M/s ARM Embedded Technologies Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1161/BANG/2011

• Counselvise Citation: 116121114 RSA 2011
• Duration Of Justice: 4 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-10-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 25-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: I P S BINDRA I
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Related party transaction; Transfer pricing; International transaction; Additional evidence; Revenue expenditure
• Section: 143(3); 92D; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT( TP )A NOS.1112/BANG/2010 & 1161/BANG/2011 ASSESSMENT YEARS : 2006-07 & 2007-08 M/S. ARM EMBEDDED TECHNOLOGIES PVT. LTD., BAGMANE WORLD TECHNOLOGY CENTER- SEZ, CITRINE BLOCK, 5 TH & 6 TH FLOOR, MARATHAHALLI OUTER RING ROAD, DODDANAKUNDI VILLAGE, MAHADEVAPURA, BANGALORE 560 048. PAN: AAECA 1582E VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI T. SURYANARAYANA, ADVOCATE RESPONDENT BY : SHRI I.P.S. BINDRA, CIT(DR-I) DATE OF HEARING : 13.10.2015 DATE OF PRONOUNCEMENT : 01.12.2015 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THESE ARE APPEALS FILED BY THE ASSESSEE COMPANY D IRECTED AGAINST THE ORDER DATED 26.07.2010 AND 20.09.2011 PASSED BY THE ASSESSING IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 2 OF 78 OFFICER U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX A CT, 1961 [THE ACT] RELATING TO ASSESSMENT YEARS 2006-07 AND 2007-08 RE SPECTIVELY. 2. THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING SOF TWARE DESIGN, DEVELOPMENT AND MAINTENANCE SERVICES AND MARKETING SUPPORT SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) AS A CAPTIVE SERVI CE PROVIDER. A.Y. 2006-07 3. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR 2006-07 ON 08.11.2006 DECLARING A TOTAL INCOME OF RS, 18,62,486 AND A TAX LIABILITY OF RS. 6,43,587 (INCLUDING INTEREST OF RS. 16,674). 4. THE ASSESSEE CARRIED ON SOFTWARE DESIGN, DEVELOP MENT AND MAINTENANCE ACTIVITIES DURING THE PREVIOUS YEAR FRO M THE UNDERTAKING REGISTERED WITH THE STPI AUTHORITIES. THE ASSESSEE COMPANY IS ELIGIBLE FOR AND ACCORDINGLY CLAIMED DEDUCTION IN RESPECT OF PRO FITS OF BUSINESS OF THE SAID UNDERTAKING U/S. 10A OF THE ACT. ACCORDINGLY, DEDUCTION OF RS. 3,53,52,679 U/S. 10A OF THE ACT WAS CLAIMED BY THE ASSESSEE IN RELATION TO PROFITS EARNED BY TILE STPI UNIT. 5. THE ASSESSMENT WAS COMPLETED COMPUTING AN INCOME OF RS. 2,33,07,708. IN DONG SO, THE ASSESSING OFFICER MADE AN ADDITION OF RS.1,08,39,448 ON ACCOUNT OF ARMS LENGTH PRICE (AL P) OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 3 OF 78 (AES) IN RESPECT OF SOFTWARE DESIGN, DEVELOPMENT AN D MAINTENANCE SERVICES, PURSUANT TO THE ORDER DATED 26.10.2009 PA SSED BY THE TRANSFER PRICING OFFICER (TPO). THE AO ALSO MADE AN ADDITI ON OF RS. 16,05,774 ON ACCOUNT OF RE-COMPUTATION OF DEDUCTION CLAIMED U/S. 10A OF THE ACT. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE ASSESS EE FILED ITS OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE DRP UPHELD THE ORDER PASSED BY THE AO. CONSEQUENTLY, THE AO PASSED THE F INAL ORDER DATED 26.07.2010 RAISING A DEMAND FOR THE BALANCE TAX PAY ABLE OF RS. 1,12,22,415. 6. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE THE T RIBUNAL. 7. THE DETAILS OF INTERNATIONAL TRANSACTIONS ENTERE D INTO BY THE ASSESSEE ARE AS FOLLOWS:- 8. THE NET MARGIN ON COST EARNED BY THE ASSESSEE IS AS UNDER:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 4 OF 78 TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS ADOPTED AS THE MOST APPROPRIATE METHOD BY THE ASSESSEE AND THE TPO. 9. THE COMPARABLES SELECTED BY THE ASSESSEE COMPANY AND THEIR ARITHMETIC MEAN ARE AS FOLLOWS:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 5 OF 78 10. OUT OF THE 44 COMPARABLES SELECTED BY ASSESSEE, THE TPO ACCEPTED 3 COMPARABLES VIZ., AZTEC SOFTWARE & TECHN OLOGY SERVES LTD., MEGASOFT LTD. AND ACCEL TRANSMATIC LTD. AND REJECTE D THE REMAINING 41. 11. THE COMPARABLES SELECTED BY THE TPO AND THEIR A RITHMETIC MEAN WAS AS FOLLOWS:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 6 OF 78 12. THE COMPUTATION OF ARMS LENGTH PRICE AND THE A DJUSTMENT U/S. 92CA MADE BY THE TPO IS AS UNDER:- 13. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE APPLICATION OF THE TURNOVER FILTER WAS NOT PRESSED BEFORE THE LOWE R AUTHORITIES SINCE AT THAT TIME THE ISSUE WAS PENDING CONSIDERATION BEFORE THE SPECIAL BENCH OF THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 7 OF 78 TRIBUNAL. HOWEVER, THE ASSESSEE HAS NOW RAISED THE ADDITIONAL GROUNDS OF APPEAL AFTER GROUND NO.5.4 WHICH READ AS FOLLOWS:- 5.5 THAT, LUCID SOFTWARE LTD. OUGHT TO STAND REJEC TED IN VIEW OF IT BEING FUNCTIONALLY DISSIMILAR TO THE APPELLAN T. 5.6 THAT, FLEXTRONICS SOFTWARE SYSTEMS LTD., IGATE GLOBAL SOLUTIONS LTD., MINDTREE LTD., PERSISTENT SYSTEMS L TD., AND SASKEN COMMUNICATION TECHNOLOGY LTD. OUGHT TO STAND REJECTED IN VIEW OF THEIR TURNOVERS BEING RS.595.12 CRORES, RS.527.91 CRORES, RS.448.79 CRORES, RS.209.18 CRORES AND RS.2 40.03 CRORES, RESPECTIVELY, AND THUS BEYOND THE UPPER LIMIT OF RS .200 CRORES BY APPLYING THE TURNOVER FILTER, AS IS CONSISTENTLY BE ING HELD BY THIS HONBLE TRIBUNAL. 5.7 THAT, GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. OUG HT TO STAND REJECTED IN VIEW OF ITS RELATED PARTY TRANSAC TIONS EXCEEDING 15% OF ITS SALES. 14. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT DUE TO INADVERTENCE AND OVERSIGHT, IT HAD NOT RAISED SPECIFIC GROUNDS S EEKING THE REJECTION OF THE ABOVE COMPARABLES. IT WAS SUBMITTED THAT CONSIDERA TION OF THE AFORESAID ADDITIONAL GROUNDS WILL NOT REQUIRE EXAMINATION OF ANY ADDITIONAL EVIDENCE AND THE ASSESSEE IS ENTITLED TO RAISE THE SAME. 15. THE LEARNED DR STRONGLY OBJECTED TO ADMISSION O F ABOVE ADDITIONAL GROUNDS AND SUBMITTED THAT IN CASE THESE WERE ADMIT TED, THE COMPARABILITY OF THE CONCERNED COMPANIES HAS TO BE REFERRED BACK TO THE AO/TPO FOR VERIFICATION AFRESH. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 8 OF 78 16. AFTER CONSIDERING THE AVERMENTS OF THE COUNSELS WITH REGARD TO ADMISSION OF ADDITIONAL GROUNDS, WE FIND FORCE IN T HE CONTENTION OF THE LEARNED AR THAT BY VIRTUE OF SPECIAL BENCH DECISION IN THE CASE OF M/S QUARK SYSTEMS PVT. LTD (SUPRA) , ASSESSEE CAN RAISE ADDITIONAL GROUNDS SEEKING EXCLUSION OF COMPARABLES SELECTED BY IT OR NOT OBJECTED BY IT BEFORE THE LOWER AUTHORITIES. HOWEVER, THE HONBLE PUNJAB & HARYANA HIGH COURT IN (2011) 62 DTR 0182 HAD UPHELD THE SPECIAL BENCH DECISION IN THE CASE OF M/S QUARK SYSTEMS PVT. LTD. ( SUPRA) SPECIFICALLY NOTING THAT THE SPECIAL BENCH HAD REMITTED THE ISSUE OF COMPARABILITY OF SU CH COMPANIES TO THE AO/TPO FOR VERIFICATION AFRESH. HENCE, WE ARE ADMIT TING THE ADDITIONAL GROUNDS. HOWEVER, THE COMPARABILITY OF THE COMPANIE S ASSAILED IN SUCH ADDITIONAL GROUNDS WILL BE DEALT BY US, CONSIDERING THE JUDGMENT OF THE HONBLE PUNJAB & HARYANA HIGH COURT JUDGMENT IN THE CASE OF CIT VS M/S QUARK SYSTEMS INDIA (P) LTD., (2011) 62 DTR 0182. HENCE THE ADDITIONAL GROUNDS ARE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER. 17. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT 5 COMPARABLES AT SL. NOS. 4, 5, 10, 11 & 16 OF THE FINAL SET OF COMPARAB LES SELECTED BY THE TPO MAY BE REJECTED AS BEING FUNCTIONALLY DISSIMILAR ON THE BASIS OF DECISION OF THE TRIBUNAL IN THE CASE OF CYPRESS SEMICONDUCTOR INDIA P. LTD. V. DCIT, ITA NO.1167/BANG/2010 DATED 27.03.2015. THE RELEVANT PARAGRAPHS OF THE TRIBUNALS ORDER ARE AS FOLLOWS:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 9 OF 78 11. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN T HE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) :- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONT ENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVE NUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCT S. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THI S COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS A LSO SUBMITTED THAT AS PER THE ANNUAL REPORT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE C ASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. IT A NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXT RACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES BY THE TPO IS REGARDING INCLUSION OF KA LS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, A ND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 10 OF 78 BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOU LD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN P UBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN TH E SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRE D TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BE NCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPA RABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF T HE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWAR E DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITT ED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ACCEL TRANSMATI C SHOULD BE REJECTED AS COMPARABLE. THE RELEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THAT THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENTRE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 11 OF 78 (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS)- TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THI S COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MOR E THAN THE PERMITTED LEVEL AND THEREFORE SHOULD NOT B E TAKEN FOR COMPARABILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMP ANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR , ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF T HE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESA ID COMPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE L D. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WA S NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HO LD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 12. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANIES WERE CONSIDERED AS COMPARABLE ARE IDENTIC AL IN THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 12 OF 78 CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF TRIL OGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA). RESPECTFULLY FOLL OWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE C ASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA), WE DIREC T THAT KALS INFORMATION SYSTEMS LIMITED AND ACCEL TRANSMATICS L TD., BE EXCLUDED FROM THE LIST OF 20 COMPARABLE ARRIVED AT BY THE TPO. 15. AS FAR AS THE COMPARABLE CHOSEN BY TPO VIZ., I NFOSYS LIMITED IS CONCERNED, IT HAS BEEN HELD BY THE CO-OR DINATE BENCH OF ITAT BANGALORE IN THE CASE OF LOGICA PVT.LTD. VS . ACIT ITA NO.1129/BANG/2011 (AY 07-08) THAT THIS COMPANY IS A FULL FLEDGE RISK ASSUMING ENTREPRENEUR, HOLDS TECHNOLOGY AND MARKETING INTANGIBLE AND IS FUNCTIONALLY DIFFERENT PROVIDING END- TO-END SOLUTIONS ENCOMPASSING TECHNICAL CONSULTING, DESIGN, DEVELOPMENT, RE-ENGINEERING, MAINTENANCE, SYSTEMS I NTEGRATION AND PACKAGE EVALUATION AND IMPLEMENTATION. THE COM PANY GENERATES AROUND 3.96% OF ITS REVENUE FROM SOFTWARE PRODUCTS. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THE CA SE OF LOGICA PVT. LTD. (SUPRA) WERE AS FOLLOWS: 13. SO ALSO, THE COMPARABLES LISTED AT SL.NOS. 10 , 14 AND 26 HAVE TO BE REJECTED AS FUNCTIONALLY NOT COMPARAB LE WITH THAT OF THE ASSESSEE IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. IN ITA NO.7821/MUM/2011 , WHEREIN IT WAS HELD AS UNDER:- 7.2 LUCID SOFTWARE LIMITED IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY, BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALSO INVOLVED IN DEVELOPMENT OF SOFTWA RE PRODUCT. THE LEARNED AR HAS TRIED TO DISTINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMENT EXPENDITURE IN THIS CASE IS AROUND 39% OF THE CAPITAL EMPLOYED BY THE SAID COMPANY, AND, THEREFORE, SUCH A COMPANY CANNOT BE CONSIDERED AS TESTED PARTY. EVEN AS PER IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 13 OF 78 THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDE R SECTION 133(6), THE COMPANY HAS DESCRIBED ITS BUSINESS AS SOFTWARE DEVELOPMENT COMPANY OR PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. THIS INFORMATION ITSELF IS VERY VAGUE AS THE SEGMENTAL DETAILS OF OPERATING REVENUE HAS NOT BEEN MADE AVAILABLE TO EXAMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWARE PRODUCT AND SALE OF SOFTWARE SERVICE AND DEVELOPMENT. LOOKING TO THE FACT THAT IT HAS DEVELOPED A SOFTWARE PRODUCT NAMED AS MUULAM WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTI AL VIS-A-VIS THE CAPITAL EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS , IT IS ESSENTIAL THAT THE CHARACTERISTICS AND THE FUNCT IONS ARE BY AND LARGE SIMILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STUDY CAN BE MADE WITH FEWEST AND MOST RELIABLE ADJUSTMENT. IF A COMPANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN THE SALE OF PRODUCT WOULD BE ENTIRELY DIFFERENT FROM THE COMPANY, WHO I S INVOLVED IN SERVICE SECTOR. THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILITY RATIO. IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFORM ATION ABOUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE SALE OF PRODUCT AND HOW MUCH IS FROM THE SERVICES, THEREFORE, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. 7.4 INFOSYS TECHNOLOGIES LTD.: THE PARAMETER FOR IDENTIFYING COMPARABLE ENTITY HA S TO BE SEEN FROM THE ANGLE OF FUNCTIONS FORMED BY THE COMPANY, SIZE OF THE COMPANY IN TERMS OF THE SALE REVENUE, STAGE OF BUSINESS CYCLE AND COMPANYS GROW TH CYCLE. IN THE CASE OF INFOSYS, THERE ARE HUGE INTA NGIBLE ASSETS WHICH AS PER THE INFORMATION PROVIDED BY THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 14 OF 78 LEARNED AR ARE VALUED AT RS.69,522 CRORES, WHICH COMPRISES OF BRAND VALUE ITSELF AT RS.22,915 CRORES . BASED ON SUCH FUND VALUATION, THE PROFIT OF INFOSYS IS PREDOMINANTLY DUE TO ITS PREMIUM BRANDING. IT IS I NDIAS NO.2 SOFTWARE SERVICE EXPORTER AND THIRD IN THE WOR LD AS AN IT SERVICE COMPANY. IT IS A GIANT COMPANY WHIC H IS EVIDENT FROM ITS REVENUE FUND FROM THE SALES WHICH ITSELF IS MORE THAN RS.13145 CRORES AND EXPENDITURE ON ADVERTISEMENT/SALES PROMOTION AND EXPENDITURE ON R& D IS AT RS.69 CRORES AND RS.167 CRORES RESPECTIVELY, WHEREAS IN THE CASE OF THE ASSESSEE THE REVENUE IS ONLY 10. 7 CRORES WITH NO EXPENDITURE ON ADVERTISEMENT, SALES AND PROMOTION ETC., WHICH ARE BORNE BY THE ASSOCIATED ENTERPRISES. EVEN FROM THE TEST OF FAR IE. FUNCTI ON PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED, COMPARABILITY ANALYSIS MISERABLY FAILS IN THIS CASE . THE COMPARISON OF FUNCTION AND PROFILE AS HAS BEEN REPRODUCED IN PARA 6(IV) ABOVE, MOSTLY SHOWS THAT T HE PROFIT LEVEL INDICATORS IN RELATION TO RETURN OF CO ST, RETURN OF SALES AND RETURN OF ASSETS ARE HUGE BETWEEN INFO SYS AND THE ASSESSEE COMPANY AND THEREFORE, THE INFOSYS CAN NOT BE TREATED AS COMPARABLE ENTITY FOR MAKING COMPARABILI TY ANALYSIS WITH THE ASSESSEE COMPANY. THE COMPARABILI TY OF LNFOSYS TECHNOLOGY OF THE COMPANY AS THAT OF AN ASS ESSEE HAS BEEN DEALT WITH ITAT DELHI BENCH IN THE CASE OF AGNITY INDIA TECHNOLOGIES PRIVATE LIMITED (ITA NO.3856/DELHI/2010), WHEREIN IT WAS HELD THAT LNFOS YS IS A GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHER PROFIT AND CAN NOT BE COMPARED WITH THE COMPANY WHICH IS A CAPTIVE UNIT O F ITS PARENT COMPANY ASSUMING ONLY LIMITED CURRENCY RISK. IN VIEW OF THE ABOVE FINDING, WE HOLD THAT THE INFOSYS CANNOT BE TAKEN AS A COMPARABLE FOR DETERMINING THE ARMS L ENGTH PRICE IN THE CASE OF THE ASSESSEE. . 13. AS FAR AS COMPARABLE TATA ELXSI LTD., IS CON CERNED, THE COMPARABILITY OF THIS COMPANY WITH THAT OF THE SOFT WARE SERVICE PROVIDER WAS CONSIDERED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF LOGICA PVT.LTD. IT (TP) 1129/BANG/20 11 (AY 07- 08) WHEREIN ON THE AFORESAID COMPANY, THE TRIBUNAL HELD AS FOLLOWS:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 15 OF 78 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 ARE CONCE RNED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH T HAT OF THE SOFTWARE SERVICE PROVIDER WAS CONSIDERED BY THE MUM BAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. (SUPRA) WHEREIN ON THE AFORESAID TWO COMPANIES, THE TRIBUNAL HELD AS FOLLOWS:- 7.6 FLEXTRONICS SOFTWARE SYSTEMS LTD. .. 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 EL XSI 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 T HE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FRO M THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. E VEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPA RABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT A ND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TR EAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMIN ING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD B E EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. 15. IN VIEW OF THE ABOVE, THE LD. COUNSEL FOR THE A SSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY AT SL.NO.6 VIZ., F LEXTRONICS SOFTWARE SYSTEMS PVT. LTD. SHOULD BE TAKEN AS A COM PARABLE, WHILE COMPARABLE AT SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A COMPARABLE. 14. IN VIEW OF THE AFORESAID DECISION, WE HOLD TH AT TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE CHOSEN BY T HE TPO. 18. RESPECTFULLY FOLLOWING THE COORDINATE BENCH DEC ISION OF THIS TRIBUNAL IN THE CASE OF CYPRESS SEMICONDUCTOR INDIA P. LTD. (SUPRA), WE DIRECT THAT THE 4 COMPANIES VIZ., INFOSYS LTD., KALS INFOSYSTEM S LTD., TATA ELXSI (SEG.) IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 16 OF 78 AND ACCEL TRANSMATICS LTD. BEING FUNCTIONALLY DISSI MILAR BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES SELECTED BY THE TPO. 19. WITH RESPECT TO LUCID SOFTWARE LTD., SINCE THE ASSESSEE HAS RAISED ADDITIONAL GROUND BEFORE THE TRIBUNAL THAT THIS COM PANY IS FUNCTIONALLY DISSIMILAR, FOLLOWING THE DECISION IN CASE OF M/S. QUARK SYSTEMS INDIA (P) LTD., (2011) 62 DTR 0182 WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE WHETHER LUCID SOFTWARE LTD. IS F UNCTIONALLY DISSIMILAR,. 20. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT THE NEXT FIVE COMPARABLES VIZ., SL.NOS. 3, 6, 7, 9 AND 20 OF TPO S COMPARABLES MAY BE REJECTED APPLYING THE UPPER LIMIT OF RS.200 CRORES TO THE TURNOVER IN VIEW OF THE DECISION OF THIS TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. IN ITA NO.1054/BANG/2011 WHICH HAS BEEN FOLLOWED IN CYPRESS SEMICONDUCTOR INDIA P. LTD. (SUPRA) . THE RELEVANT PARAGRAPHS OF THE ORDER OF THE TRIBUNAL IN CYPRESS SEMICONDUCTOR INDIA P. LTD. (SUPRA ) ARE REPRODUCED BELOW :- 17. AS FAR AS COMPARABLE COMPANIES CHOSEN BY TH E TPO VIZ., IGATE GLOBAL SOLUTIONS LTD., MINDTREE CONSULTING LT D., SASKEN COMMUNICATIONS LTD., AND FLEXTRONICS SOFTWARE SYSTE MS LTD., ARE CONCERNED, THIS TRIBUNAL IN THE CASE OF TRILOGY E-B USINESS (SUPRA) HAS BY APPLYING TURNOVER FILTER HELD THAT WHILE SELECTI NG COMPARABLE COMPANIES FOR COMPARABILITY ANALYSIS TURNOVER WILL BE A RELEVANT CRITERIA AND HELD AS FOLLOWS: (1) TURNOVER FILTER IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 17 OF 78 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT THE TPO HAS APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE, BUT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCO ME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLLED TRAN SACTION WITH AN INTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMPARED OR THE ENTERPRISES ENTERING INTO SUCH TRANSACTION, WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT WHEREVER THERE ARE SOME DIFFERENCES SUCH DIFFE RENCES SHOULD BE CAPABLE OF REASONABLE ACCURATE ADJUSTMENT IN MON ETARY TERMS TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES. IT WA S HIS SUBMISSION THAT SIZE WAS AN IMPORTANT FACET OF THE COMPARABILI TY EXERCISE. IT WAS SUBMITTED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WOULD IMPACT COMPARABILITY. IN THIS REGA RD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGARH BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 , WHEREIN THE SPECIAL BENCH HAD LAID DOWN THAT IT IS IMPROPER TO PROCEED ON THE BASIS OF LOWE R LIMIT OF 1 CRORE TURNOVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASONABLE CLASSIFICATION. SEVERAL OTHER DECIS IONS WERE REFERRED TO IN THIS REGARD LAYING DOWN IDENTICAL PR OPOSITION. WE ARE NOT REFERRING TO THOSE DECISIONS AS THE DECISIO N OF THE SPECIAL BENCH ON THIS ASPECT WOULD HOLD THE FIELD. REFEREN CE WAS ALSO MADE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERVED AS FOLLOWS:- SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PAR TIES MIGHT AFFECT THE RELATIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COMPARABILITY. 12. THE ICAI TP GUIDELINES NOTE ON THIS ASPECT LAY DOWN IN PARA 15.4 THAT A TRANSACTION ENTERED INTO BY A RS. 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENT ERED INTO BY A RS. 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASON S ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIE S OF SCALE UNDER WHICH THEY OPERATE. THE FACT THAT THEY OPERA TE IN THE SAME MARKET MAY NOT MAKE THEM COMPARABLE ENTERPRISES. T HE RELEVANT EXTRACT IS AS FOLLOWS [ON RULE 10B(3)]: IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 18 OF 78 CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE NOT MATERIAL, THE TRANSACTIONS WOULD BE COMPARABLE. THESE DIFFERENCES COULD EITHER BE WITH REFERENCE TO THE TRANSACTION OR WITH REFERENCE TO THE ENTERPRISE. FOR INSTANCE, A TRANSACTION ENTERED INTO BY A RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. 13. IT WAS FURTHER SUBMITTED THAT THE TPOS RANGE ( RS. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COMPANIES LIKE INFOSYS WHICH IS 277 TIMES BIGGER THAN THE ASSESSEE (TURNOV ER OF RS. 13,149 CRORES AS COMPARED TO RS. 47.47 CRORES OF AS SESSEE). IT WAS SUBMITTED THAT AN APPROPRIATE TURNOVER RANGE S HOULD BE APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPAN IES. 14. REFERENCE WAS MADE TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , WHEREIN RELYING ON DUN AND BRADSTREETS ANALYSIS, THE TURNO VER OF RS. 1 CRORE TO RS. 200 CRORES WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSERVATIONS WERE BROUGHT TO OUR NOTICE:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE JUDIC IAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALS O ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 19 OF 78 THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 15. IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PRO POSITION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN THE FOLLOWING CASES: 1. M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO.1413/BANG/2010) 2. M/S GENESIS MICROCHIP (I) PRIVATE LIMITED VS. D CIT (ITA NO.1254/BANG/20L0). 3. ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (I TA NO. 1171/BANG/2010). IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURN OVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COM PARABLE WITH THE ASSESSEE. 16. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HA VING TURNOVER OF MORE THAN RS. 200 CRORES AS COMPARABLES . IN THESE CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASS ESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 20 OF 78 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECI DING THE ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDES THAT INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR L ENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTER PRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORT IONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED O R TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERP RISES. SEC.92- A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE TRANSACTION BETWEEN TH E ASSESSEE AND ITS AE WAS AN INTERNATIONAL TRANSACTION ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATION OF ARMS LENGTH PRICE IN AN INTERNATION AL TRANSACTION AND IT PROVIDES:- (1) THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 21 OF 78 PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PR ICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT ( A ) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR ( B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR ( C ) THE INFORMATION OR DATA USED IN COMPUTATION OF TH E ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ( D ) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNAT IONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 22 OF 78 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A). TO (D).. ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 23 OF 78 (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 24 OF 78 (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH TH E INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE S IN RELATION TO THE TRANSACTIONS BEING COMPARED. 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF T HE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPA RED WITH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACT ORS SET OUT THEREIN. BEFORE US THERE IS NO DISPUTE THAT THE TN MM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE I NTERNATIONAL TRANSACTION. THE DISPUTES ARE WITH REGARD TO THE C OMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLE ARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSEES TURNOVER I S RS. 47,46,66,638. IT WOULD THEREFORE FALL WITHIN THE C ATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES H AVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOW N IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE AS SESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY T HE TPO VIZ., TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CR ORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 25 OF 78 18. RESPECTFULLY FOLLOWING THE AFORESAID DECISIO N OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), WE HOLD THAT THE FOLLOWING COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CRO RES (2) IGATE GLOBAL SOLUTIONS LTD. 527.91 CRORES (3) MINDTREE LTD. 448.79 CRORES (4) SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 240.03 CRORES (5) PERSISTENT SYSTEMS LIMITED 209.18 CRORES. 19. THE AO IS DIRECTED TO COMPUTE THE ARITHMETIC MEAN BY EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE . 21. WE DIRECT THE AO TO DECIDE WHETHER THE FIVE COM PANIES VIZ., IGATE GLOBAL SOLUTIONS LTD. (SEG.), MINDTREE CONSULTING L TD., PERSISTENT SYSTEMS LTD., SASKEN COMMUNICATION LTD. (SEG.) AND FLEXTRON ICS SOFTWARE SYSTEMS LTD., HAVING TURNOVER EXCEEDING RS.200 CRORES IS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES SELECTED BY THE TPO IN TH E LIGHT OF DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CYPRESS SEMICONDUCTOR INDIA P. LTD. (ITA NO.1167/BANG/2010 DATED 27.03.20 15). 22. THE LD. COUNSEL FOR THE ASSESSEE NEXT SUBMITTED THAT 3 COMPARABLES AT SL.NO.1, 2 & 18 OF THE FINAL COMPARABLES OF THE TPO HAVING MORE THAN 15% RELATED PARTY TRANSACTIONS MAY BE REJECTED AS H ELD IN 24/7 CUSTOMER.COM V. DCIT (ITA NO.227/BANG/2010) AND CYPRESS SEMICONDUCTOR INDIA PL. LTD. (SUPRA) . THE OBSERVATIONS OF THE TRIBUNAL AT IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 26 OF 78 PARAS 22 & 23 IN THE CASE OF CYPRESS SEMICONDUCTOR INDIA PVT. LTD. (SUPRA) IN THIS REGARD ARE AS FOLLOWS:- 22. AS FAR AS COMPARABLE COMPANIES CHOSEN BY THE T PO VIZ., AZTEC SOFTWARE LIMITED AND GEOMETRIC SOFTWARE LTD. (SEG.) AND MEGASOFT LTD., ARE CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THE RELATED PARTY TRANSACTION IN THE CASE OF COMPAN IES EXCEEDS 15% AND IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF 24 X 7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010, FOLLOWED BY THIS TRIBUNAL IN THE CASE OF LOGICA PRIVATE LTD. (SUPRA) WHEREIN IT WAS HELD THAT WHERE THE RPT EXCEEDS 15%, SUCH COMPANIES SHOULD NOT BE TAKEN AS COMPARABLE COMPANI ES. FOLLOWING THE SAID DECISION, WE HOLD THAT SAID COMP ANIES SHOULD BE EXCLUDED FROM THE LIST OF THE COMPARABLE COMPANI ES CHOSEN BY THE TPO WHILE WORKING OUT THE ALP. 23. AFTER EXCLUDING THE AFORESAID COMPARABLE FROM T HE LIST OF COMPARABLE CHOSEN BY THE TPO, THE ARITHMETIC MEAN O F PROFIT MARGIN OF THE REMAINING 7 COMPARABLE WOULD BE 11.3 0% (UNADJUSTED) AND 9.87% AFTER WORKING CAPITAL ADJUST MENT. THE ASSESSEES PROFIT MARGIN OPERATING PROFIT ON COST I S 10.15% WHICH IS WITHIN THE + / - 5% RANGE PERMITTED UNDER SECOND PROVISO TO SEC.92CA(2) OF THE ACT AND THEREFORE THE ADDITION MADE BY THE TPO AND CONFIRMED BY THE DRP NEEDS TO B E DELETED. ACCORDINGLY THE SAME IS DELETED. THE RELEVANT GROU NDS OF APPEAL OF THE ASSESSEE ARE ALLOWED. 23. RESPECTFULLY FOLLOWING THE DECISION OF THE COOR DINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CYPRESS SEMICONDUCTOR INDIA P. LTD. (SUPRA), WE DIRECT THAT THE COMPANIES VIZ., AZTECH SOFTWARE LTD . AND MEGASOFT LTD. WHEREIN THE RELATED PARTY TRANSACTIONS EXCEED 15% B E EXCLUDED FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 27 OF 78 24. AS REGARDS GEOMETRIC SOLUTIONS LTD., SINCE THE ASSESSEE HAS RAISED ADDITIONAL GROUND BEFORE THE TRIBUNAL, WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE WHETHER GEOMETRIC SOLUTIONS LTD. EXCEEDS 15% RPT, FOLLOWING THE DECISION IN CASE OF CYPRESS SEMICONDUCTOR INDIA P. LTD. (SUPRA) / M/S. QUARK SYSTEMS INDIA (P) LTD., (2011) 62 DTR 0182. 25. THUS, AFTER EXCLUSION OF THE ABOVE 13 COMPARABL ES, ACCORDING TO THE ASSESSEE, THE ARITHMETIC MEAN OF THE REMAINING 7 CO MPARABLES WOULD BE AS FOLLOWS:- 26. THE ASSESSEE SUBMITTED THAT +/- 5% OF THE ARITH METICAL MEAN FOR SOFTWARE DEVELOPMENT SERVICES WOULD BE AS FOLLOWS:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 28 OF 78 27. THEREFORE, THE AO HAS TO DETERMINE WHETHER THE NCP MARGIN OF THE ASSESSEE COMPANY WOULD BE WITHIN THE RANGE OF + / - 5% OF THE ARITHMETICAL MEAN AND IF SO, THE TP ADJUSTMENT MADE BY THE TPO I S LIABLE TO BE SET ASIDE. ACCORDINGLY, WE SET ASIDE THE ISSUE OF DET ERMINATION OF NCP MARGIN TO THE FILE OF THE ASSESSING OFFICER. 28. THE NEXT ISSUE THAT ARISES FOR CONSIDERATION IS WITH RESPECT TO INCLUSION OF REIMBURSEMENT OF EXPENSES IN THE OPERA TING COST AS WELL AS OPERATING REVENUE OF THE ASSESSEE COMPANY. THE TPO HAS INCLUDED THE REIMBURSEMENT OF EXPENSES RECEIVED AMOUNTING TO RS. 4,371,178/- AS PART OF THE COST BASE FOR APPLYING THE ADJUSTED OPERATIN G COST PLUS MARKUP. IN THIS REGARD, THE ASSESSEE SUBMITTED THAT THE REIMBU RSEMENT OF EXPENSES RECEIVED BY THE COMPANY WAS INCURRED BY IT ON BEHAL F OF ITS AES, FOLLOWING THE POLICY OF REIMBURSING SUCH EXPENSES ON COST TO COST BASIS AND NO SERVICES HAVE BEEN RENDERED BY THE ASSESSEE IN RELA TION TO THE REIMBURSEMENTS, THEREFORE, REIMBURSEMENTS PURELY RE LATE TO THIRD PARTY EXPENSES INCURRED ON BEHALF OF THE AES. IT WAS SUBM ITTED THAT THE COMPANY HAD RECEIVED REIMBURSEMENT OF THESE EXPENSES AT COS T FROM ITS AES AND CONSEQUENTLY, THE AMOUNT RECEIVED/RECEIVABLE IS DEE MED TO BE THE ARMS LENGTH PRICE. 29. WITHOUT PREJUDICE TO THE ABOVE ARGUMENT, THE LD . COUNSEL FOR THE ASSESSEE ARGUED THAT EVEN IF THE REIMBURSEMENT OF E XPENSES RECEIVED WAS CONSIDERED IN BOTH OPERATING INCOME AND EXPENSE, TH E NCP MARGIN OF THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 29 OF 78 ASSESSEE WOULD BE 11.30% WHICH IS WITHIN THE RANGE OF + / - 5% OF THE ARITHMETICAL MEAN OF COMPARABLE COMPANIES AS UNDER: - 30. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT T HE ASSESSEE COMPANY HAS RECEIVED REIMBURSEMENT OF THESE EXPENSE S AS COST FROM ITS AE AND CONSEQUENTLY THE AMOUNT RECEIVED/RECEIVABLE IS DEEMED TO BE AT ARMS LENGTH PRICE. HENCE THIS GROUND OF APPEAL IS ALLOWED. 31. WITH RESPECT TO THE NEXT ISSUE OF WORKING CAPIT AL ADJUSTMENT, THE LD. COUNSEL SUBMITTED THAT THOUGH THE RESULTS OF +/- 5% OF THE ARITHMETICAL MEAN FOR SOFTWARE DEVELOPMENT SERVICES IS ACHIEVED BY APPLYING WORKING CAPITAL ADJUSTMENT AS COMPUTED BY THE TPO, THE AO/T PO ERRED IN NOT CONSIDERING THE ADVANCES RECEIVED FROM THE CUSTOMER S AS PART OF TRADE PAYABLES IN DETERMINATION OF WORKING CAPITAL ADJUST MENT AND THEREBY ERRED IN NOT PROVIDING AN APPROPRIATE ADJUSTMENT TOWARDS WORKING CAPITAL. IT WAS SUBMITTED THAT IN THE TP ORDER, THE TPO HAS DETERMI NED THE ARMS LENGTH MARKUP AS 20.08% (AFTER WORKING CAPITAL ADJUSTMENT OF 0.59%) FOR SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. HOWE VER, THE TPO HAS IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 30 OF 78 NOT CONSIDERED ADVANCES FROM ARM LTD. UK AND ARM IN C., USA IN COMPUTATION OF THE WORKING CAPITAL ADJUSTMENT. 32. IT WAS FURTHER SUBMITTED THAT THE TPO HAS CONSI DERED THE ASSESSEES TRADE PAYABLES AS ON MARCH 31, 2006 AT RS. 53,56,60 2 AND AS ON APRIL 1, 2006 AT RS. 11,79,063. THE TPO HAS THEREBY NOT CONS IDERED THE ADVANCES RECEIVED FROM ARM LTD. UK AMOUNTING TO RS. 13,62,30 ,811 AS ON MARCH 31, 2006 AND RS. 6,27,66,411 AS ON APRIL 1, 2005 (S CHEDULE 8A OF AUDITED FINANCIAL STATEMENTS CURRENT LIABILITIES). THE AS SESSEES CONTENTION IS THAT IT RECEIVES COMPENSATION FOR THEIR CONTRACTUAL SERVICES IN ADVANCE AND SUBSEQUENTLY ADJUSTS THESE ADVANCES AGAINST THE INV OICES RAISED. GIVEN THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER, IT MAY CHOOSE TO INVEST SUCH ADVANCES TOWARDS EITHER PURCHASE OF ASSETS OR FOR INCURRING EXPENSES, BUT ULTIMATELY SUCH AN ADVANCE IS UTILIZE D TOWARDS PERFORMING CONTRACTUAL SERVICES. THEREFORE, IT WAS THE SUBMISS ION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ADVANCES RECEIVED FROM ITS AE S SHOULD BE CONSIDERED AS A PART OF TRADE PAYABLES IN COMPUTATI ON OF WORKING CAPITAL ADJUSTMENT. THE WORKINGS FOR AVERAGE TRADE PAYABLE S FURNISHED BY THE ASSESSEE ARE AS FOLLOWS:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 31 OF 78 33. ACCORDINGLY, IT WAS SUBMITTED BY THE ASSESSEE T HAT THE WORKING CAPITAL ADJUSTED ARMS LENGTH MARK-UP FOR THE 20 CO MPARABLES SELECTED BY THE TPO WOULD BE 15.55% (AFTER WORKING CAPITAL ADJU STMENT OF 5.13%) FOR SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSES SEE. BASED ON THE REMAINING 7 OUT OF THE 20 COMPARABLES SELECTED BY T HE TPO THE ASSESSEES MARGIN OF 11.52% IS WITHIN THE +/- 5% OF THE WORKIN G CAPITAL ADJUSTED MEAN OF 10.56% AS COMPUTED BY THE TPO. IF THE WORKING C APITAL ADJUSTMENT IS COMPUTED BY INCLUDING ADVANCES RECEIVED FROM AES AS PART OF TRADE PAYABLES, THE WORKING CAPITAL ADJUSTED MARK-UP FOR THE ABOVE 7 COMPARABLES WOULD BE EVEN LOWER. 34. WE ARE OF THE OPINION THAT ADVANCES RECEIVED F ROM AES SHOULD BE CONSIDERED AS A PART OF TRADE PAYABLES IN THE COMPU TATION OF WORKING CAPITAL ADJUSTMENT. HENCE, THE TPO/AO IS DIRECTED TO CONSIDER ADVANCES FROM ARM LTD. UK AND ARM INC., USA IN THE COMPUTATI ON OF WORKING IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 32 OF 78 CAPITAL ADJUSTMENT AND REWORK THE SAME. THIS GROUN D IS ALLOWED FOR STATISTICAL PURPOSES. 35. THE NEXT ISSUE RELATES TO RECOMPUTATION OF DEDU CTION U/S. 10A OF THE ACT. THE ASSESSEE CLAIMED A DEDUCTION OF RS.3,52, 52,679/- U/S. 10A OF THE ACT. IN COMPUTING THE DEDUCTION, THE ASSESSEE H AD NOT REDUCED TRAVEL EXPENSES OF RS.97,89,659 AND TELECOMMUNICATION CHAR GES RS. 14,62,515 FROM EXPORT TURNOVER AS, ACCORDING TO THE ASSESSEE, NO PART OF THE EXPENDITURE WAS ATTRIBUTABLE TO THE DELIVERY OF SOF TWARE OUTSIDE INDIA. THE ASSESSING OFFICER, HOWEVER, PROCEEDED TO RECOMPUTE THE DEDUCTION BY REDUCING THE SAID AMOUNTS FROM EXPORT TURNOVER BUT NOT FROM TOTAL TURNOVER AND THEREBY DISALLOWED THE 10A DEDUCTION TO THE EXT ENT OF RS.16,05,774/-. THE ASSESSEES SUBMISSION IS THAT NO PART OF THE AB OVE EXPENDITURE WAS ATTRIBUTABLE TO THE DELIVERY OF SOFTWARE OUTSIDE IN DIA AND IN THE ALTERNATIVE, IF THE SAME IS REDUCED FROM EXPORT TURNOVER IT SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER. ON THE ALTERNATIVE SUBMISSION, RELI ANCE WAS PLACED UPON THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KAR ). IN THIS JUDGMENT, IT HAS BEEN HELD THAT WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER, HAS ALSO TO BE E XCLUDED FROM THE TOTAL TURNOVER. ACCORDINGLY, WE DIRECT THE AO TO RECOMP UTE THE DEDUCTION U/S. 10A IN RESPECT OF TRAVEL EXPENSES AND TELECOMMUNICA TION CHARGES BY REDUCING THE SAME FROM TOTAL TURNOVER ALSO. 36. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 33 OF 78 A.Y. 2007-08 37. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR 2007-08 ON 29.10.2007 DECLARING A TOTAL INCOME OF RS. 40,47,198 AND A TAX LIABILITY OF RS. 13,62,288 (INCLUDING INTERES T OF RS. 21,585). 38. THE ASSESSEE CARRIED ON SOFTWARE DESIGN, DEVELO PMENT AND MAINTENANCE ACTIVITIES DURING THE PREVIOUS YEAR FRO M THE UNDERTAKING REGISTERED WITH THE STPI AUTHORITIES. THE ASSESSEE CLAIMED DEDUCTION OF RS. 9,12,57,120 U/S. 10A OF THE ACT IN RELATION TO PROFITS EARNED BY TILE STPI UNIT. 39. THE ASSESSMENT WAS COMPLETED COMPUTING AN INCOM E OF RS. 6,36,40,660. IN DONG SO, THE ASSESSING OFFICER MADE AN ADDITION OF RS.5,78,84,564 ON ACCOUNT OF ALP OF INTERNATIONAL T RANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES IN RESPECT OF SOFTWARE DESIGN, DEVELOPMENT AND MAINTENANCE SERVICES, PURSUANT TO THE ORDER DAT ED 30.09.2010 PASSED BY THE TPO. THE AO ALSO MADE AN ADDITION OF RS. 1 7,08,902 ON ACCOUNT OF RE-COMPUTATION OF DEDUCTION CLAIMED U/S. 10A OF THE ACT. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE DRP UPHELD THE ORDER PASSED BY THE AO. CONSEQUENTLY, THE AO PASSED THE FINAL ORDER DAT ED 20.09.2011 RAISING A DEMAND OF RS. 3,07,35,220. 40. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 34 OF 78 41. THE DETAILS OF INTERNATIONAL TRANSACTIONS ENTER ED INTO BY THE ASSESSEE ARE AS FOLLOWS:- 42. NET MARGIN ON COST EARNED BY ASSESSEE IS AS UND ER:- 43. OUT OF THE 18 COMPARABLES SELECTED BY THE ASSES SEE, THE TPO ACCEPTED TWO COMPANIES I.E, SIP TECHNOLOGIES & EXPO RTS LTD. AND MINDTREE CONSULTING LTD. AND REJECTED THE REMAINING 16 COMPA RABLES ON THE FOLLOWING GROUNDS:- (A) THE INCOME FROM ONSITE ACTIVITIES OF 4 COMPANIE S WERE MORE THAN 75% OF THE EXPORT REVENUES; (B) 3 COMPANIES WERE FOUND TO BE FUNCTIONALLY DISSI MILAR; (C) RPT EXCEEDED 25% OF SALES IN RESPECT OF 3 COMPA NIES; (D) EXPORT EARNINGS OF 2 COMPANIES WERE LESS THAN 2 5% OF REVENUES; IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 35 OF 78 (E) 1 COMPANY HAD DIMINISHING REVENUES AND PREDOMIN ANTLY ONSITE ACTIVITIES; (F) 1 COMPANY ON ACCOUNT OF DIFFERENT YEAR ENDING A ND EMPLOYEES COST BEING LESS THAN 25% OF REVENUES; (G) NO FINANCIAL DATA FOR FY 2006-07 WAS AVAILABLE FOR 1 COMPANY; AND (H) ANOTHER COMPANY HAD ABNORMAL PROFITABILITY. 44. THE FINAL SET OF COMPARABLES SELECTED BY THE TP O AND THEIR ARITHMETIC MEAN ARE AS FOLLOWS:- SL. NO. NAME OF THE COMPANY MARK UP (% AGE) UNADJUSTED WC IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 36 OF 78 45. THE COMPUTATION OF ALP AND THE ADJUSTMENT MADE BY THE TPO ARE AS FOLLOWS:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 37 OF 78 46. THE ASSESSEE HAS RAISED THE FOLLOWING ADDITION AL GROUNDS OF APPEAL IN CONTINUATION OF THE EXISTING GROUNDS:- 7. THAT, ACCEL TRANSMATICS LTD., E-ZEST SOLUTIONS LTD., HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., QUIN TEGRA SOLUTIONS LTD. AND THIRDWARE SOLUTIONS LTD. OUGHT T O STAND REJECTED IN VIEW OF THEM BEING FUNCTIONALLY DISSIMI LAR TO THE APPELLANT. 8. THAT, IGATE GLOBAL SOLUTIONS LTD., MINDTREE LTD. AND SASKEN COMMUNICATION TECHNOLOGY LTD. OUGHT TO STAND REJECTED IN VIEW OF THEIR TURNOVERS BEING RS.747.27 CRORES, RS.590.35 CRORES AND RS.343.57 CRORES RESPECTIVELY, AND THUS BEYOND THE UPPER LIMIT OF RS.200 CRORES BY APPLYING THE TURNOV ER FILTER, AS IS CONSISTENTLY BEING HELD BY THIS HONBLE TRIBUNAL. 9. THAT PERSISTENT SYSTEMS LTD. OUGHT TO STAND REJE CTED IN VIEW OF IT BEING FUNCTIONALLY DISSIMILAR TO THE APP ELLANT AND ALSO IN VIEW OF ITS TURNOVER BEING RS.293.75 CRORES AND THUS BEYOND THE UPPER LIMIT OF RS.200 CRORES BY APPLYING THE TU RNOVER FILTER, AS IS CONSISTENTLY BEING HELD BY THIS TRIBUNAL. 47. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT DUE TO INADVERTENCE AND OVERSIGHT, IT HAD NOT RAISED SPECIFIC GROUNDS S EEKING THE REJECTION OF THE ABOVE COMPARABLES. IT WAS SUBMITTED THAT CONSIDERA TION OF THE AFORESAID ADDITIONAL GROUNDS WILL NOT REQUIRE EXAMINATION OF ANY ADDITIONAL EVIDENCE AND THE ASSESSEE IS ENTITLED TO RAISE THE SAME. 48. THE LEARNED DR STRONGLY OBJECTED TO ADMISSION O F ABOVE ADDITIONAL GROUNDS AND SUBMITTED THAT IN CASE THESE WERE ADMIT TED, THE COMPARABILITY OF THE CONCERNED COMPANIES HAS TO BE REFERRED BACK TO THE AO/TPO FOR VERIFICATION AFRESH. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 38 OF 78 49. AFTER CONSIDERING THE AVERMENTS OF THE COUNSEL S WITH REGARD TO ADMISSION OF ADDITIONAL GROUNDS, WE FIND FORCE IN T HE CONTENTION OF THE LEARNED AR THAT BY VIRTUE OF SPECIAL BENCH DECISION IN THE CASE OF M/S QUARK SYSTEMS PVT. LTD (SUPRA) , ASSESSEE CAN RAISE ADDITIONAL GROUNDS SEEKING EXCLUSION OF COMPARABLES SELECTED BY IT OR NOT OBJECTED BY IT BEFORE THE LOWER AUTHORITIES. HOWEVER, THE HONBLE PUNJAB & HARYANA HIGH COURT IN (2011) 62 DTR 0182 HAD UPHELD THE SPECIAL BENCH DECISION IN THE CASE OF M/S QUARK SYSTEMS PVT. LTD. ( SUPRA) SPECIFICALLY NOTING THAT THE SPECIAL BENCH HAD REMITTED THE ISSUE OF COMPARABILITY OF SU CH COMPANIES TO THE AO/TPO FOR VERIFICATION AFRESH. HENCE, WE ARE ADMIT TING THE ADDITIONAL GROUNDS. HOWEVER, THE COMPARABILITY OF THE COMPANIE S ASSAILED IN SUCH ADDITIONAL GROUNDS WILL BE DEALT BY US, CONSIDERING THE JUDGMENT OF THE HONBLE PUNJAB & HARYANA HIGH COURT JUDGMENT IN THE CASE OF CIT VS M/S QUARK SYSTEMS INDIA (P) LTD., (2011) 62 DTR 0182. HENCE THE ADDITIONAL GROUNDS ARE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER. 50. THE LD. COUNSEL FOR THE ASSESSEE FIRSTLY SUBMIT TED THAT THE MEGASOFT LTD. IS TO BE ACCEPTED AS A COMPARABLE TAKING INTO ACCOUNT THE SEGMENTAL DETAILS IN VIEW OF THE DECISION OF THIS TRIBUNAL IN THE CASE OF LOGICA PVT. LTD. V. ACIT IN ITA NO.1129/BANG/2011 DATED 28.02.2013 , WHEREIN IT WAS HELD AS FOLLOWS:- 18. AS FAR AS SL.NO.16 VIZ., MEGASOFT IS CONCERNED, ONLY SOFTWARE SERVICES SEGMENT MARGIN IS TO BE TAKEN AS HELD BY T HIS TRIBUNAL IN THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 39 OF 78 CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) . THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AT PARAGR APHS 24 TO 38 OF THE ORDER OF THE TRIBUNAL IN THAT CASE WHICH READS AS U NDER:- (3) IMPROPER SELECTION OF COMPARABLES (A) MEGASOFT LTD. : 24. THIS COMPANY WAS CHOSEN AS A COMPARABLE BY THE TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE ARE TWO SEGMENTS IN THIS COMPANY VIZ., (I) SOFTWARE DEVELOPMENT SEGMENT , AND (II) SOFTWARE PRODUCT SEGMENT. THE ASSESSEE IS A PURE S OFTWARE SERVICES PROVIDER AND NOT A SOFTWARE PRODUCT DEVELO PER. ACCORDING TO THE ASSESSEE THERE IS NO BREAK UP OF R EVENUE BETWEEN SOFTWARE PRODUCTS AND SOFTWARE SERVICES BUS INESS ON A STANDALONE BASIS OF THIS COMPARABLE. THE TPO RELI ED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHIC H THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ ., BLUEALLY DIVISION AND XIUS-BCGI DIVISION. XIUS- BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE . THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PRODUCTS ARE SO LD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE CO MPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FIT I NTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE WO ULD CONSTITUTE PACKAGED PRODUCT AND AROUND 50% TO 60% W OULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES REL ATED TO TRAVELLING, BOARDING AND LODGING EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABL E COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO PRODUCT SOFTWARE) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% OF THE OVE RALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE RE VENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. THE BASIS ON W HICH THE TPO ARRIVED AT THE PLI OF 60.23% IS GIVEN AT PAGE-1 15 AND 116 OF THE ORDER OF THE TPO. IT IS CLEAR FROM THE PERU SAL OF THE SAME IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 40 OF 78 THAT THE TPO HAS PROCEEDED TO DETERMINE THE PLI AT THE ENTITY LEVEL AND NOT ON THE BASIS OF SEGMENTAL DATA. 25. IN THE ORDER OF THE TPO, OPERATING MARGIN WAS COMPUTED FOR THIS COMPANY AT 60.23%. IT IS THE COMPLAINT OF THE ASSESSEE THAT THE OPERATING MARGINS HAVE BEEN COMPUTED AT EN TITY LEVEL COMBINING SOFTWARE SERVICES AND SOFTWARE PRODUCT SE GMENTS. IT WAS SUBMITTED THAT THE PRODUCT SEGMENT OF MEGASOFT IS SUBSTANTIALLY DIFFERENT FROM ITS SOFTWARE SERVICE S EGMENT. THE PRODUCT SEGMENT HAS EMPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SERVICE SEGMENT HAS EMPLOYEE COST OF 50%. SIMILARLY, THE PROFIT MARGIN ON COST IN PRODUCT SEGMENT IS 117 .95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11%. BOTH THE SEGMENTS ARE SUBSTANTIALLY DIFFERENT AND THEREFORE COMPARISO N AT ENTITY LEVEL IS WITHOUT BASIS AND WOULD VITIATE THE COMPARABILIT Y (SUBMISSIONS ON PAGE 381 TO 383 OF THE PB-I). IT WAS FURTHER SU BMITTED THAT MEGASOFT LIMITED HAS PROVIDED SEGMENTAL BREAK-UP BE TWEEN THE SOFTWARE SERVICES SEGMENT AND SOFTWARE PRODUCT SEGM ENT (PAGE 68 OF PB-II), WHICH WAS ALSO ADOPTED BY THE TPO IN HIS SHOW CAUSE NOTICE (PAGE 84 OF PB-I). THE SEGMENTAL RESU LTS I.E., RESULTS PERTAINING TO SOFTWARE SERVICES SEGMENT OF THIS COM PANY WAS: SEGMENTAL OPERATING REVENUES RS.63,71,32,544 SEGMENTAL OPERATING EXPENSES RS.51,75,13,211 OPERATING PROFIT RS.11,96,19,333 OP/TC (PLI) 23.11% 26. IT WAS REITERATED THAT IN THE GIVEN CIRCUMSTAN CES ONLY PLI OF SOFTWARE SERVICE SEGMENT VIZ., 23.11% OUGHT TO H AVE BEEN SELECTED FOR COMPARISON. 27. IT WAS FURTHER SUBMITTED THAT THE LEARNED TPO IN CASE OF OTHER COMPARABLE, SIMILARLY PLACED, HAD ADOPTED THE MARGINS OF ONLY THE SOFTWARE SERVICE SEGMENT FOR COMPARABILITY PURPOSES. CONSISTENT WITH SUCH STAND, IT WAS SUBMITTED THAT T HE MARGINS OF THE SOFTWARE SEGMENT ONLY SHOULD BE ADOPTED IN THE CASE OF MEGASOFT ALSO, IN CONTRAST TO THE ENTITY LEVEL MARG INS. 28. THE MARGINS AT ENTITY LEVEL AND SEGMENT LEVEL OF OTHER COMPARABLES CONSIDERED BY THE TPO IN HIS FIRST SHOW CAUSE NOTICE WERE AS FOLLOWS (PAGE 382 OF PB-I): IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 41 OF 78 29. IN CASE OF ALL THE ABOVE COMPARABLES, THE LEAR NED TPO HAS USED SEGMENTAL MARGINS FOR COMPARABILITY PURPOSE. I N ALL THESE CASES, THE REVENUES FROM SOFTWARE DEVELOPMENT EXCEE DED 75% OF THE TOTAL REVENUES OF THE ENTITY. CONSIDERING MARGI NS OF MEGASOFT AT THE ENTITY LEVEL WOULD BE INCONSISTENT WITH THE TPOS POSITION IN CASE OF OTHER COMPARABLES. IT WAS SUBMITTED THAT A DIFFERENT APPROACH WAS ADOPTED IN CASE OF MEGASOFT POSSIBLY BECAUSE IN CASE OF MEGASOFT, THE MARGINS AT THE ENTITY LEVEL A RE HIGHER THAN THAT AT THE SEGMENT LEVEL; WHEREAS IN CASE OF OTHER COMPARABLES (EG: KALS, SASKEN, TATA ELXSI, GEOMETRIC, R SYSTEM S) MARGINS AT THE SEGMENT LEVEL WERE HIGHER. IT WAS SUBMITTED THA T LEARNED TPOS APPROACH IS ARBITRARY AND WITHOUT BASIS. THE ASSESSEE THEREFORE SUBMITTED THAT IF AT ALL MEGASOFT IS CONS IDERED AS COMPARABLE THEN ONLY THE SEGMENTAL MARGINS, IF AT A LL, SHOULD BE USED FOR COMPARABILITY PURPOSE. BOTH THE SEGMENTS B EING SUBSTANTIALLY DIFFERENT, CONSIDERING THE MARGINS AT ENTITY LEVEL WOULD VITIATE THE COMPARABILITY. 30. ALTERNATIVELY IT WAS SUBMITTED THAT THE PROFIT MARGIN OF 60.23% WAS ABNORMALLY HIGH AND DESERVES TO BE REJEC TED ON THIS GROUND, AS NOT WITHIN THE PARAMETERS OF COMPARABILI TY. IN THIS REGARD, REFERENCE WAS MADE TO THE DECISION OF SPECI AL BENCH OF ITAT CHANDIGARH IN THE CASE OF QUARK SYSTEMS PVT. LTD. (SUPRA) BESIDES SEVERAL OTHER TRIBUNAL DECISIONS LAYING DOW N IDENTICAL PROPOSITION. FURTHER IT WAS SUBMITTED TH AT VISUAL SOFT TECHNOLOGIES LTD. MERGED WITH MEGASOFT LTD. W.E.F. 01.10.2006. THEREFORE THE BOOK RESULTS IN THE YEAR IN WHICH THE MERGER HAS TAKEN PLACE CANNOT BE TAKEN AS A COMPARABLE. IN TH IS REGARD, RELIANCE WAS PLACED ON THE DECISION OF THE MUMBAI B ENCH OF THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 42 OF 78 ITAT IN THE CASE OF EMERSONS & PROCESS MANAGEMENT INDIA PVT. LTD. V. ADDL. CIT 13 TAXMANN.COM 149 . 31. THE LEARNED DR RELIED ON THE ORDER OF THE TPO A ND THE DRP ON THIS ASPECT. 32. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIR ST WE WILL CONSIDER THE SUBMISSION OF THE ASSESSEE THAT COMPAN IES WITH ABNORMAL MARGINS SHOULD NOT BE REGARDED AS COMPARAB LE. IN THE CASE OF QUARK SYSTEMS PVT. LTD. (SUPRA) , THE SPECIAL BENCH HAD TO DEAL WITH CASES WHERE THE RESULTS WERE ABNORMAL. THE SPECIAL BENCH OBSERVED AS FOLLOWS: EVEN IF THE TAXPAYER OR ITS COUNSEL HAD TAKEN DATAMATI CS AS COMPARABLE IN ITS T.P. AUDIT, THE TAXPAYER IS ENTIT LED TO POINT OUT TO THE TRIBUNAL THAT ABOVE ENTERPRISE HAS WRONGLY BEEN TAKEN AS COMPARABLE. IN FACT THERE ARE V AST DIFFERENCES BETWEEN TESTED PARTY AND THE DATAMATICS. THE CASE OF DATAMATICS IS LIKE THAT OF 'IMERCIUS TECHNOLOGIES' REPRESENTING EXTREME POSITIONS. IF IMER CIUS TECHNOLOGIES HAS SUFFERED HEAVY LOSSES AND, THEREFOR E, IT IS NOT TREATED AS COMPARABLE BY THE TAX AUTHORITIES, THEY ALSO HAVE TO CONSIDER THAT THE DATAMATICS HAS EARNED EXTRAORDINARY PROFIT AND HAS A HUGE TURNOVER, BESIDES DIFFERENCES IN ASSETS AND OTHER CHARACTERISTICS REFERR ED TO BY SHRI AGGARWAL. THE ABOVE OBSERVATIONS OF THE SPECIAL BENCH IS A PO INTER TO THE FACT THAT WHERE THERE ARE EXTRAORDINARY PROFITS AND THOSE COMPANIES ARE CONSIDERED BY THE TPO FOR COMPARABILI TY BUT LOSS MAKING COMPANIES ARE NOT CONSIDERED AS COMPARABLE, THAT WOULD IMPROPER. THE TRIBUNAL FOUND THAT SUCH CONTRADICTI ON IN APPROACH SHOULD NOT BE PERMITTED. SIMILARLY IN THE CASE OF M/S. SAP LABS INDIA PVT. LTD. 2010-TII-44-ITAT BANG-TP HAD OBSERVED AS FOLLOWS: 86. AT THE COST OF REPETITION, WE HAVE TO SAY THAT EXTREME CASES SHOULD NOT BE INCLUDED IN SAMPLES AND EXTREME COMPARABLES MEAN NOT ONLY THE POSITIVE HIGHER SIDE BUT ALSO THE LOWER SIDE. IN THE LIST OF 22 COMPARABLES, MANY OF THEM ARE HAVING VERY LOW MARGIN IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 43 OF 78 RATE, NOT ONLY LESS THAN 10 OR 5, EVEN BELOW THAT. WE HAVE ALREADY CONSIDERED THAT THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS GERMAN ASSOCIATE CONCERN HAS CONTEMPLATED A COMPENSATION OF COST PLUS 6 PER CENT, OR 1.5 TIMES OF THE TOTAL WAGES BILL, WHICHEVER I S HIGHER. THIS POINT WE HAVE TO CONSIDER IN THE LIGHT OF THE FACT THAT THE ASSESSEE IS WORKING IN A RISK MITIGATED ENVIRONMENT. THAT IS WHY WE HAVE AGREED WITH THE ARGUMENT OF THE ASSESSEE-COMPANY THAT THERE MAY NOT BE EXTREME PROFITS IN THE CASE OF THE ASSESSEE. WHEN EXTREMES ARE EXCLUDED FROM THE SAMPLES, ALL SORTS OF EXTREMES SHOULD BE AVOIDED. OTHERWISE, SAMPLES SELECTED FOR COMPARATIVE STUDY MAY NOT BE REPRESENTATIVE. 33. EVEN IN THE AFORESAID DECISION THE POINT THAT H AS BEEN EMPHASIZED IS THAT WHEN THE MARGINS OF COMPARABLE C OMPANIES ARE EITHER EXTREMELY LOW OR HIGH, THE APPROACH SHOU LD BE TO ELIMINATE BOTH AND NOT CONSIDER ONLY THE HIGH OR LO W MARGIN COMPARABLES AS IT SUITS EITHER THE TPO OR THE ASSES SEE. 34. AS FAR AS THE PROVISIONS OF THE ACT ARE CONCER NED, THEY LAY DOWN THAT THE COMPARABLE COMPANIES SHOULD BE FUNCTI ONALLY COMPARABLE TO THE TESTED PARTY. THERE ARE NO SPECI FIC STANDARDS OF COMPARABILITY ON THE BASIS OF ABNORMAL PROFITS OR L OSS. RULE 10B(2) PROVIDES THAT THE COMPARABILITY OF AN INTERN ATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRAN SFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSE TS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN E XPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND B ENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 44 OF 78 ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAP ITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE O R RETAIL. 35. THERE IS THEREFORE NO BAR TO CONSIDERING COMPA NIES WITH EITHER ABNORMAL PROFITS OR ABNORMAL LOSSES AS COMPA RABLE TO THE TESTED PARTY, AS LONG AS THEY ARE FUNCTIONALLY COMP ARABLE. THE OECD GUIDELINES AND IN US TP REGULATIONS, THIS QUES TION MAY NOT ARISE AT ALL BECAUSE THOSE REGULATIONS ADVOCATE THE QUARTILE METHOD FOR DETERMINING ALP. INDIAN REGULATIONS SPE CIFICALLY DEVIATE FROM OECD GUIDELINES AND PROVIDE ARITHMETIC MEAN METHOD FOR DETERMINING ALP. IN THE QUARTILE METHOD , COMPANIES THAT FALL IN THE EXTREME QUARTILES GET EXCLUDED AND ONLY THOSE THAT FALL IN THE MIDDLE QUARTILES ARE RECKONED FOR COMPA RABILITY. HENCE, CASES OF EITHER ABNORMAL PROFITS OR LOSSES ( WHICH ARE REFERRED TO AS OUTLINERS) GET AUTOMATICALLY EXCLUDE D. IN THE ARITHMETIC MEAN METHOD, ALL COMPANIES THAT ARE IN T HE SAMPLE ARE CONSIDERED, WITHOUT EXCEPTION AND THE AVERAGE OF AL L THE COMPANIES ARE CONSIDERED AS THE ALP. HENCE, A GENE RAL RULE THAT COMPANIES WITH ABNORMAL PROFITS SHOULD BE EXCLUDED MAY BE IN TUNE WITH THE PRINCIPLES ENUNCIATED IN OECD GUIDELI NES BUT CANNOT BE SAID TO BE IN TUNE WITH INDIAN TP REGULAT IONS. HOWEVER, IF THERE ARE SPECIFIC REASONS FOR ABNORMAL PROFITS OR LOSSES OR OTHER GENERAL REASONS AS TO WHY THEY SHOU LD NOT BE REGARDED AS COMPARABLES, THEN THEY CAN BE EXCLUDED FOR COMPARABILITY. IT IS FOR THE ASSESSEE TO DEMONSTRA TE EXISTENCE OF ABNORMAL FACTORS. 36. IN THE PRESENT CASE FACTORS FOR ABNORMAL PROFI TS HAVE NOT BEEN HIGHLIGHTED BY THE ASSESSEE. IN SUCH CIRCUMST ANCES IT IS NOT POSSIBLE TO ACCEPT THE SUBMISSION OF THE ASSESSEE T O EXCLUDE THIS COMPANY FOR THE PURPOSE OF COMPARISON. 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT AL L THIS COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGMENTAL MA RGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SE GMENT) ALONE SHOULD BE CONSIDERED FOR COMPARABILITY. ON THE AB OVE SUBMISSION, WE FIND THAT THE TPO CONSIDERED THE SEG MENTAL MARGIN (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GE OMETRIC, KALS IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 45 OF 78 INFO SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND T ATA ELXSI. BEFORE DRP THE ASSESSEE POINTED OUT THAT THE SEGMEN TAL MARGIN OF 23.11% ALONE SHOULD BE TAKEN FOR COMPARABILITY. THE DRP HAS NOT GIVEN ANY SPECIFIC FINDING ON THE ABOVE PLEA OF THE ASSESSEE. PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHIC H THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ ., BLUEALLY DIVISION AND XIUS-BCGI DIVISION. XIUS- BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PR ODUCTS ARE SOLD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPL EMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FI T INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (S OFTWARE DEVELOPED) WOULD CONSTITUTE PACKAGED PRODUCT AND AR OUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BOARDING AND LODGING EXPENSE . BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COM PARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE P RODUCTS DEVELOPED (WHICH WAS AKIN TO SOFTWARE DEVELOPMENT) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMEN T OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% O F THE OVERALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25 % OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HA VING DRAWN THE ABOVE CONCLUSION, THE TPO DID NOT BOTHER TO QUA NTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUC T DEVELOPMENT AND SOFTWARE DEVELOPMENT SERVICE BUT AD OPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TER MS OF RULE 10B(3)(B) OF THE RULES, AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIK ELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 46 OF 78 OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN TH E OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 38. NEITHER THE TPO NOR THE DRP HAVE NOTICED THAT THERE IS BOUND TO BE A DIFFERENCE BETWEEN THE ASSESSEE AND M EGASOFT AND THE PROFIT ARISING TO THE MEGASOFT AS A RESULT OF T HE EXISTENCE OF THE SOFTWARE PRODUCT SEGMENT AND NO FINDING HAS BEE N GIVEN THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FOR THIS RE ASON, WE ARE INCLINED TO HOLD THAT THE PROFIT MARGIN OF 23.11% W HICH IS THE MARGIN OF THE SOFTWARE SERVICE SEGMENT BE TAKEN FOR COMPARABILITY. IN VIEW OF THE ABOVE CONCLUSION, WE DO NOT WISH TO GO INTO THE QUESTION AS TO WHETHER LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. 51. RESPECTFULLY FOLLOWING THE DECISION OF THIS TRI BUNAL IN THE CASE OF LOGICA PVT. LTD., (SUPRA) , WE ARE OF THE VIEW THAT ONLY SOFTWARE SERVICES SEGMENT MARGIN OF THE COMPARABLE, MEGASOFT LTD., IS TO BE CONSIDERED. 52. IT WAS NEXT CONTENDED BY THE LD. COUNSEL FOR TH E ASSESSEE THAT THE FOLLOWING 9 COMPANIES OF THE TPOS LIST OF COMPARAB LES HAVE TO BE REJECTED AS FUNCTIONALLY DISSIMILAR TO THAT OF THE ASSESSEE COMPANY IN VIEW OF THE DECISION OF THIS TRIBUNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA P. LTD. V. ACIT IN ITA NO.1174/BANG/2010 :- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 47 OF 78 (I) ACCEL TRANSMATIC LTD. (SEG.) (II) AVANI CINCOM TECHNOLOGIES LTD. (III) CELESTIAL LABS LTD. (IV) E-ZEST SOLUTIONS LTD. (V) HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. (VI) KALS INFORMATION SYSTEMS LTD. (VII) LUCID SOFTWARE LTD. (VIII) QUINTEGRA SOLUTIONS LTD. (IX) THIRDWARE SOLUTIONS LTD. (SEG.) 53. OUT OF THE ABOVE 9 COMPARABLES, KALS INFORMATIO NS SYSTEMS LTD. AND LUCID SOFTWARE ARE FUNCTIONALLY DISSIMILAR TO T HE ASSESSEE COMPANY AND HENCE THEY ARE TO BE EXCLUDED AS COMPARABLES IN LIGHT OF THE TRIBUNALS DECISION IN THE CASE OF CYPRESS SEMICONDUCTORS INDIA P. LTD. (SUPRA) , WHICH HAS BEEN EXTRACTED AT PARA 17 IN THE ORDER FO R AY 2006-07. 54. AS REGARDS THE 3 COMPANIES VIZ., ACCEL TRANSMAT ICS LTD., AVANI CINCOM TECHNOLOGIES LTD. AND CELESTIAL LABS, THIS TRIBUNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA P. LTD. (SUPRA) HAS HELD AS FOLLOWS:- 18. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO .1,2,3 AND 12 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., M/S.ACCEL IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 48 OF 78 TRANSMATIC LIMITED (SEG.), AVANI CINCOM TECHNOLOGIE S LTD., CELESTIAL LABS LIMITED AND KALS INFOSYSTEMS LTD., ARE CONCERN ED, THIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PV T.LTD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE A FORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVI CES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CAS E OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE S AME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VERY SAME 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA ). IN COMING TO THE AFORESAID CONCLUSION, THE TRIBUNAL IN THE CASE OF F IRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) FOLLOWED THE DECI SION RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. VS. DCIT ITA NO.1064/BANG/2011 FOR AY 07-08 ORDER DATED 23.11.20 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CAS E OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA): 18. AS REGARDS THE GROUP 2 COMPANIES WHICH ARE TO BE EXCLUDED AS FUNCTIONALLY DIFFERENT BASED ON THE TRIBUNALS ORDE R IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD., WE FIND THAT THESE COMPANIES ARE- 1) ACCEL TRANSMATIC 2) AVANI CIMCON TECHNOLOGIES LTD. 3) CELESTIAL LABS LTD. 4) KALS INFORMATION SYSTEMS LTD. 19. THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD., WHILE CONSIDERING THE ISSUE OF IMPROPER S ELECTION OF COMPARABLES HAS HELD AS UNDER: (B) AVANI CIMCON TECHNOLOGIES LTD. 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFEREN T FROM THE ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN TH E COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELO PED A IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 49 OF 78 SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITT ED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SA LES APART FROM RENDERING OF SOFTWARE SERVICES AND THEREFORE I S FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS FURTHER SUBMIT TED THAT THE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/2011 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTW ARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAI LS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPARABLE TO THE AS SESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY AN D IT WAS HELD AS FOLLOWS:- 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCO M): HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPE RATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PROFIT R ATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESSEE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PART Y. LEARNED CIT DR HAS PROVIDED A COPY OF PROFIT LOSS A CCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWAR E EXPORTS, HOWEVER, THE DETAILS OF PERCENTAGE OF EXPO RT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THERE FORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERA TION FOR COMPARABILITY ANALYSIS. IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS COM PANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS . THE FOLLOWING FIGURES WERE PLACED BEFORE US:- PARTICULARS FYS 05-06 06-07 07-08 08-09 OPERATING REVENUE 21761611 35477523 29342809 28 039851 OPERATING EXPNS. 16417661 23249646 23359186 311 08949 OPERATING PROFIT 5343950 12227877 5983623 (3 069098) OPERATING MARGIN 32.55% 52.59% 25.62% - 9. 87% IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 50 OF 78 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UN USUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06-07. THE OPERAT ING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXT RAORDINARY YEAR FOR THIS COMPANY. EVEN THE GROWTH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR AS PER NASSCOM WAS 32%. THE GROW TH RATE OF THIS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. I N VIEW OF THE ABOVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAV E BEEN REJECTED AS A COMPARABLE. 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE REASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE ARE FOUND TO B E ACCEPTABLE. THE DECISION OF ITAT (MUMBAI) IN THE C ASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE. (C) CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVELOPMENT C OMPANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- I. IN THE DIRECTORS REPORT (PAGE 20 OF PB-IL), IT IS STATED THAT THE COMPANY HAS APPLIED FOR INCOME TAX CONCES SION FOR IN-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UN DER SECTION 35(2AB) OF THE INCOME TAX ACT. II. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UNDER DEFERRED REVENUE EXPENDITURE (PAGE 31 OF PB-II), IT IS MENTIONED THAT, EXPENDITURE INCURRED ON RESEARCH A ND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS DEF ERRED REVENUE EXPENDITURE AND THE SAME HAS BEEN WRITTEN O FF IN 10 YEARS EQUALLY YEARLY INSTALLMENTS FROM THE YEAR IN WHICH IT IS INCURRED. AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 51 OF 78 EXPENDITURE (PAGE 30 OF PB-II). THIS AMOUNTS TO NE ARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SO FTWARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D AC TIVITIES IS BAD IN LAW. 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISIO N OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (F OR AY 2007-08) IN WHICH THE COMPARABILITY OF THIS COMPANY FOR CLI NICAL TRIAL RESEARCH SEGMENT. THE RELEVANT EXTRACT OF DIS CUSSION REGARDING THIS COMPANY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAG E- 389 OF THE PAPER BOOK WHICH IS AN EXTRACT FROM THE DIRECTORS REPORT WHICH READS AS FOLLOWS: THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TOOL CELSUITE TO DRUG DISCOVERY IN, FINDING THE L EAD MOLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT A CT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYING BIO-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE B EEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY , OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, THE COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS . THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FACILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORI ES IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 52 OF 78 FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELO P NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY WILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA PRADESH. ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALS O IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AND SH OULD BE CONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED B Y THE LEARNED COUNSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELATION TO A SOFTWARE DISCOVERY OF NEW DRUGS. MORE OVER THE COMPANY ALSO IS OWNER OF THE IPR. THERE IS HOW EVER A REFERENCE TO DEVELOPMENT OF A MOLECULE TO TREAT CAN CER USING BIO-INFORMATICS TOOLS FOR WHICH PATENTING PRO CESS WAS ALSO BEING PURSUED. AS EXPLAINED EARLIER IT IS A DIVERSIFIED COMPANY AND THEREFORE CANNOT BE CONSIDE RED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSE E. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIM INATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT T HE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMI NATED. BY NOT RESORTING TO SUCH A PROCESS OF MAKING ADJUST MENT, THE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE AB OVE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARC H IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT TH IS COMPANY IS OWNER OF IPR, IT HAS SOFTWARE FOR DISCOVERY OF N EW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCER. IN THE ULTI MATE ANALYSIS, THE ITAT DID NOT CONSIDER THIS COMPANY AS A COMPARA BLE IN CLINICAL TRIAL SEGMENT, FOR THE REASON THAT THIS CO MPANY HAS DIVERSE BUSINESS. IT WAS SUBMITTED THAT, HOWEVER, FROM THE ABOVE EXTRACTS IT IS CLEAR THAT THIS COMPANY IS NOT INTO SOFTWARE DEVELOPMENT ACTIVITIES, ACCORDINGLY, THIS COMPANY S HOULD BE REJECTED AS A COMPARABLE BEING FUNCTIONALLY DIFFERE NT. 45. FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANS PIRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY W AS CLASSIFIED AS A RESEARCH AND DEVELOPMENT COMPANY. ACCORDING TO THE TPO IN AY 07-08 THIS COMPANY HAS BEEN CLASSI FIED AS SOFTWARE DEVELOPMENT SERVICE PROVIDER IN THE CAPITA LINE/PROWESS DATABASE AS WELL AS IN THE ANNUAL REPORT OF THIS CO MPANY. THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 53 OF 78 TPO HAS RELIED ON THE RESPONSE FROM THIS COMPANY TO A NOTICE U/S.133(6) OF THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. THE AS SESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREAT THIS AS A COMPARABLE HAS POINTED OUT THAT THIS COMPANY PROVIDES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOINFORMATICS SERVICE S AND THAT THE SEGMENTAL DATA FOR EACH ACTIVITY IS NOT AVAILABLE A ND THEREFORE THIS COMPANY SHOULD NOT BE TREATED AS COMPARABLE. BESID ES THE ABOVE, THE ASSESSEE HAS POINT OUT TO SEVERAL REFERE NCES IN THE ANNUAL REPORT FOR 31.3.2007 HIGHLIGHTING THE FACT T HAT THIS COMPANY WAS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PRO VIDES RELATED SOFTWARE DEVELOPMENT SERVICES. THE TPO CAL LED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPAN Y. THE TPO ALSO CALLED FOR DESCRIPTION OF SOFTWARE DEVELOPMENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DATED 29.3.2010 HAS GIVEN DETAILS OF EMPLOYEES WORKING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHETHER ANY S EGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OT HER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISSUE D DRAFT RED HERRING PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH. TH E TPO WANTED TO KNOW AS TO WHETHER THE PRIMARY BUSINESS OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN THE A NNUAL REPORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE O F BIO PRODUCTS AND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFERENCE TO ANY REPLY BY CELESTIAL LABS TO THE ABOVE CLARIFI CATION OF THE TPO. THE TPO WITHOUT ANY BASIS HAS HOWEVER CONCLU DED THAT THE BUSINESS MENTIONED IN THE DRHP ARE THE SERVICES OR BUSINESSES THAT WOULD BE STARTED BY UTILIZING THE F UNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN N O WAY CONNECTED WITH BUSINESS OPERATIONS OF THE COMPANY D URING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISSIONS MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUF ACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THERE IS NO CLEAR BASI S ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE B USINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. WE THEREF ORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY OUGHT NO T TO HAVE BEEN CONSIDERED AS COMPARABLE. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 54 OF 78 55. AS REGARDS ACCEL TRANSMATICS LTD., FOR A.Y. 200 6-07 WE HAVE ALREADY HELD IN PARAS 17 & 18 HEREINABOVE THAT THIS COMPANY IS TO BE EXCLUDED AS A COMPARABLE. HOWEVER, FOR THE PRESENT AY 2007-08, SINCE WITH REGARD TO COMPARABILITY OF ACCEL TRANSMATICS L TD. AS FUNCTIONALLY DISSIMILAR, THE ASSESSEE HAS RAISED ADDITIONAL GROU ND BEFORE THE TRIBUNAL, WE THEREFORE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE WHETHER IT IS FUNCTIONALLY DISSIMILAR, FOLL OWING THE DECISION IN CASE OF M/S. QUARK SYSTEMS INDIA (P) LTD., (2011) 62 DTR 0182. 56. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT. LTD. (SUPRA), WE DIRECT THE AO/TPO TO EXCLUDE THE 2 COMPANIES VIZ., AVANI CINCOM TECHNOLO GIES LTD. AND CELESTIAL LABS. FROM THE FINAL LIST OF TPOS COMPAR ABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. 57. AS REGARDS THE COMPARABLES SELECTED BY THE TPO VIZ., E-ZEST SOLUTIONS LTD., HELIOS & MATHESON INFORMATION TECHN OLOGY LTD., QUINTEGRA SOLUTIONS LTD. AND THIRDWARE SOLUTIONS LTD. (SEG); THIS TRIBUNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA P. LTD. (SUPRA) HAS HELD AS FOLLOWS:- 26. AS FAR AS COMPARABLE COMPANIES AT SL.NO.5, 1 8, 19 AND 25 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O ARE CONCERNED, VIZ., M/S. E-ZEST SOLUTIONS LTD., PERSISTENT SYSTE MS LTD., QUINTEGRA SOLUTIONS LIMITED AND THIRD WARE SOLUTIONS LTD., TH IS TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. I.T (T.P) A. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 55 OF 78 NO.1303/BANG/2012 (ASSESSMENT YEAR : 2008-09) ORDER DATED 28.11.2013 WAS PLEASED TO HOLD THAT THE AFORESAID C OMPANIES ARE NOT COMPARABLE WITH A COMPANY ENGAGED IN SOFTWARE DEVEL OPMENT SERVICES SUCH AS THE ASSESSEE. THE FOLLOWING WERE THE RELEV ANT OBSERVATIONS OF THE TRIBUNAL: 14. E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COM PARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE I NCLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED T HE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUND THAT AS PER TH E INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SER VICES AND SATISFIES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTAT IVE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FR OM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY D IFFERENT TO THE ASSESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E-BUSINESS CONSULT ING SERVICES, CONSISTING OF WEB STRATEGY SERVICES, I T DESIGN SER VICES AND IN TECHNOLOGY CONSULTING SERVICES INCLUDING PRODUCT DE VELOPMENT CONSULTING SERVICES. THESE SERVICES, THE LEARNED AU THORISED REPRESENTATIVE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMEN TAL DATA IN ITS ANNUAL REPORT. THE LEARNED AUTHORISED REPRESENT ATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIVE INFORMATION ON THE BUS INESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAIL S AVAILABLE ON THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WH ILE EVALUATING THE COMPANYS FUNCTIONAL PROFILE. IT IS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO S ERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CO NSIDERED AS COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES AND RE LIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF CA PITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961 (HYD)/2011 DT.23.11.2012 AND PRAYED THAT IN VIEW OF THE ABOVE REASONS, THIS IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 56 OF 78 COMPANY I.E. E-ZEST SOLUTIONS LTD., OUGHT TO BE OMI TTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN TH E LIST OF COMPARBALES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE NOTICE UNDER SECTION 13 3(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVIC ES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVIC ES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOP MENT SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON RECO RD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMEN T SERVICES, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERING PR ODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICE S WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BEE N HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF C APITAL I-Q INFORMATION SYSTEMS (INDIA) (P) LTD. SUPRA) THAT KP O SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID D ECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E-ZEST SOLUTI ONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED. 15. THIRDWARE SOLUTIONS LTD. (SEGMENT) 15.1 THIS COMPANY WAS PROPOSED FOR INCLUSION IN TH E LIST OF COMPARABLES BY THE TPO. BEFORE THE TPO, THE ASSESSE E OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COM PARABLES ON THE GROUND THAT ITS TURNOVER WAS IN EXCESS OF RS.500 CR ORES. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, IT IS IN THE BUSINESS OF PRODUCT DEVELOPM ENT AND TRADING IN SOFTWARE AND GIVING LICENSES FOR USE OF SOFTWARE . IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THA T :- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 57 OF 78 (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTIO N. IT HAS BEEN POINTED OUT FROM THE ANNUAL REPORT THAT THE COMPANY HAS NOT PROVIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACC OUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPME NT SERVICES. (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD . (2008-TII- 04-ITAT-PUNE-TP), THE TRIBUNAL HAS DIRECTED THAT TH IS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PRO VIDERS, AS ITS INCOME INCLUDES INCOME FROM SALE OF LICENCES WHICH HAS INCREASED THE MARGINS OF THE COMPANY. THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THE TRIBUNAL (S UPRA), THIS COMPANY OUGHT TO BE OMITTED FROM THE LIST OF COMPAR ABLES. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE LIST OF COMPARABLES. 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE MATERIAL ON RECORD THAT THE COMPANY IS ENGAGED IN P RODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, THE SEGMENTAL PROFIT AND LOS S ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPME NT ARE NOT GIVEN SEPARATELY. FURTHER, AS POINTED OUT BY THE LE ARNED AUTHORISED REPRESENTATIVE, THE PUNE BENCH OF THE TR IBUNAL IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (SUPRA) HAS DIRECTED THAT SINCE THE INCOME OF THIS COMPANY INCLUDES INCO ME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABL E FOR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFT WARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE M ATTER AND FOLLOWING THE AFORE CITED DECISION OF THE PUNE TRIB UNAL (SUPRA), WE DIRECT THAT THIS COMPANY BE OMITTED FROM THE LIS T OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN T HE CASE ON HAND. 17. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 58 OF 78 18. QUINTEGRA SOLUTIONS LTD. 18.1 THIS CASE WAS SELECTED BY THE TPO AS A COMPAR ABLE. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUS ION OF THIS COMPANY IN THE SET OF COMPARABLES ON THE GROUND THA T THIS COMPANY IS FUNCTIONALLY DIFFERENT AND ALSO THAT THE RE WERE PECULIAR ECONOMIC CIRCUMSTANCES IN THE FORM OF ACQU ISITIONS MADE DURING THE YEAR. THE TPO REJECTED THE ASSESSEE 'S OBJECTIONS HOLDING THAT THIS COMPANY QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. ON THE ISSUE OF ACQUISITIONS, THE TPO REJECTED THE ASSESSEE'S OBJECTIONS OBSERVING THAT THE ASSESSEE HAS NOT ADDU CED ANY EVIDENCE AS TO HOW THIS EVENT HAD AN ANY INFLUENCE ON THE PRICING OR THE MARGIN EARNED. 18.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INC LUSION OF THIS COMPANY FOR THE REASON THAT IT IS FUNCTIONALLY DIFF ERENT AND ALSO THAT THERE ARE OTHER FACTORS FOR WHICH THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. IT WAS SUBMITTED THAT, (I) QUINTEGRA SOLUTIONS LTD., THE COMPANY UNDER CON SIDERATION, IS ENGAGED IN PRODUCT ENGINEERING SERVICES AND NOT IN PURELY SOFTWARE DEVELOPMENT SERVICES. THE ANNUAL REPORT OF THIS COMPANY ALSO STATES THAT IT IS ENGAGED IN PREPARATO RY SOFTWARE PRODUCTS AND IS THEREFORE NOT SIMILAR TO THE ASSESS EE IN THE CASE ON HAND. (II) IN ITS ANNUAL REPORT, THE SERVICES RENDERED BY THE COMPANY ARE DESCRIBED AS UNDER : LEVERAGING ITS PROVEN GLOBAL MODEL, QUINTEGRA PRO VIDES A FULL RANGE OF CUSTOM IT SOLUTIONS (SUCH AS DEVELO PMENT, TESTING, MAINTENANCE, SAP, PRODUCT ENGINEERING AND INFRASTRUCTURE MANAGEMENT SERVICES), PROPRIETARY SOFTWARE PRODUCTS AND CONSULTANCY SERVICES IN IT ON VARIOUS PLATFORMS AND TECHNOLOGIES. (III) THIS COMPANY IS ALSO ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITIES WHICH RESULTED IN THE CREATION OF INTELL ECTUAL PROPRIETARY RIGHTS (IPRS) AS CAN BE EVIDENCED FROM THE STATEMEN TS MADE IN THE ANNUAL REPORT OF THE COMPANY FOR THE PERIOD UND ER CONSIDERATION, WHICH IS AS UNDER : IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 59 OF 78 QUINTEGRA HAS TAKEN VARIOUS MEASURES TO PRESERVE ITS INTELLECTUAL PROPERTY. ACCORDINGLY, SOME OF THE PRO DUCTS DEVELOPED BY THE COMPANY HAVE BEEN COVERED BY THE PATENT RIGHTS. THE COMPANY HAS ALSO APPLIED FOR TRADE MARK REGISTRATION FOR ONE OF ITS PRODUCTS, VIZ. INV ESTOR PROTECTION INDEX FUND (IPIF). THESE MEASURES WILL H ELP THE COMPANY ENHANCE ITS PRODUCTS VALUE AND ALSO MIT IGATE RISKS. (IV) THE TPO HAS APPLIED THE FILTER OF EXCLUDING CO MPANIES HAVING PECULIAR ECONOMIC CIRCUMSTANCES. QUINTEGRA F AILS THE TPOS OWN FILTER SINCE THERE HAVE BEEN ACQUISITIONS IN THIS CASE, AS IS EVIDENCED FROM THE COMPANYS ANNUAL REPORT FO R F.Y. 2007-08, THE PERIOD UNDER CONSIDERATION. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE SUBMISSIONS MADE ABOVE, IT IS CLEAR THAT INTER ALIA , THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BEING FUNCTIONALLY DI FFERENT AND POSSESSING ITS OWN INTANGIBLES / IPRS, IT CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND AND THEREFORE OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES F OR THE PERIOD UNDER CONSIDERATION. 18.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE SET OF COMPARABLES TO THE ASSESSEE FOR THE PERIOD U NDER CONSIDERATION. 18.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS BROUGHT ON RECORD THAT THIS COMPANY I.E.QUI NTEGRA SOLUTIONS LTD. IS ENGAGED IN PRODUCT ENGINEERING SE RVICES AND IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. IT IS ALSO SEEN THAT THIS COMPANY IS ALSO ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS AND H AS SUBSTANTIAL R&D ACTIVITY WHICH HAS RESULTED IN CREATION OF ITS IPRS. HAVING APPLIED FOR TRADE MARK REGISTRATION OF ITS PRODUCTS , IT EVIDENCES THE FACT THAT THIS COMPANY OWNS INTANGIBLE ASSETS. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER .COM PVT. LTD. (ITA NO.227/BANG/2010 DT.9.11.2012) HAS HELD T HAT IF A COMPANY POSSESSES OR OWNS INTANGIBLES OR IPRS, THEN IT CANNOT BE CONSIDERED AS A COMPARABLE COMPANY TO ONE THAT DOES NOT OWN IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 60 OF 78 INTANGIBLES AND REQUIRES TO BE OMITTED FORM THE LIS T OF COMPARABLES, AS IN THE CASE ON HAND. 18.3.2 WE ALSO FIND FROM THE ANNUAL REPORT OF QUI NTEGRA SOLUTIONS LTD. THAT THERE HAVE BEEN ACQUISITIONS MA DE BY IT IN THE PERIOD UNDER CONSIDERATION. IT IS SETTLED PRINCIPLE THAT WHERE EXTRAORDINARY EVENTS HAVE TAKEN PLACE, WHICH HAS AN EFFECT ON THE PERFORMANCE OF THE COMPANY, THEN THAT COMPANY SHALL BE REMOVED FROM THE LIST OF COMPARABLES. 18.3.3 RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER. COM PVT. LTD. (SUPRA), WE DIRECT THAT THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLES IN THE CAS E ON HAND SINCE IT IS ENGAGED IN PROPRIETARY SOFTWARE PRODUCT S AND OWNS ITS OWN INTANGIBLES UNLIKE THE ASSESSEE IN THE CASE ON HAND WHO IS A SOFTWARE SERVICE PROVIDER. 27. 28. AS FAR AS COMPARABLE CHOSEN BY THE TPO AT SL. NO.8 OF THE FINAL LIST OF COMPARABLE VIZ., M/S. HELIOS & MATHE SON INFORMATION TECHNOLOGY LTD., WE FIND THAT THE SAID COMPANY HAS BEEN HELD TO BE NOT COMPARABLE WITH A SOFTWARE SERVICE PROVIDER LIKE TH E ASSESSEE BY THE ITAT PUNE BENCH IN THE CASE OF PTC SOFTWARE (INDIA )PVT.LTD. ITA.NO.1605/PN/2011 (ASSTT. YEAR : 2007-08) ORDER D ATED 30.4.2013. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WI TH REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIO S & MATHESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION S OLUTIONS LTD. (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE L IST OF COMPARABLES IS TO BE EFFECT THAT THEY ARE FUNCTIONA LLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUD ED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CONCERNS ARE ENGAGED IN DEVELOPMENT AND S ALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIFFERENT F ROM THE SERVICES UNDERTAKEN BY THE ASSESSEE IN ITS IT-SERVI CES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE OR DER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMA TION IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 61 OF 78 SYSTEMS LTD., IS TO THE EFFECT THAT THE SAID CONCER NS APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE DEVELOPMENT OF S OFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESS EE COMPANY. THE SAID CONCERN IS ENGAGED IN TWO SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATION SOFTWARE SEGMENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS ENGAGED IN SOFTWARE SERVICES. T HE STAND OF THE ASSESSEE IS THAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F.Y. 2006-07 REVEALS THAT THE APPLICATION SOFTW ARE SEGMENT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCT S AND SOFTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRITTEN SUBMISSIONS, COPY OF WHICH IS PLACED IN THE PAPER B OOK AT PAGE 420.3 TO 420.4. THE ASSESSEE FURTHER POINTED OUT TH AT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTWARE SERVICES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPLICATION SOFTWA RE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEES IT-SERVICES SEGMENT. THE TPO HOWEVER, NO TICED THAT THOUGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODU CTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PRODUCTS AS THERE WERE NO COST OF PURCHAS ES DEBITED IN THE PROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED TH AT THE QUANTUM OF REVENUE FROM SALE OF PRODUCTS WAS NOT AV AILABLE AS PER THE FINANCIAL STATEMENTS OF THE SAID CONCERN, B UT AS THE BASIC FUNCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPME NT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEES SEGMENT OF IT-SERVICES. 18. BEFORE US, APART FROM REITERATING THE POINTS R AISED BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIATELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALLY INCOMPARABLE. FOR THE SAID PURPOSE, OU R REFERENCE HAS BEEN INVITED TO PAGES 421 TO 542 OF THE PAPER B OOK, WHICH IS THE COPY OF THE TRANSFER PRICING STUDY UNDERTAKEN B Y THE ASSESSEE FOR THE A.Y. 2006-07, AND IN PARTICULAR, ATTENTION WAS INVITED TO PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REFLECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 62 OF 78 A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICAT ION FOR THE TPO TO CONSIDER THE SAID CONCERN AS FUNCTIONALLY CO MPARABLE IN THE INSTANT ASSESSMENT YEAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT TH E SAID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH T HE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN TH E PRESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFER RED TO IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORIT IES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID C ONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WA S QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESS EE IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER I S THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDERS OF THE LOWER AU THORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAID C ONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRE CEDING YEAR. THEREFORE, HAVING REGARD TO THE FACTUAL ASPECTS BRO UGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERTED THAT THE APPLICA TION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO TH E ASSESSEES SEGMENT OF IT SERVICES. 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHE SON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISE D SIMILAR ARGUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTI ONS LTD. (SEG). WE HAVE PERUSED THE RELEVANT PARA OF THE ORD ER OF THE TPO I.E., 6.3.21, IN TERMS OF WHICH THE SAID CONCERN HA S BEEN INCLUDED AS A COMPARABLE CONCERN. THE ASSESSEE POINTED OUT T HAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG), IN T HE INSTANT CASE ALSO FOR A.Y. 2006-07 THE SAID CONCERN WAS FOU ND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TR ANSFER PRICING STUDY AND THE SAID POSITION WAS NOT DISTURBED BY TH E TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY, PLA CED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESAID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTA NT CASE ALSO WE FIND THAT THE SAID CONCERN IS LIABLE TO BE EXCLU DED FROM THE LIST OF COMPARABLES. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 63 OF 78 58. WE DIRECT THE AO TO DECIDE WHETHER TO EXCLUDE T HE AFORESAID COMPANIES I.E., E-ZEST SOLUTIONS LTD., HELIOS & MAT HESON INFORMATION TECHNOLOGY LTD., QUINTEGRA SOLUTIONS LTD. AND THIRD WARE SOLUTIONS LTD. (SEG) FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP, FOLLOWING THE DECISION OF THE TRIB UNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT. LTD., (SUPRA) . 59. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT GEOMETRIC LTD. (SEG). SELECTED BY THE TPO AS A COMPARABLE HAS TO BE EXCLUDED AS ITS RPT EXCEEDS 15% IN VIEW OF THE DECISION OF THE TRIB UNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 AND LOGICAL PVT. LTD. (SUPRA) . 60. THIS TRIBUNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT. LTD., (SUPRA) HAS HELD THAT THE RPT OF GEOMETRIC LTD. EXCEEDS 15 % AND SUCH COMPANY SHOULD NOT BE TAKEN AS A COMPARABLE. THE R ELEVANT OBSERVATIONS OF THE TRIBUNAL HAVE BEEN EXTRACTED AT PARA 22 OF T HIS ORDER WHILE DEALING WITH A.Y. 2006-07. FOLLOWING THE AFORESAID DECISI ON, GEOMETRIC LTD. IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE S FOR A.Y. 2007-08. 61. SIMILARLY, IN THE A.Y. 2006-07 IN THE ASSESSEE S OWN CASE, FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUN AL IN THE CASE OF CYPRESS SEMICONDUCTOR INDIA P. LTD. (SUPRA), WE HAVE ALREADY HELD AT PARAS 20 & 21 HEREINABOVE THAT THE COMPANIES VIZ., IGATE GLOBAL S OLUTIONS LTD. (SEG.), IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 64 OF 78 MINDTREE CONSULTING LTD., SASKEN COMMUNICATION LTD. (SEG.) AND FLEXTRONICS SOFTWARE SYSTEMS LTD., HAVING TURNOVER EXCEEDING RS.200 CRORES BE EXCLUDED FROM THE FINAL LIST OF COMPARABL ES SELECTED BY THE TPO. ACCORDINGLY, FLEXTRONICS LTD. IS DIRECTED TO BE EX CLUDED FROM THE LIST OF COMPARABLES FOR THE A.Y. 2007-08. THE OTHER 3 COMP ANIES VIZ., IGATE GLOBAL SOLUTIONS LTD. (SEG.), MINDTREE CONSULTING L TD. AND SASKEN COMMUNICATION LTD. (SEG.) SOUGHT FOR EXCLUSION BY T HE ASSESSEE BY WAY OF ADDITIONAL GROUNDS ARE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER TO DECIDE WHETHER THESE ARE TO BE EXCLUDED FROM THE FI NAL LIST OF COMPARABLES ON THE TURNOVER FILTER EXCEEDING RS.200 CRORES, FOL LOWING THE DECISIONS OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (ITA NO .1054/BANG/2011) AND CYPRESS SEMICONDUCTOR INDIA P. LTD. V. DCIT, ITA NO .1167/BANG/2010 DATED 27.03.2015 . 62. AS FAR AS COMPARABLE CHOSEN BY THE TPO VIZ., M/ S. INFOSYS TECHNOLOGIES LIMITED, TATA ELXSI LTD. (SEG.) & WIPR O LIMITED ARE CONCERNED, THE LD. COUNSEL FOR THE ASSESSEE SUBMIT TED THAT THESE COMPANIES HAVE TO BE EXCLUDED ON APPLICATION OF MOR E THAN ONE FILTER. THESE COMPANIES ARE FUNCTIONALLY DISSIMILAR IN VIEW OF THE DECISION OF THIS TRIBUNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT. LTD. (SUPRA) AND M/S. CURAM SOFTWARE INTERNATIONAL PVT. LTD. VS. ITO ITA NO.1280/BANG/2012 FOR AY 08-09 ORDER DATED 31.7.201 3, WHEREIN IT WAS HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABL E COMPANIES IN THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 65 OF 78 CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. TH E FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CASE OF M/S.CURAM SOFT WARE INTERNATIONAL PVT.LTD.(SUPRA):- 12. (4) INFOSYS TECHNOLOGIES LTD. 12.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND A TTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTION S RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASP ECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS C OMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THI S CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPA NY TO THIS EFFECT WHICH IS AS UNDER :- (I) THE COMPANY HAS AN INTELLECTUAL PROPERTY (IP) CELL TO GUIDE ITS EMPLOYEES TO LEVERAGE THE POWER OF IP FOR THEIR GRO WTH. IN 2008, THIS COMPANY GENERATED OVER 102 INVENTION DISCLOSURES AN D FILED AN AGGREGATE 10 PATENTS IN INDIA AND THE USA. TILL DA TE THIS COMPANY HAS FILED AN AGGREGATE OF 119 PATENT APPLICATIONS (PEND ING) IN INDIA AND USA OUT OF WHICH 2 HAVE BEEN GRANTED IN THE US. (II) THIS COMPANY HAS SUBSTANTIAL REVENUES FROM SO FTWARE PRODUCTS AND THE BREAK-UP OF THE SOFTWARE PRODUCT REVENUES IS NO T AVAILABLE. (III) THIS COMPANY HAS INCURRED HUGE RESEARCH AND D EVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATELY RS.200 CR ORES. (IV) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWARE PRODUCT US ED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 66 OF 78 (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLO WING JUDICIAL DECISIONS:- (A) ITAT, DELHI BENCH DECISION IN THE CASE OF AGNIT Y INDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010 ) AND (B) TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (IT A NO.1054/BANG/2011) 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF O PERATIONS AND THE OPERATING MARGINS OF THIS COMPANY HAVE NOT BEEN EXT RAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATI VE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FI ND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABL ISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSES SMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. THE ARGUMENT PUT FORTH BY ASSESSEE'S IS THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY C OMPARABLE SINCE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES F ROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REV ENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. I N THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITT ED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. 13.0 (5) WIPRO LIMITED 13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY T HE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES OR SEVERAL GROUN DS LIKE FUNCTIONAL DIS-SIMILARITY, BRAND VALUE, SIZE, ETC. THE TPO, H OWEVER, BRUSHED ASIDE THE OBJECTIONS OF THE ASSESSEE AND INCLUDED THIS CO MPANY IN THE SET OF COMPARABLES. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 67 OF 78 13.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE FOR SEV ERAL REASONS, WHICH ARE AS UNDER : (I) THIS COMPANY OWNS SIGNIFICANT INTANGIBLES IN TH E NATURE OF CUSTOMER RELATED INTANGIBLES AND TECHNOLOGY RELATED INTANGIB LES AND QUOTED EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY IN THE SUBMISSIONS MADE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCIA L STATEMENTS FOR COMPARABILITY PURPOSES AND FOR COMPUTING THE MARGIN S, WHICH CONTRADICTS THE TPOS OWN FILTER OF REJECTING COMP ANIES WITH CONSOLIDATED FINANCIAL STATEMENTS. 13.3. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE SET OF COMPARABLES. 13.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MERIT I N THE CONTENTIONS OF THE ASSESSEE FOR EXCLUSION OF THIS COMPANY FROM THE SET OF COMPARABLES. IT IS SEEN THAT THIS COMPANY IS ENGAGED BOTH IN SOF TWARE DEVELOPMENT AND PRODUCT DEVELOPMENT SERVICES. THERE IS NO INFO RMATION ON THE SEGMENTAL BIFURCATION OF REVENUE FROM SALE OF PRODU CT AND SOFTWARE SERVICES. THE TPO APPEARS TO HAVE ADOPTED THIS COM PANY AS A COMPARABLE WITHOUT DEMONSTRATING HOW THE COMPANY SA TISFIES THE SOFTWARE DEVELOPMENT SALES 75% OF THE TOTAL RE VENUE FILTER ADOPTED BY HIM. ANOTHER MAJOR FLAW IN THE COMPARABILITY AN ALYSIS CARRIED OUT BY THE TPO IS THAT HE ADOPTED COMPARISON OF THE CON SOLIDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NOT AN APPROPRIATE COMPARISON. 13.4.2 WE ALSO FIND THAT THIS COMPANY OWNS INTELLE CTUAL PROPERTY IN THE FORM OF REGISTERED PATENTS AND SEVE RAL PENDING APPLICATIONS FOR GRANT OF PATENTS. IN THIS REGARD, THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (ITA NO.227/BANG/2010) HAS HELD THAT A COMPANY OWNING IN TANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY SUCH INTANGIBLE AND HENCE DOES NOT HAVE AN ADDI TIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CASE ON HAND DO ES NOT OWN ANY INTANGIBLES, FOLLOWING THE AFORESAID DECISION OF T HE CO-ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOMER.COM PVT. LTD. (SUPR A), WE HOLD THAT THIS IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 68 OF 78 COMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO OMIT THIS COMPANY FROM THE SET OF COMPARABLE COMPANIES IN THE CASE ON HAND FOR THE YEAR UNDER CONSIDERATION. 14.0 (6) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNC TIONAL DIS-SIMILARITY, SIGNIFICANT R&D ACTIVITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, REJECTED THE CONTENTION PUT FORTH BY THE ASSESSEE A ND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. 14.2 BEFORE US, IT WAS REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT PERFO RMS A VARIETY OF FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT AND SERVIC ES SEGMENT NAMELY (A) PRODUCT DESIGN SERVICES (B) INNOVATION DESIGN ENGINEERING AND (C) VISUAL COMPUTING LABS. IN THE SUBMISSIONS MADE THE ASSESSEE HAD QUOTED REL EVANT PORTIONS FROM THE ANNUAL REPORT OF THE COMPANY TO THIS EFFECT. IN VIEW OF THIS, THE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE STAND O THE TPO IN INCLUDING THIS COM PANY IN THE LIST OF COMPARABLES. 14.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. FROM THE DETAIL S ON RECORD, WE FIND THAT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODU CT DESIGNING SERVICES AND NOT PURELY SOFTWARE DEVELOPMENT SERVIC ES. THE DETAILS IN THE ANNUAL REPORT SHOW THAT THE SEGMENT SOFTWARE D EVELOPMENT SERVICES RELATES TO DESIGN SERVICES AND ARE NOT SI MILAR TO SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MU M/2011) HAS IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 69 OF 78 HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEVELOP MENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONALLY COMPARABLE. I N THIS CONTEXT THE RELEVANT PORTION OF THIS ORDER IS EXTRACTED AND REP RODUCED BELOW :- . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFERENT FR OM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUC T 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 P ROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON T HESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY AS FIT FOR COMPARA BILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSE SSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PORT ION. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL RE PORT OF THIS COMPANY PRODUCED BEFORE US, THE FACTS PERTAINING TO TATA ELXSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 2007-08 TO ASSESSMENT YEAR 2008-09. WE, THEREFORE, HOLD THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLUSION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDERED ACCORDINGLY. 63. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT. LTD. (SUPRA) AND M/S. CURAM SOFTWARE INTERNATIONAL PVT. LTD. (SUPRA) , WE DIRECT THE AO/TPO TO EXCLUDE THESE COMPANIES VIZ., INFOSYS TECHNOLOGIES LTD., TATA ELX SI LTD. (SEG) AND WIPRO LTD. (SEG) FROM THE FINAL LIST OF COMPARABLE COMPAN IES FOR THE PURPOSE OF DETERMINING ALP. 64. AS REGARDS PERSISTENT SYSTEMS LTD., THE SAME HA S BEEN DEALT WITH IN THE ASSESSEES OWN CASE FOR A.Y. 2006-07 HEREINABOV E AT PARA 21 AND SET IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 70 OF 78 ASIDE TO THE ASSESSING OFFICER TO EXAMINE WHETHER T HIS COMPANY HAVING TURNOVER EXCEEDING RS.200 CRORES IS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES SELECTED BY THE TPO IN THE LIGHT OF DE CISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CYPRESS SEMICONDUCTOR INDIA P. LTD. (ITA NO.1167/BANG/2010 DATED 27.03.2015). ACCORDINGLY, FOR THE PRESENT AY 2007-08 ALSO, THE ISSUE IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER WITH SIMILAR OBSERVATIONS. 65. WITH RESPECT TO EXCLUSION OF ISHIR INFOTECH LT D. AS A COMPARABLE, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT HAS TO BE REJECTED AS FAILING THE TPOS OWN FILTER OF 25% EMPLOYEE COST. RELIANC E WAS PLACED ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT. LTD. (SUPRA) , WHEREIN IT WAS HELD AS FOLLOWS:- 20. AS FAR AS COMPARABLE COMPANIES LISTED AT SL. NO.11 & 14 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWARE LTD., IS CONCERNED , THIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.L TD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE A FORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVI CES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CAS E OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE S AME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VERY SAME 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA ). THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA): 22. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE BASIS OF THE FINDING OF THIS TRI BUNAL IN THE IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 71 OF 78 CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. DT 22.2.2013, WHEREIN AT PAGES 17 AND 22 OF ITS OR DER THE DISTINCTIONS AS TO WHY THESE COMPANIES SHOULD BE EX CLUDED ARE BROUGHT OUT. HE SUBMITTED THAT THE FACTS OF THE CA SE BEFORE US ARE SIMILAR AND, THEREFORE, THE SAID DECISION IS APPLIC ABLE TO THE ASSESSEE'S CASE ALSO. 23. THE LEARNED DR HOWEVER OBJECTED TO THE EXCLUSIO N OF THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. ON A CAREFUL PERUSAL OF THE MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. (CITED SUPRA) HAS TAKEN A NOTE OF DISSIMILARITIES B ETWEEN THE ASSESSEE THEREIN AND LUCID SOFTWARE LTD. AS OBSERV ED THEREIN LUCID SOFTWARE LTD. COMPANY IS ALSO INVOLVED IN THE DEVELOPMENT OF SOFTWARE AS COMPARED TO THE ASSESSEE , WHICH IS ONLY INTO SOFTWARE SERVICES. SIMILARLY, AS REGARDS ISHIR INFOTECH LTD., THE TRIBUNAL HAS CONSIDERED THE DECISION OF T HE TRIBUNAL IN THE CASE OF 24/7 CO. PVT. LTD TO HOLD THAT ISHIR IN FOTECH IS ALSO OUT-SOURCING ITS WORK AND, THEREFORE, HAS NOT SATIS FIED THE 25% EMPLOYEE COST FILTER AND THUS HAS TO BE EXCLUDED FR OM THE LIST OF COMPARABLES. AS THE FACTS OF THE CASE BEFORE US AR E SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH, WE HOLD THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUD ED. 66. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT. LTD. (SUPRA), ISHIR INFOTECH LTD. IS DIRECTED TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE CO MPANIES FOR THE PURPOSE OF DETERMINING ALP. 67. AFTER EXCLUSION OF THE ABOVE 19 COMPARABLE COMP ANIES, THE ASSESSEE SUBMITTED THAT ARITHMETIC MEAN OF THE REMA INING 7 COMPARABLES WOULD BE AS FOLLOWS:- IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 72 OF 78 68. THE ASSESSEE SUBMITTED THAT +/- 5% OF THE ARITH METICAL MEAN FOR SOFTWARE DEVELOPMENT SERVICES ARE AS FOLLOWS:- 69. THEREFORE, THE AO HAS TO DETERMINE WHETHER THE NCP MARGIN OF THE ASSESSEE COMPANY WOULD BE WITHIN THE RANGE OF + / - 5% OF THE ARITHMETICAL MEAN AND IF SO, THE TP ADJUSTMENT MADE BY THE TPO I S LIABLE TO BE SET ASIDE. ACCORDINGLY WE SET ASIDE THE ISSUE TO THE F ILE OF AO FOR DETERMINATION OF NCP MARGIN. 70. THE NEXT ISSUE THAT ARISES FOR CONSIDERATION IS WITH RESPECT TO INCLUSION OF REIMBURSEMENT OF EXPENSES IN THE OPERA TING COST AS WELL AS OPERATING REVENUE OF THE ASSESSEE COMPANY. THE TPO HAS INCLUDED THE REIMBURSEMENT OF EXPENSES RECEIVED AMOUNTING TO RS. 2,935,123/- AS PART OF THE COST BASE FOR APPLYING THE ADJUSTED OPERATIN G COST PLUS MARKUP. IN IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 73 OF 78 THIS REGARD, THE ASSESSEE SUBMITTED THAT THE REIMBU RSEMENT OF EXPENSES RECEIVED BY THE COMPANY WAS INCURRED BY IT ON BEHAL F OF ITS AES, FOLLOWING THE POLICY OF REIMBURSING SUCH EXPENSES ON COST TO COST BASIS AND NO SERVICES HAVE BEEN RENDERED BY THE ASSESSEE IN RELA TION TO THE REIMBURSEMENTS, THEREFORE, REIMBURSEMENTS PURELY RE LATE TO THIRD PARTY EXPENSES INCURRED ON BEHALF OF THE AES. IT WAS SUBM ITTED THAT THE COMPANY HAD RECEIVED REIMBURSEMENT OF THESE EXPENSES AT COS T FROM ITS AES AND CONSEQUENTLY, THE AMOUNT RECEIVED/RECEIVABLE IS DEE MED TO BE THE ARMS LENGTH PRICE. 71. WITHOUT PREJUDICE TO THE ABOVE ARGUMENT, THE LD . COUNSEL FOR THE ASSESSEE ARGUED THAT EVEN IF THE REIMBURSEMENT OF E XPENSES RECEIVED WAS CONSIDERED IN BOTH OPERATING INCOME AND EXPENSE, TH E NCP MARGIN OF THE ASSESSEE WOULD BE 11.41% WHICH IS WITHIN THE RANGE OF + / - 5% OF THE ARITHMETICAL MEAN OF COMPARABLE COMPANIES AS UNDER: - OPERATING INCOME (INCLUDING REIMBURSEMENT OF RS.2,9 35,123) 524,740,693 OPERATING EXPENSES (INCLUDING REIMBURSEMENT OF RS.2 ,935,123) 470,998,591 OPERATING PROFIT (OP. INCOME OP. EXPENSES) 25,517 ,383 OPERATING/NET MARGIN (OP/TC) 11.41% 72. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT THE ASSESSEE COMPANY HAS RECEIVED REIMBURSEMENT OF THESE EXPENSE S AS COST FROM ITS AE AND CONSEQUENTLY THE AMOUNT RECEIVED/RECEIVABLE IS DEEMED TO BE AT ARMS LENGTH PRICE. HENCE THIS GROUND OF APPEAL IS ALLOWED. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 74 OF 78 73. WITH RESPECT TO THE NEXT ISSUE OF WORKING CAPIT AL ADJUSTMENT, THE LD. COUNSEL SUBMITTED THAT THOUGH THE RESULTS OF +/- 5% OF THE ARITHMETICAL MEAN FOR SOFTWARE DEVELOPMENT SERVICES IS ACHIEVED BY APPLYING WORKING CAPITAL ADJUSTMENT AS COMPUTED BY THE TPO, THE AO/T PO ERRED IN NOT CONSIDERING THE ADVANCES RECEIVED FROM THE CUSTOMER S AS PART OF TRADE PAYABLES IN DETERMINATION OF WORKING CAPITAL ADJUST MENT AND THEREBY ERRED IN NOT PROVIDING AN APPROPRIATE ADJUSTMENT TOWARDS WORKING CAPITAL. IT WAS SUBMITTED THAT IN THE TP ORDER, THE TPO HAS DETERMI NED THE ARMS LENGTH MARKUP AS 23.70% (AFTER WORKING CAPITAL ADJUSTMENT OF 1.44%) FOR SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. HOWE VER, THE TPO HAS NOT CONSIDERED ADVANCES FROM ARM LTD. UK AND ARM IN C., USA IN COMPUTATION OF THE WORKING CAPITAL ADJUSTMENT. 74. IT WAS FURTHER SUBMITTED THAT THE TPO HAS CONSI DERED THE ASSESSEES TRADE PAYABLES AS ON MARCH 31, 2006 AT RS. 2,88,79, 340 AND AS ON APRIL 1, 2006 AT RS. 50,29,849. THE TPO HAS THEREBY NOT CONS IDERED THE ADVANCES RECEIVED FROM ARM LTD. UK AMOUNTING TO RS. 13,62,30 ,811 AS ON APRIL 1, 2006 AND RS. 6,27,66,411 AS ON APRIL 1, 2005 (SCHED ULE 8A OF AUDITED FINANCIAL STATEMENTS CURRENT LIABILITIES). THE AS SESSEES CONTENTION IS THAT IT RECEIVES COMPENSATION FOR THEIR CONTRACTUAL SERVICES IN ADVANCE AND SUBSEQUENTLY ADJUSTS THESE ADVANCES AGAINST THE INV OICES RAISED. GIVEN THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER, IT MAY CHOOSE TO INVEST SUCH ADVANCES TOWARDS EITHER PURCHASE OF ASSETS OR FOR INCURRING IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 75 OF 78 EXPENSES, BUT ULTIMATELY SUCH AN ADVANCE IS UTILIZE D TOWARDS PERFORMING CONTRACTUAL SERVICES. THEREFORE, IT WAS THE SUBMISS ION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ADVANCES RECEIVED FROM ITS AE S SHOULD BE CONSIDERED AS A PART OF TRADE PAYABLES IN COMPUTATI ON OF WORKING CAPITAL ADJUSTMENT. THE WORKINGS FOR AVERAGE TRADE PAYABLE S FURNISHED BY THE ASSESSEE ARE AS FOLLOWS:- 75. ACCORDINGLY, THE WORKING CAPITAL ADJUSTED ARMS LENGTH MARK-UP FOR THE 26 COMPARABLES SELECTED BY THE TPO WOULD BE 20. 38% (AFTER WORKING CAPITAL ADJUSTMENT OF 3.33%) FOR SOFTWARE DEVELOPME NT SERVICES PROVIDED BY THE ASSESSEE. BASED ON THE REMAINING 7 OUT OF THE 26 COMPARABLES SELECTED BY THE TPO, THE ASSESSEES MARGIN OF 11.48 % IS WITHIN THE +/- 5% OF THE WORKING CAPITAL ADJUSTED MEAN OF 10.43% AS C OMPUTED BY THE TPO. IF THE WORKING CAPITAL ADJUSTMENT IS COMPUTED BY IN CLUDING ADVANCES RECEIVED FROM AES AS PART OF TRADE PAYABLES, THE W ORKING CAPITAL ADJUSTED MARK-UP FOR THE ABOVE 7 COMPARABLES WOULD BE EVEN L OWER. IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 76 OF 78 76. WE ARE OF THE OPINION THAT ADVANCES RECEIVED FR OM AES SHOULD BE CONSIDERED AS A PART OF TRADE PAYABLES IN THE COMPU TATION OF WORKING CAPITAL ADJUSTMENT. HENCE, THE TPO/AO IS DIRECTED TO CONSIDER ADVANCES FROM ARM LTD. UK AND ARM INC., USA IN THE COMPUTATI ON OF WORKING CAPITAL ADJUSTMENT AND REWORK THE SAME. THIS GROUN D IS ALLOWED FOR STATISTICAL PURPOSES. 77. THE NEXT ISSUE RELATES TO RECOMPUTATION OF DEDU CTION U/S. 10A OF THE ACT. THE ASSESSEE CLAIMED A DEDUCTION OF RS.9,212 ,57,120 U/S. 10A OF THE ACT. IN COMPUTING THE DEDUCTION, THE ASSESSEE HAD N OT REDUCED TRAVEL EXPENSES OF RS.93,35,997 AND TELECOMMUNICATION CHAR GES RS. 14,36,441 FROM EXPORT TURNOVER AS, ACCORDING TO THE ASSESSEE, NO PART OF THE EXPENDITURE WAS ATTRIBUTABLE TO THE DELIVERY OF SOF TWARE OUTSIDE INDIA. THE ASSESSING OFFICER, HOWEVER, PROCEEDED TO RECOMPUTE THE DEDUCTION BY REDUCING THE SAID AMOUNTS FROM EXPORT TURNOVER BUT NOT FROM TOTAL TURNOVER AND THEREBY DISALLOWED THE 10A DEDUCTION TO THE EXT ENT OF RS.17,08,902. THE ASSESSEES SUBMISSION IS THAT NO PART OF THE AB OVE EXPENDITURE WAS ATTRIBUTABLE TO THE DELIVERY OF SOFTWARE OUTSIDE IN DIA AND IN THE ALTERNATIVE, IF THE SAME IS REDUCED FROM EXPORT TURNOVER IT SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER. ON THE ALTERNATIVE SUBMISSION, RELI ANCE WAS PLACED UPON THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KAR ). IN THIS JUDGMENT, IT HAS BEEN HELD THAT WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER, HAS ALSO TO BE E XCLUDED FROM THE TOTAL IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 77 OF 78 TURNOVER. ACCORDINGLY, WE DIRECT THE AO TO RECOMP UTE THE DEDUCTION U/S. 10A IN RESPECT OF TRAVEL EXPENSES AND TELECOMMUNICA TION CHARGES BY REDUCING THE SAME FROM TOTAL TURNOVER ALSO. 78. THE LAST ISSUE RAISED BY THE ASSESSEE IS REGARD ING NON-GRANT OF REFUND AND CORRESPONDING INTEREST U/S. 234D. THE ASSESSEE SUBMITTED THAT ACCORDING TO THE AO, REFUND OF RS.7,04,700 HAS BEEN ISSUED TO THE ASSESSEE, BUT THE ASSESSEE HAS NOT RECEIVED THE REF UND. CONSEQUENTLY, THE AO HAS ERRED IN CHARGED U/S. 234D OF THE ACT OF RS.81,041 ON THE SAID REFUND OF RS.7,04,700. WE SET ASIDE THIS ISSUE T O THE FILE OF ASSESSING OFFICER TO VERIFY THE CLAIM OF ASSESSEE AND DECIDE THE ISSUE AFRESH. 79. THUS, THE APPEAL BY THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. 80. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLO WED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 1 ST DAY OF DECEMBER, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) (ASHA VIJAYARAGHAVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 1 ST DECEMBER, 2015. /D S/ IT(TP)A NOS.1112/B/10 & 1161/BANG/2011 PAGE 78 OF 78 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.