IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT (TP) A NO.1295/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. ACTIANCE INDIA PRIVATE LTD., (FORMERLY KNOWN AS FACETIME COMMUNICATIONS INDIA PVT. LTD.,) LE PARC RICHMONDE, 51, RICHMOND ROAD, BANGALORE 560 025. PAN : AABCV2926N VS. THE INCOME TAX OFFICER, WARD 11(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI CHAVALI S.NARAYAN, C.A. RESPONDENT BY : SHRI T.S.N. MURTHY CIT-I(DR) DATE OF HEARING : 13.10.2014 DATE OF PRONOUNCEMENT : 17.10.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 28.9.2010 OF THE ITO, WARD 11(2), BANGALORE, PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [THE ACT] IN RELATION TO AS SESSMENT YEAR 2006-07. 2. GROUND NO.1 IS GENERAL IN NATURE, CALLING FOR NO SPECIFIC ADJUDICATION. IT (TP) A NO. 1295/BANG/2010 PAGE 2 OF 26 3. GROUNDS NO.2 TO 4 RAISED BY THE ASSESSEE PROJECT THE GRIEVANCE OF THE ASSESSEE REGARDING THE ACTION OF THE LEARNED AS SESSING OFFICER AND HONBLE DISPUTE RESOLUTION PANEL, EXCLUDING EXPENSE S INCURRED ON TRAVEL EXPENSES IN FOREIGN CURRENCY AND EXPENSES INCURRED TOWARDS TELECOMMUNICATION EXPENSES FROM EXPORT TURNOVER ON THE GROUND THAT THESE EXPENSES ARE INCURRED IN RENDERING TECHNICAL SERVIC ES RENDERED TO CLIENTS OUTSIDE INDIA, WHILE COMPUTING DEDUCTION UNDER SECT ION 10A. IT IS THE PLEA OF THE ASSESSEE THAT AT ALL TIMES, DURING THE RELEV ANT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT RENDERING ANY TECHNICAL SERVICES. WITHOUT PREJUDICE TO ITS CONTE NTION THAT THE AFORESAID SUMS SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVE R WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER THAT IF THE EXPENSES ARE REDUCED FROM THE EX PORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER AND IN THIS REGARD, HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE KARN ATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) . 4. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE A ND THE LD. DR ON THE ISSUES RAISED IN GROUND NOS.2 TO 4. TAKING INT O CONSIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARN ATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE ASSESSI NG OFFICER TO EXCLUDE EXPENSES INCURRED IN FOREIGN CURRENCY TOWARDS TRAVE LLING AND EXPENSES INCURRED TOWARDS TELECOMMUNICATION BOTH FROM EXPORT TURNOVER AND TOTAL IT (TP) A NO. 1295/BANG/2010 PAGE 3 OF 26 TURNOVER, AS HAS BEEN PRAYED FOR BY THE ASSESSEE IN GROUND NO.4. IN VIEW OF THE ACCEPTANCE OF THE ALTERNATIVE PRAYER IN GROU ND NO.4, WE ARE OF THE VIEW THAT NO ADJUDICATION IS REQUIRED ON GROUND NO. 2 & 3. 5. GROUNDS NO.5 TO 15 RAISED BY THE ASSESSEE ARE WI TH REGARD TO THE 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. 92CA OF THE ACT. AT THE TIME OF HEARING OF THE APP EAL, IT WAS SUBMITTED THAT THE COMPARABLE COMPANIES CHOSEN BY THE TPO AND THE ADDITION MADE BY THE AO IN THE DRAFT ASSESSMENT ORDER, WHICH WAS CON FIRMED BY THE DRP, ARE IDENTICAL TO THE CASE DECIDED BY THE TRIBUNAL I N ITA NO.1054/BANG/2011 FOR AY 07-08 IN M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. VS. DCIT, CIRCLE 12(4), BANGALORE; AND YODLEE INFOTECH VS. ITO, ITA NO.1397/BANG/2010 FOR A.Y.2006-07. IT WAS ALSO SUBMITTED THAT THE BUSINESS PROFILE OF THE ASSESSEE AND THAT OF THE ASSESSEE IN THE CASE OF M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. ( SUPRA ) AND YODLEE INFOTECH ( SUPRA ) WERE ALSO IDENTICAL. THIS SUBMISSION WAS FOUND TO BE CORRECT AT THE TIME OF H EARING. WITH THIS BACKGROUND, WE WILL NOW CONSIDER THE FACTUAL BASIS OF THE PRESENT CASE AND THE DECISION RENDERED IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. ( SUPRA ). IT (TP) A NO. 1295/BANG/2010 PAGE 4 OF 26 6. THE ASSESSEE IS A COMPANY. IT IS A WHOLLY OWNED SUBSIDIARY OF M/S. FACE TIME, USA. IT RENDERED SOFTWARE DEVELOPMENT R ESEARCH AND DEVELOPMENT SERVICES TO ITS HOLDING COMPANY. IT WA S REMUNERATED ON A COST PLUS 10% MARK UP FOR SERVICES RENDERED TO ITS HOLDING COMPANY. IT IS NOT IN DISPUTE, BEFORE US, THAT THE TRANSACTION OF PROVIDING SOFTWARE RESEARCH & DEVELOPMENT SUPPORT SERVICES BY THE ASSESSEE TO I TS HOLDING COMPANY WAS AN INTERNATIONAL TRANSACTION WITH THE ASSOCIATE D ENTERPRISE ( AE ) AND THEREFORE THE PRICE AT WHICH THE ASSESSEE RENDERS S ERVICES TO ITS AE HAS TO PASS THE ARMS LENGTH PRICE (ALP) TEST AS LAID DOWN BY SECTION 92C OF THE ACT. DURING THE FINANCIAL YEAR 2005-06, THE ASSES SEE PROVIDED SOFTWARE RESEARCH & DEVELOPMENT SUPPORT SERVICES TO ITS AE A ND WAS REMUNERATED ON A COST PLUS BASIS. THE TOTAL VALUE OF INTERNA TIONAL TRANSACTION WITH RESPECT TO THE PROVISION OF SOFTWARE RESEARCH & DEV ELOPMENT SUPPORT SERVICES BY THE ASSESSEE TO ITS AE WAS RS. 9,84,50, 937. 7. 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 AS FOL LOWS:- IT (TP) A NO. 1295/BANG/2010 PAGE 5 OF 26 OPERATING REVENUE RS.9,84,50,937 OPERATING COST RS.8,83,97,189 OPERATING PROFIT RS.1,00,53,748 OP.PR/COST% 11.37% 8. THE TPO ARRIVED AT A FINAL SET OF 20 COMPARABLES . THE SET OF 20 COMPARABLES IS GIVEN AS ANNEXURE-I TO THIS ORDER . 9. 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. IN THE CO URSE OF PROCEEDINGS BEFORE THE TPO, NOTICE U/S. 133(6) HAS BEEN ISSUED TO THE COMPANIES THAT WERE CHOSEN AS COMPARABLE BY THE ASSESSEE AS WELL A S THE TPO AND ON THE BASIS OF THE REPLIES RECEIVED IN RESPONSE TO SU CH NOTICES, CERTAIN INFERENCES WERE DRAWN BY THE TPO. THE ACTION OF TH E TPO IN RELYING ON SOME OF THOSE INFORMATION WAS ALSO CHALLENGED BY TH E ASSESSEE. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE COMPARABLES SET OUT IN ANNEXURE-I TO THIS ORDER , ARRIVED AT ARITHMETIC MEAN OF 20.68%. AFTER FACTORING THE WORKING CAPITA L ADJUSTMENT OF 1.51%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 19.1 7%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS :- 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(S) IS COMPUTED AS UNDER:- IT (TP) A NO. 1295/BANG/2010 PAGE 6 OF 26 ARITHMETIC MEAN PLI 20.67% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) 1.5 1% ADJ.ARITHMETIC MEAN PLI 19.17% ARMS LENGTH PRICE: OPERATING COST RS.8,83,97,189 ARMS LENGTH MARGIN 19.17% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 119.17% OF OPERATING COST RS.10,53,42,930/- PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRICE:- THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER:- ARMS LENGTH PRICE (ALP) AT 119.17% OF OPERATING COST RS.10,53,42,930/- PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.9,84,50,937 SHORTFALL BEING ADJUSTMENT U/S.92CA RS.68,91,931 THE ABOVE SHORTFALL OF RS.68,91,931/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 10. 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. IT (TP) A NO. 1295/BANG/2010 PAGE 7 OF 26 11. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 20 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE FOLL OWING COMPANIES WILL HAVE TO BE EXCLUDED AS THE TURNOVER OF THESE C OMPANIES ARE MORE THAN RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSES SEE WHOSE TURNOVER IS LESS THAN RS.20 CRORES: (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 C RORES (2) IGATE GLOBAL SOLUTIONS LTD. 527.91 CRORES (3) MINDTREE LTD. 448.79 CRORES (4) PERSISTENT SYSTEMS LTD. 209.18 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 240.03 CRORES (6) INFOSYS TECHNOLOGIES LTD. 9028 CRORES 12. 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. 13. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE AND THE LEARNED DR. IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. ( SUPRA ), THIS TRIBUNAL ON APPLICATION OF THE TURNOVER FILTER WHILE SELECTING COMPARABLE COMPANIE S FOR COMPARABILITY ANALYSIS HELD AS FOLLOWS:- IT (TP) A NO. 1295/BANG/2010 PAGE 8 OF 26 (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 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 IT (TP) A NO. 1295/BANG/2010 PAGE 9 OF 26 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 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 IT (TP) A NO. 1295/BANG/2010 PAGE 10 OF 26 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 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. IT (TP) A NO. 1295/BANG/2010 PAGE 11 OF 26 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:- (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: IT (TP) A NO. 1295/BANG/2010 PAGE 12 OF 26 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 ( 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 IT (TP) A NO. 1295/BANG/2010 PAGE 13 OF 26 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; ( 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: IT (TP) A NO. 1295/BANG/2010 PAGE 14 OF 26 ( 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 ( 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 : IT (TP) A NO. 1295/BANG/2010 PAGE 15 OF 26 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 (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES. IT (TP) A NO. 1295/BANG/2010 PAGE 16 OF 26 14. 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 FRO M THE LIST OF COMPARABLE COMPANIES. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CRO RES (2) IGATE GLOBAL SOLUTIONS LTD. 527.91 CRORES (3) MINDTREE LTD. 448.79 CRORES (4) PERSISTENT SYSTEMS LTD. 209.18 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 240.03 CRORES (6) INFOSYS TECHNOLOGIES LTD. 9028 CRORES 15. THE AO IS DIRECTED TO COMPUTE THE ARITHMETIC ME AN BY EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. 16. IMPROPER SELECTION OF COMPARABLES: IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FOLLOWING COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE. A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED. 17. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE D ECISION OF THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. ( SUPRA ), WHEREIN THESE COMPANIES WERE HELD TO BE NOT IT (TP) A NO. 1295/BANG/2010 PAGE 17 OF 26 FUNCTIONALLY COMPARABLE WITH THAT OF A PURE SOFTWAR E DEVELOPER LIKE THE ASSESSEE. 18. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. ( SUPRA ):- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION 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 ENGAGE D IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF T HE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TR IBUNALS 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 O F IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT 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 COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE IT (TP) A NO. 1295/BANG/2010 PAGE 18 OF 26 ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OU R VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FRO M 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 REJ ECTED AS A COMPARABLE. 47. 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 COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (P) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THA T 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 CEN TRE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT IT (TP) A NO. 1295/BANG/2010 PAGE 19 OF 26 (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 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 T HE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID COMPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUN AL 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 THIS CO MPANY 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 AFORESAI D COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 19. 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. IT (TP) A NO. 1295/BANG/2010 PAGE 20 OF 26 ( SUPRA ). RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THAT THE FOLLOWING COMPANIES BE EX CLUDED FROM THE LIST OF 26 COMPARABLE ARRIVED AT BY THE TPO:- A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED. 20. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VIZ. , TATA ELXSI IS CONCERNED, THIS TRIBUNAL IN THE CASE OF YODLEE INFOTECH PVT. LTD. VS. ITO IN ITA NO.1538/BANG/2012 BY ITS ORDER DATED 30.8.2013 HELD THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE WI TH A SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE FOLLOWING WERE T HE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THIS REGARD. 15. TATA ELXSI LIMITED. 15.1.1 THIS COMPANY WAS SELECTED BY THE TPO FOR INCLUSION IN THE SET OF COMPARABLES. BEFORE THE TP O, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMP ANY IN THE SET OF COMPARABLES FOR VARIOUS REASONS SUCH AS FUNCTION AL DIS- SIMILARITY SIGNIFICANT R & D ACTIVITY, BRAND VALUE , SIZE, ETC. THE TPO, HOWEVER, REJECTED THE ASSESSEE'S OBJECTIONS AN D INCLUDED THE COMPANY IN THE SET OF COMPARABLES. BEFORE US, IN THIS APPEAL THE LEARNED AUTHORISED REPRESENTATIVE REITERATED TH AT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSES SEE AS IT PERFORMS A VARIETY OF ACTIVITIES AND FUNCTIONS UNDE R THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT AND HAS DRAWN OUR ATTENTION TO AND QUOTED FROM THE ANNUAL REPORT OF THE COMPANY . IT (TP) A NO. 1295/BANG/2010 PAGE 21 OF 26 15.1.2 THE LEARNED AUTHORISED REPRESENTATIVE SUBMI TTED THAT AS PER THE ANNUAL REPORT, THIS COMPANY OPERATE S IN TWO SEGMENTS, NAMELY, 1. SYSTEMS AND INTEGRATION SUPPORT SERVICES - WHICH CATERS TO THE DOMESTIC MARKET AND OFFERS INTEGRATED HARDWARE AND PACKAGED SOFTWARE SOLUTIONS SOURCED FROM PRINCIPALS AND 2. SOFTWARE DEVELOPMENT SERVICES - WHILE THE TPO HAS CONSIDERED THE SOFTWARE DEVELOPMENT AND SERVICES SE GMENT AS COMPARABLE TO THE ASSESSEE, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT ON PERUSAL OF THE ANNUA L REPORT OF THE COMPANY, IT CAN BE OBSERVED THAT THE SOFTWARE D EVELOPMENT SEGMENT CANNOT BE CONSIDERED FOR ANALYSIS FOR THE F OLLOWING REASONS : (I) AS PER THE DIRECTORS REPORT AND THE MANAGEMENT DISCUSSION AND ANALYSIS, THE SOFTWARE DEVELOPMENT A ND SERVICES SEGMENT COMPRISES OF THREE SUB-SERVICES NAMELY : A) PRODUCT DESIGN SERVICES I.E. DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE. B) INNOVATION DESIGN ENGINEERING I.E. MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN; AND C) VISUAL COMPUTING LABS I.E. ANIMATION AND SPECIAL EFFECTS FOR MOVIES AND TV. II) AS THE SOFTWARE DEVELOPMENT AND SERVICES SEGMEN T COMPRISES OF HARDWARE, SOFTWARE AND ANIMATION SERVICES, THERE IS NO SUB- SERVICES BREAK-UP / INFORMATION PROVIDED IN THE ANN UAL REPORT OR THE DATABASES, THE LEARNED AUTHORISED REPRESENTA TIVE CONTENDS THAT THIS COMPANY SHOULD BE REJECTED AS A COMPARABLE AS IT IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW ON TH IS ISSUE. 15.3.1 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDING THE JUD ICIAL IT (TP) A NO. 1295/BANG/2010 PAGE 22 OF 26 DECISIONS RELIED UPON. FROM THE RECORD, WE FIND TH AT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODUCT DESIGNI NG SERVICES AND NOT PURELY SOFTWARE DEVELOPMENT SERVIC ES. THE REFERENCES MADE TO THE ANNUAL REPORT BY THE LEARNED AUTHORISED REPRESENTATIVE SHOW THAT THE SEGMENT SOFTWARE DEVE LOPMENT AND SERVICES RELATES TO DESIGN SERVICES AND ARE NO T SIMILAR TO SOFTWARE SUPPORT SERVICES PERFORMED BY THE ASSESSEE IN THE CASE ON HAND. FURTHER, THE MUMBAI ITAT IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT . LTD. (ITA NO.7821/MUM/2011 ) HAS HELD, THAT THIS COMPANY, M/S. TATA ELXSI LTD. IS NO T A SOFTWARE DEVELOPMENT SERVICE PROVIDER, AT PARA 7.7 ON PAGE 2 1 OF ITS ORDER WHICH IS EXTRACTED HEREUNDER : 7.7 . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FA CTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REPO RT OF THIS COMPANY, PLACED BEFORE US, THIS FACTUAL POSITI ON PERTAINING TO TATA ELXSI LTD., HAS NOT CHANGED FROM ASSESSMENT YEARS 2007-08 TO 2008-09. IN THIS VIEW OF THE MATTER, WE ARE OF THE VIEW THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLUSION IN THE SET OF COMPARABLE I N THE CASE ON HAND FOR THE PERIOD UNDER CONSIDERATION AND THER EFORE DIRECT THE TPO TO EXCLUDE THIS COMPANY FROM THE FIN AL SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION . IT (TP) A NO. 1295/BANG/2010 PAGE 23 OF 26 21. 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. 22. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VI Z., MEGASOFT LTD. IN THE LIST OF FINAL COMPARABLES CHOSEN BY THE TPO IS CONCERNED, THIS TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. ( SUPRA ) HAD HELD THAT ONLY SEGMENTAL DATA OF THE SAID COMPA NY SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. FOLLOWING ARE THE RELEV ANT OBSERVATIONS OF THE TRIBUNAL:- 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT AL L THIS COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGMENTAL MA RGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SE GMENT) ALONE SHOULD BE CONSIDERED FOR COMPARABILITY. ON THE ABO VE SUBMISSION, WE FIND THAT THE TPO CONSIDERED THE SEG MENTAL MARGIN (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GE OMETRIC, KALS INFO SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND T ATA ELXSI. BEFORE DRP THE ASSESSEE POINTED OUT THAT THE SEGMEN TAL MARGIN OF 23.11% ALONE SHOULD BE TAKEN FOR COMPARABILITY. THE DRP HAS NOT GIVEN ANY SPECIFIC FINDING ON THE ABOVE PLEA OF THE ASSESSEE. PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHIC H THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ ., BLUEALLY DIVISION AND XIUS-BCGI DIVISION. XIUS- BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PR ODUCTS ARE SOLD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPL EMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FI T INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO IT (TP) A NO. 1295/BANG/2010 PAGE 24 OF 26 EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (S OFTWARE DEVELOPED) WOULD CONSTITUTE PACKAGED PRODUCT AND AR OUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BOARDING AND LODGING EXPENSE . BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COM PARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE P RODUCTS DEVELOPED (WHICH WAS AKIN TO SOFTWARE DEVELOPMENT) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMEN T OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% O F THE OVERALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25 % OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HA VING DRAWN THE ABOVE CONCLUSION, THE TPO DID NOT BOTHER TO QUA NTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUC T DEVELOPMENT AND SOFTWARE DEVELOPMENT SERVICE BUT AD OPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TER MS OF RULE 10B(3)(B) OF THE RULES, AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM , SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 38. NEITHER THE TPO NOR THE DRP HAVE NOTICED THAT THERE IS BOUND TO BE A DIFFERENCE BETWEEN THE ASSESSEE AND M EGASOFT AND THE PROFIT ARISING TO THE MEGASOFT AS A RESULT OF T HE EXISTENCE OF THE SOFTWARE PRODUCT SEGMENT AND NO FINDING HAS BEE N GIVEN THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FOR THIS RE ASON, WE ARE INCLINED TO HOLD THAT THE PROFIT MARGIN OF 23.11% W HICH IS THE MARGIN OF THE SOFTWARE SERVICE SEGMENT BE TAKEN FOR COMPARABILITY. IN VIEW OF THE ABOVE CONCLUSION, WE DO NOT WISH TO GO INTO THE QUESTION AS TO WHETHER LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. IT (TP) A NO. 1295/BANG/2010 PAGE 25 OF 26 23. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUN AL, SEGMENTAL MARGINS IN SO FAR AS IT RELATES TO PROVIDING SOFTWARE SERVI CES BY MEGASOFT ALONE SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. 24. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT IF THE AFORESAID 9 COMPARABLE COMPANIES ARE EXCLUDED F ROM THE LIST OF 20 COMPARABLE COMPANIES CHOSEN BY THE TPO AND SEGMENTA L RESULTS (SOFTWARE DEVELOPMENT SEGMENT) ALONE OF COMPARABLE COMPANY CHOSEN BY THE TPO M/S.MEGASOFT LTD., IS TAKEN FOR COMPARABILI TY, THEN THE PROFIT MARGIN OF THE ASSESSEE WOULD BE WELL WITHIN THE (+) (-) 5% RANGE OF THE ARITHMETIC MEAN OF THE REMAINING COMPARABLE COMPANI ES AND THEREFORE THE PRICE RECEIVED BY THE ASSESSEE WOULD BE CONSIDERED AS AT ARMS LENGTH. HE PRAYED FOR A LIMITED DIRECTION TO THE TPO ON THE LINES SET OUT ABOVE AND DETERMINE THE ALP. IT ALSO SUBMITTED THAT THE OTHE R ISSUES RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL NEED NOT BE GONE INTO. 25. 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. THE TPO IS ALSO DIRECTED TO TAKE ONLY THE SOFTWARE DEVELOPMENT SEGMENT MARGIN OF THE COMPARABLE COMPANY M/S.MEGASO FT LTD., AS WAS DIRECTED AND HELD IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. ( SUPRA ). IT (TP) A NO. 1295/BANG/2010 PAGE 26 OF 26 21. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF OCTOBER , 2014 . SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEM BER ENCL: ANNEXURE-I BANGALORE, DATED, THE 17 TH 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.