The Income Tax Officer Ward-7(1)(3), Bangalore V. M/s Verifone India Technology Pvt Ltd , Bangalore

ITA 3119/BANG/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 8617 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 19-11-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRIYADARSHI MISHRA
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; International transaction; TDS
• Section: 10B; 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.3087/BANG/2018 ASSESSMENT YEAR : 2010-11 M/S VERIFONE INDIA TECHNOLOGY PVT. LTD., A 101, 1 ST FLOOR, CYBER PARK, PLOT NO.76,77 & 78, DODDATHOGUR VILLAGE, BEGUR HOBLI, BANGALORE SOUTH TALUK, BENGALURU-560 100. PAN AACCV 1683 K VS. THE INCOME-TAX OFFICER, WARD-12(2), BENGALURU. APPELLANT RESPONDENT ITA NO.3119/BANG/2018 ASSESSMENT YEAR : 2010-11 THE INCOME-TAX OFFICER, WARD-12(2), BENGALURU VS. M/S VERIFONE INDIA TECHNOLOGY PVT. LTD., A 101, 1 ST FLOOR, CYBER PARK, PLOT NO.76,77 & 78, DODDATHOGUR VILLAGE, BEGUR HOBLI, BANGALORE SOUTH TALUK, BENGALURU-560 100. PAN AACCV 1683 K APPELLANT RESPONDENT ASSESSEE BY : SHRI K.R VASUDEVAN, ADVOCATE REVENUE BY : SHRI PRIYADARSHI MISHRA, ADDL.CIT (DR) DATE OF HEARING : 01-02-2021 DATE OF PRONOUNCEMENT : 12-02-2021 PAGE 2 OF 17 ITA NO.3087 & 3119/BANG/2018 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT CROSS APPEALS HAS BEEN FILED BY ASSESSE E AS WELL AS REVENUE AGAINST ORDER DATED 17/09/2018 PASSED BY TH E LD.CIT (A)-7, BANGALORE, FOR ASSESSMENT YEAR 2010-11 ON FO LLOWING GROUNDS OF APPEAL: ITA NO. 3119/B/2018 1. THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO F ACTS OF THE CASE. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE CIT(A) WAS RIGHT IN REMOVING 4 COMPARABLE COMPANIES IN SOFTWAR E DEVELOPMENT SEGMENT. VIZ. 1. LNFOSYS LTD.,2. KALS INFORMATION S YSTEMS LTD., (SEG) 3. PERSISTENT SYSTEMS LTD., AND 4. TATA ELXSI LTD., (S EG) ON GROUNDS OF FUNCTIONALLY DISSIMILARITY IN SOFTWARE DEVELOPMENT SEGMENT? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE C!T(A) IS RIGHT IN NOT APPRECIATING IN FACT THAT TRANSFER PRICING I S NOT AN EXACT SCIENCE AND NO TWO ENTITIES CAN BE EXACT REPLICAS? 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE CIT(A) IS RIGHT IN TRYING TO FIND OUT EXACT REPLICA OF THE ASSESSEE FOR DETERMINING THE ARM'S LENGTH PRICE BASED ON SUCH REPLICA, EVEN WHEN THE LAW AND THE INTERNATIONAL JURISPRUDENCE ITSELF RECOGNIZE THAT T HERE CANNOT BE AN EXACT COMPARABLE TO A GIVEN SITUATION, ESPECIALLY WITH TN MM AS THE MOST 5. WHETHER THE ORDER OF CIT(A) IN IMPOSING CONDITIO NS IS NOT BEYOND THE SCOPE OF LAW AND BUSINESS REALITY BY REJECTING ALL CLOSE COMPARABLES ON ONE OR THE OTHER GROUND, WITHOUT APPRECIATING THAT NOT TWO COMPANIES CAN EVER BE SAME? 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED (HAT THE ORDER OF THE CIT(A) IN SO FOR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING O FFICER MAY BE RESTORED. 7. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. ITA NO. 3087/B/2018 I. TRANSFER PRICING THE GROUNDS MENTIONED HEREINAFTER ARE WITHOUT PREJU DICE TO ONE ANOTHER. 1. THE LEARNED ASSESSING OFFICER ('LEARNED AO'), LE ARNED TRANSFER PRICING OFFICER ('LEARNED TPO') AND THE HONOURABLE COMMISSI ONER OF INCOME TAX (APPEALS) ['HON'BLE CIT(A)'] GROSSLY ERRED IN ADJUS TING THE TRANSFER PRICE BY PAGE 3 OF 17 ITA NO.3087 & 3119/BANG/2018 FNR 4,067,365/- WITH RESPECT TO THE INTERNATIONAL T RANSACTION RENDERED BY THE APPELLANT UNDER SECTION 92CA OF THE INCOME-TAX ACT, 1961 ('THE ACT'). 2. THE LEARNED AO/ LEARNED TPO/ HON'BLE CIT(A) ERRE D IN REJECTING THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY THE APPELLANT BY INVOKING PROVISIONS OF SUB-SECTION (3) OF SECTION 9 2C OF THE ACT. 3. THE LEARNED AO/ LEARNED TPO/HON'BLE CIT(A) ERRED IN REJECTING COMPARABILITY ANALYSIS UNDERTAKEN IN THE TP DOCUMEN TATION AND IN CONDUCTING A FRESH COMPARABILITY ANALYSIS BY INTROD UCING VARIOUS FILTERS FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE ( 'ALP') OF THE INTERNATIONAL TRANSACTION. 4. THE LEARNED AO/ LEARNED TPO/ HON'BLE CIT(A) ERRE D IN NOT CONSIDERING THE PREVIOUS TWO YEARS FINANCIAL DATA OF THE COMPAR ABLE COMPANIES WHILE DETERMINING THE ALP. 5. THE LEARNED AO/ LEARNED TPO/ HON'BLE CIT(A) ERRE D IN DISREGARDING MULTIPLE YEAR DATA AND THEY OUGHT TO HAVE ACCEPTED THE USE OF CONTEMPORANEOUS DATA DUE TO NON-AVAILABILITY OF CUR RENT YEAR DATA IN THE PUBLIC DOMAIN AT THE TIME OF PREPARING THE DOCUMENT ATION. 6. THE LEARNED AO/ LEARNED TPO/ HON'BLE CIT(A) ERRE D IN NOT APPLYING THE UPPER LIMIT FOR SALES TURNOVER FILTER WHILE CARRYIN G OUT THE BENCHMARKING ANALYSIS. 7. THE LEARNED AO/ LEARNED TPO/ HON'BLE CIT(A) HAS GROSSLY ERRED IN NOT REJECTING THE FOLLOWING COMPANIES FROM THE LIST OF COMPARABLE COMPANIES: L & T INFOTECH LTD. MINDTREE LTD. SASKEN COMMUNICATION TECHNOLOGIES LTD. 8. THE LEARNED AO/LEARNED TPO/HON'BLE CIT(A) ERRED IN NOT ALLOWING THE BENEFIT OF APPLYING THE RANGE OF +1-5% IN DETERMINI NG THE ARM'S LENGTH PRICE. 9. THE LEARNED AO/ LEARNED TPO/ HON'BLE CIT(A) HAS ERRED IN NOT ALLOWING APPROPRIATE ADJUSTMENTS TOWARDS WORKING CA PITAL DIFFERENTIAL EXISTING BETWEEN THE APPELLANT VIS--VIS INDEPENDENT COMPARABLE COMPANIES. 10. THE LEARNED AO/ LEARNED TPO/ HON'BLE CIT(A) ERR ED IN NOT ALLOWING APPROPRIATE ADJUSTMENT TOWARDS THE RISK DIFFERENCE BETWEEN THE APPELLANT VIS--VIS THE COMPARABLE COMPANIES. CORPORATE TAXES 11. THE LEARNED AO/ HON'BLE CIT(A) ERRED IN DISALLO WING SOFTWARE EXPENSES AMOUNTING TO INR 2,690,426 BY ERRONEOUSLY CONSIDERING THE SAME AS SOFTWARE PURCHASE AND THEREFORE THAT TH SAM E WAS OUGHT TO HAVE BEEN CAPITALIZED WHILE IN REALITY THE SAME WERE IN THE NATURE O SOFTWARE EXPENSES INCURRED FOR PROFESSIONAL SERVICES. FURTHE R EVEN CONSIDERING BUT NOT ADMITTING THAT THE SAID SUM WAS TO BE DISALLOWE D, THE LEARNED AO ERRED IN ADDING BACK THE SAID SUM AS INCOME WITHOUT CONSIDERING THE BENEFIT OF SECTION 10B ON SUCH ADDITION WHEN THE SA ME OUGHT TO HAVE BEEN RIGHTLY CONSIDERED. PAGE 4 OF 17 ITA NO.3087 & 3119/BANG/2018 12. FOR THE PURPOSE OF COMPUTING 'EXPORT TURNOVER' U/S 10B THE LEARNED ASSESSING OFFICER ERRED IN REDUCING THE EXPENDITURE INCURRED TOWARDS TELE- COMMUNICATION CHARGES AMOUNTING TO INR. 4,057,317/- INSURANCE AMOUNTING TO INR. 282,534/- AND FOREIGN TRAVEL AND OTHER EXPENSES INCURRED IN FOREIGN CURRENCY AMOUNTING TO INR. 3,38 4,388/- TOTALLING TO INR. 7.724,239/- 13. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AO OUGHT HAVE MADE CORRESPONDING ADJUSTMENT IN THE AMOUNT OF 'TOTAL TU RNOVER' WHILE ARRIVING AT THE AMOUNT OF PROFIT DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE IN TERMS OF SECTION I OB OF THE ACT IN ACCORDANCE WITH THE RULING OF THE KARNATAKA HIGH COURT WHICH IS BINDING OIL LEARNED A O IN THE CASE OF TATA ELXSI LTD. (DATED AUGUST 30, 2011) (201 1-TIOL-684- HC-KAR-IT) 14. FURTHER TO THE ABOVE, THE LEARNED AO ERRED IN C ALCULATING 'EXPORT TURNOVER' BY NOT CONSIDERING THE ACTUAL TURNOVER WH ICH WERE RECEIVED IN 'CONVERTIBLE FOREIGN EXCHANGE' AND CONSIDERED A WRO NG SUM AS EXPORT TURNOVER BASED OIL SPECIOUS GROUND THAT THE ASSESSE E HAD NOT PROVIDED DETAILS WHEN THE ASSESSEE HAD PROVIDED DETAILS OF T HE FIRC'S RECEIVED AND THEREFORE RESULTING IN WRONGFUL COMPUTATION OF 'UNR EALIZED EXPORT SALES' AMOUNTING TO INR. 41,541,267/- BY ADOPTING ERRONEOU SLY THE 'TOTAL EXPORT TURNOVER' AS INR. 186,713,868/- INSTEAD OF THE CORR ECT 'TOTAL EXPORT TURNOVER' OF INR. 230,147,524/- 15. THE ABOVE MENTIONED ERRONEOUS CALCULATION HAS R ESULTED IN A REVISED ERRONEOUS DEDUCTION UNDER SECTION LOB OF INR. 29.58 1.804/- AS OPPOSED TO INR. 38,036,724/- THAT WAS CORRECTLY CLAIMED IN THE INCOME-TAX RETURN. 16. THE AO HAS ERRED IN DETERMINING THE TOTAL TAXAB LE INCOME OF THE COMPANY AT INR. 26,647,550/- INSTEAD OIINR. 67,32 1 /- THE APPELLANT CRAVES LEAVE TO ADD, ALTER, RESCIND A ND MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS, FACTS AN D EVIDENCE BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE RA ISED AT THE TIME OF HEARING, IT IS PRAYED THAT NECESSARY RELIEF MAY BE PROVIDED. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. THE ASSESSEE IS A COMPANY THAT PROVIDES SOFTWARE DEVELOPMENT SERVICES TO ITS PARENT COMPANY BEING VE RIFONE SINGAPORE. IT FILED ITS RETURN OF INCOME FOR YEAR U NDER CONSIDERATION ON 29/09/2009 DECLARING TOTAL INCOME OF RS.67,321/-AFTER CLAIMING DEDUCTION UNDER SECTION 1 0B OF THE ACT AMOUNTING TO RS.30,036,723/-. PAGE 5 OF 17 ITA NO.3087 & 3119/BANG/2018 3. THE LD.AO NOTED THAT ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAS ENTERED INTO INTERNATIONAL TRANSA CTION WITH ITS ASSOCIATED ENTERPRISE EXCEEDING RS.15 CRORES AND TH EREFORE THE MATTER WAS REFERRED TO THE TRANSFER PRICING OFFICER FOR COMPUTING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TION. 4. UPON RECEIPT OF THE REFERENCE, LD. TPO CALLED UP ON ASSESSEE TO FILE ECONOMIC DETAILS OF THE INTERNATIONAL TRANS ACTION IN FORM 3 CD. 5. THE LD.TPO NOTED THAT ASSESSEE ENTERED INTO FOLL OWING INTERNATIONAL TRANSACTION: SL NO TYPE OF TRANSACTION AMOUNT (RS) 1 R & D SERVICES 19,19,57,973 2 TECH SUPPORT SERVICES 3,81,89,551 TOTAL 23,01,47,524 5.1 THE LD.TPO OBSERVED ASSESSEE CARRIED OUT FOLLOW ING FUNCTIONS AS PER TP DOCUMENT: VERIFONE INDIA OPERATIONS: CURRENTLY VERIFONE INDIA IS CARRYING OUT R & D SERV ICES AS PER REQUIREMENT OF VERIFONE SINGAPORE. VERIFONE INDIA CURRENTLY EMPLOYS OVER 156 EMPLOYEES . VERIFONE INDIA HAS BASIC STRENGTHS IN SOFTWARE DEVELOPMENT AND RENDERI NG TECHNICAL SUPPORT FOR THE VARIOUS REQUIREMENTS OF VERIFONE SINGAPORE IN THE PAYMENT SOLUTIONS. VERIFONE INDIA OPERATIONS ARE FUNDED BY VENFONE SINGAPORE. THE DETAILS OF R & D SERVICES THAT VERIFONE INDIA C URRENTLY PROVIDES TO VERIFONE SINGAPORE ARE: A) SOFTWARE DEVELOPMENT PROJECTS AS AGREED FROM TIM E TO TIME BETWEEN VERIFONE SINGAPORE AND VERIFONE INDIA. B) ASSISTING WITH RESEARCH AND DEVELOPMENT PROJECT/ PROGRAM ISSUES IN COORDINATION WITH VERIFONE SINGAPORE PERSONNEL OR P ERSONNEL OF VERIFONE SINGAPORE SUBSIDIARIES OR AFFILIATES WORLDWIDE; C) TESTING AND DOCUMENTING THE RESULTS OF THE RESEA RCH AND DEVELOPMENT WORK UNDERTAKEN PURSUANT TO AGREEMENT D) PROVIDING SUCH OTHER RESEARCH AND DEVELOPMENT SE RVICES REASONABLY REQUESTED BY VERIFONE SINGAPORE THAT ARE RELATED TO THE ABOVE SERVICES PAGE 6 OF 17 ITA NO.3087 & 3119/BANG/2018 SOFTWARE DEVELOPMENT: TYPICALLY SOFTWARE DEVELOPMENT CONSISTS OF FOLLOWIN G SERVICES: ANALYSIS OF REQUIREMENT ANALYSIS OF VENFONE SINGAPO RE. . DEVELOPING SOFTWARE AS PER DESIGN GIVEN BY VERIFO NE SINGAPORE. CODING, QUALITY CHECK, TESTING AND VALIDATION OF THE PROGRAM DEVELOPED. OVERALL SOFTWARE AUTHENTICATION AND VALIDATION IS D ONE BY VENFONE SINGAPORE. PERFORMING OF ADDITIONAL FUNCTIONAL REQUIREMENT R EMARKED BY VENFONE SINGAPORE. 5.2 THE LD.TPO NOTED THAT THE ASSESSEE HAS USED TNM M AS MOST APPROPRIATE METHOD AND OP/OC AS PLI, THEREBY C OMPUTING ITS MARGIN TO BE AT 14.99%. ASSESSEE USED SET OF F OLLOWING 20 COMPARABLES WITH AN AVERAGE MARGIN OF 6.55%, THEREB Y HELD THE TRANSACTION TO BE AT ARMS LENGTH PRICE: SI. NO. NAME OF THE COMPARABLE 1 AXIS IT & T LTD. 2 BLUE STAR INFOTECH LTD. 3 CALIFORNIA SOFTWARE CO. LTD. 4 CAMBRIDGE TECHNOLOGY ENTERPRISES 5 GOLDSTONE TECHNOLOGIES LTD. 6 ICRA TECHNO ANALYTICS LTD. 7 MINDTECK (INDIA) LTD. 8 MINDTREE WIRELESS PVT. LTD., 9 NUCLEUS SOFTWARE EXPORTS LTD., 10 RS SOFTWARE (I) LTD. 11 R SYSTEMS INTERNATIONAL LTD., 12 SAKSOFT LTD. 13 SONATA SOFTWARE LTD. 14 THINKSOFT GLOBAL SERVICES LTD. 15 ADITYA BIRLA MINACS IT SERVICES LTD 16 ADITYA BIRLA MINACS TECHNOLOGIES LTD 17 BRISTLECONE INDIA LTD. 18 CG - VAK SOFTWARE & EXPORTS LTD (SEG) 19 SAGARSOFT (INDIA) LTD. 20 SUNDARAM INFOTECH SOLUTIONS LT.D PAGE 7 OF 17 ITA NO.3087 & 3119/BANG/2018 6. THE LD.TPO REJECTED THE COMPARABLES SELECTED BY ASSESSEE BY APPLYING FOLLOWING FILTERS: S .N FILTER FOR SELECTION OF COMPANIES QUANTITATIVE CRITERION 1. COMPANIES WHICH ARE IN SOFTWARE BUSINESS (INFORMATI ON TECHNOLOGY) 2. REJECTED DATA FOR THE YEAR ENDED 31 MARCH 2010 NOT AVAILABLE 3. COMPANIES HAVING A TURNOVER OF LESS THAN 1 CRORE SE LECTED 4. REJECTED COMPANIES HAVING A TURNOVER OF MORE THAN I NR 300 CRORES 5. REJECTED COMPANY WITH ANY UNUSUAL TRANSACTIONS DURI NG THE TEST PERIOD 6. REJECTED COMPANY WITH BUSINESS ACTIVITY CANNOT BE A SCERTAINED 7. REJECTED COMPANIES WITH NO DATA AVAILABLE 8. REJECTED COMPANIES WITH UNUSUAL TRANSACTIONS DURING THE YEAR OF REVIEW 9. SELECTED COMPANIES WITH SEGMENTAL DATA 7. THEREAFTER, THE LD.TPO APPLIED FOLLOWING FILTERS AND SELECTED FOLLOWING SET OF 11 COMPARABLES WHICH INCLUDED 8 NE W COMPARABLES AND 3 COMPARABLES SELECTED BY ASSESSEE IN THE TP DOCUMENT: S NO FILTERS USED FOR SOFTWARE DEVELOPMENT SEGMENT 1. USE OF CURRENT YEAR DATA 2. COMPANIES WHOSE SOFTWARE DEVELOPMENT INCOME WAS LES S THAN RS 1 CRORE WERE EXCLUDED 3. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE IS LES S THAN 75 PERCENT OF THE TOTAL OPERATING REVENUES WERE EXCLUDED 4. COMPANIES WHO HAVE MORE THAN 25 PERCENT RELATED PAR TY TRANSACTIONS OF THE SALES WERE EXCLUDED 5. COMPANIES WHO HAVE PERSISTENT LOSSES FOR THE LAST T HREE YEARS UPTO AND INCLUDING FY 2009-10 WERE EXCLUDED 6. COMPANIES HAVING DIFFERENT FY ENDING (I,E NOT MARCH 31, 2010) OR DATA OF THE COMPANY DOES NOT FALL WITHIN 12 MONTH PERIOD IE, AP RIL 1 2009 TO MARCH 31 2010, WERE REJECTED 7. COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM THE TAXPAYER WERE EXCLUDED 8. COMPANIES THAT ARE HAVING PECULIAR ECONOMIC CIRCUMS TANCES WERE EXCLUDED 9. COMPANIES WHO HAVE EXPORT SALES LESS THAN 75 PERCEN T OF THE SALES WERE EXCLUDED 10. COMPANIES WITH EMPLOYEE COST LESS THAN 25 PERCENT O F TURNOVER WERE EXCLUDED PAGE 8 OF 17 ITA NO.3087 & 3119/BANG/2018 SL.NO NAME PLI 1 IC R A TECHNO ANALYTICS LTD.(SEG) 24.94% 2 INFOSYS LTD 44.98% 3 KALS INFORMATION SYSTEMS LTD.(SEG) 34.41% 4 LARSEN & TOUBRO INFOTECH LTD. 19.33% 5 MINDTREE LTD.(SEG) 14.83% 6 PERSISTENT SYSTEMS &. SOLUTIONS LTD. 15.38% 7 PERSISTENT SYSTEMS LTD. 30.35% 8 R S SOFTWARE (INDIA) LTD. 10.29% 9 SASKEN COMMUNICATION TECHNOLOGIES 17.36% 10 TATA ELXSI(SEG) 20.93% 11 THINKSOFT GLOBAL SERVICES LTD. 17.05% AVERAGE MARGIN 22.71% 8. WHILE CONSIDERING THE WORKING CAPITAL ADJUSTMENT THAT THE LD.TPO TOOK THE VIEW THAT, WORKING CAPITAL ADJUSTM ENT IS TO BE RESTRICTED TO THE AVERAGE WORKING CAPITAL COMPONENT OF THE COMPARABLES WHICH IS 1.98%. HOWEVER WHILE COMPUTING THE MARGIN THE LD.TPO FAILED TO GRANT SUCH ADJUSTMENT A ND COMPUTED THE SHORTFALL BEING RS.1,54,34,883/-. 9. UPON RECEIPT OF THE ORDER UNDER SECTION 92CA, TH E LD.AO WHILE PASSING THE DRAFT ASSESSMENT ORDER WAS PASSED MAKING FOLLOWING ADDITIONS IN THE HANDS OF ASSESSEE: DEDUCTION UNDER SECTION 10 B DISALLOWED-RS. 29,581, 804/- EXPENDITURE TOWARDS SOFTWARE PURCHASED TO BE CAPITA L IN NATURE- RS.26,90,426/- DISALLOWANCE OF INCOME FROM OTHER SOURCES BEING INT EREST- RS.67,321/- PAGE 9 OF 17 ITA NO.3087 & 3119/BANG/2018 10. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, ASSESS EE PREFERRED APPEAL BEFORE THE LD.CIT(A). 11. THE LD.CIT(A) WHILE CONSIDERING THE COMPARABLES ALLEGED BY ASSESSEE FOR EXCLUSION, UPHELD EXCLUSION OF INFOSYS LTD., KALS INFORMATION SYSTEMS LTD. (SEG.), PERSISTENT SYSTEMS LTD., TATA ELXSI LTD.(SEG.) AS THESE COMPARABLES WERE EXCLUDED IN ASSESSEES OWN CASE BY THIS TRIBUNAL FOR ASSESSMENT YEAR 2008-09 ON BASIS OF FUNCTIONALITY. HOWEVER UPHELD THE OTHER COMPARAB LES. 12. IN RESPECT OF DEDUCTION CLAIMED UNDER SECTION 1 0 B BY ASSESSEE, THE LD.CIT (A) DIRECTED THE LD.AO TO CONS IDER THE CLAIM IN ACCORDANCE WITH THE RULING OF HONBLE KARNATAKA HIGH COURT IN CASE OF TATA ELXSI LTD. REPORTED IN (2012) 349 ITR 98. AS REGARDS THE SOFTWARE EXPENSES DISALLOWED AMOUNTING TO RS.26 ,90,426/-IT WAS SUBMITTED THAT TDS WAS DEDUCTED BY ASSESSEE WHI CH THE LD.CIT(A) DIRECTED LD.AO TO VERIFY THE CLAIM AND AL LOW THE PAYMENT, IF TDS IS FOUND TO BE DEPOSITED. 13. AGGRIEVED BY THE ORDER OF THE LD.CIT(A), ASSESS EE AS WELL AS REVENUE ARE IN APPEAL BEFORE US. 14. AT THE OUTSET THE LD.AR SUBMITTED THAT AMONGST THE GROUNDS RAISED BY ASSESSEE, IT WISHES TO ARGUE GROU ND 6-7, 9 AND THE OTHER GROUNDS ARE NOT PRESSED. ACCORDINGLY WE ARE ADJUDICATING ONLY GROUND NO. 6, 7, 9 IN ASSESSEES APPEAL. 15. THE LD.AR SUBMITTED THAT GROUND NO. 6-7 ARE IN RESPECT OF COMPARABLES RETAINED BY THE LD.CIT(A), WITHOUT CONS IDERING THE FACT THAT, THESE COMPARABLES ARE FUNCTIONALLY NOT S IMILAR WITH PAGE 10 OF 17 ITA NO.3087 & 3119/BANG/2018 THAT OF ASSESSEE AND ALSO THAT THEY FAIL THE TURNOV ER FILTER. THE LD.AR SUBMITTED THAT APPLYING THE UPPER LIMIT FOR T URNOVER FILTER WHILE CARRYING OUT THE BENCHMARKING ANALYSIS IS NEC ESSARY AS THE LD.TPO EXCLUDED COMPARABLES WHICH IS LESS THAN RS.1 CRORE TURNOVER. HE SUBMITTED THAT, LARSEN AND TOUBRO INFO TECH LTD., MINDTREE LTD., SASKEN COMMUNICATIONS TECHNOLOGIES L TD. HAVING HIGH TURNOVER OF MORE THAN 200 CRORES DESERVES TO B E EXCLUDED BY APPLYING AN UPPER TURNOVER LIMIT. 16. THE LD.AR PLACED RELIANCE ON THE DECISION OF CO ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF DCIT VS NORTHERN OPERATING SERVICES REPORTED IN (2019) 108 TAXMANN.COM 451 IN SUPPORT OF ITS CONTENTION. HE SUBMITTED THAT FOR THE SAME YEAR UND ER CONSIDERATION THIS TRIBUNAL EXCLUDED THE COMPARABLES FOR HAVING HIGH TURNOVER. HE SUBMITTED THAT, THIS COORDINATE B ENCH OF THIS TRIBUNAL IN CASE OF GENESIS INTEGRATING SYSTEMS VS.DCIT REPORTED IN (2012) 20 TAXMANN.COM 715 , SUGGESTED GUIDELINE IN THE MATTER OF TURNOVER FILTER AND THE CATEGORISATION OF SOFTWA RE COMPANIES IN THE DUNN AND BRADSTREET STUDY TO BE ADOPTED AS A ME THOD OF CLASSIFICATION OF COMPANIES BY SIZE. IT WAS SUBMITT ED THAT THE 3 CATEGORIES OF FIRMS WERE IDENTIFIED THAT IS SMALL W ITH TURNOVER LESS THAN 200 CRORE, MEDIUM WITH TURNOVER RS. 200 TO 200 0 CRORE AND LARGE WITH TURNOVER GREATER THAN 2000 CRORE. THE LD .AR FURTHER SUBMITTED THAT ITAT MUMBAI TRIBUNAL IN CASE OF CAPGEMINI INDIA PVT.LTD., VS ACIT REPORTED IN (2015) 58 TAXMANN.COM 175, HELD THAT, THE CONCEPT OF ECONOMIC UPSCALE CANNOT BE APP LIED TO SERVICE DELIVERING COMPANIES AND THAT THERE IS NO E MPIRICAL PAGE 11 OF 17 ITA NO.3087 & 3119/BANG/2018 EVIDENCE TO SUGGEST THAT MARGINS ARE RELATED TO TUR NOVER. HENCE IT WAS SUBMITTED BY THE LD.AR THAT COMPANY HAVING HUGE BRAND VALUE AND INTANGIBLES WITH DIVERSIFY ACTIVITIES OF SOFTWARE DEVELOPMENT, CONSULTANCY, ENGINEERING SERVICES ETC. CANNOT BE COMPARED WITH A CAPTIVE SERVICE PROVIDER LIKE THAT OF ASSESSEE, THAT EARNS REVENUE ON COST PLUS BASIS. 17. THE LD.AR SUBMITTED THAT, EVEN OTHERWISE THESE COMPARABLES ARE NOT FUNCTIONALLY SIMILAR WITH THAT OF ASSESSEE AS THEY ARE INVOLVED IN SOFTWARE PRODUCTS AS HAS BEEN OBSERVED BY COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF DCIT VS ELECTRONICS FOR IMAGING INDIA PVT.LTD., REPORTED IN (2016) 70 TAXMANN.COM 299 FOR ASSESSMENT YEAR 2010-11, AND VARIOUS OTHER DECI SIONS IN SUPPORT OF THIS CONTENTION. 18. ON THE CONTRARY, THE LD.SR.DR RELIED ON ORDERS PASSED BY THE LD.CIT(A). 19. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 20. DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF AUTODESK INDIA PVT. LTD., VS DCIT REPORTED IN (2018) 96 TAXMANN.COM 263 HAS ANALYSED EVERY CONFLICTING VIEW AND CONCLUDED THAT THE LAW LAID DOWN IN CASE OF GENESIS INTEGRATING SYSTEMS INDIA PVT. LTD. (SUPRA) HAS TO BE FOLLOWED. THE RELEVANT OBSERVATIONS OF THIS TRIBUNAL ARE AS UNDER: 17.8 IN VIEW OF THE ABOVE CONCLUSION, THERE MAY NOT BE ANY NECESSITY TO EXAMINE AS TO WHETHER THE DECISION RENDERED IN THE CASE OF GENISYS INTEGRATING SYSTEMS (I) (P.) LTD. (SUPRA) BY THE IT AT BANGALORE BENCH SHOULD CONTINUE TO BE FOLLOWED. SINCE ARGUMENTS WER E ADVANCED ON THE CORRECTNESS OF THE DECISIONS RENDERED BY THE ITAT M UMBAI AND PAGE 12 OF 17 ITA NO.3087 & 3119/BANG/2018 BANGALORE BENCHES TAKING A VIEW CONTRARY TO THAT TA KEN IN THE CASE OF GENISYS INTEGRATING SYSTEMS (I) (P.) LTD. (SUPRA ), WE PROCEED TO EXAMINE THE SAID ISSUE ALSO. ON THIS ISSUE, THE FIR ST ASPECT WHICH WE NOTICE IS THAT THE DECISION RENDERED IN THE CASE OF GENISYS INTEGRATING SYSTEMS (I) (P.) LTD. (SUPRA) WAS THE EARLIEST DECI SION RENDERED ON THE ISSUE OF COMPARABILITY OF COMPANIES ON THE BASIS OF TURNOVER IN TRANSFER PRICING CASES. THE DECISION WAS RENDERED AS EARLY A S 5.8.2011. THE DECISIONS RENDERED BY THE ITAT MUMBAI BENCHES CITED BY THE LEARNED DR BEFORE US IN THE CASE OF WILLIS PROCESSING SERVICES (SUPRA) AND CAPEGEMINI INDIA (P.) LTD. (SUPRA) ARE TO BE RE GARDED AS PER INCURIUM AS THESE DECISIONS IGNORE A BINDING CO-ORD INATE BENCH DECISION. IN THIS REGARD THE DECISIONS REFERRED TO BY THE LEA RNED COUNSEL FOR THE ASSESSEE SUPPORTS THE PLEA OF THE LEARNED COUNSEL F OR THE ASSESSEE. THE DECISIONS RENDERED IN THE CASE OF NTT DATA (SUPRA), SOCIETE GENERALE GLOBAL SOLUTIONS (SUPRA) AND LSI TECHNOLOGIES (SUPR A) WERE RENDERED LATER IN POINT OF TIME. THOSE DECISIONS FOLLOW THE RATIO LAID DOWN IN WILLIS PROCESSING SERVICES (SUPRA) AND HAVE TO BE REGARDED AS PER INCURIUM. THESE THREE DECISIONS ALSO PLACE RELIANCE ON THE DE CISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHRISCAPITAL INVEST MENT (SUPRA). WE HAVE ALREADY HELD THAT THE DECISION RENDERED IN THE CASE OF CHRISCAPITAL INVESTMENT (SUPRA) IS OBITER DICTA AND THAT THE RAT IO DECIDENDI LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF PEN TAIR (SUPRA) WHICH IS FAVOURABLE TO THE ASSESSEE HAS TO BE FOLLOWED. THER EFORE, THE DECISIONS CITED BY THE LEARNED DR BEFORE US CANNOT BE THE BAS IS TO HOLD THAT HIGH TURNOVER IS NOT RELEVANT CRITERIA FOR DECIDING ON C OMPARABILITY OF COMPANIES IN DETERMINATION OF ALP UNDER THE TRANSFE R PRICING REGULATIONS UNDER THE ACT. FOR THE REASONS GIVEN AB OVE, WE UPHOLD THE ORDER OF THE CIT(A) ON THE ISSUE OF APPLICATION OF TURNOVER FILTER AND HIS ACTION IN EXCLUDING COMPANIES BY FOLLOWING THE RATI O LAID DOWN IN THE CASE OF GENISYS INTEGRATING (SUPRA). 21. FOR THE ABOVE REASONS WE DIRECT LD. AO/TPO TO E XCLUDE LARSEN AND TOUBRO INFOTECH LTD., MINDTREE LTD., SAS KEN COMMUNICATIONS TECHNOLOGIES LTD. ON THE ISSUE OF AP PLICATION OF UPPER TURNOVER FILTER FROM THE FINALIST. ACCORDINGLY GROUNDS 6-7 STANDS ALLOWED. 22. GROUND NO. 9 RAISED BY ASSESSEE IS ON WORKING CAPITAL ADJUSTMENT NOT HAVING GRANTED BY LD. AO. 23. THE LD.AR SUBMITTED THAT THE LD.AO WHILE DISCU SSING WORKING CAPITAL ADJUSTMENT MADE AN OBSERVATION THAT ASSESSEE IS PAGE 13 OF 17 ITA NO.3087 & 3119/BANG/2018 TO BE GIVEN WORKING CAPITAL ADJUSTMENT ON THE AVERA GE MARGIN AT 1.98%. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ADVANC ED BY BOTH SIDES ON THIS ISSUE IN THE LIGHT OF RECORDS PLACED BEFORE US. 25. WE NOTE THAT THE LD.TPO RESTRICTED THE WORKING CAPITAL ADJUSTMENT TO BE AT 1.98%. HOWEVER WHILE COMPUTING THE ADJUSTMENT THE SAME WAS NOT GRANTED. 26. RULE 10B(3) OF THE INCOME-TAX RULES, 1962, SUPP ORTS THE SAID ACTION OF THE TPO IN GRANTING A WORKING CAPITA L ADJUSTMENT. IN THE FOLLOWING DECISIONS RENDERED BY COORDINATE B ENCH OF THIS TRIBUNAL IN CASE OF, TNT INDIA (P.) LTD. REPORTED IN (2011) 10 TAXMANN.COM 169 (PARA 13), B EARING POINT BUSINESS CONSULTING (P.) LTD. REPORTED IN (2013) 33 TAXMANN.COM 92 (PARA 5.4) AND APIGEE TECHNOLOGIES (INDIA) (P.) LTD. REPORTED IN (2015) 63 TAXMANN.COM 129 (PARAS 17 TO 19) IT HAS BEEN HELD THAT ADJUSTMENT TOWARDS WORKING CAPITAL DIFFERENCES BETW EEN THE ASSESSEE AND THE COMPARABLES SHOULD BE CONSIDERED A ND APPROPRIATE ADJUSTMENT GRANTED IN ARRIVING AT THE P ROFIT MARGINS OF COMPARABLE COMPANIES FOR THE PURPOSE OF COMPARIS ON. 27. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE LD.AO/TPO TO GRANT WORKING CAPITAL ADJUSTMENT IN ACTUALS FOR DET ERMINED IN THE PROFIT MARGIN OF COMPARABLES. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. 28. IN RESPECT OF CORPORATE TAX ISSUES RAISED BY AS SESSEE BEING 29. GROUND NO. 11-16 IT HAS BEEN SUBMITTED THAT THE DIRECTIONS PAGE 14 OF 17 ITA NO.3087 & 3119/BANG/2018 BY THE LD.CIT(A) NEEDS TO BE FOLLOWED WHILE CONSIDE RING THE CLAIM OF ASSESSEE. THE LD.AR ALSO SUBMITTED THAT, ORDER G IVING EFFECT TO THE ORDER PASSED BY THE LD.CIT(A) HAS NOT BEEN PASS ED BY THE LD.AO. 30. CONSIDERING THE SUBMISSIONS ADVANCED BY THE LD. AR, WE DIRECT THE LD.AO TO FOLLOW THE DIRECTIONS PASSED BY THE LD.CIT(A) ON THESE ISSUES AND TO CONSIDER THE CLAIM OF ASSESS EE IN ACCORDANCE WITH LAW. ACCORDINGLY THESE GROUNDS RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS ALLOW ED PARTLY AS INDICATED HEREINABOVE. ITA NO. 3119/B/2018 (REVENUE APPEAL). 31. THE ONLY ISSUE ALLEGED BY REVENUE IS AGAINST EX CLUSION OF FOLLOWING COMPARABLES BY THE LD.CIT(A) ON THE GROUN D OF FUNCTIONAL DISSIMILARITIES: 32. INFOSYS LTD., KALS INFORMATION SYSTEMS LTD. (SE G), PERSISTENT SYSTEMS LTD. AND TATA ELXI LTD. (SEG). 33. AT THE OUTSET THE LD.AR SUBMITTED THAT, THESE C OMPARABLES ANYWAYS ARE TO BE EXCLUDED FOR FUNCTIONAL DISSIMILA RITIES AND ALSO FOR HAVING HIGH TURNOVER OF MORE THAN 200 CRORES. 34. THE LD.SR.DR PLACED RELIANCE ON THE OBSERVATION S OF LEARNT AO/TPO. 35. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. PAGE 15 OF 17 ITA NO.3087 & 3119/BANG/2018 36. WHILE CONSIDERING THE COMPARABLES FOR EXCLUSION IN ASSESSEES APPEAL ON TURNOVER FILTER WE HAVE MADE C ATEGORICAL OBSERVATION REGARDING APPLICABILITY OF UPPER TURNOV ER FILTER BASED ON THE SUGGESTIONS RENDERED BY COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF GENESIS INTEGRATING (SUPRA); 37. THE OBSERVATIONS BY US IN THE PARAGRAPHS HEREIN ABOVE ARE APPLICABLE FOR THESE COMPARABLES AS THESE COMPARABL ES HAVE TURNOVER MORE THAN 200 CRORES AND THEREFORE CANNOT BE CONSIDERED WITH A CAPTIVE SERVICE PROVIDER LIKE ASS ESSEE THAT WORKS ON COST PLUS BASIS. 38. FURTHER IT IS ALSO OBSERVED BY IS THAT, FUNCTIO NALLY THIS COMPARABLE ARE NOT SIMILAR WITH THAT OF ASSESSEE A S IT HAS HUGE INTANGIBLES, AND CARRIES OUT SERVICES IN DIVERSIFY DATE AREAS WHICH IS NOT AKIN TO THE SERVICES RENDERED BY ASSESSEE TO ITS AE. 39. WE THEREFORE UPHOLD THE OBSERVATION OF THE LD.C IT(A) IN EXCLUDING THESE COMPARABLES FROM THE FINALIST. ACCORDINGLY THE GROUNDS RAISED BY REVENUE IN ITS AP PEAL STANDS DISMISSED. IN THE RESULT APPEAL FILED BY REVENUE STANDS DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH FEBRUARY, 2021 SD/- SD/- (CHANDRA POOJARI) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 12 TH FEBRUARY, 2021. /VMS/ PAGE 16 OF 17 ITA NO.3087 & 3119/BANG/2018 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE PAGE 17 OF 17 ITA NO.3087 & 3119/BANG/2018 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -2-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -2-2021 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -2-2021 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -2-2021 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -2-2021 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -2-2021 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -2-2021 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS