M/s. Fiserv India Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 1822/DEL/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91261 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 07-04-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 27-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; International transaction; Bonafide belief; Wholly owned subsidiary; Scheme of amalgamation
• Section: 143(3); 92D; 133(6)

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI S V MEHROTRA ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010 ) M/S FISERV INDIA PVT LTD, REGUS ELEGANCE, LEVEL - 2, ELEGANCE JASOLA DISTT CENTRE, OLD M A TH U RA ROAD, NEW DELHI PAN NO.AACCR0787L VS. ITO, WARD - 13(4), NEW DELHI (APPELLANT) (RESPONDENT) DATE OF HEARING 07.04.2015 DATE OF PRONOUNCEMENT 26. 06.2015 O R D E R PER A. T. VARKEY, JUDICIAL MEMBER THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 24.02.2014 U/S 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT, 1961 (HEREIN AFTER THE ACT) IN PURSUANCE TO DIRECTION S OF DRP DATED 20.12.2013 FOR THE ASSESSMENT YEAR 2009 - 10. 2 IN THIS APPEAL, THE FOLLOWING GROUNDS HAVE BEEN RAISED BY THE APPELLANTS: 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSING OFFICER ('AO') ERRED IN ASSESSING THE TOTAL INC OME OF THE APPELLANT AT RS.19,14,56,510/ - AS AGAINST INCOME OF RS.9,90,640/ - RETURNED BY THE APPELLANT AFTER MAKING TRANSFER PRICING ADDITION OF RS.19,04,65,871/ - IN RESPECT OF INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES REND ERED BY THE APPELLANT TO ITS PARENT COMPANY, VIZ., FISERV GLOBAL SERVICES INC., USA. APPELLANT BY: SH SACHIT JOLL Y , ADV & MS G A RGI BHATT ADV, RESPONDENT BY : SH JUDY JAMES , STANDING COUNSEL . DR PAGE 2 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) 2. THAT ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN MAKING A REFERENCE TO THE TPO UNDER SECTION 92CA OF THE INCOME TAX ACT, 1961 ('ACT') WITHO UT RECORDING REASONS ON THE BASIS WHICH THE AO CONSIDERED IT 'NECESSARY OR EXPEDIENT' TO REFER THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE ('AE'). 3. THAT ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LA W, THE AO AND DISPUTE RESOLUTION PANEL ('DRP') ERRED IN PARTLY CONFIRMING THE ACTION OF THE TRANSFER PRICING OFFICER ('TPO') IN MAKING AN ADDITION TO THE EXTENT OF RS.19,04,65,871/ - TO THE INCOME OF THE APPELLANT WITHOUT APPRECIATING THAT THE APPELLANT HAD COMPUTED ARM'S LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE ('AE') USING THE MOST APPROPRIATE METHOD (I.E. THE TRANSACTIONAL NET MARGIN METHOD), MAINTAINED ALL THE INFORMATION AND DOCUME NTATION REQUIRED UNDER SECTION 92D OF THE ACT, USED INFORMATION/DATA AVAILABLE IN THE DATABASE (PROWESS DATABASE AND CAPITALINE DATABASE) ALL THE TIME OF FILING THE INCOME TAX - RETURN ON A BONAFIDE BELIEF THAT THE DATA IN THE DATABASE IS RELIABLE AND CORRE CT AND FURNISH THE TRANSFER PRICING STUDY ('TP STUDY'). 4. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IMPLIEDLY REJECTING THE TRANSFER PRICING STUDY OF THE APPELLANT AND IN CONDUCTING A FRESH BENCHMARKING ANALYSIS ON THE BASIS OF CONJ ECTURES AND SURMISES. 5. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN APPLYING THE FOLLOWING FILTERS: - A. USE OF ONLY CURRENT YEAR (I.E. FY 2008 - 09) DATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF COMPARISON DONE BY THE APPELLANT, THE COMPLETE DATA FOR THE FY 2008 - 09 WAS NOT AVAILABLE IN THE PUBLIC DOMAIN, B. REJECTING COMPANIES WITH DIFFERENT FINANCIAL YEAR WITHOUT ASSIGNING ANY COGENT REASONS FOR APPLYING THE SAID FILTER, C. REJECTING COMPANIES WITH TURNOVER BELOW RS.1 CRORE WITHOUT APPLYING AN UPPER FILTER OF RS. 500 CRORES D. REJECTING COMPANIES WHOSE EXPORT REVENUES ARE LESS THAN 75% OF THE OPERATING' REVENUES WITHOUT APPRECIATING THAT THE SAID FILTER HAS N O EFFECT ON COMPARABILITY ANALYSIS, E. REJECTING COMPANIES WHERE REVENUE FROM RELATED PARTY TRANSACTIONS EXCEEDS 25% OF THE TOTAL REVENUE WITHOUT APPRECIATING THAT COMPANIES WITH ANY RELATED PARTY TRANSACTIONS SHOULD HAVE BEEN EXCLUDED OR ELSE COMPANIES WITH REVENUE FROM RPT OF MORE THAN 10 - 15% TO SALES SHOULD HAVE BEEN EXCLUDED, F. REJECTING COMPANIES WITH EMPLOYEE COST LESS THAN 25% OF TOTAL OPERATING COST, WITHOUT APPRECIATING THAT SUCH A FILTER IS NOT DECISIVE FOR TRACING OUT SERVICE COMPANIES SIN CE THERE IS NO COMPULSION ON COMPANIES TO NECESSARILY KEEP PERSONNEL ON THEIR ROLLS, PAGE 3 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) G. REJECTING COMPANIES WITH DIMINISHING REVENUE/ PERSISTENT LOSSES IN COMPLETE CONTRADICTION OF THE FILTER OF SINGLE YEAR DATA APPLIED BY THE TPO HIMSELF 6. THAT TH E AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT WITHOUT PROVIDING ANY COGENT AND/OR SUFFICIENT REASONING. 7. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN BENCHMAR KING THE TRANSACTION OF RENDITION OF CAPTIVE SERVICES UNDERTAKEN BY THE APPELLANT WITH COMPANIES OPERATING AS ENTREPRENEUR COMPANIES WITHOUT APPRECIATING THE TRUE NATURE OF SERVICES PROVIDED BY THE APPELLANT AND OTHER MATERIAL FACTS RELATED TO THE FUNCTION AL AND RISK PROFILE OF THE APPELLANT. 8. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN SELECTING THE FOLLOWING COMPANIES WHICH WERE NOT FUNCTIONALLY COMPARABLE TO THE APPELLANT FOR THE PURPOSES OF BENCHMARKING THE INTERNATIONAL TRANSACTI ON ENTERED INTO BY THE APPELLANT: A) BODHTREE CONSULTING B) COMP - U - TECH INDIAN LTD. C) SONATA SOFTWARE LTD. D) INFOSYS E) LGS GLOBAL SERVICES LTD. F) THIRDWARE SOLUTIONS 9. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN SELECTING THE FOLLOWING COMPANIES WHOSE TURNOVER EXCEEDED RS.500 CRORES AND THOSE COMPARABLES WHICH ARE MAKING ABNORMALLY HIGH PROFITS OR ARE FUNCTIONALLY DISSIMILAR: A) IGATE GLOBAL SOLUTIO NS LTD. B) INFOSYS TECHNOLOGIES LTD. C) MINDTREE LIMITED D) SASKEN COMMUNICATIONS TECHNOLOGIES LTD. E) ZYLOG SYSTEMS LTD. 10. THAT THE AO AND DRP ERRED IN CONFIRMING AND NOT SETTING ASIDE THE ACTION OF THE TPO IN APPLYING - C. FLAWED AND INCONSISTENT SEAR CH PROCESS FOR ITS BENCHMARKING ANALYSIS BY SELECTING BODHTREE CONSULTING LTD AS A COMPARABLE COMPANY WITHOUT APPRECIATING THE FACT THAT THE SAID COMPANY WAS DELETED AS A COMPARABLE BY THE HONBLE DRP IN THE CASE OF THE APPELLANT'S GROUP COMPANY VIZ OPEN S OLUTIONS SOFTWARE SERVICES PVT. LTD. ON THE GROUND OF ABNORMAL GROWTH DURING THE RELEVANT PREVIOUS YEAR. 11. THAT THE DRP ERRED IN NOT ITSELF ADJUDICATING THE GROUND RAISED BY THE APPELLANT ASSAILING THE INCORRECT COMPUTATION OF MARGINS BY THE TPO COMPLETE DISREGARD OF THE PROVISIONS OF SECTION 114C(8) OF THE ACT. 12. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN NOT ALLOWING RISK ADJUSTMENT CLAIMED BY APPELLANT IN TERMS OF RULE 10B(L)(E) READ WITH RULE 10B(3) OF THE INCOME TAX RULES, 1 962. PAGE 4 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) 13. THAT THE TPO AND THE DRP ERRED IN PROPOSING AN ADJUSTMENT TO THE ARM'S LENGTH PRICE COMPUTED BY THE APPELLANT WITHOUT APPRECIATING THAT SINCE THE APPELLANT WAS ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION IDA OF THE ACT IN RESPECT OF INCOME FROM THE INTERNATIONAL TRANSACTION ENTERED INTO BETWEEN THE APPELLANT AND ITS AE, THERE WAS NO MOTIVE TO SHIFT PROFITS OUTSIDE INDIA BY MANIPULATING THE PRICES CHARGED IN INTERNATIONAL TRANSACTIONS, WHICH IS A PRE - REQUISITE TO MAKE ANY ADJUSTMENT UNDER THE PROVISI ONS OF CHAPTER X OF THE ACT. 14. THAT THE AO/TPO ERRED IN LAW IN MECHANICALLY INITIATING PENALTY PROCEEDING UNDER SECTION 271(L)(C) OF THE ACT WITHOUT RECORDING ANY ADEQUATE SATISFACTION FOR SUCH AN INIT IATION OF PENALTY PROCEEDINGS. 3 THE BR IEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 30TH MAY 2002 UNDER THE COMPANIES ACT, 1956 AS A WHOLLY OWNED SUBSIDIARY OF RESULTS INTERNATIONAL SYSTEMS INC., USA. FURTHER, RESULTS INTERNATIONAL SYSTEMS INC., USA IS A 100% SUBSIDI ARY OF FISERV INC., USA. 4 DURING THE RELEVANT ASSESSMENT YEAR, FISERV INDIA RENDERED SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES TO ITS AE VIS. FISERV GLOBAL SERVICES INC., USA. FOR THIS IT WAS COMPENSATED BASED ON THE TERMS OF THE MASTER SERVICE AGREE MENT ENTERED BETWEEN BOTH THE ENTITIES ON COST PLUS 15%. AS PER THE TRANSFER PRICING (TP) DOCUMENT FURNISHED FOR THE AY 2009 - 10 , THE TAXPAYER COMPANY HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) NATURE OF TRANSACTION VALUE OF INTERNATIONAL SOFTWARE DEVELOPMENT SERVICES 204 , 03 , 31,108 LIABILITY WRITTEN BACK 1,220,804 LOSS ON SETTLEMENT OF FORWARD CONTRACTS 5,686,215 RECRUITMENT EXPENSES 3,483,159 REIMBURSEMENT OF EXPENSES 3,601,498 5 THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS REPRESENTING SOFTWARE DEVELOPMENT SERVICES PROVIDED TO THE ASSOCIATED ENTERPRISES (AE) IS DETERMINED BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM), WHICH IS STATED TO BE THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE OPERATING PROFIT TO TOTAL COST (OP / T C) RATIO IS TAKEN AS THE PROFIT LEVEL INDICATOR (PLI) IN THE TNMM ANALYSIS. THE PLI OF THE COMPANY IS ARRIVED AT 15.00% ON COST ; WHEREAS THE AVERAGE PLI OF THE COMPARABLES IS ARRIVED A T 9.54% AS PER THE ANALYSIS IN THE TP DOCUMENT. IT IS FURTHER SEEN THAT AVERAGE PROFIT LEVEL PAGE 5 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) INDICATOR (PLI) WAS DIRECTED ON THE BASIS OF 29 COMPARABLES SELECTED BY THE TAX PAYERS. THE MEAN MARGIN OF THE COMPARABLES SELECTED BY THE ASSESSEE AS STATED ABOV E WAS 9.54% AND SINCE THE PROFIT MARGIN OF THE ASSESSEE WAS WITHIN +/= 5% RANGE OF THE MEAN MARGIN OF THE COMPARABLES, NO TRANSFER PRICING ADJUSTMENT WAS OFFERED IN THE RETURN OF INCOME. THE RESULTS AS SUBMITTED BY THE TAX PAYER CAN BE SUMMARIZED AS UNDER: PARTICULARS SOFTWARE OPERATING REVENUES 209 , 83 , 60,555 OPERATING EXPENSES 182 , 48 , 57 , 046 OPERATING PROFIT 27 , 35 , 03 , 509 OP/TC 15% METHOD USED TNMM PLI OP/OC NO OF COMPARABLES 20 MEAN OF MARGIN OF COMPARABLES 9.54% 6 THE TPO VIDE AN ORDER DATED 14.12.2012 REJECTED THE TRANSFER PRICING STUDY OF THE ASSESSEE AND SUBSTITUTED A FRESH PROCESS AND MODIFIED THE FILTERS AND COMPARABLE SELECTED BY THE ASSESSEE. THEREAFTER THE TPO SELECTED A LIST OF 13 COMPARABLES AND PROPOSED AN ADJUSTMENT OF RS. 19 ,69,44,637/ - BY COMPUTING THE MEAN PROFIT LEVEL INDICATOR (PLI) OF THE COMPARABLE COMPANIES AT 25.78% AS AGAINST PLI OF 15% OF THE ASSESSEE. THEREAFTER DISPUTE RESOLUTION PANEL (DRP) VIDE ORDER DATED 20.12.2013, UPHELD THE ADJUSTMENT MADE BY THE TPO, SUBJECT TO THE CLAIM OF WORKING CAPITAL ADJUSTMENT AS PER THE OECD METHODOLOGY AND DIRECTED TO RE - COMPUTE THE OPERATING MARGIN OF THE ASSESSEE AS WELL AS COMPARABLE COMPANIES AS PER THE GUIDELINES PROVIDED BY SAFE HARBOR NOTIFICATION DATED 18.09.2013. AS PER THE SAID DIRECTIONS, REVISED FIN AL LIST OF THE COMPARABLE COMPANIES IS AS UNDER - SL. COMPARABLE ADJUSTED NO. OP/OC 1. AKSHAY SOFTWARE TEDCH LTD. 9.02% 2. BODHTREE CONSULTING LTD. 69.22% 3. COMOU - LEARN TECH I LTD. 22.62% 4. GOLDSTONE TECHNOLOGIES LIMITED - 40.15% 5. IGATE GLOBAL SOLUTION LTD. 22.29% 6. INFOSYS LTD. 44.34% 7. KALS INFORMATION SYSTEMS LTD. 48.11% 8. LG. G GLOBAL LTD. 14.17% 9. MINDTREE LIMITED 27.27% 10. RS SOFTWARE INDIA LTD. 11.67% PAGE 6 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) 11. SASKEN COMMUNICATION LTD. 16.30% 12. SONATA SOFTWARE LTD. 32.07% 13. THIRDWARE SOLUTION 28.03% 14. ZYLOG SYSTEMS LTD. 6.52% AVERAGE 22.25% 7 AS A RESULT OF THE ABOVE, THE FINAL ASSESSMENT WAS COMPLETED VIDE ORDER DATED 24.02.2014, PASSED U/S 143(3) R.W.S. 144C OF THE IT ACT, 1961 (THE ACT) ASSESSING THE TOTAL INCOME OF THE ASSESSEE AT RS. 19,14,56,510/ - AFTER MAKING A TRANSFER PRICING ADDITION OF RS.19,04,65,871/ - WHICH HAS BEEN COMPUTED AS UNDER: - OPERATIONAL COST 182 , 49 , 05,345 ARMS LENGTH PRICE AT A MARGIN OF 22.25% 223 , 09 , 46,784 P RICE RECEIVED 204 , 04 , 80,913 105% OF INTERNATIONAL TRANSACTION 214 , 25 , 04,956 ADJUSTMENT U/S 92CA 19 , 04 , 65,871 8 DURING THE COURSE OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALL HIS CONTENTIONS VIS - - VIS GROUND S RAISED IN THE MEMO OF APPEAL BE CONFINED TO THE EXCLUSION OF THE FOLLOWING COMPARABLES FROM THE LIST WHICH WAS FINALLY SELECTED BY THE DRP: A) BODHTREE CONSULTING LTD. B) INFOSYS LTD. C) THIRDWARE SOLUTIONS D) SONATA SOFTWARE E) MINDTREE LTD. F) KALS INFORMATION SYSTEMS ; AND TREATMENT OF FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS OPERATING ITEM 9 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. TAKING UP THE EACH OF THE COMPARABLES CONTESTED AND DISPUTED BY THE APPELLANT IN THIS APPEAL. BODHTREE CONSULTING LTD : 10 . THE LEARNED AR SUBMITTED THAT THIS COMPARABLE BE EXCLUDED ON THE GROUND THAT THIS COMPANY HAS EXPERIENCED ABNORMALLY HIGH INCREASING SALES/PROFITABILITY FOR THE YEAR UNDER CONSIDERATION I.E. F.Y. 2008 - 09. THE L D. AR PAGE 7 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) FURTHER SUBMITTED THAT BODHTREE IS A PROVIDER OF INNOVATING CONSULTING AND TECHNOLOGY SERVICES. THE COMPANY HAS NICHE STRENGTHS IN BUILDING AND MANAGING A BUSINESS ORIENTED IT ENVIRONMENT WITH RICH EXPERIENCE IN TECHNOLOGY INCUBATION, PRODUCT ENGINE ERING, BUSINESS INTELLIGENCE, DATA MANAGEMENT, SOA CONSULTING, CRM CONSULTING, DATA WAREHOUSING AND PRODUCT ENGINEERING. IT WAS SUBMITTED THAT MERELY BECAUSE ONE SEGMENT OF THE COMPANY IS OF SOFTWARE DEVELOPMENT, THE SAME DOES NOT ENTAIL THE COMPANY TO BE USED AS A COMPARABLE. FURTHER IT WAS SUBMITTED THAT M/S BODHTREE COLLABORATES WITH REPUTED SOFTWARE VENDORS OF THE SILICON VALLEY FOR IMPLEMENTATION AND DEVELOPMENT OF SOLUTIONS AND DOES NOT CARRY OUT THE DEVELOPMENT THEMSELVES. IT WAS SUBMITTED THAT BODH TREE IS FUNCTIONALLY NOT COMPARABLE AND SHOULD NOT CO NSIDERED AS COMPARABLE COMPANY. THE AR SUBMITTED THAT BODHTR EE HAS EXPERIENCED ABNORMA LLY FLUCTUATING SALES/PROFITABILITY. A CHART IN SUPPORT OF THE SAME WAS HIGHLIGHTED WHICH IS AS UNDER: F.Y. 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 SALES 53,189,165 103,528,905 103,665,824 160,575,212 225,676,988 212,115,207 PBIT 925,404 46,255,168 16,199,521 71,439,120 50,515,860 (4,000,933) PBIT/SALES 1.74% 44.68% 15.63% 44.49% 22.38% - 1.89% SALES INCREASE IN % TAKING FY 2005 - 06 AS THE BASE) BASE YEAR 195% 100% 155% 141% 94% PBIT (INCREASE IN % TAKING FY 2005 - 06 AS THE BASE) BASE YEAR 4998% 35% 441% 71% - 8% 10. 1 ON THE BASIS OF ABOVE, IT WAS STATED THAT INCREASE IN PBIT IS 441% FOR FY 2008 - 09 WHEREAS THE INCREASE IN SALES IS 155%, WHICH INDICATES THAT THERE IS A DISPROPORTIONATE INCREASE IN THE PROFIT OF THE COMPANY, HENCE THE SAME OUGHT TO BE REJECTED.: 10. 2 THE LD. AR ALSO DRAW ATTENTION TO ANNUAL REPORT OF BODHTREE FOR SUBSEQUENT YEAR WHERE IT HAS CATEGORICALLY MENTIONED THAT MARGIN OF THE COMPANY HAS FALLEN DOWN DUE TO TERMINATION OF A CONTRACT WITH A CUSTOMER. BASED ON THE ABOVE THE LD. AR SUBMITTED IT CAN BE REASONABLY CONCLUDE D THAT THE OPERATING MARGINS OF FY 2008 - 09 WERE SIGNIFICANTLY INFLUENCED BY THE ABOVE MENTIONED CONTRACT , IN PAGE 8 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) ABSENCE OF WHICH THE NORMALIZED OPERATING MARGIN FOR F . Y . 2009 - 10 AND F.Y. 10 - 11 WERE CONSIDERABLY LOWER. IN THIS REGARD, RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF PTC SOFTWARE INDIA PVT. LTD. VS. DCIT DATED 31.10.2014 AND Q . LOGIC INDIA PVT. LTD. VS. DCIT DATED 21.10.2014 IN ITA NO. 27/PN/2014 WH E REIN THE SAID COMPANY WAS EXCLUDED AS COMPARABLE ON ACCOUNT OF FLUCTUATING MARGIN. APART FROM THE ABOVE, R EFERENCE WAS A L SO MADE TO ANOTHER DECISION IN THE CASE OF MINDTEC K IN ITA NO. 17/BANGALORE/2014 DATED 21.10.2014 WHEREIN ITAT HAS EXCLUDED BODHTREE CONSULTING LTD. FROM THE LIST OF FINAL COMPARABLES ON ACCOUNT OF FLUCTUATION S IN MARGINS OVER THE YEARS. 10 . 3 THE LD AR ALSO RELIED ON THE DECISION OF THE ITAT BANGALORE BENCH IN M/S. SOFTTEK INDIA PRIVATE LIMITED VS. ITO, ITA NO.222/BANG/2014 FOR THE ASSESSMENT YEAR 2009 - 10, WHEREIN THE TRIBUNAL EXCLUDED BODHTREE CONSULTING LTD. AS A COMPARABLE SINCE IT IS FUNCTIONALL Y DIFFERENT AND ENGAGED IN DEVELOPING SOFTWARE PRODUCTS AND SEGMENTAL DATA IS AVAILABLE IN PUBLIC DOMAIN. 10. 4 THE LEARNED DR SUPPORTED THE ORDER OF DRP AND THE TPO. 10. 5 HAVING CONSIDERED RIVAL SUBMISSIONS, WE FIND THAT THE ISSUE REGARDING THE EXCLUSION OF THE INSTANT COMPARABLE STANDS EXAMINED BY A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S. SOFTEK INDIA PVT. LTD. VS. ITO , ITA NO. 222/BANG/2014 FOR ASSESSMENT YEAR 2009 - 10 WHEREIN IN AN ORDER DATED 31.10.2014 IT WAS HELD AS UNDER: 4.3 HAVING RE GARD TO THE CONTENTIONS OF THE RIVAL PARTIES AND ALSO THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE IS ONLY A SOFTWARE SERVICES COMPANY WHEREAS M/S. BODHTREE CONSULTING LTD. IS ALSO INTO THE BUSINESS OF SOFTWARE PRODUCT DEVELOPMENT AND SEGMENTED DATA I S NOT AVAILABLE IN THE PUBLIC DOMAIN . THEREFORE, WE ARE SATISFIED THAT IT IS FUNCTIONALLY DIFFERENT AND CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE - COMPANY. AS REGARDS REVENUE RECOGNITION MODEL OF THE ASSESSEE AND M/S. BODHTREE CONSULTING LTD., AR E CONCERNED, SINCE THE RELEVANT MATERIAL TO DETERMINE THE REVENUE MODEL OF THE ASSESSEE HEREIN IS NOT AVAILABLE ON RECORD, WE ARE NOT INCLINED TO GIVE ANY FINDING ON THIS ISSUE. THEREFORE, WE DIRECT THE AO TO EXCLUDE M/S. BODHTREE CONSULTING LTD., FROM THE LIST OF COMPARABLES AS IT IS FUNCTIONALLY DIFFERENT. 10. 6 ALSO ANOTHER COORDINATE BENCH IN THE CASE OF CISCO SYSTEMS (INDIA) (P) LTD. VS. DCIT 66 SOT 82 (BANG) HAS HELD AS UNDER: 26.1 BODHTREE CONSULTING LTD .: - AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES CHOSEN BY THE ASSESSEE, THIS PAGE 9 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) COMPANY WAS ALSO INCLUDED BY THE ASSESSEE. THE ASSESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSESSEE'S NOTICE TH AT THIS COMPANY IS NOT BEING CONSIDERED AS A COMPARABLE COMPANY IN THE CASE OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS (P.) LTD . V. ITO [2014] 41 TAXMANN.COM 250 (MUM - TRIB.) . IN THIS CASE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMBAI BENCH OF TH E TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P. LTD. V. DY. CIT IT APPEAL NO.4547/MUM/2012, DATED 13 - 11 - 2013. IN THE AFORESAID DECISIONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN THE BUSINESS OF SOFTWARE PRODUCTS AND W AS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST TECHNOLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS (P.) LTD . ( SUPRA ) IS IN REL ATION TO A.Y. 2008 - 09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08 - 09 AS FAR AS THIS COMPARABLE COMPANY IS CONCE RNED. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSULTING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS, THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COMPANY AS COMPARABLE, IN OUR OPINION , SHOULD NOT BE THE BASIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOWN THAT THE SAID COMPANY IS A SOFTWARE PRODUCT COMPANY AND NOT A SOFTWARE DEVELOPMENT SERVICES COMPANY. 10. 7 HAVING CONSIDERED THE ABOVE, WE HOLD THAT SINCE THE ASSESSEE COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES; WHEREAS M/S. BODHTREE CONSULTING LTD. WAS ENGAGED INTO SOFTWARE PRODUCT DEVELOPMENT, WE FIND FORCE IN THE ARGUMENT OF THE LD COUNSEL FOR THE ASSESSEE THAT M/S. BODHTREE CONSU LTING LTD. IS FUNCTIONALLY DIFFERENT FROM ASSESSEE COMPANY. 10. 8 ACCORDINGLY, WE DIRECT THE EXCLUSION OF M/S BODHTREE CONSULTING LTD. FROM THE FINAL LIST OF COMPARABLE S. INFOSYS LTD .: 11. BEFORE THE TPO THE ASSESSEE OBJECTED TO THE USE OF THIS COMPARABLE ON THE GROUND THAT THIS COMPARABLE IS HAVING HUGE PREMIUM BECAUSE OF ITS BRAND VALUE, WHICH IS NOT IN THE CASE WITH THE ASSESSEE AND TURNOVER OF THE COMPARABLE IS ALSO VERY HUGE AS COMPARED TO ASSESSEE. THE TPO REJECTED THE OBJECTION AND INCLUD ED INFOSYS AS A COMPARABLE. THE ASSESSEES APPEAL BEFORE THE DRP WAS DEALT BY DRP AT PAGE. 150 AS UNDER: PAGE 10 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) THE OBJECTION OF THE ASSESSEE WAS VERIFIED FROM THE ANNUAL REPORT AND IT IS OBSERVED THAT THE REVENUES FROM SOFTWARE PRODUCTS ARE ONLY RS.848 CRORES O UT OF ITS OPERATING REVENUES OF RS.20,297/ - CRORES IN THIS REGARD THE FOLLOWING PORTION OF THE ANNUAL REPORT OF THE COMPANY IS RELEVANT INCOME: (RS. IN CRORE) % SOFTWARE SERVICES 19416 95.8 PRODUCTS 848 4.2 TOTAL 20 264 100 THUS, THE REVENUE FROM SOFTWARE PRODUCTS CONSTITUTES ONLY 4.18% OF OPERATING REVENUES FOR THE ASSESSMENT YEAR 2008 - 09. SO, MORE THAN 95% OF ITS REVENUES ARE FROM SOFTWARE DEVELOPMENT SERVICES AND THUS QUALIFY THE TPOS FILTER OF MORE THAN 75% RE VENUES FROM SOFTWARE DEVELOPMENT SERVICES. TAXPAYER HAS ARGUED THAT THIS COMPARABLE HAS INCURRED SUBSTANTIAL R&D AND, THEREFORE FUNCTIONS ARE DIFFERENT FROM THOSE OF THE TAXPAYER. HOWEVER, IT IS SEEN THAT R&D EXPENSE IS ONLY RS.267 CRORES WHICH IS ONLY 1. 3% OF THE REVENUE. THIS CANNOT BE SAID TO BE SUBSTANTIAL BY ANY STANDARDS. THEREFORE, THIS OBJECTION OF THE TAXPAYER IS NOT ACCEPTABLE. 11. 1 THE LD COUNSEL REFERRED TO FOLLOWING DISTINGUISHING PARAMETERS TO SUBMIT THAT M/S. INFOSYS LTD. IS NOT COMPARABLE WITH THE APPELLANT: DIVERSIFIED BUSINESS V. CONTRACT SOFTWARE DEVELOPMENT TURNOVER OF RS.20,264 CRORES V. RS209.83 CRORES SIGNIFICANT INTANGIBLES OF RS.1,34,478 CRORES V. NIL ONSITE (49.3) AND OFFSHORE (50.7) V. ONLY SERVICES FROM INDIA SALES, ADVERTISEM ENT AND BRAND BUILDING EXPENSES OF RS.80 CRORES V. NIL. R&D EXPENDITURE OF RS.236 CRORES V. NIL. 11.2 HE HAS REFERRED TO FOLLOWING DECISION: A) AGINITY TECHNOLOGIES ITA NO. 3856/D/2010 B) CIT V. AGINITY TECHNOLOGIES 262 CT R 291 (DEL) C) ATRENTA (INDIA) PVT. LTD. D) TOLUNA INDIA PVT. LTD. VS. ACIT (FORMERLY GREENFIELD ONLINE (P) LTD. 166 TTJ 128 (DEL) E ) CORDYS R&D (INDIA) PVT. LTD. ITA N. 1092/HYD/2010 DATED 3.1.2014 WHEREIN THE ITAT EXCLUDED INFOSYS TECHNOLOGIES AS IT IS NOT FUNCTIONALLY DIFFERE NT BUT IS A GIANT COMPANY IN THE FIELD OF SOFTWARE DEVELOPMENT SERVICES HAVING CONSIDERABLE BRAND VALUE AND ASSUMED ALL RISKS RELATED TO BUSINESS. FURTHER, APPEAL OF REVENUE AGAINST THIS ORDER HAS PAGE 11 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) BEEN DISMISSED BY THE HONBLE ANDHRA PRADESH HIGH COURT VID E AN ORDER DATED 18.06.2014 IN ITA NO. 371/2014. 11. 3 ON THE OTHER HAND THE LD DR RELIED ON FINDINGS OF DRP. 11. 4 WE HAVE CONSIDERED RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON THE RECORD. IN THE CASE OF AGNITY TECHNOLOGIES, ITA NO.3856/DEL/2010, A COORDINATE BENCH HAS HELD AS UNDER: - IT IS ARGUED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., THE REASON BEING THAT THE LATTER IS GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHER PROFIT. ON THE OTHER HAND, THE ASSESSEE IS A CAPTIVE UNIT OF ITS PARENT COMPANY IN THE USA AND IT ASSUMES ONLY LIMITED CURRENCY RISK. HAVING CONSIDERED THESE POINTS, WE ARE OF THE VIEW THAT THE CASE OF AFORESAID INFOSYS AND THE ASSESSEE ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. OF THE TWO COMPANIES MENTIONED EARLIER IN THIS ORDER. THEREFORE, WE ARE OF THE VIEW THAT THIS CASE IS REQUIRED TO BE EXCLUDED 11. 5 THE AFORESAID ORDER WAS UPHELD BY THE HONBLE DELHI HIGH COURT AFTER TAKING NO TE OF THE CHART AS GIVEN BELOW: BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. ASSESSEE RISK PROFILE OPERATE AS FULL - FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100 PERCENT SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED - CON SULTING, APPLICATION DESIGN, DEVELOPMENT, RE - ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES TURNOVER 20,264 CRORES 209.83 CRORES OWNERSHIP BRANDED/PROPRIETA RY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT. ALSO THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) PAGE 12 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) ONSITE VS. OFFISHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E. SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20 PER CENT) REFER P. 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E. REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SALES PROMOTION AND BRAND BUILDING RS. 80 CRORES RS. NIL (AS THE 1 - PERCENT SE RVICES ARE PROVIDED TO AES) EXPENDITURE ON RESEARCH AND DEVELOPMENT RS. 236 CRORES RS. NIL OTHER 100 PER CENT OFFSHORE (FROM INDIA) 11. 6 ON THE BASIS OF THE ABOVE CHART, THE HONBLE HIGH COURT AFFIRMED THE CONCLUSION THAT A CAPTIVE UNIT OF A COMPARABLE COMPANY WHICH ASSUMED ONLY A LIMITED RISK CANNOT BE COMPARED WITH A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE WHO ASSUMES ALL TYPES OF RISKS LEADING TO HIGHER PROFITS. THE FACTS OF THE APPELLANT ARE AKIN AND THEREFORE, DO NOT WARRANT ANY DIFFERENT CONCLUSION. THE APPELLANT IS ALSO CAPTIVE SERVICE PROVIDER TO ITS AE AND AS SUCH, M/S. INFOSYS LTD. IS NOT A VALID COMPARABLE WIT H THE APPELLANT M/S THIRDWARE SOLUTIONS: 12. THE DRP REPELLED THE OBJE CTION OF THE ASSESSEE BY HOLDING AS UNDER: ON THE PERUSAL OF ANNUAL REPORT, ITS CLEAR THAT THIS ENTITY IS IN EXPORTS ARE SOFTWARE SERVICES EXPORTS. FURTHER, WHEN DETAILS OF PURCHASE ARE ANALYZED, IT IS SEEN THAT MAJORITY OF EXPENSES ARE IN THE FORM OF SOFTWARE SERVICES CHARGES AND SALARIES. THESE CLEARLY ESTABLISH THAT THE EXPORTS ARE SOFTWARE SERVICES EXPORTS PAGE 27 - 33 OF ANNUAL REPORT GIVES DETAILS UNIT WISE BREAKUP OF INCOME AND EXPENSES PERUSAL OF THE SAME ALSO CLEARLY ESTABLISHES THAT THE COMPANY IS PROVIDING SOFTWARE DEVELOPING SERVICES. SALE OF LICENSE IS ONLY RS. 2.32 CRORES WHICH IS ONLY 3% OF TOTAL SALES. FURTHER, STUDY OF UNDERLINED PORTIONS THE RELEVANT EXTRACTS OF THE A NNUAL REPORT GIVEN BELOW CLEARLY SHOWS THAT IS A SOFTWARE SERVICES COMPANY: AS PER PAGE 9 OF ANNUAL REPORT: THE COMPANYS EARNING ARE A SIGNIFICANT EXTENT EXPORT ORIENTED AND THE COMPANY CONSTANTLY REVIEWING AND AUGMENTING ITS EFFORTS TO INCREASE PAGE 13 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) EXPORT OF SOFTWARE SERVICES AND APPLICATIONS TO EXISTING AND NEW MARKETS AND FOR THIS PURPOSE HAS ALSO DRAWN LONG TERM STRATEGY TO STRENGTHEN ITS OVERSEAS MARKETING INFRASTRUCTURE. AS PER PAGE 10 OF ANNUAL REPORT TECHNOLOGY ABSORPTION ADAPTION AND INNOVATION: YOUR COMPANY WILL FOCUS ON LATEST DEVELOPMENT TECHNOLOGY IN SOFTWARE SERVICES IN WHICH IT IS CARRYING ON BUSINESS. AS PER PAGE 41 OF ANNUAL REPORT QUANTITIES DETAILS THE COMPANY IS ENGAGED IT IMPLEMENTATION AND CONSULTANT SERVICES OF SOFTWARE BASED ON ERP AND BUSINESS INTELLIGENCE. THE IMPLEMENTATION ON CONSULTING SERVICES DEVELOPED AND TRADED SOFTWARE CANNOT BE EXPRESSED IN AT GENERIC UNIT. HENCE IT IS POSSIBLE TO GIVE QUANTITIVE DETAILS OF SALES AND INFORMATION AS REQUIRED AND PARAGRAPHS 3, 4C, 4D OF PA RT OF SCHEDULE VI OF COMPANIES ACT 1956 AS PER PAGE 54 OF ANNUAL REPORT 23) SEGMENT REPORTING THE COMPANYS OPERATION COMPRISES OF SOFTWARE DEVELOPMENT IMPLEMENTION AND SUPPORT SERVICES. SOFTWARE DEVELOPMENT, IMPLEMENTATION AND SUPPORT SERVICES ARE VARI OUS SUB - SEGMENTS OF SUPPORT SERVICES ARE VARIOUS SUB - SEGMENTS OF SOFTWARE DEVELOPMENT SERVICES ONLY AND REQUIRE EMPLOYMENT OF SOFTWARE ENGINEERS. HENCE, THIS COMPANY IS VALID COMPARABLE. 12.1 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT T HIRD WARE SOL UTIONS L TD. IS FUNCTIONALLY DIFFERENT ; DEALS IN PRODUCT/LICENSE SALE AND SIGNIF ICANT RELATED PARTY TRANSACTIONS. IT WAS SUBMITTED THAT O UT OF TOTAL SALES OF RS. 77 CRORES, APPROX. RS. 4 CRORES IN ON ACCOUNT OF SALE OF LICENSES AND SUBSCRIP TION. FURTHER, THERE IS NO SEGMENTAL INFORMATION REGARDING WHAT IS THE BIFURCATION OF SALES OF RS. 47 CRORES AND RS. 16 CRORES FROM THE SE Z AND STPI UNITS RESPECTIVELY. IT WAS SUBMITTED THAT IN THE ABSENCE OF SUCH DETAILS, THIRDWARE CANNOT BE TAKEN AS CO MPARABLE. RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF CARLYL INDIA ADVISORS VS. DCIT ITA NO. 717/MUM/2011 DATED 4.4.2012 (P AGE S 940 - 949 OF P APER B OOK VOL 3 ) WHEREIN IT WAS HELD THAT IF RELIABLE SEGMENTAL DATA IS NOT AVAILABLE A COMPANY CANNOT TAKEN AS COMPARABLE. 12. 2 IT WAS ALSO SUBMITTED THAT DURING THE YEAR , THIRDWARE SET UP A SUBSIDIARY IN CHINA, WHICH IS AN UNUSUAL EVENT, (PAGE 106 OF APPEAL DOCUMENTS) AND AS SUCH IT SHOULD BE EXCLUDED FROM COMPARABLES. RELIANCE WAS PLACED ON THE DECISION IN T HE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. VS. DCIT 57 SOT 14 PAGE 14 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) (HYD) (PAGES 891 - 916 OF PAPER BOOK VOL 3 AT PAGE 907) W HEREIN IT IS HELD THAT EXTRAORDINARY EVENTS WILL HAVE IMPACT ON PROFITABILITY. 12. 3 IT WAS FURTHER STATED THAT EVEN OTHERW ISE, ITS RELATED PARTY TRANSACTIONS EXCEEDED 15% OF REVENUES, WHICH MAKES IT AN UNVIABLE COMPARABLE. REFER ENCE WAS DRAWN ON THE FOLLOWING DECISIONS WHEREIN RPT FILTER OF 15% HAS BEEN APPROVED: A) BENETTON INDIA (P) LTD. VS. ITO 144 TTJ 229 (DEL) (PAGES 458 & 474 (TAB 1 OF VOL. 4) B) ITA VS. CRM SERVICES : ITA NO. 4068/DEL/2009 (PARA 12 (TAB2 OF VOL.) C) DELMIA SOLUTIONS (P) LTD. VS. DCIT ITA NO. 845/BANG/2011 (PARA 3.5.2 (TAB 3 OF VOL 4) D) LG SOFT INDIA PVT. LTD. VS. DCIT: ITA ON. 1121/BANG/2011 (PARA 3.8.2 (TAB 4 OF VOL. 4) 12. 4 HAVING CONSIDERED THE RIVAL SUBMISSION W E FIND THAT ASSESSEE IS NOT HAVING ANY LICENSE SALE OF ITS PRODUCTS AND, THE ANNUAL REPORT OF THE THIRDWARE DOES NOT REVEAL THE BIFURCATION OF SALE OF RS. 47 CRORES AND RS. 16 CORES FROM SEZ OF STPI UNITS. INFACT, A C OORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF CONEXANT SYSTEMS (P) LTD. ITA NO. 1160/HYD/2011 (HYD) DATED 25.7.2014 EXCLUDED THE SAID COMPARABLE BY OBSERVING AS UNDER: THE OTHER COMPANIES WHICH ARE OBJECTED TO BY THE ASSES SEE ARE FLEXTRONICS SOFTWARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SOLUTION LIMITED. AS FAR AS THESE THREE COMPANIES ARE CONCERNED, THE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THEY ARE INTO BOTH SOFTWARE AS WELL AS PRO DUCT DEVELOPMENT. HE SUBMITTED THAT THE TPO HAS TAKEN NOTE OF THE FACT THESE COMPANIES ARE ALSO INTO PRODUCT DEVELOPMENT BUT HAS SELECTED THESE COMPANIES AS COMPARABLES BY APPLYING THE FILTER OF MORE THAN 70% OF ITS REVENUE BEING FROM SOFTWARE DEVELOPMENT SERVICES. THE LEARNED COUNSEL SUBMITTED THAT THE FUNCTIONS OF THESE COMPANIES ARE DIFFERENT FROM THE ASSESSEE WHO WAS INTO SOLE ACTIVITY OF SOFTWARE DEVELOPMENT FOR ITS ASSOCIATED ENTERPRISE. HE SUBMITTED THAT THE TPO HAS ALLOCATED THE EXPENDITURE IN THE P ROPORTION OF THE REVENUE OF THESE COMPANIES FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS AND HAS ADOPTED THE FIGURE AS SEGMENTAL MARGIN OF THE COMPANY AND HAS TAKEN THESE COMPANIES AS COMPARABLES. HE SUBMITTED THAT BY TAKING THE PROPORTIONATE EXPENDITURE, THE CORRECT FINANCIAL RESULTS WOULD NOT EMERGE. HE SUBMITTED THAT NOTHING PREVENTED THE ASSESSING OFFICER/TPO FROM OBTAINING THE SEGMENTAL DETAILS FROM THE RESPECTIVE COMPARABLE PAGE 15 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) COMPANIES BEFORE ADOPTING THEM AS COMPARABLE COMPANIES AND BEFORE TAKING THE O PERATING MARGIN FOR ARRIVING AT THE ARMS LENGTH PRICE. HE SUBMITTED THAT WHEREVER THE SEGMENTAL DETAILS ARE NOT AVAILABLE, THEN THE SAID COMPANIES SHOULD NOT BE TAKEN AS COMPARABLES. FOR THIS PURPOSE, HE PLACED RELIANCE UPON THE DECISION OF THE BANGALORE T RIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. VS. THE DCIT IN ITA.NO.1252/BANG/2010 WHEREIN THESE COMPANIES WERE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES B ELOW. HAVING HEARD BOTH THE PARTIES AND HAVING GONE THROUGH THE MATERIAL ON RECORD, WE FIND THAT THE TPO AT PAGE 37 OF HIS ORDER HAS BROUGHT OUT THE DIFFERENCES BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICES PROVIDER. THUS, IT IS CLEAR THAT HE IS AWARE OF THE FUNCTIONAL DISSIMILARITY BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICE PROVIDER. HAVING TAKEN NOTE OF THE DIFFERENCE BETWEEN THE TWO FUNCTIONS, THE ASSESSING OFFICER OUGHT NOT TO HAVE TAKEN THE COMPANIES WHICH ARE INTO BO TH THE PRODUCT DEVELOPMENT AS WELL AS SOFTWARE DEVELOPMENT SERVICE PROVIDER AS COMPARABLES UNLESS THE SEGMENTAL DETAILS ARE AVAILABLE. EVEN IF HE HAS ADOPTED THE FILTER OF MORE THAN 75% OF THE REVENUE FROM THE SOFTWARE SERVICES FOR SELECTING A COMPARABLE C OMPANY, HE OUGHT TO HAVE TAKEN THE SEGMENTAL RESULTS OF THE SOFTWARE SERVICES ONLY. THE PERCENTAGE OF EXPENDITURE TOWARDS THE DEVELOPMENT OF SOFTWARE PRODUCTS MAY DIFFER FROM COMPANY TO COMPANY AND ALSO IT MAY NOT BE PROPORTIONATE TO THE SALES FROM THE SAL E OF SOFTWARE PRODUCTS. UNDER SECTION 133(6) OF THE I.T. ACT, THE TPO HAS THE POWER TO CALL FOR THE NECESSARY DETAILS FROM THE COMPARABLE COMPANIES. IT IS SEEN THAT THE ASSESSING OFFICER/TPO HAS EXERCISED THIS POWER TO CALL FOR DETAILS WITH REGARD TO THE V ARIOUS COMPANIES. 12. 5 THEREFORE WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. SONATA SOFTWARE: 13. THE ASSESSEES OBJECTION TO INCLUDE THIS COMPANY WAS DEALT BY THE TPO AS UNDER: - ASSESSEE OBJECTED ON THE USE OF THIS COMPARABLE ON THE GROUND THAT THIS COMPARABLE FAILS RPT FILTER SINCE IT IS HAVING RPT/SALE OF>10% AND CALCULATED THE RPT OF 16.20. IT HAS ALSO REFERRED TO INVESTMENT IN SETTING UP A COMPANY IN DUBAI WHICH HAS BEEN TAKEN AS AN EXTRAORDINARY EVENT. TPOS R EMARKS: THE RPT FILTER HAS BEEN DISCUSSED IN THE PRECEDING PARAS. AS FAR INVESTMENT IN THE COMPANY IN DUBAI IS CONCERNED, THE ASSESSEE HAS NOT DEMONSTRATED HOW THIS EVEN HAS AFFECTED THE PROFITABILITY OF THE COMPANY. HENCE THE OBJECTION IS REJECTED. 13 . 1 THE ASSESSEES CHALLENGE BEFORE THE DRP WAS DEALT AS UNDER THE DRP : PAGE 16 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) THE ANNUAL REPORT IS VERIFIED AND IT IS OBSERVED THAT AS PER P&L OF ANNUAL REPORT: INCOME SERVICE 2,43,57,68,787/ - OTHER INCOME 1,05,30,957 IT CAN BE SEEN FROM THE ABOVE, MAIN INCOME IS FROM SOFTWARE DEVELOPMENT. THEREFORE THE COMPANY IS INCLUDIBLE SO FAR AS ITS FUNCTIONALITY IS CONCERNED HOWEVER, AS PER ANNUAL REPORT OF THE COMPANY RPT OF THIS COMPANY IS 14.65% AND IS WITHIN THE OVERALL LIMIT OF 25%. AS PER THE TAXPAYERS ARGUMENT O F TAKING THE RECEIVABLE INTO THE CALCULATION OF RPT, IT IS SEEN THAT IT IS BALANCE SHEET ITEM. THE SONATA SOFTWARE LIMITED HAS 4 RELATED PARTIES IT IS SEEN THAT THE SERVICE CHARGE CREDITED IN THE P&L ACCOUNT OF SONATA SOFTWARE LTD. IS RS. 243.57 CRORES. THE ONLY RELATED PARTY WITH WHICH THIS COMPARABLE IS HAVING TRANSACTION IN SERVICES IS SONATA INFORMATION TECHNOLOGY LIMITED (SITL) AMOUNTING TO RS. 16.11 CRORES WHICH IS AROUND 6.61% OF THE TOTAL SERVICE INCOME. SIMILARLY, THE OTHER DEBIT ITEMS OF THE PR OFIT AND LOSS ACCOUNT LIKE DEPUTATION EXPENSES, TRAVELLING EXPENSES, OTHER EXPENSES AND REIMBURSEMENT OF EXPENSES HAVE BEEN CONSIDERED AS THE PART OF RPT. THE OTHER ITEMS LIKE INTEREST, THOUGH A P&L ACCOUNT ITEM HAS NOT BEEN CONSIDERED AS THIS IS NON OPER ATIONAL. ON THE CONTRARY BALANCE SHEET ITEMS LIKE ASSETS, LOANS, DEPOSITS WHETHER RECEIVABLES OR PAYABLES HAVE BEEN EXCLUDED FROM THE CALCULATION OF RPT. THIS APPROACH OF THE TPO WAS WELL JUSTIFIED IN VIEW OF THE ACCOUNTING NORMS. THEREFORE, THE TAXPAYE RS CONTENTION TO EXCLUDE SONATA SOFTWARE LTD. IS REJECTED. 13. 2 THE LD. COUNSEL SUBMITTED THAT M/S SONATA SOFTWARE MAJORLY DEALS INTO PRODUCT, SALE, OFFSHORE DEVELOPMENT SERVICES AND SIGNIFICANT RELATED PARTY TRANSACTIONS. THE COMPANY IS ALSO ENGAGED IN RESEARCH AND DEVELOPMENT. IT WAS SUBMITTED AS UNDER: AS PER SEGMENTAL RESULTS OF SONATA SOFTWARE, THE COMPANY DEALS IN SO FTWARE PRODUCTS (TAB 6 OF VOL 4) EXTRAORDINARY EVENTS: DURING THE RELEVANT PREVIOUS YEAR, IT IS ALSO SET UP A NEW SUBSIDIARY IN DUBAI WHICH ACQUIRED MAJOR BUSINESS IN DUBAI (TAB 6 OF VOL 4) REFER CAPITAL IQ VS. DCIT: CAPITAL IQ VS. DCIT WHEREIN IT IS HELD THAT EXTRAORDINARY EVENTS WILL HAVE IMPACT ON PROFITABILITY. FAILURE OF RPT FILTER: EVEN OTHERWISE, IT CAN BE SEEN THAT ITS RELATED PARTY TRANSACTION EXCEEDS 25% OF THE REVENUES, WHICH MAKES IT AN UNVIABLE COMPARABLE. IT IS SEEN FROM THE ANNUAL REPORT THA T THE RPT TO SALES RATIO IS MORE THAN 40% DURING THE RELEVANT PREVIOUS YEAR. THEREFORE, IT FAILS THE 25% FILTER APPLIED BY THE TPO . 13. 3 HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND THAT IN THE INSTANT CASE, AGGREGATE RELATED PARTY TRANSACTIONS ARE ROUGHLY AROUND 95 CRORES WHICH IS APPROXIMATELY ABOUT 40% OF THE TOTAL SERV ICE INCOME OF RS. 243.57 CRORES. PAGE 17 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) AS SUCH, THE SAID COMPARABLE IS NOT A VALID COMPARABLE AND HENCE IS DIRECTED TO BE EXCLUDED AS IT FAILS THE RTP FILTER O F 25% APPLIED BY THE TPO. MINDTREE 14. BUT WE FIND THAT THE ASSESEE HAS NOT RAISED OBJECTIONS BEFORE THE TPO OR THE DRP IN INCLUDING TH IS COMPARABLE COMPANY. SINCE, THE SPECIAL BENCH DECISION IN QUARK SYSTEM, THE ASSESSE IS ALLOWED TO RAISE THIS ISSUE FOR THE FIRST TIME BEFORE US THOUGH STOUTLY OPPOSED BY LD DR. SO , BEFORE US THE LEARNED COUNSEL SUBMITTED AS UNDER: EXTRAORDINARY EVENTS: ACQUISITION AND AMALGAMATION DURING THE YEAR REFER ANNUAL REPORT FOR FY 2008 - 09 (TAB 5 OF VOL. 4). REFER CAPITAL IQ V. DCIT: (PG 891 - 916 OF PAPER - BOOK VOL.3 @ PG. 907) WHEREIN IT IS HELD THAT EXTRAORDINARY EVENTS WILL HAVE IMPACT ON PROFITABILITY. TOLUNA INDIA PVT. LTD. (FORMERLY GREENFIELD ONLINE PVT. LTD.) [TS - 247 - ITAT - 2014(DEL) - TP] - PARA 27.1, PG 32 14. 1 HAVING CO NSIDERED THE RIVAL SUBMISSIONS, W E FIND THAT ANNUAL REPORT OF M/S MINDTREE PROVIDES AS UNDER: 3 ACQUISITION AND AMALGAMATIONS OF TES PV ELECTRONICS SOLUTIONS PRIVATE LIMITED. ON DECEMBER 17, 2007, THE COMPANY ACQUIRED 100% EQUITY IN TES PV ELECTRONIC SOLUTIONS PRIVATE LIMITED (TES PV), A COMPANY THAT DELIVERED A RANGE OF SERVICES THAT INCLUDED HARDWARE PRODUCT DESIGN CYCLE, SYSTEM DESIGN CYCLE (BOARD DESIGN DEVELOPMENT), EMBEDDED SOFTWARE SERVICES, TURNKEY SILICON DESIGN, COVERAGE, IP - RED, EDA SOLUT IONS, EMBEDDED SYSTEM SOLUTIONS, SYSTEM/BOARD DESIGN AND INTELLECTUAL PROPERTIES. TES PV WAS SUBSEQUENTLY RENAMED AS MNDTREE TECHNOLOGIES PRIVATE LIMITED (MTPL). THE TOTAL CONSIDERATION OF RS. 25,99,25,675 (INCLUDING DIRECT TRANSACTIONS COSTS OF RS. 17, 62,093/ - ) WERE ALLOCATED TO NET ASSETS OF RS. 3,66,89,086 RESULTING IN GOODWILL OF RS. 22,32,36,589 14. 2 IT IS EVIDENT FROM THE ANNUAL REPORT THAT S UBSEQUENT TO THE ACQUISITION THE COMPANY VIDE A SCHEME OF AMALGAMATION (THE SCHEME) APPROVED BY THE SHA REHOLDERS OF THE COMPANY IN JUNE 2008 PROPOSED TO MERGE MTPL WITH ITSELF. APPROVAL OF HONBLE HIGH COURT OF KARNATAKA WAS RECEIVED IN JANUARY 2009 AND THE SCHEME BECAME EFFECTIVE APRIL 1, 2008. IN TERMS OF THE SCHEME, MTPL WAS AMALGAMATED WITH THE COMPAN Y WITH EFFECT FROM APRIL 1, 2008. THE COMPANY HAS ACCOUNTED FOR THE AMALGAMATION AS AMALGAMATION IN THE NATURE OF PURCHASE UNDER AS 4 ACCOUNTING FOR AMALGAMATIONS. THE F OLLOWING ARE THE SALIENT FEATURES OF THE SCHEME: PAGE 1 8 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) A) 6,000 EQUITY SHARES OF RS. 100/ - EACH HELD BY THE COMPANY IN MINDTREE TECHNOLOGIES PRIVATE LIMITED WERE CANCELLED AND EXTINGUISHED FROM THE EFFECTIVE DATE OF THE SCHEME. B) ALL THE ASSETS AND LIABILITIES OF MINDTREE TECHNOLOGIES PRIVATE LIMITED ARE RECORDED IN THE BOOKS OF THE COMPANY AT THEIR CARRYING AMOUNTS AS ON APRIL 1, 2008. C) PURSUANT TO THE SCHEME OF AMALGAMATION APPROVED BY THE HONBLE HIGH COURT OF KARNATAKA, THE GOODWILL OF RS. 22,32,36,589/ - RESULTING FROM THE AMALGAMATION WAS SET OFF AGAINST THE SECURITIES PREMIUM ACCOUNT OF THE COMPANY. IF THE TREATMENT SPECIFIED BY AS - 14 HAD BEEN FOLLOWED, THE GOODWILL BALANCE OF RS. 22,32,36,589 WOULD HAVE BEEN AMORTIZED AS PER THE COMPANYS ACCOUNTING POLICY. 14. 3 IN VIEW OF THE AFORESAID FACT , WE DIRECT IN THE INTEREST OF JUSTICE THAT THIS FACT MAY BE TAKEN INTO ACCOUNT TO ADJUDICATE WHETHER THIS EVEN T OF AMALGAMATION WILL EFFECT IN TREATING THIS COMPANY AS A COMPARABLE TO THE ASSESSEE COMPANY. THE PRECEDENTS RELIED UPON ON BY THE LEARNED COUNSEL FOR THE ASSESSEE MAY BE TAKEN INTO ACC OUNT BEFORE THE TPO DECIDES WHETHER TO INCLUDE THE COMPANY AS COMPARABLE OR NOT. KALS INFORMATION SYSTEM 1 5 . THE DRP REPELLED THE OBJECTION OF THE ASSESSEE AS UNDER: ANNUAL REPORT OF THIS COMPANY IS VERIFIED, IT IS SEEN THAT SCHEDULE 12 OF AR SHOWS THAT MAIN INCOME IS FROM SOFTWARE DEVELOPMENT SERVICES SALES, SERVICES & TRAINING INCOME FROM SOFTWARE DEVELOPMENT EXPORT 20533880 TRANSLATION AND INTERPRETATION 166123 TRAINING RECEIPT 704683 IT CAN BE SEEN FROM THE ABOVE, MAIN INCOME IS FROM SOFTWARE DEVELOPMENT SERVICES AND THE SEGMENTAL DATA FOR THE SAME IS AVAILABLE IN THE ANNUAL REPORT. HENCE, THE MARGIN COMPUTATION SHOULD BE BASED ON THE SEGMENTAL DATA RATHER THAN STANDALONE FINANCIALS. THEREFORE, OBJECTION OF THE TAXPAYER IS NOT ACCEPTABLE. 1 5 . 1 BEFORE US THE LEARNED COUNSEL SUBMITTED AS UNDER: FUNCTIONALLY DIFFERENT: ENGAGED IN SALE OF SERVICES AND PRODUCTS. EXPORT OF RS.2.05 CRORES INCLUDED BOTH SERVICE AND SALE INCOME WITHOUT ANY BIFURCATION. REFER THE FOLLOWING CASES WHEREIN KALS BEEN EXC LUDED FROM THE LIST OF COMPARABLES. CINCOM SYSTEMS INDIA PVT. LTD. V. ACIT: (PG.698 - 715 OF PAPER - BOOK VOL.3 @ PG.704 - 705 & 713) PAGE 19 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) WITNESS SYSTEMS SOFTWARE V. DCIT: (PG.716 - 734 OF PAPER - BOOK VOL.3 @ PG.729 - 730) TRILOGY E - BUSINESS SOFTWARE V. DCIT: (PG.735 - 795 OF PAPER - BOOK VOL.3 @ PG.767 - 768) PTC SOFTWARE (INDIA) PVT. LTD. V. DCIT I.T.A. NO.336/PN/2014 DATED 31.10.2014 TOLUNA INDIA PVT. LTD. (FORMERLY GREENFIELD ONLINE PVT. LTD.) (TS - 247 - ITAT - 2014(DEL) - TP] - PARA 27.1, PG 32 PLANET ONLINE PVT. LTD. V. ACIT: ITA NOS. 464 AND 608/HYD/2014 DATED 30.01.2015 ITO V. PRANA STUDIOS PVT. LTD.: ITA NO. 2077/MUM/2014 DATED 16.01.2015 KALS WAS EXCLUDED ON THE GROUND THAT IT IS PURELY INTO SOFTWARE DEVELOPMENT PRODUCTS. 1 5 . 2 WE HAVE CONSIDERED THE RIVAL SUBMISSION AND PER U SED THE MATERIAL ON RECORD. T HE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TRILOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. VS. DCIT 23 ITR (TRIB) 464 HAS HELD AS UNDER: D) KALS INFORMATION SYSTEMS LTD. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINI NG. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPORT , THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN TH IS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006 - 07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFER ENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIO NALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185 - 186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185 - 186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ET C. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSE SSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJECTED AS A COMPARABLE. PAGE 20 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFOR E ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. 15. 3 FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, WE HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE . 1 6 THE NEXT ISSUE RELATES TO TREATMENT O F FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS OPERATING ITEM. DURING THE COURSE OF HEARING, THE LEARNED COUNSEL SUBMITTED THAT THE FOREIGN EXCHANGE LOSS CANNOT BE ACCEPTED FOR THE PURPOSE OF CALCULATION OF THE MARGIN AND IN SUPPORT, HE RELIED UPON THE FOLLOW ING DECISIONS: A) SAP LABS INDIA PVT. LTD. V. ACIT (2010) 6 ITR (TRIB) 81 DATED 30.08.2010 WHEREIN ITAT HELD THAT FOREIGN EXCHANGE FLUCTUATIONS ARE AN INTEGRAL PART OF THE SALE PROCEEDS OF THE ASSESSEE CARRYING ON EXPORT BUSINESS AND THUS COULD NOT BE EXCL UDED FROM THE COMPUTATION OF THE OPERATING MARGIN OF THE ASSESSEE. B) FOUR SOFT V. DCIT (2012) 16 ITR (TRIB) 73 (HYD): C) CAPITAL IQ INFORMATION SYSTEMS (I) P. LTD. V. DCIT 25 ITR (TRIB) 185 (HYD) DATED 23.11.2012: RELIED ON SAP LABS DECISION, THAT FOREI GN EXCHANGE FLUCTUATIONS ARE AN INTEGRAL PART OF THE SALE PROCEEDS OF THE ASSESSEE CARRYING ON EXPORT BUSINESS.. FURTHER, THIS ORDER OF CAPITAL IQ HAS BEEN AFFIRMED BY THE HONBLE ANDHRA PRADESH HIGH COURT VIDE AN ORDER DATED 05.06.2014 IN ITA NO. 305/2014 WHEREIN THE HIGH COURT DECLINED TO INTERFERE WITH THE ORDER OF THE ITAT ON AN APPEAL FILED BY THE REVENUE. D) RUSABH DIAMONDS V. ACIT: (2013) 155 TTJ (MUM) 386: ITAT HELD THAT FORWARD CONTRACTS FOR HEDGING OF FOREIGN CURRENCY EXPOSURE ON EXPORT AND IMPOR T OF DIAMONDS WITH AES HAD NEXUS WITH EXPORT AND IMPORT ACTIVITY PAGE 21 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) E) CURAM SOFTWARE INTERNATIONAL (P) LTD. V. ITO: [2014] 149 ITD 458 F) CISCO SYSTEMS (INDIA) PVT. LTD. V. DCIT (TS - 246 - ITAT - 2014(BANG) - TP] 1 7 HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND THAT THE ISSUE IS NO LONGER RES - INTEGRA AND STANDS CONCLUDED BY THE DECISION OF THE COORDINATE BENCH IN THE CASE OF WESTFALIA SEPARATOR INDIA PVT. LTD. VS. ACIT ITA NO. 4446/D/02 FOR ASSESSMENT YEAR 2003 - 04 WHEREIN IT HAS BEEN HELD AS UNDER: WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE FOREX GAIN OR LOSS IS THE DIFFERENCE BETWEEN THE PRICE AT WHICH AN IMPORT OR EXPORT TRANSACTION WAS RECORDED IN THE BOOKS OF ACCOUNT ON THE BASIS OF RATE OF FOREIGN EXCHANGE THEN PREVAILING AND THE AMOUNT ACTUALLY PAID OR RECEIVED AT THE RATE OF FOREIGN EXCHANGE PREVAILING AT THE TIME OF ACTUAL PAYMENT OR RECEIPT. SINCE SUCH FOREX LOSS OR GAIN IS A DIRECT OUTCOME OF THE PURCHASE OR SALE TRANSACTION, IT PARTAKES OF THE SAME CHARACTE R AS THAT OF THE TRANSACTION TO WHICH IT RELATES. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. PRAKASH I. SHAH (2008) 115 ITD 167 (MUM) (SB) HAS HELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN IS A PART OF EXPORT TURNOVER. THOUGH SUCH DECISION WAS RENDERED IN THE CONTEXT OF SECTION 80HHC, BUT THE SAME LOGIC APPLIES GENERALLY AS WELL. THE ESSENCE OF THE MATTER IS THAT ANY GAIN OR LOSS ARISING OUT OF CHANGE IN FOREIGN CURRENCY RATE IN RESPECT OF TRANSACTION FOR IMPORT OR EXPORT OF GOODS IS NOTHING, B UT INHERENT PART OF THE PRICE OF IMPORT OR THE VALUE OF EXPORT. THE HON'BLE SUPREME COURT IN SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 1 (SC) HAS HELD THAT : 'WHERE PROFIT OR LOSS ARISES TO AN ASSSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION ITA NOS.444 6 & 4447/DEL/2007 IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR A S PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS'. WHEN WE READ THE RATIO OF THE CASE OF SUTLEJ COTTON (SC)(SUPRA) IN JUXTAPOSITION TO THAT OF THE SPECIAL BENCH IN CASE OF PRAKASH I SHAH (SUPRA), THERE REMAINS NO DOUBT THAT FOREX GAIN OR LOSS FROM A TRADING TRANSACTION IS NOT ONLY AN ITEM OF REVENUE NATURE, BUT IS, IN FACT, A PART OF THE PRICE OF IMPORT OR VALUE OF EXPORT TRANSACTION, AS THE CASE MAY BE. OPERATING EXPENSE IS ORDINARILY AN EXPENSE THAT A BUSINESS INCURS AS A RESULT OF PERFORMING ITS NO RMAL BUSINESS OPERATIONS. AS THE BUSINESS OF 'ASSEMBLY' DONE BY THE ASSESSEE UNDER THIS SEGMENT IS NOT POSSIBLE WITHOUT PURCHASES AND FOREX GAIN IS IN RELATION TO SUCH PURCHASE TRANSACTIONS, WE HAVE NO HESITATION IN HOLDING THAT IT IS AN ITEM OF OPERATING COST. 1 8 IN LIGHT OF THE ABOVE, WE DIRECT THE AO/TPO TO TREAT THE FOREIGN EXCHANGE GAIN/LOSS AS AN OPERATING ITEM. AS SUCH, THE GROUND RAISED BY THE APPELLANT IS ALLOWED. 19 HAVING REGARD TO THE ABOVE, WE DIRECT THE ASSESSING OFFICER/TRANSFER PRICING OFFI CER TO COMPUTE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION PAGE 22 OF 22 ITA NO. 1822/DEL/2014 ( ASST. YEAR 2009 - 2010) ENTERED INTO BY THE ASSESSE E WITH ITS ASSOCIATED ENTERPRISE KEEPING IN VIEW THE OBSERVATIONS MADE BY US IN THE PRECEDING PARAGRAPHS. 20. IN THE RESULT APPEAL IS ALLOWED IN TERMS OF THE DIRECTION S ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 2 6 /0 6 - 2015. - SD / - - SD / - (S. V. MEHROTRA ) (A.T.VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 6 /06/2015 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANTREGISTRAR ITAT, NEW DELHI