M/s Kodiak Networks I P Ltd, Bangalore V. Deputy Commissioner of Income tax, Bangalore

ITA 1348/BANG/2014

• Counselvise Citation: 134821114 RSA 2014
• Duration Of Justice: 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 03-11-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR K SHANKAR PRASAD JT
• Assessee Lawyers: H PADAMCHAN D KHINCHA
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice; Opportunity of cross examination; International transaction
• Section: 92C; 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER IT (TP) A NO.1348/BANG/2014 ASSESSMENT YEAR : 2006-07 M/S. KODIAK NETWORKS INDIA PRIVATE LTD., # 401, 4 TH FLOOR, PRESTIGE SIGMA, VITTAL MALLYA ROAD, BANGALORE 560 001. PAN: AAACK 0978J VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI H. PADAMCHAND KHINCHA, C.A. RESPONDENT BY : DR. K. SHANKAR PRASAD, JT. CIT(DR) DATE OF HEARING : 06.04.2015 DATE OF PRONOUNCEMENT : 10.04.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 15.9.2014 OF CIT(APPEALS)-III, BANGALORE PASSED AGAINST THE ORDER DATED 28.2.2013 OF DCIT, CIRCLE 11(5), BANGALORE U/S. 143(3) R.W.S. 144C R.W.S. 254 OF THE ACT. IT(TP) A NO.1348/BANG/14 PAGE 2 OF 22 2. THE BRIEF BACKGROUND AND FACTS & CIRCUMSTANCES UNDER WHICH THIS APPEAL ARISES FOR CONSIDERATION ARE AS FOLLOWS. 3. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN T HE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT AND IT ENABLED SERVI CES. THE ASSESSEE EXTENDS SOFTWARE DEVELOPMENT SERVICES AND ALSO EXTE NDS INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) TO M/S KODIAK NE TWORKS INC. USA. 4. SOFTWARE DEVELOPMENT SERVICES SEGMENT: IN ORDER TO ARRIVE AT THE ARMS LENGTH PRICE (ALP) IN RESPECT OF THE INTE RNATIONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSO CIATED ENTERPRISE (AE), THE ASSESSEE, AFTER MAKING THE SEARCH ON THE PROWES S AND CAPITALINE DATA BASES, HAS SELECTED 49 COMPARABLES FOR THE SOFTWARE DEVELOPMENT SERVICES AND HAD ADOPTED THE TNMM (TRANSACTIONAL NET MARGIN METHOD) AS THE MOST APPROPRIATE METHOD FOR ARRIVING AT THE ARMS LE NGTH PRICE ( ALP ). 5. THE TPO REJECTED MANY OF THE COMPARABLES ADOPTE D BY THE ASSESSEE AND MADE HIS OWN SEARCH OF THE DATABASE. HE ARRIVED AT A SET OF 20 COMPARABLE COMPANIES, THE LIST OF WHICH IS ANNEX ED TO THIS ORDER AS ANNEXURE-I . THE PROFIT MARGIN OF COMPARABLES SO CHOSEN BY T HE TPO WAS 20.68. AFTER GIVING RISK ADJUSTMENTS, THE TPO DETERMINED THE ARM'S LENGTH PRICE (ALP) AS FOLLOWS:- 18.6 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS IT(TP) A NO.1348/BANG/14 PAGE 3 OF 22 LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 20.68% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) 1. 55% ADJ. ARITHMETIC MEAN PLI 19.13% ARMS LENGTH PRICE: OPERATING COST RS. 21,67,21,274 ARMS LENGTH MARGIN 19.130% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 119.80% OF OPERATING COST RS.29,81,80,054 18.7 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 119.80% OF OPERATING COST RS.25,81,80,054 PRICE SHOWN IN THE INTERNATIONAL TRANSACTIONS RS.24,06,82,087 SHORTFALL BEING ADJUSTMENT U/S.92CA RS. 1,74,97,967 THE ABOVE SHORTFALL OF RS.1,74,97,967 IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 6. THE ABOVE ADJUSTMENT AFTER THE DIRECTIONS OF THE DRP WAS CONSIDERED BY THIS TRIBUNAL IN ITA NO.1413/BANG/201 0 IN AN ORDER DATED 27.1.2012. AS FAR AS SOFTWARE DEVELOPMENT SERVICES ARE CONCERNED, THE TRIBUNAL SET ASIDE THE ORDER OF THE TPO/AO AND GAVE THE FOLLOWING DIRECTIONS TO BE CARRIED OUT BY THE AO/TPO:- IT(TP) A NO.1348/BANG/14 PAGE 4 OF 22 7.8 IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDER ED VIEW THAT THIS ISSUE REQUIRES TO BE REMITTED BACK TO THE FILE OF THE TPO FOR FRESH CONSIDERATION WITH THE FOLLOWING DIRECTIONS:- (I) THE OPERATING REVENUE AND THE OPERATING COST OF THE TRANSACTIONS RELATING TO ASSOCIATED ENTERPRISES ONL Y SHALL BE CONSIDERED; (II) THE COMPARABLES HAVING THE TURNOVER OF MORETH AN 1.00 CRORE BUT LESS THAN 200.00 CRORES ONLY SHALL BE TAKEN INT O CONSIDERATION; (III) ALL THE INFORMATION RELATING TO COMPARABLES WHICH WERE SOUGHT TO BE USED AGAINST THE APPELLANT SHALL BE FU RNISHED TO THE ASSESSEE; (IV) THE APPELLANT SHALL ALSO BE EXTENDED AN OPPORT UNITY TO CROSS EXAMINE THE PARTIES WHOSE REPLIES ARE SOUGHT TO BE USED AGAINST THE APPELLANT; (V) TO CONSIDER THE OBJECTIONS OF THE APPELLANT TH AT RELATE TO ADDITIONAL COMPARABLES SOUGHT TO BE ADOPTED BY THE TPO AND PASS A DETAILED ORDER AND F) TO GIVE THE STANDARD DEDUCTION OF 5% UNDER THE P ROVISO TO SEC.92C(2) OF THE ACT. 7. THE PRESENT PROCEEDINGS ARISE OUT OF THE ORDER PASSED BY THE AO GIVING EFFECT TO THE DIRECTIONS OF THE TRIBUNAL IN ITA NO. 1413/BANG/2010 (SUPRA). 8. THOUGH THE ASSESSEE'S GRIEVANCE IS WITH REGARD T O THE SELECTION OF COMPARABLES, EVEN IN THE SET ASIDE PROCEEDINGS, THE LD. COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING POINTED OUT THAT IN THE ORDER GIVING EFFECT TO THE DIRECTIONS OF THE TRIBUNAL, THE AO HAS INCORREC TLY COMPUTED THE ALP AND IF THE INACCURACY IS RECTIFIED, THEN THE PROFIT MARGIN OF THE ASSESSEE IT(TP) A NO.1348/BANG/14 PAGE 5 OF 22 WOULD BE WITHIN THE +/- 5% RANGE OF THE ARITHMETIC MEAN OF THE COMPARABLES CHOSEN BY THE TPO. ACCORDING TO THE LD . COUNSEL FOR THE ASSESSEE, THE PROVISIONS OF SECOND PROVISO TO SECTI ON 92C OF THE ACT HAVE NOT BEEN PROPERLY APPLIED BY THE TPO. 9. IN THE SET ASIDE PROCEEDINGS, THE TPO HAD CHOSEN 14 COMPARABLES. THE ARITHMETIC MEAN OF THE PROFIT MARGIN OF 14 COMP ARABLES CHOSEN AFTER WORKING THE CAPITAL ADJUSTMENT WAS 18.63%. BASED O N THE ABOVE, THE TPO COMPUTED THE ADJUSTMENT ON ACCOUNT OF ALP AS FOLLOW S:- PARTICULARS AMOUNT (RS.) OPERATING COST POST CAPACITY ADJUSTMENT 21,67,21,2 74 ARMS LENGTH MARGIN 18.63% ARMS LENGTH MARGIN PRICE @ 122.28% OF OPERATING CO ST 1.55% PRICE SHOWN IN INTERNATIONAL TRANSACTION 25,37,37,2 68 DIFFERENCE BEING SHORTFALL 24,06,82,087 DIFFERENCE BEING SHORTFALL 1,30,55,180 10. AS FAR AS IT SEGMENT IS CONCERNED, THE TPO IN T HE SET ASIDE PROCEEDINGS GAVE EFFECT TO THE DIRECTIONS OF THE TR IBUNAL INSOFAR AS IT RELATES TO APPLYING THE TURNOVER FILTER AND ALSO THE DIRECT IONS OF THE TRIBUNAL TO APPLY THE ARITHMETIC MEAN OF THE COMPARABLES CHOSEN BY TH E ASSESSEE ON THE TRANSACTIONS BY THE ASSESSEE WITH ITS ASSOCIATED EN TERPRISE (AE). AS WE HAVE ALREADY SEEN, ONE OF THE DIRECTIONS IN THE ORD ER OF TRIBUNAL WAS THAT THE TPO HAD OBTAINED INFORMATION WHILE CHOOSING THE FINAL SET OF COMPARABLE COMPANIES BY SEEKING INFORMATION U/S. 13 3(6) OF THE ACT. THE TRIBUNAL, AFTER NOTICING THE ARGUMENT OF THE LD. CO UNSEL FOR THE ASSESSEE IT(TP) A NO.1348/BANG/14 PAGE 6 OF 22 THAT THE TPO DID NOT CONFRONT THE ASSESSEE WITH THE INFORMATION OBTAINED BY ISSUE OF NOTICE U/S. 133(6), DIRECTED THE TPO IN TH E SET ASIDE PROCEEDINGS TO FURNISH THE INFORMATION SO OBTAINED AND ALSO AFFORD THE ASSESSEE OPPORTUNITY TO CROSS-EXAMINE THE PARTIES, WHOSE COM PARABLES WERE USED AGAINST THE ASSESSEE BY THE TPO. ON THE ABOVE DIRE CTIONS, THE TPO WAS OF THE VIEW THAT THE SAME IS NOT CAPABLE OF COMPLIA NCE FOR THE FOLLOWING REASONS:- 3. FURNISHING OF INFORMATION CROSS EXAMINATION FO R U/S. 133(6) OF THE IT ACT : THE HONBLE TRIBUNAL HAS DIRECTED THE TPO TO FURNI SH INFORMATION COLLECTED U/S 133(6) TO THE TAXPAYER AC CORDING TO THE PRINCIPLES OF NATURAL JUSTICE. THE TRIBUNAL HAS FUR THER DIRECTED THAT THE TAXPAYER BE PROVIDED AN OPPORTUNITY TO CRO SS EXAMINE THE PARTY FROM WHOM THE INFORMATION HAS BEEN GATHERED A ND USED AGAINST THE ASSESSEE. ACCORDINGLY THE TAXPAYER HAS BEEN FURNISHED WITH THE INFORMATION GATHERED BY THE TPO BY EXERCIS ING OF POWERS U/S 133(6) ONCE AGAIN. THIS INFORMATION HAD ALREADY BEEN GIVEN TO THE TAXPAYER ALONG WITH TIME SHOW CAUSE NO TICE ISSUED. THE DIRECTIONS OF THE HONBLE TRIBUNAL IN RESPECT O F OPPORTUNITY FOR CROSS EXAMINATION TO THE TAXPAYER C ANNOT BE COMPLIED BY THE TPO FOR THE FOLLOWING REASONS. 1. THE HONBLE ITAT IN THE ABOVE MENTIONED CASE HAS DIRECTED THE AO/TPO TO GIVE AN OPPORTUNITY OF CROSS EXAMINATION TO THE ASSESSEE IN RELATION TO INFORMAT ION COLLECTED USING POWERS U/S. 133(6) OF THE I.T. ACT. IN THIS REGARD IT IS SUBMITTED THAT, U/S. 133(6) OF THE INC OME-TAX ACT, 1961, THE INFORMATION IS COLLECTED UNDER VERIFICATI ON. THEREFORE, IT DOES NOT INVOLVE EXAMINATION OF PARTI ES. IT INVOLVES ONLY COLLECTION OF INFORMATION. COLLECTION OF INFORMATION CANNOT BE EQUATED WITH EXAMINATION OF P ARTIES. THEREFORE, NO CROSS-EXAMINATION IS POSSIBLE SO LONG AS EXAMINATION OF PARTIES HAS NOT BEEN DONE. IT(TP) A NO.1348/BANG/14 PAGE 7 OF 22 2. FURTHER, THE ASSESSEE IS DECLARING THE INFORMAT ION COLLECTED U/S. 133(6) AS NOT RELIABLE ON THE BASIS OF DATA AV AILABLE IN ELECTRONIC MEDIA SUCH AS PROWESS AND CAPITALINE DATABASES. IT IS RELEVANT TO SUBMIT THAT THE DATA-B ASE DO NOT CLAIM ABSOLUTE AUTHENTICITY. THEREFORE, HOW CAN ASS ESSEE CHALLENGE THE AUTHENTICITY OF INFORMATION COLLECTED U/S. 133(6) OF IT ACT RECEIVED UNDER VERIFICATION ON THE BASIS OF DATABASE WHICH IS NOT FULLY RELIABLE? THEREFORE, THE DIRECTI ON GIVEN BY THE ITAT CANNOT BE COMPILED WITH. THIS HAS BEEN BROUGHT TO THE NOTICE OF THE HONBLE TRIBUNAL BY WAY OF MISCELLANEOUS PETITION FILED VIDE DATED:10.0 8.2012. ORDER OF THE TRIBUNAL HAS NOT BEEN RECEIVED BY THE TPO AS ON DATE. FURTHER, THE ASSESSEE HAD FILED WITH THE TPO A LI ST OF QUESTIONS FOR WHICH THE REPLIES HAD TO BE SOUGHT FR OM THE THIRD PARTIES. THE QUESTIONS WERE FORWARDED TO KALS INFOR MATION SYSTEMS, MEGASOFT PVT LTD, ACCEL TRANSMATIC PVT LTD . THE REPLY SOUGHT FOR HAS NOT BEEN PROVIDED BY MEGASOFT PVT LTD TILL DATE. THE OTHER TWO PARTIES ACCEL TRANSMATIC P VT LTD AND KALS INFORMATION SYSTEMS PVT LTD HAD REPLIED WHICH IS ENCLOSED AS ANNEXURE-A TO THE ORDER FOR THE TAXPAYE RS REFERENCE. I PROPOSE TO PASS THE ORDER SUBJECT TO A MENDMENT TO THE HONBLE ITATS ORDER ON THE MISCELLANEOUS APPLI CATION. 11. AT THE TIME OF HEARING OF THE APPEAL, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT OUT OF 20 COMPARA BLES FINALLY CHOSEN BY THE TPO, 6 COMPARABLES HAVE ALREADY BEEN EXCLUDED B Y THE TPO IN THE SET ASIDE PROCEEDINGS, LEAVING ONLY 14 FINAL COMPARABLE COMPANIES. IT WAS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT OUT OF 14 COMPARABLES THAT REMAIN FOR CONSIDERATION, 5 COMPANIES HAVE ALR EADY BEEN REJECTED AS COMPARABLES AS THEY ARE NOT IT SOFTWARE DEVELOPMENT SERVICE PROVIDERS IN VARIOUS DECISIONS RENDERED BY THIS TRIBUNAL IN THE CASE OF IT SOFTWARE IT(TP) A NO.1348/BANG/14 PAGE 8 OF 22 DEVELOPMENT SERVICE PROVIDERS AND ARE THEREFORE FUN CTIONALLY DISSIMILAR TO AN IT SOFTWARE SERVICE PROVIDER SUCH AS THE ASSESSE E. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO SEVERAL DECISIONS OF THE TRI BUNAL ON THE COMPARABLE COMPANIES, IN WHICH THE FOLLOWING 5 COMPARABLE COMP ANIES WERE HELD TO BE FUNCTIONALLY DISSIMILAR TO A COMPANY ENGAGED IN SOF TWARE DEVELOPMENT SERVICES VIZ., (1) KALS INFOSYSTEMS LTD. (2) TATA ELXSI LTD. (3) LUCID SOFTWARE LTD. (4) ACCEL TRANSMATICS LTD. (5) MEGASOFT LTD. 12. AS FAR AS MEGASOFT LTD. IS CONCERNED, IT WAS AL SO POINTED OUT THAT SAID COMPANY WAS ACCEPTED AS A COMPARABLE FOR SOFTW ARE SERVICE DEVELOPMENT COMPANIES, BUT ONLY IN RESPECT OF SEGME NTAL OPERATING MARGINS OF SOFTWARE DEVELOPMENT SERVICES RENDERED B Y SUCH COMPANIES AND NOT MARGINS OF THE ENTITY AS A WHOLE. THE DECI SIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE IN THIS REGARD WILL BE DEA LT WITH IN THE SUBSEQUENT PARAGRAPHS. 13. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEF ORE US THAT HE DOES NOT WANT TO PRESS FOR ADJUDICATION BEFORE THE TRIBU NAL THE ISSUE WITH REGARD TO THE TPO NOT HAVING AFFORDED OPPORTUNITY TO THE A SSESSEE TO CROSS- EXAMINE THE PERSONS WHO HAVE INFORMATION U/S. 133(6 ) OF THE ACT, IN VIEW OF THE SUBSEQUENT DECISION OF THE TRIBUNAL ON FUNCTION AL COMPARABILITY OF THE 5 COMPARABLES SET OUT ABOVE. IT IS THE FURTHER PLEA OF THE LD. COUNSEL FOR THE IT(TP) A NO.1348/BANG/14 PAGE 9 OF 22 ASSESSEE THAT IF THE 4 COMPARABLES OUT OF 5 REFERRE D TO ABOVE ARE EXCLUDED AND SEGMENTAL DATA OF MEGASOFT (SOFTWARE SEGMENT) A LONE IS CONSIDERED, THEN THE OPERATING MARGIN OF THE ASSESSEE WILL BE + /- 5% RANGE OF THE OPERATING MARGINS OF THE REMAINING COMPARABLES. CO NSEQUENTLY, THERE COULD BE NO ADDITIONS TO THE TOTAL INCOME ON ACCOUN T OF ADJUSTMENT CONSEQUENT TO DETERMINATION OF ALP. THE CHART FILE D BY THE ASSESSEE IN THIS REGARD HAS ALREADY BEEN EXTRACTED AT PARA 13 H EREINABOVE. 14. IN THE ABOVE CIRCUMSTANCES, THE LD. COUNSEL FOR THE ASSESSEE HAS GIVEN UP THE ASSESSEE'S RIGHT TO AGITATE THE ISSUE WITH REGARD TO THE TPO NOT HAVING AFFORDED THE OPPORTUNITY TO THE ASSESSEE OF CROSS-EXAMINING ALL THE PERSONS FROM WHOM TPO OBTAINED INFORMATION U/S. 133(6) OF THE ACT. 15. THE LD. DR, PLACING RELIANCE ON THE ORDER OF T HE TPO, SUBMITTED THAT THE COMPARABILITY OF 4 COMPANIES OUT OF 5 COMPANIES POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE, HAS ALREADY BEEN ADJUDIC ATED BY THIS TRIBUNAL. THE 5TH COMPANY VIZ., MEGASOFT LTD. WAS CONSIDERED AS A COMPARABLE TO SOFTWARE DEVELOPMENT SERVICE PROVIDER, BUT ONLY SEG MENTAL DATA WAS DIRECTED TO BE CONSIDERED. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN THE LIGHT OF THE SUBMISSIONS MADE BY THE LD. COUNSEL FOR THE ASSESSE E, WE ARE OF THE VIEW THAT IT IS NO LONGER NECESSARY FOR US TO GO INTO QU ESTION REGARDING AFFORDING THE ASSESSEE OPPORTUNITY TO CROSS-EXAMINE ALL THE P ERSONS WHO HAVE INFORMATION IN RESPONSE TO TPO'S NOTICE U/S. 133(6) OF THE ACT. WE ARE IT(TP) A NO.1348/BANG/14 PAGE 10 OF 22 ALSO OF THE VIEW THAT 4 OUT OF THE 5 COMPARABLE COM PANIES POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE BEFORE US, HAVE AL READY BEEN HELD TO BE NOT COMPARABLE WITH A COMPANY ENGAGED IN THE PROVIS ION OF SOFTWARE DEVELOPMENT SERVICES SUCH AS THE ASSESSEE. FOLLOWI NG WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THIS REGARD (IN RES PECT OF COMPARABLE COMPANIES VIZ., KALS INFORMATION SYSTEMS LTD., ACCE L TRANSMATICS LTD., LUCID SOFTWARE LTD. AND TATA ELXSI LTD.) IN THE CAS E OF M/S. SYS ARRIS SOFTWARE PVT. LTD. VS. DCIT IT (TP) A.NO.1621/BANG/ 2012 DATED 16.5.2014 FOR AY 06-07:- 11. AS FAR AS COMPARABLES AT SL.NOS.4 & 13 OF THE LIST OF COMPARABLES CHOSEN BY THE TPO ARE CONCERNED, THIS T RIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PV T. LTD. (SUPRA) HAS TAKEN A VIEW THAT THESE COMPANIES ARE N OT COMPARABLE TO THE SOFTWARE SERVICE PROVIDER COMPANI ES. THE FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TRIB UNAL IN THIS REGARD:- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID CO MPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDI NG TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS.45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERE NT IT(TP) A NO.1348/BANG/14 PAGE 11 OF 22 FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE A S FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS 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 REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO 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 P UBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN TH E SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DEC ISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE , THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAIN LY IT(TP) A NO.1348/BANG/14 PAGE 12 OF 22 SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFOR E ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY I S NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF T HE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWAR E DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITT ED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI IND IA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RELEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE IT AT IN ITS ORDER ARE AS FOLLOWS: 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 THAT THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENTRE 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, ENTERPRISE 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 IT(TP) A NO.1348/BANG/14 PAGE 13 OF 22 WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THI S COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MOR E THAN THE PERMITTED LEVEL AND THEREFORE SHOULD NOT B E TAKEN FOR COMPARABILITY PURPOSES. THE SUBMISSION O F THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE AB OVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. TH E LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF T HE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFO RESAID COMPANY 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 REFERRED TO BY T HE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNS EL FOR THE ASSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 12. IN VIEW OF THE AFORESAID DECISION OF THE TRIBU NAL, COMPARABLES AT SL.NOS.4 & 13 OF THE LIST OF COMPARA BLES CHOSEN BY THE TPO HAVE TO BE EXCLUDED FOR THE PURPOSE OF C OMPARISON WHILE DETERMINING THE ALP OF THE IMPUGNED TRANSACTI ON IN THIS APPEAL. IT(TP) A NO.1348/BANG/14 PAGE 14 OF 22 13. AS FAR AS COMPARABLE AT SL.NO.9 VIZ., LUCID SOF TWARE LTD. FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO IS C ONCERNED, WE FIND THAT THE MUMBAI BENCH OF THE TRIBUNAL IN TH E CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) WHIL E DEALING WITH THE CASE OF SOFTWARE SERVICES PROVIDER LIKE TH E ASSESSEE, CONSIDERED THE COMPARABILITY OF LUCID SOFTWARE LTD. WITH SIMILAR SOFTWARE SERVICES PROVIDER AND THE TRIBUNAL HELD AS FOLLOWS:- 7.2 LUCID SOFTWARE LIMITED IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY, BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALSO INVOLV ED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HAS TRIED TO DISTINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMENT EXPENDITURE IN THIS CASE IS AROUND 39% OF THE CAPITAL EMPLOYED BY THE SAID COMPANY, AND, THER EFORE, SUCH A COMPANY CANNOT BE CONSIDERED AS TESTED PARTY . EVEN AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6), THE COMPANY HAS DESCRIBED ITS BUSINESS AS SOFTWARE DEVELOPMENT COMPANY OR PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. THIS INFORM ATION ITSELF IS VERY VAGUE AS THE SEGMENTAL DETAILS OF OP ERATING REVENUE HAS NOT BEEN MADE AVAILABLE TO EXAMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWARE PRODUCT AND SALE OF SOFTWARE SERVICE AND DEVELOPMENT. LOOKING TO THE FA CT THAT IT HAS DEVELOPED A SOFTWARE PRODUCT NAMED AS MUULA M WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTI AL VIS- A-VIS THE CAPITAL EMPLOYED BY THE SAID COMPANY, THI S CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ES SENTIAL THAT THE CHARACTERISTICS AND THE FUNCTIONS ARE BY A ND LARGE SIMILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STUDY CAN BE MADE WITH FEWEST AND MOST REL IABLE ADJUSTMENT. IF A COMPANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN THE SALE OF PRODUCT WOULD BE ENTIRELY DIFFERENT FROM THE COMPAN Y, WHO IS INVOLVED IN SERVICE SECTOR. THEREFORE, THIS COMPANY IT(TP) A NO.1348/BANG/14 PAGE 15 OF 22 CANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILITY RATIO. IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFOR MATION ABOUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE S ALE OF PRODUCT AND HOW MUCH IS FROM THE SERVICES, THEREFOR E, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILI TY ANALYSIS FOR DETERMINING ARMS LENGTH PRICE IN THE C ASE OF THE ASSESSEE. 14. IN VIEW OF THE AFORESAID DECISION OF THE MUMBA I BENCH OF THE TRIBUNAL, WHICH IS IN RELATION TO A.Y. 2007-08, WE ARE OF THE VIEW THAT THE SAID COMPANY SL.NO.9 OF THE LIST OF C OMPARABLE LISTED BY THE TPO IS TO BE EXCLUDED AS A COMPARABLE WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N IMPUGNED IN THIS APPEAL. . 17. WE ARE NOW LEFT WITH ONLY ONE COMPARABLE COMPAN Y CHOSEN BY THE TPO VIZ., TATA ELXSI WHICH IS AT SL.N O.8 OF THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. TH IS TRIBUNAL IN THE CASE OF YODLEE INFOTECH PVT. LTD. VS. ITO IN ITA NO.1538/BANG/2010 BY ITS ORDER DATED 30.8.2013 HELD THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH A SOFTW ARE DEVELOPMENT SERVICE PROVIDER. THE FOLLOWING WERE T HE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THIS REGARD. 15. TATA ELXSI LIMITED. 15.1.1 THIS COMPANY WAS SELECTED BY THE TPO FOR INCLUSION IN THE SET OF COMPARABLES. BEFORE THE TP O, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES FOR VARIOUS REASO NS SUCH AS FUNCTIONAL DIS-SIMILARITY SIGNIFICANT R & D ACTIVITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER , REJECTED THE ASSESSEE'S OBJECTIONS AND INCLUDED THE COMPANY IN THE SET OF COMPARABLES. BEFORE US, IN T HIS APPEAL THE LEARNED AUTHORISED REPRESENTATIVE REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT PERFORMS A VARIETY OF IT(TP) A NO.1348/BANG/14 PAGE 16 OF 22 ACTIVITIES AND FUNCTIONS UNDER THE SOFTWARE DEVELOP MENT AND SERVICES SEGMENT AND HAS DRAWN OUR ATTENTION TO AND QUOTED FROM THE ANNUAL REPORT OF THE COMPANY. 15.1.2 THE LEARNED AUTHORISED REPRESENTATIVE SUBMIT TED THAT AS PER THE ANNUAL REPORT, THIS COMPANY OPERATE S IN TWO SEGMENTS, NAMELY, 1. SYSTEMS AND INTEGRATION SUPPORT SERVICES - WHICH CATERS TO THE DOMESTIC MARKET AND OFFERS INTEGRATED HARDWARE AND PACKAGED SOFTWARE SOLUTIONS SOURCED FROM PRINCIPALS AND 2. SOFTWARE DEVELOPMENT SERVICES . WHILE THE TPO HAS CONSIDERED THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT AS COMPARABLE TO T HE ASSESSEE, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT ON PERUSAL OF THE ANNUAL REPORT OF THE COMPANY, IT CAN BE OBSERVED THAT THE SOFTWARE DEVELOPMENT SEGMENT CANNOT BE CONSIDERED FOR ANALYS IS FOR THE FOLLOWING REASONS : (I) AS PER THE DIRECTORS REPORT AND THE MANAGEMENT DISCUSSION AND ANALYSIS, THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT COMPRISES OF THREE SUB-SERVICES NAMELY : A) PRODUCT DESIGN SERVICES I.E. DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE. B) INNOVATION DESIGN ENGINEERING I.E. MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN; AND C) VISUAL COMPUTING LABS I.E. ANIMATION AND SPECIAL EFFECTS FOR MOVIES AND TV. IT(TP) A NO.1348/BANG/14 PAGE 17 OF 22 II) AS THE SOFTWARE DEVELOPMENT AND SERVICES SEGMEN T COMPRISES OF HARDWARE, SOFTWARE AND ANIMATION SERVICES, THERE IS NO SUB-SERVICES BREAK-UP / INFOR MATION PROVIDED IN THE ANNUAL REPORT OR THE DATABASES, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDS THAT THI S COMPANY SHOULD BE REJECTED AS A COMPARABLE AS IT IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORIT IES BELOW ON THIS ISSUE. 15.3.1 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDI NG THE JUDICIAL DECISIONS RELIED UPON. FROM THE RECOR D, WE FIND THAT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODUCT DESIGNING SERVICES AND NOT PURELY SOFTWARE DEVELOPMENT SERVICES. THE REFERENCES MADE TO THE ANNUAL REPORT BY THE LEARNED AUTHORISED REPRESENTATIVE SHOW THAT THE SEGMENT SOFTWARE DEVELOPMENT AND SERVICES RELATES TO DESIGN SERVICE S AND ARE NOT SIMILAR TO SOFTWARE SUPPORT SERVICES PERFORMED BY THE ASSESSEE IN THE CASE ON HAND. FURTHER, THE MUMBAI ITAT IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT . LTD. (ITA NO.7821/MUM/2011 ) HAS HELD, THAT THIS COMPANY, M/S. TATA ELXSI LTD. I S NOT A SOFTWARE DEVELOPMENT SERVICE PROVIDER, AT PARA 7. 7 ON PAGE 21 OF ITS ORDER WHICH IS EXTRACTED HEREUNDER : 7.7 . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS IT(TP) A NO.1348/BANG/14 PAGE 18 OF 22 TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REPO RT OF THIS COMPANY, PLACED BEFORE US, THIS FACTUAL POS ITION PERTAINING TO TATA ELXSI LTD., HAS NOT CHANGED FROM ASSESSMENT YEARS 2007-08 TO 2008-09. IN THIS VIEW OF THE MATTER, WE ARE OF THE VIEW THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLUSION IN THE SET OF COMPAR ABLE IN THE CASE ON HAND FOR THE PERIOD UNDER CONSIDERAT ION AND THEREFORE DIRECT THE TPO TO EXCLUDE THIS COMPAN Y FROM THE FINAL SET OF COMPARABLES FOR THE PERIOD UN DER CONSIDERATION . 18. IN VIEW OF THE ABOVE, THE AFORESAID COMPARABLE AT SL.NO.8 OF THE LIST OF COMPARABLE CHOSEN BY THE TPO SHOULD ALSO BE EXCLUDED FOR THE PURPOSE OF COMPARISON WHILE DETERM INING THE ALP OF THE INTERNATIONAL TRANSACTION IN QUESTION. 17. IN VIEW OF THE AFORESAID DECISIONS, WE ARE OF THE VIEW THAT THE FOLLOWING COMPANIES VIZ., (1) KALS INFOSYSTEMS LTD . (2) TATA ELXSI LTD. (3) LUCID SOFTWARE LTD. , AND (4) ACCEL TRANSMATIC S LTD., HAVE TO BE EXCLUDED FROM THE FINAL LIST OF 14 COMPARABLES CHOS EN BY THE TPO FOR DETERMINING THE ALP. 18. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VIZ. , MEGASOFT LTD. IN THE LIST OF FINAL COMPARABLES CHOSEN BY THE TPO IS CONCERNED, THIS TRIBUNAL IT(TP) A NO.1348/BANG/14 PAGE 19 OF 22 IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PV T. LTD.ITA NO.1054/BANG/2011 ORDER DATED 23.11.2012 HAS HELD H AD HELD THAT ONLY SEGMENTAL DATA OF THE SAID COMPANY SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. FOLLOWING ARE THE RELEVANT OBSERVATION S 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 REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% IT(TP) A NO.1348/BANG/14 PAGE 20 OF 22 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 T HE 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. 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. 19. 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. 20. IN THE LIGHT OF DISCUSSION ABOVE, WE ARE OF THE VIEW THAT THE ADJUSTMENT ON ACCOUNT OF ALP AND CONSEQUENT ADDITIO N MADE BY THE AO TO IT(TP) A NO.1348/BANG/14 PAGE 21 OF 22 THE TOTAL INCOME, BOTH IN THE IT SEGMENT WITH THE 1 0 REMAINING COMPARABLE COMPANIES (INCLUDING SEGMENTAL MARGIN OF MEGASOFT L TD.) WOULD BE 10.89% AFTER WORKING CAPITAL ADJUSTMENT. THE SAME IS GIVE N AS ANNEXURE-II TO THIS ORDER. THE SAID ARITHMETIC MEAN OF THE COMPAR ABLES IS WITHIN THE (+) (-) 5% RANGE CONTEMPLATED BY THE SECOND PROVISO TO SEC. 92C(2) OF THE ACT AND CONSEQUENTLY NO ADDITION BY WAY OF ADJUSTMENT T O ALP CAN BE MADE. WE HAVE ALREADY SEEN THAT THE ADJUSTMENT TO ALP AND CONSEQUENT ADDITION TO THE TOTAL INCOME IN ITES SEGMENT CANNOT BE SUSTA INED. 21. THE APPEAL OF THE ASSESSEE IS ACCORDINGLY PART LY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF APRIL, 2015. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R ENCL: ANNEXURES I & II. BANGALORE, DATED, THE 10 TH APRIL, 2015. /D S/ IT(TP) A NO.1348/BANG/14 PAGE 22 OF 22 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.