NEC Technologies India Ltd, New Delhi V. Deputy Commissioner of Income-tax, New Delhi

ITA 1102/DEL/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3892 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 02-08-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 24-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RAMI KATYAL S
• Keywords: Business income; Transfer pricing; Principle of natural justice; International transaction; Bad and doubtful debts
• Section: 143(3); 234B; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1102/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S. NEC TECHNOLOGIES INDIA LTD., VS. DCIT, (FORMERLY KNOWN AS NEC HCL SYSTEMS CIRCLE 18(1), TECHNOLOGIES LTD.), NEW DELHI. UNIT NO.1, 2 ND FLOOR, TDI CENTRE, COMMERCIAL PLOT NO.7, JASOLA, NEW DELHI 110 025. (PAN : AACCN2062Q) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SENIOR ADVOCATE, S/SHRI NEERAJ JAIN & RAMI KATYAL, ADVOCATES REVENUE BY : SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING : 05.10.2017 DATE OF ORDER : 27.10.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. NEC TECHNOLOGIES INDIA LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.01.2015, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE ITA NO.1102/DEL/2015 2 INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- GENERAL GROUND: 1. THAT THE IMPUGNED ORDER OF ASSESSMENT FRAMED BY THE ASSESSING OFFICER IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS 'DRP') UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 ('ACT'), IS BAD IN LAW, VIOLATIVE OF PRIN CIPLES OF NATURAL JUSTICE AND VOID AB-INITIO. 2. THAT ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DETERMINING INCOME OF THE APPELLANT AT RS.16,67,38,442 AGAINST THE TOTAL INCOME RETURNED B Y THE APPELLANT OF RS.3,09,32,409. TRANSFER PRICING MATTERS: 3. THAT THE ASSESSING' OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS. 4,11,03,650 TO THE INCOME OF THE APPELLANT, ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF RENDERING SOFTWARE SERVICES UNDERTAKEN DURING THE PREVIOUS YEAR, ON TH E BASIS OF THE ORDER PASSED UNDER SECTION 92C(3) OF T HE ACT BY THE TPO. 3.1 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW BY FAILING TO APPRECIATE THE COMMERCIAL EXPEDIENCIE S SURROUNDING THE INTERNATIONAL TRANSACTION PERTAININ G TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES, 3.2 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN REJECTING THE CORROBORATIVE ANALYSIS PERFORMED USING COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD TO ESTABLISH THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES. ITA NO.1102/DEL/2015 3 3.3 THAT THE DRP ERRED ON FACTS AND IN LAW IN REJECTING THE USE OF CUP METHOD HOLDING THAT IN THE ABSENCE OF ONE TO ONE CORRESPONDENCE WITH THE TRANSACTIONS BEING COMPARED, CUP CANNOT BE APPLIED 3.4 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT OUTSOURCING COSTS, BEING PASS THROUGH ITEMS, OUGHT TO BE EXCLUDED FROM THE COST BASE OF THE OF THE APPELLANT FOR THE PURPOSE O F BENCHMARKING ANALYSIS. 3.5 THAT THE DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT OUTSOURCING COST CANNOT BE EXCLUDED FROM THE COST BASE AS IT CONSTITUTES PART OF THE INTERNATIONAL TRANSACTION BEING BENCHMARKED 3.6 THAT THE TPO/ DRP ERRED ON FACTS AND IN LAW BY APPLYING TURNOVER FILTER OF RS 5 CRORES FOR SELECTING / REJECTING THE COMPARABLE COMPANIES. 3.7 THAT THE TPO/DRP ERRED ON FACTS AND IN LAW IN CONSIDERING INFOSYS LTD, HAVING TURNOVER OF RS 21,140 CRORE, AS COMPARABLE TO THE APPELLANT 3.8 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN REJECTING THE FOLLOWING COMPANIES BY APPLYING FILTER OF 75% EXPORT SALES: (I) CIGNITI TECHNOLOGIES LTD (II) MAVERIC SYSTEMS LTD (III) INDUS NETWORKS LIMITED 3.9 THAT THE TPO/DRP ERRED ON FACTS AND IN LAW IN APPLYING THE FILTER OF DIMINISHING REVENUE FOR SELECTION/REJECTION OF COMPARABLE COMPANIES. 3.10 THAT THE TPO/ DRP ERRED ON FACTS AND IN LAW IN REJECTING COMPANIES HAVING EMPLOYEE COST LESS THAN 25 PERCENT OF OPERATING COSTS. 3.11 THAT THE TPO/ORP ERRED ON FACTS AND IN LAW IN REJECTING CG-VAK SOFTWARE AND EXPORTS LIMITED ITA NO.1102/DEL/2015 4 AS COMPARABLE ALLEGEDLY ON THE BASIS THAT ITS EMPLOYEE COST TO OPERATING COST RATIO IS 5.56% NOT APPRECIATING THAT THE CORRECT EMPLOYEE COST RATIO I S 70.69% 3.12 THAT THE TPO/DRP ERRED ON FACTS AND IN LAW IN REJECTING THE FOLLOWING COMPANIES ALLEGEDLY ON T HE GROUND THAT FINANCIAL STATEMENTS OF THESE COMPANIES WERE NOT AVAILABLE FOR THE YEAR ENDING MARCH 31, 2009 : A) HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED B) CALIBER POINT BUSINESS SOLUTIONS LIMITED C) R SYSTEMS INTERNATIONAL LIMITED D) SILVERLINE TECHNOLOGIES LIMITED 3.13 THAT THE TPO/DRP ERRED ON FACTS AND IN LAW IN REJECTING GOLDSTONE TECHNOLOGIES LTD AS COMPARABLE HOLDING THAT THIS COMPANIES IS NOT FUNCTIONALLY COMPARABLE TO THE APPELLANT. 3.14 THAT THE TPO/DRP ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING COMPANIES IN THE FINAL SET OF COMPARABLE COMPANIES NOT APPRECIATING THAT SUCH COMPANIES ARE NOT FUNCTIONALLY COMPARABLE TO THE APPELLANT: (I) TATA ELXSI LIMITED (II) INFOSYS TECHNOLOGIES LIMITED (III) THIRDWARE SOLUTIONS LIMITED 3.15 THAT THE TPO/DRP ON FACTS AND CIRCUMSTANCES OF THE CASE, OUGHT TO HAVE EXCLUDED PERSISTENT SYSTEMS LIMITED AND EVOKE TECHNOLOGIES LIMITED FROM THE FINAL SET OF COMPARABLE COMPANIES AS BEING FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT 3.16 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN CONSIDERING INFOSYS TECHNOLOGIES LIMITED IN THE FINAL SET OF COMPARABLE COMPANIES WITHOUT ITA NO.1102/DEL/2015 5 APPRECIATING THAT ITS SCALE OF OPERATIONS CANNOT BE COMPARED WITH THAT OF THE APPELLANT. 3.17 THAT THE TPO / DRP HAVE ERRED ON FACTS AND IN LAW IN SELECTING COMPANIES EARNING SUPER NORMAL PROFITS AS COMPARABLE TO THE APPELLANT. 3.18 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN CONSIDERING FOREIGN EXCHANGE GAINS OR LOSS AS NO N OPERATING ITEM FOR THE PURPOSE OF COMPUTING THE OPERATING PROFIT MARGINS. 3.19 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN CONSIDERING PROVISION FOR DOUBTFUL DEBTS AS NON OPERATING ITEM FOR THE PURPOSE OF COMPUTING THE OPERATING PROFIT MARGINS 3.20 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN CONSIDERING BANK CHARGES AS NON OPERATING ITEM FOR THE PURPOSE OF COMPUTING THE OPERATING PROFIT MARGINS 3.21 THAT THE TPO ERRED ON FACTS AND IN LAW IN CONSIDERING INCORRECT PROFIT MARGIN OF FOLLOWING COMPANIES DESPITE A DIRECTION FROM THE DRP FOR TAKING THE CORRECT MARGIN FOR DETERMINING THE ARM'S LENGTH PRICE: NAME OF THE COMPANY MARGIN CONSIDERED BY TPO ACTUAL MARGIN LARSEN AND TOUBRO INFOTECH LTD 22.72% 21.59% RS SOFTWARE INDIA LIMITED 12.41 % 11.52% MINDTREE LIMITED 19.12% 16.74% EVOKE TECHNOLOGIES PVT LTD 20.71% 20.32% THIRDWARE SOLUTIONS LTD 41.80% 28.29% ITA NO.1102/DEL/2015 6 3.22 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN INCORRECTLY EXCLUDING THE FOLLOWING COMPANIES FROM THE FINAL LIST OF COMPARABLES: (I) GOLDSTONE TECHNOLOGIES LTD (II) QUINTEGRA SOLUTIONS LTD (III) SAVEN TECHNOLOGIES LTD 3.23 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN NOT ALLOWING APPROPRIATE RISK ADJUSTMENT FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE SERVICES UNDERTAKEN BY THE APPELLANT ALLEGEDLY HOLDING THAT IN ABSENCE OF ROBUST AND RELIABLE DATA RISK ADJUSTMENT COULD NOT BE CONSIDERED. CORPORATE TAX MATTERS: 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING A DISALLOWANCE OF RS. 9,34,91,383 UNDER SECTION 40(A)(I) OF THE ACT IN RESPECT OF PAYMENT MADE BY THE APPELLANT'S JAPAN BRANCH OFFICE TO HCL JAPAN LTD, DESPITE THE DIRECTIONS OF THE DRP TO DELETE THE SAID DISALLOWANCE. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 10A OF THE ACT TO THE EXTENT OF RS.12,11,000 WITH RESPE CT TO UNBILLED REVENUE RECORDED BY THE APPELLANT ON TH E GROUND THAT: 6. THAT THE DRP ERRED ON FACTS AND IN LAW IN NOT ALLOWING THE DEDUCTION UNDER SECTION 10A OF THE ACT HOLDING THAT THE CHANGE OF ACCOUNTING POLICY WOULD RESULT IN THE APPELLANT CLAIMING DEDUCTION IN ASSESSMENT YEAR 2011-12 WITH RESPECT TO INVOICES TO BE RAISED IN ASSESSMENT YEAR 2012-13, WHEN NO DEDUCTION UNDER SECTION 10A IS AVAILABLE 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234C OF THE ACT. ITA NO.1102/DEL/2015 7 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : NEC TECHNOLOGIES INDIA LI MITED (NEC HCL) HAS BEEN SET UP AT NOIDA WHICH IS AVAILING TAX EXEMPTION UNDER SECTION 10A OF THE ACT AND IS ALSO HAVING BRA NCH OFFICE IN JAPAN (NEC HCL BO). THE MAIN ACTIVITY OF THE TAXPA YER IS WITH NEC GROUP COMPANIES WITH REGARD TO THE CONTRACT AWA RDED TO NEC HCL. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYE R HAS ENTERED INTO INTERNATIONAL TRANSACTION QUA SOFTWARE DEVELOP MENT SERVICES TO THE TUNE OF RS.56,76,10,033/- WHICH ARE TO THE FOLL OWING EFFECT :- NO. NATURE OF TRANSACTION APPROACH OF TAXPAYER VALUE OF TRANSACTION METHOD PLI 1 PROVISION OF SOFTWARE DEVELOPMENT TNMM OP/TC 56,76,10,033 2 PAYMENT OF OUTSOURCING COSTS TNMM OP/TC 9,34,91,383 3 AVAILING OF MANAGEMENT SERVICES TNMM OP/TC 46,32,003 4 PAYMENT OF LEASE RENT TNMM OP/TC 57,43,348 5 PURCHASE OF FIXED ASSETS TNMM OP/TC 50,95,718 6 SALE OF MOBILE PHONES CUP WDV 17,533 7 REIMBURSEMENT OF EXP. TO AES TNMM OP/TC 53,74,233 8 ROYALTY PAYMENT FOR USING BRAND TNMM OP/TC 7,93,915 3. ASSESSEE IN ORDER TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT CHOSEN 21 COMPARABLES HAVING OP/TC AT 11.26% AS AGAINST 9.63% OF THE TESTED PARTIES (THE TAXPAYER IN THIS CASE) BY ADOPT ING WEIGHTED ITA NO.1102/DEL/2015 8 AVERAGE FOR THE CURRENT YEAR AND THE IMMEDIATELY PR ECEDING TWO YEARS. IN THE WORKING OF THE MARGINS, THE TAXPAYER HAS NOT MADE ANY WORKING CAPITAL OR RISK ADJUSTMENT AND CONSEQUE NTLY, THE TAXPAYER WAS CALLED UPON TO PROVIDE MARGINS OF COMP ARABLE FOR CURRENT YEAR AND THEN HE HAS PROVIDED UPDATED MARGI NS OF 23 COMPARABLE COMPANIES WITH ARITHMETIC MEAN OF 11.53% WITH NO WORKING CAPITAL OR RISK ADJUSTMENT MADE IN THE MARG INS OF COMPARABLES. AFTER APPLYING AND DISCUSSING VARIOUS FILTERS BY THE TPO, HE HAS CHOSEN 17 COMPARABLES HAVING AVERAGE ME AN OF 26.93%. TPO ALSO PROVIDED WORKING CAPITAL ADJUSTME NT TO THE COMPARABLES AND WITH WORKING CAPITAL ADJUSTMENT OP/ OC COMPARABLE IS 27.11% AND THEREBY COMPUTED THE SHORT FALL ON ACCOUNT OF ADJUSTMENT OF ARMS LENGTH PRICE AT RS.7 ,47,70,768/-. 4. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY WAY OF RAISING OBJECTIONS WHO HAS DIRECTED THE TPO TO E XCLUDE E- INFOCHIPS BANGALORE LIMITED AND INFINITE DATA SYSTE MS PVT. LTD. AND TO CORRECT HE MARGIN OF COMPARABLE COMPANIES, N AMELY, LARSEN AND TOUBRO INFOTECH LTD., MINDTREE LTD, RS SOFTWARE INDIA LTD., EVOKE TECHNOLOGIES PVT. LTD. AND THIRDWARE SOLUTION S LTD. CONSEQUENTLY, TPO CONSIDERED 15 COMPARABLES FOR BEN CHMARKING THE INTERNATIONAL TRANSACTIONS HAVING ARITHMETIC ME AN OF 20.50%. PURSUANT TO THE DIRECTIONS ISSUED BY LD. DRP, AO/TP O COMPUTED ITA NO.1102/DEL/2015 9 THE ADJUSTMENT ON ALP TO THE TUNE OF RS.4,11,03,650 /- ON ACCOUNT OF DIFFERENCE IN THE MARGIN OF COMPARABLE COMPANIES AND THE TAXPAYER. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 5. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUNDS NO.1 & 2 6. GROUNDS NO.1 & 2 ARE GENERAL IN NATURE AND DO N OT REQUIRE ANY ADJUDICATION. GROUNDS NO.3 TO 3.23 7. UNDISPUTEDLY, TRANSACTIONAL NET MARGIN METHOD (T NMM) USED BY THE TAXPAYER IN ITS TP DOCUMENTATION FOR BE NCHMARKING THE INTERNATIONAL TRANSACTION QUA SOFTWARE DEVELOPMENT SERVICES AS MOST APPROPRIATE METHOD HAS BEEN ACCEPTED BY THE LD . TPO. IT IS ALSO NOT IN DISPUTE THAT BENCHMARKING THE INTERNATI ONAL TRANSACTION, THE TAXPAYER TREATED ITSELF AS A TESTED PARTY BY TA KING OP/OC AS PROFIT LEVEL INDICATOR (PLI) AND BY SELECTING 21 CO MPANIES AS COMPARABLES WITH OP/OC OF 11.26% AS AGAINST TAXPAYE RS ITA NO.1102/DEL/2015 10 OPERATING PROFIT MARGIN AT 9.63% AND FOUND ITS INTE RNATIONAL TRANSACTIONS AT ARMS LENGTH. 8. TPO, AFTER RETAINING SOME OF THE COMPARABLES CHO SEN BY THE TAXPAYER, INTRODUCED ITS OWN COMPARABLES AND FINALL Y SELECTED THE FOLLOWING COMPANIES AS COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS :- S.NO. COMPANY NAME WORKING CAPITAL ADJUSTMENT OP/OC 1. AKSHAY SOFTWARE 0.91% 2 . CAT TECHNOLOGIES LTD 11.14 % 3 . EVOKE TECH 20.71 % 4. E-ZEST SOLUTIONS 19.92% 5 . INFOSYS LTD 45.65 % 6. LARSEN AND TOUBRO INFOTECH 22.72% 7 . MINDTREE LTD. 19.12 % 8. PERSISTENT SYSTEMS & SOLUTIONS LTD 15.08% 9. PERSISTENT SYSTEMS LTD 32.10% 10 . RS SOFTWARE INDIA LTD 12.41 % 11. SASKEN COMMUNICATION TECHNOLOGIES LTD 19.39% 12. TATA ELXSI 20.41% 13. THINKSOFT GLOBAL SERVICES LTD 16.22% 14. THIRDWARE SOLUTIONS 41.80% 15 . YBRANT DIQITA] LTD 9.98 % 16 . E-INFOCHIPS BANGALORE LIMITED 67.37 % 17. INFINITE DATA SYSTEMS PVT LTD 85.96% ARITHMETIC MEAN 27.11 % 9. TPO BY TAKING ARITHMETIC MEAN OF 27.11% OF THE COMPARABLES COMPANIES COMPUTED TP ADJUSTMENT FOR BENCHMARKING THE INTERNATIONAL TRANSACTION AS UNDER :- ITA NO.1102/DEL/2015 11 PARTICULARS AMOUNT (RS.) OPERATING COST 50,39,98,779 ARMS LENGTH MARGIN 27.11% OF OPERATING COST ARMS LENGTH PRICE 64,06,32,848 PRICE SHOWN IN INTERNATIONAL TRANSACTION 56,58,62,0 80 SHORTFALL BEING ADJUSTMENT U/S 92CA 7,47,70,768 10. HOWEVER, AFTER ORDER PASSED BY THE LD. DRP, TPO RECOMPUTED THE MARGIN OF THE COMPARABLE COMPANIES T O THE TUNE OF 20.50% AS AGAINST TAXPAYERS MEAN MARGIN OF 12.27% AND PROPOSED AN ADJUSTMENT OF RS.4,11,03,650/- ON ACCOU NT OF DIFFERENCE IN THE MARGIN OF THE COMPARABLES VIS--V IS THE TAXPAYER. 11. AT THE VERY OUTSET, THE LD. AR FOR THE TAXPAYER CHALLENGING THE IMPUGNED ORDER CONTENDED THAT HE ONLY SEEKS EXC LUSION OF FOUR COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTION FOR SOFTWARE DEVELOPMENT SERVICES, VIZ., INFOSYS LIMITE D, TATA ELEXI, THIRDWARE SOLUTIONS AND PERSISTENT SYSTEMS LTD. SO , WE WILL EXAMINE SUITABILITY OF ALL THE AFORESAID FOUR COMPA RABLE COMPANIES FOR PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANS ACTION OF THE TAXPAYER QUA SOFTWARE DEVELOPMENT SERVICES. INFOSYS LIMITED (INFOSYS) 12. THE TAXPAYER CHALLENGED THE COMPARABILITY OF IN FOSYS VIS-- VIS THE TAXPAYER BEFORE TPO AS WELL AS LD. DRP ON T HE GROUNDS ITA NO.1102/DEL/2015 12 INTER ALIA THAT IT IS HAVING HIGH TURNOVER OF RS.21 140 CRORES; THAT INFOSYS ASSUMES ENTREPRENEURIAL RISK AND HAVING HUG E OWNERSHIP OF INTANGIBLES AND BRANDS AND IT ALSO DEALS IN SOFTWAR E PRODUCTS AND RELIED UPON NUMEROUS DECISIONS RENDERED BY HONBLE HIGH COURTS AS WELL AS COORDINATE BENCHES OF THE TRIBUNAL. 13. HOWEVER, LD. DR FOR THE REVENUE DREW OUR ATTENT ION TOWARDS PARA 2.1 OF THE JOINT VENTURE AGREEMENT, AVAILABLE AT PAGE 890 OF VOL.III OF PAPER BOOK, IN ORDER TO HIGHLIGHT THE PR OFILE OF THE TAXPAYER AND TO PROVE THE FACT THAT THE TAXPAYER IS A HIGH END SERVICE PROVIDER AND THE COMPARABLE SOUGHT TO BE EX CLUDED ARE ALSO HIGH END SERVICE PROVIDER. 14. FOR READY PERUSAL, PARA 2.1 OF THE JOINT VENTUR E AGREEMENT, AVAILABLE AT PAGE 890 OF VOL.III OF THE PAPER BOOK, IS REPRODUCED AS UNDER :- 2.1 THE PARTIES HEREBY AGREE THAT THE COMPANY IS BEING ESTABLISHED FOR THE PURPOSE OF PROVIDING OFFS HORE CENTRIC SOFTWARE ENGINEERING SERVICES AND SOLUTIONS PRIMARILY TO NECC, NECST AND THEIR SUBSIDIARIES AND CLIENTS. IT IS CONTEMPLATED THAT AT THE END OF THE INITIAL TERM, THE PARTIES SHALL DISCUSS AND REVIEW THE BUSI NESS OF THE COMPANY AND UNANIMOUSLY AGREE ON THE FUTURE FUNCTIONING OF THE COMPANY INCLUDING ITS FURTHER BUSINESS PLAN. IN NO EVENT, SHALL ANYTHING IN THIS AGREEMENT BE CONSTRUED AS OBLIGATING NECCC TO PLACE ANY ORDER TO THE COMPANY FOR PURCHASING THE SOFTWAR E SERVICES AND SOLUTIONS. ITA NO.1102/DEL/2015 13 15. HOWEVER, WHEN LD. AR FOR THE TAXPAYER DREW OUR ATTENTION TOWARDS PARA 2.2 OF THE JOINT VENTURE AGREEMENT, AV AILABLE AT PAGE 891 OF VOL.III OF THE PAPER BOOK, IT HAS BECOME CLE AR THAT THE TAXPAYER IS A ROUTINE SERVICE PROVIDER. MOREOVER, THE TAXPAYER BEING A CAPTIVE SOFTWARE PROVIDER IS PROVIDING THE SERVICES TO ITS AE FOR WHICH IT IS BEING ASKED FOR. MOREOVER THE F ACT THAT THE TAXPAYER IS A SOFTWARE DEVELOPMENT PROVIDER WHICH I S A FACT ACCEPTED BY TPO/DRP AND THE LD. DRP CANNOT TRAVEL B EYOND THAT. SO, WE ARE OF THE CONSIDERED VIEW THAT PROVIDING HA RDWARE DESIGN, AS HAS BEEN POINTED OUT BY THE LD. AR FOR THE TAXPA YER, TO ITS AE IS ONE SUCH FUNCTION AMONGST OTHERS AS HAS BEEN MENTIO NED IN PARA 2.2 OF THE JOINT VENTURE AGREEMENT. MOREOVER, THER E IS NO DIFFERENCE IN HIGH END AND LOW END SERVICES SO FAR AS KPO IS CONCERNED. 16. SUITABILITY OF INFOSYS AS COMPARABLE HAS BEEN E XAMINED BY HONBLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TE CHNOLOGIES PVT. LTD. (2013) 36 TAXMANN.COM 289 (DELHI) , AVAILABLE AT PAGES 25 TO 28 OF THE PAPER BOOK, WHICH IS ALSO A CAPTIVE SOFTWARE SERVICES PROVIDER, BY MAKING FOLLOWING OBSERVATIONS :- 5. THE TRIBUNAL HAS OBSERVED THAT THE ASSESSEE WAS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., AS INFOS YS TECHNOLOGIES LTD. WAS A LARGE AND BIGGER COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE AND, THEREFORE, THE PROFITS EARNED CANNOT BE A BENCH MARKED OR EQUATED WITH THE RESPONDENT, T O DETERMINE THE RESULTS DECLARED BY THE RESPONDENT-ASSESSEE. IN PARAGRAPH 3.3 ITA NO.1102/DEL/2015 14 THE TRIBUNAL HAS REFERRED TO THE DIFFERENCE BETWEEN THE RESPONDENT-ASSESSEE AND INFOSYS TECHNOLOGIES LTD. F OR THE SAKE OF CONVENIENCE, WE ARE REPRODUCING THE SAME:- BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY INDIA RISK PROFILE OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES. REVENUE RS.9, 028 CRORES RS.16.09 CRORES OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT, ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) ONSITE VS. OFFSHORE - AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E., SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20%) (REFER PAGE 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E., REMOTELY FROM INDIA) EXPENDITURE ON RS.61 CRORES RS. NIL (AS THE ITA NO.1102/DEL/2015 15 ADVERTISING/SALES PROMOTION AND BRAND BUILDING 100% SERVICES ARE PROVIDE TO AES) EXPENDITURE ON RESEARCH & DEVELOPMENT RS. 102 CRORES RS. NIL OTHER 100% OFFSHORE (FROM INDIA) 6. LEARNED COUNSEL FOR THE REVENUE HAS SUBMITTED TH AT THE TRIBUNAL AFTER RECORDING THE AFORESAID TABLE HAS NO T AFFIRMED OR GIVEN ANY FINDING ON THE DIFFERENCES. THIS IS PARTL Y CORRECT AS THE TRIBUNAL HAS STATED THAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASO N LATTER WAS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWAR E AND IT ASSUMED ALL RISKS LEADING TO HIGHER PROFITS, WHEREA S THE RESPONDENT-ASSESSEE WAS A CAPTIVE UNIT OF THE PAREN T COMPANY AND ASSUMED ONLY A LIMITED RISK. IT HAS ALSO STATE D THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARED WITH THE RESPO NDENT- ASSESSEE AS SEEN FROM THE FINANCIAL DATA ETC. TO TH E TWO COMPANIES MENTIONED EARLIER IN THE ORDER I.E. THE CHART. IN THE GROUNDS OF APPEAL THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT OR DENY THE DATA AND DIFFERENCES MENTIONED IN THE TABULATED FOR M. THE CHART HAS NOT BEEN CONTROVERTED. 7. LEARNED COUNSEL FOR THE APPELLANT REVENUE DURING THE COURSE OF HEARING, DREW OUR ATTENTION TO THE ORDER PASSED BY THE TPO AND IT IS POINTED OUT THAT BASED UPON THE FIGUR ES AND DATA MADE AVAILABLE, THE TPO HAD TREATED A THIRD COMPANY AS COMPARABLE WHEN THE WAGE AND SALE RATIO WAS BETWEEN 30% TO 60%. BY APPLYING THIS FILTER, SEVERAL COMPANIES WE RE EXCLUDED. THIS IS CORRECT AS IT IS RECORDED IN PARA 3.1.2 OF THE ORDER PASSED BY THE TPO. TPO, AS NOTED ABOVE, HOWEVER HAD TAKEN THREE COMPANIES, NAMELY, SATYAM COMPUTER SERVICE LTD., L& T INFOTECH LTD. AND INFOSYS TECHNOLOGIES AS COMPARABL E TO WORK OUT THE MEAN. 8. IT IS A COMMON CASE THAT SATYAM COMPUTER SERVICE S LTD. SHOULD NOT BE TAKEN INTO CONSIDERATION. THE TRIBUNA L FOR VALID AND GOOD REASONS HAS POINTED OUT THAT INFOSYS TECHN OLOGIES LTD. CANNOT BE TAKEN AS A COMPARABLE IN THE PRESENT CASE . THIS LEAVES L&T INFOTECH LTD. WHICH GIVES US THE FIGURE OF 11.1 1 %, WHICH IS LESS THAN THE FIGURE OF 17% MARGIN AS DECLARED BY T HE RESPONDENT-ASSESSEE. THIS IS THE FINDING RECORDED BY THE TRIBUNAL. THE TRIBUNAL IN THE IMPUGNED ORDER HAS ALSO OBSERVE D THAT THE ASSESSEE HAD FURNISHED DETAILS OF WORKABLES IN RES PECT OF 23 COMPANIES AND THE MEAN OF THE COMPARABLES WORKED OU T TO 10%, AS AGAINST THE MARGIN OF 17% SHOWN BY THE ASSESSEE. DETAILS OF ITA NO.1102/DEL/2015 16 THESE COMPANIES ARE MENTIONED IN PARA 5 OF THE IMPU GNED ORDER. 17. COMPARABILITY OF INFOSYS HAS ALSO BEEN EXAMINED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TOLUNA INDIA PVT. LTD. VS. ACIT IN ITA NO.5645/DEL/2011 ORDER DATED 26.08.2014 WHICH WAS RENDERING SERVICES TO ITS OWN AE ON COST PLUS B ASIS WITHOUT HAVING ANY INTANGIBLE ASSETS OR RETAINING ANY INTEL LECTUAL PROPERTY IN THE WORK DONE BY IT. COORDINATE BENCH OF THE TR IBUNAL HELD INFOSYS TO BE NOT COMPARABLE ON THE GROUND THAT IT IS A GIANT COMPANY HAVING HUGE CAPACITY TO ASSUME ENTREPRENEUR IAL RISK, HAVING HUGE TURNOVER OF RS.21140 CRORES AND HAVING REVENUE OWNERSHIP OF BRANDED / PROPRIETARY PRODUCTS. 18. MOREOVER, INFOSYS IS ENGAGED IN SIGNIFICANT R&D ACTIVITIES LEADING TO CREATION OF SIGNIFICANT INTELLECTUAL PRO PERTY DURING THE YEAR UNDER ASSESSMENT AND HAS INCURRED SUBSTANTIAL EXPENDITURE OF R&D ACTIVITIES TO THE TUNE OF RS.267 CRORES I.E. 1. 3%. 19. KEEPING IN VIEW THE FACT THAT THE TAXPAYER IS A LOW END CAPTIVE SERVICE PROVIDER TO ITS AE HAVING NO INTANG IBLES OR BRANDED / PROPRIETARY PRODUCTS VIS--VIS INFOSYS AND FOLLOW ING THE DECISION RENDERED BY HONBLE HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT ITA NO.1102/DEL/2015 17 THIS COMPANY IS NOT A SUITABLE COMPARABLE FOR BENCH MARKING THE INTERNATIONAL TRANSACTION QUA SOFTWARE DEVELOPMENT SERVICES. PERSISTENT SYSTEMS LTD. (PERSISTENT) 20. PERSISTENT IS TAXPAYERS OWN COMPARABLE AND RET AINED BY THE TPO IN THE FINAL SET OF COMPARABLES ON THE OPERATIN G PROFIT MARGIN OF 32.50%. HOWEVER, NOW THE TAXPAYER SOUGHT TO EXC LUDE PERSISTENT ON GROUND OF HAVING DIFFERENT BUSINESS M ODEL VIS--VIS TAXPAYER AS PERSISTENT IS INTO THE BUSINESS OF PROV IDING SOFTWARE PRODUCT AND RELIED UPON TALUNA INDIA PVT. LTD. (SUPRA), STERIA INDIA LTD. (ITA NO.107/DEL/2016) AFFIRMED BY HONBL E DELHI HIGH COURT IN ITA 762/2017, AGILIS TECHNOLOGIES IND IA PVT. LTD. VS. ACIT (ITA NO.786/DEL/2015) AND TELCORDIA TECHNO LOGIES INDIA PVT. LTD. VS. ACIT (ITA NO.7821/MUM/2011) . 21. COMPARABILITY OF PERSISTENT HAS BEEN EXAMINED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TALUNA INDIA PVT. LTD. (SUPRA) WHEREIN IT HAS BEEN ORDERED TO BE EXCLUDED ON GROUN D OF MERGER BY MAKING FOLLOWING OBSERVATIONS :- 33. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE HOLD T HAT THIS COMPANY ALSO CANNOT BE CONSIDERED AS COMPARABL E BECAUSE OF MERGER OF ANOTHER COMPANY INTO IT, WHICH FACT IS EVIDENT FROM PAGE 196 OF THE PAPER BOOK. IT CAN BE SEEN THAT A SUBSIDIARY COMPANY WAS MERGED INTO T HIS COMPANY PURSUANT TO JUDGMENT OF HONBLE BOMBAY HIGH COURT W.E.F. 1.4.06. BECAUSE OF THE MERGER OF ITA NO.1102/DEL/2015 18 SUBSIDIARY INTO THIS COMPANY, WE HOLD THAT THE FINA NCIAL POSITION OF THIS COMPANY CANNOT BE CONSTRUED AS NOR MAL CAPABLE OF A GOOD COMPARISON. FOLLOWING THE MUMBAI BENCH DECISION IN PETRO ARALDITE (P) LTD. (SUPRA) , WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS. 22. FURTHERMORE WHEN WE EXAMINE ANNUAL REPORT OF PE RSISTENT, AVAILABLE AT PAGES 120 TO 209 OF THE PAPER BOOK, RE LEVANT PAGES 170 TO 173, IT IS AMPLY CLEAR THAT PERSISTENT DEALS IN SOFTWARE PRODUCTS AND EARNED ITS INCOME BOTH FROM SOFTWARE SERVICES A ND PRODUCT WHEREAS THE TAXPAYER DEALS IN SOFTWARE SERVICES AND AS SUCH CANNOT BE COMPARED WITH PERSISTENT FOR BENCHMARKING THE IN TERNATIONAL TRANSACTION. 23. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE DI RECT TO EXCLUDE PERSISTENT FROM FINAL SET OF COMPARABLES FO R BENCHMARKING THE INTERNATIONAL TRANSACTION. TATA ELEXI (TATA) 24. TPO HAS SELECTED TATA AS A COMPARABLE DESPITE R AISING OBJECTION BY THE TAXPAYER THAT ITS OPERATION PREDOM INANTLY RELATE TO PROVIDING SYSTEM INTEGRATION AND SOFTWARE DEVELOPME NT SERVICES IN THE INFORMATION TECHNOLOGY FIELD; FOR FY 2007-08 & 2008-09 THE COMPANY HAS REVENUE FROM TWO SEGMENTS VIZ. SYSTEMAT IC INFORMATION & SUPPORT AND SOFTWARE DEVELOPMENT & SE RVICES THE BUSINESS CONSTITUTING THIS SEGMENT ARE PRODUCT DESI GN SERVICES ITA NO.1102/DEL/2015 19 (DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE), INNOVATION DESIGN ENGINEERING (MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN) AND VISUAL COMPUTING LABS DIVISION (ANIMATI ON AND SPECIAL EFFECTS); THAT AS PER P&L ACCOUNT FOR FY 20 08-09, FOR FY 2007-08 AND FY 2008-09, THE REVENUES ARE FROM SALE S AND SERVICES: NO FURTHER BIFURCATION GIVEN FOR REVENUE S FROM SOFTWARE DEVELOPMENT AND SERVICES. HOWEVER, TPO RETAINED T HIS COMPANY AS COMPARABLE BY OBSERVING THAT THE COMPANY IS ENGA GED IN PROVIDING SOFTWARE SERVICES BY RELYING UPON ANNUAL REPORT OF THE COMPANY WHICH IS TO THE EFFECT THAT, VISUAL COMPUTING LABS : VCL DELIVERS 3D COMPUTER GRAPHICS, ANIMATION AND SP ECIAL EFFECTS IN THE PRE-PRODUCTION, PRODUCTION AND POST-PRODUCTI ON OF CONTENT FOR THE FILM, TELEVISION, GAMING AND ADVERTISING IN DUSTRY. 25. COMPARABILITY OF THIS HAS BEEN EXAMINED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TOLUNA INDIA PVT. LTD. (SUPRA) WHEREIN IT HAS BEEN ORDERED TO BE EXCLUDED AS A COMPARABLE WIT H TOLUNA INDIA PVT. LTD. (SUPRA), A SOFTWARE DEVELOPMENT AND SERVICE PROVIDER BY MAKING FOLLOWING OBSERVATIONS :- 39.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY NOTICING THAT ITS SOFTWARE DEVELOPM ENT AND SERVICES SEGMENT MATCHED WITH THE ASSESSEE. O N BEING CALLED UPON TO EXPLAIN AS TO WHY THIS COMPANY BE NOT INCLUDED IN THE LIST OF COMPARABLES, THE ASSESS EE STATED THAT THE NATURE OF ACTIVITY DONE BY THIS COM PANY WAS DIFFERENT INASMUCH AS IT WAS ENGAGED IN R&D ITA NO.1102/DEL/2015 20 ACTIVITIES ALSO WHICH RESULTED IN CREATION OF INTEL LECTUAL PROPERTY. NOT CONVINCED WITH THE ASSESSEES SUBMISSIONS, THE TPO INCLUDED THIS SEGMENT OF THE COMPANY IN THE LIST OF COMPARABLES. 26. TATA COME UP FOR COMPARABILITY BEFORE COORDINAT E BENCH OF MUMBAI OF THE TRIBUNAL IN CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD. ITA NO.7821/MUM/2011 ORDER DATED 11.05. 2012 AND HAS BEEN ORDERED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES WITH TELCORDIA TECHNOLOGIES INDIA PVT. LTD (SUPRA) WHICH IS ALSO ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT REL ATED SERVICES BY MAKING FOLLOWING OBSERVATIONS :- 7.7 TATA ELXSI LIMITED.: FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIO NS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA E LXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT F ROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR 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 TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST O F COMPARABLE PARTIES. 27. SO KEEPING IN VIEW THE FACT THAT TATA BEING ENG AGED IN PRODUCT DESIGN SERVICES, INNOVATION DESIGN ENGINEER ING SERVICES AND VISUAL COMPUTING LABS AND HAS SPECIALIZED AND N ICHE DOMAIN OF ITA NO.1102/DEL/2015 21 SOFTWARE PRODUCTS/SERVICES AND BY FOLLOWING THE DEC ISION RENDERED BY THE TRIBUNAL IN TOLUNA INDIA PVT. LTD. AND TELCORDIA TECHNOLOGIES INDIA PVT. LTD (SUPRA), WE FIND TATA AS NOT A SUITABLE COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION. THIRDWARE SOLUTIONS LTD. (THIRDWARE) 28. THE TAXPAYER SOUGHT TO EXCLUDE THIS COMPANY FRO M THE FINAL SET OF COMPARABLES. THE LD. TPO HOWEVER RETAINED T HIS COMPANY ON THE GROUND THAT THIS IS INTO DEVELOPMENT OF SOFT WARE SERVICES AND ITS ANNUAL REPORT IS AVAILABLE IN PUBLIC DOMAIN. T HE LD. DRP ALSO RETAINED THIS COMPARABLE ON THE GROUND THAT ITS INC OME FROM IT AND SOFTWARE SERVICES IS MORE THAN 75% OF THE TOTAL OPE RATING REVENUE. 29. THE LD. AR FOR THE ASSESSEE SOUGHT EXCLUSION OF THIS COMPANY ON THE GROUNDS INTER ALIA THAT IT HAS INSUF FICIENT FINANCIAL OR DESCRIPTION INFORMATION TO PERFORM ANALYSES; THA T IT HAS FUNCTIONAL DISSIMILARITY BECAUSE ITS REVENUE FROM S UBSCRIPTION AS WELL AS SALE OF LICENCE AND RELIED UPON EGAIN COMMUNICATION (P.) LTD. VS. ITO (2008) 23 SOT 385 (PUNE), 3DPLM SOFT WARE SOLUTIONS LTD. VS. DCIT ITA NO.1303/BANG/2012 AND ST. ERICSON INDIA PVT. LTD. VS. ACIT ITA NO.7821/MUM/ 2011 ; THAT THIRDWARE ALSO OWNS SOFTWARE/ PROPRIETARY PRODUCTS AND IS ALSO INTO PURCHASE AND SALE OF LICENCE TO EARN INCOME. ITA NO.1102/DEL/2015 22 30. THE FACTUM OF EARNING OF REVENUE SUBSCRIPTION A S WELL AS OF LICENCE IS PROVED FROM PAGE 258 OF THE ANNUAL REPOR T OF THIRDWARE OF THE PAPER BOOK, SCHEDULE FORMING PART OF BALANCE SHEET AND PROFIT & LOSS ACCOUNT WHEREIN THE REVENUE FROM SUBS CRIPTION AS WELL AS FROM PURCHASE IN LICENCE IS SHOWN AT RS.74, 26,721/- AND RS.1,35,24,304/- RESPECTIVELY AND THIS INCOME MAKES THIRDWARE INCOMPARABLE TO THE TAXPAYER FOR BENCHMARKING THE I NTERNATIONAL TRANSACTION. 31. COORDINATE BENCH OF THE TRIBUNAL EXAMINED COMPA RABILITY OF THIRDWARE IN CASE OF ST. ERICSON INDIA PVT. LTD. VS. ACIT ITA NO.1672/DEL/2014 WHICH IS ALSO A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND HELD THE SAME TO BE INCOMPARABLE FOR B ENCHMARKING THE INTERNATIONAL TRANSACTIONS OF SOFTWARE DEVELOPM ENT SERVICES PROVIDER BY RETURNING FOLLOWING FINDINGS :- 47. THIS IS AGAIN TPOS OWN COMPARABLE AND ASSESSEE SOUGHT TO EXCLUDE THIS COMPANY FROM THE LI ST OF COMPARABLES ON THE GROUND OF NON-COMPARABLE SERVICE S I.E APPLICATION IMPLEMENTATION, MANAGEMENT AND DEVELOPMENT SERVICES. TPO REJECTED OBJECTIONS RAIS ED BY THE ASSESSEE BY OBSERVING THAT SOFTWARE DEVELOPM ENT, IMPLEMENTATION AND SUPPORT SERVICES ARE VARIOUS SUB - SEGMENTS OF SOFTWARE DEVELOPMENT SERVICES ONLY AND REQUIRE EMPLOYMENT OF SOFTWARE ENGINEERS AND RETAIN ED THIS COMPANY AS A COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSACTIONS. 48. HOWEVER, PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY, AVAILABLE AT PAGE 1735 TO 1782 OF THE PAPE R BOOK VOL.IV, GOES TO PROVE THAT THE SUBSTANTIAL REV ENUE ITA NO.1102/DEL/2015 23 OF THIS COMPANY IS FROM SALES AND OPERATING SALES O F LICENCE; SOFTWARE SERVICES, EXPORT FROM SEZ UNIT, E XPORT FROM STPI UNIT AND REVENUE FROM SUBSCRIPTION. IT I S ALSO APPARENTLY CLEAR THAT SOFTWARE SERVICES SEGMEN T ACCOUNTS FOR RS.8.91 CRORES OUT OF THE TOTAL SALES OF RS.77 CRORES WHEREAS SEGMENTAL RESULTS ARE NOT AVAILABLE. SO, WHEN THIS COMPANYS SUBSTANTIAL REV ENUE IS FROM OTHER VARIOUS BUSINESS SEGMENTS LIKE SALE O F LICENCE, SOFTWARE SERVICES AND SEGMENTAL RESULTS AR E NOT AVAILABLE, THIS COMPANY CANNOT BE A VALID COMPARABL E FOR BENCHMARKING THE INTERNATIONAL TRANSACTION, HEN CE ORDERED TO BE EXCLUDED. 32. COORDINATE BENCH OF THE TRIBUNAL IN EGAIN COMMUNICATION (P.) LTD. VS. ITO (SUPRA), AVAILABLE AT PAGES 297 TO 325 OF THE CASE LAWS COMPENDIUM, EXAMINED ITS COMPARABILITY VIS--V IS A SOFTWARE DEVELOPMENT SERVICE PROVIDER COMPANY AND DIRECTED T O EXCLUDE THE SAME FROM THE FINAL SET OF COMPARABLES ON THE GROUN D THAT THIS COMPANY IS IN THE TRADING OF SOFTWARE AND WAS PURCH ASING LICENCE AND CLEARING THEM AND PURCHASE AND SALE OF LICENCE BUSINESS CANNOT BE COMPARED WITH SOFTWARE BUSINESS BY MAKING FOLLOW ING OBSERVATIONS :- (I) THIRDWARE SOLUTIONS LTD. WHICH HAD SHOWN PBTT OF 67.65%. COPY OF PROFIT AND LOSS ACCOUNT OF ABOVE COMPANY COLLECTED FROM THE PUBLIC DOMAIN WITH ITS ANNUAL REPORT IS AVAILABLE IN THE PAPER BOOK. T HE PROFIT AND LOSS ACCOUNT IS AVAILABLE AT PAGE 201 OF THE PAPER BOOK. ON EXAMINATION OF ABOVE ACCOUNTS, IT IS SEEN ON THE RECEIPT SIDE, UNDER THE HEAD 'SALES AND OTHER INCOME' THE TAXPAYER HAS SHOWN 'OTHER INCOME' AT RS.1,41,55,687. THE DETAIL GIVEN AS PER SCHEDULE 13 IS AS UNDER: ITA NO.1102/DEL/2015 24 SCHEDULE 13: OTHER INCOME INTEREST ON DEPOSIT 2.953.027 INTEREST ON BANK DEPOSIT 7.600.902 DEBTORS WRITTEN BACK --- OTHER INCOME --- PROFIT ON SALE OF INVESTMENT (1.180,188) EXCESS PROVISION W/BACK 183,400 INTEREST ON IT REFUND 394,838 DEPOSIT W/BACK-REED. 40,000 DIVIDEND INCOME 4,163,708 14,155,687 22. SCHEDULE XIV OF THE BALANCE SHEET FURTHER SHOW S THAT ABOVE COMPANY WAS IN THE TRADING OF SOFTWARE I N THE RELEVANT PERIOD. IT WAS PURCHASING LICENSES AND CLEARING THEM. PURCHASE AND SALE OF LICENSE IS NOT A BUSINESS WHICH CAN AT ALL BE COMPARED WITH THE SOFT WARE BUSINESS. THE BALANCE SHEET FURTHER MAKES IT CLEAR THAT THE COMPANY HAS PAID WEALTH LAX ADVANCE AND WAS NOT INVOLVED IN DEVELOPMENT OF TECHNOLOGY. IT DID NOT H AVE ANY INCOME FROM DEVELOPMENT OF SOFTWARE BUT HAD INCOME FROM MUTUAL LANDS. 33. SO, WE ARE OF THE CONSIDERED VIEW THAT BECAUSE OF FUNCTIONAL DISSIMILARITY THE THIRDWARE IS NOT A SUITABLE COMPA RABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA SOF TWARE DEVELOPMENT SERVICES PROVIDED BY THE TAXPAYER, HENC E WE DIRECT TO EXCLUDE THE SAME FROM THE FINAL SET OF COMPARABLES. 34. THE LD. AR FOR THE ASSESSEE CONTENDED THAT WITH THE EXCLUSION OF INFOSYS LIMITED, TATA ELEXI, THIRDWARE SOLUTIONS AND ITA NO.1102/DEL/2015 25 PERSISTENT SYSTEMS LTD. FROM THE FINAL SET OF COMPA RABLES, THE AVERAGE OPERATING MARGIN OF REMAINING COMPARABLE CO MPANIES FINALLY SELECTED BY THE TPO COMES TO 15.24% AS COMP ARED TO TAXPAYERS OPERATING MARGIN OF 12.27% WHICH IS WITH IN +/- 5% RANGE. HOWEVER, THIS FIGURE IS SUBJECT TO THE VERI FICATION BY THE AO. 35. INITIALLY, LD. AR FOR THE TAXPAYER SOUGHT INCLU SION OF CG-VAK SOFTWARE & EXPORTS LTD. AND QUINTEGRA SOLUTIONS IN THE FINAL SET OF COMPARABLES, HOWEVER DURING THE COURSE OF ARGUMENTS , HE HAS NOT PREFERRED TO PRESS INCLUSION OF THESE COMPANIES. H ENCE, NO FINDINGS ARE BEING RETURNED FOR INCLUSION OF CG-VAK SOFTWARE & EXPORTS LTD. AND QUINTEGRA SOLUTIONS. GROUND NO.4 36. GROUND NO.4 IS NOT PRESSED. GROUNDS NO.5 & 6 37. DRP/AO DISALLOWED AN AMOUNT OF RS.12,11,000/- O N ACCOUNT OF DEDUCTION CLAIMED BY THE TAXPAYER U/S 1 0A OF THE ACT ON THE GROUND THAT CHANGE OF ACCOUNTING POLICY WOUL D RESULT IN TAXPAYER CLAIMING DEDUCTION IN AY 2011-12 WITH REGA RD TO INVOICES TO BE RAISED IN AY 2012-13 WHEN NO SUCH DE DUCTION U/S 10A IS AVAILABLE. ITA NO.1102/DEL/2015 26 38. LD. AR FOR THE TAXPAYER CONTENDED THAT SINCE TH E INCOME PERTAINING TO UNBILLED REVENUE PROFIT IS DERIVED FR OM EXPORT OF SOFTWARE SERVICES, THE SAME IS ELIGIBLE FOR DEDUCTI ON U/S 10A (4) OF THE ACT AND RELIED UPON THE DECISION RENDERED BY TH E COORDINATE BENCH OF MUMBAI OF THE TRIBUNAL IN ACIT VS. SONATA SOFTWARE LTD. 55 SOT 533 , AVAILABLE AT PAGES 982 TO 987 OF THE CASE LAWS COMPENDIUM. 39. SECTION 10A (4) IS CATEGORIC ENOUGH TO EXPLAIN THAT PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUT ER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF T HE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURN OVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEA RS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAK ING. THIS ISSUE HAS BEEN DECIDED BY THE COORDINATE BENCH OF T HE TRIBUNAL IN SONATA SOFTWARE (SUPRA) IN FAVOUR OF THE ASSESSEE. 40. THE ASSESSEE HAS ALSO PROVED BEFORE AO THE DATE ON WHICH THE INVOICES RELATING TO SUCH UNBILLED REVENUE IS R AISED AS WELL AS DATE OF REALIZATION OF SUCH INVOICES AND THIS FACT IS NOT DISPUTED BY THE AO AND IS OTHERWISE IN ACCORDANCE WITH THE ACC OUNTING STANDARD 09. MOREOVER WHEN ASSESSEE HAS PRODUCED RELEVANT DOCUMENTS VIZ. COPIES OF FIRC BEFORE THE AO TO PROV E THE FACT THAT THE EXPORT PROCEEDS WERE REALIZED FROM THE SIX MONT HS OF THE ITA NO.1102/DEL/2015 27 EXPORT, DISALLOWANCE OF THE DEDUCTION U/S 10A OF TH E ACT ON UNBILLED REVENUE AND RELATABLE FOREIGN EXCHANGE GAI N IS NOT SUSTAINABLE IN THE EYES OF LAW. CONSEQUENTLY, WE A RE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS ENTITLED FOR D EDUCTION OF RS.12,11,000/- U/S 10A OF THE ACT. HENCE, GROUNDS NO.5 & 6 ARE DETERMINED IN FAVOUR OF THE ASSESSEE. GROUND NO.7 41. THE QUESTION OF LEVYING OF INTEREST U/S 234B OF THE ACT BY THE AO IS CONSEQUENTIAL. SO FAR AS QUESTION OF LEV YING INTEREST U/S 234C IS CONCERNED, THE SAME IS TO BE LEVIED IN ACCO RDANCE WITH THE PROVISIONS CONTAINED UNDER THE SECTION ITSELF BY CO NSIDERING THE TAX ON RETURNED INCOME AND NOT ON THE ASSESSED INCOME. CONSEQUENTLY, GROUND NO. 7 IS DETERMINED IN FAVOUR OF THE ASSESSE E. 42. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON THIS 27 TH DAY OF OCTOBER, 2017. SD/- SD/- (N.K. SAINI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 27 TH DAY OF OCTOBER, 2017 TS ITA NO.1102/DEL/2015 28 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.