Appeal Details
Counselvise Citation
131924514 RSA 2011
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 11 month(s) 20 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
10-10-2014
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
07-01-2014
Assessment Year
2007-2008
Appeal Filed On
21-10-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1319/PN/2011 (ASSESSMENT YEAR 2007-08) JOHN DEERE INDIA PVT. LTD., CYBERCITY, MAGARPATTA CITY, HADAPSAR, PUNE 411028 PAN NO.AAACJ4233B .. APPELLANT VS. ACIT, CIRCLE-11(1), PUNE .. RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SMT. M.S. VERMA DATE OF HEARING : 20-08-2014 DATE OF PRONOUNCEMENT : 10-10-2014 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER PASSED U/S.143(3) R.W.S. 144C(13) AND 115WE(3) BY T HE DCIT, CIRCLE-11(1), PUNE FOR THE ASSESSMENT YEAR 2007-08. 2. GROUND OF APPEAL NO.1 BY THE ASSESSEE READS AS U NDER : 1. THE LD. DRP ERRED IN CONFIRMING THE DISALLOWANC E OF DEDUCTION U/S.35D OF RS.39,99,272/-. 2.1 AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS THIS GROUND FOR WHICH THE LD. DEPARTMENTA L REPRESENTATIVE HAS NO OBJECTION. ACCORDINGLY, THE SAME IS DISMISSED AS NOT PRESSED. 2 3. GROUND OF APPEAL NO.2 BY THE ASSESSEE READS AS U NDER : 2. THE LD. DRP ERRED IN CONFIRMING THE DISALLOWANC E OF RS.33,174/- ON THE GROUND THAT ASSESSEE MUST HAVE INCURRE D INDIRECT EXPENDITURE FOR INCREASING THE SHARE CAPITAL AND THEREFORE, THE SAME WAS TO BE DISALLOWED. 3.1 FACTS OF THE CASE, IN BRIEF, ARE THAT DURING TH E COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERV ED THAT ASSESSEE HAS INCREASED ITS ISSUED, SUBSCRIBED AND P AID UP SHARE CAPITAL BY MAKING DIRECT EXPENSES OF RS.33,17,360/- ON ACCOUNT OF STAMP DUTY AND REGISTRATION CHARGES. HE OBSERVED T HAT IN THE COMPUTATION OF INCOME THE ASSESSEE COMPANY CLAIMED DEDUCTION OF RS.6,63,472/- U/S.35D OF THE I.T. ACT. BY AMORTIZIN G THE SAID EXPENSES OVER A PERIOD OF 5 YEARS. ACCORDING TO TH E ASSESSING OFFICER THE ASSESSEE MUST HAVE INCURRED FURTHER IND IRECT EXPENSES FOR INCREASING THE SHARE CAPITAL. THEREFORE, THE A SSESSING OFFICER MADE ADHOC DISALLOWANCE OF RS.33,174/- TREATING THE SAID EXPENSES AS CAPITAL EXPENDITURE. THE ASSESSEE APPROACHED TH E DRP BUT WITHOUT ANY SUCCESS. THE ASSESSING OFFICER ACCORDI NGLY MADE DISALLOWANCE OF RS.33,174/-. 3.2 AGGRIEVED WITH SUCH ORDER OF THE ASSESSING OFFI CER THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALLE NGED THE ORDER OF THE ASSESSING OFFICER. HE SUBMITTED THAT THE ASSESSEE HAS INCURRED EXPENDITURE OF RS.33,17,360/- ON STAMP DUT Y AND 3 REGISTRATION CHARGES. THERE IS NO EVIDENCE THAT TH E ASSESSEE HAS INCURRED ANY FURTHER EXPENDITURE OVER AND ABOVE THE AMOUNT DEBITED IN THE BOOKS OF ACCOUNT. HE SUBMITTED THAT IN ABSE NCE OF ANY CONCRETE EVIDENCE NO ADDITION CAN BE MADE ON PRESUM PTIVE BASIS. 5. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE ASSESSING OFFICE R. 6. AFTER HEARING BOTH THE SIDES, WE FIND THE DISALL OWANCE WAS MADE BY THE ASSESSING OFFICER PURELY ON GUESS WORK AND ON ADHOC BASIS WITHOUT ANY IOTA OF EVIDENCE THAT THE ASSESSE E HAS INCURRED FURTHER EXPENDITURE OVER AND ABOVE WHAT IS RECORDED IN THE BOOKS. IT IS THE SETTLED PROPOSITION OF LAW THAT PRESUMPTI ONS AND SURMISES HOWEVER STRONG MAY BE CANNOT BE THE BASIS FOR ADDIT ION. SINCE IN THE INSTANT CASE, THERE IS NO DIRECT OR INDIRECT EV IDENCE BROUGHT ON RECORD BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS INCURRED FURTHER INDIRECT EXPENSES FOR THE PURPOSE OF INCREA SING THE SHARE CAPITAL OF THE COMPANY, THEREFORE, THE ADDITION MAD E BY THE ASSESSING OFFICER DESERVES TO BE DELETED. WE ACCOR DINGLY DIRECT THE ASSESSING OFFICER TO DELETE THE SAME. GROUND OF AP PEAL NO.2 BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 7. GROUND OF APPEAL NO.3 BY THE ASSESSEE READS AS UNDE R : 3. THE LD. DRP ERRED IN CONFIRMING THE ACTION OF T HE ASSESSING OFFICER BY HOLDING THAT THE AMOUNT INCURRED OF RS.33 ,17,360/- FOR INCREASING THE SHARE CAPITAL WAS DISALLOWABLE U/S.14A OF THE ACT. 7.1 AS MENTIONED IN THE PRECEDING PARAGRAPH THE ASS ESSEE HAS INCURRED EXPENDITURE OF RS.33,17,360/- DURING THE Y EAR UNDER 4 CONSIDERATION FOR INCREASING THE SHARE CAPITAL. TH E ASSESSEE CLAIMED THE ABOVE AMOUNT AS ELIGIBLE FOR DEDUCTION U/S.35D AND ACCORDINGLY THE SAME WAS CLAIMED AS DEDUCTION IN THE RETURN OF INCOME. ACCORDING TO THE ASSESSING OFFICER, THE ABOVE DIREC T EXPENDITURE OF RS.33,17,360/- DESERVES DISALLOWANCE U/S.14A OF THE I.T. ACT SINCE THE INCREASE IN SHARE CAPITAL WAS FOR MAKING THE IN VESTMENT IN THE SUBSIDIARY COMPANIES. HOWEVER, SINCE THE ASSESSEE IN THE COMPUTATION OF INCOME HAS CLAIMED DEDUCTION OF RS.6 ,63,472/- U/S.35D OF THE I.T. ACT BY AMORTIZING THE SAID EXPE NSES OVER A PERIOD OF 5 YEARS THE ASSESSING OFFICER DISALLOWED THE SAID AMOUNT OF RS.6,63,472/- . SINCE HE DISALLOWED THE AMOUNT OF RS.6,63,472/- REJECTING THE CLAIM OF DEDUCTION U/S.35D OF THE I. T. ACT, THE ASSESSING OFFICER DID NOT MAKE FURTHER DISALLOWANCE U/S.14A. THE ASSESSEE APPROACHED THE DRP BUT WITHOUT ANY SUCCESS . THE ASSESSING OFFICER ACCORDINGLY MADE ADDITION OF RS.3 3,17,360/- TO THE TOTAL INCOME OF THE ASSESSEE. 7.2 AGGRIEVED WITH SUCH ORDER OF THE ASSESSING OFFI CER THE ASSESSEE IS IN APPEAL BEFORE US. 8. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADDITION MADE BY THE ASSESSING OFFICER IS DEVOID OF ANY MERI T. ACCORDING TO HIM, THE SHARE CAPITAL WAS INCREASED BY THE ASSESSE E COMPANY WHICH IS AVAILABLE FOR VARIOUS PURPOSES AND IT IS NOT A C ASE THAT THE CAPITAL IS INCREASED ONLY FOR MAKING THE INVESTMENT IN THE SUBSIDIARY COMPANY. HE SUBMITTED THAT THE UTILISATION OF FUND S RAISED ON ACCOUNT OF INCREASE IN THE SHARE CAPITAL IS NOT TO BE CONSIDERED FOR 5 MAKING THE DISALLOWANCE U/S.14A. REFERRING TO PAGE 98 OF THE PAPER BOOK HE SUBMITTED THAT THE ASSESSEE HAS ALREA DY DISALLOWED ITSELF AN AMOUNT OF RS.39,92,272/- AND HAS NOT CLAI MED ANY EXPENDITURE. REFERRING TO PAGE 29 OF THE PAPER BOO K HE SUBMITTED THAT THE AUDITORS IN CLAUSE 15 OF THE TAX AUDIT REP ORT HAVE MENTIONED THAT THE DEDUCTION IS ALLOWABLE U/S.35D A T RS.39,99,272/- AND THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.33,17, 360/-. HE SUBMITTED THAT SINCE THE ASSESSEE IN ITS GROUNDS OF APPEAL HAS NOT PRESSED FOR THE ADDITION OF RS.39,99,272/-, THEREFO RE, NO FURTHER DISALLOWANCE U/S.14A IS CALLED FOR. 9. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 10. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER/ TPO AND THE DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE WE FIND T HE DISALLOWANCE OF RS.39,99,272/- CLAIMED AS DEDUCTION U/S.35D WAS DISALLOWED BY THE ASSESSING OFFICER AND THE ASSESSEE DID NOT PRES S THE GROUNDS OF APPEAL NO.1 IN WHICH IT HAS CHALLENGED THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING THE CLAIM OF DEDUCTION U/S.3 5D. ONCE THE SAME IS DISALLOWED, THERE CANNOT BE ANY FURTHER ADD ITION U/S.14A SINCE IT AMOUNTS TO DOUBLE DISALLOWANCE. WE ACCORD INGLY DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.33,1 7,360/-. GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS ACCORDINGL Y ALLOWED. 6 11. GROUNDS OF APPEAL NO.4 AND 4.1 BY THE ASSESSEE READ AS UNDER: 4. THE LD. DRP ERRED IN RESTRICTING THE CLAIM OF DE DUCTION U/S.10A TO RS.6,38,86,434/- AS AGAINST THE CLAIM OF RS.9 ,22,90,403/- MADE BY THE ASSESSEE BY APPORTIONING THE VARIOUS EXPENSE S BETWEEN THE ELIGIBLE AND NON-ELIGIBLE UNDERTAKING O N THE BASIS OF TURNOVER OF EACH OF THE UNITS. 4.1 THE LD. DRP ERRED IN HOLDING THAT THE DEDUCTION U/S.10A WAS NOT ALLOWABLE IN RESPECT OF THE DISALLOWANCE MADE U/S.40(A)(IA) AND 43B. 11.1 FACTS OF THE CASE, IN BRIEF, ARE THAT DURING T HE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERV ED THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF RS.9,22,90,403/- U/S.10A OF THE I.T. ACT. FROM THE VARIOUS DETAILS FURNISHED BY TH E ASSESSEE THE ASSESSING OFFICER NOTED THAT THE ASSESSEE COMPANY H AS 2 UNITS, I.E. ONE ELIGIBLE UNIT U/S.10A AND THE OTHER ONE, A NON- ELIGIBLE UNIT. HE OBSERVED THAT THE ASSESSEE COMPANY HAS CLAIMED LOSS BEFORE TAXES OF RS.33,14,334/- AGAINST TOTAL TURNOVER OF RS.6,55,41 ,422/- IN RESPECT OF TAXABLE UNIT. AT THE SAME TIME, THE ASSESSEE HA S CLAIMED POSITIVE INCOME OF RS.8,96,71,809/- AGAINST TOTAL TURNOVER O F RS.79,82,41,740/- IN RESPECT OF EXEMPTED UNIT. THU S, ACCORDING TO THE ASSESSING OFFICER THERE IS SUBSTANTIAL ABNORMAL ITY IN THE PROFIT BEFORE TAX IN RESPECT OF TAXABLE UNIT IF THE SAME I S COMPARED WITH RESPECT TO THE EXEMPTED UNIT. ON VERIFICATION OF T HE VARIOUS DETAILS FURNISHED BY THE ASSESSEE, THE ASSESSING OFFICER NO TED THAT BOTH THE UNITS, I.E. STPI AND NON STPI (EXEMPT AND TAXABLE) ARE RENDERING THEIR TOTAL IT AND IT ENABLED SERVICES TO THEIR PAR ENT/HOLDING COMPANY. HE NOTED THAT NO SEPARATE BOOKS OF ACCOUN TS ARE 7 MAINTAINED FOR THE SAID TWO UNITS. THEREFORE, IN A BSENCE OF THE SAME, HE WAS OF THE OPINION THAT THE BOOK RESULTS S HOWN BY THE ASSESSEE ARE NOT FULLY VERIFIABLE. HE NOTED THAT T HE AUDITORS WHILE CERTIFYING THE ELIGIBILITY OF DEDUCTION OF RS.9,22, 90,403/- U/S.10A HAVE GIVEN THE FOLLOWING NOTE : 4. THE INDIRECT COSTS HAVE BEEN ALLOCATED TO THE ELI GIBLE STPI UNIT BASED ON THE ASSUMPTIONS MADE AND DETERMINED APPRO PRIATE BY THE MANAGEMENT AND WE HAVE RELIED UPON THE SAME. 5. IN DETERMINING THE PROFIT OF THE UNDERTAKING, OP ERATING AND OTHER OVERHEAD COSTS HAVE BEEN ALLOCATED BASED ON THE ASSUMPTIONS MADE AS DETERMINED APPROPRIATE BY THE MANAGEMENT OF THE COMPANY AND THE AUDITORS HAVE NOT ASCERTAINED THEIR P ROPRIETY. 11.2 HE, THEREFORE, WAS OF THE OPINION THAT THE CORRECTNESS/REASONABLENESS OF THE EXPENSES ALLOCATE D BY THE ASSESSEE COMPANY BETWEEN THE TAXABLE/NON-TAXABLE UN IT IS NOT AT ALL VERIFIABLE FOR THE FOLLOWING REASONS : (A) THE ASSESSEE HAS NOT ADOPTED ANY UNIFORM REASONABLE METHOD TO ALLOCATE THE EXPENSES BETWEEN THE TWO UNIT S. IT IS CLAIMED THAT THE BASIS OF APPORTIONMENT FOR THE SALARY IS ACTUAL AND FOR THE OTHER OPERATING EXPENDITURE BASED ON HEAD CO UNT OR PROPORTION OF REVENUE. THE EXPENSES ALLOCATED AGAINST THE TAXABLE UNIT IS AS HIGH AS 100% IN CASE OF TESTING CHARGES, WHICH IS NOT REASONABLE WITH RESPECT TO METHOD FOLLOWED BY THE ASSESSE E. (B) THE ASSESSEE DID NOT MAINTAIN SEPARATE SET OF BOOKS O F ACCOUNTS FOR THE SAID UNITS. (C) THE AUDITOR OF THE ASSESSEE COMPANY HAS CERTIFIED TH E CLAIM OF DEDUCTION U/S.10A ON THE BASIS OF ASSUMPTION MADE AN D DETERMINED APPROPRIATE BY THE MANAGEMENT OF THE COM PANY WITHOUT ASCERTAINING ITS PROPRIETY. AS SUCH, THE CERTI FICATE OF THE AUDITOR CANNOT BE RELIED UPON TO ALLOW CLAIM OF THE ASSESSEE (D) ALL SERVICES OF TAXABLE/NON-TAXABLE UNITS ARE CONSU MED BY SINGLE HOLDING COMPANY (RELATED PARTY). 11.3 IN ABSENCE OF SPECIFIC SEPARATE DETAILS OF EXP ENSES INCURRED ON THE 2 UNITS THE ASSESSING OFFICER, FOLLOWING THE PROVISIONS OF 8 SECTION 80IA(8) PROCEEDED TO COMPUTE SUCH PROFITS A ND GAINS ON REASONABLE BASIS AS PROVIDED IN THE PROVISO TO THE SAID SECTION. HE NOTED THAT CERTAIN DISALLOWANCES U/S.40(A)(IA), 40A (7) AND 43B WERE ADMITTED BY THE ASSESSEE FOR VIOLATION OF THE RESPE CTIVE PROVISIONS ACCORDING TO THE ASSESSING OFFICER, THE DISALLOWANC E U/S.40(A)(IA), 40A(7) AND 43B IS NOT THE ACTUAL EARNING BUT ADDITI ON WITH INTENTION TO PENALIZE THE MISTAKE OF THE ASSESSEE. THERE IS N O IMMUNITY GIVEN TO ANY SUCH UNDERTAKING WHICH OTHERWISE ARE ELIGIBL E FOR DEDUCTION U/S.10A TO DISOBEY THE STATUTORY PROVISIONS OF THE ACT. THE ASSESSING OFFICER ACCORDINGLY RESTRICTED THE CLAIM OF DEDUCTION U/S.10A AT RS.6,38,86,434/- AS AGAINST DEDUCTION OF RS.9,29,90,403/- CLAIMED BY THE ASSESSEE BY DISALLO WING THE FOLLOWING AMOUNTS : SR.NO. NATURE OF DISALLOWANCE AMOUNT (RS.) 1 DISALLOWANCE U/S.40(A)(IA) 1,56,99,911 2 DISALLOWANCE U/S.43B (LEAVE ENCASHMENT) 1,31,44,715 3 DISALLOWANCE U/S.43B (SERVICE TAX) 69,813 TOTAL 2,89,14,439 THE ASSESSEE CHALLENGED BEFORE THE DRP BUT WITHOUT ANY SUCCESS. THE ASSESSING OFFICER ACCORDINGLY RESTRICTED THE CL AIM OF DEDUCTION BY DISALLOWING RS.2,89,14,439/- AS ABOVE. 11.4 AGGRIEVED WITH SUCH ORDER OF THE ASSESSING OFF ICER THE ASSESSEE IS IN APPEAL BEFORE US. 12. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO P AGE 98 OF THE PAPER BOOK SUBMITTED THAT THE ASSESSEE HAS GIVEN CO MPLETE DETAILS 9 AND HAS MADE ADDITION TO THE TOTAL INCOME U/S.40(A) (IA) AND 43B. HE SUBMITTED THAT BECAUSE OF THE DISALLOWANCES THE BUS INESS INCOME OF THE ASSESSEE HAS GONE UP AND THE ASSESSEE HAS CLAIM ED HIGHER DEDUCTION U/S.10A. REFERRING TO THE DECISION OF TH E HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GEM PLUS J EWELLERY INDIA PVT. LTD. REPORTED IN 330 ITR 175 HE SUBMITTE D THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS HELD TH AT INCREASED INCOME OWING TO DISALLOWANCE HAS TO BE TAKEN INTO A CCOUNT FOR THE PURPOSE OF CALCULATION OF DEDUCTION U/S.10A. HE SU BMITTED THAT THE ASSESSING OFFICER HAS COMPLETELY IGNORED THE DECISI ON OF THE HONBLE BOMBAY HIGH COURT CITED (SUPRA). HE SUBMIT TED THAT THE ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNT. THE ASSESSEE HAS APPORTIONED THE COMMON EXPENSES ON THE BASIS OF NUMBER OF EMPLOYEES WHEREAS THE ASSESSING OFFICER HAS ALLOCAT ED THE EXPENSES ON THE BASIS OF TURNOVER. IN ANY CASE, IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF GEM PLUS JEWELLERY INDIA PVT. LTD. (SUPRA) THE ASSESSING OFF ICER IS NOT JUSTIFIED IN RESTRICTING THE DEDUCTION U/S.10A ON A CCOUNT OF DISALLOWANCE U/S.40(A)(IA) AND 43B. HE ACCORDINGLY SUBMITTED THAT THE CLAIM OF DEDUCTION U/S.10A BY THE ASSESSEE SHOU LD BE ALLOWED. 13. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND WHILE SUPPORTING THE ORDER OF THE ASSESSING OFFICER SUBMI TTED THAT THE ACTION OF THE ASSESSING OFFICER IN RESTRICTING THE CLAIM OF DEDUCTION U/S.10A TO RS.6.38 CRORES IS JUSTIFIED SINCE DEDUCT ION U/S.10A IS NOT AVAILABLE TO DISALLOWANCE U/S.40(A)(IA) AND SECTION 43B. FOR THE 10 ABOVE PROPOSITION, THE LD. DEPARTMENTAL REPRESENTAT IVE RELIED ON THE DECISIONS OF THE MUMBAI BENCH OF THE TRIBUNAL I N THE CASE OF TRICOM INDIA LTD. REPORTED IN 36 SOT 302 (MUMBAI) A ND CG INTERNATIONAL PVT. LTD. REPORTED IN 13 SOT 280 (MUM BAI) AND THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF MENON IMPEX PVT. LTD. REPORTED IN 128 TAXMANN 11. SHE SU BMITTED THAT IN THE ABOVE DECISIONS IT HAS BEEN HELD THAT DEDUCTION IS UNAVAILABLE AGAINST THE RECEIPTS WHICH WERE NOT DERIVED FROM TH E OPERATION OF THE ELIGIBLE BUSINESS. SHE SUBMITTED THAT THE ASSE SSING OFFICER IN THE ASSESSMENT ORDER HAS DISCUSSED THAT THE ASSESSE E HAS FAILED TO PROVIDE A BIFURCATION OF EXPENSES BETWEEN THE ELIGI BLE AND INELIGIBLE BUSINESS AS SEPARATE BOOKS WERE NOT MAIN TAINED FOR WHICH HE ADOPTED A REASONABLE ESTIMATE. SHE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE ASSESSING OFFICER BE UPHELD. 14. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. T HE ONLY QUESTION TO BE DECIDED IN THE IMPUGNED GROUNDS IS THE ALLOWA BILITY OF DEDUCTION U/S/10A ON THE INCOME DUE TO DISALLOWANCE U/S.40(A)(IA) AND 43B. IT IS THE CASE OF THE ASSESSING OFFICER T HAT NO DEDUCTION U/S.10A IS ALLOWABLE ON THE INCOME INCREASED DUE TO DISALLOWANCE U/S.40(A)(IA) AND 43B. IT IS THE CASE OF THE ASSES SEE THAT IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF GEM PLUS JEWELLERY INDIA PVT. LTD. (SUPRA) INCREASED IN COME OWING TO 11 DISALLOWANCE U/S.40(A)(IA) AND 43B HAS TO BE TAKEN INTO CONSIDERATION FOR CALCULATION OF DEDUCTION U/S.10A. 14.1 THE HONBLE BOMBAY HIGH COURT WHILE DECIDING A N IDENTICAL ISSUE FOR COMPUTATION OF DEDUCTION U/S.10A WHERE DI SALLOWANCE WAS MADE U/S.43B HAS OBSERVED AS UNDER : FOR THE PURPOSES OF THE APPEAL IT IS NECESSARY TO REFE R TO THE ADMITTED POSITION WHICH IS THAT THE ASSESSEE HAD DEPOSITED BOTH THE EMPLOYER'S AND THE EMPLOYEES' CONTRIBUTION TOWARDS PF AND ESIC, THOUGH BEYOND THE DUE DATE INCLUDING THE GRACE PERI OD. THE AO ADDED THESE PAYMENTS TO THE TOTAL INCOME OF THE ASSESSEE AND MADE AN ADDITION IN THE AMOUNT OF RS. 71.59 LACS. HOWEVER , FOR THE DEDUCTION UNDER S. 10A, THE ADDITION MADE ON ACCOUNT OF THE EMPLOYEES' CONTRIBUTION WAS IGNORED IN CALCULATING TH E PROFITS ELIGIBLE FOR DEDUCTION ON THE GROUND THAT THESE RECE IPTS WERE NOT GENERATED OUT OF THE MANUFACTURING ACTIVITY OF THE ASSESSEE COMPANY. BY REASON OF THE JUDGMENT OF THE SUPREME COURT IN CI T VS. ALOM EXTRUSIONS LTD. (2009) 227 CTR (SC) 417 : (2009) 32 ( SC) DTR 49 : (2009) 319 ITR 306 (SC) THE EMPLOYER'S CONTRIBUTION WAS LIABLE TO BE ALLOWED, SINCE IT WAS DEPOSITED BY THE DUE DATE FOR THE FILING OF THE RETURN. THE PECULIAR POSITION, HOWEVER, AS IT OBT AINS IN THE PRESENT CASE ARISES OUT OF THE FACT THAT THE DISALLOWANC E WHICH WAS EFFECTED BY THE AO HAS NOT, THE COURT IS INFORMED, BE EN CHALLENGED BY THE ASSESSEE. AS A MATTER OF FACT THE QUESTION OF LAW WHICH IS FORMULATED BY THE REVENUE PROCEEDS ON THE BASIS THAT T HE ASSESSED INCOME WAS ENHANCED DUE TO THE DISALLOWANCE OF THE EM PLOYER'S AS WELL AS THE EMPLOYEES' CONTRIBUTION TOWARDS PF/ESIC AN D THE ONLY QUESTION WHICH IS CANVASSED ON BEHALF OF THE REVENUE IS WHETHER ON THAT BASIS THE TRIBUNAL WAS JUSTIFIED IN DIRECTING T HE AO TO GRANT THE EXEMPTION UNDER S. 10A. ON THIS POSITION, IN THE P RESENT CASE IT CANNOT BE DISPUTED THAT THE NET CONSEQUENCE OF THE DI SALLOWANCE OF THE EMPLOYER'S AND THE EMPLOYEES CONTRIBUTION IS THAT THE BUSINESS PROFITS HAVE TO THAT EXTENT BEEN ENHANCED. THERE WAS, AS WE HAVE ALREADY NOTED, AN ADD BACK BY THE AO TO THE INCOME. ALL PROFITS OF THE UNIT OF THE ASSESSEE HAVE BEEN DERIVED FROM MANUF ACTURING ACTIVITY. THE SALARIES PAID BY THE ASSESSEE, IT HAS NOT BE EN DISPUTED, RELATE TO THE MANUFACTURING ACTIVITY. THE DISALLOWAN CE OF THE PF/ESIC PAYMENTS HAS BEEN MADE BECAUSE OF THE STATUTORY PROVISIONSS. 43B IN THE CASE OF THE EMPLOYER'S CONTRIB UTION AND S. 36(V) R/W S. 2(24)(X) IN THE CASE OF THE EMPLOYEES C ONTRIBUTION WHICH HAS BEEN DEEMED TO BE THE INCOME OF THE ASSESSEE. THE PLAIN CONSEQUENCE OF THE DISALLOWANCE AND THE ADD BACK THAT HAS BEEN MADE BY THE AO IS AN INCREASE IN THE BUSINESS PROFITS OF THE ASSESSEE. THE CONTENTION OF THE REVENUE THAT IN COMPUTI NG THE DEDUCTION UNDER S. 10A THE ADDITION MADE ON ACCOUNT OF THE DISALLOWANCE OF THE PF/ESIC PAYMENTS OUGHT TO BE IGNO RED CANNOT BE ACCEPTED. NO STATUTORY PROVISION TO THAT EFFECT HA VING BEEN MADE, THE PLAIN CONSEQUENCE OF THE DISALLOWANCE MADE BY THE AO 12 MUST FOLLOW. THE SECOND QUESTION SHALL ACCORDINGLY STAND ANSWERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 14.2 RESPECTFULLY FOLLOWING THE DECISION OF THE JUR ISDICTIONAL HIGH COURT CITED (SUPRA) WE HOLD THAT THE ASSESSING OFFI CER IS NOT JUSTIFIED IN RESTRICTING THE DEDUCTION U/S.10A ON A CCOUNT OF DISALLOWANCE U/S.40(A)(IA) AND 43B. GROUNDS OF APP EAL NO.4 AND 4.1 BY THE ASSESSEE ARE ACCORDINGLY ALLOWED. 15. GROUND OF APPEAL NO.4.2 BY THE ASSESSEE READS A S UNDER : 4.2 THE LD. DRP ERRED IN HOLDING THAT THE ASSESSEE CO MPANY WAS NOT ENTITLED TO CLAIM DEDUCTION U/S.10A IN RESPECT OF THE OTHER INCOME OF RS.13,03,075/- WITHOUT APPRECIATING THAT T HE SAID INCOME WAS DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING AND HENCE, THE DEDUCTION OUGHT TO HAVE BEEN ALLOWED. 15.1 AT THE TIME OF HEARING, THE LD. COUNSEL FOR TH E ASSESSEE DID NOT PRESS THIS GROUND FOR WHICH THE LD. DEPARTMENTA L REPRESENTATIVE HAS NO OBJECTION. ACCORDINGLY, GROU ND OF APPEAL NO.4.2 IS DISMISSED AS NOT PRESSED. 16. GROUNDS OF APPEAL NO. 5 TO 5.6 BY THE ASSESSEE READS AS UNDER: 5. THE LD. DRP ERRED IN CONFIRMING THE ADDITION O F RS.10,29,90,870/- MADE U/S.92CA OF THE ACT. 5.1] THE LEARNED DRP ERRED IN MAKING AN ADJUSTME NT OF RS.5,03,92,400/- U/S 92CA IN RESPECT OF PROVISION O F SOFTWARE DEVELOPMENT SERVICES BY THE APPELLANT COMPANY TO IT S AE. 5.2] THE LEARNED DRP ERRED IN MAKING AN ADJUSTME NT OF RS.4,63,25,506/- U/S 92CA IN RESPECT OF PROVISION OF D ESIGN ENGINEERING & TESTING SERVICES BY THE APPELLANT COMP ANY TO ITS AE. 5.3] THE LEARNED DRP ERRED IN MAKING AN ADJUSTME NT OF RS.62,72,964/- U/S 92CA IN RESPECT OF PROVISION OF RE GIONAL SUPPLY MANAGEMENT SERVICES BY THE APPELLANT COMPANY TO ITS AE. 13 5.4] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LEARNED DRP ERRED IN NOT APPRECIATING THAT THE ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL AS WELL AS MARKETING COST WAS REQUIRED TO BE MADE F OR DETERMINING THE ALP IN RESPECT OF THE INTERNATIONAL TRANSACTION R ELATING TO PROVISION OF SOFTWARE DEVELOPMENT, DESIGN ENGINEERING & TESTING & REGIONAL SUPPLY MANAGEMENT SERVICES. 5.5] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE LEARNED DRP ERRED IN NOT MAKING ADJUSTMENT S TO THE ALP TO ACCOUNT FOR VARIOUS DIFFERENCES ON ACCOUNT OF INTANG IBLE, R & D, RISK FACTORS, ETC. 5.6] THE ASSESSEE SUBMITS THAT WITHOUT PREJUDICE T O ITS CONTENTION THAT THE ADDITION MADE U/S 92CA IS NOT WARRANTED AT ALL, IT IS SUBMITTED THAT THE LEARNED DRP OUGHT TO HAVE GRANTED THE BENE FIT OF 5% TO THE ASSESSEE COMPANY AS PER THE SECOND PROVISO TO SECTION 92C(2). 16.1 FACTS OF THE CASE, IN BRIEF, ARE THAT FOR THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE COMPANY HAS PROVIDED THREE TYPES OF SERVICES TO ITS AE, NAMELY, (A) SOFTWARE DEVELOPMEN T SERVICES, (B) DESIGN, ENGINEERING, TESTING AND AUTHORING SERVICES AND (C) BUSINESS SUPPORT SERVICES, THE DETAILS OF WHICH ARE GIVEN ON PAGE 2 OF THE TPO'S ORDER AND WHICH ARE AS UNDER: 16.2 THE ASSESSEE COMPANY ADOPTED TNMM METHOD AS TH E MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF INTER NATIONAL TRANSACTIONS ENTERED INTO BY IT AND IT WAS EXPLAINE D THAT ALL THE ABOVE TRANSACTIONS WERE AT ALP AND THUS, NO ADJUSTM ENT U/S 92C WAS WARRANTED. SR.NO. NATURE OF TRANSACTION AMOUNT (RS.) METHOD 1 PROVISION OF SOFTWARE DEVELOPMENT SERVICES 39,29,09,065/- TNMM 2 PROVISION OF DESIGN ENGINEERING, TESTING AND AUTHORING SERVICES, DEVELOPMENT, MAINTENANCE AND TESTING OF EMBEDDED SYSTEM SOFTWARE SERVICES 43,48,75,003/- TNMM 3 PROVISION OF BUSINESS SUPPORT SERVICES 3,59,99,094/- TNMM 14 16.3 HOWEVER, THE TPO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE. HE ACCEPTED THE TNMM METHOD AS THE MOST A PPROPRIATE METHOD FOR DETERMINING THE ALP. HOWEVER, HE REJECTE D CERTAIN COMPANIES SELECTED AS COMPARABLE ENTITIES BY THE AS SESSEE AND SIMULTANEOUSLY INTRODUCED CERTAIN ADDITIONAL COMPAN IES AS COMPARABLE ENTITIES IN RESPECT OF VARIOUS SEGMENTS. ACCORDINGLY, THE TPO MADE THE FOLLOWING ADJUSTMENTS U/S 92CA IN RESPECT OF THE VARIOUS SERVICES RENDERED BY THE ASSESSEE TO ITS AE SOFTWARE DEVELOPMENT SERVICES SEGMENT : 17. IN THIS YEAR, THE ASSESSEE HAS PROVIDED SOFTWAR E DEVELOPMENT SERVICES TO DEERE & CO. THE SOFTWARE DEVELOPMENT SE RVICES ARE MAINLY IN THE NATURE OF COMPUTER PROGRAMMING, CODE DEVELOPMENT, INTEGRATION, ETC. THE TOTAL TURNOVER OF SOFTWARE DE VELOPMENT SERVICES IN THIS YEAR WAS RS.39,29,09,065/-. IN THE TP STUDY REPORT, THE ASSESSEE HAD INITIALLY SELECTED 28 COMPANIES AS COM PARABLE ENTITIES FOR DETERMINING ALP OF SOFTWARE SERVICES RENDERED T O ITS AE. THESE COMPANIES WERE SELECTED ON THE BASIS OF MULTIPLE YE AR DATA. THEREAFTER, THE ASSESSEE SUBMITTED A REVISED LIST O F 27 COMPARABLE SR. NO. NATURE OF SERVICES RENDERED TO AES TOTAL ADDITION U/S 92CA 1 SOFTWARE DEVELOPMENT SERVICES 5,03,92,400 2 DESIGN ENGINEERING, TESTING AND AUTHORI NG SERVICES 4,63,25,506 3 REGIONAL MANAGEMENT SUPPLY SERVICES / BUSINESS SUPPORT SERVICES 62,72,964 TOTAL 10,29,90,870 15 ENTITIES ON THE BASIS OF SINGLE YEAR DATA. THE LIST OF COMPARABLE ENTITIES SELECTED BY THE ASSESSEE IS AS UNDER : SR. NO. COMPANIES SELECTED AS COMPARABLE BY THE TPO OM (%) 1 AKSHAY SOFTWARE TECHNOLOGIES LTD 6.20 2 AZTECH SOFTWARE & TECHNOLOGY SERVICES 18.93 3 FOUR SOFT LTD 18.94 4 GEBBS INFOTECH LTD NA 5 GENYSIS INTERNATIONAL CORPORATION 12.89 6 GOLDSTONE TECHNOLOGIES LTD 20.31 7 HELIOS & MATHESON INFORMATION TECH. LTD . 40.60 8 INFOSYS TECHNOLOGIES LTD 40.87 9 KPIT CUMMINS INFOSYSTEMS LTD 17.32 10 LANCO GLOBAL SYSTEMS LTD 19.87 11 L & T INFOTECH LTD 15.15 12 MARRS SOFTWARE INTERNATIONAL LTD 6.44 13 MELSTAR INFORMAT ION TECHNOLOGY LTD 1.42 14 MINDTREE CONSULTING LTD 17.69 15 ORIENT INFORMATION TECHNOLOGIES LTD - 25.12 16 QUINTEGRA SOLUTIONS LTD 15.49 17 R S SOFTWARE INDIA LTD 13.09 18 SIP TECHNOLOGIES & EXPORTS LTD 10.12 19 SASKEN COMMUNICATION TECHNOLOGIES LTD 21.92 20 SASKEN NETWORK SYSTEMS LTD NA 21 TVS INFOTECH LTD 8.04 22 TRANSWORLD INFOTECH LTD 32.88 23 TYCHE INDUSTRIES LTD 26.77 24 VJIL CONSULTING LTD - 44.35 25 VMF SOFT TECH LTD 18.39 26 VISUALSOFT TECHNOLOGIES LTD 1.40 27 ZYLOG SYSTEMS LTD 16.69 AVG. OPERATING MARGIN 13.07 17.1 AS PER THE SAID LIST, THE AVG. OPERATING MARGI N [OPERATING PROFIT/ OPERATING COST] OF THE COMPARABLE ENTITIES WAS WORKED OUT AT 13.07% AS AGAINST THE OPERATING MARGIN OF THE ASSES SEE COMPANY OF 9.37%. ACCORDINGLY, IT WAS SUBMITTED THAT THE OPERA TING MARGIN OF THE ASSESSEE COMPANY WAS WITHIN THE RANGE OF +/- 5% FROM THE ALP DETERMINED ON THE BASIS OF AVG. OPERATING MARGINS O F VARIOUS COMPANIES AND THEREFORE, THERE WAS NO REASON TO MAK E ANY ADJUSTMENT U/S 92C OF THE ACT. 16 17.2 HOWEVER, THE TPO DID NOT ACCEPT THE CONTENTIO N OF THE ASSESSEE. OUT OF THE 27 COMPARABLE COMPANIES SELECT ED BY THE ASSESSEE, THE TPO REJECTED 16 COMPANIES AND ADDED 2 NEW COMPANIES AS COMPARABLE ENTITIES, NAMELY, KALS INFO RMATION SYSTEMS PVT. LTD. AND COMPUCOM SOFTWARE LTD. THUS, HE ARRIVED AT A FINAL SET OF 13 COMPANIES AS COMPARABLE ENTITIES IN SOFTWARE DEVELOPMENT DIVISION. THE LIST OF FINAL COMPARABLE ENTITIES AS SELECTED BY THE TPO IS AS UNDER : SR. NO. COMPANIES SELECTED AS COMPARABLE BY THE TPO OM (%) 1 AKSHAY SOFTWARE TECHNOLOGIES LTD. 6.20 2 AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD. 18.93 3 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 40.60 4 INFOSYS TECHNOLOGIES LTD. 40.87 5 L ARSEN & TUOBRO INFOTECH LTD. 15.15 6 MINDTREE CONSULTING LTD. (SEG) 17.69 7 R.S. SOFTWARE (INDIA) LTD. 13.09 8 SIP TECHNOLOGIES AND EXPORTS LTD. 10.12 9 SASKEN COMMUNICATION TECHNOLOGIES LTD. 21.92 10 TRANSWORLD INFOTECH LTD. 32.88 1 1 KALS INFORMATION SYSTEMS LTD. 30.55 12 COMPUCOM SOFTWARE LTD. 35.63 13 GOLDSTONE TECHNOLOGIES LTD. 20.31 AVG. OPERATING MARGIN 23.38 17.3 ACCORDINGLY, THE TPO COMPUTED THE AVG. OPERATI NG MARGIN OF COMPARABLE ENTITIES AT 23.38% AS AGAINST THE OPERAT ING MARGIN OF 9.37% EARNED BY THE ASSESSEE AND HENCE, THE A.O./ T PO HAS MADE AN ADJUSTMENT OF RS.5,03,92,400/- U/S 92CA IN RESPECT OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE. THE ASSESSEE APPROACHED THE DRP BUT WITHOUT ANY SUCCESS. ACCORD INGLY, THE TPO MADE ADJUSTMENT OF RS.5,03,92,400/- U/S.92CA OF THE I.T. ACT. 17 18. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALL ENGED THE ORDER OF THE TPO. HE SUBMITTED THAT THE ADDITION MADE BY THE TPO IS NOT JUSTIFIED. THE LD. COUNSEL FOR THE ASSESSEE GAVE R EASONS FOR NOT EXCLUDING THE FOLLOWING COMPANIES AS COMPARABLE, TH E DETAILS OF WHICH ARE AS UNDER: MAARS SOFTWARE INTERNATIONAL LTD. [MAARS] : 19. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS DISCUSSED THIS COMPANY ON PAGE 33 OF HIS ORDER. HE REJECTED MAARS AS A COMPARABLE ENTITY ON THE GROUND THAT IT IS CAR RYING OUT SIGNIFICANTLY DIFFERENT FUNCTIONS. FOR THE ABOVE P ROPOSITION, THE TPO REFERRED TO THE FOLLOWING PARA IN THE DIRECTORS ' REPORT - 'DURING THE YEAR, THE COMPANY WILL CONTINUOUSLY FOC US ON THE AREAS OF PRODUCTS AND CONSULTING BASED ON THE CONSIDERABLE P ROGRESS ACHIEVED DURING THE PREVIOUS YEAR. WITH THE CONTINUOUS EFFOR TS DURING THE YEAR TOO, THE COMPANY IS CONFIDENT OF ACHIEVING GROWTH O N THE AREAS OF- PRODUCTS AND SERVICES ESPECIALLY IN THE REGIONS OF MIDDLE - EAST AND FAR - EAST.' 19.1 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE TPO HAS PLACED RELIANCE ON THE ABOVE DISCUSSION IN THE DIRE CTORS' REPORT TO JUSTIFY THAT MAARS IS NOT COMPARABLE WITH THE ASSES SEE COMPANY. HE SUBMITTED THAT THE TPO HAS REFERRED TO A SMALL PARA GIVEN IN THE DIRECTORS' REPORT BUT HAS NOT APPRECIATED THE CORRE CT FACTS OF THE CASE WHILE REJECTING THE CONTENTION OF THE ASSESSEE . REFERRING TO THE COPY OF THE DIRECTORS REPORT PLACED AT PAPER BOOK P AGE NO. 495 HE SUBMITTED THAT THE SAID PARA REFERS TO THE FUTURE P LANS OF THE COMPANY AND IT DOES NOT INDICATE THE POSITION OF TH E COMPANY FOR 18 THE YEAR UNDER CONSIDERATION. ACCORDINGLY, HE SUBMI TTED THAT THE INFERENCE DRAWN BY THE A.O. MERELY BY RELYING ON TH E ABOVE PARA IS NOT CORRECT REFERRING TO PAPER BOOK PAGE 501 HE SUB MITTED THAT MAARS IS ENGAGED IN BUSINESS OF SOFTWARE DEVELOPMEN T AND THIS FACT IS EVIDENT FROM THE AUDITOR'S REPORT OF MAARS WHEREIN IT IS MENTIONED THAT MAARS IS ENGAGED IN SOFTWARE DEVELOPMENT AND I T DOES NOT CARRY ANY INVENTORIES. REFERRING TO PAGE 498 OF PAPER BOO K-III HE DREW THE ATTENTION OF THE BENCH TO THE DIRECTORS REPORT WHERE THE BREAK UP OF EXPENDITURE IS GIVEN AND SUBMITTED THAT SUBST ANTIAL EXPENDITURE HAS BEEN INCURRED BY THE SAID COMPANY O N SOFTWARE DEVELOPMENT ACTIVITY. HE ACCORDINGLY SUBMITTED THA T MAARS IS ENGAGED IN SOFTWARE DEVELOPMENT ACTIVITY AND ACCORD INGLY, THE SAME IS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE C OMPANY. EVEN THOUGH THESE WERE CLARIFIED BEFORE DRP THEY DID NOT CONSIDER THE SAME. HE ACCORDINGLY SUBMITTED THAT THE SAID COMPA NY CANNOT BE EXCLUDED. VJIL CONSULTING LTD. [VJIL] : 20. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ONLY REASON GIVEN BY THE TPO FOR REJECTING VJIL IS THAT THE SAID COMPANY HAS INCURRED LOSSES. REFERRING TO THE SUBMISSIONS G IVEN BEFORE THE DRP, COPIES OF WHICH ARE PLACED AT PAGE 561 OF THE PAPER BOOK, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT PROFITS AND LOSSES ARE PART AND PARCEL OF BUSINESS ACTIVITY AND HENCE, MERELY B ECAUSE VJIL HAS INCURRED LOSS IN THIS YEAR, THE TPO IS NOT JUSTIFIE D IN REJECTING THE SAID COMPANY FROM THE LIST OF FINAL COMPARABLES. RE FERRING TO PAGE 19 NO.402 OF PAPER BOOK-II HE SUBMITTED THAT VJIL HAS BEEN CONSISTENTLY EARNING PROFITS FOR THE PRECEDING FIVE YEARS I.E. FROM A.Y.2002 - 03 TO A.Y.2006-07 AND THUS, IT IS NOT A PERSISTENT LOSS MAKING COMPANY. HE ACCORDINGLY SUBMITTED THAT MEREL Y BECAUSE VJIL HAS INCURRED LOSS IN THIS YEAR, THERE IS NO RE ASON TO REJECT THE SAID COMPANY FROM THE LIST OF FINAL COMPARABLE ENTI TIES. FOR THE ABOVE PROPOSITION, HE RELIED ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF CUMMINS TURBO TECHNOLOG IES LTD. V. DCIT [ITA NO. 118/PN/2011] WHEREIN IT HAS BEEN HELD THAT A COMPANY SHOULD NOT BE REJECTED MERELY BECAUSE IT HA S INCURRED LOSSES, UNLESS IT IS SHOWN THAT THE SAID COMPANY IS A PERSISTENT LOSS MAKING COMPANY. REFERRING TO THE DECISION OF THE DE LHI BENCH OF THE TRIBUNAL IN THE CASE OF QUALCOMM INDIA PVT. LTD . V. ACIT REPORTED IN 147 ITD 17 HE SUBMITTED THAT THE TRIBUN AL IN THE SAID DECISION HAS HELD THAT SIMPLY BECAUSE A COMPANY HAS INCURRED LOSS IN ONE YEAR CANNOT BE A GROUND TO REJECT THE SAID C OMPANY. ACCORDINGLY, HE SUBMITTED THAT THE TPO IS NOT JUSTI FIED IN REJECTING VJIL AS A COMPARABLE ENTITY WITH THE ASSESSEE COMPA NY. QUINTEGRA SOLUTIONS LTD. (QUINTEGRA) : 21. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS DISCUSSED THIS COMPANY ON PAGE 33 OF HIS ORDER. HE REJECTED THIS COMPANY ON THE GROUND THAT IT IS FUNCTIONALLY DIFFE RENT. THE TPO HAS RELIED UPON THE FOLLOWING PARA IN THE DIRECTORS ' REPORT FOR HOLDING SO : 20 'THE COMPANY'S STRATEGY IS TO FOCUS ON THE HIGH-GRO WTH, HIGH-VALUE SEGMENTS OF THE IT INDUSTRY. THE COMPANIES BROAD CA PABILITIES INCLUDE APPLICATION MANAGEMENT, PRODUCT ENGINEERING, ENTERPRISE SOLUTIONS SUCH AS SAP, TESTING & VALIDATION, TECHNOLOGY CONSU LTING, PROFESSIONAL SERVICES AND PROPRIETARY PRODUCT SUITES.' 21.1 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T QUINTEGRA IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. RE FERRING TO PARA 1 OF MANAGEMENT DISCUSSION AND ANALYSIS REPORT HE S UBMITTED THAT IT IS MENTIONED THAT QUINTEGRA IS ENGAGED IN IT SER VICES. EVEN IN THE P & L A/C PLACED ON PAGE 516 OF THE PAPER BOOK, IT IS TO BE NOTED THAT THE MAIN ITEM OF REVENUE IS FROM SOFTWARE SERV ICES. EVEN IN THE SEGMENT REPORTING, THE DETAILS ARE GIVEN IN RESPECT OF THE DIFFERENT SEGMENTS LIKE CRM, TELECOM AND FINANCIAL SERVICES W HEREIN QUINTEGRA PROVIDES SOFTWARE SERVICES. HE ACCORDINGL Y SUBMITTED THAT QUINTEGRA IS ENGAGED IN IT SERVICES. MERELY BECAUSE THE SAID COMPANY IS ENGAGED IN DEVELOPING DIFFERENT TYPES OF SOFTWARE AS COMPARED TO THE ASSESSEE COMPANY, THERE IS NO REASO N TO HOLD THAT THE SAID COMPANY IS NOT COMPARABLE WITH THE ASSESSEE. R EFERRING TO PARA 5.10 ON PAGES 560-561 OF PAPER BOOK-III HE SUBMITTE D THAT THESE FACTS WERE ALSO CLARIFIED BY THE ASSESSEE VIDE ITS SUBMISSION TO DRP. HE ACCORDINGLY SUBMITTED THAT THE TPO IS NOT JUSTIF IED IN EXCLUDING QUINTEGRA FROM THE LIST OF FINAL COMPARABLE ENTITIE S. HE ACCORDINGLY SUBMITTED THAT MAARS, VJIL AND QUINTEGRA SHOULD BE INCLUDED IN THE FINAL LIST OF COMPARABLES WHILE DETERMINING THE AEP . 21.2 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE TPO IS NOT JUSTIFIED IN INCLUDING THE FOLLOWING COMPANIES IN T HE LIST OF FINAL COMPARABLES SINCE THESE COMPANIES ARE NOT COMPARABL E. 21 INFOSYS TECHNOLOGIES LTD. (INFOSYS) : 22. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT INFOSYS IS THE MARKET GIANT IN THE FIELD OF SOFTWARE DEVELOPMENT A ND IT ASSUMES ALL RISKS LEADING TO HIGHER PROFITS WHEREAS THE ASSESSE E COMPANY IS A CAPTIVE UNIT OF ITS HOLDING COMPANY, DEERE & CO., U SA AND IT ASSUMES ONLY LIMITED RISKS. THERE IS VAST DIFFERENC E IN THE SIZE OF OPERATIONS, ASSETS AND RISKS BORNE BY INFOSYS AND T HAT OF THE ASSESSEE COMPANY. FOR INSTANCE, THE TURNOVER OF INFOSYS FOR THIS YEAR IS RS.13,149 CRS. [PAGE 423 OF P.B- II] AS AGAINST THE TURNOVER OF THE ASSESSEE COMPANY OF RS.39.34 CRS. FROM SOFTWARE DEV ELOPMENT- ACTIVITY [PAGE 37 OF TPO'S ORDER]. HE SUBMITTED TH AT INFOSYS OWNS A LARGE NUMBER OF BRANDS/ PROPRIETARY PRODUCTS WHICH IS NOT THE CASE OF THE ASSESSEE COMPANY. FURTHER, IN THE TPO'S ORDER F OR A.Y.2006 - 07 IN THE ASSESSEE'S OWN CASE, THE TPO HAS HELD THAT I NFOSYS IS NOT COMPARABLE WITH THE ASSESSEE COMPANY ON THE GROUND THAT ITS TURNOVER IS FAR MORE THAN THAT OF THE ASSESSEE AND HENCE, IT IS NOT COMPARABLE. HE ALSO RELIED ON THE FOLLOWING DECISIO NS WHEREIN IT HAS BEEN HELD THAT CONSIDERING THE HUGE 'DIFFERENCE S IN REVENUES, ASSETS AND RISKS ASSUMED BY INFOSYS AND OTHER SMALL ER COMPANIES, INFOSYS CANNOT BE CONSIDERED AS A COMPARABLE ENTITY WITH SMALLER COMPANIES : A. C1T VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. [ITA NO. 1204/2011 - DELHI HIGH COURT] B. ADAPTEC (INDIA) PVT. LTD. VS. DCIT [ITA NO. 1801/HYD/09] C. WILLIS PROCESSING SERVICES (INDIA) PVT. LTD. V . DCIT [(2013) 57 SOT 339 (MUM)] 22 HE ACCORDINGLY SUBMITTED THAT INFOSYS SHOULD BE EXC LUDED FROM THE LIST OF COMPARABLES. TRANSWORLD INFOTECH LTD. (TRANSWORLD) : 23. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO P AGE 459 OF PAPER BOOK-III SUBMITTED THAT THE REVENUE FROM EXPO RT OF SERVICES IN THE CASE OF THIS COMPANY IS ONLY ABOUT 2.21% OF THE TOTAL REVENUE OF THE COMPANY. HE SUBMITTED THAT THE ASSESSEE COMPANY HAS DERIVED 100% OF ITS REVENUES FROM EXPORTS AND HENCE, CONSID ERING THE DIFFERENTIAL MARKET CONDITIONS AND RISKS ASSUMED IN THE EXPORT MARKET AND THE DOMESTIC MARKET, TRANSWORLD CANNOT B E CONSIDERED AS A COMPARABLE ENTITY WITH THE ASSESSEE COMPANY. R EFERRING TO PARA 2.1.8 OF PAGE 10 OF THE TPOS ORDER THE CONTENTION THAT COMPANIES WHOSE FOREIGN EXCHANGE EARNINGS ARE LESS THAN 25% O F THE TOTAL EARNINGS SHOULD NOT BE CONSIDERED AS COMPARABLE WIT H THE ASSESSEE COMPANY HAS BEEN ACCEPTED BY THE TPO AND ACCORDINGL Y, HE HAS REJECTED MELSTAR INFORMATION TECHNOLOGIES LTD. AS A COMPARABLE ENTITY. FOLLOWING THE SAME REASONING HE SUBMITTED T HAT TRANWORLD MAY BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE E NTITIES FOR THIS YEAR. 23.1 WITHOUT PREJUDICE, THE LD. COUNSEL FOR THE A SSESSEE SUBMITTED THAT THE FINANCIAL YEAR CONSIDERED FOR DE TERMINING THE OPERATING MARGIN OF TRANSWORLD IS 01.07.2006 TO 30. 06.2007 AS AGAINST THE FINANCIAL YEAR OF THE ASSESSEE COMPANY WHICH IS 01.04.2006 TO 31.03.2007. HE SUBMITTED THAT THE PR OVISIONS OF RULE 23 10B(4) OF THE INCOME TAX RULES 1962 PROVIDE THAT TH E DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROL LED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ON HAS BEEN ENTERED INTO. ACCORDINGLY, TRANSWORLD IS NOT COMPAR ABLE WITH THE ASSESSEE COMPANY. FOR THE ABOVE PROPOSITION, HE REL IED ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF PTC SOFTWARE (INDIA) PVT. LTD. [ITA NO. 1605/PN/11] FOR A.Y.2007 - 08 WHEREIN THE BENCH HAS EXCLUDED TRANSWORLD IN VIEW O F THE ABOVE REASONING. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. (HELIOS) : 24. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT HELIOS IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY. REFERRING TO THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF PTC SOFTWARE (INDIA) PVT. LTD. [ITA NO. 1605/PN/L 1] FOR A.Y.200 7 08 (COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 17) HE SUBMITTED THAT THE ASSESSEE COMPANY WAS ENGAGED IN PROVIDING SOFTW ARE DEVELOPMENT SERVICES. THE TPO CONSIDERED HELIOS AS A COMPARABLE ENTITY FOR A.Y. 2007 - 08. THE ASSESSEE CONTENDED T HAT HELIOS WAS ALSO ENGAGED IN FUNCTIONS OTHER THAN RENDERING SOFT WARE DEVELOPMENT SERVICES AND HENCE, IT WAS NOT COMPARAB LE WITH THE ASSESSEE. THE TRIBUNAL HELD THAT HELIOS WAS NOT CO MPARABLE WITH COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES A ND THUS, THE SAID COMPANY WAS EXCLUDED. HE SUBMITTED THAT LIKE P TC SOFTWARE 24 (INDIA) PVT. LTD., THE ASSESSEE IS ALSO ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES AND HENCE, THE FACTS AND THE Y EAR UNDER CONSIDERATION BEING SIMILAR AS IN THAT CASE, THEREF ORE, HELIOS HAS TO BE HELD AS FUNCTIONALLY NOT COMPARABLE WITH THE ASS ESSEE COMPANY IN VIEW OF THE ABOVE CITED DECISION. HE ACCORDINGLY SU BMITTED THAT HELIOS MAY BE EXCLUDED FROM THE LIST OF FINAL COMPA RABLES WHILE DETERMINING THE ALP. 24.1 WITHOUT PREJUDICE, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THIS YEAR, HELIOS HAS EARNED OPER ATING MARGIN OF 40.60% WHICH IS FAR MORE THAN THE NORMAL PROFIT MAR GIN EARNED BY THE COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT BUSIN ESS. HE SUBMITTED THAT HELIOS WAS ESTABLISHED IN 1991 AND T HEREAFTER, IT HAS ACQUIRED VARIOUS ENTITIES INCLUDING 'THE LAXMI GROU P INC.', USA ACQUIRED IN 2001 AND 'THE A CONSULTING TEAM', USA A CQUIRED IN 2006. HE SUBMITTED THAT HELIOS HAS OVERSEAS SUBSIDI ARIES AND OFFICES IN THE US AND SINGAPORE. FURTHER, THE MAJOR CLIENTS OF THE SAID 'COMPANY ARE ALL FORTUNE 500 ORGANISATIONS. THE SAI D COMPANY HAS SET UP STRATEGIC DELIVERY CENTRES AT IMPORTANT LOCATION S TO CATER TO THE NEEDS OF ITS CLIENTS LOCATED ACROSS THE GLOBE. ALL THESE FACTORS HAVE LED TO EARNING SUPER NORMAL PROFITS BY THE SAID COM PANY. HE SUBMITTED THAT THE ABOVE FACTS HAVE BEEN EXTRACTED FROM THE ARTICLE PUBLISHED IN 'BUSINESS INDIA' MAGAZINE WHICH HAS BE EN SOURCED FROM THE INFORMATION PROVIDED BY SHRI R. MURALIKRIS HNA, CO-FOUNDER OF HELIOS AND CRISIL REPORTS. 25 24.2 HE SUBMITTED THAT THE ASSESSEE COMPANY IS A CAPTIVE UNIT WHOLLY OWNED BY DEERE & CO., USA WHICH WORKS ON A C OST PLUS MODEL. THUS, THE ASSESSEE ASSUMES LIMITED RISKS AND HENCE, IT IS NOT POSSIBLE FOR THE ASSESSEE COMPANY TO EARN SUCH HIGH PROFIT MARGINS. THEREFORE, HELIOS IS NOT COMPARABLE WITH THE ASSESS EE COMPANY. 24.3 IN RESPECT OF THE ABOVE THREE COMPANIES, THE L D. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD SELECT ED THESE COMPANIES AS COMPARABLE ENTITIES IN THE COURSE OF T P PROCEEDINGS. HOWEVER, IN VIEW OF THE REASONS MENTIONED ABOVE, TH ESE COMPANIES ARE NOT COMPARABLE WITH THE ASSESSEE COMPANY. FOR THE ABOVE PROPOSITION, HE RELIED ON THE FOLLOWING DECISIONS W HEREIN IT HAS BEEN HELD THAT EVEN WHERE THE ASSESSEE HAD IDENTIFIED CE RTAIN COMPANIES AS COMPARABLE AT THE TIME OF TP STUDY, SUCH COMPANI ES MAY BE EXCLUDED AT A LATER STAGE IF THEY ARE FOUND TO BE N OT COMPARABLE ON FACTS - A. DCIT VS. QUARK SYSTEMS (P) LTD. [132 TTJ 1 (CHD) (SB)] B. SAPIENT CORPORATION (P) LTD. VS. DCIT [15 ITR (TRIB) 285 (DEL)] C. TEVA INDIA (P) LTD. VS. DCIT [149 TTJ 57 (MUM )(UO)] 24.4 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE TPO IS NOT JUSTIFIED IN NEWLY INTRODUCING THE FOLLOWING TW O COMPANIES AS COMPARABLE ENTITIES WITH THE ASSESSEE COMPANY. KALS INFORMATION SYSTEMS LTD. (KALS) : 25. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T KALS IS ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT SERVIC ES AS WELL AS 26 SALE OF SOFTWARE PRODUCTS AND THE SEPARATE SEGMENTA L DATA IS NOT AVAILABLE FOR SOFTWARE DEVELOPMENT SERVICES BUSINES S. ACCORDINGLY, HE SUBMITTED THAT KALS IS NOT COMPARABLE WITH THE A SSESSEE COMPANY. 25.1 REFERRING TO PARA 5.15 ON PAGE 563-564 OF PAPE R BOOK-III HE SUBMITTED THAT THE ASSESSEE HAS CLARIFIED THIS ISSU E IN ITS SUBMISSION TO DRP THE RELEVANT EXTRACTS OF THE ANNUAL REPORT O F KALS ARE ON PAGES 424 - 427 OF P.B.- II. REFERRING TO THE DECI SION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. [ITA NO. 1386/PN/10] AND PTC SOFTWARE (INDIA) PVT. LTD. [ITA NO. 1605/PN/L 1] HE SUBMITTED THAT THE TRIBUNAL IN THE AFORESAID CASES HAS HELD THAT KALS IS ENGAGED IN SOFTWARE PRODUCTS BUSI NESS AND THEREFORE, IT CANNOT BE CONSIDERED AS A COMPARABLE ENTITY IN RESPECT OF A SOFTWARE DEVELOPMENT SERVICE PROVIDER. HE ACCO RDINGLY SUBMITTED THAT KALS CANNOT BE CONSIDERED AS A COMPA RABLE ENTITY. COMPUCOM SOFTWARE LTD. (COMPUCOM) : 26. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT RELATED PARTY TRANSACTIONS IN THE CASE OF COMPUCOM ARE MORE THAN 25%. IN THIS YEAR, THE RPT EXPENSES INCURRED BY COMPUCOM ARE RS. 6.75 CRS. AGAINST THE TOTAL EXPENSES OF RS. 15.77 CRS. INCURR ED BY THE SAID COMPANY. [REFER PARA (A) ON PAGE 36 OF TPO'S ORDER] . THEREFORE, THE PROPORTION OF RPT TRANSACTIONS WORKS OUT TO 42.80%. HE SUBMITTED THAT FOR THE PURPOSES OF COMPUTING THE RPT TRANSACT IONS, ONE HAS TO CHECK THE PROPORTION OF RPT SALES TO TOTAL SALES OR RPT EXPENSES 27 TO TOTAL EXPENSES AND IF EITHER OF THE TWO RATIOS E XCEEDS THE PRESCRIBED LIMIT, THEN THE COMPANY SHOULD NOT BE CO NSIDERED AS A COMPARABLE ENTITY. HE SUBMITTED THAT EVEN IF A COMP ANY HAS - PROCURED SUBSTANTIAL AMOUNT OF SERVICES FROM ITS RE LATED PARTIES OR HAS DERIVED SUBSTANTIAL REVENUES FROM ITS RELATED P ARTIES, THEN THE PROFIT MARGIN OF SUCH COMPANY MAY BE MATERIALLY AFF ECTED. REFERRING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF PTC SOFTWARE (INDIA) PVT. LTD. [ITA NO. 160 5/PN/11] HE SUBMITTED THAT THE ABOVE PROPOSITION HAS BEEN ACCEP TED BY THE BENCH AND COMPUCOM HAS BEEN REJECTED AS COMPARABLE ON THE GROUND THAT THE RPT TRANSACTIONS (EXPENSES) OF THE SAID COMPANY ARE MORE THAN 25% FOR A. Y.2007 - 08. 26.1 WITHOUT PREJUDICE, HE SUBMITTED THAT THE RP T FILTER IS TO BE ADOPTED AT 15% AND NOT AT 25% OF TOTAL TRANSACTIONS IN VIEW OF THE RECENT DECISION OF ITAT, MUMBAI IN THE CASE OF WILL IS PROCESSING SERVICES (INDIA) PVT. LTD. V. DCIT REPORTED IN 57 S OT 339. IN THAT CASE, THE TRIBUNAL HELD THAT GENERALLY THE RPT FILT ER IS TO BE ADOPTED BETWEEN THE RANGE OF 10% - 25%. HOWEVER, WHERE A LA RGE NUMBER OF COMPARABLE ENTITIES ARE AVAILABLE, THE RPT FILTE R SHOULD BE ADOPTED AT 15% OF TOTAL TRANSACTIONS AND THE LIMIT OF RPT TRANSACTIONS IS TO BE RELAXED TO 25% ONLY WHERE SUF FICIENT NUMBER OF COMPARABLE ENTITIES ARE NOT AVAILABLE FOR DETERM INING THE ALP OF INTERNATIONAL TRANSACTIONS ENTERED BY THE TESTED PA RTY. HE SUBMITTED THAT IN THE INSTANT CASE, A LARGE NUMBER OF COMPANI ES ARE FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY A ND HENCE, THE 28 RPT FILTER SHOULD BE ADOPTED AT THE LEVEL OF 15% AN D NOT AT 25% IN VIEW OF THE ABOVE RULING. HE SUBMITTED THAT AS PER THE WORKING OF THE TPO ON PAGE 36 OF HIS ORDER, THE RPT TRANSACTIONS I N THE CASE OF COMPUCOM IS 18.58% I.E. MORE THAN 15% AND THEREFORE , COMPUCOM SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE ENTITIES. ADDITION OF RS. 4,63,25,506/- IN RESPECT OF DESIGN ENGINEERING, TESTING AND AUTHORING SERVICES SEGMENT : 27. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY HAS PROVIDED DESIGN, ENGINEERING AND OTHER RELATED SERVICES TO ITS AE. THESE SERVICES INCLUDE MODIFICATION/ IMP ROVEMENT IN THE DESIGNS OF EXISTING COMPONENTS, 3D MODELING OF THE SAME AND ANALYSIS OF THE DESIGNS. THE TOTAL TURNOVER OF THES E ACTIVITIES FOR THIS YEAR WAS RS.43,48,75,003/-. IN THE TP STUDY REPORT, THE ASSESSEE HAS SELECTED 4 COMPANIES AS COMPARABLE ENTITIES FOR DETERMINING ALP OF DESIGN ENGINEERING, TESTING AND AUTHORING SE RVICES RENDERED TO ITS AE. THESE COMPANIES WERE SELECTED ON THE BAS IS OF MULTIPLE YEAR DATA. THEREAFTER, THE ASSESSEE SUBMITTED A REV ISED LIST OF 2 COMPARABLE ENTITIES ON THE BASIS OF SINGLE YEAR DAT A, THE DETAILS OF WHICH ARE AS UNDER : SR. NO. COMPANIES SELECTED AS COMPARABLE BY THE TPO OM ( %) 1 ACE SOFTWARE EXPORTS LTD. - 7.04 2 GENESYS INTERNATIONAL CORPORATION LTD. 12.52 AVG. OPERATING MARGIN 2.74 29 HE SUBMITTED THAT AS PER THE SAID LIST, THE AVG. OP ERATING MARGIN [OPERATING PROFIT/ OPERATING COST] OF THE COMPARABL E ENTITIES WAS WORKED OUT AT 2.74% AS AGAINST THE OPERATING MARGIN OF THE ASSESSEE COMPANY OF 11.29%. HENCE, IT WAS SUBMITTED THAT THE DESIGN ENGINEERING AND OTHER ALLIED SERVICES RENDERED BY T HE ASSESSEE TO ITS AE WERE AT ALP. 27.1 HE SUBMITTED THAT THE TPO DID NOT ACCEPT THE C ONTENTION OF THE ASSESSEE. OUT OF THE 2 COMPARABLE COMPANIES SEL ECTED BY THE ASSESSEE, THE TPO HAS REJECTED 1 COMPANY AND HAS NE WLY INTRODUCED ONE ADDITIONAL COMPANY. THE FINAL LIST OF COMPARABLE EN TITIES IN THIS SEGMENT IS ON PAGE 40 OF THE TPO'S ORDER WHICH IS A S UNDER : SR. NO. COMPANIES SELECTED AS COMPARABLE BY THE TPO OM (%) 1 GENESYS INTERNATIONAL CORPORATION LTD. 12.52 2 KLG SYSTEL LTD. 33.74 AVG. OPERATING MARGIN 23.13 27.2 THE TPO ACCORDINGLY WORKED OUT AVG. OPERATING MARGIN OF THE COMPARABLE ENTITIES AT 23.13% AS AGAINST THE OP ERATING MARGIN OF THE ASSESSEE COMPANY AT 11.29% AND MADE AN ADJUSTME NT OF RS.4.63 CRS. IN RESPECT OF THE DESIGN ENGINEERING AND ALLIE D SERVICES RENDERED BY THE ASSESSEE TO ITS AE. 27.3 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ADDITION MADE BY THE TPO IS NOT JUSTIFIED. HE SUBMITTED THAT THE TPO IS NOT JUSTIFIED IN INTRODUCING KLG SYSTEL AS A COMPARABLE ENTITY WITH THE ASSESSEE COMPANY SINCE THE REVENUE FROM EXPORT OF S ERVICES IN THE CASE OF THIS COMPANY IS ONLY ABOUT 0.24% OF THE TOTAL RE VENUE OF THE 30 COMPANY WHEREAS 100% OF THE REVENUES GENERATED BY T HE ASSESSEE COMPANY ARE THROUGH EXPORT OF SERVICES. THIS ISSUE IS ALREADY CLARIFIED BY THE ASSESSEE IN ITS SUBMISSION TO DRP [PARA 6.11 - 6.12 ON PAGES 570 - 571 OF P.B. - III] AND THE COMPUTATION OF FOREIGN EXCHANGE EARNINGS TO TOTAL REVENUE RATIO IN THE CASE OF KLG SYSTEL IS ON PAGE 571 OF P.B. - III. THE RELEVANT EXCERPTS OF THE ANNUAL REPORT OF KLG S YSTEL FOR THIS YEAR ARE ON PAGES 433 - 434 OF P.B. - II. THUS, IN VIEW OF THE SUBMISSIONS MADE IN PARA 6.11 ABOVE, KLG SHOULD BE REJECTED IN THIS YEAR. HE SUBMITTED THAT KLG SYSTEL WAS REJECTED BY THE DRP I N ITS ORDER FOR A.Y.2008- 9 IN ASSESSEE'S OWN CASE ON THE GROUND T HAT THE EXPORTS OF THE SAID COMPANY WERE BELOW 25% OF TOTAL REVENUE AN D HENCE, THE DRP IS NOT JUSTIFIED IN ACCEPTING THE SAID COMPANY AS A COMPARABLE ENTITY IN THIS YEAR [PAGE 609 OF P.B. - III]. WITHO UT PREJUDICE, HE SUBMITTED THAT KLG SYSTEL IS FUNCTIONALLY DIFFERENT . FOR THIS PURPOSE, HE REFERRED TO THE DETAILED SUBMISSIONS MADE BEFORE THE DRP. [PARA 6.9 - 6.10 ON PAGES 569 - 571 OF P.B. - III]. HE ACCORDINGLY SUBMITTED THAT KLG SYSTEL MAY BE EXCLUDED FROM THE LIST OF FINAL C OMPARABLE ENTITIES. ADDITION OF RS.62,72,964/- IN RESPECT OF BUSINESS SUPPORT SERVICES SEGMENT : 28. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ASSESSEE COMPANY HAS PROVIDED BUSINESS SUPPORT SERV ICES TO ITS AE WHICH INCLUDE REGIONAL SUPPLY MANAGEMENT SERVICES, GLOBAL JOB- EVALUATION SERVICES, EVALUATION OF VENDORS, QUALITY AUDIT, ETC. ETC. THE TOTAL TURNOVER OF THIS ACTIVITY IN THE CURRENT YEAR WAS RS.3,59,99,094/-. IN THE TP STUDY REPORT, THE ASSESSEE HAS SELECTED 1 3 COMPANIES AS 31 COMPARABLE ENTITIES FOR DETERMINING ALP OF BUSINESS SUPPORT SERVICES RENDERED TO ITS AE. THESE COMPANIES WERE SELECTED O N THE BASIS OF MULTIPLE YEAR DATA. THEREAFTER, THE ASSESSEE SUBMIT TED A REVISED LIST OF 11 COMPARABLE ENTITIES ON THE BASIS OF SINGLE YEAR DATA. THE LIST OF COMPANIES SELECTED BY THE ASSESSEE IS AS UNDER SR. NO. COMPANIES SELECTED AS COMPARABLE BY THE TPO OM (%) 1 CAPITAL TRUST LTD -6.71 2 CRISIL LTD 21.41 3 CYBER MEDIA EVENTS LTD 8.43 4 EDUCATIONAL CONSULTANTS LTD 10.64 5 ELECTRONICA MACHINE TOOLS LTD 10.49 6 ICRA MANAGEMENT CONSULTING SERVICES LTD 15.23 7 IDC INDIA LTD 15.33 8 NTPC ELECTRIC SUPPLY COMPANY LTD 16.78 9 PRIYA INTERNATIONAL LTD 13.97 10 T S R DARASHAW LTD 44.47 11 TIMES INFORMATION MEDIA LTD -26.59 AVG. OPERATING MARGIN 11.22% 28.1 AS PER THE SAID LIST, THE AVG. OPERATING MARGI N [OPERATING PROFIT/ OPERATING COST] OF THE COMPARABLE ENTITIES WAS WORKED OUT AT 11.22% AS AGAINST THE OPERATING MARGIN OF THE AS SESSEE COMPANY OF 10.95%. HENCE, IT WAS SUBMITTED THAT THE DESIGN ENGINEERING AND OTHER ALLIED SERVICES RENDERED BY THE ASSESSEE TO I TS AE WERE WITHIN THE MARGIN OF +/- 5% FROM THE ALP AND HENCE, NO ADJ USTMENT U/S 92C WAS REQUIRED IN CASE OF THIS SEGMENT. 32 28.2 HOWEVER, THE TPO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE. OUT OF THE 11 COMPARABLE COMPANIES SELECT ED BY THE ASSESSEE, THE TPO REJECTED 5 COMPANIES AND HAS NEWL Y INTRODUCED 2 COMPANIES. THE FINAL LIST OF COMPARABLE ENTITIES IN THIS SEGMENT WHICH IS ON PAGES 45 - 46 OF THE TPO'S ORDER ARE AS UNDER- SR. NO. COMPANIES SELECTED AS COMPARABLE BY THE TPO OM (%) 1 CAPITAL TRUST LTD. - 6.71 2 ICC INTERNATIONAL AGENCIES LTD. 82.92 3 ICRA MANAGEMENT CONSULTING SERVICES LTD. 15.23 4 ICRA ONLINE LTD. 63.33 5 IDC (INDIA) LTD. 15.33 6 PRIY A INTERNATIONAL LTD. 13.97 7 TSR DARASHAW LTD. 36.60 8 CRISIL LTD. 21.41 AVG. OPERATING MARGIN 30.26 28.3 THE TPO ACCORDINGLY WORKED OUT AVG. OPERATING MARGIN OF THE COMPARABLE ENTITIES AT 30.26 % AS AGAINST THE O PERATING MARGIN OF THE ASSESSEE COMPANY AT 10.95 % AND MADE AN ADJU STMENT OF RS.62.72 LACS IN RESPECT OF THE BUSINESS SUPPORT SE RVICES RENDERED BY THE ASSESSEE TO ITS AE. 28.4 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ADDITION MADE BY THE LEARNED TPO IS NOT JUSTIFIED. HE SUBMIT TED THAT THE TPO IS NOT JUSTIFIED IN INCLUDING THE FOLLOWING TWO COMPANIES IN THE LIST OF FINAL COMPARABLE ENTITIES AND THESE COMPANI ES SHOULD BE REJECTED. ICC INTERNATIONAL AGENCIES LTD. (ICC) : 29. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS COMPANY IS A SUBSIDIARY OF INDIAN CARD CLOTHING COMPANY AND IS ENGAGED IN 33 THE BUSINESS OF TEXTILE MACHINES. ICC INTERNATIONAL AGENCIES IS ACTING AS A COMMISSION AGENT. THIS FACT IS EVIDENT FROM TH E WEB PAGE OF THE SAID COMPANY AND BUSINESS PROFILE OF THE SAID COMPA NY ENCLOSED ON PAGES 435 - 437 OF P.B. - II. THUS, THE SAID COMPAN Y IS ENGAGED IN A TOTALLY DIFFERENT LINE OF BUSINESS AND HENCE, THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY. T HIS ISSUE HAS ALSO BEEN CLARIFIED BY THE ASSESSEE IN ITS SUBMISSI ON TO THE DRP [PARA 7.5 ON PAGE 573 OF P.B. - III]. ACCORDINGLY, HE SUBMITTED THAT ICC SHOULD BE EXCLUDED FROM THE LIST OF FINAL COMPA RABLES SINCE IT IS FUNCTIONALLY NOT COMPARABLE. WITHOUT PREJUDICE, HE SUBMITTED THAT ICC HAS EARNED OPERATING MARGIN OF 82.92% WHICH IS HIGHLY IMPROBABLE IN THE BUSINESS SUPPORT SERVICES SECTOR ESPECIALLY CONSIDERING THE FACT THAT THE ASSESSEE IS A CAPTIVE UNIT. ACCORDINGLY, HE SUBMITTED THAT ICC IS NOT COMPARABLE WITH THE AS SESSEE COMPANY AND THE SAME MAY BE EXCLUDED FROM THE LIST OF FINAL COMPARABLE ENTITIES. ICRA ONLINE LTD. (ICRA) 30. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT THIS COMPANY IS DISCUSSED BY THE TPO ON PAGE 44 OF HIS ORDER. HE HAS REPRODUCED A SMALL PARA FROM THE ANNUAL REPORT OF ICRA ONLINE TO JUSTIFY THAT THE SAID COMPANY IS COMPARABLE WITH THE ASSESSEE CO MPANY. HE SUBMITTED THAT ICRA ONLINE IS ENGAGED IN FUNCTIONAL LY DIFFERENT FROM THE ASSESSEE COMPANY AND IT IS ALSO ENGAGED IN PROVIDING SOFTWARE SERVICES AND THUS, THE SAID COMPANY IS NOT COMPARABLE 34 WITH THE ASSESSEE COMPANY. HE REFERRED TO THE EXTRA CT OF THE WEB PAGES WHEREIN IT IS MENTIONED THAT ICRA ONLINE IS A LEADING INFORMATION SERVICES AND TECHNOLOGY SOLUTIONS PROVI DER [PAGE 438 OF PAPER BOOK - II]. FURTHER, IN THE DIRECTORS' REP ORT OF ICRA ONLINE, IT IS MENTIONED THAT THE SAID COMPANY IS EN GAGED IN PROVIDING INFORMATION PRODUCTS TO VARIOUS MUTUAL FU ND HOUSES AND THE FLAGSHIP PRODUCT OF THE SAID COMPANY IS 'MFI EX PLORER'. HE SUBMITTED THAT IT IS ENGAGED IN PROVIDING BUSINESS SUPPORT SERVICES TO ITS AE AND UNLIKE ICRA ONLINE, THE ASSESSEE IS NOT ENGAGED IN DEVELOPMENT AND SALE OF PRODUCTS. ACCORDINGLY, ICRA ONLINE IS NOT COMPARABLE WITH THE ASSESSEE COMPANY. 30.1 FURTHER, HE SUBMITTED THAT THE TPO HAS CONSI DERED THE INFORMATION PROVIDING SERVICES SEGMENTAL RESULTS. I CRA ONLINE IS ALSO ENGAGED IN PROVIDING BPO SERVICES ALONG WITH P ROVIDING INFORMATION SERVICES. HE SUBMITTED THAT BPO SERVICE S ALSO FALL WITHIN THE CATEGORY OF BUSINESS SUPPORT SERVICES AN D HENCE, IF, AT ALL, ICRA ONLINE IS TO BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE COMPANY, THEN THE CONSOLIDATED RESULTS OF BOTH SEGM ENTS OF THE SAID COMPANY I.E. INFORMATION SERVICES SEGMENT AND BPO S ERVICES SEGMENT SHOULD BE CONSIDERED WHILE DETERMINING THE OPERATING MARGIN EARNED BY THIS COMPANY. 30.2 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THERE ARE DIFFERENCES BETWEEN THE WORKING CAPITAL REQUIREMENT S OF THE ASSESSEE COMPANY AND THE VARIOUS COMPARABLE ENTITIES AND THI S HAS AFFECTED THE OPERATING MARGINS OF THE VARIOUS COMPANIES. ACC ORDINGLY, HE 35 REQUESTED FOR GRANTING OF PROPER WORKING CAPITAL AD JUSTMENT IN RESPECT OF THE ABOVE DIFFERENCES. HE SUBMITTED THAT THIS ISSUE HAS BEEN CLARIFIED BY THE ASSESSEE IN ITS SUBMISSION TO THE LEARNED DRP [PARA 8 - 8.2 ON PAGE 575 OF P.B. - III]. HE REFERR ED TO HIS RELIANCE ON THE FOLLOWING DECISIONS WHEREIN IT HAS BEEN HELD THAT APPROPRIATE ADJUSTMENT IS TO BE MADE IN RESPECT OF THE DIFFEREN CES IN WORKING CAPITAL OF THE COMPARABLE COMPANIES A. DEMAG CRANES AND COMPONENTS (INDIA) (P) LTD. V S. DCIT [144 TTJ 320 (PUNE)] B. CUMMINS TURBO TECHNOLOGIES LTD. V. DDIT [ITA N O. 118/PN/2011] C. MENTOR GRAPHICS (NOIDA) (P) LTD. VS. DY. CIT [ 112 TTJ 408(DEL)] D. E-GAIN COMMUNICATION (P) LTD. VS. ITO [118 TTJ 354 (PUNE)] E. SONY INDIA (P) LTD. VS. DY. CIT [118 TTJ 865 ( DEL)] 30.3 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ASSESSEE COMPANY IS A CAPTIVE UNIT WHICH BEARS VERY LOW RISK S AS COMPARED TO OTHER COMPANIES OPERATING IN THE OPEN MARKET WHI CH HAVE BEEN CONSIDERED AS COMPARABLE WITH THE ASSESSEE COMPANY AND FURTHER, IT DOES NOT OWN ANY INTANGIBLES OR TECHNOLOGY. AS A CO ROLLARY, THE PROFITS EARNED BY THE ASSESSEE COMPANY WOULD BE MUC H LOWER AS COMPARED TO THE OTHER COMPANIES. THIS ISSUE HAS BEE N CLARIFIED BY THE ASSESSEE IN THE SUBMISSION TO THE DRP. [PARA 9 ON PAGES 575 - 576 OF P.B. - III]. ACCORDINGLY, HE REQUESTED THAT 20% ADJUSTMENT TO THE ALP MAY KINDLY BE GRANTED ON ACCOUNT OF THE ABO VE DIFFERENCES. FOR THE ABOVE PROPOSITION, HE RELIED ON THE DECISIO N OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SONY INDIA LTD . [114 ITD 448] AND THE FOLLOWING DECISIONS : 36 A. MENTOR GRAPHICS (NOIDA) PVT. LTD. V. DCIT [109 ITD 101 (DEL)] B. PHILIPS SOFTWARE CENTRE PVT. LTD. V. ACIT [119 TTJ 721 (BANG)] 30.4 LASTLY, THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT IF, AFTER ALLOWING THE ABOVE ADJUSTMENTS, THE DIFFERENCE BETW EEN THE OPERATING MARGIN OF THE ASSESSEE COMPANY AND THE AV G. OPERATING MARGIN OF THE VARIOUS COMPARABLE COMPANIES DOES NOT EXCEED 5%, THEN THE BENEFIT OF SECOND PROVISO TO SECTION 92C(2 ) MAY BE GRANTED TO THE ASSESSEE COMPANY AND ACCORDINGLY, NO ADDITIO N SHOULD BE MADE IN THE CASE OF THE ASSESSEE. 31. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE AO/TPO/DRP. SO FAR AS THE ADJUSTMENT OF RS.5,03,32,400/- TO THE ALP OF THE IN TERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT IS CONCERNED, H E SUBMITTED THAT THE TPO HAS GIVEN A DETAILED REASONI NG FOR ARRIVING AT THE PLI MARGIN OF THE COMPARABLES AT 23 .38% AS AGAINST 14.53% WORKED OUT BY THE ASSESSEE. AFTER T AKING INTO ACCOUNT OF THESE FACTS AND AFTER TAKING INTO ACCOUN T THE OBJECTIONS RAISED BY THE ASSESSEE, THE DRP HAS CONF IRMED THE ACTION OF THE AO/TPO AND THEREFORE THE GROUNDS RAIS ED BY THE ASSESSEE IN GROUNDS OF APPEAL NO.5.1 IS NOT ACCEPTA BLE. 31.1 AS REGARDS THE TWO COMPARABLES WHICH WAS ADDED BY THE TPO NAMELY KALS INFORMATION SYSTEMS LTD AND COMPUCO M SOFTWARE LTD., HE SUBMITTED THAT THE SAME IS JUSTIF IED. SO FAR AS THE 37 COMPARABLE KALS INFORMATION SYSTEM LTD., IS CONCERN ED, HE SUBMITTED THAT THE COMPANY IS ENGAGED IN SOFTWARE D EVELOPMENT. THE WEBSITE OF THE COMPANY SHOWS THAT THE COMPANY P ROVIDES SERVICES IN JOINT SOFTWARE PROJECT EXECUTION MODELS , JUST IN TIME TEAMS AS WELL AS SHADOW TEAMS AND TECHNOLOGY MENTOR ING SERVICES. THE COMPANY ALSO PROVIDES SERVICES FOR END-USER ORG ANIZATIONS AND FOR TRANSITION MANAGEMENT. THIS SHOWS THAT THE COMP ANY IS ENGAGED INTO THE BUSINESS OF SOFTWARE DEVELOPMENT S ERVICES SIMILAR TO THE ASSESSEE COMPANY. 31.2 SO FAR AS THE COMPARABLE COMPUCOM SOFTWARE LTD . IS CONCERNED HE SUBMITTED THAT THE DRP AFTER CONSIDERI NG THE ARGUMENTS ADVANCED BY THE ASSESSEE HAS CONFIRMED TH E ACTION OF THE TPO IN SELECTING THE ABOVE CASE AS COMPARABLE, THEREFORE, THE GROUNDS RAISED BY THE ASSESSEE IS NOT ACCEPTABLE. 31.3 SO FAR AS THE ADJUSTMENT OF RS.4,63,25,506/- I N RESPECT OF PROVISION OF DESIGN ENGINEERING AND TESTING SERVICE S BY THE ASSESSEE TO ITS AE IS CONCERNED, THE LD. DEPARTMENT AL REPRESENTATIVE SUBMITTED THAT THE TPO HAS GIVEN DET AILED REASONING FOR EXCLUSION OF ONE COMPARABLE AND ADDIT ION OF ANOTHER COMPARABLE, NAMELY KLG SYSTEL WHICH WAS OTHERWISE C OMPARABLE BUT WAS REJECTED BY THE ASSESSEE. HE SUBMITTED THA T THE FINAL SET OF TWO COMPARABLE COMPANIES WAS SELECTED BY THE TPO WH OSE AVERAGE PLI MARGIN (OP/OC) WAS ARRIVED AT 23.13%. REFERRING TO THE REASONING GIVEN BY THE TPO FOR ARRIVING AT PLI MARGIN OF THE 38 COMPARABLES AT 23.13% AS AGAINST 10.82% WORKED OUT BY THE ASSESSEE, THE LD. DEPARTMENTAL REPRESENTATIVE SUBMI TTED THAT THE TPO IS JUSTIFIED IN REJECTING THE COMPARABLES GIVEN BY THE ASSESSEE AND ADDITION OF THE COMPARABLE SELECTED BY THE TPO. 31.4 SO FAR AS ACE SOFTWARE EXPORTS LTD., TAKEN BY THE ASSESSEE AS COMPARABLE IS CONCERNED, HE SUBMITTED THAT THIS COMPANY IS ENGAGED IN E-PUBLISHING AND CAD/CAM. NO SEGMENTAL DATA WAS AVAILABLE, HENCE, THE COMPANY IS FUNCTIONALLY DIFFE RENT AND NOT CONSIDERED AS A COMPARABLE. SO FAR AS FEDERAL TECHN OLOGIES LTD., IS CONCERNED, HE SUBMITTED THAT THE FINANCIAL DATA OF THIS COMPANY FOR F.Y. 2006-07 WAS NOT AVAILABLE IN PUBLIC DOMAIN FO R WHICH THIS COMPANY WAS NOT CONSIDERED AS A COMPARABLE. SO FAR AS PENTASOFT TECHNOLOGIES LTD., IS CONCERNED, HE SUBMITTED THAT AS PER THE INFORMATION IN ANNUAL REPORT, THIS COMPANY IS EARNI NG INCOME FROM PRODUCT SERVICES AND IS NOT ENGAGED IN DESIGN ENGINEERING SERVICES. SECONDLY, THE RELATED PARTY TRANSACTIONS ARE EXCEEDING 25%, THEREFORE, THIS COMPANY CANNOT BE CONSIDERED A S COMPARABLE. 31.5 AS REGARDS THE REQUEST OF THE ASSESSEE FOR EXC LUSION OF KLG SYSTEL LTD. IS CONCERNED, HE SUBMITTED THAT THE ASS ESSEE ITSELF HAS REJECTED THIS COMPANY AS A COMPARABLE STATING THAT IT IS FUNCTIONALLY DIFFERENT. HOWEVER, THE TPO HAS NOTICED FROM THE D IRECTORS REPORT THAT THIS COMPANY IS ENGAGED IN PLANNING, DE SIGN AND ERECTION AND LARGE SCALE INFRASTRUCTURAL PROJECTS I N INDIA. THE WEBSITE OF THIS COMPANY ALSO STATES SO. FURTHER, T HE WEBSITE OF THE 39 COMPANY SHOWS THAT THIS COMPANY IS ENGAGED IN DESIG N ENGINEERING SERVICES, THEREFORE, THIS COMPANY IS EN GAGED IN DESIGN ENGINEERING SERVICES WHICH IS FUNCTIONALLY S IMILAR TO THE ASSESSEE COMPANY, THEREFORE, THE ACTION OF THE TPO IS JUSTIFIED. 31.6 AS REGARDS THE ADJUSTMENT OF RS.62,72,964/- TO THE ALP OF INTERNATIONAL TRANSACTION OF DESIGN SUPPORT SERVICE S IS CONCERNED, HE SUBMITTED THAT THE ASSESSEE HAS MENTIONED THE NA TURE OF INTERNATIONAL TRANSACTION AS PROVISION OF REGIONAL SUPPLY MANAGEMENT SERVICES, HOWEVER, NO SUCH SERVICES OR NARRATION IS MENTIONED IN THE TP STUDY REPORT. HE SUBMITTED THA T THE ASSESSEE HAD SELECTED TNMM METHOD AS MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF BUSIN ESS SUPPORT SERVICES PROVIDED TO THE AE. HE SUBMITTED THAT THE TPO HAD GIVEN DETAILED REASONING FOR ARRIVING AT THE PLI MARGIN O F THE COMPARABLES AT 30.26% AS AGAINST 15.29% WORKED OUT BY THE ASSESSEE. THE DRP HAS ALSO CONFIRMED THE ACTION OF THE AO IN REJECTING 5 COMPARABLES FOR VARIOUS REASONS. RELYIN G ON VARIOUS DECISIONS, HE SUBMITTED THAT THE ACTION OF THE TPO/ AO/DRP SHOULD BE UPHELD AND THE GROUNDS RAISED BY THE ASSESSEE SH OULD BE DISMISSED. HE ALSO RELIED ON THE FOLLOWING DECISIO NS: 1. SYMANTEC SOFTWARE SOLUTIONS PVT. LTD., REPORTED IN (2011) 46 SOT 48 2. KODIAK NETWORKS (INDIA) PVT. LTD., REPORTED IN 1 8 TAXMANN.COM 32 3. PREMIER EXPLORATION SERVICES REPORTED IN (2013) 35 TAXMANN.COM 422 4. WILLIS PROCESSING SERVICES (INDIA) PVT. LTD., RE PORTED IN (2013) 30 TAXMANN.COM 350 40 5. ALBERTA PRINTED CIRCUITS LTD., VS. QUEEN REPORTE D IN 2011 TCC 232 (TAX COURT OF CANADA) 6. ADP PVT. LTD., VS. DCIT REPORTED IN (2011) 57 IT R (TRIB.) (HYD.) 310 7. DCIT VS. DELLOITE CONSULTING (INDIA) PVT. LTD., REPORTED IN (2011) 61 DTR (TRIB.) (HYD.) 101 8. MARUBENI INDIA PVT. LTD., VS. ADDL.CIT ITA NO. 809/DEL/2009 9. VEDARIS TECHNOLOGY PVT. LTD., VS. ACIT REPORTED IN (2011) 44 SOT 316 (DELHI) 32. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO/TPO/DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS RELIED ON BY BOTH THE SIDES B EFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE C OMPANY DURING THE IMPUGNED ASSESSMENT YEAR HAS PROVIDED 3 TYPES O F SERVICES TO ITS AES NAMELY, (A) SOFTWARE DEVELOPMENT SERVIC ES, (B) DESIGN ENGINEERING, TESTING AND AUTHORING SERVICES, DEVELOPMENT, MAINTENANCE AND TESTING OF EMBEDDED SY STEMS SOFTWARE SERVICES AND (C) BUSINESS SUPPORT SERVICES . THE DETAILS OF THE ABOVE TRANSACTIONS HAVE ALREADY BEEN GIVEN IN PARA 16.1 OF THE IMPUGNED ORDER AND THE ASSESSEE IN ALL THE TRANSACTIONS HAVE ADOPTED TNMM METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY IT. 32.1 SO FAR AS THE PROVISIONS OF SOFTWARE DEVELOPME NT SERVICES ARE CONCERNED, WE FIND AS AGAINST THE VALU E OF TRANSACTION OF RS.39.29 CRORES, THE TPO MADE ADJUST MENT OF 41 RS.5,03,92,400/-. WHILE DOING SO, HE REJECTED THE AVERAGE OPERATING MARGIN OF 13.07% SHOWN BY THE ASSESSEE IN RESPECT OF 27 COMPANIES AS COMPARABLE. WE FIND THE TPO REJECT ED 16 COMPANIES OUT OF THE 27 COMPANIES AND ADDED 2 NEW C OMPANIES AS COMPARABLE ENTITIES, NAMELY KALS INFORMATION SYS TEMS LTD., AND COMPUCOM SOFTWARE LTD. FROM THE 16 COMPANIES SO REJECTED BY THE TPO OUT OF THE 27 COMPANIES SHOWN B Y THE ASSESSEE, WE FIND THE ASSESSEE IS OBJECTING TO THE EXCLUSION OF THE FOLLOWING COMPANIES AS COMPARABLES : 1. MAARS SOFTWARE INTERNATIONAL LTD., 2. VJIL CONSULTING LTD., 3. QUINTEGRA SOLUTIONS LTD., 4. INFOSYS TECHNOLOGIES LTD., 5. TRANSWORLD INFOTECH LTD., 6. HELIOS AND MATHERSON INFORMATION TECHNOLOGY LTD., 32.2 FROM THE VARIOUS DETAILS FURNISHED BY THE ASSE SSEE, WE FIND MAARS SOFTWARE INTERNATIONAL LTD., (MAARS) WAS REJE CTED BY THE TPO AS A COMPARABLE ON THE GROUND THAT IT IS CARRYING OUT SIGNIFICANTLY DIFFERENT FUNCTIONS. THE BASIS OF SUCH ARRIVAL BY THE AO WAS THE REPORT OF THE DIRECTOR. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ABOVE SAID PARA OF THE DIRECTORS REPORT MENTION S ABOUT THE FUTURE PLANS OF THE COMPANY AND DOES NOT INDICATE THE POSI TION OF THE COMPANY FOR THE YEAR UNDER CONSIDERATION. WE FIND FROM PAG E 501 OF THE PAPER BOOK WHICH IS THE ANNEXURE TO THE AUDITORS REPORT THAT IN CLAUSE 2 OF THE SAID REPORT IT HAS BEEN MENTIONED THE COMPANY IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND TRAINING AND DOES NOT CARR Y ON INVENTORY. 42 SIMILARLY, WE FIND FROM PAGE 498 OF THE PAPER BOOK, WHICH SHOWS PART OF THE DIRECTORS REPORT FOR THE YEAR ENDING 31-03-2 007, THAT THE COMPANY HAS GIVEN BREAK UP OF SOFTWARE DEVELOPMENT EXPENDITURE, SALARY, CONSULTANCIES AND ALLOWANCES WHICH ACCOUNT FOR 3259.63 LAKHS AND WHICH AMOUNTS TO 96.10% OF THE TOTAL EXPENDITUR E (4239.40 FOR 31.03-2006 WHICH IS 93.54% OF THE TOTAL EXPENDITURE ). IN VIEW OF THE ABOVE, WE FIND MERIT IN THE SUBMISSION OF THE LD. C OUNSEL FOR THE ASSESSEE THAT MAARS SOFTWARE INTERNATIONAL LTD., WH ICH IS ENGAGED IN SOFTWARE DEVELOPMENT ACTIVITY IS FUNCTIONALLY COMPA RABLE WITH THE ASSESSEE COMPANY, THEREFORE, THE SAME CANNOT BE EXC LUDED. WE ACCORDINGLY, DIRECT THE AO TO INCLUDE THE SAME AS A COMPARABLE. 32.3 SO FAR AS THE VJIL CONSULTING LTD., IS CONCERN ED, WE FIND THE SAME WAS REJECTED BY THE TPO ON THE GROUND THAT THE COMPARABLE INCURRED LOSSES DURING THE YEAR. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE IN THE PAPER BOOK AT PAGE 402, WE FIND THE COMPANY WAS EARNING PROFIT FROM 31-03-2002 TILL 31-03-2006 AND ONLY FOR THE YEAR ENDING 31-03-2007 IT HAS INCURRED LOSSES. THEREFOR E, IT IS NOT A PERSISTENT LOSS MAKING COMPANY. WE FIND FROM THE D ETAILS FURNISHED BY THE ASSESSEE THAT THE COMPANY HAS EARNED THE FOLLOW ING PROFIT IN THE LAST 5 YEARS, I.E. RS.0.73 CRORES FOR THE YEAR ENDING 31 -03-2002, 0.53 CRORES FOR THE YEAR ENDING 31-03-2003, RS. 0.86 CRORES FOR THE YEAR ENDING 31- 03-2004, RS.0.53 CRORES FOR THE YEAR ENDING 31-03-2 005 AND RS.0.34 CRORES FOR THE YEAR ENDING 31-03-2006. ONLY FOR TH E YEAR ENDING 31-03- 2007, THE COMPANY HAS INCURRED LOSS OF RS.10.43 CRO RES. THE PROFIT FOR THE PAST 5 YEARS WAS PROFIT BEFORE TAX. THEREFORE, MERELY BECAUSE VJIL 43 CONSULTING LTD., HAS INCURRED LOSS IN THIS YEAR, TH E SAME IN OUR OPINION CANNOT BE REJECTED FROM THE LIST OF COMPARABLES. T HIS VIEW OF OURS IS SUPPORTED BY THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF CUMMINS TURBO TECHNOLOGIES LTD., (SUPRA) WHEREIN IT HAS BEEN HELD THAT THE COMPANY SHOULD NOT BE REJECTED MERELY BECA USE IT HAS INCURRED LOSSES. SIMILARLY, THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF QUALCOMM (INDIA) PVT. LTD., HAS HELD THAT SIMPLY BE CAUSE THE COMPANY HAS INCURRED LOSS IN ONE YEAR THE SAME CANNOT BE A GROUND TO REJECT THE COMPANY FROM THE LIST OF COMPARABLES. SINCE THE RE VENUE HAS NOT SHOWN THAT VJIL CONSULTING LTD., IS A PERSISTENT LO SS MAKING COMPANY, THEREFORE, MERELY BECAUSE THIS COMPANY HAS INCURRED LOSS DURING THE IMPUGNED FINANCIAL YEAR, THE SAME IN OUR OPINION CA NNOT BE A GROUND TO REJECT THE SAME FROM THE LIST OF COMPARABLES. WE A CCORDINGLY DIRECT THE AO/TPO TO INCLUDE THE SAME IN THE LIST OF COMPARABL ES. 32.4 SO FAR AS QUINTEGRA SOLUTIONS LTD. IS CONCERN ED, WE FIND THE TPO REJECTED THE SAME FROM THE LIST OF COMPARABLES ON THE BASIS OF CERTAIN PARAS IN THE REPORT OF THE DIRECTORS. IT I S THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT QUINTEGRA SOLUTIO NS LTD., IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. FROM THE PROFIT AND LOSS ACCOUNT OF THE COMPANY PLACED AT PAGE 516 OF THE PA PER BOOK WE FIND QUINTEGRA HAS DECLARED INCOME FROM SOFTWARE SERVICE S AT RS.62.72 CRORES FOR THE YEAR ENDING 31-03-2007 AS AGAINST TO TAL RECEIPT OF RS.62.76 CRORES. FROM THE ABOVE, IT IS CLEAR THAT THE INCOME FROM SOFTWARE SERVICES ACCOUNTS FOR 99.9% OF THE TOTAL R EVENUE. IN VIEW OF THE ABOVE, WE FIND MERIT IN THE SUBMISSION OF THE L D. COUNSEL FOR THE 44 ASSESSEE THAT QUINTEGRA SOLUTIONS LTD., SHOULD NOT HAVE BEEN REJECTED FROM THE LIST OF COMPARABLES. WE ACCORDINGLY DIREC T THE AO/TPO TO CONSIDER QUINTEGRA SOLUTIONS LTD., IN THE LIST OF C OMPARABLES AND NOT TO EXCLUDE THE SAME. 33. NOW THE SECOND LIMB OF THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE IS THAT CERTAIN COMPANIES WHICH THOUGH INC LUDED BY IT IN THE LIST OF COMPARABLES SHOULD BE EXCLUDED FROM THE LIS T OF COMPARABLES. NAMES OF SUCH COMPANIES ARE AS UNDER : 1. INFOSYS TECHNOLOGIES LTD., 2. TRANSWORLD INFOTECH LTD., 3. HELIOS AND METHERSON INFORMATION TECHNOLOGY LTD., 33.1 NOW THE FIRST QUESTION THAT HAS TO BE ANSWERED IS AS TO WHETHER THE COMPANIES WHICH WERE CONSIDERED BY THE ASSESSEE IN THE TP STUDY REPORT CAN BE EXCLUDED FROM THE LIST OF COMPARABLES . WE FIND THE CHANDIGARH SPECIAL BENCH OF THE TRIBUNAL IN THE CAS E OF DCIT VS. QUARK SYSTEMS PVT. LTD., REPORTED IN 132 TTJ 1 (CHD . (SB) HAS HELD THAT A TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A MISTAKE IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVI DENCE ADDUCED BY THE TAXPAYER. IT WAS ACCORDINGLY HELD THAT WHEN SU BSTANTIAL JUSTICE AND TECHNICAL CONSIDERATIONS ARE PITTED AGAINST EACH OT HER, THE CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED, FOR T HE OTHERSIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN INJUSTICE BEING DON E DUE TO SOME MISTAKES ON ITS PART. ACCORDINGLY, THE COMPARABLE WHICH WAS TAKEN BY THE ASSESSEE AS WELL AS THE AO WAS DIRECTED TO BE E XCLUDED FROM THE LIST OF COMPARABLES AND THE MATTER WAS RESTORED TO THE F ILE OF THE AO FOR 45 FRESH ADJUDICATION. SIMILARLY, THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SAPIENT CORPORATION PVT. LTD., (SUPRA) AND THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA INDIA PVT. LTD. , (SUPRA) HAS HELD THAT EVEN WHERE THE ASSESSEE HAS IDENTIFIED CERTAIN COMP ANIES AS COMPARABLE AT THE TIME OF TP STUDY REPORT SUCH COMPANIES MAY B E EXCLUDED AT A LATER STAGE IF THEY ARE FOUND TO BE NOT COMPARABLE ON FACTS. 33.2 IN VIEW OF OUR ABOVE DISCUSSION, WE PROCEED TO ACCEPT THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT ALTHOUGH CERTAIN COMPANIES WERE ACCEPTED BY IT AS COMPARABLE IN THE TP STUDY REPORT AND IF DUE TO SUBSEQUENT EVIDENCE THAT HAS COME TO ITS NOTICE THAT THESE COMPANIES ARE NOT TO BE INCLUDED IN THE LIST OF COM PARABLES, THEN IN THAT CASE THOSE COMPANIES CAN BE EXCLUDED. 34. NOW COMING TO THE MERIT OF EACH CASE, WE FIND T HE ASSESSEE IN ITS TP STUDY REPORT HAS INCLUDED INFOSYS TECHNOLOGIES L TD., AS COMPARABLE. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE, WE FIND THE TPO IN ITS ORDER FOR A.Y. 2006-07 IN ASSESSEES OWN CASE H AS HELD THAT INFOSYS IS NOT A COMPARABLE COMPANY WITH THAT OF THE ASSESS EE COMPANY BECAUSE OF HUGE DISPARITY BETWEEN THE TURNOVER OF I NFOSYS TECHNOLOGIES LTD. WITH THAT OF THE ASSESSEE COMPANY. 34.1 WE FIND THE HONBLE DELHI HIGH COURT IN THE CA SE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD., (SUPRA) HAS HE LD THAT INFOSYS TECHNOLOGIES LTD., CANNOT BE CONSIDERED AS A COMPAR ABLE ENTITY WITH THAT OF SMALLER COMPANIES. IN VARIOUS OTHER JUDICI AL DECISIONS IT HAS 46 BEEN HELD THAT CONSIDERING HUGE DIFFERENCE IN REVEN UES, ASSETS AND RISKS ASSUMED BY INFOSYS AND OTHER SMALLER COMPANIES, INF OSYS TECHNOLOGIES LTD., CANNOT BE CONSIDERED AS COMPARABLE ENTITY WIT H SMALLER COMPANIES. IN THIS VIEW OF THE MATTER AND CONSIDER ING THE FACT THAT THE TPO IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECE DING ASSESSMENT YEAR HAS EXCLUDED INFOSYS AS A COMPARABLE, THEREFOR E, WE DIRECT THE AO/TPO TO EXCLUDE INFOSYS FROM THE LIST OF COMPARAB LES. 35. SO FAR AS TRANSWORLD INFOTECH LTD., IS CONCERNE D, WE FIND FROM PAGE 459 OF THE PAPER BOOK THAT AS AGAINST TOTAL RE VENUE OF RS.20,61,12,657/- THE INCOME FROM SOFTWARE IN FOREI GN CURRENCY IS RS.45,44,691.66 WHICH IS JUST 2.21% OF THE TOTAL RE VENUE; WHEREAS IN THE CASE OF THE ASSESSEE IT HAS DERIVED 100% OF ITS REVENUE FROM EXPORTS. THEREFORE, TRANSWORLD, IN OUR OPINION CANNOT BE CON SIDERED AS A COMPARABLE ENTITY WITH THAT OF THE ASSESSEE COMPANY . FURTHER, WE FIND FROM THE ORDER OF THE TPO THAT ACCORDING TO HIM THE COMPANIES WHOSE FOREIGN EARNING WAS LESS THAN 25% OF THE TOTAL EARN ING, SHOULD NOT BE CONSIDERED AS A COMPARABLE AND ACCORDINGLY HE HAS REJECTED MELSTAR INFORMATION TECHNOLOGY LTD., AS A COMPARABLE ENTITY FOR THIS PRECISE PROPOSITION. THEREFORE, WE FIND MERIT IN THE SUBMI SSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT BY FOLLOWING THE SAME LOGIC TRANSWORLD INFOTECH LTD., SHOULD ALSO BE EXCLUDED FROM THE LIS T OF COMPARABLES. 35.1 WE FURTHER FIND THE PROFIT AND LOSS ACCOUNT OF TRANSWORLD INFOTECH LTD., GIVES THE YEAR ENDING AS 30-06-2007 AND 30-06-2006 FOR THE PRECEDING YEAR WHEREAS THE ASSESSEE IS FOLLOWIN G FINANCIAL YEAR AS 47 ITS ACCOUNTING YEAR. THEREFORE, WE ALSO FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN VIEW OF TH E PROVISIONS OF RULE 10B(4) OF THE I.T. RULES, 1961 THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINAN CIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. 35.2 SIMILAR VIEW HAS BEEN TAKEN BY THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF PTC SOFTWARE (SUPRA) WHEREIN THE TRI BUNAL HAS EXCLUDED TRANSWORLD INFOTECH. LTD., ON THE GROUND THAT THE D ATA ADOPTED OF TRANSWORLD INFOTECH LTD., DOES NOT RELATE TO THE FI NANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN CARRIED OUT BY THE ASSESSEE. ON THIS POINT THE SAID CONCERN WAS EXCLUDED FROM THE L IST OF COMPARABLES. IN VIEW OF THE ABOVE WE HOLD THAT TRANSWORLD INFOTE CH IS NOT A COMPARABLE ENTITY. IN VIEW OF THE ABOVE, WE DIRECT THE TPO/AO TO EXCLUDE TRANSWORLD INFOTECH LTD., FROM THE LIST OF COMPARABLE. 36. SO FAR AS HELIOS AND MATHERSON INFORMATION TECH NOLOGY LTD., IS CONCERNED, WE FIND THE PUNE BENCH OF THE TRIBUNAL I N THE CASE OF PTC SOFTWARE LTD., HAS EXCLUDED THE SAME FROM THE LIST OF COMPARABLES BY OBSERVING AS UNDER : 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISED SIMILAR ARGUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG). WE HAVE PERUSED THE RELEVANT PARA OF THE ORDER OF THE TPO I. E., 6.3.21, IN TERMS OF WHICH THE SAID CONCERN HAS BEEN INCLUDED A S A COMPARABLE CONCERN. THE ASSESSEE POINTED OUT THAT AS IN THE CASE 48 OF KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INST ANT CASE ALSO FOR A.Y. 2006-07 THE SAID CONCERN WAS FOUND FUNCTIONA LLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WAS NOT DISTURBED BY THE TPO. THE RELEVAN T PORTION OF THE TRANSFER PRICING STUDY, PLACED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFO RESAID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFOR MATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO WE FIND THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF COM PARABLES. 36.1 SINCE THE PUNE BENCH OF THE TRIBUNAL IN THE CA SE OF PTC SOFTWARE LTD., (SUPRA) HAS ALREADY TAKEN A VIEW THA T HELIOS AND MATHERSON INFORMATION LTD., IS NOT A COMPARABLE AND IS FUNCTIONALLY DIFFERENT, THEREFORE, WE DIRECT THE TPO/AO TO EXCL UDE THE SAME FROM THE LIST OF COMPARABLES. 37. SO FAR AS THE FRESH ADDITION OF 2 COMPANIES, NA MELY KALS INFORMATION SYSTEM LTD., AND COMPUCOM SOFTWARE LTD. , ARE CONCERNED, WE FIND THE PUNE BENCH OF THE TRIBUNAL I N THE CASE OF BINDVIEW INDIA PVT. LTD., HAS OBSERVED AS UNDER : 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLE S BY THE TPO IS REGARDING INCLUSION OF KALS' INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUN CTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAG ES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMP ANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVIC ES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVID ED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185- 186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPAN Y TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABL ED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTW ARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALL Y REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EX CLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSE SSEE SUCCEEDS. 37.1 SIMILARLY, WE FIND THE PUNE BENCH OF THE TRIBU NAL IN THE CASE OF PTC SOFTWARE LTD., (SUPRA) HAS OBSERVED AS UNDER : 49 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WITH REG ARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIOS & MAT HESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION S OLUTIONS LTD. (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO ASSAIL T HE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE LIST OF COMPARABLES IS TO BE EFFECT THAT THEY ARE FUNCTIONALL Y INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CON CERNS ARE ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS W HICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES UNDERTAKEN B Y THE ASSESSEE IN ITS IT-SERVICES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORDER O F THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYSTEM S LTD., IS TO THE EFFECT THAT THE SAID CONCERN'S APPLICATION SOFTWAR E SEGMENT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. THE SAID CONCERN IS E NGAGED IN TWO SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATION SOFTWARE SEG MENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCE RN IS ENGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASSESSEE IS T HAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F. Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGMENT IS ENGAGE D IN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND SOFTWARE SERVICE S. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRITTEN SUBMIS SIONS, COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 42 0.3 TO 420.4. THE ASSESSEE FURTHER POINTED OUT THAT THERE WAS NO BIFUR CATION AVAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODU CTS AND THE BUSINESS OF SOFTWARE SERVICES, AND THEREFORE, IT WAS NOT A PPROPRIATE TO ADOPT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEE'S IT-SERVI CES SEGMENT. THE TPO HOWEVER, NOTICED THAT THOUGH THE A PPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODUCTS WHICH ARE DEVELOPED BY I T, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PROD UCTS AS THERE WERE NO COST OF PURCHASES DEBITED IN THE PROFIT & LOSS A CCOUNT. THOUGH THE TPO AGREED THAT THE QUANTUM OF REVENUE F ROM SALE OF PRODUCTS WAS NOT AVAILABLE AS PER THE FINANCIAL STATEME NTS OF THE SAID CONCERN, BUT AS THE BASIC FUNCTION OF THE SAID CON CERN WAS SOFTWARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS FUNC TIONALLY COMPARABLE TO THE ASSESSEE'S SEGMENT OF IT-SERVICES. 18. BEFORE US, APART FROM REITERATING THE POINTS RAISE D BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN TH E IMMEDIATELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCT IONALLY INCOMPARABLE. FOR THE SAID PURPOSE, OUR REFERENCE HA S BEEN INVITED TO PAGES 421 TO 542 OF THE PAPER BOOK, WHICH IS THE C OPY OF THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE FOR THE A.Y. 2006-07, AND IN PARTICULAR, ATTENTION WAS INVITED TO PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASS ESSEE REFLECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FU NCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE A FORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICATION FOR THE TPO TO CONSIDER THE SAID CONCERN AS FUNCTIONALLY COMPARABLE IN THE INSTANT ASSESSMENT YEAR. 50 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY TH E ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE SAID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH T HE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN THE PR ESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, T HE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN W AS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS Q UITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EM ERGING FROM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRECEDING YEAR. THEREFORE, HAVING REGARD TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT I S CORRECTLY ASSERTED THAT THE APPLICATION SOFTWARE SEGMENT OF THE SA ID CONCERN IS NOT COMPARABLE TO THE ASSESSEE'S SEGMENT OF IT SERVICES. 37.2 SIMILARLY, IN THE CASE OF PTC SOFTWARE (INDIA) PVT. LTD., (SUPRA), WE FIND THE PUNE BENCH OF THE TRIBUNAL HAS REJECTED COMPUCOM SOFTWARE LTD., AS A COMPARABLE ON THE GROUND THAT T HE RPT TRANSACTIONS (EXPENSES) OF THE ASSESSEE WITH THAT T HE SAID COMPANY ARE MORE THAN 25% FOR A.Y. 2007-08. THE RELEVANT OBSER VATION OF THE TRIBUNAL IS AS UNDER : 14. SIMILARLY, IN THE CASE OF COMPUCOM SOFTWARE LTD ., THE TPO HAS OBSERVED IN PARA 6.3.19 OF HIS ORDER THAT THE SAID CONCERN HAS NIL SALES REVENUE FROM RELATED PARTIES AGAINST TOTAL SA LES OF 23.82 CRORES, BUT HAS INCURRED RPT EXPENSES OF RS.6.65 CRORES A GAINST TOTAL EXPENSES OF 17.78 CRORES. THE RATIO OF RPT TO TO TAL TRANSACTIONS HAS BEEN COMPUTED AT 15.19% BY THE TPO. AGAIN THE TPO HAS ADOPTED THE DENOMINATOR OF RS.41.60 CRORE S INCLUSIVE OF TOTAL SALES WHEREAS THE NUMERATOR IS RS.6.65 CRORES, COMPRISING OF ONLY RPT EXPENSES AND NO RPT SALES. THEREF ORE, THE DENOMINATOR IS TO BE CORRECTED AT RS.17.78 CROR ES AND THE CORRECT PERCENTAGE OF RPTS WOULD BE 37.40%, I.E., RP T EXPENSES/TOTAL EXPENSES. THE RPTS BEING IN EXCESS OF THE 2 5% FILTER ADOPTED BY THE TPO, THE SAID CONCERN IN OUR V IEW IS ALSO LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES FO R THE PURPOSE OF COMPARABILITY ANALYSIS. 15. BEFORE PARTING, WE MAY ALSO OBSERVE THAT THE MANN ER IN WHICH THE RPT FILTER HAS BEEN APPLIED BY THE TPO IN THE YEAR IS INCONSISTENT WITH HIS OWN APPROACH IN THE A.Y. 2006-07 . FOR THIS PURPOSE, THE APPELLANT HAS REFERRED TO PAGES 668 TO 75 1 OF THE PAPER BOOK FOR THE COPY OF THE ORDER OF THE TPO DAT ED 29.10.2009 FOR A.Y. 2006-07, SPECIFICALLY AT PAGES 68 9 TO 690, WHERE THE TPO HAS TAKEN EITHER THE SALES OR EXPENSES AS T HE APPROPRIATE BASE, AS THE CASE MAY BE, AND NOT AGGREGAT E OF SALES 51 AND TOTAL EXPENSES EVEN WHERE RELATED PARTY TRANSACTIO NS IN ONE OF THE TWO WAS ABSENT. 37.3 IN VIEW OF THE DECISION OF THE PUNE BENCH OF T HE TRIBUNAL GIVING REASONS FOR EXCLUSION OF KALS INFORMATION SYSTEM LT D., AND COMPUCOM SOFTWARE LTD., FROM THE LIST OF COMPARABLES BECAUSE OF DIFFERENT FUNCTIONS, WE FIND MERIT IN THE SUBMISSION OF THE L D. COUNSEL FOR THE ASSESSEE THAT THE ABOVE TWO COMPANIES CANNOT BE INC LUDED IN THE LIST OF COMPARABLES. WE ACCORDINGLY DIRECT THE TPO/AO TO E XCLUDE KALS INFORMATION SYSTEM LTD., AND COMPUCOM SOFTWARE LTD. , FROM THE LIST OF COMPARABLES. 38. NOW COMING TO THE ADDITION OF RS.4.63 CRORES IN RESPECT OF DESIGN ENGINEERING AND TESTING AUTHORING SERVICES S EGMENT, WE FIND THE ASSESSEE HAD SELECTED 4 COMPANIES AS COMPARABLE ENTITIES FOR DETERMINING THE ALP AND FINALLY HE SUBMITTED A REVI SED LIST OF 2 COMPARABLES, NAMELY ACE SOFTWARE EXPORTS LTD., AND GENESIS INTERNATIONAL CORPORATION LTD. WE FIND ACE SOFTWAR E EXPORTS LTD., WAS REJECTED BY THE TPO BECAUSE IT HAS SHOWN NEGATI VE OPERATING PROFIT BY OPERATING COSTS (OP/OC). WHILE THE TPO RETAINED GENESIS INTERNATIONAL TRANSACTION, HOWEVER, HE ADDED KLG SY STEL LTD., AS A COMPARABLE HAVING OP/OC AT 33.74%. IT IS THE SUBMI SSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT KLG SYSTEL LTD., IS N OT A COMPARABLE COMPANY SINCE THE REVENUE FROM EXPORT SERVICES OF K LG SYSTEL LTD., IS ONLY 0.24% OF THE TOTAL REVENUE AS AGAINST 100%. RE VENUE GENERATED BY THE ASSESSEE COMPANY FROM THE EXPORT SERVICES. 52 38.1 FROM THE DETAILS FURNISHED BY THE ASSESSEE IN PAPER BOOK AT PAGES 570 AND 571, WE FIND THAT AS AGAINST TOTAL INCOME O F RS.122.98 CRORES FOR THE F.Y. 2006-07, THE INCOME IN FOREIGN EXCHANG E FROM REVENUE ITEMS WAS ONLY RS.29,01,158/- WHICH COMES TO 0.23% OF THE TOTAL REVENUE. ALTHOUGH THIS WAS SUBMITTED BEFORE THE DR P, HOWEVER, THEY HAVE NOT CONSIDERED THE SAME. FURTHER, FROM PARA 6 .98 OF PAGE 569 OF THE PAPER BOOK WE FIND THE ASSESSEE HAS SUBMITTED B EFORE THE DRP THAT KLG SYSTEL LTD., IS NOT A COMPARABLE WITH THE ASSES SEE COMPANY SINCE KLG SYSTEL LTD.,IS ENGAGED IN VARIETY OF BUSINESS S UPPORT SERVICES SUCH AS PROVIDING ENTERPRISE PROJECT MANAGEMENT, AUTOMAT ION AND MANUFACTURING AND ENTERPRISE BUSINESS. IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT KLG SYSTEL LTD., CANNOT BE CONSIDERED AS A COMPARABLE ENTITY WITH THAT OF THE ASSESSEE COMPANY . WE ACCORDINGLY DIRECT THE TPO/AO TO EXCLUDE THE SAME FROM THE LIST OF COMPARABLES. 39. SO FAR AS THE ADDITION OF RS.62,72,964/- IN RES PECT OF BUSINESS SUPPORT SERVICES SEGMENT IS CONCERNED, WE FIND AS A GAINST 11 COMPANIES SELECTED BY THE ASSESSEE AS COMPARABLES WITH AVERAG E OPERATING MARGIN OF 11.22%, THE TPO REJECTED 5 COMPANIES AND INTRODU CED 2 NEW COMPANIES. ALTHOUGH ASSESSEE HAS NOT VEHEMENTLY AR GUED FOR ANY EXCLUSION OF CERTAIN COMPANIES, HOWEVER, HE STRONGL Y CHALLENGED THE INCLUSION OF ICC INTERNATIONAL AGENCIES LTD., AND I CRA ONLINE LTD. AS FRESH COMPARABLES. 40. SO FAR AS ICRA ONLINE LTD., IS CONCERNED WE FIN D FROM THE VARIOUS DETAILS FILED BY THE ASSESSEE THAT IT IS EN GAGED IN FUNCTIONALLY 53 DIFFERENT BUSINESS FROM THAT OF THE ASSESSEE COMPA NY. FROM THE DETAILS FURNISHED BY THE ASSESSEE IN THE PAPER BOOK AT PAGE 438 WE FIND THE SAID COMPANY IS A LEADING INFORMATION SERVICES AND TECHN OLOGY SERVICES PROVIDER, IT IS ENGAGED IN PRODUCTS OF VARIOUS MUTU AL FUNDS HOUSES AND THE FLAGSHIP PRODUCT OF THE SAID COMPANY IS MFI EX PLORER. SINCE THE ASSESSEE IS ENGAGED IN PROVIDING BUSINESS SUPPORT S ERVICES TO ITS AE AND UNLIKE ICRA ONLINE LTD., IT IS NOT ENGAGED IN DEVEL OPMENT AND SALE OF PRODUCTS, THEREFORE, THE ICRA ONLINE LTD., IN OUR O PINION IS NOT A COMPARABLE WITH THAT OF THE ASSESSEE COMPANY. IN T HIS VIEW OF THE MATTER, WE HOLD THAT ICRA ONLINE LTD., CANNOT BE CO NSIDERED AS A COMPARABLE WITH THAT OF THE ASSESSEE COMPANY. ACCO RDINGLY, SAME IS DIRECTED TO BE EXCLUDED. 41. NOW COMING TO THE FINAL ARGUMENT OF THE LD. COU NSEL FOR THE ASSESSEE THAT SOME WORKING CAPITAL ADJUSTMENT IS TO BE GIVEN FOR WHICH HE RELIED ON VARIOUS DECISIONS, WE FIND MERIT IN TH E SAME. ALTHOUGH THE ASSESSEE HAS MADE SUBSTANTIAL SUBMISSIONS BEFORE TH E TPO, WE FIND HE HAS REJECTED THE SAME AND THE DRP WITHOUT GIVING AN Y REASON HAS SIMPLY ACCEPTED THE FINDINGS GIVEN BY THE TPO. FRO M THE VARIOUS DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSE SSEE WE FIND THAT IT HAS BEEN HELD IN THOSE DECISIONS THAT PROPER ADJUST MENT HAS TO BE MADE IN RESPECT OF DIFFERENCES IN WORKING CAPITAL OF THE COMPARABLE COMPANIES. SINCE THE ASSESSEE COMPANY IS A CAPTIVE UNIT WHICH BEARS RISKS AS COMPARED TO THE OTHER COMPANIES OPERATING IN THE OPEN MARKET AND DOES NOT OWN ANY INTANGIBLE OR TECHNOLOGY, THER EFORE, WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESS EE THAT THE PROFIT 54 EARNED BY THE ASSESSEE COMPANY WOULD BE MUCH LOWER AS COMPARED TO THE OTHER COMPANIES AND SOME WORKING CAPITAL ADJUST MENT HAS TO BE GRANTED TO THE ASSESSEE IN RESPECT OF THE DIFFERENC ES IN WORKING CAPITAL OF THE COMPARABLE COMPANIES. IN VIEW OF THE ABOVE AND IN VIEW OF THE VARIOUS DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE, WE ARE OF THE OPINION THAT SOME WORKING CAPITAL ADJUSTMENT HAS TO BE GRANTED TO THE ASSESSEE IN THE INSTANT CASE. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE AO/TPO TO CONSIDER REASONABLE PERCENTAG E OF WORKING CAPITAL ADJUSTMENT AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND DECIDE THE ISSUE AS PER LAW. SO FAR AS THE ISSUE OF ADJUSTMENT OF +/- 5% THE ISSUE IS RESTORED TO THE F ILE OF THE AO/TPO WITH A DIRECTION TO CALCULATE THE FINAL ADJUSTMENT THAT IS REQUIRED TO BE MADE IN THE LIGHT OF OUR ABOVE DISCUSSION AND THEN DECIDE THE ISSUE AS PER LAW. WE HOLD AND DIRECT ACCORDINGLY. GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PU RPOSES. 42. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT 10-10-2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEM BER PUNE DATED: 10 TH OCTOBER, 2014 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. DRP, PUNE 4. THE D.R, A PUNE BENCH 5. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE
Other Referred Cases
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Laws Referred To
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Tax Holiday Secrets for Startups
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Consultation on Entity Formation
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Guide to Charitable Trusts: Formation, Benefits, and Compliance
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Research Collaboration Agreement
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Co-Founder Separation Agreement
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