Novell Software Development (india) Private Limited, Bangalore V. DCIT, Bangalore

ITA 1287/BANG/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8558 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 21-03-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 15-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAYANA SHRI G R
• Keywords: Related party transaction; Transfer pricing; International transaction; Revenue expenditure
• Section: 133(6)

Judgement Text

IT(TP)A.1287/BANG/2011 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI. VIJAY PAL RAO, JUDICIAL MEMBER I.T(TP).A NO.1287/BANG/2011 (ASSESSMENT YEAR : 2007-08) NOVELL SOFTWARE DEVELOPMENT (INDIA) P. LTD, BAGMANE TECH PARK, D BLOCK, 65/2, C. V. RAMAN NAGAR, BYRASANDRA POST, BANGALORE 560 093 .. APPELLANT PAN : AAACN6992K V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -12(2), BANGALORE .. RESPONDENT ASSESSEE BY : SHRI. T. SURYANARAYANA, ADVOCATE REVENUE BY : SHRI. G. R. REDDY, CIT DR-I HEARD ON : 21.03.2016 PRONOUNCED ON : 31.03.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY ASSESSEE IT ASSAILS AN ASSE SSMENT DONE IN PURSUANCE TO DIRECTIONS OF THE DRP U/S.144C OF THE INCOME TAX ACT, 1961 ('THE ACT' IN SHORT), FOR THE IMPUGNED ASSESSMENT Y EAR. IT(TP)A.1287/BANG/2011 PAGE - 2 2. LD. COUNSEL FOR THE ASSESSEE SUBMITTED AT THE OUTSE T THAT IF HIS GROUNDS RELATING TO SELECTION OF COMPARABLES APPEAR ING IN PARA 4.A, 4.B AND 4.F, ALONG WITH ADDITIONAL GROUNDS ARE CONSIDERED THE OTHER GROUNDS RELATING TO TRANSFER PRICING ISSUES WOULD BE TAKEN AS NOT PRESSED. IN VIEW OF THE SUBMISSIONS OF THE LD. AR WE ARE CONFINING OURS ELVES TO GROUNDS 4.A, 4.B AND 4.F, WHICH ASSAILS APPLICATION OF FILTERS B Y THE AO AND APPLYING 25% CRITERIA FOR RPTS WHILE SELECTING THE COMPARABLES. 3. FACTS APROPOS ARE THAT ASSESSEE IS A WHOLLY OWNED S UBSIDIARY OF NOVELL INC., USA (NOVELL US). NOVEL US, HELPS CUS TOMERS REALISE THE VALUE OF THEIR INFORMATION AND DELIVER IT SECURELY AND ECONOMICALLY TO THEIR STAKE HOLDERS ACROSS ANY PLATFORM. ASSESSEE PROV IDED SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO NOVEL, US INC. FINANCIAL RESULTS OF THE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR READ AS UNDER : 4. ITS INTERNATIONAL TRANSACTIONS WITH THE AES AS PER THE AUDIT REPORT IN FORM 3CEB WERE REPORTED AS UNDER IT(TP)A.1287/BANG/2011 PAGE - 3 5. ASSESSEE DID ITS TP STUDY BASED ON TNMM FOR THE SOF TWARE DEVELOPMENT SERVICES SEGMENT. VIS-A-VIS THE SEGMENT CONCERNING REIMBURSEMENT OF EXPENDITURE TO THE AE, TPO HAD NO T RECOMMENDED ANY ADJUSTMENT FOR ARMS LENGTH PRICING. ACCORDINGLY WE ARE CONFINING OURSELVES TO THE SOFTWARE DEVELOPMENT SERVICES SEGM ENT. 6. ASSESSEE HAD SELECTED 55 COMPARABLES IN ITS TP DOCU MENTATION CONSIDERING ITSELF TO BE A SOFTWARE DEVELOPMENT SER VICES PROVIDER, THROUGH A SEARCH DONE ON CAPITALINE AND PROWESS DATA BASE. I T ARRIVED AT AN ARITHMETIC MEAN OF 14.64% OF PLI OF THE SELECTED COMPARABLE (O PERATING PROFIT ON OPERATING COST). AS PER THE ASSESSEE THIS WAS WITH IN THE + / - 5% OF ITS OWN PLI OF 10.68% AND THEREFORE THERE WAS NO REQUIREMEN T FOR ADJUSTMENT OF ANY ALP. TPO HOWEVER REJECTED ALL BUT TEN OF THE C OMPARABLES SELECTED BY THE ASSESSEE BY APPLYING FILTERS LIKE USE OF NON-C OMPARANAEOUS RESULTS, EXPORTS REVENUES BEING LESS THAN 75% OF TOTAL REVEN UE, RPT IN EXCESS OF 25% , ONSITE REVENUE OF MORE THAN 75% OF EXPORT REV ENUE, FUNCTIONAL DISSIMILARITY, EMPLOYEE COST BEING LESS THAN 25% OF REVENUE ETC, CONSISTENT LOSSES AND DIMINISHING REVENUES. HE THEREAFTER DID HIS OWN ANALYSIS OF THE VERY SAME DATA BASES AND ARRIVED AT A LIST OF 26 CO MPARABLES WITH AN IT(TP)A.1287/BANG/2011 PAGE - 4 AVERAGE PLI OF 25.14% WHICH AFTER A WORKING CAPITAL ADJUSTMENT OF 1.1 % CAME DOWN TO 24.04%. COMPARABLES SELECTED BY THE T PO AND THEIR PLI WERE AS UNDER : IT(TP)A.1287/BANG/2011 PAGE - 5 7. COMMON COMPARABLES APPEARING IN BOTH THE LIST OF ASSESSEE AS WELL AS THAT OF THE TPO WERE AS UNDER : 8. TPO THEREAFTER RECOMMENDED AN ADJUSTMENT OF RS.5 ,98,19,012/- AS UNDER : 9. WHEN THE AO ISSUED A DRAFT ASSESSMENT ORDER ON T HE LINES MENTIONED ABOVE, ASSESSEE CHOSE TO MOVE THE DRP. ASSESSEE RA ISED A NUMBER OF GROUNDS BEFORE THE DRP AGAINST THE ADJUSTMENT RECOM MENDED BY THE TPO. NONE OF THESE WERE ACCEPTED BY THE DRP. THEREAFTE R THE ASSESSMENT WAS IT(TP)A.1287/BANG/2011 PAGE - 6 COMPLETED BY MAKING AN ADDITION OF RS.5,98,19,012/- . 10. NOW BEFORE US LD. AR STRONGLY ASSAILING THE MAT RIX OF THE COMPARABLES SELECTED BY THE TPO SUBMITTED THAT ASSE SSEE WAS INTO SOFTWARE DEVELOPMENT SERVICES. ACCORDING TO THE LD. AR, THI S WAS CLEAR FROM THE PROFILE OF THE ASSESSEE APPEARING IN THE TP ORDER. AS PER THE LD. AR, 17 OF THE TOTAL 26 COMPARABLES CONSIDERED BY THE TPO FOR THE ALP STUDY HAD TO BE EXCLUDED DUE TO FUNCTIONAL DISSIMILARITY. ACCORD ING TO HIM, COMPARABILITY OF ACCEL TRANSMATIC LTD (SEG), AVANI CIMCON TECHNOLOGIES LTD, CELESTIAL LABS LTD, E-ZEST SOLUTIONS LTD, FLEX TRONICS SOFTWARE SYSTEMS LTD, (SEG), HELIOS & MATHESON INFORMATION T ECHNOLOGY LTD, (SEG), INFOSYS TECHNOLOGIES LTD, ISHIR INFOTECH LTD, KALS INFORMATION SYSTEMS LTD (SEG), LUCID SOFTWARE LTD, PERSISTENT SYSTEMS LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG), TATA ELXSI (SEG), THIRDWARE SOLUTIONS LTD, AND WIPRO LTD (SEG), IN THE SOFTWARE DEVELOPMENT SERVIC ES SEGMENT WAS AN ISSUE WHICH HAD COME UP BEFORE THIS TRIBUNAL IN THE CASE OF MERITOR LVS INDIA (P) LTD V. ACIT [(2015) 64 TAXMANN.COM 136]. AS PER THE LD. AR, THE SAID CASE WAS ALSO WITH REGARD TO SOFTWARE DEVE LOPMENT SERVICES SEGMENT AND THE 26 COMPARABLES CONSIDERED BY THE TP O IN THE SAID CASE WAS ALSO THE VERY SAME. FURTHER AS PER THE LD. DR, MERITOR LVS INDIA (P) IT(TP)A.1287/BANG/2011 PAGE - 7 LTD, (SUPRA) WAS ALSO FOR THE VERY SAME ASSESSMENT YEAR. HENCE ACCORDING TO HIM, THE SAID DECISION SHOULD BE CONSIDERED AS A GOOD PRECEDENT FOR EXCLUDING THE ABOVE MENTIONED COMPANIES. AS FOR GE OMETRIC LTD (SEG), LD. AR SUBMITTED THAT RPT OF THE SAID COMPANY EXCEE DED 15% AND BY VIRTUE OF COORDINATE BENCH DECISION IN THE CASE OF 24/7 CUSTOMER.COM PVT LTD V. DCIT [(2013) 140 ITD 344] HAD TO BE EXCLUDE D. VIS A VIS QUINTEGRA SOLUTIONS LTD, LD. AR SUBMITTED THAT COM PARABILITY OF THE SAID COMPANY IN SOFTWARE DEVELOPMENT SERVICES WAS AN ISS UE WHICH HAD COME UP BEFORE THIS TRIBUNAL IN THE CASE OF NXP SEMICOND UCTORS INDIA P. LTD, [IT(TP)A.1174/BANG/2011, DT.14.11.2014]. AS PER TH E LD. AR, IT WAS HELD IN THE SAID DECISION THAT QUINTEGRA SOLUTIONS LTD, COULD NOT BE CONSIDERED AS A PROPER COMPARABLE IN THE SAID SEGMENT. 11. CONTINUING HIS ARGUMENTS, LD. AR SUBMITTED THAT MEGASOFT LTD, THOUGH IT COULD BE CONSIDERED AS A GOOD COMPARABLE, SEGMENTATION OF ITS RESULTS WAS NECESSARY IN LINE WITH THE DECISION OF THIS TRIBUNAL IN THE CASE OF TRIOLOGY E- BUSINESS SOFTWARE INDIA P LTD, V. DC IT [(2013) 140 ITD 540]. RELIANCE WAS ALSO PLACED ON THE DECISION OF COORDINATE BENCH IN THE CASE OF MERITOR LVS INDIA (P) LTD, (SUPRA). 12. PER CONTRA LD. DR SUBMITTED THAT CERTAIN BENCHE S OF THIS TRIBUNAL IT(TP)A.1287/BANG/2011 PAGE - 8 HAVE HELD THAT 25% AS THRESHOLD LIMIT FOR RPT TRANS ACTIONS, EVEN AFTER THE DECISION IN THE CASE OF 24/7 CUSTOMER.COM PVT LTD ( SUPRA). ACCORDING TO HIM, MEANING OF AE GIVEN IN SECTION 92A(2) OF THE A CT, SPECIFY THE LIMIT OF SHAREHOLDING AS NOT LESS THAN 26% OF THE VOTING POW ER IN THE OTHER ENTERPRISES. THUS ACCORDING TO HIM THERE WAS A STA TUTORY MANDATE FOR ADOPTING 25% AS THE THRESHOLD LIMIT. LD. DR SUBMIT TED THAT THE 15% LIMIT SET OUT BY THE COORDINATE BENCH IN THE CASE OF 24/7 CUSTOMER.COM PVT LTD (SUPRA) COULD NOT BE CONSIDERED AS A RIGID STANDARD . FURTHER ACCORDING TO HIM, GEOMETRIC LTD (SEG), HELIOS & MATHESON INFORMA TION TECHNOLOGY LTD, INFOSYS TECHNOLOGIES LTD, KALS INFORMATION SYSTEMS LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG), TATA ELXSI LT D (SEG), AND WIPRO LTD (SEG), WHICH ASSESSEE WAS SEEKING EXCLUSION APP EARED IN ITS OWN TP STUDY. THEREFORE, ACCORDING TO THE LD. DR ASSESSEE SHOULD NOT BE ALLOWED TO BLOW HOT AND BLOW COLD. 13. AD LIBITUM REPLY OF THE LD. AR WAS THAT IT HAD OBJECTED TO HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, INFOSYS TECHNO LOGIES LTD, KALS INFORMATION SYSTEMS LTD, SASKEN COMMUNICATION TECHN OLOGIES LTD (SEG), TATA ELXSI LTD (SEG), AND WIPRO LTD (SEG), BEFORE T HE TPO AS WELL AS BEFORE THE DRP, THOUGH THESE COMPANIES WERE A PART OF ITS OWN TP STUDY. VIS-A- IT(TP)A.1287/BANG/2011 PAGE - 9 VIS GEOMETRIC LTD (SEG), SUBMISSION OF THE LD. AR WAS THAT AN ADDITIONAL GROUND HAS BEEN RAISED FOR ITS EXCLUSION. SUPPORT WAS SOUGHT FROM THE DECISION OF SPECIAL BENCH IN THE CASE OF DCIT V. QU ARK SYSTEMS PVT. LTD. [42 DTR 414]. 14. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. LD. COUNSEL FOR THE ASSESSEE HAS PLACED CONSIDERABLE RE LIANCE ON THE DECISION OF COORDINATE BENCH IN THE CASE OF MERITOR LVS INDIA ( P) LTD (SUPRA). PROFILE OF THE SAID COMPANY APPEARING IN PARA 3 OF THE SAID ORDER DOES SHOW THAT IT WAS INTO SOFTWARE DEVELOPMENT SERVICES SEGMENT. OR DER WAS FOR THE VERY SAME ASSESSMENT YEAR WHICH IS IMPUGNED HERE. PROFI LE OF THE ASSESSEE HERE AS APPEARING IN THE TP ORDER SHOWS THAT IT WAS ALSO IN SOFTWARE DEVELOPMENT SERVICES SEGMENT. THIS BEING SO, WE ARE OF THE OPI NION THAT DECISION OF THE SPECIAL BENCH IN THE CASE OF MERITOR LVS INDIA (P) LTD (SUPRA) CAN BE TAKEN AS A GOOD PRECEDENT. TRIBUNAL IN THE SAID DE CISION FOLLOWED A COORDINATE BENCH DECISION IN THE CASE OF HEWLETT- P ACKARD (INDIA) GLOBALSOFT P. LTD, V. DCIT [IT(TP)A1031/BANG/2011, DT.23/09/2015], WHICH AGAIN RELIED ON A COORDINATE BENCH DECISION I N THE CASE OF NXP SEMI CONDUCTORS INDIA P. LTD V. ACIT [IT(TP)A.1174/BANG/ 2011, DT.14.11.2014]. IT(TP)A.1287/BANG/2011 PAGE - 10 15. VIS-A-VIS COMPARABILITY OF ACCEL TRANSMATICS LT D (SEG), THIS TRIBUNAL HAS HELD AS UNDER AT PARA 8 OF ITS ORDER : 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 A CCEPTED 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 FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE IT(TP)A.1287/BANG/2011 PAGE - 11 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 CA PGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOP ER. THE TRIBUNAL, 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. 7. VIS-A-VIS AVANI CIMCON TECHNOLOGIES LTD, IT WAS HEL D AS UNDER AT PARA 9 OF THE ORDER MENTIONED SUPRA : 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 IT(TP)A.1287/BANG/2011 PAGE - 12 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 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 INDU STRY FOR THE PREVIOUS YEAR AS PER NASSCOM WAS 32%. THE GROWTH R ATE OF THIS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW O F THE ABOVE, IT IT(TP)A.1287/BANG/2011 PAGE - 13 WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJ ECTED AS A COMPARABLE. 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE 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 TELCOR DIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE. 17. WITH REGARD TO CELESTIAL LABS LTD, FINDINGS OF THE TRIBUNAL IN THE ABOVE MENTIONED TRIBUNAL ORDER AS APPEARING IN PARA 1 IS REPRODUCED HERE 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 C OMPANY. 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 UN DER 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 A ND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS DEF ERRED REVENUE EXPENDITURE AND THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALLMENTS FROM THE YEAR IN WHICH IT IS IN CURRED. 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- IT(TP)A.1287/BANG/2011 PAGE - 14 II). THIS AMOUNTS TO NEARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE 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 PH ARMA PRIVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (FOR AY 20 07-08) IN WHICH THE COMPARABILITY OF THIS COMPANY FOR CLINICA L TRIAL RESEARCH SEGMENT. THE RELEVANT EXTRACT OF DISCUSSION REGARDI NG THIS COMPANY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO 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 TOO L 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 INSI LICO EXPERTISE (APPLYING BIO-INFORMATICS TOOLS). THE COMPANY HAS D EVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AN D PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HA VE BEEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVO RABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTMENT OF MICROBIO LOGY, OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOL OGY AREA, THE COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMEN T WITH IMTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION ) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS. THE COMPAN Y IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE I NDUSTRIAL ENZYMES. THIS FACILITY WOULD ALSO INCLUDE THE RESEA RCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELO P NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARM A AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY W ILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA PRADESH. IT(TP)A.1287/BANG/2011 PAGE - 15 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 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 ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTI ONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCE SS OF MAKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NO T 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 CLINICAL TRIAL SEGMENT, FOR THE REASON THAT THIS COMPANY HAS DIVERSE BUSINESS. IT WAS SUBMITTED THAT, HOWEVER, FROM THE ABOVE EXTRACTS IT IS CLEAR THAT THIS COMPANY IS NOT INTO SOFTWARE DEV ELOPMENT ACTIVITIES, ACCORDINGLY, THIS COMPANY SHOULD BE REJ ECTED AS A COMPARABLE BEING FUNCTIONALLY DIFFERENT. 45.FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANSP IRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY W AS CLASSIFIED AS A RESEARCH AND DEVELOPMENT COMPANY. ACCORDING T O THE TPO IN AY 07-08 THIS COMPANY HAS BEEN CLASSIFIED AS SOFTWA RE DEVELOPMENT SERVICE PROVIDER IN THE CAPITALINE/PROWESS DATABASE AS WELL AS IN THE ANNUAL REPORT OF THIS COMPANY. THE TPO HAS REL IED ON THE RESPONSE FROM THIS COMPANY TO A NOTICE U/S.133(6) O F THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PRO VIDING SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREAT THIS AS A COMPARABLE HAS POINTED OUT TH AT THIS COMPANY IT(TP)A.1287/BANG/2011 PAGE - 16 PROVIDES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOI NFORMATICS SERVICES AND THAT THE SEGMENTAL DATA FOR EACH ACTIV ITY IS NOT AVAILABLE AND THEREFORE THIS COMPANY SHOULD NOT BE TREATED AS COMPARABLE. BESIDES THE ABOVE, THE ASSESSEE HAS PO INT OUT TO SEVERAL REFERENCES IN THE ANNUAL REPORT FOR 31.3.20 07 HIGHLIGHTING THE FACT THAT THIS COMPANY WAS DEVELOPS BIOTECHNOLO GY PRODUCTS AND PROVIDES RELATED SOFTWARE DEVELOPMENT SERVICES. TH E TPO CALLED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS CO MPANY. THE TPO ALSO CALLED FOR DESCRIPTION OF SOFTWARE DEVELOPMENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DATED 29.3.2010 HAS GIVEN DETAILS OF EMPLOYEES WORKING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHETHER ANY S EGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OT HER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISSUE D 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 SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN THE ANNUAL REP ORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCT S AND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFERE NCE TO ANY REPLY BY CELESTIAL LABS TO THE ABOVE CLARIFICATION OF THE TPO. THE TPO WITHOUT ANY BASIS HAS HOWEVER CONCLUDED THAT THE BU SINESS MENTIONED IN THE DRHP ARE THE SERVICES OR BUSINESSE S THAT WOULD BE STARTED BY UTILIZING THE FUNDS GARNERED THOUGH T HE INITIAL PUBLIC OFFER (IPO) AND THUS IN NO WAY CONNECTED WITH BUSIN ESS OPERATIONS OF THE COMPANY DURING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISSIONS MADE BY THE ASSESSEE AND T HE FACT THAT THIS COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEAR CH AND MANUFACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THE RE IS NO CLEAR BASIS ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERV ICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY OUGHT NOT TO HAVE BEEN CONSIDERED AS COMPARABLE. IT(TP)A.1287/BANG/2011 PAGE - 17 18. AS FOR E-ZEST SOLUTIONS LTD, THIS TRIBUNAL HAD HELD AS UNDER AT PARA 2 OF ITS ORDER (SUPRA) : 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 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 OUTSOURCING (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. IT(TP)A.1287/BANG/2011 PAGE - 18 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 COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CA SE, 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. 19. IN RESPECT OF FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), FINDINGS OF THE TRIBUNAL AS APPEARING AT PARA 10 OF THE ABOVE MENTI ONED ORDER IS REPRODUCED HEREUNDER: 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 : IT(TP)A.1287/BANG/2011 PAGE - 19 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 31.03.2007. HOWEVER IT WAS 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 SO FTWARE DEVELOPMENT SERVICE REVENUES WERE MORE THAN 75% BAS ED ON THE FOLLOWING FIGURES : IT(TP)A.1287/BANG/2011 PAGE - 20 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. 20. VIS-A-VIS HELIOS AND MATHESON INFORMATION TECHN OLOGY LTD, FINDINGS OF THE TRIBUNAL AS IT APPEARS AT PARA 11 OF THE ORD ER READS AS UNDER : 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.1287/BANG/2011 PAGE - 21 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 THA T A PERUSAL 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. IT(TP)A.1287/BANG/2011 PAGE - 22 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT TH E SAID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WI TH THE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YE AR AND IN THE PRESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL R EPORT, REFERRED TO IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OU T THAT THE SAID CONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT FROM THE ACTIVITY UNDERTAK EN BY THE ASSESSEE IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVE NUE AND NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PRO FILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THAT IN TH E IMMEDIATELY PRECEDING YEAR. THEREFORE, HAVING REGAR D TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERTED THAT THE APPLICATION SOFTWARE SEGMENT OF T HE 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 RAISE D SIMILAR ARGUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTI ONS LTD. (SEG). WE HAVE PERUSED THE RELEVANT PARA OF THE ORD ER OF THE TPO I.E., 6.3.21, IN TERMS OF WHICH THE SAID CONCER N HAS BEEN INCLUDED AS A COMPARABLE CONCERN. THE ASSESSEE POIN TED OUT THAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS L TD. (SEG), IN THE INSTANT CASE ALSO FOR A.Y. 2006-07 THE SAID CON CERN WAS FOUND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WAS NOT DISTURB ED BY THE TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING S TUDY, 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 TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IT(TP)A.1287/BANG/2011 PAGE - 23 21. AS FOR INFOSYS TECHNOLOGIES LTD, THIS TRIBUNAL HAD OBSERVED AS UNDER AT PARA 3 OF ITS ORDER MENTIONED SUPRA : 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 ( PENDING) 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 SYSTEMS. (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLO WING JUDICIAL DECISIONS :- (A) ITAT, DELHI BENCH DECISION IN THE CASE OF AGNIT Y INDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010 ) AND (B) TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (I TA NO.1054/BANG/2011) IT(TP)A.1287/BANG/2011 PAGE - 24 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 T HAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCT S IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPA NY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT I S ORDERED ACCORDINGLY. 22. VIS-A-VIS ISHIR INFOTECH LTD, AND LUCID SOFTWAR E LTD, FINDINGS OF THE TRIBUNAL WHICH APPEAR AT PARA 5 AND 6 OF THE ORDER (SUPRA) IS REPRODUCED BELOW : 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 IT(TP)A.1287/BANG/2011 PAGE - 25 DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVI CES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. 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. IT(TP)A.1287/BANG/2011 PAGE - 26 23. IN RESPECT OF KALS INFORMATION SYSTEMS LTD, FIN DINGS OF THE TRIBUNAL AS APPEARING IN PARA 4 OF THE ORDER (SUPRA) IS REPR ODUCED HEREUNDER : 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 RE JECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFF ERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS 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. IT(TP)A.1287/BANG/2011 PAGE - 27 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. 24. VIS-A-VIS PERSISTENT SYSTEMS LTD, FINDINGS OF T HIS TRIBUNAL AS IT APPEAR AT PARA 12 OF THE ORDER MENTIONED SUPRA IS R EPRODUCED HEREUNDER : 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 COMP ANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, I T IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NO T AVAILABLE. THE TPO REJECTED THE ASSESSEE'S OBJECTIONS ON THE GROUN D THAT AS PER THE ANNUAL REPORT FOR THE COMPANY FOR FINANCIAL YEAR 20 07-08, IT IS MAINLY A SOFTWARE DEVELOPMENT COMPANY AND AS PER TH E DETAILS FURNISHED IN REPLY TO THE NOTICE UNDER SECTION 133( 6) OF THE ACT, SOFTWARE DEVELOPMENT CONSTITUTES 96% OF ITS REVENUE S. IN THIS VIEW OF THE MATTER, THE ASSESSING OFFICER INCLUDED THIS COM PANY I.E. PERSISTENT SYSTEMS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNCTIONALITY 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 IT(TP)A.1287/BANG/2011 PAGE - 28 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 DISCUSSING THE COMPARA BILITY OF ANOTHER COMPANY, NAMELY LUCID SOFTWARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGMENTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRESENTLY UNDER CONSIDERA TION, WHICH IS INTO PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICE S AND FOR WHICH THE SEGMENTAL DATA IS NOT AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. BE OMITTED FROM THE LIST OF COMPARABLES. 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORT THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS 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 IT(TP)A.1287/BANG/2011 PAGE - 29 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 . 25. AS FOR SASKEN COMMUNICATION TECHNOLOGIES LTD (S EG), FINDINGS OF THIS TRIBUNAL AS APPEARING IN PARA 13 OF ITS ORDER MENTIONED SUPRA IS GIVEN HEREUNDER : 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 INFORMA TION 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: IT(TP)A.1287/BANG/2011 PAGE - 30 IQ INFORMATION SYSTEM (I) PVT. LTD., ITA NO. 1961 /HYD./2012 (PARA NO. 11 & 23, PAGE 25); 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 PERU SED 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. 26. IN RESPECT OF TATA ELXSI (SEG) OBSERVATIONS OF THIS TRIBUNAL IN THE ORDER MENTIONED SUPRA GIVEN AT PARA 14 IS REPRODUCE D HEREUNDER : IT(TP)A.1287/BANG/2011 PAGE - 31 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. 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 :- IT(TP)A.1287/BANG/2011 PAGE - 32 . 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 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. 27. WITH REGARD TO THIRDWARE SOLUTIONS LTD FINDINGS OF THE TRIBUNAL APPEARING AT PARA 15 OF THE ORDER MENTIONED SUPRA, IS REPRODUCED BELOW : 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 IT(TP)A.1287/BANG/2011 PAGE - 33 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 INCREASED THE MARGINS OF THE COMPANY. THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF 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. 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. IT(TP)A.1287/BANG/2011 PAGE - 34 28. IN RESPECT OF WIPRO LTD (SEG), OBSERVATIONS OF THE TRIBUNAL FOUND IN PARA 7 OF THE ORDER IS REPRODUCED HEREUNDER : 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 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 IT(TP)A.1287/BANG/2011 PAGE - 35 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 PVT. LTD. (ITA NO.227/BANG/2010) HAS HELD THAT A COMPANY OWNI NG INTANGIBLES 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 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. 29. NO DOUBT LD. DR HAS TAKEN A PLEADING THAT HELIO S & MATHESON INFORMATION TECHNOLOGY LTD, INFOSYS TECHNOLOGIES LT D, KALS INFORMATION SYSTEMS LTD (SEG), SASKEN COMMUNICATION TECHNOLOGIE S LTD (SEG), TATA ELXSI LTD (SEG) AND WIPRO LTD (SEG), WERE A PART OF THE TP STUDY OF THE ASSESSEE AND HENCE IT COULD NOT SEEK EXCLUSION. HO WEVER, WE FIND THAT THOUGH THESE COMPANIES APPEARED IN THE TP STUDY OF THE ASSESSEE IT HAD RAISED OBJECTIONS AGAINST THEIR INCLUSION BEFORE TH E TPO. OBJECTIONS TAKEN BY THE ASSESSEE FOR HELIOS & MATHESON INFORMATION T ECHNOLOGY LTD, IS APPEARING AT PARA 13.15 OF TP ORDER. HOWEVER, TPO HAD OVERRULED SUCH OBJECTIONS. SIMILAR WAS THE CASE IN INFOSYS TECHNO LOGIES LTD, AND THE IT(TP)A.1287/BANG/2011 PAGE - 36 COMMENTS OF THE TPO APPEAR AT 13.18 OF ITS ORDER. VIS-A-VIS KALS INFORMATION SYSTEMS LTD, TPO HAD CONSIDERED THE OBJ ECTIONS OF THE ASSESSEE AT PARA 13.21 OF THE ORDER. ON SASKEN COM MUNICATION TECHNOLOGIES LTD, ALSO ASSESSEE HAD RAISED OBJECTIO NS BEFORE THE TPO WHICH WAS DEALT BY HIM AT PARA 13.40 OF HIS ORDER. ON TATA ELXSI LTD, FINDINGS OF THE TPO ON THE OBJECTIONS OF THE ASSESS EE APPEAR AT PARA 13.48 OF HIS ORDER. INCLUSION OF WIPRO LTD, WAS ALSO OB JECTED BY THE ASSESSEE. TPO HAD DISPOSED OF THE OBJECTIONS AT PARA 13.54 OF HIS ORDER. THUS ASSESSEE HAD RAISED OBJECTIONS BEFORE THE TPO ITSEL F ON ALL THE ABOVE COMPANIES, THOUGH IT APPEARED IN ITS OWN LIST. HO WEVER, IT IS TRUE THAT ASSESSEE HAD RAISED NO OBJECTION BEFORE THE LOWER A UTHORITIES ON THE INCLUSION OF M/S. GEOMETRIC LTD (SEG), WHICH APPEAR ED IN ITS OWN SET OF COMPARABLES. HOWEVER FOR THIS COMPANY ASSESSEE HAS FILED AN ADDITIONAL GROUND RELYING ON THE SPECIAL BENCH DECISION IN THE CASE OF QUARK SYSTEMS LTD (SUPRA). IN OUR OPINION ASSESSEE CAN RAISE SUC H A PLEA EVEN THOUGH THE COMPARABLE APPEARED IN ITS OWN LIST. 30. ACCORDINGLY WE DIRECT THE AO TO EXCLUDE ACCEL T RANSMATIC LTD (SEG), AVANI CIMCON TECHNOLOGIES LTD, CELESTIAL LABS LTD, E-ZEST SOLUTIONS LTD, FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), HELIOS & MA THESON INFORMATION IT(TP)A.1287/BANG/2011 PAGE - 37 TECHNOLOGY LTD, INFOSYS TECHNOLOGIES LTD, ISHIR INF OTECH LTD, KALS INFORMATION SYSTEMS LTD (SEG), LUCID SOFTWARE LTD, PERSISTENT SYSTEMS LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG), TATA E LXSI LTD (SEG), THIRDWARE SOLUTIONS LTD (SEG) AND WIPRO LTD (SEG) F ROM THE LIST OF COMPARABLES CONSIDERED BY HIM. 31. AS FOR GEOMETRIC LTD (SEG), ARGUMENT OF THE LD .AR IS THAT ITS RPT EXCEEDED 15% BY VIRTUE OF THE DECISION OF COORDINAT E BENCH IN THE CASE OF 24/7 CUSTOMER.COM P. LTD, (SUPRA) IT HAS TO BE EXCL UDED. TPO HIMSELF HAS IN THE COMPARISON CHART PREPARED BY HIM GIVEN RPT O F GEOMETRIC LTD (SEG), AT 19.98%. RANGE OF RPT GENERALLY ACCEPTED BY COORDINATE BENCHES OF THE TRIBUNAL IS 5 % TO 25% AND AVERAGE THEREOF C OMES TO 15%. QUESTION OF HAVING A HIGHER RPT LEVEL OR LOWER RPT LEVEL WOU LD DEPEND ON THE NUMBER OF COMPARABLES AVAILABLE AFTER EXCLUSIONS. IN THE CASE BEFORE US THERE ARE 26 COMPARABLES AND EVEN AFTER EXCLUSIONS THERE WILL DEFINITELY BE AT LEAST NINE COMPARABLES. HENCE, WE ARE OF THE OP INION THAT RPT AT 15% CAN BE RIGHTLY APPLIED. NEVERTHELESS SINCE ASSESSE E HAD NOT RAISED THIS GROUND BEFORE ANY OF THE LOWER AUTHORITIES, WE REMI T THE QUESTION OF EXCLUSION OF GEOMETRIC LTD, BACK TO THE FILE OF THE AO / TPO FOR CONSIDERATION AFRESH. IT(TP)A.1287/BANG/2011 PAGE - 38 32. VIS-A-VIS MEGASOFT LTD, WE FIND THAT THIS TRIBU NAL IN THE CASE OF MERITOR LVS INDIA (P) LTD, HAD HELD AS UNDER AT PAR A 13 OF ITS ORDER : 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) SOFTWARE PRODUCT SEGMENT. THE ASSESSEE IS A PURE SOFTWARE S ERVICES PROVIDER AND NOT A SOFTWARE PRODUCT DEVELOPER. ACCORDING TO THE ASSESSEE THERE IS NO BREAK UP OF REVENUE BETWEEN SOFTWARE PR ODUCTS AND SOFTWARE SERVICES BUSINESS ON A STANDALONE BASIS OF THIS COMPARABLE. THE TPO RELIED ON INFORMATION WHICH W AS GIVEN BY THIS COMPANY IN WHICH THIS COMPANY HAD EXPLAINED TH AT IT HAS TWO DIVISIONS VIZ., BLUEALLY DIVISION AND XIUS-BCGI DIV ISION. XIUS-BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOF TWARE. THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PRODUCTS ARE SO LD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPLEMENTING THESE ST ANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUST OMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FIT INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JO B OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALS O EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE WOULD CONSTI TUTE PACKAGED PRODUCT AND AROUND 50% TO 60% WOULD CONSTITUTE CUST OMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BO ARDING AND LODGING EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY WAS MAINLY INTO CU STOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO P RODUCT SOFTWARE) INTERNALLY AND THAT THE PORTION OF THE RE VENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUSTOMIZA TION WAS LESS THAN 25% OF THE OVERALL REVENUES. THE TPO THEREFOR E HELD THAT LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPO S FILTER OF IT(TP)A.1287/BANG/2011 PAGE - 39 MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. THE BASIS ON WHICH THE TPO ARRIVED AT THE PLI OF 60 .23% IS GIVEN AT PAGE-115 AND 116 OF THE ORDER OF THE TPO. IT IS CLEAR FROM THE PERUSAL OF THE SAME THAT THE TPO HAS PROCEEDED TO D ETERMINE THE PLI AT THE ENTITY LEVEL AND NOT ON THE BASIS OF SEG MENTAL DATA. 25. IN THE ORDER OF THE TPO, OPERATING MARGIN WAS COMPUTED FOR THIS COMPANY AT 60.23%. IT IS THE COMPLAINT OF THE ASSESSEE THAT THE OPERATING 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 SUBSTANTIAL LY DIFFERENT FROM ITS SOFTWARE SERVICE SEGMENT. THE PRODUCT SEGMENT H AS EMPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SERVICE SEGMENT HAS EMPLOYEE COST OF 50%. SIMILARLY, THE PROFIT MARGIN ON COST IN PRODUCT SEGMENT IS 117.95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11%. BOTH THE SEGMENTS ARE SUBSTANTIALLY DIFFERE NT AND THEREFORE COMPARISON AT ENTITY LEVEL IS WITHOUT BASIS AND WOU LD VITIATE THE COMPARABILITY (SUBMISSIONS ON PAGE 381 TO 383 OF TH E PB-I). IT WAS FURTHER SUBMITTED THAT MEGASOFT LIMITED HAS PROVIDE D 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). TH E SEGMENTAL RESULTS I.E., RESULTS PERTAINING TO SOFTWARE SERVIC ES SEGMENT OF THIS COMPANY WAS: SEGMENTAL OPERATING REVENUES RS.63,71,32,544 SEGMENTAL OPERATING EXPENSES RS.51,75,13,211 OPERATING PROFIT RS.11,96,19,333 OP/TC (PLI) 23.11% 26. IT WAS REITERATED THAT IN THE GIVEN CIRCUMSTAN CES ONLY PLI OF SOFTWARE SERVICE SEGMENT VIZ., 23.11% OUGHT TO HAVE BEEN SELECTED FOR COMPARISON. IT(TP)A.1287/BANG/2011 PAGE - 40 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 THE SOFTWARE SEGMENT ONLY SHOULD BE ADOPTED IN THE CASE OF MEGAS OFT 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. ACCORDINGLY WE ARE OF THE OPINION THAT MEGASOFT LTD CAN BE CONSIDERED TO BE A GOOD COMPARABLE AFTER SEGMENTATION. 33. BASED ON THE ABOVE TPO IS DIRECTED TO REWORK TH E LIST OF COMPARABLES APPLYING THE WORKING CAPITAL ADJUSTMENT RELATABLE T O THE FINAL SET COMPARABLES REMAINING IN THE LIST. 34. IN THE RESULT GROUNDS 4.A, 4.B AND 4.F OF THE A SSESSEE AS WELL AS THE ADDITIONAL GROUND RELATING TO EXCLUSION OF GEOMETRI C ARE TREATED AS ALLOWED. IT(TP)A.1287/BANG/2011 PAGE - 41 35. ASSESSEE HAS RAISED NO OTHER GROUND EXCEPT FOR TP ISSUES MENTIONED ABOVE. 36. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATE D AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31ST DAY OF MARCH, 2016. SD/- SD/- (VIJAY PAL RAO) (ABRA HAM 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 BY ORDER ASSISTANT REGISTRAR