ITO, Bangalore V. M/s Aspect Technology Centre India Pvt. Ltd., Bangalore

ITA 175/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8907 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 27-07-2020
• Assessment Year: 2011-2012
• Appeal Filed On: 12-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 73; 13; 22; 92CA; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT (TP) A NO. 187/BANG/2016 ASSESSMENT YEAR: 2011 - 12 ASPECT TECHNOLOGY CENTER (INDIA) PRIVATE LIMITED, EMBASSY STAR, 2 ND FLOOR, NO.8, PALACE ROAD, VASANTHNAGAR, BANGALORE 560 052. PAN: AACCC 3490K VS. THE INCOME TAX OFFICER, WARD 1(1)(2), BANGALORE. APPELLANT RESPONDENT IT (TP) A NO. 175/BANG/2016 ASSESSMENT YEAR: 2011 - 12 THE INCOME TAX OFFICER, WARD 1(1)(2), BANGALORE. VS. ASPECT TECHNOLOGY CENTER (INDIA) PRIVATE LIMITED, BANGALORE 560 052. PAN: AACCC 3490K APPELLANT RESPONDENT APPELLANT BY : MS. TANMAYEE RAJKUMAR, ADVOCATE RESPONDENT BY : SHRI PRADEEP KUMAR, CIT(D R)(ITAT), BENGALURU. DATE OF HEARING : 27 .0 7 .2020 DATE OF PRONOUNCEMENT : 30 .0 7 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT IT(TP)A NO.187/BANG/2016 IS AN APPEAL BY THE REV ENUE, WHILE IT(TP)A NO.175/BANG/2016 IS AN APPEAL BY THE ASSESS EE. BOTH THESE IT(TP)A NOS.187 & 175/BANG/2016 PAGE 2 OF 38 APPEALS ARE DIRECTED AGAINST THE ORDER DATED 16.12. 2016 OF THE ITO, WARD 1(1)(2), BANGALORE PASSED U/S. 143(3) R.W.S. 144C(1 3) OF THE INCOME-TAX ACT, 1961 [THE ACT] IN RELATION TO AY 2011-12. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE IN I TS APPEAL READS AS FOLLOWS:- 1. THE ORDERS OF THE DISPUTE RESOLUTION PANEL IS O PPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. SOFTWARE DEVELOPMENT SERVICES SEGMENT : 2. THE DRP ERRED IN DIRECTING THE AO/TPO TO EXCLUDE M/S. ACROPETAL TECHNOLOGIES LTD., M/S. MINDTREE LTD., AN D M/S. R.S. SOFTWARE (INDIA) LTD., FROM THE LIST OF COMPARABLES , HOLDING THEM TO BE FUNCTIONALLY DISSIMILAR AS THEY ARE HAVING SI GNIFICANT ONSITE REVENUES, THEREBY SEEKING EXACT COMPARABILITY WHILE SEARCHING FOR COMPARABLE COMPANIES OF THE ASSESSEE UNDER TNMM METHOD, WHEREAS REQUIREMENT OF LAW AND INTERNATIONAL JURISP RUDENCE REQUIRE SEEKING SIMILAR COMPARABLE COMPANIES. ALSO, THE NATURE OF ACTIVITY, IE., SOFTWARE DEVELOPMENT REMAINS THE SAME, IRRESPECTIVE OF THE COMPANY ENGAGED IN PROVIDING ON SITE OR OFFSHORE SERVICES. 3. THE DRP ERRED IN DIRECTING EXCLUSION OF M/S. R.S . SOFTWARE PVT. LTD., M/S. MINDTREE LTD., AND M/S. AC ROPETAL TECHNOLOGIES LTD., ON THE GROUND THAT THEY HAVE SIG NIFICANT ONSITE REVENUE, WITHOUT APPRECIATING THE FACT THAT ONSITE DEVELOPMENT OF SOFTWARE ENTAILS MORE COST AND THEREBY RESULTS IN L OWER PROFIT MARGINS. 4. THE DRP ERRED IN DIRECTING THE AO TO EXCLUDE M/S . ACROPETAL TECHNOLOGIES LTD., FROM THE LIST OF FINAL COMPARABLES ALSO FOR THE REASON THAT CLEAR SEGMENTAL INFORMATIO N OF THE EMPLOYEE COST AND EXPORT EARNING FILTER WAS NOT AVA ILABLE, WITHOUT APPRECIATING THAT PROPER SEGMENTAL INFORMAT ION WAS AVAILABLE ON PROWESS DATABASE AS WELL AS AUDITED FI NANCIALS. 5. THE DRP ERRED IN DIRECTING THE AO TO EXCLUDE M/S . MINDTREE LTD., FROM THE LIST OF COMPARABLES HOLDING IT TO BE IT(TP)A NOS.187 & 175/BANG/2016 PAGE 3 OF 38 FUNCTIONALLY DISSIMILAR ALSO FOR THE REASON THAT TH ERE WERE EXTRAORDINARY EVENT OF MERGER WHEN IT HAS NOT BEEN PROVED THAT SUCH MERGER HAS ANY MATERIAL EFFECT ON PROFIT MARGI N. 6. THE DRP ERRED IN DIRECTING TO EXCLUDE E-INFOCHIP S LTD., FROM THE LIST OF COMPARABLES HOLDING THAT IT IS FUN CTIONALLY NOT COMPARABLE AS NO SEGMENTAL INFORMATION IS AVAILABLE AND FOR THE REASON THAT IT FAILS 75% SERVICE REVENUE FILTER, BY NOT ACKNOWLEDGING THE FACT THAT ENTIRE REVENUE OF THE C OMPANY COMES FROM PROVISION OF SERVICES, AND SERVICE INCOME BEIN G 100% OF ITS SALES, THE COMPANY QUALIFIES THE FILTER. 7. THE DRP ERRED IN DIRECTING EXCLUSION OF M/S. M/S .ICRA TECHNO ANALYTICS LTD., FROM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS INTO DIVERSIFIED ACTIVITY AND NO SEGMENTAL DATA IS AVAILABLE, WITHOUT APPRECIATING THAT THE BASIC FUNC TION OF THE COMPANY IS DEVELOPING SOFTWARE SOLUTIONS IN THOSE A ND OTHER VERTICALS. THE DRP ALSO FAILED TO APPRECIATE THAT T HE COMPANY'S BUSINESS OF ANALYSIS OF STATISTICAL DATA OF ITS CLI ENTS BEFORE PROVIDING SOFTWARE SOLUTIONS DOES NOT RENDER THE SE RVICES TO BE FUNCTIONALLY UNCOMPARABLE. 8. THE DRP ERRED IN DIRECTING TO EXCLUDE M/S.E-ZEST SOLUTIONS LTD., FROM THE LIST OF COMPARABLES HOLDIN G IT TO BE FUNCTIONALLY UNCOMPARABLE, THEREBY SEEKING EXACT CO MPARABILITY BY IMPOSING CONDITION BEYOND LAW WHEREAS REQUIREMEN T OF LAW IS TO ACKNOWLEDGE ONLY THOSE DIFFERENCES THAT ARE LIKE LY TO MATERIALLY AFFECT THE MARGIN. THE DRP OUGHT TO HAVE APPRECIATED THAT THE COMPARABLE QUALIFIED ALL THE QUALITATIVE A ND QUANTITATIVE FILTERS APPLIED BY THE TPO AND IN A COMPUTER SOFTWA RE SERVICES, IF CONSIDERED AS A SECTOR OF BUSINESS, THE 15 DIFFEREN T LINES PREVAILING IN THE BUSINESS CANNOT BE CONSIDERED FUN CTIONALLY DIFFERENT FROM EACH OTHER. 9. THE DRP ERRED IN DIRECTING EXCLUSION OF M/S.INFO SYS TECHNOLOGIES LTD., FROM THE LIST OF COMPARABLES HOL DING IT TO BE FUNCTIONALLY UNCOMPARABLE, WITHOUT APPRECIATING THA T THE PRIMARY SOURCE OF INCOME OF THE COMPARABLE IS FROM PROVISIO N OF SOFTWARE DEVELOPMENT SERVICES. ALSO, THE DRP ERRED IN IMPOSI NG A CONDITION BEYOND LAW IN SEEKING EXACT COMPARABILITY , WHEREAS IT(TP)A NOS.187 & 175/BANG/2016 PAGE 4 OF 38 REQUIREMENT OF LAW IS TO ACKNOWLEDGE ONLY THOSE DIF FERENCES THAT ARE LIKELY TO MATERIALLY AFFECT THE MARGIN. 10. THE DRP ERRED IN DISREGARDING THE POSITION OF LAW THAT THERE COULD BE DIFFERENCES BETWEEN THE ENTERPRISES COMPARED UNDER TNMM METHOD THAT ARE NOT LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR THE PROFITS ACCRUING TO SU CH ENTERPRISES. 11. THE DRP ERRED IN DIRECTING THE AO/TPO TO EXCLU DE M/S. EVOKE TECHNOLOGIES LTD., FROM THE LIST OF COMPARABL ES, HOLDING IT TO BE FUNCTIONALLY UNCOMPARABLE DUE TO THE PECULIAR ECONOMIC CIRCUMSTANCES WITHOUT APPRECIATING THAT THE EXPENDI TURE INCURRED IS A NORMAL PHENOMENON AND A COMPANY CANNOT BE EXCL UDED MERELY ON ABNORMAL PROFIT MARGINS. 12. THE DRP ERRED IN DIRECTING THE AO/TPO TO EXCLU DE M/S. R.S. SOFTWARE (INDIA) LTD., FROM THE LIST OF COMPAR ABLES MERELY TO MAINTAIN CONSISTENCY, EVEN IN THE ABSENCE OF OBJECT ION WITH RESPECT TO INCLUSION OF THE SAID COMPARABLES IN THE LIST. 13. THE DRP ERRED IN DIRECTING THE AO/TPO TO CONSI DER THE FOREIGN EXCHANGE FLUCTUATION TO BE OPERATING IN NAT URE, WITHOUT APPRECIATING THAT THE RULE 10B(2)(D) STIPULATES THA T THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE IN THE INTERNATIONA L TRANSACTION SHALL ALONE BE COMPUTED FOR COMPARABILITY UNDER TNM M. ITES SEGMENT : 14. THE DRP ERRED IN DIRECTING THE AO/TPO TO EXCLU DE M/S. ACROPETAL TECHNOLOGIES LTD., JEEVAN SCIENTIFIC TECH NOLOGY LTD., ACCENTIA TECHNOLOGIES LTD., IGATE GLOBAL SOLUTIONS LTD. AND ICRA ONLINE LTD., HOLDING IT TO BE FUNCTIONALLY UNC OMPARABLE IN THE ABSENCE OF SEGMENTAL INFORMATION, WITHOUT APPRE CIATING THAT PROPER SEGMENTAL INFORMATION OF THE COMPANY IS AVAI LABLE ON PROWESS DATABASE AND AUDITED FINANCIALS AND ONLY TH E APPROPRIATE SEGMENT HAS BEEN CORRECTLY CONSIDERED BY THE TPO. T HE DRP ALSO ERRED IN SEEKING EXACT COMPARABILITY AS REQUIREMENT OF LAW AND INTERNATIONAL JURISPRUDENCE REQUIRE SEEKING JUST SI MILAR COMPARABLE COMPANIES. 15. THE DRP ERRED IN DIRECTING TO EXCLUDE M/S. COSM IC GLOBAL LTD., HOLDING IT TO BE FUNCTIONALLY UNCOMPARABLE AS IT IS HAVING A IT(TP)A NOS.187 & 175/BANG/2016 PAGE 5 OF 38 DIFFERENT WORKING MODEL THAT MAY HAVE SIGNIFICANT E FFECT ON THE MARGIN BY LOOKING ONLY AT THE RATIO OF SUB-CONTRACT ING EXPENSES WITHOUT LOOKING INTO THE ENTIRE FUNCTIONAL PROFILE OF THE COMPANY, WHEN THE COMPARABLE SATISFIED ALL THE FILTERS APPLI ED BY THE TPO. ALSO, INSISTING ON STRICT COMPARABILITY UNDER TNMM METHOD DEFEATS THE VERY PURPOSE OF THE LAW RELATING TO DET ERMINATION OF ALP UNDER THE I.T.ACT. CORPORATE ISSUE : 16. THE DRP ERRED IN DIRECTING THE AO TO FOLLOW THE RATIO LAID DOWN BY THE HON'BLE COURT IN THE CASE OF TATA ELXSI LIMITED 349 ITR 98 AND EXCLUDE TELECOMMUNICATION EXPENSES AND T RAVELLING EXPENSES INCURRED IN FOREIGN CURRENCY FROM THE TOTA L TURNOVER ALSO, WHILE COMPUTING THE DEDUCTION U/S 10A OF THE I.T. ACT, WITHOUT APPRECIATING THE FACT THAT THERE IS NO PROV ISION IN SECTION 10A THAT SUCH EXPENSES SHOULD BE REDUCED FROM THE T OTAL TURNOVER ALSO, AS CLAUSE (IV) OF THE EXPLANATION TO SECTION 10A PROVIDES THAT SUCH EXPENSES ARE TO BE REDUCED ONLY FROM THE EXPOR T TURNOVER. 17. THE DRP ERRED IN NOT APPRECIATING THE FACT THA T THE JURISDICTIONAL HIGH COURT'S DECISION IN THE CASE OF TATA ELXSI LIMITED 349 ITR 98 HAS NOT BEEN ACCEPTED BY THE DEP ARTMENT AND AN APPEAL HAS BEEN FILED BEFORE THE HON'BLE SUPREME COURT. 18. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE UR GED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE DRP BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTO RED. 19. THE APPELLATE CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 3. THE ASSESSEE IN ITS APPEAL HAS RAISED SEVERAL GR OUNDS, BUT AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE P RAYED THAT GROUND NO.4(A)(B)(D)(E) & (I) IN THE MAIN GROUNDS OF APPEA L AND GROUND NO.4(J) AND 7.1 RAISED IN THE FORM OF ADDITIONAL GROUNDS ALONE NEED TO BE ADJUDICATED. THE RELEVANT GROUNDS OF GROUND NO.4 AND THE ADDITIO NAL GROUNDS 4(J) AND 7.1 READ AS FOLLOWS:- IT(TP)A NOS.187 & 175/BANG/2016 PAGE 6 OF 38 4. DETERMINATION OF ARM'S LENGTH PRICE OF THE APPEL LANT'S INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES : (A) THAT, IN VIEW OF THE HIGH TURNOVERS OF L&T INFO TECH LTD., PERSISTENT SYSTEMS LTD., SASKEN COMMUNICATIONS TECH NOLOGIES LTD., AND TATA ELXSI LTD., INDICATING, INTER ALIA, HIGH OWNERSHIP OF INTANGIBLES AND SIGNIFICANTLY HIGH BRAND VALUE, THE Y OUGHT TO STAND EXCLUDED FROM THE FINAL LIST OF COMPARABLE CO MPANIES IN RESPECT OF THE APPELLANT'S INTERNATIONAL TRANSACTIO N OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES. (B) THAT, WITHOUT PREJUDICE TO THE ABOVE, TATA ELXS I LTD. OUGHT TO STAND EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES AS IT IS ENGAGED IN THE DEVELOPMENT OF NICHE PRODUCTS AND THE PROVISION OF PRODUCT DESIGNING SERVICES WHICH ARE E NTIRELY DIFFERENT FROM THE SERVICES PROVIDED BY THE APPELLA NT AND IS, HENCE, FUNCTIONALLY DISSIMILAR TO THE APPELLANT. (C) THAT, WITHOUT PREJUDICE TO THE APPELLANT'S CONT ENTION THAT THE AO/TPO OUGHT NOT TO HAVE ARBITRARILY REJECTED T HOSE COMPANIES HAVING EXPORT REVENUES LESS THAN 75% OF T HEIR TOTAL SALES, THE AO/TPO ERRED IN REJECTING HELIOS & MATHE SON INFORMATION TECHNOLOGY LTD., THINKSOFT GLOBAL SERVI CES LTD. AND ZYLOG SYSTEMS LTD. ON THAT GROUND DESPITE THE SAID COMPANIES HAVING EXPORT TURNOVERS IN EXCESS OF 75% OF THEIR T OTAL TURNOVERS. THE DRP FURTHER ERRED IN CONFIRMING THE SAME. (D) THAT, WITHOUT PREJUDICE TO THE APPELLANT'S CONT ENTION THAT THE AO/TPO OUGHT NOT TO HAVE ARBITRARILY REJECTED T HOSE COMPANIES HAVING EMPLOYEE COSTS LESS THAN 25% OF TH EIR TOTAL REVENUES, THE AO/TPO ERRED IN REJECTING CG VAK SOFT WARE & EXPORT LTD. ON THAT GROUND DESPITE THE SAID COMPANY HAVING AN EMPLOYEE COST IN EXCESS OF 25% OF ITS TOTAL REVENUE . THE DRP FURTHER ERRED IN CONFIRMING THE SAME. (E) THAT THE DRP GROSSLY ERRED IN REJECTING COMPANI ES SELECTED BY THE APPELLANT IN ITS TP STUDY AS WELL A S COMPANIES SELECTED BY THE TPO IN THE TP ORDER BY ARBITRARILY APPLYING AN ONSITE DEVELOPMENT OF SOFTWARE FILTER WITHOUT THE T PO HAVING APPLIED SUCH A FILTER AND WITHOUT AFFORDING THE APP ELLANT AN OPPORTUNITY OF HEARING PRIOR TO APPLYING SUCH A FIL TER. IT(TP)A NOS.187 & 175/BANG/2016 PAGE 7 OF 38 .. .. (I) THAT THE DRP HAS ERRONEOUSLY DIRECTED EXCLUSION OF EVOKE TECHNOLOGIES INDIA PRIVATE LIMITED AND RS SOFTWARE (INDIA) PRIVATE LIMITED FROM THE LIST OF COMPARABLE COMPANI ES WHILE BENCHMARKING THE APPELLANT'S TRANSACTION OF PROVISI ON OF SWD SERVICES, DESPITE THEM BEING FUNCTIONALLY COMPARABL E TO THE APPELLANT. ADDITIONAL GROUNDS OF APPEAL 4(J) THAT E-ZEST SOLUTIONS LTD., LARSEN AND TOUBRO LTD., PERSISTENT SYSTEMS & SOLUTIONS LTD., PERSISTENT SYS TEMS LTD. AND SASKEN COMMUNICATION TECHNOLOGIES LTD. OUGHT TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES AS THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY THE COMPANIES ARE DIFFERENT FROM THAT OF THE APPELLANT. 7.1 THAT THE AO/ TPO ERRED IN LAW AND ON FACTS IN DETERMINING A NEGATIVE WORKING CAPITAL ADJUSTMENT. 4. AS FAR AS THE QUESTION OF ADMISSION OF ADDITIONA L GROUNDS IS CONCERNED, IT IS SEEN THAT THESE GROUNDS ARISE OUT OF THE ORDER OF DRP AND RELATED TO GROUNDS OF APPEAL ALREADY RAISED BY THE ASSESSEE IN ITS APPEAL BUT OMITTED TO BE SPECIFICALLY AND PRECISELY RAISED IN THE ORIGINAL GROUNDS OF APPEAL AND ARE THEREFORE ADMITTED FOR ADJUDICATION. 5. WE SHALL FIRST IDENTIFY THE ISSUES TO BE DECIDED IN THESE CROSS APPEALS. THE ISSUES THAT ARISE IN THESE CROSS APPE ALS ARE WITH REGARD TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPEC T OF TWO INTERNATIONAL TRANSACTIONS BETWEEN THE ASSESSEE AND ITS ASSOCIATE D ENTERPRISE (AE) UNDER THE PROVISIONS OF SEC.92 OF THE INCOME TAX AC T, 1961 (ACT) VIZ., (I) INTERNATIONAL TRANSACTION OF RENDERING OF SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES) BY THE ASSESSEE TO ITS AE AND (II) R ENDERING OF INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) BY THE ASSESSEE TO ITS AE. AS FAR AS IT(TP)A NOS.187 & 175/BANG/2016 PAGE 8 OF 38 THE APPEAL OF THE REVENUE IS CONCERNED, GR.NO.1, 18 & 19 ARE GENERAL GROUNDS AND NEED NO SPECIFIC ADJUDICATION. AS FAR A S GROUNDS 2 TO 12 RAISED BY THE REVENUE ARE CONCERNED, THEY RELATE TO CORRECTNESS OF EXCLUSION OF COMPARABLE COMPANIES SELECTED BY THE T RANSFER PRICING OFFICER (TPO) IN HIS ORDER U/S.92CA OF THE ACT BY T HE DISPUTE RESOLUTION PANEL (DRP) IN ITS DIRECTIONS, IN THE SWD SERVICES SEGMENT. GR.NO.13 RAISED BY THE REVENUE RELATES TO THE ACTION OF THE DRP IN DIRECTING THE TPO/AO TO CONSIDER FOREIGN EXCHANGE GAIN AS PART OF OPERATING PROFITS OF THE ASSESSEE FOR COMPARING THE ASSESSEES PROFIT MA RGIN WITH THE COMPARABLE COMPANIES. GR.NO.14 & 15 RELATES TO COR RECTNESS OF EXCLUSION OF COMPARABLE COMPANIES SELECTED BY THE TRANSFER PR ICING OFFICER (TPO) IN HIS ORDER U/S.92CA OF THE ACT BY THE DISPUTE RESOLU TION PANEL (DRP) IN ITS DIRECTIONS, IN THE ITES SEGMENT. GR.NO.16 & 17 REL ATES TO THE DIRECTIONS OF THE DRP TO EXCLUDE FROM THE TOTAL TURNOVER WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S.10A O F THE ACT. 6. AS FAR AS THE APPEAL OF THE ASSESSEE IS CONCERNE D, GR.NO.4(A) (B) (D)(E)(I) & (J) RELATE TO EXCLUSION OF COMPARABLE C OMPANIES AND INCLUSION OF COMPARABLE COMPANIES IN THE SWD SERVICES AND ITES S EGMENTS AND CORRECTNESS OF APPLICATION OF CERTAIN FILTERS IN EX CLUDING AND INCLUDING COMPARABLE COMPANIES. GR.NO.7(I) RELATES TO THE AC TION OF THE TPO IN DETERMINING NEGATIVE WORKING CAPITAL ADJUSTMENT WHI LE COMPUTING ALP IN BOTH THE SWD SERVICES SEGMENT AND ITES SEGMENTS. W E SHALL DEAL WITH EACH OF THE SEGMENTS SEPARATELY. 7. THE ASSESSEE IS A DIRECT SUBSIDIARY OF CONCERTO SOFTWARE CAYMAN HOLDINGS LIMITED. THE ASSESSEE IS A CAPTIVE DEVELOP MENT CENTRE FOR ASPECT US AND RENDERS SOFTWARE DEVELOPMENT AND SOLUTIONS A ND ITES TO SUPPORT THE GLOBAL CONTRACTS NEGOTIATED BY ASPECT US AND OT HER AFFILIATES. IT IS A IT(TP)A NOS.187 & 175/BANG/2016 PAGE 9 OF 38 REGISTERED 100% SOFTWARE EXPORT ORIENTED UNIT UNDER THE SOFTWARE TECHNOLOGY PARKS OF INDIA(STPI) SCHEME. 8. DURING THE PREVIOUS YEAR RELEVANT TO THE AY 2011 -12, TWO OF THE INTERNATIONAL TRANSACTIONS THAT TOOK PLACE BETWEEN THE ASSESSEE AND ITS AES WERE THE PROVISION OF SOFTWARE DEVELOPMENT (SW D) SERVICES BY THE ASSESSEE AT A PRICE OF RS.17,32,18,123/-, FOR WHICH A TP ADJUSTMENT WAS MADE BY THE TPO TO AN EXTENT OF RS.1,86,43,313/-, A ND THE PROVISION OF IT- ENABLED SERVICES (ITES) BY THE ASSESSEE AT A PRIC E OF RS. 6,96,70,912/- IN RESPECT OF WHICH AN ADJUSTMENT OF RS.75,86,907/- WAS MADE BY THE TPO. 9. INITIALLY, A DRAFT ASSESSMENT ORDER DATED 09.02. 2015 CAME TO BE PASSED BY THE AO UPON INCORPORATING THE AFORESAID T P ADJUSTMENTS. IN RESPECT OF DEDUCTION UNDER SECTION 10A OF THE ACT C LAIMED BY THE ASSESSEE, IT WAS SOUGHT TO BE RESTRICTED UPON DISAL LOWING AN AMOUNT OF RS. 13,70,475/- BEING TELECOMMUNICATION EXPENSES AND AN AMOUNT OF RS. 8,35,695/- BEING TRAVEL EXPENSES INCURRED IN FOREIG N CURRENCY ONLY FROM THE ASSESSEES EXPORT TURNOVER WITHOUT MAKING A CORRESP ONDING REDUCTION OF THE SAID AMOUNTS FROM ITS TOTAL TURNOVER. 10. AGGRIEVED, THE ASSESSEE FILED ITS OBJECTIONS BE FORE THE DRP WHICH, VIDE ITS DIRECTIONS DATED 05.11.2015, PARTLY ALLOWE D THE OBJECTIONS RAISED BY THE ASSESSEE. 11. PURSUANT TO THE DIRECTIONS OF THE DRP, THE AO P ASSED THE FINAL ASSESSMENT ORDER DATED 16.12.2015 IN WHICH THE TOTA L TP ADJUSTMENT WAS REWORKED TO RS. 1,38,55,462/ FOR THE TWO SEGMENTS P UT TOGETHER. ALSO, THE DRP HAVING ACCEPTED THE CONTENTION OF THE ASSESSEE THAT THE AMOUNTS IF ANY REDUCED FROM THE EXPORT TURNOVER IN COMPUTING T HE DEDUCTION UNDER SECTION 10A SHOULD ALSO BE CORRESPONDINGLY REDUCED FROM THE TOTAL IT(TP)A NOS.187 & 175/BANG/2016 PAGE 10 OF 38 TURNOVER, THERE WAS NO REDUCTION IN THE DEDUCTION C LAIMED UNDER SECTION 10A. 12. TO THE EXTENT THE TP ADJUSTMENT SURVIVES POST T HE DRPS DIRECTIONS, THE ASSESSEE HAS FILED THE ABOVE APPEAL AND TO THE EXTENT THE REVENUE IS AGGRIEVED BY THE DRPS DIRECTIONS ALLOWING THE ASSE SSEES OBJECTIONS, IT HAS FILED THE ABOVE APPEAL BEFORE THIS HONBLE TRIB UNAL. DETAILS OF THE ASSESSEES INTERNATIONAL TRANSACTION S PARTICULARS AMOUNT IN RS. OUTCOME OF TP ORDER RECEIPT FOR PROVISION OF ITE SERVICES 6,96,70,913/- ADJUSTMENT OF RS.75,86,907/- RECEIPT OF PROVISION OF SWD SERVICES 17,32,18,123/- ADJUSTMENT OF RS. 1,86,43,313/- SOFTWARE DEVELOPMENT SERVICES SEGMENT : 13. IT IS NOT IN DISPUTE BETWEEN THE ASSESSEE AND T HE REVENUE THAT THE TRANSACTION NET MARGIN METHOD (TNMM) WAS THE MOST A PPROPRIATE METHOD (MAM) FOR DETERMINATION OF ALP AND THAT THE PROFIT LEVEL INDICATOR TO BE ADOPTED FOR COMPARISON OF THE ASSESSEES PROFIT WIT H THAT OF COMPARABLE COMPANIES WAS OPERATING PROFIT/TOTAL COST (OP/TC). THE OP/TC OF THE ASSESSEE WAS 14.69%. THE ASSESSEE IN ITS TP STUDY SELECTED 22 COMPARABLE COMPANIES WHOSE ARITHMETIC MEAN OF OP/TC WAS ARRIVED AT 13.60%. SINCE THE PROFIT MARGIN OF THE ASSESSEE WA S MORE THAN THE ARITHMETIC MEAN OF OP/TC OF THE 22 COMPARABLES SELE CTED BY THE ASSESSEE, IT WAS CLAIMED BY THE ASSESSEE THAT THE P RICE CHARGED BY IT IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE DETERMINATION OF ALP WAS REFERRED BY THE AO, ACCEPTED 6 OUT OF THE 22 COMPARABLE COMPANIES SUGGE STED IN THE TP STUDY BY THE ASSESSEE AS COMPARABLE WITH THE ASSESSEE. T HE TPO ON HIS OWN IT(TP)A NOS.187 & 175/BANG/2016 PAGE 11 OF 38 SELECTED 7 OTHER COMPANIES AS COMPARABLE COMPANIES WITH THE ASSESSEE. THUS A FINAL SET OF 13 COMPARABLE COMPANIES WAS CHO SEN BY THE TPO AS COMPARABLE COMPANIES. THE ARITHMETIC MEAN OF PROFI T MARGIN OF THESE COMPANIES AFTER AND BEFORE ADJUSTMENT TOWARDS WORKI NG CAPITAL ADJUSTMENT WAS AS FOLLOWS:- NET MARK-UP ON COST EARNED BY THE ASSESSEE AS COMPU TED BY THE TPO IN THE TP ORDER: OPERATING INCOME RS. 17,32,18,123/- OPERATING COST RS.15,10,36,319/- OPERATING PROFIT (OP. INCOME OP. COST) RS. 2,21,8 1,804/- OPERATING/NET MARK-UP (OP/TC) 14.69% COMPARABLES SELECTED BY ASSESSEE AND THEIR ARITHMET IC MEAN: SL. NO. NAME OF THE COMPANY AVERAGE NPI (IN %) 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 4.58 2. ANCENT SOFTWARE INTERNATIONAL LTD. 6.83 3. AZTECSOFT LTD. (CONSOLIDATED) 6.80 4. CALIBER POINT BUSINESS SOLUTIONS LTD. - 0.95 5. CAT TECHNOLOGIES LTD. 26.90 6. CG - VAK SOFTWARE AND EXPORTS LTD. 0.31 7. EVOKE TECHNOLOGIES PVT. LTD 20.05 8. GOLDSTONE TECHNOLOGIES LTD. 4.37 9. HELIOS AND MATHESON INFORMATION TECHNOLOGY 17.22 10. KPIT CUMMINS INFOSYSTEMS LTD. 12.53 11. LARSEN AND TOUBRO INFOTECH LTD. 18.12 12. LGS GLOBAL LTD. 14.15 13. MAVERIC SYSTEMS LT D. 14.50 14. MINDTREE LTD. 12.08 15. PERSISTENT SYSTEMS LTD. 23.91 16. RS SOFTWARE (INDIA) LTD. 11.99 17. R SYSTEMS INTERNATIONAL LTD. 12.10 18. SASKEN COMMUNICATION TECHNOLOGIES LTD. 22.79 19. SAVEN TECH NOLOGIES LTD. 17.43 20. THINKSOFT GLOBAL SERVICES LTD. 11.54 21. THIRDWARE SOLUTIONS LTD. 21.75 22. ZYLOG SYSTEMS LTD. 20.23 ARITHMETICAL MEAN 13.60 IT(TP)A NOS.187 & 175/BANG/2016 PAGE 12 OF 38 NOTE: OUT OF THE 22 COMPARABLES SELECTED BY THE ASSESSEE, THE TPO ACCEPTED THE 6 HIGHLIGHTED ABOVE, VIZ. LARSEN AND TOUBRO INF OTECH LTD., EVOKE TECHNOLOGIES PVT. LTD., PERSISTENT SYSTEMS LTD., RS SOFTWARE (INDIA) LTD., MINDTREE LTD. (AT SEGMENT LEVEL) AND SASKEN COMMUNI CATION TECHNOLOGIES LTD., AND REJECTED THE OTHER 16. COMPARABLES SELECTED BY TPO AND THEIR ARITHMETIC ME AN: SL. NO. NAME OF THE COMPANY MARK-UP ON TOTAL COSTS (WCUNADJ) (IN %) MARK-UP ON TOTAL COSTS (WC ADJ) (IN %) 1 ACROPETAL TECHNOLOGIES LTD. (SEG) 31.98 31.71 2 E-ZEST SOLUTIONS LTD. 21.03 21.96 3 E-INFOCHIPS LTD. 56.44 59.21 4 EVOKE TECHNOLOGIES PVT. LTD. 8.11 10.97 5 ICRA TECHNO ANALYTICS LTD. 24.83 25.84 6 INFOSYS LTD. 43.39 46.51 7 LARSEN & TOUBRO INFOTECH LTD. 19.83 22.90 8 MINDTREE LTD. (SEG) 10.66 12.22 9 PERSISTENT SYSTEMS & SOLUTIONS LTD. 22.12 24.20 10 PERSISTENT SYSTEMS LTD. 22.84 24.63 11 R S SOFTWARE (INDIA) LTD. 16.37 19.21 12 SASKEN COMMUNICATION TECHNOLOGIES LTD. 24.13 27.55 13 TATA ELXSI LTD. (SEG) 20.91 21.96 AVERAGE MARK-UP 24.82 26.83* NOTE: THE TPO ERRONEOUSLY CONSIDERED THE ADJUSTED AVERAGE MARK-UP OF THE COMPARABLES AT 27.03% COMPUTATION OF ARMS LENGTH PRICE BY THE TPO AND TH E ADJUSTMENT MADE: ARMS LENGTH MEAN MARK-UP 24.82% LESS: WORKING CAPITAL ADJUSTMENT -2.21%% ADJUSTED MEAN MARK-UP OF THE COMPARABLES 27.03% OPERATING COST RS. 15,10,36,319/- ARMS LENGTH PRICE 127.03% OF OPERATING COST RS. 19,18,61,436/- PRICE RECEIVED RS.17,32,18,123/- SHORTFALL BEING ADJUSTMENT U/S. 92CA RS.1,86,43,313/- IT(TP)A NOS.187 & 175/BANG/2016 PAGE 13 OF 38 14. THE AO INCORPORATED THE ADDITION TO THE TOTAL I NCOME BY WAY OF SHORTFALL BEING ADJUSTMENT U/S.92CA OF THE ACT, IN HIS DRAFT ORDER OF ASSESSMENT. AGAINST THE SAID ADDITION IN THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJECTIONS U/S.144C OF THE ACT BEFOR E THE DRP. THE DRP ACCEPTED SOME OF THE CONTENTIONS OF THE ASSESSEE. BRIEFLY, THE DIRECTIONS ISSUED BY THE DRP ARE AS FOLLOWS:- (I) FUNCTIONALITY FILTER: THE FOLLOWING COMPANIES WERE DIRECTED TO BE EXCLUDE D BY ACCEPTING THE CONTENTIONS OF THE ASSESSEE: (I) ACROPETAL TECHNOLOGIES LTD. (II) E-INFOCHIPS LIMITED (III) ICRA TECHNO ANALYTICS LTD. (IV) INFOSYS LTD. THE DRP, HOWEVER, REJECTED THE CONTENTION OF THE AS SESSEE THAT SASKEN COMMUNICATION TECHNOLOGIES LTD. WAS NOT FUNCTIONALL Y COMPARABLE TO IT AND CONSEQUENTLY UPHELD ITS INCLUSION IN THE FINAL LIST OF COMPARABLES. THE DRP ALSO SUO MOTO DIRECTED THE EXCLUSION OF R S SOFTWARE (INDIA) LTD ., MINDTREE LTD. AND EVOKE TECHNOLOGIES PVT. LTD. AS REGARDS THE ASSESSE ES CONTENTIONS FOR INCLUSION OF ITS TP STUDY COMPARABLES, THE DRP REJECTED THE S AME AND THEREBY UPHELD THEIR EXCLUSION BY THE TPO. (II) ONSITE SOFTWARE DEVELOPMENT ACTIVITIES: IN ADDITION TO THE ABOVE, THE DRP REJECTED THE FOLL OWING COMPANIES SELECTED BY THE TPO ON THE BASIS THAT THEY WERE PREDOMINANTLY ENGAGED I N ONSITE ACTIVITIES, ALTHOUGH NO ONSITE REVENUES FILTER HAD BEEN APPLIED BY THE TPO: (A) ACROPETAL TECHNOLOGIES LTD. (REJECTED BY DRP ON OTHER GROUNDS ALSO) (B) RS SOFTWARE (INDIA) LTD. (REJECTED BY DRP SUO MOTO ONLY ON THIS GROUND) (C) MINDTREE LTD. (REJECTED BY DRP SUO MOTO ON OTHER GROUNDS ALSO) IT(TP)A NOS.187 & 175/BANG/2016 PAGE 14 OF 38 15. ON GIVING EFFECT TO THE ABOVE DIRECTIONS ISSUED BY THE DRP, THE FINAL LIST OF COMPARABLES IS AS FOLLOWS:- SI. NO. NAME OF THE COMPANY 1 E-ZEST SOLUTIONS LIMITED 2 PERSISTENT SYSTEMS & SOLUTIONS LTD. 3 PERSISTENT SYSTEMS LTD. 4 SASKEN COMMUNICATION TECHNOLOGIES LTD. 5 TATA ELXSI LTD. 6 L & T INFOTECH LIMITED 16. PURSUANT TO THE DIRECTIONS OF THE DRP, THE TP A DJUSTMENT AS REGARDS THE INTERNATIONAL TRANSACTION OF PROVISION OF SWD S ERVICES WAS REWORKED TO RS. 1,38,55,462/-. 17. AGGRIEVED BY THE RELIEF ALLOWED BY THE DRP, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. AGGRIEVED BY THE ORDER OF DRP NOT ACCEPTING SOME OF THE CONTENTIONS RAISED BY THE ASSESSEE, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 18. AS FAR AS THE APPEAL OF THE REVENUE IS CONCERNE D, THE GROUNDS IN REVENUES APPEAL ARE AS FOLLOWS:- (I) THAT THE DRP ERRED IN SUO MOTO APPLYING THE ONSITE REVENUE FILTER AND IN CONSEQUENTLY EXCLUDING RS SOFTWARE PVT. LTD. MINDTR EE LTD. AND ACROPETAL TECHNOLOGIES LTD. ( GROUND NOS. 2 AND 3) (II) THAT THE DRP ERRED IN DIRECTING EXCLUSION OF A CROPETAL TECHNOLOGIES LTD. FOR THE REASON THAT SEGMENTAL INFORMATION REGARDING EMPLOYEE COST AND EXPORT EARNINGS WERE NOT AVAILABLE. ( GROUND NO. 4 ) (III) THAT THE DRP ERRED IN DIRECTING EXCLUSION OF MINDTREE LTD. FOR THE REASON THAT THE COMPANY IS FUNCTIONALLY DISSIMILAR AND THA T THERE WAS EXTRAORDINARY EVENT OF MERGER, WHEN THE SAME WAS NOT PROVED TO HA VE ANY MATERIAL EFFECT ON ITS MARGIN ( GROUND NO. 5 ) IT(TP)A NOS.187 & 175/BANG/2016 PAGE 15 OF 38 (IV) THAT THE DRP ERRED IN DELETING E-INFOCHIPS LTD . ON THE GROUND THAT IT FAILS THE FILTER OF SERVICE REVENUE INCOME LESS THAN 75% OF THE SALES. ( GROUND NO. 6 ) (V) THAT THE DRP ERRED IN DIRECTING EXCLUSION OF IC RA TECHNO ANALYTICS LTD. ON THE GROUND THAT SEGMENTAL DETAILS WERE NOT AVAIL ABLE ( GROUND NO. 7 ) (VI) THAT THE DRP ERRED IN DIRECTION EXCLUSION OF E -ZEST SOLUTIONS LTD., EVOKE TECHNOLOGIES LTD. AND INFOSYS TECHNOLOGIES LTD. ON THE GROUND THAT THEY WERE NOT FUNCTIONALLY COMPARABLE ( GROUND NOS. 8, 9 AND 11 ) (VII) THAT THE DRP ERRED IN DIRECTING EXCLUSION OF RS SOFTWARE (INDIA) LTD. IN THE ABSENCE OF OBJECTION WITH RESPECT TO ITS INCLUSION ( GROUND NO. 12 ) 19. AS FAR AS THE APPEAL OF THE ASSESSEE IS CONCE RNED, THE GROUNDS IN THE ASSESSEES APPEAL WHICH ARE BEING PRESSED ARE AS FO LLOWS: (I) THAT THE TPO ERRED AND THE DRP FURTHER ERRED IN INCLUDING SASKEN COMMUNICATIONS LTD. IN THE LIST OF COMPARABLES ALTH OUGH IT FAILS THE TEST OF COMPARABILITY. ( GROUND NO.4(A) AND 4(J)-[ ADDITIONAL GROUND ] ) (II) THAT THE DRP ERRED IN REJECTING RS SOFTWARE PV T. LTD., AND EVOKE TECHNOLOGIES PVT. LTD. FROM THE LIST OF COMPARABLES ( GROUND NOS. 4(E) AND (I) ). (III) THAT THE AO/TPO ERRED IN REJECTING CG VAK SOF TWARE AND EXPORT LTD. FOR THE REASON THAT IT FAILED THE FILTER OF EMPLOYEE COST I N EXCESS OF 25% OF ITS TOTAL REVENUE. ( GROUND NO. 4(D) ) (IV) THAT E-ZEST SOLUTIONS LTD., LARSEN AND TOUBRO LTD., PERSISTENT SYSTEMS & SOLUTIONS LTD., PERSISTENT SYSTEMS LTD. AND SASKEN COMMUNICATION TECHNOLOGIES LTD. OUGHT TO BE EXCLUDED FROM THE FIN AL LIST OF COMPARABLES ( GROUND NO. 4(J)-[ ADDITIONAL GROUND ]) (V) THAT TATA ELXSI LTD. OUGHT TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES ( GROUND NO. 4(B) ) (VI) THAT THE AO/ TPO ERRED IN LAW AND ON FACTS IN DETERMINING A NEGATIVE WORKING CAPITAL ADJUSTMENT. ( GROUND NO. 7.1-[ ADDITIONAL GROUND ] ) 19. AS FAR AS REVENUES APPEAL IS CONCERNED, IN GRO UND NOS. 2 TO 5, THE REVENUE HAS CHALLENGED THE ACTION OF THE DRP IN SUO MOTO REJECTING COMPANIES SELECTED BY THE TPO, VIZ. ACROPETAL TECHNOLOGIES LTD., IT(TP)A NOS.187 & 175/BANG/2016 PAGE 16 OF 38 MINDTREE LTD. AND RS SOFTWARE (INDIA) LTD. , ON THE BASIS THAT THEY WERE PREDOMINANTLY ENGAGED IN THE ONSITE DEVELOPMENT OF SOFTWARE IN FY 2010-11. IT WAS RIGHTLY CONTENDED THAT THE EXCLUS ION OF THESE COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO, BY THE DRP WAS ARBITRARY BECAUSE THE TPO DID NOT APPLY ANY FILTER AS REGARDS ONSITE REVENUES NOR DID THE ASSESSEE SEEK TO APPLY THESE FILTERS EITHER BEFORE TPO OR DRP. IT WAS ALSO RIGHTLY CONTENDED T HAT THE FILTER WAS NOT APPLIED BY DEFINING OR SETTING OUT A PARTICULAR THR ESHOLD OR PERCENTAGE AT WHICH IT WAS APPLIED WITH REFERENCE TO THE ACTUAL F IGURES OF ONSITE REVENUES IN THESE COMPANIES. WE FIND THAT OUT OF THE AFORES AID 3 COMPANIES THE FOLLOWING TWO COMPANIES WERE REJECTED ON APPLICATIO N OF THE ONSITE DEVELOPMENT OF SOFTWARE FILTER ALONE, VIZ., RS SOFTWARE (INDIA) LTD. AND MINDTREE LTD. WE ARE OF THE VIEW THAT FOR THE REASONS GIVEN ABOV E, THESE TWO COMPANIES HAVE TO BE INCLUDED IN THE LIST OF CO MPARABLES AND THEREFORE ALLOW IN PART GR.NO.2 & 3 AND ALLOW GR.NO.5. IN TH IS REGARD WE ALSO NOTE THAT THESE TWO COMPANIES WERE SELECTED BY THE ASSES SEE IN ITS TP STUDY AND SUBSEQUENTLY INCLUDED BY THE TPO IN THE FINAL L IST OF COMPARABLES. THEY PASS ALL THE FILTERS APPLIED BY THE TPO. IN FACT, T HE ASSESSEE IS ALSO SEEKING INCLUSION OF RS SOFTWARE (INDIA) LTD. IN THE LIST O F COMPARABLES VIDE GR.NO.4(E) IN ITS APPEAL. WE ALSO FIND THAT THIS TR IBUNAL IN THE CASES OF APPLIED MATERIALS INDIA PVT. LTD. V. ACIT [TS-815-ITAT-2016(BANG)-TP AT PARAS 21-21.2 ON PAGES 1614-1615]; COMMSCOPE NETWORKS (I) PVT. LTD. V. ITO [TS-161-ITAT-2017(BANG)-TP AT PARA 8 ON PAGE 1639]; AND CYPRESS SEMI-CONDUCTOR TECHNOLOGY INDIA PVT. LTD. V. DCIT [ IT(TP)A NO. 356/BANG/2016 AT PARAS 10 AND 11 AT PAGES 1764-176 5], DIRECTED THE INCLUSION OF THESE TWO COMPANIES UNDER IDENTICAL CI RCUMSTANCES. WE THEREFORE DIRECT INCLUSION OF R S SOFTWARE (INDIA) LTD. AND MINDTREE LTD. IN THE FINAL LIST OF COMPARABLES. IT(TP)A NOS.187 & 175/BANG/2016 PAGE 17 OF 38 20. HOWEVER, AS FAR AS ACROPETAL TECHNOLOGIES LTD. (GROUND NO. 4 IN REVENUES APPEAL) IS CONCERNED, ACROPETAL WAS DIRECTED TO BE EXCLUDED BY THE DRP NOT ONLY ON THE GROUND THAT IT WAS HELD TO BE PREDOMINANTLY ENGAGED IN ONSITE DEVELOPMENT OF SOFTWARE IN VIEW O F ITS EXPENSES IN FOREIGN CURRENCY, BUT ALSO ON THE FOLLOWING GROUNDS (I) THAT, IN THE ABSENCE OF SEGMENTAL INFORMATION CONTAINING THE BREAK-UP OF ITS EXPORT SALES, IT WAS NOT POSSIBLE TO ASCERTAIN IF IT PASSED THE EXPORT E ARNINGS FILTER; AND (II) THAT, IN THE ABSENCE OF SEGMENTAL INFORMATION CONTAINING THE BREAK-UP OF ITS EMPLOYEE COSTS, IT WAS NOT POSSIBLE TO ASCERTAIN IF IT PASSED THE EMPLOYEE COSTS FILTER (PAGES 18-20 OF THE DRPS DIRECTIONS). REVENUE VIDE GROUND NOS. 2 TO 4 IS SEEKING THE INCLUSION OF THE COMPANY IN THE FINAL LIST OF COMPARABLES. AFTER HEARING THE RIVAL SUBMISSION ON EXCLUSION OF ACROPETAL FROM THE LIST OF COMPARABLE COMPANIES, WE FIND THAT EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES SHOUL D BE UPHELD BECAUSE THIS COMPANY FAILS THE EMPLOYEE COST FILTER OF EMPL OYEE COST BEING EQUAL TO AT LEAST 25% OF THE TOTAL OPERATING REVENUE. FROM THE ANNUAL REPORT OF THE COMPANY IT CAN BE SEEN THAT THE EMPLOYEE COSTS INCU RRED BY THE COMPANY IS 11.51% OF THE TOTAL OPERATING REVENUE. APART FRO M THE ABOVE, THE COMPANY ALSO FAILS THE TPOS FILTER OF SERVICE REVE NUE IS EXCESS OF 75% AS THE INCOME FROM SOFTWARE DEVELOPMENT ACTIVITY IS RS . 81.40 CRORES OUT OF TOTAL OPERATING REVENUE OF RS. 141 CRORES. AS IT IS CLEAR THAT THE COMPANY FAILS TPOS OWN FILTERS OF EMPLOYEE COST IN EXCESS OF 25% AND SERVICE REVENUE IS EXCESS OF 75%, THE COMPANY OUGHT TO REMA IN EXCLUDED FROM THE FINAL LIST OF COMPARABLES. WE ALSO FIND THAT THIS TRIBUNAL IN APPLIED MATERIALS INDIA PVT. LTD. V. ACIT [IT(TP)A NOS. 17 & 39/BANG/2016 ] AT PARAS 16.1 TO 16.4 AT PAGES 1606-1607]; FINASTRA SOFTWARE SOLUTIONS (INDIA) (P.) LTD. V. ACIT [[2018] 93 TAXMANN.COM 460 (BANGALORE - TRIB.) AT PARA 15 AT PAGE 1744]; ELECTRONIC IMAGING INDIA P. LTD V. DCIT [(2017) 85 TAXMANN.COM 124 (BANGALORE-TRIB) PARA 8 AT PAGES 1 725-1726] AND IT(TP)A NOS.187 & 175/BANG/2016 PAGE 18 OF 38 COMMSCOPE NETWORKS (I) PVT. LTD. V. ITO [TS-161-ITAT-2017(BANG)-TP AT PARA 9 ON PAGES 1639-1640] HELD THAT THIS COMPANY S HOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES IN THE CASE O F COMPANIES ENGAGED IN RENDERING SWD SERVICES SUCH AS THE ASSESSEE. THU S, GR.NO.4 IS DISMISSED AND GR.LNO.2 & 3 ARE ALSO PARTLY DISMISSE D TO THE EXTENT OF EXCLUSION OF ACROPETAL. 21. AS FAR AS GR.NO.6 RAISED BY THE REVENUE IS CONC ERNED, THE REVENUE IN THIS GROUND HAS CHALLENGED EXCLUSION OF E-INFOCHIPS LTD. ON THE GROUND THAT IT FAILED THE SOFTWARE SERVICE INCOME FILTER A T 75%. AT THE OUTSET, THE ASSESSEE SUBMITS THAT E-INFOCHIPS LTD. WAS EXCLUDED BY THE DRP ON THE GROUND THAT: (I) NO SEGMENTAL INFORMATION REGARDING ITS DIVERSE FUNCTIONS IS AVAILABLE; (II) THERE IS PRESENCE OF SIGNIFICANT IN VENTORY AND (III) IT FAILED THE SOFTWARE SERVICE INCOME FILTER AT 75% (PAGES 17-18 OF THE DRPS DIRECTIONS). THE REVENUE, IN ITS APPEAL, HAS CHALLE NGED ITS EXCLUSION ONLY THE FIRST AND THE THIRD GROUNDS. IN OTHER WORDS, TH E REVENUE HAS NOT CHALLENGED ITS EXCLUSION ON THE GROUND OF PRESENCE OF SIGNIFICANT INVENTORY AND THUS ITS EXCLUSION ON THIS GROUND HAS ATTAINED FINALITY AND CANNOT BE DISTURBED BY THIS HONBLE TRIBUNAL. APART FROM THE ABOVE, WE FIND THAT THE COMPANYS SOFTWARE DEVELOPMENT SERVICE REVENUE FOR FY 2010-11 WAS LESS THAN 75% OF ITS TOTAL OPERATING REVENUE FOR THAT YE AR. THUS, THE ABOVE ACTION OF THE DRP IN REJECTING THE ABOVE COMPANY IS CORREC T. THE DRP HAS ALSO RIGHTLY APPRECIATED THAT THE ABOVE COMPANY IS ENGAG ED IN DIVERSE ACTIVITIES SUCH AS PRODUCT DEVELOPMENT AND THE PROVISION OF IT ENABLED SERVICES FOR WHICH NO SEPARATE SEGMENTAL INFORMATION IS AVAILABL E IN ITS ANNUAL REPORT. ON THE CONTRARY, THE DIVERSE ACTIVITIES OF SOFTWARE DEVELOPMENT AND THE IT ENABLED SERVICES ARE CONSIDERED AND REPORTED TOGETH ER IN ONE SEGMENT. THUS, IN THE ABSENCE OF SUCH SEGMENTAL DETAILS, THE COMPANY WAS RIGHTLY HELD TO BE FUNCTIONALLY NOT COMPARABLE TO THE ASSES SEE WHICH IS A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER (RELEVANT SUB MISSIONS AT INTERNAL IT(TP)A NOS.187 & 175/BANG/2016 PAGE 19 OF 38 PAGE 73 OF THE OBJECTIONS FILED BEFORE THE DRP AND PAGES 237-239 OF THE PAPERBOOK). FURTHER, AS WAS NOTED BY THE DRP, THE C OMPANY ALSO HAS PRESENCE OF INVENTORY AND IS, THEREFORE, INCOMPARAB LE TO THE ASSESSEE. WE ALSO FIND THAT THIS TRIBUNAL IN ELECTRONIC IMAGING INDIA P. LTD V. DCIT [(2017) 85 TAXMANN.COM 124 (BANGALORE-TRIB) PARA 9 AT PAGE S 1726-1727]; SAXO INDIA PVT. LTD. V. ACIT [2016] 67 TAXMANN.COM 155 (DELHI - TRIB.) (PARAS 10.1 AND 10.2 AT PAGES 1656-1657)] (WHICH CAME TO B E UPHELD BY THE HONBLE DELHI HIGH COURT); FINASTRA SOFTWARE SOLUTIONS (INDIA) (P.) LTD. V. ACIT [[2018] 93 TAXMANN.COM 460 (BANGALORE - TRIB.) AT PARA 17 AT PAGE 1744]; CYPRESS SEMI-CONDUCTOR TECHNOLOGY INDIA PVT. LTD. V . DCIT [IT(TP)A NO.356/BANG/2016 AT PARAS 19-20 AT PAGES 1773-1775]; AND COMMSCOPE NETWORKS (I) PVT. LTD. V. ITO [TS-161-ITAT-2017(BANG)-TP AT PARA 9 ON PAGES 1639-1640] HELD THAT THIS COMPANY O UGHT TO BE EXCLUDED FROM LIST OF COMPARABLE COMPANIES IN THE CASE OF CO MPANIES RENDERING SWD SERVICES SIMILAR TO THAT OF THE ASSESSEE. CON SEQUENTLY, FOR THE ABOVE REASONS, THE ACTION OF THE DRP IN DIRECTING T HE EXCLUSION OF E- INFOCHIPS LTD. IS UPHELD AND THE GROUND IS DISMISSED. 22. AS FAR AS GR.NO.7 RAISED BY THE REVENUE IS CONC ERNED, THE REVENUE IN THIS GROUND HAS CHALLENGED THE ACTION OF THE DRP IN EXCLUDING ICRA TECHNO ANALYTICS LTD. THIS COMPANY WAS REJECTED BY THE DRP FOR THE REASON THAT THE ENTIRE REVENUE OF THE COMPANY HAS B EEN REPORTED UNDER ONE SEGMENT, AND IN THE ABSENCE OF SEGMENTAL INFORM ATION REGARDING THE SAME, THE COMPANY COULD NOT BE HELD AS A COMPARABLE TO THE ASSESSEE. AT THE OUTSET IT IS SUBMITTED THAT THE ACTION OF DRP I N REJECTING THIS COMPANY IS RIGHT IN LAW AND DOES NOT REQUIRE ANY INTERFERENCE BY THIS HONBLE TRIBUNAL. WE FIND THAT THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES OF SOFTWARE DEVELOPMENT AND CONSULTANCY, LICENSING AND SUB-LICE NSING, ANNUAL MAINTENANCE FOR SOFTWARE SUPPORT, WEB DEVELOPMENT & HOSTING AND REVENUE FROM ALL THE ACTIVITIES ARE REPORTED UNDER ONE SEGMENT, WITHOUT ANY IT(TP)A NOS.187 & 175/BANG/2016 PAGE 20 OF 38 SEGMENTAL INFORMATION REGARDING THE SAME MADE AVAIL ABLE. THEREFORE, IN THE ABSENCE OF SEGMENTAL INFORMATION, IT CANNOT BE ASCERTAINED WHETHER THE COMPANY PASSES ALL THE FILTERS APPLIED BY THE TPO A ND THEREFORE OUGHT TO STAND EXCLUDED FROM THE FINAL LIST OF COMPARABLES. WE ALSO FIND THAT THIS TRIBUNAL IN APPLIED MATERIALS INDIA PVT. LTD. V. AC IT [IT(TP)A NOS. 17 & 39/BANG/2016] AT PARAS 17.1 TO 17.2 AT PAGES 1607-1 609]; FINASTRA SOFTWARE SOLUTIONS (INDIA) (P.) LTD. V. ACIT [[2018 ] 93 TAXMANN.COM 460 (BANGALORE - TRIB.) AT PARA 17 AT PAGE 1744]; AND ELECTRONICS IMAGING INDIA P. LTD V. DCIT [(2017) 85 TAXMANN.COM 124 (BANGALOR E-TRIB) PARA 10 AT PAGES 1727] EXCLUDED THIS COMPANY FROM THE LIST O F COMPARABLES IN THE CASE OF COMPANIES THAT WERE ENGAGED IN RENDERING SW D SERVICES SIMILAR TO THAT OF THE ASSESSEE. WE THEREFORE FIND NO MERIT IN GR.NO.7 RAISED BY THE REVENUE. 23. AS FAR AS GR.NO.8 RAISED BY THE REVENUE IS CONC ERNED, THE REVENUE IN THIS GROUND SEEKS INCLUSION OF E-ZEST SOLUTION L TD. AS RIGHTLY SUBMITTED ON BEHALF OF THE ASSESSEE, THIS GROUND OF THE REVEN UE IS MISCONCEIVED AS THE COMPANY WAS NOT DIRECTED TO BE EXCLUDED BY THE TRIBUNAL AND FEATURES IN THE FINAL LIST OF COMPARABLES. THEREFORE, GRD.NO .8 IS DISMISSED. 24. AS FAR AS GR.NO.9 RAISED BY THE REVENUE IS CONC ERNED, THE REVENUE IN THIS GROUND HAS QUESTIONED THE CORRECTNESS OF EX CLUSION OF INFOSYS TECHNOLOGIES LTD. FROM THE LIST OF COMPARABLE COMPA NIES. THE GROUNDS ON WHICH DRP EXCLUDED THIS COMPANY WAS THAT IT IS FUNC TIONALLY INCOMPARABLE TO THE ASSESSEE. WE FIND THAT THIS COMPANY IS FUNCT IONALLY DISSIMILAR TO THE ASSESSEE ON NUMEROUS COUNTS SUCH AS THE FACT THAT I T IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS, THAT IT HAS INVEN TORIES, HAS OWNERSHIP OF MARKETING INTANGIBLES AND INTELLECTUAL PROPERTY RIG HTS, HIGH BRAND VALUE, HIGH EXPENDITURE ON R&D, AND SO ON, FOR WHICH NO AD JUSTMENTS CAN BE MADE TO ELIMINATE THE SAID DIFFERENCES BETWEEN IT A ND THE ASSESSEE. THIS IT(TP)A NOS.187 & 175/BANG/2016 PAGE 21 OF 38 COMPANY HAS BEEN CONSISTENTLY REJECTED BY THIS HON BLE TRIBUNAL AS BEING FUNCTIONALLY DISSIMILAR TO CAPTIVE SOFTWARE DEVELOP MENT SERVICE PROVIDERS SUCH AS THE ASSESSEE FOR EVERY ASSESSMENT YEAR WHIC H HAS BEEN HEARD AND DISPOSED OF SO FAR. IN THE CASE OF APPLIED MATERIALS INDIA PVT. LTD. V. ACIT [IT(TP)A NOS. 17 & 39/BANG/2016] AT PARA 18 AT PAGE 1609]; FINASTRA SOFTWARE SOLUTIONS (INDIA) (P.) LTD. V. ACIT [[2018] 93 TAXMANN.COM 460 (BANGALORE - TRIB.) AT PARA 17 AT PAGE 1744]; COMMSCOPE NETWORKS (INDIA) PVT. LTD. V. ITO [IT(TP)A NOS. 166 AND 181/BANG/2016] AT PARA 9 AT PAGES 1639-1640]; AND ELECTRONICS IMAGING INDIA P. LTD V. DCIT [(2017) 85 TAXMANN.COM 124 (BANGALORE-TRIB) PARA 10 AT PAGES 1727] THIS COMPANY WAS REJECTED AS NOT COMPARABLE COMPANY IN THE CASE OF PURE SWD SERVICE PROVIDED SUCH AS THE ASSESSEE. GRD.NO.9 IS ACCORDIN GLY DISMISSED. 25. AS FAR AS GR.NO.10 IS CONCERNED, IT IS A GENERA L GROUND WITHOUT REFERENCE TO ANY INSTANCE WHERE THERE WAS NO MATERI AL DIFFERENCE ON PRICE OR COST CHARGED OR PROFITS AND HENCE REJECTED. 26. AS FAR AS GROUND NOS. 11 AND 12 RAISED BY THE R EVENUE IS CONCERNED, THE REVENUE IN THESE GROUNDS SEEKING THE INCLUSION OF RS SOFTWARE (INDIA) LTD. AND EVOKE TECHNOLOGIES LTD. I N THE FINAL LIST OF COMPARABLES. SUBMISSIONS AS REGARDS RS SOFTWARE (IN DIA) LTD. AS FAR AS RS SOFTWARE (INDIA) LTD., IS CONCERNED, THIS COMPAN Y HAS ALREADY BEEN INCLUDED IN THE LIST OF COMPARABLE COMPANIES AND TH EREFORE GR.NO.12 IS ALLOWED. AS FAR AS GR.NO.11 IS CONCERNED, WE FIND THAT THE COMPANY EVOKE TECHNOLOGIES LTD., WAS SELECTED BY THE ASSESSEE IN ITS TP STUDY AND WAS SUBSEQUENTLY ACCEPTED BY THE TPO AS HAVING PASSED A LL THE FILTERS APPLIED BY HIM (PAGE NO. 7 OF THE TPOS ORDER). IN THE PROC EEDINGS BEFORE THE DRP, THE ASSESSEE DID NOT OBJECT TO ITS INCLUSION I N THE LIST OF COMPARABLES. HOWEVER, DESPITE THE ABOVE, THE DRP ON ITS OWN DIRE CTED ITS EXCLUSION SOLELY ON THE GROUND THAT ITS MARGIN WAS HELD TO BE ABNORMALLY LOW AT IT(TP)A NOS.187 & 175/BANG/2016 PAGE 22 OF 38 8.11% DESPITE ITS REVENUES HAVING INCREASED 33% FRO M THE PRECEDING YEAR. THE DRP WAS OF THE VIEW THAT ITS MARGIN WAS LOW BEC AUSE ITS EXPENDITURE ON CONSULTANCY CHARGES INCREASED 1118% FROM THE PRI OR YEAR WHICH, ACCORDING TO THE DRP, CONSTITUTED A PECULIAR ECONOM IC CIRCUMSTANCE THAT MADE ITS RETENTION IN THE LIST OF COMPARABLES INAPP ROPRIATE. WE FIND THAT VIDE GROUND NOS. 4(I) IN ITS APPEAL HAS CHALLENGED THE A CTION OF THE DRP IN EXCLUDING EVOKE TECHNOLOGIES LTD. IN THAT VIEW OF T HE MATTER AND ALSO SINCE THE COMPANY HAS BEEN CONSISTENTLY HELD AS BEING COM PARABLE TO THE ASSESSES SIMILAR TO THAT OF THE ASSESSEE HEREIN, TH E EVOKE OUGHT TO BE INCLUDED IN THE FINAL LIST OF COMPARABLES. WE ALSO FIND THAT THIS TRIBUNAL IN APPLIED MATERIALS INDIA PVT. LTD. V. ACIT [IT(TP)A NOS. 17 & 39/BANG/2016] AT PARAS 14-14.1 AND 21-21.2 AT PAGES 1605, 1614-16 15]; CYPRESS SEMI- CONDUCTOR TECHNOLOGY INDIA PVT. LTD. V. DCIT [IT(TP)A NO.356/BANG/2016 AT PARAS 11,12 AT PAGES 1764-1765]; AND COMMSCOPE NETWORKS (INDIA) PVT. LTD. V. ITO [IT(TP)A NOS. 166 AND 181/BANG/2016] AT PARA 8 AT P AGE 1639 INCLUDED THIS COMPANY IN THE LIST OF COMPARABL E COMPANIES IN THE CASE OF ASSESSEES PROVIDING SWD SERVICES SUCH AS TH E ASSESSEE. WE THEREFORE ALLOW GR.NO.11 RAISED BY THE REVENUE AND ALSO GR.NO.4(I) RAISED BY THE ASSESSEE IN ITS APPEAL. 27. IN GR.NO.13, THE REVENUE HAS CONTENDED THAT THE DRP ERRED IN DIRECTING THE AO/TPO TO CONSIDER THE FOREIGN EXCHAN GE FLUCTUATION TO BE OPERATING IN NATURE. THE ASSESSEE, IN ITS OBJECTION S BEFORE THE DRP, HAD SUBMITTED THAT THE FOREIGN EXCHANGE EARNINGS OUGHT TO BE TREATED AS NON- OPERATING IN NATURE (PAGE NO. 102 OF THE OBJECTIONS FILED BEFORE THE DRP). HOWEVER, THE DRP DIRECTED THE SAME TO BE TREATED AS BEING OPERATING IN NATURE (PAGE NOS. 24-25 OF THE DRPS DIRECTIONS). T HE REVENUE, VIDE THE ABOVE GROUND IS CHALLENGING THE ACTION OF THE DRP I N DIRECTING THE FOREIGN EXCHANGE GAINS TO BE TREATED AS BEING OPERATING IN NATURE WHILE COMPUTING THE MARGINS OF THE ASSESSEE AND THE COMPARABLE COMP ANIES. AS THE IT(TP)A NOS.187 & 175/BANG/2016 PAGE 23 OF 38 REVENUE IS IN SUPPORT OF THE ASSESSEES CONTENTION THAT THE GAINS MUST BE TREATED AS BEING NON-OPERATING IN NATURE, TO THIS E XTENT, THE ASSESSEE SUBMITTED THAT THE REVENUES GROUND MAY BE ALLOWED WITH THE FOREIGN EXCHANGE EARNINGS BEING TREATED AS NON-OPERATING IN NATURE. IN VIEW OF THE ABOVE CONCESSION OF THE LEARNED COUNSEL FOR THE ASS ESSEE, WE ALLOW GR.NO.13 RAISED BY THE REVENUE. 28. NOW WE SHALL TAKE UP FOR CONSIDERATION THE GROU NDS OF APPEAL OF THE ASSESSEE IN ITS APPEAL WITH REGARD TO THE SWD SERVI CES SEGMENT. GROUND NO. 4(A) OF THE ASSESSEES APPEAL THE ASSESSEE, IS SEEKING THE EXCLUSION OF SASKEN COMMUNICATION TECHNOLOGIES LTD. FROM THE LIST OF COMPARABLES. 29. SASKEN COMMUNICATION TECHNOLOGIES LTD. AS FAR AS EXCLUSION OF SASKEN COMMUNICATION TECHNOLOGIES LTD. (SASKEN FOR SHORT) IS CONCERNED, THE REASONS FOR EXCLUSION OF THIS COMPAN Y BY THE DRP WAS THAT THIS COMPANY IS ENGAGED IN THE DEVELOPMENT OF SOFTW ARE PRODUCTS, AS IT HAS INVENTORIES, INTANGIBLE ASSETS AND ALSO BECAUSE IT HAS HIGH EXPENDITURE ON R&D, AND IS THEREFORE FUNCTIONALLY NOT COMPARABLE T O THE ASSESSEE. THE FIRST ASPECT THAT IT IS TO BE NOTICED THAT THIS COM PANY WAS SELECTED AS COMPARABLE COMPANY BY THE ASSESSEE IN ITS TP STUDY AND DID NOT CHALLENGED THE INCLUSION OF THIS COMPANY BEFORE THE DRP. FOR THIS REASON ALONE, THE ASSESSEE CANNOT BE DENIED THE RIGHT TO S EEK ITS EXCLUSION BEFORE THE TRIBUNAL AND IN THIS REGARD THE LEARNED COUNSEL FOR ASSESSEE HAS RIGHTLY PLACED RELIANCE ON THE DECISION OF THE SPECIAL BENC H OF THE HONBLE TRIBUNAL IN THE CASE OF DCIT V. QUARK SYSTEMS (P.) LTD. ([2010] 38 SOT 307 (CHD.) (SB)) FOR THE PROPOSITION THAT THE ASSES SEE CANNOT BE PRECLUDED FROM SEEKING EXCLUSION OF A COMPANY SELEC TED BY IT IN ITS TP STUDY, WHEN THE COMPANY IS OTHERWISE NOT COMPARABLE TO THE ASSESSEE. WE FIND THAT AS PER ITS ANNUAL REPORT, SASKEN DERIV ES REVENUE FROM IT(TP)A NOS.187 & 175/BANG/2016 PAGE 24 OF 38 SOFTWARE PRODUCTS AND, WHAT IS MORE, EVEN LAUNCHED A NEW PRODUCT CALLED VYPAARSEWA DURING FY 2010-11. FURTHER, AS CAN BE SE EN FROM ITS ANNUAL REPORT, R&D CONSTITUTES AN IMPORTANT PART OF THE OP ERATIONAL AND FUNCTIONAL PROFILE OF SASKEN. ALSO, AS SASKEN HAS SIGNIFICANT INTANGIBLES AND INVENTORIES, THE ASSESSEE SUBMITS THAT IT OUGHT TO BE REJECTED AS A COMPARABLE. THUS, SASKEN HAS DIVERSE FUNCTIONS AND SEGMENTAL DETAILS ARE NOT GIVEN SEPARATELY FOR THE VARIED ACTIVITIES IT I S ENGAGED IN. THE ASSESSEE THEREFORE SUBMITS THAT SASKEN OUGHT TO STAND EXCLUD ED FROM THE FINAL LIST OF COMPARABLES. WE ALSO FIND THAT THIS TRIBUNAL IN FINASTRA SOFTWARE SOLUTIONS (INDIA) (P.) LTD. V. ACIT [[2018] 93 TAXMANN.COM 460 (BANGALORE - TRIB.) AT PARA 17 AT PAGE 1744]; ELECTRONIC IMAGING INDIA P. LTD V. DCIT [(2017) 85 TAXMANN.COM 124 (BANGALORE-TRIB) PARA 9 AT PAGES 1 726 AND 1727]; CYPRESS SEMI-CONDUCTOR TECHNOLOGY INDIA PVT. LTD. V . DCIT [IT(TP)A NO.- 356/BANG/2016 PARA 8 AT PAGE 1763]; AND COMMSCOPE NETWORKS (INDIA) PVT. LTD. V. ITO [IT(TP)A NOS. 166 AND 181/BANG/2016] AT PARA 9 AT P AGES 1639-1640] HAS DIRECTED INCLUSION OF THIS COMPANY I N THE LIST OF COMPARABLE COMPANIES. 30. AS FAR AS GROUND NOS. 4(E) AND 4(I) OF THE APPE AL OF THE ASSESSEE IS CONCERNED, IN THESE GROUNDS, THE ASSESSEE SEEKS THE INCLUSION OF EVOKE TECHNOLOGIES PVT. LTD. AND RS SOFTWARE LTD. IN THE LIST OF COMPARABLES. THESE COMPANIES HAVE ALREADY BEEN DIRECTED TO BE IN CLUDED IN THE LIST OF COMPARABLES WHILE DECIDING SIMILAR GRIEVANCE OF THE REVENUE IN ITS APPEAL AND THAT DECISION WILL HOLD FOR THESE GROUNDS ALSO. 31. IN GROUND NO. 4(D) THE ASSESSEE INCLUSION OF CG VAK SOFTWARE AND EXPORT LTD. (CG VAK FOR SHORT), WHICH WAS PART OF ITS TP STUDY, IN THE FINAL LIST OF COMPARABLES AS THE COMPANY IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE. THE TPO REJECTED THE COMPANY ON THE GROUN D THAT IT FAILS THE EMPLOYEE COST FILTER. THE DRP THEN PROCEEDED TO UPH OLD ITS REJECTION ON THE IT(TP)A NOS.187 & 175/BANG/2016 PAGE 25 OF 38 GROUND THAT IT WAS NOT POSSIBLE TO ASCERTAIN WHETHE R THE COMPANY PASSES THE EMPLOYEE COST FILTER IN THE ABSENCE OF DETAILS REGARDING THE SAME BEING MADE AVAILABLE, AND ALSO FOR THE REASON THAT IN THE ABSENCE OF DETAILS REGARDING THE EXPENSES COST TO SERVICES BEING MAD E AVAILABLE, IT WAS NOT POSSIBLE TO ASCERTAIN IF THE COMPANY WAS ENGAGED IN SUB-CONTRACTING ITS SOFTWARE DEVELOPMENT SERVICES. AFTER HEARING THE RI VAL SUBMISSIONS WE FIND THAT THIS COMPANY IS ENGAGED IN THE PROVISION OF RO UTINE SOFTWARE DEVELOPMENT SERVICES, AND THEREFORE, THE MAJOR PORT ION OF EXPENSES UNDER THE HEAD COST OF SERVICES COULD ONLY RELATE TO EM PLOYEE COST. THE RATIO OF COST OF SERVICES TO TOTAL SALES AMOUNTS TO 77.65% A ND THEREFORE IT COULD BE HELD THAT THE COMPANY PASSES THE EMPLOYEE COST FILT ER. DETAILED SUBMISSIONS IN THIS REGARD ARE MADE AT PAGES 231-23 3 OF THE PAPERBOOK. THIS COMPANY HAS BEEN CONSISTENTLY INCLUDED IN THE FINAL LIST OF COMPARABLES IN CASE OF ASSESSEES PLACED SIMILARLY T HAT OF THE ASSESSEE HEREIN. FURTHER, THE DRPS OBSERVATION THAT THE COM PANY COULD BE ENGAGED IN SUB-CONTRACTING OF SERVICES FOR THE REASON THAT EXPENSES HAVE BEEN DEBITED UNDER THE HEAD COST TO SERVICES IS WITHOU T ANY BASIS MORE SO, WHEN THERE IS NO FILTER REGARDING SUB-CONTRACTING O F SERVICES APPLIED BY THE TPO OR THE DRP. WE ALSO FIND THAT IN THE DECISION O F THIS TRIBUNAL IN THE CASES OF CISCO SYSTEMS (INDIA) (P.) LTD. V. DCIT ([ 2014] 50 TAXMANN.COM 280 (BANGALORE- TRIB.) AT PARA 27.8 PAGE 1795; AND DCIT V. IVY COMPTECH PVT. LTD. ( COMMON ORDER PASSED IN ITA NO. 222/HYD/ 2015 AND ITA NO. 334/HYD/2015 ) IN PARAS 21 TO 21.3 AT PAGES 1837-18 38, THIS COMPANY HAS BEEN DIRECTED TO BE INCLUDED IN THE LIST OF COMPARA BLE COMPANIES. WE THEREFORE DIRECT THAT THIS COMPANY BE INCLUDED IN T HE FINAL LIST OF COMPARABLE COMPANIES. 32. IN GROUND NO. 4(J) THE ASSESSEE SEEKS EXCLUSIO N OF E-ZEST SOLUTIONS LTD., LARSEN AND TOUBRO LTD., PERSISTENT SYSTEMS & SOLUTIONS IT(TP)A NOS.187 & 175/BANG/2016 PAGE 26 OF 38 LTD., PERSISTENT SYSTEMS LTD. AND SASKEN COMMUNICAT ION TECHNOLOGIES LTD., FROM THE LIST OF COMPARABLE COMPANIES. 33. AS FAR AS E-ZEST SOLUTIONS LTD., AND PERSISTENT SYSTEMS & SOLUTIONS LTD., IS CONCERNED, THESE WERE COMPARABLE COMPANIES CHOSEN BY THE TPO. THE ASSESSEE DID NOT OBJECT TO INCLUSION OF THESE T WO COMPANIES BEFORE THE TPO NOR WERE OBJECTIONS FILED AGAINST INCLUSION OF THESE TWO COMPANIES BEFORE THE DRP. THE ASSESSEE NOW WANTS TO CONTENT THAT THESE TWO COMPANIES ARE FUNCTIONALLY DIFFERENT AND BASED ON J UDICIAL DECISIONS IN WHICH THESE TWO COMPANIES WERE EXCLUDED AS FUNCTION ALLY NOT COMPARABLE WITH A COMPANY RENDERING SWD SERVICES SUCH AS THE A SSESSEE. THE ASSESSEE SEEKS TO RELY ON THE DECISION OF THE SPECI AL BENCH ITAT CHANDIGARH IN THE CASE OF DCIT VS. QUARKS SYSTEMS PVT. LTD., 4 2 DTR 414 (CHANDIGARH-SB) WHEREIN IT WAS HELD THAT TH ERE CANNOT BE ESTOPPEL AGAINST LAW AND THAT NON-COMPARABLE COMPAN IES EVEN IF SELECTED BY THE ASSESSEE IN TP STUDY CAN BE SOUGHT TO BE EXCLUDED BY THE ASSESSEE BASED ON FUNCTIONAL COMPARABILITY O R OTHER VALID REASONS. WE THEREFORE ADMIT THE RELEVANT GROUND OF APPEAL SEEKING EXCLUSION OF THESE TWO COMPANIES. SINCE THE TPO/AO DID NOT HAVE OPPORTUNITY TO DECIDE THE ISSUE, WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO REMAND THE ISSUE TO THE TPO FOR DECIDING THE CORRECTNESS OF CHOOSING THIS COMPANY AS A COMPARABL E COMPANY. THE TPO/AO SHALL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 34. AS FAR AS LARSEN & TOUBRO INFOTECH LTD., AND PE RSISTENT SYSTEMS LTD. ARE CONCERNED, THESE WERE COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE IN ITS TP STUDY. THE ASSESSEE DID NOT OBJ ECT TO INCLUSION OF THESE TWO COMPANIES BEFORE THE BEFORE THE DRP. THE ASSESSEE NOW WANTS TO CONTEND THAT THESE TWO COMPANIES ARE FUNCT IONALLY DIFFERENT AND IT(TP)A NOS.187 & 175/BANG/2016 PAGE 27 OF 38 BASED ON JUDICIAL DECISIONS IN WHICH THESE TWO COMP ANIES WERE EXCLUDED AS FUNCTIONALLY NOT COMPARABLE WITH A COMPANY RENDE RING SWD SERVICES SUCH AS THE ASSESSEE. THE ASSESSEE SEEKS TO RELY O N THE DECISION OF THE SPECIAL BENCH ITAT CHANDIGARH IN THE CASE OF DCIT VS. QUARKS SYSTEMS PVT. LTD., 42 DTR 414 (CHANDIGARH-SB) WHEREIN IT WAS HELD THAT THERE CANNOT BE ESTOPPEL AGAINST LAW AND THAT NON-COMPARA BLE COMPANIES EVEN IF SELECTED BY THE ASSESSEE IN TP STUDY CAN BE SOUG HT TO BE EXCLUDED BY THE ASSESSEE BASED ON FUNCTIONAL COMPARABILITY OR O THER VALID REASONS. WE THEREFORE ADMIT THE RELEVANT GROUND OF APPEAL SEEKI NG EXCLUSION OF THESE TWO COMPANIES. SINCE THE TPO/AO DID NOT HAVE OPPOR TUNITY TO DECIDE THE ISSUE, WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO REMAND THE ISSUE TO THE TPO FOR DECIDING THE CORRECTNESS O F CHOOSING THIS COMPANY AS A COMPARABLE COMPANY. THE TPO/AO SHALL AFFORD O PPORTUNITY OF BEING HEARD TO THE ASSESSEE. 35. AS FAR AS THE COMPARABLE COMPANY SASKEN COMMUNI CATIONS LTD., IS CONCERNED, WHILE DEALING WITH GR.NO.4(A) RAISED BY THE ASSESSEE, WE HAVE ALREADY EXCLUDED THIS COMPANY FROM THE LIST OF COMP ARABLE COMPANIES AND HENCE NO SEPARATE ADJUDICATION ON THIS COMPANY IS R EQUIRED ON THE BASIS OF GR.NO.4(J) RAISED BY THE ASSESSEE. 36. IN GR.NO.4(B), THE ASSESSEE SEEKS EXCLUSION OF TATA ELXSI LTD., A COMPARABLE COMPANY CHOSEN BY THE TPO. THE ASSESSE E DID NOT OBJECT TO INCLUSION OF THIS COMPANY BEFORE THE TPO NOR WERE O BJECTIONS FILED AGAINST INCLUSION OF THESE TWO COMPANIES BEFORE THE DRP. T HE ASSESSEE NOW WANTS TO CONTEND THAT THESE TWO COMPANIES ARE FUNCT IONALLY DIFFERENT AND BASED ON JUDICIAL DECISIONS IN WHICH THESE TWO COMP ANIES WERE EXCLUDED AS FUNCTIONALLY NOT COMPARABLE WITH A COMPANY RENDE RING SWD SERVICES SUCH AS THE ASSESSEE. THE ASSESSEE SEEKS TO RELY O N THE DECISION OF THE SPECIAL BENCH ITAT CHANDIGARH IN THE CASE OF DCIT VS. QUARKS IT(TP)A NOS.187 & 175/BANG/2016 PAGE 28 OF 38 SYSTEMS PVT. LTD., 42 DTR 414 (CHANDIGARH-SB) WHEREIN IT WAS HELD THAT THERE CANNOT BE ESTOPPEL AGAINST LAW AND THAT NON-COMPARABLE COMPANIES EVEN IF SELECTED BY THE ASSESSEE IN TP ST UDY CAN BE SOUGHT TO BE EXCLUDED BY THE ASSESSEE BASED ON FUNC TIONAL COMPARABILITY OR OTHER VALID REASONS. WE THEREFORE ADMIT THE RELEVANT GROUND OF APPEAL SEEKING EXCLUSION OF THESE TWO COM PANIES. SINCE THE TPO/AO DID NOT HAVE OPPORTUNITY TO DECIDE THE I SSUE, WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO R EMAND THE ISSUE TO THE TPO FOR DECIDING THE CORRECTNESS OF CHOOSING TH IS COMPANY AS A COMPARABLE COMPANY. THE TPO/AO SHALL AFFORD OPPORT UNITY OF BEING HEARD TO THE ASSESSEE. 37. NO OTHER GROUNDS RELATING TO TRANSFER PRICING A DJUSTMENT IN SWD SERVICES SEGMENT WAS PRESSED OR ARGUED. THE TPO IS DIRECTED TO COMPUTE ALP IN THE SWD SERVICES SEGMENT, AS PER THE DIRECT IONS CONTAINED IN THIS ORDER AND AFTER AFFORDING OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. INFORMATION TECHNOLOGY ENABLED SERVICES SEGMENT: 38. IT IS NOT IN DISPUTE BETWEEN THE ASSESSEE AND T HE REVENUE THAT THE TRANSACTION NET MARGIN METHOD (TNMM) WAS THE MOST A PPROPRIATE METHOD (MAM) FOR DETERMINATION OF ALP AND THAT THE PROFIT LEVEL INDICATOR TO BE ADOPTED FOR COMPARISON OF THE ASSESSEES PROFIT WIT H THAT OF COMPARABLE COMPANIES WAS OPERATING PROFIT/TOTAL COST (OP/TC). THE OP/TC OF THE ASSESSEE WAS 14.67%. THE ASSESSEE IN ITS TP STUDY SELECTED 12 COMPARABLE COMPANIES WHOSE ARITHMETIC MEAN OF OP/TC WAS ARRIVED AT 12.68%. SINCE THE PROFIT MARGIN OF THE ASSESSEE WA S MORE THAN THE ARITHMETIC MEAN OF OP/TC OF THE 12 COMPARABLES SELE CTED BY THE ASSESSEE, IT WAS CLAIMED BY THE ASSESSEE THAT THE P RICE CHARGED BY IT IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH. THE TRANSFER PRICING IT(TP)A NOS.187 & 175/BANG/2016 PAGE 29 OF 38 OFFICER (TPO) TO WHOM THE DETERMINATION OF ALP WAS REFERRED BY THE AO, ACCEPTED 4 OUT OF THE 12 COMPARABLE COMPANIES SUGGE STED IN THE TP STUDY BY THE ASSESSEE AS COMPARABLE WITH THE ASSESSEE. T HE TPO ON HIS OWN SELECTED 6 OTHER COMPANIES AS COMPARABLE COMPANIES WITH THE ASSESSEE. THUS A FINAL SET OF 10 COMPARABLE COMPANIES WAS CHO SEN BY THE TPO AS COMPARABLE COMPANIES. THE ARITHMETIC MEAN OF PROFI T MARGIN OF THESE COMPANIES AFTER AND BEFORE ADJUSTMENT TOWARDS WORKI NG CAPITAL ADJUSTMENT WAS AS FOLLOWS: NET MARK-UP ON COST EARNED BY THE ASSESSEE AS COMPU TED BY THE TPO IN THE TP ORDER: OPERATING INCOME RS.6,96,70,912/- OPERATING COST RS.6,07,56,385/- OPERATING PROFIT (OP. INCOME TOTAL. COST) RS.89,1 4,527/- OPERATING/NET MARK-UP (OP/TC) 14.67% COMPARABLES SELECTED BY ASSESSEE AND THEIR ARITHMET IC MEAN: SL. NO. NAME OF THE COMPANY WEIGHTED AVERAGE (%) 1 ADITYA BIRLA MINACS WORLDWIDE LTD. 0.30 2 CG - VAK SOFTWARE & EXPORTS LTD. - 2.39 3 CALIBER POINT BUSINESS SOLUTIONS LTD. 18.09 4 CEPHA IMAGING PVT. LTD. 1.94 5 COSMIC GLOBAL LTD. 23.83 6 FORTUNE INFOTECH LTD. 9.95 7 INF ORMED TECHNOLOGIES INDIA LTD. 19.33 8 INFOSYS BPO LTD. 22.53 9 JEEVAN SOFTECH LTD. 46.34 10 JINDAL INTELLICOM PVT. LTD. 6.39 11 MICROGENETICS SYSTEMS LTD. 0.87 12 R SYSTEMS INTERNATIONAL LTD. 5.01 ARITHMETICAL MEAN 12.68 NOTE: OUT OF THE 12 COMPARABLES SELECTED BY THE ASSESSEE, THE TPO ACCEPTED THE 4 HIGHLIGHTED ABOVE VIZ., COSMIC GLOBAL LTD., INFOS YS BPO LTD., JEEVAN SOFTECH LTD. AND JINDAL INTELLICOM LTD., AND REJECT ED THE OTHER 8. IT(TP)A NOS.187 & 175/BANG/2016 PAGE 30 OF 38 COMPARABLES SELECTED BY TPO AND THEIR ARITHMETIC ME AN: SL. NO. NAME OF THE COMPANY MARK-UP ON TOTAL COSTS (WCUNADJ) (IN %) MARK-UP ON TOTAL COSTS (WC ADJ) (IN %) 1 ACCENTIA TECHNOLOGIES LTD. 28.89 29.47 2 ACROPETAL TECHNOLOGIES 26.86 26.12 3 COSMIC GLOBAL LTD. 9.81 13.86 4 E4E HEALTHCARE BUSINESS SERVICES PVT. L TD. 12.38 17.20 5 ICRA ONLINE LTD. (SEG.) 34.21 36.30 6 JEEVAN SCIENTIFIC TECHNOLOGY LTD. 70.66 74.58 7 INFOSYS BPO LTD. 17.89 19.24 8 JINDAL INTELLICOM PVT. LTD. 11.13 14.94 9 MINDTREE LTD. (SEG.) 10.76 12.11 10 IGATE GLOBAL SOLUTIONS LTD. 25.07 27.76 AVERAGE MARK-UP 24.77 27.16 COMPUTATION OF ARMS LENGTH PRICE BY THE TPO AND TH E ADJUSTMENT MADE: ARMS LENGTH MEAN MARK-UP 24.77% LESS: WORKING CAPITAL ADJUSTMENT -2.39% ADJUSTED MEAN MARK-UP OF THE COMPARABLES 27.16% OPERATING COST (OC) RS.6,07,56,385/- ARMS LENGTH PRICE (ALP) = 127.16% OF OC RS. 7,72 ,57,819/- PRICE RECEIVED RS. 6,96,70,912/- SHORTFALL BEING ADJUSTMENT U/S. 92CA RS. 75,86,907/ - 39. THE AO INCORPORATED THE ADDITION TO THE TOTAL I NCOME BY WAY OF SHORTFALL BEING ADJUSTMENT U/S.92CA OF THE ACT, IN HIS DRAFT ORDER OF ASSESSMENT. AGAINST THE SAID ADDITION IN THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJECTIONS U/S.144C OF THE ACT BEFOR E THE DRP. BR IEFLY, THE DIRECTIONS ISSUED BY THE DRP WERE AS FOLLOWS: IT(TP)A NOS.187 & 175/BANG/2016 PAGE 31 OF 38 THE FOLLOWING COMPANIES WERE DIRECTED TO BE EXCLUDE D BY ACCEPTING THE CONTENTIONS OF THE ASSESSEE: (A) ACCENTIA TECHNOLOGIES LTD. (B) ACROPETAL TECHNOLOGIES LTD. (C) ICRA ONLINE LTD. (SEG.) (D) JEEVAN SCIENTIFIC TECHNOLOGY LTD. (E) IGATE GLOBAL SOLUTIONS LTD. THE DRP SUO MOTO DIRECTED THE EXCLUSION OF COSMIC GLOBAL LTD. ON THE GROUND THAT IT HAD INCURRED SUB-CONTRACTING EXPENSES TO TH E EXTENT OF 41% THEREBY SUGGESTING A DIFFERENT WORKING MODEL WHICH MAY HAVE SIGNIFICANT IMPACT ON ITS MARGIN. AS REGARDS THE ASSESSEES CONTENTIONS FOR I NCLUSION OF ITS TP STUDY COMPARABLES, THE DRP REJECTED THE SAME AND THEREBY UPHELD THEIR EXCLUSION BY THE TPO. LIST OF COMPARABLES POST THE DRPS DIRECTIONS AS PER THE DRPS DIRECTIONS, THE FINAL LIST OF COMP ARABLES WAS AS FOLLOWS: SI. NO. NAME OF THE COMPANY 1 E4E HEALTCHCARE BUSINESS SERVICES PVT. LTD. 2 INFOSYS BPO LTD. 3 MINDTREE LTD. 4 JINDAL INTELLICOM PVT. LTD. 40. PURSUANT TO THE DIRECTIONS OF THE DRP, AS THE A RITHMETICAL MEAN OF THE WORKING CAPITAL ADJUSTED MARGINS OF THE ABOVE C OMPARABLES WAS WITHIN THE +/-5% RANGE OF THE ASSESSEES NCP MARK-UP FOR P ROVISION OF ITE SERVICES, THE TP ADJUSTMENT MADE TOWARDS THE SAID I NTERNATIONAL TRANSACTION WAS DELETED IN THE FINAL ASSESSMENT ORD ER. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. BRIEFLY, THE GROUNDS IN THE REVENUES APPEAL ARE AS FOLLOWS:- THAT THE DRP ERRED IN HOLDING THAT ACROPETAL TECHN OLOGIES LTD., JEEVAN SCIENTIFIC TECHNOLOGY LTD., ACCENTIA TECHNOL OGIES LTD., IGATE GLOBAL SOLUTIONS LTD. AND ICRA ONLINE LTD. CANNOT B E TAKEN AS A COMPARABLE TO THE ASSESSEE AS SEGMENTAL INFORMATION OF THE COMPANIES WERE NOT AVAILABLE ( GROUND NO. 14 ) IT(TP)A NOS.187 & 175/BANG/2016 PAGE 32 OF 38 THAT THE DRP ERRED IN DIRECTING EXCLUSION OF COSMI C GLOBAL LTD. FOR THE REASON THAT IT WAS FUNCTIONALLY INCOMPARABLE TO THE ASSESSEE. ( GROUND NO. 15 ) 41. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PART IES. AS FAR AS GR.NO.14 OF THE REVENUES APPEAL IS CONCERNED, THE REVENUE IS SEEKING THE INCLUSION OF ACROPETAL TECHNOLOGIES LTD., JEEVAN SC IENTIFIC TECHNOLOGY LTD., ACCENTIA TECHNOLOGIES LTD., IGATE GLOBAL SOLUTIONS LTD. AND ICRA ONLINE LTD. WE FIND THAT THE ABOVE COMPANIES WERE RIGHTLY REJECTED BY THE DRP AND THE SAME REQUIRES NO INTERFERENCE FROM THIS HON BLE TRIBUNAL. WE FIND THAT ACROPETAL TECHNOLOGIES LTD., I S ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND SERVICES, CONTRACT CENTRE SERVICE A ND IT ENABLED SERVICES AND THE SAME ARE REPORTED TOGETHER AS ONE SEGMENT. IN THE ABSENCE OF SEGMENTAL DETAILS MADE AVAILABLE, THE COMPANY COULD NOT BE TREATED AS A COMPARABLE. THE TPO, WHILE CHOOSING THE COMPANY AS A COMPARABLE, HAS SELECTED ITS ENGINEERING DESIGN SEGMENT (EDS FOR SHORT) WHICH IS IN THE NATURE OF HIGH END IT ENABLED SERVICES WHICH ARE IN THE NATURE OF KNOWLEDGE PROCESS OUTSOURCING (KPO). THE HIGH END SERVICES PROVIDED BY THE COMPANY CANNOT BE COMPARED WITH THE ROUTINE SERVICES PROVIDED BY THE ASSESSEE. THIS IS A SETTLED POSITION AND RELIAN CE CAN BE PLACED ON THE DECISION OF THIS HONBLE TRIBUNALS IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. (ITA NO. 1316/BANG/2012) WHERE IT WAS HELD THAT ACROPETAL CANNOT BE CONSIDERED AS A COMPARABLE TO A SSESSEES PERFORMING ROUTINE LOW END IT ENABLED SERVICES FUNCTION. AS F AR AS EXCLUSION OF COMPANY JEEVAN SCIENTIFIC TECHNOLOGY LTD., WE FIND THAT THIS COMPANY WAS REJECTED BY THE DRP FOR THE REASON THAT IT WAS ENGAGED IN DIVERSE FUNCTIONS AND THE SAME WERE REPORTED UNDER ONE SEGM ENT WITHOUT SEGMENTAL DETAILS REGARDING THE SAME BEING MADE AVA ILABLE. THE DRP IS RIGHT IN EXCLUDING THE COMPANY AS WITHOUT SEGMENTAL DETAILS, THE COMPARABILITY OF THE COMPANY CANNOT BE DETERMINED. IN ANY EVENT, THE ERP IT(TP)A NOS.187 & 175/BANG/2016 PAGE 33 OF 38 SEGMENT OF THE COMPANY IS NOT COMPARABLE TO THE ASS ESSEE, THE BPO SEGMENT OF THE COMPANY FAILS THE FILTER OF SERVICE INCOME BEING GREATER THAN 75% OF TOTAL REVENUE, AND THE COMPANY SUFFERS FROM HUGE FLUCTUATIONS WHICH INDICATE THAT CERTAIN PECULIAR CIRCUMSTANCES INFLUENCING THE PROFIT MARGIN OF THE COMPANY EXIST, FOR WHICH APPROPRIATE ADJUSTMENTS CANNOT BE MADE TO BALANCE THE EFFECT. IT IS SUBMITTED THAT TH E ERP IMPLEMENTATION SERVICES ARE NOT IN THE NATURE OF IT ENABLED SERVIC ES WHICH WERE NOTIFIED BY CBDT VIDE NOTIFICATION NO. SO 890(E) DATED 26.09.20 00. IF THE BPO SEGMENT IS CONSIDERED, THE COMPANY FAILS TO SATISFY THE TPOS OWN FILTER OF SERVICE REVENUE FROM THE RELEVANT SEGMENT HAVING TO BE IN EXCESS OF RS. 1 CRORE AS THE REVENUE FROM THE BPO SEGMENT OF THE SA ID COMPANY IS RS. 79 LAKHS ONLY. THE COMPANY IS THEREFORE NOT COMPARABLE TO THE ASSESSEE. THIS TRIBUNAL IN THE CASE OF SWISS RE SHARED SERVICES (I NDIA) PVT. LTD. V. ACIT (ORDER DATED 08.07.2016 IN IT(TP)A NO. 380/BANG/201 6) DIRECTED THE TPO TO VERIFY AS TO WHETHER THE TPOS FILTER OF SALES > 1 CRORE IS SATISFIED BY THIS COMPANY. IN THE PRESENT CASE, AS CAN BE SEEN FROM T HE ANNUAL REPORT OF THE COMPANY THE SALE OF THE COMPANY IN RESPECT OF THE B PO SEGMENT AMOUNTS TO ONLY 79 LAKHS, AND THEREFORE IT FAILS THE TPOS FILTER. AS FAR AS EXCLUSION OF ACCENTIA TECHNOLOGIES LTD., IS CONCERNED, WE FIND THAT THIS COMPANY WAS EXCLUDED BY THE DRP FOR THE REASON THAT THE DET AILS REGARDING ITS DIVERSE FUNCTIONS WERE REPORTED UNDER ONE SEGMENT, WITHOUT SEGMENTAL DETAILS REGARDING THE SAME BEING MADE AVAILABLE. IN THE ABSENCE OF SEGMENTAL DETAILS BEING MADE AVAILABLE, THE COMPARA BILITY OF THE COMPANY WITH THAT OF THE ASSESSEE CANNOT BE DETERMINED. IN ANY EVENT, ACCENTIA IS ENGAGED IN PROVIDING HIGH END SERVICES IN THE NATUR E OF KNOWLEDGE PROCESS OUTSOURCING (KPO) WHICH IS EVIDENT FROM ITS ANNUA L REPORT, WHEREAS, THE ASSESSEE IS ENGAGED IN RENDERING ROUTINE LOW END IN FORMATION TECHNOLOGY ENABLED SERVICES. FURTHER, THE SAID COMPANY NOT ONL Y DOES MEDICAL TRANSCRIPTIONS, BUT HAS ALSO VENTURED INTO HEALTHCA RE RECEIVABLES CYCLE IT(TP)A NOS.187 & 175/BANG/2016 PAGE 34 OF 38 MANAGEMENT AND HIGH END CONSULTANCY TO START-UPS RE QUIRING FIELD EXPERTS. AS CAN BE SEEN FROM THE ANNUAL REPORT, CODING INCOM E IS CONTRIBUTING 15% OF THE TOTAL INCOME WHICH ACTIVITIES ARE AKIN TO SO FTWARE DEVELOPMENT ACTIVITY WHILE THE ASSESSEE IS A MERE PROVIDER OF I T ENABLED SERVICES. THE COMPANY HAS INVESTED HUGE SUMS IN THE DEVELOPMENT O F EMR SOFTWARE. SEGMENTAL DETAILS OF ITS VARIOUS ACTIVITIES ARE UNA VAILABLE. THE COMPANY FURTHER OWNS SIGNIFICANT INTANGIBLES. THIS TRIBUNAL IN THE CASE OF SWISS RE SHARED INDIA PVT. LTD. V. ACIT [TS-598-ITAT-2016(BANG)-TP AT PARAS 9-20 ON PAGES 7-21] WHERE, IN SIMILAR CIRCUMSTANCES AND FOR THE SAME ASSESSMENT YEAR, THIS HONBLE TRIBUNAL DIRECTED THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. ACCENTIA TECHNOLOGIES LTD. IS, THEREFORE, NOT COMPARABLE TO THE ASSESSEE AND WAS R IGHTLY REJECTED AS A COMPARABLE. AS FAR AS IGATE GLOBAL SOLUTIONS LTD., IS CONCERNED, DRP REJECTED THIS COMPANY AS COMPARABLE COMPANY FOR THE REASON THAT THE DETAILS REGARDING ITS DIVERSE FUNCTIONS ARE REPORTE D UNDER ONE SEGMENT WITHOUT SEGMENTAL DETAILS REGARDING THE SAME BEING MADE AVAILABLE. THEREFORE, THE COMPARABILITY OF THE COMPANY CANNOT BE DETERMINED. IT IS SEEN THAT IGATE IS ENGAGED IN PROVISION OF VARIED SERVICES AND NO SEGMENTAL BREAKUP OF THE SAME IS AVAILABLE IN ITS A NNUAL REPORT. FURTHER, THE COMPANYS SOFTWARE SERVICES SEGMENT IS CLUBBED WITH ITS ITES SEGMENT AND THERE IS NO BREAKUP BETWEEN THE REVENUE S GENERATED FROM THE TWO SEGMENTS. DURING THE YEAR UNDER CONSIDERATI ON, THE COMPANY HAS ACQUIRED MAJORITY EQUITY INTEREST IN PATNI COMPUTER SYSTEMS LTD. RENDERING IT INCOMPARABLE DUE TO IT FAILING THE TPOS OWN FIL TER OF HAVING PECULIAR ECONOMIC CIRCUMSTANCES. IN ADDITION, THE COMPANY OW NS SIGNIFICANT INTANGIBLES IN ITS NAME, WHICH IS EVIDENT FROM THE BALANCE SHEET OF THE COMPANY FOR THE FINANCIAL YEAR 2010-11. FOR THE REA SONS ABOVE, THE COMPANY IS NOT COMPARABLE TO THE ASSESSEE AND THE D RPS FINDINGS ON EXCLUSION OF IGATE IS RIGHT IN LAW. AS FAR AS TH E COMPANY ICRA ONLINE IT(TP)A NOS.187 & 175/BANG/2016 PAGE 35 OF 38 LTD., IS CONCERNED, THE DRP EXCLUDED THIS COMPANY FOR THE REASON THAT THE DETAILS REGARDING ITS DIVERSE FUNCTIONS ARE REPORTE D UNDER ONE SEGMENT WITHOUT SEGMENTAL DETAILS REGARDING THE SAME BEING MADE AVAILABLE. THEREFORE, THE COMPARABILITY OF THE COMPANY CANNOT BE DETERMINED. IN ANY EVENT, THIS COMPANY IS FUNCTIONALLY DISSIMILAR FOR THE REASON THAT THE OUTSOURCED SERVICES SEGMENT OF THE COMPANY IS ENGAG ED IN THE PROVISION OF HIGH END CONSULTANCY SERVICES WHICH CANNOT BE COMPA RED TO THE ASSESSEE WHO IS INTO PROVISION OF LOW END IT ENABLED SERVICE S WHICH ARE ROUTINE IN NATURE. FURTHER, THE COMPANY FAILS THE TPOS OWN FI LTER OF EXPORT TURNOVER IN EXCESS OF 75% OF TOTAL SALES AS THE EXPORT TURNOVER OF THE COMPANY AMOUNT TO ONLY 61.88% OF ITS SALES. THEREFORE, THE COMPANY CANNOT BE HELD AS A COMPARABLE TO THE ASSESSEE. 42. AS FAR AS GR.NO.15 RAISED BY THE REVENUE IS CON CERNED, THE REVENUE IS SEEKING THE INCLUSION OF COSMIC GLOBAL L TD. IN THE FINAL LIST OF COMPARABLES. THE ABOVE COMPARABLE WAS SELECTED BY T HE ASSESSEE IN ITS TP STUDY AND BY THE TPO AND THUS INCLUDED BY HIM IN THE LIST OF COMPARABLES. IN THE PROCEEDINGS BEFORE THE DRP, THE ASSESSEE DID NOT OBJECT TO ITS INCLUSION IN THE LIST OF COMPARABLES. THE ASSESSEE HAS NO OBJECTION FOR INCLUSION OF THIS COMPANY AS A COMPAR ABLE COMPANY AND HENCE GR.NO.15 OF THE REVENUE IS ALLOWED. 43. AS FAR AS THE APPEAL OF THE ASSESSEE IN THE ITE S SEGMENT IS CONCERNED, IT WAS SUBMITTED THAT THE ARITHMETICAL M EAN OF THE MARGINS OF THE COMPARABLES AFTER GIVING EFFECT TO ORDER OF THE DRP WOULD FALL WITHIN THE +/-5% RANGE OF THE ASSESSEES NCP MARGIN FOR PROVIS ION OF ITE SERVICES. CONSEQUENTLY, THE INTERNATIONAL TRANSACTION OF PROV ISION OF ITE SERVICES BY THE ASSESSEE TO ITS AE IN FY 2010-11 CAN BE CONCLUD ED AS BEING AT ARMS LENGTH. THEREFORE, THE GROUNDS RAISED IN THE ASSESS EES APPEAL IN RELATION IT(TP)A NOS.187 & 175/BANG/2016 PAGE 36 OF 38 TO ITS INTERNATIONAL TRANSACTION OF PROVISION OF IT E SERVICES ARE NOT PRESSED AT THIS STAGE. 44. THE TPO IS DIRECTED TO COMPUTE ALP IN THE SWD SERVICES SEGMENT, AS PER THE DIRECTIONS CONTAINED IN THIS ORDER AND A FTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 45. IN GR.NO.7.1 THE ASSESSEE HAS CHALLENGED THE AC TION OF THE DRP IN UPHOLDING THE ORDER OF THE TPO ALLOWING AND DETERMI NING A NEGATIVE WORKING CAPITAL ADJUSTMENT IN BOTH THE SWD SERVICES SEGMENT AND ITES SEGMENT. IN THIS REGARD, IT IS SUBMITTED THAT WORKI NG CAPITAL ADJUSTMENT IS MADE FOR THE TIME VALUE OF MONEY LOST WHEN CREDIT T IME IS GIVEN TO THE CUSTOMERS. THE ASSESSEE HOWEVER IS NOT AN ENTREPREN EUR BUT A CAPTIVE SERVICE PROVIDER WHICH IS ENTIRELY FUNDED BY THE AE S. THIS BEING SO, THE ASSESSEE DOES NOT STAND TO LOSE ANYTHING AS IT IS C OMPENSATED ON A TOTAL COST PLUS BASIS. THE ASSESSEE IS RUNNING THE BUSINE SS WITHOUT ANY WORKING CAPITAL RISK AS COMPARED TO THE COMPARABLES. THEREF ORE, REQUIREMENT FOR ADJUSTMENT OF NEGATIVE WORKING CAPITAL DOES NOT ARI SE. IN THIS REGARD, WE FIND THAT IN THE CASE OF LAM RESEARCH INDIA PVT LTD, ITA NO. 1473 & 1385/2014 (ORDER DATED 30.04.2015) AND SOFTWARE AG BANGALORE TECHNOLOGIES PVT. LTD. IN ITA NO. 1628/2014 (ORDER DATED 31.03.2016) PASSED BY THIS TRIBUNAL, IT HAS BEEN HELD THAT NEGA TIVE WORKING CAPITAL ADJUSTMENT SHALL NOT BE MADE IN CASE OF A CAPTIVE S ERVICE PROVIDER AS THERE IS NO RISK AND IT IS COMPENSATED ON A TOTAL COST PL US BASIS. CONSEQUENTLY, GR.NO.7.1. RAISED BY THE ASSESSEE IS ALLOWED. 46. THE OTHER GROUNDS THAT REMAIN FOR ADJUDICATION IN REVENUES APPEAL IS THE CORPORATE TAX ISSUE RAISED IN GR.NO.16 & 17 REGARDING RE-COMPUTATION OF DEDUCTION UNDER SECTION 10A BY REDUCING TRAVEL E XPENSES INCURRED IN FOREIGN CURRENCY AND COMMUNICATION CHARGES ONLY FRO M EXPORT TURNOVER. IN ITS RETURN OF INCOME FOR AY 2011-12, THE ASSESSEE C LAIMED A DEDUCTION IT(TP)A NOS.187 & 175/BANG/2016 PAGE 37 OF 38 UNDER SECTION 10A OF THE ACT OF RS.3,72,68,882/-, B EING THE PROFITS OF BUSINESS OF ITS UNIT ELIGIBLE FOR DEDUCTION UNDER S ECTION 10A OF THE ACT. IN COMPUTING THE SAID DEDUCTION, THE ASSESSEE HAD NOT REDUCED TELECOMMUNICATION CHARGES TO THE EXTENT OF RS.13,70 ,475/- FROM ITS EXPORT TURNOVER AS THE SAID CHARGES WERE NOT ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA. FURTHER, THE ASSES SEE HAD ALSO NOT REDUCED TRAVEL EXPENSES TO THE EXTENT OF RS.8,35,695/- INCURRED IN FOREIGN CURRENCY FROM ITS EXPORT TURNOVER AS IT WAS NOT ENG AGED IN THE PROVISION OF TECHNICAL SERVICES OUTSIDE INDIA WHICH ALONE WOULD HAVE WARRANTED REDUCTION OF SUCH CHARGES FROM ITS EXPORT TURNOVER. THE AO, HOWEVER, PROCEEDED TO RE-COMPUTE THE DEDUCTION BY REDUCING T HE TELECOMMUNICATION CHARGES AND TRAVEL EXPENSES INCURRED IN FOREIGN CUR RENCY FROM ONLY ITS EXPORT TURNOVER WITHOUT MAKING A CORRESPONDING REDU CTION IN ITS TOTAL TURNOVER. THEREBY, THE AO MADE A DISALLOWANCE OF RS .22,06,170/- FROM THE DEDUCTION CLAIMED UNDER SECTION 10A. 47. ALTHOUGH THE DRP REJECTED THE PRIMARY CONTENTIO N OF THE ASSESSEE THAT NEITHER THE TELECOMMUNICATION CHARGES NOR THE TRAVEL EXPENSES OUGHT TO BE REDUCED FROM ITS EXPORT TURNOVER, IT ACCEPTED ITS ALTERNATE CONTENTION THAT THEY SHOULD ALSO BE REDUCED FROM ITS TOTAL TUR NOVER BY FOLLOWING THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN CIT V. TATA ELXSI LTD. AND OTHERS. ACCORDINGLY, IT DIRECTED THE AO TO EXCLUDE THE ABOV E EXPENSES FROM BOTH ITS EXPORT AND TOTAL TURNOVERS WHILE COMP UTING THE DEDUCTION ALLOWABLE UNDER SECTION 10A. THUS, ON THE BASIS OF THE DRPS ABOVE DIRECTIONS, THE DISALLOWANCE UNDER SECTION 10A CAME TO BE DELETED IN TOTO IN THE FINAL ASSESSMENT ORDER. IN GROUND NOS. 16 AN D 17 IN ITS APPEAL, THE REVENUE IS CHALLENGING THE AFORESAID DIRECTIONS OF THE DRP. IN THIS REGARD, IT IS SEEN THAT THE DRPS DIRECTIONS ARE IN ACCORDA NCE WITH THE AFORESAID BINDING DECISION OF THE JURISDICTIONAL HIGH COURT I N CIT V. TATA ELXSI LTD. , REPORTED IN [2012] 349 ITR 98 (KAR) WHICH SUBSEQUENTLY CAME TO BE UPHELD IT(TP)A NOS.187 & 175/BANG/2016 PAGE 38 OF 38 BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. 404 ITR 719 (SC). THEREFORE, IN THE LIGHT OF THE AB OVE JUDGMENT, THE REVENUES ABOVE GROUND STAND REJECTED. 48. IN THE RESULT APPEAL BY THE ASSESSEE AND THE AP PEAL BY THE REVENUE ARE PARTLY ALLOWED, TO THE EXTENT INDICATED IN THIS ORDER. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF JULY, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTA NT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 30 TH JULY, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.