Deputy Commissioner of Income-tax, V. Principal Global Services Pvt. Ltd., Pune

ITA 337/PUN/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1959 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-02-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 30-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Revised return
• Section: 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA , A M . / ITA NO. 2 05 /PN/201 5 / ASSESSMENT YEAR : 20 0 7 - 0 8 PRINCIPAL GLOBAL SERVICES PRIVATE LIMITED, LEVEL 6 & 7, TOWER VI, CYBERCITY, MAGARPATTA CITY, HADAPSAR, PUNE 4110 13 . / APPELLANT PAN: AA DCP 7369P VS. THE DY . COMMISSIONER OF INCOME TAX, CIRCLE - 4 , PUNE . / RESPONDENT . / ITA NO. 337 /PN/201 5 . / ITA NO. 337 /PN/201 5 / ASSESSMENT YEAR : 20 0 7 - 08 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE - 4, PUNE . / APPELLANT VS. PRINCIPAL GLOBAL SERVICES PRIVATE LIMITED, LEVEL 6 & 7, TOWER VI, CYBERCITY, MAGARPATTA CITY, HADAPSAR, PUNE 411013 . / RESPONDENT PAN: AADCP7369P ASSESSEE BY : SHRI DHANESH BAFNA R EVENUE BY : S HRI S.K. RASTOGI , CIT / DATE OF HEARING : 25 . 0 2 .201 6 / DATE OF PRONOUNCEMENT: 15 . 0 4 .201 6 ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 2 / ORDER PER SUSHMA CHOWLA, JM: THE CROSS APPEAL S FILED BY THE ASSESSEE AND THE REVENUE ARE AGAINST ORDER OF D CIT , CIRCLE 4 , PUNE , DATED 29 . 0 1 .201 5 RELATING TO AS SESSMENT YEAR 200 7 - 0 8 PASSED U NDER SECTION S 143(3) R.W.S. 144C(1) OF THE INCOME - TAX ACT, 1961 (IN SHORT THE ACT) . 2 . THE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. FIRST, WE SHALL TAKE UP THE APPEAL FILED BY THE ASSESSEE IN ITA NO.205/PN/2015, WHEREIN VARIOUS GROUNDS OF APPEAL HAVE BEEN RAISED, WHICH READ AS UNDER: - ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW; 1. THE LD ASSESSI NG OFFICER ('A O ') PURSUANT TO THE DIRECTIONS OF THE LD. DISPUTE RESOLUTION PANEL ('DRP') ERRED IN REJECTING THE BENCHMARKING APPROACH ADOPTED/CONTEMPORANEOUS DOCUMENTATION MAINTAINED BY THE APPELLANT AND THEREBY MAKING A TRANSFER PRICING ADJUSTMENT OF RS.1 ,95,83,147 TO THE INCOME OF THE APPELLANT BY HOLDING THAT THE INTERNATIONAL TRANSACTION, PERTAINING TO PROVISION OF INFORMATION TECHNOLOGY ( IT OR SOFTWARE SERVICES') AND IT ENABLED BACK OFFICE SUPPORT SERVICES ('ITES SERVICES OR BACK OFFICE SUPPORT SERVIC ES') TO THE ASSOCIATED ENTERPRISE ('AE'), ARE NOT AT ARM'S LENGTH UNDER THE INCOME - TAX ACT, 1961 ('THE ACT'). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. DRP/A O ERRED IN MODIFYING THE BENCHMARKING ANALYSIS, AS CONDUCTED BY THE APPELLANT USING TRANSACTIONAL NET MARGIN 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. IN DOING SO, THE LD DRP / A O SPECIFICALLY ERRED IN: A) INCLUDING THE COMPANIES WHICH ARE NOT FUNCTIONALLY COMPARABLE TO THE IT AND ITES SERVICES RENDERED BY THE APPELLANT IN FINAL SET OF COMPARABLES ON AN ADHOC BASIS, THEREBY RESORTING TO CHERRY PICKING OF COMPARABLES; B) REJECTING COMPANIES FUNCTIONALLY S IMILAR TO THAT OF THE APPELLANT'S BUSINESS OPERATIONS OF PROVISION OF IT AND ITES SERVICES FROM FINAL SET OF COMPARABLES. C) INCLUDING COMPANIES HAVING SIGNIFICANT RELATED PARTY TRANSACTIONS. ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 3 3. THE LD. DRP / A O ERRED IN CONSIDERING THE SINGLE YEAR DAT A FOR THE COMPARABLES I.E. DATA FOR FY 2006 - 07 ONLY AND DISREGARDING MULTIPLE YEAR DATA WHICH WAS CONSIDERED BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF RULE 10 B(4) OF THE INCOME - TAX RULE, 1962 ('RULES'). 4. THE LD. DRP / A O ERRED IN NOT ALLOWI NG AN ADJUSTMENT FOR THE DIFFERENCE BETWEEN THE LEVEL OF RISK BORNE/ASSETS EMPLOYED BY THE COMPARABLES AND THE APPELLANT AS PROVIDED BY THE APPELLANT, WITHOUT PROVIDING ANY COGENT REASONS, AND DISREGARDING THE PROVISIONS OF RULES 10 B(3) READ WITH RULE 10 C OF THE RULES. IN DOING SO, THE LD DRP / A O ERRED B Y: ( I ) FAILING TO CAPTURE THAT THE APPELLANT IS A ROUTINE CAPTIVE 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 10 B(3) READ WITH RULE 10 C OF THE RULES. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER. YOURS APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, WITHDRAW, MODIFY AND / OR SUBSTITUTE, AND TO WITHDRAW THE ABOVE GROUNDS OF APPEAL. 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE HAD FILED THE ORIGINAL RETURN OF INCOME DECLARING TOTAL INCOME OF RS.NIL ON 31.10.2007 . SUBSEQUENTLY, THE REVISED RETURN WAS FILED DISCLOSING TOTAL INCOME OF RS. 12,529/ - . THE CA SE OF THE ASSESSEE WAS PICKED UP FOR SCRUTINY AND ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT. THEREAFTER, THE SAID ASSESSMENT WAS SUBJECTED TO REVISION UNDER SECTION 263 OF THE ACT BY THE COMMISSIONER OF INCOME TAX I, PUNE. THE COMMISSION ER HELD THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER TO BE BOTH ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AND NOTED THAT THE ASSESSING OFFICER , WARD 3(2)(4), MUMBAI HAD FAILED TO TAKE NOTE THAT IN THIS CASE AN AUDIT REPORT IN FORM NO.3CE B WAS REQUIRED AND PROCEEDINGS UNDER SECTION 92CA(3) OF THE ACT WERE TO BE CONSIDERED AND H E PASSED THE ASSESSMENT ORDER WITHOUT FOLLOWING MANDATORY PROCESS. ON THE OTHER HAND, FORM NO.3CEB WAS FILED BY THE ASSESSEE WITH THE ACIT, CIRCLE - 4, WHO INITIATED THE PROCESS WITH TPO, PUNE AND PASSED ORDER UNDER SECTION 92CA(3) OF THE ACT PROPOSING AN ADJUSTMENT OF RS.3,17,20,190/ - TO THE ARM'S LENGTH PRICE . AS THE ASSESSING OFFICER HAD PASSED THE ORDER UNDER SECTION 143(3) OF THE ACT BEFORE ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 4 RECEIPT OF ORDER UNDER SECTION 92CA(3) OF THE ACT PASSED BY THE TPO, THE CONSEQUENTIAL ADJUSTMENT AS SUGGESTED BY THE TPO WAS NOT MADE. THEREAFTER, THE ORIGINAL ASSESSMENT WAS SET - ASIDE WITH DIRECTION TO COMPLETE ASSESSMENT PROCEEDINGS IN ACCORDANCE WITH LAW. ACCORDINGLY, THE ASSESSING OFFICER ISSUED NOTICE UNDER SECTION 143(2) OF THE ACT TO THE ASSESSEE AND MADE A REFERENCE TO THE T RANSFER P RICING O FFICER (TPO) UNDER SECTION 92CA(1) OF THE ACT IN ORDER TO DETERMINE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES. THE TPO NOTED THAT THE ASSESSEE WAS ENGAGED IN TWO KINDS OF ACTIVITIES I.E. SOFTWARE SERVICES SEGMENT AND BACK OFFICE SUPPORT SERVICES I.E. BOTH IN THE FIELD OF IT SERVICES AND ITES , RESPECTIVELY. THE TPO P ASSED AN ORDER DATED 29.01.2014 UNDER SECTION 92CA(3) OF THE ACT MAKING AN ADJUSTMENT ON ACCOUNT OF PROVISION OF SOFTWARE SERVICES (IT) TO THE TUNE OF RS.1.83 CRORES AND PROVISION OF BACK OFFICE SUPPORT SERVICES (ITES) TO THE TUNE OF RS. 1.83 CRORES , TOTALI NG RS.3.66 CRORES . THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE DRAFT OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE DRAFT ASSESSMENT ORDER , WHO IN TURN, GAVE INSTRUCTIONS TO THE ASSESSING OFFICER, WHO REVISED THE TP ADJUSTMENT OF RS. 1,24,97 , 284/ - UNDER THE HEAD OF PRO VISION OF SOFTWARE SERVICES (IT) AND ALSO REVISED TP ADJUSTMENT OF RS. 70,73,604/ - UNDER THE HEAD OF BACK OFFICE SUPPORT SERVICES SEGMENT BY RE VI SING THE LIST OF COMPARABLE COMPANIES FOR BOTH THE SOFTWARE SERVICES SEGMENT AND ALSO THE BACK OFFICE SUPPORT SE RVICES SEGMENT. THE REVISED LIST IS PLACED UNDER PARA 7 AT PAGES 4 AND 6 OF THE ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE ACT. THE ASSESSING OFFICER THUS, MADE AN ADDITION OF RS.1,95,83,147/ - ON ACCOUNT OF ARM'S LENGTH PRICE OF INTERNATIONAL T RANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES. 5. THE ASSESSEE IS IN APPEAL BEFORE US IN RESPECT OF THAT IN BOTH SEGMENTS INCLUSION AND EXCLUSION OF CERTAIN COMPANIES. THE REVENUE IS IN APPEAL BEFORE ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 5 US AGAINST THE DIRECTIONS O F DRP IN REJECTING CERTAIN COMPANIES IN BOTH THE SEGMENTS. THE ASSESSEE HAS RAISED SEVERAL GROUNDS OF APPEAL WITH REGARD TO TRANSFER PRICING ADJUSTMENT MADE IN RESPECT OF INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE ENTERPRISES IN THE SOFTWARE DEVELOPMENT SEGMENT AND ALSO IN ITES SEGMENT. HOWEVER, DURING THE COURSE OF HEARING OF THE PRESENT APPEAL, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT IF THE ASSESSEE SUCCEEDS ON ITS PLEA OF EXCLUSION OF BODHTREE CONSULTING LTD. FROM THE LIST OF COMPARABLES, THEN VARIATION BETWEEN ARM'S LENGTH PRICE DETERMINE D POST THE DIRECTIONS OF DRP AND THE SAID VARIATION OF INTERNATIONAL TRANSACTION WOULD FALL WITHIN + / - 5% AND THEREFORE, IN TERMS OF SECTION 92C(2) OF THE ACT, NO ADJUSTMENT WOULD BE REQUIRED TO BE MADE. SIMILARLY, IN RESPECT OF ITES SEGMENT, THE PLEA OF THE ASSESSEE WAS THAT VISHAL INFORMATION TECHNOLOGIES LTD. I.E. CORAL HUB SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. THE REVENUE BEFORE US HAS ALSO RAISE D SEVERAL GROUND S OF APPEAL. HOWEVER, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ENDS OF LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ENDS OF JUSTICE WOULD BE MET IN CASE THE DIRECTIONS OF DRP ARE UPHELD IN RESPECT OF EXCLUSION OF INFOSYS TECHNOLOGIES LTD. FOR HIGHER TURNOVER UNDER THE SOFTWARE SERVICES IT SEGMENT AND ALSO ICSA (INDIA) LTD. FOR HAVING FUNCTIONALLY DISSIMILAR AND HAVING R&D EXPENDITURE OF MORE THAN 3%. IT WAS FURTHER POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE SAID COMPANY WAS REJECTED BY PUNE BENCH OF TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2009 - 10 IN RESPECT OF ITES SEGMENT. THE ASSESSEE IS AGGRIEVED BY THE ORDER OF TPO IN HOLDING THAT THERE COULD BE NO SUB - CLA SSIFICATION UNDER ITES SEGMENT. HE FURTHER POINTED OUT THAT THE SUB - CLA SSIFICATION HAS TO BE DONE BETWEEN KPO AND BPO CASES AND WHERE THE CONCERNS PICKED UP BY THE TPO WERE ENGAGED IN KPO OPERATIONS, THEN THE MARGINS OF SAID CONCERNS ARE NOT TO BE COMPARED WITH THE MARGINS OF ASSESSEE COMPANY, WHICH IS A BPO COMPANY. RELIANC E FOR THIS PROPOSITION , WAS MADE ON THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT IN ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 6 THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. (TS - 387 - HC - 2015(DEL) - TP), WHERE IN, IT HAS BEEN LAID DOWN THAT YOU HAVE TO GO TO THE FUNCTIONALITY OF CONCERNS AND IF THEY A RE FUNCTIONALLY DIFFERENT, THEN THESE ARE TO BE EXCLUDED , THEN SUB - CLASSIFICATION HAS BEEN ALLOWED BY THE HONBLE HIGH COURT. OUR ATTENTION WAS DRAWN TO THE GROUND OF APPEAL NO.3, WHEREIN THE REVENUE IS A GGRIEVED BY EXCLUSION OF VISESH INFOTECNICS LTD. , E CLERX SERVICES LTD. FOR BEING ENGAGED IN KPO SERVICES AND CS SOFTWARE ENTERPRISES FOR BEING ENGAGED IN HEALTHCARE SERVICES. IT WAS FURTHER POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT SIMILARLY ACCENTIA TECHNOLOGIES LTD. AND APEX KNOWLEDGE SOLUTIONS PVT. LTD. ALSO TO BE EXCLUDED FROM FINAL SET OF COMPARABLES UNDER THE HEAD ITES SEGMENT. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE RELIED ON THE ORDER OF ASSESSING OFFICER / DRP. 7. WE HAVE HEARD THE RIVAL CONTEN TIONS AND PERUSED THE RECORD. THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS ENGAGED IN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES. THE ASSESSEE HAD PROVIDED SOFTWARE DEVELOPMENT SERVICES AND ALSO BACK OFFICE SUPPORT SERVICES TO ITS ASS OCIATE ENTERPRISES. THE ASSESSEE WAS OPERATING AS CAPTIVE SERVICE PROVIDER AND WAS REMUNERATED AT COST PLUS BASIS. FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATE ENTERPRISES, THE ASSESSEE HAD APPLIED TNMM METHOD AND THE MARGINS OF ASSESSEE WERE 14.59%. THE ASSESSEE HAD SELECTED CERTAIN COMPANIES AS COMPARABLE AND HAD POINTED OUT THAT ITS TRANSACTION WAS AT ARM'S LENGTH. HOWEVER, THE TPO REJECTED THE COMPARABLES SELECTED BY THE ASSESSEE AND P ICKED UP FRESH COMPARABLES AND WORKED OUT THE MARGINS OF COMPARABLES AT 28.36% AS AGAINST THE MARGINS SHOWN BY THE ASSESSEE AT 14.59% . H ENCE, AN ADJUSTMENT OF RS.1,83,00,000/ - WAS PROPOSED IN IT SERVICES SEGMENT. THE DRP ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 7 ON THE OTHER HAND DIRECTED THAT C ERTAIN COMPANIES ARE TO BE EXCLUDED AND THE ARITHMETIC MEAN OF COMPARABLES WAS REVISED TO 24% RESULTING IN TP ADJUSTMENT OF RS.1,24,97,284/ - . THE RESULTANT LIST OF COMPARABLES APPLIED BY THE ASSESSING OFFICER AFTER DIRECTIONS OF DRP ARE TOTALING 17 WHICH ARE ENLISTED AT PAGE 4 OF THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(1) OF THE ACT. THE LIMITED PLEA RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US IS WITH REGARD TO EXCLUSION OF CONCERN BODHTREE CONS U LTING LT D. FROM THE FINAL LIST OF COMPARABLES ON THE BASIS THAT THE SAID CONCERN HAD SHOWN UNUSUAL TREND OF PROFITABILITY. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID COMPANY HAD BEEN REJECTED AS A COMPARABLE BY PUNE BENCH OF TRIBUNAL IN SERIES OF CASES. 8. SIMILAR ISSUE WITH REGARD TO EXCLUSION OF BODHTREE CONSULTING LTD. AROSE BEFORE PUNE BENCH OF TRIBUNAL IN PTC SOFTWARE (INDIA) PVT. LTD. VS. DCIT IN ITA NO.336/PN/2014, RELATING TO ASSESSMENT YEAR 20 09 - 10 , WHEREIN VIDE OR DER NO.336/PN/2014, RELATING TO ASSESSMENT YEAR 20 09 - 10 , WHEREIN VIDE OR DER DATED 31.10.2014 , THE TREND OF OP/TC OF BODHTREE CONSULTING LTD. WAS NOTED AS 13.87% IN FY 2005 - 06 , 80.15% IN FY 2006 - 07 , 19.89% IN FY 2007 - 08 , 62.27% IN FY 2008 - 09, 33.42% IN FY 2009 - 10 AND ( - ) 4.46% IN FY 2010 - 11 . IN VIEW OF THE ABOVE SAID OSCILLAT ION SHOWN BY THE ASSESSEE AND FOLLOWING THE RATIO LAID DOWN BY PUNE BENCH OF TRIBUNAL IN PTC SOFTWARE (INDIA) PVT. LTD. VS. DCIT (SUPRA) , THE SAID CONCERN WAS DIRECTED TO BE EXCLUDED FROM FINAL LIST OF COMPARABLES. THE TRIBUNAL HELD AS UNDER: - 29. THE AS SESSEE FURTHER HAS ASSAILED THE INCLUSION OF BODHTREE CONSULTING LTD. APPEARING AT ITEM NO.6 IN THE LIST OF COMPARABLES SELECTED BY THE TPO. THE SAID COMPANY WAS SELECTED AS A COMPARABLE BY THE TPO BECAUSE IN ASSESSMENT YEAR 2008 - 09, BODHTREE CONSULTING L TD. WAS SELECTED BY THE ASSESSEE ITSELF. ON THE OTHER HAND, THE OBJECTION RAISED BY THE ASSESSEE WAS THAT THE CURRENT YEARS PROFITS OF THE SAID COMPANY WERE ON HIGHER SIDE AND THE SAME THUS, WAS NOT FUNCTIONALLY COMPARABLE. THE TREND OF OP/TC OF BODHTRE E 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% ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 8 30. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT ADMITTEDLY IT HAD SELECTE D THE SAID COMPANY IN THE PRECEDING YEAR AS A COMPARABLE BECAUSE IT WAS FUNCTIONALLY COMPARABLE IN THE SAID YEAR. HOWEVER, BECAUSE OF THE FLUCTUATING PROFITS SHOWN BY THE ASSESSEE WHICH VARIED IN THE RANGE OF 80.15% TO - 4.46%, THE SAID COMPANY WAS NOT 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 TH E RIVAL SUBMISSIONS. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENTRES (SUPRA) HAD AN OCCASION TO DEAL WITH THE QUESTION AS TO WHETHER HIGH PROFIT MARGIN MAKING COMPANIES SHOULD BE EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH AFTER CONSID ERING SEVERAL ASPECTS HELD IN PARA 88 OF ITS ORDER THAT THE POTENTIAL COMPARABLE COMPANIES CANNOT BE EXCLUDED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. THE SPECIAL BENCH HELD THAT IN SUCH CASES IT WOULD REQUIRE FURTHER INVESTIGATION TO AS CERTAIN THE REASONS FOR UNUSUALLY HIGH PROFIT AND IN ORDER TO ESTABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COMPARABLE OR NOT. IN THE LIGHT OF THE AFORESAID DECISION OF THE SPECIAL BENCH AND IN VIEW OF THE ADMITTED POSITION THAT TH E ASSESSEE FOLLOWS FIXED PRICE PROJECT MODEL WHERE REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS, THERE IS A POSSIBILITY OF THE EXPENDITURE IN RELATION TO THE REVENUE BEING BOOKED IN THE EARLIER YEAR. T HE RESULTS OF BODHTREE FROM FY 2003 TO 2008 EXCLUDING FY 2007 AS GIVEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WERE ALSO PERUSED. PERUSAL OF THE SAME SHOWS, THAT THERE HAS BEEN A CONSISTENT CHANGE IN THE OPERATING MARGINS. THE CHART FILED BY THE ASSESSEE IN THIS REGARD IS GIVEN AS AN ANNEXURE TO THIS ORDER. IT APPEARS TO US THAT THE REVENUE RECOGNITION METHOD FOLLOWED BY THE ASSESSEE IS THE REASON FOR THE DRASTIC RECOGNITION METHOD FOLLOWED BY THE ASSESSEE IS THE REASON FOR THE DRASTIC VARIATION IN THE PROFIT MARGINS OF THIS COMPANY. IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT WOULD BE SAFE TO EXCLUDE BODHTREE CONSULTING FROM THE FINAL LIST OF COMPARABLES CHOSEN BY THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. 32. FURTHER, THE PUNE BENCH OF TRIBUNAL IN CUMMINS TURBO TECHNOLOGIES LTD., UK, VS. DY.DIT, HAD ON SIMIL AR ISSUE OF EXCLUSION OF ABNORMAL PROFIT MAKING CONCERN HELD AS UNDER: - 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL STANDS ON THIS 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 TO THIS QUESTION WILL DEPEND ON THE FACTS AND CIRCUMSTANCES 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 COMPA RABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS TO WHETHER EARNING OF HIGH PROFIT REFLECTS A NORMAL BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITIONS PREVAILING IN THE RELEVANT YEAR. THE PROFIT MARGIN EARNED BY SUCH ENTI TY IN THE IMMEDIATELY PRECEDING YEAR/S MAY ALSO BE TAKEN INTO CONSIDERATION 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 CONDITIONS. IF IT IS FOUND ON SUCH INVESTIGATION THAT THE HIGH MARGIN PROFIT MAKING COMPANY DOES NOT SATISFY THE ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 9 COMPARABILITY ANALYSIS AND OR THE HIGH PROFIT MARGIN EARNED BY IT DOES NOT REFLECT THE NORMAL BUSINESS CONDI TION, 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 INTERNATIONAL TRANSACTION. OTHERWISE, THE ENTITY SATISFYING THE COMPARABILITY AN ALYSIS WITH ITS HIGH PROFIT MARGIN REFLECTING NORMAL BUSINESS CONDITION SHOULD NOT BE REJECTED SOLELY 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 EARNIN G ABNORMAL HIGH PROFIT MARGINS CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES UNLESS APPROPRIATE INVESTIGATIONS ARE MADE. IT WOULD BE NECESSARY TO ASCERTAIN AS TO WHETHER THE HIGH PROFIT MARGINS REFLECT A NORMAL BUSINESS PHENOMENA OR WHETHER IT IS THE RE SULT OF CERTAIN 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 REQUIRED TO BE CONSIDERED IN ORDER TO ESTABLISH WHETHER THE HIGH PROFIT MARGINS REFLECT A NORMAL BUSINESS TREND OR OTHERWISE. IN THIS 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 S UCCEEDING FINANCIAL YEAR. NOTABLY, FOR THE FINANCIAL YEAR UNDER CONSIDERATION, THE MARGIN OF THE SAID CONCERN IS 34.71% WHEREAS FOR THE PRECEDING THREE FINANCIAL YEARS OF 2003 - 04, 2004 - 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 YEARS SUGGEST THAT THERE IS A WIDE FLUCTUATION IN THE REVENUE GENERATION OF THE SAID CONCERN DURING THE FINANCIAL YEAR UNDER CONSIDERATION AS COMPARED TO THE PAST THREE FINANCIAL YEAR UNDER CONSIDERATION AS COMPARED TO THE PAST THREE FINANCIAL YEARS. FOR THE SUBSEQUENT FINANCIAL YEAR, THE REVENUE GENERATION HAS TAKEN A DOWN WARD TREND WHICH AGAIN REFLECTS A WIDE FLUCTUATION. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE HAS REFERRED TO THE ANNUAL REPORT OF THE SAID CONCERN FOR THE FINANCIAL YEAR UNDER CONSIDERATION TO POINT OUT THAT THE COMPANY HAS ACKNOWLEDGE D A GROWTH OF 132.86% IN ITS REVENUE GENERATION AS COMPARED TO THE IMMEDIATELY PRECEDING FINANCIAL YEAR. IN OUR CONSIDERED OPINION, THERE IS NO MATERIAL TO SAY THAT THE HIGH PROFIT MARGIN OF 34.71% DECLARED BY THE SAID CONCERN IN THE INSTANT FINANCIAL YEA R IS A NORMAL BUSINESS TREND. OSTENSIBLY, THE FINANCIAL RESULTS OF EITHER THE THREE PRECEDING FINANCIAL YEARS OR OF THE SUCCEEDING FINANCIAL YEAR DO NOT JUSTIFY THAT THE MARGIN OF 34.71% FOR THE YEAR UNDER CONSIDERATION IS A NORMAL BUSINESS TREND. THUS, IN OUR CONSIDERED OPINION, THE INCLUSION OF THE SAID CONCERN IN THE FINAL SET OF COMPARABLES WOULD NOT LEND CREDIBILITY TO THE COMPARABILITY ANALYSIS AND THEREFORE IT DESERVES TO BE EXCLUDED. WE HOLD SO. 9. THE PLEA SETUP BY THE CIT(A), AND WHICH HAS BE EN REITERATED BEFORE US IS THAT THE POINT SETUP BY THE ASSESSEE WOULD INVOLVE CONSIDERATION OF MULTIPLE YEAR DATA OF THE COMPARABLE WHEREAS THE TRANSFER PRICING ANALYSIS IS REQUIRED TO BE DONE BASED ON THE SINGULAR FINANCIAL YEAR DATA I.E. FINANCIAL YEAR D ATA OF THE COMPARABLES RELEVANT TO THE YEAR IN WHICH THE INTERNATIONAL TRANSACTIONS HAVE BEEN ENTERED INTO. IN OUR CONSIDERED OPINION, THE AFORESAID PLEA OF THE REVENUE IS UNTENABLE HAVING REGARD TO THE ISSUE IN QUESTION. NO DOUBT, SUB - RULE (4) OF RULE 1 0B OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES) PRESCRIBE THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNA TIONAL TRANSACTION HAS BEEN ENTERED INTO. SO HOWEVER, THE AFORESAID RULE IS NOT ABSOLUTE ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 10 INASMUCH AS PROVISO THEREOF PERMITS USE OF THE DATA RELATING TO OTHER YEARS, SUBJECT TO THE CONDITION THAT IT REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DE TERMINATION OF TRANSFER PRICES IN RELATION TO THE TESTED TRANSACTION. WE ARE ONLY POINTING OUT THE AFORESAID TO SAY THAT THE PROPOSITION BEING CANVASSED BY THE REVENUE THAT DATA OF THE FINANCIAL YEAR 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 COMPARABILITY ANALYSIS IS TO DETERMINE THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION BY MEANS OF EXAMINING SIMILARLY PLACED U NCONTROLLED TRANSACTIONS. THEREFORE, IF ON FACTS, IT CAN BE ESTABLISHED THAT ADOPTION OF A CERTAIN COMPARABLE WOULD LEAD TO SKEWED RESULTS OR THAT THE FINANCIAL DATA OF A PARTICULAR COMPARABLE IS OTHERWISE DEVOID OF CREDIBILITY, SUCH COMPARABLES WOULD DES ERVE TO BE EXCLUDED FROM THE LIST OF COMPARABLES EVEN IF SUCH AN EXERCISE INVOLVED EXAMINATION OF DATA OF THE COMPARABLES FOR MORE THAN ONE FINANCIAL YEAR. IN THE PRESENT CASE, AS OUR DISCUSSION IN THE EARLIER PARAS REVEAL, THE PROFIT MARGIN OF 34.71% FO R THE YEAR UNDER CONSIDERATION IS AN ABNORMAL BUSINESS TREND, AND, 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 INFORMED 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 COMPANY WAS REJECTED AS IT WAS NOT ENGAGED IN THE AVAILABLE. THE SAID COMPANY WAS REJECTED AS IT WAS NOT ENGAGED IN THE SOFTWARE DEVELOPMENT 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 ENGAGE D IN THE SALE OF SOFTWARE PRODUCTS AND NO SEGMENTAL 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 OUGHT TO BE CONSIDERED WHILE SELECTING THE SAID COMPARABLES. THE PERUSAL OF THE RESULTS SHOWN BY THE SAID COMPANY REFLECTED HIGH MARGINS IN CERTAIN YEARS AND VERY LOW IN OTHER YEARS, WHICH DO NOT REFLECT NORMAL BUSINESS CONDITIONS. CONSEQUENTLY, THE MARGINS OF THE SAID COMPANIES CANNOT BE APPLIED AS COMPARABLES WHILE BENCHMARKING INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN IT SEGMENTS. 9 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE DURING THE COURSE OF ARGUMENTS FURTHER STATED THAT IN CASE BODHTR EE CONSULTING LTD. WAS EXCLUDED FROM FINAL SET OF COMPARABLES, THEN THE STATED 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 ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 11 REQUIRED TO BE MADE . T HOUGH THE ASSESSEE DURING THE COURSE OF HEARING HAD RAISED VARIOUS ARGUMENTS IN RESPECT OF EXCLUSION OF OTHER COMPANIES AND INCLUSION OF CERTAIN COMPANIE S SELECTED BY WAY OF FRESH SEARCH, BUT THE SAME ARE RENDERED A S ACADEMIC AND ARE NOT BEING ADJUDICATED FOR THE PRESENT AS WE HAVE UPHELD THE PLEA OF THE ASSESSEE VIS - - VIS EXCLUSION BODHTREE CONSULTING LTD. FROM THE FINAL SET OF COMPARABLES. WE ACCORDINGL Y, DIRECT THE ASSESSING OFFICER TO RE - COMPUTE THE ARMS LENGTH PRICE OF THE TRANSACTIONS OF ASSESSEE COMPANY WITH ITS AES APPLYING THE AVERAGE PROFIT MARGIN OF REMAINING COMPARABLES AND IF THE DIFFERENCE BETWEEN THE ARMS PRICE LENGTH SO RECOMPUTED AND THE PRICE ACTUALLY CHARGED IS WITHIN THE LIMIT OF +/ - 5%, THEN NO TRANSFER PRICING ADJUSTMENT IS TO BE MADE. THE GROUNDS OF APPEAL RAISED BY ASSESSEE ARE THUS, ALLOWED FOR STATISTICAL PURPOSES. 10 . NOW, COMING TO THE SECOND ISSUE RAISED BY THE ASSESSEE WITH REGARD TO PROVISION OF INTERNATIONAL TRANSACTION IN RESPECT OF ITES SERVICES. PROVISION OF INTERNATIONAL TRANSACTION IN RESPECT OF ITES SERVICES. 1 1 . THOUGH THE ASSESSEE HAS RAISED SEVERAL GROUNDS OF APPEAL BUT THE PLEA OF ASSESSEE BEFORE US WAS LIMITED AS TO EXCLUSION OF CORAL HUB FROM THE FINAL LIST OF COMPARABLES. 1 2 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID CONCERN WAS FUNCTIONALLY DIFFERENT AS IT HAD SIGNIFICANT VENDOR PAYMENTS AND WAS OUTSOURCING ITS BUSINESS. 1 3 . ON PERUSAL OF RECORD, WE FIND THAT THE ASSESSEE HAD APPLI ED TNMM METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTION OF PROVISION OF BACK OFFICE SUPPORT SERVICES TO ITS ASSOCIATE ENTERPRISES. THE MARGINS OF ASSESSEE WERE 15.34% AND THEY WERE HELD TO BE AT ARM'S LENGTH PRICE BY SELECTING LIST OF COMPARABLES IN THI S REGARD BY THE ASSESSEE . HOWEVER, THE TPO RE - WORKED THE ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 12 LIST OF COMPARABLES IN BACK OFFICE SUPPORT SERVICES SEGMENT AND THE ARITHMETIC MEAN OF COMPARABLES WERE 33.33% AND ADJUSTMENT OF RS.1.83 CRORES WAS PROPOSED BY THE TPO. THE DRP DIRECTED TO EXCLUDE CERTAIN COMPANIES BASED ON WHICH THE ARITHMETIC MEAN RE - WORKED AT 22.71% RESULTING IN TP ADJUSTMENT OF RS.70,73,604/ - . THE FINAL LIST OF COMPARABLES W AS OF 15 CONCERNS AND THE ASSESSEE IS AGGRIEVED BY THE INCLUSION OF MARGINS OF VISHAL INFORMATION TECHNOL OGIES LTD. / CORAL HUB . WE FIND THAT THE ISSUE OF SAID CONCERN BEING NOT FUNCTIONALLY SIMILAR ON ACCOUNT OF ITS OUTSOURCING MODEL OF BUSINESS, WAS TAKEN NOTE OF BY THE PUNE BENCH OF TRIBUNAL IN PTC SOFTWARE (INDIA) PVT. LTD. VS. ACIT IN ITA NO.1605/PN/201 1, RELATING TO ASSESSMENT YEAR 2007 - 08 , ORDER DATED 30.04.2013 AND IT WAS HELD THAT THE SAID CONCERN WAS NOT TO BE INCLUDED IN THE FINAL LIST OF COMPARABLES. THE YEAR UNDER APPEAL BEFORE THE TRIBUNAL WAS ASSESSMENT YEAR 2007 - 08 I.E. THE YEAR UNDER APPEAL BEFORE US ALSO AND THE RELEVANT FINDINGS OF THE TRIBUNAL ARE AS UNDER: - 30. THE NEXT POINT RAISED BY THE ASSESSEE IS AGAINST THE INCLUSION OF VISHAL 30. THE NEXT POINT RAISED BY THE ASSESSEE IS AGAINST THE INCLUSION OF VISHAL INFORMATION TECHNOLOGIES LTD., APPEARING AT ITEM (10) IN THE TABULATION IN PARA 25 AS A COMPARABLE CASE. T HE TPO HAS DISCUSSED THE ISSUE IN PARA 6.9.6. OF THE ORDER. AS PER THE TPO, THE SAID CONCERN IS FUNCTIONALLY COMPARABLE TO THE IT - ENABLED SERVICES SEGMENT OF THE ASSESSEE AND FOR THAT REASON, THE SAID CONCERN HAS BEEN INCLUDED AS A COMPARABLE FOR THE PURPO SES 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 AND IN THE CREATION OF ANIMATED FILMS AND BOOKS. IT HAS ALSO BEEN ASCERTAINED BY REFERRING TO THE ANNUAL REPORT OF THE SAID CONCERN THAT IT IS ENGAGED IN PROVIDING AGENCY SERVICES BY WAY OF OUTSOURCING THE SERVICES TO THIRD PARTY VENDORS AND ACTING AS AN INTERMEDIARY BETWEEN THE FINAL CUSTOMER AND THE VENDOR. THE ASSESS EE FURNISHED DETAILED SUBMISSIONS IN THIS REGARD BEFORE THE LOWER AUTHORITIES, COPIES OF WHICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 420.8 TO 420.31. BY REFERRING TO THE WRITTEN SUBMISSIONS, IT IS ALSO SOUGHT TO BE POINTED OUT THAT THE INTERMEDIARY F UNCTIONS 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 AFORESAID ASSERTION IS SOUGHT TO BE SUBSTANTIATED BY THE DETAILS 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 THE IT - ENABLED SERVICES SEGMENT OF THE ASSESSEE. IT HAS ALSO BEEN ARGUED THAT THE SAID CONCERN HAS EARNED SUP ERNORMAL 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 COMPARABILITY 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 EFFECT THAT THE SAID CONCERN BEING CATEGORIZED AS AN IT - ENABLED SERVICES 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 THE PAPER BOO K, WHEREIN THE NOTES TO ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 13 ACCOUNTS FOR THE YEAR ENDED 31.3.2007 OF THE SAID CONCERN HAVE BEEN PLACED. AS PER THE AVAILABLE INFORMATION, THE SAID CONCERN HAS RELATED PARTY TRANSACTIONS AS REPORTED BY THE CONCERN AT PARA 7 OF THE SAID NOTES AT 86.92%, WHICH BR EACHES THE RPT FILTER. FURTHERMORE, THE FUNCTIONAL 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 FUNCTIONS PERFORMED BY THE SAID CONCERN AS SOUGHT OUT TO BE BROUGHT OUT BY THE ASSESSEE. CONSIDERING THE AFORESAID, WE THEREFORE, FIND THAT THE ASSESSEE WAS JUSTIFIED IN ASCERTAINING THAT THE SAID CONCERN BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASONS CANVASSED. TH US, ON THIS ASPECT ASSESSEE SUCCEEDS. 32. THE NEXT ISSUE RAISED BY THE ASSESSEE IS WITH REGARD TO THE INCLUSION OF M/S.VISHESH INFOTECHNICS LTD. (SEGMENT) IN THE LIST OF COMPARABLES. THE TPO HAS MADE THE RELEVANT DISCUSSION IN PARA 6.9.7. OF THE ORDER AN D AS PER THE SAID DISCUSSION, THE SAID CONCERN IS ENGAGED IN THREE DIFFERENT ACTIVITIES, NAMELY IT - SOLUTIONS AND PRODUCTS SUPPORT, ENTERPRISE SOFTWARE AND IT - ENABLED SERVICES. THE IT - ENABLED SERVICES SEGMENT OF THE SAID CONCERN HAS BEEN CONSIDERED AS A COM PARABLE TO IT SERVICES SEGMENT OF THE ASSESSEE. 33. THE PLEA OF THE ASSESSEE BEFORE THE LOWER AUTHORITIES WAS THAT THE SAID CONCERN IS ENGAGED IN RENDERING HIGH END KNOWLEDGE PROCESS OUTSOURCING (KPO) AND LEGAL PROCESS OUTSOURCING (LPO) SERVICES AND THE SAME CANNOT BE COMPARED WITH THE ROUTINE BACK OFFICE SUPPORT SERVICES RENDERED BY THE IT - ENABLED SERVICES SEGMENT OF THE ASSESSEE. THE SECOND OBJECTION TAKEN BY THE ASSESSEE WAS THAT THE SAID CONCERN HAS EARNED EXTRAORDINARILY HIGH PROFIT MARGIN IN THIS YE AR OF 77.31% AS AGAINST MARGINS OF 49.64% AND 53.66% FOR THE PRECEDING AND SUCCEEDING YEARS RESPECTIVELY. THE TPO HAS JUSTIFIED THE INCLUSION OF THE SAID CONCERN IN THE LIST OF COMPARABLES PRIMARILY ON THE GROUND THAT THE ACTIVITIES CARRIED OUT BY THE SAID CONCERN ARE IN THE FIELD OF IT - ENABLED SERVICES, WHICH IS COMPARABLE TO THE ASSESSEE. SERVICES, WHICH IS COMPARABLE TO THE ASSESSEE. 34. IN OUR CONSIDERED OPINION, THE ARGUMENTS SET UP BY THE ASSESSEE HAVE NOT BEEN APPRECIATED BY THE LOWER AUTHORITIES IN ITS PROPER PERSPECTIVE. THE ASSESSEE HAD POIN TED OUT THAT ITS IT - ENABLED SERVICES SEGMENT INVOLVES PROVIDING OF BACK OFFICE SERVICES PERTAINING TO THE SUPPORT TO BE PROVIDED TO THE CUSTOMERS OF PTC USA. IT WAS EXPLAINED BY THE ASSESSEE THAT SUCH QUERIES ARE RECEIVED THROUGH TELEPHONES, E - MAILS OR THE INTERNET DEPENDING ON THE CHANNEL PREFERRED BY THE CUSTOMER AND ARE ATTENDED TO BY THE ASSESSEE IN ACCORDANCE WITH THE INSTRUCTIONS PROVIDED FROM TIME TO TIME BY PTC USA. ON THE CONTRARY, THE ANNUAL REPORT OF THE VISHESH INFOTECH LTD., PLACED AT PAGE 752 796 OF THE PAPER BOOK, IT IS REVEALED THAT THE IT - ENABLED SERVICES SEGMENT OF THE SAID CONCERN IS ENGAGED IN PROVIDING HIGH END KPO AND LPO SERVICES. OSTENSIBLY, THE ASSESSEE WAS JUSTIFIED IN ASSERTING THAT THE QUALITY AND LEVEL OF MANPOWER/HUMAN RESOURC E INVOLVED IN PROVIDING OF HIGH END KPO AND LPO SERVICES IS QUALITATIVELY DIFFERENT THAN THE ROUTINE BACK OFFICE SERVICES PROVIDED BY THE ASSESSEES IT - ENABLED SERVICES SEGMENT AND, THEREFORE, THE REVENUE/MARGINS OF THE TWO CONCERNS ARE NOT COMPARABLE. JUS TIFIABLY, THE SAID CONCERN IS SHOWING A PROFIT MARGIN OF 77.31% IN THIS YEAR AND COMPARING IT WITH 49.64% IN THE PRECEDING YEAR AND 53.66% OF THE SUCCEEDING YEAR, IT IS OBVIOUS THAT DUE TO THE QUALITATIVE DIFFERENCE IN RENDERING OF SERVICES, THOUGH IN THE IT - ENABLED SERVICES SEGMENT, THE TWO CONCERNS CANNOT BE MEANINGFULLY COMPARED. THEREFORE, IN OUR VIEW, THE SAID CONCERN WAS LIABLE TO BE EXCLUDED FOR THE PURPOSES OF CARRYING OUT THE COMPARABILITY ANALYSIS. 1 4 . THE HONBLE DELHI HIGH COURT IN RAMPGREEN SO LUTIONS PVT. LTD. (SUPRA) HELD THAT VISHAL INFORMATION TECHNOLOGIES LTD. / CORAL HUB WAS NOT FUNCTIONALLY ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 14 SIMILAR TO BPO COMPANY. FOLLOWING THE SAME PARITY OF REASONING, WHERE THE ASSESSEE BEFORE US IS ALSO ENGAGED IN IT ENABLED SERVICES AND EVEN PTC SOFT WARE (INDIA) PVT. LTD. WAS ENGAGED IN IT ENABLED SERVICES , SAID TWO CONCERNS COULD NOT BE COMPARED AND HENCE, THE SAID CONCERN IS TO BE EXCLUDED FROM FINAL LIST OF COMPARABLES IN ORDER TO COMPUTE ARITHMETIC MEAN OF COMPARABLES. WE FIND SUPPORT FROM THE RA TIO LAID DOWN IN RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA) . ACCORDINGLY, WE HOLD SO. IN VIEW THEREOF, THE ISSUE RAISED BY THE ASSESSEE IN ITS APPEAL BOTH WITH REGARD TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND BACK OFFICE SUPPORT SERVICES SEGMENTS ARE ALLOWED. 1 5 . NOW, COMING TO THE APPEAL FILED BY THE REVENUE. 1 6 . THE REVENUE IN ITA NO.337/PN/2015 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, WHETHER THE LD. DISPUTE RESOLUTION PANEL WAS RIGHT IN LA W AND ON FACTS IN EXCLUDING DISPUTE RESOLUTION PANEL WAS RIGHT IN LA W AND ON FACTS IN EXCLUDING FUNCTIONALLY COMPARABLE COMPANIES ONLY ON THE BASIS OF TURNOVER. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, WHETHER THE LD. DISPUTE RESOLUTION PANEL WAS RIGHT IN LAW AND ON FACTS IN EXCLUDING FUNCTIONALLY COMPARABLE COMPANIES ON THE GROUND OF NON AVAILABILITY OF SEGMENTAL DATA, WHEN THE ENTIRE RANGE OF ACTIVITY OF THE COMPARABLE WAS IN THE FIELD OF SOFTWARE SERVICES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, WHETHER THE LD. DISPUTE RESOLUTION PANEL WAS RI GHT IN LAW AND ON FACTS IN EXCLUDING FUNCTIONALLY COMPARABLE COMPANIES WITHOUT CONSIDERING THAT ONCE A SERVICE FALLS UNDER THE CATEGORY OF ITES, THEN THERE CAN BE NO SUB - CLASSIFICATION OF SEGMENT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, WHET HER THE LD. DISPUTE RESOLUTION PANEL WAS RIGHT IN LAW AND ON FACTS IN EXCLUDING A COMPARABLE AS FUNCTIONALLY NON COMPARABLE, WHEN ON SIMILAR FACTS, THE SAME IS CONSIDERED AS FUNCTIONALLY COMPARABLE IN ANOTHER ASSESSMENT YEAR . 5. ON THE FACTS AND IN THE CI RCUMSTANCES OF THE CASE, DID THE LD. DISPUTE RESOLUTION PANEL ERRED IN NOT APPRECIATING THE TERM OF RULE 10B(2) OF THE INCOME - TAX RULES, 1962 REGARDING FUNCTIONAL COMPARABILITY. 6. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEND ANY OR ALL THE GROUNDS O F APPEAL. ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 15 1 7 . THE REVENUE IS AGGRIEVED BY THE ORDER OF DRP IN EXCLUDING CERTAIN CONCERNS FROM FINAL LIST OF COMPARABLES IN BOTH SEGMENTS OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND ALSO BACK OFFICE SUPPORT SERVICES. 1 8 . THE LEARNED AUTHORIZED REP RESENTATIVE FOR THE ASSESSEE WITH REGARD TO EXCLUSION OF INFOSYS TECHNOLOGIES LTD. IN THE SEGMENT OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES, POINTED OUT THAT THE SAID CONCERN WAS NOT COMPARABLE BECAUSE OF ITS HIGH TURNOVER. 1 9 . WE FIND THAT THE ISSUE OF EXCLUSION OF A CONCERN ON THE BASIS OF HIGH TURNOVER WITH SPECIAL REFERENCE TO CONCERN INFOSYS TECHNOLOGIES LTD. HAS BEEN ADJUDICATED IN SERIES OF DECISIONS AND THE TRIBUNAL IN JOHN DEERE INDIA PVT. LTD. VS. ACIT IN ITA NO.1319/PN/2011 , RELATING TO ASSE SSMENT YEAR 2007 - 08 VIDE ORDER DATED 10.10.2014 HAD HELD THAT INFOSYS TECHNOLOGIES LTD. COULD NOT BE CONSIDERED AS COMPARABLE ENTITY WITH THAT OF SMALLER COMPANIES, IN TURN, FOLLOWING THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT IN CIT VS. AGNITY IN DIA TECHNOLOGIES PVT. LTD. IN ITA NO.1204/2011, JUDGMENT DATED 10.07.2013 . THE HONBLE DELHI HIGH COURT HELD THAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES FOR THE REASON THAT IT WAS A GIANT COMPANY IN THE AREA OF DEV ELOPMENT OF SOFTWARE. FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT INFOSYS TECHNOLOGIES LTD. IS NOT COMPARABLE TO THE ASSESSEE ON THE GROUND OF HIGHER TURNOVER I.E. ASSESSEES TURNOVER WAS RS.26.28 CRORES AND TURNOVER OF INFOSYS TECHNOLOGIES LTD. WAS RS.1314 CRORES. ACCORDINGLY, WE UPHOLD THE DIRECTIONS OF DRP IN EXCLUDING INFOSYS TECHNOLOGIES LTD. FROM THE FINAL LIST OF COMPARABLES WHILE BENCHMARKING INTERNATIONAL TRANSACTION OF THE ASSESSEE ON ACCOUNT OF SOFTWARE DEVELOPMENT SERVICES. ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 16 20 . ANOTH ER CONCERN WHICH WAS DIRECTED TO BE EXCLUDED BY THE DRP WAS ICSA (INDIA) LTD. ON THE GROUND THAT IT WAS FUNCTIONALLY DISSIMILAR AND HAD R&D EXPENSES OF MORE THAN 3%. 2 1 . WE FIND THAT THE ISSUE OF REJECTION OF CONCERN WHICH HAD R&D EXPENSES OF MORE THAN 3% HAS BEEN ADJUDICATED BY US IN BMC SOFTWARE INDIA PVT. LTD. VS. DCIT IN ITA NO.1425/PN/2010, RELATING TO ASSESSMENT YEAR 2006 - 07 VIDE ORDER DATED 16.03.2016 , IT WAS HELD AS UNDER: - 34. AFTER CONSIDERING VARIOUS ARGUMENTS RAISED BY BOTH THE AUTHORIZED REPR ESENTATIVES VIS - A - VIS THE CONCERN ICSA (INDIA) LTD., THE FIRST OBJECTION IS THAT IT IS NOT FUNCTIONALLY COMPARABLE AND THE SECOND OBJECTION IS THAT ITS R&D EXPENDITURE IS 4.5% OF REVENUE. THE TPO REJECTED THE PLEA OF THE ASSESSEE OF NOT INCLUDING THE SAID CONCERN IN THE FINAL SET OF COMPARABLES ON THE SAID BASIS OF R&D EXPENDITURE BEING MORE THAN 3% OF REVENUE. HOWEVER, WE FIND THAT THE TRIBUNAL IN BINDVIEW INDIA PVT. LTD. VS. DCIT (SUPRA) AND THEREAFTER, IN PTC SOFTWARE (INDIA) PVT. LTD VS. ACIT (SUPRA), HAVE LAID DOWN THE PROPOSITION THAT WHERE THE R&D FILTER IS MORE THAN 3% AS AGAINST THE ASSESSEE WHO HAS NOT INCURRED ANY R&D EXPENDITURE, THEN THE SAID CONCERN IS NOT TO BE TAKEN IN THE FINAL LIST OF COMPARABLES. THE RELEVANT FINDING OF THE TRIBUNAL IN PTC SOFTWARE (INDIA) PVT. LTD VS. ACIT (SUPRA) RELATING TO ASSESSMENT YEAR 2007 - 08, WHEREIN THE INFORMATION OF ASSESSMENT YEAR 2006 - 07 WAS ALSO CONSIDERED IS AS UNDER: - 21. THE ASSESSEE HAS ASSAILED THE INCLUSION OF ICSA INDIA LTD., 21. THE ASSESSEE HAS ASSAILED THE INCLUSION OF ICSA INDIA LTD., APPEARING AT ITEM (2) IN THE TABULATION IN PARA 10 AS A COMPARABLE BY THE TPO. IN THIS CONTEXT, THE RELEVANT DISCUSSION BY THE TPO IS CONTAINED IN PARA 6.3.23 OF THE ORDER AND THE ANNUAL FINANCIAL STATEMENTS OF THE SAID CONCERN HAVE ALSO BEEN PLACED IN THE PAPER BOOK AT PAGES 246 TO 327 OF THE PAPER BOOK. THE TPO NOTICED THAT IN THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE THE SAID CONCERN WAS EXCLUDED/REJECTED BY APPLYING THE QUANTITATIVE FILTER OF RESEARCH AND DEVELOPMENT EXPENDITURE BEING IN EXCESS OF 3% OF SALES. T HE TPO HAS NOT DIFFERED WITH THE ADOPTION OF THE QUANTITATIVE FILTER FOR R&D EXPENSES, SO HOWEVER, ACCORDING TO HIM THE RESEARCH AND DEVELOPMENT EXPENDITURE INCURRED BY THE SAID CONCERN FOR THE F.Y. 2006 - 07 IS 6,71,86,184/ - WHICH IS 2.02% OF THE TOTAL TURN OVER OF THE CONCERN AND THEREFORE, IT IS WITHIN THE THRESHOLD OF THE QUANTITATIVE FILTER OF 3% OF SALES ADOPTED BY THE ASSESSEE, AND ACCORDINGLY HE INCLUDED THE SAID CONCERN IN THE LIST OF COMPARABLES. THE TPO ALSO DISAGREED WITH THE CONTENTION OF THE ASSE SSEE RAISED BEFORE HIM THAT THE SAID CONCERN WAS FUNCTIONALLY DISSIMILAR. THE TPO HAS NOTICED BY REFERRING TO THE ANNUAL REPORT FOR THE F.Y. 2006 - 07 THAT IT HAS TWO DISTINCT SEGMENTS, NAMELY (I) SOFTWARE SERVICES AND EMBEDDED SOLUTIONS; AND, (II) PRODUCTS AND PROJECTS RELATED TO POWER SECTOR. THE TPO CONSIDERED THE SOFTWARE SERVICES SEGMENT AS A COMPARABLE TO ASSESSEES SEGMENT OF IT - SERVICES AND THEREFORE HE INCLUDED THE SAID CONCERN IN THE LIST OF COMPARABLES. 22. IN THIS CONTEXT, THE LD. COUNSEL HAS REF ERRED TO THE ANNUAL FINANCIAL STATEMENTS OF THE CONCERN TO POINT OUT THAT THE TOTAL RESEARCH AND DEVELOPMENT EXPENDITURE OF RS.6,71,86,184/ - INCURRED BY THE SAID CONCERN IS IN RELATION TO THE EMBEDDED SOLUTIONS SEGMENT ONLY, AND IN THIS CONNECTION A REFERE NCE HAS BEEN MADE TO THE DIRECTORS REPORT, A COPY OF WHICH IS APPEARING AT PAGE 268 OF THE PAPER BOOK. IT IS POINTED ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 17 OUT THAT IN ORDER TO CALCULATE THE RATIO OF R&D EXPENSES TO TOTAL SALES, IT HAS TO BE CALCULATED WITH REFERENCE TO THE SALES IN SOFTWARE S ERVICES AND EMBEDDED SOLUTIONS SEGMENT OF THE SAID CONCERN, BECAUSE THE R&D EXPENSES PERTAIN ONLY TO THIS SEGMENT. IN THIS CONNECTION A REFERENCE HAS BEEN MADE TO PAGE 297 OF THE PAPER BOOK WHICH GIVES THE BREAK - UP OF THE SALES IN DIFFERENT SEGMENTS AND AF TER CONSIDERING THE R&D EXPENSES OF RS.6,71,86,184/ - VIS - - VIS THE SALES IN SOFTWARE SERVICES/EMBEDDED SERVICES SEGMENT, THE PERCENTAGE COMES TO 3.84%. THE LD. COUNSEL POINTED OUT THAT THE PERCENTAGE OF 2.04% OF R&D EXPENDITURE COMPUTED BY THE TPO WAS AFTE R CONSIDERING THE TOTAL TURNOVER OF THE SAID CONCERN INCLUDING THAT OF THE PRODUCT AND PROJECTS RELATED TO POWER SECTOR SEGMENT. IT IS SUBMITTED THAT THE AFORESAID ACTION OF THE TPO IS WRONG, FIRSTLY THE R&D EXPENDITURE HAS BEEN INCURRED ONLY FOR THE SOFTW ARE SERVICES/EMBEDDED SERVICES SEGMENT, AND SECONDLY, IT IS WRONGLY COMPARED WITH TOTAL TURNOVER WHICH INCLUDED THE TURNOVER OF PRODUCTS AND PROJECTS RELATED TO POWER SECTOR SEGMENT WHEREAS THE TPO HAS ONLY ADOPTED THE SOFTWARE SERVICES/EMBEDDED SERVICES S EGMENT FOR THE PURPOSES OF COMPARABILITY ANALYSIS. FACTUALLY SPEAKING, WE FIND NO REASONS TO DISAGREE WITH THE PLEA SET UP BY THE ASSESSEE. EVIDENTLY, THE TPO HAS NOT DISPUTED THE ADOPTION OF QUANTITATIVE FILTER OF 3% OF R&D EXPENSES. HOWEVER, THE TPO COMP UTED THE R&D EXPENDITURE AT 2.02% OF THE TOTAL SALES WHICH IS OSTENSIBLY INCORRECT IN AS MUCH AS THE EXPENDITURE IN QUESTION HAS BEEN INCURRED ONLY FOR THE SOFTWARE SERVICES/EMBEDDED SERVICES SEGMENT (WHICH HAS BEEN ADOPTED AS COMPARABLE SEGMENT) AND IT CA NNOT BE COMPARED VIS - - VIS THE TOTAL TURNOVER WHICH INCLUDES THE PRODUCTS AND PROJECTS RELATED TO POWER SECTOR SEGMENT, WHEN FACTUALLY NO R&D EXPENSES HAVE BEEN INCURRED FOR THE LATTER SEGMENT. THEREFORE, WITHOUT GOING INTO THE MERITS OF THE ASSESSEES OTH ER PLEA THAT THE SAID CONCERN IS FUNCTIONALLY DISSIMILAR, WE DO NOT FIND ANY JUSTIFICATION FOR INCLUSION OF THE SAID CONCERN CONSIDERING THAT R&D EXPENSES ARE ABOVE THE FILTER OF 3% ADOPTED FOR THE PURPOSES THAT R&D EXPENSES ARE ABOVE THE FILTER OF 3% ADOPTED FOR THE PURPOSES OF THE COMPARABILITY ANALYSIS. THUS ON THIS ASPEC T THE ASSESSEE SUCCEEDS. 35. ADMITTEDLY, IN THE FACTS OF THE PRESENT CASE, R&D EXPENDITURE IS 4.5% OF THE REVENUE AND FOLLOWING THE PARITY OF REASONING AS LAID DOWN BY THE PUNE BENCH OF TRIBUNAL IN PTC SOFTWARE (INDIA) PVT. LTD VS. ACIT (SUPRA) WE HOLD T HAT THERE IS NO JUSTIFICATION FOR THE INCLUSION OF SAID CONCERN IN THE FINAL SET OF COMPARABLES CONSIDERING THAT THE R&D EXPENDITURE WAS ABOVE FILTER OF 3%. THE OTHER OBJECTION RAISED BY THE ASSESSEE THAT THE SAID CONCERN IS NOT FUNCTIONALLY SIMILAR AND T HE YEAR OF OPERATION WAS EXCEPTIONAL YEAR CONSIDERING ITS GROWTH IS NOT BEING TAKEN UP SINCE WE ARE OF THE VIEW THAT THE SAID CONCERN IS NOT TO BE INCLUDED IN THE FINAL SET OF COMPARABLES ON THE ASPECT OF R&D EXPENDITURE. ACCORDINGLY, WE DIRECT THE TPO TO EXCLUDE ICSA (INDIA) LTD. 2 2 . FOLLOWING THE SAME PARITY OF REASONING, WE UPHOLD THE ORDER OF DRP IN EXCLUDING ICSA (INDIA) LTD. FROM THE FINAL LIST OF COMPARABLES IN THE SEGMENT OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES. 2 3 . FURTHER, THE REVENUE I S IN APPEAL VIDE GROUND OF APPEAL NO.3 AGAINST EXCLUSION OF CERTAIN COMPANIES BY THE DRP ON THE BASIS THAT THE SERVICES FALL UNDER ANOTHER SEGMENT, WHILE BENCHMARKING INTERNATIONAL TRANSACTION UNDER ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 18 ITES SEGMENT. AS PER THE OBJECTIONS RAISED BY THE REVENU E, THERE COULD BE NO SUB - CLASSIFICATION OF SEGMENT ONCE SUCH SERVICES FALLS UNDER CATEGORY OF ITES. THE DRP HAD DIRECTED THE EXCLUSION OF VISESH INFOTECNICS LTD., ECLERX SERVICES LTD. AND CS SOFTWARE ENTERPRISES AS ALL OF THEM WERE KPO COMPANIES AND THE A SSESSEE WAS BPO COMPANY. 2 4 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE REVENUE IS AGGRIEVED BY THE ORDER OF DRP IN EXCLUDING THE CONCERNS WHICH WERE KPO COMPANIES. ON THE OTHER HAND, ACCENTIA TECHNOLOGIES LTD. WAS ENGAGE D IN HEALTHCARE AND APEX KNOWLEDGE SOLUTIONS PVT. LTD. WAS ALSO EXCLUDED BUT AGAINST THESE TWO EXCLUSIONS, THERE IS NO GROUND OF APPEAL HAS BEEN RAISED BY THE REVENUE. THE HONBLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA) HAS LAID DOWN THE PROPOSITION THAT WHERE A CONCERN WAS ENGAGED IN PROVIDING KPO SERVICES, THE MARGINS OF SAID CONCERN CANNOT BE COMPARED WITH ANOTHER CONCERN WHICH WAS ENGAGED IN THE BUSINESS OF B PO COMPARED WITH ANOTHER CONCERN WHICH WAS ENGAGED IN THE BUSINESS OF B PO SERVICES. THE HONBLE DELHI HIGH COURT THUS, HAS APPLIED THE PRINCIPLE OF SUB - CLASSIFICATION UNDER ONE SEGMENT OF ITES SERVICES AND HAD UPHELD THE EXCLUSION OF ECLERX SERVICES LTD. BEING ENGAGED IN THE BUSINESS OF KPO SERVICES AND HENCE, FUNCTIONALLY NOT SIMILAR TO THE CONCERN BEFORE THEM, WHO WAS ENGAGED IN PROVIDING BPO SERVI CES. FOLLOWING THE SAME PARITY OF REASONING, WE UPHOLD THE DIRECTIONS OF DRP IN THE PRESENT CASE FOR EXCLUDING VISESH INFOTECNICS LTD., ECLERX SERVICES LTD. AND CS SOFTWARE ENTERPRISES , WHERE ALL THESE CONCERNS WERE ENGAGED IN KPO OPERATIONS AND THE MARGI NS OF THE SAID CONCERNS COULD NOT BE APPLIED WHILE BENCHMARKING INTERNATIONAL TRANSACTION OF PROVIDING BACK OFFICE SUPPORT SERVICES BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES. WE UPHOLD THE ORDER OF DRP IN THIS REGARD AND DISMISS THE GROUNDS OF APPEAL R AISED BY THE REVENUE. ITA NO. 2 05 /PN/201 5 ITA NO. 337 /PN/201 5 PRINCIPAL GLOBAL SERVICES PVT. LTD . 19 2 5 . SIMILARLY, ACCENTIA TECHNOLOGIES LTD. BEING ENGAGED IN PROVIDING HEALTHCARE SERVICES IS NOT FUNCTIONALLY SIMILAR TO THE FUNCTIONS PROFOUND BY THE ASSESSEE AND HENCE, CANNOT BE INCLUDED IN THE FINAL LIST OF COMPARABLES. 2 6 . ANOTH ER CONCERN I.E. APEX ADVANCED TECHNOLOGY PVT. LTD. WAS EXCLUDED BY THE DRP BECAUSE OF INSUFFICIENT DATA AND IN THE ABSENCE OF ANY GROUND OF APPEAL RAISED BY THE REVENUE IN THIS REGARD, WE UPHOLD THE ORDER OF DRP. THUS, THE GROUNDS OF APPEAL RAISED BY THE REVENUE IN BOTH SEGMENTS OF PROVISION OF SOFTWARE DEVELOPMENT AND BACK OFFICE SUPPORT SERVICES ARE DISMISSED. 2 7 . IN THE RESULT , APPEAL OF THE ASSESSEE IS ALLOWED AND THE APPEAL OF THE REVENUE IS DI S MISSED. ORDER P RONOUNCED ON THIS 15 TH DAY OF APRIL , 201 6 . SD/ - SD/ - SD/ - SD/ - (PRADIP KUMAR KEDIA) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 15 TH APRIL , 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2 . THE RESPONDENT; 3. THE DIT (INTL. TAXATION), PUNE ; 4. THE DRP, PUNE ; 5. THE DR A , ITAT, PUNE; 6. GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE