July Systems & Technologies Pvt. Ltd., Bangalore V. ITO, Bangalore

ITA 1574/BANG/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9327 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-10-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 08-08-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 18-11-2013
• Court: TRIBUNAL
• Assessee Lawyers: K R PRADEEP
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; Principle of natural justice
• Section: 92C; 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI S.K.YADAV, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER IT (TP) A NO.1574 (BANG) 2013 (ASSESSMENT YEAR 2005-06) M/S JULY SYSTEMS & TECHNOLOGIES PVT. LTD., NO.17/9C, 4 TH FLOOR, MARUTHI CHAMBERS, RUPENA AGRAHARA, HOSUR ROD, BANGALORE -560 068 PAN NO.AABCB6543M APPELLANT VS THE INCOME TAX OFFICER, WARD-11(2), BANGALORE RESPONDENT ASSESSEE BY : SHRI K.R.PRADEEP, CA REVENUE BY : SHRI AR V. SREENIVASAN, JCIT DATE OF HEARING : 23-08-2016 DATE OF PRONOUNCEMENT: : 18-10-2016 O R D E R PER SHRI A.K.GARODIA, AM THIS IS ASSESSEES APPEAL DIRECTED AGAINST THE ORDE R OF THE LD. CIT(A)-IV, BANGALORE DATED 16-09-2013 FOR ASSESSMEN T YEAR 2005-06. 2. THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPE AL ARE AS UNDER; 1 . THAT THE ORDER OF THE ASSESSING OFFICER A ND THE TRANSFER PRICING OFFICER IS AGAINST THE LAW, FACTS, CIRCUMSTANCES , NATURAL JUSTICE, EQUITY AND ALL OTHER KNOWN PRINCIPLES OF LAW. IT(TP)A NO.1574/B/2013 2 2.THAT THE TOTAL INCOME COMPUTED AND THE TOTAL TA X C O MPUT E D I S HEREBY DISPUTED . 3.THE AUTHORITIES BELOW ERRED IN BRINGING TO TAX A S UM O F RS.L,39 , 41,862/ - UNDER SECTION 92C R.W.S 92CA OF THE ACT AS PER THE COMMUNICATION/ORDER OF THE TRANSFER PRIC ING OFFICER. 4.THE AUTHORITIES BELOW ERRED IN HOLDING THAT IPS O FACTO TH E DETERMINATION/CALCULATION OF ARM' S LENGTH PRICE AMOUNTS TO E ARNIN G OF INCOME BY THE APPELLANT, THEREB Y TAXABLE IN ITS HANDS . 5.THE ORDER OF THE TRANSFER PRICING OFFICER AND THA T OF TH E AO IS IN CLEAR VIOLATION OF THE LAW ON THIS ISSUE A ND THE PRINCIPLE S E NUNCIATED BY VARIOU S COURT S MORE PARTICULARLY ON THE I S S U E O F REF E R E NCE , SANCTION OF APPROVAL , RECORDING OF REASONS AND LACK O F S ATI S FACTION. 6.THAT THE FINDINGS , REAS O NS, C O NCLUSION S O F THE TPO A RE A BUNDL E O F CONTRADICTIONS AND CLEARL Y UNSUSTAINABLE IN LA W AND TH E O RDER U/ S 92CA IS TOTALLY AGAINST THE CIRCULAR AND LEGISL A TI V E I NTENT . 7. THE TPO/ AO ERRED IN IGNORING THE METHOD FO LL O W E D B Y THE APPELLANT . THE TPO/ AO OUGHT TO HAVE ADDUCED C OGE NT RE A SONS FOR REJECTING THE METHOD FOLLOWED BY THE APPELLANT BEFORE SUBSTITUTING AND PRESCRIBING A NEW METHOD . 8. THE ONUS IS ON THE DEPARTMENT TO ESTABLISH THERE IS ANY TAX AVOIDANCE AND IT IS ESSENTIAL THAT INCONTROVERT IBLE EVIDENCES ARE IN THE POSSESSION OF THE AO BEFORE A REFERENCE IS MADE AS HELD BY THE SUPREME COURT IN 1 31 ITR 597 AND FURTHER HAS ERRED IN NOT RELYING ON THE CIRCULAR . 9.THE AUTHORITIES BELOW ERRED IN INCORRECTLY SELECT ING THE COMPARABLE IGNORING THE JUDICIAL PRONOUNCEMENTS AND THE APPLICABLE LAW IN THIS REGARD . 10.THE AUTHORITIES BELOW ERRED IN NOT APPLYING THE FILTERS PARTICULARLY FILTER OF EXCEPTIONAL PROFIT AND FURTH ER ERRED IN NOT MAKING APPROPRIATE ADJUSTMENT AS PER RULE 10B(3). 11. THE AUTHORITIES BELOW FAILED TO MAKE THE NECESS ARY IT(TP)A NO.1574/B/2013 3 ADJUSTMENT A S IS REQUIRED IN TERMS OF RULE 10B(2). 12.THE TPO ERRED IN IGNORING THE FACT THAT BEFORE M AKING AN ADJUSTMENT NEITHER A COMPARABLE TRANSACTION ENTE RED INTO HAS BEEN IDENTIFIED NOR THE ENTERPRISE WHICH H AS ENTERED SUCH A TRANSACTION HAS BEEN IDENTIFIED. UNL ESS THESE TWO ARE IDENTIFIED AS EXPLAINED IN RULE 10B(2 ) NO FURTHER PROCEEDINGS ARE POSSIBLE. IN THIS CASE , IN VIEW OF NON-IDENTIFICATION, THE ENTIRE ORDER REQUIRES TO BE VACATED. 13.THE AUTHORITIES BELOW ERRED IN NOT APPLYING THE CORRECT METHOD AS CONTEMPLATED IN RULE 10C OF THE I T RULES. 14.THE ASSESSEE DENIES THE LIABILITY FOR INTEREST U/S. 234B OF RS.23 , 48,575/-. FURTHER PRAYS THAT THE INTEREST IF ANY SHOULD BE LEVIED ONLY ON RETURNED INCOME. 15.THE ASSESSING OFFICER OUGHT TO HAVE GIVEN AN OPPORTUNITY OF HEARING BEFORE LEVY OF INTEREST U/S 234B . 16. WITHOUT PREJUDICE TO THE APPELLANT'S RIGHT OF S EEKING WAIVER BEFORE APPROPRIATE AUTHORITY THE APPELLANT B EGS FOR CONSEQUENTIAL RELIEF IN THE LEVY OF INTEREST U/ S 234B . 17 . FOR THE ABOVE AND THE GROUNDS AND REASONS WHICH MAY BE SUBMITTED DURING THE COURSE OF HEARING OF T HIS APPEAL, THE ASSESSEE REQUESTS THAT THE APPEAL BE AL LOWED AS PRAYED AND JUSTICE BE RENDERED. 3. AT THE VERY OUTSET, LD. AR OF THE ASSESSEE SUBMI TTED A CHART AND POINTED OUT THAT THE ASSESSEE IS REQUESTING FOR EXCLUSION OF SEVEN COMPARABLES ON ACCOUNT OF FUNCTIONAL DISSIMILARITY AND OUT OF THE SAME, ONE COMPANY HAS TO BE EXCLUDED ON ACCOUNT OF RPT FI LTER ALSO I.E. M/S BODHTREE CONSULTING LTD., HE PLACED RELIANCE ON THE TRIBUNAL ORDER RENDERED IN THE CASE OF ACIT VS MCAFEE SOFTWARE (IN D.) PVT. LTD., IN IT(TP) A NO.04(B)/2012 DATED 18-03-2016, COPY AVAIL ABLE ON PAGES -1 IT(TP)A NO.1574/B/2013 4 TO 21 OF THE PAPER BOOK AND HE SUBMITTED THAT AS PE R THIS TRIBUNAL ORDER, THE ISSUE REGARDING ALL THE SEVEN COMPARABLE S IS COVERED IN FAVOUR OF THE ASSESSEE. THE LD. DR OF THE REVENUE SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 4. WE HAVE CONSIDERED THE VIAL SUBMISSIONS. WE FIN D THAT AS PER THE FUNCTIONAL PROFILE OF M/S MCAFEE SOFTWARE (IND. ) PVT. LTD., NOTED BY THE TRIBUNAL IN THE JUDGMENT CITED BY LD. AR OF THE ASSESSEE, THIS COMPANY IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMEN T SERVICES TO ITS AE. IN THE PRESENT CASE, THE FUNCTIONAL PROFILE OF THE ASSESSEE COMPANY HAS BEEN NOTED BY THE TPO ON PAGE-2 & 3 OF HIS ORDE R AS PER WHICH THE ASSESSEE COMPANY IS ALSO PROVIDING SOFTWARE SERVICE S TO ITS AE AND THE LD. DR OF THE REVENUE ALSO COULD NOT POINT OUT ANY DIFFERENCE IN FACTS IN THE PRESENT CASE AND IN THE CASE OF M/S MCAFEE SOFT WARE (IND.)PVT. LTD., (SUPRA). HENCE, WE EXAMINE THIS CLAIM OF THE LD. AR OF THE ASSESSEE THAT THESE SEVEN COMPARABLES OF WHICH EXCLUSION IS BEING SOUGHT FOR BY THE ASSESSEE IS COVERED IN FAVOUR OF THE ASSESSEE OR NO T. AS PER THE CHART SUBMITTED BY THE LD. AR OF THE ASSESSEE, PARA NO.10 .2 TO 10.8 OF THIS TRIBUNAL ORDER ARE RELEVANT IN RESPECT OF THESE SEV EN COMPARABLES AND HENCE, WE RE-PRODUCE THESE PARAS OF THE TRIBUNAL OR DER FROM PAGES-7 TO 16 OF THE TRIBUNAL ORDER; INFOSYS TECHNOLOGIES LTD., EXENSYS SOFTWARE SOLUTIONS LTD 10.2. LD.CIT(A) HAS EXCLUDED INFOSYS AND EXENSYS , ON THE BASIS OF FUNCTIONAL DISSIMILARITY AND HAVING EXTRAORDINARY EVENT DURING THE YEAR. EXENSYS WAS IT(TP)A NO.1574/B/2013 5 HAVING EXTRAORDINARY PROFITS BY WAY OF AMALGAMATION OF COMPANIES DURING THE YEAR. INFOSYS WAS EXCLUDED HAVING DIFFERENT FUNCTIONALITY OF PRODUCTS, HAVING HIGH TURNOVER AND BRAND NAME. FOLLOWING THE DECISION OF AGNITY TECHNOLOGIES VS. ITO OF ITAT AS APPROVED BY THE HON'BLE DELHI HIGH COURT, INFOSYS CANNOT BE CONSIDERED AS COMPARABLE. THE SAME VIEW WAS HELD BY CO-ORDINATE BENCH IN THE CASE OF ITO VS . M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT(TP)A NO. IT(TP)A NOS. 04/BANG/2012 & 1388/BANG/2011 1302/BANG/2011 DT. 11-06-2015 (SUPRA). SINCE THE OR DER OF LD.CIT(A) IS IN AGREEMENT WITH THE DECISION ON T HESE TWO COMPARABLES BY VARIOUS COORDINATE BENCHES, WE UPHOLD THE SAME. BODHTREE CONSULTING LTD.,: 10.3. THIS COMPANY WAS RETAINED BY LD.CIT(A) BUT ASSESSEE OBJECTS ON THE BASIS OF FUNCTIONALITY. HOWEVER, AS SEEN FROM THE ORDERS OF CO-ORDINATE BENCHES IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT( TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA) AS WELL A S DCIT VS. TOSHIBA EMBEDDED SOFTWARE (I) PVT. LTD., I N IT(TP)A NO.1/BANG/2012 DT. 10-05-2013, BODHTREE CONSULTING LTD., WAS ACCEPTED AS A COMPARABLE. HOWEVER, IN THE CASE OF CORDYS SOFTWARE INDIA P. LT D., IN ITA NO. 1451/HYD/2010 DT. 13-06-2014 (WHERE ONE OF US, AM IS THE AUTHOR) HAS CONSIDERED IN DETAIL AND EXCLUDED THE SAME FOR THE FOLLOWING REASONS: 1. BODHTREE CONSULTING LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHO ULD BE REJECTED UNDER THE FOLLOWING TPOS FILTERS: RELATED PARTY TRANSACTIONS FILTER: AS PER SCHEDUL E 4 OF THE BALANCE SHEET, THE COMPANY HAS INVESTMENTS IN PERIG ON, LIC, IT(TP)A NO.1574/B/2013 6 USA AND AS PER THE RESPONSE U/S 133(6); THE COMPANY HAS EXPORT SALES TO PERIGON LIC, USA OF RS. 133.90 LAKH S, BEING 34.68% OF THE TOTAL TURNOVER. FUNCTIONALLY DIFFERENT FILTER: THE COMPANY IN ITS RESPONSE TO NOTICE U/S133(6) HAS STATED THAT IT PROVIDES E-P APER SOLUTIONS, DATA CLEANSING SOFTWARE, WEBSITE DEVELOP MENT AND OTHER CUSTOMIZED SOFTWARE AND ALSO STATE THAT THE E -PAPER SOLUTIONS AND DATA CLEANSING SERVICES WOULD COME UN DER THE CATEGORY OF IT ENABLED SERVICES. IT(TP)A NOS. 04/BANG/2012 & 1388/BANG/2011 CONSIDERING THE ABOVE, WE DIRECT THAT THE ABOVE COMPANY HAS TO BE EXCLUDED ON THE REASON OF RPT OF MORE THAN 25% AND FUNCTIONALITY. LANCO GLOBAL SYSTEMS LTD., : 10.4. THIS COMPANY EVEN THOUGH INCLUDED BY TPO AND HAS NOT BEEN OBJECTED TO BY ASSESSEE, WAS REJECTED BY THE CIT(A) ON THE REASON OF LOW PROFIT MARGIN. THIS IS NOT A VALID GROUND. ONLY CONTINUOUS LOSS MAKING COMPANIES ARE BEING EXCLUDED FROM THE COMPARABILITY . IF THIS ARGUMENT WAS ACCEPTED, THE HIGH PROFIT MAKI NG COMPANIES ARE ALSO TO BE EXCLUDED. THIS IS NOT THE PURPOSE FOR WHICH TP ANALYSIS IS BEING UNDERTAKEN. THEREFORE, KEEPING THE PRINCIPLES LAID DOWN BY THE SPECIAL BENCH OF ITAT IN THE CASE OF MAERSK GLOBAL CENTERS (INDIA) P. LTD 43 TAXMANN.COM 100 MUMBAI(SB), WE, CONSIDER THE SAME AS COMPARABLE AND RETAIN IT IN THE LIST. SANKHYA INFOTECH LTD., THIRD WARE SOLUTION LTD., & TATA ELXSI LTD., : 10.5. THESE THREE COMPANIES ARE REJECTED AS COMPARABLES ON FUNCTIONALITY IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITE D, IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA ) (PARAS 19- 20, 22-26, 27-30 RESTIVELY) AND IN THE C ASE OF IT(TP)A NO.1574/B/2013 7 CORDYS SOFTWARE INDIA P. LTD., IN ITA NO. 1451/HYD/ 2010 DT. 13-06-2014 (SUPRA) AT PARA NO.13. THE ANALYSIS BY THE CO-ORDINATE BENCHES IS AS UNDER: SANKHYA INFOTECH LIMITED (SANKHYA) 19. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT SANKHYA IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE PRODUCTS & SERVICES AND TRA INING. THE COMPANY FOCUSES ON THE DEVELOPMENT OF NICHE PRO DUCTS FOR THE TRANSPORT AND AVIATION INDUSTRY. HOWEVER, S EGMENTAL INFORMATION IN RELATION TO THE ABOVE MENTIONED ACTI VITIES IS NOT AVAILABLE IN PUBLIC DOMAIN. THEREFORE, AS SANKH YA ENGAGES ITSELF IN PRODUCTS AND SERVICES AS WELL AS SOFTWARE TRAINING, IT CANNOT BE CONSIDERED AS A COMPARABLE O F THE APPELLANT. THE PRODUCTS DEVELOPED AND OWNED BY SANK HYA ARE LISTED BELOW: (1) SILICONTM TRAINING SUITE OF PRODUCTS: THE PRODU CTS ARE A COMPREHENSIVE ENTERPRISE WIDE TRAINING PLATFORM T HAT COVERS THE ENTIRE SPECTRUM OF TRAINING IN A PAPERLE SS ENVIRONMENT. IT COMPRISES OF FOUR PRODUCTS:- - SILICONTM LMS (TRAINING MANAGEMENT INFORMATION - SILICONTM QT (ONLINE ASSESSMENT SYSTEM) - SILICONTM LCMS (LEARNING CONTENT MANAGEMENT SYSTE M) - IRMAQTM : THIS IS AN INTEGRATED RESOURCE PLANNING , MANAGEMENT TRACKING SYSTEM EXCLUSIVELY DEVELOPED FO R AIRLINE OPERATIONS. IT IS AN END-TO-END SOLUTION FO R ALL FLIGHT OPERATIONS. - SAKAI CLE : THIS IS A WIDELY USED AND POPULAR OPE N SOURCE LMS USED IN MANY LEADING EDUCATIONAL INSTITUTIONS A ND CORPORATE. THE RELEVANT EXTRACT FROM THE ANNUAL REP ORT SUBSTANTIATING THAT THE COMPANY ALSO ENGAGES IN DIF FERENT ACTIVITIES IS REPRODUCED BELOW: 2. ACTIVITIES THE COMPANY AS ENGAGED IN THE BUSINESS OF DEVELOPME NT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE PROD UCTION IT(TP)A NO.1574/B/2013 8 OF SOFTWARE IS NOT CAPABLE OF BEING EXPRESSED IN AN Y GENERIC UNIT AND HENCE 11 IS RIOT POSSIBLE TO GIVE THE INFO RMATION AS REQUIRED BY CERTAIN CLAUSES OF PARAGRAPHS 3.4C AND 4 D OF PART II OF SCHEDULE VI OF THE COMPANIES ACT, 1956. THE DELHI TRIBUNAL IN ITO V. COLT TECHNOLOGY SERVICES INDIA P VT. LTD. (JUDGMENT DATED 23.10.2012 IN ITA NO. 609I/DEL/2011 FOR THE ASSESSMENT YEAR 2005-06) HAS HELD THAT THE SAID COM PANY IS NOT A COMPARABLE TO THE ASSESSEE THEREIN WHICH WAS ALSO IN THE BUSINESS OF SOFTWARE DEVELOPMENT. 20. THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE CONSIDERED. THE ACTIVITIES SET OUT ABO VE AND THE DECISION OF THE DELHI ITAT RENDERED IN THE CONT EXT OF A SOFTWARE DEVELOPMENT COMPANY SUCH AS THE ASSESSEE MAKES IT AMPLY CLEAR THAT THIS COMPANY SANKHYA CANN OT BE REGARDED AS A COMPARABLE. THE SAME IS DIRECTED TO BE EXCLUDED F ROM THE LIST OF COMPARABLE COMPANIES. 22. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS, HELD THAT THE AFORESAID TWO COMPANIES VIZ., FOUR SOFT LTD., AND T HIRDWARE SOLUTIONS LTD., ARE NOT COMPARABLE COMPANIES IN SOF TWARE DEVELOPMENT SERVICES COMPANIES. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS:- 15.4. FOURSOFT LIMITED : THIS COMPARABLE IS OBJECT ED ON THE SAME REASON AS THIS COMPANY IS INVOLVED IN PROD UCT DEVELOPMENT AND OWNS PRODUCTS NAMELY 4S ETRANS AND 4S ELOG. THESE PRODUCTS ARE USED IN SUN MICROSYSTEMS I NC, IN AN APPLICATION VERIFICATION KIT CERTIFIED FOR ENTER PRISES AND ASSESSEE HAVE BEEN INVESTING CONTINUOUSLY ON PRODUC T DEVELOPMENTS. SINCE ASSESSEE IS IN THE PRODUCT DEVELOPMENT, HAVING I.P. RIGHTS, THE SAME IS NOT CO MPARABLE. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : THIS COMPANY IS OBJECTED TO BY THE ASSESSEE ON THE REASON THAT THE SAID THIRDWARE SOFTWARE SOLUTIONS LTD. IS ENGAGED IN SALE OF SOFTWARE LICENCE AND RELATED SERVICES AND N OT A SERVICE PROVIDER. REFERRING TO THE ANNUAL REPORT, I T WAS SUBMITTED THAT THIS COMPARABLE WAS REJECTED BY THE ITAT, IT(TP)A NO.1574/B/2013 9 PUNE IN THE CASE OF EGAIN COMMUNICATIONS LTD. THIS COMPANY HAVING REVENUE FROM PRODUCT LICENSE AND EAR NING EXTRAORDINARY PROFIT DUE TO INTANGIBLE OWNS. 15.6. THESE THREE COMPARABLE ABOVE FLEXTRONICS SOFT WARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SO LUTION LIMITED WERE ANALYSED BY THE COORDINATE BENCH OF TH E TRIBUNAL IN THE CASE OF INTOTO SOFTWARE SOLUTIONS P VT. LTD. (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER : '23. THE OTHER COMPANIES WHICH ARE OBJECTED TO BY T HE ASSESSEE ARE FLEXTRONICS SOFTWARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SOLUTION LIMITED. AS FAR AS THESE THREE COMPANIES ARE CONCERNED, THE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THEY ARE INTO BOTH SOFTWARE AS WELL AS PRODUCT DEVELOPMENT. HE SUBMITTED THAT THE TPO HAS TAKEN NOTE OF THE FACT T HESE COMPANIES ARE ALSO INTO PRODUCT DEVELOPMENT BUT HAS SELECTED THESE COMPANIES AS COMPARABLES BY APPLYING THE FILTER OF MORE THAN 70% OF ITS REVENUE BEING FROM S OFTWARE DEVELOPMENT SERVICES. THE LEARNED COUNSEL SUBMITTED THAT THE FUNCTIONS OF THESE COMPANIES ARE DIFFERENT FROM THE ASSESSEE WHO WAS INTO SOLE ACTIVITY OF SOFTWARE DEVELOPMENT FOR ITS ASSOCIATED ENTERPRISE. HE SUBMI TTED THAT THE TPO HAS ALLOCATED THE EXPENDITURE IN THE PROPOR TION OF THE REVENUE OF THESE COMPANIES FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS AND HAS ADOPTED THE FIGURE AS SEGMENTAL MARGIN OF THE COMPANY AND HAS TAKEN THESE COMPANIES AS COMPARABLES. HE SUBMITTED THAT BY TAKING THE PROPOR TIONATE EXPENDITURE, THE CORRECT FINANCIAL RESULTS WOULD NO T EMERGE. HE SUBMITTED THAT NOTHING PREVENTED THE ASSESSING OFFICER/TPO FROM OBTAINING THE SEGMENTAL DETAILS FROM THE RESPECTIVE COMPARABLE COMPANIES BEFORE ADOPTING THEM AS COMPARABLE COMPANIES AND BEFORE TAKING THE OPERATIN G MARGIN FOR ARRIVING AT THE ARMS LENGTH PRICE. HE SU BMITTED THAT WHEREVER THE SEGMENTAL DETAILS ARE NOT AVAILABLE, THEN THE SAID COMPANIES SHOULD NOT BE TAKEN AS COMPARABLES. FOR THIS PURPOSE, HE PLACED RELIANCE UPON THE DECISION OF THE IT(TP)A NO.1574/B/2013 10 BANGALORE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE O FFSHORE SERVICES PVT. LTD. VS. THE DCIT IN ITA.NO.1252/BANG/2010 WHEREIN THESE COMPANIES WERE DIRECTED TO BE EXCLUDE D FROM THE LIST OF COMPARABLES. 23. THE LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 24. HAVING HEARD BOTH THE PARTIES AND HAVING GONE T HROUGH THE MATERIAL ON RECORD, WE FIND THAT THE TPO AT PAG E 37OF HIS ORDER HAS BROUGHT OUT THE DIFFERENCES BETWEEN A PRO DUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICES PROVIDE R. THUS, IT IS CLEAR THAT HE IS AWARE OF THE FUNCTIONA L DISSIMILARITY BETWEEN A PRODUCT COMPANY AND A SOFTW ARE DEVELOPMENT SERVICE PROVIDER. HAVING TAKEN NOTE OF THE DIFFERENCE BETWEEN THE TWO FUNCTIONS, THE ASSESSING OFFICER OUGHT NOT TO HAVE TAKEN THE COMPANIES WHICH ARE INT O BOTH THE PRODUCT DEVELOPMENT AS WELL AS SOFTWARE DEVELOP MENT SERVICE PROVIDER AS COMPARABLES UNLESS THE SEGMENTA L DETAILS ARE AVAILABLE. EVEN IF HE HAS ADOPTED THE F ILTER OF MORE THAN 75% OF THE REVENUE FROM THE SOFTWARE SERVICES FOR SELECTING A COMPARABLE COMPANY, HE OUGHT TO HAVE TA KEN THE SEGMENTAL RESULTS OF THE SOFTWARE SERVICES ONLY. TH E PERCENTAGE OF EXPENDITURE TOWARDS THE DEVELOPMENT O F SOFTWARE PRODUCTS MAY DIFFER FROM COMPANY TO COMPAN Y AND ALSO IT MAY NOT BE PROPORTIONATE TO THE SALES FROM THE SALE OF SOFTWARE PRODUCTS. UNDER SECTION 133(6) OF THE I.T. ACT, THE TPO HAS THE POWER TO CALL FOR THE NECESSARY DETAILS FROM THE COMPARABLE COMPANIES. IT IS SEEN THAT THE ASSESSING OFFICER/TPO AS EXERCISED THIS POWER TO CALL FOR DET AILS WITH REGARD TO THE VARIOUS COMPANIES. AS SEEN FROM THE A NNUAL REPORT OF FOURSOFT LIMITED WHICH IS REPRODUCED AT P AGE 7 OF THE TPOS ORDER, THE SAID COMPANY HAS DERIVED INCOM E FROM SOFTWARE LICENCE ALSO AND AMCS. 25. AS FAR AS THIRDWARE SOFTWARE SOLUTION LIMITED I S CONCERNED, WE FIND FROM THE INFORMATION FURNISHED B Y THE SAID COMPANY THAT THOUGH THE SAID COMPANY IS ALSO I NTO PRODUCT DEVELOPMENT, THERE ARE NO SOFTWARE PRODUCTS THAT THE COMPANY INVOICED DURING THE RELEVANT FINANCIAL YEAR AND IT(TP)A NO.1574/B/2013 11 THE FINANCIAL RESULTS ARE IN RESPECT OF SERVICES ON LY. THUS, IT IS CLEAR THAT THERE IS NO SALE OF SOFTWARE PRODUCTS DURING THE YEAR BUT THE SAID COMPANY MIGHT HAVE INCURRED EXPEN DITURE TOWARDS THE DEVELOPMENT OF THE SOFTWARE PRODUCTS. 26. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CONCE RNED, WE FIND THAT AT PAGE 90 OF HIS ORDER, THE TPO HAS ALSO OBSERVED THAT THE SAID COMPANY HAS INCURRED EXPENDITURE FOR SELLING OF PRODUCTS AND HAS INCURRED R & D EXPENDITURE FOR DEVELOPMENT OF THE PRODUCTS. THE ABOVE FACTS CLEARL Y DEMONSTRATE THAT THERE IS FUNCTIONAL DISSIMILARITY BETWEEN THE ASSESSEE AND THESE COMPANIES AND WITHOUT MAKING ADJUSTMENT FOR THE DISSIMILARITIES BROUGHT OUT BY T HE TPO HIMSELF, THESE COMPANIES CANNOT BE TAKEN AS COMPARA BLE COMPANIES. THE METHOD ADOPTED BY THE TPO TO ALLOCAT E EXPENDITURE PROPORTIONATELY TO THE SOFTWARE DEVELOP MENT SERVICES AND SOFTWARE PRODUCT ACTIVITY CANNOT BE SA ID TO BE CORRECT AND REASONABLE. WHEREVER, THE ASSESSING OFFICER/TPO CANNOT MAKE SUITABLE ADJUSTMENT TO THE FINANCIAL RESULTS OF THE COMPARABLE COMPANIES WITH THE ASSESS EE COMPANY TO BRING THEM ON PAR WITH THE ASSESSEE, THE SE COMPANIES ARE TO BE EXCLUDED FROM THE LIST OF COMPA RABLES. THEREFORE, WE DIRECT THE ASSESSING OFFICER/TPO TO E XCLUDE THESE THREE COMPANIES FROM THE LIST OF COMPARABLES. 27. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT TATA ELXSI LTD., A COMPARABLE COMPANY OUT O F THE 10 EXCLUDED BY THE CIT(A) BY APPLYING RPT FILTER AND W HICH GETS INCLUDED IN THE COMPARABLE COMPANIES BECAUSE OF 15% RPT BEING ADOPTED AS THRESHOLD LIMIT FOR EXCLUDING COMP ANIES FOR THE PURPOSE OF COMPARABILITY. IT WAS HIS SUBMISSION THAT THIS COMPANY WILL HOWEVER, HAVE TO BE EXCLUDED AS THIS C OMPANY WAS HELD TO BE NOT COMPARABLE WITH AN ASSESSEE SUCH AS THE ASSESSEE IN THE PRESENT CASE PROVIDING SOFTWARE DEVELOPMENT SERVICES BY THE ITAT HYDERABAD BENCH IN THE CASE OF CNO IT SERVICES (INDIA) PVT. LTD. (FORMERLY KNOWN AS CONSECO DATA SERVICES (INDIA) PVT. LTD.) HYDERABAD VS. DCIT, CIRCLE 1(2) HYDERABAD, IN ITA.NO.1280/HYD/2010 ASSE SSMENT YEAR 2005- 2006 ORDER DATED 12.2.2014. IT(TP)A NO.1574/B/2013 12 28. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS, HELD ON COMPARABILITY OF TATA ELXSI LTD. AS FOLLOWS: 15.7. TATA ELXSI LIMITED : THE OBJECTION OF THE AS SESSEE IS THAT TATA ELXSI OPERATING TWO SEGMENTS SYSTEM COMMUNICATION SERVICES AND SOFTWARE DEVELOPMENT SER VICES. THE TPO ACCEPTED THE SOFTWARE DEVELOPMENT SERVICES SEGMENT IN HIS T.P. ANALYSIS AND ASSESSEES OBJECTI ON IS THAT THE SOFTWARE DEVELOPMENT SERVICES SEGMENT ITSELF CO MPRISES OF THREE SUBSERVICES NAMELY (A) PRODUCT DESIGN SERV ICES (B)DESIGN ENGINEERING SERVICES AND (C) VISUAL COMPU TING LABS. IT WAS SUBMITTED THAT THESE SERVICES ARE NOT AKIN TO ASSESSEE SOFTWARE SERVICES AND SEGMENTAL INFORMATIO N OF ONLY PRODUCT DESIGN SERVICES COULD HAVE BEEN ACCEPT ED BY THE TPO AS A COMPARABLE BUT NOT THE ENTIRE SOFTWARE DEVELOPMENT SERVICE. SINCE COMPANYS OPERATIONS ARE FUNCTIONALLY DIFFERENT AS SUCH, THE SAME IS NOT COM PARABLE. FURTHER, ASSESSEE IS ALSO OBJECTING ON THE BASIS OF INTANGIBLE SCALE OF OPERATIONS. THE COORDINATE BENCH IN THE CA SE OF INTOTO (SUPRA) CONSIDERED THE ISSUE AS UNDER IN PAR A 22: '22 TATA ELXSI LIMITED : AS REGARDS THIS COMPANY, T HE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE , FILED BEFORE US THE REPLY OF TATA ELXSI LIMITED TO THE AD DL. CIT (TRANSFER PRICING), HYDERABAD, WHEREIN THE CONCERNE D OFFICER HAS BEEN INFORMED THAT TATA ELXSI LIMITED I S SPECIALISED EMBEDDED SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THAT IT CANNOT BE COMPARED WITH ANY OT HER SOFTWARE DEVELOPMENT COMPANY. IT WAS SUBMITTED THAT BECAUSE OF THE SPECIALISATION AND ALSO BECAUSE OF D IVERSE NATURE OF ITS BUSINESS, IT IS VERY DIFFICULT TO SCA LE-UP THE OPERATIONS OF TATA ELXSI LIMITED. IN VIEW OF THIS, TATA ELXSI LIMITED HAS INFORMED THAT IT IS NOT FAIR TO USE ITS FINANCIAL NUMBERS TO COMPARE IT WITH ANY OTHER COMPANY. THE COMMUNICATION DATED 25TH AUGUST, 2009 TO THE TPO IS PLACED BEFORE US. AS THIS COMMUNICATION WAS NOT BEFORE THE TPO AT THE TIME OF TRANSFER PRICING ADJUSTMENT WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE ALSO TO THE FILE OF THE TPO TO IT(TP)A NO.1574/B/2013 13 RECONSIDER ADOPTING THIS COMPANY AS THE COMPARABLE IN THE LIGHT OF OBSERVATIONS OF THIS COMPANY TO THE TPO IN THE CASE OF ANOTHER ASSESSEE. IN THE RESULT, THE ASSESSING OFFICER/TPO IS DIRECTED TO RECONSIDER THE ISSUE IN ACCORDANCE WITH LAW, AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. KEEPING THE ASSESSEES OBJE CTIONS AND THE DECISIONS OF THE COORDINATE BENCH, PRIMA FA CIE, WE ARE OF THE VIEW THAT TATA ELXSI LIMITED IS FUNCTION ALLY DIFFERENT AND HAS INCOMPARABLE SIZE TO THAT OF THE ASSESSEE. FURTHER, WE ARE UNABLE TO VERIFY WHETHER THE SEGMEN TAL PROFITS ADOPTED BY THE TPO PERTAIN TO ENTIRE SOFTWA RE DEVELOPMENT SERVICES OR PERTAIN TO LIMITED SERVICE AKIN TO ASSESSEE SERVICES. SINCE, THESE ASPECTS ARE NOT CLE AR FROM THE DATA FURNISHED BEFORE US, WE DIRECT THE TPO TO EXAMINE AND IN CASE, THE SEGMENTAL PROFITS OF A PARTICULAR SERVICE IS NOT AVAILABLE, THEN, TO EXCLUDE THE TATA ELXSI LIMI TED FROM THE LIST OF COMPARABLES. ACCORDINGLY, THIS ISSUE IS RESTORED TO THE FILE OF TPO FOR EXAMINATION AND TO DECIDE IN AC CORDANCE WITH LAW AND FACTS, AFTER AFFORDING REASONABLE OPPO RTUNITY OF BEING HEARD TO ASSESSEE. 29. THOUGH THE ISSUE HAS BEEN SET ASIDE TO THE AO I N THE AFORESAID DECISION, THE ITAT HYDERABAD IN THE CASE OF NTT DATA INDIA ENTERPRISE APPLICATION SERVICES PVT. LTD ., ITA NO.1612/HYD/2010 ORDER DATED 23.10.2013 AND IN A SUBSEQUENT RULING IN THE CASE OF INVENSYS DEVELOPMENT CENTRE ( INDIA) PVT. LTD., ITA NO.1256/HYD/2010 ORDER DATED 28.2.20 14, HELD THAT TATA ELXSI IS NOT FUNCTIONALLY COMPARABLE WITH THAT OF A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. 30. IN VIEW OF THE AFORESAID DECISION RENDERED ON I DENTICAL FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT TA TA ELXSI LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABL E COMPANIES. 13. SIMILARLY, THE OTHER CASES, BODHTREE CONSULTIN G LTD, FOUR SOFT LTD, INFOSYS,., SANKHYA INFOTECH LTD., THIRDWA RE SOLUTIONS LTD, TATA ELEXI (SEG) ETC, ARE ALSO TO BE EXCLUDED AS THEY ARE IT(TP)A NO.1574/B/2013 14 CONSIDERED AND ANALYSED IN VARIOUS CASES RELIED ON ABOUT FUNCTIONALITY AND WHY THE SAME ARE NOT COMPARABLE T O THE COMPANIES LIKE ASSESSEE. BODHTREE CONSULTING LTD AL SO FAILS RPT FILTER AS CONTENDED. IN VIEW OF THIS, WE ARE NO T DISCUSSING ABOVE COMPARABLES IN DETAIL, BUT, SUFFICE TO SAY TH AT ASSESSEE SUBMISSIONS ARE VALID. THE AO IS DIRECTED TO EXCLUD E THE ABOVE COMPARABLES AND REWORK OUT THE ARMS LENGTH MARGIN ACCORDINGLY. THE GROUND NO.8 AND ADDITIONAL GROUND RAISED BY ASSESSEE ARE CONSIDERED AS ALLOWED. IN VIEW OF THE ABOVE, THE ABOVE THREE COMPANIES ARE TO BE EXCLUDED. SASKEN NETWORK SYSTEMS LTD., R S SOFTWARE (INDIA) LTD., VISUALSOFT TECHNOLOGIES LTD., AND SASKEN COMMUNICATION TECHNOLOGIES LTD., 10.6 SINCE THERE IS NO OBJECTION FROM ASSESSEE AND WAS SELECTED BY TPO, THE ABOVE COMPANIES ARE RETAINED. FOUR SOFT LTD., 10.7. THE OBJECTION BY ASSESSEE IS THAT THIS COMPAN Y IS A PRODUCT COMPANY. WAS ANALYSED AND ACCEPTED IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTE MS (INDIA) PRIVATE LIMITED, IN IT(TP)A NO. 1302/BANG/2 011 DT. 11-06-2015 (SUPRA) PARA 22. IT WAS HELD THAT TH E SAID COMPANY AHS DERIVED INCOME FROM SOFTWARE LICENSE AND AMCS. SINCE FUNCTIONALITY WAS ALREADY ANALYSED, RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCHES ALSO , THE SAME WAS TO BE EXCLUDED. I. INTOTO SOFTWARE INDIA PVT. LTD., ITA NO. 1196/HYD/2010; II. CORDYS SOFTWARE INDIA P. LTD., ITA NO. 1451/HYD/2010 GEOMETRIC SOFTWARE SOLUTIONS COMPANY LTD.,: 10.8. EVEN THOUGH THIS COMPANY WAS ACCEPTED AS COMPARABLE IN ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, IN IT(TP)A NO. IT(TP)A NO.1574/B/2013 15 1302/BANG/2011 DT. 11-06-2015 (SUPRA) AND CORDYS SOFTWARE INDIA P. LTD., IN ITA NO. 1451/HYD/2010 DT . 13- 06-2014 (SUPRA) AND WAS NOT OBJECTED TO, WE FIND TH AT THE CO-ORDINATE BENCH AT BANGALORE IN THE CASE OF D CIT VS. TOSHIBA EMBEDDED SOFTWARE (I) PVT. LTD., IN IT( TP)A NO. 1/BANG/2012 DT. 10-05-2013 HAS CONSIDERED THAT THIS IS IN PRODUCT DEVELOPMENT. WE HAVE PERUSED THE TPO S ORDER. IN PAGE 85 AND 86 OF THE ORDER, THIS COMPARA BLE WAS ANALYSED. TPO RECORDS THAT THERE ARE PRODUCT SA LES TO THE EXTENT OF 18%. SEGMENTAL PROFITS ARE NOT AVAILABLE. ON ASSUMPTIONS, THIS COMPANY WAS RETAINE D. WE ARE OF THE OPINION THAT BEING A PRODUCT BASED COMPANY, THE SAME IS NOT STRICTLY COMPARABLE TO A SERVICE COMPANY LIKE ASSESSEE. IN THE ABSENCE OF SEGMENTAL PROFIT OF SERVICE INCOME, WE HAVE TO EXCL UDE THE SAME. FOLLOWING THE DECISION IN THE CASE OF DCI T VS. TOSHIBA EMBEDDED SOFTWARE (I) PVT. LTD., IN IT( TP)A NO. 1/BANG/2012 DT. 10-05-2013 (SUPRA), THIS COMPAN Y IS ACCORDINGLY EXCLUDED. 5. AS PER THE ABOVE PARAS RE-PRODUCED FROM THE TRIB UNAL ORDER RENDERED IN THE CASE OF M/S MCAFEE SOFTWARE ( IND.) PVT. LTD. (SUPRA), WE FIND THAT THE TRIBUNAL IN THAT CASE HAS UPHELD EXCLUSION OF SEVEN COMPARABLES I.E. 1) M/S BODHTREE CONSULTING LTD., 2) M/S EXENSYS SOFTWARE SOLUTIONS PVT. LTD., 3) M/S SANKHYA INFOTECH LTD., 4) M/S THIRDWARE SOLUTIONS LTD., IT(TP)A NO.1574/B/2013 16 5) M/S TATA ELXSI LTD., 6) GEOMETRIC SOFTWARE SOLUTIONS CO. LTD., 7) M/S FOUR SOFT LTD., 6. RESPECTFULLY FOLLOWING THIS TRIBUNAL ORDER, WE DIRECT THE AO/TPO THAT IN THE PRESENT CASE ALSO, ALL THESE SEV EN COMPARABLES SHOULD BE EXCLUDED AND TP ADJUSTMENT, IF ANY, SHOUL D BE MADE, ONLY AFTER EXCLUDING THESE SEVEN COMPARABLES. IT WAS A GREED BY BOTH SIDE THAT NO SEPARATE ADJUDICATION IS CALLED FOR IN RESP ECT OF ANY OTHER GROUND RAISED BY THE ASSESSEE. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE STAND S PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. (SUNIL KUMAR YADAV) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : 18.10.2016 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE IT(TP)A NO.1574/B/2013 17 1. DATE OF DICTATION 2. , , DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICT ATING MEMBER .. 3. !' # . $ %# / $ %# # & DATE ON WHICH THE APPROVED DRAFT COMES TO THE PS/SR .PS. 4. ''() & * + DATE ON WHICH THE ORDER IS PLACED BEFORE THE DICTAT ING MEMBER FOR PRONOUNCEMENT 5. * . %# / # . . %# # + DATE ON WHICH THE ORDER COMES BACK TO THE PS/SR.PS .. 6 * !', + DATE OF UPLOADING THE ORDER ON WEBSITE .. 7. ! !', ' , - ) IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO . 8. .% / 0 + DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. * 1'2 / 34 & 5 + DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT 10. 0 6 / + DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 11. * 7 & 0 8 + THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 12. !) * 9() & 0 9() /#5 . + THE DATE ON WHICH THE FILE GOES TO DESPATCH SECTION FOR DESPATCH OF THE TRIBUNAL ORDER 13. * 9() + DATE OF DESPATCH OF ORDER .