Mrs. Suvina Krupal, Somwarpet V. ITO, Madikeri

ITA 337/BANG/2014

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7362 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 27-04-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 11-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJEET SINGH
• Assessee Lawyers: L BARATH
• Keywords: Related party transaction; Business income; Transfer pricing; Principle of natural justice; International transaction; Condonation of delay
• Section: 92C; 92D; 92B; 133(6); 64; 13; 119; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NOS.337/BANG/2014 ASSESSMENT YEAR : 2005-06 M/S COREONE TECHNOLOGIES INDIA PVT. LTD., (FORMERLY KNOWN AS M/S CAPCO IT SERVICES INDIA PVT. LTD) MOBIUS TOWER, 2 ND FLOOR, SJRIPARK, EPIP ZONE I, WHITEFILED, BANGALORE-560 066. PAN : AACCC 1734 G VS. THE COMMISSIONER OF INCOME-TAX (APPEALS)-IV, BANGALORE. APPELLANT RESPONDENT IT(TP)A NO.204/BANG/2014 ASSESSMENT YEAR : 2005-06 THE INCOME-TAX OFFICER, WARD-2(1)(1), BANGALORE-560 052. VS. M/S COREONE TECHNOLOGIES INDIA PVT. LTD., (FORMERLY KNOWN AS M/S CAPCO IT SERVICES INDIA PVT. LTD) SYMPHONY INFOSPACE, 6 TH FLOOR, BLOCK 5A, PRITECH SEZ, VARTHUR HOBLI, OUTER RING ROAD, BELLANDUR, BANGALORE-560 037. PAN : AACCC 1734 G APPELLANT RESPONDENT PAGE 2 OF 28 ITA NO.337 & 204/BANG/2014 APPELLANT BY : SHRI L BARATH, C.A RESPONDENT BY : SHRI MANJEET SINGH, ADDL. CIT DR DATE OF HEARING : 17-06-2020 DATE OF PRONOUNCEMENT : 14-08-2020 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT CROSS APPEALS HAS BEEN FILED BY A SSESSEE AS WELL AS REVENUE AGAINST ORDER DATED 22/01/2009 PASSED BY LD .CIT(A)-4, BANGALORE FOR ASSESSMENT YEAR 2005-06 ON FOLLOWING GROUNDS OF APPEAL. LD.AR SUBMITTED THAT ON 09/05/2018, ASSESSE E FILED REVISED GROUNDS IN ASSESSEES APPEAL WHICH NEEDS TO BE CONSIDERED. ITA (TP) A NO.337/B/2014 I. TRANSFER PRICING 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN DETERMINING AN ADJUSTMENT OF RS.13,718,665/- TO THE ARMS LENGTH PR ICE OF THE APPELLANTS INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES, WITH RESPECT TO THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE APPE LLANT U/S 92CA OF THE INCOME TAX ACT. 2. THE LEARNED ASSESSING OFFICER/LEARNED TRANSFER P RICING OFFICER ERRED IN NOT GIVING ANY EFFECT TO THE DIRECTIONS PROVIDED BY LEA RNED CIT(A) IN THE CIT ORDER DATED 03 JANUARY 2014 WITH RESPECT TO THE TURNOVER FILTER AND THE FOREIGN EXCHANGE EARNINGS / LOSSES. 3. THE LEARNED CIT(A) ERRED IN REJECTING THE TRANSF ER PRICING DOCUMENTATION MAINTAINED BY THE APPELLANT BY INVOKING PROVISIONS OF SUB-SECTION (3) OF 92C OF THE ACT CONTENDING THAT THE INFORMATION OR DATA USE D IN THE COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT. IN DO ING SO: 3(A) THE LEARNED CIT(A) ERRED IN REJECTING THE SET OF FILTERS APPLIED BY THE APPELLANT IN THE TP DOCUMENTATION AND IN INTRODUCIN G ADDITIONAL FILTERS FOR SELECTION/ REJECTION OF COMPANIES AS COMPARABLE TO THE APPELLANT. 3(B) THE LEARNED CIT(A) ERRED IN REJECTION OF COMPA RABILITY ANALYSIS CARRIED IN THE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMP ARABILITY ANALYSIS BASED ON APPLICATION F ADDITIONAL FILTERS IN DETERMINING THE ARMS LENGTH PRICE. 3(C) THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTI ON OF LEARNED TPO OF CONSIDERING 25 PERCENT AS THE THRESHOLD LIMIT FOR T HE RELATED PARTY PAGE 3 OF 28 ITA NO.337 & 204/BANG/2014 TRANSACTIONS FILTER AS THIS NUMBER IS AN ARBITRARY NUMBER AND HAS BEEN ADOPTED WITHOUT ANY REASONABLE BASIS. 3(D) THE LEARNED CIT(A) ERRED IN REJECTING COMPANIE S THAT ARE COMPARABLE TO THE APPELLANT WHILE PERFORMING THE COMPARABILITY ANALYS IS AND ERRED IN INCLUDING COMPANIES WHICH DO NOT SATISFY THE TEST OF COMPARAB ILITY. 3(E) THE LEARNED CIT(A) OUGHT TO HAVE EXCLUDED THE FOLLOWING COMPANIES FROM THE AMBIT OF COMPARABLE COMPANIES ON THE GROUND OF NOT SATISFYING THE TEST OF COMPARABILITY DUE TO DIFFERENCE IN FUNCTIONS: EXENSYS SOFTWARE SOLUTIONS LTD.; SANKHYA INFOTECH; FOUR SOFT LTD.; THIRDWARE SOLUTION LTD.; GEOMETRIC SOFTWARE SOLUTION CO. LTD.; AND TATA ELXI LTD. 3(F) THE LEARNED CIT(A), EVEN THOUGH HAS EXCLUDED T HE FOLLOWING COMPANIES ON THE GROUND OF TURNOVER FILTER, HAS ERRED IN NOT ADJUDICATING ON THE ISSUE THAT THESE COMPANIES ARE FUNCTIONALLY NOT COMPARABL E: - FLEXTRONICS; L&T INFOTECH LTD.; SATYAM COMPUTERS SERVICES LTD.; INFOSYS TECHNOLOGIES LTD.; AND IGATE GLOBAL SOLUTIONS LTD. 4. THE LEARNED CIT(A) ERRED IN NOT APPLYING MULTIPL E YEAR / PRIOR YEAR DATA FOR COMPARABLE COMPANIES WHILE DETERMINING ARM'S LE NGTH PRICE. 5. THE LEARNED CIT(A) ERRED IN USING DATA AS AT THE TIME OF ASSESSMENT PROCEEDINGS, INSTEAD OF THAT AVAILABLE AS ON THE DA TE OF PREPARING THE TP DOCUMENTATION FOR COMPARABLE COMPANIES WHILE DETERM INING ARM'S LENGTH PRICE. 6. THE LEARNED CIT(A) ERRED IN IGNORING THE LIMITED RISK NATURE OF THE CONTRACTUAL SERVICES PROVIDED BY THE APPELLANT AND IN NOT PROVIDING AN APPROPRIATE ADJUSTMENT TOWARDS THE RISK DIFFERENTIA L, EVEN WHEN THE FULL- FLEDGED ENTREPRENEURIAL COMPANIES ARE SELECTED AS C OMPARABLE COMPANIES. 7. THE APPELLANT RETAINS THE RIGHT TO HAVE THE BENE FIT OF APPLYING THE RANGE OF +/-5% IN DETERMINATION OF THE ARM'S LENGTH PRICE . ADDITIONAL GROUND 8. THE AO/TPO ERRED IN NOT EXCLUDING BODHTREE CONSU LTING LTD. FROM THE LIST OF COMPARABLE COMPANIES SELECTED BY THE TPO WITHOUT APPRECIATING THAT THE SAD COMPARABLE COMPANY IS FUNCTIONALLY DISSIMILAR. THE APPELLANT CRAVES LEAVE TO ADD, ALTER AND MODIFY THE ABOVE GROUNDS DURING THE COURSE OF THE 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. ITA NO.204/B/2014 PAGE 4 OF 28 ITA NO.337 & 204/BANG/2014 1. THE ORDER OF THE CIT (A) IS OPPOSED TO LAW AND T HE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT (A) ERRED IN DIRECTING THE AO TO COMPUTE THE MARGIN OF BOTH THE ASSESSEE AS WELL AS THE COMPARABLE COMPANIES BY INC LUDING THE FOREIGN EXCHANGE GAINS OR LOSS WITHOUT APPRECIATING THE FAC T THAT THE FOREIGN EXCHANGE LOSS OR GAIN THOUGH ATTRIBUTABLE TO OPERAT ING ACTIVITY IS NOT DERIVED BY THE OPERATING ACTIVITY. 3. THE CIT (A) ERRED IN DIRECTING THE AO TO COMPUTE THE MARGIN OF BOTH THE ASSESSEE AS WELL AS THE COMPARABLE COMPANIES BY INC LUDING THE FOREIGN EXCHANGE GAINS OR LOSS WITHOUT APPRECIATING THE FAC T THAT OPERATIONAL EXPENSES ARE THOSE EXPENSES WHICH ARE INCURRED TO E ARN THAT INCOME AND THAT FOREIGN EXCHANGE LOSS OR GAIN CANNOT BE SAID T O BE ONE REALIZED FROM INTERNATIONAL TRANSACTION THOUGH THEY FORM PART OF THE GAIN/LOSS OF THE ENTERPRISE AND THEREFORE THEY SHOULD BE EXCLUDED WH ILE DETERMINING THE OPERATIONAL COST. 4. THE CIT (A) ERRED IN NOT APPRECIATING THE FACT T HAT IF ANY FILTER OR CRITERIA APPLIED BY THE ASSESSEE IS ACCEPTED OR IF ANY FILTE R OR CRITERIA APPLIED BY THE TPO IS RELAXED, THE ENTIRE ACCEPT / REJECT MATRIX C HANGES RESULTING IN A NEW SET OF COMPARABLES INCLUDING THOSE COMAPARABLES WHI CH ARE NEITHER TAKEN BY THE ASSESSEE OR THE TPO AND WHICH DO NOT FIND A PLA CE IN THE ORDER UNDER SECTION 92CA. 5. THE CIT(A) ERRED IN DIRECTING THE AO TO VERIFY W HETHER THE ASSESSEE/ COMPARABLE HAVE BEEN CLAIMING DEFERRED REVENUE EXPE NDITURE OVER THE PAST THREE YEARS AND THEREAFTER APPLY THE PRINCIPLES EME RGING FROM THE ORDERS OF THE DELHI BENCH OF THE HON'BLE TRIBUNAL IN HAWORTH (INDIA) P. LTD. V DEPUTY COMMISSIONER OF INCOME-TAX (11 ITR (TRIB) 757) AND THE BANGALORE BENCH OF THE HON'BLE TRIBUNAL IN TRILOGY E-BUSINESS SOFTWARE V DEPUTY COMMISSIONER OF INCOME-TAX (23 ITR (TRIB) 464) WITHOUT APPRECIAT ING THE FACT THAT THE DIRECTIONS ISSUED ARE BEYOND THE MANDATE OF THE PRO VISIONS OF SEC.25(1)(A) OF THE ACT WHICH DOES NOT EMPOWER THE CIT(A)L TO SET A SIDE THE ISSUE. 6. THE CIT(A) ERRED IN DIRECTING THE AO TO FOLLOW T HE RATIO LAID DOWN BY THE HON'BLE COURT IN THE CASE OF TATA ELXSI LIMITED 349 ITR 98 AND EXCLUDE THE DATA LINK CHARGES OF RS. 21,27,178/- FROM THE TOTAL TURNOVER ALSO WHILE COMPUTING THE DEDUCTION U/S. 10A OF THE I.T. ACT AS THE DECISION OF THE HON'BLE HIGH COURT IS BINDING, WITHOUT APPRECIATING THE FACT THAT THERE IS NO PROVISION IN SECTION 10A THAT SUCH EXPENSES SHOULD BE REDUCED FROM THE TOTAL TURNOVER ALSO, AS CLAUSE (IV) OF THE EXPLANATION TO SECTION 10A PROVIDES THAT SUCH EXPENSES ARE TO BE REDUCED ONLY FROM THE EXPOR T TURNOVER. 7. THE CIT(A) ERRED IN NOT APPRECIATING THE FACT T HAT THE JURISDICTIONAL HIGH COURT'S DECISION IN THE CASE OF TATA ELXSI LIMITED 349 ITR 98 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN APPEAL HAS BEEN F ILED BEFORE THE HON'BLE SUPREME COURT. 8. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE UR GED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT(A) BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 9. THE APPELLATE CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. PAGE 5 OF 28 ITA NO.337 & 204/BANG/2014 APPLICATION FOR CONDONATION OF DELAY 2. AT THE OUTSET, LD.AR SUBMITTED THAT, THERE IS DE LAY OF 64 DAYS, IN FILING PRESENT APPEAL. LD.AR PLACED RELIAN CE ON AFFIDAVIT BY ASSESSEE DATED 23/08/2018, WHEREIN, IT IS SUBMIT TED THAT, PRIMAFACIE READING OF IMPUGNED ORDER, IT APPEARED T O ERSTWHILE CONSULTANT OF ASSESSEE THAT, APPEAL NEED NOT BE FIL ED. HOWEVER, SUBSEQUENTLY, WHEN ASSESSEE APPROACHED PRESENT REPRESENTATIVES, VARIOUS ISSUES THAT SHOULD HAVE BE EN RAISED BEFORE THIS TRIBUNAL, WAS BROUGHT TO NOTICE OF ASSESSEE. IT WAS ONLY THEREAFTER THAT APPEAL WAS FILED, THEREBY CAUS ING DELAY OF 64 DAYS. IT HAS BEEN THUS SUBMITTED THAT, DELAY IN FIL ING PRESENT APPEAL WAS NOT INTENTIONAL. LD.AR THUS HUMBLY PRAYED FOR THE DELAY TO BE CONDON ED IN THE INTEREST OF NATURAL JUSTICE. 3. ON THE CONTRARY, LD.SR.DR, THOUGH OPPOSED APPLIC ATION FOR CONDONATION OF DELAY, COULD NOT MAKE OUT A CASE OF INTENTIONAL DELAY ON BEHALF OF ASSESSEE, IN FILING PRESENT APPE AL. 4. ON PERUSAL OF AFFIDAVIT FILED BY ASSESSEE DATED 23/08/2018, WE NOTE THAT, ASSESSEE HAS MADE OUT REASONABLE CAUS E TO SUPPORT UNINTENTIONAL DELAY IN FILING PRESENT APPEAL BEFORE THIS TRIBUNAL . IN THE INTEREST OF JUSTICE, WE ARE OF THE VIEW TO C ONDONE THE DELAY. ACCORDINGLY, APPLICATION FILED BY ASSESSEE DATED 24 /08/2018 FOR CONDONATION OF DELAY IN FILING PRESENT APPEAL S TANDS ALLOWED. BRIEF FACTS OF THE CASE ARE AS UNDER: 5. ASSESSEE IS A COMPANY AND FILED ITS RETURN OF IN COME FOR YEAR UNDER CONSIDERATION ON 31/10/2005 DECLARING NI L INCOME. THE RETURN WAS PROCESSED UNDER SECTION 143 (1) OF T HE ACT AND PAGE 6 OF 28 ITA NO.337 & 204/BANG/2014 THE CASE WAS SUBSEQUENTLY SELECTED FOR SCRUTINY. CO NSEQUENTIALLY, NOTICE UNDER SECTION 143 (2) WAS ISSUED TO ASSESSEE IN RESPONSE TO WHICH REPRESENTATIVE OF ASSESSEE APPEARED BEFORE LD.AO AND SUBMITTED DETAILS AS CALLED FOR. 6. LD.AO OBSERVED THAT, DURING FINANCIAL YEAR RELEV ANT TO ASSESSMENT YEAR UNDER CONSIDERATION ASSESSEE HAD IN TERNATIONAL TRANSACTIONS AND THE CASE WAS REFERRED TO TRANSFER PRICING OFFICER TO DETERMINED ARMS LENGTH PRICE OF SUCH INTERNATIO NAL TRANSACTIONS. UPON RECEIPT OF REFERENCE UNDER SECTION 92CA, LD. T PO CALLED UPON ASSESSEE TO FILE ECONOMIC DETAILS OF INTERNATI ONAL TRANSACTION IN FORM 3 CEB. 7. LD.TPO FROM TRANSFER PRICING STUDY FILED BY ASSE SSEE, OBSERVED THAT, ASSESSEE WAS A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND HAD RECEIVED 10.72 CRORES FOR PROVIDIN G SUCH SERVICES TO ITS AE. IT WAS NOTED THAT ASSESSEE USED TNMM AS MOST APPROPRIATE METHOD TO DETERMINE ARMS LENGTH MARGIN AT 12.61%. IT WAS OBSERVED THAT, ASSESSEE USED 45 COMPARABLES WITH AN AVERAGE MARGIN OF 9.97% AND THEREFORE ASSESSEE HAD CONSIDERED ITS TRANSACTION WITH ASSOCIATED ENTERPRISE TO BE AT ARMS LENGTH. 8. LD.TPO, THOUGH DID NOT DISPUTE THE METHOD OF DET ERMINING ALP, REJECTED FILTERS APPLIED BY ASSESSEE, AND APPL IED NEW SET OF FOLLOWING FILTERS: SOFTWARE DEVELOPMENT SERVICE INCOME LESS THAN 1 CRO RE SOFTWARE DEVELOPMENT SERVICE REVENUE IS LESS THAN 7 5% OF TOTAL OPERATING INCOME. RELATED PARTY TRANSACTION GREATER THAN 25% EXPORT EARNINGS LESS THAN 25% OF SALES PAGE 7 OF 28 ITA NO.337 & 204/BANG/2014 DIMINISHING REVENUE/PERSISTENT LOSSES FOR THE PERIO D UNDER CONSIDERATION. DIFFERENT YEAR ENDING OR DATA IS NOT AVAILABLE FOR 12 MONTHS. EMPLOYEE COST TO SALES IS LESS THAN 25%. ON-SITE INCOME IS MORE THAN 75%. 9. LD.TPO THUS ACCEPTED 8 COMPARABLES FROM ASSESSEE S LIST AND INCLUDED FURTHER COMPARABLES TOTALLING TO 17 CO MPARABLES WITH AVERAGE MARGIN OF 26.59%, THE DETAILS OF WHICH ARE AS UNDER: SL NO. COMPANY NA ME ._,, OP TO TOTAL COST% 1. BODHTREE CONSULTING LTD 24.85 2. LANCO GLOBAL SYSTEMS 13.65 3. EXEN T _SYS SOFTWARE SOLUTIONS LTD. 70.68 4. SANKHYA .H?FTECH LTD. 27.39 5. SASKEN NETWORK SYSTEMS LTD. 1664 6. FOUR SOFT LTD. 22.98 7. THIRDWARE SOLUTION LID 66.09 8. R S SOFTWARE (INDIA) LTD. 8.07 9. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. 20.34 10. TATA ELXSI LTD. (SEG) 24.35 11. VISUAL SOFT TECHNOLOGIES LTD. (SEG) 23.52 12. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG) 14.42 13. IGATE (SEG) 4.32 14. FLEXTRONICS (SEG) 32.19 15. L&T INFOTECH 10.33 16. SATYAM 29.44 17. INFOSYS 42.83 AVG. 26.59% 10. LD.TPO, THUS PROPOSED ADJUSTMENT, BEING DIFFERE NCE BETWEEN MARGIN OF COMPARABLES SELECTED BY LD.TPO AT RS.1,37,18,665/-. AGGRIEVED BY ADJUSTMENT, ASSESSEE FILED APPEAL BEFO RE LD.CIT (A). BEFORE LD.CIT(A), ASSESSEE RAISED FOLLOWING ISSUES: REJECTION OF ASSESSEES COMPARABLES AND INTRODUCING FRESH COMPARABLES ON APPLICATION OF VARIOUS FILTERS. FAILURE TO APPLIED TURNOVER FILTER. PAGE 8 OF 28 ITA NO.337 & 204/BANG/2014 FAILURE TO APPLY THE TEST OF FUNCTIONAL DISSIMILARI TIES. FAILURE TO PROVIDE RISK ADJUSTMENT. FAILURE TO PROVIDE STANDARD DEDUCTION OF 5%. FOREX GAIN TAKEN AS NON-OPERATING INCOME. 11. LD.CIT(A), WHILE CONSIDERING ISSUES RAISED BY A SSESSEE, WAS OF THE OPINION THAT, CERTAIN COMPARABLES WERE TO BE REJECTED DUE TO HIGH TURNOVER, BY FOLLOWING DECISION OF COORDINA TE BENCH OF THIS TRIBUNAL IN GENESIS INTEGRATING SYSTEMS VS DCIT REPORTED IN 15 ITR (TRIB) 475 , KODIAK NETWORKS VS ACIT REPORTED IN 15 ITR (TRIB) 610 AND TRIOLOGY E-BUSINESS SOFTWARE INDIA VS DCIT REPORTED IN 23 ITR (TRIB) 464 WHEREIN, CONSISTENTLY IT HAS BEEN HELD THAT ONLY COMPANIES WITH TURNOVER RANGE OF RS.1CRORE TO RS.20 0 CRORE SHOULD BE TAKEN INTO CONSIDERATION FOR TRANSFER PRI CING STUDY. 12. LD.CIT(A), CATEGORICALLY OBSERVED THAT, TRANSFE R PRICING OFFICER HIMSELF HAVING REJECTED LOSS MAKING COMPANI ES AS COMPARABLES OUGHT TO HAVE APPLIED UPPER LIMIT. LD.C IT (A) WAS OF THE OPINION THAT TURNOVER FILTER IS IMPORTANT AND A SSESSEE BEING IN THE RANGE HAVING TURNOVER OF RS.8.15 CRORE COMPA NIES, HAVING TURNOVER OF RS.1CRORE TO RS.200 CRORE HAD TO BE TAK EN INTO CONSIDERATION, FOR MAKING TRANSFER PRICING STUDY. H E THEREFORE DIRECTED LD.TPO TO EXCLUDE FOLLOWING COMPARABLES DU E TO HIGH TURNOVER: IGATE (SEG) FLEXTRONICS (SEG) L& T INFOTECH SATYAM INFOSYS PAGE 9 OF 28 ITA NO.337 & 204/BANG/2014 13. IN RESPECT OF OTHER COMPARABLES, LD.CIT (A) UPH ELD THEIR INCLUSION. 14. ASSESSEE HAD ALSO RAISED ISSUE REGARDING TREATM ENT OF FOREIGN EXCHANGE GAIN/DEFERRED REVENUE AS NON-OPERA TING EXPENSES. LD.CIT(A), RELYING ON DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF T RIOLOGY E E-BUSINESS SOFTWARE VS DCIT REPORTED IN 23 ITR (TRIB) 464 AND DECISION OF ITAT DELHI BENCH IN CASE OF HAWORTH (INDIA) PVT.LTD. VS DCIT REPORTED IN 11 ITR (TRIB) 757, HELD THAT, THESE EXPENSES HAVE DIRECT NEXES WITH R EVENUE EARNED, AND HAS TO BE TAKEN AS OPERATING COST. 15. LD.CIT(A) ALLOWED CLAIM OF ASSESSEE, TO REDUCE VALUE OF TELECOMMUNICATION EXPENSES FROM EXPORT TURNOVER FOR PURPOSES OF COMPUTED DEDUCTION UNDER SECTION 10A, BY PLACING RE LIANCE ON DECISION OF HONBLE KARNATAKA HIGH COURT IN CASE OF CIT VS TATA ELXSI LTD. , REPORTED IN 349 ITR 98 . 16. LD.CIT(A) HOWEVER DID NOT GRANT RISK ADJUSTMENT FOR THE REASON THAT LD.TPO GRANTED WORKING CAPITAL ADJUSTME NT. LD.CIT(A) ALSO DENIED BENEFIT OF +/-5% RANGE OF MAR GIN. 17. AGGRIEVED BY ORDER PASSED BY LD.CIT(A), BOTH AS SESSEE AS WELL AS REVENUE ARE IN APPEAL BEFORE US. WE SHALL FIRST TAKE UP REVENUES APPEAL. 18. GROUND NO.1 RAISED BY REVENUE IS GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ANY INTERFERENCE. 19. GROUND NO.2-3 IS IN RESPECT OF GRANTING TREATMENT OF FOREIGN EXCHANGE GAIN OR LOSS AS OPERATIONAL EXPENSES BY LD .CIT (A). 20. WE HAVE CONSIDERED SUBMISSIONS ADVANCED BY BOTH SIDES AND PERUSED THE IMPUGNED ORDER OF LD.CIT (A) IN RES PECT OF THIS ISSUE. IT IS NOTED THAT LD.CIT(A) ALLOWED CLAIM OF ASSESSEE, PLACING PAGE 10 OF 28 ITA NO.337 & 204/BANG/2014 RELIANCE UPON DECISIONS OF THIS TRIBUNAL WHICH HAS BEEN CONSISTENTLY FOLLOWED AND ALSO UPHELD BY HONABLE KARNATAKA HIGH COURT IN CASE OF CIT VS SAP LABS INDIA PVT.LTD. , IN ITA NO. 340/2012, VIDE ORDER DATED 10/07/2018 . 21. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE V IEW TAKEN BY LEARNT CIT (A) AND THEREFORE THE SAME IS UPHELD. ACCORDINGLY THESE GROUNDS RAISED BY REVENUE STANDS DISMISSED. 22. GROUND 4-5 HAVE BEEN RAISED BY REVENUE IS CHALLENGING THE REJECTION OF CERTAIN COMPARABLES BY APPLYING TURNOV ER FILTER. 23. LD.CIT.DR SUBMITTED THAT THIS FILTER HAS BEEN A PPLIED BY LD.CIT(A) FOR THE FIRST TIME, AND THEREFORE, SHOULD BE SENT BACK TO LD.TPO FOR VERIFICATION. 24. ON THE CONTRARY, LD.AR SUBMITTED THAT, ASSESSEE HAD RAISED A GROUND BEFORE LD.CIT(A), FOR APPLYING ONLY LOWER LIMIT OF TURNOVER. LD.CIT(A), WHILE CONSIDERING THIS ISSUE R EFERRED TO LANDMARK DECISION OF THIS TRIBUNAL IN CASE OF GENESIS INTEGRATING SYSTEMS VS DCIT (SUPRA) , WHEREIN, NECESSITY TO EXCLUDE CERTAIN COMPANIES HAVING HUGE TURNOVER AS COMPARED TO SMALL COMPANY IS HAVE BEEN UPHELD. IT HAS BEEN SUBMITTED THAT LD. CIT(A) CONSIDERED THE UPPER LIMIT OF TURNOVER TO BE RS.200 CRORES CONSIDERING THE TURNOVER OF ASSESSEE BEING RS.8.15 CRORES. LD.AR, THUS SUPPORTED VIEW TAKEN BY LD.CIT(A). 25. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 26. THERE ARE VARIOUS DECISIONS OF THIS TRIBUNAL, WHEREIN, TURNOVER FILTER HAS BEEN CONSIDERED TO BE NECESSARY FILTER FOR SHORT LISTING COMPARABLES. THERE ARE VARIOUS DECISIONS OF THIS TRIBUNAL , PAGE 11 OF 28 ITA NO.337 & 204/BANG/2014 WHEREIN COMPARABLES HAVING HUGE TURNOVER OF EITHER MORE THAN 200 CRORES OR COMPARABLES HAVING 10 TIMES THE TURNO VER OF ASSESSEE HAVE BEEN REJECTED. IT IS OBSERVED THAT LD .TPO REJECTED VARIOUS COMPARABLES OF ASSESSEE FOR HAVING TURNOVER LESS THAN RS.1 CRORE, WITHOUT PROVIDING AN UPPER LIMIT. IN OU R VIEW LD.CIT(A) FOLLOWED GENESIS INTEGRATING SYSTEMS VS DCIT (SUPRA) AND APPLIED TURNOVER FILTER OF 1 CRORE TO 200 CRORE S, WHICH CANNOT BE FOUND FAULT WITH. 27. THE OBJECTION RAISED BY LD.CIT.DR IS THEREFORE REJECTED SINCE THIS FILTER HAS BEEN APPLIED BY LD.TPO PARTLY FOR R EJECTING SUCH COMPARABLES WITH TURNOVER LESS THAN RS.1 CRORE, WIT HOUT CAPPING IT WITH A UPPER LIMIT. THIS TRIBUNAL IN CASE OF GENESIS INTEGRATING SYSTEMS VS DCIT(SUPRA) REJECTED SUCH APPROACH OF HAVING BROAD- BASED SET OF COMPARABLES, WHICH WOULD THEN BE COMPA RED WITH A SMALL COMPANY THAT WORKS IN A CAPTIVE ENVIRONMENT. 28. WE DO NOT FIND ANY INFIRMITY IN VIEW TAKEN BY L D.CIT(A) FOR REJECTING COMPARABLES HAVING TURNOVER MORE THAT RS. 200 CRORES. ACCORDINGLY, THESE GROUNDS RAISED BY REVENUE STANDS REJECTED. 29. GROUND NO.6-7 RAISED BY REVENUE IS AGAINST ALLOWING THE DEDUCTION CLAIMED BY ASSESSEE UNDER SECTION 10A, ON ACCOUNT OF ADJUSTMENT OF EXPORT TURNOVER BY LD.AO. 30. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 31. IT IS NOTED THAT, LD.CIT(A) FOLLOWED DECISION O F HONBLE KARNATAKA HIGH COURT IN CASE OF CIT VS TATA ELXSI LTD., REPORTED IN 349 ITR 98 AND DIRECTED LD.AO TO COMPUTE 10A DEDUCTION IN ACCORDANCE WITH THE RATIO LAID DOWN BY HONBLE COURT . WE DO NOT PAGE 12 OF 28 ITA NO.337 & 204/BANG/2014 FIND ANY INFIRMITY IN THE VIEW TAKEN BY LD.CIT(A), AND THE SAME IS UPHELD. ACCORDINGLY THESE GROUNDS RAISED BY REVENUE STANDS DISMISSED. 32. GROUND NO.8-9 ARE GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. IN THE RESULT, APPEAL FILED BY REVENUE STANDS DISMI SSED. ASSESSEES APPEAL- 33. AT THE OUTSET, LD.AR SUBMITTED THAT, GROUND NO. 1-3 ARE GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ADJU DICATION. 34. LD.AR SUBMITTED THAT, GROUND 3 (A)-3 (D) IS NOT PRESSED. SIMILARLY, GROUND 4-6 HAS ALSO BEEN NOT PRESSED BY LD.AR. 35. UPON A QUERY BEING RAISED BY THIS BENCH REGARDI NG GROUND 3 (F) CERTAIN COMPARABLES ARE ALLEGED BY ASSESSEE AS FUN CTIONALLY NOT COMPARABLE, WHICH HAS BEEN EXCLUDED BY LD.CIT(A ) AGAINST WHICH REVENUE IS IN APPEAL. TO THIS, LD.AR EXPRESSE D HIS CONSENT AND ACCEPTED THAT, ALLEGED COMPARABLES IN GROUND 3( F) MAY BE CONSIDERED EITHER ON TURNOVER FILTER OR, ON FUNCTIO NAL COMPARABILITY. THIS BENCH DURING THE HEARING, EXPRESSED THE OPINIO N THAT, IN THE EVENT VIEW TAKEN BY LD.CIT(A) IS UPHELD, DECIDING A SSESSEES GROUND.3(F) WOULD BECOME ACADEMIC. 36. IN PRECEDING PARAGRAPHS, WE HAVE DECIDED GROUND 4-5 IN REVENUES APPEAL, AND WE HAVE UPHELD EXCLUSION OF T HESE ALLEDGED COMPARABLES ON TURNOVER FILTER. ACCORDINGLY, AS PER CONSENT EXPRESSED BY LD.AR DURING THE HEARING, WE HOLD GROU ND 3(F) TO BE ACADEMIC IN NATURE, AND ASSESSEE IS AT LIBERTY TO C ONTEST THESE PAGE 13 OF 28 ITA NO.337 & 204/BANG/2014 GROUNDS FOR FUNCTIONAL DISSIMILARITIES/SIMILARITIES IN APPROPRIATE CASE. ACCORDINGLY, GROUND 3 (F) IS LEFT UNANSWERED. 37. LD.AR THUS SUBMITTED THAT THE ONLY GROUNDS THAT NEEDS TO BE ADJUDICATED BY THIS TRIBUNAL IS GROUND 3 (E) AND ADDITIONAL GROUND RAISED BY ASSESSEE VIDE ITS APPLICATION DATE D 08/02/2018. 38. BEFORE DWELLING INTO GROUND 3(E), WE SHALL FIRS T DECIDE APPLICATION DATED 08/02/2018, FOR ADMISSION OF ADDI TIONAL GROUND. IT HAS BEEN SUBMITTED BY ASSESSEE THAT, WHILE RAISI NG SUBSTANTIVE GROUND BEFORE THIS TRIBUNAL, ASSESSEE INADVERTENTLY OMITTED TO RAISE EXCLUSION OF BODHTREE CONSULTING LTD. IT HAS BEEN SUBMITTED THAT, BEFORE LD. CIT (A), THIS COMPARABLE WAS CHALL ENGED BY ASSESSEE AND THEREFORE IT ARISES OUT OF THE ORDER O F LD.CIT (A). HE PLACED RELIANCE UPON DECISION OF HONBLE SUPREME COURT IN CASE OF NTPC LTD VS CIT REPORTED IN 229 ITR 383 AND JUTE CORPORATION OF INDIA VS CIT REPORTED IN 53 TAXMAN 85, SUBMITTED THAT COMPARABLES SPECIFIED IN ADDITIONAL GROUNDS MAY BE ADMITTED. 39. LD.CIT DR, THOUGH OPPOSED ADMISSION OF ADDITION AL GROUND, COULD NOT CONTROVERT SUBMISSIONS ADVANCE BY LD.AR. 40. WE HAVE PERUSED DETAILS RELIED UPON BY BOTH SID ES. IN OUR CONSIDERED OPINION THE COMPARABLES ALLEGED IN ADDIT IONAL GROUND ARISES OUT OF THE RECORDS AND WAS OBJECTED BEFORE D RP FOR ITS EXCLUSION/INCLUSION. CONSIDERING INADVERTENT MISTAK E ON BEHALF OF ASSESSEE IN RAISING THESE GROUNDS BEFORE THIS TR IBUNAL, WE ALLOW ADDITIONAL GROUND RAISED. ACCORDINGLY, WE ADMIT ADDITIONAL GROUND RAISED BY A SSESSEE. PAGE 14 OF 28 ITA NO.337 & 204/BANG/2014 41. THUS, TO SUM UP THE ISSUES TO BE ADDRESSED, WE ARE LEFT WITH FOLLOWING COMPARABLES TO BE CONSIDERED ON FUNCTIONA L SIMILARITIES/DISSIMILARITIES: EXENSYS SOFTWARE SOLUTIONS LTD., SANKHYA INFOTECH FOUR SOFT LTD THIRDWARE SOLUTIONS LTD GOEMETRIC SOFTWARE SOLUTIONS CO. LTD., TATA ELXSI LTD., BODHTREE CONSULTING LTD. 42. AT THE OUTSET, BOTH PARTIES SUBMITTED THAT COMP ARABLES ALLEGED FOR INCLUSION BY REVENUE HAS BEEN CONSIDERE D BY THIS TRIBUNAL IN CASE OF SHARP SOFTWARE DEVELOPMENT (INDIA) PVT LTD., IN ITA NO.1109/BANG/2016 ALONG WITH CO NO.13/BANG/2012 FOR ASSESSMENT YEAR 2005-06 AND KODIAK NETWORK INDIA PVT LTD IN ITA NO.523/BANG/2013, ALONG WITH CO NO.119/BANG/2015 FOR ASSESSMENT YEAR 2005-06 . 43. IN OUR CONSIDERED OPINION, COMPARABILITY IS TO BE CARRIED OUT ON BROAD OBJECT OF BENCHMARKING INTERNATIONAL TRANS ACTION AND ACCORDING TO LAW LAID DOWN UNDER SECTION 92B OF THE ACT, READ WITH RULE 10B(2) INCOME TAX RULES, 1963. COMPARABLES MU ST BE SIMILAR IN MATERIAL ASPECTS AND MUST BE COMPARED ON THE BASIS OF PRODUCTS/SERVICES, CHARACTERISTICS, FUNCTIONS UNDER TAKEN, ASSETS USED AND RISK ASSUMED. MERELY BECAUSE CERTAIN COMPA RABLES HAS BEEN UPHELD FOR ITS EXCLUSION/INCLUSION BY VARIOUS DECISIONS, DOES NOT IPSO FACTO LEAD TO EXCLUSION/INCLUSION IN A GIVEN SET OF FACT S. IN OUR CONSIDERED OPINION, EXCLUSION/INCLUSION OF ANY COMPARABLES PAGE 15 OF 28 ITA NO.337 & 204/BANG/2014 MUST BE STRICTLY ANALYSED ON BASIS OF FAR, IN ACCOR DANCE WITH RULE 10 B (2). WE ALSO ARE OF OPINION THAT COMPARAB LES SELECTED MUST BE FOR RELEVANT YEAR WHICH IS TO BE COMPARED A ND UNLESS CONTEMPORANEOUS DATA AS SECTION 92D READ WITH RULE 10D(4), IS NOT AVAILABLE FOR RELEVANT YEAR, MULTIPLE YEAR DATA SHOULD NOT BE USED. 44. BEFORE WE UNDERTAKE COMPARABILITY ANALYSIS, IT IS SINE QUA NON TO UNDERSTAND FUNCTIONS PERFORMED BY ASSESSEE, RIS KS ASSUMED AND ASSETS OWNED DURING THE YEAR UNDER CONS IDERATION. 45. WE NOTE THAT, THE LD.TPO HAS CAPTURED FAR OF AS SESSEE IN ITS ORDER AS UNDER: FUNCTIONS: 46. ASSESSEE IS STATED TO BE WHOLLY OWNED SUBSIDIAR Y OF CAPCO BELGIUM. IT HAS BEEN SUBMITTED THAT ASSESSEE IS ENG AGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES TO CAPCO GROUP COMPANIES AND IS REMUNERATED ON COST PLUS BAS IS FOR THE SERVICES RENDERED. LD.TPO HAS NOTED THAT ASSESSEE H AS CHARACTERISED ITSELF AS A ROUTINE SERVICE PROVIDER FOR THE GROUP COMPANIES IN TP DOCUMENTATION FOR PROVISION OF SOFT WARE SERVICES. ASSESSEE FOR YEAR UNDER CONSIDERATION HAS EARNED REVENUE OF RS.10,72,07,025/- FROM SOFTWARE DEVELOPM ENT SERVICES 47. AS PER TP STUDY, ASSESSEE IS STATED TO BE PROVI DING FOLLOWING FUNCTIONS FOR ITS ASSOCIATED ENTERPRISE IN RELATION TO SOFTWARE DEVELOPMENT SERVICES: MARKETING/BUSINESS DEVELOPMENT IT IS SUBMITTED THEREIN THAT, CAPCO GROUP COMPANIES ARE THE FRONT END CONTACT WITH THE CUSTOMER AND THEY UNDERT AKE LEAD PAGE 16 OF 28 ITA NO.337 & 204/BANG/2014 IN MARKETING AND SALES ACTIVITY OF THE SOFTWARE PRO DUCTS AND SECURES THE SOLUTIONS TO BE PROVIDED. ASSESSEE DOES NOT UNDERTAKE ANY MARKETING ACTIVITY WITH RESPECT TO TH E SOFTWARE PRODUCT SOLUTIONS THAT THIS DELIVERABLE TO THE CUST OMERS. CONCEPTUALISATION AND DESIGN OF THE PRODUCT 48. CAPCO GROUP COMPANIES BASED ON CUSTOMERS NEED, REQUIREMENT UNDERTAKE CONCEPTUALISATION AND DESIGN OF THE FINAL SOFTWARE PRODUCT/SOLUTIONS DELIVERABLE TO THAT. 49. ASSESSEE DOES NOT PERFORM THE CONCEPTUALISING A ND DESIGN OF THE SOFTWARE PRODUCT DELIVERABLE TO THE CUSTOMER. FUNCTIONAL SPECIFICATIONS AND REQUIREMENT ANALYSIS IT HAS BEEN SUBMITTED THAT BASED ON DESIGN AND FUNC TIONAL SPECIFICATIONS PROVIDED BY CAPCO GROUP COMPANIES, A SSESSEE CONFIRMS ITS UNDERSTANDING OF THE DESIGN AND THE FU NCTIONAL SPECIFICATIONS AND REQUIREMENT WITH CAPCO GROUP COM PANIES BEFORE COMMENCING THE ASSIGNMENT. CODING AND DOCUMENTATION ASSESSEE UNDERTAKES THE SOFTWARE CODING ACCORDING TO THE FUNCTIONAL SPECIFICATIONS AND SOFTWARE REQUIREMENT ANALYSIS. ASSESSEE RECEIVES TECHNICAL ASSISTANCE IF REQUIRED FROM THE ASSOCIATED ENTERPRISES DURING THE CODING COUPLED WI TH REGULAR REVIEWS AND FEEDBACK BY THEM. ASSESSEE IS ALSO REQU IRED TO GENERATE THE AND MAINTAIN DOCUMENTATION FOR THE COD E GENERATED. 51. IN RESPECT OF MODULES/SOLUTIONS NOT BEING DEVEL OPED BY ASSESSEE, THE ASSOCIATED ENTERPRISES UNDERTAKE THE CODING OF SOFTWARE. PROJECT MANAGEMENT PAGE 17 OF 28 ITA NO.337 & 204/BANG/2014 IT HAS BEEN STATED THAT ASSESSEE INTERACTS REGULARL Y WITH THE ASSOCIATED ENTERPRISES AND PROJECT TRACKING HAPPENS THROUGH EMAILS AND CONFERENCE CALLS. THIS ENSURES CLOSE COO RDINATION QUALITY CONTROL AND MINIMAL REWORK IN THE DEVELOPME NT PROCESS. TESTING ASSESSEE UNDERTAKES THE RESPONSIBILITY OF INITIAL U NIT TESTING OF THE MODULES/DEVELOPED BY IT TO ENSURE THAT THE ACTI VITY UNDERTAKEN BY ASSESSEE MEET THE SPECIFICATIONS AGRE EMENT PROVIDED BY THE ASSOCIATED ENTERPRISES. THESE ARE F URTHER RESPONSIBLE FOR THE FINAL TESTING OF THE COMPLETE PRODUCT/SOLUTIONS TO BE DELIVERED TO THE CUSTOMER. QUALITY CONTROL ASSESSEE IS RESPONSIBLE FOR THE QUALITY OF WOR K UNDERTAKEN BY IT BASED ON THE QUALITY CONTROL PROCEDURES DEFINED BY THE GROUP ENTITIES. INTEGRATION ASSESSEE ALONG WITH ASSOCIATED ENTERPRISE ARE JOI NTLY RESPONSIBLE FOR THE INTEGRATION OF THE MODULE DEVELOPED BY ASSE SSEE INTO THE FINAL PRODUCT/SOLUTION IS BEING DEVELOPED BY THE AS SOCIATED ENTERPRISES. ASSETS 50. IT HAS BEEN NOTED THAT ASSESSEE OWNS ROUTINE AS SETS LIKE COMPUTERS, OFFICE EQUIPMENTS, VEHICLES FURNITURE FI XTURES ETC. RISKS 51. IT HAS BEEN CLAIMED THAT ASSESSEE BEING A CONTR ACT SERVICE PROVIDER DOES NOT BEAR RISK LIKE MARKET RISK, FINAN CIAL RISK, CREDIT AND COLLECTION RISK AND SERVICE LIABILITY RISK WHIC H ARE NORMAL IN PAGE 18 OF 28 ITA NO.337 & 204/BANG/2014 CASE OF AN INDEPENDENT ENTREPRENEURS. ASSESSEE IS S TATED TO HAVE BEEN COMPENSATED AT COST +10% FOR THE TECHNICAL SER VICES PROVIDED. 52. BASED UPON ABOVE FAR ANALYSIS, WE SHALL ANALYSE COMPATIBILITY OF ASSESSEE WITH FOLLOWING COMPARABLE S, OBJECTED FOR EXCLUSION. EXENSYS SOFTWARE SOLUTIONS LTD: 53. LD.TPO CONSIDERED THIS TO BE A COMPARABLE WITH THAT OF ASSESSEE AS, IT IS A SOFTWARE SERVICE PROVIDER. LD. AR SUBMITTED THAT THIS COMPANY HAS UNDERWENT AMALGAMATION WITH M/S HO LOOL INDIA LTD. IT HAS BEEN SUBMITTED THAT THIS COMPANY IS ENG AGED IN MULTIPLE ACTIVITIES INCLUDING SOFTWARE PRODUCTS, SO FTWARE SERVICES AND BPO SERVICES. IT HAS BEEN SUBMITTED THAT DUE TO EXTRAORDINARY EVENT OF AMALGAMATION OF THIS COMPANY, THERE IS AN ABNORMAL INCREASE IN PROFITS. LD.AR HAS SUBMITTED THAT THIS COMPANY CANNOT BE FUNCTIONALLY COMPARED WITH THAT OF ASSESS EE. IT WAS SUBMITTED THAT LD.TPO WAS AWARE ABOUT THESE EXCEPTI ONAL CIRCUMSTANCES HOWEVER CONSIDERED IT TO BE A COMPARA BLE AS HE WAS OF THE OPINION THAT THERE IS NO SIGNIFICANT IMP ACT ON THE PROFITABILITY OF THIS COMPANY. 54. LD.AR ALSO SUBMITTED THAT THIS COMPANY IS INTO DEVELOPMENT OF CUSTOMISED SOFTWARE, BASED ON CURRENT CUSTOMERS REQUIREMENTS ON ITS OWN, AND THEREFORE CANNOT BE COMPARED TO A C ONTRACT SERVICE PROVIDER LIKE ASSESSEE. PAGE 19 OF 28 ITA NO.337 & 204/BANG/2014 55. LD.CIT DR, RELIED ON OBSERVATIONS OF LD.CIT(A) AND SUBMITTED THAT 95% OF THE REVENUE EARNED BY THIS COMPANY IS F ROM EXPORT OF SOFTWARE AND THEREFORE FUNCTIONALLY SIMILAR WITH AS SESSEE. 56. WE NOTE THAT, THIS COMPANY HAD AN EXCEPTIONAL Y EAR OF OPERATION DUE TO AMALGAMATION WITH HOLOOL INDIA LTD . IN THE NOTES ON ACCOUNTS AT PAGE 36 OF PAPER BOOK IT HAS BEEN SU BMITTED THAT INCOME ACCRUING AND EXPENSES INCURRED BY HOLOOL IND IA LTD HAS BEEN INCORPORATED INTO THE ACCOUNTS OF ASSESSEE FOR THE YEAR UNDER CONSIDERATION. THEREFORE IT WAS NOT RIGHT ON LD. AO TO OBSERVED THAT THE MERGER HAS NOT IMPACTED SIGNIFICANTLY ON T HE PROFITABILITY. AT THE OUTSET WE ALSO NOTE THAT LD.TPO NOTICED THAT MERGED COMPANY IS HIGHLY COMPETENT AND THE MERGER HAS IMPR OVED EXPORT PERFORMANCE OF ASSESSEE. LD.TPO REJECTED CONTENTION OF ASSESSEE, SINCE ASSESSEE FAILED TO SHOW FUNCTIONAL DISSIMILAR ITIES DUE TO MERGER. FROM THE ANNUAL REPORT OF THIS COMPANY WE N OTE THAT THIS COMPANY GENERATES INCOME UNDER THE HEAD, EXPORT OF SOFTWARE, SALE OF DOMESTIC SOFTWARE, SOFTWARE TRAINING AND OT HER INCOME. ON A COMPARATIVE STUDY OF PREVIOUS YEAR FINANCIAL YEAR INCOME, INCOME FROM EXPORT OF SOFTWARE HAS ESCALATED FROM 2 2 CRORES TO 69 CRORES IN THE YEAR UNDER CONSIDERATION WHICH SUPPOR TS THE SUBMISSIONS OF ASSESSEE THAT THE MERGER HAS IMPROVE D THE EXPORT EARNINGS OF ASSESSEE DURING THE YEAR. LIKEWISE THE EXPENDITURE ALSO INCREASED FROM 87 LAKHS TO 17 CRORES APPROXIMA TELY DURING THE YEAR UNDER CONSIDERATION. WE THEREFORE DO NOT F IND ANY MERIT IN THE REASONING OF LD. TPO TO REJECT THE SUBMISSIO NS OF ASSESSEE. WE ALSO NOTE THAT THIS COMPARABLE IS FULL-FLEDGED E NTERPRISE AND NOT A CONTRACT SERVICE PROVIDER LIKE THAT OF ASSESS EE. PAGE 20 OF 28 ITA NO.337 & 204/BANG/2014 57. AS THIS TRIBUNAL HAS BEEN CONSISTENTLY EXCLUDING COMPARABLES, THAT HAVE UNDERWENT AMALGAMATION OR AN Y SPECIAL EVENT DURING A RELEVANT YEAR. WE ARE THEREFORE OF O PINION THAT, THIS COMPARABLE CANNOT BE COMPARED WITH A CAPTIVE SERVIC E PROVIDER WITH THAT OF ASSESSEE. ACCORDINGLY, WE DIRECT LEARNT TPO TO EXCLUDE THIS C OMPARABLE FROM FINAL LIST. THIRIDWARE SOLUTIONS LTD 58.LD.CIT (A) INCLUDED THIS COMPARABLE AS IT IS ENG AGED IN SOFTWARE DEVELOPMENT SERVICES. LD.AR PLACING RELIAN CE ON WRITTEN SUBMISSION OF ASSESSEE FILED BEFORE THE LD.TPO SUBM ITTED THAT THIS COMPANY IS FUNCTIONALLY NOT SIMILAR IN ACTIVITIES C ARRIED ON BY ASSESSEE. 59. ON THE CONTRARY LD.SR.DR SUBMITTED THAT THESE C OMPANIES ARE FUNCTIONALLY SIMILAR WITH RESPECT TO THE SOFTWA RE SERVICE PROVIDED BY ASSESSEE IN THE PRESENT CASE. IN SUPPOR T HE PLACED RELIANCE UPON THE VIEW OF LD. AO. 60. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 61. AS REGARDS THIRDWARE SOLUTIONS LTD IS CONCERNED , P&L ACCOUNT AS WELL AS SCHEDULES TO P&L ACCOUNT ARE PLA CED AT PAGE 89-94 OF PAPER BOOK- INDEX TO ANNUAL REPORT. IT IS OBSERVED THAT, THIS COMPANY EARNED REVENUE FROM SOFTWARE SERVICES AMOUNTING TO RS.8,06,02,781/-, AND EXPORT REVENUE AMOUNTING TO RS.147,425,780. IN THE ANNUAL REPORTS REVENUE HAS B EEN RECOGNISED FROM SOFTWARE DEVELOPMENT AND IMPLEMENTA TION. IT IS PAGE 21 OF 28 ITA NO.337 & 204/BANG/2014 ALSO NOTED THAT THIS COMPANY FOCUSED IN R&D ACTIVIT IES IN SOFTWARE ENGINEERING AND TECHNOLOGY. IT IS OBSERVED THAT, TH IS COMPANY IS HAVING HUGE PROFITS. ANNUAL REPORT DOES NOT SPECIFY NATURE OF EXPORT INCOME EARNED BY ASSESSEE. ALSO, FOREIGN EXC HANGE EARNINGS SHOW THAT, THERE WERE OTHER REVENUES EARNE D BY THIS COMPANY ALONG WITH SOFTWARE DEVELOPMENT SERVICES. 62. THOUGH THE ANNUAL REPORTS PROVIDE SEGMENTAL INF ORMATION FOR SOFTWARE SERVICES, THERE ARE VARIOUS CONCERNS REGAR DING THE FUNCTIONS PERFORMED BY ASSESSEE UNDER THIS SEGMENT. HOWEVER WE ALSO NOTE THAT THIS COMPANY DOES NOT SEEMS TO BE A CONTRACT SERVICE PROVIDER LIKE THAT OF ASSESSEE AND THEREFOR E CANNOT CONSIDERED AS A COMPARABLE IN THE PRESENT CASE. ACCORDINGLY, LD.TPO IS DIRECTED TO EXCLUDE THIS COM PARABLE. TATA ELXI LTD (SEG.): 63. LD.AR SUBMITTED THAT, THIS COMPARABLE IS FUNCTI ONALLY DIFFERENT WITH THAT OF ASSESSE, AS IT IS ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITIES WHICH RESULTS IN CREATION OF INTELLECTUAL PROPERTY RIGHTS. 64. LD.CIT DR SUPPORTED OBSERVATIONS OF AUTHORITIES BELOW AND PRAYED FOR ITS INCLUSION. 65. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. 66. IT IS OBSERVED THAT THIS COMPARABLE CATERS BASI CALLY IN PROVIDING SOFTWARE DEVELOPMENT SERVICES WHEREIN, HU GE INTANGIBLES ARE GENERATED OWNED BY THIS COMPARABLE. IT IS ALSO OBSERVED THAT PAGE 22 OF 28 ITA NO.337 & 204/BANG/2014 THIS COMPARABLE IS A GROUP CONCERN OF TATA, WHICH M AKES IT TO BE ECONOMICALLY DIFFERENT WITH THAT OF ASSESSEES WHO UNDERTAKES LIMITED RISKS AND PROVIDES TECHNICAL ASSISTANCE TO ITS AES IN PRODUCTS DEVELOPED FOR AE. WE DO NOT FIND THIS COMP ARABLE TO BE FUNCTIONALLY SIMILAR IN ANY MANNER WHATSOEVER WITH THAT OF ASSESSEE. ACCORDINGLY THIS COMPARABLE IS DIRECTED TO BE EXCLU DED FROM FINAL LIST. SANKHYA INFOTECH 67. LD.AR SUBMITTED THAT THIS COMPARABLE IS NOT FUN CTIONALLY SIMILAR WITH ASSESSEE, AS IT IS ENGAGED IN BUSINESS OF DEVELOPMENT OF SOFTWARE PRODUCT FOR AVIATION INDUSTRY AND SERVI CES AND TRAINING. LD.AO HOWEVER REJECTED ASSESSEES CONTENT ION BASED ON REPLY SOUGHT UNDER 133(6) OF THE ACT FROM THIS COMP ANY. 68. THE LD.SR.DR PLACED RELIANCE UPON ORDERS PASSED BY AUTHORITIES BELOW. 69. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN THE LIGHT OF RECORDS PLACED BEFORE US. 70. WE NOTE THAT ANNUAL REPORT OF THIS COMPANY HAS BEEN PLACED AT PAGE 183 OF PAPER BOOK. IN THE DIRECTORS REPORT AT PAGE 192, IT HAS BEEN MENTIONED THAT COMPANY HAS BEEN FOCUSING O N DEVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORT AND AVIATION INDUSTRY. IT HAS BEEN SUBMITTED THAT DUE TO THIS RE ASON US THIS COMPANY HAD TO SPEND HEAVILY ON THE DEVELOPMENT OF THE SAME IN THE INITIAL YEARS AND HENCE INADEQUACY OF PROFITS. FURTHER AT PAGE 197 WHERE MANAGEMENT DISCUSSION AND ANALYSIS ARE ME NTIONED PERFORMANCE REVIEW FOR THE YEAR HAS ALSO BEEN RECOR DED WHEREIN IT PAGE 23 OF 28 ITA NO.337 & 204/BANG/2014 HAS BEEN MENTIONED THAT, COMPANY CHANGED ITS TARGET AREAS OF ITS OPERATION AND IS FULLY FOCUSING TO MARKET ITS PRODU CTS AND SERVICES WHICH ARE RELATED AS THE BEST BY MANY LE ADING AIRLINE COMPANIES INCLUDING THE MANUFACTURERS. 71. FURTHER IN THE PROFIT AND LOSS ACCOUNT ASSESSEE HAS INCURRED HUGE EXPENDITURE TOWARDS SOFTWARE DEVELOPMENT EXPEN SES. IN SCHEDULE 13 AT PAGE 213, REVEALS THAT THIS COMPANY HAS PURCHASED SOFTWARE DEVELOPED DURING THE YEAR. 72. IN THE PAPER BOOK, SOME CASE LAWS HAVE BEEN FIL ED, WHEREIN, IS RELIANCE PLACED ON DECISION OF THIS TRIBUNAL IN CASE OF DCIT VS TEXTRON GLOBAL TECHNOLOGY CENTRE (P) LTD REPORTED IN (2015) 56 TAXMANN.COM 465. WE NOTE THAT FOR RELEVANT YEAR UNDER CONSIDERATION THIS TRIBUNAL HAS DIRECTED EXCLUSION OF THIS COMPARABLE. FURTHER THE TRIBUNAL ALSO RECORDED THAT THIS COMPANY ALSO OWNS VARIOUS PRODUCTS. CONSIDERING OBS ERVATIONS FROM ANNUAL REPORT AS WELL AS THE VIEW EXPRESSED BY COORDINATE BENCHES OF THIS TRIBUNAL IN RESPECT OF THIS COMPARA BLE, IN OUR OPINION THIS CANNOT BE COMPARED WITH A CAPTIVE SERV ICE PROVIDER LIKE ASSESSEE PERFORMING CERTAIN LIMBS OF SOFTWARE DEVELOPMENT FOR ITS AES. ACCORDINGLY, WE DIRECT LD.TPO TO EXCLUDE THIS COMPA RABLE IN THE FINALIST. FOUR SOFT LTD 73. ASSESSEE OBJECTS FOR INCLUSION OF THIS COMPARAB LE DUE TO THE FUNCTIONAL DIFFERENCES WITH ASSESSEE. IT HAS BEEN S UBMITTED BY LD. AR THAT THIS COMPANY IS INTO PRODUCT DEVELOPMENT AN D OWNS PRODUCTS NAMELY 4S ETRANS AND 4S E LOG. IT HAS BEEN SUBMITTED THAT THESE PRODUCTS ARE USED IN SUN MICROSYSTEMS IM C 9 PAGE 24 OF 28 ITA NO.337 & 204/BANG/2014 APPLICATION VERIFICATION KIT CERTIFIED FOR ENTERPRI SES. LD.AO HOWEVER REJECTED THIS CONTENTION OF ASSESSEE FOR TH E REASON THAT PRODUCT REVENUE ONLY AMOUNTS TO 16% OF TOTAL SALES AND THE REST IS ATTRIBUTABLE TO SOFTWARE SERVICES AND HENCE IT I S COMPARABLE. LD.SR.DR RELIED ON OBSERVATIONS BY AUTHORITIES BELO W. 74. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 75. WE NOTE THAT, THIS COMPANY IS ENGAGED IN RESEAR CH AND DEVELOPMENT AND HAS CATEGORISED ITSELF TO BE A PROD UCT COMPANY AT PAGE 78. IN THE P&L ACCOUNT INCOME HAS BEEN SHOW N UNDER THE CATEGORY OF SALES AND IN SCHEDULE 12 THERE ARE NO SEGMENTAL DETAILS AVAILABLE FROM PRODUCT SALES AND SERVICES S ALES. 76. EVEN OTHERWISE THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE TO ASSESSEE MAJORLY FOR THE REASON THAT IT IS A PRO DUCT COMPANY. AND A PRODUCT COMPANY CANNOT BE COMPARED TO A CAPTI VE CONTRACT-BASED SERVICE PROVIDER LIKE ASSESSEE. ACCORDINGLY, WE DIRECT LD.TPO TO EXCLUDE THIS COMPA NY FROM THE LIST. GOEMETRIC SOFTWARE SOLUTIONS CO. LTD., 77. LD.AR OBJECTED FOR THIS COMPANY TO BE INCLUDED AS IT HAS INCOME GENERATED FROM PRODUCT SALE. IT IS ALSO BEEN SUBMITTED THAT THIS COMPANY HAS INCREASED IS REVENUE AND HAS LAUNCHED THE 1 ST CAD PDM PRODUCT. FURTHER IT HAS BEEN SUBMITTED THA T THIS COMPANY HAS ITS OWN RESEARCH AND DEVELOPMENT F OR SOFTWARE PRODUCT DEVELOPMENT IN PLM DOMAIN. LD. A.R. HAS EMP HASISED THAT THIS COMPANY IS A FULL-FLEDGED ENTERPRISE IN T HEREBY MAKING IT FUNCTIONALLY NOT SIMILAR WITH A CONTRACT SERVICE PR OVIDER LIKE ASSESSEE. PAGE 25 OF 28 ITA NO.337 & 204/BANG/2014 78. ON THE CONTRARY LEARN SENIOR DR SUBMITTED THAT INCOME GENERATED FROM SALE OF PRODUCTS ARE LESS THAN 25% O F OVERALL BUSINESS AND THEREFORE IS COMPARABLE IN RESPECT OF THE SOFTWARE DEVELOPMENT SERVICE SEGMENT. 79. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGE 119 OF PAPER BOOK. AT PAGE 16 TO BE NOTE THE PROFIT AND LOSS ACCOUNT WHEREIN INCOME IS GENERATED FROM SALE OF SOFTWARE PACKAGES AND SERVICES. ANNUAL REPORT SPECI FIES THE COMPANY TO BE A PRODUCT BASED COMPANY HAVING ITS OW N RESEARCH AND DEVELOPMENT FOR DEVELOPMENT OF THE SOFTWARE PRO DUCTS. FURTHER THE PROFIT AND LOSS ACCOUNT DOES NOT SPECIF Y THE SEGMENTAL DETAILS OF SOFTWARE PRODUCTS AND SERVICES RENDERED BY THIS COMPANY. 80. WE ARE THEREFORE OF OPINION THAT, FUNCTIONS PER FORMED BY THIS COMPANY IS FUNCTIONALLY NOT SIMILAR WITH THAT OF A CONTRACT SERVICE PROVIDER LIKE ASSESSEE. ACCORDINGLY, WE DIRECT LD.TPO TO EXCLUDE THIS COMPA RABLE FROM FINALIST. BODHTREE CONSULTING LTD 81. THIS COMPARABLE HAS BEEN OBJECTED BY LD.AR ON T HE BASIS THAT, IT IS FUNCTIONALLY NOT COMPARABLE WITH ASSESS EE. IT HAS BEEN SUBMITTED THAT THIS IS A PRODUCT COMPANY AND REVENU E RECOGNITION IS ON A FIXED-PRICE MODEL. 82. THE LD. SENIOR DR HOWEVER PLACED RELIANCE UPON ORDERS PASSED BY AUTHORITIES BELOW. 83. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. PAGE 26 OF 28 ITA NO.337 & 204/BANG/2014 84. WE NOTE THAT ANNUAL REPORT OF THIS COMPANY IS P LACED AT PAGE 1 OF PAPER BOOK. FROM THE FIXED ASSETS A SCHED ULED WE NOTE THAT THIS COMPANY HAS COMPUTER SOFTWARE AS A PART O F BLOCK OF ASSETS. IT ALSO HAS CAPITAL WORK IN PROGRESS. THUS IN OUR VIEW THIS IS A COMPANY DEVELOPS SOFTWARE ON ITS OWN AND IS A FULL-FLEDGED ENTREPRENEUR WHICH CANNOT BE COMPARED TO A CONTRACT SERVICE PROVIDER LIKE ASSESSEE THAT FUNCTIONS STRICTLY ON T HE INSTRUCTIONS OF ITS AES. ACCORDINGLY, WE DIRECT LD.TPO/AO TO EXCLUDE THIS CO MPANY FROM FINAL LIST. ACCORDINGLY GROUND 3 (E) AND ADDITIONAL GROUND 8 RA ISED BY ASSESSEE STANDS ALLOWED. 85. GROUNDS 4-6: LD.AR HAS SUBMITTED THAT ASSESSEE DO NOT WISH TO PRESS THESE GROUNDS . ACCORDINGLY THESE GROUNDS ARE DISMISSED. 86. GROUND 7 IS REGARDING THE BENEFIT OF APPLYING THE RANGE OF +/-5% IN DETERMINATION OF ARMS LENGTH PRICE. 87. WE DIRECT LD.TPO/AO TO CONSIDER THIS CLAIM IN A CCORDANCE WITH LAW. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. IN THE RESULT APPEAL STANDS ALLOWED AS INDICATED H EREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH AUG, 2020 SD/- SD/- (B. R. BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 14 TH AUG, 2020. /VMS/ PAGE 27 OF 28 ITA NO.337 & 204/BANG/2014 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 28 OF 28 ITA NO.337 & 204/BANG/2014 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -08-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -08-2020 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -08-2020 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -08-2020 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -08-2020 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -08-2020 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -07-2020 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