M/s Financial Objects Software (India) private Limited, Bangalore V. ITO, Bangalore

ITA 1471/BANG/2012

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 8906 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 13-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Earning of tax free income; Set aside
• Section: 143(3); 14A; 133(6); 144C; 56; 11; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND S HRI VIKRAM SINGH YADAV , ACCOUNTANT MEMBE IT ( TP ) A NO S . 11 56 /BANG/2011 & 1471/ BANG / 2012 ASSESSMENT YEAR S : 2007 - 08 & 2008 - 09 M/S. WIPRO GE HEALTHCARE P. LTD., (FOR THE MERGED ENTITY OF GE MEDICAL SYSTEMS INDIA P. LTD), PLOT NO.4, KADUGODI INDUSTRIAL AREA, BANGALORE 560 067. P AN: AAACG 7655G VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(3), BANGALORE. APP ELLANT RESPONDE N T APP ELLANT BY : S HRI K.R. PRADEEP, ADVOCATE RESPONDENT BY : SHRI C .H. SUNDAR RAO, CIT - I(DR)(ITAT) BANGALORE. DATE O F HEARING : 16 .09.2019 DATE OF PRONOUNCEMENT : 20 .09.2019 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT IT(TP)A NO.1156/BANG/2011 AND IT(TP)A NO.1471/ BANG/2012 ARE APPEALS BY THE ASSESSEE AGAINST THE FINAL ORDERS OF ASSESSMENT DATED 21.09.2011 AND 27.09.2012 PASSED BY THE DY.CIT, CIR CLE 11(3), BANGALORE U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [THE ACT] RELATING TO ASSESSMENT YEAR 2007-08 AND 2008-09 RESPECTIVELY. IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 2 OF 38 IT(TP)A NO.1156/BANG/2011 2. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE MADE A PRAYER FOR RESTRICTING ADJUDICATION OF THIS APPEAL ONLY INSOFAR AS CONCISE GROUNDS OF APPEAL FILED BY THE ASSESSEE BEFORE THE TRIBUNAL. THE CONCISE GROUNDS OF APPEAL READ AS FOLLOWS:- CONCISE GROUNDS OF APPEAL A SNAP-SHOT OF THE DETAILED GROUNDS OF APPEAL IS AS UNDER: I. TRANSFER PRICING A. CONTRACT MANUFACTURING SEGMENT: 1. COST PLUS METHOD ('CPM') HAS BEEN TAKEN AS THE M OST APPROPRIATE METHOD INSTEAD OF TRANSACTIONAL NET MAR GIN METHOD ('TNMM'), AS APPLIED BY THE APPELLANT; 2. FUNCTIONAL COMPARABILITY OUGHT TO TAKE PRECEDENC E OVER PRODUCT COMPARABILITY 3. THE COMPARABLE COMPANIES SELECTED BY THE TPO IS NOT COMPARABLE EVEN BASED ON PRODUCT COMPARABILITY; B. SOFTWARE SERVICES SEGMENT : 4. THE LEARNED AO/LEARNED TPO/HON'BLE DRP ERRED IN DETERMINING THE ALP OF PROVISION OF SOFTWARE SERVIC ES AND PROPOSING A TRANSFER PRICING ADJUSTMENT OF RS. 71,4 70,061. 5. THE LEARNED AO/LEARNED TPO/HON'BLE DRP ERRED IN: 5.1. IN REJECTING THE COMPARABILITY ANALYSIS CARRIE D IN THE TP DOCUMENTATION AND CONDUCTING A FRESH COMPARABILITY ANALYSIS 5.2. IN ADOPTING THE ARM'S LENGTH MARK-UP TO BE 23. 20 % [WORKING CAPITAL ADJUSTED MARGIN] IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 3 OF 38 5.3. IN TAKING RECOURSE TO SECTION 133(6) OF THE IN COME-TAX ACT, 1961 ('THE ACT') 5.4. IN CONSIDERING 25% AS THE THRESHOLD LIMIT FOR THE RELATED PARTY TRANSACTIONS ('RPT') FILTER. 5.5. IN REJECTING THE UPPER LIMIT FOR SALES TURNOVE R FILTER PROPOSED BY THE APPELLANT WITHOUT PROVIDING ANY EMPIRICAL ANALYSIS. 5.6. IN NOT MAINTAINING CONSISTENCY IN APPLYING THE FILTERS OF REJECTING COMPANIES WITH SOFTWARE DEVELOPMENT REVEN UE LESS THAN 75% OF THE TOTAL REVENUE AND COMPANIES OF DIFFERENT YEAR END. 5.7. IN UPHOLDING THE ACTIONS OF THE LEARNED TPO IN APPLYING THE ONSITE FILTER FOR SELECTION OF SOFTWARE COMPARA BLE COMPANIES WITH THE USE OF THE DATA OBTAINED U/S 133 (6) OF THE ACT 5.8. IN ACCEPTING COMPANIES WHICH ARE NOT COMPARABL E TO THE APPELLANT 6. THAT THE LEARNED AO/LEARNED TPO/HON'BLE DRP ERRE D IN DISREGARDING THE USE OF MULTIPLE YEAR DATA 7. THAT THE LEARNED AO/LEARNED TPO/HON'BLE DRP ERRE D IN DISREGARDING THE FACT THAT THE APPELLANT HAS NOT SH IFTED PROFITS. 8. THAT HON'BLE DRP ERRED IN CONCLUDING THAT THE AP PELLANT IS EXPOSED TO SINGLE CUSTOMER RISK WITHOUT EVALUATING THE BUSINESS ARRANGEMENT OF THE APPELLANT. 9. THAT THE LEARNED AO/LEARNED TPO/HON'BLE DRP ERRE D IN NOT ALLOWING THE BENEFITS OF MARKET RISK ADJUSTMENT TO THE APPELLANT. 10. THAT THE LEARNED AO/LEARNED TPO/HON'BLE DRP ERR ED IN NOT ALLOWING THE BENEFIT OF RANGE OF +/- 5% IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 4 OF 38 C. ENGINEERING SERVICES AND ITES SEGMENTS : THE LEARNED AO/ LEARNED TPO/ HON'BLE DRP ERRED: 11. IN DETERMINING THE ALP OF PROVISION OF ENGINEER ING SERVICES AND IT ENABLED SERVICES [ITES] AND IN PROPOSING A T RANSFER PRICING ADJUSTMENT OF RS.230,203,182/-. 12. IN CONSIDERING THE ENGINEERING SERVICES SEGMENT AS FUNCTIONALLY SIMILAR TO ITES SEGMENT AND BENCHMARKI NG THE ENGINEERING SERVICES SEGMENT WITH ITES COMPARABLE COMPANIES. 13. IN CONSIDERING THE RULE 10 A DEFINITION AS THE BASIS OF FUNCTIONAL CHARACTERISATION OF ENGINEERING SERVICES SEGMENT BY IGNORING THE FACT THAT IN THE EARLIER YEARS THEY HAD ACCEPTED THE ALP OF ENGINEERING SERVICES SEGMENT BY BENCHMARKING WITH ENGINEERING SERVICES COMPARABLE COMPANIES INSTEAD OF ITES COMPANIES. 14. ERRED IN REJECTING THE TP DOCUMENTATION, AND IN DOING SO HAS GROSSLY ERRED: 14.1. IN UPHOLDING THE REJECTION OF COMPARABILITY A NALYSIS CONDUCTED IN THE TP DOCUMENTATION AND PERFORMING A FRESH COMPARABILITY ANALYSIS. 14.2. IN ADOPTING THE ARM'S LENGTH MARK UP TO BE 28 .30 %. [WORKING CAPITAL ADJUSTED MARGIN] PERTAINING TO THE RENDERING OF ENGINEERING SERVICES AND ITES 14.3. IN COMPLETELY RELYING ON THE UNAUDITED DATA REQUISITIONED AND CONSEQUENTLY OBTAINED BY TAKING RECOURSE TO THE PROVISIONS OF SECTION 133(6) OF THE ACT, WHICH IN MANY INSTANCES ARE INCONSISTENT WITH THE DATA DISCLOSED IN AUDITED REPORTS. 14.4. IN CONSIDERING 25% AS THE THRESHOLD LIMIT FOR THE RPT FILTER. 14.5. INCONSISTENCY IN APPLYING THE FILTERS IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 5 OF 38 14.6. IN ACCEPTING COMPANIES WHICH ARE FUNCTIONALLY NOT COMPARABLE 14.7. IN ACCEPTING COMPANIES HAVING RPT EXCEEDING 1 0% 15. IN DISREGARDING THE USE OF MULTIPLE YEAR DATA. 16. IN CONCLUDING THAT THE APPELLANT IS EXPOSED TO SINGLE CUSTOMER RISK WITHOUT EVALUATING THE BUSINESS ARRAN GEMENT OF THE APPELLANT. 17. ERRED IN NOT ALLOWING THE BENEFITS OF MARKET RI SK ADJUSTMENT TO THE APPELLANT. 18. ERRED IN NOT ALLOWING THE BENEFIT OF RANGE OF + /- 5% CORPORATE TAX RE- COMPUTATION OF DEDUCTION UNDER SECTION 10A OF T HE INCOME TAX ACT, 1961 (ACT') IGNORING THE CONCEPT OF PARITY BETWEEN EXPORT TURNO VER AND TOTAL TURNOVER ENUNCIATED BY THE HIGH COURTS AND NO T REMOVING THE EXPENSES FROM TOTAL TURNOVER ALSO, WHEN THEY AR E REMOVED FROM EXPORT TURNOVER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, RESCIND A ND MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS, FACTS AND EVIDENCE BEFORE OR AT THE TIME OF HEARING OF THIS A PPEAL. FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE RAISED AT THE TIME OF HEARING, IT IS PRAYED THAT NECESSARY RELIEF MAY BE PROVIDED. 3. THE ASSESSEE HAS ALSO FILED APPLICATION FOR ADMI SSION OF CERTAIN ADDITIONAL GROUNDS, BUT ADMISSION AND ADJUDICATION OF THOSE ADDITIONAL GROUNDS MAY NOT BE NECESSARY AS THE ISSUES EMERGING IN THE CONCISE GROUNDS OF APPEAL NEED TO BE REMANDED TO THE TPO FO R FRESH ADJUDICATION AND THE ASSESSEE IS ALWAYS AT LIBERTY TO RAISE THE ISSUES SOUGHT TO BE RAISED IN THE ADDITIONAL GROUNDS IN THE SET ASIDE PROCEEDI NGS BEFORE THE AO/TPO. IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 6 OF 38 4. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING OF MEDICAL DIAGNOSTIC EQUIPMENT PARTS . THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SE AND THEREFORE THE PAYMENTS/RECEIPTS FROM THE AE IN THE INTERNATIONAL TRANSACTION HAS TO SATISFY THE ARMS LENGTH PRICE (ALP) AS LAID DOWN IN THE PRO VISIONS OF SECTION 92 OF THE ACT. THERE WERE BASICALLY 4 SEGMENTS FOR WHICH THE ARMS LENGTH PRICE (ALP) HAD TO BE DETERMINED VIZ., (1) CONTRACT MANUF ACTURING SEGMENT, (2) SOFTWARE SERVICES (3) INFORMATION TECHNOLOGY ENABLE D SERVICES [ITES], AND (4) ENGINEERING SERVICES. THE BREAK UP OF THE DETA ILS OF INTERNATIONAL TRANSACTIONS AND THE OPERATING PROFIT ON SALES AND OPERATING PROFIT ON COST IN EACH OF THE SEGMENT WAS AS FOLLOWS:- S EGMENTAL RESULTS : DESCRIPTION MA N UFACTURIN G SOFTWARE ITES ENGINEERING SERVICES TOTAL REVENUES 332,90,62,967 39,45,24,963 5,37,54,606 111,51,83,463 489,25,25,999 COST 301,43,33,165 37,57,38,061 4,83,18,549 103,35,10,225 447,19,00,000 PROFIT 31,47,29,802 1,87,86,902 54,36,057 8,16,73,238 42,06,26,000 OP / SALES 9.45% 4.76% 10.11% 7.32% 8.60% OP / COST 10.44% 5.00% 11.25% 7.90% 9.41% 5. WE SHALL NOW DEAL WITH EACH OF THE SEGMENTS AND THE ISSUES RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL. CONTRACT MANUFACTURING SEGMENT 6. AS FAR AS CONTRACT MANUFACTURING SEGMENT IS CONC ERNED, THE TPO DETERMINED THE ALP BY ADOPTING THE COST PRICE METHO D [CPM] AS THE MOST APPROPRIATE METHOD [MAM]. THE DETERMINATION OF ALP BY APPLYING CPM WAS MADE BY THE TPO AS FOLLOWS:- IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 7 OF 38 11.8 DETERMINATION OF ARM'S LENGTH PRICE: MEAN ARM'S LENGTH GROSS MARGIN 41.89% ON COST LESS: ADJUSTMENT FOR SELLING & DISTRIBUTION EXPENSES 7.26% ON COST ADJUSTED MEAN GROSS MARGIN 34.63% ON COST IN THE CASE OF TAXPAYER, THE COST OF PRODUCTION IS ARRIVED AT AS UNDER (BASED ON THE DETAILS GIVEN IN ANNEXURE C12 O F THE TP STUDY) D ESCRIPTION AMOUNT (RS) SALES 3329062967 CHANGE IN STOCK NA RAW MATERIAL EXPENSES 270,73,42,070 PACKAGING EXPENSES / CONSUMABLES 3,20,20,503 PURCHASE OF FINISHED GOODS 0 POWER, FUEL & WATER CHARG E S NA COM PE NSATION TO EMPLOYEES 11,96,42,332 INDIRECT TAXES NA ROYALTIES, TECHNICAL KNOW - HOW FEES, ETC. 99,28,847 LEASE RENT & OTHER RENT NA REPAIRS & MAINTENANCE 4,03,94,544 INSURANCE PREMIUM PAID 0 OUTSOURCED MFG. JOBS (INCL. JOB WORKS, ETC.) 0 D E PRECIATIO N 5,46,58,810 COST OF PRODUCTION 296,39,87,106 GROSS MARGIN 36,50,75,861 GROSS MARGIN TO COST OF PRODUCTION 12.32% GROSS COST INCURRED FOR CONTRACT MANUFACTURING ACTI VITY (AS ARRIVED AT ABOVE) A RS. 296,39,87,106/- ARITHMETICAL MEAN GROSS MARKUP ON COST B 34.63% ARMS LENGTH PRICE @ 134.63% OF THE COST C RS. 399,04,15,841/ - PRICE SHOWN IN THE INTERNATIONAL TRANSACTIONS D RS. 332,90,62,967/ - SHORTFALL BEING ADJUSTMENT U/S.92CA D - C RS. 66,13,52,874/- THE ABOVE DIFFERENCE OF RS. 66,13,52,874/- IS TREAT ED AS AN ADJUSTMENT UNDER MANUFACTURING SEGMENT. IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 8 OF 38 7. IT IS NOT IN DISPUTE BEFORE US THAT THE ASSESSEE OBJECTED TO THE AFORESAID ADJUSTMENT MADE BY THE TPO AND THE DRP CO NSIDERED THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION AS AT ARM S LENGTH. THEREFORE, THE GRIEVANCE PROJECTED BY THE ASSESSEE IN CONCISE GROU NDS OF APPEAL NO.1.1 TO 1.4 WILL NOT SURVIVE. NEVERTHELESS, THE LD. COU NSEL FOR THE ASSESSEE SUBMITTED THAT IN AY 2006-07, THE TRIBUNAL IN ASSES SEES OWN CASE IN IT(TP)A NO.1414/BANG/2010 BY ITS ORDER DATED 23.6.2 017 VIDE PARA 4 HELD THAT TNMM WILL BE THE MOST APPROPRIATE METHOD FOR D ETERMINING ALP AND RESTORED THE ISSUE OF DETERMINATION OF ALP TO AO/TP O FOR FRESH CONSIDERATION. IT IS THE STAND OF ASSESSEE BEFORE THAT EVEN APPLYING TNMM, THE TRANSACTION IS AT ARMS LENGTH AND HAS IN THIS REGARD PLACED RELIANCE ON THE SUBMISSIONS FILED ON 18.1.2018 BEFORE US IN THE FORM OF SYNOPSIS. THE LD. COUNSEL FOR THE ASSESSEE MADE A REQUEST THAT AC CEPTING THE SUBMISSIONS MADE IN THE SYNOPSIS, IT SHOULD BE HELD THAT EVEN AS PER TNMM, NO ADJUSTMENT IS REQUIRED IN DETERMINATION OF ALP. 8. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF TH E VIEW THAT THE GRIEVANCE PROJECTED BY THE ASSESSEE IN THIS REGARD IS PURELY ACADEMIC BECAUSE ADDITION MADE CONSEQUENT TO DETERMINATION O F ALP HAS BEEN DELETED BY THE DRP AND THE REVENUE IS NOT IN APPEAL AGAINST THE ORDER OF DRP. IT APPEARS TO US THAT THIS GROUND HAS BEEN T AKEN BY THE ASSESSEE PURELY BY WAY OF ABUNDANT CAUTION AND WE ARE OF THE VIEW THAT NO ADJUDICATION IS REQUIRED ON THIS ISSUE AS RAISED IN THE CONCISE GROUNDS OF APPEAL AND RECORDING THE SUBMISSIONS OF THE ASSESSE E AS ABOVE WOULD BE SUFFICIENT. CONSEQUENTLY, THE GROUNDS 1 TO 3 ARE D ISMISSED AS ACADEMIC AND NOT REQUIRING ANY ADJUDICATION. SOFTWARE SERVICES SEGMENT 9. AS FAR AS SOFTWARE SERVICES SEGMENT IS CONCERNED , THE TPO COMPUTED THE ALP OF THE INTERNATIONAL TRANSACTION O F RENDERING SOFTWARE IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 9 OF 38 DEVELOPMENT SERVICES TO AE BY CHOOSING 26 COMPARABL E COMPANIES AS PER THE CHART GIVEN AS ANNEXURE-I TO THIS ORDER . 10. THE TPO DETERMINED THE ALP AS FOLLOWS:- 21.8 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI : 25.14% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) : 1 .94% ADJ. ARITHMETIC MEAN PLI 23.20% ARM'S LENGTH PRICE: OPERATING COST (RS. 37,57,38,061/- + RECOVERY OF EXPENSES RECEIVED OF RS. 1,33,00,576/-) RS. 38,90,38,637/- ARM'S LENGTH MARGIN 23.20% OF THE OPERATING COST ARM'S LENGTH PRICE (ALP) @123.20% OF OPERATING COST RS. 47,92,95,600/- 21.9 PRICE RECEIVED VIS--VIS THE ARM'S LENGTH PRIC E: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: A RMS LENGTH PRICE @ 123.20% OF OPERATING COST RS. 47,92,95,600/- PRICE CHARGED IN THE INTERNA T IONAL T RANSACTIONS (RS. 39,45,24,963/- RECOVERY OF EXPENSES RECEIVED OF R S. 1,33,00,576/ - ) RS. 40,78,25,539/- SHORTFALL BEING ADJUSTMENT U/S 92CA RS. 7,14,70,061/- IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 10 OF 38 THE ABOVE SHORTFALL OF RS. 7,14,70,061/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. IF ANY FILTER OR CRITERIA APPLIED BY THE TAXPAYER F OR SEARCH OF COMPARABLES IS ACCEPTED OR ANY FILTER OR CRITERIA A PPLIED BY THE TPO IS RELAXED, THE ENTIRE ACCEPT / REJECT MATRIX C HANGES RESULTING IN A NEW COMPARABLE SET INCLUDING THOSE COMPANIES W HICH ARE NOT TAKEN EITHER BY THE TAXPAYER OR BY THE TPO IN ITS F INAL COMPARABLE SET AND WHICH MAY NOT BE FINDING PLACE IN THIS ORDE R. IN ESSENCE, ANY DISTURBANCE IN ANY ONE OF THE CRITERIA OF THE T AXPAYER OR THE TPO RESULTS IN FRESH COMPARABILITY ANALYSIS AND THE TPO SHOULD BE GIVEN AN OPPORTUNITY IF SUCH SITUATION ARISES. BASED ON THE ABOVE DETAILED DISCUSSION, THE ARM'S L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVID ING SOFTWARE DEVELOPMENT SERVICES IS DETERMINED AT RS. 47,92,95, 600/- (INCLUDING RECOVERY EXPENSES RECEIVED) INSTEAD OF R S. 40,78,25,539/- (INCLUDING RECOVERY EXPENSES RECEIVE D) CHARGED IN ITS INTERNATIONAL TRANSACTIONS RESULTING IN AN ADJU STMENT TO THE EXTENT OF RS. 7,14,70,061/-. 11. THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE DR P, BUT WAS NOT SUCCESSFUL IN GETTING THE ADDITION DELETED. AGGRIE VED BY THE ORDER OF DRP, WHICH WAS INCORPORATED IN THE FINAL ORDER OF ASSESS MENT BY THE AO, THE ASSESSEE HAS RAISED CONCISE GROUNDS 4 TO 10. THE L D. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SIMILAR ADDITION MADE BY T HE AO IN THE AY 2006- 07 WAS SUBJECT MATTER OF APPEAL BY THE ASSESSEE BEF ORE THE TRIBUNAL IN IT(TP)A NO.1414/BANG/2010 AND THE TRIBUNAL BY ORDER DATED 23.6.2017 SET ASIDE THE ORDER OF DRP/AO AND REMANDED THE ISSUE TO TPO FOR FRESH CONSIDERATION. IN THE LIGHT OF THE DECISION OF THE TRIBUNAL FOR AY 2006-07, THE ISSUE REQUIRES TO BE SET ASIDE TO THE AO. THE LD. COUNSEL FOR THE ASSESSEE ALSO PRAYED THAT THE TPO SHOULD BE DIRECTE D TO APPLY TURNOVER FILTER ON THE HIGHER SIDE ALSO IN THE LIGHT OF DECI SION OF ITAT BANGALORE BENCHES IN THE CASE OF CENDUIT INDIA SERVICES LTD. IN IT(TP)A NO.59/BANG/2016 DATED 24.04.2019. WE DIRECT THE AO TO CONSIDER THE CLAIM OF ASSESSEE IN THIS REGARD IN ACCORDANCE WITH THE LAW. THE TPO SHALL IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 11 OF 38 DECIDE THE ISSUE AFRESH KEEPING IN MIND THE DIRECTI ONS OF THE TRIBUNAL FOR AY 2006-07 AND AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ENGINEERING SERVICES & ITES 12. AS FAR AS THE DISPUTE IN THE ENGINEERING SERVIC ES & ITES SEGMENT IS CONCERNED, THE CONCISE GROUNDS OF APPEAL ARE GROUND S 11 TO 18. THE ASSESSEE RENDERED ITES AS WELL AS ENGINEERING SERVI CES. IT IS THE PLEA OF ASSESSEE THAT ENGINEERING SEGMENT IS DIFFERENT FROM ITES AND THAT THE TPO WAS NOT JUSTIFIED IN TREATING THE ENGINEERING SERVI CES SEGMENT ALSO AS ITES. THE COMPUTATION OF ALP IN THE ENGINEERING SEGMENT D ONE BY THE TPO WAS AS FOLLOWS:- NET MARGIN ON COST EARNED BY GEMS INDIA FOR ENGIN EERING P ARTICULARS AMOUNT (IN R) OPERATING INCOME 111,51,83,463 OPERATING EXPENSES 103,35,10,225 OPERATING PR OFIT (OP. INCOME - OP. EXPENSES) 8,16,73,238 OPERATING MARGIN TO TOTAL COST (OP/TC) 7.90% COMPARABLE COMPANIES SELECTED BY GEMS INDIA IN THE ENGINEERING SEGMENT AND THEIR ARITHMETIC MEAN S.NO. COMPANY NAME OPERATING MARGIN 1 GEOMETRIC SOFTWARE SOLUT IO NS CO. LTD. 8.13% 2 INFOTECH ENTERPRISES LTD. 18.45% 3 LARSEN & TOUBRO INFOTECH LTD. 10.66% 4 LURGI INDIA CO. LTD. - 3.90% MEAN 8.33% [PAGE 125 OF VOLUME I OF PAPER BOOK] 13. THE ASSESSEE CLAIMED THAT ITS PROFIT MARGINS A RE WITHIN THE +/- 5% VARIATION TO THE PROFIT MARGINS OF COMPARABLE COMPA NIES PERMITTED UNDER THE PROVISIONS OF SEC.92C(2) OF THE ACT. IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 12 OF 38 14. THE TPO HOWEVER HELD THAT ENGINEERING SERVICES PROVIDED BY THE ASSESSEE WAS AKIN TO ITES AND THEREFORE HE COMBINED THE FINANCIALS OF BOTH ITES AND ENGINEERING SERVICES SEGMENT AND BY D OING SO ARRIVED AT A OP/OC OF 8.05%. THE ASSESSEE HAD BENCHMARKED THE I TES AND ENGINEERING SERVICES SEGMENT SEPARATELY IN ITS TP A NALYSIS. BUT THIS WAS DISREGARDED BY THE TPO. 15. THE TPO SELECTED 27 COMPARABLE COMPANIES IN THE ITES SEGMENT AND ARRIVED AT AN AVERAGE ARITHMETIC MEAN PROFIT MA RGIN OF 30.21% AND AFTER ALLOWING A REDUCTION OF 1.91% DETERMINED THE SHORTFALL BEING ADJUSTMENT U/S.92CA AT RS.23,02,03,182/- IN THE COM BINED ITES AND ENGINEERING SERVICES SEGMENT. THE CALCULATIONS OF THE TPO IN THIS REGARD ARE FOUND AT PARAGRAPH 39.5 & 39.6 OF HIS ORDER. T HE DRP CONFIRMED THE ACTION OF THE TPO. 16. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SERVICES PROVIDED BY ASSESSEE IN THE ENGINEERING SERVICES SE GMENT WERE IN THE NATURE OF ENGINEERING DRAWING/DESIGNS (BOTH 2D AND 3D MODELS) LIKE CAD, CAM ETC. THE ENGINEERING SEGMENT HAS BEEN ANALYZED INDEPENDENTLY IN THE TP REPORT AND IN THE PRIOR YEARS BY THE LEARNED TPO, HON'BLE DRP AND CIT (APPEALS). THE TPO UNTIL AY 2006-07 HAS NOT DIS PUTED THE SEPARATE ANALYSIS OF ENGINEERING SEGMENT AND HAS ALSO ACCEPT ED THE COMPARABLE COMPANIES PROVIDED IN THE TP REPORT OF THE ASSESSEE . THE ASSESSEE SUBMITTED THAT KNOWLEDGE SERVICES DO NOT CONSTITUTE CAD /CAM DRIVEN ENGINEERING SERVICES. ENGINEERING SERVICES IS A SEP ARATE RECOGNIZED SERVICE LINE WHICH CAN BE DISTINCTLY DEMARCATED FRO M THE IT SERVICES, BPO SERVICES OR KPO SERVICES. HENCE, ENGINEERING SERVIC ES CANNOT BE IDEALLY COMPARED WITH KPO OR BPO SERVICES. HE ALSO BROUGHT TO OUR NOTICE THAT IN THE PRECEDING YEARS I.E. AY 2004-05, AY 2005-06 AND AY 2006-07, THE LEARNED TPO, HON'BLE DRP AND HON'BLE CIT(APPEALS) H AD ACCEPTED THE IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 13 OF 38 ENGINEERING SERVICES COMPANY AS COMPARABLE COMPANIE S PROPOSED BY THE ASSESSEE AND HAVE NOT COMBINED OR COMPARED IT WITH THE ITES COMPARABLE COMPANIES. PLACING RELIANCE ON THE PRIOR YEAR ORDER S OF DRP AY 2006-07 AND CIT(A) AY 2004-05, HE GAVE THE COMPUTATION OF N ET MARGIN TO TOTAL COST OF THE COMPARABLE COMPANIES FOR AY 2007-08 AS GIVEN IN THE TABLE BELOW. PARTICULARS SOURCE UNADJUSTED MARGIN (OP/TC) FY 2006-07 WORKING CAPITAL ADJUSTED MARGIN (OP/TC) FY 2006-07 UB ENGINEERING LTD. CIT(A) ORDER AY 04-05 -24.43% -25.71% HI QUALITY STEELS LTD. 2.45% 2.36% RJ SHAH & CO. LTD. 21.65% 9.34% RAUNAQ INTERNATIONAL LTD. 8.55% 7.59% TCE CONSULTING ENGINEERS LTD. DRP ORDER AY 06-07 2 2.69% 21.18% AVERAGE 6.18% 2.95% 17. THE LEARNED COUNSEL FOR THE ASSESSEE CLAIMED T HAT THE ADJUSTED OPERATING PROFIT TO TOTAL COST OF COMPARABLE COMPAN IES WAS 6.28%. THE ASSESSEES MARGIN FOR THE ENGINEERING SEGMENT WAS 7 .90% WHICH WAS HIGHER THAN THE AFOREMENTIONED ADJUSTED MARGINS OF THE COMPARABLE COMPANIES. BASED ON THE ABOVE SUBMISSION, HE PLEADE D THAT THE ENGINEERING SERVICE SEGMENT IS NOT COMPARABLE TO IT ES, BPO OR KPO SERVICES AND HENCE IT WILL NOT BE APPROPRIATE TO AG GREGATE THE ENGINEERING SERVICE SEGMENT WITH THE ITES SEGMENT. THE LEARNED DR RELIED ON THE ORDER OF THE TPO/DRP. 18. WE HAVE HEARD THE SUBMISSIONS AND WE FIND THAT THE TPO/DRP DID NOT ACCEPT THE STAND TAKEN BY THE ASSESSEE AND IT C ONSIDERED ENGINEERING SEGMENT ALSO AS PART OF ITES, DESPITE A SEPARATE TP ANALYSIS HAVING BEEN CARRIED OUT BY THE ASSESSEE IN ENGINEERING SERVICES AND ITES. IT IS ALSO THE IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 14 OF 38 PLEA OF ASSESSEE THAT ENGINEERING SERVICES AND ITES HAVE BEEN CONSIDERED AS SEPARATE SEGMENTS IN THE SAFE HARBOUR GUIDELINES FRAMED UNDER THE INCOME-TAX RULES, 1968 AND THIS ALSO SUPPORTS THE P LEA OF ASSESSEE. WE ALSO FIND THAT IN THE PRECEDING YEARS 2004-05, 2005 -06 & 2006-07, THE ENGINEERING SEGMENT HAS BEEN CONSIDERED SEPARATELY FROM THE ITES. THE LD. DR, HOWEVER, POINTED OUT THAT THE SERVICES REND ERED BY THE ASSESSEE WERE AKIN TO ITES AND THE CONCLUSION OF THE REVENUE AUTHORITIES HAVE TO BE UPHELD. 19. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT RULE OF CONSISTENCY WILL APPLY AND CONSISTENT WITH THE A PPROACH ADOPTED FOR THE AYS 2004-05 TO 2006-07, ENGINEERING SERVICES SEGMEN T SHOULD BE CONSIDERED AS DISTINCT FROM ITES AND COMPARABLE COM PANIES CHOSEN ACCORDINGLY. WE HOLD AND DIRECT ACCORDINGLY AND SE T ASIDE THE ORDERS OF THE DRP AND REMAND THE ISSUE FOR FRESH CONSIDERATION BY THE TPO/AO IN ACCORDANCE WITH THE ABOVE OBSERVATIONS AND IN ACCOR DANCE WITH LAW, AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSE E. 20. THE ONLY OTHER GROUND THAT REMAINS FOR CONSIDER ATION IN THE CONCISE GROUNDS OF APPEAL IS THE ISSUE WITH REGARD TO EXCLU SION OF CERTAIN ITEMS OF EXPENDITURE INCURRED IN FOREIGN EXCHANGE FROM THE T OTAL TURNOVER WITHOUT EXCLUDING THE SAME FROM THE EXPORT TURNOVER. 21. THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/ S.10A OF THE ACT ON THE PROFITS DERIVED FROM ITS SOFTWARE TECHNOLOGY PA RKS OF INDIA (STPI) REGISTERED UNIT. SEC.10A(4) PROVIDES THE METHODOLO GY OF COMPUTATION OF DEDUCTION U/S.10A OF THE ACT AND IT LAYS DOWN THAT THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE S HALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTA KING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINES S CARRIED ON BY THE IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 15 OF 38 UNDERTAKING. EXPORT TURNOVER HAS BEEN DEFINED UNDER EXPLANATION 2 (IV) TO SEC.10A AS: 'EXPORT TURNOVER' MEANS THE CONSIDERATION IN RESPEC T OF EXPORT BY THE UNDERTAKING OF ARTICLES OR THINGS OR COMPUTER SOFTW ARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION (3), BUT DOES NOT IN CLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTS IDE INDIA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN P ROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. 22. WHILE COMPUTING THE DEDUCTION U/S.10A OF THE AC T, THE AO NOTICED THAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSES SEE HAD INCURRED CERTAIN EXPENDITURE IN FOREIGN CURRENCY, WHICH WAS NOT REDUCED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SEC TION 10A OF THE INCOME TAX ACT, 1961. THE AO THEREFORE EXCLUDED TH E AFORESAID SUM FROM THE EXPORT TURNOVER WITHOUT EXCLUDING THEM FROM THE TOTAL TURNOVER. AS A RESULT, THE DEDUCTION CLAIMED U/S.10A OF THE ACT BY THE ASSESSEE WAS ALLOWED AT A LESSER SUM THAN WHAT WAS CLAIMED BY TH E ASSESSEE. IT WAS THE PLEA OF THE ASSESSEE IN THE APPEAL AGAINST THE ASSESSMENT ORDER BEFORE THE CIT(A) THAT AT ALL TIMES DURING THE RELE VANT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT IN RENDERING ANY TECHNICAL SERVICES. COMMUNICATION EXPENSES WERE IN CURRED NOT FOR EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA AND THEREFORE TH E EXCLUSION FROM EXPORT TURNOVER AS DONE BY THE AO WAS NOT CORRECT. WITHOU T PREJUDICE TO ITS CONTENTION THAT THE AFORESAID SUMS SHOULD NOT BE EX CLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE A CT, THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER THAT EXPENSES THAT AR E REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOT AL TURNOVER AND IN THIS IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 16 OF 38 REGARD HAS PLACED RELIANCE ON THE DECISION OF THE H ONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) WHEREIN IT WAS HELD THAT WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER. THE DRP DID NOT ALLOW THE CLAIM OF THE A SSESSEE. 23. AGGRIEVED BY THE ORDER OF DRP, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LEARNED DR RELIED ON THE ORDER OF TH E DRP. 24. WE HAVE CONSIDERED HIS SUBMISSION. TAKING IN TO CONSIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARN ATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT EXPENDITURE INCURRED IN FOREIGN CURRENCY SHOULD BE EXCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER. WE ARE OF THE VIEW THAT AS OF TODAY, LAW DECLARED BY THE HON'BLE HIGH COURT OF KARNATAKA WHI CH IS THE JURISDICTIONAL HIGH COURT IS BINDING ON US. MOREOVER, THE ORDER O F THE HONBLE KARNATAKA HIGH COURT HAS BEEN UPHELD BY THE HONBLE SUPREME C OURT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. IN CIVIL APPEAL NO.848 9-98490 OF 2013 & ORS. DATED 24.04.2018 . IN VIEW OF THE ABOVE, WE ALLOW THE ALTERNATIVE PLEA OF THE ASSESSEE. 25. IN THE RESULT, THIS APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED. IT(TP)A.NO.1471/B/2012(AY 2008-09) 26. AS FAR AS THIS APPEAL BY THE ASSESSEE FOR AY 20 08-09 IS CONCERNED, THE CONCISE GROUNDS OF APPEAL FILED BY THE ASSESSEE THAT NEEDS ADJUDICATION ARE AS FOLLOWS: CONCISE GROUNDS OF APPEAL A SNAP SHOT OF THE DETAILED GROUNDS OF APPEAL IS AS UNDER: IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 17 OF 38 I. TRANSFER PRICING 1. CONTRACT MANUFACTURING SEGMENT : 1.1. THE LEARNED DRP HAS TAKEN A CONTRARY STAND CO MPARED TO THE POSITION TAKEN BY THE HONOURABLE DRP AND CIT(A) IN THE EARLIER YEARS; 1.2. COST PLUS METHOD ('CPM') HAS BEEN TAKEN AS TH E MOST APPROPRIATE METHOD INSTEAD OF ('TNMM'), AS APPLIED BY THE APPELLANT; 1.3. FUNCTIONAL COMPARABILITY OUGHT TO TAKE PRECED ENCE OVER PRODUCT COMPARABILITY; 1.4. THE COMPARABLES SELECTED BY THE TPO IS NOT CO MPARABLE EVEN BASED ON PRODUCT COMPARABILITY; 1.5. ERRED IN WITHDRAWING THE AVERAGE SELLING AND MARKETING ADJUSTMENT GRANTED BY THE LEARNED TPO IN THE TRANSF ER PRICING ORDER WITHOUT ISSUE OF ANY NOTICE; 1.6. IF TNMM IS APPLIED, THE MARGINS WILL BE WITHI N +/-5 PERCENT RANGE AT ALP; AND 1.7. HAS NOT PROVIDED THE WORKING CAPITAL ADJUSTMENT AND SELLING AND MARKETIN G ADJUSTMENT UNDER CPM AND A CONTRARY POSITION HAS BE EN ADOPTED AGAINST THE POSITION APPROVED IN THE PRECED ING YEARS BY THE HONOURABLE DRP AND CIT(A). 2. ENGINEERING SERVICES : 2.1. THE LEARNED DRP HAS TAKEN A CONTRARY STAND CO MPARED TO THE POSITION TAKEN BY THE HONOURABLE DRP AND CIT(A) IN THE EARLIER YEARS; 2.2. CONSIDERING THE ENGINEERING SERVICES SEGMENT AS FUNCTIONALLY SIMILAR TO ITES SEGMENT AND BENCHMARKI NG THE ENGINEERING SERVICES SEGMENT WITH ITES COMPARAB LE COMPANIES, THOUGH ; 2.3. THE APPELLANT HAS PROVIDED TWO SEPARATE BENCH MARKING ANALYSIS; AND IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 18 OF 38 2.4. OUR STAND WAS ACCEPTED IN THE EARLIER YEARS A ND A CONTRARY STAND HAS BEEN TAKEN IN THIS YEAR, WITHOUT ADDUCING ANY REASON. 3. ITES AND SOFTWARE SERVICES SEGMENTS : THE HONOURABLE DRP AND THE LEARNED AO HAVE ERRED IN : 3.1. CHANGING THE FUNCTIONAL CHARACTERISATION OF E NGINEERING SERVICES SEGMENT, THEREBY TAKING A CONTRARY STAND T HIS YEAR, WITHOUT ANY REASON; 3.2. IN NOT GRANTING ADJUSTMENT FOR MARKET; 3.3. IN TAKING A RPT LIMIT OF 25%, WHICH IS AGAINS T THE GUIDANCE SET IN SEVERAL CASE LAWS, INCLUDING THOSE OF THE HON'BLE BANGALORE TRIBUNAL; 3.4. INCONSISTENCY IN APPLYING FILTERS LIKE EXPORT EARNINGS ETC. AND NOT APPLYING NECESSARY FILTERS LIKE EMPLOYEE CO ST FILTERS, WHICH ARE AGAIN NOT CONSISTENT WITH THE GU IDANCE OF SEVERAL CASE LAWS; 3.5. UPHOLDING THE ACTIONS OF THE LEARNED TPO IN A PPLYING THE EXPORT FILTER, ACCEPTING COMPANIES WITH SIGNIFICANT ADVERTISEMENT EXPENSES AND RESEARCH AND DEVELOPMENT EXPENSES AND COMPANIES HAVING DIFFERENT YEAR END; A ND 3.6. SELECTING WRONG COMPARABLES, INCONSISTENT WIT H THE GUIDANCE OF SEVERAL CASE LAWS. II. CORPORATE TAX 1. RE- COMPUTATION OF DEDUCTION UNDER SECTION 10A OF T HE ACT IGNORING THE CONCEPT OF PARITY BETWEEN ET AND TT ENUNCIATED BY THE HIGH COURTS AND NOT REMOVING THE EXPENSES FROM TT ALSO, WHEN THEY ARE REMOVED FROM E T 2. DISALLOWANCE OF EXPENSES UNDER SECTION 14A HAS IGNORED THE FACT THAT, THE DISALLOWANCE UNDER S ECTION 14A CAN BE MADE ONLY IF THE ACTUAL EXPENSE ARE INCU RRED IN RELATION TO EXEMPT INCOME AND THE ASSESSEE HAS NOT INCURRED ANY SUCH EXPENDITURE. IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 19 OF 38 III. PRAYER IN VIEW OF THE ABOVE, THE COMPANY WOULD LIKE TO SUB MIT THAT, AS 92% OF THE DEMAND HAS ARISEN DUE TO CONTRA RY STAND TAKEN BY THE HONOURABLE DRP FROM THE EARLIER YEARS, PRESSING FOR PAYMENT OF SUCH DEMAND WOULD CAUSE UND UE HARDSHIP TO THE COMPANY. THEREFORE, REQUEST THE HONOURABLE BENCH TO POST THE HEARING AND GRANT THE RELIEF TO COMPANY AT THE EARLIEST. 27. AS IN AY 2007-08, ONE OF THE DISPUTES IN THIS A PPEAL IS ALSO DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TR ANSACTIONS IN THE FOUR DIFFERENT SEGMENTS VIZ., CONTRACT MANUFACTURING SEG MENT, ENGINEERING DESIGN SERVICES, ITES SEGMENT AND SWD SERVICES SEGM ENTS. THE ARGUMENTS ADVANCED IN AY 2008-09 ARE ALSO IDENTICAL TO THE ARGUMENTS ADVANCED ON THESE ISSUES IN AY 2007-08. 28. AS FAR AS GROUND NO.1 RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL IS CONCERNED, THE FACTS ARE THAT THE ASSESSE E ENTERED INTO A CONTRACT FOR CONTRACT MANUFACTURING WITH ITS AE AND THEREFORE THE SAID TRANSACTION WAS AN INTERNATIONAL TRANSACTION AND TH E PRICE RECEIVED BY THE ASSESSEE IN THE SAID TRANSACTION HAS TO PASS THE AL P TEST AS LAID DOWN IN SEC.92 OF THE ACT. THE ASSESSEE ADOPTED TNMM AS TH E MAM FOR DETERMINING ALP. THE NET MARGIN ON COST EARNED BY THE ASSESSEE IN THE CONTRACT MANUFACTURING SEGMENT WAS AS FOLLOWS: O PERATING INCOME RS.2,832,793,348 COST OF PRODUCTION RS. 2,704,125,868 GROSS PROFIT (OP. INCOME - COST PRODUCTION) OF RS. 128,667,480 GROSS MARGIN ON COST OF PRODUCTION 4.76% TOTAL OPERATING EXPENSES RS. 2,729,518,203 OPE R A T ING PROFIT RS. 103,275,145 OPERATIN G /NET MARGIN (OP/TC) 3.78% IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 20 OF 38 29. THE ASSESSEE CHOSE COMPARABLE COMPANIES AND THE AVERAGE ARITHMETIC MEAN PROFIT OF SUCH COMPARABLE COMPANIES AFTER PERMISSIBLE VARIATION U/S.92C(2) WAS WITHIN ARMS LENGTH PRICE. 30. THE LEARNED TPO REJECTED THE ANALYSIS CARRIED OUT BY THE ASSESSEE AND REJECTED ALL THE COMPARABLE COMPANIES SELECTED IN THE TP STUDY. THE LEARNED TPO ADOPTED COST PLUS METHOD ('CPM') AS THE MOST APPROPRIATE METHOD AND GRANTED SELLING AND MARKETING ADJUSTMENT FOR THE BELOW MENTIONED COMPARABLE COMPANIES. THE FOLLOWING COMPA RABLE COMPANIES WERE SELECTED BY TPO AND THEIR ARITHMETIC MEAN OF P ROFIT MARGIN WAS AS FOLLOWS: S I. NO. NAME OF THE COMPANY UNADJUSTED 1 ALPHA X-RAY TECHNOLOGIES (INDIA) 26.96% 2 ARTFICIAL LIMBS MANUFACTURING 28.09% 3 CENTENIAL SURGICAL SURTURE LTD 56.27% 4 ISCON SURGICALS LTD 18.56% 5 POLY MEDICURE LTD 19.56% 6 SHREE PACETRONIX LTD 47.99% 7 SOUTH INDIA SURGICALS COMPANY LIMITED 33.28% ARITHMETIC MEAN 32.96% 31. THE TPO HAS GRANTED AVERAGE MARKETING ADJUSTME NT OF 7.18% ON THE ABOVE. HOWEVER NO WORKING CAPITAL ADJUSTMENT WA S GRANTED. THE LEARNED TPO IMPOSED AN ADJUSTMENT AS SHOWN IN THE T ABLE BELOW. COMPUTATION OF ARM'S LENGTH PRICE BY TPO AND THE A DJUSTMENT MADE ARM'S LENGTH MEAN MARGIN 32.96% LESS: MARKETING ADJUSTMENT 7.18% ADJUSTED MEAN MARGIN OF THE COMPARABLE COMPANIES 25.78% OPERATING COST 2,704,125,868 ARM'S LENGTH PRICE (ALP) 134.63% OF OPERATING COST 34,01,249,516 PRICE CHARGED IN INTERNATIONAL TRANSACTIONS 2,832,793,348 SHORT FALL BEING ADJUSTMENT U/S. 92CA 5,68,456,168 IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 21 OF 38 32. THE DRP CONFIRMED THE ORDER OF THE TPO. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT WORKING CAP ITAL ADJUSTMENT PROPORTIONATE TO THE COST OF PRODUCTION AND SELLING AND MARKETING ADJUSTMENT ON ACTUAL BASIS OUGHT TO HAVE BEEN PROVI DED. IT WAS SUBMITTED THAT EVEN AFTER CONSIDERING THE COMPARABLE COMPANIE S SELECTED BY THE TPO, THE PRICE RECEIVED BY THE ASSESSEE SHOULD BE R EGARDED AS AT ALP, IF WORKING CAPITAL ADJUSTMENT AND MARKETING ADJUSTMENT IS ALLOWED AT ACTUALS, THE DETAILS OF WHICH ARE GIVEN BELOW. IT WAS SUBMIT TED THAT THE METHOD OF PROVIDING ADJUSTMENTS AT ACTUALS WAS ALSO APPROVED BY THE HON'BLE DRP FOR AY 2007-08 AND AY 2006-07 AND THE HON'BLE CIT (A) I N AY 2005-06 AND AY 2004-05 [DRP ORDER FOR AY 2007-08 AND AY 2006-07 AND THE CIT(A) ORDER FOR AY 2005-06 AND AY 2004-05. MARGIN OF THE COMPARABLE COMPANIES POST WORKING CAPITAL AND SELLING AND MARK ETING ADJUSTMENT ON ACTUALS IS AS GIVEN BELOW: COMPANY GROSS MARGIN/COP [A] WORKING CAPITAL ADJUSTMENT [B] SELLING & MARKETING ADJUSTMENT [C] ADJUSTED GROSS MARGIN/COP [D=A-B-C] ARTIFICIAL LIMBS 14.28% 8.76% 10.78% - 4.72% CE NTENNIAL SURGICAL 55.39% 7.10% 39.25% 10.62 0 /0 POLY MEDICURE 16.94% 3.10% 5.06% 8.93% SHREE PACETRONIX 37. 2 1 % 9.31% 6.59% 22.06% SOUTH INDIA SURGICALS CO. LTD 22.94% 7.37% 8.86% 6.96% ISCON SURGICAL 17.18% 6.62% 6.04% 4.30% ALPHA X-RAY 28.44% 5.92% 10 .09% 12.86% AVERAGE 27.48% 6.9% 12.4% 8.72% GEMS INDIA 4.76% 33. IT WAS SUBMITTED THAT IF THE ASSESSEES ARGUME NT IS ACCEPTED AND THE WORKING CAPITAL ADJUSTED ARITHMETIC MEAN OF THE 7 COMPARABLE COMPANIES AS SHOWN IN THE TABLES ABOVE I.E. 8.72% I S TAKEN, THEN THE SAME IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 22 OF 38 WOULD BE WITHIN THE RANGE OF + / - 5% OF THE ASSESS EE'S NET MARGIN, NO TP ADJUSTMENT IS REQUIRED AND THEREFORE THE TP ADJUSTM ENT MADE BY THE TPO IS LIABLE TO BE QUASHED. IT WAS FURTHER SUBMITTED THAT THE TPO ADOPTED TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE MOS T APPROPRIATE METHOD FOR AY 2009-10 AND AY 2011-12. THE ITAT ALSO ACCEPTED TNMM AS THE MAM IN ASSESSEES OWN CASE FOR AY 2006-07 AN D THE MATTER WAS REMITTED BACK TO THE FILE OF THE TPO FOR FURTHER VE RIFICATION BY THE TPO. IT WAS SUBMITTED THAT BY ADOPTING TNMM AS THE MOST APP ROPRIATE METHOD FOR THE CONTRACT MANUFACTURING SEGMENT, THE NET LEVEL M ARGIN OF THE ASSESSEE WOULD BE AT ALP EVEN CONSIDERING THE TPOS SET OF C OMPARABLE COMPANIES. THE MARGIN OF THE COMPARABLE COMPANIES ADOPTING TNMM AS THE MOST APPROPRIATE METHOD, WAS ALSO GIVEN AND THE SAME IS AS FOLLOWS: COMPANY OP/TC ARTIFICI A L LIMBS 1.45% CENTENNIAL SURGICAL 55.39% POLY MEDICURE 4.20% SHREE PACETRONIX 11.31% SOUTH INDIA SURGICALS CO. LTD. 22.94% ISCON SURGICAL 8.68% ALPHA X-RAY 4.48% AVERAGE 6.33% RANGE COMPUTATION P ARTICULARS ASSESSEES SEGMENT 5% - 5% REVENUE 2,83,27,93,348 2,97,44,33,015 2,69,11,53,680 COST 2,72,95,18,203 2,72,95,18,203 2,72,95,18,203 OPERATING PROFIT 10,32,75,145 244914812 -38364522 OP/OC 3.78% 8.97% - 1.41% THEREFORE, EVEN IF TNMM IS CONSIDERED AS THE MOST A PPROPRIATE METHOD THEN THE OPERATING MARGIN OF THE COMPANY WOULD BE W ITHIN THE RANGE OF + / - IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 23 OF 38 5% OF THE ASSESSEE'S NET MARGIN, NO TP ADJUSTMENT I S REQUIRED AND THEREFORE THE TP ADJUSTMENT MADE BY THE TPO IS LIAB LE TO BE QUASHED. 34. IT WAS ALSO SUBMITTED THAT REIMBURSEMENT OF EX PENSES RECEIVED SHOULD NOT BE INCLUDED IN THE COST BASE. IT WAS AR GUED THAT REIMBURSEMENTS OF EXPENSES RECEIVED ARE EXPENSES IN CURRED ON BEHALF OF RELATED PARTIES FOR ADMINISTRATIVE CONVENIENCE AND ONLY REPRESENT 'PASS THROUGH COSTS'. THESE REIMBURSEMENTS WERE NOT RECEI VED AGAINST ANY SPECIFIC SERVICES RENDERED BY THE ASSESSEE TO ITS A ES. THESE WERE PURE COST REIMBURSEMENTS (E.G. TRAVEL EXPENSES, HOTEL ST AY EXPENSES) WHICH THE ASSESSEE HAD INCURRED BEHALF OF ITS AE FOR ADMINIST RATIVE CONVENIENCE AND LATER GOT REIMBURSED AT COST. IT WAS SUBMITTED THAT THE REIMBURSEMENT OF EXPENSES RECEIVED BE ALLOWED WITHOUT A MARK-UP AND NOT BE ADDED BACK TO THE OPERATING REVENUE FOR THE PURPOSES OF AN ADJUST MENT. THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE BAN GALORE TRIBUNAL RULING IN THE CASE OF FCG SOFTWARE SERVICES INDIA LTD [IT. TP A NO. 1242/BANG/2012] WHEREIN THE ITAT HELD THAT IF THE R ECEIPTS ARE MERE RECOVERY OF EXPENSES INCURRED WITHOUT SERVICE ELEME NT, THEN THE SAME SHOULD NOT BE CONSIDERED AS PART OF THE COST BASE F OR COMPUTATION OF MARK- UP. 35. THE LEARNED DR RELIED ON THE ORDER OF THE DRP. 36. WE FIND THAT THE ITAT BANGALORE IN ASSESSEES O WN CASE FOR AY 2006-07 IN IT(TP) A.NO.1414/BANG/2010 ORDER DATED 2 3.6.2017 REMANDED THE ISSUE OF DETERMINATION OF ALP IN THE CONTRACT M ANUFACTURING SEGMENT TO THE TPO/AO FOR FRESH CONSIDERATION HOLDING THAT TNM M SHOULD BE THE MAM FOR DETERMINATION OF ALP. FACTS AND CIRCUMSTANCES OF THE CASE BEING IDENTICAL IN AY 2008-09, FOLLOWING THE DECISION OF THE TRIBUNAL, WE SET ASIDE THE IMPUGNED ORDER WITH SIMILAR DIRECTIONS AS WAS G IVEN IN AY 2006-07 AND DIRECT THE TPO/AO TO DETERMINE ALP IN ACCORDANCE WI TH THE DIRECTIONS IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 24 OF 38 CONTAINED IN THE EARLIER ORDER OF THE TRIBUNAL AND KEEPING IN VIEW THE OTHER SUBMISSIONS ON MERITS MADE BY THE ASSESSEE BEFORE U S. GR.NO.1 IS THUS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 37. AS FAR AS GROUND NO.2 IS CONCERNED, THE PRELIMI NARY ISSUE IS AS TO WHETHER ENGINEERING SERVICES SHOULD NOT BE REGARDED AS BEING ITES IN NATURE AND COMPARABLE COMPANIES OUGHT NOT TO HAVE B EEN SELECTED TREATING THE ENGINEERING SERVICES SEGMENT AS AKIN T O ITES SEGMENT. THE ARGUMENTS AND SUBMISSIONS ON THIS GROUND ARE IDENTI CAL TO THE ARGUMENTS ADVANCED IN AY 2007-08. THE FACTUAL DETAILS IN THI S REGARD ARE AS FOLLOWS: THE NET MARGIN ON COST EARNED BY THE ASSESSEE FOR E NGINEERING SEGMENT WAS AS FOLLOWS: P ARTICULARS EDS OPERATING INCOME 1,310,310,457 OPERATING EXPENSES* 1,176,105,198 OPERATING PROFIT (OP. INCOME - OP. EXPENSES) 134,205,259 OPERATING/NET MARGIN (OP/TC) 1 1.41% 38. THE COMPARABLE COMPANIES SELECTED BY THE ASSESS EE IN THE ENGINEERING SEGMENT AND THEIR ARITHMETIC MEAN WAS A S FOLLOWS: S .NO . COMPARABLE COMPANIES ROTC 1 AZTECSOFT LTD. 11.70% 2 GEOMETRIC LTD. 16.99% 3 INFOTECH ENTERPRISES LTD. 25.04% 4 LARSEN & TOUBRO INFOTEC H LT D. 15.64% 5 NEILSOFT LTD. 9.1 7% 6 QUINTEGRA SOLUTIONS LTD. 9.85% 7 PRITHVI INFORMATION SOLUTIONS LTD. 14.17% 8 T V S INFOTECH LTD. - 12.04% ARITHMETIC MEAN 11.32 % IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 25 OF 38 39. THE ASSESSEE CLAIMED THAT THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION SHOULD BE REGARDED AS AT ARMS LENGTH A FTER PERMISSIBLE VARIATION TO THE ALP PROFIT MARGIN OF +/- 5% PERMIT TED UNDER THE PROVISIONS OF SEC.92C(2) OF THE ACT. 40. THE TPO HOWEVER COMBINED THE ITES AND ENGINE ERING SERVICES SEGMENT TOGETHER AND DETERMINED ALP AND CONSEQUENT ADDITION TO BE MADE TO THE TOTAL INCOME ON ACCOUNT OF ADJUSTMENT T O ALP. 41. THE SUBMISSIONS MADE BY THE ASSESSEE ARE IDENT ICAL TO THE SUBMISSION MADE IN AY 2007-08 WHICH WE HAVE EXTRACT ED IN THE EARLIER PART OF THIS ORDER AND DO NOT WISH TO REPEAT THE SAME. THE NET MARGIN TO TOTAL COST OF THE COMPARABLE COMPANIES FOR AY 2008-09 IS PROVIDED IN THE TABLE BELOW. P ARTICULARS SOURCE UNADJUSTED MARGIN (OP/TC) FY 2007-08 WORKING CAPITAL ADJUSTED MARGIN (OP/TC) FY 2007-08 UB ENGINEERING LTD. 6.7 0 % 5.71% HI QUALITY STEELS LTD. CIT(A) ORDER AY 04-05 2.15% 2.08% RJ SHAH & CO. LTD. 49.07% - 24. 36% RAUNAQ INTERNATIONAL LTD. 11.46% 9.96% TCE CONSULTING ENGINEERS LTD. DRP ORDER AY 06-07 27.93% 27.69% LURGI INDIA CO. LTD. - 0.14 % 0.86% MAHINDRA ACRES CONSULTING ENGINEERS LTD. 33.89% 31.88% AVERAGE 18.72% 7.69% IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 26 OF 38 42. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADJUSTED OPERATING PROFIT TO TOTAL COST OF COMPARABLE COMPAN IES IS 7.69%. THE ASSESSEES MARGIN FOR THE ENGINEERING SEGMENT IS 11 .32 WHICH IS HIGHER THAN THE AFOREMENTIONED ADJUSTED MARGINS OF THE COM PARABLE COMPANIES. BASED ON THE ABOVE SUBMISSION, HE SUBMITTED THAT TH E ENGINEERING SERVICE SEGMENT IS NOT COMPARABLE TO ITES, BPO OR KPO SERVI CES AND HENCE IT WILL NOT BE APPROPRIATE TO AGGREGATE THE ENGINEERING SER VICE SEGMENT WITH THE ITES SEGMENT. 43. THE LEARNED DR RELIED ON THE ORDER OF THE DRP. 44. WE HAVE ALREADY DECIDED SIMILAR ISSUE IN AY 20 07-08 IN THE EARLIER PART OF THIS ORDER. FACTS AND CIRCUMSTANCES BEING IDENTICAL IN THE PRESENT AY, WE DEEM IT FIT AND PROPER TO REMAND THE ISSUE O F DETERMINATION OF ALP TO THE TPO/AO FOR FRESH CONSIDERATION AS PER DIRECT IONS GIVEN IN AY 2007- 08. GR.NO.2 IS ACCORDINGLY TREATED AS ALLOWED FOR S TATISTICAL PURPOSE. 45. AS FAR AS GR.NO.3 RAISED BY THE ASSESSEE IS CO NCERNED, THE SAME DEALS WITH TWO SEGMENTS ITES AND SWD SERVICES SEGME NT. THE FIRST SEGMENT TO BE CONSIDERED IS ITES. AS FAR AS THIS S EGMENT IS CONCERNED, THE FACTS ARE AS FOLLOWS: ITES SEGMENT NET MARGIN ON COST EARNED BY THE ASSESSEE FOR THE I TES SEGMENT PARTICULARS AMOUNT (INR) OPERATING INCOME 55,994,948 OPERATING EXPENSES* 47,873,928 OPERATING PRO FIT (OP. INCOME - OP. EXPENSES) 8,121,021 OPERATING/NET MARGIN (OP/TC) 16.96% IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 27 OF 38 COMPARABLE COMPANIES SELECTED BY THE ASSESSEE AND T HEIR ARITHMETIC MEAN SR. NO. COMPANY NAME OPERATING MARGIN 1 COSMIC GLOBAL LTD. 11.49 2 SHREEJAL INFO HUBS LTD. 1.02% 3 TRITON CORP LTD. 28.43% 4 TRANSWORKS INFORMATION SERVICES LTD. 4.35% 5 H T M T GLOBAL SOLUTIONS LTD. 15.01% 6 ALLSEC TECHNOLOGIES LTD. 28.47% 7 SPARSH B P 0 SERVICES LTD. 4.91% MEAN 13.38% SINCE THE PROFIT MARGIN OF THE ASSESSEE WAS HIGHER THAN THE COMPARABLE COMPANIES, THE ASSESSEE CLAIMED THAT THE PRICE RECE IVED SHOULD BE REGARDED AS AT ARMS LENGTH. 46. THE LEARNED TPO REJECTED THE ANALYSIS CARRIED OUT BY THE ASSESSEE AND IMPOSED AN ADJUSTMENT OF RS. 161,312,284 IN THE ITES SEGMENT BY COMBINING ENGINEERING AND ITES SEGMENT, WHICH ACTIO N WAS CONFIRMED BY THE DRP. S R. NO. NAME OF THE COMPANY UNADJUSTED WORKING CAPITAL ADJUSTED (INCORPOR ATED FROM SCN) 1 ACCENTIA TECHNOLOGIES LTD 41.77% 37.58% 2 ACROPETAL TECHNOLOGIES LTD (SEG) 35.30% 13.50% 3 ADITYA BIRLA MINACS WORLDWIDE LTD -4.00% -4.82% 4 ASIT C MEHTA FINANCIAL SERVICES LTD (SEG) 9.42% 7.55 0 /0 5 CALIBER POINT BUSINESS SOLUTIONS LTD 10.97% 7.06% 6 CORAL HUBS LTD 50.68% 37.60% 7 COSMIC GLOBAL L TD 23.30% 21.94% 8 CROSSDOMAIN SOLUTIONS LTD 27.03% 26.34% 9 DATAMATICS FINANCIALS SERVICES LTD (SEG) 29.11% -6.39% 10 E4E HEALTHCARE SOLUTIONS LTD (FORMERLY KNOWN AS NITTANY OUTSOURCING SERVICES PVT LTD) 18.54% 16.33% IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 28 OF 38 11 ECLERX SERVICES LIMITED 58.80% 56.48% 12 GENESYS INTERNATIONAL CORPORATION LTD 47.40% 44.14% 13 INFOSYS BPO LTD 19.66% 18.60% 14 ISERVICES INDIA PRIVATE LIMITED 10.77% 9.41% 15 JINDAL INTELLICOM PVT LTD -10.29% -11.38% 16 MOLD TEK TECHNOLOGIES LTD 96.66% 90.28% 17 R SYSTEMS INTERNATIONAL LTD (SEG) 4.30% 3.32% 18 SPANCO LTD (SEG) 8.81% 3.07% 19 WIPRO LTD (SEG) 30.05% 30.05% 20 ALLSEC TECHNOLOGIES LTD -13.29% -15.56% ARITHMETIC MEAN 24.75% 19.26% 47. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL, IF DECISI ONS OF THIS HON'BLE TRIBUNAL IN THE CASES OF FLEXTRONICS TECHNOLOGIES I NDIA PVT. LTD. ITA NO. 1559/BANG/2012, RENDERED IN THE CASE OF AN ITES COM PANY SUCH AS THE ASSESSEE FOR THE VERY SAME AY, IS FOLLOWED, THE FOL LOWING COMPARABLE COMPANIES WOULD BE THE ACCEPTED / REJECTED. S R. NO. NAME OF THE COMPANY MARGIN UNADJ. % MARGIN WC ADJUSTE D REMARKS PAGE REFERENCE IN THE CASE LAW COMPENDIU M 1 ACCENTIA TECHN OL OG IES LTD. 41.77% 37.58% REJECT - DISSIMILAR FUNCTION PAGE NO. 346 2 ACROPETAL T ECHNOLOGIES LTD. 35.30% 13.50% REJECT - DISSIMILAR FUNCTION PAGE NO. 347 IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 29 OF 38 3 ADITYA BIRLA MINACS WORLDWIDE LTD. - 4.00% - 4.80% ACCEPT 4 ASIT C MEHTA FINANCIAL SERVICES LTD. 9 .42% 7.56% ACCEPT 5 CALIBER POINT BUSINESS SOLUTIONS LTD. 10.97% 7.07% ACCEPT 6 CORAL HUBS LTD. 50.68% 37.59% REJECT - DISSIMILAR FUNCTION PAGE NO.349 7 COSMIC GLOBAL LTD. 23.30% 21.94% ACCEPT 8 CROSSDOMAIN SOLUTIONS LTD. 27.03% 26.34% REJE CT - DISSIMILAR FUNCTION PAGE NO.349 9 DATAMATICS FINANCIAL SERVICES LTD. 29.11% - 6.37% ACCEPT 10 E4E HEALTHCARE SOLUTIONS LTD. 18.54% 16.34% ACCEPT 11 ECLERX SERVICES LTD. 58.80% 56.46% REJECT DISSIMILAR FUNCTION PAGE NO. 350 12 GENESYS INTERNATIONAL CORPORATION LTD. 47.70% 44.13% REJECT DISSIMILAR FUNCTION PAGE NO. 351 13 INFOSYS BPO LTD. 19.66% 18.60% REJECT DISSIMILAR FUNCTION FUNCTION PAGE NO. 351 14 ISERVICES INDIA PVT. LTD. 10.77% 9.41% ACCEPT 15 JINDAL INTELLICOM PVT. LTD. -10.29% -11.36% ACCEPT 16 MOLD-TEK TECHNOLOGIES LTD. 96.66% 90.24% REJECT DISSIMILAR FUNCTION NO. 352 17 R SYSTEMS INTERNATIONAL LTD. 4.30% 3.33% ACCEPT 18 SPANCO LTD. 8.81% 3.09% ACCEPT 19 WIPRO LTD. 30.05% 30.05% REJECT - DISSIMILAR FUNCTION PAGE NO. 352, 353 20 ALLSEC TECHNOLOGIES LTD. -13.29% -15.54% ACCEPT IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 30 OF 38 48. THE COMPUTATION OF ARITHMETIC MEAN OF 11 COMPA RABLE COMPANIES THAT REMAIN AFTER ACCEPT/REJECT MATRIX AS GIVEN IN THE TABLE IS ADOPTED WOULD BE AS FOLLOWS: SI. NO NAME OF THE COMPANY UNADJUST ED OP/TC ADJUSTED OP/TC 1 ADITYA BIRLA MINACS WORLDWIDE LTD. -4.00% -4.80% 2 ASIT C MEHTA FINANCIAL SERVICES LTD. 9.42% 7.56% 3 CALIBER POINT BUSINESS SOLUTIONS LTD. 10.97% 10.97% 4 COSMIC GLOBAL LTD. 23.30% 21.94% 5 DATAMATIC S FINANCIAL SE RVICES LTD. - 5.35% - 6.37% 6 E4E HEALTHCARE SOLUTIONS LTD. 18.54% 16.34% 7 'SERVICES INDIA PVT. LTD. 10.77% 9.41% 8 JINDAL INTELLICOM PVT. LTD. -10.29% -11.36% 9 R SYSTEMS INTERNATIONAL LTD. 4.30% 3.33% 10 SPANCO LTD. (SEG) 8.81% 3.09% 1 1 ALLSEC TEC HN OLOGIES LTD. - 13.46% - 15.5 4% ARITHMETIC MEAN 4.82% 3.14% 49. THE WORKING CAPITAL ADJUSTED ARITHMETIC MEAN O F THE 11 COMPARABLE COMPANIES WOULD BE WITHIN THE ARMS LENGTH RANGE. THEREFORE, NO TP ADJUSTMENT IS REQUIRED AND THE TP ADJUSTMENT MADE B Y THE TPO IS LIABLE TO BE QUASHED. 50. WE HAVE ALREADY HELD WHILE DECIDING GR.NO.2 T HAT THE ENGINEERING AND THE ITES SEGMENTS SHOULD BE SEPARATELY CONSIDER ED AND NOT COMBINED. IN VIEW OF THE AFORESAID FINDING, WE SET ASIDE THE ORDER OF THE DRP/AO ON THIS ISSUE AND REMAND THE QUESTION OF DET ERMINATION OF ALP IN THE ITES SEGMENT ALONE WITHOUT COMBINING THE SAME W ITH THE ENGINEERING SERVICES SEGMENT AFRESH. THE TPO/AO WILL CONSIDER THE SUBMISSIONS MADE BY ASSESSEE BEFORE US AND ALSO AFFORD OPPORTUNITY O F BEING HEARD TO THE ASSESSEE IN THE SET ASIDE PROCEEDINGS. 51. AS FAR AS THE SWD SERVICES SEGMENT WHICH IS ALS O PART OF GR.NO.3 IS CONCERNED, THE FACTUAL DETAILS ARE AS FOLLOWS:- IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 31 OF 38 A. SOFTWARE SEGMENT NET MARGIN ON COST EARNED BY THE APPELLANT P ARTICULARS OP/ OC OPERATING I NC OME RS.371,438,299 OPERATING EXPENSES RS.345,260,313 OPERATING PROFIT (OP. INCOME - OP. EXPENSES) RS.26,177,986 OPERATING/NET MARGIN (OP/TC) 7.58% COMPARABLE COMPANIES SELECTED BY THE ASSESSEE S.NO. COMPANY NAME' OPERATING MARGIN 1 AZTECSOFT LTD. 7. 10% 2 LARSEN & TOUBRO INFOTECH LTD. 15.43% 3 MINDTREE LTD. 14.87% 4 MPHASIS LTD.* 13.73% 5 P S I DATA SYSTEMS LTD.* 6.84% 6 PERSISTENT SYSTEMS PVT. LTD. 19.75% 7 PRITHVI INFORMATION SOLUTIONS LTD. 13.49% 8 QUINTEGRA SOLUTIONS LTD. 9.85% 9 R S SOFTWARE (INDIA) LTD. 13.96% 10 S I P TECHNOLOGIES & EXPORTS LTD. 13.10% 11 SONATA SOFTWARE LTD. 13.69% 12 T V S INFOTECH LTD. -12.04% ARITHMETIC MEAN 10.81% 52. THE TPO REJECTED THE ANALYSIS CARRIED OUT BY T HE ASSESSEE AND ACCEPTED ONLY THREE COMPARABLE COMPANIES. COMPARABLE COMPANIES SELECTED BY THE TPO SR. NO. NAME OF THE COMPANY UNADJUSTED MARGIN WC ADJUSTED MARGIN 1 AVANI CINCOM TECHNOLOGIES 25.62% 25.62% 2 BODHTREE CONSULTING LTD 18.72% 18.12% 3 CELESTIAL BIOLABS 87.94% 80.2 5% 4 E - Z EST SOLUTION S LTD 29.81% 28.17% 5 FLEXTRONICS (ARICENT) 7.86% 4.17% 6 IGATE GLOBAL SOLUTIONS LTD 13.99% 10.05% 7 INFOSYS 40.37% 37.18% IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 32 OF 38 8 KALS INFORMATION SYSTEM (SEG) 41.94% 27.60% 9 LGS GLOBAL LTD 27.52% 24.06% 10 MINDTREE LTD (SEG) 16.41% 12.35% 1 1 PERSISTENT S YSTEMS LTD 20.31% 19.11% 12 QUINTEGRA SOLUTIONS LTD 21.74% 13.35% 13 R SYSTEMS INTENATIONAL (SEG) 15.30% 12.05% 14 RS SOFTWARE (INDIA) LTD 7.41% 6.06% 15 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG) 7.58% 5.61% 16 TATA ELXSI LTD (SEG) 18.97% 17,38% 17 THIRDWARE SOLUTIONS LTD 19.35% 15.53% 18 WIPRO LTD (SEG) 28.45% 28.45% 19 SOFTSOL INDIA LTD 17.89% 14.11% 20 LUCID SOFTWARE LTD 16.50% 14.93% ARITHMETIC MEAN 23.65% 20.71% COMPUTATION OF ARM'S LENGTH PRICE BY TPO AND THE AD JUSTMENT MADE ARM'S LENGTH MEAN MARGIN 23.65 LESS: WORKING CAPITAL ADJUSTMENT 2.47 ADJUSTED MEAN MARGIN OF THE COMPARABLE COMPANIES 21.18 OPERATING COST 35,63,12,516/- ARM'S LENGTH MARGIN (21.18% OF OPERATING COST) 7,54,66,991/- ARM'S LENGTH PRICE (ALP) 121.18% OF OPERATING COST 43,17,79,506/- PRICE CHARGED IN INTERNATIONAL TRANSACTIONS* 38,24,90,503/ - SHORT FALL BEING ADJUSTMENT U/S. 92CA 4,92,89,004 53. THE DRP CONFIRMED THE ORDER OF THE TPO. THE L EARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT W ITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL IF THE DECISION OF THIS HON'BLE TRIBUNAL RENDERED IN T HE CASES OF INFINEON TECHNOLOGIES INDIA PVT. LTD. VS. ACIT- ITA NO. 1670 /13/12, A COMPANY WHICH IS ALSO IN SWD SERVICES AND SIMILAR TO THE AS SESSEE COMPANY, 13 OUT OF THE 20 COMPARABLE COMPANIES SELECTED BY THE TPO WOULD STAND EXCLUDED AND IN THAT EVENT THE FOLLOWING WOULD BE T HE ACCEPT / REJECT MATRIX: IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 33 OF 38 SR. NO. NAME OF THE COMPANY MARGIN UNADJ. 0 /0 MARGIN - WC ADJUSTED REMARKS PAGE REFERENCE IN THE CASE LAW COMPENDIUM 1 AVANI CIMCON 25.62% 25.62% REJECT - DISSIMILAR PAGE 314FUNCTION 2 BODHTREE LTD 18.72% 18.12% REJECT - DISSIMILAR PAGE 336FUNCTION 3 CELESTIAL BIOLABS LTD 87.94% 80.25% REJECT - DISSIMILAR PAGE 326FUNCTION 4 E-ZEST SOLUTIONS LTD 29.81% 28.17% REJECT - D IS SIMILAR PAGE 331FUNCTION 5 FLEXTRONICS SOFTWARE 7.86% 4.17% ACCEPT 6 IGATE GLOBAL SOLUTIONS LTD 13.99% 10.05% ACCEPT 7 INFOSYS TECHNOLOGIES LTD 40.37% 37.18% REJECT - DISSIMILAR PAGE 329FUNCTION 8 KALS INFO SYSTEMS (SEG) 31.29% 27.60% REJECT - DISSIMILAR PAGE 328FUNCTION 9 LGS GLOBAL LTD ( LANCO) 27.52% 24.06% ACCEPT 10 LUCID SOFTWARE 16.50% 14.93% REJECT - DISSIMILAR FUNCTION PAGE 333 11 MINDTREE CONSULTING (SEG) 16.41% 12.35% ACCEPT 12 PERSISTENT SYSTEMS LTD 20.31% 19.11% REJECT - DI SSIMILAR FUNCTION PAGE 334 13 QUINTEGRA SOLUTIONS LTD 21.74% 13.35% REJECT - DISSIMILAR FUNCTION PAGE 335 14 R S SOFTWARE (INDIA) LTD 7.41% 6.06% ACCEPT 15 R SYSTEMS INTERNATIONAL (SEG) 15.30% 12.05% ACCEPT 16 SASKEN COMMUNICATIONS (SEG) 7.58% 5.61% ACCEPT 17 SOFTSOL INDIA LTD 17.89% 14.11% REJECT - DISSIMI LAR FUNCTION PAGE 335 18 TATA ELXSI LTD(SEG) 18.97% 17.38% REJECT - DISSIMILAR FUNCTION PAGE 331 19 THIRDWARE SOLUTIONS 19.35% 15.53% REJECT DISSIMIL AR FUNCTION PAGE 332 20 WIPRO LIMITED (SEG) 28.45% 28.45% REJECT - DISSIMILAR FUNCTION PAGE 330 IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 34 OF 38 54. IF THE CORRECT WORKING CAPITAL ADJUSTED MARGINS ARE CONSIDERED, THE ARITHMETIC MEAN OF SEVEN ACCEPTED COMPARABLE COMPAN IES OUT OF THE 20 COMPARABLE COMPANIES WOULD BE AS FOLLOWS: COMPUTATION OF ARITHMETIC MEAN OF SEVEN COMPARABLE COMPANIES S I. NO. NAME OF THE COMPANY OPERATING MARGIN ON COST - WC ADJUSTED 1 FLEXTRONICS SOFTWARE (SEG) 4.17 0 /0 2 IGATE GLOBAL SOLUTIONS LTD. (SEG) 10.05% 3 LGS GLOBAL LTD. 24.06% 4 MINDTREE CONSULTING (SEG) 12.35% 5 R SYSTEMS INTERNATIONAL (SEG) 12.05% 6 R S SOFTWARE INDIA LTD. 6.06% 7 IGATE GLOBAL SOLUTIONS LTD. (SEG) 5.61% ARITHMETIC MEAN 10.62% RANGE COMPUTATION PARTICULARS GEMS (IT SEGMENT) 5% - 5% REVENUE 371,438,299 390,010,214 352,866,384 COST 345,260,313 345,260,313 345,260,313 OPERATING PROFIT 26,177,986 44,749,901 7,606,071 OP/OC 7.58% 12.96% 2.20% 55. THE WORKING CAPITAL ADJUSTED ARITHMETIC MEAN OF THE SEVEN COMPARABLE COMPANIES WHICH WORKS OUT TO BE 10.62% W OULD BE WITHIN THE RANGE OF + / - 5% OF THE ASSESSEE'S NET MARGIN. THE REFORE, NO TP ADJUSTMENT WOULD BE REQUIRED AND THEREFORE, THE TP ADJUSTMENT MADE BY THE TPO IS LIABLE TO BE QUASHED. IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 35 OF 38 56. WE HAVE CONSIDERED THE SUBMISSION OF THE ASSESS EE. WHILE DECIDING IDENTICAL GROUND IN AY 2007-08, WE HAVE AL READY SET ASIDE THIS ISSUE TO THE TPO/AO FOR FRESH CONSIDERATION WITH CE RTAIN DIRECTIONS. FACTS AND CIRCUMSTANCES BEING IDENTICAL IN THE PRESENT AY , WE DEEM IT FIT AND PROPER TO REMAND THE ISSUE OF DETERMINATION OF ALP TO THE TPO/AO KEEPING IN MIND THE SUBMISSIONS MADE AS ABOVE, FOR FRESH CO NSIDERATION. THIS PART OF GR.NO.3 IS ACCORDINGLY TREATED AS ALLOWED FOR ST ATISTICAL PURPOSE. 57. THE OTHER CORPORATE ISSUE THAT ARISES FOR CONSI DERATION IS WHETHER EXPENSES INCURRED IN FOREIGN CURRENCY SHOULD BE EXC LUDED FROM BOTH EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING DEDUCTI ON U/S.10A OF THE ACT. 58. WE HAVE ALREADY DECIDED IDENTICAL GROUND OF AP PEAL IN AY 2007-08 IN THE EARLIER PART OF THIS ORDER. TAKING INTO CON SIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT EXPENDITURE INCURRED IN FOREIGN CURRENCY SHOULD BE EXCLUDED BOT H FROM EXPORT TURNOVER AND TOTAL TURNOVER. WE ARE OF THE VIEW THAT AS OF TODAY, LAW DECLARED BY THE HON'BLE HIGH COURT OF KARNATAKA WHICH IS THE JURISD ICTIONAL HIGH COURT IS BINDING ON US. MOREOVER, THE ORDER OF THE HONBLE KARNATAKA HIGH COURT HAS BEEN UPHELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. IN CIVIL APPEAL NO.8489-98490 OF 2013 & ORS. DATED 24.04.2018 . IN VIEW OF THE ABOVE, THE GROUND RAISED IN THI S REGARD IS ALLOWED. 59. THE OTHER GROUND RELATING TO DISALLOWANCE U/S.1 4A OF THE ACT, WAS NOT PRESSED FOR ADJUDICATION AND HENCE DISMISSED AS NOT PRESSED. 60. IN THE RESULT, THIS APPEAL IS PARTLY ALLOWED. IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 36 OF 38 61. IN THE RESULT, BOTH THE APPEALS BY THE ASSESSEE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF SEPTEMBER, 2019. SD/- SD/- ( VIKRAM SINGH YADAV ) ( N.V. VASUDEVA N ) A CCOUNTANT MEM BER VICE PRESIDENT BANGALORE, DATED, THE 20 TH SEPTEMBER, 2019. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, I TAT, BANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE. IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 37 OF 38 ANNEXURE-I TO ORDER IT( TP )A NOS.1156/BANG/2011 & 1471/BANG/2012 PAGE 38 OF 38