DCIT, Bangalore V. M/s Misys Software (I) Pvt. Ltd., Bangalore

ITA 1110/BANG/2011

• Counselvise Citation: 111021114 RSA 2011
• Duration Of Justice: 3 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 22-10-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 18-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Wholly owned subsidiary
• Section: 143(3); 92D; 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T (T.P.) A. NO. 1110 /BANG/201 1 (ASSESSMENT YEAR : 200 5 - 06 ) DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(1 ), BANGALORE - 560 0 0 1 . APPELLANT. VS. M/S. MISYS SOFTWARE (I) PVT. LTD., EAGLE RIDGE, EMBASSY GOLF LINKS BUSINESS PARK, OFF INTERMEDIATE RING ROAD, BANGALORE - 560 071 . .. RESPONDENT. PAN AAACK 9067G C.O. NO.20/BANG/2012 (IN I.T (T.P.) A. NO. 1110 /BANG/20 11) (BY ASSESSEE) ASSESSEE BY : SHRI ARVIND SONDE, C.A. R E VENUE BY : SHRI FARHAT HUSSAIN QURESHI, CIT (D.R) DATE OF H EARING : 22.10.2014 DATE OF P RONOUNCEMENT : 9.1 .201 5 . O R D E R PER SHRI JASON P. BOAZ , A.M . : THIS APPEAL BY REVENUE IS D IRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - IV, BANGALORE DT.12.9.2011 FOR ASSESSMENT YEAR 2005 - 06. THE ASSESSEE HAS ALSO FILED CROSS OBJECTIONS IN THE MATTER. 2. THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER : - 2 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 2.1 THE ASSESSEE , A RESIDENT COMPANY IS A WHOLLY OWNED SUBSIDIARY OF MISYS INTERNATIONAL S.A., LUXEMBOURG AND IS PART OF THE MISYS P LC , U.K. THE ASSESSEE IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT AND PRODUCT SUPPORT SERVICES TO ITS GROUP COMPANIES. FOR ASSESSMENT YEAR 2005 - 06, THE ASSESSEE FILED THE RETURN OF INCOME ON 30.10.2005 DECLARING INCOME OF RS.29,830 AFTER CLAIMING DEDUCTION UNDER SECTION 10A OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT'). THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT AND THE CASE WAS SUBSEQUENTLY TAKEN UP FOR SCRUTINY. THE ASSESSING OFFICER MADE A REFERENCE TO THE TRANSFER PRICING OFFICER ( TPO ) UNDER SECTION 92CA(1) OF THE ACT IN RESPECT OF THE FOLLOWING INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE W ITH ITS ASSOCIATED ENTERPRISES (AES) IN THE YEAR UNDER CONSIDERATION; AS REPORTED IN THE 3CEB REPORT FILED BY THE ASSESSEE : - (I) CONTRACT SOFTWARE DEVELOPMENT SERVICES: RS.51,73,68,601. (II) REIMBURSEMENT OF EXPENSES PAID / PAYABLE: RS.25,91,064. (III ) REIMBURSEMENT OF EXPENSES RECEIVED / RECEIVABLE:RS.2,04,13,805. THE TPO PASSED AN ORDER UNDER SECTION 92CA OF THE ACT DT.2.4.2008 IN RESPECT OF THE AFORESAID INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES (SUPRA), MAKING AN ADJ USTMENT OF RS.6,45,40,063 TO THE ARMS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN RESPECT OF ITS SOFTWARE DEVELOPMENT SERVICES. 2.2 AFTER RECEIPT OF THE ORDER OF THE TPO UNDER SECTION 92CA OF THE ACT DT.2.4.2008, THE ASSESSING O FFICER COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT VIDE ORDER DT.27.11.2008 DETERMINING THE INCOME OF THE ASSESSEE AT RS.6,790,33,737 AS AGAINST THE RETURNED INCOME OF RS.29,830 IN VIEW OF THE FOLLOWING ADDITIONS / DISALLOWANCES THERETO : - 3 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 ( I) DISALLOWANCE ON ACCOUNT OF RECOMPUTATION OF DEDUCTION U/S.10A : RS.33,63,844 . (II) TRANSFER PRICING ADJUSTMENT : RS.6,45,40,063. 3. AGGRIEVED BY THE ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2005 - 06 DT.27.11.2008, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT (APPEALS) IV, BANGALORE. THE LEARNED CIT(A) DISPOSED OFF THE ASSESSEE'S APPEAL VIDE ORDER DT.12.9.2011 ALLOWING THE ASSESSEE PARTIAL RELIEF. 4. AGGRIEVED BY THE ORDER OF THE CIT (APPEALS) IV, BANGALORE, DT.12.9.2011 FOR ASSESSMENT YEAR 2005 - 06, THE REVENUE IS IN APPEAL BEFORE THIS TRIBUNAL RAISING THE FOLLOWING GROUNDS : - IT(TP)A NO.1110/BANG/2011 REVENUE S APPEAL FOR ASSESSMENT YEAR 2005 - 06. 1. THE ORDER OF THE LEARNED CIT (APPEALS) IS OPPOSED TO LAW AND FACTS OF THE CASE . 2. THE CIT (APPEALS) ERRED IN HOLDING THAT EXPENDITURE OF RS.2,12,28,101 TOWARDS DAILY ALLOWANCE, RS.24,28,829 TOWARDS SUPPORT ALLOWANCE AND RS.30,75,083 INCURRED TOWARDS MISCELLANEOUS TRAVEL EXPENSES, ALL INCURRED IN FOREIGN CURRENCY ARE TO BE EXCLUD ED FROM TOTAL TURNOVER AS WELL FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE I.T. ACT, 1961 WHILE SUCH EXCLUSION IS PERMITTED TO ARRIVE AT THE EXPORT TURNOVER ONLY AS PER THE DEFINITIONS GIVEN IN SECTION 10A OF THE ACT AND TOTAL TURN OVER HAS NOT BEEN DEFINED IN THE SECTION. 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT (APPEALS) ERRED IN HOLDING THAT THE TPO ERRED IN NOT EXCLUDING COMPARABLES HAVING ANY RELATED PARTY TRANSACTIONS, EVEN IF THE RELATED PARTY TRANSACT IONS ARE LESS THAN 25% OF THE REVENUES. 4. THE LEARNED CIT (APPEALS) ERRED IN HOLDING THAT PROFIT ON COST OF MORE THAN 50% OF THE COMPARABLE COMPANIES IS ABNORMAL WITHOUT GIVING REASONS HOW FUNCTIONS DISCHARGED, ASSETS DEPLOYED AND RISKS ASSUMED OF SUCH COMPANIES WERE DIFFERENT FROM THE APPELLANT COMPANY. 5. THE LEARNED CIT (APPEALS) ERRED IN HOLDING THAT THE ASSESSEE IS ELIGIBLE FOR A STANDARD DEDUCTION OF 5% FROM THE ARM S LENGTH PRICE UNDER THE PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT (APPEALS) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 7. THE APPELLANT CRAVE S LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 4 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 C.O. NO.20/BANG/2012 ASSESSEE'S C.O. FOR A.Y. 2005 - 06. 5. THE ASSESSEE HAS ALSO RAISED CROSS OBJECTIONS (C.O), IN RESPECT OF THE IMPUGNED ORDER OF THE CIT (APPEALS) IV, BANGALORE DT.12.9.2011 FOR ASSESSMENT YEAR 2005 - 06, WHICH ARE AS UNDER : - 1. THAT THE ORDER OF THE LEARNED CIT (APPEALS) RESULTING IN INCOME OF THE RESPONDENT BEING SUBJECT TO TAX, IS BAD IN LAW, WITHOUT APPLICATION OF MIND AND LIABLE TO BE QUASH ED. 2. THAT THE LEARNED CIT (APPEALS) ERRED IN NOT ENTIRELY DELETING THE ADJUSTMENT TO THE ARM S LENGTH PRICE MADE BY THE LEARNED ASSESSING OFFICER / TRANSFER PRICING OFFICER AMOUNTING TO INR 64,540,063 IN RESPECT O THE SOFTWARE DEVELOPMENT SERVICES. 3. THAT IN MAKING AN ADJUSTMENT TO THE RESPONDENT S TRANSFER PRICE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT (APPEALS) ERRED IN : A) UPHOLDING THE COMPARABILITY ANALYSIS PERFORMED BY THE LEARNED TPO IN THE TP ORDER. B) MODIFYING SOME O F THE FILTERS APPLIED BY THE LEARNED TPO IN THE TP ORDER, WITHOUT PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE APPELLANT. C) ARBITRARILY ARRIVING AT A SET OF COMPANIES AS COMPARABLE TO THE RESPONDENT. D) DISREGARDING APPLICATION OF MULTIPLE YEAR / PRIOR YEAR DATA AND HOLDING THAT CURRENT YEAR (I.E. FINANCIAL YEAR 2005 - 06) DATA FOR COMPANIES SHOULD BE USED FOR COMPARABILITY. E) UPHOLDING THE LEARNED TPO S APPROACH OF USING DATA AS AT THE TIME OF ASSESSMENT PROCEEDINGS. F) UPHOLDING THE APPROACH ADOPTED BY THE LEARNED TPO OF COLLECTING SELECTIVE INFORMATION OF THE COMPANIES BY EXERCISING POWER GRANTED TO HIM UNDER SECTION 133(6) OF THE INCOME TAX ACT, 1961 THAT WAS NOT AVAILABLE TO THE RESPONDENT IN THE PUBLIC DOMAIN. G) NOT PROVIDING APPROPRIATE ADJUSTMENT TOWARDS THE RI SK DIFFERENTIAL BETWEEN THE RESPONDENT AND THE ENTREPRENEURIAL COMPANIES SELECTED AS COMPARABLES, WHILE DETERMINING THE ARM S LENGTH PRICE. 4. THAT THE LEARNED CIT (APPEALS) ERRED IN UPHOLDING THE INCLUSION OF REIMBURSEMENT EXPENSES AS PART OF THE OPERAT ING COST AND INCOME IN DETERMINING THE ARM S LENGTH PRICE BY THE LEARNED TPO. 5. THAT CONSEQUENTLY THE LEARNED ASSESSING OFFICER ERRED IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT, WHILE GIVING EFFECT TO THE ORDER OF THE CIT (APPEALS). 5 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 TRANS FER PRICING ISSUES. 6.0 BEFORE PROCEEDING TO DEAL WITH THE ABOVE GROUNDS OF APPEAL ON T. P . ISSUES, THE APPROACH OF THE TPO VIS - A - VIS THAT OF THE ASSESSEE IN ITS T.P.STUDY SUBMITTED BEFORE THE TPO IS BRIEFLY SUMMARISED AS UNDER. 7.1 THE ASSESSEE IS ENGAGED IN THE PROVISIONS OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO ITS GROUP COMPANIES. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS REPORTED THE FOLLOWING INTERNATIONAL TRANSACTIONS IN ITS 3CEB REPORT : - (I) SOFTWARE DEVELOPMENT SERVICES : RS.51,73,68,601 (II) REIMBURSEMENT OF EXPENSES PAID / PAYABLE : RS.25,91,064. ( III) REIMBURSEMENT OF EXPENSES PAID / RECEIVABLE : RS.2,04,13,805. THE ASSESSEE CONDUCTED ITS T.P. STUDY APPLY THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MO ST APPROPRIATE METHOD (MAM) AND ADOPTED O PERATING P ROFIT TO OPERATING COST AS THE PROFIT LEVEL INDICATOR (PLI). AFTER CON DUCTING A SEARCH USING PROWESS AND CAPITALINE , THE ASSESSEE IDENTIFIED THE FOLLOWING 24 COMPANIES AS COMPARABLES : - SL.N O. NAME OF THE COMPARABLE COMPANY. 1. ADVANCED MICRONIC DEVICES LTD. (SEG.) 2. AKSHAY SOFTWARE TECHNOLOGIES LTD. 3. AVIATION SOFTWARE DEV. CONSULTANCY LTD. 4. AZTECSOFT LTD. 5. BODHTREE CONSULTING LTD. 6. CAPRICON SYSTEMS GLOBAL SOLUTIONS LTD. 7. E. STAR INFOTECH LTD. 8. GEBBS INFOTECH LTD. 9. GOLDSTONE TECHNOLOGIES LTD. 10. L&T INFOTECH LTD. 11. MELSTAR INFORMATION TECHNOLOGIES LTD. 12. NETVISTA INFORMATION TECHNOLOGY LTD. 6 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 13. NIIT LTD. (SEG.) 14. ORG INFORMATICS LTD. (SEG.) 15. ORIENT INFORM ATION TECHNOLOGIES LTD. 16. RICO SOFTECH LTD. (SEG.) 17. SATYAM COMPUTER SERVICES LTD. 18. SEYMOUR TECHNOLOGIES LTD. 19. SONATA SOFTWARE LTD. 20. SQL STAR INTERNATIONAL LTD. (SEG.) 21. SSI LTD. (SEG.) 22. TRANSWORLD INFOTECH LTD. 23. VISESH INFOTEC HNICS LTD. (SEG.) 24. VJIL CONSULTING LTD. 7.2 AS THE AVERAGE PROFIT MARGIN OF THE ASSESSEE WORKED OUT AT 12.5% WAS HIGHER THAN THE ARITHMETICAL MEAN MARGIN OF THE COMPARABLES WORKED OUT @ 11% ON COST, THE ASSESSEE HELD THAT ITS INTERNATIONAL TRANSA CTIONS WERE AT ARM S LENGTH. 8. THE TPO S APPROACH . 8.1 THE TPO, AFTER EXAMINING THE ASSESSEE S T.P. STUDY, REJECTED THE SAME AND PROCEEDED TO CONDUCT HIS OWN FRESH SEARCH FOR COMPARABLES USING PROWESS AND CAPITALINE. THE TPO ACCEPTED THIS ASSES SEE'S ADOPTION OF TNMM AS THE MAM. THE TPO ADOPTED THE FOLLOWING IT COMPANIES AS COMPARABLE COMPANIES : - S.NO. NAME OF THE COMPARABLE COMPANY OP/OC (%) 1. BODHTREE CONSULTING LTD. 24.85 2. LANCO GLOBAL SYSTEMS LTD. 13.65 3. EXE N SYS SOFTWARE SOLUTIO NS LTD. 70.67 4. SANKHYA INFOTECH LTD. 27.38 5. SASKEN NETWORK SYSTEMS LTD. 16.63 6. FOUR SOFT LTD. 22.98 7. THIRDWARE SOLUTION LTD. 66.09 8. R.S. SOFTWARE (INDIA) LTD. 8.07 7 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 9. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. 20.33 10. TATA ELXSI LTD. (SOFTWAR E DEVT. SERVICES - SEG) 24.343 11. VISUAL SOFT TECHNOLOGIES LTD. (SEG) 23.51 12. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG) 14.41 13. IG A TE GLOBAL SOLUTIONS LTD. (SEG) 4.32 14. FLEXTRONICS (SEG) 32.19 15. L&T INFOTECH LTD. 10.33 16. SATYAM COMPUTER S SERVICES 29.44 17. INFOSYS LTD. 42.83 8.2 THE ARITHMETIC MEAN OF THESE 17 COMPARABLES WAS COMPUTED AT 26.59%. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 2.42%, THE ADJUSTED ARITHMETIC MEAN OF THESE COMPARABLES WAS ADOPTED AT 24.17%. THE RESULT ANT SHORTFALL IN THE PRICE AMOUNTING TO RS.6,45,40,063 WAS TAKEN AT THE T.P. ADJUSTMENT TO THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES AND ADDED TO THE INCOME OF THE ASSESSEE. 9.1 IN THE IMPUGNED ORDER, THE LEARNED CIT(A) AFT ER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DISPOSED OFF THE ASSESSEE'S APPEAL EXCLUDING 13 OUT OF THE 17 COMPANIES CHOSEN BY THE TPO AS COMPARABLES TO THE ASSESSEE. AFTER CONSIDERING THE ARITHMETIC MEAN OF THE PROFIT MARGINS OF THE REMAINING FOUR COMP ANIES IN THE LIST OF COMPARABLES CHOSEN BY THE TPO, THE LEARNED CIT(A) RECOMPUTED THE TP ADJUSTMENT AND UPHELD THE TP ADJUSTMENT TO THE EXTENT OF RS.89,56,666. WHILE DECIDING ON THE EXCLUSION OF THE 13 COMPANIES FROM THE 17 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE LEARNED CIT(A) ADJUDICATED ON THE FOLLOWING ISSUES AS UNDER. 8 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 9.2 COMPANIES WITH RELATED PARTY TRANSACTIONS ( RPF ) THE LEARNED CIT(A) RELYING ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF PHILLIPS SOFTWARE CENTRE PVT. LTD. V ACIT (26 SOT 226), HELD THAT COMPANIES WITH ANY RPT ARE TO BE EXCLUDED FROM THE SET OF COMPARABLE COMPANIES AND ACCORDINGLY 12 OF THE 17 COMPANIES SELECTED BY THE TPO WERE EXCLUDED FROM THE SET OF COMPARABLE COMPANIES. AS SEEN FR OM THE ORDER OF THE LEARNED CIT(A) IN CASE OF SOME OF THE COMPARABLE COMPANIES, THE ASSESSEE HAD ARGUED AGAINST THEIR INCLUSION ON GROUNDS OF THERE BEING FUNCTIONALLY DIS - SIMILARITY ALSO. WE FIND THAT THE LEARNED CIT(A) HAS NOT ADJUDICATED ON THIS ASPECT, AS THE COMPANIES HAD BEEN EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND OF RPT. 9.3 COMPANIES WITH ABNORMAL PROFITS RELYING ON THE VARIOUS DECISIONS CITED IN THE IMPUGNED ORDER, THE LEARNED CIT(A) HELD THAT PROFIT ON COST OF MORE THAN 5 0% IS ABNORMAL AND COMPANIES SHOWING 50% OR MORE PROFIT PERCENTAGE ON COST HAVE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ACCORDINGLY, 2 OUT OF THE 17 COMPANIES SELECTED BY THE TPO WERE EXCLUDED FROM THE SET OF COMPARABLE COMPANIES. 9.4 COMPUTATIO N OF DEDUCTION U/S.10A OF THE ACT. IN RESPECT OF THE ASSESSEE'S CLAIM FOR DEDUCTION U/S.10A OF THE ACT, THE LEARNED CIT(A) RELYING ON THE DECISION OF THE HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF TATA ELXSI LTD. (349 ITR 98 ) AND OF THE SPECIAL BE NCH OF THE CHENNAI ITAT IN THE CASE OF SAK SOFT LTD. (313 ITR 353), DIRECTED THE ASSESSING OFFICER TO RECOMPUTE THE SAME BY REDUCING FROM THE TOTAL TURNOVER , THE SAME AMOUNT BY WHICH THE EXPORT TURNOVER HAS BEEN REDUCED. 9 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 10.1 IN THE PROCEEDINGS B EFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE CHALLENGED THE IMPUGNED ORDER OF THE LEARNED CIT(A) ON THE ISSUE OF RPT AND ABNORMAL PROFIT, PLACING RELIANCE ON LATER DECISIONS OF THE CO - ORDINATE BENCHES OF THIS TRIBUNAL IN SUPPORT OF THE STAND OF REVENU E. ON THE CONTRARY, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE ASSAILED THE IMPUGNED ORDER OF THE LEARNED CIT(A) IN CONFIRMING PART OF THE TP ADJUSTMENT AND SUBMITTED PAPER BOOKS VIDE LETTERS DT.28.1.2013 AND 29.10.2014. THE LEARNED AUTHORISED REPRESENTATIVE ALSO FILED A CHART IN WHICH IT HAS BEEN SUBMITTED THAT THE FOLLOWING COMPANIES OUGHT TO BE EXCLUDED FROM THE SET OF COMPARABLE COMPANIES, FOR THE REASONS GIVEN THEREIN : - S.NO. NAME OF THE COMPANY REASONS GIVEN BY ASSESSEE FOR EXCLUSION. 1. LARSEN & TOUBRO INFOTECH LTD. TURNOVER FILTER (RS.200 CRS) 2. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG) - DO - 3. IGATE GLOBAL SOLUTIONS LTD. - DO - 4. INFOSYS TECHNOLOGY LTD. - DO - 5. SATYAM COMPUTER SERVICES LTD. UNRELIABLE FINANCIAL DATA/TURNOVER FILTE R. 6. FOUR SOFT LTD. RPT FILTER (15%) 7. EXERSYS SOFTWARE SOLUTIONS LTD. EXTRAORDINARY EVENT (AMALGAMATION); DIVERSIFIED OPERATIONS; SOFTWARE PRODUCT COMPANY. 8. GEOMETRIC SOFTWARE SOLUTIONS LTD. SOFTWARE PRODUCT COMPANY. 9. SANKHYA INFOTECH LTD. - DO - 10. TATA ELXSI LTD. DIVERSIFIED ACTIVITIES IN SOFTWARE DEVELOPMENT SERVICES SEGMENT. 11. THIRDWARE SOLUTIONS LTD. DIVERSIFIED ACTIVITIES, SALE OF SOFTWARE LICENSE (SOFTWARE PRODUCTS). 10.2 WE HAVE HEARD BOTH PARTIES, PERUSED AND CAREFULLY CONSIDERE D THE ORDER OF THE TPO UNDER SECTION 92CA OF THE ACT, THE ORDER OF ASSESSMENT, THE IMPUGNED ORDER OF THE LEARNED CIT(A), THE SUBMISSIONS OF BOTH THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE AND THE 10 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE, IN CLUDING THE JUDICIAL DECISIONS CITED AND PLACED RELIANCE UPON. WE NOW PROCEED TO CONSIDER THE VARIOUS ISSUES RAISED BY REVENUE AND THE ASSESSEE. REVENUE S APPEAL IN IT(TP)A NO.1110/BANG/2011 FOR A.Y. 2005 - 06. 11. THE GROUNDS RAISED BY REVENUE AT S.N OS.1, 6 & 7 ARE GENERAL IN NATURE AND NO ADJUDICATION BEING CALLED FOR THEREON, ARE DISMISSED AS INFRUCTUOUS. 12 . GROUND NO.2 : COMPUTATION OF DEDUCTION U/S.10A OF THE ACT. 12.1 REVENUE CHALLENGES THE ORDER OF THE LEARNED CIT(A) IN DIRECTING THE AS SESSING OFFICER TO RECOMPUTE THE ELIGIBLE DEDUCTION TO THE ASSESSEE U/S.10A OF THE ACT BY REDUCING THE EXPENDITURE INCURRED IN FOREIGN CURRENCY AMOUNTING TO RS.2,12,28,101 TOWARDS DAILY ALLOWANCE, AND RS.24,28,828 TOWARDS SUPPORT ALLOWANCE AND RS.30,75,083 TOWARDS MISCELLANEOUS EXPENDITURE, FROM BOTH EXPORT TURNOVER AS WELL AS TOTAL TURNOVER . THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS HEARD IN SUPPORT OF THE GROUND RAISED. 12.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATIVE SUPPORTED THE IMPUGN ED ORDER OF THE LEARNED CIT(A) ON THIS ISSUE, SUBMITTING THA T THE ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF TATA ELXSI LTD. (SUPRA). THE LEARNED A.R. CONTENDS IN VIEW OF THIS, REVE NUE S APPEAL ON THIS GROUND IS LIABLE TO BE DISMISSED. 12.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND, AS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE , THAT THE HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF TATA ELXSI LTD. (SUPRA) HAS HELD THAT WHILE COMPUTING THE 11 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 DEDUCTION UNDER SECTION 10A OF THE ACT, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENDITURE, THEN THE SAME EXPENDITURE SHOULD AL SO BE EXCLUDED FROM THE TOTAL TURNOVER ALSO. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GROUND OF REVENUE AND DIRECT THE ASSESSING OFFICER TO EXCLUDE THE EXPENDITURE INCURRED IN FOREIGN CURRENCY TOWARDS DAILY ALLOWANCE, SUPPORT ALLOWANCE AND TRAVEL BOTH FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. ACCORDINGLY, GROUND NO.2 RAISED BY REVENUE IS DISMISSED. 13. GROUND NO.3 : RELATED PARTY TRANSACTIONS (RPT) 13.1 IN THIS GROUND, REVENU E ASSAILS THE DECISION OF THE LEARNED CIT (APPEALS) IN THE IMPUGNED ORDER IN HOLDING THAT COMPANIES HAVING ANY RPT HAVE TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 13.2.1 WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE AND THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE ON THIS ISSUE AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IN THE WRITTEN SUBMISSIONS MADE BY THE ASSESSEE VIDE LETTER DT.29.10.2014, THE ASSESSEE HAS REF ERRED TO THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BAN G/2010 WHILE MAKING SUBMISSIONS ON THE RPT FILTER IN THE CASE OF FOUR SOFT LTD.. WE FIND THAT THE CO - ORDINATE BENCH OF THIS TRIBUNA L, IN THE AFORESAID CASE, HAS DIRECTED THAT COMPANIES WITH RPT IN EXCESS OF 15% OF TOTAL REVENUES ARE TO BE EXCLUDED FROM THE SET OF COMPARABLES. THE OPERATIVE PARAGRAPH 13, THEREOF IS EXTRACTED HEREUNDER : - 12 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 13.0 RELATED PARTY TRANSACTIONS IN RESPECT OF THE GROUND RAISED AT S.NO.1 REGARDING ACCEPTANCE OF COMPARABLE COMPANIES HAVING RELATED PARTY TRANSACTIONS AS PROPOSED BY THE TPO, THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE TRANSFER PRICING REGULATIONS DO NOT STIPULATE ANY MINIMUM LIMIT OF RELATED PARTY TRANSACTIONS WHICH FORM THE THRESHOLD FOR EXCLUSION AS A COMPARABLE. IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSEE OBJECTED TO THE TPO S SETTING A LIMIT OF 25% ON RELATED PARTY TRANSACTIONS. HE OBJECTED TO THE INCLUSION OF COMPARABLES BEING RELATED PARTY TRANSACTIONS IN EXCESS OF 15% OF SALES / REVENUE. IN SUPPORT OF THIS PROPOSITION, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HON'BLE BENCH OF THE ITAT, DELHI IN THE CASE OF SONY INDIA (P) L TD. REPORTED IN 2008 - TIOL - 439 - ITAT - DELHI DT.23.12.2008. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO PARA 115.3 OF THE ORDER WHEREIN THE TRIBUNAL HAS HELD THAT - ..WE ARE FURTHER OF THE VIEW THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED IF ITS RELATED PARTY TRANSACTIONS DO NOT EXCEED 10 TO 15% OF TOTAL REVENUE. WITHIN THE ABOVE LIMIT, TRANSACTIONS CANNOT BE HELD TO BE SIGNIFICANT TO INFLUENCE THE PROFITABILITY OF THE COMPARABLES. FOR THE PURPOSE OF COMPARISON WHAT IS TO BE JUDGED IS TH E IMPACT OF THE RELATED PARTY TRANSACTIONS VIS - - VIS SALES AND NOT PROFIT SINCE PROFIT OF AN ENTERPRISE IS INFLUENCED BY LARGE NUMBER OF OTHER FACTORS . RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD (SUPRA), THE ASSESSING OFFICER / TPO ARE DIRECTED TO EXCLUDE AFTER DUE VERIFICATION THOSE COMPARABLES FROM THE LIST WITH RELATED PARTY TRANSACTIONS OR CONTROLLED TRANSACTIONS IN EXCESS OF 15% OF TOTAL REVENUES FOR THE FINANCIAL YEAR 2003 - 04. 13.2.2 IN THE LIG HT OF THE ABOVE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), WE FIND THAT THE DECISION OF THE LEARNED CIT (APPEALS) IN EXCLUDING THOSE COMPANIES WITH ANY RPT IS NOT IN KEEPING WITH THE ABOVE DECISIO N OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE HOLD THAT THE LEARNED CIT (APPEALS) WAS NOT CORRECT IN HOLDING THAT COMPANIES WITH ANY RPT HAVE TO BE EXCLUDED FROM THE SET OF COMPARABLE COMPANIES, AND DIRECT THE TPO / A.O. TO APPLY THE RPT FILTER AT 15% OF TOTAL REVENUES FOR INCLUDING / EXCLUDING THE COMPARABLE COMPANIES, EXCLUDED BY THE LEARNED CIT (APPEALS), IN THE FINAL SET OF COMPARABLES. CONSEQUENTLY GROUND NO.3 RAISED BY REVENUE IS PARTLY ALLOWED. 13 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 14. GROUND NO.4 : COMPANIES WITH ABNORMAL PROFITS. 14.1 IN GROUND NO.4, REVENUE ASSAILS THE DECISION OF THE LEARNED CIT (APPEALS) IN THE IMPUGNED ORDER IN EXCLUDING COMPANIES WITH PROFIT MARGIN OF MORE THAN 50% FROM THE FINAL SET OF COMPARABLE COMPANIES B Y HOLDING THE PROFIT MARGIN IN EXCESS OF 50% TO BE ABNORMAL. 14.2.1 WE HAVE HEARD THE RIVAL CONTENTION S OF BOTH THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE AND THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE. THIS IS AN ISSUE ON WHICH THERE HAVE BEEN CONFLICTING DECISIONS OF VARIOUS TRIBUNALS. HOWEVER, THE SPECIAL BENCH OF THE ITAT, MUMBAI IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD., IN ITA NO.7466/MUM/2012 HAS HELD THAT COMPANIES CANNOT BE EXCLUDED FROM THE SET OF COMPARAB LES ONLY BECAUSE THE MARGINS ARE HIGH AND THE MATTER IN SUCH CASES WOULD REQUIRE FURTHER INVESTIGATION TO ASCERTAIN THE REASONS FOR UNUSUALLY HIGH PROFITS IN ORDER TO ESTABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COMPARABLES OR NOT. THE OPERATIVE PORTION OF THIS ORDER AT PARAS 97 TO 99 THEREOF ARE EXTRACTED HEREUNDER : - 97. AT THE TIME OF HEARING BEFORE US, BOTH THE SIDES HAVE CITED SEVERAL DECISIONS OF THE TRIBUNAL IN SUPPORT OF THEIR CORRESPONDING STAND TAKEN ON THIS ISSUE. AFT ER GOING THROUGH ALL THESE DECISIONS OF THE DIVISION BENCHES OF THIS TRIBUNAL, WE FIND THAT THE ISSUE RELATING TO EXCLUSION OF HIGH PROFIT MARGIN ENTITIES FROM COMPARABLES HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN THE CASES CITED BY SHRI PORUS KAKA WIT HOUT TAKING INTO CONSIDERATION SOME VITAL ASPECTS INCLUDING THE RELEVANT TP REGULATIONS IN INDIA. IT IS OBSERVED THAT THE DECISION INITIALLY TAKEN IN ONE CASE WITHOUT MUCH MEANINGFUL DISCUSSION HAS BEEN INVARIABLY FOLLOWED BY THE TRIBUNAL IN OTHER CASES DE CIDED THEREAFTER. ON THE OTHER HAND, IT IS OBSERVED THAT THE TRIBUNAL, IN SOME OF THE CASES CITED BY SHRI AJEET KUMAR JAIN, THE LD. CIT DR, HAS PASSED WELL DISCUSSED AND WELL REASONED ORDERS AFTER TAKING INTO CONSIDERATION NOT ONLY THE RELEVANT TP 14 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 REGULATI ONS IN INDIA BUT EVEN THE RELEVANT OECD GUIDELINES. FOR INSTANCE, IN THE CASE OF BP INDIA SERVICES PRIVATE LIMITED (SUPRA), IT WAS HELD BY THE MUMBAI BENCH THAT THE VERY RATIONALE OF HAVING AVERAGE IN CASE OF MORE THAN ONE COMPARABLES IS TO IRON OUT THE EF FECT OF EXTREME CASES AND FIND THE PROFIT MARGIN AS A REPRESENTATIVE OF THE WHOLE LOT. IT WAS ALSO HELD BY THE TRIBUNAL THAT THE HIGHER OR LOWER PROFIT RATE HAS NOT BEEN PRESCRIBED AS THE DETERMINATIVE FACTOR IN THE RELEVANT RULES I.E. RULE 10B(2) AND 10B( 3) TO MAKE A CASE INCOMPARABLE. THE TRIBUNAL OBSERVED THAT THE PROFIT RATE IN ANY CASE CANNOT BE SUCH DETERMINATIVE FACTOR IN ITSELF AS IT IS A CONSEQUENCE OF THE EFFECT OF THE VARIOUS FACTORS. IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), THE BANG ALORE BENCH OF THIS TRIBUNAL CONSIDERED THE RELEVANT OECD GUIDELINES IN THIS RESPECT AND HELD THAT THE EXCLUSION OF COMPANIES WITH ABNORMAL PROFITS FROM THE COMPARABLES MAY BE IN LINE WITH THE PRINCIPLES ENUMERATED IN THE OECD GUIDELINES, BUT THE SAME C ANNOT BE SAID TO BE IN TUNE WITH THE INDIAN TP REGULATIONS. THE TRIBUNAL NOTED THAT THERE WAS A DEVIATION IN THE TP RULES SPECIFICALLY FROM OECD GUIDELINES BY SPECIFYING THE ARITHMETIC MEAN FOR DETERMINING THE ALP AS AGAINST THE QUARTILE METHOD SUGGESTE D IN THE OECD GUIDELINES WHICH EXCLUDES THE COMPANIES THAT FALL IN THE EXTREME QUARTILES FOR COMPARABILITY. TO THE SIMILAR EFFECT IS ANOTHER -- DECISION OF BANGALORE BENCH IN THE CASE OF TRILOGY E - BUSINESS SOFTWARE INDIA LTD. (SUPRA) WHEREIN IT WAS HELD THAT THE TP REGULATIONS PROVIDE ARITHMETIC MEAN METHOD FOR DETERMINING THE ALP WHEREIN ALL COMPANIES THAT ARE IN THE SAMPLE ARE CONSIDERED WITHOUT EXCEPTION AND THE AVERAGE OF ALL THE COMPANIES IS CONSIDERED AS ALP. IN THE CASE OF STREAM INTERNATIONAL SERV ICES PVT. LTD.(SUPRA), THE MUMBAI BENCH OF ITAT HELD THAT COMPARABILITY IS JUDGED PRIMARILY BY SEEING THE FUNCTIONAL SIMILARITY AND THEN THE CAPITAL EMPLOYED AND RISKS UNDERTAKEN BUT THE HIGHER OR LOWER PROFIT RATE IS NOT AND CAN NEVER BE A RELEVANT CRITER IA TO JUDGE THE COMPARABILITY. 98. AS NOTED BY THE DIVISION BENCHES OF THE TRIBUNAL IN THE CASES DISCUSSED ABOVE, THE OECD GUIDELINES SUGGEST QUARTILE METHOD WHICH EXCLUDES THE COMPANIES THAT FALL IN THE EXTREME QUARTILES FOR COMPARABILITY AND THERE IS DEV IATION IN THIS RESPECT IN T.P. REGULATIONS IN INDIA WHICH SPECIFY THE ARITHMETIC MEAN FOR DETERMINING THE ALP. 15 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 NEVERTHELESS, THE OECD TP GUIDELINES HAVE CONSIDERED AND DEALT WITH THE SITUATION OF EXTREME RESULTS IN THE CONTEXT OF COMPARABILITY CONSIDERATIO N IN SECTION A.7.3 OF CHAPTER III AND IT IS SUGGESTED IN PARA 2.63 THAT WHERE ONE OR MORE OF POTENTIAL COMPARABLES HAVE EXTREME RESULTS CONSISTING LOSS OR UNUSUAL HIGH PROFITS, FURTHER EXAMINATION WOULD BE NEEDED TO UNDERSTAND THE REASONS FOR EXTREME RESUL TS. AFTER TAKING INTO CONSIDERATION THIS GUIDANCE PROVIDED IN OECD TRANSFER PRICING GUIDELINES AND ON ANALYZING THE DECISIONS RENDERED BY THE DIVISION BENCHES OF THIS TRIBUNAL ON THIS ISSUE AFTER TAKING INTO CONSIDERATION INTER ALIA THE T.P. REGULATIONS IN INDIA AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE POTENTIAL COMPARABLES CANNOT BE EXCLUDED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. IN OUR OPINION, THE MATTER IN SUCH CASE WOULD REQUIRE FURTHER INVESTIGATION TO ASCERTAIN THE REASO NS FOR UNUSUAL HIGH PROFIT AND IN ORDER TO ESTABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFIT CAN BE TAKEN AS COMPARABLES OR NOT. 99. THE QUESTION NO. 2 REFERRED TO THIS SPECIAL BENCH IS AS TO WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, COMPANIE S EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD BE INCLUDED IN THE LIST OF COMPARABLE CASES FOR THE PURPOSE OF DETERMINING ARM S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. AS ALREADY OBSERVED, THE ISSUE INVOLVED IN THIS QUESTION HAS BECOME INFRUCTUOUS I N SO FAR AS THE CASE OF THE ASSESSEE BEFORE THE SPECIAL BENCH IS CONCERNED AND THE SAME THEREFORE NO MORE SURVIVES FOR CONSIDERATION IN THE PRESENT CA SE. IN GENERALITY, WE ARE OF THE VIEW THAT THE ANSWER TO THIS QUEST ION WILL DEPEND ON THE FACTS AND CI RCUMSTANCES OF EACH CASE INASMUCH AS POTENTIAL COMPARABLE EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD TRIGGER FURTHER INVESTIGA - TION IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS TO WHE THER EARNING OF HIG H PROFIT REFLECTS A NORMAL BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITIONS PREVAILING IN THE RELEVANT YEAR. THE PROFIT M ARGIN EARNED BY SUCH ENTITY IN THE IMMEDIATELY PRECEDING YEAR/S MAY ALSO BE TAKEN INTO CONSIDERATION TO FIND OUT WHETHER THE HIGH PROFIT MARGIN REPRESENTS THE NORMAL BUSINESS TREN D. THE FAR ANALYSIS IN SUCH CASE MAY BE REVIEWED TO ENSURE THAT THE POTENTIAL COMPA RABLE EARNING HIGH PROFIT SATISFIES THE COMPARABILITY CONDITIONS. IF IT IS FO UND ON SUCH INVESTIGATION THAT THE HIGH MARGIN PROFIT MAKING COMPANY DOES NOT 16 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 SATISFY THE COMPARABILITY ANALYSIS AND OR THE HIGH PROFIT MARGIN EARNED BY IT DOES NOT REFLECT THE NORMAL BUSINESS CONDITION, WE ARE OF THE VIEW THAT THE HIGH PROFIT MARGIN MAKIN G ENTITY SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE FOR THE PURPOSE OF DETERMINING THE ARM S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. OTHERWISE, THE ENTITY SATISFYING THE COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT MARGIN REFLECTING NORMAL BUSIN ESS CONDITION SHOULD NOT BE REJECTED SOLELY ON THE BASIS OF SUCH ABNORMAL HIGH PROFIT MARGIN. QUESTION NO. 2 REFERRED TO THIS SPECIAL BENCH IS ANSWERED ACCORDINGLY . 14.2.2 AS HELD BY THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD. (SUPRA), THE QUESTION OF WHETHER SUCH COMPANIES ARE TO BE INCLUDED OR EXCLUDED FROM THE FINAL SET OF COMPARABLES WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE; IN AS MUCH AS A POTENTIAL COMPARABLE COMPANY EARNING ABNORMALLY HIG H PROFITS MARGINS SHOULD TRIGGER FURTHER INVESTIGATION AS TO WHETHER EARNING OF HIGH PROFITS REFLECTS A NORMAL BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITION PREVAILING IN THE RELEVANT PERIOD TO ESTABLISH WHETHER IT CAN BE TAKEN AS A COMPARABLE OR NOT. THE COMPARABLE COMPANY SATISFYING THE COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT SHOULD NOT BE REJECTED SOLELY ON THE BASIS OF SUCH ABNORMALLY HIGH PROFIT MARGINS. 14.2.3 WE FIND FROM A PERUSAL OF THE IMPUGNED ORDER THAT THE L EARNED CIT (APPEALS) HAS EXCLUDED A NUMBER OF COMPANIES FROM THE LIST OF 12 COMPARABLES AS LISTED OUT ON PAGE 15 OF THE IMPUGNED ORDER MERELY BECAUSE THEY HAVE HIGH PROFITS IN EXCESS OF 50%, WITHOUT EXAMINING WHETHER THESE COMPANIES SATISFY THE COMPARABILI TY ANALYSIS. IN THIS FACTUAL MATRIX, RESPECTFULLY FOLLOWING THE DECISION OF THE SPECIAL BENCH OF THE ITAT, MUMBAI IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD.(SUPRA), WE HOLD THAT THE LEARNED CIT (APPEALS) WAS WRONG IN EXCLUDING 17 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 THE COMPANIES WI TH PROFIT MARGINS OF 50% OR MORE MERELY BECAUSE OF HIGH PROFIT MARGINS AND REVERSE HIS FINDING IN THE MATTER AND RESTORE THE MATTER TO THE FILE OF THE TPO. THE TPO IS DIRECTED TO RE - EXAMINE AND DECIDE ON THE COMPARABILITY OF THE COMPANIES EXCLUDED BY THE LEARNED CIT (APPEALS) ON GROUNDS OF ABNORMAL P ROFIT IN THE LIGHT OF OUR OBSERVATIONS IN PARA 14.2.2 OF THIS ORDER AFTER AFFORDING THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD AND FILING DETAILS IN THE MATTER. CONSEQUENTLY, GROUND NO.4 OF REVENUE S APPEAL IS ALLOWED AS INDICATED ABOVE. 15. GR OUND NO.5 : STANDARD DEDUCTION 5%. 15.1 GROUND NO.5 OF REVENUE S APPEAL CONTENDS THAT THE IMPUGNED ORDER OF THE LEARNED CIT (APPEALS) IS ERRONEOUS IN GRANTING STANDARD DEDUCTION OF 5% UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT. 15.2.1 WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE AND THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE. THE FACT OF THE MATTER IS THAT THE ASSESSEE SOUGHT FOR THE BENEFIT OF + / - 5% STANDARD DEDUCTION AS PER TH E PROVISO TO SECTION 92C(2) OF THE ACT, WHICH WAS GRANTED BY THE LEARNED CIT (APPEALS) CITING SEVERAL JUDICIAL DECISIONS IN SUPPORT OF THIS PROPOSITION. PRIOR TO THE AMENDMENT MADE BY FINANCE (NO.2) ACT, 2009 AND FINANCE ACT, 2012, THE PROVISO TO SECTION 92C(2) OF THE ACT PROVIDED THAT THE ALP WOULD BE TAKEN TO BE THE ARITHMETIC MEAN ( AM ) OR AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE AM BY AN AMOUNT NOT EXCEEDING 5% OF SUCH AM. THUS, THE ALP WAS + / - 5% OF SUCH AM. 18 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 15.2.2 THIS ISSUE IS NOW MORE OF ACADEMIC NATURE AND THE JUDICIAL DECISIONS CITED AND RELIED ON BY THE LEARNED CIT (APPEALS) IN THE IMPUGNED ORDER ARE NOT APPLICABLE AS THE ACT HAS BEEN AMENDED WITH RETROSPECTIVE EFFECT FROM 1.4.2002 BY THE INTRODUCTION OF THE CLARIF ICATORY AMENDMENT IN WHICH SECTION 92C(2A) OF THE ACT WAS INSERTED AS PER FINANCE ACT, 2012 AND READS AS FOLLOWS : - 92C( 2A ) : WHERE THE FIRST PROVISO TO SUB - SECTION (2) AS IT STOOD BEFORE ITS AMENDMENT BY THE FINANCE (NO.2) ACT, 2009 (33 OF 2009), IS A PPLICABLE IN RESPECT OF AN INTERNATIONAL TRANSACTION FOR AN ASSESSMENT YEAR AND THE VARIATION BETWEEN THE ARITHMETICAL MEAN REFERRED TO IN THE SAID PROVISO AND THE PRICE AT WHICH SUCH TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEEDS FIVE PER CENT OF THE AR ITHMETICAL MEAN, THEN, THE ASSESSEE SHALL NOT BE ENTITLED TO EXERCISE THE OPTION AS REFERRED TO IN THE SAID PROVISO. 15.2.3 THE NEW SECTION 92C(2A) O F THE ACT MANDATES THAT IF THE ARITHMETIC MEAN PRICE FALLS BEYOND + / - 5 % FROM THE PRICE CHARGED IN INTERNATIONAL TRANSACTIONS, THEN THE ASSESSEE DOES NOT HAVE ANY OPTION REFERRED TO IN SECTION 92C(2)OF THE ACT. THUS, AS PER THIS AMENDMENT, IT IS CLEAR THAT THE + / - 5 % VARIATION IS ALLOWED ONLY TO JUSTIFY THE PRICE CHARGED IN THE INTERNATIONAL TRANS ACTIONS AND NOT FOR ADJUSTMENT / STANDARD DEDUCTION PURPOSES. THE AFORESAID AMENDMENT HAS SETTLED THE ISSUE AND ACCORDINGLY THE 5% STANDARD DEDUCTION IS NOT ALLOWABLE TO THE ASSESSEE IN THE CASE ON HAND. THE VARIOUS JUDICIAL DECISIONS CITED PERTAIN TO TH E PERIOD PRIOR TO THE RETROSPECTIVE AMENDMENT BY WAY OF INSERTION OF SECTION 92C(2A) OF THE ACT BY FINANCE ACT, 2012 AND ARE THEREFORE NOT O F ANY HELP TO THE ASSESSEE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THE LEARNED CIT (APPEALS) ERRED IN ALLOWING THE ASSESSEE THE BENEFIT OF 5% STANDARD DEDUCTION AND ACCORDINGLY REVERSE THIS ORDER OF THIS ISSUE IN VIEW OF THE RETROSPECTI VE AMENDMENT W.E.F. 1.4.20 0 2 BROUGHT ABOUT BY THE INSERTION OF SECTION 92C(2A) OF THE ACT BY FINANCE ACT, 2012. CONSEQUENTLY, WE ALLOW THE GROUND RAISED BY REVENUE AT S.NO.3. 19 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 16. IN THE RESULT, REVENUE S APPEAL FOR ASSESSMENT YEAR 2005 - 06 IS PARTLY ALLOWED. ASSESSEE'S CROSS OBJECTION IN C.O. NO.20/BANG/2012. 17. GROUND NOS.1 AND 2 RAISED IN THE ASSESSEE'S C.O. ARE GENERAL IN NATURE AND NO ADJUDICATION BEING CALLED FOR THEREON, ARE DISMISSED AS INFRUCTUOUS. 18.1 IN GROUND NO.3 OF THE ASSESSEE'S C.O. , THE ASSESSEE HAS ASSAILED THE DECISION OF THE TPO IN MAKING THE TP ADJUSTMENT AND THE DECISION OF THE LEARNED CIT (APPEALS) IN PARTIALLY CONFIRMING THE SAME. THE ASSESSEE HAS RAISED OBJECTIONS ON SEVERAL GROUNDS, 3(A) TO (F), IN THIS REGARD. 1 8 .2 FURTHER, IN THE COURSE OF PROCEEDINGS BEFORE US, THE ASSESSEE HAS MADE DETAILED SUBMISSIONS AS TO WHY 11 OF THE 17 COMPARABLES CHOSEN BY THE TPO NEED TO BE EXCLUDED ON VARIOUS REASONS / GROUNDS , APPLICATION OF FILTERS LIKE THE UPPER LIMIT OF TURNOVER FILTER, RPT FILTER, EXTRAORDINARY EVENTS, NON - COMPARABILITY OF THE COMPARABLE BEING PRODUCT COMPANIES, ETC. IT WAS SUBMITTED THAT THE COMPARABLE COMPANIES CHOSEN BY THE TPO WERE NOT COMPARABLE TO THE ASSESSEE ON SEVERAL GROUNDS AND THAT THE CIT (APPEALS) HAS ADJUDICATED ON THE COMPARABILITY BY ONLY CONSIDERING THE RPT FILTER AND ABNORMAL PROFIT MARGIN. THE ASSESSEE ALSO SUBMITTED N OTES DETAILING THE REASONS AS TO WHY THE 11 COMPANIES REQUIRE TO BE EXCLUDED FROM THE SET OF COMPARABLES AND HAS CITED AND PLACED RELIANCE UPON SEVERAL DECISIONS OF VARIOUS TRIBUNALS ON EACH OF THE SAME. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. 20 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 18.3 GROUND NO.3(A) REVISED BENCH MARKING . THE ISSUE RAISED IN GROUND NO.3(A) CHALLENGING THE COMPARABILITY ANALYSIS OF THE TPO IS GENERAL IN NATURE AND WAS NOT URGED BEFORE US IN THE COURSE O F APPELLATE PROCEEDINGS. IN THIS VIEW OF THE MATTER, THE GROUND BEING GENERAL IN NATURE AND NO ADJUDICATION BEING CALLED FOR THEREON, THIS GROUND IS, THEREFORE, DISMISSED, AS INFRUCTUOUS. 18.4 GROUND NO.3(B) & 3(C) EXCLUSION OF CERTAIN COMPARABLES . 18.4.1 THE ISSUE RAISED IN GROUNDS NO.3(B) & 3(C) IS REGARDING CERTAIN COMPARABLES EXCLUDED BY THE LEARNED CIT (APPEALS) AND CERTAIN OTHER COMPARABLES CONFIRMED BY THE LEARNED CIT (APPEALS). AS DISCUSSED IN THE ISSUES RAISED IN REVENUE S APPEAL IN TH E CASE ON HAND, EARLIER IN THIS ORDER, THE LEARNED CIT (APPEALS) HAD ADJUDICATED ON THE ISSUE OF RPT FILTER AND ABNORMAL PROFIT MARGINS AND DELETED 13 COMPARABLES FORM THE LIST OF 17 COMPARABLES CHOSEN BY THE TPO. IT WAS, HOWEVER, OBSERVED THAT THE LEARNE D CIT (APPEALS) HAS NOT ADJUDICATED ON OTHER ISSUES LIKE THE UPPER LIMIT OF THE TURNOVER FILTER, ABNORMAL EVENTS, RPT FILTER @ 15%, NON - COMPARABILITY AS SOME OF THE COMPANIES CHOSEN BY THE TPO ARE PRODUCT COMPANIES, ETC. 18.4.2 BEFORE US, THE ASSESSEE HAD SUBMITTED DETAILED SUBMISSIONS ON EACH OF THE 11 COMPANIES WHICH AS PER THE ASSESSEE ARE REQUIRED TO BE EXCLUDED FROM THE SET OF 17 COMPARABLE COMPANIES ADOPTED BY THE TPO. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE ACCEPTS 6 O F THE COMPARABLE COMPANIES ADOPTED BY THE TPO AT S.NOS.1, 2, 5, 8, 11 AND 12 OF THE TPO S LIST OF 17 COMPARABLE COMPANIES. THE ASSESSEE HAS FILED A CHART GIVING THE 21 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 REASONS WHY THESE 11 COMPANIES ARE REQUIRED TO BE EXCLUDED AND THE JUDICIAL DECISIONS OF V ARIOUS TRIBUNALS IN SUPPORT OF ITS CONTENTIONS. 19. TURNOVER FILTER OF RS.200 CRORES . 19.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS FURNISHED A CHART WHEREIN THE NAMES OF THE 5 COMPANIES WHICH HAVE TURNOVERS IN EXCESS OF RS.200 CRORES IN THE RELEVANT PERIOD ARE INDICATED. IT IS SUBMITTED THAT IN THE RELEVANT PERIOD, THE ASSESSEE'S TURNOVER IS APPROXIMATELY RS.51 CRORES ONLY. IT WAS CONTENDED THAT THESE COMPANIES WITH TURNOVER IN EXCESS OF RS.200 CRORES OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES AS HELD BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. REPORTED IN 152 TTJ 215. ACCORDING TO THE LEARNED AUTHORISED REPRESENTATIVE, THE FOLLOWING COMPANIES FAIL THE TURNOVER FILTER OF RS.200 CRORES : - SL.NO. NAME OF THE COMPANY TURNOVER IN CRORES (RS.) 1. IGATE GLOBAL SOLUTIONS LTD. (SEG) 406.00 2. FLEXTRONICS SOFTWARE SYSTEMS LTD. 457.45 3. L&T INFOTECH LTD. 562.45 4. SATYAM COMPUTER SERVICES LTD. 3,464.20 5. INFOSYS TEC HNOLOGIES LTD. 6,859.70 19.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE TPO IN INCLUDING THESE COMPANIES IN THE SET OF COMPARABLE COMPANIES. 22 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 19.3 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED T HE MATERIAL ON RECORD, INCLUDING THE JUDICIAL DECISIONS CITED AND PLACED RELIANCE UPON. WE FIND THAT A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. (SUPRA) HAS HELD THAT TURNOVER IS AN IMPORTANT FILTER O F COMPARABILITY WHICH HAS TO BE ADOPTED FOR DETERMINATION OF ALP AND HAS DETERMINED THE UPPER LIMIT OF THE TURNOVER FILTER TO BE APPLIED AT RS.200 CRORES IN CASES WHERE THE TURNOVER OF THE ASSESSEE IS LESS THAN RS.200 CRORES. IN THE CASE ON HAND, THE TURN OVER OF THE ASSESSEE BEING APPROX. RS.51 CRORES ONLY, FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. (SUPRA), WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THE ABOVE 5 COMPANIES FR OM THE LIST OF COMPARABLE COMPANIES. 20. RPT FILTER FOUR SOFT LTD. 20.1 BEFORE US, THE ASSESSEE MADE DETAILED SUBMISSIONS TO THE EFFECT THAT M/S. FOUR SOFT LTD., THE COMPARABLE COMPANY CHOSEN BY THE TPO, OUGHT TO BE EXCLUDED FROM THE LIST OF COMPAR ABLES ON THE GROUND THAT ITS RPT WAS 19.89%, SINCE THE CO - ORDINATE BENCH OF THE BANGALORE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (SUPRA) HAS HELD THAT COMPANIES HAVING RPT IN EXCESS OF 15% ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IT I S SUBMITTED THAT THE CO - ORDINATE BENCH FOLLOWED THE DECISION OF THE DELHI BENCH OF THE ITAT IN THE CASE OF SONY INDIA (P) LTD. REPORTED IN 2008 - TIOL - 439 - ITAT - DELHI DT.23.12.2008. THE LEARNED AUTHORISED REPRESENTATIVE CONTENDS THAT IN VIEW OF THE ABOVE THI S COMPANY OUGHT TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 23 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 20.2 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL DECISIONS CITED AND PLACED RELIANCE ON. AS CONTENDED BY THE ASSESSEE, THE CO - ORDINATE BENCH OF THIS TRIBUNAL, IN THE CASE OF 24/7 CUSTOMER.COM P. LTD. (SUPRA) AT PARA 13 OF ITS ORDER, HAS HELD THAT COMPANIES HAVING RPT IN EXCESS OF 15% ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. WE, THEREFORE, DIREC T THE TPO / A.O. TO EXCLUDE THIS COMPANY, FOUR SOFT LTD. FROM THE LIST OF COMPARABLES IF THE RPT OF THI S COMPANY IS IN EXCESS OF 15% AFTER VERIFICATION OF THE ASSESSEE'S CLAIM THAT THE RPT IS 19.89%. IT IS ORDERED ACCORDINGLY. THIS OBJECTION OF THE ASSES SEE IS ALLOWED FOR STATISTICAL PURPOSES AS INDICATED ABOVE. 22. EXCLUSION OF COMPANIES ON GROUNDS OF BEING FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. 22.1.1 THE ASSESSEE HAS SOUGHT THE EXCLUSION OF THE FOLLOWING FIVE COMPANIES FROM THE LIST OF COMPA RABLES IN RESPECT OF WHICH DETAILED ARGUMENTS WERE PUT FORTH BEFORE US : - 22.1.2 (1) EXENSYS SOFTWARE SOLUTIONS LTD. IN RESPECT OF THIS COMPANY, THE ASSESSEE SUBMITTED THAT A) IT HAS DIVERSIFIED OPERATIONS LIKE, PRODUCT DEVELOPMENT, CONSULTANCY AND ERP IMPLEMENTATION, WHEREAS THE ASSESSEE IS ONLY INTO PROVISION OF SOFTWARE DEVELOPMENT SERVICES; 24 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 B) IN THE PERIOD UNDER CONSIDERATION, M/S. HOLOOL INDIA LTD. WAS AMALGAMATED WITH THIS COMPANY AND ITS ACCOUNTS ARE ALSO AMALGAMATED. THIS DISTORTS THE COMPAR ABILITY OF THIS COMPANY AS ITS ACTIVITIES HAVE BECOME DIVERSIFIED. IN SUPPORT OF ITS ARGUMENTS FOR EXCLUDING THIS COMPANY AS A COMPARABLE, SINCE THE ASSESSEE IN THE CASE ON HAND IS PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER, THE ASSESSEE PLACED RE LIANCE ON THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF MINDTREE (INDIA) LTD. IN IT(TP)A NO.70/BANG/2011 DT.21.8.2014 FOR ASSESSMENT YEAR 2009 - 10 AND SYMPHONY MARKETING SOLUTIONS (INDIA) PVT. LTD. IN IT (TP)A NO.1316/BANG/2012 FOR ASSESSMENT YEAR 2 008 - 09. 22.1.3 (2) TATA ELXSI LTD. THE ASSESSEE CONTENDS THAT THIS COMPANY IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES SINCE IT IS FUNCTIONALLY DIFFERENT, BEING INTO PRODUCT DESIGN, INDUSTRIAL DESIGN, DESIGN & ENGINEERING SERVICES, VISUAL COMPU TABLE LABS, SYSTEMS INTEGRATION, APART FROM PURE SOFTWARE DEVELOPMENT SERVICES WHICH THE ASSESSEE OFFERS. IN SUPPORT OF ITS CONTENTIONS, FOR EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES, THE ASSESSEE PLACED RELIANCE ON THE DECISIONS IN THE FOLL OWING DECISION OF THE ITAT IN EMC DATA STORAGE SYSTEMS (INDIA) PVT. LTD. IN IT(TP)A NO.1274/BANG/2010 DT.18.7.2014 FOR ASSESSMENT YEAR 2006 - 07 AND TELECORDIA TECHNOLOGIES INDIA PVT. LTD., IN ITA NO.7821/MUM/2011 DT.11.5.2012 FOR ASSESSMENT YEAR 2007 - 08. 22 .1.4 (3) GEOMETRIC SOFTWARE SOLUTIONS LTD. THE ASSESSEE CONTENDS THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES AS IT IS MAINLY PRODUCT COMPANY HAVING DEVELOPED PRODUCTS LIKE XDPM, CAD - DPM, VISUALATION ETC. WHEREAS THE ASSESS EE COMPANY IS A PURE SOFTWARE DEVELOPMENT SERVICES PROVIDER. IN SUPPORT OF 25 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 ITS ARGUMENTS FOR EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES, THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SAP LABS INDIA PVT. LTD., IN ITA NO.398/BANG/2008 DT.30.8.2010 FOR ASSESSMENT YEAR 2003 - 04. 22.1.5 (4) SANKYA INFOTECH LTD. THE ASSESSEE CONTENDS THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES SINCE IT IS FUNCTIONALLY DIFFERENT, AS IT IS MAINLY A SOFTWARE PRODUCT COMPANY DEVELOPING NICHE PRODUCTS FOR THE AVIATION AND TRANSPORTATION INDUSTRY IN THE AREAS OF SIMULATION, E - LEARNING AND TRAINING WHEREAS THE ASSESSEE IN THE CASE ON HAND IS PURELY INTO PROVISION OF SOFTWARE DEVELOPMEN T SERVICES. IN SUPPORT OF ITS CONTENTIONS FOR EXCLUSION OF THIS COMPANY FORM THE LIST OF COMPARABLES, THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THE ITAT, JAIPUR IN THE CASE OF INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD., IN ITA NO.271/JP/2011 DT.31.10.2011 FOR ASSESSMENT YEAR 2006 - 07. 22.1.6. (5) THIRDWARE SOLUTIONS LTD. THE ASSESSEE CONTENDS THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES, SINCE IT IS FUNCTIONALLY DIFFERENT AS IT MAINLY A SOFTWA RE PRODUCT DEVELOPMENT COMPANY AND IS INTO LICENSING AND SUBSCRIPTION OF SOFTWARE, WHEREAS THE ASSESSEE IN THE CASE ON HAND IS ONLY INTO PROVISION OF SOFTWARE DEVELOPMENT SERVICES. IN SUPPORT OF ITS CONTENTIONS FOR EXCLUSION OF THIS COMPANY FROM THE LI ST OF COMPARABLES, THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE PUNE BENCH IN THE CASE OF E - GAIN COMMUNICATION PVT. LTD. IN ITA NO.1685/PN/2007 DT.10.6.2008 FOR ASSESSMENT YEAR 2004 - 05. 26 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 22.2 PER CONTRA, T HE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT THE ISSUES RAISED BY THE ASSESSEE FOR THE EXCLUSION OF THE ABOVE FIVE COMPANIES FROM THE LIST OF COMPARABLES, SUCH AS FUNCTIONAL DIFFERENCES ARE MATTERS OF FACT THA T COULD DIFFER FROM YEAR TO YEAR , FROM ONE COMPARABLE COMPANY TO ANOTHER AND ALSO THERE COULD BE CHANGES IN THE PROFILE AND OPERATIONS OF THE ASSESSEE IN THE CASE ON HAND. IT WAS FURTHER SUBMITTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT MOST OF THE JUDICIAL DECI SIONS RELIED ON BY THE ASSESSEE FOR EXCLUSION OF THE AFORESAID FIVE COMPANIES CANNOT BE APPLIED ACROSS THE BOARD AS THEY PERTAINED TO DIFFERENT ASSESSMENT PERIODS TH A N ASSESSMENT YEAR 2005 - 06 WHICH IS BEFORE THE TRIBUNAL IN THE CASE ON HAND. THE LEARNED D EPARTMENTAL REPRESENTATIVE SUBMITTED THAT, IN THESE CIRCUMSTANCES, THE ISSUE OF THE COMPARABILITY OF THE ABOVE FIVE COMPANIES REQUIRES TO BE RESTORED TO THE FILE OF THE TPO FOR FRESH EXAMINATION IN THE LIGHT OF THE SUBMISSIONS MADE AND A FRESH FAR ANALYSI S CARRIED OUT TO DECIDE FACTUALLY WHETHER THESE FIVE COMPANIES OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 22.3 WE HAVE HEARD THE RIVAL CONTENTION OF BOTH PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDIC IAL DECISIONS CITED BY THE ASSESSEE (SUPRA). ON A PERUSAL OF THE IMPUGNED ORDER OF THE LEARNED CIT(A), WE FIND THE LEARNED CIT(A) HAS NOT CONSIDERED AND ADJUDICATED ON THE ISSUES RAISED BY THE ASSESSEE AND THE SUBMISSIONS MADE BY THE ASSESSEE IN THIS REGA RD ARE NOT EXAMINED. WE THEREFORE DEEM IT APPROPRIATE TO REMAND THE ISSUE OF THE COMPARABILITY OF THE AFORESAID FIVE COMPANIES, CHALLENGED BY THE ASSESSEE ON GROUNDS OF FUNCTIONAL DIFFERENCE, FOR FRESH CONSIDERATION BY THE TPO. WHILE EXAMINING THE COMPAR ABILITY OF THESE COMPANIES, THE A.O/TPO SHOULD CONSIDER THE SUBMISSIONS MADE BY THE 27 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 ASSESSEE AND THE APPLICABILITY OF THE JUDICIAL DECISIONS CITED BY THE ASSESSEE TO THE FACTS OF THE ASSESSEE'S CASE IN THE PERIOD UNDER CONSIDERATION. IT IS ORDERED ACCORDI NGLY. 23. GROUND NO.3(D) MULTIPLE YEAR DATA . 23.1 THIS GROUND OF THE ASSESSEE'S C.O. IS REGARDING THE USE OF MULTIPLE YEAR DATA BY THE ASSESSEE FOR COMPARABILITY, WHICH HAS BEEN REJECTED BY THE TPO AND WHOSE DECISION HAS BEEN UPHELD BY THE LEA RNED CIT(A). 23.2 THIS GROUND WAS NOT URGED BEFORE US IN THE APPELLATE PROCEEDINGS. EVEN OTHERWISE, THIS GROUND IS LIABLE TO BE DISMISSED. RULE 10B(4) OF THE IT RULES, 1962 SPECIFIES THE REQUIREMENT REGARDING DATA TO BE USED FOR ANALYSING THE COMPA RABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION WHICH READS AS UNDER : - RULE 10B(4) THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION 56A [ OR A SPECIFIED DOMESTIC TRANSACTION ] SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION 56A [ OR THE SPECIFIED DOMESTIC TRANSACTION ] HAS BEEN ENTE RED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSAC TIONS BEING COMPARED. 23.3 THE USE OF THE WORD SHALL IN THE MAIN PROVISION OF THE RULE MAKES IT ABUNDANTLY CLEAR THAT THE USE OF DATA OF THE CURRENT FINANCIAL YEAR (I.E. OF THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ACTUALLY ENT ERED INTO) IS A MANDATORY REQUIREMENT OF LAW IN THE COMPARABILITY ANLAYSIS TO BE UNDERTAKEN . THE EXCEPTION IS IN ALLOWING THE USE OF DATA OF THE TWO PRECEDING YEARS, IF AND ONLY, IF IT IS ESTABLISHED THAT THE DATA REVEALS FACTS WHICH COULD HAVE AN INFLUEN CE ON THE DETERMINATION OF TRANSFER PRICE. THE DATA OF THE CURRENT FINANCIAL YEAR CANNOT BE DISPENSED WITH EVEN IF THE RELEVANT DATA WAS NOT AVAILABLE TO THE ASSESSEE IN THE PUBLIC DATA BASE AT THE TIME OF THE PREPARATION OF THE T.P. REPORT. NON - AVAILAB ILITY OF INFORMATION IN THE 28 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 PUBLIC DATA BASE, AT BEST CAN BE RELEVANT TO EXPLAIN THE DISCHARGE OF THE ASSESSEE'S OBLIGATION OF MAINTAINING THE PRESCRIBED DOCUMENTATION UNDER SECTION 92D(I) OF THE ACT R.W. RULE 10D OF THE IT RULES, 1962. HOWEVER, SUCH NON - AVAILABILITY WILL NOT DISPENSE WITH THE MANDATORY REQUIREMENT OF RULE 10B(4) FOR USING CURRENT FINANCIAL YEAR DATA IN CONDUCTING COMPARABILITY ANALYSIS AND IN DETERMINING THE ALP IN ACCORDANCE WITH SECTION 92(1) AND 92C(2) OF THE ACT. 23.4 AS IT IS A MANDATORY REQUIREMENT OF LAW TO UTILISE DATA OF THE CURRENT FINANCIAL YEAR TO CONDUCT THE COMPARABILITY ANALYSIS AT THE TIME OF T.P. PROCEEDINGS, THE TPO IS NOT ONLY EMPOWERED BUT IS ALSO DUTY BOUND TO DETERMINE THE ALP USING SUCH CONTEMPORANEOUS DATA FOR THIS PURPOSE EVEN IF SUCH DATA WAS NOT AVAILABLE TO THE ASSESSEE IN THE PUBLIC DATA BASES AT THE TIME OF PREPARATION OF ITS REPORT ON THE T.P. STUDY. FURTHER, WE ARE ALSO OF THE VIEW THAT THE TPO RIGHTLY REJECTED THE USE OF EARLIER YEAR S DATA BY THE ASS ESSEE, AS THE ASSESSEE FAILED TO ESTABLISH BEFORE THE TPO, CIT (APPEALS) OR BEFORE US AS TO HOW SUCH EARLIER YEARS DATA HAD AN INFLUENCE ON THE PRICES OF THE CURRENT FINANCIAL YEAR. IN VIEW OF THE ABOVE, GROUND NO.3(D) OF THE ASSESSEE'S C.O. IS D ISMISSED. 24. GROUND NO.3(E) DATA USED BY THE TPO . 24.1 IN THIS GROUND, THE ASSESSEE CHALLENGES THE ACTION OF THE TPO IN USING DATA AVAILABLE AT THE TIME OF ASSESSMENT PROCEEDINGS, WHILE CARRYING OUT THE FRESH SEARCH PROCESS FOR COMPARABLE COMP ANIES. 24.2 THIS ISSUE IS GENERAL IN NATURE AND WAS NOT URGED BEFORE US IN APPELLATE PROCEEDINGS. AS REGARDS THE DATA USED BY THE TPO WHILE DETERMINING THE ALP, WE FIND THAT IT IS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92D OF THE ACT, WHICH REQU IRES THAT EVERY PERSON WHO HAS ENTERED 29 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 INTO INTERNATIONAL TRANSACTIONS MAINTAIN INFORMATION AND DOCUMENTATION THEREOF. RULE 10B(4) OF THE RULES PROVIDED THAT THE INFORMATION AND DOCUMENTATION SPECIFIED U/R 10B(1) AND 10B(2) SHOULD AS FAR AS POSSIBLE BE CON TEMPORANEOUS AND SHOULD EXIST LATEST BY THE SPECIFIED DATA REFERRED TO IN SECTION 92F(4) OF THE ACT, WHICH HAS THE SAME MEANING AS DUE DATE IN EXPLANATION 2 TO SECTION 139(1) OF THE ACT. THE ACT HAS NOT SPECIFIED ANY CUT OFF DATE UP TO WHICH ONLY THE INFORMATION IN THE PUBLIC DOMAIN HAS TO BE TAKEN INTO CONSIDERATION BY THE TPO WHILE ARRIVING AT THE ALP OR MAKING T.P. ADJUSTMENTS. BOTH THE ASSESSEE AND REVENUE BEING BOUND BY THE PROVISIONS OF THE ACT AND RULES ARE REQUIRED TO TAKE INTO CONSIDERATION CONTEMPORANEOUS DATA RELEVANT TO THE PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS TAKEN PLACE. THE ASSESSEE IS OBLIGED TO MAINTAIN THE INFORMATION AND DOCUMENTATION AS REQUIRED RELATING TO INTERNATIONAL TRANSACTIONS AS PER THE SPECIFIED DATA S O THAT IT CAN BE MADE AVAILABLE TO THE TPO OR THE ASSESSING OFFICER OR ANY OTHER AUTHORITY IN ANY PROCEEDING UNDER THE ACT. WE ARE, THEREFORE, OF THE VIEW THAT THERE IS NO INFIRMITY IN THE ACTION OF THE TPO IN USING CONTEMPORANEOUS DATA AT THE TIME OF T. P. AUDIT, THOUGH THE SAME MAY NOT HAVE BEEN AVAILABLE TO THE ASSESSEE AT THE TIME OF PREPARATION OF THE T.P. STUDY / DOCUMENTATION. IN VIEW OF THE ABOVE, GROUND NO.3(E) OF THE ASSESSEE'S C.O. IS DISMISSED. 25. GROUND NO. 3(F) INFORMATION COLLECTION U /S. 133(6) OF THE ACT. 25.1 GROUND NO. 3(F) OF THE ASSESSEE'S C.O. IS REGARDING THE USE OF INFORMATION COLLECTED U/S.133(6) OF THE ACT BY THE TPO. 25.2 BEFORE US, IN APPELLATE PROCEEDINGS, THIS ISSUE WAS NOT URGED. IN THIS VIEW OF THE MATTER, THIS OBJECTION IS DISMISSED AS NOT PRESSED. 30 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 26. GROUND NO. 3(G) RISK ADJUSTMENT . 26.1 GROUND NO.3(G) OF THE ASSESSEE'S C.O. IS REGARDING THE ACTION OF THE TPO & CIT (APPEALS) IN NOT GRANTING ADJUSTMENT TOWARDS THE DIFFERENCE IN RISK PROFILE BETWEEN TH E ASSESSEE AND THE COMPARABLE COMPANIES CHOSEN BY THE TPO TO BRING THEM ON PAR WITH THE ASSESSEE. THE PLEA WAS REITERATED BEFORE US. 26.2 IN RESPECT OF THE ASSESSEE S CLAIM FOR RISK ADJUSTMENT, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE TPO HAS ELABORATELY DISCUSSED THE MATTER AT PARA 15.2 OF THE ORDER UNDER SECTION 92CA OF THE ACT AND RIGHTLY REJECTED THE CLAIM, AS THE ASSESSEE FAILED TO QUANTIFY ITS CLAIM OF RISK ADJUSTMENT. 26.3 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE MATERIAL ON RECORD. ON A PERUSAL OF THE TPO S ORDER UNDER SECTION 92CA OF THE ACT, WE FIND THAT THE TPO HAS CONSIDERED THIS ISSUE AT PARA 15.2 THEREOF. THE TPO OBSERVES THAT THE PRIMARY BURDEN WHEN MAKING A CLAIM IS ON THE TAX PAYER AND HE HAS NOT PROVIDED ANY QUANTIFICATION OF ITS RISK ADJUSTMENT CLAIM. IN THIS VIEW OF THE MATTER, THE TPO DID NOT ALLOW THE ASSESSEE RISK ADJUSTMENT. WE ARE IN AGREEMENT WITH THE OBSERVATION OF THE TPO. WE FIND THAT THE ASSESSEE, IN THE CASE ON HAND, APART FROM MAK ING THE CLAIM FOR RISK ADJUSTMENT, HAS FAILED TO PROVIDE ANY QUANTIFICATION OF THIS CLAIM FOR THE ASSESSING OFFICER TO MAKE AN ASSESSMENT OF THE CLAIM. IN OUR VIEW, IF THE ASSESSEE MAKES A CLAIM, THE BURDEN IS UPON THE ASSESSEE TO PROVIDE THE BASIS OF QUA NTIFICATION FOR SUCH CLAIM SO THAT IT CAN BE CONSIDERED. IN THE CASE ON HAND THE ASSESSEE HAS FAILED TO DO SO, BOTH BEFORE THE TPO AND ALSO AT THE APPELLATE FORUMS. WHILE IT IS TRUE THAT IN CERTAIN CASES THE CO - ORDINATE BENCHES OF THIS TRIBUNAL HAVE HEL D THAT THE TPO OUGHT TO CONSIDER ALLOWING RISK ADJUSTMENT TO 31 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 BRING THE ASSESSEE ON PAR WITH THE MARGIN OF THE COMPARABLES AND WITH WHICH WE HAVE NO QUARREL, IN THE CASE ON HAND, WE FIND THAT EXCEPT FOR RAISING THE CLAIM FOR RISK ADJUSTMENT, THE ASSESSEE ; HAS FAILED TO SUBSTANTIATE THE CLAIM WITH ANY QUANTIFICATION SO THAT IT CAN BE BASIS FOR EXAMINATION BY THE TPO IN A RECENT DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF CISCI SYSTEMS (INDIA) P. LTD., IN IT(TP)A NO.271/BANG/2014, THE BENCH NOTED THAT R ISK ADJUSTMENT WAS NOT ALLOWED BY TPO FOR THE REASON OF CHANCE OF PROPER BASIS FOR QUANTIFICATION. SINCE SUCH QUANTIFICATION WAS PLACED BEFORE THE TRIBUNAL, THE BENCH DIRECTED THE TPO TO EXAMINE AND CONSIDER THE ASSESSEE'S CLAIM. IN THE CASE ON HAND IT IS NOT SO. WE ARE, THEREFORE, OF THE OPINION THAT IN THE CASE ON HAND, THE ASSESSEE HAS FAILED TO MAKE ITS CASE FOR BEING ALLOWED RISK ADJUSTMENT AND CONCUR WITH THE ORDER OF THE TPO IN NOT ALLOWING THE ASSESSEE RISK ADJUSTMENT IN THE FACTS AND CIRCUMSTA NCES OF THIS CASE. CONSEQUENTLY, THE GROUND RAISED AT 3(G) BY THE ASSESSEE IS DISMISSED. 27. GROUND NO.4 : REIMBURSEMENT OF EXPENSES CONSIDERED AS PART OF OPERATING COST. 27.1 IN THIS C.O. THE ASSESSEE CONTENDS THAT THE REIMBURSEMENTS RECEIVED BY T HE ASSESSEE FROM ITS AES AND THOSE REIMBURSEMENTS PAID BY THE ASSESSEE TO ITS AES ARE NOT IN RESPECT OF ANY SERVICES RENDERED AND THEREFORE SHOULD NOT BE ADDED BACK TO THE COST BASE FOR THE PURPOSES OF A MARK - UP. 27.2 WE HAVE CONSIDERED THE RIVAL CONTE NTIONS AND SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SETTLED PRINCIPLE THAT IF THE REIMBURSEMENTS ARE MERE PASS THROUGH EXPENSES WITHOUT ANY SERVICE ELEMENT, THEN THE SAME SHOULD NOT BE ADDED BACK TO THE COST BASE FOR THE PURPOSES OF MARK UP. WE, HOWEVER, FIND THAT BOTH THE TPO AND THE 32 IT(T.P)A NO. 1110/BANG/2011 & C.O. NO.20/BANG/2012 LEARNED CIT (APPEALS) HAVE DECIDED THE ISSUE WITHOUT EXAMINING THE DETAILS OF THE EXPENSES INVOLVED. THE BREAK - UP OF THE SAID EXPENSES ARE NOT GIVEN IN DETAIL AND THE CLAIM THAT THESE E XPENSES HAVE BEEN ACTUALLY INCURRED BY THE ASSESSEE ON BEHALF OF THE AES AND VICE VERSA HAVE NOT BEEN EXAMINED. WE THEREFORE DEEM IT FIT TO REMIT THE ISSUE TO THE FILE OF THE ASSESSING OFFICER / TPO FOR DETAILED VERIFICATION. WE MAKE IT CLEAR THAT IF THE RECEIPTS ARE MERE RECOVERY OF EXPENSES WITHOUT ANY SERVICE ELEMENT, THEN THE SAME SHOULD NOT BE ADDED BACK TO THE COST BASE FOR THE PURPOSE OF MARK - UP. IT IS ORDERED ACCORDINGLY. CONSEQUENTLY, GROUND NO.4 OF THE ASSESSEE S C.O. IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 28. GROUND NO.5 : INTEREST U/S. 234B OF THE ACT. 28.1 THE ASSESSEE CHALLENGES THE CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT IN ITS CASE. THE CHARGING OF INTEREST IS MANDATORY AND CONSEQUENTIAL AS HAS BEEN HELD BY TH E HON'BLE APEX COURT IN THE CASE OF ANJUM HON'BLE GHASWALA & OTHERS (252 ITR 1) AND WE THEREFORE UPHOLD THE ASSESSING OFFICER S ACTION IN CHARGING THE SAID INTEREST. THE ASSESSING OFFICER IS, HOWEVER, DIRECTED TO RECOMPUTE THE INTEREST CHARGEABLE UNDER SE CTION 234B OF THE ACT, IF ANY, WHILE GIVING EFFECT TO THIS ORDER. 29. IN THE RESULT, BOTH THE APPEAL OF REVENUE FOR ASSESSMENT YEAR 2005 - 06 AND THE C.O. OF THE ASSESSEE FOR THE SAME YEAR ARE TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH JANUARY, 2015. SD/ - SD/ - ( P . MADHAVI DEVI ) ( JASON P BOAZ ) JUDICIAL MEMBER ACCOUNTANT MEMBER *REDDY GP