Logica Pvt Ltd, Bangalore V. Deputy Commissioner of Income tax, Bangalore

ITA 1621/BANG/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8576 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 10-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 19-12-2014
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHOTRA II
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Related party transaction; Transfer pricing; International transaction; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI NARENDRA KUMAR CHOUDHURY, JUDICIAL MEMBER IT(TP)A NO.1621/BANG/2014 ASSESSMENT YEAR : 2009-10 M/S. LOGICA PRIVATE LIMITED ( NOW MERGED WITH CGI INFORMATION SYSTEMS AND MANAGEMENT CONSULTANTS PRIVATE LIMITED ) E-CITY, TOWER 2, 95/1 & 95/2, ELECTRONIC CITY PHASE 1 (WEST), BANGALORE PAN: AAACL3330M VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(5), BANGALORE APPELLANT RESPONDENT IT(TP)A NO.1664/BANG/2014 ASSESSMENT YEAR : 2009- 10 ASST. COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(1), BANGALORE VS. M/S. LOGICA PRIVATE LIMITED ( NOW MERGED WITH CGI INFORMATION SYSTEMS AND MANAGEMENT CONSULTATION PRIVATE LIMITED ) E-CITY, TOWER 2, 95/1 & 95/2, ELECTRONIC CITY PHASE 1 (WEST), BANGALORE PAN: AAACL3330M APPELLANT RESPONDENT ASSESSEE BY : SHRI T. SURYA NARAYANA, ADVOCATE REVENUE BY : MS. NEERA MALHOTRA, CIT-DR II DATE OF HEARING : 10-03-2016 DATE OF PRONOUNCEMENT : 18-03-2016 O R D E R PER B. RAMAKOTAIAH, ACCOUNTANT MEMBER THESE CROSS-APPEALS ARE BY ASSESSEE AND REVENUE O N THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-IV, BA NGALORE DATED 17-10-2014 ON THE ISSUE OF TRANSFER PRICING AND OTH ER CORPORATE ISSUES. IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 2 OF 21 2. BRIEFLY STATED, ASSESSEE HEREIN IS A CAPTIVE SER VICE PROVIDER IN CONTRACT SOFTWARE DEVELOPMENT SERVICES (APPLICATION MANAGEMENT) AND PROVISION OF ITES INFRASTRUCTURE MANAGEMENT SERVICE S TO LOGICA GROUP COMPANIES. ASSESSEE HAS TWO AREAS OF OPERATION AND ITS INTERNATIONAL TRANSACTIONS ARE AS UNDER: PARTICULARS AMOUNT IN RS. OUTCOME OF TP ORDER PROVISION OF SWD 323,49,75,252 ADJUSTMENT OF RS. 24,63,25,395/- PROVISION OF ITES 63,03,93,353 ADJUSTMENT OF RS. 4,03,38,142/- REIMBURSEMENT OF EXPENSES 7,70,20,731 ACCEPTED TO BE AT ARMS LENGTH MANAGEMENT FEE WRITTEN BACK 5,50,16,833 ACCEPTED TO BE AT ARMS LENGTH INTEREST ON UNSECURED LOAN 16,78,381 ACCEPTED TO BE AT ARMS LENGTH 3. IN THE TP STUDY BY THE COMPANY IN SWD DIVISION I T REPORTED 15.27% OF OP/OC AND REPORTED INCOME OF RS. 323.49 CRORES W AS CONSIDERED ARMS LENGTH BY SELECTING TNMM AS MOST APPROPRIATE METHOD , 17 COMPARABLE COMPANIES WHOSE OP/OC WAS ARRIVED AT 13%. 4. IN THE STUDY FOR ITES DIVISION, ASSESSEE REPORTE D 17.69% OF OP/OC AND REPORTED INCOME OF RS. 63.03 CRORES WAS CONSIDE RED AS ARMS LENGTH IN THE TNMM METHOD BY SELECTING 14 COMPARABLES WITH A MEAN OF 11%. 5. TPO REJECTED THE STUDY AS ASSESSEE HAS USED MULT IPLY YEAR DATA AND FOR OTHER REASONS. HE ADOPTED A DIFFERENT FILT ERS, SELECTED DATABASES AND FINALLY SELECTED 11 COMPANIES WITH AN ARITHMETI C MEAN OF 24.05% AFTER WORKING CAPITAL ADJUSTMENT AND PROPOSED AN ADJUSTM ENT OF RS. IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 3 OF 21 24,63,25,398/- IN SWD. LIKEWISE, IN ITES DIVISION, THE TPO SELECTED 8 COMPARABLES WITH AN ARITHMETIC MEAN OF 25.22% AFTER WORKING CAPITAL ADJUSTMENT AND PROPOSED RS. 4,03,38,142/- AS AN ADJ USTMENT. LD.AO HAS PASSED THE ORDER MAKING THE ABOVE TWO ADDITIONS UND ER TP PROVISIONS. IN ADDITION, THE AO ALSO DISALLOWED SOFTWARE LICENSE F EE PAID AS CAPITAL EXPENDITURE TO AN EXTENT OF RS. 3,02,80,510/-. WHI LE COMPUTING TAX LIABILITY, AO DID NOT GIVE CREDIT OF TDS TO AN EXTENT OF RS. 2 .61 CRORES. HE ALSO RECOMPUTED DEDUCTION U/S. 10A BY REDUCING SOME EXPE NDITURE FROM EXPORT TURNOVER. 6. BEING AGGRIEVED BY THE ORDER OF AO, ASSESSEE PRE FERRED AN APPEAL TO THE LD.CIT(A) AND RAISED VARIOUS GROUNDS ON USE OF DATA, FILTERS, FUNCTIONALITY ETC. LD.CIT(A) ACCEPTED TURNOVER FIL TER AND EXCLUDED INFOSYS IN SOFT WARE DIVISION WHERE AS ON DIFFERENT TURNOVER F ILTER OF (1 TO 200 CRORES) EXCLUDED TWO COMPANIES (1) ADITYA BIRLA MINACS WORL DWIDE LTD., AND (2) INFOSYS BPO LTD. HE REJECTED THE CONTENTIONS ON REDUCING THE RPT FI LTERS TO 15% AND ON COMPARABILITY OF SOME COMPANIES IN TW O DIVISIONS. HE ALSO REJECTED THE CONTENTIONS ON INCLUSION OF TWO COMPAN IES (THINKSOFT GLOBAL SERVICES PRIVATE LIMITED AND FCS SOFTWARE SOLUTIONS PRIVATE LIMITED). HE ALSO REJECTED THE CONTENTIONS ON SOFTWARE LICENSE F EE BEING REVENUE IN NATURE. CIT(A) DIRECTED THE AO TO EXCLUDE THE SAME FROM TOTAL TURNOVER U/S. 10A. IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 4 OF 21 7. BOTH REVENUE AND ASSESSEE ARE AGGRIEVED ON THE O RDER OF LD.CIT(A). REVENUES APPEAL IN IT(TP)A NO. 1664/BANG/2014 : 8. IN THE REVENUE APPEAL, THE GROUNDS 2 & 3 ARE ON EXCLUSION OF CERTAIN EXPENSES FOR BOTH EXPORT TURNOVER AND TOTAL TURNOVER. 8.1. THIS ISSUE IS ALREADY DECIDED IN FAVOUR OF ASS ESSEE IN VARIOUS DECISIONS. AO HAS DISALLOWED CERTAIN EXPENDITURE PERTAINING TO DELIVERY OF GOODS OUTSIDE INDIA AND RE-WORKED OUT THE EXPORT TU RNOVER WHILE CALCULATING DEDUCTION U/S. 10A. HOWEVER, HE HAS NOT REDUCED TH E SAME FROM THE TOTAL TURNOVER. CIT(A) DIRECTED THE AO TO TREAT THE SAME FOR THE PURPOSE OF TOTAL TURNOVER ALSO AND TO EXCLUDE THEM, FOLLOWING THE DE CISION OF ITAT IN THE CASE OF TATA ELXSI. REVENUE IS AGGRIEVED ON THAT. IT IS ADMITTED THAT ON A PARITY OF COMPARISON, WHATEVER IS REDUCED FROM THE EXPORT TURNOVER HAS TO BE REDUCED FROM THE TOTAL TURNOVER AND THIS PRINCIP LE WAS ACCEPTED BY THE JURISDICTIONAL KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD.,342 ITR 98(KAR) WHICH THE LD CIT(A) HAS FOLLO WED. WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ABOVE. CIT(A) DIR ECTION THAT WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER SHOULD ALSO BE EX CLUDED FROM THE TOTAL TURNOVER IS UPHELD. REVENUES GROUNDS ON THIS ISSU E ARE ACCORDINGLY DISMISSED. IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 5 OF 21 9. GROUND NO. 4 AND GROUND NO. 5 IN REVENUES APPEA L ARE ON THE ISSUE OF ADOPTING TURNOVER FILTER BY CIT(A). 9.1. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE SE E NO REASON TO INTERFERE FROM THE FINDINGS OF LD.CIT(A). THE CIT(A) RIGHTLY HELD THAT THE TURNOVER OF COMPARABLE COMPANIES OUGHT TO BE WITHIN A RANGE OF RS. 1 CRORE TO RS. 2000 CRORE IN RELATION TO THE SWD SEGMENT OF ASSESS EE AS ITS TURNOVER FOR THE SWD SEGMENT FOR FY. 2008-09 WAS RS. 323 CRORES, AND THAT, IN RELATION TO ITS ITES SEGMENT, AS ITS TURNOVER WAS R S. 63 CRORES, ONLY THOSE COMPANIES WHOSE TURNOVERS FELL WITHIN A RANGE OF RS . 1 CRORE TO RS. 200 CRORES OUGHT TO BE RETAINED, BY FOLLOWING THIS TRIB UNALS DECISION IN THE CASE OF GENISYS INTEGRATING SYSTEMS INDIA (P) LTD., VS. DCIT [15 ITR (TRIB) 475], APART FROM OTHER DECISION IN KODIAK NETWORKS VS. ACIT [15 ITR (TRIB) 610] AND TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD ., [23 ITR (TRIB) 464], WHICH ARE ALL BINDING ON THE CIT(A). THERE IS NO E RROR IN THE ORDER OF THE CIT(A). ACCORDINGLY, THE ABOVE GROUNDS RAISED BY T HE REVENUE, WHICH IN ANY EVENT IS MISCONCEIVED INSOFAR AS ASSESSEES SWD SEGMENT IS CONCERNED, ARE LIABLE TO BE REJECTED. EVEN OTHERWI SE, AS REGARD ASSESSEES SWD SEGMENT, INFOSYS LTD., HAS BEEN HELD TO BE FUNC TIONALLY DISSIMILAR TO A SOFTWARE DEVELOPMENT SERVICE PROVIDER BY THIS HONB LE TRIBUNAL IN CISCO SYSTEMS (INDIA) PRIVATE LIMITED VS. DCIT [IT(TP)A N O. 271/BANG/2014] THEREFORE THE SAME GETS EXCLUDED ON FUNCTIONALITY A SWELL. IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 6 OF 21 9.2. FURTHER, IN RELATION TO ASSESSEES ITES SEGMEN T, INFOSYS BPO LTD., HAS BEEN HELD TO BE FUNCTIONALLY DISSIMILAR BY THIS TRIBUNAL IN MINTECK (INDIA) LTD., VS. DCIT [IT(TP)A NO. 70/BANG/2014]. ALSO, ADITYA BIRLA MINACS LTDS RELATED PARTY TRANSACTIONS FOR FY. 200 8-09 CONSTITUTED 15.68% OF ITS TOTAL REVENUES FOR THAT YEAR AND, ACCORDINGL Y, IN THE LIGHT OF THIS TRIBUNALS DECISION IN 24/7 CUSTOMER.COM VS. DCIT [ ITA NO. 227/BANG/2010], IT OUGHT TO STAND EXCLUDED FROM THE FINAL LIST OF COMPARABLES. IN VIEW OF THE ABOVE, WE REJECT THE R EVENUES GROUNDS. ASSESSEES APPEAL IN IT(TP)A NO. 1621/BANG/2014 : 10. IN ASSESSEES APPEAL, ASSESSEE HAS RAISED GROUN DS ON TP ISSUES AS WELL AS CORPORATE ISSUES. IN THE TP ISSUES, THE CO NTENTIONS ARE CONFINED TO SELECTION OF CERTAIN COMPARABLES AND IN CORPORATE T AX ISSUES, THE CLAIM OF SOFTWARE LICENSE EXPENDITURE AS REVENUE. THESE ARE DEALT WITH AS UNDER. IN THE COURSE OF PRESENT APPEAL, ASSESSEES CONTENT IONS ON RPT FILTER ARE NOT PRESSED. CONSEQUENTLY, REJECTION OF L&T INFOTE CH AND ALLSEC TECHNOLOGIES LTD., WERE NOT PRESSED. SOFTWARE DEVOLOPEMENT SERVICES: 11. THE FINAL LIST OF COMPARABLES AFTER LD.CIT(A)S ORDER IS AS UNDER: SL NO. NAME OF THE COMPANY MARGIN % 1. AKSHAY SOFTWARE TECHNOLOGIES LTD 9.05 2. BODHTREE CONSULTING LTD 62.03 3. KALS INFO SYSTEMS LIMITED 12.94 4. LARSEN & TURBO INFOTECH LTD 25.47 IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 7 OF 21 5. MINDTREE CONSULTING LIMITED (SEG) 4.83 6. PERSISTENT SYSTEMS LIMITED 40.98 7. R S SOFTWARE LTD 11.45 8. SASKEN COMMUNICATION LTD (SEG) 28.47 9. TATA ELXSI LTD (SEG) 19.97 10. ZYLOG SYSTEMS LTD 5.52 11.1. ASSESSEE SEEKS REJECTION OF THE FOLLOWING THR EE COMPARABLES IN THIS SEGMENT: I. BODHTREE CONSULTING LTD. II. KALS INFO SYSTEMS LIMITED. III. TATA ELXSI LTD. IT WAS SUBMITTED THAT THESE ARE CONSIDERED AND REJE CTED IN (1) MINDTECK (INDIA) LTD.VS DCIT IN ITA(TP) NO 70/BANG/2014, (2) M/S. CISCO SYSTEMS (INDIA) PRIVATE LTD., IN IT(TPA) NO 271/BANG/2014 ( 3) 24/7 CUSTOMER CARE PVT. LTD., IN IT(TPA) NO 227/BANG/2011. 11.2. THE ABOVE THREE COMPARABLES WERE ALREADY CONS IDERED AND REJECTED IN M/S. CISCO SYSTEMS (INDIA) PRIVATE LTD., IN IT(T P)A NO. 271/BANG/2014 DT. 14-08-2014 BY THE CO-ORDINATE BENCH AND THE DEC ISION IS AS UNDER: 26. COMPANIES INCLUDED IN THE FINAL LIST OF COMPA RABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 26.1 BODHTREE CONSULTING LTD.:- AS FAR AS THIS COMP ANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES CHOSEN BY T HE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASSESSEE. THE ASSESSEE, HOWEVE R, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSESSEES NOTICE THAT THIS COMPANY IS NOT BEING CONSIDERED AS A COMPARABLE COMPANY IN THE CASE OF C OMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7 633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CASE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 8 OF 21 MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS P ROCESSING SERVICES (I) P. LTD., ITA NO.4547/MUM/2012. IN THE AFORESAID DECISIONS, T HE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN THE BUSINE SS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLU TIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST T ECHNOLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. I T WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMS TANCES IN THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANC ES AS IT PREVAILED IN AY 08-09 IT(TP)A NO.271/BANG/2014 PAGE 18 OF 61 AS FAR AS TH IS COMPARABLE COMPANY IS CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSULTING LTD. CANNOT BE REG ARDED AS A COMPARABLE. IN THIS REGARDS, THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COMPANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOWN THAT THE SAID COMPANY IS A SOFTWARE PRODUCT COMPANY AND NOT A SOF TWARE DEVELOPMENT SERVICES COMPANY. 26.2 INFOSYS LTD .:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED TO BE FUNC TIONALLY DIFFERENT FROM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVI CES, AS THIS COMPANY OWNS SIGNIFICANT INTANGIBLES AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IN THIS REGARD, WE FIND THAT THE BANGALORE BENCH OF THE TRI BUNAL IN THE CASE OF M/S. TDPLM SOFTWARE SOLUTIONS LTD. V. DCIT, ITA NO.1303/ BANG/2012, BY ORDER DATED 28.11.2013 WITH REGARD TO THIS COMPARABLE HAS HELD AS FOLLOWS:- 11.0 INFOSYS TECHNOLOGIES LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEF ORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY I N THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND ATTRIBUTABLE PROF IT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE S OFTWARE DEVELOPMENT SEGMENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSES SEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTIO N TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO SUBMIT THAT THIS C OMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A MARKET LEADER IN SOFTWARE DEVELOPMENT ACTIVITIES, WHEREAS THE ASSESSEE IS MER ELY A SOFTWARE SERVICE PROVIDER OPERATING ITS BUSINESS IN INDIA AND DOES N OT POSSESS EITHER ANY BRAND VALUE OR OWN ANY INTANGIBLE OR INTELLECTUAL PROPERT Y RIGHTS (IPRS). IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT :- (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE C ASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A C OMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PR OVIDER WHO DOES NOT OWN ANY INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL AD VANTAGE IN THE MARKET. IT IS SUBMITTED THAT THIS DECISION IS APPLICABLE TO THE A SSESSEE'S CASE, AS THE ASSESSEE IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 9 OF 21 DOES NOT OWN ANY INTANGIBLES AND HENCE INFOSYS TECH NOLOGIES LTD. CANNOT BE COMPARABLE TO THE ASSESSEE ; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN TH E CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856 (DEL)/2010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNOLOGIES LTD. BEING A GIANT COMPANY AND MARKET LEADER ASSUMING ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSIDERED AS C OMPARABLE TO CAPTIVE SERVICE PROVIDERS ASSUMING LIMITED RISK; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOFT WARE PRODUCTS AND THE BREAK UP OF SUCH REVENUES IS NOT AVAILABLE; (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR R ESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQU ISITION OF IPRS IN AUTOLAY, A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORISE D REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFOSYS TECHNOLOGIE S LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPANIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARAB ILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE BRAND ATTRIBUTABLE PROFIT MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY . IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS C OMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HENCE IS NOT CO MPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. WE ARE INCLINED TO CONCUR WITH THE ARGUMENT PUT FORTH BY THE ASSESSEE THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIF ICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN TH AT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAI LABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. THE DECISION RENDERED AS AFORESAID PERTAINS TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE TH AT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE F ACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COM PANY IS CONCERNED. IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 10 OF 21 RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXCLUDED FROM THE LIST OF COMPARABL E COMPANIES. 26.3 KALS INFORMATION SYSTEMS LTD .:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPARABLE TO A PURE SOFTWARE DEVELOPMENT SERVI CES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA). THE FOLLOWING WERE THE REL EVANT OBSERVATIONS OF THE TRIBUNAL:- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH S OFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO P OINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS ALSO SUBMITTE D THAT AS PER THE ANNUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPM ENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWA RE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE C ASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNC TIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIO NALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVEL OPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFT WARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITT ED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE C OMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THE SE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCE RN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DR AWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133( 6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF T HIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE T PO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING S OFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVI DER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPA RABLE. IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 11 OF 21 FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. 26.4 TATA ELXSI LTD .:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT IN ASSESSEES OWN CASE FOR T HE A.Y. 2007-08, THIS COMPANY WAS NOT REGARDED AS A COMPARABLE IN ITS SOFTWARE DE VELOPMENT SERVICES SEGMENT IN ITA NO.1076/BANG/2011, ORDER DATED 29.3.2013. 11.3. SINCE THE OBJECTIONS OF ASSESSEE ARE SIMILAR AND FACTS BEING SAME AO/TPO IS DIRECTED TO EXCLUDE THE ABOVE THREE COMPA NIES. 11.4. ASSESSEE SEEKS TO INCLUDE TWO COMPANIES THINK SOFT GLOBAL SERVICES PRIVATE LIMITED (THINKSOFT FOR SHORT) AND FCS SOF TWARE SOLUTIONS PRIVATE LIMITED (FCS SOFTWARE FOR SHORT). THE SAID TWO C OMPANIES WERE INITIALLY PROPOSED AS COMPARABLES BY THE TPO IN HER SHOW CAUS E NOTICE DT. 14-11- 2012 (PAGE 789 OF THE PAPER BOOK), BUT WERE SUBSEQU ENTLY NOT INCLUDED AS COMPARABLES BY THE TPO DESPITE ASSESSEE HAVING ACCE PTED THE SAID COMPANIES AS COMPARABLES. THE TPO HAVING ACCEPTED THAT THE SAID COMPANIES ARE FUNCTIONALLY SIMILAR TO ASSESSEE, EXC LUDED THEM ON THE SOLE GROUND THAT WHEN THEIR RESPECTIVE WORKING CAPITAL A DJUSTMENT IS COMING TO MORE THAN 4%. IT IS SUBMITTED THAT THE AD HOC REJE CTION OF THE SAID COMPANIES ON THE GROUND OF WORKING CAPITAL IMPACT O F MORE THAN 4% ON PROFIT HAS NO BASIS IN LAW AND IS, THEREFORE, LIABL E TO BE SET ASIDE AS THE SAID COMPANIES SATISFIED ALL THE FILTERS APPLIED BY THE TPO AND THERE HAVING BEEN NO FILTER APPLIED BY THE TPO TO THE ABOVE EFFE CT, THEIR EXCLUSION IS UNSUSTAINABLE. THE WORKING CAPITAL ADJUSTMENT HAS BEEN ARRIVED AT ON THE BASIS OF A SCIENTIFIC CALCULATION AND BY ADOPTING T HE METHODOLOGY PRESCRIBED BY THE OECD GUIDELINES. THUS, ONCE A WORKING CAPIT AL ADJUSTMENT IS IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 12 OF 21 ARRIVED AT IN THE MANNER PRESCRIBED BY LAW, THE CON SEQUENCES OF SUCH AN ADJUSTMENT ON A COMPARABLES PROFIT MARGIN CANNOT B E A REASON FOR ITS EXCLUSION. IT IS SUBMITTED THAT IN CASE OF A THIRD PARTY COMPARABLE, THE WORKING CAPITAL FUNDING IS LENT FROM A BANK, FOR WH ICH THE COMPANY PAYS INTEREST AND THE COSTS RELATED TO SUCH FINDING IS A LSO PASSED ON TO THE THIRD PARTY CUSTOMERS. IN CASE OF ASSESSEE, HOWEVER, AES HAD PROVIDED THE FUNDS FOR OPERATIONS AND THUS ASSESSEE DID NOT HAVE TO RELY ON WORKING CAPITAL FUNDING FROM BANKS. IN ANY EVENT, MERELY B ECAUSE OF A WORKING CAPITAL IMPACT OF OVER 4%, THE SAID COMPANIES CANNO T BE CHARACTERIZED AS BEING ENGAGED IN THE PROVISION OF FINANCING ACTIVIT IES, AS HAS BEEN HELD BY THE TPO IN HER ORDER. IT IS SUBMITTED THAT THINKSO FT AND FCS SOFTWARE ARE COMPARABLE COMPANIES WHICH OUGHT NOT HAVE BEEN EXCL UDED FROM THE LIST OF COMPARABLES. MOREOVER, THE TPO HAS, VIDE THE TP OR DER, ACCEPTED THAT THEY ARE FUNCTIONALLY COMPARABLE TO ASSESSEE. SINC E THEY ARE COMPARABLES WHICH WERE PROPOSED BY THE TPO HERSELF, IT IS EVIDE NT THAT THE SAID COMPANIES HAVE PASSED ALL THE FILTERS APPLIED BY TH E TPO IN HER STUDY. THUS, FOR THE FOREGOING REASONS, IT IS SUBMITTED TH AT THE SAID COMPANIES OUGHT TO BE CONSIDERED AS COMPARABLES TO ASSESSEE. 11.5. INCLUSION OF THESE TWO COMPANIES ON SIMILAR S UBMISSIONS WAS ALREADY CONSIDERED IN THE DECISION OF ARM EMBEDDED TECHNOLOGIES PVT. LTD., IN ITA NO. 1659/BANG/14 DT. 31-08-2015 FOR TH E SAME ASSESSMENT YEAR AS UNDER: IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 13 OF 21 20. COMING TO THE GROUND FOR INCLUSION OF M/S. TH INKSOFT GLOBAL SOLUTIONS LTD AND FCS SOFTWARE SOLUTIONS LTD, WE FIND THAT TPO HE RSELF HAD SUGGESTED THESE IN THE SHOW CAUSE NOTICE, BUT HAD THEREAFTER COME TO A CONCLUSION THAT WORKING CAPITAL ADJUSTMENT REQUIRED FOR THESE TWO COMPANIES EXCEEDED 4% OF PROFITS AND COULD NOT BE THEREFORE TAKEN AS PROPER COMPARABLES. REASONS GIVEN BY THE TPO FOR EXCLUDING THESE TWO COMPANIES, APPEAR AT PARAS 3.6.5.1, OF HER ORDER WHICH READS AS UNDER : B) TWO COMPANIES PROPOSED IN THE SHOW-CAUSE NOTICE ARE FUNCTIONALLY SIMILAR TO THE TAXPAYER. HOWEVER, WHEN THE WORKING CAPITAL OF THESE COMPANIES IS CONSIDERED, THE PROFIT MARGIN GETS DIS TORTED. IT MAY NOT BE OUT OF CONTEXT TO MENTION THAT OUR SEARCH FOR COMPA RABLE IS PRIMARILY FOCUS ON THOSE COMPANIES WHOSE PROFIT MARGIN IS PREDOMINA NTLY FROM OPERATING BUSINESS AND NOT FROM FINANCIAL ACTIVITIES. THIS P REREQUISITE IS NOT DIFFERENT IN CASE OF SOFTWARE DEVELOPMENT COMPANIES AS THEY DO NOT NEED ANY INTEREST BEARING FUNDS TO MANAGE THEIR WORKING CAPITAL REQUIREMENT. THEREFORE, WITH THE PURPOSE TO IDENTIFY ONLY THOSE UNCONTROLLED COMPARABLES WHO ARE HAVING PROFIT MARGIN FROM CORE OPERATING ACTIVITIES AND NOT FROM FINANCIAL ACTIVITIES, THE FOLLOWING TW O COMPANIES HAVING WORKING CAPITAL IMPACT OF MORE THAN 4% ON PROFIT HA VE BEEN EXCLUDED. 21. TPO HAS ACCEPTED THAT THESE COMPANIES WERE FUNC TIONALLY SIMILAR TO THAT OF THE ASSESSEE. HOWEVER, ACCORDING TO HER, THE MARGI NS OF THESE COMPANIES HAD NOT COME FROM ITS CORE OPERATING ACTIVITIES BUT FRO M FINANCIAL ACTIVITIES. PROFIT AND LOSS ACCOUNT OF M/S. THINKSOFT GLOBAL SOLUTIONS FOR THE RELEVANT PREVIOUS YEAR IS PLACED AT PAPER BOOK PAGE.247. SOFTWARE SERVICE RE VENUES OF THE SAID COMPANY CAME TO RS.920921452/-. OTHER INCOME OF THE SAID C OMPANY CAME TO RS.35,738,801/-. BREAK-UP OF THE OTHER INCOME AS G IVEN AT SCHEDULE 10 PLACED AT PAPER BOOK PAGE.256 SHOW THAT OUT OF SUCH AMOUNT RS .26,536,978/- WAS EXCHANGE GAIN. INTEREST RECEIVED FROM DEPOSITS WIT H BANKS AND OTHERS CAME TO RS.29,15,080/- ONLY. FOR BETTER CLARITY THIS BREAK -UP IS GIVEN HEREUNDER : OTHER INCOME INTEREST RECEIVED ON DEPOSITS WITH BANKS .. 2,371,7 40 INTEREST RECEIVED FROM OTHERS .. 543,310 PROFIT ON SALE OF FIXED ASSETS .. 6,276,773 EXCHANGE GAIN (NET) .. 26,536,978 MISCELLANEOUS INCOME .. 10,000 35,738,801 WE CANNOT SAY THAT THE OTHER INCOME AROSE OUT OF ANY FINANCIAL SERVICES DONE BY THE ASSESSEE AND WOULD TAKE AWAY THE SHEEN OF ITS S OFTWARE SERVICES INCOME. THE AMOUNT, IN OUR OPINION, WAS INSIGNIFICANTLY SMALL A ND NOT ENOUGH TO WARRANT A CONCLUSION THAT ITS OPERATING MARGINS HAD COME NOT FROM ITS CORE OPERATIONAL ACTIVITIES. 22. COMING TO FCS SOFTWARE SOLUTIONS LTD, PROFIT AN D LOSS ACCOUNT PLACED AT PAPER BOOK PAGE 321 SHOWS THAT ITS REVENUE FROM SOF TWARE DEVELOPMENT AND OTHER IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 14 OF 21 SERVICES WAS RS.1902547907/-. AS AGAINST THIS, MIS CELLANEOUS INCOME WAS ONLY RS.7875588/-. BREAK-UP OF SUCH MISCELLANEOUS INCOM E AS GIVEN AT SCHEDULE M, PLACED AT PAPER BOOK PAGE. 328 READS AS UNDER : INTEREST .. 2,875,685 RENT INCOME .. 4,515,000 AMOUNT W/BACK .. 484,902 7,875,588 23. COMPARED TO THE SOFTWARE DEVELOPMENT SERVICES I NCOME, INTEREST RECEIVED BY M/S. FCS SOFTWARE SOLUTIONS LTD, WAS IN OUR OPIN ION, INSIGNIFICANTLY SMALL. THUS THE REASONING GIVEN BY TPO FOR REJECTING THESE TWO COMPANIES AS PROPER COMPARABLES, WAS IN OUR OPINION, INCORRECT. WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES IN THIS REGARD AND DIRECT THESE TWO COM PANIES TO BE INCLUDED IN THE LIST OF COMPARABLES FOR WORKING OUT THE AVERAGE PLI. RESPECTFULLY FOLLOWING THE ABOVE DECISION WE DIRECT THE TPO TO INCLUDE THEM IN THE LIST OF COMPARABLE COMPANIES FOR WORKIN G OUT AVERAGE PLI. IT ENABLED SERVICES: 12. FINAL SELECTION OF COMPARABLES AFTER LD.CIT(A) S ORDER IS AS UNDER: SL NO. NAME OF THE COMPANY RPT % 1. MICROLAND LTD (BOTH SEGMENTS) 1.65% 2. ALLSEC TECHNOLOGIES LTD., 15.82% 3. ACCENTIA TECHNOLOGIES LTD., 0% 4. INFORMED TECHNOLOGIES INDIA LTD., 9.82% 5. COSMIC GLOBAL LTD., 0% 6. E-CLERX SERVICES LTD., 13.76% 12.1. ASSESSEE IS OBJECTING TO THE INCLUSION OF THR EE COMPARABLES: (1) ACCENTIA TECHNOLOGIES LTD., ; (2) COSMIC GLOBAL : ( 3) E-CLERX SERVICES LTD., ON THE BASIS OF DECISIONS OF CAPITAL IQ IN ITA NO. 170/HYD/2014 AND OTHER DECISIONS. IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 15 OF 21 12.2. CO-ORDINATE BENCH AT HYDERABAD HAS ALREADY CO NSIDERED (ONE OF US, AM IS THE AUTHOR) THE SAME COMPARABLES IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) P. LTD., IN ITA NO. 124 /HYD/2014 DT. 31-07- 2014 AS UNDER: I. ACCENTIA TECHNOLOGIES LIMITED : 21. THIS COMPANY WAS OBJECTED TO BY ASSESSEE ON THE REASON OF SUPER PROFITS AS WELL AS EXTRA-ORDINARY EVENTS. IT WAS SUBMITTED THA T ACQUISITION OF OAK TECHNOLOGIES & TRANS SERVICES HAS IMPACT ON THE PRO FITS OF THE COMPANY AND HAS TAKEN INORGANIC GROWTH AS STRATEGY TO INCREASE THE PROFITS BECAUSE OF THE PECULIAR ECONOMIC CIRCUMSTANCES AND BRAND VALUE. THE SAME IN THESE CIRCUMSTANCES CANNOT BE SELECTED. IT WAS SUBMITTED THAT ASSESSEE WAS IN MEDICAL TRANSCRIPTION SERVICES. 21.1. THE DEPARTMENTAL REPRESENTATIVE HOWEVER, OBJE CTED TO THE PLEAS OF ASSESSEE STATING THAT THE EXTRAORDINARY EVENTS OCCU RRED IN EARLIER YEAR AND THEREFORE, THE SAME CANNOT BE CONSIDERED AS HAVING ANY IMPACT IN THE YEAR UNDER CONSIDERATION. 21.2 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND N OTICED THAT THIS COMPANY OPERATES IN A DIFFERENT BUSINESS STRATEGY OF ACQUIR ING COMPANIES FOR INORGANIC GROWTH AS ITS STRATEGY. IN EARLIER YEARS ON THE REA SON OF ACQUISITION OF VARIOUS COMPANIES, BEING AN EXTRAORDINARY EVENT WHICH HAD A N IMPACT ON THE PROFIT, THIS COMPANY WAS EXCLUDED. AS SUBMITTED BY THE LEARNED C OUNSEL, THIS YEAR ALSO, THE ACQUISITION OF SOME COMPANIES BY THAT COMPANY MAY H AVE IMPACT ON THE PROFIT. CONSIDERING THE PROFIT MARGINS OF THE COMPANY AND I NSUFFICIENT SEGMENTAL DATA, WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE SELE CTED AS A COMPARABLE. MOREOVER, THIS IS ALSO NOT A COMPARABLE IN THE CASE OF M/S. MERCER CONSULTING (INDIA) P. LTD. (SUPRA), WHICH INDICATES THAT THE T PO THEREIN HAS EXCLUDED IT AT THE OUTSET. IN VIEW OF THIS, WE DIRECT THE ASSESSING OF FICER/TPO TO EXCLUDE THIS COMPARABLE, FROM THE LIST OF COMPARABLES SELECTED. (II) COSMIC GLOBAL LTD . THE MAIN OBJECTION OF ASSESSEE WITH REFERENCE TO TH E INCLUSION OF THIS COMPANY IS WITH REFERENCE TO OUTSOURCING OF ITS MAI N ACTIVITY. EVEN THOUGH THIS COMPANY IS IN ASSESSEES TP STUDY, IT HAS RAISED OB JECTION BEFORE THE TPO THAT THIS COMPANYS EMPLOYEE COST IS LESS THAN 21.30% AN D MOST OF THE COST IS WITH REFERENCE TO THE OUTSOURCING CHARGES OR TRANSLATION CHARGES,AND AS SUCH THIS IS NOT A COMPARABLE COMPANY. THE TPO, THOUGH CONSIDERED TH ESE SUBMISSIONS, REJECTED THE SAME, ON THE REASON THAT THIS DOES NOT IMPACT T HE PROFIT MARGIN OF THE COMPANY. OPPOSING THE VIEW TAKEN BY THE TPO, IT IS SUBMITTED THAT THIS COMPANY CANNOT BE SELECTED AS COMPARABLE, AS SIMILAR ISSUE WAS DISCUSSED BY THE IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 16 OF 21 COORDINATE BENCH OF THE TRIBUNAL(DELHI) IN THE CASE OF MERCER CONSULTING (INDIA) P. LTD. (SUPRA), VIDE PARAS 13.2 TO 13.3 WHICH READ AS UNDER- 13.2. NOW COMING TO THE FACTUAL MATRIX OF THIS CAS E, WE FIND FROM THE MATERIAL ON RECORD THAT OUTSOURCING CHARGES OF THIS CASE CONSTITUTE 57 .31% OF THE TOTAL OPERATING COSTS. THIS DOES NOT APPEAR TO US TO BE A VALID REASON FOR ELIM INATING THIS CASE FROM THE LIST OF COMPARABLES. ON GOING THROUGH THE ANNUAL ACCOUNTS O F COSMIC GLOBAL LIMITED, A COPY OF WHICH HAS BEEN PLACED ON RECORD, WE FIND THAT ITS T OTAL REVENUE FROM OPERATIONS ARE AT RS.7.37 CRORE DIVIDED INTO THREE SEGMENTS, NAMELY, MEDICAL TRANSCRIPTION AND CONSULTANCY SERVICES AT RS.9.90 LACS, TRANSLATION CHARGES AT RS .6.99 CRORE AND ACCOUNTS BPO AT RS.27.76 LAC. THE LD. AR HAS MADE OUT A CASE THAT O UTSOURCING ACTIVITY CARRIED OUT BY THIS COMPANY CONSTITUTES 57% OF TOTAL EXPENSES. THE REAS ON FOR WHICH WE ARE NOT AGREEABLE WITH THE LD. AR IS THAT WE HAVE TO EXAMINE THE REVE NUE OF THIS CASE ONLY FROM ACCOUNTS BPO SEGMENT AND NOT ON THE ENTITY LEVEL, BEING ALSO FROM MEDICAL TRANSCRIPTION AND TRANSLATION CHARGES. WHEN WE ARE EXAMINING THE RESU LTS OF THIS COMPANY FROM THE ACCOUNTS BPO SEGMENT ALONE, THERE IS NO NEED TO EXA MINE THE POSITION UNDER OTHER SEGMENTS. THE ENTIRE OUTSOURCING IS CONFINED TO TRA NSLATION CHARGES PAID AT RS.3.00 CRORE, WHICH IS STRICTLY INTHE REALM OF THE TRANSLATION SE GMENT, REVENUES FROM WHICH ARE TO THE TUNE OF RS.6.99 CRORE. IF THIS SEGMENT OF TRANSLATI ON IS NOT UNDER CONSIDERATION FOR DECIDING AS TO WHETHER THIS CASE IS COMPARABLE OR N OT, WE CANNOT TAKE RECOURSE TO THE FIGURES WHICH ARE RELEVANT FOR SEGMENTS OTHER THAN ACCOUNTS BPO. THUS IT IS HELD THAT THIS CASE CANNOT BE EXCLUDED ON THE STRENGTH OF OUTSOURC ING ACTIVITY, WHICH IS ALIEN TO THE RELEVANT SEGMENT. 13.3. HOWEVER, WE FIND THIS CASE TO INCOMPARABLE ON THE ALTERNATIVE ARGUMENT ADVANCED BY THE LD. AR TO THE EFFECT THAT TOTAL REVENUE OF T HE ACCOUNTS BPO SEGMENT OF COSMIC GLOBAL LIMITED IS VERY LOW AT RS.27.76 LACS. WE HAV E DISCUSSED THIS ASPECT ABOVE IN THE CONTEXT OF CG-VAKS CASE AND HELD THAT A CAPTIVE UN IT CANNOT BE COMPARED WITH A GIANT CASE AND THUS EXCLUDED CG-VAK WITH TURNOVER FROM AC COUNTS BPO SEGMENT AT RS.86.10 LACS. AS THE SEGMENTAL REVENUE OF BPO SEGMENT OF CO SMIC GLOBAL LIMITED AT RS.27.76 LAC IS STILL ON MUCH LOWER SIDE, THE REASONS GIVEN ABOV E WOULD FULLY APPLY TO HOLD COSMIC GLOBAL LIMITED AS INCOMPARABLE. THIS CASE IS, THERE FORE, DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IN VIEW OF THE DETAILED ANALYSIS OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE ABOVE REFERRED CASE, IN THIS CASE ALSO WE ACCEPT TH E CONTENTIONS OF ASSESSEE AND DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS CO MPARABLE FOR THE SAME REASONS. III. ECLERX SERVICES LTD . 18. THE OBJECTION OF ASSESSEE TO THIS COMPARABLE IS THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR. IT IS IN THE BUSINESS OF C ONSULTANCY AND ADVISORY SERVICE AND PROVIDES ONLY ANALYTICAL DATA. IT IS ALSO INVOL VED IN QUALITY MONITORING. IT IS THE STAND OF THE ASSESSEE THAT THIS COMPANY OFFERS SOLU TIONS THAT INCLUDE DATA ANALYTICS, OPERATIONS MANAGEMENT, AUDITS AND RECONC ILIATION AND THEREFORE HAS TO BE CLASSIFIED AS HIGH END KPO. IN SUPPORT OF THE ST AND OF THE ASSESSEE, EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY HAVE BEEN PO INTED OUT. THEREFORE, THE FUNCTIONS OF THE ABOVE COMPANY ARE DISSIMILAR TO AS SESSEE, WHICH IS A CAPTIVE SERVICE PROVIDER. ON THE PRINCIPLES LAID DOWN BY TH E HONBLE SPECIAL BENCH OF THE IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 17 OF 21 ITAT (MUMBAI) IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD. V/S. ACIT (ITA NO.7466/MUM/2012 FOR ASSESSMENT YEAR 2008-09 D ATED 7.3.2014) AND THE PRINCIPLES LAID DOWN BY THE COORDINATE BENCH OF THE TRIBUNAL(DELHI) IN THE CASE OF M/S. MERCER CONSULTING (INDIA) PVT. LTD., (SUPRA), ASSESSEE SUBMITS THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABLE. 18.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEV ER, SUBMITTED THAT HAVING ACCEPTED ADITYA BIRLA MINACS WORLDWIDE LTD., AS A C OMPARABLE COMPANY, THIS COMPANY SHOULD ALSO BE INCLUDED, AS OTHERWISE, BOTH THE COMPANIES SHOULD BE EXCLUDED. 18.2 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE ANNUAL REPORT AND THE OBJECTIONS OF ASSESSEE. AS SEEN FROM THE ANNUAL REP ORT, THE ABOVE COMPANY IS INVOLVED IN DIVERSE NATURE OF SERVICES AND THERE WA S NO SEGMENTAL DATA FOR DIVERSIFIED SERVICE PORT FOLIO. MOREOVER THIS COMPA NY CAN BE CONSIDERED AS KPO AND WE ARE OF THE OPINION THAT THIS COMPANY IS NOT COMPARABLE TO ASSESSEES SERVICES. WE THEREFORE, DIRECT THE ASSESSING OFFICE R/TPO TO EXCLUDE THIS COMPANY. 12.3. RESPECTFULLY FOLLOWING THE ABOVE, WE DIRECT T HE TPO TO EXCLUDE THE ABOVE COMPARABLES AND ARRIVE AT THE ADDITION, IF AN Y, ON THE BASIS OF PROVISIONS OF SECTION 92C. ORDERED ACCORDINGLY. CORPORATE TAX ISSUES: 13. ASSESSEE IS AGGRIEVED ON TREATING THE EXPENDITU RE ON SOFTWARE LICENSES AS CAPITAL IN NATURE AND NOT GIVING CRED IT OF TDS BY THE AO. SOFTWARE LICENSES : 14. ASSESSEE HAD CLAIMED A DEDUCTION OF RS. 3,02,80 ,510/- AS EXPENSES INCURRED TOWARDS PURCHASE OF LICENSES FOR COMPUTER SOFTWARE USED PRIMARILY AS APPLICATION SOFTWARE FOR VARIOUS PROJECTS UNDERT AKEN BY IT. ASSESSEE HAS TREATED THE SAID EXPENSES AS REVENUE IN NATURE AND CLAIMED DEDUCTION OF THE ENTIRE AMOUNT BUT THE AO TOOK THE POSITION THAT THE EXPENSES ARE CAPITAL IN NATURE AND THEREFORE DISALLOWED THE ENTI RE EXPENSES AS CAPITAL IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 18 OF 21 EXPENDITURE. THE ASSESSEES ARGUMENTS ARE THAT THE SOFTWARE LICENSES PROCURED BY IT ARE RENEWABLE YEAR AFTER YEAR AND TH E SOFTWARE ITSELF IS APPLIED IN PROJECTS UNDERTAKEN BY ASSESSEE AND ONCE THE PROJECT IS CONCLUDED THERE IS NO FURTHER USE OF THE SOFTWARE. ASSESSEE ALSO SUBMITS THAT THE NATURE OF SOFTWARE PROCURED IS SUCH THAT I T BECOMES OBSOLETE IN A VERY SHORT PERIOD OF TIME AND THERE IS NO ENDURING BENEFIT OR ADVANTAGE I.E., DERIVED BY ASSESSEE FROM SUCH SOFTWARE AND THEREFOR E THE EXPENSES INCURRED FOR SUCH SOFTWARE LICENSES IS REVENUE IN N ATURE AND NOT CAPITAL. ASSESSEE RELIES ON THE DECISIONS OF THE HON'BLE TRI BUNAL IN THE CASE OF IBM INDIA PRIVATE LTD., VS. CIT (2007) [290 ITR (AT) 183 (BANG) AND AMWAY INDIA ENTERPRISES VS. DCIT (2008) [301 ITR (AT) 1 (DEL). FOR THE AY. 2007-08, IN ASSESSEES OWN CASE, THIS HON'BLE TRIBU NAL IN IT (TP) NO. 1129/BANG/2011], IN PARAS 42 TO 46 AT PAGES 47-48, HAS SET ASIDE THE ASSESSMENT ORDER AND REMANDED THE ISSUE FOR FRESH C ONSIDERATION IN THE LIGHT OF THE PRINCIPLES LAID DOWN BY THE SPECIAL BE NCH IN AMWAY INDIA ENTERPRISES VS. DCIT. THEREAFTER, THE AO ASKED ASS ESSEE TO MAKE SUBMISSIONS JUSTIFYING THE CLAIM OF SOFTWARE EXPENS ES AS REVENUE EXPENDITURE. ASSESSEE MADE VARIOUS SUBMISSIONS AS REQUIRED BY THE AO. ON PERUSAL OF THE SUBMISSIONS, THE AO IN THE FINAL ASSESSMENT ORDER, IN PARAS 6.1 TO 6.6 AT PAGES 6 TO 9, ALLOWED THE CLAIM OF SOFTWARE EXPENSES AS REVENUE EXPENDITURE. ALSO, THE HON'BLE TRIBUNAL IN IT(TP)A NO. 1192/BANG/2012, IN PARAS 5 TO 6 AT PAGES 3 AND 4, I N ASSESSEES OWN CASE FOR AY. 2008-09 HAS HELD THAT THE SOFTWARE EXPENSE INCURRED BY ASSESSEE IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 19 OF 21 IN THE RELEVANT ASSESSMENT YEAR ARE SIMILAR TO THE EXPENSES CLAIMED BY ASSESSEE DURING THE AY. 2007-08 AND HENCE ARE REVEN UE IN NATURE. 14.1. SINCE THE ISSUE IS COVERED IN FAVOUR OF ASSES SEE IN EARLIER YEARS, THE CLAIM OF ASSESSEE AS REVENUE EXPENDITURE IS ACCEPTA BLE. HOWEVER, AS SEEN FROM THE ORDER OF LD.CIT(A), EVEN AFTER NOTICI NG THE JUDGMENT OF JURISDICTIONAL HIGH COURT HE DID NOT GRANT THE BENE FIT IN THE ABSENCE OF DETAILS. BEFORE US, LEARNED COUNSEL SUBMITTED THAT MOST OF THE EXPENDITURE IS ON MICROSOFT LICENSES WHICH ARE RENE WABLE ON AN YEARLY BASIS. THIS ASPECT REQUIRE EXAMINATION BY AO. CON SEQUENTLY, WHILE ACCEPTING THE PRINCIPLE THAT SOFTWARE LICENSES ARE REVENUE IN NATURE, EXAMINATION OF EXPENDITURE CLAIM IS RESTORED TO THE FILE OF AO. AO AFTER DUE VERIFICATION SHOULD ALLOW THE EXPENDITURE ACCORDING LY. TDS: 15. ASSESSEE SUBMITTED THAT WHILE FILING THE RETURN OF INCOME FOR THE AY. 2009-10, IT HAS CLAIMED A TOTAL TDS CREDIT OF RS. 2 ,61,44,238/-. HOWEVER, THE AO HAS RESTRICTED THE CLAIM OF THE COMPANY TO R S. 45,20,737/-. IN THIS REGARD, THE LD COUNSEL PLACED RELIANCE ON THE DECIS ION OF ALLAHABAD HIGH COURT IN THE CASE OF RAKESH KUMAR GUPTA [TS-321-HC- 2014 (ALL)], WHEREIN IT WAS HELD THAT THE MISMATCH OF TAX DEDUCT ED AT SOURCE (TDS), WITH THE DETAILS SHOWN IN FORM 26AS, IS NOT ATTRIBU TABLE TO THE TAXPAYER, AND THE FAULT SOLELY LIES WITH THE DEDUCTOR. FURTH ER, THE ALLAHABAD HIGH COURT REFERRED TO THE DELHI HC RULING IN A PIL IN T HE COURT ON ITS OWN IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 20 OF 21 MOTION VS. CIT [2013 (352 ITR 273)] GAVE DIRECTION S. PURSUANT TO THE DELHI HIGH COURT DECISION, THE CDBT ISSUED INSTRUCT ION NO. 5 OF 2013, DATED JULY 8, 2013, DIRECTING THAT WHERE ASSESSEE A PPROACHES AO WITH REQUISITE DETAILS AND PARTICULARS IN THE FORM OF TD S CERTIFICATE AS AN EVIDENCE AGAINST ANY MISMATCH AMOUNT, AO SOULD VERI FY WHETHER OR NOT THE DEDUCTOR HAD MADE TDS PAYMENT IN THE GOVERNMENT ACC OUNT AND, IN THE EVENT, THE PAYMENT HAD BEEN MADE, CREDIT OF THE SAM E WOULD BE GIVEN TO ASSESSEE. IT IS THEREFORE PRAYED THAT THE AO BE D IRECTED TO VERIFY AND ALLOW THE ENTIRE CLAIM OF TDS AMOUNTING TO RS. 2,61,44,23 8/- AS CLAIMED BY THE COMPANY IN ITS RETURN OF INCOME. 15.1. SINCE THE ISSUE IS ONE OF VERIFICATION, WE DI RECT THE AO TO UNDERTAKE THE EXERCISING OF VERIFICATION AND ALLOW CREDIT, KE EPING IN MIND THE BOARD CIRCULAR 5 OF 2013 AND PRINCIPLES LAID DOWN BY THE HIGH COURTS (SUPRA) AND ALLOW THE CREDIT AS CLAIMED BASED ON TDS CERTIFICAT ES. ORDERED ACCORDINGLY. 16. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES AND REVENUES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF MARCH, 2016 SD/- SD/- (NARENDRA KUMAR CHOUDHURY) (B. RAMAKOTAI AH) JUDICIAL MEMBER ACCOUNTA NT MEMBER BANGALORE, DATED, THE 18 TH MARCH, 2016 TNMM IT(TP)A NOS. 1621 & 1664 /BANG/2014 PAGE 21 OF 21 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.