M/s. CDC Software India Pvt. Ltd., Bangalore V. ITO, Bangalore

ITA 1285/BANG/2010

• Counselvise Citation: 128521114 RSA 2010
• Duration Of Justice: 3 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 22-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PRASHANTH G S
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3); 92D; 92E; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P.GEORGE , ACCOUNTANT MEMBER IT( TP )A NO.1285/BANG/2010 & IT( TP )A.NO.207/BANG/2014 ASSESSMENT YEARS : 2006-07 & 2009-10 M/S. APTEAN SOFTWARE INDIA PVT. LTD. (FORMERLY KNOWN AS CDC SOFTWARE INDIA PVT. LTD.), LEVEL-5 (8 TH FLOOR), GOLDEN HEIGHTS, NO.1/2, 59 TH C CROSS ROAD, 4 TH M BLOCK, RAJAJI NAGAR, BANGALORE 560 010. PAN : AACCP 7154M VS. THE INCOME TAX OFFICER, WARD 11(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PRASHANTH, G.S. ADVOCATE RESPONDENT BY : SHRI FARAHAT HUSSEIN QURESHI, CIT-II(DR) DATE OF HEARING : 29.10.2014 DATE OF PRONOUNCEMENT : 31.10.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER IT(TP)A.1285/BANG/2010 IS AN APPEAL BY THE ASSES SEE AGAINST THE ORDER DATED 28.9.2010 THE ITO, WARD 11(1), BANGALOR E PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (ACT), IN R ELATION TO A.Y.2006-07. IT(TP)A.NO.207/BANG/2014 IS ALSO AN APPEAL BY THE A SSESSEE AGAINST THE ORDER DATED 1.1.2014 OF THE ITO, WARD 11(1), BANGAL ORE PASSED U/S.143(3) READ WITH SEC.144C OF THE ACT, IN RELATION TO AY 20 09-10. BOTH THESE IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 2 OF 35 APPEALS WERE HEARD TOGETHER AND INVOLVE SOME COMMON ISSUES. WE DEEM IT CONVENIENT TO PASS A CONSOLIDATED ORDER. IT(TP)A NO.1285/BANG/2010: AY 06-07: 2. GROUND NOS. 1 TO12 AS RAISED BY THE ASSESSEE IN THE ORIGINAL GROUNDS OF APPEAL FILED BEFORE THE TRIBUNAL PROJECT THE GRIEVANCE OF THE ASSESSEE REGARDING THE ACTION OF THE LEARNED ASSESS ING OFFICER AND HONORABLE DISPUTE RESOLUTION PANEL MAKING AN ADDITI ON TO THE TOTAL INCOME BY WAY OF ADJUSTMENT TO THE ARMS LENGTH PRICE (AL P) TO AN INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE U/S. 92CA O F THE ACT. AT THE TIME OF HEARING OF THE APPEAL IT WAS SUBMITTED THAT THE COM PARABLE COMPANIES CHOSEN BY THE TPO AND THE ADDITION MADE BY THE AO I N THE DRAFT ASSESSMENT ORDER WHICH WAS CONFIRMED BY THE DRP ARE IDENTICAL TO THE CASE DECIDED BY THE TRIBUNAL IN ITA NO.1054/BANG/20 11 FOR AY 07-08 IN M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. VS . DCIT, CIRCLE 12(4), BANGALORE, LOGICA PVT. LTD., 36 TAXMANN.COM 374 (B ANG-TRIB), 3DPLM SOFTWARE SOLUTIONS LTD. VS. DCIT 42 TAXMANN.COM 333 (BANG-TRIB). IT WAS ALSO SUBMITTED THAT THE BUSINESS PROFILE OF THE ASS ESSEE AND THAT OF THE ASSESSEE IN THE CASE OF M/S. TRILOGY E-BUSINESS SOF TWARE INDIA PVT.LTD. (SUPRA) AND LOGICA PVT.LTD.(SUPRA) AND 3DPLM SOFTWA RE SOLUTIONS LTD. (SUPRA) WERE ALSO IDENTICAL. THIS SUBMISSION WAS FOUND TO BE CORRECT AT THE TIME OF HEARING. WITH THIS BACKGROUND WE WILL NOW CONSIDER THE FACTUAL BASIS OF THE PRESENT CASE AND THE DECISION RENDERED IN THE CASES REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE U S. IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 3 OF 35 3. THE ASSESSEE IS A COMPANY. IT RENDERED SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISE ( AE ). THERE IS NO DISPUTE THAT THE SAID TRANSACTION WAS AN INTERNATIONAL TRANSACTION W ITH AN AE AND THEREFORE THE PRICE RECEIVE BY THE ASSESSEE FOR RENDERING SUC H SERVICES HAS TO PASS THE ARMS LENGTH PRICE ( ALP ) TEST AS LAID DOWN IN SEC.92 OF THE ACT. DURING THE FINANCIAL YEAR 2005-06, THE ASSESSEE PRO VIDED SOFTWARE DEVELOPMENT SERVICES TO ITS AE AND WAS REMUNERATED ON A COST PLUS BASIS. THE TOTAL VALUE OF INTERNATIONAL TRANSACTION WITH R ESPECT TO THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO IT S AE WAS RS. 17,14,54,932. 4. IN SUPPORT OF THE ASSESSEES CLAIM THAT THE PRIC E CHARGED BY IT FOR SERVICES RENDERED TO ITS AE WAS AT ARMS LENGTH, TH E ASSESSEE FILED A REPORT AS REQUIRED BY THE PROVISIONS OF SECTION 92E OF THE ACT IN FORM 3EB TOGETHER WITH DETAILED ANALYSIS. THE ASSESSEE ADOP TED TRANSACTION NET MARGIN METHOD ( TNMM ) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. OPERATING PROFITS TO COST WAS ADOPTED AS THE PROFIT LEVEL INDICATOR ( PLI ). THE PLI OF THE ASSESSEE WAS ARRIVED AT 13.72% . THE ASSESSEE IN ITS TRANSFER PRICING ANALYSIS HAD SELECTED 6 COM PARABLE COMPANIES AND ARRIVED AT AN ARITHMETIC MEAN OF THE PROFIT MARGIN OF THE SAID COMPARABLE COMPANIES AT 10.59% AND CLAIMED THAT THE PRICE IT C HARGED WAS AT ARMS LENGTH. 5. THE TPO ARRIVED AT A FINAL SET OF 14 COMPARABLE . THE SET OF 14 COMPARABLE AND THEIR PROFIT MARGIN ARE GIVEN AS ANNEXURE-1 TO THIS ORDER . IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 4 OF 35 6. THE ASSESSEE RAISED VARIOUS OBJECTIONS TO THE ME THODOLOGY ADOPTED AND THE REASONS ASSIGNED BY THE TPO FOR REJECTING T HE COMPARABLES CHOSEN BY THE ASSESSEE IN ITS TP STUDY. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE COMPAR ABLES SET OUT IN ANNEXURE-1 TO THIS ORDER , ARRIVED AT ARITHMETIC MEAN OF 21.72%. AFTER FACTORING THE WORKING CAPITAL ADJUSTMENT OF 0.51%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 21.21%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 12.5 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: ARITHMETIC MEAN PLI 21.72% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) 0.51% ADJ.ARITHMETIC MEAN PLU 21.21% OPERATING COST RS.15,26,41,104 ARMS LENGTH MARGIN 21.21% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 119.17% OF OPERATING COST PRICE RECEIVED SHORTFALL BEING ADJUSTMENT U/S.92CA RS.18,50,16,278/- RS.17,14,54,932 RS.1,35,61,346 THE ABOVE SHORTFALL OF RS.1,35,61,346/- IS BEING TREATED AS AN ADJUSTMENT TO THE PRICE SHOWN BY THE TAX PAYER IN I TS BOOKS OF ACCOUNT. 7. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 5 OF 35 OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO EXCEPT ONE MODIFICATION VIZ., PLI OF M/S. MEGASOFT LTD. WH OSE PROFIT MARGIN WAS ADOPTED BY THE TPO AT 52.74% WAS DIRECTED TO BE ADO PTED AT 51.73% AND CONSEQUENTIAL RELIEF IF ANY IN WORKING CAPITAL ADJU STMENT WAS ALSO DIRECTED TO BE GIVEN. THE ADJUSTMENT CONFIRMED BY THE DRP W AS ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESS EE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 14 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE FOLLOWING TWO COMPANIES SHOULD BE EXCLUDED AS THESE TWO COMPANIES VIZ., KALS INFORMATION SYSTEMS LTD. (SL.NO.4 OF THE FINAL LIST OF COMPARABLES OF TPO) AND M/S. ACCEL TRANSMATICS LTD. (SEG.) (SL.NO.13 OF THE LIST OF COMPARABLES OF TPO) ARE NOT FUNCTIONALLY COMPARABLE WITH THAT O F THE ASSESSEE. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECISION OF T HE HONBLE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS S OFTWARE INDIA PVT.LTD. (SUPRA) WHEREIN THESE COMPANIES WERE HELD TO BE NOT FUNCTIONALLY COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPER L IKE THE ASSESSEE. 9. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRILO GY E-BUSINESS SOFTWARE INDIA PVT. LTD.(SUPRA):- (D) KALS INFORMATION SYSTEMS LTD. 10. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 6 OF 35 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 EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNA LS 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 FUNC TIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE A S FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 11. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO TH E TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNE D COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT TH IS 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. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOP MENT SERVICE IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 7 OF 35 COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE TH AT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RE LEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THA T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEME NT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTER PRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASS ESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FO RM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DR P THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPAR ABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T HE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARA BILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR TH E ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID CO MPANY SHOULD IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 8 OF 35 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 REFE RRED TO BY THE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THI S COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGU MENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFOR ESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 10. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICAL IN THE C ASE OF THE ASSESSEE AS WELL AS IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA). RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.( SUPRA), WE DIRECT THAT THE FOLLOWING COMPANIES BE EXCLUDED FROM THE LIST O F 14 COMPARABLE ARRIVED AT BY THE TPO. A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMATIC 11. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VIZ. , TATA ELXSI(SEG.) (SL.NO.8 OF THE FINAL LIST OF COMPARABLE CHOSEN BY TPO) IS CONCERNED, THIS TRIBUNAL IN THE CASE OF LOGICA PVT.LTD.(SUPRA) HEL D THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRI BUNAL IN THIS REGARD. 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 ARE CONC ERNED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH T HAT OF THE SOFTWARE SERVICE PROVIDER WAS CONSIDERED BY THE MUM BAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. (SUPRA) WHEREIN ON THE AFORESAID TWO COMPANIES, THE TRIBUNAL HELD AS FOLLOWS:- 7.6 FLEXTRONICS SOFTWARE SYSTEMS LTD.: IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 9 OF 35 AS PER THE STATEMENT OF THE LEARNED AR, THIS COMPANY IS ALSO INVOLVED IN THE DEVELOPMENT OF THE SOFTWARE PRODUCT AND IS ALSO INVOLVED IN BPO SERVIC ES, BESIDES JOINT SOFTWARE CONSULTANCIES FOR THE USE IN TELECOMMUNICATION INDUSTRIES. THUS, BEING PRODUCT A ND SERVICE COMPANY, IT CANNOT BE TAKEN AS COMPARABLE. HOWEVER, THE LEARNED CIT DR HAS AMPLY CONTROVERTED THE SAID CONTENTION OF THE LEARNED AR BY SUBMITTING BEF ORE US A COPY OF PROFIT AND LOSS ACCOUNT OF THE COMPANY FO R THE RELEVANT ASSESSMENT YEAR, OBTAINED FROM THE PUBLIC DOMAIN. FROM THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE SAID COMPANY, IT IS SEEN THAT THE REVENUE SALES FROM SERVICES CONSTITUTES ALMOST 90% AND THE PRODUCT SAL ES IS ONLY 10%. THUS, IN THIS CASE ALSO NOT MUCH ADJUSTME NT IS REQUIRED TO BE MADE FOR TAKING THE PROFIT RATIO FOR COMPARING IT WITH THE ASSESSEE IN DETERMINING THE A RMS LENGTH PRICE. IN VIEW OF THE ABOVE, WE HOLD THAT TP O HAS RIGHTLY INCLUDED THE SAID COMPANY AS COMPARABLE CAS E WHICH CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE PROFIT RATIO. 7.7 TATA ELXSI LIMITED.: FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODU CT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERE NT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTEN TION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELO PED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOV E. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE N OT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FRO M PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSI S FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARAB LE PARTIES. 15. IN VIEW OF THE ABOVE, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY AT SL.NO.6 VIZ., F LEXTRONICS SOFTWARE SYSTEMS PVT. LTD. SHOULD BE TAKEN AS A COM PARABLE, WHILE COMPARABLE AT SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A COMPARABLE. 16. ON THE ABOVE SUBMISSIONS OF THE LD. COUNSEL F OR THE ASSESSEE, THE LD. DR SUBMITTED THAT AS FAR AS FUNCT IONAL IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 10 OF 35 COMPARABILITY IS CONCERNED, IT IS NOT ENOUGH ONLY T O LOOK AT THE FACT THAT IN THE DECISIONS RELIED UPON BY THE LD. C OUNSEL FOR THE ASSESSEE, ALSO DEALT WITH THE CASE OF SOFTWARE DEVE LOPMENT AND THE ASSESSEE IS ALSO A SOFTWARE DEVELOPER RENDERING SOFTWARE DEVELOPMENT SERVICES. IT WAS HIS SUBMISSION THAT T HE AFORESAID COMPANIES EVEN IF THEY ARE ENGAGED IN PROVIDING SOF TWARE SERVICES, CAN BE ENGAGED IN DIFFERENT SECTORS TO WH ICH THEY CATER, LIKE SOFTWARE DEVELOPMENT IN TELECOMMUNICATION, AUT OMOBILE MANUFACTURING SECTOR, ETC. IT WAS HIS SUBMISSION T HAT IT WAS ALSO NECESSARY TO CONSIDER AS TO WHETHER THE SECTORS IN WHICH THE COMPARABLE CHOSEN BY THE TPO BELONG AND THE SECTOR TO WHICH THE ASSESSEE CATERS. 17. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR. WE ARE OF THE VIEW TH AT THE COMPARABLES WHICH ARE SOUGHT TO BE EXCLUDED BY THE LD. COUNSEL FOR THE ASSESSEE HAVE BEEN HELD TO BE NOT COMPARABL E WITH THE CASE OF SOFTWARE SERVICE PROVIDER, IN AS MUCH AS TH ESE COMPANIES DID NOT SATISFY THE FUNCTIONAL SIMILARITY TEST. E. G., IN THE CASE OF COMPANY AT SL.NO.2 OF THE LIST OF COMPARABLES CHOSE N BY THE TPO VIZ., AVANI CINCOM TECHNOLOGIES LTD., THIS TRIBUNAL HAD TAKEN A VIEW THAT INCOME OF THIS COMPANY FROM RENDERING SOF TWARE SERVICES AND SALE OF SOFTWARE WAS NOT AVAILABLE AND THEREFORE THIS WAS REJECTED AS A COMPARABLE COMPANY. SIMILARLY, I N THE CASE OF CELESTIAL LABS LTD., THE TRIBUNAL TOOK A VIEW THAT THIS COMPANY WAS ENGAGED IN R&D ACTIVITY AND CANNOT BE COMPARED WITH A SOFTWARE SERVICE PROVIDER. IT IS THUS CLEAR THAT T HE REASON GIVEN BY THE TRIBUNAL IN THE CASES REFERRED TO BY THE LD. CO UNSEL FOR THE ASSESSEE WILL EQUALLY APPLY TO THE PRESENT CASE ALS O. WE THEREFORE ACCEPT THE SUBMISSIONS MADE ON BEHALF OF THE ASSESS EE AND HOLD THAT COMPANIES AT SL.NO.1, 2, 3, 10, 12, 14, 24 & 2 6 BE EXCLUDED FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO WHIL E COMPUTING THE ALP. 12. IN VIEW OF THE ABOVE, THE AFORESAID COMPANY SHO ULD ALSO BE EXCLUDED FOR THE PURPOSE OF COMPARISON WHILE DETERM INING THE ALP OF THE INTERNATIONAL TRANSACTION IN QUESTION. 13. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VIZ. , M/S. LUCID SOFTWARE LIMITED (SL.NO.9 OF THE FINAL LIST OF COM PARABLE CHOSEN BY TPO) IS CONCERNED, THIS TRIBUNAL IN THE CASE OF M/S.3DPLM SOFTWARE SOLUTIONS LTD. IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 11 OF 35 HELD THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARAB LE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE FOLLOWING WERE T HE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THIS REGARD. 16. LUCID SOFTWARE LTD. 16.1 THIS COMPANY WAS SELECTED AS A COMPARABLE B Y THE TPO. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSI ON OF THIS COMPANY AS A COMPARABLE ON THE GROUNDS THAT IT IS INTO SOFTWARE PRODUCT DEVELOPMENT AND THEREFORE FUNCTIONALLY DIFF ERENT FROM THE ASSESSEE. IN THIS REGARD, THE LEARNED AUTHORIS ED REPRESENTATIVE SUBMITTED THAT (I) THIS COMPANY IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS. (II) THIS COMPANY HAS BEEN HELD TO BE FUNCTIONALLY DIFFERENT AND THEREFORE NOT COMPARABLE TO SOFTWARE SERVICE PROVID ERS BY THE ORDER OF A CO-ORDINATE BENCH OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007-08 (IT(TP)A NO.845/BANG/2011), FOLLOWING THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. L TD. (ITA NO.7821/MUM/2011). (III) THE REJECTION OF THIS COMPANY AS A COMPARABLE TO SOFTWARE SERVICE PROVIDERS HAS BEEN UPHELD BY THE CO-ORDINAT E BENCHES OF THIS TRIBUNAL IN THE CASES OF LG SOFT INDIA PVT. LT D. (ITA NO.1121/BANG/2011) AND CSR INDIA PVT. LTD. [ IT(TP) A NO.1119/BANG/2011 ] AND BY THE DELHI BENCH OF THE T RIBUNAL IN THE CASE OF TRANSWITCH INDIA PVT. LTD. (ITA NO.6083 /DEL/2010). (IV) THE FACTUAL POSITION AND CIRCUMSTANCES PERT AINING TO THIS COMPANY HAS NOT CHANGED FROM THE EARLIER ASSESSMENT YEAR 2007-08 TO THE PERIOD UNDER CONSIDERATION I.E. ASSE SSMENT YEAR 2008-09 AND THEREFORE ON THIS BASIS, THIS COMPANY C ANNOT BE CONSIDERED AS A COMPARABLE IN THE CASE ON HAND. (V) THE RELEVANT PORTION OF THE ANNUAL REPORT OF THIS COMPANY EVIDENCES THAT IT IS IN THE BUSINESS OF PRODUCT DEV ELOPMENT. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT I N VIEW OF THE FACTUAL POSITION AS LAID OUT ABOVE AND THE D ECISIONS OF THE CO-ORDINATE BENCHES OF THE TRIBUNAL IN THE ASSESSEE 'S OWN CASE FOR ASSESSMENT YEAR 2007-08 AND OTHER CASES CITED ABOVE , IT IS CLEAR THAT THIS COMPANY BEING INTO PRODUCT DEVELOPMENT CA NNOT BE IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 12 OF 35 CONSIDERED AS A COMPARABLE TO THE ASSESSEE IN THE C ASE ON HAND WHO IS A SOFTWARE SERVICE PROVIDER AND THEREFORE TH IS COMPANY I.E. LUCID SOFTWARE LTD., OUGHT TO BE OMITTED FROM THE L IST OF COMPARABLES. 16.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION AND FINDING OF THE TPO IN INCL UDING THIS COMPANY IN THE LIST OF COMPARABLES. 16.3 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 THE COMPANY I.E. LUCID SOFTW ARE LTD., IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS WHE REAS THE ASSESSEE, IN THE CASE ON HAND, IS IN THE BUSINESS O F PROVIDING SOFTWARE DEVELOPMENT SERVICES. WE ALSO FIND THAT, CO-ORDINATE BENCHES OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007-08 (IT(TP)A NO.845/BANG/2011), LG SOFT INDIA PVT. LTD. (SUPRA), CSR INDIA PVT. LTD. ( SUPRA); THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORDIA TECHNO LOGIES INDIA PVT. LTD. (SUPRA) AND THE DELHI ITAT IN THE C ASE OF TRANSWITCH INDIA PVT. LTD. (SUPRA) HAVE HELD, THAT SINCE THIS COMPANY, IS ENGAGED IN THE SOFTWARE PRODUCT DEVELOP MENT AND NOT SOFTWARE DEVELOPMENT SERVICES, IT IS FUNCTIONAL LY DIFFERENT AND DIS-SIMILAR AND IS THEREFORE TO BE OMITTED FROM THE LIST OF COMPARABLES FOR SOFTWARE DEVELOPMENT SERVICE PROVID ERS. THE ASSESSEE HAS ALSO BROUGHT ON RECORD DETAILS TO DEMO NSTRATE THAT THE FACTUAL AND OTHER CIRCUMSTANCES PERTAINING TO T HIS COMPANY HAVE NOT CHANGED MATERIALLY FROM THE EARLIER YEAR I .E. ASSESSMENT YEAR 2007-08 TO THE PERIOD UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2008-09. IN THIS FACTUAL MATRIX AND FOLLOWING THE AFORE CITED DECISIONS OF THE CO-ORDINATE BENCHES OF THIS TRIBUN AL AND OF THE ITAT, MUMBAI AND DELHI BENCHES (SUPRA), WE DIRECT T HAT THIS COMPANY BE OMITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. 14. IN VIEW OF THE ABOVE, THE AFORESAID COMPANY SHO ULD ALSO BE EXCLUDED FOR THE PURPOSE OF COMPARISON WHILE DETERM INING THE ALP OF THE INTERNATIONAL TRANSACTION IN QUESTION. 15. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT IF THE AFORESAID 4 COMPARABLE COMPANIES ARE EXCLUDED FROM THE LIST OF 14 IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 13 OF 35 COMPARABLE COMPANIES CHOSEN BY THE TPO THEN THE PRO FIT MARGIN OF THE ASSESSEE WOULD BE WELL WITHIN THE (+) (-) 5% RANGE OF THE ARITHMETIC MEAN OF THE REMAINING COMPARABLE COMPANIES AND THEREFORE THE PRICE RECEIVED BY THE ASSESSEE WOULD BE CONSIDERED AS AT ARMS LENG TH. HE PRAYED FOR A LIMITED DIRECTION TO THE TPO ON THE LINES SET OUT A BOVE AND DETERMINE THE ALP. IT ALSO SUBMITTED THAT THE OTHER ISSUES RAISE D BY THE ASSESSEE IN THE GROUNDS OF APPEAL NEED NOT BE GONE INTO. 16. WE ARE OF THE VIEW THAT THE PRAYER SOUGHT FOR B Y THE LEARNED COUNSEL FOR THE ASSESSEE IS ACCEPTABLE AND ACCORDINGLY, THE TPO IS DIRECTED TO COMPUTE ALP AFTER EXCLUDING THE 8 COMPARABLE COMPAN IES DEALT WITH IN THIS ORDER. 17. THE LEARNED COUNSEL FOR THE ASSESSEE FILED BEFO RE US AN APPLICATION FOR RAISING ADDITIONAL GROUND OF APPEAL. THE ASSE SSEE WAS ENTITLED TO CLAIM DEDUCTION U/S.10A OF THE ACT. WHILE COMPUTIN G DEDUCTION U/S.10A OF THE ACT, THE AO EXCLUDED SOFTLINK & INTERNET CHARGE S AMOUNTING TO RS.5,52,456/- BEING TELECOMMUNICATION EXPENSES FROM EXPORT TURNOVER ON THE GROUND THAT THESE EXPENSES ARE INCURRED IN REND ERING TECHNICAL SERVICES RENDERED TO CLIENTS OUTSIDE INDIA AND THEREFORE TO BE EXCLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SE CTION 10A. THE ASSESSEE IN THE ADDITIONAL GROUND HAS MADE PRAYER T HAT EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE RED UCED FROM THE TOTAL TURNOVER AND IN THIS REGARD HAS PLACED 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 IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 14 OF 35 EXCLUDED FROM THE EXPORT TURNOVER SHOULD ALSO BE EX CLUDED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S .10A OF THE ACT. IT IS THE PRAYER OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE AFORESAID GROUND IS A LEGAL GROUND AND CAN BE ADJUDICATED ON FACTS AVAILABLE ON RECORD AND THEREFORE IN KEEPING WITH THE DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF NTPC VS. CIT 229 ITR 383 (SC), THE ADDITIONAL GROUND SOUGHT TO BE RAISED SHOULD BE ADMITTED FOR ADJUDICA TION. 18. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE AS SET OUT ABOVE ON ADMISSION OF ADDITIONA L GROUND OF APPEAL. WE FIND THAT THE AO IN THE DRAFT ASSESSMENT ORDER D ATED 10.12.2009 THE AO HAS REFERRED TO THE FACT THAT THE PROPOSAL TO EXCLU DE THE AFORESAID CHARGES FROM THE EXPORT TURNOVER WAS ACCEPTED BY THE ASSESS EE AND THEREFORE THE EXPORT TURNOVER IS BEING REDUCED ACCORDINGLY. THE ASSESSEE DID NOT PREFER ANY OBJECTION ON THIS PROPOSED ADDITION BEFORE THE DRP. SEC. 144C READS AS UNDER : REFERENCE TO DISPUTE RESOLUTION PANEL-(1) THE ASSE SSING OFFICER SHALL, NOTWITHSTANDING ANYTHING TO THE CONT RARY CONTAINED IN THIS ACT, IN THE FIRST INSTANCE, FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT (HEREAFTER IN THIS SECTION REFE RRED TO AS THE DRAFT ORDER) TO THE ELIGIBLE ASSESSEE IF HE PROPOSE S TO MAKE, ON OR AFTER THE 1ST DAY OF OCTOBER, 2009, ANY VARIATION I N THE INCOME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF SUCH ASSESSEE. (2) ON RECEIPT OF THE DRAFT ORDER, THE ELIGIBLE ASS ESSEE SHALL, WITHIN THIRTY DAYS OF THE RECEIPT BY HIM OF THE DRAFT ORDE R,- (A) FILE HIS ACCEPTANCE OF THE VARIATIONS TO THE AS SESSING OFFICER; OR (B) FILE HIS OBJECTIONS, IF ANY, TO SUCH VARIATION WITH,- IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 15 OF 35 (I) THE DISPUTE RESOLUTION PANEL; AND (II) THE ASSESSING OFFICER. (3) THE ASSESSING OFFICER SHALL COMPLETE THE ASSESS MENT ON THE BASIS OF THE DRAFT ORDER, IF- (A) THE ASSESSEE INTIMATES TO THE ASSESSING OFFICER THE ACCEPTANCE OF THE VARIATION; OR (B) NO OBJECTIONS ARE RECEIVED WITHIN THE PERIOD SP ECIFIED IN SUB-SECTION (2). (4) THE ASSESSING OFFICER SHALL, NOTWITHSTANDING AN YTHING CONTAINED IN SECTION 153 OR SECTION 153B, PASS THE ASSESSMENT ORDER UNDER SUB-SECTION (3) WITHIN ONE MONTH FROM T HE END OF THE MONTH IN WHICH,- (A) THE ACCEPTANCE IS RECEIVED; OR (B) THE PERIOD OF FILING OF OBJECTIONS UNDER SUB-SE CTION (2) EXPIRES. (5) THE DISPUTE RESOLUTION PANEL SHALL, IN A CASE W HERE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2), ISSUE SUCH DIRECTIONS, AS IT THINKS FIT, FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. (6) THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DI RECTIONS REFERRED TO IN SUB-SECTION (5), AFTER CONSIDERING T HE FOLLOWING, NAMELY:- (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT, IF ANY, OF THE ASSESSING OFFICER, VALUA TION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; (F) EVIDENCE COLLECTED BY, OR CAUSED TO BE COLLECTE D BY, IT; AND (G) RESULT OF ANY ENQUIRY MADE BY, OR CAUSED TO BE MADE BY, IT. (7) . IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 16 OF 35 (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM, REDUC E OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB-SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT ORDER. EXPLANATION.-FOR THE REMOVAL OF DOUBTS, IT IS HEREB Y DECLARED THAT THE POWER OF THE DISPUTE RESOLUTION PANEL TO ENHANC E THE VARIATION SHALL INCLUDE AND SHALL BE DEEMED ALWAYS TO HAVE INCLUDED THE POWER TO CONSIDER ANY MATTER ARISING O UT OF THE ASSESSMENT PROCEEDINGS RELATING TO THE DRAFT ORDER, NOTWITHSTANDING THAT SUCH MATTER WAS RAISED OR NOT BY THE ELIGIBLE ASSESSEE. (9) .. 10. EVERY DIRECTION ISSUED BY THE DISPUTE RESOLUTI ON PANEL SHALL BE BINDING ON THE ASSESSING OFFICER. 19. A PERUSAL OF THE ABOVE PROVISIONS OF SEC.144C O F THE ACT MAKES IT CLEAR THAT THE DRAFT ASSESSMENT ORDER OF THE AO WIL L ATTAIN FINALITY TO THE EXTENT THAT THE ASSESSEE DOES NOT OBJECT TO THE PRO POSALS IN THE DRAFT ASSESSMENT ORDER. THE DRP IS AT LIBERTY TO CONSIDE R ANY ISSUE AFTER DUE OPPORTUNITY TO THE AO AND THE ASSESSEE. THE DIRECT IONS ISSUED BY THE DRP ARE BINDING ON THE ASSESSING OFFICER. THE ABOVE PR OVISIONS OF SEC.144C OF THE ACT WHICH ARE APPLICABLE TO THE ASSESSEE FOR TH E PRESENT ASSESSMENT YEAR, ARE APPLICABLE NOTWITHSTANDING ANYTHING TO TH E CONTRARY UNDER ANY OTHER PROVISIONS OF THIS ACT. WE ARE OF THE VIEW T HAT IN THE LIGHT OF THE ABOVE STATUTORY PROVISIONS, THE ASSESSEE CANNOT SEEK TO R AISE AN ISSUE BEFORE THE TRIBUNAL IN RESPECT OF WHICH HE HAS NOT FILED ANY O BJECTION BEFORE THE DRP NOR HAS THE DRP CONSIDERED THE ISSUE IN EXERCISE OF THEIR POWERS UNDER SEC.144C (8) OF THE ACT. WE THEREFORE DECLINE TO A DMIT THE ADDITIONAL GROUND FOR ADJUDICATION. IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 17 OF 35 20. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. IT (TP)A NO.207/BANG/14: AY 09-10: 21. IN THE GROUNDS OF APPEAL FILED BEFORE THE TRIBU NAL FOR AY 09-10, THE ASSESSEE SET OUT STATEMENT OF FACTS IN WHICH HE HAS SET OUT IN PARA 10 TO 20 HAS CHALLENGED THE VARIOUS CONCLUSIONS ARRIVED A T BY THE TPO/AO WHICH WERE CONFIRMED BY THE DRP. IN GROUND NO.2 THE ASSE SSEE HAS CHALLENGED THE ADDITION MADE BY THE AO WHICH WAS CONFIRMED BY THE DRP MAKING AN ADDITION TO THE TOTAL INCOME BY WAY OF ADJUSTMENT T O THE ARMS LENGTH PRICE ( ALP ) TO AN INTERNATIONAL TRANSACTION CARRIED OUT BY TH E ASSESSEE U/S. 92 OF THE ACT. THE SAME INCORPORATES THE POINTS SET O UT IN PARA-10 TO 20 OF THE STATEMENT OF FACTS BY REFERENCE. THE FACTS AND CIR CUMSTANCES ARE IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN A Y 06-07 WHICH WE HAVE DISCUSSED IN THE EARLIER PARAGRAPHS OF THIS ORDER. 22. THERE IS NO DISPUTE THAT THE TRANSACTION OF REN DERING SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE TO M/ S. PIVOTAL CORPORATION OF CANADA WAS AN INTERNATIONAL TRANSACT ION WITH AN AE AND THEREFORE THE PRICE RECEIVE BY THE ASSESSEE FOR REN DERING SUCH SERVICES HAS TO PASS THE ARMS LENGTH PRICE (ALP) TEST AS LAID D OWN IN SEC.92 OF THE ACT. DURING THE FINANCIAL YEAR 2005-06, THE ASSESSEE PRO VIDED SOFTWARE DEVELOPMENT SERVICES TO ITS AE AND WAS REMUNERATED ON A COST PLUS BASIS. THE TOTAL VALUE OF INTERNATIONAL TRANSACTIO N WITH RESPECT TO THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES BY THE A SSESSEE TO ITS AE WAS RS. 29,03,80,299. IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 18 OF 35 23. IN SUPPORT OF THE ASSESSEES CLAIM THAT THE PRI CE CHARGED BY IT FOR SERVICES RENDERED TO ITS AE WAS AT ARMS LENGTH, TH E ASSESSEE FILED A REPORT AS REQUIRED BY THE PROVISIONS OF SECTION 92E OF THE ACT IN FORM 3EB TOGETHER WITH DETAILED ANALYSIS. THE ASSESSEE ADOP TED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. OPERATING PROFITS TO COST WAS ADOPTED AS THE PROFIT LEVEL INDICATOR ( PLI ). THE PLI OF THE ASSESSEE WAS ARRIVED AT 15.02% . 24. THE TPO ARRIVED AT A FINAL SET OF 11 COMPARABLE COMPANIES. THE SET OF 11 COMPARABLE COMPANIES AND THEIR PROFIT MARGIN ARE GIVEN AS ANNEXURE-2 TO THIS ORDER. 25. THE ASSESSEE RAISED VARIOUS OBJECTIONS TO THE M ETHODOLOGY ADOPTED AND THE REASONS ASSIGNED BY THE TPO FOR REJECTING T HE COMPARABLES CHOSEN BY THE ASSESSEE IN ITS TP STUDY. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE COMPAR ABLES SET OUT IN ANNEXURE-2 TO THIS ORDER, ARRIVED AT ARITHMETIC MEAN OF 24.32 %. AFTER FACTORING THE WORKING CAPITAL ADJUSTMENT OF 0.31%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 23.95%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 12.3 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 THE TAXPAYER TO ITS AE IS COMPUTED AS UNDER: IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 19 OF 35 SOFTWARE DEVELOPMENT SERVICES ARMS LENGTH MEAN MARGIN ON COST 24.32% LESS: WORKING CAPITAL ADJUSTMENT (ANNEX.C) 0.37% ADJUSTED MARGIN 23.95% OPERATING COST 25,24,68,139 ARMS LENGTH PRICE (ALP) 123.95% OF OC 31,29,34,258 PRICE RECEIVED 29,03,80,299 SHORTFALL BEING ADJUSTMENT U/S.92CA 2,25,53,959 THE ABOVE SHORTFALL OF RS.2,25,53,959/- IS TREATED AS TRANSFER PRICE ADJUSTMENT U/S.92CA IN RESPECT OF SOFTWARE DEVELOPM ENT SEGMENT OF THE TAX PAYER INTERNATIONAL TRANSACTION S. 26. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 27. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED AS THE TURNOVER OF THESE COMPANIES ARE MORE THAN RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSESSEE WHOSE TURNOVER IS LESS THAN RS.30 CRORES: (1) TATA ELXSI (SEG.) 378.43 CRORES (2) ZYLOG SYSTEMS LTD. 734.93 CRORES IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 20 OF 35 (3) LARSEN & TOUBRO INFOTECH 1 950.83CRORES (4) MINDTREE LTD. (SEG.) 793.22CRORES (5) PERSISTENT SYSTEMS LTD. 519.69 CRORES (6) SASKEN COMMUNICATION TECHNOLOGIES LTD. 405.31C RORES (7) INFOSYS TECHNOLOGIES LTD. 20264 CRORES. THE ABOVE COMPANIES ARE LISTED AT SL.NO.5 TO 11 OF THE FINAL LIST OF COMPARABLES CHOSEN BY THE TPO. 28. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) ON THE APPLICATION OF TURNOVER FILTER AND IT WAS SUBMITTED THAT THE AFORESAID COMPARABLE COMPANIES HAVE TO BE EXCLUDED FROM THE F INAL LIST OF COMPARABLES SELECTED BY THE TPO. THE LEARNED DR RE LIED ON THE ORDER OF THE DRP. 29. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE AND THE LEARNED DR. IN THE CASE OF TRILOG Y E-BUSINESS SOFTWARE INDIA (P) LTD. (SUPRA), THIS TRIBUNAL ON APPLICATIO N OF THE TURNOVER FILTER WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY AN ALYSIS HELD AS FOLLOWS: (1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT THE TPO HAS APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE, BUT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCO ME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLLED TRAN SACTION WITH AN INTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMPARED OR THE ENTERPRISES ENTERING INTO SUCH TRANSACTION, WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 21 OF 35 TRANSACTION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT WHEREVER THERE ARE SOME DIFFERENCES SUCH DIFFE RENCES SHOULD BE CAPABLE OF REASONABLE ACCURATE ADJUSTMENT IN MON ETARY TERMS TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES. IT WA S HIS SUBMISSION THAT SIZE WAS AN IMPORTANT FACET OF THE COMPARABILI TY EXERCISE. IT WAS SUBMITTED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WOULD IMPACT COMPARABILITY. IN THIS REGA RD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGARH BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 , WHEREIN THE SPECIAL BENCH HAD LAID DOWN THAT IT IS IMPROPER TO PROCEED ON THE BASIS OF LOWE R LIMIT OF 1 CRORE TURNOVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASONABLE CLASSIFICATION. SEVERAL OTHER DECIS IONS WERE REFERRED TO IN THIS REGARD LAYING DOWN IDENTICAL PR OPOSITION. WE ARE NOT REFERRING TO THOSE DECISIONS AS THE DECISIO N OF THE SPECIAL BENCH ON THIS ASPECT WOULD HOLD THE FIELD. REFEREN CE WAS ALSO MADE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERVED AS FOLLOWS:- SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PAR TIES MIGHT AFFECT THE RELATIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COMPARABILITY. 12. THE ICAI TP GUIDELINES NOTE ON THIS ASPECT LAY DOWN IN PARA 15.4 THAT A TRANSACTION ENTERED INTO BY A RS. 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENT ERED INTO BY A RS. 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASON S ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIE S OF SCALE UNDER WHICH THEY OPERATE. THE FACT THAT THEY OPERA TE IN THE SAME MARKET MAY NOT MAKE THEM COMPARABLE ENTERPRISES. T HE RELEVANT EXTRACT IS AS FOLLOWS [ON RULE 10B(3)]: CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE NOT MATERIAL, THE TRANSACTIONS WOULD BE COMPARABLE. THESE DIFFERENCES COULD EITHER BE WITH REFERENCE TO THE TRANSACTION OR WITH REFERENCE TO THE ENTERPRISE. FOR INSTANCE, A TRANSACTION ENTERED INTO BY A RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. 13. IT WAS FURTHER SUBMITTED THAT THE TPOS RANGE ( RS. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COMPANIES LIKE INFOSYS IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 22 OF 35 WHICH IS 277 TIMES BIGGER THAN THE ASSESSEE (TURNOV ER OF RS. 13,149 CRORES AS COMPARED TO RS. 47.47 CRORES OF AS SESSEE). IT WAS SUBMITTED THAT AN APPROPRIATE TURNOVER RANGE S HOULD BE APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPAN IES. 14. REFERENCE WAS MADE TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , WHEREIN RELYING ON DUN AND BRADSTREETS ANALYSIS, THE TURNO VER OF RS. 1 CRORE TO RS. 200 CRORES WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSERVATIONS WERE BROUGHT TO OUR NOTICE:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE JUDIC IAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALS O ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 23 OF 35 TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 15. IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PRO POSITION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN THE FOLLOWING CASES: 1. M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO.1413/BANG/2010) 2. M/S GENESIS MICROCHIP (I) PRIVATE LIMITED VS. D CIT (ITA NO.1254/BANG/20L0). 3. ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (I TA NO. 1171/BANG/2010). IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURN OVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COM PARABLE WITH THE ASSESSEE. 16. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HA VING TURNOVER OF MORE THAN RS. 200 CRORES AS COMPARABLES . IN THESE CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASS ESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECI DING THE ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDES THAT INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR L ENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTER PRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORT IONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED O R TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERP RISES. SEC.92- A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE TRANSACTION BETWEEN TH E ASSESSEE AND ITS AE WAS AN INTERNATIONAL TRANSACTION ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATION OF ARMS LENGTH PRICE IN AN INTERNATION AL TRANSACTION AND IT PROVIDES:- IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 24 OF 35 (1) THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PR ICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT ( A ) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR ( B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR ( C ) THE INFORMATION OR DATA USED IN COMPUTATION OF TH E ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 25 OF 35 ( D ) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNAT IONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C:- 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A). TO (D).. ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 26 OF 35 ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 27 OF 35 ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH TH E INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE S IN RELATION TO THE TRANSACTIONS BEING COMPARED. 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF T HE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPA RED WITH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACT ORS SET OUT THEREIN. BEFORE US THERE IS NO DISPUTE THAT THE TN MM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE I NTERNATIONAL TRANSACTION. THE DISPUTES ARE WITH REGARD TO THE C OMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLE ARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSEES TURNOVER I S RS. 47,46,66,638. IT WOULD THEREFORE FALL WITHIN THE C ATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES H AVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOW N IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE AS SESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY T HE TPO VIZ., TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CR ORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 28 OF 35 (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES. 30. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), WE HOLD THAT THE FOLLOWING COMPANIES SHOULD BE EXCLUDED FROM THE LIS T OF COMPARABLE COMPANIES. (1) TATA ELXSI (SEG.) 378.43 CRORES (2) ZYLOG SYSTEMS LTD. 734.93 CRORES (3) LARSEN & TOUBRO INFOTECH 1950.83CROR ES (4) MINDTREE LTD. (SEG.) 793.22CRORES (5) PERSISTENT SYSTEMS LTD. 519.69 CRORES (6) SASKEN COMMUNICATION TECHNOLOGIES LTD. 405.31C RORES (7) INFOSYS TECHNOLOGIES LTD. 20264 CRORES. THE AO IS DIRECTED TO COMPUTE THE ARITHMETIC MEAN B Y EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. 31. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO BROUG HT TO OUR NOTICE THAT KALS INFOSYSTEMS LIMITED (SEG.) HAS BEEN CHOSEN AS A COMPARABLE COMPANY IN THE FINAL LIST OF COMPARABLE COMPANIES B Y THE TPO AND THE SAME SHOULD BE EXCLUDED AND IN THIS REGARD RELIED O N THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSIN ESS SOFTWARE INDIA (P) LTD. (SUPRA). WE HAVE WHILE DECIDING THE APPEAL OF THE ASSESSEE FOR AY 06-07 ALREADY HELD THAT THE AFORESAID COMPANY IS NO T COMPARABLE WITH THE ASSESSEE. FOR THE REASONS STATED THEREIN, WE DIRECT THE TPO TO EXCLUDE THE AFORESAID COMPANY FROM THE LIST OF COMPARABLES. IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 29 OF 35 32. THE LEARNED COUNSEL ALSO SUBMITTED BEFORE US TH AT BODHTREE CONSULTING LTD., WHICH WAS CONSIDERED AS A COMPARAB LE BY THE TPO IN THE FINAL LIST OF COMPARABLES SHOULD NOT BE REGARDED AS COMPARABLE FOR THE REASON THAT IT HAS BEEN HELD TO BE NOT COMPARABLE B Y THE ITAT BANGALORE BENCH IN THE CASE OF MINDTECK (INDIA) LTD. VS. DCIT IT(TP)A.NO.70/BANG/2014 ORDER DATED 21.8.2014 FOR A Y 09-10. WE HAVE CONSIDERED THE SUBMISSION AND WE FIND THAT THIS TRI BUNAL IN THE CASE OF MINDTECH (INDIA) LTD. (SUPRA) HAS HELD AS FOLLOWS O N THE COMPARABILITY OF BODHTREE CONSULTING LTD. WITH A SOFTWARE DEVELOPMEN T SERVICE PROVIDER: 14. THE NEXT ASPECT THAT WAS CANVASSED BY THE LEAR NED COUNSEL FOR THE ASSESSEE WAS WITH REGARD TO THE EXCLUSION O F THE FOLLOWING COMPARABLES FROM THE LIST OF FINAL COMPARABLES CHOS EN BY THE TPO : 1. BODHTREE CONSULTING LTD : AS FAR AS THIS COMPANY IS CONCERNED, THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THIS COMP ANY MADE EXTRA ORDINARY PROFITS DURING THE PREVIOUS YEAR. O UR ATTENTION WAS DRAWN TO THE FACT THAT THE OPERATING PROFIT / OPERA TING COST OF THIS COMPANY JUMPED FROM 17% FOR F Y 2007-08 TO 56% IN F Y 2008- 09. IT DIPPED IN FY 2009-10 TO 40% AND IN FY 2010- 11 IT BECAME (-) 2% AND 5% IN FY 2011-12 AND FINALLY TOUC HED (-) 9% IN FY 2012-13. OUR ATTENTION WAS DRAWN TO THE FACT THAT THE SPECIAL BENCH OF THE TRIBUNAL, MUMBAI, IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) P. LTD., IN ITA.7466/MUM/201 2, DT 07.03.2014 FOR AY 2008-09 HAD AN OCCASION TO CONSID ER THE QUESTION AS TO WHETHER COMPANIES HAVING ABNORMAL PR OFITS SHOULD BE EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH TOO K THE VIEW THAT IT HAS TO BE SHOWN THAT THE HIGH PROFIT MARGIN DOES NOT REFLECT THE NORMAL BUSINESS CONDITIONS AND ONLY IN SUCH CIR CUMSTANCES, HIGH PROFIT MARGIN COMPANIES CAN BE EXCLUDED. OUR ATTENTION WAS DRAWN TO THE DRP'S OBSERVATION IN ITS ORDER ON THE ISSUE WHICH IS AS FOLLOWS : IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 30 OF 35 'BODHTREE : THE ASSESSEE HAS OBJECTED TO SELECTION OF THIS ENTI TY ON THE BASIS OF FOLLOWING OBJECTIONS: THE ENTITY HAS FLUCTUATING MARGINS THE COMPANY IS MORE OF A PRODUCT COMPANY RATHER THAN SOFTWARE SERVICE COMPANY. THE PANEL HAS CONSIDERED THE OBJECTIONS OF THE ASSE SSEE. INSOFAR AS THE CONTENTION REGARDING THE REJECTION O F THIS ENTITY ON THE BASIS OF FLUCTUATING MARGIN IS CONCER NED, IN ORDER TO APPRECIATE THE COMPATIBILITY OR OTHERWISE OF THIS ENTITY, IT IS IMPORTANT TO FIRST NOTE THAT THE INDI AN SOFTWARE INDUSTRY USES TWO DIFFERENT MODELS FOR REV ENUE RECOGNITION. THE FIRST IS THE TIME AND MATERIAL (T& M) CONTRACTS MODEL IN WHICH CUSTOMER ARE BILLED ON THE BASIS OF HOURS WORKED BY THE EMPLOYEES OF SUPPLIER SOFTWARE COMPANIES. HOURLY RATES ARE AGREED ON BY B OTH PARTIES AND ARE APPLIED TO THE TOTAL HOURS WORKED T O ARRIVE AT THE REVENUE THAT IS TO BE RECOGNIZED. THE SECOND IS THE FIXED PRICE PROJECT MODEL (FPP). UNDE R THE FIXED PRICE PROJECT MODEL, THE TOTAL CONTRACT P RICE IS AGREED UPON BETWEEN THE PARTIES. BILLING MAY BE DON E EITHER AT THE END OF THE CONTRACT OR OVER THE PERIO D OF THE CONTRACT ON THE BASIS OF THE AGREED MILESTONE FOR B ILLING. IN THIS RESPECT, THE BASIS OF REVENUE RECOGNITION B Y THIS ENTITY CAN BE SEEN FROM THE ANNUAL REPORT AS BELOW: 3. REVENUE RECOGNITION : REVENUE FROM SOFTWARE DEVELOPMENT IS RECOGNISED BAS ED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS. FROM PERUSAL OF THE ABOVE, IT IS SEEN THAT THIS ENT ITY IS ENGAGED IN BUILDING REVENUES THROUGH FIXED PRICE PROJECT MODEL. AS IS A NATURAL COROLLARY IN SUCH TY PE OF REVENUE RECOGNITION, SOME PART OF THE EXPENDITURE M AY BE BOOKED IN ONE YEAR, FOR WHICH THE REVENUE MAY HA VE BEEN RECOGNISED IN THE EARLIER OR SUBSEQUENT YEAR. THEREFORE, IT IS BUT NATURAL THAT THERE IS SOME FLU CTUATION IN THE PROFITABILITY MARGIN OF SUCH ENTITY. MERELY BECAUSE OF SUCH FLUCTUATIONS, AN ENTITY ENGAGED IN THE DEVELOPMENT OF SOFTWARE, BEING FUNCTIONALLY COMPARA BLE TO THE ASSESSEE, CANNOT BE REJECTED ONLY ON THIS GR OUND.' IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 31 OF 35 14. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR A TTENTION TO THE FACT THAT BODHTREE CONSULTING ADMITTEDLY FOLLOW S A FIXED PRICE PROJECT MODEL WHEREBY REVENUES FROM SOFTWARE DEVELO PMENT IS RECOGNIZED BASED ON SOFTWARE AND BILLED TO CLIENTS. IN SUCH BUSINESS MODEL EXPENDITURE FOR DEVELOPING SOFTWARE WOULD BE BILLED IN AN EARLIER YEAR BUT THE REVENUE WOULD BE RECOGNIZED IN A SUBSEQUENT YEAR. IT WAS HIS SUBMISSION THAT THIS F ACT IS RECOGNIZED BY THE DRP IN ITS ORDER. ACCORDING TO H IM THIS CIRCUMSTANCE WOULD BE SUFFICIENT TO SHOW THAT THE M ARGIN REFLECTED OF THIS COMPANY DOES NOT REFLECT THE NORM AL BUSINESS CONDITION. 15. THE LEARNED DR PLACED RELIANCE ON THE REASON GI VEN BY THE DRP IN ITS ORDER. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENT RES (SUPRA) HAD AN OCCASION TO DEAL WITH THE QUESTION AS TO WHE THER HIGH PROFIT MARGIN MAKING COMPANIES SHOULD BE EXCLUDED A S A COMPARABLE. THE SPECIAL BENCH AFTER CONSIDERING SE VERAL ASPECTS HELD IN PARA 88 OF ITS ORDER THAT THE POTENTIAL COM PARABLE COMPANIES CANNOT BE EXCLUDED MERELY ON THE GROUND T HAT THEIR PROFIT IS ABNORMALLY HIGH. THE SPECIAL BENCH HELD THAT IN SUCH CASES IT WOULD REQUIRE FURTHER INVESTIGATION TO ASC ERTAIN THE REASONS FOR UNUSUALLY HIGH PROFIT AND IN ORDER TO E STABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COMPARABLE OR NOT. IN THE LIGHT OF THE AFORESAID DECISION OF THE SPECIAL BENCH AND IN VIEW OF THE ADMITTED POSITION THAT THE ASSES SEE FOLLOWS FIXED PRICE PROJECT MODEL WHERE REVENUES FROM SOFTW ARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOP ED AND BILLED TO CLIENTS, THERE IS A POSSIBILITY OF THE EX PENDITURE IN RELATION TO THE REVENUE BEING BOOKED IN THE EARLIER YEAR. THE RESULTS OF BODHTREE FROM FY 2003 TO 2008 EXCLUDING FY 2007 AS GIVEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WERE ALSO PERUSED. PERUSAL OF THE SAME SHOWS, THAT THERE HAS BEEN A CO NSISTENT CHANGE IN THE OPERATING MARGINS. THE CHART FILED B Y THE ASSESSEE IN THIS REGARD IS GIVEN AS AN ANNEXURE TO THIS ORDE R. IT APPEARS TO US THAT THE REVENUE RECOGNITION METHOD FOLLOWED BY THE ASSESSEE IS THE REASON FOR THE DRASTIC VARIATION IN THE PROF IT MARGINS OF THIS COMPANY. IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT WOULD BE SAFE TO EXCLUDE BODHTREE CONSULTING FROM T HE FINAL LIST OF COMPARABLES CHOSEN BY THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 32 OF 35 33. IN VIEW OF THE AFORESAID DECISION RENDERED BY T HE TRIBUNAL, WE ARE OF THE VIEW THAT THE AFORESAID COMPANY SHOULD BE EXCLU DED FROM THE LIST OF COMPARABLE COMPANIES FINALLY CHOSEN BY THE TPO. WE ORDER ACCORDINGLY. 34. THE LEARNED DR SUBMITTED BEFORE US THAT BODHTR EE CONSULTING LTD., SASKEN COMMUNICATION TECHNOLOGIES LTD. AND TATA ELX SI LTD. WERE CONSIDERED AS COMPARABLE COMPANIES BY THE TAXPAYER HIMSELF IN HIS TP STUDY AND THE TPO HAS ACCEPTED THE SELECTION BY THE TAXPAYER. ACCORDING TO HIM IT IS NOT THEREFORE OPEN TO THE ASSESSEE TO NOW CONTEND THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE. ON THIS AS PECT OUR ATTENTION WAS DRAWN TO THE DECISION OF THE SPECIAL BENCH, CHANDIG ARH IN THE CASE OF QUARK SYSTEMS (INFRA). 35. IN DCIT VS. QUARK SYSTEMS (P) LTD. ITAT, CHANDIGARH SPECIAL BENCH (2010) 38 SOT 307 HAD TO DEAL WITH ARGUMENT AS TO WHETHER THE ASSESSEE OR THE REVENUE HAVING CHOSEN A COMPANY AS COMPARABLE IS ENTITLED TO SEEK EXCLUSION OF THE VERY SAME COMPANY BEFORE THE TRIBUNAL. THE SPECIAL BENCH HELD AS FOLLOWS: CONTENTION THAT DM WAS TAKEN AS ONE OF THE COMPARA BLES BY THE TAXPAYER AND NO OBJECTION TO ITS INCLUSION WAS RAIS ED BEFORE THE TPO OR BEFORE THE CIT(A) IN APPEAL AND THEREFORE, T HE TAXPAYER SHOULD NOT BE PERMITTED TO RAISE ADDITIONAL GROUND AND ASK FOR EXCLUSION OF THE ABOVE ENTERPRISE IN THE DETERMINAT ION OF THE AVERAGE MARGINS IS NOT SUSTAINABLE. IN THE FIRST PL ACE, THESE ARE INITIAL YEARS OF IMPLEMENTATION OF TRANSFER PRICING LEGISLATION IN INDIA AND TAXPAYERS AS WELL AS TAX CONSULTANTS WERE NOT FULLY CONVERSANT, WITH THIS NEW BRANCH OF LAW WHEN PROCEE DINGS WERE INITIATED OR EVEN AT APPELLATE STAGE. BESIDES, REVE NUE AUTHORITIES, INCLUDING TPO WERE REQUIRED TO APPLY STATUTORY PROV ISIONS AND CONSIDER FOR PURPOSES OF COMPARISON FUNCTIONS, ASSE TS AND RISKS (TURNOVER), PROFIT AND TECHNOLOGY EMPLOYED BY THE T ESTED PARTY AND OTHER ENTERPRISES TAKEN AS COMPARABLE. STATUTOR Y DUTY IS CAST IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 33 OF 35 ON THEM TO UNDERTAKE ABOVE EXERCISE. THIS HAS NOT B EEN DONE IN THIS CASE. PRIMA FACIE, AS PER THE MATERIAL, DM DOE S NOT APPEAR TO BE COMPARABLE. EVEN IF THE TAXPAYER OR ITS COUNSEL HAD TAKEN DM AS COMPARABLE IN ITS T.P. AUDIT, THE TAXPAYER IS EN TITLED TO POINT OUT TO THE TRIBUNAL THAT ABOVE ENTERPRISE HAS WRONG LY BEEN TAKEN AS COMPARABLE. IN FACT THERE ARE VAST DIFFERENCES B ETWEEN TESTED PARTY AND THE DM. THE CASE OF DM IS LIKE THAT OF IC REPRESENTING EXTREME POSITIONS. IF IC HAS SUFFERED HEAVY LOSSES AND, THEREFORE, IT IS NOT TREATED AS COMPARABLE BY THE TAX AUTHORIT IES, THEY ALSO HAVE TO CONSIDER THAT THE DM HAS EARNED EXTRAORDINA RY PROFIT AND HAS A HUGE TURNOVER. BESIDES DIFFERENCES IN ASSETS AND OTHER CHARACTERISTICS. THE TRIBUNAL IS A FACT-FINDING BODY AND, THEREFORE, HAS TO TAKE INTO ACCOUNT ALL THE RELEVAN T MATERIAL AND DETERMINE THE QUESTION AS PER THE STATUTORY REG ULATIONS. TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A MISTAK E IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVI DENCE ADDUCED BY THE TAXPAYER. WHEN SUBSTANTIAL JUSTICE A ND TECHNICAL CONSIDERATIONS ARE PITTED AGAINST EACH OT HER, THE CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERR ED. FOR THE OTHER SIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN I NJUSTICE BEING DONE DUE TO SOME MISTAKES ON ITS PART. IN VIEW OF THE AFORESAID DECISION OF THE SPECIAL BE NCH, WE ARE OF THE VIEW THAT THE CONTENTION PUT FORTH BY THE LEARNED DR BEF ORE US CANNOT BE ACCEPTED. 36. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT IF THE AFORESAID COMPARABLE COMPANIES ARE EXCLUDED FROM TH E LIST OF 11 COMPARABLE COMPANIES CHOSEN BY THE TPO THEN THE PRO FIT MARGIN OF THE ASSESSEE WOULD BE WELL WITHIN THE (+) (-) 5% RANGE OF THE ARITHMETIC MEAN OF THE REMAINING COMPARABLE COMPANIES AND THEREFORE THE PRICE RECEIVED BY THE ASSESSEE WOULD BE CONSIDERED AS AT ARMS LENG TH. HE PRAYED FOR A LIMITED DIRECTION TO THE TPO ON THE LINES SET OUT A BOVE AND DETERMINE THE ALP. IT ALSO SUBMITTED THAT THE OTHER ISSUES RAISE D BY THE ASSESSEE IN THE GROUNDS OF APPEAL NEED NOT BE GONE INTO. IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 34 OF 35 37. WE ARE OF THE VIEW THAT THE PRAYER SOUGHT FOR B Y THE LEARNED COUNSEL FOR THE ASSESSEE IS ACCEPTABLE AND ACCORDINGLY, THE TPO IS DIRECTED TO COMPUTE ALP AFTER EXCLUDING THE 8 COMPARABLE COMPAN IES DEALT WITH IN THIS ORDER. 38. IN THE DRAFT ASSESSMENT ORDER DATED 14.3.2013 P ASSED BY THE AO, THE AO DISALLOWED A SUM OF RS.71,88,842 WHICH WAS A PAYMENT MADE BY THE ASSESSEE TO M/S. PIVOTAL CORPORATION, A NON-RES IDENT, WITHOUT DEDUCTION OF TAX AT SOURCE. ACCORDING TO THE ASSESSEE THE PA YMENT IN QUESTION WAS REIMBURSEMENT OF EXPENSES INCURRED BY THE NON-RESID ENT ON BEHALF OF THE ASSESSEE AND THEREFORE THERE WAS NO OBLIGATION TO D EDUCT TAX AT SOURCE AS THE PAYMENT DOES NOT CONSTITUTE INCOME OF THE NON-R ESIDENT. THE AO HOWEVER HELD THAT THE ASSESSEE DID NOT SUBSTANTIATE THAT THE PAYMENT IN QUESTION WAS REIMBURSEMENT. ACCORDINGLY ADDITION W AS MADE BY THE AO TO THE TOTAL INCOME OF THE ASSESSEE INVOKING PROVISION S OF SEC.40(A)(IA) OF THE ACT. THE ASSESSEE DID NOT RAISE ANY OBJECTION ON T HE PROPOSED ADDITION IN THE DRAFT ASSESSMENT ORDER BEFORE THE DRP. 39. THE AO WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT EXCLUDED INTERNET CHARGES AND EXPENSES INCURRED IN FOREIGN C URRENCY ON FOREIGN TRAVEL FROM THE EXPORT TURNOVER. THE ASSESSEE DID NOT FILE ANY OBJECTION TO THIS PROPOSAL IN THE DRAFT ASSESSMENT ORDER BEFORE THE DRP. 40. BEFORE THE TRIBUNAL THE ASSESSEE HAS RAISED GRO UND NO. 3 & 4 IN WHICH THE ASSESSEE SEEKS TO CHALLENGE THE AFORESAID ADDITION AND METHOD OF COMPUTATION OF DEDUCTION U/S.10A OF THE ACT. TH E FIRST QUESTION IS WHETHER THE ASSESSEE IS ENTITLED TO DO SO. WE HAVE WHILE DECIDING IT (TP) A NOS. 1285/B/10 & 207/B/14 PAGE 35 OF 35 IDENTICAL GROUND IN AY 06-07 HELD THAT THE ASSESSEE CANNOT SEEK TO RAISE A GROUND WHICH HE HAD NOT AGITATION BEFORE THE DRP. FOR THE REASONS STATED THEREIN, THE SAID GROUNDS ARE DISMISSED. 41. IN THE RESULT, THE APPEALS BY THE ASSESSEE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER , 2014 . SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEM BER ENCL: ANNEXURES I & II BANGALORE, DATED, THE 31 ST OCTOBER, 2014 . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.