Appeal details
Counselvise Citation
[2017] 128 COUNSELVISE.COM (IT) 5423 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 year(s) 3 month(s) 29 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-04-2017
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
A
Next Hearing Date
20-02-2017
Assessment Year
2005-2006
Appeal Filed On
30-12-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER IT (TP) A NOS. 1041 & 1379/BANG/2011 ASSESSMENT YEAR: 2005-06 M/S. SUNGARD SOLUTIONS (INDIA) PVT. LTD., (FORMERLY KNOWN AS SCT SOFTWARE SOLUTIONS PVT. LTD.), A BLOCK, 1 ST FLOOR, DIVYASHREE CHAMBERS, LANGFORD ROAD, BANGALORE 560 025. PAN: AABCE 7476K VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 12(3), BANGALORE. APPELLANT RESPONDENT IT (TP) A NO. 1106/BANG/2011 ASSESSMENT YEAR: 2005-06 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 12(3), BANGALORE. VS. M/S. SUNGARD SOLUTIONS (INDIA) PVT. LTD., (FORMERLY KNOWN AS SCT SOFTWARE SOLUTIONS PVT. LTD.), A BLOCK, 1 ST FLOOR, DIVYASHREE CHAMBERS, LANGFORD ROAD, BANGALORE 560 025. PAN: AABCE 7476K APPELLANT RESPONDENT APPELLANT BY : SHRI G. KAMALADHAR, STANDING COUNSEL RESPONDENT BY : SHRI K.R. VASUDEVAN, ADVOCATE IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 2 OF 31 DATE OF HEARING : 20.02.2017 DATE OF PRONOUNCEMENT : 28.04.2017 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THESE ARE CROSS APPEALS DIRECTED AGAINST THE ORDER DATED 13.09.2011 OF CIT(A) AND AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATED 27.10.2011 OF CIT(A) PASSED U/S. 154 OF THE IT ACT FOR THE ASS ESSMENT YEAR 2005-06. THE ASSESSEE IS A SUBSIDIARY OF EXETER EDUCATIONAL MANAGEMENT SYSTEMS INC. USA AND PROVIDES SOFTWARE DEVELOPMENT SERVICES FOR THE ADMINISTRATION OF HIGHER EDUCATION INSTITUTIONS WOR LDWIDE. THE ASSESSEE HAS BEEN CATEGORIZED BY THE TPO AS A ROUTINE SOFTWA RE SERVICE PROVIDER TO ITS AE. THE FINANCIAL RESULTS AS WELL AS INTERNATI ONAL TRANSACTIONS REPORTED BY THE ASSESSEE ARE REPRODUCED BY THE TPO IN PARA 2 .3 AND 2.4 AS UNDER. 2.3 FINANCIAL RESULTS OF SUNGARD INDIA, FY 2004-05 (* EXCLUDING FOREIGN EXCHANGE LOSS OF RS. 1 ,78,041) 2.4 INTERNATIONAL TRANSACTIONS (AS MENTIONED IN TH E 92 CE REPORT) EXPORT OF SOFTWARE DEVELOPMENT SERVICES- RS. 11,80, 97,508/- REIMBURSEMENT OF EXPENSES (RECEIVED) RS. 2, 12,691/- WRITE BACK OF MANAGEMENT SERVICES FEE RS. 8 ,01,775/- OPERATING REVENUE RS. 11,80,97,508/- OPERATING EXPENSES RS. 10,32,20,464/-* PBIT RS. 1,48,77,044/- PBIT ON COST 14.41% IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 3 OF 31 2. TO BENCH MARK ITS INTERNATIONAL TRANSACTION THE ASS ESSEE SELECTED SEVEN COMPARABLE COMPANIES IN ITS TP STUDY ANALYSIS WITH MEAN MARGIN OF 9.70% IN COMPARISON TO THE ASSESSEES MARGIN ON COS T AT 14.41%. THUS THE ASSESSEE CLAIMED ITS INTERNATIONAL TRANSACTION AT ARMS LENGTH. THE TPO REJECTED THE TP ANALYSIS OF THE ASSESSEE AND CA RRIED OUT A FRESH SEARCH. THE TPO HAS SELECTED A SET OF 17 COMPARABL E COMPANIES AS UNDER. SL.NO. COMPANY NAME WORKING CAPITAL UNADJUSTED MARGINS FY 2004-05 WORKING CAPITAL ADJUSTED MARGINS FY 2004-05 1 BODHTREE CONSULTING LIMITED 24.85% 27.69% 2 LANCO GLOBAL SYSTEMS LIMITED 13.65% 14.60% 3 EXENSYS SOFTWARE SOLUTIONS LIMITED 70.68% 68.84% 4 SANKHYA INFOTECH LIMITED 27.39% 26.49% 5 SASKEN NETWORKS SYSTEMS LIMITED 16.64% 19.20% 6 R S SOFTWARE (INDIA) LIMITED 22.98% 11.84% 7 FOUR SOFT LIMITED 66.09% 26.68% 8 THIRDWARE SOLUTIONS LIMITED 8.07% 70.01% 9 GEOMETRIC SOFTWARE SOLUTIONS LIMITED 20.34% 22.97% 10 TATA ELXSI LIMITED (SEG.) 24.35% 28.14% 11 VISUALSOFT TECHNOLOGIES LIMITED(SEG.) 23.52% 25.36% 12 SASKEN COMMUNICATIONS LIMITED (SEG.) 14.42% 18.44% 13 FLEXTRONICS SOFTWARE SYSTEMS LIMITED (SEG.) 32.19% 34.89% 14 LARSEN & TOUBRO INFOTECH LIMITED 10.33% 13.64% 15 SATYAM COMPUTER SERVICES LIMITED 29.44% 32.35% 16 INFOSYS TECHNOLOGIES LIMITED 42.83% 46.61% 17 IGATE GLOBAL SOLUTIONS LIMITED (SEG.) 4.32% 6.85% ARITHMETIC MEAN 26.59% 29.09% IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 4 OF 31 3. THE TPO HAS MADE A NEGATIVE WORKING CAPITAL ADJUSTM ENT OF 2.50% AND THE ADJUSTED MEAN MARGIN WAS ARRIVING AT 29.09% . ACCORDINGLY, THE TPO HAS PROPOSED AN ADJUSTMENT U/S. 92CA OF RS. 1,52,11,661/-. THE ASSESSEE CHALLENGED THE ACTION OF THE TPO BEFOR E THE CIT(A). THE CIT(A) APPLIED THE FILTER OF 0% RELATED PARTY TRANS ACTION AS WELL AS HIGH PROFIT MARGIN OF MORE THAN 50% AND THEREBY EXCLUDED 13 COMPANIES FROM THE SET OF 17 SELECTED BY THE TPO. IN CASE OF M/S. INFOSYS TECHNOLOGIES LTD. APART FROM THE RELATED PARTY TRAN SACTION THE CIT(A) HAS ALSO APPLIED THE PARAMETER OF SIZE / TURNOVER A ND RISK ASSUMED. THUS AFTER THE EXCLUSION MADE BY THE CIT(A) ONLY 4 COMPANIES REMAIN IN THE SET OF COMPARABLES AS UNDER. SL.NO. NAME OF THE COMPANY OP/OC (%) OP/OC AFTER WC ADJUSTMENT 1 BODHTREE CONSULTING LTD. 24.01 26.85 2 LANCO GLOBAL SYSTEMS LTD. 13.22 14.17 3 SANKHYA INFOTECH LTD. 26.63 25.73 4 VISUAL SOFT TECHNOLOGIES LTD. 23.52 25.36 AVERAGE 23.03 4. THE REVENUE IS AGGRIEVED BY THE ORDER OF THE CIT(A) AS IT HAS APPLIED THE 0% RELATED PARTY TRANSACTION FILTER AS WELL AS THE HIGH PROFIT MARGIN OF MORE THAN 50% WHEREAS, THE ASSESSEE IS AGGRIEVED BECAUSE OF CERTAIN COMPANIES OBJECTED BY THE ASSESSEE ON FUNCTIONAL DI SSIMILARITY HAVE BEEN RETAINED IN THE SET OF COMPARABLES. THUS BOTH THE ASSESSEE AND IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 5 OF 31 REVENUE HAVE FILED THE CROSS APPEALS AGAINST THE IM PUGNED ORDER OF THE CIT(A) AND RAISED THE FOLLOWING GROUNDS: GROUNDS RAISED BY THE ASSESSEE:- IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 6 OF 31 IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 7 OF 31 IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 8 OF 31 GROUNDS RAISED BY THE REVENUE:- 5. RPT FILTER OF 0%:- WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CO NSIDERED THE RELEVANT MATERIAL ON RECORD. THE TPO APPLIED T HE FILTER OF 25% OF RPT WHILE SELECTING THE COMPARABLES. WHEREAS THE C IT(A) HAS APPLIED A FILTER OF 0% RPT. WE FIND THAT 0% RELATED PARTY TR ANSACTION IS A IMPOSSIBLE SITUATION AND THEREFORE IF THE SAID FILT ER IS APPLIED THEN THE IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 9 OF 31 COMPARABLE COMPANIES WILL NOT BE AVAILABLE FOR DETE RMINING THE ARMS LENGTH PRICE. THUS TO AVOID THIS PRACTICAL DIFFICU LTY OF SELECTING THE COMPARABLE COMPANIES THIS TRIBUNAL IN A SERIES OF D ECISIONS HAVE TAKEN A VIEW THAT A TOLERANCE RANGE OF RELATED PARTY TRANSA CTION CAN BE CONSIDERED FROM 5% TO 25% DEPENDING UPON THE FACTS AND CIRCUMS TANCES OF EACH CASE PARTICULARLY THE AVAILABILITY OF THE COMPARABLE COM PANIES. IN ORDINARY CIRCUMSTANCES WHEN THERE IS NO DIFFICULTY OF SELECT ING THE COMPARABLE COMPANIES THE TOLERANCE RANGE OF 15% OF RELATED PAR TY IS CONSIDERED TO BE PROPER. ONLY IN EXTREME AND EXCEPTIONAL CIRCUMSTAN CES WHEN THE COMPARABLE COMPANIES ARE NOT EASILY AVAILABLE OR FO UND THEN THIS TOLERANCE RANGE IS RELAXED UP TO 25%. THEREFORE IN THE CASE OF THE ASSESSEE WHERE NEITHER THE TPO NOR THE ASSESSEE HAS MADE OUT A CAS E OF EXCEPTIONAL DIFFICULTY IN SEARCHING THE COMPARABLE COMPANIES TH EN THE NORMAL TOLERANCE RANGE OF 15% SHALL BE TAKEN AS PROPER. H ENCE WE SET ASIDE THE ORDER OF THE CIT(A) QUA THIS ISSUE OF RELATED PARTY TRANSACTION FILTER AND ALSO MODIFY THE ORDER OF THE TPO ON THIS ISSUE AND HOLD THAT 15% TOLERANCE RANGE OF RELATED PARTY IS REASONABLE AND PROPER IN THE CASE OF THE ASSESSEE. 6. BY APPLYING THIS FILTER THE COMPANIES WHICH ARE HAV ING THE RELATED PARTY TRANSACTION UPTO 15% WILL BE RESTORED TO THE SET OF COMPARABLE IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 10 OF 31 HOWEVER, SUBJECT TO OUR FINDING ON THE FUNCTIONAL C OMPARABILITY OF THOSE COMPANIES. THE SECOND ISSUE RAISED BY THE RE VENUE IS REGARDING HIGH PROFIT MARGIN WAS TAKEN BY THE CIT(A) FOR EXCL USION OF CERTAIN COMPANIES NAMELY EXENSYS SOLUTIONS LTD., AND THIRDW ARE SOLUTIONS LTD. 7. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONS IDERED THE RELEVANT MATERIAL ON RECORD. THIS ISSUE IS NOW SET TLED THAT HIGH PROFIT OR LOSS CANNOT BE A CRITERIA FOR INCLUSION OR EXCLU SION OF COMPANIES IN THE SET OF COMPARABLES. HOWEVER, IF THE HIGH PROFI T OR LOSS IS BY THE REASON OF SOME EXTRAORDINARY CIRCUMSTANCES THEN THO SE EXTRAORDINARY CIRCUMSTANCES WHICH HAS LED TO THE HIGH PROFIT OR L OSS CAN BE CONSIDERED AS A CRITERIA FOR INCLUSION OR EXCLUSION OF THE COMPANIES IN THE LIST OF COMPARABLES. THEREFORE, THE MERE HIGH PROFIT MARGIN OR LOSS CANNOT BE CONSIDERED AS A PARAMETER OR CRITERIA FOR SELECTION OF COMPARABLE COMPANIES AS HELD BY THE SPECIAL BENCH O F THIS TRIBUNAL IN CASE OF MAERSK GLOBAL CENTRES (INDIA) (P.) LTD. VS ACIT (147 ITD 83) (SPECIAL BENCH, MUMBAI) 8. THE ASSESSEE IN SEEKING EXCLUSION OF 10 COMPANIES O UT OF 17 SELECTED BY THE TPO. AT THE TIME OF HEARING THE LD. AR OF T HE ASSESSEE HAS SAID AT BAR THAT THE ASSESSEE DOES NOT PRESS GROUND NO. 5 WHEREIN THE IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 11 OF 31 ASSESSEE IS SEEKING INCLUSION OF CERTAIN COMPANIES IN THE SET OF COMPARABLES. THUS IN VIEW OF THE STATEMENT OF THE LD. AR OF THE ASSESSEE THE GROUND NO. 5 OF THE ASSESSEES APPEAL IS DISMISSED BEING NOT PRESSED. 9. AS REGARDS THE FUNCTIONAL COMPARABILITY OF THE 10 C OMPANIES THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT AN IDENTICAL SET OF COMPARABLE WAS CONSIDERED BY THE COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF ITO VS. M/S. NET DEVICES INDIA PVT. LTD. IN IT(TP)A NO. 109 9/BANG/2011 VIDE ORDER DATED 25.05.2016 AND FURTHER VIDE ORDER DATED 23.11.2016 IN MP NO. 100/BANG/2016. THUS THE LD. AR HAS SUBMITTED T HAT THE FUNCTIONAL COMPARABILITY OF THESE 10 COMPANIES HAVE BEEN EXAMI NED BY THE COORDINATE BENCH AND FOUND TO BE NOT COMPARABLE WIT H THE SOFTWARE DEVELOPMENT SERVICE SEGMENT OF CAPTIVE SERVICE PROV IDER ASSESSEE. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDE RS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE TPO HAS DULY EXAMINED THE FUNCTIONAL COMPARABILITY OF THESE COMPANIES AND THEREFORE WHEN THE ARMS LENGTH PRICE HAS BEEN DETERMINED BY ADOPTING TNMM AS A MOS T APPROPRIATE METHOD THEN MINOR VARIATIONS IN THE FUNCTIONS OF TH E COMPARABLE COMPANIES ARE IRRELEVANT. IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 12 OF 31 10. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD, WE NOTE THAT OUT OF THE 17 COMPARABLE COMPA NIES SELECTED BY THE TPO THE ASSESSEE IS NOW SEEKING EXCLUSION OF 10 COMPANIES. THE DETAILS OF WHICH ARE AS UNDER. 1. BODHTREE CONSULTING LIMITED 2. EXENSYS SOFTWARE SOLUTIONS LIMITED 3. FOUR SOFT LIMITED 4. SANKHYA INFOTECH LIMITED 5. THIRDWARE SOLUTIONS LIMITED 6. GEOMETRIC SOFTWARE SOLUTIONS LIMITED 7. TATA ELXSI LIMITED (SEG.) 8. FLEXTRONICS SOFTWARE SYSTEMS LIMITED (SEG.) 9. SATYAM COMPUTER SERVICES LIMITED 10. INFOSYS TECHNOLOGIES LIMITED 10. AT THE OUTSET WE NOTE THAT THE FUNCTIONAL COMPARABI LITY OF AN IDENTICAL SET OF 10 COMPANIES HAVE BEEN EXAMINED BY THE COORD INATE BENCH OF THIS TRIBUNAL IN THE CASE OF ITO VS M/S. NET DEVICE S INDIA PVT. LTD. (SUPRA). WHILE DECIDING THE APPEAL VIDE ORDER DATE D 25.05.2016 THE TRIBUNAL HAS DEALT WITH THE FUNCTIONAL COMPARABILIT Y OF 8 COMPANIES IN PARA 11.1 TO 18.5.3 AS UNDER. 11.1 GROUND NO.6 IS REGARDING EXCLUSION OF M/S. INFOSYS TECHNOLOGIES LTD. ON THE GROUND OF TURNOVER AND BRAND VALUE OF THE CO MPANY. 11.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WELL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE FUNCTIONAL COMPARABILITY OF THIS COMPANY WAS DECIDED BY THE DELHI BENCH OF THIS TRIBUNAL IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856/ DEL/2010 WHICH HAS BEEN UPHELD BY THE HON'BLE DELHI HIGH COURT REPORTED IN 219 TAXMAN 26 IN PARAS 5 TO 8 WHICH ARE AS UNDER : IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 13 OF 31 5. THE TRIBUNAL HAS OBSERVED THAT THE ASSESSEE W AS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., AS INFOSYS TECHNOLOGIES LTD. WAS A LARGE AND BIGGER COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWA RE AND, THEREFORE, THE PROFITS EARNED CANNOT BE A BENCH MARKED OR EQUATED WITH THE RESPONDENT, TO DETERMINE THE RESULTS DECLARED BY THE RESPONDENT- A SSESSEE. IN PARAGRAPH 3.3 THE TRIBUNAL HAS REFERRED TO THE DIFFERENCE BETWEEN THE RESPONDENT-ASSESSEE AND INFOSYS TECHNOLOGIES LTD. FOR THE SAKE OF CONVE NIENCE, WE ARE REPRODUCING THE SAME:- BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY INDIA RISK PROFILE OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100 PERCENT SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE-ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES. REVENUE RS.9, 028 CRORES RS.16.09 CRORES OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT, ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) ONSITE VS. OFFSHORE -AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E., SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20 PERCENT) (REFER PAGE 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E., REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SALES PROMOTION AND BRAND BUILDING RS.61 CRORES RS. NIL (AS THE 100 PERCENT SERVICES ARE PROVIDE TO AES) IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 14 OF 31 EXPENDITURE ON RESEARCH & DEVELOPMENT RS. 102 CRORES RS. NIL OTHER 100 PERCENT OFFSHORE (FROM INDIA) 6. LEARNED COUNSEL FOR THE REVENUE HAS SUBMITTED T HAT THE TRIBUNAL AFTER RECORDING THE AFORESAID TABLE HAS NOT AFFIRMED OR G IVEN ANY FINDING ON THE DIFFERENCES. THIS IS PARTLY CORRECT AS THE TRIBUNAL HAS STATED THAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASON LATTER WAS A GIANT COMPANY IN THE AREA OF DE VELOPMENT OF SOFTWARE AND IT ASSUMED ALL RISKS LEADING TO HIGHER PROFITS, WHE REAS THE RESPONDENT- ASSESSEE WAS A CAPTIVE UNIT OF THE PARENT COMPANY A ND ASSUMED ONLY A LIMITED RISK. IT HAS ALSO STATED THAT INFOSYS TECHN OLOGIES LTD. CANNOT BE COMPARED WITH THE RESPONDENT- ASSESSEE AS SEEN FROM THE FINANCIAL DATA ETC. TO THE TWO COMPANIES MENTIONED EARLIER IN THE ORDER I.E. THE CHART. IN THE GROUNDS OF APPEAL THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT OR DENY THE DATA AND DIFFERENCES MENTIONED IN THE TABULATED FOR M. THE CHART HAS NOT BEEN CONTROVERTED. 7. LEARNED COUNSEL FOR THE APPELLANT REVENUE DURING THE COURSE OF HEARING, DREW OUR ATTENTION TO THE ORDER PASSED BY THE TPO A ND IT IS POINTED OUT THAT BASED UPON THE FIGURES AND DATA MADE AVAILABLE, THE TPO HAD TREATED A THIRD COMPANY AS COMPARABLE WHEN THE WAGE AND SALE RATIO WAS BETWEEN 30 PERCENT TO 60 PERCENT. BY APPLYING THIS FILTER, SEV ERAL COMPANIES WERE EXCLUDED. THIS IS CORRECT AS IT IS RECORDED IN PARA 3.1.2 OF THE ORDER PASSED BY THE TPO. TPO, AS NOTED ABOVE, HOWEVER HAD TAKEN THR EE COMPANIES, NAMELY, SATYAM COMPUTER SERVICE LTD., L&T INFOTECH LTD. AND INFOSYS TECHNOLOGIES AS COMPARABLE TO WORK OUT THE MEAN. 8. IT IS A COMMON CASE THAT SATYAM COMPUTER SERVICE S LTD. SHOULD NOT BE TAKEN INTO CONSIDERATION. THE TRIBUNAL FOR VALID AN D GOOD REASONS HAS POINTED OUT THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE TAKEN AS A COMPARABLE IN THE PRESENT CASE. THIS LEAVES L&T INFOTECH LTD. WHICH G IVES US THE FIGURE OF 11.11 PERCENT, WHICH IS LESS THAN THE FIGURE OF 17 PERCEN T MARGIN AS DECLARED BY THE RESPONDENT-ASSESSEE. THIS IS THE FINDING RECORDED B Y THE TRIBUNAL. THE TRIBUNAL IN THE IMPUGNED ORDER HAS ALSO OBSERVED THAT THE AS SESSEE HAD FURNISHED DETAILS OF WORKABLES IN RESPECT OF 23 COMPANIES AND THE MEAN OF THE COMPARABLES WORKED OUT TO 10 PERCENT, AS AGAINST TH E MARGIN OF 17 PERCENT SHOWN BY THE ASSESSEE. DETAILS OF THESE COMPANIES A RE MENTIONED IN PARA 5 OF THE IMPUGNED ORDER. FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH CO URT (SUPRA), WE DO NOT FIND ANY REASON TO INTERFERE WITH THE IMPUGNED ORDER OF THE CIT (APPEALS) ON THIS ISSUE. C.O. NO.19/BANG/2012 12. THE ASSESSEE HAS RAISED THE FOLLOWING GROUN DS IN THE CROSS OBJECTIONS : IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 15 OF 31 1. THAT THE ORDER OF THE LEARNED CIT (APPEALS) RE SULTING IN INCOME OF THE RESPONDENT BEING SUBJECT TO TAX, IS BAD IN LAW, WIT HOUT APPLICATION OF MIND AND LIABLE TO BE QUASHED. 2. THAT THE LEARNED CIT (APPEALS) ERRED IN NOT EN TIRELY DELETING THE ADJUSTMENT TO THE ARMS LENGTH PRICE MADE BY THE LD. ASSESSING OFFICER / TPO AMOUNTING TO INR 12,882,925 IN RESPECT OF THE SOFTWARE DEVELOPME NT SERVICES. 3. THAT IN MAKING AN ADJUSTMENT TO THE RESPONDENT S TRANSFER PRICE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEA RNED CIT (APPEALS) ERRED IN : A) UPHOLDING THE COMPARABILITY ANALYSIS PERFORMED B Y THE LD. TPO IN THE TP ORDER. B) ARBITARILY REJECTING THE FILTERS APPLIED BY THE RESPONDENT WHILE UNDERTAKING THE TP STUDY. C) MODIFYING SOME OF THE FILTERS APPLIED BY THE LD . TPO IN THE TP ORDER, WITHOUT PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE APPE LLANT. D) ARBITRARY ARRIVING AT A SET OF COMPANIES AS COM PARABLE TO THE RESPONDENT. E) DISREGARDING APPLICATION OF MULTIPLE YEAR / PRI OR YEAR DATA AND HOLDING THAT CURRENT YEAR (I.E. OPPORTUNITY OF BEING HEARD TO TH E APPELLANT. F) UPHOLDING THE LD. TPOS APPROACH OF USING DATA AS AT THE TIME OF ASSESSMENT PROCEEDINGS. G) UPHOLDING THE APPROACH ADOPTED BY THE LD. TPO O F COLLECTING SELECTIVE INFORMATION OF THE COMPANIES BY EXERCISING POWER GR ANTED TO HIM UNDER SECTION 133(6) OF THE INCOME TAX ACT, 1961 THAT WAS NOT AVAILABLE TO THE RESPONDENT IN THE PUBLIC DOMAIN. H) NOT PROVIDING APPROPRIATE ADJUSTMENT TOWARDS TH E RISK DIFFERENTIAL BETWEEN THE RESPONDENT AND THE ENTREPRENEURIAL COMPANIES SE LECTED AS COMPARBLES, WHILE DETERMINING THE ARMS LENGTH PRICE. THAT THE RESPONDENT CRAVES LEAVE TO ADD TO AND/OR A LTER, AMEND, RESCIND, MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME HEARING OF THIS APPEAL. 13. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GRO UNDS AS UNDER : THE GROUNDS MENTIONED HEREIN ARE WITHOUT PREJUDIC E TO THE GROUNDS MENTIONED IN APPEAL NO. CO 19/BANG/12 FILED ON JULY 12,2012. TRANSFER PRICING RELATED 1. THAT THE LD. ITO, WARD 12(1), BANGALORE AND THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE LD. JDIT (TPO )-II OF ACCEPTING BODHTREE CONSULTING LIMITED AS A COMPARABLE THAT FA IL THE TEST OF COMPARABILITY ON APPLICATION OF RELATED PARTY TRANS ACTION FILTER OF 15% AND THUS NOT COMPARABLE TO THE APPELLANT IN RESPECT OF ITS SOFTWARE DEVELOPMENT SERVICES. 2. 2. THE LD. A.O/TPO ERRED IN CONSIDERING FLEXTRO NICS SOFTWARE SYSTEMS LTD. (SEG.) THAT FAILS THE TEST OF COMPARABILITY DU E TO FUNCTIONAL DISSIMILARITY AND THUS NOT COMPARABLE TO THE APPELL ANT IN RESPECT OF ITS SOFTWARE DEVELOPMENT SERVICES. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR WITHDRAW ALL OR ANY OF THE GROUNDS OF APPEAL AND TO SUBMIT SUCH STATEMENTS, DO CUMENTS AND PAPERS AS MAY BE CONSIDERED NECESSARY EITHER AT OR BEFORE TH E APPEAL HEARING. IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 16 OF 31 14. FIRST WE TAKE UP THE ADDITIONAL GROUNDS RAIS ED BY THE ASSESSEE IN RESPECT OF THE EXCLUSION OF BODHTREE CONSULTANCY LTD. & FLEXTRONICS SOFTWARE SYSTEMS (SEG. ). 15.1 THE LEARNED AUTHORISED REPRESENTATIVE OF T HE ASSESSEE HAS SUBMITTED THAT THOUGH THE ASSESSEE DID NOT RAISE ANY OBJECTIO N BEFORE THE AUTHORITIES BELOW IN RESPECT OF THE COMPARABILITY OF THESE TWO COMPANIES HOWEVER IN VIEW OF THE VARIOUS DECISIONS OF THE TRIBUNAL, THESE TWO COMPANIES ARE FOUND TO BE NOT COCMPARABLE WITH THE SOFTWARE DEVELOPMENT SERVI CES PROVIDER. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THA T THE ASSESSEE HAS RAISED OBJECTION BY FILING THE ADDITIONAL GROUNDS W HICH MAY BE ADMITTED FOR DECIDING THE COMPARABILITY OF THESE TWO COMPANIES O N MERITS. 15.2 ON THE OTHER HAND, THE LEARNED DEPARTMEN TAL REPRESENTATIVE HAS OBJECTED TO THE ADMISSION OF THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE WHEN THE ASSESSEE HAS NOT RAISED ANY OBJECTION BEFO RE THE AUTHORITIES BELOW AND THE OBJECTIONS PROPOSED TO RAISE BY THE ASSESSE E NOW WAS NOT AVAILABLE WITH THE AUTHORITIES BELOW FOR THEIR CONSIDERATION. 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WE LL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD ON THE ADMISSIBILITY OF THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE. WE FIND THAT THERE ARE SOME DECI SIONS OF THIS TRIBUNAL WHEREIN THE COMPARABILITY OF THESE TWO COMPANIES HA VE BEEN CONSIDERED AND DECIDED BY THIS TRIBUNAL. THEREFORE, ONCE THE ASSE SSEE HAS BROUGHT ON RECORD SOME DECISIONS OF THE TRIBUNAL WHEREIN THESE TWO CO MPANIES WERE HELD TO BE NOT GOOD COMPARABLES THEN THE FACTS AND CIRCUMSTANC ES AND IN THE INTEREST OF JUSTICE, WE ADMIT THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE. ACCORDINGLY, WE WILL DEAL WITH THE COMPARABILITY OF THESE TWO CO MPANIES ON MERITS. 16. BODHTREE CONSULTANCY LTD. 16.1 THE LEARNED AUTHORISED REPRESENTATIVE OF TH E ASSESSEE HAS SUBMITTED THAT THIS COMPANY IS REQUIRED TO BE REJECTED THE RP T OF 34.68% OF THE TOTAL SALE WHICH IS IN EXCESS OF 15% TAKEN AS PROPER THRE SHOLD LIMIT. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF THE HYDERABAD BENCH OF ITAT IN THE CASE OF NTT DATA ENTERPRISES PVT. LTD. VS. ACIT DT.23.10.2013 IN ITA NO.1612/HYD/2010 AND SUBMITTED THAT IN THE SAID CASE THE TRIBUNAL HAS NOTED THAT THE RPT OF THIS COMPANY ARE 34.68%. THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT BY FOLLOWING THE SAID DECISION, THE CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS. MCAFEE SOFTWARE INDIA PVT. LTD. DT.18.3.2016 IN ITA NOS.4/BANG/2012 AND 1 388/BANG/2011 HAS ALSO TAKEN A SIMILAR VIEW. THUS THE LEARNED AUTHORISED R EPRESENTATIVE HAS SUBMITTED THAT IN VIEW OF THE DECISIONS OF THE CO-O RDINATE BENCHES OF THIS TRIBUNAL, THIS COMPANY CANNOT BE CONSIDERED AS GOOD COMPARABLE AND THE SAME SHALL BE EXCLUDED FROM THE SET OF COMPARABLES. 16.2 ON THE OTHER HAND, THE LEARNED DEPARTMEN TAL REPRESENTATIVE HAS SUBMITTED THAT THIS COMPANY WAS FOUND TO BE COMPARA BLE BY THE AUTHORITIES BELOW AND EVEN OTHERWISE FROM THE ANNUAL REPORT OF THIS COMPANY THE RPT ARE LESS THAN 15% AND THEREFORE WHEN THE COMPANY IT SELF HAS REPORTED THE RPT AS LESS THAN 15% THEN THE SAME CANNOT BE EXCL UDED FROM THE SET OF COMPARABLES MERELY ON ASSUMPTION OF WRONG FACTS. 16.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WEL L AS CONSIDERED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT AS PER THE ANNUAL REPORT OF THIS COMPANY, THE RPT HAS BEEN REPORTED ONLY TO THE EXTENT OF RS.10,73,871 IN THE NATURE OF MANAGER REMUNERATION TO THE MANAGI NG DIRECTOR AND THEREFORE IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 17 OF 31 THE SAID TRANSACTION IS ALMOST NIL AND IN ANY CASE IS LESS THAN 15% OF THE TOTAL SALES. THE LEARNED AUTHORISED REPRESENTATIVE OF TH E ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF THE HYDERABAD BENCH OF ITAT IN THE CASE OF NTT DATA INDIA ENTERPRISE APPLICATION SERVICES PVT. LTD . (SUPRA), WE FIND THAT THE TRIBUNAL HAS RECORDED THE SUBMISSIONS OF THE CO UNSEL OF THE ASSESSEE IN PARA 7 AS UNDER : 7. BODHTREE CONSULTING LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPAN Y SHOULD BE REJECTED UNDER THE FOLLOWING TPOS FILTERS : - RELATED PARTY TRANSACTIONS FILTER : AS PER SCHEDULE 4 OF THE BALANCE SHEET, THE COMPANY HAS INVESTMENTS IN PERIGON, LIC, USA AND AS PER THE RESPONSE UNDER SECTION 133(6); THE COMPANY HAS EXPORT SALES TO PERIGON LIC, USA OF RS.133.90 LAKHS BEING 34.68% OF THE TOTAL TURNOVER. - FUNCTIONALLY DIFFERENT FILTER : THE COMPANY IN ITS RESPONSE TO NOTICE UNDER SECTION 133(6) HAS STATED THAT IT PROVIDES E- PAPER SOLUTIONS, DATA CLEANSING SOFTWARE, WEBSITE DEVELOPMENT AND OTHER C USTOMIZED SOFTWARE AND ALSO STATE THAT THE E-PAPER SOLUTIONS AND DATA CLEANSING SERVICES WOULD COME UNDER THE CATEGORY OF IT ENABLE D SERVICES. HOWEVER, THE TRIBUNAL DID NOT PROPOSE TO GIVE ANY F INDING ON THIS ISSUE AS THE ASSESSEE DID NOT PRESS THE EXCLUSION OF THE SAID CO MPANY AS EVIDENT FROM THE FINDING OF THE TRIBUNAL IN PARA 9 AS UNDER : 9. EVEN THOUGH DETAILED SUBMISSIONS WERE MADE WI TH REFERENCE TO THE ABOVE 7 COMPANIES, THE LEARNED COUNSEL FAIRLY ADMITTED TH AT EVEN ONE COMPANY I.E. EXENSYS SOFTWARE SOLUTIONS LTD. IS EXCLUDED, INCLUS ION OF OTHER COMPANIES WILL BECOME ACADEMIC IN NATURE AS THE ARMS LENGTH MARGI N IS WITHIN ASSESSEE'S MARGIN OF 16.74%. WITH REFERENCE TO THIS COMPANY, THE LEARNED COUNSEL REFERRING TO REPLIES GIVEN TO AP/TPO IN RESPONSE TO THE NOTICES UNDER SECTION 133(6) AND THEIR ANNUAL REPORTS, WHICH ARE AVAILABL E IN ITS PAPER BOOK, SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERE NT AND THE OPERATIONS ARE EXCEPTIONAL AS THERE WAS A MERGER IN THE YEAR WITH ANOTHER COMPANY WHICH HAD A MATERIAL/SIGNIFICANT IMPACT ON THE PROFIT MAR GINS AND FURTHER THE COMPUTATIONS ARE ALSO WRONG AS THE DIFFERED REVENUE EXPENDITURE, WHICH WAS CLAIMED REGULARLY ON THE BASIS OF ACCOUNTING POLICY OF THE COMPANY, WAS EXCLUDED BY THE TPO IN ARRIVING AT A DIFFERENT HIGH ER PROFIT MARGIN, WHICH IS NOT CORRECT. THUS IT IS MANIFEST FROM THE ORDER OF THE TRIBUNAL THAT ONLY THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE WERE RECORDED BY THE TRIBUNAL BUT THERE WAS NO OCCASION FOR THE TRIBUNAL TO EVEN EXAMINE THE FACTS AS PLEADED BY THE LEARNED AUTHORISED REPRESENTATIVE AND THEREFORE THE FACTS PLEADED BY THE LEARNED AUTHORISED REPRESENTATIVE WE RE NOT EXAMINED BY THE TRIBUNAL THEN THE QUESTION OF GIVING ANY FINDING ON THE SAID ISSUE DID NOT ARISE. IN THE CASE OF M/S. MC AFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA), THE TRIBUNAL HAS NOT GONE INTO THE FACT OF THE RPT AND EVEN NO R ECORD RELATING TO THE SAID FACT HAS BEEN EXAMINED BUT THE TRIBUNAL HAS JUST RE PRODUCED THE SUBMISSIONS OF THE ASSESSEE AS PLEADED IN CASE OF NTT DATA INDIA ENTERPRISE APPLICATION SERVICES PVT. LTD. (SUPRA) AND THEREFORE IT IS A CLEAR CASE OF IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 18 OF 31 ASSUMPTION OF UNEXAMINED FACTS. ACCORDINGLY, WE AR E OF THE VIEW THAT WHEN THE RELEVANT RECORD SHOWING THE RPT AT 34.68% AS CL AIMED BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE IS NOT AV AILABLE OR PRODUCED EITHER BEFORE THE AUTHORITIES BELOW OR BEFORE US, THEN THI S OBJECTION OF THE ASSESSEE CANNOT BE ACCEPTED FOR WANT OF THE SUPPORTING EVID ENCE. HOWEVER, IN THE INTEREST OF JUSTICE, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE A.O./TPO TO VERIFY THE FACT AS ALLEGED BY THE ASSESSEE AND IF N EED ARISES THE INFORMATION UNDER SECTION 133(6) OF THE ACT MAY ALSO BE CALLED FOR AND DECIDE THE RPT ISSUE. 17. FLEXTRONICS SOFTWARE INDIA PVT. LTD. 17.1 THE LEARNED AUTHORISED REPRESENTATIVE OF T HE ASSESSEE HAS SUBMITTED THAT THIS COMPANY IS HAVING HYBRID MODEL OF SUPPLYI NG BOTH PRODUCTS AND SERVICES. IT OFFERS NEW PRODUCT DESIGN AND DEVELOP MENT TO ENHANCING AND TESTING THEIR CURRENT PRODUCTS. THESE SERVICES ARE PROVIDED FOR FIXED NETWORKS, MOBILE NETWORKS, VOICE OVER PACKET AND DATA NETWORK . THUS THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMI TTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. HE HAS C ONTENDED THAT THIS COMPANY IS ENGAGED IN THE R&D ACTIVITY AS IT IS EVIDENT FRO M THE ANNUAL REPORT OF THIS COMPANY. IN SUPPORT OF HIS CONTENTION, HE HAS RELI ED UPON THE FOLLOWING DECISIONS : I) M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP) A NOS.4/BANG/2012 & 1388/BANG/2011. II) M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. IN IT(TP)A NO.1302/BANG/2011 & 92/BANG/2012. III) M/S. INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO.1 196/HYD/2010) IV) M/S. CNO IT SERVICES (INDIA) PVT. LTD. (ITA NO .1280/HYD/2010) 17.2 ON THE OTHER HAND, THE LEARNED DEPARTMENT AL REPRESENTATIVE HAS SUBMITTED THAT THE TPO HAS EXAMINED THE FUNCTIONAL COMPARABILITY OF THIS COMPANY AND IT HAD QUALIFIED ALL THE PARAMETERS AND FILTERS APPLIED BY THE TPO. THE OBJECTIONS RAISED BY THE ASSESSEE AT THIS STAGE WERE NOT AVAILABLE BEFORE THE TPO AND THEREFORE THE SAME CANNOT BE ACCEPTED I N THE ABSENCE OF THE EXAMINATION OF THE FACT BY THE TPO. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WE LL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE COMPARABILITY OF THIS COMPANY HAS BEEN EXAMINED BY THIS TRIBUNAL IN VARIO US CASES AS RELIED UPON BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE. IN THE CASE OF MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA), THE CO-ORDINATE BENCH OF THIS TRIBUNAL HAS AGAIN CONSIDERED THIS ISSUE IN PARA 10 .10 AS UNDER : 10.10 THIS COMPANY WAS OBJECTED TO ON FUNCTIONAL DISSIMILARITY. THIS WAS CONSIDERED IN ITO VS. M/S. SUNQUEST INFORMATION SYS TEMS (INDIA) PVT. LTD. IN IT(TP)A NO.1302/BANG/2011 DT.11.6.2015 (SUPRA) AS U NDER : 26. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CON CERNED, WE FIND THAT AT PAGE 90 OF HIS ORDER, THE TPO HAS ALSO OBSERVED THAT THE SAID COMPANY HAS INCURRED EXPENDITURE FOR SELLING OF PRODUCTS AND HA S INCURRED R & D EXPENDITURE FOR DEVELOPMENT OF THE PRODUCTS. THE AB OVE FACTS CLEARLY DEMONSTRATE THAT THERE IS FUNCTIONAL DISSIMILARITY BETWEEN THE ASSESSEE AND IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 19 OF 31 THESE COMPANIES AND WITHOUT MAKING ADJUSTMENT FOR T HE DISSIMILARITIES BROUGHT OUT BY THE TPO HIMSELF, THESE COMPANIES CANNOT BE T AKEN AS COMPARABLE COMPANIES. THE METHOD ADOPTED BY THE TPO TO ALLOCAT E EXPENDITURE PROPORTIONATELY TO THE SOFTWARE DEVELOPMENT SERVICE S AND SOFTWARE PRODUCT ACTIVITY CANNOT BE SAID TO BE CORRECT AND REASONABL E. WHEREVER, THE ASSESSING OFFICER/TPO CANNOT MAKE SUITABLE ADJUSTMENT TO THE FINANCIAL RESULTS OF THE COMPARABLE COMPANIES WITH THE ASSESSEE COMPANY TO B RING THEM ON PAR WITH THE ASSESSEE, THESE COMPANIES ARE TO BE EXCLUDED FR OM THE LIST OF COMPARABLES. THEREFORE, WE DIRECT THE ASSESSING OFF ICER/TPO TO EXCLUDE THESE THREE COMPANIES FROM THE LIST OF COMPARABLES.. RESPECTFULLY FOLLOWING, WE EXCLUDE THE SAME. IN VIEW OF THE FACTS AS RECORDED AND CONSIDERED BY THE CO-ORDINATE BENCHES OF THIS TRIBUNAL THAT THIS COMPANY IS IN THE ACTIVITY OF SOFTWARE DEVELOPMENT SERVICES AS WELL AS SOFTWARE PRODUCTS AND FURTHER A LSO INCURRED R&D EXPENDITURE. THEREFORE, THE SAME WAS FOUND TO BE D IS-SIMILAR TO THIS PURE SOFTWARE DEVELOPMENT SERVICES PROVIDER IN THE CAPAC ITY OF CAPTIVE SERVICE PROVIDER. BY FOLLOWING THE EARLIER ORDER OF THE TR IBUNAL, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST O F COMPARABLES. 18. THE ASSESSEE HAS RAISED OBJECTIONS AGAINST THE INCLUSION OF THE FOLLOWING COMPANIES BY THE TPO : (I) SANKYA INFOTECH LTD. (II) FOURSOFT LTD. (III) GEOMETRIC SOFTWARE SOLUTIONS LTD. (IV) TATA ELXSI LTD. (SEG.) AND (V) SATYAM COMPUTER SERVICES LTD. (I) SANKYA INFOTECH LTD. 18.1.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIS-SIM ILAR AS THIS COMPANY IS PRODUCT BASED COMPANY AND ALSO ENGAGED IN R&D ACTI VITY AND DEVELOPMENT OF NICHE PRODUCT FOR THE TRANSPORTATION AND AVIATIO N FIELDS. THIS COMPANY ALSO OWNS INTANGIBLES. THUS THIS COMPANY CANNOT BE CONS IDERED AS A GOOD COMPARABLE WHEN IT IS ENGAGED IN SOFTWARE PRODUCTS FOR TRANSPORTATION AND AVIATION INDUSTRY AND INCURRED SELLING AND MARKETIN G EXPENSES. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DE CISIONS :- I) M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP) A NOS.4/BANG/2012 & 1388/BANG/2011. II) M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. (IT(TP)A NO.1302/BANG/2011 & 92/BANG/2012) III) TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. IN IT(TP)A NO.29/BANG/2012. 18.1.2 ON THE OTHER HAND, THE LEARNED DEPARTMEN TAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE TPO. 18.1.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT TH E FUNCTIONAL COMPARABILITY OF THIS COMPANY HAS BEEN EXAMINED BY THE TRIBUNAL IN A SERIES OF THE CASES AS RELIED UPON BY THE LEARNED AUTHORISED REPRESENTATIV E OF THE ASSESSEE. IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. (IT(TP)A NO.1302/BANG/2011 & 92/BANG/2012), THE TR IBUNAL HAS CONSIDERED AND DECIDED AN IDENTICAL ISSUE IN PARAS 19 & 20 AS UNDER : SANKHYA INFOTECH LIMITED (SANKHYA) IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 20 OF 31 19. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT SANKHYA IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE COMPANY FOCUSES ON THE DEVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORT AND AVIATION INDUSTRY. HOWEVER, SEGMENTAL INFORMATION IN RELATION TO THE ABOVE MENTIONED ACTIVITIES IS NOT AVAILABLE IN PUBLIC DOMAIN. THEREFORE, AS SANKHYA ENGAGES ITSELF IN PRODUCTS AND SERVICES AS WELL AS SOFTWARE TRAINING, IT CANNOT BE CONSIDERED AS A COMPARABLE OF THE APPELLA NT. THE PRODUCTS DEVELOPED AND OWNED BY SANKHYA ARE LISTED BELOW: (1) SILICONTM TRAINING SUITE OF PRODUCTS: THE PRODU CTS ARE A COMPREHENSIVE ENTERPRISE WIDE TRAINING PLATFORM THAT COVERS THE E NTIRE SPECTRUM OF TRAINING IN A PAPERLESS ENVIRONMENT. IT COMPRISES OF FOUR PRODUCT S:- - SILICONTM LMS (TRAINING MANAGEMENT INFORMATION SILICON TM QT (ONLINE ASSESSMENT SYSTEM) SILICONTM LCMS (LEARNING CONTENT MANAGEMENT SYSTEM) - IRMAQTM : THIS IS AN INTEGRATED RESOURCE PLANN ING, MANAGEMENT TRACKING SYSTEM EXCLUSIVELY DEVELOPED FOR AIRLINE OPERAT IONS. IT IS AN END-TO END SOLUTION FOR ALL FLIGHT OPERATIONS. - SAKAI CLE : THIS IS A WIDELY USED AND POPULAR OPE N SOURCE LMS USED IN MANY LEADING EDUCATIONAL INSTITUTIONS AND CORPORATE . THE RELEVANT EXTRACT FROM THE ANNUAL REPORT SUBSTANTIATING THAT THE COMPANY A LSO ENGAGES IN DIFFERENT ACTIVITIES IS REPRODUCED BELOW: 2. ACTIVITIES THE COMPANY AS ENGAGED IN THE BUSINESS OF DEVELOPME NT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE PRODUCTION OF SOFTWARE IS NOT CAPABLE OF BEING EXPRESSED IN ANY GENERIC UNIT AND HENCE 11 IS RIOT POSSIBLE TO GIVE THE INFORMATION AS REQUIRED BY CERTAIN CLAUSES OF PARAG RAPHS 3.4C AND 4 D OF PART II OF SCHEDULE VI OF THE COMPANIES ACT, 1956. THE DELHI TRIBUNAL IN ITO V. COLT TECHNOLOGY SERVIC ES INDIA PVT. LTD. (JUDGMENT DATED 23.10.2012 IN ITA NO. 609I/DEL/2011 FOR THE ASSESSMENT YEAR 2005-06) HAS HELD THAT THE SAID COMPANY IS NOT A CO MPARABLE TO THE ASSESSEE THEREIN WHICH WAS ALSO IN THE BUSINESS OF SOFTWARE DEVELOPMENT. 20. THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE CONSIDERED. THE ACTIVITIES SET OUT ABOVE AND THE DE CISION OF THE DELHI ITAT RENDERED IN THE CONTEXT OF A SOFTWARE DEVELOPMENT C OMPANY SUCH AS THE ASSESSEE MAKES IT AMPLY CLEAR THAT THIS COMPANY SAN KHYA CANNOT BE REGARDED AS A COMPARABLE. THE SAME IS DIRECTED TO B E EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. A SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN TH E OTHER DECISIONS AS RELIED UPON BY THE LD. A.R. FOLLOWING THE EARLIER ORDER O F THE TRIBUNAL WHERE IT WAS FOUND THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AS WELL AS TRAINING, IT CANNOT BE CONSIDERED AS A GOOD COMPARABLE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. ACCORDINGLY, WE DIRECT THE A.O/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. FOURSOFT LTD. 18.2. WE HAVE HEARD THE LEARNED AUTHORISED REPRESE NTATIVE AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERE D THE RELEVANT MATERIAL IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 21 OF 31 ON RECORD. AT THE OUTSET, WE NOTE THAT THE RPT OF THIS COMPANY IS 19.89%. THEREFORE IN VIEW OF OUR FINDING ON THE THRESHOLD L IMIT OF RPT AT 15%, THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE H AVING MORE THAN 15% RPT. WE FIND THAT THIS FACT OF RPT AT 19.89% HAS N OT BEEN DISPUTED BY THE REVENUE. ACCORDINGLY, WE DIRECT THE A.O./TPO TO EX CLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. GEOMETRIC SOFTWARE SOLUTIONS LTD. 18.3.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE RPT OF THIS COMPANY IS 22% WHERE AS THE TPO HAS WRONGLY CONSIDERED THE RPT AT 10.97%. THE LEARNED AUTHORIS ED REPRESENTATIVE HAS REFERRED THE COMPUTATION OF RPT AT PAGE 561 OF THE PAPER BOOK CONTAINING ANNUAL REPORT AND SUBMITTED THAT IF ALL THE RPTS AR E TAKEN INTO CONSIDERATION AS REPORTED IN THE ANNUAL REPORT OF THIS COMPANY TH EN IT COMES TO 22.52% OF THE TOTAL SALES. 18.3.2 ON THE OTHER HAND, THE LEARNED DEPARTM ENTAL REPRESENTATIVE HAS SUBMITTED THAT THE TPO HAS CONSIDERED THE RPT AS TA KEN FROM THE ANNUAL REPORT OF THIS COMPANY AND THEREFORE THIS OBJECTION WAS NOT RAISED BY THE ASSESSEE BEFORE THE TPO. 18.3.3 HAVING CONSIDERED THE RIVAL SUBMISSION S AS WELL AS THE RELEVANT MATERIAL ON RECORD, WE NOTE THAT THE ASSESSEE HAS S UBMITTED COMPUTATION OF RPT OF THIS COMPANY AT PAGE NO.561 OF THE PAPER BOO K WHEREIN THE ASSESSEE HAS CALCULATED THIS PERCENTAGE BY CONSIDERING THE V ARIOUS TRANSACTIONS WITH THE RELATED PARTIES WHICH CONSISTS OF SOFTWARE DEVELOPM ENT SERVICES CHARGES AND MARKETING EXPENSES. THEREFORE, THIS ISSUE REQUIRES A PROPER EXAMINATION AND VERIFICATION OF THE FACT AS PRODUCED BY THE ASSESSE E. ACCORDINGLY, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE SET ASIDE THIS IS SUE OF COMPARABILITY OF THIS COMPANY TO THE RECORD OF THE A.O./TPO FOR PROPER VE RIFICATION OF THE FACTS AS CONTENDED AND PRODUCED BY THE ASSESSEE BEFORE US AN D THEN DECIDE THE ISSUE AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSES SEE. TATA ELXSI LTD. (SEG.) 18.4.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERE NT FROM THE ASSESSEE AS THIS COMPANY IS ENGAGED IN THE DIVERSIFIED ACTIVITY OF S OFTWARE DEVELOPMENT SEGMENT AS WELL AS IN PRODUCT DESIGN, THIS COMPANY ALSO INCURRED DEFERRED AND PROMOTIONAL EXPENSES AND ENGAGED IN THE ACTIVITY SU CH AS HARDWARE DESIGN, INDUSTRIAL DESIGN AND ENGINEERING AND VISUAL COMPUT ING. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DECISI ONS : I) M/S. MCAFEE SOFTWARE (I) PVT. LTD. IN IT(TP)A NO S.4/BANG/2012 & 1388/BANG/2011. II) M/S. CITRIX R&D INDIA PVT. LTD. IN IT(TP)A NOS .841/BANG/2013 & 172/BANG/2013. III) M/S. SYMBOL TECHNOLOGIES INDIA PVT. LTD. IN IT (TP)A NO.391/BANG/2012. IV) M/S. TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. IN IT(TP)A NO.29/BANG/2012. IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 22 OF 31 HE HAS FURTHER SUBMITTED THAT FOR THE ASSESSMENT YE AR 2006-07, THE TRIBUNAL IN THE ASSESSEE'S OWN CASE HAS DECIDED AN IDENTICAL ISSUE BY HOLDING THAT THIS COMPANY CANNOT BE COMPARED WITH THE ASSESSEE. 18.4.2 ON THE OTHER HAND, THE LEARNED DEPARTME NTAL REPRESENTATIVE HAS RELIED UPON THE ORDER OF THE TPO AND SUBMITTED THAT THE PREDOMINANT ACTIVITY OF THIS COMPANY IS SOFTWARE DEVELOPMENT AND THEREFORE IT IS CONSIDERED AS FUNCTIONALLY COMPARABLE. 18.4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WELL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOT E THAT THE FUNCTIONAL COMPARABILITY HAS BEEN CONSIDERED BY THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2006-07 VIDE ORDER DT.30.6.2015 IN ITA NO.1485/BANG/2010 IN PARA 13 TO 18 AS UNDER : 13. HAVING REGARD TO THE RIVAL CONTENTIONS AND TH E MATERIAL ON RECORD, WE FIND THAT BEING THE VERY SAME ASSESSMENT YEAR VIZ., 2006 -07 IN THE CASE OF M/S.ARIBA TECHNOLOGIES INDIA PVT. LTD. THIS TRIBUNA L HAD OCCASION TO GO INTO THE COMPARABILITY OF THESE COMPANIES WITH THE SAID COMP ANY AND THE TRIBUNAL HAS HELD IT TO BE FUNCTIONALLY DISSIMILAR FROM THE SIMI LAR ACTIVITY OF SOFTWARE DEVELOPMENT SERVICE. WE FIND THAT THE TRIBUNAL, AT PARA.12 & 13 OF ITS ORDER, HAS HELD AS UNDER: 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS O F THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRIOL OGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA): XXXXXX XXXXXX 17. AS FAR AS COMPARABLE COMPANY CHOSEN BY THE TPO VIZ., TATA ELXSI LTD., IS CONCERNED, THE COMPARABILITY OF THE AFORESAID COMPA NY WITH THAT OF THE SOFTWARE SERVICE PROVIDER SUCH AS THE ASSESSEE WAS CONSIDERED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF LOGICA PVT.LTD. IT (TP) 1129/BANG/2011 AY 07-08) WHEREIN ON THE COMPARABILI TY OF THE AFORESAID COMPANY, THE TRIBUNAL HELD AS FOLLOWS:- 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 ARE CONCE RNED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH THAT OF THE SOFTWA RE SERVICE PROVIDER WAS CONSIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN T HE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. (SUPRA) WHEREIN ON THE AFORESAID TWO COMPANIES, THE TRIBUNAL HELD AS FOLLOWS:- 7.7.TATA ELXSI LIMITED.: FROM THE FACTS AND MATERI AL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SER VICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEE N NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PAR TY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FAC TS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DET ERMINING THE ARMS LENGTH IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 23 OF 31 PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED F ROM THE LIST OF COMPARABLE PARTIES. 15. IN VIEW OF THE ABOVE, THE LD. COUNSEL FOR THE A SSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY AT SL.NO.6 VIZ., FLEXTRONICS SOF TWARE SYSTEMS PVT. LTD. SHOULD BE TAKEN AS A COMPARABLE, WHILE COMPARABLE A T SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A COMPARABLE. 18. IN VIEW OF THE AFORESAID DECISION, WE HOLD THAT TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE CHOSEN BY THE TPO. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO T O EXCLUDE THESE COMPANIES FROM THE FINAL LIST OF COMPARABLES. WE FIND THAT THERE IS NO CHANGE IN THE BUSINESS ACT IVITY OF THIS COMPANY IN THE YEAR UNDER CONSIDERATION IN COMPARISON TO THE ASSES SMENT YEAR 2006-07. WE FURTHER NOTE THAT A SIMILAR VIEW HAS BEEN TAKEN BY THIS TRIBUNAL IN THE OTHER CASES AS RELIED UPON BY THE ASSESSEE PERTAINING TO THE ASSESSMENT YEAR 2005-06. ACCORDINGLY, BY FOLLOWING THE EARLIER DEC ISIONS OF THIS TRIBUNAL, WE ARE OF THE VIEW THAT THIS COMPANY CANNOT BE CONSIDE RED AS A GOOD COMPARABLE TO THE ASSESSEE. HENCE, THE ASSESSING OFFICER / TP O IS DIRECTED TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. SATYAM COMPUTER SERVICES LTD. 18.5.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE FINANCIAL RESULTS AND INFORMATIO N OF THIS COMPANY IS NOT RELIABLE DUE TO THE FINANCIAL IRREGULARITY AND FRAU DULENT ACTIVITIES BY THE DIRECTORS OF THIS COMPANY. IN SUPPORT OF HIS CONT ENTION, HE HAS RELIED UPON THE FOLLOWING DECISIONS : I) M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP) A NOS.4/BANG/2012 & 1388/BANG/2011. II) M/S. AGNITY INDIA TECHNOLOGIES PVT. LTD. (ITA N O.3856/DEL/2010). III) M/S. SYMBOL TECHNOLOGIES INDIA PVT. LTD. IN IT (TP)A NO.391/BANG/2012. IV) M/S. TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. IN IT(TP)A NO.29/BANG/2012. 18.5.2 ON THE OTHER HAND, THE LEARNED DEPARTME NTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 18.5.3 WE HAVE CONSIDERED THE SUBMISSIONS OF R IVAL PARTIES AND THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOT E THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE CO-ORDINATE BENCH OF THIS TR IBUNAL IN CASE OF TEXTRON GLOBAL TECHNOLOGY PVT. LTD. (SUPRA) IN PARA 14 AS U NDER : 14. GROUND NO.3 RAISED BY THE REVENUE IS MISCONCE IVED AND THE ISSUE DOES NOT ARISE OUT OF THE ORDER OF THE CIT(A). AS WE HAV E ALREADY SEEN THE CIT(A) REJECTED SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO BY APPLYING RELATED PARTY TRANSACTION FILTER. THE FILTER OF COM PANIES DEALING IN SOFTWARE PRODUCTS AND ABNORMAL PROFITS OWING TO AMALGAMATION OF THE COMPANIES DURING THE RELEVANT PERIOD THEREBY SHOWING ABNORMAL PROFIT S WAS APPLIED TO EXCLUDE EXENSYS SOFTWARE SOLUTIONS LTD. INFOSYS TECHNOLOGIE S LTD., WAS EXCLUDED FOR REASONS OF HIGH TURNOVER AND HIGH RISK PROFILE. SAT YAM COMPUTER SERVICES LTD., IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 24 OF 31 HAS TO BE EXCLUDED FROM THE COMPARABLE COMPANIES FO R NON-RELIABILITY OF FINANCIAL DATA AS IT WAS INVOLVED IN FINANCIAL SCAM . IN DOING SO, THE CIT(A) FOLLOWED THE DECISION OF THIS HONBLE TRIBUNAL IN AGNITY INDIA TECHNOLOGIES V. ITO (ITA 3856/DEI/2010) AND SAP INDIA PVT. LTD V. I TO [ITA NO. 398/8/2008]. THEREFORE THE GRIEVANCE AS PROJECTED BY THE REVENUE IN GROUND NO.3 IS MISCONCEIVED. ON THE FACTS OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THE CIT(A) RIGHTLY EXCLUDED EXENSYS SOFTWARE SOLUTIONS LTD., INFOSYS TECHNOLOGIES LTD., AND SATYAM COMPUTERS LTD., FROM THE LIST OF C OMPARABLE COMPANIES. IT IS CLEAR FROM THE RECORD THAT THIS ISSUE WAS ALS O INVOLVED IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT LTD VS. ITO (SUPRA) WHEREIN DELHI BENCH OF ITAT HAS EXCLUDED THIS COMPANY ON THE GROUND OF UNRELIABLE D ATA AND INFORMATION. THE ORDER OF THE DELHI BENCH OF TRIBUNAL HAS BEEN CONFI RMED BY THE HON'BLE DELHI HIGH COURT. IN VIEW OF THE FINDING OF THE CO-ORDIN ATE BENCH OF THIS TRIBUNAL, WE DIRECT THE A.O./TPO TO EXCLUDE THIS COMPANY FROM TH E LIST OF COMPARABLES. 11. WE FURTHER NOTE THAT THE COMPARABILITY OF TWO COMPA NIES NAMELY GEOMETRIC SOFTWARE SOLUTIONS LIMITED AND EXENSYS SO FTWARE SOLUTIONS LIMITED WERE FURTHER DEALT WITH IN THE MI SCELLANEOUS PETITION NO. 100/BANG/2016 VIDE ORDER DATED 23.11.2 016 IN PARA 5 TO 8 AS UNDER. 5. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND RELEVAN T MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL HAS ORDERED THE E XCLUSION OF THREE COMPANIES ON THE GROUND OF HAVING MORE THAN 15% RPT AT PAGE 15 AS UNDER : SL. NO. COMPARABLE COMPANY NAME % OF RPT OVER SALES 1. AZTEC SOFTWARE LIMITED 17.78 2. GEOMETRIC SOFTWARE LIMITED 19.34 3. MEGASOFT LIMITED 17.08 WE FIND THAT THE COMPANY AZTEC SOFTWRE LTD. AND MEG ASOFT LTD. ARE NOT PART OF THE TPO SET OF COMPARABLES THEREFORE THESE TWO COMPANIES ARE WRONGLY MENTIONED IN THE ABOVE SAID LIST. HENCE THE IMPUGNED ORDER IS MODIFIED UNDER PARA 7.3 LAST PART AND MAY BE READ A S UNDER : IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 25 OF 31 SL. NO. COMPARABLE COMPANY NAME % OF RPT OVER SALES 1. GEOMETRIC SOFTWARE LIMITED 19.34 6. THE NEXT MISTAKE HAS BEEN POINTED OUT BY THE LEA RNED AUTHORISED REPRESENTATIVE THAT IN PARA 8.1, THE NAME OF THE CO MPARABLE COMPANY HAS BEEN MENTIONED AS ACENTIA SOFTWARE SOLUTION LT D. WHEREAS CORRECT NAME OF THE COMPANY IS EXENSYS SOFTWARE SOLUTIONS L TD. THIS MISTAKE HAS BEEN REPEATED AGAIN IN PARA NOS.8.2 & 8.3. HE H AS FURTHER SUBMITTED THAT IN PARA 8.3 THERE IS A REPRODUCTION OF FINDING BY THE TRIBUNAL IN CASE OF M/S. TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. HOWEVER WRONG PART OF THE SAID ORDER HAS BEEN REPRO DUCED IN THE IMPUGNED ORDER. THE LEARNED AUTHORISED REPRESENTATI VE HAS POINTED THAT THE CORRECT PART OF THE FINDING IS GIVEN IN PA RA 14 WHEREAS THE REPRODUCTION OF PARAS 19 & 20 HAVE BEEN MADE. THERE FORE THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THERE IS A MISTAKE IN PARA 8.3 OF THE ORDER AS A WRONG PART OF THE EARLIER ORD ER IN THE CASE OF TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. HAS BEEN REPRODUCED. 7. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS NOT DISPUTED THAT CERTAIN MISTAKES HAVE CREPT IN THE IM PUGNED ORDER REGARDING WRONG COMPARABLE COMPANIES WERE MENTIONED AS WELL AS IRRELEVANT PORTION OF THE EARLIER ORDER WAS REPRODU CED. 8. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND RELE VANT MATERIAL ON RECORD, WE FIND THAT THERE IS A MISTAKE IN PARAS 8. 1 TO 8.3 OF THE IMPUGNED ORDER REGARDING NAME OF THE COMPARABLE COM PANY EXENSYS SOFTWARE SOLUTIONS LTD. WHICH IS AT SL.NO.3 OF TPO S SET OF COMPARABLES WHEREAS IN THE FINDING OF THE TRIBUNAL NAME OF THE COMPANY HAS WRONGLY MENTIONED AS ACCENTIAL SOFTWARE SOLUTIONS L TD. THEREFORE THERE IS AN APPARENT MISTAKE IN THE PARAS 8.1 TO 8.3 OF T HE ORDER WHICH REQUIRES TO BE RECTIFIED. ACCORDINGLY, THE NAME MEN TIONED IN PARAS 8.1 TO 8.3 AS ACCENTIA SOFTWARE SOLUTIONS LTD. BE REA D AS EXENSYS SOFTWARE SOLUTIONS LTD. WE FURTHER NOTE THAT IN PA RA 8.3 THERE IS A MISTAKE IN REPRODUCTION OF THE EARLIER ORDER IN THE CASE OF TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. AND INSTEAD OF THE RELE VANT FINDING IN PARA 14, THE WRONG PART OF THE ORDER IN PARA 19 & 20 WAS REPRODUCED. THUS THERE IS A MISTAKE IN THE ORDER WHICH REQUIRES TO B E RECTIFIED. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, MISTAKE IN PARAS 8.1 TO 8.3 ARE HEREBY RECTIFIED AND THE SAME MAY BE READ AS UNDER : 8.1 GROUND NO.4 IS REGARDING EXCLUSION OF THE COM PANIES HAVING MORE THAN 50% OF PROFIT MARGIN. THE LEARNED DEPARTM ENTAL REPRESENTATIVE HAS SUBMITTED THAT THE CIT (APPEALS) HAS EXCLUDED TWO COMPANIES VIZ. EXENSYS SOFTWARE SOLUTIONS LTD. AND THIRDWARE SOLUTIONS LTD. ON THE GROUND THAT THESE COMPANIES ARE HAVING ABNORMAL PROFITS OF MORE THAN 50%. THUS THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT HIGH PRO FITS OR HIGH LOSS IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 26 OF 31 CANNOT BE A REASON FOR EXCLUSION OF A COMPANY IN TH E LIST OF COMPARABLES. HE HAS RELIED UPON THE ORDER OF THE TP O AND SUBMITTED THAT THE TPO FOUND THAT THESE TWO COMPANIES ARE IN THE SIMILAR BUSINESS AND THEREFORE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. 8.2 ON THE OTHER HAND, THE LEARNED AUTHORISED REP RESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE CIT (APPEALS) HAS E XCLUDED THESE TWO COMPANIES BY CONSIDERING VARIOUS FACTS ON FUNCT IONAL COMPARABILITY AS WELL AS EXTRA-ORDINARY EVENTS DURI NG THE YEAR UNDER CONSIDERATION AND NOT MERELY ON THE BASIS OF HIGH P ROFIT MARGINS. HE HAS FURTHER SUBMITTED THAT THE COMPANY LIKE EXENSYS SOFTWARE SOLUTIONS LTD. IS FUNCTIONALLY DIFFERENT AND THERE IS AN EXTRA ORD INARY EVENT OF AMALGAMATION DURING THE YEAR UNDER CONSIDE RATION WITH M/S. HONLOOL INDIA LTD. HE HAS REFERRED THE ANNUAL REPORT OF THIS COMPANY IN SUPPORT OF HIS CONTENTION. THE LEARNED A UTHORISED REPRESENTATIVE HAS FURTHER SUBMITTED THAT EVEN OTHE RWISE THIS COMPANY IS ENGAGED IN DIVERSIFIED OPERATION INCLUDI NG SOFTWARE PRODUCTS AS WELL AS INTANGIBLE ASSETS, BRANDS WHICH COMPRISE A SUBSTANTIAL PART OF GROWTH OF ASSETS. THEREFORE, TH IS COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE WHICH I S A CAPTIVE SERVICE PROVIDER. IN SUPPORT OF HIS CONTENTION, THE LEARNED AUTHORISED REPRESENTATIVE HAS RELIED UPON A NUMBER OF DECISION S OF THIS TRIBUNAL INCLUDING THE FOLLOWING DECISIONS : I) M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP) A NOS.4/BANG/2012 & 1388/BANG/2011. II) M/S. CITRIX R&D INDIA PVT. LTD. IN IT(TP)A NOS. 841/BANG/2013 & 172/BANG/2013. III) M/S. SYMBOL TECHNOLOGIES INDIA PVT. LTD. IN IT (TP)A NO.391/BANG/2012. IV) TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. IN I T(TP)A NO.29/BANG/2012. 8.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WE LL AS RELEVANT MATERIAL ON RECORD. WE NOTE THAT THOUGH THE CIT (APPEALS) HA S FINALLY CONCLUDED THAT THIS COMPANY HAS ABNORMAL PROFIT AND ACCORDING LY DIRECTED THE TPO/A.O TO EXCLUDE THE SAME FORM THE SET OF COMPARA BLES, HOWEVER, AS IT IS MANIFEST FROM THE ANNUAL REPORT OF THE COMPANY T HAT DURING THE YEAR UNDER CONSIDERATION THIS COMPANY ENTERED INTO A SCH EME OF AMALGAMATION WITH M/S. HOLOOL INDIA LTD. THE SCHEME OF AMALGAMATION HAS BEEN SANCTIONED BY THE HON'BLE HIGH COURT OF ANDHRA PRAD ESH W.E.F. 1.4.2004 VIDE ORDER DT.5.9.2005. THEREFORE, UNDISPUTEDLY THE RE WAS AN EXTRA-ORDINARY EVENT DURING THE YEAR UNDER CONSIDERATION IN RESPEC T OF THIS COMPANY. FURTHER WE FIND THAT THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF M/S. TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. IN IT(TP)A NO.29/BANG/2012 HAS CONSIDERED THE COMPARABILITY OF THIS COMPANY IN PARAS 14 AS UNDER : 14. GROUND NO.3 RAISED BY THE REVENUE IS MISCONCEI VED AND THE ISSUE DOES NOT ARISE OUT OF THE ORDER OF THE CI T(A). AS WE HAVE ALREADY SEEN THE CIT(A) REJECTED SOME OF THE COMPAR ABLE COMPANIES CHOSEN BY THE TPO BY APPLYING RELATED PARTY TRANSAC TION FILTER. THE FILTER OF COMPANIES DEALING IN SOFTWARE PRODUCTS AND ABNOR MAL PROFITS OWING IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 27 OF 31 TO AMALGAMATION OF THE COMPANIES DURING THE RELEVAN T PERIOD THEREBY SHOWING ABNORMAL PROFITS WAS APPLIED TO EXCLUDE EXE NSYS SOFTWARE SOLUTIONS LTD. INFOSYS TECHNOLOGIES LTD., WAS EXCLU DED FOR REASONS OF HIGH TURNOVER AND HIGH RISK PROFILE. SATYAM COMPUTE R SERVICES LTD., HAS TO BE EXCLUDED FROM THE COMPARABLE COMPANIES FOR NO N-RELIABILITY OF FINANCIAL DATA AS IT WAS INVOLVED IN FINANCIAL SCAM . IN DOING SO, THE CIT(A) FOLLOWED THE DECISION OF THIS HONBLE TRIBUN AL IN AGNITY INDIA TECHNOLOGIES V. ITO (ITA 3856/DEI/2010) AND SAP IND IA PVT. LTD V. ITO [ITA NO. 398/8/2008]. THEREFORE THE GRIEVANCE AS PR OJECTED BY THE REVENUE IN GROUND NO.3 IS MISCONCEIVED. ON THE FACT S OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THE CIT(A) RIGHTLY EX CLUDED EXENSYS SOFTWARE SOLUTIONS LTD., INFOSYS TECHNOLOGIES LTD., AND SATYAM COMPUTERS LTD., FROM THE LIST OF COMPARABLE COMPANI ES. A SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN TH E CASES AS RELIED UPON BY THE ASSESSEE. ACCORDINGLY, WE FIND T HAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE WHICH IS A CAPTIVE SERVICE PROVIDER. HENCE WE CONCUR WITH THE VIEW OF THE CIT (APPEALS) THOUGH ON A DIFFERENT REASON AND DIRECT THE A.O./TPO TO EXCLU DE EXENSYS SOFTWARE SOLUTIONS LTD. FROM THE LIST OF COMPARABLES. 12. FOLLOWING THE ORDERS OF THE COORDINATE BENCH (SUPRA ) WE DIRECT THE AO / TPO TO EXCLUDE 7 COMPANIES FROM THE SET OF COMPAR ABLES AND RECONSIDER THE FUNCTIONAL COMPARABILITY IN CASE OF GEOMETRIC SOFTWARE SOLUTIONS LTD. BY VERIFYING THE R.P.T. 13. SINCE WE HAVE DIRECTED THE AO / TPO TO EXCLUDE CERT AIN COMPANIES FROM THE SET OF COMPARABLES THEREFORE AND ALSO REMA NDED CERTAIN COMPANIES FOR VERIFICATION OF FACT THEREFORE THE TP O/AO IS DIRECTED TO RECOMPUTE THE ARMS LENGTH PRICE ON THE BASIS OF THE REMAINING SET OF COMPARABLES. NEEDLESS TO SAY THE BENEFIT OF PROVIS O TO SECTION 92C(2) OF THE ACT SHALL ALSO BE CONSIDERED. IN THE APPEAL IN IT(TP)A NO. IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 28 OF 31 1379/BANG/2011, AGAINST THE ORDER PASSED U/S. 154 T HE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS. 14. THE ONLY ISSUE ARISES IN THIS APPEAL OF THE ASSESSE E IS REGARDING THE ELIGIBILITY OF DEDUCTION U/S. 10A IN RESPECT OF THE AMOUNT OF PROVISION FOR MANAGEMENT CHARGES PAYABLE TO ITS AE HAS BEEN R EVERSED DURING IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 29 OF 31 THE YEAR UNDER CONSIDERATION. THE LD. AR OF THE AS SESSEE HAS SUBMITTED THAT THE ASSESSEE MADE PROVISION FOR MANA GEMENT CHARGES PAYABLE TO ITS PARENT COMPANY IN THE EARLIER YEARS HOWEVER DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS REVERSED THE SAID PROVISION AMOUNTING TO RS. 8,01,775/- AND THEREFORE THE ASSES SEE CLAIMED THE DEDUCTION U/S. 10A IN RESPECT OF THE SAID AMOUNT. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT REVERS AL OF MANAGEMENT CHARGES PROVISION IS NOT AN INCOME DERIVED FROM EXP ORT OF COMPUTER SOFTWARE HENCE, 10A DEDUCTION CANNOT BE ALLOWED ON THE SAME. THE CIT(A) DID NOT ADJUDICATE THIS ISSUE WHILE PASSING THE MAIN ORDER THEREFORE, THE ASSESSEE FILED A PETITION U/S. 154 B UT CIT(A) HAS REJECTED THE CLAIM OF THE ASSESSEE ON THE REASON THAT THE RE VERSAL OF PROVISION IS MERELY AN ACCOUNTING ENTRY WHICH DOES NOT RESULT IN BUSINESS INCOME AND THEREFORE THE AO WAS JUSTIFIED IN EXCLUDING THE SAID INCOME FROM THE BUSINESS PROFITS FOR COMPUTING DEDUCTION U/S. 1 0A. 15. BEFORE US, THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THIS PROVISION MADE IN THE EARLIER YEAR WAS ALLOWED BY THE AO AS B USINESS EXPENDITURE AND THEREFORE IT HAS REDUCED THE CLAIM OF DEDUCTION U/S. 10A IN THE EARLIER YEARS. IN THE YEAR UNDER CONSID ERATION WHEN THE ASSESSEE HAS REVERSED THIS PROVISION THE INCOME FRO M BUSINESS OF THE IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 30 OF 31 ASSESSEE HAS BEEN ENHANCED AND WHICH IS ELIGIBLE FO R DEDUCTION U/S. 10A. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED T HAT SINCE THIS IS ONLY AN ACCOUNTING ENTRY AND DOES NOT RESULT IN BUS INESS INCOME DURING THE YEAR UNDER CONSIDERATION THEREFORE IT IS NOT ELIGIBLE FOR DEDUCTION U/S. 10A. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. WE NOTE THAT THE AO AS WELL AS CIT(A) H AS DENIED THE CLAIM OF DEDUCTION U/S. 10A IN RESPECT OF THIS AMOU NT OF RS. 8,01,755/- PERTAINS TO THE REVERSAL OF PROVISION FOR MANAGEMEN T CHARGES PAYABLE TO ITS PARENT COMPANY. THE ASSESSEE HAS STATED THA T THIS AMOUNT WAS ALLOWED AS BUSINESS EXPENDITURE IN THE EARLIER YEAR AND THEREFORE THE BUSINESS PROFIT OF THE ASSESSEE FOR THE PURPOSE OF DEDUCTION U/S. 10A WAS REDUCED BY THIS AMOUNT IN THE EARLIER YEAR. DU RING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS REVERSED THE PROVISI ON WHICH HAS RESULTED INCREASE IN THE BUSINESS INCOME OF THE ASS ESSEE AND THEREFORE IT IS ELIGIBLE FOR DEDUCTION U/S. 10A. SINCE THIS FACT OF PROVISION BEING ALLOWED AS BUSINESS EXPENDITURE IN THE EARLIER YEAR HAS NOT BEEN VERIFIED BY THE AUTHORITIES BELOW AND THEREFORE IN THE ABSENCE OF ANY FINDING ON THIS ISSUE BY THE AUTHORITIES BELOW IT I S NOT POSSIBLE TO GIVE A CONCLUDING FINDING AT THIS STAGE. THUS IN THE FA CTS AND CIRCUMSTANCES OF THE CASE WE SET ASIDE THIS ISSUE TO THE RECORD O F THE AO FOR IT(TP)A NOS. 1041, 1106 & 1379/BANG/2011 PAGE 31 OF 31 VERIFICATION OF THE RELEVANT FACTS AND THEN DECIDE THE CLAIM OF THE ASSESSEE AS PER LAW. 17. IN THE RESULT, CROSS APPEALS ARE PARTLY ALLOWED. T HE ASSESSEES APPEAL AGAINST THE ORDER PASSED U/S. 154 IS ALLOWED FOR ST ATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF APRIL, 2017 SD/- SD/- (S. JAYARAMAN) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 28 TH APRIL, 2017. / MS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.
