Kaplan India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 2907/DEL/2014

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0910 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 10 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Assessment Year: 2007-2008
• Appeal Filed On: 09-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Initiation of penalty proceedings
• Section: 92C; 143(3); 133(6); 131; 154; 92

Judgement Text

ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI N.S. SAINI, ACCO UNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 2907/DEL/2014 ASSESSMENT YEAR: 2007-08 KAPLAN INDIA PVT. LTD., VS A CIT, PLOT NO. 15, CIRCLE-5(1), OKHLA INDUSTRIAL ESTATE-III, NEW DELHI. NEW DELHI-110020 (PAN: AAICS9919F) (APPELLANT) (RESPONDENT ) ASSESSEE : S/SHRI NAGESWAR RAO, SANDEEP S. KAR HAIL, ADV. SHRI PARTH, ADV. DEPARTMENT BY: SHRI SANDEEP KUMAR MISHRA, SR DR DATE OF HEARING: 23.01.2019 DATE OF PRONOUNCEMENT: 26.03.2019 ORDER PER SUDHANSHU SRIVASTAVA, J.M. THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AG AINST THE ORDER OF THE LD. CIT (APPEALS)-XX, NEW DELHI VI DE ORDER DATED 28.02.2014 AND PERTAINS TO ASSESSMENT YEAR 2007-08. 2.0 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE KAPLAN INDIA PRIVATE LIMITED (KIPL) WAS INCORPORA TED IN APRIL 2005 AS A SUBSIDIARY OF KAPLAN MEXICO HOLDINGS LLC. KIPL IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT AND MAINT ENANCE SERVICES TO ITS ASSOCIATED ENTERPRISE (AE). DURING THE ASSESSMENT ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 2 YEAR (AY) 2007-08, THE ASSESSEE ENTERED INTO INTERN ATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SE RVICES FOR RS. 8,80,32,063/- WHICH WERE EXPLAINED AS FOLLOWS: UNDERTAKING CODING AND DOCUMENTATION THAT ENHANCE THE FUNCTIONALITY OF EXISTING SOFTWARE APPLICATIONS BEING USED BY THE AES. ALSO UNDERTAKES DATABASE CLEANUP AND SOFTWARE MAINTENANCE SERVICES, SUPPORTING APPLICATIONS AND PLATFORMS WITHIN KAPLAN BUSINESSES , BUG FIXING AND MAINTENANCE ETC., AND UNDERTAKING FUNCTIONAL TEST AND OTHER TEST FOR VARI OUS SOFTWARE DEVELOPMENT ACTIVITIES PERFORMED BY KAPLAN INDIA PRIVATE LIMITED (KIPL). ALSO UNDERTAKE TESTIN G OF THE WORK DONE BY THE AE. 2.1 THE RETURN OF INCOME WAS FILED DECLARING AN IN COME OF RS. 28,03,0238/-. THE CASE WAS SELECTED FOR SCRUTIN Y AND DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, A RE FERENCE WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) UNDER SE CTION 92 CA OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED THE A CT). THE TPO REJECTED THE TRANSFER PRICING (TP) ANALYSIS UNDERTA KEN BY THE ASSESSEE AND MADE ADJUSTMENT OF RS. 92,77,646/-. TH E ASSESSING OFFICER (AO) ALSO MADE CERTAIN OTHER ADDITIONS TO T HE DECLARED INCOME. THE TRANSFER PRICING ADJUSTMENT TO SOFTWAR E ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 3 DEVELOPMENT SERVICES SEGMENT AND DISALLOWANCE OF EX PENDITURE INCURRED TOWARDS GROUP MEDICAL INSURANCE MADE BY TH E AO ARE NOW BEING CONTESTED IN THE PRESENT APPEAL BY THE AS SESSEE. THE FOLLOWING GROUNDS HAVE BEEN RAISED: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE APPELLANT RESPECTFULLY CRAVES LEAVE TO PREFER A N APPEAL AGAINST THE ASSESSMENT ORDER PASSED UNDER SECTION 1 43(3) OF THE INCOME-TAX ACT, 1961 (THE ACT) BY THE LEAR NED ASSESSING OFFICER (AO) (AFTER CONSIDERING THE ADJ USTMENTS PROPOSED BY THE LEARNED TRANSFER PRICING OFFICER ( TPO) IN HIS ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT) AND IN PURSUANCE OF THE ORDER PASSED BY THE HONBLE COMMISSIONER OF INCOME-TAX (APPEALS) (CIT(A)) UND ER SECTION 250(6) OF THE ACT ON THE FOLLOWING GROUNDS: EACH OF THE GROUND IS REFERRED TO SEPARATELY, WHICH MAY KINDLY BE CONSIDERED INDEPENDENT OF EACH OTHER. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, 1. THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 5(1), NEW DELHI (AO) / COMMISS IONER OF INCOME TAX (APPEALS)-XX, NEW DELHI [CIT(A)] IS BASED ON INCORRECT INTERPRETATION OF LAW AND THEREFORE IS BAD IN LAW AND WITHOUT JURISDICTION. 2. THE REFERENCE MADE TO THE TRANSFER PRICING OFFI CER (TPO) AND THE ORDER PASSED BY THE TPO U/S 92CA BY THE TPO IS ILLEGAL, BAD IN LAW AND WITHOUT JURISDICTION. 3. THE TPO / AO / CIT (A) HAS ERRED, IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE, BY REJECTING/DISREGA RDING THE DOCUMENTATION FILED BY THE APPELLANT. THE ADJUS TMENT HAS BEEN WRONGLY AND ILLEGALLY MADE AND THE ADDITIO NS MADE ARE UNJUST, UNLAWFUL, ARBITRARY AND ARE ALSO H IGHLY EXCESSIVE. 4. THE TPO / AO / CIT(A) HAS ERRED, BY NOT ACCEPTI NG THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 4 ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962 (THE RULES). 5. THE TPO / AO / CIT (A) HAS ERRED, BY REJECTING THE FILTERS APPLIED BY THE APPELLANT, AND APPLYING ADDI TIONAL FILTERS WHICH ARE INCORRECT, WRONG AND BASELESS. 6. THE LEARNED TPO/ ASSESSING OFFICER/ CIT (A) HAV E ERRED IN SELECTING CERTAIN COMPANIES (WHICH ARE EARNING S UPER NORMAL PROFITS) AS COMPARABLE TO THE APPELLANT. 7. THE TPO/AO/CIT (A) HAS ERRED, IN LAW BY EXERCIS ING HIS POWERS UNDER SECTION 133(6)/131 TO OBTAIN SELECTIVE INFORMATION WHICH WAS NOT AVAILABLE IN THE PUBLIC D OMAIN AND RELYING ON THE SAME FOR COMPARABILITY ANALYSIS. WITHOUT PREJUDICE TO THE ABOVE, THE INFORMATION COL LECTED BY THE AO/TPO U/S 133(6) OR U/S 131 HAS NOT BEEN PROVI DED TO THE APPELLANT ALTHOUGH THE SAME HAS BEEN USED AG AINST THE APPELLANT, HENCE THE ADDITION I ADJUSTMENT MADE ON THAT BASIS IS ILLEGAL AND BAD IN LAW. 8. THE LEARNED TPO / AO / CIT(A) HAVE ERRED IN ERRONEOUSLY REJECTING THE COMPARABLE COMPANIES SELE CTED BY THE APPELLANT AND ADDING CERTAIN COMPANIES TO TH E FINAL SET OF COMPARABLES ON AN AD-HOC BASIS, THEREBY RESO RTING TO CHERRY PICKING OF COMPARABLES. 9. THE LEARNED TPO I AO / CIT(A) HAVE ERRED IN NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS-A-VIS THE COMPARABLE COMPANIES. 10. THE TPO/AO /CIT (A) HAS ERRED BY WRONGLY & ILL EGALLY TREATING THE DEPRECIATION ON TRADE MARK AND LOSS ON FOREIGN EXCHANGE FLUCTUATION AS OPERATIVE COST AND IGNORING THE FACT THAT THE ADJUSTED MARGIN OF THE APPELLANT BASE D ON ACTUAL OP/OC IS 17.64%. THE CIT (A) HAVE PROVIDED N O FINDINGS/DIRECTIONS ON THIS GROUND. 11. THE TPO / AO / CIT(A) HAS ERRED IN LAW IN NOT APPLYING THE PROVISO TO SECTION 92C OF THE ACT AND HAVE FAILED TO ALLOW THE APPELLANT THE BENEFIT OF DOWNWA RD VARIATION OF 5 PERCENT IN DETERMINING THE ARMS LEN GTH PRICE. ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 5 12. THE TPO / AO / CIT (A) HAS ERRED BY DISALLOWIN G EXPENSES OF RS.352,305/- CLAIMED UNDER PROFESSIONAL & TECHNICAL SENDEES BY TREATING IT AS PRIOR PERIOD EX PENSES. 13. THE TPO / AO / CIT (A) HAS ERRED BY DISALLOWIN G THE SUM OF RS.278,185/- PAID TO ICICI LOMBARD GENERAL INSURANCE TOWARDS MEDICAL GROUP INSURANCE. THE TPO/ASSESSING OFFICER/CIT(A) HAS IGNORED THE FACT T HAT THE DETAILS AS REQUIRED WERE FILED AND NO FURTHER EVIDE NCE WAS CALLED FOR. 14. THE TPO / AO / CIT (A) HAS ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE, BY IGNORING THE FACT THAT THE ADDITIONS MADE AND THE OBSERVATIONS MADE ARE UNJUST , UNLAWFUL AND BASED ON MERE SURMISES AND CONJUNCTURE S AND ARE ALSO HIGHLY EXCESSIVE. THE ADDITIONS MADE C ANNOT BE JUSTIFIED BY ANY MATERIAL ON RECORD. 15. THE TPO/AO/CIT(A) HAS IGNORED THE FACT THAT TH E EXPLANATIONS GIVEN EVIDENCE PRODUCED, MATERIAL PLAC ED AND AVAILABLE ON RECORD BY THE APPELLANT HAS NOT BE EN PROPERLY CONSIDERED AND JUDICIALLY INTERPRETED AND THE SAME DO NOT JUSTIFY THE ADDITIONS/ ALLOWANCES MADE. 16. THE LEARNED AO / CIT(A) HAS ERRED IN LEVYING I NTEREST U/S 234B, 234C & 234D AS THE APPELLANT COULD NOT HA VE FORESEEN THE DISALLOWANCES/ADDITIONS MADE AND COULD NOT HAVE INCLUDED THE SAME IN CURRENT INCOME FOR PAYMEN T OF ADVANCE TAX. THE INTEREST CHARGED UNDER VARIOUS SEC TIONS IS ALSO WRONGLY WORKED OUT. 17. THE LEARNED AO / CIT (A) HAS GROSSLY ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1) (C) OF THE ACT. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE & WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMI T OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEA L AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL . ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 6 3.0 THE LEARNED COUNSEL FOR THE ASSESSEE (AR) MADE SUBMISSIONS IN SUPPORT OF GROUNDS OF APPEAL NOS. 7, 8 AND 9 OBJECTING TO THE INCLUSION AND EXCLUSION OF COMPANI ES AS COMPARABLE AND CONTESTED THE TRANSFER PRICING ADJUS TMENT MADE BY THE TPO AS ALSO IN SUPPORT OF GROUND OF APPEAL N O 13 RELATING TO THE DISALLOWANCE OF EXPENDITURE TOWARDS GROUP ME DICAL INSURANCE. 3.1 THE OTHER GROUNDS OF APPEAL VIZ., GROUND NOS. 1 TO 6, 11, 14 AND 15 ARE GENERAL IN NATURE AND DO NOT REQU IRE ANY SEPARATE ADJUDICATION. 3.2 GROUND NOS. 10 AND 12 WERE NOT PRESSED BY THE LD. AR AND GROUND NO 16 IS CONSEQUENTIAL. 3.3 GROUND NO 17 OBJECTING INITIATION OF PENALTY PROCEEDINGS IS PREMATURE AT THIS STAGE. 3.4 THE LD. AR SUBMITTED THAT THE ASSESSEE IS A CA PTIVE SOFTWARE DEVELOPER PROVIDING COMPUTER PROGRAMMING, APPLICATIONS, DEVELOPMENT AND OTHER SUPPORT AND TEC HNICAL SERVICES. DF INSTITUTE INC. IS A GROUP SUBSIDIARY O F THE COMPANY AND PROVIDES HIGH-END CUSTOMIZED EDUCATION TRAINING SOLUTIONS FOR THE INSTITUTIONAL AND CORPORATE CUSTOMERS IN FI NANCE, ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 7 TECHNICAL PRODUCT KNOWLEDGE AND CONSULTATIVE SELLIN G COURSES. IT WAS SUBMITTED BY THE LD. AR THAT THE ASSESSEE WAS C OMPENSATED ON COST PLUS 10 PER CENT BASIS FOR THE INTERNATIONA L TRANSACTION OF PROVISION OF DEVELOPMENT, PRODUCTION AND MAINTENANC E OF COMPUTER SOFTWARE, SUPPORT CENTRE AND OTHER SERVICE S. IT WAS SUBMITTED THAT AFTER CARRYING OUT THE FUNCTIONS ASS ETS AND RISK (FAR) ANALYSIS IN PARAGRAPH 4.2 TO 4.4 OF THE TP ST UDY, THE INTERNATIONAL TRANSACTION OF PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES WERE CONSIDERED TO BE AT ARMS LENGTH PRIC E (ALP) AT PARA 5.5.4 OF THE TP STUDY, BY COMPARING IT WITH 32 COMP ANIES IDENTIFIED BY THE ASSESSEE AT PARA 5.4.6. THE LD. A R SUBMITTED THAT, ALTHOUGH, IN THE TRANSFER PRICING STUDY THE M ETHOD ADOPTED WAS LABELLED AS COST PLUS METHOD (CPM), IT IS A COM MON GROUND OF THE ASSESSEE AND THE TPO THAT TRANSACTIONAL NET MARGIN METHOD (TNMM) IS THE MOST APPROPRIATE METHOD (MAM) AND OP/OC IS THE PROFIT LEVEL INDICATOR (PLI). 3.5 THE LD. AR FURTHER SUBMITTED THAT VIDE HIS ORD ER DATED 29 TH OCTOBER 2010, THE TPO ACCEPTED THAT THE INTERNATIO NAL TRANSACTIONS ARE TO BE CHARACTERIZED AS SOFTWARE DE VELOPMENT SERVICES. IT WAS SUBMITTED BY THE LD. AR THAT AFTER MODIFICATION/ADDITION OF THE FILTERS ADOPTED IN THE TP STUDY, ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 8 COLLECTING INFORMATION UNDER SECTION 133(6) OF THE ACT AND ACCEPTING THE TESTED PARTY MARGIN AT 17.04%, AT PAR AGRAPH 15 OF THE TP ORDER, THE TPO SELECTED A NEW SET OF 26 COMP ANIES AS COMPARABLE FOR THE PURPOSES OF DETERMINATION OF ARM S LENGTH PRICE AFTER REJECTING ALL THE 32 COMPANIES SELECTED BY THE ASSESSEE IN ITS TP STUDY. THE LD. AR ELABORATED THAT THE TPO DETERMINED THE ARITHMETIC MEAN PLI OF THE NEW COMPARABLE SET A T 25% AND AFTER ALLOWING THE WORKING CAPITAL ADJUSTMENT OF 1. 74%, DETERMINED THE ADJUSTED ARITHMETIC MEAN PLI AT 23.2 6%. THUS, THE TPO PROCEEDED TO MAKE AN ADJUSTMENT OF RS 92,77 ,646/-. 3.6 THE LD. AR FURTHER SUBMITTED THAT VIDE DRAFT ASSESSMENT ORDER DATED 25.2.2011 PASSED UNDER SECTI ON 144C R.W.S. 143(3) OF THE ACT, THE ASSESSING OFFICER DIS ALLOWED DEDUCTION CLAIMED OF RS. 2,78,185/- TOWARDS GROUP M EDICAL INSURANCE EXPENDITURE FOR THE EMPLOYEES ON THE GROU ND THAT NO EVIDENCE WAS SUBMITTED TO SUPPORT THAT ICICI LOMBAR D GENERAL INSURANCE IS APPROVED AS PER SECTION 36(1)(IB) OF T HE ACT. 3.7 CONTINUING WITH A BRIEF BACK GROUND ON THE FAC TUAL ASPECT, THE LD. AR SUBMITTED THAT BEING AGGRIEVED B Y THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED APPEAL BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEALS) {CIT (A)} INTER ALIA ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 9 CHALLENGING THE REJECTION OF THE TRANSFER PRICING S TUDY, REJECTION OF ALL THE COMPARABLES, SELECTION OF NEW SET OF COM PARABLES, USE OF INFORMATION OBTAINED UNDER SECTION 133(6) AND DISAL LOWANCE OF EXPENDITURE TOWARDS GROUP INSURANCE OF EMPLOYEES. T HE LD. AR SUBMITTED THAT THE LD. CIT (A) UPHELD THE REJECTION OF THE TP STUDY AND ITS COMPARABLES, DIRECTED EXCLUSION OF TH E COMPARABLE CELESTIAL LABS FROM SET OF COMPARABLES CHOSEN BY TH E TPO ON THE GROUND THAT IT IS ENGAGED IN DEVELOPMENT AND SALE O F PRODUCTS AND DIRECTED EXCLUSION OF THE COMPARABLES INFOSYS L IMITED AND WIPRO LIMITED FROM SET OF COMPARABLES CHOSEN BY THE TPO RELYING ON DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY INDIA. THE LD. AR FURTHER ELABORATED THAT THE LD. C IT(A) UPHELD ALL OTHER CONCLUSIONS OF THE TPO AS ALSO THE DISALL OWANCE MADE BY THE AO TOWARDS GROUP INSURANCE ON THE GROUND THAT N O EVIDENCE WAS PRODUCED TO SHOW THAT THE SCHEME OF INSURANCE I SSUED BY ICICI LOMBARD IS APPROVED UNDER SECTION 36(1)(IB). 3.8 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSE E MAINLY SOUGHT EXCLUSION OF THE FOLLOWING COMPANIES: (1) AV ANI CINCOM TECHNOLOGIES LIMITED; (2)HELIOS & MATHESON LIMITED; (3) ISHIR INFOTECH LIMITED; (4) MEGASOFT LIMITED; (5) TATA EL XSI LIMITED; AND INCLUSION OF FOLLOWING COMPANIES: (1) INDIUM SOFTWA RE (INDIA) LTD; ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 10 (2) VMF SOFT TECH LIMITED FROM/TO THE FINAL SET OF THE 26 COMPARABLES CHOSEN BY THE TPO. 3.9 DURING THE COURSE OF HEARING, THE LEARNED COUN SEL FILED A DETAILED CHART CONTAINING LIST OF DECISIONS OF TH E COORDINATE BENCHES OF THIS TRIBUNAL (ITAT) IN RELATION TO AY 0 7-08, WHEREIN THE ABOVE COMPANIES WERE CLAIMED TO HAVE BEEN DIREC TED TO BE EXCLUDED OR INCLUDED ON SIMILAR GROUNDS AS IN THE P RESENT CASE. IT WAS CONTENDED BY THE LD. AR THAT AS THESE DECISIONS ARE IN CONTEXT OF THE TP ADJUSTMENT/S MADE TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT FOR VERY SAME ASSESSME NT YEAR AND, THEREFORE, THE CONCLUSIONS REACHED BY THE COOR DINATE BENCHES SHOULD BE FOLLOWED. 3.10 THE LEARNED COUNSEL ALSO INVITED OUR ATTENTIO N TO THE INFORMATION CLAIMED TO BE IN PUBLIC REALM BY WAY O F DIRECTORS REPORT TO SUPPORT THE CLAIM OF THE ASSESSEE THAT G ROUP MEDICAL INSURANCE SCHEME ISSUED BY ICICI LOMBARD GENERAL IN SURANCE CO. IS APPROVED UNDER SECTION 36 (1)(IB) OF THE ACT AND REQUESTED ALLOWANCE OF EXPENDITURE. 4.0 THE LEARNED SENIOR DEPARTMENTAL REPRESENTATIVE (SR. DR) SUPPORTED THE CONCLUSIONS REACHED BY THE TPO. L D. SR. DR SUBMITTED THAT THE FINAL LIST OF COMPARABLES WAS SE LECTED ON THE ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 11 BASIS OF FAR ANALYSIS. BY REFERRING AND RELYING ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT DATED 30.10.2017 IN ST MICRO IN ITA 913/2017, THE LD. SR. DR CONTENDED THAT COMPARA BLES CANNOT BE INCLUDED OR EXCLUDED BY RELYING ON DECISI ONS OF COORDINATE BENCHES. THE LD. SR. DR CONTENDED THAT T HE EARLIER RULINGS SHOULD NOT BE BLINDLY FOLLOWED. THE LD. SR. DR ALSO CONTENDED THAT THE INFORMATION OBTAINED UNDER SECTI ON 133 (6) OF THE ACT WAS MADE AVAILABLE TO THE ASSESSEE AND, THE REFORE, THE SAME WAS VALIDLY USED WHILE DECIDING THE COMPARABIL ITY. THE LD. SR. DR CLARIFIED THAT WHILE IN THE TP STUDY, THE AS SESSEE HAD WRONGLY DESCRIBED THE MOST APPROPRIATE METHOD ADOPT ED AS COST PLUS, IN SUBSTANCE BOTH THE TPO AND THE TP STUDY AP PLIED TNMM AS THE MOST APPROPRIATE METHOD. IN THE CONTEXT OF D ISALLOWANCE OF EXPENDITURE TOWARDS GROUP MEDICAL INSURANCE, THE LD . SR. DR CONTENTED THAT THE INFORMATION AVAILABLE DOES NOT C LEARLY SHOW THAT ICCICI LOMBARD SCHEME IS APPROVED UNDER SECTIO N 36 (1) (IB) OF THE ACT. 5.0 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND H AVE ALSO PERUSED THE ORDERS OF THE TPO AND THE LD. CIT (A). IN THE CONTEXT OF THE TRANSFER PRICING ADJUSTMENT, DISPUTE IS MAINLY CENTRED AROUND THE EXCLUSION AND INCLUSION OF SOME COMPANIES ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 12 AS COMPARABLES. WHILE PRIMA FACIE , THE LD. SR. DRS CONTENTION THAT COORDINATE BENCH DECISIONS SHOULD NOT BE BLIND LY FOLLOWED CANNOT BE FAULTED, WELL-REASONED ORDERS OF COORDINA TE BENCHES OF THE TRIBUNAL FOR VERY SAME ASSESSMENT YEAR 07-08, M ORE SO DEALING WITH SOFTWARE DEVELOPMENT SERVICES SEGMENT DESERVE RESPECTFUL CONSIDERATION AND CANNOT BE LIGHTLY IGNO RED UNLESS FACTUAL DIFFERENCES OR DEVELOPMENTS IN LAW WHICH HA VE A BEARING ON THE ISSUE IN DISPUTE ARE POINTED OUT. THIS IS MO RE SO WHEN IN THE PRESENT CASE, BROAD CHARACTERISATION OF INTERNA TIONAL TRANSACTIONS AS SOFTWARE DEVELOPMENT SERVICES AND A PPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD IS NOT DISPUTED BY BOTH THE PARTIES. AS RIGHTLY POINTED OUT BY THE LD. COUN SEL FOR THE ASSESSEE, THE DECISIONS OF THE COORDINATE BENCHES H AVE CONSIDERED ISSUES ARISING FROM THE VERY SAME SET OF 26 COMPARABLES IN AY 07-08. IN SUCH FACTUAL BACKGROUND DECISIONS, EXCLUDING OR INCLUDING COMPANIES ON BASIS OF GENERI C DISQUALIFICATIONS LIKE SOFTWARE PRODUCT REVENUE BEI NG EARNED IN CASE OF CERTAIN COMPANIES AND SEGMENTAL DATA NOT BE ING AVAILABLE OR CONCLUSION THAT A CERTAIN COMPANY FAILS IDENTICA L FILTER IN SUCH DECIDED CASE, DESERVE TO BE FOLLOWED. FURTHER, PROV ISIONS OF CHAPTER X OF THE ACT ARE MEANT FOR COMPLIANCE BY TH E TAXPAYERS ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 13 AND PENAL CONSEQUENCES GET ATTRACTED FOR ANY NON-CO MPLIANCE. REFERENCE TO INCOME TAX RULES 10 B, 10 C AND 10 D I NDICATE THAT SUCH COMPLIANCE HAS TO BE MADE BY CONSIDERING MATER IAL AVAILABLE IN THE PUBLIC DOMAIN. THE POWER VESTED IN AUTHORITIES TO OBTAIN INFORMATION UNDER 133 (6) OF THE ACT FOR THE PURPOSES OF PROCEEDINGS UNDER THE ACT, IN THE CONTEXT OF TRANSF ER PRICING PROVISIONS, REQUIRE A CAREFULLY BALANCED APPROACH W ITH THE ABOVE COMPLIANCE REQUIREMENT EXPECTED FROM TAXPAYERS. AC CORDINGLY, WE NOTE THAT WHILE THE INFORMATION/S OBTAINED BY T HE TPO UNDER SECTION 133(6) OF THE ACT CANNOT FORM THE SOLE BASI S FOR FAR ANALYSIS, AS THAT WOULD MAKE THE REQUIREMENT OF COM PLIANCE AN IMPOSSIBILITY AND CAST AN ONEROUS BURDEN ON THE TAX PAYER WHICH MAY BE DIFFICULT TO DISCHARGE, USE OF INFORMATION O BTAINED UNDER SECTION 133 (6), IN CASES WHEREIN RULES OF NATURAL JUSTICE ARE FOLLOWED AND SUCH INFORMATION IS SHARED WITH THE T AXPAYER, AS SUPPORTIVE OR CIRCUMSTANTIAL EVIDENCE FOR CLARIFYIN G INFORMATION GAPS IN COMPARABILITY EXERCISE CANNOT BE DISAPPROVE D. RIVAL CONTENTIONS IN THE CONTEXT OF SPECIFIC COMPARABLES ARE DEALT WITH IN GREATER DETAIL IN THE FOLLOWING PARAGRAPHS. 5.1 AVANI CINCOM TECHNOLOGIES LTD: ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 14 THE LD. COUNSEL FOR THE ASSESSEE SOUGHT EXCLUSION O F AVANI CINCOM TECHNOLOGIES LIMITED FROM THE FINAL SE T OF COMPARABLE COMPANIES. IT WAS POINTED OUT THAT THE T PO REJECTED SIMILAR OBJECTIONS TO COMPARABILITY OF THI S COMPANY AT PARAGRAPH 13.2 OF HIS ORDER. THE TPO INCLUDED THIS COMPANY ON THE GROUND THAT IT QUALIFIED ALL THE FILTERS APP LIED BY THE TPO AND FURTHER ON THE GROUND THAT THE TAXPAYER DID NOT OBJECT TO THE INCLUSION OF THIS COMPANY IN ITS REPLY TO SHOW CAUSE NOTICE. THE TPO NOTED THAT WHILE THE ANNUAL REPORT AND THE RELATED PARTY TRANSACTION DETAILS OF THE COMPANY ARE NOT AV AILABLE, INFORMATION OBTAINED UNDER SECTION 133 (6) WAS CONS IDERED. THE LD. COUNSEL POINTED OUT THAT SUCH AN APPROACH W AS AT VARIANCE FROM THE APPROACH ADOPTED WHILE REJECTING THE COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE IN ITS TP STUDY WHEREIN SUCH COMPARABLES WERE REJECTED ON THE GROUN D OF INSUFFICIENT INFORMATION. THE LD. COUNSEL FURTHER C ONTENDED THAT BEFORE THE LD. CIT (A) IT WAS POINTED OUT THAT THIS COMPANY EARNED REVENUE FROM SOFTWARE PRODUCT SALE ( SOFTWARE NAMED D XCHANGE). HOWEVER, THE LD. CIT (A) REJECTED THE OBJECTIONS AT PARA 4.7 BY HOLDING THAT THE CASE LAW S RELIED ON BY THE ASSESSEE ARE NOT APPLICABLE. THE LD. COUNSE L INVITED ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 15 OUT ATTENTION TO PARA 90 OF THE DECISION IN CASE OF MOTOROLA SOLUTIONS INDIA PRIVATE LIMITED ( ITA NO 5637/DEL/2 011) AND PARA 18-19 OF DECISION IN NXP SEMI CONDUCTORS INDI A PRIVATE LIMITED ( ITA 1174/BANG/2011). IN RESPONSE, BY REFERENCE TO THE ANNUAL REPORT OF T HIS COMPANY, WHICH WAS FILED AT THE TIME OF HEARING AT PAGES 1 TO 17 OF THE PAPER BOOK CONTAINING ANNUAL REPORTS, THE LD. SR. DR CONTENDED THAT THERE IS NOTHING IN THE FINANCIALS O F THE COMPANY TO INDICATE THAT THE COMPANY HAS EARNED ANY REVENUE FROM SALE OF PRODUCTS. THE LD. SR. DR ALSO CONTENDE D THAT THIS COMPANY WAS INCLUDED ON THE BASIS OF SECTION 133 (6 ) INFORMATION. HAVING HEARD BOTH THE PARTIES ON THIS COMPARABLE, F IRSTLY, WE NOTICE FROM THE ORDER OF THE TPO THAT UNLIKE IN CASES OF CELESTIA LABS LIMITED AT PARA 13.4, MEGASOFT LIMITE D AT PARA 13.17 AND TATA ELXSI LIMITED AT PARA 13.25, THE TPO HAS CHOSEN NOT TO PROVIDE DETAILS OF INFORMATION OBTAIN ED UNDER SECTION 133 (6). SIMILAR EXTRACTION OF RELIED UPON PORTION OF THE INFORMATION OBTAINED UNDER SECTION 133 (6) WAS NECE SSARY CONSIDERING THE REASONING GIVEN BY THE TPO HIMSELF AT PARA 13.2 OF HIS ORDER WHEREIN IT IS EXPRESSLY NOTED THA T EVEN IN THE ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 16 ABSENCE OF FINANCIALS, INCLUSION OF THIS COMPANY AS A COMPARABLE WAS WARRANTED BEING BASED ON INFORMATION RECEIVED UNDER SECTION 133 (6). FURTHER, IT IS ALSO NOTICED THAT OBJECTIONS, SIMILAR TO ONES RAISED BY LD. SR. DR IN THE PRESENT CASE, WERE RAISED BY THE LD. DEPARTMENTAL REPRESENT ATIVE IN THE CASE OF MOTOROLA SOLUTIONS INDIA PVT. LIMITED, AS D ISCUSSED AT PARAGRAPHS 89 AND 90 OF SAID ORDER. RELEVANCE OF CO NCLUSIONS REACHED BY THE COORDINATE BENCH IN THAT CASE CANNOT BE OVER EMPHASISED. IN MOTOROLA, THE COORDINATE BENCH HAD C ONCLUDED THAT EVEN IF ONE WERE TO ACCEPT THE ARGUMENT OF THE DEPARTMENT THAT NO INCOME IS SHOWN TO RESULT FROM SALE OF SOFT WARE PRODUCT NAMED DXCHANGE, THE FACT THAT THE REVENUE A ND, THEREFORE, THE MARGIN EARNED BY AVANI CINCOM WAS IM PACTED BY USE OF SUCH INTERNALLY DEVELOPED AND OWNED SOFTW ARE AS AN ASSET JUSTIFIED THE EXCLUSION OF AVANI CINCOM FROM THE FINAL SET OF COMPARABLE COMPANIES. REFERENCE TO DECISIONS OF OTHER COORDINATE BENCHES MENTIONED IN THE CHART SUBMITTED BY THE LD. COUNSEL AT THE TIME OF HEARING, SHOW THAT SIMIL AR CONSISTENT REASONING HAS BEEN ADOPTED FOR CONCLUDIN G THAT AVANI CINCOM IS NOT COMPARABLE IN CASE OF SOFTWARE DEVELOPMENT SERVICES DUE TO PRESENCE OF SOFTWARE PR ODUCT ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 17 NAMED D XCHANGE. SIMILAR REASONING ADOPTED BY THE BANGALORE BENCH OF TRIBUNAL IN CASE OF SOFTBRANDS I NDIA PRIVATE LIMITED (IT (T.P) A. NO 1094/BANG/2011) AT PARAGRAPH 8.2 NOW STANDS APPROVED BY THE JUDGMENT OF THE HON BLE KARNATAKA HIGH COURT IN ITA NOS. 536 AND 537 OF 201 5. RESPECTFULLY FOLLOWING THE DECISIONS OF COORDINATE BENCHES IT IS DIRECTED THAT AVANI CINCOM TECHNOLOGIES LIMITED BE EXCLUDED FROM SET OF COMPARABLE COMPANIES IN PRESENT CASE AL SO. 5.2 HELIOS MATHESON LIMITED: THE LD. COUNSEL REQUESTED FOR EXCLUSION OF HELIOS MATHESON LIMITED FROM THE FINAL SET OF COMPARABLE COMPANIES ON THE GROUND THAT THIS COMPANY EARNED IN COME FROM ITES ACTIVITIES AND IN ABSENCE OF SEGMENTAL INFORMATION, IT CANNOT BE COMPARED WITH KAPLAN INDI A WHICH EARNS ITS REVENUE PURELY FROM SOFTWARE DEVELOPMENT SERVICES. THE LD. COUNSEL INVITED OUR ATTENTION TO SCHEDULE I OF THE ANNUAL REPORT AT PAGE 83 OF THE ANNUAL REPOR TS PAPER BOOK TO CONTEND THAT THE INCOME WAS EARNED FR OM SOFTWARE SALES & SERVICES, BY REFERENCE TO SCHEDULE D M IT WAS CONTENDED THAT HELIOS MATHESON INCURRED ADVERTISEMENT EXPENDITURE UNLIKE THE ASSESSEE. BY R EFERENCE ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 18 TO PAGE 93 OF THE ANNUAL REPORT PAPER BOOK IT WAS S UBMITTED THAT FOR HELIOS MATHESON GLOBAL BRAND BUILDING WAS A FOCUS AREA AND THAT THE SAME IMPACTS THE MARGIN EARNED BY THIS COMPANY. THE LD. COUNSEL ALSO DREW OUR ATTENTION TO SEVERAL DECISIONS OF THE COORDINATE BENCHES FOR AY 2007-08, AS LISTED IN THE CHART SUBMITTED AT THE TIME OF HEA RING, AND SUBMITTED THAT AS THIS COMPANY WAS FOUND NOT COMPAR ABLE IN THE CONTEXT OF SOFTWARE DEVELOPMENT SERVICES, EX CLUSION OF THIS COMPANY WAS REQUIRED IN THE PRESENT CASE ALSO. THE LD. COUNSEL ALSO DREW OUR ATTENTION TO APPLICATION DATE D 30.4.2014 FILED BEFORE LD. CIT (A) SEEKING RECTIFIC ATION OF THE ORDER ON THIS COMPARABLE. IT WAS SUBMITTED THAT SUC H RECTIFICATION APPLICATION WAS STILL PENDING CONSIDE RATION. THE LD. SR. DR CONTENDED THAT HELIOS MATHESON WAS RIGHTLY INCLUDED AS A COMPARABLE COMPANY BASED ON F AR ANALYSIS AND THAT A GOOGLE SEARCH OF THIS COMPANY SHOWED THAT THERE IS NO SOFTWARE PRODUCT SALE REVENUE. HAVING HEARD THE RIVAL CONTENTIONS, IT IS SEEN THAT TPOS ORDER (PARA 13.9) SHOWS THAT THIS COMPANY IS INCLUDED BY THE TPO BY OVERRULING THE OBJECTION OF THE ASSES SEE WITHOUT CITING ANY REASONS. IT IS ALSO NOTICED THA T THE LD. ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 19 CIT (A) HAS ALSO SUMMARILY REJECTED THE CONTENTION ABOUT THE FAILURE OF THE EMPLOYEE COST FILTER AND HAS UPH ELD THE INCLUSION OF THIS COMPANY. IT IS SEEN THAT THIS COM PANY FAILS THE EMPLOYEE COST FILTER OF 25% AS HELIOS MATHESAN S EMPLOYEE COST IS ONLY 1.07% OF SALES. WE NOTICE THA T EMPLOYEE COST FILTER IS ONE OF THE FILTERS ADOPTED BY THE TPO HIMSELF AT PARA 8 OF HIS ORDER. THE TOTALITY OF ABO VE FACTS AND CIRCUMSTANCES AS NOTICED IN THE ABOVE PARAGRAPHS CL EARLY SHOWS THAT FAR AND, THEREFORE, THE MARGIN EARNED BY HELIOS MATHESAN IS TOTALLY DIFFERENT IN COMPARISON TO THE FAR OF THE ASSESSEE. IT IS THEREFORE, DIRECTED THAT HELIOS MA THESAN BE EXCLUDED FROM FINAL LIST OF COMPARABLE COMPANIES. 5.3 ISHIRINFOTECH LIMITED: ISHIRINFOTECH LIMITEDS INCLUSION AS A COMPARABLE I S CONTESTED BY THE ASSESSEE. IT IS SEEN THAT THE TPO, AT PARA 13.12, NOTES THAT THIS COMPANY FAILED THE 25 % EMPL OYEE COST FILTER BASED ON DATA AVAILABLE IN CAPITOLINE D ATABASE. HOWEVER, THE TPO DECIDED TO INCLUDE THIS COMPANY AS A COMPARABLE ON THE BASIS OF INFORMATION OBTAINED UND ER SECTION 133 (6) OF THE ACT. AS ALREADY NOTED BY US IN THE CONTEXT OF DISCUSSION ON THE COMPARABILITY OF AVANI CINCOM, ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 20 THE TPO HAS NOT REFERRED TO THE INFORMATION SAID TO HAVE BEEN OBTAINED UNDER SECTION 133(6) OF THE ACT UNLIK E IN THE CASES OF CELESTIA LABS LIMITED (AT PARA 13.4), MEGA SOFT LIMITED (AT PARA 13.17) AND TATA ELXSI LIMITED (AT PARA 13.25). THE LD. CIT (A) HAS ALSO ROUTINELY UPHELD T HE INCLUSION OF THIS COMPARABLE WITHOUT CITING ANY REA SONS FOR REJECTING THE ASSESSEES CONTENTIONS. THE LD. COUNS EL FOR THE ASSESSEE ALSO DREW OUR ATTENTION TO THE APPLICATION FOR RECTIFICATION FILED BEFORE THE LD. CIT (A) SETTING OUT THE WORKINGS FOR APPLICATION OF THE EMPLOYEE COST FILTE R. IT WAS SUBMITTED THAT THIS RECTIFICATION APPLICATION IS ST ILL PENDING CONSIDERATION AS ON THE DATE OF HEARING OF THE PRES ENT APPEAL. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR A TTENTION TO PARA 20 & 21 OF THE ORDER OF ITAT BANGALORE BENC H IN THE CASE OF NXP SEMI CONDUCTORS (ITA 1174/BANG/2011), WHEREIN FOR THIS VERY REASON THE COORDINATE BENCH O F THE TRIBUNAL HAS DIRECTED EXCLUSION OF THIS COMPANY FRO M THE FINAL SET OF COMPARABLE COMPANIES. THE LD. SR. DR CONTENDED AGAINST EXCLUSION OF THIS COMPARABLE BY RELYING ON THE COORDINATE BENCH DECIS ION. IT WAS CONTENDED THAT NXP WAS ENGAGED IN BUSINESS OF ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 21 SEMICONDUCTORS AND, THEREFORE, THE FINDING OF THE C OORDINATE BENCH WAS IN A DIFFERENT CONTEXT. THE LD. COUNSEL FOR THE ASSESSEE CLARIFIED IN THIS CONTEXT THAT THE DECISION IN NXP TO EXCLUDE ISHIRIN FOTECH AS A COMPARABLE COMPANY WAS MADE IN THE CONTEXT OF BENCHMARKING THEIR SOFTWARE DEVELOPMENT SERVICES SE GMENT AND HAD NOTHING TO DO WITH THE OVERALL BUSINESS OF NXP BEING RELATED TO SEMICONDUCTORS. IT WAS, THEREFORE, CONTENDED ON BEHALF OF THE ASSESSEE THAT THE DECISI ON WAS CLEARLY APPLICABLE IN THE CONTEXT OF SOFTWARE DEVEL OPMENT SERVICES. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. REFERENCE TO PAGES 159,165 AND 166 OF THE PAPER BOO K OF ANNUAL REPORTS FILED SHOW THAT THE ENTIRE INCOME OF THIS COMPANY IS FROM PROFESSIONAL RECEIPTS. DETAILS OF ADMINISTRATIVE EXPENDITURE MARKED AS SCHEDULE 16 TO THE FINANCIAL STATEMENT INCLUDE BROKERAGE AND COMMISSIO N PAID AS ALSO PROFESSIONAL FEES. EMPLOYEE COST DETAILS AR E SHOWN SEPARATELY UNDER SCHEDULE 15 TO THE FINANCIALS. THE COMPANY RECOGNIZES INCOME BY APPLICATION OF PERCENT AGE OF COMPLETION METHOD UNLIKE COST PLUS MARK-UP BASIS OF ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 22 COMPENSATION APPLICABLE TO CAPTIVE SERVICE PROVIDER S LIKE THE PRESENT ASSESSEE. THUS, IT APPEARS THAT IN ADDITION TO THIS COMPANY NOT QUALIFYING THE EMPLOYEE COST FILTER APP LIED BY THE TPO, THE FAR OF ISHIRINFOTECH LIMITED IS DIFFER ENT COMPARED TO THAT OF KAPLAN INDIA PRIVATE LIMITED. R EFERENCE TO THE CHART FILED BY THE LD. AR DURING THE HEARING INDICATES THAT OTHER COORDINATE BENCHES, DETAILS OF WHICH ARE MENTIONED IN THE CHART, ALSO CONCLUDED THAT ISHIRI NFOTECH LIMITED IS NOT A VALID COMPARABLE FOR AY 2007-08 FO R SOFTWARE DEVELOPMENT SERVICES SEGMENT. ACCORDINGLY, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH OF BANGALORE IN THE CASE OF NXP SEMI CONDUCTORS INDIA PVT. LTD. (SUPRA), WE DIRECT EXCLUSION OF THIS COMPANY F ROM THE FINAL SET OF COMPARABLE COMPANIES. 5.4 MEGASOFT LTD: THE NEXT COMPARABLE ARGUED FOR EXCLUSION BY THE LD. COUNSEL FOR THE ASSESSEE IS MEGASOFT LIMITED. OUR A TTENTION WAS INVITED TO PAGE 217 OF THE PAPER BOOK OF ANNUAL REPORTS TO SHOW THAT THE REVENUE RECOGNITION POLICY OF THE COMPANY CLEARLY SETS OUT REVENUE RECOGNITION FROM PRODUCT L ICENSES AND RELATED REVENUES. PAGE 220 IS POINTED OUT WHERE IN ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 23 UNDER NOTE 5 TO SCHEDULE 17 DEALING WITH NOTES TO A CCOUNTS IT IS MENTIONED THAT INVENTORIES ARE VALUED BY INCL UDING DIRECT EXPENSES INCURRED FOR PRODUCT DEVELOPMENT. O UR ATTENTION WAS ALSO INVITED TO PAGE 237 OF THE PAPER BOOK CONTAINING ANNUAL REPORTS WHEREIN UNDER THE HEAD QUANTITATIVE DETAILS THE COMPANY HAS INDICATED TH AT THE DEVELOPMENT AND SALE OF SUCH SOFTWARE CANNOT BE EXP RESSED IN GENERIC UNITS. MANAGEMENT DISCUSSION AND ANALYSI S AT PAGES 256 & 258 INDICATE THAT THIS COMPANY WAS FOCU SED ON PRODUCTS, INNOVATION AND INVOLVEMENT IN THE INVENTI ON OF FUTURE TECHNOLOGIES THROUGH TWO PRODUCTS VIZ., XIUS AND BLUEALLY. IT IS ALSO NOTICED FROM PAGE 256 THAT DUR ING THE YEAR ANOTHER COMPANY BY NAME OF VISUALSOFT WAS AMALGAMATED WITH THE ASSESSEE. THE NATURE OF XIUS PRODUCTS AND BLUEALLY ARE DETAILED AT PAGES 257 AND 258 OF SUCH PAPER BOOK. THE LD. COUNSEL FURTHER DREW OUR ATTENTION TO PARA 13.17 OF THE TPOS ORDER, WHEREIN THE INFORMATION OBTAINED UNDER SECTION 133 (6) IS EXTRA CTED. THE LD. COUNSEL INVITED OUR ATTENTION TO THE REPLY RECE IVED FROM MEGASOFT WHICH IS DATED 14 JUNE 2010 AND WHEREIN AT PARAGRAPH 2 IT IS CLARIFIED IN THE CONTEXT OF XIUS THAT THE ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 24 PRODUCTS RESULTING FROM THE SOFTWARE DEVELOPMENT AR E DEFINED AND SOLD AS PACKAGED PRODUCTS TO CUSTOMERS. IT WAS ALSO POINTED OUT THAT THE TPO HAS EXPRESSLY NOTED ( JUST ABOVE PARA 13.8) THAT PRODUCT REVENUE CONSTITUTES 1 9% OF OVERALL REVENUE TO THE COMPANY. THE LD. COUNSEL, TH EREFORE, URGED THAT THIS COMPANY SHOULD BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. THE LD. COUNSEL ALSO RELIED ON PARA 22 & 23 OF THE COORDINATE BENCHS DECISION IN NXP SEMICONDUCTORS (ITA 1174/BANG/2011) WHEREIN FOR IDE NTICAL REASONS THIS COMPARABLE WAS FOUND TO BE NOT COMPARA BLE TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT FOR AY 20 07-08. THE LD. SR. DR SUBMITTED THAT BLUE ALLY AND XIUS WE RE NOT PRODUCTS IN THEMSELVES BUT WERE ONLY SEGMENTS W HICH ENGAGED IN SOFTWARE DEVELOPMENT SERVICE. FURTHER, I T WAS SUBMITTED THAT THE EXTRAORDINARY EVENT OF AMALGAMAT ION ALSO CANNOT BE A REASON TO EXCLUDE THIS COMPANY FRO M THE SET OF COMPARABLE COMPANIES UNLESS TAXPAYER COULD DEMONSTRATE THAT SUCH AMALGAMATION IMPACTED THE MAR GIN EARNED BY THE COMPANY. LD. SR. DR FURTHER ARGUED TH AT CONSULTANCY PROVIDED BY THIS COMPANY FOR SOFTWARE P RODUCT DEVELOPMENT ETC., WILL HAVE TO BE CONSIDERED AS PAR T OF ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 25 SOFTWARE DEVELOPMENT SERVICES AND ABSENCE OF SEGMEN TAL INFORMATION SHOULD NOT LEAD TO EXCLUSION OF THIS CO MPANY. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS, THE MATERIAL AVAILABLE ON RECORD AND ALSO THE DECISIONS OF THE COORDINATE BENCHES FOR THE VERY SAME YEAR. WE ARE I NCLINED TO AGREE WITH THE SUBMISSIONS OF THE LD. COUNSEL FO R THE ASSESSEE AS THIS COMPANY IS CLEARLY ENGAGED IN MULT IFARIOUS ACTIVITIES INCLUDING SALE OF SOFTWARE PRODUCTS. FUR THER, THE IMPACT OF THE EXTRAORDINARY EVENT OF AMALGAMATION I S ALSO NOT POSSIBLE TO BE QUANTIFIED AND ADJUSTED. WE ALSO NOTICE THAT THE TPO HIMSELF HAS ACCEPTED THAT 19% OF THE R EVENUE EARNED BY THIS COMPANY IS FROM SOFTWARE PRODUCTS. SUBMISSIONS OF THE LD. SR. DR ON THIS ASPECT ARE TH US CONTRARY TO FINDINGS OF THE TPO. THE LD. CIT (A) HA S ALSO NOT GIVEN ANY VALID REASONS FOR UPHOLDING THE CONCLUSIO NS REACHED BY THE TPO. ACCORDINGLY, RESPECTFULLY FOLLO WING THE DECISION OF THE COORDINATE BENCH OF BANGALORE IN TH E CASE OF NXP SEMI CONDUCTORS INDIA PVT. LTD. (SUPRA), WE DIR ECT EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COM PARABLE COMPANIES. ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 26 5.5 TATA ELXSI LIMITED: THE NEXT COMPARABLE WHICH THE LD. COUNSEL FOR THE ASSESSEE REQUESTED TO BE EXCLUDED IS TATA ELXSI LIM ITED. BY INVITING OUR ATTENTION TO THE DIRECTORS REPORT A T PAGE 287 OF PAPER BOOK FOR ANNUAL REPORTS, THE LD. COUNSEL S UBMITTED THAT THIS COMPANY WAS ENGAGED IN EMBEDDED PRODUCT D ESIGN SERVICES (DESIGN AND DEVELOPMENT OF HARDWARE AND SO FTWARE), INDUSTRIAL DESIGN AND ENGINEERING (MECHANICAL DESIG N WITH A FOCUS ON INDUSTRIAL DESIGN) AND ANIMATION AND VISUA L EFFECTS (ANIMATION AND SPECIAL EFFECTS). IT WAS SUBMITTED T HAT THE ANNUAL REPORT OF THE COMPANY AT PAGE 286 SHOWS THAT IT EARNED INCOME OF RS. 307 CRORES FROM SALES AND SERV ICES. OUR ATTENTION WAS INVITED TO THE DESCRIPTION OF THE BUSINESS OF TATA ELXSI ON PAGE 300 OF PAPER BOOK. IT WAS SUB MITTED THAT SCHEDULE 4 TO THE BALANCE SHEET SHOWS INVENTOR IES OF COMPONENTS AND SPARES WHICH ARE NOT USUALLY FOUND I N A COMPANY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES. REFERENCE WAS INVITED TO ADMINISTRATIVE AND SELLING EXPENSES (SCHEDULE 14 TO BALANCE SHEET) SHOWING THAT THIS CO MPANY INCURRED ADVERTISING AND SALES PROMOTION EXPENSES A S ALSO PAID COMMISSION ON SALES. ACCORDING TO THE LD. COUN SEL FOR ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 27 THE ASSESSEE THE FAR PROFILE OF THIS COMPANY IS VAS TLY DIFFERENT FROM THAT OF A CAPTIVE SERVICE PROVIDER L IKE THE ASSESSEE. THIS IS FURTHER CORROBORATED BY POINT NUM BERS 6 AND 8 UNDER SCHEDULE 15, SCHEDULE TO THE FINANCIAL STATEMENTS, WHEREIN THE POLICY FOR RECOGNIZING REVE NUE FROM SALES AND ACCOUNTING FOR RESEARCH AND DEVELOPMENT C OSTS ARE SET OUT. THE LD. COUNSEL DREW OUR ATTENTION TO THE FINDINGS OF THE COORDINATE BENCHES IN MOTOROLA AND NXP SEMICONDUCTOR CASES (SUPRA) AT PARAGRAPHS 112, 113 AND PARAGRAPH 24 RESPECTIVELY, WHEREIN THE COORDINATE B ENCHES HAVE CONCLUDED THAT THIS COMPANY IS NOT COMPARABLE TO CAPTIVE SOFTWARE DEVELOPMENT SERVICE SEGMENT. THE LD. SR. DR ARGUED THAT INCURRING OF RESEARCH AN D DEVELOPMENT WAS COMMON FOR COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND THAT SUCH RESEARC H DOES NOT MAKE A COMPANY NON-COMPARABLE TO THE COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES. THE LD. S R. DR DREW OUR ATTENTION TO THE INFORMATION COLLECTED UND ER SECTION 133 (6) AS EXTRACTED IN TPOS ORDER UNDER P ARA 13.25 AND ARGUED THAT 87.45 % OF REVENUES FOR AY 2007-08 WAS ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 28 STATED TO BE FROM SOFTWARE DEVELOPMENT SERVICES AND HENCE TATA ELXSI IS COMPARABLE TO THE ASSESSEE COMPANY. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AS ALSO TH E FACTUAL DETAILS. WE FIND THAT THESE VERY CONTENTIO NS WERE CONSIDERED BY THE COORDINATE BENCHES OF TRIBUNAL IN MOTOROLA AND NXP SEMICONDUCTORS AT PARAGRAPHS POINT ED OUT ABOVE. COORDINATE BENCHES HAVE COME TO THE CONC LUSION THAT THE ACTIVITIES CARRIED OUT UNDER SOFTWARE DEVE LOPMENT SEGMENT BY TATA ELXSI ARE NOT SIMPLY SOFTWARE DEVEL OPMENT SERVICES BUT ARE COMPLEX IN NATURE. THE IPR IN THE FORM OF SOFTWARE RESEARCHED AND DEVELOPED WERE USED AS A TO OL FOR FURTHER DEVELOPMENT OF SOFTWARE YIELDING HIGHER MAR GINS. IT WAS RIGHTLY CONCLUDED IN SUCH DECISIONS THAT THE SE GMENT OF SOFTWARE DEVELOPMENT SERVICES IN TATA ELXSI INCLUDE S DESIGN SERVICES INCLUDING HARDWARE DESIGN AND HENCE IS NOT COMPARABLE TO SIMPLE SOFTWARE DEVELOPMENT SERVICES. WE FIND THAT THESE OBSERVATIONS ARE FULLY APPLICABLE I N THE FACTS OF PRESENT CASE. ACCORDINGLY, RESPECTFULLY FOLLOWI NG THE DECISION OF THE COORDINATE BENCH OF BANGALORE IN TH E CASE OF NXP SEMI CONDUCTORS INDIA PVT. LTD. (SUPRA), WE DIR ECT ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 29 EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COM PARABLE COMPANIES. 5.6 THE LD. COUNSEL FOR THE ASSESSEE FURTHER REQUE STED FOR INCLUSION OF TWO COMPANIES VIZ., INDIUM SOFTWARE (I NDIA) LIMITED AND VMF SOFT TECH LIMITED. BY DRAWING ATTENTION TO PARAGRAPH 10 OF THE TP ORDER WHEREIN THE COMPARABILITY OF COM PANIES CHOSEN BY THE ASSESSEE IN THE TRANSFER PRICING STUD Y WERE DISCUSSED BY THE TPO, IT WAS SUBMITTED THAT THE TPO HAD WRONGLY EXCLUDED INDIUM SOFTWARE (INDIA) LIMITED PRESUMING THAT THE TURNOVER OF THIS COMPANY WAS LESS THAN ONE CRORE AN D FURTHER REJECTED VMF SOFTECH LIMITED BY CITING INFORMATION RECEIVED UNDER SECTION 133 (6) OF THE ACT, WHICH ACCORDING TO THE TPOS ORDER WAS THAT THE COMPANY WAS FUNCTIONING ON JOB W ORK BASIS AND THAT THE PREDOMINANT PART OF WORK WAS OUTSOURCE D. THE LD. COUNSEL DREW OUR ATTENTION TO THE RECTIFICATION APP LICATION FILED UNDER SECTION 154 OF THE ACT EXPLAINING HOW THE TUR NOVER OF INDIUM SOFTWARE (INDIA) LIMITED WAS INCORRECTLY CON SIDERED BY THE TPO TO BE LESS THAN RS. 1 CRORES WHEN, IN FACT, IT WAS RS. 5.39 CRORES. SIMILARLY, IT WAS THE CONTENTION OF THE LD. COUNSEL THAT THE EMPLOYEE COST OF VMF SOFTECH LIMITED WAS 53 %, WHICH ACCORDING TO THE LD. COUNSEL SHOWS THAT THE PRESUMP TION OF THE ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 30 TPO WAS INCORRECT. LD. COUNSEL RELIED ON PARA 37 OF THE COORDINATE BENCHS DECISION IN NXP SEMI CONDUCTORS (SUPRA) WHEREIN THE COORDINATE BENCH HAD REMANDED VMF INFOT ECH TO THE TPO FOR FRESH CONSIDERATION TAKING INTO ACCOUNT ALL AVAILABLE INFORMATION. THE LD. COUNSEL PRAYED FOR SIMILAR REL IEF AND FOR CONSIDERATION OF THESE COMPANIES FOR INCLUSION ON M ERITS. 5.7 WE NOTICE THAT THE LD. DRP ALSO UPHELD THE CONCLUSIONS OF THE TPO WITHOUT CITING ANY REASONS. THE LD. SR. DR ALSO DID NOT POINT OUT ANY SPECIFIC REASONS TO S UPPORT THE EXCLUSION OF THESE COMPANIES FROM THE FINAL LIST OF COMPARABLE COMPANIES. ACCORDINGLY, IT IS DIRECTED THAT THE TPO /AO WILL DECIDE THE ISSUE OF INCLUSION OF THESE COMPANIES AF RESH AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSE E AND CONSIDERING ALL MATERIAL PLACED BEFORE HIM FOR CONS IDERATION. 5.7 THUS, WE DIRECT THE TPO/AO TO RE-DETERMINE THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION OF SOFTWA RE DEVELOPMENT SERVICES IN CASE OF KAPLAN INDIA PRIVATE LIMITED AF TER EXCLUDING AVANICINCOM TECHNOLOGIES LIMITED, HELIOS & MATHESON LIMITED, ISHIRINFOTECH LIMITED, MEGASOFT LIMITED AND TATA EL XSI LTD. FROM THE FINAL LIST OF COMPARABLES. THE TPO/AO WILL ALSO DECIDE AFRESH THE COMPARABILITY AND INCLUSION OR OTHERWISE OF IND IUM SOFTWARE ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 31 (INDIA) LIMITED AND VMF SOFTECH AFTER AFFORDING AN OPPORTUNITY OF BEING HEARD AS DIRECTED ABOVE. 5.8 THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THA T THE DISALLOWANCE OF GROUP MEDICAL INSURANCE EXPENDITURE ON THE GROUND THAT THE SCHEME OF ICICI LOMBARD IS NOT RECO GNISED IS INCORRECT AS THE MATERIAL AVAILABLE IN THE PUBLIC D OMAIN LIKE DIRECTORS REPORT (COPY OF WHICH WAS HANDED OVER DUR ING THE HEARING) CLEARLY INDICATED THAT ICICI LOMBARD OFFER ED SCHEMES WHICH WERE APPROVED BY IRDA. THE LD. SR. DR CONTEND ED THAT NO SUCH MATERIAL WAS PLACED BEFORE THE LOWER AUTHORITI ES. WE HAVE CONSIDERED RIVAL SUBMISSIONS. IT APPEARS THAT THE S CHEMES OFFERED BY ICICI LOMBARD HAD APPROVAL OF IRDA ON 03.08.2001 . IN THE INTERESTS OF JUSTICE, WE DIRECT THE AO TO CONSIDER AFRESH ALL THE RELEVANT MATERIAL AVAILABLE IN PUBLIC DOMAIN. THE A SSESSEE IS DIRECTED TO PRODUCE THE SAME BEFORE THE AO, WHO WIL L DECIDE THE ISSUE AFRESH AFTER AFFORDING SUITABLE OPPORTUNITY O F BEING HEARD TO THE ASSESSEE. 6.0 IN THE FINAL RESULT, THE APPEAL OF THE ASSESSE E IS PARTLY ALLOWED. ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 32 ORDER PRONOUNCED IN THE OPEN COURT ON 26/03/ 2019 . SD/- SD/- (N.S. SAINI) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 26 TH MARCH, 2019 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT BY ORDER ASSTT. REGISTRAR ITA NO. 2907/DEL/2014 ASSESSMENT YEAR 2007-08 33 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER