M/s. Kodiak Networks (India) Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 1413/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57463 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 07-12-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 10-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIII
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Principle of natural justice; Opportunity of cross examination; International transaction; Bad and doubtful debts
• Section: 92C; 143(3); 92D; 92B; 92F; 80HHC; 234B; 133(6); 10B; 131; 28; 92

Judgement Text

PAGE 1 OF 61 ITA NO.141 3/BANG/2010 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES A BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NO.1413/BANG/2010 (ASST. YEAR 2006-07) M/S KODIAK NETWORKS (INDIA) PRIVATE LTD., 401, 4 TH FLOOR, PRESTIGE SIGMA, 3, VITTAL MALLYA ROAD, BANGALORE-1. - APPELLANT PA NO.AACCK0978J VS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-11(5), BANGALORE. - RESPONDENT DATE OF HEARING : 07/12/2011 DATE OF PRONOUNCEMENT : 27/01/2012 APPELLANT BY : SHRI PADAM CHAND KHINCHA, C.A. RESPONDENT BY : SHRI ETWA MUNDA, CIT-III O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE ASSESSEE IS DIRECTE D AGAINST THE ASSESSMENT COMPLETED U/S 143(3) R.W.S 144C OF THE I T ACT, 1961. THE RELEVANT ASST. YEAR IS 2006-07. THE ASSESSEE IS A GGRIEVED BY THE ORDER OF THE DISPUTE RESOLUTION PANEL (DRP) DATED 20/9/2010. THE DRP HAD ISSUED DIRECTIONS UNDER SUB-SECTION (5) OF SECTION 144C RE AD WITH SUB-SECTION (8) OF SECTION 144C OF THE ACT. THE DRP HAD APPROVED, BUT FOR MINOR MODIFICATION, THE DRAFT ORDER OF ASSESSMENT MAKING TRANSFER PRICE ADJUSTMENT AS SUGGESTED BY THE TRANSFER PRICING OFFICER (TPO) U/S 92CA OF THE ACT. PAGE 2 OF 61 ITA NO.141 3/BANG/2010 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING CONCISE G ROUNDS:- THE LOWER AUTHORITIES (THE LD. AO, LD. TPO AND HON BLE DRP) HAVE ERRED IN I) PASSING THE ORDER DISREGARDING THE PRINCIPLES OF NATURAL JUSTICE; II) MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARMS LENGTH PRICE; III) PASSING THE ORDER WITHOUT DEMONSTRATING THAT APPELLANT HAD MOTIVE OF TAX EVASION; IV) NOT APPRECIATING THAT THE MEMBERS OF DISPUTE RESOLUTION PANEL ALSO BEING JURISDICTIONAL COMMISSIONERS/DIRECTOR OF INCOME TAX OF THE APPELLANT, THE CONSTITUTION OF THE DRP IS BAD IN LA W; V) NOT APPRECIATING THAT THE CHARGING OR COMPUTATION PROVISION RELATING TO INCOME UNDER THE HEAD PROFIT S AND GAINS OF BUSINESS OR PROFESSION DO NOT REFER T O OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE THE ADDITION UNDER CHAPTER X IS BAD IN LAW; VI) ADOPTING A FLAWED PROCESS OF ISSUING NOTICES U/S 133(6) AND RELYING ON THE SAME WITHOUT PROVIDING COMPLETE INFORMATION TO THE APPELLANT OR AN OPPORTUNITY TO CROSS EXAMINE THE PARTIES INVOLVED; VII) REJECTING COMPARABLES AND TRANSFER PRICING ANALYSIS OF THE APPELLANT ON UNJUSTIFIABLE GROUNDS; VIII) DOING FRESH TRANSFER PRICING ANALYSIS AND ADOPTING INAPPROPRIATE FILTERS IN SUCH ANALYSIS; IX) CONSIDERING THE DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENTS; X) SELECTING INAPPROPRIATE COMPARABLES AND REJECTING APPROPRIATE COMPARABLES; XI) INAPPROPRIATELY COMPUTING THE OPERATING MARGINS OF COMPARABLES AND THE APPELLANT; XII) NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVEL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES; XIII) NOT APPRECIATING THAT THE LAW DOES NOT COMPEL ADOPTING MANY (OR ANY MINIMUM) COMPANIES AS PAGE 3 OF 61 ITA NO.141 3/BANG/2010 3 COMPARABLES AND THAT THE APPELLANT COULD JUSTIFY TH E PRICE PAID/CHARGED ON THE BASIS OF ANY ONE COMPARABLE ONLY; XIV) NOT ALLOWING THE BENEFIT OF THE +/-5% RANGE AS PER THE PROVISO TO SECTION 92C(2); XV) NOT EXCLUDING THE TELECOMMUNICATION CHARGES FROM THE TOTAL TURNOVER WHILE EXCLUDING THE SAME FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A; & XVI) LEVYING A SUM OF RS.30,51,668/- AS INTEREST UNDER SECTION 234B AND A SUM OF RS.19,2222/- AS INTEREST UNDER SECTION 234D. 3. BRIEF FACTS OF THE CASE ARE AS FOLLOWS:- THE ASSESSEE IS AN INDIAN COMPANY, A SUBSIDIARY O F KODIAK NETWORKS INC., USA. IT IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICE TO KODIAK NETWORKS INC, USA. THE RETURN O F INCOME FOR CONCERNED ASST. YEAR WAS FILED ON 28/11/2006 DECLARING AN INC OME OF RS.11,97,597/-. THE RETURN OF INCOME WAS TAKEN UP FOR SCRUTINY AND THE CASE WAS REFERRED TO TPO U/S 92CA FOR DETERMINATION OF ARMS LENGTH PRIC E. DURING THE YEAR, THE ASSESSEE COMPANY HAD THE FOLLOWING INTERNATIONAL TR ANSACTIONS WITH ITS ASSOCIATE ENTERPRISE (I) RENDERING OF SOFTWARE DEVE LOPMENT SERVICES; (II) MARKETING AND CUSTOMER SUPPORT SERVICES; (III) PURC HASE OF CAPITAL GOODS; (IV) SALE OF CAPITAL GOODS; AND (V) REIMBURSEMENT OF EXP ENSES. THERE IS NO OBJECTION BY THE TPO ON THE PRICING OF THE INTERNAT IONAL TRANSACTIONS WITH RESPECT TO MARKETING AND CUSTOMER SUPPORT SERVICES, PURCHASE AND SALE OF CAPITAL GOODS AND REIMBURSEMENT OF EXPENSES. THE T P ADJUSTMENT HAS BEEN MADE ONLY WITH RESPECT TO RENDERING OF SOFTWARE DEV ELOPMENT SERVICES TO THE TUNE OF RS.1,73,67,933/-. 4. THE ASSESSING OFFICER FORWARDED A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT TO THE ASSESSEE ON 17/12/2009 AND SER VED ON THE ASSESSEE ON PAGE 4 OF 61 ITA NO.141 3/BANG/2010 4 24/12/2009. AFTER RECEIVING DRAFT ASSESSMENT ORDER S, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP ON 22/01/2010. THE DRP H AS ISSUED NOTICE U/S 144C(11) OF THE ACT DATED 22/06/2010 AND ONE OPPORT UNITY OF HEARING WAS GIVEN ON 11/8/2010 AND THE DRP VIDE ITS ORDER DATED 20/09/2010 UPHELD THE TPO/AOS TRANSFER PRICING ADJUSTMENT WITH MINOR MOD IFICATION IN REGARD TO M/S MEGASOFT LTD. 5. BEING AGGRIEVED WITH THE DIRECTION OF THE DRP, THE APPELLANT COMPANY [THE APPELLANT IN SHORT] HAS COME UP WITH THE PRESENT APPEAL. DURING THE COURSE OF HEARING, THE LD. A.R ARGUED, TOUCHING VARIOUS ASPECTS AND ALSO FILED TWO WRITTEN SUBMISSIONS, THE SUBSTANCES OF TH E SECOND WRITTEN SUBMISSIONS ARE SUMMARIZED AS UNDER: (1) THE APPELLANT RENDERED SOFTWARE DEVELOPMENT SERVICES WHOLLY TO ITS AE. THE TOTAL VALUE OF SOFTWARE DEVELOPMENT SE RVICE WAS RS. 24,06,82,087/-. THE APPELLANT ADOPTED TRANSACTIONAL NET MA RGIN METHOD (TNMM) TO JUSTIFY THE PRICE CHARGED IN THE INTERNATIONAL T RANSACTIONS. THE APPELLANT CONDUCTED A METHODICAL SEARCH PROCESS ON PROWESS DA TABASE TO IDENTIFY COMPARABLE COMPANIES. AFTER ADOPTING VARIOUS SEARC H FILTERS, THE APPELLANT SELECTED 49 COMPANIES AS COMPARABLES. THE ARITHMET IC MEAN OF THESE COMPARABLES WAS 11.01%. THE APPELLANTS OPERATING MARGIN ON COST WAS 10.70%. SINCE THE APPELLANTS MARGIN OF 11.01% WAS WITHIN T HE 5% RANGE AS PROVIDED IN PROVISO TO S. 92C (2), IT WAS CONCLUDED THAT THE IN TERNATIONAL TRANSACTIONS RELATING TO SOFTWARE DEVELOPMENT SERVICES ARE AT AR MS LENGTH. IN THE FINAL ORDER PASSED U/S 92CA, THE TPO SELECTED 20 COMPANIES AS COMPARABLES. THE TPO CONSIDERED 6 ADD ITIONAL COMPANIES AS PAGE 5 OF 61 ITA NO.141 3/BANG/2010 5 COMPARABLES (APART FROM 14 COMPANIES AS PROPOSED IN THE SHOW-CAUSE NOTICE). THESE SIX NEW COMPANIES WERE ADOPTED AS COMPARABLES WITHOUT PROPOSING THE SAME IN THE NOTICE OR AFFORDING AN OPPORTUNITY TO T HE APPELLANT TO PRESENT ITS OBJECTION TO THEIR ADOPTION. THE ARITHMETIC MEAN W AS DETERMINED AT 20.68%. AFTER FACTORING A WORKING CAPITAL ADJUSTMENT OF 1.5 5%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 19.13%. THE TRAN SFER PRICING ADJUSTMENT FOR THE SOFTWARE DEVELOPMENT SERVICES WAS ACCORDING LY DETERMINED AT RS. 1.74 CRORES. THE APPELLANT FILED DETAILED OBJECTIONS WITH THE DRP WHICH HAVE BEEN REJECTED BY DRP EXCEPT FOR CORRECTING AN ERROR IN THE MARGIN COMPUTATION OF ONE COMPARABLE, NAMELY, MEGASOFT LIM ITED AND THAT THE ORDER OF THE DRP WAS BRIEF. THE AO ACCORDINGLY INCORPORA TED THE TP ADJUSTMENT, WHILE DETERMINING THE TOTAL INCOME. TURNOVER FILTER: (2) IN ITS TRANSFER PRICING ANALYSIS, THE APPELLANT HAD ADOPTED THE LOWER TURNOVER CRITERIA TO SELECT THE COMPARABL ES. DURING THE PROCEEDINGS U/S 92CA, THE APPELLANT SUBMITTED THAT IF THE LOWER TURNOVER FILTER WAS TO BE APPLIED, THEN THE UPPER TURNOVER F ILTER LIMIT OF RS. 200 CRORES SHOULD BE APPLIED. THE TPO HAD APPLIED A LOWER TUR NOVER FILTER OF RS. 1 CRORE ON THE GROUND THAT THERE WAS NO RELATIONSHIP BETWEE N SALES AND MARGINS TO APPLY THE UPPER TURNOVER LIMIT. THE APPELLANT SUBMITTED THAT SIZE OF THE COMP ARABLE WAS AN IMPORTANT FACTOR IN COMPARABILITY. THIS WAS ALSO R ECOGNISED BY THE STATUTE I.E., RULE 10B (3) LAYS DOWN GUIDELINES FOR COMPARI NG AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION. PAGE 6 OF 61 ITA NO.141 3/BANG/2010 6 (3) DIFFERENCES FOR TRANSFER PRICING PURPOSES CA N BE OF TWO TYPES: (I) DIFFERENCES IN TRANSACTIONS BEING COMPAR ED OR (II) DIFFERENCES IN ENTERPRISES. A COMPARABLE SHOULD BE REJECTED IF AN Y OF THE ABOVE DIFFERENCE MATERIALLY AFFECTS THE PRICE CHARGED OR COST PAID, OR PROFIT ARISING, FROM SUCH TRANSACTIONS IN THE OPEN MARKET UNLESS AN ACCURATE ADJUSTMENT CAN BE MADE FOR REMOVING THE EFFECT OF SUCH DIFFERENCES. WHILE APPLYING ANY OF THE METHODS, THE RULE PROV IDES AN ADJUSTMENT BEING EFFECTED FOR IRONING OUT THE ENTER PRISE WIDE DIFFERENCES. THE TNMM (WHICH IS ADOPTED BY THE TPO AS THE MOST A PPROPRIATE METHOD IN THE INSTANT CASE), FOR E.G., CONTEMPLATES AN ADJUST MENT FOR AN ENTERPRISE WIDE DIFFERENCE (RULE 10B(1)(E)). RULE 10B (3) OUTLINES VARIOUS CONDITIONS FOR COM PARABILITY THAT IN JUDGING WHETHER AN UNCONTROLLED TRANSACTION IS COMP ARABLE, THE ENTERPRISE LEVEL DIFFERENCES WILL HAVE TO BE RECKONED. IN CHO OSING THE MOST APPROPRIATE METHOD, RULE 10C (2)(E) FACTORS THE ABILITY OF MAKI NG RELIABLE AND ACCURATE ADJUSTMENT TO ACCOUNT FOR THE DIFFERENCES IN THE EN TERPRISES LEVELS. SIZE IS AN IMPORTANT FACET OF AN ENTERPRISE LEVEL DIFFERENCE. SIZE OF AN ENTERPRISE IS THUS TO BE EXAMINED FOR CO MPARABILITY PURPOSES. SIGNIFICANT DIFFERENCES IN SIZE OF COMPANIES WOULD IMPACT COMPARABILITY. COMPARABLE MEANS SOMETHING THAT IS SIMILAR OR EQUIV ALENT. IT IS SOMETHING WHICH POSSESSES THE SAME OR ALMOST THE SAME CHARACT ERISTICS. IT IS NOT THAT EVERY COMPANY IN THE INDUSTRY BECOMES A COMPARABLE. TO USE A SIMILE, A MARUTI 800 CAR CANNOT BE COMPARED TO BENZ CAR. IN BUSINESS, SIZE MATTERS. UNUSUAL PATTERNS, STRAY CASES, WIDE DISPARITIES HAV E TO BE ELIMINATED AS THEY DONT SATISFY THE TEST OF COMPARABILITY. PAGE 7 OF 61 ITA NO.141 3/BANG/2010 7 COMPANIES OPERATING ON A LARGE SCALE BENEFIT FRO M ECONOMIES OF SCALE, HIGHER RISK TAKING CAPABILITIES, ROBUST GLOB AL DELIVERY AND BUSINESS MODELS AS OPPOSED TO THE SMALLER OR MEDIUM-SIZED CO MPANIES. SIZE THEREFORE MATTERS. TWO COMPANIES OF DISSIMILAR SIZE THEREFOR E CANNOT BE ASSUMED TO EARN COMPARABLE MARGINS. IMPACT OF DIFFERENCE IN S IZE COULD BE REMOVED BY A QUANTITATIVE ADJUSTMENT TO THE MARGIN OR PRICE BEIN G COMPARED, IF IT IS POSSIBLE TO DO SO REASONABLY ACCURATELY. OTHERWISE THE UNCONTROLLED TRANSACTIONS MAY HAVE TO BE REJECTED FROM THE COMPA RABILITY EXERCISE. IT IS GENERALLY DIFFICULT TO QUANTIFY MATHEMATICALLY, THE IMPACT OF SIZE ON MARGINS. COMPANIES OF DIS-SIMILAR SIZES THEREFORE ARE NOT TO BE COMPARED. SIZE AS ONE OF THE SELECTION CRITERIA HAS ALSO BEEN APPROVED BY VARIOUS BENCHES OF ITATS. THE CHANDIGARH S. B OF ITAT IN T HE CASE OF DCIT VS. QUARK SYSTEMS PVT LTD 38 SOT 207 HAS SPECIFICALLY R EJECTED ADOPTION OF THE TURNOVER RANGE OF ONE CRORE ON LOWER END AND INFINI TY ON THE HIGHER END. RELIES ON THE CASE LAWS: EGAIN COMMUNICATIONS PRIVATE LIMITED V ITO 118 TTJ 354 (PUNE) M/S SONY INDIA (P) LIMITED V DCIT 114 ITD 448 (DELH I) DCIT VS. INDO AMERICAN JEWELLERY LTD ITA NO. 6194/M UM/2008 AGNITY INDIA TECHNOLOGIES PVT. LTD V INCOME-TAX OFF ICER ITA NO. 3856 (DEL) / 2010 PHILIPS SOFTWARE CENTRE PRIVATE LIMITED 26 SOT 226 (BANG) ACIT V NIT 10 TAXMAN.COM 42 DHL EXPRESS INDIA PVT LTD V ACIT (2011) 11 TAXMANN. COM 40 DELOITTE CONSULTING INDIA PVT LTD V DCIT ITA NO.108 4/HYD/2010 (4) THAT THE SIZE AS A CRITERIA FOR SE LECTION OF COMPARABLES IS ALSO RECOMMENDED BY OECD IN ITS TP GUIDELINES, 2010. PA RA 3.43 OF THE CHAPTER ON GUIDELINES DEALING WITH SELECTING OR REJECTING P OTENTIAL COMPARABLES, THE OECD TP GUIDELINES ENUMERATES THE LIST OF MOST COMM ONLY USED QUANTITATIVE CRITERIA PAGE 8 OF 61 ITA NO.141 3/BANG/2010 8 - IN PARA 15.4 OF ICAI TP GUIDANCE NOTE IT HAS BE EN OBSERVED THAT A TRANSACTION ENTERED INTO BY RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY RS 10 CRORE COMPANY . THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE R ELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. (5) THAT THE TPOS RANGE OF RS. 1 CRORE HAD RESULT ED IN SELECTION OF COMPANIES LIKE INFOSYS WHICH IS 375 TIMES - TURNOV ER OF RS. 9,028 CRORES AGAINST RS. 24.07 CRORES OF APPELLANTS AE TRANSACT IONS - BIGGER THAN THE APPELLANT. - THAT BASED ON THE ABOVE, AN APPROPRIATE TURNOVER RANGE SHOULD HAVE BEEN APPLIED IN SELECTING COMPARABLE UNCONTROLLED C OMPANIES; THAT SELECTION ON BASIS OF SIZE MAY BE MADE BASED ON DUN AND BRADSTRE ETS ANALYSIS, THE CLASSIFICATION OF THE SOFTWARE COMPANIES OF WHICH IS: THE IT INDUSTRY HAS BEEN LOGICALLY DIVIDED INTO 3 CATEGORIES BASED ON THE NET SALES TURNOVER. LARGE SIZE FIRMS (> RS 20,000 MN) MEDIUM SIZE FIRMS (RS 2,000 20,000 MN) SMALL SIZE FIRMS (< RS 2,000 MN) THE ASSESSEE SUBMITS THAT ABOVE EXTRACT FORMS PA RT OF TPOS OWN ORDER PASSED U/S 92CA. ACCORDINGLY, A TURNOVER RANGE OF RS. 1 CRORE AT THE LOWER END AND RS. 200 CRORES AT THE HIGHER END MAY BE ADOPTED WHILE CHOOSING THE COMPARABLES. IN THE ALTERNATIVE, A SELECTION ON THE BASIS OF SIZE MAY BE MADE BASED ON THE NASSCOM CATEGORISATION. NASSCOM RECOG NISES THREE CATEGORIES BASED ON TURNOVER: PAGE 9 OF 61 ITA NO.141 3/BANG/2010 9 TIER I: GREATER THAN USD 1 BILLION (APPROX RS. 5,00 0 CRORES) TIER II: BETWEEN USD 100 MILLION TO USD 1 BILLION (RS. 500 CRORES TO RS. 5,000 CRORES) OTHERS: LESS THAN USD 100 MILLION (RS. 500 CRORES) WITH REGARD TO USE OF INFORMATION RECEIVED IN PURSUANCE TO NOTICE U/S 133(6) FOR THE COMPARABILITY ANALYSIS, THE TPO CONDUCTE D ENQUIRIES FROM CERTAIN COMPANIES BY EXERCISING POWERS CONFERR ED BY LAW U/S 133(6) OF THE ACT. THE APPELLANT WAS PROVIDED THESE NOTICES AND REPLIES RECEIVED IN A CD. THE TPO PROPOSED TO ACCEPT/ REJECT THESE COMPA NIES AS COMPARABLES BASED ON THE RESPONSES RECEIVED FROM THESE COMPANIE S. IN CASE OF VARIANCE BETWEEN REPLY U/S 133(6) AND ANNUAL REPORT, REPLY U /S 133(6) WAS GIVEN PREFERENCE. THE APPELLANT SUBMITS THAT PROCESS ADO PTED FOR ISSUE OF NOTICE AND USE OF SUCH INFORMATION IS INAPPROPRIATE FOR TH E FOLLOWING REASONS. ARBITRARY SELECTION OF COMPANIES FOR ISSUE OF NOTIC E FROM THE DETAILS PROVIDED, IT APPEARS THAT IN AL L 154 COMPANIES WERE ISSUED NOTICES AND HOW THESE COMPANIES WERE SE LECTED WAS NOT CLEAR AS THE BASIS OF SELECTION OF THESE COMPANIES FOR ISSUA NCE OF NOTICE U/S 133(6) WAS NOT PROVIDED AND THAT THE ENTIRE PROCESS LACKS IN TRANSPARENCY AND FAIRNESS. IT WAS ALSO NOT CLEAR AS TO WHETHER ALL THE RESPONSES HAVE BEEN INCORPORATED IN THE CD PROVIDED? THE WHOLE PROCEDU RE APPEARS TO BE A SELECTIVE EXERCISE WHICH WAS CLEAR FROM THE FACT TH AT SIX COMPANIES DID NOT EVEN FIND PLACE IN THE INITIAL LIST OF COMPANIES GE NERATED BY THE TPO. - THAT FROM THE DETAILS PROVIDED ALONG WITH THE INITIAL SHOW CAUSE NOTICE, MEGASOFT LIMITED WAS REJECTED AS A COMPARAB LE ON THE GROUND THAT IT FAILS RPT FILTER AND EMPLOYEE COST FILTER. THE TPO HAD STATED THAT A COMPANY WAS NOT ISSUED NOTICE U/S 133(6), IF IT FAILS RPT F ILTER. IN CASE OF MEGASOFT, A PAGE 10 OF 61 ITA NO.14 13/BANG/2010 10 NOTICE WAS NEVERTHELESS ISSUED. WHAT PROMPTED THE ISSUE OF NOTICE WAS NOT SPELT OUT. THE APPELLANT SUBMITS THAT THE APPROACH OF TPO IN ISSUING NOTICES IS ARBITRARY AS ALSO SELECTIVE AND HENCE FAULTY. - THAT THESE ISSUES HAVE BEEN RAISED BEFORE THE DRP ALSO. THE DRP HAS STATED THAT NOT GIVING OF ALL THE INFORMATI ON IS INTENTIONAL. THE DRP HAD STATED THAT WHAT WAS RELEVANT ONLY IS GIVEN. T HE DRPS ORDER IS, THEREFORE, BAD IN LAW AND LIABLE TO BE QUASHED. THE ASSESSEE HAD DETAILED THE PROCESS ADOPTED BY IT IN THE SELECTION OF COMPARABLES. THE TPO ALSO, IN ITS INI TIAL SHOW CAUSE NOTICE, HAS DETAILED THE PROCESS ADOPTED. HOWEVER, IN DETAILIN G THE PROCESS OF HOW THE POWERS U/S 133(6) HAVE BEEN EXERCISED AND THE DISCL OSURE OF INFORMATION OBTAINED THERE-UNDER, HE WAS BEING SECRETIVE. IT I S SAID THAT ONLY RELEVANT INFORMATION WAS PROVIDED. THE ASSESSEE DEMANDED A DISCLOSURE OF THE ENTIRE PROCESS AS ALSO THE FURNISHING OF ALL THE REPLIES. THIS HAS NOT BEEN DONE. WITHHOLDING SUCH INFORMATION RESULTS IN PREJUDICE T O THE ASSESSEE AND IS AGAINST PRINCIPLES OF NATURAL JUSTICE. AUTHENTICITY OF THE INFORMATION RECEIVED RULE 10D (3) PROVIDES THAT INFORMATION SPECIFIED IN SUB-RULE (1) SHALL BE SUPPORTED BY AUTHENTIC DOCUMENTS. THE TPO HAD NOT ESTABLISHED WHETHER THE INFORMATION OBTAINED BY WAY OF NOTICE U /S 133(6) WAS AUTHENTIC AND COMPLETE. IN SPITE OF THESE DIFFERENCES, THE T PO HAD RELIED AND COMPLETED THE ASSESSMENT BASED ON REPLIES RECEIVED U/S 133(6), IN PREFERENCE TO ANNUAL REPORT OF THE COMPANIES WHICH WERE AUDITE D BY PROFESSIONALLY QUALIFIED CA AND APPROVED BY BOARD OF DIRECTORS AND THAT SUCH RELIANCE IS BAD IN LAW. PAGE 11 OF 61 ITA NO.14 13/BANG/2010 11 THE TPO HAD RELIED ON SEGMENTAL INFORMATION RECEI VED U/S 133(6), WHICH DID NOT FORM PART OF ANNUAL REPORT. THE BIFURCATION AND REPORTING OF INCOME AND EXPENSE INTO DIFFERENT SEGM ENTS AS DONE BY THE COMPANY, WAS NOT AUDITED BY A CA. IT WAS POSSIBLE THAT THE SAME MAY NOT BE AS PER ACCOUNTING STANDARD 17 ISSUED BY THE INSTITU TE OF CHARTERED ACCOUNTANTS OF INDIA AND, HENCE, EITHER INCOMPLETE OR UNRELIABLE APART FROM BEING UNVERIFIABLE. SANKHYA INFOTECH FOR E.G. WAS SELECTED AS COMPAR ABLE IN PRECEDING AY ON THE GROUND THAT IT WAS SOFTWARE DEV ELOPMENT COMPANY. THE DECISION WAS BASED ON REPLY RECEIVED U/S 133(6). F OR THE YEAR UNDER CONSIDERATION, SANKHYA INFOTECH HAS BEEN REJECTED O N THE GROUND THAT IT WAS A SOFTWARE PRODUCT COMPANY [AGAIN BASED ON REPLY RE CEIVED U/S 133(6)]. THIS INCONSISTENCY INDICATES THAT THE ENTIRE PROCESS WAS NEITHER TRANSPARENT NOR FAIR. INFORMATION OBTAINED BY PROCESS OF ISSUING NOTICE U /S 133(6) WAS NOT AVAILABLE IN PUBLIC DOMAIN OR AT THE TIME OF STUDY BY THE APP ELLANT RULE 10D PRESCRIBES THE DOCUMENT TO BE KEPT AND MAINTAINED U/S 92D. RULE 10D (1), E, F, G, H, I, J DEAL WITH THE PROCESS AND THE METHOD TO BE ADOPTED IN MAKING THE COMPARABILITY ANALYSIS. SUB- RULE 4 OF RULE 10D STATES THAT THE INFORMATION AND DOCUMENTS SPECIFIED UNDER SUB-RULE (1) AND (2) SHOULD AS FAR AS POSSIBLE BE CONTEMPORANEOUS. AS PER RULE 10D, THE INFORMATION AND DOCUMENTATI ON PRESCRIBED THEREIN MUST BE KEPT AND MAINTAINED BY THE APPELLAN T LATEST BY THE PRESCRIBED DATE I.E. FOR AY 2006-07 BY 31-10-2006. THE APPELLANT HAS KEPT AND MAINTAINED THE INFORMATION AND DOCUMENTS REQUIR ED UNDER RULE 10D ACCORDINGLY. PAGE 12 OF 61 ITA NO.14 13/BANG/2010 12 THE TPO WAS COLLECTING AND COMPILING DATA TWO/THR EE YEARS AFTER THE DATE OF THE APPELLANTS DOCUMENTATION. THIS WA S IMPERMISSIBLE. THERE WAS NO FINDING THAT A PARTICULAR COMPANY HAS BEEN R EJECTED OR IGNORED AS COMPARABLE ALTHOUGH THE DATA WAS AVAILABLE IN THE P UBLIC DOMAIN BY THE SPECIFIED DATE. IT WAS NOT ALLEGED THAT THE DATA I N EXISTENCE BY THE SPECIFIED DATE AND ADOPTED WAS INCORRECT. IN CHOOSING THE MO ST APPROPRIATE METHOD THE AVAILABILITY OF DATA WAS A RELEVANT FACTOR (RUL E 10C(2)(C)). THE POWER U/S 133(6) IS NO DOUBT EXERCISABLE BY THE TPO. THIS PO WER IS HOWEVER TO BE EXERCISED TO CHECK AND CONFIRM THE VERACITY OF DATA USED AND ADOPTED BY A COMPANY. THE POWER IS NOT TO BE USED TO GATHER INF ORMATION THAT COMES INTO PUBLIC DOMAIN AFTER THE SPECIFIED DATE. S. 92CA (3), OUTLINES CIRCUMSTANCES ON THE BASIS OF WHICH THE ALP COMPUTED BY THE COMPANY MAY BE DISCARDED AND RE -DETERMINED BY THE AO. SIMILAR POWERS ARE AVAILABLE TO THE TPO. TO I NVOKE THE POWERS U/S 92C(3), HOWEVER, THE MATERIAL OR DOCUMENT OR INFORM ATION MUST BE THAT WHICH WAS IN EXISTENCE BY THE SPECIFIED DATE. OTHERWISE, WHAT WAS CORRECT AND COMPLETE ON THE BASIS OF DATA EXISTING BY THE SPECI FIED DATE COULD BECOME UNRELIABLE OR INCOMPLETE IN THE LIGHT OF DATA THAT COMES INTO EXISTENCE SUBSEQUENTLY. SUCH A PROCESS OR RESULT IS NOT CONT EMPLATED. THE POWERS U/S 133(6) IS NOT TO BE USED FOR GATHERING DATA NOT IN EXISTENCE IN PUBLIC DOMAIN BY THE SPECIFIED DATE. THE POWER U/S 133(6) IS TO BE USED FOR VALIDATING DATA THAT HAS BEEN ADOPTED. THE POWER U/S 133(6) CANNOT BE USED TO OBTAIN INFORMATION TO ENABLE SELECTION OF COMPARABLES. TH AT THE DATA HAS TO BE IN EXISTENCE BY THE SPECIFIED DATE IS ALSO RECOGNISED BY THE AMENDMENT MADE TO THE DEFINITION OF SPECIFIED DATE - 30 TH NOVEMBER. IT HAS BEEN CLARIFIED THAT THE DATE HAS BEEN EXTENDED AS SUFFICIENT DATA WAS N OT AVAILABLE UNDER THE EXISTING SPECIFIED DATE TO MAKE THE COMPARISON MEAN INGFUL. THE EXTENSION OF PAGE 13 OF 61 ITA NO.14 13/BANG/2010 13 THE SPECIFIED DATE IS RECOGNITION AS ALSO AN ACCEPT ANCE BY THE LEGISLATURE THAT THE COMPARABILITY ANALYSIS AS ALSO THE DETERMI NATION OF ALP HAS TO BE ON THE BASIS OF DATA THAT IS AVAILABLE IN THE PUBLIC D OMAIN BY THE SPECIFIED DATE. IF SUBSEQUENT INFORMATION IS PERMITTED TO BE USED, THEN THE ALP WOULD REMAIN FLUID. THE ASSESSEE MAY DETERMINE ALP ON THE BASIS OF A PARTICULAR DATE. THE TPO MAY RE-DETERMINE ALP ON THE BASIS OF DATA UP-TO ANOTHER PARTICULAR DATE. THE DRP/ CIT(A) MAY RE-DETERMINE ALP ON THE BASIS OF UPDATED INFORMATION. THE ITAT MAY IMPROVE THE PROCESS FURT HER. THIS CAN LEAD TO AN EVER CHANGING ALP. THE ALP IS NOT A DYNAMIC OR FLU ID SUBJECT TO VAGARIES OF FUTURE. IT IS ON THE OTHER HAND A FIGURE TO BE ARR IVED AT ON THE BASIS OF DATA EXISTING BY THE SPECIFIED DATA. THE ASSESSEE CANNOT BE EXPECTED TO ADOPT DATA THA T WAS NOT IN EXISTENCE BY THE SPECIFIED DATE. IT IS SUCH DATA T HAT SHOULD BE VALIDATED BY THE TPO WHEN A REFERENCE IS MADE TO HIM U/S 92CA. THE ASSESSEE SUBMITS THAT THE DATA AS AVAILABLE T O IT MAY BE USED FOR DETERMINATION OF THE ALP. DATA AVAILABLE SUBSEQUENTLY OR OBTAINED THROUGH NOTICE U/S 133(6) (WHICH DATA IS OTHERWISE NOT AVAILABLE IN THE PUBLIC DOMAIN) SHOULD BE REJECTED AND, THUS, THE APPROACH ADOPTED BY LEARNED TPO IS BAD IN LAW. WITHOUT PREJUDICE THAT EVEN ADOPTING THE SUBSEQUE NT DATA AS USED BY THE TPO, THE ASSESSEES MARGIN SATISFY THE ARMS LENGTH RANGE IF THE FOLLOWING SUBMISSIONS ARE CONSIDERED. PAGE 14 OF 61 ITA NO.14 13/BANG/2010 14 ALP COMPUTATION IF THE ABOVE COMPANIES ARE EXCLUD ED FROM COMPARABILITY BASED ON ALL THE ABOVE, THE ASSESSEE HAS TABULATE D BELOW, A LIST OF COMPARABLES OUT OF THE TPOS COMPARABLES. TWO T ABLES HAVE BEEN PREPARED. THE FIRST TABLE COMPRISES OF ALL COMPANI ES FALLING WITHIN A TURNOVER RANGE OF RS. 1 CRORE TO RS. 200 CRORE (DUN & BRADST REET ANALYSIS). THE OPERATING MARGINS BEFORE AND AFTER WORKING CAPITAL ADJUSTMENT ARE DETAILED. THE MARGINS THAT REMAIN AFTER EXCLUDING COMPANIES T HAT DO NOT DESERVE TO REMAIN AS COMPARABLES FOR THE REASONS ALREADY DETAI LED ARE ALSO MENTIONED IN THE NOTES TO THE TABLE. IN SECOND TABLE, A SIMILAR EXERCISE IS CARRIED OU T BY ADOPTING A TURNOVER RANGE OF RS. 1 CRORE TO RS. 500 CRORES (NA SSCOM ANALYSIS). TABLE 1 TURNOVER RANGE 1 TO 200 CRORES SL.NO. NAME OF THE COMPANY OPERATING REVENUES OPERATING MARGIN ON COST WC ADJUSTED OPERATING MARGIN ON COST 1 AZTEC SOFTWARE LIMITED 1,28,61,36,000 18.09% 18.61% 2 GEOMETRIC SOFTWARE LIMITED(SEG) 98,59,57,838 6.70% 5.62% 3 KALS INFORMATION SYSTEMS LIMITED 1,96,90,390 39.75% 41.21% 4 R SYSTEMS INTERNATIONAL LIMITED(SEG) 79,41,94,053 22.20% 20.21% 5 TATA ELXSI LTD(SEG.) 1,88,81,25,000 27.65% 27.56% 6 LUCID SOFTWARE LIMITED 1,01,91,181 8.92% 5.36% 7 MEDIA SOFT SOLUTIONS PRIVATE LIMITED 1,75,77,145 6.29% 4.10% 8 R S SOFTWARE (INDIA) LIMITED 915,707,164 15.69% 15.16% 9 SIP TECHNOLOGIES & EXPORTS LIMITED 6,53,44,634 3.06% 1.00% 10 BODHTREE CONSULTING LTD 5,31,89,165 15.99% 14.85% PAGE 15 OF 61 ITA NO.14 13/BANG/2010 15 11 ACCEL TRANSMATICS LTD(SEG) 8,02,05,000 44.07% 42.23% 12 SYNFOSYS BUSINESS SOLUTIONS LTD 4,48,86,725 10.61% 7.27% 13 MEGASOFT LTD 19,21,85,451 16.97% 10.53% 14 LANCO GLOBAL SOLUTIONS LTD 35,62,93,560 5.27% 4.78% ARITHMETIC MEAN 17.23% 15.61% NOTES AFTER REMOVING KALS - MEAN - 15.50% & WC ADJUSTED M EAN 13.64% AFTER REMOVING KALS AND TATA ELXSI - MEAN - 14.49% & WC ADJUSTED MEAN 12.48% AFTER REMOVING KALS, TATA ELXSI & ACCEL - MEAN - 11 .80% & WC ADJUSTED MEAN 9.77% TABLE 2 TURNOVER RANGE 1 TO 500 CRORES SL.NO. NAME OF THE COMPANY OPERATING REVENUES OPERATING MARGIN ON COST WC ADJUSTED OPERATING MARGIN ON COST 1 AZTEC SOFTWARE LIMITED 1,28,61,36,000 18.09% 18.61% 2 GEOMETRIC SOFTWARE LIMITED(SEG) 98,59,57,838 6.70% 5.62% 3 KALS INFORMATION SYSTEMS LIMITED 1,96,90,390 39.75% 41.21% 4 MINDTREE CONSULTING LIMITED 4,48,79,82,158 14.67% 13.34% 5 PERSISTENT SYSTEMS LIMITED 2,09,17,76,542 24.67% 23.79% 6 R SYSTEMS INTERNATIONAL LIMITED(SEG) 79,41,94,053 22.20% 20.21% 7 SASKEN COMMUNICATION TECHNOLOGIES LIMITED(SEG) 2,40,03,42,000 13.90% 13.14% 8 TATA ELXSI LTD(SEG.) 1,88,81,25,000 27.65% 27.56% 9 LUCID SOFTWARE LIMITED 1,01,91,181 8.92% 5.36% 10 MEDIA SOFT SOLUTIONS PRIVATE LIMITED 1,75,77,145 6.29% 4.10% 11 R S SOFTWARE (INDIA) LIMITED 91,57,07,164 15.69% 15.16% 12 SIP TECHNOLOGIES & EXPORTS LIMITED 6,53,44,634 3.06% 1.00% 13 BODHTREE CONSULTING LTD 5,31,89,165 15.99% 14.85% 14 ACCEL TRANSMATICS LTD(SEG) 8,02,05,000 44.07% 42.23% 15 SYNFOSYS BUSINESS SOLUTIONS LTD 4,48,86,725 10.61% 7.27% PAGE 16 OF 61 ITA NO.14 13/BANG/2010 16 16 MEGASOFT LTD 19,21,85,451 16.97% 10.53% 17 LANCO GLOBAL SOLUTIONS LTD 35,62,93,560 5.27% 4.78% ARITHMETIC MEAN 17.32% 15.81% NOTES AFTER REMOVING KALS - MEAN - 15.92% & WC ADJUSTED M EAN 14.22% AFTER REMOVING KALS AND TATA ELXSI - MEAN 15.14% & WC ADJUSTED MEAN 13.33% AFTER REMOVING KALS, TATA ELXSI & ACCEL - MEAN - 13 .07% & WC ADJUSTED MEAN 11.27% COMPUTATION OF MARGINS OF THE APPELLANT THE APPELLANTS MARGINS ARE TABULATED BELOW: PARTICULARS AMOUNT IN INR OPERATING REVENUES 24,06,82,087 OPERATING EXPENSES 21,67,21,274 NET PROFIT 2,39,60,813 OPERATING PROFIT/OPERATING COST 11.05% THE MARGIN OF THE APPELLANT AS ABOVE IS MORE THAN T HE ARITHMETIC MEAN OF COMPARABLES UNDER TABLE 1 (TURNOVER RANGE O F RS. 1 CRORE TO RS. 200 CRORE), AFTER ELIMINATING KALS, TA TA ELXSI AND ACCEL IS WITHIN THE 5% RANGE. THE DIFFERENTIAL BETWEEN THE MARGINS OF THE APPELLA NT AS ABOVE AND OF THE COMPARABLES UNDER THE TABLES 2 ABOVE (TU RNOVER RANGE OF RS. 1 CRORE TO RS. 500 CRORE), AFTER ELIMI NATING KALS, TATA ELXSI AND ACCEL ARE WITHIN THE 5% RANGE. APPL YING, THE RATIO OF CIRCULAR NO 12 OF 2001, WHICH HAS BEEN STATUTORI LY THEREAFTER INCORPORATED IN THE PROVISO TO SECTION 92C (2), NO ADJUSTMENT IS REQUIRED TO BE MADE TO THE REPORTED VALUES OF THE A PPELLANTS TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. BASED ON ALL THE ABOVE, THE APPELLANT SUBMITS THAT ITS INTERNATIONAL TRANSACTIONS RELATING TO SOFTWARE DEV ELOPMENT SERVICES ARE AT ARMS LENGTH AND ADDITION MADE BY T HE TPO AND SUSTAINED BY THE DRP IN THIS REGARD NEED TO BE DELE TED. PAGE 17 OF 61 ITA NO.14 13/BANG/2010 17 BASED ON ALL THE ABOVE, THE APPELLANT HAS TABULATED BELOW, A LIST OF COMPARABLES OUT OF THE TPOS COMPARABLES WITHOUT APPLYING TURNOVER FILTER AND REJECTING THE COMPARABLES FOR R EASONS ALREADY DETAILED AND AFTER CONSIDERING THE MARGINS OF THE MEGASOFT AT THE SEGMENT LEVEL. TABLE 3 WITHOUT TURNOVER FILTER AND REJECTING COMPARABLES AS DETAILED ABOVE SL.NO. NAME OF THE COMPANY OPERATING REVENUES OPERATING MARGIN ON COST ADJUSTED OPERATING MARGIN ON COST 1 AZTEC SOFTWARE LIMITED 1,286,136,000 18.09% 18.61% 2 GEOMETRIC SOFTWARE LIMITED(SEG) 985,957,838 6.70% 5.62% 3 IGATE GLOBAL SOLUTIONS LLTD (SEG.) 5,279,075,000 15.61% 13.57% 4 PERSISTENT SYSTEMS LIMITED 2,091,776,542 24.67% 23.79% 5 R SYSTEMS INTERNATIONAL LIMITED(SEG) 794,194,053 22.20% 20.21% 6 SASKEN COMMUNICATION TECHNOLOGIES LIMITED(SEG) 2,400,342,000 13.90% 13.14% 7 LUCID SOFTWARE LIMITED 10,191,181 8.92% 5.36% 8 MEDIA SOFT SOLUTIONS PRIVATE LIMITED 17,577,145 6.29% 4.10% 9 R S SOFTWARE (INDIA) LIMITED 915,707,164 15.69% 15.16% 10 SIP TECHNOLOGIES & EXPORTS LIMITED 65,344,634 3.06% 1.00% 11 BODHTREE CONSULTING LTD 53,189,165 15.99% 14.85% 12 SYNFOSYS BUSINESS SOLUTIONS LTD 44,886,725 10.61% 7.27% 13 MEGASOFT LTD 192,185,451 16.97% 10.53% 14 LANCO GLOBAL SOLUTIONS LTD 356,293,560 5.27% 4.78% 15 FLEXTRONICS SOFTWARE SYSTEMS LTD 5,951,198,183 27.24% 26.78% ARITHMETIC MEAN 14.08% 12.32% THE DIFFERENTIAL BETWEEN THE MARGINS OF THE APPEL LANT AS ABOVE AND OF THE COMPARABLES UNDER THE TABLES ABOVE, AFTE R ELIMINATING KALS, TATA PAGE 18 OF 61 ITA NO.14 13/BANG/2010 18 ELXSI, ACCEL, INFOSYS TECHNOLOGIES AND MINDTREE IS WITHIN THE 5% RANGE. APPLING, THE RATIO OF CIRCULAR NO 12 OF 2001, WHICH HAS BEEN STATUTORILY THEREAFTER INCORPORATED IN THE PROVISO TO SECTION 9 2C(2), NO ADJUSTMENT IS REQUIRED TO BE MADE TO THE REPORTED VALUES OF THE A PPELLANTS TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. BASED ON ALL THE ABOVE, THE APPELLANT SUBMITS THA T ITS TRANSACTIONS UNDER SOFTWARE DEVELOPMENT SEGMENT ARE AT ARMS LENGTH AND ADDITION MADE BY THE TPO AND SUSTAINED BY THE DRP I N THIS REGARD NEED TO BE DELETED. BENEFIT OF 5 PERCENT RANGE: ASSUMING WITHOUT ADMITTING THAT A TP ADJUSTMENT I S TO BE MADE, THE APPELLANT SUBMITS THAT IT SHOULD BE GIVEN A STA NDARD DEDUCTION OF 5% AS PROVIDED UNDER PROVISO TO SECTION 92C(2) BEFORE MAK ING ADJUSTMENTS FOR THE TRANSFER PRICE. THE APPELLANT SUBMITS THAT ITS ABOVE CONTENTION IS SUPPORTED BY THE FOLLOWING JUDICIAL PRECEDENTS: M/S SAP LABS INDIA PRIVATE LIMITED V ACIT 2010-TII- 44-ITAT-BANG-TP PHILIPS SOFTWARE CENTRE PVT LTD 26 SOT 226 MSS INDIA PRIVATE LIMITED 32 SOT 132 CUSTOMER SERVICES INDIA (P) LTD V ACIT 30 SOT 486 SKODA AUTO INDIA PVT LIMITED V ACIT 2009-TIOL-214-I TAT-PUNE DEVELOPMENT CONSULTANTS P LIMITED V DCIT 23 SOT 455 SONY INDIA P. LTD. 315 ITR 150 CUMMINS INDIA LIMITED V DCIT ITA NO. 277 & 1412/PN/ 07 TNT INDIA PVT. LTD. V ACIT 10 TAXMANN.COM 161 ABHISHEK AUTO INDUSTRIES LTD V DCIT 2010-TII-54-ITA T-DEL-TP TECHNIMONT ICB PVT LTD V ACIT 2011-TII-31-ITAT-MUM- TP PAGE 19 OF 61 ITA NO.14 13/BANG/2010 19 5.1. IN CONCLUSION, IT WAS AVERRED THAT EVEN AFTER ADOPTING THE COMPARABLES AS CHOSEN BY THE TPO SUBJECT TO REJECTI ON OF SOME COMPANIES FOR JUSTIFIABLE REASONS, THE MARGINS OF THE APPELLA NT ARE WITHIN THE ARMS LENGTH RANGE OF THE ADJUSTED ALP. THESE MARGINS WO ULD SKEW MORE FAVOURABLY, IF COMPARABLES OF THE APPELLANT THAT DE SERVE TO BE ADOPTED ARE CONSIDERED. IN VIEW OF THE FAVOURABLE CONCLUSION O N FACTS, DETAILED ARGUMENTS OR SUBMISSIONS HAVE NOT BEEN MADE ON LEGAL ISSUES L IKES (I) THE REFERENCE TO TPO BEING BAD IN LAW; (II) THE CITS APPROVAL FOR R EFERENCE TO TPO ALSO BEING BAD IN LAW; AND (III) THE ADDITIONS BEING UNSUSTAIN ABLE AS THE DEFINITION OF INCOME OR THE COMPUTATION PROCESS UNDER SECTION 28 TO 44 NOT ENVISAGING A REFERENCE TO OR INCORPORATION OF AN ADJUSTMENT PROP OSED UNDER CHAPTER X. DEDUCTION UNDER SECTION 10A WHILE COMPUTING DEDUCTION U/S 10A, THE AO REDUCED RS. 527,929 FROM THE EXPORT TURNOVER. HOWEVER THE SAME HAS NOT BEEN REDUCED FROM THE TOTAL TURNOVER. IN THIS REGARD, THE APPELLANT SUBM ITS THAT WHAT IS REDUCED FROM EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM TO TAL TURNOVER. THE APPELLANTS CONTENTION IS SUPPORTED BY THE SPECIAL BENCH DECISION IN THE CASE OF ITO V SAK SOFT (2009) 313 ITR (AT) 353 AND PLETH ORA OF DECISIONS LISTED ON PAGES 373 TO 375 OF PB-I. THE APPELLANT SUBMITS THAT AMOUNT REDUCED FROM EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM TO TAL TURNOVER. 6. ON THE OTHER HAND, THE LD. D.R CAME UP WITH A S PIRITED REFUTATION OF THE LD. A RS CONTENTIONS. THE LEARNE D DR ALSO FILED WRITTEN SUBMISSIONS, ESSENCES OF WHICH ARE SUMMARIZED, CHRO NOLOGICALLY, AS UNDER: (1) DURING THE PROCEEDINGS U/S 144C OF THE AC T, THE DRP HAD GIVEN OPPORTUNITIES TWICE TO THE ASSESSEE. PAGE 20 OF 61 ITA NO.14 13/BANG/2010 20 RELIES ON THE CASE LAWS: (A) MESSE DUSSELDORF VS DCIT (2010) 320 ITR 565 (DEL) (B) INTIMATE FASHION (INDIA) (P) LTD VS. JCIT (2010) 321 ITR 265 (MAD). WITH REGARD TO PROCEDURE: GROUND NO.2 THE DRP AFTER GOING THROUGH VARIOUS SUBMISSIONS MADE BY THE ASSESSEE AND ALSO AFTER CONSIDERING VARIOUS JUDICIA L PRONOUNCEMENTS ON THE ISSUE SUCH AS THE DECISION OF THE SPECIAL BENCH OF HONBLE ITAT IN THE CASE OF M/S. AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD VS. ACIT REPORTED IN 107 ITD 141 (SB) (BANG) AND HONBLE HIGH COURT OF DELHI IN THE CASE OF SONY INDIA PVT. LTD VS CBDT REPORTED IN 288 ITR 52 AND VARIOUS OTHER DECISIONS HELD THAT THERE WAS NO ILLEGALITY OR ARBITRATION IN THE ORDER OF THE ASSESSING OFFICER IN MAKING A REFERENCE TO THE TPO OR IN ADOP TING THE COMPUTATION OF ALP DETERMINED BY THE TPO. FURTHER PLACED RELIANCE ON THE JUDICIAL PRONOUNC EMENT ON THIS ISSUE AS FOLLOWS:- MORGAN STANLEY & CO.(2006) 284 ITR 260, (AAR) SONY INDIA (P) LTD VS CBDT (2006), 288 ITR 52 (DELH I), RANBAXY LABORATORIES LTD. VS ADDL. CIT (2008) 299 I TR 175 (DELHI) M/S. TNT INDIA PVT. LTD VS ACIT ITA NO. 1442/BANG/0 8 M/S. SAP LABS INDIA PVT. LTD VS ACIT ITA NO398/BANG /2008 M/S. DELOITTE CONSULTING INDIA PVT. LTD VS DCIT ITA NO 1084/HYD/2010 M/S. TALLY SOLUTIONS PVT. LTD./ VS DCIT ITA NO 1235 /BANG/2010 THESE OBJECTIONS OF THE ASSESSEE WITH REFE RENCE TO THE PROCEDURE ARE COVERED AGAINST THE ASSESSEE BY THE DECISIONS R EFERRED SUPRA AND, HENCE, THERE IS NO MERIT ON THE GROUNDS AND LIABLE TO BE R EJECTED. PAGE 21 OF 61 ITA NO.14 13/BANG/2010 21 GROUND NOS. 3 & 4 THESE GROUNDS RELATE TO ADMINISTRATIVE MATTERS A ND THE DRP CONSTITUTED BY THE CBDT BY SPECIFIC NOTIFICATION AN D, HENCE, VALIDLY CONSTITUTED AS PER PROVISIONS OF ACT. MOREOVER, AP PEAL IN GROUND NOS. 3 AND 4 ARE NOT EMANATING FROM THE ORDER OF THE TPO AND THE DRP; HENCE NOT MAINTAINABLE. GROUND NO. 5 RELATING TO CHARGE OF INCOME-TAX THAT S. 92(1) OF CHAPTER X CLEARLY PROVIDES THE PROCEDURE FOR COMPUTATION OF INCOME ARISING FROM AN INTERNATIONAL TRANSACTION. S. 92(1), SAYS THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRAN SACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE TERM INTERNATIONAL TRANSACTION HAS BEEN DEFI NED IN S. 92B AND THE PROCEDURE FOR DETERMINING ARMS LENGTH PRIC E IN RELATION TO AN INTERNATIONAL TRANSACTION HAS BEEN PROVIDED IN S. 9 2C. THEREFORE, THERE REMAINS NO DOUBT THAT THE ADJUSTMENTS HAVE TO BE MA DE TO THE INCOME ON THE BASIS OF ARMS LENGTH PRICE DETERMINED, AND, THEREFO RE, WHILE COMPUTING THE INCOME OF THE ASSESSEE THE PROVISIONS OF CH. X ARE CLEARLY APPLICABLE. GROUND NO.6 IN REGARD TO THE ISSUE OF NOTIC ES U/S 133(6), IT WAS STATED THAT THE TPO DISCUSSED IN DETAIL IN PARA 14.5 TO 14.5.1, WHICH REVEALS THAT COPIES OF NOTICES U/S 133(6) ISSUED TO THE COMPANIES AS WELL AS THE COPIES OF THE REPLIES RECEIVED FROM COMPANIES WERE IN FACT GIVEN TO THE A SSESSEE IN A SOFT COPY FOR ITS COMMENTS. THE DECISION OF THE TPO BASED ON INFO RMATION COLLECTED WAS ALSO DULY COMMUNICATED TO THE ASSESSEE. THE DRP HAV E UPHELD THE AOS ACTION AND AFTER CONSIDERING THE ASSESSEES OBJECTION AND HELD THAT TPO IS PAGE 22 OF 61 ITA NO.14 13/BANG/2010 22 EMPOWERED TO COLLECT THE DETAILS RELEVANT TO THE TR ANSFER PRICING PROCEEDINGS AND THE TPO USED HIS POWER TO COLLECT RELEVANT INFO RMATION REQUIRING FOR BETTER COMPARABILITY ANALYSIS. THE TPO USED THE DAT A FOR INFORMATION THAT WAS AVAILABLE TO HIM IN THE PUBLIC DOMAIN WHENEVER A COMPANY DID NOT SUBMIT THE INFORMATION OR WHEREVER THE NOTICE U/S 133(6) N OT SERVED AT THE LATEST ADDRESS AVAILABLE EVEN AFTER REPEATED ATTEMPTS. THE TP ORDER TRANSPIRES THAT THE ASSESSEE HAD FURNISHED ITS REPLY VIDE LETTER DA TED 21-09-2009 AND NO ISSUE WAS RAISED IN REGARD TO THE CROSS-EXAMINATION OF THE CONCERNED PARTIES WHICH DISPEL THE ASSESSEES CONTENTION THAT IT WAS NOT GIVEN OPPORTUNITY TO CROSS-EXAMINE THE PARTIES INVOLVED . IN THIS CONNEC TION, THE REVENUE RELIES ON THE PRONOUNCEMENTS OF THE HONBLE ITAT BANGALORE IN THE CASE OF M/S. GENESIS INTEGRATING SYSTEM (INDIA) PVT. LTD VS. DCI T IN ITA NO/231/(BANG)/2010 AND BY THE MUMBAI TRIBUNAL IN M /S. SYMANTEC SOFTWARE SOLUTION VS. ACIT IN ITA NO 7894/MUM/2010. FROM THE FACTS AS WELL AS LEGAL POSITION DISCUSS ED ABOVE, THE TPOS ACTION WOULD BE ACCORDING TO THE STATUTORY PR OVISION OF THE ACT AND NOTICES U/S 133(6) WERE VALIDLY ISSUED SECTION 92CA(3) EMPOWER THE TPO TO CONSIDER SUCH EVIDENCE AS HE MAY REQUIRE ON ANY SPECIFIED POINT AND AFTER TAK ING INTO ACCOUNT ALL RELEVANT MATERIALS WHICH HE HAS GATHERED, HE SHALL DETERMINE THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION IN ACCORD ANCE WITH THE PROVISIONS OF S. 92C. THUS, IF THE INFORMATION AS GATHERED BY TH E TPO IS RELEVANT MATERIAL FOR THE PURPOSE OF DETERMINING THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION THEN IT WAS NOT WRONG IN USING THE UPDA TED DATA. GROUND NOS.7 & 11 THE ASSESSEE SELECTED COMPARABLES OUT OF WHICH THE ITO ACCEPTED 7 COMPARABLES. FILTER MATRIX ADOPTED BY TH E TPO HAS DISCUSSED IN PAGE 23 OF 61 ITA NO.14 13/BANG/2010 23 PARA 11.1 BASED ON THE FILTER CRITERIA THE TPO DI SCUSSED EACH COMPARABLE FROM PAGE NO 62 TO 72 AND ELIMINATED 42 COMPARABLES . THE DRP ALSO DISCUSSED THIS ISSUE ELABORATELY. IT IS RELEVANT TO MENTION THE RULING OF THE HONB LE ITAT, MUMBAI IN ACIT VS M/S MAERSK GLOBAL SERVICES CENTRE (INDIA ) PVT. LTD. ITA NO 3774/MUM/2011. IN THE INSTANT CASE, SINCE THE TPO HAS EXCLUDED COMPARABLES CHOSEN BY THE ASSESSEE WHICH CAN BE SEEN IN THE ORD ER U/S 92CA OF THE ACT CITED. TURN OVER FILTER THE ASSESSEE HAD CONTENDED THAT TNMM METHOD FOLLOWE D BY THE TPO, ADOPTING A TURN OVER FILTERS OF RS. 1 CRORE ON THE LOWER END AND INFINITY ON THE HIGHER SIDE IS WRONG. THE ASSESSEE SUBMITTED NEW ST UDY ORDER TNMM ADOPTING TURN OVER RANGE OF RS. 1 CRORE AT THE LOWE R END AND RS. 200 CRORES AT THE HIGHER END WHILE CHOOSING THE COMPARABLES IS BA SED ON DAN & BRADSTREET ANALYSIS OF CLASSIFICATION OF SOFTWARE COMPANIES. FURTHER, THE ASSESSEE HAD PROVIDED FRESH COMPARABLES HAVING A TURNOVER FILTER RANGE OF RS. 1 C RORE TO 500 CRORES BASED ON NASSCOM CATEGORISATION. IT WAS SUBMITTED BY THE LEARNED DR THAT THE ICAI TP GUIDELINE NOTE AND NASSCOM CATEGORISATION ARE ONLY CERTAIN OP INION FORMED BY THE AGENCIES AND GENERAL IN NATURE. AGAINST THE ASSESSE ES ARGUMENT, IT WAS SUBMITTED THAT THE TPO IN HIS ORDER STATED THAT THE TAX PAYERS ARGUMENT OF SIZE, SCALE AND NATURE OF OPERATION WAS ALSO RAISED DURING THE PROCEEDING U/S 92CA OF THE ACT AND THE SAME HAS BEEN DEALT WITH IN DETAIL IN THE ORDER (IN PARA 9.2). FURTHER IT ALSO HELD THAT LESSER KNOWN C OMPANIES LIKE MEGA SOFT PAGE 24 OF 61 ITA NO.14 13/BANG/2010 24 LTD, ACCEL TRANSMATIC LTD, KALS INFO SYSTEMS LTD ET C ARE HAVING ALMOST THE PROFIT MARGIN EQUIVALENT TO THE MARGIN OF INFOSYS T ECHNOLOGY LTD. WHICH MEANS THAT BRAND PER SE DOES NOT EFFECT THE MARGINS . THUS BRAND NAME MAY GET HIGHER TURNOVER BUT IT DOES NOT NECESSARILY MEA N THAT IT WOULD GENERATE HIGHER MARGIN. IT WAS STATED THAT THE OBSERVATION O F THE TPO HAS ALSO SUPPORTED BY THE DECISION OF HONBLE ITAT, MUMBAI E BENCH IN U/S SYMANTEC SOFTWARE SOLUTIONS PRIVATE LIMITED VS ACIT IN ITA N O 7894/MUM/2010. SUBMISSION OF LEARNED DR RELATING TO USE OF INFORMA TION RECEIVED IN PURSUANCE TO NOTICE U/S133 (6). FOR THE COMPARABILITY ANALYSIS, THE T PO CONDUCTED ENQUIRIES FROM CERTAIN COMPANIES BY EXERCISING POWER CONFERRE D BY LAW U/S 133(6) OF THE ACT. THE ASSESSEE WAS PROVIDED THESE NOTICES AN D REPLIES RECEIVED IN A CD. THE TPO PROPOSED TO ACCEPT/REJECT THESE COMPANI ES AS COMPARABLE BASED ON THE RESPONSE RECEIVED FROM THESE COMPANIES. IT WAS URGED THAT THIS ISSUE HAS ALREADY BEEN DISCUSSED IN GROUND NO 6. HENCE NO T DEEM FIT FOR FURTHER COMMENTS FOR SAKE OF REPETITION. SUBMISSION ON THE MARGIN OR ADOPTION OF VARIOUS COM PANIES AS COMPARABLE: THE A.R. OF THE ASSESSEE URGED THAT THE FOLLOWING COMPANIES MAY BE EXCLUDED AS COMPARABLE IN VIEW OF THE UNUSUAL FE ATURES:- COMPANY NAME OP TO TOTAL COST I) MS/. MEGASOFT LTD 52.74 II) M/S. KALS INFORMATION SYSTEM LIMITED 39.75 III) M/S. TATA ELEXI LIMITED 27.65 IV) M/S. ACCEL TRANSMATIC LIMITED 44.07 V) M/S. MIND TREE CONSULTING PRIVATE LIMITED 14.67 VI) M/S. INFOSYS TECHNOLOGIES LIMITED 40.38 PAGE 25 OF 61 ITA NO.14 13/BANG/2010 25 THE A.R. OF THE ASSESSEE POINTED OUT SEVERAL DEF ICIENCIES IN ADOPTING THESE COMPANIES AS COMPARABLE, HENCE IT IS APPROPRIATE TO OFFER COMMENTS COMPANY WISE IN FOLLOWING PARAGRAPHS:- I) MEGASOFT LTD IT WAS CONTENDED BY THE REVENUE THAT WHILE CONSIDER ING REFERENCE PETITION IN THE CASE OF M/S YADLEE INF OTECH PVT. LTD. THE DRP HELD THAT - SUB-SECTION (7) OF SECTION 92CA HAS EMPOWERED THE T PO TO EXERCISE ALL OR ANY OF THE POWERS MENTIONED IN SECT ION 131 OR SUB-SECTION (6) OF SECTION 133 FOR DETERMINATION OF ALP. THE OBJECT IS CLEARLY TO ENABLE THE TPO TO SEEK CLARIFI CATIONS WHERE THERE IS AMBIGUITY OR INSUFFICIENCY OR OBFUSCATION OF DATA OR INFORMATION IN PUBLIC DOMAIN SO THAT THE ALP CAN BE ARRIVED AT IN A MORE PRECISE MANNER. AS LONG AS THE TPO HAS ACTED OBJECTIVELY, FAIRLY AND WITHOUT ANY BIAS, THE ASSESSEE CANNOT HA VE ANY GRIEVANCE ON THE ISSUE. AS FAR AS USE OF M/S MEGASO FT LTD AS A COMPARABLE IS CONCERNED, ANY LACUNA ON THE PART OF THE TPO TO GIVING OF OPPORTUNITY TO THE ASSESSEE BEFORE INCLUD ING THE COMPANY AS A COMPARABLE GETS CURED BY THE DRP TAKIN G INTO CONSIDERATION ASSESSEES OBJECTIONS IN THE MATTER. THE DRP DISCUSSED COMPARABILITY IN REGARD TO M/S MEGASOFT LTD AND THIS IS COMMON IN BOTH THE CASE, HENCE THE DRP S FINDINGS ARE EQUALLY APPLICABLE IN THE INSTANT CASE. FURTHER, IT WAS SUBMITTED THAT: M/S MEGASOFT HAS FURNISHED SEGMENTAL INFORMATION IN PURSUANCE TO THE NOTICE ISSUED U/S 133(6) WHICH IS GIVEN BELOW: FINANCIAL STATEMENT FOR YEAR ENDING 31-03-2006 OPER ATING REVENUE (EXCLUDING NON OPERATING REVENUE) ARE: PAGE 26 OF 61 ITA NO.14 13/BANG/2010 26 PARTICULARS BLUE ALLY(CONSULTING DIVISION) IN RS. XIUS-BCITS DIVISION (PRODUCT DIVISION) IN RS. TOTAL IN RS. SALE/SERVICE EXPORT 17,07,45,151 24,32,21,163 41,39, 66,314 DOMESTIC 2,14,40,300 12,60,56,269 14,74,96,569 TOTAL 19,21,85,451 36,92,77,432 56,14,62,883 AS PER TPO 56,14,62,883 EXPENDITURES PERSONNEL COST 9,66,62,247 9,11,68,236 18,78,30,483 INCREASE/DECREASE IN WORK- IN-PROGRESS 98,62,642 49,62,180 1,48,24,822 OPERATING EXPENSES (EXCLUDING NET LOSS ON FOREIGN EXCHANGE , LOSS ON SALE OF ASSETS, FINANCE CHANGES AND PROVISION MADE ON DEBTORS) 4,18,62,533 9,61,41,392 13,80,03,925 DEPRECIATION 1,59,14,244 1,68,55,710 3,27,69,954 TOTAL 16,43,01,666 20,91,27,519 37,34,29,185 AS PER TPO 36,75,94,111 PROFIT BEFORE TAX 2,78,83,785 16,01,49,913 18,80,33 ,698 IT IS ALSO CLARIFIED BY THE COMPANY THAT: 1) BLUE ALLY DIVISION IS AN OFFSHORE AND ON LIMIT CONS ULTING DIVISION AND DOES JOBS BASED ON CUSTOMERS REQUIREMENTS AND BILLING DO NE ON HOURLY BASIS. 2) XIUS-BCCIL IS A PRODUCT WHICH CATERS THE NEED OF MO BILE SOFTWARE INDUSTRIES. THIS PRODUCT IS NOT READYMADE TO THE IN DUSTRY. IT HAS TO BE CUSTOMISE TO THE REQUIREMENT OF EACH CUSTOMER AND P RICING WILL BE DONE ACCORDINGLY. THE TPO IN PARA 11 OF THE ORDER AND STATED THAT A SOFTWARE DEVELOPMENT PROCESS IS A STRUCTURE IMPOSED ON THE D EVELOPMENT OF A SOFTWARE PRODUCT. SYNONYMS INCLUDE SOFTWARE LIFE CYCLE AND S OFTWARE PROCESS. THESE ARE SEVERAL MODES FOR SUCH PROCESS EVEN DESCRIBING APPROACHES TO A VARIETY OR ACTIVITIES THAT TAKE PLACE DURING THE PROCESS. I N FURTHERANCE HE ALSO DIFFERENTIAL SOFTWARE DEVELOPMENT PROCESS OR LIFECY CLE. A) SOFTWARE PRODUCT COMPANY B) SOFTWARE DEVELOPMENT COMPANY C) SOFTWARE CUSTOMISABLE COMPANY D) SOFTWARE TRADING COMPANY PAGE 27 OF 61 ITA NO.14 13/BANG/2010 27 AS REGARD TO SOFTWARE CUSTOMISATION COMPANY BUYS SOFTWARE PRODUCTS IN THE FORM OF LICENSE FROM THIRD PARTIES OR USES ITS OWN SOFTWARE PRODUCTS FOR CUSTOMISATION TO SUIT THE REQUIREMENTS OF THE CUSTOMER. IN THIS CASE ONLY RIGHT TO USE THE SOFTWARE IS PASSED ON TO THE CUSTOMERS. BUT THESE MAY BE COMPANIES WHICH DOES ONLY CUSTOMISATION BASE D ON THE SOFTWARE PRODUCTS BOUGHT DIRECTLY BY THE CUSTOMERS. IN SUCH SITUATION CUSTOMISATION INCLUDES CODING WHICH IN A WAY ARE A KIN TO SOFTWAR E DEVELOPMENT SERVICE PROVIDERS. THUS IF A COMPANY IS ONLY INTO PURE CUST OMISATION, THE SAME IS ALSO CONSIDERED AS A SOFTWARE DEVELOPMENT SERVICE PROVID ERS. M/S MEGASOFT LIMITED VIDE LETTER DATED 19-04-201 0 CLARIFIED THAT XIUS-BCGI (PRODUCT DIVISION) IS A PRODUCT WHIC H CATERS THE NEEDS OF MOBILE SOFTWARE INDUSTRIES. THIS PRODUCT IS NOT REA DY MADE TO THE INDUSTRY. IT HAS TO BE CUSTOMISED TO THE REQUIREMENT OF EACH CUS TOMER AND PRICING HAS BEEN DONE ACCORDINGLY. IT INDICATE THAT COMPANY PRO DUCTS ARE IN THE FORM OF LICENSE FROM THIRD PARTIES AND CUSTOMISED AS PER RE QUIREMENT OF ITS CUSTOMERS, UNDER THESE CIRCUMSTANCES M/S MEGASOFT L IMITED AS A SERVICE PROVIDER AKIN TO SOFTWARE DEVELOPMENT SERVICES. THE A.R OF THE ASSESSEE STATED THAT COMPANY HAS MADE EXTRAORDINARY OR SUPERNORMAL PROFIT OF RS. 34,62,63 ,000/- THIS FIGURES NOWHERE APPEARS IN THE FINANCIAL STATEMENT FURNISHE D IN THE COMPANY. IN FACT OPERATING PROFIT OF THE COMPARABLE COMPANY IS RS. 1 8,80,33,698. ARMS LENGTH PRICE IS THE BASIC FOUNDATIONS FOR DETERMINATIONS O F INCOME FROM INTERNATIONAL TRANSACTIONAL. IT IS PROVIDED THAT ANY INCOME ARIS ING FROM AN INTERNATIONAL TRANSACTION WOULD BE DETERMINED BY ADOPTING THE ARM S LENGTH PRICE AS THE BASIS DISREGARDING TRANSFER PRICE RECORDED BY THE E TERNISES CONCERNED. THE AR OF THE ASSESSEE STATED THAT M/S MEGASOFT LIMITED OWNS INTELLECTUAL PAGE 28 OF 61 ITA NO.14 13/BANG/2010 28 PROPERTY RIGHT AND PATENTS IS HOWEVER HOW FAR THESE INFLUENCED THE INTERNATIONAL TRANSACTIONS, NO EXPLANATION HAS BEEN FURNISHED. FURTHER IT IS ALSO STATED THAT COMPANY HOLD OPEN ING INVENTION OF RS. 3,20,26,000/- AS ON 31-12-2005 HOWEVER NO SUCH FIGURES APPEARS AT PAGE 212 OF THE ASSESSEES PAPER BOOKS. IT IS PERTINEN T TO NOTE THAT IN THE ANNUAL REPORT IT IS MENTIONED THAT (PLEASE REFER COLUMN 12 , PAGE 215 OF THE ASSESSEES PAPER BOOK) QUANTITATIVE DETAILS : THE COMPANY IS IN THE BUSINESS OF DEVELOPMENT AND MAINTENANCE OF COMPUTER SOFTWARE. THE DEVELOPMENT AND SALE OF S UCH SOFTWARE CANNOT BE EXPRESSED IN ANY GENERIC UNIT. HENCE IT IS NOT POSS IBLE TO FURNISH THE QUANTITATIVE DETAILS AND THE INFORMATION REQUIRED U NDER PARAGRAPHS 3, 4 C AND 4D OF PART II OF SCHEDULE VI TO THE COMPANIES ACT 1 956. CONSUMPTION PARTICULARS ARE GIVEN BELOW: PARTICULARS YEAR ENDED 31 DEC 2006 RS. 000 YEAR ENDED 31 DEC 2005 RS. 000 COMPUTERS AND ALLIED PERIPHERALS USED FOR SYSTEM INTEGRATIONS 51,259 64,821 FROM IT REVEALS THAT THE COMPANY IS BASICALLY IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES. THE FACTS STATED ABO VE THE TPO AS WELL AS THE DRP HAS RIGHTLY COMPUTED OPERATING PROFIT MARGI N CONSIDERING BOTH DIVISION I.E. CONSULTANCY DIVISION AND PRODUCT DIVI SION. THUS THE COMPANY SATISFIES THE FILTER CRITERIA ADOPTED BY THE TPO HE NCE CANNOT BE REJECTED MERELY BECAUSE EXTRA ORDINARY OR SUPER NORMAL PROFI TS, HENCE SAME MAY BE RETAINED AS COMPARABLE. PAGE 29 OF 61 ITA NO.14 13/BANG/2010 29 II) KALS INFO SYSTEM LIMITED . THE TPO HELD THAT THE COMPANY ENGAGED IN SOFTWAR E DEVELOPMENT SERVICES. THE SOFTWARE PRODUCTS CONSTIT UTE ONLY 0.33% OF ITS REVENUE AND OTHER INCOME CONSTITUTE ONLY 0.7% OF IT S REVENUE. THUS THE REVENUES FROM SOFTWARE DEVELOPMENT SERVICES CONSTIT UTE ALMOST 99% OF THE TOTAL OPERATING REVENUES AND IT QUALIFIES 75% REVEN UES FILTER FROM SOFTWARE DEVELOPMENT, ACCORDINGLY CONSIDERED AS COMPARABLE. AT THE TIME OF APPEAL HEARING, THE ASSES SEES AR SUBMITTED WRITTEN ARGUMENT AND IN CONCLUSION, IT WAS URGED TH AT THE COMPANY BE NOT ADOPTED AS A COMPARABLE. IN THE ALTERNATIVE, AN OPP ORTUNITY TO CROSS EXAMINE THE SAID COMPANY OR AUTHORISED PERSON WAS SOUGHT TO TEST THE INFORMATION/DATA SUBMITTED. THE TPO AND DRP HAVE, HOWEVER, CONSIDERED THIS C OMPANY AS A COMPARABLES ADOPTING THE FIGURES SUPPLIED IN THE RE PLY TO NOTICE UNDER SECTION 133(6). IN THE REPLY TO NOTICE U/S 133(6), THE COMP ANY HAS CONTENDED THAT IT IS A PURE SOFTWARE DEVELOPMENT COMPANY BY STATING T HAT: (REFER PAGE 67 OF THE TP ORDER): THE CORE OF OUR BUSINESS MAY BE CLASSIFIED AS THAT OF PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE ABOVE IS CONTRARY TO THE FACTUAL INFORMATION AS AVAILABLE IN THE ANNUAL REPORT OF THE COMPANY. IN VIEW OF ALL THE ABOVE, TH IS COMPANY IS NOT TO BE ADOPTED AS A COMPARABLE. EVEN OTHERWISE, THE OPPORT UNITY OF CROSS EXAMINATION AS REQUESTED WAS NOT GRANTED. PAGE 30 OF 61 ITA NO.14 13/BANG/2010 30 HOWEVER, IT WAS THE STAND OF THE REVENUE THAT ON A PERUSAL OF THE FINANCIAL STATEMENT OF KALS FOR YEAR ENDING 31-03-2006, FROM IT REVEALS THAT EXPORT RECEIPT AND OTHER RECEIPTS DISCLOSED AS BELOW: RS. APPLICATION SOFTWARE 1,93,29,198 97.54% OTHER RECEIPTS 3,61,192 1.82% TRAINING 1,25,949 .64% TOTAL 1,98,16,339 100% THUS OPERATING REVENUE CONSIST SOFTWARE APPLICATI ON, OTHER RECEIPTS AND TRAINING, SAME ALSO APPEARS IN SEGMENT AL INFORMATION (PLEASE REFER COL-9 OF NOTES ON ACCOUNT). FURTHER IT ALSO O BSERVED THAT AUDITORS HAS NOT GIVEN QUANTITATIVE DETAILS AND CORRESPONDING AM OUNT IN REGARD TO PURCHASE, PRODUCTION AND SALE OF SOFTWARE PRODUCTS MADE DURIN G THE YEAR WHICH REQUIRES AS PER PART II OF SCHEDULE VI TO COMPANIES ACT 1956. THIS CLEARLY INDICATES THAT MAJOR REVENUE CONSIST SOFTWARE DEVEL OPMENT SERVICES. THE AUDITOR PUT REMARKS THAT THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION. THIS IS GENERAL REMARKS PUT BY THE AUDITORS IN FACT REVENUE FOR THE YEAR OR DER CONSIDERATION MAINLY FROM SOFTWARE DEVELOPMENT SEGMENT WHICH CONSTITUTE 97.54% OF THE TOTAL INCOME . THE A.R STATED THAT THE TOTAL TURNOVER OF KAL IS RS. 2.15 CRORES, AND HOLDS AN INVENTORY OF RS. 1.27 CRORES, HOWEVER FROM THE STATEMENT OF ACCOUNT FOR YEAR ENDING 31-03-2006 NOWHERE APPEARS SUCH FIG URES(INVENTORIES THE AMOUNT OF RS. 1.27 CRORES ACTUALLY REPRESENTS RECEI VABLES. DEBTORS ARISING ON RENDERING OF SOFTWARE DEVELOPMENT SERVICES FOR EVID ENCE ENCLOSED COPY OF STATEMENT OF ACCOUNT AS PER ANNEXURE A. THUS, THE ASSESSEE WAS GIVING MISLEADING FACTS. IN VIEW OF THE FACTS DISCUSSED ABOVE, THE TPO HAS RIGHTLY CONSIDER ED THAT THE COMPANY IS A PAGE 31 OF 61 ITA NO.14 13/BANG/2010 31 SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THERE IS NO MERIT IN THE ASSESSEES CONTENTIONS. THE COMPANYS ITS LETTER DATED 13-01- 2009 CLEARLY MENTIONED THAT THE CORE OF OUR BUSINESS MAY BE CLASSIFIED AS THAT OF PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER THUS COMPANY ITSELF C ONFIRMING BEING A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS SUCH THERE IS NO QUESTION OF MAJOR REVENUE FROM SOFTWARE PRODUCTS. III) TATA ELXSI LIMITED: THE TPO HAS ORDER HELD THAT THE TPO DID NOT CONSIDER VERTICALS OR HORIZONTALS WITHIN THE SOFTWARE INDUSTRY. THE TU RNOVER LIMIT OF THE 100 CRORE IS NOT ACCEPTED BY THE TPO AND THE FUNCTIONAL DIFFERENCE HAS CONSIDERED ONLY THE SOFTWARE DEVELOPMENT AND SERVIC E SEGMENT OF THE COMPANY, THE RPT OF THE COMPANY IS RS. 8.39 CRORES AND THE SEGMENTAL REVENUE OF THE COMPANY IS 188.81 CRORES WHICH CONST ITUTE 4.4% OF THE SALES. ACCORDING TO THE TPO, THE AFORESAID COMPANY SATISFI ES ALL THE FILTERS HENCE INCLUDED AS A COMPARABLE. IN WRITTEN SUBMISSION THE ASSESSEES AR CONCLUDE D THAT: HENCE EVEN TO JUDGE OUR OWN PERFORMANCE WE DO NOT HAVE A COMPARABLE COMPANY WHICH IS OPERATING IN ALL THE AREAS WE OPERATE. CONSIDERING THESE FACTS, WE FEEL IT IS NOT FAIR TO USE OUR FINANCIAL NUMBERS EVEN TO BROAD LY COMPARE THE PERFORMANCE OF ANY OTHER COMPANY WHO WE FEEL ARE NOT IN ANY ONE OF THE COMPLEX SEGMENTS WE ARE OPERATING. DESPITE SUCH WARNING FROM THE COMPAN Y, THE SAME HAS BEEN ADOPTED AS A COMPARABLE WITHOUT REBUTTING THE WARNING OR CONDUCTING FRESH INVESTI GATION TO DISPROVE OR DISCREDIT THE LIMITATION EXPRESSED. FURTHER TATA ELXSI LIMITED DOES SUBSTANTIAL RESEARC H AND DEVELOPMENT AND OWNS SUBSTANTIAL INTANGIBLES. THIS FACT IS HIGHLIGHTED IN THE EXTRACTS OF ANNUAL REPORT OF THE PAGE 32 OF 61 ITA NO.14 13/BANG/2010 32 COMPANY. BASED ON ALL THE ABOVE, IT IS SUBMITTED TH AT THIS COMPANY SHOULD BE REJECTED AS COMPARABLE. SIMILAR SUBMISSION ALSO MADE BEFORE THE TPO AND C ONSIDERED THE ASSESSEES OBJECTIONS. THE TPO HAVE ALSO ASKED INFO RMATION BY ISSUE OF NOTICE U/S 133(6) OF THE INCOME TAX ACT AND IN COMPLIANCE, M/S TATA ELXSI LIMITED CLARIFIED THAT PRODUCT DEVELOPMENT SERVICES MAINLY DEVELOPS SOFTWARE FOR CUSTOMERS WHO LOOK FOR SOLUTION THROUGH EMBEDDED SO FTWARE. INNOVATIONS DESIGN ENGINEERING PROVIDES PRODUCTS , DESIGN AND ENGINEERING FOR AUTOMOTIVE CONSUMER GOODS AND ELECT RONICS ENCLOSURES. IT DELIVERS CONCEPT OF NOW PRODUCTS THOUGH COMPUTERS M ODELS, USING A TEAM OF HIGHLY SPECIALISED INDUSTRIAL DESIGNERS AND GRAPHIC S SPECIALISTS AND GENERALS 3D CAD MODELS AND SPECIFICATION FOR PRODUCTS. VISUAL COMPUTING LABS ORDER TAKES CONTESTS DEVELO PMENT AND ANIMATION SERVICES USING COMMERCIAL AND PROPRIETARY HIGH END SOFTWARE FOR GRAPHICS, ANIMATION AND IMAGE/VIDEO EDITING CONTENT OR EDIT EXISTING CONTENT TO ADD SPECIAL EFFECTS AS SPECIFIED BY CUSTOMERS, U SING VERY HIGH END COMPUTERS AND SOFTWARE. AS PER FINANCIAL STATEMENT SEGMENTAL REVENUES DI SCLOSED AS UNDER: PARTICULARS SYSTEM INTEGRATION AND SUPPORT (RS. 000) SOFTWARE DEVELOPMENT AND SERVICES(RS. 000) REVENUES 4,733.42 18,882.42 IDENTIFIABLE OPERATING EXPENSES 4,032.86 14,835.21 SEGMENTAL OPENING INCOME 700.56 4,047.21 PAGE 33 OF 61 ITA NO.14 13/BANG/2010 33 M/S TATA ELXSI LIMITED FURNISHED THE SEGMENTAL RE VENUE I.E. SOFTWARE DEVELOPMENT SERVICES FOR F.Y. 2005-06 AS U NDER:- RS. SALES 18,881.25 OTHER INCOME 1.17 TOTAL 18,882.42 COST OF SALES 435.33 PERSONNEL EXPENSES 10,676.21 ADMINISTRATION EXPENSES 3,058.91 DEPRECIATION 620.43 TOTAL 14,790.59 PBIT 4,091.53 PBIT AFTER EXCLUDING EXCHANGE LOSS AND INTEREST. THUS COMPANY HAS FURNISHED SEGMENTAL REVENUES AN D EXPENSES. MERELY BECAUSE EXPENSES FROM CASH OF THE SUB-ACTIVI TIES ARE NOT AVAILABLE TANTAMOUNT FOR REJECTION. IN THE DIRECTORS REPORT, COMPANYS OPERATIONS ARE BROADLY CLASSIFIED INTO TWO BUSINESS SEGMENTS I.E. SOFTWARE DEVELOPMENT AND SERVICES AND SYSTEMS INTEGRATIONS AND SUPPORT (PLEA SE REFER COLUMN 1 OF DIRECTORS REPORT) AND BREAK UP OF BOTH SEGMENT DIS CUSSED ABOVE. THUS THE ASSESSEE CONTENTION ON THIS POINT IS NOT TENABLE. C ONSIDERING FINANCIAL STATEMENTS ARE SEGMENTAL INFORMATION FURNISHED BY M /S TATA ELXSI LIMITED AND BASED ON THE SAME DATA, THE TPO HAS COMPUTED OP ERATING PROFIT ON OPERATING COST. IN THE LIGHT OF FACTS STATED ABOVE THE TPO HAS RIGHTLY RETAINED AS A COMPARABLE. IV) ACCEL TRANSMATIC LTD FINDING OF THE TPO IS THAT THE COMPANY HAS TWO D IVISIONS UNDER THE SOFTWARE SERVICES SEGMENT. THE TWO DIVISIONS AR E (1) USHUS TECHNOLOGIES DEALING IN SOFTWARE DEVELOPMENT CONCENTRATING ON EM BEDDED SOFTWARE NETWORK SYSTEM, IMAGING TECHNOLOGY AND OUTSOURCED P RODUCT DEVELOPMENT AND PAGE 34 OF 61 ITA NO.14 13/BANG/2010 34 (2) ACCEL ANIMATION STUDIOS- SOFTWARE SERVICES FOR 2D/3D ANIMATIONS, SPECIAL EFFECTS CREATION AND GAME ASSET DEVELOPMENT. THOUGH THE ANIMATION SERVICES ARE IN THE NATURE OF IT ENABLED SERVICES, THE FACT IS THAT THE DIVISION DID NOT START ITS OPERATING DURING THE F.Y 2005-06. FROM THE SOFTWARE SEGMENT QUALIFIES THE EMPLOYEE COST FILTER AS THE SEGMENTAL EMPLOYEE COST IS RS. 268.05 LAKHS ON THE SEGMENTAL REVENUES OF RS. 802.05 LAKHS I.E. 33.30% ON REVENUES. THUS THE SOFTWARE SEGMENT QUALIFIES THE EMPLOYEE COST FILTER AS THE SAME IS APPLIED ON THE SEGMENT AND NOT ON EACH OF THE UNDERTAKING WHICH MAKE INCLUDE INTER-TR ANSFER THAT MIGHT NOT BE REFLECTED IN THE ABOVE UNIT WISE. HOLDING THUS CONS IDERED AS COMPARABLE. I) THE ASSESSEE IN ITS WRITTEN SUBMISSION CONTENDED THAT:- 4.3. ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS F UNCTIONALLY DIFFERENT FORM THE ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD., FORM THE FINAL LIST OF COMPARABLES FOR THE PU RPOSE OF DETERMINING TNMM MARGIN. BASED ON THE ABOVE, THE APPELLANT SUBMITS THAT AC CEL TRANSMATIC LIMITED SHOULD BE REJECTED AS COMPARABLE. TO REFUTE THE ASSESSEES CONTENTIONS, THE REVENUE H AS CONTENDED THAT ON VERIFICATION OF RELEVANT DETAILS REVEAL THAT THE FI NANCIAL STATEMENT FOR THE YEAR 31-03-2006. PAGE 35 OF 61 ITA NO.14 13/BANG/2010 35 SALES INCOME-INCOME FROM OPERATION:- RS. RS. MANUFACTURE SALES 43,143,255 TRADING SALES 71,758,548 TOTAL 114,901,803 SERVICE INCOME MAINTENANCE AND REPAIRS SERVICES 25,341,956 TRAINING AND EDUCATION SERVICES 76,302,823 SOFTWARE SERVICES DOMESTIC 24,705,319 EXPORT 55,500,099 TOTAL 181,850,197 GRAND TOTAL 296,752,000 M/S ACCEL TRANSMATIC LTD VIDE ITS LETTER DATED 2 7-01-2009 CLARIFIED IN REGARD TO USHUS TECHNOLOGIES THAT (KIN DLY REFER PARA 4 PAGE 75 OF PAPER BOOK). USHUS TECHNOLOGIES IS THE TECHNOLOGY DIVISION OF M/S. ACCEL TRANSMATIC LTD THAT PRODUCES CUSTOM SOFTWARE DEVELO PMENT SERVICES TO COMPANIES WORLD WIDE. USHUS TECHNOLOGIES DIVISION SERVICES CLIENTS IN OFFSHORE SOFTWARE DEVELOPMENT AND ON SITE CONSULTANCY FROM A CLARIFICATION, IT REVEALS THAT GIVEN BY M /S.ACCEL USHUS TECHNOLOGIES DIVISION OF ACCEL IS EXCLUSIVELY SOFTW ARE SERVICE DIVISION. FURTHER IT IS ALSO CONTENDED THAT THE IP RIGHTS HAVE BEEN CREATED/ DEVELOPED BY USHUS TECHNOLOGIES DIVISION A ND RELATED COST OF CREATION AND TRANSFER OF IP RIGHTS HAS ALSO BEEN RE CORDED IN THIS SEGMENT. IN THIS CONTEXT IT IS TO BE MENTIONED THAT THE ACCEL I S DERIVING REVENUES FROM MANUFACTURING SALES, TRADING SALES AND SOFTWARE DEV ELOPMENT SERVICES, DETAILS OF INCOME EACH DIVISION IS GIVEN ABOVE. UNDER SCHED ULE 16-B GIVEN THE COST OF SALES OF TRADED GOODS ON WHICH THE COST OF IP RIGHT S ALSO EMBEDDED. IT USED PAGE 36 OF 61 ITA NO.14 13/BANG/2010 36 TO RECEIVE ROYALTY/ON SALE OF SOFTWARE LICENSES NOT FOR THE SOFTWARE SERVICES RENDERED TO THE OFF SHORE/ON SHORE CLIENTS. THE A.R OF THE ASSESSEE SUBMITTED THAT OUT OF SER VICE INCOME TO THE TUNE OF RS. 18,18,50,157 RENDERED SERVICES TO RELATED PARTIES AMOUNTING TO RS. 5,62,74,970, WHICH CONSTITUTES 31% OF THE TO TAL SERVICES REVENUES. HOWEVER AS PER STATEMENT ACCOUNT SHOWS SERVICE INCO ME INCLUDES: RS. MAINTENANCE AND REPAIRS SERVICES 25,341,956 TRAINING AND EDUCATION SERVICES 76,302,823 SOFTWARE SERVICES 80,205,618 TOTAL 181,850,397 AS PER THE SCHEDULE F (PAGE 73 OF PAPER BOOK) TRANSACTION WITH RELATED PARTIES WOULD BE RS.5,62,74,970 SHOWN AGAIN ST RENDERING OF SERVICES HOWEVER THERE IS NO INFORMATION APPEARS T OWARDS SOFTWARE DEVELOPMENT SERVICES. EVEN THOUGH COMPANY HAS GIVEN SEGMENTAL INFORMATION (KINDLY REFER COLUMN-20.15, BASED ON THESE INFORMAT ION, THE TPO CONSIDERED AS COMPARABLE. THE FACT DISCUSSED ABOVE ACCEL HAS RIGHTLY BEEN R ETAINED AS A COMPARABLE. V) M/S MINDTREE CONSULTING LIMITED THE TPO HAS SELECTED AS A COMPARABLE SINCE THE COMP ANY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND QUALIFIES ALL THE FILTERS APPLIED BY HER. AS PER FINAL LIST OF TPOS COMPARABLE M/S MEGASOFT HAV ING A TURN OVER JUST RS. 56 CRORES AND PROFIT MARGIN OF 52.74%. SIMILARLY M/ S I GATE GLOBAL SOLUTION LTD HAVING A TURNOVER OF RS. 527 CRORES AND PROFIT MARGIN ONLY 15.61% EVEN M/S MINDTREE CONSULTING LTD. HAVING TURNOVER OF RS. 448 CRORES HAS A PROFIT PAGE 37 OF 61 ITA NO.14 13/BANG/2010 37 MARGIN ONLY 14.67%, THUS THE TPO HELD THAT THERE IS NO RELATIONSHIP BETWEEN MARGIN AND TURNOVER AND, HENCE CONSIDERED AS A COMP ARABLE. IN WRITTEN ARGUMENT THE ASSESSEE STATED THAT:- AS PER THE NOTES THE ACCOUNT (EXTRACT IN PAGE 87 O F PB-II) MINDTREE HAS ENTERED INTO AN AGREEMENT WITH THE CUS TOMERS IN DECEMBER 2003 WHERE BY THE WARRANT HAVE BEEN ISSUED TO THE CUSTOMER. THE WARRANT CAN BE CONVERTED INTO EQUITY SHARES AT AN EXERCISE PRICE OF RS. 2 PER SHARE. A TOTAL OF 8, 266,777 WARRANTS HAD BEEN ISSUED UNDER THIS AGREEMENT. THE CUSTOMER CAN CONVERT THESE WARRANTS INTO EQUITY SHARES BASED ON REVENUE GENERATED BY THE CUSTOMERS DURING THE DEFINED PERIO D AND ON FULFILLING THE CONDITIONS SPECIFIED IN THE AGREEMEN T. THE ISSUE PRICE OF MINDTREE SHARE WAS FIXED AT RS. 425 PER SHARE AS ON THE LISTING DATED 7 TH MARCH 2007. THIS PROVIDES AN INCENTIVE OF RS. 423 PER SHARE TO THE CUSTOMER. THI S IS AN INDIRECT BENEFIT TO THE CUSTOMERS TO THE TUNE OF RS .349.68 CRORES EQUITY. FROM THE NOTES TO ACCOUNTS YEAR ENDING 31-03-2006 R EVEALS THAT AS PER AGREEMENT 82,66,777 WARRANTS HAS BEEN ISSUED TO THE CUSTOMER AND SAME CAN BE CONVERTED INTO SHARES AT AN EXERCISE PRICE OF RS . 2 PER SHARE, HOWEVER THERE IS NO DETAILS AVAILABLE CONVERSION OF SHARES DURING THE YEAR. EVEN THOUGH HOW IT INFLUENCED/FACTORISED THE INTERNATIONAL TRAN SACTION WITH ITS AE OWING TO ISSUE OF WARRANTS AND CONVERSION OF SHARES REMAINED UNEXPLAINED. NO SUCH ARGUMENTS WERE MADE BEFORE THE TPO NOR THE DRP. IT IS TO BE NOTED THAT THE MARGIN OF THE COMPARABLE COMPANY ON INTERNATIONAL T RANSACTION IS RELEVANT AND NOT THE AES REVENUE IN REMUNERATED BY ASSESSEE. THE INCOME FROM INTERNATIONAL TRANSACTION IS COMPUTED HAVING REGARD TO ALP AND NOTHING ELSE. THEREFORE THE ARGUMENTS ADVANCED BY THE ASSESSEE TH AT THE ABOVE STRATEGY EFFECTIVELY MOVED THE MARKETING EXPENDITURE FROM TH E PROFIT AND LOSS ACCOUNT TO THE BALANCE SHEET AND IS TOTALLY IRRELEVANT BECA USE ALP IS A DEEMED PRICE. PAGE 38 OF 61 ITA NO.14 13/BANG/2010 38 THE PRICE IS COMPARED IN THE CONTEST OF MARGIN PROF IT OF THE ASSESSEE IN RELATION TO INTERNATIONAL TRANSACTION AND NOT THE S HARE IN THE REVENUE OF THE AE. THUS WHAT IS RELEVANT IS THE MARGIN/PROFIT OF T HE ASSESSEE EARNED FROM INTERNATIONAL TRANSACTION AND COMPARISON WITH THE U NCONTROLLED TRANSACTIONS. HENCE THERE IS NO MERIT IN THIS ARGUMENT . VI) INFOSYS TECHNOLOGIES LTD WHILE ANALYSING THE COMPARABLES THE TPO OBSERVED THAT PRODUCTS REVENUE OF THE COMPANY FOR THE F.Y. 2005-0 6 FOR RS. 357 CRORES OUT OF ITS OPERATIVE REVENUES OF RS. 9028 CRORES I.E. 3 .95% ONLY TO TOTAL OPERATIVE REVENUE, THUS MORE THAN 96% OF ITS REVENUES ARE FRO M SOFTWARE DEVELOPMENT SERVICES AND ACCORDINGLY QUALIFIES FILTER OF 75% FR OM SOFTWARE DEVELOPMENT SERVICES. THE TPO FURTHER HELD THAT MARGINS OF THE LESSER KNOWN COMPANIES LIKE M/S ACCEL TRANSMATIC LTD. 44%, M/S. KALS INFO SYSTEM 39.75%, M/S MEGASOFT LTD. 52.74% ARE HAVING SAME O R BETTER MARGINS THAN INFOSYS WHICH MEANS THAT BRAND OR SIZE PER SE DOES NOT AFFECT THE MARGINS THOUGH BRAND NAME MAY SET HIGHER TURNOVER BUT IT DO ES NOT NECESSARILY GENERATE HIGHER MARGIN. THE MARGINS DOES NOT AUTOMA TICALLY INDICATE THAT THE COMPANY CHARGED PREMIUM OVER MARKET FOR THE SERVICE S RENDERED, HOWEVER THE ASSESSEE DID NOT PRODUCED ANY EVIDENCE EXCEPT M AKING STATEMENT THAT IT CHARGES PREMIUM OVER MARKET FOR ITS SERVICES. HOLDI NG THUS THE TPO RETAINED THIS COMPANY AS A COMPARABLE. THE AR OF THE ASSESSEE ARGUED IN WRITING AND THE SAME IS REPRODUCED BELOW: PAGE 39 OF 61 ITA NO.14 13/BANG/2010 39 INFOSYS TECHNOLOGIES LIMITED IS 443 TIMES BIGGER T HAN THE APPELLANT AND IS THUS SIGNIFICANTLY DISSIMILAR IN SIZE. FOR THE REASONS ALREADY DETAILED, INFOSYS TECHNOLOG IES LIMITED SHOULD NOT BE ACCEPTED AS A COMPARABLE. THE DELHI TRIBUNAL DECISION IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD VS INCOME-TAX OFFICER ITA NO. 3856 (DEL)/ 2010 HAS HELD THAT INFOSYS TECHNOLOGIE S LIMITED CANNOT BE COMPARED WITH SMALL COMPANIES HAV ING NOMINAL TURNOVER AND BEARING MINIMAL RISKS. AGAINST THE ASSESSEES ARGUMENT IT WAS SUBMITTED THAT THE OBSERVATION OF THE TPO IS THAT INFOSYS TECHNOLOGIES LIMITED ENGAGED N SOFTWARE DEVELOPMENT SERVICES AND BRAND NAME MAY GE T HIGHER TURNOVER BUT IT DOES NOT NECESSARILY WOULD GENERATE HIGHER MARGI N. THE ASSESSEE HAS NOT DEMONSTRATED AS TO HOW THE DIFFERENCE IN TURNOVER H AS INFLUENCED THE RESULT OF THE COMPARABLES IT IS ACCEPTED ECONOMIC PRINCIPL E AND COMMERCIAL PRACTICE THAT HIGHLY COMPETITIVE MARKET CONDITION ONE CAN SU RVIVE AND SUSTAIN ONLY BY KEEPING LOW MARGIN BUT HIGH TURNOVER AS HELD BY THE HONBLE ITAT MUMBAI E BENCH IN THE CASE OF M/S SYMANTEC SOFTWARE SOLUTION PVT. LTD VS ACIT(SUPRA). FURTHER, THE ASSESSEE REFERRING AN ART ICLE PUBLISHED IN THE ECONOMIC TIMES DATED 12-01-2011 WHICH SHOW IN GENER AL NATURE AND NO SPECIFIC INSTANCE HAS BEEN BROUGHT ON RECORD. SECON DLY ARTICLE RELATES FOR THE F.Y. 2010-11 WHERE AS TRANSACTION IN QUESTION FOR F .Y. 2005-06 I.E. AFTER FIVE YEARS AND COMPETITIVE MARKET CONDITIONS ALSO VARIES DURING THE RELEVANT PERIOD. THUS, MERELY BECAUSE PROFIT MARGIN IS ON THE HIGH ER SIDE CANNOT THE REASON FOR ELIMINATION AS COMPARABLE; IT IS NOT THE GENERAL RULE TO EXCLUDE THE SAME UNLESS SPECIFIC FACT HAS BEEN ADDED. PAGE 40 OF 61 ITA NO.14 13/BANG/2010 40 RELYING ON THE JUDICIAL DECISION CITED ABOVE THE TPO HAS RIGHTLY CHOSEN THE COMPARABLE AND THE ASSESSEE ARGUMENT IN THIS REGARDS DESERVES TO BE REJECTED, MORE SO BECAUSE THE ASSESSEE ITSELF CO NSIDERED AS COMPARABLE THE AR OF THE ASSESSEE SUBMITTED LIST OF 14 COMPA RABLE, (TABLE- I) ADOPTING TURNOVER OF RS.1 CRORE TO RS.500 CRORES BASED ON NASSCOM AND REMAINING COMPARABLE EXCLUDED ON THE PLEASE THAT TU RNOVER EXCEED RS.500 CRORES AS UNDER: SL.NO COMPANY NAME SALES (RS. CRORES) OP TO TOTAL COST% 1 INFOSYS LIMITED 9,028.00 40.38 2 MINDTREE CONSULTING LTD 448.79 14.67 3 PERSISTENT SYSTEMS LTD 209.18 24.67 4 SASKEN COMMUNICATION 240.03 13.90 5 FLACTRONICS SOFTWARE SYSTEM LIMITED 595.12 27.24 6 I GATE GLOBAL SOLUTION LTD (SEG 527.91 15.61 IN THIS CONNECTION IT IS TO BE MENTIONED THAT CO MPARABLE SELECTED BY THE TPO IS JUSTIFIED AS DISCUSSED ABOVE AND, HENCE, THE ASSESSEES PLEA FOR EXCLUSION OF COMPARABLE TURNOVE R BASIS IS NOT JUSTIFIABLE. SECONDLY OPERATING PROFIT TO TOTAL COST COMPUTED BY THE ASSESSEE AT 16.97% INSTEAD OF 51.73 (AS PER DRPS D IRECTION) IN RESPECT OF MEGASOFT LTD. THIS POINT ALSO DISCUSSED IN THE PREC EDING PARAS, AND, HENCE, THE ASSESSEES CONTENTION IS OBJECTIONABLE. IF MAR GIN OF MEGASOFT BE AT 51.73% ARITHMETIC MEAN AS PER TABLE - 1 WOULD BE 19.71% TABLE - 2 AT 19.36% AND AS PER TABLE 3 AT 16.39% ALTERNATIVELY, THE ASSESSEE LISTED 17 COMPARABLE S BASED ON TURNOVER RANGE RS. 1 CRORE TO 500 CRORES AND IN TAB LE B 15 COMPARABLES AFTER PAGE 41 OF 61 ITA NO.14 13/BANG/2010 41 EXCLUDING KALS, TATA ELXSI, ACCEL, INFOSYS TECHNOLO GIES AND MINDTREE ALSO NOT ACCEPTABLE AS DISCUSSED IN PRECEDING PARAGRAPHS . RELIES ON THE CASE LAWS: I) EXXON MOBIL COMPANY INDIA PVT. LTD VS DCIT ITA NO. 8311/MUM/2010; II) SYMANTEC SOFTWARE SOLUTION PVT. L TD VS ACIT ITA NO. 7894/MUM/2010 AS HELD BY THE HONBLE ITAT, MUMBAI IN THE CASE O F SYMANTEC SOFTWARE SOLUTION PVT. LTD (SUPRA) THAT IN THE CASE OF HAND, THE ASSESSEE RAISED OBJECTIONS ONLY BECAUSE SOME OF THE COMPARAB LES ARE HAVING PROFIT AND ALSO HIGH DIFFERENCE IN THE TURNOVER AND NOT BECAUS E OF HIGH OR LOW TURNOVER HAS INFLUENCED THE OPERATING MARGIN OF THE COMPARAB LES. ALL THE OBJECTIVES AND CONTENTIONS RAISED BY THE ASSESSEE ARE DISCUSSE D ABOVE AND THE TPO AS WELL AS THE DRP WERE JUSTIFIED IN RETAINING AS COMP ARABLES. APPELLANTS COMPATEBLES:- IN THE WRITTEN SUBMISSION THE ASSESSEE SUBMITTED THAT CERTAIN COMPARABLES PROPOSED BY THE APPELLANT HAVE BEEN REJ ECTED BY THE LOWER AUTHORITIES. THE PROPOSED COMPARABLES ARE:- 1) GOLDSTONE TECHNOLOGIES PVT. LTD. 2) TVS INFOTECH LTD. 3) VMF SOFT TECH LTD. 4) VISU INTERNATIONAL LTD. 5) VISUAL SOFT TECHNOLOGIES LTD. 6) VJIL CONSULTING LTD. FURTHER IT IS ALSO SUBMITTED THAT COMPARABLES SELEC TED BY THE ASSESSEE HAVE NOT BEEN FACTORED IN THE ANALYSIS SHOWN IN THREE TA BLES AND IF THE ANALYSIS UNDER ANY OF THE THREE TABLES ARE MODIFIED INCORPOR ATING THE ABOVE COMPARABLES, THE RESULT WOULD BE INCREASINGLY SKEW IN FAVOUR OF THE APPELLANT. PAGE 42 OF 61 ITA NO.14 13/BANG/2010 42 IN THIS CONNECTION IT WAS SUBMITTED THAT THESE CO MPARABLES WERE NOT LISTED IN THE TP STUDY DOCUMENTS MAINTAIN BY TH E ASSESSEE. EVEN PROPOSAL FOR INCLUSION FOR AFORESAID COMPARABLES ALSO WAS NO T MADE BEFORE THE TPO. THUS, NO SUCH MATTERS WERE BEFORE THE TPO. THE PROP OSAL OF COMPARABLES WERE BEFORE THE DRP FIRST TIME (PLEASE REFER PAGE- 348 TO 356 OF PAPER BOOK-1 OF THE ASSESSEE FILED BEFORE THE DRP) SINCE THE COMPARABLES SELECTED BY THE ASSESSEE NOT BEFORE THE TPO, EXCEPT VMF SOFT TECH LIMITED (PLEASE REFER PAGE -141 OF PAPER BOOK-1 OF THE ASSESSEE). F URTHERMORE NO ANALYSIS HAS BEEN GIVEN BY THE ASSESSEE TO DETERMINE WHETHER COM PARABLES QUALIFIES FILTER CRITERIA ADOPTED BY THE TPO. THEREFORE THE SAME CAN NOT BE ACCEPTED AT THIS STAGE; HENCE THE ASSESSEES CONTENTIONS ON THIS POI NT MAY BE REJECTED. I GATE GLOBAL SOLUTION LIMITED: THE ASSESSEE HAD RAISED CONTENTIONS IN COMPUTING MARGIN IN THE CASE OF M/S. IGATE GLOBAL SOLUTION LIMITED. IT WAS SUBMITTED THAT USE OF INFORMATION WHICH IS NOT AVAILABLE IN PUBLIC DOMAIN AND SOURCING THE SAME THROUGH PRIVATE MEAN AND LABELLING IT AS INFORMATIO N UNDER SECTION 133(6) IS BAD IN LAW. IT WAS ALSO SUBMITTED THAT :- FURTHER ASSUMING WITHOUT ADMITTING THAT THIS SEGMEN TAL INFORMATION CAN BE USED, THE ASSESSEE SUBMITS THAT THE SAME IS INCOMPLETE AND IMPROPER. IN THE SEGMENTAL DATA ON P AGE 98 OF THE ORDER, THE OPERATING PROFIT (BEFORE DEPRECIATIO N) OF THE COMPANY HAS BEEN ARRIVED AT RS. 53,93,57,000/-. THI S AMOUNT TALLIES WITH THE OPERATING PROFIT BEFORE DEPRECIATI ON AS REFLECTED IN THE COMPANYS AUDITED FINANCIAL STATEM ENTS. AFTER THIS AN ADDITION TO EXPENSES HAS BEEN MADE FOR DEPR ECIATION AND REDUCTION FROM EXPENSES HAS BEEN MADE FOR EXTRAORD INARY EXPENSES. THE ADJUSTMENT FOR EXTRAORDINARY EXPENS ES FOR SOFTWARE SERVICE SEGMENT IS RS. 56,86,28,000/-. WHA T ARE THESE EXTRAORDINARY EXPENSES IS NOT DETAILED. THE AMOUN T OF EXTRAORDINARY EXPENSES IS 10.77% OF REVENUES. HO WEVER NO PAGE 43 OF 61 ITA NO.14 13/BANG/2010 43 DETAILS ON THE NATURE OF EXPENSE OR REASONS FOR TRE ATING THIS AS EXTRAORDINARY EXPENSES ARE FORTHCOMING. FURTHER, FROM THE AUDITED FINANCIAL STATEMENTS OF IGATE IT IS CLEAR T HAT IT HAS NOT TREATED ANY EXPENSE AS EXTRAORDINARY EXPENSES. PO SSIBLY, IGATE HAS DURING THE COURSE OF ITS OWN TP ASSESSMENT CLAI MED THESE EXPENSES EXTRAORDINARY EXPENSES. THE TPO HAS POSS IBLY TAKEN THOSE MARGINS FOR COMPARABILITY PURPOSES WITHOUT DE TAILING THE REASONS FOR TREATING THE EXPENSES AS EXTRAORDINARY EXPENSES. ACCORDINGLY, THE ASSESSEE SUBMITS THAT THESE EXPENS ES SHOULD BE CONSIDERED AS NORMAL OPERATING EXPENSES. THE REVISED OPERATING MARGIN OF IGATE WOULD THEN BE AS FOLLOWS: DESCRIPTION AMOUNT(RS. IN 000S) OPERATING REVENUES 5,279,075 EXPENSES DEBITED TO P&L ACCOUNT 5,135,006 LESS: NON-OPERATING ITEMS - OPERATING EXPENSES 5,135,006 OPERATING PROFIT 144,069 OP MARGIN 2.81% THE ASSESSEE SUBMITTED THAT THE REVISED OPERATING M ARGIN OF 2.81% PERCENT ON COST AS COMPUTED ABOVE BE CONSIDERED FOR COMPARA BILITY PURPOSE. IN THIS CONNECTION IT WAS MENTIONED THAT ORIGINALLY THE ASSESSEE ITSELF HAD CHOSEN AFORESAID COMPANY AS A COMPARABLE, HOWEVER W HILE ISSUING SHOW-CAUSE THE TPO HAD NOT CONSIDERED AS A COMPARABLE. AFTER R ECEIVING THE COMPANYS LETTER IN COMPLIANCE TO THE NOTICE U/S 133(6), THE TPO EXAMINED THE DATA, IT FOUND ACCEPTABLE AS COMPARABLE. THEREFORE ISSUE OF NOTICE UNDER SAID SECTION CANNOT BE CONSTRUED BAD IN LAW. FROM THE SEGMENTAL INFORMATION AVAILABLE ON FINANC IAL STATEMENT FOR F.Y. 2005-06 IN RESPECT OF M/S. I GATE GLOBAL SOLUT ION LTD, REVEALS THAT OPERATING COST CONSIST, SALARIES AND WAGES, SELLING AND MARKETING, DEPRECIATION ETC TOTALLING TO RS. 5,13,50,06,000 WHICH INCLUDES CERTAIN EXTRA ORDINARY ITEM LIKE PAYMENT OF DEFERRED ESOP COMPENSATION OF RS. 2 5.93 CRORES BAD DEBTS PAGE 44 OF 61 ITA NO.14 13/BANG/2010 44 OF RS. 33.08 LAKHS AND ALSO OTHER MISCELLANEOUS EXP ENSE WHICH NOT RELATABLE INTO THE INTERNATIONAL TRANSACTIONS. THE TPO HAS WO RKED OUT EXTRAORDINARY ITEMS AFTER ANALYSING THE FINANCIAL STATEMENT FOR T HE F.Y. 2005-06. HOWEVER, ACCORDING TO THE ASSESSEE OPERATING COST WOULD BE RS. 5,13,50,06,000 (RS. 4,56,63,78,000+5,68,628,000 ), RESULTING MARGIN WOULD BE AT 2.81%. WHEREAS TPO COMPUTED MARGIN AT 15.61% AFTER CONSIDERING EXTRA ORDINARY ITEMS OF RS. 56,86,28,000, INCREASED OPERATING PROFIT (SEGMENTAL) BY RS. 71,26,97,000. HERE IT IS TO BE M ENTIONED THAT EITHER EXTRA ORDINARY ITEMS TO BE INCLUDED TO THE SEGMENTAL PROF IT OR EXCLUDED FROM THE SEGMENTAL OPERATING COST THERE IS NO DIFFERENCE SO FAR AS THE MARGIN OF THE COMPARABLE. THE FACTS DISCUSSED ABOVE THE TPO HAS R IGHTLY COMPUTED MARGIN AT 15.61%. THE DRP HAD ALSO HELD THAT MARGIN IN RES PECT IGATE GLOBAL SOLUTION HAS CORRECTLY BEEN WORKED OUT BY THE TPO. IN VIEW O F THE ABOVE FACTS THERE IS NO MERIT IN THE ASSESSEE OBJECTIONS AND THE SAME MAY BE REJECTED. GROUND NO.10 THE TPO AND THE DRP HAD REJECTED THE ASSE SSEES CLAIM OF RISK ADJUSTMENT ON THE GROUND THAT THE ASSESSEE FAILED T O BRING ANY EVIDENCE ON THE RECORD TO SHOW THAT THERE EXISTS ANY DIFFERENCE IN THE RISK PROFILE OF THE COMPARABLE COMPANIES VIS-A-VIS OF THE ASSESSEE. IN ORDER TO TAKE BENEFIT OF THIS ADJUSTMENT INFORMATION SHOULD BE SUBMITTED ALO NG WITH DETAILS UNDER RULE 10D MAINTAINED BY THE ASSESSEE. UNDER S. 92D(I) OF THE ACT PROVIDE THAT EVERY PERSON ENTERING IN TO AN INTERNATIONAL TRANSA CTION IS REQUIRED TO KEEP AND MAINTAIN SUCH INFORMATION AND DOCUMENT IN RESPE CT THEREOF, AS IS BEING PRESCRIBED UNDER RULE 10D (I) OF IT RULES. THIS RUL ES REQUIRED MAINTENANCE OF A RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMP ARABLE AS WELL AS A RECORD OF THE ACTUAL WORKING CARRIED OUT FOR DETERMINING T HE ALP. UNDER RULE 10D (4) PAGE 45 OF 61 ITA NO.14 13/BANG/2010 45 OF THE I.T. RULES REQUIRES THAT THE INFORMATION AND DOCUMENTATION TO BE MAINTAINED. UNDER RULE 10D(1) SHOULD BE CONTEMPORAN EOUS AS FOR AS POSSIBLE AND SHOULD EXIST LATEST BY THE DUE DATE OF FILING O F THE RETURN. THE ASSESSEE ADMITTED THAT THEY DID NOT UNDERTAKE ANY RISK ADJUS TMENT IN THE TP DOCUMENT REPORT. IN THE ABSENCE OF THAT COMPARABILITY, IT IS DIFFICULT TO MAKE ADJUSTMENT. AS FOR AS THE DECISION OF THE ITAT IS C ONCERNED, THAT RELATES TO FACTS OF THE RELEVANT CASES. IN A GIVEN CIRCUMSTANC E, SOME ESTIMATE MARK UPON MAY NOT BE APPLIED FOR RISK ADJUSTMENT. THE AS SESSEE OUGHT TO HAVE DEMONSTRATED THIS FACTOR BEFORE THE TPO AS WELL AS BEFORE THE DRP. RELY ON THE FOLLOWING CASE LAWS. M/S. MARUBENI INDIA PRIVATE LIMITED VS ADDL. CIT IT A NO 945/DEL/2009. SYMANTEC SOFTWARE SOLUTION PRIVATE LIMITED VS ACIT ITA NO/7894/MUM/2010 EXXON MOBIL COMPANY INDIA PVT. LTD VS DCIT ITA NO 8 311/MUM/2010 ADP (P) LTD VS. DCIT, ITA NO 106/HYD/2009 VEDARIS TECHNOLOGY (P) LTD VS. ACIT (2010) 131 TTJ (DEL) 309 M/S. DELOITTE CONSULTING INDIA PVT. LTD VS DCIT ST MICRO ELECTRONICS PVT. LTD VS. CIT(A), ITA NO 18 06, 1807/DEL/2008 IN VIEW OF THE FACTS AS WELL AS LEGAL POSITION DISC USSED ABOVE, THIS ISSUE RAISED BY THE ASSESSEE IS DEVOID OF MERIT AND IS LIABLE TO BE REJECTED. BENEFIT OF 5 PERCENT RANGE . IN PARA-16 OF THE TPOS ORDER HELD THAT PROVISO TO S. 92C (2) WAS AMENDED WITH EFFECT FROM 01.10.2009 BY INTRODUCING A CLARIFICATORY AMENDMENT. THE SECOND PROVISION SAYS THAT IF ARITHM ETICAL MEAN PRICE DETERMINED IS WITHIN +/-5% FROM PRICE CHARGED IN TH E INTERNATIONAL TRANSACTION, THE PRICE CHARGED BY THE TAX PAYER HAS BEEN TREATED AS ARMS LENGTH PRICE. NO ADJUSTMENT WOULD BE MADE, IF THE A RITHMETICAL MEAN PRICE FALLS BEYOND +/-5% FROM THE PRICE CHARGED IN THE IN TERNATIONAL TRANSACTION, PAGE 46 OF 61 ITA NO.14 13/BANG/2010 46 AND THEN SECOND PROVISO IS NOT APPLICABLE. IN SUCH CASE, ONLY THE FIRST PROVISO SHALL ALONE APPLICABLE AS PER WHICH THE ARITHMETICA L MEAN PRICE SHALL BE TAKEN TO BE THE ARMS LENGTH PRICE. MEANING THEREBY, THE TRANSFER PRICING ADJUSTMENT WOULD BE MADE ONLY FROM ARITHMETICAL MEA N PRICE. THUS ACCORDING TO THE TPO, BY VIRTUE OF AMENDMENT THE +/-5% VARIAT ION IS ALLOWABLE ONLY THE CASE OF THE PRICE CHARGED IN THE INTERNATIONAL TRAN SACTIONS AND NOT FOR THE ADJUSTMENT. THE DRP ALSO UPHOLD THE TPOS STANDS. ON THE OTHER HAND, THE ASSESSEE SUBMITTED THAT T HE PROVISO TO SUB- SECTION (2) OF SECTION 92C AS ADDED BY FINANCE (NO-2) ACT 2009 IS PROSPECTIVE IN OPERATION WILL BE APPLICABLE ONLY AF TER 1.10.2009 THEREFORE THEY PRAYED THAT THE TPO MAY BE DIRECTED TO PROVIDE DEDUCTION OF 5% FROM THE ALP DETERMINED BY HIM. IT HAD PLACED RELIANCE O N A NUMBER OF CASE LAWS:- IN THIS CONTEXT, THE REVENUE HAD RELIED ON THE F INDINGS OF THE HONBLE ITAT, DELHI IN THE CASE OF M/S. MARUBENI IN DIA PRIVATE LIMITED VS ADDL.CIT ITA NO 935/DEL/2009. SIMILAR VIEW ALSO TAK EN IN THE CASE OF - DCIT VS GLOBAL VANTADGE PVT. LTD (2010-T10L-24-ITAT -DEL) DCIT VS BAST INDIA LTD (41 SOT 10) M/S.DELOITTE CONSULTANCY INDIA PVT. LTD VS. DCIT IT A NO 1084/HYD/2010 EXXON MOBIL COMPANY INDIA PVT. LTD VS DCIT ITA NO 8 311/MUM/2010 ST MICRO ELECTRONICS PVT. LTD VS. CIT (A) ITA NO.180 6,1807/DEL/2008 ADP (P) LTD VS DCIT, ITA NO 106/HYD/2009 WRIGLEY INDIA (P) LTD VS. ADDL. CIT, ITA NO 5224/D EL/2010, (2011) 62 DTR (DEL) (TRIB) 201 THE DECISIONS CITED ABOVE, SUPPORT THE TPOS VIE W. THEREFORE THE CLAIM OF THE ASSESSEE ON THIS ISSUE DESERVES FO R REJECTION. IN CONCLUSION, THE LD. D R FORCEFULLY PLEADED THAT THE STAND OF TH E TPO AND THE DRP REQUIRES TO BE SUSTAINED. PAGE 47 OF 61 ITA NO.14 13/BANG/2010 47 IN THE REJOINDER, IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT ON PAGE 4 OF THE NOTE FILED BY THE LD . D.R, IT IS STATED THAT THE APPELLANT DID NOT RAISE THE ISSUE OF CROSS EXAMINAT ION BEFORE TPO/DRP. IN THIS REGARD, THE APPELLANT SUBMITTED THAT IT MADE S PECIFIC REQUEST FOR CROSS EXAMINATION BEFORE THE TPO AS WELL AS DRP. IT WAS SUBMITTED THAT THE APPELLANTS CONTENTION WAS ALSO SUPPORTED THE NOTE OF THE LD. DR (PAGE 26) WHEREIN THE LD. DR HAD EXTRACTED THE SUBMISSION OF THE APPELLANT AND ACKNOWLEDGED THEREIN THAT APPELLANT HAD REQUESTED F OR CROSS EXAMINATION. THE LD. D R (ON PAGES 27 & 28 OF THE NOTE), IT WA S STATED THAT IN CASE OF KALS, RS.1.27 CRORES WHICH WAS CONTENDED BY THE APPELLANT AS INVENTORY WAS ACTUALLY RECEIVABLE FROM CUSTOMERS. IT WAS, FURTHER, CONTENDED BY THE LD. D.R THAT THE APPELLANT WAS GIVING MISLEA DING FACTS. TO COUNTER THIS, IT WAS SUBMITTED BY THE APPELLANT THAT AS PER ANNUA L REPORT OF KALS RS.1.27 CRORES WAS IN FACT INVENTORY. SUNDRY DEBTORS WERE SEPARATELY MENTIONED IN THE ANNUAL REPORT. THIS WAS CLEAR FROM THE ANNUAL REPORT OF KALS FOR FY 2005-06 WHEREIN RS.1.27 CRORES WAS REFLECTED AS INV ENTORY AND SUNDRY DEBTORS WERE SEPARATELY SHOWN. THE LD. D.RS CONTE NTION THAT THE APPELLANT DID NOT RAISE THE ISSUE OF CONVERSION OF WARRANTS I N CASE OF MINDTREE BEFORE THE TPO/DRP WAS ALSO FACTUALLY INCORRECT AS THE APP ELLANT HAD MADE SUBMISSIONS ON THIS ISSUE BEFORE THE TPO AS WELL AS DRP. 7. WE HAVE DULY CONSIDERED RIVAL SUBMISSIONS, DILI GENTLY PERUSED THE RELEVANT CASE RECORDS AND ALSO VOLUMINOUS PAPER BOO KS FURNISHED BY THE LD. A.R. WITH DUE RESPECTS, WE HAVE ALSO PERUSED VARIO US CASE LAWS ON WHICH EITHER PARTY HAD PLACED THEIR UNSTINTED CONFIDENCE. THE PRIME THRUST AND GRIEVANCES OF THE APPELLANT BEING: PAGE 48 OF 61 ITA NO.14 13/BANG/2010 48 (I) NO REASONABLE OPPORTUNITY OF HEARING PROVIDED BY THE LD. TPO AND DURING THE HEARING BEFORE THE D RP, ONLY ONE OPPORTUNITY WAS AFFORDED; (II) THAT THE TPO HAD SELECTED SIX COMPANIES IN THE ORD ER PASSED U/S 92CA OF THE ACT AS COMPARABLES IN ADDITION TO THOSE PROPOSED IN THE NOTICE WITHOUT GIVI NG AN OPPORTUNITY TO THE APPELLANT TO PRESENT ITS OBJECTION( S)/COMMENTS; (III) EVEN UNDER TNMM, CONSIDERING TURNOVER RANGE OF RS.1 CRORE TO RS.200 CRORES AND RS.1 CRORE TO RS.500 CRORES AN D REJECTING CERTAIN COMPARABLES SELECTED BY TPO, THE APPELLANTS TRANSACTIONS WERE AT ARMS LENGTH; (IV) SIX COMPANIES WHICH DID NOT EVEN APPEAR IN THE INIT IAL SEARCH LIST OF THE TPO WERE ISSUED NOTICE U/S 133(6) OF TH E ACT TO COLLATE INFORMATION. THE PROCESS ADOPTED IN ISSUIN G NOTICE U/S 133 (6) OF THE ACT WAS NOT DETAILED. THE INFORMATI ON OBTAINED IN RESPONSE THERETO HAD NOT BEEN FULLY SHA RED; (V) DETAILS OF INFORMATION WERE NOT GIVEN TO THE APPELL ANT AND THAT THE DRP HAD STATED THAT WAS INTENTIONAL; (VI) COPIES OF SUBSEQUENT NOTICES U/S 133(6) OF THE ACT ISSUED BY THE TPO AND REPLIES RECEIVED THERE-FROM WERE NOT GI VEN TO THE APPELLANT, FOR WHICH, DRP IN ITS IMPUGNED ORDER S STATED THAT THE SAME WAS NOT RELEVANT AND, HENCE, NOT REQU IRED TO BE GIVEN (VII) DIFFERENCE BETWEEN REPLIES RECEIVED U/S 133(6) AND ANNUAL REPORTS HAVE BEEN TABULATED BY THE APPELLANT. NO C OMMENTS HAVE BEEN MADE ON THE SAME EITHER BY THE TPO OR DRP . NO OPPORTUNITY WAS EXTENDED AS SOUGHT FOR TO CROSS-EXA MINE IN CASES WHERE REPLIES U/S 133(6) OF THE ACT HAVE BEEN RELIED UPON; THE DRP IN ITS IMPUGNED ORDER STATED THAT TH E OFFICE OF THE TPO CANNOT BE CONVERTED INTO AN OFFICE GRANT ING OPPORTUNITY OF CROSS EXAMINATION TO THE APPELLANT; (VIII) THE APPELLANT HAD MADE DETAILED SUBMISSIONS FOR REJ ECTION OF KALS AS COMPARABLE, HOWEVER, THE APPELLANTS SUBMISS IONS HAVE NOT BEEN COMMENTED EITHER BY THE TPO OR THE DR P; (IX) IN THE CASE OF MEGASOFT, THE TPO AND THE DRP HAVE CONSIDERED ENTITY-WIDE MARGINS ON THE GROUND THAT S OFTWARE PRODUCT SEGMENT ALSO CONSISTS SOFTWARE SERVICES AN D, THEREFORE, AT ENTITY LEVEL SOFTWARE SERVICES WERE M ORE THAN 75% OF OPERATING REVENUES. HOWEVER, SIMILAR SITUATI ON IN THE CASE OF OTHER COMPARABLES HAVE BEEN IGNORED. IF AT ALL PAGE 49 OF 61 ITA NO.14 13/BANG/2010 49 MEGASOFT WAS TO BE ADOPTED AS A COMPARABLE, THE MAR GIN OF THE SOFTWARE SEGMENT MAY BE USED; & (X) BENEFIT OF 5% DEDUCTION IN DETERMINING THE ARMS LE NGTH PRICE IN ACCORDANCE WITH PROVISO TO S.92C OF THE ACT NOT GIVEN. 7.1. AFTER ANALYZING THE SUBMISSIONS OF RIVAL PART IES AND ALSO DELIBERATING THE SPECIFIC APPREHENSIONS OF THE APPE LLANT AS NARRATED ABOVE, THE MATTER HAS NOW BEEN NARROWED DOWN FOR CONSIDERA TION TO TWIN ISSUES, NAMELY: (1) WHAT IS THE DATA TO BE CONSIDERED BY THE TPO AT THE TIME OF DETERMINING ALP? & (2) WHETHER THE APPELLANT SHOULD HAVE BEEN GIVEN AN OPPORTUNITY TO REFUTE THE MATERIAL SOUGHT TO BE UTI LIZED BY THE TPO? 7.2. AS FAR AS THE DATA TO BE USED BY THE TPO WHILE DETERMINING THE ALP WAS CONCERNED, IT IS OBSERVED THAT IT IS COVERED BY THE PROVISIONS OF RULE 10D SUB-RULE 4 OF THE INCOME-TAX RULES. SECTION 92 C P ROVIDES THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION SHALL BE DETERMINED BY ANY OF THE METHODS BEING THE MOST APPROPRIATE METHO D HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CL ASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER R ELEVANT FACTORS FOR COMPUTING THE ALP AND ALSO ANY OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. S. 92D PROVIDES THAT (I) EVERY PERSON WHO H AS ENTERED INTO AN INTERNATIONAL TRANSACTION SHALL MAINTAIN AND KEEP S UCH INFORMATION AND DOCUMENTS IN RESPECT THEREOF; (II) THE BOARD MAY AL SO PRESCRIBE THE PERIOD FOR WHICH THE INFORMATION AND DOCUMENTS SHALL BE KE PT AND MAINTAINED; AND (III) THE AO OR THE CIT (A) MAY, IN THE COURSE OF A NY PROCEEDING UNDER THE ACT, REQUIRE ANY PERSON WHO HAS ENTERED INTO AN INT ERNATIONAL TRANSACTION TO FURNISH ANY INFORMATION OR DOCUMENT IN RESPECT THER EOF. THUS, IT SUBSCRIBES THAT THE REQUIREMENT IS ONLY TO MAINTAIN AND KEEP T HE INFORMATION AND PAGE 50 OF 61 ITA NO.14 13/BANG/2010 50 DOCUMENTS RELATING TO INTERNATIONAL TRANSACTIONS SO THAT THEY ARE AVAILABLE AS AND WHEN REQUIRED DURING ANY PROCEEDING UNDER THE A CT. THE SECTION DOES NOT PROVIDE THAT THE INFORMATION AND DOCUMENTS ARE TO B E KEPT AND MAINTAINED FOR A PERIOD OF EIGHT YEARS. RULE 10-D (1) SPECIFI ES THE DOCUMENTS AND INFORMATION WHICH ARE TO BE KEPT AND MAINTAINED BY THE ASSESSEE AND SUB-RULE 2 THEREOF PROVIDES THAT NOTHING CONTAINED IN SUB-RU LE 1 SHALL APPLY IN A CASE WHERE THE AGGREGATE VALUE AS RECORDED IN THE BOOKS OF ACCOUNTS, THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE DOES NOT EXCEED RS.1 CRORE. SUB-RULE 3 PROVIDES THE SUPPORTING AUTHENTI C DOCUMENTS WHICH ARE TO BE KEPT AND MAINTAINED AND SUB-RULE 4 THEREOF PROVI DES THAT THE INFORMATION AND DOCUMENTS SPECIFIED UNDER SUB-RULE 1 & 2 SHOULD AS FAR AS POSSIBLE BE CONTEMPORANEOUS AND SHOULD EXISTS LATEST BY THE SP ECIFIED DATE REFERRED TO IN CLAUSE-4 OF S.92F. CLAUSE 4 OF S. 92F GIVES TH E DEFINITION OF SPECIFIED DATE TO HAVE THE SAME MEANING AS ASSIGNED TO DUE DATE IN EXPLN. 2 BELOW SUB- SECTION 1 OF S.139. EXPLANATION 2 TO S.139 DEFINES DUE DATE IN A CASE OF A COMPANY TO BE 30 TH OF SEPTEMBER OF THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE IS SUPPOSED TO MAINTAIN INFORMATION AND DO CUMENTS. AFTER GOING THROUGH THE ABOVE PROVISIONS OF LAW, IT IS CLEAR TH AT THE ACT HAS NOT PROVIDED FOR ANY CUT OFF DATE UP-TO WHICH ONLY THE INFORMATI ON AVAILABLE IN PUBLIC DOMAIN HAS TO BE TAKEN INTO CONSIDERATION BY THE TP O, WHILE MAKING THE TRANSFER PRICING ADJUSTMENTS AND ARRIVING AT ARMS LENGTH PRICE. THE ASSESSEE AS WELL AS THE REVENUE IS BOTH BOUND BY THE ACT AND THE RULES THERE-UNDER AND, THEREFORE, AS PROVIDED UNDER THE ACT AND RULES , THEY ARE SUPPOSED TO BE TAKING INTO CONSIDERATION, THE CONTEMPORANEOUS DATA RELEVANT TO THE PREVIOUS YEAR IN WHICH THE TRANSACTION HAS TAKEN PLACE. TH E ASSESSEE HAD STRENUOUSLY ARGUED THAT THE PROVISIONS OF S.92D AND RULE 10D IS DEFEATED, IF THE TPO TAKES THE DATA WHICH IS AVAILABLE IN THE PUBLIC DOM AIN AFTER THE SPECIFIED DATE AND THE ALP WOULD BE FLUID AND THERE WOULD BE NO CE RTAINTY FOR THE SAME. WE PAGE 51 OF 61 ITA NO.14 13/BANG/2010 51 ARE, HOWEVER, NOT IN AGREEMENT WITH THE ARGUMENTS P UT-FORTH BY THE LD. A.R. THE ALP HAS TO BE DETERMINED BY THE TPO IN ACCORDAN CE WITH LAW AND THE ACT PROVIDES THAT THE TPO SHALL TAKE INTO CONSIDERATION THE CONTEMPORANEOUS DATA. THE ASSESSEE WAS ONLY REQUIRED TO MAINTAIN T HE INFORMATION AND DOCUMENTS AS MAY BE NECESSARY RELATING TO THE INTER NATIONAL TRANSACTIONS SO THAT IT CAN BE MADE AVAILABLE TO THE TPO OR THE AO OR ANY OTHER AUTHORITY IN ANY PROCEEDINGS UNDER THE ACT. BY PROVIDING A SPEC IFIED DATE IN THE ACT, THE OBLIGATION IS CAST UPON THE ASSESSEE TO KEEP AND MA INTAIN THE DOCUMENTS FOR THAT PERIOD. BUT, IT DOES NOT RESTRICT THE TPO FRO M MAKING ENQUIRIES THEREAFTER FOR DETERMINING THE CORRECT ALP. 7.3 HAVING HELD SO, WE SHALL NOW GLIMPSE AT THE N EXT QUESTION, AS TO WHETHER THE TPO CAN MAKE HIS OWN ENQUIRIES AND CALL FOR INFORMATION FROM VARIOUS ENTITIES KEEPING THE ASSESSEE IN THE DARK. UNDER SUB-SEC. (3) & (7) OF SEC. 92CA, THE TPO IS ENTRUSTED WITH ALL THE POWERS UNDER CLAUSES (A) TO (D) OF SUB-SECTION (1) OF 131 OR SUB-SECTION (6) OF S.1 33 TO CALL FOR AND GATHER ANY INFORMATION AS MAY BE REQUIRED. WHEN THE TPO IS MA KING THE SEARCH FOR A RELEVANT COMPARABLE, HE CAN ISSUE NOTICES TO THE PA RTIES WHOM HE CONSIDERS AS RELEVANT TO GATHER REQUISITE INFORMATION AND ON BEI NG SATISFIED WITH REGARD TO RELEVANCY OF THE MATERIAL WHICH CAN BE USED AGAINST THE ASSESSEE ONLY THEN THE ASSESSEE HAS TO BE GIVEN AN OPPORTUNITY OF PRES ENTING ITS OBJECTIONS, IF ANY. THUS, THE TPO NEED NOT INFORM THE ASSESSEE AB OUT THE PROCESS USED BY HIM FOR ISSUING THE NOTICES U/S 133(6) OF THE ACT N OR IS HE UNDER ANY OBLIGATION TO FURNISH THE ENTIRE INFORMATION TO THE ASSESSEE. 7.4. HOWEVER, WE ARE OF THE FIRM VI EW THAT THE PRINCIPLES OF NATURAL JUSTICE REQUIRES THAT WHEN ANY INFORMATION IS SOUGH T TO BE USED AGAINST THE APPELLANT, THE APPELLANT HAS TO BE GIVEN A REASONAB LE OPPORTUNITY OF HEARING ON PAGE 52 OF 61 ITA NO.14 13/BANG/2010 52 THAT MATERIAL. IN THE PRESENT CASE, THE TPO HAD FU RNISHED ALL THE INFORMATION TO THE APPELLANT IN THE FORM OF CD AND THE APPELLAN T, AFTER PERUSING THE SAME, HAD SUBMITTED A DETAILED SUBMISSION ALONG WITH ITS OBJECTIONS FOR TAKING VARIOUS COMPANIES AS COMPARABLES. IT WAS ANOTHER M ATTER, IF THE TPO HAD NOT CONSIDERED THE OBJECTIONS OF THE APPELLANT JUDICIOU SLY. IN SUCH A CASE, IT WOULD BE AN ERROR OF JUDGMENT, BUT, NOT VIOLATION O F PRINCIPLES OF NATURAL JUSTICE. THE OBJECTIONS OF THE APPELLANT WERE THAT CERTAIN COMPANIES HAVE BEEN TAKEN INTO CONSIDERATION BY THE TPO AS COMPARA BLES WITHOUT AFFORDING THE APPELLANT AN OPPORTUNITY OF FURNISHING ITS OBJE CTIONS, IF ANY, AND ALSO WITH REGARD TO CERTAIN OTHER COMPANIES, IT HAD SOUGHT OP PORTUNITY TO CROSS- EXAMINE THEM, BUT, IT HAS BEEN OBSERVED THAT NO SUC H AN OPPORTUNITY HAS BEEN EXTENDED TO THE APPELLANT. 7.5. AS RECORDED EARLIER, IF ANY INFORMA TION IS SOUGHT TO BE USED AGAINST THE APPELLANT, THE SAME HAS TO BE FURNISHED TO THE APPELLANT AND THEREAFTER, TAKING INTO CONSIDERATION THE APPELLANT S OBJECTIONS, IF ANY, ONLY THEN CAN THE TPO PROCEED TO TAKE A DECISION. IF TH E APPELLANT SEEKS AN OPPORTUNITY TO CROSS-EXAMINE THE PARTIES CONCERNED, THE APPELLANT SHALL BE PROVIDED SUCH AN OPPORTUNITY. IT IS ONLY DURING A CROSS-EXAMINATION THAT THE APPELLANT CAN REBUT THE STAND OF THAT PARTICULAR PA RTY (COMPANY). AS LISTED OUT EARLIER, THE APPELLANT HAD ALSO BROUGHT OUT VAR IOUS DEFECTS IN THE ADDITIONAL COMPARABLES SELECTED BY THE TPO AND HAD BROUGHT OUT THE STRIKING DIFFERENCES BETWEEN THE FUNCTIONS OF THOSE COMPARAB LES AS COMPARED TO THE APPELLANT AND ALSO AS TO HOW THE ENTIRE REVENUE OF THE APPELLANT HAS BEEN TAKEN INTO CONSIDERATION IN SPITE OF THERE BEING IN COME FROM UNRELATED PARTY TRANSACTIONS ALSO. ALL THESE OBJECTIONS HAVE BEEN DETAILED IN ITS WRITTEN SUBMISSION WHICH HAS ALSO BEEN INCORPORATED IN THIS ORDER IN A SUMMARIZED MANNER. IT HAS BEEN OBSERVED THAT THE TPO HAD NOT CONSIDERED THOSE PAGE 53 OF 61 ITA NO.14 13/BANG/2010 53 OBJECTIONS WHILE DETERMINING THE ALP. FURTHER, IT WAS ALSO THE STAND OF THE APPELLANT THAT IT SHOULD BE GIVEN A STANDARD DEDUCT ION OF 5% AS PROVIDED UNDER THE PROVISO TO S.92C (2) BEFORE MAKING ADJUST MENTS FOR THE TRANSFER PRICE. TO DRIVE HOME ITS POINT, THE APPELLANT HAD PLACED STRONG RELIANCE ON THE FOLLOWING DECISIONS: M/S. SAP LABS INDIA PVT. LTD V. ACIT 2010-T II-44-I TT-BANG-TP; PHILIPS SOFTWARE CENTRE PVT LTD. 26 SOT 226; MSS INDIA PRIVATE LIMITED 32 SOT 132 CUSTOMER SERVICES INDIA (P) LTD V. ACIT 30 SOT 486; SKODA AUTO INDIA PVT. LIMITED V. ACIT 2009-TIOL-21 4-ITAT-PUNE; DEVELOPMENT CONSULTANTS P. LTD V. DCIT 23 SOT 455; SONY INDIA P. LTD 315 ITR 150; CUMMINS INDIA LIMITED V. DCIT ITA NO.277 & 1412/PN/ 07; TNT INDIA PVT. LTD V. ACIT 10 TAXMANN. COM 161; (10)ABHISHEK AUTO INDUSTRIES LTD V. DCIT 2010-T II- 54-ITAT, DEL-TP; & (11)TECHNIMONT ICB PVT. LTD V. ACIT 2011-T II-31-IT AT-MUM-TP 7.6. ON THE OTHER HAND, THE LD. D R, PLACI NG STRONG RELIANCE ON THE STAND OF THE AUTHORITIES BELOW, SUBMITTED THAT 5% WAS NOT THE STANDARD, BUT, IT WAS THE RANGE WITHIN WHICH IF THE ALP FAILS, THEN, THE ALP OF THE APPELLANT HAS TO BE ACCEPTED. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND OF THE FIRM VIEW THAT THIS ISSUE HAS ALREADY BEEN COVERED BY THE DECISION S WHICH HAVE BEEN RELIED ON BY THE APPELLANT. 7.7. TURNOVER FILTER : AS REGARD THE ASSESSEES OBJECTION OF TPO ADOPTING INFINITY FIGURES FOR UPPER LIMIT TURNOVER FOR THE SELECTION OF COMPARABLES, WE FIND THAT THE ISSUE IS SQUARELY COV ERED BY THE ORDER OF BANGALORE BENCH OF TRIBUNAL IN THE CASE OF M/S GENI SYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. THE RELEVANT FINDING OF THE TRIBU NAL AT PARA 9 READS AS FOLLOWS:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE JUDIC IAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSE LF PAGE 54 OF 61 ITA NO.14 13/BANG/2010 54 HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY TH ERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSES SEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY W OULD BE IN A POSITION TO BARGAIN THE PRICE AND ALSO ATTR ACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKIL LED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SM ALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGI N. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNA L, WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED F ROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SAL ES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS .1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULA R RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO H AVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TA KEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STU DY. IN THE INSTANT CASE, THE TURNOVER OF THE COMPANY IS IN THE RANGE OF 24 CRORES, THEREFORE, THE COMPANIES, WHICH HAVE TURNOVER OF RS .1.00 CRORES TO 200 CRORES ALONE SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 7.8 IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDE RED VIEW THAT THIS ISSUE REQUIRES TO BE REMITTED BACK TO THE FILE OF T HE TPO FOR FRESH CONSIDERATION WITH THE FOLLOWING DIRECTIONS: PAGE 55 OF 61 ITA NO.14 13/BANG/2010 55 (I) THE OPERATING REVENUE AND THE OPERATING COST OF THE TRANSACTIONS RELATING TO ASSOCIATED ENTERPRISES ONL Y SHALL BE CONSIDERED; (II) THE COMPARABLES HAVING THE TURNOVER OF MORE THAN RS .1 CRORE, BUT, LESS THAN RS.200 CRORES ONLY SHALL BE TAKEN IN TO CONSIDERATION; (III) ALL THE INFORMATION RELATING TO COMPARABLES WHICH W ERE SOUGHT TO BE USED AGAINST THE APPELLANT SHALL BE FURNISHED TO THE APPELLANT; (IV) THE APPELLANT SHALL ALSO BE EXTENDED AN OPPORTUNITY TO CROSS- EXAMINE THE PARTIES WHOSE REPLIES WERE SOUGHT TO BE USED AGAINST THE APPELLANT; (V) TO CONSIDER THE OBJECTIONS OF THE APPELLANT THAT RE LATE TO ADDITIONAL COMPARABLES SOUGHT TO BE ADOPTED BY THE TPO AND TO PASS A DETAILED ORDER; AND (VI) TO GIVE THE STANDARD DEDUCTION OF 5% UNDER THE PROV ISO TO S.92C(2) OF THE ACT. 7.9. BEFORE PARTING WITH, WE WOULD LIKE TO RECALL THAT MOST OF THE ISSUES RAISED IN THIS APPEAL WITH REGARD TO TP STUD Y HAD ALSO CROPPED UP IN THE CASE OF M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PV T. LTD V. DCIT IN ITA NO.1231 (BANG)/2010 DATED: 5-8-2011 (ASSESSMENT YE AR 2006-07) WHEREIN THE HONBLE BENCH, AFTER DUE CONSIDERATION, HAD TAK EN SIMILAR VIEWS. 8. WITH REGARD TO DEDUCTION U/S 10A OF THE ACT, IT WAS CONTENDED BY THE APPELLANT THAT THE AO REDUCED RS.5,27,929/- FRO M THE EXPORT TURNOVER, HOWEVER, THE SAME HAS NOT BEEN REDUCED FROM THE TOT AL TURNOVER. IT WAS, FURTHER, SUBMITTED THAT WHAT WAS REDUCED FROM EXPOR T TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER. PAGE 56 OF 61 ITA NO.14 13/BANG/2010 56 8.1 THE LEARNED AR SUBMITTED THAT THE ISSUE IN QUE STION IS SQUARELY COVERED BY THE JUDGEMENT OF THE HONBLE KARNATAKA H IGH COURT IN THE CASE OF CIT V M/S TATA ELXSI LTD. & OTHERS (2011-TIOL-684-H C-KAR-II), HONBLE MUMBAI HIGH COURT IN THE CASE OF CIT V GEM PLUS JEW ELLERY INDIA LTD. 330 ITR 175 AND THE ORDER OF THE SPECIAL BENCH IN THE C ASE OF ITO V M/S SAK SOFT LTD. 313 ITR 353. THE LEARNED DR WAS UNABLE TO CONTROVERT THE SUBMISSIONS OF THE LEARNED AR. 8.2. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUS ED THE MATERIAL ON RECORD. THE HONBLE KARNATAKA HIGH COURT IN THE C ASE OF CIT V M/S TATA ELXSI LTD. & OTHERS HAD HELD THAT WHILE COMPUTING T HE EXEMPTION U/S 10A, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIV ED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DE NOMINATOR. THE RELEVANT FINDING OF THE HONBLE JURISDICTIONAL HIGH COURT RE ADS AS FOLLOWS:- ..SECTION 10A IS ENACTED AS AN INCENTIVE TO EXP ORTERS TO ENABLE THEIR PRODUCTS TO BE COMPETITIVE IN THE G LOBAL MARKET AND CONSEQUENTLY EARN PRECIOUS FOREIGN EXCHA NGE FOR THE COUNTRY. THIS ASPECT HAS TO BE BORNE IN MI ND. WHILE COMPUTING THE CONSIDERATION RECEIVED FROM SUC H EXPORT TURNOVER, THE EXPENSES INCURRED TOWARDS FREI GHT, TELECOMMUNICATION CHARGES, OR INSURANCE ATTRIBUTABL E TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA, OR EXPENSES IF ANY INCURRED IN FOREIGN EXCHANGE, IN PROVIDING THE TECHNICAL SERVIC ES OUTSIDE INDIA SHOULD NOT BE INCLUDED. HOWEVER, THE WORD TOTAL TURNOVER IS NOT DEFINED FOR THE PURPOSE OF TH IS SECTION. IT IS BECAUSE OF THIS OMISSION TO DEFINE TOTAL TURNOVER, THE WORD TOTAL TURNOVER FALLS FOR INTE RPRETATION BY THIS COURT; PAGE 57 OF 61 ITA NO.14 13/BANG/2010 57 ..IN SECTION 10A, NOT ONLY THE WORD TOTAL TURNOV ER IS NOT DEFINED, THERE IS NO CLUE REGARDING WHAT IS TO BE E XCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER. HOWEVER, WHI LE INTERPRETING THE PROVISIONS OF SECTION 80HHC, THE C OURTS HAVE LAID DOWN VARIOUS PRINCIPLES, WHICH ARE INDEPE NDENT OF THE STATUTORY PROVISIONS. THERE SHOULD BE UNIFORMI TY IN THE INGREDIENTS OF BOTH THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA, SINCE OTHERWISE IT WOUL D PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10A I S A BENEFICIAL SECTION WHICH INTENDS TO PROVIDE INCENTI VES TO PROMOTE EXPORTS. IN THE CASE OF COMBINED BUSINESS OF AN ASSESSEE, HAVING EXPORT BUSINESS AND DOMESTIC BUSIN ESS, THE LEGISLATURE INTENDED TO HAVE A FORMULA TO ASCER TAIN THE PROFITS FROM EXPORT BUSINESS BY APPORTIONING THE TO TAL PROFITS OF THE BUSINESS ON THE BASIS OF TURNOVERS. APPORTIONMENT OF PROFITS ON THE BASIS OF TURNOVER W AS ACCEPTED AS A METHOD OF ARRIVING AT EXPORT PROFITS. IN THE CASE OF SECTION 80HHC, THE EXPORT PROFIT IS TO BE D ERIVED FROM THE TOTAL BUSINESS INCOME OF THE ASSXCESSEE, WHEREAS IN SECTION 10-A, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS OF THE UNDERTAKING. EVEN I N THE CASE OF BUSINESS OF AN UNDERTAKING, IT MAY INCLUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN OTHER WORDS, EXP ORT TURNOVER AND DOMESTIC TURNOVER. TO THE EXTENT OF E XPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWEEN THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA. IF T HE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED A T AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMP ONENT OF TOTAL TURNOVER IN THE DENOMINATOR. THE REASON B EING THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERATOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE, TH OUGH THERE IS NO DEFINITION OF THE TERM TOTAL TURNOVER IN SECTION 10A, THERE IS NOTHING IN THE SAID SECTION T O MANDATE THAT, WHAT IS EXCLUDED FROM THE NUMERATOR T HAT IS EXPORT TURNOVER WOULD NEVERTHELESS FORM PART OF THE DENOMINATOR. WHEN THE STATUTE PRESCRIBED A FORMULA AND IN THE SAID FORMULA, EXPORT TURNOVER IS DEFINED, AND WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE VERY SAME MEANING GIVEN TO THE EXPORT TURNOVER BY THE PAGE 58 OF 61 ITA NO.14 13/BANG/2010 58 LEGISLATURE IS TO BE ADOPTED WHILE UNDERSTANDING TH E MEANING OF THE TOTAL TURNOVER, WHEN THE TOTAL TURNO VER INCLUDES EXPORT TURNOVER. IF WHAT IS EXCLUDED IN COMPUTING THE EXPORT TURNOVER IS INCLUDED WHILE ARR IVING AT THE TOTAL TURNOVER, WHEN THE EXPORT TURNOVER IS A COMPONENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISS IBLE. THUS, THERE IS NO ERROR COMMITTED BY THE TRIBUNAL I N FOLLOWING THE JUDGEMENTS RENDERED IN THE CONTEXT OF SECTION 80HHC IN INTERPRETING SECTION 10A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE A ND THE SAME. 8.3. THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. (SUPRA), IN IDENTICAL CIRCUMST ANCES, HELD THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TOTAL TURNOVER, I F AN ITEM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCE D FROM THE TOTAL TURNOVER TO MAINTAIN PARITY BETWEEN NUMERATOR AND DENOMINATO R WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBLE MUMBAI HIGH COURT READS AS FOLLOWS:- THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY T HE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPO RT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB- SECTION (4). EXPORT TURNOVER ALSO FORMS A CONSTITU ENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPO RT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANI NG AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TUR NOVER IN EXPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKI NG OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED IN O R BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN E XCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGHT, TELECO MMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY O F THE PAGE 59 OF 61 ITA NO.14 13/BANG/2010 59 ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREF ORE IN COMPUTING THE EXPORT TURNOVER THE LEGISLATURE HAS M ADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE CHARGES . THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE RE VENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EX CLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POIN T THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN DEFINE D AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AN D INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FRE IGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PR EVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OT HER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRES SION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNO TATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSIO N OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECIFICALLY EXCL UDED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN T HE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISION W HICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVER, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NOT HAVE A NY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL T URNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAVE ANY ELEME NT OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO I TEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICU LARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CO NTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 16 3 CTR (BOM) 596: (2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 PAGE 60 OF 61 ITA NO.14 13/BANG/2010 60 ITR 667 (SC) AND CIT V CATAPHARMA (INDIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 8.4. IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASS ESSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTWARE AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IN COMPLETING THE ASSESSMENT U/S 1 43(3) OF THE ACT, THE AO REDUCED THE EXPENDITURE INCURRED IN FOREIGN EXCHANG E IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA, FROM THE EXPORT T URNOVER WITHOUT CORRESPONDING REDUCTION FROM TOTAL TURNOVER, THEREB Y REDUCING THE DEDUCTION CLAIMED BY THE ASSESSMENT U/S 10B OF THE ACT. 8.5. IN LIGHT OF THE ABOVE FACTS, THE SPECIAL BENC H HELD AS UNDER:- FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOS E OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTI ON 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTA BLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINAT OR RESPECTIVELY IN THE FORMULA. THE APPEALS FILED BY THE DEPARTMENT ARE THUS DISMISSED. ALTHOUGH THE ORDER OF SPECIAL BENCH IS IN THE CONTE XT OF SECTION 10B OF THE ACT, THE RATIO LAID DOWN IN THE ABOVE DECISION APPL IES TO SECTION 10A OF THE ACT AS WELL, AS THE PROVISIONS OF SECTIONS 10A AND 10B ARE IDENTICAL ON ALL MATERIAL ASPECTS. MORE PARTICULARLY, BOTH THE SECT IONS DEFINE ONLY EXPORT TURNOVER BUT NOT TOTAL TURNOVER AND SUB-SECTION (4) OF BOTH THE SECTIONS PRESCRIBE AN IDENTICAL FORMULA FOR COMPUTING THE EX PORT PROFITS. PAGE 61 OF 61 ITA NO.14 13/BANG/2010 61 8.6. THEREFORE, WE DIRECT THAT RS.5,72,929/- SHOUL D BE REDUCED NOT ONLY FROM EXPORT TURNOVER BUT ALSO FROM THE TOTAL T URNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. 9. THE ISSUE OF LEVYING OF INTEREST U/S 234B AND U/S 234D OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE AND, T HEREFORE, IT HAS NOT BEEN ADDRESSED TO. 10. IN THE RESULT, THE APPELLANTS APP EAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH DAY OF JANUARY, 2012 SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO:- 1.THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCE RNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.