Starnet Networks (India) Pvt. Ltd., Pune V. Asst.Comm.of Income-tax, Pune

ITA 1684/PUN/2011

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 0803 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 07-09-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 28-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR HARSHVARDHINI BUTY
• Assessee Lawyers: KRISHNA N ZANWAR
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Working capital adjustments
• Section: 143(3); 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , , !'#'' $ , % & BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 1684/PN/2011 %' ( ')( / ASSESSMENT YEAR : 2007-08 STARENT NETWORKS (INDIA) PRIVATE LIMITED, PLOT NO. P-17, RAJIV GANDHI INFOTECH PARK, HINJEWADI, PUNE 411-57 PAN : AAACN5937G ....... / APPELLANT ' / V/S. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 6, PUNE . / RESPONDENT ASSESSEE BY : SHRI M.P. LOHIA & SHRI KRISHNA N. ZANWAR REVENUE BY : DR. HARSHVARDHINI BUTY / DATE OF HEARING : 07-09-2015 / DATE OF PRONOUNCEMENT : 04-12-2015 * / ORDER PER VIKAS AWASTHY, JM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASS ESSMENT ORDER DATED 21-10-2011 FOR THE ASSESSMENT YEAR 2007- 08 PASSED U/S. 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (HEREINAFTE R REFERRED TO AS THE ACT). THE IMPUGNED ASSESSMENT ORDER HAS BEEN PASSED IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PAN EL (DRP), PUNE DATED 26-09-2011. 2 ITA NO. 1684/PN/2011, A.Y. 2007-08 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORDS ARE : THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND IS ENGAGED IN TH E BUSINESS OF SOFTWARE DEVELOPMENT. THE ASSESSEE IS A SUBSIDIARY OF STA RENT NETWORKS CORPORATION (SNC), USA. THE ASSESSEE EXPORTS IT S ENTIRE OUTPUT TO ITS PARENT COMPANY (SNC) ON COST + 10% MARK UP. THE ASSESSEE HAS ITS ESTABLISHMENTS IN THE APPROVED SOFTWARE TECHNOLOGY PARKS LOCATED AT PUNE AND BANGALORE. HENCE, THE ASSESS EE IS ENTITLED FOR THE BENEFIT U/S. 10 OF THE ACT. THE ASSESSEE FILED RET URN OF INCOME FOR THE ASSESSMENT YEAR 2007-08 ON 29-10-2007 DECLARIN G ITS INCOME AT RS.42,20,130/- AFTER CLAIMING EXEMPTION U/S. 10A OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS, THE INCOME OF THE ASSESSEE WAS ENHANCED TO RS.5,68,15,190/- BY VIRTUE OF ADDITION OF RS.5,25,95,056/- ON ACCOUNT OF ADJUSTMENT MADE TO ARMS LENGTH PRICE OF IN TERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AE). 3. DURING THE PERIOD RELEVANT TO THE IMPUGNED ASSESSMEN T YEAR THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS FOR RENDERING SOFTWARE DEVELOPMENT SERVICES WITH ITS AE TO THE TUNE OF RS.31,30,40,056/-. TO BENCHMARK THE SAME, THE ASSESSEE A DOPTED CPM METHOD. THE TPO AFTER EXAMINING THE DOCUMENTS SUBM ITTED AND THE BENCHMARKING DONE BY THE ASSESSEE IN RESPECT OF INT ERNATIONAL TRANSACTIONS REJECTED THE SAME. THE ASSESSEE HAD ORIG INALLY SELECTED 27 COMPARABLES. THE ASSESSEE HAD APPLIED FOLLOWING FILTERS FOR SE LECTION OF COMPARABLES: I. COMPANIES FOR WHICH DATA IS NOT AVAILABLE. II. SALES < RS.1 CRORE AND SALES > RS.100 CRORE. III. NO OPERATIONAL INCOME. IV. RATIO OF INCOME FROM NON-FINANCIAL SERVICES TO SALES LESS THAN 75%. V. ABNORMAL PLI I.E. NEGATIVE PLI OR PLI GREATER THAN 50%. 3 ITA NO. 1684/PN/2011, A.Y. 2007-08 VI. LINE OF BUSINESS ACTIVITIES/SERVICES NOT COMPARABLE TO THAT OF THE ASSESSEE. 4. THE AVERAGE MEAN (OPERATING PROFIT/OPERATING COST) OF COMPARABLES WAS DETERMINED AT 9.9% AND THAT OF THE ASSE SSEE COMPANY AT 9.34%. HOWEVER, THE TPO WAS NOT CONVINCED WITH THE TP STUDY OF THE ASSESSEE. THE TPO REJECTED 22 OUT OF 27 COMPARAB LES SELECTED BY THE ASSESSEE AND INTRODUCED THREE MORE COMPANIES FOR T P STUDY. THE FINAL SET OF COMPARABLES SELECTED BY THE TPO ARE AS UNDER: SR. NO. NAME OF THE COMPANY PLI (OPERATING PROFIT/OPERATING COST) 1 GOLDSTONE TECHNOLOGIES LTD. 20.79% 2 OMNITECH INFOSOLUTIONS LTD. 23.02% 3 STERLING INTERNATIONAL ENTERPRISES LTD. 32.35% 4 SIP TECHNOLOGIES & EXPORTS LTD. 13.90% 5 COMPUCOM SOFTWARE LTD. (SEG) 35.53% 6 KALS INFORMATION SYSTEMS LTD. (SEG) 30.55% 7 AVANI CIMCON TECHNOLOGIES LTD. 49.79% 8 LGS GLOBAL LTD. 15.75% ARITHMETIC MEAN 27.71% THE TPO ARRIVED AT THE ARITHMETIC MEAN OF THE PLIS AT 2 7.71% AS AGAINST 9.34% OF THE ASSESSEE. ACCORDINGLY, THE TPO DET ERMINED THE ALP OF THE ASSESSEES INTERNATIONAL TRANSACTIONS AT RS.36 ,56,35,112/-. AS A CONSEQUENCE, AN ADJUSTMENT TO ALP OF INTERNATIONAL TRANSACTIONS WITH AE WAS MADE TO THE TUNE OF RS.5,25,95,056/-. 5. AGGRIEVED BY THE ORDER OF TPO DATED 29-10-2010, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP VIDE DIRECTIONS DA TED 26-09-2011 UPHELD THE FINDINGS OF TPO AND REJECTED THE O BJECTIONS FILED 4 ITA NO. 1684/PN/2011, A.Y. 2007-08 BY THE ASSESSEE. BASED ON THE DIRECTIONS OF DRP, THE AS SESSING OFFICER MADE ADDITION OF RS.5,25,95,056/- ON ACCOUNT OF ADJUSTMENT MADE TO ALP OF THE INTERNATIONAL TRANSACTION WITH AE. ASSAILING THE ASSESSMENT ORDER AND THE DIRECTIONS OF THE DRP, THE ASSESSEE IS IN APPEAL B EFORE THE TRIBUNAL. 6. THE GROUNDS RAISED BY THE ASSESSEE IN APPEAL ARE ADJ UDICATED IN SERIATIM AS UNDER : GROUND NO. 1 TRANSFER PRICING ADJUSTMENT ERRED IN MAKING TRANSFER PRICING ADJUSTMENT BY REJE CTING THE ANALYSIS UNDERTAKEN BY THE APPELLANT TO DETERMINE ARMS LENG TH PRICE FOR ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO THE AE. GROUND NO. 2 REJECTION OF TRANSFER PRICING ANALYS IS CONDUCTED BY THE APPELLANT ERRED IN REJECTING OF THE ECONOMIC ANALYSIS CONDUCT ED BY THE APPELLANT AND REJECTING THE COMPARABLE COMPANIES INDENTIFIED BY THE APPELLANT IN THE TP STUDY. THE GROUND NOS. 1 AND 2 RAISED IN THE APPEAL ARE GENERA L IN NATURE AND THUS, REQUIRES NO ADJUDICATION. 7. GROUND NO. 3 ELIGIBILITY UNDER SECTION 10A OF THE ACT ERRED IN IGNORING THE FACT THAT SINCE APPELLANT IS AVAILING TAX HOLIDAY UNDER SECTION 10A OF THE ACT, THERE IS NO INTENTION TO SHIFT THE PROFIT BASE OUT OF INDIA, WHICH IS ONE OF THE BASIC INTENTIONS OF THE INTRODUCTION OF TRANSFER PRICING PROVISIONS. GROUND NO. 4 USE OF SINGLE YEAR DATA ERRED IN NOT CONSIDERING MULTIPLE YEAR DATA FOR DET ERMINING THE ARMS LENGTH PRICE 5 ITA NO. 1684/PN/2011, A.Y. 2007-08 GROUND NO. 5 USE OF ADDITIONAL FILTERS/MODIFICATI ON OF FILTERS ERRED IN INAPPROPRIATELY INTRODUCING ADDITIONAL FIL TERS (SELECTION CRITERIAS) AND MODIFYING THE FILTERS ADOPTED BY THE APPELLANT AND THEREFORE, INAPPROPRIATELY REJECTING CERTAIN COMPARABLE COMPAN IES AND DETERMINING INAPPROPRIATE COMPANIES AS COMPARABLES TO THE APPEL LANT. THE LD. AR OF THE ASSESSEE STATED AT THE BAR THAT HE IS NOT PRESSING GROUND NOS. 3, 4 AND 5 RAISED IN THE APPEAL. AC CORDINGLY, ALL THE ABOVE THREE GROUNDS ARE DISMISSED AS NOT PRESSED. 8. GROUND NO. 6 REJECTION OF CERTAIN COMPARABLE COMP ANIES ERRED IN REJECTING COMPARABLE COMPANIES FROM THE SE T OF COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT IN RESPECT OF INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE DEV ELOPMENT SERVICES. THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE TPO HAS R EJECTED 22 COMPANIES OUT OF 27 SELECTED BY THE ASSESSEE AS COMPARABLE ENTIT IES. HOWEVER, IN APPEAL THE ASSESSEE IS ONLY PRESSING FOR 3 C OMPARABLES TO BE INCLUDED IN THE LIST OF COMPARABLE ENTITIES I.E. :- 1) OBJECT ONE INFORMATION SYSTEMS LTD. 2) QUINTEGRA SOUTIONS LTD. 3) SYNFOSYS BUSINESS SOLUTION LTD. THE REASONS FOR REJECTION GIVEN BY THE TPO FOR THE AFORE SAID COMPANIES ARE : - OBJECT ONE INFORMATION SYSTEMS LTD. FUNCTIONALLY NON-COMPAR ABLE. - QUINTEGRA SOUTIONS LTD. - BUSINESS ACTIVITIES DIFFERENT FROM THAT OF THE ASSESSEE. - SYNFOSYS BUSINESS SOLUTION LTD. - BUSINESS ACTIVITIES DIFFER ENT FROM THAT OF THE ASSESSEE, RATIO OF PERSONNEL EXPENSES TO TOT AL EXPENSES LESS THAN 10%. 6 ITA NO. 1684/PN/2011, A.Y. 2007-08 THE LD. AR OF THE ASSESSEE SUBMITTED THAT OBJECT ONE INFORMATION SYSTEMS LTD. IS ENGAGED IN TECHNOLOGY CONSULTING AND SOFT WARE DEVELOPMENT SERVICES AND QUINTEGRA SOUTIONS LTD. IS ENGAG ED IN MANAGEMENT, DEVELOPMENT, MAINTENANCE, MIGRATION, RE-ENGINEER ING, SAP, TESTING ETC. THE ACTIVITIES OF THE SAID COMPANIES ARE NOT DIFFERENT FROM THAT OF THE ASSESSEE AND THUS, THE AFORESAID COMPAN IES ARE FUNCTIONALLY COMPARABLE. THE LD. AR PLACED RELIANCE ON THE D ECISION RENDERED IN THE CASE OF TIBCO SOFTWARE INDIA PVT. LTD. VS . DY. COMMISSIONER OF INCOME TAX IN ITA NO. 2536/PN/2012 FOR AS SESSMENT YEAR 2008-09 DECIDED ON 11-02-2015 WHEREIN IT HAS BEEN HELD THAT TESTING IS PART OF SOFTWARE DEVELOPMENT. AS REGARDS SYNFO SYS BUSINESS SOLUTION LTD. THE LD. AR SUBMITTED THAT THE COMPANY SHOULD BE CONSIDERED AS COMPARABLE ENTITY AS IT IS ENGAGED IN SOFTW ARE DEVELOPMENT SERVICES. THE TPO HAS CONSIDERED WRONG FIGUR ES IN RESPECT OF EXPENDITURE TOWARDS REMUNERATION AND SALARY PAID TO T HE EMPLOYEES OF THE COMPANY. THE RATIO OF PERSONNEL EXPENSES TO TOTA L EXPENSES IN THE CASE OF SAID COMPANY IS MORE THAN 77%. 9. ON THE OTHER HAND DR. HARSHVARDHINI BUTY REPRESENT ING THE DEPARTMENT VEHEMENTLY SUPPORTED THE FINDINGS OF DRP AN D TPO. THE LD. DR SUBMITTED THAT OBJECT ONE INFORMATION SYSTEMS LTD . IS ENGAGED IN SOFTWARE DEVELOPMENT, MEDIA BUSINESS, INTERNET TV ETC. T HE SEGMENTAL INFORMATION FOR SOFTWARE SERVICES IS NOT AVAILABLE IN RESPEC T OF THE SAID COMPANY. THEREFORE, THE COMPANY IS NOT FUNCTION ALLY COMPARABLE. IN RESPECT OF QUINTEGRA SOUTIONS LTD. THE LD . DR CONTENDED THAT THE COMPANY IS ENGAGED IN MANAGEMENT, P RODUCT ENGINEERING, ENTERPRISE SOLUTION SUCH AS SAP, TESTING AND V ALIDATION, TECHNOLOGY CONSULTING, ETC. THE COMPANY HAS DIVERSIFIED ACT IVITIES. SEGMENTAL ANALYSIS FOR SOFTWARE DEVELOPMENT SERVICES IS NO T AVAILABLE. IN RESPECT OF SYNFOSYS BUSINESS SOLUTION LTD. THE LD. DR S UBMITTED THAT 7 ITA NO. 1684/PN/2011, A.Y. 2007-08 COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT IN THE AREAS OF MOBILE SECURITY AND HEALTH CARE. MOREOVER, THE TOTAL EXPENSES OF THE COMPANY DURING THE YEAR ARE RS.5.56 CRORES AND THE EXPENDITURE TOWARDS REMUNERATION AND SALARIES PAID TO THE EMPLOYEES IS ONLY R S.22 CRORES. THEREFORE, THE COMPANY IS NOT A GOOD COMPARABLE. THE LD. DR VEHEMENTLY SUPPORTED THE FINDINGS OF THE TPO IN REJECTING THE AFORESAID COMPANIES. 10. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIE S BELOW. ON PERUSAL OF THE DIRECTIONS OF DRP WE FIND THAT THE ASSESSEE HAS RAISED OBJECTIONS (GROUND OF OBJECTION NO. 6) WITH REGARD TO REJ ECTION OF CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE ASSESSEE AS COMPAR ABLES. HOWEVER, THE DRP HAS NOT CONSIDERED THE SAME IN AN OBJ ECTIVE MANNER. THE DRP HAS MERELY MADE GENERAL OBSERVATIONS WHILE REJE CTING THE OBJECTION OF THE ASSESSEE, WITHOUT GIVING ANY SPECIFIC FINDING S AS TO WHY THE COMPARABLES REJECTED BY THE TPO SHOULD NOT BE SELE CTED. ACCORDINGLY, WE REMIT THIS ISSUE BACK TO THE FILE OF DRP FOR DECIDE THIS ISSUE AFRESH BY GIVING DETAILED REASONS FOR SELECTING/REJECT ING EACH COMPARABLE. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. 11. GROUND NO. 7 DETERMINING INAPPROPRIATE COMPANIES AS COMPARABLES TO THE APPELLANT ERRED IN CONSIDERING DISSIMILAR COMPANIES AS COMPARA BLE COMPANIES TO THE APPELLANT FOR DETERMINING THE ARMS LENGTH PRIC E OF THE INTERNATIONAL TRANSACTION. THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE TPO IN AN ARBITRARY AND UNJUSTIFIED MANNER HAS SELECTED 3 COMPANIES AS COMPARABLES I.E.: 1) COMPUCOM SOFTWARE LTD. 8 ITA NO. 1684/PN/2011, A.Y. 2007-08 2) KALS INFORMATION SYSTEMS LIMITED (SEG). 3) AVANI CIMCON TECHNOLOGIES LIMITED. THE ASSESSEE HAD INITIALLY SELECTED COMPUCOM SOFTWARE LT D. AS COMPARABLE, BUT LATER ON IT WAS DROPPED FOR EXCESSIVE REL ATED PARTY TRANSACTIONS. THE TRIBUNAL IN ASSESSEES OWN CASE IN ASS ESSMENT YEAR 2006-07 REJECTED THE SAID COMPANY FOR HAVING RELATED PA RTY TRANSACTIONS EXCEEDING 25%. THE LD. AR FURTHER IN SUPPORT OF HIS SUBMISSIONS PLACED RELIANCE ON THE DECISION OF PUNE BENCH O F THE TRIBUNAL IN THE CASES OF : I. SUNGARD SOLUTIONS (INDIA) PVT. LTD. VS. DDIT (ITA NO. 1670/PN/2011)(A.Y. 2007-08). II. PTC SOFTWARE (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO. 1605/PN/2011)(A.Y. 2007-08). 11.1 IN RESPECT OF KALS INFORMATION SYSTEMS LIMITED (SEG) TH E LD. AR SUBMITTED THAT THE COMPANY IS FUNCTIONALLY DIFFERENT AS COMPARED TO T HE ACTIVITY OF THE ASSESSEE. THE SAID COMPANY IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. SEGMENT AL INFORMATION IS RESPECT OF INCOME GENERATED FROM DIFFERENT ACTIVITIES OF T HE COMPANY IS NOT AVAILABLE IN PUBLIC DOMAIN. THE LD. AR REFERRED TO THE BALANCE SHEET OF KALS INFORMATION SYSTEMS LTD. AT PAGES 594 TO 6 02 OF THE PAPER BOOK. THE LD. AR POINTED OUT THAT THE INVENTORY SHOWN IN THE BALANCE SHEET IS GENERATED FROM SOFTWARE PRODUCTS. IN CASE OF S OFTWARE SERVICES NO INVENTORY IS GENERATED. THEREFORE, THE SAID COMPANY C ANNOT BE CONSIDERED AS A GOOD COMPARABLE. THE LD. AR FURTHER SUBM ITTED THAT KALS INFORMATION SYSTEMS LTD. HAS BEEN REJECTED AS COMP ARABLE BY THE TRIBUNAL IN THE FOLLOWING DECISIONS: I. SUNGARD SOLUTIONS (INDIA) PVT. LTD. VS. DDIT (ITA NO. 1670/PN/2011)(A.Y. 2007-08). 9 ITA NO. 1684/PN/2011, A.Y. 2007-08 II. PTC SOFTWARE (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO. 1605/PN/2011)(A.Y. 2007-08). III. BARCLAYS TECHNOLOGY CENTRE INDIA PRIVATE LIMITED VS. ACIT (ITA NO. 2279/PN/2012)(A.Y. 2008-09). 11.2 IN RESPECT OF AVANI CIMCON TECHNOLOGIES LIMITED THE LD. AR SUBMITTED THAT THE COMPANY IS NOT A GOOD COMPARABLE AS IT IS FUNCTIONALLY DIFFERENT. THE SAID COMPANY DEVELOPED SOFTWARE PRODUCTS NAMED DXCHANGE AND CARMA. THE COMPANY WOULD HAVE EARNED REVENUE FROM SALE OF SAID SOFTWARES IN THE MARKET. WHERE AS, THE ASSESSEE IS PROVIDING R AND D FACILITIES TO ITS HOLDING COMPAN Y ONLY AND IS NOT ENGAGED IN DEVELOPMENT OF SOFTWARE TO BE SOLD IN TH E OPEN MARKET. IN THE ABSENCE OF SEGMENTAL DETAILS AVANI COMCON TECHNOLOGIES LIMITED CANNOT BE CONSIDERED AS A COMPARABLE ENTITY. TO SUPPORT OF HIS SUBMISSIONS THE LD. AR PLACED RELIANCE ON THE FOLLOWING DECISIONS: I. TELECORDIA TECHNOLOGIES INDIA PVT. LTD. VS. ACIT (ITA NO. 7821/MUM/2011) (A.Y. 2007-08). II. TRILOGY E-BUSINESS SOFTWARE VS. DCIT (ITA NO. 1054/BANG/2 011) (A.Y. 2007-08). III. NETHAWK NETWORKS INDIA PVT. LTD. VS. ITO (ITA NO. 7633/MUM/2012) (A.Y. 2008-09). 12. ON THE OTHER HAND, THE LD. DR SUPPORTED THE FINDINGS OF THE AUTHORITIES BELOW FOR INCLUDING THE AFORESAID THREE COMPANIES IN THE LIST OF COMPARABLE ENTITIES. 13. BOTH SIDES HEARD. THE TPO INCLUDED COMPUCOM SOFTWARE LTD., KALS INFORMATION SYSTEMS LIMITED AND AVANI CIMCON TECHNOLOG IES LIMITED IN THE FINAL LIST OF THE COMPARABLE ENTITIES. HOWEVER, T HE 10 ITA NO. 1684/PN/2011, A.Y. 2007-08 ASSESSEE HAS OBJECTED TO THE SAME. IN RESPECT OF COM PUCON SOFTWARE LTD. THE CONTENTION OF THE ASSESSEE IS THAT IT HAS RELATE D PARTY TRANSACTION EXCEEDING 25% OF THE TOTAL REVENUE, THEREFORE , IT HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE TRIBUNAL IN ASSE SSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 HAS REJECTED THE SA ID COMPANY FOR SIMILAR REASONS. IN THE CASE OF PTC SOFTWARE (INDIA) PRIVATE LIMITED VS. ACIT (SUPRA) THE TRIBUNAL EXCLUDED THE SAID COMPANY FROM FINAL SET OF COMPARABLES ON ACCOUNT OF EXCESSIVE RELATED PARTY TRANS ACTIONS. THE RELEVANT EXTRACT OF THE FINDINGS OF THE TRIBUNAL ARE AS UNDER: 11. IN THIS REGARD THE FIRST PLEA OF THE ASSESSEE IS THAT THE ITEMS AT (1) AND (8) NAMELY, FCS SOFTWARE SOLUTIONS LTD. AND COM PUCOM SOFTWARE LTD. (SEG) HAVE BEEN WRONGLY INCLUDED BY THE TPO IN THE SET OF COMPARABLES. THE ARGUMENT SET UP BY THE ASSESSEE IS THAT THOUGH THE SAID CONCERNS MAY BE FUNCTIONALLY COMPARABLE, SO HO WEVER, THE SAME STAND TO BE EXCLUDED ON THE BASIS OF THE RPT FILTER OF 25% WHICH HAS BEEN ADOPTED BY THE TPO HIMSELF BUT HAS BEEN WRONGLY APP LIED TO INCLUDE THE TWO COMPANIES. IN THIS REGARD WE FIND THAT IN THE T RANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE IT HAD NOT APPLIED THE F ILTER OF RPT FOR THE PURPOSES OF ELIMINATING CASES HAVING RELATED PARTY TRANSACTIONS. IN THE COURSE OF TRANSFER PRICING PROCEEDINGS, THE ASSESSE E ON BEING ASKED, STATED THAT THE RPT FILTER BE APPLIED TO EXCLUDE CA SES FROM THE LIST OF COMPARABLES WHERE THE RPT TRANSACTIONS EXCEED 10% O F THE TOTAL TRANSACTIONS. THE TPO HOWEVER, DECIDED TO IDENTIFY THE COMPANIES WHERE THE QUANTUM OF RPT IS MORE THAN 25% CALCULATED WITH REFERENCE TO THE APPROPRIATE BASE, AND EXCLUDED THE SAME FOR THE PUR POSES OF COMPARABILITY ANALYSIS. NOTWITHSTANDING THE ASSESSE ES 6 PRIMARY PLEA THAT THE THRESHOLD LIMIT OF 25% ADOPTED BY THE TPO W AS INAPPROPRIATE, IT HAS BEEN SUBMITTED BEFORE US THAT EVEN AFTER APPLYI NG THE FILTER ADOPTED BY THE TPO, THE AFORESTATED TWO CONCERNS ARE LIABLE TO BE EXCLUDED AS THEY HAVE RELATED PARTY TRANSACTIONS IN EXCESS OF 2 5% OF THE TOTAL TRANSACTIONS. IT HAS BEEN POINTED OUT THAT THE RPT PERCENTAGE HAS BEEN WRONGLY CALCULATED BY THE TPO AND FOR THAT MATTER I T REFERRED TO THE DETAILED SUBMISSIONS MADE IN THIS REGARD TO THE DRP WHICH ARE PLACED AT PAGES 815 816 OF THE PAPER BOOK. 12. IN THIS CONNECTION, WE FIND THAT THE TPO DEFINE D THE RPT FILTER TO MEAN THAT IN CASES WHERE THE RPT TRANSACTIONS EXCEE D 25% OF THE TOTAL TRANSACTIONS, THE SAME ARE LIABLE TO BE EXCLUDED FO R THE PURPOSES OF COMPARABILITY ANALYSIS. THE TPO FURTHER DECIDED TO COMPUTE THE LIMIT OF 25% OF RPT TRANSACTIONS WITH REFERENCE TO THE APPRO PRIATE BASE, WHICH 11 ITA NO. 1684/PN/2011, A.Y. 2007-08 WAS EITHER SALES OR TOTAL OPERATING EXPENSES, AS TH E CASE MAY BE. IN PARA 6.3.2. OF HIS ORDER, THE TPO HAS NOTICED IN RELATIO N TO FCS SOFTWARE LTD THAT THE SAID COMPANY HAD SALES REVENUES FROM RELAT ED PARTIES OF RS.36.89 CRORES AGAINST TOTAL SALES OF RS.131.27 CR ORES AND IT HAD INCURRED RPT EXPENSES OF NIL AGAINST TOTAL EXPENSES OF RS.107.58 CRORES. HE COMPUTED THE PERCENTAGE OF RPT TO THE TOTAL TRAN SACTIONS AT 15.40% BY THE FOLLOWING METHOD: RPT SALES DIVIDED BY (TOTAL SALES + TOTAL EXPENSES) MULTIPLIED BY 100 I.E., RS.36.89 CRORES DIVIDED BY (RS.131.27 + R S.107.58) MULTIPLIED BY 100. 13. OSTENSIBLY, THE AFORESAID CALCULATION RESULTS I N RPTS OF 15.40% WHICH IS BELOW THE FILTER OF 25% ADOPTED BY THE TPO AND A CCORDINGLY, IT WAS NOT EXCLUDED. HOWEVER, IT IS QUITE EVIDENT THAT THE DEN OMINATOR OF RS.238.85 CRORES ADOPTED BY THE TPO IS WRONG IN AS MUCH AS IT INCLUDES TOTAL EXPENSES ALSO WHEREAS AS PER TPOS OWN OBSERVATIONS , THERE ARE NO RPT EXPENSES. THE NUMERATOR COMPRISES OF ONLY THE SALES TO RELATED PARTIES AND NO RPT EXPENSES. THEREFORE, THE ADOPTION OF THE DENOMINATOR, I.E., THE BASE, BY CONSIDERING TOTAL SALES PLUS TOTAL EXP ENSES IN THE PRESENT CASE 7 WHERE THERE IS NO RPT EXPENSES WOULD LEAD TO A MISLEADING RESULT. IF THE DENOMINATOR IS RESTRICTED TO THE TOT AL SALES IN THE PRESENT CASE, AS THERE ARE ONLY RPT SALES, THE RESULT WOULD BE PERCENTAGE OF RPTS OF 28.10%, I.E, RS.36.89 CRORES DIVIDED BY RS.131.2 7 CRORES. THE CASE OF THE ASSESSEE IS THAT EVEN BY APPLYING THE RPT FILTE R OF 25% ENVISAGED BY THE TPO, THE SAID CONCERN IS EXCLUDIBLE AS IT HAS R PTS VIS--VIS ITS TOTAL TRANSACTIONS IN EXCESS OF 25%. IN VIEW OF THE AFORE SAID FACTUAL MATRIX, WE HOLD THAT FCS SOFTWARE LTD IS EXCLUDIBLE FROM THE L IST OF COMPARABLES FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 14. SIMILARLY, IN THE CASE OF COMPUCOM SOFTWARE LTD ., THE TPO HAS OBSERVED IN PARA 6.3.19 OF HIS ORDER THAT THE SAID CONCERN HAS NIL SALES REVENUE FROM RELATED PARTIES AGAINST TOTAL SALES OF 23.82 CRORES, BUT HAS INCURRED RPT EXPENSES OF RS.6.65 CRORES AGAINST TOT AL EXPENSES OF 17.78 CRORES. THE RATIO OF RPT TO TOTAL TRANSACTIONS HAS BEEN COMPUTED AT 15.19% BY THE TPO. AGAIN THE TPO HAS ADOPTED THE DE NOMINATOR OF RS.41.60 CRORES INCLUSIVE OF TOTAL SALES WHEREAS TH E NUMERATOR IS RS.6.65 CRORES, COMPRISING OF ONLY RPT EXPENSES AND NO RPT SALES. THEREFORE, THE DENOMINATOR IS TO BE CORRECTED AT RS.17.78 CRORES A ND THE CORRECT PERCENTAGE OF RPTS WOULD BE 37.40%, I.E., RPT EXPEN SES/TOTAL EXPENSES. THE RPTS BEING IN EXCESS OF THE 25% FILTER ADOPTED BY THE TPO, THE SAID CONCERN IN OUR VIEW IS ALSO LIABLE TO BE EXCLUDED F ROM THE LIST OF COMPARABLES FOR THE PURPOSE OF COMPARABILITY ANALYS IS. 12 ITA NO. 1684/PN/2011, A.Y. 2007-08 IN THE PRESENT CASE THE ASSESSEE IS SEEKING REJECTIO N OF COMPUCOM SOFTWARE LTD. FROM THE LIST OF COMPARABLES ON THE GROUND OF EXCESSIVE RPT. RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDIN ATE BENCH, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THE SAID COMPANY FROM THE LIST OF COMPARABLES. 13.1 AS FAR AS KALS INFORMATION SYSTEMS LIMITED IS CONCERN ED THE CONTENTION OF THE ASSESSEE IS THAT IT IS FUNCTIONALLY DIFFERE NT. THE ASSESSEE IS ENGAGED IN SOFTWARE RESEARCH AND DEVELOPMEN T SOLELY FOR ITS AE. WHEREAS, KALS INFORMATION SYSTEMS LIMITED IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. THE TRIBU NAL IN THE CASE OF BARCLAYS TECHNOLOGY CENTRE INDIA PRIVATE LIMITED VS. ACIT (SUPRA) EXCLUDED THE SAID COMPANY FROM THE LIST OF COMPARAB LES BEING FUNCTIONALLY DIFFERENT. THE RELEVANT EXTRACT OF THE FINDINGS OF THE TRIBUNAL ARE REPRODUCED HERE-IN-UNDER: 18. THIRDLY, ASSESSEE HAS CONTENDED THAT THE CONCE RN M/S. KALS INFORMATION SYSTEMS LTD. BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. ON THIS ASPECT ALSO, THE CASE SET UP BY THE ASSESSE E IS THAT THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SY MPHONY SERVICES PUNE PVT. LTD. (SUPRA) FULLY COVERS THE CONTROVERSY. IN THE CASE OF SYMPHONY SERVICES (SUPRA), M/S. KALS INFORMATION SYSTEMS LTD . WAS EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND THAT THE SAID CONCERN WAS INVOLVED NOT ONLY IN THE ACTIVITY OF PROVIDING OF SOFTWARE D EVELOPMENT SERVICES BUT ALSO IN SELLING OF SOFTWARE PRODUCTS. SYMPHONY SER VICES PUNE PVT. LTD. WAS ONLY ENGAGED IN PROVIDING SOFTWARE SERVICES. I N THE CASE OF SYMPHONY SERVICES PUNE PVT. LTD. (SUPRA) AS WELL AS IN THE PRESENT CASE ALSO, THE TPO DID NOT ACCEPT THE PLEA FOR EXCLUSION OF KALS INFORMATION SYSTEM LTD. PRIMARILY ON THE GROUND THAT THE FINANC IAL STATEMENTS OF THE SAID CONCERN DID NOT REFLECT ANY SALE OF SOFTWARE P RODUCTS. QUITE CLEARLY THE STAND OF THE REVENUE IN THE PRESENT CASE AS WEL L IN THE CASE OF SYMPHONY SERVICES PUNE PVT. LTD. (SUPRA) IS SIMILAR. IT IS ALSO QUITE CLEAR THAT THE NATURE OF SERVICE BEING RENDERED BY THE AS SESSEE AND SYMPHONY SERVICES PUNE PVT. LTD. (SUPRA) ARE SIMILAR, NAMELY RENDERING OF SOFTWARE DEVELOPMENT SERVICES TO ITS AFFILIATES. THE FOLLOW ING DISCUSSION IN THE ORDER OF THE TRIBUNAL IN CASE OF SYMPHONY SERVICES DATED 30-04-2014 (SUPRA) BRINGS OUT THE SALIENT FEATURES OF THE CONT ROVERSY : 13 ITA NO. 1684/PN/2011, A.Y. 2007-08 13. THE SECOND POINT RAISED BY THE ASSESSEE IS WIT H REGARD TO THE ADOPTION OF KALS INFORMATION SYSTEMS LIMITED AS A CO MPARABLE CONCERN WHILE BENCHMARKING THE INTERNATIONAL TRANSA CTIONS OF THE ASSESSEE. BEFORE THE TPO, ASSESSEE SUBMITTED THAT T HE SAID CONCERN BE EXCLUDED FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DISSIMILARITIES. THE RELEVANT DISCUSSION IN THIS REGARD IS CONTAINED IN PARA 6.1 OF THE ORDER OF THE TPO. THE PLEA OF THE ASSESSEE WAS THAT THE SAID CONCERN WAS ENGAGED IN S ELLING OF SOFTWARE PRODUCTS, NAMELY, VIRTUAL INSURE, LA. VISI ON, CMSS, E- DMS AND ERP 'SHINE', ETC., WHICH ARE ALL SPECIALISE D SOFTWARE PRODUCTS DEVELOPED FOR THE RESPECTIVE SECTORS. FOR THE INSTANCE, VIRTUAL INSURE WAS SAID TO BE A WEB BASED SOLUTION THAT WAS USEFUL IN THE INSURANCE SECTOR; LA VISION WAS AN E- COMMERCE BASED APPLICATION IN THE FIELD OF INTRA-ORGANIZATIO NAL COMMUNICATIONS, ETC.; AND, CMSS WAS A SOFTWARE FOR CONSULTANTS/AGENTS TO MANAGE THEIR CUSTOMERS PRE AN D POST SALES. ON THIS BASIS, IT WAS SOUGHT TO BE MADE OUT THAT TH E ASSESSEE WAS FUNCTIONALLY DIFFERENT INASMUCH IT WAS ENGAGED IN T HE PROVISION OF SOFTWARE DEVELOPMENT AND OTHER RELATED SERVICES TO ITS ASSOCIATED ENTERPRISES AS WELL AS TO THE NON-ASSOCIATED ENTERP RISES AND, WAS NOT INVOLVED IN DEVELOPMENT AND SALE OF SOFTWARE PR ODUCTS. THE TPO DID NOT ACCEPT THE PLEA OF THE ASSESSEE FOR THE REASON THAT THE ANNUAL REPORT OF THE SAID CONCERN DID NOT REFLECT A BOUT SALE OF SOFTWARE PRODUCTS AFTER DEVELOPMENT AND THEREFORE, ACCORDING TO HIM, IT WAS NOT FUNCTIONALLY DIFFERENT. 14. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSE E HAS VEHEMENTLY POINTED OUT THAT THE PLEA OF THE ASSESSE E HAS BEEN REJECTED BY THE INCOME-TAX AUTHORITIES WITHOUT ANY JUSTIFIABLE REASONS, AS EVEN ON THE BASIS OF THE INFORMATION AV AILABLE IN THE PUBLIC DOMAIN IT IS QUITE EVIDENT THAT KALS INFORMA TION SYSTEM LIMITED WAS A CONCERN WHICH WAS DEVELOPING AND SELL ING SOFTWARE PRODUCTS, WHICH WAS AN ACTIVITY QUITE DISTINCT FROM THE ACTIVITY OF SOFTWARE DEVELOPMENT UNDERTAKEN BY THE ASSESSEE. IN THE COURSE OF HEARING, THE LEARNED COUNSEL HAS FURNISHED THE P RINTS OUT FROM THE ANNUAL REPORT OF KALS INFORMATION SYSTEMS LTD. WHEREIN VARIOUS SOFTWARE PRODUCTS SOLD BY THE SAID CONCERN HAVE BEEN DETAILED, WHICH ACCORDING TO HIM, SUPPORTS THE PLEA OF THE ASSESSEE THAT THE SAID CONCERN WAS FUNCTIONALLY DIF FERENT. APART THEREFROM, THE LEARNED COUNSEL HAS REFERRED TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. VS. DCIT VIDE ITA NO.1386/PN/2010 DATED 30.11.2011, WHICH WAS ALSO A CONCERN ENGAGED IN RENDERING SOFTWARE DE VELOPMENT 14 ITA NO. 1684/PN/2011, A.Y. 2007-08 SERVICES FOR ITS PARENT COMPANY. THE ACTION OF THE TPO OF SELECTING KALS INFORMATION SYSTEMS LIMITED AS A COMPARABLE CON CERN WHILE APPLYING THE TNM METHOD WAS REJECTED BY THE TRIBUNA L ON THE BASIS THAT THE SAID CONCERN WAS ENGAGED IN DEVELOPM ENT OF SOFTWARE PRODUCTS AND SALE, WHICH WAS FUNCTIONALLY DISSIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN BY THE BINDVIEW INDIA PVT. LTD. (SUPRA). THE LEARNED COUNSEL POINTE D OUT THAT THE SAID DECISION IS FULLY APPLICABLE TO THE FACTS OF T HE PRESENT CASE INASMUCH AS SIMILAR FUNCTIONS WERE UNDERTAKEN BY BIN DVIEW INDIA PVT. LTD. AND THEREFORE KALS INFORMATION SYST EMS LIMITED IS LIABLE TO BE EXCLUDED FROM THE LISTS OF COMPARABLES . 15. A REFERENCE HAS ALSO BEEN MADE TO THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S 3DPLM SOFTWARE SOLUTIONS LTD. VS. DCIT VIDE IT(TP)A NO.1303/BANG/2012 DATED 28.11.2013 WHEREIN ALSO THE SAID CONCERN, NAMELY, KALS INFORMATION SYSTEMS LIMITED W AS NOT CONSIDERED AS A COMPARABLE ON ACCOUNT OF FUNCTIONAL DISSIMILARITIES. THE LEARNED COUNSEL POINTED OUT TH AT M/S 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) WAS ALSO A CONCERN ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT AND OTHER RELATED SERVICES, WHICH IS SIMILAR TO THE FUNCTIONS UNDERTAKEN BY THE ASSESSEE. IT WAS POINTED OUT THAT THE FUNCTIONS OF KALS INFORMAT ION SYSTEMS LIMITED CONSIDERED BY THE BANGALORE BENCH OF THE TR IBUNAL IS FOR THE SAME ASSESSMENT YEAR AS IS IN THE PRESENT CASE AND THEREFORE THE SAID DECISION ALSO SQUARELY APPLIES TO THE FACT S OF THE PRESENT CASE. 16. THE LEARNED CIT-DR HAS DEFENDED THE POSITION OF THE TPO BY RELYING ON THE DISCUSSION IN THE ORDER OF THE TPO, WHICH WE HAVE ALREADY ADVERTED TO IN THE EARLIER PART OF THIS ORD ER, AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. WE FIND THAT THE PRECEDENTS BY WAY OF THE DECISION OF THE P UNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD . (SUPRA) AND THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) RELIED UP ON BY THE ASSESSEE SQUARELY COVER THE CONTROVERSY RELATING TO KALS INFORMATION SYSTEMS LIMITED. IN THE AFORESAID TWO P RECEDENTS, THE SAID CONCERN HAS BEEN SOUGHT TO BE EXCLUDED FROM TH E LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DISSIMILARITIE S. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) HAS CONSIDERED THE FUNCTIONS UNDERTAKEN BY THE SAID CONCERN DURING THE PREVIOUS YEAR RELEVANT 15 ITA NO. 1684/PN/2011, A.Y. 2007-08 TO THE ASSESSMENT YEAR UNDER CONSIDERATION BEFORE U S, AND IT HAS BEEN FOUND THAT THE SAID CONCERN WAS ENGAGED IN THE BUSINESS OF DEVELOPING AND SELLING SOFTWARE PRODUCTS AND WAS NO T PURELY OR MAINLY A SOFTWARE SERVICE PROVIDER. THERE IS NO DIS PUTE TO THE FACT POSITION THAT THE APPELLANT BEFORE US HAS UNDERTAKE N MAINLY SOFTWARE DEVELOPMENT SERVICES FOR ITS ASSOCIATED EN TERPRISES AND THE NON-ASSOCIATED ENTERPRISES AND THAT SUCH ACTIVI TY IS QUITE DISTINCT FROM THE DEVELOPING AND SELLING OF SOFTWAR E PRODUCTS. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. (SUPRA) HAS ALSO FOUND THE SAID CONCERN TO BE FUNCT IONALLY DISSIMILAR FROM A CONCERN WHICH WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES, WHICH IS THE CASE BE FORE US. THOUGH, THE DECISION OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. (SUPRA) RELATES TO THE ASSESSMENT YEAR 20 06-07 WHEREAS THE PRESENT CASE OF THE ASSESSEE IS FOR ASSESSMENT YEAR 2008-09 YET THERE IS NO MATERIAL ON RECORD TO SUGGEST THAT THE ACTIVITIES CARRIED OUT BY KALS INFORMATION SYSTEMS LIMITED IN T HE CURRENT ASSESSMENT YEAR ARE DIFFERENT FROM THOSE NOTED BY T HE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. (SUPRA) FOR AS SESSMENT YEAR 2006-07. 18. CONSIDERING THE AFORESAID DISCUSSION, IN OUR VI EW, THE CONCERN I.E. KALS INFORMATION SYSTEMS LIMITED IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE PURPOSES OF BENCHMA RKING INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES. WE HOLD SO. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS. 19. FOLLOWING AFORESAID PRECEDENT, AS THE FACTS AND CIRCUMSTANCES IN THE PRESENT CASE ARE SIMILAR, WE DIRECT THAT M/S. K ALS INFORMATION SYSTEMS LTD., BE EXCLUDED FROM THE FINAL SET OF COM PARABLES. FOR THE SIMILAR REASONS WE ARE OF THE VIEW THAT KALS INFOR MATION SYSTEMS LTD. HAS TO BE EXCLUDED FROM THE LIST OF THE COMP ARABLES IN THE PRESENT CASE AS WELL. 13.2 THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF AVANI CIMCON TECHNOLOGIES LIMITED IN THE LIST OF COMPARABLES ON THE GROUN D THAT THE COMPANY IS FUNCTIONALLY DIFFERENT. IN SUPPORT OF HIS SUBMISSIO NS THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE VS. DCIT (SUPRA). 16 ITA NO. 1684/PN/2011, A.Y. 2007-08 THE RELEVANT EXTRACT OF THE ORDER OF TRIBUNAL IS REPRODUC ED HERE-IN- UNDER: (B) AVANI CIMCON TECHNOLOGIES LTD. 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA O F THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FR OM THE ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN THE COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITTED THAT THIS COMPANY WOUL D HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFTWARE SERVICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FROM THE AS SESSEE. IT WAS FURTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/2011 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTW ARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY AND IT WAS HELD AS FOLLOWS:- 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCOM ): HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPERATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDE D SO AS TO SEE WHETHER THE PROFIT RATIO OF THIS COMPANY CAN BE TAK EN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESS EE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PART Y. LEARNED CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVE R, THE DETAILS OF PERCENTAGE OF EXPORT OF PRODUCTS OR SERVICES HAV E NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERATION FOR COMPARABILITY ANALYSIS. IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS COM PANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS. THE FOLLOWING FIGURES WERE PLACED BEFORE US:- PARTICULARS FYS 05-06 06-07 07-08 08-09 OPERATING REVENUE 21761611 35477523 29342809 28039851 OPERATING EXPNS. 16417661 23249646 23359186 31108949 OPERATING PROFIT 5343950 12227877 5983623 (3069098) OPERATING MARGIN 32.55% 52.59% 25.62% -9.87% 17 ITA NO. 1684/PN/2011, A.Y. 2007-08 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UNU SUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06-07. THE OPERATING REVE NUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXTRAORDINARY YEAR FOR THIS COMPANY. EVEN THE GROWTH OF SOFTWARE INDUSTRY FOR T HE PREVIOUS YEAR AS PER NASSCOM WAS 32%. THE GROWTH RATE OF THIS COMPAN Y WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW OF THE ABOVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJECTED AS A COMPARABLE . 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE REASONS GIVEN BY THE ASSESSEE FOR EXC LUDING THIS COMPANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECIS ION OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACC EPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE. SIMILAR VIEW HAS BEEN TAKEN BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS INDIA PVT. LTD. V S. ITO (SUPRA). THE LD. DR HAS NOT BEEN ABLE TO DISTINGUISH THE D ECISION OF THE TRIBUNAL, NOR ANY MATERIAL HAS BEEN BROUGHT ON RECORD TO ENABLE US TO TAKE A DIFFERENT VIEW. RESPECTFULLY FOLLOWING THE DECISION OF C O-ORDINATE BENCH WE EXCLUDED AVANI CIMCON TECHNOLOGIES LIMITED FROM TH E LIST OF COMPARABLES IN THE PRESENT CASE AS WELL. 13.3 IN VIEW OF THE FACTS OF THE CASE AND THE CASE LAWS D ISCUSSED ABOVE, GROUND NO. 7 RAISED IN THE APPEAL OF ASSESSEE IS ALLOWED. 14. GROUND NO. 8 ADOPTING INAPPROPRIATE APPROACH OF S ELECTION OF COMPANIES AS COMPARABLES. ERRED IN ADOPTING INAPPROPRIATE APPROACH OF SELECTI NG CERTAIN ADDITIONAL COMPANIES (DISCUSSED IN GROUND 7 ABOVE) AS COMPARAB LE TO THE APPELLANT AND IGNORING COMPANIES WHICH COULD ALSO BE CONSIDER ED AS COMPARABLE TO THE APPELLANT ON THE SAME BASIS. IN RESPECT OF GROUND NO. 8 THE LD. AR OF THE ASSESSEE S UBMITTED THAT THE ASSESSEE HAS RAISED OBJECTIONS BEFORE THE DRP FOR ADOPTING 18 ITA NO. 1684/PN/2011, A.Y. 2007-08 INAPPROPRIATE APPROACH OF SELECTING COMPANIES AS COMPARAB LES. HOWEVER, THE DRP HAS NOT GIVEN ANY FINDINGS ON THE ISSUE. A PERUSAL OF THE DIRECTIONS OF DRP SHOW THAT THE ASSESSEE HAD RAISED THIS ISSUE AS OBJECTION NO. 8. HOWEVER, THE DRP HAS NOT GIVEN ANY FINDI NGS ON THE OBJECTION RAISED BY THE ASSESSEE WITH REGARD TO ARBITRA RY SELECTION OF THE COMPANIES AS COMPARABLE ENTITIES. THE ASSESSEE HAD PURP ORTEDLY SUGGESTED THE FOLLOWING COMPANIES TO THE TPO FOR INCLUDING IN THE LIST OF COMPARABLE ENTITIES: 1) AKSHAY SOFTWARE TECHNOLOGIES LIMITED. 2) MAARS SOFTWARE INTERNATIONAL LTD. 3) MELSTAR INFORMATION TECHNOLOGIES LTD. 4) VMF SOFTWARE INTERNATIONAL LTD. A PERUSAL OF THE ORDER OF TPO, AS WELL AS THE DRP SHOWS THAT THERE IS NO REFERENCE OF THE AFORESAID COMPANIES IN THE OR DER. NO REASON WHATSOEVER HAS BEEN GIVEN FOR NOT CONSIDERING TH E AFORESAID COMPANIES IN TP STUDY. WE, ACCORDINGLY, DEEM IT APPROPRIAT E TO REMIT THIS ISSUE BACK TO THE FILE OF TPO FOR CONSIDERING THE AFORE SAID COMPANIES AND PASS SPEAKING ORDER THEREON ACCEPTING/RE JECTING THE SAID COMPANIES AS COMPARABLE ENTITIES, PROVIDED THE ASSESS EE HAS FURNISHED THE DATA OF SAID COMPANIES WITH A REQUEST TO CO NSIDER THE SAME DURING THE PENDENCY OF PROCEEDINGS BEFORE TPO IN FIRS T ROUND. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATIST ICAL PURPOSE IN AFORESAID TERMS. 15. GROUND NO. 9 ADJUSTMENT FOR WORKING CAPITAL ERRED IN NOT GRANTING ANY ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN LEVEL OF WORKING CAPITAL EMPLOYED BY THE APPELLANT AND THE C OMPARABLE COMPANIES. 19 ITA NO. 1684/PN/2011, A.Y. 2007-08 GROUND NO. 10 ADJUSTMENT FOR RISK DIFFERENCE ERRED IN COMPARING FULL-FLEDGED RISK BEARING ENTITI ES WITH THE APPELLANTS CAPTIVE OPERATIONS WITHOUT MAKING ANY RISK ADJUSTME NT FOR DIFFERENCE BETWEEN THE FUNCTIONAL AND RISK PROFILE OR COMPARAB LE COMPANIES CONSIDERED AS COMPARABLE VIS--VIS THE RISK PROFILE OF THE APPELLANT. WITH RESPECT TO THE ADJUSTMENT OF WORKING CAPITAL AND RIS K THE LD. AR SUBMITTED THAT THE ISSUE HAS NOT BEEN PROPERLY APP RECIATED BY THE DRP. THE ASSESSEE HAD GIVEN THE DETAIL OF WORKING CAPITA L ADJUSTMENT BEFORE THE DRP. HOWEVER, THE SAME WERE NOT CONSIDERED. SIMILARLY, IN THE CASE OF ADJUSTMENT OF RISK DIFFERENCE THE DRP HAS NOT CONSIDERED AND APPRECIATED THE ISSUE RAISED BEFORE IT. THE LD. AR SUB MITTED THAT THE WORKING CAPITAL ADJUSTMENT HAS TO BE ALLOWED. IN SUP PORT OF HIS SUBMISSIONS, HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: I. DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS. DCIT (ITA NO. 1683/PN/2011) (A.Y. 2007-08) DECIDED ON 31-12-2012. II. ARISTON THERMO INDIA LIMITED VS. DCIT (ITA NO. 1455/PN/201 0) (A.Y. 2006-07) DECIDED ON 25-06-2013. AND IN SUPPORT OF RISK ADJUSTMENT THE LD. AR PLACED RELIAN CE ON FOLLOWING CASE LAWS: I. INTELLINET TECHNOLOGIES INDIA PVT. LTD. (ITA NO. 1237/BANG/2010)(A.Y. 2006-07) DECIDED ON 30-03-2012. II. CURAM SOFTWARE INTERNATIONAL PVT. LTD. VS. ITO (ITA NO. 1280/BANG/2012)(A.Y. 2008-09) DECIDED ON 31-07-2013. THE LD. DR SUBMITTED THAT THE DRP HAS ADMITTED THAT WO RKING CAPITAL ADJUSTMENT CANNOT BE DENIED. HOWEVER, THE ASSES SEE DID NOT FURNISH THE NECESSARY DOCUMENTS IN SUPPORT OF ITS SUBMISS IONS. SIMILARLY, FOR RISK ADJUSTMENT THE ASSESSEE FAILED TO PROVIDE NECESSARY INFORMATION. 20 ITA NO. 1684/PN/2011, A.Y. 2007-08 A PERUSAL OF DIRECTIONS OF DRP SHOWS THAT THE ISSUE OF WOR KING CAPITAL ADJUSTMENT AND RISK MANAGEMENT HAS BEEN SUMMAR ILY REJECTED BY THE DRP. THE LD. AR POINTED THAT WORKING CAPITAL ADJUS TMENT HAS BEEN ALLOWED IN THE SUBSEQUENT ASSESSMENT YEARS I.E. ASSE SSMENT YEARS 2009-10 AND 2010-11. THE LD. AR REFERRED TO THE ORDER OF TPO DATED 23-01-2013 FOR ASSESSMENT YEAR 2009-10 AT PAGE 1159 TO 1197 OF THE PAPER BOOK AND THE DIRECTIONS OF DRP DATED 23-12-2014 FOR ASSESSMENT YEAR 2010-11 AT PAGE 1199 TO 1241 OF THE PAPER BOOK. THE ASSESSEE HAS OSTENSIBLY GIVEN DETAILED WORKING OF WORKING CAPITAL ADJ USTMENT AND RISK ADJUSTMENT BEFORE THE AUTHORITIES BELOW. THE DR P HAS REJECTED THE ISSUES RAISED BY THE ASSESSEE IN MECHANICA L MANNER. IN VIEW OF THE FACT THAT THE ISSUES RAISED IN GROUND NOS. 9 A ND 10 OF THE APPEAL HAVE NOT BEEN PROPERLY ADJUDICATED BY THE DRP , THE SAME ARE REMITTED BACK TO THE DRP FOR FRESH ADJUDICATION, IN ACCORD ANCE WITH LAW. THUS, BOTH THE GROUNDS I.E. GROUND NOS. 9 AND 10 OF T HE APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. 16. GROUND NO. 11 APPLICABILITY OF 5 PERCENT VARIATIO N FROM MEAN OF COMPARABLE MARGINS. ERRED IN COMPUTING THE ARMS LENGTH PRICE OF SOFTWA RE DEVELOPMENT SERVICES AS THE MEAN ARMS LENGTH PRICE DETERMINED WITHOUT TAKING INTO ACCOUNT THE LOWER 5 PERCENT VARIATION FROM THE MEAN ARMS LENGTH PRICE DETERMINED. THE LD. AR SUBMITTED THAT GROUND NO. 11 IS ACADEMIC AND I S NOT LEFT WITH MUCH MERIT IF THE ABOVE GROUNDS ARE ADJUDICATED. ACCORDINGLY, THIS GROUND OF APPEAL IS DISMISSED AS NOT PRESSED BY THE LD. AR OF THE ASSESSEE. 21 ITA NO. 1684/PN/2011, A.Y. 2007-08 17. GROUND NO. 12 PENALTY PROCEEDINGS AND LEVY OF INT EREST. ERRED IN INITIATING PENALTY PROCEEDING UNDER SECTIO N 271(1)(C) OF THE ACT AND LEVYING INTEREST UNDER SECTIONS 234A, 234B, 234 C AND 234D OF THE ACT. THE GROUND NO. 12 OF THE APPEAL RELATES TO THE PENALTY PROCEEDINGS AND LEVY OF INTEREST. AS FAR AS LEVY OF PENALTY IS CONCERNED THE ISSUE IS PREMATURE. AS REGARDS INTEREST U/S. 234A, 2 34B, 234C AND 234D IS CONCERNED, THE LEVY OF INTEREST IS CONSEQUENTIAL IN NATURE. THEREFORE, THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ACCEPTED IN THE AFORESAID TERMS. ORDER PRONOUNCED ON FRIDAY, THE 04 TH DAY OF DECEMBER, 2015. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 04 TH DECEMBER, 2015 RK *+,%-.#/#)- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. DISPUTE RESOLUTION PANEL, PUNE 4. DIT (INTL. TAXATION), PUNE 5. !'( %%)* , )* , + +,- , / DR, ITAT, A BENCH, PUNE. 6. ( . /0 / GUARD FILE. // ! % // TRUE COPY// #1 / BY ORDER, %2 )- / PRIVATE SECRETARY, )* / ITAT, PUNE