PTC Software (India) Pvt.Ltd, Pune V. ACIT, Cir 4, Pune

ITA 2546/PUN/2012

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7469 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-07-2017
• Assessment Year: misc
• Appeal Filed On: 26-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ROSHAN LUNAWAT
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUNE . , , , BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO . 2546 /P U N/201 2 / ASSESSMENT YEAR : 20 0 8 - 09 PTC SOFTWARE (INDIA) PRIVATE LIMITED, SURVEY NO. 15, MARISOFT - II, VADGAONSHERI, KALYANINAGAR, PUNE 4110 14 PAN : AABCC1268J ....... / APPELLANT / V/S. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4 , PUNE / RESPONDENT ASSESSEE BY : S /S HRI ASHW ANI TANEJA , SO MI L AGARWAL & ROSHAN LUNAWAT REVENUE BY : SHRI RAJEEV KUMAR / DATE OF HEARING : 1 2 - 07 - 2017 / DATE OF PRONOUNCEMENT : 11 - 0 9 - 2017 / ORDER PER VIKAS AWASTHY, JM : TH IS APPEAL HAS BEEN FILED BY THE ASSESSEE ASSAILING THE ASSESSMENT ORDER DATED 27 - 11 - 2012 PASSED U/S. 143(3) R.W.S. 144C O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ). 2 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORD S ARE: THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DESIGNING AND DEVELOPING SOFTWARES. THE ASSESSEE IS ALSO PROVIDING SUPPORT SERVICES THROUGH CALL CENTRE. THE ASSESSEE IS PROVIDING INFORMATION TECHNOLOGY S ERVI CES (ITS) AND INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) TO ITS HOLDING COMPANY M/S. PARAMETRIC TECHNOLOGY CORPORATION (PTC USA). THUS, THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER. DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL, THE AS SESSEE HAD ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) : I . PROVISION OF IT SERVICES RS.1,15,17,54,575/ - . II . PROVISION OF IT ENABLED SERVICES RS.8,14,01,681/ - . 2.1 THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS ARMS LENGTH PRICE (ALP) WITH AE. IN RESPECT OF IT S THE ASSESSEE SELECTED 16 COMPANIES AS COMPARABLES AND COMPUTED AVERAGE ARITHMETIC MEAN (OP/TC) OF THE COMPARABLE COMPANIES AT 11. 66 % AS AGAI NST ASSESSEES PLI OF 16.42%. THE TRANSFER PRICING OFFICER (TPO) ACCEPTED TNMM APPLIED BY ASSESSEE AS THE MOST APPROPRIATE METHOD, HOWEVER, THE TPO DID NOT AGREE WITH THE SELECTION OF COMPARABLES. THE TPO EXCLUDED CERTAIN COMPANIES FROM THE LIST OF COMPA RABLES SELECTED BY ASSESSEE AND INCLUDED SOME MORE COMPANIES IN THE FINAL LIST. THE FINAL SET OF COMPARABLES AS SELECTED BY TPO ARE AS UNDER : 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 3 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 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 10 AKSHAY SOFTWARE TECHNOLOGIES LTD. 7.45 ARITHMETIC MEAN 27.81 THUS, THE TPO MADE ADJUSTMENT OF RS.14,78,25,360/ - IN RESPECT OF INTERNATIONAL TRANSACTION RELATING TO SOFTWARE DEVELOPMENT SERVICES UNDER ITS SEGMENT. 2.2 SIMILARLY, IN RESPECT OF ITES SEGMENT THE TPO ACCEPTED TNMM AS MOST APPROPRIATE METHOD FOR BENCHMARKING ALP BUT DID NOT CONCUR WITH THE COMPARABLES SELECTED BY ASSESSEE. THE TPO INCLUDED TWO COMPANIES I.E. ACCENTIA TECHNOLOGIES LTD. AND CORAL HUBS LTD. IN THE FINAL LIST OF COMPARABLES AND EXCLUDED ADITYA BIRLA MINACS WORLDWIDE LTD. FROM THE LIST OF COMPARABLES. THUS, THE FINAL SET OF COMPARABLES SELECTED BY TPO IS AS UNDER : SR. NO. COMPANY COMPANIES CONSIDERED BY THE TPO IN THE ORDER OP/TC FOR FY 2007 - 08 AS PER TPOS METHOD 1 ACCENTIA TECHNOLOGIES LTD. 42.70% 2 CORAL HUBS LTD. (FORMERLY KNOWN AS VISHAL INFORMATION TECHNOLOGIES LTD.) 51.79% 3 COSMIC GLOBAL LTD. 23.30% 4 CROSSDOMAIN SOLUTIONS LTD. 27.59% 5 E4E HEALTHCARE SOLUTIONS LTD. 19.38% 6 MAPLE ESOLUTIONS LTD. 20.67% 4 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 7 TRITON CORP LTD. 25.26% ARITHMETIC MEAN 30.10% 2.3 AS AGAINST ASSESSEES PLI OF ITES SEGMENT AT 18.21% , THE ARITHMETIC MEAN (OP/TC) OF COMPARABLES FINALLY SELECTED BY TPO IS 30.10%. THE ASSESSEE HAD COMPUTED PLI OF COMPARABLES AT 14.91%. CONSEQUENT TO COMPUTATION OF FRESH PLI OF COMPARABLES, THE TPO MADE ADJUSTMENT OF RS.1,05,65,617/ - IN RESPECT OF INTERNATIONAL TRANSACTIONS RELATING TO ITES SEGMENT. 2.4 THE ASSESSEE IN APPEAL H AS PRIMARILY ASSAILED EXCLUSION OF FOLLOWING COMPANIES AS COMPARABLES IN ITS SEGMENT : I . KALS INFORMATION SYSTEMS LTD ; II . FCS SOFTWARE SOLUTION LTD ; AND III . HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 2.5 IN RESPECT OF ITES SEGMENT , THE ASSESSEE HAS PRAYED FOR EXCLUSION OF: I . ACCENTIA TECHNOLOGIES LTD. ; AND II . CORAL HUBS LTD. FROM THE FINAL SET OF COMPARABLES . THE ASSESSEE HAS FURTHER PRAYED FOR INCLUSION OF ADITYA BIRLA MINACS WORLDWIDE LTD. IN THE FINAL SET OF COMPARABLES UNDER ITES S EGMENT. 3. SHRI ASHWANI TANEJA APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT HE IS NOT PRESSING GROUND NOS. 3, 4 , 5 AND 7 RAISED IN THE GROUNDS OF APPEAL. THUS, THE GROUNDS FOR EFFECTIVE ADJUDICATION BY THE TRIBUNAL ARE AS UNDER : 1. THE LD ASSESSING OFFICER ('AO') PURSUANT TO THE DIRECTIONS OF THE LD. DISPUTE RESOLUTION PANEL (DRP') ERRED IN REJECTING THE BENCHMARKING APPROACH ADOPTED/CONTEMPORANEOUS DOCUMENTATION MAINTAINED BY 5 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 THE APPELLANT AND THEREBY MAKING A TRANSFER PRICING ADJ USTMENT OF RS.14,83,01,854 TO TH E INCOME OF THE APPELLANT BY HOLDING THAT THE INTERNATIONAL TRANSACTION, PERTAINING TO PROVISION OF SOFTWARE SERVICES ('IT SERVICES') AND CUSTOMER SUPPORT BACK OFFICE SERVICES ('ITES SERVICES') TO THE ASSOCIATED ENTERPRISE ( 'AE'), ARE NOT AT ARMS LENGTH UNDER THE INCOME - TAX ACT, 1961 ('THE ACT'). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO/DRP ERRED IN MODIFYING THE BENCH MARKING ANALYSIS, AS CONDUCTED BY THE APPELLANT USING TRANSACTIONAL NET MARGIN ME THOD ('TNMM') FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF IT AND ITES SERVICES TO THE AE, AND THEREBY MODIFYING THE SET OF COMPARABLES. IN DOING SO, THE LD AO / DRP SPECIFICALLY ERRED IN : A ) CONDUCTING SELECTIVE FRESH ANALYSIS BY APPLYING CERTAIN ADDITIONAL QUANTITATIVE / QUALITATIVE FILTERS FOR IDENTIFYING THE COMPARABLES RESULTING IN CHERRY PICKING OF COMPARABLES WHICH CONTRADICTS WITH THE PRINCIPLES OF CONDUCTING SEARCH (FOR COMPARABLES) IN A SCIENTIFIC MANNER; B ) REJECTING COMPANIES FUNCTIONALLY SIMILAR TO THAT OF THE APPELLANT'S BUSINESS OPERATIONS OF PROVISION OF IT SERVICES FROM FINAL SET OF COMPARABLES (IDENTIFIED BASED ON THE FRESH SEARCH CONDUCTED BY THE APPELLANT ON A WITHOUT PREJUDICE BASIS); C ) INCLUDING THE COMPANIES WHICH ARE NOT FUNCTIONALLY COMPARABLE TO THE IT SERVICES RENDERED BY THE APPELLANT IN FINAL SET OF COMPARABLES (IDENTIFIED BASED ON THE FRESH SEARCH CONDUCTED BY THE APPELLANT ON A WITHOUT PREJUDICE BASIS). 6. THE LD. DRP/AO ERRED IN NOT GRANTING THE BENE FIT OF +/ - 5% RANGE AS ENVISAGED BY THE PROVISO TO SECTION 92C(2) OF THE ACT, AS REGARDS COMPUTING THE ARMS LENGTH PRICE OF THE APPELLANTS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF IT AND ITES SERVICES. 8. THE LD. AO, WHILE COMPUTING THE DEMA ND HAS ERRONEOUSLY COMPUTED THE INTEREST LIABILITY UNDER SECTION 234B OF THE ACT. 6 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 4. FOR THE SAKE OF CONVENIENCE AND CLARITY FIRST THE ISSUES RAISED BY THE ASSESSEE IN IT S SEGMENT ARE TAKEN UP FOR ADJUDICATION FOLLOWED BY THE ISSUES RAISED IN ITES SEGMENT. ITS SEGMENT 5. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO AS WELL AS DRP HAS ERRED IN INCLUDING KALS INFORMATION SYSTEMS LTD. IN THE FINAL SET OF COMPARAB LES. THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2007 - 08 AND IN THE IMMEDIATE SUCCEEDING ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2009 - 10 KALS INFORMATION SYSTEMS LTD. WAS EXCLUDED FROM THE LIST OF COMPARABLE S IN ASSESSEES OWN CASE. THERE HAS BEEN NO CHANGE IN FACTS AND CIRCUMSTANCES IN THE ASSESSMENT YEAR UNDER APPEAL. THEREFORE, THE SAME SHOULD BE EXCLUDED IN THE ASSESSMENT YEAR UNDER APPEAL AS WELL. THE LD. COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE CO MPANY IS ENGAGED IN SOFTWARE DEVELOPMENT AND IS NOT DEVELOPING AND SELLING SOFTWARE PRODUCT. KALS INFORMATION SYSTEMS LTD. IS DEVELOPING A SOFTWARE PRODUCT THEREFORE , IT IS FUNCTIONALLY DIFFERENT. THE LD. COUNSEL REFERRED TO THE DECISION S OF TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 1605/PN/2011 FOR ASSESSMENT YEAR 2007 - 08 DECIDED ON 30 - 04 - 2013 AND ITA NO. 336/PN/2014 FOR ASSESSMENT YEAR 2009 - 10 DECIDED ON 31 - 10 - 2014. THE LD. COUNSEL FURTHER SUBMITTED THAT THE REVENUE HAD ASSAILED THE ORDER OF TRIBUNAL IN ASSESSMENT YEAR 2007 - 08 BEFORE THE HONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO. 732 OF 2014 [395 ITR 176]. THE HONBLE HIGH COURT VIDE ORDER DATED 26 TH SEPTEMBER, 2016 DISMISSED THE APPEAL OF DEPARTMENT AND CONFIRMED THE FINDINGS OF TRIBUNAL. THUS, EXCLUSION OF KALS INFORMATION SYSTEMS LTD. FROM THE FINAL SET OF COMPARABLES HAS BEEN UPHELD BY THE HONBLE JURISDICTIONAL HIGH COURT. 7 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 6. ON THE OTHER HAND SHRI RAJEEV KUMAR REPRESENTING THE DEPARTMENT VEHEMENTLY DEFENDED THE ORDER OF TPO AND THE DIRECTIONS OF DRP . THE LD. DR SUBMITTED THAT THE TPO IN HIS ORDER HAS CONSIDERED ALL THE SUBMISSIONS OF THE ASSESSEE . AF TER EXAMINING THE FINANCIAL STATEMENTS OF KALS INFORMATION SYSTEMS LTD. T HE TPO HAS OBSERVED THAT THE EXPEND ITURE ON R AND D IS NIL AS PER ANNUAL REPORT OF THE SAID COMPANY. THE LD. DR CONTENDED THAT THE DOCUMENTS ON RECORD SHOW THAT KALS INFORMATION SYSTEMS LTD. HAS ACTUALLY NOT EARNED ANY REVENUE FROM SALE OF PRODUCTS. THEREFORE, KALS INFORMATION SYSTEMS LTD . IS A GOOD COMPARABLES AND THERE IS NOT FUNCTIONALLY DIFFERENCE BETWEEN THE ASSESSEE AND KALS INFORMATION SYSTEMS LTD. 7. BOTH SIDES HEARD. ORDERS OF THE AUTHORITIES BELOW PERUSED. THE ASSESSEE HAS ASSAILED INCLUSION OF KALS INFORMATION SYSTEMS LTD. ON THE GROUND OF FUNCTIONAL DISPARITY. IT HAS BEEN CONTENDED THAT APART FROM IT SERVICES KALS INFORMATION SYSTEMS LTD. IS ALSO ENGAGED IN PRODUCT DEVELOPMENT AND THERE HAS BEEN NO SEGMENTAL BIFURCATION OF REVENUE FROM THE TWO ACTIVITIES. WE FIND THAT KALS INFORMATION SYSTEMS LTD. WAS INCLUDED IN THE LIST OF COMPARABLES IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND SUCCEEDING ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2007 - 08 AND 2009 - 10. THE TRIBUNAL IN APPEAL BY ASSESSEE IN ITA NO. 1605/PN/2011 (SUPRA) EXCLU DED KALS INFORMATION SYSTEMS LTD. FORM THE LIST OF COMPARABLES BY OBSERVING AS UNDER : 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE SAID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN THE PRE SENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT 8 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHA T MANNER THE FUNCTIONAL PROFILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRECEDING YEAR. THEREFORE, HAVING REGARD TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERTED THAT THE APPLICATION SOFTWARE SEGM ENT OF THE SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEES SEGMENT OF IT SERVICES. 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISED SIMILAR ARGUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG). WE HAVE PERUSED THE RELEVANT PARA OF THE ORDER OF THE TPO I.E., 6.3.21, IN TERMS OF WHICH THE SAID CONCERN HAS BEEN INCLUDED AS A COMPARABLE CONCERN. THE ASSESSEE POINTED OUT THAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO FOR A.Y. 2006 - 07 THE SAID CONCERN WAS FOUND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WAS NOT DISTURBED BY THE TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY, PLACED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESAID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO WE FIND THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 8. THEREAFTER, IN ASSESSMENT YEAR 2009 - 10 KALS INFORMATION SYSTEMS LTD. WAS AGAIN INCLUDED IN THE LIST OF COMPARABLES BY TPO AND DRP. THE MATTER TRAVELLED UP TO THE TRIBUNAL. THE CO - ORDINATE BENCH IN ITA NO. 336/PN/2014 (SUPR A) BY FOLLOWING ITS EARLIER ORDER FOR ASSESSMENT YEAR 2007 - 08 EXCLUDED KALS INFORMATION SYSTEMS LTD. FROM FINAL SET OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DIFFERENCE. FURTHER, WE OBSERVE THAT THE HONBLE BOMBAY HIGH COURT IN APPEAL BY THE DEPARTMENT IN T HE CASE OF COMMISSIONER OF INCOME TAX VS. PTC SOFTWARE (I) PVT. LTD. (SUPRA) HAS UPHELD THE ORDER OF TRIBUNAL FOR ASSESSMENT YEAR 2007 - 08 . 9 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 THUS, IN VIEW OF FACTS OF THE CASE AND THE DECISIONS DISCUSSED ABOVE, WE DIRECT THE ASSESSING OFFICER TO EXCLUDE K ALS INFORMATION SYSTEMS LTD. FROM THE LIST OF COMPARABLES FOR THE REASONS STATED ABOVE. 9. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS ERRED IN INCLUDING FCS SOFTWARE SOLUTIONS LTD. IN THE FINAL SET OF COMPARABLES. THE LD. COUNSEL SUBMIT TED THAT FCS SOFTWARE SOLUTIONS LTD. IS ENGAGED IN RENDERING DIVERSIFIED SERVICES LIKE IT CONSULTING SERVICES, E - LEARNING AND DIGITAL CONSULTING, APPLICATION SUPPORT AND INFRASTRUCTURE MANAGEMENT SERVICES. THE E - LEARNING & DIGITAL CONSULTING IS A WEB BASE D/CD BASED TRAINING PROGRAM USED FOR TRAINING THE EMPLOYEES, CUSTOMERS AND TECHNICIANS OF THE COMPANY. AS FAR AS APPLICATION SUPPORT SERVICES ARE CONCERNED THEY ARE SIMILAR TO BACK OFFICE SUPPORT OPERATIONS AND CALL CENTRE ACTIVITIES. FCS SOFTWARE SOLUTI ONS LTD. ALSO PROVIDES SERVICES OF MANAGING HARDWARE NETWORK, DATA BACK - UP AND RECOVERY SERVICES WHICH MAINLY RELATE TO REMOTE MAINTENANCE SERVICES. THE LD. COUNSEL REFERRED TO FINANCIAL STATEMENT OF COMPANY AT PAGE 664 OF THE PAPER BOOK TO SHOW THAT THE SAID COMPANY HAS NOT PROVIDED SERVICES CATEGORY - WISE SEGMENTAL DATA. THE LD. COUNSEL FURTHER CONTENDED THAT THE TPO HAS APPLIED FILTER OF 75% FOR REJECTING THE COMPARABLES HAVING INCOME FROM SOFTWARE DEVELOPMENT SERVICES. EVEN IF E - LEARNING AND DIGITAL C ONSULTING ARE CONSIDERED AS SOFTWARE DEVELOPMENT ACTIVITIES OF FCS SOFTWARE SOLUTIONS LTD. , T HE REMAINING ACTIVITIES OF FCS SOFTWARE SOLUTIONS LTD. WHICH ARE IN THE NATURE OF ITES ACTIVITIES CONSTITUTES 26% TO TOTAL REVENUE. THUS, THE REVENUE OF FCS SOFTWARE SOLUTIONS LTD. FROM ITES IS 74% I.E. BELOW THE FILTER SET BY TPO. THE TPO HAS CHERRY PICKED THE COMPANIES FOR INCLUDING THE SAME IN FINAL LIST OF COMPARABLES BY VIOLATING ITS OWN SET OF FILTERS. 10 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 10. THE LD. COUNSEL SUBMITTED THAT THE TRIBUNA L IN THE CASE OF TIBCO SOFTWARE INDIA PVT. LTD. VS. DY. COMMISSIONER OF INCOME TAX IN ITA NO. 2536/PN/2012 FOR ASSESSMENT YEAR 2008 - 09 DECIDED ON 11 - 02 - 2015 HAS HELD THAT FCS SOFTWARE SOLUTIONS LTD. IS NOT A GOOD COMPARABLE. THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE AND TIBCO SOFTWARE INDIA PVT. LTD. ARE INVOLVED IN SIMILAR BUSINESS ACTIVITY AND HAVE SIMILAR BUSINESS MODEL. BOTH THE COMPANIES ARE NOT ENGAGED IN SALE OF ANY SOFTWARE PRODUCTS. BOTH THE COMPANIES ARE REMUNERATED ON COST PLUS BASIS FOR AL L THE SERVICES RENDERED TO THEIR RESPECTIVE AES. BOTH THESE COMPANIES ARE CAPTIVE SERVICE PROVIDER AND ARE ELIGIBLE FOR EXEMPTION U/S. 10A OF THE ACT. THE LD. COUNSEL FURTHER SUBMITTED THAT BOTH THE COMPANIES ARE OPERATING UNDER THEIR OVERSEAS HOLDING CO MPANIES AND THEY PROVIDED SERVICES AS PER DESIGN AND PRODUCT SPECIFICATION PROVIDED TO THEM BY THEIR HOLDING COMPANIES. THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BARCLAYS TECHNOLOGY CENTRE VS. ACIT IN ITA NO. 2279/PN/2012 FOR ASSESSMENT YEAR 20 08 - 09 DECIDED ON 28 - 01 - 2015 HAS AGAIN HELD THAT FCS SOFTWARE SOLUTIONS LTD. IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON ACCOUNT OF ABNORMALLY HIGH PROFITS AND HIGH FLUCTUATION IN PROFIT MARGINS. 11. ON THE OTHER HAND THE LD. DR SUBMITTED TH AT FCS SOFTWARE SOLUTIONS LTD. WAS ORIGINALLY SELECTED BY ASSESSEE AS COMPARABLE IN TP STUDY REPORT. THE TPO IN HIS DETAILED ORDER HAS HELD THAT SUBSTANTIAL PART OF THE COMPANYS REVENUE COMES FROM SOFTWARE DEVELOPMENT. THEREFORE, THE COMPAN Y SHOULD BE R ETAINED IN THE FINAL LIST OF COMPARABLES. 12. BOTH SIDES HEARD. THE ASSESSEE HAS ASSAILED INCLUSION OF FCS SOFTWARE SOLUTION LTD. IN FINAL SET OF COMPARABLES PRIMARILY ON GROUND THAT 11 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 THE COMPAN Y IS FUNCTIONALLY DIFFERENT, FAILS TO QUALIFY FILTER OF 75% INCOME FROM SOFTWARE DEVELOPMENT SERVICES AND HAS ABNORMALLY HIGH PROFITS. WE FIND THAT THE ISSUE REGARDING EXCLUSION/INCLUSION OF FCS SOFTWARE SOLUTIONS LTD. HAS BEEN CONSIDERED BY THE CO - ORDINATE BENCH OF TRIBUNAL IN THE CASE OF TIBCO SOFTWARE INDIA PV T. LTD. VS. DY. COMMISSIONER OF INCOME TAX (SUPRA). THE LD. COUNSEL HAS GIVEN A COMPARATIVE ANALYSIS AS TO HOW THE ACTIVITIES OF THE ASSESSEE AND TIBCO SOFTWARE INDIA PVT. LTD. ARE AT PAR WITH EACH OTHER. THE LD. DR HAS NOT DISPUTED THE SAME. IN THE CAS E OF TIBCO SOFTWARE INDIA PVT. LTD. VS. DY. COMMISSIONER OF INCOME TAX (SUPRA) THE TRIBUNAL HAS EXCLUDED FCS SOFTWARE SOLUTIONS LTD. BY OBSERVING AS UNDER : 23. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. 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 THAT INCOME EARNED BY THE SAID CONCERN FROM RENDERING OF APPLICATION SUPPORT SERVICES AND INFRASTRUCTURE MANAGEMENT SERVICES, WHICH CONSTITUTE 11% AND 15 % RESPECTIVELY OF THE TOTAL REVENUE, ARE IN THE NATURE OF IT ENABLED SERVICES AND NOT LINKED TO THE SOFTWARE DEVELOPMENT SERVICES. ON THIS BASIS, IT WAS SOUGHT TO BE POINTED OUT THAT IF THE AFORESAID INCOME STREAMS ARE EXCLUDED FROM THE SEGMENT OF SOFTWARE DEVELOPMENT SERVICES, THEN THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES SEGMENT FALLS BELOW 75% OF THE TOTAL INCOME. THE TPO HAD APPLIED A FILTER TO EXCLUDE SUCH CONCERNS FROM THE LIST OF COMPARABLES, 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 SAME. THOUGH THE TPO GOES ON TO RELY ON THE CBDTS CIRCULAR DATED 26.09.2000 (SUPRA), BUT THAT IS I N RELATION TO THE ACTIVITY OF E - LEARNING AND DIGITAL CONSULTING BEING CARRIED OUT BY THE ASSESSEE. THE SEGMENT OF E - LEARNING AND DIGITAL CONSULTING IS A DIFFERENT SEGMENT. IN ANY CASE, ASSESSEES PLEA BASED ON THE NATURE OF SERVICES ON ACCOUNT OF APPLICATI ON SUPPORT SERVICES SEGMENT AND INFRASTRUCTURE MANAGEMENT SERVICES SEGMENT HAVE NOT BEEN REBUTTED BY THE TPO. THEREFORE, WE ARE INCLINED TO HOLD THAT THE APPLICATION SUPPORT SERVICES AND INFRASTRUCTURE MANAGEMENT SERVICES, WHICH CONSTITUTE 11% AND 15% RESP ECTIVELY OF THE TOTAL INCOME, ARE IT ENABLED SERVICES AND NOT LINKED TO THE SOFTWARE DEVELOPMENT SERVICES. 12 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 24. MOREOVER, THE ASSESSEE HAD REFERRED TO THE FOLLOWING EXTRACT FROM THE ANNUAL REPORT OF THE SAID CONCERN IN RELATION TO THE E - LEARNING AND DIGIT AL 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 BASED TRAINING PROGRAMS AS ONE OF THE WAYS TO ACHIEVE ORGANIZATIONAL GROWTH AND IMPROVED BUSINESS PERFORMANCE. E - LEARNING HELPS EMPLOYEES, VENDORS, AND DEALERS OF A COMPANY TO BETTER THEIR PERFORMANCE AND DEAL WITH FAST - CHANGING ENVIRONMENTS. E - LEARNING MAKES TRAINING HIGHLY EFFICIENT, BY MAKING IT AVAILABLE ANYTIME, ANYWHERE AND REDUCES TOTAL COST OF TRAINING. E - LEARNING IS USED TO TRAIN EMPLOYEES, CUSTOMERS AND SERVICE TECHNICIANS ON PRODUCT KNOWLEDGE, CONCEPTS, STRATEGIES, RISK AND FINANCE, COMPLIANCE AND TECHNOLOGY. 25. OSTENSIBLY, THE AFORESAID SERVICES INVOLVE SETTING UP O F SUPPORT CENTRES AND REMOTE MAINTENANCE, WHICH HAVE BEEN DULY CATEGORIZED AS ITES BY THE CBDTS CIRCULAR DATED 26.09.2000 ITSELF, WHICH HAS BEEN REPRODUCED BY THE TPO IN THE IMPUGNED ORDER. THEREFORE, EVEN THE SAID SEGMENT IS NOT TO BE INCLUDED AS PART OF THE SOFTWARE DEVELOPMENT SERVICES, AS ASSERTED BY THE ASSESSEE. ONCE THE SEGMENT OF APPLICATION SUPPORT AND INFRASTRUCTURE MANAGEMENT SERVICES ARE REMOVED ALONG WITH THE EXCLUSION OF E - LEARNING AND DIGITAL CONSULTING SEGMENT, THEN THE INCOME OF THE SAID C ONCERN FROM SOFTWARE DEVELOPMENT SERVICES FALLS BELOW 75% OF ITS TOTAL INCOME AND THEREFORE, IT DESERVES TO BE EXCLUDED EVEN ON THE BASIS OF THE FILTER APPLIED BY THE TPO. THUS, ON THIS ASPECT, ASSESSEE SUCCEEDS. 13. R ELIANCE HAS ALSO BEEN PLACED BY THE ASSESSEE ON THE DECISION OF BARCLAYS TECHNOLOGY CENTRE VS. ACIT (SUPRA) TO CONTEND THAT FCS SOFTWARE SOLUTIONS LTD. HAS ABNORMALLY HIGH PROFIT MARGIN. THE CO - ORDINATE BENCH OF TRIBUNAL WHILE EXCLUDING FCS SOFTWARE SOLUTIONS LTD. IN THE SAID CASE HAS HELD AS UNDER : 28. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. THE ARGUMENT OF THE ASSESSEE IN ORDER TO EXCLUDE FCS SOFTWARE SOLUTIONS LTD. FROM THE FINAL SET OF COMPARABLES IS BASED ON TWIN GROUNDS. FIRSTLY, IT IS CONTENDED THAT THE SAID CONCERN HAS DECLARED AN ABNORMALLY HIGH PROFIT MARGIN OF 57.02% FOR THE FINANCIAL YEAR UNDER CONSIDERATION; AND, SECONDLY, THAT THE MARGINS OF 13 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 THE SAID CONCERN WIDELY FLUCTUATE IN OVER THE YEARS. IN THE CONTEXT OF THE EXCLUSION OF ABNORMAL PROFIT MAKING CONCERNS, THE FOLLOWING DISCUSSION MADE BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTREA (INDIA) PVT. LTD. (SUPRA) IS WO RTHY 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 ABNORMALLY HIGH PROFIT MARGIN SHOULD TRIGGER FURTHER INVESTIGATION IN ORD ER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS TO WHETHER EARNING OF HIGH PROFIT REFLECTS A NORMAL BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITIONS PREVAILING IN THE RELE VANT YEAR. THE PROFIT MARGIN EARNED BY SUCH ENTITY 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 REVIEWED TO EN SURE THAT THE POTENTIAL COMPARABLE EARNING HIGH PROFIT SATISFIES THE COMPARABILITY CONDITIONS. IF IT IS FOUND ON SUCH INVESTIGATION THAT THE HIGH MARGIN PROFIT MAKING COMPANY DOES NOT SATISFY THE COMPARABILITY ANALYSIS AND OR THE HIGH PROFIT MARGIN EARNED BY IT DOES NOT REFLECT THE NORMAL BUSINESS CONDITION, WE ARE OF THE VIEW THAT THE HIGH PROFIT MARGIN MAKING ENTITY SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. OTHER WISE, 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.' 29. THE AFORESAID DISCUSSION OF THE SPECIAL BENCH REV EALS THAT A CONCERN WHICH HAS EARNED ABNORMALLY HIGH PROFIT MARGIN CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES STRAIGHTAWAY WITHOUT MAKING APPROPRIATE INVESTIGATIONS. AS PER THE SPECIAL BENCH, IT WOULD BE APPROPRIATE TO ASCERTAIN AS TO WHETHER THE HIGH PROFIT MARGIN DECLARED BY THE CONCERN REFLECTS A NORMAL BUSINESS PHENOMENON OR IT HAS RESULTED BECAUSE OF CERTAIN ABNORMAL CONDITIONS PREVAILING IN A PARTICULAR YEAR. AS PER THE SPECIAL BENCH, IN ORDER TO CARRY OUT THE AFORESAID ANALYSIS, THE PROFIT MARGI NS EARNED BY SUCH CONCERN IN THE PROXIMATE PRECEDING AND SUCCEEDING YEARS SHOULD ALSO BE TAKEN INTO CONSIDERATION SO AS TO ESTABLISH WHETHER THE HIGH PROFIT MARGINS REFLECT A NORMAL BUSINESS TREND OR OTHERWISE. IN THIS BACKGROUND OF THE MATTER, WE FIND THA T IN THE CASE OF FCS SOFTWARE SOLUTIONS LTD., THE MARGINS FOR THE TWO PRECEDING FINANCIAL YEARS ARE 14.75% AND 19.94%, WHEREAS IN THE FINANCIAL YEAR SUCCEEDING TO THE YEAR UNDER CONSIDERATION, THE MARGIN IS 37.07%; AND, THE MARGIN DECLARED FOR THE YEAR UND ER CONSIDERATION IS 57.02%. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE POINTED OUT THAT IN THE FINANCIAL YEAR 2007 - 08 RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION THE SAID 14 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 CONCERNS REVENUES FROM THE SOFTWARE ACTIVITY WAS RS.86.73 CRORES AS AGAI NST RS.143.43 CRORES IN IMMEDIATELY PRECEDING YEAR. ON THE CONTRARY THE EXPENDITURE INCURRED ON DEVELOPMENT OF SOFTWARE FOR THE YEAR UNDER CONSIDERATION STOOD AT RS.30.44 CRORES AS AGAINST RS.104.35 CRORES IN THE IMMEDIATELY PRECEDING YEAR. IT IS POINTED O UT THAT THE RATIO OF SOFTWARE DEVELOPMENT EXPENDITURE TO TOTAL INCOME HAS FALLEN DRASTICALLY FROM 72.75% TO 35.10%, WHICH SHOWS THAT THE CURRENT YEAR HAS WITNESSED ABNORMAL EVENTS. ALL THE AFORESAID FACTUAL ASPECTS OF THE MATTER HAVE NOT BEEN DISPUTED BY T HE REVENUE BEFORE US. FROM THE AFORESAID ANALYSIS, IT IS CLEAR THAT THE OPERATING MARGINS OF THE SAID CONCERN DO NOT REFLECT A CONSISTENT TREND OVER THE YEARS, AND IN ANY CASE, THE CURRENT YEARS OPERATIONS IN COMPARISON TO THE EARLIER YEARS ARE QUITE ABNO RMAL. 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 CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. W E HOLD SO . THE LD. DR HAS NOT CONTROVERTED THE DECISIONS OF CO - ORDINATE BENCH IN REJECTING FCS SOFTWARE SOLUTIONS LTD. FROM THE FINAL LIST OF COMPARABLES. THUS, IN VIEW OF THE FACTS OF THE CASE AND THE DECISIONS DISCUSSED ABOVE WE FIND THAT FCS SOFTWARE SOLUTIONS LTD. IS NOT A GOOD COMPARABLES AND HENCE, IS LIABLE TO BE EXCLUDED FROM FINAL SET OF COMPARABLES. WE HOLD AND DIRECT, ACCORDINGLY. 14. AS REGARDS THE OBJECTION RAISED BY LD. DR THAT THE COMPANY WAS ORIGINALLY SELECTED BY THE A SSESSEE IN ITS TP STUDY THEREFORE SHOULD BE INCLUDED IN THE FINAL SET OF COMPARABLES, WE FIND NO FORCE IN SUCH OBJECTION. IT IS A WELL ACCEPTED PRINCIPLE THAT IF AT SUBSEQUENT STAGE THE ASSESSEE DISCOVERS THAT THE COMPANY ORIGINALLY SELECTED IN TP STUDY I S NOT A GOOD COMPARABLE FOR ANY REASONS, THERE IS NO BAR ON ASSESSEE TO SEEK ITS EXCLUSION FROM THE LIST OF COMPARABLES [DEPUTY COMMISSIONER OF INCOME TAX VS. QUARK SYSTEMS PVT. LTD., 38 SOT 307 (CHD) (SB)]. 15 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 15. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE THIRD COMPANY THAT SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES IS HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. THE SAID COMPANY SHOULD BE EXCLUDED ON THE GROUND OF FUNCTIONAL DISPARITY. THE LD. COUNSEL CONTENDED THAT HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. IS ENGAGED IN RENDERING ITES INCLUDING BPO SERVICES, OFFSHORE DELIVERY, PROJECT MANAGEMENT SERVICES, ETC. THEREFORE, THE SERVICES RENDERED BY HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. ARE NOT COMPARABLE TO IT S RENDERED BY T HE ASSESSEE. THE LD. COUNSEL SUBMITTED THAT IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007 - 08 THE TRIBUNAL HAS EXCLUDED HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. FROM THE LIST OF COMPARABLES. 16. ON THE OTHER HAND THE LD. DR VEHEMENTLY DEFENDED THE FINDINGS OF TPO IN INCLUDING HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. IN THE FINAL SET OF COMPARABLES. 17. BOTH SIDES HEARD. ORDERS OF THE AUTHORITIES BELOW PERUSED. WE FIND THAT THE CO - ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN AS SESSMENT YEAR 200 7 - 08 HAVE EXCLUDED HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE REASONS SIMILAR TO EXCLUDE KALS INFORMATION SYSTEMS LTD. THE RELEVANT EXTRACT OF THE FINDINGS OF THE ORDER OF TRIBUNAL HAS ALREADY BEEN REPRODUCED IN PARA 7 HERE - IN - ABOVE. FOR THE SAKE OF BREVITY AND TO AVOID REPETITIVENESS WE ARE NOT EXTRACTING THE SAME REASONS HERE AGAIN . THE HONBLE HIGH COURT HAS CONFIRMED THE FINDINGS OF TRIBUNAL IN HOLD HELIOS & MATHESON INFORMATION TECHNOLOG Y LTD. AS NOT COMPARABLE ON ACCOUNT OF FUNCTIONAL DIFFERENCES. THE LD. DR HAS NOT BEEN ABLE TO PLACE ON RECORD ANY MATERIAL TO SHOW ANY CHANGE IN THE FACTS AND CIRCUMSTANCES IN THE ASSESSMENT YEAR UNDER 16 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 APPEAL. THEREFORE, FOLLOWING THE DECISION OF CO - ORD INATE BENCH IN ASSESSMENT YEAR 200 7 - 08 WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. FROM THE FINAL SET OF COMPARABLES. 18. THE LD. COUNSEL SUBMITTED THAT IF THE AFORESAID THREE COMPANIES I.E. KALS INFORMATION SYSTEMS LTD., FCS SOFTWARE SOLUTION LTD. AND HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. ARE EXCLUDED FROM THE FINAL SET OF COMPARABLES THE ARITHMETIC MEAN OF THE COMPARABLES WOULD FALL WITHIN 5% RANGE , THEREFORE, NO TP ADJUSTMENT WOULD BE REQUIRED. THE LD. COUNSEL FURNISHED A CHART INDICATING THAT IT THE THREE COMPANIES DISCUSSED ABOVE ARE EXCLUDED, THE PLI OF COMPARABLES WOULD BE 22.01%. IN VIEW OF THE PRAYER MADE BY THE LD. COUNSEL FOR THE ASSESSEE , WE RESTRICT OUR FINDINGS WITH RESPECT TO EXCLUSION OF AFORESAID THREE COMPANIES FROM THE FINAL SET OF COMPARABLES ONLY. ITES SEGMENT 19. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT CORAL HUBS LTD. (FORMERLY KNOWN AS VISHAL INFORMATION TECHNOLOGIES LTD.) SHOULD BE EXCLUDED FROM THE LI ST OF COMPARABLES IN RESPECT OF ITES SERVICES AS THE ACTIVITIES OF THE SAID COMPANIES ARE AT VARIANCE AS COMPARE D TO THE ACTIVITIES OF THE ASSESSEE COMPANIES. CORAL HUBS LTD. IS ENGAGED IN DATA CONVERSION, E - PUBLISHING, CUSTOM APPLICATION DEVELOPMENT SERV ICES. ON THE OTHER HAND ITES OF THE ASSESSEE COMPRISES OF RENDERING SUPPORT SERVICES (CALL CENTRE SERVICES) TO CLIENTS OF ITS AE WORLDWIDE. THE LD. COUNSEL SUBMITTED THAT THE BUSINESS MODEL OF CORAL HUBS LTD. IS ENTIRELY DIFFERENT FROM THAT OF THE ASSESS EE. CORAL HUBS LTD. PROVIDES AGENCY SERVICES BY OUTSOURCING THE SERVICES TO THIRD PARTY . IT ACTS AS AN 17 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 INTERMEDIARY BETWEEN THE FINAL CUSTOMER AND THE VENDOR . SINCE, THE SAID COMPANY HAS ADOPTED SUB - CONTRACTING MODEL THE ASSETS EMPLOYED WOULD BE LOW RES ULTING IN LOWER INVESTMENT IN ASSETS. THE LD. COUNSEL POINTED THAT DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL I.E. FINANCIAL YEAR 2007 - 08 CORAL HUBS LTD. COMMENCED NEW LINE OF BUSINESS OF PRINTING ON DEMAND (POD). THE POD IS NOT IT ENABLED SERVICES. THE LD. COUNSEL POINTED THAT THE FINANCIAL STATEMENTS OF CORAL HUBS LTD. DO NOT SHOW SEGMENTED FINANCIAL RESULTS. THUS, THE CORAL HUBS LTD. C ANNOT BE ACCEPTED AS COMPARABLE ON ACCOUNT OF FUNCTIONAL DIFFERENCE. THE LD. COUNSEL FURTHER SUBMITTED THAT THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007 - 08 HAS REJECTED CORAL HUBS LTD. AS COMPARABLE ON ACCOUNT OF FUNCTIONAL DIFFERENCE. 2 0. ON THE OTHER HAND THE LD. DR VEHEMENTLY SUPPORTED THE FINDINGS OF TPO AND DRP IN INCLUDING CORAL HUBS LTD. IN THE FINAL SET OF COMPARABLES. 21. BOTH SIDES HEARD. THE ASSESSEE IS SEEKING EXCLUSION OF CORAL HUBS LTD. FROM THE LIST OF COMPARABLES ON AC COUNT OF FUNCTIONAL DISPARITY. THE LD. COUNSEL HAS POINTED THAT THE SAID COMPAN Y APART FROM PROVIDING IT ENABLED SERVICES IS ALSO PROVIDING DIVERSIFIED ACTIVITIES LIKE CUSTOM APPLICATION DEVELOPMENT SERVICES. THE SAID COMPANY HAS ALSO VENTURE D INTO NEW L INE OF BUSINESS I.E. PRINTING ON DEMAND. OUR ATTENTION HAS BEEN DRAWN TO FINANCIAL RESULTS OF THE COMPANY FOR THE YEAR ENDING 31 ST MARCH, 2008 AT PAGES 741 TO 751 OF THE PAPER BOOK. A PERUSAL OF P ROFIT AND L OSS ACCOUNT OF THE COMPAN Y FOR YEAR ENDED 31 ST MARCH, 2008 SHOWS THAT THERE ARE NO SEGMENT ED DETAILS OF INCOME OF COMPANY. THE SCHEDULE 6 TO BALANCE SHEET GIVING DETAILS OF INVENTORIES INDICATE THAT THERE IS STOCK TO THE TUNE OF RS.4.27 CRORES (APPROXIMATELY) ON PRINT ON DEMAND, PUBLISHING 18 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 TITLES AS O N 31 - 03 - 2008 . WHEREAS, THERE WAS NO SUCH STOCK AS ON 31 - 03 - 2007. THUS, THE NEW LINE OF BUSINESS INTRODUCED BY THE COMPANY HAS GENERATED SUBSTANTIAL STOCK RESULTING IN ABERRATION OF FINANCIAL RESULTS FOR COMPARATIVE ANALYSIS. THE CO - ORDINATE BENCH OF TH E TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 1605/PN/2011 FOR ASSESSMENT YEAR 2007 - 08 HAS EXCLUDED CORAL HUBS LTD. FORM THE FINAL LIST OF COMPARABLES BY OBSERVING AS UNDER : 31. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ON THIS ASPECT. AT THE OUT SET, WE MAY REFER TO PAGE 810 OF THE PAPER BOOK, WHEREIN THE NOTES TO ACCOUNTS FOR THE YEAR ENDED 31.3.2007 OF THE SAID CONCERN HAVE BEEN PLACED. AS PER THE AVAILABLE INFORMATION, THE SAID CONCERN HAS RELATED PARTY TRANSACTIONS AS REPORTED BY THE CONCERN A T PARA 7 OF THE SAID NOTES AT 86.92%, WHICH BREACHES THE RPT FILTER. FURTHERMORE, THE FUNCTIONAL PROFILE OF THE SAID CONCERN BROUGHT OUT BY THE ASSESSEE ALSO REVEALS DIFFERENTIATION IN THE ACTIVITY PROFILE. THE TPO, IN OUR VIEW, HAS NOT APPRECIATED THE QUA LITATIVE DIFFERENCE IN THE FUNCTIONS PERFORMED BY THE SAID CONCERN AS SOUGHT OUT TO BE BROUGHT OUT BY THE ASSESSEE. CONSIDERING THE AFORESAID, WE THEREFORE, FIND THAT THE ASSESSEE WAS JUSTIFIED IN ASCERTAINING THAT THE SAID CONCERN BE EXCLUDED FROM THE LIS T OF COMPARABLES FOR THE REASONS CANVASSED. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS. THE HONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO. 732 OF 2014 (SUPRA) HAS UPHELD THE DECISION OF TRIBUNAL IN EXCLUDING CORAL HUBS LTD. ON ACCOUNT OF FUNCTIONAL DIFFERENCE AS WELL AS FAILING TO QUALIFY RPT FILTER. 22. THE LD. DR HAS NOT BEEN ABLE TO CONTROVERT THE FINDINGS OF CO - ORDINATE BENCH OF THE TRIBUNAL IN EXCLUDING CORA L HUBS LTD. FROM THE FINAL SET OF COMPARABLES. THUS, IN VIEW OF THE FACTS DISCUSSED ABOVE AND THE DECISION OF CO - ORDINATE BENCH IN ASSESSEES OWN CASE , WE DO NOT FIND ANY REASON TO TAKE A CONTRARY VIEW. ACCORDINGLY, CORAL HUBS LTD. IS DIRECTED TO BE EXCL UDED FROM THE FINAL LIST OF COMPARABLES IN TH E ASSESSMENT YEAR UNDER APPEAL ON ACCOUNT OF FUNCTIONAL DIFFERENCE . 19 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 23. IN RESPECT OF ACCENTIA TECHNOLOGIES LTD. , THE LD. COUNSEL SUBMITTED THAT THE SAID COMPANY IS PROVIDING MEDICAL TRANSCRIPTION SERVICES, ME DICAL CODING, MEDICAL BILLING, RECEIVABLES MANAGEMENT WITH RESPECT TO THE HEALTHCARE RECEIVABLES CYCLE MANAGEMENT SECTOR. THE LD. COUNSEL SUBMITTED THAT THE SAID COMPANY HAS DEVELOPED ITS OWN SOFTWARE PRODUCTS AND OWNS INTANGIBLES IN THE FORM OF GOODWILL. SUCH SOFTWARE PRODUCTS ARE PRIMARILY THE PLATFORMS REQUIRED FOR RENDERING MEDICAL TRANSCRIPTION SERVICES. THE ANALYSIS OF ACTIVITIES CARRIED OUT BY ACCENTIA TECHNOLOGIES LTD. USING ITS OWN PLATFORM WOULD SHOW THAT THE ACTIVITIES OF THE SAID COMPANY ARE DISTINGUISHABLE FROM OTHER MEDICAL TRANSCRIPTION SERVICE PROVIDERS SUCH AS E4E HEALTHCARE SOLUTIONS LTD. THE LD. COUNSEL FURTHER POINTED THAT ACCENTIA TECHNOLOGIES LTD. DURING THE FINANCIAL YEAR 2007 - 08 HAS ENTERED INTO AMALGAMATION/ACQUISITION OF OTHER C OMPANIES, THEREFORE, THE SAID COMPANY CANNOT BE SELECTED AS COMPARABLE. THE LD. COUNSEL IN SUPPORT OF HIS CONTENTIONS REFERRED TO A NNUAL R EPORT OF ACCENTIA TECHNOLOGIES LTD. FOR FINANCIAL YEAR 2007 - 08 AT PAGE 800 OF THE PAPER BOOK. 24. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE CO - ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 336/PN/2014 FOR ASSESSMENT YEAR 2009 - 10 DECIDED ON 31 - 10 - 2014 EXCLUDED ACCENTIA TECHNOLOGIES LTD. FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUN CTIONAL DIFFERENCE. 25. THE LD. DR VEHEMENTLY DEFENDED THE FINDINGS OF TPO AND DRP IN INCLUDING ACCENTIA TECHNOLOGIES LTD. IN THE LIST OF COMPARABLES. 20 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 26. BOTH SIDES HEARD. WE FIND THAT THE CO - ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 336/PN/2014 (SUPRA) HAS EXCLUDED ACCENTIA TECHNOLOGIES LTD. FROM THE LIST OF COMPARABLES BY OBSERVING AS UNDER : 47. THE NEXT OBJECTION OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS WITH REGARD TO THE INCLUSION OF M/S. ACCENTIA TE CHNOLOGIES LTD. WHICH ADMITTEDLY WAS ENGAGED IN DEVELOPING ITS OWN SOFTWARE PRODUCTS AND WAS RENDERING MEDICAL TRANSCRIPTION SERVICES. FURTHER, THE SAID COMPANY DURING THE YEAR UNDER CONSIDERATION HAD MADE CERTAIN ACQUISITIONS WHICH IN TURN AFFECTED THE MA RGINS OF THE YEAR OF THE ACQUISITION. WE FIND THAT HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (SUPRA) HAD REJECTED ACCENTIA TECHNOLOGIES LTD. FOR HAVING EXTRA - ORDINARY CIRCUMSTANCES I.E. AMALGAMATION. FO LLOWING THE PARITY OF REASONING AS ADOPTED BY THE HYDERABAD BENCH OF THE TRIBUNAL, WE HOLD THAT THE SAID COMPANY HAD DIFFERENT FUNCTIONAL PROFILE AS COMPARED TO THE ASSESSEE, WHICH IN TURN EXPLAINED THE ABNORMALLY HIGH PROFIT MARGINS EARNED BY THE SAID COM PANY AS COMPARED TO THE ASSESSEE. ACCORDINGLY, WE ACCEPT THE PLEA OF THE ASSESSEE AND HOLD THAT THE SAID COMPANY IS NOT TO BE USED AS COMPARABLE IN ITES SEGMENTS OF THE ASSESSEE. 27. FURTHER, ON PERUSAL OF ANNUAL REPORT OF ACCENTIA TECHNOLOGIES LTD. FOR THE FINANCIAL YEAR 2007 - 08 WE FIND THAT THE SAID COMPANY HAD ACQUIRED THUNGA SOFTWARE PVT. LTD. A MEDICAL TRANSCRIPTION AND CODING COMPANY , CONSOLIDATED THE OPERATIONS OF ASSCENT INFOSERVE PVT. LTD. ONE OF ITS SUBSIDIARY , IRIDIUM TECHNOLOGIES AND GEOSOFT TECHNOLOGIES AMALGAMATED INTO PARENT COMPANY I.E. ACCENTIA TECHNOLOGIES LTD. T HE COMPANY HAD ALSO ACQUIRED 3 COMPANIES IN THE USA. THUS, ON ACCOUNT OF EXTRA - ORDINARY EVENTS VIZ. MERGER , CONSOLIDATION AND AMALGAMATION THERE WOULD BE ABERRATION IN THE FINA NCIAL RESULTS OF THE COMPANY . IT IS A WELL SETTLED PRINCIPLE THAT WHERE THERE ARE EXTRAORDINARY EVENTS IN A PARTICULAR FINANCIAL YEAR OF A COMPANY , THE SAID COMPANY SHOULD NOT BE SELECTED AS COMPARABLE. THUS, IN THE LIGHT OF FACTS OF THE CASE AND THE DEC ISION OF CO - 21 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 ORDINATE BENCH OF TRIBUNAL , ACCENTIA TECHNOLOGIES LTD. CANNOT BE CONSIDERED AS GOOD COMPARABLE. THEREFORE, THE SAME IS DIRECTED TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. 28. FINALLY, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT TPO HAS EXCLUDED ADITYA BIRLA MINACS WORLDWIDE LTD. FROM THE LIST OF COMPARABLES FOR THE REASON THAT THE SAID COMPANY INCURRED LOSSES IN FINANCIAL YEAR 2007 - 08. THE LD. COUNSEL SUBMITTED THAT A COMPANY CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES MEREL Y FOR THE REASON THAT THE COMPANY HAS SUFFERED LOSSES IN A PARTICULAR YEAR. THE OP/TC OF THE COMPANY IN FINANCIAL YEARS 2006, 2007 AND 2008 ARE 19.92%, 13.72% AND - 4.36%, RESPECTIVELY. THEREFORE, THE SAID COMPANY IS NOT A CONSISTENT LOSS MAKING COMPANY. IT IS ONLY THE CONSISTENT LOSS MAKING COMPANIES THAT ARE REJECTED AS COMPARABLES. THE AFORESAID COMPANY HAS INCURRED LOSSES ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION . SUCH A LOSS CANNOT BE CATEGORIZED AS OPERATING LOSS . THE LD. COUNSEL FURTHER SUBMITT ED THAT THE TRIBUNAL IN THE CASE OF TIBCO SOFTWARE INDIA PVT. LTD. VS. DY. COMMISSIONER OF INCOME TAX IN ITA NO. 2536/PN/2012 FOR ASSESSMENT YEAR 2008 - 09 DECIDED ON 11 - 02 - 2015 HAS HELD THAT THE COMPANY SHOULD NOT BE EXCLUDED FROM THE LIST OF COMPARABLES ME RELY BECAUSE IT HAS INCURRED LOSSES IN A PARTICULAR YEAR ESPECIALLY WHEN THE SAID LOSS HAS NOT BEEN ESTABLISHED TO BE UNDER ABNORMAL BUSINESS CONDITION. 29. ON THE OTHER HAND LD. DR VEHEMENTLY SUPPORTED THE FINDINGS OF TPO IN INCLUDING ADITYA BIRLA MINACS WORLDWIDE LTD. IN THE FINAL SET OF COMPARABLES. 22 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 30. BOTH SIDES HEARD. WE FIND THAT THE TPO HAS EXCLUDED ADITYA BIRLA MINACS WORLDWIDE LTD. FROM THE LIST OF COMPARABLES FOR THE REASON THAT THE SAID COMPANY HAS SUFFERED LOSSES IN FINANCIAL YEAR 2007 - 08. A COMPANY , IF FUNCTIONALLY COMPARABLE , SHOULD NOT BE EXCLUDED FROM THE LIST OF COMPARABLES MERELY ON THE GROUND THAT IT HAS SUFFERED LOSSES IN A PARTICULAR FINANCIAL YEAR , UNLESS IT IS A CONSISTENT LOSS MAKING COMPANY. FURTHER, THE LD. COUNSEL HAS POINT ED THAT ALLEGED LOSS SUFFERED BY ADITYA BIRLA MINACS WORLDWIDE LTD. ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IS NOT IN THE NATURE OF OPERATING LOSS. THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF TIBCO SOFTWARE INDIA PVT. LTD. VS. DY. COMMISSIONER OF INCOME TAX (SUPRA) WHILE DEALING WITH SOMEWHAT SIMILAR ISSUE HAS HELD AS UNDER : 29. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN OUR CONSIDERED OPINION, THE POINT SOUGHT TO BE MADE OUT BY THE TPO IS QUITE MIS - PLACED HAVING REGARD TO THE PUR POSE AND IMPORT OF THE COMPARABILITY ANALYSIS OF THE INTERNATIONAL TRANSACTION BEING UNDERTAKEN FOR DETERMINING ITS ARM'S LENGTH PRICE. OSTENSIBLY, THE WHOLE OBJECTIVE OF THE TRANSFER PRICING PROCEEDING IS THAT THE CONTOURS OF AN UN - CONTROLLED TRANSACTION SHALL REFLECT A MEASURE OF ARM'S LENGTH PRICE OF THE TESTED INTERNATIONAL TRANSACTION. THE UN - CONTROLLED TRANSACTION, IF IT REFLECTS A LOSS, WOULD NOT NORMALLY BE EXCLUDIBLE UNLESS ANY PECULIARITY IN SUCH UN - CONTROLLED TRANSACTION IS BROUGHT OUT. FOR INSTA NCE, THE UN - CONTROLLED TRANSACTION IS OF AN ENTITY WHICH IS CONSISTENTLY LOSS MAKING OR THAT THE LOSS HAS ARISEN IN THE UN - CONTROLLED TRANSACTION ON ACCOUNT OF AN ABNORMAL FACT - SITUATION, ETC. IN SUCH SITUATIONS, OSTENSIBLY, THE UN - CONTROLLED TRANSACTION W OULD NOT REFLECT A NORMAL BUSINESS SITUATION. IN THE PRESENT CASE, THE COMPARABLE IN QUESTION HAS INCURRED A LOSS; NOTABLY, INCURRENCE OF LOSS IN BUSINESS OPERATIONS IS A NORMAL INCIDENT OF BUSINESS AND THERE IS NOTHING TO SUGGEST IN THE PRESENT CASE THAT IT HAS BEEN INCURRED 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 SAID CONCERN CANNOT BE EXCLUDED MERELY BECAUSE OF INCURRENCE OF LOSS IN THIS YEAR, ESPECIALLY WHEN THE SAID LOSS HAS NOT BEEN ESTABLISHED TO BE AN ABNORMAL 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 FO R INCLUDING THE SAID CONCERN IN 23 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 THE FINAL SET OF COMPARABLES IN ORDER TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. THUS, ON THIS ASPECT, ASSESSEE SUCCEEDS. 31. THE FACT THAT ACTIVITIES OF THE ASSESSEE IN ITES SEGMENT ARE SIMILAR TO ADITYA BIRLA MINACS WORLDWIDE LTD . HAS NOT BEEN DISPUTED BY THE AUTHORITIES BELOW. TH US , IT IS AN ACCEPTED POSITION THAT THE SAID COMPANY IS FUNCTIONALLY COMPARABLE. FURTHER, THE FACT THAT ADITYA BIRLA MINACS WORLDWIDE LTD. IS NOT A CONSISTENT LOSS MAKING COMPANY HAS REMAINED UN - REBUTTED. THE DEPARTMENT HAS NOT PLACED ON RECORD ANY DECISION CONTRARY TO THE DECISION DISCUSSED ABOVE. THEREFORE, IN VIEW OF THE FACTS OF THE CASE AND THE DECISION OF CO - ORDINATE BENCH, WE DIRECT THE TPO TO INCLUDE THE AF ORESAID COMPANY IN THE FINAL LIST OF COMPARABLES. CONCLUSION: 32. IN VIEW OF OUR ABOVE FINDINGS , GROUND NO. 2 RAISED IN THE APPEAL BY ASSESSEE IS PARTLY ALLOWED. 33. THE GROUND NO. 1 RAISED IN THE APPEAL BY THE ASSESSEE IS GENERAL IN NATURE , HENCE, R EQUIRES NO ADJUDICATION. 34. THE ASSESSEE IN GROUND NO. 6 HAS PRAYED FOR ALLOWING THE BENEFIT OF 5% RANGE . THE TPO/AO IS DIRECTED TO CONSIDER THE ASSESSEES CLAIM OF ALLOWING THE BENEFIT OF 5% UNDER THE PROVISIONS OF SECTION 92C(2) OF THE ACT WHIL E COMPUTING ALP IN BOTH THE SEGMENTS I.E. IT S AND ITES. ACCORDINGLY, GROUND NO. 6 RAISED IN THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSE. 24 ITA NO . 2546/PUN/2012, A.Y. 2008 - 09 35. THE LD. COUNSEL FOR ASSESSEE HAS STATED AT THE BAR THAT GROUND NOS. 3, 4, 5 AND 7 ARE NOT PRESSED. ACCORDINGLY, THE SAME ARE DISMISSED AS NOT PRESSED. 3 6 . IN GROUND NO. 8 THE ASSESSEE HAS ASSAILED LEVY OF INTEREST U/S. 234B OF THE ACT . L EVY OF INTERES T U/S. 234B IS CONSEQUENTIAL AND MANDATORY, HENCE, GROUND NO. 8 RAISED IN THE APPEAL BY ASSESSEE IS DISMISSED BEING DEVOID OF ANY MERIT. 3 7 . IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED IN THE AFORESAID TERMS. ORDER PRONOUNCED ON MONDAY, TH E 11 TH DAY OF SEPTEMBER, 2017 . SD/ - SD/ - ( . /D. KARUNAKARA RAO ) ( / VIKAS AWASTHY) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; / DATED : 11 TH SEPTEMBER, 2017 RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE DISPUTE RESOLUTION PANEL, PUNE 4. THE DIT (TP/IT), PUNE 5. , , , / DR, ITAT, A BENCH, PUNE. 6. / GUARD FILE. / / // TRUE COPY// / BY ORDER, / PRIVATE SECRETARY, , / ITAT, PUNE