LSI Technologies India Private Limited, Bangalore V. ITO, Bangalore

ITA 1224/BANG/2011

• Counselvise Citation: 122421114 RSA 2011
• Duration Of Justice: 3 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 02-06-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 08-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITIDR
• Assessee Lawyers: ARVIND SONDE SR
• Keywords: Related party transaction; Transfer pricing; International transaction; Wholly owned subsidiary; Revenue expenditure
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT(TP)A NO. 1224/BANG/2011 ASSESSMENT YEAR : 2007-08 LSI TECHNOLOGIES INDIA PRIVATE LIMITED, GLOBAL TECHNOLOGY PARK-BLOCK C, MARATHAHALLI OUTER RING ROAD, DEVARABEESANAHALLI, BANGALORE 560 103. PAN : AABCV 5892R VS. THE INCOME-TAX OFFICER, WARD 11(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI ARVIND SONDE, SR. COUNSEL RESPONDENT BY : SHRI C.H. SUNDAR RAO, CIT-I(DR) DATE OF HEARING : 02.06.2015 DATE OF PRONOUNCEMENT : 11.06.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 4.10.2011 OF THE INCOME TAX OFFICER, WARD-11(2), BANGALORE PASSE D U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (ACT). 2. THE ASSESSEE WAS FORMERLY KNOWN AS LSI LOGIC I NDIA PVT.LTD. IT IS A WHOLLY OWNED SUBSIDIARY OF VELIO COMMUNICATIONS I NTERNATIONAL INC., IT(TP)A NO.1224/BANG/2011 PAGE 2 OF 40 CAYMAN ISLANDS. THE ASSESSEE WAS INCORPORATED ON 2 5.10.2002 AS VELIO COMMUNICATIONS INDIA PVT. LTD. CONSEQUENT TO THE A CQUISITION OF THE VELIO COMMUNICATIONS INC., US BY LSI CORP, THE INDIAN ENT ITY CHANGED ITS NAME TO LSI LOGIC (INDIA) PVT. LTD. THE ASSESSEE PROVID ES SOFTWARE DEVELOPMENT SERVICES IN RELATION TO THE CHIP DESIGNING ACTIVITY OF LSI CORP AT ITS FACILITIES IN BANGALORE AND KOLKATTA. 3. THE ISSUE RAISED BY THE ASSESSEE IN GROUNDS OF A PPEAL 1 TO 7 RELATE TO THE ADDITION MADE BY THE AO OF RS.8,76,50,141/- TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENT IN THE ARMS LENGTH PRICE(ALP) OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSES SEE WITH ITS ASSOCIATED ENTERPRISE (AE) UNDER THE PROVISIONS OF SEC.92 OF THE INCOME TAX ACT, 1961 (ACT). 4. THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT SERVI CES TO ITS AE. THE SAID TRANSACTION WAS AN INTERNATIONAL TRANSACTI ON WITH AN ASSOCIATED ENTERPRISE (AE) AND HAVE TO PASS THE ARMS LENGTH P RICE (ALP) TEST AS PROVIDED U/S.92 OF THE INCOME TAX ACT, 1961 (ACT). IN GROUNDS NO.1 TO 7 THE DISPUTE IS WITH REGARD TO ADDITION MADE CONSEQU ENT TO DETERMINATION OF ALP AND CONSEQUENT UPWARD REVISION AND ADJUSTMENT M ADE TO THE PRICE AT WHICH INTERNATIONAL TRANSACTIONS WERE CARRIED OUT B Y THE ASSESSEE WITH ITS AE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. IT(TP)A NO.1224/BANG/2011 PAGE 3 OF 40 FINANCIAL RESULTS OF THE ASSESSEE FOR THE F Y 2006- 07 DESCRIPTION AMOUNT OPERATING REVENUE RS.72,87,30,616/- OPERATING COST . . . . RS.65,60,43,681/- OPERATING PROFIT (PBIT) RS. 7,26,86,935/- OPERATING PROFIT TO COST RATIO 11.08 % *EXCLUDING EXCHANGE LOSS, FINANCE CHARGES AND INTER EST ON TERM LOAN 5. TP ADJUSTMENT RELATING TO IT SERVICES (SOFTWARE DEVELOPMENT SERVICES COMPARABLES ULTIMATELY SELECTED BY TPO AND THEIR AR ITHMETIC MEAN : SL. NO NAME OF COMPANY OP / TC TURNOVER RS. IN CRORES 1 ACCEL TRANSMATIC LTD (SEG. 21.11% 9.68 2 AVANI CIMCON TECHNOLOGIES LTD 52.59% 3.55 3 CELESTIAL LABS LTD 58.35% 14.13 4 DATAMATICS LTD 1.38% 54.51 5 E-ZEST SOLUTIONS LTD 36.12% 6.26 6 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 25.31% 848.66 7 GEOMETRIC LTD (SEG.) 10.71% 158.38 8 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 36.63% 178.63 9 IGATE GLOBAL SOLUTIONS LTD 7.49% 747.27 10 INFOSYS TECHNOLOGIES LTD 40.30% 13149 11 ISHIR INFOTECH LTD 30.12% 7.42 12 KALS INFORMATION SYSTEMS LTD (SEG.) 30.55% 2.00 13 LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 15.75% 45.39 14 LUCID SOFTWARE LTD 19.37% 1.70 15 MEDIASOFT SOLUTIONS LTD 3.66% 1.85 IT(TP)A NO.1224/BANG/2011 PAGE 4 OF 40 16 MEGASOFT LTD 60.23% 139.33 17 MINDTREE LTD 16.90% 590.35 18 PERSISTENT SYSTEMS LTD 24.52% 293.75 19 QUINTEGRA SOLUTIONS LTD 12.56% 62.72 20 R S SOFTWARE (INDIA) LTD 13.47% 101.04 21 R SYSTEMS INTERNATIONAL LTD (SEG.) 15.07% 11 2.01 22 S I P TECHNOLOGIES & EXPORTS LTD 13.90% 3.80 23 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG.) 22.16% 343.57 24 TATA ELXSI LTD (SEG.) 26.51% 262.58 25 THIRDWARE SOLUTIONS LTD 25.12% 36.08 26 WIPRO LTD (SEG.) 33.65% 9616.09 ARITHMETIC MEAN 25.14% APPELLANT'S OP / TC FOR FY 2006-07 11.08% 6. A CHART DRAWN BY THE TPO GIVING THE RELATED PART Y TRANSACTIONS, % OF EXPORT OVER SALES, ONSITE REVENUE ETC., OF THE FINA L 26 COMPARABLE COMPANIES CHOSEN BY THE TPO IS ALSO GIVEN AS AN ANNEXURE-I TO THIS ORDER . 7. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF TH E ACT AND ON THE BASIS OF THE COMPARABLES SET OUT ABOVE, ARRIVED AT ARITHMETIC MEAN OF 25.14%. AFTER FACTORING THE WORKING CAPITAL ADJUST MENT OF 0.70%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 24.44%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 22.6 COMPUTATION OF ARMS LENGTH PRICE : THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY YOU IS COMPUTED AS UNDER: IT(TP)A NO.1224/BANG/2011 PAGE 5 OF 40 ARITHMETIC MEAN PLI 25.14% LESS: WORKING CAPITAL ADJUSTMENT(ANNEXURE-C) 0.70% ADJ.ARITHMETIC MEAN PLI 24.44% ARMS LENGTH PRICE : OPERATING COST RS.65,60,43,681 ARMS LENGTH MARGIN 24.44% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 124.44% OF OPERATING COST RS.81,63,80,757/- 22.7 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRIC E : THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 124.44% OF OPERATING COST RS. 81,63,80,757/- PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.72,87,30,616/- SHORTFALL BEING ADJUSTMENT U/S.92CA RS.8,76,50,141/- THE ABOVE SHORTFALL OF RS.8,76,50,141/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 8. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE IT(TP)A NO.1224/BANG/2011 PAGE 6 OF 40 ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 9. THE ASSESSEE FILED A CHART SHOWING HOW THE TPO H AS NOT GIVEN WORKING CAPITAL ADJUSTMENT AS PRAYED FOR BY THE ASS ESSEE, THE TURNOVER AND THE MARGINS OF THE 20 COMPARABLE COMPANIES FINA LLY CHOSEN BY THE TPO AFTER GIVING EFFECT TO ADJUSTMENT TOWARDS WORKI NG CAPITAL AS ALLOWED BY THE TPO AND ALSO AS CLAIMED BY THE ASSESSEE. THE CHART ALSO EXPLAINS AS HOW SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO WERE NOT COMPARABLE FOR THE REASON THAT THESE COMPANIES WERE NOT FUNCTIONALLY COMPARABLE. THE CHART ALSO GIVES THE CASES DECIDED BY VARIOUS BENCHES OF THE ITAT WHERE THE COMPARABLE COMPANIES HAVE BEE N HELD TO BE NOT COMPARABLE WITH THAT OF AN ASSESSEE PROVIDING IT SO FTWARE DEVELOPMENT SERVICES. WE WILL PROCEED TO CONSIDER THE COMPARA BILITY OF COMPANIES CHOSEN BY THE TPO AND LISTED IN PARA- 5 OF THIS ORD ER. 10. 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 IT(TP)A NO.1224/BANG/2011 PAGE 7 OF 40 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 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 O RDER IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD., WE F IND THAT THESE COMPANIES ARE- 1) ACCEL TRANSMATIC 2) AVANI CIMCON TECHNOLOGIES LTD. 3) CELESTIAL LABS LTD. 4) KALS INFORMATION SYSTEMS LTD. 19. THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD., WHILE CONSIDERING THE ISSUE OF IMPR OPER SELECTION OF COMPARABLES HAS HELD AS UNDER: (B) AVANI CIMCON TECHNOLOGIES LTD. IT(TP)A NO.1224/BANG/2011 PAGE 8 OF 40 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. BASED ON THE INFORMAT ION AVAILABLE IN THE COMPANYS WEBSITE, WHICH REVEALS T HAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITTED THAT THIS COMPANY WOUL D HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFTWARE SERVICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS F URTHER SUBMITTED 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 COMPAN Y HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT B E CONSIDERED AS COMPARABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY AND IT WAS HELD AS FOLLOWS:- 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCOM) : HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPERATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESSEE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PARTY. LEARNED CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETAILS OF PERCENTAGE OF EXPORT OF PRODUCTS OR SERVICES HAVE 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 COMPANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS. THE FOLLOWING FIGURES WERE PLACED BEFORE US:- IT(TP)A NO.1224/BANG/2011 PAGE 9 OF 40 PARTICULARS FYS 05-06 06-07 07-0 8 08-09 OPERATING REVENUE 21761611 35477523 29342809 280 39851 OPERATING EXPNS. 16417661 23249646 23359186 3110 8949 OPERATING PROFIT 5343950 12227877 5983623 (3 069098) OPERATING MARGIN 32.55% 52.59% 25.62% - 9 .87% 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UNUSUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06- 07. THE OPERATING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXTRAORDINARY YEAR FOR THIS COMPANY. EVE N THE GROWTH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR A S PER NASSCOM WAS 32%. THE GROWTH RATE OF THIS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW OF THE AB OVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJ ECTED AS A COMPARABLE. 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. THE RE ASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECISIO N OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE. (C) CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVE LOPMENT COMPANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- IT(TP)A NO.1224/BANG/2011 PAGE 10 OF 40 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 RESEARCH AND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AND THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALLMENTS FROM THE YEAR IN WHICH IT IS INCURRED. AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO T HE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE (PAGE 30 OF PB-II). THIS AMOUNTS TO NE ARLY 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 I NTO PURE SOFTWARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D ACTIVITIES IS BAD IN LAW. 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISIO N OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (FOR AY 2007-08) IN WHICH THE COMPARABILITY OF THIS COMPANY FOR CLINICAL TRIAL RE SEARCH 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 TOOL CELSUITE TO DRUG DISCOVERY IN, FINDING THE LEAD MOLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT ACT. (APPRISED AND FUNDED IT(TP)A NO.1224/BANG/2011 PAGE 11 OF 40 BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYING BIO-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE BEEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY, OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, THE COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS. THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FACILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY WILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA PRADESH. ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALSO 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 DISCOVERY 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 IT(TP)A NO.1224/BANG/2011 PAGE 12 OF 40 AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCESS OF 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 DISCOV ERY OF NEW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCE R. IN THE ULTIMATE ANALYSIS, THE ITAT DID NOT CONSIDER TH IS COMPANY AS A COMPARABLE 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 SHOULD BE REJ ECTED AS A COMPARABLE BEING FUNCTIONALLY DIFFERENT. 45. FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANSPIRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY WAS CLASSIFIED AS A RESEARCH AND DEVELOPMENT COMPANY. ACCORDING TO THE TPO IN AY 07 - 08 THIS COMPANY HAS BEEN CLASSIFIED AS SOFTWARE DEVELOPMENT SERVICE PROVIDER IN THE CAPITALINE/PROW ESS DATABASE AS WELL AS IN THE ANNUAL REPORT OF THIS CO MPANY. THE TPO HAS RELIED ON THE RESPONSE FROM THIS COMPAN Y TO A NOTICE U/S.133(6) OF THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE 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 SERVICES AND THAT THE SEGMENTAL DATA FOR EACH ACTIVITY IS NOT AVAILABLE AND THEREFORE THIS C OMPANY SHOULD NOT BE TREATED AS COMPARABLE. BESIDES THE A BOVE, THE ASSESSEE HAS POINT OUT TO SEVERAL REFERENCES IN THE ANNUAL REPORT FOR 31.3.2007 HIGHLIGHTING THE FACT T HAT THIS IT(TP)A NO.1224/BANG/2011 PAGE 13 OF 40 COMPANY WAS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PROVIDES RELATED SOFTWARE DEVELOPMENT SERVICES. TH E TPO CALLED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPANY. THE TPO ALSO CALLED FOR DESCRIPTION OF SO FTWARE DEVELOPMENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DATED 29.3.2010 HAS G IVEN DETAILS OF EMPLOYEES WORKING IN SOFTWARE DEVELOPMEN T BUT IT IS NOT CLEAR AS TO WHETHER ANY SEGMENTAL DATA WA S GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OTHER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISSUED DRAFT RED HERRING PROSPECTUS (DRH P) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH. THE TPO WANTED TO KNOW AS TO W HETHER THE PRIMARY BUSINESS OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN THE ANNUAL REP ORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE OF BI O 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 TH E DRHP ARE THE SERVICES OR BUSINESSES THAT WOULD BE S TARTED BY UTILIZING THE FUNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN NO WAY CONNECTED WITH BUSIN ESS OPERATIONS OF THE COMPANY 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 CLE AR BASIS ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DEVELO PMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSE SSEE THAT THIS COMPANY OUGHT NOT 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 REVE NUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCT S. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THI S COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS A LSO IT(TP)A NO.1224/BANG/2011 PAGE 14 OF 40 SUBMITTED THAT AS PER THE ANNUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOF TWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS 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 OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXT RACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOU LD BE REJECTED AS A COMPARABLE. 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 INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE IT(TP)A NO.1224/BANG/2011 PAGE 15 OF 40 ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN P UBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN TH E 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 REFERRE D TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BE NCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPA RABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWAR E DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITT ED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ACCEL TRANSMATIC SH OULD BE REJECTED AS COMPARABLE. THE RELEVANT OBSERVATION S OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FO LLOWS: 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 THAT THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENTRE 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, IT(TP)A NO.1224/BANG/2011 PAGE 16 OF 40 EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE 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 CLAIM 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 DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THI S COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MOR E THAN THE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAK EN FOR COMPARABILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMP ANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR , ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESA ID COMPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE L D. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WA S NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HO LD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. IT(TP)A NO.1224/BANG/2011 PAGE 17 OF 40 20. RESPECTFULLY FOLLOWING THE DECISION OF THE TR IBUNAL IN SIMILAR SET OF FACTS, THESE COMPANIES ARE DIRECTE D TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 11. THE LEARNED DR HOWEVER SUBMITTED BEFORE US THAT KALS INFORMATION SYSTEMS LTD., CANNOT BE CONSIDERED AS A SOFTWARE PR ODUCT COMPANY AND ON THAT GROUND BE NOT HELD COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. IN THIS REGARD, HE HAS FILED BEFORE US A COPY OF THE ANNUAL REPORT OF THE COMPANY FOR THE PE RIOD 2007-2008 WHICH RELATES TO SUBSEQUENT ASSESSMENT YEAR 2008-09. HE DREW OUR ATTENTION TO THE SEGMENTAL RESULTS OF THE COMPANY FOR THE PERIOD 2006-07 AS GIVEN IN THE AFORESAID ANNUAL REPORT AND POINTED OUT THAT SE GMENTAL REVENUE AS ON 31.3.2007 WAS RS.2,00,09,937 FROM APPLICATION SOFTW ARE AND RS.8,95,385 FROM TRAINING. ACCORDING TO HIM THEREFORE THE CONC LUSION THAT KALS INFORMATION SYSTEMS LTD. IS A SOFTWARE PRODUCT COMP ANY MAY NOT BE CORRECT. LEARNED COUNSEL FOR THE ASSESSEE HOWEVER POINTED OUT THAT THIS COMPANY HAS INVENTORIES WORTH RS.1,12,97,218 AS ON 31.3.2007 WHICH ITSELF IS A REFLECTION THAT THIS COMPANY IS A SOFTW ARE PRODUCT COMPANY. HE ALSO POINTED OUT THAT IN SCHEDULE 16 NOTES TO FINAN CIAL STATEMENTS IN NOTE 2 (B) IT HAS BEEN MENTIONED THAT THE COMPANY DERIVE S ITS REVENUES PRIMARILY FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT I S SEEN FROM PARA 16.4.13 OF THE TPOS ORDER AT PAGE 141 THAT THE TPO HAS BASED HIS IT(TP)A NO.1224/BANG/2011 PAGE 18 OF 40 CONCLUSIONS ONLY ON THE BASIS OF THE REPLY GIVEN BY THIS COMPANY IN RESPONSE TO NOTICE U/S.133(6) OF THE ACT THAT IT IS A SOFTWARE DEVELOPMENT SERVICE PROVIDER. THEREFORE THE CONCLUSIONS DRAWN IN THE CASES REFERRED TO ABOVE FOR EXCLUDING THIS COMPANY AS A COMPARABLE CO MPANY IS FOUND TO BE CORRECT. RESPECTFULLY FOLLOWING THE DECISION OF TH E TRIBUNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESA ID COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. 13. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 11 & 14 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ. , M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWARE LTD., IS CONCERNED, THIS TR IBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD. VS. DCIT IT (T P) 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). THE FOLLOWING WERE THE R ELEVANT OBSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.L TD.(SUPRA): 22. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE BASIS OF THE FINDING OF THIS TRI BUNAL IN THE CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. IT(TP)A NO.1224/BANG/2011 PAGE 19 OF 40 DT 22.2.2013, WHEREIN AT PAGES 17 AND 22 OF ITS OR DER THE DISTINCTIONS AS TO WHY THESE COMPANIES SHOULD BE EX CLUDED ARE BROUGHT OUT. HE SUBMITTED THAT THE FACTS OF THE CA SE BEFORE US ARE SIMILAR AND, THEREFORE, THE SAID DECISION IS APPLIC ABLE TO THE ASSESSEE'S CASE ALSO. 23. THE LEARNED DR HOWEVER OBJECTED TO THE EXCLUSIO N OF THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. ON A CAREFUL PERUSAL OF THE MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. (CITED SUPRA) HAS TAKEN A NOTE OF DISSIMILARITIES B ETWEEN THE ASSESSEE THEREIN AND LUCID SOFTWARE LTD. AS OBSERV ED THEREIN LUCID SOFTWARE LTD. COMPANY IS ALSO INVOLVED IN THE DEVELOPMENT OF SOFTWARE AS COMPARED TO THE ASSESSEE , WHICH IS ONLY INTO SOFTWARE SERVICES. SIMILARLY, AS REGARDS ISHIR INFOTECH LTD., THE TRIBUNAL HAS CONSIDERED THE DECISION OF T HE TRIBUNAL IN THE CASE OF 24/7 CO. PVT. LTD TO HOLD THAT ISHIR IN FOTECH IS ALSO OUT-SOURCING ITS WORK AND, THEREFORE, HAS NOT SATIS FIED THE 25% EMPLOYEE COST FILTER AND THUS HAS TO BE EXCLUDED FR OM THE LIST OF COMPARABLES. AS THE FACTS OF THE CASE BEFORE US AR E SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH, WE HOLD THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUD ED. 14. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 15. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 16 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ., M/S.ME GASOFT LIMITED IS CONCERNED, THIS TRIBUNAL IN THE CASE OF FIRST ADVA NTAGE 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. THE NATURE OF SERVICES RENDERED IT(TP)A NO.1224/BANG/2011 PAGE 20 OF 40 BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VERY SAM E 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA ). IN COMING TO THE AFORESAID CONCLUSION, THE TRIBUNAL IN THE CASE OF F IRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) FOLLOWED THE DECISION REND ERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. VS. DCIT ITA NO.1064/BANG/2011 FOR AY 07-08 ORDER DATED 23.11.20 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA): 27. AS FAR AS ADOPTION OF MEGA SOFT LTD., AS ONE OF COMPARABLES, THE LEARNED COUNSEL FOR THE ASSESSEE S UBMITTED THAT THERE IS AN ERROR IN COMPUTING ITS NET MARGIN. HE HAS DRAWN OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT.LTD., AT PARA 24 TO 27 AT PAGE 18, WHEREIN THE ERROR IN COMPUTING THE NET MARGIN OF TH IS COMPANY HAS BEEN TAKEN NOTE OF AND IT HAS BEEN DIRECTED AS UNDER: (A) MEGASOFT LTD. : 24. THIS COMPANY WAS CHOSEN AS A COMPARABLE BY TH E TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE A RE TWO SEGMENTS IN THIS COMPANY VIZ., (I) SOFTWARE DEVELOP MENT SEGMENT, AND (II) SOFTWARE PRODUCT SEGMENT. THE AS SESSEE IS A PURE SOFTWARE SERVICES PROVIDER AND NOT A SOFT WARE PRODUCT DEVELOPER. ACCORDING TO THE ASSESSEE THERE IS NO BREAK UP OF REVENUE BETWEEN SOFTWARE PRODUCTS AND SOFTWARE SERVICES BUSINESS ON A STANDALONE BASIS OF THIS 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 IT(TP)A NO.1224/BANG/2011 PAGE 21 OF 40 DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE. TH IS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PRODUCTS ARE SO LD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUC TS TO FIT INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGE D SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40 % OF THE PRODUCT SOFTWARE WOULD CONSTITUTE PACKAGED PROD UCT AND AROUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BO ARDING AND LODGING EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVE LOPED (WHICH WAS AKIN TO PRODUCT SOFTWARE) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMENT OF SOFT WARE 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 SOFT WARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPO S 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 A ND 116 OF THE ORDER OF THE TPO. IT IS CLEAR FROM THE PERU SAL OF THE SAME THAT THE TPO HAS PROCEEDED TO DETERMINE THE PL I 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 COM PLAINT OF THE ASSESSEE THAT THE OPERATING MARGINS HAVE BEE N COMPUTED AT ENTITY LEVEL COMBINING SOFTWARE SERVICE S AND SOFTWARE PRODUCT SEGMENTS. IT WAS SUBMITTED THAT T HE PRODUCT SEGMENT OF MEGASOFT IS SUBSTANTIALLY DIFFER ENT FROM ITS SOFTWARE SERVICE SEGMENT. THE PRODUCT SEGM ENT HAS EMPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SE RVICE SEGMENT HAS EMPLOYEE COST OF 50%. SIMILARLY, THE P ROFIT MARGIN ON COST IN PRODUCT SEGMENT IS 117.95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11%. BOTH THE SEGMENTS 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 MEGASO FT IT(TP)A NO.1224/BANG/2011 PAGE 22 OF 40 LIMITED HAS PROVIDED SEGMENTAL BREAK-UP BETWEEN THE SOFTWARE SERVICES SEGMENT AND SOFTWARE PRODUCT SEGM ENT (PAGE 68 OF PB-II), WHICH WAS ALSO ADOPTED BY THE T PO IN HIS SHOW CAUSE NOTICE (PAGE 84 OF PB-I). THE SEGME NTAL RESULTS I.E., RESULTS PERTAINING TO SOFTWARE SERVIC ES SEGMENT OF THIS COMPANY WAS: SEGMENTAL OPERATING REVENUES RS.63,71,32,544 SEGMENTAL OPERATING EXPENSES RS.51,75,13,211 OPERATING PROFIT RS.11,96,19,333 OP/TC (PLI) 23.11% 26. IT WAS REITERATED THAT IN THE GIVEN CIRCUMSTAN CES ONLY PLI OF SOFTWARE SERVICE SEGMENT VIZ., 23.11% OUGHT TO HAVE BEEN SELECTED FOR COMPARISON. 27. IT WAS FURTHER SUBMITTED THAT THE LEARNED TPO IN CASE OF OTHER COMPARABLE, SIMILARLY PLACED, HAD ADOPTED THE MARGINS OF ONLY THE SOFTWARE SERVICE SEGMENT FOR COMPARABILITY PURPOSES. CONSISTENT WITH SUCH STAND, IT WAS SUBMITTED THAT THE MARGINS OF THE SOFTWARE SEGMENT ONLY SHOULD BE ADOPTED IN THE CASE OF MEGASOFT ALSO, IN CONTRAST TO THE ENTITY LEVEL MARGINS. 28. COMPUTATION OF THE NET MARGIN FOR MEGA SOFT LT D. IS THEREFORE REMITTED TO THE FILE OF THE TPO TO COMPUT E THE CORRECT MARGIN BY FOLLOWING THE DIRECTION OF THE TR IBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PV T.LTD. 16. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO COMPUTE THE CORRECT MARGIN OF MEGA SOFT LTD., AS DIRECTED BY THE TRIBUNAL IN THE CASE OF FIRST ADVAN TAGE OFFSHORE SERVICES PVT.LTD. (SUPRA). IT(TP)A NO.1224/BANG/2011 PAGE 23 OF 40 17. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 10, 24 & 26 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., M/S.INFOSYS TECHNOLOGIES LIMITED, TATA ELXSI LTD. (SEG.) & WIPR O LIMITED ARE CONCERNED, THIS TRIBUNAL IN THE CASE OF M/S.CURAM SOFTWARE INTERNATIONAL PVT.LTD. VS. ITO ITA NO.1280/BANG/2012 FOR AY 08-09 ORDER DATED 31.7.2013 HAS HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVI CES PROVIDER. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CAS E OF M/S.CURAM SOFTWARE INTERNATIONAL PVT.LTD.(SUPRA): 12. (4) INFOSYS TECHNOLOGIES LTD. 12.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJE CTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS TH AT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE S OFTWARE DEVELOPMENT SEGMENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THI S CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPANY TO THIS EFFECT WHICH IS AS UNDER :- (I) THE COMPANY HAS AN INTELLECTUAL PROPERTY (IP) CELL TO GUIDE ITS EMPLOYEES TO LEVERAGE THE POWER OF IP FOR THEIR GROWTH. IN 2008, THIS COMPANY GENERATED OVER 102 INVENTION 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.1224/BANG/2011 PAGE 24 OF 40 (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. (IT A 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. 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 FUNCTIONALLY DIS- SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HENCE IS 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 IT(TP)A NO.1224/BANG/2011 PAGE 25 OF 40 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 THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPAR ABLES 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. 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 TECHNOLO GY RELATED INTANGIBLES AND QUOTED EXTRACTS FROM THE AN NUAL REPORT 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 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 IT(TP)A NO.1224/BANG/2011 PAGE 26 OF 40 THE TPO IS THAT HE ADOPTED COMPARISON OF THE CONSOL IDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NOT AN APPROPR IATE 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 PATENTS. IN THIS REGARD, THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN T HE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (ITA NO.227/BANG/201 0) HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT B E COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY SUCH INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSE E IN THE CASE ON HAND DOES NOT OWN ANY INTANGIBLES, FOLLOWIN G THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), WE HOLD T HAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFI CER/TPO TO OMIT THIS COMPANY FROM THE SET OF COMPARABLE COMPANIES IN THE CASE ON HAND FOR THE YEAR UNDER CONSIDERATION. 14.0 (6) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE 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. IT(TP)A NO.1224/BANG/2011 PAGE 27 OF 40 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. 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 ASSE SSEE. 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 DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY AS FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, IT(TP)A NO.1224/BANG/2011 PAGE 28 OF 40 SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PORTION. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL RE PORT 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 INCLUSION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDE RED ACCORDINGLY. 18. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 19. AS FAR AS COMPARABLE COMPANIES AT SL.NO.5, 18, 19 AND 25 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O ARE CONCERNED, VIZ., M/S. E-ZEST SOLUTIONS LTD., PERSISTENT SYSTEMS LTD ., QUINTEGRA SOLUTIONS LIMITED AND THIRD WARE SOLUTIONS LTD., THIS TRIBUNA L IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. I.T (T.P) A. NO.1303/BANG/2 012 (ASSESSMENT YEAR : 2008-09) ORDER DATED 28.11.2013 WAS PLEASED TO HO LD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE WITH A COMPANY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES SUCH AS THE ASSESSEE. THE FOL LOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: 14. E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMP ARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE I NCLUSION OF THIS IT(TP)A NO.1224/BANG/2011 PAGE 29 OF 40 COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED T HE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUND THAT AS PER TH E INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SER VICES AND SATISFIES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIS T OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY D IFFERENT TO THE ASSESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E-BUSINESS CONSULT ING SERVICES, CONSISTING OF WEB STRATEGY SERVICES, I T DESIGN SER VICES AND IN TECHNOLOGY CONSULTING SERVICES INCLUDING PRODUCT DE VELOPMENT CONSULTING SERVICES. THESE SERVICES, THE LEARNED AU THORISED REPRESENTATIVE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMEN TAL DATA IN ITS ANNUAL REPORT. THE LEARNED AUTHORISED REPRESENT ATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIVE INFORMATION ON THE BUS INESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAIL S AVAILABLE ON THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WH ILE EVALUATING THE COMPANYS FUNCTIONAL PROFILE. IT IS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO S ERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CO NSIDERED AS COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES AND RE LIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF CA PITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961 (HYD)/2011 DT.23.11.2012 AND PRAYED THAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., OUGHT TO BE OMI TTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN TH E LIST OF COMPARBALES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE NOTICE UNDER SECTION 13 3(6) OF THE ACT. IT(TP)A NO.1224/BANG/2011 PAGE 30 OF 40 IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVIC ES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVIC ES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOP MENT SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON RECO RD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMEN T SERVICES, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERING PR ODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICE S WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BEE N HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF C APITAL I-Q INFORMATION SYSTEMS (INDIA) (P) LTD. SUPRA) THAT KP O SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID D ECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E-ZEST SOLUTI ONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED. 15. THIRDWARE SOLUTIONS LTD. (SEGMENT) 15.1 THIS COMPANY WAS PROPOSED FOR INCLUSION IN THE LIST OF COMPARABLES BY THE TPO. BEFORE THE TPO, THE ASSESSE E OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COM PARABLES ON THE GROUND THAT ITS TURNOVER WAS IN EXCESS OF RS.500 CR ORES. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, IT IS IN THE BUSINESS OF PRODUCT DEVELOPM ENT AND TRADING IN SOFTWARE AND GIVING LICENSES FOR USE OF SOFTWARE . IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THA T :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTION. IT HAS BEEN POINTED OUT FROM THE ANNUAL REPORT THAT THE COMPANY HAS NOT PROVIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACC OUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPME NT SERVICES. (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (2008-TII-04- ITAT-PUNE-TP), THE TRIBUNAL HAS DIRECTED THAT THIS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PROVID ERS, AS ITS INCOME INCLUDES INCOME FROM SALE OF LICENCES WHICH HAS INCREASED THE MARGINS OF THE COMPANY. IT(TP)A NO.1224/BANG/2011 PAGE 31 OF 40 THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THE TRIBUNAL (S UPRA), THIS COMPANY OUGHT TO BE OMITTED FROM THE LIST OF COMPAR ABLES. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE LIST OF COMPARABLES. 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE MATERIAL ON RECORD THAT THE COMPANY IS ENGAGED IN P RODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, THE SEGMENTAL PROFIT AND LOS S ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPME NT ARE NOT GIVEN SEPARATELY. FURTHER, AS POINTED OUT BY THE LE ARNED AUTHORISED REPRESENTATIVE, THE PUNE BENCH OF THE TR IBUNAL IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (SUPRA) HAS DIRECTED THAT SINCE THE INCOME OF THIS COMPANY INCLUDES INCO ME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABL E FOR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFT WARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE M ATTER AND FOLLOWING THE AFORE CITED DECISION OF THE PUNE TRIB UNAL (SUPRA), WE DIRECT THAT THIS COMPANY BE OMITTED FROM THE LIS T OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN T HE CASE ON HAND. 17. PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A CO MPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, I T IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL R ESULTS ARE NOT AVAILABLE. THE TPO REJECTED THE ASSESSEE'S OBJECTIO NS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPAN Y FOR FINANCIAL YEAR 2007-08, IT IS MAINLY A SOFTWARE DEV ELOPMENT COMPANY AND AS PER THE DETAILS FURNISHED IN REPLY T O THE NOTICE UNDER SECTION 133(6) OF THE ACT, SOFTWARE DEVELOPME NT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF THE MATTER, TH E ASSESSING OFFICER INCLUDED THIS COMPANY I.E. PERSISTENT SYSTE MS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNCTIONALI TY CRITERION. IT(TP)A NO.1224/BANG/2011 PAGE 32 OF 40 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCL USION OF THIS COMPANY AS A COMPARABLE SUBMITTING THAT THIS COMPAN Y IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE ARE SEVE RAL OTHER FACTORS ON WHICH THIS COMPANY CANNOT BE TAKEN AS A COMPARAB LE. IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMI TTED THAT : (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING SERVICES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007- 08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY EN GAGED IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES FOR INDEPENDENT SOFTWARE VENDORS AND ENTERPRISES. (III) WEBSITE EXTRACTS INDICATE THAT THIS COMPANY I S IN THE BUSINESS OF PRODUCT DESIGN SERVICES. (IV) THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORD IA TECHNOLOGIES INDIA PVT. LTD.(SUPRA) WHILE DISCUSSIN G THE COMPARABILITY OF ANOTHER COMPANY, NAMELY LUCID SOFT WARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGME NTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR CO MPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRESENTLY UNDER CONSIDERATION, WHICH IS INTO PRODUC T DEVELOPMENT AND PRODUCT DESIGN SERVICES AND FOR WHICH THE SEGME NTAL DATA IS NOT AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. BE OMITTED FROM THE LIST OF COMPARABLES. 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORT THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN S ERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVIC ES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSEE, THE SEG MENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE IT(TP)A NO.1224/BANG/2011 PAGE 33 OF 40 ENUNCIATED IN THE DECISION OF THE MUMBAI TRIBUNAL I N THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THA T IN THE ABSENCE OF SEGMENTAL DETAILS / INFORMATION A COMPAN Y CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS, WE H OLD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OM ITTED FROM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERA TION. IT IS ORDERED ACCORDINGLY. 18. QUINTEGRA SOLUTIONS LTD. 18.1 THIS CASE WAS SELECTED BY THE TPO AS A COMPARA BLE. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON THE GROUND THAT THIS C OMPANY IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE WERE PEC ULIAR ECONOMIC CIRCUMSTANCES IN THE FORM OF ACQUISITIONS MADE DURI NG THE YEAR. THE TPO REJECTED THE ASSESSEE'S OBJECTIONS HOLDING THAT THIS COMPANY QUALIFIES ALL THE FILTERS APPLIED BY THE TP O. ON THE ISSUE OF ACQUISITIONS, THE TPO REJECTED THE ASSESSEE'S OB JECTIONS OBSERVING THAT THE ASSESSEE HAS NOT ADDUCED ANY EVI DENCE AS TO HOW THIS EVENT HAD AN ANY INFLUENCE ON THE PRICING OR THE MARGIN EARNED. 18.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCL USION OF THIS COMPANY FOR THE REASON THAT IT IS FUNCTIONALLY DIFF ERENT AND ALSO THAT THERE ARE OTHER FACTORS FOR WHICH THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. IT WAS SUBMITTED THAT, (I) QUINTEGRA SOLUTIONS LTD., THE COMPANY UNDER CONSIDERATION, IS ENGAGED IN PRODUCT ENGINEERING SE RVICES AND NOT IN PURELY SOFTWARE DEVELOPMENT SERVICES. TH E ANNUAL REPORT OF THIS COMPANY ALSO STATES THAT IT I S ENGAGED IN PREPARATORY SOFTWARE PRODUCTS AND IS THEREFORE N OT SIMILAR TO THE ASSESSEE IN THE CASE ON HAND. (II) IN ITS ANNUAL REPORT, THE SERVICES RENDERED BY THE COMPANY ARE DESCRIBED AS UNDER : LEVERAGING ITS PROVEN GLOBAL MODEL, QUINTEGRA 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 SERVI CES IN IT ON VARIOUS PLATFORMS AND TECHNOLOGIES. IT(TP)A NO.1224/BANG/2011 PAGE 34 OF 40 (III) THIS COMPANY IS ALSO ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITIES WHICH RESULTED IN THE CREATION OF INTELL ECTUAL PROPRIETARY RIGHTS (IPRS) AS CAN BE EVIDENCED FROM THE STATEMEN TS MADE IN THE ANNUAL REPORT OF THE COMPANY FOR THE PERIOD UND ER CONSIDERATION, WHICH IS AS UNDER : QUINTEGRA HAS TAKEN VARIOUS MEASURES TO PRESERVE ITS INTELLECTUAL PROPERTY. ACCORDINGLY, SOME OF THE PRO DUCTS DEVELOPED BY THE COMPANY HAVE BEEN COVERED BY THE PATENT RIGHTS. THE COMPANY HAS ALSO APPLIED FOR TRADE MARK REGISTRATION FOR ONE OF ITS PRODUCTS, VIZ. INVESTOR PROTECTION INDEX FUND (IPIF). THESE MEASURES WILL HELP THE COMPANY ENHANCE ITS PRODUCTS VALUE AND ALSO MITIGATE RISKS. (IV) THE TPO HAS APPLIED THE FILTER OF EXCLUDING CO MPANIES HAVING PECULIAR ECONOMIC CIRCUMSTANCES. QUINTEGRA F AILS THE TPOS OWN FILTER SINCE THERE HAVE BEEN ACQUISITIONS IN THIS CASE, AS IS EVIDENCED FROM THE COMPANYS ANNUAL REPORT FO R F.Y. 2007-08, THE PERIOD UNDER CONSIDERATION. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE SUBMISSIONS MADE ABOVE, IT IS CLEAR THAT INTER ALIA , THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BEING FUNCTIONALLY DI FFERENT AND POSSESSING ITS OWN INTANGIBLES / IPRS, IT CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND AND THEREFORE OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES F OR THE PERIOD UNDER CONSIDERATION. 18.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE SET OF COMPARABLES TO THE ASSESSEE FOR THE PERIOD U NDER CONSIDERATION. 18.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS BROUGHT ON RECORD THAT THIS COMPANY I.E.QUI NTEGRA SOLUTIONS LTD. IS ENGAGED IN PRODUCT ENGINEERING SE RVICES AND IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. IT IS ALSO SEEN THAT THIS COMPANY IS ALSO ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS AND H AS SUBSTANTIAL R&D ACTIVITY WHICH HAS RESULTED IN CREATION OF ITS IPRS. HAVING APPLIED FOR TRADE MARK REGISTRATION OF ITS PRODUCTS , IT EVIDENCES THE IT(TP)A NO.1224/BANG/2011 PAGE 35 OF 40 FACT THAT THIS COMPANY OWNS INTANGIBLE ASSETS. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER .COM PVT. LTD. (ITA NO.227/BANG/2010 DT.9.11.2012) HAS HELD T HAT IF A COMPANY POSSESSES OR OWNS INTANGIBLES OR IPRS, THEN IT CANNOT BE CONSIDERED AS A COMPARABLE COMPANY TO ONE THAT DOES NOT OWN INTANGIBLES AND REQUIRES TO BE OMITTED FORM THE LIS T OF COMPARABLES, AS IN THE CASE ON HAND. 18.3.2 WE ALSO FIND FROM THE ANNUAL REPORT OF QUINT EGRA SOLUTIONS LTD. THAT THERE HAVE BEEN ACQUISITIONS MA DE BY IT IN THE PERIOD UNDER CONSIDERATION. IT IS SETTLED PRINCIPLE THAT WHERE EXTRAORDINARY EVENTS HAVE TAKEN PLACE, WHICH HAS AN EFFECT ON THE PERFORMANCE OF THE COMPANY, THEN THAT COMPANY SHALL BE REMOVED FROM THE LIST OF COMPARABLES. 18.3.3 RESPECTFULLY FOLLOWING THE DECISION OF THE C O-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER. COM PVT. LTD. (SUPRA), WE DIRECT THAT THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLES IN THE CAS E ON HAND SINCE IT IS ENGAGED IN PROPRIETARY SOFTWARE PRODUCT S AND OWNS ITS OWN INTANGIBLES UNLIKE THE ASSESSEE IN THE CASE ON HAND WHO IS A SOFTWARE SERVICE PROVIDER. 20. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 21. AS FAR AS COMPARABLE CHOSEN BY THE TPO AT SL.NO .8 OF THE FINAL LIST OF COMPARABLE VIZ., M/S.HELIOS & MATHESON INFORMAT ION TECHNOLOGY LTD., WE FIND THAT THE SAID COMPANY HAS BEEN HELD TO BE N OT COMPARABLE WITH A SOFTWARE SERVICE PROVIDER LIKE THE ASSESSEE BY THE ITAT PUNE BENCH IN THE CASE OF PTC SOFTWARE (INDIA)PVT.LTD. ITA.NO.1605/P N/2011 (ASSTT. YEAR : 2007-08) ORDER DATED 30.4.2013. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: IT(TP)A NO.1224/BANG/2011 PAGE 36 OF 40 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WIT H REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION S OLUTIONS LTD. (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE L IST OF COMPARABLES IS TO BE EFFECT THAT THEY ARE FUNCTIONA LLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUD ED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CONCERNS ARE ENGAGED IN DEVELOPMENT AND S ALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIFFERENT F ROM THE SERVICES UNDERTAKEN BY THE ASSESSEE IN ITS IT-SERVI CES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORD ER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYSTEMS LTD., IS TO THE EFFECT THAT THE SAID CONCERNS APPL ICATION SOFTWARE SEGMENT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE W HICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. T HE SAID CONCERN IS ENGAGED IN TWO SEGMENTS NAMELY APPLICATI ON SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATI ON SOFTWARE SEGMENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS ENGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASSESSEE IS THAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F.Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGME NT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND SO FTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRI TTEN SUBMISSIONS, COPY OF WHICH IS PLACED IN THE PAPER B OOK AT PAGE 420.3 TO 420.4. THE ASSESSEE FURTHER POINTED OUT TH AT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTWARE SERVICES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPLICATION SOFTWA RE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEES IT-SERVICES SEGMENT. THE TPO HOWEVER, NO TICED THAT THOUGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODU CTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PRODUCTS AS THERE WERE NO COST OF PURCHAS ES DEBITED IN THE PROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED TH AT THE QUANTUM OF REVENUE FROM SALE OF PRODUCTS WAS NOT AV AILABLE AS PER THE FINANCIAL STATEMENTS OF THE SAID CONCERN, B UT AS THE BASIC FUNCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPME NT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEES SEGMENT OF IT-SERVICES. IT(TP)A NO.1224/BANG/2011 PAGE 37 OF 40 18. BEFORE US, APART FROM REITERATING THE POINTS RA ISED BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR OF 2006-07, T HE SAID CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALLY INCOMPARABLE. FOR THE SAID PURPOSE, OU R REFERENCE HAS BEEN INVITED TO PAGES 421 TO 542 OF THE PAPER B OOK, WHICH IS THE COPY OF THE TRANSFER PRICING STUDY UNDERTAKEN B Y THE ASSESSEE FOR THE A.Y. 2006-07, AND IN PARTICULAR, ATTENTION WAS INVITED TO PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REFLECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICAT ION FOR THE TPO TO CONSIDER THE SAID CONCERN AS FUNCTIONALLY CO MPARABLE IN THE INSTANT ASSESSMENT YEAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE S AID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH T HE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN TH E PRESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFER RED TO IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORIT IES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID C ONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WA S QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESS EE IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER I S THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDERS OF THE LOWER AU THORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAID C ONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRE CEDING YEAR. THEREFORE, HAVING REGARD TO THE FACTUAL ASPECTS BRO UGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERTED THAT THE APPLICA TION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO TH E ASSESSEES SEGMENT OF IT SERVICES. 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHES ON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISE D SIMILAR ARGUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTI ONS LTD. (SEG). WE HAVE PERUSED THE RELEVANT PARA OF THE ORD ER OF THE TPO I.E., 6.3.21, IN TERMS OF WHICH THE SAID CONCERN HA S BEEN INCLUDED AS A COMPARABLE CONCERN. THE ASSESSEE POINTED OUT T HAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG), IN T HE INSTANT CASE ALSO FOR A.Y. 2006-07 THE SAID CONCERN WAS FOU ND IT(TP)A NO.1224/BANG/2011 PAGE 38 OF 40 FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TR ANSFER PRICING STUDY AND THE SAID POSITION WAS NOT DISTURBED BY TH E TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY, PLA CED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESAID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTA NT CASE ALSO WE FIND THAT THE SAID CONCERN IS LIABLE TO BE EXCLU DED FROM THE LIST OF COMPARABLES. 22. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANY FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMIN ING ALP. 23. THE AO IS DIRECTED TO COMPUTE THE ARITHMETIC ME AN BY EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. A CCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, IF THE SUBMISSIONS OF THE ASSESSEE ARE ACCEPTED, THEN THE ARITHMETIC MEAN OF THE COMPARABLES RETAINE D WOULD BE WITHIN THE RANGE OF +/- 5% OF THE ASSESSEES NET MARGIN. THERE FORE, THE OTHER GROUNDS RAISED IN THE APPEAL ARE NOT ADJUDICATED AT THIS STAGE. THE LEARNED COUNSEL FOR THE ASSESSEE HAS HOWEVER SOUGHT LIBERT Y TO URGE THE SAID GROUNDS IN ANY FUTURE PROCEEDING, APPELLATE OR OTHE RWISE, AND IN THESE PROCEEDINGS AT A FUTURE POINT IN TIME. THE PRAYER SOUGHT BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD IS ACCEPTED . 24. GROUND NO.8 RAISED BY THE ASSESSEE IN ITS APPEA L IS WITH REGARD TO METHOD OF COMPUTATION OF DEDUCTION U/S.10A OF THE A CT. THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/S.10A OF THE ACT. WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE AO EXCLUDED FORE IGN TRAVEL EXPENSES OF IT(TP)A NO.1224/BANG/2011 PAGE 39 OF 40 RS.74,21,703/- AND TELECOMMUNICATION EXPENSES OF RS .1,00,65,102 FROM EXPORT TURNOVER ON THE GROUND THAT THESE EXPENSES W ERE INCURRED FOR RENDERING TRAINING OF PERSONNEL AND TECHNICAL SERVI CES OUTSIDE INDIA AND FOR EXPORT COMPUTER SOFTWARE, RESPECTIVELY AND THEREFOR E TO BE EXCLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDE R SECTION 10A. THE ASSESSEE PRAYED THAT THE AFORESAID EXPENDITURE ARE NOT OF THE NATURE SET OUT IN EXPLANATION 2(IV) TO SEC.10A OF THE ACT WHIC H DEFINES EXPORT TURNOVER. THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER THAT EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER AND IN THIS REGARD HAS PLAC ED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) WHEREIN THE HONBLE COURT HELD THAT WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER SHOUL D ALSO BE EXCLUDED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTIN G DEDUCTION U/S.10A OF THE ACT. THE MAIN PRAYER AS WELL AS THE ALTERNATE PRAYER WAS REJECTED BY THE AO AND BY THE DRP. 25. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN GROUND NO.8 RAISED BY THE REVE NUE. TAKING INTO CONSIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT THE ALTERNATE PRAYER SOUGHT FOR BY THE ASSESSEE SHOULD BE ALLOWED. IN VIEW OF THE ACCEPTANCE OF TH E ALTERNATE PRAYER NO IT(TP)A NO.1224/BANG/2011 PAGE 40 OF 40 ADJUDICATION IS GIVEN ON THE QUESTION WHETHER THE S UMS IN QUESTION SHOULD BE EXCLUDED FROM THE EXPORT TURNOVER. 26. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PAR TLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 11 TH DAY OF , 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER ENCL: ANNEXURE-I BANGALORE, DATED, THE 11 TH JUNE, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.