Appeal details
Counselvise Citation
[2016] 133 COUNSELVISE.COM (IT) 8597 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 2 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-03-2016
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
A
Next Hearing Date
16-02-2016
Assessment Year
2007-2008
Appeal Filed On
16-12-2011
Judgement Text
IT(TP)A.1304/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.1304/BANG/2011 (ASSESSMENT YEAR : 2006-07) M/S. HEWLETT PACKARD (INDIA) SOFTWARE OPERATION P. LTD, 29, CUNNINGHAM ROAD, BANGALORE .. APPELLANT PAN : AAACH7164B V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -11(4), BANGALORE .. RESPONDENT ASSESSEE BY : SHRI. AJIT KUMAR JAIN, CA REVENUE BY : SHRI. G. R. REDDY, ADDL.CIT HEARD ON : 16.02.2016 PRONOUNCED ON : 09.03.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY ASSESSEE DIRECTED AGAINST AN ORDER DT.30.09.2011 OF AO, PASSED IN PURSUANCE TO DIRECTI ONS OF DRP U/S.144C OF THE INCOME-TAX ACT, 1961 (THE ACT IN SHORT), IT H AS FILED CONCISE GROUNDS AS WELL AS A SET OF ADDITIONAL GROUNDS. IT(TP)A.1304/BANG/2011 PAGE - 2 02. CONCISE GROUNDS CONSIST OF SEVEN GROUNDS, OUT O F WHICH GROUNDS 1 AND 7 ARE GENERAL IN NATURE, NEEDING NO S PECIFIC ADJUDICATION. GROUND 2 IS REGARDING ADJUSTMENTS MA DE ON THE VALUE OF THE INTERNATIONAL TRANSACTIONS BY THE AO / TPO T O THE EXTENT CONFIRMED BY THE DRP. 03. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT OUT OF GROUND 2 RELATING TO TRANSFER PRICING, HE WAS PRESSING ONL Y SUB-GROUNDS 2.4, 2.6 AND 2.7. ACCORDINGLY ALL OTHER SUB-GROUNDS REL ATING TO TP ISSUES ARE DISMISSED AS NOT PRESSED. 04. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN R & D SERVICES IN THE FIELD OF E-COMMERCE, E-SOLUTIONS, INTERNET S ECURITY AND MANAGEMENT, FILED ITS RETURN OF INCOME FOR THE IMPU GNED ASSESSMENT YEAR DECLARING INCOME OF RS.54,94,29,613 /-. SINCE VALUE OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR EXCEEDED THE STIP ULATED LIMIT, REFERENCE WAS MADE TO THE TPO FOR ANALYSING THE ALP OF SUCH TRANSACTIONS WITH ITS AE. ASSESSEE IS A PART OF H P GROUP AND ITS IT(TP)A.1304/BANG/2011 PAGE - 3 ULTIMATE HOLDING COMPANY IS HEWLETT PACKARD COMPANY , USA. IT HAD OPERATING REVENUE OF RS.628,74,04,881/- AGAINST OPERATING COST OF RS.580,40,71,166/- RESULTING IN A PROFIT OF RS.4 8,33,33,715/-, WITH A RATIO OF 8.33% AS OPERATING PROFIT TO OPERAT ING COST. INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE DURING THE RELEVANT PREVIOUS YEAR AS REPORTED IN ITS AUDIT REP ORT WERE AS UNDER : 05. RECOMMENDATIONS OF THE TPO WHICH WERE ADVERSE T HE ASSESSEE WAS CONFINED TO SOFTWARE DEVELOPMENT SERVI CES AND THEREFORE ISSUES ARISING IN THIS APPEAL ARE ALSO OF THE SAME SEGMENT. FOR JUSTIFYING ITS PRICING OF THE INTERNATIONAL TRA NSACTIONS WITH ITS AE, ASSESSEE HAD SELECTED 46 COMPARABLES AND THE AV ERAGE PLI OF THE 46 COMPARABLES CAME TO 12.52%. AS PER THE ASSE SSEE, THIS WAS WITHIN + / - 5% MARGIN OF ITS OWN PLI AND THEREFORE THERE WAS NO REQUIREMENT OF ANY ADJUSTMENT FOR THE PRICING OF TH E TRANSACTIONS WITH ITS AE. ASSESSEE HAD ADOPTED TNMM METHOD AS T HE MOST APPROPRIATE ONE. TPO WHILE AGREEING WITH TNMM, WAS OF THE IT(TP)A.1304/BANG/2011 PAGE - 4 OPINION THAT MANY OF THE COMPARABLES SELECTED BY TH E ASSESSEE WERE NOT APPROPRIATE FOR VARIOUS REASONS MENTIONED IN TH E TP ORDER. HE REJECTED ALL, BUT 38 COMPARABLES FOR FUNCTIONAL DIS SIMILARITY, UNRELIABLE DATA, LACK OF COMPLETE INFORMATION, DIFF ERENCE IN ECONOMIC CIRCUMSTANCES AND EXISTENCE OF RELATED PAR TY TRANSACTIONS. COMPARABLES WHICH WERE ACCEPTED BY THE TPO WERE ACC EL TRANSMATIC LTD, LGS GLOBAL LTD, MIND TREE LTD, QUIN TEGRA SOLUTIONS LTD, R S SOFTWARE (INDIA) LTD, R SYSTEMS INTERNATIONAL (SEG), SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG) AND TATA ELXSI LTD. RELYING ON THE VERY SAME DATA BASE, NAM ELY, CAPITALINE PLUS AND PROWESS, TPO IN ADDITION TO THE EIGHT COMP ANIES MENTIONED ABOVE ZEROED IN ON ANOTHER EIGHTEEN COMPA RABLE COMPANIES WHICH ACCORDING TO HIM FITTED PERFECTLY W ITH THAT OF THE ASSESSEES PROFILE AS SOFTWARE DEVELOPMENT SERVICES PROVIDER. FINAL LIST CONSIDERED BY TPO FOR THE ALP ANALYSIS AND THE IR AVERAGE PLI READ AS UNDER : IT(TP)A.1304/BANG/2011 PAGE - 5 06. ON THE AVERAGE ALP OF 25.14% AS WORKED OUT ABOV E, TPO ALLOWED NEGATIVE WORKING CAPITAL ADJUSTMENT OF 2.16%. FINA L ALP OF THE COMPARABLES CONSIDERED BY THE TPO WAS 22.98%. HE T HEREFORE IT(TP)A.1304/BANG/2011 PAGE - 6 RECOMMENDED AN ADJUSTMENT OF RS.85,04,41,829/-, WO RKED OUT AS HEREUNDER: 07. WHEN A PROPOSAL ON THE ABOVE LINES WAS PUT BEFO RE THE ASSESSEE, IT CHOSE TO MOVE THE DRP. THOUGH ASSESSEE ASSERTED A NUMBER OF GROUNDS BEFORE THE DRP FOR EXCLUDING COMPARABLES WHICH AS P ER THE ASSESSEE WERE FUNCTIONALLY DIFFERENT, DRP WAS NOT IMPRESSED. THE REAFTER FINAL ASSESSMENT ORDER WAS PASSED BY MAKING AN ADDITION OF RS.85,04, 41,839/- AS ALP ADJUSTMENT. 08. NOW BEFORE US, LD. AR SUBMITTED THAT HE WAS SEE KING FOR EXCLUSION OF AVANI CIMCON TECHNOLOGIES LTD, CELESTIAL LABS LT D, E- ZEST SOLUTIONS LTD, FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG), HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, INFOSYS TECHNOLOGIES LT D, ISHIR INFOTECH LTD, IT(TP)A.1304/BANG/2011 PAGE - 7 KALS INFORMATION SYSTEMS LTD, LUCID SOFTWARE LTD, P ERSISTENT SYSTEMS LTD, TATA ELXSI LTD (SEG) AND WIPRO LTD (SEG), FROM THE LIST OF COMPARABLES CONSIDERED BY THE TPO. FURTHER ACCORDING TO HIM, M /S. MEGASOFT LTD, COULD BE CONSIDERED AS COMPARABLE ONLY AFTER SEGMEN TISING ITS RESULTS. FOR SEEKING THE ABOVE EXCLUSIONS, LD. AR PLACED RELIANC E ON A COORDINATE BENCH ORDER IN THE CASE OF HEWLETT PACKARD GLOBAL S OFT P. LTD V. DCIT [IT(TP)A.1031/BANG/2011, DT.23.09.2015]. LD. AR SU BMITTED THAT THE ASSESSEE IN THE SAID CASE WAS ALSO WAS INTO SOFTWAR E DEVELOPMENT SERVICES AND THE SEGMENT CONSIDERED FOR COMPARISON WAS VERY SAME. AS PER THE LD AR, PROFILE IN SO FAR AS SOFTWARE DEVELOPMENT SERVI CES OF HEWLETT PACKARD GLOBAL SOFT P. LTD, COMPARED FAVOURABLY WITH THAT O F THE ASSESSEE. ACCORDING TO HIM, THIS TRIBUNAL HAD DIRECTED EXCLUS ION OF AVANI CIMCON TECHNOLOGIES LTD, CELESTIAL LABS LTD, E- ZEST SOLUT IONS LTD, HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, INFOSYS TECHNO LOGIES LTD, ISHIR INFOTECH LTD, KALS INFORMATION SYSTEMS LTD, LUCID S OFTWARE LTD, PERSISTENT SYSTEMS LTD, TATA ELXSI LTD (SEG) AND WIPRO LTD (SE G), AS NOT COMPARABLE BEING FUNCTIONALLY DIFFERENT VIDE PARA 24 OF THE OR DER MENTIONED SUPRA. 09. CONTINUING HIS SUBMISSIONS, LD. AR ASSERTED THA T COMPARABILITY OF MEGASOFT LTD, WAS ALSO CONSIDERED BY THIS TRIBUNAL IN THE ABOVE DECISION IT(TP)A.1304/BANG/2011 PAGE - 8 AND THE TRIBUNAL HAD REMITTED THIS ISSUE BACK TO TH E AO / TPO FOR PROPER SEGMENTATION OF ITS RESULTS. FURTHER ACCORDING TO HIM, M/S. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) ALSO HAD TO BE EXCLUDED BY VIRTUE OF THE FINDING APPEARING AT PARA 28 OF THE DECISION IN THE CASE OF HEWLETT PACKARD GLOBAL SOFT P. LTD (SUPRA). 10. PER CONTRA, LD. DR SUBMITTED THAT ASSESSEE COUL D NOT SHOW HOW IT WAS FUNCTIONALLY SIMILAR TO THE SOFTWARE DEVELOPMEN T SEGMENT OF HEWLETT PACKARD GLOBALSOFT P. LTD (SUPRA). 11. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. OUT OF THE 26 COMPARABLES SELECTED BY THE TPO, ASSESSEE IS SEEKING EXCLUSION OF TWELVE COMPANIES AND IS ALSO PLEADING FOR SEGMEN TATION OF RESULT OF ONE COMPANY BEFORE COMPARING. AS PER THE ASSESSEE THESE COMPANIES WERE FUNCTIONALLY DIFFERENT AND IT WAS SO HELD BY T HIS TRIBUNAL IN THE CASE OF HEWLETT PACKARD GLOBAL SOFT P. LTD (SUPRA). WHA T WE FIND IS THAT M/S. HEWLETT PACKARD GLOBAL SOFT P. LTD (SUPRA) ALSO FEL L IN THE SAME GROUP OF IT(TP)A.1304/BANG/2011 PAGE - 9 COMPANIES AS THAT OF THE ASSESSEE. COMPARISON DON E IN THE SAID CASE WAS ALSO WITH REGARD TO THE SOFTWARE DEVELOPMENT SERVIC ES AND THIS IS CLEAR FROM FUNCTIONAL PROFILE OF THE SAID COMPANY WHICH HAS BE EN REPRODUCED AT PARA EIGHT OF THAT ORDER. PROFILE OF THE ASSESSEE IN TH E CASE BEFORE US IS REPRODUCED HERE UNDER : THUS WE ARE INCLINED TO ACCEPT THE CONTENTION OF TH E LD. AR THAT THE COMPANIES WHICH WERE EXCLUDED FROM LIST OF COMPARAB LES CONSIDERED IN SOFTWARE DEVELOPMENT SERVICES SEGMENT IN THE CASE O F HEWLETT PACKARD GLOBAL SOFT P. LTD (SUPRA) HAVE TO BE EXCLUDED HERE ALSO. THIS TRIBUNAL FOLLOWING THE DECISION OF ANOTHER COORDINATE BENCH IN THE CASE OF NXP SEMICONDUCTORS (INDIA) P. LTD, V. ACIT [IT(TP)A.117 4/BANG/2011, DT.14.11.2014], HAS HELD AS UNDER IN PARAS 23 AND 2 4 OF ITS ORDER IN THE CASE OF M/S. HEWLETT PACKARD GLOBAL SOFT P. LTD (SUPRA) : IT(TP)A.1304/BANG/2011 PAGE - 10 23. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IN SO FAR AS ACCEL TRANSMATIC LTD (SEG), AVANI CIMC ON TECHNOLOGIES LTD, CELESTIAL LABS LTD, E-ZEST SOLUTIONS LTD,, HEL IOS & MATHESON INFORMATION TECHNOLOGY LTD, INFOSYS TECHNOLOGIES LT D, ISHIR INFOTECH LTD, KALS INFORMATION SYSTEMS LTD (SEG), LUCID SOFT WARE LTD, PERSISTENT SYSTEMS LTD, QUINTEGRA SOLUTIONS LTD, TA TA ELXSI LTD (SEG), THIRDWARE SOLUTIONS LTD (SEG) AND WIPRO LTD (SEG) A RE CONCERNED, THE ISSUE OF COMPARABILITY OF THESE COMPANIES HAD COME UP BEFORE THIS TRIBUNAL IN THE CASE OF NXP SEMICONDUCTORS INDIA P. LTD (SUPRA). ANALYSIS DONE IN THE SAID DECISION WAS ALSO FOR SOF TWARE DEVELOPMENT SERVICES SEGMENT AND THE TPO IN THE SAID CASE HAD A LSO SELECTED THE VERY SAME SET OF 26 COMPANIES. SAID DECISION BEING FOR THE VERY SAME ASSESSMENT YEAR 2007-08, WE ARE OF THE OPINION THAT IT CAN BE TAKEN AS A GOOD PRECEDENCE FOR DECIDING THE ISSUE OF COMPARA BILITY RAISED BY THE ASSESSEE HEREIN, IN SO FAR AS THESE COMPANIES A RE CONCERNED. THIS TRIBUNAL HAD OBSERVED AS UNDER : I) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWAR E DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITT ED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ACCEL TRANSMATIC SHOULD BE REJECT ED 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 SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THAT THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENTRE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IT(TP)A.1304/BANG/2011 PAGE - 11 IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE 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 DIFFEREN T FROM THE ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THI S COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T HE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARA BILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR TH E ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDE RED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID CO MPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECI SION REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTE D THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSES SEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. IT(TP)A.1304/BANG/2011 PAGE - 12 ACCEPTING THE ARGUMENT OF THE LD. COUNSEL FOR THE A SSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 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. II) 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 FROM THE ASSESSEE. BASED ON THE INFORMATION AVAILA BLE IN THE COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITTED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFT WARE SERVICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FR OM THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/20 11 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CIN COM 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 OPERATING INCOME OF IT SERVICES AND SALE OF SOFTWAR E PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THA T OF ASSESSEE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PARTY. LEARNE D CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETAILS OF PERCENTAG E IT(TP)A.1304/BANG/2011 PAGE - 13 OF EXPORT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERATION FOR COMPARABILITY ANALYSIS. IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS 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 O PERATING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT W AS AN EXTRAORDINARY YEAR FOR THIS COMPANY. EVEN THE GROW TH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR AS PER NASS COM WAS 32%. THE GROWTH RATE OF THIS COMPANY WAS DOUBLE TH E INDUSTRY AVERAGE. IN VIEW OF THE ABOVE, IT WAS ARG UED THAT THIS COMPANY OUGHT TO HAVE BEEN REJECTED AS A COMPARABLE . 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE RE ASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPA RABLE ARE FOUND TO BE ACCEPTABLE. THE DECISION OF ITAT (MUMB AI) IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A CO MPARABLE. III) CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVE LOPMENT IT(TP)A.1304/BANG/2011 PAGE - 14 COMPANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- IN THE DIRECTORS REPORT (PAGE 20 OF PB-IL), IT IS STATED THAT THE COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR IN-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2AB) OF THE INCOME TAX ACT. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UNDER DEFERRED REVENUE EXPENDITURE (PAGE 31 OF PB-II), IT IS MENTIONED THAT, EXPENDITURE INCURRED ON RESEARC H AND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AND THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALLMENTS FROM THE YEAR IN WHICH IT IS INCURRED. AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO T HE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE (PAGE 30 OF PB-II). THIS AMOUNTS TO 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 SOFTWARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D AC TIVITIES IS BAD IN LAW. 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISI ON OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (F OR AY 2007-08) IN WHICH THE COMPARABILITY OF THIS COMPANY FOR CLINICAL TRIAL RESEARCH SEGMENT. THE RELEVANT EXTRA CT OF DISCUSSION REGARDING THIS COMPANY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAGE-389 OF THE PAPER BOOK WHICH IS AN EXTRACT FROM THE DIRECTORS REPORT WHICH READS AS FOLLOWS: THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TOOL CELSUITE TO DRUG DISCOVERY IN, FINDING THE LEAD MOLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY IT(TP)A.1304/BANG/2011 PAGE - 15 FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT ACT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYIN G BIO- INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE BEEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFIC ATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OU R COLLABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY , OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, THE COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS . THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FA CILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORIES FOR CA RRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NEW CANDIDA TES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARM A AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY WILL BE SET UP IN GENOME VALLEY AT HYDERAB AD IN ANDHRA PRADESH. ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALS O IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AN D SHOULD BE CONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELATION TO A SOFTWARE DISCOVERY OF NEW DRUGS. MOREOVER THE COMPANY ALSO IS OWNER OF THE IPR. THERE IS HOWEVER A REFERENCE TO DEVELOPMENT O F A MOLECULE TO TREAT CANCER USING BIO-INFORMATICS TO OLS FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. AS EXPLAINED EARLIER IT IS A DIVERSIFIED COMPANY AN D THEREFORE CANNOT BE CONSIDERED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS B EEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFER ENCE IN IT(TP)A.1304/BANG/2011 PAGE - 16 FUNCTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCESS OF MAKING ADJUSTMENT, T HE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE AB OVE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARC H IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT TH IS COMPANY IS OWNER OF IPR, IT HAS SOFTWARE FOR DISCOV ERY OF NEW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCER. I N THE ULTIMATE ANALYSIS, THE ITAT DID NOT CONSIDER THIS C OMPANY AS A COMPARABLE IN CLINICAL TRIAL SEGMENT, FOR THE REASO N THAT THIS COMPANY HAS DIVERSE BUSINESS. IT WAS SUBMITTED THA T, HOWEVER, FROM THE ABOVE EXTRACTS IT IS CLEAR THAT T HIS COMPANY IS NOT INTO SOFTWARE DEVELOPMENT ACTIVITIES, ACCORD INGLY, THIS COMPANY SHOULD BE REJECTED 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 TO THE TPO IN AY 07-08 THIS COMPANY HAS B EEN CLASSIFIED AS SOFTWARE DEVELOPMENT SERVICE PROVIDER IN THE CAPITALINE/PROWESS DATABASE AS WELL AS IN THE ANNUA L REPORT OF THIS COMPANY. THE TPO HAS RELIED ON THE RESPONSE F ROM THIS COMPANY TO A NOTICE U/S.133(6) OF THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PROVIDING SOFTWARE DE VELOPMENT SERVICES. THE ASSESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREAT THIS AS A COMPARABLE HAS POINTED OUT THAT THI S COMPANY 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 DEVELOP S BIOTECHNOLOGY PRODUCTS AND PROVIDES RELATED SOFTWAR E DEVELOPMENT SERVICES. THE TPO CALLED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPANY. THE TPO ALSO C ALLED FOR IT(TP)A.1304/BANG/2011 PAGE - 17 DESCRIPTION OF SOFTWARE DEVELOPMENT PROCESS. IN RE SPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DA TED 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 OTHER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTW ARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. CE LESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISSUED DRAFT RED HERRING PROSPECTUS (DRH P) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH. THE TPO WANTED TO KNOW AS TO W HETHER THE PRIMARY BUSINESS OF THIS COMPANY IS SOFTWARE DEVELO PMENT SERVICES AS INDICATED IN THE ANNUAL REPORT FOR FY 0 6-07 OR CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS A ND 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 THA T THE BUSINESS MENTIONED IN THE DRHP ARE THE SERVICES OR BUSINESSES THAT WOULD BE STARTED BY UTILIZING THE F UNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN NO WAY CONNECTED WITH BUSINESS OPERATIONS OF THE COMPA NY DURING FY 06-07. WE ARE OF THE VIEW THAT IN THE LI GHT OF THE SUBMISSIONS MADE BY THE ASSESSEE AND THE 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 CO MPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DE VELOPMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSE SSEE THAT THIS COMPANY OUGHT NOT TO HAVE BEEN CONSIDERED AS COMPARABLE. IV) E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMP ARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE I NCLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED T HE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUND THAT AS PER TH E INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS IT(TP)A.1304/BANG/2011 PAGE - 18 COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND SATISFIES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIS T OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY D IFFERENT TO THE ASSESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E-BUSINESS CONSULT ING SERVICES, CONSISTING OF WEB STRATEGY SERVICES, I T DESIGN SER VICES AND IN TECHNOLOGY CONSULTING SERVICES INCLUDING PRODUCT DE VELOPMENT CONSULTING SERVICES. THESE SERVICES, THE LEARNED AU THORISED REPRESENTATIVE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMEN TAL DATA IN ITS ANNUAL REPORT. THE LEARNED AUTHORISED REPRESENTATIV E SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NO T CONTAIN DETAILED DESCRIPTIVE INFORMATION ON THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAILS AVAILAB LE ON THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WHILE 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 THE REFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CO NSIDERED AS COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES AND RE LIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF CA PITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961 (HYD)/2011 DT.23.11.2012 AND PRAYED THAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., OUGHT TO BE OMI TTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLYCONSIDERED THE MATERIAL ON RECORD. IT IS S EEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN TH E LIST OF COMPARBALES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE NOTICE UNDER SECTION 13 3(6) OF THE ACT. IT(TP)A.1304/BANG/2011 PAGE - 19 IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVIC ES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVICES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON RECO RD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT SER VICES, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERING PR ODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICE S WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BEEN HEL D BY THE CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CAPI TAL I-Q INFORMATIONSYSTEMS (INDIA) (P) LTD. SUPRA) THAT KPO 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 AFO RESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E-ZEST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDE RATION IN THE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED . V) HELIOS & MATHESON INFORMATION TECHNOLOGY LTD : 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WITH REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION S OLUTIONS LTD. (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE L IST OF COMPARABLES IS TO BE EFFECT THAT THEY ARE FUNCTIONA LLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM AN D SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORES AID CONCERNS ARE ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCT S WHICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES UNDERTAKEN BY THE ASSESSEE 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 SYSTEMS LTD., IS TO THE EFFECT THAT THE SAID CONCERNS APPL ICATION SOFTWARE SEGMENT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE W HICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. T HE SAID CONCERN IS ENGAGED IN TWO SEGMENTS NAMELY APPLICATI ON SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATI ON SOFTWARE SEGMENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID IT(TP)A.1304/BANG/2011 PAGE - 20 CONCERN IS ENGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASSESSEE IS THAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F.Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGME NT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND SO FTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRI TTEN SUBMISSIONS, COPY OF WHICH IS PLACED IN THE PAPER B OOK AT PAGE 420.3 TO 420.4. THE ASSESSEE FURTHER POINTED OUT TH AT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTWARE SERVICES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPLICATION SOFTWA RE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEES IT-SERVICES SEGMENT. THE TPO HOWEVER, NO TICED THAT THOUGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODU CTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PRODUCTS AS THERE WERE NO COST OF PURCHAS ES DEBITED IN THE PROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED TH AT THE QUANTUM OF REVENUE FROM SALE OF PRODUCTS WAS NOT AV AILABLE AS PER THE FINANCIAL STATEMENTS OF THE SAID CONCERN, BUT A S THE BASIC FUNCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPME NT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEES SEGMENT OF IT-SERVICES. 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 CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALLY INCOMPARABLE. FOR THE SAID PURPOSE, OUR REFERENCE H AS BEEN INVITED TO PAGES 421 TO 542 OF THE PAPER BOOK, WHICH IS THE COPY OF THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE F OR THE A.Y. 2006-07, AND IN PARTICULAR, ATTENTION WAS INVITED T O PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REFLECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONAL LY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIE R A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICATION FOR THE T PO TO CONSIDER THE SAID CONCERN AS FUNCTIONALLY COMPARABLE IN THE INSTANT ASSESSMENT YEAR. IT(TP)A.1304/BANG/2011 PAGE - 21 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE S AID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH T HE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN TH E PRESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED T O IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS IN TER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTI NCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVI CES SEGMENT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FR OM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE F UNCTIONAL PROFILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THA T IN THE 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 THE SAID C ONCERN 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 CONCERN HA S BEEN INCLUDED AS A COMPARABLE CONCERN. THE ASSESSEE POINTED OUT T HAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG), IN T HE INSTANT CASE ALSO FOR A.Y. 2006-07 THE SAID CONCERN WAS FOUND FU NCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICIN G STUDY AND THE SAID POSITION WAS NOT DISTURBED BY THE TPO. THE REL EVANT PORTION OF THE TRANSFER PRICING STUDY, PLACED AT PAGE 432 O F 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 F IND THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF C OMPARABLES. VI) 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 TURNOV ER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER , REJECTED IT(TP)A.1304/BANG/2011 PAGE - 22 THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROU NDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELE VANT IN THE SOFTWARE DEVELOPMENT SEGMENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THIS CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPANY TO THIS EFFECT WHICH IS AS UNDER :- (I) THE COMPANY HAS AN INTELLECTUAL PROPERTY (IP) CELL TO GUIDE ITS EMPLOYEES TO LEVERAGE THE POWER OF IP FOR THEIR GROWTH. IN 2008, THIS COMPANY GENERATED OVER 102 I NVENTION DISCLOSURES AND FILED AN AGGREGATE 10 PATENTS IN IN DIA AND THE USA. TILL DATE 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 R EVENUES IS NOT AVAILABLE. (III) THIS COMPANY HAS INCURRED HUGE RESEARCH AND DEVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATEL Y RS.200 CRORES. (IV) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWAR E PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTUR AL 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) 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT IT(TP)A.1304/BANG/2011 PAGE - 23 COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE OPERATING MARGINS OF THIS COM PANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARN ED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARAB LE 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 ESTABLISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND D IFFERENT FROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FI NDING RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICA BLE TO THIS YEAR ALSO. THE ARGUMENT PUT FORTH BY ASSESSEE'S IS THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SIN CE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM S OFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REV ENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAI LABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT I S ORDERED ACCORDINGLY. VII) & VIII) M/S.ISHIR INFOTECH LTD. AND LUCID SO FTWARE LTD : 20. AS FAR AS COMPARABLE COMPANIES LISTED AT SL. NO.11 & 14 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ., M/S.ISHIR INFOTECH LTD. AND LUCID SOFTWARE LT D., IS CONCERNED, THIS TRIBUNAL IN THE CASE OF FIRST ADVAN TAGE OFFSHORE SERVICES PVT.LTD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE AFORES AID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVICES RENDERED BY THE ASSESSEE IN THIS APPEAL AN D THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SE RVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WO ULD BE CLEAR FROM THE FACT THAT THE VERY SAME 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS I N THE CASE OF IT(TP)A.1304/BANG/2011 PAGE - 24 FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA). THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CAS E 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 TH E LIST OF COMPARABLES ON THE BASIS OF THE FINDING OF THIS TRI BUNAL IN THE CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. DT 22.2.2013, WHEREIN AT PAGES 17 AND 22 OF I TS ORDER THE DISTINCTIONS AS TO WHY THESE COMPANIES SHOULD BE EX CLUDED ARE BROUGHT OUT. HE SUBMITTED THAT THE FACTS OF THE CA SE BEFORE US ARE SIMILAR AND, THEREFORE, THE SAID DECISION IS AP PLICABLE TO THE ASSESSEE'S CASE ALSO. 23. THE LEARNED DR HOWEVER OBJECTED TO THE EXCLUSIO N OF THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. ON A CAREFUL PERUSAL OF THE MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. (CITED SUPRA) HAS TAKEN A NOTE OF DISSIMILARITIES BETWEEN THE ASSESSEE THEREIN AND LU CID SOFTWARE LTD. AS OBSERVED THEREIN LUCID SOFTWARE L TD. COMPANY IS ALSO INVOLVED IN THE DEVELOPMENT OF SOFT WARE AS COMPARED TO THE ASSESSEE, WHICH IS ONLY INTO SOFTWA RE SERVICES. SIMILARLY, AS REGARDS ISHIR INFOTECH LTD., THE TRIB UNAL HAS CONSIDERED THE DECISION OF THE TRIBUNAL IN THE CASE OF 24/7 CO. PVT. LTD TO HOLD THAT ISHIR INFOTECH IS ALSO OUT-SO URCING ITS WORK AND, THEREFORE, HAS NOT SATISFIED THE 25% EMPLOYEE COST FILTER AND THUS HAS TO BE EXCLUDED FROM THE LIST OF COMPAR ABLES. AS THE FACTS OF THE CASE BEFORE US ARE SIMILAR, RESPEC TFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE 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.1304/BANG/2011 PAGE - 25 IX) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTE NTION 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 IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE D EVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THA N 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SAL ARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE CASE O F BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386 /PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006 -07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATI ON SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWA RE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOU LD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS IT(TP)A.1304/BANG/2011 PAGE - 26 DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAI NED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORM ATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE B EEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DEC ISION 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 MAIN LY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFOR E ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT C OMPARABLE. X) PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASONS THAT THIS C OMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANA LYTIC SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NOT AVAILABLE. THE TPO REJECTED THE ASS ESSEE'S OBJECTIONS ON THE GROUND THAT AS PER THE ANNUAL REP ORT FOR THE COMPANY FOR FINANCIAL YEAR 2007-08, IT IS MAINLY A SOFTWARE DEVELOPMENT COMPANY AND AS PER THE DETAILS FURNISHE D IN REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT, SOFT WARE DEVELOPMENT CONSTITUTES 96% OF ITS REVENUES. IN THI S 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 WHICH THIS COMPANY CANNOT BE TAKEN AS A COMPARAB LE. IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMI TTED THAT : (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING 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. IT(TP)A.1304/BANG/2011 PAGE - 27 (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007- 08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY EN GAGED IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES FOR INDEPENDENT SOFTWARE VENDORS AND ENTERPRISES. (III) WEBSITE EXTRACTS INDICATE THAT THIS COMPANY I S IN THE BUSINESS OF PRODUCT DESIGN SERVICES. (IV) THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORD IA TECHNOLOGIES INDIA PVT. LTD.(SUPRA) WHILE DISCUSSIN G THE COMPARABILITY OF ANOTHER COMPANY, NAMELY LUCID SOFT WARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGME NTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR CO MPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRESENTLY UNDER CONSIDERATION, WHICH IS INTO PRODUC T DEVELOPMENT AND PRODUCT DESIGN SERVICES AND FOR WHICH THE SEGME NTAL DATA IS NOT AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. BE OMITTED FROM THE LIST OF COMPARABLES. 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORT THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN S ERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVIC ES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSEE, THE SEG MENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUNCIATED IN THE DECISION OF THE MUMBAI TRIBUNAL I N THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THA T IN THE ABSENCE OF SEGMENTAL DETAILS / INFORMATION A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS, WE HOLD THAT TH IS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM TH E SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. IT(TP)A.1304/BANG/2011 PAGE - 28 XI) QUINTEGRA SOLUTIONS LTD. 18.1 THIS CASE WAS SELECTED BY THE TPO AS A COMPARA BLE. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON THE GROUND THAT THIS COMP ANY IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE WERE PEC ULIAR ECONOMIC CIRCUMSTANCES IN THE FORM OF ACQUISITIONS MADE DURI NG THE YEAR. THE TPO REJECTED THE ASSESSEE'S OBJECTIONS HOLDING THAT THIS COMPANY QUALIFIES ALL THE FILTERS APPLIED BY THE TP O. ON THE ISSUE OF ACQUISITIONS, THE TPO REJECTED THE ASSESSEE'S OB JECTIONS OBSERVING THAT THE ASSESSEE HAS NOT ADDUCED ANY EVI DENCE AS TO HOW THIS EVENT HAD AN ANY INFLUENCE ON THE PRICING OR THE MARGIN EARNED. 18.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCL USION OF THIS COMPANY FOR THE REASON THAT IT IS FUNCTIONALLY DIFF ERENT AND ALSO THAT THERE ARE OTHER FACTORS FOR WHICH THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. IT WAS SUBMITTED THAT, (I) QUINTEGRA SOLUTIONS LTD., THE COMPANY UNDER CON SIDERATION, IS ENGAGED IN PRODUCT ENGINEERING SERVICES AND NOT IN PURELY SOFTWARE DEVELOPMENT SERVICES. THE ANNUAL REPORT OF THIS COM PANY ALSO STATES THAT IT IS ENGAGED IN PREPARATORY SOFTWARE P RODUCTS AND IS THEREFORE NOT SIMILAR TO THE ASSESSEE IN THE CASE O N HAND. (II) IN ITS ANNUAL REPORT, THE SERVICES RENDERED BY THE COMPANY ARE DESCRIBED AS UNDER : LEVERAGING ITS PROVEN GLOBAL MODEL, QUINTEGRA PRO VIDES A FULL RANGE OF CUSTOM IT SOLUTIONS (SUCH AS DEVELOPMENT, TESTING, MAINTENANCE, SAP, PRODUCT ENGINEERING AND INFRASTRU CTURE MANAGEMENT SERVICES), PROPRIETARY SOFTWARE PRODUCTS AND CONSULTANCY SERVICES IN IT ON VARIOUS PLATFORMS AND TECHNOLOGIES. (III) THIS COMPANY IS ALSO ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITIES WHICH RESULTED IN THE CREATION OF INTELL ECTUAL PROPRIETARY RIGHTS (IPRS) AS CAN BE EVIDENCED FROM THE STATEMEN TS MADE IN THE ANNUAL REPORT OF THE COMPANY FOR THE PERIOD UNDER C ONSIDERATION, WHICH IS AS UNDER : IT(TP)A.1304/BANG/2011 PAGE - 29 QUINTEGRA HAS TAKEN VARIOUS MEASURES TO PRESERVE ITS INTELLECTUAL PROPERTY. ACCORDINGLY, SOME OF THE PRODUCTS DEVELOP ED BY THE COMPANY HAVE BEEN COVERED BY THE PATENT RIGHT S. THE COMPANY HAS ALSO APPLIED FOR TRADE MARK REGISTRATIO N FOR ONE OF ITS PRODUCTS, VIZ. INVESTOR PROTECTION INDEX FUND (IPIF ). THESE MEASURES WILL HELP THE COMPANY ENHANCE ITS PRODUCTS VALUE AND ALSO MITIGATE RISKS. (IV) THE TPO HAS APPLIED THE FILTER OF EXCLUDING CO MPANIES HAVING PECULIAR ECONOMIC CIRCUMSTANCES. QUINTEGRA FAILS TH E TPOS OWN FILTER SINCE THERE HAVE BEEN ACQUISITIONS IN THIS C ASE, AS IS EVIDENCED FROM THE COMPANYS ANNUAL REPORT FOR F.Y. 2007-08, THE PERIOD UNDER CONSIDERATION. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE SUBMISSIONS MADE ABOVE, IT IS CLEAR THAT INTER ALIA , THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BEING FUNCTIONALLY DI FFERENT AND POSSESSING ITS OWN INTANGIBLES / IPRS, IT CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND AND THEREFORE OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION. 18.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE SET OF COMPARABLES TO THE ASSESSEE FOR THE PERIOD U NDER CONSIDERATION. 18.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS BROUGHT ON RECORD THAT THIS COMPANY I.E.QUI NTEGRA SOLUTIONS LTD. IS ENGAGED IN PRODUCT ENGINEERING SE RVICES AND IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. IT IS ALSO SEEN THAT THIS COMPANY IS ALSO ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS AND H AS SUBSTANTIAL R&D ACTIVITY WHICH HAS RESULTED IN CREATION OF ITS IPRS. HAVING APPLIED FOR TRADE MARK REGISTRATION OF ITS PRODUCTS , IT EVIDENCES THE FACT THAT THIS COMPANY OWNS INTANGIBLE ASSETS. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THECASE OF 24/7 CUSTOMER. COM PVT. LTD. (ITA NO.227/BANG/2010 DT.9.11.2012) HAS HELD THAT I F A COMPANY POSSESSES OR OWNS INTANGIBLES OR IPRS, THEN IT CANN OT BE IT(TP)A.1304/BANG/2011 PAGE - 30 CONSIDERED AS A COMPARABLE COMPANY TO ONE THAT DOES NOT OWN INTANGIBLES AND REQUIRES TO BE OMITTED FORM THE LIS T OF COMPARABLES, AS IN THE CASE ON HAND. 18.3.2 WE ALSO FIND FROM THE ANNUAL REPORT OF QUINT EGRA SOLUTIONS LTD. THAT THERE HAVE BEEN ACQUISITIONS MA DE BY IT IN THE PERIOD UNDER CONSIDERATION. IT IS SETTLED PRINCIPLE THAT WHERE EXTRAORDINARY EVENTS HAVE TAKEN PLACE, WHICH HAS AN EFFECT ON THE PERFORMANCE OF THE COMPANY, THEN THAT COMPANY SHALL BE REMOVED FROM THE LIST OF COMPARABLES. 18.3.3 RESPECTFULLY FOLLOWING THE DECISION OF THE C O-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER. COM PVT. LTD. (SUPRA), WE DIRECT THAT THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLES IN THE CAS E ON HAND SINCE IT IS ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS AND OWNS ITS OWN INTANGIBLES UNLIKE THE ASSESSEE IN THE CASE ON HAND WHO IS A SOFTWARE SERVICE PROVIDER. 27. 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. XII) 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 C OUNTS LIKE, FUNCTIONAL DIS-SIMILARITY, SIGNIFICANT R&D ACTIVITY , BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, REJECTED THE C ONTENTION 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 SER VICES SEGMENT NAMELY (A) PRODUCT DESIGN SERVICES IT(TP)A.1304/BANG/2011 PAGE - 31 (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 T HIS EFFECT. IN VIEW OF THIS, THE LEARNED AUTHORISED REPRESENTAT IVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMP ARABLES. 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 TH AT THE SEGMENT SOFTWARE DEVELOPMENT SERVICES RELATES TO DESIGN SERVICES AND ARE NOT SIMILAR TO SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MUM/2011) HAS HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONALLY COMPARABLE. IN THIS CONTEXT THE RELEV ANT PORTION OF THIS ORDER IS EXTRACTED AND REPRODUCED BELOW :- . 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 PROVID ED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAV E BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DET AILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARI NG THE IT(TP)A.1304/BANG/2011 PAGE - 32 PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON T HESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY AS FIT F OR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LE NGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED 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 ASSESSMENT YEAR 2008-09. WE, THEREFORE, HOLD THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLUSION IN TH E SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDERED ACC ORDINGLY. 25. 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. XIII) THIRDWARE SOLUTIONS LTD. (SEGMENT) 15.1 THIS COMPANY WAS PROPOSED FOR INCLUSION IN THE LIST OF COMPARABLES BY THE TPO. BEFORE THE TPO, THE ASSESSE E OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LI ST OF COMPARABLES ON THE GROUND THAT ITS TURNOVER WAS IN EXCESS OF RS.500 CRORES. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE R EASON THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, IT I S IN THE BUSINESS OF PRODUCT DEVELOPMENT AND TRADING IN SOFT WARE AND GIVING LICENSES FOR USE OF SOFTWARE. IN THIS REGARD , THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTIO N. IT HAS BEEN POINTED OUT FROM THE ANNUAL REPORT THAT THE CO MPANY HAS NOT PROVIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACCOUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODU CT DEVELOPMENT SERVICES. IT(TP)A.1304/BANG/2011 PAGE - 33 (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (2008- TII-04-ITAT-PUNE-TP), THE TRIBUNAL HAS DIRECTED THA T THIS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SER VICE PROVIDERS, AS ITS INCOME INCLUDES INCOME FROM SALE OF LICENCES WHICH HAS INCREASED THE MARGINS OF THE COM PANY. THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THE TRIB UNAL (SUPRA), 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 C OMPANY IN THE LIST OF COMPARABLES. 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE MATERIAL ON RECORD THAT THE COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, THE SEGMENTAL PROFIT AND LOSS ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PROD UCT DEVELOPMENT ARE NOT GIVEN SEPARATELY. FURTHER, AS P OINTED OUT BY THE LEARNED AUTHORISED REPRESENTATIVE, THE P UNE BENCH OF THE TRIBUNAL IN THE CASE OF E-GAIN COMMUNICATIONS 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 F OR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFT WARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE M ATTER AND FOLLOWING THE AFORE CITED DECISION OF THE PUNE TRIB UNAL (SUPRA), WE DIRECT THAT THIS COMPANY BE OMITTED FRO M THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION I N THE CASE ON HAND. XIV) WIPRO LIMITED 13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IT(TP)A.1304/BANG/2011 PAGE - 34 INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S OR SEVERAL GROUNDS LIKE FUNCTIONAL DIS-SIMILARITY, BRA ND VALUE, SIZE, ETC. THE TPO, HOWEVER, BRUSHED ASIDE THE OBJ ECTIONS OF THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SE T OF COMPARABLES. 13.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSES SEE FOR SEVERAL REASONS, WHICH ARE AS UNDER : (I) THIS COMPANY OWNS SIGNIFICANT INTANGIBLES IN TH E NATURE OF CUSTOMER RELATED INTANGIBLES AND TECHNOLOGY RELA TED INTANGIBLES AND QUOTED EXTRACTS FROM THE ANNUAL REP ORT OF THIS COMPANY IN THE SUBMISSIONS MADE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCIA L STATEMENTS FOR COMPARABILITY PURPOSES AND FOR COMPU TING THE MARGINS, WHICH CONTRADICTS THE TPOS OWN FILT ER OF REJECTING COMPANIES WITH CONSOLIDATED FINANCIAL STA TEMENTS. 13.3. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ACTION OF THE TPO IN I NCLUDING THIS COMPANY IN THE SET OF COMPARABLES. 13.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MER IT IN THE CONTENTIONS OF THE ASSESSEE FOR EXCLUSION OF THIS C OMPANY FROM THE SET OF COMPARABLES. IT IS SEEN THAT THIS COMPANY IS ENGAGED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMENT SERVICES. THERE IS NO INFORMATION ON T HE SEGMENTAL BIFURCATION OF REVENUE FROM SALE OF PRODU CT 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% OF THE TOTAL REVENUE FILTER ADOPTED BY HIM. ANOTHE R MAJOR FLAW IN THE COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO IS THAT HE ADOPTED COMPARISON OF THE CONSOLIDATED FINA NCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NOT AN APPROPRIATE COMPARISON. 13.4.2 WE ALSO FIND THAT THIS COMPANY OWNS INTELLECTUAL PROPERTY IN THE FORM OF REGISTERED PAT ENTS AND IT(TP)A.1304/BANG/2011 PAGE - 35 SEVERAL PENDING APPLICATIONS FOR GRANT OF PATENTS. IN THIS REGARD, THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN T HE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (ITA NO.227/BANG/2010) HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE CO MPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY SUCH INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITION AL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CA SE ON HAND DOES NOT OWN ANY INTANGIBLES, FOLLOWING THE A FORESAID DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL I .E. 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), WE HOLD THAT THIS C OMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSE E. WE, THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO OMIT THIS COMPANY FROM THE SET OF COMPARABLE COMPANIES IN THE CASE ON HAND FOR THE YEAR UNDER CONSIDERATION. 24. NO DOUBT IF WE FOLLOW THE ABOVE DECISION M/S. A CCEL TRANSMATIC LTD (SEG), AVANI CIMCON TECHNOLOGIES LTD , CELESTIAL LABS LTD, E-ZEST SOLUTIONS LTD,, HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, INFOSYS TECHNOLOGIES LT D, ISHIR INFOTECH LTD, KALS INFORMATION SYSTEMS LTD (SEG), L UCID SOFTWARE LTD, PERSISTENT SYSTEMS LTD, QUINTEGRA SO LUTIONS LTD, TATA ELXSI LTD (SEG), THIRDWARE SOLUTIONS LTD (SEG) AND WIPRO LTD (SEG) HAVE TO BE EXCLUDED FROM THE LIST O F COMPARABLES. HOWEVER OUT OF THESE, M/S. ACCEL TRAN SMATICS LTD (SEG), QUINTEGRA SOLUTIONS LTD AND TATA ELXSI L TD (SEG) WERE A PART OF ASSESSEES OWN TP STUDY. HONBLE PU NJAB & HARYANA HIGH COURT IN CIT V. QUARK SYSTEMS INDIA (P ) LTD (SUPRA), UPHELD THE SPECIAL BENCH DECISION IN DCIT V. QUARK SYSTEMS (P) LTD [(2010) 42 DTR 414], NOTING THAT LA TTER HAD ONLY REMITTED THE ISSUE OF COMPARABILITY OF COMPARA BLES CONSIDERED IN ASSESSEES OWN TP STUDY, BACK TO TPO. HENCE WE ARE OF THE OPINION THAT THE ISSUE OF COMPARABILI TY OF THESE THREE COMPANIES HAVE TO GO BACK TO AO / TPO FOR CONSIDERATION AFRESH. HOWEVER M/S. AVANI CIMCON TECHNOLOGIES LTD, CELESTIAL LAB LTD, E-ZEST SOLUTIO NS LTD, HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, INFOS YS TECHNOLOGIES LTD, ISHIR INFOTECH LTD, KALS INFORMAT ION SYSTEMS LTD (SEG), LUCID SOFTWARE LTD, PERSISTENT S YSTEMS LTD, THIRDWARE SOLUTION LTD (SEG) AND WIPRO LTD (SE G) HAVE TO IT(TP)A.1304/BANG/2011 PAGE - 36 BE EXCLUDED BY VIRTUE OF COORDINATE BENCH DECISION IN THE CASE OF NXP SEMICONDUCTORS INDIA LTD (SUPRA). COMPARABI LITY OF M/S. ACCEL TRANSMATICS LTD (SEG), M/S. QUINTEGRA SO LUTIONS LTD AND M/S. TATA ELXSI LTD (SEG) IS REMITTED BACK TO THE AO / TPO FOR CONSIDERATION AFRESH AS PER LAW. ORDERED A CCORDINGLY. ACCORDINGLY WE DIRECT EXCLUSION OF AVANI CIMCON TEC HNOLOGIES LTD, CELESTIAL LABS LTD, E- ZEST SOLUTIONS LTD, HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, INFOSYS TECHNOLOGIES LTD, ISHIR INF OTECH LTD, KALS INFORMATION SYSTEMS LTD, LUCID SOFTWARE LTD, PERSIS TENT SYSTEMS LTD, AND WIPRO LTD (SEG), FROM THE LIST OF COMPARABLES. COM PARABILITY OF M/S. TATA ELXSI LTD (SEG) IS REMITTED BACK TO THE TPO / AO FO R CONSIDERATION AFRESH IN LINE WITH THE DIRECTIONS GIVEN IN THE CASE OF M/S. HEWLETT PACKARD GLOBAL SOFT P. LTD (SUPRA), 12. AS FOR THE ARGUMENT OF THE ASSESSEE THAT M/S. F LEXTRONICS SOFTWARE SYSTEMS LTD (SEG) WAS ALSO FUNCTIONALLY DIFFERENT A ND NOT COMPARABLE TO IT, PARA 28 OF THE ORDER OF THE TRIBUNAL IN THE CASE OF M/S. HEWLETT PACKARD GLOBAL SOFT P. LTD (SUPRA), IS REPRODUCED HEREUNDER : 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 R ECONCILIATION WAS ATTEMPTED BY THE LOWER AUTHORITIES BETWEEN THE FIGURES GIVEN IN SUCH ANNUAL REPORT WITH THE FIGURES WHICH WERE MADE AVAILABLE BY THE SAID COMPANY TO THE TPO PURSUANT TO NOTICE ISSU ED TO THEM U/S.133(6) OF THE ACT. NO DOUBT AT PAGE 123 OF TP ORDER, TPO HAS IT(TP)A.1304/BANG/2011 PAGE - 37 STATED THAT THE SOFTWARE DEVELOPMENT SERVICE REVENU ES WERE MORE THAN 75% BASED ON THE FOLLOWING FIGURES : BUT HOW THIS SEGMENTATION WAS DONE BY THE TPO AND T HE RECONCILIATION OF THE SAID SEGMENTATION WITH THE AN NUAL REPORT OF THE ASSESSEE WAS NEVER ATTEMPTED OR DONE. IN SUCH A SI TUATION WE ARE OF THE OPINION THAT FLEXTRONICS SOFTWARE SOLUTIONS LTD (SEG) COULD NOT BE CONSIDERED AS A PROPER COMPARABLE. WE DIRECT EX CLUSION THEREOF. ACCORDINGLY WE DIRECT THAT FLEXTRONICS SOFTWARE SYS TEMS LTD (SEG) ALSO BE EXCLUDED FROM THE LIST OF COMPARABLES. 13. IN SO FAR AS MEGASOFT LTD, IS CONCERNED, DIRECT ION OF THE TRIBUNAL IN PARA 25 OF ITS ORDER IN THE CASE OF M/S. HEWLETT PA CKARD GLOBAL SOFT P. LTD (SUPRA), IS REPRODUCED HEREUNDER : 25. VIS-A-VIS MEGASOFT LTD, WE FIND THAT COORDINATE BENCH OF THIS TRIBUNAL IN THE VERY CASE CASE OF NXP SEMI CONDUCTO RS INDIA LTD (SUPRA) RELYING ON ITS OWN EARLIER DECISION IN TRIL OGY E-BUSINESS SOFTWARE INDIA PVT.LTD. VS. DCIT [ITA NO.1064/BANG/ 2011 FOR AY 07- 08 ORDER DATED 23.11.2012] HELD IT TO BE A GOOD COM PARABLE, BUT HAD DIRECTED SEGMENTATION OF ITS RESULTS. THIS TRIBUNA L HAD DIRECTED THAT ONLY THE BLUE ALLY SEGMENT OF THE SAID COMPANY COUL D BE CONSIDERED FOR COMPARISON. RELEVANT FINDINGS OF THE TRIBUNAL AS IT APPEARS IN THE DECISION OF NXP SEMICONDUCTORS INDIA LTD (SUPRA) IS REPRODUCED HEREUNDER: IT(TP)A.1304/BANG/2011 PAGE - 38 MEGASOFT LTD. : 24. THIS COMPANY WAS CHOSEN AS A COMPARABLE BY THE TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE ARE TWO SEGMENTS IN THIS COMPANY VIZ., (I) SOFTWARE DEVELOPMENT SEGMENT , AND (II) SOFTWARE PRODUCT SEGMENT. THE ASSESSEE IS A PURE S OFTWARE SERVICES PROVIDER AND NOT A SOFTWARE PRODUCT DEVELO PER. ACCORDING TO THE ASSESSEE THERE IS NO BREAK UP OF R EVENUE BETWEEN SOFTWARE PRODUCTS AND SOFTWARE SERVICES BUS INESS ON A STANDALONE BASIS OF THIS COMPARABLE. THE TPO RE LIED 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 . 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 STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE CO MPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FIT I NTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMP ANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE WO ULD CONSTITUTE PACKAGED PRODUCT AND AROUND 50% TO 60% W OULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES REL ATED TO TRAVELLING, BOARDING AND LODGING EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABL E COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE P RODUCTS DEVELOPED (WHICH WAS AKIN TO PRODUCT SOFTWARE) INTE RNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMENT 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 PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERV ICES. THE BASIS ON WHICH THE TPO ARRIVED AT THE PLI OF 60 .23% IS 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 PROCE EDED TO DETERMINE THE PLI AT THE ENTITY LEVEL AND NOT ON TH E BASIS OF SEGMENTAL DATA. IT(TP)A.1304/BANG/2011 PAGE - 39 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 EN TITY LEVEL COMBINING SOFTWARE SERVICES AND SOFTWARE PRODUCT SE GMENTS. IT WAS SUBMITTED THAT THE PRODUCT SEGMENT OF MEGASO FT IS SUBSTANTIALLY DIFFERENT FROM ITS SOFTWARE SERVICE S EGMENT. THE PRODUCT SEGMENT HAS EMPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SERVICE SEGMENT HAS EMPLOYEE COST OF 50%. SIMILARLY, THE PROFIT MARGIN ON COST IN PRODUCT SEG MENT IS 117.95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11%. BOTH THE SEGMENTS ARE SUBSTANTIALLY DIFFERENT AND T HEREFORE COMPARISON AT ENTITY LEVEL IS WITHOUT BASIS AND WOU LD VITIATE THE COMPARABILITY (SUBMISSIONS ON PAGE 381 TO 383 O F THE PB- I). IT WAS FURTHER SUBMITTED THAT MEGASOFT LIMITED HAS PROVIDED SEGMENTAL BREAK-UP BETWEEN THE SOFTWARE SE RVICES SEGMENT AND SOFTWARE PRODUCT SEGMENT (PAGE 68 OF PB -II), WHICH WAS ALSO ADOPTED BY THE TPO IN HIS SHOW CAUSE NOTICE (PAGE 84 OF PB-I). THE SEGMENTAL RESULTS I.E., RES ULTS PERTAINING TO SOFTWARE SERVICES SEGMENT OF THIS COM PANY 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 H AVE BEEN SELECTED FOR COMPARISON. 27. IT WAS FURTHER SUBMITTED THAT THE LEARNED TPO IN CASE OF OTHER COMPARABLE, SIMILARLY PLACED, HAD ADOPTED THE MARGINS OF ONLY THE SOFTWARE SERVICE SEGMENT FOR COMPARABIL ITY PURPOSES. CONSISTENT WITH SUCH STAND, IT WAS SUBMIT TED THAT THE MARGINS OF THE SOFTWARE SEGMENT ONLY SHOULD BE ADOP TED IN THE CASE OF MEGASOFT ALSO, IN CONTRAST TO THE ENTITY LE VEL MARGINS. 28. COMPUTATION OF THE NET MARGIN FOR MEGA SOFT LT D. IS THEREFORE REMITTED TO THE FILE OF THE TPO TO COMPUT E THE CORRECT IT(TP)A.1304/BANG/2011 PAGE - 40 MARGIN BY FOLLOWING THE DIRECTION OF THE TRIBUNAL I N 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 TH E TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PV T.LTD. (SUPRA). ACCORDINGLY, WE DIRECT THAT MEGASOFT LTD, COULD BE CONSIDERED AS A COMPARABLE ONLY AFTER PROPER SEGMENTATION IN LINE W ITH ABOVE DIRECTIONS. 14. TO SUMMARISE WE DIRECT EXCLUSION OF AVANI CIMCO N TECHNOLOGIES LTD, CELESTIAL LABS LTD, E- ZEST SOLUTIONS LTD, FLE XTRONICS SOFTWARE SYSTEMS LTD (SEG), HELIOS & MATHESON INFORMATION TE CHNOLOGY LTD, INFOSYS TECHNOLOGIES LTD, ISHIR INFOTECH LTD, KALS INFORMATION SYSTEMS LTD, LUCID SOFTWARE LTD, PERSISTENT SYSTEMS LTD, AN D WIPRO LTD (SEG), FROM THE LIST OF COMPARABLES. COMPARABILITY OF M/S . TATA ELXSI LTD (SEG), IS REMITTED BACK TO THE TPO / AO FOR CONSIDERATION AFR ESH AS PER LAW. WE ALSO DIRECT THAT MEGASOFT LTD, SHALL BE CONSIDERED FOR INCLUSION ONLY AFTER SEGMENTATION OF ITS RESULTS. NEEDLESS TO SAY WORKI NG CAPITAL ADJUSTMENT SHALL BE REWORKED BY THE AO / TPO CONFINING TO THE COMPARABLES THAT ARE LEFT AFTER EXCLUSIONS. CONCISE GROUNDS 2.4, 2.6 AN D 2.7 ARE TREATED AS PARTLY ALLOWED. IT(TP)A.1304/BANG/2011 PAGE - 41 15. LD. AR DID NOT PRESS GROUND 3. HENCE IT IS DIS MISSED AS NOT PRESSED. 16. VIDE GROUNDS 4 AND 5, ASSESSEE STATES THAT FORE IGN CURRENCY EXPENDITURE ON TELECOMMUNICATION EXPENDITURE OUGHT NOT BE EXCLUDED FROM THE EXPORT TURNOVER AND IN THE ALTERNATIVE IT SHOULD BE REDUCED FROM TOTAL TURNOVER ALSO WHILE COMPUTING THE RELIEF U/S. 10A OF THE ACT. 17. WE FIND THAT SUBMISSION OF THE ASSESSEE THAT WH AT HAS BEEN REDUCED FROM EXPORT TURNOVER SHOULD ALSO BE DEDUCTED FROM T HE TOTAL TURNOVER WHILE WORKING OUT THE DEDUCTION U/S.10A OF THE ACT, NEEDS TO BE ACCEPTED IN VIEW OF THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF CIT V. TATA ELXSI LTD (349 ITR 98). ACCORDINGLY, GROUNDS 4 AND 5 ARE TREATED AS PARTLY ALLOWED. 18. VIDE GROUND 6 GRIEVANCE RAISED BY THE ASSESSEE IS THAT SOFTWARE EXPENDITURE WAS NOT ALLOWED AS A REVENUE OUTGO BUT WAS CONSIDERED AS CAPITAL EXPENDITURE. 19. FACTS APROPOS ARE THAT ASSESSEE HAD CLAIMED RS. 1,86,58,327/- AS SOFTWARE EXPENDITURE BY DEBITING IT TO ITS PROFIT A ND LOSS ACCOUNT. AS PER THE ASSESSEE, EXPENDITURE WAS FOR THE PURPOSE OF AC QUIRING APPLICATION SOFTWARE AND FOR MEETING ANNUAL MAINTENANCE CHARGES . HOWEVER AO WAS IT(TP)A.1304/BANG/2011 PAGE - 42 OF THE OPINION THAT THESE EXPENDITURE GAVE AN ENDUR ING BENEFIT TO THE ASSESSEE. HE THEREFORE HELD IT AS A CAPITAL OUTGO. NEVERTHELESS HE ALLOWED A DEPRECIATION OF 60%. 20. NOW BEFORE US, LD. AR STRONGLY ASSAILING THE OR DER OF LOWER AUTHORITIES SUBMITTED THAT THE EXPENDITURE WAS ON A PPLICATION SOFTWARE WHICH DID NOT GIVE RISE TO ANY ENDURING BENEFIT TO THE ASSESSEE. ACCORDING TO HIM, SUCH CLAIM OUGHT NOT HAVE BEEN DISALLOWED. 21. PER CONTRA, LD. DR SUPPORTED THE ORDERS OF LOWE R AUTHORITIES. 22. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. WHAT WE FIND IS THAT THE NATURE OF SOFTWARE EXPENDITURE WAS NOT ANALYSED BY THE LOWER AUTHORITIES. AO HAD SIMPLY CONSIDERED IT AS A CAPITAL OUTGO WITHOUT VERIFYING WHETHER THE EXPENDITURE WAS RELATABLE TO APPLICATION SOFTWARE OR SYSTEM SOFTWARE, WHICH GAVE ENDURING BENEFIT TO THE ASSESSEE. IT IS TRUE THAT SOME APPLICATION SOFTWARE CAN HAVE ENDURING QUALITY . A CLOSE ANALYSIS OF THE EXPENDITURE IS REQUIRED FOR COMING TO A REASONE D CONCLUSION WE ARE OF THE OPINION THAT THE MATTER REQUIRES A FRESH LOOK B Y THE AO. WE REMIT THE ISSUE BACK TO THE FILE OF THE AO FOR CONSIDERATION IN ACCORDANCE WITH LAW. IT(TP)A.1304/BANG/2011 PAGE - 43 23. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D PROTANTO. ORDER PRONOUNCED IN OPEN COURT ON 9 TH DAY OF MARCH, 2016. SD/- SD/- (VIJAY PAL RAO) (ABRA HAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER
