Global Logic India Ltd., New Delhi V. DCIT, Circle- 10(1), New Delhi

ITA 4740/DEL/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1186 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-05-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Assessment Year: 2014-2015
• Appeal Filed On: 28-06-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Business income; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 143(3); 92B; 234B; 133(6); 144C; 208; 64; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NO.4740/DEL./2018 ASSESSMENT YEAR: 2014-15 M/S GLOBAL LOGIC INDIA LTD., 207, GUPTA ARCADE, CIRCLE- 12(1), LSC PLOT NO. 5, MAYUR VIHAR PHASE-1 EXTENSION, NEW DELHI VS. DCIT, CIRCLE-10(1), NEW DELHI PAN : AABCI2526F (APPELLANT) (RESPONDENT) APPELLANT BY SHRI NEERAJ JAIN, ADV.; SHRI ABHISHEK AGGARWAL, ADV.; & MS. RAMIT KATYAL, CA RESPONDENT BY SH. SURENDER PAL, CIT(DR) DATE OF HEARING 06.02.2020 DATE OF PRONOUNCEMENT 01.05.2020 ORDER PER O.P. KANT,A.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST FI NAL ASSESSMENT ORDER DATED 25/05/2018 PASSED BY THE LEA RNED DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-10(1), NE W DELHI [IN SHORT THE LEARNED ASSESSING OFFICER] PURSUANT TO THE DIRECTION OF THE LEARNED DISPUTE RESOLUTION PANEL (DRP) FOR AS SESSMENT YEAR 2014-15. THE GROUNDS RAISED IN THE APPEAL ARE REPRO DUCED AS UNDER: 1. THAT THE IMPUGNED ORDER OF ASSESSMENT FRAMED BY THE ASSESSING OFFICER IN PURSUANCE OF THE DIRECTIONS OF THE DISPU TE RESOLUTION PANLE (HEREINAFTER REFERRED TO AS DRP) UNDER SECTION 14 3(3) READ WITH 2 ITA NO.4740/DEL./2018 SECTION 144C OF THE INCOME-TAX ACT, 1961 (ACT), I S BAD IN LAW, VIOLATIVE OF PRINCIPLES OF NATURAL JUSTICE AND VOID AB-INITIO. 1.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN PASSING ORDER UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT AT AN INCOME OF RS.57,96,95,314 AS AGAINST RETURNED INCOME OF RS .35,04,84,700. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADJUSTMENT OF RS.18,16,82,680/- TO THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTW ARE DEVELOPMENT SERVICES UNDERTAKEN WITH THE ASSOCIATED ENTERPRISE ON THE BASIS OF ORDER PASSED BY THE TRANSFER PRICING OFFICER (TPO )/DISPUTE RESOLUTION PANEL (DRP). 2.1 THAT WHILE GIVING EFFECT TO THE DIRECTION OF DR P, THE AO/TPO ERRED ON FACTS AND IN LAW IN COMPUTING THE OPERATING PROFIT TO COST RATIO OF APPELLANT AT 9.61% AS AGAINST 15.20% (13.17% IN AE SEGMENT) COMPUTED BY THE APPELLANT, BY ERRONEOUSLY CONSIDERI NG FOREIGN EXCHANGE FLUCTUATION INCOME OF RS.10,51,15,282/- AS NON-OPERATING ITEM OF INCOME. 2.2 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN PA SSING ORDER UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT IN GROSS VIOLATION OF SECTION 144C(10) OF THE ACT, BY NOT CONSIDERING THE SPECIFIC DIRECTION OF THE DRP TO CONSIDER FOREIGN EXCHANGE FLUCTUATIO N INCOME AS OPERATING ITEM OF INCOME. 2.3 THAT DRP/TPO ERRED ON FACTS AND IN LAW IN CONSI DERING FOLLOWING COMPANIES IN THE FINAL SET OF COMPARABLE COMPANIES ALLEGEDLY HOLDING THEM TO BE FUNCTIONALLY COMPARABLE TO THE A SSESSEE: (I) E-ZEST SOLUTIONS (II) INFOBEANS TECHNOLOGIES LIMITED (III)LARSEN &TUBRO INFOTECH LIMITED (IV)MINDTREE LIMITED (V) PERSISTENT SYSTEMS LIMITED (VI)TATA ELXSI LIMITED (VII)THIRDWARE SOLUTIONS LIMITED 2.4 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN C ONSIDERING FOLLOWING COMPANIES IN THE FINAL SET OF COMPARABLES COMPANIES MERELY FOR THE REASON THAT THE SAID COMPANIES WERE CONSIDERED BY T HE ASSESSEE ITSELF, AT THE TIME OF PREPARATION OF TRANSFER PRIC ING DOCUMENT: (I) LARSEN &TUBRO INFOTECH LIMITED (II) MINDTREE LIMITED (III)PERSISTENT SYSTEMS LIMITED. 2.5 THAT WHILE GIVING EFFECT TO THE DIRECTION OF DR P, THE AO/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING THIRDWARE SOLUTIONS LIMITED IN THE FINAL SET OF COMPARABLE COMPANIES, WITHOUT CONSIDER ING THE SPECIFIC DIRECTION OF THE DRP TO RETAIN THE COMPANY ONLY IF SEGMENTAL PROFITABILITY OF COMPANY WITH RESPECT TO SOFTWARE D EVELOPMENT SERVICES (IT SEGMENT ) IS AVAILABLE. 2.6 WITHOUT PREJUDICE, THAT THE TPO WHILE GIVING EF FECT TO THE DIRECTION OF DRP, ERRED ON FACTS IN CONSIDERING INCORRECT OPERAT ING PROFIT MARGIN OF FOLLOWING COMPANIES: (I) PERSISTENT SYSTEMS LIMITED (II) TATA ELXSI LIMITED 3 ITA NO.4740/DEL./2018 (III)THIRDWARE SOLUTION LIMITED 2.7 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN NOT ALLOWING APPROPRIATE RISK ADJUSTMENT TO ESTABLISH C OMPARABILITY ON ACCOUNT OF THE ASSESSEE BEING A LOW-RISK BEARING CA PTIVE SERVICE PROVIDER AS OPPOSED TO THE COMPARABLE COMPANIES WHO WERE INDEPENDENT SOFTWARE DEVELOPMENT SERVICE PROVIDER. 2.8 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE TPO ERRED IN REJECTING THE CONTENTION OF THE AS SESSEE REGARDING RISK ADJUSTMENT, HOLDING THAT IN ABSENCE OF ROBUST AND RELIABLE DATE, BOTH FOR THE ASSESSEE AND FOR THE COMPARABLES, RISK ADJUSTMENT CANNOT BE CONSIDERED FOR ENHANCING COMPARABILITY. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADJUSTMENT OF RS.4,75,27,934/- TO THE ARMS LENGTH PRICE OF ALLEGED INTERNATIONAL TRANSACTIONS OF DELAY IN RECEIPT OF OUTSTANDING RECEIVABLES, ON THE BASIS OF ORDER PASSED BY THE TR ANSFER PRICING OFFICER (TPO)/DISPUTE RESOLUTION PANEL (DRP). 3.1 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN R E-CHARACTERIZING THE ALLEGED TRANSACTION OF DELAY IN RECEIPTS OF RECEIVA BLES AS UNSECURED LOANS ADVANCED TO THE ASSOCIATED ENTERPRISES. 3.2 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THAT DELAY IN RECEIPT OF RECEIVABLE IS NOT AN INTERNATI ONAL TRANSACTION, PER SE, UNDER SECTION 92B OF THE ACT BUT IS A CONSEQUE NCE OF AN INTERNATIONAL TRANSACTION UNDERTAKEN IN THE FORM OF SERVICES RENDERED TO THE ASSOCIATED ENTERPRISE. 3.3 THAT THE DRP ERRED ON FACTS AND IN LAW IN HOLDI NG THAT THE NON- REALIZATION OF INVOICE VALUE BEYOND THE STIPULATED PERIOD (AS PER CONTRACT) IS A SEPARATE INTERNATIONAL TRANSACTION, WHOSE ARMS LENGTH PRICE IS REQUIRED TO BE DETERMINED SEPARATELY. 3.4 WITHOUT PREJUDICE, THAT THE DRP/TPO ERRED ON FA CTS AND IN LAW IN NOT ACCEPTING THAT IN ANY CASE THE TRANSACTION OF DELAY IN RESPECT OF RECEIVABLES WAS CLOSELY LINKED TO THE INTERNATION AL TRANSACTIONOF EXPORT AND SINCE THE PROFIT EARNED BY THE ASSESSEE AS A PERCENTAGE OF COST IS HIGHER THAN THE PROFIT EARNED BY COMPARA BLE COMPANIES, NO TRANSFER PRICING ADJUSTMENT WAS EVEN OTHERWISE REQU IRED TO BE MADE IN THIS REGARD. 3.5 THAT THE DRP ERRED ON FACTS AND IN LAW IN HOLDI NG THAT WORKING CAPITAL ADJUSTMENT DOES NOT ADDRESS THE MISPRICING IN THE CASE OF TAXPAYER WHERE INTEREST FREE RECEIVABLES WERE OUTST ANDING BEYOND. 3.6 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THAT WORKING CAPITAL ADJUSTMENT IS MORE APPROPRIATE MEAS URE TO BENCHMARK THE REALIZATION OF TRADE RECEIVABLES OF T HE APPELLANT INSTEAD OF APPLICATION OF AN INTEREST RATE. 3.7 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE HONBLE TRIBUNAL IN THE APPELLANTS OWN CASE FO R ASSESSMENT YEAR 2010-11 AND 2012-13 IN ITA NO. 1104/DEL./2015 AND 1115/DEL./2017, RESPECTIVELY HAS DELETED SUCH ADJUS TMENT MADE IN RELATION TO DELAY IN RECEIPT OF RECEIVABLES. 3.8 WITHOUT PREJUDICE, THAT THE DRP/TPO ERRED ON FA CTS AND IN LAW IN NOT APPRECIATING THAT THE APPELLANT HAS RECEIVED RECEIV ABLES FROM UNRELATED PARTIES WITH SIMILAR DELAY OF PERIOD AND ACCORDINGLY THE 4 ITA NO.4740/DEL./2018 DELAY IN RECEIPT OF RECEIVABLES FROM UNRELATED PART IES SHOULD BE CONSIDERED AS A VALID INTERNAL CUP FOR THE PURPOSE OF BENCHMARKING. 3.9 WITHOUT PREJUDICE, THAT THE DRP/TPO ERRED ON FA CTS AND IN LAW IN ADDING AN ADHOC MARK-UP OF 400 POINTS ON THE LIBOR RATE OF INTEREST, ARBITRARILY ON ACCOUNT OF CREDIT RATING RISK, SECUR ITY RISK, TRANSACTION COST ETC. 3.10 WITHOUT PREJUDICE, THAT ON THE FACTS AND IN TH E CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE IN TERMS OF MASTER CIRCULAR N O. 10/2011-12, RESERVE BANK OF INDIA ALLOWS A PERIOD OF 12 MONTHS TO ALL COMPANIES FOR RECEIVING REPATRIATION OF EXPORT SALES PROCEEDS , AND THEREFORE, INTEREST IF ANY, OUGHT TO BE IMPUTED ON THE PERIOD OF DELAY BEYOND 12 MONTHS. 4. THAT THE ASSESSING OFFICE ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234A AND 234B OF THE ACT. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE, A WHOLLY-OWNED SUBSIDIARY OF GLOBAL LOGIC INC. USA, I S ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO GLOBAL LOGIC (GL) GROUP AND OTHER UNRELATED CUSTOMERS. THE COMP ANY OPERATES THROUGH EXPORT-ORIENTED UNITS REGISTERED W ITH THE SOFTWARE TECHNOLOGY PARKS OF INDIA SCHEME (STPI). F OR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILED ITS RETURN OF INCOME ON 27/11/2014 DECLARING TOTAL INCOME OF RS.35,04,84,70 0/-. THE RETURN OF INCOME FILED BY THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND STATUTORY NOTICES UNDER THE INCOME-T AX ACT, 1961 (IN SHORT THE ACT) WERE ISSUED AND COMPLIED WITH. IN VIEW OF THE INTERNATIONAL TRANSACTION CARRIED OUT BY THE AS SESSEE WITH ITS ASSOCIATED ENTERPRISES (AES), THE LEARNED ASSESSING OFFICER REFERRED THE MATTER OF DETERMINATION OF ARMS-LENGT H PRICE OF THE SAID TRANSACTION TO THE LEARNED TRANSFER PRICING OF FICER (TPO). THE LEARNED TPO IN HIS ORDER DATED 04/10/2017 PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.26,82,48,663/-WHICH CONSIS TED OF ADJUSTMENT FOR PROVISION OF SOFTWARE DEVELOPMENT S ERVICES AMOUNTING TO RS.21,09,11,213/- AND ADJUSTMENT FOR I NTEREST ON RECEIVABLES AMOUNTING TO RS.5,73,37,450/-. THE ASSE SSING OFFICER 5 ITA NO.4740/DEL./2018 IN HIS DRAFT ASSESSMENT ORDER INCLUDED THE TRANSFER PRICING ADJUSTMENT PROPOSED BY THE LEARNED TPO. ON THE OBJE CTION FILED BY THE ASSESSEE AGAINST THE PROPOSED TRANSFER PRICI NG ADJUSTMENTS, THE LEARNED DRP AFTER CONSIDERING SUBM ISSION OF THE ASSESSEE ISSUED CERTAIN DIRECTIONS TO THE ASSESSING OFFICER/ TPO. THE LEARNED TPO RE-COMPUTED THE TRANSFER PRICING AD JUSTMENT IN COMPLIANCE WITH THE DIRECTION OF THE LEARNED DRP, W HICH WAS WORKED OUT TO RS.22,92,10,640/-. PURSUANT TO THE DI RECTION OF THE LEARNED DRP, THE LEARNED ASSESSING OFFICER ISSUED T HE IMPUGNED FINAL ASSESSMENT ORDER MAKING ADDITION OF RS.22,92, 10,614/-TO THE INCOME RETURNED BY THE ASSESSEE. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS AS R EPRODUCED ABOVE. 3. THE GROUND NO. 1 TO 1.1 OF THE APPEAL ARE GENERA L IN NATURE AND THUS, WE ARE NOT REQUIRED TO ADJUDICATE UPON TH OSE GROUND SEPARATELY. 4. THE GROUND NO. 2 TO 2.8 OF THE APPEAL RELATES TO TRANSFER PRICING ADJUSTMENT TO THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES. BEFORE US, THE ASSES SEE HAS SOUGHT EXCLUSION OF FOUR COMPANIES FROM THE FINAL S ET OF THE COMPARABLES. BEFORE COMING TO ADJUDICATION OF EXCLUSION/INCLUSION OF THOSE COMPANIES, IT IS RELEV ANT TO TAKE NOTE OF FUNCTION, ASSETS AND RISK ANALYSIS (FAR) OF THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SE RVICES CARRIED OUT BY THE ASSESSEE. 4.1 BEFORE US, THE ASSESSEE FILED A PAPER-BOOK (PB) IN TWO VOLUMES CONTAINING PAGES 1-393 AND 1-1022. THE LEAR NED COUNSEL OF THE ASSESSEE REFERRED TO PAGES 45 TO 50 OF THE PB-I, WHEREIN OWNERSHIP STRUCTURE OF THE ASSESSEE; PROFIL E OF GL GROUP; 6 ITA NO.4740/DEL./2018 PROFILE OF GLOBAL LOGIC INC, USA; PROFILE OF GL ISR AEL AND PROFILE OF THE ASSESSEE I.E. GL INDIA IS REPORTED. THE LEARN ED TPO IN HIS ORDER DATED 04/10/2017 HAS REPRODUCED THE SAME PROF ILES OF ENTITIES OF THE GROUP INCLUDING THE ASSESSEE. ACCOR DING TO THE PROFILE, THE GROUP IS A WORLDWIDE LEADING PROVIDER OF SOFTWARE RESEARCH AND DEVELOPMENT SERVICES TO TECHNOLOGY AND SOFTWARE ENABLED COMPANIES THROUGH ITS OFFICES, SALES OFFICE AND GLOBAL DELIVERY CENTERS IN USA, ARGENTINA, CHILE, UNITED K INGDOM, ISRAEL, INDIA AND CHINA ETC. THE GLOBAL LOGIC INC. USA IS A FULL LIFE-CYCLE PRODUCT DEVELOPMENT SERVICE COMPANY IN THE FIELD OF DIGITAL MEDIA, ELECTRONICS, HEALTHCARE INFRASTRUCTURE, FINA NCE, RETAIL AND TELECOM INDUSTRIES. IT ALSO PROVIDES CONSULTING SER VICES AND PERFORM SOFTWARE RESEARCH AND ALLOTMENT FOR ITS COR PORATE CLIENTS. THE GLOBAL LOGIC ISRAEL IS ENGAGED IN THE BUSINES S OF DEVELOPMENT OF THE COMPUTER SOFTWARE. THE ASSESSEE COMPANY HAS CLAIMED TO HAVE BEEN ENGAGED IN THE PROVISION O F THE SOFTWARE DEVELOPMENT SERVICES WHICH INCLUDED PRODUCT REALIZA TION, PRODUCT TESTING, MIGRATION AND PORTING, PRODUCT MAINTENANCE AND SUPPORT AND PRODUCT EXTENSIONS. THE PROFILE OF THE ASSESSEE AVAILABLE ON PAGE 49 OF PB-I IS REPRODUCED AS UNDER: 2.6 PROFIT OF GL INDIA GL INDIA IS A COMPANY REGISTERED UNDER THE PROVISIO NS OF THE COMPANIES ACT, 1956 AND IS A SUBSIDIARY OF GLOBAL L OGIC INC. GL INDIA IS ENGAGED IN THE PROVISION OF SOFTWARE DEVEL OPMENT SERVICES TO ITS CUSTOMERS INCLUDING GLOBAL LOGIC GROUP COMPANIE S. THE DEPARTMENTS OF GL INDIA INCLUDE DELIVERY, FINANCE & LEGAL, HUMAN RESOURCE (INCLUDING EMPLOYEE SERVICES, RECRUITMENT, RESOURCING AND LEARNING & DEVELOPMENT AND OPERATIONS. DURING THE Y EAR, THERE WERE APPROXIMATELY 1,575 EMPLOYEES ON THE PAYROLL OF GL INDIA. THE COMPANY HAS OFFICES IN NOIDA, BANGALORE AND NAGPUR. THE COMPANY OPERATES THROUGH CERTAIN EOU REGISTERED WITH THE ST PI AND SEZ. 4.2 THE ASSESSEE REPORTED FOLLOWING INTERNATIONAL T RANSACTIONS IN ITS TRANSFER PRICING STUDY: 7 ITA NO.4740/DEL./2018 SL. NO. NATURE OF TRANSACTION METHOD APPLIED VALUE OF TRANSACTION (IN RS.) 1. AMOUNT RECEIVED FOR THE SOFTWARE SERVICES PROVIDED TNMM 1,77,98,61,522 2. PURCHASE OF EQUIPMENTS 1,19,862 3. REIMBURSEMENT OF EXPENSES BY AES OTHER METHOD 28,26,31,589 4. AMOUNT RECEIVED ON BEHALF OF AE 21,24,490 4.3 THE LEARNED TPO HAS PROPOSED ADJUSTMENT ONLY TO THE TRANSACTION OF PROVISION OF THE SOFTWARE SERVICES. 4.4 THE FAR ANALYSIS OF THE PROVISION OF THE SOFTWA RE DEVELOPMENT SERVICES HAS BEEN PROVIDED IN TRANSFER PRICING STUDY, A COPY OF WHICH IS AVAILABLE ON PAGE 65 TO 69 OF TH E PAPER-BOOK-I. ACCORDING TO THE ANALYSIS, THE ASSESSEE RENDERED OF FSHORE SOFTWARE DEVELOPMENT SERVICES TO ITS AES NAMELY GLOBAL LOGI C INC, USA (RS.1,75,58,65,221/-) AND GLOBAL LOGIC ISRAEL LTD ISRAEL (RS.2,39,96,301/-) AND FOR ITS SERVICES THE ASSESSE E HAS BEEN REMUNERATED FOR THE COST INCURRED IN RENDERING SERV ICES ALONG WITH 15% MARKUP. 4.5 THE FUNCTIONS PERFORMED INCLUDE, STRATEGIC PLAN NING, MARKETING PLANNING, CUSTOMER RELATIONSHIP MANAGEMEN T AND LICENSING, PROJECT MANAGEMENT, PROVISION OF SERVICE S AS PER THE SPECIFICATION REQUIREMENT PROVIDED BY THE AE, TESTI NG AND QUALITY CONTROL ETC. THE ASSESSEE HAS CLAIMED IT TO BE RISK -FREE ENTITY AND ENTIRE RISKS RELATED TO MARKET, UTILIZATION, REWORK , SERVICE LIABILITY, CUSTOMER CREDIT AND FOREIGN EXCHANGE HAVE BEEN CLAI M TO BE BORNE BY AES. 8 ITA NO.4740/DEL./2018 4.6 THE LD COUNSEL REFERRED TO AGREEMENT WITH THE G L INC., USA, WHICH IS AVAILABLE ON PAGE 208 OF THE PB-I AND AGRE EMENT WITH THE GL ISRAEL, WHICH IS AVAILABLE ON PAGE 214 OF THE PB -I. THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE IN AY 2007-08 H AD BEEN CHARACTERIZED AS PROVIDER OF SOFTWARE DEVELOPMENT SERVICES. 4.7 IN RELATION TO THE SOFTWARE DEVELOPMENT SERVICE S, THE ASSESSEE HAS APPLIED TRANSACTIONAL NET MARGIN METHO D (TNMM) AS THE MOST APPROPRIATE METHOD AND OPERATING PROFIT /OPERATING COST (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI). T HE ASSESSEE HAS ARRIVED AT A SET OF 21 COMPARABLE COMPANIES WITH AN AVERAGE MARGIN (PLI) OF 14.32%. THE ASSESSEE HAS USED MULTI PLE YEAR DATA. THE ASSESSEE HAS CALCULATED ITS OWN OP/OC AT 13.17%. BUT ACCORDING TO THE LEARNED TPO, THE OP/OC OF THE ASSE SSEE WAS ONLY 9.61%. THE LEARNED TPO ALSO REJECTED THE MULTI PLE YEAR DATA OF THE COMPARABLES TAKEN BY THE ASSESSEE. THE LEARN ED TPO FINALLY RETAINED 15 COMPARABLES AND USING THEIR CURRENT YEA R DATA, ARRIVED AT AVERAGE MARGIN (OP/OC) OF 22.60 PERCENT. IN VIEW OF THE AVERAGE MARGIN OF THE COMPARABLES BEING MORE TH AN THE MARGIN OF THE ASSESSEE , THE LEARNED TPO COMPUTED A DJUSTMENT OF RS.21,09,11,213/-TO THE VALUE OF THE INTERNATIONAL TRANSACTION REPORTED BY THE ASSESSEE. ON THE DIRECTION OF THE L EARNED DRP TO EXCLUDE/INCLUDE THE COMPARABLES, FINALLY 13 COMPARA BLES ARE RETAINED WITH THEIR AVERAGE MARGIN AT 20.80%. THE A DJUSTMENT HAS ACCORDINGLY HAS BEEN COMPUTED AT RS.18,16,82,68 0/-. 4.8 THE COMPARABLE SOUGHT TO BE EXCLUDED BEFORE US BY THE ASSESSEE ARE ADJUDICATED AS UNDER: 9 ITA NO.4740/DEL./2018 MINDTREE LTD. 5. THIS COMPANY WAS INITIALLY SELECTED BY THE ASSES SEE AS COMPARABLE, HOWEVER DURING THE COURSE OF PROCEEDING BEFORE THE LD. TPO, THE ASSESSEE SOUGHT TO EXCLUDE THE COMPANY FROM THE SET OF THE COMPARABLES ON THE GROUND OF FUNCTIONAL DISSIMILARITY. THE LEARNED TPO REFERRED TO THE VARIOUS PAGES OF TH E ANNUAL REPORT OF THE COMPANY ( I.E. P-77, P-92 , P-32 ) AN D PROFIT AND LOSS ACCOUNT AND HELD THAT THE COMPANY PROVIDED SOFTWARE DEVELOPMENT SERVICES, WHICH IS FUNCTIONALLY SIMILAR TO THE ASSESSEE, WHO IS ALSO DEVELOPING SOFTWARE FOR THE A SSOCIATED ENTERPRISES. 5.1 BEFORE THE LEARNED DRP, THE ASSESSEE TAKEN FOLL OWING OBJECTIONS AGAINST INCLUSION OF THE COMPANY: 1. IT IS FUNCTIONALLY DIFFERENT AS IT IS SEEN THAT THE COMPANY HAS DEVELOPED VARIOUS PRODUCTS TO OFFER TO ITS CUSTOMER S. THE COMPANY DEVELOPED A SOFTWARE PRODUCT I GOT GARBATE AND AL SO LAUNCHED A PRODUCE, GLADIUS, A VIDEO MANAGEMENT SOFTWARE. 2. THE COMPANY ALSO HAVE SAP MOBILITY APPLICATIONS WHICH CAN BE OPERATED ON MOBILE PHONES AND TABLETS. 3. AT PAGE 76 OF THE ANNUAL REPORT THE COMPANY, THE COMPANY IN ITS NOTES TO ACCOUNTS OF THE AUDITED ACCOUNTS HAS D ESCRIBED THAT THE COMPANY ALSO PROVIDES SERVICES IN THE NATURE OF BUS INESS PROCESS MANAGEMENT, BUSINESS TECHNOLOGY CONSULTING, CLOUD, INDEPENDENT TESTING INFRASTRUCTURE MANAGEMENT SERVICES, MOBILIT Y, PRODUCT ENGINEERING ETC. 4. AT PAGE 64 OF THE ANNUAL REPORT, THE COMPANY CLA IMS ITSELF TO BE A FULL RISK BEARING ENTITY RENDERING HIGH END IT SERVICES UNDERTAKING VARIOUS RISK, SUCH AS OPERATIONAL RISK , ECONOMIC ENVIRONMENT RISK, PRICING RISK, COMPETITION RISK, M ANPOWER RISK, CLIENT LOSS RISK, FOREIGN CURRENCY FLUCTUATION RISK ETC. 5.2 THE LEARNED DRP, HOWEVER, IN VIEW OF THE REVENU E RECOGNITION BEING PRIMARILY FROM THE SOFTWARE SERVI CES AND INTELLECTUAL PROPERTY OWNED BY THE COMPANY BEING VE RY INSIGNIFICANT, HELD THE COMPANY AS COMPARABLE TO TH E SOFTWARE DEVELOPMENT SERVICES OF THE ASSESSEE. 10 ITA NO.4740/DEL./2018 5.3 BEFORE US, THE LD COUNSEL OF ASSESSEE REPEATED SUBMISSIONS WHICH WERE MADE BEFORE THE LEARNED DRP AND ALSO REL IED ON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF AGILIS INFORMATION TECHNOLOGIES INDIA (P) LTD. VERS US ACIT (ITA NO. 555/DEL/2017) TO SUPPORT THAT THE COMPANY IS ENGAGE D IN DEVELOPMENT AND SALE OF THE SOFTWARE PRODUCTS AND A LSO OWNS INTANGIBLE ASSETS, AND THUS NOT COMPARABLE TO THE A SSESSEE. 5.4 THE LEARNED DR, ON THE OTHER HAND, RELIED ON TH E ORDER OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE ASSOCIATED ENTERPRISES OF THE ASSESSEE DEALS IN PRODUCT AND THE ASSESSEE I S DEVELOPING SOFTWARE PRODUCTS AS WELL AS RENDERING SOFTWARE SER VICES AND, THE COMPANY WHO IS HAVING REVENUE FROM OPERATIONS OF SO FTWARE DEVELOPMENT AND SERVICES, IT IS A VALID COMPARABLE TO THE ASSESSEE. 5.5 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES O N THE ISSUE IN DISPUTE. THE ASSOCIATED ENTERPRISES , NAMELY M/S GLOBAL LOGIC INC, USA , TO WHOM THE ASSESSEE IS PROVIDING SERVI CES IS A FULL LIFE CYCLE PRODUCT DEVELOPMENT SERVICE COMPANY WHICH OPE RATES, DESIGN AND ENGINEERING CENTERS AROUND THE WORLD IN FIELD OF DIGITAL MEDIA, RETAIL, FINANCE, INFRASTRUCTURE, TELECOMMUNI CATION, ELECTRONICS AND HEALTHCARE AND ALSO HAS ONGOING PAR TNERSHIP WITH PRODUCT MARKETS IN THESE FIELDS. THE ASSESSEE COMPA NY, DURING THE YEAR WAS HAVING APPROXIMATELY 1575 EMPLOYEES ON ITS PAYROLL AND WAS POSSESSING SKILLS IN MAJOR TECHNOLOGIES LIK E JAVA, MICROSOFT, VOIP, MOBILE TECHNOLOGIES, WEB SERVICES, INTEGRATION WITH BACK-OFFICE APPLICATION SUCH AS SAP, SIEBTEL, MS EXCHANGE AND DATABASES (ORACLE, SQL SERVER, DB2, SYBASE, MS ACCESS) . THE ASSESSEE CLAIMED TO HAVE INCLUDED SERVICES DEVE LOPMENT DELIVERY AND INTEGRATION OF A SPECIALIZED ITEMS, PR ODUCT TESTING. 11 ITA NO.4740/DEL./2018 THE ASSESSEE ALSO USES A MIGRATION METHODOLOGY PROV IDED BY THE GL GROUP THAT COVERS ALL PHASES FROM IMPACT ANALYSI S TO DEPLOYMENT AND TESTING. THE ASSESSEE ALSO WAS ENGAG ED IN PROVIDING PRODUCT EXTENSION SERVICES, APPEND NEW FE ATURES AND FUNCTIONALITY TO EXISTING PRODUCTS. THUS, THE ASSES SEE IS ENGAGED IN DEVELOPING SOFTWARE PRODUCTS FOR THE ASSOCIATED ENTERPRISES THROUGH SKILLS POSSESSED IN VARIOUS TECHNOLOGIES AN D ALSO IN EXTENSION OF FUNCTIONALITY OF EXISTING PRODUCTS OF THE ASSOCIATED ENTERPRISES. THE ASSESSEE IS ALSO ENGAGED IN PROVID ING SERVICES OF MAINTENANCE AND SUPPORT, TESTING, MIGRATION AND POR TING ETC TO ITS ASSOCIATED ENTERPRISES. THE ASSESSEE CAN BE CAT EGORIZED AS PROVIDER OF SOFTWARE DEVELOPMENT AND SERVICES. 5.7 THE LEARNED COUNSEL HAS REFERRED TO PAGE 141 AN D 135 OF THE PAPER-BOOK TO CONTEST THAT THE COMPANY HAS DEVELOPE D VARIOUS PRODUCTS TO OFFER TO ITS CUSTOMER. THE LEARNED COUN SEL REFERRED TWO PRODUCTS NAMELY I GOT GARBAGE AND GALDIUS. THE LEARNED COUNSEL SUBMITTED THAT THERE IS NO SEPARATE SEGMENT FOR SALE OF THE PRODUCT AND THUS COMPANY SHOULD BE EXCL UDED. 5.8 AS FAR AS CONTENTION OF DEVELOPING SOFTWARE PRO DUCT BY THE COMPANY IS CONCERNED, THIS FACT IS NOT DISPUTED. TH E ASSESSEE IS ALSO ULTIMATELY DEVELOPING SOFTWARE PRODUCTS FOR IT S ASSOCIATED ENTERPRISES AND THEREFORE, THE ASSESSEE IS NOT FUNC TIONALLY DIFFERENT FROM THE COMPANY. IN THE PROFIT AND LOSS ACCOUNT, WE DO NOT FIND ANY REVENUE FROM THE SALE OF THE PRODUCTS AND ONLY REVENUE IS FROM THE OPERATIONS. THE COMPANY IS EARN ING REVENUE FROM ITS OPERATION WHICH INCLUDE REVENUE FROM OPERA TING THE SOFTWARE LIKE I GOT GARBAGE. THE LEARNED COUNSEL HAS FAILED TO INDICATE ANY REFERENCE IN THE ANNUAL REPORT REGA RDING SALE OF THE PRODUCT BY THE COMPANY. THUS, THE CONTENTION OF THE ASSESSEE 12 ITA NO.4740/DEL./2018 THAT THE COMPANY IS ENGAGED IN SALE OF PRODUCT CANN OT BE ACCEPTED. 5.9 THE NEXT CONTENTION THAT COMPANY ALSO APPLY SAP MOBILITY APPLICATIONS WHICH CAN BE OPERATED ON MOBILE PHONES AND TABLETS. ON PERUSAL OF THE PROFILE OF THE ASSESSEE WHICH WE HAVE ALREADY REPRODUCED ABOVE , WHILE EXTRACTING THE PROFILE OF THE ASSESSEE IN EARLIER PARAGRAPHS, WE FIND THAT THE ASSESSEE ALSO POSSESS SKILLS IN VARIOUS TECHNOLOGIES INCLUDING MOBILE TECHNOLOGI ES ( POCKET PC, CDPD, GSM, GPRS) AND SAP ETC, THUS, ON THIS CONTEN TION OF THE ASSESSEE, THE COMPANY CANNOT BE EXCLUDED. 5.10 FURTHER, THE LEARNED COUNSEL REFERRED TO PAGE 76 OF THE ANNUAL REPORT OF THE COMPANY (PAGE 216 OF PB-I) AND SUBMITTED THAT COMPANY IN ITS NOTES TO THE ACCOUNT OF THE AUD ITED ACCOUNTS HAS DESCRIBED THE COMPANY ALSO PROVIDES SERVICES IN THE NATURE OF BUSINESS PROCESS MANAGEMENT, BUSINESS TECHNOLOGY CO NSULTING, CLOUD, INDEPENDENT TESTING INFRASTRUCTURE MANAGEMEN T SERVICES, MOBILITY, PRODUCT ENGINEERING ETC. WE FIND THAT THE ASSESSEE ALSO IS ENGAGED IN PROVIDING SERVICES RELATED TO THE SOF TWARE INCLUDING PRODUCT TESTING, MAINTENANCE AND SUPPORT. IT IS SPE CIFICALLY MENTIONED IN THE PROFILE THAT GL INDIA HAS INVESTED IN CREATING EXTENDED SUPPORT INFRASTRUCTURE FOR SOFTWARE COMPAN IES IN THE PRODUCT SUPPORT TEAM AS A COMBINATION OF THE DOMAIN AND TECHNOLOGY EXPERTS PROVIDING QUALITY SUPPORTS. IN V IEW OF THE FACT THAT ASSESSEE IS ALSO ENGAGED IN PROVIDING VARIOUS KIND OF SERVICES ASSOCIATED TO SOFTWARE PRODUCT DEVELOPMENT IN COMPA RISON TO THE COMPANY WHICH IS ENGAGED IN PROVIDING SERVICES RELA TED TO SOFTWARE. THUS, WE REJECT THE CONTENTION OF THE ASS ESSEE FOR EXCLUDING THE COMPANY FROM THE SET OF THE COMPARABL E ON THE GROUND OF FUNCTIONAL DISSIMILARITY. 13 ITA NO.4740/DEL./2018 5.11 THE NEXT ARGUMENT OF THE LEARNED COUNSEL OF TH E ASSESSEE THAT COMPANY POSSESS INTANGIBLE ASSETS WORTH MILLIO NS OF RUPEES. THIS ARGUMENT OF THE COMPANY HAS BEEN REJECTED BY T HE LEARNED DRP. THE LEARNED DRP HAS NOTED THAT THE COMPANY OWN S INTANGIBLE OF RS.17.10 CRORES, WHICH INCLUDES SOFTW ARE OF RS.15.50 CRORES AND INTELLECTUAL PROPERTY IS ONLY OF RS.1.50 CRORE AS AGAINST THE OPERATING REVENUE OF RS.3081 CRORES AND THUS TH E INTELLECTUAL PROPERTY OWNED IS VERY INSIGNIFICANT. WE AGREE WITH THIS FINDING OF THE LEARNED DRP, AND ACCORDINGLY REJECT THE CONTENT ION OF THE ASSESSEE OF DIFFERENCE IN THE ASSET BASE OF THE COM PANY AS COMPARED TO THE ASSESSEE. 5.12 THE LEARNED COUNSEL HAS RELIED ON THE DECISION OF THE AGILIS INFORMATION TECHNOLOGIES INDIA PRIVATE LIMITED (SUP RA), WHEREIN THE COMPANY WAS EXCLUDED BY THE TRIBUNAL HOLDING AS UNDER: 4.13 WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E RECORDS AVAILABLE BEFORE US. THIS COMPANY IS ENGAGED IN DEV ELOPMENT AND SALE OF SOFTWARE PRODUCT AND ALSO OWNS INTANGIBLE A SSETS (PATENTS). IN ASSESSEES CASE, THE COMPANY IS UNDERTAKING SOFT WARE DEVELOPMENT WHICH IS MORE OF AN EVEWNT CONSTITUTING A NEW STAGE IN A CHANGING SITUATION, THAN A COMPLETE PRODUCT. THER EFORE, MINDTREE LIMITED IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY AND SHOULD HAVE BEEN EXCLUDED BY THE TPO. THUS, AS HELD BY THE HONBLE DELHI HIGH COURT & THIS TRIBUNAL IN VARIOUS DECISIO NS COMPANIES WHICH ARE FUNCTIONALLY DIFFERENT HAS TO BE EXCLUDED . THEREFORE, WE DIRECT TPO TO EXCLUDE THIS COMPANY FROM COMPARABLES . 5.13 WE FIND THAT THE TRIBUNAL HAS REJECTED THE COM PANY OBSERVING THAT IT WAS ENGAGED IN SALE OF THE SOFTW ARE PRODUCT, BUT IN THE YEAR UNDER CONSIDERATION THERE IS NO SALE OF THE PRODUCTS AND THEREFORE FACTS OF THE PRESENT YEAR UNDER CONSI DERATION OF THE COMPANY BEING DIFFERENT, IT CANNOT BE EXCLUDED IN V IEW OF THE DECISION CITED BY THE ASSESSEE. 14 ITA NO.4740/DEL./2018 5.14 IN VIEW OF THE ABOVE DISCUSSION, WE REJECT THE CONTENTION OF THE ASSESSEE FOR EXCLUDING THE COMPANY FROM THE FIN AL SET OF THE COMPARABLES. LARSON AND TOUBRO INFOTECH LTD: 6. THIS COMPANY WAS SELECTED BY THE ASSESSEE AS COM PARABLE IN ITS TRANSFER PRICING STUDY, HOWEVER BEFORE THE L D TPO, THE ASSESSEE SOUGHT TO EXCLUDE IT FROM SET OF THE COMPA RABLES ON THE GROUND OF FUNCTIONAL DISSIMILARITY BEING ENGAGED IN DIVERSIFIED OPERATIONS. THE LEARNED TPO REFERRED TO THE ANNUAL REPORT OF THE COMPANY AND HELD THAT THE COMPANY IS NOT ENGAGED IN SALE/LICENSE OF SOFTWARE PRODUCTS OR ANY OTHER DIVE RSIFIED ACTIVITIES, AND THUS IT IS A VALID COMPARABLE. 6.1 BEFORE THE LEARNED DRP, THE ASSESSEE SOUGHT EXC LUSION OF THE COMPANY ON THE GROUND OF EXTRAORDINARY EVENT, S IGNIFICANT INTANGIBLESAND SOFTWARE PACKAGES PURCHASED FOR RESA LE (SALE OF PRODUCT). THE LEARNED DRP HELD THAT COMPANYS REVEN UE WAS NOT IMPACTED BY THE INTANGIBLES HELD BY THE COMPANY AS MOST OF THE INTANGIBLES WERE SOFTWARE. THE LD DRP ALSO HELD THA T THERE IS NO REVENUE FROM THE SALE OF THE PRODUCTS. 6.2 BEFORE US, THE LEARNEDCOUNSEL HAS SOUGHT TO EXC LUDETHE COMPANY ON THE GROUND OF SIGNIFICANT INTANGIBLES, E XPENSES ON COST OF THE BOUGHT-OUT ITEMS FOR RESALE, MULTIPLE S EGMENTS AND EXTRAORDINARY EVENT. 6.3 THE LEARNED DR, ON THE OTHER HAND, RELIED ON TH E FINDING OF THE LOWER AUTHORITIES. 6.4 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES O N THE ISSUE IN DISPUTE. THE LEARNEDCOUNSEL OF THE ASSESSEE SUBM ITTED THAT THE COMPANY OWNS SIGNIFICANT INTANGIBLES (RS.75,04,78,3 29/-) IN THE 15 ITA NO.4740/DEL./2018 FORM OF THE SOFTWARE AND INTANGIBLE ASSETS UNDER DE VELOPMENT. ON PERUSAL OF FIXED ASSETS SCHEDULE, AVAILABLE ON PAGE S-1245 OF THE ANNUAL REPORT ( PAGE 116 OF PB-2), WE FIND THAT AT THE BEGINNING OF THE YEAR THE ASSESSEE OWNED INTANGIBLE ASSETS OF RS.153,42,45,196/- WHICH INCLUDED SOFTWARE OF RS.14 3,61,95,196 ( 93 %), THUS THE INTANGIBLE OTHER THEN THE SOFTWAR E ARE INSIGNIFICANT. DURING THE YEAR, THE COMPANY HAS SO LD/TRANSFERRED THE SOFTWARE AND CLAIMED DEPRECIATION, WHICH RESULT ED IN NET BLOCK OF SOFTWARE AT THE END OF THE YEAR TO RS.33,2 2,11,879/-. THE ASSESSEE HAS ALSO SHOWN INTANGIBLE ASSETS UNDER DEV ELOPMENT OF RS.41,82,66,450/-, WHICH MAKES THE NET INTANGIBLES OWNED BY THE COMPANY TO RS.75,04,78,329/- AT THE END OF THE YEAR. BUT NO DEPRECIATION HAS BEEN CLAIMED ON THE UNDER DEVELOPE D INTANGIBLES, THEREFORE THERE IS NO EFFECT ON THE PR OFITABILITY OF THE COMPANY ON ACCOUNT OF THE UNDERDEVELOPED INTANGIBLE S. THUS, THE OBJECTION OF THE ASSESSEE OF NON-COMPARABILITY OF T HE ASSETS IS REJECTED. 6.5 FURTHER, THE LEARNED COUNSEL SUBMITTED THAT OPE RATING EXPENSES AMOUNTING TO RS.34,91,74,116/-AND RS.54,82 ,74,109/- ON COST OF THE SOFTWARE PACKAGES FOR OWN USE AND CO ST OF THE BOUGHT-OUT ITEMS FOR RESALE DURING THE YEAR UNDER C ONSIDERATION. THUS, ACCORDING TO THE LEARNED COUNSEL, THE COMPANY WAS ENGAGED IN SALE OF THE PRODUCT AND ACCORDINGLY NOT COMPARABLE. ON PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE CO MPANY ON PAGE S-1237 OF THE ANNUAL REPORT (PAGE 108 OF PB-2), WE FIND THAT COMPANY HAS SHOWN TWO REVENUE STREAMS. FIRST, AS RE VENUE FROM THE OPERATIONS OF RS.46,439,403,178/-FROM OVERSEAS AND SECOND AS OTHER INCOME (LOSS OF RS.81,09,17,799/-). NO REV ENUE FROM SALE OF PRODUCT HAS BEEN SHOWN. AS REGARD TO THE OBJECTI ON OF COST OF 16 ITA NO.4740/DEL./2018 SOFTWARE PACKAGES FOR OWN USE UNDER OPERATING EXPEN SES, IS CONCERNED IN OUR OPINION, FOR A COMPANY ENGAGED IN SOFTWARE DEVELOPMENT, INCURRING EXPENSES ON PURCHASE OF THE SOFTWARE FOR OWN USE CANNOT TERM THE ASSESSEE AS ENGAGED IN SALE OF THE PRODUCT. REGARDING THE COST OF THE ITEMS FOR RESALE IS CONCERNED, THE COST OF PURCHASE OF INVENTORY FOR RESALE WILL N OT IMPACT ON THE PROFIT AND LOSS ACCOUNT BECAUSE WHEN GOODS ARE NOT SOLD , THEN IT WILL APPEAR IN CLOSING STOCK AND RESULTANT EFFECT O N PROFIT AND LOSS ACCOUNT IS NIL. 6.6 THE NEXT OBJECTION OF THE ASSESSEE IS REGARDING MULTIPLE SEGMENTS. FROM SEGMENT REPORTING ON PAGE S-1258 OF THE ANNUAL REPORT (PAGE 129 OF PB-2) , WE FIND THAT THE ASSESS EE HAS REPORTED THREE BUSINESS SEGMENTS. THE FIRST SEGMENT IS SERVI CE CLUSTER WHICH INCLUDES BANKING, FINANCIAL SERVICES, INSURAN CE, MEDIA AND ENTERTAINMENT, TRAVEL AND LOGISTICS AND HEALTHCARE. THE SECOND SEGMENT INDUSTRY CLUSTER WHICH INCLUDES HI TECH AND CONSUMER ELECTRONICS, CONSUMER, RETAIL AND PHARMA, ENERGY AN D PROCESS, AUTO MOBILE AND AEROSPACE, PLANT EQUIPMENT AND IND USTRIAL MACHINERY, UTILITIES AND E &C. THE THIRD SEGMENT, I S TELECOM SEGMENT WHICH REFERS TO PRODUCT ENGINEERING SERVICE S (PES) WHICH HAS BEEN DISCONTINUED IN THIS YEAR. REGARDING THE P ES, IN DIRECTORS REPORT, (AVAILABLE ON PAGE S-1225 OF THE ANNUAL REPORT OR PAGE 96 OF PB-2), IT IS REPORTED AS UNDER: TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) AS PART OF BUSINESS RESTRUCTURING UNDERTAKEN WITHIN L&T GROUP, IT WAS DECIDED TO CONSOLIDATE THE ENGINEERING SERVICES BUSINESS UNDER A SEPARATE SUBSIDIARY OF L&T, L&T TECHNOLOGY SERVIC ES LTD. (LTTSL). PURSUANT TO THIS, THE COMPANY INITIATED AND COMPLET ED TRANSFER OF ITS PRODUCT ENGINEERING SERVICES (PES) BUSINESS UNIT TO LTTSL EFFECTIVE JANUARY 1, 2014, PES BUSINESS UNIT WAS TRANSFERRED BY WAY OF SLUMP SALE FOR TOTAL SALES CONSIDERATION OF RS.489. 53 CRS BASED ON 17 ITA NO.4740/DEL./2018 FAIR VALUATION, GDA TECHNOLOGIES INC., USA (GDA INC .), A WHOLLY OWNED SUBSIDIARY OF THE COMPANY WAS PART OF PES BUS INESS WITH SYNERGY IN TERMS OF THE END CUSTOMERS THEY SERVE, P RIMARILY THE SEMICONDUCTOR COMPANIES. OVER LAST FEW YEARS, THE P ERFORMANCE OF GDA INC. WAS ADVERSELY AFFECTED RESULTING IN FALLIN G REVENUES AND OPERATIONAL LOSSES. CONSEQUENT TO THE TRANSFER OF P ES BUSINESS, CERTAIN IPS (INTELLECTUAL PROPERTIES) OWNED BY GDA INC. WERE TRANSFERRED TO LTTSL, THE COMPANY WAS WOUND UP DURI NG THE YEAR. 6.7 IN VIEW OF THE ABOVE REPORTING, IT IS CLEAR THA T UNDER THE TELECOM SEGMENT, THE ASSESSEE WAS ENGAGED IN PROVID ING ENGINEERING SERVICES, WHICH IS DISTINCT FROM THE SE RVICES OF THE SOFTWARE DEVELOPMENT. THUS, AT ENTITY LEVEL, THE CO MPANY CANNOT BE CONSIDERED FUNCTIONALLY SIMILAR TO THE ASSESSEE. THE COMPANY CANNOT BE CONSIDERED COMPARABLE AT THE SEGMENT LEVE L ALSO BECAUSE OF THERE ARE EXPENSES OF RS.205,80,17,445/- ( PAGE 129 OF PB-2) , WHICH HAS NOT BEEN ALLOCATED INTO THREE SEGMENTS, AND THUS THE SEGMENTAL RESULT ARE DISTORTED. 6.8 DURING THE YEAR, THE EXTRAORDINARY EVENT OF DEM ERGER OF PRODUCT ENGINEERING SERVICE BUSINESS (PES) HAS OCCU RRED WITH EFFECT FROM 01/01/2014, WHICH HAS ALSO IMPACTED THE PROFIT OF THE COMPANY AT THE ENTITY LEVEL. IN THE DECISION OF THE TRIBUNAL IN CASE OF XCHANGING TECHNOLOGY SERVICE INDIA PRIVATE LIMIT ED (ITA NO.1897/DEL./2004), WHICH HAS BEEN APPROVED THE HON BLE HIGH COURT IN ITA NO. 813/2015 , THE COMPANY IS HELD TO BE NOT VALID COMPARABLE ON ACCOUNT OF EXTRAORDINARY EVENTS. THUS , IN VIEW OF THE EXTRAORDINARY EVENT IN THE YEAR UNDER CONSIDERA TION ALSO, THIS COMPANY IS LIABLE TO BE EXCLUDED FROM THE SET OF TH E COMPARABLE. 6.9 ACCORDINGLY, IN VIEW OF THE FUNCTIONAL DISSIMIL ARITY AT ENTITY LEVEL AND EXTRAORDINARY EVENT DURING THE YEAR, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE FINAL SET OF THE C OMPARABLES. 18 ITA NO.4740/DEL./2018 PERSISTENT SYSTEMS LTD. 7. THIS COMPANY WAS INITIALLY SELECTED BY THE ASSES SEE AS COMPARABLE IN ITS TRANSFER PRICING STUDY, HOWEVER B EFORE THE LEARNED TPO, THE ASSESSEE SOUGHT TO EXCLUDE THE COM PANY ON THE GROUND OF FUNCTIONAL DISSIMILARITY. ACCORDING TO TH E ASSESSEE THE COMPANY DERIVES INCOME FROM THE SALE OF SOFTWARE SE RVICES AS WELL AS SOFTWARE PRODUCTS. THE LEARNED TPO HOWEVER REFER RED TO PROFIT AND LOSS ACCOUNT OF THE COMPANY WHERE REVENUE HAS B EEN SHOWN FROM SALE OF SOFTWARE SERVICES. THE LEARNED TPO ALS O REFERRED TO THE WEBSITE OF THE COMPANY WHERE IT WAS CLAIMED THA T THE COMPANY SPECIALIZE IN SOFTWARE PRODUCT DEVELOPMENT. THE LEARNED TPO HELD THAT COMPANY IS EQUIPPED TO CARRY OUT HIGH -END TECHNOLOGY DRIVEN SOFTWARE DEVELOPMENT SERVICES, WH ICH IS ALSO THE FUNCTION OF THE ASSESSEE, AND THEREFORE THE COM PANY IS COMPARABLE. 7.1 THE LD. DRP OBSERVED THAT THERE IS NO SALE OF T HE PRODUCT IN THE REVENUE STREAM IN THE PROFIT AND LOSS ACCOUNT. THE INTANGIBLE ASSETS HELD BY THE COMPANY WERE ALSO NOT FOUND TO B E SIGNIFICANT BY THE LEARNED DRP, AND THUS RETAINED THE COMPANY A S COMPARABLE. 7.2 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE REFERRED TO PAGE 257 OF PB-2 AND SUBMITTED THAT COMPANY SPECIAL IZE IN SOFTWARE PRODUCTS, SERVICE AND TECHNOLOGY AND IT OF FERS COMPLETE PRODUCT LIFE-CYCLE SERVICES. THE LEARNED COUNSEL RE LIED ON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SAXO INDIA PRIVATE LIMITED VS ACIT (ITA NO. 6148/DE L/2015) TO SUPPORT THAT THE COMPANY IS ENGAGED IN DEVELOPMENT AND PRODUCT DESIGN AND ANALYSIS SERVICES, WHICH IS FUNCTIONALLY DIFFERENT FROM A PURE SOFTWARE SERVICE PROVIDER AND THEREFORE IT O UGHT TO BE 19 ITA NO.4740/DEL./2018 EXCLUDED. THE LEARNED COUNSEL SUBMITTED THAT THE AP PEAL FILED BY THE REVENUE AGAINST THE DECISION WAS DISMISSED BY T HE HONBLE DELHI HIGH COURT IN ITA NO. 682/2016. THE LEARNED C OUNSEL ALSO SUBMITTED THAT IN ASSESSEES OWN CASE FOR ASSESSMEN T AT 2008-09 (ITA NO, 122/DEL/2013) THE COMPANY HAS BEEN EXCLUDE D FROM SET OF COMPARABLES. ACCORDINGLY, HE SUBMITTED THAT THE COMPANY MIGHT BE EXCLUDED IN THE YEAR UNDER CONSIDERATION A LSO. 7.3 THE LEARNED DR, ON THE OTHER HAND, RELIED ON TH E ORDER OF THE LOWER AUTHORITIES. 7.4 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES A ND PERUSED RELEVANT MATERIAL ON RECORD. REGARDING THE CONTENTI ON OF THE LEARNED COUNSEL OF THE ASSESSEE OF THE FUNCTIONAL D ISSIMILARITY, WE HAVE PERUSED THE ANNUAL REPORT OF THE COMPANY. ON P AGE 136 OF THE ANNUAL REPORT (PAGE 323 OF PB-2), THE REVENUE F ROM OPERATION OF SALE OF THE SOFTWARE SERVICES AMOUNTING TO RS. 1 6, 691.53 MILLION HAS BEEN REPORTED. ON PAGE 27 OF THE ANNUAL REPORT (PAGE 265 OF PB-2), IN THE DIRECTORS REPORT BUSINESS OVE R VIEW OF THE COMPANY HAS BEEN REPORTED AS SPECIALIZES IN BUILDIN G COMPUTER SOFTWARE PRODUCTS. THE RELEVANT PART OF THE BUSINES S OUR VIEW IS REPRODUCED AS UNDER: BUSINESS OVERVIEW YOUR COMPANY SPCIALIZES IN BUILDING COMPUTER SOFTWA RE PRODUCTS. YOUR COMPANYS BUSINESS IS ORGANIZED WITH A FOCUS O N THE FOLLOWING THREE AREAS. PRODUCTS (IP BUSINESS), PLATFORMS (SOL UTIONS INTEGRATION) AND SERVICES (PRODUCT ENGINEERING). YOUR COMPANY HA S DECIDED TO BRAND THE PRODUCT BUSINESS SEPARATELY FROM THE PERS ISTENT BRANCH AND HAS NAMED IT ACCELERITE (WWW.ACCELERITE.COM). ACCELERITE WILL BE HEADQUARTERED IN THE SILICON VALLEY AND WILL HELP YOUR COMPANY PROVIDE CLARITY-PERSISTENT BRAND IS FOR PRODUCT DEV ELOPMENT AND THE ACCELERITE BRANCH IS FOR PRODUCTS. YOUR COMPANY HAS ORGANIZED THE DEVELOPMENT AND ENGI NEERING TEAMS AROUND THREE STRATEGIES: ACCOUNT-LED, PLATFOR M-LED AND PRODUCT-LED. FURTHER, ACCOUNT-LED TEAMS ARE ORGANIZ ED AS NAMED ACCOUNTS AND GROWTH ACCOUNTS. 20 ITA NO.4740/DEL./2018 7.5 ON PAGE 105 OF THE ANNUAL REPORT (PAGE 292 OF P B-2) MANAGEMENT DISCUSSION AND ANALYSIS OF REVENUE FROM OPERATION HAS BEEN REPORTED, WHICH READS AS UNDER: REVENUE FROM OPERATIONS THE COMPANY PROVIDES PRODUCT ENGINEERING SERVICES, PLATFORM BASED SOLUTION AND IP-BASED SOFTWARE PRODUCTS TO ITS GLOB AL CUSTOMERS. THE COMPANY DERIVES A SIGNIFICANT PORTION OF ITS REVENU ES FROM EXPORT OF SOFTWARE SERVICES AND PRODUCTS. THE REVENUES FOR THE YEAR IN USD TERMS WAS UP BY 15 .2% AT USD 274.06 MILLION AS AGAINST USD 237.82 MILLION IN THE PREVIOUS YEAR. IN RUPEES TERMS, THE REVENUE WAS RS.16,691.53 MILLI ONS AS AGAINST RS.12,945.12 MILLION REPRESENTING A GROWTH OF 28.9% OVER THE PREVIOUS YEAR. THE RUPEES DEPRECIATED BY 11.9% DURI NG THE YEAR. DURING THE YEAR, THE GROWTH IN REVENUE WAS DRIVEN B Y GROWTH IN BOTH, IP AND SOFTWARE SERVICES WHICH RECORDED A RIS E ORF 34.7% AND 27.7% RESPECTIVELY. 7.6 FURTHER, ON SAME PACE OF THE ANNUAL REPORT, A B AR GRAPH HAS BEEN SHOWN. ACCORDING TO THE GRAPH IN THE FINAN CIAL YEAR 2013-14 I.E. CORRESPONDING TO THE ASSESSMENT YEAR U NDER CONSIDERATION, THE SHARE OF REVENUE FROM SOFTWARE S ERVICES WAS OF 82.0% AND IP LED PRODUCT WAS OF 18%. 7.7 FURTHER ON PAGE 97 OF THE ANNUAL REPORT ( PAGE 284 OF PB-2) UNDER MANAGEMENT DISCUSSION AND ANALYSIS, THE PRODU CT STRATEGY HAS BEEN REPORTED AS UNDER: PRODUCT STRATEGY OVER THE LAST THREE YEARS, IN CONSULTATION WITH OUR LARGE CUSTOMERS, WE HAVE CREATED A BUSINESS THAT IS BASED ON IP REVE NUES. IN THIS BUSINESS LINE, OUR REVENUES ARE NOT DIRECTLY RELATE D TO THE NUMBER OF EMPLOYEES ON THE PROJECT BUT DEPEND ON THE OUTCOME FROM PRODUCT SALES. THERE ARE THREE KINDS OF IP BUSINESS THAT WE ARE FOCUSING ON: A) BUSINESS ACQUIRED FROM CUSTOMERS BY TAKING OVER SOM E OF THEIR NON-STRATEGIC PRODUCTS B) DEVELOPING PRODUCTS THAT FILL WHITE-SPACES IN OUR C USTOMERS PRODUCTS. C) NEW PRODUCTS BUILT BY US OVER THE LAST THREE YEARS, OUR IP PORTFOLIO HAS GRO WN WELL AND CONTRIBUTES TO NEARLY 20% OF OUR BUSINESS AND IS GR OWING. TO ACCENTUATE OUR FOCUS ON PRODUCTS AND TO ENSURE THAT WE ARE SEEN AS A CREDIBLE PRODUCT COMPANY, WE HAVE CREATED A SE PARATE BUSINESS UNIT BRANDED AS ACCELERITE BASED OUT OF OU R SILICON VALLEY 21 ITA NO.4740/DEL./2018 OFFICES. ACCELERITE WILL BE OUR PRODUCT BRAND FOR S OME OF OUR INFRASTRUCTURE PRODUCTS RADIA CLIENT AUTOMATION, RCLOUD DISASTER RECOVERY, LOCATION BASED SERVICES AND PAXPRO. AS PART OF THIS STRATEGY, WE HAVE SET APART THE TEA M THAT IS WORKING ON PRODUCTS UNDER THE NEW BRAND AND ARE OPERATING T HIS TEAM AS A TYPICAL SILICON-VALLEY SOFTWARE EARLY STAGE PRODUCT COMPANY. THE PRODUCT GROUP WILL OPERATE INDEPENDENTLY WITH P OLICIES, HIERARCHIES AND PROCESSES APPROPRIATE FOR A PRODUCT COMPANY. THE FORMATION OF ACCELERITE IS JUST A LOGICAL SEPARATIO N AND WE WILL CONTINUE TO REMAIN ONE COMPANY IN SPIRIT AND WILL L EVERAGE THE BENEFITS OF PERSISTENT ACROSS THE ENTIRE COMPANY. THIS STRATEGY WILL PROVIDE CLARITY TO OUR CUSTOMERS AND HELP US BRAND PERSISTENT AS THE BRAND FOR PRODUCT DEVELOPMENT AND ACCELERITE AS THE BRAND FOR PRODUCTS. 7.7 FROM THE ABOVE, IT IS EVIDENT THAT 82 % OF THE REVENUE IS FROM SOFTWARE SERVICES. THE 18 % REVENUE FROM IP LA ID BUSINESS, UNDER WHICH ALSO THE PRODUCTS ARE DEVELOPED FOR CUS TOMERS BUT REVENUE HAVE BEEN CHARGED NOT ON THE BASIS OF THE N O. OF THE EMPLOYEES IN THE PROJECT BUT ON THE BASIS OF THE OU TCOME FROM THE PRODUCT SALES. 7.8 THOUGH THE COMPANY BUILD SOFTWARE WHICH DRIVES THE BUSINESS OF CUSTOMERS, ENTERPRISES AND SOFTWARE PRO DUCT COMPANIES, IN THE YEAR UNDER CONSIDERATION 18% OF T HE REVENUE IS FROM THE IP LED BUSINESS PRODUCT. IN SUCH A SCENARI O, THE COMPANY CANNOT BE TERMED AS EXCLUSIVELY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND THUS CANNOT BE FUNCTIONALL Y COMPARED WITH THE ASSESSEE WHO IS ENGAGED IN SOFTWARE DEVELO PMENT SERVICES ONLY. THEREFORE, AT ENTITY LEVEL, THE COMP ANY IS FUNCTIONALITY DISSIMILAR TO THE ASSESSEE AND NO SEP ARATE SEGMENT OF SOFTWARE DEVELOPMENT IS AVAILABLE, HENCE WE DIRE CT THE LEARNED AO/TPO TO EXCLUDE THE COMPANY FROM THE FINAL SET OF THE COMPARABLES. 22 ITA NO.4740/DEL./2018 TATA ELEXI LTD. 8. BEFORE THE LEARNED TPO, THE ASSESSEE CLAIMED THI S COMPANY AS FUNCTIONALLY DISSIMILAR. THE LEARNED TPO, HOWEVE R, REFERRED TO PAGE 35 OF THE ANNUAL REPORT CONTAINING DETAILS OF THE ACTIVITIES UNDER SEGMENT OF SOFTWARE DEVELOPMENT AND SERVICE A ND SYSTEM INTEGRATION AND SUPPORT AND CONCLUDED THAT THE COMP ANY IS FUNCTIONALLY SIMILAR TO THE ASSESSEE. BEFORE THE LE ARNED DRP, THE ASSESSEE AGAIN SUBMITTED THAT THE COMPANY PROVIDES TECHNOLOGY CONSULTING, NEW PRODUCT DESIGN DEVELOPMENT AND TEST ING SERVICES. THE COMPANY ALSO PROVIDE SOLUTIONS AND SERVICES FOR TECHNOLOGIES SUCH AS INTERNET OF THINGS (IOT), BIG DATA ANALYTIC S, CLOUD MOBILITY, VIRTUAL REALITY AND ARTIFICIAL INTELLIGEN CE. ALL THESE FUNCTIONS BEING DIFFERENT FROM THE ASSESSEE, THE CO MPANY SHOULD BE EXCLUDED. THE LEARNED DRP, HOWEVER HELD THAT UND ER TNMM, THE BROAD FUNCTIONAL SIMILARITY IS TO BE SEEN AND T HUS UPHELD THE ACTION OF THE LEARNED TPO. BEFORE US THE LEARNED CO UNSEL OF THE ASSESSEE REPEATED THE SUBMISSIONS MADE BEFORE THE L EARNED DRP AND SUBMITTED THAT REVENUE FROM THE OPERATIONS INCL UDE REVENUE FROM PRODUCT DESIGN, GRAPHICS ANIMATION AND GAMING AND SYSTEM INTEGRATION AND SUPPORT. ACCORDING TO HIM ALL THESE ACTIVITIES ARE FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE. H E ALSO SUBMITTED THAT THE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 AND 2008-09, THE COORDINATE BENCH OF THE TRIBUNAL IN IT A NO. 5809/DEL/2011 AND 122/DE/2013 HAS DIRECTED TO EXCLU DE THE COMPANY FROM THE SET OF THE COMPARABLES. 8.1 THE LEARNED DR ON THE OTHER AND RELIED ON THE O RDER OF THE LOWER AUTHORITIES. 8.2 WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTI ES ON THE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL INCLUDING 23 ITA NO.4740/DEL./2018 ANNUAL REPORT OF THE COMPANY. THE DETAILS OF REVENU E FROM OPERATIONS AVAILABLE ON PAGE 51 OF THE ANNUAL REPOR T ( PAGE 394 OF PB-2) , REPRODUCED AS UNDER: 18. REVENUE FROM OPERATIONS YEAR ENDED 31 MARCH, 2014 SALE OF TRADED GOODS [REFER NONE(I) BELOW] 4,700.5 1 RENDERING ON SERVICES [REFER NONE(II) BELOW] 72,509 .25 TOTAL 77,209.76 (I) SALE OF TRADED GOODS INCLUDE SALES OF COMPUTERS, NETWORKING AND STORAGE SYSTEMS. (II) RENDERING OF SERVICES COMPRISES: (A)PRODUCT DESIGN 66,427.07 (B) GRAPHICS ANIMATION AND GAMING 1,843.15 (C) SYSTEM INTEGRATION AND SUPPORT 4,239.03 72,509.25 8.3 OUT OF THE ABOVE REVENUE STREAMS, WE FIND THAT MAJOR REVENUE HAS BEEN EARNED FROM RENDERING OF PRODUCT D ESIGN SERVICES. UNDER PRODUCT DESIGN, THE ASSESSEE HAS CA RRIED MAJOR PROJECT OF DESIGN AND DEVELOPING OF A COMPLETE ELEC TRONIC CONTROL UNIT (ECU) INCLUDING HARDWARE AND SOFTWARE FOR HYBR ID ELECTRIC VEHICLE, DESIGNED THE CONTROL HARDWARE FOR INDIAS MARS ORBITER MISSION, WORKED WITH GVK TO DESIGN THE EXPERIENTIAL SERVICES FOR VARIOUS CONSUMER TOUCH POINTS AT MUMBAI INTERNATION AL AIRPORTS NEW INTEGRATED TERMINAL-2. THE RELEVANT PART OF THE ANNUAL REPORT HAS BEEN REPRODUCED BY THE LEARNED TPO IN HIS ORDER . FROM THE VARIOUS ACHIEVEMENTS OF THE COMPANY MENTIONED IN TH E ANNUAL REPORT, WE ARE OF THE OPINION THAT THE COMPANY HAS EARNED REVENUE FROM DESIGNING USING SOFTWARES RATHER THAN SOFTWARE DEVELOPMENT SERVICES AND SOFTWARE MAINTENANCE SERVI CES. THE OTHER SERVICES OF GRAPHIC ANIMATION AND GAMING INCL UDES MAJOR PROJECT FOR ANIMATION AND VISUAL EFFECTS FOR TWO FE ATURE FILMS, 24 ITA NO.4740/DEL./2018 WHICH WON THE 59 TH FILMFARE AWARD AND THE STAR GUILD AWARD 2014 FOR BEST VISUAL EFFECTS FOR IT WORKS IN FILM DHOOM 3. THE COMPANY ALSO CARRIED OUT VISUAL EFFECTS FOR THE FIL M BHAG MILKA BHAG. THE SERVICES UNDER THE REVENUE FROM GRAPHICS ANIMATION AND GAMING ARE ALSO DIFFERENT FROM SERVICES OF SOFT WARE DEVELOPMENT. 8.4 IN VIEW OF THE ACTIVITY FROM WHICH REVENUE HAS BEEN EARNED BY THE COMPANY, THE COMPANY IS FUNCTIONALLY DIFFERE NT FROM THE ASSESSEE AT ENTITY LEVEL, THUS, WE DIRECT THE LEARN ED AO/TPO TO EXCLUDE THE COMPANY FROM THE SET OF THE COMPARABLES . THIRDWARE SOLUTIONS LTD. : 9. BEFORE THE LD. TPO, THE ASSESSEE SOUGHT TO EXCLU DE THIS COMPANY ON THE GROUND THAT IT DERIVES REVENUE FROM VARIOUS SOURCES SUCH AS SALE OF LICENSE, SOFTWARE SERVICES, EXPORT FROM SEZ, REVENUE FROM SUBSCRIPTION ETC. THE LEARNED TPO , HOWEVER REFERRED TO PAGES 13 AND 80 OF THE ANNUAL REPORT TO HIGHLIGHT THAT THE COMPANYS OPERATION COMPRISES OF SOFTWARE DEVEL OPMENT, IMPLEMENTATION AND SUPPORT SERVICES, WHICH ARE VARI OUS SEGMENT OF THE SOFTWARE DEVELOPMENT SERVICES ONLY AND REQUI RED DEPLOYMENT OF SOFTWARE ENGINEERS AND THEREFORE COMP ANY IS COMPARABLE TO THE ASSESSEE. 9.1 BEFORE THE LEARNED DRP, THE ASSESSEE CLAIMED TH AT DURING THE YEAR THE ASSESSEE HAS EARNED REVENUE AGGREGATIN G TO RS.20,675.74 LAKHS FROM SALE OF THE SOFTWARE PRODUC TS AND IN ABSENCE OF SEGMENTAL RESULT OF SOFTWARE DEVELOPMENT SERVICES AND SALE OF THE SOFTWARE PRODUCTS, THE COMPANY CANNOT B E TREATED AS COMPARABLE. THE LEARNED DRP, HELD THAT COMPANY IS E NGAGED IN TWO BUSINESS SEGMENTS NAMELY INFORMATION TECHNOLOGY (IT) AND 25 ITA NO.4740/DEL./2018 INFORMATION TECHNOLOGY ENABLED SERVICES (ITE S) AND HELD THE COMPANY AS FUNCTIONALLY SIMILAR TO THE ASSESSEE. 9.2 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE REPEATED THE ARGUMENT THAT THE COMPANY IS ENGAGED IN SALE OF PRO DUCTS. HE SUPPORTED THIS CLAIM ON THREE GROUNDS. FIRSTLY, IN THE PROFIT AND LOSS ACCOUNT REVENUE HAS BEEN SHOWN FROM SALE OF SO FTWARE PRODUCTS. SECONDLY, THE FOLLOWING INFORMATION ON TH E WEBSITE OF THE COMPANY ALSO SUPPORT SALE OF THE PRODUCTS: THIRDWARES MANUFACTURING SOLUTIONS AND CAPABILITI ES INCLUDE-ERP & SUPPLY CHAIN. WE HAVE CAPABILITIES IN MULTIPLE INDUSTRY-LEADING E RP AND SCM SOLUTIONS TO HELP OUR CLIENTS DEVELOP AN ENTERPRISE SYSTEM STRATEGY, RE-ENGINEER BUSINESS PROCESSES AND IMPLEMENT LARGE SCALE ENTERPRISE-WISE PROGRAMS. WE ALSO HELP INTEGRATE BA CK-END ENTERPRISE SYSTEMS WITH BUSINESS APPLICATIONS SUCH AS WAREHOUSE MANAGEMENT AND TRANSPORTATION MANAGEMENT SYSTEMS. OUR SUPPLY CHAIN EXPERTISE COVERS TRADITIONAL PACKA GES AS WELL AS NICHE ONES LIKE SALES AND OPERATIONS PALNNING ON TH E CLOUND AND CROSS-ORGANIZATION SUPPLY CHAIN VISIBILITY. WE HAVE ALSO DEVELOPED AUTOMOTIVE INDUSTRY SPECIFIC , SOLUTIONS DESIGNED PRIMARILY TO INCREASE OPERATIONAL EFFICIEN CY, REDUCE COST AND MITIGATE RISKS. 9.3 THIRDLY, HE SUBMITTED THAT THE FACT OF THE SALE OF THE PRODUCT IS ALSO CORROBORATED FROM THE FACT THAT THE EMPLOYE E COST IN THE CASE OF THIRDWARE SOLUTIONS LTD. IS ONLY 41% OF THE REVENUE AS AGAINST 69% IN THE CASE OF THE ASSESSEE. THE COMPUT ATION OF THE RATIO OF THE EMPLOYEE COST TO THE REVENUE COMPUTED BY THE ASSESSEE IS REPRODUCED AS UNDER: PARTICULARS THIRDWARE SOLUTIONS (PG. 528 TO PB2) APPELLANT (PG. 528 OF PB2) EMPLOYEE COST 8549.31 141,95,69,028 REVENUE 20675.74 205,28,98,016 EMPLOYEE COST/REVENUE 41.35% 69.14% 26 ITA NO.4740/DEL./2018 9.4 THE LD. COUNSEL SUBMITTED THAT THE COORDINATE B ENCH OF TRIBUNAL IN THE CASE OF FISEV INDIA P LTD VS ITO ( ITA NO. 1822/DEL/2014) HAS EXCLUDED THE COMPANY ON ACCOUNT OF NON- AVAILABILITY OF SEGMENTAL DATA. HE FURTHER SUBMITTE D THAT THE TRIBUNAL IN THE CASE OF ION TRADING INDIA PRIVATE L IMITED VS ITO (ITA NO.1035/DEL/2015) HAS EXCLUDED THE COMPANY ON ACCOUNT OF FUNCTIONAL DISSIMILARITY. ACCORDINGLY, SUBMITTED TH AT COMPANY SHOULD BE EXCLUDED IN THE CASE OF THE ASSESSEE ALSO . 9.5 THE LEARNED DR ON THE OTHER HAND RELIED ON FIND ING OF THE LOWER AUTHORITIES. 9.6 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES O N THE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. AS FAR AS THE PROFIT AND LOSS OF ACCOUNT OF COMPANY AVAILABLE ON PAGES 528 AND 529 OF PB-2 ( PAGE-2 AND 3 OF PROFIT AND LOSS A CCOUNT PART OF THE ANNUAL REPORT) , WE FIND THAT REVENUE OF RS. 20 ,675.74 LAKHS HAS BEEN SHOWN FROM SALE OF PRODUCTS, BUT IN FOOTNO TES TO THE SUB CLASSIFICATION AND NOTES ON INCOME AND EXPENSES (NO TE-300500), AVAILABLE ON PB-530, WE FIND THAT THE REVENUE DURIN G THE YEAR UNDER CONSIDERATION CONSIST OF EXPORT OF SOFTWARE S ERVICES (RS.20,194.37 LAKHS) , SOFTWARE SERVICES FROM LOCAL UNIT (RS.414.07 LAKHS) , REVENUE FROM SUBSCRIPTION AND T RAINING (RS. 59.32 LAKHS) AND SALE OF LICENCE( RS. 7.98 LAKHS). SIMILAR COMPOSITION OF THE REVENUE OF PRECEDING YEAR HAS AL SO BEEN GIVEN IN THE FOOTNOTE. FURTHER, ON PERUSAL OF PART OF MAN AGEMENT DISCUSSION AND ANALYSIS , AVAILABLE ON PAGE 13 OF A NNUAL REPORT ( PB-445), WE FIND THAT UNDER THE HEADING FOREIGN EX CHANGE EARNING AN OUTGOING AND TECHNOLOGY ABSORPTION, ADAP TION AND INNOVATION, THE ACTIVITIES OF THE COMPANY HAS BEEN SHOWN AS 27 ITA NO.4740/DEL./2018 EXPORT OF SOFTWARE SERVICES. THE RELEVANT PART OF T HE MANAGEMENT DISCUSSION AND ANALYSIS REPRODUCED AS UNDER: FOREIGN EXCHANGE EARNING AND OUTGOING: THE COMPANYS EARNINGS ARE TO A SIGNIFICANT EXTENT EXPORT ORIENTED AND THE COMPANY IS CONSTANTLY REVIEWING AND AUGMENT ING ITS EFFORTS TO INCREASE EXPORT OF SOFTWARE SERVICES AND APPLICA TIONS TO EXISTING AND NEW MARKETS AND FOR THIS PURPOSE HAS ALSO DRAW N LONG-TERM STRATEGY TO STRENGTHEN ITS OVERSEAS MARKETING INFR ASTRUCTURE. THE PARTICULARS REGARDING FOREIGN EXCHANGE AND OUTG OINGS ARE REFLECTED IN NOTES TO ACCOUNTS. TECHNOLOGY ABSORPTION, ADAPTATION AND INNOVATION: YOUR COMPANY WILL FOCUS ON LATEST DEVELOPMENT IN TE CHNOLOGY IN SOFTWARE SERVICES IN WHICH IT IS CARRYING ON BUSINE SS. THE COMPANY LEVERAGES ITS EXCELLENCE IN TECHNOLOGY BY ADAPTING IT TO PRODUCING WORLD-CLASS TECHNOLOGY SOLUTIONS. THE CONTINUAL EXP OSURE TO NEW AND IMPROVED TECHNOLOGIES HAS HELPED MAINTAIN HIGH MOTI VATION LEVELS IN THE EMPLOYEES AND TO GENERATE HIGHER LEVEL OF PRODU CTIVITY, EFFICIENCY AND QUALITY. 9.7 ON PAGE 16 OF THE ANNUAL REPORT (PB-448) ALSO T HE DETAILS OF MATERIAL CHANGES OCCURRED DURING PERIOD AFFECTING C OMPANYS BUSINESS OPERATION HAS BEEN REPORTED, WHICH ALSO SU PPORT THAT COMPANY WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEV ELOPMENT AND OTHER SERVICES REPORTED IN FOOTNOTE TO STATEMEN T OF INCOME AND EXPENSES. THE RELEVANT PART OF THE INFORMATION ON PAGE 16 OF THE ANNUAL REPORT IS REPRODUCED AS UNDER: TEXTUAL INFORMATION (8) DETAILS OF MATERIAL CHANGES OCCURRED DURING PERIOD A FFECTING COMPANYS BUSINESS OPERATIONS 1. CORPORATE INFORMATION THIRDWARE SOLUTION LIMITED (THE COMPANY) IS A PUBLIC COMPANY DOMICILED IN INDIA AN D INCORPORATED UNDER THE PROVISIONS OF THE COMPANY AT, 1956. THE C OMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND CONSULTANCY SERVICES. THE COMPANY CATERS TO BOTH DOMESTIC AND I NTERNATIONAL MARKETS. 28 ITA NO.4740/DEL./2018 9.8 ALL THESE INFORMATION AVAILABLE IN THE ANNUAL R EPORT CLEARLY INDICATE THAT MAJORITY OF THE REVENUE IS EARNED FRO M SOFTWARE SERVICES AND INSIGNIFICANT PART IS EARNED FROM SUBS CRIPTION AND TRAINING AND SALE OF LICENSE. THE LD. COUNSEL IN IT S SUBMISSION IN THE SYNOPSIS HAS SUBMITTED THAT THE LEARNED TPO HAS NOT CONSIDERED THE DIRECTION OF THE LEARNED DRP OF CONS IDERING SEGMENT DATA. THE LEARNED COUNSEL FURTHER MENTIONED THAT IN RECTIFICATION DATED 25/07/2018 HAS CONCLUDED THAT S EGMENTAL DATA OF THE COMPANY IS AVAILABLE IN PUBLIC DOMAIN A ND THAT IN TERMS OF THE INFORMATION SOUGHT UNDER SECTION 133(6 ) OF THE ACT THE COMPANY HAS EXPLAINED ITS REVENUE AS FROM SOFTW ARE DEVELOPMENT SERVICES. 9.9 IN VIEW OF THE INFORMATION AVAILABLE IN THE ANN UAL REPORT AND FURTHER CONFIRMED FROM THE COMPANY UNDER SECTIO N 133(6) OF THE ACT, WE REJECT THE ARGUMENTS OF THE LEARNED COU NSEL THE ASSESSEE THAT THE COMPANY IS ENGAGED IN SALE OF PRO DUCT. IN OUR OPINION, CLEARLY THE COMPANY IS FUNCTIONALLY SIMILA R TO THE ASSESSEE, AND WE DIRECT THE LEARNED AO/TPO TO RETAI N THE COMPANY AS A VALID COMPARABLE. INFOBEANS TECHNOLOGIES LTD. 10. BEFORE THE LEARNED TPO, THE ASSESSEE SOUGHT EXC LUSION OF THE COMPANY ON THE GROUND OF INSUFFICIENT DATA/SEGMENTA L INFORMATION AND FUNCTIONAL DISSIMILARITY. THE LEARN ED TPO, HOWEVER, REFERRED TO WEBSITE AND ANNUAL REPORT OF T HE COMPANY TO HIGHLIGHT THAT THE COMPANY IS MAINLY ENGAGED IN PRO VIDING SOFTWARE DEVELOPMENT SERVICES. 10.1 BEFORE THE LD. DRP, THE ASSESSEE SUBMITTED THA T COMPANY IS PROVIDING WIDE-RANGING SERVICES INCLUDING AUTOMATIO N ENGINEERING, SERVICE NOW, UX AND UI AND CUSTOMIZE S OFTWARE 29 ITA NO.4740/DEL./2018 SERVICES. FURTHER IT WAS SUBMITTED THAT COMPANY IS DOING BUSINESS IN THREE VERTICALS I.E. STORAGE AND VISUAL IZATION, PUBLISHING AND SDO AND E-COMMERCE AND NO SEGMENTAL BIFURCATIONS AVAILABLE IN RESPECT OF THE RANGE OF S ERVICES. IT WAS ALSO SUBMITTED THAT THIS IS EXCEPTIONAL YEAR OF OPE RATION IN VIEW OF THE INCREASING REVENUE OF 52.0% AND INCREASE IN PRO FIT BEFORE TAX OF 85.66%. THE LEARNED DRP HOWEVER HELD THAT AUTOMA TION ENGINEERING IS IN CONTEXT OF PROVIDING AUTOMATED TE STING SERVICES, WHICH IS PART OF SOFTWARE DEVELOPMENT SERVICES. REG ARDING EXCEPTIONAL YEAR OF OPERATION, THE LEARNED DRP, HEL D THAT THE ASSESSEE HAS NOT DEMONSTRATED AS TO HOW HIGH TURNOV ER/PROFIT HAS AFFECTED THE MARGINS. ACCORDINGLY, THE LD. DRP, RETAINED THE COMPANY AS COMPARABLE. 10.2 BEFORE US, THE LEARNED COUNSEL REPEATED THE SU BMISSION WHICH WERE MADE BEFORE THE LEARNED DRP. FURTHER, TH E LEARNED COUNSEL RELIED ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF PUBMATIC INDIA (P) LTD VS ACIT (ITA N O 655/PUN/2017), WHERE THE COMPANY HAS BEEN EXCLUDED ON ACCOUNT OF FUNCTIONAL DISSIMILARITY WITH THE ASSESS EE ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT SERVICES. 10.3 THE LEARNED DR, ON THE OTHER HAND, RELIED ON T HE FINDING OF THE LOWER AUTHORITIES. 10.4 WE HAVE HEARD RIVAL SUBMISSION AND PERUSED REL EVANT MATERIAL ON RECORD. WE FIND THAT MAIN OBJECTION OF THE ASSESSEE FOR INCLUDING THE COMPANY IS RANGE OF THE SERVICES UNDERTAKEN BY THE COMPANY. THE RANGE OF THE SERVICES MENTIONED B Y THE ASSESSEE ARE NOT AVAILABLE IN THE ANNUAL REPORT FOR THE YEAR UNDER CONSIDERATION AND SAME ARE AVAILABLE ON THE WEBSITE OF THE COMPANY. 30 ITA NO.4740/DEL./2018 10.5 BUT IN OUR OPINION AUTOMATION ENGINEERING, SER VICE NOW, UX AND UI AND CUSTOMIZE SOFTWARE SERVICES ARE ALL PART OF SOFTWARE DEVELOPMENT OR SOFTWARE SERVICES. THE AUTOMATION IN FORMATION TECHNOLOGY IS FOCUSED ON SERVICE AUTOMATION AND QUA LITY ASSURANCE TESTING OF AUTOMATED PROCESS. UNDER THE A UTOMATION THE GOAL IS TO ELIMINATE DEFECTS, ERRORS AND PROBLE MS WITH PRODUCTS SOFTWARE DEVELOPMENT AND WITH BUSINESS OR CUSTOMER SERVICE PROCESSES. EXAMPLE OF AUTOMATION ARE AUTOMA TED CHATBOTS TO HELP SOLVE CUSTOMER ISSUES OR TO DIRE CT CUSTOMER TO THE RIGHT PERSON. AUTOMATION IS ALSO USED TO STREAM LINE IT HELP DESK TICKETING, SERVICE MANAGEMENT AND TO DELIVER Q UALITY PRODUCTS AND SOFTWARE FASTER, WITH FEWER DEFECTS. T HUS, AUTOMATION ENGINEERING IS PART OF THE PROCESS OF TH E SOFTWARE DEVELOPMENT SERVICES. 10.6 FURTHER, THE TERM SERVICE NOW HAS BEEN DESCR IBED ON THE WEBSITE OF THE COMPANY AS UNDER: SERVICE NOW PROVIDES A FRAMEWORK THAT DESCRIBES, O RGANIZES AND AUTOMATES THE FLOW OF WORK, AND REMOVES UNNECESSARY EMAILS AND SPREADSHEETS FROM THE PROCESS TO STREAMLINE THE DEL IVERY OF SERVICES. THERE IS NO DENYING THE FACT THAT SERVICE NOW HAS M YRIAD BENEFITS FOR AN ENTERPRISE BESIDES REPLACING MANUAL TRANSACT IONS WITH CONSUMERIZED AND FAST SPEED SERVICES. 10.7 IN VIEW OF THE ABOVE DESCRIPTION, THE SERVICE NOW IS A TOOL OF AUTOMATION PROCESS, WHICH A SOFTWARE DEVELOPMENT SE RVICE ACTIVITY. 10.8 THE TERM UX DESIGN REFERS TO THE TERM USER EX PERIENCE DESIGN , WHILE UI STANDS FOR USER INTERFACE DESIGN. THE USER EXPERIENCE AND USER INTERFACE DESIGN ARE TO BE KEPT IN MIND WHILE DESIGNING OR DEVELOPING THE SOFTWARE, THUS THESE RA NGE OF SERVICES ARE PART OF SOFTWARE DEVELOPMENT SERVICES. 31 ITA NO.4740/DEL./2018 10.9 THE THREE VERTICALS IN WHICH COMPANY IS DOING BUSINESS ,IS NOT MAKING IT FUNCTIONALLY DIFFERENT. THE PRIME FUN CTION IN ALL THE THREE VERTICALS REMAIN THE SOFTWARE DEVELOPMENT. 10.10 THE ASSESSEE HAS PLACED RELIANCE ON THE DECIS ION OF THE TRIBUNAL IN THE CASE OF PUBMATIC PRIVATE LIMITED (S UPRA), WHERE THE TRIBUNAL HAS OBSERVED THAT COMPANY HAS SHOWN FO REIGN EXCHANGE FROM EXPORT OF GOODS ON FOB BASIS AND THUS IN ABSENCE OF SEGMENTAL DATA, THE COMPANY CANNOT BE TREATED AS COMPARABLE TO A SOFTWARE DEVELOPMENT SERVICE COMPANY. 10.11 WE FIND THAT THE DECISION OF THE TRIBUNAL IS IN RELATION TO ASSESSMENT YEAR 2012-13, WHEREAS THE ASSESSMENT YEAR INVOLVED BEFORE US IS 2014-15 AND THEREFORE RESULT OF THAT YEAR BEING DIFFERENT, THE DECISION RELIED UPON BY THE AS SESSEE IS DISTINGUISHABLE. WE FIND THAT IN THE YEAR UNDER CON SIDERATION IN THE ANNEXURE TO AUDITORS REPORT (PAGE 76 OF PB-2) IN PARA 2 IN RESPECT OF THE INVENTORY IT IS MENTIONED AS UNDER 2. THE COMPANY IS SERVICE COMPANY, PRIMARILY ENGAG ED IN SOFTWARE DEVELOPMENT. ACCORDINGLY, IT DOES NOT HOLD ANY PHYSICAL INVENTORY. THUS, THE PROVISIONS OF CLAUSES 4(II)(A) , 4(III)(B) AND 4(III)(C), OF ORDER IS NOT APPLICABLE. 10.12 THUS, IT IS EVIDENT THAT IN THE YEAR UNDER CO NSIDERATION, THE COMPANY IS PRIMARILY IN SOFTWARE DEVELOPMENT AN D THERE IS NO SALE OF THE PRODUCT. 10.13 ACCORDINGLY, WE REJECT THE CONTENTION OF THE ASSESSEE, AND DIRECT THE LD. AO/TPO TO RETAIN THE COMPANY AS VALID COMPARABLE. 11. IN VIEW OF OUR FINDING ON THE COMPANYS CHALLEN GED BY THE ASSESSEE FOR INCLUSION/EXCLUSION OF THE COMPARABLE, THE LEARNED AO/TPO IS DIRECTED TO COMPUTE THE ADJUSTMENT TO THE TRANSACTION 32 ITA NO.4740/DEL./2018 OF THE SOFTWARE DEVELOPMENT SERVICES. THE GROUNDS R AISED BY THE ASSESSEE IN RELATION TO ADJUSTMENT TO SOFTWARE DEVE LOPMENT SERVICES ARE ACCORDINGLY ALLOWED PARTLY FOR STATIST ICAL PURPOSES. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED PARTLY FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST MAY, 2020. SD/- SD/- ( SUDHANSHU SRIVASTAVA ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 ST MAY, 2020. RK/- (D.T.D.S) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI