M/s TE Connectivity India Pvt. Ltd., Bangalore V. CIT,

ITA 1603/BANG/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0221 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 30-06-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 22-11-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAVIN KISHORE PRASAD; UMASHANKAR
• Keywords: Related party transaction; Transfer pricing; International transaction; Cost of acquisition
• Section: 133(6); 10B

Judgement Text

IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI. VIJAY PAL RAO, JUDICIAL MEMBER I.T(TP).A NO.1603/BANG/2013 (ASSESSMENT YEAR : 2005-06) M/S. TE CONNECTIVITY INDIA P. LTD, (PREIOUSLY KNOWN AS TYCO ELECTRONICS CORPN.INDIA P. LTD), TE PARK, 22B, DODDENAKUNDI 2 ND PHASE, INDUSTRIAL AREA, WHITEFIELD ROAD, BENGALURU 560 048 .. APPELLAN T PAN : AABCT7374C V. COMMISSIONER OF INCOME-TAX (APPEALS), LTU, BENGALURU .. RESPONDENT I.T(TP).A NO.1722/BANG/2013 (ASSESSMENT YEAR : 2005-06) DY.COMMISSIONER OF INCOME-TAX (LTU), BENGALURU .. APPELLANT V. M/S. TE CONNECTIVITY INDIA P. LTD, (PREIOUSLY KNOWN AS TYCO ELECTRONICS CORPN.INDIA P. LTD), TE PARK, 22B, DODDENAKUNDI 2 ND PHASE, INDUSTRIAL AREA, WHITEFIELD ROAD, BENGALURU 560 048 .. RESPONDENT IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 2 CROSS OBJECTION NO.14/BANG/2016 (IN I.T(TP).A NO.1722/BANG/2013) (ASSESSMENT YEAR : 2005-06) (BY THE ASSESSEE) ASSESSEE BY : SHRI. PRAVIN KISHORE PRASAD, ADVOCATE & SHRI. UMA SHANKAR, ADVOCATE REVENUE BY : SHRI. K. R. NARAYAN, JCIT HEARD ON : 30.06.2016 PRONOUNCED ON : 25 .07.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE CROSS APPEALS FILED BY ASSESSEE AND REVEN UE. ASSESSEE HAS ALSO FILED A CROSS OBJECTION. THE APPEALS AND CROS S OBJECTION ARE AGAINST AN ORDER DT.26.08.2013 OF CIT (A), FOR A. Y.2005-06 02. APPEAL OF ASSESSEE IS TAKEN UP FIRST FOR DISPOS AL. ASSESSEE HAS ALTOGETHER TAKEN TEN GROUNDS OF WHICH GROUNDS 1 AND 10 ARE GENERAL NEEDING NO ADJUDICATION. GROUNDS 2 TO 4 ARE ON TP RELATED ISSUES, WHEREAS GROUNDS 5 TO 9 ARE ON CORPORATE TAX ISSUES. 03. LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBM ITTED THAT IF HIS GROUNDS WITH REGARD TO EXCLUSION OF CERTAIN COMPARA BLES CONSIDERED BY THE TPO IN HIS TP STUDY FOR ANALYSING THE ALP OF THE TR ANSACTIONS WITH ITS AE IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 3 IS CONSIDERED, THEN OTHER GROUNDS RELATING TO TP MA Y BE TREATED AS NOT PRESSED. ACCORDINGLY, WE ARE CONFINING OURSELVES T O THE GROUNDS FOR EXCLUSION OF CERTAIN COMPARABLE COMPANIES FROM THE LIST FINALLY ARRIVED AT AFTER EXCLUSIONS DIRECTED BY THE CIT (A). WE ALSO FIND THAT DEPARTMENT IN ITS APPEAL HAS RAISED A TRANSFER PRICING ISSUE ASSA ILING THE DIRECTION OF CIT (A) TO EXCLUDE COMPARABLES HAVING TURNOVER IN EXCES S OF RS.200 CRORES. THIS ISSUE APPEARS AS GROUND 7 OF REVENUES APPEAL. HENCE WHILE CONSIDERING ASSESSEES GROUNDS SEEKING EXCLUSION OF SOME COMPARABLES, WE WILL ALSO DEAL WITH THE DEPARTMENTAL GROUND MENTION ED SUPRA. 04. FACTS APROPOS ARE THAT ASSESSEE WAS A 100% SUBS IDIARY OF ONE COMPANY CALLED AMP INC, USA WHICH WAS LATER ACQUIRE D BY ONE M/S. TYCO GROUP IN 1999. ASSESSEE MANUFACTURES ELECTRICAL AN D ELECTRONIC INTER CONNECTION DEVICES, WIRING HARNESSES AND FIBRE OPTI C CABLES, ASSEMBLIES AND ACCESSORIES, PRESSES AND APPLICATORS, WHICH WERE SO LD IN INDIA AS WELL AS EXPORTED TO TYCO GROUP WORLD WIDE. ASSESSEE HAD AL SO RENDERED SOFTWARE DEVELOPMENT SERVICES TO ITS AE ABROAD. SEGMENTWISE REVENUE OF THE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR WAS AS UNDE R : IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 4 05. INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE FOR THE RELEVANT PREVIOUS YEAR WERE AS UNDER : 7. ROYALTY INR 2,14,53,835 NONE 8. SOFTWARE DEVELOPMENT & SERVICE INCOME INR 6,97,35,671 ADJUSTMENT DONE BY TPO IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 5 SINCE THE ADJUSTMENTS RECOMMENDED BY THE TPO WERE C ONFINED TO THE SOFTWARE DEVELOPMENT SEGMENT, ISSUES RAISED BY THE ASSESSEE IN THIS APPEAL ARE ALSO ON THE SAID SEGMENT. 06. FOR JUSTIFYING THE PRICING OF ITS INTERNATIONAL TRANSACTIONS RELATING TO SOFTWARE DEVELOPMENT SEGMENT, ASSESSEE HAD SELECTED 93 COMPARABLES FROM PROWESS AND CAPITALINE DATA BASE AND APPLIED TNMM. AS PER ASSESSEE THE AVERAGE MARK-UP OF THESE COMPARABLES CAME TO 11% AN D THIS WAS WITHIN THE TOLERANCE RANGE OF ITS OWN MARK-UP, THEREBY NOT NECESSITATING ANY ADJUSTMENTS ON ALP. LIST OF 93 COMPARABLES SELECTE D BY THE ASSESSEE ARE REPRODUCED HEREUNDER : IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 6 IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 7 07. TPO WHILE ACCEPTING TNMM AS THE MOST APPROPRIAT E ONE, APPLIED CERTAIN FILTERS AND FINALLY ARRIVED AT THE FOLLOWIN G SET OF COMPARABLES AS PROPER FOR ANALYSING THE ALP OF THE INTERNATIONAL T RANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS AE : 08. FILTERS APPLIED BY THE TPO WERE SOFTWARE DEVELO PMENT INCOME LESS THAN 75%, CURRENT YEAR DATA NOT AVAILABLE, RPT TRAN SACTIONS MORE THAN 25%, ADOPTION OF DIFFERENT FINANCIAL YEAR, DIMINISH ING REVENUE, PERSISTENT LOSSES, EMPLOYEE COST TO SALES LESS THAN 25%, EXPOR T SALES LESS THAN 25%, TURNOVER LESS THAN RS.1 CRORE, AND ON-SITE INCOME O F MORE THAN 75%. THE IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 8 LIST OF COMPARABLES SELECTED BY THE TPO CONSISTED O F FIVE COMPANIES FROM ASSESSEES OWN TP STUDY NAMELY BODHTREE CONSULTING LTD, GEOMETRIC SOFTWARE SOLUTIONS CO. LTD, L & T INFOTECH, SATHYAM COMPUTER SERVICES LTD AND INFOSYS TECHNOLOGIES LTD, 09. ON THE AVERAGE PLI OF 26.59%, TPO ALLOWED A WOR KING CAPITAL REBATE OF 2%. RECOMMENDED ADJUSTMENT U/S.92CA OF TH E ACT, WERE AS FOLLOWS : ASSESSMENT WAS THEREAFTER COMPLETED BY MAKING THE A DDITION AS RECOMMENDED BY THE TPO. 10. ASSESSEE MOVED AN APPEAL BEFORE THE CIT (A). O NE OF THE PLEADINGS TAKEN BY ASSESSEE WAS FOR EXCLUSION OF COMPANIES HA VING TURNOVER IN EXCESS OF RS.200 CRORES FROM THE LIST OF SEVENTEEN COMPANIES SELECTED BY IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 9 THE TPO, CIT (A) WAS APPRECIATIVE OF THIS CONTENTIO N. HE DIRECTED EXCLUSION OF THESE COMPANIES WHICH WERE HAVING TURN OVER IN EXCESS OF RS.200 CRORES. 11. NOW BEFORE US, LD. AR SUBMITTED THAT HE WAS SEE KING EXCLUSION FROM THE LIST, AS FINALLY ARRIVED AT BY THE TPO, EV EN WITHOUT CONSIDERING BENEFIT OF EXCLUSION OF COMPANIES HAVING TURNOVER I N EXCESS OF RS.200 CRORES. ACCORDING TO HIM, OUT OF THE 17 COMPARABLE S SELECTED BY THE TPO, BODHTREE CONSULTING LTD, GEOMETRIC SOFTWARE SOLUTIO NS CO. LTD, L& T INFOTECH, SATHYAM COMPUTER SERVICES LTD AND INFOSYS TECHNOLOGIES LTD, WERE A PART OF ASSESSES OWN TP STUDY. HOWEVER ACCO RDING TO HIM, ASSESSEE HAD BEFORE THE CIT (A) SOUGHT EXCLUSION OF ALL THE ABOVE, EXCEPT BODHTREE CONSULTING LTD, BUT THIS WAS NOT ACCEPTED BY THE CI T (A). IN SO FAR AS BODHTREE CONSULTING LTD WAS CONCERNED, AS PER THE LD. AR ASSESSEE HAD FILED AN ADDITIONAL GROUND BEFORE THIS TRIBUNAL SEE KING ITS EXCLUSION. FOR ADMISSION OF ADDITIONAL GROUND, HE PLACED RELIANCE ON THE SPECIAL BENCH DECISION IN THE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. [42 DTR 414]. 12. ADVERTING TO EACH OF THE COMPANIES THAT HE WAS SEEKING EXCLUSION, LD. AR SUBMITTED THAT BODHTREE CONSULTING LTD, WAS FUNCTIONALLY DISSIMILAR TO THAT OF THE ASSESSEE. FURTHER AS PER THE LD. AR, IT HAD RPT IN IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 10 EXCESS OF 15% AS WELL. IN SUPPORT OF HIS CONTENTIO N THAT BODHTREE CONSULTING LTD, WAS TO BE EXCLUDED, LD. AR PLACED R ELIANCE ON THE DECISION OF COORDINATE BENCH DECISION IN THE CASE OF ACIT V. SYMBOL TECHNOLOGIES P. LTD, [IT(TP)A.391 & 296/BANG/2012, DT.27.03.2015 ]. 13. ACCORDING TO HIM, ANNUAL REPORT OF BODHTREE CON SULTING LTD, REFLECTED THAT ONE M/S. PERIGON LLC(PB, P.730) WAS HAVING MORE THAN 50% SHARES HOLDING IN THAT COMPANY. RELIANCE WAS PLACE D ON LETTER DT.13.09.2007 WRITTEN BY THE STATUTORY AUDITORS OF THE SAID COMPANY, ADDRESSED TO ADDL. CIT, IN REPLY TO A NOTICE U/S.13 3(6) OF THE ACT ISSUED TO THE SAID COMPANY. AS PER THE LD. AR IN THIS LETTER IT WAS MENTIONED THAT TURNOVER OF M/S. BODHTREE CONSULTING LTD TO M/S. PE RIGON LLC CAME TO RS.133.90 LAKHS. ACCORDING TO HIM AGAINST TOTAL TU RNOVER OF THE SAID COMPANY WHICH CAME TO RS.386.86 LAKHS, SALES TO REL ATED PARTY CAME TO 34.61%. AS PER THE LD. AR, THIS EXCEEDED THE RECOG NISED RPT LIMIT OF 25%. 14. SEEKING EXCLUSION OF EXTENSYS SOFTWARE SOLUTION S LTD, LD. AR SUBMITTED THAT THE SAID COMPANY HAD ABNORMAL PROFIT S FOR THE RELEVANT PREVIOUS YEAR DUE TO AMALGAMATION OF ANOTHER COMPAN Y CALLED M/S. HALOOL INDIA LTD, AS PER THE LD. AR, RESULTS OF THIS COMPA NY FOR THE RELEVANT IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 11 PREVIOUS YEAR WAS CONSIDERABLY AFFECTED DUE TO THIS AMALGAMATION. LD. AR SUBMITTED THAT ABNORMAL PROFITS RECEIVED FROM AMALG AMATION WAS A GOOD REASON FOR EXCLUSION OF THIS COMPANY FROM LIST OF C OMPARABLES. RELIANCE WAS PLACED ON THE DECISION OF COORDINATE BENCH IN T HE CASE OF SYMBOL TECHNOLOGIES INDIA P. LTD (SUPRA) ONCE AGAIN. 15. SEEKING EXCLUSION OF SANKHYA INFOTECH LTD, LD. AR SUBMITTED THAT THE SAID COMPANY WAS FUNCTIONALLY DIFFERENT FROM TH AT OF THE ASSESSEE. AS PER THE LD. AR IN THE DECISION OF THE COORDINATE BE NCH IN THE CASE OF SYMBOL TECHNOLOGIES INDIA P. LTD, (SUPRA), SANKHYA INFOTECH LTD, WAS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE S IN THE SOFTWARE DEVELOPMENT SEGMENT. 16. SEEKING EXCLUSION OF FOURSOFT LTD, LD. AR SUBMI TTED THAT THE SAID COMPANY WAS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE. AS PER THE LD. AR, FOURSOFT LTD, ALSO HAD RPT IN EXCESS OF 15% . RELIANCE WAS ONCE AGAIN PLACED IN THE CASE OF SYMBOL TECHNOLOGIES IND IA P. LTD, (SUPRA). 17. SEEKING EXCLUSION OF THIRDWARE SOLUTIONS LTD, L D. AR SUBMITTED THAT THE SAID COMPANY WAS ALSO FUNCTIONALLY DIFFERE NT AND HAD DIVERSIFIED ACTIVITIES INCLUDING DISTRIBUTION OF SOFTWARE PRODU CTS AND PROVIDING TURN- IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 12 KEY PROJECTS. AS PER THE LD. AR, SEGMENTAL RESULTS WERE NOT AVAILABLE DESPITE SUCH DIVERSIFIED ACTIVITIES. FURTHER AS PE R THE LD. AR, COORDINATE BENCH IN THE CASE OF SYMBOL TECHNOLOGIES INDIA P. L TD (SUPRA) HAD DIRECTED EXCLUSION OF M/S. THIRDWARE SOLUTIONS LTD, IN THE S OFTWARE DEVELOPMENT SEGMENT. 18. SEEKING EXCLUSION OF GEOMETRIC SOFTWARE SOLUTIO NS CO. LTD, LD. AR SUBMITTED THAT IT WAS A COMPARABLE ORIGINALLY SELEC TED BY THE ASSESSEE. HOWEVER AS PER THE LD. AR, ASSESSEE HAD CANVASSED F OR ITS EXCLUSION BEFORE THE CIT (A). RELYING ON THE COORDINATE BENCH DECIS ION IN THE CASE OF ITO V. NET DEVICES INDIA P. LTD, [IT(TP)A.1099/BANG/20 11, DT.25.05.2016], LD. AR SUBMITTED THAT THIS COMPANY WAS NOT A GOOD C OMPARABLE IN THE SOFTWARE DEVELOPMENT SEGMENT. 19. SEEKING EXCLUSION OF TATA ELXSI LTD (SEG), LD. AR SUBMITTED THAT THE SAID COMPANY WAS INTO PRODUCT-DESIGN SERVICES, DESI GN ENGINEERING SERVICES AND VISUAL COMPUTING. AS PER THE LD. AR I T WAS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE WAS DEVELOPING NICHE PRODUCTS. RELIANCE WAS AGAIN PLACED ON THE DECISION OF COORDI NATE BENCH IN THE CASE OF NET DEVICES INDIA P. LTD, (SUPRA). IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 13 20. SEEKING EXCLUSION OF VISUAL SOFT TECHNOLOGIES L TD (SEG), LD. AR SUBMITTED THAT THE SAID COMPANY WAS BASICALLY A SOF TWARE PRODUCT COMPANY. ACCORDING TO HIM, ANNUAL REPORT OF THE SA ID COMPANY PLACED AT PAPER BOOK PAGE.1210, CLEARLY MENTIONED THAT THE CO MPANY WAS PROVIDING SERVICES IN APPLICATION DEVELOPMENT, PRODUCT REENGI NEERING, PRODUCT DEVELOPMENT, APPLICATION MAINTENANCE AND SUPPORT, E NTERPRISE APPLICATION INTEGRATION, PACKAGED SOFTWARE IMPLEMENTATION AND B PO. ACCORDING TO THE LD. AR, THESE AREAS WERE MAINLY RELATED TO SOFTWARE PRODUCT DEVELOPMENT. IN ANY CASE, AS PER THE LD. AR, THE SAID COMPANY WA S CONSIDERED TO BE FUNCTIONALLY DISSIMILAR TO A SOFTWARE SERVICE PROVI DER BY THE DELHI BENCH OF THIS TRIBUNAL IN THE CASE OF ITO V. COLT TECHNOLOGY SERVICES INDIA P. LTD [ITA NO.609/DEL/2011 & CO.81/DEL/2011, DT.23.10.201 2]. 21. SEEKING EXCLUSION OF FLEXTRONICS (SEG), LD. AR SUBMITTED THAT IT WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AND WAS PR OVIDING A HYBRID SERVICE INCLUDING BOTH PRODUCTS AND SERVICES. RELIANCE WAS PLACED ON THE DECISION OF COORDINATE BENCH IN THE CASE OF NET DEVICES IND IA P. LTD, (SUPRA). 22. VIS-A-VIS SATYAM COMPUTER SERVICES LTD, LD. AR SUBMITTED THAT THIS COMPANY APPEARED IN TP STUDY OF ASSESSEE. HOWEVER AS PER THE LD. AR, ASSESSEE HAD CONTESTED ITS INCLUSION BEFORE THE CIT (A) ON A GROUND THAT IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 14 PROFITS REPORTED BY THE SAID COMPANY WERE INFLATED. AS PER THE LD. AR, COORDINATE BENCH IN THE CASE OF NET DEVICES INDIA P . LTD, (SUPRA) HAD HELD THAT SATYAM COMPUTER SERVICES LTD, COULD NOT BE CON SIDERED AS A GOOD COMPARABLE. 23. SEEKING EXCLUSION OF INFOSYS TECHNOLOGIES LTD, LD. AR SUBMITTED THAT THE SAID COMPANY ALSO APPEARED IN THE LIST OF COMPARABLES SELECTED BY THE ASSESSEE. HOWEVER ACCORDING TO THE LD. AR, ASS ESSEE HAD SOUGHT EXCLUSION OF THIS COMPANY BEFORE THE CIT (A) SINCE IT WAS HAVING DIVERSIFIED FOLIO OF ACTIVITIES AND HUGE IN NATURE, OWNING A NUMBER OF INTANGIBLE AND INTELLECTUAL PROPERTY. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. A GNITY INDIA TECHNOLOGIES P. LTD [(2013) 93 DTR 375]. 24. PER CONTRA, LD. DR OPPOSING THE EXCLUSIONS SOUG HT BY ASSESSEE SUBMITTED THAT M/S. BODHTREE CONSULTING LTD, GEOMET RIC SOFTWARE SOLUTIONS CO. LTD, SATYAM COMPUTER SERVICES LTD, AN D INFOSYS TECHNOLOGIES LTD, APPEARED IN ASSESSEES OWN TP STU DY. AS PER THE LD. DR, ASSESSEE COULD NOT NOW TURN BACK AND SAY THAT S UCH COMPANIES WERE NOT GOOD COMPARABLES. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 15 25. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IT IS TRUE THAT OUT OF THE MANY COMPANIES WHICH ASSESSEE IS SE EKING EXCLUSION, BODHTREE CONSULTING LTD, GEOMETRIC SOFTWARE SOLUTIO NS CO. LTD, SATYAM COMPUTER SERVICES LTD, AND INFOSYS TECHNLOGIES LTD, WERE IN ASSESSEES OWN LIST OF COMPARABLES. HOWEVER ASSESSEE HAD CONT ENDED BEFORE THE CIT (A) THAT GEOMETRIC SOFTWARE SOLUTIONS CO. LTD, HAD DIVERSIFIED OPERATIONS CONSISTING OF SOFTWARE PRODUCTS AND SERVICES. IN S O FAR AS SATYAM COMPUTER SERVICES LTD, ASSESSEE HAD CONTENDED BEFORE THE CI T (A) THAT ITS FINANCIALS WERE UNRELIABLE. IN SO FAR AS INFOSYS TECHNOLOGIES LTD, ASSESSEE HAD CONTENDED BEFORE THE CIT (A) THAT ITS TURNOVER WAS FAR IN EXCESS OF THAT OF THE ASSESSEE WHICH HAD A TURNOVER WAS ONLY RS.6.97 CRORES IN THE SOFTWARE DEVELOPMENT SEGMENT. ONCE ASSESSEE HAD TAKEN GROUN DS SEEKING EXCLUSION OF CERTAIN COMPANIES BEFORE THE CIT (A) IN OUR OPIN ION, EVEN IF SUCH COMPANIES APPEARED IN THE TP STUDY OF THE ASSESSEE ITSELF, CIT (A) HAVING ADJUDICATED AND DECIDED ON SUCH GROUND AGAINST THE ASSESSEE, ASSESSEE CANNOT BE PRECLUDED FROM SEEKING EXCLUSION OF SUCH COMPANIES BEFORE THE TRIBUNAL. HOWEVER, IN SO FAR AS BODHTREE CONSULTIN G LTD, IS CONCERNED, NOT ONLY WAS THE SAID COMPANY IN THE LIST OF ASSESSEE, BUT WE FIND THAT ASSESSEE HAD NOT CONTESTED ITS INCLUSION BEFORE THE TPO OR B EFORE THE CIT (A). HOWEVER, IN VIEW OF THE DECISION OF THE SPECIAL BEN CH IN THE CASE OF QUARK IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 16 SYSTEMS LTD, (SUPRA), ASSESSEE AGAIN CANNOT BE PREC LUDED FROM SEEKING EXCLUSION OF A COMPARABLE, THOUGH IT WAS A PART OF ITS OWN COMPARABLES, SINCE TP IS AN EVOLVING AREA. SAID DECISION OF THE SPECIAL BENCH WAS CONFIRMED BY THE HONBLE PUNJAB & HARYANA HIGH COUR T IN (2011) 62 DTR 182. NEVERTHELESS SINCE COMPARABILITY OF THE SAID COMPANY WAS NOT BEFORE ANY OF THE LOWER AUTHORITIES, WE ARE OF THE OPINION THAT THIS HAS TO BE LOOKED INTO AFRESH BY THE AO / TPO. IT IS TRUE THAT COOR DINATE BENCH IN THE CASE OF SYMBOL TECHNOLOGIES INDIA P. LTD, (SUPRA) HAD HELD THAT BODHTREE CONSULTING LTD, HAD RPT OF MORE THAN 15% AND WAS RE QUIRED TO BE EXCLUDED. HOWEVER AS MENTIONED ABOVE, THE GROUNDS SEEKING EXCLUSION OF M/S. BODHTREE CONSULTING LTD WAS NOT RAISED BEFORE TPO OR CIT (A). HENCE IN OUR OPINION, THE ISSUE REQUIRES A FRESH LO OK BY THE AO / TPO. WE SET ASIDE THE ORDER OF CIT (A) AND REMIT THE ISSUE OF COMPARABILITY OF BODHTREE CONSULTING LTD, TO THE AO / TPO FOR CONSID ERATION AFRESH IN ACCORDANCE WITH LAW. 26. NOW WE WILL TRY TO RESOLVE THE GROUNDS RAISED B Y THE ASSESSEE SEEKING EXCLUSION OF VARIOUS OTHER COMPANIES IN THE LIST CONSIDERED BY THE TPO, INCLUDING M/S. GEOMETRIC SOFTWARE SOLUTIONS LT D, SATYAM COMPUTER SERVICES LTD AND INFOSYS TECHNOLOGIES LTD. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 17 27. TAKING UP THE CASE OF M/S. EXTENSYS SOFTWARE SO LUTIONS LTD, ANNUAL REPORT OF THE SAID COMPANY HAS BEEN PLACED BEFORE U S AT PAPER BOOK PAGE 747. IT DOES MENTION THAT THERE WAS AN AMALGAMATIO N OF THAT COMPANY WITH ONE M/S. HOLOOL INDIA LTD, WITH EFFECT FROM 01.04.2 004. IN THE NOTES TO ACCOUNTS, PLACED AT PAPER BOOK PAGE 767, IT IS CLEA RLY MENTIONED THAT AMALGAMATION WAS COME INTO EFFECT FROM 31.03.2004. THUS THE PROFITS OF THE SAID COMPANY COULD HAVE BEEN SKEWED BECAUSE OF THE AMALGAMATION FACTOR. IN THE CASE OF SYMBOL TECHNOLOGIES INDIA P . LTD, (SUPRA), THIS TRIBUNAL HAD HELD AS UNDER AT PARA 14 OF ITS ORDER, WHICH IS REPRODUCED HEREUNDER : 14. THE GROUND RAISED BY THE REVENUE WITH REGARD TO THE ACTION OF THE CIT(A) IN EXCLUDING COMPANIES WITH ABNORMAL PROFITS IS MISCONCEIVED AND THE ISSUE AND DOES NOT ARISE OUT O F THE ORDER OF THE CIT(A). AS WE HAVE ALREADY SEEN THE CIT(A) REJE CTED SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO BY APPLY ING RELATED PARTY TRANSACTION FILTER. THE FILTER OF COM PANIES DEALING IN SOFTWARE PRODUCTS AND ABNORMAL PROFITS OWING TO AMA LGAMATION OF THE COMPANIES DURING THE RELEVANT PERIOD THEREBY SHOWING ABNORMAL PROFITS WAS APPLIED TO EXCLUDE EXENSYS SOF TWARE SOLUTIONS LTD., WAS EXCLUDED FOR REASONS OF HIGH TU RNOVER AND HIGH RISK PROFILE. SATYAM COMPUTER SERVICES LTD., H AS TO BE EXCLUDED FROM THE COMPARABLE COMPANIES FOR NON-RELI ABILITY OF FINANCIAL DATA AS IT WAS INVOLVED IN FINANCIAL SCAM . IN DOING SO, THE CIT(A) FOLLOWED THE DECISION OF THIS HONBLE TR IBUNAL IN AGNITY INDIA TECHNOLOGIES V. ITO (ITA 3856/DEI/2010 ) AND SAP INDIA PVT. LTD V. ITO [ITA NO. 398/8/2008]. THEREFO RE THE GRIEVANCE AS PROJECTED BY THE REVENUE IN GROUND NO. 5 IS MISCONCEIVED. ON THE FACTS OF THE PRESENT CASE, WE ARE OF THE VIEW IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 18 THAT THE CIT(A) RIGHTLY EXCLUDED EXENSYS SOFTWARE S OLUTIONS LTD., AND SATYAM COMPUTERS LTD., FROM THE LIST OF COMPARA BLE COMPANIES. ACCORDINGLY WE DIRECT EXCLUSION OF EXTENSYS SOFTWAR E SOLUTIONS LTD. 28. COMING TO THE CASE OF SANKHYA INFOTECH LTD, ARG UMENT OF THE ASSESSEE IS THAT IT WAS ENGAGED IN THE BUSINESS OF SOFTWARE PRODUCTS AND SERVICES TRAINING AND HENCE FUNCTIONALLY DIFFERENT. COMPARABILITY OF SANKHYA INFOTECH LTD, IN THE SOFTWARE DEVELOPMENT SEGMENT WAS AN ISSUE WHICH CAME UP BEFORE THIS TRIBUNAL IN THE CASE OF N ET DEVICES INDIA P. LTD, (SUPRA). SAID DECISION WAS ALSO FOR THE VERY SAME ASSESSMENT YEAR. THIS TRIBUNAL HAD HELD AS UNDER AT PARA 18.1.1 OF ITS OR DER DT.25.05.2014 : 18.1.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIS-SIM ILAR AS THIS COMPANY IS PRODUCT BASED COMPANY AND ALSO ENGAGED I N R&D ACTIVITY AND DEVELOPMENT OF NICHE PRODUCT FOR THE T RANSPORTATION AND AVIATION FIELDS. THIS COMPANY ALSO OWNS INTANGI BLES. THUS THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARA BLE WHEN IT IS ENGAGED IN SOFTWARE PRODUCTS FOR TRANSPORTATI ON AND AVIATION INDUSTRY AND INCURRED SELLING AND MARKETING EXPENSE S. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DECISIONS :- I) M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP) A NOS.4/BANG/2012 & 1388/BANG/2011. II) M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. (IT(TP)A NO.1302/BANG/2011 & 92/BANG/2012) III) TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. IN IT(TP)A NO.29/BANG/2012. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 19 18.1.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE TP O. 18.1.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE FUNCTIONAL COMPARABILITY OF THIS COMPANY HAS BEEN E XAMINED BY THE TRIBUNAL IN A SERIES OF THE CASES AS RELIED UPO N BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE. IN THE C ASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. (IT(TP)A NO.1302/BANG/2011 & 92/BANG/2012), THE TRIBUNAL HAS CONSIDERED AND DECIDED AN IDENTICAL ISSUE IN PARAS 19 & 20 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 O F SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE COMPANY FOCUS ES ON THE DEVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORT AND AVIATION INDUSTRY. HOWEVER, SEGMENTAL INFORMATION IN RELATIO N TO THE ABOVE MENTIONED ACTIVITIES IS NOT AVAILABLE IN PUBL IC DOMAIN. THEREFORE, AS SANKHYA ENGAGES ITSELF IN PRODUCTS AN D SERVICES AS WELL AS SOFTWARE TRAINING, IT CANNOT BE CONSIDERED AS A COMPARABLE OF THE APPELLANT. THE PRODUCTS DEVELOPED AND OWNED BY SANKHYA ARE LISTED BELOW: (1) SILICONTM TRAINING SUITE OF PRODUCTS: THE PRODU CTS ARE A COMPREHENSIVE ENTERPRISE WIDE TRAINING PLATFORM THA T COVERS THE ENTIRE SPECTRUM OF TRAINING IN A PAPERLESS ENVIRONM ENT. IT COMPRISES OF FOUR PRODUCTS:- - SILICONTM LMS (TRAINING MANAGEMENT INFORMATION SILICON TM 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 FOR ALL FL IGHT OPERATIONS. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 20 - 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 BUSINE SS OF DEVELOPMENT OF SOFTWARE PRODUCTS & SERVICES AND TRA INING. THE PRODUCTION OF SOFTWARE IS NOT CAPABLE OF BEING EXPR ESSED IN ANY GENERIC UNIT AND HENCE 11 IS RIOT POSSIBLE TO GIVE THE INFORMATION AS REQUIRED BY CERTAIN CLAUSES OF PARAGRAPHS 3.4C A ND 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. 6091/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 I N THE BUSINESS OF SOFTWARE DEVELOPMENT. 20. THE SUBMISSIO NS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE CONSIDERED . THE ACTIVITIES SET OUT ABOVE AND THE DECISION OF THE DE LHI ITAT RENDERED IN THE CONTEXT OF A SOFTWARE DEVELOPMENT C OMPANY SUCH AS THE ASSESSEE MAKES IT AMPLY CLEAR THAT THIS COMP ANY SANKHYA CANNOT BE REGARDED AS A COMPARABLE. THE SAME IS DIR ECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. A SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN TH E OTHER DECISIONS AS RELIED UPON BY THE LD. A.R. FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL WHERE IT WAS FOUND THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AS WELL AS TRAINING, IT CANNOT BE CONSIDER ED AS A GOOD COMPARABLE OF SOFTWARE DEVELOPMENT SERVICES PROVIDE R. ACCORDINGLY, WE DIRECT THE A.O/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. ACCORDINGLY WE DIRECT EXCLUSION OF SANKHYA INFOTECH LTD, FROM THE LIST OF COMPARABLES. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 21 29. COMING TO M/S. FOURSOFT LTD, ARGUMENT OF ASSESS EE IS THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT AND HAD BEEN CAT ERING TO ENTERPRISE SOLUTIONS AND SOFTWARE PRODUCTS. IT IS ALSO STATED BY THE ASSESSEE THAT RPT OF THE SAID COMPANY EXCEEDED 15%. COMPARABILITY OF FOURSOFT LTD, WAS AN ISSUE WHICH CAME UP BEFORE THE COORDINATE BENCH OF THIS TRIBUNAL IN SYMBOL TECHNOLOGIES INDIA P. LTD, (SUPRA), WITHIN T HE VERY SAME SEGMENT. IT WAS HELD AS UNDER BY THE TRIBUNAL AT PARA 22 OF ITS ORDER DT.27.03.2015: 22. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS, HELD THAT THE A FORESAID TWO COMPANIES VIZ., FOUR SOFT LTD., AND THIRDWARE SOLUT IONS LTD., ARE NOT COMPARABLE COMPANIES IN SOFTWARE DEVELOPMENT SE RVICES COMPANIES. THE FOLLOWING WERE :- 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 INC, IN AN APPLICATION VERIFICATION KIT CERTIFIED FOR ENTERPRI SES AND ASSESSEE HAVE BEEN INVESTING CONTINUOUSLY ON PRODUCT DEVELOP MENTS. SINCE ASSESSEE IS IN THE PRODUCT DEVELOPMENT, HAVING I.P. RIGHTS, THE SAME IS NOT COMPARABLE. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : THIS COMPANY IS OBJECTED TO BY THE ASSESSEE ON THE REASO N THAT THE SAID THIRDWARE SOFTWARE SOLUTIONS LTD. IS ENGAGED IN SAL E OF SOFTWARE LICENCE AND RELATED SERVICES AND NOT A SERVICE PROV IDER. REFERRING TO THE ANNUAL REPORT, IT WAS SUBMITTED THAT THIS CO MPARABLE WAS REJECTED BY THE ITAT, PUNE IN THE CASE OF EGAIN COM MUNICATIONS LTD. THIS COMPANY HAVING REVENUE FROM PRODUCT LICEN SE AND EARNING EXTRAORDINARY PROFIT DUE TO INTANGIBLE OWNS . IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 22 15.6. THESE THREE COMPARABLE ABOVE FLEXTRONICS SOFT WARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SOLUTION LI MITED WERE ANALYSED BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF INTOTO SOFTWARE SOLUTIONS PVT. 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 CO MPANIES 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 THESE COMPANIES ARE ALSO INTO PRODUCT DEVE LOPMENT BUT HAS SELECTED THESE COMPANIES AS COMPARABLES BY APPL YING 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 SUBMITTED THAT THE TPO HAS ALLOCATED THE EXPENDITURE IN THE PROPORTION OF THE REVENUE OF THE SE COMPANIES FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS AND HA S ADOPTED THE FIGURE AS SEGMENTAL MARGIN OF THE COMPANY AND HAS T AKEN THESE COMPANIES AS COMPARABLES. HE SUBMITTED THAT BY TAKI NG THE PROPORTIONATE EXPENDITURE, THE CORRECT FINANCIAL RE SULTS WOULD NOT EMERGE. HE SUBMITTED THAT NOTHING PREVENTED THE ASS ESSING OFFICER/TPO FROM OBTAINING THE SEGMENTAL DETAILS FR OM THE RESPECTIVE COMPARABLE COMPANIES BEFORE ADOPTING THE M AS COMPARABLE COMPANIES AND BEFORE TAKING THE OPERATIN G MARGIN FOR ARRIVING AT THE ARMS LENGTH PRICE. HE SUBMITTED THA T WHEREVER THE SEGMENTAL DETAILS ARE NOT AVAILABLE, THEN THE SAID COMPANIES SHOULD NOT BE TAKEN AS COMPARABLES. FOR THIS PURPOS E, HE PLACED RELIANCE UPON THE DECISION OF THE BANGALORE TRIBUNA L IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. VS. THE DCIT IN ITA.NO.1252/BANG/2010 WHEREIN THESE COMPANIES WERE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 24. THE LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 23 25.HAVING HEARD BOTH THE PARTIES AND HAVING GONE TH ROUGH THE MATERIAL ON RECORD, WE FIND THAT THE TPO AT PAGE 37 OF HIS ORDER HAS BROUGHT OUT THE DIFFERENCES BETWEEN A PRODUCT C OMPANY AND A SOFTWARE DEVELOPMENT SERVICES PROVIDER. THUS, IT IS CLEAR THAT HE IS AWARE OF THE FUNCTIONAL DISSIMILARITY BETWEEN A PRO DUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICE PROVIDER. HAVING TAKEN NOTE OF THE DIFFERENCE BETWEEN THE TWO FUNCTIONS, THE AS SESSING OFFICER OUGHT NOT TO HAVE TAKEN THE COMPANIES WHICH ARE INT O BOTH THE PRODUCT DEVELOPMENT AS WELL AS SOFTWARE DEVELOPMENT SERVICE PROVIDER AS COMPARABLES UNLESS THE SEGMENTAL DETAIL S ARE AVAILABLE. EVEN IF HE HAS ADOPTED THE FILTER OF MOR E THAN 75% OF THE REVENUE FROM THE SOFTWARE SERVICES FOR SELECTIN G A COMPARABLE COMPANY, HE OUGHT TO HAVE TAKEN THE SEGMENTAL RESUL TS OF THE SOFTWARE SERVICES ONLY. THE PERCENTAGE OF EXPENDITU RE TOWARDS THE DEVELOPMENT OF SOFTWARE PRODUCTS MAY DIFFER FROM CO MPANY TO COMPANY 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 DET AILS FROM THE COMPARABLE COMPANIES. IT IS SEEN THAT THE ASSESSING OFFICER/TPO AS EXERCISED THIS POWER TO CALL FOR DETAILS WITH RE GARD TO THE VARIOUS COMPANIES. AS SEEN FROM THE ANNUAL REPORT O F FOURSOFT LIMITED WHICH IS REPRODUCED AT PAGE 7 OF THE TPOS ORDER, THE SAID COMPANY HAS DERIVED INCOME FROM SOFTWARE LICEN CE ALSO AND AMCS. 26. AS FAR AS THIRDWARE SOFTWARE SOLUTION LIMITED I S CONCERNED, WE FIND FROM THE INFORMATION FURNISHED BY THE SAID COMPANY THAT THOUGH THE SAID COMPANY IS ALSO INTO PRODUCT DEVELO PMENT, THERE ARE NO SOFTWARE PRODUCTS THAT THE COMPANY INVOICED DURING THE RELEVANT FINANCIAL YEAR AND THE FINANCIAL RESULTS A RE IN RESPECT OF SERVICES ONLY. THUS, IT IS CLEAR THAT THERE IS NO S ALE OF SOFTWARE PRODUCTS DURING THE YEAR BUT THE SAID COMPANY MIGHT HAVE INCURRED EXPENDITURE TOWARDS THE DEVELOPMENT OF THE SOFTWARE PRODUCTS. 27. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CONCE RNED, WE FIND THAT AT PAGE 90 OF HIS ORDER, THE TPO HAS ALSO OBSE RVED THAT THE SAID COMPANY HAS INCURRED EXPENDITURE FOR SELLING O F PRODUCTS AND HAS INCURRED R & D EXPENDITURE FOR DEVELOPMENT OF T HE PRODUCTS. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 24 THE ABOVE FACTS CLEARLY DEMONSTRATE THAT THERE IS F UNCTIONAL DISSIMILARITY BETWEEN THE ASSESSEE AND THESE COMPAN IES AND WITHOUT MAKING ADJUSTMENT FOR THE DISSIMILARITIES B ROUGHT OUT BY THE TPO HIMSELF, THESE COMPANIES CANNOT BE TAKEN AS COMPARABLE COMPANIES. THE METHOD ADOPTED BY THE TPO TO ALLOCAT E EXPENDITURE PROPORTIONATELY TO THE SOFTWARE DEVELOP MENT SERVICES AND SOFTWARE PRODUCT ACTIVITY CANNOT BE SAID TO BE CORRECT AND REASONABLE. WHEREVER, THE ASSESSING OFFICER/TPO CAN NOT MAKE SUITABLE ADJUSTMENT TO THE FINANCIAL RESULTS OF THE COMPARABLE COMPANIES WITH THE ASSESSEE COMPANY TO BRING THEM O N PAR WITH THE ASSESSEE, THESE COMPANIES ARE TO BE EXCLUDED FR OM THE LIST OF COMPARABLES. THEREFORE, WE DIRECT THE ASSESSING OFF ICER/TPO TO EXCLUDE THESE THREE COMPANIES FROM THE LIST OF COMP ARABLES'. RESPECTFULLY, FOLLOWING THE SAME, WE ACCEPT THE ASS ESSEES OBJECTIONS AND DIRECT THE TPO TO EXCLUDE THE ABOVE THREE COMPANIES FROM THE LIST OF COMPARABLES. 23. IN VIEW OF THE AFORESAID DECISION RENDERED ON I DENTICAL FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT FOURSOFT LTD., AND THIRDWARE SOLUTIONS LTD., SHOULD BE EXCLUDED FROM T HE LIST OF COMPARABLE COMPANIES. FOLLOWING THE ABOVE, WE DIRECT EXCLUSION OF FOURSOF T LTD, FROM THE LIST OF COMPARABLES. 30. COMING TO THIRDWARE SOLUTIONS LTD, CLAIM OF THE ASSESSEE IS THAT THIS WAS ALSO A FUNCTIONALLY DIFFERENT COMPANY ENGAGED I N THE SALE OF SOFTWARE DESIGNS, SOFTWARE PRODUCTS AND SOFTWARE DEVELOPMENT , AND NO SEGMENTAL RESULTS WERE AVAILABLE. WE FIND THAT COMPARABILITY OF THIRDWARE SOLUTIONS LTD, WAS AN ISSUE WHICH CAME UP BEFORE THE COORDINA TE BENCH IN THE CASE OF IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 25 NET DEVICES INDIA P. LTD, (SUPRA). IN ITS ORDER DT .25.05.2016, IT WAS HELD AS UNDER AT PARA 9.1 OF THE ORDER : THIRDWARE SOLUTIONS P. LTD : 9.1 THERE IS NO DISPUTE THAT THE HIGH PROFIT MARGIN OR LOSS CANNOT BE A GROUND FOR EXCLUSION OR INCLUSION OF A PARTICU LAR COMPANY IN THE LIST OF COMPARABLES. THE LEARNED AUTHORISED REP RESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY IS IN THE DIVERSIFIED ACTIVITIES AND DERIVE ITS INCOME FROM SALE OF SOFTW ARE LICENSE, SOFTWARE PRODUCTS APART FROM SOFTWARE DEVELOPMENT S ERVICES. THIS COMPANY IS ENGAGED IN THE DIVERSIFIED ACTIVITI ES OF RENDERING APPLICATION DEVELOPMENT, CUSTOMER RELATIONSHIP MANA GEMENT AND ERP, SOFTWARE PRODUCTS. HE HAS REFERRED TO THE ANNU AL REPORT OF THIS COMPANY AND SUBMITTED THAT THIS COMPANY IS ALS O ENGAGED IN THE DISTRIBUTION OF SOFTWARE PRODUCTS AND PROVIDING TRUNKY PROJECT WHICH INCLUDE A BUNDLE OF ACTIVITIES SUCH A S PROVIDING SOFTWARE PRODUCT COMBINED WITH IMPLEMENTATION AND C USTOMER SERVICES. IN SUPPORT OF HIS CONTENTION, HE HAS RELI ED UPON THE FOLLOWING DECISIONS : I) M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP) A NOS.4/BANG/2012 & 1388/BANG/2011. II) M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. IN IT(TP)A NO.1302/BANG/2012. III) M/S. SYMBOL TECHNOLOGIES INDIA PVT. LTD. IN IT (TP)A NO.391/BANG/2012. IV) TEXTRON GLOBAL TECHNOLOGY CEN TRE PVT. LTD. IN IT(TP)A NO.29/BANG/2012. 9.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUB MITTED THAT THE TPO HAS ANALYSED THE FUNCTIONS OF THIS COMPANY AND IT WAS FOUND THAT THIS COMPANY IS ENGAGED IN THE SIMILAR A CTIVITY OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. HE HAS REL IED UPON THE ORDERS OF THE AUTHORITIES BELOW. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 26 9.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WELL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LEARNED AUTHOR ISED REPRESENTATIVE OF THE ASSESSEE HAS CONTENDED THAT T HIS COMPANY IS HAVING DIVERSIFIED ACTIVITIES INCLUDING SOFTWARE PRODUCT AS WELL AS TRUNKY PROJECT. WE FIND THAT AS PER SCHEDULES 12 AS WELL AS 14 OF THE BALANCE SHEET OF THIS COMPANY, THIS COMPANY HAS SALE OF LICENSE, PURCHASE OF LICENSE AND PURCHASE OF AMC CH ARGES. THE DETAILS OF THE SALES IN SCHEDULE 12 AND DETAILS OF PURCHASE IN SCHEDULE 14 ARE AS UNDER : SCHEDULE 12 : SALES SALE OF LICENCE .. 27,202,087 SOFTWARE SERVICES .. 80,602,781 EXPORT .. 147,425,780 REVENUE FROM SUBSCRIPTION .. 35,939,678 SCHEDULE 14 : DETAILS OF PURCHASE PURCHASE OF LICENCE .. 21,168.657 CLEARING AND FORWARDING CHARGES 835,754 PURCHASE AMC CHARGES .. 16,893,037 SOFTWARE SERVICE CHARGES .. 17,329,999 TRAINING EXPENSES .. 554,296 PURCHASE OTHERS .. 0 THUS IT IS CLEAR FROM THE SCHEDULES 12 & 14 OF THE BALANCE SHEET OF THIS COMPANY THAT THIS COMPANY IS IN TRADING OF LICENSES AND NO SEPARATE SEGMENTAL DATA ARE AVAILABLE. THEREFORE, T HIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE TO THE SO FTWARE DEVELOPMENT SERVICES PROVIDER, COMPANIES LIKE ASSES SEE WHICH IS A CAPTIVE SERVICE PROVIDER. ACCORDINGLY, WE DIRECT THE A.O./TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE S. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 27 FOLLOWING THE ABOVE DECISION, WE DIRECT EXCLUSION O F THIRDWARE SOLUTIONS LTD, FROM THE LIST OF COMPARABLES. 31. COMING TO GEOMETRIC SOFTWARE SOLUTIONS CO. LTD, CASE OF THE ASSESSEE IS THAT ITS RPT EXCEEDED 15% AND WAS DOING SOFTWARE PRODUCT WORK ALSO. WE FIND THAT THE ISSUE OF COMPARABILITY OF GEOMETRIC SOFTWARE SOLUTIONS CO. LTD, HAD COME UP BEFORE THIS TRIBUNAL IN THE CASE OF NET DEVICES INDIA P. LTD, (SUPRA). IT WAS HELD AS UNDE R IN ITS ORDER DT.25.05.2016 : 7.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WEL L AS THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT IN STRICT SENSE, THE ALP HAS TO BE DETERMINED BY CONSIDERING UNCONTROLLED COMPARABLE PRICES WHICH MEANS UNRELATED COMPARABLE PRICES HAS TO BE TAKEN INTO ACCOUNT TO BENCH MARK THE INTE RNATIONAL TRANSACTIONS WHICH ARE THE CONTROL AND RPTS. HOWEVE R, 0% RPTS OF THE COMPARABLE PRICE IS AN IMPOSSIBLE SITUATION AND THEREFORE A REASONABLE TOLERANCE RANGE OF THE REVENUE FROM RP T CAN BE CONSIDERED FOR SELECTING THE UNCONTROLLED COMPARABL ES. THERE CANNOT BE A SINGLE CRITERIA / PARAMETER WHICH CAN B E APPLIED AS A GENERAL RULE IN ALL CASES. THEREFORE, THIS TOLERANC E RANGE VARIES FROM CASE TO CASE AND DEPENDING UPON THE AVAILABILI TY OF THE COMPARABLES. IF THE COMPARABLES OF INTERNATIONAL TR ANSACTIONS ARE EASILY AVAILABLE, THEN, THIS TOLERANCE OF RPT S HOULD BE RESTRICTED TO MINIMUM. THERE IS NO SPECIFIED TOLERA NCE RANGE IN THE ACT OR RULES UNDER THE TRANSFER PRICING PROVISI ONS, HOWEVER, IN DUE COURSE OF DISCUSSION AND ADJUDICATION OF THI S ISSUE IN A SERIES OF DECISIONS OF THIS TRIBUNAL, COMMONLY ACCE PTED TOLERANCE RANGE OF 5% TO 25% OF THE TOTAL REVENUE FROM RPT HA S BEEN CONSIDERED AS REASONABLE DEPENDING UPON THE FACTS A ND CIRCUMSTANCES OF EACH CASE. IN THE CASE ON HAND, TH E AVAILABILITY IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 28 OF THE COMPARABLES IS ABUNDANT IN NUMBER AS THE TPO SELECTED 17 COMPARABLES BY APPLYING THE FILTER OF 25% OF REV ENUE FROM RELATED PARTIES. THEREFORE, IN THIS CASE, GOOD NUMB ER OF COMPARABLES ARE AVAILABLE AND THERE IS NO DIFFICULT Y IN SEARCHING THE COMPARABLES. ACCORDINGLY, IN ORDER TO DETERMINE THE ALP BY CONSIDERING THE COMPARABLE UNCONTROLLED TRANSACTION S, IT SHOULD BE KEPT IN MIND THAT THE UNCONTROLLED TRANSACTIONS SHOULD BE LEAST INFLUENCED BY THE RPT IN THE CASE OF DCIT VS. TEXTR ON GLOBAL TECHNOLOGY CENTRE PVT. LTD. IN IT(TP)A NO.29/BANG/2 012 & C.O. NO.40/BANG/2012 DT.20.3.2015 FOR THE ASSESSMEN T YEAR 2005-06 THE TRIBUNAL HAS HELD IN PARA 17 AS UNDER : - 17. IN VIEW OF THE CONCLUSION ABOVE THAT EXCLUSIO N OF COMPARABLE COMPANIES WITH RPT OF LESS THAN ZERO PER CENT IS NOT VALID, AND THAT COMPANIES WHERE RPT IS LESS THAN 15 % ALONE CAN BE CONSIDERED, THEN THE COMPARABLE REJECTED BY THE CIT (APPEALS) ON THE BASIS OF THE SAID FILTER WILL HAVE TO BE INCLUDED ALONG WITH THE FOUR COMPARABLE RETAINED BY THE CIT (APPEALS). ALTHOUGH 12 COMPARABLE WHICH WERE REJECTED ON THE B ASIS OF RPT BEING MORE THAN ZERO PERCENT, ONE COMPARABLE VI Z., FOUR SOFT LTD, WILL HAVE TO BE EXCLUDED SINCE THE RPT IS AT 19.89% AND THUS IN EXCESS OF 15%. SATHYAM COMPUTERS LTD. AND I NFOSYS TECHNOLOGIES LTD. WILL GET EXCLUDED FOR THE REASON THAT THE FINANCIAL RESULTS ARE NOT RELIABLE IN THE CASE OF S ATHYAM COMPUTERS LTD. AND FOR THE REASON THAT THE HIGH TUR NOVER, BRAND VALUE, HIGH RISKS ETC. THE REMAINING 9 COMPARABLE C OMPANIES WHICH WERE EXCLUDED BY THE CIT (APPEALS) BY APPLYIN G THE RPT FILTER OF 0% RELATED PARTY TRANSACTION WILL NOT HAV E TO BE INCLUDED. THEIR COMPARABILITY WITH THE ASSESSEE IN TERMS OF OTHER FILTERS WILL BE DISCUSSED IN THE FOLLOWING PARAGRAP HS. WE FURTHER NOTE THAT IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2006- 07, THE TRIBUNAL HAS TAKEN A SIMILAR VIEW HAS BEEN TAKEN IN ASSESSEE'S OWN CASE FOR THE ASSES SMENT YEAR 2006-07 IN PARA 14 AS UNDER : 14. FURTHER, AS REGARDS MEGA SOFT LTD., AZTEC SOF TWARE LTD., AND GEOMETRIC SOFTWARE LTD.(SEGMENT) ARE CONCERNED, IT IS STATED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT RPT OF THESE IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 29 COMPANIES IS 17.08%, 17.78% AND 19.34% RESPECTIVELY . HE STATED THAT THIS TRIBUNAL, IN A NUMBER OF CASES HAS BEEN HOLDING THAT IF THE RPT ARE MORE THAN 15%, THEN SUCH COMPAR ABLE COMPANIES HAVE TO BE EXCLUDED FROM THE FINAL LIST O F COMPARABLES. IN SUPPORT OF THIS CONTENTION ALSO, THE LEARNED COU NSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE DECISION OF T HE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF M/S.ARIBA TECH NOLOGIES INDIA PVT. LTD. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE WHEN THERE IS GOOD NUMBER OF COMPARABLES AVAILABLE THEN, WE CONCU R WITH THE VIEW OF THE CO-ORDINATE BENCH THAT THE RPT FILTER O F 15% IS PROPER IN THE CASE OF THE ASSESSEE. ACCORDINGLY WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THE COMPARABLE COM PANIES HAVING THE REVENUE OF MORE THAN 15% FROM RELATED PA RTIES. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE H AS REFERRED ANNEXURE A TO TPO ORDER WHICH MENTIONS THE PERCENTA GE OF RPTS. THUS AS PER THE ANNEXURE A OF THE TPOS ORDER , THE FOLLOWING COMPANIES HAVING MORE THAN 15% OF RPT ARE DIRECTED TO BE EXCLUDED. SL. NO. COMPARABLE COMPANY NAME % OF RPT OVER SALES 1. AZTEC SOFTWARE LIMITED 17.78 2. GEOMETRIC SOFTWARE LIMITED 19.34 3. MEGASOFT LIMITED 17.08 THE ORDER OF THE CIT (APPEALS) STANDS MODIFIED ON T HIS ISSUE. TRIBUNAL HAD GIVEN A FINDING THAT 15% RPT FILTER WA S PROPER THRESHOLD IN THE CASE OF NET DEVICES INDIA P. LTD, (SUPRA). FUR THER IN THE CASE BEFORE US COMPARABLES ON THE SEGMENT RELATING TO INTERNATIONA L TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WERE EASILY AVAILABLE. ASSESSEE ITSELF HAD IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 30 SELECTED 93 CASES IN ITS TP STUDY. THUS THE TOLERA NCE OF RPT CAN BE RESTRICTED TO THE MINIMUM LEVEL OF 15%. THEREFORE EXCLUSIONS DIRECTED BY THE TRIBUNAL IN THE CASE OF NET DEVICES INDIA P. LT D, (SUPRA) BASED ON RPT FILTER OF 15% CAN BE APPLIED HERE ALSO. ACCORDINGL Y WE DIRECT EXCLUSION OF GEOMETRIC SOFTWARE SOLUTIONS LTD, FROM THE LIST OF COMPARABLES. 32. COMING TO TATA ELXSI LTD,(SEG), IN THE CASE OF NET DEVICES INDIA P. LTD, (SUPRA), IT WAS HELD AS UNDER AT PARA 18.4.3 O F ORDER DT.25.05.2016 : 18.4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WELL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE FUNCTIONAL COMPARABILITY HAS BEEN CONSIDERED BY THI S TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2006-07 VIDE ORDER DT.30.6.2015 IN ITA NO.1485/BANG/2010 IN PARA 13 TO 18 AS UNDER : 13. HAVING REGARD TO THE RIVAL CONTENTIONS AND TH E MATERIAL ON RECORD, WE FIND THAT BEING THE VERY SAME ASSESSMENT YEAR VIZ., 2006- 07 IN THE CASE OF M/S.ARIBA TECHNOLOGIES INDIA PVT. LTD. THIS TRIBUNAL HAD OCCASION TO GO INTO THE COMPARABILITY OF THESE COMPANIES WITH THE SAID COMPANY AND THE TRIBUNAL H AS HELD IT TO BE FUNCTIONALLY DISSIMILAR FROM THE SIMILAR ACTIVIT Y OF SOFTWARE DEVELOPMENT SERVICE. WE FIND THAT THE TRIBUNAL, AT PARA.12 & 13 OF ITS ORDER, HAS HELD AS UNDER: 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS O F THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE O F TRIOLOGY E- BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA): XXXXXX XXXXXX IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 31 17. AS FAR AS COMPARABLE COMPANY CHOSEN BY THE TPO VIZ., TATA ELXSI LTD., IS CONCERNED, THE COMPARABILITY OF THE AFORESAID 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 COMPA NY, 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 MUM BAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. (SUPRA) WHEREIN ON THE AFORESAID TWO COMPANIES , THE TRIBUNAL HELD AS FOLLOWS:- 7.7.TATA ELXSI LIMITED.: FROM THE FACTS AND MATERI AL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AN D DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSE SSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT TH E NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COM PANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED I N PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPA RABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICE S. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FI T FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LEN GTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST O F 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., F LEXTRONICS SOFTWARE SYSTEMS PVT. LTD. SHOULD BE TAKEN AS A COM PARABLE, WHILE COMPARABLE AT SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A COMPARABLE. 18. IN VIEW OF THE AFORESAID DECISION, WE HOLD THAT TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE CHOSEN BY T HE TPO. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO T O EXCLUDE THESE COMPANIES FROM THE FINAL LIST OF COMPARABLES. WE F IND THAT THERE IS IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 32 NO CHANGE IN THE BUSINESS ACTIVITY OF THIS COMPANY IN THE YEAR UNDER CONSIDERATION IN COMPARISON TO THE ASSESSMENT YEAR 2006-07. WE FURTHER NOTE THAT A SIMILAR VIEW HAS BEEN TAKEN BY THIS TRIBUNAL IN THE OTHER CASES AS RELIED UPON BY THE ASSESSEE PERT AINING TO THE ASSESSMENT YEAR 2005- 06. ACCORDINGLY, BY FOLLOWING THE EARLIER DECISIONS OF THIS TRIBUNAL, WE ARE OF THE VIEW THAT THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE TO THE AS SESSEE. HENCE, THE ASSESSING OFFICER / TPO IS DIRECTED TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. ACCORDINGLY WE DIRECT EXCLUSION OF TATA ELXSI LTD, (SEG) FROM THE LIST OF COMPARABLES. 33. COMING TO VISUAL SOFT TECHNOLOGIES LTD, (SEG), CLAIM OF ASSESSEE IS THAT THE SAID COMPANY WAS A PRODUCT COMPANY AND DEL HI BENCH IN THE CASE OF ITO V. COLT TECHNOLOGY SERVICES INDIA P. LTD, [I TA.6091/DEL/2011, DT.23.10.2012] HAD DIRECTED ITS EXCLUSION IN THE SO FTWARE DEVELOPMENT SEGMENT. WHAT WAS HELD BY THE COORDINATE BENCH IN THE CASE OF COLT TECHNOLOGY SERVICES INDIA P. LTD (SUPRA) IS REPROD UCED HEREUNDER : 14. WE FIND THE SUBMISSIONS OF THE ASSESSEE DIFFERE NTIATING ITS CASE WITH THE CLAIMED COMPARABLES (I) EXENSYS S OFTWARE SOLUTIONS LTD. 2) SANKHYA INFOTECH LTD. 3) THIRD WA RE SOLUTION LTD. AND 4) VISUAL SOFT TECHNOLOGIES LTD. (SEG) SEARCHED BY TPO, WHICH HAVE BEEN ACCEPTED BY THE LD . CIT(A), HAVE NOT BEEN SUCCESSFULLY REBUTTED BY THE DEPARTMENT BEFORE US. REGARDING EXENSYS SOFTWARE SOLUTIONS LTD. THE SUBMISSION OF THE ASSESSEE REMAI NED THAT THE SAID COMPANY OWNS BRANDS WORTH RS. 5 CRORES AS AGAINST ITS TURN OVER OF RS. 7.37 CRORES DURING THE FINANCIAL YEAR 2004-05, HENCE THE COMPANY IS A BRAND OWNER OF THE IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 33 PRODUCTS DEVELOPED BY IT. THE SAID COMPANY IS ALSO ENGAGED IN SECTION R & D AND OWNS SEVERAL SOFTWARE PRODUCTS SUCH AS X MIGRATE, INTEGRATION WORKBENCH , AND REPORT DE SIGNER ETC. REGARDING SANKHYA INFOTECH LTD., IT WAS SUBMIT TED THAT THEY OWN THE INTELLECTUAL PROPERTY RIGHTS IN THE FO RM OF SOFTWARE PRODUCTS DEVELOPED BY IT AND BEARS SUBSTAN TIAL RISK ASSOCIATED WITH THE SUCCESS / FAILURE OF THESE PROD UCTS IN THE MARKET. THESE SUBMISSIONS WERE MADE ON THE BASIS OF ITS ANNUAL REPORT FOR THE RELEVANT FINANCIAL YEAR. IT W AS ALSO SUBMITTED THAT AS A PART OF ITS BUSINESS OPERATIONS THE SAID COMPANY IS ENGAGED IN AND FOCUSES ON DEVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORTATION AND AVIATION INDUST RY AND ACCORDINGLY SPENDS HEAVILY ON DEVELOPMENT OF SOFTWA RE PRODUCTS. IT WAS ALSO SUBMITTED THAT THE SAID COMPA NY OWNS SOFTWARE PRODUCTS. THIS INFORMATION WAS BASED ON A REVIEW OF THE SCHEDULE 4 OF ITS BOOKS OF ACCOUNTS ON FIXED ASSETS. REGARDING THIRDWARE SOLUTIONS LTD. IT WAS SUBMITTED THAT THE SAID COMPANY HAS A DIVERSIFIED FUNCTIONAL PROFE SSIONAL PROFILE AND IS ALSO ENGAGED IN SALE OF SOFTWARE LIC ENSES. THEY INVEST IN R&D AND ALSO PROVIDES / SELLS SOFTWA RE LICENSES AND THERE ARE NO SEGMENTAL RESULTS AVAILAB LE IN ITS AUDITED FINANCIALS TO SEGREGATE PROFITABILITY FROM PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND FROM SALE OF S OFTWARE LICENCES.. THESE INFORMATIONS WERE SUPPORTED BY THE ANNUAL REPORT FOR FINANCIAL YEAR 2004-05 OF THE SAID COMPA NY. IN ITS ANNUAL REPORT A GENERIC DISCLOSURE WAS MADE THA T THE COMPANY IS INVOLVED IN TRADING OF SOFTWARE AND PROV ISION OF IT SERVICES. SCHEDULE 14 OF THE FINANCIAL STATEMENT OF THE SAID COMPANY PROVIDE INFORMATION ON DETAILS OF PURC HASES AS PER WHICH THE TOTAL PURCHASE COST INCURRED BY TH E COMPANY WAS ABOUT RS. 56871743/- AS AGAINST THE TOT AL COST OF RS. 175527264/- WHICH IS ABOUT 32% OF THE TOTAL COST. BESIDES THE SAID COMPANY EARNED ABNORMALLY HIGH OP / TC MARGIN OF 66.11% DURING FINANCIAL YEAR 2004-05 INDICATING RISK DISSIMILARITY VIS A VIS THE ASSESSE E WHICH CLAIMED TO BE A COST PLUS LOW RISK CAPTIVE WHICH CA NNOT BE EXPECTED TO EARN SUCH HIGH PROFITABILITY. REGARDING VISUAL SOFT TECH LTD. (SEG) IT WAS SUBMITTED THAT COMPANY IS ENGAGED IN UNDERTAKING SUBSTANTIAL R & D ACTIVITIES AND IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 34 HENCE SHOULD BE EXCLUDED FROM THE FINAL SET OF COMP ARABLES SINCE ITS RETURN INCLUDES A RETURN ON ACCOUNT OF TH E R & D FUNCTION. IT WAS DEMONSTRATED BY THE FACT THAT DURI NG FINANCIAL YEAR 2004-05, THE SAID COMPANY WAS HAVING A HIGH R & D / SALES SPEND OF 4.5% (FAILS THE R /& D FILTER OF 3%AS APPLIED BY THE ASSESSEE). THE LD. CIT(A) ON TH E BASIS OF INDIAN TP REGULATIONS, OECD GUIDELINES AND JUDIC IAL DECISIONS CAME TO THE CONCLUSION THAT IN MUCH AS TH ESE COMPANIES OWNING SOFTWARE PRODUCTS AND UNDERTAKING R & D COMMAND A PREMIUM RETURN COMPARED TO ANY ROUTINE CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER, THE Y SHOULD NOT BE TAKEN AS COMPARABLE FOR A CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. DELHI BENCH DECISION MENTIONED SUPRA WAS ALSO IN RE LATION TO THE SOFTWARE DEVELOPMENT SEGMENT. IN THE SAID CASE, CIT (A) HIM SELF HAD DIRECTED EXCLUSION OF THE SAID COMPANY FINDING IT TO BE NOT A ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER. NOTHING WAS BROUGHT BEFORE US BY LD. DR FOR TAKING A DIFFERENT VIEW, THOUGH THE ANNUAL REPO RT OF THE COMPANY PLACED BY ASSESSEE AT PAPER BOOK PAGE 1210 DOES NOT CLEARL Y INDICATE WHETHER THE SAID COMPANY WAS INTO SOFTWARE PRODUCTS SEGMENT ONL Y. JUDICIAL DISCIPLINE REQUIRES US TO FOLLOW THE DECISION OF A COORDINATE BENCH UNLESS IT HAS TAKEN A VIEW WHICH IS NOT A POSSIBLE ONE. IN THE CIRCUMS TANCES WE DIRECT EXCLUSION OF VISUAL SOFT TECHNOLOGIES LTD, (SEG) FR OM THE LIST OF COMPARABLES. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 35 34. COMING TO FLEXTRONICS LTD, (SEG), WE FIND THAT COMPARABILITY OF THE SAID COMPANY WAS AN ISSUE WHICH CAME UP BEFORE THE COORDINATE BENCH IN THE CASE OF NET DEVICES INDIA P. LTD, (SUPRA). IT WAS HELD BY THE COORDINATE BENCH AS UNDER IN ITS ORDER DT.25.05.2016 : 17.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE A SSESSEE HAS SUBMITTED THAT THIS COMPANY IS HAVING HYBRID MODEL OF SUPPLYING BOTH PRODUCTS AND SERVICES. IT OFFERS NEW PRODUCT D ESIGN AND DEVELOPMENT TO ENHANCING AND TESTING THEIR CURRENT PRODUCTS. THESE SERVICES ARE PROVIDED FOR FIXED NETWORKS, MOBILE NE TWORKS, VOICE OVER PACKET AND DATA NETWORK. THUS THE LEARNED AUTH ORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT T HIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. HE HAS CO NTENDED THAT THIS COMPANY IS ENGAGED IN THE R&D ACTIVITY AS IT IS EVI DENT FROM THE ANNUAL REPORT OF THIS COMPANY. IN SUPPORT OF HIS CO NTENTION, HE HAS RELIED UPON THE FOLLOWING DECISIONS : I) M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP) A NOS.4/BANG/2012 & 1388/BANG/2011. II) M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. IN IT(TP)A NO.1302/BANG/2011 & 92/BANG/2012. III) M/S. INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO.1 196/HYD/2010) IV) M/S. CNO IT SERVICES (INDIA) PVT. LTD. (ITA NO.1280 /HYD/2010) 17.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL R EPRESENTATIVE HAS SUBMITTED THAT THE TPO HAS EXAMINED THE FUNCTIO NAL COMPARABILITY OF THIS COMPANY AND IT HAD QUALIFIED ALL THE PARAMETERS AND FILTERS APPLIED BY THE TPO. THE OBJE CTIONS RAISED BY THE ASSESSEE AT THIS STAGE WERE NOT AVAILABLE BEFOR E THE TPO AND THEREFORE THE SAME CANNOT BE ACCEPTED IN THE ABSENC E OF THE EXAMINATION OF THE FACT BY THE TPO. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WELL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 36 COMPARABILITY OF THIS COMPANY HAS BEEN EXAMINED BY THIS TRIBUNAL IN VARIOUS CASES AS RELIED UPON BY THE LEARNED AUTH ORISED REPRESENTATIVE OF THE ASSESSEE. IN THE CASE OF MCAF EE SOFTWARE (INDIA) PVT. LTD. (SUPRA), THE CO-ORDINATE BENCH OF THIS TRIBUNAL HAS AGAIN CONSIDERED THIS ISSUE IN PARA 10.10 AS UNDER : 10.10 THIS COMPANY WAS OBJECTED TO ON FUNCTIONAL D ISSIMILARITY. THIS WAS CONSIDERED IN ITO VS. M/S. SUNQUEST INFORM ATION SYSTEMS (INDIA) PVT. LTD. IN IT(TP)A NO.1302/BANG/2011 DT.1 1.6.2015 (SUPRA) AS UNDER : 26. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CON CERNED, WE FIND THAT AT PAGE 90 OF HIS ORDER, THE TPO HAS ALSO OBSE RVED THAT THE SAID COMPANY HAS INCURRED EXPENDITURE FOR SELLING O F PRODUCTS AND HAS INCURRED R & D EXPENDITURE FOR DEVELOPMENT OF T HE PRODUCTS. THE ABOVE FACTS CLEARLY DEMONSTRATE THAT THERE IS F UNCTIONAL DISSIMILARITY BETWEEN THE ASSESSEE AND THESE COMPAN IES AND WITHOUT MAKING ADJUSTMENT FOR THE DISSIMILARITIES BROUGHT O UT BY THE 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 DEVELOPMENT SERVICE S AND SOFTWARE PRODUCT ACTIVITY CANNOT BE SAID TO BE CORRECT AND R EASONABLE. WHEREVER, THE ASSESSING OFFICER/TPO CANNOT MAKE SUI TABLE ADJUSTMENT TO THE FINANCIAL RESULTS OF THE COMPARAB LE COMPANIES WITH THE ASSESSEE COMPANY TO BRING THEM ON PAR WITH THE ASSESSEE, THESE COMPANIES ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THEREFORE, WE DIRECT THE ASSESSING OFFICER/TPO TO E XCLUDE THESE THREE COMPANIES FROM THE LIST OF COMPARABLES.. RESPECTFULLY FOLLOWING, WE EXCLUDE THE SAME. IN VIEW OF THE FACTS AS RECORDED AND CONSIDERED BY THE CO-ORDINATE BENCHES OF THIS TRIBUNAL THAT THIS COMPANY IS IN TH E ACTIVITY OF SOFTWARE DEVELOPMENT SERVICES AS WELL AS SOFTWARE P RODUCTS AND FURTHER ALSO INCURRED R&D EXPENDITURE. THEREFORE, T HE SAME WAS FOUND TO BE DIS-SIMILAR TO THIS PURE SOFTWARE DEVEL OPMENT SERVICES PROVIDER IN THE CAPACITY OF CAPTIVE SERVICE PROVIDE R. BY FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL, WE DIRECT THE AS SESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST O F COMPARABLES. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 37 ACCORDINGLY WE DIRECT EXCLUSION OF FLEXTRONICS LTD, (SEG) FROM THE LIST OF COMPARABLES. 35. VIS-A-VIS, SATYAM COMPUTER SERVICES LTD, COMPAR ABILITY OF THIS COMPANY WAS AN ISSUE WHICH CAME UP BEFORE THIS TRIB UNAL IN THE CASE OF NET DEVICES INDIA P. LTD, (SUPRA). THIS TRIBUNAL H AS HELD AS UNDER IN ITS ORDER DT.25.05.2016 : 18.5.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE FINANCIAL RESULTS AND INFORMATIO N OF THIS COMPANY IS NOT RELIABLE DUE TO THE FINANCIAL IRREGULARITY A ND FRAUDULENT ACTIVITIES BY THE DIRECTORS OF THIS COMPANY. IN SUP PORT OF HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DECISI ONS : I) M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP) A NOS.4/BANG/2012 & 1388/BANG/2011. II) M/S. AGNITY INDIA TECHNOLOGIES PVT. LTD. (ITA NO.3856/DEL/2010). III) M/S. SYMBOL TECHNOLOGIES INDIA PVT. LTD. IN IT (TP)A NO.391/BANG/2012. IV) M/S. TEXTRON GLOBAL TECHNOLOGY CENTRE PVT. LTD. IN IT(TP)A NO.29/BANG/2012. 18.5.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW . 18.5.3 WE HAVE CONSIDERED THE SUBMISSIONS OF RIVAL PARTIES AND THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF TEXTRON GLOBAL TECHNOLOGY PVT. LTD. (SUP RA) IN PARA 14 AS UNDER : IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 38 14. GROUND NO.3 RAISED BY THE REVENUE IS MISCONCE IVED AND THE ISSUE DOES NOT ARISE OUT OF THE ORDER OF THE CIT(A) . AS WE HAVE ALREADY SEEN THE CIT(A) REJECTED SOME OF THE COMPAR ABLE COMPANIES CHOSEN BY THE TPO BY APPLYING RELATED PAR TY TRANSACTION FILTER. THE FILTER OF COMPANIES DEALING IN SOFTWARE PRODUCTS AND ABNORMAL PROFITS OWING TO AMALGAMATION OF THE COMPA NIES DURING THE RELEVANT PERIOD THEREBY SHOWING ABNORMAL PROFIT S WAS APPLIED TO EXCLUDE EXENSYS SOFTWARE SOLUTIONS LTD. INFOSYS TECHNOLOGIES LTD., WAS EXCLUDED FOR REASONS OF HIGH TURNOVER AND HIGH RISK PROFILE. SATYAM COMPUTER SERVICES LTD., HAS TO BE E XCLUDED FROM THE COMPARABLE COMPANIES FOR NON-RELIABILITY OF FINANCI AL DATA AS IT WAS INVOLVED IN FINANCIAL SCAM. IN DOING SO, THE CI T(A) FOLLOWED THE DECISION OF THIS HONBLE TRIBUNAL IN AGNITY INDIA T ECHNOLOGIES V. ITO (ITA 3856/DEI/2010) AND SAP INDIA PVT. LTD V. I TO [ITA NO. 398/8/2008]. THEREFORE THE GRIEVANCE AS PROJECTED B Y THE REVENUE IN GROUND NO.3 IS MISCONCEIVED. ON THE FACTS OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THE CIT(A) RIGHTLY EXCLUDED EX ENSYS SOFTWARE SOLUTIONS LTD., INFOSYS TECHNOLOGIES LTD., AND SATY AM COMPUTERS LTD., FROM THE LIST OF COMPARABLE COMPANIES. IT IS CLEAR FROM THE RECORD THAT THIS ISSUE WAS ALS O INVOLVED IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT LTD VS. ITO ( SUPRA) WHEREIN DELHI BENCH OF ITAT HAS EXCLUDED THIS COMPANY ON TH E GROUND OF UNRELIABLE DATA AND INFORMATION. THE ORDER OF THE D ELHI BENCH OF TRIBUNAL HAS BEEN CONFIRMED BY THE HON'BLE DELHI HI GH COURT. IN VIEW OF THE FINDING OF THE CO-ORDINATE BENCH OF THI S TRIBUNAL, WE DIRECT THE A.O./TPO TO EXCLUDE THIS COMPANY FROM TH E LIST OF COMPARABLES. FOLLOWING THE ABOVE, WE DIRECT EXCLUSION OF SATYAM COMPUTER SERVICES LTD, FROM THE LIST OF COMPARABLES. 36. COMING TO THE ISSUE OF COMPARABILITY OF INFOSYS TECHNOLOGIES LTD, HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY INDI A TECHNOLOGIES P. LTD, (SUPRA) HAS HELD THAT DUE TO THE HUGE REVENUES, OWN ERSHIP OF INTANGIBLES IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 39 AND PROPRIETARY BRAND OF THE SAID COMPANY, IT WOUL D NOT BE A PROPER COMPARABLE. WE FIND THAT THIS TRIBUNAL IN A NUMBE R OF CASES INCLUDING THAT OF SYMBOL TECHNOLOGIES INDIA P. LTD, (SUPRA) HELD INFOSYS TECHNOLOGIES LTD, NOT TO BE A GOOD COMPARABLE. ACC ORDINGLY WE DIRECT THE EXCLUSION OF INFOSYS TECHNOLOGIES LTD, FROM THE LIS T OF COMPARABLES. 37. IN VIEW OF THE DISCUSSIONS AT PARA 27 TO 36 ABO VE, WE DIRECT THE AO / TPO TO EXCLUDE EXTENSYS SOFTWARE SOLUTIONS LTD, SAN KHYA INFOTECH LTD, FOURSOFT LTD, THIRDWARE SOLUTIONS LTD, GEOMETRIC SO FTWARE SOLUTIONS CO. LTD, TATA ELXSI LTD, (SEG), VISUAL SOFT TECHNOLOGIE S LTD (SEG), FLEXTRONICS LTD (SEG), SATHYAM COMPUTER SERVICES LTD, AND INFOS YS TECHNOLOGIES LTD, FROM THE LIST OF COMPARABLES FOR COMPUTING ARMS LEN GTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE. 38. IN SO FAR AS BODHTREE CONSULTING LTD, IS CONCER NED, COMPARABILITY OF THE SAID COMPANY IS REMITTED BACK TO THE AO / TPO F OR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. ORDERED ACCORDINGLY. 39. IN THE RESULT, GROUNDS 2 TO 4 OF THE ASSESSEE A RE PARTLY ALLOWED. GROUND 7 OF THE DEPARTMENTAL APPEAL HAS BECOME IN FRUCTUOUS SINCE COMPARABLES COMING IN IF TURNOVER FILTER, HAS ALSO BEEN CONSIDERED BY US IN IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 40 THE EXCLUSIONS SOUGHT BY THE ASSESSEE IN ITS APPEAL . IN THE RESULT, GROUND 7 OF THE REVENUE IS DISMISSED AS INFRUCTUOUS. 40. NOW WE SHALL TAKE UP THE CORPORATE TAX GROUNDS TAKEN BY THE ASSESSEE AND REVENUE. ASSESSEE VIDE ITS GROUND.5 S TATE THAT LOWER AUTHORITIES ERRONEOUSLY REDUCED A SUM OF RS.2,63,77 ,801/- FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE A CT, FOR A REASON THAT IT DID NOT PRODUCE RECEIPT FOR EXPORT PROCEEDS TO THIS EXTENT, WITHIN THE TIME ALLOWED. LD. AR SUBMITTED THAT SALE PROCEEDS WERE RECEIVED BY THE ASSESSEE DURING THE TIME ALLOWED UNDER THE ACT, BUT DUE TO REASONS BEYOND ITS CONTROL, EVIDENCE IN THIS REGARD COULD NOT BE P RODUCED BEFORE THE LOWER AUTHORITIES. WE ARE OF THE OPINION THAT THIS MATTE R CAN BE VERIFIED BY THE AO AND IF THE ASSESSEE IS ABLE TO PRODUCE EVIDENCE TO SHOW THAT PROCEEDS WERE RECEIVED WITHIN THE TIME ALLOWED UNDER THE STA TUTE, THEN ITS CLAIM FOR DEDUCTION U/S.10A CANNOT BE CURTAILED. MATTER IS T HEREFORE SET ASIDE TO THE FILE OF AO FOR CONSIDERATION AFRESH. GROUND.5 IS A LLOWED FOR STATISTICAL PURPOSE. 41. VIDE ITS GROUND.6, GRIEVANCE RAISED BY THE ASSE SSEE IS THAT CIT (A) UPHELD AN ADHOC DISALLOWANCE OF RS.50 LAKHS ON SALE S PROMOTION EXPENSES. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 41 42. FACTS APROPOS ARE THAT ASSESSEE HAD CLAIMED AN EXPENDITURE OF RS.3,81,79,000/- ON SALES PROMOTION. AO WAS OF THE OPINION THAT SUCH AMOUNT INCLUDED EXPENDITURE IN RELATION TO PARTIES, GET-TOGETHERS AND CONFERENCES IN HIGH-END HOTELS AT DIFFERENT PLACES. AS PER THE AO, ASSESSEE WAS HAVING ITS OWN CONFERENCE FACILITY AND THEREFOR E EXPENDITURE COULD NOT BE CONSIDERED AS INCURRED FOR BUSINESS PURPOSE. AO ALSO REFERRED TO THE FBT PROVISIONS UNDER WHICH SALES PROMOTION EXPENDIT URE WAS SUBJECT TO FRINGE BENEFIT TAX. AN AD HOC DISALLOWANCE OF RS.5 0 LAKHS WAS MADE. 43. ASSESSEES APPEAL BEFORE THE CIT (A) DID NOT ME ET WITH ANY SUCCESS. AS PER THE CIT (A), ASSESSEE COULD NOT SHOW BUSINES S PURPOSE OF SUCH EXPENDITURE. 44. BEFORE US, LD. AR SUBMITTED THAT EXPENDITURE WA S FULLY VOUCHED AND VOUCHER / BILLS PRODUCED. AS PER THE LD. AR EXPEND ITURE WAS FOR BUSINESS PURPOSE ONLY. FURTHER AS PER THE LD. AR, BUSINESS PURPOSE OF THE EXPENDITURE WAS FOR THE ASSESSEE TO DECIDE AND NOT THE REVENUE. 45. PER CONTRA, LD. DR SUPPORTED THE ORDER OF LOWER AUTHORITIES. 46. WE HAVE PERUSED THE MATERIALS AND HEARD THE RIV AL CONTENTIONS. DISALLOWANCE WAS MADE FOR A REASON THAT ASSESSEE CO ULD NOT SHOW THE IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 42 BUSINESS PURPOSE OF EXPENDITURE, FOR HOLDING PARTIE S, GET TOGETHERS AND CONFERENCES IN HIGH-END HOTELS. THERE IS NO FINDIN G OF THE AO THAT THE EXPENDITURE WAS OF PERSONAL NATURE. WHETHER THE E MPLOYEES AND GUESTS OF THE ASSESSEE ARE TO BE HOSTED IN HIGH-END OR LOW-EN D HOTEL AND WHETHER THE BUSINESS OF THE ASSESSEE REQUIRED SUCH A FACILITY, IS AN ISSUE WHICH IS ENTIRELY IN THE DOMAIN OF THE BUSINESSMAN. ASSESSE E HAD SUBSTANTIAL TURNOVER AND WAS DOING BUSINESS ON A LARGE SCALE. OBVIOUSLY, ASSESSEE WAS DOING LARGE SCALE BUSINESS. IN SUCH A SITUATION DI SALLOWANCE OF SUCH AMOUNT BY REVENUE IN OUR OPINION WAS NOT WARRANTED. REVEN UE CANNOT SIT IN THE ARM-CHAIR OF A BUSINESSMAN AND CANNOT DECIDE WHAT I S PROPER AND NOT PROPER IN RUNNING THE BUSINESS. WE ARE OF THE OPIN ION THAT THE DISALLOWANCE WAS NOT CALLED FOR. SUCH DISALLOWANCE STANDS DELET ED. GROUND.6 STANDS DISMISSED. 47. VIDE GROUND 7, GRIEVANCE OF ASSESSEE IS THAT CI T (A) CONFIRMED THE DISALLOWANCE OF WARRANTY PROVISION OF RS.37,54,000/ -. AS AGAINST THIS, REVENUE IN GROUND 1 OF ITS APPEAL IS AGGRIEVED THAT A RELIEF OF RS.20,60,000/- WAS GIVEN TO THE ASSESSEE BY THE CIT (A). THE AO DISALLOWED THE CLAIM CONSIDERING IT TO BE A CONTING ENT LIABILITY AND NOT AN ASCERTAINED ONE. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 43 48. ARGUMENT OF ASSESSEE BEFORE THE CIT (A) WAS THA T IT WAS AN ASCERTAINED LIABILITY. RELIANCE WAS PLACED ON JUD GMENT OF HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD, V. CIT [314 ITR 62]. FURTHER AS PER THE ASSESSEE, DURING THE RELEVANT PR EVIOUS YEAR ACTUAL WARRANTY EXPENDITURE CAME TO RS.20,60,000/-. LD. CIT (A) WAS OF THE OPINION THAT THERE WAS NO OBJECTIVE OR SCIENTIFIC S TUDY NOR ANY DOCUMENTED EXPERIENCE BASED ON WHICH THE ESTIMATE WAS MADE. C IT (A) NOTED THAT ASSESSEE HAD RELIED ON JUST ONE YEAR DATA FOR JUSTI FYING THE WARRANTY PROVISIONING. HE HELD THAT THE CLAIM WAS NOT ALLOW ABLE, EXCEPT FOR THE ACTUAL OUT GO OF RS.20,60,000/-. DISALLOWANCE WAS RESTRICTED TO RS.16,94,000/-. 49. NOW BEFORE US, LD. AR SUBMITTED THAT ASSESSEE H AD VIDE ITS LETTER DT.21.08.2013, GIVEN DETAILS OF THE PROVISIONING FO R WARRANTY. AS PER THE LD. AR, IT WAS VERY SCIENTIFIC. ACCORDING TO HIM B Y VIRTUE OF THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF ROTORK CONTROL S INDIA P. LTD, (SUPRA), THE CLAIM HAD TO BE ALLOWED. 50. PER CONTRA, LD. DR SUPPORTED THE ORDER OF LOWER AUTHORITIES. LD. DR SUBMITTED THAT EVEN THE RELIEF OF RS.20,60,000/- GI VEN BY THE CIT (A) WAS NOT WARRANTED ON FACTS. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 44 51. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS. THE BASIS FOR CREATING WARRANTY PROVISIONS FURNISHED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES, IS REPRODUCED HEREUNDER : 52. ASSESSEE HAD RELIED ON RATIO OF TRADING SALES F OR THE FINANCIAL YEAR 2003-04. AS PER THE ASSESSEE WARRANTY PROVISIONING FOR SWITCHES WERE BASED ON ACTUAL USAGE. HOWEVER THE TABLE ABOVE CLE ARLY INDICATES THAT PROVISIONING WAS MADE BY APPLYING 0.18% ON ESTIMAT ED TRADING SALES FOR F. Y. 2003-04. WE CANNOT SAY THAT THIS WAS A SCIEN TIFIC METHOD. NO IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 45 HISTORICAL DATA WAS RELIED ON BY THE ASSESSEE FOR W ORKING OUT THE PROVISIONING. DETAILS OF THE ACTUAL USUAGE WAS NOT PROVIDED. HOW THE PERCENTAGE OF 0.18% WAS ARRIVED IS ALSO NOT CLEAR. IN OUR OPINION THE PROVISIONING DONE BY THE ASSESSEE WAS A PURE ESTIMA TION WITHOUT ANY SCIENTIFIC DATA TO BACK. IN SUCH A SITUATION, JUDG MENT OF HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD (SUPRA) WILL NOT COME TO THE AID OF ASSESSEE. FIRST CONDITION FOR ALLOWING A WARRAN TY PROVISION IS THAT ASSESSEE SHOULD BE ABLE TO SHOW THE SCIENTIFIC DATA BASED ON WHICH SUCH PROVISIONING IS DONE. IN OUR OPINION, CIT (A) WAS JUSTIFIED IN RESTRICTING THE CLAIM TO THE EXTENT OF ACTUAL WARRANTY EXPENDIT URE INCURRED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. NO INT ERFERENCE IS REQUIRED. GROUND.7 OF THE ASSESSEE AND GROUND 1 OF THE REVENU E ARE DISMISSED. 53. VIDE ITS GROUND 8 ASSESSEE ASSAILS AN AD HOC DI SALLOWANCE OF RS.20 LAKHS MADE BY THE LOWER AUTHORITIES FOR COMMISSION PAID TO SELLING AGENTS. LD. AR SUBMITTED THAT HE WAS NOT PRESSING THE SAID GROUND. HENCE THIS GROUND IS DISMISSED AS NOT PRESSED. 54. GROUND 9 OF THE ASSESSEE RELATES TO INTEREST U/ S.234B AND 234D OF THE ACT. THIS GROUND BEING CONSEQUENTIAL, NO SPECIFIC ADJUDICATION IS REQUIRED. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 46 55. NOW WE TAKE UP APPEAL OF REVENUE IN SO FAR AS IT RELATES TO GROUNDS ALREADY NOT DISPOSED OFF BY US, IN THE APPEAL FILED BY THE ASSESSEE. 56. GROUNDS 1 AND 7 OF THE REVENUE ARE ALREADY CONS IDERED BY US IN ASSESSEES APPEAL. 57. VIDE ITS GROUND.2 GRIEVANCE OF REVENUE IS THAT CIT (A) ALLOWED CLUB EXPENDITURE OF RS.15,36,000/- CLAIMED BY THE ASSESS EE. 58. FACTS APROPOS ARE THAT AO HAD DISALLOWED THE AB OVE AMOUNT ON A REASONING THAT THESE WERE PERSONAL EXPENDITURE OF E MPLOYEES OF THE ASSESSEE. AS PER THE AO, FBT PROVISIONS WERE APPLI CABLE TO CLUB EXPENDITURE AND THIS CLEARLY MEANT THAT SUCH EXPEND ITURE WAS PERSONAL IN NATURE. 59. WHEN THE MATTER REACHED THE CIT (A), HE WAS OF THE OPINION THAT PAYMENTS WERE ON ACCOUNT OF CORPORATE MEMBERSHIP TA KEN BY ASSESSEE IN SOME CLUBS. ACCORDING TO CIT (A), ASSESSEE HAD MAD E NO PAYMENTS FOR ANY INDIVIDUAL MEMBERS. 60. NOTHING WAS BROUGHT BEFORE THE LD. DR TO DEVIAT E FROM THE VIEW TAKEN BY THE CIT (A) THAT EXPENDITURE INCURRED ON C ORPORATE MEMBERSHIP OF CLUBS COULD BE CONSIDERED AS PERSONAL IN NATURE. I T MAY BE TRUE THAT IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 47 EMPLOYEES OF THE ASSESSEE ALSO GOT SOME ADVANTAGE O N ACCOUNT OF CLUB MEMBERSHIP. HOWEVER THESE WERE ONLY EXPENDITURE WH ICH COULD BE CONSIDERED AS LINKED TO THE BUSINESS PURPOSE OF THE ASSESSEE. WE DO NOT FIND ANY MERIT IN THE GROUND TAKEN BY THE REVENUE. GROUND 2 IS DISMISSED. 61. VIDE GROUND 3, REVENUE IS AGGRIEVED THAT CIT (A ) ALLOWED CLAIM OF STAFF WELFARE EXPENDITURE OF RS.49,60,750/-. AO A FTER VERIFICATION OF THE EVIDENCE PRODUCED BY THE ASSESSEE IN RELATION TO ST AFF WELFARE EXPENDITURE OF RS.1,98,43,000/- HAD OBSERVED THAT 80% OF SUCH A MOUNT WAS PAID TO ONE M/S. SAI HOSPITALITY SERVICES FOR PROVIDING LUNCH, DINNER, SNACKS ETC., RELYING ON FBT PROVISIONS, AO MADE A DISALLOWANCE O F RS.49,60,750/-. 62. WHEN THE MATTER REACHED CIT (A), HE WAS OF THE OPINION THAT PROVIDING FREE MEALS AND NON-ALCOHOLIC BEVERAGES TO THE EMPLOYEES DURING WORKING HOURS COULD BE CONSIDERED AS PERQUISITES IN THE HANDS OF EMPLOYEES. CIT (A) ALSO NOTED THAT ASSESSEE HAD FI LED SAMPLE CANTEEN BILLS WHICH PROVED THAT MEAL COST WAS BELOW RS.50/- . AFTER EXAMINING THIS, CIT (A) ALLOWED THE CLAIM OF ASSESSEE. 63. IN OUR OPINION FOOD AND BEVERAGES SUPPLIED TO T HE EMPLOYEES BY AN ASSESSEE DURING WORKING HOURS CANNOT BE CONSIDERED AS PERQUISITE IN THE IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 48 HANDS OF EMPLOYEES AND CAN ALSO NOT BE CONSIDERED A S AN EXPENDITURE ALIEN TO THE BUSINESS OF THE ASSESSEE. WE CANNOT FIND AN Y FAULT IN ORDER OF THE CIT (A) IN THIS REGARD. GROUND.3 OF THE REVENUE ST ANDS DISMISSED. 64. VIDE ITS GROUNDS 4, 5 AND 6, GRIEVANCE RAISED B Y THE REVENUE IS THAT CIT (A) DIRECTED INCLUSION OF INSURANCE EXPENSES OF RS.48,86,675/-, TELECOMMUNICATION EXPENDITURE OF RS.10,00,000/- AND TRAVELLING EXPENDITURE OF RS.60,47,642/- IN THE EXPORT TURNOV ER WHILE WORKING OUT THE DEDUCTION AVAILABLE TO THE ASSESSEE U/S.10A OF THE ACT. AO WHILE COMPUTING THE DEDUCTION U/S.10A OF THE ACT HAD EXCL UDED THESE AMOUNTS FROM EXPORT TURNOVER RELYING ON THE DEFINITION OF EXPORT TURNOVER AS GIVEN IN EXPLANATION (IV) TO THE SAID SECTION. 65. IN ITS APPEAL BEFORE THE CIT (A), ARGUMENT OF T HE ASSESSEE WAS THAT EXCLUSION OF FOREIGN TRAVEL EXPENDITURE, TELECOMMUN ICATION EXPENDITURE AND INSURANCE CHARGES WERE INCORRECT. ASSESSEE ALS O RELIED ON THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [349 ITR 98] AND SOUGHT DEDUCTION OF THE AMOUNTS FR OM THE TOTAL TURNOVER AS WELL, IN THE ALTERNATIVE. CIT (A) HELD AS UNDER AT PARA 21.4 OF HIS ORDER : 21.4 I HAVE GONE THROUGH THE SUBMISSIONS AS ABOVE AND I AM CONVINCED THAT THERE IS STRENGTH IN THE APPELLANTS ARGUMENTS. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 49 RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDIC TIONAL HIGH COURT CITED, AS WELL AS THE OTHER JUDICIAL DECISION S RELIED UPON, THE GROUNDS RAISED BY THE APPELLANT ARE ALLOWED. 66. NOW BEFORE US, LD. DR SUBMITTED THAT CIT (A) HA D DIRECTED INCLUSION OF THE ABOVE AMOUNTS IN THE EXPORT TURNOV ER AND HAD NOT GIVEN A CLEAR FINDING WHETHER THE CLAIM OF THE ASSESSEE WAS ALLOWED WITH REGARD TO ITS ALTERNATIVE CONTENTION OR THE MAIN CONTENTION. 67. PER CONTRA, LD. AR SUBMITTED THAT IF THE ABOVE AMOUNTS WERE TO BE EXCLUDED FROM THE EXPORT TURNOVER THEN SUCH AMOUNTS HAD TO BE DEDUCTED FROM THE TOTAL TURNOVER ALSO IN VIEW OF THE JUDGMEN T OF HONBLE JURISDICTIONAL HIGH COURT IN TATA ELXSI LTD (SUPRA) . 68. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IT IS TRUE THAT ASSESSEE HAD PLEADED FOR INCLUSION OF THE ABOV E AMOUNTS IN THE TOTAL TURNOVER BEFORE THE CIT (A). ASSESSEE HAD ALSO RAI SED AN ALTERNATIVE PLEA BEFORE THE CIT (A) SEEKING EXCLUSION OF SUCH AMOUNT S FROM TOTAL TURNOVER ALSO. WE FIND THAT CIT (A) HAD NOT GIVEN ANY CLEAR FINDING ON THESE GROUNDS. BY VIRTUE OF DEFINITION OF EXPORT TURNOV ER AS GIVEN IN EXPLANATION (IV) TO SECTION 10B OF THE ACT, WE ARE OF THE OPINION THAT THE ABOVE AMOUNTS CANNOT BE INCLUDED IN THE EXPORT TURN OVER OF THE ASSESSEE. HOWEVER ALTERNATIVE CONTENTION OF THE ASSESSEE THAT THE AMOUNTS WHICH ARE IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 50 EXCLUDED FROM THE EXPORT TURNOVER HAVE TO BE DEDUCT ED ALSO FROM THE TOTAL TURNOVER NEEDS TO BE ACCEPTED IN VIEW OF THE JUDGME NT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI LTD (SUPRA). ACCORDINGLY, WE ALLOW GROUNDS 4 TO 6 OF THE REVENUE . HOWEVER WE DIRECT THAT THE AMOUNTS WHICH ARE EXCLUDED FROM EXPORT TUR NOVER SHALL ALSO BE DEDUCTED FROM THE TOTAL TURNOVER FOR COMPUTING THE RELIEF U/S.10A OF THE ACT. 69. NOW COMING THE CROSS OBJECTION OF THE ASSESSEE, GROUNDS 1 AND 2 HAVE ALREADY BEEN DEALT WITH IN RELATION TO GROUND 7 IN ASSESSEES APPEAL. GROUNDS 3 TO 7 ARE IN SUPPORT OF THE ORDER OF CIT ( A). GROUNDS 8 AND 9 OF THE CROSS OBJECTION HAVE BEEN DEALT WITH IN RELATIO N TO GROUNDS 4 TO 6 OF THE REVENUES APPEAL. GROUNDS 11 AND 12 IN THE CROSS O BJECTION STANDS ALLOWED SINCE THE SAID GROUND SEEKS PARITY BETWEEN EXPORT TURNOVER AND TOTAL TURNOVER FOR COMPUTING THE DEDUCTION U/S.10A OF THE ACT. GROUNDS 10 12 AND 13 ARE GENERAL NEEDING NO SPECIFIC ADJUDICAT ION. IT(TP)A.1603, 1722/BANG/2013, CO.14/BANG/2016 PAGE - 51 70. TO SUMMARISE THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE, APPEAL OF THE REVENUE IS PARTL Y ALLOWED AND CROSS OBJECTION OF THE ASSESSEE IS ALSO PARTLY ALLOWED FO R STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH DAY OF JULY, 2016. SD/- SD/- (VIJAY PAL RAO) (ABRA HAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR