Mindteck (India) Limited, Bangalore V. ITO, Bangalore

ITA 1082/BANG/2011

• Counselvise Citation: 108221114 RSA 2011
• Duration Of Justice: 3 year(s) 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2015
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 15-11-2011
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITIDR
• Assessee Lawyers: SAMPATH RAGHUNATHAN
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; International transaction; Unabsorbed depreciation; Revenue expenditure
• Section: 92C; 143(3); 92D; 92E; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT(TP)A NO.1082/BANG/2011 ASSESSMENT YEAR : 2007-08 M/S. MINDTECK (INDIA) LTD., 16/3, CAMBRIDGE ROAD, ULSOOR, BANGALORE-560 008. PAN : AAACH1072Q VS. THE INCOME TAX OFFICER, CIRCLE 12(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI SAMPATH RAGHUNATHAN, ADVOCATE RESPONDENT BY : SHRI C.H. SUNDAR RAO, CIT-I(DR) DATE OF HEARING : 30.04.2015 DATE OF PRONOUNCEMENT : 14.05.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 19.09.2011 THE ITO, WARD 12(1), BANGALORE PASSED U/S. 143(3) R .W.S. 144C OF THE ACT, IN RELATION TO A.Y.2007-08. IT(TP)A NO.1082/BANG/2011 PAGE 2 OF 36 2. THE ASSESSEE HAS RAISED AS MUCH AS 10 GROUNDS OF APPEAL IN THE GROUNDS OF APPEAL. OUT OF THE 10 GROUNDS RAISED IN THE GROUNDS OF APPEAL, GROUND NO.1, GROUND NO.2 & 3 ARE RELATING TO TRANSF ER PRICING ADJUSTMENT ON ACCOUNT OF DETERMINATION OF ALP. GROUND NO.2.5 TO 7 AND GROUND NO.3 IN SO FAR AS IT RELATES TO ALLOWING WORKING CAPITAL ADJUSTMENT WAS ALONE PRESSED FOR ADJUDICATION. GROUND NO.6 WAS NOT PRES SED FOR ADJUDICATION GROUND NO.7 WITH REGARD TO LEVY OF INTEREST U/S.234 A & B OF THE ACT IS PURELY CONSEQUENTIAL. GROUND NO.8 WITH REGARD TO I NITIATION OF PENALTY PROCEEDINGS U/S. 271(1)(( C) OF THE ACT CANNOT BE S UBJECT MATTER OF APPEAL. GROUND NO.9 & 10 ARE GENERAL IN NATURE AND CALLS FO R NO SPECIFIC ADJUDICATION. GROUND NO.4 IS WITH REGARD TO EXCLUS ION OF FOREIGN CURRENCY EXPENSES AND COMMUNICATION CHARGES FROM THE EXPORT TURNOVER/TOTAL TURNOVER. GROUND NO.5 IS WITH REGARD TO THE REVENU E AUTHORITIES IN NOT ALLOWING SET-OFF OF CURRENT YEAR UNABSORBED DEPRECI ATION AGAINST THE ADJUSTMENT MADE TO THE BUSINESS INCOME. 3. GROUNDS 2.5 TO 7 AND GROUND NO.3 RAISED BY THE A SSESSEE ARE WITH REGARD TO THE ADDITION TO THE TOTAL INCOME BY WAY O F ADJUSTMENT TO THE ARMS LENGTH PRICE ( ALP ) TO AN INTERNATIONAL TRANSACTION CARRIED OUT BY TH E ASSESSEE U/S. 92CA OF THE ACT. AT THE TIME OF HEAR ING OF THE APPEAL IT WAS SUBMITTED THAT THE COMPARABLE COMPANIES CHOSEN BY T HE TPO AND THE ADDITION MADE BY THE AO IN THE DRAFT ASSESSMENT ORD ER WHICH WAS CONFIRMED BY THE DRP ARE IDENTICAL TO THE CASE DECI DED BY THE TRIBUNAL IN. JULY SYTSTEMS & TECHNOLOGIES (P) LTD., VS. ITO (201 4) 33 ITR (TRIB) 643 IT(TP)A NO.1082/BANG/2011 PAGE 3 OF 36 (ITAT BANG)., 3DPLM SOFTWARE SOLUTIONS LTD. VS. DCI T 2014 12 TMI 612- ITAT BANGALORE, ELEMENT K.INDIA PRIVATE LTD. VS. IT O, WARD 11(1), NEW DELHI (2014) 36 ITR (TRIB) 604 (ITAT-DEL), CSR INDI A PVT. LTD. VS. ITO IT(TP) A.NO.1119/BANG/2011 AY 07-08 ORDER DATED 29. 1.2013 & TOLUNA INDIA PVT.LTD. VS. ACIT (2014) 35 ITR (TRIB.) 388 ( ITAT-DEL.), ITA NO.1054/BANG/2011 FOR AY 07-08 IN M/S.TRILOGY E-BUS INESS SOFTWARE INDIA PVT.LTD. VS. DCIT, CIRCLE 12(4), BANGALORE, YODLEE INFOTECH VS. ITO ITA NO.1397/BANG/2010 FOR A.Y.2006-07 AS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF M/S.ACTIANCE INDIA PRIVATE LIMITED VS. THE ITO IN I.T.(TP)A.NO.1295/BANG/2010 ORDER DATED 17.10.2014 IT WAS ALSO SUBMITTED THAT THE BUSINESS PROFILE OF THE ASSESSEE AND THAT OF THE ASSESSEE AND THE AFORESAID CASES ARE ALSO IDENTICAL . THIS SUBMISSION WAS FOUND TO BE CORRECT AT THE TIME OF HEARING. WITH T HIS BACKGROUND WE WILL NOW CONSIDER THE FACTUAL BASIS OF THE PRESENT CASE AND THE DECISION RENDERED IN THE CASE REFERRED TO ABOVE. 4. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT RESEARCH AND DEVELOP MENT SERVICES. THE ASSESSEE PROVIDES SUCH SERVICES TO ITS GROUP COMPAN IES APART FROM INDEPENDENT CUSTOMERS. THE TOTAL OPERATING REVENU E FROM RENDERING SOFTWARE DEVELOPMENT SERVICES WAS A SUM OF RS.23,57 ,26,348/-. OUT OF THE ABOVE THE REVENUE FROM RENDERING SOFTWARE DEVELOPME NT SERVICES TO AN ASSOCIATED ENTERPRISES (AE) WAS A SUM OF RS.18,58,8 4,791/-. IT IS NOT IN DISPUTE BEFORE US THAT THE TRANSACTION OF PROVIDING SOFTWARE RESEARCH & IT(TP)A NO.1082/BANG/2011 PAGE 4 OF 36 DEVELOPMENT SUPPORT SERVICES BY THE ASSESSEE TO ITS RELATED PARTY VIZ., GROUP COMPANIES WAS AN INTERNATIONAL TRANSACTION WI TH THE ASSOCIATED ENTERPRISE ( AE ) AND THEREFORE THE PRICE AT WHICH THE ASSESSEE REN DERS SERVICES TO ITS AE HAS TO PASS THE ARMS LENGTH PRI CE (ALP) TEST AS LAID DOWN BY SECTION 92C OF THE ACT. 5. IN SUPPORT OF THE ASSESSEES CLAIM THAT THE PRIC E CHARGED BY IT FOR SERVICES RENDERED TO ITS AE WAS AT ARMS LENGTH, TH E ASSESSEE FILED A REPORT AS REQUIRED BY THE PROVISIONS OF SECTION 92E OF THE ACT IN FORM 3EB TOGETHER WITH DETAILED ANALYSIS. THE ASSESSEE ADOP TED COMPARABLE UNCONTROLLED PRICE METHOD (CUP) AS THE MOST APPROPR IATE METHOD FOR DETERMINING THE ALP. THE ASSESSEE RELIED ON THE PR ICE CHARGED BY THE AE TO ITS CUSTOMER WAS ADOPTED. THIS WAS REJECTED BY THE TPO, WHO PROCEED TO ADOPT TRANSACTION NET MARGIN (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP. 6. OPERATING PROFITS TO COST WAS ADOPTED AS THE PRO FIT LEVEL INDICATOR ( PLI ). THE PLI OF THE ASSESSEE WAS ARRIVED AT AS FO LLOWS: OPERATING REVENUE RS.18,58,84,791 OPERATING COST RS.17,68,70,698 OPERATING PROFIT RS.90,14,093 OP.PR/COST% 5.09% IT(TP)A NO.1082/BANG/2011 PAGE 5 OF 36 7. THE TPO ARRIVED AT A FINAL SET OF 26 COMPARABLES . THE SET OF 20 COMPARABLES IS AS FOLLOWS: SL. NO NAME OF COMPANY OP / TC TURNOVER RS. IN CRORES 1 ACCEL TRANSMATIC LTD (SEG. 21.11% 9.68 2 AVANI CIMCON TECHNOLOGIES LTD 52.59% 3.55 3 CELESTIAL LABS LTD 58.35% 14.13 4 DATAMATICS LTD 1.38% 54.51 5 E-ZEST SOLUTIONS LTD 36.12% 6.26 6 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 25.31% 848.66 7 GEOMETRIC LTD (SEG.) 10.71% 158.38 8 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 36.63% 178.63 9 IGATE GLOBAL SOLUTIONS LTD 7.49% 747.27 10 INFOSYS TECHNOLOGIES LTD 40.30% 131.49 11 ISHIR INFOTECH LTD 30.12% 7.42 12 KALS INFORMATION SYSTEMS LTD (SEG.) 30.55% 2.00 13 LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 15.75% 45.39 14 LUCID SOFTWARE LTD 19.37% 1.70 15 MEDIASOFT SOLUTIONS LTD 3.66% 1.85 16 MEGASOFT LTD 60.23% 139.33 17 MINDTREE LTD 16.90% 590.35 18 PERSISTENT SYSTEMS LTD 24.52% 293.75 19 QUINTEGRA SOLUTIONS LTD 12.56% 62.72 20 R S SOFTWARE (INDIA) LTD 13.47% 101.04 21 R SYSTEMS INTERNATIONAL LTD (SEG.) 15.07% 112.01 22 S I P TECHNOLOGIES & EXPORTS LTD 13.90% 3.80 23 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG.) 22.16% 343.57 24 TATA ELXSI LTD (SEG.) 26.51% 262.58 25 THIRDWARE SOLUTIONS LTD 25.12% 36.08 26 WIPRO LTD (SEG.) 33.65% 961.09 ARITHMETIC MEAN 25.14% 8. THE ASSESSEE RAISED VARIOUS OBJECTIONS TO THE ME THODOLOGY ADOPTED AND THE REASONS ASSIGNED BY THE TPO FOR REJECTING T HE COMPARABLES IT(TP)A NO.1082/BANG/2011 PAGE 6 OF 36 CHOSEN BY THE ASSESSEE IN ITS TP STUDY. THE TPO F INALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE COMPAR ABLES SET OUT ABOVE AND ARRIVED AT ARITHMETIC MEAN OF 25.14%. THE COMP UTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 12.6 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED BELOW. IT NEEDS TO BE POINTED OUT THAT ALLOCATION OF COST IN RESPECT OF AE TRANSA CTIONS TAKEN IN THIS COMPUTATION IS THE SAME AS INTIMATED TO THE TA XPAYER VIDE NOTICE DATED 11.6.2010. THE TAXPAYER HAS NOT GIVEN ANY COMMENTS IN THIS REGARD. ARMS LENGTH MEAN MARGIN ON COST OPERATING COST 25.14% RS.17,68,70,698 ARMS LENGTH MARGIN 25.14% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 125.14% OF OPERATING COST PRICE RECEIVED SHORT FALL BEING ADJUSTMENT U/S.92CA RS.22,13,35,991 RS.18,58,84,791 RS.3,54,51,200 12.7 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRIC E: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 125.14% OF OPERATING COST RS.22,13,35,991 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.18,58,84,791 SHORTFALL BEING ADJUSTMENT U/S.92CA RS.3,54,51,200 IT(TP)A NO.1082/BANG/2011 PAGE 7 OF 36 THE ABOVE SHORTFALL OF RS.3,54,51,200/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 9. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 10. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 26 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE FOLL OWING COMPANIES WILL HAVE TO BE EXCLUDED AS THE TURNOVER OF THESE C OMPANIES ARE MORE THAN RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSES SEE WHOSE TURNOVER IS LESS THAN RS.200 CRORES: (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. (2) IGATE GLOBAL SOLUTIONS LTD. (3) MINDTREE LTD. (4) PERSISTENT SYSTEMS LTD. (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. (6) INFOSYS TECHNOLOGIES LTD. (7) TATA ELXSI LTD. (8) WIPRO LTD.(SEG.) IT(TP)A NO.1082/BANG/2011 PAGE 8 OF 36 11. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) (ITA NO.1338/BANG/2010) FOR ASSESSMENT YEAR (07-08) ON THE APPLICATION OF TURNOVER FILTER AND IT WAS SUBMITTED THAT THE AFORE SAID COMPARABLE COMPANIES HAVE TO BE EXCLUDED FROM THE FINAL LIST O F COMPARABLE SELECTED BY THE TPO. 12. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARN ED COUNSEL FOR THE ASSESSEE AND THE LEARNED DR. IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P) LTD. (SUPRA ), THIS TRIBUNAL ON APPLICATION OF THE TURNOVER FIL TER WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY AN ALYSIS HELD AS FOLLOWS: (1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT THE TPO HAS APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE, BUT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCO ME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLLED TRAN SACTION WITH AN INTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMPARED OR THE ENTERPRISES ENTERING INTO SUCH TRANSACTION, WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT WHEREVER THERE ARE SOME DIFFERENCES SUCH DIFFE RENCES SHOULD BE CAPABLE OF REASONABLE ACCURATE ADJUSTMENT IN MON ETARY TERMS TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES. IT WA S HIS SUBMISSION THAT SIZE WAS AN IMPORTANT FACET OF THE COMPARABILI TY EXERCISE. IT WAS SUBMITTED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WOULD IMPACT COMPARABILITY. IN THIS REGA RD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGARH BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 , WHEREIN THE SPECIAL BENCH HAD LAID DOWN THAT IT IS IMPROPER TO PROCEED ON THE BASIS OF LOWE R LIMIT OF 1 IT(TP)A NO.1082/BANG/2011 PAGE 9 OF 36 CRORE TURNOVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASONABLE CLASSIFICATION. SEVERAL OTHER DECIS IONS WERE REFERRED TO IN THIS REGARD LAYING DOWN IDENTICAL PR OPOSITION. WE ARE NOT REFERRING TO THOSE DECISIONS AS THE DECISIO N OF THE SPECIAL BENCH ON THIS ASPECT WOULD HOLD THE FIELD. REFEREN CE WAS ALSO MADE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERVED AS FOLLOWS:- SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PAR TIES MIGHT AFFECT THE RELATIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COMPARABILITY. 12. THE ICAI TP GUIDELINES NOTE ON THIS ASPECT LAY DOWN IN PARA 15.4 THAT A TRANSACTION ENTERED INTO BY A RS. 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENT ERED INTO BY A RS. 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASON S ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIE S OF SCALE UNDER WHICH THEY OPERATE. THE FACT THAT THEY OPERA TE IN THE SAME MARKET MAY NOT MAKE THEM COMPARABLE ENTERPRISES. T HE RELEVANT EXTRACT IS AS FOLLOWS [ON RULE 10B(3)]: CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE NOT MATERIAL, THE TRANSACTIONS WOULD BE COMPARABLE. THESE DIFFERENCES COULD EITHER BE WITH REFERENCE TO THE TRANSACTION OR WITH REFERENCE TO THE ENTERPRISE. FOR INSTANCE, A TRANSACTION ENTERED INTO BY A RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. 13. IT WAS FURTHER SUBMITTED THAT THE TPOS RANGE ( RS. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COMPANIES LIKE INFOSYS WHICH IS 277 TIMES BIGGER THAN THE ASSESSEE (TURNOV ER OF RS. 13,149 CRORES AS COMPARED TO RS. 47.47 CRORES OF AS SESSEE). IT WAS SUBMITTED THAT AN APPROPRIATE TURNOVER RANGE S HOULD BE APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPAN IES. 14. REFERENCE WAS MADE TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , WHEREIN IT(TP)A NO.1082/BANG/2011 PAGE 10 OF 36 RELYING ON DUN AND BRADSTREETS ANALYSIS, THE TURNO VER OF RS. 1 CRORE TO RS. 200 CRORES WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSERVATIONS WERE BROUGHT TO OUR NOTICE:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE JUDIC IAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD 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 POSITION TO BARGAIN THE PRICE AND ALS O 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 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 PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 15. IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PRO POSITION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN THE FOLLOWING CASES: IT(TP)A NO.1082/BANG/2011 PAGE 11 OF 36 1. M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO.1413/BANG/2010) 2. M/S GENESIS MICROCHIP (I) PRIVATE LIMITED VS. D CIT (ITA NO.1254/BANG/20L0). 3. ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (I TA NO. 1171/BANG/2010). IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURN OVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COM PARABLE WITH THE ASSESSEE. 16. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HA VING TURNOVER OF MORE THAN RS. 200 CRORES AS COMPARABLES . IN THESE CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASS ESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECI DING THE ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDES THAT INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR L ENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTER PRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORT IONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED O R TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERP RISES. SEC.92- A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE TRANSACTION BETWEEN TH E ASSESSEE AND ITS AE WAS AN INTERNATIONAL TRANSACTION ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATION OF ARMS LENGTH PRICE IN AN INTERNATION AL TRANSACTION AND IT PROVIDES:- (1) THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE IT(TP)A NO.1082/BANG/2011 PAGE 12 OF 36 METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PR ICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT ( A ) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR ( B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR IT(TP)A NO.1082/BANG/2011 PAGE 13 OF 36 ( C ) THE INFORMATION OR DATA USED IN COMPUTATION OF TH E ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ( D ) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNAT IONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C:- 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A). TO (D).. ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, IT(TP)A NO.1082/BANG/2011 PAGE 14 OF 36 OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF IT(TP)A NO.1082/BANG/2011 PAGE 15 OF 36 ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH TH E INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE S IN RELATION TO THE TRANSACTIONS BEING COMPARED. 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF T HE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPA RED WITH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACT ORS SET OUT THEREIN. BEFORE US THERE IS NO DISPUTE THAT THE TN MM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE I NTERNATIONAL TRANSACTION. THE DISPUTES ARE WITH REGARD TO THE C OMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLE ARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSEES TURNOVER I S RS. 47,46,66,638. IT WOULD THEREFORE FALL WITHIN THE C ATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES H AVE TO BE IT(TP)A NO.1082/BANG/2011 PAGE 16 OF 36 ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOW N IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE AS SESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY T HE TPO VIZ., TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CR ORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES. 13. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) AND ASSESSEES CASE FOR AY 06-07, WE HOLD THAT THE AFORESAID COMP ANIES (LISTED AT S.NO.6, 9, 10, 17, 18, 23, 24 AND 26 OF THE FINAL LIST OF C OMPARABLE COMPANIES SET OUT IN THE CHART GIVEN PARA-4 OF THIS ORDER) SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE AO IS DIRECTED TO COM PUTE THE ARITHMETIC MEAN BY EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. 14. IMPROPER SELECTION OF COMPARABLES: IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FOLLOWING TWO COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE:- A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED. IT(TP)A NO.1082/BANG/2011 PAGE 17 OF 36 IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECIS ION OF THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) WHEREIN THESE COMPANIES WERE HELD TO BE NOT FUNCTIO NALLY COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPER L IKE THE ASSESSEE. 15. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRILO GY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA): (D) KALS INFORMATION SYSTEMS LTD. 3. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENT ION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGE D IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNA LS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNC TIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE A S FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY IT(TP)A NO.1082/BANG/2011 PAGE 18 OF 36 REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 4. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUB MISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO TH E TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNE D COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT TH IS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOP MENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE TH AT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RE LEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THA T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEME NT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT IT(TP)A NO.1082/BANG/2011 PAGE 19 OF 36 (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTER PRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM TH E ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES F OR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTE D. DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXC LUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPAR ABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T HE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARA BILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR TH E ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID CO MPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFE RRED TO BY THE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THI S COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGU MENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFOR ESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 16. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICAL IN THE C ASE OF THE ASSESSEE AS IT(TP)A NO.1082/BANG/2011 PAGE 20 OF 36 WELL AS IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) . RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.( SUPRA), WE DIRECT THAT THE FOLLOWING COMPANIES BE EXCLUDED FROM THE LIST O F 26 COMPARABLE ARRIVED AT BY THE TPO. A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED. 17. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VIZ. , MEGASOFT LTD. IN THE LIST OF FINAL COMPARABLES CHOSEN BY THE TPO IS CONCERNED, THIS TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PV T. LTD. (SUPRA) HAD HELD THAT ONLY SEGMENTAL DATA OF THE SAID COMPANY SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT A LL THIS COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGMENTAL MA RGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SE GMENT) ALONE SHOULD BE CONSIDERED FOR COMPARABILITY. ON THE ABO VE SUBMISSION, WE FIND THAT THE TPO CONSIDERED THE SEG MENTAL MARGIN (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GE OMETRIC, KALS INFO SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND T ATA ELXSI. BEFORE DRP THE ASSESSEE POINTED OUT THAT THE SEGMEN TAL MARGIN OF 23.11% ALONE SHOULD BE TAKEN FOR COMPARABILITY. THE DRP HAS NOT GIVEN ANY SPECIFIC FINDING ON THE ABOVE PLEA OF THE ASSESSEE. PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHIC H THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ ., BLUEALLY DIVISION AND XIUS-BCGI DIVISION. XIUS- BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE IT(TP)A NO.1082/BANG/2011 PAGE 21 OF 36 WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PR ODUCTS ARE SOLD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPL EMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FI T INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (S OFTWARE DEVELOPED) WOULD CONSTITUTE PACKAGED PRODUCT AND AR OUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BOARDING AND LODGING EXPENSE . BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COM PARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE P RODUCTS DEVELOPED (WHICH WAS AKIN TO SOFTWARE DEVELOPMENT) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMEN T OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% O F THE OVERALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25 % OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HA VING DRAWN THE ABOVE CONCLUSION, THE TPO DID NOT BOTHER TO QUA NTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUC T DEVELOPMENT AND SOFTWARE DEVELOPMENT SERVICE BUT AD OPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TER MS OF RULE 10B(3)(B) OF THE RULES, AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM , SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 38. NEITHER THE TPO NOR THE DRP HAVE NOTICED THAT THERE IS BOUND TO BE A DIFFERENCE BETWEEN THE ASSESSEE AND M EGASOFT AND THE PROFIT ARISING TO THE MEGASOFT AS A RESULT OF T HE EXISTENCE OF THE SOFTWARE PRODUCT SEGMENT AND NO FINDING HAS BEE N GIVEN THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FOR THIS RE ASON, WE ARE INCLINED TO HOLD THAT THE PROFIT MARGIN OF 23.11% W HICH IS THE MARGIN OF THE SOFTWARE SERVICE SEGMENT BE TAKEN FOR IT(TP)A NO.1082/BANG/2011 PAGE 22 OF 36 COMPARABILITY. IN VIEW OF THE ABOVE CONCLUSION, WE DO NOT WISH TO GO INTO THE QUESTION AS TO WHETHER LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. 18. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUN AL, SEGMENTAL MARGINS IN SO FAR AS IT RELATES TO PROVIDING SOFTWARE SERVI CES BY MEGASOFT ALONE SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. 19. THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE COMPARABLE COMPANY CHOSEN BY THE TPO AT SL.NO.14 OF THE CHART GIVEN IN PARA-4 OF THIS ORDER VIZ., LUCID SOFTWARE LIMITED, HAS TO BE EXCLUDED AS FUNCTIONALLY NOT COMPARABLE WITH THAT OF THE ASSESS EE IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. IN ITA NO.7821/MUM/ 2011 , WHICH WAS FOLLOWED BY THE ITAT BANGALORE BENCH IN THE CASE OF LOGICA PRIVATE LTD. ITA NO.1129/BANG/2011 FOR AY 07-08, WHEREIN IT WAS HELD AS UNDER:- 7.2 LUCID SOFTWARE LIMITED IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY , BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALSO INVOLV ED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HAS TRIED TO DISTINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMEN T EXPENDITURE IN THIS CASE IS AROUND 39% OF THE CAPITAL EMPLOYED BY THE SAID COMPANY, AND, THEREFORE, SUCH A COMPANY CANNOT BE C ONSIDERED AS TESTED PARTY. EVEN AS PER THE INFORMATION RECEIV ED IN RESPONSE TO NOTICE UNDER SECTION 133(6), THE COMPANY HAS DES CRIBED ITS BUSINESS AS SOFTWARE DEVELOPMENT COMPANY OR PURE SO FTWARE DEVELOPMENT SERVICE PROVIDER. THIS INFORMATION ITS ELF IS VERY VAGUE AS THE SEGMENTAL DETAILS OF OPERATING REVENUE HAS NOT BEEN IT(TP)A NO.1082/BANG/2011 PAGE 23 OF 36 MADE AVAILABLE TO EXAMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWARE PRODUCT AND SALE OF SOFTWARE SERVICE AND D EVELOPMENT. LOOKING TO THE FACT THAT IT HAS DEVELOPED A SOFTWAR E PRODUCT NAMED AS MUULAM WHICH IS USED FOR CIVIL ENGINEERI NG STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS-A-VIS THE CAPITAL EMPLOYED BY THE S AID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENT IAL THAT THE CHARACTERISTICS AND THE FUNCTIONS ARE BY AND LARGE SIMILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STUDY CAN BE MADE WITH FEWEST AND MOST RELIABLE ADJUSTMENT. IF A COMP ANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN THE SALE OF PRODUCT WOULD BE ENTIR ELY DIFFERENT FROM THE COMPANY, WHO IS INVOLVED IN SERVICE SECTOR . THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCT ION AND PROFITABILITY RATIO. IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFOR MATION ABOUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE S ALE OF PRODUCT AND HOW MUCH IS FROM THE SERVICES, THEREFORE, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS FO R DETERMINING ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. 20. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANY WERE CONSIDERED AS COMPARABLE IS IDENTICAL IN THE C ASE OF THE ASSESSEE AS WELL AS IN THE CASE OF LOGICA PRIVATE LTD., (SUPRA) . RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN T HE CASE OF LOGICA PVT.LTD..(SUPRA), WE DIRECT THAT THE COMPANY LISTED AS SL.NO.14 OF THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO AND LISTED I N PARA-4 OF THIS ORDER TO BE EXCLUDED FROM THE LIST OF 20 COMPARABLE ARRIVED AT BY THE TPO. 21. AS FAR AS COMPARABLE COMPANY AT SL.NO. 7 &11 O F THE CHART OF COMPARABLE COMPANIES CHOSEN BY THE TPO AT PAGE-4 OF THIS ORDER VIZ., IT(TP)A NO.1082/BANG/2011 PAGE 24 OF 36 GEOMETRIC SOFTWARE LTD. (SEG.) & ISHIR INFOTECH LT D. ARE CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THE RELATED PARTY TRA NSACTION IN THE CASE OF COMPANIES EXCEEDS 15% ( 19.98 % IN THE CASE OF GEOM ETRIC SOFTWARE LTD. AND 21.97% IN THE CASE OF ISHIR INFOTECH LTD.) AND IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF 24 X 7 CUSTOMER.COM PVT . LTD. IN ITA NO.227/BANG/2010, FOLLOWED BY THIS TRIBUNAL IN THE CASE OF LOGICA PRIVATE LTD. (SUPRA) WHEREIN IT WAS HELD THAT WHERE THE RPT EXCEEDS 15%, SUCH COMPANIES SHOULD NOT BE TAKEN AS COMPARABLE COMPANI ES. FOLLOWING THE SAID DECISION, WE HOLD THAT COMPANIES AT SL.NOS. 7 & 11 REFERRED TO ABOVE OF THE LIST OF THE COMPARABLE COMPANIES CHOSEN BY T HE TPO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES WHILE WORKING OUT THE ALP. 22. AS FAR AS COMPARABLES AT SL.NOS. 2 &, 3 OF THE LIST OF COMPARABLES CHOSEN BY THE TPO ARE CONCERNED, THIS TRIBUNAL IN T HE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) HAS TAKEN A VIEW THAT THESE COMPANIES ARE NOT COMPARABLE TO THE SOFTWARE SERVIC E PROVIDER COMPANIES. THE FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THIS REGARD:- (B) AVANI CIMCON TECHNOLOGIES LTD. 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA O F THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. BASED ON THE INFORMATION AVAILA BLE IN THE COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITTED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFTWARE SERV ICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FROM THE ASSESS EE. IT WAS FURTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIB UNAL TO THE IT(TP)A NO.1082/BANG/2011 PAGE 25 OF 36 DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/2011 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPANY HAS REV ENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE O F SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPA RABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SER VICES ONLY AND IT WAS HELD AS FOLLOWS:- 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCOM): HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPE RATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PROFIT R ATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESSEE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PART Y. LEARNED CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETAILS OF PERCENTAG E OF EXPORT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INT O CONSIDERATION FOR COMPARABILITY ANALYSIS. IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS COM PANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS . THE FOLLOWING FIGURES WERE PLACED BEFORE US:- PARTICULARS FYS 05-06 06-07 07-0 8 08-09 OPERATING REVENUE 21761611 35477523 29342809 280398 51 OPERATING EXPNS. 16417661 23249646 23359186 3110894 9 OPERATING PROFIT 5343950 12227877 5983623 (306909 8) OPERATING MARGIN 32.55% 52.59% 25.62% - 9.87% 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UNU SUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06-07. THE O PERATING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT W AS AN EXTRAORDINARY YEAR FOR THIS COMPANY. EVEN THE GROW TH OF IT(TP)A NO.1082/BANG/2011 PAGE 26 OF 36 SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR AS PER NASS COM WAS 32%. THE GROWTH RATE OF THIS COMPANY WAS DOUBLE TH E INDUSTRY AVERAGE. IN VIEW OF THE ABOVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJECTED AS A COMPARABLE. 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE REASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE ARE FOUND TO B E ACCEPTABLE. THE DECISION OF ITAT (MUMBAI) IN THE C ASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE . (C) CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVE LOPMENT COMPANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- I. IN THE DIRECTORS REPORT (PAGE 20 OF PB-IL), IT IS STATED THAT THE COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR IN-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2AB) OF THE INCOME TAX ACT. II. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UN DER DEFERRED REVENUE EXPENDITURE (PAGE 31 OF PB-II), IT IS MENTIONED THAT, EXPENDITURE INCURRED ON RESEARCH A ND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AND THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALLMENTS FROM THE YEAR IN WHICH IT IS INCURRED. III. AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE (PAGE 30 OF PB-II). THIS AMOUNTS TO NE ARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SO FTWARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D AC TIVITIES IS BAD IN LAW. IT(TP)A NO.1082/BANG/2011 PAGE 27 OF 36 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISIO N OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (F OR AY 2007-08) IN WHICH THE COMPARABILITY OF THIS COMPANY FOR CLI NICAL TRIAL RESEARCH SEGMENT. THE RELEVANT EXTRACT OF DIS CUSSION REGARDING THIS COMPANY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAG E- 389 OF THE PAPER BOOK WHICH IS AN EXTRACT FROM THE DIRECTORS REPORT WHICH READS AS FOLLOWS: THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TOOL CELSUITE TO DRUG DISCOVERY IN, FINDING THE L EAD MOLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT A CT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYING BIO-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE B EEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY , OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, THE COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS . THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FA CILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NE W CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY WILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA PRADESH. ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALS O IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AN D SHOULD BE CONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELATION TO A SOFTWARE DISCOVERY OF NEW DRUGS. MOREOVER THE COMPANY ALSO IS OWNER OF THE IP R. IT(TP)A NO.1082/BANG/2011 PAGE 28 OF 36 THERE IS HOWEVER A REFERENCE TO DEVELOPMENT OF A MOLECULE TO TREAT CANCER USING BIO-INFORMATICS TOOL S FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. AS EXPLAINED EARLIER IT IS A DIVERSIFIED COMPANY AND T HEREFORE CANNOT BE CONSIDERED AS COMPARABLE FUNCTIONALLY WIT H THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE P ROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPAR ABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCE SS OF MAKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPAN Y AS NOT QUALIFYING FOR COMPARABILITY. WE THEREFORE A CCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE ABO VE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARC H IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT TH IS COMPANY IS OWNER OF IPR, IT HAS SOFTWARE FOR DISCOVERY OF N EW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCER. IN THE ULTI MATE ANALYSIS, THE ITAT DID NOT CONSIDER THIS COMPANY AS A COMPARA BLE IN CLINICAL TRIAL SEGMENT, FOR THE REASON THAT THIS CO MPANY HAS DIVERSE BUSINESS. IT WAS SUBMITTED THAT, HOWEVER, FROM THE ABOVE EXTRACTS IT IS CLEAR THAT THIS COMPANY IS NOT INTO SOFTWARE DEVELOPMENT ACTIVITIES, ACCORDINGLY, THIS COMPANY S HOULD BE REJECTED AS A COMPARABLE BEING FUNCTIONALLY DIFFERE NT. 45. FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANS PIRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY W AS CLASSIFIED AS A RESEARCH AND DEVELOPMENT COMPANY. ACCORDING TO THE TPO IN AY 07-08 THIS COMPANY HAS BEEN CLASSI FIED AS SOFTWARE DEVELOPMENT SERVICE PROVIDER IN THE CAPITA LINE/PROWESS DATABASE AS WELL AS IN THE ANNUAL REPORT OF THIS CO MPANY. THE TPO HAS RELIED ON THE RESPONSE FROM THIS COMPANY TO A NOTICE U/S.133(6) OF THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. THE AS SESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREAT THIS AS A COMPARABLE HAS POINTED OUT THAT THIS COMPANY PROVIDES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOINFORMATICS SERVICE S AND THAT THE SEGMENTAL DATA FOR EACH ACTIVITY IS NOT AVAILABLE A ND THEREFORE THIS COMPANY SHOULD NOT BE TREATED AS COMPARABLE. BESID ES THE ABOVE, THE ASSESSEE HAS POINT OUT TO SEVERAL REFERE NCES IN THE ANNUAL REPORT FOR 31.3.2007 HIGHLIGHTING THE FACT T HAT THIS COMPANY WAS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PRO VIDES IT(TP)A NO.1082/BANG/2011 PAGE 29 OF 36 RELATED SOFTWARE DEVELOPMENT SERVICES. THE TPO CAL LED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPAN Y. THE TPO ALSO CALLED FOR DESCRIPTION OF SOFTWARE DEVELOPMENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DATED 29.3.2010 HAS GIVEN DETAILS OF EMPLOYEES WORKING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHETHER ANY S EGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OT HER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISSUE D DRAFT RED HERRING PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH. TH E TPO WANTED TO KNOW AS TO WHETHER THE PRIMARY BUSINESS OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN THE A NNUAL REPORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE O F BIO PRODUCTS AND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFERENCE TO ANY REPLY BY CELESTIAL LABS TO THE ABOVE CLARIFI CATION OF THE TPO. THE TPO WITHOUT ANY BASIS HAS HOWEVER CONCLU DED THAT THE BUSINESS MENTIONED IN THE DRHP ARE THE SERVICES OR BUSINESSES THAT WOULD BE STARTED BY UTILIZING THE F UNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN N O WAY CONNECTED WITH BUSINESS OPERATIONS OF THE COMPANY D URING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISSIONS MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUF ACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THERE IS NO CLEAR BASI S ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE B USINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. WE THEREF ORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY OUGHT NO T TO HAVE BEEN CONSIDERED AS COMPARABLE. 23. RESPECTFULLY FOLLOWING THE DECISION REFERRED TO ABOVE, WE HOLD THAT THE AFORESAID COMPANIES LIST AT SL.NO.2 & 3 OF THE LIST OF COMPARABLES CHOSEN BY THE TPO BE EXCLUDED FROM THE LIST OF COMP ARABLES. 24. AS FAR AS HELIOS & MATHERSON INFORMATION TECHNO LOGY LTD., AT SL.NO.8 OF THE COMPARABLE COMPANIES CHOSEN BY THE T PO IS CONCERNED, THE IT(TP)A NO.1082/BANG/2011 PAGE 30 OF 36 ITAT DELHI IN THE CASE OF TOLUNA INDIA PVT. LTD., ( SUPRA) HAS HELD IN PARA 23.1 & 23.2 OF ITS ORDER THAT THIS COMPANY CANNOT B E REGARDED AS A COMPARABLE COMPANY IN THE CASE OF SOFTWARE DEVELOPM ENT SERVICE PROVIDER SUCH AS THE ASSESSEE. IN VIEW OF THE ABOV E, THE SAID COMPANY IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 25. AS FAR AS COMPARABLE AT SL.NO.5 OF THE LIST OF COMPARABLE CHOSEN BY THE TPO LISTED IN THE CHART GIVEN AT PARA-4 OF THIS ORDER VIZ., E-ZEST SOLUTIONS LTD., IS CONCERNED, THE COMPARABILITY OF THE AFORESAID COMPANY WITH THAT OF THE SOFTWARE SERVICE PROVIDER WAS CONS IDERED BY THE BANGALORE BENCH OF ITAT IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS VS. DCIT IT(TP)A NO.1303/BANG/2012 , WHEREIN ON THE COMPARABILITY OF THE AFORESAID COMPANY WITH A SOFTWARE DEVELOPMENT SERVI CE PROVIDER, THE TRIBUNAL HELD AS FOLLOWS:- 14. E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMP ARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUND THAT AS PER TH E INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SER VICES AND SATISFIES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FR OM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY D IFFERENT TO THE ASSESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISE D REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E-B USINESS CONSULTING SERVICES, CONSISTING OF WEB STRATEGY SE RVICES, I T IT(TP)A NO.1082/BANG/2011 PAGE 31 OF 36 DESIGN SERVICES AND IN TECHNOLOGY CONSULTING SERVIC ES INCLUDING PRODUCT DEVELOPMENT CONSULTING SERVICES. THESE SERV ICES, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDS, ARE HIG H END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCI NG (KPO) SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPAN Y HAS NOT PROVIDED SEGMENTAL DATA IN ITS ANNUAL REPORT. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT SINCE THE AN NUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIV E INFORMATION ON THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAILS AVAILABLE ON THE COMPANYS WEBSITE WHIC H SHOULD BE CONSIDERED WHILE EVALUATING THE COMPANYS FUNCTIONA L PROFILE. IT IS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESE NTATIVE THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOP MENT SERVICES AND THEREFORE COMPANIES RENDERING KPO SERV ICES OUGHT NOT TO BE CONSIDERED AS COMPARABLE TO SOFTWARE DEVE LOPMENT COMPANIES AND RELIED ON THE DECISION OF THE CO-ORDI NATE BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961(HYD)/2011 DT.23.11.2012 AND PRAYED THAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLU TIONS LTD., OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN TH E LIST OF COMPARABLES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE NOTICE UNDER SECTION 13 3(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVIC ES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVIC ES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOP MENT SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON REC ORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMEN T SERVICES, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERING PR ODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICE S WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BE EN HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CAPITAL I-Q INFORMATION SYSTEMS (INDIA) (P) LTD. SUPRA) THAT KP O SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID IT(TP)A NO.1082/BANG/2011 PAGE 32 OF 36 CASE, WE HOLD THAT THIS COMPANY, I.E. E-ZEST SOLUT IONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. / TPO IS ACCORDINGLY DIRECTED. 26. THE LEARNED DR HOWEVER SUBMITTED THAT THE COMPA RABILITY OF THIS COMPANY WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDE R WAS NOT OBJECTED TO BY ASSESSEES WHO ARE IN SIMILAR BUSINESS IN SEVERA L CASES LIKE THE CASE OF TELECORDIA (SUPRA), LOGICA (SUPRA) AND TRILOGY E-BU SINESS(SUPRA). ACCORDING TO HIM THE ASSESSEE IN THE PRESENT APPEAL SHOULD NOT BE PERMITTED TO TAKE A PLEA THAT THIS COMPANY IS NOT C OMPARABLE. BESIDES THE ABOVE, IT WAS ALSO HIS SUBMISSION THAT THE DECISION RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE RELATES TO AY 07-0 8 WHEREAS THE CASE OF THE ASSESSEE IN THIS APPEAL RELATES TO AY 08-09. A CCORDING TO HIM IT NEEDS TO BE VERIFIED AS TO WHETHER THE FUNCTIONAL PROFILE OF THIS COMPANY CHOSEN AS COMPARABLE HAS CHANGED IN AY 08-09. 27. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D DR AND ARE OF THE VIEW THAT THE FIRST OBJECTION RAISED BY HIM IS WITHOUT ANY BASIS. THE FACT THAT ONE ASSESSEE IN THE SOFTWARE DEVELOPMENT SERVI CES SECTOR ACCEPTS A COMPANY AS A COMPARABLE DOES NOT BAR ANY OTHER ASSE SSEE IN THE SAME LINE OF BUSINESS TO TAKE A STAND THAT SUCH A COMPAN Y IS NOT COMPARABLE. IN THIS REGARD THE IMPORTANT ASPECT TO BE NOTICED IS T HAT THE ASSESSEES IN THE CASES CITED BY THE LEARNED DR HAVE NOT RAISED A PLE A THAT THE SAID COMPANY IS NOT FUNCTIONALLY COMPARABLE AND THE SAME HAS BEEN REJECTED BY IT(TP)A NO.1082/BANG/2011 PAGE 33 OF 36 THE TRIBUNAL. IN OTHER WORDS THE FUNCTIONAL COMPAR ABILITY OF THE SAID COMPANY HAS NEVER BEEN SUBJECT MATTER OF INVESTIGAT ION IN ANY OF THE CASES. IN THE PRESENT CASE THE ASSESSEE HAS CHOSEN TO OBJECT TO THIS COMPANY BEING CHOSEN AS A COMPARABLE AND THE DECISI ON OF THE TRIBUNAL CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE SUPPO RTS HIS PLEA. THERE IS NO CONTRARY DECISION BROUGHT TO OUR NOTICE TO TAKE A DIFFERENT VIEW. WE MAY ALSO ADD THAT COMPARABILITY AND NON-COMPARABILITY O F COMPANIES IN THE MATTER OF DETERMINATION OF ALP IS NOT DEPENDENT UPO N ANY CONCESSION EITHER AT THE INSTANCE OF THE ASSESSEE OR THE REVEN UE. AT ANY STAGE IT CAN BE DEMONSTRATED THAT A COMPANY CHOSEN AS A COMPARAB LE IS IN FACT NOT COMPARABLE AND THAT WHICH HAS BEEN ACCEPTED AS NON- COMPARABLE IS IN FACT COMPARABLE. 28. WITH REGARD TO THE OBJECTION OF THE LEANED DR T HAT THE FUNCTIONAL PROFILE OF THE COMPANY E-ZEST SOLUTIONS LTD. IN AY 07-08 HAS TO BE COMPARED WITH THAT IN AY 08-09 DECIDED BY THE TRIBU NAL, WE ACCEPT THE SAID PRAYER AND FOR THIS LIMITED PURPOSE DIRECT THE TPO/AO TO EXAMINE AS TO WHETHER THERE IS ANY CHANGE IN THE PROFILE OF THE S AID COMPANY SO THAT IT CAN BE REGARDED AS COMPARABLE WITH AN ASSESSEE REND ERING SOFTWARE DEVELOPMENT SERVICE SUCH AS THE ASSESSEE. 29. THE TPO IS DIRECTED TO COMPUTE ALP AFTER EXCLUD ING THE COMPARABLE COMPANIES DEALT WITH IN THIS ORDER. THE TPO IS AL SO DIRECTED TO TAKE ONLY THE SOFTWARE DEVELOPMENT SEGMENT MARGIN OF THE COMP ARABLE COMPANY IT(TP)A NO.1082/BANG/2011 PAGE 34 OF 36 M/S.MEGASOFT LTD., AS WAS DIRECTED AND HELD IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA). THE GROU ND RELATING TO TRANSFER PRICING ARE DECIDED ACCORDINGLY. 30. GROUND NO.4 RAISED BY THE ASSESSEE PROJECT THE GRIEVANCE OF THE ASSESSEE REGARDING THE ACTION OF THE LEARNED ASSESS ING OFFICER AND HONORABLE DISPUTE RESOLUTION PANEL EXCLUDING EXPENS ES INCURRED ON TRAVEL EXPENSES IN FOREIGN CURRENCY AND EXPENSES INCURRED TOWARDS COMMUNICATION EXPENSES FROM EXPORT TURNOVER ON THE GROUND THAT THESE EXPENSES ARE INCURRED IN RENDERING TECHNICAL SERVIC ES RENDERED TO CLIENTS OUTSIDE INDIA, WHILE COMPUTING DEDUCTION UNDER SECT ION 10A. IT IS THE PLEA OF THE ASSESSEE THAT AT ALL TIMES DURING THE RELEVA NT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT IN RENDERING ANY TECHNICAL SERVICES. WITHOUT PREJUDICE TO ITS CONTE NTION THAT THE AFORESAID SUMS SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVE R WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER THAT EXPENSES THAT ARE REDUCED FROM THE EXPO RT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER AND IN THIS REGA RD HAS 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) . 31. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN GROUND NO.4. TAKING INTO CONS IDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. IT(TP)A NO.1082/BANG/2011 PAGE 35 OF 36 TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE ASSESSING OFF ICER TO EXCLUDE EXPENSES INCURRED IN FOREIGN CURRENCY TOWARDS TRAVELLING AND EXPENSES INCURRED TOWARDS COMMUNICATION BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER, AS HAS BEEN PRAYED FOR BY THE ASSESSEE IN GROUND NO.9( D ). IN VIEW OF THE ACCEPTANCE OF THE ALTERNATIVE PRAYER IN GROUND NO.4 , WE ARE OF THE VIEW THAT NO ADJUDICATION IS REQUIRED ON THE QUESTION WHETHER THE SAID EXPENSES HAVE TO BE EXCLUDED FROM EXPORT TURNOVER OR NOT. 32. GROUND NO.5 RAISED BY THE ASSESSEE READS AS FOL LOWS: THE ASSESSING OFFICER ERRED IN NOT GRANTING SET-OF F OF CURRENT YEAR UNABSORBED DEPRECIATION AGAINST THE ADJUSTMENT S MADE TO THE BUSINESS INCOME. 33. THE ASSESSEE FILED RETURN OF INCOME FOR AY 06-0 7 DECLARING LOSS OF RS.10,53,268/-. THE AO IN PAGE 5 OF HIS ORDER COMP UTED TOTAL INCOME TREATING INCOME DECLARED IN THE RETURN AS NIL. D ESPITE SPECIFIC OBJECTION NO.7 BY THE ASSESSEE IN THIS REGARD BEFORE THE DRP, THE DRP DID NOT CONSIDER THE CLAIM OF THE ASSESSEE. WE ARE OF THE VIEW THAT IT WOULD JUST AND APPROPRIATE TO DIRECT THE AO TO VERIFY THE CLAI M OF THE ASSESSEE FOR SET OFF OF CURRENT YEAR UNABSORBED DEPRECIATION AGAINST THE ADJUSTMENTS MADE TO THE BUSINESS INCOME, IF THE CLAIM OF THE ASSESS EE IS FOUND TO BE CORRECT, THE AO SHALL GIVE CONSEQUENTIAL RELIEF TO THE ASSES SEE. IT(TP)A NO.1082/BANG/2011 PAGE 36 OF 36 34. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 14 TH DAY OF MAY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 14 TH MAY, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.