QLogic (India) Private Limited, Pune V. Deputy Commissioner of Income-tax,

ITA 227/PUN/2014

• Counselvise Citation: 22724514 RSA 2014
• Duration Of Justice: 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-10-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 05-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VERMA
• Assessee Lawyers: ROSHAN LUNAVAT
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.227/PN/2014 (ASSESSMENT YEAR : 2009-10) Q LOGIC (INDIA) PRIVATE LIMITED B-301 TO B-306 MCCIA TRADE TOWERS SENAPATI BAPAT ROAD PUNE 411016 PAN: AAACQ1664K . APPELLANT VS. THE DY. COMMISSIONER OF INCOME, CIRCLE 1(2), PUNE . RESPONDENT ASSESSEE BY : S/SHRI DHANESH BAFNA AND ROSHAN LUNAVAT DEPARTMENT BY : SMT. M.S. VERMA, CIT DATE OF HEARING : 14-10-2014 DATE OF PRONOUNCEMENT : 21-10-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2009-10 IS DIRECTED AGAINST AN ORDER OF THE DEPUTY COMMISSIONE R OF INCOME TAX, CIRCLE- 1(2), PUNE (IN SHORT THE AO), PASSED U/S 143 R.W.S. 144C(13) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT), DATED 26.12.2013, WHICH IS IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL (I N SHORT DRP) DATED 23.12.2013. 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL:- 1. THE LD ASSESSING OFFICER ('AO') PURSUANT TO THE DIRECTIONS OF THE LD. DISPUTE RESOLUTION PANEL ('DRP') ERRED IN REJECTIN G THE BENCHMARKING APPROACH ADOPTED/CONTEMPORANEOUS DOCUMENTATION MAIN TAINED BY THE APPELLANT AND THEREBY MAKING A TRANSFER PRICING ADJ USTMENT ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. OF RS.19,689,494 TO THE INCOME OF THE APPELLANT BY HOLDING THAT THE INTERNATIONAL TRANSACTION, PERTAINING TO PROVISION OF SOFTWARE SERVICES ('IT SERVICES') TO THE ASSOCIATED ENTERPRISE ('AE'), ARE NOT AT ARM'S LENGTH UNDER THE INCOME-TAX ACT, 1961 ('THE ACT'). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. AO/DRP ERRED IN MODIFYING THE BENCHMARKING ANALYSIS, AS CO NDUCTED BY THE APPELLANT USING TRANSACTIONAL NET MARGIN METHOD (TN MM') FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS PERTAIN ING TO PROVISION OF SOFTWARE SERVICES TO THE AE, AND THEREBY MODIFYING THE SET OF COMPARABLES. IN DOING SO, THE LD AO/DRP SPECIFICALL Y ERRED IN: A) CONDUCTING SELECTIVE FRESH ANALYSIS BY APPLYING CERTAIN ADDITIONAL QUANTITATIVE / QUALITATIVE FILTERS FOR I DENTIFYING THE COMPARABLES RESULTING IN CHERRY PICKING OF COMPARAB LES WHICH CONTRADICTS WITH THE PRINCIPLES OF CONDUCTING SEARC H (FOR COMPARABLES) IN A SCIENTIFIC MANNER; B) REJECTING COMPANIES FUNCTIONALLY SIMILAR TO THAT OF THE APPELLANT'S BUSINESS OPERATIONS OF PROVISION OF SOF TWARE SERVICES FROM FINAL SET OF COMPARABLES (IDENTIFIED BASED ON THE FRESH SEARCH CONDUCTED BY THE APPELLANT ON A WITHOUT PREJ UDICE BASIS); C) COMPLETELY DISREGARDING THE FRESH SEARCH PROVID ED BY THE ASSESSEE (ON A WITHOUT PREJUDICE BASIS) USING THE D ATA FOR FY 2008-09 WITHOUT PROVIDING ANY COGENT REASONS FOR TH E SAME, WHEREAS THE LD. AO/TPO HAD HIMSELF CONDUCTED A FRES H SEARCH/ANALYSIS. 3. THE LD. DRP/AO ERRED IN CONSIDERING THE SINGLE Y EAR DATA FOR THE COMPARABLES I.E. DATA FOR FY 2008-09 ONLY AND DISRE GARDING MULTIPLE YEAR DATA WHICH WAS CONSIDERED BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF RULE 10B(4) OF THE INCOME-TAX RULE, 1 962 ('RULES'). 4. THE LD. DRP / AO ERRED IN NOT ALLOWING AN ADJUST MENT FOR THE DIFFERENCE BETWEEN THE LEVEL OF RISK BORNE/ASSETS E MPLOYED BY THE COMPARABLES AND THE APPELLANT AS PROVIDED BY THE AP PELLANT, WITHOUT PROVIDING ANY COGENT REASONS, AND DISREGARDING TH E PROVISIONS OF RULES 10B(2) AND (3) READ WITH RULE 10C OF THE RULE S. IN DOING SO, THE LD DRP/AO ERRED BY: (I) FAILING TO CAPTURE THAT THE APPELLANT IS A ROUT INE CAPTIVE SERVICE PROVIDER AS AGAINST THE COMPARABLE COMPANIE S SELECTED BY THE LD TPO WHICH INCLUDE ENTREPRENEURIA L COMPANIES AND HENCE AN ADJUSTMENT IS NECESSARY; (II) DISREGARDING THE PROVISIONS OF RULES 10B(2) AN D 10B(3) READ WITH RULE 10C OF THE RULES. 3. IN THIS APPEAL, ALTHOUGH THE ASSESSEE HAS RAISED MULTIPLE GROUNDS OF APPEAL BUT THE SUBSTANTIVE DISPUTE IS WITH REGARD T O AN ADDITION OF RS.1,96,89,494/- MADE BY THE ASSESSING OFFICER TO T HE STATED VALUE OF THE ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. INTERNATIONAL TRANSACTIONS OF SOFTWARE SERVICES (IT SERVICES) RENDERED BY THE ASSESSEE TOWARDS ASSOCIATE ENTERPRISES IN ORDER TO DETERMINE THEIR ARMS LENGTH PRICE. 4. THE APPELLANT BEFORE US IS A COMPANY INCORPORATE D UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 IN NOVEMBER, 2007 AS A W HOLLY OWNED SUBSIDIARY OF QLOGIC CORPORATION, USA. THE ASSESSEE COMPANY I S ENGAGED IN PROVIDING SOFTWARE SERVICES, QUALITY ASSURANCE AND IT SUPPORT TO QLOGIC CORPORATION AND IT HAS BEEN CONTENDED THAT THE OPERATIONS OF ASSESS EE COMMENCED IN THE FINANCIAL YEAR 2008-09 CORRESPONDING TO THE ASSESSM ENT YEAR UNDER CONSIDERATION I.E. 2009-10. THE PARENT COMPANY I.E . QLOGIC CORPORATION OUTSOURCES CERTAIN SOFTWARE DEVELOPMENT ACTIVITIES TO THE ASSESSEE COMPANY ALONG WITH DETAILED SPECIFICATIONS OF THE WORK TO B E UNDERTAKEN. THE ASSESSEE COMPANY IS REGISTERED AS A 100% EXPORT ORIENTED UNI T (EOU) WITH THE SOFTWARE TECHNOLOGY PARKS OF INDIA AND IS PROVIDING SERVICES ONLY TO ITS PARENT COMPANY I.E. QLOGIC CORPORATION. IN RETURN OF REND ERING SUCH SERVICES, ASSESSEE IS REMUNERATED BY THE PARENT COMPANY ON A COST PLUS MARK UP BASIS. 5. FOR THE ASSESSMENT YEAR 2009-10, ASSESSEE FILED A RETURN OF INCOME DECLARING AN INCOME OF RS.2,06,44,601/-. SINCE ASS ESSEE HAD UNDERTAKEN CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIA TE ENTERPRISES, THE ASSESSING OFFICER MADE A REFERENCE TO THE TRANSFER PRICING OF FICER (IN SHORT TPO) U/S 92CA(1) OF THE ACT IN ORDER TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES. THE TPO PASSED AN ORDER U/S 92CA(3) O F THE ACT ON 29.01.2013 DETERMINING AN ADJUSTMENT OF RS.4,25,48,240/- TO TH E STATED VALUE OF THE INTERNATIONAL TRANSACTIONS OF SOFTWARE SERVICES REN DERED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE SO AS TO BRING IT TO THE LEVEL OF ARMS LENGTH PRICE. ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. SUBSEQUENTLY, THE TPO HAS PASSED A RECTIFICATION OR DER U/S 92CA(5) R.W.S. 154 OF THE ACT DATED 20.03.2013 ON AN APPLICATION BY TH E ASSESSEE, WHEREBY THE ADJUSTMENT TO THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS HAS BEEN RE- WORKED AT RS.1,96,89,494/-. ON THE BASIS OF THE OR DER OF THE TPO, THE ASSESSING OFFICER PASSED A DRAFT ASSESSMENT ORDER O N 25.03.2013 WHEREBY, THE TOTAL INCOME OF THE ASSESSEE WAS SOUGHT TO BE C OMPUTED IN CONFORMITY WITH THE ARMS LENGTH PRICE OF THE INTERNATIONAL TR ANSACTIONS DETERMINED BY THE TPO THEREBY, RESULTING IN A PROPOSED ADDITION OF RS .1,96,89,494/-. THE ASSESSEE PREFERRED TO FILE OBJECTIONS BEFORE THE DR P WHO HAS SINCE DISPOSED OF THE SAID OBJECTIONS VIDE ITS ORDER DATED 23.12.2 013 WHEREIN, THE DRAFT ASSESSMENT ORDER OF THE ASSESSING OFFICER WAS CONFI RMED. 6. SUBSEQUENTLY, THE ASSESSING OFFICER HAS PASSED A N ASSESSMENT ORDER U/S 143(3) R.W.S. 144C(13) OF THE ACT ON 26.12.2013 WHEREBY, IN TERMS OF SECTION 92CA(4) OF THE ACT TOTAL INCOME OF THE ASSE SSEE HAS BEEN COMPUTED IN CONFORMITY WITH THE ARMS LENGTH PRICE OF THE INTER NATIONAL TRANSACTIONS OF SOFTWARE SERVICES DETERMINED BY THE TPO AT RS.1,96, 89,494/-. THIS ADDITION IS THE SUBJECT MATTER OF THE PROCEEDINGS BEFORE US. 7. IN THE MEMO OF APPEAL, ASSESSEE HAS RAISED MULTI PLE GROUNDS OF APPEAL ASSAILING THE AFORESAID ADDITION BUT IN THE COURSE OF HEARING BEFORE US, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE HAS ARG UED ON (I) EXCLUSION OF BODHTREE CONSULTING LIMITED FROM THE LIST OF FINAL COMPARABLES; (II) INCLUSION OF AKSHAY SOFTWARE TECHNOLOGIES LIMITED IN THE FINAL L IST OF COMPARABLES; AND, (III) CORRECTING THE MARGIN OF MINDTREE LIMITED A COMPARA BLE ADOPTED BY THE TPO IN THE FINAL SET OF COMPARABLES. 8. BEFORE WE PROCEED TO ADJUDICATE THE SPECIFIC GRI EVANCE OF THE ASSESSEE IN THE ABOVE BACKGROUND, THE FOLLOWING FACTS ARE RE LEVANT. THE INTERNATIONAL ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. TRANSACTIONS WHICH ARE SUBJECT MATTER OF CONSIDERAT ION BEFORE US RELATES TO THE SERVICES COMPRISING OF SOFTWARE DEVELOPMENT, TEST A ND QUALITY ASSURANCE SERVICES BEING PROVIDED TO QLOGIC CORPORATION, THE PARENT COMPANY OF THE ASSESSEE. IN ITS TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE WITH RESPECT TO AFORESAID INTERNATIONAL TRANSACTIONS, AS SESSEE SELECTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD IN ORDER TO DETERMINE THE ARMS LENGTH PRICE OF SUCH T RANSACTIONS. THE ASSESSEE USED OPERATING PROFIT / TOTAL COST AS THE PROFIT LE VEL INDICATOR (PLI). BY SELECTING COMPARABLES, USING CERTAIN FILTERS, THE A SSESSEE DETERMINED THE ARITHMETIC MEAN PLI OF THE COMPARABLES AT 8.53% BAS ED ON THREE YEARS FINANCIAL DATA OF SUCH COMPARABLES AND 8.92% BY USI NG THE FINANCIAL DATA OF THE COMPARABLES FOR THE FINANCIAL YEAR 2008-09 ONLY . THE ASSESSEES PLI WAS COMPUTED AT 18.02% AND SINCE THE SAME COMPARED FAVO RABLY WITH THE ARITHMETIC MEAN OF THE COMPARABLE, IT WAS CONTENDED THAT THE INTERNATIONAL TRANSACTIONS OF SOFTWARE SERVICES RENDERED TO THE A SSOCIATE ENTERPRISE WAS AT A ARMS LENGTH PRICE. THE TPO HAS NOT DISTURBED TH E SELECTION OF TNMM METHOD AS THE MOST APPROPRIATE METHOD FOR THE PURPO SES OF DETERMINING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. THE TPO HAS DIFFERED WITH THE ASSESSEE ON ADOPTION OF CERTAIN COMPARABLES IN THE FINAL SET OF COMPARABLES. THE TPO HAS CONSIDERED THE SINGLE YEAR FINANCIAL DA TA OF 2008-09 OF THE COMPARABLE CONCERNS FOR THE PURPOSES OF CARRYING OU T THE COMPARABILITY ANALYSIS. BE THAT AS IT MAY, THE TPO HAS SELECTED THE FOLLOWING FINAL SET OF COMPARABLES FOR THE PURPOSE OF CARRYING OUT THE COM PARABILITY ANALYSIS:- SR. NO. COMPANY AFTER ALLOWING WORKING CAPITAL ADJUSTMENT 1. L G S GLOBAL LTD. 10.26% 2. FCS SOFTWARE SOLUTIONS LTD. 7.64% 3. MINDTREE LTD. 38.18% 4. BODHTREE CONSULTING LIMITED 64.48% 5. PERSISTENT SYSTEM LTD. 34.1% 6. LARSEN & TURBO INFOTECH LTD. 18.23% ARITHMETIC MEAN 28.82% ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. 9. IN TERMS OF THE AFORESAID, THE TPO DETERMINED TH E ARITHMETIC MEAN OF THE MARGINS OF THE COMPARABLES AT 28.82% AND SINCE ASSESSEES MARGIN WAS 18.02%, HE HAS DETERMINED AN AMOUNT OF RS.1,96,89,4 94/- AS ADJUSTMENT REQUIRED TO BE MADE TO THE STATED VALUE OF THE INTE RNATIONAL TRANSACTIONS SO AS TO BRING IT AT THE LEVEL OF ARMS LENGTH PRICE. 10. AT THE TIME OF HEARING, ONE OF THE ASPECTS RAIS ED BY THE ASSESSEE IS THE EXCLUSION OF BODHTREE CONSULTING LTD. FROM THE FINA L SET OF COMPARABLES. ACCORDING TO LEARNED REPRESENTATIVE FOR THE ASSESSE E, THE SAID CONCERN IS LIABLE TO BE EXCLUDED AS IT HAS ABNORMAL TRENDS IN ITS PROFITABILITY. AS PER THE APPELLANT, THE SAID CONCERN IS A ABNORMALLY HIGH PR OFIT MAKING CONCERN WHEREBY, ITS MARGINS FOR THE YEAR UNDER CONSIDERATI ON ARE 64.48%. IN THIS CONTEXT, IT IS SUBMITTED THAT ABNORMAL PROFIT-MAKIN G CONCERNS OUGHT TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES AS IT WO ULD SKEW THE RESULTS OF THE COMPARABILITY ANALYSIS. IT HAS ALSO BEEN ASSERTED THAT THE APPELLANT IS A CAPTIVE SERVICE PROVIDER AND HAS TRANSACTED ONLY WI TH ITS ASSOCIATE ENTERPRISE AND IS BEING COMPENSATED ON COST PLUS AGREED MARK-U P IN RESPECT OF THE SOFTWARE SERVICES. THE ASSESSEE DOES NOT BEAR SIGN IFICANT RISKS AS COMPARED TO THE COMPARABLES WHICH ARE FULL RISK BEARING ENTI TIES. THEREFORE, THE CONCERNS WHICH HAVE ABNORMALLY HIGH PROFITS OR WHIC H WITNESS WIDE FLUCTUATIONS IN THEIR PROFITS CONSIDERED OVER A PER IOD OF TIME SHOULD BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. IN SUPPORT, REL IANCE HAS BEEN PLACED ON THE FOLLOWING DECISIONS:- (I) CUMMINS TURBO TECHNOLOGIES LTD. VS. DCIT (ITA NO.161 & 269/PN/2013, DATED 29.09.2014 (II) ACTIS ADVISORS PRIVATE LTD. VS. DCIT (ITA NO.5 277/DEL/2011) 11. IN PARTICULAR, RELIANCE HAS BEEN PLACED ON THE DECISION OF BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. MINDTECK (INDIA) LTD. VS. DY.CIT, VIDE I.T(TP).A NO.70/BANG/2014, DATED 21.08.2014 WHEREIN , UNDER IDENTICAL ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. CIRCUMSTANCES, THE CONCERN M/S. BODHTREE CONSULTING LIMITED HAS BEEN HELD TO BE EXCLUDIBLE FROM THE FINAL SET OF COMPARABLES ON ACCOUNT OF IT HAVING WIDE FLUCTUATIONS IN MARGINS OVER THE YEARS. 12. AT THE TIME OF HEARING, THE LEARNED CIT-DR SUBM ITTED THAT THE ASSESSEE WAS NOT JUSTIFIED IN SEEKING EXCLUSION OF THE SAID CONCERN FROM THE LIST OF COMPARABLES BECAUSE THE SAID CONCERN HAS BEEN INCLU DED BY THE ASSESSEE ITSELF AS A COMPARABLE IN ITS TRANSFER PRICING STUD Y. THEREFORE, IT IS IN- APPROPRIATE FOR THE ASSESSEE TO SEEK THIS EXCLUSION AT THE PRESENT STAGE. 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. OSTENSIBLY, THE CONTROVERSY AS TO WHETHER ABNORMAL PROFIT-MAKING CO NCERNS OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES OR NOT, HAS B EEN A SUBJECT MATTER OF CONSIDERATION BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PRIVATE LTD. VS. ACIT VIDE I TA NO.7466/MUM/2012 DATED 07.03.2014. THE RELEVANT OBSERVATIONS OF THE SPECIAL BENCH ARE AS UNDER: 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 ABNORMALLY HIGH PROFIT MARGIN SHOULD TRIGGER FURTHER INVESTIGATION IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS T O WHETHER EARNING OF HIGH PROFIT REFLECTS A NORMAL BU SINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITION S PREVAILING IN THE RELEVANT YEAR. THE PROFIT MARGIN EARNED BY SUCH ENT ITY IN THE IMMEDIATELY PRECEDING YEAR/S MAY ALSO BE TAKEN INTO CONSIDERATION TO FIND OUT WHETHER THE HIGH PROFIT MARGIN REPRESENTS THE NORMAL BUSINESS TREND. THE FAR ANALYSIS IN SUCH CASE MAY BE REVIEWE D TO ENSURE THAT THE POTENTIAL COMPARABLE EARNING HIGH PROFIT SATISF IES THE COMPARABILITY CONDITIONS. IF IT IS FOUND ON SUCH INVESTIGATION TH AT THE HIGH MARGIN PROFIT MAKING COMPANY DOES NOT SATISFY THE COMPARABILITY A NALYSIS AND OR THE HIGH PROFIT MARGIN EARNED BY IT DOES NOT REFLECT TH E NORMAL BUSINESS CONDITION, WE ARE OF THE VIEW THAT THE HIGH PROFIT MARGIN MAKING ENTITY SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE FO R THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF AN INTERNATIO NAL TRANSACTION. OTHERWISE, THE ENTITY SATISFYING THE COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT MARGIN REFLECTING NORMAL BUSINESS CONDITION SHOULD NOT BE REJECTED SOLELY ON THE BASIS OF SUCH ABNORMAL HIGH PROFIT MARGIN.' ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. 14. IN TERMS OF THE AFORESAID DISCUSSION IN THE ORD ER OF THE SPECIAL BENCH, IT IS CLEAR THAT CONCERNS WHICH EARN ABNORMALLY HIGH P ROFIT MARGINS CANNOT BE EXCLUDED STRAIGHT AWAY BUT IT WOULD REQUIRE FURTHER INVESTIGATIONS TO ASCERTAIN THE REASONS FOR THEIR HIGH PROFITS. IT WOULD BE NE CESSARY TO ASCERTAIN AS TO WHETHER THE HIGH PROFIT MARGINS REFLECT A NORMAL BU SINESS PHENOMENON OR WHETHER IT IS A RESULT OF CERTAIN ABNORMAL CONDITIO NS PREVAILING IN A PARTICULAR YEAR. IN ORDER TO DO SO, THE PROFIT MARGINS EARNED BY SUCH A CONCERN IN THE PROXIMATE PRECEDING AND SUCCEEDING YEARS WOULD BE R EQUIRED TO BE CONSIDERED. IN THIS BACKGROUND OF THE MATTER, ASSE SSEE HAS FURNISHED BEFORE US THE OPERATING MARGIN TRENDS OF THE SAID CONCERN OVER THE SIX FINANCIAL YEARS I.E. FOR THREE PRECEDING YEARS, CURRENT YEAR AND TW O SUCCEEDING FINANCIAL YEARS. ON THE BASIS OF AFORESAID TABULATION, IT IS SOUGHT TO BE POINTED OUT THAT THERE EXISTS WIDE FLUCTUATION IN PROFIT MARGINS WHICH OST ENSIBLY DOES NOT REFLECT A NORMAL BUSINESS PHENOMENON. WE FIND THAT THE BANGA LORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. MINDTECK (INDIA) LTD. (SUPRA) CONSIDERED A SIMILAR PLEA WITH RESPECT TO THE EXCLUSION OF BODHTREE CONS ULTING LTD. ON THE GROUND OF IT BEING A ABNORMALLY HIGH PROFIT MAKING CONCERN. THE ASSESSMENT YEAR BEFORE THE BANGALORE BENCH WAS 2009-10, WHICH IS ALSO THE YEAR BEFORE US. THE OPERATING PART OF THE ORDER OF THE BANGALORE BENCH READS AS UNDER: 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENTRES (S UPRA) HAD AN OCCASION TO DEAL WITH THE QUESTION AS TO WHETHER HI GH PROFIT MARGIN MAKING COMPANIES SHOULD BE EXCLUDED AS A COMPARABLE . THE SPECIAL BENCH AFTER CONSIDERING SEVERAL ASPECTS HELD IN PAR A 88 OF ITS ORDER THAT THE POTENTIAL COMPARABLE COMPANIES CANNOT BE EXCLUD ED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. THE S PECIAL BENCH HELD THAT IN SUCH CASES IT WOULD REQUIRE FURTHER INVESTIGATIO N TO ASCERTAIN THE REASONS FOR UNUSUALLY HIGH PROFIT AND IN ORDER TO E STABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COM PARABLE OR NOT. IN THE LIGHT OF THE AFORESAID DECISION OF THE SPECIAL BENC H AND IN VIEW OF THE ADMITTED POSITION THAT THE ASSESSEE FOLLOWS FIXED P RICE PROJECT MODEL WHERE REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNI ZED BASED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS, THERE IS A POSSIBILITY OF THE EXPENDITURE IN RELATION TO THE REVENUE BEING BOOKED IN THE EARLIER YEAR. THE RESULTS OF BODHTREE FROM FY 2003 TO 2008 EXCLUD ING FY 2007 AS ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. GIVEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WERE ALSO PERUSED. PERUSAL OF THE SAME SHOWS, THAT THERE HAS BEEN A CO NSISTENT CHANGE IN THE OPERATING MARGINS. THE CHART FILED BY THE ASSE SSEE IN THIS REGARD IS GIVEN AS AN ANNEXURE TO THIS ORDER. IT APPEARS TO US THAT THE REVENUE RECOGNITION METHOD FOLLOWED BY THE ASSESSEE IS THE REASON FOR THE DRASTIC VARIATION IN THE PROFIT MARGINS OF THIS COM PANY. IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT WOULD BE SAFE TO EXCLUDE BODHTREE CONSULTING FROM THE FINAL LIST OF COMPARAB LES CHOSEN BY THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. 15. THE AFORESAID DISCUSSION OF THE BANGALORE BENCH OF THE TRIBUNAL REFLECTS THAT ASSESSEE IS JUSTIFIED IN ASSERTING TH AT THE MARGINS OF 64.48% OF THE SAID CONCERN CONSIDERED FOR THE YEAR UNDER CONSIDER ATION IS NOT A NORMAL BUSINESS TREND. THUS, IN OUR CONSIDERED OPINION, T HE INCLUSION OF THE SAID CONCERN IN THE FINAL SET OF COMPARABLES WOULD NOT L END CREDIBILITY TO THE COMPARABILITY ANALYSIS AND THEREFORE, THE SAME DESE RVES TO BE EXCLUDED. WE HOLD SO. 16. IN SO FAR AS THE PLEA RAISED BY THE LEARNED CIT -DR TO THE EFFECT THAT THE SAID CONCERN WAS INITIALLY INCLUDED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AS A COMPARABLE IS CONCERNED, THE APPELLANTS REPRESENTATIVE POINTED OUT THAT IN THE TRANSFER PRICING STUDY, ASSESSEE HA D CARRIED OUT THE COMPARABILITY ANALYSIS BY ADOPTING MULTIPLE YEARS DATA OF THE COMPARABLES WHICH HAD OFF-SET THE WIDE FLUCTUATIONS. HOWEVER, THE TPO HAS DIS-AGREED WITH THE ASSESSEE ON THE ADOPTION OF MULTIPLE YEAR S FINANCIAL DATA OF THE COMPARABLES AND INSTEAD, HE HAS CARRIED OUT THE COM PARABILITY ANALYSIS AFTER ADOPTING SINGLE YEAR DATA OF THE COMPARABLES RELATA BLE TO THE PERIOD UNDER CONSIDERATION. IT HAS ALSO BEEN SUBMITTED THAT THE CHANDIGARH SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. QUARK SYSTE MS PRIVATE LTD. (ITA NO.100, 105/CHD/2009) (CHD) HAS HELD THAT IF SOME I NCONSISTENCY IN A COMPARABLE EXISTS, THEN IT SHOULD BE REMOVED FROM T HE FINAL LIST OF COMPARABLES NOTWITHSTANDING THE FACT THAT ASSESSEE HAD INITIALL Y CONSIDERED IT AS A COMPARABLE. ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. 17. IN OUR CONSIDERED OPINION, THE PLEA OF THE ASSE SSEE FOR EXCLUSION OF BODHTREE CONSULTING LTD. FROM THE FINAL LIST OF COM PARABLES CANNOT BE SHUT OUT MERELY BECAUSE THE SAID COMPARABLE HAS BEEN ADOPTED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY. SO HOWEVER, THE AFORESAID PROPOSITION IS NOT AN ABSOLUTE PROPOSITION. IN OTHER WORDS, IT WOULD BE IMPERATIVE FOR THE ASSESSEE TO JUSTIFY EXCLUSION OF A CONCERN FROM THE LIST OF COMPARABLES IF IN THE INITIAL TRANSFER PRICING STUDY UNDERTAKEN BY IT, SUCH A CON CERN HAS BEEN ADOPTED AS A COMPARABLE. IN THE PRESENT SITUATION, CASE HAS B EEN SET UP BY THE ASSESSEE FOR EXCLUSION OF BODHTREE CONSULTING LTD ON THE GRO UND THAT THE PROFIT MARGINS OF THE SAID CONCERN ARE FLUCTUATING WIDELY AND ARE ABNORMALLY HIGH FOR THE PERIOD UNDER CONSIDERATION. OSTENSIBLY, THE FINANC IAL DATA OF THE SUCCEEDING YEARS WHICH HAS BEEN PRESSED INTO SERVICE BY THE AS SESSEE TO DEMONSTRATE ABNORMAL PROFIT TRENDS OF THE SAID CONCERN WAS NOT AVAILABLE WITH THE ASSESSEE AT THE TIME OF CARRYING OUT ITS TRANSFER PRICING ST UDY. THEREFORE, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, IN OUR VIEW, ASSESSEE HAS JUSTIFIABLY DEMONSTRATED THAT THE CONCERN M/S. BODH TREE CONSULTING LTD. IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARA BLES, EVEN THOUGH THE SAID CONCERN WAS CONSIDERED AS A COMPARABLE INITIALLY IN ITS TRANSFER PRICING STUDY. THEREFORE, ON THIS ASPECT, WE CONCLUDE BY HOLDING T HAT THE CONCERN, M/S. BODHTREE CONSULTING LTD. BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES FOR CARRYING OUT THE COMPARABILITY ANALYSIS. WE HOLD S O. 18. AT THE TIME OF HEARING, IT WAS STATED BY THE LE ARNED REPRESENTATIVE FOR THE APPELLANT THAT IF THE ASSESSEE WAS TO SUCCEED O N ITS PLEA OF THE EXCLUSION OF BODHTREE CONSULTING LIMITED FROM THE FINAL SET O F COMPARABLES, THEN THE VARIATION BETWEEN ARMS LENGTH PRICE DETERMINED BY THE TPO AND THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS IN QUESTION WOULD FALL WITHIN THE + / - 5% AND THEREFORE, IN TERMS OF SECTION 92C(2) OF THE AC T, NO ADJUSTMENT WOULD SURVIVE FOR CONSIDERATION. SINCE WE HAVE UPHELD TH E PLEA OF THE ASSESSEE FOR ITA NO.227/PN/2014 Q LOGIC (INDIA) PVT. LTD. EXCLUSION OF BODHTREE CONSULTING LIMITED FROM THE F INAL SET OF COMPARABLES, THE OTHER ASPECTS RAISED BY THE ASSESSEE AT THE TIM E OF HEARING AND / OR IN THE MEMO OF APPEAL IN ORDER TO ASSAIL THE ADDITION OF R S. 1,96,89,494/ ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT ARE RENDERED ACADEMI C AND ARE NOT BEING ADJUDICATED FOR THE PRESENT. 19. IN CONCLUSION, WE DIRECT THE ASSESSING OFFICER TO RE-WORK THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF SOFTW ARE SERVICES RENDERED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE IN ACCORDANCE WITH THE ABOVE DIRECTIONS. 20. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST OCTOBER, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBE R PUNE, DATED: 21 ST OCTOBER, 2014. GCVSR COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE 4) THE DR A BENCH, I.T.A.T., PUNE; 5) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE