DCIT, New Delhi V. M/s. ST Ericsson India Pvt. Ltd., New Delhi

ITA 168/DEL/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7241 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 08-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY KUMAR YADAV SENIOR
• Assessee Lawyers: S D KAPILA
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Question of law; Wholly owned subsidiary; Bad and doubtful debts; Revenue expenditure
• Section: 92C; 92B; 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.609/DEL./2015 (ASSESSMENT YEAR : 2010-11) ST-ERICSSON INDIA PVT. LTD., VS. DCIT, CIRCLE 24 ( 2), S 327, LOWER GROUND FLOOR, NEW DELHI. GREATER KAILASH II, NEW DELHI 110 048. (PAN : AAMCS1022K) ITA NO.168/DEL./2015 (ASSESSMENT YEAR : 2010-11) DCIT, CIRCLE 24 (2), VS. ST-ERICSSON INDIA PVT. LTD ., NEW DELHI. S 327, LOWER GROUND FLOOR, GREATER KAILASH II, NEW DELHI 110 048. (PAN : AAMCS1022K) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S.D. KAPILA, ADVOCATE REVENUE BY : SHRI SANJAY KUMAR YADAV, SENIOR DR DATE OF HEARING : 09.05.2018 DATE OF ORDER : 03.07.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : PRESENT CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE BEING DISPOSED OF BY WAY OF CONSOLIDATE D ORDER TO AVOID REPETITION OF DISCUSSION. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 2 APPELLANT, ST-ERICSSON INDIA PVT. LTD. (STE INDIA) (FOR SHORT THE TAXPAYER), BY FILING THE PRESENT APPEAL SOUGH T TO SET ASIDE THE IMPUGNED ORDER DATED 28.11.2014, PASSED BY THE AO U NDER SECTION 144C READ WITH SECTION 143 (3) OF THE INCOME-TAX AC T, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO ON THE GR OUNDS INTER ALIA THAT :- 1. THE ORDER PASSED BY THE LEARNED JOINT DIRECTOR OF INCOME TAX, TRANSFER PRICING-III (1),NEW DELHI (ERSTWHILE TRANSFER PRICING-II (2) ('THE TPO'), DRAFT AND FINAL ASSESSM ENT ORDER PASSED BY DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 24(2) (ERSTWHILE CIRCLE 9(1 )), NEW DELHI ('THE AO') PURS UANT TO THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL - III ('THE DRP'), ARE BAD IN LAW AND VOID AD-INITIO. 2. THE AO HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DETERMINING THE TOTAL INCOME OF THE APPELLANT AT RS .479,668,511 AS AGAINST RETURNED INCOME OF RS.197,866,765 AND TH EREBY MADE AN UPWARD ADJUSTMENT OF RS.281 ,801 ,746. PART I - TRANSFER PRICING GROUNDS 3. THAT ON FACTS OF THE CASE AND IN LAW, THE DRPI TPO/AO HAVE ERRED IN NOT DEMONSTRATING THAT THE MOTIVE OF THE APPELLANT WAS TO SHIFT PROFITS OUTSIDE OF INDIA BY MANIPULATI NG THE PRICES CHARGED IN ITS INTERNATIONAL TRANSACTIONS AS ENVISA GED UNDER PROVISIONS OF CHAPTER X OF THE ACT. 4. THAT ON FACTS OF THE CASE AND IN LAW, THE DRPI T PO/AO HAVE ERRED IN REJECTING CERTAIN COMPANIES AND ADDIN G CERTAIN COMPANIES TO THE FINAL SET OF ALLEGED COMPARABLE CO MPANIES ON AN AD-HOC BASIS, THEREBY RESORTING TO CHERRY PICKIN G OF COMPARABLE COMPANIES FOR BENCHMARKING THE INTERNATI ONAL TRANSACTION PERTAINING TO IC DESIGN AND SOFTWARE DE VELOPMENT SERVICES ('IMPUGNED TRANSACTION') 5. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/T PO/AO HAVE ERRED IN LAW AND IN FACTS BY SELECTING CERTAIN COMPANIES WHICH ARE FUNCTIONALLY NON-COMPARABLE TO THE APPELL ANT. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 3 6. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/TP O/AO HAVE FAILED TO CONSIDER THE FOREIGN EXCHANGE GAIN A ND PROVISIONS/LIABILITIES NO LONGER REQUIRED WRITTEN B ACK AS OPERATING IN NATURE AND CONSEQUENTLY TREATED IT AS NON-OPERAT ING ITEM AND ERRONEOUSLY TREATED NON-OPERATING COSTS AS OPERATIN G WHILE CALCULATING THE OPERATING MARGIN OF THE APPELLANT A S WELL OF THE ALLEGED COMPARABLE COMPANIES. 7. THAT ON FACTS OF THE CASE AND IN LAW, THE TPO HA S ERRONEOUSLY TREATED AMORTIZATION OF GOODWILL AS AN OPERATING EXPENSE WHILE CALCULATING THE OPERATING MARGIN OF T HE APPELLANT. 8. THAT ON FACTS OF THE CASE AND IN LAW, THE TPO HA S ERRED IN COMPUTATION OF THE OPERATING MARGIN AND WORKING CAP ITAL ADJUSTED MARGIN OF ALLEGED COMPARABLE COMPANIES 9. THAT ON FACT OF THE CASE AND IN LAW, THE DRP/TP O/AO HAVE ERRED IN CONDUCTING A FRESH ECONOMIC ANALYSIS BY USING ARBITRARY FILTERS FOR IDENTIFYING COMPANIES COMPARA BLE TO THE APPELLANT. THE ARBITRARY FILTERS APPLIED BY THE TPO AND CONFIRMED BY THE DRP/AO ARE BASED ON TURNOVER, DIFF ERENT ACCOUNTING YEAR, EXPORT REVENUE, EMPLOYEE COST AND PECULIAR ECONOMIC CIRCUMSTANCES. 10. THAT ON THE FACTS AND IN LAW, TPO HAS ERRED IN ADDING CERTAIN COMPANIES FROM THE LIST OF COMPANIES REJECT ED BY THE APPELLANT WITHOUT UNDERTAKING DETAILED ECONOMIC ANA LYSIS AND NOT PROVIDING A DETAILED ACCEPT-REJECT MATRIX FOR S ELECTION OF COMPARABLE COMPANIES. FURTHER, THE TPO HAS ERRED BY NOT PERFORMING ANY QUANTITATIVE ANALYSIS I APPLYING FIL TERS WHILE SELECTING THE COMPARABLE COMPANIES. 11. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/T PO/AO HAVE ERRED IN LAW AND IN FACTS BY SELECTING CERTAIN COMPANIES WHICH ARE EARNING SUPER NORMAL PROFITS AS COMPARABL E TO THE APPELLANT. 12. THAT ON FACTS AND IN LAW, THE DRP AND TPO/AO HA VE FAILED TO MAKE APPROPRIATE ADJUSTMENTS TO ACCOUNT F OR VARYING RISK PROFILES OF THE APPELLANT VIS-A-VIS THE ALLEGE D COM PARABLES AND IN THE PROCESS INTER-ALIA NEGLECTED THE INDIAN TRANSFER PRICING REGULATIONS, INTERNATIONAL GUIDELINES ON TRANSFER P RICING AND JUDICIAL PRECEDENCE. 13. THAT ON FACTS AND IN LAW, THE DRP AND TPO/AO HA VE ERRED BY NOT CONSIDERING THAT THE ADJUSTMENT TO THE ARM'S LENGTH PRICE, IF ANY, SHOULD BE LIMITED TO THE LOWER END O F THE 5 PERCENT RANGE AS THE APPELLANT HAS THE RIGHT TO EXERCISE TH IS OPTION UNDER THE SECOND PROVISO TO SECTION 92C(2) OF THE ACT. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 4 14. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/T PO/AO HAVE ERRED IN USING SINGLE YEAR DATA FOR FINANCIAL YEAR ('FY') 2009-10 OF ALLEGED COMPARABLE COMPANIES WITHOUT CON SIDERING THE FACT THAT THE SAME WAS NOT AVAILABLE TO THE APP ELLANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMEN TATION REQUIREMENTS AND DISREGARDING THE APPELLANT'S CLAIM FOR USE OF MULTIPLE YEAR DATA FOR COMPUTING THE ARM'S LENGTH P RICE. 15. THAT ON FACTS AND IN LAW, THE DRP/AO HAS ERRED IN CONFIRMING THAT TPO HAS DISCHARGED HIS STATUTORY ON US BY ESTABLISHING THAT THE CONDITIONS SPECIFIED IN CLAUS E (A) TO (D) OF SECTION 92C (3) OF THE ACT HAVE BEEN SATISFIED BEFO RE DISREGARDING THE ARM'S LENGTH PRICE DETERMINED BY THE APPELLANT AND PROCEEDING TO DETERMINE THE ARM'S LENGTH PRICE. PART II - CORPORATE TAX GROUNDS 16. THAT THE DRP AND LEARNED AO HAS ERRED ON FACTS AND IN LAW IN TREATING THE SOFTWARE EXPENSES AMOUNTING TO RS.1,227,686 AS CAPITAL IN NATURE. 17. WITHOUT PREJUDICE TO THE ABOVE AND ASSUMING WIT HOUT ACCEPTING THE ABOVE REVENUE EXPENDITURE IS TO BE CA PITALIZED, THE DRP AND LEARNED AO HAS ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEPRECIATION ON WRITTEN DOWN VALUE OF THE AMOUNT EXPENDED, ON SOFTWARE EXPENSE CAPITALIZED IN THE AS SESSMENT ORDER PASSED IN RELATION TO THE A Y 2009-10. 18. THAT THE DRP AND LEARNED AO HAS ERRED IN LAW AN D IN FACTS, IN PROPOSING THAT EXPENDITURE ON TRAINING OF EMPLOYEES AMOUNTING TO RS 1,384,084 LEADS TO ENDURING BENEFIT TO THE APPELLANT AND IS CAPITAL IN NATURE. 19. WITHOUT PREJUDICE TO THE ABOVE AND ASSUMING WIT HOUT ACCEPTING THAT THE ABOVE REVENUE EXPENDITURE IS TO BE CAPITALIZED, THE DRP AND LEARNED AO HAS ERRED IN NOT ALLOWING DE PRECIATION ON THE SAME. 20. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AO HAS ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEPRECIATION ON TRAINING EXPENSES HELD AS CAPITAL EXPENSE IN THE ASSESSMENT ORDER PASSED IN RELATION TO THE AY 2009-10. 21. THE DRP AND LEARNED AO HAS ERRED ON FACTS AND I N LAW IN NOT GRANTING DEPRECIATION ON GOODWILL AMOUNTING TO RS 26,453,670 WHICH WAS CLAIMED BY THE APPELLANT DURIN G THE ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 5 COURSE OF ASSESSMENT PROCEEDINGS IN ACCORDANCE WITH THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SM IFS SECURITIES LTD. PART III - GENERAL GROUNDS 22. THAT ON FACTS OF THE CASE AND IN LAW, THE AO HA S ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT WHILE COMPLETELY DISREGARDING THE PROVISIONS OF THE ACT A ND THE JUDICIAL PRECEDENCE IN THIS REGARD. 23. THAT ON FACTS OF THE CASE AND IN LAW, THE AO HA S GROSSLY ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTI ON 271 (1)(C) OF THE ACT. 2. APPELLANT, DEPUTY COMMISSIONER OF INCOME-TAX, CI RCLE 24 (2), NEW DELHI (FOR SHORT THE REVENUE), BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 28.11.2014, PASSED BY THE AO UNDER SECTION 144C READ WITH SECTI ON 143 (3) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 IN CONSONANCE WITH THE ORDERS PASSED B Y THE LD. DRP/TPO TO THE EXTENT OF SEEKING INCLUSION OF INFOS YS LTD. AS COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTIONS ON THE GROUNDS INTER ALIA THAT :- 1. 'WHETHER ON THE FACTS AND IN CIRCUMSTANCES OF T HE CASE, THE HON'BLE DRP HAS ERRED IN DIRECTING THE ASSESSIN G OFFICER/TRANSFER PRICING OFFICER (AO/TPO) TO EXCLUD E M/S. INFOSYS TECHNOLOGIES LTD. FROM THE LIST OF COMPARAB LES FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTI ON AND COMPUTATION OF ARM'S LENGTH PRICE IN RELATION TO SO FTWARE DEVELOPMENT SERVICES. 2. WHETHER THE DECISION OF THE HON'BLE DRP TO EXCLU DE M/S. INFOSYS TECHNOLOGIES LTD. IS UNSUSTAINABLE IN LAW, BEING CRYPTIC AND HAVING BEEN GIVEN WITHOUT ANY COGENT REASONS IN THE FACE OF ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 6 DETAILED ANALYSIS GIVEN BY THE TPO FOR SELECTING TH E COMPANY AS A COMPARABLE IN BENCHMARKING THE INTERNATIONAL TRANSA CTION. 3. WHETHER THE HON'BLE DRP HAS ERRED IN SUMMARILY HOLDING THAT M/S.INFOSYS TECHNOLOGIES LTD. IS NOT A PROPER COMPARABLE IGNORING THE TPO'S DETAILED ANALYSIS OF THE COMPANY ON ALL THE RELEVANT PARAMETERS IN SUPPORT OF HIS FI NDING AS TO HOW M/S. INFOSYS TECHNOLOGIES LTD. QUALIFIES AS A COMPA RABLE FOR BENCHMARKING THE TRANSLATION. 4. WHETHER THE HON'BLE DRP HAS ERRED IN MECHANICALL Y AND SELECTIVELY RELYING UPON THE DECISION IN THE CASE O F M/S. AGNITY INDIA TECHNOLOGIES PVT. LTD. WITHOUT APPRECIATING T HAT THE DECISION IN THE SAID CASE TURNED ON THE SPECIFIC FA CT-SITUATION INVOLVED THEREIN AS THE HON'BLE ITAT HAD RENDERED A N UNCONTROVERTED FINDING REGARDING THE DIFFERENCE IN THE FUNCTIONAL & RISK PROFILES BETWEEN THE ASSESSEE AND M/S. INFOS YS TECHNOLOGIES LTD. IN THE CASE UNDER CONSIDERATION, THE TPO HAS GIVEN A DETAILED ANALYSIS AS TO HOW THE ASSESSEE AN D M/S. INFOSYS TECHNOLOGIES ARE NOT DIFFERENT FUNCTIONALLY AND THE REFORE THE CASE OF M/S. AGNITY INDIA TECHNOLOGIES PVT. LTD. IS DISTINGUISHABLE. 3. BRIEFLY STATED THE FACTS NECESSARY TO ADJUDICATE THE ISSUES IN CONTROVERSY ARE : ACCORDING TO THE TRANSFER PRICING REPORT, ST ERICSSON IS INTO INTEGRATED CIRCUIT DESIGN DEVELOPM ENT, VERIFICATION, MAINTENANCE AND SOFTWARE DEVELOPMENT RELATED TO THE COMMUNICATION DEVICES. THE TAXPAYER, ONE OF THE DE SIGN CENTERS FOR STE GROUP, WORKS ONLY ON THE SPECIFICATIONS GIV EN TO IT BY THE STE GROUP AND ITS LIMITED FUNCTIONS IN THE DESIGN A ND DEVELOPMENT STAGE OF THE SEMI-CONDUCTOR PRODUCTS IS MERGED WITH THE REST OF THE IMPLEMENTATION PERFORMED BY THE OTHER CENTERS OF ST E GROUP IN ORDER TO COMPLETE THE DESIGNING AND DEVELOPMENT OF PARTICULAR PRODUCT. THE TAXPAYER CLAIMED ITS ROLE TO BE THAT OF A CONTRACT ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 7 CAPTIVE DESIGN CENTRE. DURING THE YEAR UNDER ASSES SMENT, THE TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTIONS WI TH ITS ASSOCIATED ENTERPRISE (AE) TABULATED AS UNDER :- S.NO. TYPE OF INTERNATIONAL TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) MAM PLI 1 PROVISION OF IC DESIGN AND SOFTWARE DEVELOPMENT SERVICES TNMM OP/OC 1,663,523,492 2 PURCHASE OF EQUIPMENT TNMM OP/OC 26,722,373 4. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTION IN ITS TP STUDY CHOSEN 20 COMPARABLES O N THE BASIS OF THREE YEARS DATA AND COMPUTED OP/OC OF COMPARABLES AT 4.99% AND FOUND ITS INTERNATIONAL TRANSACTION AT ARMS LE NGTH. TPO ON THE BASIS OF AUDITED FINANCIALS PROCEEDED TO HOLD THAT THE ASSESSEE IS NOT MERELY A SERVICE PROVIDER BUT CARRIED OUT WHOLE RAN GE OF SOFTWARE DEVELOPMENT SERVICES TO CARRY OUT THE MAIN WORK OF ITS AE AND FOR THAT, SET OUT THE FILTERS INTER ALIA THAT USE OF CU RRENT YEARS DATA EXCLUDING THE COMPANYS DIFFERENT FINANCIAL YEARS; REJECTING THE COMPANIES HAVING TURNOVER OF LESS THAN RS.5 CRORES; SELECTING COMPANIES HAVING RATIO OF SERVICE INCOME TO TOTAL I NCOME OF AT LEAST 75%; SELECT COMPANIES HAVING EXPORT INCOME OF AT LE AST 75% OF THE TOTAL INCOME EXCLUDING COMPANIES HAVING RELATED PAR TY TRANSACTION EXCEEDING 25% OF SALES; REJECTING COMPANIES HAVING EMPLOYEE COST ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 8 OF LESS THAN 25% OF THE TOTAL COST; EXCLUDING COMPA NIES AFFECTED BY SOME PECULIAR CIRCUMSTANCES LIKE PERSISTENT LOSSES, DECLINING SALES, EXTRA ORDINARY INCOME OR EXPENSES, MERGERS AND ACQU ISITION. BY APPLYING THE AFORESAID FILTERS, TRANSFER PRICING OF FICER (TPO) REJECTED 7 COMPARABLES CHOSEN BY THE TAXPAYER AND H AS SELECTED 20 COMPARABLES HAVING AVERAGE OP/OC OF 27.88% AND WORK ING CAPITAL ADJUSTED OP/OC AT 22.47% FOR BENCHMARKING T HE INTERNATIONAL TRANSACTIONS, DETAILED AS UNDER :- S.NO. COMPANY NAME OP/OC (%) WORKING CAPITAL ADJUSTED OP/OC (%) I. AKSHAV SOFTWARE TECHNOLOGIES LTD. -1.04 -3.77 II. E-INFOCHIPS BANGALORE LTD. 72.69 62.79 III. EVOKE TECHNOLOGIES PVT LTD 19.02 16.32 IV. E-ZEST SOLUTIONS LTD. 18.66 11.46 V. INFINITE DATA SYSTEMS PVT. LTD. 88.25 81.39 VI. INFOSYS LTD. 45.08 43.05 VII. LARSEN & TOUBRO INFOTECH LTD. 20.48 17.63 VIII. LGS GLOBAL LTD. 12.79 5.11 IX. MINDTREE LTD. 16.62 12.14 X. PERSISTENT SYSTEMS LTD. 30.50 25.50 XI. R S SOFTWARE (INDIA) LTD. 10.29 7.82 XII. SASKEN COMMUNICATION 17.54 15.51 XIII. TATA ELXSI LTD. 19.82 14.68 XIV. THINKSOFT GLOBAL SERVICES LTD. 17.35 11.27 XV. THIRDWARE SOLUTIONS LTD 41.63 35.70 XVI. CAT TECHNOLOGIES 11.48 1.29 ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 9 XVII. MAVERIC SYSTEMS LTD. 16.17 12.35 XVIII. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 15.38 9.49 XIX. SANKHYA INFOTECH 11.44 2.36 XX. WIPRO TECHNOLOGY SERVICES LTD. 73.35 67.32 AVERAGE 27.88% 22.47% 5. TPO ALSO TREATED FOREIGN EXCHANGE GAIN AND PROVI SIONS/ LIABILITIES NO LONGER REQUIRED WRITTEN BACK AS NON- OPERATING IN NATURE THUS TREATED NON-OPERATING COST AS OPERATING WHILE CALCULATING OPERATING MARGIN OF THE ASSESSEE AS WEL L AS COMPARABLE COMPANIES. TPO ALSO TREATED AMORTIZATION OF GOODWI LL AS OPERATING EXPENSES WHILE CALCULATING THE OPERATING MARGIN OF THE ASSESSEE. TPO HAS ALSO COMPUTED OPERATING MARGIN AND WORKING CAPITAL ADJUSTED MARGIN OF THE COMPARABLE COMPANY. AO PROP OSED EXPENDITURE ON TRAINING OF EMPLOYEES AS ENDURING BE NEFIT TO THE ASSESSEE AS CAPITAL IN NATURE. 6. ON THE BASIS OF TP ANALYSIS CARRIED OUT BY THE T PO, ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION S RELATED TO IC DESIGN AND SOFTWARE DEVELOPMENT SERVICES IS COMPUTE D AS UNDER:- PARTICULARS AMOUNT (INR) OPERATING COST 1,613,801,867 ARMS LENGTH MARGIN (%) 22.47% ARMS LENGTH MARGIN (RS.) 362,621,280 ARMS LENGTH PRICE 1,976,423,147 PRICE CHARGED BY THE ASSESSEE 1,677,615,077 105% OF PRICE CHARGED IN 1,761,495,831 ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 10 INTERNATIONAL TRANSACTION DIFFERENCE BETWEEN ALP AND PRICE CHARGED BY ASSESSEE 298,808,070 7. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP WHO HAS DISPOSED OF THE OBJECTIONS. FEELING AGGRIEVED, THE TAXPAYER AS WELL AS REVENUE HAVE COME UP BEFORE THE TRIBUNAL BY WAY OF FILING CROSS APPEALS. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 9. UNDISPUTEDLY THE FACTS OF THE CASE UNDER CONSIDE RATION ARE IDENTICAL TO THAT OF AY 2009-10. IN AN ORDER PASSE D BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1672/DEL/2014 FOR AY 2009-10 ORDER DATED 22.02.2017 , AVAILABLE AT PAGES 1966 TO 2001OF VOL.5 OF THE PAPER BOOK, RELEVANT PAGE 1982, ASSESSEE HAS BE EN TREATED AS A CAPTIVE SERVICE PROVIDER INVOLVED AT THE DESIGN AND DEVELOPMENT STAGE ONLY WITH A LIMITED SCOPE OF WORK AND IS NOT INVOLVED IN THE PROCESS OF CONCEPTUALIZATION OF ANY PRODUCT OR WORK S AND WORKS ONLY ON THE SPECIFICATION PROVIDED BY THE STE GROUP FOR THE IMPLEMENTATION OF IC DESIGN, ITS MAINTENANCE, VERIF ICATION AND SOFTWARE DEVELOPMENT. SO, FOR THE PURPOSE OF BENCH MARKING THE ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 11 INTERNATIONAL TRANSACTIONS, THE ASSESSEE IS TO BE T REATED AS A CONTRACT CAPTIVE DESIGN CENTRE. 10. TPO HAS ACCEPTED TNMM AS MOST APPROPRIATE METHO D (MAM) WITH OP/OC AS PLI ADOPTED BY THE ASSESSEE FOR TP ANALYSIS. THE MAJOR DISPUTE RAISED BY ASSESSEE IS INCLUSION OF CERTAIN COMPANIES IN THE FINAL SET OF COMPARABLES W HICH ARE FUNCTIONALLY DISSIMILAR; TREATING THE FOREIGN EXCHA NGE GAIN AND PROVISIONS/LIABILITY AS NON-OPERATING IN NATURE; TR EATING AMORTIZATION OF GOODWILL AS OPERATING EXPENSES. TO ARRIVE AT THE LOGICAL CONCLUSION QUA TP ADJUSTMENT MADE BY THE TP O/DRP/AO, WE WOULD DISCUSS GROUNDS NO.6, 7 AND 12 FIRST. TAXPAYERS APPEAL (ITA NO.609/DEL./2015) GROUNDS NO.1, 2 & 3 11. GROUNDS NO.1, 2 & 3 ARE GENERAL IN NATURE, HENC E DO NOT REQUIRE ANY SPECIFIC ADJUDICATION. GROUND NO.6 12. IT IS THE CASE OF THE ASSESSEE THAT FOREIGN EXC HANGE AND PROVISION OF DOUBTFUL DEBTS ARE OPERATING ITEMS FOR THE PURPOSE OF COMPUTING THE OPERATING MARGIN OF THE ASSESSEE AS W ELL AS COMPARABLES. HOWEVER, LD. TPO REJECTED THE ARGUMENT S RAISED BY ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 12 THE ASSESSEE AND TREATED THE FOREIGN EXCHANGE GAIN AND PROVISION OF DOUBTFUL DEBTS AS NON-OPERATING ITEM FOR THE PURPOS E OF COMPUTING THE OPERATING MARGIN OF THE ASSESSEE AS WELL AS COM PARABLES. LD. DRP ALSO RATIFIED FINDINGS RETURNED BY THE LD. TPO. 13. LD. AR FOR THE ASSESSEE CONTENDED THAT THIS ISS UE IS ALREADY COVERED IN ASSESSEES OWN CASE IN AY 2009-10 (SUPRA) . FOR READY PERUSAL, OPERATIVE PART OF THE FINDINGS RETURNED BY THE COORDINATE BENCH OF THE TRIBUNAL ARE EXTRACTED AS UNDER :- 15. LD. TPO AS WELL AS LD. DRP HAVE TREATED FOREIG N EXCHANGE GAIN/LOSS AS NON-OPERATING IN NATURE BY RELYING UPO N NOTIFICATION OF CBDT ISSUED ON 18.09.2013, WHICH IS A NOTIFICATI ON ON SAFE HARBOUR RULES. LD. DRP HAS CATEGORICALLY HELD AS UNDER :- HOWEVER, THE POSITION HAS CHANGED SINCE THE NOTIFI CATION OF CBDT ISSUED ON 18.09.2013. THIS IS THE NOTIFICATION ON 'SAFE HARBOUR RULES'. RULE 10TA(J)(K) AND (L) DEFINE THE CONCEPT OF 'OPERATING EXPENSE', 'OPERATING REVENUE' AND 'OPERA TING PROFIT' RESPECTIVELY. ACCORDING TO THIS RULE, LOSS OR INCOME ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATIONS ARE EXCLUDED FROM THE CALCULATION OF 'OPERATING EXPENSE ' AND 'OPERATING INCOME' RESPECTIVELY. THEREFORE, THE TPO WAS CORRECT IN EXCLUDING FOREX ITEMS FROM THE CALCULATI ON OF OPERATING PROFIT. THIS OBJECTION OF THE ASSESSEE IS REJECTED. 16. HOWEVER, AS IS APPARENT FROM THE DATE OF NOTIFI CATION OF THE RULE RELIED UPON BY THE LD. DRP DATED 18.09.201 3, THE SAME IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE WHICH IS QUA ASSESSMENT YEAR 2009-10. THIS IDENTICAL ISSUE HAS ALSO BEEN DEALT WITH BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS WESTFALIA SEPARATOR INDIA (P.) LTD. VS. ACIT ( 2014) 52 TAXMANN.COM 381 (DELHI TRIB.) BY MAKING FOLLOWING OBSERVATIONS :- 4.8 THE LD. AR RELIED ON RULE 10T(J) TO CONTEND TH AT LOSS ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATIONS CANNOT BE INCLUDED IN THE OPERATING EXPENSE. WE ARE NOT PERS UADED TO GIVE ANY MILEAGE TO THE LD. AR ON THIS COUNT FOR TH E SIMPLE REASON THAT RULE 10T IS A PART OF SAFE HARBOR RULES NOTIFIED ON 18.09.2013 WHICH ARE NOT APPLICABLE TO THE ASSESSME NT YEAR UNDER CONSIDERATION. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 13 17. SO, IN VIEW OF THE MATTER, ORDER PASSED BY TPO/ DRP IN NOT CONSIDERING THE FOREIGN EXCHANGE GAIN / LOSS AS OPERATING IN NATURE IS NOT TENABLE IN THE EYES OF LAW, HENCE HER EBY SET ASIDE. LD. TPO IS DIRECTED TO TREAT THE FOREIGN EXCHANGE G AIN / LOSS AS OPERATING IN NATURE IN CALCULATING THE OPERATING MA RGIN OF THE ASSESSEE AS WELL AS FINAL COMPARABLE COMPANIES. SO , GROUND NO.6 IS DETERMINED IN FAVOUR OF THE ASSESSEE. 14. SO, BY FOLLOWING THE DECISIONS RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL, WE DIRECT THE LD. TPO TO TRE AT FOREIGN EXCHANGE GAIN/LOSS AND PROVISION OF DOUBTFUL DEBT A S OPERATING IN NATURE IN CALCULATING THE OPERATING MARGIN OF THE A SSESSEE AS WELL AS FINAL COMPARABLE COMPANIES. SO, GROUND NO.6 IS DET ERMINED IN FAVOUR OF THE ASSESSEE. GROUND NO.7 15. ASSESSEE HAS CHALLENGED THE FINDINGS RETURNED B Y TPO/DRP TREATING AMORTIZATION OF GOODWILL AS NOT EXTRA ORDI NARY IN NATURE. IT IS THE CASE OF THE ASSESSEE THAT GOODWILL IS ON ACC OUNT OF ACQUISITION OF UNITS THROUGH SLUMP SALE UNDER BUSINESS TRANSFER AGREEMENT AND IN THESE CIRCUMSTANCES, AMORTIZATION OF GOODWIL L IS AN EXTRA ORDINARY ITEM AND IS NOT PERTAINING TO THE REGULAR OPERATION OF THE TAXPAYER, HENCE NON-OPERATING IN NATURE. 16. LD. AR FOR THE ASSESSEE CONTENDED THAT LD. DRP IN ASSESSEES OWN CASE IN AYS 2011-12 AND 2012-13 AND LD. TPO IN AY 2013-14 ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 14 HAS ALREADY AMORTIZED GOODWILL AS EXTRA ORDINARY IN NATURE BY EXCLUDING THE SAME BY COMPUTING OPERATING MARGIN OF THE TAXPAYER AND ORDER THEREOF IS AVAILABLE AT PAGES 2681 TO 269 5, 2696 TO 2713 AND 2718 AND 2764 OF THE PAPER BOOK. IT IS ALSO NO T IN DISPUTE THAT THERE IS NO CHANGE IN THE FACTS OF AYS 2010-11, 201 1-12, 2012-13 AND 2013-14. PERUSAL OF THE ORDER PASSED BY LD. DR P AVAILABLE AT PAGE 2681 RELEVANT PORTION AT PAGE 2691, SHOWS THAT AMORTIZATION OF GOODWILL IS AN EXTRA ORDINARY ITEM AND IS NOT PE RTAINING TO THE REGULAR OPERATION OF THE ASSESSEE, AND HENCE NON-OP ERATING IN NATURE. SO, IN THESE CIRCUMSTANCES, WE DIRECT THE TPO TO VERIFY THE FACTS AND TREAT THE AMORTIZATION OF THE GOODWILL AS NON-OPERATING EXPENDITURE IN ORDER TO COMPUTE THE OPERATING MARGI N OF THE ASSESSEE. SO, GROUND NO.7 IS DETERMINED IN FAVOUR OF THE ASSESSEE. GROUND NO.12 17. ASSESSEE CLAIMED RISK ADJUSTMENT ON ACCOUNT OF DIFFERENCES BETWEEN THE ASSESSEE AND COMPARABLE COMPANIES WHICH HAS BEEN DENIED BY TPO/DRP ON THE GROUND THAT THE ASSESSEE H AS ONLY A SINGLE CUSTOMER RISK. ASSESSEE CLAIMED RISK ADJUST MENT OF 13.89% TO BE APPLIED TO THE MARGIN OF THE COMPARABLE COMPA NIES FOR BENCHMARKING THE INTERNATIONAL TRANSACTION COMPUTED AS UNDER : ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 15 PARTICULARS MARGIN (IN %) RATE OF RETURN ON 5 YEAR GOVERNMENT SECURITIES AS ON MARCH 2010 (A) 7.25% CREDIT SPREAD BETWEEN 5 YEAR GOVERNMENT SECURITIES AND AAA RATED CORPORATE BOND AS ON 31 MARCH 2010 (B) 1.17% RATE OF RETURN ON AAA RATED CORPORATE BONDS C = (A + B) 8.42% RISK ADJUSTMENT TO BE MADE ON MARGIN EARNED BY COMPARABLES (B/A) 13.89% 18. ASSESSEE RELIED UPON RULE 10B (2) AND DECISION RENDERED BY DELHI BENCH OF THE TRIBUNAL IN HYUNDAI ROTEM COMPANY VS. ACIT IN ITA NO.510/DEL/2016 ORDER DATED 22.11.2017 AVAILABLE AT PAGES 2667 TO 2680 OF VOL.V OF THE PAPER BOOK, R ELEVANT PAGE 2678. 19. LD. DRP REJECTED THE CLAIM OF THE ASSESSEE FOR RISK ADJUSTMENT ON THE GROUND THAT THE MECHANICAL ADJUST MENT CANNOT BE MADE TO THE MARGIN OF THE COMPARABLES WITHOUT KNOWI NG WHICH RISK WAS TAKEN BY THE ENTITY CONCERNED AND HOW ITS PROFITABILITY WAS AFFECTED. LD. DRP FURTHER STATED THAT THIS EXERCIS E REQUIRES ROBUST AND RELIABLE DATA AVAILABLE WITH THE ASSESSEE AS WE LL AS FOR THE COMPARABLES AND IN THE ABSENCE OF WHICH, RISK ADJUS TMENT CANNOT BE CONSIDERED FOR ENHANCING COMPARABILITY AND THERE BY REJECTED THE OBJECTION. FINDING OF THE LD. DRP SHOWS THAT THE L D. DRP HAS NOT DENIED THE RISK ADJUSTMENT BUT REQUIRES ROBUST AND RELIABLE DATA TO QUANTIFY THE RISK ADJUSTMENT. IT IS SETTLED PRINCI PLE OF LAW THAT ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 16 CLAIM CANNOT BE REJECTED MERELY ON THE GROUND THAT IT CANNOT BE QUANTIFIED. 20. COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS HYUNDAI ROTEM COMPANY VS. ACIT (SUPRA) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY RETURNING FOLLOWING FINDINGS :- 18. LD. DRP FOR THE REVENUE CONTENDED THAT THE RIS K HAS TO BE EXPLAINED IN CASE OF EACH COMPARABLE AND ECONOMIC A NALYSIS CANNOT BE THE BASIS FOR RISK ADJUSTMENT IN THE ABSE NCE OF COMPLETE DATA PROVIDED BY THE TAXPAYER. HOWEVER, T HE LD. AR FOR THE TAXPAYER CONTENDED THAT THE RISK ADJUSTMENT IS REQUIRED TO BE GIVEN ON EACH COMPARABLE AS HAS BEEN HELD BY THE CO ORDINATE BENCH A, PUNE BENCH OF THE TRIBUNAL IN CASE OF HO NEYWELL TURBO TECHNOLOGIES (INDIA) PVT. LTD. VS. DCIT IN IT A NO.2584/PUN/2012 ORDER DATED 10.02.2017 BY FOLLOWIN G THE CASE OF SONY INDIA PVT. LTD. CITED AS 114 ITD 448 BY MAK ING FOLLOWING OBSERVATION:- 33. FURTHER, THE DELHI BENCH OF TRIBUNAL IN THE CA SE OF SONY INDIA PVT. LTD. REPORTED IN 114 ITD 448 HAS ALLOWED 20% RISK ADJUSTMENT CONSIDERING THE FACT TH AT IT MAY NOT BE POSSIBLE TO QUANTIFY RISK ADJUSTMENTS. THE ASSESSEE APPLYING THE SAID RATIO IN THE CASE OF SON Y INDIA PVT. LTD. (SUPRA) HAS WORKED OUT THE RISK ADJUSTMEN T ON THE OPERATING MARGINS OF COMPARABLES TO BE ALLOWED WHEN COMPUTED @ 20%. WE DIRECT THE ASSESSING OFFICER TO ALLOW THE RISK ADJUSTMENT AND RE-COMPUTE THE MARGIN S OF COMPARABLES BY APPLYING THE RATIO LAID DOWN BY DELH I BENCH OF TRIBUNAL IN THE CASE OF SONY INDIA PVT. LT D. (SUPRA) AND COMPUTE THE TP ADJUSTMENT, IF ANY, IN T HE HANDS OF ASSESSEE. 19. SIMILAR VIEW HAS BEEN TAKEN BY THE COORDINATE B ENCH OF THE TRIBUNAL IN CASE OF ITO VS. M/S. SUPPORTSOFT IN DIA PVT. LTD. IN IT (TP) A.NO.1372/BANG/2011 ORDER DATED 28.03.20 13 BY RETURNING FOLLOWING FINDINGS :- 27. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS, WE FIND THAT THE TRIBUNAL IN THE CASE OF M/S. INTELLINET TECHNOLOGIES INDIA P VT. LTD. VS. ITO IN ITA 1237/BANG/2007 DATED 30-3-2012 HAS CONSIDERED THIS CONTENTION OF THE ASSESSEE AND HAS HELD THAT THE SINGLE CUSTOMER RISK ATTRIBUTABLE TO THE A SSESSEE IS ONLY AN ANTICIPATED RISK WHEREAS THE RISK ATTRIBUTE D BY THE ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 17 ASSESSEE TO THE COMPARABLES IS EXISTING RISK AND IN SUCH SITUATION THE TPO OUGHT TO HAVE GIVEN THE RISK ADJU STMENT TO THE NET MARGIN OF THE COMPARABLE FOR BRINGING TH EM ON PAR WITH THE ASSESSEE-COMPANY. IN THE SAID CASE ALS O, THE ASSESSEE HAD CLAIMED RISK ADJUSTMENT AT 5.5% AND TH E TRIBUNAL HAS DIRECTED THE TPO TO CONSIDER THE CONTE NTION OF THE ASSESSEE AND DECIDE THE PERCENTAGE ON RISK ADJUSTMENT TO BE MADE IN ACCORDANCE WITH LAW. AS BO TH OF US ARE SIGNATORIES TO THE SAID ORDER, WE RESPECTFUL LY FOLLOWING THE DECISION IN THE CASE OF M/S.INTELLINE T TECHNOLOGIES INDIA PVT. LTD. (SUPRA) REMIT THIS ISS UE ALSO TO THE FILE OF THE AO/TPO FOR RE-CONSIDERATION OF T HE ISSUE IN ACCORDANCE WITH LAW AND IN THE LIGHT OF OUR OBSERVATIONS ABOVE. 20. SO, FOLLOWING THE DECISION RENDERED BY COORDINA TE BENCH OF THE TRIBUNAL IN CASE OF M/S. SUPPORTSOFT INDIA P VT. LTD (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE TAX PAYER IN THIS CASE IS ENTITLED FOR RISK ADJUSTMENT TO THE NET MAR GIN OF COMPARABLES FOR BRINGING THEM AT PAR WITH THE TAXPA YER. SO, GROUND NO.4 IS DETERMINED IN FAVOUR OF THE ASSESSEE . 21. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS ENTITLED FOR RISK ADJUSTMENT TO THE NET MARGIN OF T HE COMPARABLES FOR BRINGING THEM AT PAR WITH THE TAXPAYER ON SUPPL YING THE COMPLETE DATA BY THE ASSESSEE. SO, GROUND NO.12 IS DETERMINED IN FAVOUR OF THE ASSESSEE FOR STATISTICAL PURPOSES. GROUND NO.11, 13, 14 & 15 22. GROUNDS NO.11, 13, 14 & 15 ARE DISMISSED HAVING NOT BEEN PRESSED DURING THE COURSE OF ARGUMENTS. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 18 GROUNDS NO.4, 5, 9 & 10 23. TPO HAS ACCEPTED THE TNMM AS MOST APPROPRIATE M ETHOD WITH OP/OC AS THE PLI ADOPTED BY THE TAXPAYER. THE TAXPAYER IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS S OUGHT EXCLUSION OF 9 COMPARABLES CHOSEN BY TPO/DRP VIZ. (I) E-INFOC HIPS BANGALORE LTD., (II) INFINITE DATA SYSTEMS PVT. LTD ., (III) WIPRO TECHNOLOGY SERVICES LTD., (IV) LARSEN & TOUBRO INFO TECH LTD., (V) MINDTREE LTD., (VI) TATA ELXSI LTD., (VII) THIRDWAR E SOLUTIONS LTD., (VIII) PERSISTENT SYSTEMS LTD. AND (IX) E-ZEST SOLU TIONS LTD. THE TAXPAYER ALSO SOUGHT INCLUSION OF 4 COMPARABLES EXC LUDED BY TPO/DRP VIZ. (I) R SYSTEM INTERNATIONAL LTD., (II) CALIBER POINT BUSINESS SOLUTIONS LTD. (SEG), (III) SIP TECHNOLOGI ES & EXPORTS LTD. AND (IV) CG-VAK SOFTWARE & EXPORTS LTD.. FIRS T OF ALL, WE WOULD EXAMINE THE COMPARABLES SOUGHT TO BE EXCLUDED BY THE TAXPAYER ONE BY ONE AS UNDER. COMPARABLES SOUGHT TO BE EXCLUDED BY THE TAXPAYER E-INFOCHIP BANGALORE LTD. (E-INFOCHIP) 24. ASSESSEE SOUGHT EXCLUSION OF E-INFOCHIP ON THE GROUND THAT IT ENABLED SERVICES (ITES) SEGMENT IS NOT A COMPARA BLE SERVICES ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 19 VIS--VIS TAXPAYER IN THE ABSENCE OF INSUFFICIENT S EGMENTAL INFORMATION. WHEN WE EXAMINE ANNUAL REPORT OF E-IN FOCHIP, RELEVANT PAGE 930 OF THE PAPER BOOK, SUFFICIENT SEG MENTAL INFORMATION IS NOT AVAILABLE. FOR READY PERUSAL, R ELEVANT PORTION REGARDING SEGMENT INFORMATION IS EXTRACTED AS UNDER :- 16. SEGMENT INFORMATION INFORMATION ABOUT PRIMARY SEGMENTS THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENT AND I.T. ENABLED SERVICES WHICH IS CONSIDERED THE ONLY REPORTABLE BUSINESS SEGMENT AS PER ACCOUNTING STANDARD-AS 17 SEGMENT REPORTING ISSUE D BY MANDATORY ACCOUNTING STANDARD PRESCRIBED IN COMPANIES (ACCOUNTING STANDARD) RULES, 2006 AND THE RELEVANT PROVISIONS OF COMPANIES ACT, 1956. INFORMATION ABOUT SECONDARY SEGMENT SALES BY MARKET THE COMPANY HAS ONLY ONE GEOGRAPH ICAL SEGMENT I.E. USA. 25. HONBLE HIGH COURT IN CASE CITED AS UNITED HEALTH GROUP INFORMATION SERVICES (P) LTD. IN ITA 1180/2017 FOR AY 2010-11 AVAILABLE AT PAGE 2034 TO 2037, RELEVANT PAGE 2035, CONFIRMED THE EXCLUSION OF E-INFOCHIP MADE BY THE TRIBUNAL ON THE GROUND THAT E- INFOCHIP BEING PRIMARILY ENGAGED WITH THE TECHNOLOG Y AND SOFTWARE DEVELOPMENT VIS--VIS UNITED HEALTH GROUP INFORMATI ON SERVICES ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 20 PVT. LTD. WHICH IS A SOFTWARE DEVELOPMENT SERVICES LIKE THE TAXPAYER. 26. COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS SUN LIFE INDIA SERVICE CENTRE PVT. LTD. IN ITA NO.750/DEL/20 15 FOR AY 2010-11 AVAILABLE AT PAGE 2038 TO 2080, A ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER HAS ORDERED TO EXCLUDE THE E- INFOCHIP BEING NOT VALID COMPARABLE FOR TP ANALYSIS . 27. LD. DR FOR THE REVENUE BY RELYING UPON THE TP O RDER CONTENDED THAT EXCEPT IN SEGMENTAL INFORMATION, NOW HERE IN THE ANNUAL REPORT ITES HAS BEEN MENTIONED NOR ANY INCOM E HAS BEEN ATTRIBUTED TO IT. HOWEVER, WE ARE OF THE CONSIDERE D VIEW THAT WHEN COMPANY HAS CATEGORICALLY CLAIMED TO BE PRIMARILY E NGAGED IN SOFTWARE DEVELOPMENT AND ITES AND CONSIDERED THE SA ME AS THE ONLY REPORTABLE BUSINESS SEGMENT, THE SAME CANNOT B E TAKEN AS A VALID COMPARABLE PARTICULARLY UNDER TNMM UNDER WHIC H LARGE POOL OF COMPARABLE IS AVAILABLE. 28. IN VIEW OF THE MATTER, WE ARE OF THE CONSIDERED VIEW THAT WHEN E-INFOCHIP IS ENGAGED INTO SOFTWARE DEVELOPMEN T AS WELL AS ITES AND SEGMENTAL INFORMATION IS NOT AVAILABLE, TH E SAME CANNOT BE A VALID COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTINE ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 21 SOFTWARE DEVELOPMENT SERVICE PROVIDER, HENCE WE ORD ER TO EXCLUDE E-INFOCHIP FROM THE FINAL SET OF COMPARABLES. INFINITE DATA SYSTEMS PRIVATE LTD. (INFINITE) 29. THE TAXPAYER SOUGHT TO EXCLUDE INFINITE ON THRE E GROUNDS INTER ALIA IT PROVIDES SERVICES TO FUJITSU SERVICES LTD. (FUJITSU), UK UNDER CONTRACT WITH THE HOLDING COMPANY; THAT IT EA RNS REVENUE FROM FUJITSU SERVICES LTD. UNDER BUILD, OPERATE AND TRANSFER (BOT) MODEL AND INFINITE HAS PROVIDED SERVICES TO F UJITSU UNDER CONTRACT BETWEEN INFINITE AND FUJITSU SERVICES LTD. , UK AND THE SAID CONTRACT IS NOT AVAILABLE IN THE PUBLIC DOMAIN . LD. DR FILED COMPREHENSIVE WRITTEN SUBMISSIONS OPPOSING THE EXCL USION OF INFINITE. 30. IT IS NOT IN DISPUTE THAT INFINITE IS A 100% SU BSIDIARY OF INFINITE COMPUTER SOLUTIONS (INDIA) LIMITED (ICS) W HICH HAD SIGNED AGREEMENT WITH FUJITSU SERVICES LTD., A COMP ANY INCORPORATED IN UK TO SET UP GLOBAL DELIVERY CENTER IN INDIA IN ORDER TO RENDER SERVICE TO FUJITSU SERVICES LTD. AN D ITS ASSOCIATE WITH EFFECT FROM JANUARY 1, 2009 ON BOT MODEL, AS I S EVIDENT FORM DIRECTORS REPORT, AVAILABLE IN THE ANNUAL REPORT L YING AT PAGE 1048 OF PB-3. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 22 31. IN THE NOTES TO FINANCIAL STATEMENT, AVAILABLE AT PAGE 1063, IT IS CATEGORICALLY MENTIONED THAT INFINITE PROVIDE S SOLUTIONS THAT ENCOMPASS TECHNICAL CONSULTING, DESIGN AND DEVELOPM ENT OF SOFTWARE, MAINTENANCE, SYSTEM INTEGRATION, IMPLEMEN TATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES BEING WHOLLY OWNED SUBSIDIARY OF ICS. WHEN THE INFINITE IS WORKING FO R ICS IN TERMS OF THE AGREEMENT OF BOT MODEL AS PER AGREEMENT WITH FUJITSU SERVICES LTD TO PROVIDE OFFSHORE DELIVERY CAPABILIT IES, IT CANNOT BE A VALID COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTINE CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE COMPANY WORKING UNDER UNCONTROLLED BUSINESS ENVIRONMENT CANNOT BE C OMPARED WITH COMPANY WORKING UNDER CONTROLLED BUSINESS ENVIRONME NT. 32. MOREOVER, WHEN IDS HAS BEEN PROVIDING SERVICES TO FUJITSU SERVICES LTD. UNDER THE CONTRACT WITH IDS AND FUJIT SU SERVICES LTD., UK TO WHICH IDS IS NOT A PARTY AND AGREEMENT IS NOT AVAILABLE IN THE PUBLIC DOMAIN, THEIR ENTIRE TRANSACTION IS O PAQUE AND CANNOT BE A VALID COMPARABLE. HONBLE DELHI HIGH COURT IN UNITED HEALTH GROUP INFORMATION SERVICES (INDIA) PVT. LTD. (SUPRA), CONFIRMED THE EXCLUSION OF INFINITE AS COMPARABLE V IS--VIS UNITED HEALTH GROUP INFORMATION SERVICES (INDIA) PVT. LTD. WHICH IS A ROUTINE SOFTWARE DEVELOPMENT SERVICES PROVIDER. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 23 33. COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS SUN LIFE INDIA SERVICE CENTRE PVT. LTD. (SUPRA) ORDERED THE EXCLUSION OF INFINITE AS A COMPARABLE WITH ROUTINE SOFTWARE SERV ICE PROVIDER. MOREOVER, WHEN INFINITE IS DEALING WITH SOLE CUSTOM ER, FUJITSU SERVICES LTD., THE SAME IS EXPOSED TO SIGNIFICANT S INGLE CUSTOMER RISK. 34. COORDINATE BENCH OF THE TRIBUNAL IN LAB ADVANTAGE SOLUTION PVT. LTD. VS. DCIT IN ITA NO.1051, 599, 61 7/KOL/2015 FOR AY 2010-11 , ALSO EXAMINED COMPARABILITY OF INFINITE WITH LAB ADVANTAGE SOLUTIONS PVT. LTD., A SOFTWARE DEVELOPME NT SERVICE PROVIDER AND ORDERED TO EXCLUDE THE SAME BY RETURNI NG FOLLOWING FINDINGS :- 8.3. EXCLUSION OF INFINITE DATA SYSTEMS PVT LTD ( MERGED) WE FIND THAT THIS COMPANY HAD REPORTED NCP OF 88.25 %. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT.' HENCE COMPARABLE SHOULD ALSO BE IN THE COMPANIES EN GAGED IN THE SIMILAR SECTOR. WE FIND THAT THIS COMPANY IS HA VING A DIFFERENT BUSINESS MODEL AND ENGAGED IN PROVIDING E NTIRE GAMUT OF SOLUTIONS COMPRISING OF TECHNICAL CONSULTING, DE SIGN AND DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEM INTEGR ATION, IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEME NT SERVICES. WE FIND FROM THE PAPER BOOK THAT THE REVENUE IS PRI MARILY DERIVED FROM TECHNICAL SUPPORT AND INFRASTRUCTURE M ANAGEMENT SERVICES. WE FIND THAT INFINITE DATA SYSTEMS PVT LT D COMMENCED ITS OPERATIONS ON 1 ST JANUARY 2009 AND AS PER SEGMENT REPORTING DISCLOSURE, THE COMPANY'S OPERATIONS PREDOMINANTLY RELATE TO PROVIDING SOFTWARE TECHNICAL CONSULTANCY SERVICES T O ITS SOLE CUSTOMER FUJITSU SERVICES LIMITED. FURTHER, AS PER THE ANNUAL REPORT OF 2009, AT PAGE L, IT IS STATED THAT THE HO LDING COMPANY M/S INFINITE COMPUTER SOLUTIONS (INDIA) LIMITED SIG NED AN AGREEMENT (BUILD, OPERATE AND TRANSFER - BOT MODEL) WITH FUJITSU SERVICES LIMITED TO SET UP GLOBAL DELIVERY CENTERS IN ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 24 INDIA TO PROVIDE OFFSHORE DELIVERY CAPABILITIES TO FUJITSU & FUJITSU'S ASSOCIATED COMPANIES. WE FIND THAT THESE FACTS HAVE ALSO BEEN ACKNOWLEDGED BY THE LD TPO AT PAGE 77 OF HIS ORDER. THE LD. AR STATED THAT IT WOULD BE WORTHWHILE TO NO TE THAT INFINITE DATA SYSTEMS PVT LTD COMPLETED ITS THREE YEARS CONT RACT WITH FUJITSU, POST WHICH, THE BUSINESS WAS TRANSFERRED T O FUJITSU AND THUS THE COMPANY HAS BEEN MERGED WITH ITS HOLDING C OMPANY - INFINITE COMPUTER SOLUTION INDIA) LTD DURING THE FI NANCIAL YEAR 2011-12. WE ARE INCLINED TO AGREE WITH THE SUBMISSI ON OF THE LD AR THAT THIS COMPARABLE INFINITE DATA SYSTEMS PVT L TD WAS CREATED FOR PURPOSES OF TRANSFER OF BUSINESS. HENCE THE NATURE OF SERVICES AND BUSINESS MODEL OF ASSESSEE COMPANY AND COMPARABLE COMPANY ARE ENTIRELY DIFFERENT. APART FR OM THIS, WE ALSO FIND THAT THERE EXIST ABNORMAL CIRCUMSTANCES I N THE SAID COMPARABLE. DURING THE LAST 3 YEARS, VARIATIONS IN MARGINS EARNED SHOW AN ABNORMAL CIRCUMSTANCES LEADING TO HU GE FLUCTUATIONS AND SUPERNORMAL PROFIT, THE MARGIN EAR NED BY INFINITE IS 88.25% WHICH IS ABNORMALLY HIGH. IT WAS ARGUED THAT SUCH COMPANIES WHICH ARE MAKING MORE THAN TWICE THE ARITHMETICAL MEAN MARGIN AS COMPUTED BY THE LD TPO SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD AR REFERRED TO PAGE 591 OF THE PAPER BOOK WHERE THE DETAILS OF THE FLUCTUATION IN THE REVENUE, PROFIT AND MARGINS HAS BEEN PROVIDED. IT IS TRUE THAT WHERE COMPANY IN WHICH EXTRAORDINARY EVENTS HAD TAK EN PLACE DURING THE YEAR LIKE MAJOR ACQUISITIONS WHICH HAD I MPACT ON PROFITS OF COMPANY, IT COULD NOT BE SELECTED AS COM PARABLE TO ASSESSEE ENGAGED IN SOFTWARE DEVELOPMENT. WE PLACE RELIANCE IN THIS REGARD ON THE DECISION OF HYDERABAD TRIBUNAL I N THE CASE OF EXCELLENCE DATA RESEARCH (P) LTD VS ACIT REPORTED I N ( 2016) 74 TAXMANN.COM 13 (HYD TRIB) DATED 12.9.2016 FOR ASST YEAR 2010- 11 , WHEREIN IT WAS HELD THAT :- 8. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE DRP HAS DIRECT ED THE AO TO CONSIDER WHETHER THE EXTRA ORDINARY EVENT OF AMALGAMATION DURING THE YEAR IS FOUND TO HAVE AN IM PACT ON THE PROFITS OF THE COMPANY. WE FIND THAT INSTEA D OF CARRYING OUT THE EXERCISE, THE AO HAS SIMPLY FOLLOW ED THE ORDER OF THE TPO IN HOLDING THAT THE FACT OF AMALGAMATION ON THE MARGIN OF THE SAID COMPANY HAS NO EFFECT ON THE MARGIN OF THE SAID COMPANY. THIS, IN OUR OPINION, IS NOT A CORRECT APPROACH A/THE AO. WHERE A DIRECTION HAS BEEN GIVEN BY THE DRP TO FOLLOW A CER TAIN PROCEDURES, THE AO HAS SIMPLY FOLLOWED THE TPO ORDE R. THEREFORE, ORDER OF THE AO ON THIS ISSUE NEEDS TO B E SET ASIDE. IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P .) LTD. (2015) 64 TAXMANN.COM 442 (HYD.-TRIB.) WHICH I S ALSO ENGAGED IN RENDERING OF ITES TO ITS AES, THE TRIBUNAL HAS TAKEN NOTE OF THE SAME AT PARA 9.1 AND 9.3 OF ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 25 ITS ORDER. THEREFORE, THE DECISION OF THE TRIBUNAL IN THE SAID CASE IS APPLICABLE TO THE CASE ON HAND, MORE PARTICULARLY SINCE THE COMPARABLES ADOPTED BY THE T PO IN THE SAID CASE ARE THE SAME ILL THE ASSESSEE'S CASE ALSO. IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P.) LTD. (S UPRA) AT PAGE 20, PARA 18, THE TRIBUNAL HAS HELD AS UNDER : '18. AS REGARDS M/S. ACCENTIA TECHNOLOGIES LTD., IS CONCERNED, WE FIND THAT THE DRP HAS DIRECTED TO EXCLUDE THIS COMPANY BY PLACING RELIANCE UPON THE ORDER OF THE ITA T IN THE ASSESSEE'S OWN CASE FOR THE A. Y. 2009-10 BY HOLDING THAT THIS COMPANY OPERATES IN A DIFFERENT BUSINESS STRATEGY OF ACQUIRING COMPANIES FOR INORGANIC GROWTH AS ITS STRATEGY AND CONSIDERING THE PROFIT MARGINS OF THE COMPANY AND INSUFFICIENT SEGMENTAL DATA, HELD THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABLE. IT WAS ALSO HELD BY THE DRP THAT ON THE VERY SAME REASON OF ACQUISITION OF VARIOUS COMPANIES, BEING AN EXTRAORDINARY EVENT, IT HAD AN IMPACT ON THE PROFIT OF THE COMPANY AND THE SAID COMPANY WAS DIRECTED TO BE EXCLUDED. 18.1 FOR THE RELEVANT A.Y. 2010-11, THE LD. COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE INFORMATION AVAILABLE ON ACCENTIA TECHNOLOGIES LTD., TO DEMONSTRATE THAT THE SAID COMPANY IS INTO DIVERSIFIED KNOWLEDGE PROCESS OUTSOURCING ACTIVITIES. IT IS SEEN THERE FROM THAT THE SAID COMPANY IS INVOLVED IN HEALTHCARE DOCUMENTATION AS WELL AS RECEIVABLES, MANAGEMENT SERVICES INCLUDING INSTALLATION AND MAINTENANCE OF ALL SOFTWARE, HARDWARE AND BAND WIDTH INFRASTRUCTURE REQUIRED FOR THE SAME, DEPLOYMENT OF MAN POWER AND SERVICE DELIVERY IN ALL THESE AREAS. IT IS ALSO SEEN THAT IT IS ENGAGED IN LEGAL PROCESS OUTSOURCING. FROM SCHEDULE-OV SHOWING THE FIXED ASSETS OF THE ASSESSEE, IT IS ALSO SEEN T HAT THE SAID COMPANY OWNS GOODWILLIBRANDL1PRS (INTELLECTUAL PROPERTY RIGHTS). FROM THE NOTES TO THE ACCOUNTS, IT IS ALSO SEEN THAT A SUBSIDIARY OF THE COMPANY ASSCENT INFOSERVE PVT. LTD., HAS BEEN AMALGAMATED WITH THE COMPANY CONSEQUENT TO WHICH, ASSETS AND LIABILITIES OF THE ERSTWHILE COMPANY WERE TRANSFERRED AND VESTED IN THE COMPANY W.E.F 1 ST APRIL, 2008 AND THE SCHEME HAS BEEN GIVEN EFFECT TO IN THE ACCOUNTS OF THE YEAR. THEREFORE, IT IS CLEAR THAT THERE IS AN EXTRAORDINA RY ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 26 EVENT IN THE CASE OF ACCENTIA TECHNOLOGIES LTD., DURING THE RELEVANT FINANCIAL YEAR PARTICULARLY SINCE THE APPROVAL FOR AMALGAMATION HAS BEEN GIVEN BY THE HON'BLE HIGH COURT OF MUMBAI VIDE ORDERS DATED 21 ST AUGUST, 2009 AND BY THE HON'BLE KARNATAKA HIGH COURT VIDE ORDERS DATED 6TH FEBRUARY, 2010. THIS EVENT WOULD DEFINITELY HAVE AN EFFECT ON THE PROFIT MARGINS OF THE SAID COMPANY AND THEREFORE, HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES AS RIGHTLY DONE BY THE DRP. THEREFORE, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP ON THIS COMPANY ALSO. ACCORDINGLY, GROUND NO. 3 OF THE REVENUE IS DISMISSED'. SINCE THE ORDER OF THE TRIBUNAL IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P.) LTD. (SUPRA) FOR THE SAME A. Y, WE DIRECT THE AO;TPO TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 11. TCS E-SERVE INTERNATIONAL LTD: AS REGARDS THE COMPARABILITY OF THIS COMPANY WITH THE ASSESSEE, TH E LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TCS INTERNATIONAL ALSO PROVIDES SOFTWARE TESTING, VERIF ICATION AND VALIDATION WHICH ARE DIFFERENT FROM ITES SERVIC ES PROVIDERS BY THE ASSESSEE. IT IS ALSO SUBMITTED THA T THE SEGMENTAL INFORMATION OF TCS INTERNATIONAL ARE NOT AVAILABLE IN THE ANNUAL REPORT. THE EXCEPTIONAL CIRCUMSTANCES OF THE COMPANY REPORTED IN ANNUAL REP ORT SUCH AS ACQUISITION OF INDIA BASED CAPTIVE BUSINESS OUTSOURCING ARM, RESULTING IN ACQUISITION OF AN AGG REGATE AMOUNT OF $ 2.5 BILLION OVER A PERIOD OF 9.5 YEARS AND ITS IMPACT ON THE FINANCIAL IMPLICATIONS OF THE COMPANY ALSO BROUGHT TO OUR NOTICE. IT IS SUBMITTED THAT THESE P ECULIAR CIRCUMSTANCES HAVE BEEN CONSIDERED BY THE COORDINAT E BENCH OF THIS TRIBUNAL IN THE CASE OF HYUNDAI MOTOR S INDIA ENGG. (P.) LTD. (SUPRA) FOR EXCLUSION OF THE LIST OF COMPARABLES. RESPECTFULLY FOLLOWING THE DECISION OF THE BENCH, THESE TWO COMPARABLES TCS E-SERVE INTERNATIONAL LTD AND TCS E-SERVE LTD DIRECTED TO BE EXCLUDED. IN VIEW OF THE AFORESAID FINDINGS AND JUDICIAL PREC EDENT RELIED UPON, WE HOLD THAT THE COMPARABLE CHOSEN BY LD TPO I.E INFINITE DATA SYSTEMS PVT LTD (MERGED) IS FUNCTIONALLY NOT C OMPARABLE WITH THE ASSESSEE COMPANY. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 27 35. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT INFINITE IS NOT A VALID COMPAR ABLE VIS--VIS THE TAXPAYER FOR TP ANALYSIS. SO, WE ORDER TO EXCLUDE THE SAME FROM THE FINAL SET OF COMPARABLES. WIPRO TECHNOLOGY SERVICES LTD. (WIPRO) 36. THE TAXPAYER SOUGHT EXCLUSION OF WIPRO ON THE G ROUND THAT IT INVOLVED IN PROVIDING SOFTWARE RELATED SERVICES TO ITS SOLE CUSTOMER CITI GROUP ENTITIES WHICH WERE ACQUIRED BY WIPRO AN D HAS SIGNED A MASTER SERVICE AGREEMENT WITH CITI GROUP FOR THE DE LIVERY OF SERVICES FOR A PERIOD OF SIX YEARS; THAT WIPROS TR ANSACTION WITH CITI GROUP FALLS WITHIN THE AMBIT OF SECTION 92B (2) AND AS SUCH, IS DEEMED INTERNATIONAL TRANSACTION AND HAS RELIED UPO N THE DECISION OF HONBLE DELHI HIGH COURT IN CASHEDGE INDIA PVT. LTD. IN ITA 279/2016 ORDER DATED 04.05.2015, DECISIONS RENDERED BY THE TRIBUNAL IN OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. FOR AY 2010-11 (ITA NO.7078/DEL/2014) AND EQUANT SOLUTIONS INDIA PVT. LTD. FOR AY 2010-11. 37. BARE PERUSAL OF THE ANNUAL REPORT OF WIPRO, AVA ILABLE AT PAGE 1545 OF PAPER BOOK-III, SHOWS THAT WIPRO IS PROVIDI NG SOFTWARE RELATED SERVICES TO ITS SOLE CUSTOMER CITI GROUP AS PER MASTER SERVICE AGREEMENT (MSA) DATED 21.01.2009. MSA PROV IDES FOR ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 28 THE DELIVERY OF AT LEAST $ 500 MILLION IN SERVICE R EVENUES OVER THE PERIOD OF THE CONTRACT. SO, THE WIPRO IS INTO CONT ROLLED TRANSACTIONS WITH ITS SOLE CUSTOMER. FURTHERMORE, WHEN WE EXAMI NE BUSINESS TRANSACTIONS BETWEEN WIPRO AND CITI GROUP COMPANIES IN THE LIGHT OF THE MSA, SUCH TRANSACTIONS ARE DEEMED INTERNATIO NAL TRANSACTIONS U/S 92B (2) OF THE ACT. 38. HONBLE DELHI HIGH COURT IN CASE OF CASHEDGE INDIA PVT. LTD. (SUPRA) CONFIRMED THE FINDINGS RETURNED BY COORDINA TE BENCH OF THE TRIBUNAL DIRECTING TO EXCLUDE WIPRO AS A COM PARABLE VIS-- VIS CASHEDGE WHICH IS ALSO INTO BUSINESS OF SOFTWAR E DEVELOPMENT BY RETURNING FOLLOWING FINDINGS :- 6. AS FAR AS THE WIPRO TECHNOLOGY SERVICES GOES, IT WAS PART OF THE CITI GROUP AND WAS DURING THE FINANCIAL YEAR IN QUESTION ACQUIRED ON 21.01.2009 BY THE WIPRO LTD. A S A SUBSIDIARY. AS A PART OF THE ARRANGEMENT, THE EXIST ING CONTRACTS PERTAINING TO THE WORK OF THE CITI GROUP CONTINUED TO BE WITH THE NEWLY CREATED ENTITY, I.E., WIPRO TECHNOLOGY SERVIC ES. EQUALLY IMPORTANTLY, IS THAT THERE WAS NO PUBLISHED SEGMENT ED DATA AS FAR AS SOFTWARE DEVELOPMENT OR ITS FINANCES WERE CONCER NED WITH RESPECT TO WIPRO TECHNOLOGY SERVICES. IN THESE CIRC UMSTANCES, THE FINDINGS OF THE ITAT ARE PURELY FACTUAL AND CAN NOT BE GONE INTO AS NO SUBSTANTIAL QUESTION OF LAW ARISES FOR C ONSIDERATION. 39. SIMILARLY, COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. (SUPRA) EXAMINED THE COMPARABILITY OF WIPRO AVIS-AVIS OPEN SOLUTIONS SOF TWARE SERVICES PVT. LTD. ENGAGED IN SOFTWARE DEVELOPMENT, RESEARCH AND OTHER RELATED SERVICES AND FOUND THE SAME TO BE INV ALID COMPARABLE ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 29 IN THE LIGHT OF THE PROVISIONS CONTAINED U/S 92B(2) OF THE ACT BY RETURNING FOLLOWING FINDINGS :- THE AFORESAID PROVISION CLEARLY ENVISAGES THAT, IF A TRANSACTION HAS BEEN ENTERED INTO BY AN ENTERPRISE WITH UNRELAT ED PARTY, THEN FOR THE PURPOSE OF SECTION 92B(1) IT IS DEEMED TO B E TRANSACTION ENTERED INTO BETWEEN RELATED PARTIES (TWO A.ES) IF THERE EXISTS PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSAC TION BETWEEN THIRD PARTY AND THE A.E. IN OTHER WORDS, AS PER TER MS OF SECTION 92B(2), EVEN IF THE TRANSACTION IS BETWEEN UNRELATE D PARTY AND AN ENTERPRISE, THEN, IT WOULD BE DEEMED TO BE AN INTER NATIONAL TRANSACTION IF THERE WAS ANY PRIOR AGREEMENT BETWEE N THE RELATED PARTIES ON THE BASIS OF WHICH PRESENT TRANSACTION I S BEING UNDERTAKEN. 40. SO, WHEN WIPRO HAS RECEIVED THE REVENUE BY VIRT UE OF MSA WITH CITI GROUP ON ACCOUNT OF PRE-ARRANGEMENT, IT I S DEEMED TO BE INTERNATIONAL TRANSACTIONS AND IN THESE CIRCUMSTANC ES, WIPRO FAILS RPT FILTER APPLIED BY THE TPO. 41. LD. DR FOR THE REVENUE IN ORDER TO REPEL THE AR GUMENTS ADDRESSED BY THE LD. AR FOR THE ASSESSEE CONTENDED THAT IN THE ANNUAL REPORT IN THE RELATED PARTY TRANSACTIONS, NO WHERE THE NAME OF CITI GROUP ENTITIES HAVE BEEN MENTIONED AS RELATED PARTY AND AS SUCH, THIS COMPARABLE DOES NOT FAIL RPT FILTER BY V IRTUE OF PROVISIONS OF SECTION 92B(2) OF THE ACT. 42. HOWEVER, THIS CONTENTION OF THE LD. DR IS NOT S USTAINABLE BECAUSE THIS ISSUE HAS ALREADY BEEN EXAMINED AT LEN GTH BY THE COORDINATE BENCH OF THE TRIBUNAL IN OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. (SUPRA) AND IN THE LIGHT OF THE MSA ENTERED INTO ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 30 BETWEEN WIPRO AND CITI GROUP W.E.F. 21.01.2009, REL ATED PARTY TRANSACTION IS PROVED AND PROVISIONS CONTAINED U/S 92B(2) ARE ATTRACTED. SO, THERE IS NO COGENT FACTUAL AND LEGA L REASON TO DEPART FROM THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. (SUPRA). 43. SO, WHEN THE ENTIRE REVENUE IS RECEIVED BY THE TAXPAYER BY VIRTUE OF MSA ENTERED INTO WITH CITI GROUP SERVICES WHICH IS ALSO ITS SUBSIDIARY, THE BENEFIT ACCRUING TO THIS COMPAN Y ON THE BASIS OF BRAND NAME OF WIPRO CANNOT BE DENIED. SO, IN THESE CIRCUMSTANCES, WE FIND WIPRO AS UNSUITABLE COMPARAB LE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS AND EXC LUDE THE SAME FROM THE FINAL SET OF COMPARABLES. TATA ELXSI LTD. (TATA ELXSI) 44. THE TAXPAYER SOUGHT EXCLUSION OF TATA ELXSI ON GROUND OF FUNCTIONAL DISSIMILARITY AND NON-AVAILABILITY OF SE GMENTAL DATA. PERUSAL OF THE ANNUAL REPORT, AVAILABLE AT PAGES 13 55 TO 1420 OF PAPER BOOK III, SHOWS THAT THE TAXPAYER IS HAVING WIDE RANGE OF SEGMENTS VIZ. PRODUCT DESIGN SERVICES (PDS), INDUST RIAL DESIGN & ENGINEERING (IDE), VISUAL COMPUTING LABS (VCL), SYS TEMS INTEGRATION (SI) AND SOFTWARE DEVELOPMENT SERVICES. AT THE SAME TIME, SEGMENTAL DATA IS NOT AVAILABLE. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 31 45. KEEPING IN VIEW THE FUNCTIONAL DIS-SIMILARITY A ND NON- AVAILABILITY OF SEGMENTAL DATA, COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 (SUPRA), ORDERED TO EXCLUDE TATA ELXSI FROM THE FINAL SET OF COMPARABLES BY RET URNING FOLLOWING FINDINGS :- 45. ASSESSEE RAISED OBJECTION BEFORE THE TPO/DRP T HAT THIS COMPANY IS NOT A VALID COMPARABLE AS THIS IS AN IT ENABLED AND SOFTWARE PRODUCT COMPANY. TPO/DRP OVERRULED THIS O BJECTION BY OBSERVING THAT IT CAN EASILY BE INCLUDED IN THE LIST OF COMPARABLE AS IT IS PROVIDING SOFTWARE SERVICES AND ONLY VERTICALS ARE DIFFERENT. 46. FROM THE ANNUAL REPORT OF THIS COMPANY, AVAILAB LE AT PAGE 1465 TO 1540 OF THE PAPER BOOK, WE CAN EASILY MAKE OUT THAT THIS COMPANY IS INTO SOFTWARE DEVELOPMENT SERV ICES, PRODUCT DESIGN SERVICES, INNOVATION DESIGN ENGINEERING SERV ICES, SYSTEM INTEGRATION AND SUPPORT SERVICES. BUT THE TPO HAS TAKEN SOFTWARE DEVELOPMENT SERVICES ONLY FOR THE PURPOSE OF COMPARABILITY WITH THE ASSESSEE. HOWEVER, PERUSAL OF THE DETAIL SEGMENT GOES TO PROVE THAT DESIGN AND DEVELOPMENT O F HARDWARE IS ALSO INCLUDED IN THE SOFTWARE SERVICES. IN OTHE R WORDS, TATA ELEXI LTD. IS INTO SOFTWARE PRODUCE AS IS EVIDENT F ROM THE ANNUAL REPORT AND AS SUCH, CANNOT BE TAKEN AS A VALID COMP ARABLE. SO, WE ORDER TO EXCLUDE THIS COMPANY FROM THE FINAL LIS T OF COMPARABLES. 46. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT TATA ELXSI IS NOT A VALID COMP ARABLE VIS--VIS THE TAXPAYER, HENCE WE ORDER TO EXCLUDE THE SAME FR OM THE FINAL SET OF COMPARABLES. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 32 THIRDWARE SOLUTIONS LTD. (THIRDWARE) 47. THE TAXPAYER SOUGHT EXCLUSION OF THIRDWARE ON G ROUND OF FUNCTIONAL DISSIMILARITY BEING ENGAGED INTO SALE OF SOFTWARE PRODUCTS AND ON THE GROUND THAT THIRDWARE HAS BEEN ORDERED TO BE EXCLUDED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 (SUPRA). UNDISPUTEDLY, THE RE IS NO CHANGE IN THE FUNCTIONAL PROFILE OF THE TAXPAYER SI NCE AY 2009-10. COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 ORDERED TO EXCLUDE THIRDWARE BY RETURNING F OLLOWING FINDINGS :- 47. THIS IS AGAIN TPOS OWN COMPARABLE AND ASSESSEE SOUGHT TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE S ON THE GROUND OF NON-COMPARABLE SERVICES I.E APPLICATION IMPLEMENTATION, MANAGEMENT AND DEVELOPMENT SERVICES . TPO REJECTED OBJECTIONS RAISED BY THE ASSESSEE BY OBSER VING THAT SOFTWARE DEVELOPMENT, IMPLEMENTATION AND SUPPORT SE RVICES ARE VARIOUS SUB-SEGMENTS OF SOFTWARE DEVELOPMENT SERVIC ES ONLY AND REQUIRE EMPLOYMENT OF SOFTWARE ENGINEERS AND RETAIN ED THIS COMPANY AS A COMPARABLE FOR BENCHMARKING INTERNATIO NAL TRANSACTIONS. 48. HOWEVER, PERUSAL OF THE ANNUAL REPORT OF THIS C OMPANY, AVAILABLE AT PAGE 1735 TO 1782 OF THE PAPER BOOK VO L.IV, GOES TO PROVE THAT THE SUBSTANTIAL REVENUE OF THIS COMPANY IS FROM SALES AND OPERATING SALES OF LICENCE; SOFTWARE SERVICES, EXPORT FROM SEZ UNIT, EXPORT FROM STPI UNIT AND REVENUE FROM SU BSCRIPTION. IT IS ALSO APPARENTLY CLEAR THAT SOFTWARE SERVICES SEGMENT ACCOUNTS FOR RS.8.91 CRORES OUT OF THE TOTAL SALES OF RS.77 CRORES WHEREAS SEGMENTAL RESULTS ARE NOT AVAILABLE. SO, W HEN THIS COMPANYS SUBSTANTIAL REVENUE IS FROM OTHER VARIOUS BUSINESS SEGMENTS LIKE SALE OF LICENCE, SOFTWARE SERVICES AN D SEGMENTAL RESULTS ARE NOT AVAILABLE, THIS COMPANY CANNOT BE A VALID COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION, HENCE ORDERED TO BE EXCLUDED. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 33 48. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, IN TH E FACE OF THE FACT THAT THIRDWARE IS HAVING SUBSTANTIAL REVENUE F ROM SALES AND OPERATING SALES OF LICENCE; SOFTWARE SERVICES; EXPO RT FROM SEZ UNIT; EXPORT FROM STPI UNIT; AND REVENUE FROM SUBSC RIPTION AND ITS SEGMENTAL RESULTS ARE NOT AVAILABLE, IT IS FUNCTION ALLY INCOMPARABLE, SO IT CANNOT BE TAKEN AS A VALID COMPARABLE. HENCE , WE ORDER TO EXCLUDE THE SAME. PERSISTENT SYSTEMS LTD. (PERSISTENT) 49. THE TAXPAYER SOUGHT EXCLUSION OF PERSISTENT ON GROUND OF FUNCTIONAL DISSIMILARITY BEING A SOFTWARE PRODUCT C OMPANY HAVING SIGNIFICANT IPS AND EARNING ITS REVENUE FROM ITS MO NETIZATION, HAVING INTANGIBLES IN THE NATURE OF SOFTWARE LICENS ES. 50. WHEN WE EXAMINE PROFIT & LOSS ACCOUNT FOR THE Y EAR ENDING MARCH 31, 2010 OF PERSISTENT, AVAILABLE AT PAGE 184 8 OF THE PAPER BOOK IV, IT SHOWS THAT THE SUBSTANTIAL INCOME OF PERSISTENT IS FROM SALE OF SOFTWARE SERVICES AND PRODUCTS AND HAS EARNED ITS REVENUE FROM SALE OF LICENSING OF PRODUCTS AND ROYA LTY. FOR READY PERUSAL, REVENUE RECOGNITION OF PERSISTENT, AVAILAB LE AT PAGE 1858, IS EXTRACTED AS UNDER :- ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 34 H. REVENUE RECOGNITION REVENUE IS RECOGNISED TO THE EXTENT IT IS PROBABLE THAT THE ECONOMIC BENEFITS WILL FLOW TO THE COMPANY AN REVEN UE CAN BE RELIABLY MEASURED. I. INCOME FROM SOFTWARE SERVICES REVENUE FROM TIME AND MATERIAL ENGAGEMENTS IS RECOG NISED ON TIME BASIS IN ACCORDANCE WITH THE TERMS CONTRACTS. IN CASE OF FIXED PRICE CONTRACTS, REVENUE IS RECOGN ISED BASED ON THE MILESTONES ACHIEVED AS SPECIFIED IN THE CONTRAC TS ON PROPORTIONATE COMPLETION BASIS. REVENUE FROM LICENSING OF PRODUCTS IS RECOGNISED ON DELIVERY OF PRODUCTS. REVENUE FROM ROYALTY IS RECOGNISED ON SALE OF PRODU CTS IN ACCORDANCE WITH THE TERMS OF THE RELEVANT AGREEMENT . REVENUE FROM MAINTENANCE CONTRACTS ARE RECOGNISED O N A PRO- RATA BASIS OVER THE PERIOD OF THE CONTRACT AS AND S ERVICES ARE RENDERED. UNBILLED REVENUE REPRESENTS REVENUE RECOGNISED IN R ELATION TO WORK DONE ON TIME AND MATERIAL PROJECTS AND PRICE P ROJECTS UNTIL THE BALANCE SHEET DATE FOR WHICH BILLING HAS NOT TA KEN PLACE. UNEARNED REVENUE REPRESENTS THE BILLING IN RESPECT OF CONTRACTS FOR WHICH THE REVENUE IS NOT RECOGNISED AS PER THE TERMS OF CONTRACT. 51. IT IS ALSO PROVED THAT PERSISTENT IS HAVING HUG E INTANGIBLE IN THE NATURE OF SOFTWARE LICENSE. 52. HONBLE DELHI HIGH COURT IN CASE OF CASHEDGE INDIA PVT. LTD. (SUPRA) UPHELD THE EXCLUSION OF PERSISTENT FROM TH E LIST OF COMPARABLES VIS--VIS CASHEDGE INDIA PVT. LTD. ON T HE GROUND THAT PERSISTENT IS INVOLVED IN SOFTWARE DEVELOPMENT, SOF TWARE PRODUCTS AND MARKETING AND ITS SEGMENTAL DATA IS NOT AVAILAB LE. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 35 53. COORDINATE BENCH OF THE TRIBUNAL IN CASE OF NEC TECHNOLOGIES INDIA LTD. VS. DCIT IN ITA NO.1102/DEL /2015 FOR AY 2010-11 ORDER DATED 27.10.2017 EXAMINED THE COMPARABILITY OF PERSISTENT VIS--VIS NEC TECHNOLOGIES LTD. WHICH WAS INTO PROVIDING SOFTWARE DEVELOPMENT SERVICES AND ORDERED TO EXCLUDE PERSISTENT BY RETURNING FOLLOWING FINDINGS :- 22. FURTHERMORE WHEN WE EXAMINE ANNUAL REPORT OF PERSISTENT, AVAILABLE AT PAGES 120 TO 209 OF THE PA PER BOOK, RELEVANT PAGES 170 TO 173, IT IS AMPLY CLEAR THAT P ERSISTENT DEALS IN SOFTWARE PRODUCTS AND EARNED ITS INCOME BOTH FRO M SOFTWARE SERVICES AND PRODUCT WHEREAS THE TAXPAYER DEALS IN SOFTWARE SERVICES AND AS SUCH CANNOT BE COMPARED WITH PERSIS TENT FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. 23. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE DI RECT TO EXCLUDE PERSISTENT FROM FINAL SET OF COMPARABLES FO R BENCHMARKING THE INTERNATIONAL TRANSACTION. 54. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT PERSISTENT HAVING A DIFFERENT BUSINESS MODEL WITH NO SEGMENTAL DATA AVAILABLE AND HAVING HUGE IN TANGIBLES IS NOT A VALID COMPARABLES VIS--VIS THE TAXPAYER WHICH IS A ROUTINE CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDERS, HEN CE ORDERED TO BE EXCLUDED. E-ZEST SOLUTIONS LTD. (E-ZEST) 55. THE TAXPAYER SOUGHT EXCLUSION OF E-ZEST ON GROU ND OF FUNCTIONAL DISSIMILARITY BEING INTO BROAD PORTFOLIO S OF SERVICES ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 36 (DIVERSIFIED SERVICES) WITH NO SEGMENTAL REPORTING. PERUSAL OF PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31.03.201 0, AVAILABLE AT PAGE 1946 OF THE PAPER BOOK IV SHOWS THAT THE E-Z EST HAS SUBSTANTIAL INCOME FROM OPERATIONS WHEREAS IT HAS T HREE BUSINESS SEGMENTS VIZ. PRODUCT ENGINEERING SERVICES/ OUTSOUR CED PRODUCT DEVELOPMENT SERVICES, ENTERPRISE APPLICATION DEVELO PMENT AND IT SERVICES. HOWEVER, NO SEGMENTAL INFORMATION IS AVA ILABLE. 56. COMPARABILITY OF E-ZEST WAS EXAMINED BY THE COO RDINATE BENCH OF THE TRIBUNAL IN CASE OF ST MICROELECTRONICS PRIVATE LTD. (FORMERLY GENESIS MICROCHIP (INDIA) PVT. LTD. IN IT (TP) A.NO.949/BANG./2011 ORDER DATED 06.01.2017 , AVAILABLE AT PAGE 2459 OF PAPER BOOK V VIS--VIS ST MICROELECTRONIC S PRIVATE LTD., A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND O RDERED TO EXCLUDE THE SAME BY RETURNING FOLLOWING FINDINGS :- 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN TH E LIST OF COMPARABLES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE NOTICE UNDER SECTION 13 3(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVIC ES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVIC ES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOP MENT SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON RECO RD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMEN T SERVICES, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERING PR ODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICE S WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BEEN HEL D BY THE CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CAPI TAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. SUPRA) THAT KP O SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID D ECISION OF ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 37 THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E-Z EST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. / TPO I S ACCORDINGLY DIRECTED. 57. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT E-ZEST CANNOT BE A VALID COMPA RABLE ON GROUND OF FUNCTIONAL DISSIMILARITY BEING INTO THREE SEGMENTS WITH NO SEGMENTAL INFORMATION AVAILABLE. SO, WE ORDERED TO EXCLUDE E- ZEST FROM THE FINAL SET OF COMPARABLES. LARSEN & TOUBRO INFOTECH LTD. (L&T) MINDTREE LTD. (MINDTREE) 58. THE TAXPAYER BY MOVING AN APPLICATION UNDER RUL E 11 OF THE INCOME TAX (APPELLATE TRIBUNAL) RULES SOUGHT TO RAI SE ADDITIONAL GROUND AS UNDER :- ADDITIONAL GROUND 1 : ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE TH E LD. AO/DRP WERE NOT CORRECT IN INCLUDING THE FOLLOWING ENTITIE S IN THE LIST OF APPROPRIATE COMPARABLES (I) LARSEN & TOUBRO INFOTECH LTD. AND (II) MINDTREE LTD. ADDITIONAL GROUND 2 : WITHOUT PREJUDICE TO THE ADDITIONAL GROUND 1, THE L D. TPO HAS ERRED IN DETERMINING THE PLI AT ENTITY LEVEL DESPIT E THE FACT THAT THE ASSESSEE HAD BROUGHT TO HIS NOTICE THE SEGMENTA L RESULTS OF MINDTREE LTD. AS HAS BEEN NOTED BY HIM IN HIS ORDER DATED 25.11.2014 AT PAGE 197 (PARA 3.1 (I) OF THE APPEAL MEMO. (SEGMENTAL RESULTS ARE AT PAGE 55 OF THE ANNUAL REP ORT AT PAGE 1251 OF VOLUME III) ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 38 ON THE GROUND THAT AT THE TIME OF TP ANALYSIS ON TH E BASIS OF INFORMATION THEN AVAILABLE IN THE DATA BASES-PROWES S ETC., CERTAIN COMPARABLES WERE TAKEN FOR BENCHMARKING THE INTERNA TIONAL TRANSACTIONS BUT SUBSEQUENTLY FORM THE ANNUAL REPOR T, IT HAS COME TO THE NOTICE OF THE TAXPAYER THAT L&T AND MINDTREE AR E ALSO NOT VALID COMPARABLES SINCE BOTH THESE COMPARABLES ARE TAXPAY ERS OWN COMPARABLES HAVING BEEN ACCEPTED AND THE TAXPAYER H AS NOW SOUGHT TO CHALLENGE THE SAME BY WAY OF ADDITIONAL E VIDENCE ON THE GROUND THAT TPO HAD NO COMPLETE DATA AT THAT TIME A ND THERE IS NO ESTOPPEL AGAINST STATUTE AS THE ISSUE CAN BE CHALLE NGED AT ANY POINT OF TIME DURING PROCEEDINGS, THE APPLICATION FOR ADD ITIONAL GROUND IS ALLOWED. MOREOVER NO EVIDENCE IS REQUIRED TO BE BR OUGHT ON RECORD TO ADJUDICATE THE CONTROVERSY RAISED BY THE TAXPAYE R BY WAY OF ADDITIONAL EVIDENCE. 59. KEEPING IN VIEW THE FACT THAT L&T AND MINDTREE TAKEN AS COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS HAVE NOT BEEN ANALYZED FOR BENCHMARKING THE INTERNATIONA L TRANSACTIONS HAVING BEEN CHALLENGED NOW BY WAY OF ADDITIONAL GRO UNDS, WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE IS REQUIRED T O BE SENT BACK TO THE TPO TO DECIDE AFRESH AFTER PROVIDING AN OPPORTU NITY OF BEING HEARD TO THE TAXPAYER. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 39 COMPARABLES SOUGHT TO BE INCLUDED BY THE TAXPAYER R. SYSTEMS INTERNATIONAL LTD. (R. SYSTESM) CALIBER POINT BUSINESS SOLUTIONS LTD. (CALIBRE) 60. THE TAXPAYER SOUGHT INCLUSION OF R. SYSTEMS ON THE GROUND THAT IT IS FUNCTIONALLY SIMILAR. THE TPO HAS EXCLU DED R. SYSTEMS ON THE SOLE GROUND THAT ITS FINANCIAL YEAR IS CALEN DAR YEAR AND ALSO ON THE GROUND THAT DATA FOR THE QUARTER ENDING DECE MBER 2009 WAS UNAUDITED AND AS SUCH QUARTERLY RESULT SHALL NOT BE CONSIDERED. 61. IDENTICAL ISSUE HAS BEEN DECIDED BY HONBLE HIG H COURT OF PUNJAB & HARYANA HIGH COURT IN CIT VS. M/S. MERCER CONSULTING (INDIA) PVT. LTD. IN ITA NO.101 OF 2015 (O&M) ORDER DATED 24.08.2016 , AVAILABLE AT PAGE 2628 OF PAPER BOOK V, RELEVAN T PAGE 2637, WHICH HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY RETURNING FOLLOWING FINDINGS :- 27. THE TPO EXCLUDED THE CASE OF R. SYSTEMS INTERN ATIONAL LIMITED FROM THE LIST OF COMPARABLES. THE ITAT INCL UDED THE SAME. THE TPO EXCLUDED THE CASE OF R. SYSTEMS INTER NATIONAL LIMITED ON THE GROUND THAT IT FOLLOWS THE CALENDAR YEAR I.E. IST JANUARY TO 31ST DECEMBER FOR MAINTAINING ITS ANNUAL ACCOUNT WHEREAS THE ACCOUNTING YEAR OF THE ASSESSEE IS 1ST APRIL TO 31ST MARCH. THE TPO FOLLOWED AN ORDER PASSED BY THE MUMB AI BENCH OF THE TRIBUNAL IN ACIT V. HAPAG LLOYD GLOBAL SERVI CES LTD. 2013-TII-68-ITATMUM-TP IN WHICH IT HAD BEEN HELD TH AT A ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 40 COMPANY WITH A DIFFERENT FINANCIAL YEAR ENDING CANN OT BE COMPARED. 28. WE ARE UNABLE TO AGREE WITH THE DECISION OF TH E TPO AND OF THE DRP THAT AFFIRMED IT. THE VIEW TAKEN BY THE TRIBUNAL COMMENDS ITSELF TO US. IT IS NOT THE FINANCIAL YEAR PER SE THAT IS RELEVANT. EVEN IF THE FINANCIAL YEARS OF THE ASSESS EE AND OF ANOTHER ENTERPRISE ARE DIFFERENT, IT WOULD MAKE NO DIFFERENCE. IF IT IS POSSIBLE TO DETERMINE THE VALUE OF THE TRANSACTI ONS DURING THE CORRESPONDING PERIODS, THE PURPOSE OF COMPARABLES W OULD BE SERVED. THE QUESTION IN EACH CASE IS WHETHER DESPIT E THE FINANCIAL YEARS OF THE ASSESSEE AND OF THE OTHER ENTERPRISE B EING DIFFERENT, THE FINANCIALS OF THE CORRESPONDING PERIOD OF EACH OF THEM ARE AVAILABLE. IF THEY ARE, THE TPO MUST REFER TO THE C ORRESPONDING PERIOD OF BOTH THE ENTITIES IN DETERMINING WHETHER THE TWO ARE COMPARABLE OR NOT FOR THE PURPOSE OF DETERMINING TH E ALP. 29. AS NOTED BY THE TRIBUNAL, THE AUDIT ACCOUNTS O F R SYSTEM INTERNATIONAL LTD. FOR THE YEAR ENDING 31.12.2008 H AD BEEN GIVEN UNDER ONE COLUMN AND THE DATA FOR THE QUARTER ENDIN G 31.03.2009 AND 31.03.2008 (BOTH AUDITED) HAD BEEN G IVEN IN TWO OTHER COLUMNS. THUS, AS RIGHTLY HELD BY THE TRIBUNA L, IF FROM THE YEARLY DATA ENDING 31.12.2008, THE RESULTS OF THE Q UARTER ENDING 31.03.2008 ARE EXCLUDED AND IF THE RESULTS FOR THE QUARTER ENDING 31.03.2009 ARE INCLUDED, IT IS POSSIBLE TO OBTAIN T HE DATA FOR THE FINANCIAL YEAR 01.04.2008 TO 31.03.2009. 30. THIS VIEW IS NOT CONTRARY TO RULE 10(B)(4) WHI CH READS AS UNDER:- 10B(4) THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATIN G TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ON HAS BEEN ENTERED INTO. 31. THE RULE DOES NOT EXCLUDE FROM CONSIDERATION T HE DATA OF AN ENTITY MERELY BECAUSE ITS FINANCIAL YEAR IS DIFF ERENT FROM THE FINANCIAL YEAR OF THE ASSESSEE. WHAT THE RULE REQUI RES IS THAT THE DATA TO BE USED IN ANALYZING THE FINANCIAL RESULTS OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. TH US SO LONG AS THE DATA RELATING TO THE FINANCIAL YEAR IS AVAILABL E, IT MATTERS NOT, IF THE FINANCIAL YEAR FOLLOWED IS DIFFERENT. IN THE CASE BEFORE US THE DATA RELATING TO THE RELEVANT FINANCIAL YEAR OF R.SYSTEMS INTERNATIONAL LIMITED IS AVAILABLE. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 41 32. WE ARE, THEREFORE, ENTIRELY IN AGREEMENT WITH THE DECISION OF THE TRIBUNAL THAT IF THE DATA RELATING TO THE FI NANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERE D INTO IS DIRECTLY AVAILABLE FROM THE ANNUAL ACCOUNTS OF THAT COMPARABLE, THEN IT CANNOT BE HELD AS NOT PASSING THE TEST OF S UB-RULE(4) OF RULE 10B. 62. SO, FOLLOWING THE FINDINGS RETURNED BY HONBLE HIGH COURT IN CIT VS. M/S. MERCER CONSULTING (INDIA) PVT. LTD. (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT WHEN DATA FOR THE F INANCIAL YEAR IS AVAILABLE, THE COMPARABLE CANNOT BE REJECTED MERELY ON THE GROUND THAT FINANCIAL YEAR FOLLOWED IS DIFFERENT. SO, THI S ISSUE IS REMITTED BACK TO THE TPO TO DECIDE AFRESH IN THE LIGHT OF TH E JUDGMENT IN CIT VS. M/S. MERCER CONSULTING (INDIA) PVT. LTD. (SUPRA) BY PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXP AYER. CG VAK SOFTWARE & EXPORTS LTD. (CG VAK) 63. CG VAK HAS BEEN EXCLUDED BY THE TPO ON THE GROU ND THAT IT FAILS EMPLOYEES COST FILTER OF 25%. CG VAK WAS ALSO EXCLUDED BY TPO IN AGILIS INFORMATION TECHNOLOGIES INTERNATIONAL (P.) LTD. (2015) 61 TAXMANN.COM 127 (DELHI-TRIB.) ON FAILURE OF EMPLOYEES COST FILTER OF 25%. HOWEVER, COORDINATE BENCH OF T HE TRIBUNAL HAS SET ASIDE THE MATTER TO THE TPO TO DECIDE AFRESH IN THE LIGHT OF NEW FACTS BROUGHT INTO THE NOTICE OF THE TRIBUNAL BY RE TURNING FOLLOWING FINDINGS :- ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 42 8. GROUND NO. 2.8 OF THE GROUNDS OF APPEAL RELATES TO THE REJECTION OF M/S. CG VAK SOFTWARE & EXPORTS LIMITED FROM FINAL SET OF COMPARABLES BY HOLDING THAT SUCH COMPANY IS NOT PASSING THE FILTER OF EMPLOYEE COST TO TOTAL COST LESS THAN 25%. 8.1 HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIN D THAT THIS ISSUE HAS BEEN CONSIDERED BY THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF KENEXA TECHNOLOGIES (P.) LT D. V. DY. CIT [2014] 51 TAXMANN.COM 282/[2015] 67 SOT 195 (URO) FOR ASSESSMENT YEAR 2009-10 BY OBSERVING AS UNDER: '43. IN GROUND NO. 2, 6, 5, THE ASSESSEE HAS OBJECT ED TO THE REJECTION OF COMPARABLE COMPANIES BY TPO IN THE COU RSE OF APPLYING EMPLOYEE COST FILTER. THE ITAT BANGALORE B ENCH IN THE CASE OF CISO SYSTEMS INDIA PVT. LTD. HAS HELD WITH RESPECT OF CG-VAK SOLUTIONS & EXPORTS LTD. HAS HELD AS UNDER: (II) THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSE SSEE WAS THAT IN THE CASE OF ASSESSEE, THIS TEST IS SATISFIED. IN TH IS REGARD OUR ATTENTION WAS DRAWN TO PAGE 818 TO 824 OF THE ASSES SEE'S PAPER BOOK WHEREIN ANNUAL REPORT OF THIS COMPANY HAS BEEN PROVIDED. ATTENTION WAS DRAWN TO THE FACT THAT IN THE PROFIT & LOSS ACCOUNT OF THE AUDITED ACCOUNTS, HE COST OF SERVICES HAS BE EN SHOWN AS AN EXPENDITURE AND IN SCHEDULE 15 TO THE NOTES TO ACCO UNTS, IT HAS BEEN ELABORATED AS FOLLOWS:- COST OF SERVICES RS. 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 3,10,87 5,88,05,074 (III) IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE A SSESSEE THAT THE TPO IGNORED THE CONTRIBUTION TO PF & ESI, GRATUITY AND EX GRATIA PAYMENTS AND ARRIVED AT THE EMPLOYEE COST. A CCORDING TO THE LD. COUNSEL FOR THE ASSESSEE, DOING SO WAS NOT PROPER. IF ALL THE EMPLOYEE COSTS ARE PROPERLY CONSIDERED, THEN TH IS COMPANY CAN PASS THE FILTER APPLIED BY THE TPO FOR EXCLUDIN G IT. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 43 (IV) WE HAVE CONSIDERED THE SUBMISSION OF THE LD. C OUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT PRIMA FACIE THE S UBMISSION OF THE LD. COUNSEL ARE ACCEPTABLE. WE, HOWEVER, FEEL T HAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE TPO TO CONSIDER INCLUDING 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. 44. FOLLOWING THE DECISION CITED ABOVE, WE SET ASID E THE ISSUE OF COMPARABILITY OF CG-VAK SOLUTIONS & EXPORTS LTD. TO THE TPO FOR CORRECT APPLICATION OF EMPLOYEE COST FILTER.' 8.2 HAVING REGARD TO THE ABOVE, WE SET ASIDE THE SA ID ISSUE OF COMPARABLES WITH M/S. CG VAK SOFTWARE & EXPORTS LIM ITED TO THE TPO FOR CORRECT APPLICATION OF EMPLOYEE COST FI LTER. GROUND RAISED IS THUS ALLOWED FOR STATISTICAL PURPOSES. 64. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL IN AGILIS INFORMATION TECHNOLOGIES INTERNATIONAL (P.) LTD. (SUPRA), WE SET ASIDE THIS ISSUE TO THE TPO TO DECI DE AFRESH IN THE LIGHT OF THE DATA BROUGHT ON RECORD BY THE T AXPAYER. SIP TECHNOLOGIES & EXPORTS LTD. (SIP) 65. THE TAXPAYER CHALLENGED INCLUSION OF SIP BY THE TPO ON THE GROUND THAT ITS TURNOVER IS LESS THAN RS.5 LAKHS. THE LD. AR FOR THE TAXPAYER CONTENDED THAT SIP HAS BEEN FOUND TO BE FU NCTIONALLY COMPARABLE VIS--VIS TAXPAYER IN ASSESSEES OWN CAS E OF AY 2009- 10 (SUPRA). 66. UNDISPUTEDLY, THERE IS NO DIFFERENCE IN THE BUS INESS MODEL OF THE TAXPAYER SINCE AY 2009-10. COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOUND SIP AS A VALID COMPARA BLE BY RETURNING FOLLOWING FINDINGS :- ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 44 53. SO FAR AS QUESTION OF LOW TURNOVER OF A COMPAN Y TO BE ACCEPTED AS COMPARABLE IS CONCERNED, IT IS SETTLED PRINCIPLE OF LAW THAT TURNOVER SHOULD NOT BE THE SOLE CRITERIA TO CH OOSE A PARTICULAR COMPANY FOR COMPARABILITY RATHER FUNCTIO NAL SIMILARITY IS A FUNDAMENTAL REQUIREMENT. RELIANCE IN THIS REG ARD IS PLACED ON THE JUDGMENT CITED AS CHRYS CAPITAL (2015) 376 ITR 183 AND CIT VS. MCKINSY KNOWLEDGE CENTRE INDIA PVT. LTD . ITA NO.217/2014 ORDER DATED 27.03.2015. 54. SINCE THIS COMPANY PASSES EMPLOYEE COST RATIO A ND EXPORT COST RATIO FILTER EMPLOYED BY THE TPO, THE TURNOVER FILTERS CANNOT BE A GROUND FOR REJECTION OF THIS COMPARABLE AS DIS CUSSED IN THE PRECEDING PARA, SO WE HEREBY ORDER TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE. 67. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL, WE ORDER TO INCLUDE SIP IN THE FIN AL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS. GROUND NO.8 68. THIS ISSUE WAS RAISED BY THE TAXPAYER BEFORE LD . DRP WHO HAS DIRECTED THE AO/TPO TO VERIFY THE CORRECTNESS O F THE COMPUTATION OF OPERATING MARGIN OF COMPARABLES AND WORKING CAPITAL ADJUSTMENT MARGIN OF THE ALLEGED COMPARABLE COMPANIES FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO NS OF THE TAXPAYER IN ACCORDANCE WITH THE PROVISIONS OF THE A CT. AO/TPO HAS FAILED TO COMPLY WITH THE DIRECTIONS. SO, THEY ARE DIRECTED TO COMPLY WITH THE DIRECTIONS ISSUED BY LD. DRP. CONS EQUENTLY ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 45 GROUND NO.8 IS DETERMINED IN FAVOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. GROUND NO.16 69. LD. DRP/AO HAS TREATED THE SOFTWARE EXPENSES AM OUNTING TO RS.12,27,686/- AS CAPITAL IN NATURE. THE LD. AR FO R THE TAXPAYER CONTENDED THAT SOFTWARE EXPENSES CANNOT BE CAPITALI ZED AND THIS ISSUE IS ALREADY DECIDED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE FOR AY 2009-10 (SUPRA). OPERATIVE PART THEREOF IS EXTRACTED AS UNDER:- 55. ASSESSEE IN THE PROFIT AND LOSS ACCOUNT HAS DEB ITED AN AMOUNT OF RS.3,84,651/- BEING EXPENDITURE ON TIME B ASED LICENCES. AO TREATED THE SOFTWARE TIME BASED LICEN CE EXPENSES OF RS.3,84,651/- AS CAPITAL IN NATURE AND THEREBY DIS ALLOWED THE SAME. HOWEVER, THE AO ALLOWED THE ASSESSEE TO DEPR ECIATION THEREON @ 60% WHICH IS RS.2,30,791/- AND ADDED BACK THE REMAINING AMOUNT OF RS.1,53,860/- TO THE RETURNED I NCOME. DRP ALSO AFFIRMED THE DECISION RENDERED BY AO. 56. LD. AR FOR THE ASSESSEE CONTENDED THAT SINCE ON E TIME REVENUE EXPENDITURE HAS BEEN INCURRED BY THE ASSESS EE THE SAME CANNOT BE DEFERRED AND RELIED UPON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN CASE OF DIRECTOR OF INCOME-TAX VS. INFRASOFT LTD. (2013) 39 TAXMANN.COM 88 (DELHI). HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVENUE BY RELYING UPON THE OR DER PASSED BY AO/DRP CONTENDED THAT SINCE 60% DEPRECIATION HAS AL READY BEEN GIVEN TO THE ASSESSEE, THE CONTENTION OF THE ASSESS EE IS NOT SUSTAINABLE. 57. ASSESSEE HAS BROUGHT ON RECORD THAT ASSESSEE HA S INCURRED AN AMOUNT OF RS.3,84,651/- FOR RUNNING THE LICENCE ONLY AND ANNUAL MAINTENANCE CHARGES FOR OPERATING, TROUB LE SHOOTING OF THE SOFTWARE AND NOT FOR PURCHASE/ACQUISITION OF THE SOFTWARE AND THE PERIOD FOR RUNNING OF THESE LICENCES / AMC WAS MOSTLY ONE YEAR OR LESS THAN ONE YEAR. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 46 58. IN THE GIVEN CIRCUMSTANCES, WHEN THE AFORESAID FIXED LICENCES WERE RENTED FOR A LIMITED PERIOD ONLY WHIC H IS LESS THAN ONE YEAR, NO ENDURING BENEFIT ACCRUES TO THE ASSESS EE NOR ANY OWNERSHIP RIGHT VESTS IN THE ASSESSEE. ISSUE IN CO NTROVERSY HAS ALREADY BEEN DEALT WITH BY THE HONBLE JURISDICTION AL HIGH COURT IN DIRECTOR OF INCOME-TAX VS. INFRASOFT LTD. (SUPRA ), THE RATIO OF WHICH IS THAT :- WHAT IS TRANSFERRED IS NEITHER THE COPYRIGHT IN TH E SOFTWARE NOR THE USE OF THE COPYRIGHT IN SOFTWARE, BUT WHAT IS TRANSFERRED IS THE RIGHT TO USE THE COPYRIG HTED MATERIAL OR ARTICLE WHICH IS CLEARLY DISTINCT FROM THE RIGHT IN THE COPYRIGHT WHICH IS TOO FOR ONLY LIMITED PERI OD. 59. SO, THESE EXPENSES, TO OUR MIND, ARE IN THE NAT URE OF REVENUE EXPENSES INCURRED FOR THE PURPOSE OF BUSINE SS. MOREOVER, ONE TIME EXPENDITURE TO PURCHASE TIME BAS ED SOFTWARE LICENSES CANNOT BE DEFERRED AND AS SUCH, ARE REVENU E EXPENSES TO RUN THE BUSINESS. SO, THE AO IS DIRECTED TO RE-EXA MINE THE ISSUE ACCORDINGLY AND AS SUCH, THIS GROUND IS DETERMINED IN FAVOUR OF THE ASSESSEE. 70. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL ON THE IDENTICAL ISSUE IN TAXPAYER S OWN CASE FOR AY 2009-10 (SUPRA), THE AMOUNT OF RS.12,27,686/- ON ACCOUNT OF SOFTWARE EXPENSES CAPITALIZED BY THE AO/DRP IS ORDE RED TO BE TREATED AS REVENUE IN NATURE. HENCE, GROUND NO.16 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.17 71. GROUND NO.17 HAS BECOME INFRUCTUOUS IN VIEW OF OUR FINDINGS RETURNED ON GROUND NO.16, HENCE DISMISSED. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 47 GROUND NO.18 72. AO/DRP HAVE TREATED EXPENDITURE OF RS.13,84,084 /- CLAIMED BY THE TAXPAYER AS EXPENDITURE ON TRAINING OF EMPLO YEES AS CAPITALIZED IN NATURE BEING OF ENDURING BENEFIT TO THE TAXPAYER. THE LD. AR FOR THE TAXPAYER CONTENDED THAT THIS ISSUE H AS ALREADY BEEN DECIDED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE F OR AY 2009-10 (SUPRA). OPERATIVE PART THEREOF IS EXTRACTED AS UN DER:- 60. ASSESSEE DEBITED AN AMOUNT OF RS.38,09,220/- I N HIS PROFIT & LOSS ACCOUNT ON ACCOUNT OF TRAINING EXPENSES AND CLAIMED THE SAME AS REVENUE EXPENDITURE. HOWEVER, AO BEING NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE CAME TO THE CONCLUSION THAT THESE EXPENSES HAVE BEEN INCURRED FOR PROVIDIN G VARIOUS TRAINING WHICH IS IN THE NATURE OF GIVING ENDURING BENEFIT TO THE ASSESSEE AND TREATED THE SAME AS CAPITAL EXPENDITUR E AND THEN ADDED TO THE INCOME OF THE ASSESSEE. 61. HOWEVER, LD. AR FOR THE ASSESSEE CONTENDED THAT THE PAYMENT OF TRAINING EXPENSES IS IN THE NATURE OF RE VENUE EXPENSES AND RELIED UPON THE DECISION RENDERED BY H ONBLE HIGH COURT OF DELHI IN JUDGMENT CITED AS COMMISSIONER OF INCOME- TAX-II VS. MUNJAL SHOWA LTD. (2010) 329 ITR 449 ( DELHI). 62. THE RATIO OF THE JUDGMENT IN CASE OF COMMISSIO NER OF INCOME-TAX-II VS. MUNJAL SHOWA LTD. (SUPRA) RENDERE D BY HONBLE DELHI HIGH COURT IS THAT :- WHEN THE TRAINING OF THE PERSONNEL OF THE ASSESSEE WAS IMPERATIVE TO RUN THE BUSINESS AND IS IN THE NATURE OF TECHNICAL SUPPORT TO THE ASSESSEE IT WILL CERTAINLY ENHANCE THE PROFIT OF THE COMPANY ON WHICH IT WILL PAY THE TAXES, SUCH EXPENDITURE CANNOT BE TREATED AS CAPITAL IN NA TURE RATHER THEY ARE REVENUE IN NATURE. 63. WE ARE OF THE CONSIDERED VIEW THAT IN THE LIGHT OF THE JUDGMENT IN CASE OF COMMISSIONER OF INCOME-TAX-II V S. MUNJAL SHOWA LTD. (SUPRA), THE AO IS DIRECTED TO RE-EXAMIN E THE ISSUE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 48 73. SINCE, UNDISPUTEDLY, THE TAXPAYER HAS NOT UNDER GONE ANY CHANGE IN ITS BUSINESS MODEL AND THE ISSUE IS IDENT ICAL, THE EXPENSES OF RS.13,84,084/- ARE ORDERED TO BE TREATED AS REVE NUE IN NATURE BY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF T HE TRIBUNAL RENDERED IN TAXPAYERS OWN CASE IN AY 2009-10 (SUPR A). HENCE, GROUND NO.18 IS DETERMINED IN FAVOUR OF THE TAXPAYE R. GROUNDS NO.19 & 20 74. SINCE TRAINING EXPENSES CLAIMED BY THE TAXPAYER ARE HELD TO BE OF REVENUE IN NATURE, GROUNDS NO.19 & 20 HAVE BE COME INFRUCTUOUS, HENCE DETERMINED AGAINST THE TAXPAYER. GROUND NO.21 75. LD. AO/DRP HAVE DENIED THE DEPRECIATION ON GOOD WILL AMOUNTING TO RS.2,64,53,670/- CLAIMED BY THE TAXPAY ER DURING THE COURSE OF PROCEEDINGS BY RELYING UPON THE DECISION RENDERED BY HONBLE SUPREME COURT IN GOETZE INDIA LIMITED (2006) 284 ITR 323 (SC) . HOWEVER, THE IDENTICAL ISSUE HAS ALREADY BEEN DE CIDED BY REMANDING THE CASE BACK TO THE AO AFTER PROVIDIN G AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER IN TAXPA YERS OWN CASE FOR AY 2009-10 BY RETURNING FOLLOWING FINDINGS :- 64. ASSESSEE CLAIMED DEPRECIATION ON GOODWILL AMOU NTING TO RS.1,38,93,062/- DURING THE COURSE OF ASSESSMENT PR OCEEDINGS BY RELYING UPON DECISIONS RENDERED BY HONBLE SUPREME COURT IN ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 49 CASE OF SMIFS SECURITIES LTD. (TS-639-SC-2012) (S UPREME COURT) BUT THE AO REMAINED SILENT ON THIS ISSUE. 65. HOWEVER, DRP BY APPLYING THE DECISIONS RENDERED BY HONBLE SUPREME COURT IN GOETZE (INDIA) LTD. (200 6) 284 ITR 323 (SC) REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT ASSESSEE DID NOT CLAIM SUCH DEPRECIATION ON GOODWIL L IN ITS RETURN OF INCOME. HOWEVER, IT HAS NOT BEEN DISPUTED BY BO TH THE LD. REPRESENTATIVES OF THE PARTIES THAT THE JUDGMENT CI TED AS GOETZE (INDIA) LTD. AS RELIED UPON BY DRP IS NOT APPLICAB LE TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND WHEN THE ISSUE HA S BEEN RAISED DURING ASSESSMENT PROCEEDINGS, THOUGH NO DEP RECIATION WAS CLAIMED IN THE RETURN OF INCOME, AO WAS DUTY BO UND TO DECIDE THIS ISSUE. SO, WE HEREBY RESTORE THIS GROU ND TO THE AO TO DECIDE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEI NG HEARD TO THE ASSESSEE. ACCORDINGLY, THIS GROUND IS DETERMINED I N FAVOUR OF THE ASSESSEE. 76. FOLLOWING THE FINDINGS RETURNED BY THE COORDINA TE BENCH OF THE TRIBUNAL IN AY 2009-10 (SUPRA), THIS ISSUE IS O RDERED TO BE REMANDED BACK TO THE AO TO DECIDE AFRESH AFTER PROV IDING AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER IN THE L IGHT OF THE DIRECTIONS ISSUED IN AY 2009-10. GROUDS NO.22 & 23 77. GROUNDS NO.22 & 23 9 BEING CONSEQUENTIAL IN NAT URE NEED NO SPECIFIC FINDINGS. REVENUES APPEAL (ITA NO.168/DEL./2015) 78. REVENUE HAS CHALLENGED EXCLUSION OF INFOSYS TECHNOLOGY LTD. (INFOSYS) BY LD. DRP. LD. DRP HAS EXCLUDED INFOSYS BY RETURNING FOLLOWING FINDINGS :- ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 50 IN ADDITION TO THE ABOVE, THE ASSESSEE HAS OBJECTE D TO THE INCLUSION OF INFOSYS IN THE FINAL SET OF COMPARABLE S. THE TURNOVER OF THE ASSESSEE IN SOFTWARE DEVELOPMENT SEGMENT IS RS.29,88,08,070/-. IN THE CASE OF WILLIS PROCESSING SERVICES (I) PVT. LTD. VS DY CIT [2013] 30 TAXMANN.COM 350, THE HON'BLE ITAT, MURNBAI HAS HELD THAT, THE TURNOVER CRITERIA IS NOT A VALID CRITERIA AS PER RULE 10B(2) AND HENCE, CANNOT -BE A PPLIED. THE APPELLANT HAS RELIED ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF AGNITY INDIA [2013] 36 TAXMANN .COM 289 (DELHI) WHEREIN IT HAS BEEN HELD THAT INFOSYS IS NO T A PROPER COMPARABLE ON ACCOUNT OF (I) RISK PROFILE, (II) REV ENUE OWNERSHIP OF BRANDED PRODUCTS, (III) R & D EXPENSES, (IV) ON SITE V. OFFSHORE OPERATIONS, (V) EXPENDITURE ON ADVERTISEME NT / SALE PROMOTION & BRAND BUILDING. RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE AGNITY INDIA (SUPRA) THE AO JTPO IS DIRECTED TO EXCLUDE IT FROM THE FINAL SE T OF COMPARABLES. ALL OTHER COMPARABLES INCLUDED IN THE FINAL SET OF COMPARABLES ARE RETAINED. 79. HONBLE HIGH COURT OF DELHI IN CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA 1204/2011 ORDER DATED 10.07.2013 WHILE EXAMINING COMPARABILITY OF INFOSYS VIS--VIS AGNITY INDIA TECHNOLOGIES PVT. LTD. WHICH IS A CONTRACT SOFTWARE DEVELOPMENT SERVICES PROVIDER HAS UPHELD THE FINDINGS RETURNED BY THE TRIBUNAL. OPERATIVE PART OF THE JUDGMENT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA) IS EXTRACTED AS UNDER :- 5. THE TRIBUNAL HAS OBSERVED THAT THE ASSESSEE WAS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., AS INFOS YS TECHNOLOGIES LTD. WAS A LARGE AND BIGGER COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE AND, THEREFORE, THE PROFITS EARNED CANNOT BE A BENCH MARKED OR EQUATED WITH THE RESPONDENT, T O DETERMINE THE RESULTS DECLARED BY THE RESPONDENT-ASSESSEE. IN PARAGRAPH 3.3 THE TRIBUNAL HAS REFERRED TO THE DIFFERENCE BETWEEN THE RESPONDENT-ASSESSEE AND INFOSYS TECHNOLOGIES LTD. F OR THE SAKE OF CONVENIENCE, WE ARE REPRODUCING THE SAME: ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 51 BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY INDIA RISK PROFILE OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES. REVENUE RS.9, 028 CRORES RS.16.09 CRORES OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT, ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE ) ONSITE VS. OFFSHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E., SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20%) (REFER PAGE 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E., REMOTELY FROM INDIA) EXPENDITURE ON RS.61 CRORES RS. NIL (AS THE ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 52 ADVERTISING/SALES PROMOTION AND BRAND BUILDING 100% SERVICES ARE PROVIDE TO AES) EXPENDITURE ON RESEARCH & DEVELOPMENT RS. 102 CRORES RS. NIL OTHER 100% OFFSHORE (FROM INDIA) 6. LEARNED COUNSEL FOR THE REVENUE HAS SUBMITTED TH AT THE TRIBUNAL AFTER RECORDING THE AFORESAID TABLE HAS NO T AFFIRMED OR GIVEN ANY FINDING ON THE DIFFERENCES. THIS IS PARTL Y CORRECT AS THE TRIBUNAL HAS STATED THAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASO N LATTER WAS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWAR E AND IT ASSUMED ALL RISKS LEADING TO HIGHER PROFITS, WHEREA S THE RESPONDENT-ASSESSEE WAS A CAPTIVE UNIT OF THE PAREN T COMPANY AND ASSUMED ONLY A LIMITED RISK. IT HAS ALSO STATE D THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARED WITH THE RESPO NDENT- ASSESSEE AS SEEN FROM THE FINANCIAL DATA ETC. TO TH E TWO COMPANIES MENTIONED EARLIER IN THE ORDER I.E. THE CHART. IN T HE GROUNDS OF APPEAL THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT OR DENY THE DATA AND DIFFERENCES MENTIONED IN THE TABULATED FOR M. THE CHART HAS NOT BEEN CONTROVERTED. 7. LEARNED COUNSEL FOR THE APPELLANT REVENUE DURING THE COURSE OF HEARING, DREW OUR ATTENTION TO THE ORDER PASSED BY THE TPO AND IT IS POINTED OUT THAT BASED UPON THE FIGUR ES AND DATA MADE AVAILABLE, THE TPO HAD TREATED A THIRD COMPANY AS COMPARABLE WHEN THE WAGE AND SALE RATIO WAS BETWEEN 30% TO 60%. BY APPLYING THIS FILTER, SEVERAL COMPANIES WE RE EXCLUDED. THIS IS CORRECT AS IT IS RECORDED IN PARA 3.1.2 OF THE ORDER PASSED BY THE TPO. TPO, AS NOTED ABOVE, HOWEVER HAD TAKEN THREE COMPANIES, NAMELY, SATYAM COMPUTER SERVICE LTD., L& T INFOTECH LTD. AND INFOSYS TECHNOLOGIES AS COMPARABL E TO WORK OUT THE MEAN. 8. IT IS A COMMON CASE THAT SATYAM COMPUTER SERVICE S LTD. SHOULD NOT BE TAKEN INTO CONSIDERATION. THE TRIBUNA L FOR VALID AND GOOD REASONS HAS POINTED OUT THAT INFOSYS TECHN OLOGIES LTD. CANNOT BE TAKEN AS A COMPARABLE IN THE PRESENT CASE . THIS LEAVES L&T INFOTECH LTD. WHICH GIVES US THE FIGURE OF 11.1 1 %, WHICH IS LESS THAN THE FIGURE OF 17% MARGIN AS DECLARED BY T HE RESPONDENT-ASSESSEE. THIS IS THE FINDING RECORDED BY THE TRIBUNAL. THE TRIBUNAL IN THE IMPUGNED ORDER HAS ALSO OBSERVE D THAT THE ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 53 ASSESSEE HAD FURNISHED DETAILS OF WORKABLES IN RESP ECT OF 23 COMPANIES AND THE MEAN OF THE COMPARABLES WORKED OU T TO 10%, AS AGAINST THE MARGIN OF 17% SHOWN BY THE ASSESSEE. DETAILS OF THESE COMPANIES ARE MENTIONED IN PARA 5 OF THE IMPU GNED ORDER. 80. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE AND FO LLOWING THE DECISION RENDERED BY THE HONBLE DELHI HIGH COURT I N CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT TAXPAYER IS A CAPTIVE SERVICE PROVIDER/SLAVE OF GLOBE ST ERICSSON, WHICH DOES NOT HAVE ITS OWN BRAN CH CANNOT BE A VALID COMPARABLE. INFOSYS WAS ORDERED TO BE EXCL UDED IN TAXPAYERS OWN CASE FOR AY 2009-10. HOWEVER, IT IS BROUGHT TO OUR NOTICE THAT THE REVENUE HAS WENT IN APPEAL AGAI NST THE ORDER OF THE TRIBUNAL PASSED IN TAXPAYERS OWN CASE FOR AY 2 009-10 (SUPRA) IN WHICH QUESTION OF LAW HAS BEEN FRAMED. 81. HONBLE HIGH COURT OF DELHI IN CASE OF PR. CIT VS. FISERV INDIA P. LTD. IN ITA 602/2016 ORDER DATED 07.10.201 6 ALSO ORDERED TO EXCLUDE INFOSYS AS A COMPARABLE VIS--VI S FISERV INDIA P. LTD. WHICH WAS INTO SOFTWARE DEVELOPMENT ON THE GROUND THAT INFOSYS IS HAVING ITS OWN BRAND INTANGIBLES, AN ADV ANTAGE WHICH THE TAXPAYER DOES NOT POSSESS. 82. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT LD. DRP HAS RIGHTLY EXCLUDED I NFOSYS FROM THE ITA NO.609/DEL./2015 ITA NO.168/DEL./2015 54 FINAL SET OF COMPARABLES. HOWEVER, OUR FINDINGS AR E SUBJECT TO THE DECISION PENDING BEFORE HONBLE HIGH COURT IN ASSES SEES OWN CASE FOR AY 2009-10 AND AS SUCH, TPO/AO TO PROCEED ACCORDINGLY. 83. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL FIL ED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 3 RD DAY OF JULY, 2018. SD/- SD/- (CHANDRA POOJARI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 3 RD DAY OF JULY, 2018 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.