Agile Software Enterprise Private Limited, Bangalore V. ITO, Bangalore

ITA 1172/BANG/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80714 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 18-09-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 26-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITIDR
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT( TP )A NO.1172/BANG/2010 ASSESSMENT YEAR : 2006-07 AGILE SOFTWARE ENTERPRISE PRIVATE LIMITED, C/O. ORACLE INDIA PRIVATE LTD. DLF BUILDING, NO.8, TOWER C, GROUND & SECOND FLOOR, DLF CYBER CITY, DLF PHASE-II, GURGAON, HARYANA 122 002. PAN: AACCP 4972D VS. THE INCOME TAX OFFICER, WARD 11(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI NIRAJ D. SHETH, C.A. RESPONDENT BY : SHRI C.H. SUNDAR RAO, CIT-I(DR) DATE OF HEARING : 18.9.2014 DATE OF PRONOUNCEMENT : 26.9.2014 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AG AINST THE ASSESSMENT ORDER DATED 19.8.2010 PASSED BY THE AO U /S. 143(3) R.W.S. ITA NO.1172/BANG/2010 PAGE 2 OF 19 144C OF THE INCOME-TAX ACT, 1961 ['THE ACT'] PURSUA NT TO THE DIRECTIONS OF THE DRP DATED 19.7.2010. IT HAS RAISED 12 GROUND S, OF WHICH GROUNDS NO.1 TO 4 ARE TRANSFER PRICING (TP) RELATED ISSUE S, WHEREAS GROUNDS NO.5 TO 10 ARE ON CORPORATE TAX ISSUES. GROUND NOS. 11 & 12 ARE GENERAL. TRANSFER PRICING ISSUES 2. ISSUES RELATING TO TRANSFER PRICING AND ARE TAKE N UP FIRST. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT HE WAS MAINLY ASSAI LING INCLUSION OF CERTAIN COMPANIES AS COMPARABLES SELECTED BY THE TPO. AS P ER THE LD. AR, THE OTHER ISSUES RAISED IN GROUNDS NO.1 TO 4 COULD BE C ONSIDERED IN AN APPROPRIATE CASE WHERE SUCH ISSUES ARE CRITICAL. H ENCE, ADJUDICATION IS LIMITED TO THE GRIEVANCES REGARDING SELECTION OF CO MPARABLES. 3. FACTS APROPOS ARE THAT THE ASSESSEE HAD DURING T HE RELEVANT PREVIOUS YEAR INTERNATIONAL TRANSACTIONS OF RS.16,1 1,00,251 ON SOFTWARE DEVELOPMENT SERVICES, WHICH WERE RENDERED BY IT TO ITS ASSOCIATED ENTERPRISES (AE) CALLED, AGILE, USA. THE ASSES SING OFFICER MADE A REFERENCE OF THE INTERNATIONAL TRANSACTIONS TO THE TPO FOR FIXING THE ARMS LENGTH PRICE (ALP). 4. DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, THE FINANCIAL RESULTS OF THE COMPANY ARISING OUT OF SOFTWARE DEVE LOPMENT SERVICES WERE FOUND TO BE AS UNDER:- ITA NO.1172/BANG/2010 PAGE 3 OF 19 DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 16,11,00,251 OPERATING COST 14,64,54,774 OPERATING PROFIT (PBIT) 1,46,45,477 OPERATING PROFIT TO COST RATIO 10% 5. THE TPO ACCEPTED THE CLAIM OF THE ASSESSEE THAT IT WAS A SOFTWARE DEVELOPMENT SERVICE PROVIDER. AS PER THE TPO, COMP ARISON OF THE WORKING RESULTS OF THE COMPANY HAD TO BE DONE WITH ENTITIES WHICH WERE HAVING REVENUE FROM SOFTWARE DEVELOPMENT SERVICES IN EXCES S OF 75% OF THEIR TOTAL REVENUES. THE TPO THEREAFTER CONSIDERED THE TP DOC UMENTATION FURNISHED BY THE ASSESSEE AND ALSO COMPARABLES SELECTED BY TH E ASSESSEE AND AFTER APPLYING FILTERS, SETTLED ON 20 COMPARABLE COMPANIE S LISTED IN PAGE 131 OF HIS ORDER. THOUGH THE ASSESSEE HAD RAISED OBJECTION S WITH REGARD TO 13 COMPANIES CONSIDERED FOR COMPARISON BY THE TPO, SUC H OBJECTIONS WERE OVERRULED. 6. WHEN THE ASSESSEE MOVED THE DRP AGAINST THE DRAF T ASSESSMENT ORDER PROPOSED BY THE AO IN LINE WITH THE TPO DIREC TIONS, THE DRP CONFIRMED THE SELECTION OF THE COMPARABLES DONE BY THE TPO. THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS OF T HE COMPARABLES SELECTED BY THE TPO CAME TO 20.68% ON WHICH HE ALLOWED WORKING CAPITAL ADJUSTMENT OF 0.80% AND ARRIVED AT AN ADJUSTED ARITHMETIC MEAN OF 19.88%. ON THIS BASIS, AN ADDITION OF RS.1,44,69,371 WAS MADE. ITA NO.1172/BANG/2010 PAGE 4 OF 19 7. NOW BEFORE US, THE LD. AR SUBMITTED WITH REGARD TO THE COMPANIES MENTIONED BY THE TPO AT SL.NOS. 15, 19, 12, 8, 13, 14 & 17 THAT HE HAD NO OBJECTION WHATSOEVER. THESE COMPANIES ARE:- (1) BODHTREE CONSULTING LTD. (2) LANCO GLOBAL SYSTEMS LTD., (3) MEDIASOFT SOLUTIONS P. LTD., (4) R. SYSTEMS INTERNATIONAL LTD. (5) R.S. SOFTWARE (INDIA) LTD. (6) SIP TECHNOLOGIES & EXPORTS LTD., AND (7) SYNFOSYS BUSINESS SOLUTIONS LTD. ACCORDING TO THE LD. AR, HIS OBJECTIONS WERE CONFIN ED TO THE FOLLOWING COMPARABLES:- 1. INFOSYS LTD. 2. FLEXTRONICS SOFTWARE SYSTEMS LTD. 3. IGATE GLOBAL SOLUTIONS LTD. 4. MINDTREE CONSULTING LTD. 5. PERSISTENT SYSTEMS LTD. 6. SASKEN COMMUNICATION LTD. 7. KALS INFOSYSTEMS LTD. 8. ACCEL TRANSMATICS LTD. 9. TATA ELXSI LTD. 10. LUCID SOFTWARE LTD. 11. MEGASOFT LTD. 12. AZTECH SOFTWARE LTD. 13. GEOMETIC SOFTWARE LTD. 8. SPECIFIC PLEA TAKEN BY THE LD. AR AND REPLY OF T HE LD. DR ON EACH OF THE ABOVE COMPANIES AND ALSO OUR FINDINGS IN THIS R EGARD ARE GIVEN HEREUNDER:- 8.1 INFOSYS LTD. : THE LD. AR SUBMITTED THAT TURNOVER OF THE SAID COMPANY WAS 9028 CRORES WHEREAS TURNOVER OF THE ASS ESSEE WAS ONLY ITA NO.1172/BANG/2010 PAGE 5 OF 19 RS.16.11 CRORES. ACCORDING TO HIM, THIS TRIBUNAL I N THE CASE OF EMC DATA STORAGE SYSTEMS (INDIA) PVT. LTD., [EMC DATA] V. DCIT, IN IT(TP)A NO.1274/BANG/2010 DATED 18.7.2014 HAD APPLIED A TURNOVER FILTER OF 1 TO 200 CRORES AND FOUND THAT I NFOSYS LTD. COULD NOT BE CONSIDERED AS A COMPARABLE AT ALL. AS PER THE LD. AR, SIMILAR VIEW WAS TAKEN BY THE COORDINATE BENCH IN OTHER DECISIONS IN CLUDING GENESIS INTEGRATING SYSTEMS INDIA PVT. LTD. V. DCIT, ITA NO .1231/BANG/2010 DATED 5.8.2011 , TRILOGY E-BUSINESS SOFTWARE (I) PVT. LTD. V. DCIT I N ITA NO.1054/BANG/2010 DATED 23.11.2012, 24 X 7 CUSTOMER .COM V. DCIT, ITA NO.227/BANG/2010 DATED 9.11.2012. 8.1.1 PER CONTRA, THE LD. DR SUBMITTED THAT TURNOV ER FILTER WAS NOT AN APPROPRIATE MEASURE FOR EXCLUSION OF COMPARABLES. HE RELIED ON THE DECISION OF THE MUMBAI BENCH OF THIS TRIBUNAL IN CAPGEMINI INDIA (P.) LTD. V. ACIT (2014) 147 ITD 330. AS PER THE LD. DR, IN THE ABOVE DECISION IT WAS HELD THAT TURNOVER WAS NOT AN APPRO PRIATE CRITERIA TO BE APPLIED FOR EXCLUSION/ INCLUSION OF COMPARABLES. 8.1.2 WE HAVE HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT INFOSYS LTD. WAS HAVING TURNOVER FAR IN EXCESS OF T HE ASSESSEE. THE ASSESSEE WAS A MINISCULE COMPANY WHEN COMPARED TO I NFOSYS LTD. THAT TURNOVER FILTER CAN BE ADOPTED FOR SELECTION OF COM PARABLES HAS BEEN HELD BY COORDINATE BENCHES OF THIS TRIBUNAL IN A NUMBER OF DECISIONS. WE FIND THAT THIS TRIBUNAL IN THE CASE OF EMC DATA (SUPRA) HAD EXCLUDED A ITA NO.1172/BANG/2010 PAGE 6 OF 19 NUMBER OF COMPANIES APPLYING THE TURNOVER FILTER WI TH THE FOLLOWING OBSERVATIONS:- TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 3 43.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES 10. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA P VT.LTD. (SUPRA), WE HOLD THAT THE AFORESAID COMPANIES (LIST ED AT S.NO.3, 5, 6, 17 & 20 OF THE LIST OF COMPARABLE COMPANIES SET OUT IN THE CHART GIVEN PARA-4 OF THIS ORDER) SHOULD BE EXCLUDE D FROM THE LIST OF COMPARABLE COMPANIES. THE AO IS DIRECTED TO COM PUTE THE ARITHMETIC MEAN BY EXCLUDING THE AFORESAID COMPANIE S FROM THE LIST OF COMPARABLE. 8.1.3 IN THE CASE OF EMC DATA ALSO, THEIR TURNOVER WAS LESS THAN 200 CRORES. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE HOLD THAT INFOSYS LTD. CANNOT BE CONSIDERED AS A COMPARABLE AND HAS TO BE EXCLUDED FOR WORKING OUT THE AVERAGE PLI OF THE COMPARABLES. 8.2 FLEXTRONIC SOFTWARE SYSTEMS LTD. 8.3 IGATE GLOBAL SOLUTIONS LTD. 8.4 MINDTREE CONSULTING LTD. 8.5 PERSISTENT SYSTEMS LTD. 8.6 SASKEN COMMUNICATION TECHNOLOGIES LTD. ALL THE ABOVE COMPANIES WERE ALSO REJECTED AS COM PARABLES ON THE BASIS OF TURNOVER FILTER IN THE CASE OF EMC DATA (SUPRA) . PERTINENT PORTION ITA NO.1172/BANG/2010 PAGE 7 OF 19 OF THAT ORDER HAS BEEN REPRODUCED AT PARA 8.1.2 ABO VE. ACCORDINGLY, WE ARE OF THE OPINION THAT THESE COMPANIES CANNOT BE C ONSIDERED AS PROPER COMPARABLES FOR WORKING OUT THE ALP. THOUGH THE LD . DR HAS TAKEN AN OBJECTION THAT THE ASSESSEE HAD NOT MADE ANY OBJECT ION BEFORE THE TPO WITH REGARD TO MINDTREE CONSULTING LTD. AND PERSIST ENT SYSTEMS LTD., WE ARE OF THE OPINION THAT IT IS HARDLY OF ANY CONSEQU ENCE. THE TURNOVER OF SUCH COMPANIES DID EXCEED RS.200 CRORES, AND THE PO INT OF TIME OR STAGE AT WHICH ASSESSEE ASSAILS ITS EXCLUSION IS NOT, IN OUR OPINION, A YARDSTICK FOR APPLYING THE FILTER. 8.7 KALS INFORMATION SYSTEMS LTD : THE LD. AR SUBMITTED THAT THIS COMPANY WAS A SOFTWARE PRODUCT COMPANY AND COULD NO T BE COMPARED WITH THAT OF THE ASSESSEE. THE ASSESSEE WAS A SOFTWARE SERVICES COMPANY AND NOT A SOFTWARE PRODUCT COMPANY. RELIANCE WAS PLACE D ON THE DECISION OF TRILOGY E-BUSINESS SOFTWARE (I) PVT. LTD. (SUPRA) . AS PER THE LD. AR, SAME VIEW WAS TAKEN IN EMC DATA (SUPRA) ALSO. 8.7.1 PER CONTRA, THE LD. DR SUBMITTED THAT KALS I NFORMATION SYSTEMS LTD. COULD NOT BE CONSIDERED AS A SOFTWARE PRODUCT COMPA NY. 8.7.2 WE HAVE PERUSED THE ORDERS AND HEARD THE RIVA L CONTENTIONS. WE FIND THAT KALS INFORMATION SYSTEMS LTD. WAS CONSIDE RED AS A SOFTWARE PRODUCT COMPANY IN BOTH TRILOGY E-BUSINESS (SUPRA) AS WELL AS EMC ITA NO.1172/BANG/2010 PAGE 8 OF 19 DATA (SUPRA) . IN THESE DECISIONS, A HOST OF COMPANIES, INTER ALIA , INCLUDING KALS INFORMATION SYSTEMS LTD. WERE DELIBERATED UPON AND HELD AS UNDER:- 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS O F THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN T HE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA): (D) KALS INFORMATION SYSTEMS LTD. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVE NUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED O UT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPOT, TH E SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THA N 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERE NCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE I TAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT O F IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPA NIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATI ON SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION 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 I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWA RE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. ITA NO.1172/BANG/2010 PAGE 9 OF 19 BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJECTED AS A COMPARABLE. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMIS SION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO 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 PUBLIC DOMAI N COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFE RRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAIN LY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFOR E ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY I S NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOF TWARE 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 THA T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDE R. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ITA NO.1172/BANG/2010 PAGE 10 OF 19 ENTERPRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASS ET 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 TH E 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 CL AIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFI CER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIS T OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COM PANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T HE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN F OR 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 T HE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNS EL FOR THE ASSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 13. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AF ORESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICA L IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA). RESPECTFULLY FOLL OWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE C ASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA), WE DIREC T THAT THE ITA NO.1172/BANG/2010 PAGE 11 OF 19 FOLLOWING COMPANIES (LISTED AS SL.NO.4 & 15 OF THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO AND LISTED I N PARA-4 OF THIS ORDER) BE EXCLUDED FROM THE LIST OF 20 COMPARA BLE ARRIVED AT BY THE TPO. 8.7.3 IT MIGHT BE TRUE THAT A NUMBER OF SOFTWARE DEVELOPMENT COMPANIES IN THEIR TP STUDIES MIGHT HAVE CONSIDERED KALS INFO SYSTEMS LTD. AS A COMPARABLE AND NOT AS A SOFTWARE PRODUCT COMPANY. HOWEVER THIS, IN OUR OPINION, WILL NOT DILUTE THE FINDINGS IN THIS REGAR D GIVEN BY THE TRIBUNAL. THE ASSESSEE HAVING RELIED ON THE DECISION OF THE TRIBU NAL WHEREIN IT HAS BEEN HELD THAT KALS IS A SOFTWARE PRODUCT COMPANY, UNLES S THE DECISION OF A HIGHER AUTHORITY WHICH IS DIFFERENT FROM THE ONE GI VEN BY THE COORDINATE BENCH IS SHOWN BY THE REVENUE, IT WILL NOT BE POSSI BLE TO DEVIATE FROM THE VIEW EARLIER TAKEN BY A COORDINATE BENCH. ACCORDIN GLY, WE DIRECT THAT KALS INFORMATION SYSTEMS LTD. BE EXCLUDED FROM THE COMPA RABLES. 8.8 ACCEL TRANSMATICS LTD. : LD. AR RAISED SIMILAR CONTENTIONS FOR EXCLUSION OF THIS COMPANY AS WAS MADE IN THE CASE O F KALS INFORMATION SYSTEMS LTD. (SUPRA) . LD. DR ALSO RAISED SIMILAR OBJECTIONS. WE FIND THAT ACCEL TRANSMATICS LTD. HAS ALSO BEEN CONSIDERED AS A SOFTWARE PRODUCT COMPANY BY THIS TRIBUNAL IN THE DECISIONS CITED AT PARA 8.7.2 ABOVE. RELEVANT PART OF THE DECISION HAS BEEN REPRODUCED B Y US THEREIN. ACCORDINGLY, WE DIRECT THAT ACCEL TRANSMATICS LTD. BE EXCLUDED FROM THE COMPARABLES. ITA NO.1172/BANG/2010 PAGE 12 OF 19 8.9 TATA ELXSI LTD. : LD. AR SUBMITTED THAT THIS COMPANY WAS ENGAGED I N RESEARCH & DEVELOPMENT WHICH RESULTED IN CREATION O F INTELLECTUAL PROPERTY RIGHTS AND THEREFORE WAS A SOFTWARE PRODUCT COMPANY . RELIANCE WAS PLACED ON THE DECISION OF COORDINATE BENCH OF THE T RIBUNAL IN THE CASE OF EMC DATA (SUPRA) . 8.9.1 PER CONTRA, THE LD. DR SUBMITTED THAT TATA E LXSI LTD. WAS NOT A SOFTWARE PRODUCT COMPANY, BUT WAS ENGAGED ONLY IN D EVELOPMENT OF SOFTWARE. 8.9.2 WE HAVE HEARD THE RIVAL CONTENTIONS. WHETHE R TATA ELXSI LTD. COULD BE CONSIDERED AS A SOFTWARE DEVELOPMENT COMPANY WAS ONE OF THE ISSUES WHICH CAME UP FOR CONSIDERATION BEFORE THE THIS TRI BUNAL IN THE CASE OF EMC DATA (SUPRA) , WHEREIN IT WAS HELD AS UNDER:- 17. AS FAR AS COMPARABLE AT SL.NO.9 OF THE LIST O F COMPARABLE CHOSEN BY THE TPO LISTED IN THE CHART GIVEN AT PARA -4 OF THIS ORDER VIZ., TATA ELXSI LTD., IS CONCERNED, THE COMPARABI LITY OF THE AFORESAID TWO COMPANIES WITH THAT OF THE SOFTWARE S ERVICE 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:- 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 ARE CONCERNED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH THAT OF THE SOFTWARE SERVICE PROVIDE R WAS CONSIDERED BY THE MUMBAI 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:- ITA NO.1172/BANG/2010 PAGE 13 OF 19 7.6 FLEXTRONICS SOFTWARE SYSTEMS LTD.: AS PER THE STATEMENT OF THE LEARNED AR, THIS COMPAN Y IS ALSO INVOLVED IN THE DEVELOPMENT OF THE SOFTWARE PRODUCT AND IS ALSO INVOLVED IN BPO SERVICES, BESID ES JOINT SOFTWARE CONSULTANCIES FOR THE USE IN TELECOMMUNICATION INDUSTRIES. THUS, BEING PRODUCT AND SERVICE COMPANY, IT CANNOT BE TAKEN AS COMPARABLE. HOWEVER, THE LEARNED CIT DR HAS AMPLY CONTROVERTED THE SAID CONTENTION OF THE LEARNED AR BY SUBMITTING BEFORE US A COPY OF PROFIT AND LOSS ACCO UNT OF THE COMPANY FOR THE RELEVANT ASSESSMENT YEAR, OBTAINED FROM THE PUBLIC DOMAIN. FROM THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE SAID COMPANY, IT IS SEEN THAT THE REVENUE SALES FRO M SERVICES CONSTITUTES ALMOST 90% AND THE PRODUCT SAL ES IS ONLY 10%. THUS, IN THIS CASE ALSO NOT MUCH ADJUSTMENT IS REQUIRED TO BE MADE FOR TAKING THE PROFIT RATIO FOR COMPARING IT WITH THE ASSESSEE IN DETERMINING THE ARMS LENGTH PRICE. IN VIEW OF THE ABOVE, WE HOLD THAT TPO HAS RIGHTLY INCLUDED THE SA ID COMPANY AS COMPARABLE CASE WHICH CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE PROFIT RATIO. 7.7. TATA ELXSI LIMITED.: FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEE N NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETA ILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICE S. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARAB LE PARTIES. 15. IN VIEW OF THE ABOVE, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY AT ITA NO.1172/BANG/2010 PAGE 14 OF 19 SL.NO.6 VIZ., FLEXTRONICS SOFTWARE SYSTEMS PVT. LTD . SHOULD BE TAKEN AS A COMPARABLE, WHILE COMPARABLE A T SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED A S A COMPARABLE. 18. IN VIEW OF THE AFORESAID DECISION, WE HOLD THA T TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE CHOSEN B Y THE TPO. 8.9.3 THE ASSESSEE BEFORE US IS NOT DEVELOPING A NY NICHE PRODUCT. AS HELD BY THE COORDINATE BENCH OF THE TRIBUNAL (SUPRA) , TATA ELXSI LTD. COULD NOT BE CONSIDERED AS A SOFTWARE DEVELOPMENT COMPANY SIMPLICITOR. THAT TATA ELXSI LTD. WAS FUNCTIONALLY DIFFERENT, HAS BEE N HELD BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF YODLEE INFOTECH PVT. LTD. (ITA NO.1397/BANG/2010 DATED 15.2.2013) AS WELL. WE THEREFORE DIRECT THAT TATA ELXSI LTD. BE EXCLUDED FROM THE COMPARABLES. 8.10 LUCID SOFTWARE LTD. : THE LD. COUNSEL FOR THE ASSESSEE RAISED SIMILAR CONTENTIONS AS IN THE CASE OF TATA ELXSI LTD. HERE ALSO. ACCORDING TO HIM, LUCID SOFTWARE LTD. WAS FUNCTIONALLY DISSIMILAR AND WAS DEVELOPING PRODUCTS AND WAS NOT AN SOFTWARE DEVELOPMENT SERVIC ES COMPANY. 8.10.1 WE FIND THAT LUCID SOFTWARE LTD. WAS ALSO O NE OF THE COMPARABLES WHICH CAME UP FOR CONSIDERATION BEFORE THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF EMC DATA (SUPRA) . EMC DATA WAS ALSO DOING SOFTWARE DEVELOPMENT SERVICES IN ONE OF ITS S EGMENTS AND TPO HAD CONSIDERED LUCID SOFTWARE LTD. ALSO FOR COMPARISON. THE COORDINATE BENCH IN THE AFORESAID DECISION HELD AS UNDER:- ITA NO.1172/BANG/2010 PAGE 15 OF 19 14. THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT T O OUR NOTICE THAT THE COMPARABLE COMPANY CHOSEN BY THE TPO AT SL .NO.10 OF THE CHART GIVEN IN PARA-4 OF THIS ORDER VIZ., LUCID SOFTWARE LIMITED, HAS TO BE EXCLUDED AS FUNCTIONALLY NOT COM PARABLE 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 , WHICH WAS FOLLOWED BY THE ITAT BANGALORE BENCH IN THE CASE OF LOGICA PRIV ATE LTD. ITA NO.1129/BANG/2011 FOR AY 07-08, 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 THE INFORMATION RECEIVED IN RESPONSE TO NOTI CE UNDER 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 SUBSTANTIAL VIS-A-VIS THE CAPITAL EMPLOYED BY THE S AID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABL E PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABIL ITY ANALYSIS, IT IS ESSENTIAL THAT THE CHARACTERISTICS AND THE FUNCTIONS ARE BY AND LARGE SIMILAR AS THAT OF T HE 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 TH E COMPANY, WHO IS INVOLVED IN SERVICE SECTOR. THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILITY RATIO. ITA NO.1172/BANG/2010 PAGE 16 OF 19 IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFORMATION 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 TAKE N INTO ACCOUNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. 15. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AF ORESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICA L IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF LOGICA PR IVATE LTD., (SUPRA). RESPECTFULLY FOLLOWING THE DECISION OF TH E TRIBUNAL REFERRED TO ABOVE IN THE CASE OF LOGICA PVT.LTD..(S UPRA), WE DIRECT THAT THE COMPANY LISTED AS SL.NO.10 OF THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO AND LISTED IN PARA-4 OF THIS ORDER TO BE EXCLUDED FROM THE LIST OF 20 COMPARABLE ARRIVED AT BY THE TPO. 8.10.2 RESPECTFULLY FOLLOWING THE SAID DECISION, W E HOLD THAT LUCID SOFTWARE LTD. WAS NOT FUNCTIONALLY SIMILAR TO THE A SSESSEE AND THE SAME HAS TO BE EXCLUDED FROM THE COMPARABLES. DIRECTED ACCORDINGLY. 8.11 MEGASOFT LTD. 8.12 AZTECH SOFTWARE LTD. 8.13 GEOMETRIC SOFTWARE LTD. LD. AR SUBMITTED THAT IN EACH OF THE ABOVE COMPANI ES THE RPT FILTER EXCEEDED 15%. ACCORDING TO HIM, RPT FILTER HAS BEE N UPHELD BY THIS TRIBUNAL IN A HOST OF DECISIONS INCLUDING THAT OF EMC DATA (SUPRA) . PER CONTRA, THE LD. DR SUPPORTED THE ORDERS OF AUTHORIT IES BELOW. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. APPLICATION OF RPT FILTER WHILE SELECTING THE COMPARABLES HAS BEEN HEL D TO BE AN APPROPRIATE CRITERIA BY THIS TRIBUNAL IN A NUMBER OF DECISIONS. IN THE CASE OF EMC DATA (SUPRA) , IT WAS HELD AS UNDER:- ITA NO.1172/BANG/2010 PAGE 17 OF 19 16. AS FAR AS COMPARABLE COMPANIES AT SL.NO.1 & 2 &19 OF THE CHART OF COMPARABLE COMPANIES CHOSEN BY THE TPO AT PAGE-4 OF THIS ORDER VIZ., AZTEC SOFTWARE LIMITED AND GEOMETR IC SOFTWARE LTD. (SEG.) AND MEGASOFT LTD., IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THE RELATED PARTY TRANSACTION IN THE CASE OF COMPANIES EXCEEDS 15% AND IN VIEW OF THE DECISION O F THE TRIBUNAL IN THE CASE OF 24 X 7 CUSTOMER.COM PVT. LT D. IN ITA NO.227/BANG/2010, FOLLOWED BY THIS TRIBUNAL IN THE CASE OF LOGICA PRIVATE LTD. (SUPRA) WHEREIN IT WAS HELD THA T WHERE THE RPT EXCEEDS 15%, SUCH COMPANIES SHOULD NOT BE TAKEN AS COMPARABLE COMPANIES. FOLLOWING THE SAID DECISION, WE HOLD THAT COMPANIES AT SL.NOS. 1 & 2 & 19 REFERRED TO ABOVE O F THE LIST OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO BE EXCLU DED FROM THE LIST OF COMPARABLE COMPANIES WHILE WORKING OUT THE ALP. THERE IS NO DISPUTE THAT RPT FILTER IN THE CASE OF MEGASOFT LTD. WAS 17.08%, THAT OF AZTECH SOFTWARE LTD. WAS 17.78% AND THAT OF GEOMETRIC SOFTWARE LTD. WAS 19.34%. COORDINATE BENCHES OF TH E TRIBUNAL ARE CONSISTENTLY FOLLOWING 15% AS CUT OFF MARK FOR APPL YING THE RPT FILTER. ACCORDINGLY, WE DIRECT EXCLUSION OF MEGASOFT LTD., AZTECH SOFTWARE LTD. AND GEOMETRIC SOFTWARE LTD. FROM THE COMPARABLES. 9. BASED ON THE ABOVE, WE DIRECT THE AO TO RECOMPUT ED THE PROFIT LEVEL INDICATOR AND WORK OUT THE ARITHMETIC MEAN MA RGIN OF THE COMPARABLES. THEREAFTER, THE AO HAS TO DECIDE WHET HER THE PLI OF THE ASSESSEE IS WITHIN +/- 5% RANGE OF THE ARITHMETIC M EAN OF THE COMPARABLES AS SET OUT U/S. 92C(2) OF THE ACT AND DECIDE ON THE ADJUSTMENT, IF ANY, REQUIRED ON THE ALP. ORDERED ACCORDINGLY. ITA NO.1172/BANG/2010 PAGE 18 OF 19 CORPORATE TAX ISSUES 10. CORPORATE TAX ISSUES RAISED BY THE ASSESSEE VID E ITS GROUNDS 5 TO 10 IS REGARDING EXCLUSION OF TELECOMMUNICATION EXPENDI TURE FROM ITS EXPORT TURNOVER. AN ALTERNATIVE GROUND HAS ALSO BEEN TAKE N THAT IF SUCH EXPENDITURE IS EXCLUDED FROM THE EXPORT TURNOVER, I T HAS TO BE EXCLUDED FROM THE TOTAL TURNOVER ALSO. WE FIND THE ALTERNAT IVE CONTENTION TO BE ACCEPTABLE IN VIEW OF THE JUDGMENT OF HONBLE JURIS DICTIONAL HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD., 349 ITR 98 . THEIR LORDSHIPS HELD THAT IF EXPORT TURNOVER IN THE NUMERATOR WAS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENDITURE, IT SHOULD ALSO BE EXCLUDED FRO M THE TOTAL TURNOVER. SINCE WE HAVE ACCEPTED THE ALTERNATIVE GROUND TAKEN BY THE ASSESSEE, WE DO NOT FIND IT NECESSARY TO ADJUDICATE ON OTHER REL ATED GROUNDS RAISED BY THE ASSESSEE. 11. GROUND NOS. 11 & 12 OF THE ASSESSEE ARE GENERAL NEEDING NO ADJUDICATION. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF SEPTEMBER , 2014 . SD/- SD/- ( N.V. VASUDEVAN ) ( ABRAHAM P. GEORG E ) JUDICIAL MEMBER ACCOUNTANT MEM BER BANGALORE, DATED, THE 26 TH SEPTEMBER , 2014 /D S/ ITA NO.1172/BANG/2010 PAGE 19 OF 19 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.