M/s Meritor LVS India (P) Ltd., Bangalore V. ACIT, Bangalore

ITA 1231/BANG/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95292 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-10-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 09-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: AMIT B JAIN
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Unabsorbed depreciation; Revenue expenditure
• Section: 133(6)

Judgement Text

IT(TP)A.1231/BANG/2011 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI. VIJAYPAL RAO, JUDICIAL MEMBER I.T(TP).A NO.1231/BANG/2011 (ASSESSMENT YEAR : 2007-08) M/S. MERITOR LVS INDIA(P) LTD, NO.69, A1- AMEEN TOWERS, 3 RD FLOOR, HOSUR ROAD, NEAR LALBAGH MAIN ROAD, BANGALORE 560 027 .. APP ELLANT PAN : AABCM9623K V. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE -12(1), BANGALORE .. RESPONDENT ASSESSEE BY : SHRI. AMIT B. JAIN, CA REVENUE BY : SHRI. J. P. S. BINDRA, CIT - DR HEARD ON : 12.10.2015 PRONOUNCED ON : 16.10.2015 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY ASSESSEE DIRECTED AGAINST AN ASSESSMENT ORDER PASSED U/S.143(3) R.W.S.144C OF THE INCOME-TAX ACT, 1961 (THE ACT IN SHORT), IT HAS FILED A SET OF CONCISE GROUNDS IN LI EU OF THE ORIGINAL GROUNDS FILED. IT(TP)A.1231/BANG/2011 PAGE - 2 02. LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBM ITTED THAT OF THE CONCISE GROUNDS HE WAS PRESSING ONLY THE GROUND NO. 3 RELATING TO NON-GRANT OF ADJUSTMENT FOR RISK AND EXCLUSION OF CERTAIN COM PARABLES, VIS-A-VIS THE TP RELATED ISSUES. AS PER THE LD. AR, THE CORPORAT E TAX GROUNDS RELATED TO EXCLUSION FROM EXPORT TURNOVER AND TOTAL TURNOVER O F TRAVELLING EXPENDITURE AND TELECOMMUNICATION EXPENDITURE INCURRED IN FOREI GN CURRENCY FOR COMPUTING THE DEDUCTION U/S.10A OF THE ACT AND FOR CONSIDERING THE CLAIM OF DEDUCTION U/S.10A OF THE ACT, INDEPENDENTLY WITH OUT SETTING OFF BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION OF NON-E LIGIBLE UNIT. AS PER THE LD. AR THE CORPORATE TAX GROUNDS WERE COVERED B Y THE JUDGMENTS OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V. TATA ELXSI LTD [349 ITR 98] AND CIT (LTU) V. YOKOGAWA INDIA LTD [341 IT R 385]. 03. IN ACCORDANCE WITH THE SUBMISSIONS OF THE LD. A R WE ARE CONFINING OURSELVES TO GROUNDS OF TRANSFER PRICING WHICH ARE RELATED TO RISK ADJUSTMENT AND COMPARABLES SELECTED BY THE TPO. PROFILE OF TH E ASSESSEE, AS IT APPEARS IN THE ORDER OF TPO, DT.28.10.2010, READS AS UNDER : 2. TAXPAYER'S PROFILE M/S MENTOR LVS INDIA PVT LTD (MLIPL) HEREIN AFTER CALLED THE COMPANY WAS INCORPORATED IN 1085 THE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF M/S. ME NTOR LVS AUSTRALIA PTY LTD. THE ULTIMATE HOLDING COMPANY IS M / S. ARVIN MENTOR INC USA. THE ULTIMATE HOLDING COMPANY M/S, ARVIN MENTOR INC USA IS ENGAGED IN THE MANUFACTURE OF AUTO IT(TP)A.1231/BANG/2011 PAGE - 3 MOTIVE COMPONENTS AND SYSTEMS. THE SAID COMPANY IS CONSISTENTLY RANKED AS A LEADING MANUFAC TURER OF AUTO MOTIVE EXHAUST SYSTEMS. M/S MLIPL IS IN THE BUSINESS OF COMPUTER RADIATED DESIGNING OF LIGHT VEHICLE SYSTEMS. 04. ASSESSEES OPERATING INCOME ENTIRELY CAME OUT O F INTERNATIONAL TRANSACTIONS AND ITS FINANCIAL RESULTS AS WORKED OU T BY THE TPO READ AS UNDER : 05. FINAL TP ADJUSTMENT RECOMMENDED BY THE TPO WAS ONLY ON THE SOFTWARE DEVELOPMENT SERVICES SEGMENT AND THEREFORE THE ISSUES RAISED BEFORE US ARE ALSO CONFINED TO THE SAID SEGMENT. I N ITS TP STUDY ASSESSEE HAD CONSIDERED THE SEVEN COMPARABLES FOR ANALYSING THE PRICING OF ITS INTERNATIONAL TRANSACTIONS RELATING TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. MARGIN OF THESE COMPARABLES AND ITS COMPA RABILITY WITH ASSESSEES OWN WORK-OUT OF ITS PLI READ AS UNDER : IT(TP)A.1231/BANG/2011 PAGE - 4 COMPARABLES : ASSESSEE : 06. AS PER THE ASSESSEE, ITS NET MARGIN WAS WELL WI THIN THE + / - 5% OF THE AVERAGE PLI OF THE COMPARABLES AND THEREFORE TH ERE WAS NO REQUIREMENT FOR ANY ADJUSTMENT ON THE PRICING OF THE INTERNATIO NAL TRANSACTIONS IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. ASSESSEE HA D FOLLOWED THE TNM METHOD FOR ITS TP STUDY. HOWEVER, TPO DID NOT ACCE PT THE COMPARABLES SELECTED BY THE ASSESSEE BUT FOR R. S. SOFTWARE (IN DIA) LTD AND IGATE GLOBAL SOLUTIONS. HE REJECTED OTHERS CITING VARIOUS REASO NS. THERE AFTER HE MADE HIS OWN ANALYSIS AND ARRIVED AT A LIST OF 26 COMPAR ABLES WHICH ACCORDING TO HIM WAS FUNCTIONALLY CLOSE TO THAT OF THE ASSESSEE. THE LIST OF THE COMPARABLES SELECTED BY THE TPO AND THEIR AVERAGE P LI WERE AS UNDER : IT(TP)A.1231/BANG/2011 PAGE - 5 SL NO NAME OF THE COMPANY SALES (RS. CR.) OPERATING PROFIT TO TOTAL COST 1 ACCEL TRANSMATIC LTD (SEG) 9.68 21.11% 2 AVANI CIMCON TECHNOLOGIES LTD (SEG) 3.55 52.59% 3 CELESTIAL LABS LTD 14.13 58.35% 4 DATAMATICS LTD 54.51 1.38% 5 E-ZEST SOLUTIONS LTD 6.26 36.12% 6 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 848.66 25.31% 7 GEOMETRIC LTD (SEG) 158.38 10.71% 8 HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD 178.38 36.63% 9 IGATE GLOBAL SOLUTIONS LTD 747.27 7.49% 10 INFOSYS TECHNOLOGIES 13149 40.30% 11 ISHIR INFOTECH LTD 7.42 30.12% 12 KALS INFORMATION SYSTEMS LTD (SEG) 2.00 30.55% 13 LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD 45.39 15.75% 14 LUCID SOFTWARE LTD 1.70 19.37% 15 MEDIASOFT SOLUTIONS LTD 1.85 3.6% 16 MEGASOFT LTD (SEG) 139.33 60.23% 17 MINDTREE LTD 590.35 16.90% 18 PERSISTENT SYSTEMS LTD 293.75 24.52% 19 QUINTEGRA SOLUTIONS LTD 62.72 12.56% 20 R S SOFTWARE (INDIA) LTD 101.04 13.47% 21 R SYSTEMS INTERNATIONAL LTD (SEG) 112.01 15.07% 22 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG) 343.57 22.17% 23 SIP TECHNOLOGIES & EXPORTS LTD 3.80 13.90% 24 TATA ELXSI LTD (SEG) 262.58 26.51% 25 THIRDWARE SOLUTIONS LTD 36.08 25.12% 26 WIPRO LTD (SEG) 9616.09 33.65% AVERAGE PLI 25.14% 07. THOUGH THE ASSESSEE ARGUED FOR A RISK ADJUSTMEN T THIS WAS NOT ACCEPTED BY THE TPO. NEVERTHELESS HE MADE A NEGATI VE WORKING CAPITAL IT(TP)A.1231/BANG/2011 PAGE - 6 ADJUSTMENT OF -2.77% ON THE AVERAGE PLI OF 25.14 % OF THE COMPARABLES AND ARRIVED AT AN ADJUSTED MEAN MARGIN OF 22.87 %. HE THEREAFTER WORKED OUT THE SHORT-FALL ON ACCOUNT OF DEFICIT IN THE INT ERNATIONAL TRANSACTIONS RELATING TO THE SOFTWARE DEVELOPMENT SERVICES SEGME NT AS UNDER : 08. WHEN A PROPOSAL ON THE ABOVE LINES SUGGESTING A DDITION OF RS.2,81,86,754/- WAS MADE TO THE ASSESSEE, IT CHOSE TO MOVE THE DRP. THOUGH THE ASSESSEE RAISED A NUMBER OF GROUNDS, ASS AILING THE FUNCTIONALITY OF THE COMPARABLES SELECTED, THE DRP CHOSE TO GO AL ONG WITH THE DIRECTIONS OF THE TPO. IT CONFIRMED THE ADJUSTMENT OF RS. 2,8 1,86,754/- RECOMMENDED BY THE TPO. ACCORDINGLY ASSESSMENT WAS COMPLETED. 09. BEFORE US, LD. AR SUBMITTED THAT OUT OF THE 26 COMPARABLES SELECTED BY THE TPO HE WAS SEEKING EXCLUSION OF THE FOLLOWIN G COMPANIES : SL NO COMPARABLES MARGINS AS PER TP STUDY REPORT IT(TP)A.1231/BANG/2011 PAGE - 7 FOR AY 2007-08 1 ACCEL TRANSMATIC LTD (SEG) 21.11% 2 AVANI CIMCON TECHNOLOGIES LTD (SEG) 52.59% 3 CELESTIAL LABS LTD 58.35% 4 E-ZEST SOLUTIONS LTD 36.12% 5 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 25.31% 6 HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD 36.63% 7 INFOSYS TECHNOLOGIES LTD 40.30% 8 ISHIR INFOTECH LTD 30.12% 9 KALS INFORMATION SYSTEMS LTD (SEG) 30.55% 10 LUCID SOFTWARE LTD 19.37% 11 MEGASOFT SOLUTIONS LTD (SEG) 60.23% 12 PERSISTENT SYSTEMS LTD 24.52% 13 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG) 22.17% 14 TATA ELXSI (SEG 26.51% 15 THIRDWARE SOLUTIONS LTD 25.12% 16 WIPRO LTD (SEG) 33.65% 10. ACCORDING TO HIM NONE OF THE ABOVE COMPARAB LES SELECTED BY THE TPO WERE PART OF LIST OF THE ASSESSEE. THEY WERE A LL FUNCTIONALLY DIFFERENT AND NOT COMPARABLE TO A SOFTWARE DEVELOPMENT SERVIC ES PROVIDER. LD. AR PLACED RELIANCE ON THE DECISION OF COORDINATE BENCH IN THE CASE OF HEWLETT- PACKARD (INDIA) GLOBALSOFT P. LTD, V. DCIT [ IT(TP) A1031/BANG/2011, DT.23/09/2015]. VIS-A-VIS THE ISSUE OF RISK ADJU STMENT, LD. AR SUBMITTED THAT ITS RISK ANALYSIS AND WORK OUT OF RISK ADJUSTM ENT WAS UNFAIRLY REJECTED BY THE TPO. AS PER THE LD. AR, MARKETING EXPENDITU RE WAS TAKEN AS THE BENCH MARK FOR DECIDING ON THE MARKET RISK, AND REL ATION OF THE PROFITABILITY TO THE MARKET RISK BY THE TPO. LD. AR SUBMITTED TH AT ASSESSEE WAS NOT IT(TP)A.1231/BANG/2011 PAGE - 8 BEARING A SIGNIFICANT MARKET RISK SINCE ITS SERVICE S WERE ONLY TO THE AE. ACCORDING TO HIM, THE SAME SITUATION WAS NOT PRESEN T IN SO FAR AS THE COMPARABLES SELECTED BY THE TPO IS CONCERNED. HENC E IT WAS NECESSARY THAT A PROPER ADJUSTMENT WAS MADE FOR THE RISK ELEM ENT FOR A MEANINGFUL COMPARISON. 11. PER CONTRA, LD. DR SUBMITTED THAT HEWLETT- PACKARD (INDIA) GLOBALSOFT P. LTD, (SUPRA) (HPIGPL IN SHORT), OPE RATED IN A DIFFERENT FIELD FROM THAT OF THE ASSESSEE AND HENCE THE DECISION OF THE TRIBUNAL IN THE CASE OF THE SAID COMPANY COULD NOT BE CONSIDERED AS A PR ECEDENT. IN SO FAR AS THE RISK ADJUSTMENT WAS CONCERNED, LD. DR SUBMITTED THAT TPO HAD MADE A DETAILED ANALYSIS OF THE RISK ADJUSTMENT SOUGHT BY THE ASSESSEE AND CAME TO A CONCLUSION THAT THE MARKET RISK TO WHICH THE ASSE SSEE WAS EXPOSED AND THE MARKET RISK TO WHICH THE SELECTED COMPANIES WERE EX POSED WERE MORE OR LESS IN THE SAME BRACKET. ACCORDING TO HIM THE RIS K ELEMENT STOOD ADJUSTED IN THE PROFITS OF THE COMPARABLES. 12. WE HAVE PERUSED THE ORDERS AND HEARD THE RI VAL CONTENTIONS. ASSESSEE IS SEEKING EXCLUSION OF 16 COMPARABLES OUT OF 26 COMPANIES SELECTED BY THE TPO. FOR THIS IT HAS PLACED RELIAN CE ON THE DECISION OF COORDINATE BENCH IN THE CASE OF HEWLETT- PACKARD (I NDIA) GLOBALSOFT P. LTD, IT(TP)A.1231/BANG/2011 PAGE - 9 (SUPRA). WE FIND THAT ISSUES BEFORE THIS TRIBUNA L IN THE CASE OF HEWLETT- PACKARD (INDIA) GLOBALSOFT P. LTD, (SUPRA) WAS ALS O WITH REGARD TO SOFTWARE DEVELOPMENT SERVICES SEGMENT, THAT TOO FOR THE VERY SAME ASSESSMENT YEAR. SERVICES RENDERED BY BOTH THE ASSESSEE AS WELL AS H PIGPL FELL WITHIN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT, AND THEREFOR E IN OUR OPINION THE DECISION OF THE COORDINATE BENCH IN HEWLETT- PACKAR D (INDIA) GLOBALSOFT P. LTD, SUPRA) CAN BE TAKEN AS A GOOD PRECEDENT. FIN DINGS OF THE TRIBUNAL IN THE CASE HEWLETT- PACKARD (INDIA) GLOBALSOFT P. LTD , (SUPRA) IN SO FAR AS THE COMPARABLES SOUGHT TO BE EXCLUDED BY THE ASSESSEE W ERE AS UNDER : 1) CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVELOPMENT COMP ANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- 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. 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 DEVELOP MENT OF NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPEN DITURE AND THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARL Y 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 (PAG E 30 OF PB-II). THIS AMOUNTS TO NEARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. IT(TP)A.1231/BANG/2011 PAGE - 10 IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SOFT WARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D ACTIVITIES IS BAD IN LAW. 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISI ON 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 REGARDING THIS COMPA NY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAG E-389 OF THE PAPER BOOK WHICH IS AN EXTRACT FROM THE DIRECTORS R EPORT WHICH READS AS FOLLOWS: THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TOOL CELSUITE TO DRUG DISCOVERY IN, FINDING THE LEAD M OLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDE R THE COPY IF SIC (OF) RIGHT/PATENT ACT. (APPRISED AND FUNDED BY DEPA RTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXP ERTISE (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 COLL ABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY, OSMANIA UNIVERSITY, HYD ERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, THE COMPANY HAS SIGN ED THE TECHNOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY R EPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIA LLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OV ERSEAS. THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACIL ITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FACILITY WOULD ALSO INCLUD E THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVIT IES TO DEVELOP NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTE RESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILI TY WILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA PRADESH. ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALS O IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AND SHOULD BE C ONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY THE LEARNED COU NSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELATION TO A SOFTWAR E DISCOVERY OF NEW DRUGS. MOREOVER THE COMPANY ALSO IS OWNER OF TH E IPR. THERE IS HOWEVER A REFERENCE TO DEVELOPMENT OF A MO LECULE TO IT(TP)A.1231/BANG/2011 PAGE - 11 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 CONSIDE RED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJ USTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCESS OF M AKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE AB OVE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARC H IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT TH IS COMPANY IS OWNER OF IPR, IT HAS SOFTWARE FOR DISCOVERY OF NEW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCER. IN THE ULTIMATE ANALYSIS, THE ITAT DID NOT CONSIDER THIS COMPANY AS A COMPARABLE IN CL INICAL TRIAL SEGMENT, FOR THE REASON THAT THIS COMPANY HAS DIVER SE 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 REJECTED AS A COMPARABLE BEING FU NCTIONALLY DIFFERENT. 45.FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANSP IRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY WAS C LASSIFIED 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/PROWESS DATABASE AS WELL AS IN THE ANNUAL REPORT OF THIS COMPANY. THE TPO HAS RELIED ON THE RESPONSE FROM THIS COMPANY TO A NOTICE U/S.133(6) OF THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PROVIDING SOFTWA RE DEVELOPMENT SERVICES. THE ASSESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREAT THIS AS A COMPARABLE HAS POINTED OUT THAT THIS COMPANY P ROVIDES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOINFORMATICS SERVICE S AND THAT THE SEGMENTAL DATA FOR EACH ACTIVITY IS NOT AVAILABLE A ND THEREFORE THIS COMPANY SHOULD NOT BE TREATED AS COMPARABLE. BESID ES THE ABOVE, THE ASSESSEE HAS POINT OUT TO SEVERAL REFERENCES IN THE ANNUAL REPORT FOR 31.3.2007 HIGHLIGHTING THE FACT THAT THIS COMPANY W AS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PROVIDES RELATED SOFTWAR E DEVELOPMENT SERVICES. THE TPO CALLED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPANY. THE TPO ALSO CALLED FOR DESCRIPTION OF SOFTWARE IT(TP)A.1231/BANG/2011 PAGE - 12 DEVELOPMENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DATED 29.3.2010 HAS GIVEN DETA ILS OF EMPLOYEES WORKING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHETHER ANY SEGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OTHER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTW ARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISS UED DRAFT RED HERRING PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH. THE TPO WA NTED TO KNOW AS TO WHETHER THE PRIMARY BUSINESS OF THIS COMPANY IS SOF TWARE DEVELOPMENT SERVICES AS INDICATED IN THE ANNUAL REP ORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS A ND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFERENCE TO AN Y REPLY BY CELESTIAL LABS TO THE ABOVE CLARIFICATION OF THE TPO. THE T PO WITHOUT ANY BASIS HAS HOWEVER CONCLUDED THAT THE BUSINESS MENTI ONED IN THE 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 BUSINESS OPERATIONS OF THE COMPA NY DURING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISSIONS MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUF ACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THERE IS NO CLEAR BASI S ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSIN ESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY OUGHT NOT TO HAVE BEEN C ONSIDERED AS COMPARABLE. 2) 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 INCLUSIO N OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS FUNCTIONA LLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED THE OBJECTIONS R AISED BY THE ASSESSEE ON THE GROUND THAT AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND SATISF IES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE IT(TP)A.1231/BANG/2011 PAGE - 13 GROUND THAT IT IS FUNCTIONALLY DIFFERENT TO THE ASS ESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E-BUSINESS CONSULTING SERVICES, CONSIS TING OF WEB STRATEGY SERVICES, I T DESIGN SERVICES AND IN TECHN OLOGY CONSULTING SERVICES INCLUDING PRODUCT DEVELOPMENT CONSULTING S ERVICES. THESE SERVICES, THE LEARNED AUTHORISED REPRESENTATIVE CON TENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTS OURCING (KPO) SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA IN ITS ANNUAL REPORT. THE L EARNED AUTHORISED REPRESENTATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIVE INFORMATION O N THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DE TAILS AVAILABLE ON THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WH ILE EVALUATING THE COMPANYS FUNCTIONAL PROFILE. IT IS ALSO SUBMIT TED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANI ES RENDERING KPO SERVICES OUGHT NOT TO BE CONSIDERED AS COMPARAB LE TO SOFTWARE DEVELOPMENT COMPANIES AND RELIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961(HYD)/2011 DT.23.11.2012 AND PRAYED T HAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLUTIO NS LTD., OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPAR ABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLYCONSIDERED THE MATERIAL ON RECORD. IT IS S EEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARBALES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMP ANY IN ITS REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT. IT APPE ARS THAT THE TPO HAS NOT EXAMINED THE SERVICES RENDERED BY THE COMPANY T O GIVE A FINDING WHETHER THE SERVICES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSE SSEE. FROM THE DETAILS ON RECORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY I.E. E-ZEST SOLU TIONS LTD., IS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVI CES. IT HAS BEEN HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN T HE CASE OF CAPITAL I- Q INFORMATIONSYSTEMS (INDIA) (P) LTD. SUPRA) THAT K PO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT IT(TP)A.1231/BANG/2011 PAGE - 14 COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E-ZEST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN T HE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED. 3) 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 BRAN D ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OB JECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THI S CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPA NY 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 GRO WTH. IN 2008, THIS COMPANY GENERATED OVER 102 INVENTION DISCLOSURES AN D FILED AN AGGREGATE 10 PATENTS IN INDIA AND THE USA. TILL DA TE THIS COMPANY HAS FILED AN AGGREGATE OF 119 PATENT APPLICATIONS (PEND ING) IN INDIA AND USA OUT OF WHICH 2 HAVE BEEN GRANTED IN THE US. (II) THIS COMPANY HAS SUBSTANTIAL REVENUES FROM SO FTWARE PRODUCTS AND THE BREAK-UP OF THE SOFTWARE PRODUCT REVENUES I S NOT AVAILABLE. (III) THIS COMPANY HAS INCURRED HUGE RESEARCH AND D EVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATELY RS.200 CR ORES. (IV) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWAR E PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTE MS. (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLO WING JUDICIAL DECISIONS :- (A) ITAT, DELHI BENCH DECISION IN THE CASE OF AGNIT Y INDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010 ) AND (B) TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (I TA NO.1054/BANG/2011) IT(TP)A.1231/BANG/2011 PAGE - 15 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF O PERATIONS AND THE OPERATING MARGINS OF THIS COMPANY HAVE NOT BEEN EXT RAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATI VE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FI ND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABL ISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT F ROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERE D 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 INFOSYS TECHNOLOGIES LTD IS N OT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE B REAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERE D ACCORDINGLY. 4) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONT ENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED I N PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDI TURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTW ARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST F AILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DEC ISION 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 DIFF ERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOL LOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS IT(TP)A.1231/BANG/2011 PAGE - 16 OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIO NALLY 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 COMPARABL E 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 ENGA GED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INT O DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE 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 HA S DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HI GHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. 5) & 6) M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWA RE LTD : 20. AS FAR AS COMPARABLE COMPANIES LISTED AT SL. NO.11 & 14 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWARE LTD., IS CONCERNED , THIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.L TD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE A FORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVI CES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CAS E OF FIRST IT(TP)A.1231/BANG/2011 PAGE - 17 ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VER Y SAME 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SER VICES PVT.LTD.(SUPRA). THE FOLLOWING WERE THE RELEVANT O BSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.( SUPRA): 22. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE BASIS OF THE FINDING OF THIS TRIBUNAL IN THE CASE O F MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. DT 22.2.201 3, WHEREIN AT PAGES 17 AND 22 OF ITS ORDER THE DISTINCTIONS AS TO WHY THESE COMPANIES SHOULD BE EXCLUDED ARE BROUGHT OUT. HE S UBMITTED THAT THE FACTS OF THE CASE BEFORE US ARE SIMILAR AND, THEREF ORE, THE SAID DECISION IS APPLICABLE 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 CAREF UL PERUSAL OF THE MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN TH E CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. (CITED SUPRA) HAS TAKEN A NOTE OF DISSIMILARITIES BETWEEN THE ASSESSEE THER EIN AND LUCID SOFTWARE LTD. AS OBSERVED THEREIN LUCID SOFTWARE L TD. COMPANY IS ALSO INVOLVED IN THE DEVELOPMENT OF SOFTWARE AS COM PARED TO THE ASSESSEE, WHICH IS ONLY INTO SOFTWARE SERVICES. SI MILARLY, AS REGARDS ISHIR INFOTECH LTD., THE TRIBUNAL HAS CONSIDERED TH E DECISION OF THE TRIBUNAL IN THE CASE OF 24/7 CO. PVT. LTD TO HOLD T HAT ISHIR INFOTECH IS ALSO OUT-SOURCING ITS WORK AND, THEREFORE, HAS NOT SATISFIED 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 EXCLUDED. 21. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL 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. 7) WIPRO LIMITED 13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES OR SEVERAL GROUN DS LIKE FUNCTIONAL IT(TP)A.1231/BANG/2011 PAGE - 18 DIS-SIMILARITY, BRAND VALUE, SIZE, ETC. THE TPO, H OWEVER, BRUSHED ASIDE THE OBJECTIONS OF THE ASSESSEE AND INCLUDED T HIS COMPANY IN THE SET OF COMPARABLES. 13.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE FOR SEV ERAL REASONS, WHICH ARE AS UNDER : (I) THIS COMPANY OWNS SIGNIFICANT INTANGIBLES IN TH E NATURE OF CUSTOMER RELATED INTANGIBLES AND TECHNOLOGY RELATED INTANGIBLES AND QUOTED EXTRACTS FROM THE ANNUAL REPORT OF THIS COMP ANY IN THE SUBMISSIONS MADE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCIA L STATEMENTS FOR COMPARABILITY PURPOSES AND FOR COMPUTING THE MARGIN S, WHICH CONTRADICTS THE TPOS OWN FILTER OF REJECTING COMP ANIES WITH CONSOLIDATED FINANCIAL STATEMENTS. 13.3. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE SET OF COMPARABLES. 13.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MERIT I N THE CONTENTIONS OF THE ASSESSEE FOR EXCLUSION OF THIS COMPANY FROM THE SET OF COMPARABLES. IT IS SEEN THAT THIS COMPANY IS ENGAG ED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMENT SERVICES. THER E IS NO INFORMATION ON THE SEGMENTAL BIFURCATION OF REVENUE FROM SALE OF PRODUCT AND SOFTWARE SERVICES. THE TPO APPEARS TO HAVE ADOPTED THIS COMPANY AS A COMPARABLE WITHOUT DEMONSTRATING HOW T HE COMPANY SATISFIES THE SOFTWARE DEVELOPMENT SALES 75% O F THE TOTAL REVENUE FILTER ADOPTED BY HIM. ANOTHER MAJOR FLAW IN THE C OMPARABILITY ANALYSIS CARRIED OUT BY THE TPO IS THAT HE ADOPTED COMPARISON OF THE CONSOLIDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NOT AN APPROPR IATE COMPARISON. 13.4.2 WE ALSO FIND THAT THIS COMPANY OWNS INTELLE CTUAL PROPERTY IN THE FORM OF REGISTERED PATENTS AND SEVE RAL PENDING APPLICATIONS FOR GRANT OF PATENTS. IN THIS REGARD, THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM P VT. LTD. (ITA NO.227/BANG/2010) HAS HELD THAT A COMPANY OWNING IN TANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PR OVIDER WHO DOES NOT OWN ANY SUCH INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CA SE ON HAND DOES NOT IT(TP)A.1231/BANG/2011 PAGE - 19 OWN ANY INTANGIBLES, FOLLOWING THE AFORESAID DECIS ION OF THE CO- ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOMER.C OM PVT. LTD. (SUPRA), WE HOLD THAT THIS COMPANY CANNOT BE CONSID ERED AS A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO OMIT THIS COMPANY FROM THE SET OF CO MPARABLE COMPANIES IN THE CASE ON HAND FOR THE YEAR UNDER CO NSIDERATION. 8) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOPMENT SER VICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECI SION 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 OBSERVATIONS OF DRP AS EXT RACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE S UBMITTED 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 MAN UFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VEN DING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OU TSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYSTEM MANAG EMENT, 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 ENGAG ED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICE S FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT TH IS COMPANY WAS IT(TP)A.1231/BANG/2011 PAGE - 20 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 MORE THAN THE P ERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARABILITY PUR POSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. TH E LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID COMPANY SHO ULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TR IBUNAL, IN THE SAID DECISION REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WAS NOT COMPARABLE IN TH E CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNSEL FOR THE A SSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS CO MPARABLES. 20. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL IN SIMILAR SET OF FACTS, THESE COMPANIES ARE DIRECTED TO BE EXCL UDED FROM THE LIST OF COMPARABLES. 9) AVANI CIMCON TECHNOLOGIES LTD. 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FR OM THE ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN THE COMPANYS WEBSITE, WHICH REVEALS THAT 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 AS SESSEE. IT WAS FURTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIB UNAL TO THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/2011 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTW ARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE WHO WAS IT(TP)A.1231/BANG/2011 PAGE - 21 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 OPE RATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEE N PROVIDED SO AS TO SEE WHETHER THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESS EE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNA BLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PARTY. LEARNE D CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETA ILS OF PERCENTAGE OF EXPORT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERA TION FOR COMPARABILITY ANALYSIS. IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS COM PANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS . THE FOLLOWING FIGURES WERE PLACED BEFORE US:- PARTICULARS FYS 05-06 06-07 07-08 08-09 OPERATING REVENUE 21761611 35477523 29342809 280398 51 OPERATING EXPNS. 16417661 23249646 23359186 3110894 9 OPERATING PROFIT 5343950 12227877 5983623 (3069098 ) OPERATING MARGIN 32.55% 52.59% 25.62% - 9.87% 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UN USUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06-07. THE OPERAT ING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXT RAORDINARY YEAR FOR THIS COMPANY. EVEN THE GROWTH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR AS PER NASSCOM WAS 32%. THE GROWTH RATE OF TH IS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW OF THE AB OVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJECTED 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 REASONS GIVE N BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECISION OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOGIES IT(TP)A.1231/BANG/2011 PAGE - 22 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. 10) FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) : 26. NOW TAKING UP THE QUESTION OF EXCLUSION OF FLE XTRONICS SOFTWARE SYSTEMS LTD (SEG), IT IS TRUE THAT THE DEC ISION OF MOTOROLA SOLUTIONS (INDIA) P. LTD (SUPRA) ALSO WAS FOR THE V ERY SAME YEAR AND ALSO ON SOFTWARE DEVELOPMENT SERVICES SECTOR. THIS TRIBUNAL HELD AS UNDER : 97.2 FOR A COMPANY TO BE INCLUDED IN THE LIST OF C OMPARABLES, IT IS NECESSARY THAT CREDIBLE INFORMATION IS AVAILABLE AB OUT THE COMPANY. UNLESS THIS BASIC REQUIREMENT IS FULFILLED, THE COM PANY CANNOT BE TAKEN AS A COMPARABLE. IT IS TRUE THAT LD. TPO IS E NTITLED TO OBTAIN INFORMATION US/ 133(6), THE OBJECT OF WHICH IS PRIM ARILY ONLY TO SUPPLEMENT THE INFORMATION ALREADY AVAILABLE ON REC ORD, BUT NOT, AS RIGHTLY SUBMITTED BY LD. COUNSEL FOR THE ASSESSEE, TO REPLACE THE INFORMATION. IF THERE IS A COMPLETE CONTRADICTION B ETWEEN THE INFORMATION OBTAINED U/S 133(6) AND ANNUAL REPORT T HEN THE SAID INFORMATION CANNOT BE SUBSTITUTED FOR THE INFORMATI ON CONTAINED IN ANNUAL REPORT. WE, THEREFORE, ARE IN ITA NO. 5637/D /2011 149 AGREEMENT WITH LD. COUNSEL FOR THE ASSESSEE THAT TH IS COMPANY CANNOT BE INCLUDED AS A COMPARABLE IN THE SET OF COMPARABL ES SELECTED BY LD. TPO ON ACCOUNT OF CLEAR CONTRADICTION BETWEEN CONTE NTS OF ANNUAL REPORT AND INFORMATION OBTAINED U/S 133(6). 27. RULE 10D(3) SPECIFIES THE INFORMATION AND DOCUM ENTS THAT ARE TO BE MAINTAINED BY A PERSON WHO IS ENTERING INTO INTE RNATIONAL TRANSACTIONS. THESE ARE OFFICIAL PUBLICATIONS, PU BLISHED ACCOUNTS OR THOSE WHICH ARE IN PUBLIC DOMAIN EXCEPT FOR AGREEME NTS AND CONTRACTS TO WHICH ASSESSEE IS PRIVY. ONCE THE ANNUAL REPORT OF A COMPANY IS FOR A YEAR DIFFERENT FROM THE FINANCIAL YEAR ENDING 31 ST MARCH, THEN WITHOUT DOUBT, IT WILL CEASE TO BE A GOOD COMPARAB LE, UNLESS THE INFORMATION RECEIVED IN PURSUANCE TO A NOTICE U/S.1 33(6) OF THE ACT FROM SUCH COMPANY, IS RECONCILED WITH THE FIGURES A VAILABLE IN SUCH ANNUAL REPORT. 28. IN THE CASE OF FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), NO DOUBT THE ANNUAL REPORT WAS FOR THE YEAR ENDING 31.03.200 7. HOWEVER IT WAS IT(TP)A.1231/BANG/2011 PAGE - 23 ONLY FOR A NINE MONTHS PERIOD. NO RECONCILIATION W AS ATTEMPTED BY THE LOWER AUTHORITIES BETWEEN THE FIGURES GIVEN IN SUCH ANNUAL REPORT WITH THE FIGURES WHICH WERE MADE AVAILABLE BY THE SAID C OMPANY TO THE TPO PURSUANT TO NOTICE ISSUED TO THEM U/S.133(6) OF THE ACT. NO DOUBT AT PAGE 123 OF TP ORDER, TPO HAS STATED THAT THE SOFTWARE DEVELOPMENT SERVICE REVENUES WERE MORE THAN 75% BAS ED ON THE FOLLOWING FIGURES : BUT HOW THIS SEGMENTATION WAS DONE BY THE TPO AND T HE RECONCILIATION OF THE SAID SEGMENTATION WITH THE AN NUAL REPORT OF THE ASSESSEE WAS NEVER ATTEMPTED OR DONE. IN SUCH A SI TUATION WE ARE OF THE OPINION THAT FLEXTRONICS SOFTWARE SOLUTIONS LTD (SEG) COULD NOT BE CONSIDERED AS A PROPER COMPARABLE. WE DIRECT EX CLUSION THEREOF. 11) HELIOS & MATHESON INFORMATION TECHNOLOGY LTD : 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 A SSAIL THE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE LIST OF COM PARABLES IS TO BE EFFECT THAT THEY ARE FUNCTIONALLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM AND SUBSTANCE, THE PL EA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CONCERNS ARE EN GAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES UNDERTAKEN BY THE ASSES SEE IN ITS IT- SERVICES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORD ER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYST EMS LTD., IS TO THE EFFECT THAT THE SAID CONCERNS APPLICATION SOFT WARE SEGMENT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. THE SAID CONCER N IS ENGAGED IN TWO SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AN D TRAINING. AS IT(TP)A.1231/BANG/2011 PAGE - 24 PER THE TPO, THE APPLICATION SOFTWARE SEGMENT IS FU NCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS E NGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASSESSEE IS THAT A PERUS AL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F.Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE BUSI NESS OF SALE OF SOFTWARE PRODUCTS AND SOFTWARE SERVICES. THE ASSESS EE POINTED OUT THIS TO THE TPO IN ITS WRITTEN SUBMISSIONS, COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 420.3 TO 420.4. THE ASSESSEE FURTHER POINTED OUT THAT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTW ARE SERVICES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPL ICATION SOFTWARE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COM PARABILITY WITH THE ASSESSEES IT-SERVICES SEGMENT. THE TPO HOWEVER , NOTICED THAT THOUGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODUCTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PRODUCTS AS THERE WERE NO COST OF PURCHAS ES DEBITED IN THE PROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED THAT T HE QUANTUM OF REVENUE FROM SALE OF PRODUCTS WAS NOT AVAILABLE AS PER THE FINANCIAL STATEMENTS OF THE SAID CONCERN, BUT AS THE BASIC FU NCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEES SEGMENT O F IT-SERVICES. 18. BEFORE US, APART FROM REITERATING THE POINTS RA ISED BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIATELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CON CERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALL Y INCOMPARABLE. FOR THE SAID PURPOSE, OUR REFERENCE HAS BEEN INVITE D TO PAGES 421 TO 542 OF THE PAPER BOOK, WHICH IS THE COPY OF THE TRA NSFER PRICING STUDY UNDERTAKEN BY 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 IN FORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN AC CEPTED BY THE TPO IN THE EARLIER A.Y. 2006-07 AND THEREFORE, THERE WA S NO JUSTIFICATION FOR THE TPO TO CONSIDER THE SAID CONCERN AS FUNCTIO NALLY COMPARABLE 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 THE A SSESSEE IN THE IT(TP)A.1231/BANG/2011 PAGE - 25 IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN THE PR ESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN T HE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS IN TER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGME NT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDER S OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PRO FILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMM EDIATELY PRECEDING YEAR. THEREFORE, HAVING REGARD TO THE FAC TUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERT ED THAT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEES SEGMENT OF IT SERVICES. 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHES ON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISED SIMILAR AR GUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG). WE H AVE PERUSED THE RELEVANT PARA OF THE ORDER OF THE TPO I.E., 6.3 .21, IN TERMS OF WHICH THE SAID CONCERN HAS BEEN INCLUDED AS A COMPA RABLE CONCERN. THE ASSESSEE POINTED OUT THAT AS IN THE CASE OF KAL S INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO FOR A.Y. 2006-07 THE SAID CONCERN WAS FOUND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WA S NOT DISTURBED BY THE TPO. THE RELEVANT PORTION OF THE TRANSFER PRICI NG STUDY, PLACED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESAID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO WE FIND THAT THE SAID CONCERN IS LIABLE T O BE EXCLUDED FROM THE LIST OF COMPARABLES. 12) PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A C OMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NOT AVAILABLE. T HE TPO REJECTED THE ASSESSEE'S OBJECTIONS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPANY FOR FINANCIAL YEAR 2007-08, IT IS MAINL Y A SOFTWARE IT(TP)A.1231/BANG/2011 PAGE - 26 DEVELOPMENT COMPANY AND AS PER THE DETAILS FURNISHE D IN REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT, SOFTWARE DE VELOPMENT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF TH E MATTER, THE ASSESSING OFFICER INCLUDED THIS COMPANY I.E. PERSIS TENT SYSTEMS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNC TIONALITY CRITERION. 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCL USION OF THIS COMPANY AS A COMPARABLE SUBMITTING THAT THIS COMPAN Y IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE ARE SEVE RAL OTHER FACTORS ON WHICH THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THA T : (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING S ERVICES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007-08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY ENGAG ED 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 SEGMENTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANA LYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRE SENTLY UNDER CONSIDERATION, WHICH IS INTO PRODUCT DEVELOPMENT AN D PRODUCT DESIGN SERVICES AND FOR WHICH THE SEGMENTAL DATA IS NOT AV AILABLE. 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. IT(TP)A.1231/BANG/2011 PAGE - 27 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 LT D., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHI LE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVICES PROVIDER. WE FIN D THAT, AS SUBMITTED BY THE ASSESSEE, THE SEGMENTAL DETAILS AR E NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUN CIATED IN THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELE CORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THAT IN THE AB SENCE OF SEGMENTAL DETAILS / INFORMATION A COMPANY CANNOT BE TAKEN INT O ACCOUNT FOR COMPARABILITY ANALYSIS, WE HOLD THAT THIS COMPANY I .E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM THE SET OF CO MPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY . 13) SASKEN COMMUNICATION TECHNOLOGIES LTD.: 109. LD TPO NOTICED THAT THE COMPANY WAS REJECTED IN THE TP DOCUMENT ON THE GROUND THAT THE COMPANY FAILS ITS F ILTER OF BUSINESS REVIEW AND R&D TO SALES WAS MORE THAN 3%. HOWEVER, NO REASONS WERE GIVEN FOR THE BUSINESS REVIEW. 109.1 LD. TPO POINTED OUT THAT R&D TO SALES BEING M ORE THAN 3% IS NOT ACCEPTABLE FOR WHICH DETAILED DISCUSSION HAS AL READY BEEN MADE EARLIER. HE FURTHER NOTICED THAT THE COMPANY HAS SO FTWARE SERVICES SEGMENT AND SEGMENTAL RESULTS ARE AVAILABLE FOR SOF TWARE SERVICES. HE FURTHER POINTED OUT THAT ON THE BASIS OF INFORMATIO N OBTAINED U/S 133(6), THE COMPANY QUALIFIES ONSITE REVENUE FILTER (ONSITE REVENUES WERE TO THE EXTENT 27.27% OF ITS EXPORT REVENUES). AFTER CONSIDERING THE ASSESSEES REPLY, LD. TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. LD. COUNSEL POINTED OUT THAT THIS COMP ANY HAS INCURRED SIGNIFICANT EXPENDITURE ON RESEARCH AND DEVELOPMENT ACTIVITY THE SAME BEING 6.07% OF SALES. HE FURTHER SUBMITTED THA T THE COMPANY HAD SIGNIFICANT INTANGIBLE INASMUCH AS IT DEVELOPS SISKIN BRANDED PRODUCTS. THE COMPANY OWNS IPR FURTHER IT WAS POINT ED OUT BEFORE TPO THAT DURING THE YEAR THE COMPANY HAD ACQUIRED B OTNIA HIGHTECH F. AND ITS TWO SUBSIDIARIES AND THUS, IT HAD UNDER GONE SIGNIFICANT RESTRUCTURING. HOWEVER, LD. TPO IGNORED THESE FACTS HE RELIED ON THE FOLLOWING DECISIONS: IQ INFORMATION SYSTEM (I) PVT. LTD., ITA NO. 1961 /HYD./2012 (PARA NO. 11 & 23, PAGE 25); IT(TP)A.1231/BANG/2011 PAGE - 28 AMERSON PROCESS MANAGEMENT INDIA PVT. LTD., ITA N O. 8118/MUM./2010 (PARA 16 PAGE 15). 110. LD. DR RELIED ON THE ORDER OF TPO AND SUBMITTE D THAT TPO CONSIDERED THE COMPANIES SOFTWARE SERVICES SEGMENT DETAILS ONLY. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE P ERUSED THE RECORD OF THE CASE. 111. LD. TPO HAS COMPLETELY IGNORED THE EXTRAORDINA RY BUSINESS CIRCUMSTANCES POINTED OUT BY ASSESSEE FOR WHICH NEC ESSARY ADJUSTMENT WAS REQUIRED TO BE MADE IN ACCORDANCE WI TH RULE 10B(3) OF INCOME TAX RULES. HOWEVER, SINCE THIS ADJUSTMENT WAS NOT POSSIBLE, TH EREFORE, THIS COMPANY SHOULD NOT HAVE BEEN INCLUDED IN THE LIST O F COMPARABLES. FURTHER, WE FIND THAT THE COMPANY OWNS IPR AND HAS BRANDED PRODUCTS WHICH ALSO DISTINGUISHES IT FROM THE ASSES SEE AND, THEREFORE, KEEPING IN VIEW THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD.(SUPRA), WE D IRECT THE LD. TPO TO EXCLUDE THIS COMPARABLE FROM THE LIST OF COMPARA BLES. IF WE FOLLOW THE COORDINATE BENCH DECISION IN THE C ASE OF MOTORALA SOLUTION (INDIA) P. LTD, SASKEN COMMUNICATION TECHN OLOGIES LTD NEEDS TO BE EXCLUDED. HOWEVER, AS MENTIONED BY US AT PARA 24 ABOVE, WHERE THE CONTESTED COMPARABLE FORMED PART O F ASSESSEES OWN STUDY, THEN THE AO / TPO HAS TO BE GIVEN A CHAN CE FOR VERIFICATION, IN VIEW OF JUDGMENT OF HONBLE PUN JA B & HARYANA HIGH COURT IN THE CASE OF QUARK SYSTEMS INDIA P. LT D (SUPRA). ACCORDINGLY WE REMIT THE ISSUE OF COMPARABILITY OF SASKEN COMMUNICATION TECHNOLOGIES LTD BACK TO THE AO / TPO FOR CONSIDERATION AFRESH AS PER LAW. ORDERED ACCORDING LY. 14) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNCTIONAL DIS-SIMILARITY, SIGNIFICANT R&D ACTIVITY, BRAND VAL UE, SIZE, ETC. THE TPO, HOWEVER, REJECTED THE CONTENTION PUT FORTH BY THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. IT(TP)A.1231/BANG/2011 PAGE - 29 14.2 BEFORE US, IT WAS REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT PERFO RMS A VARIETY OF FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT AND SERVIC ES SEGMENT NAMELY (A) PRODUCT DESIGN SERVICES (B) INNOVATION DESIGN ENGINEERING AND (C) VISUAL COMPUTING LABS. IN THE SUBMISSIONS MADE THE ASSESSEE HAD QUOTED REL EVANT PORTIONS FROM THE ANNUAL REPORT OF THE COMPANY TO THIS EFFEC T. IN VIEW OF THIS, THE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE STAND O THE TPO IN INCLUDING THIS COM PANY IN THE LIST OF COMPARABLES. 14.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. FROM THE DETAIL S ON RECORD, WE FIND THAT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODUCT DESIGNING SERVICES AND NOT PURELY SOFTWARE DEVELOPM ENT SERVICES. THE DETAILS IN THE ANNUAL REPORT SHOW THAT THE SEGM ENT SOFTWARE DEVELOPMENT SERVICES RELATES TO DESIGN SERVICES AN D ARE NOT SIMILAR TO SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE A SSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MU M/2011) HAS HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEVELOP MENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONALLY COMPA RABLE. IN THIS CONTEXT THE RELEVANT PORTION OF THIS ORDER IS EXTRA CTED AND REPRODUCED BELOW :- . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFERENT FR OM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARN ED AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASS ESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTA L DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATI O FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS IT(TP)A.1231/BANG/2011 PAGE - 30 COMPANY AS FIT FOR COMPARABILITY ANALYSIS FOR DETER MINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EX CLUDED FROM THE LIST OF COMPARABLE PORTION. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REPO RT OF THIS COMPANY PRODUCED BEFORE US, THE FACTS PERTAINING TO TATA ELXSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 2007-08 TO ASSESSM ENT 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 ORDERED ACCORDINGLY. 15) THIRDWARE SOLUTIONS LTD. (SEGMENT) : 15.1 THIS COMPANY WAS PROPOSED FOR INCLUSION IN TH E LIST OF COMPARABLES BY THE TPO. BEFORE THE TPO, THE ASSESSE E OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPAR ABLES ON THE GROUND THAT ITS TURNOVER WAS IN EXCESS OF RS.500 CR ORES. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASON THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, IT IS IN THE BUSINESS OF PRODUCT DEVELOPM ENT AND TRADING IN SOFTWARE AND GIVING LICENSES FOR USE OF SOFTWARE. I N THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTION. IT HAS BEEN POINTED OUT FROM THE ANNUAL REPORT THAT THE COMPANY HAS NOT PROVIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACCOUNT FOR SOFT WARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT SERVICES. (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (2008-TII-04- ITAT-PUNE-TP), THE TRIBUNAL HAS DIRECTED THAT THIS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PROVID ERS, AS ITS INCOME INCLUDES INCOME FROM SALE OF LICENCES WHICH HAS INC REASED THE MARGINS OF THE COMPANY. THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THE TRIBUNAL (S UPRA), THIS COMPANY OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. IT(TP)A.1231/BANG/2011 PAGE - 31 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 PRODUCT DEVEL OPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTIO N. HOWEVER, THE SEGMENTAL PROFIT AND LOSS ACCOUNTS FOR SOFTWARE DEV ELOPMENT SERVICES AND PRODUCT DEVELOPMENT ARE NOT GIVEN SEPARATELY. F URTHER, AS POINTED OUT BY THE LEARNED AUTHORISED REPRESENTATIV E, THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF E-GAIN COMMUNI CATIONS PVT. LTD. (SUPRA) HAS DIRECTED THAT SINCE THE INCOME OF THIS COMPANY INCLUDES INCOME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABLE FOR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFT WARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE MATTER AND FO LLOWING THE AFORE CITED DECISION OF THE PUNE TRIBUNAL (SUPRA), WE DIR ECT THAT THIS COMPANY BE OMITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. 13. IN SO FAR AS MEGASOFT LTD, IS CONCERNED, FINDI NGS OF THE TRIBUNAL IN THE ABOVE CASE WERE AS UNDER : MEGASOFT LTD. : 24. THIS COMPANY WAS CHOSEN AS A COMPARABLE BY THE TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE ARE TWO SEG MENTS IN THIS COMPANY VIZ., (I) SOFTWARE DEVELOPMENT SEGMENT, AND (II) SO FTWARE PRODUCT SEGMENT. THE ASSESSEE IS A PURE SOFTWARE SERVICES PROVIDER AND NOT A SOFTWARE PRODUCT DEVELOPER. ACCORDING TO THE ASSES SEE THERE IS NO BREAK UP OF REVENUE BETWEEN SOFTWARE PRODUCTS AND S OFTWARE SERVICES BUSINESS ON A STANDALONE BASIS OF THIS COMPARABLE. THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHIC H THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ., BLUEA LLY DIVISION AND XIUS-BCGI DIVISION. XIUS-BCGI DIVISION DOES T HE BUSINESS OF PRODUCT SOFTWARE. THIS COMPANY DEVELOPS PACKAGE D PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PR ODUCTS ARE SOLD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE CO MPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FIT I NTO THEIR BUSINESS IT(TP)A.1231/BANG/2011 PAGE - 32 ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JO B OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE WOULD CONSTITUTE PACKAGED PROD UCT AND AROUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BOARDING AND LODGING EXPENSE . BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COM PARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO PRODUCT SOFTWARE) INTERNALLY AND THAT T HE PORTION OF THE REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% OF THE OVERALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPO S FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERV ICES. THE BASIS ON WHICH THE TPO ARRIVED AT THE PLI OF 60.23% IS GI VEN AT PAGE-115 AND 116 OF THE ORDER OF THE TPO. IT IS CLEAR FROM THE PERUSAL 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 COMPLAINT OF THE ASSE SSEE THAT THE OPERATING MARGINS HAVE BEEN COMPUTED AT ENTITY LEVE L COMBINING SOFTWARE SERVICES AND SOFTWARE PRODUCT SEGMENTS. I T WAS SUBMITTED THAT THE PRODUCT SEGMENT OF MEGASOFT IS SUBSTANTIALLY DI FFERENT FROM ITS SOFTWARE SERVICE SEGMENT. THE PRODUCT SEGMENT HAS E MPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SERVICE SEGMENT HAS EMP LOYEE COST OF 50%. SIMILARLY, THE PROFIT MARGIN ON COST IN PRODU CT 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 WOULD VITIATE THE COMPAR ABILITY (SUBMISSIONS ON PAGE 381 TO 383 OF THE PB-I). IT WAS FURTHER SU BMITTED THAT MEGASOFT LIMITED HAS PROVIDED SEGMENTAL BREAK-UP BETWEEN THE SOFTWARE SERVICES SEGMENT AND SOFTWARE PRODUCT SEGMENT (PAGE 68 OF PB-II), WHICH WAS ALSO ADOPTED BY THE TPO IN HIS SHOW CAUSE NOTICE (PAGE 84 OF PB-I). THE SEGMENTAL RESULTS I.E., RESULTS PERT AINING TO SOFTWARE SERVICES SEGMENT OF THIS COMPANY WAS: SEGMENTAL OPERATING REVENUES RS.63,71,32,544 SEGMENTAL OPERATING EXPENSES RS.51,75,13,211 OPERATING PROFIT RS.11,96,19,333 OP/TC (PLI) 23.11% IT(TP)A.1231/BANG/2011 PAGE - 33 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 MARGI NS OF ONLY THE SOFTWARE SERVICE SEGMENT FOR COMPARABILITY PURPOSES . CONSISTENT WITH SUCH STAND, IT WAS SUBMITTED THAT THE MARGINS OF TH E 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 COMPUTE THE CORR ECT MARGIN BY FOLLOWING THE DIRECTION OF THE TRIBUNAL IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT.LTD. 23. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO COMPUTE THE CORRECT MARGIN OF MEGA SOFT LTD., AS DIRECTED BY THE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD. (SUPRA). ACCORDINGLY WE HOLD THAT MEGASOFT LTD CAN BE CONSID ERED AS A GOOD COMPARABLE AFTER SEGMENTATION AS DIRECTED IN THE AB OVE ORDER IS DONE. 14. ACCORDINGLY, FOLLOWING THE ABOVE ORDER WE DIREC T EXCLUSION OF CELESTIAL LABS LTD, E-ZEST SOLUTIONS LTD, INFOSYS T ECHNOLOGIES LTD, KALS INFORMATION SYSTEMS LTDE (SEG), LUCID SOFTWARE LTD, WIPRO LTD (SEG), ACCEL TRANSMATIC LTD (SEG), AVANI CIMCON TECHNOLOGI ES LTD, FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), HELIOS & MATHESON INFOR MATION TECHNOLOGY LTD, ISHIR INFOTECH LTD, PERSISTENT SYSTEMS LTD, SA SKEN COMMUNICATION TECHNOLOGIES LTD (SEG), TATA ELXSI LTD (SEG) AND TH IRDWARE SOLUTIONS LTD. IN SO FAR AS MEGASOFT SOLUTIONS LTD IS CONCERNED, W E DIRECT THE AO / TPO IT(TP)A.1231/BANG/2011 PAGE - 34 TO REWORK ITS SEGMENTAL RESULTS AND CONSIDER ITS CO MPARABILITY ONLY WITH REGARD TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT . ORDERED ACCORDINGLY. 15. IN SO FAR AS RISK ADJUSTMENT SOUGHT BY THE ASSE SSEE IS CONCERNED, WE FIND THAT TPO HAD CONSIDERED THE RISK ANALYSIS DONE BY THE ASSESSEE IN ITS TP STUDY AND CAME TO A CONCLUSION THAT THE RISK BOR NE BY THE VARIOUS COMPARABLES WERE MORE OR LESS SIMILAR IN NATURE TO THAT OF THE ASSESSEE. HE HAD CITED THE FOLLOWING REASONS FOR NOT GIVING ANY ADJUSTMENT FOR THE PERCEIVED RISK : THE TAXPAYER IS TOTALLY DEPENDENT OIL AE FOR BUSI NESS. THUS THE TAXPAYER TAKES THE RISKS ASSOCIATED WITH HEAVY DEPENDENCE OIL SINGLE CUSTOMER. IN COMMON BUSINESS PARLANCE IT IS KNOWN AS 'SINGLE CUSTOMER RISK'. THE TAXPAYER IS NOT COMPENSATED ANY AMOUNT FOR TERMINATION OF AGREEMENT EVEN IF IT IS TERMINATED WITHOUT ANY CAUSE. NO INDEPENDENT ENTERPRISE WOULD LIKE TO AGREE FOR A TERMINATION CLAUSE WITHOUT COMP ENSATION IF IT IS TERMINATED WITHOUT ANY CAUSE. THE AE IS EXPOSED TO THE MARKET RISK AND ANY FLUCTU ATION IN THE BUSINESS CONDITIONS OF THE AE AFFECT THE CON TRACTUAL TERMS BETWEEN THE AE AND THE TAXPAYER. THUS EVEN IF INDEPENDENT COMPARABLES UNDERTAKE SOME RISK, THE TAXPAYER ALSO HAD TO UNDERTAKE RISKS LIKE SINGLE CU STOMER RISK, POLITICAL RISK, ETC WHICH ARE NOT INCURRED BY THE COMPARABLE COMPANIES AND HENCE THE RISKS ARE EVENED OUT. THERE ARE MANY CAPTIVE SERVICE PROVIDERS OPERATING IN THE SAME ENVIRONMENT AS THE TAXPAYER AND STILL EARNING MUCH IT(TP)A.1231/BANG/2011 PAGE - 35 BETTER MAR G INS THAN INDEPENDENT RISK BEARINGS ENTERPRISES AND VICE VERSA. THUS THERE IS NO DIRECT CORRELATION BETWEEN THE MARGINS EARNED AND RISKS TAKEN. MANY BUSINESS STUDIES HAVE SHOWN- THAT THE MNCS ARE ACTUALLY DISTRIBUTING THEIR RISKS BY OPENING CAPTIV E OFFSHORE CENTERS. THE INDEPENDENT ENTREPRENEUR HAS TO INCUR EXPENDITU RE ON MARKETING, ETC. WHICH IS DEBITED TO THE PROFIT AND LOSS ACCOUNT. BUT, IT IS ALWAYS NOT NECESSARY THAT THESE RISKS REFLECTED IN THE MARKETING, SALES PROMOTION EXPENSE S WILL AUTOMATICALLY BE COMPENSATED BY INCREASE IN SALES O R HIGHER MARGINS. FOR EXAMPLE, INCREASED MARKETING EFFORTS IN SOME SEGMENTS OF EXPORT MARKET MAY NOT Y IELD RESULTS FOR A SOFTWARE DEVELOPMENT COMPANY AND THER EBY THERE MAY BE A LOSS ON THIS MARKETING EFFORT WHICH MAY BRING DOWN THE OVERALL PROFITABILITY RATHER THAN IN CREASE THE PROFITABILITY. THUS IF UNDERTAKING THE MARKET R ISK ETC. HELPS IN EARNING ANY EXTRA MARGIN, THE BENEFIT IS M ORE THAN SET OFF BY THE CORRESPONDING EXPENDITURE. THE SAME APPLIES TO CREDIT RISK UNDERTAKEN. THERE ARE MANY STUDIES CONDUCTED ON THE RISK REDUCT ION STRATEGIES FOLLOWED BY MNCS BY SHIFTING THEIR PRODUCTION FACILITIES TO OTHER COUNTRIES BASED MAIN LY ON COST FACTORS. BY OUTSOURCING TO INDIA, THE OVERALL COST OF PRODUCTION OF GOODS OR SERVICES BY THE AE GETS REDU CED WHICH IN TURN INCREASES THE COMPETITIVENESS OF THE AE IN THE MARKET. THUS THE TAXPAYER IS NOT COMPENSATED FO R THE REDUCTION OF RISK ATTRIBUTABLE TO THE OPERATIONS CA RRIED ON BY THE TAXPAYER IN INDIA. THE RISK PROFILE OF THE COMPARABLES SELECTED BY THE TAXPAYER, ACCEPTABLE TO THE TAXPAYER AND THOSE SELE CTED BY THE TPO BUT NOT ACCEPTABLE TO THE TAXPAYER IS SIMIL AR. IT IS INCORRECT TO SAY THAT HIGHER THE RISK, THE HI GHER IS THE MARGIN THOUGH IT IS TRUE THAT HIGHER RISK EXPECTS A HIGHER MARGIN. THUS REALIZATION OF RISK IS DIFFERENT FROM EXPECTED RETURN BASED ON RISK UNDERTAKEN. FINALLY SELECTED COMPARABLES HAD ALMOST SIMILAR RISKS BUT MARGINS VA RIED IT(TP)A.1231/BANG/2011 PAGE - 36 FROM 1.38% TO 60.23% ON COST. THE TAXPAYER DID NOT FURNISH ANY COMPUTATION OF THE RISK ADJUSTMENT IN THE TP STUDY. HOWEVER, DURING TH E COURSE OF TP PROCEEDINGS, THE TAXPAYER SUBMITTED SO ME METHOD FOR COMPUTATION OF THE RISK, WHICH IS DISCUS SED ABOVE AND REJECTED. THE TAXPAYER'S SINGLE CUSTOMER RISK AND POLITICAL / COUNTRY RISK MORE THAN OFFSETS ANY OTHER RISK DIFFERENTIAL BETWEEN THE TAXPAYER AND THE COMPARABLE COMPANIES. DIFFERENT COMPARABLES CAN HAVE DIFFERENT RISK PROFI LES AND DIFFERENT PROFIT MARGINS. THE PROVISO TO SEC. 9 2C(2) OF THE ACT PROVIDES FOR ADOPTING ARITHMETICAL MEAN OF THE DIFFERENT PRICES. THIS PROVISION NEUTRALIZES THE EF FECT OF DIFFERENCE IN THE RISK PROFILE, IF ANY BETWEEN THE TAX PAYER AND THE COMPARABLES AS REALIZED RISK MAY PULL DOWN THE PROFITABILITY BELOW THE RISK FREE RETURN. IT IS NOT SUFFICIENT TO MERELY SPELL OUT RISKS. BUT , IT HAS TO BE SHOWN WHICH RISK WAS ACTUALLY UNDERTAKEN BY THE COMPARABLES AND TO WHAT EXTENT IT AFFECTED THE PROF ITABILITY. THE TAXPAYER HAS NOT DONE SO. 16. NOTHING WAS BROUGHT BEFORE US BY THE LD. AR TO SHOW THAT FINDINGS OF THE TPO WAS INCORRECT. WE ARE OF THE OPINION TH AT THE RISK BORNE BY THE COMPARABLES AS WELL AS THE ASSESEE WERE OF THE VERY SAME NATURE AND THEREFORE THE EFFECT OF THE RISK ON THE PROFITABILI TY ALREADY STOOD DISCOUNTED IN THE OPERATIONAL RESULTS OF THE COMPARABLES. WE THEREFORE FIND NO MERIT IN THIS GROUND RAISED BY THE ASSESSEE. IN THE RESULT, ASSESSEES GROUND RELATING TO RISK ADJUSTMENT IS DISMISSED. AO / TPO IS DIREC TED TO REWORK THE PLI OF THE COMPARABLES AS PER OUR DIRECTIONS AT PARAGRAPH 14 ABOVE AND PROCEED IN 1', \ IT(TP)A.1231/BANG/2011 PAGE - 37 ACCORDANCE WITH LAW. CONCISE GROUNDS 1 TO 5 OF THE ASSESSEE ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 17. VIDE ITS GROUNDS 6 AND 7 ASSESSEE STATES THAT T RAVEL EXPENDITURE AND TELECOMMUNICATION EXPENDITURE INCURRED IN FOREIGN C URRENCY OUGHT NOT HAVE BEEN EXCLUDED FROM EXPORT TURNOVER. ALTERNATELY IT SAYS THAT IF THEY WERE EXCLUDED FROM EXPORT TURNOVER, SIMILAR EXCLUSION WA S TO BE DONE IN THE TOTAL TURNOVER ALSO FOR WORKING OUT DEDUCTION U/S.10A OF THE ACT. 18. IN SO FAR AS THE CONTENTION OF THE ASSESSEE TH AT FOREIGN CURRENCY EXPENDITURE SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER, WE ARE UNABLE TO APPRECIATE IN VIEW OF THE DEFINITION OF EXPORT TURNOVER GIVEN IN EXPLANATION 2 (IV) TO SECTION 10A DOES NOT WARRANT SUCH AN INTERPRETATION. HOWEVER IN RESPECT OF PARITY BETWEEN THE EXPORT TUR NOVER AND TOTAL TURNOVER, IN VIEW OF THE DECISION OF THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [349 ITR 98], ASSESSEE HAS TO SUCCEED. WE DIRECT THE AO / TPO TO EXCLUDE WHAT HAS BEEN EXC LUDED FROM THE EXPORT TURNOVER FROM THE TOTAL TURNOVER ALSO WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT. GROUNDS 6 AND 7 ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 19. IN SO FAR AS GROUND 8 IS CONCERNED, LD. AR SUBM ITTED THAT IN VIEW OF THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT (LTU) IT(TP)A.1231/BANG/2011 PAGE - 38 V. YOKOGAWA INDIA LTD [(2013) 341 ITR 0385], UNABSO RBED LOSS OF PROFITABLE UNITS COULD NOT BE SET OFF WITH THE PROF ITS OF NON-ELIGIBLE UNITS. WE ARE OF THE OPINION THAT IN VIEW OF THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT (LTU) V. YOKOGAWA INDIA LTD (SUPRA) SUPPORTS THE VIEW CANVASSED BY THE LD. AR. WE THEREFORE DIRECT THAT ASSESSEE BE GIVEN DEDUCTION U/S.10A OF THE ACT WITHOUT SETTING OFF BROUGHT FORWARD LOSS AND UNABSORBED DEPRECIATION OF NON-ELIGIBLE UNITS. ORDERED ACCORDINGLY. GROUND 8 OF THE ASSESSEE STAN DS ALLOWED. 20. GROUND 9 IS CONSEQUENTIAL IN NATURE AND DOES NO T NEED ANY SPECIFIC ADJUDICATION. 21. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16TH DAY OF O CTOBER, 2015. SD/- SD/- (VIJAYPAL RAO) (ABRAH AM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE