DCIT, Bangalore V. M/s Sunquest Information Systems (India) Pvt. Ltd., Bangalore

ITA 1604/BANG/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0358 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 05-05-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 16-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K R VASUDEVAN DR P K
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 10

Judgement Text

IT(TP)A.1604 & 1666/BANG/2014 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER I.T(TP).A NO.1604/BANG/2014 (ASSESSMENT YEAR : 2009-10) DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 6(1)(2), BANGALORE .. APPELLANT V. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) P. LTD, 1 ST FLOOR, EAGLE RIDGE, EMBASSY GOLD LINKS BUSINESS PA RK, OFF INTERMEDIATE RING ROAD, BANGALORE 560 071 .. RESPONDENT PAN : AAECS2754E I.T(TP).A NO.1666/BANG/2014 (ASSESSMENT YEAR : 2009-10) (BY THE ASSESSEE) ASSESSEE BY : SHRI. K.R. VASUDEVAN, ADVOCATE REVENUE BY : DR. P. K. SRIHARI, ADDL. CIT HEARD ON : 05.05.2016 PRONOUNCED ON : 27 .05.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY THE DEPARTMENT AND THE ASSESSEE RESPECTIVELY, DIRECTED AGAINST AN ORDER DT.27.10.20 14 OF CIT (A) IV, BENGALURU. IT(TP)A.1604 & 1666/BANG/2014 PAGE - 2 02. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN PROV IDING SOFTWARE DEVELOPMENT SERVICES, DESIGN AND SUPPORT, HAD FILED A RETURN DECLARING INCOME OF RS.9,18,153/-. SINCE ASSESSEE HAD INTERN ATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE (AE) EXCEEDING THE LIMITS LAID DOWN, PRICING OF SUCH INTERNATIONAL TRANSACTIONS WAS REFERRED TO THE TPO BY THE AO. PROFILE OF THE ASSESSEE MENTIONED BY THE TPO IN PARA 2 OF H IS ORDER, IS AS A CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER. AS SESSEE WAS A WHOLLY OWNED SUBSIDIARY OF ONE M/S. SUNQUEST, US, AND WAS PRIMARILY DEVELOPING SOFTWARE AND PROVIDING SUPPORT TO ITS PRINCIPAL. S UNQUEST, US, WAS PROVIDING SOLUTIONS IN HEALTHCARE SERVICES WHICH HE LPED PHYSICIANS, HOSPITALS AND MEDICAL PRACTITIONERS TO EFFECTIVELY MANAGE THE COMPLEXITIES IN HEALTHCARE SERVICES. FOR THE SUPPORT SERVICES R ENDERED BY THE ASSESSEE, SUNQUEST, US, WAS REMUNERATING ON COST PLUS BASIS. ASSESSEES FINANCIAL RESULTS FOR RELEVANT PREVIOUS YEAR READ AS UNDER : IT(TP)A.1604 & 1666/BANG/2014 PAGE - 3 03. WHOLE OF THE REVENUE OF THE ASSESSEE CAME FROM THE SOFTWARE DEVELOPMENT SERVICES RENDERED TO ITS PRINCIPAL. TH OUGH IT HAD ALSO RECEIVED CERTAIN COST REIMBURSEMENTS AND EXPENSES FROM THE P RINCIPAL, SUCH REIMBURSEMENTS WERE CONSIDERED BY THE TPO TO BE AT ARMS LENGTH AND THE ADJUSTMENTS MADE BY HIM WERE CONFINED TO THE SOFTWA RE DEVELOPMENT SERVICES. 04. IN ORDER TO JUSTIFY ITS PROFIT ON COST OF 11.63 % ASSESSEE HAD SELECTED 21 COMPARABLES. THESE 21 COMPARABLES AND THEIR AVE RAGE OF OPERATING PROFIT ON OPERATING COST AS DERIVED BY THE ASSESSEE , READ AS UNDER : IT(TP)A.1604 & 1666/BANG/2014 PAGE - 4 05. AS PER THE ASSESSEE, ARITHMETIC MEAN OF 14.13% ON THE ABOVE 21 COMPARABLES FELL WITHIN + / - 5% OF ITS OWN PROFIT RATE OF 11.63% AND THEREFORE THERE WAS NO REQUIREMENT OF ANY ADJUSTMEN TS FOR THE PRICING OF THE INTERNATIONAL TRANSACTIONS WITH THE AE. ASSESSEE H AD SELECTED TNMM AS THE MOST APPROPRIATE ONE FOR THE TP STUDY. TPO WHI LE ACCEPTING TNMM, WAS OF THE OPINION THAT EXCEPT FOR AKSHAY SOFTWARE TECHNOLOGIES LTD, INFOSYS TECHNOLOGIES LTD, L & T INFOTECH LTD, MINDT REE LTD, PERSISTENT SYSTEMS P. LTD, R. S. SOFTWARE (INDIA) LTD, SASKEN COMMUNICATIONS TECHNOLOGIES LTD, AND ZYLOG SYSTEMS LTD, NONE OF T HE OTHER COMPARABLES SELECTED BY THE ASSESSEE WERE APPROPRIATE. AS PER THE TPO IN THE CASE OF SOME OF THE COMPANIES SELECTED BY THE ASSESSEE, EMP LOYEE-COST WAS LESS THAN 25%, IN SOME OTHERS EXPORT SALES WERE LESS THA N 25%, SOME WERE FUNCTIONALLY DIFFERENT, SOME FAILED THE RPT FILTER AND SOME HAD VERY NEGLIGIBLE TURNOVER. THEREAFTER, TPO MADE HIS OWN ANALYSIS ON THE CAPITALINE PLUS AND PROWESS DATA BASES. FINAL LIST SELECTED BY THE TPO FOR THE COMPARATIVE STUDY READ AS UNDER : IT(TP)A.1604 & 1666/BANG/2014 PAGE - 5 06. THEREAFTER THE AO MADE A WORK OUT OF THE WORKIN G CAPITAL ADJUSTMENT AS PER THE FORMULA PRESCRIBED IN OECD GU IDELINES, 2009. AVERAGE WORKING CAPITAL ADJUSTMENT WORKED OUT BY TH E TPO CAME TO (-) 5.12 %. HOWEVER, AS PER THE TPO, AVERAGE COST OF C APITAL FOR THE UNCONTROLLED COMPARABLES CAME TO ONLY 1.71%. HE TH EREFORE RESTRICTED THE WORKING CAPITAL ADJUSTMENT TO 1.71%. THOUGH THE AS SESSEE REQUESTED THE TPO TO GIVE AN ADJUSTMENT FOR RISK THIS WAS NOT ACC EPTED BY THE TPO FOR A REASON THAT AN ACCURATE ADJUSTMENT FOR RISK COULD N OT BE QUANTIFIED AND IT(TP)A.1604 & 1666/BANG/2014 PAGE - 6 THEREFORE BY VIRTUE OF SECTION 10 B OF THE ACT, NO SUCH ADJUSTMENT COULD BE MADE. HE THEREAFTER WORKED OUT THE ADJUSTMENT REQU IRED U/S.92 CA AS UNDER : BASED ON THE RECOMMENDATION OF THE TPO ASSESSMENT W AS COMPLETED BY MAKING AN ADDITION OF RS.3,62,33,532/-. 07. ASSESSEE THERE UPON CHOSE TO MOVE THE CIT(A) IN APPEAL. BEFORE THE CIT (A), ARGUMENT OF THE ASSESSEE WAS THAT ITS COMP ARABLES WERE UNJUSTLY REJECTED CITING SOFTWARE DEVELOPMENT REVENUE BEING LESS THAN 75% OF TOTAL INCOME. ASSESSEE ALSO ASSAILED APPLICATION OF RPT FILTER BY THE TPO. THOUGH THE ASSESSEE PLEADED FOR APPLICATION OF TURN OVER FILTER, IT SEEMS THE SAID GROUND WAS NOT PRESSED BY THE ASSESSEE BEFORE THE CIT (A). ASSESSEE ALSO SOUGHT EXCLUSION OF ELEVEN NUMBER OF COMPANIES FALLING IN THE LIST OF COMPARABLES CITING FUNCTIONAL DISSIMILARITY. HOWEV ER, CIT (A) DID NOT ACCEPT THESE CONTENTIONS, BUT ON THE OTHER HAND CON FIRMED THE ADDITION IT(TP)A.1604 & 1666/BANG/2014 PAGE - 7 MADE BY THE AO. HOWEVER, CIT (A) ACCEPTED ASSESSEE S REQUEST FOR GRANTING IT RISK ADJUSTMENT. CIT (A) WAS OF THE OPI NION THAT SUCH A RISK ADJUSTMENT HAD TO BE GIVEN TO THE ASSESSEE BASED ON PREVAILING NORMS. 08. NOW BEFORE US, LD. AR SUBMITTED THAT THOUGH APP LICATION OF TURNOVER FILTER WAS A GROUND BEFORE THE CIT (A), ASSESSEE HA D BY MISTAKE NOT PRESSED SUCH GROUND. HENCE, ACCORDING TO HIM, HE HAD FILED AN ADDITIONAL GROUND FOR APPLYING UPPER LEVEL OF SALES TURNOVER FOR SELE CTION OF COMPARABLES. AS PER THE LD. AR, BY VIRTUE OF DECISION OF THE SPECIA L BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V QUARK SYSTEMS P.LTD, [42 DTR 414], SUCH ADDITIONAL GROUND HAD TO BE ADMITTED. 09. LD. AR POINTED OUT THAT TATA ELXSI LTD (SEG), S ASKEN COMMUNICATION TECHNOLOGIES LTD (SEG), PERSISTENT SYSTEMS LTD, ZYL OG SYSTEMS LTD, MINDTREE LTD (SEG), L & T INFOTECH AND INFOSYS TEC HNOLOGIES LTD, HAD TURNOVER WELL IN EXCESS OF RS.200 CRORES. RELYING ON A DECISION OF COORDINATE BENCH IN THE CASE OF LAM RESEARCH (INDIA ) P. LTD, V. DCIT [ITA NOS.1437 & 1385/BANG/2014, DT.30.04.2015], LD. AR S UBMITTED THAT THE COMPARABILITY OF THESE COMPANIES HAD COME UP BEFORE THE COORDINATE BENCH IN THIS CASE WHERE THE ASSESSEE CONCERNED WAS INTO SOFTWARE DEVELOPMENT SEGMENT. AS PER THE LD. AR, OF M/S. LAM RESEARCH ( INDIA) P. LTD, (SUPRA) IT(TP)A.1604 & 1666/BANG/2014 PAGE - 8 HAD TWO SEGMENTS, NAMELY, SOFTWARE DEVELOPMENT SEGM ENT AND ITES SEGMENT. WITH REGARD TO THE SOFTWARE DEVELOPMENT S EGMENT, THIS TRIBUNAL HAD HELD THAT THE ABOVE MENTIONED COMPANIES WERE TO BE EXCLUDED. 10. CONTINUING HIS ARGUMENTS, LD. AR SUBMITTED THAT M/S. BODHTREE CONSULTING LTD, WAS ALSO ONE AMONG THE COMPARABLES WHICH WERE DISPUTED IN THE CASE OF LAM RESEARCH INDIA (P) LTD (SUPRA). ACCORDING TO HIM, AT PARA 10 OF THE SAID ORDER, IT WAS HELD BY THIS TRIB UNAL THAT BODHTREE CONSULTING LTD, WAS NOT A PROPER COMPARABLE IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. 11. VIS-A-VIS, TATA ELXSI LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD, PERSISTENT SYSTEMS P. LTD, MINDTREE LTD (SEG) AND I NFOSYS TECHNOLOGIES LTD, LD. AR SUBMITTED THAT IN THE SAME DECISION, T HESE WERE DIRECTED TO BE EXCLUDED SINCE THE TURNOVER OF THE SAID COMPANIES E XCEEDED RS.200 CRORES. AS PER THE LD. AR, ASSESSEES TURNOVER WAS NEGLIGIB LE AND CAME TO ONLY RS.22.71 CRORES. AS PER THE LD. AR, TURNOVER OF TH E ABOVE COMPANIES WAS MORE THAN TEN TIMES OF THAT OF THE ASSESSEE AND HEN CE COULD NOT BE CONSIDERED AS GOOD COMPARABLE. IT(TP)A.1604 & 1666/BANG/2014 PAGE - 9 12. VIS-A-VIS, ZYLOG SYSTEMS LTD, LD. AR SUBMITTED THAT THIS COMPANY ALSO HAD A TURNOVER OF RS.734.93 CRORES. ACCORDING TO HIM, THIS WAS EVIDENT FROM PARA 6 OF THE ORDER OF THE TRIBUNAL IN OF LAM RESEARCH (INDIA) P. LTD, (SUPRA). SIMILARLY, ACCORDING TO HIM, TH E TURNOVER OF L & T INFOTECH LTD, CAME TO RS.1950 CRORES AND HAD TO GO OUT OF THE LIST OF COMPARABLES ON APPLICATION OF TURNOVER FILTER. 13. CONTINUING HIS ARGUMENT, LD. AR SUBMITTED THAT CG-VAK (SEG) WAS REJECTED AS A COMPARABLE THOUGH IT FORMED A PART OF ASSESSEES LIST OF COMPARABLES. AS PER THE LD. AR IT WAS REJECTED FOR A REASON THAT EMPLOYEE COST WAS LESS THAN 25% OF TURNOVER. ONCE AGAIN REL YING ON THE DECISION OF THE TRIBUNAL IN LAM RESEARCH INDIA P. LTD, (SUPRA), LD. AR SUBMITTED THAT COMPARABILITY OF CG-VAK HAD COME UP THERE. IN THE SAID CASE AT PARA 21 OF THE ORDER, IT WAS HELD THAT CG- VAK COULD BE CON SIDERED AS A PROPER COMPARABLE. 14. WITH REGARD TO THE ADJUSTMENT FOR FOREIGN CURRE NCY FLUCTUATION, LD. AR SUBMITTED THAT THIS WAS RIGHTLY CONSIDERED BY TH E CIT (A) TO BE OPERATIONAL IN NATURE. HOWEVER ACCORDING TO HIM, W HILE WORKING OUT THE MARGINS OF THE COMPARABLES ALSO, FOREIGN EXCHANGE G AINS AND LOSSES IT(TP)A.1604 & 1666/BANG/2014 PAGE - 10 CONSIDERED AS OPERATIONAL REVENUE HAD TO BE RECKONE D. AS PER THE LD. AR, DIRECTIONS IN THIS REGARD WERE REQUIRED TO BE GIVEN BY THE TRIBUNAL. 15. PER CONTRA, LD. DR SUBMITTED THAT ASSESSEE HIMS ELF HAS NOT PRESSED THE APPLICATION OF TURNOVER FILTER BEFORE THE CIT ( A) AND THEREFORE COULD NOT NOW TURN BACK AND REQUIRE ITS APPLICATION. AS PER THE LD. DR THE SAID ASPECT WAS NEVER CONSIDERED BY THE CIT (A) AND HENC E REQUIRED A FRESH LOOK BY HIM. FURTHER AS PER THE LD. DR, IF ASSESS EES CONTENTIONS WERE ACCEPTED WHAT WOULD BE LEFT WERE ONLY FOUR COMPARAB LES AND THIS WOULD NOT BE SUFFICIENT ENOUGH TO MAKE A MEANINGFUL ARMS LENG TH PRICING STUDY. 16. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. ASSESSEES FIRST SUBMISSION IS FOR APPLICATION OF T URNOVER FILTER AS APPLIED BY THIS TRIBUNAL IN THE CASE OF M/S GENISYS PVT LTD VS DCIT(2011)64 DTR 225. RELIANCE HAS ALSO BEEN PLACED ON THE CASE OF YODLEE INFOTECH PVT. LTD., VS. ITO (IT(TP)A.108/BANG/2014, DT.12.1 2.2014). NO DOUBT BEFORE THE CIT (A) THOUGH ASSESSEE HAD RAISED A GRO UND FOR APPLYING THE TURNOVER FILTER, IT WAS NOT PRESSED. NEVERTHELESS, ASSESSEE HAS RAISED AN ADDITIONAL GROUND BEFORE US FOR APPLICATION OF TURN OVER FILTER OF RS.200 CRORES. BY VIRTUE OF THE SPECIAL BENCH DECISION IN THE CASE OF QUARK SYSTEMS P. LTD, (SUPRA), AN ASSESSEE CANNOT BE DEPR IVED OF THE RIGHT TO RAISE IT(TP)A.1604 & 1666/BANG/2014 PAGE - 11 SUCH A PLEADING AS ADDITIONAL GROUND, SINCE THE TR ANSFER PRICING IS AN EVOLVING AREA. AS PER THE LD. DR IF THE TURNOVER F ILTER IS TO BE APPLIED, MATTER HAS TO BE SENT TO THE CIT (A) FOR CONSIDERAT ION SINCE HE HAD NOT ADJUDICATED THE ISSUE. ASSESSEE IS SEEKING APPLICA TION OF TURNOVER FILTER IN THE CASE OF TATA ELXSI LTD, SASKEN COMMUNICATION TE CHNOLOGIES LTD, PERSISTENT SYSTEMS LTD, ZYLOG SYSTEMS LTD, MINDTREE CONSULTING LTD (SEG), L & T INFOTECH LTD, AND INFOSYS LTD. RELIANCE HAS BEEN PLACED BY THE ASSESSEE ON THE DECISION OF COORDINATE BENCH IN THE CASE OF LAM RESEARCH (INDIA) P. LTD, (SUPRA). PROFILE OF THE ASSESSEE, AS WE HAVE ALREADY CAPTURED IN PARA 02 OF THIS ORDER IS ONE OF PROVIDING SOFTWA RE DEVELOPMENT SERVICES TO ITS PRINCIPAL ABROAD. LAM RESEARCH (INDIA) P. L TD, (SUPRA) HAD TWO SEGMENTS, NAMELY, SOFTWARE DEVELOPMENT SERVICES AND ITES. WITH REGARD TO SOFTWARE DEVELOPMENT SERVICES, IT WAS PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS PRINCIPAL CALLED NOVELLEUS SYSTEMS INTERNATIONAL INC. USA. THUS VIS-A-VIS SOFTWARE DEVELOPMENT SERVICES, ADJUD ICATION DONE BY THE TRIBUNAL IN THE CASE OF LAM RESEARCH (INDIA) P. LTD , (SUPRA) CAN BE APPLIED HERE ALSO, SINCE THE SAID CASE WAS ALSO FOR THE VE RY SAME ASSESSMENT YEAR. TURNOVER OF VARIOUS COMPANIES CONSIDERED IN THE COM PARABLES OF THE SAID CASE APPEARS AT PARA 6 OF THE ORDER AND THIS IS REP RODUCED HEREUNDER : IT(TP)A.1604 & 1666/BANG/2014 PAGE - 12 06. THE LIST OF COMPARABLES CONSIDERED BY THE ASSES SEE FOR ITS SOFTWARE DEVELOPMENT SEGMENT INCLUDED 19 COMPANIES AND FOR ITES SEGMENT INCLUDED SIX COMPANIES. WITH RESPECT TO TH E SOFTWARE DEVELOPMENT SEGMENT, TPO WHEN THE MATTER WAS REFERR ED TO HIM BY THE AO, ACCEPTED ONLY FIVE OF THE COMPANIES FROM THE LI ST OF ASSESSEE, WHICH WERE AKSHAY SOFTWARE TECHNOLOGIES LTD., BODHTREE CO NSULTING LTD., TATA ELXSI LTD., (SEGMENTAL), SASKEN COMMUNICATION TECHNOLOGIES LTD., AND MINDTREE LTD., (SEG). TPO AFTER CONSIDERING TH E DATA BASES OF PROWESS AND CAPITALINE, ARRIVED AT THE FOLLOWING LI ST AS THE APPROPRIATE COMPARABLES, FOR THE SOFTWARE DEVELOPMENT SEGMENT : SL. NO. NAME OF THE COMPARABLE SALES (IN RS.) COST (IN RS.) MARGIN 1. KALS INFORMATION SYSTEMS LTD 2,14,04,686 1,87,93,813 13.89% 2. AKSHAY SOFTWARE TECHNOLOGIES LTD 12,23,21,483 11,31,49,350 8.11% 3. BODHTREE CONSULTING LTD 16,05,75,212 9,89,56,821 62.27% 4. R. S. SOFTWARE (INDIA) LTD 1,49,57,12,634 1,36,01,02,589 9.97% 5. TATA ELXSI LTD(SEGMENTAL) 3,78,43,03,000 3,14,63,15,000 20.28% 6 SASKEN COMMUNICATION TECHNOLOGIES LTD 4,05,31,20,000 3,18,69,97,000 27.91% 7 PERSISTENT SYSTEMS LTD 5,19,69,10,000 3,67,52,70,000 41.40% 8. ZYLOG SYSTEMS LTD 7,34,93,51,475 6,81,69,98,160 7.81% 9. MINDTREE LTD (SEG) 7,93,22,79,326 5,74,06,73,058 5.52% 10 LARSEN AND TOUBRO INFOTECH (L & T INFOTECH) 19,50,83,81,374 15,65,12,76,626 24.72% 11 INFOSYS LTD 2,02,64,00,00,000 1,39,17,00,00,000 45.61% AVERAGE 24.32% IT(TP)A.1604 & 1666/BANG/2014 PAGE - 13 17. IT IS CLEAR FROM THE ABOVE, THAT TURNOVER OF T ATA ELXSI LTD WAS RS.378.43 CRORES, THAT OF SASKEN COMMUNICATION TECH NOLOGIES LTD, CAME TO RS.405.31 CRORES, THAT OF PERSISTENT SYSTEMS LTD , WAS RS.519.69 CRORES, THAT OF ZYLOG SYSTEMS LTD WAS RS.734.9 CRORES, THA T OF MINDTREE LTD (SEG) WAS RS.793.22 CRORES, THAT OF L & T INFOTECH LTD, W AS RS.1,950.83 CRORES AND THAT OF INFOSYS LTD, WAS RS.20,264 CRORES. TUR NOVER OF THE ASSESSEE WAS ONLY RS. 22.72 CRORES. OBVIOUSLY THE VOLUME OF ACTIVITY OF THE ABOVE MENTIONED COMPANIES WERE MUCH HIGHER TO THAT OF THE ASSESSEE. IT WAS MORE THAN TEN TIMES THAT OF THE ASSESSEE. IN THE C ASE OF LAM RESEARCH (INDIA) P. LTD, (SUPRA) WITH REGARD TO APPLICATION OF TURNOVER FILTER, IT WAS HELD AS UNDER AT PARA 13 OF THE ORDER DT.30.04.2015 : 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. IN THE CASE OF YODLEE INFOTECH PVT. LTD., (SUPRA), IT WAS HELD AS UNDER : 20. WE HAVE TO HOLD THAT ASSESSEEE CAN SEEK EXCLUS ION OF COMPARABLES WHICH WERE A PART OF ITS OWN LIST, AT A LATER STAGE, AND THEREFORE, WE ARE CONSTRAINED TO REJECT THE LIN E OF ARGUMENT OF THE LEARNED DR. COMING TO THE ARGUMENTS OF THE LEARNED AR THAT M/S TATA ELXSI LTD., M/S SASKEN COMMUNICATION LTD., M/S PERSISTENT SYSTEMS LTD., M/S L&T INFOTECH AND M/S I NFOSYS LTD., HAD TURNOVER IN EXCESS OF RS.200 CRORES AND WERE T O BE EXCLUDED, WE ARE OF THE OPINION THAT TURNOVER FILTE R CAN BE APPLIED FOR SELECTION OF COMPARABLES. THIS HAS BEE N THE VIEW CONSISTENTLY TAKEN BY THE CO-ORDINATE BENCHES OF TH IS TRIBUNAL IN A NUMBER OF CASES. IN THE CASE OF M/S GENISYS PVT LTD VS DCIT(2011)64 DTR 225 IT WAS HELD BY THIS TRIBUNAL A S UNDER AT PARAS-8 TO 09 OF ITS ORDER; IT(TP)A.1604 & 1666/BANG/2014 PAGE - 14 8. ACCORDING TO LEARNED COUNSEL FOR THE ASSESSEE SIZE IS AN IMPORTANT FACET OF AN ENTERPRISE LEVEL DIFFERENCE. HE SUBMITTED THAT COMPARABLES SHOULD HAVE SOMETHING SIMILAR OR E QUIVALENT AND SHOULD POSSESS SAME OR ALMOST THE SAME CHARACTE RISTICS. TO USE A SIMILE, HE SUBMITTED THAT A MARUTI 800 CAR CA NNOT BE COMPARED TO BENZ CAR, EVEN THOUGH BOTH ARE CARS ONL Y. HE SUBMITTED THAT UNUSUAL PATTERN, STRAY CASES, WIDE D ISPARITIES HAVE TO BE ELIMINATED AS THEY DO NOT SATISFY THE TE ST OF COMPARABILITY. COMPANIES OPERATING ON LARGE SCALE B ENEFIT FROM ECONOMIES OF SCALE, HIGHER RISK TAKING CAPABILITIES , ROBUST DELIVERY AND BUSINESS MODELS AS OPPOSED TO THE SMAL LER OR MEDIUM SIZED COMPANIES AND THEREFORE, SIZE MATTERS. TWO COMPANIES OF DISSIMILAR SIZE THEREFORE, CANNOT BE A SSUMED TO EARN COMPARABLE MARGINS AND THIS IMPACT OF DIFFEREN CE IN SIZE COULD BE REMOVED BY A QUANTITATIVE ADJUSTMENT TO TH E MARGINS OR PRICE BEING COMPARED IF IT IS POSSIBLE TO DO SO REA SONABLY ACCURATELY. HE SUBMITTED THAT SIZE AS ONE OF THE SE LECTION CRITERIA HAS ALSO BEEN APPROVED BY VARIOUS BENCHES OF THE TR IBUNAL, IN THE FOLLOWING CASES : 1. DY. CIT VS. QUARK SYSTEMS (P) LTD. (2010) 132 TT J (CHD)(SB) 1 : (2010) 42 DTR (CHD)(SB)(TRIB) 414 : (2010) 38 S OT 307 (CHD)(SB), WHEREIN IT WAS HELD THAT EVEN THE FILTER OF LOWER TURNOVER OF RS. 1 CRORE IS WITHOUT ANY REASONABLE B ASIS AND THERE IS NO FILTER FOR HIGHER TURNOVER ALSO. THE AP PLICATION OF TURNOVER FILTER ALSO LEAVES MUCH TO BE DESIRED AND HAS TO NO RATIONALE BASIS. IN OUR CONSIDERED VIEW, IT IS IMPR OPER TO PROCEED ON THE BASIS THAT THE TURNOVER OF RS. 1 CRO RE TO INFINITE IS A REASONABLE CLASSIFICATION AS TURNOVER BASE. 2. E-GAIN COMMUNICATION (P) LTD. VS. ITO (2008) 118 TTJ (PUNE) 354 : (2008) 13 DTR (PUNE)(TRIB) 65; 3. SONY INDIA (P) LTD. VS. DY. CIT (2008) 118 TTJ ( DEL) 865 : (2008) 14 DTR (DEL)(TRIB) 228 : (2008) 114 ITD 448 (DEL); 4. DY. CIT VS. INDO AMERICAN JEWELLERY LTD., ITA NO . 6194/MUM/2008 [REPORTED AT (2010) 131 TTJ (MUMBAI) 163 : (2010) 40 DTR (MUMBAI)(TRIB) 386ED.]; IT(TP)A.1604 & 1666/BANG/2014 PAGE - 15 5. PHILIPS SOFTWARE CENTRE (P) LTD. VS. ASSTT. CIT (2008) 119 TTJ (BANG) 721 : (2008) 15 DTR (BANG)(TRIB) 505 : ( 2008) 26 SOT 226 (BANG); 6. ASSTT. CIT VS. NIT (2011) 57 DTR (DEL)(TRIB) 334 8.1 HE FURTHER SUBMITTED THAT SIZE AS A CRITERIA FOR S ELECTION OF COMPARABLES IS ALSO RECOMMENDED BY OCED IN ITS TP GUIDELINES. THE OBSERVATION OF OCED IN PARA 3.43 OF THE CHAPTER ON GUIDELINES READS AS FOLLOWS : 'SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES : THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PARTIES MIGHT AFFECT THE RELA TIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COM PARABILITY.' 8.2 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THA T SIMILAR OBSERVATIONS WERE ALSO MADE BY ICAI IN PARA 15.4 OF TP GUIDANCE NOTE. HE SUBMITTED THAT TPOS RANGE OF RS. 1 CRORE TO INFINITY HAS RESULTED IN SELECTION OF COMPANIES LIK E M/S INFOSYS WHICH IS HAVING A TURNOVER OF RS. 9,028 CRORES WHIC H IS 1,1007 TIMES BIGGER THAN THE ASSESSEE COMPANY WHICH HAS A TURNOVER OF RS. 8.15 CRORES. HE FURTHER SUBMITTED THAT NASSCOM HAS ALSO CATEGORIZED THE COMPANIES BASED ON THE TURNOVER AS FOLLOWS : 1. GREATER THAN USD 1 BILLION (APPROX. RS. 50,000 C RORES) 2. BETWEEN USD 100 MILLION TO USD 1 BILLION (RS. 50 0 CRORES TO RS. 5,000 CRORES) AND 3. OTHERS HAVING LESS THAN USD 100 MILLION (RS. 500 CRORES). THUS, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D THAT AN APPROPRIATE TURNOVER RANGE SHOULD BE APPLIED IN SEL ECTING A COMPARABLE OF UNCONTROLLED COMPANIES AND THE ASSESS EE HAS ACCORDINGLY, APPLIED THE TURNOVER RANGE OF RS. 1 CR ORE TO RS. 200 CRORES BASED ON DUN AND BRADSTREETS ANALYSIS. HE SUBMITTED THAT IN THE ALTERNATIVE, THE CATEGORIES R ECOGNIZED BY NASSCOM MAY ALSO BE APPLIED IN SELECTING COMPARABLE S. IT(TP)A.1604 & 1666/BANG/2014 PAGE - 16 8.3 THE LEARNED DEPARTMENTAL REPRESENTATIVE REBUTTED T HIS ARGUMENT AND SUBMITTED THAT THE ACT OR RULES DOES N OT PROVIDE FOR THE TURNOVER FILTER. HE SUBMITTED THAT AS RIGHT LY POINTED OUT BY THE TPO IN THE CASE OF SERVICE SECTOR, THE SIZE OF THE COMPANY DOES NOT MATTER BECAUSE, THE INFRASTRUCTURE LAYOUT IS VERY LESS AND IT WILL NOT AFFECT THE PROFIT RATIO IN ANY WAY. HE DREW OUR ATTENTION TO THE PARTICULAR PORTION OF TPOS ORDER WHEREIN THE TPO HAS THE REASONING GIVEN FOR REJECTING THE TURNO VER FILTER. 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERE D THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPA NIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT T HERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARA BLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY TH ERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LI MIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTI ON OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATT ERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO B ARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALS O HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIV E BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCI NG PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED F ROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCEN ARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS. 1 CRORE TO RS. 2 00 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSE SSEE BEING IN THAT RANGE HAVING TURNOVER OF RS. 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF RS. 1 TO RS. 200 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKI NG TP STUDY. IT(TP)A.1604 & 1666/BANG/2014 PAGE - 17 THE ABOVE VIEW WAS FOLLOWED BY THE CO-ORDINATE BEN CH OF THIS TRIBUNAL IN THE CASE OF M/S BEARING POINT BUSINESS CONSULTING PVT. LTD.,(SUPRA) AT PARAS-5.1 OF ITS ORDER DATED 2 1-12-2012 IT WAS HELD AS UNDER; 5.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIALS ON RECORD. THE TPO HAD, WHILE SELECTING T HE ABOVE 26 COMPARABLES, APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE BUT PREFERRED NOT TO APPLY ANY UPPER TURNOVER LIMIT. T HE SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR IN COMPARABILITY. THE ICAI TP GUIDELINES NOTE HAS OBSERVED THAT THE TRANSACTIO N ENTERED INTO BY A RS.1000 CRORES COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS.10 CRORES COMPANY AND THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPAN IES AND RELATED ECONOMIES OF SCALE UNDER WHICH THEY OPERATE . THE TPOS RANGE HAD RESULTED IN SELECTION OF COMPANIES AS COMPARABLE SUCH AS INFOSYS WHICH WAS 277 TIMES BIGG ER THAN THAT OF THE ASSESEE. THE BANGALORE BENCH OF THE TR IBUNAL IN THE CASE OF M/S GENISYS INTEGRATING SYSTEMS (IND.) PVT. LTD., VS DCIT ITA NO.1231/BANG/2010 RELYING ON DUN AND BRAD STREETS ANALYSIS HAD HELD THAT TURNOVER RANGE OF RS.1 CRORE TO 200 CRORE IS APPROPRIATE. THE SAID PROPOSITION HAS FOL LOWED BY THE EARLIER BENCHES OF THIS TRIBUNAL IN THE FOLLOWING C ASES: (I) M/S KODIAK NETWORKS (I) PVT. LTD., VS ACIT I TA NO.1413/BANG/2010 (II) M/S GENISYS MICROCHIP(I) PVT. LTD., VS DCI T ITA NO.1245/BANG/2010 (III) ELECTRONIC FOR IMAGING INDI PVT.LTD., -ITA NO.1171/BANG/2010 & (IV) M/S TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD ., VS DCIT ITA NO.1054/BANG/2011 ATED 23.11.2012. 5.1.1 IN THE CASE OF M/S GENISYS INTEGRATING SYSTE MS (IND.) PVT.LTD., VS DCIT (SUPRA) RELYING O DUN AND BRADS TREET HAS OBSERVED AS UNDER; 9WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR I DENTIFYING THE IT(TP)A.1604 & 1666/BANG/2014 PAGE - 18 COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE T O UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSES SEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMER S. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE T HESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN RE DUCING PROFIT MARGIN. THUS, A HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMP ANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSI FICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN AND B RADSTREET IS MORE SUITABLE AD REASONABLE. IN VIEW OF THE SAME WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPA NIES HAVING A TURNOVER OF RS.1 CRORE TO200 CRORES HAVE TO BE TAKE N AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RAN GE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO H AVE TURNOVER OF 1.00 TO 200 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 5.12 THE ABOVE VIEW HAS BEEN FOLLOWED IN THE REC ENT ORDER OF THE TRIBUNAL N THE CASE OF TRILOGY E - BUSINESS(SUP RA). THE RELEVANT FINDINGS OF THE TRIBUNAL ARE EXTRACTED AS UNDER; 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE AS WELL AS THE DIRECTIONS REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE CLEARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN I MPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSE ES TURNOVER IS RS.47,46,66,638/-. IT WOULD THEREFORE, FALL WI THIN THE CATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETW EEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (IND.) PVT. LTD., VS DCIT ITA NO.1231(BANG) /2010) THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CR ORES HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LA ID DOWN IN SEVERAL DECISIONS REFERRED TO BY THE LEARNED COUNSE L FOR THE ASSESSEE. APPLYING THOSE TESTS, THE FOLLOWING COM PANIES WILL IT(TP)A.1604 & 1666/BANG/2014 PAGE - 19 HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ., TURNOVER RS. 1) FLEXTRONICS SOFTWARE SYSTEMS LTD., 848.66 CRORE S 2)IGATE GLOBAL SOLUTIONS LTD., 747.27 CRORES 3) MINDTREE LTD., 590.39 CRORES 4) PERSISTENT SYSTEMS LTD., 293.74 CRORES 5) SASKEN COMMUNICATION TECH.LTD., 343.57 CRORES 6) TATA ELXSI LTD., 262.58 CRORES 7) WIPRO LTD., 961.09 CRORES 8) INFOSYS TECH.LTD., 13149 CRORES ACCORDINGLY, WE HAVE NO QUALMS IN DIRECTING THE TPO TO EXCLUDE M/S TATA ELXSI LTD., M/S SASKEN COMMUNICATION PVT. LTD., M/S PERSISTENT SYSTEM LTD., M/S L&T INFOTECH LTD. AND M /S INFOSYS TECH.LTD., FROM THE SELECTED COMPARABLES. THIS TRI BUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD VS DCIT (IT(TP ) A.1303/BANG/2012 DATED 28-11-2013) HAD ALSO HELD T HAT PERSISTENT SOFTWARE SYSTEMS PVT.LTD., WAS IN PRODUC T DESIGNING SERVICES AND INTO SOFTWARE PRODUCT DEVELOPMENT. IN THE SAME DECISION IT WAS ALSO HELD THAT M/S INFOSYS TECHNOLO GIES LTD, HAD CONSIDERABLE INTANGIBLES LIKE IPR, AND WAS INTO SOF TWARE PRODUCT DEVELOPMENT. IT WAS ALSO HELD THAT M/S TA TA ELXSI LTD., WAS DEVELOPING NICHE PRODUCTS AND INTO PRODUCT DESI GNING SERVICES. HENCE, THESE COMPANIES WOULD IN ANY CASE HAVE TO BE EXCLUDED FROM THE COMPARABLES BEING FUNCTIONALLY DI FFERENT. 18. EVEN IF WE SAY THAT APPLYING TURNOVER LIMIT OF RS.200 CRORES MAY NOT BE A WISE AND PRUDENT ONE, THE TURNOVER OF THE COMP ARABLES MENTIONED ABOVE WOULD CLEARLY SHOW THAT THESE WERE MUCH BEYON D THAT OF THE ASSESSEE TAKING THEM OUT OF THE REASONABLE REALM OF COMPARAB ILITY. JUST BECAUSE THE IT(TP)A.1604 & 1666/BANG/2014 PAGE - 20 MATTER WAS NOT ADJUDICATED BY THE CIT (A) MAY NOT B E A REASON FOR SENDING IT BACK TO HIM WHEN THE FACTS ARE CLEARLY ON RECORD . THERE CAN BE NO DISPUTE ON THE POSITION OF FACTS AS MENTIONED ABOVE. IN SU CH A SITUATION IT WOULD BE FRUITLESS EXERCISE TO REMIT THE ISSUE OF APPLICATIO N OF TURNOVER FILTER BACK TO THE CIT (A). WE THEREFORE DIRECT EXCLUSION OF TATA ELXSI LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG), PERSISTENT SY STEMS LTD, ZYLOG SYSTEMS LTD, MINDTREE LTD (SEG), L & T INFOTECH LTD , AND INFOSYS LTD, FROM THE LIST OF COMPARABLES. 19. NO DOUBT WE ARE ALIVE TO THE FACT THAT SASKEN C OMMUNICATION TECHNOLOGIES LTD, PERSISTENT SYSTEMS LTD, ZYLOG SYS TEMS LTD, MINDTREE LTD (SEG), L & T INFOTECH LTD, INFOSYS LTD, WERE A PART OF ASSESSEES OWN COMPARABLES. HOWEVER AS MENTIONED BY US, ASSESSEE HAD TAKEN A GROUND BEFORE THE CIT (A) SEEKING EXCLUSION BASED ON TURNO VER, THOUGH IT HAS NOT PRESSED IT. AT LEAST IN THE CASE OF PERSISTENT SY STEMS LTD, CIT (A) SPECIFICALLY MENTIONED THIS PLEA OF THE ASSESSEE TH OUGH HE HAD NOT DIRECTED ITS EXCLUSION, FOR A REASON THAT ASSESSEE WAS NOT P RESSING APPLICATION OF TURNOVER FILTER. IN SUCH CIRCUMSTANCES, WE ARE OF THE OPINION THAT ASSESSEE CAN VERY WELL PLEAD FOR EXCLUSION OF THESE COMPANIE S FROM THE LIST OF COMPARABLES. IT(TP)A.1604 & 1666/BANG/2014 PAGE - 21 20. COMING TO BODHTREE CONSULTING LTD, ARGUMENT OF THE ASSESSEE IS THAT IT IS FUNCTIONALLY DISSIMILAR. IN THE CASE OF LAM RESEARCH INDIA P. LTD, (SUPRA), COMPARABILITY OF BODHTREE CONSULTING LTD, WAS AN ISSUE. IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT, IT WAS HELD AS UNDER BY THIS TRIBUNAL AT PARA 18 OF ITS ORDER : BODHTREE CONSULTING LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLE S CHOSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASS ESSEE. THE ASSESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSESSEES NOTICE THAT THIS COMPANY IS NOT BEING CO NSIDERED AS A COMPARABLE COMPANY IN THE CASE OF COMPANIES RENDERI NG SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CASE, THE TRIBUNAL FOLLOWED THE DECISION RE NDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS P ROCESSING SERVICES (I) P. LTD., ITA NO.4547/MUM/2012. IN TH E AFORESAID DECISIONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BOD HTREE CONSULTING LTD. IS IN THE BUSINESS OF SOFTWARE PROD UCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTION S SOFTWARE CONSULTANCY AND DESIGN & DEVELOPMENT OF SOFTWARE US ING LATEST TECHNOLOGY. THE DECISION RENDERED BY THE MUMBAI BE NCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. IT WAS AFFIRMED BY THE L EARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES I N THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUM STANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COM PANY IS CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSUL TING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARD S, THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COMPANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE IT(TP)A.1604 & 1666/BANG/2014 PAGE - 22 SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WH EN FACTUALLY IT IS SHOWN THAT THE SAID COMPANY IS A SO FTWARE PRODUCT COMPANY AND NOT A SOFTWARE DEVELOPMENT SERVICES COM PANY ACCORDINGLY WE HAVE NO HESITATION IN DIRECTING THE EXCLUSION OF BODHTREE CONSULTING LTD ALSO. 21. NOW TAKING THE PLEADING OF THE ASSESSEE THAT CG -VAK WAS UNJUSTLY REJECTED FROM THE LIST OF COMPARABLES, WE FIND THAT THE SAID COMPANY WAS ALSO ONE OF THE COMPARABLES , WHICH HAD COME UP BEF ORE THIS TRIBUNAL IN THE CASE OF LAM RESEARCH (INDIA) P. LTD, (SUPRA). THIS TRIBUNAL HAD HELD AS UNDER AT PARA 21 OF THE ORDER, AS UNDER : CG-VAK SOFTWARE & EXPORTS LTD. (D) (I) AS FAR AS THIS COMPANY IS CONCERNED, THE TPO REJECTED THE SAME BY APPLYING THE 25% EMPLOYEE COST FILTER. ACCORDING TO THE TPO, USUALLY SOFTWARE DEVELOPMENT SERVICES ARE HIGH-END SERVICES PERFORMED BY SKILLED AND PROFESSI ONAL EMPLOYEES AND HENCE THE COST OF RENDERING SUCH HIGH-END SERVI CES IS ALSO HIGH AS THEY COMPRISE OF HIGH SALARIES AND BETTER WELFAR E FACILITIES, COMPARED TO LOW-END SERVICES. THEREFORE, THE FILTER OF EMPLOYEE COST OF MORE THAN 25% OF TURNOVER WAS CONSIDERED BY THE TPO WHILE CHOOSING THE COMPARABLE. (II) THE SUBMISSION OF THE LD. COUNSEL FOR THE ASS ESSEE WAS THAT IN THE CASE OF ASSESSEE, THIS TEST IS SATISFIED. I N THIS REGARD, OUR ATTENTION WAS DRAWN TO PAGE 818 TO 824 OF THE ASSES SEES PAPERBOOK WHEREIN ANNUAL REPORT OF THIS COMPANY HAS BEEN PROV IDED. ATTENTION WAS DRAWN TO THE FACT THAT IN THE PROFIT & LOSS ACC OUNT OF THE AUDITED ACCOUNTS, THE COST OF SERVICES HAS BEEN SHOWN AS AN EXPENDITURE AND IN SCHEDULE 15 TO THE NOTES TO ACCOUNTS, IT HAS BEE N ELABORATED AS FOLLOWS:- IT(TP)A.1604 & 1666/BANG/2014 PAGE - 23 COST OF SERVICES: COST OF SERVICES - OVERSEAS 2,77,32,337 COST OF SERVICES DOMESTIC 2,58,40,435 TRANSCRIPTION CHARGES 3,97,389 WEB DESIGNING CHARGES 1,64,602 STAFF WELFARE 11,43,144 STAFF TRAINING 3,63,496 CONTRIBUTION TO PF & ESI 15,47,906 GRATUITY 13,04,894 EX GRATIA 0 HRD EXPENSES 3,10,871 5,88,05,074 (III) IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE TPO IGNORED THE CONTRIBUTION TO PF & ESI, GRATUITY AND EX GRATIA PAYMENTS AND ARRIVED AT THE EMPLOYEE COST. ACCORDI NG TO THE LD. COUNSEL FOR THE ASSESSEE, DOING SO WAS NOT PROPER. IF ALL THE EMPLOYEE COSTS ARE PROPERLY CONSIDERED, THEN THIS C OMPANY CAN PASS THE FILTER APPLIED BY THE TPO FOR EXCLUDING IT. (IV) WE HAVE CONSIDERED THE SUBMISSION OF THE LD. C OUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT PRIMA FACIE THE S UBMISSIONS OF THE LD. COUNSEL ARE ACCEPTABLE. WE, HOWEVER, FEEL THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE TPO TO CONSIDER INCLU DING THIS COMPANY AS A COMPARABLE AFRESH IN THE LIGHT OF THE FACTS BROUGHT TO OUR NOTICE BY THE LD. COUNSEL FOR THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. FOLLOWING THE ABOVE, WE DIRECT THAT CG-VAK CAN BE C ONSIDERED AS A GOOD COMPARABLE. 22. AS A RESULT OF THE ABOVE DISCUSSION, WE DIRECT EXCLUSION OF BODHTREE CONSULTING LTD, TATA ELXSI LTD (SEG), SASKEN COMMUN ICATION TECHNOLOGIES LTD (SEG), PERSISTENT SYSTEMS LTD, ZYLOG SYSTEMS LT D, MINDTREE LTD (SEG), IT(TP)A.1604 & 1666/BANG/2014 PAGE - 24 L & T INFOTECH LTD, AND INFOSYS LTD FROM THE LIST O F COMPARABLES AND DIRECT INCLUSION OF M/S. CG-VAK AS A GOOD COMPARABLE. ORD ERED ACCORDINGLY. 23. COMING TO THE PLEADING OF THE ASSESSEE THAT FOR EIGN EXCHANGE ADJUSTMENT ONCE ALLOWED AS OPERATIONAL IN NATURE SH OULD ALSO BE CONSIDERED WHILE WORKING OUT THE OPERATING MARGIN OF THE COMPA RABLES, WE ARE INCLINED TO AGREE. THIS IS BECAUSE COMPARABILITY S HOULD BE DONE BASED ON EQUAL FOOTING AND IF FOREIGN EXCHANGE GAINS / LOSSE S ARE CONSIDERED AS PART OF OPERATIONAL INCOME / LOSS OF THE ASSESSEE, THEN SUCH ITEMS OF EXPENDITURE , ARE ALSO TO BE CONSIDERED AS OPERATIONAL IN NATUR E IN THE CASE OF COMPARABLES ALSO. TPO IS THEREFORE DIRECTED TO WOR K OUT THE MARGIN OF THE COMPARABLES THAT ARE LEFT IN THE LIST AFTER CONSIDE RING FOREIGN EXCHANGE GAINS / LOSSES AS OPERATIONAL IN NATURE. ORDERED ACCORDI NGLY. 24. SINCE THE LD. AR HAD SUBMITTED THAT HE WAS NOT PRESSING ANY GROUNDS OTHER THAN THE GROUNDS RELATING TO APPLICAT ION OF TURNOVER FILTER IN GROUNDS 5, 6 AND 9, OTHER GROUNDS ARE NOT CONSIDERE D FOR ADJUDICATION BY US. 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. IT(TP)A.1604 & 1666/BANG/2014 PAGE - 25 26. NOW WE TAKE UP APPEAL OF THE REVENUE. REVENUE HAS ALTOGETHER TAKEN NINE GROUNDS OF WHICH GROUNDS 1, 8 AND 9 ARE GENERAL IN NATURE NEEDING NO ADJUDICATION. VIDE ITS GROUNDS 2 AND 3, GRIEVANCE RAISED BY REVENUE IS THAT CIT (A) DIRECTED THE AO TO EXCLUDE FROM TOTAL TURNOVER ITEMS WHICH WERE EXCLUDED FROM EXPORT TURNOVER ALSO WHILE WORKING OUT THE DEDUCTION AVAILABLE TO THE ASSESSEE U/S.10A OF THE ACT. WHAT WE FIND IS THAT THE CIT (A) HAD FOLLOWED THE JUDGMENT OF HONB LE JURISDICTIONAL HIGH COURT IN CIT V. TATA ELXSI LTD, [349 ITR 98]. JUST BECAUSE OF A REASON THAT THE REVENUE HAS MOVED AN APPEAL BEFORE THE HONBLE APEX COURT AGAINST THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT, WE CANNOT SAY THAT HONBLE JURISDICTIONAL HIGH COURT JUDGMENT SHOULD N OT BE FOLLOWED. WE ARE OF THE OPINION THAT CIT (A) WAS JUSTIFIED IN GI VING DIRECTIONS WHICH WERE IN ACCORDANCE WITH THE LAW LAID DOWN BY THE HO NBLE JURISDICTIONAL HIGH COURT IN TATA ELXSI LTD (SUPRA). GROUNDS 2 AN D 3 ARE DISMISSED. 27. VIDE ITS GROUND 4, REVENUE IS AGGRIEVED ON THE DIRECTIONS OF THE CIT (A) TO GIVE A RISK ADJUSTMENT TO THE ASSESSEE. CIT (A) HAD DIRECTED THE TPO TO GIVE RISK ADJUSTMENTS AT PREVAILING NORMS SUITA BLE / APPLICABLE TO THE ASSESSEE. AS PER THE CIT (A), THERE WAS NO WORKING CAPITAL ADJUSTMENT ACTUALLY GIVEN BY THE TPO SINCE THE ADJUSTMENT CARR IED OUT WAS NEGATIVE IN IT(TP)A.1604 & 1666/BANG/2014 PAGE - 26 ITS IMPACT. ON THIS ISSUE WHAT WE FIND IS THAT TPO AT PARA 3.7 OF HIS ORDER HAD CLEARLY STATED THAT WORKING CAPITAL ADJUSTMENT IS RESTRICTED TO 1.71% CONSIDERING THE UNCONTROLLED COMPARABLES SELECTED B Y HIM. HOWEVER, IN THE ACTUAL WORKING OF THE ADJUSTMENT U/S.92CA OF TH E ACT, REPRODUCED BY US AT PARA SIX ABOVE, WORKING CAPITAL ADJUSTMENT HAS B EEN MADE AT (-) 5,12% . IN SUCH A SITUATION, WE CANNOT SAY THAT RISK ADJUST MENT DIRECTED BY THE CIT (A) WAS INCORRECT. TPO HAVING NOT RESTRICTED HIMSE LF TO A WORKING CAPITAL ADJUSTMENT OF 1.71% AS MENTIONED BY HIM AT PARA 3.7 OF HIS ORDER OUGHT HAVE CONSIDERED ASSESSEES PLEA FOR A RISK-ADJUSTME NT, IF FOUND REASONABLE. IN SUCH CIRCUMSTANCES, WE FIND THAT DIRECTION GIVEN BY THE CIT (A) WAS JUSTIFIED AND WE DO NOT FIND ANY REASON TO INTERFER E. GROUND 4 OF THE REVENUE STANDS DISMISSED. 28. VIDE ITS GROUNDS 5 AND 6, GRIEVANCE OF THE REVE NUE IS THAT LOSS /GAIN WAS CONSIDERED AS OPERATING IN NATURE BY THE CIT (A ). LD. DR SUBMITTED THAT THERE WAS NO FINDING BY THE CIT (A) THAT FOREI GN EXCHANGE GAIN / LOSS WAS INCIDENTAL TO THE OPERATING ACTIVITY. 29. PER CONTRA, LD. AR SUPPORTED THE ORDERS OF AUTH ORITIES BELOW. 30. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. GROUND 6 OF THE REVENUE CLEARLY ADMITS THA T FOREX GAIN / LOSS WERE IT(TP)A.1604 & 1666/BANG/2014 PAGE - 27 INCIDENTAL TO THE OPERATING ACTIVITY OF THE ASSESSE E. JUST BECAUSE IT WAS NOT CRITICAL TO THE OPERATING ACTIVITY, WE CANNOT SAY T HAT THESE HAD TO BE EXCLUDED. THIS TRIBUNAL IN THE CASE OF TRIOLOGY E BUSINESS SOFTWARE INDIA P. LTD V. DCIT [(2013) 147 ITD 540], HAD HELD THAT FOREX GAINS / LOSS ARE REQUIRED TO BE ADDED TO THE OPERATING REVENUE RELYI NG ON ANOTHER COORDINATE BENCH DECISION IN SAP LABS INDIA (P) LTD, [(2011) 4 4 SOT 156]. WE THEREFORE DO NOT FIND ANY ERROR IN THE DIRECTIONS G IVEN BY THE CIT (A) . GROUNDS 5 AND 6 STAND DISMISSED. 31. TO SUMMARISE THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED WHEREAS APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH DAY OF MAY, 2016. SD/- SD/- (SUNIL KUMAR YADAV) (ABRAHAM P GEORGE ) JUDICIAL MEMBER ACCOUNTA NT 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