Software AG Bangalore Technologies Private Limited, Bangalore V. ITO, Bangalore

ITA 1306/BANG/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95277 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 9 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 28-09-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 19-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: CHAVALI NARYANA
• Keywords: Transfer pricing; International transaction; Bad and doubtful debts; Onus to prove; Revenue expenditure
• Section: 143(3); 92D; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI N. V. VASUDEVAN, JUDICIAL MEMBER AND SHRI.ABRAHAM P.GEORGE, ACCOUNTANT MEMBER IT(TP)A NO.1306/BANG/2011 ASSESSMENT YEAR : 2007-08 SOFTWARE AG BANGALORE TECHNOLOGIES PRIVATE LIMITED, (FORMERLY KNOWN AS WEBMETHODS DEVELOPMENT CENTER INDIA PRIVATE LIMITED), 1 ST FLOOR, WING B, BUILDING B-1, EXORA BUSINESS PARK, MARTHAHALLI-SARJAPURA OUTER RING ROAD, BANGALORE 560 103. .. APPELLANT PAN : AAACW5438M V. INCOME-TAX OFFICER, WARD 12(2), BANGALORE-560 001. .. RESPONDENT APPELLANT BY : SHRI CHAVALI NARYANA, CA RESPONDENT BY : SHRI G.R. REDDY, CIT(DR-I) HEARD ON : 28.09.2015 PRONOUNCED ON : 30.09.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DA TED 11.10.2011 OF THE INCOME TAX OFFICER, WARD 12(2), BANGALORE PASSE D U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (ACT). IT(TP)A NO.1306/BANG/2011 PAGE 2 OF 51 2. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR N O SPECIFIC ADJUDICATION. 3. GROUND NOS. 2 AND 3 RAISED BY THE ASSESSEE RELAT E TO COMPUTATION OF DEDUCTION U/S.10A OF THE ACT. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DESIGN AND DEVELOPMENT OF COMPUTER SOFTWARE. THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/S. 10A O F THE ACT IN RESPECT PROFITS DERIVED FROM DEVELOPMENT AND EXPORT OF COMP UTER SOFTWARE. WHILE COMPUTING THE EXPORT TURNOVER FOR THE PURPOSE OF AL LOWING DEDUCTION U/S. 10A OF THE ACT, THE AO EXCLUDED TELEPHONE AND COMMU NICATION EXPENSES (I.E., LINK CHARGES) AS EXPENSES ATTRIBUTABLE TO DE LIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA. 4. THE ASSESSEE SUBMITTED THAT EXPLANATION 2 TO SEC TION 10A DEFINES EXPORT TURNOVER TO MEAN CONSIDERATION IN RESPECT OF EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDA NCE WITH SUB-SECTION (3), BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATIO N CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCH ANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THE ASSESSEE SUB MITTED THAT NONE OF THE ITEMS OF AFORESAID ITEMS FELL WITHIN THE DEFINITION OF EXPORT TURNOVER. ALTERNATIVELY, IT WAS SUBMITTED THAT IF THE AFORESA ID AMOUNTS ARE EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE E XCLUDED FROM THE TOTAL IT(TP)A NO.1306/BANG/2011 PAGE 3 OF 51 TURNOVER. THE AO DID NOT ACCEPT THE CLAIM OF THE A SSESSEE AND EXCLUDED THE AFORESAID ITEMS FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT. 5. THE CIT(A) CONFIRMED THE ORDER OF THE AO. AGGRI EVED BY THE ORDER OF THE CIT(A) IN EXCLUDING THE AFORESAID ITEMS BOTH FROM THE EXPORT TURNOVER AND ALSO NOT ACCEPTING THE ALTERNATIVE PRAYER TO EX CLUDE THE SAID EXPENSES FROM THE TOTAL TURNOVER ALSO, THE ASSESSEE HAS RAIS ED GROUNDS NO.2 & 3 BEFORE THE TRIBUNAL. 6. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO.3 HAS NOW BEEN DECIDED BY THE HONBLE HIGH COURT OF KARNATAKA IN T HE CASE OF TATA ELXSI 349 ITR 98 (KAR) WHEREIN IT HAS BEEN HELD THAT WHATEVER IS EXCLUDED FROM EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM THE TO TAL TURNOVER. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE HIGH COURT OF KARNATAKA, WE ARE OF THE VIEW THAT THE GROUND NO.2 RAISED BY THE ASSESSE E IN ITS APPEAL DOES NOT REQUIRE ANY ADJUDICATION. GROUND NO.3 RAISED BY TH E ASSESSEE IN ITS APPEAL PRAYING FOR ALTERNATIVE RELIEF OF EXCLUDING THE EXP ENSES IN QUESTION BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER IS ACCEPTED . 7. THE ISSUE RAISED BY THE ASSESSEE IN GROUNDS OF A PPEAL NOS. 4 TO 14 RELATE TO THE ADDITION MADE BY THE AO OF RS.1,27,69 ,561/- TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENT IN THE ARMS LENGTH PRICE(ALP) OF INTERNATIONAL TRANSACTION ENTERED INT O BY THE ASSESSEE WITH IT(TP)A NO.1306/BANG/2011 PAGE 4 OF 51 ITS ASSOCIATED ENTERPRISE (AE) UNDER THE PROVISION S OF SEC.92 OF THE INCOME TAX ACT, 1961 (ACT). 8. THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT SERVI CES TO ITS AE. THE SAID TRANSACTION WAS AN INTERNATIONAL TRANSACTI ON WITH AN ASSOCIATED ENTERPRISE (AE) AND HAVE TO PASS THE ARMS LENGTH P RICE (ALP) TEST AS PROVIDED U/S.92 OF THE INCOME TAX ACT, 1961 (ACT). IN GROUNDS NO.4 TO 14 THE DISPUTE IS WITH REGARD TO ADDITION MADE CONSEQU ENT TO DETERMINATION OF ALP AND CONSEQUENT UPWARD REVISION AND ADJUSTMENT M ADE TO THE PRICE AT WHICH INTERNATIONAL TRANSACTIONS WERE CARRIED OUT B Y THE ASSESSEE WITH ITS AE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. FINANCIAL RESULTS OF THE ASSESSEE FOR THE F Y 2006- 07 DESCRIPTION AMOUNT OPERATING REVENUE RS 18,50,74,958/- OPERATING COST (NET). . . . RS.16,04,31,819/- OPERATING PROFIT RS. 2,46,43,139/- OPERATING PROFIT TO COST %AGE 15.36 % 9. TP ADJUSTMENT RELATING TO IT SERVICES (SOFTWARE DEVELOPMENT SERVICES COMPARABLE ULTIMATELY SELECTED BY TPO AND THEIR ARI THMETIC MEAN : SL. NO NAME OF COMPANY OP / TC TURNOVER RS. IN CRORES 1 ACCEL TRANSMATIC LTD (SEG.) 21.11% 9.68 2 AVANI CIMCON TECHNOLOGIES LTD 52.59% 3. 55 3 CELESTIAL LABS LTD 58.35% 14.13 IT(TP)A NO.1306/BANG/2011 PAGE 5 OF 51 4 DATAMATICS LTD 1.38% 54.51 5 E-ZEST SOLUTIONS LTD 36.12% 6.26 6 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 25.31% 848.66 7 GEOMETRIC LTD (SEG.) 10.71% 158.38 8 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 36.63% 178.63 9 IGATE GLOBAL SOLUTIONS LTD 7.49% 747.27 10 INFOSYS TECHNOLOGIES LTD 40.30% 131.49 11 ISHIR INFOTECH LTD 30.12% 7.42 12 KALS INFORMATION SYSTEMS LTD (SEG.) 30.55% 2.00 13 LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 15.75% 45.39 14 LUCID SOFTWARE LTD 19.37% 1.70 15 MEDIASOFT SOLUTIONS LTD 3.66% 1.85 16 MEGASOFT LTD 60.23% 139.33 17 MINDTREE LTD 16.90% 590.35 18 PERSISTENT SYSTEMS LTD 24.52% 293.75 19 QUINTEGRA SOLUTIONS LTD 12.56% 62.72 20 R S SOFTWARE (INDIA) LTD 13.47% 101.04 21 R SYSTEMS INTERNATIONAL LTD (SEG.) 15.07% 112.01 22 S I P TECHNOLOGIES & EXPORTS LTD 13.90% 3.80 23 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG.) 22.16% 343.57 24 TATA ELXSI LTD (SEG.) 26.51% 262.58 25 THIRDWARE SOLUTIONS LTD 25.12% 36.08 26 WIPRO LTD (SEG.) 33.65% 961.09 ARITHMETIC MEAN 25.14% APPELLANT'S OP / TC FOR FY 2006-07 15.36% 10. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF TH E ACT AND ON THE BASIS OF THE COMPARABLES SET OUT ABOVE, ARRIVED AT ARITHMETIC MEAN OF 25.14%. AFTER FACTORING THE WORKING CAPITAL ADJUST MENT OF 1.82%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 23.32%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 19.7 COMPUTATION OF ARMS LENGTH PRICE: IT(TP)A NO.1306/BANG/2011 PAGE 6 OF 51 THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY YOU IS COMPUTED AS UNDER: ARITHMETIC MEAN MARGIN ON COST 25.14% LESS: WORKING CAPITAL ADJUSTMENT( AS PER ANNEXURE-C) 1.82% ADJ.MEAN MARGIN OF COMPARABLES 23.32% OPERATING COST RS.16,04,31,819 ARMS LENGTH MARGIN 23.32% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 123.32% OF OPERATING COST PRICE RECEIVED SHORTFALL BEING ADJUSTMENT U/S.92CA RS.19,78,44,519/- RS.18,50,74,958 RS.1,27,69,561 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 123.32% OF OPERATING COST RS. 19,78,44,519/- PRICE RECEIVED RS.18,50,74,958 SHORTFALL BEING ADJUSTMENT U/S.92CA RS.1,27,69,561/- THE ABOVE SHORTFALL OF RS.1,27,69,561/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 11. 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 IT(TP)A NO.1306/BANG/2011 PAGE 7 OF 51 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. 12. THE ASSESSEE FILED A CHART SHOWING HOW THE TPO HAS NOT GIVEN WORKING CAPITAL ADJUSTMENT AS PRAYED FOR BY THE ASS ESSEE, THE TURNOVER AND THE MARGINS OF THE 26 COMPARABLE COMPANIES FINA LLY CHOSEN BY THE TPO AFTER GIVING EFFECT TO ADJUSTMENT TOWARDS WORKI NG CAPITAL AS ALLOWED BY THE TPO AND ALSO AS CLAIMED BY THE ASSESSEE. THE CHART ALSO EXPLAINS AS HOW SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO WERE NOT COMPARABLE FOR THE REASON THAT THESE COMPANIES WERE NOT FUNCTIONALLY COMPARABLE. THE CHART ALSO GIVES THE CASES DECIDED BY VARIOUS BENCHES OF THE ITAT WHERE THE COMPARABLE COMPANIES HAVE BEE N HELD TO BE NOT COMPARABLE WITH THAT OF AN ASSESSEE PROVIDING IT SO FTWARE DEVELOPMENT SERVICES. WE WILL PROCEED TO CONSIDER THE COMPARA BILITY OF COMPANIES CHOSEN BY THE TPO AND LISTED IN PARA- 9 OF THIS ORD ER. 13. BEFORE WE PROCEED TO CONSIDER THE CHART FILED B Y THE ASSESSEE, WE HAVE TO DEAL WITH THE APPLICATION FOR ADMISSION OF ADDITIONAL GROUND FILED BY THE ASSESSEE. IN THE ADDITIONAL GROUND OF APPEAL, THE ASSESSEE HAS PRAYED FOR EXCLUSION OF THE COMPARABLE CHOSEN BY TH E ASSESSEE IN ITS TRANSFER PRICING STUDY VIZ., QUINTEGRA SOLUTIONS LT D., AND HELIOS AND IT(TP)A NO.1306/BANG/2011 PAGE 8 OF 51 MATHESON INFORMATION TECHNOLOGY LTD., AND ALSO EXCL USION OF M/S.E-ZEST SOLUTIONS LTD., WHICH IS A COMPARABLE COMPANY CHOSE N BY THE TPO IN THE ORDER U/S.92C OF THE ACT. ACCORDING TO THE ASSESSE E THE AFORESAID COMPANIES (EXCLUDING ACCEL TRANSMATIC) HAVE VERY HI GH TURNOVER AND ACCEL TRANSMATIC LTD., HAS BEEN EXCLUDED AS FUNCTIONALLY NOT COMPARABLE TO A SOFTWARE SERVICE PROVIDER SUCH AS THE ASSESSEE IN S EVERAL DECISIONS RENDERED BY THE TRIBUNAL IN SEVERAL CASES. THE ASS ESSEE SEEKS TO EXCLUDE THE AFORESAID COMPANIES FROM THE FINAL LIST OF COMP ARABLE COMPANIES CHOSEN BY THE TPO. THE ASSESSEE HAD CONSIDERED TWO OF THE AFORESAID COMPANIES AS COMPARABLE IN ITS TP STUDY. THE TPO A LSO EXPRESSED THE OPINION THAT THE AFORESAID COMPANIES SATISFIED ALL THE FILTERS APPLIED BY HIM FOR CHOOSING COMPARABLE COMPANIES. EVEN BEFORE DRP THE ASSESSEE DID NOT OBJECT TO CHOOSING THESE TWO COMPANIES AS COMPA RABLE COMPANIES. 14. THE LEARNED COUNSEL FOR THE ASSESSEE IN SUPPORT OF THE ADMISSION OF ADDITIONAL GROUND PLACED RELIANCE ON THE DECISION O F THE HONBLE SPECIAL BENCH IN THE CASE OF THE ITAT CHANDIGARH BENCH IN T HE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 WHEREIN IT WAS HELD THAT A TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A MISTAKE IN THE ASS ESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVIDENCE ADDUCED BY THE TA XPAYER. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE AFORESAID TWO CO MPANIES WERE HELD TO BE SOFTWARE PRODUCT COMPANIES AND THEREFORE NOT COMPAR ABLE WITH SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE I N SEVERAL DECISIONS RENDERED BY THE TRIBUNAL. THE DECISIONS RENDERED B Y THE TRIBUNAL ARE LATER IT(TP)A NO.1306/BANG/2011 PAGE 9 OF 51 IN POINT OF TIME TO THE TRANSFER PRICING STUDY UNDE RTAKEN BY THE ASSESSEE. THE ASSESSEE IS ENTITLED TO TAKE NOTE OF THE SUBSEQ UENT JUDICIAL PRONOUNCEMENT AND SEEK TO EXCLUDE A COMPANY WHICH I S FUNCTIONALLY NOT COMPARABLE WITH THAT OF THE ASSESSEE. THE LEARNED DR OPPOSED THE PRAYER FOR ADMISSION OF ADDITIONAL GROUND. HE POINTED OUT THAT THE ASSESSEE IN THEIR TRANSFER PRICING STUDY ACCEPTED THESE COMPANI ES AS COMPARABLE AND THEREFORE CANNOT NOW SEEK TO EXCLUDE THE SAID COMPA NIES. 15. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE QUESTION AS TO WHETHER THE AFORESAID TWO COMPANIES ARE COMPARABLE OR NOT WITH THE ASSESSEE C OMPANY IN TERMS OF FAR ANALYSIS, HAS TO BE DECIDED ON THE BASIS OF DAT A WHICH IS AVAILABLE IN THE PUBLIC DOMAIN I.E., PUBLISHED ANNUAL REPORT OF THESE TWO COMPANIES.. THEREFORE FACTS NECESSARY TO APPLY THE FILTER SOUGH T TO BE RELIED UPON BY THE ASSESSEE IN THE ADDITIONAL GROUND OF APPEAL ARE ALR EADY AVAILABLE ON RECORD. THEREFORE THERE CAN BE NO VALID OBJECTION TO DECIDING THE QUESTION OF APPLYING THE AFORESAID FILTER, IF OTHERWISE IT I S FOUND TO BE A VALID FILTER. ON THE QUESTION OF THE ASSESSEE HAVING CHOSEN THE A FORESAID TWO COMPANIES AS COMPARABLE AND THEREFORE CANNOT BE PER MITTED TO CHANGE ITS STAND NOW, WE ARE OF THE VIEW THAT THE DECISION OF THE SPECIAL BENCH, CHANDIGARH IN THE CASE OF QUARK SYSTEMS (SUPRA) CLEARLY SUPPORTS THE PLEA OF THE ASSESSEE. THE SPECIAL BENCH IN THE AFORESAI D DECISION IN THE CASE OF QUARK SYSTEMS (SUPRA ) HAS AFTER CONSIDERING THE OECD COMMENTARIES OBSERVED AS FOLLOWS:- IT(TP)A NO.1306/BANG/2011 PAGE 10 OF 51 35. IN PARA 4.16 OF LATEST REPORT, THE OECD PROVI DES THE FOLLOWING GUIDELINES : 'IN PRACTICE, NEITHER COUNTRIES NOR TAXPAYERS SHOUL D MISUSE THE BURDEN OF PROOF IN THE MANNER DESCRIBED ABOVE. BECAUSE OF THE DIFFICULTIES WITH TRANSFER PR ICING ANALYSIS, IT WOULD BE APPROPRIATE FOR BOTH TAXPAYER S AND TAX ADMINISTRATIONS TO TAKE SPECIAL CARE AND TO USE RESTRAINT IN RELYING ON THE BURDEN OF PROOF IN THE COURSE OF THE EXAMINATION OF A TRANSFER PRICING CAS E. MORE PARTICULARLY, AS A MATTER OF GOOD PRACTICE THE BURDEN OF PROOF SHOULD NOT BE MISUSED BY TAX ADMINISTRATIONS OR TAXPAYERS AS A JUSTIFICATION FOR MAKING GROUNDLESS OR UNVERIFIABLE ASSERTIONS ABOUT TRANSFER PRICING. A TAX ADMINISTRATION SHOULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT ITS DETERMINATION OF TRANSFER PRICING IS CONSISTENT WIT H THE ARMS LENGTH PRINCIPLE EVEN WHERE THE BURDEN OF PRO OF IS ON THE TAXPAYER, AND THE TAXPAYERS SIMILARLY SHO ULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT THEIR TRANSFER PRICING IS CONSISTENT WITH THE ARMS LENGT H PRINCIPLE REGARDLESS OF WHERE THE BURDEN OF PROOF L IES.' 36. THE AFORESAID DECISIONS AND GUIDELINES MAY NOT BE EXACTLY ON IDENTICAL FACTS BEFORE US BUT THEY EMPHA TICALLY SHOW THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A M ISTAKE IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVI DENCE ADDUCED BY THE TAXPAYER. 37. WHEN SUBSTANTIAL JUSTICE AND TECHNICAL CONSIDER ATIONS ARE PITTED AGAINST EACH OTHER, THE CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED. FOR THE OTHER SIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN INJUSTICE BEING DONE DUE TO SOME MISTAKES ON ITS PART. 38. ACCORDINGLY, ON FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OU T THAT DATAMATICS HAS WRONGLY BEEN TAKEN AS COMPARABLE. WH ILE ADMITTING ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE TO REQUIRE US TO CONSIDER WHETHER OR NOT DATAMATICS SH OULD BE INCLUDED IN THE COMPARABLE, WE MAKE NO COMMENTS ON MERIT EXCEPT OBSERVING THAT ASSESSEE FROM RECORD HAS SHOW N ITS PRIMA FACIE CASE. FURTHER CLAIM MAY BE EXAMINED BY THE AS SESSING OFFICER. THIS COURSE WE ADOPT AS OBJECTION TO THE I NCLUSION OF DATAMATICS AS COMPARABLE HAS BEEN RAISED NOW AND NO T BEFORE REVENUE AUTHORITIES. THEREFORE, WE DEEM IT FIT AND PROPER TO REMIT IT(TP)A NO.1306/BANG/2011 PAGE 11 OF 51 THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR CONSIDERATION OF CLAIM OF THE TAXPAYER AND MAKE A DE NOVO ADJUDICATI ON OF THE ARMS LENGTH PRICE AFTER PROVIDING REASONABLE OPPOR TUNITY OF BEING HEARD TO THE ASSESSEE. WE ORDER ACCORDINGLY. 16. WE ALSO FIND THAT SOME OF THE COMPARABLE CHOSEN BY THE ASSESSEE HAVE BEEN HELD TO BE NOT COMPARABLE WITH SOFTWARE D EVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE IN SEVERAL DECISIONS RENDERED BY THE TRIBUNAL, THE MAIN DECISION BEING IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. , ITA NO.1054/BANG/2011 BANGALORE ITAT . THE DECISIONS RENDERED BY THE TRIBUNAL ARE LATER IN POI NT OF TIME TO THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE. THE ASSE SSEE IS ENTITLED TO TAKE NOTE OF THE SUBSEQUENT JUDICIAL PRONOUNCEMENT AND SEEK TO EXCLUDE A COMPANY WHICH IS FUNCTIONALLY NOT COMPARABLE WITH T HAT OF THE ASSESSEE. EVEN IN RESPECT OF THE OTHER COMPANIES HIGH TURNOVE R HAS BEEN HELD TO BE A CRITERIA TO REJECT A COMPANY AS A COMPARABLE IN THE AFORESAID DECISION OF ITAT BANGALORE IN THE CASE OF TRILOGY E-BUSINESS SO FTWARE INDIA PVT.LTD. (SUPRA). AS HELD BY THE SPECIAL BENCH IN THE CASE OF QUARK SYSTEMS (SUPRA) , THERE CANNOT BE ANY TAX LIABILITY ON THE BASIS OF ADMISSION AND THE DETERMINATION OF TAX LIABILITY HAS TO BE IN ACCORDA NCE WITH LAW. IN THE LIGHT OF THE AFORESAID JUDICIAL PRONOUNCEMENT, WE ARE OF THE VIEW THAT THE ADDITIONAL GROUND OF APPEAL DESERVES TO BE ADMITTED FOR ADJUDICATION. ACCORDINGLY, THE ADDITIONAL GROUND IS ADMITTED FOR ADJUDICATION. IT(TP)A NO.1306/BANG/2011 PAGE 12 OF 51 17. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 2,3 AND 12 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., AVANI CINCOM TECHNOLOGIES LTD., CELESTIAL LABS LIMITED AND KALS INFOSYSTEMS LTD., ARE 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 AFORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVICES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VERY SAM E 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA ). IN COMING TO THE AFORESAID CONCLUSION, THE TRIBUNAL IN THE CASE OF F IRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) FOLLOWED THE DECISION REND ERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. VS. DCIT ITA NO.1064/BANG/2011 FOR AY 07-08 ORDER DATED 23.11.20 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA): 18. AS REGARDS THE GROUP 2 COMPANIES WHICH ARE TO BE EXCLUDED AS FUNCTIONALLY DIFFERENT BASED ON THE TRIBUNALS O RDER IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD., WE F IND THAT THESE COMPANIES ARE- 1) ACCEL TRANSMATIC 2) AVANI CIMCON TECHNOLOGIES LTD. 3) CELESTIAL LABS LTD. IT(TP)A NO.1306/BANG/2011 PAGE 13 OF 51 4) KALS INFORMATION SYSTEMS LTD. 19. THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD., WHILE CONSIDERING THE ISSUE OF IMPR OPER SELECTION OF COMPARABLES HAS HELD AS UNDER:- (B) 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 INFORMAT ION AVAILABLE IN THE COMPANYS WEBSITE, WHICH REVEALS T HAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITTED THAT THIS COMPANY WOUL D HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFTWARE SERVICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS F URTHER 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/2011 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPAN Y HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT B E 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 SOFTWAR E EXPORTS, HOWEVER, THE DETAILS OF PERCENTAGE OF EXPO RT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INT O CONSIDERATION FOR COMPARABILITY ANALYSIS. IT(TP)A NO.1306/BANG/2011 PAGE 14 OF 51 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 (306909 8) OPERATING MARGIN 32.55% 52.59% 25.62% - 9. 87% 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UNUSUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06- 07. THE OPERATING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXTRAORDINARY YEAR FOR THIS COMPANY. EVE N THE GROWTH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR A S PER NASSCOM WAS 32%. THE GROWTH RATE OF THIS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW OF THE AB OVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJ ECTED AS A COMPARABLE. 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE RE ASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECISIO N OF ITAT (MUMBAI) 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 COMPARABLE. (C) 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 COMPANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- I. 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. IT(TP)A NO.1306/BANG/2011 PAGE 15 OF 51 II. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UND ER DEFERRED REVENUE EXPENDITURE (PAGE 31 OF PB-II), IT IS MENTIONED THAT, EXPENDITURE INCURRED ON RESEARCH A ND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS 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 THE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE (PAGE 30 OF PB-II). THIS AMOUNTS TO NE ARLY 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 I NTO PURE SOFTWARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D ACTIVITIES IS BAD IN LAW. 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISIO N OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (FOR AY 2007-08) IN WHICH THE COMPARABILITY OF THIS COMPANY FOR CLINICAL TRIAL RE SEARCH SEGMENT. THE RELEVANT EXTRACT OF DISCUSSION REGARDI NG 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 L EAD MOLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT A CT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYING BIO-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE B EEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY , OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL IT(TP)A NO.1306/BANG/2011 PAGE 16 OF 51 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 FACILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORI ES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELO P NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY WILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA PRADESH. ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALS O IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS 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 DISCOVER Y OF NEW DRUGS. MOREOVER THE COMPANY ALSO IS OWNER OF THE IPR. THERE IS HOWEVER A REFERENCE TO DEVELOPMENT OF A MOLECULE TO TREAT CANCER USING BIO - INFORMATICS TOOLS FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. AS EXPLAINED EARLIER IT IS A DIVERSIFIED COMPANY AND THEREFORE CANNOT BE CONSIDERED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING T O SUCH A PROCESS OF MAKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE AB OVE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RE SEARCH IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT THIS COMPANY IS OWNER OF IPR, IT HAS SOFTWARE FOR DISCOV ERY OF NEW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCE R. IN THE ULTIMATE ANALYSIS, THE ITAT DID NOT CONSIDER TH IS COMPANY AS A COMPARABLE IN CLINICAL TRIAL SEGMENT, FOR THE REASON THAT THIS COMPANY HAS DIVERSE BUSINESS. IT WAS SUBMITTED THAT, HOWEVER, FROM THE ABOVE EXTRACTS IT IS IT(TP)A NO.1306/BANG/2011 PAGE 17 OF 51 CLEAR THAT THIS COMPANY IS NOT INTO SOFTWARE DEVELO PMENT ACTIVITIES, ACCORDINGLY, THIS COMPANY SHOULD BE REJ ECTED AS A COMPARABLE BEING FUNCTIONALLY DIFFERENT. 45.FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANSP IRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY WAS CLASSIFIED AS A RESEARCH AND DEVELOPMEN T COMPANY. ACCORDING TO THE TPO IN AY 07-08 THIS COMPANY HAS BEEN CLASSIFIED AS SOFTWARE DEVELOPMENT SERVICE PROVIDER IN THE CAPITALINE/PROWESS DATABASE AS WELL AS IN THE ANNUAL REPORT OF THIS COMPANY. THE TPO HAS RELIED ON THE RESPONSE FROM THIS COMPANY TO A NOTIC E U/S.133(6) OF THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES . THE ASSESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREA T THIS AS A COMPARABLE HAS POINTED OUT THAT THIS COMPANY PROV IDES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOINFORMATIC S 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 ASSE SSEE HAS POINT OUT TO SEVERAL REFERENCES IN THE ANNUAL R EPORT FOR 31.3.2007 HIGHLIGHTING THE FACT THAT THIS COMPANY W AS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PROVIDES RELATE D SOFTWARE DEVELOPMENT SERVICES. THE TPO CALLED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPAN Y. THE TPO ALSO CALLED FOR DESCRIPTION OF SOFTWARE DEVELOP MENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THI S COMPANY IN ITS REPLY DATED 29.3.2010 HAS GIVEN DETA ILS OF EMPLOYEES WORKING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHETHER ANY SEGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OTHER DETAIL IN THE T POS ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMENT SERV ICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTIO N ISSUED DRAFT RED HERRING PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINIC AL RESEARCH. THE TPO WANTED TO KNOW AS TO WHETHER TH E PRIMARY BUSINESS OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN THE ANNUAL REP ORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE OF BI O PRODUCTS AND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFERENCE TO ANY REPLY BY CELESTIAL LAB S TO THE ABOVE CLARIFICATION OF THE TPO. THE TPO WITHOUT A NY BASIS HAS HOWEVER CONCLUDED THAT THE BUSINESS MENTI ONED IN THE DRHP ARE THE SERVICES OR BUSINESSES THAT WOU LD BE STARTED BY UTILIZING THE FUNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN NO WAY CONNECTED WIT H IT(TP)A NO.1306/BANG/2011 PAGE 18 OF 51 BUSINESS OPERATIONS OF THE COMPANY DURING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISSION S MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUF ACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THERE IS NO CLE AR BASIS ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DEVELO PMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSE SSEE THAT THIS COMPANY OUGHT NOT TO HAVE BEEN CONSIDERED AS COMPARABLE. (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTE NTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVE NUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCT S. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THI S COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS A LSO SUBMITTED THAT AS PER THE ANNUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOF TWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXT RACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES BY THE TPO IS REGARDING INCLUSION OF KA LS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION 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 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 ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE IT(TP)A NO.1306/BANG/2011 PAGE 19 OF 51 TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, A ND THUS 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 S UBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS 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 T HE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE , THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAIN LY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFOR E ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. (E) .. 20. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL IN SIMILAR SET OF FACTS, THESE COMPANIES ARE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 18. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 19. 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 LTD., IS CONCERNED, THIS TR IBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD. VS. DCIT IT (T P) IT(TP)A NO.1306/BANG/2011 PAGE 20 OF 51 NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE AFORES AID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DE VELOPMENT SERVICES PROVIDER. THE NATURE OF SERVICES RENDERED BY THE A SSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFF SHORE SERVICES 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 IN THE CASE OF FIRS T ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA). THE FOLLOWING WERE THE R ELEVANT OBSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.L TD.(SUPRA):- 22. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE BASIS OF THE FINDING OF THIS TRI BUNAL IN THE CASE OF MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. DT 22.2.2013, WHEREIN AT PAGES 17 AND 22 OF ITS OR DER 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 APPLIC ABLE 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 B ETWEEN THE ASSESSEE THEREIN AND LUCID SOFTWARE LTD. AS OBSERV ED THEREIN LUCID SOFTWARE LTD. COMPANY IS ALSO INVOLVED IN THE DEVELOPMENT OF SOFTWARE AS COMPARED TO THE ASSESSEE , WHICH IS ONLY INTO SOFTWARE SERVICES. SIMILARLY, AS REGARDS ISHIR INFOTECH LTD., THE TRIBUNAL HAS CONSIDERED THE DECISION OF T HE TRIBUNAL IN THE CASE OF 24/7 CO. PVT. LTD TO HOLD THAT ISHIR IN FOTECH IS ALSO OUT-SOURCING ITS WORK AND, THEREFORE, HAS NOT SATIS FIED THE 25% EMPLOYEE COST FILTER AND THUS HAS TO BE EXCLUDED FR OM THE LIST OF COMPARABLES. AS THE FACTS OF THE CASE BEFORE US AR E SIMILAR, IT(TP)A NO.1306/BANG/2011 PAGE 21 OF 51 RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH, WE HOLD THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUD ED. 20. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 21. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 16 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ., M/S.ME GASOFT LIMITED IS CONCERNED, THIS TRIBUNAL IN THE CASE OF FIRST ADVA NTAGE OFFSHORE SERVICES PVT.LTD. VS. DCIT IT (TP) NO.1086/BANG/2011 FOR AY 07-08 HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVICES RENDERED BY THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT THE VERY SAM E 26 COMPANIES WERE CHOSEN AS COMPARABLE IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA ). IN COMING TO THE AFORESAID CONCLUSION, THE TRIBUNAL IN THE CASE OF F IRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA) FOLLOWED THE DECISION REND ERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. VS. DCIT ITA NO.1064/BANG/2011 FOR AY 07-08 ORDER DATED 23.11.20 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD.(SUPRA): IT(TP)A NO.1306/BANG/2011 PAGE 22 OF 51 27. AS FAR AS ADOPTION OF MEGA SOFT LTD., AS ONE OF COMPARABLES, THE LEARNED COUNSEL FOR THE ASSESSEE S UBMITTED THAT THERE IS AN ERROR IN COMPUTING ITS NET MARGIN. HE HAS DRAWN OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT.LTD., AT PARA 24 TO 27 AT PAGE 18, WHEREIN THE ERROR IN COMPUTING THE NET MARGIN OF TH IS COMPANY HAS BEEN TAKEN NOTE OF AND IT HAS BEEN DIRECTED AS UNDER: (A) MEGASOFT LTD. : 24. THIS COMPANY WAS CHOSEN AS A COMPARABLE BY THE TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE A RE TWO SEGMENTS IN THIS COMPANY VIZ., (I) SOFTWARE DEVELOP MENT SEGMENT, AND (II) SOFTWARE PRODUCT SEGMENT. THE AS SESSEE IS A PURE SOFTWARE SERVICES PROVIDER AND NOT A SOFT WARE PRODUCT DEVELOPER. ACCORDING TO THE ASSESSEE THERE IS NO BREAK UP OF REVENUE BETWEEN SOFTWARE PRODUCTS AND SOFTWARE SERVICES BUSINESS ON A STANDALONE BASIS OF THIS COMPARABLE. THE TPO RELIED ON INFORMATION WHICH W AS GIVEN BY THIS COMPANY IN WHICH THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ., BLUEALLY DIVISION AND XIUS-BCGI DIVISION. XIUS-BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE. TH IS 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 COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUC TS TO FIT INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGE D SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40 % OF THE PRODUCT SOFTWARE WOULD CONSTITUTE PACKAGED PROD UCT AND AROUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BO ARDING AND LODGING EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVE LOPED (WHICH WAS AKIN TO PRODUCT SOFTWARE) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMENT OF SOFT WARE 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 SOFT WARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPO S FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. THE BASIS ON WHICH THE TPO ARRIVED AT THE PLI OF 60.23% IS GIVEN AT PAGE-115 A ND 116 IT(TP)A NO.1306/BANG/2011 PAGE 23 OF 51 OF THE ORDER OF THE TPO. IT IS CLEAR FROM THE PERU SAL OF THE SAME THAT THE TPO HAS PROCEEDED TO DETERMINE THE PL I AT THE ENTITY LEVEL AND NOT ON THE BASIS OF SEGMENTAL DATA. 25. IN THE ORDER OF THE TPO, OPERATING MARGIN WAS COMPUTED FOR THIS COMPANY AT 60.23%. IT IS THE COM PLAINT OF THE ASSESSEE THAT THE OPERATING MARGINS HAVE BEE N COMPUTED AT ENTITY LEVEL COMBINING SOFTWARE SERVICE S AND SOFTWARE PRODUCT SEGMENTS. IT WAS SUBMITTED THAT T HE PRODUCT SEGMENT OF MEGASOFT IS SUBSTANTIALLY DIFFER ENT FROM ITS SOFTWARE SERVICE SEGMENT. THE PRODUCT SEGM ENT HAS EMPLOYEE COST OF 27.65% WHEREAS THE SOFTWARE SE RVICE SEGMENT HAS EMPLOYEE COST OF 50%. SIMILARLY, THE P ROFIT MARGIN ON COST IN PRODUCT SEGMENT IS 117.95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11%. BOTH THE SEGMENTS ARE SUBSTANTIALLY DIFFERENT AND THEREFORE COMPARISON AT ENTITY LEVEL IS WITHOUT BASIS AND WOU LD VITIATE THE COMPARABILITY (SUBMISSIONS ON PAGE 381 TO 383 OF THE PB-I). IT WAS FURTHER SUBMITTED THAT MEGASO FT LIMITED HAS PROVIDED SEGMENTAL BREAK-UP BETWEEN THE SOFTWARE SERVICES SEGMENT AND SOFTWARE PRODUCT SEGM ENT (PAGE 68 OF PB-II), WHICH WAS ALSO ADOPTED BY THE T PO IN HIS SHOW CAUSE NOTICE (PAGE 84 OF PB-I). THE SEGME NTAL RESULTS I.E., RESULTS PERTAINING TO SOFTWARE SERVIC ES SEGMENT OF THIS COMPANY WAS: SEGMENTAL OPERATING REVENUES RS.63,71,32,544 SEGMENTAL OPERATING EXPENSES RS.51,75,13,211 OPERATING PROFIT RS.11,96,19,333 OP/TC (PLI) 23.11% 26. IT WAS REITERATED THAT IN THE GIVEN CIRCUMSTAN CES ONLY PLI OF SOFTWARE SERVICE SEGMENT VIZ., 23.11% OUGHT TO HAVE BEEN SELECTED FOR COMPARISON. 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 COMPARABILITY PURPOSES. CONSISTENT WITH SUCH STAND, IT WAS SUBMITTED THAT T HE MARGINS OF THE SOFTWARE SEGMENT ONLY SHOULD BE ADOPTED IN THE CASE OF MEGASOFT ALSO, IN CONTRAST TO THE ENTITY LEVEL MARG INS. 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 NO.1306/BANG/2011 PAGE 24 OF 51 MARGIN BY FOLLOWING THE DIRECTION OF THE TRIBUNAL I N THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. 22. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO COMPUTE THE CORRECT MARGIN OF MEGA SOFT LTD., AS DIRECTED BY THE TRIBUNAL IN THE CASE OF FIRST ADVAN TAGE OFFSHORE SERVICES PVT.LTD. (SUPRA). 23. AS FAR AS COMPARABLE COMPANIES LISTED AT SL.NO. 10, 24 & 26 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., M/S.INFOSYS TECHNOLOGIES LIMITED, TATA ELXSI LTD. (SEG.) & WIPR O LIMITED ARE CONCERNED, THIS TRIBUNAL IN THE CASE OF M/S.CURAM SOFTWARE INTERNATIONAL PVT.LTD. VS. ITO ITA NO.1280/BANG/2012 FOR AY 08-09 ORDER DATED 31.7.2013 HAS HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVI CES PROVIDER. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS IN THE CAS E OF M/S.CURAM SOFTWARE INTERNATIONAL PVT.LTD.(SUPRA): 12. (4) INFOSYS TECHNOLOGIES LTD. 12.1 THIS WAS A COMPARABLE SELECTED BY THE T PO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJE CTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS TH AT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE S OFTWARE DEVELOPMENT SEGMENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THI S CONTEXT HAS IT(TP)A NO.1306/BANG/2011 PAGE 25 OF 51 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 INVENTION DIS CLOSURES AND FILED AN AGGREGATE 10 PATENTS IN INDIA AND THE USA. TILL DATE THIS COMPANY HAS FILED AN AGGREGATE OF 119 PATENT APPLIC ATIONS (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 D EVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATELY RS.200 CR ORES. (IV) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWAR E PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTE MS. (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLO WING JUDICIAL DECISIONS :- (A) ITAT, DELHI BENCH DECISION IN THE CASE OF AGNIT Y INDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010 ) AND (B) TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (IT A NO.1054/BANG/2011) 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE OPERATING MARGINS OF THIS COMPAN Y HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED D EPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FI ND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND D IFFERENT FROM IT(TP)A NO.1306/BANG/2011 PAGE 26 OF 51 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 IS ORDERE D ACCORDINGLY. 13.0 (5) WIPRO LIMITED 13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY T HE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES OR SEVERAL GROUN DS LIKE FUNCTIONAL DIS-SIMILARITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, BRUSHED ASIDE THE OBJECTIONS OF THE ASSESS EE AND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. 13.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE FOR SEV ERAL REASONS, WHICH ARE AS UNDER : (I) THIS COMPANY OWNS SIGNIFICANT INTANGIBLES IN TH E NATURE OF CUSTOMER RELATED INTANGIBLES AND TECHNOLOGY RELATED INTANGIBLES AND QUOTED EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY IN THE SUBMISSIONS MADE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCIA L STATEMENTS FOR COMPARABILITY PURPOSES AND FOR COMPUTING THE MA RGINS, WHICH CONTRADICTS THE TPOS OWN FILTER OF REJECTING COMP ANIES WITH CONSOLIDATED FINANCIAL STATEMENTS. 13.3. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS C OMPANY IN THE SET OF COMPARABLES. 13.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MERIT I N THE CONTENTIONS OF THE ASSESSEE FOR EXCLUSION OF THIS C OMPANY FROM THE SET OF COMPARABLES. IT IS SEEN THAT THIS COMPA NY IS ENGAGED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMEN T SERVICES. THERE IS NO INFORMATION ON THE SEGMENTAL BIFURCATIO N OF REVENUE IT(TP)A NO.1306/BANG/2011 PAGE 27 OF 51 FROM SALE OF PRODUCT AND SOFTWARE SERVICES. THE TP O APPEARS TO HAVE ADOPTED THIS COMPANY AS A COMPARABLE WITHOUT DEMONSTRATING HOW THE COMPANY SATISFIES THE SOFTWAR E DEVELOPMENT SALES 75% OF THE TOTAL REVENUE FIL TER ADOPTED BY HIM. ANOTHER MAJOR FLAW IN THE COMPARABILITY ANALY SIS CARRIED OUT BY THE TPO IS THAT HE ADOPTED COMPARISON OF TH E CONSOLIDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NOT AN APPROPR IATE COMPARISON. 13.4.2 WE ALSO FIND THAT THIS COMPANY OWNS INTELLE CTUAL PROPERTY IN THE FORM OF REGISTERED PATENTS AND SEVE RAL PENDING APPLICATIONS FOR GRANT OF PATENTS. IN THIS REGARD, THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER .COM PVT. LTD. (ITA NO.227/BANG/2010) HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIV E SERVICE PROVIDER WHO DOES NOT OWN ANY SUCH INTANGIBLE AND H ENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CASE ON HAND DOES NOT OWN ANY INTANGIBLES, F OLLOWING THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), WE HOLD THAT T HIS COMPANY 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. 14.0 (6) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNCTIONAL DIS-SIMILARITY, SIGNIFICANT R&D ACTIVITY , BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, REJECTED THE CONTENTI ON PUT FORTH BY THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SET O F COMPARABLES. 14.2 BEFORE US, IT WAS REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT PERFO RMS A VARIETY OF FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT AND SERVIC ES SEGMENT NAMELY (A) PRODUCT DESIGN SERVICES (B) INNOVATION DESIGN ENGINEERING AND (C) VISUAL COMPUTING LABS. IT(TP)A NO.1306/BANG/2011 PAGE 28 OF 51 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 REPRESENTATIVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABL ES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE STAND O THE TPO IN INCLUDING THIS COM PANY IN THE LIST OF COMPARABLES. 14.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. FROM THE DETAIL S ON RECORD, WE FIND THAT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODUCT DESIGNING SERVICES AND NOT PURELY SOFTWARE DEVELOPM ENT SERVICES. THE DETAILS IN THE ANNUAL REPORT SHOW THAT THE SEGM ENT SOFTWARE DEVELOPMENT SERVICES RELATES TO DESIGN SERVICES AN D ARE NOT SIMILAR TO SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MU M/2011) HAS HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEV ELOPMENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONAL LY COMPARABLE. IN THIS CONTEXT THE RELEVANT PORTION OF THIS ORDER IS EXTRACTED AND REPRODUCED BELOW :- . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFEREN T FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE NATU RE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COM PANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRAT ED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REV ENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CO NSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT R ATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, W E ARE UNABLE TO TREAT THIS COMPANY AS FIT FOR COMPARABILI TY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PORTION. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL RE PORT OF THIS COMPANY PRODUCED BEFORE US, THE FACTS PERTAINI NG TO TATA ELXSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 2007-08 TO IT(TP)A NO.1306/BANG/2011 PAGE 29 OF 51 ASSESSMENT YEAR 2008-09. WE, THEREFORE, HOLD THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLUSION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDERED ACCORDINGLY. 24. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 25. AS FAR AS COMPARABLE COMPANIES AT SL.NO.5, 18, 19 AND 25 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TP O ARE CONCERNED, VIZ., M/S. E-ZEST SOLUTIONS LTD., PERSISTENT SYSTEMS LTD ., QUINTEGRA SOLUTIONS LIMITED AND THIRD WARE SOLUTIONS LTD., THIS TRIBUNA L IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. I.T (T.P) A. NO.1303/BANG/2 012 (ASSESSMENT YEAR : 2008-09) ORDER DATED 28.11.2013 WAS PLEASED TO HO LD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE WITH A COMPANY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES SUCH AS THE ASSESSEE. THE FOL LOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- 14. 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 COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SER VICES 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 IT(TP)A NO.1306/BANG/2011 PAGE 30 OF 51 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 REPRESENT ATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIVE INFORMATION ON THE BUS INESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAIL S AVAILABLE ON THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WH ILE EVALUATING THE COMPANYS FUNCTIONAL PROFILE. IT IS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO S ERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE 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 APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVIC ES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVIC ES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOP MENT SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON RECO RD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMEN T SERVICES, 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 BEE N HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF C APITAL I-Q IT(TP)A NO.1306/BANG/2011 PAGE 31 OF 51 INFORMATIONSYSTEMS (INDIA) (P) LTD. SUPRA) THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID D ECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E-ZEST SOLUTI ONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED. 15. 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 LIST OF COM PARABLES ON THE GROUND THAT ITS TURNOVER WAS IN EXCESS OF RS.500 CR ORES. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, IT IS IN THE BUSINESS OF PRODUCT DEVELOPM ENT AND TRADING IN SOFTWARE AND GIVING LICENSES FOR USE OF SOFTWARE . IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THA T :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTION. IT HAS BEEN POINTED OUT FROM THE ANNUAL REPORT THAT THE COMPANY HAS NOT PROVIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACC OUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPME NT SERVICES. (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (2008-TII-04- ITAT-PUNE-TP), THE TRIBUNAL HAS DIRECTED THAT THIS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PROVID ERS, AS ITS INCOME INCLUDES INCOME FROM SALE OF LICENCES WHICH HAS INCREASED THE MARGINS OF THE COMPANY. THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THE TRIBUNAL (S UPRA), THIS COMPANY OUGHT TO BE OMITTED FROM THE LIST OF COMPAR ABLES. 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 IT(TP)A NO.1306/BANG/2011 PAGE 32 OF 51 MATERIAL ON RECORD THAT THE COMPANY IS ENGAGED IN P RODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, THE SEGMENTAL PROFIT AND LOS S ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPME NT ARE NOT GIVEN SEPARATELY. FURTHER, AS POINTED OUT BY THE LE ARNED AUTHORISED REPRESENTATIVE, THE PUNE BENCH OF THE TR IBUNAL IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (SUPRA) HAS DIRECTED THAT SINCE THE INCOME OF THIS COMPANY INCLUDES INCO ME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABL E FOR 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 FROM THE LIS T OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN T HE CASE ON HAND. 17. PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A CO MPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, I T IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL R ESULTS ARE NOT AVAILABLE. THE TPO REJECTED THE ASSESSEE'S OBJECTIO NS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPAN Y FOR FINANCIAL YEAR 2007-08, IT IS MAINLY A SOFTWARE DEV ELOPMENT COMPANY AND AS PER THE DETAILS FURNISHED IN REPLY T O THE NOTICE UNDER SECTION 133(6) OF THE ACT, SOFTWARE DEVELOPME NT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF THE MATTER, TH E ASSESSING OFFICER INCLUDED THIS COMPANY I.E. PERSISTENT SYSTE MS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNCTIONALI TY 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 IT(TP)A NO.1306/BANG/2011 PAGE 33 OF 51 DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007- 08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY 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 COMPAN Y CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS, WE H OLD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OM ITTED FROM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERA TION. IT IS ORDERED ACCORDINGLY. IT(TP)A NO.1306/BANG/2011 PAGE 34 OF 51 18. 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 C OMPANY 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 COMPANY ALSO STATES THAT IT IS ENGAGED IN PREPARATO RY SOFTWARE PRODUCTS AND IS THEREFORE NOT SIMILAR TO THE ASSESS EE IN THE CASE ON 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 DEVELO PMENT, TESTING, MAINTENANCE, SAP, PRODUCT ENGINEERING AND INFRASTRUCTURE 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 UND ER CONSIDERATION, WHICH IS AS UNDER : QUINTEGRA HAS TAKEN VARIOUS MEASURES TO PRESERVE ITS INTELLECTUAL PROPERTY. ACCORDINGLY, SOME OF THE PRO DUCTS IT(TP)A NO.1306/BANG/2011 PAGE 35 OF 51 DEVELOPED BY THE COMPANY HAVE BEEN COVERED BY THE PATENT RIGHTS. THE COMPANY HAS ALSO APPLIED FOR TRADE MARK REGISTRATION FOR ONE OF ITS PRODUCTS, VIZ. INV ESTOR PROTECTION INDEX FUND (IPIF). THESE MEASURES WILL H ELP THE COMPANY ENHANCE ITS PRODUCTS VALUE AND ALSO MIT IGATE RISKS. (IV) THE TPO HAS APPLIED THE FILTER OF EXCLUDING CO MPANIES HAVING PECULIAR ECONOMIC CIRCUMSTANCES. QUINTEGRA F AILS THE TPOS OWN FILTER SINCE THERE HAVE BEEN ACQUISITIONS IN THIS CASE, AS IS EVIDENCED FROM THE COMPANYS ANNUAL REPORT FO R 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 F OR 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 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. IT(TP)A NO.1306/BANG/2011 PAGE 36 OF 51 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 PRODUCT S AND OWNS ITS OWN INTANGIBLES UNLIKE THE ASSESSEE IN THE CASE ON HAND WHO IS A SOFTWARE SERVICE PROVIDER. 26. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DET ERMINING ALP. 27. AS FAR AS COMPARABLE CHOSEN BY THE TPO AT SL.NO .8 OF THE FINAL LIST OF COMPARABLE VIZ., M/S.HELIOS & MATHESON INFORMAT ION TECHNOLOGY LTD., WE FIND THAT THE SAID COMPANY HAS BEEN HELD TO BE N OT COMPARABLE WITH A SOFTWARE SERVICE PROVIDER LIKE THE ASSESSEE BY THE ITAT PUNE BENCH IN THE CASE OF PTC SOFTWARE (INDIA)PVT.LTD. ITA.NO.1605/P N/2011 (ASSTT. YEAR : 2007-08) ORDER DATED 30.4.2013. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS W ITH REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIO S & 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 IT(TP)A NO.1306/BANG/2011 PAGE 37 OF 51 INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUD ED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CONCERNS ARE ENGAGED IN DEVELOPMENT AND S ALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIFFERENT F ROM THE SERVICES UNDERTAKEN BY THE ASSESSEE IN ITS IT-SERVI CES 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 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, B UT AS 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, OU R REFERENCE HAS BEEN INVITED TO PAGES 421 TO 542 OF THE PAPER B OOK, WHICH IS IT(TP)A NO.1306/BANG/2011 PAGE 38 OF 51 THE COPY OF THE TRANSFER PRICING STUDY UNDERTAKEN B Y THE ASSESSEE FOR THE A.Y. 2006-07, AND IN PARTICULAR, ATTENTION WAS INVITED TO PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REFLECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICAT ION FOR THE TPO TO CONSIDER THE SAID CONCERN AS FUNCTIONALLY CO MPARABLE IN THE INSTANT ASSESSMENT YEAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE S AID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH T HE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN TH E PRESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFER RED TO IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORIT IES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID C ONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WA S QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESS EE IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER I S THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDERS OF THE LOWER AU THORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAID C ONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRE CEDING YEAR. THEREFORE, HAVING REGARD TO THE FACTUAL ASPECTS BRO UGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERTED THAT THE APPLICA TION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO TH E 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 FOU ND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TR ANSFER PRICING STUDY AND THE SAID POSITION WAS NOT DISTURBED BY TH E TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY, PLA CED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESAID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTA NT CASE ALSO IT(TP)A NO.1306/BANG/2011 PAGE 39 OF 51 WE FIND THAT THE SAID CONCERN IS LIABLE TO BE EXCLU DED FROM THE LIST OF COMPARABLES. 28. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMP ANY FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMIN ING ALP. 29. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 26 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. 84 8.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CR ORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CROR ES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343 .57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 9616.09 CRORES (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES 30. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) (ITA NO.1338/BANG/2010) FOR SAME ASSESSMENT YEAR ON THE APPLICATION OF TURNOVER FILTER AND IT WAS SUBMITTED THAT THE AFORE SAID COMPARABLE IT(TP)A NO.1306/BANG/2011 PAGE 40 OF 51 COMPANIES HAVE TO BE EXCLUDED FROM THE FINAL LIST O F COMPARABLES SELECTED BY THE TPO. 31. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARN ED COUNSEL FOR THE ASSESSEE AND THE LEARNED DR. IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P) LTD. (SUPRA) , THIS TRIBUNAL ON APPLICATION OF THE TURNOVER FILT ER WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY AN ALYSIS HELD AS FOLLOWS: (1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT THE TPO HAS APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE, BUT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCO ME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLL ED TRANSACTION WITH AN INTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMP ARED OR THE ENTERPRISES ENTERING INTO SUCH TRANSACTION, WHICH A RE 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 DIFFE RENCES SUCH DIFFERENCES SHOULD BE CAPABLE OF REASONABLE ACCURAT E ADJUSTMENT IN MONETARY TERMS TO ELIMINATE THE EFFEC T OF SUCH DIFFERENCES. IT WAS HIS SUBMISSION THAT SIZE WAS A N IMPORTANT FACET OF THE COMPARABILITY EXERCISE. IT WAS SUBMIT TED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WO ULD IMPACT COMPARABILITY. IN THIS REGARD OUR ATTENTION WAS DR AWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGAR H 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 LOWER LIMIT OF 1 CRORE TURN OVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASO NABLE CLASSIFICATION. SEVERAL OTHER DECISIONS WERE REFER RED TO IN THIS REGARD LAYING DOWN IDENTICAL PROPOSITION. WE ARE N OT REFERRING TO THOSE DECISIONS AS THE DECISION OF THE SPECIAL BENC H ON THIS ASPECT WOULD HOLD THE FIELD. REFERENCE WAS ALSO MA DE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERV ED AS FOLLOWS:- IT(TP)A NO.1306/BANG/2011 PAGE 41 OF 51 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 REA SONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECON OMIES OF SCALE UNDER WHICH THEY OPERATE. THE FACT THAT THEY OPERATE IN THE SAME MARKET MAY NOT MAKE THEM COMPARABLE ENTERP RISES. THE 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 IT(TP)A NO.1306/BANG/2011 PAGE 42 OF 51 COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALS O ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE 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(TP)A NO.1306/BANG/2011 PAGE 43 OF 51 IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURN OVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COM PARABLE WITH THE ASSESSEE. 16. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HA VING TURNOVER OF MORE THAN RS. 200 CRORES AS COMPARABLES . IN THESE CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASS ESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVA NT FOR DECIDING THE ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTIO N SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDES THAT INTERNATIONAL TRANSACTION MEANS A T RANSACTION BETWEEN 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 LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTIO N HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT O R ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBU TION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNE CTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROV IDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. SEC.92-A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT CASE THERE I S NO DISPUTE THAT THE TRANSACTION BETWEEN THE ASSESSEE AND ITS A E WAS AN INTERNATIONAL TRANSACTION ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATIO N OF ARMS LENGTH PRICE IN AN INTERNATIONAL 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; IT(TP)A NO.1306/BANG/2011 PAGE 44 OF 51 ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PR ICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT ( A ) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR ( B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR ( C ) THE INFORMATION OR DATA USED IN COMPUTATION OF TH E ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ( 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), IT(TP)A NO.1306/BANG/2011 PAGE 45 OF 51 ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C:- 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A). TO (D).. ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( 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 ); IT(TP)A NO.1306/BANG/2011 PAGE 46 OF 51 ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR IT(TP)A NO.1306/BANG/2011 PAGE 47 OF 51 ( 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 THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE S IN RELATION TO THE TRANSACTIONS BEING COMPARED. 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF T HE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPA RED WITH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACT ORS SET OUT THEREIN. BEFORE US THERE IS NO DISPUTE THAT THE TN MM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. THE DISPUTES ARE WITH R EGARD TO THE COMPARABILITY 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 IMPORT ANT 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., IT(TP)A NO.1306/BANG/2011 PAGE 48 OF 51 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. 32. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), WE HOLD THAT THE AFORESAID COMPANIES SHOULD BE EXCLUDED FROM THE LIS T OF COMPARABLE COMPANIES. THE AO IS DIRECTED TO COMPUTE THE ARITH METIC MEAN BY EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. THE AO IS ALSO DIRECTED TO GIVE THE BENEFIT OF - / + 5% BENE FIT MARGIN TO THE ARITHMETIC MEAN SO CALCULATED, IF THE ASSESSEE IS OTHERWISE EN TITLED TO THE SAME AND THEREAFTER COMPUTE THE ALP OF THE INTERNATIONAL TRA NSACTION IN QUESTION. 33. ANOTHER CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THE TPO DID NOT CONSIDER THE FOREIGN EXCHANGE FLUCT UATION GAIN AS PART OF THE OPERATING INCOME WHILE COMPUTING OPERATING MARG INS OF THE ASSESSEE AND THE COMPARABLE COMPANIES. ACCORDING TO HIM SUC H A GAIN OR LOSS WAS INEXTRICABLY CONNECTED WITH THE SOFTWARE SERVICE AN D INCOME THERE FROM DERIVED BY THE ASSESSEE AND SIMILAR SOFTWARE DEVELO PMENT SERVICE PROVIDERS AND THEREFORE THE SAID GAIN OR LOSS SHOUL D EITHER GO TO INCREASE OR DECREE THE OPERATING INCOME. IT IS ONLY AFTER SUCH ADJUSTMENT THAT THE OPERATING MARGINS OF THE ASSESSEE AND THE COMPARABL E COMPANIES SHOULD IT(TP)A NO.1306/BANG/2011 PAGE 49 OF 51 BE COMPARED. IN THIS REGARD, HE BROUGHT TO OUR NOT ICE THE DECISION OF THE BANGALORE BENCH OF THE ITAT IN THE CASE OF M/S. TRI LOGY E- BUSINESS SOFTWARE INDIA P. LTD., IN ITA 1054/BANG/2011, DT 2 3.11.2012, FOR THE A. Y. 2007-08, WHEREIN THE TRIBUNAL HELD AS FOLLOWS : '(B) TREATING FOREIGN EXCHANGE GAIN OR LOSS AND PRO VISION FOR BAD DEBTS AS NON-OPERATING IN NATURE AND FRINGE BENEFIT TAX AS PART OF OPERATING COST: AS FAR AS FOREIGN EXCHANGE GAIN/LOSS BEING CONSIDER ED AS NOT FORMING PART OF THE OPERATING COST, THE REASONING O F THE REVENUE IS THAT SUCH LOSS OR GAIN CANNOT BE SAID TO BE ONE REA LIZED FROM INTERNATIONAL TRANSACTION THOUGH THEY MAY FORM PART OF THE GAIN/LOSS OF THE ENTERPRISE AND THEREFORE THEY SHOU LD BE EXCLUDED WHILE DETERMINING OPERATING COST. ON THE ABOVE ISSU E WE FIND THAT THE BANGALORE BENCH OF ITAT IN THE CASE OF SAP LABS INDIA (P) LTD. VS. ACIT (2011)44 SOT 156 (BANG.) HAS TAKEN TH E VIEW THAT FOREIGN EXCHANGE FLUCTUATION GAINS ARE REQUIRED TO BE ADDED TO OPERATING REVENUE. FOLLOWING THE SAME, THE AO IS DI RECTED TO ACCEPT THE CLAIM OF THE ASSESSEE IN THIS REGARD. AS FAR AS PROVISION FOR BAD DEBTS ARE CONCERNED, THE TPO HAS ACCEPTED THAT THE SAME WOULD BE PART OF OPERATING EXPENSES PROVID ED THE SAME IS INCURRED EVERY YEAR FOR AT LEAST THREE YEARS AND THE MANNER IN WHICH PROVISION IS MADE IS CONSISTENT. THE ASSESSEE IN REPLY TO THE QUERY OF THE TPO ON THE ABOVE ASPECT HAS NOT FU RNISHED ANY DETAILS. WE ARE OF THE VIEW THAT THE ASSESSEE SHOUL D BE AFFORDED OPPORTUNITY TO EXPLAIN ITS POSITION ON THE ABOVE AN D THE AO IS DIRECTED TO CONSIDER THE SAME IN ACCORDANCE WITH LA W. AS FAR AS FRINGE BENEFIT TAX (FBT) IS CONCERNED, THE SAME WAS NOT CONSIDERED BY THE TPO AS PART OF OPERATING COST IN THE CASE OF COMPARABLES AND THEREFORE THE SAME SHOULD ALSO NOT BE CONSIDERED AS PART OF OPERATING COST OF THE ASSESSE E. WE HOLD ACCORDINGLY AND DIRECT THE ASSESSING OFFICER TO COM PUTE THE OPERATING COST OF THE ASSESSEE.' IT(TP)A NO.1306/BANG/2011 PAGE 50 OF 51 34. IT WAS SUBMITTED BY HIM IN THE LIGHT OF THE AFO RESAID DECISION OF THE TRIBUNAL, THE FOREIGN EXCHANGE GAIN HAS TO BE TREAT ED AS PART OF THE OPERATING REVENUE FOR THE PURPOSE OF COMPUTING THE ASSESSEES MARGIN TO BE COMPARED WITH THE MARGIN OF THE COMPARABLE COMPA NIES. THE LEARNED DR HOWEVER PLACED RELIANCE ON THE DRP'S ORDER ON TH IS ISSUE. 35. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT I S NOT DISPUTED BY THE REVENUE THAT THE FOREIGN EXCHANGE FLUCTUATION HAS A RISEN AS A RESULT OF THE REALIZATION OF THE CONSIDERATION FOR RENDERING SOFT WARE DEVELOPMENT SERVICES. IT IS THEREFORE INCURRED IN THE NORMAL C OURSE OF BUSINESS AND THEREFORE THERE IS NO REASON WHY IT SHOULD BE EXCLU DED FROM DETERMINING THE OPERATING REVENUE FOR THE PURPOSE OF CALCULATIO N OF OPERATING MARGIN. IN OUR VIEW, THE ANALOGY DRAWN BY THE DRP REGARDING EX CLUSION OF INTEREST EXPENSES WHILE COMPUTING OPERATING MARGINS IS NOT P ROPER. IN OUR VIEW, FOREIGN EXCHANGE GAIN ON REALIZATION OF CONSIDERATI ON FOR RENDERING SOFTWARE DEVELOPMENT SERVICES SHOULD BE REGARDING AS PART OF THE OPERATING REVENUE. FOLLOWING THE DECISION OF THE ITAT, BANGA LORE BENCH IN THE CASE OF SAP LABS (SUPRA), WE HOLD THAT THE OPERATING REV ENUE FOR THE ASSESSEE BE COMPUTED BY INCLUDING THE FOREIGN EXCHANGE GAIN. 36. NONE OF THE OTHER ARGUMENTS RAISED IN THE GROU NDS NO.4 TO 14 WERE URGED BEFORE US EXCEPT ON THE COMPARABILITY OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO. IT(TP)A NO.1306/BANG/2011 PAGE 51 OF 51 37. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 30 TH SEPTEMBER, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.