PTC Software (India) Private Ltd., Pune V. Deputy Commssioner of Income-tax,

ITA 336/PUN/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8459 (ITAT-PUNE)
• Duration Of Justice: 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 24-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B C MALAKAR
• Assessee Lawyers: ASHWINI TANEJA
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 10AA; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.336/PN/2014 (ASSESSMENT YEAR: 2009-10) PTC SOFTWARE (INDIA) PRIVATE LIMITED SURVEY NO.15, MARISOFT-II VADGAONSHERI, KALYANINAGAR PUNE 411014 PAN: AABCC1268J . APPELLANT VS. THE DY. COMMISSIONER OF INCOME TAX CIRCLE 4, PUNE . RESPONDENT APPELLANT BY : SHRI ASHWINI TANEJA RESPONDENT BY : SHRI B.C. MALAKAR DATE OF HEARING : 09-10-2014 DATE OF PRONOUNCEMENT : 31-10-2014 ORDER PER SUSHMA CHOWLA, JM: THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF D Y.CIT, CIRCLE 4, PUNE DATED 15.01.2014 RELATING TO ASSESSMENT YEAR 2 009-10 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME-TAX ACT. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LD ASSESSING OFFICER ('AO') PURSUANT TO THE DIRE CTIONS OF THE LD. DISPUTE RESOLUTION PANEL ('DRP') ERRED IN REJECTIN G THE BENCHMARKING APPROACH ADOPTED / CONTEMPORANEOUS DOCUMENTATION MAINTAINED BY THE APPELLANT AND THEREBY MAKING A TRANSFER PRICING ADJUSTMENT OF RS.12,91,06,230 T O THE INCOME OF THE APPELLANT BY HOLDING THAT THE INTERNATI ONAL TRANSACTION, PERTAINING TO PROVISION OF SOFTWARE SERV ICES ('IT SERVICES') AND CUSTOMER SUPPORT BACK OFFICE SERVICE S ('ITES SERVICES') TO THE ASSOCIATED ENTERPRISE ('AE'), ARE N OT AT ARM'S LENGTH UNDER THE INCOME-TAX ACT, 1961 ('THE ACT'). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE LD. AO/DRP ERRED IN MODIFYING THE BENCHMARKING ANALYSIS , AS CONDUCTED BY THE APPELLANT USING TRANSACTIONAL NET MA RGIN ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 2 METHOD ('TNMM') FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF IT AND ITES SERVICES TO THE AE, AND THEREBY MODIFYING THE SET OF COMPARABLES. I N DOING SO, THE LD AO/DRP SPECIFICALLY ERRED IN: A) CONDUCTING SELECTIVE FRESH ANALYSIS BY APPLYING CERTAIN ADDITIONAL QUANTITATIVE / QUALITATIVE FILTERS FOR IDENTIFYIN G THE COMPARABLES RESULTING IN CHERRY PICKING OF COMPARABLES WHICH CONTRADICTS WITH THE PRINCIPLES OF CONDUCTING SEARCH (FOR COMPARABLES) IN A SCIENTIFIC MANNER; B) REJECTING THE FRESH SEARCH (USING THE DATA FOR FY 20 08-09 ONLY) FOR THE IT AND ITES SEGMENT PROVIDED BY THE APP ELLANT (ON A WITHOUT PREJUDICE BASIS) WITHOUT ANY COGENT REASONS, WHEREAS THE LD. TPO HAD HIMSELF CONDUCTED A FRESH SEARCH ANALYSIS. THIS INCONSISTENCY INDICATES A DISCRIMINATORY MINDSET WHEREBY ONLY THOSE APPROACHES THAT GENERATE RESULTS PREJUDICIAL TO THE APPELLANT WOU LD SELECTIVELY BE ACCEPTABLE TO THE LD TPO; C) INTRODUCING ADDITIONAL COMPANIES WHICH WERE CONSIDERE D AS COMPARABLES IN THE PRIOR YEAR'S TP ORDER FOR AY 07-08 AND AY 08-09 RESULTING IN CHERRY PICKING OF COMPARABLES WHI CH CONTRADICTS WITH THE PRINCIPLES OF CONDUCTING SEARCH (FOR COMPARABLES) IN A SCIENTIFIC MANNER; D) REJECTING COMPANIES FUNCTIONALLY SIMILAR TO THAT OF T HE APPELLANT'S BUSINESS OPERATIONS FROM FINAL SET OF COMPARABLES WHICH WERE ACCEPTED IN PAST ASSESSMENT YEARS (AND ALSO IDENTIFIED BASED ON THE FRESH SEARCH CONDUCTED BY THE APPELLANT ON A WITHOUT PREJUDICE BASIS) WITHOUT PROVIDING ANY REASONS. 3. THE LD. DRP/AO ERRED IN CONSIDERING THE SINGLE YEAR D ATA FOR THE COMPARABLES I.E. DATA FOR FY 2008-09 ONLY AND DISREGARDING MULTIPLE YEAR DATA WHICH WAS CONSIDERE D BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF RULE 10 B(4) OF THE INCOME-TAX RULE, 1962 ('RULES'') 4. THE LD. DRP / AO ERRED IN NOT ALLOWING AN ADJUSTMENT FOR THE DIFFERENCE BETWEEN THE LEVEL OF RISK BORNE/ASSETS EMP LOYED BY THE COMPARABLES AND THE APPELLANT AS PROVIDED BY THE APPELLANT, WITHOUT PROVIDING ANY COGENT REASONS, AND DISREGARDING THE PROVISIONS OF RULES 10B (3) READ WITH RULE 10C OF THE RULES. IN DOING SO, THE LD DRP / AO ERRED BY: I. FAILING TO CAPTURE THAT THE APPELLANT IS A ROUTINE C APTIVE SERVICE PROVIDER AS AGAINST THE COMPARABLE COMPANIES SELECTED BY THE LD TPO WHICH INCLUDE ENTREPRENEURIAL COMPANIES AND HENCE AN ADJUSTMENT IS NECESSARY; II. DISREGARDING THE PROVISIONS OF RULES 10B(3) READ WITH RULE 10C OF THE RULES. 5. THE LD. AO WHILE PASSING THE ASSESSMENT ORDER HAS ERR ED IN NOT DISPOSING OFF THE RECTIFICATION APPLICATION FILED BY THE APPELLANT FOR RECTIFYING CERTAIN MISTAKES IN THE TRANSFER PRICI NG ORDER. ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 3 6. THE LD. AO WHILE PASSING THE ASSESSMENT ORDER HAS ERR ED IN MAKING CERTAIN ERRORS IN COMPUTING THE TAX DEMAND/LIABIL ITY. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, WITHDRA W, MODIFY AND/OR SUBSTITUTE, AND TO WITHDRAW THE ABOVE GR OUNDS OF APPEAL. 3. THE BRIEF FACTS OF THE CASE ARE THAT PTC INDIA IS ENG AGED IN DESIGNING AND DEVELOPING SOFTWARE FOR PARAMETRIC CONSULTANC Y CORPORATION (PTC), WHICH IN TURN UTILIZES THE SOFTWARE TO PR OVIDE PRODUCT LIFECYCLE MANAGEMENT (PLM) SOFTWARE SOLUTIONS T O ITS CLIENTS. IN ADDITION, PTC INDIA IS ALSO ENGAGED IN RENDERING TECHNICA L SUPPORT SERVICES (CALL CENTER SERVICES) TO PTCS GLOBAL CLIENT BASE. 4. AS PER THE TRANSFER PRICING DOCUMENT (TP) FURNISHED FO R THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS FOUND TO HAVE ENT ERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTER PRISE (AE) I.E. PTC USA FOR THE PROVISION OF SOFTWARE SERVICES AND ALSO FOR THE PROVISION OF IT ENABLED SERVICES. THE ASSESSEE HAD APPLIED A SEARCH CRITERIA FOR PICKING UP THE COMPARABLES AND HAD SELECTED CERTAIN COMPANIES IN THE IT SEGMENTS AND ALSO IN THE ITES SEGME NTS WHICH ARE MENTIONED AT PAGES 2 AND 3 OF THE ORDER PASSED UN DER SECTION 92CA(3) OF THE ACT. AS THE ASSESSEE HAD ENTERED INTO IN TERNATIONAL TRANSACTIONS, THE ASSESSING OFFICER MADE A REFERENCE UNDER SECTION 92CA(1) OF THE ACT FOR COMPUTATION OF ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS MENTIONED IN THE FORM NO.3C EB. THE ASSESSEE HAD APPLIED TNMM METHOD AND USED PROFIT LEVEL I NDICATOR OF OPERATING PROFIT (OP) OVER OPERATING EXPENSES (TC) AS THE PLI INDICATOR. THE TPO WITH A VIEW TO FIND COMPARABLE COMPANIES WITH MORE ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 4 APPROPRIATENESS, CONDUCTED A FRESH SEARCH BY USING THE FOLLOWING SEARCH CRITERIA FOR SELECTING THE COMPARABLES IN IT AND ITES SEGMEN TS. A. ONLY CURRENT YEARS DATA (FY 2008-09) HAS BEEN USED B. COMPANIES WITH INCOME FROM IT SERVICES > 50% OF THE OPERATING REVENUE OR SEGMENTAL REVENUE ARE SELECTED C. COMPANIES WITH LESS THAN 75% EARNINGS FROM EXPORTS REJECTED D. COMPANIES WITH RELATED PARTY TRANSACTIONS LESS THAN 25% ARE SELECTED E. COMPANIES WITH PERSISTENT LOSSES / DIMINISHING REVENUES AR E REJECTED F. COMPANIES WITH PECULIAR ECONOMIC CIRCUMSTANCES ARE REJECTED G. COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2008-09 HAS NOT BEEN CONSIDERED. H. COMPANIES WITH IT AND IT ENABLED SERVICE INCOME < 1 CR A ND > 200 CR WERE EXCLUDED AND HAVING TURNOVER BETWEEN RS 1 CR TO RS.200 CR HAS BEEN RETAINED. I. COMPANIES WHOSE IT ENABLED SERVICE REVENUE IS LESS THAN 50% OF THE TOTAL OPERATING REVENUE OR SEGMENTAL REVENUE WERE EXCLUDED J. COMPANIES WHO HAVE MORE THAN 25% RELATED PARTY TRANSACTIONS WERE EXCLUDED K. COMPANIES WHO HAVE LESS THAN 75% OF THE OPERATING REVEN UE AS EXPORT SALES WERE EXCLUDED. L. COMPANIES WHO HAVE DIMINISHING REVENUES/PERSISTENT LOSSES FOR THE PERIOD UNDER CONSIDERATION WERE EXCLUDED M. COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM YOU OR WORKING IN PECULIAR ECONOMIC CIRCUMSTANCES, AFTER GIVING VALID REASONS, WERE EXCLUDED. 5. IN VIEW OF THE SEARCH CRITERIA APPLIED BY THE TPO, CER TAIN COMPANIES WHICH WERE SELECTED BY THE ASSESSEE AS COMPA RABLES WERE FOUND TO BE NOT COMPARABLES AND HENCE WERE REJECTED. THE FOLLOWING COMPARABLES WERE SELECTED BY THE TPO FOR THE PURPOSES OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS. THE TPO SEL ECTED THE FOLLOWING COMPANIES AS COMPARABLES WITH THE ASSESSEE IN THE IT SEGMENTS:- S. NO. NAME OF THE COMPANY REMARKS / PLI 1 FCS SOFTWARE SOLUTIONS LTD 53.08 2 LARSEH & TOURBO INFOTECH LTD 21.33 3 MINDTREE LTD 38.18 4 PERSISTENT SYSTEMS LTD. 37.77 5 KALS INFORMATION SYSTEM LTD. (SEG) 41.91 6 BODHTREE CONSULTING LTD 62.2 9 42.43 ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 5 6. THE ASSESSEE WAS SHOW CAUSED WITH REGARD TO THE S ELECTION OF THE SAID COMPANIES AS COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS BOTH IN IT AND ITES SEGMENTS. ONE OF THE FACTORS APPLIED BY THE TPO WAS THAT THE ASSESSEE IN ITS TP STUDY HAD USED THE EARLIER YEARS DATA ON THE PREMISE THAT THE CURRENT YEARS DATA WAS NOT AVAILABLE IN ALL THE CASES AT THE TIME OF TP STUDY. THE TPO WAS OF THE VIEW THAT ONLY THE CURRENT YEARS DATA TO T HE EXCLUSION OF THE EARLIER YEARS DATA WAS TO BE APPLIED. IN VIEW OF THE PRO VISIONS OF RULE 10B(4) OF IT RULES, AS PER THE TP CASE MANDATED FOR THE U SE OF THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRAN SACTION WAS ENTERED INTO. THE ASSESSEE RAISED OBJECTIONS TO TH E SEARCH CRITERIA SOUGHT TO BE APPLIED BY THE TPO. THE FIRST OBJECTION RAIS ED BY THE ASSESSEE WAS THAT THE EARLIER YEARS DATA COULD BE APP LIED FOR DOING THE BENCHMARKING FOR SELECTION OF THE COMPARABLE COMPANIES. AN OTHER OBJECTION RAISED BY THE ASSESSEE WAS AGAINST THE SELECT ION OF COMPANIES WITH INCOME FROM IT SERVICES GREATER THAN 50% OF THE OPERATING REVENUE OR SEGMENTAL REVENUE. 7. ANOTHER OBJECTION WAS RAISED AGAINST THE SELECTION OF COMPANIES WHICH HAD TURNOVER BETWEEN RS.1 CRORES TO RS.200 CRORE S. THE PLEA OF THE ASSESSEE IN THIS REGARD WAS THAT THE STRENGTH OF T NMM WAS THAT NET MARGINS (E.G. RETURN ON ASSETS, OPERATING INCOME TO SA LES, AND POSSIBLY OTHER MEASURES OF NET PROFIT) WERE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES. THE DIFFERENCE IN THE LEVEL OF TURNO VER, THOUGH BEING AN IMPORTANT CHARACTERISTIC AT THE TIME OF E VALUATION OF COMPARABILITY, CANNOT BE THE SOLE REASON OF REJECTION OF CO MPARABLES HAVING SIMILAR FUNCTIONAL PROFILE, ESPECIALLY WHILE APPLYING THE TN MM. IT WAS FURTHER POINTED BY THE ASSESSEE THAT BOTH LEVELS OF TURNOVER MENTIONED ABOVE WERE SIGNIFICANTLY HIGHER THAN THE TURNOV ER OF THE ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 6 ASSESSEE, AND ON CONSIDERATION OF THE TURNOVER FILTER AS T HE PRIMARY REASON FOR REJECTION, BOTH LEVELS WOULD STAND A SIMILAR CHAN CE FOR REJECTION. THE ASSESSEE FURTHER SUBMITTED THAT THE TU RNOVER FILTER OF SALES GREATER THAN RS.1 CRORE WAS APPLIED IN THE TP ST UDY CONDUCTED BY THE ASSESSEE. 8. THE TPO REJECTING THE PLEA OF THE ASSESSEE OBSERVED THAT IN THE PREVIOUS YEAR, THE TPO HAD APPLIED HIGHER TURNOVER CRITER IA OF RS.200 CRORES AND THE SAME FACT WAS CONFIRMED BY THE DRP IN ITS OWN CASE. THEREFORE, IN ORDER TO MAINTAIN CONSISTENCY, THE SAME CRITE RIA WAS ADOPTED AND COMPANY SUCH AS LT INFOTECH, MINDTREE AND PER SISTENT SYSTEMS WERE REJECTED ON THIS ACCOUNT. 9. THE ASSESSEE FURTHER RAISED OBJECTIONS ON THE FOLLOWING CRITERIA APPLIED BY THE TPO. A. FOREIGN EXCHANGE LOSS / GAIN NON-OPERATING IN NATURE B. CONSIDERATION OF OTHER INCOME / MISCELLANEOUS INCOME AS OPERATING INCOME C. COMPANIES WITH LESS THAN 75% EARNING FROM EXPORTS- EXCLUDED D. COMPANIES WITH LESS THAN 25% RELATED TO PARTY TRANSACTIONS E. AND COMPANIES HAVING LOSSES 10. THE ASSESSEE FURTHER CARRIED OUT A FRESH SEARCH DUR ING THE PROCEEDINGS BEFORE TPO ON THE DATA BASIS AND CAPITAL LOA N PLACE. THE ASSESSEE CLAIMS TO HAVE ADOPTED THE SAME QUANTITATIVE FILT ERS WHICH WERE ADOPTED IN THE TP FOR FINANCIAL YEAR 2008-09 AND FOLLOW ING SEARCH CRITERIA WERE ADOPTED. A. COMPANIES HAVING DATA FOR FY 2008-09 (AND REJECTED COMPANIES WITH DIFFERENT FINANCIAL YEAR END) B. COMPANIES WITH POSITIVE SALES AND RATIO OF OTHER OPERATING INCOME OF MORE THAN 50% OF TOTAL OPERATING REVENUE C. COMPANIES WITH SALES TURNOVER OF MORE THAN 1 CRORE ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 7 D. COMPANIES WITH NET WORTH MORE THAN ZERO E. COMPANIES WITH RATIO OF RESEARCH AND DEVELOPMENT EXPENSE S TO SALES LESS THAN 3% F. COMPANIES WITH RATIO OF THE SUM OF ADVERTISING, MARKETING AND DISTRIBUTION EXPENSES TO SALES LESS THAN 3% G. COMPANIES WITH RATIO OF NET FIXED ASSETS TO SALES LESS THA N 200% H. COMPANIES WITH EXPORT SALES OF MORE THAN 75% OF OPERATING REVENUE I. COMPANIES WITH RELATED PARTY TRANSACTION OF 25% 11. THE TPO APPLIED THE RATIO LAID DOWN BY THE BANGALORE T RIBUNAL IN KODIAK NETWORKS INDIA PVT. LTD. VS. ACIT (2012) 51 SOT, 1 91 (BANG), WHEREIN IT WAS HELD THAT UNDER RULE 10D(4), INFORMATION AND DOCUMENTS SHOULD BE CONTEMPORANEOUS AND SHOULD EXISTS LATEST BY THE SPECIFIED DATE IN SECTION 92F(4) OF THE ACT I.E. THE DUE D ATE FOR FILING THE RETURN OF INCOME. AS PER THE TPO, THE OBLIGATION UPO N THE TAX PAYER WAS TO KEEP AND MAINTAIN THE DOCUMENTS FOR THAT PERIOD BY PROVIDING FOR SPECIFIC DATA IN THE PROVISIONS, HOWEVER, THERE WAS NO CUT OFF DATE UP TO WHICH THE INFORMATION AVAILABLE IN PUBLIC DOMAIN COULD BE TAKEN INTO CONSIDERATION BY THE TPO, WHILE MAKING THE T RANSFER PRICING ADJUSTMENT AND ARRIVING AT THE ALP. AS PER THE TPO, THE ASSESSEE BY THE NEW SEARCH CARRIED OUT DURING THE PEN DENCY OF THE PROCEEDINGS COULD NOT DO CHERRY PICKING AND THE SAME WAS REJECT ED. 12. THE ASSESSEE THEREAFTER BEFORE THE TPO, HAS RAISED THE OBJE CTIONS AGAINST THE SELECTION OF DIFFERENT COMPANIES WHICH HAS BEEN CONSIDERED BY THE TPO ELABORATELY AND WE SHALL MAKE A REFERENCE T O THE SAME WHILE ADJUDICATING THE ISSUE RAISED IN THE PRESENT APPEAL KEEPING IN MIND THE SUBMISSIONS MADE BY THE LEARNED AUTHORIZED REPR ESENTATIVE FOR THE ASSESSEE BEFORE US. THE ASSESSEE ALSO RAISED A N OBJECTION TO THE INTRODUCTION OF THE ADDITIONAL COMPANIES BY THE TPO WIT HOUT PROVIDING ANY COGENT REASONS. HOWEVER, THE TPO REJECTE D THE PLEA OF ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 8 THE ASSESSEE AND SELECTED THE FINAL SET OF COMPARABLES IN IT SEGMENTS AS UNDER: S.NO. NAME OF THE COMPANY PLI PLI AFTER WC ADJ 1 FCS SOFTWARE SOLUTIONS LTD 15.49 14.41 2 AKSHAY SOFTWARE TECHNOLOGY 8.19 10.56 3 KALS INFORMATION SYSTEMS LTD. (SEG) 41.91 43.20 4 BODHTREE CONSULTING LTD 68.35 69.25 5 LGS GLOBAL LTD 18.03 15.03 6 GOLDSTONE TECHNOLOGIES LTD 4.15 7.07 AVERAGE 26.25 13. THE PLI OF THE COMPARABLE COMPANIES THUS WORKED OUT AT 26.25 AS AGAINST 17.19 OF THE ASSESSEE. 14. THE ALP OF THE SOFTWARE SERVICES RENDERED BY THE AS SESSEE WAS WORKED OUT AS UNDER: RS. OPERATING REVENUE OF THE ASSESSEE R 1,276,836,375 OPERATING COST (OC) 1,089,510,725 PLI OF COMPARABLES P 26.25 ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION (ALP=OC*(1+P/100) A 1,375,507,290 DIFF +/ - 5% = A*95/100 1,306,731,926 ADJUSTMENT OVER OPERATING INCOME (SHORTFALL BEING ADJUSTMENT U/S 92CA) A - R 98,670,915 15. IN VIEW THEREOF, AN ADJUSTMENT OF RS.98,670,915/- WAS M ADE TO THE INTERNATIONAL TRANSACTIONS RELATING TO SOFTWARE DEVELOP MENT SERVICES OF THE ASSESSEE TO ARRIVE AT THE ARMS LENGTH VALUE OF THE INTERNATIONAL TRANSACTION AND AS A CONSEQUENCE OF THIS AD JUSTMENT, INCOME OF THE ASSESSEE WAS PROPOSED TO BE INCREASED BY RS.98,670,915/-. 16. FURTHER, IN ITES SEGMENT ALSO, THE ASSESSEE RAISED O BJECTIONS TO THE REJECTION AND ACCEPTANCE OF CERTAIN COMPARABLES WHIC H HAS BEEN CONSIDERED BY THE TPO AND ALSO AFTER REJECTING THE FRESH SEARCH CARRIED ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 9 OUT BY THE ASSESSEE HAS SELECTED FOLLOWING COMPARABLES IN THE ITES SEGMENT:- S.NO. NAME OF THE COMPANY OP/OC 1 ACCENTIA TECHNO LOGIES LTD 52.63 49.35 2 NATIONAL SECURITIES D EPOSITORY LTD 16.98 17.18 3 E4E - HEALTH SOLUTION S LTD. (FORMERLY KNOWN AS NITTANY OUTSOURCING SERVICES PVT. LTD 33.31 30.67 4 COSMIC GLOBAL LTD. 43.11 40.38 5 ECLERX SERVICES LTD 46.90 46.57 6 VISHAL INFORM ATION TECHNOLOGY 36.99 36.52 7 MICROGENETICS - 0.33 - 0.77 AVERAGE 31.71 17. THE PLI OF THE COMPARABLE COMPANIES THUS WORKED OUT AT 31.71 AS AGAINST 15.04 OF THE ASSESSEE. 18. THE ALP OF THE SOFTWARE SERVICES RENDERED BY THE AS SESSEE WAS WORKED OUT AS UNDER:- RS. OPERATING REVENUE OF THE ASSESSEE R 101,596,764 OPERATING COST (OC) 100,244,536 PLI OF COMPARABLES P 31.71 ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION (ALP=OC*(1+P/100) A 132,032,078 ADJUSTMENT OVER OPERATING INCOME (SHORTFALL BEING ADJUSTMENT U/S 92CA) A - R 30,435,314 19. IN VIEW OF THE ABOVE, AN ADJUSTMENT OF RS.30,435,314/- WAS MADE TO THE INTERNATIONAL TRANSACTION RELATING TO ITES SE GMENT TO ARRIVE AT THE ARMS LENGTH VALUE OF THE INTERNATIONAL TRAN SACTION AND AS A CONSEQUENCE OF THIS ADJUSTMENT, INCOME OF THE ASSESSEE WAS INCREASED BY RS.30,435,314/-. 20. THE REPORT BY THE TPO WAS SUBMITTED TO THE ASSESS ING OFFICER WHICH WAS SHOW CAUSED TO THE ASSESSEE AND THE LEARNED AUTHORIZED ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 10 REPRESENTATIVE FOR THE ASSESSEE RELIED UPON THE SUBMISSI ONS MADE BEFORE THE TPO. CONSEQUENT TO THAT A DRAFT ORDER WAS ISSUED TO THE ASSESSEE ON 08.03.2013 AND IN RESPONSE TO THE SAME, THE ASSESSEE SUBMITTED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (D RP), PUNE AGAINST THE VARIATIONS PROPOSED IN THE DRAFT ASSESSMENT ORDER. THE DRP CONSIDERED THE OBJECTIONS OF THE ASSESSEE AND THE DRAFT ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 144C(5) OF T HE ACT DATED 09.12.2013. THE DRP, PUNE HAD CHOSEN NOT TO INTERFERE WIT H THE PROPOSED VARIATIONS IN THE DRAFT ASSESSMENT ORDER OF THE ASSESSING OFFICER AND CONSIDERING THE SAID DIRECTIONS, THE ASSESSING OFFIC ER PASSED THE FINAL ASSESSMENT ORDER UNDER SECTION 143(3) R. W.S. 144C OF THE ACT AND COMPUTED THE ADJUSTMENT UNDER SECTION 92 CA OF THE ACT AT RS.12,91,06,230/-. THE INCOME OF THE ASSESSEE WAS ENH ANCED AND IT WAS ALSO HELD BY THE ASSESSING OFFICER THAT NO DEDUCTI ON UNDER SECTION 10A OR SECTION 10AA OR SECTION 10B OR UNDER CH APTER VIA SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE WAS ENHANCED. 21. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER PASSED B Y ASSESSING OFFICER UNDER SECTION 143(3) R.W.S. 144C OF THE ACT. THE LEAR NED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS FILED BRIEF SYNOPSIS OF THE ARGUMENTS WHICH HAS BEEN TAKEN ON RECORD. IT WAS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE ASSESSEE WAS A CAPTIVE SERVICE PROVIDER AND ADDITION IN T HE HANDS OF THE ASSESSEE WAS MADE ON ACCOUNT OF TWO SEGMENTS I.E. IT AND IT ENABLED SERVICE SEGMENTS. IT WAS POINTED OUT BY THE LEA RNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE AS SESSEE HAS AGGRIEVED BY THE SELECTION OF THE CERTAIN COMPARABLE COM PANIES IN THE TP STUDY. THE FIRST OBJECTION RAISED BY THE LEARNED AUTH ORIZED ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 11 REPRESENTATIVE FOR THE ASSESSEE WAS AGAINST THE INCLUSION OF THE TWO COMPARABLES I.E. M/S. KALS INFORMATION SYSTEMS LTD AND BO DHTREE CONSULTING LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FO R THE ASSESSEE POINTED OUT THAT IN THE PRECEDING YEAR, THE TR IBUNAL HELD THAT KALS INFORMATION SYSTEMS LTD. WAS NOT COMPARABLE. OUR A TTENTION WAS DRAWN TO THE COMPENDIUM OF RELEVANT CASE LAWS AND T HE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSME NT YEAR 2007- 08. IT WAS ALSO POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE SAID COMPARABLES PICKED UP BY THE TPO I.E. KALS INFORMATION SYSTEM LTD. WAS PRIMARILY ENGAGED IN T HE BUSINESS OF SOFTWARE SERVICES AND SOFTWARE PRODUCTS, WHEREAS THE ASSESSEE DOES NOT SELL ANY SOFTWARE PRODUCTS AND WAS A CAPITAL SERVICE PROVIDER. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE MADE REFERENCE TO THE FINANCIAL STATEMENT OF KALS INFORMATION SYSTEM LTD. PLA CED AT PAGES 479 TO 489 OF THE PAPER BOOK AND OUR ATTENTION WAS DRAWN TO THE NOTES TO THE FINANCIAL STATEMENT AND ALSO THE PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31.03.2009, UNDER WHICH THE SAID COMPA NY HAD DECLARED THE RECEIPTS FROM SALES, SERVICES AND TRAINING AT RS.2.14 CRORES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE FURTHER REFERRED TO THE NOTES ON ACCOUNT AT PAGE 481 OF THE P APER BOOK AND POINTED OUT THAT IT WAS REPORTED THAT THE COMPANY WAS ENGAGED IN THE DEVELOPMENT OF COMPUTER SOFTWARE AND OTHER RELATED SERV ICES. FURTHER AT PAGES 482 TO 489 ATTACHED TO THE LIST OF PRODUCTS D EALT IN BY KALS INFORMATION SYSTEMS LTD. IN RESPECT OF THE OTHER COMP ARABLES SELECTED I.E. BODHTREE CONSULTING LTD., IT WAS POINTED OUT THAT THE TPO HAD SELECTED THE SAID COMPANY AS A COMPARABLE BECAUSE IT WA S CONSIDERED AS A COMPARABLE IN ASSESSMENT YEAR 2008-09 IN TPOS OR DER. HOWEVER, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS AGGRIEVED BY THE SELECTION OF THE SAID COMPANY AS A COMPARABLE AS BODHTREE ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 12 CONSULTING LTD. WAS SHOWING DRASTIC FLUCTUATION IN THE OPERA TING MARGINS WITH A HIGH OF 80.15% AND LOW OF (-) 4.46% OVER PERIO D OF SIX YEARS. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE AS SESSEE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE BANGALORE BENCH O F THE TRIBUNAL IN M/S. MINDTECK (INDIA) LTD. IN I.T(TP).A NO.70/BANG/2014, WHEREIN BODHTREE CONSULTING LTD. WAS EXCLUDED IN ASSESSMENT YEAR 2009-10 FROM THE FINAL SET OF COMPARABLES FOR ITS ABNORMAL PROFITABILIT Y TREND. FURTHER, RELIANCE WAS PLACED ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF CUMMINS TURBO TECHNOLOGIES LTD. UK IN ITA NOS.161 & 269/PN/2013 WHEREIN IT HAD FOLLOWED THE SPECIAL B ENCH DECISION IN MAERSK GLOBAL CENTRES (INDIA) PVT. LTD. IN ITA NO.7466/MUM/2012 AND HELD THAT TREND OF PROFITABILITY SHOULD REFLECT NORMAL BUSINESS CONDITIONS FOR A COMPARABLE TO BE ACCEPTED. 22. FURTHER, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE MUMBAI BENCH OF THE TRIBUNAL IN NETHAWK NETWORKS INDIA P VT. LTD. VS. ITO IN ITA NO.7633/MUM/2012, DATED 06.11.2013, WHEREIN BODHTREE CONSULTING LTD. WAS REJECTED AS COMPARABLE, SINC E THE SAME WAS INVOLVED IN SALE OF SOFTWARE PRODUCTS AND NO SEGMENTA L DATA WERE AVAILABLE. THE LAST CONTENTION RAISED BY THE ASSESSEE WAS THAT WHEN LOSS MAKING COMPANY WAS REJECTED BY THE TPO, THEN SUPE R PROFIT MAKING COMPANY LIKE BODHTREE CONSULTING LTD. AND E-INFOC HIPS LTD. ALSO BE EXCLUDED SINCE THE SAID COMPANY WAS HAVING OSCILLATING PRO FITS. 23. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVE NUE POINTED OUT THAT THE ISSUES RAISED BY THE ASSESSEE BOTH BEFORE TPO AND DRP WERE SAME. FURTHER, RELIANCE WAS PLACED ON THE ORDE R PASSED BY DRP IN THIS REGARD. OUR ATTENTION WAS DRAWN TO THE OR DER OF THE TPO AT PAGES 58 AND 59 WHEREIN THE SAID COMPANIES I.E. KALS I NFORMATION ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 13 SYSTEMS LTD. AND BODHTREE CONSULTING LTD. WERE SELECTED. IT WAS POINTED OUT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE THAT BODHTREE CONSULTING LTD. WAS SELECTED BY T HE ASSESSEE IN TP STUDY RELATING TO ASSESSMENT YEAR 2008-09 AND THE SAME SHOULD BE SELECTED AS A COMPARABLE. 24. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE POINTED OUT THAT LAST YEAR THE SAID COMPANY BODHTREE CONSULTING LTD. WAS FUNCTIONALLY COMPARABLE BUT SINCE COMPARABLE WAS DECLARING FLUCTUATING PROFITS, THE SAME CANNOT BE USED A COMPARABLE AND WAS NOT PICKED UP BY THE ASSESSEE IN ITS TP STUDY. THE ASS ESSEE FURTHER WAS AGGRIEVED BY THE SELECTION OF THE FCS SOFTWARE SOLUTIO NS LTD. AND IT WAS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTA TIVE THAT THE SAID COMPANY WAS RENDERING DIVERSE SERVICES AND NO SEGM ENTAL DATA WAS AVAILABLE. EVEN BEFORE THE TPO, IT WAS POINTED OUT THA T SEGMENTAL DATA WAS NOT AVAILABLE. THE TPO HAD SELECTED THE SAID COMPANY AS THE SOFTWARE DEVELOPMENT WAS MORE THAN 50%. HOWEVER, THE SAID COMPANY DOES NOT FIT INTO THE SAID FILTER AS IT HAS SOFTWAR E DEVELOPMENT ONLY TO THE EXTENT OF 40% OF THE REVENUE AND HENCE FA ILS THE FILTER. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINT ED OUT THAT CERTAIN COMPANIES I.E. MINDTREE LTD. (5.52%), E-INFOCHIPS LTD. (- 12.69%) SHOULD BE TAKEN AS COMPARABLE. THE LEARNED AUTH ORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THA T IT HAD CARRIED OUT A FRESH SEARCH DURING THE PROCEEDINGS BEFORE THE TP O AND THE TPO REJECTED THE FRESH SEARCH CONDUCTED BY THE ASSESSEE. IT WAS PLEA OF THE ASSESSEE THAT FRESH SEARCH WAS CONDUCTED BY APPLYING THE QUANTITATIVE FILTERS ADOPTED IN THE TP STUDY FOR THE FINANCIAL YEAR 2008- 09 AND THE ADDITIONAL FILTERS CONSIDERED BY THE TPO, ON A WITHOUT PREJ UDICE BASIS. THE TPO IN ASSESSMENT YEAR 2008-09 HAD ACCEPTED THE FRESH SEARCH ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 14 CONDUCTED BY THE ASSESSEE. HOWEVER, DURING THE YEAR U NDER CONSIDERATION, AS PER THE ASSESSEE, THE TPO HAD ADOPTED A CHERRY PICKING APPROACH FOR IDENTIFYING COMPARABLES RATHER THAN A STRUCTURED PROCESS. THE ASSESSEE HAD IDENTIFIED THE FOLLOWING COMPANIE S TO BE INCLUDED AS PER THE FRESH SEARCH:- A. THINKSOFT GLOBAL SERVICES LTD., B. ZYLOG SYSTEMS LTD., C. AVANI CIMCON TECHNOLOGIES LTD., D. R S SOFTWARE (INDIA) LTD. 25. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLAC ED RELIANCE ON THE ORDER OF THE TPO AND DRP IN RESPECT OF H IS SUBMISSIONS. 26. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST ISSUE RAISED BY THE ASSESSEE IS IN RELATION TO TH E ADJUSTMENT OF RS.9,86,70,915/- IN IT SERVICES SEGMENT. THE TPO ON A FR ESH SEARCH HAD SELECTED THE FOLLOWING COMPARABLES:- S.NO. NAME OF THE COMPANY PLI PLI AFTER WC ADJ 1 FCS SOFTWARE SOLUTIONS LTD 15.49 14.41 4 AKSHAY SOFTWARE TECHNOLOGY 8.19 10.56 5 KALS INFORMATION SYSTEMS LTD. (SEG) 41.91 43.20 6 BODHTREE CONSULTING LTD 6 8.35 69.25 7 LGS GLOBAL LTD 18.03 15.03 8 GOLDSTONE TECHNOLOGIES LTD 4.15 7.07 AVERAGE 26.25 27. THE ASSESSEE IS AGGRIEVED BY THE INCLUSION OF ITEM AT S R NO.5 KALS INFORMATION SYSTEMS LTD. (SEG). IT IS THE CASE OF TH E ASSESSEE THAT THE SAID COMPANY WAS INCLUDED BY THE TPO IN ITS STU DY RELATING TO ASSESSMENT YEAR 2007-08 AND THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1605/PN/2011 RELATING TO ASSESSMENT YEAR 2007- 08 VIDE ORDER DATED 30.04.2013 HAD HELD THE SAID COMPANY TO BE NOT FUN CTIONALLY ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 15 COMPARABLE WITH THE ASSESSEE. THE RELEVANT FINDING OF THE TRIBUNAL VIDE PARA 19 IS AS UNDER: 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE SAID CONCERN (KALS INFORMATION SYSTEMS LTD.) HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN THE IMMEDIA TELY PRECEDING ASSESSMENT YEAR AND IN THE PRESENT YEAR A LSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS C ORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS INTER ALIA EN GAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT FROM T HE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGME NT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FOR TH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FRO M THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRECEDING YEAR. THEREFO RE, HAVING REGARD TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASS ESSEE, IT IS CORRECTLY ASSERTED THAT THE APPLICATION SOFTWARE SE GMENT OF THE SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEES SEGM ENT OF IT SERVICES. 28. IN THE YEAR UNDER CONSIDERATION ALSO, THE SAID COMPAN Y KALS INFORMATION SYSTEMS LTD. IS ENGAGED IN THE SALE OF SOFTWARE PRODUCTS, WHICH IS APPARENT FROM THE FINANCIAL STATEMENTS AND NOTES TO ACCOUNTS FILED BY THE ASSESSEE AT PAGES 479 TO 489 OF THE PAPER BOOK. THE SAID COMPANY BEING NOT FUNCTIONALLY COMPARABLE IN VIEW OF THE FAC TUAL ASPECTS REFERRED TO BY THE ASSESSEE AND IN VIEW OF FINDIN G OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200 7-08, WE HOLD THAT THE APPLICATION OF SOFTWARE SEGMENT OF THE SAID CONCE RN WAS NOT COMPARABLE TO THE ASSESSEES SEGMENT OF IT SERVICES. 29. THE ASSESSEE FURTHER HAS ASSAILED THE INCLUSION OF BODH TREE CONSULTING LTD. APPEARING AT ITEM NO.6 IN THE LIST OF COMPARA BLES SELECTED BY THE TPO. THE SAID COMPANY WAS SELECTED AS A COMPARABLE BY THE TPO BECAUSE IN ASSESSMENT YEAR 2008-09, BODHTR EE CONSULTING LTD. WAS SELECTED BY THE ASSESSEE ITSELF. ON THE OTHER HAND, THE OBJECTION RAISED BY THE ASSESSEE WAS THAT THE CURRENT YEARS PROFITS OF ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 16 THE SAID COMPANY WERE ON HIGHER SIDE AND THE SAME THUS , WAS NOT FUNCTIONALLY COMPARABLE. THE TREND OF OP / TC OF BODHTREE CONSULTING LTD. WAS AS UNDER: PARTICULARS FY 05- 06 FY 06- 07 FY 07- 08 FY 08- 09 FY 09-10 FY 10- 11 FY 11-12 FY 12-13 OP / TC 13.87% 80.15% 19.89% 62.27% 33.42 -4.46% 3.29% -11.53% 30. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT ADMITTED LY IT HAD SELECTED THE SAID COMPANY IN THE PRECEDING YEAR AS A CO MPARABLE BECAUSE IT WAS FUNCTIONALLY COMPARABLE IN THE SAID YEAR. H OWEVER, BECAUSE OF THE FLUCTUATING PROFITS SHOWN BY THE ASSESSEE WHICH VARIED IN THE RANGE OF 80.15% TO -4.46%, THE SAID COMPANY WAS N OT TO BE PICKED UP AS A COMPARABLE. 31. THE BANGALORE BENCH OF THE TRIBUNAL IN M/S. MINDTECK ( INDIA) LTD. (SUPRA) HAD CONSIDERED THE OSCILLATING PROFITS DECLARED BY THE SAID CONCERN I.E. BODHTREE CONSULTING LTD. AND HELD AS UNDER:- 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENTRE S (SUPRA) HAD AN OCCASION TO DEAL WITH THE QUESTION AS TO WHETH ER HIGH PROFIT MARGIN MAKING COMPANIES SHOULD BE EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH AFTER CONSIDERING SEVER AL ASPECTS HELD IN PARA 88 OF ITS ORDER THAT THE POTENTIAL COMPA RABLE COMPANIES CANNOT BE EXCLUDED MERELY ON THE GROUND TH AT THEIR PROFIT IS ABNORMALLY HIGH. THE SPECIAL BENCH HELD THA T IN SUCH CASES IT WOULD REQUIRE FURTHER INVESTIGATION TO ASCERT AIN THE REASONS FOR UNUSUALLY HIGH PROFIT AND IN ORDER TO EST ABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TA KEN AS COMPARABLE OR NOT. IN THE LIGHT OF THE AFORESAID DE CISION OF THE SPECIAL BENCH AND IN VIEW OF THE ADMITTED POSITION THA T THE ASSESSEE FOLLOWS FIXED PRICE PROJECT MODEL WHERE REVEN UES FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS, THERE IS A POSSIBILITY OF THE E XPENDITURE IN RELATION TO THE REVENUE BEING BOOKED IN THE EARLIER YEAR. THE RESULTS OF BODHTREE FROM FY 2003 TO 2008 EXCLUDING F Y 2007 AS GIVEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WERE ALS O PERUSED. PERUSAL OF THE SAME SHOWS, THAT THERE HAS BEEN A CONS ISTENT CHANGE IN THE OPERATING MARGINS. THE CHART FILED BY T HE ASSESSEE IN THIS REGARD IS GIVEN AS AN ANNEXURE TO THIS ORDE R. IT APPEARS TO US THAT THE REVENUE RECOGNITION METHOD FOLLOWED BY TH E ASSESSEE IS THE REASON FOR THE DRASTIC VARIATION IN THE PROFI T MARGINS OF THIS COMPANY. IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE V IEW THAT IT ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 17 WOULD BE SAFE TO EXCLUDE BODHTREE CONSULTING FROM TH E FINAL LIST OF COMPARABLES CHOSEN BY THE ASSESSEE. WE HOLD AND DIREC T ACCORDINGLY. 32. FURTHER, THE PUNE BENCH OF TRIBUNAL IN CUMMINS TURBO TECHNOLOGIES LTD., UK, VS. DY.DIT, HAD ON SIMILAR ISSUE OF EXCLU SION OF ABNORMAL PROFIT MAKING CONCERN HELD AS UNDER:- 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL STANDS ON T HIS ASPECT. IN THE CONTEXT OF THE CONTROVERSY RELATING TO THE EXCLUSION OF ABNORMAL PROFIT MAKING CONCERNS, A REFERENCE HAS BEEN MADE TO THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PRIVATE LTD. VS. ACIT VIDE ITA NO.7466/MUM/2012 DATED 07.03.2014. THE RELEVANT OBSERVATIONS OF THE BENCH ARE AS UNDER :- IN GENERALITY, WE ARE OF THE VIEW THAT THE ANSWER T O THIS QUESTION WILL DEPEND ON THE FACTS AND CIRCUMSTA NCES OF EACH CASE INASMUCH AS POTENTIAL COMPARABLE EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD TRIGGER FURTHER INVESTIGATION IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS TO WHETHER EARNING OF HIGH PROFIT REFLE CTS A NORMAL BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITIONS PREVAILING IN THE RELEVANT Y EAR. THE PROFIT MARGIN EARNED BY SUCH ENTITY IN THE IMMEDIAT ELY PRECEDING YEAR/S MAY ALSO BE TAKEN INTO CONSIDERATIO N TO FIND OUT WHETHER THE HIGH PROFIT MARGIN REPRESENTS THE NORMAL BUSINESS TREND. THE FAR ANALYSIS IN SUCH CASE MAY BE REVIEWED TO ENSURE THAT THE POTENTIAL COMPARABLE EARNING HIGH PROFIT SATISFIES THE COMPARABILITY COND ITIONS. IF IT IS FOUND ON SUCH INVESTIGATION THAT THE HIGH MARG IN PROFIT MAKING COMPANY DOES NOT SATISFY THE COMPARABILITY ANALYSIS AND OR THE HIGH PROFIT MARGIN EARNED BY IT DOES NOT REFLECT THE NORMAL BUSINESS CONDITION, WE ARE OF THE VIEW THAT THE HIGH PROFIT MARGIN MAKING ENTITY SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF AN INTERNATION AL TRANSACTION. OTHERWISE, THE ENTITY SATISFYING THE COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT MARGIN REF LECTING NORMAL BUSINESS CONDITION SHOULD NOT BE REJECTED SOLEL Y ON THE BASIS OF SUCH ABNORMAL HIGH PROFIT MARGIN. IN TERMS OF THE AFORESAID DISCUSSION OF THE SPECIAL BENCH, IT IS QUITE CLEAR THAT THE CONCERNS EARNING ABNORMAL HIGH PROFIT MARGINS CANNOT BE EXCLUDED FROM THE LIST OF COMPARAB LES UNLESS APPROPRIATE INVESTIGATIONS ARE MADE. IT WOULD BE NECES SARY TO ASCERTAIN AS TO WHETHER THE HIGH PROFIT MARGINS REF LECT A NORMAL BUSINESS PHENOMENA OR WHETHER IT IS THE RESULT OF CE RTAIN ABNORMAL CONDITIONS PREVAILING IN A PARTICULAR YEAR. IN ORDER TO DETERMINE SO, PROFIT MARGINS EARNED BY SUCH CONCERN IN THE PROXIMATE PRECEDING AND SUCCEEDING YEARS WOULD BE REQ UIRED TO BE CONSIDERED IN ORDER TO ESTABLISH WHETHER THE HIG H PROFIT MARGINS REFLECT A NORMAL BUSINESS TREND OR OTHERWISE. IN THIS ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 18 BACKGROUND OF THE MATTER, THE APPELLANT HAS FURNISHED BEFORE US THE OPERATING MARGIN TRENDS OF THE SAID CONCERN OVER THE FIVE FINANCIAL YEARS I.E. FOR THE THREE PRECEDING YEARS AND ONE SUCCEEDING FINANCIAL YEAR. NOTABLY, FOR THE FINANCIA L YEAR UNDER CONSIDERATION, THE MARGIN OF THE SAID CONCERN IS 34.7 1% WHEREAS FOR THE PRECEDING THREE FINANCIAL YEARS OF 2003-04, 200 4-05 AND 2005-06 IT IS -6.47%, -69.07% AND -44.21% RESPECTIVELY AND FOR THE SUBSEQUENT FINANCIAL YEAR OF 2007-08, THE MARGIN IS 3.67%. THE AFORESAID CLEARLY SUGGESTS A WIDE FLUCTUATION IN THE MARGINS EARNED BY THE SAID CONCERN OVER A PERIOD OF TIME. IN-FACT, A FURTHER ANALYSIS OF THE FINANCIAL DATA FOR THE AFORESAID YEA RS SUGGEST THAT THERE IS A WIDE FLUCTUATION IN THE REVENUE GENERATIO N OF THE SAID CONCERN DURING THE FINANCIAL YEAR UNDER CONSIDERATION AS COMPARED TO THE PAST THREE FINANCIAL YEARS. FOR THE S UBSEQUENT FINANCIAL YEAR, THE REVENUE GENERATION HAS TAKEN A DO WNWARD TREND WHICH AGAIN REFLECTS A WIDE FLUCTUATION. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE HAS REFE RRED TO THE ANNUAL REPORT OF THE SAID CONCERN FOR THE FINANCIAL YE AR UNDER CONSIDERATION TO POINT OUT THAT THE COMPANY HAS ACK NOWLEDGED A GROWTH OF 132.86% IN ITS REVENUE GENERATION AS COMPA RED TO THE IMMEDIATELY PRECEDING FINANCIAL YEAR. IN OUR CONSIDERED OPINION, THERE IS NO MATERIAL TO SAY THAT THE HIGH PROFIT MARG IN OF 34.71% DECLARED BY THE SAID CONCERN IN THE INSTANT FINANCIAL YEAR IS A NORMAL BUSINESS TREND. OSTENSIBLY, THE FINANCIAL RESULT S OF EITHER THE THREE PRECEDING FINANCIAL YEARS OR OF THE SUCCEED ING FINANCIAL YEAR DO NOT JUSTIFY THAT THE MARGIN OF 34.71% FOR TH E YEAR UNDER CONSIDERATION IS A NORMAL BUSINESS TREND. THUS, IN OUR CONSIDERED OPINION, THE INCLUSION OF THE SAID CONCERN IN THE FINA L SET OF COMPARABLES WOULD NOT LEND CREDIBILITY TO THE COMPARAB ILITY ANALYSIS AND THEREFORE IT DESERVES TO BE EXCLUDED. WE HOLD S O. 9. THE PLEA SETUP BY THE CIT(A), AND WHICH HAS BEEN REITERATED BEFORE US IS THAT THE POINT SETUP BY THE ASSESSEE WOULD INVOLVE CONSIDERATION OF MULTIPLE YEAR DATA OF THE CO MPARABLE WHEREAS THE TRANSFER PRICING ANALYSIS IS REQUIRED T O BE DONE BASED ON THE SINGULAR FINANCIAL YEAR DATA I.E. FINANCIAL YEAR DATA OF THE COMPARABLES RELEVANT TO THE YEAR IN WHICH THE I NTERNATIONAL TRANSACTIONS HAVE BEEN ENTERED INTO. IN OUR CONSIDE RED OPINION, THE AFORESAID PLEA OF THE REVENUE IS UNTENABLE HAVING REGARD TO THE ISSUE IN QUESTION. NO DOUBT, SUB-RULE (4) OF RULE 10 B OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES) PRESCRIB E THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL B E THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIO NAL TRANSACTION HAS BEEN ENTERED INTO. SO HOWEVER, THE AFORESAID RULE IS NOT ABSOLUTE INASMUCH AS PROVISO THEREOF PERMITS USE OF T HE DATA RELATING TO OTHER YEARS, SUBJECT TO THE CONDITION T HAT IT REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMIN ATION OF TRANSFER PRICES IN RELATION TO THE TESTED TRANSACTI ON. WE ARE ONLY POINTING OUT THE AFORESAID TO SAY THAT THE PROPOSIT ION BEING CANVASSED BY THE REVENUE THAT DATA OF THE FINANCIAL Y EAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO, ALONE AND ALONE, IS TO BE USED IS NOT AN ABSOLUTE PROPOSITION . NEEDLESS TO SAY, THE OBJECTIVE OF CARRYING OUT THE COMPARABI LITY ANALYSIS IS TO DETERMINE THE ARM'S LENGTH PRICE OF AN INTERNATIO NAL TRANSACTION BY MEANS OF EXAMINING SIMILARLY PLACED UNCONTROLLED TRANSAC TIONS. THEREFORE, IF ON FACTS, IT CAN BE ESTABLISHED THAT AD OPTION OF A ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 19 CERTAIN COMPARABLE WOULD LEAD TO SKEWED RESULTS OR THA T THE FINANCIAL DATA OF A PARTICULAR COMPARABLE IS OTHERWISE DEVOID OF CREDIBILITY, SUCH COMPARABLES WOULD DESERVE TO BE EXCLUD ED FROM THE LIST OF COMPARABLES EVEN IF SUCH AN EXERCISE INV OLVED EXAMINATION OF DATA OF THE COMPARABLES FOR MORE THAN ONE FINANCIAL YEAR. IN THE PRESENT CASE, AS OUR DISCUSSIO N IN THE EARLIER PARAS REVEAL, THE PROFIT MARGIN OF 34.71% FOR THE YEAR UNDER CONSIDERATION IS AN ABNORMAL BUSINESS TREND, A ND, ACCORDINGLY THE SAID CONCERN IS LIABLE TO BE EXCLUDED. THEREFORE, WE DO NOT FIND ANY FORCE IN THE PLEA OF THE REVENUE TO RETAIN THE SAID CONCERN IN THE FINAL LIST OF COMPARABLES. 10. IN CONCLUSION, WE SET-ASIDE THE ORDER OF THE CIT (A) ON THIS ASPECT AND DIRECT THE ASSESSING OFFICER TO EXCLUDE I NFORMED TECHNOLOGIES INDIA LTD. FROM THE FINAL LIST OF COMPARABLES. 33. THE MUMBAI BENCH OF THE TRIBUNAL IN NETHAWK NETWORKS INDIA PVT. LTD. VS. ITO IN ITA NO.7633/MUM/2012, DATED 06.11.2013 HAD ALSO EXCLUDED THE COMPANY BODHTREE CONSULTING LTD. AS IT WAS ENGAGED IN THE PRODUCTION OF SOFTWARE PRODUCTS AND ALSO BECAUSE NO SEGMENTAL DATA WAS ADEQUATELY AVAILABLE. THE SAID COMPAN Y WAS REJECTED AS IT WAS NOT ENGAGED IN THE SOFTWARE DEVELOPM ENT SERVICES AND THERE WAS NO SEGMENTAL DATA COMPARABLE WERE AVAILABLE. 34. WITH REGARD TO THE INCLUSION OF BODHTREE CONSULTING LTD ., THE OBJECTION RAISED BY THE ASSESSEE WAS ON TWO ACCOUNTS THAT FIRST IT WAS ENGAGED IN THE SALE OF SOFTWARE PRODUCTS AND NO SEGMENT AL DATA WAS AVAILABLE. HOWEVER, ON THE OTHER HAND, THE SAID COMPANY WAS PICKED UP BY THE ASSESSEE AS A COMPARABLE IN THE FINANCIAL YEAR 2008-09. WE FIND THAT THE PROFITS DECLARED BY THE SAID CONCERN OUGH T TO BE CONSIDERED WHILE SELECTING THE SAID COMPARABLES. THE PERUS AL OF THE RESULTS SHOWN BY THE SAID COMPANY REFLECTED HIGH MARGINS IN CERTAIN YEARS AND VERY LOW IN OTHER YEARS, WHICH DO NOT REFLECT N ORMAL BUSINESS CONDITIONS. CONSEQUENTLY, THE MARGINS OF THE SAID COMPANIES CANNOT BE APPLIED AS COMPARABLES WHILE BENCHMAR KING INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN IT SEGMENTS. ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 20 35. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE DURING THE COURSE OF ARGUMENTS HAD STATED THAT IF THE ASSESSEE WAS T O SUCCEED ON ITS PLEA OF EXCLUSION OF KALS INFORMATION SYSTEM LTD. A ND BODHTREE CONSULTING LTD. FROM THE FINAL SET OF COMPARABLE, THEN THE S TATED VARIATION BETWEEN ARMS LENGTH PRICE WORKED OUT BY THE TPO / DRP AND THE VALUE STATED VALUE OF THE INCOME WOULD FALL WITHIN +/ - 5% MARGIN AND THEREFORE, IN TERMS OF SECTION 94C(2) OF THE ACT , NO FURTHER ADJUSTMENT IN THE INTERNATIONAL TRANSACTIONS WOULD BE RE QUIRED TO BE MADE, THOUGH THE ASSESSEE DURING THE COURSE OF HEARING HAD RAISED VARIOUS ARGUMENTS IN RESPECT OF EXCLUSION OF OTHER COMPAN IES AND INCLUSION OF CERTAIN COMPANIES SELECTED BY WAY OF FRESH SEAR CH, BUT THE SAME ARE RENDERED AN ACADEMIC AND ARE NOT BEING ADJUD ICATED FOR THE PRESENT AS WE HAVE UPHELD THE PLEA OF THE ASSESSEE VIS- -VIS EXCLUSION OF KALS INFORMATION SYSTEM LTD. AND BODHTREE CONSULTING L TD. FROM THE FINAL SET OF COMPARABLES. WE ACCORDINGLY, DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE ARMS LENGTH PRICE OF THE TRANS ACTIONS OF ASSESSEE COMPANY WITH ITS AES APPLYING THE AVERAGE PRO FIT MARGIN OF REMAINING COMPARABLES AND IF THE DIFFERENCE BETWEEN THE AR MS PRICE LENGTH SO RECOMPUTED AND THE PRICE ACTUALLY CHARGED IS WITHIN THE LIMIT OF +/- 5%, THEN NO TRANSFER PRICING ADJUSTMENT IS TO BE M ADE. THE GROUNDS OF APPEAL RAISED BY ASSESSEE ARE THUS, ALLOWED FOR STATISTICAL PURPOSES. 36. THE OTHER ISSUE REMAINING FOR ADJUDICATION IS THE ADJUS TMENT MADE IN IT ENABLES SERVICED SEGMENT AT RS.3,04,35,314/-. 37. THE ASSESSEE WAS ALSO AGGRIEVED BY THE SELECTION OF CERTAIN COMPARABLES BY THE TPO IN THE ITES SEGMENTS. THE FIRST OBJECTION ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 21 RAISED BY THE ASSESSEE IS AGAINST THE INCLUSION OF M/S. CO RAL HUBS LTD (FORMERLY KNOWN AS VISHAL INFORMATION TECHNOLOGIES LTD.). TH E PLEA OF THE ASSESSEE WAS THAT THE SAID COMPANY, BESIDES PROVIDIN G IT ENABLED SERVICES, ALSO PROVIDES DIVERSIFIED ACTIVITIES LIKE DATA CAPTURE AND DIGITALIZATION, DATA CONVERSION, E-PUBLISHING, DIGITAL LIBRARY SOLUTIO NS, FUND ACCOUNTING SERVICES, ONLINE BOOKS STORES. BASED ON THE ANALYSIS OF THE RELEVANT FINANCIAL DATA, IT ALSO OUTSOURCED THE SERVIC ES TO THIRD PARTY VENDORS AND ACTED AS AN INTERMEDIARY BETWEEN TH E FINAL CUSTOMER AND THE VENDOR. ACCORDINGLY, THE COMPANY WA S NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEES ITES SEGMENT. FURTHER, THE SAID COMPANY HAD MADE SIGNIFICANT PAYMENTS TOWARDS VENDOR. 38. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSE SSEE POINTED OUT THAT THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSM ENT YEARS 2007-08 AND 2006-07, HAD REJECTED M/S. VISHAL INFORMATIO N TECHNOLOGIES LTD. ON ACCOUNT OF BEING FUNCTIONALLY NON-CO MPARABLE TO THE ASSESSEES ITES SEGMENT SINCE THE SAID COMPANY PR OVIDED HIGH END SERVICES. FURTHER, RELIANCE WAS PLACED ON THE RATIO LA ID DOWN IN CUMMINS TURBO TECHNOLOGIES LTD., UK IN ITA NO.161 & 269/ PN/2013 RELATING TO ASSESSMENT YEAR 2007-08 AND 2008-09, ORDER DATED 29.09.2014, WHEREIN THE TRIBUNAL HAD HELD THE SAID COMPANY TO HAVE SIGNIFICANTLY OUTSOURCED ITS BUSINESS. OUR ATTENTION WAS D RAWN TO THE ANNUAL REPORTS OF THE SAID COMPANY PLACED AT PAGES 503 AND 504 OF THE PAPER BOOK. 39. THE NEXT OBJECTION RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS AGAINST THE INCLUSION OF ACCENTIA TECHNOLOGIES LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID COMPANY RENDERS ME DICAL ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 22 TRANSCRIPTION SERVICES, MEDICAL CODING, MEDICAL BILLING, RECEIVABLE S MANAGEMENT WITH RESPECT TO THE HEALTHCARE RECEIVABLES C YCLE MANAGEMENT SECTOR. FURTHER, THE SAID COMPANY DEVELOPS ITS OWN SOFTWARE PRODUCTS AND OWNS INTANGIBLES IN THE FORM OF GOOD WILL. SUCH SOFTWARE PRODUCTS WERE PRIMARILY THE PLATFORMS REQUIRED FOR RENDERING MEDICAL TRANSCRIPTION SERVICES. 40. IT WAS POINTED OUT BY THE LEARNED AUTHORIZED REPRE SENTATIVE FOR ASSESSEE THAT THE ASSESSEE DOES NOT HAVE ANY SUCH S OFTWARE PRODUCTS OR INTANGIBLES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE SAID COMPANY HAD MADE CER TAIN ACQUISITIONS DURING THE YEAR, WHICH IN TURN HAD AFFECTED ITS MARGINS FOR THE YEAR UNDER CONSIDERATION. THE LEARNED AUTHORIZED RE PRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT HYDERABAD BE NCH OF THE TRIBUNAL IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA ) PVT. LTD. IN ITA NO.1961/HYD/2011, HAD REJECTED ACCENTIA TECHNOLOG IES LTD. FOR HAVING EXTRA-ORDINARY CIRCUMSTANCES (AMALGAMATION). THUS, THE TRIBUNAL HELD THAT EXTRA-ORDINARY EVENT LIKE MERGER AND DE-MERGER WILL HAVE AN EFFECT ON THE PROFITABILITY OF THE COMPANY IN THE FINA NCIAL YEAR IN WHICH SUCH EVENT TAKES PLACE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER DREW OUR ATTEN TION TO THE LIST OF SERVICES PROVIDED BY THE SAID COMPANY AND THE NATURE O F THE ACTIVITIES AND THE LIST OF PRODUCTS AS PER THE FINANCIAL STATEMENTS O F THE SAID COMPANY PLACED AT PAGES 505 TO 507 OF THE PAPER BOOK. 41. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASS ESSEE IS ALSO AGGRIEVED BY THE INCLUSION OF ECLERX SERVICES LTD. AS A C OMPARABLE. THE GRIEVANCE OF THE ASSESSEE WAS THAT THE TPO HAD OBSERVE D THAT BOTH BPO AND KPO SERVICES WERE SIMILAR IN NATURE AND HENCE T HE SAID ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 23 COMPANIES WERE FUNCTIONALLY COMPARABLE TO THE ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID COMPANY WAS REJECTED BY THE TPO IN ITS STUDY RELATING T O ASSESSMENT YEAR 2008-09 ON ACCOUNT OF HAVING SUPER PROFITS AND THE SAME WAS ALSO NOT PART OF THE FINAL SET OF COMPANIES ACCEPTED BY DR P IN ASSESSMENT YEAR 2008-09. THE LEARNED AUTHORIZED REPRE SENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE SAID COMPANY WAS A KNOWLEDGE PROCESS OUTSOURCING (KPO) COMPANY ENGAGED IN P ROVIDING DATA ANALYTICS AND DATA PROCESS SOLUTIONS TO THE CUSTO MERS BASED ON THE ANNUAL REPORT FOR FINANCIAL YEAR 2008-09. ECLERX SUPP ORTS CORE AND COMPLEX ACTIVITIES FOR ITS CLIENTS USING PROPRIETARY PR OCESSES AND A SCALABLE OFFSHORE DELIVERY MODEL. THE PLEA OF THE ASSESSEE WAS THAT THE SAID COMPANY WAS TO BE REJECTED ON ACCOUNT OF HAVING S UPER PROFITS AND ALSO BECAUSE IT WAS ENGAGED IN PROVIDING KPO SERVICES . RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE SPECIAL BENCH OF THE MUMBAI IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD. IN IT A NO.7466/MUM/2012 (SB). 42. THE NEXT COMPARABLE PICKED UP BY THE TPO WAS COS MIC GLOBAL LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASS ESSEE POINTED OUT THAT EITHER BEFORE THE TPO OF DRP, THE ASSESSEE HAD NOT CONTESTED THE REJECTION OF THE SAID COMPANY, BUT HOWEVER, IT HAD CO ME ACROSS CERTAIN DECISIONS, WHEREIN THE SAID COMPANY HAD BEEN REJE CTED ON ACCOUNT OF HAVING DIFFERENT BUSINESS MODEL. IT WAS FURTHER POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESS EE THAT EVEN THOUGH THE ASSESSEE HAD NOT CHALLENGED THE INCLUSION OF S AID COMPARABLES IN THE TP STUDY REPORT, BUT THE SAME COULD BE CHALLENGED BEFORE THE TRIBUNAL AS HAS BEEN LAID DOWN BY THE SPECIAL BENCH OF THE ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 24 TRIBUNAL IN THE CASE OF DCIT VS. M/S. QUARK SYSTEMS PV T. LTD. IN ITA NO.115/CHD/2009 (SB), ORDER DATED 22.10.2009. 43. ANOTHER OBJECTION RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT CERTAIN COMPA NIES WERE IDENTIFIED BY THE ASSESSEE AS BEING FUNCTIONALLY COMPARABLE AS PER THE FRESH SEARCH CONDUCTED AND THE SAME SHOULD HAVE BEEN CONSIDERED BY THE TPO IN THE TP STUDY. IT WAS THE PLEA OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE SAID COMPARAB LES HAVE ARBITRARILY BEEN REJECTED BY THE TPO. HOWEVER, THE LEAR NED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FAIRLY ADMITTED THAT THE ISSUE MAY BE SENT BACK TO THE TPO FOR CONSIDERING THE SAID COMPARABLE S SELECTED BY THE ASSESSEE IN ITS FRESH STUDY. 44. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REV ENUE HAD PLACED RELIANCE ON THE ORDERS OF TPO AND DRP. 45. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E RECORD. IN THE TP STUDY CARRIED OUT BY THE TPO IN THE ITES SEGME NTS, FRESH SEARCH CRITERIA WERE APPLIED BY THE TPO AND LIST OF COMPA RABLES WHICH WERE NOT SELECTED BY THE ASSESSEE WERE PICKED UP IN TH E TP STUDY AND THE MARGINS OF THE SAID COMPARABLES WERE APPLIED TO DETER MINE THE ARMS LENGTH PRICE OF THE TRANSACTIONS OF THE ASSESSEE IN ITES SEGMENTS. THE ASSESSEE WAS AGGRIEVED BY THE SELECTION OF THE SAID COMPARABLES AND THE PLEA OF THE ASSESSEE WAS THAT IN CA SE SAID COMPARABLES WERE NOT INCLUDED IN THE TP STUDY, THE MARGIN S SHOWN BY THE ASSESSEE WOULD BE AT ARMS LENGTH. THE FIRST COMPAR ABLE REFERRED TO BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASS ESSEE WAS M/S. VISHAL INFORMATION TECHNOLOGIES LTD. THE SAID COMPANY WAS PROVIDING ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 25 IT ENABLED SERVICES AND WAS ALSO ENGAGED IN OTHER DIVERS IFIED ACTIVITIES. FURTHER, IT HAS OUTSOURCED ITS SERVICES TO THIRD PARTY VENDOR AND ACTED AS INTERMEDIARY BETWEEN THE FINAL CUSTOMER AND THE VENDO R. THE ASSESSEE ON THE OTHER HAND WAS ENGAGED IN THE RUNNING OF A CALL CE NTRE AND WAS PROVIDING TECHNICAL SUPPORT TO ITS AES. WE FIND TH AT THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT Y EAR 2006-07 IN ITA NO.1346/PN/2010 AND IN ASSESSMENT YEAR 2007-08 IN ITA NO.1605/PN/2011 HAD EXCLUDED THE SAID COMPARABLES OBSER VING AS UNDER: 30. THE NEXT POINT RAISED BY THE ASSESSEE IS AGAIN ST THE INCLUSION OF VISHAL INFORMATION TECHNOLOGIES LTD., APPEAR ING AT ITEM (10) IN THE TABULATION IN PARA 25 AS A COMPARABLE CASE. THE TPO HAS DISCUSSED THE ISSUE IN PARA 6.9.6. OF THE ORDE R. AS PER THE TPO, THE SAID CONCERN IS FUNCTIONALLY COMPARABLE TO THE IT- ENABLED SERVICES SEGMENT OF THE ASSESSEE AND FOR THAT RE ASON, THE SAID CONCERN HAS BEEN INCLUDED AS A COMPARABLE FOR TH E PURPOSES OF COMPARABILITY ANALYSIS. IN THIS CONNECTION, THE PLEA SET UP BY THE ASSESSEE IS THAT THE SAID CONCERN IS ENGAGED IN NOT ONLY IT- ENABLED SERVICES, BUT ALSO IN PROVIDING QUALITY PRODUCTS A ND IN THE CREATION OF ANIMATED FILMS AND BOOKS. IT HAS ALSO BEE N ASCERTAINED BY REFERRING TO THE ANNUAL REPORT OF THE SAID CONCERN THAT IT IS ENGAGED IN PROVIDING AGENCY SERVICES BY W AY OF OUTSOURCING THE SERVICES TO THIRD PARTY VENDORS AND ACTING AS AN INTERMEDIARY BETWEEN THE FINAL CUSTOMER AND THE VENDO R. THE ASSESSEE FURNISHED DETAILED SUBMISSIONS IN THIS REGA RD BEFORE THE LOWER AUTHORITIES, COPIES OF WHICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 420.8 TO 420.31. BY REFERRING TO TH E WRITTEN SUBMISSIONS, IT IS ALSO SOUGHT TO BE POINTED OUT THAT THE INTERMEDIARY FUNCTIONS PERFORMED BY THE SAID CONCERN CAN BE COMPARED TO THAT OF A DISTRIBUTOR WHICH TAKES TITLE TO SERVICE/PRODUCT FOR RESALE TO THE CUSTOMERS. THE AFO RESAID ASSERTION IS SOUGHT TO BE SUBSTANTIATED BY THE DETAI LS OF PAYMENTS MADE BY THE SAID CONCERN FOR DATA ENTRY AND VENDOR PAYMENTS, PERSONNEL COSTS AND SALES. IT IS, THEREFORE, CONTENDED THAT THE SAID CONCERN IS FUNCTIONALLY DISSIMILAR TO THAT OF T HE IT-ENABLED SERVICES SEGMENT OF THE ASSESSEE. IT HAS ALSO BEEN A RGUED THAT THE SAID CONCERN HAS EARNED SUPERNORMAL PROFITS AS HIGH AS 59.19% AND THEREFORE, THE SAME IS NOT INCLUDIBLE IN THE LIST OF COMPARABLES SO AS TO AVOID SKEWING OF THE COMPARABILI TY ANALYSIS. ON THE OTHER HAND, THE STAND OF THE REVENUE AS BROUGHT OUT BY THE TPO IN PARA 6.9.6. OF THE ORDER IS TO THE E FFECT THAT THE SAID CONCERN BEING CATEGORIZED AS AN IT-ENABLED SERVI CES CONCERN, THE SAME IS LIABLE TO BE INCLUDED. 31. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ON THIS ASPECT. AT THE OUTSET, WE MAY REFER TO PAGE 810 OF T HE PAPER BOOK, WHEREIN THE NOTES TO ACCOUNTS FOR THE YEAR END ED 31.3.2007 OF THE SAID CONCERN HAVE BEEN PLACED. AS PER THE A VAILABLE ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 26 INFORMATION, THE SAID CONCERN HAS RELATED PARTY TRANS ACTIONS AS REPORTED BY THE CONCERN AT PARA 7 OF THE SAID NOTES AT 86.92%, WHICH BREACHES THE RPT FILTER. FURTHERMORE, THE FUN CTIONAL PROFILE OF THE SAID CONCERN BROUGHT OUT BY THE ASSESSEE ALSO REVEALS DIFFERENTIATION IN THE ACTIVITY PROFILE. THE TPO, IN OUR VIEW, HAS NOT APPRECIATED THE QUALITATIVE DIFFERENCE IN THE FUN CTIONS PERFORMED BY THE SAID CONCERN AS SOUGHT OUT TO BE BR OUGHT OUT BY THE ASSESSEE. CONSIDERING THE AFORESAID, WE THEREFO RE, FIND THAT THE ASSESSEE WAS JUSTIFIED IN ASCERTAINING THAT THE SAID CONCERN BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REAS ONS CANVASSED. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS. 46. THE TRIBUNAL IN THE ASSESSEES OWN CASE HAD HELD THA T THE SAID CONCERN WAS FOUND TO BE OPERATING IN DIFFERENT FUNCTIONAL ENVIRONMENT AND THE SAME WAS EXCLUDED FOR THE PURPOSE OF COMPARABILIT Y ANALYSIS. FOLLOWING THE RATIO LAID DOWN BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEARS 2006-07 AND 2007-08 (SUPRA), WE UPH OLD THE PLEA OF THE ASSESSEE IN EXCLUDING THE MARGINS OF THE SAID CONCERN M/S. VISHAL TECHNOLOGIES LTD. 47. THE NEXT OBJECTION OF THE LEARNED AUTHORIZED REPRESE NTATIVE FOR THE ASSESSEE WAS WITH REGARD TO THE INCLUSION OF M/S. AC CENTIA TECHNOLOGIES LTD. WHICH ADMITTEDLY WAS ENGAGED IN DEVELOP ING ITS OWN SOFTWARE PRODUCTS AND WAS RENDERING MEDICAL TRANSCRIPTION SERVICES. FURTHER, THE SAID COMPANY DURING THE YEAR UNDER CONSIDE RATION HAD MADE CERTAIN ACQUISITIONS WHICH IN TURN AFFECTED THE MARGIN S OF THE YEAR OF THE ACQUISITION. WE FIND THAT HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LT D. (SUPRA) HAD REJECTED ACCENTIA TECHNOLOGIES LTD. FOR HAVING EXTRA -ORDINARY CIRCUMSTANCES I.E. AMALGAMATION. FOLLOWING THE PARITY OF REASO NING AS ADOPTED BY THE HYDERABAD BENCH OF THE TRIBUNAL, WE HOLD THAT THE SAID COMPANY HAD DIFFERENT FUNCTIONAL PROFILE AS COMPARED TO THE ASSESSEE, WHICH IN TURN EXPLAINED THE ABNORMALLY HIGH PROFIT MARGINS EARNED BY THE SAID COMPANY AS COMPARED TO THE ASSESS EE. ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 27 ACCORDINGLY, WE ACCEPT THE PLEA OF THE ASSESSEE AND HOLD THAT THE SAID COMPANY IS NOT TO BE USED AS COMPARABLE IN ITES SEGMEN TS OF THE ASSESSEE. 48. THE NEXT OBJECTION OF THE ASSESSEE WAS THAT WITH RE GARD TO INCLUSION OF ECLERX SERVICES LTD. WHICH ADMITTEDLY WAS ENGAG ED IN PROVIDING KPO SERVICES I.E. KNOWLEDGE PROCESS OUTSOURCING, W HEREAS THE ASSESSEE WAS ENGAGED IN BPO SERVICES. THE SPECIAL B ENCH OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. L TD. (SUPRA) VIDE ORDER DATED 21.08.2014 HAD EXCLUDED THE SAID COMPA NY AS A COMPARABLE WHILE DETERMINING THE MARGINS UNDER ITES SEGME NTS. THE SPECIAL BENCH OF THE TRIBUNAL VIDE PARAS 82 AND 83 AT PAG ES 73 AND 74 OF THE ORDER, HAD OBSERVED AS UNDER:- KEEPING IN VIEW THE NATURE OF SERVICES RENDERED BY M/S ECLERX SERVICES PVT. LTD. AND ITS FUNCTIONAL PROFILE, WE ARE OF THE VIEW THAT THIS COMPANY IS ALSO MAINLY ENGAGED IN PROVIDING HI GH-END SERVICES INVOLVING SPECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD AND THE SAME CANNOT BE COMPARED WITH THE AS SESSEE COMPANY WHICH IS MAINLY ENGAGED IN PROVIDING LOW-END SERVICES TO THE GROUP CONCERNS. 49. FOLLOWING THE SAME PARITY OF REASONING, WE DIRECT THE TP O TO EXCLUDE M/S. ECLERX SERVICES LTD. AS COMPARABLE. 50. THE NEXT COMPANY AS PER THE ASSESSEE WHICH SHOULD NOT BE TAKEN AS COMPARABLE IS COSMIC GLOBAL LTD. ADMITTEDLY, THE ASSESSEE HAD NOT OBJECTED TO ITS INCLUSION EITHER BEFORE THE TPO O R DRP. HOWEVER, THE ASSESSEE CHALLENGED THE EXCLUSION OF THE SAID COMPANY AS COMPARABLE BEFORE THE TRIBUNAL. 51. WE FIND THAT THE SPECIAL BENCH OF CHANDIGARH TRIBUNAL IN THE CASE OF QUARK SYSTEMS PVT. LTD. (SUPRA) HAD HELD THAT EV EN IF THE ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 28 ASSESSEE HAD NOT CHALLENGED THE INCLUSION OF THE COMPARAB LE BEFORE THE AUTHORITIES BELOW, THE SAME COULD BE CHALLENGED BEFORE THE TRIBUNAL FOR THE FIRST TIME. ACCORDINGLY, WE HOLD THAT THE ASSESSEE AT THIS POINT CAN RAISE THE SAID ISSUE. NOW, THE SECOND PART OF THE OBJECTION WAS THAT THE COMPANY HAD OUTSOURCED ITS VEN DOR AND WAS MAKING HIGH VENDOR PAYMENTS AS COMPARED TO THE SALES A ND HENCE WAS NOT COMPARABLE. WHILE ADJUDICATING THE EXCLUSION OF M/S . VISHAL INFORMATION TECHNOLOGIES LTD., WE HAVE IN PARAS HEREINABOVE ALREADY CONSIDERED THIS ASPECT OF THE COMPANIES OUTSOURCING TO V ENDORS AND HELD M/S. VISHAL INFORMATION TECHNOLOGIES LTD. TO BE NOT FU NCTIONALLY COMPARABLE. FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT M/S. COSMIC GLOBAL LTD. IS NOT FUNCTIONALLY COMPARABLE. 52. AN OMINOUS OBJECTION WAS RAISED BY THE ASSESSEE WIT H REGARD TO NON-CONSIDERATION OF THE FOLLOWING COMPARABLES BY THE TPO:- SR. NO. COMPANY ADJUSTED OP/TC OF COMPARABLES CONSIDERED BY LD. TPO OP/TC OF COMPARABLES CONSIDERED BY THE ASSESSEE 8 INFORMED TECHNOLOGIES LTD - 26.22% 9 OMEGA HEALTHCARE MANAGEMENT SERVICES PVT. LTD - 17.64% 10 CAMEO CORPORATE SERVICES LTD. - 21.51% 11 GEBBS INFOTECH LTD - 19.58% 12 TECHPROCESS SOLUTIONS LTD (PROCESSING SEGMENT) - 24.57% 13 IN HOUSE PRODUCTION LTD. (HEALTHCARE SEGMENT) - 5.44% 14 AOK IN HOUSE BPO SERVICES LTD - 14.57% 15 AEGIS BPO SERVICES (GURGAON) LTD (BPO SEGMENT) - 7.44% 16 DELTA SERVICES (I) PVT. LTD. - 8.33% 17 PROFESSIONAL MANAGEMENT CONSULTANTS PVT. LTD. 18.01% 53. IN THIS CONTEXT, IT WAS EXPLAINED THAT SINCE THE ADOPT ION OF MULTIPLE YEARS DATA OF THE COMPARABLES BY THE ASSESSEE IN ITS TRANSFER ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 29 PRICING STUDY WAS NOT ACCEPTED BY THE TPO, ASSESSEE WA S REQUIRED TO RE-WORK THE COMPARABILITY ANALYSIS ON THE BASIS OF THE FINA NCIAL DATA OF THE COMPARABLES PERTAINING TO THE PERIOD UNDER CONSIDERA TION. MOREOVER, IN THE COURSE OF THE TRANSFER PRICING ASSESSME NT, THE TPO MODIFIED CERTAIN FILTERS AND EVEN FOR THIS REASON, ASSESSEE W AS REQUIRED TO CONDUCT A FRESH SEARCH. THE AFORESAID COMPARABLES WE RE FOUND FUNCTIONALLY COMPARABLE BY THE ASSESSEE AND BEFORE THE T PO, IT WAS SUBMITTED THAT THE SAME BE CONSIDERED. THE TPO HAS RE JECTED THE SAME MERELY FOR THE REASON THAT SUCH COMPARABLES WERE NOT A PART OF THE ORIGINAL TRANSFER PRICING STUDY CARRIED OUT BY THE ASSESSEE. 54. HAVING REGARD TO THE AFORESAID DISCUSSION, WE FIND THAT THE TPO WRONGLY REJECTED THE AFORESAID COMPARABLES WITHOUT EVEN EXAMINING AS TO WHETHER THEY ARE FUNCTIONALLY COMPARABLE OR NOT. IF A T ALL THE TPO WAS TO REJECT THE SAME, IT WAS IMPERATIVE FOR HIM TO EXA MINE ALL THE COMPARABLES IN THE LIGHT OF THE FAR ANALYSIS AND ONLY THE REAFTER REJECT THE SAME AFTER PASSING A SPEAKING ORDER. IN THE ABSENC E OF SUCH AN APPROACH BY THE TPO, IN OUR VIEW, THE COMPARABILITY ANALYS IS CARRIED OUT BY HIM IS VITIATED. THE LEARNED AUTHORIZED REPRESENTA TIVE FOR THE ASSESSEE SUBMITTED IN THE COURSE OF HEARING THAT ASSESS EE WOULD BE SATISFIED AT THE STAGE IF THE MATTER IS SENT BACK TO THE AO / TPO TO EXAMINE THE FUNCTIONAL COMPARABILITY OF THE AFORESAID COMPARABLES AND DECIDE THE ISSUE ON MERITS. IN THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES, WE DEEM IT FIT TO RESTORE THIS ASPECT OF THE ISSUE BAC K TO THE FILE OF THE AO / TPO, WHO SHALL CONSIDER THE AFORESAID CO MPANIES PICKED UP BY WAY OF FRESH SEARCH CARRIED OUT IN ITES SEG MENTS. REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE S HOULD BE GIVEN IN THIS REGARD. THE SAID ISSUE WITH RESPECT TO DETERMINA TION OF ARMS LENGTH PRICE IN ITES SEGMENT IS THUS, SET ASIDE TO THE FILE OF AO / TPO ITA NO.336/PN/2014 PTC SOFTWARE (INDIA) PVT. LTD. 30 AND THE GROUND OF APPEAL RAISED BY THE ASSESSEE IN THIS REGARD IS THUS, ALLOWED FOR STATISTICAL PURPOSES. 55. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER, 2014. SD/- SD/- (G.S. PANNU) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 31 ST OCTOBER, 2014. GCVSR COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE; 4) THE DR A BENCH, I.T.A.T., PUNE; 5) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE