Tibco Software [I] Ltd., Pune V. Dy. CIT, Pune

ITA 2536/PUN/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88928 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 1 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-09-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 24-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Assessee Lawyers: DR RAKESH GUPTA
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 143(3); 92D; 234B; 10B; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.2536/PN/2012 (ASSESSMENT YEAR : 2008-09) TIBCO SOFTWARE INDIA PVT. LTD., BINARIUS FLOOR NO. 2 & 3, DEEPAK COMPLEX, NATIONAL GAMES ROAD, SHASTRI NAGAR, YERWADA, PUNE 411 006 PAN : AACCT6136F . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE. . RESPONDENT ASSESSEE BY : MR. (DR.) RAKESH GUPTA DEPARTMENT BY : MR. A. K. MODI DATE OF HEARING : 19-11-2014 DATE OF PRONOUNCEMENT : 11-02-2015 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL HAS BEEN PREFERRED BY THE ASSE SSEE PERTAINING TO THE ASSESSMENT YEAR 2008-09, WHICH IS DIRECTED AGAI NST THE ORDER OF THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE ( IN SHORT THE ASSESSING OFFICER) PASSED U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 27.11.2012, WHICH IS IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL, PUNE (IN SHO RT THE DRP) DATED 18.09.2012. 2. IN THIS APPEAL, THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS UNDER: - GROUND NO 1: TRANSFER PRICING ADJUSTMENT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP ERRED ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE LEARNED TRANSFER PRICING OFFICER ('LD. TPO') AND THE LEARNED ASSESSING OFFIC ER ('LD. AO') OF MAKING AN ADDITION TO THE APPELLANT'S TOTAL INCOME OF RS.3 ,69,97,907/- BASED ON THE PROVISIONS OF CHAPTER X OF THE INCOME-TAX ACT, 1961 ('THE ACT'). ITA NO.2536/PN/2012 THE HON'BLE DRP ERRED ON FACTS AND IN LAW IN CONFIR MING THE APPROACH ADOPTED BY THE LEARNED AO/ TPO, WHO DISREGARDED THE VARIOUS SUBMISSIONS MADE BY THE APPELLANT AND ALSO REJECTED THE BENCHMARKING ANALYSIS AND COMPARABLE COMPANIES SELECTED BY THE A PPELLANT WITHOUT APPRECIATING THE FACT THAT SUCH SELECTION WAS BASED ON THE CONTEMPORANEOUS DATA AND THE TRANSFER PRICING STUDY REPORT PREPARED AND MAINTAINED AS PER SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 ('THE RULES'). BASED ON THE FOLLOWING GROUNDS, THE APPELLANT PRAYS THAT THE ADJUSTMENT IN RELATION TO TRANSFER PRICING MATTERS MADE BY THE LE ARNED AO/ TPO AND UPHELD BY THE HON'BLE DRP BE DELETED. GROUND NO. 2: ERRONEOUS ADDITION/ REJECTION OF CERT AIN COMPARABLES HON'BLE DRP/ LD. AO ERRED IN MODIFYING THE SET OF C OMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT FOR PROVISION OF SOFTWARE DEVELOPMENT SERVICES. IN DOING SO, HON'BLE DRP/ LD. AO SPECIFICALLY ERRED IN: 2.1 CONSIDERING AND RETAINING THE FUNCTIONALLY INCO MPARABLE AND HIGH PROFIT MAKING FCS SOFTWARE SOLUTIONS LIMITED AS THE COMPAR ABLE, DESPITE THE FACT THAT THE APPELLANT HAD DEMONSTRATED THAT I T: FAILS THE ACCEPTANCE FILTER OF 'SOFTWARE SERVICES T O TOTAL INCOME MORE THAN 75%'; AND QUALIFIES THE REJECTION CRITERIA OF 'COMPANY HAVIN G A FOREIGN BRANCH' APPLIED BY THE LD. TPO HIMSELF WHILE FINALISING THE SET OF COMPARABLES FOR THE SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE APPELL ANT; 2.2 CONSIDERING RETAINING THE FUNCTIONALLY INCOMPAR ABLE APPLICATION SOFTWARE SEGMENT OF KALS INFORMATION SYSTEMS LIMITE D AS THE COMPARABLE, DESPITE THE FACT THAT THE APPELLANT HAD DEMONSTRATED THAT IT: OWNS SOFTWARE PRODUCTS WHICH CANNOT BE CONSIDERED C OMPARABLE TO THE FUNCTIONAL AND ASSET PROFILE OF THE APPELLANT; AND HAS REPORTED ERRONEOUS SEGMENTAL FINANCIAL INFORMAT ION IN ITS ANNUAL REPORT, WHICH WAS CONSIDERED BY THE LD. TPO; 2.3 REJECTING THE FUNCTIONALLY COMPARABLE SOFTWARE SERVICES SEGMENT OF CG -VAK SOFTWARE & EXPORTS LIMITED ON THE ERRONEOUS REASONING THAT THE LOSS MAKING COMPANIES/ SEGMENTS CANNOT BE CONSI DERED TO BE COMPARABLE TO THE APPELLANT, SINCE THE APPELLANT IS COMPENSATED ON THE BASIS OF COST PLUS PRICING MECHANISM; 2.4 REJECTING THE FUNCTIONALLY COMPARABLE THINKSOFT GLOBAL SERVICES LIMITED ON THE BASIS OF ERRONEOUS INTERPRETATION THAT IT IS ENGAGED IN SOFTWARE VERIFICATION AND VALIDATION ACTIVITIES WHICH ARE NO T A PART OF SOFTWARE DEVELOPMENT PROCESS; AND 2.5 REJECTING CERTAIN COMPANIES FUNCTIONALLY SIMILA R TO THAT OF THE APPELLANT'S BUSINESS OPERATIONS OF PROVISION OF SOF TWARE SERVICES. GROUND NO. 3: ERRONEOUS REJECTION OF ECONOMIC ADJUS TMENT FOR DIFFERENCES IN LEVELS OF RISKS HON'BLE DRP/ LD. AO ERRED IN NOT ALLOWING AN ADJUST MENT FOR THE DIFFERENCE BETWEEN THE LEVEL OF RISK BORNE BY THE COMPARABLES AND THE APPELLANT, DESPITE THE FACT THAT THE APPELLANT HAS DEMONSTRATED THESE DIFFERENCES BY SUBMITTING A ITA NO.2536/PN/2012 DETAILED ANALYSIS OF FUNCTIONS PERFORMED, ASSETS EM PLOYED AND RISKS ASSUMED ('FAR ANALYSIS') BEFORE THE HON'BLE DRP. IN DOING SO, HON'BLE DRP/ LD. AO ERRED IN: FAILING TO APPRECIATE THAT THE APPELLANT IS A ROUTI NE CAPTIVE SERVICE PROVIDER AS AGAINST THE SELECTED COMPARABLE COMPANIES, WHIC H INCLUDE ENTREPRENEURIAL COMPANIES AND HENCE AN ADJUSTMENT I S NECESSARY; AND DISREGARDING THE PROVISIONS OF RULES 10B(I)(E)(III) , 10B(2) AND 10B(3) READ WITH RULE L0C OF THE INCOME-TAX RULES, 1962 ('THE RULES). GROUND NO. 4: NOT ALLOWING THE USE OF MULTIPLE YEAR DATA HON'BLE DRP/ LD. AO ERRED IN NOT ALLOWING THE USE O F MULTIPLE YEAR DATA AS PRESCRIBED UNDER RULE 10B(4) OF THE RULES AND DETER MINING THE ARM'S LENGTH PRICE ON THE BASIS OF FINANCIAL INFORMATION OF THE COMPARABLES FOR THE PREVIOUS YEAR 2007-08 WHICH WAS AVAILABLE IN THE PUBLIC DOMA IN AT THE TIME OF ASSESSMENT PROCEEDINGS BUT NOT AT THE TIME WHEN THE APPELLANT CONDUCTED ITS ANALYSIS TO COMPLY WITH THE PROVISIONS OF RULES 10B (4) AND 10D(4) OF THE RULES. GROUND NO. 5: NOT ALLOWING THE BENEFIT OF + / - 5% RANGE HON'BLE DRP/ LD. AO ERRED IN NOT GRANTING THE BENEF IT OF +/- 5% RANGE AS PER THE PROVISO TO SECTION 92C(2) OF THE ACT. GROUND NO. 6: IGNORING THE FACT THAT THE APPELLANT IS ENTITLED TO TAX HOLIDAY UNDER SECTION L0A OF THE ACT THE HON'BLE DRP ERRED ON FACTS AND IN LAW BY NOT AP PRECIATING THAT THERE WAS NO INTENTION WHATSOEVER ON THE PART OF THE APPELLAN T TO SHIFT PROFITS OUTSIDE INDIA. THE HON'BLE DRP/ LD. AO ERRED IN IGNORING TH E FACT THAT THE APPELLANT IS ENTITLED TO TAX HOLIDAY UNDER SECTION L0A OF THE AC T ON ITS PROFITS DERIVED FROM THE SOFTWARE DEVELOPMENT SERVICES AND THEREFORE WOU LD NOT HAVE ANY UNTOWARD MOTIVE OF DERIVING A TAX ADVANTAGE BY MANI PULATING TRANSFER PRICES OF ITS INTERNATIONAL TRANSACTIONS. GROUND NO. 7: FAILURE TO CONSIDER SELF ASSESSMENT T AX AND TAX DEDUCTION AT SOURCE WHILE COMPUTING THE TAX DEMAND THE LD. AO, WHILE COMPUTING THE DEMAND, FAILED TO A LLOW TAX CREDIT IN RESPECT OF TAX DEDUCTED AT SOURCE ('TDS') AMOUNTING TO RS.4 56,632/- AND TAX CREDIT IN RESPECT OF SELF ASSESSMENT TAX PAYMENTS AMOUNTING T O RS.1,228,686/-, WHILE COMPUTING THE TAX DEMAND, WHICH ALSO HAS RESULTED I N INCREASE IN THE INTEREST LIABILITY UNDER SECTION 234B AND 234C OF THE ACT. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, M ODIFY AND/OR SUBSTITUTE, AND TO WITHDRAW THE ABOVE GROUNDS OF APPEAL. 3. ALTHOUGH, ASSESSEE HAS RAISED MULTIPLE GROUNDS O F APPEAL BUT THE SUBSTANTIVE DISPUTE IS WITH RESPECT TO THE ACTION O F THE LOWER AUTHORITIES IN DETERMINING THE ARM'S LENGTH PRICE OF ASSESSEES IN TERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES AT RS.40,85,97,054/ - AS AGAINST THE STATED ITA NO.2536/PN/2012 VALUE OF RS.37,15,99,152/-, THEREBY RESULTING IN AN ADDITION OF RS.3,69,97,907/- TO THE RETURNED INCOME. 4. BRIEFLY PUT, THE FACTS AND BACKGROUND OF THE CAS E RELEVANT TO ADJUDICATE THE AFORESAID CONTROVERSY CAN BE UNDERSTOOD AS FOLL OWS. THE APPELLANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE CO MPANIES ACT, 1956 AND IS A WHOLLY OWNED SUBSIDIARY OF TIBCO US. THE APPELLA NT COMPANY IS REGISTERED AS A 100% EXPORT ORIENTED UNIT (EOU) UNDER THE SOFT WARE TECHNOLOGY PARK OF INDIA (STPI) SCHEME AND THE PROFITS EARNED BY IT EN JOY A TAX HOLIDAY IN TERMS OF SECTION 10A OF THE ACT. BROADLY SPEAKING, ASSESSEE COMPANY PROVIDES SOFTWARE RESEARCH AND DEVELOPMENT SERVICES TO TIBCO US AS PER THE DESIGN, PRODUCTION ORDERS, PLANS, PROCESS SPECIFICATION AND PRODUCTION SCHEDULES PROVIDED BY TIBCO US. DURING THE YEAR UNDER CONSID ERATION, ASSESSEE HAD ENTERED INTO THREE TYPES OF INTERNATIONAL TRANSACTI ONS WITH ITS PARENT COMPANY, I.E. TIBCO US, WHICH WERE PROVISION OF SOFTWARE DES IGN AND DEVELOPMENT SERVICES; PROVISION OF SALES AND CUSTOMER SUPPORT S ERVICES; AND, PAYMENT OF INTEREST ON EXTERNAL COMMERCIAL BORROWINGS WHOSE ST ATED VALUES WERE RS.37,15,99,152/-; RS.8,57,78,935/-; AND, RS.90,30, 278/- RESPECTIVELY. THE APPELLANT COMPANY BENCHMARKED ITS INTERNATIONAL TRA NSACTIONS RELATING TO THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND PROV ISION OF SALES AND CUSTOMER SUPPORT SERVICES BY APPLYING THE TRANSACTI ONAL NET MARGIN (TNM) METHOD AS THE MOST APPROPRIATE METHOD; AND, THE TRA NSACTION OF PAYMENT OF INTEREST ON EXTERNAL COMMERCIAL BORROWINGS (ECB) WA S BENCHMARKED BY APPLYING THE COMPARABLE UNCONTROLLED PRICE (CUP) ME THOD. IN TERMS OF THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE, ALL THREE CATEGORIES OF INTERNATIONAL TRANSACTIONS WERE FOUND TO BE AT AN A RM'S LENGTH PRICE, AND THEREFORE, EVEN BEFORE THE TRANSFER PRICING OFFICER (IN SHORT THE TPO) ASSESSEE CONTENDED THAT NO ADJUSTMENT WAS REQUIRED TO BE MADE TO THE STATED VALUES IN ORDER TO DETERMINE THEIR ARM'S LENGTH PRI CE. ITA NO.2536/PN/2012 5. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASS ESSING OFFICER MADE A REFERENCE TO THE TPO U/S 92CA(1) OF THE ACT, SO A S TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS FOR THE PURPOSE OF COMPUTING INCOME FROM SUCH TRANSACTIONS IN TERMS OF SECTION 9 2(1) OF THE ACT. THE TPO AFTER ALLOWING THE ASSESSEE NECESSARY OPPORTUNITY O F BEING HEARD, HAS PASSED AN ORDER U/S 92CA(3) OF THE ACT DATED 31.10.2011 IN TERMS OF WHICH THE STATED VALUES IN RELATION TO THE INTERNATIONAL TRANSACTION S ON ACCOUNT OF (I) PROVISION OF SALES AND CUSTOMER SUPPORT SERVICES; AND, (II) PAYM ENT OF INTEREST ON EXTERNAL COMMERCIAL BORROWINGS HAVE BEEN FOUND TO BE AT AN A RM'S LENGTH PRICE WHEREAS IN RELATION TO THE INTERNATIONAL TRANSACTIO N RELATING TO THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES, THE STATED VALUE HAS BEEN ENHANCED BY A SUM OF RS.3,69,97,907/- IN ORDER TO DETERMINE ITS ARM'S LENGTH PRICE. THE ASSESSING OFFICER HAS THEREAFTER DETERMINED THE TOT AL INCOME IN CONFORMITY WITH THE ARM'S LENGTH PRICE SO DETERMINED BY THE TP O FOLLOWING SECTION 92CA(4) OF THE ACT VIDE ORDER DATED 27.11.2012 PASS ED U/S 143(3) R.W.S. 144C(13) OF THE ACT. PERTINENTLY, WHILE SUCH ASSES SMENT THE ASSESSING OFFICER HAS ALSO CONSIDERED THE DIRECTIONS PASSED BY THE DI SPUTE RESOLUTION PANEL, PUNE (IN SHORT THE DRP) DATED 18.09.2012, WHICH W ERE RENDERED IN RESPONSE TO THE ASSESSEE RAISING OBJECTIONS IN RESPECT OF TH E DRAFT ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER IN LINE WITH THE OR DER OF THE TPO DATED 31.10.2011. THE AFORESAID ADDITION IS THE SUBJECT- MATTER OF DISPUTE BEFORE US. 6. BEFORE PROCEEDING TO ADJUDICATE THE SPECIFIC ISS UES RAISED BEFORE US, WE MAY BRIEFLY TOUCH-UPON THE RELEVANT FACTS. IN ITS TRANSFER PRICING STUDY, ASSESSEE HAD ADOPTED THE TNM METHOD TO BENCHMARK IT S INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES UNDERT AKEN WITH ITS ASSOCIATED ENTERPRISE, AND OPERATING PROFITS/OPERATING COST WA S USED AS THE PROFIT LEVEL INDICATOR (I.E. PLI) FOR THE SAID PURPOSE. THE ASS ESSEE COMPARED ITS PLI OF 15.19% WITH ARITHMETIC MEAN OF THE MARGINS OF THE C OMPARABLE CASES SELECTED ITA NO.2536/PN/2012 AT 14.84%; AND, AS ASSESSEES PLI WAS HIGHER THAN T HE ARITHMETIC MEAN OF THE MARGINS OF THE COMPARABLE CASES, THE STATED VALUE O F THE INTERNATIONAL TRANSACTIONS WAS SAID TO BE AT ARM'S LENGTH PRICE. THE TPO HAS NOT DISPUTED THE ADOPTION OF TNM METHOD AS THE MOST APPROPRIATE METHOD FOR THE PURPOSE OF UNDERTAKING THE COMPARABILITY ANALYSIS. THE TPO HAS ALSO NOT DIFFERED WITH THE ASSESSEE WITH REGARD TO THE ADOPTION OF OPERATI NG PROFIT/OPERATING COST AS THE PLI FOR THE PURPOSE OF THE COMPARABILITY ANALYS IS. HOWEVER, THE TPO NOTICED THAT THE ASSESSEE DETERMINED THE PLI OF THE COMPARABLE CASES BY CONSIDERING THEIR FINANCIAL DATA FOR TWO YEARS I.E. FINANCIAL YEARS 2005-06 AND 2006-07, WHICH ACCORDING TO HIM, WERE PRIOR TO THE PERIOD FOR WHICH ASSESSEES INTERNATIONAL TRANSACTIONS WERE BEING TESTED. THE SAID APPROACH OF THE ASSESSEE HAS NOT BEEN ACCEPTED BY THE TPO, AS ACCOR DING TO HIM, IT WAS MORE APPROPRIATE TO ADOPT THE FINANCIAL DATA OF THE COMPARABLE CASES FOR THE CONTEMPORANEOUS PERIOD I.E. FOR THE FINANCIAL YEAR ENDING ON 31.03.2008 FOR THE PURPOSES OF THE TRANSFER PRICING ANALYSIS. IN THE COURSE OF THE TRANSFER PRICING PROCEEDINGS BEFORE THE TPO, ASSESSEE WAS SH OW-CAUSED ON THIS ASPECT AND ON THE REVISED BASIS ALSO ASSESSEE SUGGE STED CERTAIN INCLUSIONS AND EXCLUSIONS IN THE LIST OF COMPARABLE CASES. TH E TPO AFTER CONSIDERING THE FINANCIAL DATA OF THE COMPARABLE CASES BASED ON THE CURRENT YEAR DATA RE- EXAMINED THE COMPARABLES AND FINALLY SELECTED THE F OLLOWING COMPARABLES :- SR. NO. NAME OF THE COMPARABLE OP/OC (%) 1 BODHTREE CONSULTING LTD. 19.14 2 E-INFOCHIP LTD. 30.32 3 EZEST SOLUTIONS LTD. 28.58 4 F C S SOFTWARE SOLUTION LTD. 57.02 5 GOLDSTONE TECHNOLOGIES LTD. 27.06 6 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 36. 05 7 KALS INFORMATION SYSTEMS LTD. (APPLICATION SOFTWARE SEG) 30.92 8 L G S GLOBAL LTD. 26.33 9 SOFTSOL INDIA LTD. 15.18 ARITHMETIC MEAN 30.07 WORKING CAPITAL ADJUSTED MARGIN (%) 26.45 ITA NO.2536/PN/2012 7. ON THE BASIS OF THE ABOVE, THE ARITHMETIC MEAN O F THE MARGINS OF THE COMPARABLES AT 26.45% WAS COMPARED WITH THE ASSESSE ES MARGIN AND ACCORDINGLY, AN UPWARD ADJUSTMENT OF RS.3,69,97,907 /- WAS MADE TO THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS TO D ETERMINE THE ARM'S LENGTH PRICE. IN THIS BACKGROUND, NOW WE MAY CONSIDER THE VARIOUS GROUNDS OF APPEAL RAISED BY THE ASSESSEE, AS REPRODUCED ABOVE. 8. AT THE TIME OF HEARING, THE GROUND NO.3 RELATING TO ERRONEOUS REJECTION OF ECONOMIC ADJUSTMENT DIFFERENCES IN LEVELS OF RIS K; GROUND NO.4 IN RELATION TO NON-CONSIDERATION OF MULTIPLE YEAR DATA OF THE COMP ARABLE CASES; GROUND OF NO.5 RELATING TO NON-ALLOWING THE BENEFIT + / - 5% HAVE NOT BEEN PRESSED AND GROUND NO.1 IS STATED TO BE GENERAL GROUND WHICH DO ES NOT REQUIRE TO ANY SPECIFIC ADJUDICATION AND ACCORDINGLY, THE AFORESAI D GROUNDS OF APPEAL NOS.1, 3, 4 & 5 ARE DISMISSED. 9. BEFORE US, THE SPECIFIC ARGUMENTS PUT-FORTH ARE A MANIFESTATION OF GROUND NO.2 RAISED ACCORDING TO WHICH ASSESSEE CONT ENDS THAT THE TPO/AO ERRED IN ACCEPTING CERTAIN COMPARABLES AND/OR REJEC TING CERTAIN COMPARABLES IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS O F PROVISION OF SOFTWARE DEVELOPMENT SERVICES. AT THE TIME OF HEARING, APPE LLANT HAS FURNISHED VOLUMINOUS PAPER BOOKS WHICH, INTER-ALIA, CONTAINED COPIES OF THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE, COPIES OF RELEVANT EXTRACT OF ANNUAL REPORTS OF THE COMPARABLE CASES AS ALSO THE SUBMISS IONS ON VARIOUS ISSUES MADE BEFORE THE LOWER AUTHORITIES, ETC.. DURING TH E COURSE OF HEARING, THE LEARNED COUNSEL HAS REFERRED AND RELIED ON VARIOUS MATERIAL PLACED IN THE PAPER BOOK WHICH HAVE BEEN DULY CONSIDERED BY US. THE LEANED CIT-DR HAS ALSO FURNISHED WRITTEN SUBMISSIONS WHICH HAVE ALSO BEEN DULY CONSIDERED. ITA NO.2536/PN/2012 10. THE FIRST PLEA OF THE ASSESSEE IS WITH RESPECT TO M/S KALS INFORMATION SYSTEM, (APPLICATIONS SOFTWARE SEGMENT), A CONCERN WHICH HAS BEEN INCLUDED AS A COMPARABLE BY THE TPO FOR THE PURPOSES OF COMP ARABILITY ANALYSIS. ACCORDING TO THE ASSESSEE, THE INCLUSION OF SAID CO NCERN AS A COMPARABLE IS WRONG BECAUSE THE SAID CONCERN IS FUNCTIONALLY DIFF ERENT FROM THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE IN ITS SEGMENT OF PROVIS ION OF SOFTWARE DEVELOPMENT AND DESIGN SERVICES. AS PER THE ASSESS EE, THE SAID CONCERN IS ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCT S AND SUCH ACTIVITY IS QUITE DIFFERENT FROM THAT OF THE ASSESSEE WHICH REL ATES TO RENDERING OF SOFTWARE DEVELOPMENT SERVICES FOR ITS CUSTOMERS. BEFORE THE TPO, ASSESSEE REFERRED TO AN EXTRACT FROM THE ANNUAL REPORT OF THE SAID CONCE RN FOR THE FINANCIAL YEAR 2007-08 TO POINT OUT THAT THE SOFTWARE DEVELOPMENT EXPENDITURE WAS REPORTED BY THE SAID CONCERN AS AN ELEMENT OF INVENTORY, WHI CH ACCORDING TO THE ASSESSEE DEMONSTRATED THAT THE SAID CONCERN WAS A P RODUCT COMPANY AND NOT A SOFTWARE SERVICES COMPANY. IT WAS ALSO POINTED O UT ON THE BASIS OF THE WEBSITE OF THE SAID CONCERN THAT IT WAS OWNING SOFT WARE PRODUCTS LIKE VIRTUAL INSURE, IA VISION, CMSS, DOCUFLO (DOCUMENT MANAGEME NT SYSTEM) TO SUPPORT ITS PLEA THAT THE SAID CONCERN WAS INTO DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS. IT WAS ALSO POINTED OUT BEFORE THE TPO T HAT THE SAID CONCERN WAS ALSO ENGAGED IN RENDERING TRAINING SERVICES AND ALT HOUGH THE TPO HAD USED THE SEGMENTAL INFORMATION OF APPLICATION SOFTWARE O NLY BUT THE SEGMENTAL DATA PUBLISHED BY THE SAID CONCERN WAS ERRONEOUS AND ACC ORDINGLY IT WAS UNRELIABLE. THE TPO HOWEVER DID NOT FIND ANY WEIGH T IN THE ARGUMENTS OF THE ASSESSEE AND NOTED THAT THERE WAS NO MATERIAL TO SA Y THAT THE SAID CONCERN WAS ACTUAL EARNING REVENUES FROM THE SALE OF ANY PR OPRIETARY PRODUCTS AND ACCORDING TO HIM IT IS NOT UNCOMMON FOR EVEN A SOFT WARE DEVELOPMENT SERVICE PROVIDER TO CALL THEIR SERVICES AS PRODUCT, THU S SUCH COMPANIES CONTINUE TO BE SERVICE PROVIDERS. THE DRP HAS ALSO AFFIRMED TH E STAND OF THE TPO, AGAINST WHICH ASSESSEE IS IN APPEAL BEFORE US. ITA NO.2536/PN/2012 11. ON THIS ASPECT, THE LEARNED COUNSEL FOR THE ASS ESSEE HAS REITERATED THE SUBMISSIONS PUT-FORTH BEFORE THE LOWER AUTHORITIES BY POINTING OUT THAT THE APPLICATIONS SOFTWARE SEGMENT OF THE SAID CONCERN W AS INTO DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS, WHICH IS AN ACTIVITY DIS TINCT FROM PROVIDING SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN BY THE ASSESSEE. O UR ATTENTION HAS BEEN DRAWN TO PAGES 1086 AND 1087 AND PAGES 1092 TO 1096 OF THE PAPER BOOK WHEREIN ARE PLACED RELEVANT EXTRACTS OF THE ANNUAL REPORT OF THE SAID CONCERN FOR FINANCIAL YEAR 2007-08 AND THE WEBSITE EXTRACT RESPECTIVELY TO SUPPORT THE PLEAS RAISED BEFORE THE LOWER AUTHORITIES. IT HAS ALSO BEEN POINTED OUT THAT THE ACTIVITIES OF SAID CONCERN WERE CONSIDERED BY THE P UNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA P. LTD. VIDE ITA NO.1 386/PN/2010 ORDER DATED 30.11.2011, WHEREIN IT HAS BEEN HELD THAT THE SAID CONCERN WAS FUNCTIONALLY DIFFERENT FROM A SOFTWARE DEVELOPMENT SERVICE PROVI DER. A REFERENCE HAS ALSO BEEN MADE TO THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. VIDE ITA NO.1054/BANG/2011 ORDER DATED 23.11.2012, WHEREIN ALSO SAID CONCERN W AS HELD TO BE NOT COMPARABLE TO A SOFTWARE DEVELOPMENT SERVICE PROVID ER. 12. ON THE OTHER HAND, THE LEARNED CIT-DR HAS REITE RATED THE STAND OF THE LOWER AUTHORITIES BY POINTING OUT THAT MERE OWNERSH IP OF SOFTWARE PRODUCTS WOULD NOT MAKE A CONCERN FUNCTIONALLY NON-COMPARABL E TO A SOFTWARE DEVELOPMENT SERVICE PROVIDER, WHO DID NOT OWN ANY S OFTWARE PRODUCT. ACCORDING TO HIM, SUCH DIFFERENCE IS NOT A MATERIAL DIFFERENCE CONTEMPLATED UNDER THE TNM METHOD FOR THE PURPOSES OF COMPARABIL ITY ANALYSIS. APART THEREFROM, IT HAS BEEN POINTED OUT THAT THE SAID CO NCERN VIDE A COMMUNICATION DATED 13.01.2009 ADDRESSED TO THE ADDL.CIT (TP), HY DERABAD CONFIRMED THAT ITS CORE BUSINESS WAS THAT OF SOFTWARE DEVELOPMENT SERVICE PROVIDER. FURTHER, ACCORDING TO THE LEARNED CIT-DR EVEN THE ERROR IN T HE SEGMENTAL REPORTING BY THE SAID CONCERN WOULD NOT ALTER THE BIGGER PICTURE THAT IT WAS DERIVING INCOME ITA NO.2536/PN/2012 MAINLY FROM SOFTWARE DEVELOPMENT SERVICE. ACCORDIN GLY, INCLUSION OF THE SAID CONCERN IN THE FINAL SET OF COMPARABLES IS SOUGHT T O BE DEFENDED. 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE PERTINENT POINT RAISED BY THE ASSESSEE IS THAT THE SAID CONCE RN IS FUNCTIONALLY NOT COMPARABLE TO THE ACTIVITIES UNDERTAKEN BY THE ASSE SSEE ON ACCOUNT PROVISION OF SOFTWARE DEVELOPMENT SERVICES. THE SERVICES REN DERED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE UNDER THE HEADING PROVIS ION OF SOFTWARE DEVELOPMENT SERVICES INCLUDE DEVELOPMENT OF SOFTWA RE IN ACCORDANCE WITH THE DESIGNS, PRODUCTION ORDERS, PLANS, PROCESS SPECIFIC ATIONS, AND PRODUCTION SCHEDULES, ETC. SUPPLIED BY THE ASSOCIATED ENTERPRI SE. ASSESSEE IS REMUNERATED ON A COST PLUS MARKUP (15%) BASIS FOR T HE SERVICES PROVIDED TO THE ASSOCIATED ENTERPRISE. NOTABLY, THE OWNERSHIP OF THE PRODUCT DEVELOPED LIES WITH THE ASSOCIATED ENTERPRISE. THE OWNERSHIP OF ANY DOCUMENTATION OR KNOW-HOW AND ANY OTHER PROPRIETARY INFORMATION RECE IVED FROM THE ASSOCIATED ENTERPRISE FOR THE PURPOSE OF RENDERING OF SERVICES TO THE ASSOCIATED ENTERPRISE ARE ALSO THE PROPERTY OF THE ASSOCIATED ENTERPRISE. EVEN ANY IMPROVEMENTS MADE BY THE ASSESSEE TO EITHER OF THE AFORESAID ITE MS DURING THE COURSE OF PROVIDING SERVICES ARE ALSO TO BE SOLELY OWNED BY T HE ASSOCIATED ENTERPRISE. THUS, THE ASSESSEE HAS BEEN CORRECTLY UNDERSTOOD TO BE A MERE SOFTWARE DEVELOPMENT SERVICE PROVIDER. 14. WITH RESPECT TO KALS INFORMATION SYSTEM LTD. (A PPLICATIONS SOFTWARE SEGMENT), THE POINT RAISED BY THE ASSESSEE IS THAT THIS CONCERN IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND NOT PURELY/MAI NLY IN SOFTWARE DEVELOPMENT SERVICES. IN THIS CONNECTION, THE BANG ALORE BENCH OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA P. LTD. (SUPRA) HELD THAT THE SAID COMPANY WAS DEVELOPING SOFTWARE PRODU CTS AND WAS NOT PURELY/ MAINLY A SOFTWARE DEVELOPMENT SERVICE PROVIDER. AC CORDINGLY, THE BANGALORE ITA NO.2536/PN/2012 BENCH OF THE TRIBUNAL HELD THAT THE SAID CONCERN WA S NOT COMPARABLE TO THE ASSESSEE BEFORE THEM, WHICH WAS UNDERTAKING ACTIVIT IES SIMILAR TO THE CASE BEFORE US, NAMELY, SOFTWARE DEVELOPMENT SERVICES. IN-FACT, THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA P. LTD. (SUPRA) ALSO CONSIDERED A SOMEWHAT SIMILAR SITUATION AND, FOUND M/S KALS INFO RMATION SYSTEM LTD. (APPLICATIONS SOFTWARE SEGMENT) TO BE INCOMPARABLE TO A CONCERN WHICH WAS PROVIDING SOFTWARE DEVELOPMENT SERVICES, AS IS THE CASE OF THE ASSESSEE BEFORE US. MOREOVER, THE MATERIAL RELIED UPON BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES, COPIES OF WHICH HAVE ALSO BEEN P LACED IN THE PAPER BOOK FILED BEFORE US, SUPPORTS THE ASSERTIONS OF THE ASS ESSEE THAT THE SAID CONCERN IS ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PROD UCT, ETC., WHICH IS DISTINCT FROM THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE. THUS, WE ARE INCLINED TO UP HOLD THE PLEA OF THE ASSESSEE THAT THE M/S KALS INFORMATION SYSTEM LTD. (APPLICATIONS SOFTWARE SEGMENT) IS FUNCTIONALLY INCOMPARABLE TO THE ASSESS EE. 15. THE ATTEMPT BY THE LEARNED CIT-DR TO SUPPORT TH E STAND OF THE TPO ON THE BASIS OF A COMMUNICATION RECEIVED BY ADDL.CIT ( TP), HYDERABAD REGARDING KALS INFORMATION SYSTEM LTD., IN OUR VIEW, IS UNTEN ABLE. OSTENSIBLY, SUCH AN INFORMATION WAS NOT AVAILABLE IN PUBLIC DOMAIN AND THEREFORE IT COULD NOT HAVE BEEN IN THE REALM OF CONSIDERATION BY THE TPO AND M OREOVER, WE FIND THAT THE SAID ASSERTION IS QUITE CONTRARY TO THE INFORMATION AVAILABLE IN PUBLIC DOMAIN, NAMELY, THE ANNUAL REPORT, AND THE WEBSITE EXTRACT OF THE SAID CONCERN, WHICH HAVE BEEN PERTINENTLY REFERRED TO BY THE ASSESSEE. 16. FOR THE AFORESAID REASONS, WE UPHOLD THE PLEA O F THE ASSESSEE FOR EXCLUSION OF M/S KALS INFORMATION SYSTEM LTD. (APPL ICATIONS SOFTWARE SEGMENT) FROM THE FINAL SET OF COMPARABLES FOR THE PURPOSES OF COMPARABILITY ANALYSIS. ITA NO.2536/PN/2012 17. THE NEXT PLEA OF THE ASSESSEE IS FOR EXCLUDING M/S. FCS SOFTWARE SOLUTIONS LIMITED FROM THE FINAL SET OF COMPARABLES . ON THIS POINT, ASSESSEE SUBMITTED BEFORE THE TPO THAT THE SAID CONCERN WAS EARNING INCOME FROM DIVERSIFIED SEGMENTS AND THE INCOME FROM SOFTWARE D EVELOPMENT SERVICES WAS LESS THAN 75% OF THE TOTAL OPERATING INCOME. THE C LAIM OF THE ASSESSEE WAS THAT THE SAID CONCERN DID NOT QUALIFY THE FILTER AP PLIED BY THE TPO HIMSELF, NAMELY, TO EXCLUDE CONCERNS WHOSE INCOME FROM SOFTW ARE DEVELOPMENT SERVICES WAS LESS THAN 75% OF THE TOTAL INCOME. BE FORE THE TPO, ASSESSEE SUBMITTED THAT, APART FROM OTHER ACTIVITIES, THE SA ID CONCERN WAS ENGAGED IN RENDERING APPLICATION SUPPORT SERVICES AND INFRASTR UCTURE MANAGEMENT SERVICES WHICH CONSTITUTE 11% AND 15% RESPECTIVELY OF THE TOTAL REVENUE OF THE SAID CONCERN. THE AFORESAID ACTIVITIES WERE IN THE NATURE OF IT ENABLED SERVICES AND ARE DISTINCT FROM THE SOFTWARE DEVELOP MENT SERVICES, WHICH ARE BEING UNDERTAKEN BY THE ASSESSEE. IT WAS ALSO EXPL AINED THAT THE SAID CONCERN WAS RENDERING E-LEARNING AND DIGITAL CONSUL TING SERVICES WHICH CONSTITUTE 30% OF THE TOTAL REVENUE AND SUCH ACTIVI TY INVOLVES PROVISION OF TRAINING SOLUTION TO THE CLIENTS AND NOT RENDERING OF SOFTWARE SERVICES. ONLY 44% OF THE INCOME OF THE CONCERN PERTAINED TO IT CO NSULTING SERVICES, WHICH AGAIN INCLUDED APPLICATION MAINTENANCE SERVICES. O N THE BASIS OF THE AFORESAID ANALYSIS, ASSESSEE ASSERTED THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 18. AS PER DISCUSSION IN PARA 15.7 OF THE ORDER OF TPO, IT IS NOTICEABLE THAT ASSESSEE RAISED OTHER GROUNDS ALSO TO SUPPORT THE E XCLUSION OF THE SAID CONCERN FROM THE FINAL SET OF COMPARABLES. IT WAS POINTED OUT THAT THE BUSINESS MODEL OF THE SAID CONCERN WAS NOT COMPARAB LE TO THE ASSESSEE AS THE SAID CONCERN WAS ENGAGED IN PROVIDING / SUPPLYI NG MAN POWER RESOURCES TO ITS CLIENTS WHICH REQUIRED IT AS WELL AS IT ENAB LED SERVICES. THE AFORESAID ASPECT WAS ASSERTED ON THE BASIS OF THE STATEMENTS IN THE ANNUAL REPORT OF ITA NO.2536/PN/2012 THE SAID CONCERN. THE TPO HAS REPRODUCED THE SUBMI SSIONS OF THE ASSESSEE BEFORE HIM WHICH INTER ALIA, ALSO INCLUDE AN EXTRACT FROM THE ANNUAL REPORT OF THE SAID CONCERN REGARDING THE NATURE OF SERVICES B EING RENDERED BY FCS SOFTWARE SOLUTIONS LIMITED. 19. THE TPO REJECTED ASSESSEES PLEA FOR EXCLUSION OF FCS SOFTWARE SOLUTIONS LIMITED. THE TPO REFERRED TO A CBDTS CI RCULAR NO.SO890(E), DATED 26.09.2000 WHICH DETAILED LIST OF PRODUCTS / SERVICES WHICH COULD BE CATEGORIZED AS ITES FOR THE PURPOSES OF SECTIONS 10 A AND 10B OF THE ACT. ACCORDING TO THE TPO, IN TERMS OF THE CBDT CIRCULAR , THE INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) WOULD INCLUDE RU NNING OF REMOTE MAINTENANCE AND SUPPORT CENTRES ALSO. ACCORDING TO THE TPO, E-LEARNING AND DIGITAL CONSULTING ACTIVITY CANNOT BE CATEGORIZED A S ITES AND THEREFORE, THE SAME IS TO BE UNDERSTOOD AS A SEGMENT OF SOFTWARE D EVELOPMENT SERVICES. THE TPO CONCLUDED THAT SUBSTANTIAL PART OF THE SAID CONCERNS INCOME CAME FROM SOFTWARE DEVELOPMENT SERVICES AND THEREFORE, I T IS A COMPARABLE CONCERN. 20. THE STAND OF THE TPO WAS ALSO AFFIRMED BY THE D RP. BEFORE US, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE REITERATED ASSESSEES FUNDAMENTAL PLEA THAT THE SAID CONCERNS INCOME FROM SOFTWARE D EVELOPMENT SERVICES WAS LESS THAN 75% OF THE TOTAL INCOME AND THEREFORE, IT CANNOT BE INCLUDED AS A COMPARABLE. IN THIS CONTEXT, IT IS POINTED OUT THA T THE PROPORTION OF INCOME IN VARIOUS SEGMENTS IS AS UNDER:- IT CONSULTING - 44%; APPLICATION SUPPORT - 11%; INFRASTRUCTURE MANAGEMENT SERVICES - 15%; AND, E-LEARNING AND DIGITAL CONSULTING - 30%. 21. AT THE TIME OF HEARING, OUR ATTENTION WAS INVIT ED TO PAGES 1010 AND 1011 OF THE PAPER BOOK, WHEREIN IT IS PLACED RELEVA NT PAGES OF THE ANNUAL REPORT OF THE SAID CONCERN TO JUSTIFY THE AFORESAID SEGMENTAL DATA. IT HAS ALSO ITA NO.2536/PN/2012 BEEN POINTED OUT THAT EVEN IN THE WRITTEN SUBMISSIO NS MADE TO THE TPO, WHICH HAVE BEEN REPRODUCED IN THE IMPUGNED ORDER, THE AFO RESAID SEGMENTAL DATA HAS BEEN REFERRED TO AND THAT THERE IS NO DISPUTE O N THE SAME. ON THE BASIS OF THE AFORESAID, IT IS SOUGHT TO BE POINTED OUT THAT THE ACTIVITIES ON ACCOUNT OF APPLICATION SOFTWARE SERVICES AND INFRASTRUCTURE MA NAGEMENT SERVICES, WHICH CONSTITUTE 11% AND 15% RESPECTIVELY OF THE TOTAL RE VENUE, ARE OBVIOUSLY IT ENABLED SERVICES AND ARE NOT LINKED TO THE SOFTWARE DEVELOPMENT SERVICES. IT HAS ALSO BEEN SUBMITTED THAT E-LEARNING AND DIGITAL CONSULTING SERVICES ARE ALSO IN THE NATURE OF ITES AND THEREFORE, THE PROPO RTION OF THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES IS LESS THAN 75%, WHI CH IS A FILTER APPLIED BY THE TPO HIMSELF. SINCE THE SAID CONCERN FAILS THE SAID FILTER, IT IS LIABLE TO BE EXCLUDED. 22. ON THIS ASPECT, THE LEARNED CIT-DR SUBMITTED TH AT IN THE PIE CHART OF DIFFERENT BUSINESS SEGMENTS DEPICTED BY THE SAID CO NCERN AT PAGE 25 OF ITS ANNUAL REPORT, THE SEGMENT OF E-LEARNING AND DIGITA L CONSULTING HAS ALSO BEEN CONSIDERED AS A SOFTWARE DEVELOPMENT ACTIVITY AND THEREFORE, THE SAME CANNOT BE EXCLUDED AS AN IT ENABLED SERVICE. ON TH E OTHER ASPECTS, THE ORDER OF TPO IS RELIED UPON TO SUPPORT THE CASE OF THE RE VENUE. 23. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN FACT, THE TPO HAS REPRODUCED IN PARA 15.7 THE WRITTEN SUBMISSIONS OF THE ASSESSEE ON THIS ASPECT. THE FIRST PLEA RAISED BY THE ASSESSEE WAS T HAT INCOME EARNED BY THE SAID CONCERN FROM RENDERING OF APPLICATION SUPPORT SERVICES AND INFRASTRUCTURE MANAGEMENT SERVICES, WHICH CONSTITUTE 11% AND 15% R ESPECTIVELY OF THE TOTAL REVENUE, ARE IN THE NATURE OF IT ENABLED SERVICES A ND NOT LINKED TO THE SOFTWARE DEVELOPMENT SERVICES. ON THIS BASIS, IT W AS SOUGHT TO BE POINTED OUT THAT IF THE AFORESAID INCOME STREAMS ARE EXCLUDED F ROM THE SEGMENT OF SOFTWARE DEVELOPMENT SERVICES, THEN THE INCOME FROM SOFTWARE DEVELOPMENT ITA NO.2536/PN/2012 SERVICES SEGMENT FALLS BELOW 75% OF THE TOTAL INCOM E. THE TPO HAD APPLIED A FILTER TO EXCLUDE SUCH CONCERNS FROM THE LIST OF CO MPARABLES, WHEREIN THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES WAS LESS THAN 75% OF THE TOTAL INCOME. IN FACT, IN THE DISCUSSION MADE BY THE TPO IN RESPONSE TO ASSESSEES AFORESAID ASSERTIONS, THERE IS NO DENIAL TO THE SAM E. THOUGH THE TPO GOES ON TO RELY ON THE CBDTS CIRCULAR DATED 26.09.2000 (SU PRA), BUT THAT IS IN RELATION TO THE ACTIVITY OF E-LEARNING AND DIGITAL CONSULTIN G BEING CARRIED OUT BY THE ASSESSEE. THE SEGMENT OF E-LEARNING AND DIGITAL CO NSULTING IS A DIFFERENT SEGMENT. IN ANY CASE, ASSESSEES PLEA BASED ON THE NATURE OF SERVICES ON ACCOUNT OF APPLICATION SUPPORT SERVICES SEGMENT AND INFRASTRUCTURE MANAGEMENT SERVICES SEGMENT HAVE NOT BEEN REBUTTED BY THE TPO. THEREFORE, WE ARE INCLINED TO HOLD THAT THE APPLICA TION SUPPORT SERVICES AND INFRASTRUCTURE MANAGEMENT SERVICES, WHICH CONSTITUT E 11% AND 15% RESPECTIVELY OF THE TOTAL INCOME, ARE IT ENABLED SE RVICES AND NOT LINKED TO THE SOFTWARE DEVELOPMENT SERVICES. 24. MOREOVER, THE ASSESSEE HAD REFERRED TO THE FOLL OWING EXTRACT FROM THE ANNUAL REPORT OF THE SAID CONCERN IN RELATION TO TH E E-LEARNING AND DIGITAL CONSULTING BEFORE THE TPO TO SAY THAT IT IS IN THE NATURE OF IT ENABLED SERVICES:- E-LEARNING AND DIGITAL CONSULTING SERVICES: US CORPORATIONS LOOK AT E-LEARNING OF WEB / CD BASE D TRAINING PROGRAMS AS ONE OF THE WAYS TO ACHIEVE ORGANIZATIONAL GROWTH AN D IMPROVED BUSINESS PERFORMANCE. E-LEARNING HELPS EMPLOYEES, VENDORS, AND DEALERS OF A COMPANY TO BETTER THEIR PERFORMANCE AND DEAL WITH F AST-CHANGING ENVIRONMENTS. E-LEARNING MAKES TRAINING HIGHLY EFF ICIENT, BY MAKING IT AVAILABLE ANYTIME, ANYWHERE AND REDUCES TOTAL COST OF TRAINING. E-LEARNING IS USED TO TRAIN EMPLOYEES, CUSTOMERS AND SERVICE TECH NICIANS ON PRODUCT KNOWLEDGE, CONCEPTS, STRATEGIES, RISK AND FINANCE, COMPLIANCE AND TECHNOLOGY. 25. OSTENSIBLY, THE AFORESAID SERVICES INVOLVE SETT ING UP OF SUPPORT CENTRES AND REMOTE MAINTENANCE, WHICH HAVE BEEN DULY CATEGO RIZED AS ITES BY THE CBDTS CIRCULAR DATED 26.09.2000 ITSELF, WHICH HAS BEEN REPRODUCED BY THE ITA NO.2536/PN/2012 TPO IN THE IMPUGNED ORDER. THEREFORE, EVEN THE SAI D SEGMENT IS NOT TO BE INCLUDED AS PART OF THE SOFTWARE DEVELOPMENT SERVIC ES, AS ASSERTED BY THE ASSESSEE. ONCE THE SEGMENT OF APPLICATION SUPPORT AND INFRASTRUCTURE MANAGEMENT SERVICES ARE REMOVED ALONG WITH THE EXCL USION OF E-LEARNING AND DIGITAL CONSULTING SEGMENT, THEN THE INCOME OF THE SAID CONCERN FROM SOFTWARE DEVELOPMENT SERVICES FALLS BELOW 75% OF ITS TOTAL I NCOME AND THEREFORE, IT DESERVES TO BE EXCLUDED EVEN ON THE BASIS OF THE FI LTER APPLIED BY THE TPO. THUS, ON THIS ASPECT, ASSESSEE SUCCEEDS. 26. THE NEXT PLEA OF THE ASSESSEE IS FOR INCLUSION OF CG-VAK SOFTWARE SYSTEMS LIMITED (SOFTWARE SERVICES SEGMENT) IN THE FINAL SET OF COMPARABLES. AS PER THE DISCUSSION CONTAINED IN PARA 15.11 OF OR DER OF THE TPO, THE SAID CONCERN HAS BEEN EXCLUDED FROM THE LIST OF COMPARAB LES ON THE GROUND THAT IT HAS INCURRED A LOSS, WHEREAS ASSESSEES BUSINESS MO DEL IS COST PLUS MARK UP. HENCE, ACCORDING TO THE TPO, THE SAID CONCERN WAS N OT COMPARABLE TO THE ASSESSEE. 27. ON THIS POINT, THE LEARNED REPRESENTATIVE FOR T HE ASSESSEE SUBMITTED THAT THE SAID CONCERN WAS FUNCTIONALLY COMPARABLE T O THE ASSESSEE AND THEREFORE, IT COULD NOT HAVE BEEN REJECTED MERELY B ECAUSE IT HAD INCURRED A LOSS IN THIS YEAR. IT WAS POINTED OUT THAT THE SAI D CONCERN WAS NOT A CONSISTENTLY LOSS MAKING CONCERN AND THEREFORE, IT COULD HAVE BEEN EXCLUDED FROM THE LIST OF COMPARABLES. IN THIS CONTEXT, IT WAS POINTED OUT THAT THE TPO HAD SHOW CAUSED THE ASSESSEE IN THE COURSE OF TRANS FER PRICING PROCEEDINGS AS TO WHY THE PERSISTENTLY LOSS MAKING UNITS BE NOT EXCLUDED. SO HOWEVER, THE SAID CONCERN WAS NOT PERSISTENTLY LOSS MAKING, AND THEREFORE, IT COULD NOT HAVE BEEN EXCLUDED. IN THIS CONNECTION, REFERENCE WAS I NVITED TO THE DETAILED MARGIN COMPUTATIONS OF THE SAID CONCERN FOR THE THR EE YEARS I.E. PRECEDING FINANCIAL YEARS 2005-06 AND 2006-07 AND THE YEAR UN DER CONSIDERATION AS ITA NO.2536/PN/2012 DEPICTED IN WORKING, PLACED AT PAGE 1097 OF THE PAP ER BOOK. IN TERMS OF THE SAME, IT WAS POINTED OUT THAT THE SAID CONCERN WAS EARNING PROFITS IN ITS SOFTWARE SERVICES SEGMENT IN THE PRECEDING TWO FINA NCIAL YEARS 2005-06 AND 2006-07 AND THAT IT WAS ONLY IN THE YEAR UNDER CONS IDERATION, THERE WAS A LOSS. IT WAS ALSO POINTED OUT THAT THE TPO ERRED IN REJEC TING A CONCERN MERELY THAT IT INCURRED A LOSS WHILE RETAINING COMPANIES WHICH ARE MAKING SUPER NORMAL PROFITS. ACCORDING TO HIM, IF ASSESSEE BEING A CAP TIVE SERVICE PROVIDER AND BEING REMUNERATED ON COST PLUS MARK-UP BASIS, COULD NOT BEEN FOUND COMPARABLE TO A LOSS MAKING CONCERN, THE SAME APPRO ACH OUGHT TO HAVE BEEN ADOPTED BY THE TPO EVEN WITH REGARD TO THE CONCERNS EARNING SUPER NORMAL PROFITS. 28. ON THIS ASPECT, THE LEARNED CIT-DR REITERATED T HE STAND OF THE TPO TO THE EFFECT THAT THE ASSESSEE BEING AN ENTITY WHICH OPERATES ON A COST PLUS BUSINESS MODEL, THE INCURRENCE OF LOSS IS NOT POSSI BLE. THEREFORE, SUCH A CONCERN COULD NOT BE BENCHMARKED WITH A CONCERN WHI CH HAS INCURRED A LOSS FROM ITS OPERATIONS. 29. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN OUR CONSIDERED OPINION, THE POINT SOUGHT TO BE MADE OUT BY THE TPO IS QUITE MIS-PLACED HAVING REGARD TO THE PURPOSE AND IMPORT OF THE COMP ARABILITY ANALYSIS OF THE INTERNATIONAL TRANSACTION BEING UNDERTAKEN FOR DETE RMINING ITS ARM'S LENGTH PRICE. OSTENSIBLY, THE WHOLE OBJECTIVE OF THE TRAN SFER PRICING PROCEEDING IS THAT THE CONTOURS OF AN UN-CONTROLLED TRANSACTION SHALL REFLECT A MEASURE OF ARM'S LENGTH PRICE OF THE TESTED INTERNATIONAL TRANSACTIO N. THE UN-CONTROLLED TRANSACTION, IF IT REFLECTS A LOSS, WOULD NOT NORMA LLY BE EXCLUDIBLE UNLESS ANY PECULIARITY IN SUCH UN-CONTROLLED TRANSACTION IS BR OUGHT OUT. FOR INSTANCE, THE UN-CONTROLLED TRANSACTION IS OF AN ENTITY WHICH IS CONSISTENTLY LOSS MAKING OR THAT THE LOSS HAS ARISEN IN THE UN-CONTROLLED TRANS ACTION ON ACCOUNT OF AN ITA NO.2536/PN/2012 ABNORMAL FACT-SITUATION, ETC. IN SUCH SITUATIONS, OSTENSIBLY, THE UN-CONTROLLED TRANSACTION WOULD NOT REFLECT A NORMAL BUSINESS SIT UATION. IN THE PRESENT CASE, THE COMPARABLE IN QUESTION HAS INCURRED A LOSS; NOT ABLY, INCURRENCE OF LOSS IN BUSINESS OPERATIONS IS A NORMAL INCIDENT OF BUSINES S AND THERE IS NOTHING TO SUGGEST IN THE PRESENT CASE THAT IT HAS BEEN INCURR ED IN ANY ABNORMAL SITUATION. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE SAID CONCERN IS A CONSISTENTLY LOSS MAKING CONCERN. THEREFORE, THE S AID CONCERN CANNOT BE EXCLUDED MERELY BECAUSE OF INCURRENCE OF LOSS IN TH IS YEAR, ESPECIALLY WHEN THE SAID LOSS HAS NOT BEEN ESTABLISHED TO BE AN ABN ORMAL BUSINESS CONDITION AND MORE SO IN THE CONTEXT THAT THE SAID CONCERN IS NOT DENIED TO BE FUNCTIONALLY COMPARABLE TO THE ASSESSEE. THEREFORE , ON THIS ASPECT, WE UPHOLD THE PLEA OF THE ASSESSEE FOR INCLUDING THE S AID CONCERN IN THE FINAL SET OF COMPARABLES IN ORDER TO DETERMINE THE ARM'S LENG TH PRICE OF THE INTERNATIONAL TRANSACTION. THUS, ON THIS ASPECT, ASSESSEE SUCCEE DS. 30. THE NEXT PLEA OF THE ASSESSEE IS FOR INCLUSION OF M/S. THINKSOFT GLOBAL SERVICES LIMITED IN THE FINAL SET OF COMPARABLES. THE TPO IN PARA 15.11 OF HIS ORDER HAS JUSTIFIED THE EXCLUSION OF THE SAID CONCE RN FROM THE FINAL SET OF COMPARABLES ON THE GROUND THAT IT WAS ENGAGED IN SO FTWARE TESTING, SOFTWARE VALIDATION AND VERIFICATION SERVICES TO THE BANKING AND FINANCIAL SERVICES INDUSTRY WORLDWIDE. THEREFORE, ACCORDING TO THE TP O, THE SAID CONCERN WAS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE. BEFOR E THE LOWER AUTHORITIES, PLEA OF THE ASSESSEE WAS THAT THE SERVICES BEING RE NDERED BY THE SAID CONCERN WERE PART AND PARCEL OF THE ACTIVITY OF SOFTWARE DE VELOPMENT SERVICES AND THEREFORE, IT COULD NOT BE REJECTED AS A COMPARABLE . THE TPO AS WELL AS THE DRP OBSERVED THAT THE ACTIVITIES OF SOFTWARE VERIFI CATION AND VALIDATION ARE ONLY STEPS TO EXAMINE THE EFFICIENCY OF SOFTWARE, BUT CA NNOT BE SAID TO BE A PART OF A SOFTWARE DEVELOPMENT ACTIVITY. THE AFORESAID ASS ERTIONS HAVE ALSO BEEN ITA NO.2536/PN/2012 REITERATED BEFORE US IN ORDER TO JUSTIFY THE EXCLUS ION OF THINKSOFT GLOBAL SERVICES LIMITED FROM THE FINAL SET OF COMPARABLES. 31. THE LEARNED REPRESENTATIVE FOR THE ASSESSEE REF ERRED TO THE WRITTEN SUBMISSIONS MADE TO THE LOWER AUTHORITIES IN PARTIC ULAR TO THE DRP, TO POINT OUT THAT THE ACTIVITIES OF VERIFICATION AND VALIDATION OF SOFTWARE BEING UNDERTAKEN BY THE SAID CONCERN ARE A PART OF SOFTWARE DEVELOPMENT SERVICES. IN THIS CONTEXT, IT HAS BEEN SUBMITTED THAT AS PER THE FUNCTIONS EXP LAINED IN THE TRANSFER PRICING STUDY, A COPY OF WHICH IS PLACED IN PAPER B OOK, ASSESSEE HAS ALSO PERFORMED SUCH ACTIVITIES. IT WAS POINTED OUT THAT ASSESSEE WAS PREDOMINANTLY PERFORMING SOFTWARE CODING AND TESTING ACTIVITIES I N THE COURSE OF ITS SOFTWARE DEVELOPMENT SERVICES AND THEREFORE, THE SAID CONCER N WAS INDEED A GOOD COMPARABLE TO ASSESSEE. IN THIS CONTEXT, THE LEARN ED REPRESENTATIVE REFERRED TO PAGES 946 TO 983 OF THE PAPER BOOK TO POINT OUT THAT A DETAILED FUNCTIONAL ANALYSIS DOCUMENT WAS PLACED BEFORE THE DRP, WHICH SUPPLEMENTED THE FUNCTIONAL ANALYSIS CARRIED OUT IN THE TRANSFER PRI CING STUDY IN ORDER TO DEMONSTRATE VARIOUS ACTIVITIES OF SOFTWARE DEVELOPM ENT PROCESS, LIKE CODING AND TESTING, ETC., WHICH ARE CARRIED OUT BY THE ASS ESSEE, AS AGAINST THE WHOLE SOFTWARE DEVELOPMENT PROCESS. IT WAS THEREFORE, CO NTENDED THAT THE LOWER AUTHORITIES HAVE WRONGLY REJECTED ASSESSEES PLEA T O INCLUDE THE SAID CONCERN IN THE FINAL SET OF COMPARABLES. 32. IN THIS CONTEXT, LEARNED CIT-DR ALSO REFERRED T O PARA 5.6 OF THE ORDER OF DRP, WHEREIN THE PLEA OF THE ASSESSEE HAS BEEN REJE CTED ON THE GROUND THAT ASSESSEE COULD NOT SUBSTANTIATE THAT SIMILAR SERVIC ES WERE RENDERED BY IT AS PART OF ITS SOFTWARE DEVELOPMENT SERVICES. ACCORDI NG TO THE LEARNED CIT-DR, THE DRP HAS OBSERVED THAT EVEN IF SUCH ACTIVITY WAS CARRIED ON BY THE ASSESSEE, THE SAME WAS ONLY IN A NEGLIGIBLE PROPORT ION, WHEREAS THE PRIMARY ITA NO.2536/PN/2012 ACTIVITY OF THE ASSESSEE WAS TO CARRY OUT THE PROCE SS OF SOFTWARE DEVELOPMENT FOR ITS ASSOCIATED ENTERPRISE. 33. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. WE HAVE ALSO PERUSED THE ORDERS OF TPO AS WELL AS THE DRP IN THI S CONTEXT. ALTHOUGH, THE ORDER OF THE TPO IS QUITE SKETCHY ON THIS POINT, BU T THE DRP HAS DISCUSSED THE MATTER IN A SLIGHT DETAIL. ONE OF THE OBSERVATIONS OF THE DRP IS THAT THE PRIMARY ACTIVITY OF THE APPELLANT IS TO CARRY OUT PART OF THE PROCESS OF SOFTWARE DEVELOPMENT FOR ITS PARENT COMPANY AND THEREFORE, T HE FINDING OF THE TPO THAT THINKSOFT GLOBAL SERVICE LIMITED, IS A FUNCTIONALLY DIFFERENT COMPANY, APPEARS TO BE CORRECT . IN OUR CONSIDERED OPINION, THE AFORESAID FINDING OF THE DRP GOES TO SHOW, IN THE CONTEXT OF THE FACT SITUATION OF ASSESSEES ACTIVITIES AND THAT OF THINKSFOT GLOBAL SERVICES LIMITED, THAT BOT H ARE ENGAGED IN CARRYING OUT ACTIVITIES WHICH ARE PARTS OF THE PROCESS OF SOFTWA RE DEVELOPMENT ACTIVITIES. IT IS QUITE JUSTIFIABLE TO COMPREHEND THAT THE ACTIVIT Y OF VERIFICATION OF SOFTWARE AND VALIDATION OF SOFTWARE ARE ACTIVITIES WHICH ARE PAR T AND PARCEL OF THE PROCESS OF SOFTWARE DEVELOPMENT. IN FACT, BEFORE THE DRP, ASS ESSEE REFERRED TO THE WIKIPEDIA MEANING OF THE EXPRESSION VERIFICATION AND VALIDATION IN THE CONTEXT OF SOFTWARE. THE EXPRESSION VERIFICATION WAS EXPLAINED TO BE REFERRING TO THE PROCESS OF EVALUATING THE SOFTWARE TO DETERMINE WHETHER THE PRODUCTS OF A GIVEN DEVELOPMENT PHASE SPECIFIED THE CONDITIONS IMPOSED AT THE START OF THAT PHASE. SIMILARLY, THE EXPRESSION VALIDATION WAS EXPLAINED TO BE THE PROCESS OF EVALUATING SOFTWARE DURING OR AT THE END OF THE DEVELOPMENT PROCESS TO DETERMINE WHETHER IT SATISFIES SPECIFIED REQUIREMENTS. IN OUR CONSIDERED OPINION, WHERE IT IS ADMITTED THAT THE A CTIVITY BEING PERFORMED BY THE ASSESSEE IS ALSO A PART OF PROCESS OF SOFTWARE DEVELOPMENT FOR ITS ASSOCIATED ENTERPRISE, THEN THE CAPTIONED ACTIVITIE S BEING UNDERTAKEN BY THINKSOFT GLOBAL SERVICES LIMITED, WHICH OSTENSIBLY ALSO ARE A PART OF THE WHOLE PROCESS OF SOFTWARE DEVELOPMENT, WOULD DEFINI TELY BE CONSIDERED AS ITA NO.2536/PN/2012 COMPARABLE. THE ARGUMENT BEING SET UP BY THE LOWER AUTHORITIES THAT THE VERIFICATION AND VALIDATION ARE STEPS TO TEST T HE EFFICIENCY OF THE SOFTWARE, BUT NOT A PART OF SOFTWARE DEVELOPMENT, IN OUR VIEW IS A HAIRSPLITTING ARGUMENT, WHICH IS NOT JUSTIFIED IN THE CONTEXT OF THE PRESEN T COMPARABILITY ANALYSIS. OSTENSIBLY, VERIFICATION AND VALIDATION ARE BRO ADLY SPEAKING, A PART AND PARCEL OF THE PROCESS OF SOFTWARE DEVELOPMENT. THE REFORE, ON THIS ASPECT, WE ARE UNABLE TO UPHOLD THE ACTION OF LOWER AUTHORITIE S IN EXCLUDING THE SAID CONCERN FROM THE FINAL SET OF COMPARABLES. WE DIRE CT, ACCORDINGLY. 34. THE NEXT PLEA OF THE ASSESSEE WAS THAT THE LOWE R AUTHORITIES HAVE UNJUSTLY EXCLUDED M/S. MAARS SOFTWARE INTERNATIONAL LIMITED FROM THE FINAL SET OF COMPARABLES. IN THIS CONTEXT, THE TPO HAS ASSIG NED REASONS FOR EXCLUDING THE SAID CONCERN IN PARA 15.3 OF HIS ORDER. FIRSTL Y, AS PER THE TPO, THE SAID CONCERN WAS ENGAGED IN ON-SITE WORK OF SOFTWARE DEV ELOPMENT AND THAT SUCH A BUSINESS COULD NOT BE CONSIDERED COMPARABLE WITH A BUSINESS WHICH WAS OF OFF-SHORE DEVELOPMENT WORK. SECONDLY, THE TPO NOTE D THAT THE SAID CONCERN INCURRED LOSSES FOR THE PRECEDING AS WELL AS THE CU RRENT ASSESSMENT YEAR. THIRDLY, THE TPO NOTED THAT THE MAJOR AREA OF REVEN UE GENERATION OF THE SAID CONCERN WAS FROM SAP CONSULTING AND IMPLEMENTATION, WHICH IS QUITE DIFFERENT FROM THE FUNCTIONS UNDERTAKEN BY THE ASSESSEE. 35. ON THIS ASPECT, ASSESSEE HAS ATTEMPTED TO ASSAI L THE REASONS BEING ADVANCED BY THE TPO. WITH REGARD TO THE DIFFERENCE IN FUNCTIONS, THE POINT MADE BY THE ASSESSEE WAS THAT THE FACTUM OF THE SAI D CONCERN EARNING MAJOR INCOME FROM SAP CONSULTING AND IMPLEMENTATION WAS N OT SUPPORTED WITH ANY FACTS AND FIGURES; THAT, IT WAS A MERE PASSING REFE RENCE IN THE ANNUAL REPORT OF THE SAID CONCERN AND THEREFORE, IT CANNOT BE CONSID ERED AS A VALID REASON FOR REJECTION OF THE SAID CONCERN ON THE BASIS OF IT BE ING FUNCTIONALLY INCOMPARABLE. ITA NO.2536/PN/2012 36. IN THIS CONTEXT, WE HAVE PERUSED PAGE 1194 OF T HE PAPER BOOK, WHEREIN IS PLACED THE RELEVANT CONTENTS OF THE DIRECTORS RE PORT OF SAID CONCERN FOR THE YEAR UNDER CONSIDERATION. THE DIRECTORS REPORT, WH ILE GIVING AN OVERVIEW OF THE ACTIVITIES OF THE CONCERN, STATES THAT THE MAJO R AREA OF REVENUE GENERATION CONTINUES TO BE SAP CONSULTING AND IMPLEMENTATION M AINLY IN USA AND MIDDLE EAST. IN FACT, IN THE PARAGRAPH CONTAINING OVERVIE W OF THE OPERATIONS, THE AFORESAID STATEMENT IS THE ONLY ASSERTION WHICH ELU CIDATES THE ACTIVITIES BEING UNDERTAKEN BY THE SAID CONCERN. NO DOUBT, IN THE F INANCIAL STATEMENT NAMELY PROFIT & LOSS ACCOUNT, THE INCOME / REVENUE HAS BEE N CLASSIFIED AS INCOME FROM SOFTWARE DEVELOPMENT, TRAINING AND PRODUCT SO HOWEVER, EVIDENTLY NO DETAILED BIFURCATION THEREOF IS AVAILABLE. THE ENT IRE SET OF FINANCIAL STATEMENTS WHICH ARE IN PUBLIC DOMAIN, AND PLACED IN THE PAPER BOOK AT PAGES 1188 TO 1229, CONTAIN ONLY A SINGULAR OBSERVATION ABOUT THE NATURE OF ACTIVITIES, WHICH IS IN THE DIRECTORS REPORT, WHICH THROWS LIGHT ON T HE MAJOR AREA OF REVENUE GENERATION. EVEN IF ONE GOES BY THE NOMENCLATURE S TATED IN THE PROFIT & LOSS ACCOUNT I.E. SOFTWARE DEVELOPMENT, TRAINING AND PRO DUCT AND PRODUCT, AND INFER THAT THE CONCERN IS IN THE SOFTWARE DEVELOPMENT ALS O, YET THERE IS NO SEGMENTAL DETAIL RELATING TO SOFTWARE DEVELOPMENT SERVICES, L EAVE ALONE THE DETAILS SHOWING THE ACTUAL ACTIVITIES OF SOFTWARE DEVELOPME NT. THEREFORE, IN OUR VIEW, THE TPO JUSTIFIABLY EXCLUDED THE SAID CONCERN BECAU SE IT IS ONLY THE INFORMATION AVAILABLE IN PUBLIC DOMAIN, WHICH CAN B E THE BASIS TO EFFECTUATE COMPARABLE ANALYSIS. THE ASSERTIONS IN THE DIRECTO RS REPORT, WHICH DO NOT FIND ANY CONTRADICTION IN THE OTHER FINANCIAL STATEMENTS ACCOMPANYING SUCH DIRECTORS REPORT, HAVE TO BE RELIED UPON. THUS, ON THIS POINT ITSELF, WE FIND NO MERIT IN THE PLEA OF THE ASSESSEE FOR INCLUDING THE SAID CONCERN IN THE FINAL SET OF COMPARABLES. WITHOUT GOING INTO THE OTHER GROUN DS TAKEN BY THE TPO TO REJECT THE SAID CONCERN, ON THE AFORESAID ASPECT IT SELF, WE AFFIRM THE STAND OF THE TPO TO EXCLUDE M/S. MAARS SOFTWARE INTERNATIONA L LIMITED FROM THE FINAL SET OF COMPARABLES. THUS, ON THIS ASPECT, ASSESSEE HAS TO FAIL. ITA NO.2536/PN/2012 37. THE NEXT PLEA OF THE ASSESSEE IS AGAINST THE AC TION OF TPO IN EXCLUDING AKSHY SOFTWARE TECHNOLOGIES LIMITED FROM THE FINAL SET OF COMPARABLES. THE TPO HAS DISCUSSED THE ASPECT OF EXCLUSION OF AKSHY SOFTWARE TECHNOLOGIES LIMITED FROM THE FINAL SET OF COMPARABLES IN PARA 1 5.1 OF HIS ORDER. AS PER THE TPO, AKSHY SOFTWARE TECHNOLOGIES LIMITED IS PREDOMI NANTLY AN ON-SITE SERVICE PROVIDER WHEREBY THE SAID CONCERN RENDERS S ERVICES AT THE CLIENTS SITE WHICH IS OUTSIDE INDIA, WHEREAS, THE ASSESSEE IS RE NDERING SERVICES TO THE CLIENTS AS AN OFF-SHORE SERVICE PROVIDER. ACCORDIN G TO THE TPO, THE MARGINS IN THE ON-SITE SERVICE MODEL AND THE OFF-SHORE BUSINES S MODEL ARE NOT COMPARABLE. 38. THE STAND OF THE ASSESSEE BEFORE THE LOWER AUTH ORITIES AS WELL AS BEFORE US IS THAT IT IS A CONTRACT SERVICE PROVIDER ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES AND REGARDLESS OF THE LOCATION , IT IS BEING COMPENSATED ON THE BASIS OF COST PLUS MARK-UP AND THEREFORE, IT COULD NOT BE A GROUND FOR REJECTION OF THE SAID CONCERN FROM THE LIST OF COMP ARABLES. BEFORE US, IT IS SUBMITTED THAT THE MIX OF ON-SITE AND OFF-SITE ACTI VITIES ARE BUSINESS EXIGENCIES AND THAT SUCH A FACTOR CANNOT BE CONSIDERED AS A FI LTER FOR EVALUATING EXCLUSION OR INCLUSION OF A COMPARABLE CONCERN. THE LEARNED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE WRITTEN SUBMISSIONS MADE B EFORE THE DRP, WHEREIN IT WAS CONTENDED THAT ASSESSEES AGREEMENT WITH ASSOCI ATED ENTERPRISE, DOES NOT RESTRICT PROVISION OF ON-SITE SERVICES AND THAT EVEN IF ASSESSEE WOULD HAVE PROVIDED ON-SITE SERVICES TO ITS ASSOCIATED ENTERPR ISE, THEN ALSO IT WOULD HAVE BEEN REMUNERATED ON SAME BASIS, I.E. COST PLUS FIXE D MARK-UP BY THE ASSOCIATED ENTERPRISE. IN SUM AND SUBSTANCE, THE S TAND OF THE ASSESSEE IS THAT SUCH A FILTER CANNOT BE APPLIED TO HOLD AKSHY SOFTWARE TECHNOLOGIES LIMITED AS FUNCTIONALLY INCOMPARABLE. ITA NO.2536/PN/2012 39. THE LEARNED CIT-DR HAS REITERATED THE STAND OF THE TPO AS WELL THE DRP AND POINTED OUT THAT THE BUSINESS MODEL OF PROV IDING ON-SITE SERVICES AT THE PLACE OF THE CLIENTS, IS NOT COMPARABLE WITH OF F-SHORE RENDERING OF SERVICES. 40. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. FACTUALLY SPEAKING, AKSHY SOFTWARE TECHNOLOGIES LIMITED WAS F OUND BY THE TPO TO BE PREDOMINANTLY ENGAGED IN RENDERING SERVICES TO ITS CLIENTS ON ON-SITE BASIS. AS PER THE TPO, AKSHY SOFTWARE TECHNOLOGIES LIMITED RENDERED SERVICES AT CLIENTS SITE UNLIKE THE SERVICES BEING PROVIDED BY THE ASSESSEE THROUGH OFF- SHORE SITES. THE DIFFERENCE IN OPERATING MECHANISM OF TWO BUSINESS MODELS IS STARKLY EVIDENT. WHILE UNDER THE ON-SITE BUSINESS MODEL, THE SERVICE PROVIDER POSITIONS ITS PERSONNEL ON THE CLIENTS SITE AND ON THE OTHER HAND, IN THE OFF- SHORE BUSINESS MODEL, THE SERVICE PROVIDER POSITION S ITS PERSONNEL ON ITS OWN SITE I.E. AWAY FROM THE SITE OF THE CLIENTS. THE T PO IN TERMS OF HIS DISCUSSION IN THE ORDER HAS ATTEMPTED TO DEDUCE THAT THE MARGI NS FROM ON-SITE CONSULTANCY ARE LOWER WHEN COMPARED WITH MARGINS FR OM OFF-SHORE DEVELOPMENT WORK. HE HAS ALSO REFERRED TO AN EXTRA CT FROM MCKINSEYS RESEARCH ON INDIAN SOFTWARE INDUSTRY COMPETITIVENES S TO SAY THAT BECAUSE OF THE DIFFERENCES IN COSTS BETWEEN A DEVELOPED COUNTR Y AND INDIA, IT ACTS AS MOTIVATOR FOR THE COMPANIES LOCATED IN DEVELOPED CO UNTRIES TO INCREASE ITS OFF- SHORE SOURCING OF SERVICES. IN OUR CONSIDERED OPIN ION, WHETHER ON-SITE BUSINESS MODEL PROVIDES HIGHER OR LOWER MARGINS IN COMPARISON WITH OFF-SHORE DEVELOPMENT WORK, IS NOT THE ISSUE OF CONSIDERATION . THE IMPORTANT POINT IS THAT THE BUSINESS MODELS ARE QUITE DIFFERENT. OSTE NSIBLY, THE LOGISTICS AND OTHER ASPECTS OF THE TWO BUSINESS MODELS CANNOT BE TREATED ON PAR AND CERTAINLY IT WOULD IMPACT THE RELATIVE MARGINS OF T HE TWO BUSINESS MODELS. THEREFORE, IN OUR CONSIDERED OPINION, THE BUSINESS MODEL OF THE ASSESSEE I.E. PROVISION OF OFF-SHORE SERVICES TO ITS ASSOCIATED E NTERPRISE STANDS ON A DIFFERENT FOOTING THAN THE ON-SITE SERVICES BEING RENDERED BY AKSHY SOFTWARE ITA NO.2536/PN/2012 TECHNOLOGIES LIMITED. THE ASSERTIONS OF THE ASSESS EE THAT ITS ARRANGEMENT WITH ASSOCIATED ENTERPRISE DOES NOT RULE OUT PROVIS ION OF ON-SITE SERVICES DOES NOT DISTRACT FROM THE FACT THAT THE TESTED TRANSACT IONS UNDERTAKEN BY THE ASSESSEE INVOLVE OFF-SHORE RENDERING OF SERVICES, W HICH IS INCOMPARABLE TO THE ON-SITE SERVICES BEING RENDERED BY AKSHY SOFTWARE T ECHNOLOGIES LIMITED TO ITS CLIENTS ABROAD. 41. BEFORE PARTING ON THIS ISSUE, WE MAY ALSO MAKE A REFERENCE TO THE DECISION OF HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. M/S. HELLOSOFT INDIA PVT. LTD. (ITA NO.645/HYD/2009, FOR ASSESSMENT YEAR 2005-06, DATED 15.01.2013) RELIED UPON BY THE ASSESSEE BEFOR E US, AND THE FOLLOWING DISCUSSION HAS BEEN REFERRED TO:- 12. IN VIEW OF THE AFORESAID, WE UPHOLD THE DECISI ON OF THE CIT(A) IN EXCLUDING COMPANIES WHOSE TURNOVER IS MORE THAN RS. 100 CRORES. SIMILARLY THE CIT(A) IS EQUALLY CORRECT IN NOT SUSTAINING THE REJECTION OF COMPARABLES SELECTED BY THE ASSESSEE BY APPLYING EMPLOYEE COST TO SALE FILTER AS RELEVANT DATA / INFORMATION FOR THIS FILTER ARE NOT AVAILABL E. MOREOVER, IT IS ALSO A FACT THAT PART OF THE EMPLOYEE COST IS INCLUDED BY MANY COMPA NIES UNDER DIFFERENT OTHER HEADS. SELECTION OF COMPARABLES APPLYING THE ONSI TE INCOME FILTER ALSO STANDS ON THE SAME FOOTING AS RELEVANT DATA / INFOR MATION ARE NOT AVAILABLE IN RESPECT OF ALL THE COMPANIES IN THE DATABASE. IT IS ALSO A FACT THAT THOUGH THE TPO HAS HIMSELF NOT APPLIED THIS FILTER BY OBSERVIN G THAT THE COMPANIES HAVING ONSITE INCOME OR MORE THAN 75% CANNOT BE TREATED AS COMPARABLES BUT TWO OF THE COMPANIES I.E. M/S. FOURSOFT LIMITED AND SANKYA INFOTECH LIMITED SELECTED AS COMPARABLES BY THE TPO WERE HAVING ONSITE INCOME / EXPENSES OF MORE THAN 75%. IN THIS VIEW OF THE MATTER, THE CIT(A) W AS CORRECT IN HOLDING THAT REJECTION OF COMPARABLES SELECTED BY THE ASSESSEE B Y APPLYING THIS FILTER IS NOT CORRECT. WE ALSO FULLY SUBSCRIBE TO THE VIEW OF TH E CIT(A) THAT LOSS MAKING COMPANIES AND COMPANIES HAVING SUPER NORMAL PROFITS CANNOT BE CONSIDERED AS COMPARABLES IN VIEW OF THE RATIO LAID DOWN IN CA SE OF MENTOR GRAPHICS (INDIA) PVT. LTD. VS. DCIT (109 ITD 101) AND PHILIP S SOFTWARE (119 TTJ 721). IN AFORESAID VIEW OF THE MATTER, THE COMPANIES SELE CTED BY THE CIT(A) AS COMPARABLES IS RATIONAL AND APPROPRIATE IN THE FACT S OF THE PRESENT CASE. WE THEREFORE UPHOLD THE ORDER OF THE CIT(A) IN DIRECTI NG THE ASSESSING OFFICER TO COMPUTE THE ARITHMETIC MEAN OF 11 COMPARABLES SELEC TED BY HIM AND DETERMINE THE ALP AFTER COMPUTING THE ADJUSTED AVER AGE PLI. AS RESULT, GROUNDS NOS.1,2 AND 3 ARE DISMISSED. [UNDERLINED FOR EMPHASIS BY US] 42. THE AFORESAID DECISION WAS RELIED FOR THE PROPO SITION THAT ON-SITE INCOME FILTER COULD NOT BE APPLIED TO REJECT CERTAI N COMPANIES FROM BEING CONSIDERED AS COMPARABLES. IN THIS CONTEXT, A PERU SAL OF DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL DATED 15.01.2013 (S UPRA) REVEALS THAT THE ITA NO.2536/PN/2012 APPLICATION OF SUCH FILTER WAS SET-ASIDE BY THE CIT (A) ON THE GROUND THAT THE RELATIVE DATA / INFORMATION WAS NOT AVAILABLE IN RE SPECT OF THE COMPARABLES IN QUESTION. THE AFORESAID DECISION OF THE CIT(A) WAS AFFIRMED BY THE TRIBUNAL AND IT IS QUITE CLEAR THAT THERE IS NO DISCUSSION A S TO WHETHER OR NOT SUCH A FILTER IS A RELEVANT CRITERIA TO UNDERTAKE COMPARABILITY A NALYSIS. IN THE PRESENT CASE BEFORE US, IT IS NOT THE CASE OF THE ASSESSEE THAT THE APPLICATION OF ON-SITE INCOME CRITERIA APPLIED BY THE TPO CAN BE DEFEATED ON THE GROUND THAT THE RELEVANT INFORMATION IS NOT AVAILABLE. THEREFORE, IN THE PRESENT CASE, WE HAVE DECIDED THE ISSUE ON ITS OWN MERITS AND THE DECISIO N OF THE HYDERABAD BENCH OF THE TRIBUNAL STANDS ON A DIFFERENT FOOTING. WE ARE ONLY TRYING TO POINT OUT THE AFORESAID TO SAY THAT THE DECISION IN THE CASE OF A KSHY SOFTWARE TECHNOLOGIES LIMITED (SUPRA), NO WAY CONTRADICTS OUR CONCLUSION ON THIS ASPECT IN THE EARLIER PARAS. THEREFORE, IN OUR VIEW, THE TPO WAS JUSTIFI ED IN EXCLUDING AKSHY SOFTWARE TECHNOLOGIES LIMITED FROM THE FINAL SET OF COMPARABLES. THUS, ON THIS ASPECT, THE ASSESSEE HAS TO FAIL. 43. THE NEXT POINT RAISED BY THE ASSESSEE IS AGAINS T THE ACTION OF THE TPO IN REJECTING M/S. R.S. SOFTWARE (INDIA) LIMITED FRO M THE FINAL SET OF COMPARABLES. IN PARA 15.4, THE TPO HAS DISCUSSED T HE ASPECT REGARDING THE EXCLUSION OF M/S. R.S. SOFTWARE (INDIA) LIMITED FRO M THE FINAL SET OF COMPARABLES. ACCORDING TO THE TPO, THE SAID CONCER N WAS PREDOMINANTLY AN ON-SITE SERVICE PROVIDER AND THEREFORE, IT WAS EXCL UDIBLE. SECONDLY, THE TPO ALSO OBSERVED THAT THE SAID CONCERN WAS ENGAGED IN RESEARCH AND DEVELOPMENT WORK AS MENTIONED IN ITS ANNUAL ACCOUNT S. IN THIS CONTEXT, WE FIND THAT THE RIVAL STANDS ARE SIMILAR TO THE CASE OF AKSHY SOFTWARE TECHNOLOGIES LIMITED, WHICH ALSO WAS REJECTED BY TH E TPO ON THE GROUND THAT IT WAS RENDERING SERVICES TO ITS CLIENTS ON AN ON-S ITE BASIS, WHICH WAS DIFFERENT FROM THE ASSESSEE. IN THE EARLIER PARAS, WE HAVE U PHELD THE ACTION OF THE TPO ITA NO.2536/PN/2012 ON THIS COUNT. FOR SIMILAR REASONS, WE HEREBY AFFI RM THE STAND OF THE TPO IN REJECTING M/S. R.S. SOFTWARE (INDIA) LIMITED FROM T HE FINAL SET OF COMPARABLES. 44. NOW, WE MAY TAKE-UP THE PLEA OF THE ASSESSEE IN RELATION TO THE EXCLUSION OF THE FOLLOWING FOUR CONCERNS IN THE FIN AL SET OF COMPARABLES : (I) PERSISTENT SYSTEMS LTD.; (II) MINDTREE LTD. (IT SER VICES); (III) LARSEN & TURBO INFOTECH LTD.; AND, (IV) SASKEN COMMUNICATION TECHN OLOGIES LTD. (TELECOM SERVICES SEGMENT). ON THIS ASPECT, A PRELIMINARILY POINT RAISED BY THE ASSESSEE IS THAT WHILE IN THE SHOW-CAUSE NOTICE DAT ED 05.10.2011, THE TPO HAD PROPOSED TO CONSIDER THE AFORESAID CONCERNS AS COMPARABLES WHEREAS IN THE SUBSEQUENT ORDER PASSED U/S 92CA(3) OF THE ACT DATED 31.10.2011, THE TPO HAS EXCLUDED THE SAME BY APPLYING A TURNOVER FI LTER, WHEREBY THE CONCERNS WITH SALES/TURNOVER IN EXCESS OF RS.200 CR ORES HAVE BEEN EXCLUDED. IT IS FURTHER EXPLAINED BY THE LEARNED COUNSEL THAT IN THE TRANSFER PRICING STUDY THE TURNOVER FILTER APPLIED BY THE ASSESSEE WAS TO EXCLUDE CONCERNS WITH A TURNOVER OF LESS THAN 1 CRORE, WHILE NO UPPER TURNO VER FILTER WAS APPLIED BY THE ASSESSEE. IT HAS BEEN SUBMITTED THAT APPLICATI ON OF AN UPPER TURNOVER FILTER WAS NEITHER CONFRONTED AND NOR SHOW-CAUSED T O THE ASSESSEE IN THE COURSE OF TRANSFER PRICING PROCEEDINGS BEFORE THE T PO; AND, THAT SUCH ACTION OF THE TPO IS INCONSISTENT WITH HIS OWN ACTION FOR ASS ESSMENT YEAR 2010-11 WHEREIN SUCH UPPER TURNOVER FILTER HAS NOT BEEN APP LIED. IT WAS POINTED OUT BY THE LD. REPRESENTATIVE THAT ASSESSEE HAS BEEN CONSI STENTLY APPLYING ONLY THE LOWER FILTER TO EXCLUDE CONCERNS WITH TURNOVER OF L ESS THAN ONE CRORE, AND NO UPPER FILTER HAS BEING APPLIED EITHER IN THIS YEAR OR SUBSEQUENTLY. BY REFERRING TO THE ORDER OF THE TPO U/S 92CA(3) OF THE ACT DATE D 20.01.2014 FOR ASSESSMENT YEAR 2010-11 IT IS SOUGHT TO BE POINTED OUT THAT THE TPO HAS ACCEPTED THE AFORESAID FOUR CONCERNS AS COMPARABLES , EVEN WHERE THEIR TURNOVER EXCEEDED RS.200 CRORES. IT HAS BEEN SUBMI TTED THAT NO OPPORTUNITY ITA NO.2536/PN/2012 WAS ALLOWED TO THE ASSESSEE BEFORE THE TPO EXCLUDED THE SAID CONCERNS FROM THE LIST OF COMPARABLES. 45. IN SO FAR AS THE AFORESAID FACTUAL MATRIX BROUG HT OUT BY THE APPELLANT IS CONCERNED, THE LEARNED CIT-DR HAS NOT CONTROVERTED THE SAME. HOWEVER, HE HAS REFERRED TO THE PROCEEDING BEFORE THE DRP, WHER E ASSESSEE WAS PROVIDED AN OPPORTUNITY TO FURNISH ARGUMENTS AGAINST THE ORD ER OF THE TPO AND THEREFORE IT AMOUNTED TO ALLOWING AN OPPORTUNITY OF BEING HEARD AND THERE WAS VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE. 46. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS ON THE ABOVE ASPECT. IT IS QUITE EVIDENT THAT AT THE LEVEL OF T PO, NO OPPORTUNITY WAS ALLOWED TO THE ASSESSEE BEFORE EXCLUDING THE AFORESAID FOUR CONCERNS FROM THE LIST OF COMPARABLES BY APPLYING A TURNOVER LIMIT OF RS.200 CRORES. IN-FACT, THE SHOW- CAUSE NOTICE ISSUED BY THE TPO DATED 05.10.2011 DID NOT CONTAIN ANY ISSUE REGARDING EXCLUSION OF THE AFORESAID FOUR COMPARABL ES AND/OR APPLICATION OF TURNOVER FILTER OF RS.200 CRORES. IN-FACT, IT IS A LSO EVIDENT FROM THE ORDER OF THE TPO THAT NO REASON HAS BEEN ASSIGNED TO ADOPT THE T URNOVER FILTER OF RS.200 CRORES, ESPECIALLY WHEN NO SUCH FILTER HAS BEEN APP LIED BY THE TPO HIMSELF IN ASSESSMENT YEAR 2010-11, AS ASSERTED BY THE ASSESSE E BEFORE US. IN OUR CONSIDERED OPINION, SUCH AN APPROACH IMPINGES ON TH E PRINCIPLES OF NATURAL JUSTICE AND THE ASSESSEE IS RIGHTFULLY AGGRIEVED. IN SO FAR AS THE OPPORTUNITY OF RAISING OBJECTIONS BEFORE THE DRP IS CONCERNED, IN OUR VIEW, THE SAME CANNOT TAKE THE PLACE OF AN OPPORTUNITY THAT WAS REQUIRED TO BE ALLOWED BEFORE THE TPO; THAT THE ASSESSEE HAD AN OPPORTUNITY BEFORE TH E DRP IS OF NO CONSEQUENCE FOR IT IS THE FAIRNESS AND REASONABLENE SS OF FURNISHING OF AN EXPLANATION BEFORE THE TPO WHICH IS THE ISSUE. IN-F ACT, IN A SOMEWHAT SIMILAR SITUATION THE HONBLE SUPREME COURT IN THE CASE OF TIN BOX COMPANY VS. CIT (2001) 249 ITR 216 (SC) HELD THAT ONCE IT IS ESTABL ISHED THAT THE ASSESSING ITA NO.2536/PN/2012 OFFICER HAD NOT GIVEN TO THE ASSESSEE AN APPROPRIAT E OPPORTUNITY OF BEING HEARD, THAT THE ASSESSEE HAD AN OPPORTUNITY BEFORE THE HIGHER APPELLATE AUTHORITIES WAS REALLY OF NO CONSEQUENCE, FOR IT WA S THE ASSESSMENT ORDER THAT COUNTED INASMUCH AS THE ASSESSMENT ORDER WAS REQUIR ED TO BE MADE ONLY AFTER THE ASSESSEE HAD BEEN ALLOWED A REASONABLE OP PORTUNITY OF BEING HEARD. CONSIDERED IN THE AFORESAID LIGHT, IN THE PRESENT C ASE IT IS AXIOMATIC THAT SO FAR AS THE ISSUE OF THE ADOPTION OF TURNOVER FILTER OF RS.200 CRORES TO EXCLUDE THE AFORESAID FOUR CONCERNS IN CONCERNED, THE SAME HAS BEEN ADOPTED BY THE TPO WITHOUT GIVING THE ASSESSEE ANY OPPORTUNITY OF BEIN G HEARD AND THEREFORE IN OUR VIEW THE MATTER OUGHT TO BE REMANDED BACK TO TH E AO/TPO FOR CONSIDERATION AFRESH. WE HOLD SO. THUS, ON THIS A SPECT ALSO ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. 47. APART FROM THE AFORESAID, NO OTHER SPECIFIC GRO UNDS HAVE BEEN RAISED BEFORE US AND ACCORDINGLY, WE CONCLUDE BY DIRECTING THE AO / TPO TO RE- COMPUTE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS AFTER CONSIDERING OUR AFORESAID DECISION ON VARIOUS ASPEC TS OF THE MATTER. NEEDLESS TO SAY, THE AO / TPO SHALL ALLOW THE ASSESSEE A REA SONABLE OPPORTUNITY OF BEING HEARD BEFORE DETERMINING THE ARM'S LENGTH PRI CE IN RELATION TO THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES AS PER LAW AND KEEPING IN VIEW OUR AFORESAID DIRECTIONS. THUS, ASSESSEE PARTLY SUCCEEDS IN THIS APPEAL. 48. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, AS ABOVE. ORDER PRONOUNCED ON 11 TH FEBRUARY, 2015. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 11 TH FEBRUARY, 2015. SUJEET ITA NO.2536/PN/2012 COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE; 4) THE DIT (INTERNATIONAL TAXATION), PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE