M/s. Adobe Systems India Pvt. Ltd., Noida V. JCIT, Noida

ITA 1163/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3243 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 12-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 28-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Scheme of amalgamation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I - 2 , NEW DELHI BEFORE SH. H.S. SIDHU , JUDICIAL M EMBER AND SH. O.P. KANT , ACCOUNTANT MEMBER ITA NO. 1163 /DE L/ 2014 ASSESSMENT YEAR: 2009 - 10 M/S. ADOBE SYSTEMS INDIA PVT. LTD., PLOT NO. 1 - 1A, CITY CENTRE, SECTOR - 25A, NOIDA VS. JCIT, RANGE - 1, NOIDA PAN : AACCA2982J ( APPELLANT ) (RESPONDENT) ASSESSEE BY SH. NAGESHWAR RAO, ADV. RESPONDENT BY SH. H.K. CHOUDHARY, CIT(DR) DATE OF HEARING 25.10.2017 DATE OF PRONOUNCEMENT 30.11.2017 ORDER PER O.P. KANT , A. M. : THE HON BLE HIGH COURT OF ALLAHABAD VIDE ORDER DATED 04/01/2017 HAS REMANDED THE PRESENT APPEAL OF THE ASSESSEE TO THE TRIBUNAL FOR PASSING A SPEAKING ORDER IN ACCORDANCE WITH LAW ON GROUND NOS. 6 AND 14 OF THE APPEAL, WITHIN THREE MONTHS FROM THE DATE OF PRODUCTION OF THE CERTIFIED COPY OF THE ORDER BEFORE THE TRIBUNAL. 2. AT THE OUTSET, WE MAY MENTION THAT LEARNED COUNSEL OF THE ASSESSEE FILED A PHOTOCOPY OF THE ORDER OF THE HON BLE HIGH COURT BEFORE THE REGISTRY OF THE TRIBUNAL AND ACCORDINGLY AFTER APPROVAL OF T HE APPROPRIATE AUTHORITY, THE APPEAL WAS FIXED BEFORE THE TRIBUNAL ON 09/05/2017. THE APPEAL GOT ADJOURNED FROM TIME TO TIME ON THE REQUEST OF THE PARTIES. THE ASSESSEE FILED A CERTIFIED COPY OF THE ORDER OF THE 2 ITA NO.1163/DEL/2014 HON BLE HIGH COURT ONLY ON 25/10/2017 AND , T HEREAFTER, BOTH PARTIES WERE HEARD. 3. THE GROUND NO. 6 AND 14 OF THE APPEAL OF THE ASSESSEE IN ITA NO. 1163/DEL/2014 ARE REPRODUCED AS UNDER: 6. THE LEARNED AO/TPO/DRP HAVE ERRED IN REJECTING CERTAIN COMPANIES WHICH ARE COMPARABLE TO THE APPELLANT AND ADDING CERTAIN FUNCTIONALLY DISSIMILAR COMPANIES TO THE FINAL SET OF COMPARABLE COMPANIES. 14. THE LEARNED AO/DRP HAVE ERRED BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE AND WORKING CAPITAL OF THE APPELLANT VIS - - VIS THE COMPARABLE COMPANIES. 4 . THE FACTS IN BRIEF OF THE CASE ARE THAT THE ASSESSEE ( HEREINAFTER ALSO CALLED AS ADOBE I NDIA ) IS A SUBSIDIARY OF ADO BE USA . DURING RELEVANT PERIOD , THE ASSESSEE WAS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ADOBE USA . IT ALSO PROVIDED MARKETING AND SALES SUPPORT SERVICES TO ADOBE SYSTEM SOFTWARE, IRELAND . FOR THE YEAR UNDE R CONSIDERATION, THE ASSESSEE FILED RETURN OF INCOME ON 28/09/2009 , DECLARING TOTAL INCOME OF RS. 24,74,56,967/ - AFTER CLAIMING EXEMPTION UNDER SECTION 10A OF T HE INCOME - T AX ACT, 1961 (IN SHORT THE ACT ) AMOUNTING TO RS.32,78, 01,197/ - . THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED AND COMPLIED WITH. THE LD. ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISE S (AES). THE ASSESSEE DECLARED ARM S LENGTH P RICE (ALP) OF THE I NTERNATIONAL TRANSACTION AT RS. 302,23,39,368/ - . THE LD. ASSESSI NG OFFICER REFERRED THE MATTER TO LD. TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF ARM S L ENGTH PRICE (ALP) OF THE FOLLOWING INTERNATIONAL TRANSACTIONS REPORT ED BY THE ASSESSEE: 3 ITA NO.1163/DEL/2014 S. NO. NATURE OF INTERNATIONAL TRANSACTIONS VALUE (IN INR) METHOD USED 1. PROVISION OF SOFTWARE DEVELOPMENT SERVICES 2,859,782,441 TNMM WITH OP/OC AS PLI 2. PAYMENT OF DATA LINKAGE CHARGES 19,875,759 3. PROVISION OF MARKETING SUPPORT 138,845,364 TNMM WITH OP/OC AS PLI 4. PAYMENT OF INTEREST ON EXTERNAL COMMERCIAL BORROWINGS ( ECB ) 1,920,838 CUP METHOD 4.1 I N THE TRANSFER PRICING STUDY , THE ASSESSEE SELECTED 21 COMPARABLES FOR SOFTWARE DEVELOPMENT SER VICE SEGMENT AND WORKED OUT O P/TC AT 11.42% AS AGAINST 18.29 % IN ITS OWN CASE . IN MARKETING SUPPORT SERVICE SEGMENT, THE ASSESSEE SELECTED 13 COMPARABLE S AND WORKED OUT OP/TC AT 9.87% AS AGAINST 26.06% IN ITS OWN CASE . 4.2 THE LEARNED TPO MADE DETAILED ANALYSIS OF THE FUNCTIONAL PROFILE OF THE ASSESSEE AND THE COMPARABLE S SUGGESTED BY THE ASSESSEE. HE EXCLUDED CERTAIN COMPARABLES OUT OF THE LIST OF COMPARABLE S OF THE ASSESSEE AND ALSO INCLUDED CERTAIN COMPARABLES TO THE SAID LIST OF CO MPARABLES TO OPTIMIZE THE COMPARABILITY OF THE ASSESSEE. THE LEARNED TPO AGREED WITH ANALYSIS UNDERTAKEN BY THE ASSESSEE FOR ALL INTERNATIONAL TRANSACTION WITH ITS AES EXCEPT SOFTWARE DEVELOPMENT SERVICES AND PROVISION OF MARKETING SUPPORT SERVICES, WHEREI N HE PROPOSED ADJUSTMENT AS UNDER: S. NO. NATURE OF INTERNATIONAL TRANSACTION ADJUSTMENT UNDER SECTION 92CA PROVISION OF SOFTWARE DEVELOPMENT SERVICES RS.33,39,88, 898 PROVISION OF MARKETING SUPPORT SERVICES RS . 2,35,01,986 TOTAL RS.35,74,90,884 4 ITA NO.1163/DEL/2014 4.3 THE ASSESSEE FILED OBJECTIONS BEFORE THE LD. DRP. THE LD. DRP INCLUDED/EXCLUDED CERTAIN COMPARABLES OUT OF THE SET OF THE COMPARABLES SELECTED BY THE LD. TPO, WHICH RESULTED INTO REDUCTION IN ADJUSTMENT UNDER BOTH THE SEGMENT S OF SOFTWARE DEVELOPMENT S ERVICES AND MARKETING SUPPORT SERVICES AS FOLLOWS S. NO. NATURE OF INTERNATIONAL TRANSACTION ADJUSTMENT UNDER SECTION 92CA 1. PROVISION OF SOFTWARE DEVELOPMENT SERVICES RS. 18,73,02,909 2. PROVISION OF MARKETING SUPPORT SERVICES RS. 1,18,51,961 3. TOTAL RS. 19 , 91 , 54,870 4.4 AGGRIE VED, BOTH THE ASSESSEE AND THE R EVENUE FILED APPEAL BEFORE THE TRIBUNAL. 5. U NDER SOFTWARE DEVELOPMENT SERVICES SEGMENT OUT OF THE LIST OF COMPARABLE SUGGESTED BY THE ASSESSEE, THE LEARNED TPO REJECTED FEW COMPARABLES , HOWEVER THE LD. DRP, ALLOWED REQUEST OF THE ASSESSEE FOR RETAINING FOLLOWING TWO COMPARABLES: 1. QUINTEGRA S OLUTIONS LTD . 2. ZYLOG S YSTEMS LTD . 5.1 T HE R EVENUE IN ITS APPEAL CHALLENGED RETAINING ( INCLUSION) OF THE ABOVE TWO COMPARABLES BY THE LD. DRP. 5.2 FURTHER , UNDER THE SOFTWARE DEVELOPMENT SERVICES , OUT OF THE LIST OF THE COMPARABLES INCLUDED BY THE LEARNED TPO , THE DRP CONSIDERED OBJECTIONS OF THE ASSESSEE AND DIRECTED TO RETAIN/REJECT COMPARABLES A S FOLLOWS: 1. BODHTREE COUNSEL TING LTD . REJECTED 2. FCS SOFTWARE S OLUTIONS LTD . RETAINED 3. INFOSYS T ECHNOLOGIES LTD . RETAINED 4. TATA COUNSEL TANCY S ERVICES RETAINED 5 ITA NO.1163/DEL/2014 5. WIPRO LTD . RETAINED 6. ZENITH INFOTECH LTD . RETAINED. 5.3 BEFORE THE TRIBUNAL, THE ASSESSEE IN GROUND NO. 6 CHALLENGED RETAINING (INCLUSION) OF ABOVE COMPARABLES EX CEPT FCS SOFTWARE SOLUTIONS LTD . THE R EVENUE CHALLENGED THE DIRECTION OF THE DRP TO REJECT (EXCLUDE) THE COMPARABLE , NAMELY , BODHTREE COUNSEL TING LTD. 5.4 THE G ROUND OF THE R E VENUE CHALLENGING THE EXCLUSION OF COMPARABLE, NAMELY, BODHTREE C ONSULTING LTD. UNDER SOFTWARE DEVELOPMENT SERVICES HAS BEEN ALLOWED IN FAVOUR OF REVENUE BY THE TRIBUNAL IN ITA NO. 1004/DEL/2014. 5.5 UNDER THE MARKETING SUPPORT SERVICE SEGMENT ALSO , THE LEARNED DRP DID NOT ACCEPT THE CONTENTION OF THE ASSESSE E FOR EXCLUDING FEW COMPARABLES, WHICH THE ASSESSEE C HALLENGED IN GROUND NO. 6 FILED. 6. THUS, IN GROUND NO. 6 OF THE APPEAL , WHICH WE HAVE REPRODUCED ABOVE , THE ASSESSEE CHALLENGE D COMPARABLES UNDER BOTH SEGMENTS I.E. SOFTWARE DEVELOPMENT SERVICE AND MARKETING SUPPORT SERVICE . THE TRIBUNAL IN ORDER DATED 10 TH OF AUGUST, 2016 ALLOWED EXCLUSION OF THE TWO COMPARABLES UNDER MARKETING SUPPORT SERVICES SEGMENT , NAMELY , APTICO LTD AND TSR DARASHAW , HOWEVER, NO FINDING WAS GIVEN IN RESPECT OF FOLLOWING FOUR COMPARABLES RETAINED BY THE LD. DRP UNDER SOFTWARE DEVELOPMENT SERVICES : 1. INFOSYS TECHNOLOGIES LTD RETAINED 2. TATA COUNSEL TANCY SERVICES RETAINED 3. WIPRO LTD RETAINED 4. ZENITH INFOTECH LTD RETAINED. 6.1 IN BACKGROUND OF THE ABOVE FACTS, BOTH PARTIES HAVE BEEN HEARD. 6.2 ADDRESSING THE GROUND NO. 6 BEFORE US , THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT CONSEQUENT TO THE ORDER OF THE TRIBUNAL, TP 6 ITA NO.1163/DEL/2014 ADJUSTMENT RELATING TO MARKET SUPPORT SERVICES SEGMENT GOT DELETED AND DEPARTMENT S APPEAL AGAINST THE DELETION IS PENDING CONSIDERATION BEFORE THE HON BLE HIGH COURT OF THE ALLAHA BAD. 6.3 WE FIND THAT HON BLE HIGH COURT HAS RESTORED BACK THE ENTIRE GROUND NO. 6 OF THE APPEAL OF THE ASSESSEE. THE GROUND NO. 6 IS IN RESPECT OF REJECTION OF CERTAIN COMPARABLES AND ADDITION OF CERTAIN FUNCTIONALLY DISSIMILAR COMPANIES TO THE FINAL SET OF COMPARABLE COMPANIES. THUS , GROUND NO. 6 IS BOTH IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES A ND MARKETING SUPPORT SERVICES. NOW , THE POSITION IS THAT ON ONE HAND THE APPEAL OF THE DEPARTMENT AGAINST THE EXCLUSION OF THE COMPARABLES UNDER MARKETING SUPP ORT SERVICE (PART OF GROUND NO. 6 OF THE APPEAL OF THE ASSESSEE) IS PENDING BEFORE THE HON BLE HIGH COURT OF ALLAHABAD , BUT ON THE OTHER HAND , ENTIRE GROUND NO. 6 OF THE APPEAL OF THE ASSESSEE HAS BEE N RESTORED BACK TO THE TRIBUNAL . IN THE CIRCUMSTANCES, W E DO NOT DEEM IT PROPER TO ADJUDICATE IN RESPECT OF THE COMPARABLES EXCLUDED UNDER THE MARKETING SUPPORT SERVICE SEGMENT AND CONFINE OURSELVES TO THE COMPARABLES CHALLENGED UNDER SOFTWARE DEVELOPMENT SERVICE DUE TO FOLLOWING REASONS: 1 . T HE ASSESSEE MADE PLEA BEFORE THE HON BLE HIGH COURT THAT ITS ARGUMENT IN RESPECT OF THE COMPARABLES HAS NOT BEEN CONSIDERED BY THE TRIBUNAL AND ON SAID PLEA THE HON BLE HIGH COURT HAS RESTORED THE MATTER BACK TO THE TRIBUNAL. EVIDENTLY, THE PLEA OF THE ASS ESSEE WAS IN RESPECT OF COMPARABLES UNDER THE SOFTWARE DEVELOPMENT SERVICE AND NOT IN RESPECT OF MARKETING SUPPORT SERVICE. 2 . THE TRIBUNAL HAS ALREADY GIVEN FINDING IN RESPECT OF MARKETING SUPPORT SERVICE AND THAT FIND ING HAS BEEN CHALLENGED BY THE R EVENUE , WHICH IS PENDING BEFORE THE HON BLE HIGH COURT . 7 ITA NO.1163/DEL/2014 6.4 IN THE CIRCUMSTANCES, AS FAR AS GROUND NO. 6 OF THE APPE AL OF THE ASSESSEE IS CONCERNED , WE RESTRICT OURSELVES TO COMPARABLES RETAINED BY THE LD. DRP AND CHALLENGED BY THE ASSESSEE UNDER SOFTWARE DEVELO PMENT SERVICES. 6.5 BEFORE US , THE LD. COUNSEL CHALLENGED EXCLUSION OF THE FOLLOWING FIVE COMPARABLES, WHICH WE ARE DISCUSSING AS UNDER: BODHTREE CONSU L TING LTD 6.5.1 T HE LEARNED COUNSEL SUBMITTED THAT THE COMPARABLE IS FUNCTIONALLY DISSIMILAR TO THE ASSESSEE AND IT IS ENGAGED IN V IDE ARRAY OF SERVICES INCLUDING PRODUCT ENGINEERING, ANALYTICS AND CLOUD AND ENTERPRISES SERVICES WITH NO SEGMENT RESULTS. THE LEARNED COUNSEL FURTHER SUBMITTED THAT COMPANY HAS SHOWN ABNORMAL GROWTH AND PECULIAR CIRCUMSTANC ES IN THE YEAR UNDER REFERENCE. HE ALSO SUBMITTED THAT SAID C OMPARABLE IS EXCLUDED BY THE TRIBUN AL, DELHI BENCH IN THE CASE OF C ADENCE D ESIGN SYSTEMS (INDIA) P RIVATE LTD . IN ITA NO. 27 4/DEL/2014 FOR ASSESSMENT YEAR 2009 - 10 AND IN THE CASE OF CIENNA INDIA IN ITA NO. 1453/DEL/2014 FOR A Y 2009 - 10. 6.5.2 THE LD. CIT (DR), ON THE OTHER HAND , OPPOSED THAT THIS COMPARABLE WAS ALREADY EXCLUDED BY THE LD. DRP IN FAVOUR OF THE ASSESSEE AND THE ASSESSEE CANNOT BE SAID TO BE AGGRIEVED BY THE SAID DIRECTION. HE SAID THE R EVENUE WAS AGGRIEVED AND ACCORDINGLY CHALLENGED BEFORE THE T RIBUNAL, AND THE APPEAL OF THE R EVENUE HAS NOT BEEN ALLOWED BY TH E TRIBUNAL . T HEREFORE , THE ASSESSEE CANNOT CHAL LENGE EXCLUSION OF THE SAID COMPARABLE IN PROCEEDINGS REMITTED BY THE HON BLE HIGH COURT. WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTIES. WE AGREE WIT H THE CONTENTION OF THE LD. CIT( DR ) . S INCE THIS COMPARABLE WAS ALREADY EXCLUDED BY THE LD. DRP, AND A SSESSEE WAS NOT AGGRIEVED WITH THE SAID DIRECTION OF THE LD. DRP, THE ASSESSEE COULD NOT HAVE CHALLENGED THIS 8 ITA NO.1163/DEL/2014 EXCLUSION IN GROUND NO. 6. EXCLUSION OF THE SAID CO MPARABLE WAS CHALLENGED BY THE R EVENUE IN ITS APPEAL AND WHICH HAS BEEN ALLOWED BY THE TRIBUNA L. SINCE THE APPEA L OF THE R EVENUE HAS NOT BEEN REMITTED BACK TO THE TRIBUNAL, NOW WE CANNOT CONSIDER EXCLUSION/INCLUSION OF THE SAID COMPARABLE. ACCORDINGLY, WE REFRAIN FROM GIVING ANY DIRECTION ON THE EXCLUSION OF THE SAID COMPARABLE OUT OF THE LIST OF T HE FINAL SET COMPARABLE UNDER SOFTWARE DEVELOPMENT SERVICES. INFOSYS TECHNOLOGIES LTD. 6.5. 3 T HE LD. COUNSEL REQUESTED FOR EXCLUSION OF THE COMPANY DUE TO THE REASON THAT IT IS ENGAGED IN VARIOUS PRODUCTS AND INSUFFICIENT SEGMENTAL INFORMATION IS AVAILABLE IN THE ANNUAL REPORT. HE FURTHER SUBMITTED THAT THE COMPARABLE FAILS ON FILTER OF ONSITE REVENUE EARNED PROPOSED BY THE LD. TPO. OTHER REASONS FOR EXCLUSION OF THE COMPARABLE WERE SUBMITTED BY THE LD. COUNSEL AS HIGH TURNOVER, INDUSTRY GIANTS AND SIGNIFICANT INTANGIBLE ASSETS AND HAVING HIGH BRAND VALUE. HE FURTHER SUBMITTED THAT THE SAID COMPARABLE COMPANY HAS BEEN EXCLUDED BY THE ITA T DELHI BENCH IN THE CASE OF SUN LIFE INDIA SERVICE CENTRE PRIVATE L IMITED (ITA NO. 1489/DEL/2014). 6.5. 4 THE L D. CIT (DR), ON THE OTHER HAND , REFERRED TO PAGE 6 OF THE ORDER OF THE LD. TPO AND SUBMITTED THAT ASSESSEE WAS NOT MERELY ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER, BUT IT WAS ENGAGED IN DEVELOPING NEW PRODUCTS THROUGH RESEARCH AND DEVELOPMENT ACTIVITY FOR ITS AE. HE ALSO REFERRED TO PAGE 61 TO 66 OF THE ORDER OF THE LD. TPO AND SUBMITTED THAT AE HAS REGISTERED/APPLIED FOR THE PATENTS HAVING SOURCE IN INDIA, WHICH ESTABLISHED THAT THE ASSESSEE HAS PROVIDED SIGNIFICANTLY VALUE - ADDED SERVICES TO ITS AE, CAPABLE OF GENERATING PATENTS FOR THE ASSOCIATED ENTERPRISES IN US. HE SUBM ITTED THAT REMUNERATION HAS TO 9 ITA NO.1163/DEL/2014 MADE AT MUCH HIGHER LEVEL AS THE ECONOMIC OWNERSHIP OF THE INTELLECTUAL PROPERTY INTANGIBLES VEST WITH ASSESSEE. 6.5.5 REGARDING THE ARGUMENT OF THE LD. COUNSEL THAT THE COMPARABLE COMPANY IS ENGAGED IN VARIOUS PRODUCTS, THE LD. CIT (DR) SUBMITTED THAT ASSESSEE IS ALSO ENGAGED IN DEVELOPMENT OF VARIOUS PRODUCTS . ON THE ISSUE OF THE HIGH TURNOVER AND I NDUSTRY GIANTS, THE LD. CIT(DR) SUBMITTED THAT THE ASSESSEE IS ALSO NOT A SMALL CAPTIVE SERVICE PROVIDER AND IT IS HAVING TURNO VER OF MORE THAN RS. 285 CRORES AND HAVING ECONOMIC OWNERSHIP O F INTANGIBLES. 6.5.6 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ITA T IN ASSESSMENT YEAR 2008 - 09 HAS REJECTED THE INFOSYS AS COMPARABLE MAI NLY ON THE GROUND OF FUNCTIONAL DISSIMILARITY. THE TRIBUNAL HELD THAT INFOSYS LTD . IS A FULL RISK BEARING ENTREPRENEUR ENTITY ENGAGED IN DIVERSIFIED ACTIVITY. THE TRIBUNAL RELYING ON THE DECISION OF AGNITY INDIA T ECHNOLOGI ES PRIVATE L IMITED VS. ITO, ITA NO . 3856/DEL/2010 (AY 2006 - 07) ORDER DATED 04.11.2010, H ELD THAT TURNOVER BY ITSELF MAY NOT BE SUFFICIENT TO ACCEPT OR REJECT A COMPANY BUT IT COULD LEAD TO EXAMINATION OF FUNCTIONAL DIFFERENCES , IF ANY. 6.5. 7 BUT IN THE CASE BEFORE US, FROM PAGE 65 OF THE ANNUAL R EPORT OF THE COMPANY ( PAGE 938 OF THE PAPER BOOK) , WE FIND THAT DURING THE YEAR THE COMPANY HAS SHOWN INCOME FRO M SOFTWARE SERVICE AND PRODUCTS . FURTHER , ON PAGE 80 OF THE ANNUAL R EPORT ( PAGE 953 OF TH E PAPER BOOK) UNDER THE HEAD SEGMENT REPORTING , IT IS REPORTED THAT THE COMPANY S OPERATIONS PREDOMINATELY RELATE TO PROVIDE END - TO - END BUSINESS SOLUTIONS THAT LEVERAGE TECHNOLOGY, THEREBY ENABLING CLIENTS TO ENHANCE BUSINESS PERFORMANCE DELIVERED TO CUS TOMERS GLOBALLY OPERATING VARIOUS INDUSTRY SEGMENTS AND ACCORDINGLY SEGMENT INFORMATION IN RESPECT OF OPERATION IN INDUSTRIES AND GEOGRAPHIC LOCATION HAS BEEN PROVIDED. 10 ITA NO.1163/DEL/2014 6.5.8 WHEN WE COMPARE THE ACTIVITY OF THE INSTANT ASSESSEE, WE FIND FROM THE TRANSFER PRICING STUDY AS UNDER: A) ADOBE INDIA PROVIDE ENGINEERING, RESEARCH AND DEVELOPMENT SERVICES TO ADOBE US . ADOBE INDIA ALSO PERFORMS DESIGN, DEVELOPMENT, SUPPORT IMPROVEMENT IN ENHANCEMENT S ERVICES FOR ADOBE US PRODUCTS ( PARA - 4.2.1 ON PAGE 22 OF THE TP STUDY) B) ADOBE INDIA UNDERTAKES, THE CODING AND DOCUMENTATION FUNCTION WITH RESPECT TO THE SOFTWARE MODULES THAT IT DEVELOPS ( PAGE 24 OF THE TP STUDY) C) ADOBE INDIA IS RESPONSIBLE FOR DAY - TO - DAY PROJECT MANAGEMENT AND THE END DELIVERABLES WITH RESPECT TO THE MODELS OF THE SOFTWARE BEING DEVELOPED BY IT.( PAGE 24 OF THE TP STUDY) D) ADOBE INDIA UNDERTAKES QUALITY CONTROL PROCEDURE WITH RESPECT TO THE SOFTWARE MODULES DEVELOPED BY IT. ( PAGE 24 OF THE TP STUDY) E) ADOBE INDIA ALSO PERFORMS UNIT TEST FOR THE SOFTWARE MODULES DEVELOPED BY IT.( PAGE 25 OF THE TP STUDY). 6.5.9 THOUGH , IN THE TP STUDY THE ASSESSEE HAS FURNISHED THAT CONCEPTUALIZ ATION AND DESIGN OF THE SOFTWARE ARE BEING DONE IN THE SUPERVISION OR DIRECTION OF THE ADOBE US AND THE ASSESS EE S HAVING LIMITE D ROLE IN THESE ACTIVITIES, BUT, IN OUR OPINION , IT IS EVIDENT FROM THE TRANSFER PRI CING STUDY , AS FAR AS DEVELOPMENT OF SOFTWARE MODULES IS CONCERNED, THE ASSESSEE ALSO PLAYS A DOMINANT ROLE. THE LEARNED TPO IN THE ORDER HAS BROUGHT ON RECORD THAT THE ASSESSEE HAS NOT PROVIDED THE DETAILS OF SOFTWARE DEVELOPED OR DESIGNED AND CONCEPTUALIZATIONS WAS DONE ABROAD AND DEV ELOPMENT WORK WAS DONE IN INDIA . HE ALSO MENTIONED THAT DETAILS OF SOFTWARE DEVELOPED COM PLETELY AND DESCRIPTION OF FUNCTIONS IN INDIA AND ABROAD WAS NOT PROVIDED TO HIM DESPITE NUMEROUS OPPORTUNITIES GIVEN TO THE ASSESSEE. THE ASSESSEE HAS EVEN NOT BROUGHT ANY SUCH EVIDENCES BEFORE US. 11 ITA NO.1163/DEL/2014 6.5.10 IN SUCH CIRCUMSTANCES, ON THE BASIS OF THE EVIDE NCE BEFORE US, WE CONCLUDE THAT THE FUNCTION OF THE ASSESSEE COMPANY BECOMES SIMILAR TO THE COMPARABLE COMPANY , WHO DEVELOPS PRODUCTS FOR THE CLIENT AND PROVIDE SERVICE IN RESPECT OF THOSE PRODUCTS. 6. 5.11 AS FAR AS ARGUMENT OF THE HI GH TURNOVER OF THE COMPARABLE ( RS. 20,264 CRORES) AS COMPARE D TO TURNOVER OF THE ASSESSEE ( RS. 285 CRORES ), IS CONCERNED, WE PLACE OUR RELIANCE ON THE DECISION OF THE HON BLE DELHI HIGH COU RT IN THE CASE OF AGNITY INDIA T ECH NOLOGIES PRIVATE L IMITED VS. ITO (SUPRA) WHEREIN IT IS HELD THAT TURNOVER BY ITSELF MAY NOT BE SUFFICIENT TO ACCEPT OR REJECT THE COMPANY UNTIL FUNCTIONAL DIFFERENCES EXIST. SINCE IN THE INSTANT CASE , WE DO NOT FIND ANY FUNCTIONAL DIFFERENCES BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANY , WE ARE NOT INCLI NED TO REJECT THE COMPARABLE MAINLY ON THE BASIS OF THE TURNOVER. FURTHER, WE NOTE THAT T HE LEARNED TPO ON PAGE 63 OF THE ORDER HAS BROUGHT ON RECORD THAT THE ADOBE SYSTEMS INC , HAS FILED 5 PATENTS IN CALENDAR YEAR 2009 AND 17 PATENTS IN CALENDAR YEAR 2010 HAVING ORIGINATED IN INDIA. THE LEARNED TPO HAS FURTHER GIVEN FINDING ON THE ECONOMIC OWNERSHIP OF THE INTANGIBLES AS UNDER: IT IS SEEN AS PER CLAUSES OF SOFTWARE RESEARCH A GREEMENT DT. 01.09.1997 THE LEGAL OWNERSHIP OF R&D INTANGIBLES DEVELOPED BY THE ASSESSEE IN INDIA AUTOMATICALLY GETS TRANSFERRED TO THE ASSOCIATED ENTERPRISES WITHOUT ANY COMPENSATION I.E. BY THE APPLICATION OF THESE CLAUSES OF THE AGREEMENT THE ASSOCIATED ENTERPRISES BECOMES LEGAL OWNER OF THE INTANGIBLES DEVELOPED BY THE ASSESSEE IN INDIA. IT IS PERTINENT TO MENTIONED HERE THAT THE ASSESSEE HAS DEVELOPED THESE INTANGIBLES IN INDIA AND HAD BORNE COST AND RISK AND HAD USED ITS ASSET. ACCORDINGLY, THE ECONOM IC OWNERSHIP OF THE INTANGIBLES IS WITH THE ASSESSEE. IT IS NOW WELL ACCEPTED PRINCIPLE THAT LOCAL ECONOMIC OWNERSHIP OF INTANGIBLE CAN BE CREATED SEPARATELY & DISTINCTLY FROM THE LEGAL OWNERSHIP OF PARENTS, TRADEMARKS ETC. THE ASSESSEE CLAIM THAT THE ASSO CIATED ENTERPRISE IS THE LEGAL OWNER OF THE INTANGIBLES MAY BE CORRECT, BUT THE ECONOMIC OWNERSHIP OF THE INTANGIBLE IS WITH THE ASSESSEE. 12 ITA NO.1163/DEL/2014 THAT DURING THE PERIOD 2008 - 09 NUMBER OF PATENTS HAVE BEEN DEVELOPED WITH INDIA ORIGIN AND LEGAL OWNER SHIP OF THES E PATENTS HAVE BEEN TRANSFERRED TO ITS AE AS PER THE AGREEMENT WITHOUT ANY COMPENSATION BECAUSE THE COMPENSATION MODEL OF COST PLUS 15% IS NOT ADEQUATE TO COMPENSATE THE ASSESSEE FOR THE FUNCTIONS PERFORMED BY IT BECAUSE IT NOT INCLUDE RETURN ASSOCIATED WI TH ECONOMIC OWNERSHIP OF INTA NGIBLES. 6.5.12 WE AGREE WITH THE FACT THAT THE ASSESSEE HAS DEVELOPED THESE INTANGIBLES IN INDIA AND TRANSFERRED TO THE AE , WHO IS REGISTERED AS LEGAL OWNER. THUS, THOUGH THE LEGALLY ASSESSEE IS NOT OWNER OF THE INTANGIBLES, BUT IT HAS CARRIED OUT ALL FUNCTIONS TO GENERATE INTANGIBLES, AND THUS IT BECOMES FUNCTIONALLY SIMILAR TO THE COMPARABLE COMPANY WHO HAS ALSO GENERATED INTANGIBLE S DURING THE YEAR. THE ASSESSEE ALSO DESERVES TO BE COMPENSATED FOR GENERA TION OF THE INTANGIBLES SIMILAR TO THE INTANGIBLE EXPLOITED BY THE COMPARABLE. 6.5.13 NEXT ARGUMENT OF THE LEARNED COUNSEL FOR REJECTION OF THE COMPARABLE IS ON - SITE FILTER. THE LEARNED COUNSEL SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION THE COMPAR ABLE EARNED 49.3% OF THE REVENUE FROM ON - SITE ACTIVITIES. IN OUR OPINION , BY PROVIDING THE STAFF AT THE SITE OF THE CLIENT IS AKIN TO MAKING THE STAFF AVAILABLE FOR EXCLUSIVE WORK OF THE CLIENT. WE FIND THAT THE ASSESSEE ALSO ACTS AS CAPTIVE SERVICE PROVID ER FOR ITS AE. IN BOTH THE CASES THE ULTIMATE FUNCTION WHICH IS CARRIED OUT IS OF THE SOFTWARE DEVELOPMENT SERVICES. WE FIND THAT I N THIS MANNER, THE ON - SITE ACTIVITY OF THE COMPARABLE DOES NOT MAKE ANY FUNCTIONAL DIFFERENCE BETWEEN THE ASSESSEE AND THE COMPARABLE. 6.5.14 THE LEARNED TPO HAS BROUGHT ON RECORD IN THE ORDER THAT THE ASSESSEE HAS EMPLOYED 1367 EMPLOYEES OUT OF WHICH 134 2 EMPLOYEES WERE ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES. HE FURTHER SUBMITTED THAT MOS T OF THE EMPLOYEES WERE HAVING EDUCATIONAL QUALI FICATION LIKE B TECH/ B. ENGG./M TECH/ SOFTWARE DEVELOPMENT P ROFESSIONAL , MBA ETC, AND THUS THE PROFILE OF THE EMPLOYEES SHOWED THAT 13 ITA NO.1163/DEL/2014 THEY WERE PERFORMING HIGH - END SERVICES OF RESEARCH AND DEVELOPMENT AND NOT ROUTINE SERVICES . 6.5.15 WE FIND THAT IN THE KIND OF ACTIVITY CARRIED OUT BY THE ASSESSEE AND THE COMPARABLE, MOST OF THE ASSETS REQUIRED ARE HUMAN RESOURCE S AND IT INFRASTRUCTURE. THE LD. COUNSEL HAS NOT BROUGHT OUT ANY SIGNIFICANT CHANGE IN THE RATIO OF THE HUMAN RESOURCES OR IT INFRASTRUCTURE IN TERMS OF THE TURNOVER OF THE ASSESSEE AND COMPARABLE. SIMILARLY , THE LD. COUNSEL HAS NOT BROUGHT OUT IMPACT OF RISKS UNDERTAKEN BY THE ASSESSEE AND COMPARABLE ON THE PROFIT LEVEL INDICATOR. 6.5.16 FURT HER, THE CASES RELIED UPON BY THE ASSESSEE ARE NOT APPLICABLE OVER THE FACTS OF THE INSTANT CASE AS THE FUNCTIONS CARRIED OUT AND TH E ECONOMIC INTEREST IN THE PRODUCTS DEVELOPED BY THE ASSESSEE ARE DIFFERENT AS COMPARED TO THE ENTITIES IN THE CASES RELIED UPON BY THE ASSESSEE. SINCE FUNCTION OF THE COMPARABLE COMPANY AND THE ASSESSEE MAY DIFFER FROM YEAR TO YEAR, THE DECISION OF TRIBUN AL IN EARLIER YEAR , FOR NOT TREATING THE COMPANY AS COMPARABLE , CANNOT BE TAKEN AS BINDING PRECEDENT. 6.5.17 IN VIEW OF ABOVE DISCUSSION, WE DIRECT THE LEARNED TPO TO RETAIN M/S INFOSYS TECHNOLOGIES LTD . AS ONE OF THE COMPARABLE TO THE ASSESSEE. TATA CONSULTANCY LTD: 6.5.18 T HE LD. COUNSEL SUBMITTED THAT INCOME OF THE SAID COMPARABLE COMPRISING REVENUE FROM SALE OF EQUIPMENT AND SOFTWARE LICENSE ALONGWITH REVENUES FROM INFORMATION TECHNOLOGY AND CO NS U L TING SERVICES. HE ALSO SUBMITTED THAT THE COMPANY I S ENGAGED I N VARIOUS PRODUCTS AND FAILS ON SITE FILTER PROPOSED BY THE LEARNED TPO ITSELF. THE LD. COUNSEL REFERRED TO PAGE 1056 OF THE PAPER BOOK AND SUBMITTED THAT THE COMPARABLE COMPANY HAS ACQUIRED CERTAIN COMPANIES DURING THE YEAR WHICH IS HAVING IMPACT ON THE PROFIT LEVEL I NDICATOR OF THE COMPARABLE 14 ITA NO.1163/DEL/2014 COMPANY AND THUS IN VIEW OF THE EXTRAORDINARY EVENT DUR ING THE YEA R , THE COMPANY CANNOT BE COMPARED WITH ASSESSEE COMPANY . OTHER REASONS FOR EXCLUSION OF THE SAID COMPARABLE SUBMITTED INCLUDE HIGH TURNOVER, INDUSTRY GIANT, SIGNIFICANT BRAND VALUE AND SIGNIFICANT INTANGIBLE ASSETS. THE LD. COUNSEL SUBMITTED THA T THE COMPANY HAS BEEN EXCLUDED BY THE TRIBUNAL DELHI BENCH IN THE CASE OF SUN LIFE INDIA SERVICE CENTRE PRIVATE LIMITED (ITA NO. 1489/DEL/2014). HE ALSO SUBMITTED THAT THE COMPANY SHOULD BE EXCLUDED RELYING ON THE ASSESSEE S OWN ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2008 - 09 FOR REJECTING OF INFOSYS. 6.5.19 THE LEARNED CIT (DR), ON THE OTHER HAND , SUBMITTED THAT THE ACQUISITION / MERGER DURING THE YEAR HAS NOT AFFECTED THE R EVENUE OPERATION DURING THE YEAR AND IT HAS NOT AFFECTED THE ECONOMY OF THE BUSINES S. 6.5.20 WE HAVE HEARD THE RIVAL SUBMISSION S AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND FROM PAGES 105 OF THE ANNUAL R EPORT (PAGE 1138 OF THE ASSESSEE S PAPER BOOK) THAT THE COMPANY HAS SHOWN INCOME FROM INFORMATION TECHNOLOGY AND CONSU L TANCY SERVICES OF RS. 21,535 CRORES AND BIFURCATIONS OF INFORMATION TECHNOLOGY AND CONSULT ANCY SERVICE HAS NOT BEEN PROVIDED IN THE ANNUAL REPORT. WE ALSO FIND THAT THE REVENUE OF THE ASSESSEE INCLUDE SALE OF EQUIPMENT AND SOFTWAR E LICENSES, AMOUNTING TO RS . 868. 25 CRORES. THUS , IN ABSENCE OF SEGMENT RESULT OF CONSU L TANCY AND INFORMATION TECHNOLOGY, THE RESULT OF THE COMPANY CANNOT BE COMPARED WITH THE RESULT O F THE ASSESSEE COMPANY. FURTHER , FROM THE PAGE 23 OF THE ANNUAL REPORT OF THE COMPARABLE (PAGE 1056 OF THE ASSESS ES PAPER BOOK) , WE FIND THAT DURING THE YEAR THE COMPANY HAS ACQUIRED CITI GROUP INC (CITI) 96.26% INTEREST FOR A TOTAL CONSIDERATION OF USD 504.54 MILLION. THE ANNUAL REPORT HAS MENTIONED AS UNDER: THIS ACQUISITION IS NOT ONLY HELPED IN A CQUIRING NEW CAPABILITIES IN THE BANKING DOMAIN, BUT HAS ALSO UNDERSCORED THE IMPORTANCE OF TCS S LONG - 15 ITA NO.1163/DEL/2014 TERM, SUSTAINABLE RELATIONSHIP WITH LARGE CUSTOMER INCLUDING CITY. THIS ACQUISITION COMPLEMENTS TCS S DOMAIN EXPERTISE AND HAS BROUGHT IN NEW CAPABILITIE S TO TCS THAT WILL HELP DRIVE GROWTH GOING FORWARD. 6.5.21 THUS , IT IS EVIDENT THAT ACQUISITION MADE BY THE COMPANY DURING THE YEAR HAS AFFECTED ITS PROFIT LEVEL INDICATOR AND TH US BEING AN EXTRAORDINARY EVENT, THE COMPANY CANNOT BE CONSIDERED AS COMPARABLE WITH ASSESSEE COMPA NY DURING THE YEAR. ACCORDINGLY, WE DIRECT THE LD. TPO /AO TO EXCLUDE THE ABOVE COMPANY OUT OF THE SET OF THE COMPARABLES UNDER SOFTWARE DEVELOPMENTS SERVICES SEGMENT. WIPRO LTD 6.5.22 T HE LEARNED COUNSEL SUBMITTED THAT DURIN G THE YEAR THE COMPANY HAS ACQUIRED WIPRO TECHNOLOGY S ERVICE LTD . IN JANUARY 2009 AND SUBSIDIARIES OF THE COMPANY HAVE BEEN MERGED WITH THE HOLDING COMPANIES IN USA. HE SUBMITTED THAT THE COMPANY WAS ENGAGED IN DIVERSIFYING BUSINESS OPERATIONS AND DURING THE YEAR REVENUE FROM SOFTWARE DEVELOPMENT WAS ONLY 40%. HE SAID THAT THE COMPANY HAS ALSO SHOWN INCOME FROM BPO SERVICES AND CONSU L TING SERVICES. THE LD. COU NSEL ALSO SUBMITTED THAT THE COMPANY IS DISSIMILAR TO THE ASSESSEE COMPANY IN VIEW OF SIGNIFICANT INTANGIBLE ASSETS, SIGNIFICANTLY LARGE SCALE OF OPERATIONS AND INDUSTRY GIANT AND HAVING SIGNIFICANT BRAND VALUE. THE LEARNED COUNSEL SUBMITTED THAT THE COMPA NY HAS BEEN EXCLUDED AS COMPARABLE BY THE TRIBUNAL DELHI BE NCH IN THE CASE OF CIENA INDIA PRIVATE L IMITED (ITA NO. 1489/DEL/2014 FOR ASSESSMENT YEAR 2008 - 09. HE ALSO SUBMITTED THAT COMPARABLE SHOULD BE EXCLUDED RELYING ON THE DECISION OF THE TRIBUNAL IN AS SESSEE S OWN CASE FOR ASSESSMENT YEAR 2008 - 09 FOR REJECTING OF INFOSYS. 6.5.23 THE LEARNED CIT (DR), ON THE OTHER HAND , SUBMITTED THAT THE COMPARABLE COMPANY IS FUNCTIONALLY SIMILAR TO THE ASSESSEE COMPANY AND HAVING SIGNIFICANT R&D ACTIVITY. HE FURTHER SU BMITTED THAT 16 ITA NO.1163/DEL/2014 AMALGAMATION DURING THE YEAR HAS NOT AFFECTED THE PLI OF THE COMPARABLE. 6.5.24 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND FROM PAGE 70 OF THE ANNUAL R EPORT OF COMPANY THAT THE COMPANY IS LEADING INDIA - BASED PROVIDER OF IT SERVICE INCLUDING BUSINESS PROCESS OUTSOURCING ( BPO) AND FURTHER IT HAS OTHER BUSINESSES SUCH AS IT PRODUCTS AND CUSTOMER CARE AND LIGHTING. IN THE FINANCIAL STATEMENTS NO SEPARATE SEGMENT HAS BEEN PROVIDED IN RESPECT OF SALE OF THE CUSTOMER CARE AND LIGHTING PRODUCTS. IN ABSENCE OF SUCH SEGMENT RESULT, THE ENTITY LEVEL RESULT OF THE COMPANY CANNOT BE COMPARED WITH THE ASSES SEE. FURTHER ON PAGE 49 OF THE ANNUAL R EPORT (PAGE 1304 OF THE PAPER BOOK ) OF THE COMPANY FOLLOWIN G DETAILS HAVE BEEN PROVIDED IN RESPECT OF ACQUISITIONS AND MERGERS: 1. ACQUISITIONS IN JANUARY 2009, THE COMPANY ACQUIRED 100% SHAREHOLDING IN INDIA BASED CITI TECHNOLOGY SERVICES LIMITED (SUBSEQUENTLY RENAMED AS WIPRO TECHNOLOGY SERVICES WTS ) FOR A PURCHASE CONSIDERATION OF US $ 127 MILLION. WTS IS AN INDIA BASED PROVIDER OF INFORMATION TECHNOLOGY SERVICES AND SOLUTIONS TO CITI GROUP WORLDWIDE. WTS HAS A STRO NG COMPETENCY IN TECHNOLOGY INFRASTRUCTURE SERVICES (TIS), APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES (ADM) FOR CARDS, CAPITAL MARKETS AND CORPORATE BANKING. THE ACQUISITION WILL ENHANCE WIPRO S CAPABILITIES TO COMPETE FOR BOTH TIS BUSINESS AND ADM B USINESS IN THE FINANCIAL SERVICE INDUSTRY. (NOTE 5 IN THE NOTES TO ACCOUNTS OF THE ANNUAL PARENT FINANCIAL STATEMENTS.) 2. MERGER OF CE R TAIN SUBSIDIARIES . IN MARCH 2008, PURSUANT TO THE SCHEME OF AMALGAMATION APPROVED BY THE HONORABLE HIGH COURT OF KARNA TAKA AND HIGH COURT OF JUDICATURE AT BOMBAY, THE COMPANY HAD MERGED MPOWER SOFTWARE SERVICES INDIA PRIVATE LIMITED ( MPOWER ), MPACT TECHNOLOGY SERVICE PRIVATE LIMITED ( MPACT ) AND CMANGO INDIA PRIVATE LIMITED ( CMANGO ) WITH THE COMPANY RETROSPECTIVELY FROM APRIL 1, 2007, THE APPOINTED DATE. MPOWER, 17 ITA NO.1163/DEL/2014 MPACT AND CMANGO WERE FULLY HELD BY WIPRO INC., WHICH IN TURN IS A WHOLLY OWNED SUBSIDIARY OF THE COMPANY. IN THE CURRENT YEAR, PURSUANT TO THE SCHEME OF AMALGAMATION, THE COMPANY HAS ALLOTTED 968,803 FULLY P AID EQUITY SHARE WITH A MARKET VALUE AS ON APRIL 1, 2007 OF RS.542 MILLION AS CONSIDERATION TO A WIPRO INC. TRUST TO BE HELD FOR THE BENEFIT OF WIPRO INC. (NOTE 6 IN THE NOTES TO ACCOUNTS OF THE ANNUAL PARENT FINANCIAL STATEMENTS). 6.5.25 T HUS , IT IS EVIDENT THAT ACQUISITION AND MERGERS HAS ENHANCED THE CAPABILITY OF THE COMPANY. THIS BEING AN EXTRAORDINARY EVENT DURING THE YEAR UNDER CONSIDERATION, THE COMPANY CANNOT BE COMPARED WITH ASSESSEE COMPANY. ACCORDINGLY WE DIRECT THE AO/TPO TO EXCLUDE ABOVE COMPANY FROM THE LIST OF THE COMPARABLES. ZENITH INFOTECH LTD: 6.5.27 T HE LEARNED COUNSEL SUBMITTED THAT THE COMPANY IS ENGAGED IN VARIOUS PRODUCTS AND NO SEGMENT INFORMATION IS AVAILABLE IN THE ANNUAL R EPORT OF THE COMPANY. HE SUBMITTED TH AT COMPANY HAS SHOWN GROWTH OF 76.35 PERCENT AS COMPARED TO PREVIOUS YEAR AND THUS THIS BEING EXCEPTIONAL YEARS IN TERMS OF FINANCING PERFORMANCE THE COMPANY SHOULD BE EXCLUDED AS COMPARABLE. HE ALSO SUBMITTED THAT TRIBUNAL IN ASSESSMENT YEAR 2008 - 09 HAS E XCLUDED THE COMPANY AS COMPARABLE. THE LD. CIT (DR), ON THE OTHER HAND , SUBMITTED THAT THE COMPARABLE COMPAN Y IS FUNCTIONALLY SIMILAR TO THE ASSESSEE COMPANY. 6.5.28 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE MANAG EMENT DISCUSSION AND ANALYSIS OF THE COMPARABLE COMPANY ON PAGES 1401 OF THE PAPER BOOK, READS AS UNDER: THE COMPANY'S BUSINESS COMPRISES OF DOMESTIC AND OVERSEAS OPERATIONS: DURING THE YEAR THE OVERSEAS OPERATIONS OF THE COMPANY REGISTERED STRONG GROWT H. REVENUES FROM OUR OVERSEAS OPERATIOSN DOUBLED TO RS. 183.72 CRORES FROM RS. 97.33 CRORES DURING THE PREVIOUS YEAR. THIS GROWTH WAS DRIVEN BY THE 18 ITA NO.1163/DEL/2014 SALES OF THE COMPANY S SAAZ REMOTE MANAGEMENT SOFTWARE, - VIRTUAL NOC REMOTE MANAGEMENT SERVICE AND THE BACKUP AND DISASTER RECOVERY (BDR) PRODUCT LINE. BEING A SOFTWARE PRODUCT COMPANY, THE COMPANY SELLS ITS PRODUCTS THROUGH A VAST NETWORK OF RESELLERS IN NORTH AMERICA, UK AND AUSTRALIA. THE COMPANY'S RESELLER NETWORK GREW FROM APPROXIMATELY 1,500 RESELLERS AT TH E END OF 2007 - 2008 TO MORE THAN 3,000 RESELLERS AT THE END OF 2008 - 09. THE NUMBER OF ENTERPRISES USING THE COMPANIES SAAZ PRODUCT AND VIRTUAL NOC SERVICE INCREASED FROM APPROXIMATELY 10,000 AT THE END OF 2007 - 2008 TO OVER 22,000 CUSTOMERS AT THE END OF 20 06 - 2009. WITH RESPECT TO RE THE COMPANY'S BDR PRODUCT, THE NUMBER OF INSTALLATIONS INCREASED FROM APPROXIMATELY 3,000 AT THE END OF 2007 - 200810 OVER 9,000 AT ME END OF 2008 - 2009. TOWARDS THE END OF THE FINANCIAL YEAR, THE COMPANY LAUNCHED A NEW PRODUCT I N THE BACKUP AND DISASTER RECOVERY RENT CALLED ARCA (ADVANCED RECOVERY AND CONTINUITY APPLIANCE). ARCA IS A BUSINESS CONTINUITY PRODUCT DESIGNED FOR MID - MARKET AND ENTERPRISE CUSTOMERS AS COMPARED TO THE COMPANY'S BDR PRODUCT WHICH IS MEANT FOR SMB (SMALL AND MEDIUM BUSINESS) CUSTOMERS. IN THE CURRENT YEAR THE COMPANY IS LAUNCHING ITS SMARTSTYLE COMPUTING LINE OF PRODUCTS TARGETED TOWARDS THE UPCOMING CLOUD COMPUTING SEGMENT. AS OF NOW THE PRODUCT IS IN TRIAL WITH OVER 50 CUSTOMERS AND THE COMPANY ANTICIPA TES LAUNCHING THIS PRODUCT TOWARDS THE END OF 2009.' 6.5.29 T HUS , IT IS EVIDENT THAT GROWTH DURING THE YEAR IS ON ACCOUNT OF THE SALES OF SOFTWARE PRODUCT. WE FIND THAT THE ASSESSEE IS ALSO ENGAGED IN SUPPLYING SERVICES AS WELL AS SOFTWARE PRODUCTS TO ITS AE, THE FUNCTION OF THE ASSESSEE ARE COMPARABLE TO THE COMPARABLE COMPANY AND THUS IT CANNOT BE EXCLUDED MERELY ON THE GROUND THAT IT IS HAVING HIGHER PROFIT DURING THE YEAR. NO OTHER REASON HAS BEEN RAISED BY THE ASSESSEE FOR EXCLUDING TH E ABOVE COMPANY. IN VIEW OF ABOVE, WE DIRECT THE LD. AO/TPO TO RETAIN THE ABOVE COMPARABLE IN THE LIST OF COMPARABLES UNDER SOFTWARE DEVELOPMENT SERVICE SEGMENT. 7 . IN RESPECT OF GROUND NO. 14, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT DURING THE C OURSE OF ASSESSMENT PROCEEDING THE ASSESSEE FURNISHED THAT IN COMPARING MARGINS EARNED BY THE COMPARABLES VIZ - A - VIZ THE ASSESSEE, DIFFERENCE ON ACCOUNT OF WORKING CAPITAL EMPLOYED NEED TO BE FACTORED INTO. BUT THIS CLAIM OF THE ASSESSEE 19 ITA NO.1163/DEL/2014 WAS NOT ACCEPTED ON THE GROUND THAT THE ASSESSEE HAD NOT BEEN ABLE TO DEMONSTRATE THAT THE DIFFERENCE IN WORKING CAPITAL EMPLOYED BY THE COMPARABLE S AND THE ASSESSEE AFFECTED THE COMPARABILITY AND RELIABLE DATA WAS NOT AVAILABLE FOR MAKING SUCH ADJUSTMENT. 7 .1 BEFORE US , THE LEARNED COUNSEL SUBMITTED THAT DETAILED COMPUTATION WAS FILED BEFORE THE LD. DRP AND A COPY OF WHICH WAS MADE AVAILABLE ON PAGE 300 - 302 OF THE PAPER BOOK FILED BEFORE THE TRIBUNAL. 7 .2 HE FURTHER SUBMITTED THAT THE TRIBUNAL HAS ALLOWED WORKING CAPIT AL ADJUSTMENT IN ASSESSMENT YEAR 2010 - 11 AND ASSESSMENT YEAR 2008 - 09 IN THE CASE OF THE ASSESSEE ITSELF. HE ALSO SUBMITTED THAT THE LEARNED TPO HIMSELF HAS ALLOWED WORKING CAPITAL ADJUSTMENT IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2011 - 12 AND ASSES SMENT YEAR 2012 - 13. FURTHER , IN SUPPORT OF THE CLAIM OF WORKING CAPITAL ADJUSTMENT THE LD. COUNSEL RELIED ON FOLLOWING DECISIONS: MERCER CONSULTING (INDIA) PVT. LTD - (ITA NO.966/DEL/2014) - FOR AY 2009 - 10. AGILENT TECHNOLOGIES INTERNATIONAL PRIVATE LIMIT ED (ITA NO. 1837/DEL/2014) ALSO IN NAVISITE INDIA PRIVATE LIMITED (ITA NO. 5329/DEL/2012) [PARA 72, PAGE 53] NORTEL NETWORKS INDIA PVT. LTD. - DELHI ITAT - ITA 4765/ DEL/ 2011 AND 427/ DEL/ 2013 - PAGE 8 (PARA 10.8) 7 .3 LD. CIT(DR), ON THE OTHER HAND , RELYING ON THE ORDER OF THE LOWER AUTHORITIES SUBMITTED THAT ASSESSEE CANNOT MAKE A REQUEST FOR WORKING CAPITAL ADJUSTMENT AT THE STAGE OF THE TRIBUNAL. 7 .4 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE A SSESSEE HAS REQUESTED FOR ALLOWING WORKING CAPITAL ADJUSTMENT, WHICH THE LEARNED TPO HAS DISCUSSED ON PAGE 55 OF HIS ORDER. SIMILARLY THE LD. DRP HAS ALSO DISCUSSED THE OBJECTION OF THE ASSESSEE AGAINST DENIAL OF WORKING CAPITAL ADJUSTMENT WHILE ADJUDICATI NG GROUND 11 AND 12 OF THE OBJECTIONS OF THE ASSESSEE. THE LD. DRP HELD THAT ADJUSTMENT OF FUNCTIONAL DIFFERENCES IF ANY CAN BE MADE ONLY IF THOSE DIFFERENCES CAN BE ASCERTAINED ACCURATELY AND THEIR 20 ITA NO.1163/DEL/2014 IMPACT ON THE MARGINS CAN BE ASSESSED WITH REASONABLE ACC URACY AND IN ABSENCE OF THIS INFORMATION IT WAS IMPOSSIBLE TO QUANTIFY THE ADJUSTMENT OF SUCH DIFFERENCE. 7 .5 IN VIEW OF THE ABOVE FINDING, IS EVIDENT THAT THE CLAIM OF WORKING CAPITAL ADJUSTMENT HAS NOT BEEN MADE FOR FIRST TIME BEFORE THE TRIBUNAL. FURTH ER WE FIND THAT THE WORKING CAPITAL ADJUSTMENT HAS BEEN ALLOWED TO THE ASSESSEE BY THE TRIBUNAL IN ASSESSMENT YEAR 2008 - 09 AS UNDER: 18. HAVING GONE THROUGH THE ABOVE CITED DECISION, WE FIND THAT IN THE CASE OF NAVSITE INDIA PVT. LTD. VS. INCOME TAX OFF ICER (SUPRA), THE ITAT AFTER DISCUSSING THE ISSUE IN DETAIL HAS RESTORED BACK THE ISSUE TO THE FILES OF THE LEARNED TPO FOR MAKING THE WORKING CAPITAL ADJUSTMENT TO THE PROFIT MARGINS OF COMPARABLES AFTER AFFORDING OPPORTUNITY TO DEMONSTRATE THAT THERE WAS DIFFERENCE IN THE LEVELS OF WORKING CAPITAL EMPLOYED, VIS - - VIS THE COMPARABLES. FOLLOWING THE SAME, WE HOLD THAT THE OPENING WORKING CAPITAL DEPLOYED AND THE CLOSING WORKING CAPITAL DEPLOYED HAS TO BE TAKEN INTO CONSIDERATION FOR MAKING ANY ADJUSTMENT TO THE WORKING CAPITAL DEPLOYED IN THE CASE OF A COMPARABLE, OF COURSE, THE ASSESSEE FOR AVAILING THE ABOVE BENEFIT HAS TO DEMONSTRATE THAT THERE WAS DIFFERENCE IN THE LEVELS OF WORKING CAPITAL EMPLOYED, VIS - A - VIS, THE COMPARABLES. WE THUS SET ASIDE THE MATT ER TO THE FILE OF THE TPO TO DECIDE THE ISSUE ACCORDINGLY AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NO. 8 IS THUS ALLOWED FOR STATISTICAL PURPOSES. 7 .6 THE ASSESSEE SUBMITTED THAT IN ASSESSMENT YEAR 2011 - 12 AND ASSESSMENT YEAR 2012 - 13 THE LEARNED TPO HIMSELF HAS ALLOWED THE WORKING CAPITAL ADJUSTMENT. THE LD. CIT (DR) HAS NOT DISPUTED THIS FACT. 7 .7 IN VI EW OF THE ABOVE, FOLLOWING THE RULE OF C ONSISTENCY AND FINDING OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2008 - 09, WE DIRECT THE LD. AO/TPO TO GIVE EFFECT OF THE WORKING CAPITAL ADJUSTMENT TO THE WORKING CAPITAL EMPLOYED BY THE COMPARABLES. THUS , WE SET ASIDE AND RESTORE THE ISSUE OF ALLOWING WORKING CAPITAL ADJUSTMENT TO THE FILE OF THE LD. A O/TPO FOR DECIDING AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 21 ITA NO.1163/DEL/2014 8 . IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE DECISION IS PRONOUN CED IN THE OPEN COURT ON 3 0 T H NOV . , 201 7 . S D / - S D / - ( H.S. SIDHU ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 3 0 T H NOVEMBER , 201 7 . RK / - (D.T.D) COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR ASST. REGISTRAR, ITAT, NEW DELHI