Sharp Software Development India Private Limited, Bangalore V. DCIT, Bangalore

ITA 1102/BANG/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9229 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 19-09-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 18-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Revenue expenditure
• Section: 133(6); 10B

Judgement Text

IT(TP)A.1102/BANG/2011 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'B', BENGALURU BEFORE SHRI. VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER I.T(TP).A NO.1102/BANG/2011 (ASSESSMENT YEAR : 2007-08) SHARP SOFTWARE DEVELOPMENT INDIA P. LTD, UNIT 5, LEVEL 3, INNOVATOR, INTERNATIONAL TECH PARK , WHITEFIELD ROAD, BENGALURU 560 066 .. APPELLANT PAN : AAECS0269E V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -12(3), BENGALURU .. RESPONDENT ASSESSEE BY : SHRI. CHAVALI NARAYAN, CA REVENUE BY : MS. JAHANZEB AKHTAR, CIT - DR HEARD ON : 19.09.2016 PRONOUNCED ON : 23.11.2016 O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE A SSESSMENT ORDER DT.20.09.2011, PASSED IN PURSUANCE TO THE DIRECTION S OF THE DRP, FOR THE ASSESSMENT YEAR 2007-08. 02. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF SH ARP LABORATORIES OF AMERICA INC (SLA). SLA IS HELD BY SHARP ELECTRON ICS CORPORATION, AMERICA (SEC), WHICH IN TURN IS HELD BY SHARP CORPORATION , JAPAN. THE ASSESSEE IT(TP)A.1102/BANG/2011 PAGE - 2 IS IN THE BUSINESS OF DEVELOPING, TESTING, CUSTOMI SING AND MAINTAINING HIGH QUALITY SOFTWARE FOR SHARP GROUP COMPANIES. SHARP INDIA PROVIDES SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO SLA. 03. DURING THE YEAR, THE ASSESSEE HAD ENTERED INTO THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DE VELOPMENT SERVICES WITH ITS ASSOCIATED ENTERPRISES (AE) FOR RS.19,35,17,429 /-. IN ITS TP STUDY, THE ASSESSEE HAS ADOPTED TNNM AS THE MOST APPROPR IATE METHOD, SELECTED 28 COMPARABLES AND ARRIVED AT THE ARITHMETIC MEAN O F UNADJUSTED NET MARGIN OF THE COMPARABLE COMPANIES AT 14.53% OF OPE RATING COST (WITH ARMS LENGTH RANGE BEING 8.8% TO 20.25%). SINCE IT S NET MARGIN OF 9.5% WAS WITHIN + / - 5% OF THE ALP MARGIN OF THE COMPAR ABLE COMPANIES, THE ASSESSEE CONSIDERED THAT THE PRICE CHARGED BY IT I N RESPECT OF SOFTWARE DEVELOPMENT SERVICE TRANSACTIONS IS AT ARMS LENGT H. 04. HOWEVER, THE TPO REJECTED THE ASSESSEES TP STU DY AND HAS UNDERTAKEN FAR STUDY. HE PICKED UP 26 COMPARABLE S WHICH INCLUDED EIGHT OF THE FOLLOWING COMPARABLES SELECTED BY THE ASSESS EE : SL.NO. NAME OF THE COMPANY 1 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, 2 INFOSYS TECHNOLOGIES LTD 3 LANCO GLOBAL SYSTEMS LTD 4 MINDTREE CONSULTING LTD 5 QUINTEGRA SOLU TIONS LTD 6 R S SOFTWARE (INDIA) LTD 7 SIP TECHNOLOGIES AND EXPORTS LTD 8 SASKEN COMMUNICATION TECHNOLOGIES LTD IT(TP)A.1102/BANG/2011 PAGE - 3 THE TPO ARRIVED AT ARITHMETIC MEAN AT 25.14% . AFTE R GIVING A DEDUCTION ON WORKING CAPITAL AND RISK ADJUSTMENT OF 2.11%, HE AR RIVED AN ADJUSTED MEAN MARGIN OF 23.03%. THUS, THE TPO ARRIVED A SHORTFALL OF RS. 2,30,62,126/- AND TREATED IT AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 05. THE AO WHILE COMPUTING THE EXPORT TURN OVER U/S 10A , SINCE THAT PROVISION STIPULATED THAT FREIGHT, TELECOMMUNICATI ON CHARGES AND INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA AND EXPENSES, IF ANY, INCURRED IN FOR EIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA SHOU LD BE EXCLUDED IN ARRIVING AT THE FIGURE OF EXPORT TURNOVER, HELD T HAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON LEASED LINE CHARGES AT RS.2,502,447, IPLC SERVICE CHARGES (LEASED CIRCUIT) AT RS.1,332,376 & FOREIGN TRAVEL EXPENSES AT RS.23,129,06 REQUIRE EXCLUSION AND AC CORDINGLY REDUCED THEM FROM THE EXPORT TURNOVER BUT HE HAS NOT REDU CED THEM FROM THE TOTAL TURN OVER AND , THUS, ARRIVED THE DEDUCTION U/S 10A AT RS.1,67,84,994/- WHICH WAS LESSER FROM THE ASSESSEE S CLAIM BY RS.5,50,102/-. ON AN APPEAL, THE DRP AGREED WITH T HE VIEW OF THE AO / TPO AND REJECTED THE ASSESSEES CONTENTIONS. 06. AGGRIEVED, THE ASSESSEE FILED THIS APPEAL BEFOR E THIS TRIBUNAL. ITS EFFECTIVE GROUNDS OF APPEAL ARE AS UNDER : IT(TP)A.1102/BANG/2011 PAGE - 4 IT(TP)A.1102/BANG/2011 PAGE - 5 IT(TP)A.1102/BANG/2011 PAGE - 6 07. FURTHER, THE ASSESSEE ALSO FILED AN ADDITIONAL GROUND UNDER RULE 11 OF THE ITAT RULES, WHICH READ AS UNDER : A) 'THAT THE LEARNED TPO / DRP HAS FAILED TO APPRECIAT E THE FACT THAT THE FOLLOWING COMPANIES ARE NOT FUNCTIONALLY COMPAR ABLE TO THE APPELLANT AND THEREFORE ERRED IN LAW AND FACTS IN C ONSIDERING THEM AS COMPARABLE COMPANIES : I. E-ZEST SOLUTIONS LIMITED II. QUINTEGRA SOLUTIONS LIMITED III. HELIOS AND MATHESON INFORMATION TECHNOLOGY LIMITED 7.1 THE ASSESSEE SUBMITTED THAT THE ABOVE ADD ITIONAL GROUND IS BEING (SIC , RAISED) BY WAY OF ABUNDANT CAUTION. THE ADDI TIONAL GROUND RAISE THE ISSUE WHICH IS FUNDAMENTAL TO THE APPEAL, THE NON-A DMISSION AND NON- ADJUDICATION OF THEM WOULD RESULT IN AN INCOMPLETE APPRECIATION AND ADJUDICATION OF THE MATTER, THEY ARE RAISED BASED O N THE RULING OF THE BANGALORE TRIBUNAL IN THE CASE OF NXP SEMICONDUCTOR S INDIA PRIVATE LIMITED VS. ACIT, (IT(TP)A NO. 1174/ BANG/ 2011) FO R AY 2007-08 WHEREIN, THE ABOVE MENTIONED COMPANIES HAVE BEEN REJECTED AS COMPARABLE COMPANIES, THE FAILURE TO RAISE THEM AT AN EARLIER STAGE IS NEITHER WILLFUL NOR WANTON BUT DUE TO THE ABOVE REASONS , NO PREJUDICE WOULD BE CAUSED TO THE RESPONDENT BY REASON OF THE ABOVE ADDITIONAL GROUNDS BEING ADMITTED AND ADJUDICATED AND ACCORDINGLY THE BALANCE OF CONVENIENCE IS IN FAVOUR OF SUCH AN ORDER BEING PAS SED BY THIS HON'BLE TRIBUNAL ETC AND IN THE ABOVE CIRCUMSTANCES PLEADE D THAT THAT THIS HON'BLE TRIBUNAL MAY BE PLEASED TO; IT(TP)A.1102/BANG/2011 PAGE - 7 (I) ADMIT AND ADJUDICATE THE ABOVE ADDITIONAL GROUND, (II) PASS ANY OTHER ORDER THAT MAY BE REQUIRED IN THE CIRCUMSTANCES OF THE CASE AND RENDER JUSTICE. 08. WE HAVE CONSIDERED THE ABOVE SUBMISSIONS AND FI ND MERIT IN THEM AND HENCE ACCEPTED THE ADDITIONAL GROUND. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. ASSESSEE IS SEEKI NG EXCLUSION OF 18 COMPARABLES OUT OF 26 COMPANIES SELECTED BY THE TPO . THIS 18 COMPARABLES INCLUDED 5 COMPARABLES SELECTED BY THE ASSESSEE AND RETAINED BY THE TPO VIZ HELIOS & MATHESON INFORMATION TECHNO LOGY LTD, QUINTEGRA SOLUTIONS LTD, INFOSYS TECHNOLOGIES LTD, MINDTREE C ONSULTING LTD & SASKEN COMMUNICATION TECHNOLOGIES LTD. OUT OF WHICH, THE ASSSESSE FILED ADDITIONAL GROUNDS ON HELIOS & MATHESON INFORMATION TECHNOLOGY LTD & QUINTEGRA SOLUTIONS LTD. FOR E- ZEST SOLUTIONS LTD ALSO , THE ASSESSEE FILED AN ADDITIONAL GROUND, WHICH WE HAVE ADMITTED, SUPRA . IN VIEW OF THE DECISION OF THE SPECIAL BENCH IN DCIT V QUARK SYSTE MS INDIA (2010) 42 DTR 414 WHICH WAS FOLLOWED BY THIS TRIBUNAL IN M/S. A CTIANCE INDIA P. LTD V. ITO IN IT(TP)A.1056/BANG/2011, DT.12.06.2015, WE AR E OF THE OPINION THAT THE ASSESSEE CAN RAISE A FRESH GROUND FOR EXCLUSIO N CONSIDERING THE EVOLVING NATURE OF THE TRANSFER PRICING. THE ASSESS EE MAINLY SOUGHT REJECTION OF THE FOLLOWING COMPARABLES BASED ON FU NCTIONAL DIFFERENCE AND ON THE TURNOVER FILTER RELYING ON THIS TRIBUNAL DE CISIONS REPORTED IN M/S MERITER LVS INDIA (P) LTD IN IT(TP)A NO 1231/BANG/2 011 DT 16.10.2015 FOR AY 2007-08, M/S ACTIANCE INDIA PRIVATE LTD IN IT(T P)A NO 1056/BANG/2011 DT 12.06.2015 FOR AY 2007-08, M/S MAXIM INDIA INTEG RATED CIRCUIT DESIGN IT(TP)A.1102/BANG/2011 PAGE - 8 PVT LTD IN IT(TP)A NO 28/BANG/2012 DT 31.03.2016 FO R AY 2005-06 ETC , WHICH IS SCHEMATICALLY EXTRACTED AS UNDER : SL NO NAME ASSESSEES REASONS TPOS REASONS 1 AVANI CIMCON TECHNOLOGIES LTD SUPER - NORMAL PROFITS , FUNCTIONALLY DIFFERENT, REVENUE FROM SOFTWARE SERVICES & SOFTWARE PRODUCTS AND NO SEGMENTAL INFORMATION AVAILABLE BASED O N INFORMATION RECEIVED U/S.133(6), IT QUALIFIES ALL THE FILTERS APPLIED BY THE TPO 2 CELESTIAL LABS LTD FUNCTIONALLY DIFFERENT , COMPANY IS INTO BIOINFORMATICS AND HAS EARNED SUPER NORMAL PROFIT BASED ON INFORMATION RECEIVED U/S.133(6), IT IS MAINLY A R & D COMPANY AND QUALIFIES ALL THE FILTERS APPLIED BY THE TPO 3 KALS INFOSYSTEMS LTD FUNCTIONALLY DIFFERENT , REVENUE FROM SOFTWARE SERVICES & SOFTWARE PRODUCTS AND NO SEGMENTAL INFORMATION AVAILABLE AS PER THE REPLY RECEIVED U/S. 133(6), IT QUALIFIED ALL FILTERS APPLIED BY THE AO 4 MEGA S OFT LTD FUNCTIONALLY DIFFERENT , REVENUE FROM SOFTWARE SERVICES & SOFTWARE PRODUCTS AND TPO HAS DISREGARDED THE SEGMENTAL INFORMATION PROVIDED AND TAKEN THE COMPANY AS COMPARABLE AT ENTERPRISE LEVEL AS PER INFORMATION U/S.133(6), ITS CONSULTING DIVISION IS INTO SOFTWARE DEVELOPMENT SERVICES AND ITS SWD SEGMENT QUALIFIES ALL THE FILTERS APPLIED BY THE TPO IT(TP)A.1102/BANG/2011 PAGE - 9 5 E - ZEST SOLUTIONS LTD FUNCTIONALLY DIFFERENT , COMPANY IS INTO HIGH END TECHNICAL SERVICES WHICH COMES UNDER THE NATURE OF KNOWLEDGE PROCESS OUTSOURCING SERVICES BASED ON THE INFORMATION U/S.133(6), IT IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND QUALIFIES ALL THE FILTERS APPLIED BY THE TPO 6 HELIOS & MATHESON INFORMATION TECHNO-LOGY LTD FUNCTIONALLY DIFFERENT , COMPANY IS ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS QUALIFIES ALL THE FILTERS APPLIED. HENCE TO BE ACCEPTED AS COMPARABLE 7 QUINTEGRA SOLUTIONS LTD FUNCTIONALLY DIFFERENT , COMPANY IS INTO PREPARATORY SOFTWARE PRODUCTS, OWNS INTANGIBLES. ALSO ENGAGED IN R & D ACTIVITIES AND HENCE CREATION OF IPR IT IS IN TO SOFTWARE DEVELOPMENT SERVICES AND QUALIFIED ALL THE FILTERS APPLIED BY THE TPO 8 THIRDWARE SOLUTIONS LTD FUNCTIONALLY DIFFERENT, COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES & SUBSCRIPTION. SEGMENTAL INFORMATION FOR PRODUCT DEVELOPMENT AND SOFTWARE DEVELOPMENT NOT GIVEN IN P & L A/C. BASED ON THE INFORMATION U/S 133(6), IT QUALIFIED ALL THE FILTERS APPLIED BY THE TPO 9 ISHIR INFOTECH LTD OUTSOURCES THE WORK, FAILS EMPLOYEE COST 25% FILTER AS PER THE REPLY RECEIVED U/S 133(6), IT QUALIFIES ALL FILTERS APPLIED BY THE AO IT(TP)A.1102/BANG/2011 PAGE - 10 10 LUCID SOFTWARE LTD FUNCTIONALLY DIFFERENT. COMPANY DEALS WITH SOFTWARE PRODUCTS PUR E SOFTWARE DEVELOPMENT SERVICE PROVIDER. IT IS CONSIDERED COMPARABLE AS IT QUALIFIED ALL THE FILTERS APPLIED BY THE TPO 11 FLEXTRONICS SOFT - WARE SYSTEMS LTD (SEG) TURNOVER FILTER. CONTRADICTION BETWEEN 133(6) REPLY AND ANNUAL REPORT QUALIFIED ALL THE FILTERS APPLIED HENCE TO BE ACCEPTED AS COMPARABLE 12 INFOSYS TECHNOLOGIES LTD TURNOVER FILTER. FUNCTIONALLY DIFFERENT, DEVELOPS SOFTWARE PRODUCTS. OWNS SIGNIFICANT INTANGIBLES, BRAND VALUE, MARKET LEADER, SUBSTANTIAL R & D EXPENSES IT IS INTO SOFTWARE DEVELOPMENT SERVICES AND QUALIFIED ALL THE FILTERS APPLIED HENCE TO BE ACCEPTED AS COMPARABLE 13 PERSISTENT SYSTEMS LTD TURNOVER FILTER. FUNCTIONALLY DIFFERENT, ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTICAL SERVICES AS PER REPLY RECEIVED U/S 133(6), IT QUALIFIES ALL FILTERS APPLIED BY THE AO 14 SASKEN COMMUNICATION TECHNOLOGIES LTD TURNOVER FILTER. FUNCTIONALLY DIFFERENT, SUBSTANTIAL R & D EXPENSES, SIGNIFICANT INTANGIBLES, OWNS IPRS, UNDERWENT RESTRUCTURING DURING THE YEAR QUALIFIED ALL THE FILTERS APPLIED HENCE TO BE ACCEPTED AS COMPARABLE 15 TATA ELXSI LTD (SEG TURNOVER FILTER. FUNCTIONALLY DIFFERENT, SOFTWARE SEGMENT CONSISTS OF PRODUCT DESIGN SERVICES. INNOVATION DESIGN ENGINEERING AND VISUAL COMPUTING LABS. SIGNIFICANT R & D, BRAND VALUE, SIZE COMPANY SATISFIES ALL FILTERS. TPO HAS CONSIDERED THE SOFTWARE DEVELOPMENT & SERVICES SEGMENT OF THE COMPANY AS A COMPARABLE IT(TP)A.1102/BANG/2011 PAGE - 11 16 WIPRO LTD TO FILTER. FUNCTIONALLY DIFFERENT, BOTH SWD AND PRODUCT DEVELOPMENT (NO SEGMENTAL), SIGNIFICANT INTANGIBLES & MARKET LEADER AS THE SEGMENTAL DETAILS ARE AVAILABLE FOR SWD SEGMENT ON STANDALONE BASIS THE SAME IS CONSIDERED AS A COMPARABLE 17 IGATE GLOBAL SOLUTIONS LTD (SEG) TO FILTER 18 MINDTREE CONSULTING LTD TO FILTER 9. IN THE CASE OF MERITOR LVS (INDIA) P LTD V. ACIT IN IT(TP)A.1231/BANG/2011, DT.16.10.2015, FOR THE ASSE SSMENT YEAR 2007-08, THIS TRIBUNAL FOUND THAT THAT ASSESSEES ISSUES W ERE WITH REGARD TO SOFTWARE DEVELOPMENT SERVICES SEGMENT AS WAS WITH THE HEWLETT-PACKARD (INDIA) GLOBALSOFT P. LTD AND HENCE CONSIDERED THE COORDINATE BENCH DECISION IN HEWLETT-PACKARD (INDIA) GLOBALSOFT P. LTD V. DCIT IN IT(TP)A. 1031/BANG/2011, DT.23.09.2015, AS A GOOD PRECEDEN T AND CONSIDERED SUCH DECISION AS UNDER: 1. AVANI CIMCON TECHNOLOGIES LTD. 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FR OM THE ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN THE COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITTED THAT THIS COMPANY WOUL D HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFTWARE SERVICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FROM THE AS SESSEE. IT WAS FURTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIB UNAL TO THE 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 REVENUE FROM SOFTW ARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE WHO WAS IT(TP)A.1102/BANG/2011 PAGE - 12 RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY AND IT WAS HELD AS FOLLOWS:- 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCOM ) : HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPE RATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEE N PROVIDED SO AS TO SEE WHETHER THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESS EE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNA BLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PARTY. LEARNE D CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETA ILS OF PERCENTAGE OF EXPORT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERA TION 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 07-08 08-09 OPERATING REVENUE 21761611 35477523 29342809 280398 51 OPERATING EXPNS. 16417661 23249646 23359186 3110 8949 OPERATING PROFIT 5343950 12227877 5983623 (3 069098) OPERATING MARGIN 32.55% 52.59% 25.62% - 9.87% 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UN USUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06-07. THE OPERAT ING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXT RAORDINARY YEAR FOR THIS COMPANY. EVEN THE GROWTH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR AS PER NASSCOM WAS 32%. THE GROWTH RATE OF TH IS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW OF THE ABOVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJECTED AS A COMPA RABLE. 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE REASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECISION OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE. IT(TP)A.1102/BANG/2011 PAGE - 13 2. CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVELOPMENT COMP ANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- IN THE DIRECTORS REPORT (PAGE 20 OF PB-IL), IT IS STATED THAT THE COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR I N-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2A B) OF THE INCOME TAX ACT. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UNDER DEFERRED REVENUE EXPENDITURE (PAGE 31 OF PB-II), IT IS MENT IONED THAT, EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT O F NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AN D THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALL MENTS FROM THE YEAR IN WHICH IT IS INCURRED. AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO T HE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE (PAG E 30 OF PB-II). THIS AMOUNTS TO NEARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SOFT WARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D ACTIVITIES IS BAD IN LAW. 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISI ON OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PR IVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (FOR AY 2007-08) IN WHIC H THE COMPARABILITY OF THIS COMPANY FOR CLINICAL TRIAL RE SEARCH SEGMENT. THE RELEVANT EXTRACT OF DISCUSSION REGARDING THIS COMPA NY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAG E-389 OF THE PAPER BOOK WHICH IS AN EXTRACT FROM THE DIRECTO RS REPORT WHICH READS AS FOLLOWS: THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TOO L CELSUITE TO DRUG DISCOVERY IN, FINDING THE LEAD MOLECULES FO R DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC ( OF) RIGHT/PATENT ACT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND T ECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYING BI O-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCO DERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE BEEN DISCUSSED WITH PATENT OFFICIALS A ND 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 TECH NOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY REPUTED CS IR IT(TP)A.1102/BANG/2011 PAGE - 14 ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY T WO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS . THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANU FACTURE INDUSTRIAL ENZYMES. THIS FACILITY WOULD ALSO INCLUDE THE RESEA RCH 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 AND SHOULD BE C ONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELATION TO A SOF TWARE DISCOVERY OF NEW DRUGS. MOREOVER THE COMPANY ALSO I S OWNER OF THE IPR. THERE IS HOWEVER A REFERENCE TO DEVELOPME NT 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 THEREFORE CANNOT BE CO NSIDERED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJ USTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCESS OF M AKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THI S REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE AB OVE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARC H IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT TH IS COMPANY IS OWNER OF IPR, IT HAS SOFTWARE FOR DISCOVERY OF NEW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCER. IN THE ULTIMATE ANALYSIS, THE ITAT DID NOT CONSIDER THIS COMPANY AS A COMPARABLE IN CL INICAL TRIAL SEGMENT, FOR THE REASON THAT THIS COMPANY HAS DIVER SE BUSINESS. IT WAS SUBMITTED THAT, HOWEVER, FROM THE ABOVE EXTRACT S IT IS CLEAR THAT THIS COMPANY IS NOT INTO SOFTWARE DEVELOPMENT ACTIV ITIES, ACCORDINGLY, THIS COMPANY SHOULD BE REJECTED AS A COMPARABLE BEI NG FUNCTIONALLY DIFFERENT. 45. FROM THE MATERIAL AVAILABLE ON RECORD, IT T RANSPIRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY WAS C LASSIFIED AS A RESEARCH AND DEVELOPMENT COMPANY. ACCORDING TO THE TPO IN AY 07- 08 THIS COMPANY HAS BEEN CLASSIFIED AS SOFTWARE DEV ELOPMENT SERVICE PROVIDER IN THE CAPITALINE/PROWESS DATABASE AS WELL AS IN THE ANNUAL REPORT OF THIS COMPANY. THE TPO HAS RELIED ON THE RESPONSE FROM THIS COMPANY TO A NOTICE U/S.133(6) OF THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT S ERVICES. THE ASSESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREA T THIS AS A COMPARABLE HAS POINTED OUT THAT THIS COMPANY PROVID ES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOINFORMATICS SERVICE S AND THAT THE IT(TP)A.1102/BANG/2011 PAGE - 15 SEGMENTAL DATA FOR EACH ACTIVITY IS NOT AVAILABLE A ND THEREFORE THIS COMPANY SHOULD NOT BE TREATED AS COMPARABLE. BESID ES THE ABOVE, THE ASSESSEE HAS POINT OUT TO SEVERAL REFERENCES IN THE ANNUAL REPORT FOR 31.3.2007 HIGHLIGHTING THE FACT THAT THIS COMPANY W AS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PROVIDES RELATED SOFTWAR E DEVELOPMENT SERVICES. THE TPO CALLED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPANY. THE TPO ALSO CALLED FOR DESCRIPTION OF SOFTWARE DEVELOPMENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DATED 29.3.2010 HAS GIVEN DETA ILS OF EMPLOYEES WORKING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHETHER ANY SEGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OTHER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTW ARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISS UED DRAFT RED HERRING PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH. THE TPO WANTED TO KNOW AS TO WHETHER THE PRIMARY BUSINESS OF THIS COMPANY IS SOF TWARE DEVELOPMENT SERVICES AS INDICATED IN THE ANNUAL REPORT FOR FY 0 6-07 OR CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS AND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFERENCE TO ANY REPLY BY CELESTIAL LABS TO THE ABOVE CLARIFICATION OF THE TPO. THE TPO WITHOUT A NY BASIS HAS HOWEVER CONCLUDED THAT THE BUSINESS MENTIONED IN TH E DRHP ARE THE SERVICES OR BUSINESSES THAT WOULD BE STARTED BY UTI LIZING THE FUNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN NO WAY CONNECTED WITH BUSINESS OPERATIONS OF THE COMPANY D URING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISS IONS MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICAL LY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS A ND OTHER PRODUCTS, THERE IS NO CLEAR BASIS ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DE VELOPMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSE SSEE THAT THIS COMPANY OUGHT NOT TO HAVE BEEN CONSIDERED AS COMPAR ABLE. 3. KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONT ENTION 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 ENGAGED I N PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDI TURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTW ARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST F AILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DEC ISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. D CI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 IT(TP)A.1102/BANG/2011 PAGE - 16 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIO NALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DE VELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABL E TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGA GED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INT O DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS 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 REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HA S DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HI GHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. 4. MEGASOFT LTD. : 24. THIS COMPANY WAS CHOSEN AS A COMPARABLE BY THE TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE ARE TWO SEG MENTS IN THIS COMPANY VIZ., (I) SOFTWARE DEVELOPMENT SEGMENT, AND (II) SO FTWARE PRODUCT SEGMENT. THE ASSESSEE IS A PURE SOFTWARE SERVICES PROVIDER AND NOT A SOFTWARE PRODUCT DEVELOPER. ACCORDING TO THE ASSES SEE THERE IS NO BREAK UP OF REVENUE BETWEEN SOFTWARE PRODUCTS AND SOFTWAR E SERVICES BUSINESS ON A STANDALONE BASIS OF THIS COMPARABLE. THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHICH THIS COMPA NY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ., BLUEALLY DIVISION A ND XIUS-BCGI DIVISION. XIUS-BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE. THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIR ELESS AND IT(TP)A.1102/BANG/2011 PAGE - 17 CONVERGENT TELECOM INDUSTRY. THESE PRODUCTS ARE SO LD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPLEMENTING THESE ST ANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PROD UCTS OR RECONFIGURE PRODUCTS TO FIT INTO THEIR BUSINESS ENV IRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PAC KAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PR ODUCT SOFTWARE WOULD CONSTITUTE PACKAGED PRODUCT AND AROUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES REL ATED TO TRAVELLING, BOARDING AND LODGING EXPENSE. BASED ON THE ABOVE R EPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY WAS M AINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO PRODUCT SOFTWARE) INTERNALLY AND THAT THE PORTION OF THE RE VENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUSTOMIZA TION WAS LESS THAN 25% OF THE OVERALL REVENUES. THE TPO THEREFORE HEL D THAT LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. THE B ASIS ON WHICH THE TPO ARRIVED AT THE PLI OF 60.23% IS GIVEN AT PAGE-1 15 AND 116 OF THE ORDER OF THE TPO. IT IS CLEAR FROM THE PERUSAL OF THE SAME THAT THE TPO HAS PROCEEDED TO DETERMINE THE PLI AT THE ENTITY LE VEL AND NOT ON THE BASIS OF SEGMENTAL DATA. 25. IN THE ORDER OF THE TPO, OPERATING MARGIN WAS COMPUTED FOR THIS COMPANY AT 60.23%. IT IS THE COMPLAINT OF THE ASSE SSEE THAT THE OPERATING MARGINS HAVE BEEN COMPUTED AT ENTITY LEVE L COMBINING SOFTWARE SERVICES AND SOFTWARE PRODUCT SEGMENTS. I T WAS SUBMITTED THAT THE PRODUCT SEGMENT OF MEGASOFT IS SUBSTANTIALLY DI FFERENT FROM ITS SOFTWARE SERVICE SEGMENT. THE PRODUCT SEGMENT HAS E MPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SERVICE SEGMENT HAS EMP LOYEE COST OF 50%. SIMILARLY, THE PROFIT MARGIN ON COST IN PRODU CT SEGMENT IS 117.95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11 %. BOTH THE SEGMENTS ARE SUBSTANTIALLY DIFFERENT AND THEREFORE COMPARISO N AT ENTITY LEVEL IS WITHOUT BASIS AND WOULD VITIATE THE COMPARABILITY ( SUBMISSIONS ON PAGE 381 TO 383 OF THE PB-I). IT WAS FURTHER SUBMITTED THAT MEGASOFT LIMITED HAS PROVIDED SEGMENTAL BREAK-UP BETWEEN THE SOFTWAR E SERVICES SEGMENT AND SOFTWARE PRODUCT SEGMENT (PAGE 68 OF PB-II), WH ICH WAS ALSO ADOPTED BY THE TPO IN HIS SHOW CAUSE NOTICE (PAGE 8 4 OF PB-I). THE SEGMENTAL RESULTS I.E., RESULTS PERTAINING TO SOFTW ARE SERVICES SEGMENT OF THIS COMPANY WAS: SEGMENTAL OPERATING REVENUES RS.63,71,32,544 SEGMENTAL OPERATING EXPENSES RS.51,75,13,211 OPERATING PROFIT RS.11,96,19,333 OP/TC (PLI) 23.11% IT(TP)A.1102/BANG/2011 PAGE - 18 26. IT WAS REITERATED THAT IN THE GIVEN CIRCUMSTAN CES ONLY PLI OF SOFTWARE SERVICE SEGMENT VIZ., 23.11% OUGHT TO HAVE BEEN SEL ECTED FOR COMPARISON. 27. IT WAS FURTHER SUBMITTED THAT THE LEARNED TPO IN CASE OF OTHER COMPARABLE, SIMILARLY PLACED, HAD ADOPTED THE MARGI NS OF ONLY THE SOFTWARE SERVICE SEGMENT FOR COMPARABILITY PURPOSES . CONSISTENT WITH SUCH STAND, IT WAS SUBMITTED THAT THE MARGINS OF TH E SOFTWARE SEGMENT ONLY SHOULD BE ADOPTED IN THE CASE OF MEGASOFT ALSO , IN CONTRAST TO THE ENTITY LEVEL MARGINS. 28. COMPUTATION OF THE NET MARGIN FOR MEGA SOFT LT D. IS THEREFORE REMITTED TO THE FILE OF THE TPO TO COMPUTE THE CORR ECT MARGIN BY FOLLOWING THE DIRECTION OF THE TRIBUNAL IN THE CASE OF TRILOG Y E-BUSINESS SOFTWARE INDIA PVT.LTD. 5. 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 INCLUSIO N OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS FUNCTIONA LLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED THE OBJECTIONS R AISED BY THE ASSESSEE ON THE GROUND THAT AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND SATISF IES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT TO THE ASS ESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E-BUSINESS CONSULTING SERVICES, CONSIS TING OF WEB STRATEGY SERVICES, I T DESIGN SERVICES AND IN TECHN OLOGY CONSULTING SERVICES INCLUDING PRODUCT DEVELOPMENT CONSULTING S ERVICES. THESE SERVICES, THE LEARNED AUTHORISED REPRESENTATIVE CON TENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTS OURCING (KPO) SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA IN ITS ANNUAL REPORT. THE LEARNED AU THORISED REPRESENTATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIVE INFORMATION O N THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DE TAILS AVAILABLE ON THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WH ILE EVALUATING THE COMPANYS FUNCTIONAL PROFILE. IT IS ALSO SUBMIT TED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANI ES RENDERING KPO SERVICES OUGHT NOT TO BE CONSIDERED AS COMPARABLE T O SOFTWARE DEVELOPMENT COMPANIES AND RELIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN IT(TP)A.1102/BANG/2011 PAGE - 19 ITA NO.1961(HYD)/2011 DT.23.11.2012 AND PRAYED THAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLUTIONS L TD., 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 COMPAR ABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLYCONSIDERED THE MATERIAL ON RECORD. IT IS S EEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARBALES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY I N ITS REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVICES RENDERED BY THE COMPANY TO GI VE A FINDING WHETHER THE SERVICES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSE SSEE. FROM THE DETAILS ON RECORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY I.E. E-ZEST SOLU TIONS LTD., IS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVI CES. IT HAS BEEN HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN T HE 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 CASE, WE HOLD THAT THIS COMPANY, I.E. E-ZEST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN T HE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED. 6. HELIOS & MATHESON INFORMATION TECHNOLOGY LT D : 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WIT H REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION S OLUTIONS LTD. (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO A SSAIL THE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE LIST OF COM PARABLES IS TO BE EFFECT THAT THEY ARE FUNCTIONALLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CONCERNS ARE ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIF FERENT FROM THE SERVICES UNDERTAKEN BY THE ASSESSEE IN ITS IT-SERVI CES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORD ER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYST EMS LTD., IS TO THE EFFECT THAT THE SAID CONCERNS APPLICATION SOFT WARE SEGMENT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. THE SAID CONCER N IS ENGAGED IN TWO SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AN D TRAINING. AS PER THE TPO, THE APPLICATION SOFTWARE SEGMENT IS FU NCTIONALLY IT(TP)A.1102/BANG/2011 PAGE - 20 COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS E NGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASSESSEE IS THAT A PERUS AL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F.Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND SOFTWARE SERVICES. THE ASSESSEE POINTE D OUT THIS TO THE TPO IN ITS WRITTEN SUBMISSIONS, COPY OF WHICH IS PL ACED IN THE PAPER BOOK AT PAGE 420.3 TO 420.4. THE ASSESSEE FURTHER P OINTED OUT THAT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSI NESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTWARE SERV ICES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPL ICATION SOFTWARE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COM PARABILITY WITH THE ASSESSEES IT-SERVICES SEGMENT. THE TPO HOWEVER, NO TICED THAT THOUGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODUCTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PRODUCTS AS THERE WERE NO COST OF PURCHAS ES DEBITED IN THE PROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED THAT T HE QUANTUM OF REVENUE FROM SALE OF PRODUCTS WAS NOT AVAILABLE AS PER THE FINANCIAL STATEMENTS OF THE SAID CONCERN, BUT AS THE BASIC FU NCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEES SEGMENT O F IT-SERVICES. 18. BEFORE US, APART FROM REITERATING THE POINTS RA ISED BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIATELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CON CERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALL Y INCOMPARABLE. FOR THE SAID PURPOSE, OUR REFERENCE HAS BEEN INVITE D TO PAGES 421 TO 542 OF THE PAPER BOOK, WHICH IS THE COPY OF THE TRA NSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE FOR THE A.Y. 2006-07, AN D IN PARTICULAR, ATTENTION WAS INVITED TO PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REFLECTED KALS INFORMATI ON SOLUTIONS LTD. (SEG) AS FUNCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICATION F OR THE TPO TO CONSIDER THE SAID CONCERN AS FUNCTIONALLY COMPARABL E IN THE INSTANT ASSESSMENT YEAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE S AID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE A SSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN THE PR ESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN T HE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS IN TER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGME NT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND IT(TP)A.1102/BANG/2011 PAGE - 21 NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDER S OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PRO FILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMM EDIATELY PRECEDING YEAR. THEREFORE, HAVING REGARD TO THE FAC TUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERT ED THAT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEES SEGMENT OF IT SERVICES. 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHES ON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISED SIMILAR AR GUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG). WE H AVE PERUSED THE RELEVANT PARA OF THE ORDER OF THE TPO I.E., 6.3.21, IN TERMS OF WHICH THE SAID CONCERN HAS BEEN INCLUDED AS A COMPARABLE CONC ERN. THE ASSESSEE POINTED OUT THAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO FOR A.Y. 2006-07 TH E SAID CONCERN WAS FOUND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WAS NOT DISTURBED BY TH E TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY, PLACED AT PA GE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESAID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION T O KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO WE F IND THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF C OMPARABLES. 7. THIRDWARE SOLUTIONS LTD. (SEGMENT) : 15.1 THIS COMPANY WAS PROPOSED FOR INCLUSION IN TH E LIST OF COMPARABLES BY THE TPO. BEFORE THE TPO, THE ASSESSE E OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S ON THE GROUND THAT ITS TURNOVER WAS IN EXCESS OF RS.500 CRORES. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASON THAT APART FROM SOFTWARE DEVELOPMENT SERVICE S, IT IS IN THE BUSINESS OF PRODUCT DEVELOPMENT AND TRADING IN SOFT WARE AND GIVING LICENSES FOR USE OF SOFTWARE. IN THIS REGARD, THE L EARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTION. IT HAS BEEN POINTED OUT FROM THE ANNUAL REPORT THAT THE COMPANY HAS NOT PRO VIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACCOUNT FOR SOFT WARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT SERVICES. (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (2008-TII-04-ITAT- PUNE-TP), THE TRIBUNAL HAS DIRECTED THAT THIS COMPA NY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PROVIDERS, AS ITS I NCOME INCLUDES INCOME FROM SALE OF LICENCES WHICH HAS INCREASED TH E MARGINS OF THE COMPANY. IT(TP)A.1102/BANG/2011 PAGE - 22 THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THE TRIBUNAL (SUPRA) , THIS COMPANY OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE MATERIAL ON RECORD THAT THE COMPANY IS ENGAGED IN PRODUCT DEVEL OPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOW EVER, THE SEGMENTAL PROFIT AND LOSS ACCOUNTS FOR SOFTWARE DEV ELOPMENT SERVICES AND PRODUCT DEVELOPMENT ARE NOT GIVEN SEPARATELY. F URTHER, AS POINTED OUT BY THE LEARNED AUTHORISED REPRESENTATIVE, THE P UNE BENCH OF THE TRIBUNAL IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (SUPRA) HAS DIRECTED THAT SINCE THE INCOME OF THIS COMPANY INCL UDES INCOME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMP ARABLE FOR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFT WARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE MATTER AND FO LLOWING THE AFORE CITED DECISION OF THE PUNE TRIBUNAL (SUPRA), WE DIRECT TH AT THIS COMPANY BE OMITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. 8 & 9. M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWA RE LTD : 20. AS FAR AS COMPARABLE COMPANIES LISTED AT SL. NO.11 & 14 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWARE LTD., IS CONCERNED , THIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.L TD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE A FORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVI CES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VER Y SAME 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SER VICES PVT. LTD.(SUPRA). THE FOLLOWING WERE THE RELEVANT OBSER VATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA ): IT(TP)A.1102/BANG/2011 PAGE - 23 22. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE BASIS OF THE FINDING OF THIS TRIBUNAL IN THE CASE O F MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. DT 22.2.201 3, WHEREIN AT PAGES 17 AND 22 OF ITS ORDER THE DISTINCTIONS AS TO WHY THESE COMPANIES SHOULD BE EXCLUDED ARE BROUGHT OUT. HE S UBMITTED THAT THE FACTS OF THE CASE BEFORE US ARE SIMILAR AND, THEREF ORE, THE SAID DECISION IS APPLICABLE TO THE ASSESSEE'S CASE ALSO. 23. THE LEARNED DR HOWEVER OBJECTED TO THE EXCLUSIO N OF THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. ON A CAREF UL PERUSAL OF THE MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN TH E CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. (CITED SUPRA) HAS TAKEN A NOTE OF DISSIMILARITIES BETWEEN THE ASSESSEE THER EIN AND LUCID SOFTWARE LTD. AS OBSERVED THEREIN LUCID SOFTWARE L TD. COMPANY IS ALSO INVOLVED IN THE DEVELOPMENT OF SOFTWARE AS COM PARED TO THE ASSESSEE, WHICH IS ONLY INTO SOFTWARE SERVICES. SI MILARLY, AS REGARDS ISHIR INFOTECH LTD., THE TRIBUNAL HAS CONSIDERED TH E DECISION OF THE TRIBUNAL IN THE CASE OF 24/7 CO. PVT. LTD TO HOLD T HAT ISHIR INFOTECH IS ALSO OUT-SOURCING ITS WORK AND, THEREFORE, HAS NOT SATISFIED THE 25% EMPLOYEE COST FILTER AND THUS HAS TO BE EXCLUDED FR OM THE LIST OF COMPARABLES. AS THE FACTS OF THE CASE BEFORE US AR E SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH, WE HOLD THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUDED. 21. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESA ID COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. 10. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) : 26. NOW TAKING UP THE QUESTION OF EXCLUSION OF FLE XTRONICS SOFTWARE SYSTEMS LTD (SEG), IT IS TRUE THAT THE DEC ISION OF MOTOROLA SOLUTIONS (INDIA) P. LTD (SUPRA) ALSO WAS FOR THE V ERY SAME YEAR AND ALSO ON SOFTWARE DEVELOPMENT SERVICES SECTOR. THIS TRIBUNAL HELD AS UNDER : 97.2 FOR A COMPANY TO BE INCLUDED IN THE LIST OF C OMPARABLES, IT IS NECESSARY THAT CREDIBLE INFORMATION IS AVAILABLE AB OUT THE COMPANY. UNLESS THIS BASIC REQUIREMENT IS FULFILLED, THE COM PANY CANNOT BE TAKEN AS A COMPARABLE. IT IS TRUE THAT LD. TPO IS ENTITLE D TO OBTAIN INFORMATION IT(TP)A.1102/BANG/2011 PAGE - 24 US/ 133(6), THE OBJECT OF WHICH IS PRIMARILY ONLY T O SUPPLEMENT THE INFORMATION ALREADY AVAILABLE ON RECORD, BUT NOT, A S RIGHTLY SUBMITTED BY LD. COUNSEL FOR THE ASSESSEE, TO REPLACE THE INF ORMATION. IF THERE IS A COMPLETE CONTRADICTION BETWEEN THE INFORMATION OBTA INED U/S 133(6) AND ANNUAL REPORT THEN THE SAID INFORMATION CANNOT BE SUBSTITUTED FOR THE INFORMATION CONTAINED IN ANNUAL REPORT. WE, THE REFORE, ARE IN ITA NO. 5637/D/2011 149 AGREEMENT WITH LD. COUNSEL FOR THE ASSESSEE THAT THIS COMPANY CANNOT BE INCLUDED AS A COMPARABLE IN THE SET OF COMPARABLES SELECTED BY LD. TPO ON ACCOUNT OF CLEAR CONTRADICTION BETWEEN CONTENTS OF ANNUAL REPORT AND INFORMATION O BTAINED U/S 133(6). 27. RULE 10D(3) SPECIFIES THE INFORMATION AND DOCUM ENTS THAT ARE TO BE MAINTAINED BY A PERSON WHO IS ENTERING INTO INTE RNATIONAL TRANSACTIONS. THESE ARE OFFICIAL PUBLICATIONS, PU BLISHED ACCOUNTS OR THOSE WHICH ARE IN PUBLIC DOMAIN EXCEPT FOR AGREEME NTS AND CONTRACTS TO WHICH ASSESSEE IS PRIVY. ONCE THE ANNUAL REPORT OF A COMPANY IS FOR A YEAR DIFFERENT FROM THE FINANCIAL YEAR ENDING 31 ST MARCH, THEN WITHOUT DOUBT, IT WILL CEASE TO BE A GOOD COMPARABLE, UNLE SS THE INFORMATION RECEIVED IN PURSUANCE TO A NOTICE U/S.133(6) OF THE ACT FROM SUCH COMPANY, IS RECONCILED WITH THE FIGURES AVAILABLE I N SUCH ANNUAL REPORT. 28. IN THE CASE OF FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), NO DOUBT THE ANNUAL REPORT WAS FOR THE YEAR ENDING 31.03.200 7. HOWEVER IT WAS ONLY FOR A NINE MONTHS PERIOD. NO RECONCILIATION W AS ATTEMPTED BY THE LOWER AUTHORITIES BETWEEN THE FIGURES GIVEN IN SUCH ANNUAL REPORT WITH THE FIGURES WHICH WERE MADE AVAILABLE BY THE SAID C OMPANY TO THE TPO PURSUANT TO NOTICE ISSUED TO THEM U/S.133(6) OF THE ACT. NO DOUBT AT PAGE 123 OF TP ORDER, TPO HAS STATED THAT THE SOFTW ARE DEVELOPMENT SERVICE REVENUES WERE MORE THAN 75% BASED ON THE FO LLOWING FIGURES : BUT HOW THIS SEGMENTATION WAS DONE BY THE TPO AND T HE RECONCILIATION OF THE SAID SEGMENTATION WITH THE AN NUAL REPORT OF THE ASSESSEE WAS NEVER ATTEMPTED OR DONE. IN SUCH A SI TUATION WE ARE OF THE OPINION THAT FLEXTRONICS SOFTWARE SOLUTIONS LTD (SEG) COULD NOT BE CONSIDERED AS A PROPER COMPARABLE. WE DIRECT EXCLU SION THEREOF. IT(TP)A.1102/BANG/2011 PAGE - 25 11. INFOSYS TECHNOLOGIES LTD. 12.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAN D ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OB JECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THI S CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPA NY TO THIS EFFECT WHICH IS AS UNDER :- (I) THE COMPANY HAS AN INTELLECTUAL PROPERTY (IP) CELL TO GUIDE ITS EMPLOYEES TO LEVERAGE THE POWER OF IP FOR THEIR GRO WTH. IN 2008, THIS COMPANY GENERATED OVER 102 INVENTION DISCLOSURES AN D FILED AN AGGREGATE 10 PATENTS IN INDIA AND THE USA. TILL DA TE THIS COMPANY HAS FILED AN AGGREGATE OF 119 PATENT APPLICATIONS (PEND ING) IN INDIA AND USA OUT OF WHICH 2 HAVE BEEN GRANTED IN THE US. (II) THIS COMPANY HAS SUBSTANTIAL REVENUES FROM SO FTWARE PRODUCTS AND THE BREAK-UP OF THE SOFTWARE PRODUCT REVENUES I S NOT AVAILABLE. (III) THIS COMPANY HAS INCURRED HUGE RESEARCH AND D EVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATELY RS.200 CR ORES. (IV) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWAR E PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLO WING JUDICIAL DECISIONS :- (A) ITAT, DELHI BENCH DECISION IN THE CASE OF AGNIT Y INDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010) AND (B) TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (I TA NO.1054/BANG/2011) 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF O PERATIONS AND THE OPERATING MARGINS OF THIS COMPANY HAVE NOT BEEN EXT RAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATI VE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FI ND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABL ISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT F ROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY IT(TP)A.1102/BANG/2011 PAGE - 26 E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASS ESSMENT YEAR 2007- 08 IS APPLICABLE TO THIS YEAR ALSO. THE ARGUMENT P UT FORTH BY ASSESSEE'S IS THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE B REAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERE D ACCORDINGLY. 12) PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A C OMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NOT AVAILABLE. THE TPO R EJECTED THE ASSESSEE'S OBJECTIONS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPANY FOR FINANCIAL YEAR 2007-08, IT IS MAINL Y A SOFTWARE DEVELOPMENT COMPANY AND AS PER THE DETAILS FURNISHE D IN REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT, SOFTWARE DE VELOPMENT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF TH E MATTER, THE ASSESSING OFFICER INCLUDED THIS COMPANY I.E. PERSIS TENT SYSTEMS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNC TIONALITY CRITERION. 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCL USION OF THIS COMPANY AS A COMPARABLE SUBMITTING THAT THIS COMPAN Y IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE ARE SEVE RAL OTHER FACTORS ON WHICH THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THA T : (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING S ERVICES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007-08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY ENGAG ED IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES FOR INDEPEND ENT SOFTWARE VENDORS AND ENTERPRISES. (III) WEBSITE EXTRACTS INDICATE THAT THIS COMPANY I S IN THE BUSINESS OF PRODUCT DESIGN SERVICES. (IV) THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORD IA TECHNOLOGIES INDIA PVT. LTD.(SUPRA) WHILE DISCUSSING THE COMPARA BILITY OF ANOTHER COMPANY, NAMELY LUCID SOFTWARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGMENTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRESENTLY UNDER CONSIDERA TION, WHICH IS IT(TP)A.1102/BANG/2011 PAGE - 27 INTO PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICE S AND FOR WHICH THE SEGMENTAL DATA IS NOT AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. BE OMITTED FROM THE LIST OF COMPARABLES. 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORT THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LT D., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHI LE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVICES PROVIDER. WE FIN D THAT, AS SUBMITTED BY THE ASSESSEE, THE SEGMENTAL DETAILS AR E NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUN CIATED IN THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELE CORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THAT IN THE AB SENCE OF SEGMENTAL DETAILS / INFORMATION A COMPANY CANNOT BE TAKEN INT O ACCOUNT FOR COMPARABILITY ANALYSIS, WE HOLD THAT THIS COMPANY I .E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM THE SET OF CO MPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY . 13) SASKEN COMMUNICATION TECHNOLOGIES LTD.: 109. LD TPO NOTICED THAT THE COMPANY WAS REJECTED IN THE TP DOCUMENT ON THE GROUND THAT THE COMPANY FAILS ITS F ILTER OF BUSINESS REVIEW AND R&D TO SALES WAS MORE THAN 3%. HOWEVER, NO REASONS WERE GIVEN FOR THE BUSINESS REVIEW. 109.1 LD. TPO POINTED OUT THAT R&D TO SALES BEING M ORE THAN 3% IS NOT ACCEPTABLE FOR WHICH DETAILED DISCUSSION HAS AL READY BEEN MADE EARLIER. HE FURTHER NOTICED THAT THE COMPANY HAS SO FTWARE SERVICES SEGMENT AND SEGMENTAL RESULTS ARE AVAILABLE FOR SOF TWARE SERVICES. HE FURTHER POINTED OUT THAT ON THE BASIS OF INFORMA TION OBTAINED U/S 133(6), THE COMPANY QUALIFIES ONSITE REVENUE FILTER (ONSITE REVENUES WERE TO THE EXTENT 27.27% OF ITS EXPORT REVENUES). AFTER CONSIDERING THE ASSESSEES REPLY, LD. TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. LD. COUNSEL POINTED OUT THAT THIS COMP ANY HAS INCURRED SIGNIFICANT EXPENDITURE ON RESEARCH AND DEVELOPMENT ACTIVITY THE SAME BEING 6.07% OF SALES. HE FURTHER SUBMITTED THA T THE COMPANY HAD SIGNIFICANT INTANGIBLE INASMUCH AS IT DEVELOPS SISKIN BRANDED PRODUCTS. THE COMPANY OWNS IPR FURTHER IT WAS POINT ED OUT BEFORE TPO THAT DURING THE YEAR THE COMPANY HAD ACQUIRED B OTNIA HIGHTECH IT(TP)A.1102/BANG/2011 PAGE - 28 F. AND ITS TWO SUBSIDIARIES AND THUS, IT HAD UNDER GONE SIGNIFICANT RESTRUCTURING. HOWEVER, LD. TPO IGNORED THESE FACTS HE RELIED ON THE FOLLOWING DECISIONS: IQ INFORMATION SYSTEM (I) PVT. LTD., ITA NO. 1961 /HYD./2012 (PARA NO. 11 & 23, PAGE 25); AMERSON PROCESS MANAGEMENT INDIA PVT. LTD., ITA N O. 8118/MUM./2010 (PARA 16 PAGE 15). 110. LD. DR RELIED ON THE ORDER OF TPO AND SUBMITTE D THAT TPO CONSIDERED THE COMPANIES SOFTWARE SERVICES SEGMENT DETAILS ONLY. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE PERU SED THE RECORD OF THE CASE. 111. LD. TPO HAS COMPLETELY IGNORED THE EXTRAORDINA RY BUSINESS CIRCUMSTANCES POINTED OUT BY ASSESSEE FOR WHICH NEC ESSARY ADJUSTMENT WAS REQUIRED TO BE MADE IN ACCORDANCE WI TH RULE 10B(3) OF INCOME TAX RULES. HOWEVER, SINCE THIS ADJUSTMENT WAS NOT POSSIBLE, TH EREFORE, THIS COMPANY SHOULD NOT HAVE BEEN INCLUDED IN THE LIST O F COMPARABLES. FURTHER, WE FIND THAT THE COMPANY OWNS IPR AND HAS BRANDED PRODUCTS WHICH ALSO DISTINGUISHES IT FROM THE ASSES SEE AND, THEREFORE, KEEPING IN VIEW THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD.(SUPRA), WE DIRE CT THE LD. TPO TO EXCLUDE THIS COMPARABLE FROM THE LIST OF COMPARABLE S. IF WE FOLLOW THE COORDINATE BENCH DECISION IN THE C ASE OF MOTORALA SOLUTION (INDIA) P. LTD, SASKEN COMMUNICATION TECHN OLOGIES LTD NEEDS TO BE EXCLUDED. HOWEVER, AS MENTIONED BY US AT PARA 24 ABOVE, WHERE THE CONTESTED COMPARABLE FORMED PART O F ASSESSEES OWN STUDY, THEN THE AO / TPO HAS TO BE GIVEN A CHAN CE FOR VERIFICATION, IN VIEW OF JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF QUARK SYSTEMS INDIA P. LTD (SU PRA). ACCORDINGLY WE REMIT THE ISSUE OF COMPARABILITY OF SASKEN COMMU NICATION TECHNOLOGIES LTD BACK TO THE AO / TPO FOR CONSIDERA TION AFRESH AS PER LAW. ORDERED ACCORDINGLY. 14) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNCTIONAL DIS-SIMILARITY, SIGNIFICANT R&D ACTIVITY, BRAND VAL UE, SIZE, ETC. THE TPO, HOWEVER, REJECTED THE CONTENTION PUT FORTH BY THE A SSESSEE AND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. IT(TP)A.1102/BANG/2011 PAGE - 29 14.2 BEFORE US, IT WAS REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT PERFO RMS A VARIETY OF FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT AND SERVIC ES SEGMENT NAMELY (A) PRODUCT DESIGN SERVICES (B) INNOVATION DESIGN ENGINEERING AND (C) VISUAL COMPUTING LABS. IN THE SUBMISSIONS MADE THE ASSESSEE HAD QUOTED REL EVANT PORTIONS FROM THE ANNUAL REPORT OF THE COMPANY TO THIS EFFEC T. IN VIEW OF THIS, THE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE STAND O THE TPO IN INCLUDING THIS COM PANY IN THE LIST OF COMPARABLES. 14.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. FROM THE DETAIL S ON RECORD, WE FIND THAT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODU CT DESIGNING SERVICES AND NOT PURELY SOFTWARE DEVELOPMENT SERVIC ES. THE DETAILS IN THE ANNUAL REPORT SHOW THAT THE SEGMENT SOFTWARE D EVELOPMENT SERVICES RELATES TO DESIGN SERVICES AND ARE NOT SI MILAR TO SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MU M/2011) HAS HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONALLY COMPARABLE. IN TH IS CONTEXT THE RELEVANT PORTION OF THIS ORDER IS EXTRACTED AND REPRODUCED B ELOW :- . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFERENT FR OM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARN ED AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASS ESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTA L DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATI O FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO T REAT THIS COMPANY AS FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE L IST OF COMPARABLE PORTION. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REPO RT OF THIS COMPANY PRODUCED BEFORE US, THE FACTS PERTAINING TO TATA EL XSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 2007-08 TO ASSESSMENT YEAR 2008-09. WE, THEREFORE, HOLD THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR IT(TP)A.1102/BANG/2011 PAGE - 30 INCLUSION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDERED ACCORDINGLY. 15. WIPRO LIMITED 13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES OR SEVERAL GROUN DS LIKE FUNCTIONAL DIS-SIMILARITY, BRAND VALUE, SIZE, ETC. THE TPO, H OWEVER, BRUSHED ASIDE THE OBJECTIONS OF THE ASSESSEE AND INCLUDED THIS CO MPANY IN THE SET OF COMPARABLES. 13.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE FOR SEV ERAL REASONS, WHICH ARE AS UNDER : (I) THIS COMPANY OWNS SIGNIFICANT INTANGIBLES IN TH E NATURE OF CUSTOMER RELATED INTANGIBLES AND TECHNOLOGY RELATED INTANGIB LES AND QUOTED EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY IN THE SUBMISSIONS MADE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCIA L STATEMENTS FOR COMPARABILITY PURPOSES AND FOR COMPUTING THE MARGIN S, WHICH CONTRADICTS THE TPOS OWN FILTER OF REJECTING COMP ANIES WITH CONSOLIDATED FINANCIAL STATEMENTS. 13.3. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE SET OF COMPARABLES. 13.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MERIT I N THE CONTENTIONS OF THE ASSESSEE FOR EXCLUSION OF THIS COMPANY FROM THE SET OF COMPARABLES. IT IS SEEN THAT THIS COMPANY IS ENGAG ED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMENT SERVICES. THER E IS NO INFORMATION ON THE SEGMENTAL BIFURCATION OF REVENUE FROM SALE OF PRODUCT AND SOFTWARE SERVICES. THE TPO APPEARS TO HAVE ADOPTED THIS COMPANY AS A COMPARABLE WITHOUT DEMONSTRATING HOW T HE COMPANY SATISFIES THE SOFTWARE DEVELOPMENT SALES 75% O F THE TOTAL REVENUE FILTER ADOPTED BY HIM. ANOTHER MAJOR FLAW IN THE C OMPARABILITY ANALYSIS CARRIED OUT BY THE TPO IS THAT HE ADOPTED COMPARIS ON OF THE CONSOLIDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NOT AN APPROPR IATE COMPARISON. 13.4.2 WE ALSO FIND THAT THIS COMPANY OWNS INTELLE CTUAL PROPERTY IN THE FORM OF REGISTERED PATENTS AND SEVE RAL PENDING APPLICATIONS FOR GRANT OF PATENTS. IN THIS REGARD, THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM P VT. LTD. (ITA NO.227/BANG/2010) HAS HELD THAT A COMPANY OWNING IN TANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PR OVIDER WHO DOES IT(TP)A.1102/BANG/2011 PAGE - 31 NOT OWN ANY SUCH INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CA SE ON HAND DOES NOT OWN ANY INTANGIBLES, FOLLOWING THE AFORESAID D ECISION OF THE CO- ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOMER.C OM PVT. LTD. (SUPRA), WE HOLD THAT THIS COMPANY CANNOT BE CONSID ERED AS A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO OMIT THIS COMPANY FROM THE SET OF CO MPARABLE COMPANIES IN THE CASE ON HAND FOR THE YEAR UNDER CO NSIDERATION. 10. FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL IN M ERITOR LVS (INDIA) P. LTD (SUPRA), WE DIRECT EXCLUSION OF CELESTIAL LABS LTD, E-ZEST SOLUTIONS LTD, INFOSYS TECHNOLOGIES LTD, KALS INFORMATION SYSTEMS LTD (SEG), LUCID SOFTWARE LTD, WIPRO LTD (SEG), ACCEL TRANSMATIC LTD (SEG), AVANI CIMCON TECHNOLOGIES LTD, FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, ISHIR INFOTECH LTD, PERSISTENT SYSTEMS LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG), TATA ELXSI LTD (SEG) AND THIRDWARE SOLUTIONS LTD. IN SO FAR AS ME GASOFT SOLUTIONS LTD IS CONCERNED, WE DIRECT THE TPO TO REWORK ITS SEGMEN TAL RESULTS AND CONSIDER ITS COMPARABILITY ONLY WITH REGARD TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. 11. QUINTEGRA SOLUTIONS LTD AND OTHER COMPARABLES : FOR EXCLUSION OF QUINTEGRA SOLUTIONS LTD AND LUCID SOFTWARE LTD ON THE BASIS OF FUNCTIONAL DIFFERENCE AND FOR THE EXCLUSIO N OF INFOSYS TECHNOLOGIES LTD, WIPRO LTD (SEG), FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), PERSISTENT SYSTEMS LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG), TATA ELXSI LTD (SEG), IGATE GLOBAL SOLUTIONS LTD (SEG) AND MIND T REE CONSULTING LTD ON THE BASIS OF TURN OVER FILTER, THE ASSESSEE PLACED RE LIED ON THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/ S. ACTIANCE INDIA P. LTD V. IT(TP)A.1102/BANG/2011 PAGE - 32 ITO IN IT(TP)A.1056/BANG/2011, DT.12.06.2015, FOR T HE ASSESSMENT YEAR 2007-08 WHICH WAS ALSO IN SOFTWARE DEVELOPMENT SERV ICES LIKE THIS ASSESSEE. FOR EXCLUSION OF QUINTEGRA SOLUTIONS LTD, THE TRIBU NAL HELD AS UNDER IN PARA 18 OF ITS ORDER: 18.1 THIS CASE WAS SELECTED BY THE TPO AS A COMP ARABLE. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON THE GROUND THAT THIS COMPANY IS FUNC TIONALLY DIFFERENT AND ALSO THAT THERE WERE PECULIAR ECONOMIC CIRCUMSTANCE S IN THE FORM OF ACQUISITIONS MADE DURING THE YEAR. THE TPO REJECTED THE ASSESSEE'S OBJECTIONS HOLDING THAT THIS COMPANY QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. ON THE ISSUE OF ACQUISITIONS, THE TPO REJECTED THE ASSESSEE'S OBJECTIONS OBSERVING THAT THE ASSESSEE HAS NOT ADDU CED ANY EVIDENCE AS TO HOW THIS EVENT HAD AN ANY INFLUENCE ON THE PRICI NG OR THE MARGIN EARNED. 18.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INC LUSION OF THIS COMPANY FOR THE REASON THAT IT IS FUNCTIONALLY DIFF ERENT AND ALSO THAT THERE ARE OTHER FACTORS FOR WHICH THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. IT WAS SUBMITTED THAT, (I) QUINTEGRA SOLUTIONS LTD., THE COMPANY UNDER CON SIDERATION, IS ENGAGED IN PRODUCT ENGINEERING SERVICES AND NOT IN PURELY S OFTWARE DEVELOPMENT SERVICES. THE ANNUAL REPORT OF THIS COMPANY ALSO ST ATES THAT IT IS ENGAGED IN PREPARATORY SOFTWARE PRODUCTS AND IS THEREFORE N OT SIMILAR TO THE ASSESSEE IN THE CASE ON HAND. (II) IN ITS ANNUAL REPORT, THE SERVICES RENDERED BY THE COMPANY ARE DESCRIBED AS UNDER : LEVERAGING ITS PROVEN GLOBAL MODEL, QUINTEGRA PRO VIDES A FULL RANGE OF CUSTOM IT SOLUTIONS (SUCH AS DEVELOPMENT, TESTING, MAINTENANCE, SAP, PRODUCT ENGINEERING AND INFRASTRUCTURE MANAGEMENT S ERVICES), PROPRIETARY SOFTWARE PRODUCTS AND CONSULTANCY SERVI CES IN IT ON VARIOUS PLATFORMS AND TECHNOLOGIES. (III) THIS COMPANY IS ALSO ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITIES WHICH RESULTED IN THE CREATION OF INTELLECTUAL PROP RIETARY RIGHTS (IPRS) AS CAN BE EVIDENCED FROM THE STATEMENTS MADE IN THE AN NUAL REPORT OF THE COMPANY FOR THE PERIOD UNDER CONSIDERATION, WHICH I S AS UNDER : QUINTEGRA HAS TAKEN VARIOUS MEASURES TO PRESERVE ITS INTELLECTUAL PROPERTY. ACCORDINGLY, SOME OF THE PRODUCTS DEVELOP ED BY THE COMPANY HAVE BEEN COVERED BY THE PATENT RIGHTS. THE C OMPANY HAS ALSO IT(TP)A.1102/BANG/2011 PAGE - 33 APPLIED FOR TRADE MARK REGISTRATION FOR ONE OF ITS PRODUCTS, VIZ. INVESTOR PROTECTION INDEX FUND (IPIF). THESE MEASURES WILL H ELP THE COMPANY ENHANCE ITS PRODUCTS VALUE AND ALSO MITIGATE RISKS. (IV) THE TPO HAS APPLIED THE FILTER OF EXCLUDING CO MPANIES HAVING PECULIAR ECONOMIC CIRCUMSTANCES. QUINTEGRA FAILS THE TPOS O WN FILTER SINCE THERE HAVE BEEN ACQUISITIONS IN THIS CASE, AS IS EVIDENCE D FROM THE COMPANYS ANNUAL REPORT FOR F.Y. 2007-08, THE PERIOD UNDER CO NSIDERATION. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE SUBMISSIONS MADE ABOVE, IT IS CLEAR THAT INTER ALIA , THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BEING FUNCTIONALLY DIFFERE NT AND POSSESSING ITS OWN INTANGIBLES / IPRS, IT CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND AND THEREFORE OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERAT ION. 18.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE SET OF COMPARABLES TO THE ASSESSEE FOR THE PERIOD UNDER CONSIDERATION. 18.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS BROUGHT ON RECORD THAT THIS COMPANY I.E.QUINTEGRA SOLUTIONS LT D. IS ENGAGED IN PRODUCT ENGINEERING SERVICES AND IS NOT PURELY A SO FTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. IT IS ALSO SEEN THAT THIS COMPANY IS ALSO ENGAGED IN PROPRIETARY SO FTWARE PRODUCTS AND HAS SUBSTANTIAL R&D ACTIVITY WHICH HAS RESULTED IN CREATION OF ITS IPRS. HAVING APPLIED FOR TRADE MARK REGISTRATION OF ITS P RODUCTS, IT EVIDENCES THE FACT THAT THIS COMPANY OWNS INTANGIBLE ASSETS. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (ITA NO.227/BANG/2010 DT.9.11.2012) HAS HELD THAT IF A C OMPANY POSSESSES OR OWNS INTANGIBLES OR IPRS, THEN IT CANNOT BE CONSIDE RED AS A COMPARABLE COMPANY TO ONE THAT DOES NOT OWN INTANGIBLES AND RE QUIRES TO BE OMITTED FORM THE LIST OF COMPARABLES, AS IN THE CASE ON HAN D. 18.3.2 WE ALSO FIND FROM THE ANNUAL REPORT OF QUINT EGRA SOLUTIONS LTD. THAT THERE HAVE BEEN ACQUISITIONS MADE BY IT IN THE PERIOD UNDER CONSIDERATION. IT IS SETTLED PRINCIPLE THAT WHERE E XTRAORDINARY EVENTS HAVE TAKEN PLACE, WHICH HAS AN EFFECT ON THE PERFORMANCE OF THE COMPANY, THEN THAT COMPANY SHALL BE REMOVED FROM THE LIST OF COMPARABLES. 18.3.3 RESPECTFULLY FOLLOWING THE DECISION OF THE C O-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), WE DIRECT THAT THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLES IN THE CASE ON HAND SINCE IT IS ENGA GED IN PROPRIETARY SOFTWARE PRODUCTS AND OWNS ITS OWN INTANGIBLES UNLI KE THE ASSESSEE IN THE CASE ON HAND WHO IS A SOFTWARE SERVICE PROVIDER. IT(TP)A.1102/BANG/2011 PAGE - 34 12. IN RESPECT OF LUCID SOFTWARE LTD, THE TRIBUNAL S FINDINGS IS SIMILAR TO THE FINDINGS AS IN MERITOR LVS (INDIA) P. LTD (SU PRA), AND THE SAME IS EXTRACTED IN THE PRECEDING PARAGRAPH IN INNER PARA .9 IN PAGE 22,SUPRA. THE ASSESSEES TURN OVER IS RS. 19.36 CRORES .WITH REFE RENCE TO EXCLUSION OF COMPARABLES ON THE BASIS OF TURNOVER FILTER, THE TR IBUNAL IN M/S. ACTIANCE INDIA P. LTD V. ITO IN IT(TP)A.1056/BANG/2011, DT.1 2.06.2015, FOR THE ASSESSMENT YEAR 2007-08 DEALT AS UNDER: 19. VIS-A-VIS FLEXTRONICS SOFTWARE SYSTEMS LTD (SE G), IGATE GLOBAL SOLUTIONS LTD (SEG), INFOSYS TECHNOLOGIES LTD, MIND TREE CONSULTING LTD, PERSISTENT SYSTEMS LTD, SASKEN COMMUNICATION TECHN OLOGIES LTD, TATA ELXSI LTD (SEG) AND WIPRO LTD, LD. AR SUBMITTED T HAT THESE WERE HAVING TURNOVER IN EXCESS OF RS.200 CRORES AGAINST THE ASS ESSEE'S MINISCULE TURNOVER OF RS.13.11 CRORES. ACCORDING TO HIM, IN THE CASE OF TRIOLOGY E- BUSINESS SOFTWARE INDIA LTD (SUPRA), IT WAS HELD CL EARLY THAT COMPANIES HAVING TURNOVER IN EXCESS OF RS.200 CRORES COULD NO T BE CONSIDERED WITH COMPANIES HAVING TURNOVER MUCH BELOW RS.100 CRORES. COORDINATE BENCHES HAVE HELD THAT COMPANIES HAVING TURNOVER UP TO RS.200 CRORES COMPANIES COULD NOT BE COMPARED WITH COMPANIES HAVI NG TURNOVER IN EXCESS OF RS.200 CRORES. 13. THEREAFTER, THE TRIBUNAL CONSIDERED THE DECISIO N OF TRIOLOGY E-BUSINESS SOFTWARE INDIA LTD V DCIT 140 ITD 540 BANG AND THE RELEVANT PORTION IS EXTRACTED ) AS UNDER : 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF THE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPARED WI TH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACTORS SET OUT TH EREIN. BEFORE US THERE IS NO DISPUTE THAT THE TNMM IS THE MOST APPRO PRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSA CTION. THE DISPUTES ARE WITH REGARD TO THE COMPARABILITY OF TH E COMPARABLE RELIED UPON BY THE TPO. IT(TP)A.1102/BANG/2011 PAGE - 35 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 ASSESSEES TURNOVER IS Q- RS. 47,4 6,66,638. IT WOULD THEREFORE FALL WITHIN THE CATEGORY OF COMPANI ES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LT D. V. DCIT, ITA NO.1231/BANG/2010). THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOWN IN SEVERAL DECISIONS REFERRED TO BY TH E LD. COUNSEL FOR THE ASSESSEE. APPLYING THOSE TESTS, THE FOLLOWING C OMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ., TURNOVER Q (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 C RORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES. WE, THEREFORE, DIRECT THAT FLEXTRONICS SOFTWARE SYS TEMS LTD (SEG), IGATE GLOBAL SOLUTIONS LTD (SEG), INFOSYS TECHNOLOG IES LTD, MINDTREE CONSULTING LTD, PERSISTENT SYSTEMS LTD, SA SKEN COMMUNICATION TECHNOLOGIES LTD, TATA ELXSI LTD (SE G) AND WIPRO LTD, BE EXCLUDED FROM THE LIST OF COMPARABLES. 14. FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL IE M/S. ACTIANCE INDIA P. LTD V. ITO FOR THE ASSESSMENT YEAR 2007-08, WE DIR ECT EXCLUSION OF QUINTEGRA SOLUTIONS LTD ON THE BASIS OF FUNCTIONA L DIFFERENCE AND EXCLUSION OF INFOSYS TECHNOLOGIES LTD, WIPRO LTD (SEG), FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), PERSISTENT SYSTEMS LTD, SASKEN IT(TP)A.1102/BANG/2011 PAGE - 36 COMMUNICATION TECHNOLOGIES LTD (SEG), TATA ELXSI LT D (SEG), IGATE GLOBAL SOLUTIONS LTD (SEG) AND MIND TREE CONSULTING LTD O N THE BASIS OF TURNOVER FILTER . 15. THE NEXT ISSUE IS THAT THE TPO ERRED IN NOT MAK ING SUITABLE ADJUSTMENTS ON ACCOUNT OF DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS--VIS THE COMPARABLES, WHILE CONDUCTI NG COMPARABILITY ANALYSIS : THE ASSESSEE PLEADED THAT FUNCTIONS UNDER A LIMITED RISK ENVIRONMENT WITH MOST OF THE RISK BEING ASSUMED BY ITS AE. IT BEARS LESSER/ LIMITED BUSINESS RISKS THAN INDEPENDE NT COMPARABLE COMPANIES DUE TO THE NATURE OF ITS REVENUE MODEL AS IT IS GUARANTEED PROFITS BY WAY OF A MARK-UP ON COSTS INC URRED, IN PROVISION OF THE SOFTWARE DEVELOPMENT SERVICES. HOW EVER, THE INDEPENDENT COMPANIES HAVE TO BEAR THE VAGARIES OF THE ECONOMIC AND BUSINESS FACTORS THAT ARE PREVAILING IN THE IND USTRY AND THUS COULD EITHER INCUR LOSSES OR EARN PROFITS BASED ON MARKET CONDITIONS. RULE 10B (1)(E)(III) PROVIDES THAT AN ADJUSTMENT SHOULD BE MADE TO THE PROFIT MARGIN OF INDEPENDENT COMPARABLE COMPANIES T O TAKE INTO ACCOUNT THE DIFFERENCES IN FUNCTIONS AND RISKS. THE OECD TRANSFER PRICING GUIDELINES ALSO RECOGNIZE ADJUSTME NTS TO BE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN CONTROLLED AND UNCONTROLLED SITUATIONS THAT WOULD SIGNIFICANTLY AF FECT THE PRICE CHARGED OR RETURN REQUIRED BY INDEPENDENT ENTERPRIS ES. IT(TP)A.1102/BANG/2011 PAGE - 37 ACCORDINGLY, CONTROLLED AND UNCONTROLLED TRANSACTIO NS ARE COMPARABLE ONLY WHEN ADJUSTMENTS WITH RESPECT TO SI GNIFICANT DIFFERENCES BETWEEN THEM IN TERMS OF RISKS ASSUMED IS MADE. IN THE SUBMISSIONS MADE TO THE TPO, IT HAS COMPUTED THE AD JUSTMENT FOR THE RISK DIFFERENCE OF THE ASSESSEE VIS-A-VIS O F THE COMPARABLE COMPANIES BY PLACING RELIANCE ON THE MET HODOLOGY OF RISK ADJUSTMENT AS STATED IN THE DECISION OF THE HO N'BLE BANGALORE TRIBUNAL IN CASE OF PHILIPS SOFTWARE CENTRE PRIVATE LIMITED VS. ASST. COMMISSIONER OF INCOME TAX (119 TTJ 721) (2008 26 SOT 226) AS BELOW : AVERAGE PRIME LENDING RATE DURING FY 2006-07 (A) 11.88 PERCENT AVERAGE BANK RATE DURING FY 2006-07 (B) 6.00 PERCENT DIFFERENCE BETWEEN THE PRIME LENDING RATE AND BANK RATE C (A - B) 5.88 PERCENT RISK ADJUSTMENT (C) 5.88 PERCENT HOWEVER, THE TPO DID NOT PROVIDE/ MAKE ANY RISK-ADJ USTMENT TO THE MARGINS ON THE GROUND THAT IT DOES NOT HAVE MA TERIAL IMPACT ON THE PROFITABILITY AND ACCORDINGLY DENIED ANY RIS K ADJUSTMENT. THE TPO HAS STATED THAT THE APPELLANT BEARS THE 'SINGLE CUSTOMER RISK' WHICH MORE THAN OFFSETS THE OTHER RISKS BORNE BY IN DEPENDENT COMPANIES. IT PLACES RELIANCE IN M/S INTELLINET TEC HNOLOGIES INDIA PVT. LTD. VS ITO [ITA NO. 1237 (BANG)/2010] IN SUPPORT OF ITS AND HIGHLIGTED THE RELEVANT PART AS UNDER : IT(TP)A.1102/BANG/2011 PAGE - 38 7.1 AS SEEN FROM THE RECORDS, THE ASSESSEE HAD ACQ UIRED THE BUSINESS AND ALSO EARNED INCOME OUT OF THE SAID TRA NSACTION BY COST PLUS BASIS. THUS, IT CAN BE SEEN THAT THE ASSE SSEE HAS NOT ENCOUNTERED THE RISK OF HAVING A SINGLE CUSTOMER, W HEREAS THE SAME CANNOT BE SAID AS REGARDS THE COMPARABLES. AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE COMPAR ABLES WERE DEALING IN OPEN MARKET AND THEREFORE, THEY WERE PRO NE TO THE MARKETING AND TECHNICAL RISKS. THEY WOULD HAVE INCURRED CERTAIN EXPENDITURE ON MARKETING SERVICES AND ALSO TO SAFEGUARD THE TECHNICAL USE BY THEM. IN SUCH A CASE, THE RISK ENC OUNTERED BY THE ASSESSEE CANNOT BE SAID TO BE THE EQUIVALENT RISKS ATTACHED TO THE COMPARABLES. THE RISK ATTRIBUTED TO THE ASSESSEE BY THE TPO IS AN ANTICIPATED RISK WHEREAS THE RISK ATTRIBUTED BY THE ASSESSEE TO THE COMPARABLES IS AN EXISTING RISK. IN SUCH SITUAT ION, THE TPO OUGHT TO HAVE GIVEN THE RISK ADJUSTMENT TO THE NET MARGIN OF THE CORN PARABLES FOR BRINGING THEM ON PAR WITH THE ASSESSEE COMPANY. THE ASSESSEE'S CONTENTION THAT THE RISK ADJUSTMENT SHOULD BE AT 5.5% OR AT THE DIFFERENCE OF PRIME LENDING RATE OF THE RBI AND THE BANKS IS NOT ACCEPTABLE TO US. THEREFORE, WE DIRECT THE TPO TO CONSIDER ALL THE CONTENTIONS OF THE ASSESSEE AND AF TER TAKING INTO ACCOUNT ALL THE RELEVANT MATERIAL DECIDE THE P ERCENTAGE OF RISK ADJUSTMENT TO BE MADE IN ACCORDANCE WITH LA W. THIS GROUND IS ACCORDINGLY, ALLOWED FOR STATISTICAL PURP OSES.' FOLLOWING THE ABOVE DECISION , WE DIRECT THE TPO T O CONSIDER ALL THE CONTENTIONS OF THE ASSESSEE AND AFTER TAKING INTO A CCOUNT ALL THE RELEVANT MATERIAL DECIDE THE PERCENTAGE OF RISK ADJ USTMENT TO BE MADE IN ACCORDANCE WITH LAW. THIS GROUND IS, ACCORD INGLY, ALLOWED FOR STATISTICAL PURPOSES.' 16. WITH REGARD TO THE GROUNDS ON CORPORATE TAX MAT TERS : IN THOSE GROUNDS, THE ASSESSEE PLEADED THAT THE LEASED LINE CHARGES, IPLC SERVICE CHARGES (LEASED CIRCUIT) & FOREIGN T RAVEL EXPENSES OUGHT NOT TO HAVE BEEN EXCLUDED OR ALTERNATIVELY, IF THEY A RE EXCLUDED FROM THE EXPORT TURNOVER SIMILAR EXCLUSION BE MADE IN THE TO TAL TURNOVER FOR ARRIVING THE DEDUCTION U/S 10A, WHICH ARE IN ACCORDANCE WITH THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN CIT V TATA ELX SI 349 ITR 98 AND IT(TP)A.1102/BANG/2011 PAGE - 39 ACCORDINGLY WE DIRECT THE AO TO EXCLUDE THEM FROM T HE EXPORT TURNOVER AND ALSO FROM THE TOTAL TURNOVER, WHILE COMPUTING THE DEDUCTION U/S 10A. THUS, THE CORRESPONDING GROUNDS ARE ALLOWED . 17. IN THE RESULT, THE ASSESSEES APPEAL IS TREATE D AS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD DAY OF NOVEMBER, 2016. SD/- SD/- (VIJAY PAL RAO) (S. JAYARAMAN) JUDICIAL MEMBER A CCOUNTANT MEMBER MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME TAX 4. THE COMMISSIONER OF INCOME TAX (A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR