I2 Technologies India Private Limited, Bangalore V. DCIT, Bangalore

ITA 1189/BANG/2011

• Counselvise Citation: 118921114 RSA 2011
• Duration Of Justice: 3 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 08-01-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 01-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: FARHAT HUSSAIN QURESHI
• Assessee Lawyers: ARVIND SONDE
• Keywords: Related party transaction; Transfer pricing; International transaction; Revenue expenditure
• Section: 143(3); 92E; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER IT(TP)A NO.1189(BANG)/2011 (ASSESSMENT YEAR : 2007-08) AND SP NO.87(BANG.)/2013 IT(TP)A NO.1189(BANG)/2011 (ASSESSMENT YEAR : 2007-08) M/S I2 TECHNOLOGIES INDIA PVT.LTD., NO.132/133, DIVYASHREE TECHNOPOLIS, YAMALUR POST, OFF AIRPORT ROAD, BANGALORE-560 037 APPELLANT PAN NO.AAAC17334Q VS THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-11(4), BANGALORE RESPONDENT ASSESSEE BY : SHRI ARV IND SONDE, ADVOCATE REVENUE BY : SHRI FARHAT HUSSAIN QURESHI, CIT DATE OF HEARING : 08-01-2015 DATE OF PRONOUNCEMENT : 22-01-2015 O R D E R PER SHRI ABRAHAM P GEORGE, AM: THIS APPEAL FILED BY THE ASSESSEE DIRECTED AGAINS T THE ORDER DATED 30- 09-2011 BY THE AO PASSED UNDER SECTION 143(3) R.W.S .144(C) OF THE ACT, 1961(IN SHORT THE ACT). IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 2 2. ASSESSEE HAS ALTOGETHER TAKEN 14 GROUNDS OF WHIC H GROUND NO.1 TO 7 ARE ON TRANSFER PRICING(TP) ISSUES, WHEREAS GROUN D NO.8 & 9 ARE ON CORPORATE TAX ISSUES. GROUND NO.10 TO 14 ARE EITHE R CONSEQUENTIAL OR GENERAL IN NATURE NEEDING NO ADJUDICATION. GROUNDS RELATING TO TP ISSUES ARE TAKEN UP FIRST FOR DISPOSAL. 3. LEARNED COUNSEL FOR THE ASSESSEE AT THE OUTSET S UBMITTED THE GRIEVANCE OF THE ASSESSEE IS MAINLY ON THE SELECTIO N OF COMPARABLES FOR THE PURPOSE OF TESTING THE ARMS LENGTH PRICE (ALP) OF T HE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE DURING THE R ELEVANT PREVIOUS YEAR AND IF THESE GRIEVANCES ARE ADDRESSED, THE OTHER GR OUNDS ON THE TP COULD BE LEFT FOR ADJUDICATION AT A LATER STAGE, WHEN FOU ND REQUIRED. ACCORDINGLY, WITH REGARD TO THE ISSUES RAISED BY THE ASSESSEE ON ITS INTERNATIONAL TRANSACTIONS, WE ARE ADJUDICATING THOSE RELATING TO THE SELECTION OF COMPARABLES BY THE TRANSFER PRICING OFFICER (TPO). 4. FACTS APROPOS ARE THAT THE ASSESSEE A SOFTWARE D EVELOPMENT COMPANY HAD FILED ITS RETURN FOR THE IMPUGNED ASSES SMENT YEAR DECLARING INCOME OF RS.11,95,59,950/- AFTER CLAIMING DEDUCTIO N OF RS.6,36,87,980/- U/S 10A OF THE INCOME TAX ACT, 1961 ( IN SHORT THE ACT) ACT. SINCE ASSESSEE HAD INTERNATIONAL TRANSACTION WITH ITS ASS OCIATED ENTERPRISES IT HAD FILED ALONG WITH ITS RETURN OF INCOME AN AUDIT REPORT, AS STIPULATED U/S 92E OF THE ACT. AO MADE A REFERENCE TO THE TPO FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE AS SESSEE. IN THE TP IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 3 REPORT GIVEN BY THE TPO ON 12-10-2010 HE HAS MENTIO NED THAT THE ASSESSEE IS A PART OF ONE I2 GROUP A LEADING PROVID ER OF SUPPLY CHAIN MANAGEMENT SOFTWARE. THE PROFILE OF THE ASSESSEE A S CAPTURED BY THE TPO AT PARA-2 AND 2.1 OF HIS ORDER IS REPRODUCED HERE U NDER; M/S I2 TECHNOLOGIES INDIA PVT.LTD.,(I2 INDIA) IS P ART OF THE I2 GROUP, A LEADING PROVIDER OF SUPPLY CHAIN MANAGEMEN T SOFTWARE. ON MARCH 18,2004, I2 INDIA AND I2 TECHNOL OGIES SOFTWARE PVT.LTD.,(I2 SOFTWARE) PROPOSED A SCHEME O F AMALGAMATION, WHICH APPROVED BY THE HIGH COURT OF T HE STATE OF KARNATAKA UNDER SECTION 394 OF THE COMPANI ES ACT, 1956 ON JUNE 22, 2005. PURSUANT TO THE MERGER, THE BUSINESS OF THE ERSTWHILEI2 SOFTWARE IS NOW HOUSED IN I2 INDIA. I2 INDIA WAS ENGAGED IN THE DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS TO I2 INC. THE I2 GROUP IS A LEADING PROVIDER OF ENTERPRISE SO FTWARE APPLICATIONS AND SOLUTIONS FOR DYNAMIC VALUE CHAIN MANAGEMENT. THE I2 GROUPS SOLUTION ARE DESIGNED TO HELP ENTERPRISES IMPROVE EFFICIENCIES, COLLABORATE WITH SUPPLIERS AND CUSTOMERS, RESPOND TO MARKET DEMANDS AND ENGAGE IN DYNAMIC BUSINESS INTERACTIONS OVER THE INTERNET. T HE I2 GROUPS SUITE OF PRODUCTS INCLUDES SOFTWARE SOLUTIO NS FOR SUPPLY CHAIN MANAGEMENT, SUPPLIER RELATIONSHIP MANAGEMENT AND CUSTOMER RELATIONSHIP MANAGEMENT. THE I2 GROUP ALSO PROVIDES CONTENT AND CONTENT MANAGEME NT SOLUTIONS AS WELL AS INTEGRATION SERVICES TO ENABLE THEIR PRODUCTS TO WORK WITH OTHER APPLICATIONS. FURTHER, THE I2 GROUP PROVIDES SERVICES SUCH AS CONSULTING, TRAININ G AND MAINTENANCE IN SUPPORT OF THESE OFFERINGS. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 4 THERE WERE TWO SEGMENTS OF INTERNATIONAL TRANSACTIO NS FOR THE ASSESSEE WHICH WERE SOFTWARE DEVELOPMENT SERVICES AND MARKET ING SUPPORT SERVICES. THE SEGMENTAL RESULTS DECLARED BY THE ASSESSEE IN I TS TP REPORT READS AS UNDER; DESCRIPTION SOFTWARE DEV. SERVICES (SWD) RS. MARKETING SUPPORT SERVICES(MKT.) TOTAL RS. OPERATING REVENUE 115744115 7038537 1164478652 OPERATING COST 1031127051 6703369 1037830420 OPERATING PROFIT 126313064 335168 126648232 OPERATING PROFIT TO COST RATIO 12.25% 5.00 12.20% THE SEGMENTAL RESULTS RE-WORKED BY THE TPO, AFTER CONSIDERING OTHER INCOME EXCHANGE LOSS AND INTEREST AS NON-OPERA TING IN NATURE READ AS UNDER; DESCRIPTION SWD RS. MKT AE RS. MKT NON- AE RS. TOTAL RS. OPERATION REVENUE 1157440115 7038537 67714401 1232193053 % OF REVENUE 93.93% 0.57% 5.50% IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 5 OPERATING COST 1031127051 6703369 1585473 1053684795 LESS: EXCLUDED ITEMS ( EXCHANGE LOSS AND INTEREST) 3015202 18336 1767400 3209938 ACTUAL OPERATING COST (OC) 1028111849 6685033 15677975 10150474857 OPERATING PROFIT (OP) 129328266 353504 52036426 181718196 OP AS % OF OC 12.54% 5.27% 328.21% 17.30% IT IS TO BE NOTED THAT THE TP ADJUSTMENT FINALLY R ECOMMENDED BY THE TPO WAS CONFINED TO SOFTWARE DEVELOPMENT AND SERVICES S EGMENT ONLY. IN SO FAR AS MARKETING SERVICES SUPPORT WAS CONCERNED, THE TU RNOVER BEING LESS THAN RS.1.00 CRORE, NO ADVERSE INFERENCE WAS DRAWN BY TH E TPO. 5. IN ITS TP STUDY, ASSESSEE HAD SELECTED 17 COMPA RABLES FROM CAPITAL LINE AND PROWESS DATA BASE, CONSIDERING ITSELF TO B E A SOFTWARE DEVELOPMENT COMPANY. IN ADDITION TO THIS, DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, ASSESSEE HAS SUGGESTED SIX ADDITIONAL COMPARAB LES. THUS, ALTOGETHER THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE F OR JUSTIFYING ITS PROFIT MARGIN WERE 23. ASSESSEE HAD ADOPTED THE TNM METHO D FOR WORKING OUT THE MARGIN ON COST AND THIS WAS NOT DISPUTED BY THE TPO. HOWEVER, OUT OF 23 COMPARABLES COMPANIES CONSIDERED BY THE ASSESSEE , TPO REJECTED 4 APPLYING DIMINISHING REVENUE FILTER, 7 BASED ON ONS ITE REVENUE FILTER AND 4 AS FUNCTIONALLY DISSIMILAR. THIS LEFT 8 COMPARABLES OUT OF THE LIST CONSIDERED IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 6 BY THE ASSESSEE IN THE TP STUDY. ALONG WITH THESE 8 COMPANIES, TPO MADE HIS OWN ANALYSIS, CONSIDERING THE ASSESSEE TO BE A SOFTWARE DEVELOPMENT COMPANY AND ZEROED IN ON 18 COMPARABLES COMPANIES A S GOOD FOR TREATING THE ALP. THE 26 COMPARABLES SELECTED BY THE TP AND THEIR OPERATING PROFIT AS A MARGIN OF TOTAL COST READ AS UNDER; SL.NO. COMPANY NAME SALES(RS.CR) OP TO TOTAL COST % 1 ACCEL TRANSMATRIC LTD(SEG.) 9.68 21.11% 2 AVANI CIMCON TECH.LTD. 3.55 52.59% 3 CELESTIAL LABS LTD 14.13 58.35% 4 DATAMATICS LTD 54.51 1.38% 5 E-ZEST SOLUTIONS LTD. 6.26 36.12% 6 FLEXTRONICS SOFTWARE SYSTEM LTD(SEG.) 848.66 10.7 1% 7 GEOMETRIC LTD (SEG.) -158.38 10.71% 8 HELIOS & MATHESON INFORMATION TECH.LTD. 178.63 36.63% 9 IGATE GLOBAL SOLUTIONS LTD 747.27 7.49% 10 INFOSYS TECHNOLOGIES LTD 131.49 40.30% 11 ISHIR INFOTECH LTD 7.42 30.12% 12 KALS INFORMATION SYSTEMS LTD.(SEG.) 2.00 30.55% IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 7 13 LGS GLOBAL LTD(LANCO GLOBAL SOLUTIONS LTD.) 45.39 15.75% 14 LUCID SOFTWARE LTD. 1.70 19.37% 15 MEDIASOFT SOLUTIONS LTD 1.85 3.66% 16 MEGASOFT LTD 139.33 60.23% 17 MINDTREE LTD 590.35 16.90% 18 PERSISTENT SYSTEMS LTD 293.75 24.52% 19 QUINTEGRA SOLUTIONS LTD 62.72 12.56% 20 R S SOFTWARE (IND.) LTD 101.04 13.47% 21 R SYSTEMS INTERNATIONAL LTD (SEG.) 112.01 15.07 % 22 SASKEN COMMUNICATION TECH.LTD (SEG.) 343.57 22.1 6% 23 SIP TECH. & EXPORTS LTD 3.80 1.99% 24 TATA ELXSI LTD(SEG.) 262.58 26.51% 25 THIRDWARE SOLUTIONS LTD. 36.08 25.12% 26 WIPRO LTD (SEG.) 9616.09 3.65% ARITHMETIC MEAN 25.14% THEREAFTER, THE TPO WORKED OUT A NEGATIVE WORKING C APITAL ADJUSTMENT CONSIDERING THE ABOVE 26 COMPARABLES BASED ON THE P AYABLES AND RECEIVABLES OF IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 8 THE TAX PAYER, VIS--VIS THOSE OF THE SELECTED COMP ARABLES. THE FINAL ADJUSTMENT RECOMMENDED Y THE TPO READ AS UNDER; ARITHMETIC MEAN PLI 25.14% LESS: WORKING CAPITAL ADJUSTMENT(ANNEXURE-C) (-)3.41% ADJUSTED ARITHMETIC MEAN PLI 28.55% OPERATING COST RS.102,81,11,849/- ARMS LENGTH MARGIN 28.55% OF THE OPERATING CO ST ARMS LENGTH PRICE(ALP)@128,55% OF OPERATING COST RS.132,16,37,782/ PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.115,74,40,115/- SHORTFALL BEING ADJUSTMENT U/S 92CA RS. 16,41,97,667/- 6. WHEN A DRAFT ASSESSMENT ORDER IN LINE WITH THE RECOMMENDATION OF THE TPO WAS RECEIVED, ASSESSEE MOVED AN APPLICAT ION BEFORE THE DRAFT RESOLUTION PANEL(DRP). HOWEVER, THE DRP DID NOT DI STURB THE COMPARABLES CONSIDERED BY THE TPO. IN THE RESULT, THE FINAL A SSESSMENT WAS COMPLETED MAKING A TP ADDITION OF RS.16,41,97,667/-. 7. NOW BEFORE US, LEARNED AR ASSAILING THE SELECTI ON OF COMPARABLES DONE BY THE LEARNED TPO, SUBMITTED THAT IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT.LTD.,VS ACIT ADJUDICATED B Y THIS TRIBUNAL ON 14- 11-2014 (IN IT(TP)A NO.1174(B)/2011) SIMILAR SET OF 26 COMPARABLES WERE CONSIDERED BY THE TPO. ACCORDING TO HIM, BUT FOR 12 COMPARABLES ALL OTHERS WERE DIRECTED TO BE EXCLUDED BY THE TRIBUNAL FOR FUNCTIONAL IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 9 DISSIMILARITIES. LEARNED AR PLACED ON RECORD A CO PY OF THE SAID ORDER OF THE TRIBUNAL. FURTHER, AS PER THE LEARNED AR THE SAID M /S NXP SEMICONDUCTORS INDIA PVT .LTD., (SUPRA) WAS ALSO DOING SOFTWARE DE VELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES. ACCORDING TO THE LEARNED A R THE PROFILE OF THE ASSESSEE AS WELL AS M/S NXP SEMICONDUCTORS INDIA PV T.LTD., COMPARED FAVOURABLY. THE TURNOVER OF THE SAID M/S NXP SEMI CONDUCTORS INDIA PVT.LTD. WAS RS.110.00 CRORES WHEREAS THAT OF THE A SSESSEE WAS RS.123CRORES AND, AS PER THE LEARNED AR BOTH COMPAN IES THEREFORE, FELL WITHIN THE SAME BAND OF TURNOVER. ACCORDING TO HIM , M/S ACCEL TRANSMATICS LTD.(SEG.), M/S AVANI CIMCON TECH.LTD. , M/S CELESTIAL LABS LTD., M/S E-ZEST SOLUTIONS LTD., M/S HELIOS & MATH ESON INF.TECH.LTD. M/S INFOSYS TECH.LTD., M/S ISHIR INFOTECH LTD., M/S K ALS INFORMATION SYSTEMS LTD., M/S LUCID SOFTWARE LTD., M/S PERSISTENT SYST EMS LTD., M/S QUINTEGRA SOLUTIONS LTD., M/S TATA ELXSI LTD.(SEG.) , M/S THIRDWARE SOLUTIONS LTD AND M/S WIPRO LTD.,(SEG.)APPEARING AT SL.NOS.1,2,3,5 8,10,11,12,14,18,19,24,25 & 26 RESPECTIVELY, IN THE LIST OF COMPARABLES CONSIDERED BY THE TPO HAD TO BE EXCLUDED BY VIRTUE OF THE ORDER OF THE TRIBUNAL IN M/S NXP SEMICONDUCTORS INDIA PVT. LTD.( SUPRA) AS PER THE LEARNED AR, IT WAS HELD IN THE SAID ORDER THAT ALL THESE COMPANIES WERE FUNCTIONALLY NOT COMPARABLE TO A SOFTWARE DEVELOPME NT COMPANY AND HAD TO BE EXCLUDED. 8. LEARNED AR FURTHER POINTED OUT THAT THE A SSESSMENT YEAR INVOLVED IN THE CASE OF M/S NXP SEMICONDUCTORS INDIA PVT.LTD . WAS ALSO VERY SAME IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 10 AND THEREFORE, WITH RESPECT TO THE COMPARABLES CONS IDERED BY THE TPO THIS TRIBUNAL HAD TO FOLLOW ITS DECISION IN M/S NXP SEMI CONDUCTORS INDIA PVT.LTD.(SUPRA) LEARNED AR ALSO SUBMITTED THAT THE ADJUSTMENT FOR WORKING CAPITAL ALSO SHOULD BE WORKED OUT ON THE BA SIS OF THE RESULTS OF THE FINAL SET OF COMPARABLES. 9. PER CONTRA, LEARNED DR SUBMITTED THAT HE WOULD TAKE THE SAME ARGUMENTS WHICH WERE PREFERRED BY HIM BEFORE THIS T RIBUNAL IN THE CASE OF M/S NXP SEMICONDUCTORS INDIA PVT. LTD.(SUPRA). 10. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. SINCE THE ARGUMENT OF THE ASSESSEES COUNSEL IS LIM ITED TO EXCLUSION OF CERTAIN COMPARABLE COMPANIES FROM THE LIST CONSIDER ED BY THE TPO, WE ARE CONFINING OUR ADJUDICATION TO THIS. WE FIND THAT T HE ASSESSEES PROFILE CLEARLY SHOW IT TO BE A SOFTWARE DEVELOPMENT COMPAN Y AND THE PROFILE OF M/S NXP SEMICONDUCTORS INDIA PVT. LTD. WHOSE CASE H AS BEEN REFERRED BY LEARNED AR WAS ALSO SIMILAR. IN THE SAID CASE ALS O ASSESSEE CONCERNED WAS PROVIDING SOFTWARE DEVELOPMENT SERVICE TO ITS ASSOC IATED ENTERPRISES ABROAD. THE TURNOVER OF M/S NXP SEMICONDUCTORS INDIA PVT.LT D. FAVOURABLY COMPARES WITH THAT OF THE ASSESSEE. SINCE FUNCTION AL PROFILE AND THE TURNOVER OF THE ASSESSEE AND THAT OF M/S NXP SEMICO NDUCTORS INDIA PVT.LTD. ARE SIMILAR AND ALSO SINCE THE ORDER OF TH E TRIBUNAL IN THE CASE OF M/S NXP SEMICONDUCTORS INDIA PVT.LTD. RELIED ONLY T HE EARNED AR WAS ALSO FOR THE VERY SAME ASSESSMENT YEAR, WE ARE OF THE OP INION THAT SUCH ORDER OF IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 11 THE TRIBUNAL CAN BE CONSIDERED AS A GOOD PRECEDENT FOR ADJUDICATING ON THE SELECTION OF COMPARABLES IN THE CASE OF ASSESSEE AL SO. 11. M/S ACCEL TRANSMATIC LTD, M/S AVANI CIMCON TEC H. LTD., M/S CELESTIAL LABS LTD.AND M/S KALS INFORMATION SYSTEMS LTD, WERE 4 OF THE COMPANIES AMONG THE COMPARABLES CONSIDERED IN THE C ASE OF M/S NXP SEMICONDUCTORS INDIA PVT .LTD. (SUPRA). CO-ORDINA TE BENCH AT PARA-18 TO 19 OF ITS ORDER DATED 1411-2014 HELD AS UNDER; 18. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO .1,2,3 AND 12 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., M/S.ACCEL 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 AFORES AID 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 OFF SHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WO ULD BE CLEAR FROM THE FACT THAT THE VERY SAME 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRS T ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA). IN COMING TO THE AFORESA ID CONCLUSION, THE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SE RVICES PVT.LTD.(SUPRA) FOLLOWED THE DECISION RENDERED IN THE CASE OF TRILO GY E-BUSINESS SOFTWARE INDIA PVT.LTD. VS. DCIT ITA NO.1064/BANG/2011 FOR A Y 07-08 ORDER DATED IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 12 23.11.2012. THE FOLLOWING WERE THE RELEVANT OBSERV ATIONS 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 ORDE R IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT.LTD., WE FIND THAT THES E 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 O F COMPARABLES HAS HELD AS UNDER: 2. (B) AVANI CIMCON TECHNOLOGIES LTD. 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFEREN T FROM THE ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN TH E COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELO PED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITT ED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SA LES APART FROM RENDERING OF SOFTWARE SERVICES AND THEREFORE I S FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS FURTHER SUBMIT TED THAT THE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/2011 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTW ARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAI LS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPARABLE TO THE AS SESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY AN D IT WAS HELD AS FOLLOWS:- 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCOM ) : IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 13 HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPERATING INCOME OF IT SERVICES AND SALE OF SOFTWAR E PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHE R THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESS EE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE T PO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT A S COMPARABLE PARTY. LEARNED CIT DR HAS PROVIDED A COP Y OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETA ILS OF PERCENTAGE OF EXPORT OF PRODUCTS OR SERVICES HAV E NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO 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 07-08 08-09 OPERATING REVENUE 21761611 35477523 29342809 280398 51 OPERATING EXPNS. 16417661 23249646 233591 86 31108949 OPERATING PROFIT 5343950 12227877 598362 3 (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. IN V IEW OF THE ABOVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAV E BEEN REJECTED AS A COMPARABLE. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 14 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 A RE FOUND TO BE ACCEPTABLE. THE DECISION OF ITAT (MUMBAI) IN TH E CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) AL SO 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 & DEVE LOPMENT COMPANY. 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 RESEARC H 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 THE 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 SOFTWARE IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 15 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 PH ARMA PRIVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (FOR AY 20 07-08) IN WHICH THE COMPARABILITY OF THIS COMPANY FOR CLINICA L TRIAL RESEARCH SEGMENT. THE RELEVANT EXTRACT OF DISCUSSION REGARDI NG THIS COMPANY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAGE-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 TOO L 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 EXPERTI SE (APPLYING BIO-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIP LE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE BEEN DISCUSSED WITH PATENT OFFI CIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTME NT OF MICROBIOLOGY, OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, THE COMPANY HAS SIGN ED THE TECHNOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS . THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FA CILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NE W CANDIDATES DRUG MOLECULES AND LICENSE THEM TO IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 16 INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY WILL BE SET UP IN GENO ME 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 SHOULD BE CONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELATION TO A SOFTWARE DISCOVER Y OF NEW DRUGS. MOREOVER THE COMPANY ALSO IS OWNER OF THE IPR. THERE IS HOWEVER A REFERENCE TO DEVELOPMENT OF A MOLECULE TO TREAT CANCER USING BIO - INFORMATICS TOOLS FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. AS EXPLAINED EARLIER IT IS A DIVERSIFIED COMPANY AND THEREFORE CANNOT BE CONSIDERED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIF Y AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING T O SUCH A PROCESS OF MAKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE AB OVE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARC H IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT TH IS COMPANY IS OWNER OF IPR, IT HAS SOFTWARE FOR DISCOVERY OF N EW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCER. IN THE ULTI MATE ANALYSIS, THE ITAT DID NOT CONSIDER THIS COMPANY AS A COMPARA BLE IN CLINICAL TRIAL SEGMENT, FOR THE REASON THAT THIS COMPANY 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. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 17 45.FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANSP IRES 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 CLASSIFIE D 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 N OTICE 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. BESIDES 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 WORK ING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHET HER ANY SEGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OTHER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. CE LESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN T HAT CONNECTION ISSUED DRAFT RED HERRING PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINIC AL RESEARCH. THE TPO WANTED TO KNOW AS TO WHETHER THE PRIMARY BU SINESS OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES AS IN DICATED IN THE ANNUAL REPORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS AND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFERENCE TO ANY REPLY BY CELESTIAL LABS TO T HE ABOVE CLARIFICATION OF THE TPO. THE TPO WITHOUT ANY BAS IS HAS HOWEVER CONCLUDED THAT THE BUSINESS MENTIONED IN THE DRHP A RE THE SERVICES OR BUSINESSES THAT WOULD BE STARTED BY UTI LIZING THE FUNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO ) AND THUS IN IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 18 NO WAY CONNECTED WITH BUSINESS OPERATIONS OF THE CO MPANY DURING 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: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATI ON SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 19 BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWA RE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. 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 TPO HA S DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION 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 DEVELOP MENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TA XMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THA T 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.1189(B)/11 & SP NO.87/(B)/13) 20 IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THA T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDE R. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASS ET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM TH E ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CL AIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERM INING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THI S COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN THE P ERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARABILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 21 ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABL E. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE T PO. 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 TRI BUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFE RRED TO BY THE 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. 20. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL IN SIMILAR SET OF FACTS, THESE COMPANIES ARE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 19. RESPECFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFOR ESAID COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANI ES FOR THE PURPOSE OF DETERMINING ALP THEREFORE, WE DIRECT THE EXCLUSION OF THE ABOVE 4 COMPANIES FROM THE LIST OF COMPARABLES. 12. M/S E-ZEST SOLUTIONS LTD.M/S PERSISTENT SYSTEM LTD. M/S QUINTEGRA SOLUTIONS LTD AD M/S THIRDWARE SOLUTIONS LTD(SEG.) WERE ALSO CONSIDERED BY THE TRIBUNAL IN THE CASE OF M/S NXP S EMICONDUCTORS INDIA IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 22 PVT. LTD.,(SUPRA). PARAS-26 TO 27 OF THE ORDER IN THE CASE OF M/S NXP SEMICONDUTCTORS INDIA PVT.LTD. IS PRODUCED HERE UND ER; AS FAR AS COMPARABLE COMPANIES AT SL.NO.5, 18, 19 AND 25 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO ARE CONCERNED, VIZ., M/S. E-ZEST SOLUTIONS LTD., PERSISTENT SYSTEMS LTD., QUINTEGRA SOLUTIONS LIMITED AND THIRD WARE SOLUTIONS LTD., TH IS TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. I.T (T.P) A. NO.1303/BANG/2012 (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 FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: 14. E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMPARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUND THAT AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS COMPAN Y IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 23 IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND SATISFIES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT TO THE ASSESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E- BUSINESS CONSULTING SERVICES, CONSISTING OF WEB STRATEGY SERVICES, I T DESIGN SERVICES AND IN TECHNOLOGY CONSULTING SERVICES INCLUDING PRODUCT DEVELOPMENT CONSULTING SERVICES. THESE SERVICES, TH E LEARNED AUTHORISED REPRESENTATIVE CONTENDS, ARE HIG H END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES. IT IS FURTHER SUBMITT ED THAT THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA I N ITS ANNUAL REPORT. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIV E INFORMATION ON THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAILS AVAILABLE O N THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WHILE EVALUATING THE COMPANYS FUNCTIONAL PROFILE. IT IS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO SERVICES ARE NOT COMPARABLE IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 24 TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CONSIDERED AS COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES AND RELIED ON THE DECISION OF THE CO- ORDINATE BENCH IN THE CASE OF CAPITAL IQ INFORMATIO N 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., O UGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLYCONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARBALES ONLY ON THE BASI S OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY T O THE NOTICE UNDER SECTION 133(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVICES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVICES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON RECORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 25 SERVICES, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BEEN HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CAPITAL I-Q INFORMATIONSYSTEMS (INDIA) (P) LTD. SUPRA) THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWIN G THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E-ZEST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED. 15. THIRDWARE SOLUTIONS LTD. (SEGMENT) 15.1 THIS COMPANY WAS PROPOSED FOR INCLUSION IN THE LIST OF COMPARABLES BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES ON THE GROUND THAT ITS TURNOVER WAS IN EXCESS OF RS.500 CRORES. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASON THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, IT IS IN THE BUSINESS OF PRODUCT DEVELOPMENT AND TRADING IN IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 26 SOFTWARE AND GIVING LICENSES FOR USE OF SOFTWARE. I N THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTION. IT HAS BEEN POINTED OUT FROM THE ANNU AL REPORT THAT THE COMPANY HAS NOT PROVIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACCOUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT 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 PROVIDERS, 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 TH E TRIBUNAL (SUPRA), THIS COMPANY OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 27 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 I S ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, TH E SEGMENTAL PROFIT AND LOSS ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT ARE NOT GIVEN SEPARATELY. FURTHER, AS POINTED OUT BY TH E LEARNED AUTHORISED REPRESENTATIVE, THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF E-GAIN COMMUNICATION S PVT. LTD. (SUPRA) HAS DIRECTED THAT SINCE THE INCOM E OF THIS COMPANY INCLUDES INCOME FROM SALE OF LICENS ES, IT OUGHT TO BE REJECTED AS A COMPARABLE FOR SOFTWAR E DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE MATTER AND FOLLOWING THE AFORE CITED DECISIO N OF THE PUNE TRIBUNAL (SUPRA), WE DIRECT THAT THIS COMPANY BE OMITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. 17. PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASONS THAT IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 28 THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NO T AVAILABLE. THE TPO REJECTED THE ASSESSEE'S OBJECTIONS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPANY FOR FINANCIAL YEAR 2007-08, IT IS MAINLY A SOFTWARE DEVELOPMENT COMPANY AND AS PER THE DETAILS FURNISHED IN REPLY TO THE NOTICE UN DER SECTION 133(6) OF THE ACT, SOFTWARE DEVELOPMENT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF TH E MATTER, THE ASSESSING OFFICER INCLUDED THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNCTIONALITY CRITE RION. 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE SUBMITTIN G THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AND ALS O THAT THERE ARE SEVERAL OTHER FACTORS ON WHICH THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT : (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING SERVICES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS I S THE ASSESSEE IN THE CASE ON HAND. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 29 (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007-08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY ENGAGED IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES FOR INDEPENDENT SOFTWARE VENDORS AND ENTERPRISES. (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 TELECORDIA TECHNOLOGIES INDIA PVT. LTD.(SUPRA) WHIL E DISCUSSING THE COMPARABILITY OF ANOTHER COMPANY, NAMELY LUCID SOFTWARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGMENTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRESENTLY UNDER CONSIDERATION, WHICH IS INT O PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES AND FOR WHICH THE SEGMENTAL 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. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 30 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE 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 SERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVICES PROVIDE R. WE FIND THAT, AS SUBMITTED BY THE ASSESSEE, THE SEGMENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUNCIATED IN TH E DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THA T IN THE ABSENCE OF SEGMENTAL DETAILS / INFORMATION A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS, WE HOLD THAT THIS COMPANY I .E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. 18. QUINTEGRA SOLUTIONS LTD. 18.1 THIS CASE WAS SELECTED BY THE TPO AS A COMPARABLE. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 31 COMPARABLES ON THE GROUND THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE WERE PECULIAR ECONOMIC CIRCUMSTANCES IN THE FORM OF ACQUISITIONS MADE DURING THE YEAR. THE TPO REJECTED THE ASSESSEE'S OBJECTIONS HOLDING THAT THIS COMPANY QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. ON TH E ISSUE OF ACQUISITIONS, THE TPO REJECTED THE ASSESSEE'S OBJECTIONS OBSERVING THAT THE ASSESSEE HAS NOT ADDUCED ANY EVIDENCE AS TO HOW THIS EVENT HAD AN ANY INFLUENCE ON THE PRICING OR THE MARGIN EARNED. 18.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY FOR THE REASON THAT IT IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE ARE OTHE R FACTORS FOR WHICH THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. IT WAS SUBMITTED THAT, (I) QUINTEGRA SOLUTIONS LTD., THE COMPANY UNDER CONSIDERATION, 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 PREPARATORY SOFTWARE PRODUCTS AND IS THEREFORE NOT SIMILAR TO THE ASSESS EE IN THE CASE ON HAND. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 32 (II) IN ITS ANNUAL REPORT, THE SERVICES RENDERED BY THE COMPANY ARE DESCRIBED AS UNDER : LEVERAGING ITS PROVEN GLOBAL MODEL, QUINTEGRA PROVIDES A FULL RANGE OF CUSTOM IT SOLUTIONS (SUCH AS DEVELOPMENT, TESTING, MAINTENANCE, SAP, PRODUCT ENGINEERING AND INFRASTRUCTURE MANAGEMENT SERVICES) , PROPRIETARY SOFTWARE PRODUCTS AND CONSULTANCY SERVICES IN IT ON VARIOUS PLATFORMS AND TECHNOLOGIE S. (III) THIS COMPANY IS ALSO ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITIES WHICH RESULTED IN THE CREATI ON OF INTELLECTUAL PROPRIETARY RIGHTS (IPRS) AS CAN BE EVIDENCED FROM THE STATEMENTS MADE IN THE ANNUAL REPORT OF THE COMPANY FOR THE PERIOD UNDER CONSIDERATION, WHICH IS AS UNDER : QUINTEGRA HAS TAKEN VARIOUS MEASURES TO PRESERVE ITS INTELLECTUAL PROPERTY. ACCORDINGLY, SOME OF THE PRODUCTS DEVELOPED BY THE COMPANY HAVE BEEN COVERED BY THE PATENT RIGHTS. THE COMPANY HAS ALSO APPLIED FOR TRADE MARK REGISTRATION FOR ONE OF ITS PRODUCTS, VIZ. INVESTOR PROTECTION INDEX FUND (IPIF ). THESE MEASURES WILL HELP THE COMPANY ENHANCE ITS PRODUCTS VALUE AND ALSO MITIGATE RISKS. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 33 (IV) THE TPO HAS APPLIED THE FILTER OF EXCLUDING COMPANIES HAVING PECULIAR ECONOMIC CIRCUMSTANCES. QUINTEGRA FAILS THE TPOS OWN FILTER SINCE THERE HA VE BEEN ACQUISITIONS IN THIS CASE, AS IS EVIDENCED FRO M THE COMPANYS ANNUAL REPORT FOR F.Y. 2007-08, THE PERIOD UNDER CONSIDERATION. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE SUBMISSIONS MADE ABOVE, IT IS CLEAR THA T INTER ALIA, THIS COMPANY I.E. QUINTEGRA SOLUTIONS L TD. BEING FUNCTIONALLY DIFFERENT 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 FOR THE PERIOD UNDER CONSIDERATION. 18.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE SET OF COMPARABLES TO THE ASSESSEE FOR THE PERIOD UNDER CONSIDERATION. 18.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS BROUGHT ON RECO RD THAT THIS COMPANY I.E.QUINTEGRA SOLUTIONS LTD. IS ENGAGED IN PRODUCT ENGINEERING SERVICES AND IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS I S IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 34 THE ASSESSEE IN THE CASE ON HAND. IT IS ALSO SEEN T HAT THIS COMPANY IS ALSO ENGAGED IN PROPRIETARY SOFTWAR E PRODUCTS AND HAS SUBSTANTIAL R&D ACTIVITY WHICH HAS RESULTED IN CREATION OF ITS IPRS. HAVING APPLIED FO R TRADE MARK REGISTRATION OF ITS PRODUCTS, IT EVIDENC ES THE FACT THAT THIS COMPANY OWNS INTANGIBLE ASSETS. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THECASE O F 24/7 CUSTOMER.COM PVT. LTD. (ITA NO.227/BANG/2010 DT.9.11.2012) HAS HELD THAT IF A COMPANY POSSESSES OR OWNS INTANGIBLES OR IPRS, THEN IT CANNOT BE CONSIDE RED 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 QUINTEGRA SOLUTIONS LTD. THAT THERE HAVE BEEN ACQUISITIONS MADE 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. (SUPRA), WE DIRECT THAT THIS IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 35 COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLES IN THE CASE ON HAND SI NCE IT IS ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS AND OWNS ITS OWN INTANGIBLES UNLIKE THE ASSESSEE IN THE CASE ON HAND WHO IS A SOFTWARE SERVICE PROVIDER. 27. RESPECFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. ACCORDINGLY, WE DIRECT THE EXCLUSION OF TH E ABOVE FOUR COMPANIES ALSO FROM THE COMPARABLES. 13. M/S HELIOS & MATHESON INFORMATION TECHNOLOGIES LTD WAS DIRECTED TO BE EXCLUDED BY THE CO-ORDINATE BENCH IN M/S NXP SEMICONDUCTORS INDIA PVT.LTD.(SUPRA) VIDE PARAGRAPH 28, WHICH IS REPRODUCED HERE UNDER; 28. AS FAR AS COMPARABLE CHOSEN BY THE TPO AT SL.N O.8 OF THE FINAL LIST OF COMPARABLE VIZ., M/S.HELIOS & MA THESON INFORMATION TECHNOLOGY LTD., WE FIND THAT THE SAID COMPANY HAS BEEN HELD TO BE NOT COMPARABLE WITH A SOFTWARE SERVICE PROVIDER LIKE THE ASSESSEE BY THE ITAT PUNE BENCH I N THE CASE OF PTC SOFTWARE (INDIA)PVT.LTD. ITA.NO.1605/P N/2011 IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 36 (ASSTT. 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 HE LIOS & MATHESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION SOLUTIONS LTD. (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESA ID TWO COMPANIES FROM THE LIST OF COMPARABLES IS TO BE EFF ECT THAT THEY ARE FUNCTIONALLY INCOMPARABLE AND THEREFORE, A RE LIABLE TO BE EXCLUDED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CONCERNS ARE EN GAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES UNDERTAKEN BY THE ASSESSEE IN ITS IT-SERVICES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORD ER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMA TION SYSTEMS LTD., IS TO THE EFFECT THAT THE SAID CONCER NS APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE DEVE LOPMENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE T O THE ASSESSEE COMPANY. THE SAID CONCERN IS ENGAGED IN TW O SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AND TR AINING. AS PER THE TPO, THE APPLICATION SOFTWARE SEGMENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS ENGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASSE SSEE IS IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 37 THAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CON CERN FOR F.Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCT S AND SOFTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRITTEN SUBMISSIONS, COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 420.3 TO 420.4. THE ASSESSEE FURTHER P OINTED OUT THAT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSIN ESS OF SOFTWARE SERVICES, AND THEREFORE, IT WAS NOT APPROP RIATE TO ADOPT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEE S IT- SERVICES SEGMENT. THE TPO HOWEVER, NOTICED THAT THO UGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MA Y BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODUCTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PRODUCTS AS THERE WERE NO COST OF PURCHASES DEBITED IN THE PROFIT & LOSS ACCOUNT. THO UGH THE TPO AGREED THAT THE QUANTUM OF REVENUE FROM SALE OF PRODUCTS WAS NOT AVAILABLE AS PER THE FINANCIAL STA TEMENTS OF THE SAID CONCERN, BUT AS THE BASIC FUNCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEES SEGMENT O F 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 IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 38 IMMEDIATELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALLY INCOMPARABLE. FOR THE SAID PURPOSE, OU R REFERENCE HAS BEEN INVITED TO PAGES 421 TO 542 OF T HE PAPER BOOK, WHICH IS THE COPY OF THE TRANSFER PRICING STU DY UNDERTAKEN BY THE ASSESSEE FOR THE A.Y. 2006-07, AN D IN PARTICULAR, ATTENTION WAS INVITED TO PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REF LECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONAL LY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIE R A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICATION F OR THE TPO TO CONSIDER THE SAID CONCERN AS FUNCTIONALLY CO MPARABLE IN THE INSTANT ASSESSMENT YEAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDEN T THAT THE SAID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSE SSMENT YEAR AND IN THE PRESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTEN SUBMISSIONS ADDR ESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY A SSERTED OUT THAT THE SAID CONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT FROM TH E ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGME NT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 39 BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMER GING FROM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT M ANNER THE FUNCTIONAL PROFILE OF THE SAID CONCERN HAS UNDERGON E A CHANGE FROM THAT IN THE IMMEDIATELY PRECEDING YEAR. THEREF ORE, HAVING REGARD TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERTED THAT THE APPLICA TION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARA BLE TO THE 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 CONCER N HAS BEEN INCLUDED AS A COMPARABLE CONCERN. THE ASSESSEE POIN TED OUT THAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS L TD. (SEG), IN THE INSTANT CASE ALSO FOR A.Y. 2006-07 THE SAID CONCERN WAS FOUND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WAS NO T DISTURBED BY THE TPO. THE RELEVANT PORTION OF THE T RANSFER PRICING STUDY, PLACED 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 INF ORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO WE F IND THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 40 29. RESPECFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANY FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. WE THEREFORE, DIRECT EXCLUSION OF M/S HELIOS & MATH ESON INFORMATION TECHNOLOGY LTD ALSO FROM THE LIST OF COMPARABLES. 14. M/S INFOSYS TECHNOLOGIES LTD. M/S TATA ELXSI LTD. ( SEG.) AND M/S WIPRO LTD.(SEG.) WERE DIRECTED TO BE EXCLUDED F ROM THE LIST OF COMPARABLES IN THE CASE OF M/S NXP SEMICONDUCTORS INDIA PVT.LTD.(SUPRA) WITH THE FOLLOWING OBSERVATIONS; 24. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO .10, 24 & 26 OF THE FINAL LIST OF COMPARABLE COMPANIES C HOSEN BY THE TPO VIZ., M/S.INFOSYS TECHNOLOGIES LIMITED, TATA ELXSI LTD. (SEG.) & WIPRO LIMITED ARE CONCERNED, T HIS TRIBUNAL IN THE CASE OF M/S.CURAM SOFTWARE INTERNAT IONAL 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 COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE FOLLOW ING WERE THE RELEVANT OBSERVATIONS IN THE CASE OF M/S.C URAM SOFTWARE INTERNATIONAL PVT.LTD.(SUPRA): 12. (4) INFOSYS TECHNOLOGIES LTD. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 41 12.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUS ION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUN DS OF TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE AS SESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSE SSEE AND IN THIS CONTEXT HAS CITED VARIOUS PORTIONS OF T HE 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 DISCLOSURES AND FILED AN AGGREGATE 10 PAT ENTS IN INDIA AND THE USA. TILL DATE THIS COMPANY HAS FILE D AN AGGREGATE OF 119 PATENT APPLICATIONS (PENDING) IN I NDIA AND USA OUT OF WHICH 2 HAVE BEEN GRANTED IN THE US. (II) THIS COMPANY HAS SUBSTANTIAL REVENUES FROM SO FTWARE PRODUCTS AND THE BREAK-UP OF THE SOFTWARE PRODUCT REVENUES IS NOT AVAILABLE. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 42 (III) THIS COMPANY HAS INCURRED HUGE RESEARCH AND DEVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATEL Y RS.200 CRORES. (IV) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWARE PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. (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. (ITA NO.1054/BANG/2011) 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERE LY ON THE BASIS OF SCALE OF OPERATIONS AND THE OPERATING MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VI EW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPO RTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 43 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. W E FIND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTION ALLY DIS- SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HENCE I S NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. THE ARGUMENT PUT FORTH BY ASSESSEE'S IS THAT INFOSY S TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SIN CE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES F ROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCT S IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARA BLE COMPANIES. IT IS ORDERED ACCORDINGLY. 13.0 (5) WIPRO LIMITED 13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY T HE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S OR SEVERAL GROUNDS LIKE FUNCTIONAL DIS-SIMILARITY, BRA ND VALUE, SIZE, ETC. THE TPO, HOWEVER, BRUSHED ASIDE THE OBJ ECTIONS OF THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SE T OF COMPARABLES. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 44 13.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSES SEE FOR SEVERAL REASONS, WHICH ARE AS UNDER : (I) THIS COMPANY OWNS SIGNIFICANT INTANGIBLES IN TH E NATURE OF CUSTOMER RELATED INTANGIBLES AND TECHNOLOGY RELA TED INTANGIBLES AND QUOTED EXTRACTS FROM THE ANNUAL REP ORT OF THIS COMPANY IN THE SUBMISSIONS MADE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCIA L STATEMENTS FOR COMPARABILITY PURPOSES AND FOR COMPU TING THE MARGINS, WHICH CONTRADICTS THE TPOS OWN FILT ER OF REJECTING COMPANIES WITH CONSOLIDATED FINANCIAL STATEMENTS. 13.3. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE SET OF COMPARABLES. 13.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MER IT IN THE CONTENTIONS OF THE ASSESSEE FOR EXCLUSION OF TH IS COMPANY FROM THE SET OF COMPARABLES. IT IS SEEN TH AT THIS COMPANY IS ENGAGED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMENT SERVICES. THERE IS NO INFORMAT ION ON THE SEGMENTAL BIFURCATION OF REVENUE FROM SALE OF P RODUCT IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 45 AND SOFTWARE SERVICES. THE TPO APPEARS TO HAVE ADO PTED THIS COMPANY AS A COMPARABLE WITHOUT DEMONSTRATING HOW THE COMPANY SATISFIES THE SOFTWARE DEVELOPMENT SALE S 75% OF THE TOTAL REVENUE FILTER ADOPTED BY HIM. AN OTHER MAJOR FLAW IN THE COMPARABILITY ANALYSIS CARRIED OU T BY THE TPO IS THAT HE ADOPTED COMPARISON OF THE CONSOLIDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NOT AN APPROPRIATE COMPARISON. 13.4.2 WE ALSO FIND THAT THIS COMPANY OWNS INTELLECTUAL PROPERTY IN THE FORM OF REGISTERED PAT ENTS AND SEVERAL PENDING APPLICATIONS FOR GRANT OF PATEN TS. 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 INTANGIB LE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CASE ON HAND DOES NOT OWN AN Y INTANGIBLES, FOLLOWING THE AFORESAID DECISION OF T HE CO- ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOMER.C OM PVT. LTD. (SUPRA), WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO OMIT THIS IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 46 COMPANY FROM THE SET OF COMPARABLE COMPANIES IN THE CASE ON HAND FOR THE YEAR UNDER CONSIDERATION. 14.0 (6) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNCTIONAL DIS-SIMILARITY, SIG NIFICANT R&D ACTIVITY, BRAND VALUE, SIZE, ETC. THE TPO, HOW EVER, REJECTED THE CONTENTION PUT FORTH BY THE ASSESSEE A ND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. 14.2 BEFORE US, IT WAS REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT P ERFORMS A VARIETY OF FUNCTIONS UNDER THE SOFTWARE DEVELOPME NT AND SERVICES 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 EXCLUDE D FROM THE LIST OF COMPARABLES. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 47 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE STAND O THE TPO IN INC LUDING THIS COMPANY IN THE LIST OF COMPARABLES. 14.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. FROM THE DE TAILS ON RECORD, WE FIND THAT THIS COMPANY IS PREDOMINANT LY ENGAGED IN PRODUCT DESIGNING SERVICES AND NOT PUREL Y SOFTWARE DEVELOPMENT SERVICES. THE DETAILS IN THE ANNUAL REPORT SHOW THAT THE SEGMENT SOFTWARE DEVELOPMENT SERVICES RELATES TO DESIGN SERVICES AND ARE NOT SI MILAR TO SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MUM/2011) HAS HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONALLY COMPARABLE. IN THIS CONTEXT THE R ELEVANT PORTION OF THIS ORDER IS EXTRACTED AND REPRODUCED B ELOW :- . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFEREN T FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE NATU RE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COM PANY IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 48 ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRAT ED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REV ENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CO NSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT R ATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, W E ARE UNABLE TO TREAT THIS COMPANY AS FIT FOR COMPARABILI TY ANALYSIS FOR DETERMINING THE ARMS LENGTH 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 PERTAINI NG TO TATA ELXSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 20 07- 08 TO ASSESSMENT YEAR 2008-09. WE, THEREFORE, HOLD THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLU SION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDERED ACCORDINGLY. 25. RESPECFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANIES FROM THE FINAL LIST OF COMPARAB LE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. ACCORDINGLY, WE DIRECT THE EXCLUSION OF THE A BOVE THREE COMPANIES FROM THE LIST OF COMPARABLES. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 49 15. M/S ISHIR INFOTECH LTD, AND M/S LUCID SOFTWARE LTD WERE DIRECTED TO BE EXCLUDED BY THE TRIBUNAL IN THE ORDE R MENTIONED ABOVE, VIDE PARAS-20-22 & 23, REPRODUCED HERE UNDER; 20. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.N O.11 & 14 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOS EN BY THE TPO VIZ., M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWARE LTD., IS CONCERNED, THIS TRIBUNAL IN THE C ASE 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 DEVELOPMENT SERVICES PROVIDER. TH E NATURE OF SERVICES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANT AGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE S AME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VER Y SAME 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRS T ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA). THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CAS E OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA): 22. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUDED FR OM THE LIST OF COMPARABLES ON THE BASIS OF THE FINDING OF THIS TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH & IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 50 DEVELOPMENT INDIA PVT. LTD. DT 22.2.2013, WHEREIN AT PAGES 17 AND 22 OF ITS ORDER THE DISTINCTIONS AS TO WHY THESE COMPANIES SHOULD BE EXCLUDED ARE BROUGHT OUT. HE SUBMITTED THAT THE FACTS OF THE CASE 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 EXCLUSION 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 OBSERVED THEREIN LUCID SOFTWARE LTD. COMPANY IS ALS O INVOLVED IN THE DEVELOPMENT OF SOFTWARE AS COMPARED TO THE ASSESSEE, WHICH IS ONLY INTO SOFTWARE SERVICES. SIMILARLY, AS REGARDS ISHIR INFOTECH LTD., THE TRIB UNAL HAS CONSIDERED THE DECISION OF THE TRIBUNAL IN THE CASE OF 24/7 CO. PVT. LTD TO HOLD THAT ISHIR INFOTECH IS ALSO OUT-SOURCING ITS WORK AND, THEREFORE, HAS NOT SATIS FIED THE 25% EMPLOYEE COST FILTER AND THUS HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. AS THE FACT S OF THE CASE BEFORE US ARE SIMILAR, RESPECTFULLY FOLLOW ING THE IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 51 DECISION OF THE CO-ORDINATE BENCH, WE HOLD THAT THE SE TWO COMPANIES ARE ALSO TO BE EXCLUDED. 21. RESPECFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. THUS, WE DIRECT EXCLUSION OF THESE TWO COMPANIES AL SO FROM THE LIST OF COMPARABLES. 16. AS FAR AS M/S MEGASOFT LTD., IS CONCERNED THIS TRIBUNAL HAD IN THE CASE OF M/S NXP SEMICONDUCTORS INDIA PVT.LTD.(S UPRA) HELD IT AS A GOOD COMPARABLE, BUT CERTAIN MODIFICATION TO THE OP ERATING RESULTS OF THE SAID COMPANY WERE REQUIRED. THIS IS MENTIONED AT P ARA-22 23 OF ITS ORDER, WHICH IS REPRODUCED HEREUNDER; 22. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO .16 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ., M/S.MEGASOFT LIMITED IS CONCERNED, THIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD. VS. DCIT IT (TP) NO.1086/BANG/201 1 FOR AY 07-08 HELD THAT THE AFORESAID COMPANIES ARE IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 52 NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVI CES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THI S 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 ADVANT AGE OFFSHORE SERVICES PVT.LTD.(SUPRA). IN COMING TO TH E AFORESAID CONCLUSION, THE TRIBUNAL IN THE CASE OF F IRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) FOLLOWE D THE DECISION RENDERED IN THE CASE OF TRILOGY E-BUSI NESS SOFTWARE INDIA PVT.LTD. VS. DCIT ITA NO.1064/BANG/2011 FOR AY 07-08 ORDER DATED 23.11.2012. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHOR E SERVICES PVT.LTD.(SUPRA): 27. AS FAR AS ADOPTION OF MEGA SOFT LTD., AS ONE OF COMPARABLES, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE IS AN ERROR IN COMPUTING ITS N ET 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, WHEREI N THE ERROR IN COMPUTING THE NET MARGIN OF THIS COMPANY H AS BEEN TAKEN NOTE OF AND IT HAS BEEN DIRECTED AS UNDE R: IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 53 3. (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 DEVELOPMENT SEGMENT, AND (II) SOFTWARE PRODUCT SEGMENT. THE ASSESSEE IS A PURE SOFTWARE SERVICES PROVIDER AND NOT A SOFTWARE 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 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 AR E SOLD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FIT INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JO B OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWA RE WOULD CONSTITUTE PACKAGED PRODUCT AND AROUND 50% TO IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 54 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 T HE PORTION OF THE REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% O F THE OVERALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. THE BASIS 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 THE BASIS OF SEGMENTAL DATA. 25. IN THE ORDER OF THE TPO, OPERATING MARGIN WAS COMPUTED FOR THIS COMPANY AT 60.23%. IT IS THE COMPLAINT OF THE ASSESSEE THAT THE OPERATING MARGIN S HAVE BEEN COMPUTED AT ENTITY LEVEL COMBINING SOFTWA RE SERVICES AND SOFTWARE PRODUCT SEGMENTS. IT WAS SUBMITTED THAT THE PRODUCT SEGMENT OF MEGASOFT IS SUBSTANTIALLY DIFFERENT FROM ITS SOFTWARE SERVICE IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 55 SEGMENT. THE PRODUCT SEGMENT HAS EMPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SERVICE SEGMENT HAS EMPLOYEE COST OF 50%. SIMILARLY, THE PROFIT MARGIN ON COST IN PRODUCT SEGMENT IS 117.95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11%. BOTH THE SEGMENTS ARE SUBSTANTIALLY DIFFERENT AND THEREFORE COMPARISON AT ENTITY LEVEL IS WITHOUT BASIS AND WOU LD VITIATE THE COMPARABILITY (SUBMISSIONS ON PAGE 381 TO 383 OF THE PB-I). IT WAS FURTHER SUBMITTED THAT MEGASOFT LIMITED HAS PROVIDED SEGMENTAL BREAK-UP BETWEEN THE SOFTWARE SERVICES SEGMENT AND SOFTWARE PRODUCT SEGMENT (PAGE 68 OF PB-II), WHICH WAS ALSO ADOPTED BY THE TPO IN HIS SHOW CAUSE NOTICE (PAGE 8 4 OF PB-I). THE SEGMENTAL RESULTS I.E., RESULTS PERT AINING 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% O UGHT TO HAVE BEEN SELECTED FOR COMPARISON. 27. IT WAS FURTHER SUBMITTED THAT THE LEARNED TPO IN CASE OF OTHER COMPARABLE, SIMILARLY PLACED, HAD ADO PTED IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 56 THE MARGINS OF ONLY THE SOFTWARE SERVICE SEGMENT FO R 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 MARG INS. 28. COMPUTATION OF THE NET MARGIN FOR MEGA SOFT LT D. IS THEREFORE REMITTED TO THE FILE OF THE TPO TO COMPUTE THE CORRECT MARGIN BY FOLLOWING THE DIRECTI ON OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. 23. RESPECFULLY 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 B Y THE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHOR E SERVICES PVT.LTD. (SUPRA). WE THEREFORE, DIRECT THAT THE AO/TPO SHALL COMPUTE THE CORRECT MARGIN OF M/S MEGASOFT LTD., WHILE RETAINING IT IN THE LIST OF COMPARABLES . 17. THE RESULT OF THE ABOVE DISCUSSION IS THAT THE FOLLOWING COMPANIES WILL GO OUT OF THE LIST OF COMPARABLES. 1. ACCEL TRANSMATIC LTD(SEG.) 2. AVANI CIMCON TECH.LTD. 3. CELESTIAL LABS LTD IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 57 4. E-ZEST SOLUTIONS LTD. 5. HELIOS & MATHESON INFORMATION TECH.LTD. 6. INFOSYS TECHNOLOGIES LTD 7. ISHIR INFOTECH LTD 8. KALS INFORMATION SYSTEMS LTD.(SEG.) 9. LUCID SOFTWARE LTD. 10. PERSISTENT SYSTEMS LTD 11. QUINTEGRA SOLUTIONS LTD 12. TATA ELXSI LTD 13. THIRDWARE SOLUTIONS LTD. 14. WIPRO LTD VIS--VIS M/S MEGASOFT LTD., THE TPO WILL HAVE RE-W ORK ITS RESULTS WHILE RETAINING IT AS A COMPARABLES BASED ON A DIRECTION S GIVEN BY THE TRIBUNAL IN THE CASE OF M/S NXP SEMICONDUCTORS INDIA PVT.LTD . REPRODUCED AT PARA 16 ABOVE. TPO HAS TO RE-WORK THE ALP OF THE INTERN ATIONAL TRANSACTIONS WITH REGARD TO SOFTWARE DEVELOPMENT SEGMENT, BASED ON THE COMPARABLES AFTER EXCLUDING THE ABOVE MENTIONED COMPANIES AND PROCEED IN ACCORDANCE WITH LAW. FOR WORKING OUT THE WORKING CAPITAL ADJU STMENT, THE AO/TPO SHALL CONSIDER ONLY THE FINALLY RETAINED COMPARABLE S. ORDERED ACCORDINGLY. 18. IN THE RESULT, GROUND NO.1 TO 7 OF THE ASSESSE E ARE TREATED AS PARTLY ALLOWED. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 58 19. NOW WE TAKE UP THE CORPORATE TAX ISSUES RAISED BY THE ASSESSEE IN ITS GROUND NOS.8 & 9. 20. VIDE ITS GROUND NO.8 GRIEVANCE RAISED BY THE A SSESSEE IS THAT FOREIGN TRAVEL EXPENDITURE OF RS.11,32,13,112/- WAS EXCLUDED FROM THE EXPORT TURNOVER, WHILE COMPUTING THE DEDUCTION U/S 10A OF THE IT ACT. ASSESSEE HAS ALSO RAISED A GRIEVANCE THAT TELECOMMU NICATION EXPENDITURE OF RS.2,57,58,869/- THOUGH EXCLUDED FROM THE EXPORT T URNOVER WAS NOT EXCLUDED FROM THE TOTAL TURNOVER WHILE COMPUTING SU CH DEDUCTION. 21. VIS--VIS THE EXPENDITURE OF FOREIGN TRAVEL OF RS.11,32,13,112/-, WE ARE OF THE OPINION THAT THE DEFINITION OF EXPO RT TURNOVER GIVEN IN CLAUSE-IV OF EXPLANATION TO SECTION 10A OF THE ACT, DOES NOT GIVE ROOM TO THE INTERPRETATION SOUGHT BY THE ASSESSEE. ASSESSEE HA S NO CASE THAT SUCH EXPENDITURE WAS NOT INCURRED IN FOREIGN EXCHANGE FO R PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. HOWEVER, ITS CLAIM THAT F OREIGN TRAVEL EXPENDITURE OF RS.11,32,13,112/- AS WELL AS TELECOMMUNICATION E XPENSES OF RS.2,57,58,869/- ONCE EXCLUDED FROM THE EXPORT TURN OVER HAVE ALSO TO BE EXCLUDED FROM THE TOTAL TURNOVER, WHILE COMPUTING T HE DEDUCTION U/S 10A OF THE IT ACT, IS ACCEPTABLE IN VIEW OF THE DECISIO N OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS M/ S TATA ELXSI LTD., (349 ITR 98). WE THEREFORE, DIRECT THE AO TO EXCLUDE THE SE AMOUNTS FROM THE TOTAL TURNOVER, WHILE COMPUTING THE ELIGIBLE DEDUCT ION U/S 10A OF THE ACT. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 59 22. VIDE ITS GROUND NO.9 THE GRIEVANCE RAISED BY T HE ASSESSEE IS THAT THE DRP AND THE AO DID NOT CONSIDER SUBMISSIONS WIT H REGARD TO THE CLAIM OF EXPENDITURE RELATING TO LEASE RENTAL INCOME, WH EN SUCH RENTAL INCOME WAS CONSIDERED AS PART OF INCOME FROM OTHER SOURCES . 23. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED TH AT IT HAD DURING THE COURSE OF PROCEEDINGS BEFORE THE DRP SUBMITTED THAT THE LEASE RENTAL RECEIVED BY IT ON SUB-LEASING OF PREMISES, IF CONSI DERED UNDER THE HEAD INCOME FROM OTHER SOURCES THE EXPENDITURE FOR EAR NING SUCH LEASE RENTAL SHOULD BE ALLOWED AS A DEDUCTION UNDER SEC.57(III) OF THE ACT. 24. WE FIND FROM THE RECORDS THAT ASSESSEE HAD MAD E SUCH A CLAIM BEFORE THE DRP IN ITS SUBMISSIONS. IF THE ASSESSEE HAD INCURRED EXPENDITURE FOR EARNING LEASE RENTAL INCOME WHICH W AS CONSIDERED UNDER THE HEAD INCOME FROM OTHER SOURCES THEN THE EXPEN DITURE INCURRED BY IT FOR EARNING SUCH INCOME WILL HAVE TO BE ALLOWED UND ER SECTION 57(III) OF THE ACT. HOWEVER, THE CLAIM OF THE ASSESSEE NEEDS TO BE EXAMINED BY THE AO. WE ARE OF THE OPINION THAT THE ISSUE HAS TO BE CONS IDERED BY THE AO AND APPROPRIATE RELIEF TO BE GIVEN TO THE ASSESSEE, IF IT IS ELIGIBLE ACCORDING TO LAW. GROUND NO.9 IS ALLOWED FOR STATISTICAL PURPO SES. IT(TP)A NO.1189(B)/11 & SP NO.87/(B)/13) 60 25. SINCE THE APPEAL OF THE ASSESSEE HAS BEEN DISP OSED OF ITS STAY PETITION HAS BECOME INFRUCTUOUS. 26. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES, WHEREAS ITS STAY PETITION STA NDS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JANUARY, 2015. SD/- (RAJPAL YADAV) SD/- (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE: D A T E D : 22-01-2015 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE