PTC Software (India) Pvt. Ltd., Pune V. Asst. Comm. of Income-tax, Pune

ITA 1605/PUN/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 66963 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 10-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 12-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Assessee Lawyers: RAKESH GUPTA
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER, AND SHRI R.S.PADVEKAR, JUDICIAL MEMBER. ITA.NO.1605/PN/2011 (ASSTT. YEAR : 2007-08) PTC SOFTWARE (INDIA) PVT. LTD., SURVEY NO.15, MARISOFT-II, VADGAONSHERI, KALYANINAGAR, PUNE 411014. .. APPELLANT PAN: AABCC1268J VS. ACIT, CIRCLE-4, PUNE. .. RESPONDENT ASSESSEE BY : SHRI RAKESH GUPTA DEPARTMENT BY : SHRI S.K.SINGH ORDER PER G.S.PANNU, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE ASSESSING OFFICER DATED 05.10.2011 U/ S.143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961, PERTAINING TO THE A.Y. 2007-08. 2. ALTHOUGH THE ASSESSEE HAS RAISED MULTIPLE GROUND S OF APPEAL, BUT THE SUBSTANTIVE DISPUTE RAISED BY THE ASSESSEE IS AGAINST THE ACTION OF THE LOWER AUTHORITIES IN DETERMINING THE ARMS LENGTH PRICE (IN SHORT THE ALP) OF THE APPELLANTS INTERNA TIONAL TRANSACTIONS AT RS.21,63,60,620/- AS AGAINST RS.11,25,20,500/- D ECLARED BY THE ASSESSEE. 3. IN BRIEF, THE RELEVANT FACTS ARE THAT ASSESSEE I S A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956, AND IS A WHOLLY OWNED SUBSIDIARY OF M/S.PARAMETRIC TECH NOLOGY CORPORATION, USA (IN SHORT PTC USA). THE PARENT COMPANY I.E. PTC USA, IS ENGAGED IN DEVELOPING, MARKETING AND SU PPORTING PRODUCT LIFECYCLE MANAGEMENT (PLM) AND ENTERPRISE C ONTENT 2 MANAGEMENT (ECM) SOFTWARE SOLUTIONS AND RELATED SER VICES FOR THEIR CLIENTS. THE ASSESSEE COMPANY IS ENGAGED IN PROVID ING INFORMATION TECHNOLOGY (IT) SERVICES AND IT-ENABLED SERVICES TO ITS PARENT COMPANY I.E. PTC USA. IN THE IT-ENABLED SERVICES S EGMENT, ASSESSEE UNDERTAKES DESIGNING AND DEVELOPING OF SOF TWARE FOR PTC USA, WHICH IN TURN IS UTILIZED BY PTC USA TO PROVI DE PLM SOFTWARE SOLUTIONS TO ITS CLIENTS. IN THE IT-ENABLED SERVIC ES SEGMENT, THE ASSESSEE IS RENDERING SUPPORT SERVICES (CALL CENTRE SERVICES) TO THE GLOBAL CLIENT-BASE OF PTC USA. 4. IN THIS BACKGROUND, THE ASSESSEE ENTERED INTO TH E FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENT ERPRISE (IN SHORT AE) I.E. PTC USA:- SR. NO. NATURE OF INTERNATIONAL TRANSACTION AMOUNT (RS) 1. PROVISION OF IT SERVICES 95,59,54,385 2. PROVISION OF IT ENABLED SERVICES 5,75,65,117 5. IN ORDER TO DETERMINE THE INCOME ARISING FROM SU CH INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ALP AS PER SECTION 92(1) OF THE ACT, THE ASSESSING OFFICER MADE A REFE RENCE TO THE TRANSFER PRICING OFFICER (TPO) U/S.92CA(1) OF THE A CT. BEFORE THE TPO, ASSESSEE CONTENDED THAT THE AFORESTATED TWO IN TERNATIONAL TRANSACTIONS WERE UNDERTAKEN AT AN ARMS LENGTH PRI CE AND IN THE TRANSFER PRICING STUDY CONDUCTED BY IT, THE TRANSAC TIONAL NET MARGIN METHOD (IN SHORT TNM METHOD) WAS CONSIDERE D AS THE MOST APPROPRIATE METHOD. AS PER THE BENCHMARKING ANALYS IS CARRIED OUT BY THE ASSESSEE WITH RESPECT TO THE IT-SERVICES SEG MENT, THE PLI [OPERATING PROFIT (OP) / OPERATING COST (OC)] OF TH E ASSESSEE WAS COMPUTED AT 14.02% AND THE ARITHMETIC MEAN OF THE P LI OF THE COMPARABLE COMPANIES ADOPTED BY THE ASSESSEE WAS 10 .70%. SINCE THE PLI OF THE ASSESSEE WAS FAVOURABLE, ASSES SEE CONTENDED THAT THE CONSIDERATION STATED FOR PROVISION OF IT-S ERVICES TO THE AE AT RS.95,49,54,385/- WAS AT AN ARMS LENGTH. SIMI LARLY, WITH REGARD TO THE IT-ENABLED SERVICES SEGMENT, ASSESSEE ADOPTED THE TNM METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANS ACTIONS, 3 WHEREIN THE PLI OF THE ASSESSEE WAS COMPUTED AT 14. 23% AND THE SAME WAS FOUND FAVOURABLE IN COMPARISON TO THE ARIT HMETIC MEAN OF THE PLI OF THE COMPARABLE CASES AT 10.51%, AND, ACC ORDINGLY THE CONSIDERATION OF RS.5,75,65,117/- DECLARED BY THE A SSESSEE FOR PROVISION OF IT-ENABLED SERVICES WAS ALSO CONSIDERE D AT AN ARMS LENGTH. 6. THE TPO FOUND THAT SO FAR AS THE ADOPTION OF THE TNM METHOD AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE INT ERNATIONAL TRANSACTIONS WAS CONCERNED, THE SAME WAS IN ORDER. HOWEVER, THE TPO HAS DIFFERED WITH THE ASSESSEE FOR DETERMINATIO N OF THE ALP IN BOTH THE SEGMENTS. WITH RESPECT TO THE PROVISION O F IT SERVICES, THE ALP WAS DETERMINED AT RS.105,0006657 AS AGAINST RS.95,59,54,385/- DECLARED BY THE ASSESSEE WHICH RE SULTED IN AN UPWARD ADJUSTMENT OF RS.9,40,52,272/- TO THE RETURN ED INCOME. WITH REGARD TO THE IT-ENABLED SERVICES SEGMENT, THE ALP OF THE INTERNATIONAL TRANSACTION WAS DETERMINED BY THE TPO AT RS.6,73,52,967/- AS AGAINST RS.5,75,65,117/- DECLAR ED BY THE ASSESSEE WHICH RESULTED IN AN UPWARD ADJUSTMENT OF RS.97,87,850/- TO THE RETURNED INCOME. 7. THE POINTS OF DIFFERENCE BETWEEN THE ASSESSEE AN D THE TPO CAN BE BRIEFLY SUMMARIZED AS FOLLOWS. FIRSTLY, WHILE AD OPTING THE DATA OF THE COMPARABLE CASES FOR THE PURPOSES OF COMPARABIL ITY ANALYSIS, ASSESSEE UTILIZED THE DATA OF THE COMPARABLE CASES RELATING TO THREE FINANCIAL YEARS, INCLUDING THE YEAR UNDER CONSIDERA TION. ACCORDINGLY, THE PLI OF THE COMPARABLE CASES WAS CO MPUTED ON THE BASIS OF THE AVERAGE OF THREE YEARS DATA, WHEREAS T HE TPO HAS UTILISED THE DATA FOR THE SINGLE YEAR, I.E., RELATI NG TO THE FINANCIAL YEAR UNDER CONSIDERATION DURING WHICH THE IMPUGNED INTERNATIONAL TRANSACTIONS HAVE BEEN CARRIED OUT. SECONDLY, THE TPO HAS APPLIED RELATED PARTY TRANSACTION (RPT) FILTER IN ORDER TO ASCERTAIN THE COMPARABLE CASES, WHICH WAS HITHERTO NOT CONSIDERED BY THE ASSESSEE DURING ITS TRANSFER PRICING STUDY. NOTABL Y IN THE PROCEEDINGS BEFORE THE TPO, ASSESSEE HAD PUT FORTH THAT THE CASES HAVING 10% OR MORE RELATED PARTY TRANSACTIONS (I.E. , RPTS) SHOULD BE 4 EXCLUDED. THE TPO HAS, HOWEVER, CONSIDERED 25% OF THE APPROPRIATE BASE I.E. EITHER SALES OR EXPENSES, AS THE THRESHOLD LIMIT FOR APPLICATION OF THE RPT FILTER. THIRDLY, THE TP O REJECTED CERTAIN COMPARABLES SELECTED BY THE ASSESSEE ON THE GROUND OF FUNCTIONAL DISSIMILARITIES AND ALSO LOSS MAKING CONCERNS. 8. THE TPO ACCORDINGLY PASSED AN ORDER U/S.92CA(3) OF THE ACT DATED 29.10.2010 DETERMINING AN UPWARD ADJUSTMENT T O THE INTERNATIONAL TRANSACTIONS OF RS.10,38,40,122/-. THE ASSESSING OFFICER THEREAFTER MADE A DRAFT ASSESSMENT ORDER U/ S.144C OF THE ACT IN THE AFORESAID LIGHT AGAINST WHICH ASSESSEE P REFERRED OBJECTIONS BEFORE THE DRP (DRP). VARIOUS OBJECTIONS OF THE ASSESSEE WERE DISPOSED OF BY THE DRP IN TERMS OF ITS DIRECTI ONS U/S.144C(5) OF THE ACT DATED 20.05.2011. IN TERMS OF ITS DIREC TIONS DATED 20.05.2011, THE PROPOSED ACTION OF THE ASSESSING OF FICER WAS FOUND APPROPRIATE. RESULTANTLY, THE ASSESSING OFFICER PA SSED AN ORDER OF ASSESSMENT U/S.143(3) R.W.S. 144C(13) OF THE ACT DA TED 05.10.2011, WHEREIN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS WAS DETERMINED BY THE ASSESSING OFFICER IN TERMS OF THE ORDER OF THE TPO. ACCORDINGLY, THE ASSESSING OFFICER COMPUTED T HE TOTAL INCOME OF THE ASSESSEE IN RELATION TO THE INTERNATIONAL TR ANSACTIONS IN CONFORMITY WITH THE ALP SO DETERMINED BY THE TPO. AS A RESULT, THE TOTAL INCOME OF THE ASSESSEE WAS DETERMINED AT RS.2 1,63,60,620/- AS AGAINST THE INCOME DECLARED AS PER RETURN OF INC OME AT RS.11,25,20,500/-, THEREBY RESULTING IN AN ADJUSTME NT TO THE INTERNATIONAL TRANSACTIONS OF RS.10,38,40,122/-. 9. BEFORE US, THE PRIMARY GRIEVANCE RAISED BY THE A SSESSEE AT THE TIME OF HEARING IS WITH REGARD TO THE SELECTION OF CERTAIN COMPARABLE COMPANIES FOR THE PURPOSES OF COMPARABILITY ANALYSI S, WHICH ACCORDING TO THE ASSESSEE ARE EXCLUDIBLE. THE ASSE SSEE HAS ALSO ASSERTED THAT SOME OF THE COMPANIES IDENTIFIED BY T HE ASSESSEE AS COMPARABLES HAVE BEEN UNJUSTLY IGNORED WHILE UNDERT AKING THE COMPARABILITY ANALYSIS. 5 10. FIRSTLY, WE TAKE UP FOR CONSIDERATION THE RIVAL CONTENTIONS WITH REGARD TO THE ADJUSTMENT OF RS.9,40,52,272/- MADE I N THE IT-SERVICES SEGMENT. ON THIS ASPECT, THE TPO UNDER TOOK FRESH ANALYSIS AND FINALLY SELECTED THE FOLLOWING COMPARA BLES: SR.NO. COMPANY OP/OC% 1 F C S SOFTWARE SOLUTIONS LTD. 22.64 2 GOLDSTONE TECHNOLOGIES LTD. 24.75 3 S I P TECHNOLOGIES & EXPORTS LTD. 14.46 4 SONATA SOFTWARE LTD. 21.47 5 SYNETAIROS TECHNOLOGIES LTD. 19.24 6 AKSHAY SOFTWARE TECHNOLOGIES LTD. 4.78 7 MINDTREE CONSULTING LTD. 17.34 8 COMPUCOM SOFTWARE LTD. (SEG) 35.63 9 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 36.63 10 TRANSWORLD INFOTECH LTD. 32.88 11 KALS INFORMATION SYSTEMS LTD. (SEG) 30.55 12 I C SA (INDIA) LTD. (SEG) 56.16 13 ICRA TECHNO ANALYTICS LTD. 11.64 ARITHMETIC MEAN 25.24 11. IN THIS REGARD THE FIRST PLEA OF THE ASSESSEE I S THAT THE ITEMS AT (1) AND (8) NAMELY, FCS SOFTWARE SOLUTIONS LTD. AND COMPUCOM SOFTWARE LTD. (SEG) HAVE BEEN WRONGLY INCLUDED BY T HE TPO IN THE SET OF COMPARABLES. THE ARGUMENT SET UP BY THE ASS ESSEE IS THAT THOUGH THE SAID CONCERNS MAY BE FUNCTIONALLY COMPAR ABLE, SO HOWEVER, THE SAME STAND TO BE EXCLUDED ON THE BASIS OF THE RPT FILTER OF 25% WHICH HAS BEEN ADOPTED BY THE TPO HIM SELF BUT HAS BEEN WRONGLY APPLIED TO INCLUDE THE TWO COMPANIES. IN THIS REGARD WE FIND THAT IN THE TRANSFER PRICING STUDY UNDERTAK EN BY THE ASSESSEE IT HAD NOT APPLIED THE FILTER OF RPT FOR T HE PURPOSES OF ELIMINATING CASES HAVING RELATED PARTY TRANSACTIONS . IN THE COURSE OF TRANSFER PRICING PROCEEDINGS, THE ASSESSEE ON BE ING ASKED, STATED THAT THE RPT FILTER BE APPLIED TO EXCLUDE CASES FRO M THE LIST OF COMPARABLES WHERE THE RPT TRANSACTIONS EXCEED 10% O F THE TOTAL TRANSACTIONS. THE TPO HOWEVER, DECIDED TO IDENTIFY THE COMPANIES WHERE THE QUANTUM OF RPT IS MORE THAN 25% CALCULATE D WITH REFERENCE TO THE APPROPRIATE BASE, AND EXCLUDED THE SAME FOR THE PURPOSES OF COMPARABILITY ANALYSIS. NOTWITHSTANDIN G THE ASSESSEES 6 PRIMARY PLEA THAT THE THRESHOLD LIMIT OF 25% ADOPTE D BY THE TPO WAS INAPPROPRIATE, IT HAS BEEN SUBMITTED BEFORE US THAT EVEN AFTER APPLYING THE FILTER ADOPTED BY THE TPO, THE AFOREST ATED TWO CONCERNS ARE LIABLE TO BE EXCLUDED AS THEY HAVE RELATED PART Y TRANSACTIONS IN EXCESS OF 25% OF THE TOTAL TRANSACTIONS. IT HAS BE EN POINTED OUT THAT THE RPT PERCENTAGE HAS BEEN WRONGLY CALCULATED BY THE TPO AND FOR THAT MATTER IT REFERRED TO THE DETAILED SUB MISSIONS MADE IN THIS REGARD TO THE DRP WHICH ARE PLACED AT PAGES 81 5 816 OF THE PAPER BOOK. 12. IN THIS CONNECTION, WE FIND THAT THE TPO DEFINE D THE RPT FILTER TO MEAN THAT IN CASES WHERE THE RPT TRANSACTIONS EX CEED 25% OF THE TOTAL TRANSACTIONS, THE SAME ARE LIABLE TO BE E XCLUDED FOR THE PURPOSES OF COMPARABILITY ANALYSIS. THE TPO FURTHE R DECIDED TO COMPUTE THE LIMIT OF 25% OF RPT TRANSACTIONS WITH R EFERENCE TO THE APPROPRIATE BASE, WHICH WAS EITHER SALES OR TOTAL O PERATING EXPENSES, AS THE CASE MAY BE. IN PARA 6.3.2. OF HI S ORDER, THE TPO HAS NOTICED IN RELATION TO FCS SOFTWARE LTD THAT TH E SAID COMPANY HAD SALES REVENUES FROM RELATED PARTIES OF RS.36.89 CRORES AGAINST TOTAL SALES OF RS.131.27 CRORES AND IT HAD INCURRED RPT EXPENSES OF NIL AGAINST TOTAL EXPENSES OF RS.107.58 CRORES. HE COMPUTED THE PERCENTAGE OF RPT TO THE TOTAL TRANSACTIONS AT 15.4 0% BY THE FOLLOWING METHOD: RPT SALES DIVIDED BY (TOTAL SALES + TOTAL EXPENSES) MULTIPLIED BY 100 I.E., RS.36.89 CRORES DIVIDED BY (RS.131.27 + RS.107.58) MULTIPLIED BY 100. 13. OSTENSIBLY, THE AFORESAID CALCULATION RESULTS I N RPTS OF 15.40% WHICH IS BELOW THE FILTER OF 25% ADOPTED BY THE TPO AND ACCORDINGLY, IT WAS NOT EXCLUDED. HOWEVER, IT IS Q UITE EVIDENT THAT THE DENOMINATOR OF RS.238.85 CRORES ADOPTED BY THE TPO IS WRONG IN AS MUCH AS IT INCLUDES TOTAL EXPENSES ALSO WHERE AS AS PER TPOS OWN OBSERVATIONS, THERE ARE NO RPT EXPENSES. THE N UMERATOR COMPRISES OF ONLY THE SALES TO RELATED PARTIES AND NO RPT EXPENSES. THEREFORE, THE ADOPTION OF THE DENOMINATOR, I.E., T HE BASE, BY CONSIDERING TOTAL SALES PLUS TOTAL EXPENSES IN THE PRESENT CASE 7 WHERE THERE IS NO RPT EXPENSES WOULD LEAD TO A MISL EADING RESULT. IF THE DENOMINATOR IS RESTRICTED TO THE TOTAL SALES IN THE PRESENT CASE, AS THERE ARE ONLY RPT SALES, THE RESULT WOULD BE PERCENTAGE OF RPTS OF 28.10%, I.E, RS.36.89 CRORES DIVIDED BY RS. 131.27 CRORES. THE CASE OF THE ASSESSEE IS THAT EVEN BY APPLYING T HE RPT FILTER OF 25% ENVISAGED BY THE TPO, THE SAID CONCERN IS EXCLU DIBLE AS IT HAS RPTS VIS--VIS ITS TOTAL TRANSACTIONS IN EXCESS OF 25%. IN VIEW OF THE AFORESAID FACTUAL MATRIX, WE HOLD THAT FCS SOFTWARE LTD IS EXCLUDIBLE FROM THE LIST OF COMPARABLES FOR THE PURPOSE OF COM PARABILITY ANALYSIS. 14. SIMILARLY, IN THE CASE OF COMPUCOM SOFTWARE LTD ., THE TPO HAS OBSERVED IN PARA 6.3.19 OF HIS ORDER THAT THE SAID CONCERN HAS NIL SALES REVENUE FROM RELATED PARTIES AGAINST TOTAL SA LES OF 23.82 CRORES, BUT HAS INCURRED RPT EXPENSES OF RS.6.65 CR ORES AGAINST TOTAL EXPENSES OF 17.78 CRORES. THE RATIO OF RPT T O TOTAL TRANSACTIONS HAS BEEN COMPUTED AT 15.19% BY THE TPO . AGAIN THE TPO HAS ADOPTED THE DENOMINATOR OF RS.41.60 CRORES INCLUSIVE OF TOTAL SALES WHEREAS THE NUMERATOR IS RS.6.65 CRORES , COMPRISING OF ONLY RPT EXPENSES AND NO RPT SALES. THEREFORE, THE DENOMINATOR IS TO BE CORRECTED AT RS.17.78 CRORES AND THE CORRECT PERCENTAGE OF RPTS WOULD BE 37.40%, I.E., RPT EXPENSES/TOTAL EXPE NSES. THE RPTS BEING IN EXCESS OF THE 25% FILTER ADOPTED BY T HE TPO, THE SAID CONCERN IN OUR VIEW IS ALSO LIABLE TO BE EXCLUDED F ROM THE LIST OF COMPARABLES FOR THE PURPOSE OF COMPARABILITY ANALYS IS. 15. BEFORE PARTING, WE MAY ALSO OBSERVE THAT THE MA NNER IN WHICH THE RPT FILTER HAS BEEN APPLIED BY THE TPO IN THE Y EAR IS INCONSISTENT WITH HIS OWN APPROACH IN THE A.Y. 2006 -07. FOR THIS PURPOSE, THE APPELLANT HAS REFERRED TO PAGES 668 TO 751 OF THE PAPER BOOK FOR THE COPY OF THE ORDER OF THE TPO DATED 29. 10.2009 FOR A.Y. 2006-07, SPECIFICALLY AT PAGES 689 TO 690, WHERE TH E TPO HAS TAKEN EITHER THE SALES OR EXPENSES AS THE APPROPRIATE BAS E, AS THE CASE MAY BE, AND NOT AGGREGATE OF SALES AND TOTAL EXPENS ES EVEN WHERE RELATED PARTY TRANSACTIONS IN ONE OF THE TWO WAS AB SENT. 8 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WITH REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION S OLUTIONS LTD. (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE L IST OF COMPARABLES IS TO BE EFFECT THAT THEY ARE FUNCTIONA LLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM A ND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORES AID CONCERNS ARE ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCT S WHICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES UNDERTAKEN BY THE ASSESSEE IN ITS IT-SERVICES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORD ER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYSTEMS LTD., IS TO THE EFFECT THAT THE SAID CONCERNS APPLICATIO N SOFTWARE SEGMENT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. THE SAID C ONCERN IS ENGAGED IN TWO SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATION SOFTWARE SEGMENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS ENGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASS ESSEE IS THAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CONCERN FO R F.Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGMENT IS EN GAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND SOFTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRITTEN SUBMISSIONS, COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 4 20.3 TO 420.4. THE ASSESSEE FURTHER POINTED OUT THAT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTWARE SERVICES, AND THEREFORE, IT WA S NOT APPROPRIATE TO ADOPT THE APPLICATION SOFTWARE SEGMENT OF THE SA ID CONCERN FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEES I T-SERVICES SEGMENT. THE TPO HOWEVER, NOTICED THAT THOUGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODUCTS WHICH ARE DEVELOPED B Y IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE P RODUCTS AS THERE 9 WERE NO COST OF PURCHASES DEBITED IN THE PROFIT & L OSS ACCOUNT. THOUGH THE TPO AGREED THAT THE QUANTUM OF REVENUE F ROM SALE OF PRODUCTS WAS NOT AVAILABLE AS PER THE FINANCIAL STA TEMENTS OF THE SAID CONCERN, BUT AS THE BASIC FUNCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS F UNCTIONALLY COMPARABLE TO THE ASSESSEES SEGMENT OF IT-SERVICES . 18. BEFORE US, APART FROM REITERATING THE POINTS RA ISED BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIATELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALLY INCOMPARABLE. FOR THE SAID PURPOSE, OUR REFERENCE HAS BEEN INVITED TO PAGES 421 TO 542 OF THE PAPER BOOK, WHICH IS THE COPY OF THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE F OR THE A.Y. 2006-07, AND IN PARTICULAR, ATTENTION WAS INVITED T O PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REFLECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONALLY IN COMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICATION FOR THE TPO TO CONSIDER THE SA ID CONCERN AS FUNCTIONALLY COMPARABLE IN THE INSTANT ASSESSMENT Y EAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE S AID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH T HE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN TH E PRESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED T O IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS IN TER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTI NCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVI CES SEGMENT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FR OM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE F UNCTIONAL PROFILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THA T IN THE 10 IMMEDIATELY PRECEDING YEAR. THEREFORE, HAVING REGA RD TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTL Y ASSERTED THAT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEES SEGMENT OF IT SERVICES. 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHES ON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISED SIMILAR AR GUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG). WE HAVE PERUSED THE RELEVANT PARA OF THE ORDER OF THE TPO I .E., 6.3.21, IN TERMS OF WHICH THE SAID CONCERN HAS BEEN INCLUDED A S A COMPARABLE CONCERN. THE ASSESSEE POINTED OUT THAT AS IN THE C ASE OF KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CA SE ALSO FOR A.Y. 2006-07 THE SAID CONCERN WAS FOUND FUNCTIONALLY INC OMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WAS NOT DISTURBED BY THE TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY, PLACED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESA ID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMA TION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO WE FIND THAT T HE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 21. THE ASSESSEE HAS ASSAILED THE INCLUSION OF ICSA INDIA LTD., APPEARING AT ITEM (2) IN THE TABULATION IN PARA 10 AS A COMPARABLE BY THE TPO. IN THIS CONTEXT, THE RELEVANT DISCUSSI ON BY THE TPO IS CONTAINED IN PARA 6.3.23 OF THE ORDER AND THE ANNUA L FINANCIAL STATEMENTS OF THE SAID CONCERN HAVE ALSO BEEN PLACE D IN THE PAPER BOOK AT PAGES 246 TO 327 OF THE PAPER BOOK. THE TP O NOTICED THAT IN THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASS ESSEE THE SAID CONCERN WAS EXCLUDED/REJECTED BY APPLYING THE QUANT ITATIVE FILTER OF RESEARCH AND DEVELOPMENT EXPENDITURE BEING IN EXCES S OF 3% OF SALES. THE TPO HAS NOT DIFFERED WITH THE ADOPTION OF THE QUANTITATIVE FILTER FOR R&D EXPENSES, SO HOWEVER, A CCORDING TO HIM THE RESEARCH AND DEVELOPMENT EXPENDITURE INCURRED B Y THE SAID CONCERN FOR THE F.Y. 2006-07 IS 6,71,86,184/- WHICH IS 2.02% OF THE TOTAL TURNOVER OF THE CONCERN AND THEREFORE, IT IS WITHIN THE THRESHOLD OF THE QUANTITATIVE FILTER OF 3% OF SALES ADOPTED BY THE 11 ASSESSEE, AND ACCORDINGLY HE INCLUDED THE SAID CONC ERN IN THE LIST OF COMPARABLES. THE TPO ALSO DISAGREED WITH THE CONTE NTION OF THE ASSESSEE RAISED BEFORE HIM THAT THE SAID CONCERN WA S FUNCTIONALLY DISSIMILAR. THE TPO HAS NOTICED BY REFERRING TO TH E ANNUAL REPORT FOR THE F.Y. 2006-07 THAT IT HAS TWO DISTINCT SEGME NTS, NAMELY (I) SOFTWARE SERVICES AND EMBEDDED SOLUTIONS; AND, (II) PRODUCTS AND PROJECTS RELATED TO POWER SECTOR. THE TPO CONSIDER ED THE SOFTWARE SERVICES SEGMENT AS A COMPARABLE TO ASSESSEES SEGM ENT OF IT-SERVICES AND THEREFORE HE INCLUDED THE SAID CONC ERN IN THE LIST OF COMPARABLES. 22. IN THIS CONTEXT, THE LD. COUNSEL HAS REFERRED TO THE ANNUAL FINANCIAL STATEMENTS OF THE CONCERN TO POINT OUT THAT THE TOTAL RESEARCH AND DEVELOPMENT EXPENDITURE OF RS.6, 71,86,184/- INCURRED BY THE SAID CONCERN IS IN RELATION TO THE EMBEDDED SOLUTIONS SEGMENT ONLY, AND IN THIS CONNECTION A RE FERENCE HAS BEEN MADE TO THE DIRECTORS REPORT, A COPY OF WHICH IS A PPEARING AT PAGE 268 OF THE PAPER BOOK. IT IS POINTED OUT THAT IN O RDER TO CALCULATE THE RATIO OF R&D EXPENSES TO TOTAL SALES, IT HAS TO BE CALCULATED WITH REFERENCE TO THE SALES IN SOFTWARE SERVICES AND EMB EDDED SOLUTIONS SEGMENT OF THE SAID CONCERN, BECAUSE THE R&D EXPENS ES PERTAIN ONLY TO THIS SEGMENT. IN THIS CONNECTION A REFEREN CE HAS BEEN MADE TO PAGE 297 OF THE PAPER BOOK WHICH GIVES THE BREAK -UP OF THE SALES IN DIFFERENT SEGMENTS AND AFTER CONSIDERING THE R&D EXPENSES OF RS.6,71,86,184/- VIS--VIS THE SALES IN SOFTWARE SE RVICES/EMBEDDED SERVICES SEGMENT, THE PERCENTAGE COMES TO 3.84%. THE LD. COUNSEL POINTED OUT THAT THE PERCENTAGE OF 2.04% OF R&D EXP ENDITURE COMPUTED BY THE TPO WAS AFTER CONSIDERING THE TOTAL TURNOVER OF THE SAID CONCERN INCLUDING THAT OF THE PRODUCT AND PROJ ECTS RELATED TO POWER SECTOR SEGMENT. IT IS SUBMITTED THAT THE AFO RESAID ACTION OF THE TPO IS WRONG, FIRSTLY THE R&D EXPENDITURE HAS B EEN INCURRED ONLY FOR THE SOFTWARE SERVICES/EMBEDDED SERVICES SE GMENT, AND SECONDLY, IT IS WRONGLY COMPARED WITH TOTAL TURNOVE R WHICH INCLUDED THE TURNOVER OF PRODUCTS AND PROJECTS RELATED TO PO WER SECTOR SEGMENT WHEREAS THE TPO HAS ONLY ADOPTED THE SOFTWA RE 12 SERVICES/EMBEDDED SERVICES SEGMENT FOR THE PURPOSES OF COMPARABILITY ANALYSIS. FACTUALLY SPEAKING, WE FIN D NO REASONS TO DISAGREE WITH THE PLEA SET UP BY THE ASSESSEE. EVI DENTLY, THE TPO HAS NOT DISPUTED THE ADOPTION OF QUANTITATIVE FILTE R OF 3% OF R&D EXPENSES. HOWEVER, THE TPO COMPUTED THE R&D EXPEND ITURE AT 2.02% OF THE TOTAL SALES WHICH IS OSTENSIBLY INCORR ECT IN AS MUCH AS THE EXPENDITURE IN QUESTION HAS BEEN INCURRED ONLY FOR THE SOFTWARE SERVICES/EMBEDDED SERVICES SEGMENT (WHICH HAS BEEN ADOPTED AS COMPARABLE SEGMENT) AND IT CANNOT BE COMPARED VIS- -VIS THE TOTAL TURNOVER WHICH INCLUDES THE PRODUCTS AND PROJECTS R ELATED TO POWER SECTOR SEGMENT, WHEN FACTUALLY NO R&D EXPENSES HAVE BEEN INCURRED FOR THE LATTER SEGMENT. THEREFORE, WITHOU T GOING INTO THE MERITS OF THE ASSESSEES OTHER PLEA THAT THE SAID C ONCERN IS FUNCTIONALLY DISSIMILAR, WE DO NOT FIND ANY JUSTIFI CATION FOR INCLUSION OF THE SAID CONCERN CONSIDERING THAT R&D EXPENSES A RE ABOVE THE FILTER OF 3% ADOPTED FOR THE PURPOSES OF THE COMPAR ABILITY ANALYSIS. THUS ON THIS ASPECT THE ASSESSEE SUCCEEDS. 23. THE NEXT POINT MADE BY THE ASSESSEE IS WITH REG ARD TO INCLUSION OF TRANSWORLD INFOTECH LTD., APPEARING AT ITEM (10) IN THE TABULATION IN PARA 10, AS A COMPARABLE CASE. THE T PO, AS PER HIS DISCUSSION IN PARA 6.3.22 OF THE ORDER, HAS INCLUDE D THE SAID CONCERN IN THE LIST OF COMPARABLES ON THE GROUND TH AT IT WAS FUNCTIONALLY SIMILAR TO THE ASSESSEES IT-SERVICES SEGMENT. THE SHORT POINT MADE BY THE ASSESSEE BEFORE US IS TO TH E EFFECT THAT THE SAID CONCERN WAS NOT INCLUDIBLE BECAUSE THE ASSESSE ES FINANCIAL PERIOD IS FROM 1.4.2006 TO 31.3.2007, WHEREAS THE R ELEVANT DATA OF THE SAID CONCERN WHICH HAS BEEN CONSIDERED IS FOR T HE PERIOD 1.7.2006 TO 30.06.2007. IT WAS THEREFORE POINTED O UT THAT SINCE THE DATA OF THE COMPARABLE CONCERN DOES NOT CORRESPOND TO THE FINANCIAL YEAR OF THE ASSESSEE, THE SAID CONCERN IS INCOMPARA BLE. FACTUALLY, THE AFORESAID POSITION IS NOT DISPUTED BY THE REVEN UE. IN FACT THE PROVISIONS OF RULE 10B(4) OF THE INCOME TAX RULES, 1963 (IN SHORT THE RULES) PROVIDE THAT THE DATA TO BE USED IN AN ALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL 13 TRANSACTION SHALL BE THE DATA RELATING TO THE FINAN CIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO . IN THE PRESENT CASE, THE DATA ADOPTED OF TRANSWORLD INFOTECH LTD. DOES NOT RELATE TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANS ACTION HAS BEEN CARRIED OUT BY THE ASSESSEE. ON THIS POINT THE SAI D CONCERN IS EXCLUDIBLE FROM THE LIST OF COMPARABLES AND WE ALSO FIND THAT THE TPO HAS ADOPTED SUCH AN APPROACH WHILE EXCLUDING PO WERSOFT GLOBAL SOLUTIONS LTD. FROM THE LIST OF COMPARABLES AS PER DISCUSSION IN PARA 6.3.7. OF THE IMPUGNED ORDER. 24. IN SO FAR AS THE IT SERVICES SEGMENT IS CONCERN ED, THERE IS NO OTHER SPECIFIC PLEA RAISED BY THE ASSESSEE AND THER EFORE, WE CONCLUDE ON THIS ASPECT BY HOLDING THAT THE ASSESSI NG OFFICER SHALL REWORK THE ALP OF THE INTERNATIONAL TRANSACTION REL ATING TO THE IT SERVICES SEGMENT IN TERMS OF OUR AFORESAID DISCUSSI ON. 25. NOW, WE TAKE FOR DISCUSSION THE ADJUSTMENTS MAD E IN IT- ENABLED SERVICES SEGMENT, WHEREIN THE TPO SELECTED THE FOLLOWING COMPARABLES:- SR.NO. COMPANY OP/OC% 1 ASK ME INFO HUBS LTD. (SHREEJAL INFO HUBS LTD.) 5.67 2 COSMIC GLOBAL LTD. (TULSYAN TECHNOLOGIES LTD.) 11.75 3 MAPLE E - SOLUTIONS LTD. 34.32 4 TRANSWORKS INFORMATION SERVICES LTD. (ADITYA BIRLA MANDIR) 12.45 5 TRITON CORPN LTD. 32.36 6 CMC LTD. (SEG) 31.92 7 NAT I ONAL SECURITIES DEPOSITORY LTD. (SEG) 29.17 8 APEX ADVANCED TECHNOLOGY PVT. LTD. 39.73 9 VISESH INFOTECHNICS LTD. (SEG) 77.31 10 VISHAL INFORMATION TECHNOLOGIES 51.19 11 INFORMED TECHNOLOGIES INDIA LTD. 34.32 ARITHMETIC MEAN 32.74 26. IN THE IT-ENABLED SERVICES SEGMENT, AN ADJUSTME NT OF RS.97,87,850/- HAS BEEN MADE BY ADOPTING THE AFORES AID COMPARABLES. THE RIVAL STANDS ON THIS ASPECT ARE A S UNDER. 14 27. FIRSTLY, AS PER THE ASSESSEE, ENTITY AT ITEM (6 ) OF THE ABOVE TABULATION, M/S.CMC LTD (SEG.) HAS BEEN WRONGLY INC LUDED IN THE LIST OF COMPARABLES. IT HAS BEEN EXPLAINED THAT TH E RPTS IN RELATION TO SALES / EXPENSES ARE IN EXCESS OF 25% OF THE TOT AL TRANSACTIONS, AND FOR THE REASONS ADVANCED REGARDING THE EXCLUSIO N OF FCS SOFTWARE SOLUTIONS LTD (IN THE IT-SERVICES SEGMENT DEALT WITH IN EARLIER PARAGRAPHS), THE SAID CONCERN IS NOT INCLUD IBLE. IN PARA 6.9.12 OF THE ORDER OF THE TPO, THE RATIO OF RPTS T O TOTAL TRANSACTIONS HAS BEEN COMPUTED AT 24.05%, AND AS IT WAS BELOW THE THRESHOLD OF 25% ADOPTED BY THE TPO, THE SAME HAS B EEN INCLUDED IN THE LIST OF COMPARABLES. THE ASSESSEE HAS REFER RED TO PAGE 892 OF PAPER BOOK, WHEREIN THE RELEVANT DETAILS HAVE BEEN PLACED. IN TERMS OF THE SAME, THE RPT SALES AND RPT EXPENSES A RE RS.501.43 CRORES AND RS.87.78 CRORES RESPECTIVELY AS AGAINST TOTAL SALES AND TOTAL COSTS OF RS.989.88 CRORES AND RS.853.19 CRORE S RESPECTIVELY. IN THIS CONTEXT, THE RATIO OF RPTS TO TOTAL TRANSAC TIONS HAS BEEN CALCULATED AT 31.97% I.E. (RS.87.78 CRORES PLUS RS. 501.43 CRORES) DIVIDED BY (RS.989.88 CRORES PLUS RS.853.19 CRORES) . AS PER THE AFORESAID CALCULATION, OSTENSIBLY THE SAID CONCERN S RPTS EXCEED THE THRESHOLD FILTER OF 25% AND THE SAME IS THUS EXCLUD IBLE. HOWEVER, WE FIND THAT THE TPO IN PARA 6.9.12 OF THE ORDER HA S COMPUTED THE RATIO OF RPTS TO TOTAL TRANSACTIONS AT 24.05%, BUT THE RELEVANT DETAILS OF CALCULATION ARE NOT EMERGING FROM THE OR DERS OF TPO OR EVEN THE DRP, BEFORE WHOM A SPECIFIC OBJECTION WAS RAISED BY THE ASSESSEE. IN THIS BACKGROUND, WE REMAND THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER, WHO SHALL RECONSIDER THE COMPUTATION OF THE RATIO OF RPTS TO THE TOTAL TRANSACTIONS, AS CANVASSED BY THE ASSESSEE AND DECIDE ACCORDINGLY. 28. THE NEXT POINT RAISED BY THE ASSESSEE IS AGAINS T THE INCLUSION OF APEX ADVANCED TECHNOLOGY PVT. LTD., APPEARING AT ITEM (8) IN THE TABULATION AT PARA 25 ABOVE. IN THIS REGARD, THE P LEA RAISED BY THE ASSESSEE IS THAT THE SAID CONCERN IS FUNCTIONALLY D IFFERENT IN AS MUCH AS IT IS ENGAGED IN DATABASE CREATION BUSINESS AND THE INFORMATION IN PUBLIC DOMAIN DOES NOT THROW ANY LIG HT ON THE EXACT 15 NATURE OF SERVICES RENDERED BY THE SAID CONCERN. I N THE ABSENCE OF SUFFICIENT DATA FOR CONDUCTING THE COMPARABILITY AN ALYSES, THE PLEA SET UP BY THE ASSESSEE IS THAT THE SAID CONCERN BE EXCLUDED FROM THE LIST OF COMPARABLES. THE LD. COUNSEL FOR THE ASSE SSEE HAD REFERRED TO THE WRITTEN SUBMISSIONS MADE BEFORE THE LOWER AU THORITIES, WHICH ARE PLACED AT PAGES 420.28 AND 823 OF THE PAPER BOO K. THE TPO HAS DISCUSSED THE ISSUE IN PARA 6.9.5. OF HIS ORDER . 29. AFTER HAVING CONSIDERED THE RIVAL SUBMISSIONS A ND THE MATERIAL REFERRED TO BY THE ASSESSEE, IN OUR CONSIDERED OPIN ION, NO JUSTIFIABLE GROUNDS HAVE BEEN RAISED BY THE ASSESSEE TO CLAIM E XCLUSION OF THE SAID CONCERN. WHILE THE ASSESSEE MAY BE CORRECT IN ASSERTING THAT THE SAID CONCERN IS ENGAGED IN DATABASE CREATION SE RVICES AND THAT THE ASSESSEE DOES NOT ENGAGE IN CREATION OF ANY DAT ABASE FOR ITS CLIENTS. HOWEVER, IT IS TO BE NOTICED THAT THE FUN CTIONAL ASPECTS ARE SIMILAR IN AS MUCH AS IN BOTH CASES THE BPO FACILIT Y IS USED AND IN OUR VIEW THE TPO WAS JUSTIFIED IN OBSERVING THAT TH E IT-ENABLED SERVICES PERFORMED BY THE ASSESSEE CAN BE COMPARED WITH THE FUNCTIONS OF THE SAID CONCERN. IN THE ABSENCE OF A NY OTHER OBJECTION RAISED BY THE ASSESSEE WE DEEM IT FIT AND PROPER TO HOLD THAT THE TPO WAS JUSTIFIED IN INCLUDING THE SAID CONCERN IN THE LIST OF COMPARABLES. 30. THE NEXT POINT RAISED BY THE ASSESSEE IS AGAINS T THE INCLUSION OF VISHAL INFORMATION TECHNOLOGIES LTD., APPEARING AT ITEM (10) IN THE TABULATION IN PARA 25 AS A COMPARABLE CASE. TH E TPO HAS DISCUSSED THE ISSUE IN PARA 6.9.6. OF THE ORDER. A S PER THE TPO, THE SAID CONCERN IS FUNCTIONALLY COMPARABLE TO THE IT-E NABLED SERVICES SEGMENT OF THE ASSESSEE AND FOR THAT REASON, THE SA ID CONCERN HAS BEEN INCLUDED AS A COMPARABLE FOR THE PURPOSES OF C OMPARABILITY ANALYSIS. IN THIS CONNECTION, THE PLEA SET UP BY T HE ASSESSEE IS THAT THE SAID CONCERN IS ENGAGED IN NOT ONLY IT-ENABLED SERVICES, BUT ALSO IN PROVIDING QUALITY PRODUCTS AND IN THE CREAT ION OF ANIMATED FILMS AND BOOKS. IT HAS ALSO BEEN ASCERTAINED BY R EFERRING TO THE ANNUAL REPORT OF THE SAID CONCERN THAT IT IS ENGAGE D IN PROVIDING AGENCY SERVICES BY WAY OF OUTSOURCING THE SERVICES TO THIRD PARTY 16 VENDORS AND ACTING AS AN INTERMEDIARY BETWEEN THE F INAL CUSTOMER AND THE VENDOR. THE ASSESSEE FURNISHED DETAILED SU BMISSIONS IN THIS REGARD BEFORE THE LOWER AUTHORITIES, COPIES OF WHICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 420.8 TO 420.31. BY REFERRING TO THE WRITTEN SUBMISSIONS, IT IS ALSO SOUGHT TO BE PO INTED OUT THAT THE INTERMEDIARY FUNCTIONS PERFORMED BY THE SAID CONCER N CAN BE COMPARED TO THAT OF A DISTRIBUTOR WHICH TAKES TITLE TO SERVICE/PRODUCT FOR RESALE TO THE CUSTOMERS. THE A FORESAID ASSERTION IS SOUGHT TO BE SUBSTANTIATED BY THE DETA ILS OF PAYMENTS MADE BY THE SAID CONCERN FOR DATA ENTRY AND VENDOR PAYMENTS, PERSONNEL COSTS AND SALES. IT IS, THEREFORE, CONTE NDED THAT THE SAID CONCERN IS FUNCTIONALLY DISSIMILAR TO THAT OF THE I T-ENABLED SERVICES SEGMENT OF THE ASSESSEE. IT HAS ALSO BEEN ARGUED T HAT THE SAID CONCERN HAS EARNED SUPERNORMAL PROFITS AS HIGH AS 5 9.19% AND THEREFORE, THE SAME IS NOT INCLUDIBLE IN THE LIST O F COMPARABLES SO AS TO AVOID SKEWING OF THE COMPARABILITY ANALYSIS. ON THE OTHER HAND, THE STAND OF THE REVENUE AS BROUGHT OUT BY THE TPO IN PARA 6.9.6. OF THE ORDER IS TO THE EFFECT THAT THE SAID CONCERN BEING CATEGORIZED AS AN IT-ENABLED SERVICES CONCERN, THE SAME IS LIAB LE TO BE INCLUDED. 31. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS ON THIS ASPECT. AT THE OUTSET, WE MAY REFER TO PAGE 810 OF THE PAPER BOOK, WHEREIN THE NOTES TO ACCOUNTS FOR THE YEAR ENDED 31 .3.2007 OF THE SAID CONCERN HAVE BEEN PLACED. AS PER THE AVAILABL E INFORMATION, THE SAID CONCERN HAS RELATED PARTY TRANSACTIONS AS REPORTED BY THE CONCERN AT PARA 7 OF THE SAID NOTES AT 86.92%, WHIC H BREACHES THE RPT FILTER. FURTHERMORE, THE FUNCTIONAL PROFILE O F THE SAID CONCERN BROUGHT OUT BY THE ASSESSEE ALSO REVEALS DIFFERENTI ATION IN THE ACTIVITY PROFILE. THE TPO, IN OUR VIEW, HAS NOT A PPRECIATED THE QUALITATIVE DIFFERENCE IN THE FUNCTIONS PERFORMED B Y THE SAID CONCERN AS SOUGHT OUT TO BE BROUGHT OUT BY THE ASSE SSEE. CONSIDERING THE AFORESAID, WE THEREFORE, FIND THAT THE ASSESSEE WAS JUSTIFIED IN ASCERTAINING THAT THE SAID CONCERN BE EXCLUDED FROM THE 17 LIST OF COMPARABLES FOR THE REASONS CANVASSED. THU S, ON THIS ASPECT ASSESSEE SUCCEEDS. 32. THE NEXT ISSUE RAISED BY THE ASSESSEE IS WITH R EGARD TO THE INCLUSION OF M/S.VISHESH INFOTECHNICS LTD. (SEGMENT ) IN THE LIST OF COMPARABLES. THE TPO HAS MADE THE RELEVANT DISCUSS ION IN PARA 6.9.7. OF THE ORDER AND AS PER THE SAID DISCUSSION, THE SAID CONCERN IS ENGAGED IN THREE DIFFERENT ACTIVITIES, NAMELY IT -SOLUTIONS AND PRODUCTS SUPPORT, ENTERPRISE SOFTWARE AND IT-ENABLE D SERVICES. THE IT-ENABLED SERVICES SEGMENT OF THE SAID CONCERN HAS BEEN CONSIDERED AS A COMPARABLE TO IT SERVICES SEGMENT O F THE ASSESSEE. 33. THE PLEA OF THE ASSESSEE BEFORE THE LOWER AUTHO RITIES WAS THAT THE SAID CONCERN IS ENGAGED IN RENDERING HIGH END K NOWLEDGE PROCESS OUTSOURCING (KPO) AND LEGAL PROCESS OUTSOUR CING (LPO) SERVICES AND THE SAME CANNOT BE COMPARED WITH THE R OUTINE BACK OFFICE SUPPORT SERVICES RENDERED BY THE IT-ENABLED SERVICES SEGMENT OF THE ASSESSEE. THE SECOND OBJECTION TAKEN BY THE ASSESSEE WAS THAT THE SAID CONCERN HAS EARNED EXTRAORDINARILY HI GH PROFIT MARGIN IN THIS YEAR OF 77.31% AS AGAINST MARGINS OF 49.64% AND 53.66% FOR THE PRECEDING AND SUCCEEDING YEARS RESPECTIVELY. T HE TPO HAS JUSTIFIED THE INCLUSION OF THE SAID CONCERN IN THE LIST OF COMPARABLES PRIMARILY ON THE GROUND THAT THE ACTIVITIES CARRIED OUT BY THE SAID CONCERN ARE IN THE FIELD OF IT-ENABLED SERVICES, WH ICH IS COMPARABLE TO THE ASSESSEE. 34. IN OUR CONSIDERED OPINION, THE ARGUMENTS SET UP BY THE ASSESSEE HAVE NOT BEEN APPRECIATED BY THE LOWER AUT HORITIES IN ITS PROPER PERSPECTIVE. THE ASSESSEE HAD POINTED OUT T HAT ITS IT-ENABLED SERVICES SEGMENT INVOLVES PROVIDING OF B ACK OFFICE SERVICES PERTAINING TO THE SUPPORT TO BE PROVIDED T O THE CUSTOMERS OF PTC USA. IT WAS EXPLAINED BY THE ASSESSEE THAT SUCH QUERIES ARE RECEIVED THROUGH TELEPHONES, E-MAILS OR THE INTERNE T DEPENDING ON THE CHANNEL PREFERRED BY THE CUSTOMER AND ARE ATTEN DED TO BY THE ASSESSEE IN ACCORDANCE WITH THE INSTRUCTIONS PROVID ED FROM TIME TO TIME BY PTC USA. ON THE CONTRARY, THE ANNUAL REPOR T OF THE VISHESH INFOTECH LTD., PLACED AT PAGE 752 796 OF THE PAPER BOOK, 18 IT IS REVEALED THAT THE IT-ENABLED SERVICES SEGMENT OF THE SAID CONCERN IS ENGAGED IN PROVIDING HIGH END KPO AND LP O SERVICES. OSTENSIBLY, THE ASSESSEE WAS JUSTIFIED IN ASSERTING THAT THE QUALITY AND LEVEL OF MANPOWER/HUMAN RESOURCE INVOLVED IN PR OVIDING OF HIGH END KPO AND LPO SERVICES IS QUALITATIVELY DIFF ERENT THAN THE ROUTINE BACK OFFICE SERVICES PROVIDED BY THE ASSESS EES IT-ENABLED SERVICES SEGMENT AND, THEREFORE, THE REVENUE/MARGIN S OF THE TWO CONCERNS ARE NOT COMPARABLE. JUSTIFIABLY, THE SAI D CONCERN IS SHOWING A PROFIT MARGIN OF 77.31% IN THIS YEAR AND COMPARING IT WITH 49.64% IN THE PRECEDING YEAR AND 53.66% OF THE SUCCEEDING YEAR, IT IS OBVIOUS THAT DUE TO THE QUALITATIVE DIF FERENCE IN RENDERING OF SERVICES, THOUGH IN THE IT-ENABLED SERVICES SEGM ENT, THE TWO CONCERNS CANNOT BE MEANINGFULLY COMPARED. THEREFOR E, IN OUR VIEW, THE SAID CONCERN WAS LIABLE TO BE EXCLUDED FOR THE PURPOSES OF CARRYING OUT THE COMPARABILITY ANALYSIS. 35. THE LAST ISSUE RAISED BY THE ASSESSEE IS WITH R EGARD TO THE INCLUSION OF M/S.INFORMED TECHNOLOGIES INDIA LTD., APPEARING AT ITEM (11) IN THE TABULATION, IN PARA 25 ABOVE. ON THIS ASPECT ALSO, THE ASSESSEE HAS RAISED TWO-FOLD GRIEVANCES, NAMELY THAT THE SAID CONCERN WAS RENDERING HIGH END KPO SERVICES APART F ROM RENDERING THE ROUTINE IT-ENABLED SERVICES AND SECONDLY, THERE WAS INCONSISTENCY IN OPERATING MARGINS IN AS MUCH AS IN THE EARLIER YEARS, IT HAD INCURRED LOSSES OF 66.34%, 76,24%, 44 .44% ON ONE HAND AND EARNED A MEAGER PROFIT OF 5.34% IN THE INS TANT FINANCIAL YEAR. THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE WRITTEN SUBMISSIONS MADE TO THE LOWER AUTHORITIES ON THE AB OVE LINES, COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGES 420.3 3 TO 420.35 AS ALSO THE ANNUAL REPORT OF THE SAID CONCERN PLACED A T PAGE 844 TO 883. 36. THE TPO HAS DISCUSSED THE ISSUE IN PARA 6.2.8. OF THE ORDER AND HAS JUSTIFIED THE INCLUSION PRIMARILY ON THE GR OUND THAT THE SAID CONCERN WAS IN PRINCIPLE, ENGAGED IN BUSINESS PROCESSING OUTSOURCING WHICH IS SIMILAR TO THAT OF THE ASSESSE E. AS PER THE TPO, THE SAID CONCERN WAS FUNCTIONALLY COMPARABLE A ND THAT THE 19 MARGINS PRIMARILY COMPRISED OF THE INCOME FROM IT-E NABLED SERVICES SEGMENT AND NOT FROM RENTAL/BUSINESS CENTR E CHARGES, AS MADE OUT BY THE ASSESSEE. 37. WE HAD CONSIDERED THE RIVAL STANDS AND FIND THA T THE STAND OF THE TPO IS LIABLE TO BE AFFIRMED. THE ASSESSEE, IN OUR VIEW, HAS NOT BEEN ABLE TO SUBSTANTIATE THE PROPOSITIONS CANVASSE D TO SUPPORT THE EXCLUSION OF THE SAID CONCERN FROM THE LIST OF COMP ARABLES. THE ASSESSEE HAS NOT JUSTIFIED AS TO IN WHAT MANNER THE PROFITS ARE INFLUENCED BY THE INCLUSION OF RENTAL/BUSINESS CENT RE CHARGES. THE TPO HAS DEALT WITH THE PLEA SET UP BY THE ASSESSEE WHICH IS NOT FOUND TO BE LACKING AND, THEREFORE, WE ARE INCLINED TO UPHELD THE ACTION OF THE TPO IN INCLUDING THE SET CONCERN IN T HE SAID OF COMPARABLES FOR CARRYING OUT THE COMPARABLE ANALYSI S OF THE IT-ENABLED SERVICES SEGMENT. 38. ANOTHER ASPECT RAISED BY THE ASSESSEE IS WITH R EGARD TO M/S.GALAXY COMMERCIAL LTD., WHICH HAS NOT BEEN CONS IDERED AS COMPARABLE BY THE TPO WITH REGARD TO THE IT-ENABLED SERVICES SEGMENT OF THE ASSESSEE. THE PLEA OF THE ASSESSEE IS THAT THE SAID CONCERN IS PRINCIPALLY ENGAGED IN THE PROVISION OF BACK OFFICE PROCESSING SERVICES AND IS, THEREFORE, LIABLE TO BE INCLUDED IN THE LIST OF COMPARABLES. THE TPO IN PARA 6.9.2. OF THE ORDE R, HAS NOT ACCEPTED THE PLEA OF THE ASSESSEE ON THE GROUND THA T THE SAID CONCERN IS NOT ONLY ENGAGED IN BPO SERVICES, BUT AL SO DERIVES INCOME FROM RENTAL AND TRANSPORTATION AND IN THE AB SENCE OF THE AVAILABILITY OF SEGMENTAL RESULTS, IT COULD NOT BE CONSIDERED AS A COMPARABLE CASE. 39. ON THIS ASPECT, THE PLEA OF THE ASSESSEE, BEFOR E THE LOWER AUTHORITIES AS WELL AS BEFORE US, IS THAT THE PRINC IPAL BUSINESS OF THE SAID CONCERN IS PROVIDING OF BACK OFFICE PROCESSING SERVICES AND THE TRANSPORTATION BUSINESS IS MERELY 7% OF THE INCOME. IT IS ALSO SUBMITTED THAT THE RENTAL INCOME EARNED BY THE SAID CONCERN HAS NOT BEEN CONSIDERED FOR THE PURPOSES OF DETERMINING THE MARGIN OF THE SAID CONCERN AS IS EVIDENT FROM THE RELEVANT EX TRACT OF THE ANNUAL REPORT OF THE SAID CONCERN PLACED AT PAGES 1 90 TO 191 OF THE 20 PAPER BOOK. A REFERENCE HAS ALSO BEEN MADE TO THE WRITTEN SUBMISSIONS MADE TO THE LOWER AUTHORITIES, COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK AT PAGE 420.25 TO 420.26. 40. AT THE TIME OF HEARING THE LD. COUNSEL HAS REFE RRED TO THE EXTRACT OF THE PROFIT & LOSS ACCOUNT OF THE SAID CO NCERN, WHICH IS AT PAGE 420.26 OF THE PAPER BOOK TO POINT OUT THAT THE ANALYSIS WOULD SHOW THAT THE SAID CONCERN IS PREDOMINANTLY ENGAGED IN PROVIDING BPO SERVICES. 41. WE HAVE CONSIDERED THE RIVAL STANDS AND FIND TH AT THE PLEA OF THE ASSESSEE IS WELL FOUNDED IN AS MUCH AS OUT OF T HE TOTAL REVENUE OF RS.9.84 CRORES AS MUCH AS RS.8.63 CRORES IS EARN ED FROM BPO OPERATIONS, WHICH IS 87% OF THE TOTAL REVENUE. THE INCOME FROM TRANSPORTATION AND RENTAL IS QUITE INSIGNIFICANT CO MPARED TO THE TOTAL REVENUES EARNED, AND THEREFORE, IN OUR VIEW, THE FUNCTIONAL SIMILARITY OF THE SAID CONCERN IS LIABLE TO BE APPR ECIATED AND THE SAME IS INCLUDIBLE IN THE LIST OF COMPARABLES. THE TPO, IN OUR VIEW, WAS NOT JUSTIFIED IN EXCLUDING THE SAID CONCERN FRO M THE LIST OF COMPARABLES. 42. THE ASSESSEE HAS NOT RAISED ANY OTHER SPECIFIC PLEA WITH REGARD TO THE ADJUSTMENT MADE IN THE IT-ENABLED SERVICES S EGMENT AND, THEREFORE, WE SET ASIDE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL RE-WORK THE ALP OF THE INTERNATIO NAL TRANSACTIONS RELATING TO THE IT-ENABLED SERVICES SEGMENT IN TERM S OF OUR AFORESAID DISCUSSION. 43. BEFORE CONCLUDING, WE MAY ALSO REFER TO THE PLE A RAISED BY THE ASSESSEE THAT NO ADJUSTMENT WAS MERITED IN THE IT-E NABLED SERVICES SEGMENT EVEN IF THERE WAS A DIFFERENCE IN PERCEIVIN G THE ALP OF THE INTERNATIONAL TRANSACTIONS, ON THE GROUND THAT THE INCOME OF THE ASSESSEE WAS EXEMPT U/S.10A OF THE ACT, AND THEREFO RE, THERE WAS NO MOTIVE ON THE PART OF THE ASSESSEE IN TAKING TAX ADVANTAGE BY REPORTING A LOWER CONSIDERATION. IN OUR CONSIDERED OPINION, THE PURPORT OF PROVISIONS OF CHAPTER X PROVIDING FOR TH E TRANSFER PRICING ADJUSTMENTS IS NOT JEOPARDIZED BY PRESENCE OR ABSEN CE OF ANY 21 MOTIVE OF DERIVING TAX ADVANTAGE, VIS--VIS THE EXE MPTION PROVIDED U/S.10A OF THE ACT. THEREFORE, THE AFORESAID PLEA OF THE ASSESSEE IS LIABLE TO BE REJECTED. 44. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 30 TH DAY OF APRIL, 2013. SD/- SD/- ( R.S.PADVEKAR ) ( G.S.PANNU ) JUDICIAL MEMBER ACCOUNTANT MEMBER GSPS PUNE, DATED THE 30 TH APRIL, 2013 COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE ACIT, CIRCLE-4, PUNE. 3. THE DRP, PUNE. 4. THE CIT CONCERNED. 5. THE DR B BENCH, PUNE. 6. GUARD FILE. BY ORDER //TRUE COPY// PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE.