M/s. Citrix R & D India Pvt. Ltd., Bangalore V. ITO, Bangalore

ITA 1373/BANG/2010

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8463 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-01-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 03-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BIJOY KUMAR PANDA
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 133(6); 201; 144C; 13; 119; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BENGALURU BEFORE S HRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 1373 / BANG/2 010 (ASSESSMENT YEAR: 20 06 - 07 ) M/S.CITRIX R&D INDIA PVT. LTD., NO.33, PR ESTIGE DYNASTY, ULSOOR ROAD, BENGALURU - 560042. PAN:AABCN 3639 C VS. APPELLANT INCOME - TAX OFFICER, WARD 11(1), BENGALURU. RESPONDENT APPELLANT BY : SHRI S.RAGHUNATHAN, ADVOCATE. RESPONDENT BY : SHRI BIJOY KUMAR PANDA, CI T(DR) DATE OF HEARING : 25/01/2017 DATE OF PRONOUNCEMENT : 24 /03/2017 O R D E R PER I NTURI RAMA RAO, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C INCOME - TAX ACT, 1961 ['THE ACT' FOR SHORT] DATED 30/09/2010 FOR THE ASSESSMENT YEAR 2006 - 07. 2. BRIEFLY FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY DULY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, IT (T P) A NO . 1373 /BANG/201 0 PAGE 2 OF 22 1956. IT IS A SUBSIDIARY OF M/S. CITRIX APPLICATION NETWORKING LLC, USA . IT IS ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES AND SUPPORT SERVICES TO ITS ASSOCIATED ENTERPRISES (AES). RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006 - 07 WAS FILED ON 30/11/2006 DECLARING INCOME OF RS.22,030/ - . THE ASS ESSEE - COMPANY REPORTED THE FOLLOWING INTERNATIO NAL TRANSACTIONS IN ITS FORM 3CB : I. SOFTWARE DEVELOPMENT SERVICES RS.15,96,66,504/ - II. PROCUREMENT OF ASSETS ON LOAN BASIS RS. 38,03,634/ - III. TRAVEL EXPENDITURE RS. 2,25,320/ - THE ASSESSEE - COMPANY SOUGHT TO JUSTIFY THE CONSIDERATION RECEIVED FOR THE ABOVE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS AES TO BE AT ARM S LENGTH. THE ASSESSEE - COMPANY ALSO SUBMITTED THAT TRANSFER PRICING (TP) STUDY ADOPTING OPERATING PROFIT TO OPERATING COST (OP/OC) AS PROFIT LEVEL INDICATOR FOR TRANSFER PRICING STUDY. THE ASSESSEE - COMPANY ALSO APPLIED TNMM WHICH WAS CONSIDERED TO BE MOST APPROPRIATE METHOD FOR THE PURPOSE OF BENCH MARKING INTERNATIONAL TRANSACTION. THE ASSESSEE - COMPANY S PR OFIT MARGIN WAS COMPUTED AT 9.85% AND THE ASSESSEE - COMPANY CLAIMED THAT THE SAME WAS COMPARABLE WITH OTHER COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. FOR THE PURPOSE OF TP STUDY, ASSESSEE - COMPANY HAD CHOSEN THE FOLLOWING 36 COMPARABLE ENTITIES WHO SE PROFI T MARGIN WAS COMPUTED AT 12.06%. IT (T P) A NO . 1373 /BANG/201 0 PAGE 3 OF 22 ACCORDING TO THE ASSESSEE - COMPANY , ITS PLI WAS WITHIN RANGE +/ - 5 OF ARITHMETICAL MEAN OF THE COMPARABLE ENTITY CHOSEN. IT (T P) A NO . 1373 /BANG/201 0 PAGE 4 OF 22 HENCE, IT WAS CLAIMED THAT ITS INTERNATIONAL TRANSACTIONS WITH ITS AES ARE AT ARM S LENGT H. 3 . THE ASSESSING OFFICER REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO). THE TPO, BY ORDER DATED 19/10/2009 PASSED U/S 92CA OF THE ACT, COMPUTED TP ADJUSTMENT AT RS.1,03,23,342/ - . THE TPO ACCEPTED TNMM ADOPTED BY THE ASSESSEE - COMPANY BUT REJECTED THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE - COMPANY. THE N TPO PROCEEDED TO IDENTIFY DIFFERENT SET OF COMPARABLES BY APPL Y ING THE FOLLOWING FILTER S : I. USE OF CURRENT YEAR DATA ONLY. II. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICES REVENUE IS LESS THAN 75% OF THE TOTAL REVENUE ARE EXCLUDED. III. SOFTWARE DEVELOPMENT SE R VICES REVENUE MORE THAN 75%. IV. MINIMUM AMPLE COST MORE THAN 25% TO SALE V. ONSITE FILTER OF THE COMPANIES WHOSE ONSITE REVENUE EXCEEDED 75% OF EXPORT REVENUE ARE REJECTED. VI. COMPANIES WHO HAVE LESS THAN 25% OF THE REVENUE AS EXPORT SALES WERE EXCLUDED. VII. COMPANIES WHO HAVE DIMINISHING REVENUE OR PERSISTENT LOSS ARE EXCLUDED VIII. COMPANIES WHOSE ONSITE REVENUE IS MO R E THAN 75% ARE EXCLUDED IX. COMPANIES THAT ARE FUNCTIONALLY DIFFERENT ARE EXCLUDED APP LYING THE ABOVE FIL TERS, TPO FINALLY SELECTED THE FOLLOWING 20 COMPARABLES: IT (T P) A NO . 1373 /BANG/201 0 PAGE 5 OF 22 THE TPO COMPUTED AVERAGE PROFIT MARGIN OF THE COMPARABLES AT 17.91%. ON TH E ABOVE BASIS, THE TPO COMPUTED TP ADJUSTMENT AS FOLLOWS: IT (T P) A NO . 1373 /BANG/201 0 PAGE 6 OF 22 THE AO PASSED DRAFT ASSESSMENT ORDER DATE D 10/12/2009 INCORPORATING ABOVE ADJUSTMENT AND ALSO RESTRICTING BENEFIT U/S 10A BY REDUCING TELECOMMUNICATION EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM EXPORT TURNOVER ONLY. 4. BEING AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJEC TIONS BEFORE THE DISPUTES RESOLUTION PANEL (DRP) CONTENDING INTER ALIA THAT THE BENEFIT OF 10A DEDUCTION SHOULD BE GRANTED BY TELECOMMUNICATION EXPENDITURE BOTH FROM EXPORT TURN OVER AS WELL AS TOTAL TURNOVER. ON THE ISSUE OF TP PRICING ADJUSTMENT, IT WAS CONTENDED THAT THE TPO WAS NOT JUSTIFIED IN USING THE CURRENT YEAR S DATA AND ALSO CONTENDING THAT THE TPO WAS NOT JUSTIFIED IN REJECTING THE COMPANIES WHOSE TURNOVER IS LESS THAN RS.1 CRORE. THE DRP CONFIRMED THE ENTIRE ORDER OF THE TPO. ACCORDINGLY, T HE AO PASSED FINAL ASSESSMENT ORDER DATED 30/09/2010 U/S 143(3) R.W.S. 144C OF THE ACT. 5. BEING AGGRIEVED, THE ASSESSEE IS BEFORE US IN THE PRESENT APPEAL RAISING THE FOLLOWING GROUNDS OF APPEAL: IT (T P) A NO . 1373 /BANG/201 0 PAGE 7 OF 22 IT (T P) A NO . 1373 /BANG/201 0 PAGE 8 OF 22 IT (T P) A NO . 1373 /BANG/201 0 PAGE 9 OF 22 6. THE ASSESSEE ALSO RAISED THE FOLLOWING AD DITIONAL GROUNDS OF APPEAL: 7. DURING THE COURSE OF HEARING, LEARNED COUNSEL FOR THE ASSESSEE HAD NOT PRESSED THE ADDITIONAL GROUNDS OF APPEAL URGING THAT COMPANIES WHOSE TURNOVER IS MORE THAN RS.200 CRORES SHOULD BE EXCLUDED. LEARNED COUNSEL FOR THE ASSESSEE ARGUES THAT THE COMPARABLES AZTE C SOFTWARE TECHNOLOGY SERVICES LTD., ZEOMETRIC LTD., MEGASOFT LTD., SHOULD BE REJECTED AS THEIR RPT FILTER IS MORE THAN 15% OF THE SALES. IT WAS MENTIONED THAT RPT FILTER IN THE CASE OF AZTEC SOFTWARE TECHNOLOG Y SERVICES LTD IS 17.78% WH E REAS IN THE CASE OF GEOMETRIC LTD., IT IS 19.34%. IT (T P) A NO . 1373 /BANG/201 0 PAGE 10 OF 22 RELIANCE IN THIS REGARD WAS PLACED ON THE DECISION OF THE CO - ORDINATE BENCH OF TRIBUNAL IN THE CASE OF LSI TECHNOLOGIES INDIA (P) LTD. VS. ITO (2015) 59 TAXMANN.COM 434(BANG.TRI B.) 8. WE HEARD RIVAL SUBMISSION AND PERUSED MATERIAL ON RECORD. THE ONLY GROUND ON WHICH ASSESSEE IS SEEKING EXCLUSION OF THOSE COMPANIES IS RPT OF THE SAID COMPANIES IS MORE THAN 15%. IT IS UNDISPUTED FACT THAT THE TPO HAS APPLIED RPT FILTER OF 25%. THE ASSESSEE - COMPANY HAD NOT CONTESTED THE APPLICATION OF RPT FILTER OF 25%. THIS TRIBUNAL HAS BEEN CONSISTENTLY UP HOLDING TH E DECISION OF THE TPO WHEREIN THE TPO HAD APPLIED RPT FILTER IN THE RANGE OF 15% TO 25% . IN THE PRESENT CASE, SINCE ASSESSEE - COMPANY HAD NOT CONTESTED APPLICATION OF RPT FILTER OF 25% BY THE TPO, NOW IT IS NOT OPEN FOR THE ASSESSEE - COMPANY TO CONSIDER RPT FILTER OF 25%. ACCORDINGLY, WE UPHOLD INCLUSION OF THESE TWO COMPANIES. 9. AS REGARDS COMPARABLE MINDTREE CONSULTING LTD. I S CONCERNED, THE SAME WAS NOT PRESSED DURING THE COURSE OF HEARING, HENCE DISMISSED. THE ASSESSEE IS SEEKING EXCLUSION OF THE FOLLOWING COMPANIES ON T HE GROUNDS OF FUNCTIONAL DIFFERENCE RELYING ON THE DECISION OF THE TRIBUNAL IN THE CASE OF LCI TECHNOLOGIE S INDIA (P) LTD . (SUPRA) : I. INFOSYS TECHNOLOGIES II. KALS INFORMATION SYSTEMS LTD., III. TATA ELXSI ALTD., IV. LUCID S OFT WARE LTD., - PARA 29 30 V. ACCEL TRANSMATIC LTD., - 23 24 IT (T P) A NO . 1373 /BANG/201 0 PAGE 11 OF 22 THE ISSUE OF COMPARABILITY OF ABOVE ENTITIES IN RELATION TO SOFTWARE DEVELOPMENT SERVICES HAD COME UP FOR CONSIDERATION BEFO R E THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF LCI TECHNOLOGIES INDIA (P) LTD . (SUPRA) . THE RELEVANT FINDINGS OF THE TRIBUNAL ARE EXTRACTED BELOW: 17. AS FAR AS COMPARABLE COMPANIES LISTED AT SL. NO. 10, 24 & 26 OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ., M/S. INFOSYS TECHNOLOGIES LIMITED, TATA ELXSI LTD. (SEG.) & WIPRO LIMITED ARE CONCERNED, THIS TRIBUNAL IN THE CASE OF CURAM SOFTWARE INTERNATIONAL (P.) LTD. V. ITO [2014] 149 ITD 458/[2013] 37 TAXMANN.COM 141 (BANG - TRIB.) HAS HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE COMPANIES IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE FOLLOWING W ERE THE RELEVANT OBSERVATIONS IN THE CASE OF CURAM SOFTWARE INTERNATIONAL (P.) LTD. ( SUPRA ): '12. (4) INFOSYS TECHNOLOGIES LTD. 12.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THIS CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPANY TO THIS EFFECT WHICH IS AS UNDER : ( I ) THE COMPANY HAS AN I NTELLECTUAL PROPERTY (IP) CELL TO GUIDE ITS EMPLOYEES TO LEVERAGE THE POWER OF IP FOR THEIR GROWTH. IN 2008, THIS COMPANY GENERATED OVER 102 INVENTION DISCLOSURES AND FILED AN AGGREGATE 10 PATENTS IN INDIA AND THE USA. TILL DATE THIS COMPANY HAS FILED AN A GGREGATE OF 119 PATENT APPLICATIONS (PENDING) IN INDIA AND USA OUT OF WHICH 2 HAVE BEEN GRANTED IN THE US. ( II ) THIS COMPANY HAS SUBSTANTIAL REVENUES FROM SOFTWARE PRODUCTS AND THE BREAK - UP OF THE SOFTWARE PRODUCT REVENUES IS NOT AVAILABLE. ( III ) THI S COMPANY HAS INCURRED HUGE RESEARCH AND DEVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATELY RS.200 CRORES. ( IV ) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWARE PRODUCT USED IN DESIGNING HIGH PE RFORMANCE STRUCTURAL SYSTEMS. IT (T P) A NO . 1373 /BANG/201 0 PAGE 12 OF 22 ( V ) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLOWING JUDICIAL DECISIONS : ( A ) ITAT, DELHI BENCH DECISION IN THE CASE OF AGNITY INDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010) AND ( B ) TRILOGY E - BUSINESS S OFTWARE INDIA PVT. LTD. (ITA NO.1054/BANG/2011) 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE OPERATING MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTIONALLY DIS - SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RE NDERED IN THE CASE OF TRILOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. ( SUPRA ) FOR ASSESSMENT YEAR 2007 - 08 IS APPLICABLE TO THIS YEAR ALSO. THE ARGUMENT PUT FORTH BY ASSESSEE'S IS THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIF ICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SE T OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. 14.0 (6) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNCTIONAL DIS - SIMILARITY, SIGNIFICANT R&D ACTIVITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, REJECTED THE CONTENTION PUT FORTH BY THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. 14.2 BEFORE US, IT WAS REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT PERFORMS A VARIETY OF FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT NAMELY ( A ) PRODUCT DESIGN SERVICES ( B ) INNOVATION DESIGN ENGINEERING AND ( C ) VISUAL COMPUTING LABS. IT (T P) A NO . 1373 /BANG/201 0 PAGE 13 OF 22 IN THE SU BMISSIONS MADE THE ASSESSEE HAD QUOTED RELEVANT PORTIONS FROM THE ANNUAL REPORT OF THE COMPANY TO THIS EFFECT. IN VIEW OF THIS, THE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE L EARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE STAND O THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 14.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PERUSED AND CONSIDERED THE MATERIAL ON RECORD. FROM THE DETAILS ON RECORD, WE FIND THAT T HIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODUCT DESIGNING SERVICES AND NOT PURELY SOFTWARE DEVELOPMENT SERVICES. THE DETAILS IN THE ANNUAL REPORT SHOW THAT THE SEGMENT 'SOFTWARE DEVELOPMENT SERVICES' RELATES TO DESIGN SERVICES AND ARE NOT SIMILAR TO SOFTWA RE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MUM/2011) HAS HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THER EFORE IT IS NOT FUNCTIONALLY COMPARABLE. IN THIS CONTEXT THE RELEVANT PORTION OF THIS ORDER IS EXTRACTED AND REPRODUCED BELOW : ' . . . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFERENT FROM THE ASS ESSEE 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 DETA ILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS 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 AS FIT FOR COMPARABILITY ANALYSIS FOR DET ERMINING THE ARM'S LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PORTION.' AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REPORT OF THIS COMPANY PRODUCED BEFORE US, THE FACTS PERTAINING TO TATA ELXSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 2007 - 08 TO ASSESSMENT YEAR 2008 - 09. WE, THEREFORE, HOLD THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLUSION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDERED ACCORDINGLY.' 18. RESPECTFULLY FOLLOWING THE DECISION OF THE T RIBUNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. KALS INFORMATION SYSTEMS LTD. 11. THE LEARNED DR HOWEVER SUBMITTED BEFORE US THAT KALS IN FORMATION SYSTEMS LTD., CANNOT BE CONSIDERED AS A SOFTWARE PRODUCT COMPANY AND ON THAT GROUND BE NOT HELD COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. IN THIS REGARD, HE HAS FILED BEFORE US A COPY IT (T P) A NO . 1373 /BANG/201 0 PAGE 14 OF 22 OF THE ANNUAL REPORT OF TH E COMPANY FOR THE PERIOD 2007 - 2008 WHICH RELATES TO SUBSEQUENT ASSESSMENT YEAR 2008 - 09. HE DREW OUR ATTENTION TO THE SEGMENTAL RESULTS OF THE COMPANY FOR THE PERIOD 2006 - 07 AS GIVEN IN THE AFORESAID ANNUAL REPORT AND POINTED OUT THAT SEGMENTAL REVENUE AS O N 31.3.2007 WAS RS. 2,00,09,937 FROM APPLICATION SOFTWARE AND RS. 8,95,385 FROM TRAINING. ACCORDING TO HIM THEREFORE THE CONCLUSION THAT KALS INFORMATION SYSTEMS LTD. IS A SOFTWARE PRODUCT COMPANY MAY NOT BE CORRECT. LEARNED COUNSEL FOR THE ASSESSEE HOWEVE R POINTED OUT THAT THIS COMPANY HAS INVENTORIES WORTH RS. 1,12,97,218 AS ON 31.3.2007 WHICH ITSELF IS A REFLECTION THAT THIS COMPANY IS A SOFTWARE PRODUCT COMPANY. HE ALSO POINTED OUT THAT IN SCHEDULE 16 NOTES TO FINANCIAL STATEMENTS IN NOTE 2 (B) IT HAS B EEN MENTIONED THAT THE COMPANY DERIVES ITS REVENUES PRIMARILY FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS SEEN FROM PARA 16.4.13 OF THE TPO'S ORDER AT PAGE 141 THAT THE TPO HAS BASED HIS CONCLUSIONS ONL Y ON THE BASIS OF THE REPLY GIVEN BY THIS COMPANY IN RESPONSE TO NOTICE U/S.133(6) OF THE ACT THAT IT IS A SOFTWARE DEVELOPMENT SERVICE PROVIDER. THEREFORE THE CONCLUSIONS DRAWN IN THE CASES REFERRED TO ABOVE FOR EXCLUDING THIS COMPANY AS A COMPARABLE COMP ANY IS FOUND TO BE CORRECT. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. 15. ACCEL TRANSMAT ICS LTD . (SEG.) 15.1 THOUGH THIS COMPANY WAS PART OF THE T.P. ANALYSIS OF THE ASSESSEE AND ALSO PART OF THE 44 COMPARABLES SELECTED BY THE ASSESSEE ITSELF FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS, HOWEVER, THE ASSESSEE OBJECTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES SELECTED BY THE TPO ON THE GROUND THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE. THE TPO AS WELL AS DRP REJECTED THE CONTENTIONS OF THE ASSESSEE. 15.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE H AS SUBMITTED THAT THE ASSESSEE IS SEEKING EXCLUSION OF THIS COMPANY AS THIS COMPANY PROVIDES SOFTWARE DESIGN AND DEVELOPMENT PRODUCT SERVICES. SINCE THIS IS A SOFTWARE PRODUCT COMPANY AND THEREFORE IS FUNCTIONALLY DIS - SIMILAR TO THE ASSESSEE. THEREFORE, TH IS COMPANY IS NOT A GOOD COMPARABLE FOR THE PURPOSE OF DETERMINING THE ALP. THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT AS PER THE ANNUAL REPORT OF THIS COMPANY, IT IS ENGAGED IN THE PRODUCT MANUFACTURING ACTIVITY AS WELL AS DIVERSIFIED BUSINE SS ACTIVITY LIKE TRANSMATIC SYSTEM, TECHNOLOGY , ACCEL INTERNATIONAL TRANSACTIONS ACADEMY AND ACCEL STUDIO. HE HAS FURTHER CONTENDED THAT THE FUNCTIONAL COMPARABILITY HAS BEEN CONSIDERED BY THE TRIBUNAL IN A NUMBER OF CASES AND IT WAS HELD THAT THIS COMPANY IS FUNCTIONALLY DIS - SIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES PROVIDER COMPANY. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DECISIONS: CASES PERTAINING TO ASSTT. YEAR : 2006 - 07 CASES PERTAINING TO OTHER ASSTT. YEARS IT (T P) A NO . 1373 /BANG/201 0 PAGE 15 OF 22 CYPRESS SEM ICONDUCTOR TECHNOLOGY INDIA PRIVATE LIMITED IT (TP) A NO 1167/BANG 2010 CONEXANT SYSTEMS INDIA PVT. LTD . (AY 2006 - 07 & 2007 - 08) (ITA NO. 1429/HYD/2010, ITA NO. 1978/HYD/2011. VERISIGN SERVICES INDIA PRIVATE LIMITED IT (TP) A NO 1404 BANG 2010 LOGICA PVT . LTD . V. ACIT (ITA NO. 1129/BANG/2011) MISYS SOFTWARE SOLUTIONS INDIA PRIVATE LIMITED IT (TP) A NO. 1425/BANG/2010 TRIOLOGY E - BUSINESS SOFTWARE INDIA PVT. LTD . V. DCIT IN IT A NO. 1054/BANG/2012 (AY - 2007 - 08) THOUGHT WORKS TECHNOLOGIES ( INDIA ) PRIV ATE LIMITED IT (TP) A NO. 1326/BANG/2010 15.3 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THIS COMPANY WAS PART OF THE T.P. ANALYSIS OF THE ASSESSEE AND THE ASSESSEE DID NOT OBJECT THE COMPARABILITY OF THIS COMPANY BEFORE THE AUTHORITIES BELOW. THEREFORE, THIS COMPANY CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES WHEN THE ASSESSEE ITSELF HAS SELECTED THIS COMPANY AS A COMPARABLE. SHE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 15.4 WE HAVE CONSIDERED THE RIVAL S UBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THOUGH THIS COMPANY WAS PART OF THE T.P. ANALYSIS OF THE ASSESSEE AND ALSO INCLUDED IN THE COMPARABLES SELECTED BY THE ASSESSEE HOWEVER, THE FUNCTIONAL COMPARABILITY OF THE COMPANY HAS BEEN EXAMINED BY THIS TRIBUNAL IN A SERIES OF DECISIONS AND IT HAS BEEN CONSISTENTLY HELD THAT THIS COMPANY CANNOT BE CONSIDERED AS FUNCTIONAL COMPARABLE TO A PURE SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE TRIBUNAL IN A NUMBER OF DECISIONS AS RELIED UPON BY THE ASSESSEE MENTIONED ( SUPRA ) HAS GIVEN THIS CONSISTENT FINDING. IN THE CASE OF MISYS SOFTWARE SOLUTIONS PVT. LTD . ( SUPRA ), THE FUNCTIONAL COMPARABILITY HAS BEEN EXAMINED BY THE TRIBUNAL IN PARAGRAPHS 7.2 TO 7.4.2 WHICH IS REPRODUCED BELOW : '7.2 (5) ACCEL TRANSMATI CS LTD . THIS COMPANY WAS SELECTED AS A COMPARABLE BY THE TPO AND WAS RETAINED AS A COMPARABLE EVEN THOUGH THE ASSESSEE OBJECTED TO ITS INCLUSION BEFORE THE DRP. IT IS THE CONTENTION OF THE ASSESSEE THAT THE ABOVE COMPANY IS FUNCTIONALLY DIFFERENT FROM THE COMPANIES ENGAGED IN BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS AES. IT IS SUBMITTED THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY IS ENGAGED IN PROVISION OF ACCEL ANIMATION STUDIES SERVICES IN THE FORM OF ACCEL IT AND ACCEL A NIMATION SERVICES FOR 2D AND 3D ANIMATION. IT WAS ALSO ENGAGED IN VARIOUS BUSINESS ACTIVITIES, SOME OF WHICH ARE USHUS TECHNOLOGIES - FOR OFFSHORE DEVELOPMENT CENTRE FOR EMBEDDED SOFTWARE NETWORK SYSTEM, IMAGING TECHNOLOGIES ; ACCEL IT ACADEMY FOR TRAINING SERVICES IN HARDWARE AND NETWORKING, VLSI DESIGNS, CAD/CAM/BPO, ETC., THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE CONTENDS THAT IN VIEW OF THE IT (T P) A NO . 1373 /BANG/201 0 PAGE 16 OF 22 ABOVE SERVICES RENDERED, IT IS EVIDENT THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE I N THE CASE ON HAND AND THEREFORE OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES TO THE ASSESSEE. IN SUPPORT OF THIS CONTENTION, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBU NAL IN THE CASE OF HUAWEI TECHNOLOGIES INDIA PVT. LTD . FOR ASSESSMENT YEAR 2006 - 07 ( SUPRA ). 7.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE TPO IN INCLUDING THESE TWO COMPANIES AS COMPARABLES TO THE ASSESSEE IN THE CASE ON HAND. 7.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL PRONOUNCEMENT RELIED ON BY THE ASSESSEE. WE FIND THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF HUAWEI TECHNO LOGIESINDIA PVT. LTD . FOR ASSESSMENT YEAR 2006 - 07 ( SUPRA ) HAS EXCLUDED THESE TWO COMPANIES FROM THE LIST OF COMPARABLES TO ASSESSEE'S ENGAGED IN THE SOFTWARE DEVELOPMENT SERVICES AS THEY ARE FUNCTIONALLY DIFFERENT. AT PARAS 12 AND 13 OF ITS ORDER, THE CO - O RDINATE BENCH HAS HELD AS UNDER: '12. INSOFAR KALS INFO SYSTEMS LTD ., AND ACCEL TRANSMATICS LTD . CHOSEN BY THE TPO AS COMPARABLES, THIS TRIBUNAL IN THE CASE OF TRIOLOGY E - BUSINESS SOFTWARE INDIA PVT. LTD . ( SUPRA ) HAS TAKEN A VIEW THAT THESE COMPANIES ARE NOT COMPARABLE TO THE SOFTWARE SERVICE PROVIDER COMPANIES AS THEY ARE FUNCTIONALLY DIFFERENT. THE FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THIS REGARD: ( D ) KALS INFORMATION SYSTEMS LTD . 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUA L REPORT, 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 T RIBUNAL'S DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED V. DCI ITA NO. 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006 - 07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS 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 PA GES 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 PAGE S 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 IT (T P) A NO . 1373 /BANG/201 0 PAGE 17 OF 22 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 REJE CTED 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 WH ICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED T O 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 MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE 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 THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDI A (F) LTD . V. ADDL. CIT 12 TAXMANN.COM 51 , THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RELEVANT OBSERVAT IONS OF DRP AS EXTRACTED BY THE ITAT 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, NETWORK SYSTEM, IMA GING 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 STUDIE S SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD . DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSE E 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 ASSESSEE'S CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL IT (T P) A NO . 1373 /BANG/201 0 PAGE 18 OF 22 TRANSMATIC LTD . FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN.' 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN THE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARABILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID 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 THE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEE ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES.' 13. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUNAL, KALS INFO SYSTEMS LTD ., AND ACCEL TRANSMATICS LTD . ARE TO BE EXCLUDED FOR THE PURPOSE OF COMPARISON WHILE DETERMINING THE ALP OF THE IMPUGNED TRANSACTION IN THIS APPEAL. IT IS ORDERED ACCORDINGLY.' 7.4.2 FOLLOWING THE AFORESAID DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF HUAWEI TECHNOLOGIES INDIA PVT. LTD . FOR ASSESSMENT YEAR 2006 - 07 ( SUPRA ), WE HOLD AND DIRECT THA T THESE TWO COMPANIES, NAMELY KALS INFOSYSTEMS LTD . AND ACCEL TELEMETRICS LTD . ARE TO BE EXCLUDED FROM THE SET OF COMPARABLE COMPANIES FOR THE SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE.' IN VIEW OF THE DIFFERENT BUSINESS ACTIVITIES OF THIS COMP ANY AS REFERRED IN THE ANNUAL REPORT OF THIS COMPANY AS WELL AS THE CONSISTENT FINDING OF THIS TRIBUNAL IN THE CASES CITED ( SUPRA ), WE DIRECT THE A.O./TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING THE ALP. LUCID SOFTWARE LTD. '8.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL PRONOUNCEMENTS RELIED ON BY THE ASSESSEE. WE FIND THAT THE CO - ORDINATE BENCH IN THE CASE OF HUAWEI TECHNOLOGIES IND IA PVT. LTD . FOR ASSESSMENT YEAR 2006 - 07 ( SUPRA ) HAS EXCLUDED THESE TWO COMPANIES FROM THE SET OF COMPARABLES HOLDING AS UNDER AT PARAS 14 & 15 THEREOF : '14. AS FAR AS LUCID SOFTWARE LTD . AND TATA ELXSI LTD . CHOSEN BY THE TPO AS COMPARABLES, WE FIND THAT THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD . ( SUPRA ) WHILE DEALING WITH THE CASE OF SOFTWARE SERVICES PROVIDER LIKE THE ASSESSEE, CONSIDERED THE COMPARABILITY OF LUCID SOFTWARE LTD . WITH SIMILAR SOFTWARE SERVICES PROVIDER AND THE TRIBUNAL HELD AS FOLLOWS : IT (T P) A NO . 1373 /BANG/201 0 PAGE 19 OF 22 '7.2 LUCID SOFTWARE LIMITED . IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY, BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALSO INVOLVED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HAS TRIED TO DISTI NGUISH BY POINTING OUT THAT PRODUCT DEVELOPMENT EXPENDITURE IN THIS CASE IS AROUND 39% OF THE CAPITAL EMPLOYED BY THE SAID COMPANY, AND, THEREFORE, SUCH A COMPANY CANNOT BE CONSIDERED AS TESTED PARTY. EVEN AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOT ICE UNDER SECTION 133(6), THE COMPANY HAS DESCRIBED ITS BUSINESS AS SOFTWARE DEVELOPMENT COMPANY OR PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. THIS INFORMATION ITSELF IS VERY VAGUE AS THE SEGMENTAL DETAILS OF OPERATING 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 FACT THAT IT HAS DEVELOPED A SOFTWARE PRODUCT NAMED AS 'MUULAM' WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVEL OPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS - - VIS THE CAPITAL EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENTIAL THAT THE CHARACTERISTICS AND THE FUNCT IONS ARE BY AND LARGE SIMILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STUDY CAN BE MADE WITH FEWEST AND MOST RELIABLE 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 COMPANY, WHO IS INVOLVED IN SERVICE SECTOR. THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILITY RATIO. IN OUR VIEW, DUE TO NON - AVAILABILITY OF FULL INFORMATION ABUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE SALE OF PRODUCT AND HOW MUCH IS FROM THE SERVICES, THEREFORE, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ARM'S LENGTH PRICE IN THE CASE OF THE ASSESSEE.' 15. IN VIEW OF THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WHICH IS IN RELATION TO A.Y. 2006 - 07, WE ARE OF THE VIEW THAT LUCID SOFTWARE LTD . AND TATA ELXSI LTD . ARE ALSO TO BE EXCLUDED AS COMPARABLES WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION IMPUGNED IN THIS APPEAL.' 8.3.2 AS FAR AS THE COMPANY TATA ELXSI LTD . , IS CONCERNED, FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF HUAWEI TECHNOLOGIES INDIA PVT. LTD . FOR ASSESSMENT YEAR 2006 - 07 ( SUPRA ), WE HOLD AND DIRECT THAT THIS COMPANY BE EXCL UDED FROM THE LIST OF COMPARABLES FOR THE SOFTWARE DEVELOPMENT SERVICES OF THE ASSESSEE. IT IS ORDERED ACCORDINGLY.' IN VIEW OF THE ABOVE DISCUSSION, AS WELL AS THE DECISION OF THE CO - ORDINATE BENCH, WE DIRECT THE A.O./TPO TO EXCLUDE THIS COMPANY FROM THE SET OF COMPARABLES FOR DETERMINING THE ALP. 14. ADDITIONAL GROUNDS. IT (T P) A NO . 1373 /BANG/201 0 PAGE 20 OF 22 14.1 THE ASSESSEE HAS ALSO SOUGHT THE EXCLUSION OF CERTAIN MORE COMPANIES FROM THE LIST OF COMPARABLES IN THE ADDITIONAL GROUNDS RAISED BEFORE THIS TRIBUNAL. THE COMPANIES SOUGHT TO BE EXC LUDED ARE DISCUSSED AS UNDER: 14.2 AS REGARDS M/S. AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD . & MEGASOFT LTD , SINCE THESE TWO COMPANIES HAVE NOT SATISFIED WITH THE FILTER OF RPT AT 15%, THEREFORE, IN VIEW OF THE CONSISTENT VIEW TAKEN BY THE TRIBUNAL AND OUR FINDING IN THE FOREGOING PARAGRAPHS, THESE TWO COMPANIES STAND EXCLUDED FROM THE LIST OF COMPARABLES. 14.3 IN THE ADDITIONAL GROUNDS, THE ASSESSEE IS ALSO SEEKING EXCLUSION OF SOME MORE COMPANIES ON THE GROUND OF TURNOVER FILTER. THE TURNOVER FILTER WAS N EITHER APPLIED BY THE ASSESSEE NOR BY THE TPO FOR SELECTING COMPARABLE COMPANIES. FURTHER, THE ASSESSEE DID NOT RAISE ANY SUCH OBJECTION EITHER BEFORE THE TPO OR BEFORE THE DRP. THUS, THIS PLEA RAISED BY THE ASSESSEE DOES NOT PERTAIN TO ANY FINDING OF THE AUTHORITIES BELOW AND THEREFORE THIS ISSUE DOES NOT EMANATE FROM THE ORDERS OF THE AUTHORITIES BELOW. MOREOVER, THE ASSESSEE COMPANY SOUGHT EXCLUSION OF SELECTED COMPANIES FROM THE LIST OF COMPARABLES OF THE TPO ON THE GROUND OF TURNOVER FILTER. IF SUCH A CRITERIA HAS TO BE APPLIED IN SELECTION OF THE COMPARABLES THEN, ALL THE COMPARABLES SELECTED BY THE TPO ARE TO BE TESTED BY APPLYING SUCH FILTER OF TURNOVER. THE ASSESSEE CANNOT BE PERMITTED TO PICK AND CHOOSE CERTAIN COMPANIES ON THE GROUND OF TURNOVER F ILTER WHICH SUPPORTS THE INTEREST OF THE ASSESSEE. EVEN OTHERWISE, THE TURNOVER FILTER OF RS. 1 CRORE TO RS. 200 CRORES AS SOUGHT BY THE ASSESSEE IF APPLIED WILL GIVE ABSURD RESULTS WHICH ARE NOT ACCEPTABLE AS PER THE MINIMUM COMMON LOGIC. APPLYING SUCH A FILTER OF TURNOVER OF RS. 1 CRORE TO RS. 200 CRORES, MEANS THAT DIFFERENCE OF 200 TIMES OF TURNOVER IS ACCEPTABLE FOR SELECTING THE COMPANY BUT AT THE SAME TIME IT DEFIES THE SAID CRITERIA WHEN A COMPANY OF RS. 200 CRORES TURNOVER CANNOT BE COMPARED WITH T HAT OF A COMPANY OF RS. 201 CRORES TURNOVER DESPITE THE DIFFERENCE IS ONLY RS. 1 CRORE. THEREFORE, ON THIS BASIC AND FUNDAMENTAL ANALYSIS OF THIS FILTER, IT IS APPARENT THAT IF SUCH FILTER OF TURNOVER IS APPLIED, IT WILL GIVE ABSURD RESULTS. EVEN OTHERWISE , IF 200 TIMES MULTIPLE IS ACCEPTED FOR SELECTING COMPARABLES AND APPLIED THE SAME RATIO TO THE TURNOVER OF THE ASSESSEE WHICH IS ABOVE RS. 18 CRORES, A COMPANY OF UP TO RS. 3,600 CRORES WOULD BE CONSIDERED AS A GOOD COMPARABLE WHICH ITSELF DEFIES THIS FIL TER OF RS. 1 CRORE TO RS. 200 CRORES. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE ON HAND, WE DECLINE TO GRANT LEAVE TO THE ASSESSEE TO RAISE THIS NEW PLEA OF APPLYING TURNOVER FILTER ON THE SELECTIVE COMPANIES. 14.4 HOWEVER, THE PLEA TAKEN BY THE ASSESSEE IN THE ADDITIONAL GROUND REGARDING THE FUNCTIONAL DIS - SIMILARITY EVEN IN RESPECT OF THOSE COMPARABLES SELECTED BY THE ASSESSEE ITSELF CANNOT BE REJECTED MERELY ON THE GROUND THAT THE ASSESSEE HAS RAISED ITS PLEA FOR THE FIRST TIME AT THIS STA GE BECAUSE IF A PARTICULAR COMPANY IS FOUND FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE OUGHT TO HAVE BEEN EXCLUDED FROM THE SET OF COMPARABLES TO AVOID INCORRECT RESULTS. EVEN OTHERWISE, IN CASE IF THE ASSESSEE COMMITS SOME MISTAKES IN THE ASSESSMENT PR OCEEDINGS THAT RESULTS INCORRECT ASSESSMENT OF THE TAX LIABILITY THEN THE ASSESSEE CANNOT BE BARRED FROM RAISING SUCH A PLEA AT THE APPELLATE STAGE IN ORDER TO ASSESS CORRECTLY THE TAX LIABILITY OF THE ASSESSEE. IT (T P) A NO . 1373 /BANG/201 0 PAGE 21 OF 22 WE FIND THAT THE FUNCTIONAL COMPARABILITY OF THESE COMPANIES NAMELY ACCEL TRANSMATICS LTD ., GEOMETRIC SOFTWARE LTD ., FLEXTRONIC SOFTWARE SYSTEM LTD . AND INFOSYS TECHNOLOGIES LTD . HAS BEEN EXAMINED IN A NUMBER OF CASES BY THIS TRIBUNAL AND THEREFORE IN VIEW OF THE FINDINGS OF THE TRIBUNAL ON THE ISSU E OF COMPARABILITY OF THESE COMPANIES, WE INCLINE TO ADMIT THE ADDITIONAL GROUNDS OF THE ASSESSEE RAISING OBJECTION ON THE GROUND OF FUNCTIONAL DIS - SIMILARITY OF THESE COMPANIES MENTIONED ( SUPRA ) FOR DECIDING THE ISSUE ON MERITS. 10. THE LEARNED DR HA S NOT FILED ANY EVIDENCE CONTROVERTING THE FINDING OF THE TRIBUNAL IN THE ABOVE CASES. IN THE CIRCUMSTANCES, RESPECTFULLY FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF LCI TECHNOLOGIES INDIA (P) LTD., (SUPRA) , WE HOLD THAT ABOVE COMPARABL E COMPANIES CANNOT BE CONSIDER E D TO BE COMPARABLE ON THE GROUND OF FUNCTIONALITY. HENCE, WE DIRECT THE AO/TPO TO DELETE THESE COMPANIES FROM THE LIST OF COMPARABLES. 11. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ONCE THESE COMPANIES AR E EXCLUDED FRO M THE LIST OF COMPARABLES, IT COMES WITHIN TP ADJUSTMENT OF + / - 5%. HENCE, HAD NOT PRESSED RISK ADJUSTMENT. GROUND NO .5 IN THIS REGARD IS DISMISSED AS NOT PRESSED. 12. THE ISSUE RAISED IN GROUND NO.7 IS THAT EXPENSES INCURRED ON COMMUNICATION EXPENS ES IN FOREIGN CURRENCY SHOULD BE REDUCED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER FOR THE PURPOSE OF CALCULATING BENEFIT U/S 10A OF THE ACT. THIS ISSUE IS NOW SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI (349 IT (T P) A NO . 1373 /BANG/201 0 PAGE 22 OF 22 ITR 98) , WHEREIN THE HON BLE JURISDICTIONAL HIGH COURT HELD THAT THE SAME IS REQUIRED TO BE REDUCED FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. RESPECTFULLY FOLLOWING THE RATIO OF THE DECISION OF THE HON'BLE JURIS DICTIONAL HIGH COURT WE DIRECT THAT EXPENSES INCURRED IN FOREIGN EXCHANGE TOWARDS COMMUNICATION ARE TO BE REDUCED BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. HENCE, THIS GROUND OF APPEAL IS ALLOWED. 13. GROUND NOS.8 AND 9 ARE CONSEQUENTIAL IN NAT URE AND DO NOT REQUIRE ADJUDICATION. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE - COMPA N Y IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH MARCH , 201 7 . S D/ - SD/ - ( SUNIL KUMAR YADAV ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : BANGALORE D A T E D : / 03 /2017 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL , BANGALORE