Broadcom India Research Private Limited, Bangalore V. DCIT, Bangalore

ITA 1180/BANG/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86020 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 30-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITI
• Assessee Lawyers: SREERAM SESHADRI
• Keywords: Related party transaction; Recovery proceedings; Transfer pricing; Double taxation relief; International transaction; Wholly owned subsidiary; Onus to prove; Revenue expenditure
• Section: 143(3); 92D; 80IB; 133(6); 194C; 10B

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. 1180/BANG/2011 ASSESSMENT YEAR : 2007-08 BROADCOM INDIA RESEARCH PRIVATE LIMITED, 4 TH FLOOR, CAMPUS 3 A, RMZ ECOSPACE, BELLANDUR VILLAGE, VARTHUR HOBLI, BANGALORE 560 037. PAN : AACCB 6307L VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI SREERAM SESHADRI, ADVOCATE. RESPONDENT BY : SHRI.C.H. SUNDAR RAO, CIT-I (DR) DATE OF HEARING : 21.01.2015 DATE OF PRONOUNCEMENT : 28.01.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 30.9.2011 OF THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(2) , BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (ACT). IT(TP)A NO. 1180/BANG/2011 PAGE 2 OF 65 2. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF B ROADCOM NETHERLANDS BV., NETHERLANDS, WHICH IN TURN IS A SU BSIDIARY OF BROADCOM CORPORATION, USA. THE ASSESSEE FOCUSES ON DELIVERI NG SEMICONDUCTOR SOLUTIONS FOR COMMUNICATIONS TO THE HOME, ENTERPRIS E AND MOBILE MARKETS. THEIR PRODUCT PORTFOLIO INCLUDES: BLUETOOTH, SHORT- RANGE WIRELESS PRODUCTS FOR PC, MOBILE PHONES, PDAS, KEYBOARDS, MICE AND AU TOMOTIVE ELECTRONICS. 3. THE ASSESSEE HAS FILED CONCISE GROUNDS OF APPEAL AND THOSE GROUNDS ARE TAKEN UP FOR CONSIDERATION. GROUNDS NO .1 TO 6 OF THE CONCISE GROUNDS OF APPEAL FILED BY THE ASSESSEE RELATE TO T HE ADDITION MADE BY THE AO OF RS.2,92,24,427/- TO THE TOTAL INCOME OF THE A SSESSEE ON ACCOUNT OF ADJUSTMENT IN THE ARMS LENGTH PRICE (ALP) OF INTER NATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED E NTERPRISE (AE) UNDER THE PROVISIONS OF SEC.92 OF THE INCOME TAX ACT, 196 1 (ACT). 4. THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT SERVI CES TO ITS AE. THE SAID TRANSACTION WAS AN INTERNATIONAL TRANSACTI ON WITH AN ASSOCIATED ENTERPRISE (AE) AND HAVE TO PASS THE ARMS LENGTH P RICE (ALP) TEST AS PROVIDED U/S.92 OF THE INCOME TAX ACT, 1961 (ACT). FINANCIAL RESULTS OF THE ASSESSEE FOR THE F Y 2006- 07 DESCRIPTION AMOUNT OPERATING REVENUE RS.25,95,40,100/- OPERATING COST RS.23,50,18,401/- OPERATING PROFIT (PBIT) RS.2,45,21,699/- OPERATING PROFIT TO COST RATIO 10.43 % IT(TP)A NO. 1180/BANG/2011 PAGE 3 OF 65 THE SEGMENTAL DETAILS PERTAINING TO SOFTWARE DEVELO PMENT SERVICES IS AS UNDER (AS PER THE TP REPORT). DESCRIPTION SOFTWARE DEVELOPMENT SERVICES OPERATING REVENUE RS.25,95,40,100 OPERATING EXPENSES RS.23,19,89,306 OPERATING PROFIT RS 2,75,50,794 OPERATING PROFIT TO COST RATIO 11.88 % 5. COMPARABLES ULTIMATELY SELECTED BY TPO AND THEIR ARITHMETIC MEAN WERE AS FOLLOWS:- SL. NO NAME OF COMPANY OP / TC TURNOVER RS. IN CRORES 1 ACCEL TRANSMATIC LTD (SEG. 21.11% 9.68 2 AVANI CIMCON TECHNOLOGIES LTD 52.59% 3. 55 3 CELESTIAL LABS LTD 58.35% 14.13 4 DATAMATICS LTD 1.38% 54.51 5 E-ZEST SOLUTIONS LTD 36.12% 6.26 6 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 25.31% 848.66 7 GEOMETRIC LTD (SEG.) 10.71% 158.38 8 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 36.63% 178.63 9 IGATE GLOBAL SOLUTIONS LTD 7.49% 747.27 10 INFOSYS TECHNOLOGIES LTD 40.30% 131.49 11 ISHIR INFOTECH LTD 30.12% 7.42 12 KALS INFORMATION SYSTEMS LTD (SEG.) 30.55% 2.00 13 LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 15.75% 45.39 IT(TP)A NO. 1180/BANG/2011 PAGE 4 OF 65 14 LUCID SOFTWARE LTD 19.37% 1.70 15 MEDIASOFT SOLUTIONS LTD 3.66% 1.85 16 MEGASOFT LTD 60.23% 139.33 17 MINDTREE LTD 16.90% 590.35 18 PERSISTENT SYSTEMS LTD 24.52% 293.75 19 QUINTEGRA SOLUTIONS LTD 12.56% 62.72 20 R S SOFTWARE (INDIA) LTD 13.47% 101.04 21 R SYSTEMS INTERNATIONAL LTD (SEG.) 15.07% 112.01 22 S I P TECHNOLOGIES & EXPORTS LTD 13.90% 3.80 23 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG.) 22.16% 343.57 24 TATA ELXSI LTD (SEG.) 26.51% 262.58 25 THIRDWARE SOLUTIONS LTD 25.12% 36.08 26 WIPRO LTD (SEG.) 33.65% 961.09 ARITHMETIC MEAN 25.14% ASSESSEES OP / TC FOR FY 2006-07 11.88% 6. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE COMPARABLES SET OUT ABOVE, ARRIVED AT ARITHMETIC MEAN OF 25.14%. AFTER FACTORING THE WORKING CAPITAL ADJUST MENT OF 1.96%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 23.18%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY YOU IS COMPUTED AS UNDER: IT(TP)A NO. 1180/BANG/2011 PAGE 5 OF 65 ARITHMETIC MEAN PLI 25.14% LESS: WORKING CAPITAL ADJUSTMENT(ANNEXURE-C) 1.96% ADJ.ARITHMETIC MEAN PLI 23.18% ARMS LENGTH PRICE: OPERATING COST RS.23,19,89,306 ARMS LENGTH MARGIN 23.18% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 123.18% OF OPERATING COST RS.28,57,64,427/- PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 123.18% OF OPERATING COST RS.28,57,64,427/- PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.25,95.,40,100/- SHORTFALL BEING ADJUSTMENT U/S. 92CA RS.2,62,24,427/- THE ABOVE SHORTFALL OF RS.2,62,24,427/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 7. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER IT(TP)A NO. 1180/BANG/2011 PAGE 6 OF 65 OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. THE ASSESSEE FILED A CHART EXPLAINING AS HOW SOM E OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO WERE NOT COM PARABLE FOR THE REASON THAT THESE COMPANIES WERE NOT FUNCTIONALLY C OMPARABLE. THE CHART ALSO GIVES THE CASES DECIDED BY VARIOUS BENCHES OF THE ITAT WHERE THE COMPARABLE COMPANIES HAVE BEEN HELD TO BE NOT COMPA RABLE WITH THAT OF AN ASSESSEE PROVIDING IT SOFTWARE DEVELOPMENT SERVI CES FOR REASONS OF FUNCTIONALLY BEING DIFFERENT, TURNOVER BEING HUGE, EMPLOYEE COST NOT BEING UPTO THE THRESHOLD LIMIT. BEFORE WE PROCEED TO CO NSIDER THE CHART FILED BY THE ASSESSEE, WE HAVE TO DEAL WITH THE APPLICATION FOR ADMISSION OF ADDITIONAL GROUND FILED BY THE ASSESSEE. IN THE AD DITIONAL GROUND OF APPEAL, THE ASSESSEE HAS PRAYED FOR EXCLUSION OF THE COMPAR ABLE CHOSEN AT SL.NO.8 AND 12 VIZ., HELIOS AND MATHERSON INFORMATI ON TECHNOLOGY PVT.LTD. AND KALS INFO SYSTEMS LTD., EVEN THOUGH THESE COMPA NIES WERE CHOSEN AS COMPARABLE BY THE ASSESSEE IN THEIR TRANSFER PRICIN G STUDY. THE ASSESSEE SEEKS TO EXCLUDE THESE TWO COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. THE ASSESSEE HAD CONS IDERED BOTH THE AFORESAID COMPANIES AS COMPARABLE IN ITS TP STUDY. THE TPO ALSO EXPRESSED THE OPINION THAT THE TWO COMPANIES SATISF IED ALL THE FILTERS APPLIED BY HIM FOR CHOOSING COMPARABLE COMPANIES. EVEN BEF ORE DRP THE ASSESSEE DID NOT OBJECT TO CHOOSING THESE TWO COMPA NIES AS COMPARABLE COMPANIES. THE LEARNED COUNSEL FOR THE ASSESSEE I N SUPPORT OF THE IT(TP)A NO. 1180/BANG/2011 PAGE 7 OF 65 ADMISSION OF ADDITIONAL GROUND PLACED RELIANCE ON T HE DECISION OF THE HONBLE SPECIAL BENCH IN THE CASE OF THE ITAT CHAND IGARH BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 WHEREIN IT WAS HELD THAT A TAXPAYER IS NOT ESTOPPED FROM POINT ING OUT A MISTAKE IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVI DENCE ADDUCED BY THE TAXPAYER. THE LEARNED COUNSEL FURTHER SUBMITTED TH AT THE AFORESAID TWO COMPANIES WERE HELD TO BE SOFTWARE PRODUCT COMPANIE S AND THEREFORE NOT COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICE PROVID ER SUCH AS THE ASSESSEE IN SEVERAL DECISIONS RENDERED BY THE TRIBU NAL. THE DECISIONS RENDERED BY THE TRIBUNAL ARE LATER IN POINT OF TIME TO THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE. THE ASSESSEE IS ENTITLED TO TAKE NOTE OF THE SUBSEQUENT JUDICIAL PRONOUNCEMENT AND SEEK T O EXCLUDE A COMPANY WHICH IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF T HE ASSESSEE. THE LEARNED DR OPPOSED THE PRAYER FOR ADMISSION OF ADDI TIONAL GROUND. HE POINTED OUT THAT THE ASSESSEE IN THEIR TRANSFER PRI CING STUDY ACCEPTED THESE COMPANIES AS COMPARABLE AND THEREFORE CANNOT NOW SEEK TO EXCLUDE THE SAID COMPANIES. 9. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE QUESTION AS TO WHETHER THE AFORESAID TWO COMPANIES ARE COMPARABLE OR NOT WITH THE ASSESSEE C OMPANY IN TERMS OF FAR ANALYSIS, HAS TO BE DECIDED ON THE BASIS OF DAT A WHICH IS AVAILABLE IN THE PUBLIC DOMAIN I.E., PUBLISHED ANNUAL REPORT OF THESE TWO COMPANIES.. THEREFORE FACTS NECESSARY TO APPLY THE FILTER SOUGH T TO BE RELIED UPON BY THE IT(TP)A NO. 1180/BANG/2011 PAGE 8 OF 65 ASSESSEE IN THE ADDITIONAL GROUND OF APPEAL ARE ALR EADY AVAILABLE ON RECORD. THEREFORE THERE CAN BE NO VALID OBJECTION TO DECIDING THE QUESTION OF APPLYING THE AFORESAID FILTER, IF OTHERWISE IT I S FOUND TO BE A VALID FILTER. ON THE QUESTION OF THE ASSESSEE HAVING CHOSEN THE A FORESAID TWO COMPANIES AS COMPARABLE AND THEREFORE CANNOT BE PER MITTED TO CHANCE ITS STAND NOW, WE ARE OF THE VIEW THAT THE DECISION OF THE SPECIAL BENCH, CHANDIGARH IN THE CASE OF QUARK SYSTEMS (SUPRA) CLEARLY SUPPORTS THE PLEA OF THE ASSESSEE. THE SPECIAL BENCH IN THE AFO RESAID DECISION IN THE CASE OF QUARK SYSTEMS (SUPRA ) HAS AFTER CONSIDERING THE OECD COMMENTARIES OBSERVED AS FOLLOWS: 35. IN PARA 4.16 OF LATEST REPORT, THE OECD PROVID ES THE FOLLOWING GUIDELINES : 'IN PRACTICE, NEITHER COUNTRIES NOR TAXPAYERS SHOUL D MISUSE THE BURDEN OF PROOF IN THE MANNER DESCRIBED ABOVE. BECAUSE OF THE DIFFICULTIES WITH TRANSFER PR ICING ANALYSIS, IT WOULD BE APPROPRIATE FOR BOTH TAXPAYER S AND TAX ADMINISTRATIONS TO TAKE SPECIAL CARE AND TO USE RESTRAINT IN RELYING ON THE BURDEN OF PROOF IN THE COURSE OF THE EXAMINATION OF A TRANSFER PRICING CAS E. MORE PARTICULARLY, AS A MATTER OF GOOD PRACTICE THE BURDEN OF PROOF SHOULD NOT BE MISUSED BY TAX ADMINISTRATIONS OR TAXPAYERS AS A JUSTIFICATION FOR MAKING GROUNDLESS OR UNVERIFIABLE ASSERTIONS ABOUT TRANSFER PRICING. A TAX ADMINISTRATION SHOULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT ITS DETERMINATION OF TRANSFER PRICING IS CONSISTENT WIT H THE ARMS LENGTH PRINCIPLE EVEN WHERE THE BURDEN OF PROOF IS ON THE TAXPAYER, AND THE TAXPAYERS SIMILAR LY SHOULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT THEIR TRANSFER PRICING IS CONSISTENT WITH THE ARMS LENGTH PRINCIPLE REGARDLESS OF WHERE THE BURDEN OF PROOF LIES.' IT(TP)A NO. 1180/BANG/2011 PAGE 9 OF 65 36. THE AFORESAID DECISIONS AND GUIDELINES MAY NOT BE EXACTLY ON IDENTICAL FACTS BEFORE US BUT THEY EMPHATICALLY SHOW THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A MISTAK E IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVI DENCE ADDUCED BY THE TAXPAYER. 37. WHEN SUBSTANTIAL JUSTICE AND TECHNICAL CONSIDER ATIONS ARE PITTED AGAINST EACH OTHER, THE CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED. FOR THE OTHER SIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN INJUSTICE BEING DONE DUE TO SOME MISTAKES ON ITS PART. 38. ACCORDINGLY, ON FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OU T THAT DATAMATICS HAS WRONGLY BEEN TAKEN AS COMPARABLE. WH ILE ADMITTING ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE TO REQUIRE US TO CONSIDER WHETHER OR NOT DATAMATICS SH OULD BE INCLUDED IN THE COMPARABLE, WE MAKE NO COMMENTS ON MERIT EXCEPT OBSERVING THAT ASSESSEE FROM RECORD HAS SHOW N ITS PRIMA FACIE CASE. FURTHER CLAIM MAY BE EXAMINED BY THE AS SESSING OFFICER. THIS COURSE WE ADOPT AS OBJECTION TO THE I NCLUSION OF DATAMATICS AS COMPARABLE HAS BEEN RAISED NOW AND NO T BEFORE REVENUE AUTHORITIES. THEREFORE, WE DEEM IT FIT AND PROPER TO REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR CONSIDERATION OF CLAIM OF THE TAXPAYER AND MAKE A DE NOVO ADJUDICATI ON OF THE ARMS LENGTH PRICE AFTER PROVIDING REASONABLE OPPOR TUNITY OF BEING HEARD TO THE ASSESSEE. WE ORDER ACCORDINGLY. 10. WE ALSO FIND THAT THE AFORESAID TWO COMPANIES W ERE HELD TO BE SOFTWARE PRODUCT COMPANIES AND THEREFORE NOT COMPAR ABLE WITH SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE I N SEVERAL DECISIONS RENDERED BY THE TRIBUNAL, THE MAIN DECISION BEING I N THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. , ITA NO.1054/BANG/2011 BANGALORE ITAT . THE DECISIONS RENDERED BY THE TRIBUNAL ARE LATER IN POINT OF TIME TO THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE. THE IT(TP)A NO. 1180/BANG/2011 PAGE 10 OF 65 ASSESSEE IS ENTITLED TO TAKE NOTE OF THE SUBSEQUENT JUDICIAL PRONOUNCEMENT AND SEEK TO EXCLUDE A COMPANY WHICH IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF THE ASSESSEE. AS HELD BY THE SPECIAL BENCH IN THE CASE OF QUARK SYSTEMS (SUPRA) , THERE CANNOT BE ANY TAX LIABILITY ON THE BASIS OF ADMISSION AND THE DETERMINATION OF TAX LIABILITY HA S TO BE IN ACCORDANCE WITH LAW. IN THE LIGHT OF THE AFORESAID JUDICIAL PRONO UNCEMENT, WE ARE OF THE VIEW THAT THE ADDITIONAL GROUND OF APPEAL DESERVES TO BE ADMITTED FOR ADJUDICATION. ACCORDINGLY, THE ADDITIONAL GROUND I S ADMITTED FOR ADJUDICATION. 11. WE WILL PROCEED TO CONSIDER THE COMPARABILITY O F COMPANIES CHOSEN BY THE TPO AND LISTED IN PARA-5 OF THIS ORDER. 12. 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 TRANSMATIC LIMITED (SEG.), AVANI CINCOM TECHNOLOGIE S LTD., CELESTIAL LABS LIMITED AND KALS INFOSYSTEMS LTD., ARE CONCERNED, T HIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWAR E DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVICES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FR OM THE FACT THAT THE VERY SAME 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE IT(TP)A NO. 1180/BANG/2011 PAGE 11 OF 65 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 FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) FOLLOWED THE DECISION RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. VS. DCIT ITA NO.1064/BANG/2011 FOR A Y 07-08 ORDER DATED 23.11.2012 . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CASE 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 O RDER IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD., WE F IND 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 SELECTION 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 DIFFERENT FROM THE ASSESSEE. BASED ON THE INFORMATION AVAILA BLE IN THE COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITTED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFTWARE SERV ICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FROM THE ASSESS EE. IT WAS FURTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIB UNAL TO THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/2011 WHEREIN THE TRIBUNAL ACCEPTED THE IT(TP)A NO. 1180/BANG/2011 PAGE 12 OF 65 ASSESSEES CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE O F SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPA RABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SER VICES ONLY AND IT WAS HELD AS FOLLOWS:- 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCOM): 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 ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETAILS OF PERCENTAG E OF EXPORT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INT O CONSIDERATION 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 0 7-08 08-09 OPERATING REVENUE 21761611 35477523 29342809 28039851 OPERATING EXPNS. 16417661 23249646 23359186 3110894 9 OPERATING PROFIT 5343950 12227877 5983623 (3069098) OPERATING MARGIN 32.55% 52.59% 25.62% - 9.87% 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. IT(TP)A NO. 1180/BANG/2011 PAGE 13 OF 65 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 CONCESSION FOR IN-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER 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 RESE ARCH AND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AND THE SAME HAS BEEN WRITTEN OFF 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 T HE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE (PAGE 30 OF PB-II). THIS AMOUNTS TO NEARLY 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 IT(TP)A NO. 1180/BANG/2011 PAGE 14 OF 65 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 LEAD MOLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT ACT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYIN G 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 BEEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFIC ATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OU R 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 FACIL ITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FACILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY W ILL 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. IT(TP)A NO. 1180/BANG/2011 PAGE 15 OF 65 THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCESS OF M AKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NO T QUALIFYING FOR COMPARABILITY. WE THEREFORE ACCEPT T HE 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 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 IT(TP)A NO. 1180/BANG/2011 PAGE 16 OF 65 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. (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTE NTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGE D IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TR IBUNALS DECISION OF THE ITAT 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 COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: IT(TP)A NO. 1180/BANG/2011 PAGE 17 OF 65 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION 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 IS ENGA GED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND I S NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDE D BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXT RACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROV IDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS I NTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE AS PECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCC EEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSION 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 WHI CH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF T HIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED 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 MAINLY SOFTWARE DEVELOPMENT SERVICE PROVI DER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS 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 SOFTWARE DEVELOPMEN T SERVICE COMPANY. IT IS FURTHER SUBMITTED 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 TH AT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RE LEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IT(TP)A NO. 1180/BANG/2011 PAGE 18 OF 65 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 MANAGEME NT 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, ENTER PRISE 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 ASS ESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FO RM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DR P THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPAR ABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT TH IS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T HE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARA BILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR TH E ASSESSEE WAS THAT IF THE ABOVE COMPANY 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 THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID COMPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUN AL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFE RRED TO BY THE IT(TP)A NO. 1180/BANG/2011 PAGE 19 OF 65 LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THI S COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGU MENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFOR ESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 13. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 14. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 11 & 14 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ. , M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWARE LTD., IS CONCERNED, THIS TR IBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DE VELOPMENT SERVICES PROVIDER. THE NATURE OF SERVICES RENDERED BY THE A SSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FRO M 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):- IT(TP)A NO. 1180/BANG/2011 PAGE 20 OF 65 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 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. 15. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 16. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 16 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ., M/S.ME GASOFT LIMITED IS CONCERNED, THIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE IT(TP)A NO. 1180/BANG/2011 PAGE 21 OF 65 AFORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVICES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VERY SAM E 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 FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) FOLLOWED THE DECISION RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. VS. DCI T ITA NO.1064/BANG/2011 FOR AY 07-08 ORDER DATED 23.11.20 12 . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA): 27. AS FAR AS ADOPTION OF MEGA SOFT LTD., AS ONE OF COMPARABLES, THE LEARNED COUNSEL FOR THE ASSESSEE S UBMITTED THAT THERE IS AN ERROR IN COMPUTING ITS NET MARGIN. HE HAS DRAWN OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT.LTD., AT PARA 24 TO 27 AT PAGE 18, WHEREIN THE ERROR IN COMPUTING THE NET MARGIN OF TH IS COMPANY HAS BEEN TAKEN NOTE OF AND IT HAS BEEN DIRECTED AS UNDER: (A) MEGASOFT LTD. : 24. THIS COMPANY WAS CHOSEN AS A COMPARABLE BY THE TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE A RE TWO SEGMENTS IN THIS COMPANY VIZ., (I) SOFTWARE DEVELOP MENT SEGMENT, AND (II) SOFTWARE PRODUCT SEGMENT. THE AS SESSEE IS A PURE SOFTWARE SERVICES PROVIDER AND NOT A SOFT WARE PRODUCT DEVELOPER. ACCORDING TO THE ASSESSEE THERE IS NO BREAK UP OF REVENUE BETWEEN SOFTWARE PRODUCTS AND SOFTWARE SERVICES BUSINESS ON A STANDALONE BASIS OF THIS IT(TP)A NO. 1180/BANG/2011 PAGE 22 OF 65 COMPARABLE. THE TPO RELIED ON INFORMATION WHICH W AS GIVEN BY THIS COMPANY IN WHICH 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. TH IS 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 FI T INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. T HE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUC T SOFTWARE WOULD CONSTITUTE PACKAGED PRODUCT AND AROU ND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BOARDING AND LODGIN G EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEED ED TO HOLD THAT THE COMPARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO PRODUCT SOFTWARE) INTERNALLY AND THAT THE P ORTION OF THE REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND U SED FOR CUSTOMIZATION WAS LESS THAN 25% OF THE OVERALL REVE NUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE RE VENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND TH EREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. THE B ASIS ON WHICH THE TPO ARRIVED AT THE PLI OF 60.23% IS GIVEN AT PAGE-115 AND 116 OF THE ORDER OF THE TPO. IT IS CL EAR FROM THE PERUSAL OF THE SAME THAT THE TPO HAS PROCEEDED TO DETERMINE THE PLI AT THE ENTITY LEVEL AND NOT ON TH E BASIS OF SEGMENTAL DATA. 25. IN THE ORDER OF THE TPO, OPERATING MARGIN WAS COMPUTED FOR THIS COMPANY AT 60.23%. IT IS THE COM PLAINT OF THE ASSESSEE THAT THE OPERATING MARGINS HAVE BEE N COMPUTED AT ENTITY LEVEL COMBINING SOFTWARE SERVICE S AND SOFTWARE PRODUCT SEGMENTS. IT WAS SUBMITTED THAT T HE PRODUCT SEGMENT OF MEGASOFT IS SUBSTANTIALLY DIFFER ENT FROM ITS SOFTWARE SERVICE SEGMENT. THE PRODUCT SEGMENT H AS EMPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SERVIC E SEGMENT HAS EMPLOYEE COST OF 50%. SIMILARLY, THE P ROFIT MARGIN ON COST IN PRODUCT SEGMENT IS 117.95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11%. BOTH THE SEGMENTS IT(TP)A NO. 1180/BANG/2011 PAGE 23 OF 65 ARE SUBSTANTIALLY DIFFERENT AND THEREFORE COMPARISO N AT ENTITY LEVEL IS WITHOUT BASIS AND WOULD VITIATE THE COMPAR ABILITY (SUBMISSIONS ON PAGE 381 TO 383 OF THE PB-I). IT W AS FURTHER SUBMITTED THAT MEGASOFT LIMITED HAS PROVIDE D SEGMENTAL BREAK-UP BETWEEN THE SOFTWARE SERVICES SE GMENT AND SOFTWARE PRODUCT SEGMENT (PAGE 68 OF PB-II), WH ICH WAS ALSO ADOPTED BY THE TPO IN HIS SHOW CAUSE NOTIC E (PAGE 84 OF PB-I). THE SEGMENTAL RESULTS I.E., RESULTS P ERTAINING TO SOFTWARE SERVICES SEGMENT OF THIS COMPANY 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 HAVE 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 THE MARGINS OF THE SOFTWARE SEGMENT ONLY SHOULD BE ADOPTED IN THE CASE OF MEGASOFT ALSO, IN CONTRAST TO THE ENTITY LEVEL MARGINS. 28. COMPUTATION OF THE NET MARGIN FOR MEGA SOFT LT D. IS THEREFORE REMITTED TO THE FILE OF THE TPO TO COMPUT E THE CORRECT MARGIN BY FOLLOWING THE DIRECTION OF THE TRIBUNAL I N THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. 17. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO COMPUTE THE CORRECT MARGIN OF MEGA SOFT LTD., AS DIRECTED BY THE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD. (SUPRA). IT(TP)A NO. 1180/BANG/2011 PAGE 24 OF 65 18. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 10, 24 & 26 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., M/S.INFOSYS TECHNOLOGIES LIMITED, TATA ELXSI LTD. (SEG.) & WIPR O LIMITED ARE CONCERNED, THIS TRIBUNAL IN THE CASE OF M/S. CURAM SOFTWARE INTERNATIONAL PVT.LTD. VS. ITO ITA NO.1280/BANG/2012 FOR AY 08-09 ORDER DATED 31.7.2013 HAS HELD THAT THE AFORESAID COMPANIES ARE NOT COMP ARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVI CES PROVIDER. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CAS E OF M/S.CURAM SOFTWARE 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 ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJE CTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS TH AT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE S OFTWARE DEVELOPMENT SEGMENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THI S CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPANY 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 GROWTH. IN 2008, THIS COMPANY GENERATED OVER 102 INVENTION DIS CLOSURES AND FILED AN AGGREGATE 10 PATENTS IN INDIA AND THE USA. TILL DATE THIS COMPANY HAS FILED AN AGGREGATE OF 119 PATENT APPLIC ATIONS (PENDING) 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 R EVENUES IS NOT AVAILABLE. IT(TP)A NO. 1180/BANG/2011 PAGE 25 OF 65 (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 SOFTWAR E PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTE MS. (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 OPERATIONS AND THE OPERATING MARGINS OF THIS COMPAN Y HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED D EPARTMENTAL REPRESENTATIVE 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 PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FI ND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND D IFFERENT FROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FI NDING RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICA BLE TO THIS YEAR ALSO. THE ARGUMENT PUT FORTH BY ASSESSEE'S IS THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SIN CE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM S OFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REV ENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAI LABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERE D ACCORDINGLY. IT(TP)A NO. 1180/BANG/2011 PAGE 26 OF 65 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, HOWEVER, BRUSHED ASIDE THE OBJECTIONS OF THE ASSESS EE AND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. 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 INTANGIBLES AND QUOTED EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY IN THE SUBMISSIONS MADE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCI AL STATEMENTS FOR COMPARABILITY PURPOSES AND FOR COMPUTING THE MA RGINS, 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 PE RUSED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MERIT I N THE CONTENTIONS OF THE ASSESSEE FOR EXCLUSION OF THIS C OMPANY FROM THE SET OF COMPARABLES. IT IS SEEN THAT THIS COMPA NY IS ENGAGED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMEN T SERVICES. THERE IS NO INFORMATION ON THE SEGMENTAL BIFURCATIO N OF REVENUE FROM SALE OF PRODUCT AND SOFTWARE SERVICES. THE TP O APPEARS TO HAVE ADOPTED THIS COMPANY AS A COMPARABLE WITHOUT DEMONSTRATING HOW THE COMPANY SATISFIES THE SOFTWAR E DEVELOPMENT SALES 75% OF THE TOTAL REVENUE FIL TER ADOPTED BY HIM. ANOTHER MAJOR FLAW IN THE COMPARABILITY ANALY SIS CARRIED OUT BY THE TPO IS THAT HE ADOPTED COMPARISON OF TH E CONSOLIDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NOT AN APPROPR IATE COMPARISON. IT(TP)A NO. 1180/BANG/2011 PAGE 27 OF 65 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 INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIV E SERVICE PROVIDER WHO DOES NOT OWN ANY SUCH INTANGIBLE AND H ENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CASE ON HAND DOES NOT OWN ANY INTANGIBLES, F OLLOWING THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), WE HOLD THAT T HIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSE E. 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 IN CLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNCTIONAL DIS-SIMILARITY, SIGNIFICANT R&D ACTIVITY , BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, REJECTED THE CONTENTI ON PUT FORTH BY THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SET O F 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 T HIS EFFECT. IN VIEW OF THIS, THE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABL ES. 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. IT(TP)A NO. 1180/BANG/2011 PAGE 28 OF 65 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 PRODUCT DESIGNING SERVICES AND NOT PURELY SOFTWARE DEVELOPM ENT SERVICES. THE DETAILS IN THE ANNUAL REPORT SHOW THAT THE SEGM ENT SOFTWARE DEVELOPMENT SERVICES RELATES TO DESIGN SERVICES AN D ARE NOT SIMILAR 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 HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEV ELOPMENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONAL LY COMPARABLE. IN THIS CONTEXT THE RELEVANT PORTION OF THIS ORDER IS EXTRACTED AND REPRODUCED BELOW :- . 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 AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVID ED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAV E BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DET AILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARI NG THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON T HESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY AS FIT F OR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LE NGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PORTION. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REPO RT OF THIS COMPANY PRODUCED BEFORE US, THE FACTS PERTAINING TO TATA ELXSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 2007-08 TO AS SESSMENT YEAR 2008-09. WE, THEREFORE, HOLD THAT THIS COMPAN Y IS NOT TO BE CONSIDERED FOR INCLUSION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDERED ACCORDINGLY. IT(TP)A NO. 1180/BANG/2011 PAGE 29 OF 65 19. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 20. AS FAR AS COMPARABLE COMPANIES AT SL.NO.5, 18 , 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 SYSTEMS LTD ., QUINTEGRA SOLUTIONS LIMITED AND THIRD WARE SOLUTIONS LTD., THIS TRIBUNA L IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. I.T (T.P) A. NO.1303/BANG/2 012 (ASSESSMENT YEAR: 2008-09) ORDER DATED 28.11.2013 WAS PLEASED TO HOLD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE WITH A COMPANY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES SUCH AS THE ASSESSEE. THE FOL LOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: 14. E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMP ARABLE. 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 IT(TP)A NO. 1180/BANG/2011 PAGE 30 OF 65 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 COMPANY I.E. E-ZEST SOLUTIONS LTD., OUGHT TO BE OMI TTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE 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 COMPARABLES 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 IT(TP)A NO. 1180/BANG/2011 PAGE 31 OF 65 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 THE 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 :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTION. 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 THIS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PROVID ERS, 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 REPRESENT ATIVE 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 PERUSE D 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 IT(TP)A NO. 1180/BANG/2011 PAGE 32 OF 65 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. PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A CO MPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, I T IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL R ESULTS ARE NOT AVAILABLE. THE TPO REJECTED THE ASSESSEE'S OBJECTIO NS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPAN Y FOR FINANCIAL YEAR 2007-08, IT IS MAINLY A SOFTWARE DEV ELOPMENT COMPANY AND AS PER THE DETAILS FURNISHED IN REPLY T O THE NOTICE UNDER SECTION 133(6) OF THE ACT, SOFTWARE DEVELOPME NT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF THE MATTER, TH E ASSESSING OFFICER INCLUDED THIS COMPANY I.E. PERSISTENT SYSTE MS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNCTIONALI TY CRITERION. 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCL USION OF THIS COMPANY AS A COMPARABLE SUBMITTING THAT THIS COMPAN Y IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE ARE SEVE RAL OTHER FACTORS ON WHICH THIS COMPANY CANNOT BE TAKEN AS A COMPARAB LE. IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMI TTED THAT : (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING S ERVICES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007- 08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY EN GAGED IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES FOR INDEPENDENT SOFTWARE VENDORS AND ENTERPRISES. IT(TP)A NO. 1180/BANG/2011 PAGE 33 OF 65 (III) WEBSITE EXTRACTS INDICATE THAT THIS COMPANY I S IN THE BUSINESS OF PRODUCT DESIGN SERVICES. (IV) THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORD IA TECHNOLOGIES INDIA PVT. LTD.(SUPRA) WHILE DISCUSSIN G THE COMPARABILITY OF ANOTHER COMPANY, NAMELY LUCID SOFT WARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGME NTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR CO MPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRESENTLY UNDER CONSIDERATION, WHICH IS INTO PRODUC T DEVELOPMENT AND PRODUCT DESIGN SERVICES AND FOR WHICH THE SEGME NTAL DATA IS NOT AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. BE OMITTED FROM THE LIST OF COMPARABLES. 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORT THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN S ERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVIC ES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSEE, THE SEG MENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUNCIATED IN THE DECISION OF THE MUMBAI TRIBUNAL I N THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THA T IN THE ABSENCE OF SEGMENTAL DETAILS / INFORMATION A COMPAN Y CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS, WE H OLD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OM ITTED FROM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERA TION. IT IS ORDERED ACCORDINGLY. 18. QUINTEGRA SOLUTIONS LTD. 18.1 THIS CASE WAS SELECTED BY THE TPO AS A COMPARA BLE. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON THE GROUND THAT THIS C OMPANY IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE WERE PEC ULIAR ECONOMIC CIRCUMSTANCES IN THE FORM OF ACQUISITIONS MADE DURI NG THE YEAR. THE TPO REJECTED THE ASSESSEE'S OBJECTIONS HOLDING THAT THIS IT(TP)A NO. 1180/BANG/2011 PAGE 34 OF 65 COMPANY QUALIFIES ALL THE FILTERS APPLIED BY THE TP O. ON THE ISSUE OF ACQUISITIONS, THE TPO REJECTED THE ASSESSEE'S OB JECTIONS OBSERVING THAT THE ASSESSEE HAS NOT ADDUCED ANY EVI DENCE 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 INCL USION 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 : 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, VI Z. INVESTOR PROTECTION INDEX FUND (IPIF). THESE MEASUR ES WILL HELP THE COMPANY ENHANCE ITS PRODUCTS VALUE AN D ALSO MITIGATE RISKS. (IV) THE TPO HAS APPLIED THE FILTER OF EXCLUDING CO MPANIES HAVING PECULIAR ECONOMIC CIRCUMSTANCES. QUINTEGRA F AILS THE IT(TP)A NO. 1180/BANG/2011 PAGE 35 OF 65 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 REPRESENT ATIVE 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 PERU SED 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 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 QUIN TEGRA 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 C O-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER. COM PVT. LTD. IT(TP)A NO. 1180/BANG/2011 PAGE 36 OF 65 (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. 21. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 22. AS FAR AS COMPARABLE CHOSEN BY THE TPO AT SL.NO .8 OF THE FINAL LIST OF COMPARABLE VIZ., M/S.HELIOS & MATHESON INFORMAT ION TECHNOLOGY LTD., WE FIND THAT THE SAID COMPANY HAS BEEN HELD TO BE N OT COMPARABLE WITH A SOFTWARE SERVICE PROVIDER LIKE THE ASSESSEE BY THE ITAT PUNE BENCH IN THE CASE OF PTC SOFTWARE (INDIA)PVT.LTD. ITA.NO.1605/PN/2011 (A SSTT. YEAR : 2007-08) ORDER DATED 30.4.2013 . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WIT H REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIOS & 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 ORD ER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYSTEMS LTD., IS TO THE EFFECT THAT THE SAID CONCERNS APPL ICATION SOFTWARE IT(TP)A NO. 1180/BANG/2011 PAGE 37 OF 65 SEGMENT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE W HICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. T HE SAID CONCERN IS ENGAGED IN TWO SEGMENTS NAMELY APPLICATI ON SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATI ON SOFTWARE SEGMENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS ENGAGED IN SOFTWARE SERVICES. THE 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 SOFTWARE SEGME NT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND SO FTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRI TTEN 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 RA ISED BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR OF 2006-07, T HE 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 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. IT(TP)A NO. 1180/BANG/2011 PAGE 38 OF 65 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE S AID 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 & MATHES ON 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. 23. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANY FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMIN ING ALP. IT(TP)A NO. 1180/BANG/2011 PAGE 39 OF 65 24. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 26 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE FOLL OWING COMPANIES WILL HAVE TO BE EXCLUDED AS THE TURNOVER OF THESE C OMPANIES ARE MORE THAN RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSES SEE WHOSE TURNOVER IS LESS THAN RS.20 CRORES: (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 84 8.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CR ORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CROR ES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 9616.09 CRORES (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES 25. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) (ITA NO.1338/BANG/2010) FOR SAME ASSESSMENT YEAR ON THE APPLICATION OF TURNOVER FILTER AND IT WAS SUBMITTED THAT THE AFORE SAID COMPARABLE COMPANIES HAVE TO BE EXCLUDED FROM THE FINAL LIST O F COMPARABLES SELECTED BY THE TPO. 26. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE AND THE LEARNED DR. IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE IT(TP)A NO. 1180/BANG/2011 PAGE 40 OF 65 INDIA (P) LTD. (SUPRA) , THIS TRIBUNAL ON APPLICATION OF THE TURNOVER FILT ER WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY AN ALYSIS HELD AS FOLLOWS: (1) TURNOVER FILTER 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 IT(TP)A NO. 1180/BANG/2011 PAGE 41 OF 65 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)]: 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 IT(TP)A NO. 1180/BANG/2011 PAGE 42 OF 65 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 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 IT(TP)A NO. 1180/BANG/2011 PAGE 43 OF 65 CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASS ESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 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. IT(TP)A NO. 1180/BANG/2011 PAGE 44 OF 65 (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: 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: IT(TP)A NO. 1180/BANG/2011 PAGE 45 OF 65 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C:- 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 NO. 1180/BANG/2011 PAGE 46 OF 65 (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 NO. 1180/BANG/2011 PAGE 47 OF 65 (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 IT(TP)A NO. 1180/BANG/2011 PAGE 48 OF 65 (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. 27. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), WE HOLD THAT THE AFORESAID COMPANIES SHOULD BE EXCLUDED FROM THE LIS T OF COMPARABLE COMPANIES. THE AO IS DIRECTED TO COMPUTE THE ARITH METIC MEAN BY EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. 28. THE AO/TPO IS DIRECTED TO COMPUTE THE ARITHMET IC MEAN OF THE PROFIT MARGINS OF THE REMAINING COMPARABLE COMPANIE S AFTER EXCLUDING THE COMPANIES FROM THE FINAL LIST OF 26 COMPARABLE COMP ANIES CHOSEN BY THE TPO AND COMPARE THE SAME WITH THE PROFIT MARGIN OF THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF SEC.92C OF THE AC T. 29. NO OTHER ARGUMENTS WERE RAISED ON THE OTHER IS SUES RAISED IN THE CONCISE GROUNDS OF APPEAL NO.1 TO 6 AND THEREFORE T HE ISSUE WITH REGARD TO DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ON OF PROVIDING SOFTWARE DEVELOPMENT SERVICES TO THE AE BY THE ASSESSEE IS DECIDED AS SET OUT IN THE EARLIER PARAGRAPHS. 30. CONCISE GROUND NO.7 & 8 RAISED BY THE ASSESSE E PROJECT THE GRIEVANCE OF THE ASSESSEE REGARDING THE ACTION OF T HE LEARNED ASSESSING OFFICER AND HONORABLE DISPUTE RESOLUTION PANEL IN E XCLUDING WHILE IT(TP)A NO. 1180/BANG/2011 PAGE 49 OF 65 COMPUTING DEDUCTION U/S.10A OF THE ACT TELECOMMUNIC ATION CHARGES, CONSULTANCY CHARGES, REPAIRS AND MAINTENANCE AND CE RTAIN OTHER EXPENSES INCURRED BY THE ASSESSEE (INCLUDING EXPENSES INCURR ED IN FOREIGN CURRENCY) ARE TO BE EXCLUDED FROM EXPORT TURNOVER ON THE GRO UND THAT THESE EXPENSES (EXCEPT TELECOMMUNICATION CHARGES) ARE NO T INCURRED IN RENDERING TECHNICAL SERVICES RENDERED TO CLIENTS OU TSIDE INDIA. IT IS THE PLEA OF THE ASSESSEE THAT AT ALL TIMES DURING THE RELEVA NT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT IN RENDERING ANY TECHNICAL SERVICES. WITHOUT PREJUDICE TO ITS CONTE NTION THAT THE AFORESAID SUMS SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVE R WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER( IN CONCISE GROUND NO.8) THAT EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOT AL TURNOVER AND IN THIS REGARD HAS PLACED RELIANCE ON THE DECISION OF THE H ONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) . 31. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN CONCISE GROUND NOS.7 & 8. TAK ING INTO CONSIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE ASSESSI NG OFFICER TO EXCLUDE TELECOMMUNICATION CHARGES, CONSULTANCY CHARGES, REP AIRS AND MAINTENANCE AND CERTAIN OTHER EXPENSES INCURRED BY THE ASSESSEE (INCLUDING EXPENSES INCURRED IN FOREIGN CURRENCY), BOTH FROM EXPORT TU RNOVER AND TOTAL TURNOVER, IT(TP)A NO. 1180/BANG/2011 PAGE 50 OF 65 AS HAS BEEN PRAYED FOR BY THE ASSESSEE IN CONCISE G ROUND NO.8. IN VIEW OF THE ACCEPTANCE OF THE ALTERNATIVE PRAYER IN CONCISE GROUND NO.8, WE ARE OF THE VIEW THAT NO ADJUDICATION IS REQUIRED ON CONCIS E GROUND NO.7. 32. GR.NO.9 RAISED BY THE ASSESSEE IN THE CONCISE GROUNDS OF APPEAL RELATE TO DISALLOWANCE OF INTEREST EXPENSES DEBITED TO THE PROFIT & LOSS A/C BY INVOKING THE PROVISIONS OF SEC.40(A)(I) OF THE A CT I.E., ON THE GROUND THAT TAX AT SOURCE HAS NOT BEEN DEDUCTED AT SOURCE. THE MATERIAL FACTS RELEVANT FOR ADJUDICATION OF THE AFORESAID GROUNDS ARE AS FO LLOWS. 33. THE ASSESSEE HAD BORROWED LOANS FROM BROADCOM SINGAPORE PTE. LTD. ON SUCH EXTERNAL COMMERCIAL BORROWING (ECB) IN TEREST WAS PAYABLE BY THE ASSESSEE. INTEREST FOR THE PERIOD FROM 1-4- 2006 TO 31.3.2007 DEBITED IN THE INTEREST ACCOUNT OF THE ASSESSEE AND CREDITED IN THE ACCOUNT OF THE PAYEE, WAS A SUM OF RS.28,65,514/. THE ASSE SSEE DID NOT DEDUCT TAX AT SOURCE ON THE AFORESAID SUM AT THE TIME OF C REDIT TO THE ACCOUNT OF THE PAYEE IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. ACCORDING TO THE AO AS PER THE PROVISIONS OF SEC.195 OF THE ACT, ANY PE RSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT ANY INTEREST CHARGEABLE UN DER THE PROVISIONS OF THIS ACT SHALL, AT THE TIME OF CREDIT OF SUCH INCOM E TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER , DEDUCT INCOME-TAX THEREON AT THE RATES IN FORCE. SINCE THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE ON THE SUM CREDITED TO THE ACCOUNT OF THE NO N-RESIDENT PAYEE, THE IT(TP)A NO. 1180/BANG/2011 PAGE 51 OF 65 AO WAS OF THE VIEW THAT AS PER THE PROVISIONS OF SE C.40(A)(I) OF THE ACT, THE AMOUNT ON WHICH TAX HAS NOT BEEN DEDUCTED IN ACCORD ANCE WITH THE PROVISIONS OF SEC.195 OF THE ACT AND WHICH IS CLAIM ED AS A DEDUCTION WHILE COMPUTING TOTAL INCOME, SHOULD BE DISALLOWED. SEC. 40(A)(I) OF THE ACT PROVIDES AS FOLLOWS: SEC.40: AMOUNTS NOT DEDUCTIBLE. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTION S 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTIN G THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION': (A) IN THE CASE OF ANY ASSESSEE (I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISSU ED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938), RO YALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER TH IS ACT, WHICH IS PAYABLE, (A) OUTSIDE INDIA; OR (B) IN INDIA TO A NON-RESIDENT, NOT BEING A COMPANY OR TO A FOREIGN COMPANY, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 : PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR OR, HAS BEEN DEDUCT ED IN THE PREVIOUS YEAR BUT PAID IN ANY SUBSEQUENT YEAR AFTER THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTIO N 200, SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING TH E INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID. IT(TP)A NO. 1180/BANG/2011 PAGE 52 OF 65 34. THE AO ACCORDINGLY DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE AFORESAID SUM AND ADDED THE SAME T O THE TOTAL INCOME OF THE ASSESSEE. 35. BEFORE THE DRP THE ASSESSEE SUBMITTED THAT THE PAYEE BROADCOM SINGAPORE PTE.LTD. IS A TAX RESIDENT OF SINGAPORE. THE ASSESSEE SUBMITTED THAT THE INTEREST INCOME THAT ACCRUES OR ARISES TO THE NON-RESIDENT VIZ., BROADCOM SINGAPORE PTE.LTD. WILL BE TAXABLE IN INDI A AS PER THE PROVISIONS OF DTAA BETWEEN INDIA AND SINGAPORE. THE ASSESSEE POINTED OUT THAT TAXABILITY OF THE INTEREST INCOME IN INDIA IS AS PE R ARTICLE 11 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA A ND SINGAPORE WHICH READS THUS:- ARTICLE 11 INTEREST 1. INTEREST ARISING IN A CONTRACTING STATE AND PAID T O A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OT HER STATE. 2. HOWEVER, SUCH INTEREST MAY ALSO BE TAXED IN THE CO NTRACTING STATE IN WHICH IT ARISES, AND ACCORDING TO THE LAWS OF THAT STATE, BUT IF THE BENEFICIAL OWNER OF THE INTEREST IS A RE SIDENT OF THE OTHER CONTRACTING STATE, THE TAX SO CHARGED SHALL NOT EXC EED : (A) 10% OF THE GROSS AMOUNT OF THE INTEREST IF SUC H INTEREST IS PAID ON A LOAN GRANTED BY A BANK CARRYING ON A BONA FIDE BANKING BUSINESS OR BY A SIMILAR FINANCIAL INSTITUTION (INC LUDING AN INSURANCE COMPANY); (B) 15% OF THE GROSS AMOUNT OF THE INTEREST IN ALL OTHER CASES. ......... IT(TP)A NO. 1180/BANG/2011 PAGE 53 OF 65 36. THE ASSESSEE POINTED OUT THAT AS PER ARTICLE 11 INTEREST INCOME IS TAXABLE BOTH IN INDIA AND SINGAPORE. UNDER ARTICLE 11(1) ABOVE INTEREST INCOME IS TAXABLE IN SINGAPORE IN THE HANDS OF BROA DCOM SINGAPORE PTE.LTE. ONLY ON RECEIPT BASIS BECAUSE THE RELEVANT ARTICLE REFERS TO INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDE NT OF THE OTHER CONTRACTING STATE. ARTICLE 11(2) UNDER WHICH INDIA HAS A RIGH T TO TAX THE SAME INTEREST INCOME REFERS TO SUCH INTEREST AND THEREFORE EVEN IN INDIA INTEREST INCOME IS CHARGEABLE TO TAX ONLY ON RECEIPT BASIS. SINCE I NTEREST WAS PAYABLE AND NOT PAID, THERE WAS NO ACCRUAL OF INCOME CHARGEABLE TO TAX IN THE HANDS OF THE NON-RESIDENT AND THEREFORE THERE WAS NO OBLIGAT ION TO DEDUCT TAX AT SOURCE. THE ASSESSEE THUS SUBMITTED THAT THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE ON THE PART OF THE ASSESSEE AN D THEREFORE THE PROVISIONS OF SEC.40(A)(I) COULD NOT BE INVOKED TO MAKE DISALLOWANCE. 37. THE DRP DID NOT CONSIDER THE SUBMISSIONS AND ME RELY OBSERVED THAT THE ASSESSEE DID NOT FURNISH ANY DETAIL OR EXP LANATION TO SUBSTANTIATE ITS ARGUMENT AND CONFIRMED THE ORDER OF THE AO. 38. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT AS ON 1-4-2006 THE OPENING BALANCE OF INTEREST PAYABLE TO THE NON-RESIDENT WAS RS.12,42,739 AND THE INTEREST FOR THE MONTHS AP RIL, MAY, JUNE & JULY, 2006 WAS CREDITED TO THE ACCOUNT OF THE NON-RESIDEN T OF RS.2,32,839.13, RS.2,97,790.19, RS.2,26,631.79 AND RS.2,68,977.23 R ESPECTIVELY HAVE BEEN CREDITED. ON 29.8.2006 THE ASSESSEE DEDUCTED TAX AT SOURCE ON THE IT(TP)A NO. 1180/BANG/2011 PAGE 54 OF 65 SUM TOTAL OF THE OPENING BALANCE AND ACCRUED INTERE ST UP TO 31.7.2006 AND DEPOSITED THE SAME TO THE CREDIT OF THE CENTRAL GOV ERNMENT ON 29.8.2006. HIS FIRST SUBMISSION WAS THAT TO THE EXTENT OF TAX DEDUCTED AND PAID ON 29.8.2006 ON THE INTEREST CREDITED TO THE ACCOUNT O F THE NON-RESIDENT FOR THE MONTHS APRIL, MAY, JUNE & JULY, 2006 WAS CREDITED T O THE ACCOUNT OF THE NON-RESIDENT OF RS.2,32,839.13, RS.2,97,790.19, RS. 2,26,631.79 AND RS.2,68,977.23 RESPECTIVELY, THERE CAN BE NO DISALL OWANCE U/S.40(A)(I) OF THE ACT IN VIEW OF THE PROVISO TO SEC.40(A)(I) WHIC H LAYS DOWN THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DED UCTED IN ANY SUBSEQUENT YEAR OR, HAS BEEN DEDUCTED IN THE PREVIO US YEAR BUT PAID IN ANY SUBSEQUENT YEAR AFTER THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200, SU CH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME OF T HE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID 39. THE LEARNED DR ON THE ABOVE SUBMISSION OF THE L EARNED COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE CLAIM OF THE ASSES SEE MAY BE DIRECTED TO BE VERIFIED BY THE AO AND IF FOUND CORRECT, TO THE EXTENT TAX DEDUCTED AND PAID TO THE CREDIT OF THE GOVERNMENT, THE DISALLOWA NCE MAY BE DELETED. 40. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND A PPROPRIATE TO DIRECT THE AO TO VERIFY THE CLAIM OF THE ASSESSEE AS AFORESAID AND IF FOUND CORRECT, TO THE EXTENT TAX DEDUCTED AND PAID TO THE CREDIT OF T HE GOVERNMENT, THE DISALLOWANCE SHOULD BE DELETED. IT(TP)A NO. 1180/BANG/2011 PAGE 55 OF 65 41. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER S UBMITTED THAT IN VIEW OF ARTICLE 11(2) OF THE DTAA BETWEEN INDIA AND SING APORE INTEREST INCOME IS TAXABLE IN INDIA ONLY WHEN THE NON-RESIDENT RECE IVES THE SAME. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE FOLLOWING DEC ISIONS IN WHICH IT HAS BEEN HELD IN THE CONTEXT OF DIFFERENT TREATIES WHER E SIMILAR EXPRESSION OF INTEREST ARISING AND PAID ARE USED TRIBUNALS HAVE TAKEN A VIEW THAT INTEREST INCOME CAN BE TAXED ONLY ON RECEIPT BASIS AND NOT ON ACCRUAL BASIS. (I) PIZZA HUT INTERNATIONAL LLC VS. DDIT IT A NOS. 1600, 1601 & 1656/DEL/2011 ORDER DATED 8.6.2012; (II) DCIT VS. U HDE GMBH 54 TTJ MUMBAI 355; (III) CSC TECHNOLOGY SINGAPORE PTE.LTE VS. ADIT (2012) 50 SOT 399 (ITAT) |(DEL); (IV) BOOZ ALLEN AND HAMILTON INDIA LTD AND CO.KG. VS. ADIT (2013) 56 SOT 96 (MUMBAI)(ITAT). THE LEAR NED COUNSEL FOR THE ASSESSEE THEREFORE SUBMITTED THAT INTEREST FOR THE MONTHS AUGUST, 2006 TO MARCH, 2007 ADMITTED WERE NOT PAID TO THE NON-RESID ENT AND THEREFORE THE SAME CANNOT BE BROUGHT TO TAX IN INDIA. SINCE THE OBLIGATION TO DEDUCT TAX IS LINKED TO CHARGEABILITY TO TAX IN THE HANDS OF T HE NON-RESIDENT AS HELD IN THE CASE OF ELI LILLY & CO. 312 ITR 225 (SC), IT WA S SUBMITTED BY HIM THAT THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE AND CONSEQUENTLY NO DISALLOWANCE COULD BE MADE U/S.40(A)(I) OF THE ACT. 42. THE LEARNED DR SUBMITTED THAT NONE OF THE DECIS IONS ON WHICH RELIANCE WAS PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE IN THE CONTEXT OF OBLIGATION TO DEDUCT TAX AT SOURCE U/S.1 95 OF THE ACT. HE POINTED OUT THAT ALL THE CASES RELATE TO TAXATION OF INTERE ST INCOME IN THE HANDS OF IT(TP)A NO. 1180/BANG/2011 PAGE 56 OF 65 THE NON-RESIDENT AND THE YEAR IN WHICH INTEREST INC OME IS TO BE TAXED IN THE HANDS OF THE NON-RESIDENT. ACCORDING TO HIM THE QU ESTION IN THE PRESENT CASE IS DIFFERENT AND HAS NOTHING TO DO WITH TAXABI LITY OF INTEREST INCOME IN THE HANDS OF THE NON-RESIDENT. ACCORDING TO HIM TH E OBLIGATION TO DEDUCT TAX AT SOURCE U/S.195(1) OF THE ACT ON THE ASSESSEE IS AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT TH E TIME OF PAYMENT THEREOF IN CASE OR BY THE ISSUE OF A CHEQUE OR DRAF T OR BY ANY OTHER MODE, WHICHEVER IS EARLIER . THE YEAR IN WHICH ACCRUAL OF INCOME AND THE CHARGEABILITY TO TAX IN THE HANDS OF THE NON-RESIDE NT IS TO BE DETERMINED, ACCORDING TO HIM WILL NOT BE RELEVANT. 43. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. IN CIT VS. ELI LILLY & COMPANY (INDIA) (P) LTD. & OTHE RS 312 ITR 225 (SC) THE HONBLE SUPREME COURT HAD TO DECIDE APPLICABILITY O F TDS PROVISIONS U/S. 192 OF THE ACT IN RESPECT OF HOME SALARY/SPECIAL AL LOWANCES PAID BY FOREIGN COMPANY/HEAD OFFICE TO EXPATRIATE EMPLOYEES OUTSIDE INDIA. THE HONBLE SUPREME COURT OBSERVED THAT TDS PROVISIONS WHICH AR E IN THE NATURE OF MACHINERY PROVISIONS TO ENABLE COLLECTION AND RECOV ERY OF TAX ARE NOT INDEPENDENT OF THE CHARGING PROVISIONS WHICH DETERM INE THE ASSESSABILITY IN THE HANDS OF THE EMPLOYEE. THE LEARNED COUNSEL FOR THE ASSESSEE RELYING ON THE AFORESAID OBSERVATIONS SUBMITTED THAT UNLESS THE INCOME IS CHARGEABLE TO TAX IN THE HANDS OF THE NON-RESIDENT FOR THE RELEVANT PREVIOUS YEAR, THERE IS NO OBLIGATION TO DEDUCT TAX AT SOURC E. ACCORDING TO HIM INTEREST INCOME AS PER ARTICLE 11 OF THE DTAA BETWE EN INDIA AND SINGAPORE IT(TP)A NO. 1180/BANG/2011 PAGE 57 OF 65 OF WHICH THE PAYEE NON-RESIDENT IS A TAX RESIDENT, TAXABILITY OF THE INTEREST INCOME IN THE HANDS OF THE NON-RESIDENT IN INDIA IS ONLY AT THE POINT OF TIME OF RECEIPT AND NOT EARLIER. SINCE THE MACHINERY PR OVISIONS FOR COLLECTION AND RECOVERY OF TAX AND THE CHARGING PROVISIONS FORM AN INTEGRAL CODE AND CANNOT BE LOOKED AT INDEPENDENTLY, THE OBLIGATION T O DEDUCT TAX AT SOURCE SHOULD ALSO BE AT THE POINT OF TIME WHEN THE INCOME IS TAXABLE IN INDIA IN THE HANDS OF THE NON-RESIDENT. 44. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE AND OF THE VIE W THAT THE SAME ARE NOT ACCEPTABLE. THE HONBLE SUPREME COURT IN THE CASE OF ELIY LILLY & CO. (SUPRA) WAS NOT CONCERNED WITH THE CASE OF YEAR OF TAXABILITY OF A SUM IN THE HANDS OF NON-RESIDENT. IN THE PRESENT CASE, THE AS SESSEE DOES NOT DISPUTE THE FACT THAT INTEREST INCOME IS CHARGEABLE TO TAX IN INDIA. THE ASSESSEE CLAIMS THAT THE POINT OF ACCRUAL OF INCOME AND TAXA TION OF INCOME IN THE HANDS OF THE NON-RESIDENT IS ONLY WHEN THE PAYMENT IS RECEIVED BY THE NON- RESIDENT AND THAT WILL ALSO DECIDE THE POINT OF TIM E AT WHICH TAX DEDUCTIBLE AT SOURCE HAS TO BE DEDUCTED. THE OBLIGATION OF THE A SSESSEE TO DEDUCT TAX AT SOURCE IS LAID DOWN BY SEC.195 OF THE ACT. SEC.195 (1) OF THE ACT READS THUS: (1) ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RES IDENT, NOT BEING A COMPANY, OR TO A FOREIGN COMPANY, ANY INTER EST (NOT BEING INTEREST REFERRED TO IN SECTION 194LB OR SECTION 19 4LC OR 194LD OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD 'SALARIES' S HALL, AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE IT(TP)A NO. 1180/BANG/2011 PAGE 58 OF 65 TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, D EDUCT INCOME- TAX THEREON AT THE RATES IN FORCE: 45. A READING OF THE AFORESAID PROVISIONS SHOWS TH AT THE FIRST PART TALKS ABOUT THE CHARGEABILITY TO TAX OF INTEREST INCOME O R ANY OTHER SUM. THE SECOND PART TALKS ABOUT THE POINT OF TIME AT WHICH TAX HAS TO BE DEDUCTED, IF THE SUM IN QUESTION IS CHARGEABLE TO TAX. THE SECO ND PART MAKES IT CLEAR THAT THE POINT OF TIME AT WHICH TAX HAS TO BE DEDUC TED AT SOURCE IS AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASE OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER . ONCE CHARGEABILITY OF THE SUM IN QUESTION TO TAX IS ADMITTED, THEN THE SECOND PART OF SECTION 19 5(1) COMES INTO OPERATION AND THE ACCRUAL OF INCOME IN THE HANDS OF THE NON-RESIDENT OR THE YEAR OF CHARGEABILITY OF INCOME IN THE HANDS OF THE NON-RESIDENT BECOME IRRELEVANT. THE PERSON MAKING PAYMENT TO THE NON-R ESIDENT HAS TO DEDUCT TAX AT SOURCE. HE CANNOT BE HEARD TO SAY THAT NON- RESIDENT IS LIABLE TO TAX ONLY WHEN THE INTEREST INCOME IS RECEIVED BY HIM AN D THEREFORE ONLY ON RECEIPT OF INTEREST INCOME BY THE NON-RESIDENT, TAX AT SOURCE SHOULD BE DEDUCTED BY THE PERSON MAKING PAYMENT. 46. AS RIGHTLY CONTENDED BY THE LEARNED DR, THE DE CISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE RENDERE D IN THE CONTEXT OF TAXATION OF INTEREST INCOME IN THE HANDS OF THE NON -RESIDENT AND ARE NOT IN THE CONTEXT OF POINT OF TIME AT WHICH OBLIGATION TO DEDUCT TAX AT SOURCE LIES IT(TP)A NO. 1180/BANG/2011 PAGE 59 OF 65 ON THE PERSON MAKING PAYMENT TO A NON-RESIDENT. WE AGREE WITH THE SUBMISSION OF THE LEARNED DR THAT THE SAID DECISION S ARE THEREFORE NOT RELEVANT TO THE FACTS OF THE PRESENT CASE. WE THERE FORE HOLD THAT DISALLOWANCE U/S.40(A)(I)OF THE ACT, IN THE FACTS A ND CIRCUMSTANCES OF THE CASE, IS JUSTIFIED. THE QUANTUM OF SUM TO BE DISALL OWED AS WE HAVE ALREADY STATED IS TO BE DECIDED BY THE AO AFRESH IN VIEW OF THE DISCUSSION ON THE ISSUE RAISED IN GROUND NO.9 IN THE EARLIER PART OF THIS ORDER. WE HOWEVER HASTEN TO ADD THAT THE DECISION ON GROUND NO.9 WOUL D BE SUBJECT TO THE DECISION ON GR.NO.11 WHICH WE WILL DEAL WITH IN THE LATER PART OF THIS ORDER. THUS GROUND NO.9 IS TREATED AS PARTLY ALLOWED. 47. IN CONCISE GROUND NO.10, THE ASSESSEE HAS CHALL ENGED THE ACTION OF THE AO/DRP IN MAKING A DISALLOWANCE OF RS.4,22,867 CONSIDERING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. IN THE TAX AUDIT REPORT IN FORM 3CD FILED BY THE ASSESSEE; THE AUDITORS, IN COLUMN 27(B) OF THE REPORT, HAVE MENTIONED THAT THE ASSESSEE FAILED TO DEDUCT AT SOU RCE AND PAY TAX OF RS.2534 IN RESPECT OF PAYMENTS MADE TO CONTRACTORS FOR CARRYING OUT WORK U/S. 194C OF THE ACT AND A FURTHER SUM OF RS.53,579 IN RESPECT OF PAYMENTS FOR PROFESSIONAL SERVICES RENDERED U/S. 194J OF THE ACT. IN RESPECT OF THE AFORESAID TWO ITEMS FOR WHICH TAX WAS NOT DEDUCTED AT SOURCE AND PAID BY THE ASSESSEE, THE AMOUNT TO BE DISALLOWED U/S. 40(A )(IA) IS ON SUMS OF RS.12,932 AND RS.9,55,062 RESPECTIVELY, WHICH IS AR RIVED AT AS FOLLOWS:- IT(TP)A NO. 1180/BANG/2011 PAGE 60 OF 65 PARTICULARS AMOUNT AMOUNT OF TDS NOT DEDUCTED U/S. 194C OF THE ACT A S PER FORM 3CD 2,534 AMOUNT TO BE DISALLOWED (TDS NOT DEDUCTED *100/2.244) - (A) 1,12,923 AMOUNT DISALLOWED IN THE STI 1,12,923 AMOUNT OF TDS NOT DEDUCTED U/S. 194J OF THE ACT A S PER FORM 3CD - (B) 53,579 AMOUNT TO BE DISALLOWED (TDS NOT DEDUCTED * 100/5.61) 9,55,062 AMOUNT DISALLOWED IN THE STI 9,55,062 THE AO GROSSED UP THE TDS AMOUNT U/S. 194J AT THE R ATE OF 10% - (C) [{(B) * 100}/10] 5,35,790 THE AO SUBTRACTED SUCH AN AMOUNT FROM THE AMOUNT DISALLOWED FOR NON-DEDUCTION U/S. 194C (D) [ (C) (A)] 4,22,867 AMOUNT DISALLOWED BY THE AO IN THE FINAL ASSESSMENT ORDER 4,22,867 48. THE ASSESSEE FILED GROSS RETURN OF INCOME DECLA RING GROSS TOTAL INCOME (GTI) OF RS.3,18,87,823. THE ENTIRE GTI WAS CLAIMED AS DEDUCTION U/S. 10A OF THE ACT AND THEREFORE THE TOTAL INCOME DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME WAS NIL. WHILE ARRIVING AT INCOME FROM BUSINESS, THE ASSESSEE HAS ADDED TO THE PROFIT AS PER PROFIT & LOSS ACCOUNT OF RS.2,45,21,699 A SUM OF RS.1,12,923 AND RS.9,55,060 WHICH IS THE SUM TO BE DISALLOWED U/S. 40(A)(IA) FOR NON-DEDUCTION OF T AX AT SOURCE. 49. IN THE ORDER OF ASSESSMENT, THE AO COMPUTED TOT AL INCOME BY STARTING FROM THE PROFIT AS PER P&L ACCOUNT OF RS.2 ,45,21,699 AND ADDED THE SUM OF RS.1,12,923 AND RS.9,55,060 WHICH ARE TH E SUMS TO BE DISALLOWED U/S. 40(A)(IA) OF THE ACT. THERE IS NO DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE UPTO THIS POINT. THE AO A DDED A FURTHER SUM OF IT(TP)A NO. 1180/BANG/2011 PAGE 61 OF 65 RS.4,22,867 U/S. 40(A)(IA) OF THE ACT. THE ADDITIO N WAS MADE BY THE AO ON THE ASSUMPTION THAT RATE OF TAX FOR TDS ON FEES FOR FTS IS 10%. THE AO GROSSED UP TAX DEDUCTIBLE OF RS.53,579 AT 10 TIMES AND ARRIVED AT A FIGURE OF RS.5,35,790. AFTER DEDUCTING THIS SUM OF RS.5,3 5,790 FROM RS.9,55,062, THE AO ARRIVED AT A FURTHER DISALLOWANCE OF RS.4,22 ,867. THIS IS SHOWN IN THE CHART GIVEN IN THE EARLIER PART OF THIS ORDER I N THE LAST TWO COLUMNS. THE AO THUS PROCEEDED ON A WRONG ASSUMPTION THAT AMOUNT DISALLOWED BY THE ASSESSEE IN THE RETURN OF INCOME U/S. 40(A)(IA) WAS INCORRECT, WHEREAS THE AMOUNT DISALLOWED BY THE ASSESSEE WAS CORRECT. IT IS THIS ADDITION THAT IS SUBJECT MATTER OF DISPUTE BETWEEN THE ASSESSEE AND REVENUE RAISED IN CONCISE GROUND NO.10. ACCORDING TO THE ASSESSEE, I T IS A DOUBLE ADDITION AND THE FIGURE OF RS.4,22,867 HAS BEEN ARRIVED AT I N THE MANNER SET OUT IN THE TABLE GIVEN IN THE EARLIER PARAGRAPH OF THIS OR DER. 50. WE HAVE SEEN THE COMPUTATION OF TOTAL INCOME IN THE RETURN FILED BY THE ASSESSEE AS ALSO IN THE ORDER OF ASSESSMENT AND ARE OF THE VIEW THAT THE FURTHER DISALLOWANCE OF RS.4,22,867 U/S. 40(A)( IA) IS UNCALLED FOR, AS THE ASSESSEE HAS ALREADY IN ITS COMPUTATION OF TOTAL IN COME, DISALLOWED THE CORRECT FIGURE OF RS.9,55,060 TO BE DISALLOWED U/S. 40(A)(IA) AND A FURTHER DISALLOWANCE OF RS.4,22,867 IS WITHOUT ANY BASIS. THE SAID ADDITION IS THEREFORE HEREBY DELETED. CONCISE GROUND NO.10 IS ALLOWED. 51. CONCISE GROUND NO.11 READS AS UNDER:- IT(TP)A NO. 1180/BANG/2011 PAGE 62 OF 65 11. WITHOUT PREJUDICE TO THE OUR ABOVE CLAIM THAT NO ADDITION OUGHT TO HAVE BEEN MADE ON ACCOUNT OF NON-DEDUCTION OR SHORT DEDUCTION OF TDS, THE HONBLE DRP AND THE LEARNED A O HAS ERRED IN LAW AND FACTS IN UPHOLDING THE ACTION OF P ROVIDING RELIEF UNDER SECTION 10A OF THE ACT ON THE PROFITS OF BUSI NESS IN RETURNED INCOME INSTEAD OF ASSESSED PROFITS (I.E., AFTER ADJUSTMENTS ARE MADE TO THE PROFIT ON ACCOUNT OF SHORT AND NON- DEDUCTION OF TDS). 52. THE PRAYER OF THE ASSESSEE IS THAT IN THE EVEN T OF DISALLOWANCE U/S. 40(A)(IA) BEING SUSTAINED, THEN THE SAME WOULD GO T O INCREASE THE PROFITS OF THE BUSINESS IN RESPECT OF WHICH THE ASSESSEE IS EN TITLED TO DEDUCTION U/S. 10A OF THE ACT AND THAT THE ASSESSEE SHOULD BE ALLO WED DEDUCTION U/S. 10A OF THE ACT ON SUCH ENHANCED PROFITS. IN SUPPORT OF THE CLAIM OF ASSESSEE AS AFORESAID, RELIANCE IS PLACED ON THE DECISION OF TH E HONBLE GUJARAT HIGH COURT IN THE CASE OF ITO V. KEVAL CONSTRUCTION, 354 ITR 13 (GUJ) . IN THE AFORESAID DECISION, THE HONBLE GUJARAT HIGH CO URT WAS DEALING WITH A CASE, WHERE THE ASSESSEE CLAIMED DEDUCTION U/S. 80I B(10) OF THE ACT IN RESPECT OF PROFITS DERIVED FROM THE BUSINESS OF DEV ELOPING HOUSING PROJECTS. IN THE COURSE OF ASSESSMENT, CERTAIN EXPENSES CLAIM ED AS DEDUCTION WHILE COMPUTING PROFITS ON DEVELOPING HOUSING PROJECTS WE RE DISALLOWED INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. THE ASSESSEE CLAIMED DEDUCTION ON THE ENHANCED PROFIT AFTER THE DISALLOW ANCE U/S. 40(A)(IA) OF THE ACT. THE HONBLE GUJARAT HIGH COURT HELD THAT ASSE SSEE SHOULD BE ALLOWED DEDUCTION U/S. 80IB(10) OF THE ACT ON THE ENHANCED PROFITS, CONSEQUENT TO DISALLOWANCE U/S. 40(A)(IA) OF THE ACT. WE HAVE CO NSIDERED THE IT(TP)A NO. 1180/BANG/2011 PAGE 63 OF 65 SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME ARE ACCEPTABLE. 53. THE COMPUTATION OF PROFITS AND GAINS FROM THE E LIGIBLE BUSINESS HAS TO BE MADE IN ACCORDANCE WITH THE PROVISIONS OF SEC TION 30 TO SECTION 43D OF THE ACT. THE DISALLOWANCE SOUGHT TO BE MADE BY THE REVENUE ARE DISALLOWANCES WHICH ARE MADE UNDER THE PROVISIONS F ALLING WITHIN THE PROVISIONS OF SECTION 30 TO 43D OF THE ACT (VIZ., DISALLOWANCE UNDER SECTION 40(A)(IA) & 40(A)(I) OF THE ACT. SUCH DISALLOWANCE , WILL NATURALLY GO TO INCREASE THE PROFITS DERIVED FROM THE ELIGIBLE BUSI NESS. IT IS ON SUCH INCREASED PROFITS THAT THE ASSESSEE HAS CLAIMED DED UCTION UNDER SECTION 80IB OF THE ACT. WE FAIL TO SEE AS TO HOW BECAUSE OF THE DISALLOWANCES MADE, THE AMOUNT CEASED TO BE PROFITS DERIVED FROM THE ELIGIBLE BUSINESS. 54. A SIMILAR ISSUE WAS CONSIDERED BY THE ITAT MUMB AI IN THE CASE OF S.B. BUILDERS AND DEVELOPERS VS. ITO, 136 TTJ (MUM) 420 . THE ASSESSEE IN THAT CASE CLAIMED DEDUCTION UNDER S. 80 -IB OF THE ACT ON THE PROFITS AND GAINS FROM HOUSING PROJECT. THE AO MAD E ADDITION ON ACCOUNT OF DISALLOWANCE UNDER S. 40(A)(IA) AND DISALLOWED C ERTAIN PAYMENTS RELATING TO THE COST OF CONSTRUCTION, RCC CONSULTANCY, ARCHI TECTS FEES, COMMISSION AND PROFESSIONAL CHARGES AGGREGATING TO RS.4,50,12, 485/- AS THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE AS STIPULATED IN S.4 0(A)(IA) OF THE ACT. AS A RESULT, THE GROSS TOTAL INCOME STOOD ENHANCED AT RS .8,26,90,888. THE AO HOWEVER RESTRICTED DEDUCTION UNDER S. 80-IB(10) BAS ED ON ORIGINAL PROFIT OF IT(TP)A NO. 1180/BANG/2011 PAGE 64 OF 65 RS. 3,76,78,403 DECLARED. THE TRIBUNAL HELD THAT T HE ACTION OF THE AO WAS NOT JUSTIFIED. THE TRIBUNAL HELD THAT UNDER S. 80A B THE INCOME THAT IS DERIVED FROM THE ELIGIBLE BUSINESS MUST BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SS.30 TO 43D, AS PROVIDED IN S. 2 9. SEC.29 PROVIDES THAT THE INCOME CHARGEABLE TO TAX UNDER THE HEAD PROFIT S AND GAINS OF BUSINESS SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SS.30 TO 43D. THE TRIBUNAL HELD THAT UNQUESTIO NABLY, S. 40(A)(IA) IS A SECTION FALLING BETWEEN SS. 30 TO 43D AND THEREFORE EFFECT MUST BE GIVEN TO THE SAME IN COMPUTING THE PROFITS AND GAINS DERIVED FROM THE ELIGIBLE BUSINESS, WHICH IN THAT CASE WAS A HOUSING PROJECT. THE TRIBUNAL FURTHER HELD THAT WHILE GIVING EFFECT TO THE COMPUTATION P ROVISIONS CONTAINED IN SS. 30 43D ONE SHOULD NOT BE BOGGED DOWN BY THE THEORY THAT THE DISALLOWED EXPENDITURE CANNOT BE CONSIDERED AS PROFITS DERIVE D FROM THE HOUSING PROJECT OR AS OPERATIONAL PROFITS. THE ABOVE RULI NG OF THE TRIBUNAL, IN OUR VIEW, WOULD SQUARELY APPLY TO THE PRESENT CASE ALSO . SIMILAR IS THE RULING RENDERED BY THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF KEVAL CONSTRUCTION (SUPRA) . 55. IN THE LIGHT OF THE AFORESAID JUDICIAL PRONOUNC EMENTS, WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE AS RAISED IN CO NCISE GROUND NO.11 DESERVES TO BE ALLOWED. ACCORDINGLY, THE SAME IS A LLOWED. IT(TP)A NO. 1180/BANG/2011 PAGE 65 OF 65 56. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF JANUARY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 28 TH JANUARY, 2015. /D S/ 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.