M/s. Tesco Hindustan Service Centre Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1317/BANG/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89916 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-05-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-05-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 25-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITIDR
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Related party transaction; Transfer pricing; International transaction; Scheme of amalgamation
• Section: 143(3); 92D; 92B; 92A; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT(TP).A NO.1317/BANG/2010 ASSESSMENT YEAR : 2006-07 TESCO HINDUSTAN SERVICE CENTRE PVT.LTD., 81 & 82, EPIP AREA, WHITEFIELD, BANGALORE 560 066. PAN : AABCT 8915B VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 12(4), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI K.R. VASUDEVAN, ADVOCATE RESPONDENT BY : SHRI.C.H. SUNDAR RAO, CIT-I(DR) DATE OF HEARING : 13.05.2015 DATE OF PRONOUNCEMENT : 26.05.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER D ATED 13.8.2010 OF THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE12(4), BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE ACT. IT(TP)A NO.1317/BANG/2010 PAGE 2 OF 41 2. THE ASSESSEE IS A PART OF TESCO GROUP. TESCO GROUP RUNS A CHAIN OF RETAIL STORES IN SEVERAL COUNTRIES IN EUROPE AND ASIA. THE GROUP IS HEADQUARTERED IN UK, AND ITS FLAGSHIP COMPANY, TESC O PLC., IS LISTED IN STOCK EXCHANGES IN UK. THE CORE BUSINESS OF TESCO GROUP IS IN THE UK. TESCO GROUP ALSO HAS SEVERAL STORES IN HUNGARY, POL AND, THE CZECH REPUBLIC, THE SLOVAK REPUBLIC, THAILAND, SOUTH KORE A, TAIWAN, THE REPUBLIC OF IRELAND AND MALAYSIA. THE ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH TESCO STORES TO PROVIDE BUSINESS PRO CESS SERVICES, INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) AS W ELL AS SOFTWARE DEVELOPMENT SERVICES (IT SERVICES). ITES RENDERED BY THE ASSESSEE INCLUDE CUSTOMER SERVICES, STORES HELP DESK, FINANC IAL SERVICES, ONE STOP PROCESSES, PENSION SERVICE, PROPERTY SERVICES AND O NLINE ADVERTISING SERVICES. IT SERVICES INCLUDE SOFTWARE DEVELOPMENT , QUALITY DEPLOYMENT, TESTING AND SUPPORT SERVICES. ALL THE ABOVE TRANSA CTIONS WERE INTERNATIONAL TRANSACTIONS WITH AN ASSOCIATED ENTERPRISE (AE) AND HAVE TO PASS THE ARMS LENGTH PRICE (ALP) TEST AS PROVIDED U/S.92 OF THE INCOME TAX ACT, 1961 (ACT). IN THIS APPEAL THE DISPUTE IS WITH REG ARD TO ADDITION MADE CONSEQUENT TO DETERMINATION OF ALP AND CONSEQUENT U PWARD 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) IT ENABLED SERVICES. IT(TP)A NO.1317/BANG/2010 PAGE 3 OF 41 3. FINANCIAL RESULTS OF EMC INDIA FOR THE F Y 2005-06 DESCRIPTION AMOUNT OPERATING REVENUE RS 101,79,12,068 OPERATING PROFIT (PBIT) RS. 1,07,04,828 OPERATING PROFIT TO COST RATIO 11.76 % THE SEGMENTAL DETAILS PERTAINING TO SOFTWARE DEVELO PMENT SERVICES, IT ENABLED SERVICES ARE AS UNDER (AS PER THE TP REPORT ). P & L ACCOUNT SOFTWARE DEVELOPMENT SERVICES I T ENABLED SERVICES TOTAL REVENUE TOTAL COSTS RS.68,69,78,783 RS.61,46,50,852 RS.33,09,33,282 RS.29,61,56,385 RS.101,79,12,065 RS.91,08,07,237 OPERATING PROFIT 7,23,27,931 RS.3,47,76,897 RS.10,71,04,828 OPERATING PROFIT TO COST 11.77 % 11.74% 11.76% *EXCLUDING LOSS ON SALE OF ASSETS, DONATION, FRINGE BENEFIT TAX, INTEREST INTERNATIONAL TRANSACTIONS (AS MENTIONED IN THE 92 CE REPORT) : BUSINESS PROCESS SERVICES - RS. 33,09,33,282/- SOFTWARE DEVELOPMENT SERVICES - RS. 68,69,78,78 3/- LEASE RENT - RS 1,73,40,000/- REIMBURSEMENT OF EXPENSES-PAYABLE - RS 2, 53,967/- REIMBURSEMENT OF EXPENSES-RECEIVABLE - RS. 2,32,47,077/- RENT DEPOSIT RECEIVED - RS. 2,00,00,000/- IT(TP)A NO.1317/BANG/2010 PAGE 4 OF 41 TP ADJUSTMENT RELATING TO IT SERVICES (SOFTWARE DEVELOPMENT SERVICES 4. COMPARABLE COMPANIES ULTIMATELY SELECTED BY TPO AND THEIR ARITHMETIC MEAN ARE GIVEN AS ANNEXURE-I TO THIS ORDER (PAGE 121 OF TPOS ORDER). THE ARITHMETIC MEAN OF THE 22 COMPAR ABLE COMPANIES CHOSEN BY THE TPO WAS 20.48%. AFTER ALLOWING WORKI NG CAPITAL ADJUSTMENT OF 1.87%, THE ADJUSTED ARITHMETIC MEAN WAS ARRIVED AT BY THE TPO AT 18.61%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 20.6 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 DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY YOU IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 20.48% LESS: WORKING CAPITAL ADJUSTMENT ANNEXURE-C) 1.87% ADJ.ARITHMETIC MEAN PLI 18.61% ARMS LENGTH PRICE: OPERATING COST (RS.61,46,50,852 + REIMBURSEMENT OF EXPENSES RECEIVED OF RS.1,56,87,128 RS.63,03,37,980 ARMS LENGTH MARGIN 18.61% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 123.58% OF OPERATING COST RS.74,76,43,878/- IT(TP)A NO.1317/BANG/2010 PAGE 5 OF 41 20.7 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRIC E: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 123.58% OF OPERATING COST RS.74,76,43,878 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.70,26,65,911 SHORTFALL BEING ADJUSTMENT U/S.92CA RS.4,49,77,967 THE ABOVE SHORTFALL OF RS.4,49,77,967/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 5. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 6. THE ASSESSEE FILED A CHART SHOWING HOW THE TPO H AS NOT GIVEN WORKING CAPITAL ADJUSTMENT AS PRAYED FOR BY THE ASS ESSEE, THE TURNOVER AND THE MARGINS OF THE 22 COMPARABLE COMPANIES FINA LLY CHOSEN BY THE TPO AFTER GIVING EFFECT TO ADJUSTMENT TOWARDS WORKI NG CAPITAL AS ALLOWED BY IT(TP)A NO.1317/BANG/2010 PAGE 6 OF 41 THE TPO AND ALSO AS CLAIMED BY THE ASSESSEE. THE CHART ALSO EXPLAINS AS TO HOW SOME OF THE COMPARABLE COMPANIES CHOSEN BY T HE TPO ARE NOT COMPARABLE (A) FOR THE REASON THAT THE TURNOVER OF THOSE COMPANIES WERE BEYOND RS.200 CRORES AND THEREFORE CANNOT BE COMPAR ED WITH THE ASSESSEE WHOSE TURNOVER IS LESS THAN 75 CRORES, (B) FOR THE REASON THAT THESE COMPANIES WERE NOT FUNCTIONALLY COMPARABLE; ( C) FOR THE REASON THAT THE RELATED PARTY TRANSACTION (RPT) CARRIED OUT BY THE COMPARABLE COMPANIES DURING THE PREVIOUS YEAR WAS BEYOND 15% O F ITS REVENUE AND HENCE OUGHT NOT TO BE INCLUDED AS A COMPARABLE. TH E 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 DEVELOPMENT SERVICES. WE WI LL PROCEED TO CONSIDER THE COMPARABILITY OF COMPANIES CHOSEN BY THE TPO AN D LISTED IN ANNEXURE-I TO THIS ORDER . 7. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 22 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE FOLL OWING COMPANIES WILL HAVE TO BE EXCLUDED AS THE TURNOVER OF THESE C OMPANIES ARE MORE THAN RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSES SEE WHOSE TURNOVER IS LESS THAN RS.200 CRORES: (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. (2) IGATE GLOBAL SOLUTIONS LTD. (3) MINDTREE LTD. (4) PERSISTENT SYSTEMS LTD. IT(TP)A NO.1317/BANG/2010 PAGE 7 OF 41 (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. (6) INFOSYS TECHNOLOGIES LTD. 8. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF T HE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) (ITA NO.1338/BANG/2010) FOR ASSESSMENT YEAR (07-08) ON THE APPLICATION OF TURNOVER FILTER AND IT WAS SUBMITTED THAT THE AFORE SAID COMPARABLE COMPANIES HAVE TO BE EXCLUDED FROM THE FINAL LIST O F COMPARABLE SELECTED BY THE TPO. RELIANCE WAS ALSO PLACED ON THE DECISI ON OF THE TRIBUNAL RENDERED IN ASSESSEES CASE FOR AY 06-07 ON THE SAM E ISSUE IN IT(TP) NO.1274/BANG/2010 DATED 18.7.2014. 9. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE AND THE LEARNED DR. IN THE CASE OF TRILOG Y E-BUSINESS SOFTWARE INDIA (P) LTD. (SUPRA), THIS TRIBUNAL ON APPLICATIO N OF THE TURNOVER FILTER WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY AN ALYSIS HELD AS FOLLOWS: (1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT THE TPO HAS APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE, BUT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCO ME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLLED TRAN SACTION WITH AN INTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMPARED OR THE ENTERPRISES ENTERING INTO SUCH TRANSACTION, WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT WHEREVER THERE ARE SOME DIFFERENCES SUCH DIFFE RENCES SHOULD IT(TP)A NO.1317/BANG/2010 PAGE 8 OF 41 BE CAPABLE OF REASONABLE ACCURATE ADJUSTMENT IN MON ETARY TERMS TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES. IT WA S HIS SUBMISSION THAT SIZE WAS AN IMPORTANT FACET OF THE COMPARABILI TY EXERCISE. IT WAS SUBMITTED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WOULD IMPACT COMPARABILITY. IN THIS REGA RD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGARH BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 , WHEREIN THE SPECIAL BENCH HAD LAID DOWN THAT IT IS IMPROPER TO PROCEED ON THE BASIS OF LOWE R LIMIT OF 1 CRORE TURNOVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASONABLE CLASSIFICATION. SEVERAL OTHER DECIS IONS WERE REFERRED TO IN THIS REGARD LAYING DOWN IDENTICAL PR OPOSITION. WE ARE NOT REFERRING TO THOSE DECISIONS AS THE DECISIO N OF THE SPECIAL BENCH ON THIS ASPECT WOULD HOLD THE FIELD. REFEREN CE WAS ALSO MADE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERVED AS FOLLOWS:- SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PAR TIES MIGHT AFFECT THE RELATIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COMPARABILITY. 12. THE ICAI TP GUIDELINES NOTE ON THIS ASPECT LAY DOWN IN PARA 15.4 THAT A TRANSACTION ENTERED INTO BY A RS. 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENT ERED INTO BY A RS. 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASON S ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIE S OF SCALE UNDER WHICH THEY OPERATE. THE FACT THAT THEY OPERA TE IN THE SAME MARKET MAY NOT MAKE THEM COMPARABLE ENTERPRISES. T HE RELEVANT EXTRACT IS AS FOLLOWS [ON RULE 10B(3)]: CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE NOT MATERIAL, THE TRANSACTIONS WOULD BE COMPARABLE. THESE DIFFERENCES COULD EITHER BE WITH REFERENCE TO THE TRANSACTION OR WITH REFERENCE TO THE ENTERPRISE. FOR INSTANCE, A TRANSACTION ENTERED INTO BY A RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. IT(TP)A NO.1317/BANG/2010 PAGE 9 OF 41 13. IT WAS FURTHER SUBMITTED THAT THE TPOS RANGE ( RS. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COMPANIES LIKE INFOSYS WHICH IS 277 TIMES BIGGER THAN THE ASSESSEE (TURNOV ER OF RS. 13,149 CRORES AS COMPARED TO RS. 47.47 CRORES OF AS SESSEE). IT WAS SUBMITTED THAT AN APPROPRIATE TURNOVER RANGE S HOULD BE APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPAN IES. 14. REFERENCE WAS MADE TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , WHEREIN RELYING ON DUN AND BRADSTREETS ANALYSIS, THE TURNO VER OF RS. 1 CRORE TO RS. 200 CRORES WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSERVATIONS WERE BROUGHT TO OUR NOTICE:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE JUDIC IAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALS O ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES IT(TP)A NO.1317/BANG/2010 PAGE 10 OF 41 HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 15. IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PRO POSITION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN THE FOLLOWING CASES: 1. M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO.1413/BANG/2010) 2. M/S GENESIS MICROCHIP (I) PRIVATE LIMITED VS. D CIT (ITA NO.1254/BANG/20L0). 3. ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (I TA NO. 1171/BANG/2010). IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURN OVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COM PARABLE WITH THE ASSESSEE. 16. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HA VING TURNOVER OF MORE THAN RS. 200 CRORES AS COMPARABLES . IN THESE CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASS ESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECI DING THE ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDES THAT INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR L ENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTER PRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORT IONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED O R TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED IT(TP)A NO.1317/BANG/2010 PAGE 11 OF 41 OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERP RISES. SEC.92- A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE TRANSACTION BETWEEN TH E ASSESSEE AND ITS AE WAS AN INTERNATIONAL TRANSACTION ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATION OF ARMS LENGTH PRICE IN AN INTERNATION AL TRANSACTION AND IT PROVIDES:- (1) THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PR ICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE IT(TP)A NO.1317/BANG/2010 PAGE 12 OF 41 BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT ( A ) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR ( B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR ( C ) THE INFORMATION OR DATA USED IN COMPUTATION OF TH E ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ( D ) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNAT IONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C:- 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A). TO (D).. ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; IT(TP)A NO.1317/BANG/2010 PAGE 13 OF 41 ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; IT(TP)A NO.1317/BANG/2010 PAGE 14 OF 41 ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH TH E INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE S IN RELATION TO THE TRANSACTIONS BEING COMPARED. 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF T HE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPA RED WITH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACT ORS SET OUT THEREIN. BEFORE US THERE IS NO DISPUTE THAT THE TN MM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE I NTERNATIONAL IT(TP)A NO.1317/BANG/2010 PAGE 15 OF 41 TRANSACTION. THE DISPUTES ARE WITH REGARD TO THE C OMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLE ARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSEES TURNOVER I S RS. 47,46,66,638. IT WOULD THEREFORE FALL WITHIN THE C ATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES H AVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOW N IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE AS SESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY T HE TPO VIZ., TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CR ORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES. 10. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) AND ASSESSEES CASE FOR AY 06-07, WE HOLD THAT THE AFORESAID COMPA NIES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. TH E AO IS DIRECTED TO COMPUTE THE ARITHMETIC MEAN BY EXCLUDING THE AFORES AID COMPANIES FROM THE LIST OF COMPARABLE. IT(TP)A NO.1317/BANG/2010 PAGE 16 OF 41 11. IMPROPER SELECTION OF COMPARABLES: IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FOLLOWING 2 COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE. A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECIS ION OF THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) WHEREIN THESE COMPANIES WERE HELD TO BE NOT FUNCTI ONALLY COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPER L IKE THE ASSESSEE. 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA) , WHICH WAS FOLLOWED BY THE ITAT BANGALORE BENCH IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. IT (TP)A.NO.1109/BANG/2010 FOR AY 2006-07 ORDER DATED 10.5.2013: (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGE D IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNA LS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNC TIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE A S FOLLOWS: IT(TP)A NO.1317/BANG/2010 PAGE 17 OF 41 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO TH E TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNE D COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT TH IS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOP MENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE TH AT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RE LEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IT(TP)A NO.1317/BANG/2010 PAGE 18 OF 41 IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THA T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEME NT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTER PRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASS ESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FO RM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DR P THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPAR ABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T HE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARA BILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR TH E ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID CO MPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFE RRED TO BY THE IT(TP)A NO.1317/BANG/2010 PAGE 19 OF 41 LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THI S COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGU MENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFOR ESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 13. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICAL IN THE C ASE OF THE ASSESSEE AS WELL AS IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA). RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.( SUPRA), WE DIRECT THAT THE SAID COMPANIES BE EXCLUDED FROM THE LIST OF 22 COMPARABLE ARRIVED AT BY THE TPO. 14. AS FAR AS COMPARABLE COMPANY VIZ., GEOMETRIC SO FTWARE LTD. (SEG.) & AZTECH SOFTWARE LTD., ARE CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THE RELATED PARTY TRANSACTION IN THE CASE OF THIS C OMPANY EXCEEDS 15% ( 19.98 % IN THE CASE OF GEOMETRIC SOFTWARE LTD. & 17 .78% IN THE CASE OF AZTECH SOFTWARE LTD.) AND IN VIEW OF THE DECISION O F THE TRIBUNAL IN THE CASE OF 24 X 7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG /2010, FOLLOWED BY THIS TRIBUNAL IN THE CASE OF LOGICA PRIVATE LTD. (S UPRA) WHEREIN IT WAS HELD THAT WHERE THE RPT EXCEEDS 15%, SUCH COMPANIES SHOU LD NOT BE TAKEN AS COMPARABLE COMPANIES. FOLLOWING THE SAID DECISION, WE HOLD THAT SAID COMPANIES REFERRED TO ABOVE BE EXCLUDED FROM THE L IST OF COMPARABLE COMPANIES WHILE WORKING OUT THE ALP. IT(TP)A NO.1317/BANG/2010 PAGE 20 OF 41 15. AS FAR AS MEGASOFT LTD., A COMPARABLE CHOSEN BY THE TPO IS CONCERNED, THIS TRIBUNAL IN THE CASE OF TRILOGY E-B USINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOLLOWED IN THE CASE OF 3DPLM SO FTWARE SOLUTIONS LTD., (SUPRA) HAD HELD THAT ONLY SEGMENTAL DATA SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. FOLLOWING ARE THE RELEVANT OBSERVAT IONS OF THE TRIBUNAL:- 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT AL L THIS COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGMENTAL MA RGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SE GMENT) ALONE SHOULD BE CONSIDERED FOR COMPARABILITY. ON THE ABO VE SUBMISSION, WE FIND THAT THE TPO CONSIDERED THE SEG MENTAL MARGIN (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GE OMETRIC, KALS INFO SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND T ATA ELXSI. BEFORE DRP THE ASSESSEE POINTED OUT THAT THE SEGMEN TAL MARGIN OF 23.11% ALONE SHOULD BE TAKEN FOR COMPARABILITY. THE DRP HAS NOT GIVEN ANY SPECIFIC FINDING ON THE ABOVE PLEA OF THE ASSESSEE. PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHIC H THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ ., BLUEALLY DIVISION AND XIUS-BCGI DIVISION. XIUS- BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PR ODUCTS ARE SOLD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPL EMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FI T INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (S OFTWARE DEVELOPED) WOULD CONSTITUTE PACKAGED PRODUCT AND AR OUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BOARDING AND LODGING EXPENSE . BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COM PARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE P RODUCTS DEVELOPED (WHICH WAS AKIN TO SOFTWARE DEVELOPMENT) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMEN T OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% O F THE OVERALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25 % OF THE IT(TP)A NO.1317/BANG/2010 PAGE 21 OF 41 REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HA VING DRAWN THE ABOVE CONCLUSION, THE TPO DID NOT BOTHER TO QUA NTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUC T DEVELOPMENT AND SOFTWARE DEVELOPMENT SERVICE BUT AD OPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TER MS OF RULE 10B(3)(B) OF THE RULES, AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 38. NEITHER THE TPO NOR THE DRP HAVE NOTICED THAT THERE IS BOUND TO BE A DIFFERENCE BETWEEN THE ASSESSEE AND M EGASOFT AND THE PROFIT ARISING TO THE MEGASOFT AS A RESULT OF T HE EXISTENCE OF THE SOFTWARE PRODUCT SEGMENT AND NO FINDING HAS BEE N GIVEN THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FOR THIS RE ASON, WE ARE INCLINED TO HOLD THAT THE PROFIT MARGIN OF 23.11% W HICH IS THE MARGIN OF THE SOFTWARE SERVICE SEGMENT BE TAKEN FOR COMPARABILITY. IN VIEW OF THE ABOVE CONCLUSION, WE DO NOT WISH TO GO INTO THE QUESTION AS TO WHETHER LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. 16. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUN AL, SEGMENTAL MARGINS IN SO FAR AS IT RELATES TO PROVIDING SOFTWARE SERVI CES BY MEGASOFT ALONE SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. IT(TP)A NO.1317/BANG/2010 PAGE 22 OF 41 17. AS FAR AS TATA ELXSI LTD., A COMPARABLE CHOSEN BY THE TPO IS CONCERNED, IT WAS HELD IN THE CASE OF 3DPLM SOFTWAR E SOLUTIONS LTD., (SUPRA) THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE A ND IT SHOULD BE EXCLUDED FOR COMPARABILITY PURPOSES. 18. IN VIEW OF THE AFORESAID DECISION, WE HOLD THAT TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE CHOSEN BY THE TPO. 19. AFTER EXCLUDING THE AFORESAID COMPARABLE FROM T HE LIST OF COMPARABLE CHOSEN BY THE TPO, THE TPO IS DIRECTED TO COMPUTE T HE ARITHMETIC MEAN OF PROFIT MARGIN OF THE REMAINING COMPARABLES AND ALL OW THE BENEFIT OF + / - 5% RANGE IN ACCORDANCE WITH THE PROVISIONS OF SEC.9 2C OF THE ACT AND REWORK THE ALP. THE RELEVANT GROUNDS OF APPEAL OF T HE ASSESSEE ARE TREATED ALLOWED TO THE EXTENT INDICATED IN THIS OR DER AND ALL OTHER ARGUMENTS RAISED IN THE GROUNDS OF APPEAL WERE NOT ARGUED AND NEED NO ADJUDICATION. TP ADJUSTMENT IN THE IT ENABLED SERVICES TRNSACTIONS WITH AE: 20. FINAL SET OF COMPARABLE COMPANIES CONSIDERED BY THE TPO AND THE OP TO TOAL COST % SL. NO. COMPANY NAME OP TO TOTAL COST % 1. MAPLE ESOLUTIONS LTD. 32.66 2. ALLSEC TECHNOLOGIES LTD 28.51 IT(TP)A NO.1317/BANG/2010 PAGE 23 OF 41 3. DATAMATICS FINANCIAL SERVICES LTD. (SEG.) 24.99 4. TRANSWORKS INFORMATION SERVICES LTD. 19.56 5. COSMIC GLOBAL LTD.(SEG.) 16.03 6. VISHAL INFORMATION TECHNOLOGIES LTD. 19.56 7. ASIT C.MEHTA FINANCIAL SERVICES LTD. (EARLIER KNOWN AS NUCLEUS & GIS (INDIA) LTD. 34.52 8. GOLDSTONE INFRATECH LTD. (SEG.) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD.) 29.01 9. SPANCO LTD. (SEG.) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD.) 20.86 10. ACE SOFTWARE EXPORTS LTD. 7.72 11. APEX KNOWLEDGE SOLUTIONS PVT.LTD. 20.48 12. R SYSTEMS INTERNATIONAL LTD. (SEG.) 15.11 13. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 14.54 AVERAGE 24.00 21. THE COMPUTATION DONE BY THE TPO WITH RPT AND OT HER DETAILS ARE GIVEN AS ANNEXURE-II TO THIS ORDER WHICH IS AT PAGE-217 OF THE TPOS ORDER. THE TPO FINALLY PASSED AN ORDER U/S. 92CA O F THE ACT AND ON THE BASIS OF THE COMPARABLES SET OUT ABOVE, ARRIVED AT ARITHMETIC MEAN OF 24.00%. AFTER FACTORING THE WORKING CAPITAL ADJUST MENT OF 2.06%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 21.94%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 39.5 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE E FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY YOU IS COMPUTED AS UNDER: IT(TP)A NO.1317/BANG/2010 PAGE 24 OF 41 ARITHMETIC MEAN PLI 24.00% LESS: WORKING CAPITAL ADJUSTMENT(ANNEXURE-F) 2.06% ADJ.ARITHMETIC MEAN PLI 21.94% ARMS LENGTH PRICE: OPERATING COST (RS.29,61,56,385 +REIMBURSEMENT OF EXPENSES RECEIVED RS.75,59,949 RS.30,37,16,334 ARMS LENGTH MARGIN 21.94% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 121.94% OF OPERATING COST RS.37,03,51,698 *EXCLUDING EXCHANGE LOSS, DONATION, LOSS ON SALE OF ASSETS, FRINGE BENEFIT TAX. 39.6 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRIC E: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 121.94% OF OPERATING COST RS. 37,03,51,698 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.33,84,93,234 SHORTFALL BEING ADJUSTMENT U/S.92CA RS.3,18,58,464 THE ABOVE SHORTFALL OF RS.3,18,58,464/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 22. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE IT(TP)A NO.1317/BANG/2010 PAGE 25 OF 41 ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS F AR AS COMPARABLE COMPANIES CHOSEN BY THE TPO AT S.NO.1,3,6,7 & 8 VIZ ., MAPLE ESOLUTION LTD., DATAMATICS FINANCIAL SERVICES LTD., VISHAL IN FORMATION TECHNOLOGICAL SERVICES LTD., ASIT C.MEHTA FINANCIAL SERVICES LTD. , AND GOLD STONE INFRATECH LTD., IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO, WE FIND THAT THE HYDERABAD BENCH OF THE ITAT IN THE CA SE OF HSBC ELECTRONIC DATA PROCESSING INDIA LTD. VS. ACIT, ITA NO.1624/HY D/2010 BY ORDER DARTED 28.6.2013 CONSIDERED COMPARABILITY OF THESE COMPANIES IN THE CASE OF A COMPANY ENGAGED IN RENDERING IT ENABLED SERVIC ES TO ITS AE SIMILAR TO THAT OF THE ASSESSEE IN THE PRESENT CASE. THE TRIB UNAL HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE. THE FOLLOW ING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL. '8. THE FIRST OBJECTION IS WITH REFERENCE TO SELECT ION OF COMPARABLE DATA BY THE TPO WITH REFERENCE TO THE FO LLOWING FIVE COMPANIES- (A) VISHAL INFORMATION TECHNOLOGIES LTD. (B) GOLDSTONE INFRATECH LTD. (C) DATAMATIC FINANCIAL SERVICES LTD.(SEG) (D) MAPLE E-SOLUTIONS LTD. (E) NUCLEUS NETSOFT & GIS(INDIA) LTD. (NOW KNOWN AS (ASIT C. MEHTA FINANCIAL SERVICES LTD.) VISHAL INFORMATION TECHNOLOGIES LTD . IT(TP)A NO.1317/BANG/2010 PAGE 26 OF 41 9. THE ASSESSEES OBJECTION WITH REFERENCE TO INCLU SION OF THIS COMPARABLE IS ON THE REASON THAT THE COMPANY IS FUN CTIONALLY DIFFERENT, ALSO DOES NOT SATISFY THE FILTERS SUCH A S EMPLOYEE COST AND ON-SITE REVENUE FILTER. IT WAS SUBMITTED THAT E MPLOYEE COST FORMS A MAJOR PORTION OF THE TOTAL COST OF BPO SERV ICES AND IN THE ASSESSEES CASE EMPLOYEE COST IS 62% OF THE TOTAL C OST, WHEREAS IN THE SELECTED COMPANY THE EMPLOYEE COST IS LESS THAN 2%, WHICH INDICATES THAT MOST OF THE WORK WAS OUTSOURCED AND THE OUT- SOURCING COST WAS AT 88.64% OF THE OPERATING COST. IT WAS FURTHER SUBMITTED THAT THE ITAT BANGALORE IN THE CASE OF FI RST ADVANTAGE OFF-SHORE SERVICES (ITA NO.1252/BANG/2010) HAS DIRE CTED TO USE EMPLOYEE TURNOVER FILTER IN A CONSISTENT MANNER FOR SELECTION OF COMPARABLES AND IN THE CASE OF MAERSK GLOBAL SERVIC ES CENTRE (INDIA) PVT. LTD. (14 ITR(TRIB) 541) THE MUMBAI BEN CH OF THE TRIBUNAL HAS ANALYSED AND REJECTED THIS COMPANY AS COMPARABLE FOR THE REASON THAT IT HAS OUTSOURCED A CONSIDERABL E PORTION OF ITS BUSINESS AND IS FUNCTIONALLY DIFFERENT. MOREOVER, I T WAS ALSO SUBMITTED THAT THE DRP IN THE LATER YEAR OF 2008-09 VIDE ITS ORDER DATED 3.8.2012 HAS REJECTED THIS COMPANY AS A COMPA RABLE (NAME CHANGED TO CORAL HUB LTD.), VIDE PARA 18 OF THE ORD ER, WHEREIN ULTIMATELY, IT WAS DECIDED THAT THERE IS MAJOR DIFF ERENCE IN FUNCTIONALITY AND THE BUSINESS MODEL AND THE DRP BE NCH WAS OF THE VIEW THAT CORAL HUB (FORMERLY KNOWN AS VISHAL I NFORMATION TECHNOLOGY LTD.) WAS NOT A SUITABLE COMPARABLE AND NEEDS TO BE DROPPED FROM THE FINAL SET OF COMPARABLES. BASED ON THE ABOVE SUBMISSIONS, IT WAS SUBMITTED THAT THIS COMPANY CAN NOT BE USED AS A COMPARABLE AND HAS TO BE EXCLUDED. 9.1. THE LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEV ER RELIED ON THE ORDERS OF THE TPO. 9.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE FI ND CONSIDERABLE FORCE IN THE CONTENTIONS ADVANCED BY THE LEARNED CO UNSEL. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT MOST OF THE COST INCURRED BY THE COMPANY TAKEN AS COMPARABLE IS OUTSOURCING C OST, AS CAN BE SEEN FROM THE ANNUAL REPORT PLACED IN THE PAPER- BOOK AND ITAT, MUMBAI IN THE CASE OF MAERSK GLOBAL SERVICE C ENTRE (SUPRA) HAS ANALYSED AND REJECTED THIS COMPANY AS C OMPARABLE, DUE TO THE REASON THAT IT HAS OUTSOURCED A CONSIDER ABLE PORTION OF ITS BUSINESS AND IT IS FUNCTIONALLY DIFFERENT. THIS FACTOR WAS ALSO APPROVED BY THE DRP IN ASSESSEES OWN CASE IN THE L ATER YEAR, AS CAN BE SEEN FROM THE COPY OF THE ORDER PLA CED ON RECORD, FOR ASSESSMENT YEAR 2008-09. IN VIEW OF THIS, WE DI RECT THE IT(TP)A NO.1317/BANG/2010 PAGE 27 OF 41 ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. GOLDSTONE INFRATECH LTD 10. THE ASSESSEES OBJECTION FOR INCLUSION OF THIS COMPARABLE IS ON THE BASIS OF THE FILTER ON FOREIGN EXCHANGE EARN INGS, DIMINISHING REVENUE FILTER AND FUNCTIONALITY, BEING RUN ON LEASE BASIS. IT WAS SUBMITTED THAT THIS COMPANY WAS REJEC TED IN THE CASE OF STREAM INTERNATIONAL SERVICES PVT. LTD. V/S. ADIT(INTERNATIONAL TAXATION) BY THE MUMBAI BENCH OF THE TRIBUNAL, VIDE ITS ORDER DATED 11.1.2013 IN ITA NO.8997/MUM/2010 FOR ASSESSMENT YEAR 2006-07. 10.1. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE A RE OF THE OPINION THAT THE BUSINESS MODEL OF THE ABOVE COMPAN Y IS DIFFERENT FROM THAT OF THE ASSESSEE. IN THIS CASE, THE FOREIG N EXCHANGE REVENUE IS LESS THAN 1% OF THE TOTAL TURNOVER. THER EFORE, IT FAILS THE FILTER PROVIDED BY THE ASSESSING OFFICER, ON TH E BASIS OF THE FOREIGN EXCHANGE EARNINGS. FURTHER, THE REVENUE FR OM BPO IS FAILING OVER A PERIOD OF THREE YEARS. THIS ISSUE WA S CONSIDERED BY THE COORDINATE BENCH (MUMBAI BENCH) OF THE TRIBUNAL IN THE CASE OF STREAM INTERNATIONAL SERVICES LTD.(SUPRA) WHEREI N IT WAS CONSIDERED AS UNDER- 14. THE INCLUSION OF SECOND CASE OBJECTED TO BY TH E ID. AR IS THAT OF GOLDSTONE INFRATECH LIMITED (SEG) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LIMITED). HERE IT IS RELEVANT TO NOTE THAT THE TPO, INTER ALI A, APPLIED FILTER OF COMPANIES WITH EXPORT REVENUES MORE THAN 25% OF THE REVENUES. ANNUAL ACCOUNTS OF GOLDSTONE TELESERVICES LIMITED INDICATE TOTAL REVENUE OF THE COMPANY AT RS. 30.89 CRORE FROM THREE SEGMENTS, VIZ., TELECOMMUNICATION AT RS. 13.63 CRORE, BPO AT RS. 5.02 CRORE AND INSULATOR AT RS. 12.23 CRORE. THE BREAK UP OF SUCH REVENUE OF GOLDSTONE TELESERVICES LIMITED HAS BEEN PROVIDED AT PAGE 236 OF THE PAPER BOOK. SCHEDULE FORMING IT(TP)A NO.1317/BANG/2010 PAGE 28 OF 41 PART OF THE ANNUAL ACCOUNTS OF GOLDSTONE TELESERVICES LIMITED DIVULGES EARNINGS IN FOREIGN CURRENCY AT RS. 4.24 LAKH. SUCH DETAIL IS AVAILABLE AT PAGE 239 OF THE PAPER BOOK. WHEN WE COMPARE EARNING IN FOREIGN CURRENCY AT RS. 4.24 LAKH WITH T HE EARNINGS OF BPO AT RS. 5.02 CRORE OR FOR THAT PURPOSE OF THE ENTITY AS A WHOLE AT RS. 30.89 CRORE , IT BECOMES MANIFEST THAT THIS CASE DOES NOT PASS THROUGH THE FILTER ADOPTED BY THE TPO, BEING, THE COMPANIES WHOSE EXPORT REVENUES ARE MORE THAN 25% OF THE REVENUES. THEREFORE, WE ARE OF THE OPINION, THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE FOR THE PURPOSE OF DETER MINING THE ALP IN THIS CASE. WE DIRECT THE SAME TO BE EXCLUDED . DATAMATIC FINANCIAL SERVICES LTD. 11. THE ASSESSEES OBJECTION TO INCLUSION OF THIS C OMPARABLE IS ON THE BASIS OF RELATED PARTY TRANSACTIONS FILTE R. IT WAS SUBMITTED THAT RPT EXCEEDS 25% OF THE SALES AND THE REFORE, TO BE EXCLUDED. THE ASSESSEE RELIED ON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL (MUMBAI BENCH) IN THE CASE OF STREAM INTERNATIONAL SERVICES (SUPRA), WHER EIN, WHEREIN WITH REFERENCE TO THIS COMPARABLE COMPANY, IT WAS HELD AS UNDER : 11. THE FIRST IS M/S. DATAMATICS FINANCIAL SERVICE S LIMITED. IT CAN BE OBSERVED THAT THE TPO APPLIED FILTER OF COMPANIES WITH LESS THAN 25% RELATED PARTY TRANSACTIONS. THE LEARNED COUNSEL FOR THE ASSESSEE TOOK US THROUGH THE ANNUAL ACCOUNTS OF DATAMATICS FINANCIAL SERVICES LIMITED, AND SUBMITTED THAT THE GROSS INCOME OF THIS COMPANY FOR THE YEAR ENDING ON 31.03.2006 WAS AT RS. 2.31 CRORE AS AGAINST TOTAL EXPENSES OF RS. 1.84 CRORE. REFERRING TO PAGES 319 AND 320 OF THE PAPER BOOK, OUR ATTENTION WAS DRAWN TOWARDS ANNEXURE-2 TO DEMONSTRATE THAT THE TRANSACTIONS WITH THE IT(TP)A NO.1317/BANG/2010 PAGE 29 OF 41 ASSOCIATED PARTIES WITHIN THE MEANING OF SECTION 92A AND 92B OF THE INCOME-TAX ACT, 1961 SHOWED ONE MAJOR TRANSACTION WITH DATAMATICS LIMITED TOWARDS REIMBURSEMENT OF EXPENSES AT RS. 99.14 LAKH. THE LEARNED AR CONTENDED THAT THE TRANSACTIONS OF DATAMATICS FINANCIAL SERVICES LIMITED WITH OTHER AES AMOUNTED TO RS. 14.31 LAKH MAKING TOTAL OF TRANSACTIONS WITH THE AES AT RS. 1. 13 CRORE. IT WAS SUBMITTED THAT THE PERCENTAGE OF TRANSACTION WITH RELATED PARTIES IS MUCH MORE THAN 25%, BEING, THE FILTER ADOPTED BY THE TPO HIMSELF AND HENCE THE SAME SHOULD BE EXCLUDED. 12. IN THE OPPOSITION, THE LEARNED DEPARTMENTAL RE PRESENTATIVE CONTENDED THAT THE MAJOR TRANSACTION OF RS. 99.14 L AKH OF DATAMATICS FINANCIAL SERVICES LIMITED WITH DATAMATI CS LIMITED WAS TOWARDS REIMBURSEMENT OF EXPENSES. SINCE THE REIMBURSEMENT OF EXPENSES DOES NOT INCLUDE ANY PROF IT ELEMENT, THE ID. DR URGED THAT THE SAME BE EXCLUDED. HE STAT ED THAT ONCE THIS TRANSACTION IS EXCLUDED, THE OTHER TRANSACTION OF RS. 14.31 LAKH ARE LESS THAN 25% OF THE TOTAL TRANSACTION WIT H RELATED PARTIES. 13. WE DO NOT FIND ANY FORCE IN THE CONTENTION AD VANCED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE EXC LUSION OF TRANSACTIONS WITH DATAMATICS LIMITED TOWARDS REIMB URSEMENT OF EXPENSES FROM THE OVERALL TRANSACTIONS ENTERED INT O BY DATAMATICS FINANCIAL SERVICES LTD. WITH ITS AES. SE CTION 92F(V) DEFINES TRANSACTION IN THE CONTEXT OF TRANSFER PR ICING PROVISIONS TO INCLUDE AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT WHETHER OR NOT IT IS FORMAL OR IN WRITING OR WHETHE R OR NOT IT IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDING. THE RE IS NO REFERENCE TO ANY TRANSACTION HAVING NECESSARILY INC LUDING PROFIT ELEMENT OR MARK-UP SO AS TO FALL WITHIN THE DEFINIT ION OF TRANSACTION UNDER CHAPTER X OF THE INCOME-TAX ACT . SINCE THE TPO APPLIED FILTER OF HAVING COMPANIES WITH LESS TH AN 25% RELATED PARTY TRANSACTIONS, IT IS NOT OPEN TO ARGUE THAT THE TRANSACTIONS OF REIMBURSEMENT OF EXPENSES DULY REPO RTED BY DATAMATICS FINANCIAL SERVICES LIMITED AS AN INTERN ATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B SHOU LD BE IGNORED SIMPLY BECAUSE THEY REPRESENT REIMBURSEMENT OF EXPE NSES. IF THE CONTENTION OF THE ID. DR THAT THE REIMBURSEMENT OF EXPENSES NOT INVOLVING PROFIT ELEMENT SHOULD NOT BE CONSTRUED AS A TRANSACTION, IT(TP)A NO.1317/BANG/2010 PAGE 30 OF 41 IS TAKEN TO A LOGICAL CONCLUSION, IT WOULD MEAN THA T ALL SUCH DEALINGS WILL CEASE TO BE TRANSACTIONS FOR THE PURP OSES OF CHAPTER- X OF THE ACT. ONCE THESE DEALINGS ARE NOT CONSIDERE D AS TRANSACTIONS, THESE WILL ALSO CEASE TO BE INTERNA TIONAL TRANSACTIONS, GOING OUT OF THE PURVIEW OF SECTION 9 2 ITSELF. OBVIOUSLY, SUCH A VIEW POINT IS CONTRARY TO THE CLE AR INTENTION AND THE LANGUAGE OF THE RELEVANT PROVISIONS. A PURE REI MBURSEMENT OF EXPENSES BY ONE AE TO ANOTHER AE IS VERY MUCH A TR ANSACTION AS PER SECTION 92F(V) AND CONSEQUENTLY IS EQUALLY A N INTERNATIONAL TRANSACTION AS PER SECTION 92B REQUIRING CONSIDERAT ION AS PER SECTION 92 OF THE ACT. BE THAT AS IT MAY, THE LEARN ED DEPARTMENTAL REPRESENTATIVE COULD NOT DEMONSTRATE THE FACT THAT SUCH REIMBURSEMENT OF EXPENSES WAS WITHOUT ANY MARKUP. A S THE SO CALLED COMPARABLE CASE OF DATAMATICS FINANCIAL SERV ICES LIMITED WAS INCLUDED BY THE TPO IN THE FINAL LIST OF COMPAR ABLES, IN OUR CONSIDERED OPINION, THE SAME IS LIABLE TO BE EXCLUD ED AS IT INVOLVES RELATED PARTY TRANSACTIONS AT MUCH HIGHER LEVEL, AS AGAINST THE FILTER ADOPTED BY THE TPO HIMSELF, BEIN G COMPANIES WITH LESS THAN 25% RELATED PARTY TRANSACTIONS. WE O RDER ACCORDINGLY. IN VIEW OF THE ABOVE, SINCE THIS COMPANY FAILS IN T HIS FILTER ADOPTED BY THE TPO, WE DIRECT THE TPO TO EXCLUDE TH IS COMPANY FROM THE LIST OF COMPARABLES ADOPTED. MAPLE E-SOLUTIONS LTD. 12. THE OBJECTION OF THE ASSESSEE WITH REFERENCE T O THIS COMPANY IS WITH REGARD TO THE FINANCIALS OF THE COM PANY, ON THE GROUND OF UNRELIABILITY OF DATA. IT WAS SUBMITTED T HAT SELECTION OF THIS COMPANY WAS REJECTED IN THE CASE OF CRM SERVIC ES INDIA PVT. LTD IN ITA NO.468/DEL/2009 AND ALSO IN THE CASE OF STREAM INTERNATIONAL SERVICES (SUPRA). FURTHER, THE ASSESS EE ALSO RELIED ON THE DRP ORDER IN ASSESSMENT YEAR 2007-08, WITH REFE RENCE TO THE ABOVE COMPANY. 12.1. WE HAVE CONSIDERED THE RIVAL SUB MISSIONS. W E AGREE WITH THE OBJECTIONS OF THE ASSESSEE. IN THE CASE OF STRE AM INTERNATIONAL SERVICES P. LTD. (SUPRA), IT IS HELD WITH REFERENCE TO THIS COMPANY AS UNDER : IT(TP)A NO.1317/BANG/2010 PAGE 31 OF 41 18. WE ARE UNABLE TO UPHOLD THE CONTENTION RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IT IS APPARENT FROM TWO ORDERS PASSED ONE BY THE DELHI BENCH AND THE OTHER BY THE HYDERABAD BENCH OF THE TRIBUNAL THAT THE CASE OF MAPLE ESOLUTIONS LIMITE D HAS BEEN DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. AS THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2006-2007 AND THE DELHI BENCH OF THE TRIBUNAL HAS ALSO CONSIDERED THE SAME ASSESSMEN T YEAR WHILE DIRECTING THE EXCLUSION OF THE CASE OF MAPLE E SOLUTIONS LIMITED FROM THE LIST OF COMPARABLES, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE ID. DR IN THIS REGARD. IT IS MORE SO BECAUSE NO CONTRARY VIEW HAS BEEN BROUGHT BY THE LD. DR TO OUR NOTICE. RESPECTFULLY FOLLOWING THE PRECEDENTS, WE DIRECT THE EXCLUSION OF THIS CASE FROM THE FINAL LI ST OF COMPARABLES.' SINCE THE DRP IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007- 08 ALSO CONSIDERED AND EXCLUDED THIS COMPANY, WE UP HOLD THE ASSESSEES OBJECTION IN THIS REGARD AND DIRECT THE ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM THE COMPARABLE S ADOPTED. NUCLEUS NETSOFT & GIS(INDIA) LTD. 13. THE LAST OBJECTION WAS WITH REFERENCE TO THE A BOVE COMPANY, WHICH IS ON SIMILAR FACTS AS THAT OF VISHA L INFORMATION TECHNOLOGIES, DISCUSSED ABOVE. IT WAS SUBMITTED THA T THIS COMPANY IS FUNCTIONALLY DIFFERENT AND FAILS UNDER T HE EMPLOYEE COST FILTER. IT WAS FURTHER SUBMITTED THAT THERE IS A SCHEME OF AMALGAMATION OF EARLIER COMPANY BY THE ORDERS OF TH E HONBLE HIGH COURT OF JUDICATURE OF BOMBAY, ON 22.2.2006 AN D IN VIEW OF AMALGAMATION, THE FINANCIALS HAVE CHANGED AND TH E BUSINESS MODEL ALSO CHANGED. REFERRING TO THE ANNUAL REPORT PLACED ON RECORD, IT WAS SUBMITTED THAT AS AGAINST RS.24.02 L AKHS OF EMPLOYEE COSTS FOR THE YEAR ENDING 31ST MARCH, 2005 , THE EMPLOYEE COST HAS INCREASED TO RS.132.59 LAKHS. FUR THER, THE DATA PROCESSING CHARGES IS ALSO TO THE EXTENT OF RS.1.04 CRORES, WHICH INDICATES THAT THE ASSESSEE IS OUTSOURCING THE WORK . ACCORDINGLY, IT CANNOT BE SELECTED AS A COMPARABLE. DUE TO AMALG AMATION DURING THE YEAR, THE ASSESSEES BUSINESS MODEL HAS CHANGED AND IT(TP)A NO.1317/BANG/2010 PAGE 32 OF 41 BECAUSE OF EMPLOYEE COST FILTER ALSO, THIS COMPARAB LE HAS TO BE EXCLUDED. 13.1 AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE AR E OF THE OPINION THAT THIS COMPANY CANNOT BE SELECTED AS A C OMPARABLE NOT ONLY ON THE REASON OF FAILING EMPLOYEE COST FILTER, BUT ALSO DUE TO AMALGAMATION DURING THE YEAR, WHICH HAS CHANGED THE BUSINESS MODEL OF THE COMPANY. 14. IN VIEW OF THE FOREGOING DISCUSSION, WE AGREE W ITH THE ASSESSEES OBJECTION THAT THE ABOVE FIVE COMPARABLE S SHOULD BE EXCLUDED. 24. THE FACTS AND CIRCUMSTANCES AND THE ASSESSMENT YEAR FOR WHICH THE AFORESAID COMPANIES WERE NOT CONSIDERED AS COMPARAB LE ARE IDENTICAL TO THE CASE DECIDED BY THE HYDERABAD BENCH OF ITAT AND THAT OF THE CASE OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE DECISION OF THE HYDERABAD BENCH OF ITAT, WE DIRECT THE TPO TO EXCLUDE THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE WHILE ARRIVING AT THE ARITHMETIC MEAN OF COMPARABLE. THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLO WED. 25. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE COMPARABLE COMPANY CHOSEN BY THE TPO VIZ., APEX KNOWLEDGE SOLUTION PVT .LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES CHOS EN BY THE TPO. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF GOOGLE INDIA PVT. LTD. VS. DCIT ITA NO.1368/BANG/2010 (AY 06-07) ORDER DATED 19.10.2012 . 26. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE. WE FIND THAT IN THE CASE OF GOOGLE INDIA PVT.LTD. (SUPRA), THIS IT(TP)A NO.1317/BANG/2010 PAGE 33 OF 41 TRIBUNAL IN THE CASE OF TP ADJUSTMENT IN IT ENABLED SERVICES SEGMENT OF AN ASSESSEE FOR AY 06-07 CONSIDERED THE COMPARABILITY OF THE COMPANY M/S.APEX KNOWLEDGE SOLUTION PVT.LTD. IN THE IT ENAB LED SERVICES SEGMENT. THE TRIBUNAL IN PARA-16 OF ITS ORDER HELD THAT THE SAID COMPANY IS NOT FUNCTIONAL COMPARABLE AS IT PROVIDES SERVICES SUCH AS E-PUBLISHING KNOWLEDGE BASED SERVICES ETC. IN VIEW OF THE ABOVE , WE DIRECT THE TPO TO EXCLUDE THE AFORESAID COMPANY ALSO FROM THE FINAL L IST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING THE ALP. 27. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT AFTER EXCLUDING THE AFORESAID 6 COMPANIES FROM THE LIST OF COMPARAB LE AND IF THE (-) (+) 5% ADJUSTMENT UNDER PROVISO TO SEC.92C IS CONSIDERED T HAN THE ASSESSEES MARGIN WOULD BE HELD TO BE AT ARMS LENGTH. THE A O/TPO IS ACCORDINGLY DIRECTED TO WORK OUT THE PROFITS MARGINS AFTER EXCL UDING THE AFORESAID COMPANIES AND DETERMINE THE ALP. 28. IN GROUND NO.36 THE ASSESSEE HAS PROJECTED THE FOLLOWING GRIEVANCE: 36. REIMBURSEMENT OF EXPENSES ARE NOT RELATED TO S ERVICES RENDERED BUT ARE PURE COST REIMBURSEMENTS AND HENCE SHOULD NOT BE MARKED UP. - THE APPELLANT WISHES TO REITERATE THE FACT THAT THE HONOURABLE DRP OUGHT TO HAVE APPRECIATED THAT REIMBURSEMENTS RECEIVED ARE NOT IN RESPECT OF ANY SERVICES RENDERED BUT IN FACT CONSTITUTE PAYMENTS M ADE FOR ADMINISTRATIVE CONVENIENCE. IT(TP)A NO.1317/BANG/2010 PAGE 34 OF 41 - THE HONOURABLE DRP HAS NOT ACCEPTED THE REIMBURSEMENT OF EXPENSES AT COST AND ERRONEOUSLY ADDED IT BACK TO THE COST BASE FOR THE PURPOSE OF A MARK-UP. 29. WE HAVE ALREADY SEEN THAT THE ASSESSEE RECEIVED A SUM OF RS.2,32,47,077 FROM ITS AE AND THE SAME HAS BEEN SH OWN AS AN INTERNATIONAL TRANSACTION WITH AE BY THE ASSESSEE IN THE REPORT U /S.92CE OF THE ACT. ACCORDING TO THE TPO, THE ASSESSEE DID NOT GIVE ANY DETAILS WITH REGARD TO REIMBURSEMENT OF EXPENSES (RECEIVED) TO THE EXTENT OF RS. 2,32,47,077 . ACCORDING TO THE TPO, THE ASSESSEE ONLY TOOK A STAN D THAT THE TRANSFER PRICING PROVISIONS DO NOT PROVIDE ANY DETAILED GUIDELINES O R FRAMEWORK ON THE METHOD OF COMPUTATION OF ALP IN RESPECT OF REIMBURSEMENT. THE TPO THEREFORE CALLED UPON THE ASSESSEE VIDE LETTER DATED 22-07-2009, TO GIVE NATURE OF REIMBURSEMENT OF EXPENSES AND ALSO CLARIFY WHETHER SUCH EXPENSES ARE ROUTED THROUGH THE PROFIT AND TOSS ACCOUNT, IF YES, TO SPE CIFY THE HEAD(S) UNDER WHICH IT IS SHOWN, IF NO, SPECIFY AS TO WHY SUCH EXPENDITURE SHOULD NOT BE INCLUDED AS PART OF THE ASSESSEES OPERATING COST AND THUS FOR MARK-UP. ACCORDING TO THE TPO, THE ASSESSEE DID NOT OFFER ANY COMMENTS. THER EFORE THE TPO PRESUMED THAT THE REIMBURSEMENT OF EXPENSES RECEIVED IS NOT ROUTED THROUGH PROFIT AND LOSS ACCOUNT AND THESE EXPENSES ARE INCURRED IN CON NECTION WITH RENDERING SOFTWARE DEVELOPMENT SERVICES. ACCORDING TO THE TPO , NO INDEPENDENT PARTY WOULD RENDER SUCH SERVICES WITHOUT ANY MARK UP. THE TPO THEREFORE ADDED THE REIMBURSEMENT OF EXPENSES (RECEIVED) OF RS. 2,32,47 ,077/- TO THE OPERATING REVENUES AS WELL AS THE OPERATING COSTS FOR THE PUR POSE OF AGGREGATION OF IT(TP)A NO.1317/BANG/2010 PAGE 35 OF 41 TRANSACTIONS AND DETERMINING ARMS LENGTH PRICE UND ER TNMM. FURTHER THE TPO OBSERVED THAT THE REIMBURSEMENT OF EXPENSES PERTAIN ING TO EACH SEGMENT IS NOT AVAILABLE. HE PROCEEDED TO APPORTION THE EXPEN SES BETWEEN THE SOFTWARE DEVELOPMENT AND ITES SEGMENTS IN THE RATIO OF SEGME NT TURNOVER (67.48% : 32.52%). THUS THE REIMBURSEMENT OF EXPENSES WERE AD DED TO THE REVENUES AND COSTS IN THE ABOVE RATIO I.E. RS. 1,56,87,128/- IN THE SOFTWARE DEVELOPMENT SEGMENT AND RS. 75,59,948 IN THE ITES SEGMENT FOR C OMPARABILITY ANALYSIS UNDER TNMM. 30. BEFORE DRP, THE ASSESSEE SUBMITTED THAT THE RE IMBURSEMENT OF EXPENSE RECEIVED ARE NOTHING BUT EXPENSES INCURRED ON BEHALF OF RELATED PARTIES FOR ADMINISTRATIVE CONVENIENCE. THE ASSESSE E POINTED OUT THAT DURING THE PREVIOUS YEAR, IT HAD PAID EXPAT TAX FOR THE EM PLOYEES DEPUTED BY TESCO STORES LIMITED, UK (PARENT COMPANY) TO WORK AS PART OF VARIOUS PROJECTS CONDUCTED BY THE ASSESSEE. THE ASSESSEE ALSO PAID A CERTAIN AMOUNT AS INTEREST FOR THE DELAY IN THE PAYMENT OF TAX DEDUCT ED AT SOURCE (TDS). ALL THESE EXPENSES WERE CROSS CHARGED BY THE ASSESSEE T O TESCO STORES LIMITED, UK WHO REIMBURSED THE SAME AT COST, WITHOUT ANY MAR K UP. THE DETAILS OF EXPAT TAX AND INTEREST PAID ON DELAY IN THE PAYMENT OF TD S WERE ALSO PROVIDED AS GIVEN BELOW:- EXPAT TAX DETAILS FOR THE FINANCIAL YEAR 2005-2006 SL. NO. NAME OF THE EXPAT TAX (RS) INTEREST (RS) TOTAL INCOME TAX (RS) 1 TIM SEA 2,240,802 145,652 2,386,454 2 SANGENU PARK 2,101,111 136,572 2,237,683 IT(TP)A NO.1317/BANG/2010 PAGE 36 OF 41 3 HENRY KANG 2,395,230 155,690 2,550,920 4 PHILIP GREENWOOD 4,806,569 312,247 5,118,996 5 USHIR BHATT 2,572,258 67,197 2,739,45 6 DAVID BRIGGS 3,911,924 254,275 4,166,199 7 PETER HANLON 1,654,880 107,567 1,762,447 8 ROGER MORGAN 1,360,427 88,428 1,448,855 9 SARAH MORGAN 878,935 57,131 936,066 TOTAL 21,922,137 1,424,939 23,347,076 31. THE LEDGER ENTRIES PERTAINING TO THE ABOVEMENTI ONED TRANSACTIONS WERE PROVIDED AS APPENDIX 25A TO THE OBJECTIONS FIL ED BEFORE THE DRP. THE CHALLANS IN SUPPORT OF THE PAYMENT OF THE ABOVEMENT IONED EXPAT TAX AND THE INTEREST ON DELAYED PAYMENT OF TDS WERE ALSO PR OVIDED AS ANNEXURE TO THE OBJECTIONS BEFORE THE DRP. SAMPLE INVOICE COPIE S OF THE REIMBURSEMENTS RECEIVED WERE ALSO PROVIDED AS ANNEX URE TO THE OBJECTIONS FILED BEFORE THE DRP. 32. THE ASSESSEE ALSO PLACED RELIANCE ON CIRCULAR NO. 87-2R DATED 27 SEPTEMBER 1999 OF THE CANADA CUSTOMS AND REVENUE AG ENCY WHEREIN IT HAS BEEN STATED THAT OFTEN THE PRICE THE RECIPIENT IS WILLING TO PAY FOR THE SERVICE DOES NOT EXCEED THE COST OF SUPPLY TO THE S ERVICE SUPPLIER. 163. ARMS LENGTH SERVICE SUPPLIERS WOULD USUALLY EXPECT TO RECOVER THEIR COSTS PLUS AN ELEMENT OF PROFIT. HOWEVER, IN DETERMINING AN ARMS LENGTH CHARGE FOR SERVICE, ONE MUST ALSO TAKE INTO ACCOUNT THE ECONOMIC ALTERNATIVES AVAILABLE TO THE RECIPIENT OF THE SERVICE. OFTEN, T HE PRICE THE RECIPIENT IS WILLING TO PAY FOR THE SERVI CE DOES NOT EXCEED THE COST OF SUPPLY TO THE SERVICE SUPPLIER. THE ABOVE HAS BEEN EXPLAINED BY MEANS OF AN EXAMPLE : IT(TP)A NO.1317/BANG/2010 PAGE 37 OF 41 FOR EXAMPLE, IN MANY CASES, THE SERVICES PROVIDED THROUGH INTRA-GROUP ARRANGEMENTS ARE ADMINISTRATIVE OR ANCILLARY IN NATURE, AND THE PARTICIPANTS WOULD ONLY HAVE BEEN PREPARED TO CENTRALIZE THE ACTIVITY IF THEY COULD SHARE IN THE COST SAVINGS. COST MAY REPRESENT AN ARMS LENGTH CHARGE IN SUCH SITUATIONS. 164. DETERMINING WHETHER A MARK-UP IS APPROPRIATE AND, WHERE APPLICABLE, THE QUANTUM OF THE MARK-UP, REQUIRES CAREFUL CONSIDERATION OF FACTORS SUCH AS: - THE NATURE OF THE ACTIVITY; - THE SIGNIFICANCE OF THE ACTIVITY TO THE GROUP; - THE RELATIVE EFFICIENCY OF THE SERVICE SUPPLIER; AND - ANY ADVANTAGE THAT THE ACTIVITY CREATES FOR THE GROUP. FOR EXAMPLE, THE RELATIVE EFFICIENCY OF ARMS LENGT H SERVICE SUPPLIERS MAY NOT BE COMPARABLE TO THE INTRA-GROUP SERVICES WHERE THE INTRA-GROUP SERVICES ORE OFFERED AS A CONVENIENCE TO THE GROUP AND NOT AS AN ORDINARY AND RECURRENT ACTIVITY. 165. AS DISCUSSED IN PARAGRAPH 7.36 OF THE OECD GUIDELINES, IT IS IMPORTANT TO DISTINGUISH BETWEEN THE SITUATION OF A TAXPAYER WHO RENDERS SERVICES FO R THE OTHER MEMBERS OF A GROUP; AND A TAXPAYER WHO ACTS SOLELY AS AN AGENT ON BEHALF OF THE GROUP TO ACQUIRE SERVICES FROM AN ARMS LENGTH PARTY. IN THE LATTER SITUATION, THE ARMS LENGTH COMPENSATION WOULD BE LIMITED TO REWARDING THE AGENCY ROLE. IN SUCH A CASE, IT WOULD NOT BE APPROPRIATE TO DETERMINE AN ARMS LENGTH CHARGE BY REFERRING TO A MARK-UP ON THE COST OF THE SERVICES ACQUIRED FROM AN ARMS LENGTH PARTY. WHETHER A TAXPAYER IS PROVIDING A SERVICE OR MERELY ACTING AS AN AGENT ON BEHALF OF THE GROUP IS A QUESTION OF FACT. IT(TP)A NO.1317/BANG/2010 PAGE 38 OF 41 33. THE DRP HOWEVER DID NOT AGREE WITH THE SUBMISSI ONS OF THE ASSESSEE AND HELD AS FOLLOWS: THE REASON WHY THE TPO HAS CONSIDERED A MARK UP IS THAT ARMS LENGTH SERVICE SUPPLIERS WOULD USUALLY EXPECT TO RE COVER THEIR COTS PLUS ELEMENT OF PROFIT. THEREFORE, IN DETERMINING ARMS LENGTH CHARGE FOR SERVICE ONE MUST ALSO TAKE INTO ACCOUNT THE ECONOMIC ALTERNATIVES AVAILABLE TO THE RECIPIENT OF THE SERV ICE. WE AGREE WITH THE REASONING OF THE TPO. 34. AGGRIEVED BY THE ORDER OF THE DRP, THE ASSESSEE HAS RAISED GROUND NO.36 BEFORE THE TRIBUNAL. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED SUBMISS IONS MADE BEFORE THE DRP. THE LEARNED DR RELIED ON THE ORDER OF THE DRP . 35. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS OBSERVED IN THE OECD COMMENTARIES REFERRED TO IN THE CIRCULAR OF THE CAN ADA CUSTOMS AND REVENUE AGENCY, IT IS IMPORTANT TO DISTINGUISH BETWEEN THE SITUATION OF A TAXPAYER WHO RENDERS SERVICES FOR THE OTHER MEMBERS OF A GROUP; AND A TAXPAYER WHO ACTS SOLELY AS AN AGENT ON BEHALF OF THE GROUP TO ACQUIR E SERVICES FROM AN ARMS LENGTH PARTY. IN THE LATTER SITUATION, THE ARMS LE NGTH COMPENSATION WOULD BE LIMITED TO REWARDING THE AGENCY ROLE. IN SUCH A CAS E, IT WOULD NOT BE APPROPRIATE TO DETERMINE AN ARMS LENGTH CHARGE BY REFERRING TO A MARK-UP ON THE COST OF THE SERVICES ACQUIRED FROM AN ARMS LENGTH PARTY. WHETH ER A TAXPAYER IS PROVIDING A SERVICE OR MERELY ACTING AS AN AGENT ON BEHALF OF T HE GROUP IS A QUESTION OF FACT. IT(TP)A NO.1317/BANG/2010 PAGE 39 OF 41 36. IN THE PRESENT CASE, THE DETAILS GIVEN BEFORE T HE DRP CLEARLY SHOWS THAT WHAT THE ASSESSEE RECEIVED AS REIMBURSEMENT FROM TH E AE IS NOTHING BUT THE EXPAT TAX PAID AND INTEREST PAID ON DELAY IN THE PA YMENT OF TDS. THERE CAN BE NO ELEMENT OF SERVICE IN SUCH PAYMENT. THE TAXPAYE R SHOULD BE CONSIDERED AS HAVING ACTED SOLELY AS AN AGENT ON BEHALF OF THE GR OUP TO ACQUIRE SERVICES FROM AN ARMS LENGTH PARTY. IN SUCH CASES, IT WOULD NOT BE APPROPRIATE TO DETERMINE AN ARMS LENGTH CHARGE BY REFERRING TO A MARK-UP ON THE COST OF THE SERVICES ACQUIRED FROM AN ARMS LENGTH PARTY. WE THEREFORE HOLD THAT THE REIMBURSEMENT OF EXPENSES BE EXCLUDED FROM THE REVENUES AND COSTS IN THE RATIO I.E. RS. 1,56,87,128/- IN THE SOFTWARE DEVELOPMENT SEGMENT A ND RS. 75,59,948 IN THE ITES SEGMENT FOR COMPARABILITY ANALYSIS UNDER TNMM AS WAS DONE BY THE TPO AND DIRECT THE TPO TO COMPUTE THE ALP AFTER SUCH EX CLUSION. GROUND NO.36 IS ACCORDINGLY ALLOWED. 37. ASSESSEE IN THE GROUND NO.38 OF GROUNDS OF APPE AL BEFORE THE TRIBUNAL HAS ALSO PROJECTED ITS GRIEVANCE REGARDING THE ACTI ON OF THE LEARNED ASSESSING OFFICER AND THE DISPUTE RESOLUTION PANEL IN EXCLUDI NG WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT TELECOMMUNICATION CHAR GES AND INSURANCE EXPENSES OF AND EXPENSES INCURRED IN FOREIGN CURREN T FROM THE EXPORT TURNOVER. IT IS THE PLEA OF THE ASSESSEE THAT AT ALL TIMES DU RING THE RELEVANT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT IN RENDERING ANY TECHNICAL SERVICES. WITHOUT PREJUDICE TO ITS CONTE NTION THAT THE AFORESAID SUMS SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER WHI LE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE ASSESSEE HAS ALSO MADE AN A LTERNATE PRAYER THAT IT(TP)A NO.1317/BANG/2010 PAGE 40 OF 41 EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER AND IN THIS REGARD HAS PLAC ED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) . 38. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN THIS REGARD. TAKING INTO CONS IDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE ASSESSING OFFICER TO EXCLUDE TELECOMMUNICATION CHARGES AND INSURANCE CHARGES INC URRED BE EXCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER, AS HA S BEEN PRAYED FOR BY THE ASSESSEE IN THE ALTERNATIVE. IN VIEW OF THE ACCEPT ANCE OF THE ALTERNATIVE PRAYER, WE ARE OF THE VIEW THAT NO ADJUDICATION IS REQUIRED ON THE GROUND WHETHER THE AFORESAID SUMS ARE REQUIRED TO BE EXCLU DED FROM THE EXPORT TURNOVER. 39. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PAR TLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF MAY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 26 TH MAY, 2015. ENCLOSURE : ANNEXURES-I & II / D S/ IT(TP)A NO.1317/BANG/2010 PAGE 41 OF 41 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.