M/s.Microsemi Storage Solutions India Private Limited, Bangalore V. Assistant Commissioner of Income-tax, Bangalore

ITA 2103/BANG/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 3460 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 07-08-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 02-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUNIL KUMAR SINGH BENGALURU
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI A.K. GARODIA , ACCOUNTANT MEMBER I T (TP) A NO. 2103/BANG/2016 ASSESSMENT YEAR : 2012 - 13 MICROSEMI STORAGE SOLUTIONS INDIA PVT. LTD., (FORMERLY PMC SIERRA INDIA PVT. LTD.), 2 ND FLOOR, 5A BLOCK, PRITECH PARK SEZ, ORR, BELLANDUR, BANGALORE 560 103. PAN: AADCP 6802F VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 5(1)(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI T. S URYANARAYANA, ADVOCATE RE SPONDENT BY : SHRI SUNIL KUMAR SINGH, CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 07 .0 8 .201 8 DATE OF PRONOUNCEMENT : 24 .08.2018 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER IT(TP) A.NO.2103/BANG/2016 IS AN APPEAL BY THE AS SESSEE AGAINST THE ORDER DATED 29.9.2016 OF ASST. COMMISSIONER OF INCOME-TAX, CIRCLE- 5(1)(2), BANGALORE IN RESPECT OF AN ORDER PASSED U/ S 143(3) R.W.S 144C(13) OF THE INCOME TAX ACT, 1961 (THE ACT) RELATING TO ASSESSMENT YEAR 2012-13. IT(TP)A NO.2103/BANG/2016 PAGE 2 OF 14 2. THE ONLY ISSUE PRESSED FOR ADJUDICATION AND RAIS ED IN GROUND NO.5 IN THIS APPEAL BY THE ASSESSEE IS WITH REGARD TO DETER MINATION OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS OF R ENDERING OF SOFTWARE DEVELOPMENT SERVICES AND SALES SUPPORT SERVICES BY THE ASSESSEE TO ITS HOLDING COMPANY. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING CONTRACT SOFTWARE DEVELOPMENT SERVICES (S WD SERVICES) TO ITS ASSOCIATED ENTERPRISE (AE) PMCSIERRA ISRAEL LTD. AND SALES SUPPORT SERVICES TO ITS AE PMC-SIERRA INTERNATIONAL SDN. BHD., MALAYSIA. THE ABOVE TWO TRANSACTIONS WITH AES WERE INTERNATIONAL TRANSACTIONS. AS PER THE PROVISIONS OF SECTION 92 OF THE ACT, INCOME FRO M INTERNATIONAL TRANSACTION HAS TO BE COMPUTED HAVING REGARD TO ARM S LENGTH PRICE (ALP). 3. THE DETAILS OF THE INTERNATIONAL TRANSACTIONS BE TWEEN THE ASSESSEE AND ITS AE IN AY 2012-13 WERE AS FOLLOWS:- PARTICULARS AMOUNT IN RS. PROVISION OF SWD SERVICES 75,48,23,937/- PROVISION OF SALES SUPPORT SERVICES 1,98,78,885/- 4. SOFTWARE DEVELOPMENT SERVICES SEGMENT : IT IS NOT IN DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE THAT T HE TRANSACTION NET MARGIN METHOD (TNMM) WAS THE MOST APPROPRIATE METHO D (MAM) FOR DETERMINATION OF ALP AND THAT THE PROFIT LEVEL INDI CATOR (PLI) TO BE ADOPTED FOR COMPARISON OF THE ASSESSEES PROFIT WITH THAT O F COMPARABLE COMPANIES WAS OPERATING PROFIT/TOTAL COST (OP/TC). THE OP/TC OF THE ASSESSEE WAS 10.07%. THE ASSESSEE IN ITS TP STUDY SELECTED 14 C OMPARABLE COMPANIES WHOSE ARITHMETIC MEAN OF OP/TC WAS ARRIVED AT 13.08 %. SINCE THE PROFIT MARGIN OF THE ASSESSEE WAS WITHIN THE (+)/(-) MARGI N OF 5% ALLOWED BY THE PROVISO TO SEC. 92C(2) OF THE ACT, OF THE ARITHMETI C MEAN OF OP/TC OF THE IT(TP)A NO.2103/BANG/2016 PAGE 3 OF 14 14 COMPARABLES SELECTED BY THE ASSESSEE, IT WAS CLA IMED BY THE ASSESSEE THAT THE PRICE CHARGED BY IT IN THE INTERNATIONAL T RANSACTION WAS AT ARMS LENGTH. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE DETERMINATION OF ALP WAS REFERRED BY THE AO, ACCEPTED 1 OUT OF THE 1 4 COMPARABLE COMPANIES SUGGESTED IN THE TP STUDY BY THE ASSESSEE AS COMPARABLE WITH THE ASSESSEE. THE TPO ON HIS OWN SELECTED 9 OTHER COMPANIES AS COMPARABLE COMPANIES WITH THE ASSESSEE. THUS, A FI NAL SET OF 10 COMPARABLE COMPANIES WAS CHOSEN BY THE TPO AS COMPA RABLE COMPANIES. THE ARITHMETIC MEAN OF PROFIT MARGIN OF THESE COMPANIES AFTER AND BEFORE ADJUSTMENT TOWARDS WORKING CAPITAL ADJUS TMENT WAS AS FOLLOWS:- SL. NO. NAME OF THE COMPANY MARK-UP ON TOTAL COSTS (WCUNADJ) (IN %) MARK-UP ON TOTAL COSTS (WCADJ) (IN %) 1 DATAMATICS GLOBAL SERVICES LTD. 14.57 1 6.95 2 GENESYS INTERNATIONAL CORPN. LTD. 30.09 2 7.59 3 ICRA TECHNO ANALYTICS LTD. 17.24 18.12 4 INFOSYS LTD. 43.10 4 3.89 5 LARSEN & TOUBRO INFOTECH LTD. 25.47 2 7.63 6 MINDTREE LTD. 15.01 1 6.90 7 PERSISTENT SYSTEMS LTD. 27.20 29.02 8 RS SOFTWARE (INDIA) LTD . 15.34 19.72 9 SASKEN COMMUNICATION TECHNOLOGIES LTD. 12.15 1 5.29 10 SPRY RESOURCES INDIA PVT. LTD. 26.18 1 3.12 AVERAGE MARK-UP 22.63 22.82 5. BASED ON THE ABOVE AVERAGE ARITHMETIC MEAN OF PR OFIT MARGIN OF THE COMPARABLE COMPANIES, THE TPO COMPUTED THE ALP OF T HE INTERNATIONAL TRANSACTION OF RENDERING OF SWD SERVICES BY THE ASS ESSEE TO ITS HOLDING COMPANY AS FOLLOWS:- IT(TP)A NO.2103/BANG/2016 PAGE 4 OF 14 COMPUTATION OF ARMS LENGTH PRICE BY THE TPO AND AD JUSTMENT MADE: ARMS LENGTH MEAN MARK-UP 22.63% LESS: WORKING CAPITAL ADJUSTMENT -0.19% ADJUSTED MEAN MARK-UP OF THE COMPARABLES 22.82% OPERATING COST RS.68,57,70,299 ARMS LENGTH PRICE 122.82% OF OPERATING COST RS.84,22,60,181 PRICE RECEIVED RS.75,48,23,937 SHORTFALL BEING ADJUSTMENT U/S. 92CA RS.8,74,36,244 6. THE DIFFERENCE BETWEEN THE PRICE CHARGED BY THE ASSESSEE AND THE ALP DETERMINED BY THE TPO VIZ., RS.8,74,36,244/- WA S ADDED TO THE TOTAL INCOME BY THE AO IN HIS DRAT ASSESSMENT ORDER DATED 29.2.2016 AS ADDITION ON ACCOUNT OF SHORTFALL BEING ADJUSTMENT U/S.92CA O F THE ACT. 7. THE ASSESSEE FILED OBJECTIONS TO THE DRAFT ASSES SMENT ORDER BY THE AO BEFORE THE DISPUTES RESOLUTION PANEL (DRP). THE DRP IN ITS DIRECTIONS DATED 19.8.2016 DIRECTED THE AO :- (I) TO EXCLUDE ICRA TECHNO ANALYTICS LTD. AND DATA MATICS GLOBAL SERVICES LTD. FROM THE LIST OF COMPARABLE COMPANIES AS THEY AGREED WITH THE ASSESSEE THAT THESE TWO COMPANIES ARE NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE, (II) REJECTED THE ASSESSEES CLAIM FOR EXCLUSION O F THE FOLLOWING FIVE COMPANIES VIZ., (A) GENESYS INTERNATIONAL CORPN. LT D., (B) INFOSYS LTD., (C) LARSEN AND TOUBRO INFOTECH LTD., (D) PERS ISTENT SYSTEMS LTD. AND (E) SPRY RESOURCES INDIA LTD. THE ASSESSEE HAD CONTENDED BEFORE DRP THAT THE FIRST 4 COMPANIES ARE NOT COMPA RABLE TO THE ASSESSEE. IT(TP)A NO.2103/BANG/2016 PAGE 5 OF 14 (III) DIRECTED THE TPO TO RECOMPUTE THE MARGINS OF THE ASSESSEE AND THE COMPARABLES AFTER TREATING FOREIGN EXCHANGE FLUCTUA TIONS AS OPERATING INCOME OR LOSS AS THE CASE MAY BE. 8. PURSUANT TO THE ABOVE DIRECTIONS ISSUED BY THE D RP, THE LIST OF COMPARABLES THAT REMAINED FOR CONSIDERATION WAS AS FOLLOWS:- SI. NO. NAME OF THE COMPANY 1 GENESYS INTERNATIONAL CORPN. LTD. 2 INFOSYS LTD. 3 LARSEN & TOUBRO INFOTECH LTD. 4 MINDTREE LTD. 5 PERSISTENT SYSTEMS LTD. 6 RS SOFTWARE (INDIA) LTD. 7 SASKEN COMMUNICATION TECHNOLOGIES LTD. 8 SPRY RESOURCES INDIA PVT. LTD. 9. PURSUANT TO THE DIRECTIONS OF THE DRP, THE AO PA SSED THE FINAL ASSESSMENT ORDER WHEREIN THE TP ADJUSTMENT STOOD RE WORKED AT A LESSER FIGURE THAN WHAT WAS ORIGINALLY SUGGESTED BY THE TP O. THE AO PASSED A FAIR ORDER OF ASSESSMENT MAKING THE ADDITION ON ACC OUNT OF DETERMINATION OF ALP BY THE TPO AS MODIFIED BY THE DRP. AGGRIEVED B Y THE ADDITION MADE IN THE FAIR ORDER OF ASSESSMENT, THE ASSESSEE HAS R AISED SEVERAL GROUNDS OF APPEAL CHALLENGING THE ADDITION ON SEVERAL COUNTS. HOWEVER, AT THE TIME OF HEARING, THE LEARNED COUNSEL RESTRICTED HIS ARGUMEN TS TO EXCLUSION OF 4 COMPARABLES OUT OF THE 8 COMPARABLE COMPANIES THAT REMAIN IN THE FINAL LIST OF COMPARABLE COMPANIES AFTER THE DIRECTIONS OF THE DRP VIZ., (A) GENESYS INTERNATIONAL CORPN. LTD., (B) INFOSYS LTD., (C) LA RSEN AND TOUBRO INFOTECH LTD., AND (D) PERSISTENT SYSTEMS LTD. IT(TP)A NO.2103/BANG/2016 PAGE 6 OF 14 10. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE COMPARABILITY OF THE AFORESAID 4 COMPANIES WAS CONS IDERED BY THIS TRIBUNAL IN AN IDENTICAL CASE OF SWD SERVICE PROVIDER SUCH A S THE ASSESSEE FOR AY 2012-13 IN THE CASE OF CGI INFORMATION SYSTEMS AND MANAGEMENT CONSULTANTS PVT. LTD. VS. ACIT IT(TP)A NO.183/BANG/ 2017 ORDER DATED 11.4.2018 . THE RELEVANT PARAGRAPHS OF THE AFORESAID ORDER WA S BROUGHT TO OUR NOTICE AND A COPY OF THE AFORESAID ORDER WAS AL SO FILED BEFORE US. THE LEARNED DR RELIED ON THE DIRECTIONS OF THE DRP. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN P ARAGRAPH 29 TO 35 OF THE ORDER OF THE TRIBUNAL IN CGI INFORMATION SYSTEM S AND MANAGEMENT CONSULTANTS PVT. LTD. (SUPRA), THIS TRIBUNAL IN IDE NTICAL FACT SITUATION OF A SWD SERVICE PROVIDER WHERE 8 COMPANIES RETAINED AFT ER ORDER OF DRP IN THIS CASE WAS DECIDED BY THE TRIBUNAL AS FOLLOWS: 29. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN THE CASE OF AGILIS INFORMATION TECHNOLOGIES INDIA (P) LTD., (SU PRA), THIS TRIBUNAL CONSIDERED THE COMPARABILITY OF THE 3 COMP ANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE FROM THE FINAL LIST O F COMPARABLE COMPANIES CHOSEN BY THE TPO. THE FUNCTIONAL PROFIL E OF THE ASSESSEE AND THAT OF THE ASSESSEE IN THE CASE OF AG ILIS TECHNOLOGIES INDIA (P) LTD., IS IDENTICAL IN AS MUC H AS THE SAID COMPANY WAS ALSO INVOLVED IN PROVIDING SWD SERVICES TO ITS AE AND THE TPO HAD CHOSEN SOME COMPARABLE COMPANIES WH ICH WERE ALSO CHOSEN BY THE TPO IN THE CASE OF THE ASSESSEE FOR THE PURPOSE OF COMPARABILITY. IN THE AFORESAID DECISION THE TR IBUNAL HELD ON THE COMPARABILITY OF THE 3 COMPANIES WHICH THE ASSE SSEE SEEKS TO EXCLUDE AS FOLLOWS: (A) INFOSYS LTD., WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES BY FOLLOWING THE DECISION OF T HE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNI TY INDIA TECHNOLOGIES (2013) 36 TAXMANN.COM 289 (DELHI ). THE DISCUSSION IS CONTAINED IN PARAGRAPHS 4.5 TO 4. 7 OF THE TRIBUNALS ORDER. THE TRIBUNAL ACCEPTED THAT INFOS YS LTD. IS A GIANT RISK TAKING COMPANY AND ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS AND ALSO OWNS IT(TP)A NO.2103/BANG/2016 PAGE 7 OF 14 INTANGIBLE ASSETS AND THEREFORE NOT COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE IN THAT CASE. (B) LARSEN & TOUBRO INFOTECH LTD., WAS EXCLUDED FRO M THE LIST OF COMPARABLE COMPANIES BY RELYING ON THE DECI SION OF THE DELHI BENCH OF ITAT IN THE CASE OF SAXO INDIA (P ) LTD. VS. ACIT (2016) 67 TAXMANN.COM 155 (DEL-TRI). THE DISCUSSION IS CONTAINED IN PARAGRAPHS 4.8 TO 4.10 O F THE TRIBUNALS ORDER. THE TRIBUNAL HELD THAT L & T INFO TECH LTD., WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL ALSO NOTICED THAT THE APPEAL FILED BY THE REVENUE AGAINST THE TRIBUNALS ORDER WAS DISMISSED BY THE H ONBLE DELHI HIGH COURT IN ITA NO.682/2016. (C) PERSISTENT SYSTEMS LTD., WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THIS COMPAN Y WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL IN COMING TO THE ABOVE CONCLUSION REFERRED TO THE DECISION RENDERED BY ITAT DELHI BENCH IN THE CASE OF CASH EDGE INDIA PVT.LTD. VS. ITO ITA NO.64/DEL/2015 ORDER DATED 23.9.2015 AND THE DECISION OF HONBLE DELHI H IGH COURT IN THE CASE OF SAXO INDIA PVT.LTD. (SUPRA). THE FINDINGS IN THIS REGARD ARE CONTAINED IN PARAGRAPHS 4.14 TO 4.16 OF ITS ORDER. 30. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL WE HOLD THAT THE AFORESAID 3 COMPANIES BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF ARRIVING AT THE ARITHMETIC MEAN OF COMPARABLE COMPANIES FOR THE PURPOSE OF COM PARISON WITH THE PROFIT MARGINS. IN THIS REGARD WE ARE ALS O OF THE VIEW THAT THE PLEA OF THE LEARNED DR FOR A REMAND OF THE ISSU E TO THE DRP ON THE GROUND THAT THE DRP HAS NOT GIVEN ANY REASONS I N ITS DIRECTIONS CANNOT BE ACCEPTED. THE DRP HAS ENDORSED THE VIEW OF THE TPO IN ITS DIRECTIONS AND THEREFORE THE REASONS GIVEN BY T HE TPO SHOULD BE REGARDED AS THE CONCLUSIONS OF THE DRP. 31. THE LEARNED DR NEXT SUBMITTED THAT GENESYS INT ERNATIONAL CORPORATION LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE COMPARABILITY OF THIS COMPANY WITH THE ASSESSEE HAS BEEN DISCUSSED BY THE TPO IN PAGE-11 OF HIS ORD ER. THE ASSESSEE OBJECTED TO INCLUSION OF THIS COMPANY IN T HE LIST OF IT(TP)A NO.2103/BANG/2016 PAGE 8 OF 14 COMPARABLE COMPANIES FOR THE REASON THAT THIS COMPA NY IS FUNCTIONALLY DIFFERENT AND OWNS INTANGIBLE ASSETS W HICH ARE PECULIAR ONLY WHEN THE ASSESSEE OWNS SOFTWARE PRODU CTS. THE OBJECTIONS OF THE ASSESSEE ARE CONTAINED IN ITS LET TER DATED 22.12.2015 ADDRESSED TO THE TPO AND IN ANNEXURE-B T O THE SAID LETTER. THE RELEVANT PORTION OF THE OBJECTION IS A T PAGE 711-713 OF THE ASSESSEES PAPER BOOK. ACCORDING TO THE ASSESS EE THIS COMPANY IS ENGAGED IN PROVIDING GEOGRAPHICAL INFORM ATION SERVICES COMPRISING OF PHOTOGRAMMETRY, REMOTE SENSI NG, CARTOGRAPHY, DATA CONVERSION, STATE OF THE ART TERR ESTRIAL AND 3D GEOCONTENT INCLUDING LOCATION BASED AND OTHER COMPU TER BASED RELATED SERVICES. PAGE-38 OF THE ANNUAL REPORT 201 2 CONTAINING THE ABOVE DESCRIPTION WAS BROUGHT TO THE NOTICE OF THE TPO. ATTENTION OF THE TPO WAS INVITED TO THE DIRECTORS REPORT TO T HE SHAREHOLDERS AT PAGE II OF THE ANNUAL REPORT 2012, WHEREIN THE DIRE CTORS HAVE INFORMED THE SHAREHOLDERS THAT THE COMPANY CONTINUE D IN ITS JOURNEY TO BE INNOVATORS AND LEADERS IN THE FIELDS OF LOCATION BASED SERVICES RELATED GEO PLATFORMS AND ADVANCED SURVEY TECHNIQUES. THERE IS NO SEGMENTAL REPORTING BECAUSE IT IS STATE D IN THE ANNUAL REPORT THAT THIS COMPANY IS ONLY IN ONE SEGMENT VIZ ., GIS BASED SERVICES AND THEREFORE THERE IS NO REQUIREMENT OF S EGMENTAL REPORTING. IT WAS ALSO SUBMITTED THAT THIS COMPANY OWNS SUBSTANTIAL INTANGIBLES EQUIVALENT TO 10.42% OF ITS TOTAL TURNOVER. 32. THE TPO HOWEVER HAS REGARDED THIS COMPANY AS A COMPARABLE COMPANY BY OBSERVING THAT THIS COMPANY DEVELOPS SOF TWARE FOR MAPPING AND GEOSPATIAL SERVICES AND OPERATES A FEW DEVELOPMENT CENTRES IN INDIA. THE COMPANY IS PREDOMINANTLY INT O SOFTWARE DEVELOPMENT SERVICES. THE INTANGIBLES IN THE POSSE SSION OF THE COMPANY ARE ONLY THE GIS DATABASE WHICH IS ONLY DEP RECIATION. IT DOES NOT ADD SIGNIFICANT VALUE TO THE COMPANY. 33. THE OBJECTIONS AS PUT FORTH BEFORE THE TPO WER E REITERATED BEFORE THE DRP. THE DRP IN PARAGRAPH 6.2.2 & 6.2.3 OF ITS DIRECTIONS DEALT WITH THIS ISSUE AS FOLLOWS: 6.2.2. THE FUNCTIONS OF THE ASSESSEE COMPANY HAVE B EEN EXAMINED IN DETAIL. A FINANCIAL PRODUCT ON WHICH TH E SETTLEMENT SYSTEM OF BANK RUNS IS A REAL TIME SYSTE M. IT IS VERY COMPLEX. ANY BUG OR PROBLEM IN IT CAN CRASH TH E ENTIRE BANKING SYSTEM OF SEVERAL NATIONS. THE ASSES SEES CLAIM OF PROVIDING ONLY BASIS SOFTWARE SERVICES IS REJECTED. IT(TP)A NO.2103/BANG/2016 PAGE 9 OF 14 6.2.3. THE PANEL HOLDS THAT THE SOFTWARE FOR FINAN CIAL PRODUCT IS MUCH MORE COMPLEX THAN A GEOSPATIAL SOFT WARE. THEREFORE, THE PANEL HOLDS THAT THE GENESYS IS A VA LID COMPARABLE. 34. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DRP HAS COMPLETELY PROCEEDED ON WRONG FACTS WHICH DOES NOT EITHER EMANATE FROM THE ORDER OF THE TPO OR THE SUBMISSION S OF THE ASSESSEE. HE REITERATED SUBMISSIONS MADE BEFORE TH E TPO AND DRP. THE LEARNED DR RELIED ON THE ORDER OF THE DRP /TPO. 35. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. IT IS CLEAR FROM THE MATERIAL BROUGHT TO THE NOTICE OF THE TPO BY THE ASSESSEE THAT THIS COMPANY RENDERS M APPING AND GEOSPATIAL SERVICES. IN RENDERING SUCH SERVICES IT DEVELOPS SOFTWARE. BUT THAT DOES NOT MEAN THAT THIS COMPANY IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT. THE BUSINESS PRO FILE OF THIS COMPANY AS PER THE ANNUAL REPORT DOES NOT SHOW THAT THIS COMPANY IS INTO SOFTWARE DEVELOPMENT SERVICE. THE ONLY LIN E OF BUSINESS THAT THIS COMPANY CARRIES ON IS RENDERING GIS BASED SERVICES AND THIS IS CLEAR FROM THE ANNUAL REPORT WHICH SPECIFIE S THAT SINCE THE COMPANY CARRIES ON ONLY ONE LINE OF BUSINESS VIZ., GIS BASED SERVICES THERE IS NO NEED TO GIVE ANY SEGMENTAL RES ULTS. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THERE IS NO BASIS FOR THE TPO TO CONCLUDE THAT THIS COMPANY IS PREDOMINANTLY INTO SOFTWARE DEVELOPMENT SERVICES. THE PRESENCE OF INTANGIBLE A SSETS IS INDICATIVE OF THE FACT THAT THIS COMPANY IS NOT IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. THE TPO HAS OVERLOO KED THIS ASPECT AND PROCEEDED ON THE BASIS THAT THE PRESENCE OF INTANGIBLE ASSETS WOULD NOT BE SIGNIFICANT. RULE 10B(2) OF TH E INCOME TAX RULES, 1962 (RULES) SPECIFICALLY PROVIDES THAT F OR THE PURPOSES OF SUB-RULE (1) OF RULE 10B, THE COMPARABILITY OF AN I NTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRAN SFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSE TS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RES PECTIVE PARTIES TO THE TRANSACTIONS; IT(TP)A NO.2103/BANG/2016 PAGE 10 OF 14 IN THE GIVEN FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT GENESYS INTERNATIONAL CORPORATION LTD., CANNOT BE C ONSIDERED AS A COMPARABLE COMPANY AND THE SAID COMPANY SHOULD BE E XCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES. WE HO LD ACCORDINGLY. 12. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE EXCLUDE THE FOLLOWING COMPANIES FROM THE LIST OF COMPARABLE COM PANIES VIZ., (A) GENESYS INTERNATIONAL CORPN. LTD., (B) INFOSYS LTD. , (C) LARSEN AND TOUBRO INFOTECH LTD., AND (D) PERSISTENT SYSTEMS LTD. IF THE AFORESAID 4 COMPANIES ARE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES, THE REMAINING COMPARABLE COMPANIES AND THE AVERAGE ARITHMETIC MEA N OF THOSE COMPARABLES WOULD BE AS FOLLOWS:- SL. NO. NAME OF THE COMPANY 1. MINDTREE LTD. 2. RS SOFTWARE (INDIA) LTD. 3. SASKEN COMMUNICATION TECHNOLOGIES LTD. 4. SPRY RESOURCES INDIA PVT. LTD. 13. THE ARITHMETICAL MEAN OF THE WORKING CAPITAL AD JUSTMENT OF RECOMPUTED MARGINS OF THE ABOVE COMPARABLES WOULD F ALL WITHIN THE +/-5% RANGE OF THE ASSESSEES NCP MARGIN OF 10.07% FOR PR OVISION OF SWD SERVICES. CONSEQUENTLY, THE INTERNATIONAL TRANSACTI ON OF PROVISION OF SWD SERVICES BY THE ASSESSEE TO ITS AES IN FY 2012-13 C AN BE CONCLUDED AS BEING AT ARMS LENGTH. THE TPO IS DIRECTED TO COMPU TE THE ALP AFTER EXCLUDING THE AFORESAID 4 COMPANIES FROM THE LIST O F COMPARABLE COMPANIES. 14. SALES SUPPORT SERVICES SEGMENT: IT IS NOT IN DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE THAT THE TRANSACTION NET M ARGIN METHOD (TNMM) WAS THE MOST APPROPRIATE METHOD (MAM) FOR DE TERMINATION OF ALP IT(TP)A NO.2103/BANG/2016 PAGE 11 OF 14 AND THAT THE PROFIT LEVEL INDICATOR TO BE ADOPTED F OR COMPARISON OF THE ASSESSEES PROFIT WITH THAT OF COMPARABLE COMPANIES WAS OPERATING PROFIT/TOTAL COST (OP/TC). THE OP/TC OF THE ASSESS EE WAS 4.99%. THE ASSESSEE IN ITS TP STUDY SELECTED 7 COMPARABLE COMP ANIES WHOSE ARITHMETIC MEAN OF OP/TC WAS ARRIVED AT 9.59%. SIN CE THE PROFIT MARGIN OF THE ASSESSEE WAS WITHIN THE (+) (-) MARGIN OF 5% AL LOWED BY THE PROVISO TO SEC.92C(2) OF THE ACT, OF THE ARITHMETIC MEAN OF OP /TC OF THE 7 COMPARABLE COMPANIES SELECTED BY THE ASSESSEE, IT W AS CLAIMED BY THE ASSESSEE THAT THE PRICE CHARGED BY IT IN THE INTERN ATIONAL TRANSACTION WAS AT ARMS LENGTH. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE DETERMINATION OF ALP WAS REFERRED BY THE AO ON HIS OWN SELECTED 5 OTHER COMPANIES AS COMPARABLE COMPANIES. THE ARITHMETIC MEAN OF PROFIT MARGIN OF THESE COMPANIES AFTER AND BEFORE ADJUSTME NT TOWARDS WORKING CAPITAL ADJUSTMENT WAS AS FOLLOWS: COMPARABLES SELECTED BY TPO AND THEIR ARITHMETIC ME AN: SL. NO. NAME OF THE COMPANY MARK-UP ON TOTAL COSTS (IN %) 1 CONCEPT COMMUNICATION LTD. 4 2 CYBER MEDIA RESEARCH LTD. 7.96 3 JUST DIAL LTD. 28.86 4 KILLICK AGENCIES & MKTG.LTD. 8.96 5 MARKETING CONSULTANTS & AGENCIES LTD. 10.53 AVERAGE MARK-UP 12.06 15. ON THE BASIS OF THE COMPARABLE COMPANIES, THE T PO COMPUTED ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF RENDERING OF SALES SUPPORT SERVICES BY THE ASSESSEE TO ITS AE AND THE CONSEQUENT ADDITION TO TOTAL INCOME BY WAY OF ADJUSTMENT TO ALP AS FOLLOWS : IT(TP)A NO.2103/BANG/2016 PAGE 12 OF 14 ARMS LENGTH MEAN MARK-UP 12.06% OPERATING COST (OC) RS.1,89,32,272/- ARMS LENGTH PRICE (ALP) = 112.06% OF OC RS.2,12,15,504 PRICE RECEIVED RS. 1,98,78,885/- SHORTFALL BEING ADJUSTMENT U/S. 92CA RS. 13,36,619/- 16. THE DIFFERENCE BETWEEN THE PRICE CHARGED BY THE ASSESSEE AND THE ALP DETERMINED BY THE TPO VIZ., RS.13,36,619/- WAS ADDED TO THE TOTAL INCOME BY THE AO IN HIS DRAT ASSESSMENT ORDER DATED 29.2.2016 AS ADDITION ON ACCOUNT OF SHORTFALL BEING ADJUSTMENT U/S.92CA O F THE ACT. 17. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP AG AINST THE ADDITION MADE ON ACCOUNT OF ADJUSTMENT TO ALP. THE CONTENTI ON OF THE ASSESSEE BEFORE DRP WAS THAT JUST DIAL LTD., WHICH WAS CHOSE N AS A COMPARABLE COMPANY BY THE AO WAS NOT IN FACT COMPARABLE. THIS WAS REJECTED BY THE DRP FOR THE REASONS:- THIS OBJECTION OF THE ASSESSEE HAS BEEN DEALT IN D ETAIL BY THE TPO IN HIS ORDER. COGENT REASONS ARE GIVEN BY TPO AS TO WHY THE OBJECTION OF THE ASSESSEE ARE NOT ACCEPTABLE. THIS PANEL FINDS THE ANALYSIS AND JUSTIFICATION OF TPO ARE CONVINCING AN D DO NOT CALL FOR INTERFERENCE. HENCE OBJECTION OF THE ASSESSEE AGAIN ST THIS COMPARABLE IS REJECTED. M/S JUST DIAL LTD : THE ASSESSEE HAS OBJECTED TO M/S JUST DIAL LTD ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT, EN GAGED IN R&D AND EXTRA ORDINARY EVENTS DURING THE YEAR. THE TPO HAS NOTED THAT THE COMPANY IS FUNCTIONALLY SIMILAR TO THE ASSESSEE. IT WAS SUBMITTED THAT THE COMPANY IS ENGAGED PRIMARILY IN PROVIDING LOCAL SEARCH RELATED SERVICES TO USERS IN INDIA THROUGH MULTIPLE PLATFORMS SUCH AS THE INTERNET, MOBILE INTERNET, OVER THE TELEPHON E (VOICE) AND TEXT (SMIS). THE COMPANY ALSO EARNS REVENUE FROM RESELLE R ACTIVITY PROVIDING DATA COLLECTION SERVICES TO THE COMPANY. IT WAS ALSO IT(TP)A NO.2103/BANG/2016 PAGE 13 OF 14 SUBMITTED THAT THERE IS EXTRA ORDINARY EVENT DURING THE YEAR. IN SUPPORT, THE FINANCIALS OF THE COMPANY WAS FILED. H OWEVER, IT WAS FOUND THAT THE FINANCIALS OF JUST DIAL LTD IS FOR F Y 12-13 WHERE AS THE RELEVANT YEAR UNDER CONSIDERATION IS FY 11-12. AS SUCH, THE FINANCIAL FOR A DIFFERENT YEAR HAS NO RELEVANCE FOR AN ISSUE TO BE DECIDED FOR FY 11-12. CONSEQUENTLY, THE OBJECTIONS OF THE ASSESSEE REMAIN UNSUBSTANTIATED AND THEREFORE, CAN NOT BE AC CEPTED. 18. PURSUANT TO THE DIRECTIONS OF THE DRP, THE AO P ASSED THE FINAL ASSESSMENT ORDER. AGGRIEVED BY THE ADDITION MADE I N THE FAIR ORDER OF ASSESSMENT, THE ASSESSEE HAS RAISED SEVERAL GROUNDS OF APPEAL CHALLENGING THE ADDITION ON SEVERAL COUNTS. 19. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE ASSESSEE SEEKS THE ONLY RELIEF OF EXCLUDING JUST DI AL LTD., AS A COMPARABLE CHOSEN BY THE TPO AND CONFIRMED BY THE DRP AS A COM PARABLE COMPANY. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FINANCIAL RESULTS OF THIS COMPANY FOR FY 11-12 WERE NOT AVAILABLE IN THE PUBLIC DOMAIN WHEN THE PROCEEDINGS BEFORE THE DRP WERE COMPLETED AND I S NOW AVAILABLE IN THE PUBLIC DOMAIN. IT WAS POINTED OUT BY HIM THAT THE TPO ALSO PLACED RELIANCE ONLY ON THE FINANCIALS OF FY 12-13 WHEN HE COMPLETED THE PROCEEDINGS. A COPY OF THE FINANCIALS FOR FY 11-12 RELEVANT TO AY 12-13 WAS FILED BEFORE US AND IT WAS POINTED OUT THAT JUS T DIAL LTD., WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. WE ARE O F THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE DRP TO CONSID ER EXCLUSION OF JUST DIAL LTD., FROM THE LIST OF COMPARABLE COMPANIES BASED O N THE FINANCIALS FOR FY 11-12 WHICH ARE NOW AVAILABLE IN PUBLIC DOMAIN AND A COPY OF WHICH WAS ALSO FILED BEFORE US. THE DRP SHALL AFFORD OPPORTU NITY OF BEING HEARD BEFORE DECIDING THE ISSUE. THE ISSUE OF DETERMINATI ON OF ALP IN THE SALES SUPPORT SERVICES SEGMENT IS ACCORDINGLY SET ASIDE T O THE DRP FOR CONSIDERATION AFRESH AS PER THE DIRECTIONS GIVEN IN THIS ORDER. IT(TP)A NO.2103/BANG/2016 PAGE 14 OF 14 20. GROUND NOS.1 TO 4, 6 TO 8 WERE NOT PRESSED AND HENCE DISMISSED AS NOT PRESSED. GROUND NO.9 WITH REGARD TO CHARGING O F INTEREST U/S.234B AND 234C OF THE ACT IS PURELY CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF. GROUND NO.10 WITH REGARD TO INITIATING OF PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT IS NOT APPEALA BLE AND HENCE DISMISSED. 21. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF AUGUST, 2018. SD/- SD/- ( A.K. GARODIA ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMB ER BANGALORE, DATED, THE 24 TH AUGUST, 2018. / D ESAI S MURTHY / COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6 . GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.