JOHN DEERE INDIA P. LTD, Pune V. ACIT, Pune

ITA 2236/PUN/2012

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 0828 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-11-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 17-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 09-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Question of law; Wholly owned subsidiary
• Section: 92C; 43B; 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E . . , , ' , $ % BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO. 2236/PN/2012 $' ' / ASSESSMENT YEAR : 2008-09 JOHN DEERE INDIA PVT. LTD., CYBERCITY, MAGARPATTA CITY, HADAPSAR, PUNE-411028 PAN : AAACJ4233B ....... / APPELLANT / V/S. ACIT, CIRCLE 11(1), PUNE . / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI S.K. RASTOGI / DATE OF HEARING : 29-09-2015 / DATE OF PRONOUNCEMENT : 18-11-2015 / ORDER PER VIKAS AWASTHY, JM : THE APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE AS SESSMENT ORDER DATED 28-09-2012 PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR T HE ASSESSMENT YEAR 2008-09. 2 ITA NO. 2236/PN/2012, A.Y. 2008-09, 2. THE ASSESSEE HAS FILED ELABORATE GROUNDS OF APPEAL. H OWEVER, A PERUSAL OF GROUNDS RAISED WOULD SHOW THAT THE ASSESSEE HAS IMPUGNED THE ASSESSMENT ORDER PRIMARILY ON THE 3 ISSUES : I. DISALLOWANCE OF DEDUCTION U/S. 35D. II. RESTRICTING THE CLAIM OF DEDUCTION U/S. 10A TO RS.20,37,01,518 /- AS AGAINST THE CLAIM OF RS.22,87,09,861/-. III. ADDITION OF RS.19,30,02,824/- U/S. 92CA BY SUBSTITUTING SOME NEW COMPARABLES AND REJECTING THE ENTITIES, SELECTED BY T HE ASSESSEE AS COMPARABLES FOR DETERMINING ALP. 3. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORDS ARE : THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY COMPANY OF DEERE A ND CO. USA. THE ASSESSEE IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES, ITES AND SALES SUPPORT SERVICES TO JOHN DEERE GROUP EN TITIES {ASSOCIATED ENTERPRISES (AES)}. THE ASSESSEE IS HAVING TH REE DIVISIONS; (I) SOFTWARE DEVELOPMENT; (II) DESIGN, ENGINEERING & TESTING, AND (III) BUSINESS SUPPORT SERVICES. FOR BENCHMARKING ITS INTERNAT IONAL TRANSACTIONS WITH ITS AES, THE ASSESSEE SELECTED TNM MET HOD AS THE MOST APPROPRIATE METHOD. AS PER THE ASSESSEE THE MAR GIN OF OPERATING PROFIT TO TOTAL OPERATING COST OF THE COMPARABLES ENTITIES WAS 12.72% AND THAT OF THE ASSESSEE IS 12%. SINCE, THE MARGIN OF TH E ASSESSEE IS WITHIN +/- 5% RANGE, THE TRANSACTION OF PROVIDING SOFTWARE SERVICES TO THE AES WAS ADOPTED AS ALP. THE ASSESSEE SELECTED 23 COMPANIES AS COMPARABLE ENTITIES FOR SOFTWARE DEVELOPMENT SERVICES AND 11 COMPANIES AS COMPARABLE FOR DESIGN, ENGINEERING, TESTING AN D AUTHORING SERVICES. FOR BUSINESS SUPPORT SERVICES THE AS SESSEE SELECTED 18 COMPANIES AS COMPARABLES. 4. THE ASSESSEE FURNISHED TP STUDY REPORT BEFORE THE TRANSFER PRICING OFFICER (TPO). IN RESPECT OF SOFTWARE DEVELOPMENT S ERVICES, THE TPO REJECTED MOST OF THE COMPANIES SELECTED BY THE AS SESSEE ON VARIOUS GROUNDS AND DETERMINED THE ALP BY SUBSTITUTING SOME NE W COMPARABLE 3 ITA NO. 2236/PN/2012, A.Y. 2008-09, ENTITIES. THE TPO FINALLY CONSIDERED 14 COMPANIES AS COMPA RABLES WITH THE ASSESSEE. OUT OF THESE 14 COMPANIES, THE TPO RETAIN ED 9 COMPANIES WHICH WERE SELECTED BY THE ASSESSEE WHILE REMA INING 5 COMPANIES WERE INTRODUCED BY THE TPO. ACCORDING TO THE TPO THE AVERAGE OPERATING MARGIN TO TOTAL COST OF THE 14 COMPAR ABLES WAS 24.63% AFTER CALCULATING WORKING CAPITAL ADJUSTMENT. THUS, THE TPO HELD THAT THE ASSESSEE SHOULD HAVE EARNED OPERATING MA RGIN @ 24.63% AND ACCORDINGLY PROPOSED ADJUSTMENT OF RS.8,28,77,622/- IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. 4.1 IN RESPECT OF DESIGN & ENGINEERING SERVICES THE TPO A CCEPTED ONLY 3 COMPARABLES OUT OF 11 SELECTED BY THE ASSESSEE. ON TH E BASIS OF THE 2 COMPARABLE ENTITIES THE TPO ARRIVED AT NET OPERATING MAR GIN OF 31.62%. ACCORDINGLY, HE PROPOSED AN ADJUSTMENT OF RS.13,54,20,738/-. 4.2 AS REGARDS BUSINESS SUPPORT SERVICES THE TPO ACCEP TED ONLY 7 COMPARABLES AS AGAINST 18 SELECTED BY THE ASSESSEE. TH E ASSESSEE INCLUDED 2 MORE COMPANIES AS COMPARABLES AND DETERMINED AVERAGE OPERATING MARGIN OF FINALLY SELECTED COMPANIES AT 23.37%. AC CORDINGLY, FOR BUSINESS SUPPORT SERVICES, THE TPO PROPOSED AN ADJU STMENT OF RS.45,61,355/-. 5. ON THE BASIS OF PROPOSED ADJUSTMENTS OF ALP THE ASS ESSING OFFICER MADE DRAFT ASSESSMENT ORDER ON 17-11-2011. APAR T FROM THE ADDITIONS MADE ON ACCOUNT OF INTERNATIONAL TRANSACTIONS TH E ASSESSING OFFICER MADE DISALLOWANCE OF RS.37,60,272/- U/S. 35D AND RS.20,37,01,518/- U/S. 10A OF THE ACT ON STPI UNIT. THE ASS ESSEE CLAIMED DEDUCTION OF RS.22,87,09,861/- U/S. 10A OF THE ACT. THE ASSESSEE IS HAVING 2 UNITS. BOTH THE UNITS ARE RENDERING IT AND IT ENABLED SERVICES TO THEIR HOLDING AND OTHER GROUP COMPAN IES. ONE OF 4 ITA NO. 2236/PN/2012, A.Y. 2008-09, THE UNIT IS ELIGIBLE FOR DEDUCTION U/S. 10A OF THE ACT. THE A SSESSEE HAD NOT MAINTAINED SEPARATE BOOKS OF ACCOUNT FOR THE UNIT ELIG IBLE TO CLAIM DEDUCTION U/S. 10A. THE ASSESSING OFFICER HELD, THAT IN T HE ABSENCE OF SEPARATE BOOKS OF ACCOUNT THE RESULT SHOWN BY THE ASS ESSEE ARE NOT FULLY VERIFIABLE. THE CORRECTNESS/REASONABLENESS OF THE EXPE NSES ALLOCATED BY THE ASSESSEE BETWEEN THE TAXABLE AND NON- TAXABLE UNITS CANNOT BE ASCERTAINED. THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 80IA(8) OF THE ACT. THE ASSESSING OFFICER ALLOCATED O PERATING EXPENSES BETWEEN ELIGIBLE AND NON-ELIGIBLE UNITS ON THE BA SIS OF REVENUE RECEIPTS OF THE RESPECTIVE UNITS. THE ASSESSING OFFICER ALS O MADE DISALLOWANCE U/S. 40(A)(I) AND 43B OF THE ACT IN RESPECT OF UNIT ELIGIBLE FOR DEDUCTION U/S.10A. THE ASSESSING OFFICER DISALLOWED DEDUC TION U/S. 10A ON THE DISALLOWANCE MADE U/S. 40(A)(I) AND 43B OF TH E ACT IN RESPECT OF PROFITS OF STPI UNIT. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJECTIONS BEFORE DISPUTE RESOLUTION PANEL (DRP). THE DRP V IDE DIRECTIONS U/S. 44C(5) DATED 28-08-2012 REJECTED THE OBJ ECTIONS OF THE ASSESSEE. IN THE LIGHT OF THE DIRECTIONS OF DRP THE ASSESSING OFFICER PASSED THE IMPUGNED ASSESSMENT ORDER, AGAINST WHICH THE ASSESS EE IS IN APPEAL BEFORE THE TRIBUNAL. 6. SHRI NIKHIL PATHAK APPEARING ON BEHALF OF THE ASSESSEE S UBMITTED THAT THE ASSESSEE HAS RAISED PRIMARILY 3 GROUNDS IN THE GROUNDS OF APPEAL. AS FAR AS GROUND NO. 1 RELATING TO DISALLOWANCE OF DEDUCTION U/S. 35D IS CONCERNED, THE SAME IS NOT PRESSED. GROUND NO. 2 RELATES TO RESTRICTING THE CLAIM OF DEDUCTION U/S. 10A ON THE GROU ND THAT DEDUCTION U/S. 10A IS NOT ALLOWABLE IN RESPECT OF DISALLOWANCE MADE U/S. 40(A)(I) AND 43B OF THE ACT. THE AUTHORITIES BELOW HAVE ERRED IN 5 ITA NO. 2236/PN/2012, A.Y. 2008-09, NOT APPRECIATING THE FACT THAT THE AMOUNT DISALLOWED U/S. 40(A)(I) AND 43B RESULTS IN HIGHER BUSINESS INCOME OF THE ASSESSEE. TH EREFORE, THE DEDUCTION U/S. 10A OUGHT TO HAVE BEEN GRANTED. THE LD . COUNSEL CONTENDED THAT THE DRP HAS ERRED IN HOLDING THAT THE A LLOCATION OF VARIOUS EXPENSES BY THE ASSESSEE BETWEEN ELIGIBLE AND NO N-ELIGIBLE UNITS ARE WITHOUT ANY PROPER BASIS. THE DRP FURTHER ERR ED IN APPROPRIATING THE ACTUAL EXPENSES INCURRED BY INDIVIDUAL UN IT ON TURNOVER BASIS. THE AUTHORITIES BELOW HAVE FAILED TO TAKE IN TO CONSIDERATION THE FACT THAT THESE EXPENSES RELATE TO TH E INDIVIDUAL UNITS AND HENCE THERE WAS NO REASON TO APPROPRIATE THE SAM E ON THE BASIS OF TURNOVER OF EACH UNIT. THE LD. COUNSEL CONTENDED THAT S IMILAR ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE ASSESSMENT YEAR 2007-08. THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THE LD. COUNSEL PLACED ON RECORD A COPY OF THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 1319/PN/2011 FOR ASSESSMENT YEAR 2007-08 DECIDED ON 10-10-2014. 7. IN RESPECT OF THIRD GROUND IN THE APPEAL, THE LD. COUN SEL SUBMITTED THAT THE ASSESSEE IS RENDERING 3 TYPES OF SER VICES IT ITS AES; (I) SOFTWARE DEVELOPMENT SERVICES, (II) DESIGN, ENGINEERING, TESTING AND AUTHORING SERVICES, AND (III) BUSINESS SUPPORT SERVICES. THE A SSESSEE APPLIED TNM METHOD FOR DETERMINING ALP. THE TPO ACCEPTED THE METHOD FOLLOWED BY ASSESSEE IN DETERMINING ALP. THUS, THER E IS NO DISPUTE ABOUT THE METHOD FOLLOWED BY THE ASSESSEE IN DET ERMINING ALP. HOWEVER, THE TPO REJECTED THE COMPARABLES SELECTED BY THE ASSESSEE FOR DETERMINING ALP AND SUBSTITUTED HIS OWN LIST OF COMPARABLES TO WHICH THE ASSESSEE HAD RAISED OBJECTIONS. THE COMPARABLES SE LECTED BY THE TPO WERE EITHER FUNCTIONALLY DIFFERENT OR HAD ABNORMALLY HIG H PROFIT MARGINS. SOME OF THE COMPARABLES SELECTED BY THE ASSES SEE WERE REJECTED BY THE TPO ON WHIMSICAL GROUND IN AN UNJUSTIFIED MANNER. 6 ITA NO. 2236/PN/2012, A.Y. 2008-09, THE ASSESSEE INITIALLY SELECTED 23 COMPANIES AS COMPARABLE S FOR SOFTWARE DIVISION. THE TURNOVER OF SOFTWARE DIVISION IS RS.73,52,09,170/-. THE OPERATING MARGIN OF SOFTWARE DIVISION IS 12.50%. THE ADDITION MADE BY TPO IN RESPECT OF SOFTWARE D IVISION IS RS.8,35,80,880/-. THE DRP UPHELD THE SELECTION OF COMPARABLE COMPANIES BY THE TPO AND DIRECTED THE ASSESSING OFFICER T O ALLOW WORKING CAPITAL ADJUSTMENT. AFTER ALLOWING WORKING CAPITAL AD JUSTMENT, THE OPERATING MARGIN OF THE COMPARABLES WAS COMPUTED AS 25.30%. THE OBJECTIONS RAISED BY THE LD. COUNSEL FOR ASSESSEE IN RESPECT OF COMPARABLES SELECTED BY THE TPO IN RESPECT OF SOFTWARE D IVISION ARE AS UNDER: COMPARABLES SELECTED BY THE TPO OBJECTIONS RAISED BY THE ASSESSEE BODHTREE CONSULTING LTD. THE SAID COMPANY IS NOT EXCLUSIVELY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND HENCE, THE SAME CANNOT BE CONSIDERED AS COMPARABLE ENTITY. THE LD. COUNSEL IN SUPPORT OF HIS SUBMISSIONS RELIED ON THE DECISION OF CO- ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BARCLAYS TECHNOLOGY CENTRE INDIA (P) LTD. VS. ACIT REPORTED AS 56 TAXMANN.COM 386 (PUNE)(TRIB.). E - ZEST SOLUTIONS LTD. THE LD. COUNSEL SUBMITTED THAT THE SAID COMPANY IS FUNCTIONALLY DIFFERENT. PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SYMPHONY SERVICES PUNE (P) LTD. VS. ITO REPORTED AS 46 TAXMANN.COM 182 (PUNE)(TRIB.) HAS HELD THAT E-ZEST SOLUTIONS LTD. IS NOT ENGAGED IN SOFTWARE DEVELOPMENT. SINCE, THE SAID COMPANY IS ENGAGED IN A DIFFERENT ACTIVITY, IT SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF BARCLAYS TECHNOLOGY CENTRE INDIA (P) LTD. (SUPRA). HELIOS & MATHESON INFORMATION TECH. THE LD. COUNSEL CONTENDED THAT THE SAID COMPANY WAS REJECTED AS COMPARABLE ENTITY IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007-08 ON THE GROUND THAT IT IS FUNCTIONALLY NOT COMPARABLE. 7 ITA NO. 2236/PN/2012, A.Y. 2008-09, INFOSYS LTD. THE LD. COUNSEL SUBMITTED THAT THE COMPANY WAS REJECTED AS COMPARABLE ENTITY IN ASSESSEES OWN CASE FO R ASSESSMENT YEAR 2007-08. THE ASSESSEE REFERRED TO PARA 34 OF THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2007-08 IN ITA NO. 1319/PN/2011 DECIDED ON 10-10- 2014. KALS INFORMATION SYSTEM THE LD. COUNSEL SUBMITTED THAT THE COMPANY IS NOT EXCLUSIVELY ENGAGED IN THE SOFTWARE DEVELOPMENT SERVICES. THUS, THE SAME CANNOT BE CONSIDERED AS COMPARABLE ENTITY. FURTHER, THE SAID COMPANY WAS REJECTED AS COMPARABLE ENTITY IN ASSESSEES OWN CASE FO R ASSESSMENT YEAR 2007-08 IN PARA 37 OF THE ORDER OF TRIBUNAL. SIMILAR VIEW HAS BEEN TAKEN BY THE CO- ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SYMPHONY SERVICES PUNE (P) LTD. (SUPRA) AND BARCLAYS TECHNOLOGY CENTRE INDIA (P) LTD. (SUPRA). FCS SOFTWARE SOLUTIONS LTD. THE LD. COUNSEL SUBMITTED THAT THE OPERATING MARGIN OF THE SAID COMPANY IS 57.02% BEFORE WORKING CAPITAL ADJUSTMENT. THE COMPANY IS A SUPER PROFIT MAKING COMPANY AND CANNOT BE CONSIDERED AS COMPARABLE. THE DRP HAS ITSELF REJECTED FCS SOFTWARE LTD. AS COMPARABLE IN SOME OF THE CASES ON SIMILAR GROUNDS. IN THE CASE OF BARCLAYS TECHNOLOGY CENTRE INDIA (P) LTD. (SUPRA), THE PUNE BENCH OF THE TRIBUNAL HAS HELD THAT THE RESULTS OF FCS SOFTWARE LTD. ARE ABNORMAL FOR ASSESSMENT YEAR 2008-09 AND HENCE, THE SAID COMPANY HAS TO BE EXCLUDED. 8. THE LD. COUNSEL CONTENDED THAT THE TPO REJECTED SO ME OF THE COMPARABLES CONSIDERED BY THE ASSESSEE FOR DETERMINING ALP. HOWEVER, FROM THE LIST OF REJECTED COMPARABLES, THE FOLLOWING TWO SHOU LD HAVE BEEN INCLUDED: COMPARABLES REJECTED BY THE TPO OBJECTIONS RAISED BY THE ASSESSEE AZTEC SOFT LTD. THE TPO HAS REJECTE D THE SAID COMPANY ON THE GROUND THAT IT IS IN RESTRUCTURING PHASE AND THE RELATED PARTY TRANSACTIONS (RPT) ARE MORE THAN 25%. THE DRP HAS UPHELD THE OBSERVATIONS OF THE TPO. THE AUTHORITIES 8 ITA NO. 2236/PN/2012, A.Y. 2008-09, BELOW HAVE FAILED TO TAKE NOTE OF THE FACT THAT AZTEC SOFT LTD. WAS NOT IN RESTRUCTURING PHASE IN THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2008-09. THIS FACT WAS BROUGHT TO THE NOTICE OF THE AUTHORITIES BELOW. THE TOTA L REVENUE GENERATED BY THE COMPANY IN THE PERIOD RELEVANT TO ASSESSMENT YEAR 2008-09 WAS ABOUT RS.225.50 CRORES. IN F.Y. 2006-07, THE REVENUE GENERATED FROM SOFTWARE DEVELOPMENT AND SERVICES WAS 241.43 CRORES. A COMPARATIVE ANALYSIS OF THE ABOVE FIGURES SHOW THAT THERE WAS NO DRASTIC CHANGE (FALL) IN THE REVENUE OF THE COMPANY. FURTHER, FROM THE PERUSAL OF ANNUAL REPORT OF AZTEC SOFT LTD. ON STANDALONE BASIS, IT IS EVIDENT THAT THERE IS NO EXCEPTIONAL ITEM ON SALE OF ANY UNIT. THUS, THE CONTENTION OF THE TPO THAT THE COMPANY IS IN RESTRUCTURING PHASE IS NOT TENABLE. THE LD. COUNSEL SUBMITTED THAT THE RELATED PARTY TRANSACTION (RPT) FILTER APPLIED BY THE AUTHORITIES BELOW CONSIDERING THE RELATED PARTY TRANSACTIONS IN RESPECT OF BOTH REVENUE AND EXPENDITURE IN NUMERATOR AND ONLY REVENUE IN DENOMINATOR, IS NOT CORRECT. THE CORRECT PERCENTAGE OF RELATED PARTY TRANSACTION IN THE CASE OF AZTEC SOFT LTD. IS 18.69% AND NOT 25% AS HAS BEEN CALCULATED BY THE TPO. THUS, THE REJECTION OF AZTEC SOFT LTD. AS COMPARABLE ENTITY IS WRONG. SIP TECHNOLOGIES AND EXPORTS LTD. THE LD. COUNSEL SUBMITTED THAT THE CO MPANY HAS BEEN REJECTED AS COMPARABLE ON THE GROUND THAT IT HAS INCURRED LOSS IN THE CURRENT YEAR. SIP TECHNOLOGIES IS NOT A PERSISTENTLY LOSS MAKING ENTITY. IT WAS ACCEPTED AS A COMPARABLE BY THE LD. TPO IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08. IN F.Y. 2007-08 AND IN THE EARLIER YEARS THE COMPANY HAD SUBSTANTIAL PROFIT. SIMPLY BECAUSE THE REVENUE OF THE COMPANY IN THE FINANCIAL YEAR UNDER CONSIDERATION VIZ-A-VIZ THE REVENUE IN EARLIER FINANCIAL YEARS HAS DECLINE, IT CANNOT BE A REASON FOR REJECTING THE COMPANY AS COMPARABLE. THE LD. COUNSEL PRAYED FOR INCLUDING AZTEC SOFT LTD. AND SIP TECHNOLOGIES AND EXPORTS LTD. AS COMPARABLE ENTITIES FOR DETERMINING ALP. 9 ITA NO. 2236/PN/2012, A.Y. 2008-09, 9. IN RESPECT OF DESIGN, ENGINEERING, TESTING AND AUTHORIN G SERVICES DIVISION, THE LD. COUNSEL SUBMITTED THAT THE TOTAL TURNOVER OF THE ASSESSEE IN THE SAID DIVISION IS RS.86,42,20,000/-. THE OPER ATING MARGIN OF THIS DIVISION IS 14.30%. THE ASSESSING OFFICER MADE A DDITION OF RS.10,94,21,944/-. THE ASSESSEE HAD INITIALLY SELECTED 11 COMPANIES AS COMPARABLES. WHILE SELECTING THE COMPARABLES, THE ASSES SEE HAD CONSIDERED THE DATA OF 3 YEARS. THE TPO HELD THAT THE DATA OF CURRENT YEAR SHOULD ONLY BE CONSIDERED AND REJECTED SOME COMP ARABLES SELECTED BY THE ASSESSEE AND INTRODUCED SOME NEW COMPANIES AS COMPARABLE ENTITIES. FINALLY, THE ASSESSING OFFICER CALCULATED THE OPERAT ING MARGIN OF THE COMPARABLES ON THE BASE OF 6 COMPANIES AT 28.77%. HOWEVER, ONE OF THE COMPANIES INCLUDED BY THE TPO I.E. M/S. KLG SYSTEL LTD. WAS EXCLUDED BY THE DRP FROM THE LIST OF COMPARABLES. THE ASS ESSEE RAISED OBJECTION TO THE SELECTION OF THE NEW COMPARABLES SELECTE D BY THE AUTHORITIES BELOW ON THE FOLLOWING GROUNDS : COMPARABLES SELECTED BY THE TPO OBJECTIONS RAISED BY THE ASSESSEE CORAL HUBS (EARLIER KNOWN AS VISHAL INFORMATION TECHNOLOGIES LIMITED) THE OPERATING MARGIN OF THE SAID COMPANY IS 51.79% WHICH IS ABNORMALLY HIGH. MOREOVER, THE SAID COMPARABLE IS FUNCTIONALLY DIFFERENT. CORAL HUBS IS ENGAGED IN E-PUBLISHING AND THE EMPLOYEE COST OF THE SAID COMPANY IS 4.39% OF THE TOTAL OPERATING COST. THIS FACT ITSELF INDICATES THAT THE BUSINESS MODEL OF THE SAID COMPANY IS NOT COMPARABLE WITH THE ASSESSEE. FOR THE SIMILAR REASONS, THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. IN IT(TP)A NO.1316/BANG/2012 FOR A.Y. 2008-09 DECIDED ON 14-08-2013 HAS HELD THAT CORAL HUBS LTD. CANNOT BE CONSIDERED AS COMPARABLE. GENESYS INTERNATIONAL CORPORATION LTD. THE SAID COMPANY IS NOT FUNCTIONALLY COMPARABLE. IT IS ENGAGED IN THE BUSINESS OF GEOSPATIAL SERVICES AND HENCE, IT CANNOT BE COMPARED WITH THE ASSESSEE COMPANY. FURTHER, THE OPERATING MARGIN OF GENESYS IS 46.82% WHICH IS VERY MUCH ON THE HIGHER SIDE. THE LD. 10 ITA NO. 2236/PN/2012, A.Y. 2008-09, COUNSEL SUBMITTED THAT THE GENESYS HAS BEEN REJECTED AS COMPARABLE ENTITY IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. (SUPRA) AND HYUNDAI MOTORS INDIA ENGINEERING PVT. LTD. 152 ITD 112 (HYDERABAD)(TRIB.) COSMIC GLOBAL LTD. THE LD. COUNSEL SUBMITTED THAT THE SAID COMPANY HAS BEEN HELD TO BE FUNCTIONALLY NOT COMPARABLE IN THE CASE OF PAREXEL INTERNATIONAL INDIA PVT. LTD. REPORTED AS 51 TAXMANN.COM 238 (HYDERABAD)(TRIB.). 10. THE LD. COUNSEL CONTENDED THAT THE TPO HAS REJECT ED CG-VAK SOFTWARE & EXPORTS LTD. ON THE GROUND THAT IT IS ENGAGE D IN DIFFERENT BUSINESS AND IT HAD INCURRED LOSS IN THE YEAR UNDER CONS IDERATION. THE DRP HAS POINTED OUT THAT THE SAID COMPANY IS MAINLY ENG AGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND IS NOT PROVIDING ITE S/BPO SERVICES. THE SAID OBSERVATIONS OF THE AUTHORITIES BELOW A RE AGAINST THE FACTS. CG-VAK SOFTWARE & EXPORTS LTD. IS PROVIDING ITES SERVICES SIMILAR TO THE ONE PROVIDED BY THE ASSESSEE. THUS, THE ASSESSEE AND THE SAID COMPANY ARE NOT FUNCTIONALLY DIFFERENT. AN EXAMINATION OF THE SEGMENTAL RESULTS OF THE SAID COMPANY WOULD ALSO SHOW THA T THE SAID COMPANY IS NOT PERSISTENTLY LOSS MAKING COMPANY. THEREFO RE, IT SHOULD HAVE BEEN SELECTED AS COMPARABLE ENTITY. 11. IN RESPECT OF THIRD DIVISION, I.E. BUSINESS SUPPORT SERV ICES, THE LD. COUNSEL SUBMITTED THAT THE TURNOVER OF DIVISION IS RS.5,4 3,91,000/. OPERATING MARGIN OF THE THIS DIVISION IS 14.22%. THE ASSESS ING OFFICER MADE ADDITION OF RS.29,09,282/- IN RESPECT OF BUSINESS SUPPO RT SERVICES. THE LD. COUNSEL CONTENDED THAT THE ASSESSEE HAD INITIALLY SELECTED 18 COMPANIES AS COMPARABLES. THE ASSESSEE CON SIDERED THE DATA OF 3 YEARS WHILE SELECTING THE COMPARABLES FOR BUSINE SS SUPPORT SERVICES. THE TPO REJECTED VARIOUS COMPARABLES SELECTED BY THE ASSESSEE ON THE GROUND THAT ONLY CURRENT YEAR COMPA RABLES SHOULD BE 11 ITA NO. 2236/PN/2012, A.Y. 2008-09, CONSIDERED. THE TPO INTRODUCED FEW NEW COMPANIES AS COM PARABLES AND FINALLY MADE ANALYZE BY SELECTING 9 COMPANIES AS COMP ARABLE ENTITIES. AFTER ALLOWING THE WORKING CAPITAL ADJUSTMENT, THE OPERATING MARGIN OF THE COMPARABLES WAS DETERMINED AT 20.32%. THE LD. AR OBJECTED TO THE SELECTION OF NEW COMPARABLES ON THE FOLLOWING GROUNDS : COMPARABLES SELECTED BY THE TPO OBJECTIONS RAISED BY THE ASSESSEE TSR DARASHAW LTD. THE LD. COUNSEL SUB MITTED THAT THE SAID COMPANY SHOULD NOT HAVE BEEN SELECTED AS COMPARABLE, AS THE OPERATING MARGIN OF THE SAID COMPANY IS 44.77% WHICH IS ABNORMAL IN THIS LINE OF BUSINESS. APITCO LTD. THE SAID COMPANY IS ENGAGED IN SPECIALIZED BUSINESS OF PROVIDING SUPPORT TO SME THROUGH PROJECT CONSULTANCY HENCE, IT IS FUNCTIONALLY DIFFERENT. MOREOVER, THE OPERATING MARGIN OF THE COMPANY IS 52.10% WHICH IS ABNORMAL IN THIS LINE OF BUSINESS. THE LD. COUNSEL PLACED RELIANCE ON THE DECISION OF CIENA INDIA (P.) LTD. REPORTED AS 57 TAXMANN.COM 329 (DELHI)(TRIB.), WHEREIN IT HAS BEEN HELD THAT APITCO LTD. IS FUNCTIONALLY NOT COMPARABLE WITH THE COMPANIES IN THE LINE OF BUSINESS SUPPORT SERVICES. 12. THE LD. COUNSEL POINTED OUT THAT IN THE ASSESSMENT YEAR 2008- 09, THE TPO APPLIED A NEW FILTER, I.E. ONSITE COMPANY CANNOT BE COMPARED WITH OFFSHORE COMPANY. THE LD. COUNSEL FURTHER P OINTED OUT THAT THE ASSESSEE HAD INITIALLY INCLUDED AKSHAY SOFTWARE TE CHNOLOGIES LTD. AND MAARS SOFTWARE INTERNATIONAL LTD. IN ITS TP STUDY IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. HOWEVER, THE SAME WERE LA TER ON DROPPED FOR THE REASON THAT IN THE CASE OF TIBCO SOFTWA RE INDIA (P.) LTD. REPORTED AS 56 TAXMANN.COM 91 (PUNE)(TRIB.), IT WAS HELD THAT THESE COMPANIES ARE NOT GOOD COMPARABLES. THUS, THE SA ME WERE DELETED FROM THE LIST OF COMPARABLE ENTITIES. THE LD. COUNS EL PRAYED FOR EXCLUDING THE COMPANIES FROM THE LIST OF COMPARABLES WHICH A RE EITHER FUNCTIONALLY NOT COMPATIBLE WITH THE ASSESSEE COMPANY OR HAVE 12 ITA NO. 2236/PN/2012, A.Y. 2008-09, ABNORMALLY HIGH PROFITS AND TO INCLUDE THE COMPANIES WHICH HAVE BEEN DROPPED FROM THE LIST OF COMPARABLES BY THE TPO ON ONE P RETEXT OR THE OTHER. 13. ON THE OTHER HAND SHRI S.K. RASTOGI REPRESENTING THE DEPARTMENT VEHEMENTLY SUPPORTED THE FINDINGS OF DRP, TPO AND ASSESS ING OFFICER. THE LD. DR SUBMITTED THAT THE ASSESSEE HAS NOT MAINTAIN ED SEPARATE BOOKS OF ACCOUNT IN RESPECT OF THE TWO UNITS, ELIGIBLE AND N ON-ELIGIBLE TO CLAIM DEDUCTION U/S.10A OF THE ACT. IN THE ABSENCE OF SEP ARATE BOOKS OF ACCOUNT, THE CORRECTNESS/REASONABLENESS OF ALLOCATION O F EXPENSES BETWEEN THE TWO UNITS CANNOT BE VERIFIED. THE ASSESSING OFFICER RIGHTLY ALLOCATED THE OPERATING EXPENSES ON THE BASIS OF SALES. A S FAR AS RESTRUCTURING OF DEDUCTION U/S. 10A ON THE BASIS OF DISALLOW ANCE U/S. 40(A)(I) AND SECTION 43B IS CONCERNED THE DEDUCTION U/S. 10A IS GIVEN TO PROMOTE EXPORT OF GOODS AND COMPUTER SOFTWARE. DISALLOWA NCE U/S. 40(A)(I) AND SECTION 43B IS NOT ACTUAL EARNING. THE DISALLOWANC E HAS BEEN MADE FOR NOT COMPLYING WITH STATUTORY REQUIREMENTS , UNDER THE PROVISIONS OF THE ACT. THE ASSESSEE CANNOT BE ALLOWED TO TAKE ADVANTAGE OF ITS OWN WRONG. 14. IN RESPECT OF ADDITIONS MADE ON ACCOUNT OF INTERNATIO NAL TRANSACTIONS THE LD. DR SUBMITTED THAT THE TPO AFTER D ETAILED STUDY HAS REJECTED THE COMPARABLES ADOPTED BY THE ASSESSEE AND HAS INCLUDED THE COMPARABLE ENTITIES COMMENSURATE TO THE BUSINESS SIZ E AND FUNCTION OF THE ASSESSEE COMPANY. IN RESPECT OF INCLUSION OF COMPARABLES, I.E. BODHTREE CONSULTING LTD., E-ZEST SOLUTIONS L TD., HELIOS & MATHESON INFORMATION LTD., INFOSYS LTD., KALS INFORMA TION SYSTEM AND FCS SOFTWARE SOLUTIONS LTD. ETC. THE LD. DR P LACED RELIANCE ON THE ORDER OF TPO. SIMILARLY FOR REJECTING SOME OF THE C OMPARABLES WHICH WERE INITIALLY INCLUDED BY THE ASSESSEE IN TP STUDY, T HE LD. DR 13 ITA NO. 2236/PN/2012, A.Y. 2008-09, SUBMITTED THAT THE FINDINGS OF TPO ARE UPHELD BY DRP. IN RESPECT OF DESIGN, ENGINEERING DIVISION, THE LD. DR CONTROVERTING THE SU BMISSIONS OF LD. AR IN RESPECT OF GENESYS INTERNATIONAL CORPORATION LTD. AND CG- VAK SOFTWARE & EXPORTS LTD. CONTENDED THAT THE COMPAR ABLE ARE FUNCTIONALLY SIMILAR. THE LD. AR HAS NOT BEEN ABLE TO CONTR OVERT THE FINDINGS OF THE LD. DRP. THE DRP AFTER ANALYZING THE INCOM E OF THE SAID COMPARABLE ENTITIES FROM DIFFERENT SOURCES CONCLUDED THAT T HE SAID COMPANIES WERE MAINLY ENGAGED IN THE DEVELOPMENT OF COM PUTER SOFTWARE. REVENUE FROM DESIGN SERVICES OR ITES/BPO SERV ICES WAS MARGINAL. THE INCOME OF THE ASSESSEE FROM SUCH SERVICES IS ONLY 15% OF TOTAL TURNOVER HENCE, THE CONTENTION OF THE ASSESSEE TH AT THEY ARE FUNCTIONALLY DIFFERENT HAS TO BE REJECTED. ON EXCLUSION OF SUPER PROFIT COMPANIES FROM THE LIST OF COMPARABLES, THE LD. DR SUBMITTED THAT THE TERM SUPER PROFIT IS NOT DEFINED EITHER IN THE ACT OR THE RULES. THE RATIONALE OF HAV ING AVERAGE IN TRANSFER PRICING REGULATIONS TAKES CARE OF THE EFFECT OF E XTREME CASES AND TO FIND OUT THE PROFIT MARGIN AS A REPRESENTATIVE OF T HE WHOLE LOT. THE LD. DR FURTHER CONTENDED THAT THE COMPARABILITY IS JU DGED PRIMARILY BY ANALYZING FUNCTIONAL ANALYSIS, CAPITAL EMPLOYED A ND RISK UNDERTAKEN AND NOT IN ACCORDANCE WITH THE HIGHER OR LOW ER PROFIT RATE. IN SUPPORT OF HIS SUBMISSIONS THE LD. DR PLACED RELIANCE ON THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBA L CENTRES INDIA P LTD. REPORTED AS 43 TAXMANN.COM 100 (MUMBAI)(TRIB .)(SB) AND THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CH RYS CAPITAL INVESTMENT ADVISORS INDIA P. LTD. VS. DCIT REPORTED AS 56 TAXMANN.COM 417 (DELHI). THE LD. DR FURTHER SUBMITTED THAT BEFORE REJECTING THE COMPANY ON ACCOUNT OF HIGH MARGINS, THE REASONS FOR S UCH EXTREME RESULTS SHOULD BE EXAMINED AND AFTER CONDUCTING DETAILED ANALYSIS, IF IT IS FOUND THAT NORMAL BUSINESS CONDITIONS HAVE RESULTED INTO HIGHER PROFITS FOR AN ENTERPRISES, THE ENTERPRISE SHOU LD BE SELECTED 14 ITA NO. 2236/PN/2012, A.Y. 2008-09, AS A COMPARABLE. THE LD. DR PRAYED FOR SUSTAINING THE ORD ER OF DRP AND ASSESSING OFFICER AND DISMISSING THE APPEAL OF THE ASSESSEE. 15. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESE NTATIVE OF RIVAL SIDES AT LENGTH. BOTH THE SIDES HAVE VEHEMENTLY AR GUED ON THE ISSUES RAISED IN THE APPEAL. WE HAVE ALSO EXAMINED THE OR DERS OF THE AUTHORITIES BELOW AND PERUSED THE DECISIONS ON WHICH BOTH THE SIDES HAVE PLACED RELIANCE TO SUPPORT THEIR SUBMISSIONS. 16. THE FIRST GROUND RAISED BY THE ASSESSEE IN APPEAL IS WITH REGAR D TO DISALLOWANCE OF DEDUCTION U/S. 35D OF THE ACT. THE LD. COU NSEL OF THE ASSESSEE HAS STATED AT THE BAR THAT HE IS NOT PRESS ING THE FIRST GROUND RAISED IN THE APPEAL. ACCORDINGLY, THE FIRST GROUND OF APPE AL RELATING TO DISALLOWANCE OF DEDUCTION U/S. 35D IS DISMISSED AS NOT PRESSED. 17. THE SECOND GROUND IN THE APPEAL RELATES TO DEDUCT ION U/S. 10A IN RESPECT OF DISALLOWANCE MADE U/S.40(A)(IA) AND 43B OF THE ACT. THE LD. COUNSEL HAS SUBMITTED THAT SIMILAR ISSUE HAS BEEN ADJUDIC ATED IN FAVOUR OF THE ASSESSEE BY THE CO-ORDINATE BENCH OF TRIBU NAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007-08. A COPY OF THE OR DER OF TRIBUNAL IN ITA NO. 1319/PN/2011 FOR ASSESSMENT YEAR 200 7-08 DECIDED ON 10-10-2014 HAS BEEN PLACED ON RECORD. WE FI ND THAT THE ISSUE RAISED IN THE PRESENT APPEAL IS IDENTICAL TO THE ONE RAISED IN ASSESSMENT YEAR 2007-08. THE CO-ORDINATE BENCH OF THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY FOLLOWING THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY INDIA PVT. LTD. REPORTED AS 330 ITR 175 (BOM). THE RELEVA NT EXTRACT OF THE FINDINGS OF THE TRIBUNAL ARE AS UNDER: 14. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AN D THE DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. TH E ONLY QUESTION 15 ITA NO. 2236/PN/2012, A.Y. 2008-09, TO BE DECIDED IN THE IMPUGNED GROUNDS IS THE ALLOWABILIT Y OF DEDUCTION U/S/10A ON THE INCOME DUE TO DISALLOWANCE U/S.40(A)(IA) AND 43B. IT IS THE CASE OF THE ASSESSING OFFICER THAT NO DEDUCTION U/S.10A IS ALLOWABLE ON THE INCOME INCREAS ED DUE TO DISALLOWANCE U/S.40(A)(IA) AND 43B. IT IS THE CASE OF T HE ASSESSEE THAT IN VIEW OF THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA PVT. LTD. (SUPRA) INC REASED INCOME OWING TO DISALLOWANCE U/S.40(A)(IA) AND 43B HAS TO BE TAKEN INTO CONSIDERATION FOR CALCULATION OF DEDUCTION U/ S.10A. 14.1 THE HONBLE BOMBAY HIGH COURT WHILE DECIDING AN ID ENTICAL ISSUE FOR COMPUTATION OF DEDUCTION U/S.10A WHERE DIS ALLOWANCE WAS MADE U/S.43B HAS OBSERVED AS UNDER : FOR THE PURPOSES OF THE APPEAL IT IS NECESSARY TO REFE R TO THE ADMITTED POSITION WHICH IS THAT THE ASSESSEE HAD DEPOSIT ED BOTH THE EMPLOYER'S AND THE EMPLOYEES' CONTRIBUTION TOW ARDS PF AND ESIC, THOUGH BEYOND THE DUE DATE INCLUDING THE GRACE PERIOD. THE AO ADDED THESE PAYMENTS TO THE TOTA L INCOME OF THE ASSESSEE AND MADE AN ADDITION IN THE A MOUNT OF RS. 71.59 LACS. HOWEVER, FOR THE DEDUCTION UNDER S. 10 A, THE ADDITION MADE ON ACCOUNT OF THE EMPLOYEES' CONTRI BUTION WAS IGNORED IN CALCULATING THE PROFITS ELIGIBLE FOR DE DUCTION ON THE GROUND THAT THESE RECEIPTS WERE NOT GENERATE D OUT OF THE MANUFACTURING ACTIVITY OF THE ASSESSEE COMPANY. BY REASON OF THE JUDGMENT OF THE SUPREME COURT IN CI T VS. ALOM EXTRUSIONS LTD. (2009) 227 CTR (SC) 417 : (2009) 32 (SC) DTR 49 : (2009) 319 ITR 306 (SC) THE EMPLOYER'S CONTRIBUTION WAS LIABLE TO BE ALLOWED, SINCE IT WAS DEPOS ITED BY THE DUE DATE FOR THE FILING OF THE RETURN. THE PEC ULIAR POSITION, HOWEVER, AS IT OBTAINS IN THE PRESENT CASE A RISES OUT OF THE FACT THAT THE DISALLOWANCE WHICH WAS EFFECT ED BY THE AO HAS NOT, THE COURT IS INFORMED, BEEN CHALLENGED BY THE ASSESSEE. AS A MATTER OF FACT THE QUESTION OF LAW WHICH IS FORMULATED BY THE REVENUE PROCEEDS ON THE BASIS T HAT THE ASSESSED INCOME WAS ENHANCED DUE TO THE DISALLOWANCE OF THE EMPLOYER'S AS WELL AS THE EMPLOYEES' CONTRIBUTION TOWARDS PF/ESIC AND THE ONLY QUESTION WHICH IS CANV ASSED ON BEHALF OF THE REVENUE IS WHETHER ON THAT BASIS T HE TRIBUNAL WAS JUSTIFIED IN DIRECTING THE AO TO GRANT THE EXEMPTION UNDER S. 10A. ON THIS POSITION, IN THE PRESENT CASE IT CANNOT BE DISPUTED THAT THE NET CONSEQUENCE OF THE DISALLOWANCE OF THE EMPLOYER'S AND THE EMPLOYEES CONTRIBUTION IS THAT THE BUSINESS PROFITS HAVE TO TH AT EXTENT BEEN ENHANCED. THERE WAS, AS WE HAVE ALREADY NOTED, AN ADD BACK BY THE AO TO THE INCOME. ALL PROFITS OF THE U NIT OF THE ASSESSEE HAVE BEEN DERIVED FROM MANUFACTURING A CTIVITY. THE SALARIES PAID BY THE ASSESSEE, IT HAS NOT BEEN DI SPUTED, RELATE TO THE MANUFACTURING ACTIVITY. THE DISALLOWANCE OF THE PF/ESIC PAYMENTS HAS BEEN MADE BECAUSE OF THE STATU TORY PROVISIONSS. 43B IN THE CASE OF THE EMPLOYER'S CONTRIBU TION AND S. 36(V) R/W S. 2(24)(X) IN THE CASE OF THE EMPLOYEES CONTRIBUTION WHICH HAS BEEN DEEMED TO BE THE INCOME OF THE ASSESSEE. THE PLAIN CONSEQUENCE OF THE DISALLOWANCE AND THE ADD BACK THAT HAS BEEN MADE BY THE AO IS AN INC REASE IN THE BUSINESS PROFITS OF THE ASSESSEE. THE CONTENTI ON OF THE REVENUE THAT IN COMPUTING THE DEDUCTION UNDER S. 10A THE ADDITION MADE ON ACCOUNT OF THE DISALLOWANCE OF THE PF/ESIC PAYMENTS OUGHT TO BE IGNORED CANNOT BE ACCE PTED. 16 ITA NO. 2236/PN/2012, A.Y. 2008-09, NO STATUTORY PROVISION TO THAT EFFECT HAVING BEEN MAD E, THE PLAIN CONSEQUENCE OF THE DISALLOWANCE MADE BY THE AO M UST FOLLOW. THE SECOND QUESTION SHALL ACCORDINGLY STAND ANSWERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 14.2 RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDICT IONAL HIGH COURT CITED (SUPRA) WE HOLD THAT THE ASSESSING OFFICER IS NOT JUSTIFIED IN RESTRICTING THE DEDUCTION U/S.10A ON ACC OUNT OF DISALLOWANCE U/S.40(A)(IA) AND 43B. GROUNDS OF APPEAL NO .4 AND 4.1 BY THE ASSESSEE ARE ACCORDINGLY ALLOWED. 17.1 THE LD. DR HAS NOT BEEN ABLE TO CONTROVERT THE FIN DINGS OF TRIBUNAL IN ASSESSEES OWN CASE WITH RESPECT TO DISALLOWAN CE U/S. 10A. WE DO NOT FIND ANY REASON TO TAKE A DIFFERENT VIEW AS THE RE IS NO MATERIAL CHANGE IN THE FACTS AND CIRCUMSTANCES IN THE PRE SENT CASE. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ACCE PTED. THE ASSESSING OFFICER IS DIRECTED TO ALLOW DEDUCTION U/S. 10A TO THE ASSESSEE IN THE AFORESAID TERMS. 18. THE THIRD GROUND IN APPEAL OF THE ASSESSEE RELATES T O SELECTION OF COMPARABLES FOR DETERMINING ALP. THE ASSESSEE IS HAVING 3 DIVISIONS NAMELY; (I) SOFTWARE DEVELOPMENT SERVICES; (II) DESIGN, ENGINEERING , TESTING AND AUTHORING SERVICES; AND (III) BUSINESS SUPPORT S ERVICES. THE ASSESSEE APPLIED TNM METHOD FOR DETERMINING ALP IN RE SPECT OF ALL THE THREE DIVISIONS. THE REVENUE HAS NOT DISPUTED THE M ETHOD ADOPTED BY THE ASSESSEE FOR DETERMINATION OF ALP. THE DISPUTE IS WITH REGARD TO SELECTION OF COMPARABLE ENTITIES FOR DETERMINATION OF ALP. TO DECIDE THESE ISSUES WE WILL FIRST TAKE UP THE ENTITIES INITIALLY SELEC TED BY THE ASSESSEE IN THE CASE OF SOFTWARE DEVELOPMENT SERVICES AN D THE ENTITIES SUBSTITUTING BY THE TPO FOR TP STUDY. 18.1 THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT SERVICES TO DEERE & CO., USA. SERVICES PROVIDED BY THE ASSESSEE WERE IN NATU RE OF COMPUTER PROGRAMMING, CODE DEVELOPMENT, INTEGRATION ETC. THE TOTAL 17 ITA NO. 2236/PN/2012, A.Y. 2008-09, TURNOVER OF SOFTWARE DIVISION IS RS.73,52,09,170/- AND OPERAT ING MARGIN TO OPERATING COST RATIO IS 12.50%. THE ASSESSEE HAD INITIALLY SELECTED 23 COMPANIES AS COMPARABLE ENTITIES FOR DETERMININ G ALP. THE LIST OF COMPANIES SELECTED BY THE ASSESSEE AS COMPARABLES IS AS UNDER : SL. NO. NAME OF THE COMPANY WEIGHTED AVERAGE OF OPERATING PROFITS ON OPERATING COSTS (%) 1 AKSHAY SOFTWARE TECHNOLOGIES LIMITED 6.60% 2 AZTECSOFT LIMITED 18.16% 3 GOLDSTONE TECHNOLOGIES LIMITED 11.50% 4 HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED 38.40% 5 INDIUM SOFTWARE (INDIA) LIMITED 11.09% 6 INFOSYS TECHNOLOGIES LIMITED 39.96% 7 K P 1 T CUMMINS INFOSYSTEMS LIMITED 13.20% 8 LANCO GLOBAL SYSTEMS LIMITED 13.28% 9 LARSEN & TOUBRO INFOTECH LIMITED 11.35% 10 MAARS SOFTWARE INTERNATIONAL LIMITED 15.58% 11 MELSTAR INFORMATION TECHNOLOGIES LIMITED 3.46% 12 MINDTREE LIMITED 16.98% 13 PERSISTENT SYSTEMS PRIVATE LIMITED 24.34% 14 QUINTEGRA SOLUTIONS LIMITED 15.18% 15 R S SOFTWARE (INDIA) LIMITED 14.11% 16 S 1 P TECHNOLOGIES AND EXPORTS LIMITED 18.37% 17 SASKEN COMMUNICATION TECHNOLOGIES LIMITED 17.88% 18 SATYAM COMPUTERS SERVICES LIMITED 29.43% 19 T VS INFOTECH LIMITED -21.27% 20 V J 1 L CONSULTING LIMITED 5.85% 21 V M F SOFTECH LIMITED 4.32% 22 VISUALSOFT TECHNOLOGIES LIMITED 16.76% 23 ZYLOG SYSTEMS LIMITED 16.87% ARITHMETIC MEAN 14.84% 18 ITA NO. 2236/PN/2012, A.Y. 2008-09, RANGE: LOWER RANGE (-) 5% 9.10% UPPER RANGE(+)5% 20.58% THE AVERAGE OPERATING MARGIN OF THE COMPARABLE ENTITIES IS 14.84% AS AGAINST THE OPERATING MARGIN OF ASSESSEE AT 12 .50%. IT IS CONTENDED THAT THE OPERATING MARGIN OF THE ASSESSEE CO MPANY IS WITHIN THE RANGE OF + - 5% FROM THE ALP DETERMINED ON THE BAS IS OF AVERAGE OPERATING MARGIN OF THE COMPARABLE ENTITIES. THEREFORE, NO ADJUSTMENT U/S. 92C OF THE ACT IS REQUIRED. 19. THE TPO REJECTED SOME OF THE COMPARABLES SELECTED B Y THE ASSESSEE AND ADDED CERTAIN MORE COMPANIES IN THE LIST OF COMPARABLE ENTITIES. THE FINAL SET OF COMPARABLES SELECTED BY THE TPO ARE AS UNDE R: SR. NO. NAME OF THE COMPARABLE OP/TC WORKING CAPITAL ADJUSTED MARGIN 1 BODHTREE CONSULTING LTD. 19.14 17.00 2 E INFOCHIPS LTD. 30.32 26.61 3 EZEST SOLUTIONS LTD. 28.58 28.01 4 GOLDSTONE TECHNOLOGIES 27.06 21.31 5 HELIOS AND MATHESON INFORMATION TECH. 36.05 31.79 6 INFOSYS 39.84 37.35 7 KALS INFORMATION SYSTEM 30.21 27.82 8 LGS GLOBAL LTD. 26.33 23.43 9 L & T INFOTECH 19.90 15.98 10 MIND TREE 17.51 13.36 11 R S SOFTWARE 6.71 7.55 12 FCS SOFTWARE SOLUTIONS LTD. 57.02 52.29 13 PERSISTENT SYSTEMS 27.59 26.73 19 ITA NO. 2236/PN/2012, A.Y. 2008-09, 14 SASKEN COMMUNICATION TECHNOLOGY 17.75 15.59 ARITHMETIC MEAN 261.42/9 27.28 24.63 20. THE TPO DURING TP STUDY OBJECTED TO THE ASSESSEE S SELECTION OF COMPARABLES ON THE BASIS OF 3 YEARS DATA. THE TPO CONFINED TO THE DATA OF COMPARABLE ENTITIES RELATING TO ASSESSMENT YEAR 2008-0 9 ONLY. THE OPERATING MARGIN DETERMINED BY THE TPO FROM THE SET OF C OMPARABLES SELECTED WORKED OUT TO 27.28% AFTER ALLOWING THE WORKING C APITAL ADJUSTMENT, OPERATING MARGIN OF COMPARABLES IS 24.63%. HOW EVER, THE ASSESSEE RAISED OBJECTION TO THE SELECTION OF SOME OF CO MPARABLES ADOPTED BY THE TPO. THE LIST OF COMPARABLES SELECTED B Y THE TPO AND UPHELD BY THE DRP ON WHICH THE ASSESSEE HAS RAISED OBJ ECTION IS AS UNDER: 20.1 BODHTREE CONSULTING LTD. : THE ASSESSEE HAD INITIALLY SELECTED BODHTREE CONSULTING LTD. IN ITS LIST OF COMPARABLE. SUBSEQUE NTLY, THE SAME WAS TAKEN OUT FROM THE LIST OF COMPARABLE AS THE SA ID COMPANY IS NOT EXCLUSIVELY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES. THE TPO AGAIN INCLUDED THE COMPANY IN THE LIST OF COMPARABLE ENTITY. THE LD. COUNSEL IN SUPPORT OF HIS SUBMISSIONS THAT, BODHTREE CONSU LTING LTD. IS NOT A GOOD COMPARABLE PLACED RELIANCE ON THE DECISION IN THE CASE OF BARCLAYS TECHNOLOGY CENTRE INDIA (P) LTD. VS. ACIT (SUPRA). THE CO- ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BARCLAYS TEC HNOLOGY CENTRE INDIA (P) LTD. VS. ACIT (SUPRA) REJECTED BODHTREE CONSULTING LTD. AS COMPARABLE BY PLACING RELIANCE ON THE DECISION OF BANGA LORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. MINDTECK (INDIA) LTD. IN I.T.(TP).A.NO.70/BANG/2014 DECIDED ON 21-08-2014 IN THE CA SE OF NETHAWK NETWORKS INDIA PVT. LTD. IN ITA NO. 7633/M/2012 DECIDED ON 06-11-2013 FOR THE ASSESSMENT YEAR 2008-09. THE RELEV ANT EXTRACT OF THE ORDER OF TRIBUNAL IS AS UNDER: 20 ITA NO. 2236/PN/2012, A.Y. 2008-09, 20. THE NEXT POINT RAISED BY THE ASSESSEE IS FOR EXC LUSION OF BODHTREE CONSULTING LTD., FROM THE FINAL SET OF COMPAR ABLES. THE MAIN PLEA OF THE ASSESSEE IS THAT THE SAID CONCERN IS ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS AND THEREFO RE IT IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE. IT IS ALSO POIN TED OUT THAT THE SAID CONCERN IS ENGAGED IN PRODUCT ENGINEERING A ND CONTENT ENGINEERING SERVICES WHICH ARE IN THE NATURE OF ITE S SERVICES, AND ARE NOT COMPARABLE WITH THE ASSESSEES ACTIVITIES. AT THE TIME OF HEARING, IT WAS ALSO POINTED OUT THAT THE SAID CONCERN OPERATES UNDER A DIFFERENT PRICING MODEL, I.E. FIXED PRICE PROJECT METHOD, WHEREBY REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNI ZED BASED ON SOFTWARE DEVELOPED AND BILLED TO THE CLIENTS. IT HAS BEEN EXPLAINED THAT IN SUCH A SITUATION, EXPENDITURE FOR DE VELOPING SOFTWARE WOULD BE BILLED IN AN EARLIER YEAR BUT THE IN COME WOULD BE RECOGNIZED IN A SUBSEQUENT YEAR. THIS BUSINESS MODEL RESULTS IN FLUCTUATION IN MARGINS OVER THE YEARS. THE COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE PUNE BENCH OF THE TRIBUNAL I N THE CASE OF QLOGIC (INDIA) PRIVATE LIMITED VS. DCIT (ITA NO.227/PN/ 2014) FOR ASSESSMENT YEAR 2009-10 DATED 21.10.2014 HAS EXCLUD ED THE SAID CONCERN FROM THE LIST OF COMPARABLES IN A SIMILA R SITUATION BY FOLLOWING THE DECISION OF THE BANGALORE BENCH OF THE T RIBUNAL IN THE CASE OF M/S. MINDTECK (INDIA) LTD., VIDE I.T.(TP).A.NO.70/BANG/2014 DATED 21-08-2014. THE DECISION O F THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETH AWK NETWORKS INDIA PVT. LTD. VIDE ITA NO.7633/M/2012 DATED 06-11- 2013 FOR ASSESSMENT YEAR 2008-09 HAS ALSO BEEN RELIED UPON FOR EXCLUDING THE SAID CONCERN FROM THE FINAL SET OF COMPARABLE S. 21. ON THE OTHER HAND THE LD. CIT-DR APPEARING FOR THE REVENUE HAS DEFENDED THE INCLUSION OF BODHTREE CONSULTING LT D., BY REFERRING TO THE DISCUSSION IN PARA 14.1 OF THE ORDE R OF TPO. AS PER THE TPO, THE MATERIAL ON RECORD DOES NOT JUSTIFY THE A SSERTIONS OF THE ASSESSEE THAT THE SAID CONCERN WAS ENGAGED IN D EVELOPMENT AND SALE OF SOFTWARE PRODUCTS. THE LD. CIT-DR HAS OPPOS ED THE PLEA OF THE ASSESSEE BY REFERRING TO THE STAND OF THE TPO AS CONTAINED IN HIS ORDER. 22. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S WITH RESPECT TO BODHTREE CONSULTING LIMITED. THE PLEA OF THE ASSESSEE IS THAT THE SAID CONCERN IS ENGAGED IN THE SALE OF S OFTWARE PRODUCTS, APART FROM CONSIDERING SOFTWARE SERVICES, AN D THAT NO SEGMENTAL DATA IS AVAILABLE IN THIS CONTEXT; THUS, IT I S FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEES ACTIVITIES. IN THIS REGARD, WE HAVE PERUSED THE DISCUSSION MADE BY OUR COORDINATE B ENCH IN THE CASE OF NETHAWK NETWORKS INDIA PVT. LTD. (SUPRA) WHEREI N THE SAID CONCERN HAS BEEN FOUND TO BE NOT EXCLUSIVELY ENGAGED I N RENDERING SOFTWARE DEVELOPMENT SERVICES. THE RELEVANT DISCUSSIO N IN THE CASE OF NETHAWK NETWORKS INDIA PVT. LTD. (SUPRA) IS AS UNDER : C. BODHTREE CONSULTING LIMITED 21. ON THIS COMPARABLE, CASE OF THE ASSESSEE IS THA T THE COMPANY IS NOT A GOOD COMPARABLE IN VIEW OF THE SOFTW ARE PRODUCTS PRODUCED BY THE COMPANY. AS SUCH, NO SEGMENT AL DATA IS ADEQUATELY AVAILABLE TOO. ACCORDINGLY, WE DISMISS THE ARGUMENT OF THE LD. DR I N THIS REGARD. EX CONSEQUENTI, THE AO/TPO IS DIRECTED TO EX CLUDE THE SAME FROM THE LIST OF FINAL COMPARABLES FOR WORKI NG OUT THE ARITHMETIC MEAN. 21 ITA NO. 2236/PN/2012, A.Y. 2008-09, 22. ON THE OTHER HAND, LD DR FILED A COPY OF THE FINANC IAL STATEMENT AND ARGUED VEHEMENTLY STATING THAT THIS C OMPANY IS NOT ENGAGED IN THE SOFTWARE PRODUCTS. IN THIS REG ARD, LD DR RELIED ON THE NOTE NO.3, RELATING TO THE RELATING TO THE REVENUE RECOMMENDATION IN SCHEDULE 12, NOTE NO.5 RELAT ING TO THE SEGMENTAL INFORMATION ETC TO MENTION THAT THE COMPANY IS ENGAGED IN THE SOFTWARE DEVELOPMENT ONLY. HOWEVER, THE ASSESSEE ARGUED VEHEMENTLY STATING THAT THIS COMPANY IS ENGAGED IN THE SOFTWARE BASED PRODUCTS. FURTHER, LD COUNSEL MENTIONED THAT THE SAID COMPANY W AS ALREADY EXAMINED AND WAS HELD AS PRODUCT BASED COMPANY BY THE TPO IN THE TP STUDY OF OTHER CASE AND THE TP O CANNOT TAKE DIFFERENT STAND IN THIS CASE. IN THIS REGARD, WE HAVE PERUSED THE PARA 29 OF THE ORDER OF THE TRIBUNAL IN T HE CASE OF M/S. WILLS PROCESSING SERVICES (I) P LTD (SUPRA) WHER EIN IT WAS MENTIONED THAT THE TPO DESCRIBED THIS COMPANY I S ENGAGED IN THE BUSINESS OF SOFTWARE PRODUCTS, NOT TH E SOFTWARE DEVELOPMENT SERVICES. RELEVANT PORTIONS FROM T HE SAID PARA 29 OF THE ORDER OF THE TRIBUNAL IS REPRODU CED HERE UNDER: '29.1 THE LD SR COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY IS ENGAGED IN THE SOFTWARE PRODUCTS. HE HAS REFERRED THE TPO ORDER AND SUBMITTED THAT IN THE PROF ILE OF THE COMPARABLES SELECTED BY THE TPO ITSELF HAS MENTI ONED THE BUSINESS OF THE ASSESSEE IS IN SOFTWARE PRODUCTS . THE ID AR HAS REFERRED THE OBJECTIONS RAISED BY THE ASSESS EE BEFORE THE TPO AT PAGE 286 OF THE PAPER BOOK AND SUBMITTED T HAT THE ASSESSEE BROUGHT THIS FACT THAT THIS COMPANY IS ENGAGED IN PROVIDING OPEN AND END TO END WEB SOLUTIONS, SOFTWAR E CONSULTANCY, DESIGN AND DEVELOPMENT OF SOFTWARE, USING THE LATEST TECHNOLOGIES. FURTHER, THE COMPANY HAS IDENTIF IED ONLY ONE SEGMENT I.E SOFTWARE DEVELOPMENT. THEREFORE, THE ID AR HAS SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE AND CONSEQUENTLY SHOULD B E EXCLUDED FROM THE COMPARABLES. 29.2 ON THE OTHER HAND, THE ID DR HAS FILED THE INFORM ATION COLLECTED U/S 133(6) OF THE I T ACT AND SUBMITTED THAT AS PER THIS INFORMATION, THIS COMPANY HAS REVENUE FROM ITES ACTIVITY TO THE EXTENT OF RS. 2,94,85,528/-. THEREFORE, TH IS COMPANY IS A GOOD COMPARABLE HAVING FUNCTIONAL SIMILAR ITY. 29.3......... 30. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE DETAILS FILED BY THE ID DR BEFORE US HAS BEEN OBTAINED BY THE TPO AT HYDERABAD AND NOT BY THE TPO OF THE ASSESSEE IN THE PRESENT CASE. IT IS STATED IN THE LETTER DATED 5.2.2010 WRITTEN BY THE CHAR TERED ACCOUNTANT OF BODHTREE CONSULTING LTD TO THE TPO HYDERABAD THAT THE COMPANY IS PROVIDING DATA CLEANING SERVICES TO CLIENTS FOR WHOM IT HAD DEVELOPED THE SOF TWARE APPLICATION.........' 23. CONSIDERING THE ABOVE, WE ARE OF THE OPINION THAT BODHTREE CONSULTING LIMITED IS NOT ENGAGED IN THE SOF TWARE DEVELOPMENT SERVICES AND THERE IS NO SEGMENTAL DATA COMPARABLE. THEREFORE, THE FAR ANALYSIS GOES AGAINST TH E TPO/AO. 22 ITA NO. 2236/PN/2012, A.Y. 2008-09, 23. THERE IS NO MATERIAL PLACED BEFORE US WHICH WOULD REQUIRE US TO DEVIATE FROM THE CONCLUSION DRAWN BY THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS INDIA PV T. LTD. (SUPRA) IN THE CONTEXT OF THE EXCLUSION OF BODHTREE CO NSULTING LTD. FROM THE FINAL SET OF COMPARABLES. THUS, IN VIEW OF THE DETAILED DISCUSSION IN THE AFORESAID ORDE R, WE ARE OF THE VIEW THAT BODHTREE CONSULTING LTD. IS NOT FU NCTIONALLY COMPARABLE TO THE SERVICES RENDERED BY THE ASSESSEE. THE LD. DR HAS NOT PLACED ON RECORD ANY MATERIAL TO DISTINGUISH THE AFORE SAID DECISION. ACCORDINGLY, BODHTREE CONSULTING LTD. HAS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 20.2 E-ZEST SOLUTIONS LTD. : THE OBJECTION OF THE ASSESSEE IS THAT THE SAID COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COM PANY. THE E-ZEST SOLUTIONS LTD. IS ENGAGED MORE IN INFORMATION TECH NOLOGY ENABLED SERVICES (ITES) AND THAT TOO IN THE NATURE OF KP O SERVICES, WHEREAS, THE ASSESSEE IS IN THE BUSINESS OF SOFTWARE DEVE LOPMENT AND RELATED SERVICES. THE TRIBUNAL IN THE CASE OF SYMPHONY S ERVICES PUNE (P) LTD. VS. ITO IN ITA NO.257/PN/2013 FOR A.Y. 2008-09 DECID ED ON 30-04-2014 HAS HELD AS UNDER : 23. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS . IN THIS CONTEXT, WE FIND THAT BEFORE THE TPO RELIED UPON THE I NFORMATION AVAILABLE ON THE WEBSITE OF THE SAID CONCERN AND SUB MITTED THAT THE SAID CONCERN WAS ENGAGED IN E-BUSINESS CONSULTAN CY SERVICES, CONSISTING OF WEB STRATEGY SERVICES, ITES SERVICES, AND IN TECHNOLOGY CONSULTANCY SERVICES INCLUDING PORTAL DEVELOP MENT SERVICES, ETC.. IT IS SOUGHT TO BE EXPLAINED THAT SUCH KIND OF SERVICES ARE ITES SERVICES WHICH ARE UNDERSTOOD AS KPO SERVI CES. IT WAS ALSO POINTED OUT THAT THE SAID CONCERN HAS NOT PROVIDE D ANY SEGMENTAL DATA IN ITS ANNUAL REPORT. BEFORE US, IT IS SO UGHT TO BE CONTENDED THAT THE KPO SERVICES ARE NOT COMPARABLE T O THE SOFTWARE DEVELOPMENT SERVICES BEING RENDERED BY THE ASSESSEE AND THEREFORE CONCERNS WHICH RENDER KPO SERVICES CA NNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE TO THE CONCERNS WHO RENDER SOFTWARE DEVELOPMENT SERVICES. FOR THE SAID P1RO3POSITION, RE LIANCE HAS BEEN PLACED ON THE DECISION OF THE BANGALORE BENC H OF THE TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) WHICH HAS INDEED BEEN RENDERED IN THE CONTEXT OF TH E SAME COMPARABLE, WHICH IS THE SUBJECT-MATTER OF CONSIDERAT ION BEFORE US, I.E. E-ZEST SOLUTIONS LIMITED. 24. WE FIND THAT THE FACTUAL ASSERTIONS MADE BY THE A SSESSEE BEFORE THE TPO AS WELL AS BEFORE US WITH REGARD TO TH E FUNCTIONS BEING PERFORMED BY EZEST SOLUTIONS LIMITED HAVE NOT BEE N 23 ITA NO. 2236/PN/2012, A.Y. 2008-09, CONTROVERTED BY THE REVENUE. OSTENSIBLY, E-ZEST SOLUTI ONS LIMITED IS RENDERING PRODUCT DEVELOPMENT SERVICES AND TECHNOLOGY SERVICES, AND THE LATTER FALLS IN THE CATEGORY OF KPO SERVICES A ND THE SAME HAVE NOT BEEN HELD BY THE BANGALORE BENCH OF THE TRIB UNAL TO BE SIMILAR TO A CONCERN ENGAGED IN RENDERING OF SOFTWAR E DEVELOPMENT SERVICES, AS IS THE ASSESSEE BEFORE US. FOLLOWING THE R ATIO OF THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN T HE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) WE HOLD THAT E-ZEST SOLUTIONS LIMITED IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION. WE HOLD SO. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS. THUS, IN VIEW OF AFORESAID FINDINGS OF THE CO-ORDINATE BENC H IN RESPECT OF FUNCTIONAL DIFFERENCE BETWEEN THE ACTIVITIES OF E-Z EST SOLUTIONS LTD. AND THE COMPANIES ENGAGED IN SOFTWARE DEVE LOPMENT ACTIVITIES (ASSESSEE BEING ONE OF SUCH SOFTWARE DEVELOPMENT COMPANIES), WE ARE OF THE CONSIDERED VIEW THAT THE SAID COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES IN THE PRESENT CASE. 20.3 HELIOS & MATHESON INFORMATION TECH .: THE COMPANY WAS SELECTED AS COMPARABLE BY THE ASSESSEE IN THE FIRST INSTANCE IN TP STUDY. A PERUSAL OF THE TPO ORDER SHOWS THAT NO OBJECTION WAS FILE D BY THE ASSESSEE AGAINST THIS COMPARABLE. BEFORE US THE LD. CO UNSEL SUBMITTED THAT THIS COMPARABLE WAS REJECTED BY THE TRIBUNAL IN AS SESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT. THE RELEVANT EXTRACT OF THE ORDER OF THE TRIBUN AL IN ITA NO. 1319/PN/2011 FOR THE ASSESSMENT YEAR 2007-08 DECIDED ON 10-10-2014 IS REPRODUCED HERE-IN-UNDER: 36. SO FAR AS HELIOS AND MATHERSON INFORMATION TEC HNOLOGY LTD., IS CONCERNED, WE FIND THE PUNE BENCH OF THE TRIBUNAL I N THE CASE OF PTC SOFTWARE LTD., HAS EXCLUDED THE SAME FROM THE LIST OF COMPARABLES BY OBSERVING AS UNDER : 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHESO N INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISED S IMILAR ARGUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTIO NS LTD. (SEG). WE HAVE PERUSED THE RELEVANT PARA OF THE ORDER O F THE TPO I.E., 6.3.21, IN TERMS OF WHICH THE SAID CONCERN HAS B EEN INCLUDED AS A COMPARABLE CONCERN. THE ASSESSEE POINTED OUT THAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS LT D. (SEG), IN THE INSTANT CASE ALSO FOR A.Y. 2006-07 THE SAID CONC ERN WAS FOUND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WAS NOT 24 ITA NO. 2236/PN/2012, A.Y. 2008-09, DISTURBED BY THE TPO. THE RELEVANT PORTION OF THE TRAN SFER PRICING STUDY, PLACED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORES AID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE A LSO WE FIND THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED F ROM THE LIST OF COMPARABLES. 36.1 SINCE THE PUNE BENCH OF THE TRIBUNAL IN THE CA SE OF PTC SOFTWARE LTD., (SUPRA) HAS ALREADY TAKEN A VIEW THA T HELIOS AND MATHERSON INFORMATION LTD., IS NOT A COMPARABLE AND IS FUNCTIONALLY DIFFERENT, THEREFORE, WE DIRECT THE TPO/AO TO EXCLU DE THE SAME FROM THE LIST OF COMPARABLES. IN VIEW OF THE FACT THAT THE CO-ORDINATE BENCH OF THE TR IBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2007-08 HAS HELD THAT HELIOS & MATHESON INFORMATION TECH. IS FUNCTIONALLY DIFFERENT AND THERE IS NO M ATERIAL CHANGE IN THE ACTIVITIES OF THE ASSESSEE AND THE FUNCTIONS OF THE COMPARABLE ENTITY DURING THE IMPUGNED ASSESSMENT YEAR, T HEREFORE, WE DO NOT FIND ANY REASON TO TAKE A DIFFERENT VIEW. ACCORDING LY, WE DIRECT THE TPO/ASSESSING OFFICER TO EXCLUDE THE SAME FROM THE LIST OF COMPARABLES. 20.4 INFOSYS TECHNOLOGIES LTD. : THE ASSESSEE HAS SOUGHT EXCLUSION OF THE SAID COMPANY FROM THE LIST OF COMPARABLES ON ACCOUNT OF DISPARITY IN SCALE OF WORK AND TURNOVER. THE LD. COUNSEL POINTED O UT THAT THE SAID COMPANY WAS EXCLUDED FROM THE LIST OF COMPARABLE BY T HE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007-0 8. THE CO- ORDINATE BENCH HAD EXCLUDED THE AFORESAID COMPARABLE ON ACCOUNT OF HUGE DISPARITY BETWEEN THE TURNOVER OF INFOSYS TECHNOLO GIES LTD. AND THE ASSESSEE. THE RELEVANT EXTRACT OF THE ORDER OF TRIBUNAL IS AS U NDER: 34. NOW COMING TO THE MERIT OF EACH CASE, WE FIND THE ASSESSEE IN ITS TP STUDY REPORT HAS INCLUDED INFOSYS TECHNOLOGI ES LTD., AS COMPARABLE. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE, WE FIND THE TPO IN ITS ORDER FOR A.Y. 2006-07 IN ASSES SEES OWN CASE HAS HELD THAT INFOSYS IS NOT A COMPARABLE COMPANY WITH THAT OF THE ASSESSEE COMPANY BECAUSE OF HUGE DISPARITY BETWEEN THE TURNOVER OF INFOSYS TECHNOLOGIES LTD. WITH THAT OF THE ASSESSEE COMPANY. 34.1 WE FIND THE HONBLE DELHI HIGH COURT IN THE CA SE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD., (SUPRA) HAS HE LD THAT INFOSYS TECHNOLOGIES LTD., CANNOT BE CONSIDERED AS A COMPAR ABLE ENTITY WITH 25 ITA NO. 2236/PN/2012, A.Y. 2008-09, THAT OF SMALLER COMPANIES. IN VARIOUS OTHER JUDICI AL DECISIONS IT HAS BEEN HELD THAT CONSIDERING HUGE DIFFERENCE IN REVEN UES, ASSETS AND RISKS ASSUMED BY INFOSYS AND OTHER SMALLER COMPANIE S, INFOSYS TECHNOLOGIES LTD., CANNOT BE CONSIDERED AS COMPARAB LE ENTITY WITH SMALLER COMPANIES. IN THIS VIEW OF THE MATTER AND CO NSIDERING THE FACT THAT THE TPO IN ASSESSEES OWN CASE IN THE IMMEDIAT ELY PRECEDING ASSESSMENT YEAR HAS EXCLUDED INFOSYS AS A COMPARABLE, THE REFORE, WE DIRECT THE AO/TPO TO EXCLUDE INFOSYS FROM THE LIST OF COMPARABLES. IN THE PERIOD RELEVANT TO THE IMPUGNED ASSESSMENT YEAR , THE TURNOVER OF THE SOFTWARE DIVISION OF THE ASSESSEE IS RS.73 .5 CRORES, WHEREAS, INFOSYS HAS HUGE TURNOVER OF RS.15,648 CRORES. THUS, DUE TO SUBSTANTIAL DISPARITY IN SCALE OF OPERATION, THERE CANNOT B E ANY COMPARISON BETWEEN THE TWO COMPANIES. INFOSYS TECHNOLOG IES LTD. WAS REJECTED AS COMPARABLE IN ASSESSMENT YEAR 2007-08 FOR THE SIMILAR REASONS. WE DIRECT THE TPO/ASSESSING OFFICER TO EXCLUDE T HE SAME FROM THE LIST OF COMPARABLE ENTITY IN THE IMPUGNED ASSESSMENT YEAR AS WE LL. 20.5 KALS INFORMATION SYSTEM : THE ASSESSEE HAS OBJECTED TO INCLUSION OF THE SAID COMPANY IN THE LIST OF COMPARABLE ON THE GROUN D OF DIFFERENCE IN FUNCTIONALITY. THE TRIBUNAL IN ASSESSEES OWN C ASE FOR THE ASSESSMENT YEAR 2007-08 EXCLUDED THE SAID COMPANY FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DIFFERENCE. THE RELEVAN T EXTRACT OF THE ORDER OF TRIBUNAL IS AS UNDER: 37. SO FAR AS THE FRESH ADDITION OF 2 COMPANIES, N AMELY KALS INFORMATION SYSTEM LTD., AND COMPUCOM SOFTWARE LTD. , ARE CONCERNED, WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD., HAS OBSERVED AS UNDER : 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLE S BY THE TPO IS REGARDING INCLUSION OF KALS' INFORMATION S YSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EX PLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSE E. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO EST ABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICE S AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWAR E PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE 26 ITA NO. 2236/PN/2012, A.Y. 2008-09, EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS O N THIS ASPECT, ASSESSEE SUCCEEDS. 37.1 SIMILARLY, WE FIND THE PUNE BENCH OF THE TRIBU NAL IN THE CASE OF PTC SOFTWARE LTD., (SUPRA) HAS OBSERVED AS UNDER : 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WITH R EGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIO S & MATHESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION SOLUTIONS LTD. (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE LIST OF COMPARABLES IS TO BE EFFEC T THAT THEY ARE FUNCTIONALLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CONCERNS ARE EN GAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES UNDERTAKEN BY THE ASSESSEE IN ITS IT-SERVICES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORDER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATI ON SYSTEMS LTD., IS TO THE EFFECT THAT THE SAID CONCERN' S APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE DEVELOP MENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. THE SAID CONCERN IS ENGAGED IN TW O SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATION SOFTWARE SEGM ENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAI D CONCERN IS ENGAGED IN SOFTWARE SERVICES. THE STAND O F THE ASSESSEE IS THAT A PERUSAL OF THE ANNUAL REPORT OF TH E SAID CONCERN FOR F. Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE BUSINESS OF SALE O F SOFTWARE PRODUCTS AND SOFTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRITTEN SUBMISSIONS , COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 420.3 TO 420.4. THE ASSESSEE FURTHER POINTED OUT THAT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE O F SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTWARE SERVI CES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPLIC ATION SOFTWARE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEE'S IT-SERVICES SEGMENT. THE TPO HOWEVER, NOTICED THAT THOUGH THE APPLICATION SOF TWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLIN G OF SOME OF THE SOFTWARE PRODUCTS WHICH ARE DEVELOPED BY IT , HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SO FTWARE PRODUCTS AS THERE WERE NO COST OF PURCHASES DEBITED IN THE PROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED THAT TH E QUANTUM OF REVENUE FROM SALE OF PRODUCTS WAS NOT AVAI LABLE AS PER THE FINANCIAL STATEMENTS OF THE SAID CONCERN, BU T AS THE BASIC FUNCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEE'S SEGMENT OF IT-SERVICES. 18. BEFORE US, APART FROM REITERATING THE POINTS RAISE D BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIATELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS F OUND FUNCTIONALLY INCOMPARABLE. FOR THE SAID PURPOSE, OUR REFERENCE HAS BEEN INVITED TO PAGES 421 TO 542 OF TH E PAPER BOOK, WHICH IS THE COPY OF THE TRANSFER PRICING STUDY 27 ITA NO. 2236/PN/2012, A.Y. 2008-09, UNDERTAKEN BY THE ASSESSEE FOR THE A.Y. 2006-07, AND IN PARTICULAR, ATTENTION WAS INVITED TO PAGE 454 WHERE T HE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REF LECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN TH E EARLIER A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIF ICATION FOR THE TPO TO CONSIDER THE SAID CONCERN AS FUNCTIO NALLY COMPARABLE IN THE INSTANT ASSESSMENT YEAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY TH E ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT T HAT THE SAID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN THE IMMEDIATELY PRECEDIN G ASSESSMENT YEAR AND IN THE PRESENT YEAR ALSO, ON THE B ASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTEN SUBMI SSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS IN TER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSE E IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER I S THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THE RE ANY DISCUSSION EMERGING FROM THE ORDERS OF THE LOWER AUT HORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAI D CONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRECEDING YEAR. THEREFORE, HAVING REGARD TO T HE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS COR RECTLY ASSERTED THAT THE APPLICATION SOFTWARE SEGMENT OF TH E SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEE'S SEGMENT OF IT SERVICES. 37.2 XXXXXXXXXX 37.3 IN VIEW OF THE DECISION OF THE PUNE BENCH OF T HE TRIBUNAL GIVING REASONS FOR EXCLUSION OF KALS INFORMATION SYSTEM LT D., AND COMPUCOM SOFTWARE LTD., FROM THE LIST OF COMPARABLES BECAUSE OF DIFFERENT FUNCTIONS, WE FIND MERIT IN THE SUBMISSION OF THE L D. COUNSEL FOR THE ASSESSEE THAT THE ABOVE TWO COMPANIES CANNOT BE INC LUDED IN THE LIST OF COMPARABLES. WE ACCORDINGLY DIRECT THE TPO/AO T O EXCLUDE KALS INFORMATION SYSTEM LTD., AND COMPUCOM SOFTWARE LTD., FRO M THE LIST OF COMPARABLES. IN THE ASSESSMENT YEAR UNDER CONSIDERATION, NO MATERIAL CHANGE HAS BEEN POINTED OUT BY THE REVENUE IN THE FACTS OR FUN CTIONS/ACTIVITIES OF THE ASSESSEE. THEREFORE, FOR THE SIMILAR REASONS, WE DIR ECT THE TPO/ASSESSING OFFICER TO EXCLUDE KALS INFORMATION SYSTEM LT D. FROM THE LIST OF COMPARABLES. 20.6 FCS SOFTWARE SOLUTIONS LTD. : THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF THE SAID COMPANY IN THE LIST OF COMPARABLE ON TW O GROUNDS; (I) THE SAID COMPANY IS FUNCTIONALLY DIFFERENT. FCS SOFTWARE S OLUTIONS 28 ITA NO. 2236/PN/2012, A.Y. 2008-09, LTD. IS NOT ONLY ENGAGED IN THE SOFTWARE DEVELOPMENT BUT IS ALSO PROVIDING IT ENABLED SERVICES. THE TOTAL REVENUE OF THE S AID COMPANY GENERATED FROM DIFFERENT SEGMENTS, IS AS UNDER: (A) IT CONSULTING SERVICES - 44%. (B) E-LEARNING AND DIGITAL CONSULTING - 30%. (C) APPLICATION SUPPORT 24/7 11%. (D) INFRASTRUCTURE MANAGEMENT SERVICES 15%. THE LD. COUNSEL POINTED OUT THAT FROM THE ABOVE SAID S ERVICES THE ONLY COMPARABLE SEGMENT IS IT CONSULTING SERVICES WHICH C ONSTITUTE 44% OF TOTAL REVENUE. THE OTHER SERVICES RENDERED BY T HE COMPANY MENTIONED IN (B), (C) AND (D) COLLECTIVELY CONSTITUTE 56% OF THE TOTAL REVENUE, WHICH FALL UNDER ITES CATEGORY AND THUS IS NOT A COMPARABLE ENTITY. (II) THE SECOND REASON FOR EXCLUDING THE SAID COMPAN Y IS, IT IS A SUPER PROFIT MAKING COMPANY WITH OPERATING MARGIN OF 57.02% (BEFORE MAKING ADJUSTMENT FOR WORKING CAPITAL). IT HAS BEEN POINTED OUT T HAT IN CASE OF BARCLAYS TECHNOLOGY CENTRE INDIA (P) LTD. VS. ACI T (SUPRA), FCS SOFTWARE SOLUTIONS LTD. WAS REJECTED AS COMPARABLE ON TH E GROUND OF ABNORMAL PROFITS IN ASSESSMENT YEAR 2008-09. THE RELEVAN T EXTRACT OF THE ORDER IN THE CASE OF BARCLAYS TECHNOLOGY CENTRE IND IA (P) LTD. VS. ACIT (SUPRA) IS AS UNDER: 25. THE LAST POINT MADE BY THE LD. REPRESENTATIVE WAS FOR EXCLUSION OF M/S. FCS SOFTWARE SOLUTIONS LTD. FROM THE FINAL SET OF COMPARABLES. THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID CONCERN IS FUNCTIONALLY DISSIMILAR TO T HE ACTIVITIES BEING CARRIED OUT BY THE ASSESSEE BECAUSE THE SAID CONCER N IS ENGAGED IN THE SALE OF SOFTWARE PRODUCTS AS WELL AS ITES ACTIVITI ES AND FURTHER THAT NO SEGMENTAL DETAILS ARE AVAILABLE. APART THEREFR OM, IT HAS ALSO BEEN POINTED OUT THAT DURING THE YEAR UNDER CONSIDER ATION THE SAID CONCERN HAS EARNED ABNORMALLY HIGH PROFIT MARGIN OF 57 .02% AND FOR THIS REASON ALSO, IT SHOULD BE EXCLUDED FROM THE FINAL S ET OF COMPARABLES. IT HAS ALSO BEEN SUBMITTED THAT AFTER PERUS ING PROFIT MARGINS FOR VARIOUS YEARS, IT IS EVIDENCED THAT THE MARGINS HAVE WIDELY FLUCTUATED OVER THE YEARS. THE FOLLOWING TABULAT ION HAS BEEN PLACED BEFORE US :- 29 ITA NO. 2236/PN/2012, A.Y. 2008-09, YEAR UNADJUSTED OPERATING MARGIN (OP/OC) F.Y. 2005-06 14.75 F.Y. 2006-07 19.94% F.Y. 2007-08 57.02% F.Y. 2008-09 37.07% 26. THE LD. COUNSEL POINTED OUT THAT THE OPERATING MAR GIN OF THE SAID CONCERN FOR THE YEAR UNDER CONSIDERATION IS 57 .02%, WHICH IS QUITE ABNORMAL IN THE CONTEXT OF THE OPERATING MARGIN S OF 19.94% TO 14.75% FOR THE PRECEDING FINANCIAL YEARS OF 2006-07 AND 2005-06 RESPECTIVELY, AS ALSO FOR THE SUCCEEDING FINANCIAL YEAR OF 2008-09 WHERE THE OPERATING MARGIN IS 37.09%. IN THIS CONTEXT , RELIANCE HAS BEEN PLACED ON THE DECISION OF THE SPECIAL BENCH O F THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD., ACIT VIDE ITA NO.7466/MUM/2012 DATED 07-03-2014. 27. THE LD. CIT DEPARTMENTAL REPRESENTATIVE POINTED OUT THAT THE DRP HAS REJECTED THE PLEA OF THE ASSESSEE ON THE GROUND THAT THERE WAS NO INDEPENDENT DATA AVAILABLE TO ASSESS WH ETHER THE PROFIT MARGIN OF 57.02% PERTAINING TO THE SAID CONCER N CAN BE CONSTRUED AS ABNORMALLY HIGH. 28. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS . THE ARGUMENT OF THE ASSESSEE IN ORDER TO EXCLUDE FCS SOF TWARE SOLUTIONS LTD. FROM THE FINAL SET OF COMPARABLES IS BAS ED ON TWIN GROUNDS. FIRSTLY, IT IS CONTENDED THAT THE SAID CONCE RN HAS DECLARED AN ABNORMALLY HIGH PROFIT MARGIN OF 57.02% F OR THE FINANCIAL YEAR UNDER CONSIDERATION; AND, SECONDLY, THAT THE MARGINS OF THE SAID CONCERN WIDELY FLUCTUATE IN OVER THE YEARS. IN THE CONTEXT OF THE EXCLUSION OF ABNORMAL PROFIT MAKING CONCER NS, THE FOLLOWING DISCUSSION MADE BY THE SPECIAL BENCH OF THE T RIBUNAL IN THE CASE OF MAERSK GLOBAL CENTREA (INDIA) PVT. LTD. (S UPRA) IS WORTHY OF NOTICE : IN GENERALITY, WE ARE OF THE VIEW THAT THE ANSWER TO THIS QUESTION WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE INASMUCH AS POTENTIAL COMPARABLE EARNING ABNORMALL Y HIGH PROFIT MARGIN SHOULD TRIGGER FURTHER INVESTIGATI ON IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPAR ABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS TO W HETHER EARNING OF HIGH PROFIT REFLECTS A NORMAL BUSINESS COND ITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITIONS PREVAILING IN THE RELEVANT YEAR. THE PROFIT MARGIN EARN ED BY SUCH ENTITY IN THE IMMEDIATELY PRECEDING YEAR/S MAY ALSO BE TAKEN INTO CONSIDERATION TO FIND OUT WHETHER THE HI GH PROFIT MARGIN REPRESENTS THE NORMAL BUSINESS TREND. THE FAR ANALYSIS IN SUCH CASE MAY BE REVIEWED TO ENSURE THA T THE POTENTIAL COMPARABLE EARNING HIGH PROFIT SATISFIES THE COMPARABILITY CONDITIONS. IF IT IS FOUND ON SUCH INVEST IGATION THAT THE HIGH MARGIN PROFIT MAKING COMPANY DOES NOT SATISFY THE COMPARABILITY ANALYSIS AND OR THE HIGH PROFIT MAR GIN EARNED BY IT DOES NOT REFLECT THE NORMAL BUSINESS COND ITION, WE ARE OF THE VIEW THAT THE HIGH PROFIT MARGIN MAKIN G ENTITY SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE FOR T HE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. OTHERWISE, THE ENTITY SATISFYIN G THE 30 ITA NO. 2236/PN/2012, A.Y. 2008-09, COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT MARGIN REFLE CTING NORMAL BUSINESS CONDITION SHOULD NOT BE REJECTED SOLEL Y ON THE BASIS OF SUCH ABNORMAL HIGH PROFIT MARGIN.' 29. THE AFORESAID DISCUSSION OF THE SPECIAL BENCH REVE ALS THAT A CONCERN WHICH HAS EARNED ABNORMALLY HIGH PROFIT MARGIN CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES STRAIGHTAWAY W ITHOUT MAKING APPROPRIATE INVESTIGATIONS. AS PER THE SPECIAL BENC H, IT WOULD BE APPROPRIATE TO ASCERTAIN AS TO WHETHER THE HIG H PROFIT MARGIN DECLARED BY THE CONCERN REFLECTS A NORMAL BUS INESS PHENOMENON OR IT HAS RESULTED BECAUSE OF CERTAIN ABNO RMAL CONDITIONS PREVAILING IN A PARTICULAR YEAR. AS PER TH E SPECIAL BENCH, IN ORDER TO CARRY OUT THE AFORESAID ANALYSIS, THE PROFIT MARGINS EARNED BY SUCH CONCERN IN THE PROXIMATE PRECED ING AND SUCCEEDING YEARS SHOULD ALSO BE TAKEN INTO CONSIDERATI ON SO AS TO ESTABLISH WHETHER THE HIGH PROFIT MARGINS REFLECT A N ORMAL BUSINESS TREND OR OTHERWISE. IN THIS BACKGROUND OF THE MATTE R, WE FIND THAT IN THE CASE OF FCS SOFTWARE SOLUTIONS LTD., THE MARGIN S FOR THE TWO PRECEDING FINANCIAL YEARS ARE 14.75% AND 19.94%, WHEREAS IN THE FINANCIAL YEAR SUCCEEDING TO THE YEAR UNDER CONSIDERA TION, THE MARGIN IS 37.07%; AND, THE MARGIN DECLARED FOR THE YEA R UNDER CONSIDERATION IS 57.02%. AT THE TIME OF HEARING, THE L D. REPRESENTATIVE POINTED OUT THAT IN THE FINANCIAL YEAR 2007-08 RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION THE SAID CONCERNS REVENUES FROM THE SOFTWARE ACTIVITY WAS RS.8 6.73 CRORES AS AGAINST RS.143.43 CRORES IN IMMEDIATELY PRECEDING YEA R. ON THE CONTRARY THE EXPENDITURE INCURRED ON DEVELOPMENT OF SOFTWARE FOR THE YEAR UNDER CONSIDERATION STOOD AT RS.30.44 CR ORES AS AGAINST RS.104.35 CRORES IN THE IMMEDIATELY PRECEDING YEA R. IT IS POINTED OUT THAT THE RATIO OF SOFTWARE DEVELOPMENT EX PENDITURE TO TOTAL INCOME HAS FALLEN DRASTICALLY FROM 72.75% TO 35.10 %, WHICH SHOWS THAT THE CURRENT YEAR HAS WITNESSED ABNORMAL EV ENTS. ALL THE AFORESAID FACTUAL ASPECTS OF THE MATTER HAVE NOT BEEN DISPUTED BY THE REVENUE BEFORE US. FROM THE AFORESAID ANALYS IS, IT IS CLEAR THAT THE OPERATING MARGINS OF THE SAID CONCERN DO NO T REFLECT A CONSISTENT TREND OVER THE YEARS, AND IN ANY CASE, THE CURRENT YEARS OPERATIONS IN COMPARISON TO THE EARLIER YEARS ARE QU ITE ABNORMAL. CONSIDERING THE ENTIRETY OF CIRCUMSTANCES, IN OUR VIEW, THE FINANCIAL RESULTS DECLARED BY THE SAID CONCERN DO NOT REFLECT A NORMAL BUSINESS TREND AND THEREFORE IN OUR VIEW THE SAID C ONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. WE HOLD SO. THE LD. DR HAS ARGUED THAT THE COMPANY SHOULD NOT BE REMOVED FROM THE LIST OF COMPARABLES SOLELY ON THE GROUND OF SUPER PROFITS. IN SUPPORT OF HIS SUBMISSIONS, THE LD. DR PLACED RELIANCE ON TH E DECISION IN THE CASE OF MAERSK GLOBAL CENTRES INDIA PVT. LTD. (SUPRA ). IN THE CASE OF BARCLAYS TECHNOLOGY CENTRE (P) LTD., THE CO-ORDINA TE BENCH BEFORE REJECTING M/S. FCS SOFTWARE SOLUTIONS LTD. AS COMPA RABLE HAD ANALYSED THE FACTORS RESULTING IN ABNORMALLY HIGH PROFITS O F THE SAID COMPANY IN THE ASSESSMENT YEAR 2008-09. THE TRIBUNAL A FTER 31 ITA NO. 2236/PN/2012, A.Y. 2008-09, CONSIDERING THE RATIO LAID DOWN BY THE SPECIAL BENCH IN TH E CASE OF MAERSK GLOBAL CENTRES INDIA (P) LTD. HAS REJECTED M/S. FC S SOFTWARE SOLUTIONS LTD. AS COMPARABLE ENTITY. ACCORDINGLY, WE ARE OF THE VIEW THAT SINCE, THE COMPANY IS EARNING ABNORMALLY HIGH PROFITS IN THE ASSESSMENT YEAR UN DER CONSIDERATION AS COMPARED TO THE PROFITS EARNED IN EARLIE R FINANCIAL YEAR, THE SAID COMPANY SHOULD NOT BE CONSIDERED AS COMP ARABLE ENTITY. WE DIRECT THE TPO/ASSESSING OFFICER TO EXCLUDE THE SAME FR OM THE LIST OF COMPARABLES, ACCORDINGLY. 21. NOW, WE WILL TAKE UP THE COMPANIES THAT HAVE BEEN RE JECTED BY THE TPO AS COMPARABLE AND THE ASSESSEE HAS OBJECTED TO THE EXCLUSION OF THE SAID COMPARABLE ENTITIES. 21.1 AZTEC SOFT LTD. : THE SAID COMPANY HAS BEEN REJECTED AS COMPARABLE ENTITY BY THE TPO ON THE FILTER OF RELATED PART Y TRANSACTION (RPT). ACCORDING TO THE TPO, THE RPT OF THE SAID COMPARAB LE WAS MORE THAN 25%. THE TPO FURTHER OBSERVED THAT THE SAID COMP ANY IS IN RESTRUCTURING PHASE, THEREFORE, CANNOT BE CONSIDERED AS COMPARABLE. THE LD. COUNSEL HAS PLACED ON RECORD THE FINANCIAL RESULTS OF AZTEC SOFT LTD. FOR THE F.YS. 2006-07 AND 2007-08. A PERUSAL OF THE PROFIT AND LOSS ACCOUNT FOR THE SAID FINANCIAL YEARS SHOWS THAT AS ON 31-03-2007 THE INCOME OF AZTEC SOFT LTD. FROM SOFTWARE DEVELOPMENT AN D SERVICES WAS TO THE TUNE OF RS.241.43 CRORES AND FOR THE FINANCIAL YEAR ENDING ON 31-03-2008 THE CORRESPONDING INCOME FROM SOFTWARE DE VELOPMENT SERVICES WAS RS.225.52 CRORES. THUS, THE FINANCIAL RESULT SH OWS THAT THERE HAS NOT BEEN MUCH DEVIATION IN THE REVENUE GENERA TED BY THE SAID COMPANY. AS FAR AS THE RPT ARE CONCERNED THE ASSESSE E HAS PLACED ON 32 ITA NO. 2236/PN/2012, A.Y. 2008-09, RECORD AT PAGE 420 OF THE PAPER BOOK THE CALCULATION OF RPT. FOR THE SAKE OF CONVENIENCE THE SAME IS REPRODUCED HEREIN : CALCULATION OF RELATED PARTY TRANSACTIONS (RPT) PARTICULARS AMOUNT (INR000) REVENUE 2,306,448 EXPENSES 2,122,712 SUBTOTAL (A) 4,429,160 TOTAL RELATED PARTY TRANSACTIONS ONSITE CONSULTANCY FEES PAYABLE TO AZTECH SOFTWARE USA 278787 REVENUE FROM AZTECH DISHA INC USA 421367 REIMBURSEMENTS PAID TO SUBSIDIARIES 1977 REIMBURSEMENTS RECEIVED FROM SUBSIDIARIES 10277 SUBTOTAL (B) 712,408 PERCENTAGE OF RELATED PARTY TRANSACTIONS 16.08% THUS, FROM THE ABOVE CALCULATIONS WHICH HAVE NOT BEEN DISP UTED BY THE REVENUE IT IS EVIDENT THAT THE PERCENTAGE OF RELA TED PARTY TRANSACTION IS ONLY 16.08% AND NOT MORE THAN 25% AS HA S BEEN HELD BY THE TPO. THUS, WE DO NOT FIND ANY VALID REASON IN THE OBSERVATIONS MADE BY THE TPO IN REJECTING THE AZTEC SOFT LTD. AS COM PARABLE ENTITY. WE, ACCORDINGLY, DIRECT THE TPO/ASSESSING OFFICER TO INCLUDE THE SAME IN THE LIST OF COMPARABLES. 21.2 SIP TECHNOLOGIES AND EXPORTS LTD. : THE SAID COMPANY HAS BEEN EXCLUDED FROM THE LIST OF COMPARABLE BY THE TPO ON THE GROUND THAT IT IS A LOSS MAKING COMPANY. THE ASSESSEE HAS BROUGHT ON RE CORD THE OPERATING MARGIN OF THE THREE PRECEDING ASSESSMENT YEA R OF THE SAID COMPANY. THE SAME ARE AS UNDER: 33 ITA NO. 2236/PN/2012, A.Y. 2008-09, F.Y. 2005-06 21.09% F.Y. 2006-07 10.12% F.Y. 2007-08 -33.20% THE CONTENTION OF THE ASSESSEE IS THAT THE SAID COMPANY IS NOT A PERSISTENT LOSS MAKING COMPANY. ONLY FOR THE REASON THA T THE COMPARABLE HAS SUFFERED LOSS IN ONE YEAR THE SAME SHOULD NOT BE REJECTED. WE FIND MERIT IN THE SUBMISSION OF THE LD. A.R. IN THE CASE OF BOBST INDIA PVT. LTD. VS. DCIT IN ITA NO.1380/PN/2010 FOR A.Y. 2006- 07 THE TRIBUNAL HAS OBSERVED THAT ONLY PERSISTENT LOSS MAKING COMPANIES SHOULD BE HELD AS NOT GOOD COMPARABLE. THE TR IBUNAL HELD THAT THE PERSISTENT LOSS MEANS, CONTINUOUS LOSS FOR MO RE THAN 3 YEARS. THUS, WHERE THE COMPARABLE ENTITY IS NOT UNDER PERSISTEN T LOSS, THE SAME SHOULD NOT BE REJECTED AS COMPARABLE. SIMILAR VIEW H AS BEEN TAKEN IN THE CASE OF GOLDMAN SACHS (INDIA) SECURITIES PVT. L TD. VS. ACIT, ITA NO.7724/MUM/2011, AND BRIGADE GLOBAL VS. ITO, ITA NO.1494/HYD/2010. IN THE PRESENT CASE, THE COMPARABLE ENTITY SIP TECHNOLOGIES & EXPORTS LTD. HAS SUFFERED LOSS IN F.Y. 2007-0 8 ONLY. THEREFORE, IT CANNOT BE SAID TO BE A PERSISTENT LOSS MAKIN G COMPANY. THE AUTHORITIES BELOW HAVE THUS ERRED IN EXCLUDING THE SAME FROM THE LIST OF COMPARABLE ENTITIES. WE DIRECT THE TPO/AO TO INCLUDE THE AFORESAID COMPANY AS COMPARABLE ENTITY. 22. NOW, WE PROCEED ON TO DEAL WITH THE OBJECTION RAISED BY THE ASSESSEE IN RESPECT OF COMPARABLES INCLUDED/EXCLUDED BY T HE TPO WHILE BENCHMARKING ALP OF DESIGN, ENGINEERING DIVISION. DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2008-09 THE ASSESSEE PROVIDED DESIGNING & ENGINEERING RELATED SERVICES TO THE TUNE OF RS.86,42,20,000/- TO ITS AE. TO BENCHMARK INTERNATIONAL TR ANSACTION IN RESPECT OF DESIGN & ENGINEERING DIVISION THE ASSESSEE ADOPTED T NMM AS THE MOST APPROPRIATE METHOD. THE OPERATING MARGIN O F THE ASSESSEE COMPANY UNDER THIS DIVISION IS 14.30%. THE ASSESSEE INITIALL Y SELECTED 34 ITA NO. 2236/PN/2012, A.Y. 2008-09, 11 COMPANIES AS COMPARABLES. THE LIST OF THE COMPANIES SE LECTED BY THE ASSESSEE IS AS UNDER: OPERATING PROFIT ON OPERATING COST (%) NAME OF THE COMPANY FY 2005- 06 FY 2006-07 FY 2007-08 WEIGHTED AVERAGE OPERATING PROFIT ON OPERATING COST (%) ACE SOFTWARE EXPORTS LIMITED 7.92% -7.04% NA 0.25% APEX ADVANCED TECHNOLOGY PRIVATE LIMITED 20.03% 39.73% NA 31.49% CG-VAK SOFTWARE & EXPORTS LIMITED (CONSOLIDATED SEGMENTAL) 3.79% 4.97% NA 4.48% CALIBER POINT BUSINESS SOLUTIONS LIMITED 23.51% 23.05% NA 23.21% COSMIC GLOBAL LIMITED 16.73% 11.31% NA 13.53% FLEXTRONICS SOFTWARE SYSTEMS LIMITED (SEGMENTAL) 16.28% -0.89% NA 12.62% GENESYS INTERNATIONAL CORPORATION LIMITED 2.64% 12.52% NA 8.22% INFORMED TECHNOLOGIES INDIA LIMITED (CONSOLIDATED FOR FY 2005-06) -43.18% 34.30% NA -1.90% R SYSTEMS INTERNATIONAL LIMITED (SEGMENTAL) 14.28% 13.54% 10.34% 12.12% TRICOM INDIA LIMITED (COSOLIDATED) VISHAL INFORMATION TECHNOLOGIES LIMITED 51.86% 63.73% NA 58.26% VISHAL INFORMATION TECHNOLOGIES LIMITED 48.03% 51.11% NA 49.69% ARITHMETIC MEAN 19.27% RANGE LOWER RANGE (-) 5% UPPER RANGE (+) 5% 13.31% 25.23% NOTE 1 : THE AVERAGE NET MARGIN REPRESENTS THE WE IGHTED AVERAGE OF THE MARGIN FOR THE FY 2007-08, FY 2006-07 AND FY 2005-0 6 (WHEREVER AVAILABLE) WITH THE OPERATING COSTS OF THE RESPECTIVE YEARS BE ING USED AS WEIGHTS. NOTE 2: NA DENOTES DATA NOT AVAILABLE 23. THE ASSESSEE WHILE SELECTING THE COMPARABLES FOR BENCH MARKING CONSIDERED THE FUNCTIONAL RESULTS OF THE COMPARABLE ENTITIES OF 3 FINANCIAL YEARS. IN THE FIRST INSTANCE THE TPO REJECTED TH E THREE YEAR 35 ITA NO. 2236/PN/2012, A.Y. 2008-09, CRITERIA AND CONFINED TO THE COMPARISON OF FINANCIAL RESULT RE LATING TO ASSESSMENT YEAR 2008-09. THE ASSESSING OFFICER REJECTE D MOST OF THE COMPANIES WHICH WERE INCLUDED BY THE ASSESSEE IN THE LIST OF COMPARABLES AND INCLUDED NEW COMPANIES AS COMPARABLE ENT ITIES. THE FINAL LIST OF THE ENTITIES, CONSIDERED BY THE TPO AS COMPARAB LES IS AS UNDER: SR. NO. COMPANY OPERATING PROFITS ON OPERATING COSTS % (F.Y. 2007-08) 1 GENESYS INTERNATIONAL CORPORATION LTD. 46.82 2 KLG SYSTEL LTD. 23.48 3 CORAL HUBS 51.79 4 COSMIC GLOBAL 23.30 5 E4E - HEALTH 19.38 6 TRITON CORPORATION 25.26 ARITHMETIC MEAN (210.7/7) 31.62% ASSESSEES MARGIN 13.79% 24. THE ASSESSEE OBJECTED TO SOME OF THE COMPANIES SELE CTED BY THE TPO AS COMPARABLES WHICH ARE AS UNDER: 24.1 CORAL HUBS LTD. (EARLIER KNOWN AS VISHAL INFORMATION TECHNOLOGIES LIMITED) : THE OBJECTION OF THE ASSESSEE IS THAT THE SAID COMPANY IS ENGAGED IN E-PUBLISHING WHICH IS QUITE DIFFERENT I N FUNCTION FROM THE ACTIVITIES CARRIED OUT BY THE ASSESSEE. THE ANO THER OBJECTION RAISED BY THE ASSESSEE IS THAT THE OPERATING MARGIN OF THE SAID COMPARABLES IS ABNORMALLY HIGH I.E. 51.79%. THE LD. COUNSEL POINTED THAT IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA PV T. LTD. VS. ITO IN IT(TP) A.NO.1316/BANG/2012, A.Y. 2008-09 DECIDED ON 14-08- 2013 IT HAS BEEN HELD THAT CORAL HUBS IS NOT A GOOD COM PARABLE ON ACCOUNT OF FUNCTIONAL DISPARITY AS WELL AS ON ACCOUNT OF ABN ORMALLY HIGH PROFITS. THE RELEVANT EXTRACT OF THE ORDER OF TRIBUN AL IN THE CASE OF SYMPHONY MARKETING SOLUTIONS PVT. LTD. (SUPRA) IS AS UNDER: 36 ITA NO. 2236/PN/2012, A.Y. 2008-09, 14. THIS COMPANY IS LISTED AT SL.NO.6 OF THE LIST OF CO MPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPANY IS CONCERNED, IT IS SEEN THAT THIS COMPANY WAS EARLIER KNOWN AS VISHAL INFORMATION TECHNOLOGIES LTD. THE COMPARABILITY OF THIS COMPANY IN THE CASE OF AN ITES COMPANY BY NAME 24 X 7 CUSTOMER.COM PVT. LTD. WAS CONSIDERED BY THE TRIBUNAL IN ITA NO.227/BANG/2010 AND BY ORDER DATED 09.11.2012 THE TRI BUNAL HELD THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE W ITH ITES FOR THE FOLLOWING REASON:- 17.3 VISHAL INFORMATION TECHNOLOGIES LTD. (VIT) - IN THE CASE OF THIS COMPARABLE, WE FIND THAT THE MUMBAI TRIBUNAL IN THE CASE OF MEARSK GLOBAL SERVICES (I) PVT LTD IN ITA NO.3774/MUM/2011 BY ORDER DT.9.11.2011 HAS HELD THAT SINCE VISHAL INFORMATION TECHNOLOGIES LTD IS OUTSOURC ING MOST OF ITS WORK IT HAS TO BE EXCLUDED FROM THE LIST WHEREAS THE ASSESSEE IN THE CITED CASE WAS CARRYING OUT THE W ORK BY ITSELF. IN THE INSTANT CASE OF THE ASSESSEE ALSO THE A SSESSEE WAS CARRYING OUT ITS WORK BY ITSELF WHEREAS IN THE CA SE OF VITL, IT IS OUTSOURCING MOST OF ITS WORK. WE ARE THER EFORE OF THE CONSIDERED OPINION THAT THE DECISION OF THE ITAT , MUMBAI IN THE CITED CASE ON THE ISSUE OF EXCLUDING VITL AS A COMPARABLE SQUARELY APPLIES. THIS DECISION WAS FOLLOWED BY THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUN AL IN THE CASE OF NETLINX INDIA(P) LTD IN ITA NO.454/BANG/2011 DT.19.10.2012 WHEREIN IT WAS HELD THAT VISHAL INFORMATION TECHNOLOGIES LTD CANNOT BE CONSIDERED AS A COMPARABLE . WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE MU MBAI TRIBUNAL IN THE CASE OF MEARSK GLOBAL SERVICES (I) PVT LTD, DIRECT THE ASSESSING OFFICER / TPO TO EXCLUDE VISHAL INFORMATION TECHNOLOGIES LTD. FROM THE LIST OF COMPARABLES. 15. FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT CORAL HUBS LTD. CANNOT BE CONSIDERED AS A CO MPARABLE. IT MAY ALSO BE RELEVANT TO POINT OUT THAT THE TPO IN HIS ORDER HAS OBSERVED THAT THIS COMPANY IS RETAINED AS A COMPARA BLE ON THE BASIS OF DETAILED DISCUSSION IN THE TP ORDER FOR THE A.Y. 2007-08. IN FACT IN A.Y. 2007-08, THERE WAS NO DETERMINATION OF ALP AND THEREFORE THERE WAS NO OCCASION FOR ANY ORDER BEING PASSED BY THE TPO. IT IS ALSO SEEN THAT THIS COMPANY ENTERED INTO A N AREA OF BUSINESS KNOWN AS NEW VERTICAL DIGITAL LIBRARY & PRINT ON DEMAND IN F.Y. 2007-08. IN THE CASE OF CAPITAL IQ INFORM ATION SYSTEMS INDIA PVT. LTD. (SUPRA), THE ITAT HYDERABAD BENCH IN THE CASE OF ITES COMPANY CONSIDERED THE COMPARABLE OF TH IS COMPANY AS AN ITES COMPANY AND HELD AS FOLLOWS:- IV. CORAL HUB LIMITED (EARLIER KNOWN AS VISHAL INFORMATI ON TECHNOLOGIES LTD.): 16. THE ASSESSEE HAS OBJECTED FOR THIS COMPANY BEING TAKEN AS COMPARABLE MAINLY ON THE GROUND THAT THE ACTIVITIE S OF THE COMPANY IS NOT ONLY FUNCTIONALLY DIFFERENT, BUT THE B USINESS MODEL OF THE COMPANY IS ALSO DIFFERENT AS IT SUB-CONTRA CTS MAJORITY OF ITS ITES WORKS TO THIRD PARTY VENDORS AN D HAS ALSO MADE SIGNIFICANT PAYMENTS TO THOSE VENDORS. THE PAYMENTS MADE TO VENDORS TOWARDS THE DATA ENTRY CHA RGES ALSO SUPPORTS THE FACT THAT THE COMPANY OUTSOURCES IT S WORKS. IN THE CIRCUMSTANCES, IT CANNOT BE TAKEN AS A COMPARABLE TO THE ITES FUNCTIONS PERFORMED BY THE ASSE SSEE. SINCE THIS COMPANY IS ACTING AS AGENT ONLY BY OUTSOU RCING ITS 37 ITA NO. 2236/PN/2012, A.Y. 2008-09, WORKS TO THE THIRD PARTY VENDORS. IN THIS CONTEXT, TH E ASSESSEE RELIED UPON THE ORDER OF THE DRP IN ASSESSE E'S OWN CASE FOR THE ASSESSMENT YEAR 2008-09, WHEREIN THE DRP , AFTER TAKING INTO CONSIDERATION, THE AFORESAID ASPECT , HAS ACCEPTED THE CLAIM OF THE ASSESSEE. THE ASSESSEE FURT HER SUBMITTED THAT THE INCOME-TAX APPELLATE TRIBUNAL MUMBAI BENCH IN THE CASE OF ASSTT. CIT V. MAERSK GLOBAL SERVIC E CENTRE (INDIA) (P.) LTD. [2011] 133 ITD 543/16 TAXMANN .COM 47 (MUM.), A COPY OF WHICH IS SUBMITTED BEFORE US, HAS ALSO DIRECTED FOR THE EXCLUSION OF THE AFORESAID COMPANY S INCE IT HAS OUTSOURCED A CONSIDERABLE PORTION OF ITS BUSINESS. 17. AFTER CONSIDERING THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, WE FIND T HAT THE DRP, IN THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2008-09 IN ASSESSEE'S OWN CASE, AFTER TAKING NOTE OF THE COMPOSIT ION OF THE VENDOR PAYMENTS OF CORAL HUB FOR THE LAST THREE YEARS, AND THE FACT THAT IT HAS ALSO COMMENCED A NEW LINE OF BUSINESS OF PRINTING ON DEMAND(POD), WHEREIN IT PRINTS UPON CLIENTS REQUEST, CONCLUDED AS FOLLOWS- '18.4. IN VIEW OF THIS MAJOR DIFFERENCE IN FUNCTIONALIT Y AND THE BUSINESS MODEL, THIS PANEL IS OF THE VIEW THAT 'COR AL HUB' IS NOT A SUITABLE COMPARABLE TO THE TAXPAYER AND HENCE NEEDS TO BE DROPPED FORM THE FINAL LIST OF COMPARABLES. ' IN CASE OF MAERSK GLOBAL SERVICE CENTRE INDIA (P.) LT D. (SUPRA), THE ITAT MUMBAI BENCH HAS ALSO DIRECTED FOR EXCLUSION OF THE AFORESAID COMPANY, BY OBSERVING IN THE FOLLOWING MANNER- 'INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMITED A ND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPAN IES OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS. A S THE ASSESSEE CARRIED OUT ENTIRE OPERATIONS BY ITSELF, IN OUR CONSIDERED OPINION, THESE TWO CASES WERE RIGHTLY EXCLUDED .' IN VIEW OF THE OBSERVATIONS MADE BY THE DRP AS WELL AS THE DECISION OF THE ITAT MUMBAI IN THE CASE OF MAERSK G LOBAL SERVICE CENTRE, (SUPRA), WE ACCEPT THAT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. 16. IT IS ALSO FURTHER NOTICED THAT THE EMPLOYEE COST/ OPERATING SALES OF THIS COMPANY IS A MERE 3%, WHEREAS THE THRESHOLD L IMIT FOR ACCEPTANCE AS A COMPARABLE ON THE BASIS OF EMPLOYEE CO ST TO SALES SHOULD BE AT LEAST 25%. THIS TRIBUNAL IN THE CASE OF FI RST ADVANTAGE OFFSHORE SERVICES LTD. V. CIT, IT(TP)A NO.1086/BANG/2011, ORDER DATED 30.4.2013, HAS TAKEN THE FOLLOWING VIEW:- 36. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THIS ISSUE HAD ARISEN IN THE ASSESSEES OWN CAS E FOR THE ASSESSMENT YEAR 2006-07. THIS TRIBUNAL HAS HELD THAT EMPLOYEE COST FILTER IS TO BE THE SAME EVEN FOR ITES S EGMENT ALSO. THE LEARNED DRS ARGUMENT THAT THE EMPLOYEE COST FILTER IS APPLICABLE ONLY TO SOFTWARE DEVELOPMENT SEGMENT AND NOT TO ITES SEGMENT IS NOT ACCEPTABLE. THOUGH IT IS WITHO UT ANY DISPUTE THAT THE SOFTWARE DEVELOPMENT WOULD REQUIRE SK ILLED EMPLOYEES AND, THEREFORE, THE EMPLOYEE COST WOULD DEFINITELY BE MORE THAN 25% OF THE TOTAL EXPENSES, IT CANNOT BE SAID THAT THE SAID FILTER IS NOT APPLICABLE TO ITES SEGMEN T, WHERE 38 ITA NO. 2236/PN/2012, A.Y. 2008-09, COMPARABLY LESS SKILLED EMPLOYEES ARE EMPLOYED. IN THE ITES SEGMENT, THE ENTIRE WORK IS TO BE DONE BY THE EMPLOYEES AND, THEREFORE, EVEN THOUGH THEY MAY BE LESS SKILLED COMPARED TO SOFTWARE DEVELOPMENT SEGMENT, THE NUMBER OF EMPLOYEES WOULD DEFINITELY BE MORE AND THUS T HE EMPLOYEE COST WOULD BE HIGH AND THUS APPLICATION OF EMPLOYEE COST FILTER TO THE ITES SECTOR IS ALSO JUSTIFI ED. IN VIEW OF THE SAME, WE DIRECT THE TPO TO APPLY THE EMPLOY EE COST FILTER TO EXCLUDE COMPANIES WITH EMPLOYEE COST OF LESS THAN 25% FROM THE LIST OF COMPARABLES FOR THE COMPUTA TION OF ALP. 17. APPLYING THE AFORESAID DECISIONS, WE ARE OF THE VIE W THAT CORAL HUBS LTD. CANNOT BE CONSIDERED AS A COMPARABLE. WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE COMPA NY IS FUNCTIONALLY DIFFERENT FROM CORAL HUB LIMITED. BOTH THE COMPA NIES HAVE DIFFERENT OPERATING MODELS, THUS THERE CANNOT BE ANY COMPARISON BETWEEN TWO ENTITIES HAVING DIFFERENT BUSINESS SPHERES AND DISTINCT MODE OF OPERATION. ACCORDINGLY, WE DIRECT THE TPO/AO TO EXCLUDE THE COMPANY FROM THE LIST OF COMPARABLE ENTITIES. 24.2 GENESYS INTERNATIONAL CORPORATION LTD. : THE LD. COUNSEL OBJECTED TO THE INCLUSION OF THE AFORESAID COMPANY AS COM PARABLE ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT. THE SAID COMP ANY IS ALLEGEDLY ENGAGED IN THE BUSINESS OF GEOSPATIAL SERVICES AN D HENCE, IT CANNOT BE COMPARED WITH THE ACTIVITIES CARRIED ON BY THE ASSESSEE. THE LD. COUNSEL POINTED OUT THAT THE OPERATING MARGIN OF THE SAID COMPANY IS 46.82% WHICH IS VERY MUCH ON THE HIGHER SIDE. THE LD. COUNSEL HAS FURTHER POINTED OUT THAT IN THE CASE OF HYUNDAI MOTORS INDIA ENGINEERING PVT. LTD. (SUPRA) AND SYMPHONY MARKETING SOLUT IONS INDIA PVT. LTD. (SUPRA), GENESYS INTERNATIONAL CORPORATION LTD. HA VE BEEN REJECTED ON THE GROUND OF FUNCTIONAL DISPARITY. THE RELEVA NT EXTRACT OF THE ORDER OF HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF HYUNDAI MOTORS INDIA ENGINEERING PVT. LTD. (SUPRA) IS AS UNDER: V. GENESYS INTERNATIONAL CORPORATION LTD. : THIS COMPANY IS LISTED AT SL. NO.11 IN THE LIST OF COMPARAB LE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPANY IS CONCERN ED, THE STAND 39 ITA NO. 2236/PN/2012, A.Y. 2008-09, OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCT IONALLY NOT COMPARABLE AND THAT IT HAS A DIFFERENT EMPLOYEE SKILL SET AND THAT THIS COMPANY PERFORMS R&D SERVICES AND ALSO OWNS INTA NGIBLES. THIS COMPANY IS A GEOSPATIAL SERVICES CONTENT PROVIDER SPECIALISING IN LAND BASED TECHNOLOGIES. FROM THE NOTES TO ACCOUNT S OF THIS COMPANY, IT IS SEEN THAT THIS COMPANY IS ENGAGED IN PR OVIDING GEOGRAPHICAL INFORMATION SERVICES COMPRISING OF PHOTOG RAMMETRY, REMOTE SENSING CARTOGRAPHY, DATA CONVERSION RELATED C OMPUTED BASED SERVICES AND OTHER RELATED SERVICES. FURTHER T HE BUSINESS OF THIS COMPANY REQUIRES SKILLED MANPOWER AND SCIENTISTS, CIVIL ENGINEERS, ETC. BESIDES THE ABOVE, THIS COMPANY ALSO CA RRIES OUT R&D SERVICES AND OWN INTANGIBLES. THE AFORESAID FACTS , IN OUR VIEW, WILL TAKE THIS COMPANY OUT OF THE LIST OF COM PARABLES. SIMILAR VIEW WAS ALSO TAKEN IN THE CASE OF SYMPHONY MARKETIN G SOLUTIONS INDIA(P) LTD (SUPRA) BY THE BANGALORE BENCH. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THIS COMPANY CANNOT BE REGA RDED AS A COMPARABLE AND DESERVES TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IN THE PRESENT CASE, THE ASSESSEE IS UNDISPUTEDLY NOT ENGAGED IN GEOSPATIAL SERVICES. THE ACTIVITIES OF THE ASSESSEE ARE AT VARIANCE FROM THAT OF GENESYS INTERNATIONAL CORPORATION LTD. THUS, THE SAID COM PANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE, HENCE IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 24.3 COSMIC GLOBAL LTD. : INITIALLY THE ASSESSEE HAD INCLUDED THE SAID COMPANY IN THE LIST OF COMPARABLE. SUBSEQUENTLY, THE ASS ESSEE OBJECTED TO THE INCLUSION OF SAME. THE LD. COUNSEL FOR TH E ASSESSEE POINTED THAT IN THE CASE OF PAREXEL INTERNATIONAL INDIA PV T. LTD. (SUPRA) THE TRIBUNAL HAS HELD THAT THE COMPANY IS NOT FUNCTIONA LLY COMPARABLE. THE RELEVANT EXTRACT OF THE ORDER OF TRIBUNAL IS AS UNDER: 14. AS REGARDS THE SELECTION OF COSMIC GLOBAL LTD. AS C OMPARABLE, IT IS OBSERVED THAT THIS COMPANY WAS ALSO EXCLUDED BY T HE TRIBUNAL FROM THE LIST OF COMPARABLES IN THE CASE OF EXCELLENCE DATA RESEARCH SERVICES P. LIMITED (SUPRA), FOLLOWING THE DECISI ON OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MERCER CON SULTING (INDIA) LTD. V/S DCIT (VIDE ORDER DATED 6TH JUNE, 2014 IN ITA NO.966/DEL/2014), WHEREIN M/S. COSMIC GLOBAL LIMITED WAS NO T ACCEPTED AS COMPARABLE BY THE TRIBUNAL FOR THE FOLLOWI NG REASONS GIVEN IN PARAS 13.2 AND 13.3 OF ITS ORDER- 13.2. NOW COMING TO THE FACTUAL MATRIX OF THIS CASE, W E FIND FROM THE MATERIAL ON RECORD THAT OUTSOURCING CHARGES OF THIS CASE CONSTITUTE 57.31% OF THE TOTAL OPERATING COSTS. THIS DOES NOT APPEAR TO US TO BE A VALID REASON FOR ELIMINATING THIS CASE FROM THE LIST OF COMPARABLES. ON GOING THROUGH T HE ANNUAL ACCOUNTS OF COSMIC GLOBAL LIMITED, A COPY OF WHICH 40 ITA NO. 2236/PN/2012, A.Y. 2008-09, HAS BEEN PLACED ON RECORD, WE FIND THAT ITS TOTAL REVE NUE FROM OPERATIONS ARE AT RS.7.37 CRORE DIVIDED INTO THRE E SEGMENTS, NAMELY, MEDICAL TRANSCRIPTION AND CONSULTAN CY SERVICES AT RS.9.90 LACS, TRANSLATION CHARGES AT RS.6.99 CRORE AND ACCOUNTS BPO AT RS.27.76 LAC. THE LD. AR HAS MADE OUT A CASE THAT OUTSOURCING ACTIVITY CARRIED OU T BY THIS COMPANY CONSTITUTES 57% OF TOTAL EXPENSES. THE REASON FOR WHICH WE ARE NOT AGREEABLE WITH THE LD. AR IS THAT WE HAVE TO EXAMINE THE REVENUE OF THIS CASE ONLY FROM ACCOU NTS BPO SEGMENT AND NOT ON THE ENTITY LEVEL, BEING ALSO FROM MED ICAL TRANSCRIPTION AND TRANSLATION CHARGES. WHEN WE ARE EXAMINING THE RESULTS OF THIS COMPANY FROM THE ACCO UNTS BPO SEGMENT ALONE, THERE IS NO NEED TO EXAMINE THE POS ITION UNDER OTHER SEGMENTS. THE ENTIRE OUTSOURCING IS CONF INED TO TRANSLATION CHARGES PAID AT RS.3.00 CRORE, WHICH IS STRICT LY IN THE REALM OF THE TRANSLATION SEGMENT, REVENUES FROM WHICH ARE TO THE TUNE OF RS.6.99 CRORE. IF THIS SEGMENT OF TRANSLATION IS NOT UNDER CONSIDERATION FOR DECIDING AS TO WHETHER THIS CASE IS COMPARABLE OR NOT, WE CANNOT TAKE RECOURSE TO THE FIGURES WHICH ARE RELEVANT FOR SEGME NTS OTHER THAN ACCOUNTS BPO. THUS IT IS HELD THAT THIS CASE CAN NOT BE EXCLUDED ON THE STRENGTH OF OUTSOURCING ACTIVITY, WHIC H IS ALIEN TO THE RELEVANT SEGMENT. 13.3. HOWEVER, WE FIND THIS CASE TO INCOMPARABLE ON TH E ALTERNATIVE ARGUMENT ADVANCED BY THE LD. AR TO THE EFFECT THAT TOTAL REVENUE OF THE ACCOUNTS BPO SEGMENT OF CO SMIC GLOBAL LIMITED IS VERY LOW AT RS.27.76 LACS. WE HAVE DISCUSSED THIS ASPECT ABOVE IN THE CONTEXT OF CGVAKS CASE AND HELD THAT A CAPTIVE UNIT CANNOT BE COMPARED WITH A GIANT CASE AND THUS EXCLUDED CG-VAK WITH TURNOVER FRO M ACCOUNTS BPO SEGMENT AT RS.86.10 LACS. AS THE SEGMENTA L REVENUE OF BPO SEGMENT OF COSMIC GLOBAL LIMITED AT RS.27.76 LAC IS STILL ON MUCH LOWER SIDE, THE REASONS G IVEN ABOVE WOULD FULLY APPLY TO HOLD COSMIC GLOBAL LIMITED AS INCOMPARABLE. THIS CASE IS, THEREFORE, DIRECTED TO BE EXCLUD ED FROM THE LIST OF COMPARABLES. 15. AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE FR OM THE RELEVANT DETAILS PLACED AT PAGE NO.391 OF HIS PAPER-BOOK , SUBSTANTIAL WORK WAS OUTSOURCED BY M/S. COSMIC GLOBAL LIM ITED IN THE RELEVANT YEAR, WHICH IS EVIDENT FROM THE FACT THAT THE OUTSOURCING COST WAS 57% OF THE TOTAL OPERATING COST OF THE SAID COMPANY. KEEPING IN VIEW THIS POSITION CLEARLY EVIDENT FROM THE RELEVANT DETAILS FURNISHED ON RECORD, WHICH IS NOT DIS PUTED EVEN BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE RESPECTFULLY F OLLOW THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNA L IN THE CASE OF MERCER CONSULTING INDIA P. LTD. (SUPRA) AND EXCELLENCE DAT A RESEARCH P. LTD. (SUPRA) TO HOLD THAT M/S. COSMIC GLOBAL LIM ITED CANNOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE-C OMPANY. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO EX CLUDE THE SAME FROM THE LIST OF COMPARABLES. WE MAY CLARIFY HERE FOR THE SAKE OF COMPLETENESS THAT THE LEARNED DEPARTMENTAL REPRESENTATI VE HAS POINTED OUT AT THE TIME OF HEARING BEFORE US THAT M/S . COSMIC GLOBAL LIMITED WAS INITIALLY SELECTED BY THE ASSESSEE COMPA NY ITSELF AS A COMPARABLE IN THE TP STUDY REPORT. IN OUR O PINION, THIS ASPECT ON ITS OWN IS NOT SUFFICIENT TO INCLUDE M/S. C OSMIC GLOBAL LTD. IN THE LIST OF COMPARABLES, AS THE ASSESSEE HAS A LWAYS A RIGHT TO OBJECT SELECTION OF A COMPANY TAKEN AS COMPARABLE E ARLIER, IF IT IS SUBSEQUENTLY FOUND TO BE NOT COMPARABLE, AS A RESULT OF DIFFERENCE 41 ITA NO. 2236/PN/2012, A.Y. 2008-09, IN FUNCTIONS PERFORMED ETC., AND SUCH OBJECTION IS REQ UIRED TO BE CONSIDERED ON MERITS. THE LD. DR HAS NOT BEEN ABLE TO CONTROVERT THE FINDINGS OF THE TRIBUNAL. A PERUSAL OF THE ABOVE ORDER SHOWS THAT COSM IC GLOBAL LTD. IS PRIMARILY ENGAGED IN PROVIDING BPO SERVICES. OUTSOURCING ACTIVITY CARRIED OUT BY THE SAID COMPANY CONSTITUTES 57% OF THE TOTAL OPERATING COST. HENCE, THE ASSESSEE AND COSMIC GLOBAL LTD. ARE FU NCTIONALLY DIFFERENT. ACCORDINGLY, WE HOLD THAT COSMIC GLOBAL LTD. HAS T O BE EXCLUDED FROM THE LIST OF COMPARABLE. 24.4 CG-VAK SOFTWARE & EXPORTS LTD. : THE ASSESSEE INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE. HOWEVER, THE TPO REJECT ED THE SAME ON THE GROUND THAT THE SAID COMPARABLE IS ENGAGED IN DIFFERENT BUSINES S AND HAS INCURRED LOSS IN THE YEAR UNDER CONSIDERATION. T HE DRP HAS OBSERVED THAT CG-VAK SOFTWARE & EXPORTS LTD. IS PRIMAR ILY ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND IS NOT PROVIDING ITE S/BPO SERVICES. ON THE OTHER HAND THE CONTENTION OF THE ASSE SSEE IS THAT CG- VAK SOFTWARE & EXPORTS LTD. IS PROVIDING ITES SERVICES. THE ASSESSEE HAS PLACED ON RECORD ANNUAL REPORT OF CG-VAK SOFTWARE & EXPORTS L TD. FOR THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2008-09 AT PAGES 460 TO 474 OF THE PAPER BOOK. FROM THE PERUSAL OF THE SAID REP ORT WE OBSERVE THAT CG-VAK SOFTWARE & EXPORTS LTD. IS ENGAGED IN PROVID ING SOFTWARE SERVICES AND BPO SERVICES. THE SUBSTANTIAL PART OF THE R EVENUE EARNED BY CG-VAK SOFTWARE & EXPORTS LTD. IS FROM SOFTWARE SERV ICES AND ONLY 15.40% OF THE TOTAL REVENUE IS GENERATED FROM BPO SERVIC ES. THUS, THE SEGMENTAL RESULT AS REFLECTED IN THE PROFIT AND LOSS ACCOU NT AND BALANCE SHEET OF THE COMPARABLE ENTITY SHOWS THAT THE SAME CAN BE CONSIDERED AS GOOD COMPARABLE. ACCORDINGLY, WE REJECT THE CONTENT IONS OF THE ASSESSEE IN RESPECT OF THE SAID COMPANY. 42 ITA NO. 2236/PN/2012, A.Y. 2008-09, 25. THE THIRD SEGMENT IN WHICH THE ASSESSEE COMPANY IS O PERATING IS BUSINESS SUPPORT SERVICES. THE ASSESSEE HAS BEEN PROV IDING MANAGEMENT SERVICES TO ITS AE. THE TURNOVER OF THE AS SESSEE FROM THE BUSINESS SUPPORT SERVICES IS TO THE TUNE OF RS.5,43,91,000/ -. THE OPERATING MARGIN OF THE ASSESSEE FROM BUSINESS SUPPORT S ERVICES IS 14.22%. THE ASSESSEE HAD INITIALLY SELECTED 18 COMPANIES A S COMPARABLES BY CONSIDERING THE FINANCIAL RESULTS OF 3 YEARS. THE LIST OF THE COMPANIES SELECTED BY THE ASSESSEE IS AS UNDER: NAME OF THE COMPANY OPERATING PROFITS ON OPERATING COSTS (%) WEIGHTED AVERAGE OF OPERATING PROFITS ON OPERATING COSTS (%) 2008 2007 2006 ACCESS INDIA ADVISORS LIMITED NA 16.48% 20.50% 18.50% BESANT RAJ INTERNATIONAL LIMITED NA - 11.74% - 14.45% - 13.16% CAPITAL TRUST LIMITED (SEGMENTAL) NA - 6.71% - 9.18% - 7.92% CRISIL LIMITED (SEGMENTAL) NC 21.41% 10.63% 17.36% CYBER MEDIA EVENTS LIMITED NA 8.43% NC 8.43% EDUCATIONAL CONSULTANTS (INDIA) LIMITED (SEGMENTAL) NA 10.64% 12.56% 11.60% ICC INTERNATIONAL AGENCIES 1 ID (SEGMENTAL) NA 82 92% 73.80% 78.77% (CRA MANAGEMENT CONSULTING SERVICES LTD 3.22% 15.41% 15.50% 10.20% ICRA ONLINE LIMITED (SEGMENTAL) 26.78% 63.33% 25.28% 35.84% IDC INDIA LIMITED NA 15.33% 14.05% 14.72% INDIA TOURISM DEVELOPMENT CORPORATION LIMITED (SEGMENTAL) NA NA 3.38% 3.38% PRIYA INTERNATIONAL LTD (SEGMENTAL) NA 13.97% 26.09% 19.72% SAKET PROJECTS LIMITED (SEGMENTAL) NA 23.65% NC 23.65% TSR DARASHAW (SEGMENTAL) NA NC 10.32% 10.32% 43 ITA NO. 2236/PN/2012, A.Y. 2008-09, IN HOUSE PRODUCTIONS 1 TD. (SEGMENTAL) NA 0.05% - 5.62% - 2.26% ARITHMETIC MEAN 15.28% RANGE LOWER RANGE ( - ) 5% UPPER RANGE <+) 5% 9.51% 21.04% NOTE 1: THE AVERAGE NET MARGIN REPRESENTS THE WEIGH TED AVERAGE OF THE MARGIN FOR THE YEARS 2008, 2007 AND 2006 WITH THE OPERATIN G COSTS OF THE RESPECTIVE YEARS BEING USED AS WEIGHTS. NA DENOTES NOT AVAILABLE NC DENOTES NOT COMPARABLE 26. THE TPO REJECTED THE THREE YEAS CRITERIA AND SELECT ED THE COMPARABLE ON THE BASIS OF FINANCIAL RESULTS OF THE ENTITY RE LATING TO ASSESSMENT YEAR 2008-09 ALONE. THE TPO REJECTED SOME OF THE COMPANIES CONSIDERED BY ASSESSEE AS COMPARABLE ENTITIES AND INTRODUCED SOME NEW COMPANIES IN THE LIST OF COMPARABLE EN TITY. THE FINAL LIST OF 9 COMPANIES CONSIDERED BY THE TPO IS AS UNDER: SR. NO. NAME OF THE COMPARABLE OP /OC (%) AS PER SHOW CAUSE NOTICE OP/OC (%) AS PER ASSESSEES REPLY AFTER WORKING CAPITAL ADJUSTMENT 1 IN - HOUSE PRODUCTION LTD. 18.97 0.80% 2 ICRA MANAGEMENT CONSULTING SERVICES LTD. 6.22 - 1.34% 3 ICRA ONLINE LTD 6.84 5.77% 4 IDC (INDIA) LIMITED 15.35 14.31% 5 PRIYA INTERNATIONAL LTD 11.91 9.36% 6 T S R DARASHAW LTD. ' 44.77 33.87% 7 ASIAN BUSINESS EXHIBITION AND CONFERENCES LTD 15.84 14.59% 8 AGRIMA CONSULTANTS INTERNATIONAL LTD. 21.11 16.90% 44 ITA NO. 2236/PN/2012, A.Y. 2008-09, 9 APITCO LTD. 52.10 34.54% ARITHMETIC MEAN (128.8/9) 23.37% 14.31% 27. THE TPO AFTER ALLOWING WORKING CAPITAL ADJUSTMENT DETER MINED THE OPERATING MARGIN OF THE COMPARABLES AT 20.32%. THE A SSESSEE OBJECTED TO THE INCLUSION OF FOLLOWING TWO COMPANIES IN THE LIS T OF COMPARABLES: 27.1 IN RESPECT OF TSR DARASHAW LTD., THE CONTENTION O F THE ASSESSEE IS THAT THE SAID COMPANY IS HAVING ABNORMALLY HIGH OPERAT ING MARGIN OF 44.77%, THEREFORE, THE SAME SHOULD NOT BE CONSIDERED. SIMILA R OBJECTION HAS BEEN RAISED IN RESPECT OF APITCO LTD., WHE REIN THE OPERATING MARGIN OF THE COMPANY IS 52.10%. ANOTHER OBJEC TION RAISED BY THE ASSESSEE IN RESPECT OF APITCO LTD. IS THAT THE SA ID COMPANY IS ENGAGED IN SPECIALIZED BUSINESS OF PROVIDING SUPPORT TO SM E THROUGH PROJECT CONSULTANCY. IN SUPPORT OF HIS SUBMISSIONS THE L D. COUNSEL PLACED RELIANCE ON THE DECISION OF CIENA INDIA (P.) LTD. (SUPR A). A PERUSAL OF ORDER OF TPO SHOWS THAT THE ASSESSEE HAS R AISED OBJECTION WITH REGARD TO APITCO LTD. ON THE GROUND OF FUNCTIONAL DISP ARITY WHEREIN IT HAS BEEN SPECIFICALLY STATED THAT APITCO LTD. IS PROVIDING SPECIALIZED SERVICES TO SMES IN PROJECT IDENTIFICATION, PROJECT COUNSE LING, PRE- FEASIBILITY REPORTS, DETAILED PROJECT FEASIBILITY STUDIES, SKILL DEVE LOPMENT ETC. THE RELEVANT EXTRACT OF THE SERVICES PROVIDED BY A PITCO LTD. ARE AS UNDER: 'APITCO, INCORPORATED IN 1976, IS A PREMIER TECHNICAL CON SULTANCY ORGANIZATION (TCO) PROMOTED JOINTLY BY ALL-INDIA FINANC IAL INSTITUTIONS (IDBI, IFCI, ICICI), INDUSTRY DEVELOPMENT C ORPORATIONS IN ANDHRA PRADESH (APIDC, APSFC) AND COMMERCIAL BANKS (ANDHRA BANK, INDIAN BANK, STALE BANK OF INDIA, SYNDICAT E BANK). AT AP1TCO, WE OFFER A WIDE RANGE OF CONSULTING SERVI CES, ESPECIALLY TO SMES IN PROJECT IDENTIFICATION, PROJECT CO UNSELING, PRE- FEASIBILITY REPORTS, DETAILED PROJECT FEASIBILITY STUDIE S, INFRASTRUCTURE PLANNING, MARKET ASSESSMENT, EXPANSION, DIVERSIFICATION AND TURNAROUND .STRATEGIES, ENERGY AU DITS, WASTE MINIMIZATION, ENVIRONMENT IMPACT ASSESSMENT, VALUATION O F FIXED 45 ITA NO. 2236/PN/2012, A.Y. 2008-09, ASSETS, SKILL DEVELOPMENT ETC. EXTENDING HANDHOLDING TO M ICRO ENTREPRENEURS THROUGH ITS 'ESCORT SERVICES' IS APITCO'S USP. APITCO'S SERVICES TO INSTITUTIONS ENGAGED IN INDUSTR IAL AND ENTREPRENEUR SHIP DEVELOPMENT RELATE TO UNDERTAKING A REA DEVELOPMENT STUDIES, PREPARATION OF PERSPECTIVE PLANS, CARR YING OUT EVALUATION STUDIES, INDUSTRY SPECIFIC STUDIES, PROJECT A PPRAISALS, PROJECT MANAGEMENT, ASSET VALUATION, HRD INTERVENTIONS , CAPACITY BUILDING, LIVELIHOOD SUPPORT STRATEGIES AND MICRO ENTE RPRISE DEVELOPMENT. APITCOS CORE CLIENTELE COMPRISES OF SMES, PRIVATE CORPORATE, INDUSTRY PROMOTION AGENCIES, INFRASTRUCTURE DEVELOPMENT AGENCIES, COMMERCIAL BANKS, FINANCIAL INSTITUTIONS, MULTIL ATERAL FUNDING AGENCIES, GOVERNMENT DEPARTMENTS AND NGOS. 27.2 THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF CIENA INDIA PVT. LTD. VS. DCIT (SUPRA) HAD OCCASION TO DECIDE, WHETHER APITCO LTD. IS COMPARABLE WITH THE COMPANY ENGAGED IN PROVIDING TECHNICA L AND ENGINEERING SERVICES. CIENA INDIA PVT. LTD. IS ENGAGED IN DE SIGN, DEVELOPMENT AND MAINTENANCE OF SOFTWARE, WHICH ESSENTIALLY INCLUDE THE ACTIVITIES OF SOFTWARE DEVELOPMENT, PROCUREMENT, RESEA RCH AND TECHNOLOGY, DEVELOPMENT OF DESIGN, AFTER SALES ACTIVITY, ETC. AFTER ANALYZING THE ACTIVITIES OF APITCO LTD AND COMPARING IT WITH THE FUNCTIONS OF CIENA INDIA PVT. LTD., THE TRIBUNAL HELD THAT THE COMPANY CANNOT BE CONSIDERED AS COMPARABLE ENTITY. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL ARE AS UNDER : 17.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPO RT OF THIS COMPANY THAT IT IS ENGAGED IN PROVIDING SEVERAL SERVIC ES, VIZ., MICRO ENTERPRISES DEVELOPMENT, SKILL DEVELOPMENT, ENTREPRENEURSHIP DEVELOPMENT, RESEARCH STUDIES, PROJEC T RELATED SERVICES, INFRASTRUCTURE PLANNING & DEVELOPMENT, ENVIR ONMENT MANAGEMENT, ENERGY RELATED SERVICES, ITA NOS.3324 & 2948/DEL/2013 CLUSTER DEVELOPMENT, TECHNOLOGY FACILITATI ON, ASSET RECONSTRUCTION & MANAGEMENT SERVICES, EMERGING AREAS. IT CAN BE SEEN FROM THE NATURE OF OPERATIONS CARRIED OU T BY THIS COMPANY THAT THE SAME IS TOWARDS MICRO ENTERPRISES D EVELOPMENT, SKILL DEVELOPMENT AND PROJECT RELATED SERVICES, ETC., ALSO INCLUDING INFRASTRUCTURE PLANNING AND DEVELOPMENT ALONG WITH ENER GY RELATED SERVICE AND CLUSTER DEVELOPMENT. A PART OF ITS ACTIVITIES HAS GOT SOME RESEMBLANCE WITH THE NATURE OF SERVICE PROVI DED BY THE ASSESSEE UNDER THIS SEGMENT. THE LD. CIT(A) HAS RECORD ED THAT 'ONLY 12% OF TOTAL INCOME OF THIS COMPANY IS FROM RE SEARCH STUDIES WHICH IS AKIN TO THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE COMPANY.' THIS CONTENTION HAS NOT BEEN CONTROVERTED BY THE LD. DR WITH ANY CLINCHING EVIDENCE. WHEN WE CONSIDER THE OPE RATIONS OF THIS COMPANY AS ENUMERATED ABOVE AND THE FACT THAT THIS COMPANY HAS MAINTAINED ACCOUNTS ON ENTITY LEVEL AND THERE IS N O BIFURCATION 46 ITA NO. 2236/PN/2012, A.Y. 2008-09, AVAILABLE IN RESPECT OF THE SERVICES SIMILAR TO THOSE PROVIDED BY THE ASSESSEE UNDER THIS SEGMENT, THIS COMPANY ON ENTITY LE VEL CANNOT BE CONSIDERED AS COMPARABLE. WE, THEREFORE, HOLD THAT T HE LD. CIT(A) WAS JUSTIFIED IN CONSIDERING THIS COMPANY AS NOT COMPARABLE. WHEN WE COMPARE THE ACTIVITIES OF THE ASSESSEE WHICH IS A LSO PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENT AND OTHER RELA TED SERVICES WITH APITCO LTD., WE OBSERVE THAT BOTH THE ENTITIES ARE A T VARIANCE FUNCTIONALLY. THEREFORE, WE ARE OF CONSIDERED VIEW THAT AP ITCO LTD. IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 27.3. AS FAR AS TSR DARASHAW LTD. IS CONCERNED THE ONLY OBJECTION IS THAT THE SAID COMPANY IS HAVING ABNORMALLY HIGH OPERATING MARGIN. IN VIEW OF THE FACT THAT NOTHING HAS BEEN BROUGHT ON RECOR D TO SHOW THE REASONS FOR HIGH PROFIT MARGIN, THE SAME CANNOT BE EXCLUDE D FROM THE LIST OF COMPARABLE ON MERE BALD ASSERTIONS. 28. IN VIEW OF OUR DETAILED FINDINGS ABOVE, THE THIRD GROUND OF APPEAL IS PARTLY ACCEPTED FOR STATISTICAL PURPOSE. 29. THE FOURTH GROUND RAISED BY THE ASSESSEE IN APPEAL IS GENERAL IN NATURE AND THUS, REQUIRES NO ADJUDICATION. 30. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ACCEPTED FOR STATISTICAL PURPOSE IN THE AFORESAID TERMS. ORDER PRONOUNCED ON WEDNESDAY, THE 18 TH DAY OF NOVEMBER, 2015. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) ' / ACCOUNTANT MEMBER $% ' / JUDICIAL MEMBER / PUNE; & / DATED : 18 TH NOVEMBER, 2015 RK/PS/SATISH 47 ITA NO. 2236/PN/2012, A.Y. 2008-09, + ,$.' /' / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. DISPUTE RESOLUTION PANEL, PUNE 4. DIT (IT), PUNE 5. ! %%) , ) , - , / DR, ITAT, A BENCH, PUNE. 6. / / GUARD FILE. // ! % // TRUE COPY// / BY ORDER, // TRUE COPY // 34 % ) SENIOR PRIVATE SECRETARY, ) / ITAT, PUNE