BMC Software Pvt.Ltd., Pune V. Dy.CIT, Circle 1(1), Pune, Pune

ITA 1425/PUN/2010

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2490 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 02-07-2015
• Assessment Year: misc
• Appeal Filed On: 07-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Assessee Lawyers: FAROOQ V IRANI
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Question of law; Initiation of penalty proceedings; Wholly owned subsidiary; Difference of opinion
• Section: 143(3); 234B; 10B; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , . . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM . / ITA NO. 1425 /PN/201 0 / ASSESSMENT YEAR : 200 6 - 07 BMC SOFTWARE INDIA PVT. LTD., TOWER A, ICC TECH PARK, SENAPATI BAPAT ROAD, PUNE 411 016 . / APPELLANT PAN: AABCB6110E VS. THE DY . COMMISSIONER OF INCOME - TAX, CIRC LE 1(1), PUNE. . / RESPONDENT / APPELLANT BY : SHRI FAROOQ V. IRANI / RESPOND ENT BY : S HRI A.K. MODI , CIT / DATE OF HEARING : 18 . 1 2 .2015 / DATE OF PRONOUNC EMENT: 16 . 0 3. 201 6 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF DC IT , CIRCLE 1(1), P UNE DATED 27 . 09 .201 0 RELATING TO ASSESSMENT YEAR 20 0 6 - 0 7 PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INC OME TAX ACT, 1961 (IN SHORT THE ACT) . 2 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE DRP AND CONSEQUENTLY THE LEARNED AO HA VE: 1. GENERAL GROUND CHALLENGING THE TRANSFER PRICING ADJUSTMENT OF RS . 123 , 984 , 018 CONSEQUENTIAL TO NON CONSIDERATION/ACCEPTANCE OF COMPARABILITY ANALYSIS AS DOCUMENTED IN THE TRANSFER PRICING STUDY REPORT ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 2 ERRED IN MAKING TRANSFER PRICING ADJUSTMENT TO ITS INTERNATIONAL TRANSACTIONS IN THE NATURE OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND SALES SUPPORT SERVICES AND NOT CONSIDERING/ ACCEPTING THE COMPARABILITY ANALYSIS DOCUMENTED IN THE TRANSFER PRICING STUDY REPORT FOR BENCHMARKING ANALYSIS. 2. NON APPLICABILITY OF TRANSFER PRICING P ROVISIONS TO SOFTWARE DEVELOPMENT UNIT OF THE APPELLANT WHICH IS ENJOYING TAX HOLIDAY UNDER SECTION 10 A OF THE ACT ERRED IN APPLYING T RANSFER PRICING PROVISIONS TO SOFTWARE DEVELOPMENT UNIT (I . E . PROVISION OF SOFTWARE DEVELOPMENT SERVICES) OF THE APPELLAN T WHICH ENJOYS TAX HOLIDAY UNDER SECTION 10 A OF THE ACT. 3. USE OF CONTEMPORANEOUS DATA ERRED IN CONDUCTING ARM'S LENGTH ANALYSIS BASED ON INFO RMATION OF COMPARABLE COMPANIES AVAILABLE AT THE TIME OF TRANSFER PRICING ASSESSMENT BUT NOT AVAILABLE AT THE T IME OF COMPLIANCE WITH THE TRANSFER PRICING REGULATIONS BY THE APPELLANT. 4. USE OF MULTIPLE YEAR DATA ERRED IN NOT CONSIDERING MULTIPLE YEAR DATA I . E . DATA FOR FINANCIAL YEAR (HEREINAFTER REFERRED TO AS FY) 200 5 - 0 6 AND TWO PRIOR YEARS , IN RESPECT OF C OMPARABLE COMPANIES FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND SALES SUPPORT SERVICES. 5. CONDUCTING AN UNJUSTIFIED FRESH SEARCH BY USING TURNOVER FILTER FOR IDENTIFI CATION OF COMPARABLE COMPANIES IDENTIFI CATION OF COMPARABLE COMPANIES ERRED IN CONDUCTING AN UNJUSTIFIED FRESH SEARCH BY APPLYING A BROADER RANGE OF TURNOVER FILTER OF RS.25 CRORES TO 150 CRORES (AS AGAINST RS.25 CRORES TO RS.100 CRORES APPLIED BY THE APPELLANT) FOR IDENTIFICATION OF COMPARABLE COMPANIES FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES. 6. REJECTION OF LOSS MAKING COMPANIES ERRED IN REJECTING CERTAIN COMPARABLE COMPANIES FROM THE COMPARABLE SET IDENT IFIED BY THE APPELLANT, ON THE BASIS THAT SUCH COMPANIES ARE LOSS MAKING COMPANIES AND THE APPELLANT CANNOT INCUR LOSSES AS IT IS A COST PROTECTED ENTITY. 7 . REJECTION OF CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT IN THE TRANSFER PRICING STU DY REPORT ERRED IN REJECTING CERTAIN COMPARABLE COMPANIES FROM THE COMPARABLE SET IDENTIFIED BY THE APPELLANT IN RESPECT OF INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND PROVISION OF SALES SUPPORT SERVICES. 8. R EJECTION OF GOLDSTONE TECHNOLOGIES LIMITED (HEREINAFTER REFERRED TO AS 'GTL') ON THE GROUND THAT IT DOES NOT HAVE SIGNIFICANT FOREIGN EXCHANGE EARNINGS ERRED IN REJECTING GTL AS COMPARABLE TO BMC INDIA'S INTERNATIONAL TRANSACTION PERTAINING TO PROVISION O F SOFTWARE DEVELOPMENT SERVICES, ON THE BASIS THAT THE FOREIGN EXCHANGE EARNINGS OF GTL IS INSUFFICIENT (IE LESS THAN 25 PER CENT OF TOTAL EARNINGS), WITHOUT APPRECIATING THE FACT THAT THE ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 3 ENTIRE EARNINGS OF GTL IS FROM EXPORTS AND HENCE, THE FOREIGN EXCHA NGE EARNINGS OF GTL EXCEEDS 25 PER CENT OF ITS TOTAL EARNINGS. 9. ACCEPTING CERTAIN COMPANIES AS COMPARABLE FOR FY 2005 - 06 IN RELATION TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES ERRED IN CONSIDERING ICSA (INDIA) LTD, AZTECSOFT LTD AND HELIOS AND MATH ESON INFORMATION TECHNOLOGY LTD AS COMPANIES COMPARABLE TO THE APPELLANT'S ACTIVITY PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES. 10. REJECTION OF 3 YEARS WEIGHTED AVERAGE MARGIN APPROACH USED FOR COMPUTATION OF OPERATING MARGIN OF THE APPELL ANT FOR PROVISION OF SOFTWARE DEVELOPMENT SERVICES ERRED IN REJECTING 3 YEARS WEIGHTED AVERAGE MARGIN USED FOR COMPUTING THE APPELLANT'S OPERATING MARGIN FOR COMPARISON WITH THE ARITHMETIC MEAN OF OPERATING MARGIN OF COMPARABLE COMPANIES PERTAINING TO INT ERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES. 11. NON ACCEPTANCE OF OPERATING PROFIT BEFORE DEPRECIATION, INTEREST AND TAX (HEREINAFTER REFERRED TO AS 'OPBDIT') AS PROFIT LEVEL INDICATOR (HEREINAFTER REFERRED TO AS 'PLI') FOR CO M PA RISON PURPOSE IN CONNECTION WITH PROVISION OF SOFTWARE DEVELOPMENT SERVICES WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE HONOURABLE DRP AND CONSEQUENTLY THE LEARNED AO HAVE ERRED IN NOT ACCEPTING THE ALTERNATIVE ARGUMENT THAT OPBDIT SHOULD BE CONSIDERED AS PLI FOR THE PURPOSE OF COMPARISON OF OPERATING MARGINS EARNED BY THE APPELLANT WITH THE ARITHMETIC MEAN OF OPERATING MARGINS EARNED BY THE COMPARABLE COMPANIES IN CONNECTION WITH INTERNATIONAL TRANSACTION PERTAINING TO COMPANIES IN CONNECTION WITH INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SE RVICES. 12. ADJUSTMENT FOR DIFFERENCES ON ACCOUNT OF FUNCTIONAL AND RISK PROFILE OF COMPARABLE COMPANIES VIS - A - VIS THE APPELLANT ERRED IN COMPARING FULL - FLEDGED RISK BEARING ENTITIES WITH THE APPELLANT'S CAPTIVE OPERATIONS WITHOUT MAKING ANY RISK ADJUSTM ENT FOR DIFFERENCES BETWEEN THE FUNCTIONAL AND RISK PROFILE OF COMPARABLE COMPANIES VIS - A - VIS THE RISK PROFILE OF THE APPELLANT. 1 3 . APPLICABILITY OF +/ - 5% RANGE ERRED IN COMPUTING THE TRANSFER PRICING ADJUSTMENT FROM THE ARM'S LENGTH PRICE WITHOUT GI VING BENEFIT OF THE OPTION AVAILABLE TO THE APPELLANT UNDER PROVISO TO SECTION 92C(2) OF THE ACT OF ADOPTING AS ARM'S LENGTH PRICE, A PRICE WHICH VARIES BY NOT MORE THAN 5 PER CENT FROM THE ARM'S LENGTH PRICE. 1 4 . INITIATION OF PENALTY PROCEEDINGS UNDER SEC 271(1)(C) OF THE ACT WITHOUT PREJUDICE TO THE ABOVE GROUNDS, EVEN IF THE TRANSFER PRICING ADJUSTMENT IS SUSTAINED, THE LEARNED AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) WITHOUT CONSIDERING THE FACT THAT THE TRANSFER PRICING AD JUSTMENT IS ON ACCOUNT OF DIFFERENCE OF OPINION PERTAINING TO SELECTION CRITERIA ADOPTED FOR IDENTIFYING THE COMPARABLE COMPANIES. ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 4 15. ERRONEOUS LEVY OF INTEREST UNDER SECTION 234B OF THE ACT WITHOUT PREJUDICE TO THE ABOVE GROUNDS, EVEN IF THE TRANSFER PRICING ADJUSTMENT IS SUSTAINED, THE LEARNED AO ERRED IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT TO THE EXTENT THAT THE ADDITION IS COMPUTED BASED ON THE UPDATED FINANCIAL DATA FOR THE COMPARABLE COMPANIES. THE APPELLANT CRAVES LEAVE TO ADD, ALTER , VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HONOURABLE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. 3. THE ISSUE RAISED IN THE PRE SENT APPEAL IS WITH REGARD TO VARIOUS ASPECTS OF TRANSFER PRICING ADJUSTMENT MADE IN THE HANDS OF ASSESSEE. 4. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THOUGH VARIOUS ISSUES HAVE BEEN RAISED IN RELATION TO TRANSFER PRICING A DJUSTMENT TO BE MADE ON ACCOUNT OF INTERNATIONAL TRANSACTIONS CONDUCTED BY THE ASSESSEE . H OWEVER, THE RESULTS SHOWN BY THE ASSESSEE WOULD BE WITHIN + / - 5% RANGE OF ARITHMETIC MEAN OF THE MARGINS OF COMPARABLES , I N CASE, SOME OF THE CONCERNS ARITHMETIC MEAN OF THE MARGINS OF COMPARABLES , I N CASE, SOME OF THE CONCERNS ARE INCLUDED AND SOME OF THE CONCERNS PICKED UP BY THE TRANSFER PRICING OFFICER (TPO) / ASSESSING OFFICER ARE EXCLUDED. FURTHER, THE ASSESSEE STRESSED THAT ADJUSTMENT HAD TO BE MADE ON ACCOUNT OF ACCELERATED DEPRECIATION AND RISK S . 5. BOTH THE AUTHORIZED REPRESENT ATIVES MADE THEIR SUBMISSIONS IN RESPECT OF THE SAME, WHICH WE SHALL DEAL WITH WHILE DECIDING THE ISSUE AT HAND. 6. BRIEFLY, IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE WAS WHOLLY OWNED SUBSIDIARY OF BMC SOFTWARE , US. THE UNIT OF THE ASSESSEE COMPANY IS REGISTERED UNDER THE SOFTWARE TECHNOLOGY PARKS SCHEME OF THE GOVERNMENT OF INDIA. FOR THE YEAR UNDER CONSIDERATION , THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 10A OF THE ACT AND HAD DECLARED TAXABLE INCOME OF RS.6,87,913/ - . THE ASSESSEE HAD ENTE RED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES AND SINCE THE TOTAL INTERNATIONAL TRANSACTIONS WERE MORE THAN RS.15 ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 5 CRORES, REFERENCE WAS MADE TO THE TPO UNDER SECTION 92CA(1) OF THE ACT. THE TPO NOTED THAT THE ASSESSEE WAS ENGAGED IN P ROVIDING SOFTWARE DEVELOPMENT SERVICES TO THE TUNE OF RS. 80,96,60,358/ - TO ITS ASSOCIATE ENTERPRISES AND SALES SUPPORT SERVICES TO BMC - USA OF RS.69,89,833/ - . SINCE THE ASSESSEE WAS SOLELY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES AND SALES SUPPOR T SERVICES TO BMC, USA IN RESPECT OF SOFTWARE PRODUCTS OF BMC, USA, THE TPO OBSERVED THAT THE ASSESSEE COULD BE CLASSIFIED AS A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER AND AS SALES SUPPORT SERVICE PROVIDER. THE ASSESSEE WAS PROVIDING THESE SERVICES AT COST PLUS MARGIN OF 10% AS PER THE SOFTWARE DEVELOPMENT SERVICE AGREEMENT. FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS, THE ASSESSEE HAD FOLLOWED TNMM METHOD WITH EXTERNAL COMPARABLES WITH OPERATING PROFIT / TOTAL COST AS PROFIT LEVEL INDICATOR I.E . PLI. THE TPO SHOW CAUSED THE ASSESSEE OBSERVING THAT FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS, THE ASSESSEE HAD IDENTIFIED COMPARABLE COMPANI ES ON THE BASIS OF FAR ANALYSIS I.E. FUNCTION PERFORMED, RISK ASSUMED AND ASSET UTILIZED. THE ASSESSEE H AD SELECTED 12 COMPANIES AS COMPARABLES FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS, WHICH ARE ENLISTED AT PAGE 4 OF THE TPOS ORDER. BASED ON THE MARGINS OF SAID CONCERNS, THE WEIGHTED AVERAGE MARGINS OF COMPARABLE COMPANIES WAS 5.40% THOUGH THE ASSE SSEE WAS BILLING AT COST PLUS 10% FOR RENDERING SOFTWARE DEVELOPMENT SERVICES. HOWEVER, THE OPERATING MARGIN OF THE ASSESSEE WAS WORKED OUT TO 5.89% FOR THE YEAR UNDER CONSIDERATION. THE TPO WAS OF THE VIEW THAT OUT OF 12 CONCERNS SELECTED BY THE ASSESSE E, ONLY ONE CONCERN R S SOFTWARE (INDIA) LIMITED WAS COMPARABLE, BUT SINCE ONE COMPANY COULD NOT REPRESENT ANALYSIS FOLLOWING TNMM METHOD, THEREFORE, FRESH SEARCH WAS CARRIED OUT BY THE TPO AND THEREAFTER, THREE MORE CONCERNS WERE SELECTED WHOSE AVERAGE MA RGIN WAS WORKED OUT TO 24.97 % AND THE ASSESSEE WAS ASKED AS TO WHY THE AFORESAID SET OF COMPARABLES SHOULD NOT BE TAKEN FOR THE PURPOSE OF BENCHMARKING INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES. SIMILAR EXERCISE O F SELECTION OF CONCERNS WAS ALSO CARRIED ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 6 OUT BY THE TPO IN RESPECT OF INTERNATIONAL TRANSACTIONS OF SALES SUPPORT SERVICES PROVIDED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES. THE OBJECTIONS OF THE ASSESSEE WITH REGARD TO CONCERNS PICKED UP BY THE TPO A ND THOSE REJECTED BY THE TPO ARE REPRODUCED IN THE ORDER OF TPO UNDER PARA 7.1. IN THE FINAL ANALYSIS, THE TPO REJECTING THE EXPLANATION OF ASSESSEE, WORKED OUT ARITHMETIC MEAN OF FINAL SET OF FOUR COMPARABLES, WHICH WORKS OUT TO 24.68% , WHEREAS THE OPERA TING PROFIT / TOTAL COST OF THE ASSESSEE COMPANY WAS AT 5.89% , HENCE, AN ADJUSTMENT OF RS.12,31,04,464/ - WAS PROPOSED BY THE TPO IN RESPECT OF INTERNATIONAL TRANSACTIONS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE S. IN RESPECT OF SALES SUPPORT SERVICES, THE TPO SELECTED FIVE COMPANIES AND THE ARITHMETIC MEAN OF FINAL SET OF COMPARABLES WAS WORKED OUT TO 24.25% AS AGAINST THE OP/TC OF THE ASSESSEE COMPANY AT 9.39%. CONSEQUENTLY, ADDITION OF RS. 8,79,554/ - WAS PROPO SED. THE TOTAL ADDITION MADE IN THE HANDS OF ASSESSEE WAS TO THE TUNE OF RS.12,39,84,018/ - . THE DRP UPHELD THE DIRECTIONS OF TPO. THEREAFTER, T HE ASSESSING OFFICER WHILE PASSING ORDER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT HAD REJECTED THE CONT ENTIONS OF THE ASSESSEE AND MADE AN ADDITION TO THE EXTENT OF RS.12,39,84,018/ - . 7. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF ASSESSING OFFICER. 8. ON THE PERUSAL OF RECORD, I N ORDER TO ADJUDICATE THE ISSUE RAISED IN THE PRESENT APPEAL, WE WOULD FIR ST REFER TO THE FACTS RELATING TO THE ADJUSTMENT ON ACCOUNT OF SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE IN ITS TP STUDY REPORT HAD SELECTED 12 COMPANIES WHICH ARE AS UNDER: - SR. NO. NAME OF THE COMPANY OPERATING PROFIT ON OPERATING COST (%) WEIGHTED AVERAGE MARGINS FY 2003 - 04 FY 2004 - 05 FY 2005 - 06 1 3I INFOTECH LIMITED (SEGMENTAL) 6.42% NC NC 6.42% 2 BRISTLECONE INDIA LIMITED (FORMERLY KNOWN AS MAHINDRA CONSULTING LIMITED) - 2.92% NC NC - 2.92% ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 7 3 DATAMATICS LIMITED NA - 5.87% NA - 5.87% 4 F UTURE SOFTWARE LIMITED 2.88% NA NA 2.88% 5 GOLDSTONE TECHNOLOGIES LIMITED 9.62% 4.65% NA 7.48% 6 MAARS SOFTWARE INTERNATIONAL LIMITED 5.52% 3.25% NA 4.27% 7 MELSTAR INFORMATION TECHNOLOGIES LIMITED NC - 0.15% NA 0.15% 8 ORIENT INFORMATION TECHNOLOGIES L IMITED 14.52% 14.90% NA 14.76% 9 QUINTEGRA SOLUTION LIMITED NA 6.93% 10.73% 8.59% 10 R S SOFTWARE (INDIA) LIMITED - 2.69% 7.92% 15.34% 7.65% 11 SONATA SOFTWARE LIMITED (CONSOLIDATED SEGMENTAL) 15.31% NC NC 15.31% 12 SUBEX SYSTEMS LIMITED (CONSOLIDATED SEGMENTAL) 6.39% NC 6.39% ARITHMETIC MEAN 5.40% 9. THE TPO REJECTING THE AFORESAID COMPANIES AND ONLY ACCEPTING R S SOFTWARE (INDIA) LIMITED I.E. CONCERN SELECTED BY THE ASSESSEE, DREW FINAL SET OF COMPARABLES, WHICH ARE AS UNDER: - S.N O. COMPARABLES OP/TC (2006) % 1 AZTECSOFT LTD. 17.23 2 HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. 35.44 3 ICSA (INDIA) LTD. (SEGMENTAL) 31.88 4 R S SOFTWARE (INDIA) LTD. 15.34 AVERAGE 24.97 10. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE AS SESSEE POINTED OUT THAT LOOKING AT THE ANALYSIS CARRIED ON BY THE ASSESSEE AND THEREAFTER BY THE TPO, SOME OF THE COMPANIES WHICH WERE SELECTED BY THE ASSESSEE IN ITS TP STUDY REPORT SHOULD BE INCLUDED WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF S OFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES. THE FIRST SUCH COMPANY WAS ORIENT INFORMATION TECHNOLOGIES LIMITED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT THE SAID COMPANY IS TO BE INCLUDE D IN THE FINAL SET OF COMPARABLES SINC E IT WAS ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 8 FUNCTIONALLY SIMILAR, WHICH STANDS PROVED BY THE FACT THAT THE SAID CONCERN WAS SELECTED AS COMPARABLE IN THE PRECEDING AND SUCCEEDING YEARS. 11. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, POINTED OUT THAT THIS COMPANY IS TO BE EXCLUDED AS THE PRESENT YEAR WAS AN EXCEPTIONAL YEAR, WHERE THERE WAS A LOSS DECLARED BY THE SAID CONCERN. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE WAS OF THE VIEW THAT THE ISSUE NEEDS TO BE GONE INTO DEEPER TO FIND OUT THE NATURE OF LOSS. HE FAIRLY ACCEPTED THAT ONLY BECAUSE OF LOSS, IT SHOULD NOT BE REJECTED. HOWEVER, THE LOSS INCURRED BY THE SAID CONCERN ORIENT INFORMATION TECHNOLOGIES LIMITED WAS TO BE LOOKED INTO. OUR ATTENTION WAS DRAWN TO THE DIRECTORS REPORT AND THE OTHER ATTACHED DOCUMENTS PLACED AT PAGES 65.5 TO 65.24 OF PAPER BOOK BY THE ASSESSEE, WHEREIN THERE IS REVIEW BY THE DIRECTORS OF THE ASSESSEE COMPANY AND THEY CHANGED THE DEPRECIATION POLICY FROM THIS YEAR. AS PER TH E LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE, THE LOSS DECLARED BY THE SAID CONCERN FOR THE YEAR WAS AUTOMATION LOSS AND WAS NOT NORMAL BUSINESS LOSS BECAUSE OF THIS ABNORMALITY, THE SAID COMPANY SHOULD BE EXCLUDED. 12. THE LEARNED AUTHORIZED REP RESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ISSUE RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE WAS NOT RAISED BY THE TPO AND HENCE, MERITS NOT TO BE APPLIED. HE FURTHER POINTED OUT THAT THE ASSESSEE RULED OUT THE COST PLUS ENTIT Y AND HENCE, THE CHANCES OF LOSSES WERE NIL , BUT MERELY BECAUSE THE COMPANY WAS NOT DOING WELL , COULD NOT BE THE BASIS FOR REJECTION OF THE SAID CONCERN AS COMPARABLE. SINCE THE TPO PERIOD AND AGAIN ALLOWS THE ADJUSTMENT FOR RISK MANAGEMENT. SIMILARLY, A DJUSTMENT FOR DEPRECIATION SHOULD BE ALLOWED. 13. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN REPLY, STRONGLY OPPOSED THE PROPOSITION RAISED BY THE LEARNED AUTHORIZED ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 9 REPRESENTATIVE FOR THE ASSESSEE AND POINTED OUT THAT WHERE HE WAS SUPPORT ING THE CASE OF REVENUE ON THE BASIS OF MATERIAL SUPPLIED BY THE ASSESSEE AND WHERE NO FRESH GROUND OF APPEAL WAS RAISED BY HIM AND EVENTUALLY, THERE IS NO ENHANCEMENT IN THE HANDS OF ASSESSEE, WHERE THE ASSESSING OFFICER HAS MISSED SOMETHING, THEN THE DUT Y OF THE TRIBUNAL AS ASSISTED BY LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE AND THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IS TO COME TO A FINALITY . HE WAS OF THE VIEW THAT THE FACTS SUPPORTED THE CASE OF TPO. IN THIS REGARD, RELIANC E WAS PLACED ON THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT IN CIT VS. M/S. JANSAMPARK ADVERTISING AND MARKETING (P) LTD. IN ITA NO.525/2014, JUDGMENT DATED 11.03.2015. 14. WE SHALL DEAL WITH THE ARGUMENTS OF LEARNED AUTHORIZED REPRESENTATIVES A T THE RELEVANT POINT OF TIME IN THE PARAS HEREINAFTER. 15. THE NEXT CONCERN PICKED UP BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS GOLDSTONE TECHNOLOGIES LIMITED , WHICH AS PER THE ASSESSEE WAS FUNCTIONALLY COMPARABLE. 16. OUR ATTENTION WAS DRAWN TO THE ORDER OF TPO W ITH SPECIAL REFERENCE TO PAGE 7, WHEREIN HE OBJECTED TO INCLUSION OF SAID CONCERN ON THE PREMISE THAT THE SAID COMPANY HAD EARNED FOREIGN EXCHANGE WORTH RS.3.50 CRORES, WHICH WAS LESS THAN 25% OF TOTAL EARNING OF THE SAID CO MPANY AND HENCE, NOT COMPARABLE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE FINANCIAL STATEMENTS OF THE SAID CONCERN, WHICH ARE PLACED AT PAGE 12.2 OF THE PAPER BOOK AND POINTED OUT THAT THE TOTAL EXPORTS WERE TO THE TUNE OF RS .34.90 CRORES AND THE SAME WAS 100% OF THE TOTAL SALES. HE QUESTIONED ON WHAT BASIS THE TPO WAS SAYING THAT IT WAS ONLY 25%. HE FURTHER POINTED OUT THAT THE TPO HAD ACCEPTED THE SAID CONCERN AS COMPARABLE IN ASSESSMENT YEARS 2005 - 06 AND 2007 - 08 . ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 10 1 7 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FAIRLY AGREED THAT LOOKING AT THE FINANCIAL STATEMENTS, THERE SEEMS TO BE SOME CONFUSION. THE ASSESSEE IS AGGRIEVED BY THE EXCLUSION OF GOLDSTONE TECHNOLOGIES LIMITED , WHICH WAS PICKED UP BY THE ASSESSE E AS COMPARABLE, WHICH IN TURN, WAS REJECTED BY THE TPO. 18. THE BASIS FOR EXCLUSION OF GOLDSTONE TECHNOLOGIES LIMITED IS THE OBSERVATION OF TPO AT PAGE 7 OF ITS ORDER , THAT THE SAID CONCERN FOR THE YEAR UNDER CONSIDERATION HAD EARNED FOREIGN EXCHANGE T O THE EXTENT OF 25% OF ITS TOTAL EARNING. HO W EVER, THE PERUSAL OF FINANCIAL STATEMENTS OF THE SAID CONCERN AT PAGE 12.2 OF THE PAPER BOOK FOR THE YEAR ENDING 31.03.2006 REFLECTS THAT THE TOTAL SALES OF THE SAID CONCERN WERE ON ACCOUNT OF EXPORT OF SOFTWAR E AND SERVICES TO THE TUNE OF RS. 34,90,47,247/ - I.E. THE SAID CONCERN HAD EARNED FOREIGN EXCHANGE TO THE TUNE OF 100% OF ITS TOTAL SALES. IN THIS REGARD, WE FIND NO MERIT IN THE ORDER OF ASSESSING OFFICER / TPO IN REJECTING THE SAID CONCERN I.E. GOLDSTONE TECHNOLOGIES LIMITED . ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER / TPO TO INCLUDE GOLDSTONE TECHNOLOGIES LIMITED IN THE FINAL SET OF COMPARABLES TO WORK OUT THE ARITHMETIC MEAN OF COMPARABLES SELECTED FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. 1 9 . THE NEXT CONCERN WHICH WAS SELECTED BY THE ASSESSEE AND REJECTED BY THE TPO WAS QUINTEGRA SOLUTION LIMITED . THE TPO AFTER TAKING NOTE OF THE ANNUAL REPORT OF THE SAID COMPANY, WHEREIN IT WAS REPORTED THAT IT WAS DELIVERING INTEGRAT ED SE T OF IT SERVICES IN INDUSTRIES LIKE FINANCIAL SERVICES, MANUFACTURING, EDUCATION, HEALTHCARE AND HIGH TECHNOLOGY AND IT WAS ALSO REPORTED BY THE DIRECTOR THAT THE SAID CONCERN WAS DELIVERING FULL RANGE OF SERVICE OFFERINGS COVERING THE SOFTWARE SERVICES, S PECTRUM OF APPLICATION DEVELOPMENT AND MAINTENANCE, PRODUCT SERVICES, TESTING AND PROFESSIONAL SERVICES , HELD IT TO DISSIMILAR . THE TPO HELD THAT THE SAID COMPANY WAS UNDERTAKING SIGNIFICANTLY ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 11 DIFFERENT FUNCTIONS COMPARED TO THE ASSESSEE. FURTHER, THE CO NCERN HAD PREPARED ITS ACCOUNTS FOR A PERIOD OF 15 MONTHS ENDING ON 30 TH SEPTEMBER, 2005 AS AGAINST THE FINANCIAL YEAR ADOPTED BY THE ASSESSEE COMPANY FOR PREPARING ITS ACCOUNTS. THE TPO THEN HELD THAT THE SAID CONCERN WAS NOT COMPARABLE TO THE ASSESSEE C ONCERN. 2 0 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ACCOUNTS WERE ADMITTEDLY PREPARED FOR 15 MONTHS. HOWEVER, THE GRIEVANCE OF THE ASSESSEE WAS THAT WHILE REJECTING QUINTEGRA SOLUTION LIMITED , THE TPO ADOPTS THE SAID Y ARDSTICK OF D IFFERENT ACCOUNTING YEAR, BUT IN THE FINAL ANALYSIS, ACCEPTED THE SUBMISSIONS OF THE ASSESSEE. HOWEVER, THE COMPANY WAS REJECTED BEING OPERATIONAL IN DIFFERENT FIELD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ALSO POINTED OUT TH AT THE SAID CONCERN WAS ACCEPTED BY THE DRP IN ASSESSMENT YEAR 2008 - 09 . 2 1 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE STRONGLY OBJECTED TO THE CONTENTION OF ASSESSEE AND POINTED OUT THAT THE PERUSAL OF PAGE 66.45 OF THE PAPER BOOK WOULD REFL ECTS THAT FOR THE YEAR UNDER CONSIDERATION THE SAID CONCERN WAS FUNCTIONALLY DIFFERENT , AS IT , THOUGH PROVIDED SOFTWARE SERVICES, BUT IN A DIFFERENT FIELD AS IS CLEAR FROM THE DIRECTORS REPORT. FURTHER, THE YEAR COMPRISED OF 6 MONTHS FOR THE PERIOD ENDING 31.03.2006 AND 9 MONTHS FOR THE PERIOD ENDING 30.09.2005 . IN CASE THE FINANCIAL YEAR WAS NOT MATCHING, THEN THE SAID CONCERN IS TO BE EXCLUDED. IN THIS REGARD, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY PUNE BENCH OF TRIBUNAL IN M/S. SUNGARD SOLUTION S (INDIA) PVT. LTD. VS. DDIT IN ITA NO.122/PN/2011, RELATING TO ASSESSMENT YEAR 2006 - 07 , ORDER DATED 30.09.2014 . FURTHER, IT WAS AN END TO END COMPANY AND HENCE, FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE. ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 12 2 2 . THE ASSESSEE IS AGGRIEVED BY THE EXCLUSIO N OF QUINTEGRA SOLUTION LIMITED FROM THE FINAL LIST OF COMPARABLES . IT HAS BEEN POINTED OUT BY BOTH THE AUTHORIZED REPRESENTATIVES THAT ADMITTEDLY, THE SAID CONCERN HAD A FINANCIAL YEAR COMPRISING OF 15 MONTHS AS AGAINST THE FINANCIAL YEAR OF 12 MONTHS AD OPTED BY THE ASSESSEE. THE PERUSAL OF EXTRACT OF ANNUAL REPORT OF QUINTEGRA SOLUTION LIMITED REFLECTS THAT THE FINANCIAL PERIOD OF 15 MONTHS DOES NOT CORRESPOND WITH THE FINANCIAL PERIOD OF 12 MONTHS OF THE ASSESSEE CONCERN. IN VIEW OF THE SAME, WE HOLD THAT THE SAID CONCERN IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES AND WE DISMISS THE PLEA OF ASSESSEE IN THIS REGARD. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY PUNE BENCH OF TRIBUNAL IN M/S. SUNGARD SOLUTIONS (INDIA) PVT. LTD. VS. DDIT (SUPRA) , WHERE IN, SIMILAR PROPOSITION WAS LAID DOWN. MERELY BECAUSE DRP HAS ACCEPTED THIS CONCERN AS COMPARABLE IN ASSESSMENT YEAR 2008 - 09 CANNOT BE BASIS FOR ITS SELECTION IN THIS YEAR BECAUSE OF DIFFERENT ACCOUNTING PERIOD. 2 3 . ANOTHER ISSUE RAISED BY THE ASSESSEE W AS WITH REGARD TO EXCLUSION OF MAARS SOFTWARE INTERNATIONAL LIMITED. THE TPO HELD THE SAID COMPANY NOT TO BE FUNCTIONALLY SIMILAR AS IN THE DIRECTORS REPORT , THE COMPANY WAS STATED TO BE SOFTWARE PRODUCT COMPANY AND NOT ENGAGED IN SOFTWARE DEVELOPMENT SER VICES. THE EXPLANATION OF THE ASSESSEE IN THIS REGARD WAS THAT IT WAS ENGAGED IN BOTH THE AREAS I.E. PRODUCT AND SERVICES, WHICH HAS BEEN MENTIONED IN THE DIRECTORS REPORT. THE COMPANY AS PER THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPME NT. 2 4. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE SAID CONCERN WAS ENGAGED IN ON - SITE DEVELOPMENT . THE SAID CONCERN WAS ON - SITE DEVELOPER, WHICH IS DIFFERENT FROM OFF - SITE DEVELOPER. OUR ATTENTION WAS DRAWN TO THE FI NANCIALS OF THE SAID CONCERN ESPECIALLY AT PAGES 61.27 AND 61.28 , WHEREIN BOTH THE FOREIGN EXCHANGE EARNINGS AND EXPENDITURE IN FOREIGN EXCHANGE IS REPORTED, WHICH CLEARLY SHOWS ON - SITE DEVELOPMENT. THE LEARNED ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 13 DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT IN TIBCO SOFTWARE INDIA PVT. LTD. VS. DCIT IN ITA NO.2536/PN/2012 , RELATING TO ASSESSMENT YEAR 2008 - 09 , ORDER DATED 11.02.2015 , WHERE BOTH AKSHAY SOFTWARE TECHNOLOGIES LIMITED AND MAARS SOFTWARE INTERNATIONAL LIMITED WERE REJECTED BEING ON - SITE DEVELOPERS. HE FURTHER POINTED OUT THAT AT PAGE 61.21 OF THE PAPER BOOK FILED BY THE ASSESSEE, WHEREIN IT IS MENTIONED THAT THE SAID CONCERN WAS IN SOFTWARE DEVELOPMENT AND TRAINING AND PRODUCT. HOWEVER, THE MAIN RECEIPT WAS FROM TRAINING AND PRODU CTS AND HENCE, THE SAID CONCERN WAS NOT FUNCTIONALLY SIMILAR. 2 5 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE COULD NOT IMPROVE UPON THE CASE OF TPO I.E. THE SAID CONCER N WAS ON - SITE DEVELOPER. HE FURTHER POINTED OUT THAT ON - SITE WAS A SOFTWARE DEVELOPMENT SERVICE AND HENCE, COMPARABLE. FURTHER, IT WAS POINTED OUT BY HIM THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE R ELIED ON THE RATIO LAID DOWN IN TIBCO SOFTWARE INDIA PVT. LTD. VS. DCIT (SUPRA) , RELATING TO ASSESSMENT YEAR 2008 - 09 AND HENCE, NOT TO BE RELIED ON. 2 6 . IN THE FIRST INSTANCE, WE WOULD LIKE TO MEET THE OBJECTIONS OF LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT WHILE ARGUING THE A PPEAL BEFORE THE TRIBUNAL CAN FRESH OBJECTIONS BE RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE, WHICH IN TURN, HAVE NOT BEEN RAISED BY THE TPO. IN THIS REGARD, THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE STRONGLY OBJECTED AND POINTED OUT THAT WHERE THE TPO / ASSESSING OFFICER HAD MISSED OUT SOMETHING, THEN IT IS THE DUTY OF THE TRIBUNAL TO COME TO A CORRECT FINDING OF FACTS, WHERE NO FRESH GROUND OF APPEAL IS BEING RAISED BY THE REVENUE. THE HONBLE DELHI HIGH COURT IN CIT VS. M/S. JANSAMPARK ADVERTISING AND MARKETING (P) LTD. (SUPRA) POINTED OUT THAT THE OBLIGATION TO MAKE PROPER ENQUIRIES AND REACH FINDING ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 14 OF FACTS DOES NOT END WITH THE ASSESSING OFFICER, BUT THE OBLIGATION MOVES UPWARDS TO CIT(A) AND ALSO ITAT, WHERE IT COMES TO THEIR NOTICE THAT THERE HAS BEEN DEFAULT IN SUCH RESPECT ON THE PART OF ASSESSING OFFICER. IN SUCH AN EVENT, THE HONBLE DELHI HIGH COURT HELD THAT BOTH THE APPELLATE AUTHORITIES WERE BOUND TO EITHER THEMSELVES PROPERLY ENQUIRE OR CAUSE SUCH ENQU IRY TO BE COMPLETED. THE RELEVANT OBSERVATIONS OF THE HONBLE DELHI HIGH COURT A RE AS UNDER: - 35. ASSESSMENT PROCEEDINGS UNDER THE INCOME TAX ACT ARE NOT A GAME OF HIDE AND SEEK. THE INQUIRY IN THE SAKE OF A NOTICE UNDER SECTION 148 IS NOT AN EMPTY FORM ALITY. IT MUST BE EFFECTIVE AND WITH A SENSE OF PURPOSE. THERE IS AN ELABORATE PROCEDURE SET OUT WHICH REQUIRES SCRUPULOUS ADHERENCE AND FOLLOWED UP ON. IN THE HIERARCHY OF THE AUTHORITIES, THE AO IS PLACED AT THE BOTTOM RUNG. THE TWO LAYERS OF APPEALS , BEFORE THE MATTER ENGAGES THE APPELLATE JURISDICTION OF THIS COURT, ARE AUTHORITIES VESTED WITH THE JURISDICTION, POWER AND OBLIGATION TO REACH APPROPRIATE FINDINGS ON FACTS. NOTICEABLY, IT IS ONLY THE APPEAL TO THE HIGH COURT, UNDER SECTION 260 - A , WHIC H IS RESTRICTED TO CONSIDERATION OF SUBSTANTIAL QUESTION OF LAW, IF ANY ARISING. AS WOULD BE SEEN FROM THE DISCUSSION THAT FOLLOWS, THE OBLIGATION TO MAKE PROPER INQUIRY AND REACH FINDING ON FACTS DOES NOT END WITH THE AO. THIS OBLIGATION MOVES UPWARDS TO CIT(APPEALS), AND ALSO ITAT, SHOULD IT COME TO THEIR NOTICE THAT THERE HAS BEEN DEFAULT IN SUCH RESPECT ON THE PART OF THE AO. IN SUCH EVENT, IT IS THEY WHO ARE DUTY BOUND TO EITHER THEMSELVES PROPERLY INQUIRE OR CAUSE SUCH INQUIRY TO BE COMPLETED. I F THIS WERE NOT TO BE DONE, THE POWER UNDER SECTION 148 WOULD BE RENDERED PRONE TO ABUSE. 2 7 . IN VIEW OF THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT AND WHILE DECIDING THE PRESENT ISSUE OF TRANSFER PRICING AS TO WHETHER A CONCERN IS COMPARABLE TO THE ASSESSEE, THE FULL FACTUAL ASPECTS OF THE SAID CONCERN ARE TO BE LOOKED INTO WHILE DECIDING THE ISSUE. WE FIND NO MERIT IN THE OBJECTIONS RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD. THE ISSUE RAISED BEFORE US IS WHETHER A CONCERN MAARS SOFTWARE INTERNATIONAL LIMITED WAS FUNCTIONALLY SIMILAR OR FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE. THE ASSESSEE HAS PLACED ON RECORD THE FINANCIAL STATEMENTS OF THE SAID CONCERN MAARS SOFTWARE INTERNATIONAL LIMITED. THE DIREC TORS HAVE REPORTED THAT THE COMPANY FOR THE YEAR HAD FOCUSED ON AREAS OF PRODUCTS AND CONSULTING AND WAS HOPEFUL OF ACHIEVING HIGHER GROWTH IN THE AREAS OF PRODUCTS AND SERVICES. THE COMPANY HAD ENTERED INTO AGREEMENTS WITH ORGANIZATIONS TOWARDS MARKETING AND SUPPORT OF ITS PRO DUCTS IN MANUFACTURING, FINANCE AND MAINTENANCE AREAS. IN THE PROFIT & LOSS ACCOUNT, THE ASSESSEE HAD DECLARED INCOME FROM SOFTWARE ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 15 DEVELOPMENT, TRAINING AND PRODUCT BOTH IN THE DOMESTIC AND EXPORT MARKET. HOWEVER, THE PERUSAL OF D ETAILS AT PAGE 61.27 OF THE PAPER BOOK REFLECTS THAT UNDER SEGMENTAL REPORTING , THE ASSESSEE HAD DECLARED THE REVENUE ON ACCOUNT OF ON - SITE OVERSEAS AT RS. 498.624 MILLIONS . U NDER THE INCOME DECLARED IN THE PROFIT & LOSS ACCOUNT , THE INCOME UNDER THE SUB - H EAD EXPORT THE AMOUNT DECLARED WAS RS. 498.624 MILLIONS I.E. THOUGH IN THE PROFIT & LOSS ACCOUNT, IT IS REPORTED THAT THE ASSESSEE HAD EARNED INCOME FROM SOFTWARE DEVELOPMENT, TRAINING AND PRODUCT, BUT WHILE GIVING THE SEGMENTAL REPORTING ON ACCOUNT OF RE VENUE, THE ASSESSEE HAD DECLARED THE SAID REVENUE ARISING FROM ON - SITE OVERSEAS AT RS. 498.624 MILLIONS. FURTHER, AT PAGE 61.28 OF THE PAPER BOOK , EARNING AND OUT GO OF THE FOREIGN EXCHANGE IS ALSO DECLARED I.E. AGAINST TOTAL FOREIGN EXC HANGE EARNINGS OF R S.39.10 CRORES, THE FOREIGN EXCHANGE USED IS RS.37.45 CRORES. THE ABOVE RESULTS OF THE SAID CONCERN REFLECT THAT IT TO BE AN ON - SITE DEVELOPER. ON THE OTHER HAND, THE ASSESSEE BEFORE US IS PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATE ENTERPRI SES AND IS OFF - SITE DEVELOPER, WHICH ADMITTEDLY, IS DIFFERENT FROM ON - SITE DEVELOPER. ON THE OTHER HAND, THE CONCERN MAARS SOFTWARE INTERNATIONAL LIMITED HAS TOTAL RECEIPTS FROM ON - SITE OVERSEAS DEVELOPMENT I.E. ON ACCOUNT OF TRAINING AND PRODUCTS AND HEN CE, THE SAID CONCERN IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE. WE FIND SIMILAR ISSUE OF EXCLUSION OF MAARS SOFTWARE INTERNATIONAL LIMITED FROM THE FINAL SET OF COMPARABLES AROSE BEFORE THE TRIBUNAL IN TIBCO SOFTWARE INDIA PVT. LTD. VS. DCIT (SUPRA) , WHEREIN THE TRIBUNAL CONSIDERED THE SEGMENTAL REPORTING OF THE SAID CONCERN IN ASSESSMENT YEAR 2008 - 09 AND NOTED THAT THERE WAS NO SEGMENTAL DETAILS RELATING TO SOFTWARE DEVELOPMENT SERVICES THOUGH THE NOMENCLATURE STATED IN PROFIT & LOSS ACCOUNT WAS SOFT WARE DEVELOPMENT, TRAINING AND PRODUCT. AFTER CONSIDERING THE FINANCIALS OF THE SAID CONCERN, THE TRIBUNAL HELD THAT THE SAID CONCERN WAS NOT FUNCTIONALLY SIMILAR TO A CONCERN WHICH WAS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATE E NTERPRISES. THE RELEVANT FINDING OF THE TRIBUNAL IN PARAS 34 TO 36, WHICH READ AS UNDER: - ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 16 34. THE NEXT PLEA OF THE ASSESSEE WAS THAT THE LOWER AUTHORITIES HAVE UNJUSTLY EXCLUDED M/S. MAARS SOFTWARE INTERNATIONAL LIMITED FROM THE FINAL SET OF COMPARABLES. IN THIS CONTEXT, THE TPO HAS ASSIGNED REASONS FOR EXCLUDING THE SAID CONCERN IN PARA 15.3 OF HIS ORDER. FIRSTLY, AS PER THE TPO, THE SAID CONCERN WAS ENGAGED IN ON - SITE WORK OF SOFTWARE DEVELOPMENT AND THAT SUCH A BUSINESS COULD NOT BE CONSIDERED COMPAR ABLE WITH A BUSINESS WHICH WAS OF OFF - SHORE DEVELOPMENT WORK. SECONDLY, THE TPO NOTED THAT THE SAID CONCERN INCURRED LOSSES FOR THE PRECEDING AS WELL AS THE CURRENT ASSESSMENT YEAR. THIRDLY, THE TPO NOTED THAT THE MAJOR AREA OF REVENUE GENERATION OF THE SAID CONCERN WAS FROM SAP CONSULTING AND IMPLEMENTATION, WHICH IS QUITE DIFFERENT FROM THE FUNCTIONS UNDERTAKEN BY THE ASSESSEE. 35. ON THIS ASPECT, ASSESSEE HAS ATTEMPTED TO ASSAIL THE REASONS BEING ADVANCED BY THE TPO. WITH REGARD TO THE DIFFERENCE IN FUNCTIONS, THE POINT MADE BY THE ASSESSEE WAS THAT THE FACTUM OF THE SAID CONCERN EARNING MAJOR INCOME FROM SAP CONSULTING AND IMPLEMENTATION WAS NOT SUPPORTED WITH ANY FACTS AND FIGURES; THAT, IT WAS A MERE PASSING REFERENCE IN THE ANNUAL REPORT OF THE SA ID CONCERN AND THEREFORE, IT CANNOT BE CONSIDERED AS A VALID REASON FOR REJECTION OF THE SAID CONCERN ON THE BASIS OF IT BEING FUNCTIONALLY INCOMPARABLE. 36. IN THIS CONTEXT, WE HAVE PERUSED PAGE 1194 OF THE PAPER BOOK, WHEREIN IS PLACED THE RELEVANT CO NTENTS OF THE DIRECTORS REPORT OF SAID CONCERN FOR THE YEAR UNDER CONSIDERATION. THE DIRECTORS REPORT, WHILE GIVING AN OVERVIEW OF THE ACTIVITIES OF THE CONCERN, STATES THAT THE MAJOR AREA OF REVENUE GENERATION CONTINUES TO BE SAP CONSULTING AND IMPLEMENT ATION MAINLY IN USA AND MIDDLE EAST. IN FACT, IN THE PARAGRAPH CONTAINING OVERVIEW OF THE OPERATIONS, THE AFORESAID STATEMENT IS THE ONLY ASSERTION WHICH ELUCIDATES THE ACTIVITIES BEING UNDERTAKEN BY THE SAID CONCERN. NO DOUBT, IN THE FINANCIAL STATEMENT NAMELY PROFIT & LOSS ACCOUNT, THE INCOME / REVENUE HAS BEEN CLASSIFIED AS INCOME FROM SOFTWARE DEVELOPMENT, TRAINING AND PRODUCT SO HOWEVER, EVIDENTLY NO DETAILED BIFURCATION THEREOF IS AVAILABLE. THE ENTIRE SET OF FINANCIAL STATEMENTS WHICH ARE BIFURCATION THEREOF IS AVAILABLE. THE ENTIRE SET OF FINANCIAL STATEMENTS WHICH ARE IN PUB LIC DOMAIN, AND PLACED IN THE PAPER BOOK AT PAGES 1188 TO 1229, CONTAIN ONLY A SINGULAR OBSERVATION ABOUT THE NATURE OF ACTIVITIES, WHICH IS IN THE DIRECTORS REPORT, WHICH THROWS LIGHT ON THE MAJOR AREA OF REVENUE GENERATION. EVEN IF ONE GOES BY THE NOMEN CLATURE STATED IN THE PROFIT & LOSS ACCOUNT I.E. SOFTWARE DEVELOPMENT, TRAINING AND PRODUCT AND PRODUCT, AND INFER THAT THE CONCERN IS IN THE SOFTWARE DEVELOPMENT ALSO, YET THERE IS NO SEGMENTAL DETAIL RELATING TO SOFTWARE DEVELOPMENT SERVICES, LEAVE ALONE THE DETAILS SHOWING THE ACTUAL ACTIVITIES OF SOFTWARE DEVELOPMENT. THEREFORE, IN OUR VIEW, THE TPO JUSTIFIABLY EXCLUDED THE SAID CONCERN BECAUSE IT IS ONLY THE INFORMATION AVAILABLE IN PUBLIC DOMAIN, WHICH CAN BE THE BASIS TO EFFECTUATE COMPARABLE ANALYS IS. THE ASSERTIONS IN THE DIRECTORS REPORT, WHICH DO NOT FIND ANY CONTRADICTION IN THE OTHER FINANCIAL STATEMENTS ACCOMPANYING SUCH DIRECTORS REPORT, HAVE TO BE RELIED UPON. THUS, ON THIS POINT ITSELF, WE FIND NO MERIT IN THE PLEA OF THE ASSESSEE FOR INC LUDING THE SAID CONCERN IN THE FINAL SET OF COMPARABLES. WITHOUT GOING INTO THE OTHER GROUNDS TAKEN BY THE TPO TO REJECT THE SAID CONCERN, ON THE AFORESAID ASPECT ITSELF, WE AFFIRM THE STAND OF THE TPO TO EXCLUDE M/S. MAARS SOFTWARE INTERNATIONAL LIMITED FROM THE FINAL SET OF COMPARABLES. THUS, ON THIS ASPECT, ASSESSEE HAS TO FAIL. 28 . SIMILARLY, M/S. AKSHAY SOFTWARE TECHNOLOGIES LIMITED WAS PROVIDING ON - SITE SERVICES AND WERE HELD TO BE NOT FUNCTIONALLY SIMILAR AND IT WAS OBSERVED THAT THE BUSINESS MOD EL OF THE SAID ASSESSEE I.E. PROVISION OF OF - S HORE TO ITS ASSOCIATE ENTERPRISES STOOD ON DIFFERENT FOOTING THAN ON - SITE SERVICES BEING RENDERED BY M/S. AKSHAY SOFTWARE TECHNOLOGIES LIMITED . THE TRIBUNAL FURTHER HELD AS UNDER: - ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 17 40. .. THE ASSERTIONS OF TH E ASSESSEE THAT ITS ARRANGEMENT WITH ASSOCIATED ENTERPRISE DOES NOT RULE OUT PROVISION OF ON - SITE SERVICES DOES NOT DISTRACT FROM THE FACT THAT THE TESTED TRANSACTIONS UNDERTAKEN BY THE ASSESSEE INVOLVE OFF - SHORE RENDERING OF SERVICES, WHICH IS INCOMPARABL E TO THE ON - SITE SERVICES BEING RENDERED BY AKSHY SOFTWARE TECHNOLOGIES LIMITED TO ITS CLIENTS ABROAD. 29 . THE FACTS AND ISSUE BEFORE US ARE IDENTICAL THOUGH THE YEAR BEFORE THE TRIBUNAL IN TIBCO SOFTWARE INDIA PVT. LTD. VS. DCIT (SUPRA) WAS ASSESSMENT Y EAR 2008 - 09 . W E FIND THAT THERE IS NO DIFFERENCE IN THE REPORTING OF THE REVENUE BY MAARS SOFTWARE INTERNATIONAL LIMITED IN THE YEAR UNDER APPEAL ALSO. APPLYING THE SAID RATIO TO THE FACTS OF THE PRESENT CASE, WHERE THE ASSESSEE BEFORE US IS PROVIDING OF F - SHORE SERVICES TO ITS ASSOCIATE ENTERPRISES, ITS MARGINS COULD NOT BE COMPARED WITH A CONCERN, WHICH IS ENGAGED IN ON - SITE DEVELOPMENT. ACCORDINGLY, WE HOLD THAT MAARS SOFTWARE INTERNATIONAL LIMITED IS FUNCTIONALLY VERY DIFFERENT FROM THE ASSESSEE BEFOR E US AND THE SAID CONCERN IS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. 3 0 . THE NEXT OBJECTION OF THE ASSESSEE WAS TO THE CONCERN S WHICH W ERE SELECT ED BY THE TPO IN ITS ANALYSIS AND THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OU T THAT THE TW O CONCERNS ICSA (INDIA) LTD. AND HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD . ARE TO BE EXCLUDED. ANOTHER CONCERN TO WHICH THE OBJECTION WAS RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS AZTECSOFT LTD. THE ISSUE RA ISED BY THE ASSESSEE BEFORE US IS THE EXCLUSION OF ICSA (INDIA) LTD. THE OBJECTION OF THE ASSESSEE TO ITS INCLUSION IS THAT THE SAID CONCERN WAS ENGAGED IN CONCEPTUALIZING, DEVELOPING AND MANUFACTURING OF EMBEDDED SOFTWARE, WHERE THE VALUE ADDITION WAS CO MPLETELY DIFFERENT. FURTHER, THE SAID CONCERN WAS SPENDING 4.5% OF ITS REVENUE ON R & D, WHEREAS, THE ASSESSEE HAD NOT INCURRED ANY R & D EXPENDITURE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ALSO POINTED OUT THAT THERE WAS SUBSTANTIAL JOB WORK UNDERTAKEN BY THE SAID CONCERN AND HENCE NOT COMPARABLE TO THE FUNCTIONS OF ASSESSEE BEFORE US. ANOTHER OBJECTION OF THE LEARNED ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 18 AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT IT WAS AN EXCEPTIONAL YEAR, CONSIDERING ITS GROWTH I.E. THE RATE OF G ROWTH IN RESPECT OF PBT WAS 302.70% FOR THE YEAR. THE TPO HOWEVER, NOTED THAT THE SAID CONCERN WAS IN THE BUSINESS OF SOFTWARE AND EMBEDDED SYSTEM DEVELOPMENT ACTIVITY IN THE POWER AND POWER RELATED SECTORS. SINCE THE EMBEDDED SOLUTION CONSISTED OF COMBI NATION OF HARDWARE AND SOFTWARE SOLUTIONS, THUS, THE TYPE OF SERVICES WERE SIMILAR TO WHAT WAS PROVIDED BY THE ASSESSEE COMPANY AND HENCE, THE SAID COMPANY WAS COMPARABLE TO THE ASSESSEE COMPANY. 31. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSE E POINTED OUT THAT THE TPO HAD FAILED TO CONSIDER THE NATURE OF OPERATIONS AND THE OBJECTIONS RAIS ED BY THE ASSESSEE IN THIS REGARD . WITH REGARD TO THE DIRECTORS REPORT , IT WAS POINTED OUT THAT IT ONLY TALKS OF INCREASE IN TURNOVER. THE LEARNED AUTHORIZE D REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT BECAUSE OF EXCEPTIONAL GROWTH OF SAID CONCERN DURING THE YEAR, THE SAME WAS NOT COMPARABLE. ANOTHER ISSUE RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS IN RESPECT OF R&D EXPENSES BEING 4.5% FOR THE YEAR AND IT WAS POINTED OUT THAT IN BIND VIEW INDIA PVT. LTD. VS. DCIT IN ITA NO.1501/PN/2011, RELATING TO ASSESSMENT YEAR 2005 - 06 , ORDER DATED 26.06.2014 , THE TRIBUNAL HAD HELD THAT ICSA (INDIA) LTD. WAS NOT COMPARABLE . RELIANCE WAS PLACED O N THE SAID DECISION THOUGH THE YEAR UNDER APPEAL WAS ASSESSMENT YEAR 2005 - 06 . SIMILARLY, IN PTC SOFTWARE (INDIA) PVT. LTD. VS. ACIT IN ITA NO.160 5 /PN/2011, RELATING TO ASSESSMENT YEAR 2007 - 08, ORDER DATED 30.04.2013, WHERE THE TPO HAD ACCEPTED THE CUT OFF OF 3%, BUT THE TRIBUNAL HAD HELD THAT ICSA (INDIA) LTD. WAS NOT COMPARABLE ON ACCOUNT OF ITS R&D EXPENSES, WHICH WERE ABOVE THE FILTER OF 3% ADOPTED FOR THE PURPOSE OF COMPARABILITY ANALYSIS. ANOTHER POINT RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT MOST OF WORK OF ICSA (INDIA) LTD. WAS OUTSOURCING. ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 19 3 2 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE SUPPORTING THE ORDER OF TPO POINTED OUT THAT THE SOFTWARE IS SOFTWARE WHETHER EMBEDDED OR NOT AND SOFTWARE FOR ANY PUR POSES WAS ONE PARTICULAR ACTIVITY. OUR ATTENTION WAS DRAWN TO THE SEGMENTAL AVAILABLE AT PAGE 62.39 OF THE P APER B OOK AND IT WAS POINTED OUT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE THAT DOMINANTLY, THE SAID CONCERN WAS A SOFTWARE COMPAN Y. OBJECTING TO THE SUBMISSIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT WHERE THERE IS OUTSOURCING , MARGINS GO DOWN, BUT IN THE CASE OF SAID CONCERN PROFITS ARE SUBSTANTIAL. 3 3 . THE LEARNED AUTHORIZED REP RESENTATIVE FOR THE ASSESSEE IN REJOINDER SUBMITTED THAT THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IS INCORRECT THAT THE SOFTWARE IS SOFTWARE I.E. EMBEDDED OR NOT. OUR ATTENTION WAS DRAWN TO THE SEGMENTAL AT PAGE 62.39 OF T HE PAPER BOOK , WHERE AS AGAINST THE REVENUE OF RS.76.63 CRORES, THE PURCHASES WERE TO THE TUNE OF RS.56.01 CRORES AND THERE WAS STOCK OF SOFTWARE DECLARED BY THE ASSESSEE AT PAGE 62.41 OF THE PAPER BOOK . 3 4 . AFTER CONSIDERING VARIOUS ARGUMENTS RAISED BY BOTH THE AUTHORIZED REPRESENTATIVES VIS - A - VIS THE CONCERN ICSA (INDIA) LTD. , THE FIRST OBJECTION IS THAT IT IS NOT FUNCTIONALLY COMPARABLE AND THE SECOND OBJECTION IS THAT ITS R&D EXPENDITURE IS 4.5% OF REVENUE. THE TPO REJECTED THE PLEA OF THE ASSESSEE OF NOT INCLUDING THE SAID CONCERN IN THE FINAL SET OF COMPARABLES ON THE SAID BASIS OF R&D EXPENDITURE BEING MORE THAN 3% OF REVENUE. HOWEVER, WE FIND THAT THE TRIBUNAL IN BIND VIEW INDIA PVT. LTD. VS. DCIT (SUPRA) AND THEREAFTER, IN PTC SOFTWARE (INDIA) P VT. LTD VS. ACIT (SUPRA) , HAVE LAID DOWN THE PROPOSITION THAT WHERE THE R&D FILTER IS MORE THAN 3% AS AGAINST THE ASSESSEE WHO HAS NOT INCURRED ANY R&D EXPENDITURE, THEN THE SAID CONCERN IS NOT TO BE TAKEN IN THE FINAL LIST OF COMPARABLES. THE RELEVANT FI NDING OF THE TRIBUNAL IN PTC SOFTWARE ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 20 (INDIA) PVT. LTD VS. ACIT (SUPRA) RELATING TO ASSESSMENT YEAR 2007 - 08 , WHEREIN THE INFORMATION OF ASSESSMENT YEAR 2006 - 07 WAS ALSO CONSIDERED IS AS UNDER: - 21. THE ASSESSEE HAS ASSAILED THE INCLUSION OF ICSA INDIA LTD ., APPEARING AT ITEM (2) IN THE TABULATION IN PARA 10 AS A COMPARABLE BY THE TPO. IN THIS CONTEXT, THE RELEVANT DISCUSSION BY THE TPO IS CONTAINED IN PARA 6.3.23 OF THE ORDER AND THE ANNUAL FINANCIAL STATEMENTS OF THE SAID CONCERN HAVE ALSO BEEN PLACED IN THE PAPER BOOK AT PAGES 246 TO 327 OF THE PAPER BOOK. THE TPO NOTICED THAT IN THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE THE SAID CONCERN WAS EXCLUDED/REJECTED BY APPLYING THE QUANTITATIVE FILTER OF RESEARCH AND DEVELOPMENT EXPENDITURE BEING IN EXCESS OF 3% OF SALES. THE TPO HAS NOT DIFFERED WITH THE ADOPTION OF THE QUANTITATIVE FILTER FOR R&D EXPENSES, SO HOWEVER, ACCORDING TO HIM THE RESEARCH AND DEVELOPMENT EXPENDITURE INCURRED BY THE SAID CONCERN FOR THE F.Y. 2006 - 07 IS 6,71,86,184/ - WHICH IS 2.02% OF THE TOTAL TURNOVER OF THE CONCERN AND THEREFORE, IT IS WITHIN THE THRESHOLD OF THE QUANTITATIVE FILTER OF 3% OF SALES ADOPTED BY THE ASSESSEE, AND ACCORDINGLY HE INCLUDED THE SAID CONCERN IN THE LIST OF COMPARABLES. THE TPO ALSO DISAGREED WITH TH E CONTENTION OF THE ASSESSEE RAISED BEFORE HIM THAT THE SAID CONCERN WAS FUNCTIONALLY DISSIMILAR. THE TPO HAS NOTICED BY REFERRING TO THE ANNUAL REPORT FOR THE F.Y. 2006 - 07 THAT IT HAS TWO DISTINCT SEGMENTS, NAMELY (I) SOFTWARE SERVICES AND EMBEDDED SOLUTI ONS; AND, (II) PRODUCTS AND PROJECTS RELATED TO POWER SECTOR. THE TPO CONSIDERED THE SOFTWARE SERVICES SEGMENT AS A COMPARABLE TO ASSESSEES SEGMENT OF IT - SERVICES AND THEREFORE HE INCLUDED THE SAID CONCERN IN THE LIST OF COMPARABLES. 22. IN THIS CONTEXT, THE LD. COUNSEL HAS REFERRED TO THE ANNUAL FINANCIAL STATEMENTS OF THE CONCERN TO POINT OUT THAT THE TOTAL RESEARCH AND DEVELOPMENT EXPENDITURE OF RS.6,71,86,184/ - INCURRED BY THE SAID CONCERN IS IN RELATION TO THE EMBEDDED SOLUTIONS SEGMENT ONLY, AND IN THIS CONNECTION A REFERENCE HAS BEEN MADE TO THE DIRECTORS REPORT, A COPY OF WHICH IS APPEARING AT PAGE 268 OF THE MADE TO THE DIRECTORS REPORT, A COPY OF WHICH IS APPEARING AT PAGE 268 OF THE PAPER BOOK. IT IS POINTED OUT THAT IN ORDER TO CALCULATE THE RATIO OF R&D EXPENSES TO TOTAL SALES, IT HAS TO BE CALCULATED WITH REFERENCE TO THE SALES IN SOFTWARE SERVICES AND EMBEDDED SOLUTIONS SEGMENT OF THE SAID CONCERN, BECAUSE THE R&D EXPENSES PERTAIN ONLY TO THIS SEGMENT. IN THIS CONNECTION A REFERENCE HAS BEEN MADE TO PAGE 297 OF THE PAPER BOOK WHICH GIVES THE BREAK - UP OF THE SALES IN D IFFERENT SEGMENTS AND AFTER CONSIDERING THE R&D EXPENSES OF RS.6,71,86,184/ - VIS - - VIS THE SALES IN SOFTWARE SERVICES/EMBEDDED SERVICES SEGMENT, THE PERCENTAGE COMES TO 3.84%. THE LD. COUNSEL POINTED OUT THAT THE PERCENTAGE OF 2.04% OF R&D EXPENDITURE COMP UTED BY THE TPO WAS AFTER CONSIDERING THE TOTAL TURNOVER OF THE SAID CONCERN INCLUDING THAT OF THE PRODUCT AND PROJECTS RELATED TO POWER SECTOR SEGMENT. IT IS SUBMITTED THAT THE AFORESAID ACTION OF THE TPO IS WRONG, FIRSTLY THE R&D EXPENDITURE HAS BEEN INC URRED ONLY FOR THE SOFTWARE SERVICES/EMBEDDED SERVICES SEGMENT, AND SECONDLY, IT IS WRONGLY COMPARED WITH TOTAL TURNOVER WHICH INCLUDED THE TURNOVER OF PRODUCTS AND PROJECTS RELATED TO POWER SECTOR SEGMENT WHEREAS THE TPO HAS ONLY ADOPTED THE SOFTWARE SERV ICES/EMBEDDED SERVICES SEGMENT FOR THE PURPOSES OF COMPARABILITY ANALYSIS. FACTUALLY SPEAKING, WE FIND NO REASONS TO DISAGREE WITH THE PLEA SET UP BY THE ASSESSEE. EVIDENTLY, THE TPO HAS NOT DISPUTED THE ADOPTION OF QUANTITATIVE FILTER OF 3% OF R&D EXPENSE S. HOWEVER, THE TPO COMPUTED THE R&D EXPENDITURE AT 2.02% OF THE TOTAL SALES WHICH IS OSTENSIBLY INCORRECT IN AS MUCH AS THE EXPENDITURE IN QUESTION HAS BEEN INCURRED ONLY FOR THE SOFTWARE SERVICES/EMBEDDED SERVICES SEGMENT (WHICH HAS BEEN ADOPTED AS COMPA RABLE SEGMENT) AND IT CANNOT BE COMPARED VIS - - VIS THE TOTAL TURNOVER WHICH INCLUDES THE PRODUCTS AND PROJECTS RELATED TO POWER SECTOR SEGMENT, WHEN FACTUALLY NO R&D EXPENSES HAVE BEEN INCURRED FOR THE LATTER SEGMENT. THEREFORE, WITHOUT GOING INTO THE MERI TS OF THE ASSESSEES OTHER PLEA THAT THE SAID CONCERN IS FUNCTIONALLY DISSIMILAR, WE DO NOT FIND ANY JUSTIFICATION FOR INCLUSION OF THE SAID CONCERN CONSIDERING THAT R&D EXPENSES ARE ABOVE THE FILTER OF 3% ADOPTED FOR THE PURPOSES OF THE COMPARABILITY ANAL YSIS. THUS ON THIS ASPECT THE ASSESSEE SUCCEEDS. ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 21 3 5 . ADMITTEDLY, IN THE FACTS OF THE PRESENT CASE, R&D EXPENDITURE IS 4.5% OF THE REVENUE AND FOLLOWING THE PARITY OF REASONING AS LAID DOWN BY THE PUNE BENCH OF TRIBUNAL IN PTC SOFTWARE (INDIA) PVT. LTD VS . ACIT (SUPRA) WE HOLD THAT THERE IS NO JUSTIFICATION FOR THE INCLUSION OF SAID CONCERN IN THE FINAL SET OF COMPARABLES CONSIDERING THAT THE R&D EXPENDITURE WAS ABOVE FILTER OF 3% . THE OTHER OBJECTION RAISED BY THE ASSESSEE THAT THE SAID CONCERN IS NOT FU NCTIONALLY SIMILAR AND THE YEAR OF OPERATION WAS EXCEPTIONAL YEAR CONSIDERING ITS GROWTH IS NOT BEING TAKEN UP SINCE WE ARE OF THE VIEW THAT THE SAID CONCERN IS NOT TO BE INCLUDED IN THE FINAL SET OF COMPARABLES ON THE ASPECT OF R&D EXPENDITURE. ACCORDING LY, WE DIRECT THE TPO TO EXCLUDE ICSA (INDIA) LTD. 3 6 . THE NEXT CONCERN TO WHICH THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS RAISED OBJECTION IS HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. THE FIRST OBJECTION RAISED BY THE LEARNED AUTH ORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD IS THAT THE TURNOVER OF THE SAID CONCERN WAS ABOVE THE FILTER APPLIED BY THE ASSESSEE COMPANY I.E. RS.120 CRORES AND THE SAID CONCERN HAD EXTREMELY HIGH PROFITS AND ALSO THIS WAS AN EXCEPTIONAL YEAR OF REVENUE AND PROFITS. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ALSO REFERRED TO THE NATURE OF SERVICES UNDERTAKEN BY THE SAID CONCERN AND IT WAS POINTED OUT THAT THE SAME WAS FUNCTIONALLY DIFFERENT. 3 7 . ANOTHER OBJECTION RAISED BY THE LEAR NED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT ORIENT INFORMATION TECHNOLOGIES LIMITED WAS EXCLUDED BY THE TPO BECAUSE OF ITS HIGH TURNOVER AND IN CASE THE SAME IS TO BE EXCLUDED, THEN EVEN HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. IS TO BE EXCLUDED OR ON THE OTHER HAND, BOTH THE CONCERNS ARE TO BE INCLUDED. ANOTHER ISSUE RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WITH REGARD TO THE SAID CONCERN WAS THA T IT WAS ENGAGED IN SIGNIFICANT ON - SITE DEVELOPMENT AND OUR ATTENTIO N WAS DRAWN TO THE FINANCIALS OF THE SAID CONCERN, WHEREIN AT PAGE 63.62 ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 22 OF THE PAPER BOOK, IT IS REPORTED THAT IT HAS STRONG US PRESENCE AND WAS ENGAGED IN ON - SITE AND OFF - SHORE ACTIVITIES. FURTHER, I F FOREIGN EARNINGS AND FOREIGN OUTGO WERE TAKEN, THEN SIMILAR BASIS IS TO BE APPLIED AS FOR EXCLUSION OF MAARS SOFTWARE INTERNATIONAL LIMITED . 3 8 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE SAID CONCERN WAS ENGAGED IN ON - SITE DEVELOPMENT. 39 . WE HAVE ALREADY CONSIDERED THE ISSUES IN THE PARAS HEREINABOVE WHILE DIRECTING THE TPO TO EXCLUDE MAARS SOFTWARE INTERNATIONAL LIMITED . S INCE THE CONCERN HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. WAS ALSO ENGAGED IN ON - SITE DEVELOPMENT AND ITS FOREIGN EXCHANGE EARNINGS WERE T O THE EXTENT OF RS.101.64 CRORES AS AGAINST ITS FOREIGN OUTGO OF ABOUT RS.75 CRORES, THE SAID CONCERN IS ON - SITE DEVELOPER, WHICH IS REPORTED BY THE SAID CONCERN IN ITS AUDIT REPORT, WHEREIN IT IS STATED THAT IT HAS STRONG US PRESENCE. APPLYING THE SAID R ATIONAL E AS WHILE EXCLUDING MAARS SOFTWARE INTERNATIONAL LIMITED FROM THE FINAL LIST OF COMPANIES, WE HOLD THAT EVEN HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. IS TO BE EXCLUDED WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. WE AR E NOT EXCLUDING THE SAID CONCERN FOR ITS TURNOVER BUT SINCE IT IS FUNCTIONALLY DISSIMILAR. 4 0 . ANOTHER SET OF ARGUMENTS RAISED BY THE ASSESSEE WERE WITH REGARD TO TURNOVER FILTER TO BE APPLIED. AS PER THE ASSESSEE, IN VIEW OF TURNOVER FILTER APPLIED BY IT IN ITS TP STUDY REPORT, CERTAIN CONCERNS HAD TO BE EXCLUDED HAVING HIGH TURNOVER. IN THIS REGARD, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT BOTH HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. AND AZTECSOFT LTD. ARE TO BE EXCLUDED OF HAVING TURNOVER MORE THAN RS.100 CRORES, WHERE THE ASSESSEE HAD ADOPTED A RANGE OF INR 25 CRORES TO INR 100 CRORES. THE TPO WHILE BENCHMARKING INTERNATIONAL TRANSACTION OF THE ASSESSEE ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 23 HAD INCREASED THE RANGE OF QUANTITATIVE SEARCH TO BE BETW EEN INR 25 CRORES AND INR 150 CRORES. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE STRONGLY OBJECTED TO THE PROPOSITION RAISED BY THE ASSESSEE IN THIS REGARD. IN VIEW OF LEGAL POSITION SETTLED BY VARIOUS DECISIONS OF TRIBUNAL IN THIS REGARD, W E UPHOLD THE ORDER OF ASSESSING OFFICER IN ADOPTING THE RANGE OF TURNOVER TO BE BETWEEN INR 25 CRORES TO INR 150 CRORES. THE TWO CONCERNS WHICH WERE INTRODUCED BY THE TPO WERE HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. , WHICH HAD TURNOVER OF INR118.3 3 CRORES AND AZTECSOFT LTD. OF INR 128.61 CRORES. THE RELATED ARGUMENT RAISED BY THE ASSESSEE WAS THAT IN CASE THE ABOVE TWO CONCERNS ARE ACCEPTED AS COMPARABLE, THEN EVEN ORIENT INFORMATION TECHNOLOGIES LTD. SHOULD BE ACCEPTED AS A COMPARABLE. FURTHER, IT WAS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT IN CASE THE TURNOVER FILTER IS TO BE APPLIED EVEN MAARS SOFTWARE INTERNATIONAL LIMITED AND QUINTEGRA SOLUTION LIMITED WOULD FALL WITHIN THE RANGE. 41. ON THE PERUSAL OF RECO RD , WE FIND IN THE PARAS HEREINABOVE THAT HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. , MAARS SOFTWARE INTERNATIONAL LIMITED AND QUINTEGRA SOLUTION LIMITED BEING NOT FUNCTIONALLY SIMILAR, HAVE TO EXCLUDED AND DESPITE THE FACT THAT IT FALLS WITHIN THE RA NGE, BUT BECAUSE ITS FUNCTIONS WERE DISSIMILAR, THE SAID CONCERNS ARE NOT TO BE INCLUDED IN THE FINAL SET OF COMPARABLES. FURTHER, WE ALSO HELD THAT HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD . BEING ENGAGED IN ON - SITE DEVELOPMENT SERVICES AS MAARS SOFTWARE INTERNATIONAL LIMITED , IS NOT TO BE INCLUDED IN THE FINAL SET OF COMPARABLES. THE TWO CONCERNS WHICH ARE LEFT IN THE LIST ARE AZTECSOFT LTD. AND ORIENT INFORMATION TECHNOLOGIES LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON THE LAST DATE OF HEARING FAIRLY CONCEDED THAT AZTECSOFT LTD. MAY BE INCLUDED AS COMPARABLE AND IN CASE AZTECSOFT LTD. IS SO INCLUDED, THEN THE CONCERN PICKED UP BY THE ASSESSEE IN ITS TP STUDY REPORT I.E. ORIENT INFORMATION TECHNOLOGIES LTD. IS ALSO TO BE INCLUDED IN THE FINAL SET OF COMPARABLES. IN VIEW ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 24 THEREOF, APPLYING THE SAID TURNOVER FILTER RANGE OF RS.25 CRORES TO RS.150 CRORES, WE DIRECT THE ASSESSING OFFICER / TPO TO INCLUDE BOTH THE CONCERNS I.E. AZTECSOFT LTD. AND ORIENT INFORMATION TECHNOLOGIES LTD. IN THE FINAL SET OF COMPARABLES. IT MAY BE POINTED OUT THAT THE CONCERN HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD ., WHICH WAS INCLUDED BY THE TPO IS BEING EXCLUDED BEING FUNCTIONALLY DISSIMILAR AND IS NOT BEING EXCLUDED ON THE BASIS OF TURNOVER. THE AS SESSING OFFICER / TPO IS THUS, DIRECTED TO BENCHMARK INTERNATIONAL TRANSACTION BY USING THE MARGINS OF FOLLOWING CONCERNS: - I) R S SOFTWARE (INDIA) LIMITED II) GOLDSTONE TECHNOLOGIES LTD. III) AZTECSOFT LTD. IV) ORIENT INFORMATION TECHNOLOGIES LIMITED 4 2 . NOW, COMING TO THE PLEA OF ASSESSEE OF ALLOWING RISK ADJUSTMENT. IT WAS THE CASE OF ASSESSEE BEFORE US THAT SINCE IT WAS PRICING ITS SERVICES AT COST PLUS MARK - UP AND WAS MAKING SUPPLIES TO ITS ASSOCIATE ENTERPRISES, THERE WAS NO RISK TAKEN BY THE ASS ESSEE. HOWEVER, RISK ADJUSTMENT WAS TO BE ALLOWED IN THE CASE OF COMPARABLES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TPO NOWHERE IN ITS ORDER HAD STATED THAT THE COMPARABLES WERE RISK MITIGATED. THE LEARNED AUTHORIZE D REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD PLACED RELIANCE ON THE RATIO LAID DOWN BY PUNE BENCH OF TRIBUNAL IN SCHLUMBERGER GLOBAL SUPPORT CENTRE LIMITED VS. DDIT IN ITA NO.86/PN/2013, RELATING TO ASSESSMENT YEAR 2009 - 10, ORDER DATED 30.10.2015. 4 3 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, POINTED OUT THAT THERE WERE VARIOUS TYPES OF RISKS, WHICH HAVE TO BE QUANTIFIED AND IN THE ABSENCE OF DETAILS PROVIDED BY THE ASSESSEE, THE SAME IS NOT TO BE ALLOWED. ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 25 44 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE PLEA RAISED VIDE THIS PROPOSITION IS THE ALLOWANCE OF RISK ADJUSTMENT TO THE ASSESSEE. THE ASSESSEE CLAIMS THAT ITS BUSINESS MODEL WAS SUCH, WHEREIN IT IS BEING REIMBURSED THE SERVICES AT COST PLUS MARK - UP AND THERE WAS NO POSSIBILITY OF INCURRING ANY LOSSES SINCE IT WAS PROVIDING THE SERVICES TO ITS ASSOCIATE ENTERPRISES TOTALLY. WITH REGARD TO THE COMPARABLES, THE CLAIM OF THE ASSESSEE BEFORE US IS THAT THEY ARE NORMAL RISK BEARING ENTITIES AND TH E TPO AT NO PLACE HAS GIVEN A FINDING THAT COMPARABLE CONCERNS PICKED UP WERE RISK MITIGATED. IN SUCH CIRCUMSTANCES, VARIOUS BENCHES OF TRIBUNAL IN THE CASE OF CAPTIVE SERVICE PROVIDER, ARE OF THE VIEW THAT SINCE CAPTIVE SERVICE PROVIDER DOES NOT ASSUME A NY RISK OR TAKES LESSER RISK AS COMPARED TO THE CONCERNS, WHICH UNDERTAKE HIGHER RISK, THEN THE RISK ADJUSTMENT IS TO BE ALLOWED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD HAS PLACED ON RECORD THE METHODOLOGY PRESCRIBED BY BANG ALORE BENCH OF TRIBUNAL IN PHILIPS SOFTWARE CENTRE INDIA PVT. LTD. VS. ACIT (2008) 119 TTJ (BANG) 721. FURTHER, THE ASSESSEE HAS ALSO SUBMITTED THE RISK ADJUSTMENT TO BE MADE AS PER THE METHODOLOGY PRESCRIBED BY DELHI BENCH OF TRIBUNAL IN M/S. SONY INDIA (P) LTD. VS. DCIT (2008) 114 ITD 448. IN VIEW OF THE PROVISIONS OF SECTION 10B OF THE ACT, WE RESTORE THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER / TPO TO COMPUTE RISK ADJUSTMENT AFTER AFFORDING REASONABLE OPPORTUNITY TO THE ASSESSEE TO WORK OUT AND JUSTIFY TO THE SATISFACTION OF ASSESSING OFFICER, THE RISK ADJUSTMENT IT WOULD BE ENTITLED TO. WE HOLD SO. THE ISSUE RAISED IS THUS, ALLOWED FOR STATISTICAL PURPOSES. 4 5 . THE NEXT CONTENTION OF THE ASSESSEE WITH REGARD TO THE WORKING OF PROFIT BEFORE DE PRECIATION AND THE ALLOWABILITY OF ITS ADJUSTMENT. 4 6 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT TO THE NEXT PROPOSITION OF COMPUTATION OF PLI. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT THE PROFITS SHOULD BE TAKEN BEFO RE DEPRECIATION AND SIMILARLY, ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 26 THE PROFITS OF COMPARABLES SHOULD BE TAKEN BEFORE DEPRECIATION. IN THIS REGARD, HE POINTED OUT THAT THE MARGINS OF ASSESSEE COMPANY WE RE CALCULATED ON THE BASIS OF INDIAN GAAP, BUT DEPRECIATION RATES UNDER US LAWS WERE HIGHE R AND HENCE, IT AFFECT ED THE MARGINS OF ASSESSEE COMPANY AS IT WAS ADOPTING COST PLUS METHOD. IN THIS REGARD, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY MUMBAI BENCH OF TRIBUNAL IN CONSOLIDATED ORDER DATED 25.01.2012 WITH LEAD ORDER IN ACIT VS. M/S. AG ILITY LOGISTICS PVT. LTD. IN ITA NO.2000/MUM/2010, RELATING TO ASSESSMENT YEAR 2004 - 05 . 4 7 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, SUBMITTED THAT IN CASE EACH AND EVERY EXPENDITURE IS PICKED UP, THEN WHAT IS THE USE O F TNMM METHOD. HE FURTHER POINTED OUT THAT THE ASSESSEE HIMSELF IN ITS TP STUDY HAD ADOPTED THE PLI AFTER DEPRECIATION AND IN ANY CASE, WITHOUT DEPRECIATION COMMERCIAL PROFITS COULD NOT BE WORKED OUT. 4 8 . IN REJOINDER, THE LEARNED AUTHORIZED REPRESENTATI VE FOR THE ASSESSEE POINTED OUT THAT THOUGH IN THE TP REPORT, IT HAD ADOPTED PLI AFTER DEPRECIATION, BUT BEFORE THE TPO, OBJECTIONS WERE RAISED WHICH HAVE NOT BEEN CONSIDERED. 4 9 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. FOR BENCHMARKI NG ITS INTERNATIONAL TRANSACTIONS, THE ASSESSEE HAS APPLIED TNMM METHOD, WHICH ADMITTEDLY TAKES CARE OF MANY DISSIMILARITIES. THE CASE OF THE ASSESSEE BEFORE US IS THAT SINCE IT WAS PRICING ITS SERVICES AT COST WITH MARK - UP, HENCE, ITS MARGINS ARE TO BE C ALCULATED BY TAKING PROFITS BEFORE DEPRECIATION. SINCE THE MARGINS OF THE ASSESSEE ARE CALCULA TED ON THE BASIS OF INDIAN GAAP, WHEREAS THE DEPRECIATION RATES UN DER US LAWS WERE ON HIGHER SIDE, THE SAME WERE AFFECTED. IT MAY BE POINTED OUT HERE THAT THE A SSESSEE IN ITS TP STUDY HAD ADOPTED THE PLI AFTER DEPRECIATION . THE CASE OF THE ASSESSEE BEFORE US WAS THAT WHERE IT WAS ADOPTING COST PLUS 10% FOR BILLING THE SOFTWARE SERVICES PROVIDED BY IT TO ITS ASSOCIATE ENTERPRISES, THE OPERATING PROFITS REFLECTED IN THE BOOKS OF ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 27 ACCOUNT OF THE ASSESSEE WERE LOWER ON ACCOUNT OF TIMING DIFFERENCE OF DEPRECIATION, WHICH WOULD EVENTUALLY EVEN OUT OVER PERIOD OF TIME. AS PER THE ASSESSEE, OPBDIT SHOULD BE USED AS P L I FOR THE PURPOSE OF COMPARING OPERATING MARGINS OF BM C INDIA WITH THE OPERATING MARGINS OF COMPARABLE COMPANIES. IN VIEW OF OUR DECIDING OTHER ASPECTS OF TRANSFER PRICING ADJUSTMENT, WE ARE OF THE VIEW THAT FINAL ADJUSTMENTS , IF ANY, WOULD FALL WITHIN + / - 5% RANGE AND NO ADJUSTMENT IS TO BE MADE TO INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE. ACCORDINGLY, WE DO NOT ADDRESS THE ISSUE OF EXCLUSION OF DEPRECIATION FROM OPERATING COST WHILE BENCHMARKING INTERNATIONAL TRANSACTION OF THE ASSESSEE AT PRESENT . 5 0 . ANOTHER PROPOSITION RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT WHERE THE COMPANIES ARE ENTITLED TO DEDUCTION UNDER SECTION 10 A OF THE ACT, NO ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING IS TO BE MADE. RELIANCE IN THIS REGARD WAS PLACED UPON THE RATIO LAID DOWN BY MUMBAI BENCH OF TRIBUNAL IN DCIT VS. M/S. TATA CONSULTANCY SERVICES LTD. IN ITA NO.7513/MUM/2010 AND CO NO.216/MUM/201 0, RELATING TO ASSESSMENT YEAR 2005 - 06, ORDER DATED 04.11.2015 . 5 1 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, POINTED OUT THAT IF THERE IS NO QUESTION OF ANY TP ADJUSTMENT, THEN WHY THE SECTION 10A OF THE ACT ITSELF PROVID ES THAT NO SUCH DEDUCTION IS TO BE ALLOWED ON TP ADJUSTMENT. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE SPECIAL BENCH IN AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD. VS. ACIT REPORTED IN 294 ITR AT 32 FOLLOWED BY PUNE BENC H OF TRIBUNAL IN ACIT VS. MSS INDIA PVT. LTD. IN ITA NO.393/PN/2007 , RELATING TO ASSESSMENT YEAR 2003 - 04, ORDER DATED 19.05.2009 HAS TAKEN A VIEW THAT THE RATIO IS SQUARELY APPLICABLE. ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 28 5 2 . AFTER CONSIDERING CONTENTIONS OF BOTH THE LEARNED AUTHORIZED REP RESENTATIVES, WE FIND THAT THE ISSUE IN THE PRESENT APPEAL IS DECIDED BY PUNE BENCH OF TRIBUNAL IN ACIT VS. MSS INDIA PVT. LTD. (SUPRA) . A CONTRARY VIEW HAS BEEN TAKEN BY MUMBAI BENCH OF TRIBUNAL IN DCIT VS. M/S. TATA CONSULTANCY SERVICES LTD. (SUPRA). I N VIEW OF THE RATIO LAID DOWN BY THE COORDINATE PUNE BENCH OF TRIBUNAL IN ACIT VS. MSS INDIA PVT. LTD. (SUPRA), WE FIND NO MERIT IN THE CLAIM OF ASSESSEE. FURTHER, IN ANY CASE, THE PROVISIONS OF THE ACT ARE CLEAR IN NOT ALLOWING ANY DEDUCTION ON ANY TP AD JUSTMENT MADE UNDER SECTIONS 10A AND 10B OF THE ACT . WHERE THE SECTION ITSELF PROVIDES THAT NO DEDUCTION UNDER SECTION 10A OF THE ACT IS TO BE ALLOWED ON ANY TRANSFER PRICING ADJUSTMENT, THEN COROLLARY TO THE SAME IS THAT TRANSFER PRICING ADJUS TMENT CAN BE MADE IN THE CASE OF CONCERNS WHICH ARE CLAIMING DEDUCTION UNDER SECTIONS 10A AND 10B OF THE ACT. ACCORDINGLY, WE FIND NO MERIT IN THE CLAIM OF ASSESSEE AND THE SAME IS REJECTED. 5 3 . NOW, COMING TO THE LAST PROPOSITION OF THE ASSESSEE I.E. WIT H REGARD TO 5 3 . NOW, COMING TO THE LAST PROPOSITION OF THE ASSESSEE I.E. WIT H REGARD TO SALES SUPPORT SERVICES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US POINTED OUT THAT THE TPO HAD EXCLUDED LOSS MAKING COMPANIES. FURTHER CONTENTION OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE CO MPARABLES PICKED UP BY THE TPO WERE NOT IN THE FIELD AND HENCE, WERE FUNCTIONALLY DISSIMILAR. OUR ATTENTION WAS DRAWN TO THE EXPLANATION FILED BEFORE THE TPO IN THIS REGARD. 5 4 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, PLACED RELIANCE ON THE ORDER OF TPO AND POINTED OUT THAT ALL THE COMPANIES WHICH WERE FUNCTIONALLY DIFFERENT, WERE REJECTED BY THE TPO. 5 5 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE HAD ADOPTED TNMM METHOD AND HAD WORKED O UT THE PLI AND ASSESSEE PICKED UP 13 COMPARABLES AND THE ARITHMETIC MEAN OF THE COMPARABLE COMPANIES MARGIN AS PER THE TP STUDY REPORT OF THE ASSESSEE WAS WORKED OUT AT ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 29 10.62%. THE PLI OF ASSESSEE IN THIS REGARD FOR THE YEAR WAS 9.39%. THE TPO ON THE OTH ER HAND, FIRST PICKED UP 13 COMPARABLES AND FINALLY SELECTED 7 COMPANIES WHOSE ARITHMETIC MEAN WAS 41.50%. THEREAFTER, CERTAIN DIRECTIONS WERE GIVEN BY THE DRP AND ARMS LENGTH MARGIN OF THE COMPARABLES WAS WORKED OUT AT 23.15%. THE TPO WHILE BENCHMARKIN G FIRST INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE SERVICES, HAS REJECTED LOSS MAKING COMPANIES. HOWEVER, THE CASE OF ASSESSEE BEFORE US WAS THAT THE APPROACH OF TPO WAS NOT CONSISTENT AND WHILE BENCHMARKING INTERNATIONAL TRANSACTION OF PROVISION OF SALES SUPPORT SERVICES, THE COMPANIES WHICH HAD INCURRED LOSSES HAVE BEEN TAKEN AS COMPARABLE. BUT WE FIND THAT LOSS MAKING COMPANIES HAVE BEEN EXCLUDED BY TPO. THE FINAL SET OF COMPARABLES PICKED UP BY THE TPO WE RE AS UNDER: - SR. NO. NAME OF THE COMP ANY OPERATING PROFITS ON OPERATING COSTS (%) 1 CRISIL LIMITED 17.39% 2 EPIC ENERGY LIMITED 53.96% 3 ICC INTERNATIONAL AGENCIES LTD. 49.39% 4 IDC (INDIA) LIMITED 14.59% 5 PRIYA INTERNATIONAL LTD. 28.55% 5 PRIYA INTERNATIONAL LTD. 28.55% 6 RATAN GLITTER INDUSTRIES LTD. 115.30% 7 T S R DARASHAW LTD. 11.33% ARITHMETIC MEAN 41.50% 5 6 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT FIRST COMPANY CRISIL LIMITED WA S A CREDIT RATING AGENCY AND SIMILARLY, TSR DARASHAW LTD. WAS SHARE S REGISTRAR. IT WAS CLAIMED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT B OTH THESE COMPANIE S WERE NOT FUNCTIONALLY SIMILAR TO THE ASSESSEE AND THE MARGINS OF THE SAID COMPANIES SHOULD BE EXCLUDED. THE SAID COMPANIES BEING FUNCTIONALLY DISSIMILAR TO THE ASSESSEE COMPANY ARE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES WAS THE PLEA RAISED BY THE ASSESSEE. WE FIND NO MERIT IN THE SAID PLEA . THE ARITHMETIC MEAN OF THE MARGINS OF FINAL SET OF COMPANIES WORKS OUT TO 24.25% AS AGAINST THE MARGINS OF ASSESSEE AT 9.39% . FURTHER, WORKING CAPITAL ADJUSTMENT IN RESPECT OF FOUR COMPARABLE COMPANIES WE RE ALLOWED TO THE ASSESSEE AND AN ADJUSTMENT TO THE TUNE OF RS.8,79,554/ - WAS FINALLY DETERMINED IN THE CASE. IN THE TOTALITY OF THE ITA NO . 1425 /PN/20 1 0 BMC SOFTWARE PVT. LTD. 30 ABOVE SAID FACTS AND CIRCUMSTANCES, WE FIND NO MERIT IN THE CLAIM OF THE ASSESSEE AND THE SAME IS REJECTED AND THE ADJUSTMENT MADE BY THE ASSESSING OFFICER / TPO IS UPHELD. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, PARTLY ALLOWED. 5 7 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 16 TH DAY OF MARCH , 201 6 . SD/ - SD/ - ( R.K. PANDA ) ( SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 16 TH MARCH , 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 2. THE RESPONDENT; 3. THE DIT (INTL. TAXATION), PUNE ; 4. THE DRP, PUNE ; 5. THE DR B , ITAT, PUNE; 6. GUARD FILE . / BY ORDER , // // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE