ACIT, Bangalore V. Symbol Technologies India Pvt. Ltd., Bangalore

ITA 391/BANG/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8690 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 19-03-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 16-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Assessee Lawyers: ERIC MEHTA; SHILPA S
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 92E; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER IT (TP) A NO.391/BANG/2012 ASSESSMENT YEAR : 2005- 06 THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE-560 001 VS. M/S. SYMBOL TECHNOLOGIES INDIA PVT. LTD., RMZ-ECOSPACE, BLOCK 3B, SARJAPUR OUTER RING ROAD, VARTHUR HOBLI, BANGALORE-560 037. PAN: AAECS 7171H APPELLANT RESPONDENT IT(TP) A NO.296/BANG/2012 ASSESSMENT YEAR : 2005- 06 M/S. SYMBOL TECHNOLOGIES INDIA PVT. LTD., BANGALORE-560 037. PAN: AAECS 7171H VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. REVENUE BY : DR. P.K. SRIHARI, ADDL. CIT (DR) ASSESSEE BY : SHRI ERIC MEHTA & SMT. SHILPA S., CA S DATE OF HEARING : 19.03.2015 DATE OF PRONOUNCEMENT : 27.03.2015 ITA NOS.391 & 296/BANG/2012 PAGE 2 OF 26 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER IT(TP)A NO.391/BANG/2012 IS AN APPEAL BY THE REVE NUE AND IT(TP)A NO.296/BANG/2012 IS AN APPEAL BY THE ASSESS EE. BOTH THE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 5.1.20 12 OF CIT(APPEALS)-IV, BANGALORE, RELATING TO ASSESSMENT YEAR 2005-06. 2. THE MAIN ISSUE THAT ARISES FOR CONSIDERATION IN THE APPEAL BY THE REVENUE AND BY THE ASSESSEE ARE RELATING TO THE ADD ITION MADE TO THE TOTAL INCOME CONSEQUENT TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE AS SESSEE WITH ITS ASSOCIATED ENTERPRISES (AE) U/S.92 OF THE INCOME TA X ACT, 1961 (ACT). THE ADDITION MADE CONSEQUENT TO DETERMINATION OF ALP BY THE TPO AND ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT WAS A SUM OF RS.2,43,93,255. THE CIT(A) GAVE PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE RELIEF ALLOWED BY THE CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. APART FROM THE TRANSFER PRICING ADJUSTME NT, THE AO ALSO EXCLUDED TELECOMMUNICATION EXPENSES AND TRAVEL EXPENSES FROM THE TOTAL TURNOVER WITHOUT EXCLUDING THE SAME FROM THE EXPORT TURNOVER ALSO WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT. THE CIT(A) DIRECTED THE AO TO EXCLUDE TELECOMMUNICATION EXPENSES AND TRAVEL EXPENSES BOTH FROM THE TOTAL TURNOVER AND EXPORT TURNOVER WHILE COMPUTING DEDUCT ION U/S.10A OF THE ACT. THE REVENUE HAS CHALLENGED THE SAID ACTION OF THE C IT(A) ALSO. AGGRIEVED ITA NOS.391 & 296/BANG/2012 PAGE 3 OF 26 BY THE ORDER OF CIT(A) IN NOT APPLYING CERTAIN FILT ERS WHILE CHOOSING COMPARABLE COMPANIES THE ASSESSEE HAS FILED APPEAL BEFORE THE TRIBUNAL. 3. THE ASSESSEE IS A COMPANY INCORPORATED ON 12TH MAY, 2000 UNDER THE COMPANIES ACT, 1956. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF SYMBOL TECHNOLOGIES INC. USA. THE ASSESSEE PROVIDE S SOFTWARE DEVELOPMENT SERVICE TO ITS HOLDING COMPANY SYMBOL T ECHNOLOGIES INC. USA. 4. DURING THE FINANCIAL YEAR 2004-05 RELEVANT TO T HE ASSESSMENT YEAR 2005-06, ONE OF THE INTERNATIONAL TRANSACTION THAT TOOK PLACE BETWEEN THE ASSESSEE AND SYMBOL TECHNOLOGIES INC. USA WAS PROVI SION OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO THE HOLDING COM PANY AT A PRICE OF RS. 21,61,03,704/-. 5. IN SUPPORT OF THE ASSESSEES CLAIM THAT THE PRI CE CHARGED BY IT FOR SERVICES RENDERED TO ITS AE WAS AT ARMS LENGTH, TH E ASSESSEE FILED A REPORT AS REQUIRED BY THE PROVISIONS OF SECTION 92E OF THE ACT IN FORM 3EB TOGETHER WITH DETAILED ANALYSIS. THE ASSESSEE ADOP TED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. OPERATING PROFITS TO COST WAS ADOPTED AS THE PROFIT LEVEL INDICATOR ( PLI ). THE PLI OF THE ASSESSEE WAS ARRIVED AT AS FO LLOWS: OPERATING REVENUE RS.21,61,03,704 OPERATING COST RS.19,48,13,252 OPERATING PROFIT RS. 2,12,90,452 OP.PR/COST% 10.93% ITA NOS.391 & 296/BANG/2012 PAGE 4 OF 26 6. THE TRANSFER PRICING OFFICER ( TPO ) ARRIVED AT A FINAL SET OF 17 COMPARABLE COMPANIES. THE SET OF 17 COMPARABLE COM PANIES IS GIVEN AS ANNEXURE-I TO THIS ORDER . 7. THE ASSESSEE RAISED VARIOUS OBJECTIONS TO THE M ETHODOLOGY ADOPTED AND THE REASONS ASSIGNED BY THE TPO FOR REJ ECTING THE COMPARABLE CHOSEN BY THE ASSESSEE IN ITS TP STUDY. THE TPO F INALLY PASSED AN ORDER U/S. 92CA OF THE ACT AND ON THE BASIS OF THE PROFIT MARGINS OF COMPARABLE COMPANIES SET OUT IN ANNEXURE-I TO THIS ORDER , ARRIVED AT ARITHMETIC MEAN OF 23.45% AFTER WORKING CAPITAL ADJUSTMENT AND 26.59% BEFORE WORKING CAPITAL ADJUSTMENT. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS:- COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 26.59% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) 3.14% ADJ.ARITHMETIC MEAN PLU 23.45% ARMS LENGTH PRICE: OPERATING COST RS.19,48,13,252/- ARMS LENGTH MARGIN 23.45% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 123.45% OF OPERATING COST RS.24,04,96,960/- ITA NOS.391 & 296/BANG/2012 PAGE 5 OF 26 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 123.45% OF OPERATING COST RS.24,04,96,960 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.21,61,03,704 SHORTFALL BEING ADJUSTMENT U/S.92CA RS. 2,43,93,255 THE ABOVE SHORTFALL OF RS.2,43,93,255/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 8. ON APPEAL BY THE ASSESSEE, THE CIT(A) PARTLY AL LOWED THE APPEAL OF THE ASSESSEE. THE FOLLOWING WERE THE KEY FINDINGS OF THE CIT(A):- (I) OUT OF THE 17 COMPANIES CHOSEN BY THE TPO AS T HE FINAL SET OF COMPARABLE COMPANIES, THE CIT(A) EXCLUDED 12 COMPAN IES FOR THE REASON THAT THESE COMPANIES HAD RELATED PARTY TRANS ACTION. THE CIT(A) APPLIED THE FILTER OF RELATED PARTY TRANSACT ION BY HOLDING THAT TO BE CHOSEN AS A COMPARABLE COMPANY, THE COMPARABLE C OMPANIES SHOULD NOT HAVE ANY RELATED PARTY TRANSACTION. THE REFORE EVEN IF THERE IS A SINGLE RELATED PARTY TRANSACTION, THE SA ID COMPANIES WERE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. BY DOING SO, THE CIT(A) COULD RETAIN ONLY 5 OUT OF THE FINAL 17 COMP ARABLE COMPANIES CHOSEN BY THE TPO, VIZ., BODHTREE CONSULTING LTD., LANCO GLOBAL SYSTEM LTD., SANKHYA INFOTECH LTD., EXENSYS SOFTWAR E SOLUTION LTD., AND VISUAL SOFT TECHNOLOGY LTD. IN COMING TO THE A BOVE CONCLUSION, THE CIT(A) FOLLOWED THE DECISIONS OF THIS HONBLE T RIBUNAL IN THE CASE ITA NOS.391 & 296/BANG/2012 PAGE 6 OF 26 OF MENTOR GRAPHICS (NOIDA) (P.) LTD. VS DCIT (2007] 109 LTD 101 (DEL). (II) ONE COMPANY, EXENSYS SOFTWARE SOLUTIONS LTD. , WAS EXCLUDED BECAUSE IT WAS IN MULTIPLE ACTIVITIES INCLUDING SOF TWARE PRODUCTS, SOFTWARE SERVICES AND FOR THE REASONS THAT THE COMP ANY WAS SHOWING SUPER NORMAL PROFITS BECAUSE OF AMALGAMATIO N OF ANOTHER COMPANY BY NAME HOLOOL INDIA PRIVATE LIMITED AND SU CH AMALGAMATION HAD A MATERIAL/SIGNIFICANT IMPACT ON T HE RESULTS OF EXENSYS FOR THE FINANCIAL YEAR ENDING 31.3.2005. (III) SATYAM COMPUTER SERVICES LTD., AND INFOSYS TECHNOLOGIES LTD., GET EXCLUDED BY APPLYING THE RELATED PARTY TRANSACTION FILTER. NEVERTHELESS, THE CIT(A) HELD THAT SATYAM COMPUTER SERVICES LTD., HAS TO BE EXCLUDED FROM COMPARABLE COMPANIES FOR NO N-RELIABILITY OF FINANCIAL DATA. IN DOING SO, THE CIT(A) FOLLOWED TH E DECISION OF THIS HONBLE TRIBUNAL IN AGNITY INDIA TECHNOLOGIES V. IT O (ITA 3856/DEI/2010) AND SAP INDIA PVT. LTD V. ITO [ITA N O. 398/8/2008]. LIKEWISE LNFOSYS TECHNOLOGIES SELECTED BY THE TPO, WAS REJECTED AS A COMPARABLE BASED ON HIGH TURNOVER AND HIGH RIS K. IN DOING SO, THE CIT(A) FOLLOWED THE DECISION OF THIS HONBLE TR IBUNAL IN AGNITY INDIA TECHNOLOGIES V. ITO AND GENISYS INTEGRATED SY STEMS (INDIA) PVT LTD V. ITO (SUPRA). THE CIT(A) ALSO HELD THAT THE ASSESSEE WOULD BE ENT ITLED TO 5% STANDARD DEDUCTION UNDER THE PROVISO TO SEC.92CA(2) OF THE A CT. 9. AFTER GIVING EFFECT TO THE FINDINGS GIVEN ABOVE , STILL THERE WOULD BE A VERY NEGLIGIBLE ADDITION THAT WILL BE SUSTAINED EVE N AFTER THE CIT(A)S ORDER. ITA NOS.391 & 296/BANG/2012 PAGE 7 OF 26 10. THE REVENUE AND ASSESSEE ARE IN APPEAL BEFORE AGAINST THE ORDER OF THE CIT(A). THE ASSESSEE IN ITS GROUNDS OF APPE AL EMPHASIZED ITS STAND THAT SOME OF THE FILTERS WHICH THE ASSESSEE SUBMITT ED SHOULD BE APPLIED IN CHOOSING SOME COMPARABLE COMPANIES HAVE NOT BEEN AC CEPTED BY THE CIT(A). 11. THE REVENUE IS IN APPEAL ON THE FOLLOWING GROU NDS:- (1) THE DECISION OF THE HONBLE HIGH COURT OF KARN ATAKA IN THE CASE OF TATA ELXSI 349 ITR 98 (KARN) WHEREIN IT WAS HELD THAT WHATEVER IS REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER, HAS BEEN C HALLENGED BY THE REVENUE IN HIGHER FORUMS; (2) THE LEARNED CIT(A) ERRED IN HOLDING THAT THE TPO ERRED IN NOT EXCLUDING COMPARABLES HAVE ANY RELATED PARTY TRANSACTIONS; (3) THE LD.CIT(A) ERRED IN HOLDING THAT PROFIT ON COST OF MORE THAN 50% OF THE COMPARABLE COMPANY(IES) IS ABNORMAL WITHOUT GIVING REASONS HOW FUNCTIONS DISCHARGED, AS SETS DEPLOYED AND RISKS ASSUMED OF SUCH COMPANIES WERE DIFFERENT FROM THAT OF THE APPELLANT COMPANY; AND (4) THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS ELIGIBLE FOR A STANDARD DEDUCTION OF 5% FROM THE ARMS LENGTH PR ICE UNDER THE PROVISO TO SECTION 92C(2) OF THE INCOME-T AX ACT, 1961. 12. THE GROUNDS RAISED BY THE ASSESSEE IN ITS GRO UNDS OF APPEAL ARE:- (A) ARBITRARILY REJECTING FILTERS APPLIED BY THE RESPONDENT WHILE UNDERTAKING THE TP STUDY. ITA NOS.391 & 296/BANG/2012 PAGE 8 OF 26 (B) MODIFYING FILTERS APPLIED BY THE LEARNED TPO I N THE TP ORDER, WITHOUT PROVIDING AN OPPORTUNITY OF BEING HE ARD TO THE APPELLANT. (C) DISREGARDING APPLICATION OF MULTIPLE YEAR/PRIO R YEAR DATA FOR COMPARABILITY. (D) UPHOLDING THE LEARNED TPOS APPROACH OF USING DATA AVAILABLE AT THE TIME OF ASSESSMENT PROCEEDINGS. (E) UPHOLDING THE APPROACH ADOPTED BY THE LEARNED TPO OF COLLECTING SELECTING INFORMATION OF THE COMPANIES E XERCISING POWER GRANTED TO HIM UNDER SECTION 133(6) OF THE IN COME TAX ACT, 1961 (ACT). (F) NOT PROVIDING APPROPRIATE ADJUSTMENT TOWARDS T HE RISK DIFFERENTIAL BETWEEN THE RESPONDENT AND THE ENTREPR ENEURIAL COMPANIES SELECTED AS COMPARABLES, WHILE DETERMININ G THE ARMS LENGTH PRICE. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS. AS FAR AS THE GROUNDS OF APPEAL OF THE REVENUE ARE CONCERNED, THE GROUND WIT H REGARD TO IMPROPER APPLICATION OF THE RELATED PARTY TRANSACTION (RPT) FILTER BY THE CIT(A), IT IS NOT IN DISPUTE BEFORE US THAT THIS TRIBUNAL, IN THE CASES OF 24/7 CUSTOMER PVT. LTD. (ITA NO.227/BANG/2010), AND SONY INDIA PR IVATE LTD. REPORTED IN (2009) 315 ITR (80) 150 (DEL.) AND VARIOUS OTHER CA SES HAS TAKEN A VIEW THAT COMPARABLES HAVING RPT OF UPTO 15% OF TOTAL RE VENUES CAN BE CONSIDERED. IN VIEW THEREOF, THE REVENUES GRIEVANC E ON THIS ISSUE AS PROJECTED IN THE RELEVANT GROUND HAS TO BE ALLOWED. IT IS HELD THAT THE CIT(A) OUGHT TO HAVE ADOPTED A THRESHOLD LIMIT OF 1 5% OF THE TOTAL REVENUE ATTRIBUTABLE TO RELATED PARTY TRANSACTION AS GROUND FOR REJECTING COMPARABLE ITA NOS.391 & 296/BANG/2012 PAGE 9 OF 26 COMPANIES. CONSEQUENTLY IT IS HELD THAT COMPARABLE COMPANIES HAVING RPT UPTO 15% OF THE TOTAL REVENUES ALONE CAN BE INC LUDED. 14. THE GROUND RAISED BY THE REVENUE WITH REGARD TO THE ACTION OF THE CIT(A) IN EXCLUDING COMPANIES WITH ABNORMAL PROFITS IS MISCONCEIVED AND THE ISSUE AND DOES NOT ARISE OUT OF THE ORDER OF TH E CIT(A). AS WE HAVE ALREADY SEEN THE CIT(A) REJECTED SOME OF THE COMPAR ABLE COMPANIES CHOSEN BY THE TPO BY APPLYING RELATED PARTY TRANSAC TION FILTER. THE FILTER OF COMPANIES DEALING IN SOFTWARE PRODUCTS AND ABNORMAL PROFITS OWING TO AMALGAMATION OF THE COMPANIES DURING THE RELEVANT P ERIOD THEREBY SHOWING ABNORMAL PROFITS WAS APPLIED TO EXCLUDE EXENSYS SOF TWARE SOLUTIONS LTD., WAS EXCLUDED FOR REASONS OF HIGH TURNOVER AND HIGH RISK PROFILE. SATYAM COMPUTER SERVICES LTD., HAS TO BE EXCLUDED FROM THE COMPARABLE COMPANIES FOR NON-RELIABILITY OF FINANCIAL DATA AS IT WAS INVOLVED IN FINANCIAL SCAM. IN DOING SO, THE CIT(A) FOLLOWED THE DECISION OF THIS HONBLE TRIBUNAL IN AGNITY INDIA TECHNOLOGIES V. ITO (ITA 3856/DEI/2 010) AND SAP INDIA PVT. LTD V. ITO [ITA NO. 398/8/2008]. THEREFORE TH E GRIEVANCE AS PROJECTED BY THE REVENUE IN GROUND NO.5 IS MISCONCEIVED. ON THE FACTS OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THE CIT(A) RI GHTLY EXCLUDED EXENSYS SOFTWARE SOLUTIONS LTD., AND SATYAM COMPUTERS LTD., FROM THE LIST OF COMPARABLE COMPANIES. 15. AS REGARDS THE STANDARD DEDUCTION OF 5% OF THE ARMS LENGTH PRICE ALLOWED TO THE APPELLANT BY THE CIT(A), WHICH IS CH ALLENGED IN GROUND NO.5 ITA NOS.391 & 296/BANG/2012 PAGE 10 OF 26 BY THE REVENUE BEFORE THE TRIBUNAL, IT IS NOT IN DI SPUTE BEFORE US THAT IN VIEW OF THE SUBSTITUTION OF THE SECOND PROVISO TO S ECTION 92C(2) OF THE INCOME-TAX ACT BY THE FINANCE (NO.2) ACT, 2009, THE SECOND GROUND OF APPEAL (GROUND NO.3 IN THE APPEAL FILED BY THE REVE NUE) MAY HAVE TO BE ALLOWED. CONSEQUENTLY IT IS HELD THAT IF THE DIFFE RENCE BETWEEN THE ARITHMETIC MEAN OF THE PROFIT MARGINS COMPARABLE CO MPANIES ULTIMATELY RETAINED AND THE PROFIT MARGIN OF THE ASSESSEE IS M ORE THAN 5% THAN NO DEDUCTION UNDER THE PROVISO TO SEC.92C(2) OF THE AC T COULD BE ALLOWED TO AN ASSESSEE. 16. IN VIEW OF THE CONCLUSION ABOVE THAT EXCLUSION OF COMPARABLE COMPANIES WITH RPT OF LESS THAN ZERO PERCENT IS NOT VALID, AND THAT COMPANIES WHERE RPT IS LESS THAN 15% ALONE CAN BE C ONSIDERED, THEN THE COMPARABLE REJECTED BY THE CIT(A) ON THE BASIS OF T HE SAID FILTER WILL HAVE TO BE INCLUDED ALONG WITH THE FOUR COMPARABLE RETAINED BY THE CIT(A). ALTHOUGH 12 COMPARABLE WHICH WERE REJECTED ON THE B ASIS OF RPT BEING MORE THAN ZERO PERCENT, ONE COMPARABLE VIZ., FOUR S OFT LTD., WILL HAVE TO BE EXCLUDED SINCE THE RPT IS AT 19.89% AND THUS IN EXC ESS OF 15%. SATHYAM COMPUTERS LTD., WILL GET EXCLUDED FOR THE REASON TH AT THE FINANCIAL RESULTS ARE NOT RELIABLE. THE REMAINING 10 COMPARABLE COMP ANIES WHICH WERE EXCLUDED BY THE CIT(A) BY APPLYING THE RELATED PART Y TRANSACTION FILTER OF 0% RELATED PARTY TRANSACTION WILL NOW HAVE TO BE IN CLUDED. THEIR COMPARABILITY WITH THE ASSESSEE IN TERMS OF OTHER F ILTERS WILL BE DISCUSSED IN THE FOLLOWING PARAGRAPHS. ITA NOS.391 & 296/BANG/2012 PAGE 11 OF 26 17. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SEEKS EXCLUSION OF ONE COMPARABLE CHOSEN BY THE TPO AS A COMPARABLE VIZ., SANKHYA LNFOTECH LIMITED. SANKHYA INFOTECH LIMITED (SANKHYA) 18. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT SANKHYA IS ENGAGED IN THE BUSINESS OF DEVELOPMENT O F SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE COMPANY FOCUSES ON THE D EVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORT AND AVIATION INDUSTRY. H OWEVER, SEGMENTAL INFORMATION IN RELATION TO THE ABOVE MENTIONED ACTI VITIES IS NOT AVAILABLE IN PUBLIC DOMAIN. THEREFORE, AS SANKHYA ENGAGES ITSELF IN PRODUCTS AND SERVICES AS WELL AS SOFTWARE TRAINING, IT CANNOT BE CONSIDERED AS A COMPARABLE OF THE APPELLANT. THE PRODUCTS DEVELOPE D AND OWNED BY SANKHYA ARE LISTED BELOW:- (1) SILICON TM TRAINING SUITE OF PRODUCTS: THE PRODUCTS ARE A COMPREHENSIVE ENTERPRISE WIDE TRAINING PLATFORM THA T COVERS THE ENTIRE SPECTRUM OF TRAINING IN A PAPERLESS ENVIRONMENT. IT COMPRISES OF FOUR PRODUCTS:- - SILICON TM LMS (TRAINING MANAGEMENT INFORMATION - SILICON TM QT (ONLINE ASSESSMENT SYSTEM) - SILICON TM LCMS (LEARNING CONTENT MANAGEMENT SYSTEM) - IRMAQ TM : THIS IS AN INTEGRATED RESOURCE PLANNING, MANAG EMENT TRACKING SYSTEM EXCLUSIVELY DEVELOPED FOR AIRLINE O PERATIONS. IT IS AN END-TO- END SOLUTION FOR ALL FLIGHT OPERATIONS. - SAKAI CLE : THIS IS A WIDELY USED AND POPULAR O PEN SOURCE LMS USED IN MANY LEADING EDUCATIONAL INSTITUTIONS AND CORPORATE . THE RELEVANT EXTRACT ITA NOS.391 & 296/BANG/2012 PAGE 12 OF 26 FROM THE ANNUAL REPORT SUBSTANTIATING THAT THE COMP ANY ALSO ENGAGES IN DIFFERENT ACTIVITIES IS REPRODUCED BELOW: 2. ACTIVITIES THE COMPANY AS ENGAGED IN THE BUSINESS OF DEVELOPME NT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE PROD UCTION OF SOFTWARE IS NOT CAPABLE OF BEING EXPRESSED IN ANY G ENERIC UNIT AND HENCE 11 IS RIOT POSSIBLE TO GIVE THE INFORMATI ON AS REQUIRED BY CERTAIN CLAUSES OF PARAGRAPHS 3.4C AND 4 D OF PA RT II OF SCHEDULE VI OF THE COMPANIES ACT, 1956. 19. THE DELHI TRIBUNAL IN ITO V. COLT TECHNOLOGY SE RVICES INDIA PVT. LTD. (JUDGMENT DATED 23.10.2012 IN ITA NO. 609I/DEL/2011 FOR THE ASSESSMENT YEAR 2005-06) HAS HELD THAT THE SAID COMPANY IS NOT A COMPARABLE TO THE ASSESSEE THEREIN WHICH WAS ALSO IN THE BUSINESS OF SOFTWARE DEVELOPMENT. 20. THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE CONSIDERED. THE ACTIVITIES SET OUT ABOVE AND THE D ECISION OF THE DELHI ITAT RENDERED IN THE CONTEXT OF A SOFTWARE DEVELOPMENT C OMPANY SUCH AS THE ASSESSEE MAKES IT AMPLY CLEAR THAT THIS COMPANY SAN KHYA CANNOT BE REGARDED AS A COMPARABLE. THE SAME IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 21. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT TWO OF THE COMPARABLE COMPANIES OUT OF THE 12 EXCLUDED BY THE CIT(A) BY APPLYING RPT FILTER AND WHICH GETS INCLUDED IN THE COMPARABLE COMPANIES BECAUSE OF 15% RPT BEING ADOPTED AS THRESHOLD LIMIT FOR EXCLUDING COMPANIES FOR THE PURPOSE OF COMPARABILITY , VIZ., FOUR SOFT LTD., AND THIRDWARE SOLUTIONS LTD., WILL HAVE TO BE EXCLUDED AS THESE COMPANIES ARE ITA NOS.391 & 296/BANG/2012 PAGE 13 OF 26 NOT FUNCTIONALLY COMPARABLE. THESE COMPANIES ACCOR DING TO HIM, WILL HOWEVER, HAVE TO BE EXCLUDED AS THESE TWO COMPANIES WERE HELD TO BE NOT COMPARABLE WITH AN ASSESSEE SUCH AS THE ASSESSEE IN THE PRESENT CASE PROVIDING SOFTWARE DEVELOPMENT SERVICES BY THE ITAT HYDERABAD BENCH IN THE CASE OF CNO IT SERVICES (INDIA) PVT. LTD. (FORM ERLY KNOWN AS CONSECO DATA SERVICES (INDIA) PVT. LTD.) HYDERABAD VS. DCIT , CIRCLE 1(2) HYDERABAD, IN ITA.NO.1280/HYD/2010 ASSESSMENT YEAR 2005-2006 ORDER DATED 12.2.2014. 22. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS, HELD THAT THE A FORESAID TWO COMPANIES VIZ., FOUR SOFT LTD., AND THIRDWARE SOLUTIONS LTD. , ARE NOT COMPARABLE COMPANIES IN SOFTWARE DEVELOPMENT SERVICES COMPANIE S. THE FOLLOWING WERE :- 15.4. FOURSOFT LIMITED : THIS COMPARABLE IS OBJECT ED ON THE SAME REASON AS THIS COMPANY IS INVOLVED IN PROD UCT DEVELOPMENT AND OWNS PRODUCTS NAMELY 4S ETRANS AND 4S ELOG. THESE PRODUCTS ARE USED IN SUN MICROSYSTEMS I NC, IN AN APPLICATION VERIFICATION KIT CERTIFIED FOR ENTERPRI SES AND ASSESSEE HAVE BEEN INVESTING CONTINUOUSLY ON PRODUC T DEVELOPMENTS. SINCE ASSESSEE IS IN THE PRODUCT DEVE LOPMENT, HAVING I.P. RIGHTS, THE SAME IS NOT COMPARABLE. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : THIS COMPANY IS OBJECTED TO BY THE ASSESSEE ON THE REASON THAT THE SAID THIRDWARE SOFTWARE SOLUTIONS LTD. IS ENGAG ED IN SALE OF SOFTWARE LICENCE AND RELATED SERVICES AND NOT A SER VICE PROVIDER. REFERRING TO THE ANNUAL REPORT, IT WAS SUBMITTED TH AT THIS COMPARABLE WAS REJECTED BY THE ITAT, PUNE IN THE CA SE OF EGAIN COMMUNICATIONS LTD. THIS COMPANY HAVING REVEN UE FROM PRODUCT LICENSE AND EARNING EXTRAORDINARY PROFIT DU E TO INTANGIBLE OWNS. ITA NOS.391 & 296/BANG/2012 PAGE 14 OF 26 15.6. THESE THREE COMPARABLE ABOVE FLEXTRONICS SOFT WARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SO LUTION LIMITED WERE ANALYSED BY THE COORDINATE BENCH OF TH E TRIBUNAL IN THE CASE OF INTOTO SOFTWARE SOLUTIONS PVT. LTD. (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER : '23. THE OTHER COMPANIES WHICH ARE OBJECTED TO BY T HE ASSESSEE ARE FLEXTRONICS SOFTWARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SOLUTION LIMITED. AS FAR AS THESE THREE COMPANIES ARE CONCERNED, THE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITT ED THAT THEY ARE INTO BOTH SOFTWARE AS WELL AS PRODUCT DEVELOPMENT. HE SUBMITTED THAT THE TPO HAS TAKEN NO TE OF THE FACT THESE COMPANIES ARE ALSO INTO PRODUCT DEVELOPMENT BUT HAS SELECTED THESE COMPANIES AS COMPARABLES BY APPLYING THE FILTER OF MORE THAN 70% OF ITS REVENUE BEING FROM SOFTWARE DEVELOPMENT SERVICES. T HE LEARNED COUNSEL SUBMITTED THAT THE FUNCTIONS OF THE SE COMPANIES ARE DIFFERENT FROM THE ASSESSEE WHO WAS I NTO SOLE ACTIVITY OF SOFTWARE DEVELOPMENT FOR ITS ASSOC IATED ENTERPRISE. HE SUBMITTED THAT THE TPO HAS ALLOCATED THE EXPENDITURE IN THE PROPORTION OF THE REVENUE OF THE SE COMPANIES FROM SOFTWARE SERVICES AND SOFTWARE PRODU CTS AND HAS ADOPTED THE FIGURE AS SEGMENTAL MARGIN OF T HE COMPANY AND HAS TAKEN THESE COMPANIES AS COMPARABLES. HE SUBMITTED THAT BY TAKING THE PROPORTIONATE EXPENDITURE, THE CORRECT FINANCIAL RE SULTS WOULD NOT EMERGE. HE SUBMITTED THAT NOTHING PREVENT ED THE ASSESSING OFFICER/TPO FROM OBTAINING THE SEGMEN TAL DETAILS FROM THE RESPECTIVE COMPARABLE COMPANIES BE FORE ADOPTING THEM AS COMPARABLE COMPANIES AND BEFORE TAKING THE OPERATING MARGIN FOR ARRIVING AT THE ARM S LENGTH PRICE. HE SUBMITTED THAT WHEREVER THE SEGMENTAL DET AILS ARE NOT AVAILABLE, THEN THE SAID COMPANIES SHOULD N OT BE TAKEN AS COMPARABLES. FOR THIS PURPOSE, HE PLACED RELIANCE UPON THE DECISION OF THE BANGALORE TRIBUNA L IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. VS. THE DCIT IN ITA.NO.1252/BANG/2010 WHEREIN THESE COMPANIES WERE DIRECTED TO BE EXCLUDED FROM THE LIS T OF COMPARABLES. 24. THE LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. ITA NOS.391 & 296/BANG/2012 PAGE 15 OF 26 25. HAVING HEARD BOTH THE PARTIES AND HAVING GONE THROUGH THE MATERIAL ON RECORD, WE FIND THAT THE TP O AT PAGE 37OF HIS ORDER HAS BROUGHT OUT THE DIFFERENCES BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMEN T SERVICES PROVIDER. THUS, IT IS CLEAR THAT HE IS AWA RE OF THE FUNCTIONAL DISSIMILARITY BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICE PROVIDER. HAVING TAKEN NOTE OF THE DIFFERENCE BETWEEN THE TWO FUNCTIONS, T HE ASSESSING OFFICER OUGHT NOT TO HAVE TAKEN THE COMPA NIES WHICH ARE INTO BOTH THE PRODUCT DEVELOPMENT AS WELL AS SOFTWARE DEVELOPMENT SERVICE PROVIDER AS COMPARABLE S UNLESS THE SEGMENTAL DETAILS ARE AVAILABLE. EVEN IF HE HAS ADOPTED THE FILTER OF MORE THAN 75% OF THE REVENUE FROM THE SOFTWARE SERVICES FOR SELECTING A COMPARABLE COMPANY, HE OUGHT TO HAVE TAKEN THE SEGMENTAL RESUL TS OF THE SOFTWARE SERVICES ONLY. THE PERCENTAGE OF EXPENDITURE TOWARDS THE DEVELOPMENT OF SOFTWARE PRODUCTS MAY DIFFER FROM COMPANY TO COMPANY AND ALS O IT MAY NOT BE PROPORTIONATE TO THE SALES FROM THE SALE OF SOFTWARE PRODUCTS. UNDER SECTION 133(6) OF THE I.T. ACT, THE TPO HAS THE POWER TO CALL FOR THE NECESSARY DET AILS FROM THE COMPARABLE COMPANIES. IT IS SEEN THAT THE ASSESSING OFFICER/TPO AS EXERCISED THIS POWER TO CA LL FOR DETAILS WITH REGARD TO THE VARIOUS COMPANIES. AS SE EN FROM THE ANNUAL REPORT OF FOURSOFT LIMITED WHICH IS REPRODUCED AT PAGE 7 OF THE TPOS ORDER, THE SAID COMPANY HAS DERIVED INCOME FROM SOFTWARE LICENCE AL SO AND AMCS. 26. AS FAR AS THIRDWARE SOFTWARE SOLUTION LIMITED I S CONCERNED, WE FIND FROM THE INFORMATION FURNISHED B Y THE SAID COMPANY THAT THOUGH THE SAID COMPANY IS ALSO I NTO PRODUCT DEVELOPMENT, THERE ARE NO SOFTWARE PRODUCTS THAT THE COMPANY INVOICED DURING THE RELEVANT FINANCIAL YEAR AND THE FINANCIAL RESULTS ARE IN RESPECT OF SERVICE S ONLY. THUS, IT IS CLEAR THAT THERE IS NO SALE OF SOFTWARE PRODUCTS DURING THE YEAR BUT THE SAID COMPANY MIGHT HAVE INCURRED EXPENDITURE TOWARDS THE DEVELOPMENT OF THE SOFTWARE PRODUCTS. 27. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CONCE RNED, WE FIND THAT AT PAGE 90 OF HIS ORDER, THE TPO HAS A LSO OBSERVED THAT THE SAID COMPANY HAS INCURRED EXPENDI TURE FOR SELLING OF PRODUCTS AND HAS INCURRED R & D EXPENDITURE FOR DEVELOPMENT OF THE PRODUCTS. THE AB OVE FACTS CLEARLY DEMONSTRATE THAT THERE IS FUNCTIONAL ITA NOS.391 & 296/BANG/2012 PAGE 16 OF 26 DISSIMILARITY BETWEEN THE ASSESSEE AND THESE COMPAN IES AND WITHOUT MAKING ADJUSTMENT FOR THE DISSIMILARITI ES BROUGHT OUT BY THE TPO HIMSELF, THESE COMPANIES CAN NOT BE TAKEN AS COMPARABLE COMPANIES. THE METHOD ADOPTED BY THE TPO TO ALLOCATE EXPENDITURE PROPORTIONATELY TO THE SOFTWARE DEVELOPMENT SERVICE S AND SOFTWARE PRODUCT ACTIVITY CANNOT BE SAID TO BE CORR ECT AND REASONABLE. WHEREVER, THE ASSESSING OFFICER/TPO CAN NOT MAKE SUITABLE ADJUSTMENT TO THE FINANCIAL RESULTS O F THE COMPARABLE COMPANIES WITH THE ASSESSEE COMPANY TO BRING THEM ON PAR WITH THE ASSESSEE, THESE COMPANIE S ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THEREFORE, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE THREE COMPANIES FROM THE LIST OF COMPARABLES'. RESPECTFULLY, FOLLOWING THE SAME, WE ACCEPT THE ASS ESSEES OBJECTIONS AND DIRECT THE TPO TO EXCLUDE THE ABOVE THREE COMPANIES FROM THE LIST OF COMPARABLES. 23. IN VIEW OF THE AFORESAID DECISION RENDERED ON I DENTICAL FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT FOURSOFT LTD ., AND THIRDWARE SOLUTIONS LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 24. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT TATA ELXSI LTD., A COMPARABLE COMPANY OUT OF THE 12 EXCLUDED BY THE CIT(A) BY APPLYING RPT FILTER AND WHICH GETS INCLUD ED IN THE COMPARABLE COMPANIES BECAUSE OF 15% RPT BEING ADOPTED AS THRES HOLD LIMIT FOR EXCLUDING COMPANIES FOR THE PURPOSE OF COMPARABILIT Y. IT WAS HIS SUBMISSION THAT THIS COMPANY WILL HOWEVER, HAVE TO BE EXCLUDED AS THIS COMPANY WAS HELD TO BE NOT COMPARABLE WITH AN ASSES SEE SUCH AS THE ASSESSEE IN THE PRESENT CASE PROVIDING SOFTWARE DEV ELOPMENT SERVICES BY ITA NOS.391 & 296/BANG/2012 PAGE 17 OF 26 THE ITAT HYDERABAD BENCH IN THE CASE OF CNO IT SERV ICES (INDIA) PVT. LTD. (FORMERLY KNOWN AS CONSECO DATA SERVICES (INDIA) PV T. LTD.) HYDERABAD VS. DCIT, CIRCLE 1(2) HYDERABAD, IN ITA.NO.1280/HYD /2010 ASSESSMENT YEAR 2005-2006 ORDER DATED 12.2.2014. 25. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS, HELD ON COMPARA BILITY OF TATA ELXSI LTD. AS FOLLOWS: 15.7. TATA ELXSI LIMITED : THE OBJECTION OF THE AS SESSEE IS THAT TATA ELXSI OPERATING TWO SEGMENTS SYSTEM COMMUNICATION SERVICES AND SOFTWARE DEVELOPMENT SER VICES. THE TPO ACCEPTED THE SOFTWARE DEVELOPMENT SERVICES SEGM ENT IN HIS T.P. ANALYSIS AND ASSESSEES OBJECTION IS THAT THE SOFTWARE DEVELOPMENT SERVICES SEGMENT ITSELF COMPRISES OF TH REE SUB- SERVICES NAMELY (A) PRODUCT DESIGN SERVICES (B)DESI GN ENGINEERING SERVICES AND (C) VISUAL COMPUTING LABS. IT WAS SUBM ITTED THAT THESE SERVICES ARE NOT AKIN TO ASSESSEE SOFTWARE SE RVICES AND SEGMENTAL INFORMATION OF ONLY PRODUCT DESIGN SERVIC ES COULD HAVE BEEN ACCEPTED BY THE TPO AS A COMPARABLE BUT NOT TH E ENTIRE SOFTWARE DEVELOPMENT SERVICE. SINCE COMPANYS OPERA TIONS ARE FUNCTIONALLY DIFFERENT AS SUCH, THE SAME IS NOT COM PARABLE. FURTHER, ASSESSEE IS ALSO OBJECTING ON THE BASIS OF INTANGIBLE SCALE OF OPERATIONS. THE COORDINATE BENCH IN THE CASE OF INTOTO (SUPRA) CONSIDERED THE ISSUE AS UNDER IN PARA 22. '22 TATA ELXSI LIMITED : AS REGARDS THIS COMPANY, T HE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE , FILED BEFORE US THE REPLY OF TATA ELXSI LIMITED TO THE ADDL. CIT (TRANSFER PRICING), HYDERABAD, WHEREIN TH E CONCERNED OFFICER HAS BEEN INFORMED THAT TATA ELXSI LIMITED IS SPECIALISED EMBEDDED SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THAT IT CANNOT BE COMPARED WITH ANY OTHER SOFTWARE DEVELOPMENT COMPANY. IT WAS SUBMITTED THAT BECAUSE OF THE SPECIALISATION AND ALSO BECAUSE OF DIVERSE NATURE O F ITS BUSINESS, IT IS VERY DIFFICULT TO SCALE-UP THE OPERATIONS OF TATA ELXSI LIMITED. IN VIEW OF THIS, TATA ITA NOS.391 & 296/BANG/2012 PAGE 18 OF 26 ELXSI LIMITED HAS INFORMED THAT IT IS NOT FAIR TO U SE ITS FINANCIAL NUMBERS TO COMPARE IT WITH ANY OTHER COMPANY. THE COMMUNICATION DATED 25TH AUGUST, 2009 TO THE TPO IS PLACED BEFORE US. AS THIS COMMUNICATION WAS NOT BEFORE THE TPO AT THE TIME OF TRANSFER PRICING ADJUSTMENT WE DEEM IT FIT AND PROP ER TO REMAND THIS ISSUE ALSO TO THE FILE OF THE TPO TO RECONSIDER ADOPTING THIS COMPANY AS THE COMPARABLE IN THE LIGHT OF OBSERVATIONS OF THIS COMPANY TO THE TPO IN THE CASE OF ANOTHER ASSESSEE. IN THE RESULT, THE ASSESSING OFFICER/TPO IS DIRECTED TO RECONSIDER THE ISSUE IN ACCORDANCE WITH LAW, AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. KEEPING THE ASSESSEES OBJECTIONS AND THE DECISIONS OF THE COORDINATE BENCH, PRIMA FACIE, WE ARE OF THE VIEW T HAT TATA ELXSI LIMITED IS FUNCTIONALLY DIFFERENT AND HAS INC OMPARABLE SIZE TO THAT OF THE ASSESSEE. FURTHER, WE ARE UNABLE TO VERIFY WHETHER THE SEGMENTAL PROFITS ADOPTED BY THE TPO PERTAIN TO ENTIRE SOFTWARE DEVELOPMENT SERVICES OR PERTAIN TO LIMITED SERVICE AKIN TO ASSESSEE SERVICES. SINCE, THESE ASPECTS ARE NOT CLEAR FROM THE DATA FURNISHED BEFORE US, WE DIRECT THE TPO TO EXAM INE AND IN CASE, THE SEGMENTAL PROFITS OF A PARTICULAR SERVICE IS NOT AVAILABLE, THEN, TO EXCLUDE THE TATA ELXSI LIMITED FROM THE LI ST OF COMPARABLES. ACCORDINGLY, THIS ISSUE IS RESTORED TO THE FILE OF TPO FOR EXAMINATION AND TO DECIDE IN ACCORDANCE WIT H LAW AND FACTS, AFTER AFFORDING REASONABLE OPPORTUNITY OF BE ING HEARD TO ASSESSEE. 26. THOUGH THE ISSUE HAS BEEN SET ASIDE TO THE AO I N THE AFORESAID DECISION, THE ITAT HYDERABAD IN THE CASE OF NTT DAT A INDIA ENTERPRISE APPLICATION SERVICES PVT.LTD., ITA NO.1612/HYD/2010 ORDER DATED 23.10.2013 AND IN A SUBSEQUENT RULING IN THE CASE O F INVENSYS DEVELOPMENT CENTRE (INDIA) PVT.LTD., ITA NO.1256/HY D/2010 ORDER DATED ITA NOS.391 & 296/BANG/2012 PAGE 19 OF 26 28.2.2014, HELD THAT TATA ELXSI IS NOT FUNCTIONALLY COMPARABLE WITH THAT OF A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. 27. IN VIEW OF THE AFORESAID DECISION RENDERED ON I DENTICAL FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT TATA ELXSI L TD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 28. IN THE CHART FILED BEFORE US THE LEARNED COUNSE L FOR THE ASSESSEE HAS SUBMITTED THAT BODHTREE CONSULTING LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES BECAUSE OF THE RPT BEING MORE THAN 15%. INFOSYS TECHNOLOGIES LTD., SHOULD BE EXCLUDED AS IT HAS DIV ERSIFIED OPERATIONS AND ENGAGED IN DEVELOPMENT OF NICHE PRODUCTS, OWNS BRAN DS, INTANGIBLES AND HAS HUGE SCALE OF OPERATIONS ETC., IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING OBSERVATIONS O F THE HYDERABAD ITAT BENCH IN THE CASE OF IVY COMPUTECH P.LTD. VS. ACIT ITA NO.1558/HYD/2010 FOR AY 05-06:- (F) BODHTREE CONSULTING LTD.: THE LEARNED AR OBJECT ING TO THE AFORESAID COMPANY BEING TREATED AS A COMPARABLE SUB MITTED THAT THE RELATED PARTY TRANSACTION OF THE AFORESAID COMP ANY BEING MORE THAN 25% OF ITS REVENUE I.E., PRECISELY 34%, IT FAI LS THE RPT FILTER OF MORE THAN 25% ADOPTED BY THE TPO HIMSELF. FOR TH IS CONTENTION THE LEARNED AR REFERRED TO THE OBSERVATI ON MADE BY THE TPO AT PAGE 289 OF THE PAPER BOOK. THE LEARNED AR SUBMITTED THAT SINCE THE AFORESAID COMPANY FAILS TH E RPT FILTER IT CANNOT BE TREATED AS A COMPARABLE. THE LEARNED DR S UPPORTED THE ORDER OF THE TPO. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES A ND PERUSED THE MATERIALS ON RECORD. THE GROUND ON WHICH THE LE ARNED AR SEEKS FOR EXCLUSION OF THE AFORESAID COMPANY IS, IT S RELATED PARTY ITA NOS.391 & 296/BANG/2012 PAGE 20 OF 26 TRANSACTION AS A PERCENTAGE TO THE TOTAL REVENUE IS 34% WHICH IS MORE THAN THE ACCEPT/REJECT MATRIX OF MORE THAN 25% FIXED BY THE TPO. IT IS TO BE NOTED THAT IN FINAL FILTERS ADOPTE D BY THE TPO IN PARA 8.7 OF HIS ORDER HE HIMSELF HAS EXCLUDED COMPA NIES HAVING RPT OF MORE THAN 25%. WE, THEREFORE, DIRECT THE AO TO EXAMINE THIS ASPECT AND EXCLUDE IT FROM THE LIST OF COMPARA BLES IF THE ASSESSEE'S CONTENTION IS FOUND TO BE CORRECT. IN COURSE OF HEARING THE LEARNED DR HAS CONTENDED T HAT THE DECISIONS RELIED UPON BY THE ASSESSEE WILL NOT APPL Y TO THE FACTS OF THE PRESENT CASE AS THEY RELATE TO DIFFERENT ASSESS MENT YEARS. HOWEVER, ON PERUSAL OF THE ORDERS CITED BEFORE US, WE FIND MANY OF THEM TO BE RELATING TO THE IMPUGNED ASSESSMENT Y EAR. HENCE, CONTENTION OF THE LEARNED DR IS NOT ACCEPTABLE. (D) INFOSYS TECHNOLOGIES LTD..: THE LEARNED AR OBJE CTED TO THE AFORESAID COMPANY BEING TREATED AS A COMPARABLE IN VIEW OF ITS EXTRAORDINARY HIGH TURNOVER OF ABOUT RS. 6,859 CROR ES COMPARED TO THE TOTAL TURNOVER OF ABOUT RS. 66 CRORES OF THE ASSESSEE FROM BOTH THE SEGMENTS AND IT WAS CONTENDED BY THE LEARN ED AR THAT UNDER NO CIRCUMSTANCES INFOSYS TECHNOLOGIES LTD. AN D WIPRO CAN BE TREATED AS COMPARABLE TO THE ASSESSEE AS IT IS A GIANT IN THE SECTOR OF SOFTWARE DEVELOPMENT AND ITES HAVING CONS IDERABLE BRAND VALUE. THE LEARNED DR, ON THE OTHER HAND, WHILE STRONGLY O PPOSING CONTENTION OF THE ASSESSEE, SUBMITTED THAT THE ASSE SSEE ITSELF IN ITS OWN TP STUDY HAD SELECTED INFOSYS TECHNOLOGIES AS A COMPARABLE HAVING FOUND IT TO BE FUNCTIONALLY SIMILAR. HENCE, THE ASSESSEE'S CONTENTION TO EXCLUDE COMPANIES AS COMPARABLES WOUL D BE TOTALLY IRRELEVANT. THE LEARNED AR IN HIS REJOINDER SUBMITTED THAT THOU GH THE ASSESSEE HAD SELECTED INFOSYS TECHNOLOGIES LTD. AS A COMPARABLE BUT IT IS NOT ESTOPPED FROM OBJECTING TO THE COMPAN Y BEING SELECTED AS A COMPARABLE IF IT HAS BEEN MISTAKENLY CONSIDERED AS A COMPARABLE BY THE ASSESSEE. IN SUPPORT OF SUCH CONT ENTION, THE LEARNED AR RELIED UPON THE DECISION OF THE ITAT SPE CIAL BENCH IN THE CASE OF QUARK SYSTEMS (38 SOT 207). WE HAVE HEARD SUBMISSIONS OF THE PARTIES AND PERUSE D THE MATERIALS ON RECORD. SO FAR AS INFOSYS TECHNOLOGIES LTD. IS CONCERNED THE ISSUE OF COMPARABILITY OF THE AFORESA ID COMPANY ITA NOS.391 & 296/BANG/2012 PAGE 21 OF 26 HAS BEEN CONSIDERED BY DIFFERENT BENCHES OF THE TRI BUNAL INCLUDING THE HYDERABAD BENCHES. IT IS TO BE NOTED THAT THE CONSISTENT VIEW OF DIFFERENT BENCHES OF THE TRIBUNA L IS TO THE EFFECT THAT INFOSYS TECHNOLOGIES LTD. BEING A BIG C OMPANY IN ALL RESPECTS INCLUDING THE RANGE OF TURNOVER IS NOT A C OMPARABLE TO SMALL COMPANIES WHICH ARE CAPTIVE SERVICE PROVIDERS HAVING CONSIDERABLY LOW TURNOVER. IN FACT, THE HONBLE DEL HI COURT IN A JUDGEMENT DATED 19.7.2013 IN THE CASE OF AGNITY IND IA LTD. UPHELD THE DECISION OF ITAT DELHI BENCH IN EXCLUDIN G INFOSYS TECHNOLOGIES LTD. AS A COMPARABLE IN VIEW OF ITS SI ZE. IT IS A FACT THAT THE ASSESSEE IN THE TP STUDY HAD SELECTED INFO SYS TECHNOLOGIES LTD. AS A COMPARABLE. HOWEVER, AS HELD BY ITAT SPECIAL BENCH IN THE CASE OF QUARK SYSTEMS LTD. (SU PRA) MERELY BECAUSE THE ASSESSEE HAD SELECTED IT AS A COMPARABL E IT CANNOT OPERATE AS AN ESTOPPEL IN RAISING OBJECTIONS WITH R EGARD TO COMPARABILITY OF THE AFORESAID COMPANY. THEREFORE, KEEPING IN TUNE WITH THE CONSISTENT VIEW OF DIFFERENT BENCHES OF THE TRIBUNAL IN RESPECT OF THE AFORESAID COMPANY, WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANY FROM THE LIST OF COMP ARABLES. 29. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL WHICH IS ALSO IN RELATION TO AY 05-06, WE DIRECT THAT BODHTR EE CONSULTING LTD., AND INFOSYS TECHNOLOGIES LTD., BE EXCLUDED FROM THE LIS T OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING THE ALP. 30. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT GEOMETRIC SOFTWARE SOLUTIONS LTD., SHOULD BE EXCLUDED AS IT H AS RPT OF 22%. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECISION OF T HE ITAT BANGALORE IN THE CASE OF EMC DATA STORAGE SYSTEMS (INDIA) PVT. LTD. IT(TP)A.NO.1274/BANG/2010 FOR AY 06-07. IT IS SEEN THAT THE AFORESAID DECISION RELATES TO AY 06-07 AND WE DO NOT KNOW THE DETAILS OF THE RPT IN AY 05-06. WE THEREFORE DEEM IT FIT AND PROPER TO R EMAND THE QUESTION OF ITA NOS.391 & 296/BANG/2012 PAGE 22 OF 26 EXCLUDING THIS COMPANY AS A COMPARABLE TO THE TPO. IF THE RPT IS MORE THAN 15% OF THE TOTAL REVENUES THAN THIS COMPANY S HOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. WE HOLD AND DIRE CT ACCORDINGLY. 31. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESS EE, IF THE SUBMISSIONS OF THE ASSESSEE ARE ACCEPTED, THEN THE ARITHMETIC MEAN OF THE COMPARABLES RETAINED WOULD BE WITHIN THE RANGE OF + /- 5% OF THE ASSESSEES NET MARGIN. THEREFORE, THE OTHER GROUNDS RAISED IN THE MEMORANDUM OF APPEAL ARE NOT PRESSED AT THIS STAGE. HE HAS HOWEVER SOUGHT LIBERTY TO URGE THE SAID GROUNDS IN ANY FUTU RE PROCEEDING, APPELLATE OR OTHERWISE, AND IN THESE PROCEEDINGS AT A FUTURE POINT IN TIME. THE PRAYER SOUGHT BY THE LEARNED COUNSEL FOR THE ASSESSEE IN T HIS REGARD IS ACCEPTED. WORKING CAPITAL ADJUSTMENT : [GROUND 2 (G)] 32. THE ASSESSEE HAS POINTED OUT THAT WHILE WORKING OUT THE ADJUSTMENT TO BE MADE TO THE PROFIT MARGINS ON ACCOUNT OF WORK ING CAPITAL ADJUSTMENT, THE TPO DID NOT TAKE INTO ACCOUNT THE ADVANCE RECEI VED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISE ON THE GROUND THAT T HESE ADVANCES WERE UTILIZED FOR ACQUIRING FIXED ASSETS. THE ASSESSEE POINTED OUT BEFORE DRP THAT THE ADVANCES WERE PROVIDED TO THE ASSESSEE BY THE AE TO MEET ITS CURRENT WORKING CAPITAL AS WELL AS THE FUTURE REQUI REMENTS. ACCORDINGLY, THE ASSESSEE, BEING A SERVICE PROVIDER UTILIZES THESE F UNDS FOR CARRYING OUT ITS DAY TO DAY OPERATIONS AND ALSO TO SET OFF AGAINST T HE PROVISION OF SERVICES (CURRENT OR FUTURE). THE ASSESSEE ALSO SUBMITTED T HAT THE AE CAN MAKE ITA NOS.391 & 296/BANG/2012 PAGE 23 OF 26 ADVANCE PAYMENTS TO ASSIST THE ASSESSEE IN ITS CASH FLOWS. ANY ADVANCE PAYMENT MADE SHALL BE TAKEN INTO CONSIDERATION WHEN SETTLING THE FINAL FEES. IT WAS ALSO POINTED OUT THAT THE FIXED ASSET S WERE ACQUIRED OUT OF THE BUSINESS OPERATIONS AND NOT OUT OF THE ADVANCES GIV EN BY THE AE. THE TPO AS WELL AS THE DRP DID NOT CONSIDER THIS CLAIM BY EXAMINING THE DETAILS FURNISHED BY THE ASSESSEE BUT HELD THAT THE ADVANCES RECEIVED FROM THE AE WERE UTILIZED FOR ACQUIRING FIXED ASSETS. 33. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS MADE BEFORE DRP. THE LEARNED COUNSEL T HEREFORE PRAYED FOR INCLUSION OF ADVANCES RECEIVED FROM AE WHILE COMPUT ING WORKING CAPITAL FOR ARRIVING AT THE ADJUSTMENT TO BE MADE TO THE MARGIN S OF THE ASSESSEE TOWARDS WORKING CAPITAL ADJUSTMENT. THE LEARNED DR RELIED ON THE DIRECTIONS OF THE DRP. 34. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THERE IS NO BASIS FOR THE TPO TO COME TO A CONCLUSION THAT ADVANCES RECEIVED FROM AE, AS HAVING BEEN UTIL IZED FOR PURCHASE OF FIXED ASSETS AND THEREFORE THEY NEED TO BE IGNORED WHILE COMPUTING WORKING CAPITAL ADJUSTMENT TO THE PROFIT MARGIN OF THE ASSESSEE. HAVING COME TO THIS WRONG CONCLUSION WITHOUT ANY BASIS, TH E TPO HAS PROCEEDED TO IGNORE THE ADVANCES RECEIVED FROM AE WHILE COMPU TING WORKING CAPITAL ADJUSTMENT. IN OUR VIEW SUCH AN APPROACH CANNOT BE SUSTAINED. BESIDES THE ABOVE, THE DRP HAS IGNORED THE SUBMISSIONS MADE BY THE ASSESSEE ITA NOS.391 & 296/BANG/2012 PAGE 24 OF 26 REGARDING NON UTILIZATION OF THE ADVANCES RECEIVED FOR ACQUIRING FIXED CAPITAL. BEFORE US THE ASSESSEE DID NOT DEMONSTRAT E REGARDING THE UTILIZATION OF ADVANCES FROM THE AE. IN OUR VIEW T HE SUBMISSIONS MADE BY THE ASSESSEE THAT THE ADVANCE RECEIVED FROM THE AE SHOULD BE CONSIDERED WHILE WORKING OUT THE WORKING CAPITAL ADJUSTMENT DE SERVES TO BE ACCEPTED, IF THE ASSESSEE DEMONSTRATES THAT SUCH ADVANCES WER E NOT UTILIZED FOR ACQUISITION OF FIXED ASSETS. IF IT IS SO DEMONSTRA TED, THESE ADVANCES NEED TO BE INCLUDED FOR WORKING OUT THE WORKING CAPITAL OF THE ASSESSEE WHILE COMPUTING ADJUSTMENT TOWARDS WORKING CAPITAL. THE ISSUE IS ACCORDINGLY REMANDED TO THE AO/TPO AND THE ASSESSEE IS DIRECTED TO FILE THE NECESSARY DETAILS TO DEMONSTRATE ITS CASE REGARDING ADVANCES NOT HAVING BEEN UTILIZED FOR ACQUIRING FIXED ASSETS. THE AO/T PO WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. 35. THE AO/TPO IS ACCORDINGLY DIRECTED TO WORK OUT THE PROFIT MARGINS AND WORKING CAPITAL ADJUSTMENT IN THE LIGHT OF THE DIRECTIONS GIVEN ABOVE. 36. THE REVENUE IN THE GROUNDS OF APPEAL BEFORE THE TRIBUNAL (GROUND NO.2 & 3) HAS ALSO PROJECTED ITS GRIEVANCE REGARDI NG THE ACTION OF THE LEARNED DISPUTE RESOLUTION PANEL IN DIRECTING THE A O TO EXCLUDE TELECOMMUNICATION EXPENSES AND TRAVEL EXPENSES BOTH FROM TOTAL TURNOVER AS WELL AS EXPORT TURNOVER WHILE COMPUTING DEDUCTIO N U/S.10A OF THE ACT. THE AO EXCLUDED FROM THE EXPORT TURNOVER, WHILE COM PUTING DEDUCTION ITA NOS.391 & 296/BANG/2012 PAGE 25 OF 26 U/S.10A OF THE ACT TELECOMMUNICATION EXPENSES AND T RAVEL EXPENSES ON THE GROUND THAT THESE EXPENSES ARE ATTRIBUTABLE TO DELI VERY OF SOFTWARE OUTSIDE INDIA AND EXPENSES INCURRED ON RENDERING TECHNICAL SERVICES OUTSIDE INDIA. IT IS THE PLEA OF THE ASSESSEE THAT AT ALL TIMES DU RING THE RELEVANT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOF TWARE AND NOT IN RENDERING ANY TECHNICAL SERVICES AND THAT TELECOMMU NICATION EXPENSES WERE INCURRED NOT IN CONNECTION WITH DELIVERY OF CO MPUTER SOFTWARE OUTSIDE INDIA. WITHOUT PREJUDICE TO ITS CONTENTION THAT TH E AFORESAID SUMS SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER WHILE COMP UTING DEDUCTION U/S.10A OF THE ACT, THE ASSESSEE HAS ALSO MADE AN A LTERNATE PRAYER THAT EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER AND IN THIS REGARD HAS PLAC ED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) . THE ALTERNATE CLAIM WAS ACCEPTED BY THE CIT(A) AGAINST WHICH THE REVENUE HAS RAISED GRO UND NO.2 & 3 BEFORE THE TRIBUNAL. 37. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN THIS REGARD. TAKING INTO CONS IDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY DIRECTED THE AO TO EXCLUDE TELECOMMUNICATIO N CHARGES AND TRAVEL EXPENSES INCURRED BE EXCLUDED BOTH FROM EXPORT TUR NOVER AND TOTAL ITA NOS.391 & 296/BANG/2012 PAGE 26 OF 26 TURNOVER. THE RELEVANT GROUNDS OF APPEAL OF THE RE VENUE ARE ACCORDINGLY DISMISSED. 38. IN THE RESULT THE APPEAL BY THE ASSESSEE AND TH E REVENUE ARE PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF MARCH , 2015 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 27 TH MARCH , 2015 . /D S/ COPY TO: 1. REVENUE 2. ASSESSEE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.