M/s. First Apex Software Technologies Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1311/BANG/2010

• Counselvise Citation: 131121114 RSA 2010
• Duration Of Justice: 4 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 17-03-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 25-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: RISHI HARLALKAR
• Keywords: Related party transaction; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 92D; 10B

Judgement Text

IT(TP)NO.1311/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B', BANGALORE BEFORE SHRI. N. V. VASUDEVAN, JUDICIAL MEMBER AND SHRI. JASON P.BOAZ, ACCOUNTANT MEMBER I.T(TP).A NO.1311/BANG/2010 (ASSESSMENT YEAR : 2006-07) NTT DATA FA INSURANCE SYSTEMS (INDIA) PRIVATE LIMITED (FORMERLY KNOWN AS FIRST APEX SOFTWARE TECHNOLOGY PRIVATE LIMITED) C/O.RISHI MADHUR & CO. CHARTERED ACCOUNTANTS, 1 ST FLOOR, HVM HOUSE, 106, AMARJYOTHI LAYOUT, OFF INTERMEDIATE RING ROAD, DOMLUR, BANGALORE 560 071. APPELLANT PAN : AAACF9123A VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(3), BANGALORE RESPONDENT APPELLANT BY : SHRI. RISHI HARLALKAR, C.A. RESPONDENT BY : SHRI.FARHAT HUSSAIN QURESHI, CIT ( DR) HEARD ON : 18.03.2015 PRONOUNCED ON : 20 .03.2015 O R D E R PER N. V. VASUDEVAN, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DA TED 19.8.2010 OF THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE11(3), BAN GALORE PASSED U/S. 143(3) R.W.S. 144C OF THE ACT RELATING TO AY 2006-07. IT(TP)NO.1311/BANG/2010 2 2. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF FI RST APEX SYSTEMS PTE.LTD., SINGAPORE. THE ASSESSEE IS ENGAGED IN THE BUSINES S PROVIDING SOFTWARE DEVELOPMENT SERVICES TO GROUP COMPANIES. DURING T HE PREVIOUS YEAR, THE ASSESSEE ENTERED INTO THE FOLLOWING INTERNATIONAL T RANSACTIONS VIZ., THE BUSINESS OF THE ASSESSEE IS ORGANIZED INTO THREE DIVISIONS V IZ., (1) SOFTWARE DEVELOPMENT SERVICES FROM WHICH IT RECEIVED A SUM OF RS.7,51,78 ,503 FROM ITS ASSOCIATED ENTERPRISE (AE) (2) REIMBURSEMENT OF EXPENSES RECEI VED FROM ITS AE OF RS.27,02,741/- (3) REIMBURSEMENT OF EXPENSES PAID OF RS.14,23,145/-. THE ASSESSEE PROVIDES SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES. ALL THE ABOVE TRANSACTIONS WERE INTERNATIONAL TRANS ACTIONS 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 THIS APPEAL THE DISPUTE IS WITH REGARD TO ADDITION MADE CONSEQUENT TO DETERMINATION OF ALP AND CONSEQUENT UPWARD REVISION AND ADJUSTMENT MADE TO THE PRICE AT WHICH INTERNATIONAL TRANSACTIONS WERE CARRIED OUT BY THE ASSESSEE WITH ITS AE IN RESPECT OF (1) SOFTWARE DEVELOPMENT SERVICES AND (2) REIMBURSEMENT OF EXPENSES RECEIVED FROM AE. 3. FINANCIAL RESULTS OF THE ASSESSEE FOR THE F Y 2005- 06 DESCRIPTION AMOUNT IT(TP)NO.1311/BANG/2010 3 OPERATING REVENUE RS.7,51,78,503/- OPERATING COST . . . . RS.6,75,15,662/- OPERATING PROFIT (PBIT) RS.76,62,841/- OPERATING PROFIT TO COST RATI 11.35% INTERNATIONAL TRANSACTIONS (AS MENTIONED IN THE 92 CE REPORT) : SOFTWARE DEVELOPMENT SERVICES - RS. 7,51,78,503/ - REIMBURSEMENT OF EXPENSES RECEIVED - RS. 27,0 2,741/- REIMBURSEMENT OF EXPENSES PAID - RS 14,23,14 5/- TP ADJUSTMENT RELATING TO IT SERVICES (SOFTWARE DEVELOPMENT SERVICES 4. COMPARABLE ULTIMATELY SELECTED BY TPO AND THEIR ARITHMETIC MEAN : SL. NO NAME OF COMPANY OP / TC (FY 2006- 07) SALES (RS.CR.) 1 AZTEC SOFTWARE LIMITED 18.09 128.61 2 GEOMETRIC SOFTWARE LIMITED (SEG.) 6.70 98.59 3 INFOSYS LTD 40.38 9028.00 4 KALS INFO SYSTEMS LIMITED 39.75 1.97 5 MINDTREE CONSULTING LTD 14.67 448.79 6 PERSISTENT SYSTEMS LTD. 24.67 209.18 7 R.SYSTEMS INTERNATIONAL LTD. (SEG.) 22.20 79.42 8 SASKEN COMMUNICATIONS LTD. (SEG.) 13.90 240.03 9 TATA ELXSI LTD (SEG.) 27.65 188.81 10 LUCID SOFTWARE LTD 8.92 1.02 11 MEDIASOFT SOLUTIONS LTD 6.29 1.76 12 R S SOFTWARE (INDIA) LTD 15.69 91.57 13 S I P TECHNOLOGIES & EXPORTS LTD 3.06 6.53 14 BODHTREE CONSULTING LTD. 15.99 5.32 15 ACCEL TRANSMATIC LTD. (SEG.) 44.07 8.02 16 SYNFOSYS BUSINESS SOLUTIONS LTD. 10.61 4.49 17 FLEXTRONICS SOFTWARE SYSTEMS LTD. 27.24 595.12 IT(TP)NO.1311/BANG/2010 4 18 LANCO GLOBAL SOLUTIONS LTD 5.27 35.63 19 MEGASOFT LTD 52.74 56.15 20 IGATE GLOBAL SOLUTIONS LTD.(SEG.) 15.61 527.91 ARITHMETIC MEAN 20.68% 5. 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 ME AN OF 20.68%. AFTER FACTORING THE WORKING CAPITAL ADJUSTMENT OF -4.75%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 25.43%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 18.6. COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETAILS OF COMPU TATION OF PLI OF THE COMPARABLES). BASED ON THIS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY YOU IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 20.68% LESS: WORKING CAPITAL ADJUSTMENT(ANNEXURE-C) - 4.75% ADJ.ARITHMETIC MEAN PLI 2 5.43% ARMS LENGTH PRICE: OPERATING COST 6,75,15,662+ RS.27,02,741* RS.7,02,18,403 ARMS LENGTH MARGIN 25.43% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 118.44% OF OPERATING COST RS.8,80,74,993/- 18.7. PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRI CE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: IT(TP)NO.1311/BANG/2010 5 ARMS LENGTH PRICE (ALP) AT 125.43% OF OPERATING COST RS.8,80,74,993 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.7,78,81,244 SHORTFALL BEING ADJUSTMENT U/S.92CA RS.1,01,93,749/- *REIMBURSEMENT OF EXPENSE RECEIVED THE ABOVE SHORTFALL OF RS.1,01,93,749/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 6. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE AO, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE OBJECTIONS AND CONFIRME D THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CO NFIRMED BY THE DRP WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSIN G OFFICER, THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. THE ASSESSEE FILED A CHART SHOWING HOW 6 OUT OF THE 20 COMPARABLE COMPANIES FINALLY CHOSEN BY THE TPO TO ARRIVE AT AR ITHMETIC MEAN OF PROFIT MARGINS FOR THE PURPOSE OF COMPARISON WITH THE PROF IT MARGINS OF THE ASSESSEE, ARE NOT COMPARABLE (A) FOR THE REASON THAT THE TURN OVER OF THOSE COMPANIES WERE BEYOND RS.200 CRORES AND THEREFORE CANNOT BE COMPAR ED WITH THE ASSESSEE WHOSE TURNOVER IS ONLY RS.12.99 CRORES, (B) FOR THE REASON THAT THESE COMPANIES WERE NOT FUNCTIONALLY COMPARABLE; (C) FOR THE REASO N THAT THE RELATED PARTY IT(TP)NO.1311/BANG/2010 6 TRANSACTION (RPT) CARRIED OUT BY THE COMPARABLE COM PANIES DURING THE PREVIOUS YEAR WAS BEYOND 15% OF ITS REVENUE AND HENCE OUGHT NOT TO BE INCLUDED AS A COMPARABLE. THE CHART ALSO GIVES THE CASES DECIDED BY VARIOUS BENCHES OF THE ITAT WHERE THE COMPARABLE COMPANIES HAVE BEEN HELD TO BE NOT COMPARABLE WITH THAT OF AN ASSESSEE PROVIDING IT SOFTWARE DEVE LOPMENT SERVICES. THE LEARNED DR RELIED ON THE ORDER OF THE TPO/DRP. WE WILL PROCEED TO CONSIDER THE COMPARABILITY OF COMPANIES CHOSEN BY THE TPO AN D LISTED IN PARA- 4 OF THIS ORDER. THE OTHER DISPUTE IN THIS APPEAL BY THE ASS ESSEE WITH REGARD TO THE ACTION OF THE TPO IN ADDING THE SUM OF RS.27,02,741/- BEIN G REIMBURSEMENT OF EXPENSES RECEIVED FROM THE AE AS PART OF THE OPERAT ING COST. ACCORDING TO THE ASSESSEE, THE ABOVE RECEIPTS ARE NOT TOWARDS RENDER ING OF ANY SERVICES TO THE AE AND ARE THEREFORE NOT TO BE INCLUDED IN THE OPERATI NG COST. EXCEPT THE ABOVE TWO ISSUES, VIZ., (1) EXCLUDING 6 COMPANIES FROM THE FI NAL SET OF 20 COMPARABLE COMPANIES FINALLY CHOSEN BY THE TPO FOR THE PURPOSE OF COMPARISON AND (2) EXCLUDING THE SUM OF RS.27,02,741/- BEING REIMBURSE MENT OF EXPENSES RECEIVED FROM THE AE AS PART OF THE OPERATING COST, OTHER I SSUES RAISED IN THE GROUNDS OF APPEAL AND THE REVISED GROUNDS OF APPEAL WERE NOT P RESSED. 8. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 20 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE FOLLOWI NG COMPANIES WILL HAVE TO BE EXCLUDED AS THE TURNOVER OF THESE COMPANIES A RE MORE THAN RS.200 CRORES IT(TP)NO.1311/BANG/2010 7 AND CANNOT BE COMPARED WITH THE ASSESSEE WHOSE TURN OVER IS LESS THAN RS.100 CRORES: (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CRORES (2) INFOSYS TECHNOLOGIES LTD. 9028.00 CRORES. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) (ITA NO.1338/BANG/2010) FOR ASSESSMENT YEAR (07-08) ON THE APPLICATION OF T URNOVER FILTER AND IT WAS SUBMITTED THAT THE AFORESAID COMPARABLE COMPANIES H AVE TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE SELECTED BY THE TPO. 9. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE AND THE LEARNED DR. IN THE CASE OF TRIOLOGY E-BUSI NESS SOFTWARE INDIA (P) LTD. (SUPRA), THIS TRIBUNAL ON APPLICATION OF THE TURNOV ER FILTER WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY ANALYSIS HEL D AS FOLLOWS: (1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT TH E TPO HAS APPLIED A LOWER TURNOVER FILTER OF Q 1 CRORE, BUT H AS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCOME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLLED TRANSACTION WITH AN I NTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMPARED OR THE ENTERPRISES ENTERING I NTO SUCH TRANSACTION, WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH TRANSAC TION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT W HEREVER THERE ARE IT(TP)NO.1311/BANG/2010 8 SOME DIFFERENCES SUCH DIFFERENCES SHOULD BE CAPABLE OF REASONABLE ACCURATE ADJUSTMENT IN MONETARY TERMS TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES. IT WAS HIS SUBMISSION THAT SIZE WAS A N IMPORTANT FACET OF THE COMPARABILITY EXERCISE. IT WAS SUBMITTED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WOULD IMPACT C OMPARABILITY. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGARH BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 , WHEREIN THE SPECIAL BENCH HAD LAID DOWN THAT IT IS IMPROPER TO PROCEED ON THE BASIS OF LOWER LIMIT OF 1 CRORE TURNOVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASONABLE CLASSIFICATION. SEVERAL OTHER DECISIONS WERE REFERRED TO IN THIS REGARD LAYING DOWN IDENTICAL PROPOSITION. WE ARE NOT REFERRING TO THOSE DECISIONS AS THE DECISION OF THE SPECIAL BENC H ON THIS ASPECT WOULD HOLD THE FIELD. REFERENCE WAS ALSO MADE TO T HE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERVED AS FO LLOWS:- SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PRO PORTION TO THE ACTIVITIES OF THE PARTIES 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 ENTERED INT O 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. THE FACT THAT THEY OPERATE IN THE SAME MA RKET MAY NOT MAKE THEM COMPARABLE ENTERPRISES. THE RELEVANT EXTRACT IS AS FOLLOWS [ON RULE 10B(3)]: CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE N OT 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 TRA NSACTION ENTERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE R ELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. 13.IT WAS FURTHER SUBMITTED THAT THE TPOS RANGE (R S. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COMPANIES LI KE INFOSYS WHICH IS 277 TIMES BIGGER THAN THE ASSESSEE (TURNOVER OF RS. 13,149 CRORES AS IT(TP)NO.1311/BANG/2010 9 COMPARED TO RS. 47.47 CRORES OF ASSESSEE). IT WAS SUBMITTED THAT AN APPROPRIATE TURNOVER RANGE SHOULD BE APPLIED IN SEL ECTING COMPARABLE UNCONTROLLED COMPANIES. 14.REFERENCE WAS MADE TO THE DECISION OF THE ITAT B ANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DC IT, ITA NO.1231/BANG/2010 , WHEREIN RELYING ON DUN AND BRADSTREETS ANALYSIS, THE TURNOVER OF Q 1 CRORE TO Q 200 CRORES WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSERVATIONS WERE B ROUGHT TO OUR NOTICE:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPA NIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPA RABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE U PPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SI ZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO B ARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALS O HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIV E BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCI NG PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED F ROM 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 & B RADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASS IFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE . IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VE RY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CROR E TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND T HE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.0 0 CRORES IT(TP)NO.1311/BANG/2010 10 ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PUR POSE OF MAKING TP STUDY. 15.IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PROP OSITION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN T HE FOLLOWING CASES: 1.M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED VS. A CIT (ITA NO.1413/BANG/2010) 2.M/S GENESIS MICROCHIP (I) PRIVATE LIMITED VS. DCI T (ITA NO.1254/BANG/20L0). 3.ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (ITA NO. 1171/BANG/2010). 16.IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING T URNOVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COMPARAB LE WITH THE ASSESSEE. 17. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HAVING TURNOVE R OF MORE THAN Q 200 CRORES AS COMPARABLES. IN THESE CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASSESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECIDING TH E ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDES THAT INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONE Y, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME , LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEM ENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SER VICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SU CH ENTERPRISES. IT(TP)NO.1311/BANG/2010 11 SEC.92-A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE TRANSACTION BETWE EN THE ASSESSEE AND ITS AE WAS AN INTERNATIONAL TRANSACTION ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATION OF ARMS LENGTH PRICE IN AN INTERNATIONAL TRANSACTION AND IT PROVIDES:- (1) THAT THE ARMS LENGTH PRICE IN RELATION TO AN I NTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASS OCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER R ELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : ( A )COMPARABLE UNCONTROLLED PRICE METHOD; ( B )RESALE PRICE METHOD; ( C )COST PLUS METHOD; ( D )PROFIT SPLIT METHOD; ( E )TRANSACTIONAL NET MARGIN METHOD; ( F )SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOAR D. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, I N THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRIC E SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER C ENT OF THE LATTER, THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HA S ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH P RICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF M ATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE O PINION THAT ( A )THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRAN SACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR IT(TP)NO.1311/BANG/2010 12 ( B )ANY INFORMATION AND DOCUMENT RELATING TO AN INTERN ATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY TH E ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SEC TION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR ( C )THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ( D )THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPE CIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FU RNISH 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 INTERNATIONAL TRANSACTION I N ACCORDANCE WITH SUB- SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FO R DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92C:- 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING T HE 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 ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON 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 TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; IT(TP)NO.1311/BANG/2010 13 ( 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 M ARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TA KEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO T HE 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 TRAN SFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSE TS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPEC TIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPL ICITLY 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 TH E RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT OR DERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER TH E 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 TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST C HARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE O PEN MARKET; OR ( II)R EASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMI NATE 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 IT(TP)NO.1311/BANG/2010 14 DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE IN TERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEI NG COMPARED. A READING OF THE PROVISIONS OF RULE 10B(2) OF THE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPARED WITH IN TERNATIONAL TRANSACTION HAVING REGARD TO THE FACTORS SET OUT TH EREIN. BEFORE US THERE IS NO DISPUTE THAT THE TNMM IS THE MOST APPRO PRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N. THE DISPUTES ARE WITH REGARD TO THE COMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS R EFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOWN THE PRINC IPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSIN G THE COMPARABLES. THE ASSESSEES TURNOVER IS Q 47,46,66,638. IT WOUL D THEREFORE FALL WITHIN THE CATEGORY OF COMPANIES IN THE RANGE OF TU RNOVER 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 B E EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ., TURNOVER RS. (1)FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRORES (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 IT(TP)NO.1311/BANG/2010 15 (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES 10. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) , WE HOLD THAT THE FOLLOWING COMPANIES (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CRORES (2) INFOSYS TECHNOLOGIES LTD. 9028.00 CRORES WHOSE TURNOVER IS ABOVE RS.200 CRORES SHOULD BE EXC LUDED FROM THE LIST OF COMPARABLE COMPANIES. THE AO IS DIRECTED TO COMPUT E THE ARITHMETIC MEAN BY EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. 11. IMPROPER SELECTION OF COMPARABLES: IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FOLLOWING 2 COMPA NIES ARE NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE. A) KALS INFORMATION SYSTEMS LIMITED B) TATA ELXSI C) ACCEL TRANSMISSION LIMITED. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECIS ION OF THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF TEKTRONIX ENGINEERIN G DVT. INDIA P.LTD. VS. DCIT IT (TP) A.NO.1465/BANG/2010 ORDER DATED 20.2.2 015 WHEREIN THE ABOVE IT(TP)NO.1311/BANG/2010 16 COMPANIES WERE HELD TO BE NOT FUNCTIONALLY COMPARAB LE WITH THAT OF A PURE SOFTWARE DEVELOPER LIKE THE ASSESSEE. 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS O F THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TEKTR ONIX ENGINEERING DVT. INDIA P.LTD. (SUPRA): 8. IMPROPER SELECTION OF COMPARABLES FUNCTIONALLY DI FFERENT. 8.1 THE LEARNED AUTHORISED REPRESENTATIVE SUBMI TTED THAT THE FOLLOWING FOUR COMPANIES BE EXCLUDED FROM THE LIST OF COMPARA BLES SELECTED BY THE TPO AS THEY ARE FUNCTIONALLY DIFFERENT AND NOT COMP ARABLE TO THE ASSESSEE. I) KALS INFORMATION SYSTEMS LTD. II) TATA ELXSI LTD. (SEG). III) ACCEL TRANSMATICS LTD. (SEG.) AND IV) R SYSTEMS INTERNATIONAL LTD. (SEG.) IN THIS CONNECTION, THE LEARNED AUTHORISED REPRESEN TATIVE DREW THE ATTENTION OF THE BENCH TO THE DECISION OF THE CO-OR DINATE BENCH OF THIS TRIBUNAL IN THE CASE OF AGILE SOFTWARE ENTERPRISES PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2006-07, WHEREIN THE COMPANIES LIST ED AT S.NOS.(I), (II) AND (III) SUPRA WERE HELD TO BE NOT FUNCTIONALLY COMPAR ABLE WITH THAT OF A PURE SOFTWARE DEVELOPER LIKE THE ASSESSEE. 8.2.1 WE HAVE HEARD THE RIVAL CONTENTIONS OF BO TH THE LEARNED AUTHORISED REPRESENTATIVE AND THE LEARNED DEPARTMENTAL REPRESE NTATIVE, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLU DING THE JUDICIAL DECISION CITED AND PLACED RELIANCE UPON BY THE ASSESSEE. ON A PERUSAL OF THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CAS E OF AGILE SOFTWARE ENTERPRISES PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2 006-07, RELIED UPON BY THE ASSESSEE, WE FIND THAT THE FOLLOWING THREE COMP ANIES WERE EXCLUDED FROM THE TPOS LIST OF COMPARABLES AS THEY WERE HEL D TO BE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE, WHO WAS INTO PURE SOFT WARE DEVELOPMENT SERVICES :- I) KALS INFORMATION SYSTEMS LTD. II) TATA ELXSI LTD. (SEG). IT(TP)NO.1311/BANG/2010 17 III) ACCEL TRANSMATICS LTD. (SEG.) AND 8.2.2 IN THIS CONTEXT, THE RELEVANT OBSERVATION S AND FINDINGS OF THE CO- ORDINATE BENCH IN THE CASE OF AGILE SOFTWARE ENTERP RISES PVT. LTD. (SUPRA) AT PARA 8.7 TO 8.9.3 THEREOF ARE EXTRACTED HEREUNDER : - 8.7 KALS INFORMATION SYSTEMS LTD : THE LD. AR SUBMITTED THAT THIS COMPANY WAS A SOFTWARE PRODUCT COMPANY AND COULD NO T BE COMPARED WITH THAT OF THE ASSESSEE. THE ASSESSEE WAS A SOFTWARE SERVICES COMPANY AND NOT A SOFTWARE PRODUCT COMPANY. RELIANCE WAS PLACED ON THE DECISION OF TRILOGY E-BUSINESS SOFTWARE (I) PVT. LTD. (SUPRA). AS PER THE LD. AR, SAME VIEW WAS TAKEN IN EMC DATA (SUPRA) ALSO. 8.7.1 PER CONTRA, THE LD. DR SUBMITTED THAT KALS INFORMATION SYSTEMS LTD. COULD NOT BE CONSIDERED AS A SOFTWARE PRODUCT COMPANY. 8.7.2 WE HAVE PERUSED THE ORDERS AND HEARD THE RI VAL CONTENTIONS. WE FIND THAT KALS INFORMATION SYSTEMS LTD. WAS CONSIDERED AS A SOFTWARE PRODUCT COMPANY IN BOTH TRILOGY E- BUSINESS (SUPRA) AS WELL AS EMC DATA (SUPRA). IN THESE DECISIONS, A HOST OF COMPANIES, INTER ALIA, INCLUDING KALS INFORMATION SYSTEMS LTD. WERE DELIBERATED UPON AND HELD AS UNDER:- 12. THE FOLLOWING WERE THE RELEVANT OBSERV ATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA): (D) KALS INFORMATION SYSTEMS L T D. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION O F THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS R E V E N U ES FROM BOTH SOFTWARE DEVELOPMENT AND S O F T W A R E PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED O U T THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. I T WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPOT, T H E SALARY COST DEBITED UNDER THE SOFTWARE D E V E L O P M E N T EXPENDITURE WAS Q 4 5 , 9 3 , 3 5 1 . THE SAME WAS LESS T H A N 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE T H E SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE W A S MADE TO THE PUNE BENCH T R I B U N A L S DECISION OF THE I T A T IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. D C I , ITA NO. ITA NO 1 3 8 6 / P N / 1 O WHEREIN KALS A S COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT O F IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE C O M P A N I ES . THE RELEVANT EXTRACT ARE AS F O LL O W S : IT(TP)NO.1311/BANG/2010 18 16. ANOTHER ISSUE RELATING TO SELECTION OF C O M P A R AB L ES BY THE TPO IS REGARDING INCLUSION OF KALS IN F O R MA T I O N SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS I N CL U S I O N ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS N O T COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF T H E PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS A N D SERVICES AND IS NOT COMPARABLE TO SOFTWARE D E V E L O P M E N T SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT H A S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE P A P E R BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T H A T IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES A N D THAT THE SAID COMPANY IS INTO DEVELOPMENT OF S O F T W A R E PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN F A C T U A LL Y REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE T O BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND T H U S ON THIS ASPECT, ASSESSEE S U CC EE D S . BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF T H E ASSESSEE THAT KALS INFORMATION SYSTEMS L I M I T E D SHOULD BE REJECTED AS A C O M P A R AB L E . WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S U BM I SS I O N MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T P O HAS DRAWN CONCLUSIONS ON THE BASIS OF I N F O R MA T I O N OBTAINED BY ISSUE OF NOTICE U / S . 1 33 (6) OF THE ACT. T H I S INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC D O MA I N COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME I S CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY A S HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 2 1 . 6 . 2 0 1 0 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED T O BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE M U MBA I BENCH OF ITAT HAS HELD THAT THIS COMPANY W A S DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MA I N L Y SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE T H E R E F O R E ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS N O T C O M P A R AB L E . (E) ACCEL TRANSMATIC L T D. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT O F THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE S O F T W A R E DEVELOPMENT SERVICE COMPANY. IT IS FURTHER S U BM I TT E D THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI IN D I A (F) LTD IT(TP)NO.1311/BANG/2010 19 V AD. CIT 12 TAXMAN.COM 51, THE DRP A CC E P T E D THE CONTENTION OF THE ASSESSEE THAT ACCEL T R A N S MA T I C SHOULD BE REJECTED AS COMPARABLE. THE R E L E V A N T OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN I T S ORDER ARE AS F O LL O W S : IN REGARD TO ACCEL TRANSMATICS LTD. THE A SSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT F O R FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED T H A T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS U N D E R . (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT A N D MANUFACTURE OF MULTI FUNCTION KIOSKS Q U E U E MANAGEMENT SYSTEM, TICKET VENDING S Y S T E M (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT C E N TR E FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, I MA G I N G TECHNOLOGIES, OUTSOURCED PRODUCT D E V E L O P M E N T (III) ACCEL IT ACADEMY (THE NET STOP FOR E N G I N EE R S )- TRAINING SERVICES IN HARDWARE AND N E T W O R K I N G ,EN TERPRISE SYSTEM MANAGEMENT, EMBEDDED S Y S T E M , VLSI DESIGNS, C A D / C A M / B P O (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES F O R 2 D / 3 D ANIMATION, SPECIAL EFFECT, ERECTION, GAME A SSE T D E V E L O P M E N T . 49 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES O F ACCEL TRANSMATIC LTD. DRP AGREED WITH THE A SSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM T H E ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES I N THE FORM OF ACCEL IT AND ACCEL ANIMATION SE R V I C ES FOR 2D AND 3D ANIMATION AND THEREFORE A SSESSEE S CL A I M THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT W A S ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING O FF I C E R TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST O F COMPARABLES FOR THE PURPOSE OF DETERMINING T NMM MA R G I N . BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS C O M P A N Y HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T H E PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN F O R COMPARABILITY PURPOSES. THE SUBMISSION OF THE L D . COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE C O M P A N Y SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR , ON THE OTHER HAND, RELIED ON THE ORDER OF THE T P O . 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF T H E VIEW THAT THE PLEA OF THE ASSESSEE THAT THE A F O R ES A I D COMPANY SHOULD NOT BE TREATED AS COMPARABLES W A S CONSIDERED IT(TP)NO.1311/BANG/2010 20 BY THE TRIBUNAL IN CAPGEMINI INDIA L T D (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE D E V E L O P E R . THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE L D . COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT T H I S COMPANY WAS NOT COMPARABLE IN THE CASE OF T H E ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SE R V I C ES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNSEL F O R THE ASSESSEE, WE HOLD THAT THE AFORESAID C O M P A N Y SHOULD BE EXCLUDED AS COMPARABLES. 13. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE A FORESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICA L IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF TRIO LOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA). RESPECTFULLY FOL LOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE C ASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPR A), WE DIRECT THAT THE FOLLOWING COMPANIES (LISTED AS SL.NO.4 & 15 OF THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO AND LISTED I N PARA-4 OF THIS ORDER) BE EXCLUDED FROM THE LIST OF 20 COMPARA BLE ARRIVED AT BY THE TPO. 8.7.3 IT MIGHT BE TRUE THAT A NUMBER OF SOFTWARE DEVELOPMENT COMPANIES IN THEIR TP STUDIES MIGHT HAVE CONSIDERED KALS INFOSYSTEMS LTD. AS A COMPARABLE AND NOT AS A SOFTWARE PRODUCT COMPANY. HOWEVER THIS, IN OUR OPINION, WILL NOT DILUTE THE FINDINGS IN THIS REGARD GIVEN BY THE TRIBUNAL. THE ASSESSEE HAVING RELIED ON THE DECISION OF THE TRIBUNAL WHEREIN IT HAS BEEN HELD THAT KALS IS A SOFTWARE PRODUCT COMPANY, UNLESS THE DECISION OF A HIGHER AUTHORITY WHICH IS DIFFERENT FROM THE ONE GIVEN B Y THE COORDINATE BENCH IS SHOWN BY THE REVENUE, IT WILL NOT BE POSSI BLE TO DEVIATE FROM THE VIEW EARLIER TAKEN BY A COORDINATE BENCH. ACCORDIN GLY, WE DIRECT THAT KALS INFORMATION SYSTEMS LTD. BE EXCLUDED FROM THE COMPARABLES. 8.8 ACCEL TRANSMATICS LTD. : LD. AR RAISED SIMILAR CONTENTIONS FOR EXCLUSION OF THIS COMPANY AS WAS MADE IN THE CASE O F KALS INFORMATION SYSTEMS LTD. (SUPRA). LD. DR ALSO RAISED SIMILAR O BJECTIONS. WE FIND THAT ACCEL TRANSMATICS LTD. HAS ALSO BEEN CONSIDERED A S A SOFTWARE PRODUCT COMPANY BY THIS TRIBUNAL IN THE DECISIONS CI TED AT PARA 8.7.2 ABOVE. RELEVANT PART OF THE DECISION HAS BEEN REP RODUCED BY US THEREIN. ACCORDINGLY, WE DIRECT THAT ACCEL TRANSMATICS LTD . BE EXCLUDED FROM THE COMPARABLES. 8.9 TATA ELXSI LTD. : LD. AR SUBMITTED THAT THIS COMPANY WAS ENGAGED IN RESEARCH & DEVELOPMENT WHICH RESULTED IN CREATION O F INTELLECTUAL PROPERTY RIGHTS AND THEREFORE WAS A SOFTWARE PRODUCT COMPANY. RELIANCE WAS PLACED ON THE DECISION OF COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF EMC DATA (SUPRA). IT(TP)NO.1311/BANG/2010 21 8.9.1 PER CONTRA, THE LD. DR SUBMITTED THAT TATA ELXSI LTD. WAS NOT A SOFTWARE PRODUCT COMPANY, BUT WAS ENGAGED ONL Y IN DEVELOPMENT OF SOFTWARE. 8.9.2 WE HAVE HEARD THE RIVAL CONTENTIONS. WHETH ER TATA ELXSI LTD. COULD BE CONSIDERED AS A SOFTWARE DEVELOPMENT COMPANY WAS ONE OF THE ISSUES WHICH CAME UP FOR CONSIDERATION BEFORE THE THIS TRIBUNAL IN THE CASE OF EMC DATA (SUPRA), WHEREIN IT WAS HELD AS UNDER:- 17. AS FAR AS COMPARABLE AT SL.NO.9 OF THE LIST OF COMPARABLE CHOSEN BY THE TPO LISTED IN THE CHART GI VEN AT PARA-4 OF THIS ORDER VIZ., TATA ELXSI LTD., IS CO NCERNED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH THAT OF THE SOFTWARE SERVICE PROVIDER WAS CONSI DERED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF LOGICA PVT.LTD. IT (TP) 1129/BANG/2011 AY 07-08) WHEREIN ON THE AFORESAID COMPANY, THE TRIBUNAL HELD AS FOLLOWS:- 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 A R E CONCERNED, THE COMPARABILITY OF THE AFORESAID T W O COMPANIES WITH THAT OF THE SOFTWARE SERVICE P R O V I D E R WAS CONSIDERED BY THE MUMBAI BENCH OF THE T R I B U N A L IN THE CASE OF T E LC O R D I A TECHNOLOGIES INDIA P R IV A T E LTD. (SUPRA) WHEREIN ON THE AFORESAID TWO C O M P A N I ES , THE TRIBUNAL HELD AS F O LL O W S :- 7.7. T A T A ELXSI L I M I T E D . : FROM THE FACTS AND MATERIAL ON RECORD A N D SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN T H A T THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF N I C H E PRODUCT AND DEVELOPMENT SERVICES, WHICH IS E N T I R E L Y DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE W I T H THE CONTENTION OF THE LEARNED AR THAT THE NATURE O F PRODUCT DEVELOPED AND SERVICES PROVIDED BY T H I S COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE B EE N NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE T P O SO AS TO CONSIDER IT AS A COMPARABLE PARTY F O R COMPARING THE PROFIT RATIO FROM PRODUCT AND SE R V I C ES . THUS, ON THESE FACTS, WE ARE IT(TP)NO.1311/BANG/2010 22 UNABLE TO TREAT T H I S COMPANY FIT FOR COMPARABILITY ANALYSIS F O R DETERMINING THE ARMS LENGTH PRICE FOR THE A SSESSEE , HENCE, SHOULD BE EXCLUDED FROM THE LIST OF C O M P A R AB L E P A RT I ES . 15. IN VIEW OF THE ABOVE, THE LD. COUNSEL FOR T H E ASSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY A T SL.NO.6 VIZ., FLEXTRONICS SOFTWARE SYSTEMS PVT. L T D . SHOULD BE TAKEN AS A COMPARABLE, WHILE COMPARABLE A T SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A C O M P A R AB L E . 18. IN VIEW OF THE AFORESAID DECISION, WE HOLD THA T TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABL E CHOSEN BY THE TPO. 8.9.3 THE ASSESSEE BEFORE US IS NOT DEVELOPING ANY NICHE PRODUCT. AS HELD BY THE COORDINATE BENCH OF THE TRIBUNAL (SUPRA ), TATA ELXSI LTD. COULD NOT BE CONSIDERED AS A SOFTWARE DEVELOPMENT COMPANY SIMPLICITOR. THAT TATA ELXSI LTD. WAS FUNCTIONALLY DIFFERENT, HAS BEEN HELD BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF YODLEE INFOTECH PVT. LTD. (ITA NO.1397/BANG/2010 DATED 15.2.2013) AS WELL. WE THEREFORE DIRECT THAT TATA ELXSI LTD. BE EXCLUDED FROM THE COMPARABLES. 8.2.3 FOLLOWING THE AFORESAID DECISION OF THE C O-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF AGILE SOFTWARE ENTERPRISES PVT. LTD. FOR ASSESSMENT YEAR 2006-07 (SUPRA), WE HOLD THAT THE ABOVE MENTIO NED THREE COMPANIES I.E. I) KALS INFORMATION SYSTEMS LTD. II) TATA ELX SI LTD. (SEG). AND III) ACCEL TRANSMATICS LTD. (SEG.) SHOULD BE EXCLUDED FROM THE TPOS FINAL LIST OF COMPARABLES. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE ALP OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS AFTER EXC LUDING THESE THREE COMPANIES. 13. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AF ORESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICAL IN THE CASE O F THE ASSESSEE AS WELL AS IN THE CASE OF TEKTRONI ENGINEERING (SUPRA). RESPECTF ULLY FOLLOWING THE DECISION OF IT(TP)NO.1311/BANG/2010 23 THE TRIBUNAL REFERRED TO ABOVE IN THE CASE OF TEKTR ONIX ENGINEERING (SUPRA), WE DIRECT THAT KALS INFOSYSTEMS LTD. AND ACCEL TRANSMA TIC LTD. AND TATA ELXSI BE EXCLUDED FROM THE LIST OF 20 COMPARABLE AR RIVED AT BY THE TPO. 14. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ONE OF THE COMPARABLE OUT OF THE 20 COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., MEGASOFT LTD., HAS RELATED PARTIES TRANSACTION EXCEEDING 15% AND THERE FORE SHOULD NOT BE REGARDED AS COMPARABLE AND IN THIS REGARD DREW OUR ATTENTION TO THE FOLLOWING OBSERVATIONS OF THE ITAT BANGALORE BENCH IN THE CAS E OF TEKTRONIX ENGINEERING DEVT. (SUPRA): 7. RELATED PARTY TRANSACTIONS EXCEEDING 15%. 7.1 IN RESPECT OF THE FOLLOWING 3 COMPARABLE C OMPANIES SELECTED BY THE TPO, THE LEARNED AUTHORISED REPRESENTATIVE OF THE A SSESSEE HAS OBJECTED TO THEIR INCLUSION IN THE LIST OF COMPARABLES ON TH E GROUNDS OF THAT THEIR RPT IS IN EXCESS OF 15%. THE THREE COMPARABLES ARE S.NO. NAME OF COMPANY RPT % (I) AZTEC SOFTWARE LTD. 17.78 (II) GEOMETRIC SOFTWARE LTD. (SEG) 19.34 (III) MEGASOFT LTD. 17.08 IN SUPPORT OF THEIR EXCLUSION, THE LEARNED AUTHORIS ED REPRESENTATIVE HAS PLACED RELIANCE ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF AGILE SOFTWARE ENTERPRISES PVT. LTD. IN IT(TP)A NO.1172/BANG/2010 DT.26.9.2014; WHICH IS ALSO FOR A SSESSMENT YEAR 2006- 07; THE PERIOD UNDER CONSIDERATION. THE LEARNED AU THORISED REPRESENTATIVE PRAYED THAT IN VIEW OF THE ABOVE, THESE THREE COMPA RABLES BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES TO THE ASSESSEE. 7.2 WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE LEARNED AUTHORISED REPRESENTATIVE AND LEARNED DEPARTMENTAL REPRESENTAT IVE, PERUSED AND IT(TP)NO.1311/BANG/2010 24 CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUD ING THE JUDICIAL DECISION CITED AND PLACED RELIANCE UPON BY THE ASSESSEE. TH E FACT IS THAT THE RPT IN THE CASE OF THE ABOVE THREE COMPARABLE COMPANIES LI STED AT PARA 7.1 (SUPRA) EXCEED 15%. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF AGILE SOFTWARE ENTERPRISES PVT. LTD. (SUPRA) FOR ASSESSME NT YEAR 2006-07, AS IN MANY OTHER DECISIONS OF THIS TRIBUNAL, HAS HELD THA T WHERE THE RPT EXCEEDS 15%, SUCH COMPANIES SHOULD NOT BE TAKEN AS COMPARAB LES. THE OPERATIVE PORTION OF THIS ORDER OF THE CO-ORDINATE BENCH (SUP RA) IN PARAS 8.11 AND 8.12 AT PAGES 16 & 17 THEREOF IS EXTRACTED HEREUNDER :- 8.11 MEGASOFT LTD. 8.12 AZTECH SOFTWARE LTD. 8.13 GEOMETRIC SOFTWARE LTD. LD. AR SUBMITTED THAT IN EACH OF THE ABOVE COMPANIE S THE RPT FILTER EXCEEDED 15%. ACCORDING TO HIM, RPT FILTER HAS BEEN UPHELD B Y THIS TRIBUNAL IN A HOST OF DECISIONS INCLUDING THAT OF EMC DATA (SUPRA). PER C ONTRA, THE LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. WE HAVE PERUSED TH E ORDERS AND HEARD THE RIVAL CONTENTIONS. APPLICATION OF RPT FILTER WHILE SELECTING THE COMPARABLES HAS BEEN HELD TO BE AN APPROPRIATE CRITERIA BY THIS TRIBUNAL IN A NUMBER OF DECISIONS. IN THE CASE OF EMC DATA (SUPRA), IT WAS HELD AS UNDER:- 16. AS FAR AS COMPARABLE COMPANIES AT SL.NO.1 & 2 &19 OF THE CHART OF COMPARABLE COMPANIES CHOSEN BY THE TPO AT PAGE-4 OF THIS ORDER VIZ., AZTEC SOFTWARE LIMITED AND GEOMETRIC SOFTWARE LTD. (SEG.) AND MEGASOFT LTD., IS CONCERNED, IT IS NOT IN DISPUTE B EFORE US THAT THE RELATED PARTY TRANSACTION IN THE CASE OF COMPANIES EXCEEDS 15% AND IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF 24 X 7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010, FOL LOWED BY THIS TRIBUNAL IN THE CASE OF LOGICA PRIVATE LTD. (SUPRA) WHEREIN IT WAS HELD THAT WHERE THE RPT EXCEEDS 15%, SUCH COMPANIES SHOU LD NOT BE TAKEN AS COMPARABLE COMPANIES. FOLLOWING THE SAID D ECISION, WE HOLD THAT COMPANIES AT SL.NOS. 1 & 2 & 19 REFERRED TO AB OVE OF THE LIST OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO BE EXCLU DED FROM THE LIST OF COMPARABLE COMPANIES WHILE WORKING OUT THE ALP. THERE IS NO DISPUTE THAT RPT FILTER IN THE CASE OF MEGASOFT LTD. WAS 17.08%, THAT OF AZTECH SOFTWARE LTD. WAS 17.78% AND THAT OF GEOMETRIC SOFTWARE LTD. WAS 19.34%. COORDINATE BENCHES OF THE TRIBUNAL ARE CONSISTENTLY FOLLOWING 15% AS CUT OFF MARK FOR APPLYING THE RPT FILTER. AC CORDINGLY, WE DIRECT EXCLUSION OF MEGASOFT LTD., AZTECH SOFTWARE LTD. AN D GEOMETRIC SOFTWARE LTD. FROM THE COMPARABLES. IT(TP)NO.1311/BANG/2010 25 7.3 FOLLOWING THE AFORESAID DECISION OF THE CO -ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF AGILE SOFTWARE ENTERPRISES PVT. LTD. (SUPRA), WE HOLD THAT THE AFORESAID THREE COMPANIES LISTED AT PARA 7 .1 OF THIS ORDER BE EXCLUDED FROM THE LIST OF COMPARABLES. 15. FOLLOWING THE AFORESAID DECISION OF THE TRIBUN AL, WE HOLD THAT MEGASOFT LTD., BE EXCLUDED FROM THE FINAL LIST OF 20 COMPARA BLE COMPANIES CHOSEN BY THE TPO. 16. THE LEARNED COUNSEL FOR THE ASSESSEE ADDRESSED ARGUMENT ON THE NEXT ISSUE IN THE APPEAL, VIZ., THE ACTION OF THE TPO IN INCLU DING THE REIMBURSEMENT OF EXPENSES OF RS.27,02,741/- BY THE AE TO THE ASSESSE E AS PART OF THE OPERATING COST WHILE WORKING THE ADJUSTMENT ON ACCOUNT OF ALP . THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE TPO IN HIS ORDER HAS NOT DISCUSSED ANYTHING ABOUT THE NATURE OF THESE EXPENSES BUT HAS SIMPLY A DDED THE SAME TO THE OPERATING COST FOR THE PURPOSE OF WORKING OUT THE A LP ADJUSTMENT. THOUGH IT WAS HIGHLIGHTED IN THE OBJECTIONS BEFORE THE DRP TH AT THE ABOVE EXPENSES ARE IN THE NATURE OF TRAVELLING EXPENSES, HOTEL EXPENSES, PER DIEMS, AND VISA AND TRAVEL INSURANCE CHARGES ETC., AND ARE THEREFORE NOT RELAT ED TO THE CONSIDERATION RECEIVED BY THE ASSESSEE FOR SERVICES RENDERED AND ARE PUREL Y IN THE NATURE OF OUT OF POCKET EXPENSES, THE DRP DID NOT CHOOSE TO CONSIDER THE SUBMISSIONS AND HAVE MERELY ENDORSED THE ACTION OF THE TPO. IT(TP)NO.1311/BANG/2010 26 17. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE LEDGER COPY OF EXPENSES RECOVERABLE-APEX JAPAN A/C. AND EXPE NSES RECOVERABLE-APEX SINGAPORE A/C. AND POINTED OUT THAT THE PERUSAL OF THE SAME WOULD SHOW THAT THESE WERE OUT OF POCKET EXPENSES INCURRED BY THE A SSESSEE ON BEHALF OF THE AE AND WERE REIMBURSED BY THE AE AND HAS NOTHING TO DO WITH THE CONSIDERATION THAT THE ASSESSEE RECEIVED FOR RENDERING SOFTWARE D EVELOPMENT SERVICES. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE REIMBURSEMENT OF EXPENSES CAN NEITHER BE TREATED AS OPERATING REVENUE OR OPER ATING EXPENSE AND SHOULD BE WHOLLY EXCLUDED FROM THE PROFIT AND LOSS ACCOUNT. OUR ATTENTION WAS ALSO DRAWN TO THE AGREEMENT BETWEEN THE ASSESSEE AND ITS HOLDI NG COMPANY WHEREIN IT WAS PROVIDED THAT THE ASSESSEE WILL REIMBURSE EXPENSES IN RELATION TO TRAVEL OF ASSESSEES STAFF FOR ONSITE PROJECTS. IT WAS THUS SUBMITTED THAT REIMBURSEMENT OF EXPENSES RECEIVABLE SHOULD BE TREATED AS NON-OPERAT ING AND NEITHER BE CONSIDERED AS OPERATING INCOME NOR SHOULD BE CONSID ERED AS OPERATING EXPENSES FOR THE PURPOSE OF CALCULATING MARGIN OF THE ASSESS EE. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUT ATTENTION TO THE DECISION REN DERED BY THE ITAT BANGALORE BENCH IN THE CASE OF M/S.L.G.SOFT INDIA PVT.LTD. VS . THE DCIT IT (TP) A.NO.1121/BANG/2011 FOR AY 07-08 WHEREIN THE TRIBUN AL HELD THAT REIMBURSEMENT OF EXPENSES SHOULD NOT BE ADDED BACK TO THE COST BASE FOR THE PURPOSE OF MARK UP. IT(TP)NO.1311/BANG/2010 27 18. THE LEARNED DR WHILE RELYING ON THE ORDER OF T HE DRP SUBMITTED THAT THE QUESTION AS TO WHETHER THE RECEIPTS IN QUESTION ARE REALLY REIMBURSEMENT OF EXPENSES HAS NOT BEEN EXAMINED BY THE TPO AND THERE FORE IN ANY EVENT, THE ISSUE SHOULD BE REMANDED TO THE TPO TO VERIFY THE C LAIM OF THE ASSESSEE THAT THE SUM IN QUESTION IS PURELY REIMBURSEMENT OF EXPENSES . 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS CLEAR FROM THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN THE CASE OF L. G.SOFT INDIA PVT.LTD. (SUPRA) THAT REIMBURSEMENT OF EXPENSES CANNOT BE CONSIDERED AS RECEIPTS FOR RENDERING SERVICES AND SHOULD NOT BE ADDED BACK TO THE COST B ASE FOR THE PURPOSE OF MARK UP. FOLLOWING THE SAID DECISION, WE HOLD THAT REIM BURSEMENT OF EXPENSES CANNOT BE CONSIDERED AS RECEIPTS FOR RENDERING SERVICES AN D SHOULD NOT BE ADDED BACK TO THE COST BASE FOR THE PURPOSE OF MARK UP. AS SUBMI TTED BY THE LEARNED DR NEITHER THE TPO NOT THE DRP HAVE GONE INTO THE QUES TION AS TO WHETHER THE RECEIPT IN QUESTION IS REIMBURSEMENT. WE THEREFORE REMAND THE ISSUE TO THE LIMITED EXTENT OF VERIFICATION REGARDING THE NATURE OF THE RECEIPT ONLY AND HOLD THAT IF THE RECEIPTS ARE PURELY REIMBURSEMENT OF EX PENSES THEY SHOULD NEITHER BE CONSIDERED AS OPERATING INCOME NOR OPERATING EXPENS ES FOR THE PURPOSE OF CALCULATING MARGINS OF THE ASSESSEE. WE HOLD AND D IRECT ACCORDINGLY. IT(TP)NO.1311/BANG/2010 28 20. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF MARCH, 2015. SD/- SD/- ( JASON P. BOAZ) ( N.V. VASUDE VAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 20 TH MARCH, 2015. DSM COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY O RDER ASSISTANT REGISTRAR ITAT, BANGALORE.