ION Trading India Private Limited, New Delhi V. Income Tax Officer, New Delhi

ITA 1035/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97949 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 09-09-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 20-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: MANOJ PARDASANI
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Onus to prove
• Section: 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I - 1 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.1035/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S. ION TRADING INDIA PRIVATE LTD., VS. ITO, WARD 12(4), A-136, DEFENCE COLONY, NEW DELHI. NEW DELHI (PAN : AAECA4325R) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MANOJ PARDASANI, CA REVENUE BY : SHRI AMRENDRA KUMAR, CIT DR DATE OF HEARING : 09.09.2015 DATE OF PRONOUNCEMENT : 07.12.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS APPEAL ARISES FROM AN ORDER PASSED BY INCOME TAX OFFICER, WARD 12(4), NEW DELHI DATED 21.01.2015 U/S 144C(13)/143(3) OF THE ACT IN PURSUANCE TO DIRECTIONS OF THE DRP ITA NO.1035/DEL./2015 2 DATED 14.11.2014 U/S 144C(5) OF THE ACT AND RELATES TO AS SESSMENT YEAR 2010-11. 2. THE GROUNDS RAISED BY THE APPELLANT IN THIS APPEAL ARE AS UNDER: 1. ON THE FACTS AND IN LAW, THE LEARNED INCOME TA X OFFICER, WARD 12(4), NEW DELHI (LD. AO) ERRED IN PASSING T HE IMPUGNED ASSESSMENT ORDER DATED 21 JANUARY 2015 PURSUANT TO THE DIRECTIONS OF THE HONBLE DISPUTE RESOLUTION PANEL (HONBLE D RP) AND COMPUTING THE TOTAL INCOME OF THE APPELLANT FOR ASS ESSMENT YEAR (AY) 2010-11 AT RS. 30,678,470 AS AGAINST THE RET URNED INCOME OF RS. 353,440, THEREBY MAKING AN ADJUSTMENT OF RS. 30,325,034 TO THE OFFICER-1 (2)VALUE OF THE INTERNATIONAL TRAN SACTION OF PROVISION OF COMPUTER SOFTWARE DEVELOPMENT SERVICES BY THE APPELLANT TO ITS ASSOCIATES ENTERPRISES (AES). 2. ON FACTS AND IN LAW, THE LD. AO ERRED IN MAKING A REFERENCE TO THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TA X, TRANSFER PRICING OFFICER-1 (2), NEW DELHI (LD. TPO), INTER ALIA, SINCE HE HAS NOT RECORDED AN OPINION THAT ANY OF THE CONDITI ONS IN SECTION 92C(3) OF THE INCOME TAX ACT, 1961 (THE ACT), WER E SATISFIED IN THE INSTANT CASE. ACCORDINGLY, THE ORDER PASSED BY THE TPO IS WITHOUT JURISDICTION. 3. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. TPO ERRED IN NOT DEMONSTRATING THAT THE MOTIVE OF THE APPELLANT WAS TO SHIFT PROFITS OUTSIDE INDIA BY MAN IPULATING THE PRICES CHARGED IN ITS INTERNATIONAL TRANSACTIONS, W HICH IS A PRE- REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UNDER TH E PROVISIONS OF CHAPTER X OF THE ACT. 4. ON FACTS AND IN LAW, THE LD. TPO/LD. AO ERRED IN CONDUCTING AND THE HONBLE DRP FURTHER ERRED IN ALL OWING A FRESH BENCHMARKING ANALYSIS USING NON CONTEMPORANEOUS D ATA AND SUBSTITUTING THE APPELLANTS ANALYSIS WITH THE FRES H BENCHMARKING ANALYSIS ON HIS OWN CONJECTURES AND SURMISES. ITA NO.1035/DEL./2015 3 5. ON FACTS AND IN LAW, THE LD. TPO/LD. AO AND HON BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RULE 10B(2) OF INCOME TAX RULES, 1962 (THE RULES) BY INTRODUCING NEW COMPAN IES WITHOUT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFOR MED, ASSETS EMPLOYED AND RISKS ASSUMED BY SUCH COMPANIES VIS-- VIS THE APPELLANT, THEREBY RESORTING TO UNSUBSTANTIATED SEL ECTION OF COMPARABLES. 6. ON THE FACTS AND IN LAW, THE HONBLE DRP VIOLATE D THE PROVISIONS OF RULE 10B(2) OF THE RULES BY REJECTING CG-VAK SOFTWARE & EXPORTS LIMITED, A COMPARABLE COMPANY SE LECTED BY THE APPELLANT IN THE TP DOCUMENTATION BY MODIFYING THE FILTER OF EMPLOYEE COST BEING LESS THAN 25% OF TURNOVER AS PR OPOSED BY THE LD. TPO TO EMPLOYEE COST OF LESS THAN 75% OF TURNOV ER; AND FURTHER ERRED IN INCORRECTLY COMPUTING THE FILTER R ATIO AT LESS THAN 75% INSTEAD OF CORRECT RATIO OF 79.69% OF TURNOVER. 7. ON THE FACTS AND IN LAW, THE LD. AO/LD. TPO AND THE HONBLE DRP ERRED, VIOLATING PROVISIONS OF RULE 10B (2) BY CONSIDERING E-INFOCHIPS BANGALORE LIMITED AS A COMP ARABLE TO THE APPELLANT. 8. ON THE FACTS AND IN LAW, THE LD. AO/LD. TPO AND THE HONBLE DRP ERRED, VIOLATING PROVISIONS OF RULE 10B (2) BY CONSIDERING INFINITE DATA SYSTEM PRIVATE LIMITED AS A COMPARABLE TO THE APPELLANT. 9. ON THE FACTS AND IN LAW, THE LD. AO/LD. TPO AND THE HONBLE DRP ERRED, VIOLATING PROVISIONS OF RULE 10B (2) BY CONSIDERING INFOSYS TECHNOLOGIES LIMITED AS A COMPA RABLE TO THE APPELLANT. 10. ON THE FACTS AND IN LAW, THE LD. AO/LD. TPO AND THE HONBLE DRP ERRED, VIOLATING PROVISIONS OF RULE 10B (2) BY CONSIDERING PERSISTENT SYSTEMS LIMITED AS A COMPARA BLE TO THE APPELLANT. 11. ON THE FACTS AND IN LAW, THE LD. AO/LD. TPO AND THE HONBLE DRP ERRED, VIOLATING PROVISIONS OF RULE 10B (2) BY CONSIDERING SASKEN COMMUNICATIONS TECHNOLOGIES LIMI TED AS A COMPARABLE TO THE APPELLANT. ITA NO.1035/DEL./2015 4 12. ON THE FACTS AND IN LAW, THE LD. AO/LD. TPO AND THE HONBLE DRP ERRED, VIOLATING PROVISIONS OF RULE 10B (2) BY CONSIDERING THIRDWARE SOLUTIONS LIMITED AS A COMPAR ABLE TO THE APPELLANT. 13. ON THE FACTS AND IN LAW, THE LD. AO/LD. TPO AND THE HONBLE DRP ERRED, VIOLATING PROVISIONS OF RULE 10B (2) BY CONSIDERING WIPRO TECHNOLOGY SERVICES LIMITED AS A COMPARABLE TO THE APPELLANT. 14. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AN D THE HONBLE DRP ERRED IN CONTRAVENING PROVISIONS OF RUL E 10B(1)(E)(I) BY CONSIDERING THE UNUTILIZED RENT AND MAINTENANCE EXPENSES AS EXPENSES INCURRED IN RELATION TO THE IN TERNATIONAL TRANSACTION OF THE PROVISION OF SOFTWARE DEVELOPMEN T SERVICES. 15. ON THE FACTS AND IN LAW, THE LD. TPO/LD. AO AND THE HONBLE DRP GROSSLY ERRED IN NOT ALLOWING THE RISK ADJUSTMENT UNDER RULE 10B(1)(E)(III) AND RULE 10B(3) TO ACCOUN T FOR DIFFERENCES IN THE RISK PROFILE OF THE COMPARABLE C OMPANIES VIS-- VIS THE APPELLANT. 16. ON THE FACTS AND IN LAW, THE LD. AO/LD. TPO AND THE HONBLE DRP ERRED IN NOT GRANTING THE BENEFIT OF REDUCTION/VARIATION OF 5 PERCENT FROM THE ARITHMETI C MEAN WHILE DETERMINING THE ARMS LENGTH PRICE TO THE APPELLANT AS PER THE PROVISO TO SECTION 92C(2) OF THE ACT. 17. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE, THE LD. AO ERRED IN LEVYING TAX AT THE RATE OF 40% ON THE ASSE SSED INCOME VIS- -VIS APPLICABLE TAX RATE OF 30%, GIVEN THE FACT TH AT THE APPELLANT IS A DOMESTIC COMPANY INCORPORATED UNDER THE COMPAN IES ACT, 1956. 18. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. AO ERRED IN COMPUTING INTEREST UNDER SECTION 234B O F THE ACT. 19. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, LD. AO ERRED IN DEMANDING AN AMOUNT OF RS. 162,976 IN RELA TION TO TAX REFUNDED EARLIER AS THIS AMOUNT WAS NEVER REFUNDED AND NOT RECEIVED BY THE APPELLANT. ITA NO.1035/DEL./2015 5 20. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 234A AND 234D OF THE ACT. 21. ON THE FACTS AND IN LAW, THE LD. AO ERRED IN IN ITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 3. GROUNDS 1 TO 15 RELATE TO ADJUSTMENT OF RS. 3,03,25,0 34/- TO THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PRO VISION OF SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE APPELLANT COMP ANY TO ITS HOLDING COMPANY M/S ION TRADING UK LTD. 4. THE FACTUAL MATRIX AS EMANATING FROM THE MATERIAL ON REC ORD IS THAT THE APPELLANT COMPANY IS A WHOLLY OWNED SUBSIDIARY COMPAN Y OF M/S ION TRADING UK LTD. IT IS ENGAGED IN THE BUSINESS OF PROVIDING COMPUTER SOFTWARE DEVELOPMENT SERVICES TO ITS AE O N A CAPTIVE BASIS. IN THE INSTANT ASSESSMENT YEAR, THE APPELLAN T FURNISHED A RETURN OF INCOME ON 11.10.2010 DECLARING AN INCOME OF RS. 3,53,440/-. DURING THE YEAR THE APPELLANT HAD ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISE (AE): SR. NO. TYPE OF INTERNATIONAL TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION 1 COMPUTER SOFTWARE DEVELOPMENT SERVICES TRANSACTIONAL NET MARGIN METHOD 21,82,68,570 ITA NO.1035/DEL./2015 6 5. IN VIEW OF THE ABOVE, AO MADE A REFERENCE U/S 92CA( 1) TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARM'S LEN GTH PRICE (ALP). IN COURSE OF PROCEEDING BEFORE TPO, APPELLA NT SUBMITTED A TP STUDY REPORT. IN THE TP ANALYSIS, APPELLANT SELE CTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROP RIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION AND FOR THE PURPOSE OF APPLYING TNMM, THE ASSESSEE COMPANY IDENTIFIED ITSELF AS THE TESTED PARTY. FURTHER, OPERATING PROFIT TO OPERATING COS T (OP/OC) WAS CONSIDERED AS THE PROFIT LEVEL INDICATOR (PLI) TO DEMONSTRATE ITS ADHERENCE TO THE ARMS LENGTH PROVISIONS CO NTAINED IN THE ACT. THE PLI OF THE ASSESSEE WAS CALCULATED AT 9.37%; WHEREAS AVERAGE PLI OF THE COMPARABLES WAS ARRIVED AT 6.48%. THE CALCULATION OF THE ASSESSEES MARGIN IS AS UNDER: PARTICULARS AS ON MARCH 2010 (AMT. IN RS.) OPERATING INCOME 22,29,50,213 OPERATING COST 20,38,55,648 OPERATING PROFIT 1,90,94,565 OP/OC 9.37% IT IS TO BE NOTED HERE THAT WHILE CALCULATING THE OPERATING COST OF RS.20,38,55,648/-, A DEDUCTION OF RS. 82,18,899/- ON ACCOUNT OF ITA NO.1035/DEL./2015 7 ADJUSTMENT OF COST RELATING TO RENT AND MAINTENANCE CHARGES F OR UNDER-UTILIZATION OF CAPACITY WAS CLAIMED BY THE APPELLANT. 6. FURTHERMORE, THE APPELLANT HAD COMPUTED THE PLI OF THE COMPARABLES BY SELECTING A SET OF 6 COMPARABLES AND THE M ARGIN OF THESE WAS SHOWN TO BE 6.48% USING THE CURRENT YEAR DAT A AS UNDER: SR. NO. NAME OF THE COMPANY MARGIN FOR FY 2009- 10 1 CG- VAK SOFTWARE & EXPORTS LTD. -12.48% 2 QUINTEGRA SOLUTIONS LTD. -9.42% 3 R S SOFTWARE (INDIA) LTD. 9.29% 4 TATA ELXSI LTD. 20.60% 5 THINKSOFT GLOBAL SERVICES LTD. 11.82% 6 ZYLOG SYSTEMS LIMITED 19.08% AVERAGE 6.48% 7. THE TPO VIDE ITS ORDER DATED 22.01.2014, HAS OBSERVED THAT APPELLANT HAS SELECTED 6 COMPANIES AS COMPARABLES ON THE BA SIS OF THE SEARCH CONDUCTED IN THE PUBLIC DATA BASE PROWESS ONLY. FURTHER, TPO APPLIED THE FOLLOWING FILTERS: I) COMPANIES WITH RPT GREATER THAN 25% OF REVENUE SHOU LD HAVE BEEN EXCLUDED; II) COMPANIES WHO HAVE LESS THAN 75% OF THE REVENUE AS EXPORT SALES SHOULD HAVE BEEN EXCLUDED; AND III) COMPANIES WHOSE EMPLOYEE COST TO REVENUE RATIO IS LESS THAN 25% SHOULD HAVE BEEN EXCLUDED. ITA NO.1035/DEL./2015 8 8. PURSUANT TO THE ABOVE, FINAL COMPARABLES OUT OF COMPARAB LES SELECTED BY THE APPELLANT ARE AS UNDER: SR. NO. NAME OF THE COMPANY REMARKS I) QUINTEGRA SOLUTIONS LTD. THIS IS A SUITABLE COMPARABLE BUT THE PLI (OP/OC) IS 0.75% AS ON 31 ST MARCH, 2010 AND NOT -9.42%. II) R S SOFTWARE (INDIA) LTD. THIS IS A SUITABLE COMPARABLE, HENCE ACCEPTED. III) TATA ELXSI LTD. THIS IS A SUITABLE COMPARABLE, HENCE ACCEPTED. IV) THINKSOFT GLOBAL SERVICES LTD. THIS IS A SUITABLE COMPARABLE, HENCE ACCEPTED. V) ZYLOG SYSTEMS LIMITED THIS IS A SUITABLE COMPARABLE, HENCE ACCEPTED. 9. AS A FURTHER STEP, BASED ON THE ABOVE STATED FILTERS, SE ARCH ON THE CAPITALINE DATABASE WAS ALSO CONDUCTED BY THE TPO AND FU RTHER 18 COMPARABLES WERE IDENTIFIED AND INCLUDED IN THE FINAL LIST O F COMPARABLES. AS A RESULT, 23 COMPARABLES WERE SELECTED A ND, THE MARGIN COMPUTED AS UNDER:: SR. NO. NAME OF THE COMPANY OP/OC WITH FOREX 1 ACCELYA KALE SOLUTIONS LTD. 12.51% 2 AKSHAY SOFTWARE TECHNOLOGIES LTD. -3.91% 3 ALLGO EMBEDDED 8.72% 4 CTIL LTD. 18.22% 5 E-INFOCHIPS BANGALORE LTD. 71.38% 6 EVOKE TECH 18.20% 7 E-ZEST SOLUTIONS 18.38% 8 INFINITE DATA SYSTEM PVT. LTD. 72.67% 9 INFOSYS LIMITED 45.47% 10 KULIZA TECHNOLOGIES PRIVATE LIMITED 12.94% ITA NO.1035/DEL./2015 9 11 LARSEN & TOUBRO INFOTECH LTD. 19.76% 12 MINDTREE LIMITED (SEGMENT) 20.47% 13 PERSISTENT SYSTEMS LIMITED 30.15% 14 PERSISTENT SYSTEMS & SOLUTIONS LIMITED 11.37% 15 QUINTEGRA SOLUTIONS LTD. -8.83% 16 RS SOFTWARE (INDIA) LTD. 9.07% 17 SASKEN COMMUNICATION TECHNOLOGIES LTD. 22.65% 18 SONATA SOFTWARE 32.16% 19 TATA ELXSI LTD. 17.08% 20 THINKSOFT GLOBAL SERVICES LTD. 11.22% 21 THIRDWARE SOLUTIONS LIMITED 29.05% 22 WIPRO TECHNOLOGY SERVICES LIMITED (FORMERLY CITI TECHNOLOGIES) 63.27% 23 ZYLOG SYSTEMS LIMITED 19.08% AVERAGE 23.99% 10. ON THE AFORESAID BASIS, THE TPO MADE AN ADJUSTMENT OF RS. 4,46,82,661/- IN THE MANNER AS UNDER: SR. NO. PARTICULARS AMOUNT (RS.) 1. TOTAL OPERATING COST 21,20,74,547* 2. ARMS LENGTH PRICE AT A MARGIN OF 23.99% 26,29,51,231 3. TRANSFER PRICE RECEIVED BY THE TAXPAYER 21,82,68,570 4. SHORTFALL OF TRANSFER PRICE FROM ALP 4,46,82,661 *BY DISALLOWING DEDUCTION OF RS. 82,18,889/- ON AC COUNT OF ADJUSTMENT OF COST RELATING TO REND AND MAINTENANCE CHARGES FO R UNDER UTILIZATION OF CAPACITY. 11. DRP VIDE DIRECTIONS DATED 14.11.2014 OUT OF THE SET OF 23 COMPARABLES ADOPTED BY THE TPO DIRECTED FOR EXCLUSION OF ONE OF THE COMPARABLES, NAMELY, SONATA SOFTWARE LTD. AND ALSO TO GR ANT ITA NO.1035/DEL./2015 10 WORKING CAPITAL ADJUSTMENT. AFTER GIVING THE EFFECT OF THE AFO RESAID DIRECTIONS, MARGIN OF COMPARABLES WAS RE-DETERMINED AT 17.2 2% ON A SET OF 22 COMPARABLES IN THE MANNER AS UNDER: SR. NO. NAME OF THE COMPANY OP/OC WITH FOREX 1 ACCELYA KALE SOLUTIONS LTD. 7.18% 2 AKSHAY SOFTWARE TECHNOLOGIES LTD. -6.83% 3 ALLGO EMBEDDED 2.18% 4 CTIL LTD. 7.47% 5 E-INFOCHIPS BANGALORE LTD. 61.40% 6 EVOKE TECH 14.60% 7 E-ZEST SOLUTIONS 12.75% 8 INFINITE DATA SYSTEM PVT. LTD. 64.96% 9 INFOSYS LIMITED 39.83% 10 KULIZA TECHNOLOGIES PRIVATE LIMITED 7.71% 11 LARSEN & TOUBRO INFOTECH LTD. 15.51% 12 MINDTREE LIMITED (SEGMENT) 14.46% 13 PERSISTENT SYSTEMS LIMITED 4.80% 14 PERSISTENT SYSTEMS & SOLUTIONS LIMITED 24.70% 15 QUINTEGRA SOLUTIONS LTD. -23.63% 16 RS SOFTWARE (INDIA) LTD. 5.68% 17 SASKEN COMMUNICATION TECHNOLOGIES LTD. 18.32% 18 TATA ELXSI LTD. 12.66% 19 THINKSOFT GLOBAL SERVICES LTD. 4.53% 20 THIRDWARE SOLUTIONS LIMITED 22.88% 21 WIPRO TECHNOLOGY SERVICES LIMITED (FORMERLY CITI TECHNOLOGIES) 56.61% 22 ZYLOG SYSTEMS LIMITED 11.03% AVERAGE 17.22% 12. THE ASSESSING OFFICER ACCORDINGLY PASSED AN ORDER U NDER SECTION 144C(13)/143(3) OF THE ACT DETERMINING THE ADJUSTMEN T AT RS.3,03,25,034/- AND AS SUCH, INCOME OF THE APPELLANT WA S FINALLY ITA NO.1035/DEL./2015 11 ASSESSED AT RS.3,06,78,474/-. THE SAID ADJUSTMENT HAS BEEN COMPUTED IN THE MANNER HEREUNDER: SR. NO. PARTICULARS AMOUNT (RS.) 1. OPERATIONAL COST 21,20,74,547 2. ARMS LENGTH PRICE AT A MARGIN OF 17.22% 24,85,93,784 3. TRANSFER PRICE RECEIVED BY THE TAXPAYER 21,82,68,570 4. 105% OF INTERNATIONAL TRANSACTION 22,91,82,188 5. PROPOSED ADJUSTMENT U/S 92CA 3,03,25,034 13. BEFORE US THE LEARNED COUNSEL FOR THE APPELLANT MADE O RAL ARGUMENTS AND ALSO FILED WRITTEN SUBMISSIONS. BOTH DURING THE COURSE OF ORAL ARGUMENTS AND IN WRITTEN SUBMISSIONS, NO SPE CIFIC SUBMISSION HAVE BEEN MADE VIZ-A-VIZ GROUNDS 1 TO 5 OF G ROUNDS OF APPEAL. IT HAS BEEN CONTENDED THAT ION TRADING IS ENGAGE D IN RENDERING GENERIC, REPETITIVE SOFTWARE DEVELOPMENT SERVICES TO ITS AE-ION TRADING UK LIMITED AND IS THEREFORE CHARACTERIZED A S A CAPTIVE OR LOW-RISK SERVICE PROVIDER, COMPENSATED ON A FIXE D FEE BASIS. IT WAS FURTHER SUBMITTED THAT THE TPO/DRP/AO HAVE ERRED IN MAKING AN ADJUSTMENT OF RS. 3,03,25,034/- TO THE VALUE OF THE INTERNATIONAL TRANSACTION OF PROVISION OF COMPUTER SOFTWARE DEVELOPMENT SERVICES BY THE APPELLANT TO ITS AE. IN SUPPORT OF THE ITA NO.1035/DEL./2015 12 ABOVE SUBMISSION, IT HAS PRAYED FOR INCLUSION OF THE COMPAR ABLE M/S CG-VAK SOFTWARE AND EXPORTS LIMITED (SEGMENTAL) AND EXCLUS ION OF (I) M/S E-INFOCHIPS BANGALORE LTD., (II) M/S INFINITE DATA SY STEM (P) LTD. (III) M/S INFOSYS LTD., (IV) M/S PERSISTENT SYSTEMS LTD. , (V) M/S SASKEN COMMUNICATION TECHNOLOGIES LTD. (VI) M/S THIRDWARE SOLUTIONS LIMITED AND (VII) M/S WIPRO TECHNOLOGIES SERVICES LIMITED. IN THE FINAL SET OF COMPARABLES. APART FROM THE ABO VE, IT WAS ALSO PRAYED THAT AO/TPO/DRP ERRED IN CONTRAVENING PROVISI ON OF RULE 10B(1)(E)(I) BY CONSIDERING THE UNUTILIZED RENT AND MAINTENANCE EXPENSES AS EXPENSES INCURRED IN RELATION TO THE INTERNATIONAL TRANSACTION OF THE PROVISION OF SOFTWARE DEVELOPME NT SERVICES. IT WAS ALSO SUBMITTED THAT THE AUTHORITIES BELOW HAVE GROSSLY ERRED IN NOT ALLOWING THE RISK ADJUSTMENT UNDER RULE 10B(1)(E)(III) AND RULE 10B(3) TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE COMPARABLE COMPANIES VIS-A-VIS THE APPELLANT. THE LEARNED DR HAS SUPPORTED THE ORDERS OF DRP/TPO/AO AND CONTENDED THAT ADJUSTMENT MADE SHOULD BE SUSTAINED AND, NO INTERFERENCE IS WARRANTED. ITA NO.1035/DEL./2015 13 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PLACED ON RECORD. THE FIRST AND FOREMOST SUBSTAN TIVE CONTENTION RAISED BY THE LEARNED COUNSEL VIS-A-VIS GROUND 6 OF GROUNDS OF APPEAL IS THAT DRP VIOLATED THE PROVISIONS OF RULE 10B(2) OF THE RULES BY REJECTING CG-VAK SOFTWARE EXPORTS LIMITED, A COMPARABLE COMPANY SELECTED BY THE APPELLANT IN THE TP DOCUMENTATION BY MODIFYING THE FILTER OF EMPLOYEE COST BEING LE SS THAN 25% OF TURNOVER AS PROPOSED BY THE LD. TPO TO EMPLOYE E COST OF LESS THAN 75% OF TURNOVER AND FURTHER ERRED IN INCORRE CTLY COMPUTING THE FILTER RATIO AT LESS THAN 75% INSTEAD OF CORRECT RA TIO OF 79.69% OF TURNOVER. THE TPO HAD REJECTED THE ABOVE COM PARABLE BY HOLDING AS UNDER: REJECTION OF CG-VAK AS A COMPARABLE BY THE UNDERSI GNED IS VALID FOR THE REASONS EXPLAINED IN THE SHOW CAUSE N OTICE. FURTHER, THE ASSESSEE HAS NOT SUBMITTED ANY DETAIL TO JUSTIF Y THAT EACH ONE OF THE IDENTIFIED FILTERS ARE SATISFIED IN THIS CASE. SINCE THE ASSESSEE COMPANY HAS FAILED TO DISCHARGE ITS ONUS, THE UNDER SIGNED IS CONSTRAINED, TO REJECT THE SAID COMPANY AS COMPARAB LE. 15. IT IS SEEN THAT THE REASONS MENTIONED IN THE SHOW CAUSE NOTICE VIS--VIS THE SAID COMPARABLE WAS THAT THE FINANCIALS DO NOT REFLECT THE DETAILS OF RELATED PARTY TRANSACTION AND THE OTHER IMPORTAN T FILTERS ITA NO.1035/DEL./2015 14 WHICH HAVE BEEN IGNORED BY THE ASSESSEE FROM THE FINAL LIS T OF COMPARABLE COMPANIES. 16. BEFORE THE DRP THE APPELLANT CONTENDED AS UNDER: CG-VAK SOFTWARE & EXPORTS LTD. WAS INCORPORATED IN 1995. THE COMPANY SPECIALIZES IN CONSULTING SERVICES AND OFFSHORE SOFTWARE DEVELOPMENT. IT IS ENGAGED IN PROVIDING O UTSOURCED SOFTWARE PRODUCT SERVICES (PRODUCT LIFECYCLE, PRODU CT MAINTENANCE, PRODUCT MIGRATION, PRODUCT TESTING, TECH WRITING/DO CUMENTATION); CUSTOM SOFTWARE SERVICES (E-COMMERCIE APPLICATION, WEBSITE DESIGN, CLIENT SERVICER APPLICATION); TESTING SERVI CES; AND PROFESSIONAL SERVICES. THE COMPANY HAS THREE BUSIN ESS SEGMENTS NAMELY SOFTWARE SERVICES; BPO SERVICES AND TRAINING . THE SOFTWARE SERVICES SEGMENT HAS BEEN CONSIDERED FOR T HE PURPOSE OF OUR ANALYSIS. FURTHER, IT IS SUBMITTED THAT CG-VAK SOFTWARE & EXP ORTS LTD. DOES NOT FALL THE 25% RELATED PARTY FILTER APPLIED BY THE LEARNED TPO. A WORKING OF THE SAME WAS PROVIDED TO THE TPO VIDE SUBMISSION DATED 15.1.2014 AND HAS BEEN PROVIDED BE LOW BASED ON THE DETAILS AVAILABLE IN THE ANNUAL REPORT FOR F Y 2010-11: THE DETAILED COMPUTATION OF THE RELATED PARTY PERCE NTAGE IS AS UNDER: NATURE OF RELATED PARTY TRANSACTION AMOUNT (IN INR) PURCHASE OF ASSETS 27,07,672 INTEREST RECEIPTS 7,28,390 INTEREST BPO 10,979 SALARY 33,00,000 RENT 13,20,000 INTEREST PAID ON FD 4,36,429 TOTAL RELATED PARTY TRANSACTIONS (A) 85,03,470 TOTAL INCOME AS PER ANNUAL REPORT (B) 6,19,81,460 RPT AS A % OF SALES (A/B) 13.72% ITA NO.1035/DEL./2015 15 17. HOWEVER THE DRP UPHELD THE EXCLUSION ON THE FOLLOWING BASIS: HAVING CONSIDERED THE ABOVE AND THE MATERIAL PLACE D ON RECORD, WE ARE OF THE OPINION THAT THE SAID COMPANY DOES NO T SATISFY THE FILTER APPLIED BY THE TPO OF EMPLOYEE COST LESS THA N 75% OF TURNOVER AND THEREFORE THE SAME CANNOT BE TAKEN AS COMPARABLE. IN VIEW OF THE ABOVE, ACTION OF THE TPO IS UPHELD. 18. BEFORE US IT WAS SUBMITTED THAT DRP INCORRECTLY APPLIED EMPLOYEE COST FILTER WHICH WAS NEVER PROPOSED BY THE TPO. IT WAS SUBMITTED IN THE PROFIT AND LOSS ACCOUNT, CG-VAK HAS REPORTED CERTAIN COST OF SERVICES, HOWEVER, THE BREAKUP OF THE SAME IS NOT KNOWN (TO ASCERTAIN WHETHER THE SAME INCLUDES ANY EMPLOYEE COST OR NOT). IT WAS FURTHER SUBMITTED THAT FROM THE ANNUAL REPO RT FOR FINANCIAL YEAR 2010-11 AND FINANCIAL YEAR 2011-12, IT IS CAN BE SEEN THAT THE EMPLOYEE COST WAS DISCLOSED AS COST OF SERVICES. THE RELEVANT EXTRACTS FROM THE ANNUAL REPORT IS GIVEN BELOW: PROFIT & LOSS STATEMENT FOR THE YEAR ENDED 31 ST MARCH 2012 NOTE NO. 31.3.2012 (RS.) 31.3.2011 (RS.) III EXPENDITURE : EMPLOYEE BENEFIT EXPENSES 3.03 5,33,80,368 4,73,01,685 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.3.201 1 SCHEDUL E 31.3.2011 (RS.) 31.3.2010 (RS.) EXPENDITURES COST OF SERVICES 135 4,73,01,685 4,73,59,185 ITA NO.1035/DEL./2015 16 19. IT WAS ALSO SUBMITTED THAT THE COMPANY HAS FOLLOWED DI FFERENT NOMENCLATURE IN THE FY 2009-10, WHEREIN THE EMPLOYEE COST IS SHOWN AS COST OF SERVICES. THE RELEVANT EXTRACT FROM TH E ANNUAL REPORT OF THE COMPANY IS REPRODUCED BELOW: SCHEDULE 31.3.2010 (RS.) 31.3.2009 (RS,) INCOME: INCOME FROM SOFTWARE DEVELOPMENT, SERVICES & PRODUCTS - OVERSEAS 12 5,74,87,587 7,16,87,088 - DOMESTIC 13 19,40,663 6,52,093 5,94,28,250 7,23,39,181 OTHER INCOME 14 25,53,210 72,26,721 6,19,81,460 7,95,65,902 EXPENDITURE: COST OF SERVICES 15 4,73,59,185 5,88,05,074 ADMINISTRATIVE EXPENSES 16 1,32,67,939 1,04,53,160 INTEREST 17 19,16,993 30,47,952 DEPRECIATION 63,65,886 59,23,335 6,89,10,003 7,72,29,521 NET PROFIT/(LOSS) FOR THE YEAR (69,28,543) 23,36,381 20. IT WAS SUBMITTED THAT SINCE THE COST OF SERVICE/EMPLOYEE COST (I.E. RS.4,73,59,185) IS 79.69% OF TURNOVER (I.E. RS.5 ,94,28,250) IT SATISFIES THE FILTER APPLIED BY THE HONBLE DRP AND THUS, CG-VAK SHOULD BE ACCEPTED AS A COMPARABLE TO THE APPELLANT. RELIANC E WAS PLACED ON THE FOLLOWING JUDGMENTS: ITA NO.1035/DEL./2015 17 - LAM RESEARCH INDIA (P) LTD. VS. DCIT [TS 203-ITAT -2015 (BANG)] - YODLEE INFOTECH (P) LD. VS. ITO [TS-465-ITAT-2014 (BANG)] - CISCO SYSTEM INDIA (P) LTD. VS. DCIT [TS-246-ITAT -2014 (BANG)] 21. WE HAVE CONSIDERED THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE AND HAVE CONSIDERED THE ARGUMENT OF THE LD. DR THAT THE ASSESSEE IS NOT PRODUCING ANY PRODUCT, HOWEVER, WE FIND THAT CG- VAK SOFTWARE AND EXPORTS LIMITED IS NOT ONLY INTO COMPUTER SOFTWARE BUT IT IS A PRODUCT MANUFACTURER TOO. SINCE ASSE SSEE IS NOT INTO PRODUCT MANUFACTURING AND THE SEGMENTAL DETAILS CANNOT BE BIFURCATED FROM THE FINANCIAL DETAILS, WE FIND THAT THE ASSESSEE AND THE CG-VAK SOFTWARE AND EXPORTS LIMITED ARE NOT COMPARABLES . THEREFORE, WE ARE INCLINED TO UPHOLD THE ORDERS OF THE A UTHORITIES BELOW IN REJECTING THIS COMPANY AS A COMPARABLE. WE DIRECT ACCORDINGLY. 22. NOW TAKING UP GROUNDS NO.7 TO 13 OF GROUNDS OF APP EAL, THE LEARNED COUNSEL MADE HIS SUBMISSION FOR EXCLUSION OF COMPA RABLES SELECTED BY TPO. WE WILL NOW CONSIDER THE MERITS OF THE ARGU MENTS OF THE PARTIES WITH REGARD TO SELECTION OF THE THESE COMPANIES AS COMPARABLES BY TPO. ITA NO.1035/DEL./2015 18 23. E-INFOCHIPS BANGALORE LIMITED 24. THE LEARNED AR CONTENDED THAT DRP/TPO HAVE ERRED BOTH IN LAW AND ON FACTS BY CONSIDERING E-INFOCHIPS BANGALORE LIM ITED AS A COMPARABLE TO THE APPELLANT. THE LEARNED COUNSEL FOR THE AS SESSEE CONTENDED THAT THE DRP, HOWEVER HAS IGNORED THE SUBMISSION S MADE BY THE ASSESSEE AND UPHELD THE ACTION OF THE ASSESS ING OFFICER/TPO TO INCLUDE M/S. E-INFOCHIPS BANGALORE LTD. IN THE LIS T OF FINAL COMPARABLES. THE APPELLANT HAS OBJECTED TO THE INCLUS ION OF THE COMPARABLE ON THE GROUND OF FUNCTIONALLY NOT COMPARABLE AND, ABNORMAL DEVIATION IN PROFIT MARGIN. THE APPELLANT SUBMITTED TH AT THE FUNCTIONAL PROFILE OF M/S. E-INFOCHIPS BANGALORE LTD. IS D IFFERENT FROM THAT OF THE ASSESSEE COMPANY. IN THIS REGARD, HE PO INTED OUT THAT THE SAID COMPANY IS A PRODUCT ENGINEERING SERVICES PRO VIDER HAVING A TECHNICAL EXPERTISE IN SOFTWARE, FIRMWARE, HARDWARE , FPGPA, ASIC, QUALITY TESTING ETC. ITS KEY FOCUS AREA IN PRODU CT ENGINEERING SERVICES INCLUDES CONCEPTUALIZATION, ARCHITECTURE AN D DESIGN, SUSTENANCE AND SUPPORT, DEVELOPMENT, PRODUCTION AND QUALITY TESTING. FURTHER IT FOCUSES ON WIDE ARRAY OF INDUSTRIES INCLUDING AEROSPACE, SECURITY AND SURVEILLANCE, SEMICONDUCTO R, ITA NO.1035/DEL./2015 19 MEDICAL DEVICES, CONSUMER DEVICES, SOFTWARE AND RETAIL & E - COMMERCE. IT ALSO HAS ITS IPS AND ACCELERATORS IN SOFTWARE D OMAIN NAMELY AUTOMATED QUALITY ASSURANCE TESTBORG (AQUA TESTBOR G) AND THE SAME WAS SUPPORTED BY THE SCREENSHOT TAKEN FROM THE COMPANYS WEBSITE ( HTTPS://WWW.EINFOCHIPS.COM/SOFTWARE-IPS ). HE THUS CONTENDED THAT M/S. E-INFOCHIPS BANGALORE LTD. THUS IS LIA BLE TO BE EXCLUDED, BESIDES DUE TO FUNCTIONAL DIFFERENCES, EVEN O N THE BASIS OF INSUFFICIENT INFORMATION AVAILABLE IN THE PUBLIC DOMAIN FROM THE LIST OF COMPARABLES. 25. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT MATERIAL ON RECORD. THE CONTENTION RAISED BY THE LEAR NED COUNSEL FOR THE ASSESSEE IS THAT THE ENTITY M/S. E-INFOCHIPS BANGALORE LTD. TAKEN BY THE ASSESSING OFFICER/TPO AS COMPAR ABLE SHOULD BE EXCLUDED FROM THE LIST OF FINAL COMPARABLES FOR TH E PURPOSES OF TRANSFER PRICING ANALYSIS ON THE GROUND OF FUNCTIONAL DIFFERENCES AS WELL AS ON THE GROUND OF INSUFFICIENT INFORM ATION AVAILABLE IN RESPECT OF THE SAID ENTITY IN PUBLIC DOMAIN. IN ORDE R TO SUPPORT AND SUBSTANTIATE HIS CONTENTION OF FUNCTIONAL DISSIMILA RITY, THE LEARNED COUNSEL FOR THE ASSESSEE HAS HEAVILY RELIED ON THE ITA NO.1035/DEL./2015 20 CONTENTS OF THE WEBSITE WWW.EINFOCHIP.COM., THE PRINT OUT OF RELEVANT PORTION OF WHICH IS PLACED ON RECORD BEFORE US. O N THE BASIS OF THE SAID CONTENTS, HE HAS MADE AN ATTEMPT TO POINT OUT THAT M/S. E-INFOCHIPS BANGALORE LTD. IS FUNCTIONALLY DIFFERENT FORM THE ASSESSEE COMPANY IN AS MUCH AS THE SAID COMPANY IS MAINLY INTO DEVELOPMENT OF NEW PRODUCTS WHEREAS THE ASSESSEE COMPAN Y IS MAINLY PROVIDING SOFTWARE DEVELOPMENT SERVICES. IT IS SEEN THA T REFERENCE TO THE WEBSITE OF COMPANY IS NOT OF MUCH HELP AS IT MAY NOT HAVE INFORMATION WHICH PERTAINED TO FY 2009-10. IT IS PO SSIBLE THAT THESE SERVICES WERE PROVIDED BY E-INFOCHIPS LTD. INSTE AD OF E- INFOCHIPS BANGALORE LTD. ALSO, IT IS POSSIBLE THAT PROVISION O F THESE SERVICES IS A SUBSEQUENT DEVELOPMENT. FURTHER, MANY OF THES E SERVICES LIKE SOFTWARE, FPGA, ASIC, QA & TESTING REQUIRE SOFTWARE ENGINEERS ONLY. HENCE, THE SERVICES AND PERSONN EL REQUIRED ARE NOT ENTIRELY DIFFERENT. THE REFERENCE MADE BY THE TAXP AYER IS IN RESPECT OF WEBSITE OF E-INFOCHIPS LTD. AND NOT THAT OF E-IN FOCHIPS BANGALORE LTD. AFTER HAVING GONE THROUGH THE WEBSITE WWW.EINFOCHIP.COM ., WE HOWEVER FIND THAT THE SAME IS IN RESPECT OF THE ENTIRE GROUP OF E-INFOCHIPS, OF WHICH M/S. E-INFOCHIPS ITA NO.1035/DEL./2015 21 BANGALORE LTD. IS ONLY A PART. THE FUNCTIONAL PROFILE GIVEN ON THE SAID WEBSITE THUS IS THAT OF THE ENTIRE GROUP AND NOT JUST OF THE M/S. E-INFOCHIPS BANGALORE LTD. THE CONTENT OF THE SAID WEBSITE IN OUR OPINION, THEREFORE, CANNOT BE RELIED UPON TO ASCERTAIN THE FU NCTIONAL PROFILE OF M/S. E-INFOCHIPS BANGALORE LTD., ESPECIALLY WHE N THE NATURE OF FUNCTIONS/SERVICES GIVEN THERE ARE MATERIALLY DIFFER ENT FROM THE FUNCTIONS/SERVICES STATED TO BE RENDERED BY M/S. E-INFO CHIPS BANGALORE LTD. IN ITS ANNUAL REPORT. EVEN THE DETAILS OF SERVIC ES STATED TO BE RENDERED BY M/S. E-INFOCHIPS BANGALORE LTD. AT DIFFERENT PLACES IN ITS ANNUAL REPORT ARE VERY SKETCHY AND IT IS VERY DIFFICULT TO ASCERTAIN FROM THE SAME, EXACT NATURE OF SERVICE S RENDERED BY THE SAID ENTITY. 26. A PERUSAL OF THE ORDER OF THE DRP/TPO HOWEVER, SHOWS THAT NO FINDING/OBSERVATION HAS BEEN RECORDED BY THEM ON THE GROUND OF FUNCTIONAL DIFFERENCES AS WELL AS INSUFFICIENT DATA/INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. IT IS ALSO WORTHWHILE TO NOTE HERE THAT THE PROFIT MARGIN OF M/S. E-INFOCHIPS BANGALORE LTD. IS ABNORMALLY HIGH AND ALTHOUGH THE SAID ENTITY CANNOT BE EXCLUDED FROM THE LIST OF FINAL COMPARABLES MERELY ON THE GROUND OF HIGH OR ITA NO.1035/DEL./2015 22 ABNORMAL PROFITS, AS HELD BY IN THE CASE OF MAERSK GLOBAL C ENTRES (INDIA) (P.) LTD. V. ASSTT. CIT 147 ITD 83 AND BY JURISDIC TIONAL HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA ) (P) LTD. IT SHOULD TRIGGER FURTHER INVESTIGATION IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. AS FURTHER HELD BY THE SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) (P.) LTD. (SUPRA), SUCH INVESTIGATIONS SHOULD BE TO ASCERTAIN AS TO WHE THER EARNING OF SUPER PROFITS REFLECTS NORMAL BUSINESS CONDITION O R WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITION PREVAILING IN THE RELEVANT YEAR. THE PROFIT MARGIN OF SUCH ENTITY IN THE IMMEDI ATELY PRECEDING YEAR(S) MAY ALSO BE TAKEN INTO CONSIDERATION AND THE FAR ANALYSIS IN SUCH CASES MAY BE REVIEWED TO ENSURE THAT THE POTENTIAL COMPARABLE EARNING HIGHER PROFIT SATISFIES THE COMPARABILITY CONDITION. SINCE THIS EXERCISE HAS NOT BEEN DONE EITHER BY TH E AO/TPO OR THE DRP IN THE PRESENT CASE, WE ARE OF THE VIEW TH AT THE MATTER SHOULD GO BACK TO THE ASSESSING OFFICER/TPO FOR FRES H CONSIDERATION. THIS, IN OUR OPINION, WILL ALSO TAKE CARE OF TH E GRIEVANCE OF THE ASSESSEE RELATING TO THE LACK OF SUFFICIENT INFORMATION IN RESPECT OF M/S. E-INFOCHIPS BANGALORE LTD. AV AILABLE ITA NO.1035/DEL./2015 23 IN THE PUBLIC DOMAIN IN AS MUCH AS THE TPO CAN OBTAIN SUCH INFORMATION IN THE FORM OF RELEVANT SCHEDULES OF THE PROFIT & LOSS ACCOUNT OF THE SAID ENTITY AS WELL AS THE SEGMENTAL DETAILS, IF A NY, DIRECTLY FROM THE SAID ENTITY. 27. FOLLOWING THE ABOVE JUDGMENTS, WE THEREFORE, SET ASIDE THE IMPUGNED ORDER OF THE ASSESSING OFFICER AS WELL AS THE DIRECTION GIVEN BY THE DRP ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER/TPO FOR DECIDING THE SAME AFRESH A FTER GIVING THE ASSESSEE PROPER AND SUFFICIENT OPPORTUNITY OF BEING HEA RD. 28. INFINITE DATA SYSTEM PRIVATE LIMITED 29. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER CONTEND ED THAT THE DRP, HAS COMPLETELY IGNORED THE SUBMISSIONS MADE BY THE AS SESSEE AND UPHELD THE ACTION OF THE ASSESSING OFFICER/TPO TO INCLUDE INFINITE DATA SYSTEM PRIVATE LIMITED IN THE LIST OF FINAL COMPARABLES. THE APPELLANT OBJECTED TO THE INCLUSION OF THE COMPARABLE BEFORE TPO ON THE FOLLOWING GROUNDS: I) FUNCTIONALLY NOT COMPARABLE II) ABNORMAL/SUPERNORMAL PROFITS III) SIGNIFICANT INTANGIBLES IV) ACCEPTED AS A NON COMPARABLE IN PREVIOUS YEAR BY TP O ITA NO.1035/DEL./2015 24 30. THE DRP UPHELD THE ORDER OF TPO AS UNDER: THE TPO HAS DEALT THE ISSUE IN PARA 8,4, OF THE OR DER AND HELD THAT THE COMPANY IS PROVIDING SOFTWARE DEVELOPMENT SERVI CES WHICH IS PARIMATERIAL WITH THE FUNCTIONS CARRIED ON BY THE A SSESSEE. HAVING CONSIDERED THE MATERIAL PLACED ON RECORD WE FIND TH AT THE COMPANY IS MAINLY INVOLVED IN SOFTWARE SERVICES. THEREFORE WE HOLD THAT TPO IS RIGHT IN INCLUDING THE SAME FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 31. BEFORE US THE LEARNED AR OF THE APPELLANT HAS CONTEND ED AS UNDER: SUBSTANTIALLY RELATED PARTY TRANSACTIONS - COMPANYS OPERATIONS RELATES TO PROVIDING SERVICES TO ITS SOLE CUSTOMER-FUJITSU SERVICES LTD. (SUBSTANTIALLY RELATED) WHICH CAN BE SUBSTANTIATED AS PER THE NEWS LETTER AND ANN UAL REPORT. AS PER THE NEWS LETTER FUJITSU ENTERED INTO A BOT (BUILT, OPERATE & TRANSF ER) CONTRACT WITH INFINITE COMPUTER SOLUTIONS (INDIA) LTD. HOLDI NG COMPANY OF INFINITE FOR DEVELOPMENT OF OFFSHORE CENTRE IN INDI A. THE CONTRACT WAS SIGNED IN JULY 2008 FOR PERIOD OF THREE YEARS. INFINITE HAVE BEEN SET UP AS A SEPARATE ENTITY FOR BOT THE INDIAN OFFSHORE CENTRE OF FUJUITSU (SOURCE-HTTP:/WWW.INDIANOFLINE.COM/ARTICLE/NEWSINFI TE-COMPUTER- SOLUTIONS-INDIA-SUFFESSFULL COMPLETES-BOT-CONTRACT- WITH FUJITSU- SERVICES-4020499021_1.HTML) AS PER THE ANNUAL REPORT THE COMPANYS OPERATIONS ARE PREDOMINANTLY RELATED TO PROVIDING SOFTWARE TECHNICAL CONSULTANCY SERVICES TO US SOLE CUSTOMER FUJITSU SERVICES LTD. ITA NO.1035/DEL./2015 25 (REFER PAGE 689 OF THE PAPER BOOK VOLUME II) B) FUNCTIONALLY NOT COMPARABLE AS PER ANNUAL REPORT S(CHEDULE 17) IT PROVIDES SOLUTIONS THAT ENCOMPASS TECHNICAL CONS ULTING, DESIGN AND DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEM IN TEGRATION, IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEME NT SERVICES. AS PER ANNUAL REPORT (REVENUE RECOGNITION SECTION) IT GENERATES REVENUE PRIMARILY FROM TECHNICAL SUPPO RT & INFRASTRUCTURE MANAGEMENT SERVICES (REFER PAGE 685 OF PAPER BOOK VOLUME II) -SEGMENTAL INFORMATION NOT AVAILABLE FOR SOFTWARE D ESIGN AND DEVELOPMENT. -FURTHER, THE FINANCIAL STATE THAT MORE THAN 10% OF THE ADMINISTRATION EXPENSES & OTHER EXPENSES ARE TOWARD S PROJECT IMPLEMENTATION EXPENSES, WHICH ARE DIFFERENT FROM S OFTWARE DEVELOPMENT (REFER PAGE 683 OF THE PAPER BOOK VOLUME II) C) LD. TPOS APPROACH OF USING DATA FROM INFINITES WEBSITE AS ON THE CURRENT DATE AND DRAWING COMPARISON THEREOF WITH FY 2009010 I.E. 4 YEARS PRIOR TO THE CURRENT YEAR IS I NCORRECT. (REFER PAGE 70 OF THE PAPER BOOK FOR TPOS OBSERVAT ION) 32. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ORDER OF THE LOWER AUTHORITIES REGARDING THE INCLUSION OF THE SAME IN THE LIST OF COMPARABLES. HE REITERATED THE CONTENTS OF THE TPO'S ORDER W HICH STATES AS UNDER: ITA NO.1035/DEL./2015 26 IT IS SEEN THAT INFINITE IS PROVIDING FOLLOWING SE RVICES:- TECHNICAL CONSULTING, DESIGN & DEVELOPMENT OF SOFTWARE, MAINT ENANCE, SYSTEMS INTEGRATION, IMPLEMENTATION, TESTING AND IN FRASTRUCTURE MANAGEMENT SERVICES. THESE SERVICES EXCEPT INFRASTR UCTURE MANAGEMENT SERVICES HAVE ALSO BEEN REFEREED AS TEC HNICAL SUPPORT SERVICES IN REVENUE RECOGNITION PORTION AND AS SO FTWARE TECHNICAL CONSULTANCY SERVICES IN SEGMENT REPORTIN G PORTION OF THE ANNUAL REPORT. ALL THESE SERVICES ARE IN THE NA TURE OF SOFTWARE DEVELOPMENT SERVICES. .IT CAN BE SEEN THAT ALL THE SERVICES HAVE BEEN R EFERRED PRIMARILY AS IT SERVICES. THE OBJECTION OF THE ASSE SSEE IS MAINLY ON VERTICALS OF THE COMPANY. UNDER TNMM THE STANDAR DS OF COMPARABILITY ARE RELATIVELY RELAXED AND ONLY BROAD SIMILARITY OF FUNCTIONS IS REQUIRED. IT IS FURTHER STATED THAT TN MM CAN BE USED WITH DATA FOR COMPANIES THAT ARE BROADLY COMPARABLE TO THE TAXPAYER, AS FUNCTIONAL DIFFERENCES ARE LIKELY TO B E REFLECTED IN THE LEVEL OF OPERATING EXPENSES INCURRED BY EACH COMPAN Y. THESE EXPENSES ARE DEDUCTED IN THE CALCULATION OF OPERATI NG PROFIT AND ARE ACCORDINGLY TAKEN ACCOUNT OF IN THE COMPARABILI TY ANALYSIS. IT IS FURTHER SEEN THAT THIS COMPANY HAS BEEN CHOSEN A S IT IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT, WHICH IS BROADLY SIMILAR TO THE SERVICES BEING PROVIDED BY THE ASSESSEE. SINCE, THE ASSESSEE IS ALSO PROVIDING SIMILAR SERVICES, SO THIS COMPANY CAN BE USED AS A COMPARABLE. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED TH E FACTS AND MATERIALS ON RECORD. AFTER CONSIDERING THE SUBMISSIONS, WE ARE IN AGREEMENT WITH THE CONCLUSION OF TPO/DRP HELD THAT INFINITE IS PROVIDING FOLLOWING SERVICES: TECHNICAL CONSULTING, DESIGN & DEVELOPMENT OF SOFTWARE MAINTENANCE, SYSTEMS INTEGRATION, IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES . THESE SERVICES EXCEPT INFRASTRUCTURE MANAGEMENT SERVICES H AVE ITA NO.1035/DEL./2015 27 BEEN REFERRED AS TECHNICAL SUPPORT SERVICES IN REVENUE RECOGNITION PORTION AND AS SOFTWARE TECHNICAL CONSULTANCY SERVICES IN S EGMENT REPORTING PORTION OF THE ANNUAL REPORT AND THUS SERVICES ARE IN THE NATURE OF SOFTWARE DEVELOPMENT SERVICES AND HAVING REGARD TO THE ABOVE IT IS CONCLUDED THAT THE INFINITE IS A FUNCTIONALLY SIMILAR COMPANY TO THE APPELLANT COMPANY. 34. WE HAVE GONE THROUGH THE ANNUAL REPORT OF THE APPELLA NT COMPANY. THE SAID COMPANY PROVIDES SOLUTIONS THAT ENCOM PASS TECHNICAL CONSULTING, DESIGN AND DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEM INTEGRATION, IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES WHICH IS FUNCTIONALLY SIMILAR TO THE APPELLANT COMPANY. THERE IS NO RPT TRANSACTION OF THE COMPARABLE AND TRANSACTION WITH A SOLE CUSTOMER DOES NOT CON STITUTE A RPT TRANSACTION. 35. HAVING REGARD TO THE ABOVE AND FOR THE REASONS STATE D ABOVE, WE UPHOLD THE CONCLUSION OF TPO FOR INCLUSION OF INFINITE DATA SYSTEM PRIVATE LIMITED SINCE IT IS COMPARABLE TO APPELLANT COMPANY. ITA NO.1035/DEL./2015 28 36. INFOSYS LIMITED 37. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT TH E DRP HAS COMPLETELY IGNORED THE SUBMISSIONS MADE BY THE ASSESSE E AND UPHELD THE ACTION OF THE ASSESSING OFFICER/TPO TO INCLUDE INFO SYS LIMITED IN THE LIST OF FINAL COMPARABLES AND SUBMITTED THAT INFOS YS LIMITED CANNOT BE CONSIDERED AS A COMPARABLE AS IT IS ENGAG ED IN DIVERSIFIED ACTIVITIES AS IT HAS WIDE SPECTRUM OF SERVICES SUCH AS BUSINESS SERVICES, TECHNOLOGY SERVICES AND OUTSOURCING SER VICES. IT WAS CONTENDED THAT INFOSYS LIMITED IS ENGAGED IN SIGNIFICAN T RESEARCH & DEVELOPMENT (R&D) THAT HAS LED TO CREATION OF SIGNIFICANT INTELLECTUAL PROPERTY. IT HAS BEEN FURTHER POINTED O UT THAT AS PER ANNUAL REPORT OF FY 2009-10, THE COMPANY CLAIMS ITS ELF AS THE MOST REPUTED AND ADMIRED COMPANY IN INDIA (PG. 18 OF DIRECTORS REPORT). FURTHER ASSESSEE CONTENDED THAT INFOSY S LIMITED HAS A TURNOVER OF RS 21,140 CRORES, WHICH IS EVEN MORE THAN 968 TIMES OF THAT OF THE ASSESSEE. THE LD. COUNSEL FOR THE APPELLANT HAS PLACED RELIANCE UPON THE VARIOUS DECISIONS, IN WHICH INFO SYS LIMITED HAS BEEN REJECTED AS A COMPARABLE CONSIDERING THE SAME NOT ITA NO.1035/DEL./2015 29 ONLY AS A GIANT COMPANY BUT IS ALSO ENGAGED IN DEVELOPMENT OF VARIOUS NICHE PRODUCTS, WHICH ARE AS FOLLOWS: I) 35 TAXMANN.COM 421 (HYD) INTOTO SOFTWARE INDIA PVT. LTD. VS. ASST. CIT II) 40 TAXMANN.COM 173 (HYD) NTT DATA INDIA ENTERPRISE APPLICATION SERVICES (P.) LTD. VS. ASST. CIT III) 38 TAXMANN.COM 306 (DEL) AGNITY INDIA TECHNOLOGIES (P.) LTD. VS. DCIT IV) 38 TAXMANN.COM 166 (HYD) VIRTUSA (INDIA) (P.) LTD. VS. DCIT 38. THE TPO HAS OBSERVED AS UNDER: THE BRAND NAME MAY HAVE HELPED INFOSYS IN INCREASI NG ITS NUMBER OF CLIENTS & RETENTION OF EXISTING CLIENTS A ND THIS AN INCREASE IN ITS MARKET SHARE, BUT IT HAS NOT NECESS ARILY RESULTED IN BETTER PROFIT MARGINS. BRAND MAY BRING MORE REVENUE S BUT NOT NECESSARILY HIGHER MARGINS.A BRAND MAY GENERATE RE VENUE BUT WITH A COST COMPENSATING ANY EXTRA BENEFIT, IF ANY DERIVED FROM SUCH EFFORTS. ASSESSEE HAD OBJECTED ON THE HIGH TURNOVER OF THIS COMPARABLE COMPANY WHICH IS ALREADY DISCUSSED IN THE ORDER. HO WEVER, TPO HAS MADE AN ANALYSIS IN RESPECT OF INFLUENCE OF SCA LE OF OPERATIONS ON THE PROFITABILITY IN THE CASE OF INFOSYS TECHNOL OGIES LTD. FROM THE YEAR 1997 TO 2012 BASED ON THE INFORMATION EXTR ACTED FROM THE CAPITALINE PLUS DATABASE, WHICH SHOWS THAT THERE IS NO POSITIVE CORRELATION BETWEEN THE TWO ALTHOUGH THE TURNOVER OF THE COMPANY HAS INCREASED 183 TIMES FROM THE YEAR 1997 TO 2012, THE OPERATING MARGINS HAS MORE OR LESS REMAINED THE SAM E I.E. RANGING BETWEEN 35% TO 51%.... HENCE, THE TAXPAYERS ARGUME NT THAT COMPANIES HAVING LARGE SCALE OF OPERATIONS HAVE BET TER MARGINS IS WITHOUT ANY BASIS, AND IS THEREFORE LIABLE FOR REJE CTION. ITA NO.1035/DEL./2015 30 39. THE DRP SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE FINAL LIST OF COMPARABLES BY HOLDING AS UNDER: THE TPO HAS DEALT THE ISSUE IN PARA 8.5 OF THE ORD ER AND HELD THAT THE COMPANY IS PROVIDING SOFTWARE DEVELOPMENT SERVI CES WHICH IS PARIMATERIA WITH THE FUNCTIONS CARRIED ON BY THE AS SESSEE. HAVING CONSIDERED THE MATERIAL PLACED ON RECORD WE FIND THAT THE COMPANY IS MAINLY INVOLVED IN SOFTWARE SERVICES THEREFORE, WE HOLD THAT TPO IS RIGHT IN INCLUDING T HE SAME FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 40. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND PERUSED THE MATERIAL PLACED ON RECORD. THE SAID COMPARABLE WAS RECEN TLY CONSIDERED BY THE DECISION OF ITAT IN THE CASE OF MENTOR G RAPHICS (NOIDA) (P) LTD. 60 TAXMANN.COM 164 WHEREIN FOLLOWING THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF AGNITY INDIA TECHNOLOGIES VS. ITO ITA NO. 3856/2010 (DEL), IT WAS HE LD AS UNDER: 15. WE FIND THAT LD. CIT(A) AFTER CONSIDERING THE FACTS OF THE CASE AND THE SUBMISSION OF THE AR OBSERVED THAT WIT H REGARD TO INFOSYS TECHNOLOGIES LTD. IT WAS EVIDENT FROM TH E ANNUAL REPORT OF THE COMPANY THAT INFOSYS TECHNOLOGIES PRO VIDES MUCH WIDER RANGE OF SERVICES, PERFORMS EXTENSIVE FUNCTIO NS, UNDERTAKES DIVERSIFIED BUSINESS ACTIVITIES AND ASSUMES SIGNIFI CANT RISKS AS COMPARED TO ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDERS LIKE THE ASSESSEE. FURTHER, THE COMPANY UNDERTAKES SUBSTANTIAL R&D ACTIVITIES AND DERIVES MAJORITY OF ITS REVENUES THE SALE OF PROPRIETARY PRODUCTS UNLIKE THE ASSESSEE. ALSO, THE TURNOVER OF THE COMPANY IS SIGNIFICANTLY HIGHER THAN THAT OF THE AP PELLANT AND IN NO MANNER IS COMPARABLE TO THE SIZE/OPERATIONS OF T HE ASSESSEE. ITA NO.1035/DEL./2015 31 16. WE NOTE THAT ALL THE ABOVE FACTS HIGHLIGHT THAT INFOSYS TECHNOLOGIES LTD. IS A PRODUCT OWNER, UNDERTAKES SUBSTANTIAL ADVERTISING/SALES PROMOTION AND BRAND-B UILDING ACTIVITIES AND IS ENGAGED IN SIGNIFICANT R&D ACTIVI TIES, AND IS VERY HUGE IN SIZE/VOLUME AS COMPARED TO THE ASSESSEE. HE NCE, IT CANNOT BE SAID TO BE COMPARABLE WITH THE ASSESSEE. THE SAI D PROPOSITION HAS ALSO BEEN CONFIRMED BY DELHI TRIBUNAL IN AGNITY INDIA TECHNOLOGIES V. ITO [IT APPEAL NO.3856 (DELHI ) OF 2010] WHEREIN THE COORDINATE BENCH HELD AS FOLLOWS : 'VARIOUS ARGUMENTS, AS STATED EARLIER, WERE TAKEN B EFORE THE DRP WHICH INTER-ALIA INCLUDED REJECTION OF COMPARABLE C ASES; APPLICATION OF ARBITRARY FILTER OF WAGE TO SALES RA TIO; IGNORING THAT THE ASSESSEE IS A LIMITED RISK COMPANY; INCLUSION OF INFOSYS TECHNOLOGIES LTD.; AND INCLUSION OF SAT YAM COMPUTERS SERVICES LTD. IN SPITE OF THE FACT THAT ITS DATA IS NOT RELIABLE AS PUBLICLY KNOWN. ON THE BASIS OF THESE ARGUMENTS, TH E DRP EXCLUDED THE CASE OF SAT YAM COMPUTERS SERVICES LTD ., THEREBY REDUCING THE ARM'S LENGTH MARGIN TO 25.6%. IT IS AR GUED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., THE REASON BEING THAT THE LATTER IS GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHER PROFIT. ON THE OTHER HAND, THE ASSESSEE IS A CAPTIVE UNIT OF ITS PARENT COMPANY IN THE USA AND IT ASSUMES ONLY LIMITED CURRENCY RISK. HAVING CONSIDER ED THESE POINTS, WE ARE OF THE VIEW THAT THE CASE OF AFORESA ID INFOSYS AND THE ASSESSEE ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. OF THE TWO COMPANIES MENTIONED EARLIER IN THIS ORDER. THEREFORE, WE ARE OF THE VIEW THAT THIS CASE IS REQ UIRED TO BE EXCLUDED. ONCE THAT IS DONE, IT IS THE ACCEPTED POS ITION OF BOTH THE PARTIES THAT THE RESULTS OF THE ASSESSEE ARE IN LIN E WITH THE MEAN MARGIN OF COMPARABLE CASES EVEN IF NO ADJUSTMENT IS MADE ON ACCOUNT OF CAPITAL ETC. THEREFORE, IT IS HELD THAT NO ADJUSTMENT WAS REQUIRED TO BE MADE TO THE RESULTS DECLARED BY THE ASSESSEE COMPANY.' 11.5 THE AFORESAID ORDER WAS UPHELD BY THE HON'BLE DELHI HIGH COURT AFTER TAKING NOTE OF THE CHART AS GIVEN BELOW : ITA NO.1035/DEL./2015 32 BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. ASSESSEE RISK PROFILE OPERATE AS FULL- FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100 PERCENT SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES TURNOVER 20,264 CRORES 209.83 CRORES OWNERSHIP BRANDED/PROPRIETAR Y PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSY S CONNECT. ALSO THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) ONSITE V. OFFISHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E. SERVICES PERFORMED AT THE CUSTOMER'S LOCATION OVERSEAS). AND OFFSHORE (50.20 PER CENT) REFER P. 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E. REMOTELY FROM INDIA) EXPENDITURE ON RS. 80 CRORES RS. NIL (AS THE 1- ITA NO.1035/DEL./2015 33 ADVERTISING/SALES PROMOTION AND BRAND BUILDING PERCENT SERVICES ARE PROVIDED TO AES) EXPENDITURE ON RESEARCH AND DEVELOPMENT RS. 236 CRORES RS. NIL OTHER 100 PER CENT OFFSHORE (FROM INDIA) 11.6 ON THE BASIS OF THE ABOVE CHART, THE HON'BLE H IGH COURT AFFIRMED THE CONCLUSION THAT A CAPTIVE UNIT OF ACOMPARABLE COMPANY WHICH ASSUMED ONLY A LIMITED RI SK CANNOT BE COMPARED WITH A GIANT COMPANY IN THE AREA OF DEV ELOPMENT OF SOFTWARE WHO ASSUMES ALL TYPES OF RISKS LEADING TO HIGHER PROFITS. THE FACTS OF THE APPELLANT ARE AKIN AND THEREFORE, DO NOT WARRANT ANY DIFFERENT CONCLUSION. THE ASSESSEE IS ALSO CAPT IVE SERVICE PROVIDER TO ITS AE AND AS SUCH, M/S. INFOSYS LTD. I S NOT A VALID COMPARABLE WITH THE ASSESSEE 17. ACCORDINGLY, LD. CIT(A) PROPOSED TO EXCLUDE THI S COMPANY FROM COMPARABLE SET OF COMPANIES. THEREFORE, THE LD . CIT (A) HAS RIGHTLY ORDERED EXCLUSION OF THE INFOSYS TECHNOLOGI ES LTD. FROM THE COMPARABLE AND THIS IMPUGNED ORDER IS UPHELD. 41. HAVING REGARD TO THE ABOVE REGARD TO THE ABOVE JUDIC IAL PRONOUNCEMENT, WE HOLD THAT INFOSYS LIMITED CANNOT BE CONS IDERED AS COMPARABLE FOR THE PURPOSE OF BENCHMARKING INTERNATIONA L TRANSACTION OF THE ASSESSEE. 42. PERSISTENT SYSTEMS LIMITED 43. THE ASSESSEE HAS SOUGHT EXCLUSION OF THE AFORESAID COMPANY ON THE GROUND THAT THIS COMPANY IS A TECHNOLOGY COMPANY INTO SOFTWARE PRODUCT DEVELOPMENT SERVICES AND IS FOCUSED MAINLY ON ITA NO.1035/DEL./2015 34 THREE INDUSTRIES I.E. INFRASTRUCTURE & SYSTEMS, TELECOM & WI RELESS, LIFE SCIENCE AND HEALTHCARE, WHEREAS THE ASSESSEE IS OPERA TING IN FINANCE DOMAIN WHICH IS TOTALLY DIFFERENT. IT WAS FURTHER SUBM ITTED THAT ON ECONOMY OF SCALES, THE COMPANY PERSISTENT SYSTEMS LI MITED IS VERY LARGE IN COMPARISON WITH THAT OF THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THE COMPANY HAS REVENUE FROM SALE OF PRODUC TS AS WELL WITH THE SOFTWARE SERVICES. IT HAS BEEN SUBMITTED THAT SEGMENTAL BREAK OF SALES ON SALE OF PRODUCTS AND SERVICE S HAS NOT BEEN GIVEN BY THE COMPANY AS THE PRICING CONSEQUENTLY THE M ARGIN WOULD DIFFER THAT ON SALE OF PRODUCTS AND SALE OF SERVICES. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ACTION O F THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 44. THE TPO HAS HELD AS UNDER: THE COMPANY DOES HAVE SOME PRODUCTS BUT AS HAS BEE N BROUGHT OUT ABOVE, THE PRODUCT REVENUE (FROM IP LED BUSINES SES) ARE ONLY 7.2%. HENCE, THE COMPANY IS PREDOMINANTLY A SOFTWAR E SERVICE PROVIDER AND WILL BE TAKEN AS A COMPARABLE. UNDER T NMM, THE STANDARDS OF COMPARABILITY ARE RELATIVELY RELAXED A ND ONLY BROAD SIMILARITY OF FUNCTIONS IS REQUIRED. 45. THE DRP SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE FINAL LIST OF COMPARABLES BY HOLDING AS UNDER ITA NO.1035/DEL./2015 35 THE TPO HAS DEALT THE ISSUE IN PARA 8.6 OF THE ORD ER AND HELD THAT THE COMPANY IS PROVIDING SOFTWARE DEVELOPMENT SERVI CES WHICH IS PARAMATERIA WITH THE FUNCTIONS CARRIED ON BY THE AS SESSEE. HAVING CONSIDERED THE MATERIAL PLACED ON RECORD WE FIND THAT THE COMPANY IS MAINLY INVOLVED IN SOFTWARE SERVICES. THEREFORE, WE HOLD THAT TPO IS RIGHT IN INCLUDING T HE SAME FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 46. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FRO M THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICE S WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVICES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSEE, THE SEGMENTAL DETAILS ARE N OT GIVEN SEPARATELY. A COORDINATE BENCH IN THE CASE OF AGNITY I NDIA TECHNOLOGIES (P) LTD. VS. ITO 154 ITD 293 (DEL) REGARDING THE SAID COMPARABLE HAS HELD AS UNDER: 11. SO FAR AS EXCLUSION OF THREE COMPARABLES I.E. LARSEN AND TOURBO INFOTECH LTD., PERSISTENT SYSTEMS LTD. AND M INDTREE LTD., IT IS NOTED THAT BEFORE THE CIT(A) THE ASSESSEE CON TENDED THAT DURING THE FINANCIAL YEAR 2008-09, IT HAS A TURNOVE R OF APPROX. RS. 14.45 CRORES WHICH CANNOT BE COMPARED WITH CERTAIN COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES. SUPPORT WA S DRAWN FROM THE FOLLOWING DECISIONS : (A) DECISION OF ITAT IN THE CASE OF APPELLANT FOR A.Y. 2006-07 ITA NO. 3856/D/2010 A.Y. 2006-07; ITA NO.1035/DEL./2015 36 (B) GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. V. DY . CIT [2012] 20 TAXMANN.COM 715/53 SOT 159 (BANG.) (C) CENTILLIUM INDIA (P.) LTD. V. DY. CIT [2012] 23 TAXMANN.COM 34/53 SOT 145 (BANG.) (D) KODIAK NETWORKS (INDIA) (P.) LTD. V. ASSTT. CIT [20 12] 18 TAXMANN.COM 32/51 SOT 191 (BANG.) (E) ACTIS ADVISERS (P.) LTD. V. DY. CIT [IT APPEAL NO. 5277 (DELHI) OF 2011] 13. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. WE FIND THIS ISSUE IS NO LONGER RES-INTEGRA. THE HON'BLE HIGH COURT UPHOLDING THE DECISION OF TRIBUN AL IN THE CASE OF THE APPELLANT FOR A.Y. 2006-07 HAS HELD IN AN OR DER DATED 10.7.2013 IN ITA NO. 1204/2011 IN [CIT V. AGNITY IN DIA TECHNOLOGIES (P.) LTD. [2013] 36 TAXMANN.COM 289/219 TAXMAN 26 (DELHI) ] THAT A GIANT COMPANY IN THE AREA OF DEVELOPMENT O F SOFTWARE WHICH ASSUMED ALL RISKS LEADING TO HIGHER PROFITS IS NOT COMPARABLE WITH THE ASSESSEE WHICH WAS A CAPTIVE UN IT OF THE PARENT COMPANY AND ASSUMED ONLY A LIMITED RISK. THE HON'BLE HIGH CURT HAS HELD AS UNDER : '8. IT IS A COMMON CASE THAT SATYAM COMPUTER SERVIC ES LTD. SHOULD NOT BE TAKEN INTO CONSIDERATION. THE TRIBUNA L FOR VALID AND GOOD REASONS HAS POINTED OUT THAT INFOSYS TECHNOLOG IES LTD. CANNOT BE TAKEN AS A COMPARABLE IN THE PRESENT CASE . THIS LEAVES L&T INFOTECH LTD. WHICH GIVES US THE FIGURE OF 11.1 1%, WHICH IS LESS THAN THE FIGURE OF 17% MARGIN AS DECLARED BY T HE RESPONDENT- ASSESSEE. THIS IS THE FINDING RECORDED BY THE TRIBU NAL. THE TRIBUNAL IN THE IMPUGNED ORDER HAS ALSO OBSERVED THAT THE AG E HAD FURNISHED DETAILS OF WORKABLES IN RESPECT OF 23 COMPANIES AND THE MEAN OF THE COMPARABLES WORKED OUT TO 10%, AS AGAINST THE M ARGIN OF 17% SHOWN BY THE ASSESSEE. DETAILS OF THESE COMPANIES A RE MENTIONED IN PARA 5 OF THE IMPUGNED ORDER. 9. IN VIEW OF THE AFORESAID POSITION, WE DO NOT THINK THAT ANY SUBSTANTIAL QUES TION OF LAW ARISES FOR CONSIDERATION. THE APPEAL IS DISMISSED.' 16. WHEN CONSIDERING THE EXCLUSION OF PERSISTENT SY STEM LTD, WE FIND NO NEED TO INTERFERE IN THE ORDER OF THE LD CI T(A) BECAUSE IT ITA NO.1035/DEL./2015 37 IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCT; AND THIS COMPANY WAS EXCLUDED BY THE TRIBUNAL IN ASSESSMENT YEAR 200 6-2007, WHICH HAS BEEN UP HELD BY THE HON'BLE HIGH COURT, T HUS THE ISSUE ABOUT EXCLUSION OF PERSISTENT SYSTEM LTD, WHILE MAK ING TP ADJUSTMENTS IN IT'S CASE STANDS SETTLED IN VIEW OF THESE DECISIONS IN ITS OWN CASE. THEREFORE WE DO NOT FIND ANY NECESSIT Y TO INTERFERE THIS COMPANY'S EXCLUSION. 17. HAVING REGARD TO THE FACTUAL POSITION AND RESPE CTFULLY FOLLOWING THE JUDGMENT OF THE HON'BLE HIGH COURT WE PARTLY ALLOW THE GROUND RAISED BY THE REVENUE AND UPHOLD THE EXC LUSION OF PERSISTENT SYSTEM LTD, AND DIRECT INCLUSION OF LARS EN & TOUBRO INFOTECH LTD AND MIND TREE LTD. 47. SIMILAR VIEW HAS ALSO BEEN EXPRESSED IN THE CASE OF FIS ERV INDIA (P) LTD. VS. DCIT 60 TAXMANN.COM 345 (DEL), IT WAS HELD AS UNDER: 12.2 WE HAVE CONSIDERED THE RIVAL SUBMISSION AND P ERUSED THE MATERIAL ON RECORD. THE COUNSEL FOR THE ASSESSEE HA S CONTENDED THAT PERSISTENT SYSTEMS LTD. IS FUNCTIONALLY DIFFER ENT FROM THE ASSESSEE AS THE COMPANY IS INTO SOFTWARE DEVELOPMEN T SERVICES AS WELL AS SOFTWARE PRODUCTS UNLIKE THE ASSESSEE WHO I S A CAPTIVE SERVICE PROVIDER. MOREOVER, NO SEGMENTAL DETAILS AR E AVAILABLE IN THE ANNUAL REPORT. IT CAN BE THUS DERIVED THAT THE PRICES MAY HAVE BEEN INFLUENCED. THE RATIONALE OF APPLYING A RELATE D PARTY FILTER IS DEFENDED. 12.3 THE BANGALORE BENCH OF THE TRIBUNAL IN THE CAS E OF CSR INDIA (P.) LTD . V. ITO [2013] 31 TAXMANN.COM 265 , HAS HELD AS UNDER: '(I) TURNOVER FILTER 3.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE TPO HAD, WHILE SELECTING THE ABOVE 2 6 COMPARABLES, APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE BUT PREFERRED NOT TO APPLY ANY UPPER TURNOVER LIMIT. TH E SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR IN COMPARABILITY. THE ICAI TP ITA NO.1035/DEL./2015 38 GUIDANCE NOTE HAS OBSERVED THAT THE TRANSACTION ENT ERED INTO BY A RS.1000 CRORES COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS.10 CRORES COMPANY AND THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND RELAT ED ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. THE TPO'S RANGE HAD RESULTED IN SELECTION OF COMPANIES AS COMPARABLE SUCH AS INF OSYS WHICH WAS 277 TIMES BIGGER THAN THAT OF THE ASSESSEE. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. GENISYS I NTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT - ITA NO.1231/BAN G/2010 RELYING ON DUN AND BRADSTREET'S ANALYSIS HAD HELD T HAT TURNOVER RANGE OF RS.1 CRORE TO 200 CRORES IS APPROPRIATE. T HE SAID PROPOSITION HAS FOLLOWED BY THE EARLIER BENCHES OF THIS TRIBUNAL IN THE FOLLOWING CASES: (I) M/S. KODIAK NETWORKS (I) P VT. LTD. V. ACIT - ITA NO.1413/BANG/2010; (II) M/S GENE SIS MICROCHIP (I) PVT. LTD. DCIT - ITA NO.1254/BANG/201 0; (III) ELECTRONIC FOR IMAGING INDIA PVT. LTD - ITA NO.1171 /BANG/2010; & (IV) M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVA TE LTD . V. DCIT - ITA NO.1054/BANG/2011 DATED 23.11.2012. 3.3.1 IN THE CASE OF M/S.GENISYS INTEGRATING SYSTEM S (INDIA) PVT. LTD . V. DCIT (SUPRA ), RELYING ON DUN AND BRADSTRE ET', HAS OBSERVED AS UNDER: '9. .WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. T HIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIF YING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT S HOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A PO SITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE 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 ARE LOSS MAKING ARE EXCLUDED F ROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF C OMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REAS ONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT T HE TURNOVER ITA NO.1035/DEL./2015 39 FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PART ICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200 C RORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY.' 3.3.2 THE ABOVE VIEW HAS BEEN FOLLOWED IN THE RECEN T ORDER OF THE TRIBUNAL IN THE CASE OF TRILOGY E -BUSINESS (SUPRA ). THE RELEVANT FINDINGS OF THE TRIBUNAL ARE EXTRACTED AS UNDER: 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF L AW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DEC ISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOW N THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA I N CHOOSING THE COMPARABLES. THE ASSESSEE'S TURNOVER IS RS.47,46,66 ,638. IT WOULD THEREFORE FALL WITHIN THE CATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DO WN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVE R 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 C OMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ. TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYST EMS LTD. 848.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.2 7 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 3 43.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES' .. IN VIEW OF THE ABOVE SAID REASONING AND THE ORDERS OF THE BENCHES OF BANGALORE TRIBUNAL CITED SUPRA, THE FOLLOWING 8 COMPANIES WILL HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES SELECTED BY THE TPO, NAMELY: FLEXTRONICS SOFTWARE SYSTEMS LIMITED ; IGATE GLOBAL SOLUTIONS LIMITED; MINDTREE LIMITED; PER SISTENT SYSTEMS LIMITED; SASKEN COMMUNICATION TECHNOLOGIE S LIMITED; TATA ELXSI LIMITED; WIPRO LIMITED; & INFOSYS TECHNOLOGIES LIMITED. IT IS ORDERED ACCORDINGLY.' 12.4 FOLLOWING THE AFORESAID DECISION OF THE TRIBUN AL AND THE JUDGMENT OF HON'BLE HIGH COURT OF DELHI IN THE CASE OF AGINITY ITA NO.1035/DEL./2015 40 TECHNOLOGIES (SUPRA ) WE HOLD THAT PERSISTENT SYSTE MS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. 48. THEREFORE, FOLLOWING THE ABOVE JUDGMENTS WE HOLD THAT TH IS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FR OM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. 49. SASKEN COMMUNICATION TECHNOLOGIES LIMITED (SASKEN) 50. THE ASSESSEE HAS SOUGHT EXCLUSION OF THE AFORESAID COMPANY ON THE GROUND THAT THIS COMPANY HAS DIFFERENT BUSINESS MOD EL AND THERE IS PRESENCE OF INTANGIBLES. IT HAS ALSO SUBMITTED THAT, AS PER ANNUAL REPORT, THE COMPANY DERIVES REVENUE FROM SOFTWARE PRODUCTS, WHICH SUGGESTS THAT THE COMPANY IS A PRODUCT COM PANY UNLIKE THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT THE COMPANY HAS INVENTORIES AMOUNTING TO RS. 166.55 LAKHS AND BEING A SOFTWA RE SERVICE COMPANY, IT WAS ALSO PROVIDED THAT SHOULD NOT BE HO LDING ANY INVENTORY IN THE BOOKS OF ACCOUNTS. THE ASSESSEE ALS O CONTENDED THAT COMPANY IS ALSO ACTIVELY ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE ALSO FROM SALE OF SOFTWARE PRODUCTS, THERE WERE ALSO ITA NO.1035/DEL./2015 41 PECULIAR ECONOMIC CIRCUMSTANCES AS IT UNDERWENT RESTRUCTURIN G DURING THE YEAR WHICH INFLATED ITS PROFIT BY RS. 1,519.70 LAKH S IN ADDITION TO OTHER FACTORS AFFECTING ITS SALES AND MARGINS. FURTHE R, THE TURNOVER OF THE COMPANY IS MORE THAN 19 TIMES OF THE APP ELLANT. THE TPO HAS HELD AS UNDER: IT IS SEEN THAT THIS COST (CONTRACT STAFF COST) IS INSIGNIFICANT IN COMPARISON TO EMPLOYEE COST OF RS. 213.46 CR. ALL SOFTWARE COMPANIES HAVE SOFTWARE IN THEIR FIXE D ASSETS. IT IS ONLY WHEN IT IS SIGNIFICANT AND DEVELOPED BY THEM A ND IS BEING AMORTIZED ON SALE OF SOFTWARE PRODUCTS EXCEEDING 25 % OF TOTAL INCOME, IT CAN BE SAID TO BE RESULTING IN DIFFERENT INCOME WHICH CHANGES THE PROFILE FROM PURE SOFTWARE DEVELOPER TO A COMPANY ALSO SELLING PRODUCTS. IT IS FURTHER SEEN THAT THIS COMPANY HAS BEEN CHOSEN AS IT IS ENGAGED IN PROVIDING SOFTWARE DEVEL OPMENT, WHICH IS BROADLY SIMILAR TO THE SERVICE BEING PROVIDED BY THE ASSESSEE. SINCE, THE ASSESSEE IS ALSO PROVIDING SIMILAR SERVI CES, SO THIS COMPANY CAN BE USED AS A COMPARABLE. 51. THE DRP SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE FINAL LIST OF COMPARABLES BY HOLDING AS UNDER: THE TPO HAS DEALT THE ISSUE IN PARA 8.8 OF THE ORD ER AND HELD THAT THE COMPANY IS PROVIDING SOFTWARE DEVELOPMENT SERVI CES WHICH IS PARIMATERIA WITH THE FUNCTIONS CARRIED ON BY THE AS SESSEE. HAVING CONSIDERED THE MATERIAL PLACED ON RECORD WE FIND THAT THE COMPANY IS MAINLY INVOLVED IN SOFTWARE SERVICES. THEREFORE, WE HOLD THAT TPO IS RIGHT IN INCLUDING T HE SAME FOR THE PURPOSE OF COMPARABILITY ANALYSIS. ITA NO.1035/DEL./2015 42 52. WE HAVE CONSIDERED THE SUBMISSION AND PERUSED THE MA TERIAL PLACED ON RECORD. A COORDINATE BENCH OF TRIBUNAL IN THE C ASE OF TIBCO SOFTWARE (INDIA) (P) LTD. VS. DCIT ITA NO. 94/PN?2014 DATED 10.4.2015, IT WAS HELD AS UNDER: 32. BY WAY OF GROUND OF APPEAL NO.4.5, THE APPELLA NT HAS ASSAILED THE ACTION OF THE TPO IN EXCLUDING SASKEN COMMUNICATIONS TECHNOLOGIES LTD. FROM THE FINAL SET OF COMPARABLES. AS PER THE DISCUSSION IN PARA 11(VIII) OF THE ORDER OF THE TPO, IT IS NOTICED THAT THE SAID CONCERN HAS BE EN EXCLUDED ON THE GROUND THAT DURING THE YEAR UNDER CONSIDERATION IT HAS UNDERTAKEN BUSINESS RESTRUCTURING. THE LD. REPRESEN TATIVE ALSO POINTED OUT THAT IN THE SHOW-CAUSE NOTICE DATED 31. 10.2012 ISSUED BY THE TPO ANOTHER REASON HAS BEEN ADVANCED WHICH I S TO THE EFFECT THAT THE SAID CONCERN FAILS THE EXPORT TURNO VER FILTER OF 75% OF THE TOTAL TURNOVER. 53. HAVING REGARD TO THE ABOVE JUDGMENT AND SINCE IT IS EVID ENT FROM RECORD THAT SASKEN COMMUNICATION TECHNOLOGIES LIMITED IS FUNCTIONALLY NOT SIMILAR TO THE APPELLANT AND ALSO HAVING GONE THROUGH RESTRICTING IN THE INSTANT YEAR, IT CANNOT BE TREATED AS COMPARABLE TO ASSESSEE. WE ORDER ACCORDINGLY. 54. THIRDWARE SOLUTIONS LIMITED (THIRDWARE) 55. THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF THE SAID COMPARABLE ON THE FOLLOWING GROUND THAT THE AFORESAID COMPAN Y IS FOCUSED ON SOLUTIONS AND SERVICES IN THE ENTERPRISE ALLOCATION SPACE ITA NO.1035/DEL./2015 43 (EAS) IN THE TRANSACTION, ANALYTICS, AND COLLABORATIVE SOLUTION LAYERS. THIS INCLUDES ERP, CUSTOMER RELATIONSHIP MANAGEMENT (CRM), SCM, BI/DW, BPM ETC. THIRDWARE OFFERS APPLICATION IMPLEMENTATION SERVICES (AIS), APPLICATION DEVELOPMENT SERVICES (ADS) AND APPLICATION MANAGEMENT-SUPPORT SERVICES (AMS). I T WAS FURTHER SUBMITTED THAT IT IS ENGAGED IN DEVELOPMENT OF OWN SOFTWARE-PAPA AND HAS INCURRED EXPENSES TOWARDS IMPORT OF SOFTWARE SERVICE, EVIDENCING OUTSOURCING OF SOFTWARE SERVIC ES UNLIKE THE APPLICANT COMPANY. THE TPO HAS NOT PROVIDED ANY REASON FOR HOLDING THIRDWARE AS A COMPANY COMPARABLE TO THE APPELLANT WHEREAS, THE DRP WHILE UPHOLDING THIRDWARE AS COMPARABLE TO THE APPELLANT COMPANY OBSERVED AS UNDER: THE AUDITED REPORT OF THE COMPANY REVEALS THAT COM PANY IS MAINLY ENGAGED IN SOFTWARE DEVELOPMENT. THE MAJORIT Y OF INCOME IS FROM SOFTWARE DEVELOPMENT. HAVING CONSIDERED THE MATERIAL PLACED ON RECORD WE FIND THAT THE COMPANY IS MAINLY INVOLVED IN SOFTWARE SERVICES. THEREFORE, WE HOLD THAT TPO IS RIGHT IN INCLUDING T HE SAME FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 56. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FRO M THE DETAILS ON RECORD THAT THE FUNCTIONS OF THIRDWARE ARE IN CON TRAST WITH ITA NO.1035/DEL./2015 44 THE ASSESSEE WHICH ONLY PROVIDES SOFTWARE DEVELOPMENT IN THE FINANCE DOMAIN AS PER THE INSTRUCTION OF ITS AE. ALSO, THIRDWA RE HAS INCURRED EXPENSES TOWARDS IMPORT OF SOFTWARE SERVICES, EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THE ASSESSEE. SIN CE IT IS ALSO ENGAGED IN OUTSOURCING ITS ACTIVITIES AS IT HAS INCURRED EXPENSE S TOWARDS IMPORTS OF SOFTWARE SERVICES, EVIDENCING OUTSOURCIN G OF SOFTWARE SERVICES UNLIKE THE APPELLANT COMPANY. HENCE, IT IS FUNCTIONALLY NOT COMPARABLE AND CANNOT BE TREATED AS A COMPA RABLE TO ASSESSEE. WE ORDER ACCORDINGLY. 57 WIPRO TECHNOLOGY SERVICES LIMITED (WIPRO) 58. AS FAR AS THIS COMPANY IS CONCERNED, THE ARGUMENTS O F THE ASSESSEE WERE NOT ONLY ON ACCOUNT OF FUNCTIONAL DISSIMILARITY BUT THE ASSESSEE ALSO RAISED THE OTHER OBJECTION THAT THERE WAS AN EXTRAORDINARY EVENT DURING THE YEAR. WIPRO PROVIDES PROGRA M MANAGEMENT AND THIRD PARTY INFORMATION SECURITY ASSESSMENT SERVICES TO BUSINESSES THAT OUTSOURCE TECHNOLOGY AND OPERATIO NS TO THIRD PARTY VENDORS IN INDIA, THE PHILIPPINES, CHINA AND THE RU SSIAN FEDERATION. IT ALSO OFFERS SOFTWARE QUALITY MANAGEMENT, QUA LITY ASSURANCE, AND BUSINESS PROCESS MANAGEMENT SERVICES AS WELL AS ITA NO.1035/DEL./2015 45 TECHNOLOGY INFRASTRUCTURE SUPPORT, DEVELOPMENT AND DEPLOYMEN T FOR STRATEGIC SOFTWARE APPLICATIONS TO INFORMATION TECHNOLOGY AND BUSINESS PROFESSIONALS. DURING THE YEAR, WIPRO LIMITED (WIP RO) HAS REACHED AN AGREEMENT WITH CITIGROUP INC. FOR ACQUIRING ALL O F CITIGROUP INTEREST IN CTS W.E.F. 21 JANUARY 2009. ON 21 JAN UARY 2009, WIPRO SIGNED A MASTER SERVICE AGREEMENT (MSA) WITH CITIGROUP INC. FOR THE DELIVERY OF TECHNOLOGY INFRASTRUCTURE S ERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES FOR THE PERIOD OF SIX YEARS. WITHOUT PREJUDICE, IT WAS SUBMITTED THAT B EFORE 20.01.2009, THE COMPANY WAS PART OF THE CITI GROUP AND R ENDERED SERVICES TO VARIOUS ENTITIES OF THE CITI GROUP WORLDWIDE. WITH EF FECT FROM 21.01.2009, THE COMPANY WAS ACQUIRED BY WIPRO LTD. HOWEVER, IN ORDER GIVING EFFECT TO THE DIRECTIONS OF HONBLE DRP, LD. TPO HAS HELD THAT IN THE CASE OF M/S WIPRO TECHNOLOG Y SERVICES LTD., ASSESSEE IS SUBMITTING THAT THE TRANSACTION OF RENDERING SERVICES BY WIPRO TECHNOLOGY TO CITI GROUP ARE CONSTRUED AS DEEMED INTERNATIONAL TRANSACTIONS AS PER SECTION 92B(2) OF THE ACT. HOWEVER, ANNUAL REPORT OF THE COMPANY HAS BE EN PERUSED AND IT IS SEEN FROM THE AUDITED FINANCIAL THAT IN RPT ITA NO.1035/DEL./2015 46 SCHEDULE IT IS NOT CONSIDERED AS AN ASSOCIATED ENTERPRISE. TH E TPO HAS NOT PROVIDED ANY REASON FOR HOLDING WIPRO AS A COM PANY COMPARABLE TO THE APPELLANT WHEREAS THE DRP WHILE UPHOLDING WIPRO AS COMPARABLE TO THE APPELLANT COMPANY OBSERVED AS U NDER: THE AUDITED REPORT OF THE COMPANY REVEALS THAT COMP ANY IS MAINLY ENGAGED IN SOFTWARE DEVELOPMENT. THE MAJORIT Y OF INCOME IS FROM SOFTWARE DEVELOPMENT. HAVING CONSIDERED THE MATERIAL PLACED ON RECORD WE FIND THAT THE COMPANY IS MAINLY INVOLVED IN SOFTWARE SERVICES. HOWEVER, THE ASSESSEE HAS BROUGHT TO THE NOTICE THA T WIPRO TECHNOLOGIES SERVICE LTD HAS RPT OF MORE THAN 25%. THE AO IS DIRECTED TO VERIFY THE COMPUTATION PROVIDED BY THE ASSESSEE AND IF RPT IS MORE THAN 25% THAN IT SHOULD NOT BE INCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 59. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD. IN OUR VIEW, COMPANIES THAT ARE AFFECTE D BY FACTORS LIKE PERSISTENT LOSSES, DECLINING SALES, EXTRAORDINARY INCOME OR EXPENSE, MERGERS AND ACQUISITIONS OR OTHER SUCH FACTO RS WHICH AFFECT THE OPERATIONS OF THE COMPANY SUBSTANTIALLY SHOULD NOT B E USED AS COMPARABLES AS THEY WILL NOT PROVE TO BE GOOD BE NCHMARKS. FURTHER, WHILE REPELLING THE OBJECTION REGARDING EXTRA-ORDINARY EVENT TAKING PLACE FOR THIS COMPARABLE, BUT FOR A DIFFERENT REASON , I.E. THE RELEVANT EXTRA ORDINARY EVENT TOOK PLACE IN THE PRECEDING FINA NCIAL ITA NO.1035/DEL./2015 47 YEAR I.E. FY 2008-09. HOWEVER, WE CONCUR WITH THE SUBMIS SIONS ADVANCED BY LD AR THAT THE DIRECTOR'S REPORT AND NOTES TO A CCOUNT FOR THIS COMPARABLE ARE NOT AVAILABLE IN PUBLIC DOMAIN. LD. D R HAS NOT BEEN ABLE TO CONTROVERT THIS FACT. SINCE SUFFICIENT INFORMATION FOR THIS COMPARABLE IS NOT AVAILABLE, WE DIRECT EXCLUSION OF THIS COMPANY AS A COMPARABLE. 60. NOW TAKING UP GROUND NO. 14, WHICH RELATES TO ADJUSTMEN T OF UNUTILIZED RENT AND MAINTENANCE EXPENSES AS EXPENSES INCURR ED IN RELATION TO THE INTERNATIONAL TRANSACTION OF THE PROVISION OF SOFTWAR E DEVELOPMENT SERVICES. THE ASSESSEE CONTENDED THAT AS PER THE RULE 10B(1)(E)(I) OF INCOME TAX RULES, 1962 WHICH DETAILS TRAN SACTIONAL NET MARGIN METHOD PROVIDES THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY E NTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE. IN VIEW OF THE ABOVE, FOR COMPUTING MARGIN FROM AN INTERNATIONAL TRANSACTION ADJUSTMENT CLAIM OUGHT TO BE ALLOWED. ITA NO.1035/DEL./2015 48 61. THE TPO HAS REJECTED THE CONTENTION OF THE ASSESSEE BY HOLDING THAT: THE CONTENTION OF THE ASSESSEE COMPANY IS NOT ACCE PTABLE ON ACCOUNT OF THE FOLLOWING REASONS:- A) THE ASSESSEE HAS ADMITTED THAT THE EXPANSION WAS AT THE BEHEST OF THE AE ONLY. SINCE THE ASSETS FOR THE ANT ICIPATED INCREASE IN BUSINESS HAD ALLEGEDLY GONE UNUTILIZED, THE COMP ENSATION THEREOF SHOULD HAVE BEEN BORNE BY THE AE AND IN NO CASE SHOULD BE CHARGED ON THE ASSESSEE COMPANY. B) EXPENDITURE ON ENHANCEMENT OF BUSINESS IS A ROUT INE OPERATING EXPENDITURE WHICH IS UNDERTAKEN WITH THE INTENTION OF GAINING MORE BUSINESS. THE ASSESSEE HAS DONE JUST T HE SAME IN ITS CASE BY TAKING THE STEP OF HIRING MORE SPACE. THIS EXPENDITURE CANNOT BE TAKEN TO BE EXTRA ORDINARY IN NATURE FOR THE SIMPLE REASON THAT IT WAS EXPENDED IN THE HOPE OF GAINING BUSINESS AS IS DONE BY MILLIONS OF BUSINESSES WORLDWIDE AND EVERY FAILURE CANNOT BE WRITTEN OFF BY THE TAX AUTHORITIES AS BEING EXT RA ORDINARY. IN THIS CASE THE ASSESSEE HAS OVER REACHED ITSELF IN THE HURRY TO GET BUSINESS BY COMMITTING A SUM OF MONEY IN TERMS OF R ENTAL AND MAINTENANCE CHARGES. C) THE ASSESSEE IS REQUIRED TO SUPPORT ITS CLAIM FO R ANY ADJUSTMENT WITH ROBUST DATA AND FULL DETAILS AND EV IDENCES SO AS TO ENABLE THE TPO TO EXAMINE THE CLAIM. THE BURDEN IS ON THE ASSESSEE WHENEVER IT MAKES A CLAIM AND IN THIS CASE , IT HAS NOT DISCHARGED THE BURDEN OF PROOF. THESE ADJUSTMENTS ARE BEING CLAIMED IN AN ADHOC MANNER. FURTHER, ACCORDING TO ASSESSEE SINCE FIXED COST REMAIN CONSTANT IRRESPECTIVE LEVEL OF O PERATION AND THEREFORE SUCH COSTS COULD NOT BE OPTIMALLY UTILIZE D TO LOW LEVEL OF CAPACITY UTILIZATION. IN VIEW OF THIS OFFICE CAPACI TY ADJUSTMENT IN SERVICE INDUSTRY IS NOT APPLICABLE AS THE BUSINESS MODEL I S COST PLUS SO THERE IS NO QUESTION OF IDLE CAPACITY IN T ERMS OF FIXED COSTS ASSETS. D) IF THE TAXPAYER HAD SEEN A SUDDEN SPIKE IN THE VOLUME O F ITS WORK DURING THE YEAR, IT WOULD HAVE REAPED THE BEN EFITS OF ADVANCE PLANNING AND FORESIGHT. THIS WOULD HAVE RES ULTED IN ITA NO.1035/DEL./2015 49 GREATER PROFITS AND BETTER MARGINS OWING TO ITS SMA RT MOVES. HOWEVER, WHEN THE VOLUME OF WORK DID NOT GROW AS ANTICIPATED, IT IS SEEKING AN ADJUSTMENT DUE TO THE SAME SMART BUSINESS MOVE. IT CANNOT CUT BOTH WAYS. E) MOREOVER, THE METHOD OF COMPUTING THE ADJUSTMENT IS ALSO NOT CORRECT. ANY COMPARABILITY ADJUSTMENT IN TRANSF ER PRICING ANALYSIS HAS TO BE CARRIED OUT IN RESPECT OF THE CO MPARABLE COMPANIES. IN THE INSTANT CASE, THE TAXPAYER HAS R EDUCED ITS OWN EMPLOYEE COSTS TO ACHIEVE THE DESIRED GOAL. 62. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD. WE UPHOLD THE ORDER OF HONBLE DRP, A S IT HAS RIGHTLY HELD THAT AS THERE IS NO OBJECTIVE BASIS LED BY THE ASSES SEE TO SUPPORT ITS CLAIM; MERE SUBMISSION THAT THERE WAS UNDERUTILIZATION DOES NOT DISCHARGE THE BURDEN UPON THE ASSESSEE. MOREOV ER, THE ASSESSEE HAS NOT GIVEN ANY COGENT BASIS TO SATISFY THE REAS ONS FOR UNDER UTILIZATION. ONCE THE ASSESSEE IS A SOFTWARE SERVICE P ROVIDER TO ITS AE THEN THERE CAN BE NO CLAIM ON ACCOUNT OF UNDER U TILIZATION OF CAPACITY AS IT WAS AE WHO INITIATES SUCH EXPANSION. HENCE, WE REJECT THE GROUND RAISED BY THE ASSESSEE. 63. THE NEXT ISSUE RAISING IN GROUND NO. 15 OF GROUNDS O F APPEAL RELATES TO THE RISK ADJUSTMENT UNDER RULE 10B(1)(E)(III) AND RULE 10B(3) TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF TH E COMPARABLE COMPANIES VIS--VIS THE APPELLANT. ITA NO.1035/DEL./2015 50 64. THE ASSESSEE CONTENDED THAT SINCE IT IS A CAPTIVE UNIT, IT DOES NOT BEAR ANY ENTREPRENEURIAL RISKS. HOWEVER, WHILE PROPOSIN G THE SET OF COMPARABLES IN THE NOTICE, THE LD. TPO HAS NOT UNDERSTOOD THE RISK-FREE NATURE OF THE ASSESSEE AND HAS FAILED TO CONSID ER THE FULL- RISK TAKING PROFILES OF THE COMPANIES SELECTED AS COMPARABLES . 65. THE AR HAS HIGHLIGHTED THE SIGNIFICANCE OF COMPARING TH E LEVEL OF RISKS BETWEEN INDEPENDENT COMPARABLES AND THE TAXPA YER. IT WAS SUBMITTED THAT TPO SHOULD CONSIDER THE RISK FREE NATURE O F THE TAXPAYERS OPERATIONS WHILE ADJUDICATING ON THE TRANSFER PR ICES. BASED ON THE ABOVE, IGNORING THE RISK PROFILE OF THE ASSES SEE WOULD BE UNJUST ON THE PART OF THE REVENUE. HE CONTENDED THAT TPO/ DRIP SHOULD HAVE APPRECIATED THAT THE INTENT OF THE TRANSFER PRICIN G LEGISLATION IN INDIA IS TO AVOID TAX EVASION AND NOT TO CAUSE AN Y HARDSHIP TO THE ASSESSEE. 66. IN VIEW OF AND TAKING DUE COGNIZANCE OF ALL THE DIFFERE NTIATING FACTORS CITED ABOVE, THE ASSESSEE CONTENDED THAT AN ADJUST MENT WITH REGARD TO THE RISK PREMIUM EARNED BY COMPARABLE UNCONTROLLE D COMPANIES IS IMPERATIVE FOR A FAIR AND JUDICIOUS COMPARISON OF THE ITA NO.1035/DEL./2015 51 TRANSFER PRICES OF THE INTERNATIONAL TRANSACTIONS OF THE ASSE SSEE WITH THE ARMS LENGTH PRICE. 67. THE TPO IN ITS ORDER DATED 22.01.2014 HAS HELD AS UN DER: THE ASSESSEE HASNT CLAIMED RAISED RISK ADJUSTMENT IN ITS SUBMISSION. HOWEVER, IT MAY CLAIM AT LATER STAGE ON ACCOUNT OF ADJUSTMENT COMMENSURATE TO THE RISK PROFILE OF THE ASSESSEE. AFTER CAREFULLY CONSIDERING THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE TAXPAYER, I AM NOT INCLINED TO ACCEPT THE ASSES SEES FUTURE CLAIM OF RISK ADJUSTMENT. RISK ADJUSTMENT AS A GENE RAL RULE CANNOT BE ALLOWED UNLESS IT IS CLEARLY SHOWN THAT THE COMP ARABLES HAD ACTUALLY UNDERTAKEN SUCH RISK AND HOW THE SAME MATE RIALLY AFFECTED THEIR MARGINS. THE REVISED OECD GUIDELINES OF 2010 HAS ALSO STATED IN PARA 3.54 AS UNDER:- ENSURING THE NEEDED LEVEL OF TRANSPARENCY OF COMPA RABILITY ADJUSTMENTS MAY DEPEND UPON THE AVAILABILITY OF AN EXPLANATION OF ANY ADJUSTMENTS PERFORMED, THE REASONS FOR THE ADJU STMENTS BEING CONSIDERED APPROPRIATE, HOW THEY WERE CALCULATED, H OW THEY CHANGED THE RESULTS FOR EACH COMPARABLE AND HOW THE ADJUSTMENT IMPROVES COMPARABILITY. ISSUES REGARDING DOCUMENTAT ION OF COMPARABILITY ADJUSTMENTS ARE DISCUSSED IN CHAPTER V. FROM THE ABOVE GUIDELINES IT CAN BE SEEN THAT UNLES S IT IS SHOWN THAT HOW THE RISK ADJUSTMENT WOULD CHANGE THE RESUL T OF EACH COMPARABLE AND HOW THE SAME WOULD IMPROVE THE COMPA RABILITY AND UNLESS ADEQUATE REASONS ARE GIVEN FOR SUCH ADJU STMENT, NO ADJUSTMENT CAN BE ALLOWED TO THE TAXPAYER. IN THE P RESENT CASE, EXCEPT GIVING PROPORTION OF VARIOUS RISKS BORNE, TH E TAXPAYER HAS NOT SHOWN WITH EVIDENCE AS TO WHETHER EACH OF THE R ISK WAS ACTUALLY UNDERTAKEN OR NOT BY THE COMPARABLES AND I F SO, HOW THESE RISKS AFFECTED EACH OF THEM AND WHETHER SUCH ADJUST MENT WOULD IMPROVE THE COMPARABILITY. MECHANICAL ADJUSTMENT CA NNOT BE MADE TO THE MARGINS OF THE COMPARABLES WITHOUT KNOW ING WHICH RISK WAS TAKEN BY THE ENTITY CONCERNED AND HOW ITS PROFITABILITY WAS AFFECTED. PROBABILITY OF RISK AND CERTAINTY OF RISK ARE TWO DIFFERENT ASPECTS AND CANNOT BE EQUATED FOR THE PUR POSE OF ADJUSTMENT. IN MY VIEW ASSESSEE CANNOT BE COMPARED TO A RISK FREE SECURITY. EVEN OTHER METHODOLOGY, WHETHER ADHOC ADJ USTMENT AS IN ITA NO.1035/DEL./2015 52 CASE OF SONY INDIA, CAPM OR SHARPE RATIO (WHICH IS A MEASURE OF THE EXCESS RETURN ON RISK UNDERTAKEN BY AN ENTITY I NVESTING IN A PARTICULAR ASSET), AS APPLIED BY HYDERABAD ITAT IN THE CASE OF ADP PRIVATE LTD, ARE BASED ON RETURN OF CAPITAL WHI CH IS NOT THE PLI ADOPTED BY THE ASSESSEE AND THE TPO. ALL THIS R EQUIRES ROBUST AND RELIABLE DATA, BOTH FOR THE ASSESSEE AND THE CO MPARABLES IN THE ABSENCE OF WHICH RISK ADJUSTMENT CANNOT BE CONSIDER ED FOR ENHANCING COMPARABILITY. 68. FURTHER, DRP UPHELD THE VIEW OF LD. TPO BY HOLDING AS UNDER: WE HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE ASSESSEE. AS PER RULE 10B(2) AND 10B(3) OF INCOME TAX RULES, 1962, INDIAN TRANSFER PRICING PRO VISIONS PRESCRIBE ONLY FOR REASONABLE ACCURATE ADJUSTMENT AND FURTHER ADJUSTMENT TO THE MARGINS OF COMPARABLES CAN BE MAD E ONLY IF THEY ENHANCE COMPARABILITY. BUT AT THE SAME TIME TH E DATA FOR THE SAME MUST BE RELEVANT RELIABLE AND ROBUST. RISK ADJ USTMENT AS A GENERAL RULE CANNOT BE ALLOWED UNLESS IT IS CLEARLY SHOWN THAT THE COMPARABLES HAD ACTUALLY UNDERTAKEN SUCH RISK AND H OW THE SAME MATERIALLY AFFECTED THEIR MARGINS. THE REVISED OECD GUIDELINES OF 2010 HAS ALSO STATED IN PARA 3.54 AS UNDER:- ENSURING THE NEEDED LEVEL OF TRANSPARENCY OF COMPA RABILITY ADJUSTMENTS MAY DEPEND UPON THE AVAILABILITY OF AN EXPLANATION OF ANY ADJUSTMENTS PERFORMED THE REASONS FOR THE ADJUS TMENTS BEING CONSIDERED APPROPRIATE, HOW THEY WERE CALCULATED HO W THEY CHANGED THE RESULTS FOR EACH COMPARABLE AND HOW THE ADJUSTMENT IMPROVES COMPARABILITY. ISSUES REGARDING DOCUMENTAT ION OF COMPARABILITY ADJUSTMENTS ARE DISCUSSED IN CHAPTER V. EVEN THE VARIOUS JUDICIAL DECISIONS ON THE ISSUE OF ADJUSTMENTS AND EVEN OECD GUIDELINES, IMPRESSES UPON TIME AND AGAIN THAT THE ADJUSTMENT SHOULD BE REASONABLE ACCURATE ADJUSTMEN T. 13.10 FROM THE ABOVE GUIDELINES, IT CAN BE SEEN THA T UNLESS IT IS SHOWN THAT HOW THE RISK ADJUSTMENT WOULD CHANGE THE RESULT OF EACH COMPARABLE AND HOW THE SAME WOULD IMPROVE THE COMPARABILITY AND UNLESS ADEQUATE REASONS ARE GIVEN FOR SUCH ITA NO.1035/DEL./2015 53 ADJUSTMENTS, NO ADJUSTMENT CAN BE ALLOWED TO THE AS SESSEE. IN THE PRESENT CASE, EXCEPT POINTING OUT VARIOUS RISKS, TH E ASSESSEE HAS NOT SHOWN WITH EVIDENCE AS TO WHETHER EACH OF THE R ISK WAS ACTUALLY UNDERTAKEN OR NOT BY THE COMPARABLES AND I F SO, HOW THESE RISKS AFFECTED EACH OF THEM AND WHETHER SUCH ADJUST MENT WOULD IMPROVE THE COMPARABILITY. 13.11 MECHANICAL ADJUSTMENT CANNOT BE MADE TO THE M ARGINS OF THE COMPARABLES WITHOUT KNOWING WHICH RISKS WERE TA KEN BY THE ENTITY CONCERNED AND HOW ITS PROFITABILITY WAS AFFE CTED. PROBABILITY OF RISK AND CERTAINTY OF RISK ARE TWO DIFFERENT ASP ECTS AND CANNOT BE EQUATED FOR THE PURPOSE OF ADJUSTMENTS. THE SIGNIFI CANT OF RISK DEPENDS ON ITS ECONOMIC SIGNIFICANCE, LIKELIHOOD OF ITS REALIZATION AND PREDICTABILITY. ALL THESE REQUIRES ROBUST AND R ELIABLE DATA, BOTH FOR THE ASSESSEE AND THE COMPARABLES IN THE ABSENCE OF WHICH TAX ADJUSTMENTS CANNOT BE CONSIDERED FOR ENHANCING COMP ARABILITY. THUS THE OBJECTION IS REJECTED. 13.12 IN THE VARIOUS JUDICIAL PRONOUNCEMENTS THE RI SK ADJUSTMENT HAS NOT BEEN ALLOWED BY THE ITATS. SOME OF THESE DE CISIONS ARE DISCUSSED BELOW: (A) VEDARIS TECHNOLOGY 2010-TII-10-ITAT-DEL-TPL: NO RIS K ADJUSTMENT TO BE ALLOWED EVEN ON AD HOC BASIS PARTI CULARLY WHEN THE SAME HAS NOT BEEN QUANTIFIED; (B) MARUBENI INDIA PRIVATE LTD. (2010-TII-36-ITAT-DEL-T P) IN WHICH IT WAS HELD THAT AS THE ASSESSEE FAILED TO BR ING ANY EVIDENCE ON RECORD TO SHOW THAT THERE WAS ANY DIFFERENCE IN RISK PROFILES OF COMPARABLE COMPANIES AND SINCE THE ASSESSEE FAILED TO FILE THE DETAILS EXHIBITING RISK BORNE BY COMPARABLES, NO RI SK ADJUSTMENT CAN BE GIVEN, EVEN ON AD HOC BASIS. (C) ADP PRIVATE LIMITED (2011-TII-44-ITAT-HYD-TP) WHERE IN THE ITAT HELD THAT THERE IS NO THUMB RULE FOR ALLOW ANCE OF RISK ADJUSTMENT. (D) SYMANTEC SOFTWARE SOLUTIONS PVT. LTD. (2011-TII-60- ITAT- MUM-TP): THE ITAT HELD THAT; ITA NO.1035/DEL./2015 54 (I) UNTIL AND UNLESS IT IS SHOWN THAT THE DIFFERENCE IN FUNCTION AND RISK RESULTS IN DEFLATION OR INFLATION OF FINAN CIAL RESULTS OF THE COMPARABLES, IT IS NOT A GENERAL RULE TO GRANT IT A S A STANDARD ADJUSTMENT. (II) THE ASSESSEE COULD NOT SHOW HOW SUCH DIFFERENCE IN RISK AND FUNCTIONS AFFECTED THE RESULTS OF THE COMPARABL ES. (E) ST MICRO ELECTRONICS (2011-TII-63-ITAT-DEL-TP): THE ASSESSEES CLAIM THAT IT WAS A RISK FREE CAPTIVE SER VICE PROVIDER AND HENCE CANNOT BE COMPARED WITH COMPARABLES WHO WERE FULL ENTREPRENEURS WAS NOT ACCEPTED BY THE ITAT. (F) EXXON MOBIL COMPANY INDIA PVT. LTD. (2011-TII-68-IT AT- MUM-TP): THE ITAT HELD THAT SINCE WORKING CAPITAL A DJUSTMENT HAS BEEN GIVEN AND THE ASSESSEE HAS NOT WORKED OUT THE RISK ADJUSTMENT, NO ADJUSTMENT CAN BE GRANTED ON THIS AC COUNT. 13.13 THEREFORE, FOR THE REASONS MENTIONED ABOVE, W E DECLINE TO INTERFERE WITH THE ACTION OF TPO IN THIS REGARD. 69. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PLACED ON RECORD. IN OUR VIEW, WHERE THE ASSESSE E SUCCEEDS IN ABLY DEMONSTRATING THAT THE COMPARABLES FINALLY SELECTED BORE RELATIVELY MORE RISK THAN IT, THEN THERE SHOULD BE NO DENIAL OF THE RISK ADJUSTMENT. IF, HOWEVER, THE ASSESSEE FAILS IN SPECIFICALLY P OINTING OUT THE EXTRA RISKS UNDERTAKEN BY THE COMPARABLES, THEN, OF COURSE, THERE CANNOT BE ANY QUESTION OF GRANTING RISK ADJUSTMENT. U NDER THE TRANSFER PRICING REGIME, ONUS IS ALWAYS ON THE ASSESSEE TO SHOW THE REASONS FOR CLAIMING ANY SEPARATE ADJUSTMENT BY POINTING O UT THE ITA NO.1035/DEL./2015 55 DIFFERENCES BETWEEN IT AND THE COMPARABLES. RISK ADJUSTMENT CAN BE ALLOWED PROVIDED THE ASSESSEE PLACES ON RECORD SOME APPR OPRIATE MATERIAL TO DEMONSTRATE THAT THE RISK UNDERTAKEN BY THE COMPARA BLE COMPANIES WERE RELATIVELY MORE THAN IT, WARRANTING DOWNWARD ADJUSTMENT IN THEIR PROFIT RATES. FURTHER, THE VARIATION IN SUCH RISKS, IF ANY, SHOULD BE CAPABLE OF QUANTIFICATION ON SOME REASONAB LE AND LOGICAL BASIS. SINCE THE LD. AR HAS FAILED TO OBJECTIVELY DEMONSTR ATE THE RELATIVELY HIGHER RISKS UNDERTAKEN BY THE COMPARABLES ON AN OVERALL BASIS, WE ARE DISINCLINED TO GRANT ANY RISK ADJUSTMENT. 69.1 IN VIEW OF THE FOREGOING DISCUSSION, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER OF DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTION OF PROVISION OF IT ENABLED DATA CONV ERSION SERVICES TO THE FILE OF TPO/AO FOR A FRESH DECISION IN ACCO RDANCE WITH OUR ABOVE OBSERVATIONS/DIRECTIONS. APART FROM THE ISSUES DISCUSSED IN THIS ORDER, THE DECISION OF THE TPO ON ALL OTHER ASPECTS OF THE DETERMINATION OF THE ALP OF THIS INTERNATIONAL TRANSACTION SHOULD BE CONSIDERED AS FINAL, AS NO OTHER ISSUE HAS BEE N AGITATED BEFORE US. ITA NO.1035/DEL./2015 56 70. GROUND NO. 16: ON THE FACTS AND IN LAW, THE LD. AO/L D. TPO AND THE HONBLE DRP ERRED IN NOT GRANTING THE BENEFIT OF REDUCTION/VARIATION OF 5 PERCENT FROM THE ARITHMETIC MEAN WHILE DETERMINING THE ARMS LENGTH PRICE TO THE APPELLANT AS PER THE PROVISO TO SECTION 92C(2) OF THE ACT. 71. THIS ISSUE HAS BEEN DEALT AT GREAT LENGTH BY THE TPO/DRP . BOTH HAVE REFERRED TO THE RELEVANT PROVISIONS, CIRCULARS AND JUDGMENTS ON THE ISSUE. ACCORDINGLY, WE DO NOT FIND ANY IN FIRMITY IN THE ORDER OF THE TPO/ DRP IN THIS RESPECT AND THE SAME IS THEREFORE UPHELD. 72. IN GROUNDS NO. 18 ASSESSEE HAS CHALLENGED THE LEVY OF INTEREST U/S 234B. SINCE THE CHARGEABILITY OF INTEREST U/S 234B WILL ULTIMATELY DEPEND UPON THE INCOME TO BE DETERMINED IN ACCOR DANCE WITH OUR DIRECTIONS CONTAINED HEREINABOVE, AT THIS STAGE IT IS PREMATURE TO DWELL UPON THIS ISSUE. IT IS OPEN FOR ASSESSE E TO RAISE THE ISSUE AT THE APPROPRIATE STAGE. SIMILARLY, GROUND NOS. 1 9 AND 20 ARE CONSEQUENTIAL IN NATURE. ITA NO.1035/DEL./2015 57 73. GROUND NO. 21 NOT CONNECTED ON MERITS SINCE THE ISSUE EMERGES WHEN THE PROCEEDINGS UNDER SECTION 271(1)(C) A RE INDEPENDENTLY INITIATED. THEREFORE THIS GROUND IS REJECTED. 74. IN THE RESULT, THE APPEAL IS DISPOSED OFF AS ABOVE. ORDER PRONOUNCED IN OPEN COURT ON THIS 07 TH DAY OF DECEMBER, 2015. -SD- -SD- (R.S. SYAL) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 07 TH DAY OF DECEMBER , 2015 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.