSS OBJECTION IN CO NO.21/BANG/2016 AGAINST THE VERY SA ME ORDER OF THE CIT(APPEALS). ALL THESE APPEALS ARISE OUT OF THE O RDERS PASSED U/S. 143(3) OF THE INCOME-TAX ACT, 1961 [THE ACT] FOR THE AY 2005-06. 2. AS FAR AS ITA NO.1026/BANG/2014 IS CONCERNED, TH IS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 18.4.2014 OF THE CIT(APPEALS), LTU, BANGALORE RELATING TO AY 2005-06. THIS APPEAL ARISES OUT OF THE ORDER OF ASSESSMENT PASSED U/S. 147 R.W.S. 143(3) O F THE ACT IN RELATION TO AY 2005-06. 3. WE WILL FIRST TAKE UP THE APPEAL OF THE REVENUE IN ITA NO. 1838/BANG/2013 FOR CONSIDERATION FOR THE AY 2005-06 ARISING OUT O F ASSESSMENT PROCEEDINGS U/S. 143(3) OF THE ACT. 4. GROUND NO.1 BY THE REVENUE IS GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 3 OF 36 5. GROUND NO.2 RAISED BY THE REVENUE READS AS FOLLO WS:- 2. THE LD CIT(A) ERRED IN DIRECTING THE AO TO DEDU CT TELECOMMUNICATION EXPENSES FROM TOTAL TURNOVER AND EXPORT TURNOVER WHILE COMPUTING THE ELIGIBLE DEDUCTION U/S L0A, AS THIS IS AGAINST THE PROVISIONS OF SECTION 10A. 6. THE ASSESSEE IS IN THE BUSINESS OF RENDERING SOF TWARE DEVELOPMENT SERVICES. IT HAS STPI (SOFTWARE TECHNOLOGY PARKS O F INDIA) IN BANGALORE AND HYDERABAD, WHICH ARE ELIGIBLE FOR DEDUCTION U/S.10A OF THE INCOME TAX ACT, 1961 (ACT). GROUND NO.2 RAISED BY THE REVENUE PROJ ECT THE GRIEVANCE OF THE REVENUE REGARDING THE ACTION OF THE CIT(A) IN E XCLUDING EXPENSES INCURRED ON TELECOMMUNICATION FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. THE ASSESSEE HAD INCURRED A SUM OF RS. 17,07,43,928 IN RESPECT OF THE BANGALORE STPI UNIT AND RS. 11,82,59,570 IN RESPECT OF THE HYDERABAD STPI UNIT TOWARDS TELECOMMUNICATION CHARG ES, WHICH WERE INCURRED IN CONNECTION WITH PROVIDING CALL CENTRE S ERVICES TO VARIOUS DELL ENTITIES OVERSEAS. THE TELECOMMUNICATION CHARGES WE RE CONSIDERED AS PART OF 'EXPORT TURNOVER' WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. THE AO EXCLUDED THE SAID TELECOMMUNICATION CHA RGES AMOUNTING TO RS. 28,90,03,498 FROM THE 'EXPORT TURNOVER' WHILE C OMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. THE PLEA OF THE ASSES SEE WAS THAT THE DEFINITION OF 'EXPORT TURNOVER' UNDER THE ACT EXCLU DES ONLY FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 4 OF 36 ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE IND IA, FROM THE EXPORT TURNOVER. THE ASSESSEE ARGUED THAT FOR AN EXPENSE T O BE CONSIDERED AS 'ATTRIBUTABLE' TO SOME ACTIVITY, IT SHOULD HAVE BEE N SPECIFICALLY AND EXCLUSIVELY INCURRED AND IDENTIFIABLE WITH THAT ACT IVITY. IT WAS SUBMITTED THAT THE PAYMENT MADE BY THE ASSESSEE TOWARDS TELECOMMUN ICATION CHARGES WAS STATED TO BE FOR OBTAINING SPECIFIC BANDWIDTH C APACITY FOR FACILITATING THE 'CONNECTIVITY' ACTIVITIES. THIS BANDWIDTH WAS USED BY THE COMPANY FOR DOWNLOADING OF DATA/SOFTWARE FOR CARRYING OUT THE P RIMARY BUSINESS ACTIVITY OF PROVIDING CALL CENTRE SUPPORT TO THE CUSTOMERS O F VARIOUS DELL OVERSEAS ENTITIES WORLDWIDE. THUS, THE TELECOMMUNICATION CHA RGES, IN THE INSTANT CASE, ARE NOT SPECIFICALLY ATTRIBUTABLE TO THE DELI VERY OF THE ARTICLES OR THINGS OUTSIDE INDIA AND, HENCE, THE TELECOMMUNICATION CHA RGES INCURRED IN PROVIDING THESE SERVICES FROM INDIA, WOULD FORM PAR T OF THE 'EXPORT TURNOVER' FOR COMPUTING DEDUCTION UNDER SECTION 10A OF THE AC T. 7. WITHOUT PREJUDICE TO THE ABOVE CONTENTION, THE A SSESSEE FURTHER SUBMITTED THAT SHOULD A STAND BE TAKEN THAT TELECOM MUNICATION CHARGES BE EXCLUDED FROM EXPORT TURNOVER, THE SAME SHOULD BE E XCLUDED FROM 'TOTAL TURNOVER' AS WELL, WHILE COMPUTING THE DEDUCTION UN DER SECTION 10A OF THE ACT. THE ASSESSEE RELIED ON THE DECISION OF THE BAN GALORE BENCH OF ITAT IN ASSESSEE'S OWN CASE FOR THE AYS 2002-03, 2003-04 & 2004- 05, WHEREIN IT WAS HELD THAT TELECOMMUNICATIONS CHARGES SHOULD BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND TOTAL TURNOVER. THE ASSESSE E ALSO PLACED RELIANCE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 5 OF 36 ON THE DECISION OF THE SPECIAL BENCH OF THE CHENNAI ITAT IN THE CASE OF SAK SOFT LIMITED V. ITO (ITA NO. 691 & 1953/MDS/2007) WHEREIN IT WAS HELD THAT IF THE TELECOMMUNICATION, FREIGHT AND INSURANCE EXP ENSES ARE REDUCED FROM THE EXPORT TURNOVER THEN THE SAME WOULD ALSO HAVE T O BE REDUCED FROM THE TOTAL TURNOVER IN ORDER TO COMPUTE THE DEDUCTION UN DER SECTION 10A. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF TH E HON'BLE HIGH COURT OF KARNATAKA IN THE APPELLANT'S OWNS CASE FOR AY 2002-03, 2003-04 & 2004-05 (ITA NO. 450 OF 2008, ITA NO. 451 OF 2008 & ITA NO. L37 OF 2010) WHEREIN IT WAS HELD THAT TELECOMMUNICATION CHARGES SHOULD BE E XCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER WHILE APPLYING T HE FORMULA FOR ALLOWING DEDUCTION U/S.10A(4) OF THE ACT. 8. THE AO DID NOT ACCEPT THE PLEA OF THE ASSESSEE AND HE REDUCED TELECOMMUNICATION CHARGES ONLY FROM THE EXPORT TURN OVER AND DID NOT REDUCE IT FROM THE TOTAL TURNOVER WHILE APPLYING TH E FORMULA FOR ALLOWING DEDUCTION U/S.10A(4) OF THE ACT. AS A RESULT, THE DEDUCTION U/S.10A OF THE ACT WAS ALLOWED AT A MUCH LOWER SUM THAN WHAT WAS C LAIMED BY THE ASSESSEE. 9. BEFORE CIT(APPEALS), THE REITERATED SUBMISSIONS MADE BEFORE AO AND FURTHER PLACED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) WHEREIN IT WAS HELD THAT TELECOMMUNICATION CHARGES SHOULD B E EXCLUDED BOTH FROM IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 6 OF 36 THE TOTAL TURNOVER AND EXPORT TURNOVER WHILE APPLYI NG THE FORMULA U/S.10A(4) OF THE ACT WHILE ALLOWING DEDUCTION U/S.10A OF THE ACT. THE CIT(A) ACCEPTED THE ALTERNATIVE PRAYER OF THE ASSESSEE. THE REVENU E IS AGGRIEVED BY THE ORDER OF CIT(A) AND HAS RAISED THE AFORESAID GROUND S BEFORE THE TRIBUNAL. 10. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN GROUND NO.2. TAKING INTO CONS IDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT THE CIT(A)S ORDER DIRECTING THE ASSESSING OFFICER TO EXCLUDE TE LECOMMUNICATION CHARGES BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER, AS WA S PRAYED FOR BY THE ASSESSEE IN THE ALTERNATE WAS RIGHTLY ACCEPTED BY T HE CIT(A). THE RELEVANT GROUND OF APPEAL OF THE REVENUE IS ACCORDINGLY DISM ISSED. 11. GROUND NO.3 RAISED BY THE REVENUE READS AS FOLL OWS:- 3. THE LD. CIT(A) ERRED IN ALLOWING THE EXCESS PR OVISION TOWARDS WARRANTY EXPENSES CREATED BY THE ASSESSEE WITHOUT A PPRECIATING THE FACT THAT THE AO HAS CLEARLY BROUGHT OUT THE FACT T HAT THE PROVISION WAS MADE IN AN UNSCIENTIFIC WAY. 12. THE ASSESSEE IS IN THE BUSINESS OF TRADING IN C OMPUTER SYSTEMS BESIDES PROVIDING SOFTWARE DEVELOPMENT SERVICES (I T SERVICES) AND ALSO INFORMATION TECHNOLOGY RELATED SERVICES (ITRS). TH E AO FOUND FROM THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE THAT IN ARR IVING AT THE PROFITS OF THE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 7 OF 36 BUSINESS, THE ASSESSEE HAD CLAIMED AS DEDUCTION A S UM OF RS.4,71,61,000/- TOWARDS 'WARRANTY EXPENDITURE'. OU T OF THIS AMOUNT, A SUM OF RS.2,21,80,000/- WAS ACTUALLY PAID BY THE ASSESS EE ON ACCOUNT OF WARRANTY CLAIMS MADE BY THE CUSTOMERS. THUS THE BAL ANCE AMOUNT OF RS.2,49,81,000/- WAS ONLY A PROVISION MADE FOR POSS IBLE CLAIMS ON ACCOUNT OF WARRANTY LIABILITY. ACCORDING TO THE AO, THE EXP ENDITURE BEING CONTINGENT ONE, THE SAME CANNOT BE ALLOWED AS A DEDUCTION ONLY COMPUTING INCOME FROM BUSINESS. 13. THE PLEA OF THE ASSESSEE BEFORE THE AO WAS THAT THE PROVISION FOR LIABILITY ON ACCOUNT OF POSSIBLE WARRANTY CLAIM WAS MADE ON A SCIENTIFIC BASIS WITH MINIMUM MARGIN OF ERROR. THE ASSESSEE C LAIMED THAT THE LIABILITY TO INCUR THE EXPENDITURE ON ACCOUNT OF WARRANTY LIA BILITY WAS A CERTAIN LIABILITY AND THAT THE QUANTIFICATION OF SUCH LIABILITY WAS B ASED ON SALES MADE IN EACH YEAR AND THE QUANTUM OF CLAIMS ON ACCOUNT OF WARRAN TY LIABILITY AS A PERCENTAGE OF SALES IN THE PAST. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE HON'BLE ITAT IN ITS OWN CASE FOR THE ASSESSMENT YEARS 2003-04 AND 2004-05, WHEREIN SIMILAR CLAIM WAS HELD TO BE A LIA BILITY OF THE ASSESSEE AND ALLOWABLE AS DEDUCTION WHILE COMPUTING INCOME F ROM BUSINESS OF THE ASSESSEE. THE ASSESSEE THUS CLAIMED THAT THE LIABIL ITY IN QUESTION WAS NOT CONTINGENT LIABILITY AND SHOULD BE ALLOWED AS DEDUC TION. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 8 OF 36 14. THE AO EXAMINED THE ASPECT WHETHER THE PROVISIO N BY THE ASSESSEE ON ACCOUNT OF WARRANTY LIABILITY WAS MADE ON SCIENT IFIC BASIS WITH MINIMUM MARGIN OF ERROR. HE WAS OF THE VIEW THAT IN MAKING A PROVISION ON ACCOUNT OF WARRANTY LIABILITY THE ASSESSEE MERELY ADOPTS A FOR MULA AND BY DOING SO CLAIMS THAT THE LIABILITY WAS AN ASCERTAINED LIABIL ITY. HE WAS OF THE VIEW THAT THE ESTIMATION MADE SHOULD BE MORE OR LESS EQUAL TO THE ACTUAL EXPENDITURE INCURRED. THE AO EXAMINED THE PROVISION MADE FOR LI ABILITY ON ACCOUNT OF WARRANTY CLAIMS BY THE ASSESSEE IN THE PAST AND THE ACTUAL LIABILITY IT DISCHARGED ON ACCOUNT OF SUCH CLAIMS, WHICH WAS AS FOLLOWS: FINANCIAL YEAR OPENING BALANCE ACCRUAL DURING THE YEAR PAYMENTS MADE DURING THE YEAR MOVEMENT DURING THE YEAR CLOSING BALANCE 2000-01 - (10,913,999) - (10,913,999) (10,913,999) 2001-02 (10,913,999) (59,251,209) 35,706,693 (23,544,516) (34,458,516) 2002-03 (34,458,516) (92,038,800) 42,668,862 (49,369,938) (83,828,454) 2003-04 (83,828,454) (3,273,145) 24,052,936 20,779,790 (63,048,663) 2004-05 (63,048,663) (47,161,000) 22,180,000 (24,981,000) (88,029,663) 15. ACCORDING TO THE AO, A PERUSAL OF THE ABOVE TAB LE WOULD SHOW THAT THE PROVISIONS MADE IN EACH YEAR (WHICH IS SHOWN UN DER THE HEAD, 'ACCRUALS DURING THE YEAR), ARE WAY OFF THE MARK, COMPARED TO THE ACTUAL EXPENDITURE (SHOWN UNDER THE HEAD 'PAYMENTS MADE DURING THE YEA R). HE THEREFORE HELD THAT WHEN THE ESTIMATION FOR THE PROVISION IS NOWHE RE NEAR THE ACTUAL EXPENDITURE, IT CANNOT BE SAID THAT THE PROVISION I S ON A SCIENTIFIC BASIS. IT CAN ONLY BE CALLED AN AD HOC PROVISION. THE FACT TH AT THE EXCESS PROVISION IS IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 9 OF 36 WRITTEN BACK IN THE NEXT YEAR DOES NOT ALTER THE PO SITION IN THIS YEAR. THE AO RELIED ON THE DECISION OF THE HONBLE MADRAS HIGH C OURT IN THE CASE OF CIT VS ROTORK CONTROLS INDIA LTD AND OTHERS 293 ITR 311 MAD WHEREIN IT WAS HELD THAT IF THE PROVISION FOR WARRANTY IS MADE ON AN AD HOC BASIS, THE SAME CANNOT BE ALLOWED AS A DEDUCTION. ACCORDING TO THE AO, THE PROVISION MADE BY THE ASSESSEE CANNOT BE SAID TO BE ON A SCIENTIFI C BASIS AND AS SUCH, CANNOT BE ALLOWED AS A DEDUCTION. 16. ON THE ARGUMENT OF THE ASSESSEE THAT THE LIABIL ITY OF THE ASSESSEE ON ACCOUNT OF WARRANTY LIABILITY IS A CERTAIN LIABILIT Y WHICH HAD ARISEN DURING THE RELEVANT PREVIOUS YEAR, THE AO HELD THERE WAS A WID E GAP IN THE ESTIMATION MADE BY THE ASSESSEE AND THE ACTUAL EXPENDITURE INC URRED BY IT LATER. THEREFORE AT LEAST TO THE EXTENT OF EXCESS PROVISIO N MADE IT CANNOT BE SAID THAT THE LIABILITY TO INCUR THE EXPENDITURE HAS ARI SEN DURING THE YEAR. AS FAR AS THE ASSESSEE'S RELIANCE ON THE DECISION IN ITS O WN CASE FOR THE EARLIER YEARS, THE AO WAS OF THE VIEW THAT THE ITATS DECIS ION WAS NOT ACCEPTED BY THE DEPARTMENT AND THE MATTER WAS AGITATED BEFORE T HE HON'BLE HIGH COURT OF KARNATAKA. 17. FOR THE ABOVE REASONS, THE AO HELD THAT THE PRO VISION MADE BY THE ASSESSEE IN ITS BOOKS AND DEBITED IN THE PROFIT AND LOSS ACCOUNT, TOWARDS WARRANTY EXPENDITURE, IN EXCESS OF THE ACTUAL EXPEN DITURE HAS TO BE TREATED AS A CONTINGENT LIABILITY. ACCORDINGLY, AN AMOUNT O F RS.2,49,81,000/-, BEING IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 10 OF 36 THE EXCESS PROVISION MADE, WAS DISALLOWED AND ADDED BACK TO THE ASSESSEE'S TOTAL INCOME. 18. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) ACC EPTED THE SUBMISSION OF THE ASSESSEE THAT SIMILAR DISALLOWANC E MADE IN ASSESSEES OWN CASE FOR THE AYS 2002-03 & 2003-04 WAS DELETED BY THE TRIBUNAL AND THE CIT(A) FOUND THAT THE FACTS AND CIRCUMSTANCES U NDER WHICH THE DISALLOWANCE WAS MADE IN THE PRESENT ASSESSMENT YEA R WAS IDENTICAL TO THE FACTS AS IT PREVAILED IN AYS 2002-03 & 2003-04. TH E CIT(APPEALS) ACCORDINGLY DELETED THE ADDITION MADE BY THE AO. T HE CIT(A) WAS OF THE VIEW THAT PROVISION FOR WARRANTY AS MADE BY THE ASS ESSEE COMPANY WAS IN CONFORMITY WITH THE RULING OF THE HONBLE SUPREME C OURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. V. CIT, 223 CTR 425 . AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE REVENUE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. 19. THE LD. DR POINTED OUT THAT THE AO HAS CLEARLY BROUGHT OUT IN THE ORDER OF ASSESSMENT THAT PROVISION MADE BY THE ASSE SSEE ON ACCOUNT OF LIABILITY TOWARDS WARRANTY CLAIM WAS NOT MADE BY TH E ASSESSEE ON A SCIENTIFIC BASIS AND THIS FINDING HAS NOT BEEN COUN TERED BY THE ASSESSEE BEFORE THE CIT(APPEALS) NOR HAS THE CIT(A) GIVEN A FINDING THAT THE PROVISION MADE BY THE ASSESSEE WAS SCIENTIFIC. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 11 OF 36 20. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, BROUGHT TO OUR NOTICE THAT IN AYS 2002-03 & 2003-04 IN ITA NOS.362 & 363/BANG/2007, ORDER DATED 18.03.2016, THE TRIBUNAL HELD THAT PROV ISION FOR WARRANTY MADE BY THE ASSESSEE WAS SCIENTIFIC AND BASED ON THE CLA IM OF WARRANTY EXPENSES MADE IN THE CASE OF ASSESSEE IN THE PAST. 21. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS. THE BASIS ON WHICH PROVISION FOR WARRANTY WAS MADE BY THE ASSESSEE WAS THAT THE ASSESSEE HAS ARRIVED AT A MODEL FOR ASCERT AINING THE WARRANTY COST, BASED ON THE TYPE OF EQUIPMENT, PERIODICITY OF WARR ANTY AND NATURE OF COMMITMENT. THE ASSESSEE HAS A SPECIALIZED WARRANTY ACCOUNTING TEAM WHICH TRACKS THE INCIDENTS REPORTED FOR EACH PRODUC T COUNTRY-WISE AND ASSOCIATED COST OF PROVIDING WARRANTY SERVICES. THE TOTAL SALES ARE DIVIDED INTO VARIOUS CATEGORIES OF IT HARDWARE PRODUCTS BAS ED ON THE WARRANTY PERIODS ATTACHED TO EACH SUCH PRODUCT. THE FAULTS A RE TRACKED ON THE BASIS OF A UNIQUE IDENTIFICATION NUMBER ATTACHED TO EACH IT HARDWARE SO AS TO IDENTIFY CASES OF FAULTS. THE WARRANT COST IS A PR ODUCT OF THE FIELD INCIDENT RATE I.E., THE NUMBER OF REPAIRS AND THE COST PER I NCIDENT. FIELD INCIDENT RATE IS DETERMINED BASED ON THE ACTUAL FAULTS REPOR TED OVER THE EARLIER YEARS, THE COST PER INCIDENT IS DETERMINED A SCIENT IFIC BASIS BASED ON THE PAST EXPERIENCE, WHICH IS THE SUM OF THE FOLLOWING: - COST OF SPARE PARTS; - COST OF LOGISTICS; AND - LABOUR COST IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 12 OF 36 THE ASSESSEE WRITES BACK THE DIFFERENCE BETWEEN THE WARRANT PROVISION MADE FOR A PARTICULAR YEAR AND ACTUAL EXPENDITURE I NCURRED IN THE SUBSEQUENT YEAR, IN THE SUBSEQUENT YEAR. 22. IT IS NOT IN DISPUTE BEFORE US THAT THE BASIS O N WHICH THE PROVISION FOR WARRANTY WAS MADE WAS IDENTICAL IN AYS 2002-03 & 20 03-04 AS WELL AS IN AY 2005-06. THE TRIBUNAL HAS IN THE APPEAL FOR THE AYS 2002-03 & 2003- 04 AFTER CONSIDERING THE METHOD OF PROVIDING FOR WA RRANTY LIABILITY BY WAY OF A PROVISION, SPECIFIED THAT THE PROVISION MADE WAS BASED ON PAST HISTORY AND WAS ON SCIENTIFIC METHOD OF ESTIMATING LIABILIT Y ON ACCOUNT OF WARRANTY CLAIMS. IT IS CLEAR FROM THE CHART WHICH HAS BEEN EXTRACTED IN THE ORDER OF ASSESSMENT THAT AS AND WHEN THE PERIOD OF WARRANTY EXPIRES, THE ASSESSEE WRITES BACK THE PROVISION MADE IN THE BOOKS OF ACCO UNT TO THE EXTENT IT RELATES TO THE WARRANTY LIABILITY WHICH THE ASSESSE E DOES NOT INCUR AND WHICH WAS ALREADY PROVIDED BY WAY OF A PROVISION AND ALLO WED AS DEDUCTION IN THE PAST. IT APPEARS TO US THAT THE PROVISION MADE BY THE ASSESSEE IS SCIENTIFIC AND IS BASED ON PAST HISTORY. WE ARE ALSO OF THE V IEW THAT IN VIEW OF THE PARITY OF BASIS OF PROVISION OF WARRANTY IN AYS 200 2-03 & 2003-04 AND AY 2005-06, THE RULING OF THE TRIBUNAL IN AYS 2002-03 & 2003-04 IS SQUARELY APPLICABLE TO AY 2005-06 ALSO. FOR THE REASONS STA TED ABOVE, WE DO NOT FIND ANY MERIT IN GROUND NO.3 RAISED BY THE REVENUE AND ACCORDINGLY THE SAME IS DISMISSED. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 13 OF 36 23. GROUND NOS. 4 TO 8 RAISED BY THE REVENUE IN ITS APPEAL AND THE GROUNDS RAISED BY THE ASSESSEE IN THE CO NO.21/BANG/2016 ARE WITH REGARD TO DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY BETWEEN THE ASSESSEE AND ITS AE IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. THESE GROUNDS READ AS FOLLOWS:- REVENUES GROUNDS (4 TO 8) 4. WHETHER THE LD. CIT(A) WAS JUSTIFIED IN FIXING THE RPT FILTER AT 0% OF TOTAL REVENUE AND DELETING COMPARAB1ES SELECT ED BY THE TPO, BY SUPERIMPOSING THE DECISIONS OF ITAT IN OTHER CAS ES, WITHOUT GOING INTO SPECIFIC FACTS IN THE CASE OF THE TAXPAYER AND WITHOUT ADDUCING THE BASIS FOR ARRIVING AT THE 0% CUT OFF FOR RPT FILTER , IN THE CASE OF THE TAXPAYER. 5. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE TU RNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPARABLE, AND ACCORDINGLY ERRED IN EXCLUDING IGATE GLOBAL SOL UTIONS LTD, F1EXTRONICS. L&T INFOTECH LTD, SATYAM COMPUTERS LTD , M/S INFOSYS TECHNOLOGY LTD. M/S F1EXTRONICS SOFTWARE SYSTEMS LT D(SEG), AS A COMPARABLE IN THE SEGMENT. 6. WHETHER THE LD CIT(A) WAS JUSTIFIED IN IMPOSING THE DECISION OF DIFFERENT CASE WITHOUT APPRECIATING THE FINDINGS OF THE TPO. 7. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN HOLDING THAT M/S SANKHYA INFOTECH LTD, CANNOT BE TAKEN AS COMPARABLE. WHEN THE COMPANY QUALIFIES ALL THE QUAL ITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO IN SELECTIO N OF THIS COMPANY AS A COMPARABLE. 8. WHETHER THE LD.CIT(A) WAS JUSTIFIED IN TREATING THE COMPARABLE COMPANY M/S SANKHYA INFOTECH LTD, AS A P RODUCT COMPANY ON THE BASIS OF THE DIRECTOR'S REPORT IN TH E ABSENCE OF ANY ENTRY TO THAT EFFECT IN THE P&L ACCOUNT AND BALANCE SHEET. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 14 OF 36 ASSESSEES GROUNDS IN CO I. THE LD. CIT(A) WHILE REJECTING FOUR SOFT LTD., ON RPT BEING MORE THAN 0%, HAS GROSSLY ERRED IN NOT ADJUDICATING ON THE FOLLOWING GROUNDS: FUNCTIONAL DISSIMILARITY 2. THE LD. CIT(A) WHILE REJECTING THIRDWARE SOLUTI ONS LTD., ON RPT BEING MORE THAN 0%, HAS GROSSLY ERRED IN NOT AD JUDICATING ON THE FOLLOWING GROUNDS: FUNCTIONAL DISSIMILARITY 3. THE LD. CIT(A) WHILE REJECTING GEOMETRIC SOFTWA RE SOLUTIONS LTD., ON RPT BEING MORE THAN 0%, HAS GROSSLY ERRED IN NOT ADJUDICATING ON THE FOLLOWING GROUNDS: FUNCTIONAL DISSIMILARITY 4. THE LD. CIT(A) WHILE REJECTING TATA ELXSI LTD., ON RPT BEING MORE THAN 0%, HAS GROSSLY ERRED IN NOT ADJUDICATING ON THE FOLLOWING GROUNDS: FUNCTIONAL DISSIMILARITY 5. THE LD. CIT(A) WHILE REJECTING SASKEN COMMUNICA TION TECHNOLOGIES LTD., ON RPT BEING MORE THAN 0%, HAS G ROSSLY ERRED IN NOT ADJUDICATING ON THE FOLLOWING GROUNDS: FUNCTIONAL DISSIMILARITY PRESENCE OF INTANGIBLES HIGH TURNOVER 6. THE LD. CIT(A) WHILE REJECTING FLEXTRONICS SOFTW ARE LTD., ON TURNOVER FILTER HAS GROSSLY ERRED IN NOT ADJUDICATI NG ON THE FOLLOWING GROUNDS: FUNCTIONAL DISSIMILARITY 7. THE LD. CIT(A) WHILE REJECTING SATYAM COMPUTER SERVICES LTD., ON TURNOVER FILTER HAS GROSSLY ERRED IN NOT A DJUDICATING ON THE FOLLOWING GROUNDS: IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 15 OF 36 UNRELIABLE FINANCIAL STATEMENTS PRESENCE OF BRAND 8. THE LD. CIT(A) WHILE REJECTING INFOSYS TECHNOLO GIES LTD., ON TURNOVER FILTER HAS GROSSLY ERRED IN NOT ADJUDICATI NG ON THE FOLLOWING GROUNDS: PRESENCE OF BRAND ECONOMIES OF SCALE FUNCTIONALLY DISSIMILAR 9. THE LD. CIT(A) WHILE REJECTING SANKHYA INFOTECH LTD., ON THE GROUND OF FUNCTIONAL DISSIMILARITY HAS ERRED IN NOT ADJUDICATING ON THE FOLLOWING GROUND: FAILS EMPLOYEE COST FILTER THE RESPONDENT CRAVES LEAVE TO ADD, ALTER, AMEND AN D/OR DELETE ANY OF THE GROUND MENTIONED ABOVE. 24. AS WE HAVE ALREADY SEEN, THE ASSESSEE IS IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES. THE ASSES SEE RENDERS SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATE ENTE RPRISE (AE), M/S. DELL INTERNATIONAL INC. AND RECEIVED CONSIDERATION FROM THE AE FOR RENDERING SUCH SERVICES. SECTION 92(L) OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN 'INTERNATIONAL TRANSACTION' SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE EXPLANA TION TO THE SAID SECTION PROVIDES THAT ALLOWANCE FOR ANY EXPENSE OR INTEREST ARISING FROM AN INTERNATIONAL TRANSACTION HALL ALSO BE DETERMINE D HAVING REGARD TO THE ARMS LENGTH PRICE. THE TERM 'INTERNATIONAL TRANSAC TION' HAS BEEN DEFINED IN SECTION 92B(1) OR THE ACT TO MEAN A TRANSACTION BETWEEN TWO OR MORE 'ASSOCIATED ENTERPRISES' EITHER OR BOTH OF WHOM A RE NON-RESIDENTS IN IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 16 OF 36 THE NATURE OF INTER ALIA PURCHASE, SALE OR LEASE OF INTANGIBLE PROPERTY OR PROVISION OF SERVICES, OR LENDING OR BORROWING MON EY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME , LOSSES OR ASSETS OF SUCH ENTERPRISES. SECTION 92A OF THE ACT DEFINES T HE TERM 'ASSOCIATED ENTERPRISE' IN RELATION TO ANOTHER ENTERPRISE, IN A MANNER WHERE THE ENTERPRISE DIRECTLY OR INDIRECTLY PARTICIPATES IN T HE MANAGEMENT, CONTROL OR CAPITAL OF THE OTHER ENTERPRISE. THE TERM 'ARM' S LENGTH PRICE' HAS BEEN DEFINED IN CLAUSE (II) OF SECTION 92F OF THE A CT, TO MEAN A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRA NSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISES IN UNCONT ROLLED CONDITIONS. SECTION 92C(1) OF THE ACT PROVIDES THAT THE ARM'S L ENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINE D BY ANY OF THE SEVERAL METHODS, SPECIFIED THEREIN, HAVING REGARD T O THE NATURE OF THE TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASS OCIATED PERSON OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER R ELEVANT FACTORS AS THE CENTRAL HOARD OF DIRECT TAXES (HEREINAFTER REFE RRED TO AS 'BOARD') MAY PRESCRIBE. THE ASSESSEE HAS THEREFORE TO JUSTI FY THAT THE PRICE IT RECEIVED FROM ITS AE FOR RENDERING SOFTWARE DEVELOP MENT SERVICES WAS AT ARMS LENGTH. 25. THERE IS NO DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE THAT TRANSACTIONAL NET MARGIN METHOD (TNMM) IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE (ALP). THE CONSIDERATION RECEIVED BY IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 17 OF 36 THE ASSESSEE FROM ITS AE FOR RENDERING SOFTWARE DEV ELOPMENT SERVICES WAS A SUM OF RS.109,98,69,000. PROFIT LEVEL INDICATOR (PLI) ADOPTED BY THE ASSESSEE AND THE REVENUE WAS OPERATING PROFITS TO T OTAL COST (OP TO TC) FOR THE PURPOSE OF COMPARING THE PROFIT MARGINS OF COMPARABLE COMPANIES IN SIMILAR TRANSACTIONS. THE ASSESSEE IN ITS TP REPOR T FILED TO JUSTIFY THE PRICE RECEIVED FROM THE AE WAS AT ARMS LENGTH, SELECTED THE COMPARABLE COMPANIES AND THE AVERAGE PLI OF THOSE COMPARABLE C OMPANIES WAS COMPARED WITH OP TO TC OF THE ASSESSEE AND IT WAS C LAIMED THAT THE PRICE RECEIVED BY THE ASSESSEE WAS AT ARMS LENGTH. THE TPO AFTER REJECTING THE METHODOLOGY APPLIED BY THE ASSESSEE CAME TO THE CON CLUSION THAT THE COMPANIES AS PER LIST ENCLOSED AS ANNEXURE-I TO THI S ORDER ALONE WERE COMPARABLE AND ARRIVED AT THE AVERAGE ARITHMETIC ME AN OF PROFITS OF THE THOSE COMPARABLE COMPANIES AT 26.59%. 26. THE TPO THEREAFTER COMPUTED THE ALP AS FOLLOWS: - 13.6 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 YOU IS COMPUTED AS: ARITHMETIC MEAN PLI : 26.59% LESS WORKING CAPITAL ADJ. AS PER ANN.-C : 2.90% ADJ.ARITHMETIC MEAN PLI : 23.69% IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 18 OF 36 ARMS LENGTH PRICE: OPERATING COST RS.99,98,80,000/-* ARMS LENGTH MARGIN 22.69% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) @ 123.69% OF OPERATING COST RS.123,67,51,572/- * AS SHOWN IN THE SEGMENTAL BREAK UP IN TP REPOR T VIDE PG 142. 13.7 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PR ICE : 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) @ 123.69% OF OPERATING COST RS.123,67,51,572/- PRICE RECEIVED RS.109,98,69,000/- * SHORTFALL BEING ADJUSTMENT U/S.92CA RS. 13,68,82,572/- * AS SHOWN IN SEGMENTAL BREAK UP IN TP REPORT V IDE PG 142. 27. THUS A SUM OF RS.13,68,82,572 WAS DIRECTED TO B E ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY WAY OF ADJUSTMENT TO THE ALP. THIS DIRECTION OF THE TPO WAS CARRIED OUT BY THE AO BY MAKING ADDITIO N OF THE SAID SUM TO THE TOTAL INCOME OF THE ASSESSEE. 28. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) HEL D THAT COMPANIES CHOSEN BY THE TPO AS FINAL COMPARABLE COMPANIES WHO SE PROFIT MARGINS WERE TO BE COMPARED WITH THAT OF THE ASSESSEE, EVEN IF THEY HAD RELATED PARTY TRANSACTIONS (RPT) THEN SUCH COMPANIES SHOULD BE EXCLUDED FROM THE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 19 OF 36 LIST OF COMPARABLE COMPANIES. THUS THE CIT(A) APPLI ED 0% RPT AS A FILTER TO EXCLUDE COMPANIES FOR THE PURPOSE OF COMPARISON. AS A RESULT OF THIS RULING BY THE CIT(APPEALS), 12 OUT OF 17 COMPARABLE COMPAN IES FINALLY CHOSEN BY THE TPO STOOD EXCLUDED. OUT OF 12 COMPANIES EXCLUD ED BY APPLYING 0% RPT FILTER, 5 COMPANIES WERE ALSO REJECTED AS NOT C OMPARABLE FOR THE REASON THAT THEIR TURNOVER WAS VERY HIGH COMPARED T O THE TURNOVER OF THE ASSESSEE. 29. THE CIT(APPEALS) ALSO HELD THAT COMPANIES HAVIN G ABNORMAL TURNOVER CANNOT BE REGARDED AS COMPARABLE WITH THAT OF THE ASSESSEE. THE CIT(APPEALS) FOLLOWING THE DECISION OF THE ITAT IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , WAS OF THE VIEW THAT FOR THE PURPOSE OF COMPARISON OF TURNOVER, COMPANIES WILL HAVE TO BE CATEGORIZED AS COMPANIES HAVING TURNOVER OF < 200 CRORES AS SMALL, COMPANIES HAVING TURNOVER OF 200 & 2000 CRORES AS MEDIUM AND COMPANIES HAVING TURNOVER > 20 00 CRORES AS LARGE. BY DOING SO, THE CIT(APPEALS) FOUND THAT THE ASSESS EES TURNOVER WAS ONLY 109.86 CRORES AND THEREAFTER COMPARABLE COMPANIES C HOSEN BY THE TPO WHICH HAD TURNOVER BEYOND 200 CRORES HAD TO BE EXCL UDED FROM THE LIST OF COMPARABLE COMPANIES, AS THEY WERE MEDIUM SIZED COM PANIES AND ASSESSEE WAS A SMALL SIZED COMPANY AND THEREFORE IT CANNOT BE COMPARED. BY THIS PROCESS, 5 COMPANIES WERE EXCLUDED FROM THE LIST OF COMPARABLE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 20 OF 36 COMPANIES. THESE 5 COMPANIES, AS WE HAVE ALREADY M ENTIONED, ALSO GOT EXCLUDED BY APPLICATION OF RPT FILTER. THESE COMPAN IES ARE:- (1) IGATE SOLUTIONS LTD. (2) INFOSYS TECHNOLOGIES LTD. (3) SATYAM COMPUTER SERVICES LTD. (4) L&T INFOTECH LTD. AND (5) FLEXTRONICS SOFTWARE SYSTEMS LTD. 30. COMPANIES WHICH GOT EXCLUDED BY APPLICATION OF RPT FILTER ALONE ARE:- (1) SASKEN NETWORK SYSTEMS LTD. (2) FOUR SOFT LTD. (3) THIRDWARE SOLUTIONS LTD. (4) R S SOFTWARE (INDIA) LTD. (5) GEOMETRIC SOFTWARE SOLUTIONS LTD. (6) TATA ELXSI LTD. (7) SASKEN COMMUNICATION TECHNOLOGIES LTD. 31. ANOTHER QUESTION THAT CAME UP FOR CONSIDERATION BEFORE THE CIT(APPEALS) WAS WITH REGARD TO ACCEPTING SANKHYA I NFOTECH LTD. WHICH WAS A COMPARABLE CHOSEN BY THE TPO, WHICH WAS REJEC TED AS NOT COMPARABLE BY THE CIT(APPEALS) ON THE BASIS THAT TH E SAID COMPANY WAS NOT ONLY A SOFTWARE DEVELOPMENT SERVICE PROVIDER, B UT ALSO DEVELOPING SOFTWARE PRODUCTS, THEREFORE IT CANNOT BE REGARDED AS A COMPARABLE COMPANY WITH THE ASSESSEE WHICH WAS A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. ON THE DECISION OF THE CIT(APPEA LS), THE GRIEVANCE OF THE REVENUE IS THAT IN COMING TO THE AFORESAID CONCLUSI ON THAT SANKHYA INFOTECH LTD. WAS A SOFTWARE PRODUCT COMPANY, THE CIT(APPEAL S) HAS PLACED RELIANCE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 21 OF 36 ONLY ON THE REPORT OF DIRECTOR AND HAS NOT POINTED OUT ANY FINANCIAL DETAILS FROM THE PROFIT & LOSS ACCOUNT AND BALANCE SHEET, W HICH WOULD SHOW THAT THIS COMPANY WAS A SOFTWARE PRODUCT COMPANY. 32. AS FAR AS THE CROSS OBJECTION OF THE ASSESSEE I S CONCERNED, THE GROUNDS RAISED IN THE CO IS THAT THE CIT(APPEALS) E XCLUDED 5 COMPANIES BY APPLYING RPT FILTER. IN THE CO, IT IS THE PLEA OF THE ASSESSEE THAT THESE 5 COMPANIES ARE LIABLE TO BE REJECTED, BESIDES APPLIC ATION OF RPT FILTER ALSO ON THE GROUND THAT THESE COMPANIES ARE NOT FUNCTIONALL Y COMPARABLE WITH THAT OF THE ASSESSEE. THESE 5 COMPANIES REFERRED TO BY THE ASSESSEE IN ITS CO ARE :- (1) FOUR SOFT LTD. (2) THIRDWARE SOLUTIONS LTD. (3) GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. (4) TATA ELXSI LTD. AND (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 33. THE OTHER GRIEVANCE PROJECTED BY THE ASSESSEE I N ITS CO IS THAT BY APPLYING TURNOVER FILTER, THE CIT(APPEALS) EXCLUDED 3 COMPANIES FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO VIZ., (1) FLEXTRO NICS SOFTWARE LTD. (2) SATYAM COMPUTER SERVICES LTD. (3) INFOSYS TECHNOLOG IES LTD. IT IS THE PLEA OF THE ASSESSEE IN THE CO THAT FLEXTRONICS IS ALSO REQUIRED TO BE REJECTED ON THE GROUND OF FUNCTIONAL DISSIMILARITY; SATYAM COM PUTER SERVICES LTD. IS LIABLE TO BE REJECTED ON THE GROUND OF UNRELIABLE F INANCIAL STATEMENTS AND PRESENCE OF BRAND VALUE; AND INFOSYS TECHNOLOGIES LTD. IS ALSO LIABLE TO BE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 22 OF 36 REJECTED ON THE GROUND OF PRESENCE OF BRAND, ECONOM IES OF SCALE AND FUNCTIONAL DISSIMILARITY. 34. ANOTHER GRIEVANCE PROJECTED BY THE ASSESSEE IS THAT SANKHYA INFOTECH LTD. BESIDES BEING FUNCTIONALLY DISSIMILAR ALSO FAILS EMPLOYEE COST FILTER. 35. THE LD. COUNSEL FOR THE ASSESSEE ALSO MADE ORAL SUBMISSIONS THAT BODHTREE CONSULTING LTD. OUGHT TO HAVE BEEN REJECTE D AS NOT COMPARABLE BECAUSE IT WAS FUNCTIONALLY DISSIMILAR AND HAD ABNO RMAL GROWTH AND FAILS THE RPT FILTER OF MORE THAN 15%. THOUGH THE CO HAS BEE N FILED, THE ABOVE OBJECTION HAS BEEN ORALLY RAISED AS THE DECISION OF CIT(APPEALS) ON THIS ASPECT IS AGAINST THE ASSESSEE AND THEREFORE IN TER MS OF RULE 27 OF THE ITAT RULES, THE ASSESSEE IS ENTITLED TO RAISE ANY I SSUE DECIDED AGAINST THE ASSESSEE, EVEN WITHOUT FILING A CO. RELIANCE IS PL ACED ON THE DECISION OF HONBLE GAUHATI HIGH COURT IN THE CASE OF ASSAM COMPANY (INDIA) LTD. VS. CIT 256 ITR 453 (GAU) WHEREIN IT WAS HELD THAT IT IS PERMISSIBLE ON PART OF TRIBUNAL TO ENTERTAIN A GROUND BEYOND THOSE INCORPO RATED IN MEMORANDUM OF APPEAL THOUGH PARTY URGING SAID GROUND HAD NEITH ER APPEALED BEFORE IT NOR HAD FILED A CROSS-OBJECTION IN APPEAL FILED BY OTHER PARTY PROVIDED RELEVANT FACTS ON WHICH SUCH GROUND ARE TO BE FOUND ED ARE AVAILABLE ON RECORD. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 23 OF 36 36. WE HAVE HEARD THE RIVAL SUBMISSIONS. AS FAR A S GROUND NO.4 RAISED BY THE REVENUE IS CONCERNED, THE SUBMISSION OF THE LEARNED DR WAS THAT ONLY WHERE THE RELATED PARTY TRANSACTION (RPT) IS M ORE THAN 15% TO 25%, CAN A COMPANY BE EXCLUDED FROM THE LIST OF COMPARAB LE COMPANIES. OUR ATTENTION WAS DRAWN TO THE DECISION OF THE HONBLE ITAT BANGALORE B BENCH IN THE CASE OF ROBERT BOSCH ENGINEERING AND BUSINESS SOLUTIONS LTD . VS. DCIT IT (TP) A.NO.1519/BANG/2013 AND 1687/BANG/ 2013 ORDER DATED 13.9.2017 WHEREIN THE TRIBUNAL IN PARAGRAPH 8 HAS OBSERVED 2 5% TO 15% RPT FILTER HAS TO BE APPLIED DEPENDING ON AVAILABIL ITY OF COMPARABLES. HIS SUBMISSION WAS THEREFORE THAT COMPANIES WITH RPT OF 25% OR MORE ALONE SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMP ANIES CHOSEN BY THE TPO AND THE ACTION OF THE CIT(A) IN EXCLUDING COMPA RABLE COMPANIES EVEN IN A CASE WHERE THERE ARE SINGLE AND INSIGNIFICANT RPT WAS NOT CORRECT. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND , POINTED OUT THAT THIS TRIBUNAL, IN THE CASES OF 24/7 CUSTOMER PVT. LTD. (ITA NO.227/BANG/2010), SONY INDIA PRIVATE LTD. REPORTED IN (2009) 315 ITR (80) 150 (DEL.) AND VARIOUS OTHER CASES, HAS TAKEN A VIEW THAT COMPARAB LES HAVING RPT OF UPTO 15% OF TOTAL REVENUES CAN BE CONSIDERED AS COMPARAB LE COMPANY. IT WAS FURTHER SUBMITTED BY HIM THAT BY VIRTUE OF 0% RPT FILTER ADOPTED BY THE CIT(A), 12 COMPARABLE COMPANIES GETS EXCLUDED FROM THE LIST OF 17 COMPARABLE COMPANIES CHOSEN BY THE TPO. HE POINTED OUT THAT OUT OF THE 12 COMPANIES THAT WILL GET EXCLUDED, IF 15% THRESHO LD LIMIT OF RPT IS IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 24 OF 36 APPLIED, ONE COMPANY VIZ., FOUR SOFT LIMITED WHICH IS A COMPARABLE COMPANY CHOSEN BY THE TPO WILL GET EXCLUDED AS THE RPT IN THE CASE OF THIS COMPANY IS 19.89%. HIS SUBMISSION WAS THAT 5 OUT OF THE REMAINING 11 COMPANIES WERE EXCLUDED BY THE CIT(A) FOR THE REASO N THAT THE TURNOVER OF THESE COMPANIES WERE VERY HIGH COMPARED TO THE TURN OVER OF THE ASSESSEE. HIS FURTHER SUBMISSION WAS THAT FOUR OUT OF THE REM AINING 6 COMPARABLE COMPANIES DESERVE TO BE REJECTED BY APPLICATION OF OTHER FILTERS AS PROJECTED BY THE ASSESSEE IN THE GROUNDS OF CROSS-OBJECTION. THESE FOUR COMPANIES POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE:- (1) THIRDWARE SOLUTIONS LTD., (2) M/S. TATA ELXSI LTD. (3) M/S.SA SKEN COMMUNICATION TECHNOLOGIES LTD., WHICH ACCORDING TO THE LEARNED C OUNSEL FOR THE ASSESSEE, ARE LIABLE TO BE EXCLUDED AS FUNCTIONALLY NOT COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE A SSESSEE AS HELD BY THIS TRIBUNAL IN THE CASE OF ELECTRONICS FOR IMAGING INDIA PVT. LTD. IT (TP) A.NO. 464/BANG/2013 AND M/S. NET DEVICES INDIA PVT. LTD. IT(TP) NO. 1099/BANG/2011 AND M.P.100/BNG.2016 . IT WAS ALSO SUBMITTED THAT SASKEN COMMUNICATION TECHNOLOGIES LTD., HAS HIGH TURNOVER AND OWNS INTANGIBLES WHICH WILL RENDER ITS COMPARABILITY WITH THE ASSESS EE AS INAPPROPRIATE. (4) M/S. GEOMETRIC SOFTWARE SOLUTIONS LTD., WHICH ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, FAILS RPT TEST AS THE PER CENTAGE OF RPT IN THE CASE OF THIS COMPANY IS 18.19% AND NOT 11.49% AS W RONGLY COMPUTED BY THE REVENUE AUTHORITIES. IN THIS REGARD OUR ATTENT ION WAS DRAWN TO THE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 25 OF 36 DECISION OF THE HONBLE ITAT IN THE CASE OF NET DEVICES INDIA PVT.LTD., WHEREIN AT PARAGRAPH 7.3 THE TRIBUNAL HAS REFERRED TO THE RPT OF M/S. GEOMETRIC SOFTWARE SOLUTIONS LTD., AS COMPUTED BY T HE TPO HIMSELF AS 19.34% FOR THE VERY SAME AY 05-06. HENCE ACCORDING TO HIM THIS COMPANY HAS TO BE REGARDED AS NOT COMPARABLE BY APPLYING RP T FILTER. BESIDES THE ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE ALSO PO INTED OUT THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE AS STATED BY THE ASSESSEE IN THE VARIOUS SUBMISSIONS FILED BEFORE THE CIT(A) AND SIN CE THE CIT(A) EXCLUDED THIS COMPANY BY APPLYING 0% RPT FILTER, THE FUNCTIO NAL COMPARABILITY OF THIS COMPANY WAS NOT CONSIDERED BY THE CIT(A) AND THE IS SUE SHOULD BE EXAMINED BY THE CIT(A) ON THE FUNCTIONAL COMPARABIL ITY OF THIS COMPANY. 37. WE HAVE CONSIDERED THE SUBMISSIONS. IT IS NO DOUBT TRUE THAT IN THE CASE OF ROBERT BOSCH (SUPRA) THIS TRIBUNAL HAS HELD THAT RPT FILTER CAN BE IN THE RANGE OF 25% TO 15% OF THE TOTAL RECEIPTS FROM SOFTWARE DEVELOPMENT SERVICES, DEPENDING ON AVAILABILITY OF COMPARABLE C OMPANIES. IT IS NO BODYS CASE THAT THERE IS DEARTH OF COMPARABLE COMP ANIES IN SOFTWARE DEVELOPMENT SERVICES INDUSTRY. THEREFORE IT WOULD BE SAFE TO FOLLOW THE RULING OF THIS TRIBUNAL IN THE CASES OF 24/7 CUSTOMER PVT. LTD. (ITA NO.227/BANG/2010), SONY INDIA PRIVATE LTD. REPORTED IN (2009) 315 ITR (80) 150 (DEL.) WHEREIN A VIEW HAS BEEN TAKEN THAT COMPARABLE COMP ANIES HAVING RPT OF UPTO 15% OF TOTAL REVENUES CAN BE CON SIDERED AS COMPARABLE COMPANIES. IN VIEW THEREOF, THE REVENUE S GRIEVANCE ON THIS IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 26 OF 36 ISSUE AS PROJECTED IN GROUND NO.4 REQUIRES TO BE AC CEPTED. THE TPO/AO ARE DIRECTED TO ADOPT A THRESHOLD LIMIT OF 15% OF T HE TOTAL REVENUE ATTRIBUTABLE TO RELATED PARTY TRANSACTION AS GROUND FOR REJECTING COMPARABLE COMPANIES. CONSEQUENTLY IT IS HELD THAT COMPARABLE COMPANIES HAVING RPT UPTO 15% OF THE TOTAL REVENUES CAN BE INCLUDED. 38. WITH REGARD TO THE 4 COMPARABLE COMPANIES WHERE RPT IS NOT MORE THAN 15% OF ITS REVENUES VIZ., (1) THIRDWARE SOLUTI ONS LTD., (2) M/S. TATA ELXSI (3) M/S.SASKEN COMMUNICATION TECHNOLOGIES LTD .,(4) M/S.GEOMETRIC SOFTWARE SOLUTIONS LTD., THE SAME WILL NOT GET EXCL UDED BY APPLICATION OF RPT FILTER. NEVERTHELESS, THE COMPARABILITY OF THE SE FOUR COMPANIES ON THE GROUND OF WRONG DETERMINATION OF RPT IN THE CASE OF GEOMETRIC SOFTWARE SOLUTIONS LTD., AS WELL AS FUNCTIONAL AND OTHER COM PARABILITY FACTORS OF THESE FOUR COMPANIES WERE SPECIFICALLY PLEADED BEFORE CIT (A) BUT WERE NOT CONSIDERED BY THE CIT(A). THE PARTIES AGREED THAT IT WOULD BE APPROPRIATE TO DIRECT THE CIT(A) TO CONSIDER THESE ASPECTS BY S ETTING ASIDE THE ORDER OF THE CIT(A) ON THE COMPARABILITY OF THESE FOUR COMPA NIES AND REMANDING THE QUESTION OF COMPARABILITY OF THESE COMPANIES ON THE BASIS OF OTHER FACTORS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE INCLUDING WRONG DETERMINATION OF RPT IN THE CASE OF GEOMETRIC SOFTW ARE SOLUTIONS LTD., TO THE CIT(A) FOR DETERMINATION IN ACCORDANCE WITH LAW , AFTER AFFORDING ASSESSEE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE . IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 27 OF 36 39. AS FAR AS GROUND NO. 5 & 6 RAISED BY THE REVEN UE IS CONCERNED, THE LEARNED DR SUBMITTED THAT THIS TRIBUNAL HAS IN THE CASE OF ROBERT BOSCH ENGINEERING AND BUSINESS SOLUTIONS LTD., (SUPRA) HAS TAKEN THE VIEW, AFTER CONSIDERING THE DECISION RENDERED BY THE HONBLE DE LHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS INDIA PVT.LTD VS. DCIT 82 TAXMANN.COM 167(DEL) , THAT HIGH TURNOVER IPSO FACTO DOES NOT LEAD TO TH E CONCLUSION THAT A COMPANY WHICH IS OTHERWISE COMPAR ABLE ON FAR ANALYSIS CAN BE EXCLUDED AND THAT THE EFFECT OF SUCH HIGH TU RNOVER ON THE MARGIN SHOULD BE SEEN. ACCORDING TO HIM, THEREFORE, THE O RDER OF CIT(A) EXCLUDING COMPANIES WITH HUGE TURNOVER WAS NOT PROPER. 40. THE LEARNED COUNSEL FOR THE ASSESSEE HOWEVER PL ACED RELIANCE ON THE DECISION OF THE ITAT BANGALORE BENCH IN THE CAS E OF SYSARRIS SOFTWARE PVT.LTD. VS. DCIT (2016) 67 TAXMANN.COM 243 (BANGLO RE-TRIB) WHEREIN THE TRIBUNAL AFTER NOTICING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL (SUPRA) AND THE DECISION TO THE CONTRARY IN THE CASE OF CIT VS. PENTAIR WATER INDIA PVT.LTD., TAX APPEAL NO .18 OF 2015 DATED 16.9.2015 WHEREIN IT WAS HELD THAT HIGH TURNOVER IS A GROUND TO EXCLUDE A COMPANY FROM THE LIST OF COMPARABLE COMPANIES IN DE TERMINING ALP, HELD THAT THERE WERE CONTRARY VIEWS ON THE ISSUE AND HEN CE THE VIEW FAVOURABLE TO THE ASSESSEE LAID DOWN IN THE CASE OF PENTAIR WATER (SUPRA) SHOULD BE ADOPTED. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 28 OF 36 41. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS. ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , RELYING ON DUN AND BRADSTREETS ANALYSIS, HELD GROUPING OF COMPANIES HAVING TURNOVE R OF RS. 1 CRORE TO RS.200 CRORES AS COMPARABLE WITH EACH OTHER WAS HEL D TO BE PROPER. THE FOLLOWING RELEVANT OBSERVATIONS 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 COMPANIE S WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARA BLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY TH ERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTI ON OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATT ERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A B ROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPU T. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE P URPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SAL ES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFF ERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATI ON, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE T URNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULA R RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.1 5 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.0 0 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PUR POSE OF MAKING TP STUDY. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 29 OF 36 42. THE ASSESSEES TURNOVER WAS AROUND RS.110 CRORE S. THEREFORE THE ACTION OF THE CIT(A) IN DIRECTING TPO TO EXCLUDE CO MPANIES HAVING TURNOVER OF MORE THAN RS.200 CRORES AS NOT COMPARABLE WITH T HE ASSESSEE WAS JUSTIFIED. AS RIGHTLY POINTED OUT BY THE LEARNED C OUNSEL FOR THE ASSESSEE, THERE ARE TWO VIEWS EXPRESSED BY TWO HONBLE HIGH C OURTS OF BOMBAY AND DELHI AND BOTH ARE NON-JURISDICTIONAL HIGH COURTS. THE VIEW EXPRESSED BY THE BOMBAY HIGH COURT IS IN FAVOUR OF THE ASSESSEE AND THEREFORE FOLLOWING THE SAID VIEW, THE ACTION OF THE CIT(A) EXCLUDING C OMPANIES WITH TURNOVER OF ABOVE RS.200 CRORES FROM THE LIST OF COMPARABLE COM PANIES IS HELD TO CORRECT AND SUCH ACTION DOES NOT CALL FOR ANY INTER FERENCE. 43. IN VIEW OF THE ABOVE CONCLUSION, THE GROUNDS RA ISED IN CO FOR EXCLUDING FLEXTRONICS SOFTWARE LTD., SATYAM COMPUTE R SERVICES LTD. AND INFOSYS TECHNOLOGIES LTD., FROM THE LIST OF COMPARA BLE COMPANIES ON THE GROUND OF FUNCTIONAL AND OTHER DISSIMILARITIES HAS BECOME ACADEMIC AND HENCE IS NOT BEING ADJUDICATED AND LEFT OPEN. 44. AS FAR AS GROUND NOS .7 & 8 RAISED REGARDING EX CLUSION BY CIT(A) OF M/S. SANKHYA INFOTECH LTD. AS COMPARABLE COMPANY IS CONCERNED, THE LEARNED DR REITERATED THE STAND AS TAKEN BY THE REV ENUE IN THE GROUNDS OF APPEAL. THE LEARNED COUNSEL FOR THE ASSESSEE PLACE D RELIANCE ON THE DECISION RENDERED IN THE CASE OF ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) AND M/S. NET DEVICES INDIA PVT.LTD. (SUPRA) WHEREIN M/S. SANKHYA IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 30 OF 36 INFOTECH LTD. WAS REGARDED AS A COMPANY IN SOFTWARE PRODUCTS ALSO AND NOT PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE AND HENCE CANNOT BE REGARDED AS COMPARABLE IN CASES OF COMPANIES RENDERING PURE SOFTWARE DEVELOPMENT SERVICES. 45. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT I S NO DOUBT TRUE, AS CONTENDED IN GROUND NO.8 BY THE REVENUE THAT THE BA SIS OF CONCLUDING THAT M/S. SANKHYA INFOTECH LTD. IS A SOFTWARE PRODUCT CO MPANY ALSO AND HENCE CANNOT BE COMPARED WITH A COMPANY PROVIDING SOFTWAR E DEVELOPMENT SERVICE ALONE IS BASED ON THE OBSERVATIONS IN A ANN UAL/ DIRECTORS REPORT BUT IN PARAGRAPH 18.1.3 OF THE TRIBUNALS ORDER IN THE CASE OF M/S. NET DEVICES INDIA PVT.LTD. (SUPRA) , THE TRIBUNAL HAS OBSERVED THAT THERE IS NO SEGMEN TAL DATA AVAILABLE BETWEEN SOFTWARE PRODUCTS, SERVICES, SOFTWARE TRAINING ETC. THUS IT IS AMPLY CLEAR THAT THIS COMPANY IS NOT A P URE SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. IN SUCH CIR CUMSTANCES, WE FIND NO GROUNDS TO INTERFERE WITH THE ORDER OF THE CIT(A). IN VIEW OF THE ABOVE CONCLUSION, THE GROUNDS RAISED IN CO TO EXCLUDE THI S COMPANY FROM THE LIST OF COMPARABLE COMPANIES BY APPLYING EMPLOYEES COST FILTER HAS BECOME ACADEMIC AND HENCE IS NOT BEING ADJUDICATED AND LEF T OPEN. 46. WE WILL NOW TAKE UP FOR CONSIDERATION, THE QUES TION WHETHER COMPARABILITY OF BODHTREE CONSULTING LIMITED CAN BE CONSIDERED IN THESE PROCEEDINGS WHEN NO SPECIFIC GROUND IN THE CO IS RA ISED BY THE ASSESSEE. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 31 OF 36 ON THIS ASPECT, WE FIND THAT THE HONBLE GAUHATI HI GH COURT IN THE CASE OF ASSAM COMPANY (INDIA) LTD., (SUPRA) TAKEN THE VIEW THAT IT IS PERMISSIBLE ON PART OF TRIBUNAL TO ENTERTAIN A GROUND BEYOND THOSE INCORPORATED IN MEMORANDUM OF APPEAL THOUGH PARTY URGING SAID GROUN D HAD NEITHER APPEALED BEFORE IT NOR HAD FILED A CROSS-OBJECTION IN APPEAL FILED BY OTHER PARTY PROVIDED RELEVANT FACTS ON WHICH SUCH GROUND ARE TO BE FOUNDED ARE AVAILABLE ON RECORD. 47. THE PLEA OF THE LEARNED COUNSEL FOR THE ASSESSE E IS THAT THIS COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND OF FUNCTIONAL DISSIMILARITY, ABNORMAL GROWTH AND RP T FILTER, WHICH ACCORDING TO THE ASSESSEE IS 34.68%. ON THE QUESTI ON OF COMPARABILITY OF THIS COMPANY, THE ASSESSEE IN ITS TP STUDY REGAR DED THIS COMPANY AS COMPARABLE. HOWEVER BEFORE CIT(A), THE ASSESSEE ARGUED THAT THIS COMPANY WAS NOT COMPARABLE FOR THE REASON OF FUNCTI ONAL DISSIMILARITY AND OTHER REASONS. THE CIT(A) REFUSED TO CONSIDER THE ARGUMENT ON THE GROUND THAT THE ASSESSEE ON HIS OWN HAS ACCEPTED TH IS COMPANY AS COMPARABLE. 48. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ABOVE COMPANY IS TO BE EXCLUDED AS FUNCTIONALLY NOT COMPA RABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE A S HELD BY THIS TRIBUNAL IN THE CASE OF ELECTRONICS FOR IMAGING INDIA PVT. LTD. IT (TP) A.N O. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 32 OF 36 464/BANG/2013 AND M/S. NET DEVICES INDIA PVT. LTD. IT(TP) NO. 1099/BANG/2011 AND M.P.100/BANG/2016 . 49. ON THE ASPECT WHETHER COMPARABILITY OF THIS COM PANY CAN BE CONSIDERED IN THE PRESENT PROCEEDINGS, WE FIND THAT THE HONBLE GAUHATI HIGH COURT IN THE CASE OF ASSAM COMPANY (INDIA) LTD ., (SUPRA) TAKEN THE VIEW THAT IT IS PERMISSIBLE ON PART OF TRIBUNAL TO ENTERTAIN A GROUND BEYOND THOSE INCORPORATED IN MEMORANDUM OF APPEAL THOUGH P ARTY URGING SAID GROUND HAD NEITHER APPEALED BEFORE IT NOR HAD FILED A CROSS-OBJECTION IN APPEAL FILED BY OTHER PARTY PROVIDED RELEVANT FACTS ON WHICH SUCH GROUND ARE TO BE FOUNDED ARE AVAILABLE ON RECORD . WE ARE OF THE VIEW THAT THERE IS NO APPLICATION OF THE PRINCIPLE OF ESTOPPEL IN THE MATTER DETERMINATION OF ALP. THE COMPARABILITY OR OTHERWISE OF A COMPANY FOR THE PURPOSE OF DETERMINATION OF ALP UNDER THE TRANSFER PRICING PRO VISIONS OF THE ACT CANNOT BE ON THE BASIS OF ADMISSION OF A PARTY THAT A PARTICULAR COMPANY IS COMPARABLE OR NOT. IF ON FACTS IT IS SHOWN THAT A COMPANY CHOSEN BY THE ASSESSEE AS COMPARABLE IN ITS TP STUDY IS LATER FOU ND TO BE NOT COMPARABLE, SUCH COMPANY SHOULD BE EXCLUDED FOR THE PURPOSE OF COMPARABILITY. THE SPECIAL BENCH OF THE ITAT CHANDIGARH BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207( SB)(CHD.) HAS TAKEN THE VIEW THAT IT IS OPEN TO THE PARTIES IN TRANSFER PRICING CASES TO TAKE A STAND CONTRARY TO THEIR TP STUDY, IF THEY CONTEND T HAT THE STAND TAKEN IN THE TP STUDY IS CONTRARY TO FACTS OR WAS ERRONEOUS. SU CH A CLAIM CANNOT BE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 33 OF 36 DISREGARDED ONLY ON THE BASIS THAT IT IS CONTRARY T O ASSESSEES OWN STAND IN THE TP STUDY. WE THEREFORE HOLD THAT THE COMPARABI LITY OF BODHTREE CONSULTING LTD., OUGHT TO HAVE BEEN ANALYSED BY THE CIT(A) IN THE LIGHT OF THE STAND TAKEN BY THE ASSESSEE THAT THE SAID COMPA NY IS NOT COMPARABLE FOR THE REASON THAT IT IS FUNCTIONALLY DISSIMILAR T O THE FUNCTIONS PERFORMED BY THE ASSESSEE AND WAS, OTHERWISE, NOT COMPARABLE BY APPLICATION OF OTHER KNOWN FILTERS IN TRANSFER PRICING ANALYSIS. WE THE REFORE DIRECT THE CIT(A) TO CONSIDER THE COMPARABILITY OF THIS COMPANY AFRESH A FTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 50. IN THE RESULT, APPEAL BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE AND THE CO FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. IT(TP)A 85/BANG/2014 51. THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE O RDER DATED 20.09.2013 OF CIT(A), LTU, BANGALORE, RELATING TO A Y 2005-06. 52. THERE IS A DELAY OF 35 DAYS IN FILING THIS APPE AL. THE REASON FOR THE DELAY IN FILING THE APPEAL HAS BEEN EXPLAINED IN AN AFFIDAVIT FILED BY ONE MR. ALOK OHRIE, AUTHORIZED SIGNATORY ON BEHALF OF THE A SSESSEE. IN PARAGRAPH 4 OF THE AFFIDAVIT IT HAS BEEN STATED THAT THE DELAY IN FILING IN APPEAL WAS DUE TO THE DELAY IN TAKING A DECISION WHETHER THE FILE AN APPEAL OR NOT BEFORE THE TRIBUNAL KEEPING IN MIND THE TIME AND EFFORTS INVOL VED IN LITIGATION. WE ARE OF IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 34 OF 36 THE VIEW THAT DECISION TO FILE APPEAL HAS TO BE TAK EN WITHIN THE TIME LIMIT PROVIDED BY THE RELEVANT STATUTORY PROVISION. THE PERIOD OF LIMITATION FOR FILING APPEAL CANNOT BE EXTENDED ON THE GROUND THAT A DECISION COULD NOT BE TAKEN WITHIN THE TIME PERMITTED IN LAW. THERE ARE NO OTHER FACTS OR CIRCUMSTANCES WHICH WILL WARRANT TAKING A LIBERAL V IEW AS THE GRIEVANCE OF THE ASSESSEE HAS ALREADY BEEN ADDRESSED IN THE CO FILED BY THE ASSESSEE AGAINST THE VERY SAME ORDER OF THE CIT(A) AGAINST W HICH THE PRESENT APPEAL HAS BEEN FILED. WE THEREFORE REFUSE TO CONDONE THE DELAY IN FILING THE APPEAL AS THERE IS NO REASONABLE OR SUFFICIENT CAUS E MADE OUT FOR FILING THE APPEAL BELATEDLY. 53. IN THE RESULT, APPEAL BY THE ASSESSE IS DISMISS ED. ITA NO. 1026/BANG/2014 54. THIS IS AN APPEAL BY THE REVENUE AGAINST THE OR DER DATED 18.4.2014 OF THE CIT(A), LTU, BANGALORE. THIS APPEAL ARISES OUT OF ASSESSMENT OF THE TOTAL INCOME OF THE ASSESSEE FOR AY 2005-06 UNDER S EC.147 OF THE ACT. 55. THE ONLY GROUND RAISED BY THE REVENUE IN ITS AP PEAL IS WITH REGARD TO THE ORDER OF THE CIT(A) IN HOLDING THAT SOFTWARE EX PENDITURE INCURRED BY THE ASSESSEE WAS REVENUE IN NATURE AND THEREFORE SHOULD BE ALLOWED AS DEDUCTION IN COMPUTING INCOME FROM BUSINESS OF THE ASSESSEE. THE CONTENTION OF THE LEARNED DR BEFORE US WAS THAT THE AO HAS COME TO THE CONCLUSION THAT THE EXPENDITURE IN QUESTION WAS CAP ITAL IN NATURE FOR THE IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 35 OF 36 REASON THAT THE ASSESSEE DID NOT PRODUCE THE RELEVA NT EVIDENCE TO SHOW THAT THE SOFTWARE IN QUESTION WAS NON EXCLUSIVE NON TRANSFERABLE LICENSED SOFTWARE. WITHOUT DISLODGING THIS FINDING OF THE AO, THE CIT(A) HAS COME TO A CONCLUSION THAT THE SOFTWARE EXPENDITURE WAS REVE NUE IN NATURE. 56. AT THE TIME OF HEARING, THE BENCH EXPRESSED THE VIEW THAT THERE WAS MERIT IN THE CONTENTION OF THE LEARNED DR BECAUSE I N PARAGRAPH 10.2 THE CIT(A) HAS NOT DISLODGED THE FACTUAL FINDING OF THE AO AND HAS MERELY PROCEEDED TO RELY ON JUDICIAL PRONOUNCEMENTS. THOU GH THERE IS A FINDING THAT SOFTWARE IN QUESTION WAS OPERATING SOFTWARE, T HERE IS NO REFERENCE TO THE BASIS ON WHICH SUCH A FINDING WAS GIVEN. THERE FORE, IT WOULD BE JUST AND PROPER TO SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND REMAND FOR FRESH CONSIDERATION OF THE ISSUE, AS TO WHETHER THE SOFTWARE EXPENDITURE WHICH WAS CLAIMED AS DEDUCTION WAS CAPITAL OR REVEN UE IN NATURE. THE ASSESSEE IS DIRECTED TO PLACE ALL THE RELEVANT EVID ENCE BEFORE THE AO TO SHOW THE EXPENDITURE WAS REVENUE EXPENDITURE. THE AO WILL CONSIDER THE SAME AND DECIDE THE ISSUE IN THE LIGHT OF THE VARIO US JUDICIAL PRONOUNCEMENTS ON THE ISSUE INCLUDING THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF IBM INDIA LTD. 290 ITR 183 (KARN) . THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PU RPOSE. 57. IN THE RESULT, IT(TP)A NO. 1838/BANG/13 AND CO 21/BANG/2016 [IN IT(TP)A 1838/BANG/13] ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. IT(TP)A NOS. 85 & 1026/B/14, 1838/B/13 & CO NO.21/B/16 PAGE 36 OF 36 IT(TP)A NO. 85/BANG/14 IS DISMISSED. ITA NO.1026/B ANG/14 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 13 TH DAY OF OCTOBER, 2017. SD/- SD/- ( JASON P. BOAZ ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER ENCL: ANNEXURE-I BANGALORE, DATED, THE 13 TH OCTOBER, 2017. / D ESAI S MURTHY / COPY TO: 1. ASSESSEE 2. REVENUE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.
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