M/s. Trident Microsystems India Pvt. Ltd., Bangalore V. Deputy Commissioner of Income Tax, Bangalore

ITA 2234/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7361 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 22-06-2020
• Assessment Year: 2012-2013
• Appeal Filed On: 16-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Set aside
• Section: 92D; 92B; 142(1); 10B; 144C; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.2234/BANG/2016 ASSESSMENT YEAR : 2012-13 M/S TRIDENT MICROSYSTEMS INDIA PVT. LTD., #2924, THIRD FLOOR, 14 TH CROSS, K.R ROAD, BSK II STAGE, BENGALURU-560 070. PAN : AADCN 1384L VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-7(1)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI SURESH MUTHUKRISHNA, C.A RESPONDENT BY : MS. NEERA MALHOTRA, CIT (DR) DATE OF HEARING : 22-06-2020 DATE OF PRONOUNCEMENT : 14-08-2020 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST O RDER PASSED BY LD.AO UNDER SECTION 143 (3) READ WITH SEC TION 144C (13) OF THE ACT ON FOLLOWING GROUNDS OF APPEAL : THE APPELLANT CRAVES YOUR HONOUR'S LEAVE TO URGE T HE UNDERMENTIONED AMENDED GROUNDS OF APPEAL THAT IS BE ING URGED IN SUBSTITUTION OF THE ORIGINAL GROUNDS OF APPEAL TO B RING OUT THE ISSUES UNDER CHALLENGE IN A POINTED AND PRECISE MANNER AND IT THEREFORE PRAYED THAT THE FOLLOWING GROUNDS OF APPEAL MAY KIN DLY BE CONSIDERED IN PLACE OF THE ORIGINAL GROUNDS OF APPE AL URGED IN THE APPEAL MEMO:- PAGE 2 OF 23 ITA NO.2234/BANG/2016 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSES SING OFFICER IS BAD IN LAW AND VOID AB-INITIO. 2. THE REFERENCE MADE BY THE [EARNED AO SUFFERS FRO M JURISDICTIONAL ERROR AS THE LD. AO HAS NOT RECORDED ANY REASONS IN THE D RAFT ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'NECESSARY OR EXPEDIENT' TO REFER THE MATTER TO THE LD. TRANSF ER PRICING OFFICER ('TPO'/ 'LD. TPO') FOR COMPUTATION OF THE ARM'S LENGTH PRIC E('ALP') AS IS REQUIRED UNDER SECTION 92CA(1 )OF THE ACT. 3. THE LD. AO/ LD. TPO HAS ERRED ON FACTS AND IN LA W IN ENHANCING THE INCOME OF THE ELIGIBLE ASSESSEE BY RS 9,42,35,339/- BY HOLDING THAT THE INTERNATIONAL TRANSACTIONS DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT AND IN DOING SO HAVE GROSSL Y ERRED IN NOT APPRECIATING THAT NONE OF THE CONDITIONS SET OUT IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRESENT CASE; 4. THE ORDER OF THE LEARNED AO/TPO IS VIOLATIVE OF THE PRINCIPLES OF NATURAL JUSTICE AND VOID AB-INITIO AND NEEDS TO BE CANCELLED IN AS MUCH AS THE ELIGIBLE ASSESSEE AS NOT PROVIDED WITH THE M ANDATOR, SHOW CAUSE NOTICE OR AN OPPORTUNITY OF BEING HEARD AS REQUIRED UNDER THE PROVISIONS OF SECTION 92C(3) OF THE ACT; 5. THE LD AO/LD. TPO HAS ERRED ON FACTS AND IN LAW BY DISREGARDING MULTIPLE YEAR/ PRIOR YEARS' DATA AS USED BY THE ASS ESSEE IN THE TRANSFER PRICING ('TP') DOCUMENTATION AND HOLDING THAT CURRE NT YEAR (I.E. FY 2011- 12) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DE SPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE ASSES SEE AT THE TIME OF PREPARING ITS TP DOCUMENTATION, AND INTERPRETING TH E REQUIREMENT OF 'CONTEMPORANEOUS' DATA IN THE RULES TO NECESSARILY IMPLY CURRENT/ SINGLE YEAR (I.E. FY 2011-12) DATA; 6. THE LEARNED TPO ERRED IN LAW AND ON FACTS BY NOT APPRECIATING THAT THE ELIGIBLE ASSESSEE HAD PREPARED THE DETAILED CON TEMPORANEOUS TRANSFER PRICING DOCUMENTATION BONAFIDE AND IN COMP LIANCE WITH THE PROVISIONS OF THE ACT AND INCOME TAX RULES, 1962 [T HE RULES'] AND HAD SELECTED THE SET OF UNCONTROLLED COMPANIES BASED ON A DETAILED FUNCTIONAL, ASSET AND RISK ('FAR') ANALYSIS FOLLOWI NG A METHODICAL BENCHMARKING PROCESS BY REJECTING SUCH UNCONTROLLED COMPARABLE COMPANIES IDENTIFIED AND INSTEAD PROCEEDING TO UNDE RTAKE A FRESH SEARCH FOR IDENTIFYING COMPARABLE COMPANIES; 7. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED TPO HAS ERRED ON FACTS AND IN LAW AND THEREBY CONTRADICTING HIS OWN STAND IN THE EARLIER YEAR, IN RE-COMPUTING THE SEGMENTAL RESULTS OF MARGINS EA RNED BY THE ELIGIBLE ASSESSEE ON SOFTWARE R&D SERVICES BY TREATING THE D EPRECIATION ON INTANGIBLE ASSETS AS OPERATING IN NATURE; 8. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED TPO HAS ERRED ON FACTS AND IN LAW, IN RE-COMPUTING THE SEGMENTAL RESULTS O F MARGINS EARNED BY THE ELIGIBLE ASSESSEE ON SOFTWARE R&D SERVICES BY T REATING THE INCOME EARNED ON FOREIGN EXCHANGE FLUCTUATION AS NON-OPERA TING IN NATURE; 9. WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED THAT THE LEARNED TPO WHILE CONDUCTING A FRESH SEARCH FOR COMPARABTES HAS CHOSEN TO APPLY A FILTER FOR REJECTING COMPANIES WHOSE EMPLOYEE COSTS ARE LESS THAN 25%, PAGE 3 OF 23 ITA NO.2234/BANG/2016 WHICH IS ARBITRARY AND NECESSARILY DOES NOT CAPTURE THE VARIED BUSINESS MODELS OF THE COMPARABLE COMPANIES. 10. WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED THAT THE LEARNED TPO HAS ERRED IN INCLUDING COMPARABLES WHICH WERE HAVIN G RELATED PARTY TRANSACTIONS IN EXCESS OF 25%, WHICH FAIL HIS OWN F ILTER AND THEREBY CONTRADICTING HIS STAND; 11. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED TPO HAS ERRED ON FACTS AND IN LAW BY INTRODUCING / RETAINING CERTAIN COMPA NIES IN THE FINAL COMPARABLE SET WHICH WERE FUNCTIONALLY/ QUALITATIVE LY DISSIMILAR TO THE ASSESSEE; 11.1 INTRODUCING GENESYS INTERNATIONAL CORP. LTD., IN THE FINAL COMPARABLE SET WHICH COMPARABLE IS FUNCTIONALLY/QUALITATIVELY DISS IMILAR TO THE APPELLANT. 11.2 INTRODUCING INFOSYS LTD., IN THE FINAL COMPARA BLE SET WHICH COMPARABLE IS FUNCTIONALLY/QUALITATIVELY DISSIMILAR TO THE APPELL ANT. 11.3 INTRODUCING LARSEN ET TOUBRO INFOTECH LTD., IN THE FINAL COMPARABLE SET WHICH COMPARABLE IS FUNCTIONALLY/QUALITATIVELY DISSIMILAR TO THE APPELLANT. 11.4 INTRODUCING SPRY RESOURCES INDIA PVT. LTD., IN THE FINAL COMPARABLE SET WHICH COMPARABLE IS FUNCTIONALLY/QUALITATIVELY DISSIMILAR TO THE APPELLANT. 12. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED TPO HAS ERRED ON FACTS AND IN LAW BY REJECTING CERTAIN COMPANIES IN THE FI NAL COMPARABLE SET WHICH WERE FUNCTIONALLY/ QUALITATIVELY SIMILAR TO T HE ASSESSEE AND HENCE OUGHT TO HAVE BEEN INCLUDED IN THE FINAL LIST OF COMPARABLES; 12.1 EXCLUDING AKSHAY SOFTWARE TECHNOLOGIES LTD., F ROM THE FINAL COMPARABLE SET WHICH COMPARABLE IS FUNCTIONALLY/QUA LITATIVELY COMPARABLE TO THE APPELLANT ON AN ERRONEOUS CONCLUS ION THAT ITS FUNCTIONS NOT CLEAR. 12.2 EXCLUDING BLUE STAR INFOTECH LIMITED FROM THE FINAL COMPARABLE SET WHICH COMPARABLE IS FUNCTIONALLY/ QUALITATIVELY COM PARABLE TO THE APPELLANT ON AN ERRONEOUS CONCLUSION THAT ITS FUNCT IONS NOT CLEAR. 12.3 EXCLUDING CIGNITI TECHNOLOGIES LTD., FROM THE FINAL COMPARABLE SET WHICH COMPARABLE IS FUNCTIONALLY/QUALITATIVELY COMP ARABLE TO THE APPELLANT ON AN ERRONEOUS CONCLUSION THAT ITS FUNCT IONS NOT CLEAR. 12.4 EXCLUDING GOLDSTONE TECHNOLOGIES LIMITED, FROM THE FINAL COMPARABLE SET WHICH COMPARABLE IS FUNCTIONALLY/QUA LITATIVELY COMPARABLE TO THE APPELLANT ON AN ERRONEOUS CONCLUS ION THAT ITS FUNCTIONS NOT CLEAR. 12.5 EXCLUDING THINKSOFT GLOBAL SERVICES LIMITED, F ROM THE FINAL COMPARABLE SET WHICH COMPARABLE IS FUNCTIONALLY/QUA LITATIVELY COMPARABLE TO THE APPELLANT ON AN ERRONEOUS CONCLUS ION THAT ITS FUNCTIONS NOT CLEAR. 13. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.AO HAS ERRED IN INITIATING PENALTY UNDER SECTION 271 (1)(C) OF THE ACT. PAGE 4 OF 23 ITA NO.2234/BANG/2016 14. THE APPELLANT CRAVES LEAVE OF THIS HON'BLE TRIB UNAL TO ADD, ALTER, AMEND, DELETE OR SUBSTITUTE SUCH GROUND AS MAY BE N ECESSARY AT THE TIME OF HEARING. 15. WHEREFORE THE APPELLANT PRAYS THAT THIS HON'BLE TRIBUNAL BE PLEASED TO ALLOW THE APPEAL AND SET-ASIDE THE ORDERS PASSED BY THE AUTHORITIES BELOW TO THE EXTENT WHICH IS AGAINST THE APPELLANT AND PASS SUCH OTHER ORDER AS THIS HON'BLE TRIBUNAL DEEM FIT AND PROPER ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE INTEREST OF JUSTIC E AND EQUITY. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING SALES, MARKETING, RESEARCH AND DEVELOPMEN T SUPPORT SERVICES RELATING TO WHOM BUSINESS UNIT AND ITS GROUP COMPANY. IT FILED ITS RETURN OF INCOME DECLAR ING TOTAL INCOME OF RS.3,47,37,750/-. THE CASE WAS SELECTED F OR SCRUTINY AND NOTICE UNDER SECTION 142(1) WAS ISSUED TO ASSESSEE. IN RESPONSE TO STATUTORY NOTICES AUTHORIS ED REPRESENTATIVE OF ASSESSEE AT ATTENDED FROM TIME TO TIME AND THE CASE WAS DISCUSSED. LD.AO OBSERVED THAT, ASSESS EE ENTERED INTO INTERNATIONAL TRANSACTION, AND AS THE VALUE EXCEEDED THE PRESCRIBED LIMIT THE CASE WAS REFERRED TO TRANSFER PRICING OFFICER FOR COMPUTATION OF ARMS LE NGTH PRICE. 3. UPON RECEIPT OF REFERENCE, LD.TPO CALLED UPON AS SESSEE TO FILE ECONOMIC DETAILS OF INTERNATIONAL TRANSACTI ON ENTERED INTO BY ASSESSEE IN FORM 3CEB. LD.TPO OBSERVED THAT , ASSESSEE ENTERED INTO FOLLOWING INTERNATIONAL TRAN SACTIONS: 4. ASSESSEE COMPUTED ITS MARGIN UNDER SOFTWARE R&D SEGMENT TO BE 9.73%. LD.TPO NOTED THAT, ASSESSEE IN TP PAGE 5 OF 23 ITA NO.2234/BANG/2016 DOCUMENTATION CONSIDERED 25 COMPARABLES WITH AVERAG E MARGIN OF 12.79%. ASSESSEE USED TNMM AS MOST APPROPRIATE METHOD AND OP/TC AS PLI AND ARRIVED AT THE WEIGHTED AVERAGE MARGIN OF 3 YEARS DATA. LD.TPO NOT ED THAT ASSESSEE USED EARLIER YEAR DATA PERTAINING TO FY 20 09-10, 2010-11 BESIDES THE YEAR ENDING ON 2012 WHEREVER AVAILABLE. 5. LD.TPO OBJECTED USE OF MULTIPLE YEAR DATA. LD.TP O SELECTED NEW SET OF 10 COMPARABLES WHICH ASSESSEE O BJECTED ON FILTERS. LD.TPO HOWEVER FINALISED A SET OF COMPA RABLES HAVING AVERAGE MARGIN OF 22.63%. LD.TPO ALSO USED C URRENT YEAR DATA FOR COMPUTING ARMS LENGTH PRICE OF THE TRANSACTION. SI. NO. NAME OF THE TAXPAYER OP/OC 1. DATAMATICS GLOBAL SERVICES LTD. 14.57% 2. GENESYS INTERNATIONAL CORPN. LTD. 30.09% 3. I C R A TECHNO ANALYTICS LTD. 17.24% 4. INFOSYS LTD. 43.10% 5. LARSEN & TOUBRO INFOTECH LTD. 25.47% 6. M I NDTREE LTD. 1501% 7. PERSISTENT SYSTEMS LTD. 27,23% 8. R S SOFTWARE (INDIA) LTD. 15.34% 9. SASKEN COMMUNICATION TECHNOLOGIES LTD. 12.13% 10. SPRY RESOURCES INDIA PVT, LTD. 26,1S% AVERAGE 22.63% 6. LD.TPO DENIED RISK ADJUSTMENT TO ASSESSEE FOR TH E REASON THAT ACCURATE ADJUSTMENT CANNOT BE MADE. PRO POSED ADJUSTMENT WAS COMPUTED BEING DIFFERENCE BETWEEN AR MS LENGTH COMPUTED BY ASSESSEE AND LD.TPO BEING RS.9,42,35,339/-. PAGE 6 OF 23 ITA NO.2234/BANG/2016 7. AGGRIEVED BY PROPOSED ADJUSTMENT, ASSESSEE RAISE D OBJECTIONS BEFORE DRP. 8. ASSESSEE OBJECTED SOME COMPARABLES ON TURNOVER F ILTER, AND SOME COMPARABLES ON FUNCTIONAL DISSIMILARITIES. ASSESSEE HAD ARGUED BEFORE DRP THAT FOLLOWING COMPA RABLES CANNOT BE COMPARED WITH ASSESSEE WHO HAS OPERATING MARGIN OF 12% APPROXIMATELY; INFOSYS LTD., LARSEN A ND TOUBRO INFOTECH LTD., MINDTREE LTD., PERSISTENT SYS TEMS LTD., RS SOFTWARE INDIA LTD. IT WAS SUBMITTED THAT THESE COMPARABLES HAVE HUGE TURNOVER WHICH CANNOT BE COMP ARED TO A CONTRACT COMPANY LIKE ASSESSEE. 9. DRP WHILE CONSIDERING OBJECTIONS RAISED BY ASSES SEE, DELETED 2 COMPARABLES BEING DATAMETICS GLOBAL SERVI CES LTD., AND ICRA TECHNO ANALYTICS LTD. DRP REJECTED ASSESSEES OBJECTIONS IN RESPECT OF REMAINING COMPA RABLES SELECTED BY LD.TPO. 10. LD.AO THEREAFTER PASSED FINAL ASSESSMENT ORDER ON RECEIPT OF DRP DIRECTIONS THEREBY MAKING ADDITION I N THE HANDS OF ASSESSEE AT RS.8,61,19,385/-. 11. AGGRIEVED BY ADDITION MADE IN THE HANDS OF ASSE SSEE, APPEAL HAS BEEN FILED BEFORE THIS TRIBUNAL . 12. AT THE OUTSET, LD.AR SUBMITTED THAT, AMONGST AM ENDED GROUNDS RAISED BY ASSESSEE, GROUND 11, ADDITIONAL G ROUND AND GROUND 12.4 ARE ONLY PRESSED. APPLICATION OF ADDITIONAL GROUND : 13. LD.AR SUBMITTED THAT A SPECIFIC GROUND HAS BEEN RAISED BY ASSESSEE BY AN APPLICATION OF ADDITIONAL GROUND WHEREIN THESE COMPARABLES HAVE BEEN CHALLENGED FOR EXCLUSIO N DUE TO PAGE 7 OF 23 ITA NO.2234/BANG/2016 EXCESSIVE TURNOVER. LD.AR SUBMITTED THAT THESE COMP ARABLES WERE CHALLENGED BEFORE DRP ON HAVING HIGH TURNOVER, HOWEVER A SPECIFIC GROUND WAS INADVERTENTLY MISSED OUT TO BE RAISED BEFORE THIS TRIBUNAL IN ORIGINAL GROUNDS OF APPEAL. HE SUBMITTED THAT GROUND NO.11 IS GENERAL, CHALLENG ING THE FUNCTIONAL DISSIMILARITY. ASSESSEE THUS HAS RAISED FOLLOWING ADDITIONAL GROUND: 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSE SSING OFFICER IS BAD IN LAW AND VOID AB-INITIO. 2. THE REFERENCE MADE BY THE [EARNED AO SUFFERS FRO M JURISDICTIONAL ERROR AS THE LD. AO HAS NOT RECORDED ANY REASONS IN THE DRAFT ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONC LUSION THAT IT WAS 'NECESSARY OR EXPEDIENT' TO REFER THE MATTER TO THE LD. TRANSFER PRICING OFFICER ('TPO'/ 'LD. TPO') FOR COMPUTATION OF THE ARM'S LENGTH PRICE('ALP') AS IS REQUIRED UNDER SECTION 92CA(1 )O F THE ACT. 13.1 HE PLACED RELIANCE UPON DECISION OF HONBLE SUPREME COURT IN CASE OF NTPC LTD VS CIT REPORTED IN 229 ITR 383 AND JUTE CORPORATION OF INDIA VS CIT REPORTED IN 53 TAXMAN 85, SUBMITTED THAT COMPARABLES SPECIFIED IN ADDITIONAL GROUNDS MAY BE ADMITTED. 13.2 LD.CIT DR, OPPOSED ADMISSION OF ADDITIONAL GRO UND. IT WAS SUBMITTED THAT TURNOVER FILTER WAS NOT ALLEGED BY ASSESSEE BEFORE DRP. 14. WE HAVE PERUSED DETAILS RELIED UPON BY BOTH SID ES 14.1 WE HAVE PERUSED THE DIRECTIONS OF DRP IN RESPE CT OF THESE COMPARABLES AND WE NOTE THAT ARGUMENT ADVANCE D BY ASSESSEE ON TURNOVER FILTER HAS BEEN INCORPORATED T HEREIN. THEREFORE WE REJECT THE ARGUMENT OF REVENUE THAT TH IS ISSUE WAS NOT RAISED BEFORE DRP. PAGE 8 OF 23 ITA NO.2234/BANG/2016 14.2 CONSIDERING INADVERTENT MISTAKE ON BEHALF OF ASSESSEE IN RAISING THESE GROUNDS BEFORE THIS TRIBUNAL , WE ALLOW ADDITIONAL GROUND RAISED. ACCORDINGLY, WE ADMIT ADDITIONAL GROUND RAISED BY ASSESSEE. 15. ASSESSEE CHALLENGED INCLUSION OF FOLLOWING COMP ARABLES IN GROUND 11 FOR FUNCTIONAL DISSIMILARITY. IN THE ADDITIONAL GROUND THESE COMPARABLES HAVE BEEN CHALLENGED FOR HAVING HIGH TURNOVER. INFOSYS LTD LARSEN AND TOUBRO INFOTECH LTD MINDTREE LTD PERSISTENT SYSTEMS LTD RS SOFTWARE INDIA LTD ASSESSEE CHALLENGED GENESIS INTERNATIONAL CORP LTD ON FUNCTIONAL INCOMPATIBILITY IN GROUND 12.4. 16. BEFORE CARRYING OUT COMPARABILITY ANALYSIS, IT IS SINE QUA NON TO UNDERSTAND FUNCTIONS, ASSETS, RISK ASSUMED BY ASSESSEE UNDER THIS SEGMENT. FUNCTIONS: 16.1 IT HAS BEEN SUBMITTED IN TRANSFER PRICING STUD Y THAT, ASSESSEE ENTERED INTO AGREEMENT FOR PROVISION OF SO FTWARE R&D SERVICES WITH ITS AE ON 08/02/2010 FOR PROVIDIN G SERVICES INCLUDING R&D SERVICES AND ALL RELEVANT OR ANCILLARY SERVICES RELATING TO R&D SERVICES PROVIDED TO AE. 16.2 IT HAS BEEN SUBMITTED IN, TRANSFER PRICING STU DY THAT, ASSESSEE PERFORMS FUNCTIONS LIKE MANAGEMENT FUNCTIO NS, CORPORATE SERVICE FUNCTIONS, MARKETING/BUSINESS PAGE 9 OF 23 ITA NO.2234/BANG/2016 DEVELOPMENT FUNCTION, CONCEPTUALISATION AND DESIGN OF THE PRODUCT, FUNCTIONAL SPECIFICATIONS AND REQUIREMENT ANALYSIS, CODING AND DOCUMENTATION, PROJECT MANAGEMENT, QUALI TY CONTROL, TESTING, INTEGRATION. 16.3 IT HAS ALSO BEEN SUBMITTED IN TP STUDY THAT, A SSESSEE HAS LIMITED PARTICIPATION IN CONCEPTUALISATION AND DESIGN AS WELL AS FUNCTIONAL SPECIFICATIONS AND REQUIREMENT A NALYSIS. 16.4 IT HAS BEEN SUBMITTED THAT AE DETERMINED IS A FUNCTIONAL SPECIFICATIONS AND REQUIREMENT ANALYSIS OF THE PRODUCTS DELIVERABLE TO THE CUSTOMER AND APPROVES T HE PRD PREPARED BY ASSESSEE. 16.5 FURTHER IT IS ALSO BEEN MENTIONED THAT ASSESSE E RECEIVES TECHNICAL ASSISTANCE COUPLED WITH REGULAR REVIEWS AND FEEDBACK FROM AE BOTH ON CHIP DESIGNING AND SOF TWARE DEVELOPMENT FUNCTION. ALSO THAT THE AE UNDERTAKES C HIP DESIGNING AND CODING OF SOFTWARE IN RESPECT OF MODULES/SOLUTIONS NOT BEING DEVELOPED BY ASSESSEE. IT HAS BEEN SUBMITTED THAT, ASSESSEE AND AE JOINTLY UNDERTAKE PROJECT MANAGEMENT TO ENSURE CLOSE COORDI NATION, QUALITY CONTROL AND MINIMAL REWORK IN THE DEVELOPME NT PROCESS. ASSETS: 16.6 IT IS SUBMITTED THAT, ALL RIGHTS ENTITLED INCL UDING ALL RIGHTS IN COPYRIGHTS AND OTHER INTELLECTUAL PROPERT Y RIGHTS FOR COURTS, DOCUMENTATION, SOFTWARE, TEST PROGRAMS AND OTHER MATERIALS TO BE DELIVERED TO AE SHALL BE OWNED BY A E. 16.7 IT HAS BEEN SUBMITTED THAT ASSESSEE OWNS TANGI BLE ASSETS LIKE COMPUTER EQUIPMENT, OFFICE LAB EQUIPMEN T PAGE 10 OF 23 ITA NO.2234/BANG/2016 VEHICLES ETC. ASSESSEE ALSO POSSESSES TRAINED AND O RGANISED WORKFORCE WHICH IT USES FOR PROVIDING SOFTWARE R&D SERVICES TO ITS AE. RISKS: 16.8. IT HAS BEEN SUBMITTED THAT ASSESSEE UNDERTAKE S LTD MARKET RISK AND FOREIGN EXCHANGE RISK. APART FROM T HAT SERVICE LIABILITY RISK, PRODUCT RISK AND R&D RISKS ARE OWNED BY THE AE. 17. BASED ON THE ABOVE WE SHALL ANALYSE THE COMPARA BLES ALLEGED BY ASSESSEE FOR EXCLUSION AS WELL AS INCLUS ION. (LD.AR RESTRICTED HIS ARGUMENTS TO GROUND 11 ADDITI ONAL GROUND AND GROUND 12.4. WE ARE THEREFORE CONSIDERIN G COMPARABLES ALLEGED IN THESE GROUNDS. HOWEVER, ASSE SSEE IS AT LIBERTY OF RAISING OTHER ISSUES IN APPROPRIATE YEARS.) GROUND NO.11 AND ADDITIONAL GROUND 18. THESE GROUNDS ARE RAISED BY ASSESSEE, CHALLENGI NG, INCLUSION OF FOLLOWING COMPARABLES FOR FUNCTIONAL/Q UALITATIVE DISSIMILARITIES AND EXCESSIVE TURNOVER. INFOSYS LTD LARSEN AND TOUBRO INFOTECH LTD MINDTREE LTD PERSISTENT SYSTEMS LTD RS SOFTWARE INDIA LTD 18.1 AT THE OUTSET LD.AR SUBMITTED THAT THESE COMPA RABLES HAVE BEEN EXCLUDED IN ASSESSEES OWN CASE FOR ASSES SMENT YEAR 2010-11 BY THIS ( TRIBUNAL) IN IT(TP)A NO.192/BANG/2015 FOR HAVING HUGE TURNOVER. AS WE A RE PAGE 11 OF 23 ITA NO.2234/BANG/2016 CONSIDERING THESE COMPARABLES ON TURNOVER LIMIT CRI TERIA, FUNCTIONAL DISSIMILARITY BECOMES ACADEMIC. 18.2 WE NOTE THAT THIS (TRIBUNAL) HAS ANALYSED THESE COMPARABLES ON TURN OVER FILES AS UNDER: 11. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NO TICE THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P.) LTD . V. DY. CIT [IT APPEAL NO. 1338/BANG/2010, DATED 30-4-2013] FOR ASSESSMENT YEAR 08-09, ON THE APPLICATION OF TURNOVER FILTER AND HOW THE SAID FILTER IS A VALID FILTER IN CHOOSING COMPARABLES. IT WAS THEREFORE ARGUED THAT THE LEARN ED CIT(A) WAS FULLY JUSTIFIED IN APPLYING THE AFORESAID FILTER AND EXCL UDING COMPARABLE COMPANIES CHOSEN BY THE TPO WHICH DID NOT PASS THE TEST AS LAID DOWN IN THE AFORESAID DECISION. THE LEARNED DR REITERATE D THE STAND OF THE REVENUE AS REFLECTED IN THE GROUNDS OF APPEAL OF TH E REVENUE. 12. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNED C OUNSEL FOR THE ASSESSEE AND THE LEARNED DR. IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P) LTD . (SUPRA), THIS TRIBUNAL ON APPLICATION OF THE TURNOVER FILTER WHILE SELECTING COMPARABLE COMPANIE S FOR COMPARABILITY ANALYSIS HELD AS FOLLOWS: '(1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE, BUT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCOME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLLED TRANSACTION WITH AN I NTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMPARED OR THE ENTERPRISES ENTERING I NTO SUCH TRANSACTION, WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH TRANSAC TION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT WH EREVER THERE ARE SOME DIFFERENCES SUCH DIFFERENCES SHOULD BE CAPABLE OF REASONABLE ACCURATE ADJUSTMENT IN MONETARY TERMS TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES. IT WAS HIS SUBMISSION THAT SIZE W AS AN IMPORTANT FACET OF THE COMPARABILITY EXERCISE. IT WAS SUBMITT ED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WOULD IMPACT C OMPARABILITY. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGARH BENCH IN THE CASE OF D Y. CIT V. QUARK SYSTEMS (P.) LTD . [2010] 38 SOT 207, WHEREIN THE SPECIAL BENCH HAD LAID DOWN THAT IT IS IMPROPER TO PROCEED ON THE BAS IS OF LOWER LIMIT OF 1 CRORE TURNOVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASONABLE CLASSIFICATION. SEVERAL OTHER DECISI ONS WERE REFERRED TO IN THIS REGARD LAYING DOWN IDENTICAL PROPOSITION . WE ARE NOT REFERRING TO THOSE DECISIONS AS THE DECISION OF THE SPECIAL BENCH ON PAGE 12 OF 23 ITA NO.2234/BANG/2016 THIS ASPECT WOULD HOLD THE FIELD. REFERENCE WAS ALS O MADE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERV ED AS FOLLOWS: 'SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PARTIES MIGHT AFFECT THE RELA TIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COM PARABILITY.' 12. THE ICAI TP GUIDELINES NOTE ON THIS ASPECT LAY DOWN IN PARA 15.4 THAT A TRANSACTION ENTERED INTO BY A RS. 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INT O BY A RS. 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. THE FACT THAT THEY OPERATE IN THE SAME MAR KET MAY NOT MAKE THEM COMPARABLE ENTERPRISES. THE RELEVANT EXTR ACT IS AS FOLLOWS [ON RULE 10B(3)]: 'CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE N OT MATERIAL, THE TRANSACTIONS WOULD BE COMPARABLE. THESE DIFFERENCES COULD EITHER BE WITH REFERENCE TO THE TRANSACTION OR WITH REFERENCE TO THE ENTERPRISE. FOR INSTANCE, A TRANSACTION ENTERED INTO BY A RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRA NSACTION ENTERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE R ELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE.' 13. IT WAS FURTHER SUBMITTED THAT THE TPO'S RANGE ( RS. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COMPANIES LI KE INFOSYS WHICH IS 277 TIMES BIGGER THAN THE ASSESSEE (TURNOVER OF RS. 13,149 CRORES AS COMPARED TO RS. 47.47 CRORES OF ASSESSEE). IT WA S SUBMITTED THAT AN APPROPRIATE TURNOVER RANGE SHOULD BE APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPANIES. 14. REFERENCE WAS MADE TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (I NDIA) PVT. LTD . V.DCIT, ITA NO.1231/BANG/2010, WHEREIN RELYING ON DUN AND BRADSTREET'S ANALYSIS, THE TURNOVER OF RS. 1 CRORE TO RS. 200 CRORES WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSER VATIONS WERE BROUGHT TO OUR NOTICE: '9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPA NIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A L IMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARAB LES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LI MIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTI ON OF THE PAGE 13 OF 23 ITA NO.2234/BANG/2016 L EARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTE RS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO B ARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALS O HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIV E BETTER OUTPUT. A SMALL C OMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCI NG PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED F ROM COMPARABLES, THEN THE SUPER PROFIT MAKI NG COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & B RADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKI NG THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASS IFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE . IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CROR E TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSE SSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMP ANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SH OULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STU DY.' 15. IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PRO POSITION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN T HE FOLLOWING CASES: 1. M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED V. A CIT (ITA NO.1413/BANG/2010) 2. M/S GENESIS MICROCHIP (I) PRIVATE LIMITED V. DCI T (ITA NO.1254/BANG/20L0). 3. ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (ITA NO. 1171/BANG/2010). IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURN OVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COMPARAB LE WITH THE ASSESSEE. 16. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HAVING TURN OVER OF MORE THAN RS. 200 CRORES AS COMPARABLES. IN THESE CIRCUM STANCES, IT WAS SUBMITTED BY HIM THAT THE ASSESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE P ROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECIDING TH E ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY IN COME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVI NG REGARD TO THE ARM'S LENGTH PRICE. SEC. 92B PROVIDES THAT 'INTERNA TIONAL TRANSACTION' PAGE 14 OF 23 ITA NO.2234/BANG/2016 MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE N ATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, O R PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTH ER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT O R ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BEN EFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR M ORE OF SUCH ENTERPRISES. SEC.92A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE TRANS ACTION BETWEEN THE ASSESSEE AND ITS AE WAS AN INTERNATIONAL TRANSACTIO N ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES T HE MANNER OF COMPUTATION OF ARM'S LENGTH PRICE IN AN INTERNATION AL TRANSACTION AND IT PROVIDES: (1) THAT THE ARM'S LENGTH PRICE IN RELATION TO AN I NTERNATIONAL TRANSACTION SHALL BE DETERMINED BY A NY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR S UCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE B OARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARM'S LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMIN ED BY THE MOST APPROPRIATE METHOD, THE ARM'S LE NGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARM'S LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNAT IONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT E XCEED FIVE PER CENT OF THE LATTER, THE PRICE AT WHICH THE INTE RNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE D EEMED TO BE THE ARM'S LENGTH PRICE. PAGE 15 OF 23 ITA NO.2234/BANG/2016 (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, O N THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSI ON, OF THE OPINION THAT (A ) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE W ITH SUB-SECTIONS (1) AND (2); OR (B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB- SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR (C) THE INFORM ATION OR DATA USED IN COMPUTATION OF THE ARM'S LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR (D ) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SP ECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQU IRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECT ION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARM'S LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSAC TION IN ACCORDANCE WITH SUB- SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM:' 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 9 2C: '10B. (1) FOR THE PURPOSES OF SUB- SECTION (2) OF SECTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEIN G THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A) TO (D) (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVA NT BASE; (II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROL LED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COM PUTED PAGE 16 OF 23 ITA NO.2234/BANG/2016 HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF A NY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRAN SACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN I N THE OPEN MARKET; (IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE (I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SU B - CLAUSE ( III ); (V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TA KEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB- RULE (1), THE COMPARABILITY OF AN INTERNATIONAL 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 ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICI TLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; (D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INC LUDING THE GEOGRAPHICAL LOCA TION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOU R AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMEN T AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATER IALLY PAGE 17 OF 23 ITA NO.2234/BANG/2016 AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING M ORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED.' 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF T HE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPARED WI TH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACTORS SET OUT TH EREIN. BEFORE US THERE IS NO DISPUTE THAT THE TNMM IS THE MOST APPRO PRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSA CTION. THE DISPUTES ARE WITH REGARD TO THE COMPARABILITY OF TH E COMPARABLE RELIED UPON BY THE TPO. 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF L AW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DEC ISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOW N THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA I N CHOOSING THE COMPARABLES. THE ASSESSEE'S TURNOVER IS RS. 47,46,6 6,638. IT WOULD THEREFORE FALL WITHIN THE CATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DO WN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD . V.CDIT, ITA NO.1231/BANG/2010). THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOWN IN SEVERAL DECISIONS REFERRED TO BY TH E LD. COUNSEL FOR THE ASSESSEE. APPLYING THOSE TESTS, THE FOLLOWING C OMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ., TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD . 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES PAGE 18 OF 23 ITA NO.2234/BANG/2016 (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES.' 13-14. THE AFORESAID DECISION CLEARLY SETS OUT THE REASON WITH REFERENCE TO RULE 10B(2) OF THE RULES WHICH PROVIDES THAT UNC ONTROLLED TRANSACTION HAS TO BE COMPARED WITH INTERNATIONAL TRANSACTION H AVING REGARD TO THE FACTORS SET OUT THEREIN. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P.) LTD . (SUPRA), WE UPHOLD DECISION OF THE CIT(A), TO EXCLUDE THE AFORESAID COMPANIES FROM THE LIST OF CO MPARABLE COMPANIES ON THE BASIS OF TURNOVER AND SIZE. THE AO IS DIRECT ED TO COMPUTE THE ARITHMETIC MEAN BY EXCLUDING THE AFORESAID COMPANIE S FROM THE LIST OF COMPARABLE. BESIDES THE ABOVE, THE BANGALORE BENCHE S OF THE TRIBUNAL HAVE BEING TAKING A CONSISTENT VIEW AS LAID DOWN IN THE AFORESAID DECISION. WE ARE THEREFORE OF THE VIEW THAT THERE I S NO MERIT IN THIS APPEAL BY THE REVENUE. ACCORDINGLY THE SAME IS DISM ISSED. 18.2 WE NOTE THAT, BEFORE US ASSESSEE ALLEGED EXC LUSION RS SOFTWARE INDIA PVT. LTD. FOR YEAR UNDER CONSIDERATI ON, ON TURNOVER FILTER, AS THIS COMPANY HAS HUGE TURNOVER OF 2472.08%. 18.3 LD. CIT,DR RELIED ON ORDERS PASSED BY AUTHORIT Y BELOW. 18.4 WE NOTE THAT INTERNATIONAL TRANSACTION FOR YEA R UNDER CONSIDERATION AND ASST. YEAR 2010-11 ARE SIMILAR. THERE IS NOTHING ON RECORD PLACED BY REVENUE THAT BRINGS OUT ANY FACTUAL DIFFERENCES. RESPECTFULLY FOLLOWING ABOVE VIEW, WE DIRECT LD.AO/ TPO TO EXCLUDE ALL THESE COMPARABLES, FOR HAVING EXCESS IVE TURNOVER. ACCORDINGLY ADDITIONAL GROUNDS STANDS ALLOWED. 19. ASSESSEE CHALLENGED GENESIS INTERNATIONAL CORP LTD., FOR BEING FUNCTIONALLY NOT SIMILAR. 19.1 LD. AR SUBMITTED THAT, THIS COMPANY OWNS INTAN GIBLE ASSETS, WHICH ARE PECULIAR TO SOFTWARE PRODUCTS. AC CORDING TO PAGE 19 OF 23 ITA NO.2234/BANG/2016 LD. AR THIS COMPANY IS ENGAGED IN PROVIDING GEOGRAP HICAL INFORMATION SERVICES COMPRISING OF PHOTOGRAMMETRY, REMOTE SENSING, CARTOGRAPHY, DATA CONVERSION, STATE OF THE ART TERRORIST REAL AND 3-D GEO-CONTENT INCLUDING LOCATI ON-BASED AND OTHER COMPUTER-BASED RELATED SERVICES. 19.2 LD. TPO CONSIDERED TO BE A COMPARABLE WITH ASS ESSEE BY OBSERVING THAT IT DEVELOPED SOFTWARE FOR MAPPING AND GEO SPATIAL SERVICES. 19.3 ON THE CONTRARY LD.DR PLACED RELIANCE ON OBSE RVATIONS OF AUTHORITIES BELOW. 19.4 WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH S IDES IN LIGHT OF RECORDS PLACED BEFORE US. 19.5 WE NOTE THAT THIS COMPANY RENDERS MAPPING AND GEO SPATIAL SERVICES IN THE PROCESS OF WHICH IT DEVELOP S SOFTWARE. WE REFER TO THE OBSERVATIONS OF THIS (TRIBUNAL) IN CASE OF (CGI INFORMATION SYSTEMS AND MANAGEMENT CONSULTANTS PVT. LTD. VS ACIT) REPORTED IN [(2018) 94 TAXMANN.COM 97] WHICH IS AS UNDER: 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 MAPPING AND GEO SPATIAL SERVICES. IN RENDERING SUCH SERVICES IT DEVELOPS SO FTWARE. BUT THAT DOES NOT MEAN THAT THIS COMPANY IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT. THE BUSINESS PROFILE OF THIS COMPANY A S PER THE ANNUAL REPORT DOES NOT SHOW THAT THIS COMPANY IS INTO SOFT WARE DEVELOPMENT SERVICE. THE ONLY LINE OF BUSINESS THAT THIS COMPAN Y CARRIES ON IS RENDERING GIS BASED SERVICES AND THIS IS CLEAR FROM THE ANNUAL REPORT WHICH SPECIFIES THAT SINCE THE COMPANY CARRIES ON O NLY ONE LINE OF BUSINESS VIZ., GIS BASED SERVICES THERE IS NO NEED TO GIVE ANY SEGMENTAL RESULTS. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THERE IS NO BASIS FOR THE TPO TO CONCLUDE THAT THIS COMPA NY IS PREDOMINANTLY INTO SOFTWARE-DEVELOPMENT SERVICES. T HE PRESENCE OF PAGE 20 OF 23 ITA NO.2234/BANG/2016 INTANGIBLE ASSETS IS INDICATIVE OF THE FACT THAT TH IS COMPANY IS NOT IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. THE TPO HAS OVERLOOKED THIS ASPECT AND PROCEEDED ON THE BASIS THAT THE PRESENCE OF INTANGIBLE ASSETS WOULD NOT BE SIGNIFICANT. RULE 1013(2) OF TH E INCOME TAX RULES, 1962 (RULES) SPECIFICALLY PROVIDES THAT FOR THE PUR POSES OF SUB-RULE (1) OF RULE LOB, THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFER ENCE TO THE FOLLOWING, NAMELY: (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT AS SETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIV E PARTIES TO THE TRANSACTIONS; IN THE GIVEN FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT GENESYS INTERNATIONAL CORPORATION LTD., CANNOT BE CONSIDERE D AS A COMPARABLE COMPANY AND THE SAID COMPANY SHOULD BE EXCLUDED FRO M THE FINAL LIST OF COMPARABLE COMPANIES. WE HOLD ACCORDINGLY. 19.6 WE NOTE THAT THIS TRIBUNAL EXPRESSED ABOVE OBSERVATIONS FOR ASSESSMENT YEAR 2010-11 AND 2012-1 3. PRESENT YEAR UNDER CONSIDERATION BEFORE US IS ASSES SMENT YEAR 2012-13. 19.7 THERE IS NOTHING ON RECORD BROUGHT BY REVENUE TO COUNTER ABOVE OBSERVATIONS OF THIS TRIBUNAL . RESPECTFULLY FOLLOWING THE SAME, WE DIRECT LD.AO/TPO TO EXCLUDE ALL THESE COMPARABLE. ACCORDINGLY WE DIRECT LD.AO/TPO TO EXCLUDE THIS ALL EGED COMPARABLES FROM FINAL LIST. ACCORDINGLY, GROUND 12.14 RAISED BY ASSESSEE STANDS ALLOWED. 20 . WE NOW NOTE THAT, OUT OF 10 COMPARABLES FINALL Y SELECTED BY LD.TPO, TWO HAVE BEEN ALREADY EXCLUDED BY DRP. AMONGST THE BALANCE 8 COMPARABLES, 7 COMPARABLE STA ND PAGE 21 OF 23 ITA NO.2234/BANG/2016 EXCLUDED BY APPLYING TURNOVER FILTER BY FOLLOWING V IEW TAKEN BY COORDINATE BENCH IN ASSESSEES OWN CASE FOR ASST . YEAR 2010-11 (SUPRA) AND ONE COMPARABLE FOR FUNCTIONAL DISSIMILARITY. WE NOTE THAT ONLY ONE COMPARABLE R EMAINS FOR DETERMINING ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION. UNDER SUCH CIRCUMSTANCES WE ARE OF THE VIEW THAT, ENTIRE ISSUE SHOULD BE RESTORED TO THE FILE OF LD. AO/TPO FOR UNDERTAKING EXERCISE AFRESH BY SELECTIN G FRESH SET OF COMPARABLE COMPANIES IN RESPECT OF SOFTWARE R & D SEGMENT. ACCORDINGLY, WE SET ASIDE THE ORDER PASS ED BY LD. AO ON THIS ISSUE AND RESTORE THE SAME TO HIS FILE F OR EXAMINING THE ISSUE AFRESH IN THE LIGHT OF DISCUSSI ONS MADE SUPRA . 20.1 WE NOTE THAT SIMILAR DIRECTION WAS ISSUED TO LD.AO/TPO FOR ASSESSMENT YEARS 2011-12 AND 2013-14 IN ASSESSEES OWN CASE REPORTED IN [2020] 117 TAXMANN.COM 304. 20.2 UNDER SUCH CIRCUMSTANCES GROUND NO. 12.4 IS NO T ADJUDICATED BY US LEAVING IT OPEN TO BE CONSIDERED BY LEARNT AO/TPO AFRESH. 20.3 WE DIRECT LEARNT LD.TPO TO UNDERTAKE FRESH SEA RCH ANALYSIS HAVING REGARDS THE ABOVE OBSERVATIONS AND THE VIEW TAKEN BY THIS (TRIBUNAL) IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING AND SUCCEEDING ASSESSMENT YEA RS. ASSESSEE IS DIRECTED TO FILE ALL RELEVANT INFORMATI ON/DETAILS TO ASSIST LD. AO/TPO FOR DETERMINING ARMS LENGTH PRICE OF THE TRANSACTION IN ACCORDANCE WITH LAW. PAGE 22 OF 23 ITA NO.2234/BANG/2016 IN THE RESULT APPEAL FILED BY ASSESSEE STANDS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH AUGUST, 2020. SD/- SD/- (B. R. BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 14 TH AUGUST, 2020. /VMS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME-TAX APPELLATE TRIBUNA L. BANGALORE. PAGE 23 OF 23 ITA NO.2234/BANG/2016 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -08-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -08-2020 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -08-2020 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -08-2020 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -08-2020 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -08-2020 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -08-2020 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS