Sri. Lalanath Reddy, Bangalore V. ACIT, Bangalore

ITA 271/BANG/2014

• Counselvise Citation: 27121114 RSA 2014
• Duration Of Justice: 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 06-02-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 24-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITIDR
• Keywords: Related party transaction; Business income; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 92C; 143(3); 10B; 10; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM GEORGE, ACCOUNTANT MEMBER S.P. NO.130/BANG/2014 AND IT (TP) A NO.271/BANG/2014 ASSESSMENT YEAR : 2009-10 M/S. CISCO SYSTEMS (INDIA) PRIVATE LTD., DIVYASHREE CHAMBERS, B WING, NO.11, O SHAUGHNESSEY ROAD, BANGALORE 560 025. PAN : AABCC 0258Q VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI RAJAN VORA, C.A. RESPONDENT BY : SHRI C.H. SUNDAR RAO, CIT-I(DR) DATE OF HEARING : 30.07.2014 DATE OF PRONOUNCEMENT : 14.08.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER IT (TP) A NO.271/BANG/2014 IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 31.1.2004 OF THE DY. CIT, C IRCLE 11(2), BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE ACT. IT(TP)A NO.271/BANG/2014 PAGE 2 OF 61 2. THE GROUNDS A 1 TO 3 RAISED BY THE ASSESSEE R EADS AS FOLLOWS:- A. GROUNDS OF APPEAL RELATING TO CORPORATE TAX MAT TERS 1. THE LEARNED AO HAS ERRED IN LAW AND IN FACT, BY NOT CONSIDERING THE PLEA OF THE APPELLANT THAT COMMUNIC ATION EXPENSES (IN THE NATURE OF LEASE LINE CHARGES AND I NTERNET CHARGES) SHOULD NOT BE REDUCED FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10A AND 10B OF TH E ACT, RESPECTIVELY/ 2. THE LEARNED AO HAS ERRED IN LAW AND IN FACTS BY DISREGARDING THE METHODOLOGY ADOPTED BY APPELLANT I N ALLOCATING THE COMMON/INDIRECT COSTS AMONG ITS VARIOUS BUSINES S SEGMENTS. 3. THE LEARNED AO HAS ERRED IN LAW AND IN FACT, IN DISALLOWING THE SOFTWARE EXPENSES INCURRED AMOUNTIN G TO RS 77,82,476 WHICH WERE IN THE NATURE OF REIMBURSEMEN TS AND HENCE NO TAXES WERE REQUIRED TO BE DEDUCTED IN RELA TION TO SUCH PAYMENTS MADE. 3. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES, BESIDES MA RKETING AND SALES SUPPORT SERVICES, MANAGEMENT SERVICES, ETC. THE A SSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/S. 10A AND 10B OF THE ACT. WH ILE COMPUTING THE ELIGIBLE DEDUCTION, THE AO REDUCED FROM THE EXPORT TURNOVER COMMUNICATION EXPENSES IN THE NATURE OF LEASE LINE CHARGES AND IN TERNET CHARGES FROM THE EXPORT TURNOVER. ACCORDING TO THE ASSESSEE, SUCH E XCLUSION IS NOT CONTEMPLATED BY THE PROVISIONS OF EXPLANATION 2 (IV ) TO SECTION 10A OF THE ACT, WHICH DEFINES EXPORT TURNOVER. THE ASSESSEE MADE AN ALTERNATIVE PRAYER THAT IN THE EVENT OF SUCH CHARGES BEING EXCL UDED FROM THE EXPORT IT(TP)A NO.271/BANG/2014 PAGE 3 OF 61 TURNOVER, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER, WHILE COMPUTING DEDUCTION U/S. 10A/10B OF THE ACT. 4. THE ASSESSING OFFICER, IN THE DRAFT ASSESSMENT ORDER, DID NOT AGREE WITH EITHER OF THE SUBMISSIONS MADE BY THE ASSESSEE . ON OBJECTIONS BEING FILED BY THE ASSESSEE BEFORE THE DRP AGAINST THE DR AFT ASSESSMENT ORDER, THE DRP ALLOWED THE ALTERNATIVE PRAYER OF THE ASSES SEE TO EXCLUDE THE LEASE LINE CHARGES AND INTERNET CHARGES BOTH FROM T HE EXPORT TURNOVER AND TOTAL TURNOVER, FOLLOWING THE DECISION OF THE HONB LE HIGH COURT OF KARNATAKA IN THE CASE OF TATA ELXSI LTD. [2012] 349 ITR 98 (KARN) . THE RELIEF GRANTED BY THE DRP WILL RESULT IN DEDUCTION U/S. 10 A/10B BEING NOT REDUCED AS PROPOSED BY THE AO IN THE DRAFT ASSESSMENT ORDER . THE ASSESSEE HAS, HOWEVER, RAISED GROUND NO.A(1) REFERRED TO ABOVE CO NTENDING THAT THE COMMUNICATION EXPENSES IN QUESTION CANNOT BE EXCLUD ED FROM THE EXPORT TURNOVER. IN OUR VIEW, THIS ISSUE IS ACADEMIC AND DOES NOT REQUIRE ANY ADJUDICATION IN VIEW OF THE ASSESSEE GETTING THE AL TERNATIVE RELIEF FROM THE DRP. CONSEQUENTLY, THIS GROUND IS DISMISSED AS NOT CALLING FOR ANY ADJUDICATION. 5. AS FAR AS GROUND NO.A (2) RAISED BY THE ASSESSEE IS CONCERNED, THE ISSUE THEREIN IS WITH REGARD TO ALLOCATION OF COMMO N EXPENSES INCURRED BY THE ASSESSEE AMONGST THE VARIOUS UNITS OF THE ASSES SEE. IN THIS REGARD, THE FACTS ARE AS FOLLOWS. IT(TP)A NO.271/BANG/2014 PAGE 4 OF 61 6. THE BUSINESS SEGMENTS OF THE ASSESSEE PRIMARILY CONSIST OF THE FOLLOWING SOFTWARE DEVELOPMENT SERVICES SEGMENT ( CONSISTING OF THE STPI AND THE SEZ UNITS), MARKETING SUPPORT SERVICES SEGMENT, PRODUCT REPLACEMENT SERVICES SEGMENT, ADMINISTRATIVE AND OT HER SUPPORT SERVICES SEGMENT. THE DIRECT COSTS/EXPENSES RELATA BLE TO THE SPECIFIC SEGMENT(S) AND WHICH ARE DIRECTLY ATTRIBUTABLE TO S UCH SEGMENT(S) ARE ACCOUNTED AS COSTS/EXPENSES RELATING TO SUCH SPECIF IC SEGMENT(S). IN RELATION TO COSTS/EXPENSES WHICH CANNOT BE DIRECTLY IDENTIFIED WITH THE SEGMENTS ARE ALLOCATED ON THE BASIS OF THE HEAD COU NT OF PERSONNEL EMPLOYED IN THESE SEGMENTS (EXCLUDING THE PRODUCT R EPLACEMENT SERVICES SEGMENT AS THE ENTIRE OPERATIONS OF THIS SEGMENT HA VE BEEN OUTSOURCED), WHICH ACCORDING TO THE ASSESSEE IS A REASONABLE MET HOD OF ALLOCATION. THIS METHOD OF APPORTIONMENT HAS ALSO BEEN CONSISTE NTLY ADOPTED BY THE ASSESSEE ON A YEAR TO YEAR BASIS AND SUCH A MANNER OF APPORTIONMENT HAS ALSO BEEN ACCEPTED BY THE ASSESSING OFFICER PREVIOU SLY AFTER DUE APPLICATION OF MIND DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND PASSING OF THE ORDER. 7. HOWEVER, FROM AY 2008-09 ONWARDS, THE AO DISREGA RDED THE METHODOLOGY ADOPTED BY THE ASSESSEE TO ALLOCATE THE COMMON EXPENSES AMONG ITS BUSINESS SEGMENTS. THE AO HAS REALLOCATED THE COMMON EXPENSES ON THE BASIS OF THE REVENUE (TURNOVER) OF EACH OF THE BUSINESS SEGMENTS (EXCLUDING THE PRODUCT REPLACEMENT SERVICE S SEGMENT AS NO COMMON EXPENSES ARE ALLOCABLE AS THE ENTIRE OPERATI ONS OF THIS SEGMENT IT(TP)A NO.271/BANG/2014 PAGE 5 OF 61 HAVING BEEN OUTSOURCED). THE AO, WHILE ADOPTING THE TURNOVER/REVENUE BASIS FOR APPORTIONMENT OF COMMON EXPENSES WAS OF T HE VIEW THAT THE SAME IS ADOPTED FOR THE SAKE OF CONTINUITY AS WELL AS TO FOLLOW COMMONLY ACCEPTED AND ROYAL METHOD TO DISTRIBUTE THE EXPENSE S. FURTHER, THE AO HAS OPINED THAT THE REVENUE METHOD HAS BEEN HELD TO BE MUCH SUPERIOR TO THE HEAD COUNT METHOD IN AS MUCH AS IT TAKES CARE OF AL L ISSUES AND REVENUE GENERATING ACTIVITY INCLUDING ASSET BASE, MARKETING EFFORT, COMPLEXITY OF THE BUSINESS, VALUE CREATION AND PROFITABILITY OF EACH INDIVIDUAL SEGMENTS OF THE BUSINESS OF THE ASSESSEE. 8. THE DRP CONFIRMED THE ACTION OF THE AO. 9. AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR NO TICE THAT IN ASSESSEES OWN CASE FOR THE A.Y. 2008-09 IN ITA NO.1510/BANG/2 012, BY ORDER DATED 31.10.2013, HAS UPHELD THE USE OF HEADCOUNT METHOD FOLLOWED BY THE ASSESSEE AS APPROPRIATE METHOD FOR ALLOCATION OF CO MMON EXPENSES BETWEEN ITS VARIOUS BUSINESS UNITS. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- 6. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND ALSO THE MATERIAL ON RECORD, WE FIND THAT THE DISPUTE REVOLVES AROUND THE ALLOCATION OF INDIRECT AND COMMON EXPENSES RELATING TO VARIOUS UNITS AND THE EXPENDIT URE ALLOCATED TO STPI UNIT, INCOME FROM WHICH IS ELIGIBLE FOR DEDUCT ION U/S 10A OF THE ACT. THE ASSESSEE IS STATED TO BE FOLLOWING HEAD-COUNT OF PERSONNEL AS THE BASIS FOR ALLOCATION OF THE COMMON AND INDIRECT EXPENSES WHILE THE AO SEEKS TO ALLOCATE THE COMMON EXPENSES ON THE BASIS OF THE TURNOVER OF EACH SEGMENT. AS NARRA TED IN THE ABOVE PARAGRAPHS, THE ASSESSEE IS INTO VARIOUS ACTI VITIES AND THE IT(TP)A NO.271/BANG/2014 PAGE 6 OF 61 ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE A CT ONLY WITH REGARD TO SOFTWARE DEVELOPMENT ACTIVITY WHICH IS SE T UP IN STPI. THE ASSESSEE HAD EXPLAINED IN DETAIL BEFORE THE AO THE METHODOLOGY AND AS TO HOW THE TOTAL EXPENDITURE OF 207 CRORES HAS BEEN BIFURCATED INTO 120 CRORES WHICH IS TOWARD S THE COMMON COST EXCLUDING IT AND COMMUNICATION SUPPORT COST AN D 87 CRORES WHICH IS COMMON COSTS ONLY IN RELATION TO IT AND CO MMUNICATION COST. THE SOFTWARE DEVELOPMENT WOULD FALL WITHIN TH E SECOND CATEGORY I.E. IT AND COMMUNICATION COST AND ITS EMP LOYEES WHO ARE INVOLVED IN SUCH IT AND COMMUNICATION ARE CONSI DERED FOR ALLOCATION OF THE EXPENDITURE. THE AO, IN THE DRAFT ASSESSMENT ORDER, HAS CONSIDERED NUMBER OF EMPLOYEES IN STPI A ND SEZ DIVISION AND HAS COME TO THE CONCLUSION THAT THE AS SESSEE IS NOT FOLLOWING HEAD-COUNT METHOD FOR DIVISION OF ALLOCAB LE EXPENSES. BEFORE GIVING A FINDING AS TO WHETHER THE ASSESSEE IS FOLLOWING THE HEAD-COUNT METHOD FOR DIVISION OF ALLOCABLE EXP ENSES, WE WOULD LIKE TO EXAMINE WHETHER THE METHOD ADOPTED BY THE ASSESSEE IS CORRECT. SIMILAR QUESTION HAD ARISEN BE FORE THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S.EHTP IN DIA PVT. LTD. (CITED SUPRA) WHEREIN APPORTIONMENT OF EXPENSE S BETWEEN 10A AND NON-10A UNITS WAS CONSIDERED. IN THE SAID C ASE ALSO, THE ASSESSEE WAS FOLLOWING ALLOCATION OF COMMON EXPENSE S ON THE HEAD-COUNT BASIS. AFTER CONSIDERING THE FACTS OF TH E SAID CASE, THE HONBLE HIGH COURT HELD THAT THE ASSESSEES CONTENT ION THEREIN THAT IN THE SERVICE INDUSTRY HEAD-COUNT METHOD WOUL D BE MORE PROPER IS A PLAUSIBLE VIEW THOUGH IT COULD POSSIBLY BE A DEBATABLE VIEW. IT WAS HELD THAT MERELY BECAUSE THERE CAN BE MORE THAN ONE METHOD OF APPORTIONING COMMON EXPENSES BETWEEN STPI AND DOMESTIC UNIT, IT CANNOT BE SAID THAT THE METHOD OF HEAD-COUNT FOLLOWED BY THE ASSESSEE SHOULD BE DISCARDED THAT T OO MIDWAY EVEN THOUGH IT WAS NOT QUESTIONED AT ANY TIME IN TH E PAST. WHILE REFERRING TO THE OBSERVATIONS OF THE HONBLE SUPREM E COURT IN THE CASE OF HUKUMCHAND MILLS, THE HONBLE HIGH COURT OB SERVED THAT WHERE ALTERNATIVE METHODS OF APPORTIONING OF EXPENS ES ARE RECOGNIZED AND THERE IS NO STATUTORY OR FIXED FORMU LA, THE ENDEAVOUR CAN ONLY BE TOWARDS APPROXIMATION WITHOUT ANY GREAT PRECISION OR EXACTNESS AND IF SUCH IS THE ENDEAVOUR , IT CAN HARDLY BE SAID THAT THERE IS AN ATTEMPT TO DISTORT THE PRO FITS. THUS IT CAN BE SEEN THAT WHERE TWO BASIS OF APPORTIONMENT ARE A VAILABLE, FOLLOWING ONE OF THE BASIS CONSISTENTLY IS TO BE AC CEPTED. AS THE CLAIM OF DEDUCTION U/S 10A DURING THE RELEVANT ASSE SSMENT YEAR IS THE 9TH YEAR IN WHICH THE ASSESSEE IS CLAIMING THE DEDUCTION U/S IT(TP)A NO.271/BANG/2014 PAGE 7 OF 61 10A AND THE REVENUE HAS ACCEPTED THE METHOD OF ALLO CATION OF EXPENSES IN ALL THE EARLIER ASSESSMENT YEARS, WE AR E OF THE OPINION THAT THE SAME METHOD SHOULD BE ADOPTED FOR THE RELE VANT ASSESSMENT YEAR ALSO. HOWEVER, WITH REGARD TO THE D ISCREPANCY POINTED OUT BY THE AO TO THE EFFECT THAT THERE WERE MORE EMPLOYEES IN THE STPI UNIT WHILE ONLY 27 CRORES WAS ALLOCATED TOWARDS SUCH UNIT, WHEREAS THERE WERE LESS EMPLOYEE S IN SEZ UNIT BUT MORE THAN 53 CRORES WAS ALLOCATED TO SUCH DIVIS ION, WE ARE OF THE OPINION THAT THIS NEEDS VERIFICATION BY THE AO. THE ASSESSEE HAS GIVEN DETAILED EXPLANATION AS TO HOW IT IS ALLO CATING THE EXPENDITURE BETWEEN VARIOUS UNITS ON THE BASIS OF H EAD-COUNT BUT BOTH THE AO AS WELL AS THE DRP HAVE FAILED TO CONSI DER THE FACTUAL ASPECTS OF THE SAID SUBMISSION. IN VIEW OF THE SAME, UPHOLDING THE METHOD ADOPTED BY THE ASSESSEE FOR AL LOCATION OF COMMON EXPENSES, WE REMAND THE ISSUE TO THE FILE OF THE AO ONLY FOR VERIFICATION OF THE NUMBER OF EMPLOYEES AND THE EXPENDITURE ALLOCATED TO SUCH EMPLOYEES. GROUND NO.3 IS ACCORDI NGLY ALLOWED FOR STATISTICAL PURPOSES. 10. IT IS NOT IN DISPUTE BEFORE US THAT THE FACTS A ND CIRCUMSTANCES PREVAILING IN THE PRESENT ASSESSMENT YEAR ARE IDENT ICAL TO THE FACTS THAT PREVAILED IN A.Y. 2008-09. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL FOR THE A.Y. 2008-09, WE DIRECT THE ASSESSING OFFIC ER TO ALLOCATE COMMON EXPENSES ON THE BASIS OF HEADCOUNT AND REMAND THE I SSUE TO HIS FILE FOR THE LIMITED PURPOSE OF VERIFICATION OF THE NUMBER OF EM PLOYEES AND EXPENSES ALLOCATED TO SUCH EMPLOYEES, AS WAS DONE IN THE A.Y . 2008-09. 11. AS FAR AS GROUND NO.A(3) REFERRED TO ABOVE IS C ONCERNED, THE FACTUAL DETAILS ARE AS FOLLOWS. CISCO SYSTEMS INC., USA [ CSI FOR SHORT] PURCHASES SOFTWARE FROM THIRD PARTY VENDORS FOR USE BY THE CISCO GROUP ON A GLOBAL BASIS. THE ASSESSEE WAS ALSO ONE SUCH USE R OF SOFTWARE PURCHASED BY CSI. CSI CHARGES EACH OF THE GROUP CO MPANY CHARGES IT(TP)A NO.271/BANG/2014 PAGE 8 OF 61 DEPENDING UPON THE USE OF THE SOFTWARE. SUCH CHARG ES COLLECTED ARE CALLED INTER-COMPANY CHARGES. THE INTER-COMPANY CHARGES S O DETERMINED AND CROSS CHARGED TO CISCO INDIA BY CSI DEPENDING ON TH E USAGE OF THE SOFTWARE BY THE ASSESSEES EMPLOYEES FOR BUSINESS P URPOSES ACCORDING TO THE ASSESSEE WERE AT ACTUAL COST WITH NO PROFIT ELE MENT TO CSI. ACCORDING TO THE ASSESSEE, THE NATURE OF PAYMENTS MADE BY CIS CO INDIA TO CSI IS THEREFORE IN THE NATURE OF REIMBURSEMENTS AND THE RE IS NO ELEMENT OF PROFIT INVOLVED IN SUCH TRANSACTIONS. 12. THE AO NOTICED THAT THE ASSESSEE HAD NOT DEDUCT ED TAX AT SOURCE ON PAYMENTS MADE ON SOFTWARE EXPENSES WHICH WERE CL AIMED AS REVENUE EXPENSES. THE ASSESSEE SUBMITTED THAT THE SOFTWARE EXPENSES WERE PAYMENTS MADE BY IT TO CSI AND WERE REIMBURSEMENTS HENCE TAX AT SOURCE WAS NOT TO BE DEDUCTED. THE AO HOWEVER HELD THAT T HE ABSENCE OF PROFIT ELEMENT IN CROSS-CHARGES AS CLAIMED BY THE ASSESSEE WAS NEITHER EXPLAINED BY ASSESSEE NOR COULD IT BE INDEPENDENTLY VERIFIED AND ASCERTAINED. THE AO WAS OF THE VIEW THAT AS TDS HA S NOT BEEN DEDUCTED ON THE REVENUE EXPENSES CLAIMED AND THEREFORE THE S AID AMOUNT IS LIABLE FOR DISALLOWANCE U/S.40(A)(IA) OF THE INCOME-TAX AC T. THUS A SUM OF RS.77,82,476/- BEING INTER-COMPANY CHARGES PAID BY THE ASSESSEE TO CSI WAS ACCORDINGLY BROUGHT TO TAX U/S.40(A)(IA) OF THE ACT. THE DRP CONFIRMED THE ACTION OF THE AO. IT(TP)A NO.271/BANG/2014 PAGE 9 OF 61 13. AT THE TIME OF HEARING, A QUERY WAS PUT TO THE LD. COUNSEL FOR THE ASSESSEE AS TO WHETHER THE DEBIT NOTES RAISED BY CS I FOR SOFTWARE PURCHASE AND THE AGREEMENT FOR USE OF THE SOFTWARE PURCHASED FROM CSI WERE FILED BEFORE THE LOWER AUTHORITIES AND AS TO W HETHER IT WAS SUBSTANTIATED BEFORE THE REVENUE AUTHORITIES THAT P AYMENTS IN QUESTION ARE PURE REIMBURSEMENTS WITH NO PROFIT ELEMENT INVOLVED . THE LD. COUNSEL FOR THE ASSESSEE COULD NOT POINT OUT ANY EVIDENCE FILED BEFORE THE LOWER AUTHORITIES IN THIS REGARD. EVEN BEFORE THE TRIBUN AL, NO EVIDENCE HAS BEEN FILED TO ESTABLISH THE CLAIM OF THE ASSESSEE. IN S UCH CIRCUMSTANCES, THE PLEA OF THE ASSESSEE THAT THERE WAS NO PROFIT ELEME NT IN THE PAYMENTS MADE TO CSI STANDS UNSUBSTANTIATED. IN THE GIVEN C IRCUMSTANCES, WE ARE OF THE VIEW THAT THE ACTION OF THE REVENUE AUTHORIT IES IS JUSTIFIED. ACCORDINGLY, GROUND NO.3 RAISED BY THE ASSESSEE IS ALSO DISMISSED. 14. IN GROUNDS B 4 TO 17, THE ASSESSEE HAS CHALLE NGED THE ACTION OF THE DRP IN CONFIRMING THE ADDITION SUGGESTED BY THE TPO BY WAY OF ADJUSTMENT OF ARMS LENGTH PRICE (ALP) IN RESPECT O F INTERNATIONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVI CES BY THE ASSESSEE TO ITS AE. THE FACTS IN THIS REGARD ARE AS FOLLOWS. 15. THE ASSESSEE COMPANY, CISCO SYSTEMS (INDIA) PV T. LTD. IS A WHOLLY OWNED SUBSIDIARY OF CISCO GROUP REPRESENTED BY CISC O SYSTEMS MANAGEMENT BV AND CISCO MAURITIUS INC., MAURITIUS. CISCO INDIA IS RESPONSIBLE FOR MARKETING OF CISCO PRODUCTS IN INDI A AND FOR PROVIDING IT(TP)A NO.271/BANG/2014 PAGE 10 OF 61 SERVICES TO ITS AES NAMELY CSJ, CISCO BV AND CTI. T HE COMPANY IS PRIMARILY ENGAGED IN THE PROVISION OF CONTRACT SOFT WARE DEVELOPMENT SERVICES TO CISCO TECHNOLOGY INC., US [CTI]. T HUS, CISCO INDIA IS ENGAGED IN CONTRACT SOFTWARE DEVELOPMENT SERVICES, PRODUCT REPLACEMENT SERVICES, ADMINISTRATIVE AND OTHER SUPPORT SERVICES AND MANAGEMENT SERVICES TO ITS AES. THE SEGMENTAL FINANCIALS FOR THE F.Y. 2008-09 WERE AS UNDER:- DESCRIPTION SOFTWARE DEVELOPMENT MARKETING & SALES SERVICES PRODUCT REPLACEMENT SERVICES ADMIN & OTHER SUPPORT SERVICES MANAGE- MENT SERVICES OTHER REVENUE 9654304981 5270847929 2463723146 1491900613 1250254745 54441247 TOTAL COST 8904581852 4213518148 2413930963 1374404584 1136594862 51245935 OPERATING PROFIT 749723129 1057329781 49792183 117496029 113659883 3195312 MARK UP ON COST 8.42% 25.09% 2.06% 8.55% 10.00% MARK UP ON VAE 7% 16. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. B 1 TO 17 RELATES TO THE DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RE SPECT OF RECEIPTS BY THE ASSESSEE FROM ITS AE IN RESPECT OF TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES. IN SUPPORT OF THE CLAIM OF T HE ASSESSEE THAT THE PRICE PAID AS ABOVE WAS AT ARMS LENGTH, THE ASSESS EE FILED A TRANSFER PRICING ANALYSIS. THE ASSESSEE ADOPTED TNMM AS THE MOST APPROPRIATE METHOD. THE PROFIT LEVEL INDICATOR (PLI) CHOSEN WA S OPERATING PROFIT TO OPERATING COST. THE ASSESSEE PROPOSED 17 COMPARABL E COMPANIES OUT OF IT(TP)A NO.271/BANG/2014 PAGE 11 OF 61 WHICH THE TPO ACCEPTED 5 COMPARABLE COMPANIES AND R EJECTED THE 12 COMPARABLES. ON HIS OWN, THE TPO SELECTED 6 COMPAN IES AND ARRIVED AT A FINAL SET OF 11 COMPARABLES AND THEIR OPERATING MAR GINS AS FOLLOWS:- SL. NO. NAME OF THE COMPARABLE SALES (IN RS.) COST (IN RS.) MARGIN 1 KALS INFORMATION SYSTEMS LTD 2,14,04,686 1,87.93,813 L3.89% 2 AKSHAY SOFTWARE TECHNOLOGIES LTD. 12,23,21,483 11,31,49,350 8.11% 3 BODHTREE CONSULTING LTD. 16,05,75,212 9,89,56,821 62.27% 4 R S SOFTWARE (INDIA) LTD. 1,49,57,12,634 1,36,01,02,589 9.97% 5 TATA ELXSI LTD. (SEGMENTAL) 3,78,43,03,000 3,14,63,15,000 20.28% 6 SASKEN COMMUNICATION TECHNOLOGIES LTD. 4,05,31,20,000 3,18,69,97,000 27.91% 7 PERSISTENT SYSTEMS LTD. 5,19,69,10,000 3,67,52,70,000 41.40% 8 ZYLOG SYSTEMS LTD. 7,34,93,51,475 6,81,69,98,160 7.81% 9 MINDTREE LTD. (SEG) 7,93,22,79,326 5,74,06,73,058 5.52% 10 LARSEN AND TOUBRO INFOTECH 19,50,83,81,374 15,64,12,76,626 24.72% 11 INFOSYS LTD. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% AVERAGE MEAN 24.32% 17. THE MARGINS OF THE ASSESSEE AS COMPUTED BY THE TPO WAS 8.42%, WHICH WAS NOT WITHIN THE (+) OR (-) 5% RANGE OF THE ARITHMETIC MEAN OF THE FINAL SET OF COMPARABLE COMPANIES CHOSEN BY THE TPO . THE TPO THEREFORE PROCEEDED TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION BY APPLYING THE ARITHMETIC MEAN OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY HIM. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT, TH E TPO COMPUTED THE ALP AS FOLLOWS:- ARMS LENGTH MEAN MARGIN ON COST 24.32% LESS: WORKING CAPITAL ADJUSTMENT (ANNEX.C) - 0.41% ADJUSTED MARGIN 24.73% OPERATING COST 890481852 ARMS LENGTH PRICE 124.73% OF OPERATING COST 11106684944 PRICE RECEIVED 9654304981 SHORTFALL BEING ADJUSTMENT U/S 92CA 1452379963 IT(TP)A NO.271/BANG/2014 PAGE 12 OF 61 18. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP TO THE PROPOSAL MADE BY THE TPO IN THE ORDER PASSED U/S. 92CA OF THE ACT . THE DRP CONFIRMED THE ORDER OF THE TPO. THE AO PASSED FAIR ASSESSMEN T ORDER IN WHICH THE ADDITION PROPOSED BY THE TPO WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 19. THE FIRST ASPECT THAT NEEDS CONSIDERATION IS TH E COMPUTATION OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. IN IT S OBJECTION NO.12 BEFORE THE DRP, THE ASSESSEE SUBMITTED THAT THE TPO ERRED IN NOT TREATING THE FOREIGN EXCHANGE FLUCTUATION AS PART OF THE OPE RATING PROFITS AND ADDING THE SAME TO THE INCOME FROM SOFTWARE DEVELOPMENT SE RVICES. THE ASSESSEE SPECIFICALLY BROUGHT TO THE NOTICE OF THE DRP THAT THE TPO WHILE COMPUTING THE OPERATING MARGIN, HAS NOT INCLUDED TH E INCOME FROM FOREIGN EXCHANGE FLUCTUATION ON THE GROUND THAT THE SAME IS NON-OPERATING IN NATURE. THE ASSESSEE BROUGHT TO THE NOTICE OF THE D RP THAT THE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LTD. IN ITA NO.1054/BANG/2011 , HAS HELD THAT FOREIGN EXCHANGE GAIN/LOSS HAS TO BE CONSIDERED AS OPERATIN G IN NATURE. THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE BANG ALORE BENCH IN THE CASE OF SAP LABS INDIA PVT. LTD. V. ACIT, [2011] 44 SOT 156 (BANG) . THE ASSESSEE BROUGHT TO THE NOTICE OF THE DRP THA T IF THE FOREIGN EXCHANGE FLUCTUATION IS CONSIDERED AS INCOME FROM O PERATIONS, THEN THE OPERATING MARGINS OF THE ASSESSEE WOULD BE AS FOLLO WS:- IT(TP)A NO.271/BANG/2014 PAGE 13 OF 61 MARGIN COMPUTATION FOR YEAR ENDING MARCH 31, 2009 20. THE DRP, HOWEVER, DID NOT AGREE WITH THE SUBMIS SIONS MADE BY THE ASSESSEE AND IT HELD AS FOLLOWS:- .. HOWEVER, THE DECISION OF THE TPO TO EXCLU DE FOREIGN EXCHANGE GAIN/LOSS IS CORRECT FOR THE REASONS SUMMA RIZED BELOW. ALL THE DECISIONS CITED BY THE TAXPAYER PERTAIN TO THE ISSUE OF WHETHER FOREIGN EXCHANGE GAIN/LOSS IS AN ALLOWABLE EXPENSE OR WHETHER IT FORMS PART OF SALE. THERE IS NO DISPUTE REGARDING WHETHER EXCHANGE GAIN IS BUSINESS INCOME OF FOREIGN EXCHANGE LOSS IS BUSINESS EXPENDITURE. THE ISSUE IS WHETHER THE FOREIGN EXCHANGE GAIN/LOSS FORMS PART OF PROFIT S REALIZED FROM INTERNATIONAL TRANSACTIONS. THE ANSWER IS NO, AS THE FOREIGN EXCHANGE GAIN/LOSS IS DEPENDENT ON EXTRANEO US FACTORS BEYOND THE PURVIEW OF THE TAXPAYER. IN THIS REGARD. IT IS VERY PERTINENT TO MENTION HERE THAT INTEREST EXPENSE IS ALSO EXCLUDED FROM EXPENSES THOUGH THIS EXPENSE IS ELIGI BLE AS BUSINESS EXPENDITURE UNDER THE ACT. THUS ALL THE BU SINESS EXPENSES MAY NOT FORM PART OF OPERATING EXPENSES TO BE CONSIDERED FOR COMPARABILITY AS THE OPERATING EXPEN SES SHOULD BE COMPARED AT THE SAME LEVEL FOR COMPARABILITY ANA LYSIS. IT(TP)A NO.271/BANG/2014 PAGE 14 OF 61 THE COMPARISON OF THE PROFITS SHOULD BE AT SAME LEVEL FOR THE UNCONTROLLED ENTERPRISE AND FOR THE TAX PAYER. SINC E, THERE IS RISK DIFFERENTIAL BETWEEN THE TAXPAYER AND THE COMP ARABLES ON ACCOUNT OF FOREIGN CURRENCY, THE OPERATING MARGINS OF THE TAXPAYER AS WELL AS THAT OF THE COMPARABLES ARE TAK EN BY EXCLUDING THE RISK ARISING ON ACCOUNT OF FOREIGN EX CHANGE I.E. BY EXCLUDING THE EXPENDITURE/INCOME ON ACCOUNT OF F OREIGN EXCHANGE FLUCTUATIONS. AS FAR AS THE RELIANCE ON CASE LAWS IS CONCERNED, IT IS SEEN THAT EXCEPT FOR THE CASE OF SAP LABS NONE OF THE JU DGEMENTS PERTAIN TO THE TP PROVISIONS, WHICH, AS ALREADY ELA BORATELY DISCUSSED ABOVE, WOULD GIVE DIFFERENT RESULTS VIS A VIS NORMAL PROVISIONS OF THE ACT. AS FAR AS SAP LABS IS CONCER NED, IT IS SEEN THAT THE DECISION WAS MADE IN THE CONTEXT OF THE JU DGEMENTS DELIVERED IN RELATION TO CHAPTER VIA DEDUCTIONS. TH E DISCUSSION WAS NOT MADE IN RESPECT OF THE PRINCIPLES OF TRANSF ER PRICING. CONSEQUENTLY WHILE DECIDING THE ISSUE THE HONBLE T RIBUNAL DID NOT HAVE THE BENEFIT OF THE DISCUSSION MADE ABOVE. ON THE BASIS OF ABOVE DISCUSSION, NO RELIEF IS GIVEN TO THE ASSE SSEE ON THE BASIS OF THIS OBJECTION. 21. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REI TERATED THE SUBMISSIONS AS WERE MADE BEFORE THE DRP. IN GROUND NO.13 RAISED BEFORE THE TRIBUNAL, THE ASSESSEE HAS SUBMITTED AS FOLLOWS :- 13. THE LEARNED TPO/LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY NOT TREATING FOREIGN EXCHANGE FLUCTUATION AS BEING OPERATING IN NATURE IN COMPUTING THE OPERATING MA RGINS OF THE APPELLANT AND THE COMPARABLE COMPANIES. 22. THE LD. DR PLACED RELIANCE ON THE ORDER OF THE DRP ON THIS ISSUE. IT(TP)A NO.271/BANG/2014 PAGE 15 OF 61 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN T HE COURSE OF HEARING BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE ALSO FI LED A SEGMENT WISE BREAK UP OF FOREIGN EXCHANGE FLUCTUATION GAIN, THE SAME I S GIVEN AS ANNEXURE-I TO THIS ORDER . IT CAN BE SEEN FROM THE AFORESAID CHART GIVEN BY THE ASSESSEE THAT THE TOTAL FOREIGN EXCHANGE GAIN ON AC COUNT OF REALIZATION OF PROCEEDS FROM DEBTORS, TAKEN TO CREDITORS, INTER-CO MPANY STATEMENTS ETC. WAS A SUM OF RS.179,01,08,756. OUT OF THE ABOVE, THE ASSESSEE ON HIS OWN HAS EXCLUDED FOREIGN EXCHANGE FLUCTUATION ON AC COUNT OF ADVANCES TOWARDS SHARE CAPITAL CHARGED TO P&L ACCOUNT AND FO REIGN EXCHANGE FLUCTUATION IN THE MATTER OF PURCHASE OF FIXED ASSE TS CHARGED TO P&L ACCOUNT. IT IS THUS CLEAR FROM THE CHART THAT A S UM OF RS.37,89,23,185 WHICH WAS SOUGHT TO BE ADDED AS PART OF THE OPERATI NG INCOME ON RENDERING SOFTWARE DEVELOPMENT SERVICES IS ONLY ON ACCOUNT OF TRANSACTIONS OF RENDERING SOFTWARE DEVELOPMENT SERVICES BY THE ASSE SSEE TO ITS AE AND THE FOREIGN EXCHANGE FLUCTUATION AT THE TIME OF REALIZA TION OF THE PAYMENT FOR RENDERING SOFTWARE DEVELOPMENT SERVICES. IT IS THE REFORE CLEAR THAT THE FOREIGN EXCHANGE FLUCTUATION IN QUESTION HAS TO BE TREATED AS PART OF THE OPERATING INCOME OF SOFTWARE DEVELOPMENT SERVICES S EGMENT OF THE ASSESSEE AND THE OPERATING PROFIT TO OPERATING COST HAS TO BE DETERMINED ACCORDINGLY. THE DRP HAS REFUSED TO FOLLOW THE DEC ISION OF ITAT BANGALORE BENCH IN THE CASE OF SAP LABS INDIA PVT. LTD. (SUPRA) . IN OUR VIEW, THE DECISION RENDERED BY THE TRIBUNAL IS BINDING ON THE DRP AND THE DRP CANNOT BE HEARD TO SAY THAT THE DECISION RE NDERED BY THE TRIBUNAL IT(TP)A NO.271/BANG/2014 PAGE 16 OF 61 IS INCORRECT AND REFUSE TO FOLLOW THE SAME. IN THE GIVEN FACTS AND CIRCUMSTANCES, WE HOLD THAT THE FOREIGN EXCHANGE GA IN FROM SOFTWARE DEVELOPMENT SERVICES HAS TO BE CONSIDERED AS PART O F THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES WHILE COMPUTING THE M ARGIN OF THE ASSESSEE AND ACCORDINGLY THE MARGIN OF 12.67% COMPU TED BY THE ASSESSEE IS DIRECTED TO BE ADOPTED. 24. THE NEXT ASPECT THAT REQUIRES CONSIDERATION IS WITH REGARD TO THE COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO. AS WE HAVE ALREADY SEEN, THE ASSESSEE HAD CHOSEN A LIST OF 17 COMPARABLE COM PANIES, WHICH ARE GIVEN IN PARA 3.6.1 OF THE TPOS ORDER. WE HAVE A LSO SEEN THAT OUT OF THE 17 COMPARABLE CHOSEN BY THE ASSESSEE, THE AO ACCEPT ED ONLY 5 COMPANIES AS COMPARABLE WITH THAT OF THE ASSESSEE A ND EXCLUDED THE REMAINING 12 COMPANIES. THE TPO ON HIS OWN CONDUCT ED A SEARCH OF DATABASE AND ARRIVED AT A LIST OF 6 NEW COMPARABLE COMPANIES. THE FINAL LIST OF 11 COMPARABLE COMPANIES AND THEIR MARGINS W ERE TAKEN FOR ARRIVING AT AN ARITHMETIC MEAN OF 24.32% OF THE COMPARABLES. 25. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS FILED A CHART IN WHICH HE HAS QUESTIONED THE ACTION OF THE TPO IN INCLUDIN G/RETAINING SOME OF THE COMPARABLE CHOSEN BY THE TPO IN THE FINAL LIST OF C OMPARABLES CHOSEN BY HIM. THE ASSESSEE HAS ALSO SUBMITTED THAT SOME OF THE COMPARABLE CHOSEN BY THE ASSESSEE OUGHT NOT TO HAVE BEEN REJEC TED BY THE TPO. WE WILL DEAL WITH EACH OF SUCH COMPARABLE COMPANIES IN THE FOLLOWING PARAS. IT(TP)A NO.271/BANG/2014 PAGE 17 OF 61 26. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 26.1 BODHTREE CONSULTING LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES C HOSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASSESSEE. THE ASS ESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSE SSEES NOTICE THAT THIS COMPANY IS NOT BEING CONSIDERED AS A COMPARABLE COM PANY IN THE CASE OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11 .2013 . IN THIS CASE, THE TRIBUNAL FOLLOWED THE DECISION RENDE RED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P. LTD., ITA NO.4547/MUM/2012 . IN THE AFORESAID DECISIONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN THE BUSINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOP MENT OF SOFTWARE USING LATEST TECHNOLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. IT WAS AFFIRMED BY THE L EARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PR ESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 IT(TP)A NO.271/BANG/2014 PAGE 18 OF 61 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. FO LLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HO LD THAT BODHTREE CONSULTING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS, THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COM PANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE S AID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOW N THAT THE SAID COMPANY IS A SOFTWARE PRODUCT COMPANY AND NOT A SOFTWARE DE VELOPMENT SERVICES COMPANY. 26.2 INFOSYS LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSID ERED TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVICES, AS THIS COMPANY OWNS SIGNIFICANT INTANGIBLES AND HA S HUGE REVENUES FROM SOFTWARE PRODUCTS. IN THIS REGARD, WE FIND THAT TH E BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TDPLM SOFTWARE SOLUTIO NS LTD. V. DCIT, ITA NO.1303/BANG/2012, BY ORDER DATED 28.11.2013 WITH R EGARD TO THIS COMPARABLE HAS HELD AS FOLLOWS:- 11.0 INFOSYS TECHNOLOGIES LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BE FORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPA NY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND A TTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASP ECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTAT IVE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTA TIVE DREW OUR ATTENTION TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO IT(TP)A NO.271/BANG/2014 PAGE 19 OF 61 SUBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A MARKET LEADER IN SOFTWARE DEVELOPMENT ACTIVITIES, WHEREAS THE ASSESSEE IS MER ELY A SOFTWARE SERVICE PROVIDER OPERATING ITS BUSINESS IN INDIA AN D DOES NOT POSSESS EITHER ANY BRAND VALUE OR OWN ANY INTANGIBLE OR INT ELLECTUAL PROPERTY RIGHTS (IPRS). IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT :- (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY INTANGIBLE AN D HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS S UBMITTED THAT THIS DECISION IS APPLICABLE TO THE ASSESSEE'S CASE, AS T HE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INFOSYS TECHNOLOG IES LTD. CANNOT BE COMPARABLE TO THE ASSESSEE ; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN T HE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856 (DEL)/2 010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNOLOGIES LTD. BEING A GIA NT COMPANY AND MARKET LEADER ASSUMING ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSIDERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDE RS ASSUMING LIMITED RISK ; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA ; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOF TWARE PRODUCTS AND THE BREAK UP OF SUCH REVENUES IS NOT AVAILABLE ; (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR RESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQ UISITION OF IPRS IN AUTOLAY, A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORI SED REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFO SYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPA NIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE A SSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF O PERATIONS AND THE BRAND ATTRIBUTABLE PROFIT MARGINS OF THIS COMPANY H AVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTM ENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIN D THAT THE ASSESSEE IT(TP)A NO.271/BANG/2014 PAGE 20 OF 61 HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABL ISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT F ROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERE D IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. WE AR E INCLINED TO CONCUR WITH THE ARGUMENT PUT FORTH BY THE ASSESSEE THAT IN FOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SI GNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFT WARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMP ANIES. IT IS ORDERED ACCORDINGLY. THE DECISION RENDERED AS AFORESAID PERTAINS TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE TH AT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDEN TICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. RESPECTFULLY FOLLOWING THE D ECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXC LUDED FROM THE LIST OF COMPARABLE COMPANIES. 26.3 KALS INFORMATION SYSTEMS LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPARABLE TO A PURE SOFTWARE DEV ELOPMENT SERVICES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN T HE CASE OF M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH IT(TP)A NO.271/BANG/2014 PAGE 21 OF 61 SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGE D IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTW ARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TR IBUNALS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON A CCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPA NIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHI CH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF T HIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD IT(TP)A NO.271/BANG/2014 PAGE 22 OF 61 THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVI DER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. 26.4 TATA ELXSI LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT IN ASSESSEES OWN CASE FOR T HE A.Y. 2007-08, THIS COMPANY WAS NOT REGARDED AS A COMPARABLE IN ITS SOF TWARE DEVELOPMENT SERVICES SEGMENT IN ITA NO.1076/BANG/2011, ORDER DATED 29.3.2013 . FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. THE LEARNED CHARTERED ACCOUNTANT PLEADED THAT O UT OF THE SIX COMPARABLES SHORTLISTED ABOVE AS COMPARABLES BASED ON THE TURNOVER FILTER, THE FOLLOWING TWO COMPANIES, NAMEL Y (I) TATA ELXSI LTD; AND (II) M/S. FLEXTRONICS SOFTWARE SYSTE MS LTD., DESERVE TO BE ELIMINATED FOR THE FOLLOWING REASONS : (I) TATA ELXSI LTD., : THE COMPANY OPERATES IN THE SEGMENTS OF SOFTWARE DEVELOPMENT SERVICES WHICH COMPRISES OF EMBEDDED PRODUCT DESIGN SERVICES, INDUSTRIAL DESIGN AND ENGINEERING SERVICES AND VISUAL COMPUTING LABS AND SYSTEM INTEGRATION SERVICES SEGMENT. THERE IS NO SUB-SERVI CES BREAK UP/INFORMATION PROVIDED IN THE ANNUAL REPORT OR THE DATABASES BASED ON WHICH THE MARGIN FROM SOFTWARE SERVICES ACTIVITY ONLY COULD BE COMPUTED. THE COMPA NY HAS ALSO IN ITS RESPONSE TO THE NOTICE U/S.133(6) S TATED THAT IT CANNOT BE CONSIDERED AS COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY BECAUSE OF ITS COMPLEX NA TURE. HENCE, TATA ELXSI LTD., IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IT(TP)A NO.271/BANG/2014 PAGE 23 OF 61 (II) FLEXTRONICS SOFTWARE SYSTEMS LTD. : THE LEARN ED TPO HAS CONSIDERED THIS COMPANY AS A COMPARABLE BASED ON 13 3(6) REPLY WHEREIN THIS COMPANY REFLECTED ITS SOFTWARE DEVELOP MENT SERVICES REVENUES TO BE MORE THAN 75% OF THE 'SOFTWARE PRODU CTS AND SERVICES' SEGMENT REVENUES. FLEXTRONICS HAS A HYBRI D REVENUE MODEL AND HENCE SHOULD BE REJECTED AS FUNCTIONALLY DIFFERENT. BASED ON THE INFORMATION PROVIDED UNDER 'REVENUE RE COGNITION' IN ITS ANNUAL REPORT, IT CAN BE INFERRED THAT THE S OFTWARE SERVICES REVENUES ARE EARNED ON A HYBRID REVENUE MODEL, AND THE SAME IS NOT SIMILAR TO THE REGULAR MODELS ADOPTED BY OTHER SOFTWARE SERVICE PROVIDERS. THE LEARNED REPRESENTATIVE PLEAD ED THAT A REGULAR SOFTWARE SERVICES PROVIDER COULD NOT BE COM PARED TO A COMPANY HAVING SUCH A UNIQUE REVENUE MODEL, WHEREIN THE REVENUES OF THE COMPANY FROM SOFTWARE/PRODUCT DEVEL OPMENT SERVICES DEPENDS ON THE SUCCESS OF THE PRODUCTS SOL D BY ITS CLIENTS IN THE MARKETPLACE. HENCE, IT WOULD BE INAPPROPRIAT E TO COMPARE THE BUSINESS OPERATIONS OF THE ASSESSEE WITH THAT O F A COMPANY FOLLOWING HYBRID BUSINESS MODEL COMPRISING OF ROYAL TY INCOME AS WELL AS REGULAR SOFTWARE SERVICES INCOME, FOR WHICH REVENUE BREAK-UP IS NOT AVAILABLE. HE FINALLY SUBMITTED THA T THIS WAS A GOOD REASON TO EXCLUDE THIS COMPANY ALSO FROM THE L IST OF COMPARABLES. 20. ON THE OTHER HAND, THE LEARNED DR SUPPORTED TH E ORDER OF THE LOWER AUTHORITIES REGARDING THE INCLUSION OF TA TA ELXSI AND FLEXTRONICS SOFTWARE SYSTEMS LTD., IN THE LIST OF C OMPARABLES. HE REITERATED THE CONTENTS OF PARA 14.2.25 OF THE TPO' S ORDER. HE ALSO READ OUT THE FOLLOWING PORTION FROM THE TPO'S ORDER : 'THUS AS STATED ABOVE BY THE COMPANY, THE FOLLOWING FACTS EMERGE : 1. THE COMPANY'S SOFTWARE DEVELOPMENT AND SERVICES SEGMENT CONSTITUTES THREE SUB-SEGMENTS I) PRODUCT DESIGN SERVICES; II) ENGINEERING DESIGN SERVICES AN D III) VISUAL COMPUTING LABS. 2. THE PRODUCT DESIGN SERVICES SUB-SEGMENT IS INTO EMBEDDED SOFTWARE DEVELOPMENT. THUS THIS SEGMENT IS INTO SOFTWARE DEVELOPMENT SERVICES. 3. THE CONTRIBUTION OF THE EMBEDDED SERVICES SEGMEN T IS TO THE TUNE OF RS.230 CRORES IN THE TOTAL SEGMENT REVENUE OF RS.263 CRORES. EVEN IF WE CONSIDER THE IT(TP)A NO.271/BANG/2014 PAGE 24 OF 61 OTHER TWO SUB-SEGMENTS PERTAIN TO IT ENABLED SERVICES, THE 87.45% (75%) OF THE SEGMENT'S REVENU ES IS FROM SOFTWARE DEVELOPMENT SERVICES. 4. THIS SEGMENT QUALIFIES ALL THE FILTERS APPLIED B Y THE TPO.' REGARDING FLEXTRONICS SOFTWARE SYSTEMS, THE FOLLOWI NG EXTRACT FROM PAGE 143 OF TPO'S ORDER WAS READ OUT BY HIM AS HIS SUBMISSIONS : 'IT IS VERY PERTINENT TO MENTION HERE THAT THE COMP ANY WAS CONSIDERED BY THE TAXPAYER AS A COMPARABLE FOR THE PRECEDING ASSESSMENT YEAR I.E., AY 2006-07. WHEN TH E SAME WAS ACCEPTED BY THE TPO AS A COMPARABLE, THE S AME WAS NOT OBJECTED TO IT BY THE TAXPAYER. AS THE FACT S MENTIONED BY THE TAXPAYER ARE THE SAME AND THESE WE RE THERE IN THE EARLIER FY 2005-06, THERE IS NO REASON WHY THE TAXPAYER IS OBJECTING TO IT. HOW THE COMPANY IS FUNCTIONALLY SIMILAR IN THE EARLIER FY 2005-06 BUT THE SAME IS NOT FUNCTIONALLY SIMILAR FOR THE SUBSEQUENT FY 2006-07 EVEN WHEN NO FACTS HAVE BEEN CHANGED FROM T HE PRECEDING YEAR. THUS THE TAXPAYER IS ARGUING AGAINS T THIS COMPARABLE AS THE COMPANY WAS NOT CONSIDERED AS A COMPARABLE BY THE TAXPAYER FOR THE PRESENT FY 2006- 07.' 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSID ERED THE FACTS AND MATERIALS ON RECORD. AFTER CONSIDERING TH E SUBMISSIONS, WE FIND THAT TATA ELXSI AND FLEXTRONICS ARE FUNCTIO NALLY DIFFERENT FROM THAT OF THE ASSESSEE AND HENCE THEY DESERVE TO BE DELETED FROM THE LIST OF SIX COMPARABLES AND HENCE THERE RE MAINS ONLY FOUR COMPANIES AS COMPARABLES, AS LISTED BELOW: 26.5. FOLLOWING THE AFORESAID DECISION OF THE TRIB UNAL, WE HOLD THAT M/S.TATA ELXSI LTD. SHOULD NOT BE REGARDED AS A COM PARABLE. 27. LIST OF COMPANIES WHICH WERE CHOSEN AS COMPARABLE BY THE ASSESSEE, BUT WHICH WERE REJECTED AS COMPARABLE BY THE TPO, WHICH THE ASSESSEE WANTS TO INCLUDE IN THE LIST OF COMPARABLE:- 27.1 EVOKE TECHNOLOGIES PVT. LTD. 27.2 MAVERICK SYSTEMS LTD. IT(TP)A NO.271/BANG/2014 PAGE 25 OF 61 27.3 QUINTEGRA SOLUTIONS LTD. 27.4 GOLDSTONE TECHNOLOGIES LTD. (A) THE TPO REJECTED THE AFORESAID COMPANIES AS NOT COMPARABLE FOR THE REASON THAT MORE THAN 75% OF THE REVENUES IS NO T FROM EXPORTS. IN THIS REGARD, AT PARA 3.5 OF THE TPOS ORDER, THE TPO ADO PTED A FILTER BY WHICH HE EXCLUDED COMPANIES WHERE THE SOFTWARE DEVELOPMENT S ERVICES REVENUE IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES. ON THIS BASIS, THE AFORESAID 4 COMPARABLES WERE EXCLUDED. THE DRP CONFIRMED THE ORDER OF THE TPO. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE BEFORE US WAS THAT IN CASE OF EVOKE TECHNOLOGIES PVT. LTD. AND MAVERICK SYSTEMS LTD. , ADMITTEDLY, THE EXPORT REVENUES DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2009-10 WERE LESS THAN 75%. HOWEVER, THESE COMPANI ES IN THE PAST HAD EXPORT REVENUES ABOVE 75% AND THEREFORE THE TPO OUG HT NOT TO HAVE BEEN REJECTED AS COMPARABLE AND SHOULD HAVE SEEN THE AVE RAGE EXPORT REVENUES TO THE TOTAL OPERATING REVENUES FOR THE PA ST THREE YEARS. IN OUR VIEW, THE RELEVANT DATA TO BE CONSIDERED IS THE DAT A FOR THE PREVIOUS YEAR RELEVANT TO A.Y. 2009-10. ADMITTEDLY, EXPORT SALES WAS LESS THAN 75% OF THE TOTAL SALES DURING THE PREVIOUS YEAR RELEVANT T O A.Y. 2009-10 AND ONLY THIS DATA WOULD BE RELEVANT. ACCORDINGLY, WE UPHOL D THE REJECTION OF THOSE TWO COMPANIES AS COMPARABLE. (B) AS FAR AS THE OTHER TWO COMPANIES VIZ., QUINTE GRA SOLUTIONS LTD. AND GOLDSTONE TECHNOLOGIES LTD. ARE CONCERNED, IT IS SEEN FROM PAGE 825 TO 827 AND 828 TO 833 OF THE ASSESSEES PAPERBOOK THAT BOTH THESE IT(TP)A NO.271/BANG/2014 PAGE 26 OF 61 COMPANIES SEEM TO HAVE MORE THAN 75% EXPORT EARNING S. SINCE THE FACTS HAVE NOT BEEN PROPERLY APPRECIATED, WE DEEM IT FIT AND PROPER TO RESTORE THE QUESTION OF CONSIDERING THESE TWO COMPANIES AS COMPARABLE TO THE TPO/AO FOR FRESH CONSIDERATION. 27.5 R SYSTEMS INTERNATIONAL 27.6 SILVERLINE TECHNOLOGIES LTD. (C) THESE COMPANIES WERE REJECTED BY THE TPO/DRP F OR THE REASON THAT THESE COMPANIES HAVE DIFFERENT ACCOUNTING YEAR. ON THIS ISSUE, THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT THE DATA FOR EACH QUARTER OF BOTH THE AFORESAID COMPANIES WERE AVAILA BLE AND FROM THAT DATA, THE TPO COULD HAVE CULLED OUT THE FINANCIAL RESULTS OF THE TWO COMPANIES TO MATCH WITH THE ACCOUNTING YEAR OF THE ASSESSEE. OU R ATTENTION WAS DRAWN TO THE DECISION OF THE ITAT DELHI BENCH OF THE TRIB UNAL IN THE CASE OF MERCER CONSULTING (INDIA) PVT. LTD. V. DCIT, ITA NO.966/DEL/2014 , WHEREIN THE DELHI BENCH OF THE TRIBUNAL, ON THE QUESTION OF APPLYING THE FILTER OF DIFFERENT ACCOUN TING YEAR OF THE COMPARABLE, OBSERVED AS FOLLOWS:- R. SYSTEMS INTERNATIONAL LIMITED 11.1. THE ASSESSEE INCLUDED THIS CASE IN A LIST OF COMPARABLES. THE TPO APPLIED A FILTER OF EXCLUDING COMPANIES WHO SE DATA FOR THE FINANCIAL YEAR 2008-09 WAS NOT AVAILABLE. AS TH E DATA CONSIDERED BY R. SYSTEMS INTERNATIONAL LTD. WAS FOR THE YEAR ENDING OTHER THAN MARCH, THE TPO HELD THAT THIS CAS E WAS NOT COMPARABLE. THE ASSESSEE IS CONTESTING THE EXCLUSIO N OF THIS CASE. IT(TP)A NO.271/BANG/2014 PAGE 27 OF 61 11.2. THE LD. AR FAIRLY CONCEDED THAT R. SYSTEMS WA S FOLLOWING CALENDAR YEAR FOR MAINTAINING ITS ANNUAL ACCOUNTS A ND, AS SUCH, THE ASSESSEE ADOPTED DATA FOR 31.12.08 FOR INCLUDIN G IT IN THE LIST OF COMPARABLES. IT WAS, HOWEVER, STRESSED THAT THIS CASE OUGHT NOT TO HAVE BEEN EXCLUDED ON THIS COUNT ALONE, WHEN IT WAS OTHERWISE COMPARABLE. THE LD. DR OPPOSED THIS CONTENTION BY P LACING RELIANCE ON CERTAIN DECISIONS IN WHICH IT HAS BEEN HELD THAT IF THE DATA FOR THE FINANCIAL YEAR OF THE COMPARABLE CASE SIMILAR TO THAT OF THE TESTED PARTY IS NOT AVAILABLE, THEN, SUCH CA SE SHOULD BE EXPUNGED FROM THE LIST OF COMPARABLES. 11.3. IN ORDER TO APPRECIATE THE RIVAL SUBMISSIONS ON THIS ISSUE, IT WOULD BE APT TO NOTE THE RELEVANT PART OF SUB-RULE (4) OF RULE 10B WHICH IS AS UNDER:- `(4) THE DATA TO BE USED IN ANALYSING THE COMPARABI LITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONA L TRANSACTION SHALL BE THE DATA RELATING TO THE FINAN CIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEE N ENTERED INTO. 11.4. ON CIRCUMSPECTION OF THE ABOVE PART OF THIS S UB-RULE, IT COMES TO FORE THAT THE COMPARABILITY OF AN UNCONTRO LLED TRANSACTION CAN BE ANALYSED WITH THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE TRANSACTION HAS BEEN ENTERED INT O. AS PER THIS MANDATE, IT IS CLEAR THAT IF THE TESTED PARTY HAS M ARCH ENDING, THEN THE COMPARABLES MUST ALSO HAVE THE DATA RELATING TO THE FINANCIAL YEAR ENDING ON 31 ST MARCH ITSELF. IF SUCH A DATA IS NOT AVAILABLE, THEN THE CASE SHOULD BE DISQUALIFIED FROM THE LIST OF COMPARABLES. 11.5. TURNING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE HAS ADOPTED THE FIGURES OF THIS COMPANY FO R THE CALENDAR YEAR ENDING 31.12.2008. SINCE THE ASSESSEE IS CLOSI NG ITS ACCOUNTS AS ON 31.3.2009, NATURALLY, THE DATA OF R.SYSTEMS D OES NOT PASS THE TEST LAID DOWN IN SUB-RULE (4) OF RULE 10B. THE LD. AR INVITED OUR ATTENTION TOWARDS THE ANNUAL ACCOUNTS OF R. SYS TEMS AVAILABLE AT PAGE 144 OF THE ASSESSEES PAPER BOOK. IT CAN BE SEEN FROM THE AUDITED ACCOUNTS OF R. SYSTEMS THAT THE DA TA FOR YEAR ENDING 31.12.08 HAS BEEN GIVEN UNDER ONE COLUMN AND THE DATA FOR QUARTER ENDING 31.3.09 AND 31.3.08 (BOTH AUDITE D) HAS BEEN GIVEN IN THE OTHER TWO COLUMNS. THIS SHOWS THAT IF WE TAKE UP THE YEARLY DATA ENDING 31.12.08 AND EXCLUDE THE RESULTS OF QUARTER ENDING 31.3.08 AND INCLUDE THE RESULTS OF QUARTER E NDING 31.3.09, WHAT WE GET IS THE DATA FOR THE FINANCIAL YEAR ENDI NG 31.3.09, IT(TP)A NO.271/BANG/2014 PAGE 28 OF 61 BEING THE SAME FINANCIAL YEAR IN WHICH THE INSTANT INTERNATIONAL TRANSACTIONS WERE ENTERED INTO BY THE ASSESSEE. 11.6. THE LD. DR RELIED ON AN ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN ACIT VS. HAPAG LLOYD GLOBA L SERVICES LTD. 2013-TII-68-ITAT-MUM-TP (AUTHORED BY ONE OF US , NAMELY, THE AM) IN WHICH IT HAS BEEN HELD THAT A CO MPANY WITH A DIFFERENT FINANCIAL YEAR ENDING CANNOT BE COMPARED AND IS LIKELY TO BE EXCLUDED. THERE IS NOT AND CANNOT BE ANY DISP UTE OVER THIS PROPOSITION THAT AN OTHERWISE COMPARABLE COMPANY HA VING A DIFFERENT FINANCIAL YEAR CANNOT BE CONSIDERED AS CO MPARABLE. BUT IF THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO IS DIRECTLY AVAIL ABLE FROM THE ANNUAL ACCOUNTS OF THAT COMPARABLE, THEN IT CANNOT BE HELD AS NOT PASSING THE TEST GIVEN UNDER SUB-RULE (4) OF RULE 1 0B. IN THE CASE UNDER CONSIDERATION BEFORE THE MUMBAI BENCH, THERE IS NO MENTION OF THE AUDITED QUARTERLY DATA OF SUCH COMPA RABLE BEING AVAILABLE FOR CONSIDERATION. IT IS QUITE NATURAL TH AT IF THE DATA OF THE FINANCIAL YEAR IS NOT AVAILABLE OR NOT CAPABLE OF BEING DIRECTLY DEDUCED FROM THE ANNUAL ACCOUNTS OF SUCH COMPANY, T HEN SUCH CASE DESERVES TO BE EXCLUDED. IF, HOWEVER, THE AUDI TED ACCOUNTS OF SUCH COMPARABLE DIRECTLY GIVE THE FIGURES IN SUCH A MANNER THAT THE DATA OF THE FINANCIAL YEAR IN WHICH THE ASSESSE E HAS ENTERED INTO AN INTERNATIONAL TRANSACTION CAN BE EASILY DED UCED, THEN THERE IS NO REASON FOR EXCLUDING SUCH AN OTHERWISE COMPAR ABLE CASE. 11.7. WE FIND THAT R. SYSTEMS INTERNATIONAL LTD. H AS BEEN EXCLUDED BY THE TPO SOLELY FOR THE REASON THAT ITS FINANCIAL YEAR IS DIFFERENT WITHOUT CONSIDERING THAT THE DATA FOR THE FINANCIAL YEAR ADOPTED BY THE ASSESSEE CAN BE EASILY COMPILED FROM THE AUDITED STATEMENTS OF SUCH COMPANY. WE, THEREFORE, SET ASID E THE IMPUGNED ORDER ON THIS ISSUE AND REMIT THE MATTER T O THE TPO/AO FOR INCLUDING THE CASE OF R. SYSTEMS INTERNATIONAL LTD. IN THE LIST OF COMPARABLES BY WORKING OUT THE FIGURES RELEVANT TO THE FINANCIAL YEAR ENDING 31.3.09 FROM THE AUDITED ACCO UNTS OF R. SYSTEMS INTERNATIONAL LTD. 27.7. FOLLOWING THE AFORESAID DECISION OF THE TRIBU NAL, WE DIRECT THE TPO TO CULL OUT THE FINANCIAL RESULTS OF THESE TWO COMPARA BLE COMPANIES FOR THE IT(TP)A NO.271/BANG/2014 PAGE 29 OF 61 PERIOD RELATABLE TO THE ASSESSEES FINANCIAL YEAR A ND THEREAFTER CONSIDER THESE TWO COMPANIES AS COMPARABLES. WE HOLD AND DI RECT ACCORDINGLY. 27.8 CG-VAK SOFTWARE & EXPORTS LTD. (D) (I) AS FAR AS THIS COMPANY IS CONCERNED, THE TPO REJECTED THE SAME BY APPLYING THE 25% EMPLOYEE COST FILTER. ACC ORDING TO THE TPO, USUALLY SOFTWARE DEVELOPMENT SERVICES ARE HIGH-END SERVICES PERFORMED BY SKILLED AND PROFESSIONAL EMPLOYEES AND HENCE THE CO ST OF RENDERING SUCH HIGH-END SERVICES IS ALSO HIGH AS THEY COMPRISE OF HIGH SALARIES AND BETTER WELFARE FACILITIES, COMPARED TO LOW-END SERVICES. T HEREFORE, THE FILTER OF EMPLOYEE COST OF MORE THAN 25% OF TURNOVER WAS CONS IDERED BY THE TPO WHILE CHOOSING THE COMPARABLE. (II) THE SUBMISSION OF THE LD. COUNSEL FOR THE ASS ESSEE WAS THAT IN THE CASE OF ASSESSEE, THIS TEST IS SATISFIED. I N THIS REGARD, OUR ATTENTION WAS DRAWN TO PAGE 818 TO 824 OF THE ASSESSEES PAPE RBOOK WHEREIN ANNUAL REPORT OF THIS COMPANY HAS BEEN PROVIDED. A TTENTION WAS DRAWN TO THE FACT THAT IN THE PROFIT & LOSS ACCOUNT OF THE A UDITED ACCOUNTS, THE COST OF SERVICES HAS BEEN SHOWN AS AN EXPENDITURE AND IN SC HEDULE 15 TO THE NOTES TO ACCOUNTS, IT HAS BEEN ELABORATED AS FOLLOW S:- COST OF SERVICES: COST OF SERVICES - OVERSEAS 2,77,32,337 COST OF SERVICES DOMESTIC 2,58,40,435 TRANSCRIPTION CHARGES 3,97,389 WEB DESIGNING CHARGES 1,64,602 STAFF WELFARE 11,43,144 STAFF TRAINING 3,63,496 CONTRIBUTION TO PF & ESI 15,47,906 IT(TP)A NO.271/BANG/2014 PAGE 30 OF 61 GRATUITY 13,04,894 EX GRATIA 0 HRD EXPENSES 3,10,871 5,88,05,074 (III) IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE TPO IGNORED THE CONTRIBUTION TO PF & ESI, GRATUITY AND EX GRATIA PAYMENTS AND ARRIVED AT THE EMPLOYEE COST. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE, DOING SO WAS NOT PROPER. IF ALL THE EMPL OYEE COSTS ARE PROPERLY CONSIDERED, THEN THIS COMPANY CAN PASS THE FILTER A PPLIED BY THE TPO FOR EXCLUDING IT. (IV) WE HAVE CONSIDERED THE SUBMISSION OF THE LD. C OUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT PRIMA FACIE THE SUBMISSIONS OF THE LD. COUNSEL ARE ACCEPTABLE. WE, HOWEVER, FEEL THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE TPO TO CONSIDER INCLUDING THIS COMPANY AS A COMPARABLE AFRESH IN THE LIGHT OF THE FACTS BROUGHT TO OUR NOTICE BY THE LD. COUNSEL FOR THE ASSESSEE. WE HOLD AND DIRECT ACCOR DINGLY. 28. THE LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTE D BEFORE US THAT THE ASSESSEE HAD SOUGHT FOR RISK ADJUSTMENTS, BUT THE S AME HAS NOT BEEN CONSIDERED BY THE TPO. IN THIS REGARD, OUR ATTENTI ON WAS DRAWN TO THE FOLLOWING SUBMISSIONS MADE BEFORE THE REVENUE AUTHO RITIES:- 17.1 THE APPELLANT FUNCTIONS UNDER A LIMITED RI SK ENVIRONMENT WITH MOST OF THE RISK BEING ASSUMED BY ITS AE. THE APPELLANT BEARS LESSER LIMITED BUSINESS RISKS THAN INDEPENDEN T COMPARABLE COMPANIES DUE TO THE NATURE OF ITS REVENUE MODEL AS IT IS GUARANTEED PROFITS BY WAY OF A MARK-UP ON COSTS INC URRED, IN IT(TP)A NO.271/BANG/2014 PAGE 31 OF 61 PROVISION OF THE SOFTWARE DEVELOPMENT SERVICES. HOW EVER, THE INDEPENDENT COMPANIES HAVE TO BEAR THE VAGARIES OF THE ECONOMIC AND BUSINESS FACTORS THAT ARE PREVAILING IN THE IND USTRY AND THUS COULD EITHER INCUR LOSSES OR EARN PROFITS BASED ON MARKET CONDITIONS. 17.2 RULE L0B(L)(E)(III) OF THE RULES PROVIDES THA T AN ADJUSTMENT SHOULD BE MADE TO THE PROFIT MARGIN OF INDEPENDENT COMPARABLE COMPANIES TO TAKE INTO ACCOUNT THE DIFFERENCES IN F UNCTIONS AND RISKS. THE OECD TRANSFER PRICING GUIDELINES ALSO RE COGNIZE ADJUSTMENTS TO BE MADE TO ACCOUNT FOR DIFFERENCES B ETWEEN CONTROLLED AND UNCONTROLLED SITUATIONS THAT WOULD S IGNIFICANTLY AFFECT THE PRICE CHARGED OR RETURN REQUIRED BY INDE PENDENT ENTERPRISES. ACCORDINGLY, CONTROLLED AND UNCONTROLL ED TRANSACTIONS ARE COMPARABLE ONLY WHEN ADJUSTMENTS WITH RESPECT T O SIGNIFICANT DIFFERENCES BETWEEN THEM IN TERMS OF RISKS ASSUMED IS MADE. 17.3 IN THE SUBMISSIONS MADE TO THE LEANED TPO, TH E APPELLANT HAS COMPUTED THE ADJUSTMENT FOR THE RISK DIFFERENCE OF THE APPELLANT VIS--VIS OF THE COMPARABLE COMPANIES BY PLACING RELIANCE ON THE METHODOLOGY OF RISK ADJUSTMENT AS S TATED IN THE DECISION OF THE HONBLE BANGALORE TRIBUNAL IN CASE OF PHILIPS SOFTWARE CENTRE PRIVATE LIMITED VS. ASST. COMMISSIO NER OF INCOME TAX (119 TTJ 721) (2008 26S0T226) AS BELOW. AVERAGE PRIME LENDING RATE DURING FY 2008-09 (A) 1 12.75 PERCENT 2 AVERAGE BANK RATE DURING FY 2008-09 (B) 6.00 PERCEN T 3 DIFFERENCE BETWEEN THE PRIME LENDING RATE AND BANK RATE C = (A B) 6.75 PERCENT RISK ADJUSTMENT (C) 6.75 PERCENT 1 THE RATES HAVE BEEN CONSIDERED AS PER THE DETAILS AS AVAILABLE IN THE ECONOMIC SURVEY ANALYSIS FOR 2008-09 2 AVERAGE BENCHMARK PLR FOR PUBLIC SECTOR BANKS WAS 1 2.25%- 12.75% 3 THE AVERAGE BANK RATE EFFECTIVE SINCE APRIL 30, 200 3 HAS BEEN 6% 17.4 FURTHER, THE HONBLE DELHI TRIBUNAL IN THE CA SE OF SONY INDIA PVT LTD (315 ITR 150) HAS ALLOWED 20% RISK AD JUSTMENT CONSIDERING THE FACT THAT IT MAY NOT BE POSSIBLE TO QUANTIFY RISK ADJUSTMENTS. IT(TP)A NO.271/BANG/2014 PAGE 32 OF 61 29. THE LIMITED REQUEST OF THE LD. COUNSEL FOR THE ASSESSEE IS FOR A DIRECTION TO THE TPO TO CONSIDER THE AFORESAID SUBM ISSIONS IN THE LIGHT OF JUDICIAL PRONOUNCEMENTS REFERRED TO THEREIN. ON TH E ABOVE ASPECT, THE TPO IN HIS ORDER HAS REJECTED THE CLAIM OF THE ASSESSEE OBSERVING AS FOLLOWS:- 3.8. RISK ADJUSTMENT : RISK ADJUSTMENT INVOLVES TWO VITAL PRECONDITIONS. THEY ARE THAT DIFFERENCE IN RISK LEVEL EXISTS BETWEEN TH E TESTED PARTY AND THE UNCONTROLLED COMPARABLES; AND THAT IT IS PO SSIBLE TO CALCULATE IN TERMS OF NUMBERS THE DIFFERENCES IN RI SK SO THAT ADJUSTMENT CAN BE MADE. BUT IN CASE OF THE TAXPAYER , BOTH THE PREREQUISITES ARE MISSING. NEITHER THE DIFFERENCE I N RISK LEVEL OF THE TESTED PARTS AND UNCONTROLLED COMPARABLES HA S BEEN ESTABLISHED NOR IS IT POSSIBLE TO CONVERT THE DIFFE RENCE IN RISK LEVEL, IF THERE IS ANY. INTO NUMBERS. IF THERE IS A NY DIFFERENCE. FOR A MOMENT ACADEMICALLY SPEAKING, IT RESTS IN THE REALM OF QUALITY AND NOT QUANTITY. THERE IS NO RELIABLE ME THOD TO CONVERT THE QUALITATIVE DIFFERENCE INTO QUANTITATIV E DIFFERENCE AND TO MAKE ADJUSTMENT ON ACCOUNT OF RISK LEVEL. AS PER THE PROVISIONS OF RULE 10B(3), IF ANY ADJUSTMENT SHOULD BE MADE, IT SHOULD BE REASONABLY ACCURATE TO ELIMINATE THE M ATERIAL EFFECTS OF SUCH DIFFERENCES. BUT IN CASE OF RISK A DJUSTMENT, NEITHER REASONABLY ACCURATE ADJUSTMENT CAN BE MADE FOR WANT OF METHOD TO DO SO NOR HAS IT BEEN ESTABLISHED THAT THERE IS A MATERIAL EFFECT THAT IS AFFECTING THE COMPARISONS D UE TO RISK LEVEL. IF THE TAXPAYER IS SUGGESTING THAT THERE EXI STS A DIFFERENCE IN THE RISK LEVEL ASSUMED BY THE TESTED PARTY AND UNCONTROLLED COMPARABLES, IT IS ACADEMIC IN NATURE AND NOT BASED ON ANY STUDY WHOSE RESULTS HAS BEEN VALIDATED . IT IS NOT OUT OF PLACE TO REITERATE THAT SINGLE CUSTOMER RISK IS A HUGE RISK WHICH THE UNCONTROLLED COMPARABLES ARE NOT ASSUMING . BY HAVING MORE CUSTOMERS, THE RISK IS SHARED OR SPREAD . IN OTHER WORDS, IF ONE CUSTOMER GOES OUT OF BUSINESS STILL T HERE ARE OTHERS WHICH WILL SUSTAIN THE BUSINESS OF THE TESTE D PARTY. BUT IN CASE OF THE TAXPAYER THERE BEING ONLY ONE CLIENT , THE ENTIRE RISK IS CONCENTRATED ON ONE CLIENT, AND THEREFORE. IF THE CLIENT IS OUT OF BUSINESS THE TAXPAYER WILL ALSO BE OUT OF BUSINESS. IT(TP)A NO.271/BANG/2014 PAGE 33 OF 61 EARLIER THE ARGUMENT GIVEN ABOUT THE COUNTRY RISK WAS THAT EU & US ARE HAVING BETTER CREDIT RATING AS COM PARED TO INDIA. THIS ARGUMENT IS NO LONGER VALID AS THEIR CR EDIT RATING IS ALSO ON A DOWNWARD TREND. AND MOREOVER IN CASE OF UNCONTROLLED COMPARABLES WE ARE TAKING THE FILTER O F EXPORT SALES >75%. MOST OF THE EXPORTS OF SOFTWARE SERVICE S FROM INDIA ARE PRIMARILY TO EU & US AND THEREFORE IN CAS E OF UNCONTROLLED COMPARABLES ALSO THE RISK LEVEL WILL H E EQUATED. SO FAR AS THE METHODS SUGGESTED BY TAXPAYERS IN THI S REGARD ARE CONCERNED, THEY ARE STATISTICAL METHODS AVAILA BLE IN STANDARD BOOKS OF STATISTICS AND FINANCIAL MANAGEME NT. A CAREFUL STUDY OF THESE METHODS WOULD SHOW THAT IN A LL OF THEM A NUMBER OF ASSUMPTIONS ARE MADE TO DRAW THE CONCLU SIONS. TRANSFER PRICING REGULATIONS IN INDIA IS AGAINST AN Y ASSUMPTION IN RESPECT TO ANY ADJUSTMENT. IN SUPPORT , REFERENCE IS MADE TO RULE 10B DISCUSSED ABOVE WHICH SPEAKS OF REASONABLY ACCURATE ADJUSTMENT. IF ACCURATE ADJUSTM ENT CANNOT HE MADE, THEN ALTERNATIVE IS NO ADJUSTMENT SHOULD B E MADE. THEREFORE NO RISK ADJUSTMENT IS ALLOWED. HOWEVER T PO IS NOT AGAINST ADJUSTMENT IF REASONABLE ACCURATE ADJUSTMEN T CAN BE MADE AND THERE IS A METHOD TO DO SO, AS IS EVIDENT IN RESPECT OF WORKING CAPITAL ADJUSTMENT WHICH THE TPO HAS GIV EN, IF IT IS POSSIBLE. IN THE LIGHT OF ABOVE DISCUSSION. NO ADJUSTMENT ON ACCOUNT OF RISK IS ALLOWED TO THE TAXPAYER. 30. AS CAN BE SEEN FROM THE AFORESAID OBSERVATIONS OF THE TPO, THE RISK ADJUSTMENT WAS NOT ALLOWED FOR THE REASON OF ABSENC E OF PROPER BASIS OF QUANTIFICATION. NOW THAT THE ASSESSEE HAS GIVEN TH E BASIS OF SUCH QUANTIFICATION, THE TPO IS DIRECTED TO CONSIDER THE SAME. 31. THE ISSUE OF COMPUTATION OF ALP IS REMANDED TO THE TPO TO BE CONSIDERED AFRESH IN THE LIGHT OF DIRECTIONS GIVEN EARLIER. THUS, GROUND NOS.B 4 TO 17 RAISED BY THE ASSESSEE ARE DECIDED AC CORDINGLY. IT(TP)A NO.271/BANG/2014 PAGE 34 OF 61 32. IN GROUND NOS.B. 18 & 19, THE ASSESSEE HAS CHAL LENGED THE ADDITION MADE BY THE TPO WHICH WAS CONFIRMED BY THE DRP IN T HE MATTER OF DETERMINATION OF ALP IN THE SPARES REPLACEMENT SERV ICES TRANSACTION WITH THE AE. 33. AS FAR AS THESE GROUNDS ARE CONCERNED, THE FACT UAL ASPECTS, AS WE HAVE ALREADY SEEN, ARE THAT THE ASSESSEE PROVIDES S PARES REPLACEMENT SERVICES IN RELATION TO CSI PRODUCTS SOLD BY AFFILI ATE IN INDIA. THE ASSESSEE PROCURES SPARE PARTS FROM CSI AND SUPPLIES IT TO TH E CHANNEL PARTNER/ CUSTOMERS IN INDIA. THE PRODUCT REPLACEMENT SERVIC ES ARE PROVIDED THROUGH THIRD PARTY LOGISTICS SERVICES PROVIDER, WH O DELIVERS THE SPARE PARTS TO CUSTOMERS/CHANNEL PARTNERS AS AND WHEN REQUIRED. THE ASSESSEE IS REMUNERATED ON A COST PLUS MARK-UP BASIS FOR PROVIS ION OF PRODUCT REPLACEMENT SERVICES. 34. IN JUSTIFICATION OF THE PRICE IT RECEIVED, THE ASSESSEE SUBMITTED AS FOLLOWS:- 4.2 FUNCTIONS BUYS SPARE PARTS FROM CISCO KEEPS INVENTORY SUPPLIES TO END CUSTOMERS AT ITS OWN COST SHIPS BACK REPLACEMENT TO CISCO 4.3 ASSETS EMPLOYS OWN ASSETS. THE TAXPAYER KEEPS A HUGE INVEN TORY AS SHOWN BELOW. OPENING STOCK AS ON 01-04-2007 : RS. 2,252,138,000 /- CLOSING STOCK AS ON 31-03-2008 : RS. 1,14,89,47,0 00 IT(TP)A NO.271/BANG/2014 PAGE 35 OF 61 THE OTHER ASSETS EMPLOYED INCLUDE MANPOWER COSTS. S TORAGE COSTS, LOGISTICS COSTS ETC. 4.4 RISKS THE TAXPAYER IS CLAIMED TO BE A CONTRACT SERVICE PR OVIDER WITH ASSURED BUT VERY LOW MARKUP. IN FACT AS DISCUSSED B ELOW IN DETAIL THE TAXPAYER CARRIES OUT ALL THE FUNCTIONS OF A TRA DER/DISTRIBUTOR. IT BEARS THE RISK RELATING TO INVENTORY CARRYING. IT I S SUBJECTED TO CUSTOMS AND VAT ETC ON THE GOODS PURCHASED AND SOLD ETC. THE ACTUAL CHARACTERIZATION OF THE TAXPAYER HAS BEEN DI SCUSSED BELOW IN DETAIL. 4.5 JUSTIFICATION OF TRANSFER PRICE BY TAXPAYER TAXPAYER HAS FURNISHED THE FOLLOWING SEGMENTAL ACCO UNTS IN ITS TP ANALYSIS. PARTICULARS AMOUNT INCOME FROM SALE OF GOODS AND PROVISION OF SERVICES - OPERATING INCOME 2233620846 TOTAL COST OPERATING COSTS 2413930963 OPERATING PROFIT L80310117 COST OF GOODS SOLD 170261400 VALUE ADDED COST (OPERATING COST (-) GOODS SOLD 711 316963 OPERATING PROFIT / VALUE ADDED COSTS - 25.32% 4.6 THE TAXPAYER FOLLOWED THE TNMM TO JUSTIFY THE MARGINS. THE FOLLOWING COMPANIES WERE SELECTED BY THE TAXPAY ER AS COMPARABLE: SL. NO. NAME OF THE COMPARABLE WEIGHTED AVERAGE OPERATING PROFIT ON VALUE ADDED COSTS IN PERCENTAGE % 1 ARSHIYA INTERNATIONAL LTD. 7% 2 ASSOCIATED ROAD CARRIERS LTD. 4% 3 BLUE DART EXPRESS LTD. 14% 4 CHARTERED LOGISTICS LTD. 3% 5 COSTAL ROADWAYS LTD. 3% 6 CONTAINER CORPORATION OF INDIA LTD. 33% 7 EITA INDIA LTD. -2% IT(TP)A NO.271/BANG/2014 PAGE 36 OF 61 8 GAIT 6% 9 GORDAON WOODFOFFE LOGISTICS LTD. 6% 10 HAYTRANS (INDIA) LTD. 2% 11 IAL CONTAINER LINE (INDIA) LTD. 0% 12 NECC LOGISTICS LTD. 4% 13 NORTH EASTERN CARRYING CORP LTD. 2% 14 OVERNITE EXPRESS LTD. 6% 15 P L SHIPPING & LOGISTICS LTD. 4% 16 PATEL INTEGRATED LOGISTICS LTD. 4% 17 ROADWAYS INDIA LTD. 1% 18 S E R INDUSTRIES LTD. -1% 19 SHREYAS RELAY SYSTEMS LTD. 4% 20 SICAL LOGISTICS LTD. 4% 21 SKYLINE AIR LOGISTICS LTD. 31% 22 SOUTHERN ROAD CARRIERS LTD. 2% 23 SPEEDY MULTIMODES LTD. 37% 24 TM INTERNATIONAL LOGISTICS LTD. 10% 25 DEEKSHA TRAVELS PVT LTD. 16% 26 DTDC COURIERS & CARGO LTD. 6% 27 HINDUSTAN CARGO LTD. 5% 28 INDO ARYA CENTRAL TRANSPORT LTD. 4% 29 PRIMIER ROAD CARRIERS LTD. 0% AVERAGE MARGIN 7% AS PER THE ABOVE ANALYSIS, THE TAXPAYER CLAIMED THA T ITS MARGINS FROM THE REPLACEMENT SERVICES ARE AT PAR WITH THE C OMPARABLES AND HENCE SHOULD BE ACCEPTED AT ARMS LENGTH. 35. THE TPO REJECTED THE CLAIM OF THE ASSESSEE FOR THE REASON THAT WHILE DOING THE SEARCH PROCESS ON THE DATABASE, THE ASSES SEE HAD CONSIDERED ITSELF AS A LOGISTIC COMPANY AND THEREFORE COMPARAB ILITY CRITERION ADOPTED BY THE ASSESSEE WAS NOT PROPER. THE TPO ALSO REJECTED THE TNMM AS NOT SUITABLE FOR DETERMINATION OF ALP INSOFAR AS IT REL ATES TO THE PRODUCT REPLACEMENT SERVICES SEGMENT OF THE ASSESSEE. THE TPO ADOPTED RESALE IT(TP)A NO.271/BANG/2014 PAGE 37 OF 61 PRICE METHOD AS THE MOST APPROPRIATE METHOD AND FIN ALLY DETERMINED THE ALP AS FOLLOWS:- 4.12 THUS THE FOLLOWING 2 COMPANIES HAVE BEEN CONS IDERED AS FINAL COMPARABLES. COMPANY NAME SALES TRADING INCOME CHANGE IN STOCK PURCHASE OF FINISHED GOODS GROSS PROFIT GP/ SALES POINT RED TELECOM LTD. 24.74 24.67 0.39 23.93 1.13 4.57% TVS INTERCONNECT SYSTEMS LTD. 404.51 208.15 - 6.23 145.45 56.47 13.96% ARITHMETIC MEAN MARGIN 9.26% 4.13 COMPUTATION OF ARMS LENGTH PRICE : ARMS LENGTH MEAN MARGIN ON COST 9.26% OPERATING COST 2,413,930,963 ARMS LENGTH PRICE (ALP) 109.26% OF OPERATING COST 2,637,460,970 PRICE RECEIVED 2,463,723,146 SHORTFALL BEING ADJUSTMENT U/S. 92CA 173,737,824 THE ABOVE SHORTFALL OF RS.173,737,824/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S. 92CA IN RESPECT OF PRODUCT REPLACEMENT SERVICES SEGMENT OF THE TAXPAYERS INTERNATIONAL TR ANSACTIONS. 36. THE DRP CONFIRMED THE ORDER OF THE TPO. AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR NOTICE THAT IN THE CASE OF ASSES SEE FOR THE A.Y. 2006-07, SIMILAR ISSUE REGARDING DETERMINATION OF ALP IN RES PECT OF PRODUCT IT(TP)A NO.271/BANG/2014 PAGE 38 OF 61 REPLACEMENT SERVICES SEGMENT HAD COME UP FOR CONSID ERATION IN ITA NO.1410/BANG/2010 AND THE TRIBUNAL, IN ITS ORDER DA TED 30.8.2011, HAS HELD AS FOLLOWS:- 7.1. HAVING HEARD BOTH THE PARTIES AND HAVING CON SIDERED THE RIVAL CONTENTIONS, WE FIND THAT THE DETERMINATION O F ALP OF THE INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND THE AE IN USA AS REGARDS THE PRODUCT REPLACEMENT SERVICE IS BEF ORE US. IT IS NOT IN DISPUTE THAT THE INTERNATIONAL TRANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE SCRUTINIZED TO VERIFY, IF THE SAME IS AT ALP. THE DISPUTE BEFORE US IS WITH REGARD TO THE METHOD OF COMPUTING THE ALP AND ALSO THE COMPARABLES SELECTED BY THE TP O. WE, THEREFORE, FIRST PROCEED TO DECIDE THE CORRECT METH OD OF COMPUTING THE ALP. 7.2 IN THE CASE BEFORE US, TWO DIFFERENT METHODS A RE ADOPTED TNMM BY THE ASSESSEE AND RPM BY THE TPO. WHICH IS T HE MOST APPROPRIATE METHOD FOR ARRIVING AT THE ALP IS TO BE EXAMINED. RULE 10B OF IT RULES PROVIDES FOR DIFFERENT METHODS TO BE FOLLOWED FOR DETERMINATION OF THE ALP UNDER SUB-SEC .2 OF SEC.92C OF THE IT ACT. THE FOLLOWING ARE THE METHOD S FOR COMPUTING THE ALP. (A) COMPARABLE UNCONTROLLED PRICE METHOD (CUP) IN WHICH THE PRICE CHARGED OR PAID FOR PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS I DENTIFIED AND SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENC ES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET AND THE ADJUSTED PRICE ARRIVED AT IS TAKEN TO BE AN ARMS L ENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SER VICES PROVIDED IN THE INTERNATIONAL TRANSACTION; THUS, IT CAN BE SEEN THAT IN THIS METHOD A COMPARIS ON HAS TO BE WITH TRANSACTION OF A COMPARABLE IN AN UNCONTROLLED MARKET CONDITIONS I.E WITH AN UNRELATED THIRD PARTY IN A F REE MARKET. IN THE CASE BEFORE US, THERE IS NO SUCH COMPARABLE UNCONTR OLLED IT(TP)A NO.271/BANG/2014 PAGE 39 OF 61 TRANSACTION TO BE COMPARED WITH THE TRANSACTIONS OF THE ASSESSEE WITH ITS AE. THEREFORE, THE CUP METHOD IS NOT APPLI CABLE. 9B) RESALE PRICE METHOD (RPM) BY WHICH THE PRICE A T WHICH PROPERTY PURCHASED OR SERVICES OBTAINED BY THE ENTE RPRISE FROM AN ASSOCIATED ENTERPRISE IS RE-SOLD OR ARE PROVIDED TO AN UN-RELATED ENTERPRISE (EMPHASIS PROVIDED BY US) IS IDENTIFIED AND SUCH RE- SALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GRO SS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATE D ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME OR SIMILAR SE RVICES, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS. THUS, IT CAN BE SEEN THAT TO ADOPT R ESALE PRICE METHOD, THE PROPERTY PURCHASED OR SERVICES OBTAINED BY THE ENTERPRISES FROM AN ASSOCIATED ENTERPRISE IS TO BE RESOLD TO AN UNRELATED PARTY. 7.3 IN THE CASE BEFORE US, THE PURCHASE FROM AND S ALE TO IS THE SAME ASSOCIATED ENTERPRISE. THE REASON GIVEN BY THE TPO FOR ADOPTING THE RE-SALE PRICE METHOD IS THAT THE ASSES SEE IS A TRADER/DISTRIBUTOR OF THE SPARES OF ITS ASSOCIATED ENTERPRISE. WE ARE NOT ABLE TO AGREE WITH THIS FINDING OF THE TPO. A T RADER IS A ONE WHO PURCHASES THE GOODS BY TRANSFER OF OWNERSHIP OV ER THE GOODS AND IS FREE TO FIX THE RE-SALE PRICE AND ALSO IS FR EE TO CHOOSE THE CUSTOMERS TO WHOM HE WOULD SELL THE GOODS. LIKEWISE , IN THE CASE OF DISTRIBUTION ALSO THE RE-SALE PRICE CAN BE FIXED BY THE DISTRIBUTOR AND SELLER HAS NO INFLUENCE WHATSOEVER IN FIXING SUCH A RESALE PRICE. HOWEVER, IN THE CASE BEFORE US, THOUG H THE ASSESSEE IS BECOMING THE OWNER OF THE GOODS IMPORTED, BUT, B Y VIRTUE OF THE PRODUCT REPLACEMENT SERVICES AGREEMENT, HE HAS NO RIGHT TO FIX THE RESALE PRICE OR TO CHOOSE THE CUSTOMER TO WHOM THE PRODUCTS ARE TO BE SOLD. IT IS CLEAR FROM THE AGREEMENT THAT THE ASSESSEE PURCHASES THE SPARE PARTS TO BE SOLD TO ITS ASSOCIA TED ENTERPRISE ONLY AND FOR DOING SO, IT EARNED 1% OF MARK UP ON T HE VALUE OF THE PRODUCTS AND THE COST OF IMPORTING THE GOODS. T HUS, IT CAN BE SEEN THAT THE ASSESSEE IS ONLY A CUSTODIAN OF THE G OODS IMPORTED TILL THEY ARE DELIVERED TO THE CLIENT OR CUSTOMER O F ITS PARENT COMPANY ON ITS DIRECTIONS. THEREFORE, THE ASSESSEE CANNOT BE HELD TO BE A TRADER OR DISTRIBUTOR OF THE GOODS. WHEN TH E ASSESSEE CANNOT BE HELD TO BE A TRADER OR DISTRIBUTOR OF THE SPARE PARTS, IT IS CLEAR THAT THE RESALE PRICE METHOD IS NOT APPLICABL E FOR ARRIVING AT THE ALP OF THE INTERNATIONAL TRANSACTIONS. IT(TP)A NO.271/BANG/2014 PAGE 40 OF 61 7.4 THE OTHER METHODS PROVIDED ARE COST PLUS METHO D WHICH IS APPLICABLE TO THE TRANSACTIONS RELATING TO MANUFACT URE AND SALE OF GOODS AND PROFIT SPLIT METHOD WHICH IS APPLICABLE M AINLY IN INTERNATIONAL TRANSACTIONS INVOLVING TRANSFER OF UN IQUE INTANGIBLES OR IN MULTIPLE INTERNATIONAL TRANSACTIONS WHICH ARE SO INTER-RELATED THAT THEY CANNOT BE EVALUATED SEPARATELY FOR THE PU RPOSE OF DETERMINING THE ALP OF ANY ONE TRANSACTION. THESE T WO METHODS CANNOT BE MADE APPLICABLE TO THE FACTS BEFORE US. T HE ONLY REMAINING METHOD IS THE TRANSACTIONAL NET MARGIN ME THOD (TNMM)BY WHICH THE NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE AND IS COMPARED TO NET PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE FROM AN UNCONTROLLED TRANSACTION OR A NU MBER OF SUCH TRANSACTIONS AND THE ADJUSTMENTS FOR THE DIFFERENCE IS MADE. THE ASSESSEE HAS ADOPTED THE TRANSACTIONAL NET MARGIN M ETHOD, AS THE MOST APPROPRIATE METHOD AS SEEN ABOVE. WE HAVE ALRE ADY FOUND THAT THE OTHER METHODS PRESCRIBED BY RULES ARE NOT APPLICABLE TO THE FACTS OF THE CASE BEFORE AND THEREFORE, THE TNM M METHOD IS THE MOST APPROPRIATE METHOD FOR COMPUTING THE ALP R ELATING TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE. 8. COMING TO THE NEXT ISSUE I.E SELECTION OF COMPA RABLES, WE FIND THAT THE RULE-10B OF SUB-RULE-2 & 3 CLEARLY PR OVIDES THE CRITERIA TO BE CONSIDERED IN SELECTION OF COMPARABL ES. ONE OF THE IMPORTANT CRITERIA IS THE FAR ANALYSIS I.E FUNCTION S PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY THE ASSESSE E AS WELL AS THE COMPARABLE COMPANIES. IN THE SUBMISSIONS MADE B Y THE ASSESSEE, IT IS CLEAR THAT THE ASSESSEE IS PERFORMI NG THE FUNCTION OF STORING THE SPARE PARTS IMPORTED AND SUPPLY THEM TO THE CUSTOMERS WHILE BILLING THE US COMPANY FOR THE SALE OF THE PR ODUCTS. THE SERVICES PROVIDED BY THE ASSESSEE ARE AKIN TO THAT OF THE C & F AGENTS WHO ARE RESPONSIBLE FOR THE SAFE KEEPING AND TRANSPORT OF THE GOODS TO THE CLIENTS ON THE DIRECTION OF THE PR INCIPAL. THE COMPARABLES ADOPTED BY THE ASSESSEE ARE ALSO PERFOR MING SIMILAR FUNCTIONS. 8.1 AS ALREADY BROUGHT OUT BY THE COUNSEL FOR THE A SSESSEE THE ASSETS EMPLOYED AND THE RISK UNDERTAKEN BY THE ASSE SSEE ARE NIL. ALL THESE FACTORS ARE TO BE CONSIDERED WHILE SELECT ING THE COMPARABLES, BUT THE TPO HAS NOT CONSIDERED THESE A SPECTS BEFORE IT(TP)A NO.271/BANG/2014 PAGE 41 OF 61 REJECTING THE COMPARABLES SELECTED BY THE ASSESSEE. AS REGARDS THE COMPARABLES SELECTED BY THE TPO, AS RIGHTLY POINTED OUT BY THE COUNSEL FOR THE ASSESSEE, THREE OF THESE COMPARABLE S EXCEPT IRIS COMPUTERS ARE INVOLVED IN TRADING AND MANUFACTURING ACTIVITIES AND THE SEGMENTAL BREAK UP IS NOT GIVEN. FURTHER, THE ASSETS EMPLOYED AND THE RISK UNDERTAKEN BY THESE COMPANIES ARE ALSO HIGHER THAN THE ASSESSEE. THEREFORE, WE ARE IN AGRE EMENT WITH THE LEARNED COUNSEL FOR THE ASSESSEE THAT THESE COMPANI ES HAVE TO BE REJECTED AS THE COMPARABLES. THE ONLY COMPARABLE WH ICH CAN BE ACCEPTED IS IRIS COMPUTERS AND IS TO BE ACCEPTED AN D THE GROSS PROFIT AS POINTED OUT BY THE LEARNED COUNSEL FOR TH E ASSESSEE SHOULD ALSO RECONSIDERED BY THE TPO. HOLDING THUS, WE REMIT THE ISSUE BACK TO THE TPO/AO WITH A DIRECTION TO RECOMP UTE THE ALP BY ADOPTING THE PROPER COMPARABLES AND ALSO BY USIN G THE TNMM METHOD FOR ARRIVING AT THE ALP. HE SHALL ALSO CONSIDER THE ISSUE OF ALLOWING THE BENEFIT OF 5% RANGE AS PR OVIDED UNDER THE ERSTWHILE PROVISO TO SEC.92C(2) OF THE ACT IN T HE LIGHT OF THE JUDICIAL PRECEDENTS THEREON. 37. WE ARE OF THE VIEW THAT THE FACTS AND CIRCUMSTA NCES OF THE PRESENT ASSESSMENT YEAR BEING IDENTICAL, THE ISSUE OF DETER MINING THE ALP SHOULD BE REMANDED TO THE TPO/AO FOR FRESH CONSIDERATION I N THE LIGHT OF THE DIRECTIONS GIVEN BY THE TRIBUNAL IN A.Y. 2006-07. WE HOLD AND DIRECT ACCORDINGLY. THUS, GROUNDS NOS.18 & 19 ARE DECIDED ACCORDINGLY. 38. VIDE GROUND NOS.20 & 21, THE ASSESSEE HAS CHALL ENGED THE ACTION OF THE REVENUE AUTHORITIES IN MAKING AN ADDITION ON AC COUNT OF DETERMINATION OF ALP IN RESPECT OF ADMINISTRATION AND OTHER SUPPO RT SERVICES TRANSACTION TO ITS AE. THE TRANSFER PRICING ANALYSIS DONE BY THE ASSESSEE IN SUPPORT OF ITS CLAIM THAT THE CONSIDERATION RECEIVED FROM I TS AE FOR RENDERING ADMINISTRATIVE AND OTHER SUPPORT SERVICES WAS AT AR MS LENGTH, CONTAINED THE FOLLOWING DETAILS. IN THIS SEGMENT RELATED TO ADMINISTRATION AND IT(TP)A NO.271/BANG/2014 PAGE 42 OF 61 SUPPORT SERVICES, THE ASSESSEE PROVIDED CERTAIN ADM INISTRATIVE SUPPORT SERVICES TO CISCO SYSTEMS SERVICES BV. THE ASSESSE E HAD ALSO ENTERED INTO AN AGREEMENT WITH CISCO SYSTEMS INC. USA FOR P ROVISION OF CERTAIN MANAGEMENT SERVICES. THE TAXPAYER HAD SELECTED 12 C OMPANIES AS COMPARABLES FOR THE ADMINISTRATIVE AND OTHER SUPPOR T SEGMENT AND 14 COMPANIES FOR THE MANAGEMENT SERVICES ON THE BASIS OF SEARCH CONDUCTED IN THE PUBLIC DATABASES PROWESS AND CAPITAL LINE PL US.. THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS PROVIDED TO THE ASSOCIATED ENTERPRISES (AE) WAS DETERMINED BY APPLYING TRANSAC TIONAL NET MARGIN METHOD (TNMM), STATING TO BE THE MOST APPROPRIATE M ETHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE OPERATING PROFIT TO TOTAL COST RATIO WAS TAKEN AS THE PROFIT LEVEL INDICATOR (PLI) IN TNMM ANALYSI S. THE PLI OF THE COMPARABLES WAS ARRIVED BY CONSIDERING WEIGHTED AVE RAGE MARGIN OF 3 YEARS DATA. THE FIRST OBJECTION OF THE TPO WAS WITH REGARD TO USE OF MULTIPLE YEAR DATA. HE HELD THAT THE TAXPAYER HAD TO CONSID ER ONLY DATA PERTAINING TO THE F.Y. ENDED 31.03.2009. THE FINANCIALS OF THE ASSESSEE IN THIS SEGMENT WHICH WAS BIFURCATED INTO TWO BY THE ASSESS EE WERE AS FOLLOWS: SEGMENT PROFIT % AS PER TP DOCUMENTS: DESCRIPTION ADMIN & OTHER SUPPORT SERVICES MANAGEMENT SERVICES REVENUE 1491900613 12502544745 TOTAL COST 1374404584 1136594862 OPERATING PROFIT 117496029 113659883 MARK UP ON COST 8.55% 10.00% IT(TP)A NO.271/BANG/2014 PAGE 43 OF 61 39. THE TPO, HOWEVER, DID NOT AGREE WITH THE TP ANA LYSIS CARRIED OUT BY THE ASSESSEE. HE FIRSTLY HELD THAT IT WAS NECESSAR Y TO DISTINGUISH MANAGEMENT FUNCTIONS FROM ADVISORY FUNCTIONS WHILE CHOOSING COMPARABLE COMPANIES. ACCORDING TO HIM MANAGEMENT SERVICES BEL ONG TO A SEPARATE GROUP OF SERVICES AND CANNOT BE CLUBBED WITH ADVISO RY FUNCTIONS. HE FOUND THAT THE ASSESSEE IN ITS TP STUDY HAD CONSIDERED CO MPARABLE COMPANIES THE UNDERLYING NATURE WHICH HAS BEEN TREATED AS A C OMMON POINT WAS EITHER ADVISORY IN NATURE, SOFTWARE SERVICES OR MAR KETING SERVICES. ACCORDING TO THE TPO THE ABOVE FUNCTIONS RENDERED W ERE CLEARLY DISTINGUISHABLE FROM THE MANAGEMENT SERVICES PROVID ED BY THE ASSESSEE. THE TPO THEREFORE REJECTED THE COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE. HE THEREAFTER HELD THAT FROM THE FAR ANA LYSIS GIVEN BY THE TAXPAYER MANAGEMENT AND THE ADMINISTRATIVE SUPPORT SERVICES BELONG TO ONE GROUP OF SERVICES AND THEREFORE HAVE TO BE CLUB BED TOGETHER AS BELONGING TO ONE GROUP. HE ALSO FOUND THAT BOTH TH E SERVICES HAD BEEN OUTSOURCED TO THE ASSESSEE BY THE ASSOCIATED ENTERP RISE AND THE ASSESSEE DID NOT HAVE INFRASTRUCTURE OR PERSONNEL TO CARRY O UT THESE ACTIVITIES INDEPENDENTLY ON ITS OWN FOOTING. HE THEREFORE HEL D THAT THE ASSESSEE DID NOT PERFORM EITHER ADVISORY OR MARKETING FUNCTIONS. THE MARKETING FUNCTIONS HAVE BEEN BENCHMARKED SEPARATELY AND THER EFORE THE COMPARABLE COMPANIES WHICH HAVE BEEN USED BY THE TA XPAYER TO BENCHMARK THE TRANSACTION ARE APPLICABLE FOR THE SE GMENT RELATING TO MARKETING AND SALES SUPPORT NOT TO THESE TWO SEGMEN TS OF ADMINISTRATION IT(TP)A NO.271/BANG/2014 PAGE 44 OF 61 AND MANAGEMENT SERVICES SEGMENT. THEREFORE, THE AN ALYSIS DONE BY THE ASSESSEE WAS NOT ACCEPTED. 40. THE FAR ANALYSIS DONE BY THE ASSESSEE IN ITS TP STUDY DESCRIBED THE NATURE OF SERVICES PERFORMED BY THE ASSESSEE AS REPRODUCED BELOW:- ADMINISTRATIVE SUPPORT SERVICES: CISCO INDIA PROVIDES CERTAIN ADMINISTRATIVE SUPPORT SERVICES TO CISCO SYSTEMS SERVICES BV, INDIA BRANCH OFFICE PURSUANT TO ADMINISTRATIVE SUPPORT SERVICES AGREEMENT ENTERED INTO. THE SERVICES PROVIDED ARE PRIMARILY IN THE NATURE OF FINANCE, TREASURY, RISK MANAGEMENT, LEGAL, GENERAL, ADMINISTRATION AND OTHE R SIMILAR ACTIVITIES, HUMAN RESOURCE AND EMPLOYEE REL ATED ACTIVITIES, MIS AND RELATED ACTIVITIES ETC. IN RELA TION TO THE SERVICES PROVIDED. CISCO INDIA IS REMUNERATED O N A COST PLUS BASIS. MANAGEMENT SUPPORT SERVICES: CISCO INDIA HAS ENTERED INTO AN AGREEMENT WITH CISC O SYSTEMS INC. USA FOR PROVISION OF CERTAIN MANAGEMEN T SERVICES IN THE NATURE OF STRATEGIC OVERSIGHT OF SA LES ORGANIZATION, SETTING DIRECTION FOR INDIVIDUALS AND THEIR TEAMS WITHIN THE ORGANIZATION IN TERMS OF MARKET, PRODUCT ARID SERVICES, CUSTOMER SEGMENTS, SALES SUP PORT FOR STRATEGIC OR HIGH VALUE CUSTOMERS, SUPPORT SERV ICES SUCH AS LEGAL AND FINANCE ETC. IN RELATION TO THE S ERVICES PROVIDED, CISCO INDIA IS REMUNERATED ON A COST PLUS BASIS. WE WISH TO SUBMIT THAT THE TP ANALYSIS WAS UNDERTAKEN BY CISCO INDIA IN ACCORDANCE WITH THE PROVISIONS OF INDIAN TP REGULATIONS, PLEASE REFER T O OUR DETAILED SUBMISSIONS. 41. THE ASSESSEE SUBMITTED BEFORE TPO THAT THE TPO S CONCLUSION THAT THE COMPARISON SELECTED BY THE ASSESSEE FOR BOTH AD MINISTRATIVE SUPPORT SERVICES AND MANAGEMENT SERVICES TRANSACTION ARE MO RE IN THE NATURE OF IT(TP)A NO.271/BANG/2014 PAGE 45 OF 61 MARKETING SUPPORT SERVICES AND HENCE THE TP STUDY O F THE ASSESSEE IS PROPOSED TO BE REJECTED WAS NOT CORRECT. IN THIS REGARD, THE ASSESSEE SUBMITTED THAT IT HAD CONSIDERED COMPANIES ENGAGED IN ARRAY OF SUPPORT SERVICES TO BENCHMARK ITS ADMINISTRATIVE SUPPORT SE RVICES TRANSACTION. IN RELATION TO MANAGEMENT SERVICES TRANSACTION, THE AS SESSEE HAD CONSIDERED COMPANIES ENGAGED IN CONSULTING, ANALYTICS AND ADVI SORY SERVICES FOR THE PURPOSE OF BENCHMARKING THIS TRANSACTION. ACCORDIN GLY, THE ASSESSEE SUBMITTED THAT THE OBSERVATION OF THE TPO THAT COMP ARABLES SELECTED BY THE ASSESSEE FOR BOTH ADMINISTRATIVE SUPPORT SERVIC ES AND MANAGEMENT SERVICES TRANSACTION ARE MORE IN THE NATURE OF MARK ETING SUPPORT SERVICES WAS INAPPROPRIATE AND THE DOCUMENTATION MAINTAINED BY THE ASSESSEE SHOULD BE ACCEPTED. 42. THE TPO HOWEVER REJECTED THE TP ANALYSIS CARRI ED OUT BY THE ASSESSEE HOLDING THAT UNDER THE PROVISIONS OF SEC. 92C(3)(C) READ WITH SEC. 92CA OF THE ACT THE TPO MAY DETERMINE THE ARM S LENGTH PRICE ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT A VAILABLE WITH HIM, IF ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENTS I N THE POSSESSION OF TPO, HE IS OF THE OPINION THAT THE INFORMATION OR DATA U SED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT. THE FOLLOWING FURTHER DEFECTS WERE POINTED OUT BY THE TPO IN THE TP ANALYSIS 1. AS PER RULE 10B(4), IT WAS MANDATORY TO THE USE THE CURRENT FINANCIAL YEAR DATA. RULE 10B(4) MANDATES THE USE O F IT(TP)A NO.271/BANG/2014 PAGE 46 OF 61 CONTEMPORANEOUS DATA AND THE USE OF PREVIOUS YEARS DATA ONLY IF SUCH PREVIOUS YEARS DATA HAS INFLUENCED THE CURREN T YEARS DATA. 2. MANY OF THE COMPARABLES SELECTED BY THE TAXPAYER ARE NOT FOUND SUITABLE FOR COMPARABILITY PURPOSES AND DO NOT QUAL IFY THE FILTERS ADOPTED BY THE TPO IN VIEW OF THE ABOVE DEFECTS AND OTHERS, THE INFORM ATION AS WELL AS THE DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE AND CORRECT. THE PROVISIONS OF SEC. 92C(3)9(C ) WERE INVOKED BY THE TPO AND THE DOCUMENT OF THE ASSESSEE WAS REJECTED. 43. THE TPO THEREAFTER CARRIED HIS OWN SEARCH OF T HE DATABASE PROWESS. THE SEARCH WORD USED BY THE TPO WAS NO N-FINANCIAL SERVICES/ TECHNICAL CONSULTANCY, RENDERING SERVICES, CUSTOMER CARE, ADVERTISING. APART FROM THE FILTERS APPLIED BY THE ASSESSEE IN A DOPTING ITS TP ANALYSIS, THE TPO ADOPTED THE FOLLOWING ADDITIONAL FILTERS:- 1. COMPANIES WHOSE DATA WERE NOT AVAILABLE FOR F.Y. 2008-09 WERE EXCLUDED. 2. COMPANIES WHOSE INCOME WERE LESS THAN 1 CRORE WE RE EXCLUDED. 3. COMPANIES WHERE THE SERVICE INCOME IS LESS THAN 75% OF THE TOTAL OPERATING REVENUE WERE REJECTED. 4. COMPANIES WHERE RELATED PARTY TRANSACTIONS WERE MORE THAN 25% WERE EXCLUDED. IT(TP)A NO.271/BANG/2014 PAGE 47 OF 61 5. PERSISTENT LOSS MAKING COMPANIES FOR 3 YEARS WER E EXCLUDED. 6. COMPANIES WITH DIFFERENT FINANCIAL YEAR WERE EXC LUDED. 7. COMPANIES WHICH WERE FUNCTIONALLY DIFFERENT WERE EXCLUDED. 8. COMPANIES WHOSE FINANCIAL RESULTS WERE EFFECTED BY TAKING ECONOMIC CIRCUMSTANCES AND WHICH WERE HAVING DIMINI SHING REVENUE WERE ALSO EXCLUDED. 44. BY ADOPTING THE ABOVE COMPARABLE ANALYSIS, THE TPO ARRIVED AT THE FOLLOWING LIST OF COMPARABLE COMPANIES AND THEIR AR ITHMETIC MEAN:- SL. NO. COMPANY NAME OP/TC 1 APITCO LTD. 37.17 2 VAPI WASTE & EFFLUENT MGMT. CO. LTD. 45.84 3 BENGAL CES INFRATECH PVT. LD. 22.17 4 CYBERMEDIA INDIA ONLINE LTD. (MERGED) 7.66 5 I C R A ONLINE 47.62 6 BEST MULYANKAN CONSULTANTS LTD. 9.45 7 KSHITIJ INVESTMENT ADVISORY CO. LTD. 20.44 8 KITCO LTD. 0.61 9 FUTURE CAPITAL INVESTMENT ADVISORS LTD. 26.03 ARITHMETIC MEAN MARGIN 24.11 45. THE TPO COMPUTED THE ALP AS FOLLOWS:- 8. COMPUTATION OF ALP IN VIEW OF THE ABOVE DISCUSSION, IT IS CONCLUDED TH AT THE INFORMATION AS WELL AS THE DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE AND CORRECT. THUS THE PROVISIONS OF SEC. 92C(3)(C) ARE INVOKED AND THE TP DOCUMENT IS P ROPOSED TO BE REJECTED. THE TPO PROCEEDS TO DETERMINE ARMS LE NGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY YOU ADMINISTRATIVE SERVICES AS UNDER. IT(TP)A NO.271/BANG/2014 PAGE 48 OF 61 8.1 METHODOLOGY : TNMM AS SELECTED BY YOU. 8.2 PROFIT LEVEL INDICATOR : THE TPO HAS ALSO CONSIDERED THE SAME PLI AS ADOPTED BY YOU IN RESPECT OF ADMINISTRATIVE SERVICES. THE PROFIT BEFO RE INTEREST AND TAX IS CONSIDERED FOR COMPUTING THE OPERATING MARGI NS. BUT, THE INCOMES AND EXPENSES RELATED TO THE OPERATIONS OF T HE RELEVANT FINANCIAL YEAR ALONE IS CONSIDERED FOR THE COMPUTAT ION OF OPERATING MARGINS OF THE COMPARABLES 8.3 COMPARABLES : AS DISCUSSED ABOVE 8.4 DATA USED : DATA PERTAINING TO THE FY 2008-2009 AS MANDATED UNDER RULE 10B(4). 8.5 COMPUTATION OF ARMS LENGTH PRICE : THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION). BASED ON THIS, THE ARMS LENGTH PRICE OF THE SERVICES RENDERED BY YOU IS COMPUTED ADOPTING THE ALP AS UND ER: ARM S LENGTH MEAN MARGIN 24.11 ON COST% 9. ADJUSTMENT MADE 9.1 ADMIN SERVICES SEGMENT OPERATING COST IN RESPECT OF EXPORTS 1374404584 TOTAL ARMS LENGTH SALES @ 124.11% OF OPERATING COST AS DISCUSSED ABOVE 170,57,73,529 ACTUAL SALES PRICE RECEIVED 14,91,900,613 ADJUSTMENT U/S. 92CA 21,38,72,916 THE AMOUNT OF RS. 21,38,72,916/- IS TREATED AS TRAN SFER PRICING ADJUSTMENT U/S. 92CA IN RESPECT OF TAXPAYERS INTER NATIONAL TRANSACTIONS. 9.2 MANAGEMENT SEGMENT OPERATING COST IN RESPECT OF EXPORTS 1136594862 TOTAL ARMS LENGTH SALES @ 124.11% OF OPERATING COST AS DISCUSSED ABOVE 141,06,27,883 ACTUAL SALES PRICE RECEIVED 1250254745 ADJUSTMENT U/S. 92CA 16,03,73,138 IT(TP)A NO.271/BANG/2014 PAGE 49 OF 61 THE AMOUNT OF RS.16,03,73,138/- IS TREATED AS TRANS FER PRICING ADJUSTMENT U/S. 92CA IN RESPECT OF TAXPAYERS INTER NATIONAL TRANSACTIONS. 46. THE ADDITION SUGGESTED BY THE TPO BY WAY OF ADJ USTMENT TO THE ALP WAS INCORPORATED BY THE AO IN THE DRAFT ASSESSMENT ORDER. THE ASSESSEE FILED OBJECTIONS TO THE DRAFT ASSESSMENT ORDER OF T HE AO INCORPORATING THE DIRECTIONS OF THE TPO. MAJOR OBJECTION RAISED BY T HE ASSESSEE BEFORE DRP AND ALSO BEFORE THE TRIBUNAL WAS: (1) THAT IN RELATION TO THE INTERNATIONAL TRANSACT ION PERTAINING TO PROVISION OF ADMINISTRATION SUPPORT S ERVICES BY THE ASSESSEE TO CSS BV INDIA BRANCH OFFICE, WHIC H WAS ASSESSED TO TAX IN INDIA, THE TPO DID NOT MAKE ANY ADJUSTMENT IN THE HANDS OF CSS BV INDIA BO FOR T HE SAME TRANSACTION. HENCE THE TPO HAS ADOPTED AN INCONSIST ENT APPROACH BY CONSIDERING THE TRANSACTION TO BE AT AR MS LENGTH IN THE CASE OF CSS BV INDIA BO WHILE AN UPWARD ADJUSTMENT HAS BEEN MADE IN THE CASE OF CISCO INDIA FOR THE SAME TRANSACTION. (2) THE ASSESSEE ALSO PROVIDED SIMILAR SERVICES IN THE NATURE OF ADMINISTRATION SUPPORT SERVICES TO CISCO SYSTEMS CAPITAL (INDIA) PRIVATE LIMITED (REFERRED TO AS CI SCO CAPITAL) IT(TP)A NO.271/BANG/2014 PAGE 50 OF 61 AS WELL, DURING THE FY 2008-09. FOR A SIMILAR TRANS ACTION, THE ASSESSING OFFICER HAS NOT CONSIDERED THE SAME TO BE EXCESSIVE OR UNREASONABLE AS PER THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT AND ALLOWED THE SAME IN THE BO OKS OF CISCO CAPITAL INDIA. ACCORDINGLY, THE TPO ALSO OUGH T TO HAVE REGARDED THE TRANSACTION PERTAINING TO PROVISION OF ADMINISTRATIVE BY ASSESSEE TO CSS BV INDIA BO TO BE AT ARMS LENGTH. (3) CSS BV INDIA BO BEING A BRANCH OFFICE OF A F OREIGN COMPANY, IS ALSO TAXED AT A CORPORATE INCOME TAX RA TE OF 40% (EXCLUDING SURCHARGE AND CESS). WHEREAS, CISCO INDI A BEING A DOMESTIC COMPANY, IS TAXED AT A CORPORATE INCOME TA X RATE OF 30% (EXCLUDING SURCHARGE AND CESS). ACCORDINGLY, IF THE TPO IS CONSIDERING THE RECEIPT OF ADMINISTRATIVE SUPPOR T SERVICES NOT TO BE AT ARMS LENGTH IN ASSESSEES HANDS, IT W OULD LEAD TO A SITUATION WHERE CSS BV INDIA BO WOULD NEED TO P AY A HIGHER REMUNERATION TO ASSESSEE FOR THE RECEIPT OF THE SERVICES. THIS WOULD LEAD TO A SITUATION WHERE IN C SS BV INDIA BO EXPENSES WOULD INCREASE LEADING TO A LOWER TAXABLE INCOME AND HENCE LOWER INCOME BEING OFFERED TO TAX (AT THE HIGHER CORPORATE TAX RATE OF 40%). HOWEVER, SUCH IN COME IN THE HANDS OF ASSESSEE FROM PROVISION OF ADMINISTRAT IVE SUPPORT SERVICES WOULD BE TAXED AT THE RATE OF 30%. IT(TP)A NO.271/BANG/2014 PAGE 51 OF 61 ACCORDINGLY, THE ASSESSES SUBMITTED THAT THERE WAS NO TAX ARBITRAGE THAT THE CISCO GROUP WOULD ATTAIN AS A W HOLE BY RECEIVING AN ARMS LENGTH REMUNERATION FOR PROVISIO N OF SERVICES TO CSS BV INDIA BO. 47. BESIDES THE ABOVE, THE ASSESSEE ALSO SUBMITTED THAT THE COMPARABLES ULTIMATELY CHOSEN BY THE TPO HAD TO BE EXCLUDED. IT WAS ALSO SUBMITTED THAT THE TURNOVER FILTER AS HELD BY THE I TAT BANGALORE BENCH IN THE CASE OF GENESIS (SUPRA) HAD ALSO TO BE APPLIED. IT WAS ALSO SUBMITTED THAT FOREIGN EXCHANGE GAIN HAD TO BE CONSIDERED AS OPERATING REVENUE WHILE WORKING OUT THE OPERATING MARGINS OF THE ASSE SSEE. IT WAS ALSO SUBMITTED THAT DIFFERENT FINANCIAL YEAR OF THE COMP ARABLE FILTER SHOULD NOT BE APPLIED WHEREVER THE DATA OF THE SAID COMPARABLE CO MPANY RELEVANT TO THE FINANCIAL YEAR OF THE TESTED PARTY CAN BE CULLED OU T AND ARE AVAILABLE IN THE PUBLIC DOMAIN. 48. APART FROM THE ABOVE, OBJECTIONS WERE RAISED WI TH REGARD TO THE MODE OF REJECTION AND ACCEPTANCE OF COMPARABLES ADO PTED BY THE TPO. THE DRP IN ITS ORDER DID NOT DEAL WITH ALL THESE OB JECTIONS, BUT NEVERTHELESS CONFIRMED THE ORDER OF THE TPO. 49. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REI TERATED THE SUBMISSIONS AS WERE MADE BEFORE THE DRP. WITH REGA RD TO THE COMPARABLES CHOSEN BY THE ASSESSEE WHICH WERE REJEC TED BY THE TPO AND IT(TP)A NO.271/BANG/2014 PAGE 52 OF 61 THE COMPARABLES WHICH WERE ULTIMATELY SELECTED BY T HE TPO, OBJECTIONS WERE PUT FORTH. 50. THE LD. DR PLACED STRONG RELIANCE ON THE ORDERS OF THE TPO AND THE DRP. 51. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE MAJOR ARGUMENT PUT FORTH BY THE ASSESSEE BEFORE THE TRIBUNAL WAS THAT THE ADMINISTRATION SUPPORT SERVICE AND MARKETING SUPPORT SERVICES WERE RENDERED BY THE ASSESSEE TO ONE OF ITS AES, CSS BV INDIA BO. THE SAID AE WAS ASSESSED TO TAX IN INDIA AS IT HAD A PE IN INDIA. IN SUCH ASSESSMENT IN THE CASE OF THE AE, THIS TRANSACTION WAS ACCEPTED WITHO UT ANY ADJUSTMENT. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THE ASSE SSEE RENDERED SERVICES TO ANOTHER GROUP COMPANY CISCO SYSTEMS CAPITAL (I) PVT. LTD. THE SAID COMPANY WAS COVERED BY THE PROVISIONS OF SECTION 40 A(2)(B) OF THE ACT, BUT THE AO DID NOT MAKE ANY DISALLOWANCE OF THE PAYMENT S MADE TO THE ASSESSED TAX, INVOKING THE PROVISIONS OF SECTION 40 A(2)(A) OF THE ACT. IN OUR VIEW, THE ABOVE FACTS CANNOT BE THE BASIS TO CO ME TO THE CONCLUSION THAT THE PAYMENTS MADE TO THE ASSESSEE FOR ADMINIST RATION SUPPORT SERVICES AND MARKETING SUPPORT SERVICES BY ITS AE I S AT ARMS LENGTH. IN VIEW OF THE PROVISIONS OF SECTION 92 OF THE ACT, AN Y TRANSACTION WITH AE HAS TO PASS THE ARMS LENGTH PRICE TEST, THEREFORE, THE ABOVE CONTENTIONS RAISED BY THE ASSESSEE ARE REJECTED AS NOT RELEVANT. IT(TP)A NO.271/BANG/2014 PAGE 53 OF 61 52. WE ARE ALSO OF THE VIEW THAT THE APPROACH ADOPT ED BY THE TPO OF COMBINING THE ADMINISTRATIVE SUPPORT SERVICES AND M ANAGEMENT/MARKETING SERVICES AND MAKING A COMPARISON OF THE COMBINED RE SULTS HAS TO BE UPHELD AS BOTH THE SEGMENTS WERE INTER CONNECTED. WITH REGARD TO THE COMPARABILITY CRITERIA ADOPTED BY THE TPO, WE HAVE GONE THROUGH THE ORDER OF THE TPO AND ALSO THE NATURE OF SERVICES RENDERED BY THE COMPARABLES CHOSEN BY THE ASSESSEE. THE CHART SHOWING ALL THE DETAILS OF THE COMPARABLES CHOSEN BY THE ASSESSEE AND THE COMPARAB LES CHOSEN BY THE TPO IS ANNEXED AS ANNEXURE-II TO THIS ORDER . WE WILL NOW DEAL WITH THE COMPARABILITY OF EACH OF THE COMPANIES AND THEIR CO MPARABILITY WITH THAT OF THE ASSESSEE. 53. A COMPANIES CHOSEN BY THE ASSESSEE IN ITS ADMINISTRATIVE AND OTHER SUPPORT SERVICES : 53.1 HINDUSTAN HOUSING COMPANY LTD. : THIS COMPANY IS ENGAGED IN PROVIDING ADMINISTRATIVE SERVICES, HOUSE KEEPING SE RVICES AND OTHER ADMINISTRATION SUPPORT SERVICES TO BAJAJ GROUP OF C OMPANIES OF WHICH IT IS A PART. THIS COMPANY HAS RELATED PARTY TRANSACTIONS TO THE EXTENT OF 88.23% AND CANNOT BE REGARDED AS A COMPARABLE. 53.2 IDC INDIA LTD. : THIS COMPANY IS IN THE BUSINESS OF MARKET RESEA RCH AND MANAGEMENT CONSULTANCY. THIS COMPANY CAN BE RE GARDED AS A COMPARABLE. IN THIS REGARD, WE ARE ALSO OF THE VIE W THAT THE ADMINISTRATION SUPPORT SERVICES AND MANAGEMENT SUPPORT SERVICES AR E AKIN TO IT(TP)A NO.271/BANG/2014 PAGE 54 OF 61 MANAGEMENT SERVICES AND THIS COMPANY SHOULD BE CONS IDERED AS A COMPARABLE. 53.3 NEW AGE ENTERTAINMENT LTD. : THIS COMPANY IS IN THE ENTERTAINMENT INDUSTRY AND RENDERS DISTRIBUTION OF MARKETING OF M OTION PICTURES. THIS COMPANY, IN OUR VIEW, CANNOT BE REGARDED AS A COMPA RABLE AS THE FUNCTIONS PERFORMED ARE ENTIRELY DIFFERENT. 53.4 OFFICE CARE SERVICES LTD. : THIS COMPANY RENDERS HOUSE KEEPING MAINTENANCE WORK AND MANPOWER SUPPORT SERVICES, WHI CH ARE NOT AKIN TO THE NATURE OF SERVICES PERFORMED BY THE ASSESSEE AN D THEREFORE WAS RIGHTLY REJECTED BY THE TPO. 53.5 FORBES FACILITY SERVICES PVT. LTD. : THIS COMPANY RENDERS TO ITS HOLDING COMPANY MECHANIZED HOUSE KEEPING AND PROVID ING INTEGRATED FACILITY SERVICES. THE NATURE OF THE INDUSTRY BEIN G DIFFERENT AND THE NATURE OF SERVICES TO BE PERFORMED BEING ROUTINE UPKEEP OF PR ODUCTS SOLD, IT CANNOT BE CONSIDERED AS COMPARABLE WITH THAT OF THE ASSESS EE. 53.6 COMPETENT AUTOMOBILES COMPANY LTD. : THIS COMPANY IS IN THE AUTOMOBILE SECTOR. THE ASSESSEE HAS TAKEN THE SEGM ENTAL RESULTS OF THE SERVICES AND SPARE PARTS DIVISION. IN OUR VIEW, TH IS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. 53.7 DLF SERVICES LTD. : THIS COMPANY IS A GROUP COMPANY OF DLF LTD. AND IS IN THE BUSINESS OF PROVIDING SERVICES FACILI TY MANAGEMENT TO CLIENTS IT(TP)A NO.271/BANG/2014 PAGE 55 OF 61 OF COMMERCIAL COMPLEXES. IN OUR VIEW, THE INDUSTRY IS DIFFERENT AND THE NATURE OF SERVICES PERFORMED IS ALSO DIFFERENT AND THEREFORE, RIGHTLY REJECTED AS NOT COMPARABLE BY THE TPO. 53.8 EMPIRE INDUSTRIES LTD. : THIS COMPANY HAS OPERATIONS IN MANUFACTURING DIVISION, TRADING AND INDENTING DIVIS ION, EDUCATIONAL PROGRAMMES DIVISION AND OTHERS. THIS COMPANY IN OU R VIEW IS NOT COMPARABLE CONSIDERING THE FUNCTIONS PERFORMED WHIC H IS ALTOGETHER DIFFERENT FROM THAT OF THE ASSESSEE. 53.9 GLODYNE TECHNOSERVE LTD. : THIS COMPANY IS ENGAGED IN TECHNOLOGY, INFRASTRUCTURE MANAGEMENT SERVICES AND APPLICATION SOFTWARE SERVICE IN INDIA AND OVERSEAS. THE ASSESSEE HAS TAKEN THE RES ULTS OF TECHNOLOGY INFRASTRUCTURE MANAGEMENT SERVICES FOR THE PURPOSE OF COMPARABILITY. THIS COMPANY, IN OUR VIEW, IS FUNCTIONALLY SIMILAR WITH THAT OF THE ASSESSEE AND HAS TO BE ACCEPTED AS COMPARABLE. 53.10 KHAITAN (INDIA) LTD. : THIS COMPANY IS ENGAGED IN MARKETING OF ELECTRICAL EQUIPMENTS AND THEREFORE CANNOT BE REGAR DED AS COMPARABLE WITH THAT OF THE ASSESSEE. 53.11 PAE LTD. : THIS COMPANY IS IN THE BUSINESS OF DISTRIBUTION OF LEAD ACID STORAGE BATTERIES TO PROVIDE POWER STORAGE IN POWER BACK-UP SYSTEMS. THIS COMPANY CANNOT BE REGARDED AS A COMPARABLE. IT(TP)A NO.271/BANG/2014 PAGE 56 OF 61 53.12 SALORA INTERNATIONAL LTD. : THE INFOCOM DIVISION OF THIS COMPANY WAS SELECTED FOR THE PURPOSE OF COMPARISON. THIS DIVIS ION IS INVOLVED IN THE DISTRIBUTION OF MOBILE HANDSETS, LAPTOPS, LCD PROJE CTORS, ETC. AND CANNOT BE REGARDED AS A COMPARABLE WITH THAT OF THE ASSESSEE. 53.B COMPARABLE COMPANIES IN MANAGEMENT SERVICES SEGMENT SELECTED BY THE ASSESSEE : 53.13 AKSHAY SOFTWARE TECHNOLOGIES LTD. : THIS COMPANY IS INVOLVED IN PROCUREMENT, INSTALLATION, IMPLEMENTATION, SUPPORT AND MAINTENANCE OF ERP PRODUCTS AND SERVICES AND PROVIDING PROFESSIONA L SERVICES. IT ALSO OFFERS SWIFT INFRASTRUCTURE, INTEGRATION AND OUTSOU RCING SERVICES TO SWIFT USERS. THIS COMPANY, IN OUR VIEW, CAN BE REGARDED AS A COMPARABLE WITH THAT OF THE ASSESSEE. 53.14 CRISIL RISK & INFRASTRUCTURE SOLUTIONS LTD. : THIS COMPANY IS IN THE BUSINESS OF RATING RESEARCH. IT ALSO PROVIDES INTE GRATED RISK MANAGEMENT SOLUTIONS AND ADVICE TO BANKS AND CORPORATES. THIS COMPANY, IN OUR VIEW, WILL PASS THE TEST OF FUNCTIONAL COMPARABILITY AND HAS TO BE REGARDED AS COMPARABLE. 53.15 E2E INFOTECH LTD. : THIS COMPANY IS A CAPITAL MARKET SOLUTION PROVIDER CATERING TO THE IT REQUIREMENTS OF FINANCI AL INSTITUTIONS, MORE SPECIFICALLY, TRADERS, BROKERS AND BANKS. ADMITTED LY, FINANCIAL STATEMENTS ARE NOT AVAILABLE IN THE PUBLIC DOMAIN AND THIS COM PANY, THEREFORE, CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPARISON. IT(TP)A NO.271/BANG/2014 PAGE 57 OF 61 53.16 I C R A MANAGEMENT CONSULTING LTD. : THIS COMPANY IS A MANAGEMENT AND DEVELOPMENT CONSULTING FIRM. FOR WA NT OF PROPER DETAILS, IT IS NOT POSSIBLE TO ASCERTAIN THE EXACT NATURE OF SERVICES RENDERED BY THIS COMPANY AND THEREFORE WAS RIGHTLY REJECTED BY THE T PO AS NOT COMPARABLE. 53.17 I C R A TECHNO ANALYTICS LTD. : THIS COMPANY IS A GROUP COMPANY OF ICRA LTD. AND ENGAGED IN SOFTWARE DEVELOPMENT AND C ONSULTANCY SERVICES, ENGINEERING SERVICES, WEB DEVELOPMENT AND HOSTING. IT IS THE CLAIM OF THE ASSESSEE THAT THIS COMPANY DIVERSIFIED ITSELF INTO THE DOMAIN OF BUSINESS ANALYTICS AND BUSINESS PROCESS OUTSOURCING. IN OUR VIEW, THIS COMPANY CANNOT PASS THE TEST OF FUNCTIONAL COMPARABILITY AN D WAS RIGHTLY REJECTED BY THE TPO. 53.18 KPMG INDIA PVT. LTD. : FOR WANT OF FINANCIAL STATEMENTS, THIS COMPANY WAS RIGHTLY REJECTED AS COMPARABLE BY THE T PO. 53.19 LARSEN & TOUBRO INFOTECH LTD. : THIS COMPANY IS A GLOBAL IT SERVICE AND SOLUTIONS PROVIDER AND CANNOT BE REGARD ED AS A COMPARABLE. 53.20 MAHINDRA CONSULTING ENGINEERS LTD. : THIS COMPANY IS ENGAGED IN PROVIDING INFRASTRUCTURE CONSULTING. IN OUR VIEW, IT CANNOT BE REGARDED AS A COMPARABLE AS THE NATURE OF SERVICES PERFORMED AND THE INDUSTRY ARE ENTIRELY DIFFERENT. 53.21 MINDTREE LTD. : THIS COMPANY IS IN THE BUSINESS OF CONSULTANCY A ND R&D SERVICES TO CUSTOMERS POST-PRODUCTION. IN OUR VIEW, THIS COMPANY IT(TP)A NO.271/BANG/2014 PAGE 58 OF 61 CANNOT BE REGARDED AS A COMPARABLE, CONSIDERING THE FACT THAT THE ASSESSEE RENDERS CONSULTANCY SERVICES TO ITS AE. 53.22 PSI DATA SYSTEMS LTD. : THIS COMPANY IS A PART OF ADITYA BIRLA GROUP, PROVIDING END TO END IT SERVICES, PRODUCT EN GINEERING AND BUSINESS ASSURANCE SOLUTIONS TO THE BANKING, FINANCIAL SERVI CES, INSURANCE, TELECOMMUNICATION, ETC., RIGHTLY REGARDED AS FUNCTI ONALLY NOT COMPARABLE, AS THE AREA OF OPERATIONS ARE DIFFERENT. 53.23 SIP TECHNOLOGIES & EXPORTS LTD. : THIS COMPANY PROVIDES SOFTWARE DEVELOPMENT SERVICES, MAINTENANCE, ETC., CANNOT BE REGARDED AS A COMPARABLE WITH THAT OF THE ASSESSEE. 53.24 SYNETAIROS TECHNOLOGIES LTD. : THIS COMPANY IS ENGAGED IN OBTAINING AND EXECUTING DEVELOPMENT PROJECTS FOR DE VELOPMENT AND MAINTENANCE OF COMPUTER SOFTWARE AND TO PROVIDE SYS TEMS AND SERVICES IN AUTOMATION, COMPUTERIZATION AND RELATED ACTIVITIES. IN OUR VIEW, THIS COMPANY CANNOT BE REGARDED AS COMPARABLE FUNCTIONAL LY, AS RIGHTLY HELD BY THE TPO. 53.25 COMPUTECH INTERNATIONAL LTD : THIS COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND DATA PROCESSIN G, BESIDES COMPUTER MONITORS AND COMPUTER SYSTEMS AND THEREFORE, CANNOT BE REGARDED AS A COMPARABLE WITH THAT OF THE ASSESSEE. IT(TP)A NO.271/BANG/2014 PAGE 59 OF 61 53.26 H S INDIA LTD. : THIS COMPANY IS ENGAGED IN THE OPERATION OF HOTE LS AND RESTAURANT BUSINESS, PROVIDING PARKING FACILITI ES, CONFERENCE ROOMS, ETC. IT CANNOT BE REGARDED AS A COMPARABLE WITH THAT OF THE ASSESSEE. 53.C COMPANIES CHOSEN BY THE TPO AS COMPARABLE FUNCTIONALLY PROVIDING ADMINISTRATIVE AND OTHER SUPPORT SERVICES AND MANAGEMENT SERVICES. 53.27 APITCO LTD. : THIS COMPANY IS ENGAGED IN THE ACTIVITIES OF SKI LLS DEVELOPMENT, TOURISM RESEARCH STUDIES, MICRO ENTERP RISE DEVELOPMENT, CLUSTER DEVELOPMENT, ENERGY RELATED SERVICES, ENVIR ONMENT MANAGEMENT ETC. THIS COMPANY, IN OUR VIEW, IS FUNCTIONALLY DI FFERENT AND CANNOT BE COMPARED WITH THAT OF THE ASSESSEE. 53.28 VAPI WASTE & EFFLUENT MANAGEMENT CO. LTD. : IT WAS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE THAT THIS COMPANY WAS HELD TO BE A ENGINEERING COMPANY AND PROVIDING END TO END SOLUTI ONS BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ACTIS ADVISORS PVT. LTD. V. ACIT, ITA NO.6390/DEL/12. FOLLOWING THE SAID DECISION, WE ARE OF THE VIEW T HAT THIS COMPANY WAS RIGHTLY REJECTED FROM THE LIST OF COMPA RABLES CHOSEN. 53.29 BENGAL C E S INFRATECH PVT. LTD. : THIS COMPANY, ADMITTEDLY, HAS RELATED PARTY TRANSACTIONS OF 77.80% AND APPLYING T HE FILTER ADOPTED BY THE TPO HIMSELF, THIS COMPANY HAS TO BE REGARDED AS NOT COMPARABLE. 53.30 CYBERMEDIA INDIA ONLINE LTD. 53.31 BEST MULYANKAN CONSULTANTS LTD. 53.32 KITCO LTD. 53.33 FUTURE CAPITAL INVESTMENT ADVISORS LTD. IT(TP)A NO.271/BANG/2014 PAGE 60 OF 61 THESE COMPANIES ARE ADMITTED BY THE ASSESSEE TO BE COMPARABLE. 53.34 ICRA ONLINE : THIS COMPANY FAILS THE TPOS FILTER OF COMPANIES , WHOSE INCOME FROM SERVICES IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES AND THEREFORE HAD TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 53.35 KSHITIJ INVESTMENT ADVISORY CO. LTD. : THIS COMPANY HAS RELATED PARTY TRANSACTIONS OF MORE THAN 25% AND APPLYING TP OS OWN FILTER, THIS COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARA BLES. 54. WITH REGARD TO THE SEGMENT OF ADMINISTRATION SU PPORT SERVICES AND MANAGEMENT SERVICES, THE PLEA OF THE ASSESSEE TO IN CLUDE FOREIGN EXCHANGE GAIN TO BE CONSIDERED AS OPERATING REVENUE DESERVES TO BE ACCEPTED IN THE LIGHT OF THE FINDINGS, WHICH WE HAV E GIVEN WHILE DECIDING IDENTICAL ISSUE IN THE CASE OF THE ASSESSEE IN ITS SOFTWARE DEVELOPMENT SERVICES SEGMENT IN THE EARLIER PART OF THIS ORDER. THE TPO IS DIRECTED TO COMPUTE THE ARMS LENGTH PRICE AFTER ALLOWING THE B ENEFIT OF PROVISO TO SECTION 92C OF THE ACT, AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THUS, THE RELEVANT GROUNDS ARE DECIDED A CCORDINGLY. 55. THE OTHER ISSUES REGARDING LEVY OF INTEREST IS PURELY CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF . 56. IN VIEW OF THE DECISION RENDERED IN THE MAIN AP PEAL, THE PETITION FOR GRANT OF STAY FILED BY THE ASSESSEE HAS BECOME INFR UCTUOUS AND THE SAME IS DISMISSED AS INFRUCTUOUS. IT(TP)A NO.271/BANG/2014 PAGE 61 OF 61 57. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED WHILE THE STAY PETITION IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 14 TH DAY OF AUGUST , 2014 . SD/- SD/- (ABRAHAM GEORGE) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 14 TH AUGUST, 2014 . ENCL: ANNEXURES I & II. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER \ ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.