Asst.C.I.T., Bangalore V. M/s Curam Software International Pvt. Ltd., Bangalore

ITA 499/BANG/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8437 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 29-09-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 27-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 13; 119; 22

Judgement Text

IT(TP)A.499 & CO.136/BANG/2015 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER I.T (TP).A NO.499/BANG/2015 (ASSESSMENT YEAR : 2010-11) ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -2(1)(1), BENGALURU .. APPELLANT V. M/S. CURAM SOFTWARE INTERNATIONAL P. LTD, C/O.IBM INDIA P. LTD, SUBRAMANYA ARCADE, 12, BANNERGHATTA MAIN ROAD, BENGALURU 560 029 .. RESPONDENT PAN : AACCC5472F CROSS OBJECTION NO.136/BANG/2015 (IN I.T (TP).A NO.499/BANG/2015) (ASSESSMENT YEAR : 2010-11) M/S. CURAM SOFTWARE INTERNATIONAL P. LTD, C/O.IBM INDIA P. LTD, SUBRAMANYA ARCADE, 12, BANNERGHATTA MAIN ROAD, BENGALURU 560 029 .. APPELLANT V. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -2(1)(1), BENGALURU .. RESPONDENT ASSESSEE BY : SHRI. NAGESHWAR RAO, ADVOCATE REVENUE BY : MS. NEERA MALHOTRA, CIT-DR HEARD ON : 28.12.2016 PRONOUNCED ON : 21.03.2017 O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THESE APPEAL AND CROSS OBJECTION FILED BY THE REVE NUE AND THE ASSESSEE, RESPECTIVELY, ARE AGAINST THE ORDER OF TH E ACIT, CIRCLE -2(1)(1), IT(TP)A.499 & CO.136/BANG/2015 PAGE - 2 BENGALURU, DT.30.01.2014, PASSED IN PURSUANCE TO TH E DIRECTIONS OF THE DRP, FOR THE ASSESSMENT YEAR 2010-11. 02. CURAM INDIA, THE ASSESSEE, IS A WHOLLY OWNED SU BSIDIARY OF CURAM IRELAND, INCORPORATED IN BANGALORE AS A PRIVATE LI MITED COMPANY, REGISTERED AS A 100% EXPORT ORIENTED UNIT UNDER THE SOFTWARE TECHNOLOGY PARK OF INDIA SCHEME, OPERATES AS A DEDICATED SOFTWARE DEVE LOPMENT CENTER FOR CURAM IRELAND, PERFORMS SOFTWARE DEVELOPMENT THAT S UPPORTS AND SUPPLEMENTS CURAM IRELANDS PRODUCT OFFERINGS IN THE SOCIAL ENTERPRISE MANAGEMENT SECTOR AND IS REMUNERATED ON A COST P LUS BASIS FOR THE SERVICES RENDERED. FOR THIS AY , IT FILED ITS R ETURN DECLARING A TAXABLE INCOME OF RS.43,210 AFTER CLAIMING A DEDUCTION U/S .10A AT RS.3,41,93,046/-. THE AO HAS RECOMPUTED THE DEDUCT ION U/S.10A , BY REDUCING RS.35,32,499/- & RS.15,57,339/-, INCURRE D TOWARDS COMMUNICATION EXPENSES & EXPENSES ON TRAVEL IN FOR EIGN CURRENCY AS ATTRIBUTABLE TO DELIVERY OF SERVICES OUTSIDE INDIA, RESPECTIVELY, FROM THE EXPORT TURNOVER WITHOUT SIMULTANEOUSLY REDUCING SIM ILAR AMOUNT FROM THE TOTAL TURNOVER AND HENCE REDUCED THE DEDUCTION CLAI MED U/S.10A . 03. ON ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES WITH ITS AE, THE ASSESSEE HAD UNDERTAKEN ANALYSIS SELECTING THE TNMM AS THE MOS T APPROPRIATE METHOD. FOR THE 21 COMPANIES IDENTIFIED AS COMPARABLES, WEI GHTED AVERAGE OF OPERATING PROFIT EARNED ON OPERATING COSTS WERE COM PUTED .THE ARITHMETIC IT(TP)A.499 & CO.136/BANG/2015 PAGE - 3 MEAN OF THE UNADJUSTED NET MARGINS OF THE COMPARABL E COMPANIES WAS AT 11.26 % ON OPERATING COST. THE ASSESSEES NET MARG IN OF 13.02 % WAS HIGHER THAN THE MEAN MARGIN OF THE COMPARABLES AND HENCE IT CONSIDERED THAT THE PRICE CHARGED BY THE ASSESSEE IN RESPECT O F THE SOFTWARE DEVELOPMENT AND SUPPORT SERVICES WAS AT ARMS LENGT H. 04. THE TPO DID NOT CONCUR WITH THE ANALYSIS UNDER TAKEN BY THE ASSESSEE. IN HIS TP ORDER DT.29.01.2014, HE RETAI NED 7 COMPARABLES CHOSEN BY THE ASSESSEE , INTRODUCED 4 NEW COMPARA BLES AND COMPUTED THE AVERAGE NET MARGIN OF THE COMPARABLES AT 21.22 % ON OPERATING COST (AFTER UNDERTAKING A WORKING CAPITAL ADJUSTMENT OF 1.49%) AS AGAINST 11.26% ORIGINALLY COMPUTED BY THE ASSESSEE . ACCORDINGLY , THE TPO MADE AN ADDITION OF RS.1,66,67,453/- TO THE TOTAL INCOME IN CONNECTION WITH ITS INTERNATIONAL TRANSACTION. 05. ON THE ASSESSEES OBJECTIONS, THE DRP HAS REJECTED THE OBJECTIONS ON FILTER SPECIFIC GROUNDS OF UPPER TURNOVER FILTER , APPLICATION OF DIFFERENT FINANCIAL YEAR ENDING, EMPLOYEE COST FILTER AND EXP ORT EARNING FILTER. WITH RESPECT TO THE COMPARABLE SPECIFIC ARGUMENTS, THE D RP REJECTED THE CONTENTIONS ON THE COMPARABLES SELECTED BY THE AS SESSEE IN ITS TP DOCUMENTATION AND ON THE ADDITIONAL COMPARABLES. ON THE COMPARABLES SELECTED BY THE TPO, THE DRP UPHELD THE ASSESSEES CONTENTIONS ON EXCLUSIONS OF COMPARABLES VIZ ICRA TECHNO ANALYTICS LTD, INFOSYS IT(TP)A.499 & CO.136/BANG/2015 PAGE - 4 TECHNOLOGIES LTD, KALS INFO SYSTEMS LTD & TATA ELX SI LTD. FURTHER, THE DRP, SUO-MOTO, EXCLUDED TWO COMPARABLES , VIZ R S SOF TWARE LTD & PERSISTENT SYSTEMS LTD, WHICH WERE NOT CONTESTED EITHER BY T HE ASSESSEE OR THE TPO. NO RELIEF WAS GRANTED BY THE DRP WITH RESPECT TO RI SK ADJUSTMENT. AGGRIEVED, THE REVENUE FILED ITS APPEAL WITH FOLLOW ING GROUNDS : IT(TP)A.499 & CO.136/BANG/2015 PAGE - 5 6. THE ASSESSEE FILED ITS CROSS OBJECTION WITH THE FOLLOWING GROUNDS : IT(TP)A.499 & CO.136/BANG/2015 PAGE - 6 07. THE ASSESSSEE ALSO FILED ADDITIONAL GROUNDS AS UNDER : IT(TP)A.499 & CO.136/BANG/2015 PAGE - 7 08. WE HEARD THE RIVAL SUBMISSIONS AND ADMIT THE ADDITIONAL GROUNDS AFTER CONSIDERING ITS REASON. ON THE GROUND NOS 2 & 3 OF THE REVENUES APPEAL, WE FIND THAT THIS ISSUE IS COVERED BY THE JURISDICTIONAL HIGH COURTS DECISION IN CIT V TATA ELXSI 349 ITR 98. IT CLEAR LY LAYS DOWN THE PRINCIPLE THAT WHILE COMPUTING DEDUCTION U/S 10A, IF THE EXPORT TURNOVER IS CALCULATED AFTER EXCLUDING CERTAIN EXPE NSES, SUCH EXPENSES SHOULD ALSO BE EXCLUDED IN COMPUTING THE TOTAL TURN OVER. SINCE THE DRPS DECISION IS IN ACCORDANCE WITH THE RATIO OF THE JURISDICTIONAL HIGH COURT, SUPRA, WE CONFIRM IT. THEREFORE, THE REVENUES APPEAL GROUNDS FAIL. 09. IN RESPECT OF REVENUES GROUND NOS 4, 5 & 6, T HE DR ARGUED THE CASE BASED ON THE TPO/AOS ORDER AND ON THE LINES OF TH E GROUNDS OF APPEAL. THE AR OPPOSED THEM WITH CHARTS , PAPER BOOKS, COPI ES OF CASE LAWS AND OTHER MATERIAL. THE GIST OF THE ARS SUBMISSIONS ARE EXTRACTED AS UNDER: IT(TP)A.499 & CO.136/BANG/2015 PAGE - 8 9.1. IN SUPPORT OF ITS CONTENTIONS, THE ASSESSEE RELIED ON THE FOLLOWING CASE LAWS : 1. CURAM SOFTWARE INTERNATIONAL P. LTD V. ITO [ITA NO.1280/BANG/2012] 2. AGNITY INDIA TECHNOLOGIES P. LTD V. CIT [ITA NO. 1204/DEL/2011] IT(TP)A.499 & CO.136/BANG/2015 PAGE - 9 3. DCIT V. IKANOS COMMUNICATION INDIA P. LTD [ITA N O.137/BANG/2015] 4. DCIT V. APPLIED MATERIALS INDIA P. LTD [IT(TP)A. 180/BANG.2015] AND 5. DCIT V. NOVELL SOFTWARE DEVELOPMENT INDIA P. LTD [IT(TP)A.281/BANG/2015]. NOW, LET US EXAMINE THE RELEVANT PORTION OF THE ORDER OF THIS TRIBUNAL, IN THE ASSESSEES OWN CASE, SUPRA, IN THE EARLIER Y EAR AS UNDER : 11.0 (3) KALS INFORMATION SYSTEMS LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BE FORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON THE GROUNDS OF FUNCTIONAL DIFFERENCE S AND THAT THE SEGMENTAL DETAILS HAVE NOT BEEN PROVIDED IN THE ANN UAL REPORT OF THE COMPANY WITH RESPECT TO SOFTWARE SERVICES REVENUE A ND SOFTWARE PRODUCTS REVENUE. THE TPO, HOWEVER, REJECTED THE O BJECTIONS OF THE ASSESSEE OBSERVING THAT THE SOFTWARE PRODUCTS AND T RAINING CONSTITUTES ONLY 4.24% OF TOTAL REVENUES AND THE REVENUE FROM S OFTWARE DEVELOPMENT SERVICES CONSTITUTES MORE THAN 75% OF T HE TOTAL OPERATING REVENUES FOR THE F.Y. 2007-08 AND QUALIFIES AS A CO MPARABLE BY THE SERVICE INCOME FILTER. 11.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE, AS IT IS INTO SOFTWARE PRO DUCTS. THE ASSESSEE HAD ALSO SUBMITTED THAT :- (I) THIS COMPANY HAS TWO SEGMENTS NAMELY ; APPLICAT ION SOFTWARE SEGMENT WHICH INCLUDES SOFTWARE PRODUCT REVENUES, W HILE THE TRAINING SEGMENT DOES NOT HAVE ANY PRODUCT REVENUE. (II) FROM THE ANNUAL REPORT OF KALS FOR THE YEAR EN DED 31.3.2008; I.E. THE YEAR UNDER CONSIDERATION, IT IS OBSERVED THAT T HE COMPANY IS INTO PROVISION OF SOFTWARE DEVELOPMENT SERVICES AS WELL AS SALE OF SOFTWARE PRODUCTS. INVENTORIES UNDER SCHEDULE TO THE FINANCIAL STATE MENTS ON PAGE 16 OF THE ANNUAL REPORT DISCLOSES SOFTWARE DEVELOPMENT AS INVENTORY AND IT(TP)A.499 & CO.136/BANG/2015 PAGE - 10 WORK-IN-PROGRESS. IT IS TO BE NOTED THAT A PURE SO FTWARE DEVELOPMENT SERVICE PROVIDER WOULD NOT BE ABLE TO DISCLOSE SUCH DETAILS AS IT DOES NOT CARRY ANY SUCH INVENTORY OR WORK-IN-PROGRESS. BACKGROUND UNDER THE SCHEDULES TO THE FINANCIAL STATEMENTS ON PAGE 18 OF THE ANNUAL REPORT STATES :- THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION. THIS COMPANY CONSISTING OF STPI UNIT ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS AND A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTW ARE PROFESSIONALS ON ONLINE PROJECTS (EMPHASIS PROVIDE D) REVENUE RECOGNITION UNDER NOTES TO THE FINANCIA L STATEMENTS ON PAGE 18 OF THE ANNUAL REPORT STATES :- THE COMPANY DERIVES ITS REVENUES PRIMARILY FROM SO FTWARE SERVICES AND SOFTWARE PRODUCTS. (III) AS PER THE WEBSITE OF KALS, THE COMPANY HAS D EVELOPED TWO PRODUCTS, NAMELY; VIRTUAL INSURE AND LA-VISION ESTABLISHING THE FACT THAT KALS EARNS REVENUES FROM THE DEVELOPMENT OF SO FTWARE PRODUCTS. (IV) THE SEGMENTAL INFORMATION PROVIDED UNDER NOT ES ON ACCOUNTS OF THE ANNUAL REPORT PROVIDES THE BREAK-UP OF REVENUES FROM TWO SEGMENTS, NAMELY APPLICATION SOFTWARE AND TRAINI NG WHICH SHOWS THAT REVENUE FROM SOFTWARE PRODUCTS FORMS PART OF APPLIC ATION SOFTWARE AND THERE ARE NO SEGMENTAL DETAILS. (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE JUDIC IAL DECISIONS RENDERED IN THE FOLLOWING CASES : A) TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (IT A NO.1054/BANG/2011) B) MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. (IT(TP)A NO.1222/BANG/2011). 11.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESE NTATIVE CONTENDED THAT THE DECISION OF THE CO-ORDINATE BENC H OF THE TRIBUNAL IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) WAS IT(TP)A.499 & CO.136/BANG/2015 PAGE - 11 RENDERED WITH RESPECT TO F.Y.2006-07 AND THEREFORE THERE CANNOT BE AN ASSUMPTION THAT IT WOULD CONTINUE TO BE APPLICABLE TO THE YEAR UNDER CONSIDERATION I.E. A.Y. 2008-09. TO THIS, THE COUN TER ARGUMENT OF THE LEARNED AUTHORISED REPRESENTATIVE IS THAT THE FUNCT IONAL PROFILE OF THIS COMPANY CONTINUES TO REMAIN THE SAME FOR THE YEAR U NDER CONSIDERATION ALSO AND THE SAME IS EVIDENT FROM THE DETAILS CALLE D OUT FROM THE ANNUAL REPORT AND QUOTED ABOVE (SUPRA). 11.4 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CA REFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDING THE JUD ICIAL DECISIONS CITED. AS DISCUSSED EARLIER IN THIS ORDER, THERE IS MERIT IN THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE RULING RENDERED IN THE CASE OF TRIOLOGY E-BUSINESS INDIA PVT. LTD. (SUPRA) WAS WITH RESPECT TO AN EARLIER PERIOD I.E. F.Y. 2006-07 AND THERE CANNO T BE AN ASSUMPTION OR PRESUMPTION THAT IT IS APPLICABLE FOR THE YEAR UNDE R CONSIDERATION AS WELL. AT THE SAME TIME, WE FIND THAT THE TPO HAS D RAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED UNDER SECTION 133 (6) OF THE ACT, WHICH WAS NOT IN THE PUBLIC DOMAIN AND COULD NOT HAVE BEE N USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF T HE COMPANY AS HAS BEEN HIGHLIGHTED BY THE ASSESSEE IN ITS SUBMISSIONS . WE ALSO FIND THAT THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND WAS NOT PURELY OR MAINLY A SOFTWARE DEVELOPMENT SERVICE PROVIDER. FURTHER, APART FROM RELYING ON THE DECISION OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA), THE ASSESSEE HAS BROUGHT ON RECORD SUBSTANTIAL EVIDENCE QUOTING FROM VARIOUS PORTIONS OF THE ANNUAL REPORT OF THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT FROM THE ASS ESSEE AND HENCE IS NOT COMPARABLE AND THEREFORE THE FINDING RENDERED IN RE SPECT OF THIS COMPANY IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE FOR THIS YEAR I.E. ASSESSMENT YEAR 2008-09 ALSO. IN VIEW OF THE FACTS AND CIRCUM STANCES OF THE CASE AS DISCUSSED ABOVE, WE HOLD THAT THIS COMPANY I.E. KALS INFORMATION SYSTEMS LTD., IS TO BE OMITTED FROM THE SET OF COMP ARABLE COMPANIES. IT(TP)A.499 & CO.136/BANG/2015 PAGE - 12 12. (4) INFOSYS TECHNOLOGIES LTD. 12.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPA NY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND A TTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTION S RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASP ECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THI S CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPA NY TO THIS EFFECT WHICH IS AS UNDER :- (I) THE COMPANY HAS AN INTELLECTUAL PROPERTY (IP) CELL TO GUIDE ITS EMPLOYEES TO LEVERAGE THE POWER OF IP FOR THEIR GRO WTH. IN 2008, THIS COMPANY GENERATED OVER 102 INVENTION DISCLOSURES AN D FILED AN AGGREGATE 10 PATENTS IN INDIA AND THE USA. TILL DA TE THIS COMPANY HAS FILED AN AGGREGATE OF 119 PATENT APPLICATIONS (PEND ING) IN INDIA AND USA OUT OF WHICH 2 HAVE BEEN GRANTED IN THE US. (II) THIS COMPANY HAS SUBSTANTIAL REVENUES FROM SO FTWARE PRODUCTS AND THE BREAK-UP OF THE SOFTWARE PRODUCT REVENUES IS NO T AVAILABLE. (III) THIS COMPANY HAS INCURRED HUGE RESEARCH AND D EVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATELY RS.200 CR ORES. (IV) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWARE PRODUCT US ED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLO WING JUDICIAL DECISIONS:- (A) ITAT, DELHI BENCH DECISION IN THE CASE O F AGNITY INDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010) AND (B) TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (ITA NO.1054/BANG/2011) IT(TP)A.499 & CO.136/BANG/2015 PAGE - 13 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF O PERATIONS AND THE OPERATING MARGINS OF THIS COMPANY HAVE NOT BEEN EXT RAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATI VE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FI ND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABL ISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSES SMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. THE ARGUMENT PUT FORTH BY ASSESSEE'S IS THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY C OMPARABLE SINCE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES F ROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REV ENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. I N THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITT ED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. ................................................... .................................................. ................................................... .................................................. ...................................... 14.0 (6) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNC TIONAL DIS-SIMILARITY, SIGNIFICANT R&D ACTIVITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, REJECTED THE CONTENTION PUT FORTH BY THE ASSESSEE A ND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. 14.2 BEFORE US, IT WAS REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT PERFO RMS A VARIETY OF IT(TP)A.499 & CO.136/BANG/2015 PAGE - 14 FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT AND SERVIC ES SEGMENT NAMELY (A) PRODUCT DESIGN SERVICES (B) INNOVATION DESIGN ENGINEERING AND ( C ) VISUAL COMPUTING LABS. IN THE SUBMISSIONS MADE THE ASSESSEE HAD QUOTED REL EVANT PORTIONS FROM THE ANNUAL REPORT OF THE COMPANY TO THIS EFFEC T. IN VIEW OF THIS, THE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE STAND O THE TPO IN INCLUDING THIS COM PANY IN THE LIST OF COMPARABLES. 14.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. FROM THE DETAIL S ON RECORD, WE FIND THAT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODU CT DESIGNING SERVICES AND NOT PURELY SOFTWARE DEVELOPMENT SERVIC ES. THE DETAILS IN THE ANNUAL REPORT SHOW THAT THE SEGMENT SOFTWARE D EVELOPMENT SERVICES RELATES TO DESIGN SERVICES AND ARE NOT SI MILAR TO SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MU M/2011) HAS HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONALLY COMPARABLE. IN TH IS CONTEXT THE RELEVANT PORTION OF THIS ORDER IS EXTRACTED AND REPRODUCED B ELOW :- . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFERENT FR OM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARN ED AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASS ESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DET AILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CO NSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FRO M PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO T REAT THIS COMPANY AS IT(TP)A.499 & CO.136/BANG/2015 PAGE - 15 FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE L IST OF COMPARABLE PORTION. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REP ORT OF THIS COMPANY PRODUCED BEFORE US, THE FACTS PERTAINING TO TATA ELXSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 2007-08 TO ASSESSMENT YEAR 2008-09. WE, THEREFORE, HOLD THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLUSION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS ORDERED ACCORDINGLY. 9.2. NOW, LET US EXAMINE THE RELEVANT PORTION OF THE ORDER OF THIS TRIBUNAL IN DCIT V. IKANOS COMMUNICATION INDIA P. LTD IN ITA NO.137/BANG/2015 FOR AY 2010-11 DT 10.11.2015, WHIC H WAS PROVIDING CONTRACT SOFTWARE DEVELOPMENT SERVICES TO ITS PRI NCIPAL, AS UNDER: 04. VIDE ITS GROUND 4, GRIEVANCE RAISED BY THE REVE NUE IS THAT DRP DIRECTED EXCLUSION OF M/S. INFOSYS LTD, M/S. ICRA T ECHNO ANALYTICS LTD, M/S. KALS INFORMATION SYSTEMS LTD AND M/S. PERSISTENT SY STEMS LTD FROM THE LIST OF COMPARABLES CONSIDERED BY THE TPO FOR ANALYSING THE PRICING OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE). 05. LD. DR SUBMITTED THAT ASSESSEE WAS PROVIDING CO NTRACT SOFTWARE DEVELOPMENT SERVICES TO ITS PRINCIPAL AT USA, CALLE D IKANOS COMMUNICATIONS INC. USA AND IKANOS TECHNOLOGY LTD, CAYMAN ISLAND. AS PER THE LD. DR, BOTH THE ASSESSEE AS WELL AS THE TPO HAD FOLLOWED TNMM F OR BENCH MARKING THE PRICING OF ITS INTERNATIONAL TRANSACTIONS WITH ITS AE. LD. DR POINTED OUT THAT ASSESSEE HAD BEFORE THE TPO OBJECTED TO INFOSYS LTD BEING TAKEN AS A COMPARABLE FOR REASONS LIKE HUGE TURNOVER, SOFTWAR E PRODUCT REVENUES, OWNING IT(TP)A.499 & CO.136/BANG/2015 PAGE - 16 OF INTANGIBLES AND SIGNIFICANT R & D EXPENDITURE. AS PER THE LD. DR, TPO HAD POINTED OUT THAT INFOSYS LTD WAS COMPARABLE WITH TH E ASSESSEE SINCE THE ASSESSEE HAD ITSELF SELECTED CERTAIN COMPARABLES WH ICH HAD BRANDING EXPENDITURE IN ITS PROFIT AND LOSS ACCOUNT. AS PER THE LD. DR REVENUE FROM SOFTWARE PRODUCTS SALE OF INFOSYS LTD WAS ONLY 4.3% OF ITS TOTAL REVENUES AND ITS R &D EXPENDITURE WAS ONLY 1.26% OF ITS REVENUES . RELYING ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF CAPG EMINI INDIA PVT. LTD V. ACIT [(2014) 147 ITD 330], LD. DR SUBMITTED THAT SIZE O F THE COMPANY HAD NO RELEVANCE AND THERE WAS NO CORRELATION BETWEEN SALE S VOLUME AND PROFITS IN SOFTWARE DEVELOPMENT SERVICES. ACCORDING TO HIM, D RP HAD SIMPLY RELIED ON THE ANNUAL REPORT OF INFOSYS LTD, WHILE DIRECTION I TS EXCLUSION WITHOUT CLOSELY VERIFYING THE REASONS WHY TPO HAD REJECTED THE CONT ENTIONS OF THE ASSESSEE. 06. PER CONTRA, LD. AR SUPPORTED THE ORDER OF THE D RP. RELIANCE WAS ALSO PLACED ON THE DECISION OF HYDERABAD BENCH OF THIS T RIBUNAL IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA P. LTD V. ACIT [ITA.175 8 & 1936/HYD/2014, DT.16.10.2015. AS PER THE LD. AR, PEGASYSTEMS WORL DWIDE INDIA P. LTD, WAS ALSO INTO SOFTWARE DEVELOPMENT SERVICES AND THE TRI BUNAL HAD CONSIDERED THE COMPARABILITY OF INFOSYS LTD, IN THE SAID CASE. 07. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IT IS NOT DISPUTED THAT INFOSYS BRAND HAS A SIGNIFICANT I NTANGIBLE VALUE AND IT HAD REVENUE FROM SOFTWARE PRODUCT SEGMENT ALSO. HONBL E DELHI HIGH COURT IN THE CASE OF CIT V. AGNITY INDIA TECHNOLOGIES P. LTD [93 DTR 375], WHILE AFFIRMING A DECISION OF THIS TRIBUNAL WHERE IT WAS HELD THAT IN FOSYS LTD COULD NOT BE CONSIDERED AS A COMPARABLE, HAD UPHELD THE VIEW THA T IT WAS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE, ASSUMING AL L RISKS LEADING TO HIGHER IT(TP)A.499 & CO.136/BANG/2015 PAGE - 17 PROFITS. FURTHER IN THE CASE OF PEGASYSTEMS WORLD WIDE INDIA P. LTD (SUPRA), WHICH WAS ALSO FOR THE VERY SAME ASSESSMENT YEAR, T HIS TRIBUNAL HAD HELD AS UNDER AT PARA 22 OF ITS ORDER : 22. GROUND NO.2 PERTAINS TO REJECTION OF INFOSYS TE CHNOLOGIES LTD., FROM THE LIST OF COMPARABLES BY DRP. WE HAVE ALREADY CONSIDERED THE OPINION OF DRP WHICH IS CONSISTENT NOT ONLY IN ASSESSEE'S CASE BUT ALSO IN THE CASE OF M/S. SUMTOTAL SYSTEMS INDIA PVT. LTD., (SUPRA), EXTRACTED ABOVE WHILE CONSIDERING THE EXCL USION OF L&T INFOTECH LTD. SINCE DRP'S DECISION IS CONSISTENT WI TH THE STAND TAKEN BY THE REVENUE IN OTHER CASES AND ALSO BY THE ITAT IN A NUMBER OF CASES ON REASON OF TURNOVER, BRAND EQUITY , FUNCTIONAL DISSIMILARITY, WE ARE OF THE OPINION THA T DRP IS CORRECT IN EXCLUDING THE ABOVE COMPANY FROM THE LIS T OF COMPARABLES. THEREFORE, THERE IS NO MERIT IN THE RE VENUE'S GROUND AND THE SAME IS REJECTED. ACCORDINGLY WE ARE OF THE OPINION THAT DRP WAS JUST IFIED IN DIRECTING EXCLUSION OF INFOSYS LTD FROM THE LIST OF COMPARABLES. 08. ASSAILING THE DIRECTION OF THE DRP DIRECTING EX CLUSION OF ICRA TECHNO ANALYTICS LTD, LD. DR POINTED OUT THAT ASSESSEE HA D CITED FUNCTIONAL INCOMPATABILITY FOR EXCLUDING THIS COMPANY BEFORE T HE TPO. AS PER THE LD. DR, DIRECTORS REPORT OF THE SAID COMPANY MENTIONED THAT IT WAS PROVIDING TECHNOLOGY SOLUTIONS AND THE SERVICES RENDERED DONE BY IT WERE NOT DIFFERENT FROM THAT OF THE ASSESSEE. AS PER THE LD. DR, DRP HAD ERRONEOUSLY HELD THAT SERVICES SEGMENT OF THE SAID COMPANY COMPRISED OF S OFTWARE CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT, WEB HOSTING ETC., IN ADDITION TO SOFTWARE DEVELOPMENT AND SEGMENTAL INFORMATION WAS NOT AVAILABLE. AS PER THE LD. DR EVEN IF SEGMENTAL INFORMATION WAS NOT RE ADILY AVAILABLE, DRP SHOULD HAVE DIRECTED THE AO TO OBTAIN SUCH DATA FRO M THE CONCERNED COMPANY INSTEAD OF DIRECTING ITS EXCLUSION. IT(TP)A.499 & CO.136/BANG/2015 PAGE - 18 09. PER CONTRA, LD. AR SUBMITTED THAT SEGMENTAL RES ULTS BEING UNAVAILABLE, ICRA TECHNO ANALYTICS LTD, COULD NOT BE CONSIDERED AS A GOOD COMPARABLE. AS PER THE LD. AR, REVENUE OF THE SAID COMPANY INCLUDE D LICENSING AND SUB- LICENSING FEE, WEB DEVELOPMENT AND HOSTING, BUT THE SE WERE NOT SEPARATELY AVAILABLE FOR ANALYSIS. AS PER THE LD. AR, THE SAI D COMPANY WAS PURCHASING AND RESELLING BRANDED COMPUTER SOFTWARE. RELIANCE WAS PLACED ON THE DIRECTORS REPORT OF THE SAID COMPANY FOR F. Y. 20 09-10. 10. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. NOTES TO ACCOUNTS OF ICRA TECHNO ANALYTICS LTD FORMING A PAR T OF ITS AUDITED FINANCIAL STATEMENT OF ACCOUNTS AND ANNUAL REPORT FOR YEAR EN DED 31.03.2010 MENTIONS AS UNDER : IN THE NOTE DETAILING OF THE REVENUE RECOGNITION WH ICH ALSO FORM A PART OF ITS ANNUAL REPORT IT HAS BEEN STATED THAT ITS REVENUE S TREAM CONSISTED OF SOFTWARE DEVELOPMENT CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT AND HOSTING. THUS ICRA TECHNO ANALYTICS HAD MORE THAN ONE SEGMENT. THERE IS NO CASE FOR THE REVENUE THAT THE SEGMENTAL RESULTS WERE SEPARATELY AVAILABLE IN PUBLIC DOMAIN OR WAS NOT OBTAINED BY THE TPO FRO M THE SAID COMPANY, INVOKING THE POWERS VESTED ON HIM. IN SUCH A SITUA TION THE DRP, IN OUR OPINION, WAS JUSTIFIED IN DIRECTING EXCLUSION OF IC RA TECHNO ANALYTICS LTD FROM IT(TP)A.499 & CO.136/BANG/2015 PAGE - 19 THE LIST OF COMPARABLES. 11. LD. DR ASSAILING THE ORDER OF DRP FOR EXCLUSION OF KALS INFORMATION SYSTEMS LTD, SUBMITTED THAT KALS INFORMATION SYSTEM S LTD WAS A SOFTWARE DEVELOPMENT SERVICES COMPANY NOT A SOFTWARE PRODUCT DEVELOPMENT COMPANY. AS PER THE LD. DR THOUGH THE ASSESSEE HAD STATED THAT KALS INFORMATION SYSTEMS LTD WAS A FULL-FLEDGED PRODUCT DEVELOPMENT COMPANY, THE DATA WHICH WAS RELIED ON BY THE ASSESSEE FOR CO MING TO SUCH CONCLUSION WAS NOT AVAILABLE IN THE ANNUAL REPORT. AS PER THE LD. DR, THE SAID COMPANY DID NOT OWN ANY SOFTWARE PRODUCT OF ITS OWN, BUT WA S ONLY PROVIDING SOFTWARE DEVELOPMENT SERVICES TO OTHER PARTIES. ACCORDING T O HIM, CONCLUSION OF THE DRP THAT IT WAS INTO PRODUCT DEVELOPMENT AND NOT PR OVIDING SOFTWARE DEVELOPMENT SERVICES WAS INCORRECT. 12. PER CONTRA, LD. AR SUPPORTED THE DIRECTIONS OF THE DRP. 13. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IN THE ANNUAL REPORT FOR F. Y. 2009-19 OF KALS INFORMATION SYSTEMS LTD, BACKGROUND OF THE SAID COMPANY HAS BEEN MENTIONED AS UNDER : 14. SAID COMPANY WAS HAVING SIGNIFICANT INVENTORY C OMING TO 27% OF ITS CURRENT ASSETS. INVENTORY HELD BY KALS INFORMATION SYSTEMS LTD CAME TO RS.60,47,977/-. WE ALSO FIND THAT HYDERABAD BENCH IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA P. LTD (SUPRA) HAD HELD AS UNDER AT PARA 10.1 OF ITS ORDER VIS--VIS THE COMPARABILITY OF M/S. KALS INFORMATION SYSTEMS LTD : IT(TP)A.499 & CO.136/BANG/2015 PAGE - 20 10.1. ASSESSEES MAIN OBJECTION BEFORE US IS ON FUN CTIONALITY OF THE COMPARABLE COMPANY. AS SEEN FROM THE ANNUAL REPORT OF 2008-09 AND 2009-10 AND COMPARATIVE STATEMENT PLACED BY ASSESSE E, THE COMPANY CLASSIFIED ITSELF AS THE COMPANY ENGAGED IN DEVELO PMENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION. THE COM PANY CONSISTING OF STPI UNIT ENGAGED IN DEVELOPMENT OF SOFTWARE AND SO FTWARE PRODUCTS AND A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTWA RE PROFESSIONALS ON ON-LINE PROJECTS. THIS INDICATES THAT COMPANY IS EN GAGED IN DEVELOPMENT OF SOFTWARE AND PRODUCTS AND ITS INVENTORY ALSO IND ICATES THAT ASSESSEE HAS BEEN USING ITS READYMADE LIBRARIES FOR SALES. T HIS COMPANY WAS REJECTED IN EARLIER YEAR ON FUNCTIONAL ANALYSIS BY ITAT IN THE CASE OF PLANET ONLINE PVT. LTD., IN ITA NO. 464/HYD/2014 WH ERE IN IT WAS HELD THAT COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS. SINCE ITS ANNUAL REPORT STATES THE SAME FACTS IN THIS ASSESSM ENT YEAR ALSO, WE ARE OF THE OPINION THAT THE COMPANY CANNOT BE SELECTED AS A COMPARABLE AS IT WAS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTW ARE PRODUCTS. ACCORDINGLY, ASSESSEES OBJECTIONS ARE ACCEPTED AND AO IS DIRECTED TO EXCLUDE THE COMPANY. ACCORDINGLY WE ARE OF THE OPINION THAT DRP WAS CORR ECT IN DIRECTING EXCLUSION OF THE SAID COMPANY FROM THE LIST OF COMPARABLES. 15. ASSAILING THE DIRECTIONS OF THE DRP FOR EXCLUSI ON OF PERSISTENT SYSTEMS AND SOLUTIONS LTD, LD. DR SUBMITTED THAT ASSESSEE HAD N OT RAISED ANY OBJECTION ON THIS COMPARABLE BEFORE THE TPO. ACCORDING TO HIM A SSESSEE HAD FOR THE FIRST TIME ASSAILED ITS COMPARABILITY BEFORE THE DRP, WHILE ACCEPTING IT AS A GOOD COMPARABLE BEFORE THE TPO. ACCORDING TO HIM, DRP H AD ACCEPTED THE CONTENTIONS OF THE ASSESSEE WITHOUT VERIFYING THE D ATA FURNISHED BY IT. 16. PER CONTRA, LD. AR SUBMITTED THAT PERSISTENT SY STEMS AND SOLUTIONS LTD WAS RENDERING OUTSOURCED PRODUCT DEVELOPMENT SERVIC ES AND NOT ANY SOFTWARE DEVELOPMENT AS SUCH. ACCORDING TO HIM, ITS REVENUE WAS FROM SALE OF PRODUCT SOFTWARE DEVELOPMENT SERVICES AND SEGMENTAL RESULTS WERE NOT AVAILABLE. RELYING ON THE ANNUAL REPORT OF PERSISTENT SYSTEMS AND SOLUTIONS FOR F. Y. 2009-10, LD. AR SUBMITTED THAT IT WAS PROVIDING END TO END PRODUCT DEVELOPMENT SERVICES. FURTHER AS PER THE LD. AR WE B-SITE OF THE SAID IT(TP)A.499 & CO.136/BANG/2015 PAGE - 21 COMPANY CLEARLY INDICATED THAT IT WAS DEVELOPING PR ODUCTS LIKE PAXPRO, CHEMLMS, VIEMOR, CLAP, E2GMIGRATOR, TLALOC, EMEE. THUS ACCORDING TO HIM, DIRECTIONS OF THE DRP WERE JUST AND PROPER. 17. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. NO DOUBT ASSESSEE HAD RAISED NO OBJECTIONS WITH REGARD TO IN CLUSION OF PERSISTENT SYSTEMS AND SOLUTIONS LTD AS A COMPARABLE, WHEN IT WAS SO SUGGESTED BY THE TPO. HOWEVER BEFORE THE DRP ASSESSEE HAD STATED TH AT THE SAID COMPANY WAS ENGAGED IN OUTSOURCED PRODUCT DEVELOPMENT SERVI CES AND NOT INTO SOFTWARE DEVELOPMENT SERVICES. ANNUAL REPORT OF PER SISTENT SYSTEMS AND SOLUTIONS, STATES AS UNDER : IT IS ALSO MENTIONED THAT THEY WERE PROVIDING OUT-S OURCED PRODUCT DEVELOPMENT SERVICES AND SIGNIFICANT PORTION OF ITS REVENUE WAS FROM EXPORT OF SOFTWARE SERVICES AS WELL AS PRODUCTS. IN THE P & L ACCOUNT FOR THE YEAR ENDING 31.03.2010, REVENUE FROM SALE OF SOFTWARE SE RVICES AND PRODUCTS CAME TO RS.5,044.13 MILLIONS. THERE WAS NO SEGMENT ATION OF THE RESULTS INTO SOFTWARE SERVICES AND SOFTWARE PRODUCT DEVELOPMENT. THUS SEGMENTAL RESULTS WERE NOT AVAILABLE AND THE ASSESSEE HAS ALSO SHOWN THAT M/S. PERSISTENT SYSTEMS & SOLUTIONS LTD, WAS DEVELOPING PRODUCTS LI KE PAXPRO, CHEMLMS, VIEMOR, CLAP, E2GMIGRATOR, TLALOC, EMEE. IN SUCH A SITUATION WE ARE OF THE OPINION LD. DRP RIGHTLY DIRECTED EXCLUSION OF PERSI STENT SYSTEMS AND SOLUTIONS IT(TP)A.499 & CO.136/BANG/2015 PAGE - 22 LTD FROM THE LIST OF COMPARABLES. DRP HAS ALSO GIV EN A FINDING THAT ASSESSEE WAS RENDERING CONTRACT SOFTWARE DEVELOPMENT SERVICE S TO ITS PRINCIPAL ABROAD AND SUCH SERVICES WERE PROVIDED BY IT THROUGH PROJE CTS AND ASSIGNMENTS CONTRACTED TO IT BY THEIR PRINCIPALS ABROAD. THUS, ACCORDING TO US, DRP WAS JUSTIFIED IN DIRECTING EXCLUSION OF PERSISTENT SYST EMS AND SOLUTIONS LTD, CONSIDERING THE FUNCTIONAL PROFILE OF THE ASSESSEE AS DISSIMILAR FROM THAT OF PERSISTENT SYSTEMS AND SOLUTIONS LTD. 18. TO SUMMARISE WE ARE OF THE OPINION THAT NO PROP ER REASONS HAVE BEEN SHOWN BY THE REVENUE FOR INTERFERING WITH THE DIREC TIONS OF THE DRP TO EXCLUDE INFOSYS LTD, ICRA TECHNO ANALYTICS LTD, KALS INFORM ATION SYSTEMS LTD AND PERSISTENT SYSTEMS AND SOLUTIONS LTD FROM THE LIST OF COMPARABLES CONSIDERED BY THE TPO FOR BENCH MARKING THE PRICING OF THE INT ERNATIONAL TRANSACTIONS IN THE NATURE OF SOFTWARE DEVELOPMENT SERVICES RENDERE D BY THE ASSESSEE TO ITS AE ABROAD. GROUND 4 OF THE REVENUE THEREFORE STAND S D ISMISSED. SINCE THIS TRIBUNAL HAS FOUND THAT THE COMPARABLES, ICRA TECHNO ANALYTICS LTD, INFOSYS TECHOLOGIES LTD, KALS IN FORMATION SYSTEMS LTD (SEG) AND TATA ELXSI LTD (SEG) ARE FUNCTIONALLY DI FFERENT, IN THE ABOVE CASES, FOLLOWING THEM, THE DRPS DECISION IS UP HELD AND THE CORRESPONDING GROUNDS OF THE REVENUE ARE DISMIS SED. PER CONTRA, GROUND NOS.1, 2 & 3 OF THE CO OF THE ASSESSEE ARE ALLOWED. 10. THE NEXT ISSUE IS SEEKING INCLUSION OF THE FOLLOWING TWO COMPARABLES (GROUND NO.7 OF REVENUES APPEAL AND GR OUND NO 4 OF THE ASSESSEES CO). THE GIST OF THE ARS SUBMISSIONS AR E AS UNDER : IT(TP)A.499 & CO.136/BANG/2015 PAGE - 23 1. R S SOFTWARE (INDIA) LTD : THE TPOS/DRPS REASON FOR EXCLUSION IS THAT 82% EX PENSES IN THE P & L ARE INCURRED BY FOREIGN BRANCHES , HENCE IT IS AN ONSI TE SOFTWARE DEVELOPMENT COMPANY THE ASSESSEES REASONS FOR INCLUSION ARE THAT : THE COMPANY IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES. ONSITE DEVELOPMENT SHOULD NOT BE A CRITE RIA TO JUDGE COMPARABILITY. ONSITE REVENUE IS NOT ONE OF THE FILTERS ADOPTED BY THE TPO IN THE ORDER. 2. PERSISTENT SYSTEMS & SOLUTIONS LTD : THE TPOS/DRPS REASON FOR EXCLUSION IS THAT NO SEG MENTAL INFORMATION IS AVAILABLE WITH REGARD TO SOFTWARE SERVICES AND PROD UCT SEPARATELY. THE ASSESSEES REASONS FOR INCLUSION ARE : AS PER NOTES TO ACCOUNTS, THE COMPANY IS PREDOMINAN TLY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS GLOB AL CUSTOMERS. AS PER REVENUE RECOGNITION, THE COMPANY DERIVES INC OME FROM SOFTWARE SERVICES. WE HEARD THE RIVAL SUBMISSIONS. THE ASSESSEE SU BMITTED THAT IT IS IN AGREEMENT WITH THE GROUND OF THE REVENUE AND REQU ESTED TO RESTATE THE ABOVE COMPARABLES IN THE FINAL SET OF COMPARABLES . ACCORDINGLY, THE TPO/AO IS DIRECTED TO INCLUDE THEM. THE REVENUES G ROUND NO 7 AND THE GROUND NO 4 OF THE ASSESSEES CO ARE ALLOWED. IT(TP)A.499 & CO.136/BANG/2015 PAGE - 24 11. THE NEXT ISSUE IS SEEKING INCLUSION OF THE FOLL OWING 5 COMPARABLES (GROUND NO.5 OF THE ASSESSEES ADDITIONAL GROU ND ). THE GIST OF THE ARS SUBMISSIONS ARE AS UNDER : 1. AKSHAY SOFTWARE TECHNOLOGIES LTD : THE DRPS REASONS FOR EXCLUSION ARE : PREDOMINANTLY ENGAGED IN ONSITE DEV ELOPMENT OF SOFTWARE & ABNORMAL EMPLOYEE COST OF 87%. THE ASSESSEES REASONS FOR INCLUSION ARE : THE COMPANY IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES. ONSITE DEVELOPMENT SHOULD NOT BE A CRITE RIA TO JUDGE COMPARABILITY. ONSITE REVENUE IS NOT ONE OF THE FILTERS ADOPTED BY THE TPO IN THE ORDER. THRESHOLD FOR EMPLOYEE COST FILTER APPLIED BY TPO I S 25%, HENCE IT PASSES THE FILTER. 2. GOLDSTONE TECHNOLOGIES LTD : THE DRPS REASON FOR EXCLUSION : EXPORT TURNOVER IS 67%, WHICH IS LESS THAN THE THRE SHOLD OF 75% APPLIED BY THE TPO. THE ASSESSEES REASONS FOR INCLUSION ARE : TPO AND DRP HAVE CONSIDERED THE EARNINGS IN FOREIGN CURRENCY TO TOTAL TURNOVER, INSTEAD OF CONSIDERING THE EXPORT T URNOVER. AS PER THE FILTERS APPLIED BY THE TPO, THE FILTER I S COMPANIES WHO HAVE EXPORT SALES LESS THAN 75% OF THE SALES WERE E XCLUDED. ACCORDINGLY EXPORT SALES TURNOVER SHOULD BE CONSIDE RED FOR COMPUTATIONAL PURPOSES. 3. LGS GLOBAL LTD : THE DRPS REASONS FOR EXCLUSION ARE :EXPORT TURNOVER IS 49% WHICH IS LESS THAN THE THRESHOLD OF 75% APPLIED BY THE TPO & ENGAGED IN ONSITE DEVELOPMENT OF SOFTWARE IT(TP)A.499 & CO.136/BANG/2015 PAGE - 25 THE ASSESSEES REASONS FOR INCLUSION ARE : THE COMPANY IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES. ONSITE DEVELOPMENT SHOULD NOT BE A CRITE RIA TO JUDGE COMPARABILITY. ONSITE REVENUE IS NOT ONE OF THE FILTERS ADOPTED BY THE TPO IN THE ORDER. LGS PASSES THE FILTER, EXPORT TURNOVER IS 98.71%. TPO AND DRP HAVE CONSIDERED THE EARNINGS IN FOREIGN CURRENCY TO TOTA L TURNOVER, INSTEAD OF CONSIDERING THE EXPORT TURNOVER. 4. SILVERLINE TECHNOLOGIES LTD : THE DRPS REASONS FOR EXCLUSION ARE : COMPANY HAS DIFFERENT FINANCIAL YEAR ENDING. COMPANY IS PROVIDING IT SERVICES COMPRISING IF SOFT WARE DEVELOPMENT SYSTEM SOLUTION, APPLICATION SOFTWARE SYSTEM AND MA INTENANCE OF SOFTWARE AND NO SEGMENTAL INFORMATION IS PROVIDED I N THIS REGARD. ENGAGED IN ONSITE DEVELOPMENT OF SOFTWARE. THE ASSESSEES REASONS FOR INCLUSION ARE : EXTRAPOLATED DATA CAN BE CONSIDERED IN THE LIGHT OF THE HIGH COURT RULING IN MCKINSEY KNOWLEDGE CENTRE INDIA PVT LTD THE COMPANY IS ENGAGED IN THE PROVISION OF SOFTWAR E DEVELOPMENT SERVICES. ONSITE DEVELOPMENT SHOULD NOT BE A CRITE RIA TO JUDGE COMPARABILITY. ONSITE REVENUE IS NOT ONE OF THE FILTERS ADOPTED BY THE TPO IN THE ORDER. AS PER THE ANNUAL REPORT OF THE COMPANY, THERE IS O NLY ONE SEGMENT I.E., IT SERVICE. THE OTHER SERVICES PROVIDED ARE A SUB-CLASSIFICATION OF THE IT SERVICES PROVIDED AND HENCE FUNCTIONALLY COMPARABLE. 5. CALIBER POINT BUSINESS SOLUTION : THE DRPS REASONS FOR EXCLUSION ARE : REVENUE FROM FOREIGN BRANCHES ARE A PART OF THE BUSINESS TURNOVER, ASSETS AND LIABILITIES, OTHER INCOME AND INTEREST HAVE NOT BEEN IDENTIFIED TO SEGMENTS. HENCE, THE SEGMENTAL ARE U NRELIABLE. THE ASSESSEES REASONS FOR INCLUSION ARE : ASSETS AND LIABILITIES HAVE NO ROLE TO PLAY FOR DET ERMINATION OF MARGIN COMPUTATION. FURTHER, INTEREST AND OTHER INCOME W OULD BE NON- OPERATING IN NATURE AND HENCE NOT RELEVANT. IT(TP)A.499 & CO.136/BANG/2015 PAGE - 26 THE SEGMENT TITLED OTHERS CAN BE CONSIDERED AS CO MPARABLE WHICH REPRESENTS SOFTWARE SUPPORT, MAINTENANCE AND CONSU LTING RELATED ACTIVITIES AND HENCE FUNCTIONALLY COMPARABLE. THE AR TOOK US THROUGH RELEVANT PAGES IN THE PAPE R BOOK. WE HAVE HEARD THE RIVAL SUBMISSIONS. SINCE THESE INCLUSIO NS ARE SOUGHT ON THE BASIS OF THE ADDITIONAL GROUNDS, THESE ISSUES ARE REMITTE D BACK TO THE TPO/AO FOR RE-ADJUDICATION IN ACCORDANCE WITH LAW. 12. THE NEXT ISSUE ARGUED ON THE BASIS OF ADDITIONA L GROUND IS THAT THE DONATION IS TO BE CONSIDERED AS NON-OPERATING IN NA TURE IN THIS REGARD, THE ASSESSEE SUBMITTED THAT DONAT ION IS NOT CLOSELY LINKED TO THE BUSINESS OPERATIONS AND SHOULD BE CON SIDERED AS NON- OPERATING IN NATURE. THE ASSESSEE PLACED RELIANC E ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF M/S. CAPITAL ONE SERVICES I NDIA P. LTD [IT(TP)A NO.28/BANG/2014], WHEREIN IT HAS BEEN HELD THAT DON ATION IS NOT IN THE NATURE OF NORMAL BUSINESS ACTIVITY AND HENCE SHOULD NOT BE CONSIDERED AS OPERATING. FOLLOWING THE DECISION, THE AO IS DIRECT ED TO TREAT DONATION AS NON OPERATING ONE. 13. THE NEXT ISSUE ARGUED IS SEEKING RISK ADJUS TMENT ON THE BASIS OF ADDITIONAL GROUND : IN THIS REGARD, THE ASSESSEE SUBMITTED THAT SUITABL E ADJUSTMENT SHOULD BE PROVIDED TO ACCOUNT FOR DIFFERENCES IN RI SK PROFILE OF THE IT(TP)A.499 & CO.136/BANG/2015 PAGE - 27 COMPARABLES. THE ASSESSEE PLACED RELIANCE ON THE TRIBUNAL DECISION OF HYDERABAD BENCH IN HELIOSOFT INDIA P. LTD [ITA.6 45/HYD/2009], WHEREIN THE TRIBUNAL HELD AS UNDER : 17. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES I N THIS REGARD. THE MATERIALS ON RECORD CLEARLY PROVE THE FACT THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER. IT HAS TRANSACTIONS ONLY WITH ITS AE. IT IS ALSO A FACT THAT ALL THE RISKS LIES WITH THE AE. DIFFERENT BENCHES OF TH E TRIBUNAL HAVE ALSO TAKEN A DIVERGENT VIEW ON THIS ISSUE. THE INCOME-TAX APPELL ATE TRIBUNAL, MUMBAI BENCH IN THE CASE OF SIMONTECH (SUPRA) HAS HELD THA T NO SEPARATE ADJUSTMENT IS REQUIRED ON ACCOUNT OF RISK AND FUNCTIONAL DIFFE RENCE, THE INCOME-TAX APPELLATE TRIBUNAL DELHI BENCH IN THE CASE OF SONY INDIA PVT. LIMITED V/S. DCIT (114 ITD 448) HAS HELD THAT DEDUCTION ON ACCOU NT OF OWNERSHIP OF INTANGIBLES, RISK FACTORS CAN BE ALLOWED. IN AFORES AID VIEW OF THE MATTER, WE ARE INCLINED TO ACCEPT THE VIEW FAVORABLE TO THE AS SESSEE. WE THEREFORE UPHOLD THE DIRECTION OF THE CIT (A) IN THIS REGARD IN ALLO WING THE BENEFIT OF RISK ADJUSTMENTS AT 1%. ACCORDINGLY, THE GROUND RAISED B Y THE DEPARTMENT IS DISMISSED. ON THE OTHER HAND, THE DR SUBMITTED THAT THE TPO IS NOT AGAINST GRANTING ANY RISK ADJUSTMENT BUT THE RISK HAS TO BE ESTABLISHED BY THE ASSESSEE . IN THE FACTS AND CIRCUMSTANCES, THIS IS SUE IS REMITTED BACK TO THE TPO/AO SHALL RE-ADJUDICATE IT IN ACCORDANCE WITH L AW. 14. IN THE RESULT, THE REVENUES APPEAL AND THE CR OSS OBJECTION FILED BY THE ASSESSEE , BOTH ARE ALLOWED PARTLY. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST MARCH, 2017. SD/- SD/- (SUNIL KUMAR YADAV) (S. JAYARAMAN) JUDICIAL MEMBER A CCOUNTANT MEMBER MCN* IT(TP)A.499 & CO.136/BANG/2015 PAGE - 28 COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME TAX 4. THE COMMISSIONER OF INCOME TAX (A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR.