Mercedes - Benz Research and Development India Private Limited, Bangalore V. DCIT, Bangalore

ITA 1222/BANG/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0645 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 08-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITI
• Keywords: Transfer pricing; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary
• Section: 143(3); 234B; 133(6); 10; 154

Judgement Text

PAGE 1 OF 26 IT(TP)A NO.1222/BA NG/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER IT(TP)A NO.1222/BANG/2011 (ASSESSMENT YEAR 2007-08) M/S MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. (FORMERLY DAIMLER CHRYSLER RESEARCH & TECHNOLOGY INDIA PVT. LTD.), PINE VALLY, 3 RD FLOOR, EMBASSY GOLD LINKS BUSINESS PARK, OFF INTERMEDIATE RING ROAD, BANGALORE-87. PA NO.AAACD6261B/MA-227 VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(2), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 17.01.2013 DATE OF PRONOUNCEMENT : 22.02.2013 APPELLANT BY : SHRI RAJAN VORA, C. A. RESPONDENT BY : SHRI S K AMBASTHA, CIT -I ORD ER PER GEORGE GEORGE K : THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE COMP ANY, IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER UNDER SECTION 143(3) RWS 144C OF THE ACT DATED 26.09.2011. THE RELEVANT ASSESSMENT YEAR IS 2007-08. 2. THE ASSESSEE COMPANY IS IN THE BUSINESS OF SOFTW ARE DEVELOPMENT AND RENDERING CONNECTED SERVICES USED F OR IMPROVING SOFTWARE PAGE 2 OF 26 IT(TP)A NO.1222/BA NG/2011 2 BEING USED IN AUTOMOBILES/ AIRCRAFT ENGINES MANUFAC TURED BY DAIMLER AG (DAG) OR ASSOCIATED ENTERPRISE (AE). ACCORDI NG TO THE ASSESSEE, THE SERVICES PROVIDED BY IT WERE FOR INTERNAL CONSUMPTIO N OF AE, AND WAS COMPENSATED ON COST PLUS 5%. DURING THE YEAR UNDER DISPUTE, THE ASSESSEE HAD INTERNATIONAL TRANSACTION WITH ITS AE TO THE TU NE OF RS. 38,53,25,283/-. THE ASSESSING OFFICER REFERRED THE CASE TO THE TRAN SFER PRICING OFFICER (TPO) TO DETERMINE THE ARMS LENGTH PRICE (ALP). THE TPO, AFTER EXAMINING THE DETAILS FURNISHED BY THE ASSESSEE, PASSED AN ORD ER UNDER SECTION 92CA OF THE ACT DATED 28/10/2010, BY MAKING AN ADJUSTMENT OF RS.7,47,59,120/- IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. THE A SSESSING OFFICER THEREAFTER PASSED A DRAFT ASSESSMENT ORDER ON 30.11 .2010, ASSESSING THE TOTAL INCOME OF THE ASSESSEE AT RS.8,07,92,079/-. IN THE DRAFT ASSESSMENT ORDER, FOLLOWING ADDITIONS/DISALLOWANCES WERE MADE WHILE COMPUTING TOTAL INCOME OF THE ASSESSEE:- (A) AN ADJUSTMENT TO ARMS LENGTH PRICE TO THE EX TENT OF RS.7,47,59,120 WITH REFERENCE TO TRANSFER PRICING OFFICERS (TPO) ORDER IN RESPECT OF INTERNATIONAL TRANSACTION DEALT BY THE ASSESSEE WITH ITS AE. (B) THE REDUCTION OF THE AMOUNT OF TELECOMMUNICATIO N CHARGED OF RS.58,18,751 AND TRAVEL EXPENSES INCURRE D IN FOREIGN CURRENCY FOR PROVIDING TECHNICAL SERVICES OF RS.9,59,94,590/- ATTRIBUTABLE TO DELIVERY OF SOFTWAR E OUTSIDE INDIA, AS PROVIDED UNDER SECTION 10A OF THE ACT AND WITHOUT SIMULTANEOUSLY REDUCING THE SAID AMOUNT FROM TOTAL TURNOVER. 2.1 AGGRIEVED, THE ASSESSEE APPROACHED THE DISPUTE RESOLUTION PANEL (DRP) FOR RELIEF. THE DRP HAD, AFTER TAKING INTO ACCOUNT THE PAGE 3 OF 26 IT(TP)A NO.1222/BA NG/2011 3 CONTENTIONS PUT FORTH BY THE ASSESSEE AND ALSO THE R EASONS RECORDED IN ITS DIRECTIONS UNDER SECTION 144C OF THE ACT DATED 23/8 /2011, CONFIRMED THE ORDERS OF THE TPO AND THE ASSESSING OFFICER. THE A SSESSING OFFICER, INCORPORATING THE DIRECTIONS OF THE DRP AND ISSUED FINAL ORDER DATED 26/9/2011. 2.2 AGGRIEVED BY THE FINAL ORDER PASSED BY THE ASSES SING OFFICER, THE ASSESSEE HAS COME UP WITH THE PRESENT APPEAL BE FORE US, RAISING 18 GROUNDS OF APPEAL. 3. GROUND NO.1 AND 4 ARE GENERAL IN NATURE AND NO SPECIFIC ADJUDICATION IS CALLED FOR AND HENCE, THE SAME ARE DISMISSED. 3.1 GROUND NO.17 IS REGARDING CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT. THE LEVY OF INTEREST UNDER SECTIO N 234B OF THE ACT IS MANDATORY AND CONSEQUENTIAL AND HENCE, THIS GROUND I S DISMISSED. 3.2 GROUND NO.18 IS REGARDING THE INITIATION OF PE NALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. THE CHALLENGE TO INITIATION OF PENALTY PROCEEDINGS IS PREMATURE; HENCE THIS GROUND IS ALSO DISMISSED. 3.3 GROUND NO.2 & 3 IS WITH REGARD TO RE-COMPUTATI ON OF DEDUCTION UNDER SECTION 10A OF THE ACT. 3.4 GROUND NOS. 5 TO 16 IS REGARDING TRANSFER PRIC ING ISSUE. PAGE 4 OF 26 IT(TP)A NO.1222/BA NG/2011 4 10A DEDUCTION (GROUND NO.2 & 3) : 4. THE ASSESSING OFFICER HAD RE-COMPUTED THE DEDU CTION UNDER SECTION 10A OF THE ACT BY REDUCING THE FOREIGN EXCHA NGE EXPENDITURE AMOUNTING TO RS.10,18,13,341/- FROM THE EXPORT TURN OVER WITHOUT MAKING A CORRESPONDING ADJUSTMENT TO THE TOTAL TURNOVER (FOR EIGN EXCHANGE EXPENSES OF RS.9,59,94,590/- IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA AND TELECOMMUNICATION EXPENSES OF RS.58,18,751/- TOTALI NG TO RS.10,18,13,341/-). IN GROUND NO.2 RAISED, THE ASSESSEE SUBMITS THAT TH E ABOVE SAID EXPENSES SHOULD NOT BE REDUCED FROM THE EXPORT TURNOVER WHIL E COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. ALTERNATIVELY, IN GRO UND NO.3, IT WAS SUBMITTED THAT IF THE ABOVE EXPENSES ARE REDUCED FR OM THE EXPORT TURNOVER, AN EQUAL AMOUNT ALSO BE REDUCED FROM THE TOTAL TURNOVER FOR COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. THE ALTERNATIVE SUBMISSION, ACCORDING TO THE LEARNED AR, IS SQUAREL Y COVERED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V TATA ELXSI LTD. (2012) 349 ITR 98 (KAR.). IT WAS FURTHER SUBMITTED THAT IN ASSESS EES OWN CASE FOR THE ASSESSMENT YEAR 2002-03, THE HONBLE HIGH COURT HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE BY FOLLOWING THE CASE OF TATA ELXSI LTD. 4.1 THE LEARNED DR WAS UNABLE TO CONTROVERT THE SU BMISSIONS MADE BY THE LEARNED AR. 4.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. THE HONBLE JURISDICTIONAL HI GH COURT IN THE CASE CITED SUPRA HAD HELD THAT WHEN THE EXPENSES ARE REDUCED F ROM THE EXPORT PAGE 5 OF 26 IT(TP)A NO.1222/BA NG/2011 5 TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10 A OF THE ACT, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER IN O RDER TO MAINTAIN PARITY BETWEEN THE NUMERATOR AND THE DENOMINATOR. IN THE LIGHT OF THE ABOVE JUDGMENT, WE DIRECT THE ASSESSING OFFICER TO REDUCE A SUM OF RS.10,18,13,341/- FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10 A OF THE ACT. IT IS ORDERED ACCORDINGLY. IN THE RESULT, GROUND NO.3 IS ALLOWED. SINCE WE HAVE DECIDED THE ALTERNATE PLEA OF THE ASSESSEE, FOLLOWI NG THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT CITED SUPRA, WE A RE NOT ADJUDICATING GROUND NO.2 REFERRED ABOVE. II. TRANSFER PRICING (GROUND NOS.5 TO 16) 5. AS STATED EARLIER, THE ASSESSEES REPORTED VALU E OF THE INTERNATIONAL TRANSACTION WITH ITS AE DURING THE AS SESSMENT YEAR 2007-08 WAS RS.38,53,25,283/-. THE ASSESSEE IN ITS TRANSFER PRICING STUDY HAD ADOPTED COMPARABLE UNCONTROLLED PRICE METHOD (CUP) AND COST PLUS METHOD (CPM) AS THE MOST APPROPRIATE METHOD TO DETERMINE T HE ALP OF THE ABOVE SAID INTERNATIONAL TRANSACTION. FOR THE PURPOSE OF ANALYSIS, THE ASSESSEE HAD COMPARED THE MAN HOUR RATES CHARGED BY MAJOR SOFTWAR E COMPANIES IN INDIA WITH THE RATES CHARGED BY THE ASSESSEE. THE RATE OF USD 41.2 CHARGED BY THE ASSESSEE SINCE IT WAS HIGHER THAN THE RATE CHAR GED BY THE COMPARABLE COMPANIES, THE ASSESSEE TREATED INTERNATIONAL TRANS ACTION WITH ITS AE AT ARMS LENGTH. THE TPO REJECTED THE CUP/CPM ANALYSIS CARRIED OUT BY THE ASSESSEE AND APPLIED THE TRANSACTION NET MARGIN MET HOD (TNMM) AS THE MOST APPROPRIATE METHOD. THE TPO DETERMINED THE AD JUSTED NET MARGIN OF THE COMPARABLE COMPANIES (AFTER PROVIDING FOR THE W ORKING CAPITAL PAGE 6 OF 26 IT(TP)A NO.1222/BA NG/2011 6 ADJUSTMENT OF 1.31%) AT 23.83% ON OPERATING COST. THE NET MARGIN OF THE ASSESSEE WAS DETERMINED AT 3.7% ON OPERATING COST B Y THE TPO (AS AGAINST 7.09% DETERMINED BY THE ASSESSEE CONSIDERING THE FOR EIGN EXCHANGE GAINS AS OPERATING ITEM). ACCORDINGLY, THE TPO MADE AN AD JUSTMENT OF RS.7,47,59,120/- TO THE INTERNATIONAL TRANSACTION O F THE ASSESSEE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. THE ADJUSTMENT M ADE BY THE TPO WAS AFFIRMED BY THE DRP AND THE SAME WAS INCORPORATED IN THE FINAL ASSESSMENT ORDER. 5.1 NO ARGUMENTS WERE RAISED BY THE LEARNED AR WITH REGARD TO GROUND NOS.5, 8, 9, 16 AND PART OF GROUND NO.10, NA MELY, THE TPO FOLLOWED INAPPROPRIATE FILTERS IN PROCESS OF SELECTING THE C OMPARABLE COMPANIES UNDER TNMM - COMPANIES WITH ONSITE REVENUE GREATER THAN 75% OF E XPORT REVENUE. COMPANIES WITH DIFFERENT ACCOUNTING YEAR AND COMPANIES WITH DIMINISHING REVENUE. HENCE, THE ISSUES RAISED IN THE ABOVE GROUNDS ARE N OT ADJUDICATED. 5.2 THE ARGUMENTS RAISED BY THE LEARNED AR IN THE C OURSE OF HEARING ARE CONSIDERED ISSUE-WISE AS UNDER:- OBJECTIONS REGARDING REJECTION OF CPM/CUP METHOD ADOPTED BY THE ASSESSEE AND CONDUCTING FRESH ECONOMIC ANALYSIS (GROUND NOS.6 & 7) 5.3.1 THE WRITTEN SUBMISSIONS MADE BY THE LEARNED AR ARE SUMMARIZED AS UNDER: PAGE 7 OF 26 IT(TP)A NO.1222/BA NG/2011 7 - THAT THE ASSESSEE HAD ADOPTED CPM AS THE MOST APP ROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTION A ND SUPPLEMENTARY ANALYSIS WAS UNDERTAKEN USING CUP METHO D BY COMPARING THE MAN HOUR RATES CHARGED BY MAJOR SOFTWA RE COMPANIES IN INDIA WITH RATES CHARGED BY THE ASSESSE E; THAT FOR THE FYS 2001-02 AND 2002-03, THE TPO HAD CONSIDERED THE INTERNATIONAL TRANSACTION OF THE ASSESSEE TO BE AT ARMS LENGTH AND NO ADJUSTMENT HAS BEEN PROPOSED FOR THOSE AYS. RELIES ON THE FINDING OF THE HONBLE MUMBAI TRIBUNA L IN THE CASE OF AGILITY LOGISTICS PRIVATE LIMITED V. ACIT [ITA NO.2000/MUM/2010] - FOR AY 2007-08, THE RATES CHARGED BY THE SOFTWARE COMPANIES IN THE INDUSTRY WERE IN THE RANGE OF USD 5 .73 TO 32.10; THAT THE ASSESSEE HAD CONSIDERED COMPANIES I N THE IT SPACE WHICH COMMANDS PREMIUM IN THE MARKET AND SUBSTANTIATED THAT THE HOURLY RATE CHARGED BY THE ASS ESSEE USD 41.42 WAS HIGHER THAN THE RATES CHARGED BY COM PARABLE COMPANIES; RELIES ON THE FINDING OF THE HONBLE MUMBAI TRIBUNA L IN 3 GLOBAL SERVICES PT. LTD V. DCIT [ITA NO.1812/MUM/2009] & M SS INDIA PRIVATE LIMITED V ACIT [32 SOT 132 (PUNE)] 5.3.2 THE LEARNED DR, IN REBUTTAL, SUBMITTED AS FO LLOWS:- - THAT THE ASSESSEE HAD CLAIMED THAT CUP METHOD WAS THE MOST APPROPRIATE METHOD FOR THE TP ANALYSIS BY TAKING REFU GE IN THE FINDINGS OF THE EARLIER BENCH IN THE ASSESSEES OWN CASE FOR THE EARLIER AY IN M.P. NO.60/BANG/ 2012 DATED 21.12.201 2. HOWEVER, THERE WAS NO BASIS OR MERIT IN ADOPTING TH E UP METHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE; - THAT THE ASSESSEE BEING A 100% SUBSIDIARY OF DAIML ER AG, AND IS ENGAGED IN SPECIALIZED CONTRACT SOFTWARE R&D SER VICES IN AUTOMOBILE FIELD TO ITS PARENT COMPANY ON COST PLUS MARK-UP BASIS. HOWEVER, CUJP METHOD IS APPROPRIATE IN A CA SE WHERE PAGE 8 OF 26 IT(TP)A NO.1222/BA NG/2011 8 THE SAME OR SIMILAR PRODUCTS AND/OR SERVICES ARE SO LD TO OTHER UNCONTROLLED ENTITIES WHICH CAN BE COMPARED; THAT T HE ASSESSEE WAS NEITHER RENDERING ANY R&D SERVICES TO ANY PARTY NO R IT HAD GIVEN ANY COMPARABLE CASE WHERE THE AE WAS GETTING T HE SAME PRODUCT OR SERVICES FROM UNCONTROLLED ENTERPRISE AT THE SAME RATE. THUS, TNMM METHOD ADOPTED BY THE TPO WAS THE MOST APPROPRIATE FOR DETERMINATION OF THE ALP; 5.3.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE MATERIALS ON RECORD. THE ASSESSEE HAD ADOPTED CPM/CUP METHOD BY COMPARING THE MAN HOUR RATES CHARGED BY MAJOR SOFTWARE COMPANIES I N INDIA WITH THE RATES CHARGED BY THE ASSESSEE, WHEREAS THE TPO ADOPTED THE TNMM. AT THIS POINT OF TIME, WE WOULD LIKE TO RECALL THAT AN IDE NTICAL ISSUE TO THAT OF THE PRESENT ONE HAD CROPPED UP IN THE ASSESSEES OWN CA SE FOR THE AY 2006-07 BEFORE THE EARLIER BENCH WHEREIN THE BENCH VIDE ITS ORDER IN M.P. 60/BANG/2012 DATED 21.12.2012, AFTER DUE CONSIDERAT ION OF THE ISSUE IN DETAIL, DIRECTED THE ASSESSING OFFICER/TPO TO CONSI DER (1) WHETHER CPM/CUP IS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF THE ASSESSEES INTERNATIONAL TRANSACTION; AND (II) WHETHER THE FOR EIGN EXCHANGE GAIN/LOSS IS ARISING IN THE NORMAL COURSE OF THE BUSINESS AND WH ETHER IT SHOULD BE CONSIDERED AS PART OF OPERATING IN NATURE FOR BOTH THE ASSESSEE AS WELL AS FOR THE COMPARABLE COMPANIES. [REFER: PARA 6 OF M.P. ORDER]. IN CONFORMITY WITH THE FINDING OF THE EARLIER BENCH (SUPRA), THIS ISSUE IS RESTORED ON THE FILES OF AO/TPO FOR FRESH CONSIDERATION. IT IS ORD ERED ACCORDINGLY. 5.4 WITHOUT PREJUDICE TO THE METHODOLOGY ADOPTED, I T WAS SUBMITTED BY THE LEARNED AR THAT EVEN IF THE TNMM IS ADOPTED, THE ASSESSEES MARGIN WOULD BE WITHIN THE PARAMETERS, I F CERTAIN COMPARABLES PAGE 9 OF 26 IT(TP)A NO.1222/BA NG/2011 9 ARE EXCLUDED BY FOLLOWING THE REASONING OF THE ORDER S OF THE TRIBUNAL; NAMELY, M/S GENESIS MICROCHIP (I) PRIVATE LIMITED - ITA NO.1254/BANG/2010; TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. ITA NO.1 054/BANG/2011 DATED 23.11.2012; TELCORDIA TECHNOLOGIES INDIA PRIVATE LIMITED-ITA NO .7821/MUM/2011 24/7 CUSTOMER COM PRIVATE LTD. (ITA NO.227/BANG/201 0 DATED 9/11/2012) I) TURNER FILTER & FUNCTIONAL DISSIMILARITY (PART OF GROUND NO.10, 11) 5.5 IT WAS SUBMITTED THAT THE 8 COMPARABLES ARE TO BE REJECTED FROM THE TPOS LIST ON ACCOUNT OF THE TURN OVER FILTER. THE LEARNED AR RELIES ON THE FOLLOWING ORDERS OF THE TRIBUNAL F OR THE ABOVE PROPOSITION:- I) M/S. KODIAK NETWORKS (I) PVT. LTD V. ACIT ITA NO.1413/BANG/2010; II) M/S. GENESIS MICROCHIP (I) PVT. LTD V. DCIT ITA NO.1254/BANG/2010; III) M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD V. DCIT ITA NO.1054/BANG/2011 DATED 23.11.2012. IT WAS, FURTHER, SUBMITTED THAT 5 COMPANIES ARE TO BE EXCLUDED ON ACCOUNT OF FUNCTIONAL DISSIMILARITY. FOR THE ABOVE ARGUMENT , THE LEARNED AR RELIED ON THE ORDERS OF THE TRIBUNAL IN THE CASE OF (I) M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD.; (II) MUMBAI TRIBUNAL IN T HE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LIMITED. LASTLY IT WAS S UBMITTED THAT ISHIR INFOTECH LTD. (THE COMPARABLE OF THE TPO) ALSO SHOU LD BE REJECTED SINCE IT FAILS EMPLOYEES COST FILTER OF 25% OF REVENUE AND FO R THIS CONTENTION, RELIANCE WAS PLACED ON THE ORDER OF THE BANGALORE T RIBUNAL IN THE CASE OF PAGE 10 OF 26 IT(TP)A NO.1222/B ANG/2011 10 24/7 CUSTOMER COM PRIVATE LTD. (ITA NO.227/BANG/201 0 DATED 9/11/2012). IN CONCLUSION, IT WAS ARGUED BY THE LEARNED AR THAT THE ARITHMETIC MEAN OF 12 REMAINING OF THE 26 COMPARABLES WOULD BE 12.40 A FTER PROVIDING FOR WORKING CAPITAL ADJUSTMENT AND FACTORING IN RISK AD JUSTMENT. SINCE THE ASSESSEES OPERATING MARGIN IS AT 7.09% (AFTER CONS IDERING FOREIGN EXCHANGE GAINS), THE SAME WOULD BE WITHIN THE RANGE OF +/-5% OF THE ASSESSEES NET MARGIN AND THUS, NO TRANSFER PRICING ADJUSTMENT IS REQUIRED AND THEREFORE, THE TP ADJUSTMENT MADE BY THE TPO IS LIABLE TO BE SE T ASIDE. 5.5.1 ON THE OTHER HAND, THE LEARNED DR HAD SUPPOR TED THE FINDINGS OF THE AUTHORITIES BELOW. THE SUBMISSIONS OF THE RE VENUE ARE SUMMARIZED AS UNDER: TURNOVER FILTER: - THAT THE STUDY BY DUN AND BRADSHEET WAS FOR THE PUR POSE OF COMPARING THE FINANCIALS OF SOFTWARE COMPANIES OVER TWO YEARS, AND WAS NOT HAVING ANY BASIS TO CATEGORIZE THE RANGE S BASED ON ANY EMPIRICAL ANALYSIS ESTABLISHING ANY CORRELATION OF PROFITABILITY AND TURNOVER IN SOFTWARE INDUSTRY; AND THAT IT WAS MADE FOR MERE CONVENIENCE OF GROUPING FOR FINANCIAL PERFORMANCE STUDY OVER TWO YEARS AND, THEREFORE, INST EAD OF HAVING A CLOSED CATEGORY OF TURNOVER CUT-OFFS, IN O THER CASES OF HIGHER TURNOVER, IT WOULD BE MORE REALISTIC TO ADOP T A BAND RATHER THAN A RIGID RANGE; FUNCTIONALLY DIFFERENT: - THAT EVEN IN CASE OF SOFTWARE PRODUCTS, SOFTWARE DEVELOPMENT WAS REQUIRED FOR CUSTOMIZATION AND UP-GRADATION; TH AT THE ASSESSEE WHICH WAS INTO CONTRACT SOFTWARE R&D SERVI CES HAD NOT STATED WHETHER IT WAS DEVELOPING SOFTWARE FOR R UNNING AUTOMOBILES OR MERELY USING SOFTWARE PRODUCTS SUCH A S CAD & CAE TO DEVELOP DESIGNS OF ENGINES, BODIES OR THEIR PARTS FOR THE PAGE 11 OF 26 IT(TP)A NO.1222/B ANG/2011 11 AUTOMOBILES OF THE AE COMPANY; THAT IF THAT BE THE C ASE, IT WOULD RESULT IN A PRODUCT ALTHOUGH FOR SPECIFIC USE OF THE AE; - THAT IN TELECORDIA, AVANI WAS EXCLUDED FOR LACK O F INFORMATION REGARDING THE PERCENTAGES OF SOFTWARE PRODUCT AND S OFTWARE SERVICES IN ITS EXPORT TO AE; - THAT THE MATTER BE REMANDED TO TPO TO EXAMINE THE FUNCTIONS AND SEGMENTS IN DETAILS OF THESE COMPARAB LES; AND THAT THE TPO MAY ALSO CONSIDER OTHER SOFTWARE R & D COMPARABLES IN THE FIELD OF AUTOMOBILES SUCH AS BOS CH LTD., MITSUBISHI ETC., COMPARABLE PROPOSED BY THE ASSESSEE: - THAT THE ASSESSEE SOUGHT TO EXCLUDE (I) ISHIR AND (II) LUCID FOLLOWING THE DECISIONS OF OTHER TRIBUNALS (SUPRA), HOWEVER, IT HAD NOT DEMONSTRATED THAT THESE COMPARABLES WERE FU NCTIONALLY DIFFERENT; THAT ANY COMPARABLE OR SET OF COMPARABLES WHICH HAVE BEEN HELD TO BE FUNCTIONALLY DIFFERENT IN A PAR TICULAR CASE VIZ., TRIOLOGY OR TELECORDIA, NEED NOT BE EXCLUDED I N ASSESSEES CASE, AS IT WAS NOT THE CASE OF THE ASSESSEE THAT T RIOLOGY OR TELECORDIA WERE FUNCTIONALLY SIMILAR TO THE ASSESSEE IF THAT BE THE CASE, THESE COMPANIES SHOULD HAVE BEEN SELECTED BY THE ASSESSEE IN ITS TP STUDY OR AT LEAST SUGGESTED DURIN G THE TP PROCEEDINGS; 5.6.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE MATERIALS ON RECORD. BEFORE WE PROCEED TO CONSIDE R THE ISSUES, IT IS TO BE MENTIONED THAT THE LINE OF BUSINESS OF THE ASSESSEE IN THIS CASE AND THAT OF THREE CASE LAWS (TRILOGY, TELECORDIA & 24/7 CUSTOMER ) ARE SIMILAR, NAMELY, DEVELOPMENT OF SOFTWARE AND THE SIZE/TURNOVER WAS A LSO SIMILAR TO THAT OF THE ASSESSEE IN THE INSTANT CASE. MOREOVER, THE AS SESSMENT YEAR 2007-08 WAS SUBJECT MATTER OF CONSIDERATION IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. AND TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. AND PAGE 12 OF 26 IT(TP)A NO.1222/B ANG/2011 12 THE COMPARABLES SELECTED BY THE TPO IN THOSE CASES A RE IDENTICAL TO THAT OF THE INSTANT CASE. NOW WE SHALL PROCEED TO DISPOSE OF THE ISSUES AS UNDER:- (I) TURNOVER FILTER 5.6.2 THE TPO HAD, WHILE SELECTING THE ABOVE 26 CO MPARABLES, APPLIED A LOWER TURNOVER FILTER OF RS.1 CRORE BUT P REFERRED NOT TO APPLY ANY UPPER TURNOVER LIMIT. THE SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR IN COMPARABILITY. THE ICAI TP GUIDANCE NOTE HAS OBSERV ED THAT THE TRANSACTION ENTERED INTO BY A RS.1000 CRORES COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS.10 CRORES COMPANY AND THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPAN IES AND RELATED ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. THE TP OS RANGE HAD RESULTED IN SELECTION OF COMPANIES AS COMPARABLE SUCH AS INF OSYS WHICH WAS 277 TIMES BIGGER THAN THAT OF THE ASSESSEE. THE BANGALORE BE NCH OF THE TRIBUNAL IN THE CASE OF M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT ITA NO.1231/BANG/2010 RELYING ON DUN AND BRADSTREET S ANALYSIS HAD HELD THAT TURNOVER RANGE OF RS.1 CRORE TO 200 CRORES IS APPROPRIATE. THE SAID PROPOSITION HAS FOLLOWED BY THE EARLIER BENCHES OF THIS TRIBUNAL IN THE FOLLOWING CASES: (I) M/S. KODIAK NETWORKS (I) PVT. LTD V. ACIT ITA NO. 1413/BANG/2010; (II) M/S GENESIS MICROCHIP (I) PVT. LTD. DCIT ITA NO.1 254/BANG/2010; (III) ELECTRONIC FOR IMAGING INDIA PVT. LTD ITA NO.1171 /BANG/2010; & (IV) M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LTD. V. DCIT ITA NO.1054/BANG/2011 DATED 23.11.2012. 5.6.3 IN THE CASE OF M/S.GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT (SUPRA), RELYING ON DUN AND BRADST REET, HAS OBSERVED AS UNDER: PAGE 13 OF 26 IT(TP)A NO.1222/B ANG/2011 13 9. .WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, W E ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE A N UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS AN OTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENT ION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SI ZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A PO SITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMER S. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WH O ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOU LD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHI CH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUD ED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON T HE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REAS ONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE H OLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1 CRORE TO 200 CR ORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSE SSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200 C RORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURP OSE OF MAKING TP STUDY. 5.6.4 THE ABOVE VIEW HAS BEEN FOLLOWED IN THE RECE NT ORDER OF THE TRIBUNAL IN THE CASE OF TRILOGY E BUSINESS (SUP RA). THE RELEVANT FINDINGS OF THE TRIBUNAL ARE EXTRACTED AS UNDER: 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 CLEARLY LAY DOWN THE PRINCIPLE THAT PAGE 14 OF 26 IT(TP)A NO.1222/B ANG/2011 14 THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHO OSING THE COMPARABLES. THE ASSESSEES TURNOVER IS RS.47,46,66,638. IT WOULD THEREFORE FALL WITHIN TH E CATEGORY 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 HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOW N IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ. TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 C RORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES.. 5.6.5 IN VIEW OF THE ABOVE SAID REASONING AND THE ORDERS OF THE BENCHES OF BANGALORE TRIBUNAL CITED SUPRA, THE FOLL OWING 8 COMPANIES WILL HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES SELECTED BY THE TPO, NAMELY: FLEXTRONICS SOFTWARE SYSTEMS LIMITED; IGATE GLOBAL SOLUTIONS LIMITED; MINDTREE LIMITED; PERSISTENT SYSTEMS LIMITED; SASKEN COMMUNICATION TECHNOLOGIES LIMITED; TATA ELXSI LIMITED; WIPRO LIMITED; & INFOSYS TECHNOLOGIES LIMITED. IT IS ORDERED ACCORDINGLY. PAGE 15 OF 26 IT(TP)A NO.1222/B ANG/2011 15 (II) FUNCTIONAL DISSIMILARITY 5.7.1 WE SHALL NOW DEAL WITH THE IMPROPER SELECTI ON OF COMPARABLES BY THE TPO FOR THE REASONS THAT THEY WERE FUNCTIONALLY DIFFERENT. A. ACCEL TRANSMATIC LTD. (SEG): THE SELECTION OF THIS COMPANY AS COMPARABLE BY THE TP O WAS DULY CONSIDERED BY THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS AND THE REASON RECORDED IN ITS FINDING IS EXTRACTED AS UNDER: 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFO RESAID COMPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (S UPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE LD . COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS CO MPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENG AGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPT ING THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, W E HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. B. AVANI CIMCON TECHNOLOGIES LTD: THE SELECTION OF THIS COMPANY AS COMPARABLE BY THE TPO WAS REJECTED BY THE EARLIER BENCH OF THE TRIBUNAL IN TRILOGY E-BUSINESS FOR THE REASONS THAT- 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. TH E REASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COM PANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECI SION PAGE 16 OF 26 IT(TP)A NO.1222/B ANG/2011 16 OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOG IES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSE SSEE TO REJECT THIS COMPANY AS A COMPARABLE. C. CELESTIAL LABS. LTD: THIS COMPANY WAS ALSO SELECTED BY THE TPO AS COMPARAB LE. HOWEVER, ON DUE CONSIDERATION OF THE ISSUE, THE EARLIER BENCH OF TH IS TRIBUNAL IN TRILOGY E- BUSINESS HAD OPINED THAT THIS COMPANY CANNOT BE AS C OMPARABLE ON THE GROUND THAT 45. .. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISS IONS MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THE RE IS NO CLEAR BASIS ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTW ARE DEVELOPMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY OUGHT NOT TO HAVE BEE N CONSIDERED AS COMPARABLE. D. KALS INFORMATION SYSTEM LTD (SEG): INCIDENTALLY, THE SELECTION OF THIS COMPANY AS COMP ARABLE BY THE TPO WAS REJECTED BY THE TRIBUNAL IN THE CASE O F TRILOGY E-BUSINESS ON THE PREMISE THAT THE INFORMATION OBTAINED BY THE TPO BY ISSUANCE OF NOTICE U/S 133(6) OF THE ACT WAS NOT, HOWEVER, AVAI LABLE IN PUBLIC DOMAIN. THE REASONS RECORDED, FOR APPRECIATION OF FACTS, AR E EXTRACTED HEREUNDER: 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF PAGE 17 OF 26 IT(TP)A NO.1222/B ANG/2011 17 INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) O F THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN P UBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPAN Y AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6 .2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFE RRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMB AI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOP ING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE . IN CONFORMITY WITH THE FINDINGS OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS, WE A RE OF THE CONSIDERED VIEW THAT (I) ACCEL TRANSMATIC LTD (SEG); (II) AVANI CIM CON TECHNOLOGIES LTD; (III) CELESTIAL LABS. LTD., & (IV) KALS INFORMATION SYSTEM S LTD (SEG) CANNOT QUALIFY AS COMPARABLES IN THE CASE OF THE ASSESSEE U NDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. E) LUCID SOFTWARE LIMITED THE ABOVE COMPANY HAS BEEN REJECTED AS COMPARABLE IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) . THE SUBMISSIONS AND THE FINDING OF THE HONBLE MUMBAI TRIBUNAL IS REPRODUCE D BELOW:- 7.2 LUCID SOFTWARE LIMITED: IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY, BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALS O INVOLVED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HAS TRIED TO DISTINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMENT EXPENDITURE IN THIS CASE IS ARO UND 39% OF THE CAPITAL EMPLOYED BY THE SAID COMPANY, AND, PAGE 18 OF 26 IT(TP)A NO.1222/B ANG/2011 18 THEREFORE, SUCH A COMPANY CANNOT BE CONSIDERED AS TESTED PARTY. EVEN AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6), THE COMPAN Y HAS DESCRIBED ITS BUSINESS AS SOFTWARE DEVELOPMENT COMP ANY OR PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. THI S INFORMATION ITSELF IS VERY VAGUE AS THE SEGMENTAL DE TAILS OF OPERATING REVENUE HAS NOT BEEN MADE AVAILABLE TO EXAMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWARE PRODUCT AND SALE OF SOFTWARE SERVICE AND DEVELOPMEN T. LOOKING TO THE FACT THAT IT HAS DEVELOPED A SOFTWAR E PRODUCT NAMED AS MUULAM WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS--VIS THE CAP ITAL EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENTIAL TH AT THE CHARACTERISTICS AND THE FUNCTIONS ARE BY AND LARGE S IMILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STU DY CAN BE MADE WITH FEWEST AND MOST RELIABLE ADJUSTMEN T. IF A COMPANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN THE SALE OF PRODU CT WOULD BE ENTIRELY DIFFERENT FROM THE COMPANY, WHO IS INVOLVED IN SERVE SECTOR. THEREFORE, THIS COMPANY C ANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILIT Y RATIO. IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFORMATION ABOUT THE SEGMENTAL DETAILS AS TO HOW M UCH IS THE SALE OF PRODUCT AND HOW MUCH IS FROM THE SER VICES, THEREFORE, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ARMS LENGTH PR ICE IN THE CASE OF THE ASSESSEE. THE OBJECTIONS RAISED BY THE ASSESSEE FOR INCLUSIO N OF LUCID SOFTWARE LTD. AS A COMPARABLE IS PLACED AT PAGE 534 OF THE PAPER BOOK-II FILED BY THE ASSESSEE. WE FIND IDENTICAL OBJECTION HAS BEEN RAISED AGAINST THE INCLUSION OF LUCID SOFTWARE IN CASE OF TELCORDI A TECHNOLOGIES. SINCE THE PAGE 19 OF 26 IT(TP)A NO.1222/B ANG/2011 19 FACTS AND THE ASSESSMENT YEAR ARE IDENTICAL, FOLLOWI NG THE ORDER OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA), WE DIRECT THE ASSESSING OFFICER/TPO NOT TO INCLUDE LUC ID SOFTWARE LIMITED AS A COMPARABLE. 5.7.2 AFTER EXCLUDING FROM THE TPOS LIST OF COMPA RABLES, THE COMPANIES HAVING TURNOVER EXCEEDING RS.200 CRORES A ND FIVE COMPANIES WHICH ARE FUNCTIONAL DISSIMILAR TO THAT OF THE ASSE SSEE, THE FOLLOWING THIRTEEN COMPANIES IN TPO LIST ARE RETAINED AS COMP ARABLES:- SL. NO. NAME OF THE COMPANY 1. DATAMATICS LIMITED 2. E ZEST SOLUTIONS LIMITED 3. GEOMETRIC LTD. (SEG) 4. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 5. ISHIR INFOTECH LTD 6. LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 7. MEDIASOFT SOLUTIONS PVT. LTD 8. MEGASOFT LTD (SEG) 9. QUINTEGRA SOLUTIONS LTD 10. R S SOFTWARE (INDIA) LTD 11. R SYSTEMS INTERNATIONAL LTD (SEG) 12. SIP TECHNOLOGIES & EXPORTS LTD 13. THIRDWARE SOLUTIONS LTD (SEG) THE ABOVE COMPANIES HAVE BEEN RETAINED AS COMPARAB LES IN CONFORMITY WITH THE FINDINGS OF THE EARLIER BENCH IN THE CASES OF TRILOGY E- BUSINESS AND TELCORDIA TECHNOLOGIES PVT. LTD . (SUPRA). PAGE 20 OF 26 IT(TP)A NO.1222/B ANG/2011 20 (F) MEGASOFT : IT IS TO BE NOTED THAT IN THE CASE OF TRILOGY E-BU SINESS, THE TRIBUNAL TURNED DOWN THE PLEA OF THE ASSESSEE T HAT M/S. MEGASOFT LTD SHOULD BE REJECTED AS COMPARABLE. HOWEVER, THE TRI BUNAL ACCEPTED THE ALTERNATIVE SUBMISSION OF THE ASSESSEE THAT THE SEG MENTAL PROFIT MARGIN IS TO BE RECKONED WITH INSTEAD OF ENTITY LEVEL MARGIN AND HELD THAT THE PROFIT MARGIN OF 23.11% WHICH IS THE MARGIN OF THE SOFTWAR E SERVICE SEGMENT BE TAKEN FOR COMPARABILITY. THE DISCUSSION AND THE FINDINGS OF THE BENCH WITH REGARD TO THE ACCEPTANCE OF THE ALTERNATIVE SUBMISS ION OF THE ASSESSEE TO ADOPT THE SEGMENTAL MARGIN OF 23.11% ARE REPRODUCED BELOW: 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT ALL THI S COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGMENTAL MARGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SEGMENT) ALONE SHOULD BE CONSIDERE D FOR COMPARABILITY. ON THE ABOVE SUBMISSION, WE FIND TH AT THE TPO CONSIDERED THE SEGMENTAL MARGIN (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GEOMETRIC, KALS INF O SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND TATA ELXSI. BEFORE DRP THE ASSESSEE POINTED OUT THAT TH E SEGMENTAL MARGIN OF 23.11% ALONE SHOULD BE TAKEN FO R COMPARABILITY. THE DRP HAS NOT GIVEN ANY SPECIFIC FI NDING ON THE ABOVE PLEA OF THE ASSESSEE. PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHICH THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ., BLUEA LLY DIVISION AND XIUS-BCGI DIVISION. XIUS-BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPANY DEVELOPS PACKAG ED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PRODUCTS ARE SOLD AS PACKAGED PRODU CTS TO CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZE D PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FIT I NTO PAGE 21 OF 26 IT(TP)A NO.1222/B ANG/2011 21 THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWA RE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (SOFTWARE DEVELOPED) WOULD CONSTIT UTE PACKAGED PRODUCT AND AROUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES REL ATED TO TRAVELLING, BOARDING AND LODGING EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO SOFT WARE DEVELOPMENT) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% OF THE OVERALL REVE NUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HAVING DRAWN THE ABOVE CONCLUSION, THE T PO DID NOT BOTHER TO QUANTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUCT DEVELOPMENT AND SOFTWARE DEVELOPMENT SERVICE BUT ADOPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TERMS OF RULE 10B(3)(B) OF THE RULES, AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 38. NEITHER THE TPO NOR THE DRP HAVE NOTICED THAT THERE IS BOUND TO BE A DIFFERENCE BETWEEN THE ASSESSEE AND MEGASOFT AND THE PROFIT ARISING TO THE PAGE 22 OF 26 IT(TP)A NO.1222/B ANG/2011 22 MEGASOFT AS A RESULT OF THE EXISTENCE OF THE SOFTWA RE PRODUCT SEGMENT AND NO FINDING HAS BEEN GIVEN THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FOR THIS REASON, WE ARE INCLINED TO HOLD THAT THE P ROFIT MARGIN OF 23.11% WHICH IS THE MARGIN OF THE SOFTWAR E SERVICE SEGMENT BE TAKEN FOR COMPARABILITY... IN CONFORMITY WITH THE FINDINGS OF THE EARLIER BEN CH (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE TPO WAS JUSTIFIED IN SELECTING M/S. MEGASOFT LTD AS COMPARABLE. HOWEVER , THE AO/TPO IS DIRECTED TO TAKE SEGMENTAL MARGINS OF 23.11% FOR CO MPARABILITY. IT IS ORDERED ACCORDINGLY. G) ISHIR INFOTECH LIMITED : THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF IS HIR INFOTECH LIMITED AS A COMPARABLE, SINCE THAT COMPANY FAILS EM PLOYEES COST FILTER OF 25% REVENUE. ACCORDING TO THE LEARNED AR. THE ISHI R INFOTECH LTD, EMPLOYEE COST AS A PERCENTAGE OF REVENUE IS ONLY 3.96 %. IT WAS SUBMITTED BY THE LEARNED AR THAT THE TPO ON RESPONSE OBTAINED UNDER SECTION 133(6) CONSIDERED PROFESSIONAL FEE PAID AS PART OF EMPLO YEES COST OF THE ISHIR INFOTECH LTD. IT WAS STATED THAT PROFESSIONAL FEE PAID IS PAYMENT MADE TO EXTERNAL THIRD PARTIES FOR THE PERFORMANCE OF THEIR SERVICES ON A COMPANYS BEHALF AND NOT SALARY PAID TO THE EMPLOYEES OF THE O RGANIZATION. THE LEARNED COUNSEL PLACED RELIANCE ON THE ORDER OF BAN GALORE TRIBUNAL IN THE CASE OF 24X7 CUSTOMER.COM PVT. LTD. (SUPRA) IN SUPP ORT OF HIS CONTENTION. THE LEARNED DR PRESENT WAS DULY HEARD. PAGE 23 OF 26 IT(TP)A NO.1222/B ANG/2011 23 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIALS ON RECORD. THE BANGALORE TRIBUNAL IN THE CASE OF 24X7 CUSTOMER.COM PVT. LTD. (SUPRA) EXCLUDED VISHAL INFORMATION TECHNOLOGI ES FROM THE LIST OF COMPARABLES FOR THE REASON THAT THE COMPANY WAS OUTS OURCING MOST OF ITS WORK (PAGE 22 OF 24/7 CUSTOMER.COM PVT. LTD.). IN THE LIGHT OF ABOVE ORDER OF THE TRIBUNAL, THE ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER/TPO TO EXAMINE WHETHER PROFESSIONAL FEES PA ID AMOUNTING TO RS.3,41,09,398/- IN THE CASE OF ISHIR INFO TECH IS FOR THE WORK OUTSOURCED. IF THE SAID AMOUNT IS PAID FOR THE WORK OUTSOURCED, ISHIR INFOTECH WILL NOT QUALIFY 25% EMPLOYEE COST FILTER AS SALARY PAID, EXCLUDING THE PROFESSIONAL FEE PAID IS ONLY RS.17,48,310/- COMPARED TO OPERATI NG REVENUE OF RS.7,42,09,887/-. IT IS ORDERED ACCORDINGLY. II) FOREIGN EXCHANGE GAINS/LOSS IMPACT (GROUND NO.12) 5.8 THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS HAD DIRECTED THAT THE FOREIGN EXCHANGE GAIN OR LOSS SHO ULD BE CONSIDERED AS OPERATING REVENUE OR COST WHILE COMPUTING THE OPERA TING MARGIN OF THE ASSSESSEE AS WELL AS THE COMPARABLE. THE RELEVANT FINDING OF THE TRIBUNAL READ AS FOLLOWS: 79 (B) . AS FAR AS FOREIGN EXCHANGE GAIN/LOSS BEING CONSIDERED AS NOT FORMING PART OF THE OPERATING COST, THE REASONING OF THE REVENUE IS THAT SUCH LOS S OR GAIN CANNOT BE SAID TO BE ONE REALIZED FROM INTERNATIONAL TRANSACTION THOUGH THEY MAY FORM PAGE 24 OF 26 IT(TP)A NO.1222/B ANG/2011 24 PART OF THE GAIN/LOSS OF THE ENTERPRISE AND THEREFORE THEY SHOULD BE EXCLUDED WHILE DETERMINING OPERATING COST. ON THE ABOVE ISSUE WE FIND THAT THE BANGALORE BENCH OF ITAT IN THE CASE OF SAP LABS INDIA (P) LTD. VS. ACIT (2011) 44 SOT 156 (BANG.) HAS TAKEN THE VIEW THAT FOREIGN EXCHANGE FLUCTUATION GAINS ARE REQUIRED TO BE ADDED TO OPERATING REVENUE. FOLLOWING THE SAME, THE AO IS DIRECTED TO ACCEPT THE CLAIM OF THE ASSESSEE IN THIS REGARD. 5.8.1 IN CONFORMITY WITH THE ABOVE FINDING, WE DIR ECT THE AO/TPO TO CONSIDER THE FOREIGN EXCHANGE GAIN OR LOSS AS PART OF THE OPERATING COST OR REVENUE, AS THE CASE MAY BE, FOR BOTH THE ASSESSEE A S WELL FOR THE COMPARABLE COMPANIES. III) INCORRECT MARGIN COMPUTATION OF COMPARABLE MAR GIN (GROUND NO.13) 5.9 IT WAS THE GRIEVANCE OF THE ASSESSEE THAT CERT AIN ARITHMETICAL MISTAKES HAVE CREPT IN, IN THE ORDER OF THE TPO, FO R WHICH, AN APPLICATION U/S 154 OF THE ACT FILED BY THE ASSESSEE IS STILL PENDIN G FOR DISPOSAL WHICH REQUIRES TO BE DISPOSED OFF. IT IS DESIRED THAT THE TPO SHALL LOOK INTO THE MATTER AND DECIDE THE ISSUE ON MERITS, EXPEDITIOUSL Y. IV) WORKING CAPITAL ADJUSTMENT (GROUND NO.14) 5.10 WE HAVE DULY CONSIDERED THE SUBMISSION MADE BY THE ASSESSEE ON THIS ISSUE. TO BE PRECISE, IT WAS THE CONTENTIO N OF THE ASSESSEE THAT THE WORKING CAPITAL ADJUSTMENT HAS BEEN WRONGLY WORKED O UT BY THE TPO WHICH REQUIRES RECONCILIATION. SINCE THE ASSESSEES ALLE GATION REQUIRES TO BE RECONCILED AT THE AO/ TPOS LEVEL, THE ISSUE IS REM ITTED BACK ON THE FILES OF PAGE 25 OF 26 IT(TP)A NO.1222/B ANG/2011 25 THE AO/TPO WITH A DIRECTION TO VERIFY THE VERACITY OF THE ASSESSEES CLAIM AND TO RECTIFY THE SAME, IF IT SO WARRANTS. V) RISK ADJUSTMENT (GROUND NO.15) 5.11 IT WAS THE CASE OF THE ASSESSEE THAT THE AO/T PO ERRED IN NOT MAKING SUITABLE ADJUSTMENTS ON ACCOUNT OF DIFFERENC ES IN THE RISK PROFILE OF THE ASSESSEE VIS-A-VIS THE COMPARABLES. AT THIS JUN CTURE, WE WOULD LIKE TO RECALL THAT A SIMILAR ISSUE RAISED BY THE ASSESSEE I N THE IMMEDIATELY PRECEDING ASSESSMENT YEAR HAS BEEN REMANDED BACK TO THE FILES OF AO/TPO BY THE EARLIER BENCH TO DECIDE THE ISSUE AFRESH. TH E ABOVE DIRECTION WAS IN CONFORMITY WITH THE FINDINGS RECORDED IN THE CASE OF M/S. INSILICA SEMICONDUCTORS INDIA PVT. LTD V. ITO [ITA NO.1399/B ANG/2010 FOR THE AY 2006-07 DATED 29.2.2012]. WE ARE, THEREFORE, OF TH E VIEW THAT THE FINDINGS OF THE EARLIER BENCH (SUPRA) HOLD GOOD FOR THIS AY ALSO. IT IS ORDERED ACCORDINGLY. 6. IN CONCLUSION, THE ASSESSING OFFICER/TPO IS DIR ECTED TO WORK OUT THE ALP OF THE ASSESSEE IN ACCORDANCE WITH THE DIRECTIONS OF THIS BENCH (SUPRA) AND IF FOUND THAT THE DIFFERENTIAL IN THE M ARGIN OF THE ASSESSEE AND THE COMPARABLES IS BEYOND 5% BANDWIDTH RECOGNIZED IN PROVISO TO SECTION 92C(2) OF THE ACT, THEN ADJUSTMENT IS REQUIRED TO B E MADE TO THE REPORTED VALUE OF THE ASSESSEES TRANSACTION WITH ITS AE. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AS INDICATED ABOVE. PAGE 26 OF 26 IT(TP)A NO.1222/B ANG/2011 26 THE ORDER IS PRONOUNCED ON THE 22 ND DAY OF FEBRUARY, 2013 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNE D. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BAN GALORE.