Sterling Commerce Private Limited, Bangalore V. DCIT, Bangalore

ITA 1497/BANG/2010

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 9703 (ITAT-BANGALORE)
• Duration Of Justice: 8 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 23-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR BENGALURU
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Question of law; Wholly owned subsidiary; Scheme of amalgamation; Unabsorbed depreciation; TDS
• Section: 143(3); 92B; 92A; 10AA; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN , ACCOUNTANT MEMBER IT (TP) A NO. 1497/BANG/2010 ASSESSMENT YEAR : 2006 - 07 STERLING COMMERCE SOLUTIONS INDIA PRIVATE LTD., (SUCCESSOR IN INTEREST TO TELELOGIC INDIA PVT. LTD.), C/O. IBM INDIA PVT. LTD., III FLOOR, SUBRAMANYA ARCADE, 12, BANNERGHATTA ROAD, BANGALORE 560 029. PAN: AABCT 3727D VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANGALORE. APPELLANT R ESPONDENT APP ELLANT BY : SHRI PADAMCHAND KHINCHA, CA RESPONDENT BY : SHRI PRADEEP KUMAR, CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 26 .0 6 .2019 DATE OF PRONOUNCEMENT : 28 . 0 6 .201 9 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 11.10.2010 OF THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE12( 4), BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [THE ACT]. 2. THE ASSESSEE EARLIER KNOWN AS TELELOGIC INDIA PR IVATE LIMITED IS A 100% SUBSIDIARY OF TELELOGIC AB. THE ASSESSEE IS E NGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES) AND IN FORMATION IT(TP)A NO.1497/BANG/2010 PAGE 2 OF 37 TECHNOLOGY ENABLED SERVICES (ITES) TO ITS ASSOCIATE D ENTERPRISES (AE). THE TRANSACTION OF PROVIDING SWD SERVICES AND ITES TO ITS AE BY THE ASSESSEE WERE INTERNATIONAL TRANSACTIONS AND THE PR ICE RECEIVED FOR RENDERING SUCH SERVICES BY THE ASSESSEE FROM ITS AE HAS TO PASS THE ARMS LENGTH PRICE (ALP) TEST AS PROVIDED U/S.92 OF THE I NCOME TAX ACT, 1961 (ACT). IN THIS APPEAL TWO OF THE DISPUTES ARE WITH REGARD TO ADDITION MADE CONSEQUENT TO DETERMINATION OF ALP AND CONSEQUENT U PWARD REVISION AND ADJUSTMENT MADE TO THE PRICE AT WHICH INTERNATIONAL TRANSACTIONS WERE CARRIED OUT BY THE ASSESSEE WITH ITS AE IN RESPECT OF (1) SOFTWARE DEVELOPMENT SERVICES AND (2) IT ENABLED SERVICES. TP ADJUSTMENT RELATING TO IT SERVICES (SOFTWARE DEVELOPMENT SERVICES: 3. THERE IS NO DISPUTE THAT THE MOST APPROPRIATE ME THOD CHOSEN FOR THE PURPOSE OF COMPARISON OF THE PROFIT MARGIN OF THE A SSESSEE WITH THAT OF THE COMPARABLE COMPANIES WAS THE TRANSACTION NET MARGIN METHOD (TNMM) AND THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR THE PURPOSE OF SUCH COMPARISON WAS OPERATING PROFIT TO OPERATING COST ( OP/OC). THE OP/OC OF THE ASSESSEE IN THE SWD SERVICES SEGMENT WAS AS FOLLOWS:- D ESCRIPTION AMOUNT OPERATING REVENUE RS .6,31,98,998/ - OPERATING COST RS. 5,86,25,045 / - OPERATING PROFIT (PBIT) RS. 45,73,953 / - OPERATING PROFIT TO COST RATI 7.80 % IT(TP)A NO.1497/BANG/2010 PAGE 3 OF 37 4. COMPARABLE ULTIMATELY SELECTED BY TPO AND THEIR ARITHMETIC MEAN :- SL. NO NAME OF COMPANY OP / TC (FY 2006 - 07) SALES (RS.CR.) 1 AZTEC SOFTWARE LIMITED 18.09 128.61 2 GEOMETRIC SOFTWARE LIMITED (SEG.) 6.70 98.59 3 INFOSYS LTD 40.38 9028.00 4 KALS INFO SYSTEMS LIMITED 39.75 1.97 5 MINDTREE CONSULTIN G LT D 14.67 448.79 6 PERSISTENT SYSTEMS LTD. 24.67 209.18 7 R.SYSTEMS INTERNATIONAL LTD. (SEG.) 22.20 79.42 8 SASKEN COMMUNICATIONS LTD. (SEG.) 13.90 240.03 9 TATA ELXSI LTD (SEG.) 27.65 188.81 10 LUCID SOFTWARE LTD 8.92 1.02 11 MEDIASOFT SOLUTIONS L TD 6 .29 1.76 12 R S SOFTWARE (INDIA) LTD 15.69 91.57 13 S I P TECHNOLOGIES & EXPORTS LTD 3.06 6.53 14 BODHTREE CONSULTING LTD. 15.99 5.32 15 ACCEL TRANSMATIC LTD. (SEG.) 44.07 8.02 16 SYNFOSYS BUSINESS SOLUTIONS LTD. 10.61 4.49 17 FLEXTRONICS SOFT WA RE SYSTEMS LTD. 27.24 595.12 18 LANCO GLOBAL SOLUTIONS LTD 5.27 35.63 19 MEGASOFT LTD 52.74 56.15 20 IGATE GLOBAL SOLUTIONS LTD.(SEG.) 15.61 527.91 ARITHMETIC MEAN 20.68% LESS:AD-HOCWORKINGCAPITALADJUSTMENT ADJUSTED PROFIT MARGIN MEAN 1.00% 19.68% 5. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE COMPARABLES SET OUT ABOVE, ARRIVED AT ARITHMETIC MEAN OF IT(TP)A NO.1497/BANG/2010 PAGE 4 OF 37 20.68%. AFTER FACTORING THE WORKING CAPITAL ADJUST MENT OF 1.00%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 19.68%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 19.6. 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 YOU IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 20.68% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) 1.00% ADJ.ARITHMETIC MEAN PLI 1 9.68% ARMS LENGTH PRICE: OPERATING COST RS. 5,64,27,676 ARMS LENGTH MARGIN 1 9.68 % OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 11 9.68 % OF OPERATING COST RS.6,74,98,786/- 19.7. PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRI CE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 1 19.68% OF OPERATING COST RS.6,74,98,786/- PRICE CHARGED IN THE INTERNATI ON TRANSACTIONS RS.6,31,98,998/- SHORTFALL BEING ADJUSTMENT U/S.92CA RS.42,99,788/- THE ABOVE SHORTFALL OF RS.42,99,788/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. IT(TP)A NO.1497/BANG/2010 PAGE 5 OF 37 6. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. THE ASSESSEE FILED A CHART SHOWING TURNOVER AND THE MARGINS OF THE 20 COMPARABLE COMPANIES FINALLY CHOSEN BY THE TPO A FTER GIVING EFFECT TO ADJUSTMENT TOWARDS WORKING CAPITAL AS ALLOWED BY TH E TPO AND ALSO AS CLAIMED BY THE ASSESSEE. THE CHART ALSO EXPLAINS AS TO HOW SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO ARE NOT COMP ARABLE (A) FOR THE REASON THAT THE TURNOVER OF THOSE COMPANIES WERE BE YOND RS.200 CRORES AND THEREFORE CANNOT BE COMPARED WITH THE ASSESSEE WHOSE TURNOVER IS ONLY RS.6.31 CRORES, (B) FOR THE REASON THAT THESE COMPANIES WERE NOT FUNCTIONALLY COMPARABLE; (C) FOR THE REASON THAT TH E RELATED PARTY TRANSACTION (RPT) CARRIED OUT BY THE COMPARABLE COMPANIES DURIN G THE PREVIOUS YEAR WAS BEYOND 15% OF ITS REVENUE AND HENCE OUGHT NOT T O BE INCLUDED AS A COMPARABLE. THE CHART ALSO GIVES THE CASES DECIDED BY VARIOUS BENCHES OF THE ITAT WHERE THE COMPARABLE COMPANIES HAVE BEE N HELD TO BE NOT COMPARABLE WITH THAT OF AN ASSESSEE PROVIDING IT SO FTWARE DEVELOPMENT SERVICES. THE LEARNED DR RELIED ON THE ORDER OF T HE REVENUE AUTHORITIES. WE WILL PROCEED TO CONSIDER THE COMPARABILITY OF CO MPANIES CHOSEN BY THE TPO AND LISTED IN PARA- 4 OF THIS ORDER. IT(TP)A NO.1497/BANG/2010 PAGE 6 OF 37 8. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 20 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE FOLL OWING COMPANIES WILL HAVE TO BE EXCLUDED AS THE TURNOVER OF THESE C OMPANIES ARE MORE THAN RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSES SEE WHOSE TURNOVER IS LESS THAN RS.100 CRORES:- (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 527.91 CRORES (3) MINDTREE LTD. 448.79 CRORES (4) PERSISTENT SYSTEMS LTD. 209.18 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 240.03 CRORES (6) INFOSYS TECHNOLOGIES LTD. 9028.00 CRORES. 9. AS FAR AS EXCLUDING THE COMPANIES ON THE BASIS O F TURNOVER IS CONCERNED, THE ISSUE HAS BEEN SETTLED IN SEVERAL DE CISIONS OF THE TRIBUNAL AND HAS BEEN ELABORATELY DISCUSSED BY THIS TRIBUNAL IN THE CASE OF AUTODESK INDIA PVT. LTD. V. DCIT IN IT(TP)A NO.540 & 541/BANG/2013, ORDER DATED 06.07.2018. THE TRIBUNAL IN THIS DECISION AFTER REVIEW OF ENTIR E CASE LAWS ON THE SUBJECT, CONSIDERED THE QUESTION, WHETHER COMPANIES HAVING TURNOVER MORE THAN 200 CRORES UPTO 500 CRORE S HAS TO BE REGARDED AS ONE CATEGORY AND THOSE COMPANIES CANNOT BE REGAR DED AS COMPARABLES WITH COMPANIES HAVING TURNOVER OF LESS THAN 200 CRO RES, THE TRIBUNAL HELD AS FOLLOWS:- 17.7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. T HE SUBSTANTIAL QUESTION OF LAW (QUESTION NO.1 TO 3) WHICH WAS FRAM ED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITA L INVESTMENT ADVISORS (INDIA) PVT.LTD., (SUPRA) WAS AS TO WHETHE R COMPARABLE CAN BE REJECTED ON THE GROUND THAT THEY HAVE EXCEPT IONALLY HIGH PROFIT MARGINS OR FLUCTUATION PROFIT MARGINS, AS CO MPARED TO THE ASSESSEE IN TRANSFER PRICING ANALYSIS. THEREFORE AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE T HE OBSERVATIONS IT(TP)A NO.1497/BANG/2010 PAGE 7 OF 37 OF THE HON'BLE HIGH COURT, IN SO FAR AS IT REFERS T O TURNOVER, WERE IN THE NATURE OF OBITER DICTUM. JUDICIAL DISCIPLINE RE QUIRES THAT THE TRIBUNAL SHOULD FOLLOW THE DECISION OF A NON-JURISD ICTION HIGH COURT, EVEN THOUGH THE SAID DECISION IS OF A NON-JU RISDICTIONAL HIGH COURT. WE HOWEVER FIND THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PENTAIR WATER INDIA PVT.LTD. TA X APPEAL NO.18 OF 2015 JUDGMENT DATED 16.9.2015 HAS TAKEN THE VIEW THAT TURNOVER IS A RELEVANT CRITERION FOR CHOOSING COMPANIES AS C OMPARABLE COMPANIES IN DETERMINATION OF ALP IN TRANSFER PRICI NG CASES. THERE IS NO DECISION OF THE JURISDICTIONAL HIGH COURT ON THIS ISSUE. IN THE CIRCUMSTANCES, FOLLOWING THE PRINCIPLE THAT WHERE T WO VIEWS ARE AVAILABLE ON AN ISSUE, THE VIEW FAVOURABLE TO THE A SSESSEE HAS TO BE ADOPTED, WE RESPECTFULLY FOLLOW THE VIEW OF THE HON 'BLE BOMBAY HIGH COURT ON THE ISSUE. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE UPHOLD THE ORDER OF THE DRP EXCLUDING 5 COMPANIES FROM THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO ON THE BASIS THAT THE 5 COMPANIES TURNOVER WAS MUCH HIGHER COMPARED TO THAT THE ASSESSEE. 17.8. IN VIEW OF THE ABOVE CONCLUSION, THERE MAY N OT BE ANY NECESSITY TO EXAMINE AS TO WHETHER THE DECISION REN DERED IN THE CASE OF GENISYS INTEGRATING (SUPRA) BY THE ITAT BAN GALORE BENCH SHOULD CONTINUE TO BE FOLLOWED. SINCE ARGUMENTS WE RE ADVANCED ON THE CORRECTNESS OF THE DECISIONS RENDERED BY THE ITAT MUMBAI AND BANGALORE BENCHES TAKING A VIEW CONTRARY TO THA T TAKEN IN THE CASE OF GENISYS INTEGRATING (SUPRA), WE PROCEED TO EXAMINE THE SAID ISSUE ALSO. ON THIS ISSUE, THE FIRST ASPECT W HICH WE NOTICE IS THAT THE DECISION RENDERED IN THE CASE OF GENISYS I NTEGRATING (SUPRA) WAS THE EARLIEST DECISION RENDERED ON THE I SSUE OF COMPARABILITY OF COMPANIES ON THE BASIS OF TURNOVER IN TRANSFER PRICING CASES. THE DECISION WAS RENDERED AS EARLY AS 5.8.2011. THE DECISIONS RENDERED BY THE ITAT MUMBAI BENCHES C ITED BY THE LEARNED DR BEFORE US IN THE CASE OF WILLIS PROCESSI NG SERVICES (SUPRA) AND CAPEGEMINI INDIA PVT.LTD. (SUPRA) ARE T O BE REGARDED AS PER INCURIUM AS THESE DECISIONS IGNORE A BINDING CO -ORDINATE BENCH DECISION. IN THIS REGARD THE DECISIONS REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE SUPPORTS THE PLEA OF THE L EARNED COUNSEL FOR THE ASSESSEE. THE DECISIONS RENDERED IN THE CA SE OF M/S.NTT DATA (SUPRA), SOCIETE GENERALE GLOBAL SOLUTIONS (SU PRA) AND LSI TECHNOLOGIES (SUPRA) WERE RENDERED LATER IN POINT O F TIME. THOSE IT(TP)A NO.1497/BANG/2010 PAGE 8 OF 37 DECISIONS FOLLOW THE RATIO LAID DOWN IN WILLIS PROC ESSING SERVICES (SUPRA) AND HAVE TO BE REGARDED AS PER INCURIUM. T HESE THREE DECISIONS ALSO PLACE RELIANCE ON THE DECISION OF TH E HONBLE DELHI HIGH COURT IN THE CASE OF CHRISCAPITAL INVESTMENT ( SUPRA). WE HAVE ALREADY HELD THAT THE DECISION RENDERED IN THE CASE OF CHRISCAPITAL INVESTMENT (SUPRA) IS OBITER DICTA AND THAT THE RATIO DECIDENDI LAID DOWN BY THE HONBLE BOMBAY HIGH COUR T IN THE CASE OF PENTAIR (SUPRA) WHICH IS FAVOURABLE TO THE ASSESSEE HAS TO BE FOLLOWED. THEREFORE, THE DECISIONS CITED BY THE LEARNED DR BEFORE US CANNOT BE THE BASIS TO HOLD THAT HIGH TUR NOVER IS NOT RELEVANT CRITERIA FOR DECIDING ON COMPARABILITY OF COMPANIES IN DETERMINATION OF ALP UNDER THE TRANSFER PRICING REG ULATIONS UNDER THE ACT. FOR THE REASONS GIVEN ABOVE, WE UPHOLD THE ORDER OF THE CIT(A) ON THE ISSUE OF APPLICATION OF TURNOVER FILT ER AND HIS ACTION IN EXCLUDING COMPANIES BY FOLLOWING THE RATIO LAID DOWN IN THE CASE OF GENISYS INTEGRATING (SUPRA). 10. RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT THE FOLLOWING COMP ANIES WHOSE TURNOVER IS ABOVE RS.200 CRORES SHOULD BE EXCLUDED FROM THE LIS T OF COMPARABLE COMPANIES:- (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 527.91 CRORES (3) MINDTREE LTD. 448.79 CRORES (4) PERSISTENT SYSTEMS LTD. 209.18 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 240.03 CRORES (6) INFOSYS TECHNOLOGIES LTD. 9028.00 CRORES THE AO IS DIRECTED TO COMPUTE THE ARITHMETIC MEAN B Y EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. IT(TP)A NO.1497/BANG/2010 PAGE 9 OF 37 IMPROPER SELECTION OF COMPARABLES: 11. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FOLLOWING 2 COMPANIES ARE NOT FUNCTIONALLY COMPARAB LE WITH THAT OF THE ASSESSEE. A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECIS ION OF THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. ITA NO.1338/BANG/2010 FOR AY 2007-08 WHEREIN THESE TWO COMPANIES WERE HELD TO BE NOT FUNCTIONALLY COMPARABLE WITH TH AT OF A PURE SOFTWARE DEVELOPER LIKE THE ASSESSEE. 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRIOL OGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA):- (D) KALS INFORMATION SYSTEMS LTD. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWA RE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS A LSO SUBMITTED THAT AS PER THE ANNUAL REPORT, THE SALARY COST DEBITED UNDE R THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COM PARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNC TIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOL LOWS: IT(TP)A NO.1497/BANG/2010 PAGE 10 OF 37 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIO NALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVEL OPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFT WARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T EN ABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PR ODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OU R VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMP ARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJECTED AS A COMPARABLE. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMIS SION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCL USIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAI N COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE A NNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTE R DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF T HE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAP GEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CO NTENTION OF THE ASSESSEE THAT ACCEL TRANSMATIC SHOULD BE REJECTED A S COMPARABLE. THE IT(TP)A NO.1497/BANG/2010 PAGE 11 OF 37 RELEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE IT AT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE S UBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 20 05-06 FROM WHICH THE DRP NOTED THAT THE BUSINESS ACTIVITIES OF THE COMPA NY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MAN UFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VEN DING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OU TSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYSTEM MANAGEME NT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES O F ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FU NCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFI CER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COM PANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN THE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARABILITY PURPOSES. THE SUBMI SSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOU LD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. IT(TP)A NO.1497/BANG/2010 PAGE 12 OF 37 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF T HE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID COMPANY SHOULD N OT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGE MINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE LD. COUNSEL FOR TH E ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPT ING THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFOR ESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 13. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICAL IN THE C ASE OF THE ASSESSEE AS WELL AS IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA). RESPECFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.( SUPRA), WE DIRECT THAT KALS INFOSYSTEMS LTD. AND ACCEL TRANSMATIC LTD. BE EXCLUDED FROM THE LIST OF 20 COMPARABLE ARRIVED AT BY THE TPO. 14. THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE COMPARABLE COMPANY CHOSEN BY THE TPO VIZ., LUCID SO FTWARE LIMITED, HAS TO BE EXCLUDED AS FUNCTIONALLY NOT COMPARABLE WITH THAT OF THE ASSESSEE IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF THE TRI BUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. IN ITA NO .7821/MUM/2011 , WHICH WAS FOLLOWED BY THE ITAT BANGALORE BENCH IN THE CAS E OF LOGICA PRIVATE LTD. ITA NO.1129/BANG/2011 FOR AY 07-08, WHEREIN IT WAS HELD AS UNDER:- 7.2 LUCID SOFTWARE LIMITED IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY , BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALSO INVOLVED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HAS TRIED TO DISTINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMENT EXPENDITURE IN THIS CASE IS AR OUND 39% OF THE CAPITAL IT(TP)A NO.1497/BANG/2010 PAGE 13 OF 37 EMPLOYED BY THE SAID COMPANY, AND, THEREFORE, SUCH A COMPANY CANNOT BE CONSIDERED AS TESTED PARTY. EVEN AS PER THE INFORMA TION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6), THE COMPAN Y HAS DESCRIBED ITS BUSINESS AS SOFTWARE DEVELOPMENT COMPANY OR PURE SO FTWARE DEVELOPMENT SERVICE PROVIDER. THIS INFORMATION ITSELF IS VERY VAGUE AS THE SEGMENTAL DETAILS OF OPERATING REVENUE HAS NOT BEEN MADE AVAI LABLE TO EXAMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWARE PRODUCT AND SALE OF SOFTWARE SERVICE AND DEVELOPMENT. LOOKING TO THE FACT THAT I T HAS DEVELOPED A SOFTWARE PRODUCT NAMED AS MUULAM WHICH IS USED FO R CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS-A-VIS THE CAPITAL EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE P URPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENTIAL THAT THE CHARACTERISTICS AND THE FUNCTIONS ARE BY AND LARGE SIMILAR AS THAT OF THE ASSESSEE COMPANY AND T .P. ANALYSIS/STUDY CAN BE MADE WITH FEWEST AND MOST RELIABLE ADJUSTMENT. I F A COMPANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN THE SALE OF PRODUCT WOULD BE ENTIRELY DIFFERENT FRO M THE COMPANY, WHO IS INVOLVED IN SERVICE SECTOR. THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILITY RATIO. IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFORM ATION ABOUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE SALE OF PRODUCT AND H OW MUCH IS FROM THE SERVICES, THEREFORE, THIS ENTITY CANNOT BE TAKEN IN TO ACCOUNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. 15. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICAL IN THE C ASE OF THE ASSESSEE AS WELL AS IN THE CASE OF LOGICA PRIVATE LTD., (SUPRA) . RESPECFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE C ASE OF LOGICA PVT.LTD. (SUPRA), WE DIRECT THAT THE COMPANY VIZ., LUCID SOF TWARE BE EXCLUDED FROM THE LIST OF 20 COMPARABLE ARRIVED AT BY THE TPO. IT(TP)A NO.1497/BANG/2010 PAGE 14 OF 37 16. AS FAR AS COMPARABLE COMPANIES CHOSEN BY THE TP O VIZ., AZTEC SOFTWARE LIMITED AND GEOMETRIC SOFTWARE LTD. (SEG.) AND MEGASOFT LTD., ARE CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THE RELATED PARTY TRANSACTION IN THE CASE OF COMPANIES EXCEEDS 15% AN D IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF 24 X 7 CUST OMER.COM PVT. LTD. IN ITA NO.227/BANG/2010, FOLLOWED BY THIS TRIBUNAL IN THE CASE OF LOGICA PRIVATE LTD. (SUPRA) WHEREIN IT WAS HELD THAT WHERE THE RPT EXCEEDS 15%, SUCH COMPANIES SHOULD NOT BE TAKEN AS COMPARABLE CO MPANIES. FOLLOWING THE SAID DECISION, WE HOLD THAT THE AFORESAID COMPA NIES REFERRED TO ABOVE BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES W HILE WORKING OUT THE ALP. 17. AS FAR AS COMPARABLE COMPANY CHOSEN BY THE TPO VIZ., TATA ELXSI LTD., IS CONCERNED, THE COMPARABILITY OF THE AFORE SAID COMPANY WITH THAT OF THE SOFTWARE SERVICE PROVIDER SUCH AS THE ASSESSEE WAS CONSIDERED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF LOGICA PVT.LTD. IT (TP) 1129/BANG/2011 AY 07-08) WHEREIN ON THE COMPARABILITY OF THE AFORESAID COMPANY, THE TRIBUNAL HELD AS FOLLOWS:- 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 ARE CONCE RNED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH T HAT OF THE SOFTWARE SERVICE PROVIDER WAS CONSIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LT D. (SUPRA) WHEREIN ON THE AFORESAID TWO COMPANIES, THE TRIBUNAL HELD AS F OLLOWS:- 7.7.TATA ELXSI LIMITED.: FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIO NS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAG ED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS EN TIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT IT(TP)A NO.1497/BANG/2010 PAGE 15 OF 37 THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVID ED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED I N PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BE EN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMP ARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMIN ING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED F ROM THE LIST OF COMPARABLE PARTIES. 15. IN VIEW OF THE ABOVE, THE LD. COUNSEL FOR THE A SSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY AT SL.NO.6 VIZ., FLEXTRONIC S SOFTWARE SYSTEMS PVT. LTD. SHOULD BE TAKEN AS A COMPARABLE, WHILE CO MPARABLE AT SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A COMPA RABLE. 18. IN VIEW OF THE AFORESAID DECISION, WE HOLD THAT TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE CHOSEN BY THE TPO. 19. THE LEARNED COUNSEL SUBMITTED THAT BODHTREE CON SULTING LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES C HOSEN BY THE TPO, AS IT IS FUNCTIONALLY DIFFERENT AS HELD IN THE CASE OF SUPPORT.COM INDIA PVT.LTD. (TS 609-ITAT-2015 (BANG)TP) (COPY AT PAGE 2104 OF P APER BOOK-III FILED BY ASSESSEE) WHICH CASE ALSO RELATES TO A SWD SERVI CE PROVIDER SUCH AS THE ASSESSEE. RESPECTFULLY, FOLLOWING THE SAME, WE HOLD THAT BODHTREE CONSULTING LTD., SHOULD BE EXCLUDED FROM THE LIST O F COMPARABLE COMPANIES CHOSEN BY THE TPO. 20. WE DIRECT THE TPO TO COMPUTE ALP IN SWD SERVICE SEGMENTS, AFTER EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE COMPANIES AFTER GIVING THE BENEFIT OF THE SECOND PROVISO TO S EC.92(2) OF THE ACT. THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEE ARE TREA TED AS ALLOWED. IT(TP)A NO.1497/BANG/2010 PAGE 16 OF 37 TP ADJUSTMENT IN THE IT ENABLED SERVICES TRNSACTIONS WITH AE: 21. THERE IS NO DISPUTE THAT THE MOST APPROPRIATE M ETHOD CHOSEN FOR THE PURPOSE OF COMPARISON OF THE PROFIT MARGIN OF THE A SSESSEE WITH THAT OF THE COMPARABLE COMPANIES WAS THE TRANSACTION NET MARGIN METHOD (TNMM) AND THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR THE PURPOSE OF SUCH COMPARISON WAS OPERATING PROFIT TO OPERATING COST ( OP/OC). THE OP/OC OF THE ASSESSEE IN THE SWD SERVICES SEGMENT WAS AS FOLLOWS: D ESCRIPTION AMOUNT OPERATING REVENUE RS .4,87,32,573/ - OPERATING COST RS. 4,10,87,673 / - O PE R ATING PROFIT (PBIT) RS. 76,44,900 / - OPERATING PROFIT TO COST RATI 18.61 % FINAL SET OF COMPARABLE COMPANIES CONSIDERED BY THE TPO AND THE OP TO TOAL COST % SL.NO. COMPANY NAME OP TO TOTAL COST% 1. MAPLE ESOLUTIONS LTD. 32.66 2. ALLSECTECHNOLO GI E S LTD 28.51 3. DATAMATICS FINANCIAL SERVICES LTD. (SEG.) 24.99 4. TRANSWORKS INFORMATION SERVICES LTD. 19.56 5. COSMIC GLOBAL LTD.(SEG.) 16.03 6. VISHAL INFORMATION TECHNOLOGIES LTD. 19.56 7. ASIT C.MEHTA FINANCIAL SERVICES LTD. (EARLIER KNOWN AS NU C LEUS & GIS (INDIA) LTD. 34.52 8. GOLDSTONE INFRATECH LTD. (SEG.) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD.) 29.01 9. SPANCO LTD. (SEG.) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD.) 20.86 10. ACE SOFTWARE EXPORTS LTD. 7.72 11. APEX KNOW LE D GE SOLUTIONS PVT.LTD. 20.48 IT(TP)A NO.1497/BANG/2010 PAGE 17 OF 37 12. R SYSTEMS INTERNATIONAL LTD. (SEG.) 15.11 13. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 14.54 AVERAGE 24.00 22. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF TH E ACT AND ON THE BASIS OF THE COMPARABLE SET OUT ABOVE, ARRIVED AT A RITHMETIC MEAN OF 24.00%. AFTER FACTORING THE WORKING CAPITAL ADJUST MENT OF 1.00%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 23.00%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- 38.6 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE E FOR DETAILS O F COMPUTATION OF PLI OF THE COMPARABLES). BASED ON THIS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY YOU IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 24.00% LESS: WORKING CAPITAL ADJUSTMENT(ANNEXURE-F) 1.00% ADJ.ARITHMETIC MEAN PLI 23.00% ARMS LENGTH PRICE: OPERATING COST RS. 4, 8 2,74,952 ARMS LENGTH MARGIN 23.00% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 12 3 % OF OPERATING COST RS.6,51,61,645/- 38.7 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRIC E: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: IT(TP)A NO.1497/BANG/2010 PAGE 18 OF 37 ARMS LENGTH PRICE (ALP) AT 12 3 % OF OPERATING COST RS.6,51,61,645/- PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.5,34,34,568/- SHORTFALL BEING ADJUSTMENT U/S.92CA RS.1,17,27,077/- THE ABOVE SHORTFALL OF RS.1,17,27,077/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 23. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 24. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE AND THE LEARNED DR. THE ASSESSEE FILED A CHART SHOWING HOW THE COMPANIES ULTIMATELY CHOSEN BY THE TPO FOR THE PURPOSE OF COMPARISON ARE NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE A S HAS BEEN HELD BY THE TRIBUNAL IN VARIOUS DECISIONS RENDERED IN THE CASE OF ASSESSEES RENDERING ITES SUCH AS THE ASSESSEE. THE LEARNED DR RELIED O N THE ORDER OF THE DRP. 25. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS F AR AS COMPARABLE COMPANIES CHOSEN BY THE TPO AT S.NO.1,3,6,7 & 8 VIZ ., MAPLE ESOLUTION LTD., DATAMATICS FINANCIAL SERVICES LTD., VISHAL IN FORMATION TECHNOLOGICAL IT(TP)A NO.1497/BANG/2010 PAGE 19 OF 37 SERVICES LTD., ASIT C.MEHTA FINANCIAL SERVICES LTD. , AND GOLD STONE INFRATECH LTD., IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO, WE FIND THAT THE HYDERBAD BENCH OF THE ITAT IN THE CAS E OF HSBC ELECTRONIC DATA PROCESSING INDIA LTD. VS. ACIT, ITA NO.1624/HY D/2010 BY ORDER DARTED 28.6.2013 CONSIDERED COMPARABILITY OF THESE COMPANIES IN THE CASE OF A COMPANY ENGAGED IN RENDERING IT ENABLED SERVIC ES TO ITS AE SIMILAR TO THAT OF THE ASSESSEE IN THE PRESENT CASE. THE TRIB UNAL HELD THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE. THE FOLLOW ING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL. '8. THE FIRST OBJECTION IS WITH REFERENCE TO SELECT ION OF COMPARABLE DATA BY THE TPO WITH REFERENCE TO THE FO LLOWING FIVE COMPANIES- (A) VISHAL INFORMATION TECHNOLOGIES LTD. (B) GOLDSTONE INFRATECH LTD. (C) DATAMATIC FINANCIAL SERVICES LTD.(SEG) (D) MAPLE E-SOLUTIONS LTD. (E) NUCLEUS NETSOFT & GIS(INDIA) LTD. (NOW KNOWN AS (ASIT C. MEHTA FINANCIAL SERVICES LTD.) VISHAL INFORMATION TECHNOLOGIES LTD. 9. THE ASSESSEES OBJECTION WITH REFERENCE TO INCLU SION OF THIS COMPARABLE IS ON THE REASON THAT THE COMPANY IS FUN CTIONALLY DIFFERENT, ALSO DOES NOT SATISFY THE FILTERS SUCH A S EMPLOYEE COST AND ON-SITE REVENUE FILTER. IT WAS SUBMITTED T HAT EMPLOYEE COST FORMS A MAJOR PORTION OF THE TOTAL CO ST OF BPO SERVICES AND IN THE ASSESSEES CASE EMPLOYEE COST I S 62% OF THE TOTAL COST, WHEREAS IN THE SELECTED COMPANY THE EMPLOYEE COST IS LESS THAN 2%, WHICH INDICATES THAT MOST OF THE WORK WAS OUTSOURCED AND THE OUT-SOURCING COST WAS AT 88. 64% OF THE OPERATING COST. IT WAS FURTHER SUBMITTED THAT T HE ITAT BANGALORE IN THE CASE OF FIRST ADVANTAGE OFF-SHORE SERVICES (ITA NO.1252/BANG/2010) HAS DIRECTED TO USE EMPLOYE E IT(TP)A NO.1497/BANG/2010 PAGE 20 OF 37 TURNOVER FILTER IN A CONSISTENT MANNER FOR SELECTIO N OF COMPARABLES AND IN THE CASE OF MAERSK GLOBAL SERVIC ES CENTRE (INDIA) PVT. LTD. (14 ITR(TRIB) 541) THE MUM BAI BENCH OF THE TRIBUNAL HAS ANALYSED AND REJECTED THI S COMPANY AS COMPARABLE FOR THE REASON THAT IT HAS OU TSOURCED A CONSIDERABLE PORTION OF ITS BUSINESS AND IS FUNC TIONALLY DIFFERENT. MOREOVER, IT WAS ALSO SUBMITTED THAT THE DRP IN THE LATER YEAR OF 2008-09 VIDE ITS ORDER DATED 3.8.2012 HAS REJECTED THIS COMPANY AS A COMPARABLE (NAME CHANGED TO CORAL HUB LTD.), VIDE PARA 18 OF THE ORDER, WHEREIN ULTIMATELY, IT WAS DECIDED THAT THERE IS MAJOR DIFF ERENCE IN FUNCTIONALITY AND THE BUSINESS MODEL AND THE DRP BE NCH WAS OF THE VIEW THAT CORAL HUB (FORMERLY KNOWN AS VISHA L INFORMATION TECHNOLOGY LTD.) WAS NOT A SUITABLE COM PARABLE AND NEEDS TO BE DROPPED FROM THE FINAL SET OF COMPA RABLES. BASED ON THE ABOVE SUBMISSIONS, IT WAS SUBMITTED TH AT THIS COMPANY CANNOT BE USED AS A COMPARABLE AND HAS TO B E EXCLUDED. 9.1. THE LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEV ER RELIED ON THE ORDERS OF THE TPO. 9.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE FI ND CONSIDERABLE FORCE IN THE CONTENTIONS ADVANCED BY THE LEARNED CO UNSEL. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT MOST OF THE COST INCURRED BY THE COMPANY TAKEN AS COMPARABLE IS OUTSOURCING COST, AS CAN BE SEEN FROM THE ANNUAL RE PORT PLACED IN THE PAPER-BOOK AND ITAT, MUMBAI IN THE CA SE OF MAERSK GLOBAL SERVICE CENTRE (SUPRA) HAS ANALYSED A ND REJECTED THIS COMPANY AS COMPARABLE, DUE TO THE REA SON THAT IT HAS OUTSOURCED A CONSIDERABLE PORTION OF ITS BUS INESS AND IT IS FUNCTIONALLY DIFFERENT. THIS FACTOR WAS ALSO APP ROVED BY THE DRP IN ASSESSEES OWN CASE IN THE LATER YEAR, AS CAN BE SEEN FROM THE COPY OF THE ORDER PLA CED ON RECORD, FOR ASSESSMENT YEAR 2008-09. IN VIEW OF THI S, WE IT(TP)A NO.1497/BANG/2010 PAGE 21 OF 37 DIRECT THE ASSESSING OFFICER TO EXCLUDE THIS COMPAN Y FROM THE LIST OF COMPARABLES. GOLDSTONE INFRATECH LTD 10. THE ASSESSEES OBJECTION FOR INCLUSION OF THIS COMPARABLE IS ON THE BASIS OF THE FILTER ON FOREIGN EXCHANGE EARN INGS, DIMINISHING REVENUE FILTER AND FUNCTIONALITY, BEING RUN ON LEAS E BASIS. IT WAS SUBMITTED THAT THIS COMPANY WAS REJECTED IN THE CAS E OF STREAM INTERNATIONAL SERVICES PVT. LTD. V/S. ADIT(INTERNAT IONAL TAXATION) BY THE MUMBAI BENCH OF THE TRIBUNAL, VIDE ITS ORDER DATED 11.1.2013 IN ITA NO.8997/MUM/2010 FOR ASSESSMENT YEAR 2006-07. 10.1. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE A RE OF THE OPINION THAT THE BUSINESS MODEL OF THE ABOVE COMPAN Y IS DIFFERENT FROM THAT OF THE ASSESSEE. IN THIS CASE, THE FOREIGN EXCHANGE REVENUE IS LESS THAN 1% OF THE TOTAL TURNO VER. THEREFORE, IT FAILS THE FILTER PROVIDED BY THE ASSE SSING OFFICER, ON THE BASIS OF THE FOREIGN EXCHANGE EARNINGS. FUR THER, THE REVENUE FROM BPO IS FAILING OVER A PERIOD OF THREE YEARS. THIS ISSUE WAS CONSIDERED BY THE COORDINATE BENCH ( MUMBAI BENCH) OF THE TRIBUNAL IN THE CASE OF STREAM INTERN ATIONAL SERVICES LTD.(SUPRA) WHEREIN IT WAS CONSIDERED AS U NDER- 14. THE INCLUSION OF SECOND CASE OBJECTED TO BY TH E ID. AR IS THAT OF GOLDSTONE INFRATECH LIMITED (SEG) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LIMITED). HERE IT IS RELEVAN T TO NOTE THAT THE TPO, INTER ALIA, APPLIED FILTER OF COMPAN IES WITH EXPORT REVENUES MORE THAN 25% OF THE REVENUES. ANN UAL ACCOUNTS OF GOLDSTONE TELESERVICES LIMITED INDICATE TOTAL REVENUE OF THE COMPANY AT RS. 30.89 CRORE FROM THRE E SEGMENTS, VIZ., TELECOMMUNICATION AT RS. 13.63 CROR E, BPO IT(TP)A NO.1497/BANG/2010 PAGE 22 OF 37 AT RS. 5.02 CRORE AND INSULATOR AT RS. 12.23 CRORE. THE BREAK UP OF SUCH REVENUE OF GOLDSTONE TELESERVICES LIMITE D HAS BEEN PROVIDED AT PAGE 236 OF THE PAPER BOOK. SCHEDU LE FORMING PART OF THE ANNUAL ACCOUNTS OF GOLDSTONE TELESERVICES LIMITED DIVULGES EARNINGS IN FOREIGN C URRENCY AT RS. 4.24 LAKH. SUCH DETAIL IS AVAILABLE AT PAGE 239 OF THE PAPER BOOK. WHEN WE COMPARE EARNING IN FOREIGN CURR ENCY AT RS. 4.24 LAKH WITH THE EARNINGS OF BPO AT RS. 5.02 CRORE OR FOR THAT PURPOSE OF THE ENTITY AS A WHOLE AT RS. 30 .89 CRORE, IT BECOMES MANIFEST THAT THIS CASE DOES NOT PASS THROU GH THE FILTER ADOPTED BY THE TPO, BEING, THE COMPANIES WH OSE EXPORT REVENUES ARE MORE THAN 25% OF THE REVENUES. THEREFORE, WE ARE OF THE OPINION, THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE FOR THE PURPOSE OF DETER MINING THE ALP IN THIS CASE. WE DIRECT THE SAME TO BE EXCL UDED. DATAMATIC FINANCIAL SERVICES LTD. 11. THE ASSESSEES OBJECTION TO INCLUSION OF THIS C OMPARABLE IS ON THE BASIS OF RELATED PARTY TRANSACTIONS FILTE R. IT WAS SUBMITTED THAT RPT EXCEEDS 25% OF THE SALES AND THE REFORE, TO BE EXCLUDED. THE ASSESSEE RELIED ON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL (MUMBAI BENCH) IN THE CASE OF STREAM INTERNATIONAL SERVICES (SUPRA), WHER EIN, WHEREIN WITH REFERENCE TO THIS COMPARABLE COMPANY, IT WAS HELD AS UNDER : 11. THE FIRST IS M/S. DATAMATICS FINANCIAL SERVICE S LIMITED. IT CAN BE OBSERVED THAT THE TPO APPLIED FI LTER OF COMPANIES WITH LESS THAN 25% RELATED PARTY TRANSACTIONS. THE LEARNED COUNSEL FOR THE ASSESSEE TOOK US THROUGH THE ANNUAL ACCOUNTS OF DATAMATICS FINANCIAL SERVICES LIMITED, AND SUBMITTED THAT THE GROSS INCOME OF THIS COMPANY FOR THE YEAR ENDING ON 31.03.2006 WAS AT RS. 2.31 CRORE AS AGAINST TOTAL IT(TP)A NO.1497/BANG/2010 PAGE 23 OF 37 EXPENSES OF RS. 1.84 CRORE. REFERRING TO PAGES 319 AND 320 OF THE PAPER BOOK, OUR ATTENTION WAS DRAWN TOWARDS ANNEXURE-2 TO DEMONSTRATE THAT THE TRANSACTIONS WITH THE ASSOCIATED PARTIES WITHIN TH E MEANING OF SECTION 92A AND 92B OF THE INCOME-TAX AC T, 1961 SHOWED ONE MAJOR TRANSACTION WITH DATAMATICS LIMITED TOWARDS REIMBURSEMENT OF EXPENSES AT RS. 99.14 LAKH. THE LEARNED AR CONTENDED THAT THE TRANSACTIONS OF DATAMATICS FINANCIAL SERVICES LIMIT ED WITH OTHER AES AMOUNTED TO RS. 14.31 LAKH MAKING TOTAL OF TRANSACTIONS WITH THE AES AT RS. 1.13 CROR E. IT WAS SUBMITTED THAT THE PERCENTAGE OF TRANSACTION WI TH RELATED PARTIES IS MUCH MORE THAN 25%, BEING, THE FILTER ADOPTED BY THE TPO HIMSELF AND HENCE THE SAM E SHOULD BE EXCLUDED. 12. IN THE OPPOSITION, THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT THE MAJOR TRANSACTION OF RS. 99.14 LAKH OF DATAMATICS FINANCIAL SERVICES LIMITED WITH DATAMATICS LIMITED WAS TOWARDS REIMBURSEMENT OF EXPENSES. SINCE THE REIMBURSEMENT OF EXPENSES DOES NOT INCLUDE ANY PROFIT ELEMENT, THE ID. DR URGED THAT T HE SAME BE EXCLUDED. HE STATED THAT ONCE THIS TRANSACTION IS E XCLUDED, THE OTHER TRANSACTION OF RS. 14.31 LAKH ARE LESS THAN 2 5% OF THE TOTAL TRANSACTION WITH RELATED PARTIES. 13. WE DO NOT FIND ANY FORCE IN THE CONTENTION ADVA NCED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE EXC LUSION OF TRANSACTIONS WITH DATAMATICS LIMITED TOWARDS REIMBURSEMENT OF EXPENSES FROM THE OVERALL TRANSA CTIONS ENTERED INTO BY DATAMATICS FINANCIAL SERVICES LTD. WITH ITS AES. SECTION 92F(V) DEFINES TRANSACTION IN THE CO NTEXT OF TRANSFER PRICING PROVISIONS TO INCLUDE AN ARRANGEME NT, UNDERSTANDING OR ACTION IN CONCERT WHETHER OR NOT I T IS FORMAL OR IN WRITING OR WHETHER OR NOT IT IS INTENDED TO B E ENFORCEABLE BY LEGAL PROCEEDING. THERE IS NO REFERE NCE TO ANY TRANSACTION HAVING NECESSARILY INCLUDING PROFIT ELE MENT OR IT(TP)A NO.1497/BANG/2010 PAGE 24 OF 37 MARK-UP SO AS TO FALL WITHIN THE DEFINITION OF TRA NSACTION UNDER CHAPTER X OF THE INCOME-TAX ACT. SINCE THE TP O APPLIED FILTER OF HAVING COMPANIES WITH LESS THAN 2 5% RELATED PARTY TRANSACTIONS, IT IS NOT OPEN TO ARGUE THAT TH E TRANSACTIONS OF REIMBURSEMENT OF EXPENSES DULY REPO RTED BY DATAMATICS FINANCIAL SERVICES LIMITED AS AN INTERN ATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B SHOU LD BE IGNORED SIMPLY BECAUSE THEY REPRESENT REIMBURSEMENT OF EXPENSES. IF THE CONTENTION OF THE ID. DR THAT THE REIMBURSEMENT OF EXPENSES NOT INVOLVING PROFIT ELEM ENT SHOULD NOT BE CONSTRUED AS A TRANSACTION, IS TAKEN TO A LOGICAL CONCLUSION, IT WOULD MEAN THAT ALL SUCH DEALINGS WI LL CEASE TO BE TRANSACTIONS FOR THE PURPOSES OF CHAPTER-X OF TH E ACT. ONCE THESE DEALINGS ARE NOT CONSIDERED AS TRANSACT IONS, THESE WILL ALSO CEASE TO BE INTERNATIONAL TRANSACTI ONS, GOING OUT OF THE PURVIEW OF SECTION 92 ITSELF. OBVIOUSLY, SUCH A VIEW POINT IS CONTRARY TO THE CLEAR INTENTION AND THE LA NGUAGE OF THE RELEVANT PROVISIONS. A PURE REIMBURSEMENT OF EX PENSES BY ONE AE TO ANOTHER AE IS VERY MUCH A TRANSACTION A S PER SECTION 92F(V) AND CONSEQUENTLY IS EQUALLY AN INTER NATIONAL TRANSACTION AS PER SECTION 92B REQUIRING CONSIDERAT ION AS PER SECTION 92 OF THE ACT. BE THAT AS IT MAY, THE LEARN ED DEPARTMENTAL REPRESENTATIVE COULD NOT DEMONSTRATE T HE FACT THAT SUCH REIMBURSEMENT OF EXPENSES WAS WITHOUT ANY MARKUP. AS THE SO CALLED COMPARABLE CASE OF DATAMAT ICS FINANCIAL SERVICES LIMITED WAS INCLUDED BY THE TPO IN THE FINAL LIST OF COMPARABLES, IN OUR CONSIDERED OPINIO N, THE SAME IS LIABLE TO BE EXCLUDED AS IT INVOLVES RELATED PAR TY TRANSACTIONS AT MUCH HIGHER LEVEL, AS AGAINST THE F ILTER ADOPTED BY THE TPO HIMSELF, BEING COMPANIES WITH LE SS THAN 25% RELATED PARTY TRANSACTIONS. WE ORDER ACCORDINGL Y. IN VIEW OF THE ABOVE, SINCE THIS COMPANY FAILS IN T HIS FILTER ADOPTED BY THE TPO, WE DIRECT THE TPO TO EXCLUDE TH IS COMPANY FROM THE LIST OF COMPARABLES ADOPTED. IT(TP)A NO.1497/BANG/2010 PAGE 25 OF 37 MAPLE E-SOLUTIONS LTD. 12. THE OBJECTION OF THE ASSESSEE WITH REFERENCE TO THIS COMPANY IS WITH REGARD TO THE FINANCIALS OF THE COM PANY, ON THE GROUND OF UNRELIABILITY OF DATA. IT WAS SUBMITT ED THAT SELECTION OF THIS COMPANY WAS REJECTED IN THE CASE OF CRM SERVICES INDIA PVT. LTD IN ITA NO.468/DEL/2009 AND ALSO IN THE CASE OF STREAM INTERNATIONAL SERVICES (SUPRA). FURTHER, THE ASSESSEE ALSO RELIED ON THE DRP ORDER IN ASSESS MENT YEAR 2007-08, WITH REFERENCE TO THE ABOVE COMPANY. 12.1. WE HAVE CONSIDERED THE RIVAL SUB MISSIONS. WE AGREE WITH THE OBJECTIONS OF THE ASSESSEE. IN THE CASE OF STREAM INTERNATIONAL SERVICES P. LTD. (SUPRA), IT IS HELD WITH REFERENCE TO THIS COMPANY AS UNDER : 18. WE ARE UNABLE TO UPHOLD THE CONTENTION RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IT IS APPARENT FROM TWO ORDERS PASSED ONE BY THE DELHI BENCH AND THE OTHER BY THE HYDERABAD BENCH OF THE TRIBUNAL THAT THE C ASE OF MAPLE ESOLUTIONS LIMITED HAS BEEN DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. AS THE ASSESS MENT YEAR UNDER CONSIDERATION IS 2006-2007 AND THE DELHI BENCH OF THE TRIBUNAL HAS ALSO CONSIDERED THE SAME ASSESSMENT YEAR WHILE DIRECTING THE EXCLUSION OF TH E CASE OF MAPLE E SOLUTIONS LIMITED FROM THE LIST OF COMPA RABLES, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE ID. D R IN THIS REGARD. IT IS MORE SO BECAUSE NO CONTRARY VIEW HAS BEEN BROUGHT BY THE LD. DR TO OUR NOTICE. RESPECTFU LLY FOLLOWING THE PRECEDENTS, WE DIRECT THE EXCLUSION O F THIS CASE FROM THE FINAL LIST OF COMPARABLES.' SINCE THE DRP IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 ALSO CONSIDERED AND EXCLUDED THIS COMPANY, WE UPHOLD THE ASSESSEES OBJECTION IN THIS REGARD AND DIRECT THE ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM THE COMPARABLES ADOPTED. IT(TP)A NO.1497/BANG/2010 PAGE 26 OF 37 NUCLEUS NETSOFT & GIS(INDIA) LTD. 13. THE LAST OBJECTION WAS WITH REFERENCE TO THE AB OVE COMPANY, WHICH IS ON SIMILAR FACTS AS THAT OF VISHA L INFORMATION TECHNOLOGIES, DISCUSSED ABOVE. IT WAS S UBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AND FAI LS UNDER THE EMPLOYEE COST FILTER. IT WAS FURTHER SUBMITTED THAT THERE IS A SCHEME OF AMALGAMATION OF EARLIER COMPANY BY THE OR DERS OF THE HONBLE HIGH COURT OF JUDICATURE OF BOMBAY, ON 22.2.2006 AND IN VIEW OF AMALGAMATION, THE FINANCIA LS HAVE CHANGED AND THE BUSINESS MODEL ALSO CHANGED. REFERR ING TO THE ANNUAL REPORT PLACED ON RECORD, IT WAS SUBMITTE D THAT AS AGAINST RS.24.02 LAKHS OF EMPLOYEE COSTS FOR THE YE AR ENDING 31ST MARCH, 2005, THE EMPLOYEE COST HAS INCREASED T O RS.132.59 LAKHS. FURTHER, THE DATA PROCESSING CHARG ES IS ALSO TO THE EXTENT OF RS.1.04 CRORES, WHICH INDICATES TH AT THE ASSESSEE IS OUTSOURCING THE WORK. ACCORDINGLY, IT C ANNOT BE SELECTED AS A COMPARABLE. DUE TO AMALGAMATION DURIN G THE YEAR, THE ASSESSEES BUSINESS MODEL HAS CHANGED AND BECAUSE OF EMPLOYEE COST FILTER ALSO, THIS COMPARABLE HAS T O BE EXCLUDED. 13.1 AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE AR E OF THE OPINION THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABLE NOT ONLY ON THE REASON OF FAILING EMPLOY EE COST FILTER, BUT ALSO DUE TO AMALGAMATION DURING THE YEA R, WHICH HAS CHANGED THE BUSINESS MODEL OF THE COMPANY. 14. IN VIEW OF THE FOREGOING DISCUSSION, WE AGREE W ITH THE ASSESSEES OBJECTION THAT THE ABOVE FIVE COMPARABLE S SHOULD BE EXCLUDED. 26. THE FACTS AND CIRCUMSTANCES AND THE ASSESSMENT YEAR FOR WHICH THE AFORESAID COMPANIES WERE NOT CONSIDERED AS COMPARAB LE ARE IDENTICAL TO THE CASE DECIDED BY THE HYDERABAD BENCH OF ITAT AND THAT OF THE CASE OF IT(TP)A NO.1497/BANG/2010 PAGE 27 OF 37 THE ASSESSEE. RESPECTFULLY FOLLOWING THE DECISION OF THE HYDERABAD BENCH OF ITAT, WE DIRECT THE TPO TO EXCLUDE THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE WHILE ARRIVING AT THE ARITHMETIC MEAN OF COMPARABLE. THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLO WED. 27. WE DIRECT THE TPO TO COMPUTE ALP IN ITES SEGMEN T, AFTER EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE COMPANIES AFTER GIVING THE BENEFIT OF THE SECOND PROVISO TO SEC.92(2) OF T HE ACT. THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEE ARE TREATED AS AL LOWED. 28. GROUND NO.5 RAISED BY THE ASSESSEE WITH REGARD TO DETERMINATION OF ALP IN THE ITES SEGMENT REQUIRES CONSIDERATION. GR .NO.5 RAISED BY THE ASSESSEE READS AS FOLLOWS:- 5. MISTAKES APPARENT FROM RECORD AND ERRONEOUS CO MPUTATION OF NET COST PLUS MARGIN BY THE AO/TPO A) THE AO/TPO HAS ERRED ON FACTS AND IN LAW IN DISR EGARDING THE SEGMENTAL DETAILS AS PROVIDED BY THE APPELLANT AND IN CONSIDERING INCORRECT NET PROFIT MARGINS OF THE APP ELLANT. B) THE AO/TPO HAS ERRED ON FACTS IN COMPUTING THE OPERATING COST OF THE APPELLANT IN RELATION TO THE ITES SEGMENT. 29. TO APPRECIATE THE AFORESAID GROUND, IT IS NECES SARY TO LOOK INTO THE BASIS ON WHICH THE TPO COMPUTED THE OPERATING EXPEN DITURE TO ARRIVE AT PLI (OP/OC) OF THE ASSESSEE IN ITS ITES SEGMENT. T HE OP/OC COMPUTED BY THE ASSESSEE IN THE ITES SEGMENT WAS AS FOLLOWS: - D ESCRIPTION AMOUNT OPERATING REVENUE RS .4,87,32,573/ - OPERATING COST R S . 4,10,87,673 / - OPERATING PROFIT (PBIT) RS. 76,44,900 / - OPERATING PROFIT TO COST RATI O 18.61 % IT(TP)A NO.1497/BANG/2010 PAGE 28 OF 37 THE TPO COMPUTED THE OP/OC IN ALL THE THREE BUSINES S SEGMENT OF THE ASSESSEE I.E., SWD SERVICES, ITES AND DISTRIBUTION SEGMENT, BY DISREGARDING THE FIGURES GIVEN IN THE FINANCIAL STA TEMENTS AND WORKING OUT THE OPERATING PROFITS IN THE FOLLOWING MANNER:- MARGIN COMPUTATION OF THE APPELLANT -MODIFIED BY TH E TPO PARTICULARS SOFTWARE SERVICES IT ENABLED SERVICES DISTRIBUTION SEGMENT UNALLOCABLE INCOME TOTAL OPERATING REVENUE AS PER THE APPELLANT 6,31,98,998 4,87,32,573 10,43,35,049 4,53,435 21,67,20,055 ADD: REIMBURSEMENTS MADE BY AE 53,27,085 LESS: REIMBURSEMENTS MADE BY APPELLANT 6,25,090 TOTAL ADJUSTED OPERATING REVENUE 6,31,98,998 5,34,34,568 10,43,35,049 4,53,435 22,14,22,050 LESS: OTHER INCOME EXCLUDED TURNOVER (%) [SEGMENT TURNOVER / TOTAL TURNOVER] 29.22 22.53 48.24 100 OPERATING EXPENDITURE 11,52,68,853 COST FOR SOFTWARE SEGMENT = REV ENUE * 100/(100 + 12) (12 BEING MARK-UP OVER COST) 5,64,27,677 COST FOR ITES SEGMENT - (ENTITY COST ' SEGMENT REVENUE) 4,82,74,953 TOTAL OPERATING EXPENDITURE 5,64,27,677 4,82,74,953 11,52,68,853 21,99,71,482 ADD: REIMBURSEMENTS MADE BY AE 53,27,085 LESS: REIMBURSEMENTS MADE BY APPELLANT 6,25,090 TOTAL OPERATING EXPENDITURE 5,64,27,677 5,29,76,948 11,52,68,853 22,46,73,477 GROSS PROFIT OPERATING PROFIT / (LOSS) 67,71,321 4,57,620 (1,09,33,804) 4,53,435 (32,51,427) OPERATING PROFIT/OPERATING COST 12.00% 0.86% . . 30. IN ITS SUBMISSION BEFORE THE DRP, THE ASSESSEE POINTED OUT THE FOLLOWING MISTAKES IN THE COMPUTATION OF PROFIT MAR GINS IN THE ITES SEGMENT BY THE TPO:- THE ASSESSEE HAD SUBMITTED BEFORE THE TPO, ON 15 S EPTEMBER 2009, THE SUMMARY SEGMENTAL P&L ACCOUNT OF THE COMP ANY, SPLIT IT(TP)A NO.1497/BANG/2010 PAGE 29 OF 37 INTO INTER-CILIA IT AND ITES SEGMENTS, ARRIVING AT THE NCP MARGINS, COMPUTED AT 7.80 % AND 18.61 % FROM IT AND ITES, RE SPECTIVELY. THE ASSESSEE SUBMITS BELOW, THE SEGMENTAL PROFIT AN D LOSS ACCOUNT OF THE COMPANY, AS WAS SUBMITTED BEFORE THE TPO: PARTICULARS SOFTWARE SERVICES IT ENABLED SERVICES DISTRI-BUTION SEGMENT UNALLOCABLE INCOME TOTAL INCOME INCOME FROM ASSOCIATED ENTERPRISES 63,193,998 48,732 573 243,666 - INCOME FROM MAINTENANCE SERV I CES - - 41,368,166 453,435 INCOME FROM SALE OF LICENCES - - 62,723.218 - 63,198,998 48,732.573 104,335,049 453,435 216,720,054 PERSONNEL COST 31,411,196 20,421,978 41,165,573 - 92,998,747 ROYALTY PAID TO ASSOCIATED ENTERPRISES - - 30,199,854 - 30,199,854 OTHER OPERATING EXPENSES 22,788,880 17,660,493 40,297,943 - 80,747,316 DEPRECIATION 4,424,969 3005,202 3,605,483 11,035,654 TOTAL OPERATING EXPENSES 58,625,045 41,087,673 115.268.853 214,981,571 GROSS PROFIT 32,523,364 OPERATING PROFIT/ (LOSS) 4,573,953 7,644 900 (10,933.804) 453.435 1,738,483 GR OSS PROFIT MARGIN (%) 51.85 NET COST PLUS MARGIN (%) 7.80 18.61 THE ASSESSEE REITERATES THAT THE COMPUTATION OF NCP MARGINS WORKED OUT BY THE TPO IS ERRONEOUS. THE ASSESSEE SU BMITS THAT THE SUMMARY OF SEGMENTAL P&L ACCOUNT OF THE COMPANY, FU RNISHED TO IT(TP)A NO.1497/BANG/2010 PAGE 30 OF 37 THE TPO ON 15 SEPTEMBER 2009 WAS BASED ON THE WORKI NGS DONE FOR THE PURPOSE OF CLAIMING DEDUCTION UNDER SECTION 10A OF THE ACT. THE ASSESSEE PROVIDES BELOW, A SPLIT OF THE ITES SE GMENT INTO `STPI' AND `NON-STPI' OPERATIONS. THE ASSESSEE ALSO SUBMITS THAT THE SUMMATION OF (I) THE PROFIT FROM THE IT SEGMENT AND, (II) THE PROFIT FROM THE STPI OPERATIONS OF THE ITES SEGMENT IS RS. 8,712,868. THIS AMOUNT RECONCILES WITH THE NET PROF IT ON WHICH THE COMPANY HAS CLAIMED DEDUCTION UNDER SECTION 10A OF THE ACT. PARTICULARS SOFTWARE DEVELOPMENT SERVICES IT ENABLED SERVICES ' STPI STPI NON STPI INCOME INCOME FROM ASSOCIATED ENTERPRISES 63,198,998 37,994,463 10,738,109 TOTAL INCOME 63,198,998 37,994,463 10,738,109 PERSONNEL COST 31,411,197 15,689,252 4,732,726 OTHER OPERATING EXPENSES 22,788,880 15,390,892 2,269,601 DEPRECIATION 4,424,969 2,937,701 67,501 TOTAL OPERATING EXPENSES 58,625,046 34,017,845 7,069,828 OPERATING PROFIT 4,573,952 3,976,618 3,668,281 AD D : OTHER INCOME 92,656 69,642 TOTAL OPERATING INCOME 4,666,608 4,046,260 OPERATING PROFIT FROM STPI AND NON- STPI OPERATIONS 8,712,868 3,668,281 A COPY OF THE COMPUTATION OF TOTAL INCOME OF THE AS SESSEE (FILED WITH THE RETURN OF INCOME) IS ENCLOSED AS EXHIBIT I . A COPY OF FORM NO. 56F OBTAINED BY THE COMPANY FROM AN ACCOUNTANT IS ENCLOSED AS EXHIBIT 17). THE ASSESSEE HUMBLY REQUESTS YOUR GOODSELF TO RECTI FY THE CAPTIONED TRANSFER PRICING ORDER UNDER SECTION 154 READ WITH SECTION 92CA(5) OF THE ACT. THE TPO IN HIS ORDER DATED 30 OCTOBER 2009 DISREGAR DED THAT THE RECOVERY OF EXPENSES BY TELELOGIC INDIA FROM ITS AE S ARE ON A COST- TO-COST BASIS. IT(TP)A NO.1497/BANG/2010 PAGE 31 OF 37 FURTHER, THE TPO INCLUDED SUCH EXPENSES IN THE OPER ATING REVENUE AND COST OF THE ASSESSEE FOR THE PURPOSE OF COMPUTI NG THE TRANSFER PRICING ADJUSTMENT UNDER SECTION 92CA FOR THE ITES SEGMENT OF THE ASSESSEE. THE OPERATING EXPENSES OF THE ASSESSEE IN RELATION TO THE ITES SEGMENT WAS COMPUTED BY THE TPO AT RS. 56,427,676 V IS-A-VIS RS. 41,087,673 AS SUBMITTED ON 15 SEPTEMBER 2009 BY THE ASSESSEE. 31. THE DRP HAS HOWEVER NOT CONSIDERED THE ISSUE IN PROPER PERSPECTIVE AND HAS DECIDED THE ISSUE AS FOLLOWS:- 7. GROUND NO. 8 ERRONEOUS COMPUTATION OF NET COST PLUS MARGIN OF THE ASSESSEE THE GROUND OF OBJECTION NO.8 IS AS UNDER THE TPO HAS ERRED ON FACTS IN COMPUTING THE OPERATING COST OF THE ASSESSEE, AT RS.5,29,76,947 INSTEAD OF RS.4,10,87,6 73 IN RELATION TO THE ITES SEGMENT. IN THIS CONNECTION THE ASSESSEE HAS SUBMITTED THAT ALL EXPENSES WERE RECOVERED BY THE ASSESSEE BASED ON THE AGREEMENT BE TWEEN THE ASSESSEE AND ITS AE. THE ASSESSEE HAD ALSO SUBMITTE D THAT EXPENSES WERE RECOVERED ON ACTUAL BASIS. THE ASSESSEE HAS FU RTHER SUBMITTED THAT IN VIEW OF THESE FACTS, THE ADDITION OF RECOVE RY OF EXPENSES TO THE OPERATING REVENUE AND COST OF THE ASSESSEE FOR THE PURPOSE OF COMPUTING THE TRANSFER PRICING ADJUSTMENT U/S 92CA, BY THE TPO FOR THE ITES SEGMENTS WAS ERRONEOUS. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY THE ASSE SSEE. THIS ISSUE HAS BEEN DISCUSSED BY THE TPO IN PARA 2.8 OF HIS ORDER. IN THIS CASE THE TPO HAD ASKED THE ASSESSEE TO SUBMIT THE D ETAILS AND NATURE OF RECOVERY OF EXPENSES RECEIVED. THE TPO HAS SPECI FICALLY ASKED THE ASSESSEE TO PROVIDE AS TO HOW THESE WERE ACCOUN TED FOR. THE TAXPAYER HAD NOT FURNISHED THE REQUIRED DETAILS AND EXPLANATION. THE TPO OBSERVED THAT THE REIMBURSEMENT OF EXPENSES WAS FOR THE PURPOSES OF BUSINESS AND HENCE THE SAME SHOULD BE C ONSIDERED PART OF THE COST AND REVENUE. THE ASSESSEE HAS NOT PRODU CED ANY EVIDENCE EITHER BEFORE THE AO OR BEFORE THE PANEL TO SHOW TH AT THESE EXPENSES IT(TP)A NO.1497/BANG/2010 PAGE 32 OF 37 HAD BEEN ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE. THERE IS NO REASON FOR SEGREGATING THE AMOUNT RECEI VED IN TO DIFFERENT COMPONENTS. EACH AND EVERY RECEIPT IS A PART OF REV ENUE AND AN INTEGRAL COMPONENT OF THE INTERNATIONAL TRANSACTION . WE FIND NO JUSTIFIABLE REASONS FOR INTERFERING WITH THE APPROA CH OF THE TPO. 32. IT IS CLEAR FROM THE ORDER OF THE TPO/DRP AND T HE SUBMISSION OF THE ASSESSEE BEFORE DRP THAT THE DRP HAS NOT CONSIDERED THE MAIN CONTENTION OF THE ASSESSEE REGARDING IMPROPER ALLOC ATION OF OPERATING EXPENDITURE TO ITES SEGMENT. THE TPO HAS INCREASED THE OPERATIVE REVENUE OF THE ASSESSEE IN ITES BY ADDING REIMBURSE MENTS MADE BY AE, WHICH CANNOT BE REGARDED AS PART OF THE OPERATING R EVENUE. THE TPO HAS ALSO TAMPERED WITH THE OPERATING EXPENDITURE BY ALL OCATING THE TOTAL COST OF THE ENTITY ON THE BASIS OF PROPORTIONATE SEGMENT RE VENUE OF THE ITES SEGMENT. WHILE ALLOWING DEDUCTION U/S.10A OF THE A CT, THE AO HAS ACCEPTED THE SEGMENTAL DETAILS AS GIVEN BY THE ASSE SSEE FOR THE SWD SEGMENT AND THE ITES SEGMENT. THE QUESTION IS, CAN THE TREATMENT BE DIFFERENT WHEN IT COMES TO DETERMINING ALP. THE IS SUE REQUIRES REEXAMINATION BY THE TPO. THE PARTIES THEREFORE AG REED THAT THE ISSUE REQUIRES TO BE EXAMINED AFRESH BY THE TPO IN THE LI GHT OF THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE DRP EXTRACTED IN PARAGR APH-29 OF THIS ORDER. 33. ALL OTHER GROUNDS REGARDING DETERMINATION OF AL P IN THE SWD SEGMENT AND ITES SEGMENT WERE NOT PRESSED FOR ADJUD ICATION BY THE ASSESSEE. CORPORATE TAX ISSUES: 34. GROUND NO.9 RAISED BY THE ASSESSEE READS AS FOL LOWS: IT(TP)A NO.1497/BANG/2010 PAGE 33 OF 37 SET OFF OF LOSSES PRIOR TO RELIEF UNDER SECTION 10A OF THE ACT THE AO HAS ERRED AND THE HONORABLE DISPUTE RESOLUTI ON PANEL [DRP] HAS FURTHER ERRED IN CONFIRMING THE COMPUTA TION OF DEDUCTION UNDER SECTION 10A OF THE ACT AFTER SET OF F OF THE LOSSES OF THE DOMESTIC UNIT OF RS.3,617,542. 35. AS FAR AS THIS GROUND IS CONCERNED, THE ISSUE I S WITH REGARD TO THE SET OFF OF LOSSES OF THE NON-10A UNIT AGAINST THE ELIGI BLE PROFITS OF THE 10A UNIT WHILE ALLOWING DEDUCTION U/S.10A OF THE INCOME TAX ACT, 1961 (ACT). THE ASSESSEE HAD CLAIMED DEDUCTION U/S 10A OF THE ACT B EFORE SETTING OF LOSSES OF THE NON-10A UNIT. THE AO WAS OF THE VIEW THAT D EDUCTION U/S 10A OF THE ACT WAS NOT IN THE NATURE OF EXEMPTION PROVISION AN D, THEREFORE, THE BUSINESS LOSS AND UNABSORBED DEPRECIATION OF THE EA RLIER YEARS HAS TO BE FIRST SET OFF AGAINST THE INCOME OF THE ELIGIBLE UN IT AND ONLY ON THE REMINDER DEDUCTION U/S 10A OF THE ACT HAS TO BE ALLOWED. TH E VIEW OF THE AO WAS CONFIRMED BY THE CIT(A), HENCE THIS GROUND OF APPEA L BY THE ASSESSEE BEFORE THE TRIBUNAL. 36. AT THE TIME OF HEARING IT WAS AGREED BY THE PAR TIES BEFORE US THAT THIS ISSUE IS NO LONGER RES INTEGRA AND HAS BEEN CONCLUDED BY THE HONBLE SUPREME COURT IN THE CASE OF YOKOGAWA INDIA LTD., 391 ITR 274 BY ITS ORDER DATED 16.12.2016 AND IN THE AFORESAID DECISIO N THE HONBLE SUPREME COURT TOOK THE FOLLOWING VIEW :- THAT FROM A READING OF THE RELEVANT PROVISIONS OF SECTION 10A IT IS MORE THAN CLEAR THAT THE DEDUCTIONS CONTEMPLATED TH EREIN IS QUA THE ELIGIBLE UNDERTAKING OF AN ASSESSEE STANDING ON ITS OWN AND WITHOUT REFERENCE TO THE OTHER ELIGIBLE OR NON-ELIGIBLE UNI TS OR UNDERTAKINGS OF THE ASSESSEE. THE BENEFIT OF DEDUCTION IS GIVEN BY THE ACT TO THE INDIVIDUAL UNDERTAKING AND RESULTANTLY FLOWS TO THE ASSESSEE. THIS IS ALSO MORE THAN CLEAR FROM THE CONTEMPORAN EOUS CIRCULAR NO. 794, DATED 9-8-2000. IT(TP)A NO.1497/BANG/2010 PAGE 34 OF 37 IF THE SPECIFIC PROVISIONS OF THE ACT PROVIDE [FI RST PROVISO TO SECTIONS 10A(1); 10A(1A) AND 10A(4)] THAT THE UNIT THAT IS CONTEMPLATED FOR GRANT OF BENEFIT OF DEDUCTION IS T HE ELIGIBLE UNDERTAKING AND THAT IS ALSO HOW THE CONTEMPORANEOU S CIRCULAR OF THE DEPARTMENT (NO.794 DATED 9-8-2000) UNDERSTOOD T HE SITUATION, IT IS ONLY LOGICAL AND NATURAL THAT THE STAGE OF DE DUCTION OF THE PROFITS AND GAINS OF THE BUSINESS OF AN ELIGIBLE UN DERTAKING HAS TO BE MADE INDEPENDENTLY AND, THEREFORE, 'IMMEDIATELY AFTER THE STAGE OF DETERMINATION OF ITS PROFITS AND GAINS. AT THAT STAGE THE AGGREGATE OF THE INCOMES UNDER OTHER HEADS AND THE PROVISIONS FOR SET OFF AND CARRY FORWARD CONTAI NED IN SECTIONS 70, 72 AND 74 WOULD BE PREMATURE FOR APPLICATION. T HE DEDUCTIONS UNDER SECTION 10A THEREFORE WOULD BE PRIOR TO THE C OMMENCEMENT OF THE EXERCISE TO BE UNDERTAKEN UNDER CHAPTER VI F OR ARRIVING AT THE TOTAL INCOME OF THE ASSESSEE FROM THE GROSS TOT AL INCOME. THE SOMEWHAT DISCORDANT USE OF THE EXPRESSION 'TOTAL IN COME OF THE ASSESSEE' IN SECTION 10A HAS ALREADY BEEN DEALT WIT H EARLIER AND IN THE OVERALL SCENARIO UNFOLDED BY THE PROVISIONS OF SECTION 10A THE AFORESAID DISCORD CAN BE RECONCILED BY UNDERSTANDIN G THE EXPRESSION 'TOTAL INCOME OF THE ASSESSEE' IN SECTIO N 10A AS 'TOTAL INCOME OF THE UNDERTAKING'. FOR THE AFORESAID REASONS IT IS HELD THAT THOUGH SECTION 10A, AS AMENDED, IS A PROVISION FOR DEDUCTION, THE STAGE OF DEDUCTION WOULD BE WHILE COMPUTING THE GROSS TOTAL INCOME OF THE ELIGIBLE UNDERTAKING UNDER CHAPTER IV AND' NOT AT THE STAGE OF COMPUTATION OF THE TOTAL INCOME UNDER CHAPTER VI. 37. THE EFFECT OF THE AFORESAID DECISION WOULD BE T HAT THE PROVISION OF SET OFF AND CARRY FORWARD AS CONTEMPLATED UNDER CHA PTER-VI OF THE ACT WOULD NOT BE ATTRACTED AND THEREFORE INTRA HEAD SET OFF SOUGHT BY SEEKING TO RELY ON THE PROVISION OF SECTION 70(1) OF THE ACT A ND SEEKING TO RESTRICT THE DEDUCTION U/S 10A AND 10AA OF THE ACT TO THE EXTENT OF GROSS TOTAL INCOME AS CONTEMPLATED U/S 80A(2) OF THE ACT, CANNOT BE SU STAINED. WE THEREFORE HOLD THAT DEDUCTION U/S.10A OF THE ACT HAS TO BE AL LOWED WITHOUT SETTING OFF LOSSES OF NON-10A UNIT BEFORE ALLOWING THE DEDUCTIO N UNDER SECTION 10A OF IT(TP)A NO.1497/BANG/2010 PAGE 35 OF 37 THE ACT. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE SU PREME COURT, THE AO IS DIRECTED NOT TO SET OFF THE LOSSES OF NON -10A UNITS AGAINST PROFITS OF 10A UNITS BEFORE ALLOWING DEDUCTION U/S. 10A OF THE ACT. 38. GR.NO.10 RAISED BY THE ASSESSEE READS AS FOLLOW S: 10 GRANT OF LOWER DEDUCTION UNDER SECTION 10A OF THE INCOME-TAX ACT, 1961 THE LEARNED AO HAS ERRED AND THE HONORABLE DRP HAS FURTHER ERRED IN CONFIRMING THE COMPUTATION OF DEDUCTION UN DER SECTION 10A OF THE ACT. WITHOUT PREJUDICE TO THE GENERALITY OF THE ABOVE, THE AO HAS ERRED, INTER ALIA, IN: A) REDUCING FOREIGN CURRENCY EXPENDITURE OF RS 3,24 5,683 FROM THE EXPORT TURNOVER; B) REDUCING INSURANCE CHARGES OF RS 421,997 FROM TH E EXPORT TURNOVER; C) REDUCING COMMUNICATION CHARGES OF RS 4,214,060 F ROM THE EXPORT TURNOVER; AND D) NOT MAKING ANY CORRESPONDING REDUCTION IN THE TO TAL TURNOVER AFTER HAVING REDUCED THE ITEMS MENTIONED IN (A), (B ) AND (C) ABOVE FROM THE EXPORT TURNOVER. 39. THE ASSESSEE IN THE GROUNDS OF APPEAL NO.10 PRO JECTED ITS GRIEVANCE REGARDING THE ACTION OF THE LEARNED ASSES SING OFFICER AND HONORABLE DISPUTE RESOLUTION PANEL IN EXCLUDING, WH ILE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE ITEMS OF EXPENDIT URE SET OUT IN THE GROUNDS OF APPEAL FROM THE EXPORT TURNOVER ON THE G ROUND THAT THESE EXPENSES ARE ATTRIBUTABLE TO DELIVERY OF SOFTWARE O UTSIDE INDIA FROM THE EXPORT TURNOVER. IT IS THE PLEA OF THE ASSESSEE THAT AT ALL TIMES DURING THE RELEVANT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPME NT OF COMPUTER SOFTWARE AND NOT IN RENDERING ANY TECHNICAL SERVICE S. WITHOUT PREJUDICE TO IT(TP)A NO.1497/BANG/2010 PAGE 36 OF 37 ITS CONTENTION THAT THE AFORESAID SUMS SHOULD NOT B E EXCLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S.10A O F THE ACT, THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER THAT EXP ENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE RED UCED FROM THE TOTAL TURNOVER AND IN THIS REGARD HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , 40. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN THIS REGARD. TAKING INTO CONS IDERATION 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 IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE ASSESSING OFFICER TO EXCLUDE THE CHARGES REFERRED TO IN GR.NO.10 REFERRED TO ABOVE BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER, AS HAS BEEN PRAYED FOR BY THE ASSES SEE IN THE ALTERNATIVE. IN VIEW OF THE ACCEPTANCE OF THE ALTERNATIVE PRAYER, W E ARE OF THE VIEW THAT NO ADJUDICATION IS REQUIRED ON THE GROUND WHETHER THE AFORESAID SUMS ARE REQUIRED TO BE EXCLUDED FROM THE EXPORT TURNOVER. M OREOVER, 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 . 41. GROUND NO.11 RAISED BY THE ASSESSEE IS WITH REG ARD TO CREDIT FOR TAX DEDUCTED AT SOURCE NOT HAVING BEEN ALLOWED. WE DIR ECT THE AO TO VERIFY THE CERTIFICATES FILED BY THE ASSESSEE FOR TDS AND ALLOW CREDIT AFTER DUE VERIFICATION AND IN ACCORDANCE WITH LAW. THE OTHER GROUNDS OF APPEAL REGARDING INTEREST U/S.234B AND 234D ARE PURELY CON SEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF. 42. THE OTHER GROUNDS ARE EITHER GENERAL OR NOT APP EALABLE. IT(TP)A NO.1497/BANG/2010 PAGE 37 OF 37 43. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PAR TLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF JUNE, 2019. SD/- SD/- ( B.R. BASKARAN ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 28 TH JUNE, 2019. / D ESAI S MURTHY / COPY TO: 1. APP ELL ANT 2. RESPONDE N T 3. CIT 4. CIT(A) 5. DR , ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.