Income Tax Officer, Ward-11(2), Bangalore V. M/s iPass India P Ltd, Bangalore

ITA 1310/BANG/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95224 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 09-07-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 22-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI VIJAYPAL RAO , JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. (T.P) A. NO. 1292 /BANG/201 4 (ASSESSMENT YEAR : 200 9 - 10 ) M/S. IPASS INDIA PVT. LTD. UNIT 501, LEVEL V, NO.6, BRUNTON ROAD, BANGALORE - 560 001 PAN AABCG 3659H VS. INCOME TAX OFFICER, WARD 11(2), BANGALORE. APPELLANT RESPONDENT. I.T.(T.P) A. NO.1310/BANG/2014 (ASSESSMENT YEAR : 2009 - 10) (BY REVENUE) ASSESSEE BY : SHRI CHAVALI NARAYAN, C.A. REVENUE BY : DR.P.K. SRIHARI, ADDL. CIT (D.R.) DATE OF H EARING : 9.7.2015. DATE OF P RONOUNCEMENT : 4.9. 201 5 . O R D E R PER SHRI JASON P. BOAZ, A.M. : TH ESE ARE CROSS AP PEAL S, ONE EACH BY THE ASSESSEE AND REVENUE, DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - I V , BANGALORE DT. 18.8.2014 FOR ASSESSMENT YEAR 2009 - 10. 2. THE FACTS OF THE CASE, BRI EFLY, ARE AS UNDER : - 2.1 THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF IPASS INC., USA PROVIDING CAPTIVE SOFTWARE DEVELOPMENT SUPPORT SERVICES FOR ITS ASSOCIATED ENTERPRISE (AE) IN USA 2 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 IN ITS PRODUCT OFFERINGS IN THE INTERNET BASED MOBILE OFF ICE COMMUNICATION SERVICES. THE ASSESSEE IS REGISTERED AS A 100% EOU UNDER THE SCHEME OF STPI AND IS REMUNERATED ON COST PLUS MARK UP BASIS. FOR ASSESSMENT YEAR 2009 - 10, THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.9.2009 DECLARING TOTAL INCOME OF RS.4, 44,20,779 AS BOOK PROFITS UNDER MAT PROVISIONS AND INCOME OF RS.34,848 UNDER NORMAL PROVISIONS OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') AFTER CLAIMING DEDUCTION OF RS.5,05,29,384 UNDER SECTION 10A OF THE ACT. THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT AND THE CASE WAS SUBSEQUENTLY TAKEN UP FOR SCRUTINY. 2.2 THE ASSESSING OFFICER ON OBSERVING THAT THE ASSESSEE REPORTED INTERNATIONAL TRANSACTIONS, MADE A REFERENCE UNDER SECTION 92CA OF THE ACT TO THE TRANSFER PRICING OFFICER ( TPO ) FOR DETERMINATION OF ARM S LENGTH PRICE ( ALP ) OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE. THE TPO PASSED AN ORDER UNDER SECTION 92CA OF THE ACT DT.11.1.2013 PROPOSING AN ADJUSTMENT OF RS.1,95,59,772 TO THE ALP OF INTERN ATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE. SUBSEQUENTLY, THE ASSESSING OFFICER COMPLETED THE ASSESSMENT UNDER SECTION 143(3) RWS 92CA OF THE ACT VIDE ORDER DT.5.3.2013 WHEREIN THE INCOME OF THE ASSESSEE WAS DETERMINED AT RS.1,95,94,62 0 WHICH INCLUDED THE T.P. ADJUSTMENT OF RS.1,95,59,772. SINCE THE ASSESSEE DECIDED TO PREFER AN APPEAL IN THE MATTER BEFORE THE CIT (APPEALS), THE ASSESSING OFFICER PASSED THE FINAL ORDER OF ASSESSMENT UNDER SECTION 143(3) OF THE ACT DT.15.5.2013. 3 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 3. AGGRIEVED BY THE ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2009 - 10 DT.15.5.2013, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (APPEALS) IV, BANG A LORE. THE LEARNED CIT (APPEALS) DISPOSED OFF THE APPEAL BY ORDER DT.18.8.2014 ALLOWING THE ASSESSEE PART IAL RELIEF. 4. BOTH THE ASSESSEE AND REVENUE ARE AGGRIEVED BY THE ORDER OF THE CIT (APPEALS) IV, BANGALORE DT.18.8.2014 FOR ASSESSMENT YEAR 2009 - 10 AND HAVE FILED SEPARATE APPEALS WHICH WILL BE DISPOSED OFF HEREUNDER. ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2009 - 10 IN IT(TP)A NO.1292/BANG/2014 . 5. IN ITS APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : - ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW: 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS, BY UPHOLDING THE ADDITION OF RS. 1,95,59,772 MADE BY THE LEARNED ASSESSING OFFICER ( AO ) / TRANSFER PRICING OFFICER ( TPO ) ON ACCOUNT OF ADJUSTMENT TO THE ARM S LENGTH PRICE OF THE PAYMENTS MADE BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISE ( AE ) TOWARDS SOFTWARE DEVELOPMENT SERVICES; 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY NOT ACCEPTING THE APPELLANT S PLEA ENTIRELY AND CONFIRMING WITH THE LEARNED ASSESSING OFFICER ( AO )/ TRANSFER PRICING OFFICER ( TPO ) ON NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME - TAX RULES, 1962 ( RULES ), AND CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ARM S LENGTH PRICE IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANSACTION AND HOLDING THA T THE APPELLANT S INTERNATIONAL TRANSACTION IS NOT AT ARM S LENGTH; 3. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY UPHOLDING THE ACTION OF AO/TPO IN DETERMINATION OF THE ARM S LENGTH MARGIN/PRICE USING ONLY SINGLE YEAR DATA I.E. FOR FY 2008 - 09 AND NOT ALLOWING THE USE OF MULTIPLE YEAR DATA AS APPLIED BY THE APPELLANT IN THE TRANSFER PRICING DOCUMENTATION; 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY UPHOLDING THE ACTION OF AO/ TPO IN REJECTING CERTAIN COMPARABLES CONSIDERED BY THE APPELLANT IN THE COMPARABILITY ANALYSIS BY APPLYING DIFFERENT QUANTITATIVE AND QUALITATIVE FILTERS: I. THE LEARNED CIT(A) HAS ERRED, BY NOT ADJUDICATING ON THE APPELLANT S PLEA THAT COMPANIES THAT HAVING DIFFERENT ACCOUNTING YEAR (I.E. COMPANIES HAVING ACCOUNTING 4 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 YEAR OTHER THAN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS)SHOULD NOT BE REJECTED . II. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY UPHOLDING AO/TPO ACTION IN REJECTING THE COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT WHEREIN CONSOLIDATED RESULTS HAVE BEEN USED FOR ANALYSIS. THE APPELLANT HAD CONSIDERED THE CONSOLIDATED RESULTS IN ONLY THOSE CASES WHERE THE SOFTWARE DEVELOPMENT SERVICES RELATED INCOME OF THE INDIAN COMPANY CONSTITUTED MORE THAN 75 PERC ENT OF THE CONSOLIDATED COMPANY - WIDE/ SEGMENTAL REVENUES. III. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE APPELLANT S PLEA THAT COMPANIES SHOULD NOT BE REJECTED USING EMPLOYEE COST GREATER THAN 25% OF THE TOTAL REVENUES AS A CO MPARABILITY CRITERION. IV. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE APPELLANT S PLEA THAT REJECTING COMPANIES USING EXPORT SALES LESS THAN 75% OF THE OPERATING REVENUES AS A COMPARABILITY CRITERION IN RESPECT OF THE SOFTWARE DEVELOPMENT SERVICES TRANSACTION, IS NOT APPROPRIATE. 5. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY UPHOLDING THE ACTION OF AO/ TPO IN ACCEPTING/ REJECTING CERTAIN COMPARABLE COMPANIES BASED ON UNREASONABLE COMPARABILITY CRITERIA. 6. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, BY CONSIDERING INCORRECT RECEIVABLES AND PAYABLES IN COMPUTING THE WORKING CAPITAL ADJUSTMENT AND FURTHER ERRED, BY RESTRICTING THE BENEFIT ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT TO 1.71 PERCENT. 7. THE LEARNED CIT(A ) HAS ERRED, IN LAW AND FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS - - VIS THE COMPARABLES AND CONCLUDING THAT ONCE THE WORKING CAPITAL ADJUSTMENT IS GRANTED, THERE IS NO NECESSITY OF PROVID ING ANY FURTHER ADJUSTMENTS. 8. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, IN COMPUTING THE ALP WITHOUT GIVING BENEFIT OF +/ - 5 PERCENT UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT; 9. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, IN CONFIRMING T HE IMPOSITION OF INTEREST UNDER SECTIONS 234D OF THE ACT BY THE LEARNED AO. 10. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, IN UPHOLDING INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT BY THE LEARNED AO. 6. AT THE OUTSET ITSELF, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WILL ONLY BE PRESSING ONLY THE GROUND AT S.NO.5 SEEKING THE EXCLUSION OF 3 COMPARABLE COMPANIES FROM THE FINAL SET OF COMPARABLES SELECTED BY THE TPO. 5 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 7. THE LE ARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE WILL NOT PRESS AND ARGUE THE GROUNDS AT S.NOS.1TO 4 (I TO IV) AND 6 TO 8 . CONSEQUENTLY, SINCE THESE GROUNDS ARE NOT PRESSED THEY ARE RENDERED INFRUCTUOUS AND ARE ACCORDINGLY DISMISSED. 8. IN GROUND NO.9 , THE ASSESSEE HAS DENIED ITSELF LIABLE TO BE CHARGED INTEREST UNDER SECTION 234D OF THE ACT. THE CHARGING OF INTEREST IS CONSEQUENTIAL AND MANDATORY AND THE ASSESSING OFFICER HAS NO DISCRETION IN THE MATTER. THIS PROPOSITION HAS BEEN UPHELD B Y THE HON'BLE APEX COURT IN THE CASE OF ANJUM H GHASWALA 252 ITR 1. IN THIS VIEW OF THE MATTER, WE UPHOLD THE ACTION OF THE ASSESSING OFFICER IN CHARGING THE ASSESSEE THE SAID INTEREST. THE ASSESSING OFFICER IS, HOWEVER, DIRECTED TO RECOMPUTE THE INTERES T CHARGEABLE UNDER SECTIONS 234D OF THE ACT, IF ANY, WHILE GIVING EFFECT TO THIS ORDER. 9. IN GROUND NO.10 , THE ASSESSEE CHALLENGES THE ACTION OF THE ASSESSING OFFICER IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT IN ITS CASE FOR ASSESSMENT YEAR 2009 - 10. THIS GROUND IS NOT MAINTAINABLE AS NO PENALTY HAS BEEN LEVIED ON THE ASSESSEE UNDER SECTION 271(1)(C) OF THE ACT FOR ANY CAUSE OF GRIEVANCE TO ARISE IN THE ASSESSEE'S CASE AND FOR US TO ADJUDICATE UPON IN THE IMPUGNED ORDER. THIS GROUND BEING NOT MAINTAINABLE IS DISMISSED ACCORDINGLY. TRANSFER PRICING ISSUES. 10.1 IN THE YEAR UNDER CONSIDERATION (I.E. ASSESSMENT YEAR 2009 - 10), THE ASSESSEE REPORTED THE FOLLOWING INTERNATIONAL TRANSACTIONS IT HAD ENTERED INTO WITH ITS AE : - S L.NO. INTERNATIONAL TRANSACTIONS AMOUNT RS. 1, PROVISION OF SOFTWARE DEVELOPMENT SERVICES 29,13,15,514 2. REIMBURSEMENT OF EXPENSES 1,65,24,195 6 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 10.2 THE FINANCIALS OF THE ASSESSEE AS PER ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATIO N ARE AS UNDER : - OPERATING REVENUES RS.29,13,15,514 OPERATING EXPENSES RS.24,98,99,748 OPERATING PROFIT RS.4,14,15,766 OPERATING PROFIT ON COST % 16.57% 10.3 THE ASSESSEE UNDERTOOK A T.P. STUDY IN RESPECT OF THE ALP OF ITS INTERNATIONAL TRANSACTI ONS WITH ITS AE. THE ASSESSEE CHARACTERIZING ITSELF AS A ROUTINE PROVIDER OF SOFTWARE DE VELOPMENT SERVICES TO ITS AE, TOOK ITSELF AS THE TESTED PARTY, AND ADOPTED TNMM AS THE MOST APPROPRIATE METHOD ( MAM ) TO DETERMINE THE ALP. IN ORDER TO IDENTIFY CO MPANIES COMPARABLE TO THE ASSESSEE, THE ASSESSEE CONDUCTED ITS SEARCH ON PROWESS AND CAPITALINE DATABASES. THE SEARCHES IN THESE DATA BASES RESULTED IN THE ASSESSEE SELECTING THE FOLLOWING 21 COMPANIES AS COMPARABLES FOR ITS SOFTWARE DEVELOPMENT SERVICES . SL.NO. COMPARABLE WEIGHTED AVERAGE MARGIN (%) 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 6.79 2. ANCENT SOFTWARE INTERNATIONAL LTD. 7.41 3. AZTECSOFT LTD. 12.13 4. CG - VAK SOFTWARE & EXPORTS LTD. - 1.41 5. GOLDSTONE TECHNOLOGIES LTD. 24.01 6. HELIOS & MATHE RSON INFORMATION TECHNOLOGY LTD. 38.09 7. INDIUM SOFTWARE (INDIA) LTD. 1.25 8. INFOSYS TECHNOLOGIES LTD. 40.83 9. KPIT CUMMINS INFOSYSTEMS LTD. 12.36 10. LARSEN & TOUBRO INFOTECH LTD. 16.46 7 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 11. LGS GLOBAL LTD. 24.60 12. MAARS SOFTWARE INTERNATIONAL L TD. 7.14 13. MINDTREE LIMITED 12.01 14. PERSISTENT SYSTEMS PVT. LTD. 24.10 15. QUINTEGRA SOLUTIONS LTD. 18.95 16. R S SOFTWARE (INDIA) LTD. 9.80 17. SASKEN COMMUNICATION TECHNOLOGIES LTD. 19.55 18. SIP TECHNOLOGIES AND EXPORTS LTD. - 10.97 19. SOFTSOL INDIA LTD. 14.95 20. VMF SOFTECH LTD. 2.08 21. ZYLOG SYSTEMS LTD. 16.63 ARITHMETIC MEAN 14.13 AS THE OPERATING MARGIN OF THE ASSESSEE WAS 1 6.57 % WHEREAS THE MEAN MARGIN OF THE COMPARABLES WAS 14.13%, THE ASSESSEE TREATED THE ALP OF ITS INTERNAT IONAL TRANSACTIONS WITH ITS AE IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT BEING AT ARM S LENGTH. 11.1 THE TPO REJECTED THE ASSESSEE'S T.P. STUDY FOR THE REASONS GIVEN IN THE SHOW CAUSE NOTICE AND TAKING TNMM AS THE MAM CARRIED OUT A FRESH SEARCH USIN G THE DATA BASES PROWESS AND CAPITALINE AND APPLYING VARIOUS FILTERS. BASED ON THIS STUDY, THE TPO REJECTED 13 OF THE 21 COMPANIES SELECTED BY THE ASSESSEE AS COMPARABLES. THE TPO S FINALLY SELECTED 11 COMPARABLES IN THE FINAL SET OF COMPARABLES, 8 BEIN G THOSE CHOSEN BY THE ASSESSEE AND 3 FRESH COMPARABLES, WITH AN AVERAGE MEAN MARGIN OF 24.32 % ON OPERATING COST. THE TPO S FINAL LIST OF COMPARABLE IS AS UNDER : SL.NO. COMPARABLE MARGIN (%) (UNADJUSTED) 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 8.11 2. BO DHTREE CONSULTING LTD. 62.27 3. KALS INFORMATION SYSTEMS LTD. 13.89 4. R S SOFTWARE (INDIA) LTD. 9.97 5. TATA ELXSI LTD. 20.28 8 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 6. SASKEN COMMUNICATION TECHNOLOGIES LTD. 27.91 7. PERSISTENT SYSTEMS LTD. 41.40 8. LARSEN & TOUBRO INFOTECH 24.72 9. INFO SYS LTD. 45.61 10. ZYLOG SYSTEMS LTD. 7.81 11. MINDTREE LTD. 5.52 ARITHMETIC MEAN 24.32 11.2 AFTER PROVIDING A NEGATIVE WORKING CAPITAL ADJUSTMENT OF 0.08%, THE NET ADJUSTED MARGIN WAS COMPUTED AT 24.40% ON OPERATING COST. THE ASSESSING OFFICER T HEN PROCEEDED TO COMPUTE THE ALP OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WITH ITS AE AS UNDER : - SOFTWARE DEVELOPMENT SERVICES. ARM S LENGTH MEAN MARGIN ON COST 24.32% LESS : WORKING CAPITAL ADJUSTMENT (ANNEX.C) (0.08%) ADJUSTED MARGIN 24.40% OPER ATING COST RS.24,98,99,748 ARM S LENGTH PRICE (ALP) @ 124.40% OF OPERATING COST. RS.31,08,75,286 PRICE RECEIVED RS.29,13,15,514 SHORTFALL BEING ADJUSTMENT U/S.92CA R S .1,95,59,772 THE ABOVE SHORTFALL OF RS.1,95,59,772 WAS PROPOSED AS THE T.P. ADJU STMENT UNDER SECTION 92CA OF THE ACT IN RESPECT OF THE SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS. 12. GROUND NO.5 EXCLUSION OF COMPARABLES SOUGHT FOR BY THE ASSESSEE. 12.1 IN THIS GROUND, THE ASSESSEE HAS SOUGHT FOR THE EXCLUSION OF THE FOLLOWING THREE COMPARABLES FORM THE TPO S SET OF COMPARABLES : - 9 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 (I) BODHTREE CONSULTING LTD. (II) INFOSYS TECHNOLOGIES LTD. (III) TATA ELXSI LTD. IN SUPPORT OF ITS CLAIM FOR EXCLUSION OF THE ABOVE THREE COMPANIES FROM THE LIST OF COMPARABLES, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE HAS FILED WRITTEN SUBMISSIONS, A CHART SHOWING THE ACCEPT / REJECT MATRIX OF VARIOUS COMPARABLES, A CASE LAW COMPILATION OF THE JUDICIAL PRONOUNCEMENTS RELIED UPON, COPIE S OF ANNUAL REPORTS OF COMPANIES, ETC. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT, INTER ALIA, THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. IN IT(TP)A NO.27 1/BANG/2014 FOR ASSESSMENT YEAR 2009 - 10; WHEREIN THAT COMPANY LIKE THE ASSESSEE, IN THE CASE ON HAND, WAS ALSO RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS AES AND IN WHICH CASE THE TPO HAD SELECTED THE VERY SAME FINAL SET OF 11 COMPARABLE COMPANIES HAVI NG THE SAME AVERAGE MEAN MARGIN OF 24.32%. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CITED CASE, IN WHICH THE ORDER OF THE CO - ORDINATE BENCH IS ALSO FOR ASSESSMENT YEAR 2009 - 10, WE FIND THAT THE SIMILARITY AND APPLICABILITY OF THE FINDINGS THEREIN WO ULD BE SIMILAR TO THOSE OF THE CASE ON HAND. 13. BODHTREE CONSULTING LTD. ( BODHTREE ) 13.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMPARABLE INSPITE OF THE ASSESSEE'S OBJECTIONS TO ITS INCLUSION IN THE FINAL LIST OF COMPARABLES. THE LEARN ED CIT (APPEALS) UPHELD THE TPO S ACTION IN SELECTING THIS COMPANY AS A COMPARABLE. 10 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 13.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES AS IT WAS FUNC TIONALLY DIFFERENT FROM THE ASSESSEE. THE LEARNED AUTHORISED REPRESENTATIVE DREW THE ATTENTION OF THE BENCH TO PAGE 12 OF THE ANNUAL REPORT OF BODHTREE SEGMENT WISE AND PRODUCT WISE PERFORMANCE WHEREIN IT IS STATED THAT : - BODHTREE HAS ONLY ONE SEGMENT, NAMELY SOFTWARE DEVELOPMENT. BEING A SOFTWARE SOLUTIONS COMPANY, IT IS ENGAGED IN PROVIDING OPEN AND END - TO - END WEB SOLUTIONS, OFF SHORING DATA MANAGEMENT, DATA WAREHOUSING, SOFTWARE CONSULTANCY, DESIGN AND DEVELOPMENT OF SOLUTIONS, USING LATEST TECHNOLOGIES. 13.2.2 THE LEARNED AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT THE WEBSITE OF BODHTREE SUGGESTS THAT IT IS A GLOBAL IT CONSULTING AND PRODUCT ENGINEERING SERVICES PROVIDER WITH ITS KEY AREAS BEING PRODUCT ENGINEERING, ANALYTICS , CLOUD AND ENTERPRISE SERVICES. THE SERVICES OFFERED INCLUDE: - PRODUCT ENGINEERING OUTSOURCED PRODUCT DEVELOPMENT, MICROSOFT SHARE POINT SERVICES, SOA SERVICES AND Q&A MANAGED TESTING SERVICES. ANALYTIC SERVICES INCLUDES SAP BOBJ, OBIEE, BIG DATA, ET C. CLOUD SERVICES INCLUDING CLOUD APPLICATIONS AND PLATFORMS, SOCIAL ENTERPRISE, ETC. ENTERPRISE SERVICES INCLUDING ORACLE IMPLEMENTATION SERVICES, R12 UPGRADE SERVICES, ORACLE ENTERPRISE INTEGRATION SERVICES, ETC. PROVIDES SOFTWARE SOLUTIONS LIKE SHAR E TREE, T ELE TREE, SEEMA TREE, APPS SCALE AND MIDAS. 11 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 OUTLOOK SECTION OF ANNUAL REPORT AT PAGE 15 STATES T HAT THIS COMPANY HAS VENTURED INTO NEW AREAS LIKE BUSINESS INTELLIGENCE, SPEED DATA MANAGEMENT AND DATA CLEARING OPERATIONS. 13.3.3 THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT CONSIDERING THE FACT THAT BODHTREE PROVIDES VARIED BUSINESS SOLUTIONS AND SERVICES AS LAID OUT ABOVE, IT IS PRAYED THAT IT MAY BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES AS IT IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE , IN THE CASE ON HAND, WHO IS A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER TO ITS AE. IN THIS REGARD, THE ASSESSEE , PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. IN IT(TP )A NO.271/BANG/2014 DT.14.8.2014 FOR ASSESSMENT YEAR 2009 - 10 WHEREIN THIS COMPANY WAS EXCLUDED FROM THE LIST OF COMPARABLES TO A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IT IS A SOFTWARE PRODUCT COMPANY. 13.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRES ENTATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW IN RETAINING THIS COMPANY AS A COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. 13.5.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENT RELIED ON BY THE ASSESSEE. WE FIND THAT A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2009 - 10, FOLLOWING THE DECISIONS OF THE MUMBAI BENCHES OF THE ITAT IN NETHAWK NETWORKS PVT. LTD. IN ITA NO.7633/MUM/2012 DT.6.11.2013 AND WILLS PROCESSING SERVICES (I) PVT. LTD. IN ITA NO.4547/MUM/2012 HAD OMITTED THIS 12 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 COMPANY FROM THE LIST OF COMPARABLES TO A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IT WAS ESTABLISHED TO BE IN SOF TWARE PRODUCT COMPANY. AT PARA 26.1 OF ITS ORDER, THE CO - ORDINATE BENCH HELD AS UNDER : - 2 6 . 1 B O D H T R E E C ON S U L T I N G L T D . : - A S F A R A S T H I S COM PA N Y I S C ON C E RN E D , IT I S NO T I N D I S P U TE T HA T I N T H E L I ST O F C O M P A R A B L E S C HO S E N B Y T H E A S S E S S EE , T H IS C O M P AN Y W A S A L S O I N CL U DE D B Y T H E A SS E S S E E . T H E A SS E S SE E , HO W E V ER , S U B M ITS B E F OR E U S T HA T L A T E R O N IT C A M E TO T H E A S S E SS E E S N O T I CE T HA T T H IS C O M P AN Y IS N O T B E I N G C O N S I D E R E D A S A C O MP A R A B L E C O M PA N Y I N T H E C A S E O F C O M P A N I E S R E N D E R I N G S O FT W A R E D E V E L O P ME N T S E R VI C E S. IN T H I S R EGA R D , T H E L D . C O U N S E L F O R T H E A S S E S S E E HA S B R O UGH T T O OU R N O TICE T H E DE CIS I O N O F T H E M U M B A I B EN C H O F T H E TR I BU N A L IN T H E C A S E O F N E T HA W K N E T W O R K S P V T . L T D. V . I T O , I T A N O . 7633 / M U M/ 2012, O R D ER D A T ED 6 . 1 1 . 2 0 13. I N T H I S C A S E , T H E T R I BU N A L F O LL O W E D T H E D E CI S I O N R E N D E R E D B Y T H E MU M B A I B E N C H O F T H E T R I B UN A L IN T H E C A S E O F W I L L S P R OCE S S I NG S E R V I C E S (I ) P . L T D . , I TA N O . 4 5 4 7 /M U M / 20 1 2 . I N T H E AF ORE S A I D DE C I S I O N S, T H E TR I BUN A L H A S T A K E N T H E VI E W T HA T B O D H T R E E C ON S U LT I N G L T D . IS IN T H E B U S I N E SS O F S O F T W A R E P RO D U C T S AN D W A S E NG A GE D IN P RO V I D I N G O PE N & EN D T O E N D W E B S O L U T I O N S S O FT W A R E C ON S U L T AN C Y A N D DE S I G N & D E V E L O P M E N T O F S O F T W A R E U SI N G L A T E ST T E C H NO L OG Y . T H E D E C I S I O N R E NDE R E D B Y T H E M U M BA I B EN C H O F T H E TR I B U NA L I N TH E CA SE O F N E T HA W K N E T W O R K S P V T . L T D . ( S U P R A ) I S I N R E L A TI O N T O A . Y . 2 00 8 - 0 9 . IT W A S A F F I R M E D B Y T H E L E A R N E D C OUN S E L F O R T H E A SS E SS E E T H A T T H E F A CTS A N D C I R C U M ST A N C E S IN T H E P R E S E N T Y EA R A L S O R E M A I N S I DEN TI C A L T O TH E F A CTS AN D CI R C U M ST A N C E S A S IT P R E V A I L E D IN A Y 0 8 - 0 9 A S F A R A S T H IS C O M PA R AB LE C O M P AN Y IS C O N C E R NED . F O L L O W I N G T H E A F O R E S A I D D E CI S I O N O F T H E M U M BA I B EN C H O F T H E T R I B U NA L, WE HO L D T H A T B O D H T R E E C ON S U L T I N G L T D . C AN N O T B E R EGA R D E D A S A C O M P AR A B L E . I N T H I S R E G A R D S, T H E F A CT T H A T T H E A S S E SS E E HA D ITS E LF P RO P O S E D T H I S C O MP A N Y A S C O MP A R A B L E , IN O U R O P I N I O N , S H OU L D N O T B E T H E BA SIS O N W H I C H TH E S A I D C O M PA N Y S H OU LD B E R E T A I N E D A S A C O M P A RA B L E , W HE N F A C T U A LL Y IT I S S H O WN T H A T T H E S A I D C O M P A N Y I S A S O FT W A R E P R O D U CT C O M PA N Y AN D NO T A S O FT W A R E D E V E L O P ME N T S ER VI C E S C O M P AN Y . 13.5.2 FOLLOWING THE AFORESAID DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2009 - 10, WE HOLD THAT BODHTREE CANNOT BE REGARDED AS A CO MPARABLE TO A SOFTWARE DEVELOPMENT SERVICE 13 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 PROVIDER, LIKE THE ASSESSEE IN THE CASE ON HAND, AS IT IS A SOFTWARE PRODUCT COMPANY AND CONSEQUENTLY DIRECT THE ASSESSING OFFICER / TPO TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 14. IN FOSYS TECHNOLOGIES LTD. ( INFOSYS ) 14.1 THIS COMPANY WAS INITIALLY CHOSEN BY THE ASSESSEE AS A COMPARABLE TO THE ASSESSEE. HOWEVER, BEFORE THE TPO ITSELF THE ASSESSEE OBJECTED TO ITS INCLUSION IN THE FINAL SET OF COMPARABLES ON GROUNDS OF BEING FUNC TIONALLY DIFFERENT SINCE IT HAS BRAND ATTRIBUTABLE PROFITS, WAS OWN ING SIGNIFICANT INTANGIBLES, WAS HAVING SIGNIFICANT R&D ACTIVITIES, ITS SCALE OF OPERATIONS, ETC. THE TPO HOWEVER OVERRULED THE ASSESSEE'S OBJECTIONS AND INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. THE LEARNED CIT (APPEALS) UPHELD THE TPO S DECISION. 14.2.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE REITERATED THE ASSESSEE'S OBJECTIONS TO THE INCLUSION OF INFOSYS IN THE FINAL SET OF COMPARABLES AS IT WAS F UNCTIONALLY DIS - SIMILAR AND DIFFERENT FORM THE ASSESSEE WHO IS A CAPTIVE SOFTWARE SERVICE PROVIDER TO ITS AE. IT WAS SUBMITTED THAT INFOSYS WAS A MARKET LEADER BY VIRTUE OF ITS SCALE OF OPERATIONS, BRAND ATTRIBUTABLE PROFITS, OWNING OF SIGNIFICANT IPRS ; AND INTANGIBLES AND HAVING SIGNIFICANT R&D ACTIVITIES. 14.2.3 IN WRITTEN SUBMISSIONS BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDS THAT : - COMPANY SHOULD BE REJECTED AS FUNCTIONALLY DIFFERENT THE COMPANY PROVIDES SOLUTIONS THAT SPAN THE ENTIRE SOFTWARE LIFE CYCLE ENCOMPASSING TECHNICAL CONSULTING, DESIGN, DEVELOPMENT, RE - ENGINEERING, MAINTENANCE, SYSTEMS 14 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES. THE COMPANY ALSO OFFERS SOFTWARE PRODUCTS FOR THE BANKING INDUSTRY, BUSINESS CONSULTING AND BUSINESS PROCESS MANAGEMENT SERVICES. DURING THE YEAR, INFOSYS EARNED RS 848 CRORES FROM SOFTWARE P RODUCTS, AN INCREASE OF 42% OVER SALES OF RS. 597 CRORES IN FY 07 - 08. (A) FINACLE , ITS UNIVERSAL BANKING SOLUTION, PARTNERS WITH BANKS ACROSS THE GLOBE TO POWER THEIR INNOVATION AGENDA ENABLING THEM TO DIFFERENTIATE THEIR PRODUCTS AND SERVICES THEREBY ENHANCING CUSTOMER EXPERIENCE AND ACHIEVING GREATER OPERATIONAL EFFICIEN CY (PAGE 13, ANNUAL REPORT FY 2008 - 09). (B) INFOSYS ALSO DEVELOPS PRODUCTS LIKE FLYPP , INFOSYS CUSTOMER SELF - SERVICE ENERGY MANAGER , INFOSYS HEALTH BENEFIT EXCHANGE , INFOSYS ITRANSFORM ICD 10 MIGRATION SUITE , INFOSYS MCONNECT , INFOSYS OMNI - CHANNEL PERSONALIZATION ENGINE , INFOSYS REAL TIME EXPERT MANAGER , INFOSYS SUPPLY CHAIN PERFORMANCE MANAGEMENT SUITE , INFOSYS TRADE ORIGINATION SYSTEM , INFOSYS TRAN SACTION RECONCILIATION SYSTEM . COMPANY IS ENGAGED IN SIGNIFICANT R&D INFOSYS IS ENGAGED IN SIGNIFICANT RESEARCH & DEVELOPMENT (R&D) THAT HAS LED TO CREATION OF SIGNIFICANT INTELLECTUAL PROPERTY (IP). IN THIS REGARD, THE ANNUAL REPORT REPORTS AS BELOW (PAGE 19, ANNEXURE TO DIRECTOR S REPORT): RESEARCH AND DEVELOPMENT OF NEW SOLUTIONS AND SERVICES, DESIGNS, FRAMEWORKS, PROCESSES AND METHODOLOGIES CONTINUE TO BE OF TOP PRIORITY FOR US. THE INTELLECTUAL PROPERTY (IP) CREATED HAS LED TO ENHANCE QUALITY, PRODUCTIVITY AND CUSTOMER SATISFA CTION. THIS YEAR WE STARTED FOCUSING ON CREATING SIGNIFICANT IP TO HELP THE COMPANY S NON - LINEAR GROWTH STRATEGY. R&D IS CONDUCTED AT THE VARIOUS SOFTWARE ENGINEERING & TECHNOLOGY LABS (SETLABS) AT INFOSYS. THE SET LABS ARE ENGAGED IN R&D IN VARIOUS TECH NOLOGIES, WHICH INTER ALIA INCLUDES (PAGE 19 - 20, ANNEXURE TO DIRECTOR S REPORT) NEXT GENERATION OF SOFTWARE ENGINEERING CONVERGENCE OF SERVICES, NETWORK AND APPLICATIONS TEXT ANALYSIS, MACHINE LEARNING, SYMBOLIC AND QUANTITATIVE APPROACHES TO REASONI NG AND DECISION MAKING, AND TASK ORIENTED KNOWLEDGE MANAGEMENT SYSTEMS VIRTUALIZATION, GRID MODELS FOR COMPUTING EFFICIENCIES AND CLOUD COMPUTING. APPLICATION SECURIT Y REQUIREMENTS, ETC. THE EFFORTS OF THE SETLABS HAVE LEAD TO CREATION OF R&D AND FI LING OF PATENTS. DURING THE YEAR, THE IP CELL OF SETLABS HAS HELPED FILE AN AGGREGATE OF 79 PATENT APPLICATIONS IN THE U.S. PATENT AND TRADEMARK OFFICE AND INDIAN PATENT OFFICE. (PAGE 13, DIRECTOR S REPORT) 15 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 SET LABS IS ALSO ENGAGED IN COLLABORATIVE R&D EFFORTS LIKE (PAGE 20, ANNEXURE TO DIRECTOR S REPORT): BT (BRITISH TELECOM) INNOVATES & SET LABS ARE JOINTLY WORKING ON DEVELOPMENT AND FOR TAKING TO MARKET A PRODUCT CALLED REAL - TIME BIZ INTELLIGENCE PLUS (RTBI PLUS) NOMURA SECURITIES PARTNERED INFOSYS REGARDING INTEREST RATE RISK ANALYSIS APPLICATION. IN FOSYS MAKES SUBSTANTIAL EXPENDITURE ON R&D YEAR ON YEAR AS CAN BE SEEN FROM THE TABLE BELOW (PAGE 20, ANNEXURE TO DIRECTOR S REPORT): IN RS. CRORE 2009 2008 REVENUE EXPENDITURE 236 201 CAPITAL EXPENDITURE 31 -- TOTAL 267 201 R&D EXPE NDITURE/TOTAL REVENUE 1.3% 1.3% FURTHER, THE COMPANY HAS ALREADY ACQUIRED A NUMBER OF PATENTS AND MANY OTHER APPLICATIONS ARE PENDING WITH THE TRADEMARK OFFICES. THE RELEVANT SCREENSHOT OF THE ANNUAL REPORT IS PROVIDED BELOW FOR YOUR READY REFERENCE: WE CONTINUE TO CONCENTRATE ON RESEARCH AND INNOVATION. AS OF FISCAL 2009, WE HAVE 200 PATENT APPLICATIONS (PENDING) IN INDIA AND THE U.S. WE HAVE BEEN GRANTED TWO PATENTS BY THE UNITED STATES PATENT AND TRADEMARK OFFICE, EARLIER IN FISCAL 2009. OUR AUSTR ALIAN SUBSIDIARY AND OUR RESEARCH GROUP HAVE JOINTLY PARTICIPATED IN ESTABLISHING THE SMART SERVICES COOPERATIVE RESEARCH CENTRE TO DEVELOP AN R&D PROGRAM FOR CREATING INTELLECTUAL PROPERTY VALUABLE TO AUSTRALIA S SERVICES MARKET. INFOSYS SIGNED AN AGREEM ENT WITH THE INTERNATIONAL INSTITUTE OF INFORMATION TECHNOLOGY, HYDERABAD (IIIT - H) TO SPONSOR RESEARCH IN UNSTRUCTURED DATA ANALYTICS, INFERENCE AND DIAGNOSTICS TOOLS AND THE DEVELOPMENT OF NEXT GENERATION BUSINESS INTELLIGENCE TOOLS. WE HAVE ALSO PARTNER ED WITH THE UNIVERSITY OF SOUTHERN CALIFORNIA (USC) VITERBI SCHOOL OF ENGINEERING FOR JOINT RESEARCH. COMPANY HAS SIGNIFICANT INTANGIBLE ASSETS AS PER ANNUAL REPORT OF FY 2008 - 09, THE COMPANY CLAIMS ITSELF AS THE MOST REPUTED AND ADMIRED COMPANY IN INDIA (PAGE 14, DIRECTOR S REPORT). WE WERE RANKED 14TH AMONG THE MOST RESPECTED COMPANIES IN THE WORLD BY REPUTATION INSTITUTE. WE WERE RANKED SECOND IN THE GLOBAL SOURCING LIST OF 100 BEST PERFORMING IT SERVICE PROVIDERS. HAYS GROUP AND CEO MAGAZINE RANKED US AMONG THE BEST COMPANIES IN THE WORLD FOR LEADERS. INFOSYS IS ALSO SPENDING SUBSTANTIAL AMOUNTS FO R BRANDING ACTIVITIES. DURING FY 2008 - 09, IT HAD INCURRED AN AMOUNT OF INR 77 CRORE FOR BRAND BUILDING AND MARKETING ACTIVITIES, AS EVIDENT FROM THE RELEVANT SCREENSHOT OF THE ANNUAL REPORT BELOW: 2.C SELLING AND MARKETING EXPENSES. WE INCURRED SELLING AND MARKETING EXPENSES AT 4.6% OF OUR TOTAL REVENUES, COMPARED TO 4.7% DURING THE PREVIOUS YEAR. RS. IN CRORE. 16 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 2009 % 2008 % GROWTH REVENUES 20,264 100.0 15,648 100.0 29.5 SELLING AND MA RKETING EXPENSES : SALARIES AND BONUS 682 3.4 506 3.2 34.8 OVERSEAS TRAVEL EXPENSES. 92 0.5 86 0.5 7.0 BRAND BUILDING AND MARKETING EXPENSES. 77 0.4 70 0.4 10.0 COMMISSION CHARGES 21 0.1 14 0.1 50.0 PROFESSIONAL CHARGES 21 0.1 18 0.1 16.7 OTHER S 40 0.2 36 0.2 11.1 TOTAL : 933 4.6 730 4.7 27.8 14.2.4 THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ELABORATE REASONS GIVEN ABOVE, THIS COMPANY I.E. INFOSYS SHOULD BE EXCLUDED FOR THE FINAL LIST OF COMPARABLES TO THE ASS ESSEE. IN SUPPORT OF THIS PROPOSITION, THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2009 - 10 WHEREIN THIS COMPANY INFOSYS WAS EXCLUDED FR OM THE LIST OF COMPARABLES AS IT WAS FOUND TO BE OWNING SIGNIFICANT IPRS AND INTANGIBLES, WAS INTO SOFTWARE PRODUCTS, HAD BRAND ATTRIBUTABLE PROFITS, ETC. AND WAS HELD TO BE NOT FUNCTIONALLY COMPARABLE TO A PURELY CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROV IDER. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE AUTHORITIES BELOW IN INCLUDING THIS COMPANY AS A COMPARABLE TO THE ASSESSEE. 14.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL DECISIONS CITED. WE FIND THAT A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2009 - 10, FOLLOWING THE DECISION OF AN EARLIER CO - ORDINATE BENCH I N THE 17 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 CASE OF 3DPLM SOFTWARE SOLUTIONS P. LTD. V DCIT IN IT(TP)A NO.1303/BANG/2013 DT.28.11.2013 , HAS OMITTED THIS COMPANY FROM THE LIST OF COMPARABLES TO A MERE SOFTWARE DEVELOPMENT SERVICE PROVIDER SINCE IT WAS FOUND TO BE FUNCTIONALLY DIS - SIMILAR AND DI FFERENT, BEING A MARKET LEADER ENGAGED IN SOFTWARE PRODUCTS, OWNED SIGNIFICANT IPRS AND INTANGIBLES, HAD SIGNIFICANT R&D ACTIVITIES, BRAND ATTRIBUTABLE PROFITS ETC. AT PARA 26.2 OF ITS ORDER THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CISCO SYS TEMS (INDIA) PVT. LTD. (SUPRA) HAS HELD AS UNDER : - 2 6 . 2 I N F O S Y S L T D . : - A S FA R A S T H I S C O MP A N Y IS C O N C E R N E D , IT IS NO T I N D IS P U TE BE F OR E U S T H A T T H IS C O M P AN Y H A S BE E N C ON SI D E R E D TO B E F U N CTI ONA LLY D IF F EREN T F RO M A C O M P AN Y P R O V I D I N G S I M P L E SO FT W AR E D E V E L O P M E N T S ER V I C E S, A S T H IS C O MP AN Y O W N S S I GN I F IC A N T I N T AN G I B L E S A N D H A S H UG E RE VE NUE S F R O M S O F T W A R E PR OD U CTS. IN T H IS R E GA R D , WE F I N D TH A T T H E B A NG A L O R E B E N C H O F T H E TR I BU N A L I N T H E C A S E O F M / S. T D P L M S O F T W A R E S O L U T I O N S L T D . V. DCI T , I T A N O . 1 3 0 3 / B A N G / 2 01 2 , B Y O R D E R D A T E D 28 .1 1 . 2 01 3 W ITH R EGA R D TO T H I S C O M P A RA B LE H A S H E LD A S F O L L O W S : - 11. 0 I N F O S Y S T E C HNOL O G I ES LTD. 11.1 TH I S W AS A C O M PARABLE S EL E C TED B Y T HE T P O . B E FORE T HE T P O , THE A SS E S S EE O B J E C T ED T O THE I N C L US ION O F T HE C O M PANY IN T H E S ET O F C O M PARABL E S , ON THE G R O UNDS O F TU R NO V ER AND B R AND AT T R I BUTABLE PRO F I T M ARGIN. THE T P O , HO W E V ER, R E J E C TED T HE S E OB J E C TIO N S RA I S ED B Y T HE A S S E SS EE ON T HE GROUN D S THAT TURNO V ER AND BR A ND A S PE C T S W ERE NO T MA T E RIAL L Y RELE V ANT IN T HE S O F T W ARE D E V ELO P M ENT S EG M EN T . 11.2 B E F ORE U S , T HE LEARNED A U T HO R I S ED R E P R E S ENTA T I V E C ON T ENDED THAT T H IS C O M PANY IS NOT F U N C T IONAL L Y C O M PA R ABLE T O T H E A S S E SS EE IN THE C A S E ON HAND. THE LEARNED A UTHOR I S ED R EP R E S EN T ATI V E DREW OUR AT T EN T ION T O V ARIOUS P A RTS O F THE A NNUAL R EPORT O F T HIS C O M PANY T O S U B M IT T HAT THIS C O M PA N Y C O M M A N D S S U B S TAN T IAL BRAND V A L U E, O W NS IN T E L LE C TUAL PROPERTY RI G H T S A N D I S A M A R K ET L EA D ER I N S O F T W ARE DE V ELO P M ENT A C T I V I T IE S , W HE R EAS THE A SS E S S EE IS M ERELY A S O F T W ARE S E R V I C E PRO V IDER OPERATING I T S B U S INE S S I N I NDIA AND DO E S NOT P O S S E S S EI T HER 18 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 A N Y BRAND V ALUE OR O W N A N Y INTAN G IBLE O R INTE L LE C T UAL PROPER T Y RIGHTS (I P R S ). IT W AS AL S O S U B M IT T ED B Y T HE LEARNED A U T HORI S E D R EPR E S E N T ATI V E T HAT : - (I) T HE C O - O RDINA T E BEN C H O F TH I S T R I BUNAL IN THE C A S E O F 24 / 7 C U S T O M E R . C O M P V T. LTD. I N I T A N O . 227/ B ANG/2 0 10 HAS HE L D T HAT A C O M PANY O W NING INTANGIBLES C ANNOT BE C O M PAR E D TO A L O W RI S K C AP T I V E S E R V I C E P R O V IDER W HO DOES NOT O W N A N Y IN T A N GIB L E AND HEN C E DO E S NO T HA V E AN ADDI T IONAL AD V ANTAGE I N THE M A R K E T . IT I S S U B M I T TED T HAT T HIS DE C I S ION IS APPLI C ABLE TO T HE A S S E SS EE ' S C A S E, A S T HE A SS E S S EE DO E S NOT O W N A N Y I N T A N G I B LES A N D HEN C E I N F O S Y S T E C H NOLOGIES LTD. C ANNO T BE C O M PARABLE TO THE A S S E S S EE ; (II) T HE OB S ER V ATION O F THE IT A T , D E L HI B E N C H IN THE C A S E O F A GNI T Y IND I A T E C HNOLOGI E S P V T. L T D. IN I T A N O.3856 ( D E L ) / 2010 AT PARA 5 . 2 THERE O F , THAT I N F O S Y S T E C HNOLOGI E S L T D. BEING A G I A NT C O M PANY AND M A R K ET LEADER A SS U M ING ALL RI S K S LEADING TO H I G HER P R O F I T S C ANNOT BE C O N S I D E R ED A S C O M PAR A B L E TO C APTI V E S ER V I C E P R O V IDE R S A S S U M ING L I M ITED RI S K ; (III) T HE C O M PANY HAS GENE R ATED S E V E RAL IN V ENTIONS AND F ILED F O R M ANY PA T E N TS IN I NDIA A N D US A ; (I V ) T HE C O M PANY HAS S U B S T AN T IAL RE V ENUES F R O M S O F T W ARE PRODU C T S AND T HE BREAK UP OF S U C H RE V ENUES I S NOT A V AILA BL E ; ( V ) T HE C O M PANY HAS I N C U RR ED HUGE E X P END I TURE F OR R E S E A R C H A N D DE V ELO P M EN T ; ( V I ) T HE C O M PANY HAS M ADE ARRANG E M EN T S TO W ARDS A C QU I S I TION O F I P R S IN A U T O L A Y , A C O MM E R C IAL A P P LI C A T ION PROD U C T U S ED IN DE S IGNING HIGH PER F O R M A N C E S T R U C T U R AL S Y S T E M S . I N V I E W OF THE ABO V E REA S ON S , THE LEARNED A U T HOR I S ED R EPR E S E N T ATI V E PLEADED T HAT, T H IS C O M PANY I .E. I N F O S Y S T E C HNOLOGI E S LTD . , BE E X C LUDED F R O M T H E L I S T OF C O M PARABLE C O MPANIE S . 11.3 P ER C ONTRA, OPP O S ING THE C ON T ENTIONS O F THE A S S E S S EE, T HE LEARNED D EP A R T M ENTAL R EPRE S E N T ATI V E S U B M IT T ED T H AT C O M P A R ABI L I T Y C ANNOT BE D E C IDED M E R E L Y ON THE BA S IS O F S C ALE O F 19 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 OPERATIO N S AND T HE BRAND AT T RIBUTABLE PRO F IT M A R G I NS O F T HIS C O M P A N Y HA V E NOT BEEN E X TRAORDINAR Y . I N V I E W OF T HI S , THE L E ARNED D EP A R T M EN T AL R EPR E S E N T ATI V E S UPPO R T ED THE DE C I S ION OF THE T P O T O IN C LUDE T HIS C O M PANY IN THE LI S T OF C O M P ARABLE C O M PANI E S . 11.4 W E HA V E HE A RD THE RI V AL S U B M I S S IO N S AND PE R U S ED AND C A R E F ULLY C ON S IDERED T HE M AT E RIAL ON R E C ORD. W E F I ND THAT T HE A SS E S S EE H AS BROUGHT ON R E C ORD S U F F I C I ENT E V I D E N C E TO E S TAB L I S H THAT T H IS C O M PANY I S F U N C T IONAL L Y DI S - S I M I LAR AND D I FF E RE N T F R O M T HE A S S E SS EE AND HEN C E I S NOT C O M P A R AB L E AND T HE F INDING RENDERED IN THE C A S E O F T RILOGY E - B U S IN E S S S O F T W A R E IND I A P V T . LT D . ( S U PRA) F OR A S S E S S M EN T Y EAR 2007 - 08 IS A P P L I C A B L E T O T H IS Y EAR AL S O. W E A RE IN C LINED TO C ON C U R W ITH T H E ARG U M ENT PUT F O R TH B Y THE A S S E S S EE T HAT I N F O S Y S T E C HNOLOGI E S LTD IS NOT FU N C T IONAL L Y C O M P ARABLE S I N C E IT O W NS S IGN I F I C ANT IN T ANGIBLE AND HAS HU G E R E V ENU E S F R O M S O F T W ARE PROD U C T S . IT IS A L S O S EEN T HAT T HE BRE A K UP O F RE V ENUE F R O M S O F T W ARE S E R V I C E S A N D S O F T W ARE P R OD U C T S I S NOT A V A I LA B LE. IN T H IS V IEW OF T HE M AT T ER, W E HO L D T HAT T H IS C O M PANY OUGHT T O BE O M I T T ED F R O M T HE S ET O F C O M PA R A B L E C O M PANI E S . I T IS ORDER E D A C C ORDINGL Y . TH E D E C I S I O N R E N D E RE D A S A F O R E S A I D P E R T A I N S TO A . Y . 20 0 8 - 0 9 . IT W A S A FF I R M E D B Y T H E L EA R NE D C O UN S E L F O R T H E A S S E SS E E T HA T T H E F A C T S A N D C I R C U M S T A N C E S I N T H E P R E S E N T Y EA R A L S O R E M A I N S I DE N TIC A L TO T H E F A C T S A N D C I R C U M S T A N C E S A S IT P R E V A I L E D IN A Y 0 8 - 0 9 A S F A R A S T H IS COM PARAB L E C O M P AN Y IS C O N C E RN ED . R E S PE CT F U L L Y F O LL O W I N G T H E D E C I S I O N O F T H E TR I B U N A L R E F E RR E D T O A B O V E , WE H O L D T HA T I N F O S Y S L T D . B E E XC L UD E D F R O M T H E LIST O F C O M P A RA B LE C O MP AN I E S. 14.4.2 FOLLOWING THE AFORESAID DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CIS CO INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2009 - 10, WE HOLD THAT INFOSYS CANNOT BE REGARDED AS A COMPARABLE TO A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER, LIKE THE ASSESSEE IN THE CASE ON HAND, AND CONSEQUENTLY DIRECT THE ASSESSING OFFICER / TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 20 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 15. TATA ELXSI LTD. (SEG.) 15.1 THIS COMPANY SELECTED BY THE TPO AS A COMPARABLE OVERRULING THE OBJECTIONS OF THE ASSESSEE TO ITS INCLUSION AS A COMPARABLE, ON GROUNDS THAT THIS COMPANY WAS A PRODUCT COMPANY AND INTO SYSTEMS INTEGRATION AND SUPPORT SERVICES AND WAS THEREFORE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE LEARNED CIT (APPEALS) UPHELD THIS DECISION OF THE TPO. 15.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE REITERATED THE CONTENTIONS PUT FORTH BEFORE THE AUTHORITIES BELOW THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE IN THE CASE ON HAND WHO IS A CAPTIVE SOFTWARE DEVELOPMENT SERVICES PROVIDER TO ITS AE. IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THE DIRECTORS REPORT AND MANAGEMENT DISCUSSION AND ANALYSIS OF THE ANNUAL REPORT OF TATA ELXSI LTD. FOR F.Y. 2008 - 09 INDICATES THAT THE SOFTWARE DEVELOPMENT SERVICES SEGMENT CANNOT BE CONSIDERED FOR ANALYSIS SINCE IT COMPRIS ES OF 3 SUB - SEGMENTS, NAMELY I. PRODUCT DESIGN SERVICES I.E. DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE; II. INNOVATION DESIGN ENGINEERING (I.E. MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN) AND III. VISUAL COMPUTING LABS (I.E. ANIMATION AND SPECIAL E FFECTS FOR MOVIES). IT IS SUBMITTED THAT THERE BEING NO SUB - SERVICES BREAK UP UNDER THE SOFTWARE DEVELOPMENT SERVICES SEGMENT TO DETERMINE THE INCOME AND EXPENSES FROM EACH OF THE SUB - ACTIVITIES MENTIONED ABOVE, THE COMPANY TATA ELXSI OUGHT TO BE E XCLUDED FROM THE LIST OF COMPARABLES AS IT IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE IN THE CASE ON HAND WHO IS A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER TO ITS AE. IN THIS REGARD, THE 21 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE DECIS ION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. IN IT(TP)A NO.271/BANG/2014 DT.14.8.2014. 15.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE AUTHORITIES BELOW IN SELECTING THIS COMPANY TO BE A COMPARABLE TO THE ASSESSEE. 15.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENT RELIED UPON BY THE ASSESSEE. WE FIND THAT A CO - ORDINATE BENC H OF THIS TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. (SUPRA), FOLLOWING THE DECISION IN THAT ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 (ITA NOI.1076/BANG/2011 DT.29.3.2013) HAS HELD TATA ELXSI BEING INTO SOFTWARE DEVELOPMENT SERVICE S EGMENTS SUCH AS EMBEDDED PRODUCT DESIGN SERVICES, INDUSTRIAL DESIGN AND ENGINEERING SERVICES, SYSTEMS INTEGRATING SERVICES, VISUAL COMPUTING LABS , ETC. CANNOT BE REGARDED AS COMPARABLE TO A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER, LIKE IS THE ASSESSEE IN THE CASE ON HAND. AT PARA 26.4 OF ITS ORDER THE CO - ORDINATE BENCH IN CISCO SYSTEMS (INDIA) PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2009 - 10 HAS HELD AS UNDER : - 2 6 . 4 TA T A E LXSI L T D . : - A S F A R A S T H IS C O M PA N Y IS C O N C E R NED , IT IS N O T IN D IS P U TE B E F OR E U S T H A T I N A S S E SS E E S O W N C A SE F O R T H E A . Y . 2 0 0 7 - 0 8 , T H I S C O M P AN Y W A S N O T R E G A R D E D A S A C O M P A R A B LE I N I T S S O F TW A R E D E V E L OP ME N T S E R V I C E S S EG ME N T I N I TA N O . 1 0 7 6 / B ANG / 2 0 1 1 , O R D ER DA T ED 29 . 3 . 2 013 . FO L L O W I N G W E R E T H E R E L E V A N T OB S E RV A T I O N S O F T H E T R I B U N A L : - II. U N R E A S O N A B L E C O M P A R A B ILITY C R ITE R IA : 19 . T H E L EAR N ED CH AR T ERED A CC OUN T A N T P L E A D E D T H AT OU T O F T H E S I X C O M P ARA B L E S SHO R T L I S T E D A BOV E AS C O M P A R A B L ES B A S ED O N T H E T U R NOV ER F I LT ER, T H E F O LL O W I N G T W O C O M P A N I E S , N A M E L Y ( I ) T A T A 22 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 E L XS I L T D ; A N D ( II ) M /S . F L E X T R ON I CS SO F TWA RE SYS T E M S L T D . , D E S ER V E T O B E E L I M I N A T E D F O R T H E F O L L O W I N G R E A S ON S : ( I ) TA T A E L X S I L T D . , : T H E C O M P A N Y OP ERA T E S I N T H E S E G M E N T S O F S O F T WA RE D E V E L O P ME N T S E R V I CES W H I CH C O M P R I S ES O F EM B E DD ED P R O D U CT D E S I G N S ER V IC E S , I NDU S T R I AL D E S I G N A N D E N G I N EER I N G S ER V I C ES A N D V I S U AL C O M P U TI N G L A B S A N D SYS T E M I N T E G RA T I O N S ER V I C E S S E G M E N T . T H ERE I S N O SUB - S ER V I C E S B RE A K U P / I N F O R M AT I O N P R OV I D ED I N T H E A NNU AL R E P O RT O R T H E D A T A B A S ES B A S ED O N W H I CH T H E M AR G I N F R O M S O F T W ARE S ER V I C E S A C TI V I T Y O N L Y C OU L D B E C O M PU T E D . T H E C O M P A N Y H A S A L S O I N I T S RE S P O NS E T O T H E NO T I CE U / S.133 ( 6 ) S T A T ED T H AT I T CA NNO T B E C O N S I D E RED AS C O M P A R A B L E T O A N Y O T H ER S O F T WA RE S E R V I CES C O M P A N Y B E C A U S E O F I T S C O M P L E X N A T U RE. H E N CE, TA T A E L XS I L T D. , I S T O B E E X C L U D ED F R O M T H E L IS T O F C O M P ARA B L E S . ( II ) F L E X T R ON I C S S O F T W ARE SYS T E M S L T D . : T H E L EA R N ED T P O H AS C ON S I D ERED T H I S C O M P A N Y AS A C O M P AR A B L E B A S ED O N 133 ( 6 ) RE P L Y W H ER E I N T H I S C O M P A N Y R E F L E C T E D IT S SO F TW ARE D E V E L O P M E N T S ER V I C E S RE V E NU ES T O B E M O RE T H AN 75 % O F T H E ' S O F T W ARE P R O D U C T S A N D S ER V I CE S ' S E G ME N T R E V E N U E S . F L E X T R ON I CS H A S A HY B R I D RE V E NU E M O D EL A N D H E N C E S H O U L D B E R E J EC T ED AS F U N C TI ON A L L Y D I FF E R E N T . B A S ED O N T H E I N F O R MA TI O N P R OV I D E D U N D ER ' R E V E N U E R E C OGN I TI ON ' I N IT S A NN U A L R E P O R T , I T CAN B E I N F ERRED T H A T T H E SO F T WA RE S ER V I C E S RE V E NU ES ARE EAR N ED O N A HYB R I D RE V E NU E M O D E L , A N D T H E S A M E I S NO T S I M I L AR T O T H E R E GU L AR M O D E L S A DO P T ED B Y O T H ER S O F T W ARE S ER V I CE P R O V I D ER S . T H E L E A R N E D R E P RE S E N T A TI V E P L EA D E D T H A T A RE GU L AR S O F T WA R E S E R V I CES P R O V I D ER C OU L D NO T B E C O M P AR E D T O A C O M P A N Y H A V I N G SU CH A U N I QU E RE V E N U E M OD E L , W H ERE I N T H E RE V E NU ES O F T H E C O M P A N Y FR O M SO F TW ARE / P R ODU CT D E V E L OP M E N T S ER V I CES D E P E ND S O N T H E S U C CE S S O F T H E P R O D U CT S S O L D B Y IT S C LI E N T S I N T H E M A R K E T P L ACE. H E N C E , I T W OU L D B E I N A P P R OP R I A T E T O C O M P A RE T H E B U S I N E S S OP E RA TI O N S O F T H E A S S E S S E E W IT H T H AT O F A C O M P A N Y F O L L O W I N G HY B R I D B U S I N E S S M O D E L C O M P R I S I N G O F R OY A LT Y I N C O ME A S WE L L AS RE GU L AR S O F T W ARE S ER V I CES I N C O M E, F O R W H I CH RE V E NU E B REA K - U P I S NO T A V A I LA B L E. H E F I N A LL Y SU B M I T T E D T H AT T H I S W AS A GOO D REA S O N T O E X C L U D E T H I S C O M P A N Y AL S O F R O M T H E LI S T O F C O M P ARA B L E S . 20 . O N T H E O T H ER H A ND , T H E L E AR N E D D R S UPP O R T ED T H E O R D E R O F T H E L O W ER A U T H O R I TI ES RE G AR D I N G T H E I N C L US I O N O F TA T A E L XS I A N D F L E X T R ON I CS SO F T W ARE S Y S T E MS L T D. , I N T H E L IS T O F C O M P ARA B L E S . H E 23 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 RE I T ERA T ED T H E C O N T E N T S O F P A R A 14.2.2 5 O F T H E T P O ' S O R D E R. H E A L S O READ O U T T H E FO L L O W I N G PO R T I O N FR O M T H E T P O ' S O R D ER : ' T H US A S S TATE D A BOV E B Y T H E C O M P A N Y , T H E F O L L O W IN G F A C T S E ME R GE : 1 . T H E COMP AN Y ' S S O FT W A R E D E VE L O P M E N T A N D S E R V I C E S S E G M E N T C O N S T I T U TE S T H R E E S U B - S E G M E N T S I ) P RO D U C T D E S I GN S ER V I C E S ; II ) E N G IN EE RIN G D E S I GN SE R VIC E S A N D I I I ) V I S U A L COMP U T I N G L A B S . 2 . T H E P RO D U C T D E S I GN SE R V I C E S S U B - S E G M EN T I S I N T O E M B E DD E D S OF T W A R E D E V E L OPM ENT . T H U S T HI S S E G M E N T I S IN T O S O F T W A R E D EV E L O PM EN T S E R V I C E S . 3. T H E CON TR I B U T IO N O F T H E E M B E D D E D S ER V I C E S S E G M E NT I S T O T H E T U N E O F R S . 2 30 CROR E S I N T H E T O TA L S E G M E N T RE VE N UE O F R S . 2 63 C R O R E S . E V E N I F W E CO N SI D E R T H E O T H E R T W O S U B - S E G M E N T S P E RT A I N T O I T E N A B L E D S E R V IC E S , T H E 8 7. 4 5 % ( 7 5 %) O F T H E S E G M E N T' S R E V E N U E S I S FR O M SOF TWA R E D E VE L O P ME N T S E R V I C E S . 4. T HI S S E G M E N T Q U A L IFI E S A L L T H E F I L TE R S A P P L I E D BY T H E T P O . ' R E G AR D I N G F L E X T R O N I CS SO F T WA RE SYS T E M S , T H E F O L L O W I N G E X T R A CT F R O M P A G E 14 3 O F T P O ' S O R D ER W AS READ O U T B Y H I M AS H I S S U B M I S S I O N S : 'I T I S VE R Y P ERT I NE N T T O M ENT I O N H E R E T H A T T H E C O M P A N Y WA S C O N SI D E RE D B Y T H E TAX P AYE R A S A COMP ARA B LE F O R T H E PR E C E D IN G A SS E SSM E N T Y E A R I .E . , AY 2 0 0 6 - 0 7 . WH E N T H E S A M E WA S A C C E P T E D B Y T H E T P O A S A COMP A R A B L E , T H E S A M E WA S N O T OB JE C T E D T O I T B Y T H E T A X P A Y E R . AS T H E F A C T S M E N T ION E D B Y T H E T A XP AYE R A R E T H E S A M E A N D T H E S E W E R E T H E R E I N T H E EA R L IE R F Y 2 005 - 0 6, T H E R E I S N O REA S O N W H Y T H E T A X P AY E R I S OB JE C T I N G T O I T . H O W T H E COMP AN Y I S F U NC T ION A LLY SI M I L A R I N T H E E AR L I E R F Y 20 0 5 - 0 6 B UT T H E S A M E I S NO T F U N C TI O NA L LY SI M I L A R FO R T H E 24 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 S U BS E Q U EN T F Y 20 0 6 - 0 7 E VE N W H E N N O F A C T S H A V E B EE N C H A N G E D FRO M T H E PR E C E D IN G YEA R . T H US T H E T A X P A Y E R I S A R GU I N G A G A IN S T T H I S C O MP A R A B L E A S T H E C OM P A N Y W A S N O T CO N S I D E RE D A S A C O MP A R A B L E B Y T H E T A X P AY E R FO R T H E PR E S E N T F Y 2 0 0 6 - 0 7 . ' 21 . W E H A V E H EARD T H E R I V AL S UB M I S S I O N S A N D C O N SI D ER E D T H E F AC T S A N D MA T ER I A L S O N REC O R D . A F T ER C ON SI D ER I N G T H E S U B M I S SI O NS , W E F I N D T H AT TA T A E L XS I A N D F L E X T R ON I C S ARE F U N C T I O N A LL Y D I F F E R E N T F R O M T H A T O F T H E A S S E SS EE A N D H E N CE T H EY D E S ER V E T O B E D E L E T ED F R O M T H E L I S T O F S I X C O M P ARA B L ES A N D H E N CE T H E RE R E M A I N S ON L Y F OU R C O M P A N I ES A S C O M P A RA B L E S , A S LI S T ED B E L O W : 2 6 . 5 . FO LL O W I N G T H E A F O R E S A I D D EC I S I O N O F T H E TR I BU N A L , W E HO L D T H AT M /S . TA T A E L X S I L T D . S H OU L D NO T B E RE G AR D ED A S A C O M P AR A B L E. 15.4.2 FOLLOWING THE AFORESAID DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF C ISCO SYSTEMS (INDIA) PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2009 - 10, WE HOLD THAT TATA ELXSI LTD. CANNOT BE REGARDED AS COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND WHO IS A CAPTIVE SOFTWARE SERVICE PROVIDER AND CONSEQUENTLY DIRECT THE ASSESSING OFFICE R / TPO TO EXCLUDE THIS COMPANY FORM THE LIST OF COMPARABLES. 16. IN THE RESULT, THE ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2009 - 10 IS PARTLY ALLOWED. REVENUE S APPEAL FOR A.Y. 2009 - 10 IN IT(TP)A NO.1310/BANG/2014 17. IN ITS APPEAL, REVENUE HAS RAISED T HE FOLLOWING GROUNDS : - 1. THE ORDER OF THE CIT (APPEALS) IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT (APPEALS) ERRED IN HOLDING THAT FOREIGN EXCHANGE LOSS/GAIN IS OPERATING IN NATURE WITHOUT ASCERTAINING THE NEXUS OF THE FOREX GAIN/LOSS WITH THE BUSINESS ACTIVITY OF THE TAXPAYER AND WITHOUT APPRECIATING THAT SUCH LOSS/GAIN THOUGH ATTRIBUTABLE TO THE OPERATING ACTIVITY IS NOT DERIVED FROM THE OPERATING ACTIVITY. 3. THE CIT (APPEALS) ERRED IN CONCLUDING THAT FOREX GAIN/LOS S ARE TO BE TREATED AS OPERATING IN NATURE WITHOUT APPRECIATING THAT THOUGH THEY MAY BE INCIDENTAL TO THE 25 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 OPERATING ACTIVITY, THEY CANNOT BE DEEMED AS OPERATING IN NATURE SINCE, THEY ARE NOT CRITICAL TO OPERATIONAL ACTIVITIES OF THE BUSINESS CONDUCTED BY T HE TAXPAYER. 4. THE CIT (APPEALS) ERRED IN LAW AS WELL AS ON FACTS BY DIRECTING THE TPO TO DECIDE THE CASE OF THE ASSESSEE, BY APPLYING THE PRINCIPLES EMERGING FROM THE ORDERS OF THE DELHI BENCH OF THE HON'BLE TRIBUNAL IN HAWORTH (INDIA) PVT. LTD. V DCIT 11 ITR (TRIB) 757 AND THE BANGALORE BENCH OF THE HON'BLE TRIBUNAL IN TRIOLOGY E - BUSINESS SOFTWARE V DCIT 23 ITR (TRIB) 464 WITHOUT APPRECIATING THAT IN TRANSFER PRICING EVERY CASE IS UNIQUE AND REQUIRES TO BE DECIDED INDEPENDENTLY AND THAT THE DIRECTIONS ISSUED ARE BEYOND THE MANDATE OF THE PROVISIONS OF SECTION 251(1)(A) OF THE IT ACT WHICH DOES NOT EMPOWER THE CIT (APPEALS) TO SET ASIDE THE ISSUE. 5. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT (APPEALS) BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6. THE APPELLATE CRAVES TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 18. THE GROUNDS AT S.NOS.1 , 5 & 6 , BEING GENERAL IN NATURE AND NOT URGED BEFORE US, NO ADJUDICATION IS CALLED FOR THEREON. 19.0 GROUNDS AT S.NOS.2 TO 4 : - FOREIGN EXCHANGE GAIN/LOSS. 19.1 IN THESE GROUNDS, THE REVENUE ASSAILS THE DECISION OF THE LEARNED CIT (APPEALS) IN T HE IMPUGNED ORDER IN HOLDING THAT FOREIGN EXCHANGE G AIN/LOSS IS OPERATING IN NATURE W ITHOUT APPRECIATING THAT SUCH GAIN/LOSS THROUGH ATTRIBUTABLE TO THE OPERATING ACTIVITY OF THE ASSESSEE IS NOT DERIVED FROM THE OPERATING ACTIVITY BUT IS ONLY INCIDENTAL TO IT. REVENUE ALSO ASSAILED THE DECISION OF THE LEARNED CIT (APPEALS) IN FOLLOWING THE DECISIONS OF THE DELHI BENCH OF THE ITAT IN THE CASE OF HAWORTH (INDIA) PVT. LTD. IN 11 ITR (TRIB) 757 AND OF THE CO - ORDINATE BENCH OF THE ITAT, BANGALORE IN THE CASE O F TRIOLOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. IN 23 ITR (TRIB) 464. THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED. 26 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 19.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE PLACED RELIANCE ON THE DE CISION OF THE LEARNED CIT (APPEALS) IN THE IMPUGNED ORDER IN HOLDING THAT FOREIGN EXCHANGE GAIN/LOSS IS TO BE TREATED AS PART OF OPERATING ACTIVITY FOR DETERMINING/COMPARABLE COMPANIES. IT WAS CONTENDED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESS EE BY A CATENA OF DECISIONS OF THE VARIOUS BENCHES OF THE ITAT AND THE LEARNED CIT (APPEALS) HAD, INTER ALIA, RIGHTLY FOLLOWED AND DIRECTED THE ASSESSING OFFICER TO FOLLOW THE DECISIONS OF THE CO - ORDINATE BENCH OF THE ITAT, BANGALORE BENCHES IN THE CASE O F TRIOLOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) . IT WAS PRAYED, IN THE LIGHT OF THE ABOVE AVERMENTS, THAT REVENUE S APPEAL ON THIS ISSUE BE DISMISSED. 19.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL DECISIONS CITED AND PLACED RELIANCE UPON. WE OBSERVE THAT IT HAS NOT BEEN DISPUTED THAT THE FOREIGN EXCHANGE GAIN/LOSS HAS ARISEN AS A CONSEQUENCE OF THE REALIZATION OF THE CONSIDERATION FOR RENDERING SOFTWARE DEVELOPMENT SERVICES AND THEREFORE THERE IS NO REASON FOR ITS EXCLUSION FROM THE OPERATING REVENUES FOR THE PURPOSE OF CALCULATING THE OPERATING MARGIN OF THE ASSESSEE. WE FIND THAT THIS PROPOSITION HAS BEEN UPHELD BY A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CAS E OF AMBA RESEARCH INDIA PVT. LTD. IN IT(TP)A NO.1376/BANG/2014 DT.17.4.2015 WHEREIN AT PARA 5.7 THEREOF IT HAS BEEN HELD AS UNDER : - 5.7 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JU DICIAL DECISIONS CITED AND PLACED RELIANCE UPON. WE OBSERVE THAT IT HAS NOT BEEN DISPUTED THAT THE FOREIGN EXCHANGE GAIN HAS ARISEN AS A CONSEQUENCE OF THE REALIZATION OF THE CONSIDERATION FOR RENDERING ITES SERVICES AND THEREFORE THERE IS NO REASON FOR I TS EXCLUSION FROM THE OPERATING REVENUES FOR THE 27 IT (T.P) A NO S . 1292 & 1310 /BANG/ 2014 PURPOSE OF CALCULATING THE OPERATING MARGIN OF THE ASSESSEE. WE FIND THAT THIS PROPOSITION HAS BEEN UPHELD BY A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF MINDTECK (INDIA) LTD. IN IT(TP)A NO.70/BANG/ 2014 DT.21.8.2014 WHEREIN AT PARA 11 THEREOF IT HAS BEEN HELD AS UNDER : - 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS NOT DISPUTED BY THE REVENUE THAT THE FOREIGN EXCHANGE FLUCTUATION HAS ARISEN AS A RESULT OF THE REALIZATION OF THE CONSIDERA TION FOR RENDERING SOFTWARE DEVELOPMENT SERVICES. IT IS THEREFORE INCURRED IN THE NORMAL COURSE OF BUSINESS AND THEREFORE THERE IS NO REASON WHY IT SHOULD BE EXCLUDED FROM DETERMINING THE OPERATING REVENUE FOR THE PURPOSE OF CALCULATION OF OPERATING MARGI N. IN OUR VIEW, THE ANALOGY DRAWN BY THE DRP REGARDING EXCLUSION OF INTEREST EXPENSES WHILE COMPUTING OPERATING MARGINS IS NOT PROPER. IN OUR VIEW, FOREIGN EXCHANGE GAIN ON REALIZATION OF CONSIDERATION FOR RENDERING SOFTWARE DEVELOPMENT SERVICES SHOULD B E REGARDING AS PART OF THE OPERATING REVENUE. FOLLOWING THE DECISION OF THE ITAT, BANGALORE BENCH IN THE CASE OF SAP LABS (SUPRA), WE HOLD THAT THE OPERATING REVENUE FOR THE ASSESSEE BE COMPUTED BY INCLUDING THE FOREIGN EXCHANGE GAIN. FOLLOWING TH E DECISION OF THE CO - ORDINATE BENCHES OF THIS TRIBUNAL IN THE CASE OF SAP LABS I NDIA (PVT.) LTD. (SURPA), TRIOLOGY E BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) AND MINDTECK (INDIA) LTD. (SUPRA), WE HOLD THAT OPERATING REVENUE SHOULD BE COMPUTED BY INCLUDING THE FOREIGN EXCHANGE GAIN. CONSEQUENTLY, THE GROUNDS AT S.NOS.2 TO 4 RAISED BY REVENUE ARE DISMISSED. FOLLOWING THE DECISION OF THE CO - ORDINATE BENCHES OF THIS TRIBUNAL IN THE CASE OF SAP LABS INDIA (PVT.) LTD. (SURPA), TRIOLOGY E BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA), MINDTECK (INDIA) LTD. (SUPRA) AND AMBA RESEARCH I NDIA PVT. LTD. (SUPRA), WE HOLD THAT OPERATING REVENUE SHOULD BE COMPUTED BY INCLUDING THE FOREIGN EXCHANGE GAIN/LOSS. CONSEQUENTLY, THE GROUNDS AT S.NOS.2 TO 4 RAISED BY REVENUE ARE DISMISSED. 20. IN THE RESULT,REVENUE S APPEAL FOR ASSESSMENT YEAR 2009 - 10 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH SEPT., 201 5 . SD/ - ( VIJAYPAL RAO ) JUDICIAL MEMBER SD / - (JASON P BOAZ) ACCOUNTANT MEMBER *REDDY GP