DCIT, Bangalore V. M/s Cisco Systems India Pvt. Ltd., Bangalore

ITA 508/BANG/2015

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 6534 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-04-2021
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 30-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFAR HUSSAIN
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice; International transaction; Capital receipt; Set aside
• Section: 92C; 143(3); 234B; 10B; 143(1); 144C; 43; 48; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B, BANGALORE BEFORE SHRI CHANDRA POOJARI, AM & SHRI GEORGE GEORGE K, JM IT(TP)A NO.505/BANG/2015 : ASST.YEAR 2010-2011 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. BRIGADE SOUTH PARADE NO.16 MAHATMA GANDHI ROAD BANGALORE 560 001. PAN : AABCC0258Q. V. THE ASST.COMMISSIONER OF INCOME-TAX, CIRCLE 2(1)(1) BANGALORE (APPELLANT) (RESPONDENT) IT(TP)A NO.508/BANG/2015 : ASST.YEAR 2010-2011 THE ASST.COMMISSIONER OF INCOME - TAX, CIRCLE 2(1)(1) BANGALORE V. M/S.CISCO SYSTEMS (INDIA) PVT.LTD. BRIGADE SOUTH PARADE NO.16 MAHATMA GANDHI ROAD BANGALORE 560 001. (APPELLANT) (RESPONDENT) CO NO.135/BANG/2015 : ASST.YEAR 2010-2011 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. BRIGADE SOUTH PARADE NO.16 MAHATMA GANDHI ROAD BANGALORE 560 001. V. THE ASST.COMMISSIONER OF INCOME-TAX, CIRCLE 2(1)(1) BANGALORE (CROSS OBJECTOR) (RESPONDENT) REVENUE BY : SRI.MUZAFAR HUSSAIN, CIT-DR ASSESSEE BY : SRI.RAJAN VORA, CA DATE OF HEARING : 24.03.2021 DATE OF PRONOUNCEMENT : 15.04.2021 O R D E R PER CHANDRA POOJARI, AM : THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARISING OUT OF THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C(13) OF THE I.T.ACT CONSEQUENT TO THE DIRECTION OF THE DISPUTE RESOLUTION PANEL, DATED 30.12.2014, PASSED U/S 144C(5) OF THE I.T.ACT. THE ASSESSEE HAS ALSO PREFERRED A CROSS OBJECTION IN SUPPORT OF THE ORDER OF THE A.O. WITH REFERENCE TO IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 2 THE ISSUE RAISED BY THE REVENUE IN ITS APPEAL. THE RELEVANT ASSESSMENT YEAR IS 2010-2011. 2. THE REVISED GROUNDS RAISED BY THE ASSESSEE READ AS FOLLOWS:- BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, CISCO SYSTEMS (INDIA) PRIVATE LIMITED (HEREINAFTER REFERRED TO AS THE 'APPELLANT') CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, RANGE 11, BANGALORE [HEREINAFTER REFERRED TO AS THE 'LEARNED AO'] UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE 'ACT'), IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE HON'BLE DISPUTE RESOLUTION PANEL - I, (HEREINAFTER REFERRED TO AS THE 'HON'BLE DRP') ON THE FOLLOWING GROUNDS, EACH OF WHICH ARE WITHOUT PREJUDICE TO ONE ANOTHER. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW: ORIGINAL GROUNDS: A. GROUNDS OF APPEAL RELATING TO CORPORATE TAX MATTERS 1. THE LEARNED AO HAS ERRED IN LAW AND IN FACT, BY NOT CONSIDERING THE PLEA OF THE APPELLANT THAT COMMUNICATION EXPENSES (IN THE NATURE OF INTERNET CHARGES) SHOULD NOT BE REDUCED FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10A AND 1OB OF THE ACT, RESPECTIVELY 2. THE LEARNED AO HAS ERRED IN LAW AND IN FACTS BY DISREGARDING THE METHODOLOGY ADOPTED BY APPELLANT IN ALLOCATING THE COMMON/ INDIRECT COSTS AMONG ITS VARIOUS BUSINESS SEGMENTS; 3. THE LEARNED DRP/ AO HAVE ERRED IN LAW AND IN FACT BY WITHDRAWING THE DEDUCTION CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME FILED AMOUNTING TO INR 40,23,03,313 IN RESPECT OF FOREX FLUCTUATION WHICH IS CAPITAL IN NATURE B. GROUNDS OF APPEAL RELATING TO TRANSFER PRICING MATTERS I. GROUNDS OF APPEAL SPECIFIC TO SOFTWARE DEVELOPMENT SERVICES TRANSACTION & TECHNICAL SUPPORT SERVICES TRANSACTION IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 3 4. THE LEARNED TPO/ LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT USING THE EXPORT SALES LESS THAN 75% OF THE SALES AS A COMPARABILITY CRITERION; 5. THE LEARNED TPO/LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT USING THE EMPLOYEE COST GREATER THAN 25% OF THE TOTAL REVENUES AS A COMPARABILITY CRITERION; II. GROUNDS OF APPEAL APPLICABLE TO ALL SEGMENTS (SOFTWARE DEVELOPMENT SERVICES SEGMENT, TECHNICAL SUPPORT SERVICES SEGMENT, MARKETING & SALES SUPPORT SERVICES SEGMENT) 6. THE LEARNED TRANSFER PRICING OFFICER (TPO')/LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY NOT APPRECIATING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ALP IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANSACTION AND HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACTION IS NOT AT ARM'S LENGTH. 7. THE LEARNED TPO/LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT USING THE RELATED PARTY TRANSACTIONS MORE THAN 25% OF THE SALES AS A COMPARABILITY CRITERION; 8. THE LEARNED TPO/LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY NOT APPLYING A HIGHER THRESHOLD WHILE APPLYING THE TURNOVER FILTER; 9. THE LEARNED TPO / LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY APPLYING THE FILTER OF COMPANIES HAVING DIFFERENT ACCOUNTING YEAR FOR REJECTING THE COMPARABLE COMPANIES (I.E., COMPANIES HAVING ACCOUNTING YEAR OTHER THAN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS); 10. THE LEARNED TPO/LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY DETERMINING THE ARM'S LENGTH MARGIN/PRICE USING ONLY FY 2009-10 DATA, WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS. 11. THE LEARNED TPO / LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY REJECTING THE FILTER OF RATIO OF RESEARCH AND DEVELOPMENT EXPENSES TO SALES LESS THAN 3% CONSIDERED BY THE APPELLANT FOR IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 4 THE PURPOSE OF SELECTING THE COMPANIES WHICH DO NOT OWN INTANGIBLES AND ARE PURE SERVICE PROVIDERS; 12. THE LEARNED TPO / LEARNED AO HAVE ERRED IN LAW AND IN FACTS, BY REJECTING THE FILTER ADOPTED BY THE APPELLANT FOR SELECTING COMPANIES HAVING A RATIO OF SUM OF ADVERTISING, MARKETING AND DISTRIBUTION EXPENSES TO SALES LESS THAN 3%; MODIFIED GROUNDS: 13. THE LEARNED TPO / LEARNED AO HAVE ERRED IN LAW AND IN FACTS, BY ACCEPTING/REJECTING FOLLOWING COMPANIES BASED ON UNREASONABLE COMPARABILITY CRITERIA: 13.1. FOR SOFTWARE DEVELOPMENT SERVICES SEGMENT, PERSISTENT SYSTEMS LIMITED SHOULD NOT BE SELECTED AS COMPARABLE TO THE APPELLANT 13.2. FOLLOWING COMPANIES SHOULD BE SELECTED AS COMPARABLE TO THE APPELLANT IN RELATION TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT: (A) AKSHAY SOFTWARE TECHNOLOGIES LIMITED (B) GOLDSTONE TECHNOLOGIES LIMITED (C) LGS GLOBAL LIMITED (D) RELIANCE INFOSOLUTIONS PRIVATE LIMITED (E) CRAZY INFOTECH LIMITED (F) TELEDATA MARINE SOLUTIONS LIMITED (G) CAT TECHNOLOGIES LIMITED (H) CG-VAK SOFTWARE & EXPORTS LIMITED (I) CIGNITI TECHNOLOGIES LIMITED 13.3. FOR TECHNICAL SUPPORT SERVICES SEGMENT, ACCENTIA TECHNOLOGIES LIMITED SHOULD NOT BE SELECTED AS COMPARABLE; 13.4. FOR MARKETING AND SALES SUPPORT SERVICES SEGMENT, ASIAN BUSINESS EXHIBITION & CONFERENCES LIMITED SHOULD NOT BE SELECTED AS COMPARABLE TO THE APPELLANT; 13.5. FOLLOWING COMPANIES SHOULD BE SELECTED AS COMPARABLE TO THE APPELLANT IN RELATION TO THE MARKETING AND SALES SUPPORT SERVICES SEGMENT: IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 5 A) COMPETENT AUTOMOBILES COMPANY LIMITED B) EMPIRE INDUSTRIES LIMITED C) PAE LIMITED D) SALORA INTERNATIONAL LIMITED ORIGINAL GROUNDS: 14. THE LEARNED TPO / LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, IN COMPUTING THE ARM'S LENGTH PRICE WITHOUT GIVING THE BENEFIT OF 5 PERCENT UNDER THE PROVISO TO SECTION 92C OF THE ACT; 15. THE LEARNED TPO / LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS-A-VIS THE COM PARABLES. ADDITIONAL GROUNDS FILED VIDE LETTER DATED 7 JANUARY 2016: 15A. THE LEARNED ASSESSING OFFICER HAS ERRED IN MAKING A REFERENCE TO THE TPO WITHOUT RECORDING A FINDING THAT HE CONSIDERS IT 'NECESSARY OR EXPEDIENT' TO DO SO AS REQUIRED UNDER SECTION 92CA(1) OF THE ACT, HENCE THE REFERENCE MADE BY THE LD AO TO TPO SUFFERS FROM JURISDICTIONAL ERROR. 15B. THE LEARNED AO HAS ERRED IN NOT GRANTING AN OPPORTUNITY TO THE APPELLANT BEFORE MAKING A REFERENCE TO THE LEARNED TPO FOR THE COMPUTATION OF ARM'S LENGTH PRICE. 15C. THE LEARNED DRP ERRED BY IGNORING THE FACT THAT SINCE THE ASSESSEE IS AVAILING TAX HOLIDAY BENEFITS UNDER SECTION 10AL 10B OF THE ACT, THERE IS NO MOTIVE OR REASON TO SHIFT THE PROFITS OUTSIDE INDIA, RESTRICTING OF WHICH IS THE BASIC INTENTION OF INTRODUCING THE TRANSFER PRICING PROVISIONS. 15D. THE LEARNED DRP ERRED IN EXERCISING ITS POWERS OF ENHANCEMENT AS PER PROVISIONS OF SECTION 144C(8) OF THE ACT, BY DIRECTING THE AO / TPO TO CONSIDER FOREX FLUCTUATION LOSS AS OPERATING IN NATURE, WITHOUT CONSIDERING THE FACT THE SAID ISSUE WAS NOT 'ANY MATTER ARISING OUT OF ASSESSMENT PROCEEDINGS RELATING TO DRAFT ORDER' AND HENCE THE ENHANCEMENT DONE BY THE DRP IS BEYOND ITS JURISDICTION AND BAD IN-LAW. ADDITIONAL GROUNDS FILED VIDE LETTER DATED 18 NOVEMBER 2016: IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 6 15E. THE LEARNED TPO/AO HAVE ERRED WRONGLY COMPUTING THE OPERATING MARGIN OF CYBER MEDIA RESEARCH LIMITED (IDC LIMITED) AT 19.52% AS AGAINST 12.88% COMPUTED BY THE APPELLANT. 15F. THE LEARNED TPO/AO HAVE ERRED IN LAW AND IN FACTS, BY NOT MAKING SUITABLE WORKING CAPITAL ADJUSTMENT WHILE COMPUTING OPERATING MARGINS FOR THE APPELLANT VIS-A-VIS THE COM PARABLES. ORIGINAL GROUNDS: C. GROUNDS OF APPEAL RELATING TO OTHER MATTERS 16. THE LEARNED AO HAS ERRED IN LAW AND IN FACTS BY PROVIDING CREDIT TO THE TAXES DEDUCTED AT SOURCE ONLY TO THE EXTENT OF INR 8,01,53,278 AS AGAINST INR 8,35,65,585 CLAIMED BY THE APPELLANT IN ITS RETURN OF INCOME AND AS ALLOWED BY THE LEARNED AO WHILE PASSING THE DRAFT ASSESSMENT ORDER. 17. THE LEARNED AO HAS ERRED, IN LAW AND IN FACTS, BY CONSIDERING AN AMOUNT OF INR 34,36,61,090 AS REFUND ISSUED UNDER SECTION 143(1) OF THE ACT IN COMPUTING THE DEMAND COUPLED WITH ERRONEOUSLY LEVYING AN INTEREST AMOUNTING TO INR 7,38,87,135 UNDER SECTION 234D OF THE ACT. 18. THE LEARNED AO HAS ERRED IN LAW BY LEVYING INTEREST OF INR 27,34,46,800 UNDER SECTION 234B OF THE ACT, WHICH IS ON ACCOUNT OF THE ADJUSTMENTS PROPOSED TO THE RETURNED INCOME. 3. THE GROUNDS RAISED BY THE REVENUE READ AS FOLLOWS:- 1. THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL ARE OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DISPUTE RESOLUTION PANEL ERRED IN LAW IN DIRECTING THE AO TO EXCLUDE THE EXPENDITURE INCURRED IN FOREIGN CURRENCY BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A, WITHOUT APPRECIATING THE FACT THAT THE STATUTE ALLOWS EXCLUSION OF SUCH EXPENDITURE ONLY FROM EXPORT TURNOVER BY WAY OF SPECIFIC DEFINITION OF EXPORT TURNOVER AS ENVISAGED BY SUB-CLAUSE (4) OF EXPLANATION 2 BELOW SUB-SECTION (8) OF SECTION 10A AND THE TOTAL TURNOVER HAS NOT BEEN DEFINED IN THIS SECTION. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 7 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE AO TO COMPUTE DEDUCTION U/S 10A IN THE ABOVE MANNER BY PLACING RELIANCE ON THE DECISION OF HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF M/S TATA ELXSI LTD WHICH HAS NOT BECOME FINAL SINCE THE SAME HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND SLPS ARE PENDING BEFORE THE HON'BLE SUPREME COURT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN APPLYING THE EMPLOYEE COST FILTER AND ONSITE FILTER IN ITES SEGMENT. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN APPLYING THE NEW FILTER FOR ITES SEGMENT AND DIRECTING THE TPO TO APPLY 75% EXPORT EARNING FILTER AND EXCLUDE ICRA ONLINE AND SUNDARAM BUSINES SERVICES ON THE SAME BASIS. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE APPLICATION OF A NEW FILTER VIS-A- VIS EXPORT FILTER AND ONSITE FILTER IS WITHIN THE JURISDICTION OF HON'BLE DISPUTE RESOLUTION PANEL. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN GIVING A DIRECTION WHICH AMOUNT TO SET ASIDE AN ISSUE. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN DIRECTING TO INCLUDE FOREX GAIN / LOSS AS OPERATING IN NATURE WITHOUT ASCERTAINING THE NEXUS WITH THE BUSINESS ACTIVITY OF THE TAXPAYER. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN EXCLUDING ICRA TECHNO ANALYTICS LTD, M/S PERSISTENT SYSTEMS & SOLUTION LTD AND KALS INFORMATION SYSTEMS LTD, WHILE THE COMPARABLE IS QUALIFYING ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO. 10. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN EXCLUDING INFOSYS BPO LTD ON THE BASIS OF DECISION IN A DIFFERENT CASE FOR A DIFFERENT FY WHILE THE COMPARABLE IS QUALIFYING ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO. 11. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN HOLDING THAT IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 8 ECLERX SERVICES LTD CANNOT BE TAKEN AS COMPARABLE, BEING FUNCTIONALLY DIFFERENT WHEN IT SATISFIES ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE PO. 12. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HONBLE DISPUTE RESOLUTION PANEL WAS RIGHT IN SUPER IMPOSING THE DECISION OF OTHER BENCHES OF ITAT IN THE CASE OF ASSESSEE TO REJECT THE COMPARABLES VIZ MIS ECLERX SERVICES LTD AND INFOSYS BPO LTD WHEN SELECTION OF COM PARABLES IN A CASE DEPENDS IN TRANSFER PRICING ON ASSESSEE SPECIFIC FAR ANALYSIS. 13. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL INSTEAD OF RELYING ON DECISION OF OTHER BENCHES OF ITAT, OUGHT TO HAVE DECIDED THE COMPARABILITY OF THE COMPANIES VIZ MIS ECLERX SERVICES LTD AND INFOSYS BPO LTD, ON THE BASIS OF SPECIFIC FACTS BROUGHT ON RECORD BY THE TPO IN THE CASE OF ASSESSEE. 14. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL WAS RIGHT IN DECIDING THAT THE BRAND VALUE OF A COMPANY IS A VITAL FACTOR IN DECIDING THE PROFIT MARGIN AT' A COMPANY IGNORING THE FINDING OF THE TPO THAT THE BRAND IS NOT A VARIABLE WHICH DETERMINES THE PROFIT MARGIN OF A COMPANY . 15. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL WAS RIGHT IN HOLDING THAT M/S TATA ELXSI LTD CANNOT BE TAKEN AS COMPARABLE, BEING FUNCTIONALLY DIFFERENT WHEN IT SATISFIES ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO SPECIALLY WHEN THE SEGMENTAL RESULT HAS BEEN USED. 16. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL WAS RIGHT IN SUPER IMPOSING THE DECISION OF OTHER BENCHES OF ITAT IN THE CASE OF ASSESSEE TO REJECT M/S TATA ELXSI LTD AND M/S INFOSYS BPO LTD AS COMPARABLE WHEN SELECTION OF COMPARABLES IN A CASE DEPENDS IN TRANSFER PRICING ON ASSESSEE SPECIFIC FAR ANALYSIS. 17. IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL INSTEAD OF RELYING ON DECISION OF OTHER BENCHES OF ITAT, OUGHT TO HAVE DECIDED THE COMPARABILITY OF M/S TATA ELXSI LTD AND M/S INFOSYS BPO LTD., ON THE BASIS OF SPECIFIC FACTS BROUGHT ON RECORD BY THE TPO IN THE CASE OF ASSESSEE. 18. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN EXCLUDING M/S IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 9 HCCA BUSINESS SERVICES PVT LTD AND M/S KILLIC AGENCIES & MARKETING LTD IN THE MARKETING & SALES SUPPORT SERVICES, WHILE THE COMPARABLES IS QUALIFYING ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO. 19. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN EXCLUDING M/S APITCO LTD, ICRA ONLINE LTD AND M/S KSHITIJ INVESTMENT ADVIROSY CO LTD IN ADMINISTRATION AND OTHER SUPPORT SERVICES AND MANAGEMENT SERVICES SEGMENT, WHILE THE COMPARABLES IS QUALIFYING ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO. 20. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED. 21. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. CORPORATE TAX MATTERS 4. THE FIRST GROUND IN ASSESSEES APPEAL IS WITH REGARD TO NOT CONSIDERING THE PLEA OF THE ASSESSEE THAT COMMUNICATION EXPENSES SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE I.T.ACT. 4.1 AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LIMITED 349 ITR 98, WHEREIN HELD THAT FOR THE PURPOSE OF COMPUTING EXEMPTION U/S 10A OF THE ACT, WHEN EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AFTER EXCLUDING TELECOMMUNICATION EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DENOMINATOR. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 10 4.2 THE SAME JUDGMENT WAS FOLLOWED IN ASSESSEES OWN CASE IN ITA NO.65 TO 67/2011 FOR ASSESSMENT YEARS 2003-2004 AND 2004-2005 VIDE JUDGMENT DATED 18 TH OCTOBER, 2011 BY THE HONBLE JURISDICTIONAL HIGH COURT. BEING SO, TAKING A CONSISTENT VIEW, WE ALLOW THIS GROUND OF THE ASSESSEE. 5. THE NEXT GROUND IN ASSESSEES APPEAL IS WITH REGARD TO METHODOLOGY ADOPTED BY THE ASSESSEE IN ALLOCATING THE COMMON / INDIRECT COSTS AMONG ITS VARIOUS SEGMENTS. 5.1 THE FACTS OF THE CASE IN BRIEF ARE THAT THE BUSINESS OF THE ASSESSEE PRIMARILY CONSISTS OF SOFTWARE DEVELOPMENT SERVICES SEGMENT (CONSISTING OF THE STPI, EOU AND THE SEZ UNITS), TECHNICAL SUPPORT SERVICES SEGMENT, MARKETING AND SALE SUPPORT SERVICES SEGMENT, PRODUCT REPLACEMENT SERVICES SEGMENT, ADMINISTRATIVE AND OTHER SUPPORT SERVICES SEGMENT AND MANAGEMENT SERVICE SEGMENT. BEFORE THE DRP, IT WAS SUBMITTED THAT THE DIRECT COSTS / EXPENSES RELATABLE TO THE SPECIFIC SEGMENTS OF CISCO INDIA AND WHICH ARE DIRECTLY ATTRIBUTABLE TO SUCH SEGMENTS ARE ACCOUNTED AS COSTS / EXPENSES RELATING TO SUCH SPECIFIC SEGMENTS. IN RELATION TO THE COMMON EXPENSES INCURRED BY CISCO INDIA AND ALLOCATED AMONG VARIOUS SEGMENTS, IT IS STATED THAT THE INCOME-TAX ACT, 1961 DOES NOT PROVIDE FOR THE METHOD / RULES TO BE ADOPTED FOR ALLOCATING COMMON EXPENSES INCURRED BETWEEN DIFFERENT SEGMENTS. ACCORDINGLY, IN THE ABSENCE OF ANY SPECIFIC METHOD / RULES., THE COMMON EXPENSES NOT DIRECTLY INCURRED BY THE SEGMENTS OF CISCO INDIA ARE ALLOCATED ON A REASONABLE BASIS OF APPORTIONMENT SUCH AS THE HEADCOUNT OF PERSONNEL EMPLOYED IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 11 IN THESE RESPECTIVE SEGMENTS. THE BUSINESS OF CISCO INDIA PRIMARILY CONSISTS OF THE FOLLOWING BUSINESS SEGMENTS SOFTWARE DEVELOPMENT SERVICES SEGMENT (CONSISTING OF THE STPI, EOU AND SEZ UNITS), MARKETING SUPPORT SERVICES SEGMENT, PRODUCT REPLACEMENT SERVICE SEGMENT, ADMINISTRATIVE SERVICES SEGMENT AND OTHER SUPPORT SERVICES SEGMENT. IT IS SUBMITTED THAT SUCH BASIS OF APPORTIONMENT ADOPTED BY CISCO INDIA IS A REASONABLE BASIS OF ALLOCATION OF COMMON EXPENSES INCURRED. THIS METHOD OF APPORTIONMENT HAS ALSO BEEN CONSISTENTLY ADOPTED BY CISCO INDIA ON A YEAR ON YEAR BASIS. IT WAS FURTHER SUBMITTED THAT THE BANGALORE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2008-09 IN IT(TP)A NO.1510/ BANG/2012, FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. EHPT INDIA (P) LTD. 350 ITR 41 AND FOR A.Y. 2009-2010 IN IT(TP)A NO.271/BANG/2014 HAS UPHELD THE METHOD OF ALLOCATION OF THE COMMON EXPENSES ADOPTED BY THE ASSESSEE AND HELD THAT WHERE TWO BASIS OF APPORTIONMENT OF COMMON COSTS ARE AVAILABLE, ANY ONE OF THE BASIS SHOULD BE CONSISTENTLY FOLLOWED. THUS, SINCE CISCO INDIA HAS BEEN FOLLOWING HEADCOUNT BASIS FOR ALLOCATION FROM PAST 8 YEARS THE SAME BASIS SHOULD BE FOLLOWED FOR A.Y. 2008-2009 AS WELL. FURTHER, IT WAS ALSO SUBMITTED THAT THE HEADCOUNT BASIS OF ALLOCATION OF COMMON EXPENSES SHOULD BE FOLLOWED FOR A.Y. 2010-2011 AS WELL. 5.2 AFTER HAVING HEARD THE OBJECTIONS OF THE ASSESSEE, THE DRP NOTICED THAT THE ALLOCATION MADE BY THE ASSESSEE TO THE VARIOUS SEGMENTS IS NOT CORRECT WHICH IS EVIDENT FROM THE INFORMATION GIVEN IN THE TABLE BELOW :- IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 12 SEGMENT PROFIT % ON COST OF REIMBURSED AS PER THE AGREEMENT WITH THE AE PROFIT % AS PER THE SEGMENTAL INFORMATION GIVEN BY THE ASSESSEE SOFTWARE DEVELOPMENT 10 11 TECHNICAL SERVICES 10 17.65 MARKETING & SUPPORT SERVICES 10 10 ADMINISTRATIVE SUPPORT SERVICES 10 13.89 MANAGEMENT SUPPORT SERVICES 10 13 5.3 THE DRP OBSERVED FROM THE ABOVE THAT IT IS CLEAR THAT THE PROFIT MARGIN SHOWN IN FOUR OUT OF THE FIVE SEGMENTS IS MORE THAN THE PROFIT AS PER THE AGREEMENT WHICH INDICATES THAT THE ALLOCATION METHOD ADOPTED BY THE ASSESSEE IS NOT AN APPROPRIATE METHOD. IT APPEARS THAT SUCH FACTS WERE NOT BEFORE THE ITAT AND THEREFORE THE ITAT UPHELD THAT METHOD ADOPTED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2008-09 AND 2009-10. ACCORDING TO THE DRP, IF THE ABOVE FACT SHOULD NOT HAVE COME TO THEIR NOTICE, THEY SHOULD HAVE DIRECTED THE A.O. TO FOLLOW THE DECISION OF THE ITAT BANGALORE IN ASSESSEES OWN CASE FOR A.Y. 2008-09 AND 2009-10. THE DRP CONCLUDED THAT THE ALLOCATION MADE BY THE A.O. IS JUSTIFIED AND THE OBJECTION IS NOT FOUND ACCEPTABLE. 5.4 BEFORE US, THE LEARNED AR SUBMITTED THAT THE HEADCOUNT METHOD OF APPORTIONMENT HAS ALSO BEEN CONSISTENTLY ADOPTED BY THE ASSESSEE ON YEAR TO YEAR BASIS. IF ONE WERE TO ASSUME THAT THE `REVENUE BASIS OF ALLOCATION IS THE MOST APPROPRIATE BASIS, THEN AS CISCO INDIA OPERATES ON A COST PLUS MODEL, IT IS NOT POSSIBLE TO ALLOCATE THE COMMON COSTS ON SUCH BASIS AS THE `REVENUES UNDER EACH OF THESE SEGMENTS IS A `DERIVED NUMBER. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 13 HE RELIED ON THE EARLIER ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-2009 IN ITA NO.1510/BANG/ 2012 DATED 31.10.2013, WHEREIN THE TRIBUNAL UPHELD THE USE OF HEADCOUNT METHOD FOLLOWED BY THE ASSESSEE AS THE APPROPRIATE METHOD OF ALLOCATION OF COMMON EXPENSES WITHIN VARIOUS BUSINESSES. HE FURTHER SUBMITTED THAT THE APPEAL FILED BY THE DEPARTMENT AGAINST THE ITATS ORDER FOR ASSESSMENT YEAR 2008-2009 BEFORE THE HONBLE HIGH COURT WAS DISMISSED VIDE ITA NO.140/2014 DATED 12 TH JULY, 2018. 5.5 THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE DRP. 5.6 WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THIS ISSUE CAME FOR CONSIDERATION IN ASSESSEES OWN CASE IN AN EARLIER YEAR IN ITA NO.1510/BANG/2012, VIDE ORDER DATED 31.10.2013, WHEREIN THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, BY OBSERVING AS UNDER:- 6. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE MATERIAL ON RECORD, WE FIND THAT THE DISPUTE REVOLVES AROUND THE ALLOCATION OF INDIRECT AND COMMON EXPENSES RELATING TO VARIOUS UNITS AND THE EXPENDITURE ALLOCATED TO STPI UNIT, INCOME FROM WHICH IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. THE ASSESSEE IS STATED TO BE FOLLOWING HEAD-COUNT OF PERSONNEL AS THE BASIS FOR ALLOCATION OF THE COMMON AND INDIRECT EXPENSES WHILE THE AO SEEKS TO ALLOCATE THE COMMON EXPENSES ON THE BASIS OF THE TURNOVER OF EACH SEGMENT. AS NARRATED IN THE ABOVE PARAGRAPHS, THE ASSESSEE IS INTO VARIOUS ACTIVITIES AND THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT ONLY WITH REGARD TO SOFTWARE DEVELOPMENT ACTIVITY WHICH IS SET UP IN STPI. THE ASSESSEE HAD EXPLAINED IN DETAIL BEFORE THE IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 14 AO THE METHODOLOGY AND AS TO HOW THE TOTAL EXPENDITURE OF RS.207 CRORES HAS BEEN BIFURCATED INTO RS.120 CRORES WHICH IS TOWARDS THE COMMON COST EXCLUDING IT AND OMMUNICATION SUPPORT COST AND RS.87 CRORES WHICH IS COMMON COSTS ONLY IN RELATION TO IT AND COMMUNICATION COST. THE SOFTWARE DEVELOPMENT WOULD FALL WITHIN THE SECOND CATEGORY I.E. IT AND COMMUNICATION COST AND ITS EMPLOYEES WHO ARE INVOLVED IN SUCH IT AND COMMUNICATION ARE CONSIDERED FOR ALLOCATION OF THE EXPENDITURE. THE AO, IN THE DRAFT ASSESSMENT ORDER, HAS CONSIDERED NUMBER OF EMPLOYEES IN STPI AND SEZ DIVISION AND HAS 'COME TO THE CONCLUSION THAT THE ASSESSEE IS NOT FOLLOWING HEAD-COUNT METHOD FOR DIVISION OF ALLOCABLE EXPENSES. BEFORE GIVING A FINDING AS TO WHETHER THE ASSESSEE IS FOLLOWING THE HEAD-COUNT METHOD FOR DIVISION OF ALLOCABLE EXPENSES, WE WOULD LIKE TO EXAMINE WHETHER THE METHOD ADOPTED BY THE ASSESSEE IS CORRECT. SIMILAR QUESTION HAD ARISEN BEFORE THE HON'BLE DELHI HIGH COURT IN THE CASE OF M/S.EHTP INDIA PVT. LTD. (CITED SUPRA) WHEREIN APPORTIONMENT OF EXPENSES BETWEEN 10A AND NON- 10A UNITS WAS CONSIDERED. IN THE SAID CASE ALSO, THE ASSESSEE WAS FOLLOWING ALLOCATION OF COMMON EXPENSES ON THE HEAD-COUNT BASIS. AFTER CONSIDERING THE FACTS OF THE SAID CASE, THE HON'BLE HIGH COURT HELD THAT THE ASSESSEE'S CONTENTION THEREIN THAT IN THE SERVICE INDUSTRY HEAD-COUNT METHOD WOULD BE MORE PROPER IS A PLAUSIBLE VIEW THOUGH IT COULD POSSIBLY BE A DEBATABLE VIEW. IT WAS HELD THAT MERELY BECAUSE THERE CAN BE MORE THAN ONE METHOD OF APPORTIONING COMMON EXPENSES BETWEEN STPI AND DOMESTIC UNIT, IT CANNOT BE SAID THAT THE METHOD OF HEAD-COUNT FOLLOWED BY THE ASSESSEE SHOULD BE DISCARDED THAT TOO MIDWAY EVEN THOUGH IT WAS NOT QUESTIONED AT ANY TIME IN THE PAST. WHILE REFERRING TO THE OBSERVATIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF HUKUMCHAND MILLS, THE HON'BLE HIGH COURT OBSERVED THAT WHERE ALTERNATIVE METHODS OF APPORTIONING OF EXPENSES ARE RECOGNIZED AND THERE IS NO STATUTORY OR FIXED FORMULA, THE ENDEAVOUR CAN ONLY BE TOWARDS APPROXIMATION WITHOUT ANY GREAT PRECISION OR EXACTNESS AND IF SUCH IS THE ENDEAVOUR, IT CAN HARDLY BE SAID THAT THERE IS AN ATTEMPT TO DISTORT THE PROFITS. THUS IT CAN BE SEEN THAT WHERE TWO BASIS OF APPORTIONMENT ARE AVAILABLE, FOLLOWING ONE OF THE BASIS CONSISTENTLY IS TO BE ACCEPTED. AS THE CLAIM OF DEDUCTION U/S 10A DURING THE RELEVANT ASSESSMENT YEAR IS THE 9TH YEAR IN IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 15 WHICH THE ASSESSEE IS CLAIMING THE DEDUCTION U/S 10A AND THE REVENUE HAS ACCEPTED THE METHOD OF ALLOCATION OF EXPENSES IN ALL THE EARLIER ASSESSMENT YEARS, WE ARE OF THE OPINION THAT THE SAME METHOD SHOULD BE ADOPTED FOR THE RELEVANT ASSESSMENT YEAR ALSO. HOWEVER, WITH REGARD TO THE DISCREPANCY POINTED OUT BY THE AO TO THE EFFECT THAT THERE WERE MORE EMPLOYEES IN THE STPI UNIT WHILE ONLY RS.27 CRORES WAS ALLOCATED TOWARDS SUCH UNIT, WHEREAS THERE WERE LESS EMPLOYEES IN SEZ UNIT BUT MORE THAN RS.53 CRORES WAS ALLOCATED TO SUCH DIVISION, WE ARE OF THE OPINION THAT THIS NEEDS VERIFICATION BY THE AO. THE ASSESSEE HAS GIVEN DETAILED EXPLANATION AS TO HOW IT IS ALLOCATING THE EXPENDITURE BETWEEN VARIOUS UNITS ON THE BASIS OF HEAD- COUNT BUT BOTH THE AO AS WELL AS THE DRP HAVE FAILED TO CONSIDER THE FACTUAL ASPECTS OF THE SAID SUBMISSION. IN VIEW OF THE SAME, WHILE UPHOLDING THE METHOD ADOPTED BY THE ASSESSEE FOR ALLOCATION OF COMMON EXPENSES, WE REMAND THE ISSUE TO THE FILE OF THE AO ONLY FOR VERIFICATION OF THE NUMBER OF EMPLOYEES AND THE EXPENDITURE ALLOCATED TO SUCH EMPLOYEES. GROUND NO.3 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 5.7 WE ALSO FIND THAT THE DEPARTMENT HAS CHALLENGED THE ABOVE ORDER OF THE TRIBUNAL BEFORE THE HONBLE HIGH COURT OF KARNATAKA. THE HONBLE HIGH COURT IN ITA NO.140/2014, VIDE JUDGMENT DATED 12 TH JULY, 2018, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. BEING SO, TAKING THE CONSISTENT VIEW, WE ALLOW THIS GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE, AND UPHOLD THE VIEW TAKEN BY THE TRIBUNAL IN THE FIRST ROUND OF APPEAL (IN ITA NO.1510/BANG/2012 - ORDER DATED 31.10.2013). 6. GROUND NO.3 OF THE ASSESSEES APPEAL IS WITH REGARD WITHDRAWING THE DEDUCTION CLAIMED BY THE ASSESSEE IN ITS RETURN OF INCOME AMOUNTING TO RS.40,23,03,313 IN RESPECT OF FOREX FLUCTUATION, WHICH IS CAPITAL IN NATURE. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 16 6.1 THE FACTS OF THE CASE IN BRIEF ARE THAT ON PERUSAL OF THE ORDER OF THE ITAT, THE DRP NOTICED THAT IN ASSESSEES OWN CASE FOR A.Y. 2009-2010, WHEREIN THE DRPS DIRECTION TO CONSIDER THE FOREIGN EXCHANGE GAIN AS NON-OPERATING IN NATURE WERE REVERSED BY THE ITAT IN PARAGRAPH 23 BY OBSERVING THAT THE FOREIGN EXCHANGE GAIN FROM SOFTWARE DEVELOPMENT SERVICE HAS TO BE CONSIDERED AS PART OF THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES WHILE COMPUTING THE MARGIN OF THE ASSESSEE. HOWEVER, IT IS NOTICED BY THE DRP THAT THE ASSESSEE HAS NOT FOLLOWED THE CONSISTENT APPROACH FOR THIS ASSESSMENT YEAR WHEREIN THE ASSESSEE HAS NOT CONSIDERED FOREIGN EXCHANGE LOSS AS OPERATING IN NATURE. ON EXAMINATION OF THE ANNUAL REPORT, IT IS NOTICED BY THE DRP THAT DURING THE YEAR THE NET EXCHANGE LOSS OF RS.33,68,11,000 HAS BEEN DEBITED IN PROFIT AND LOSS ACCOUNT. HOWEVER, IT HAS NOT BEEN ALLOCATED TO THE VARIOUS SEGMENTS FOR COMPUTING THE OPERATING MARGIN OF THE ASSESSEE COMPANY. THEREFORE, A NOTICE U/S 144C(8) WAS ISSUED TO THE ASSESSEE ON 11.12.2014, AS UNDER:- DURING THE EXAMINATION OF THE RECORD, IT IS NOTICED BY US THAT THE HONBLE ITAT IN YOUR OWN CASE FOR ASSESSMENT YEAR 2009-10 WHERE THE DRP REJECTED THE CLAIM TO CONSIDER THE FOREIGN EXCHANGE GAIN AS OPERATING IN NATURE. THE ITAT ALLOWED YOUR APPEAL BY FOLLOWING THE DECISION OF M/S.SAP LAB INDIA (P) LTD (SUPRA). HOWEVER, THE CONSISTENCY HAS NOT BEEN FOLLOWED BY YOU FOR AY 2010-11 WHERE WHILE COMPUTING THE OPERATING MARGIN, YOU HAVE NOT CONSIDERED NET FOREIGN EXCHANGE LOSS OF RS.33,68,11,000/- DEBITED IN P&L ACCOUNT. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 17 3. PLEASE FILE A WRITTEN SUBMISSION ON OR BEFORE 19.12.2014 TO THE SECRETARIAT, ON THE ADDRESS MENTIONED ABOVE, TO SHOW CAUSE AS TO WHY THE FOREIGN EXCHANGE LOSS SHOULD NOT BE CONSIDERED AS PART OF THE OPERATING COST FOR COMPUTING THE MARGIN IN YOUR CASE AND THE COMPARABLES FOR THE ASSESSMENT YEAR BEFORE US. ALSO, FURNISH THE BREAKUP OF SUCH EXPENSES (SEGMENT WISE). 4. IN ABSENCE OF ANY EXPLANATION BY THE DUE DATE, IT WILL BE PRESUMED THAT YOU DO NOT HAVE ANY OBJECTION ON THE PROPOSED ACTION AS MENTIONED ABOVE'. 6.2 THE ASSESSEE COMPANY IN RESPONSE TO THE ABOVE NOTICE FILED LETTER DATED 19-12-2014 IN WHICH IT IS SUBMITTED THAT THE COMPANY IS IN PROCESS OF COLLATING THE REQUIRED INFORMATION / DETAILS AND WOULD REQUIRE ADDITIONAL TIME TO FILE THE SUBMISSIONS. IT IS IN THE KNOWLEDGE OF THE ASSESSEE THAT THE DIRECTIONS ULS 144C CANNOT BE ISSUED IN THIS CASE AFTER 31-12- 2014, AND IN SUCH CIRCUMSTANCES, THE TIME CANNOT BE ALLOWED BEYOND 30-12-2014. HOWEVER, THE ASSESSEE FAILED TO FURNISH THE INFORMATION TILL THE DATE OF ISSUE OF THE DIRECTIONS BY THIS ORDER. IN SUCH CIRCUMSTANCES, THE DRP ISSUED FOLLOWING DIRECTIONS TO THE ASSESSING OFFICER:- (I) DIRECT THE ASSESSING OFFICER TO ALLOCATE THE NET FOREIGN EXCHANGE LOSS OF RS.3,68,11,310/- TO THE 5 SEGMENTS MENTIONED IN PARAGRAPH 25 OF THE ORDER OF TPO BASED ON THE % OF OPERATING REVENUE OF THE RELEVANT IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 18 SEGMENT TO THE TOTAL REVENUE AND THEN THE OPERATING COST TO BE INCREASED BY ADDING THE PROPORTIONATE FOREIGN EXCHANGE LOSS TO THE COST OF RELEVANT SEGMENT FOR MAKING THE ADJUSTMENT ULS 92CA OF THE INCOME-TAX ACT AS IT IS EVIDENT FROM THE APPENDIX - B TO THE TP DOCUMENTATION THAT EXCHANGE LOSS WAS RS.54,13,17,857/- WAS NETTED TO THE EXCHANGE GAIN OF RS.20,45,06,547/- AND THE NET FOREIGN EXCHANGE LOSS OF RS.33,68,11,310/- WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD' OPERATING AND OTHER EXPENSES'. FURTHER, ON PERUSAL OF COMPUTATION OF TOTAL INCOME, IT IS NOTICED BY US THAT THE NET FOREIGN EXCHANGE LOSS HAS BEEN ALLOCATED TO DIFFERENT UNITS / SEGMENTS IN THE COMPUTATION OF TOTAL INCOME UNDER THE HEAD 'MISCELLANEOUS EXPENSES' WHICH MAKES IT PRIMA- FACIE CLEAR THAT THE ABOVE GROSS FOREIGN EXCHANGE LOSS AND THE FOREIGN EXCHANGE GAIN' ON REVENUE ACCOUNT. (II) TO EXAMINE THE NATURE (REVENUE OR CAPITAL) OF THE FOREIGN EXCHANGE GAIN OF RS.20,45,06,547 NETTED OUT WITH THE GROSS FOREIGN EXCHANGE LOSS, WE EXAMINED THE COMPUTATION OF TOTAL INCOME FILED BEFORE THE ASSESSING OFFICER FROM WHICH IT NOTICED BY US THAT THE ASSESSING OFFICER HAS ALLOWED DEDUCTION IN THE COMPUTATION OF TOTAL INCOME OF RS.40,23,03,313/- IN RESPECT OF FOREIGN EXCHANGE GAIN WHICH ACCORDING TO THE COMPUTATION OF TOTAL INCOME INCLUDES RS.25,26,39,693/- ON ACCOUNT OF REALIZED EXCHANGE GAIN ON REPAYMENT OF SHARE APPLICATION MONEY, RS.14,40,19,285/- UNREALIZED EXCHANGE GAIN ON IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 19 RESTATEMENT OF CREDITORS FOR FIXED ASSET PURCHASES AND REALIZED GAIN ON FIXED ASSET OF RS.56,44,335 CLAIMED BY THE ASSESSEE HOWEVER, AS MENTIONED IN (I) ABOVE, THE FOREIGN EXCHANGE GAIN OF RS.20,45,06,547, IS PRIMA-FACIE ON REVENUE ACCOUNT AND THEREFORE, IN THE ABSENCE OF CORRESPONDING CREDIT OF FOREIGN EXCHANGE GAIN OF RS.40.23,03,313/- (RS,25,26.39,693 + RS.14,40,19,285/- RS.56,44,335/-) IN THE PROFIT AND LOSS ACCOUNT, THE DEDUCTION OF RS.40,23,03.313/- ALLOWED IN THE DRAFT ASSESSMENT ORDER IS INCORRECT, HENCE, WE DIRECT THE ASSESSING OFFICER TO WITHDRAW THE DEDUCTION OF RS.40,23,03,313/- (RS.25,26,39,693 + RS.14,40,19,285/- RS.56,44,335/-) CLAIMED IN THE COMPUTATION OF THE TOTAL INCOME. (III) THE DIRECTIONS IN (I) AND (II) ABOVE ARE BASED ON THE VERIFICATION OF THE FACTS FROM THE RECORD, AS THE ASSESSEE FAILED TO FURNISH THE DETAIL IN REGARD TO FOREIGN EXCHANGE GAIN AND LOSS AS REQUIRED BY THE NOTICE DATED 11-12-2014 EVEN AFTER AVAILING SUFFICIENT OPPORTUNITIES, HOWEVER, IN THE PRINCIPLES OF NATURAL JUSTICE, IF THE ASSESSEE ON RECEIPT OF THIS ORDER, SUBMIT THE BREAK-UP OF FOREIGN EXCHANGE GAIN AND LOSS BEFORE THE ASSESSING OFFICER ALONG WITH THE EVIDENCES TO SUPPORT THE SAME WITHIN 10DAYS OF RECEIPT OF THIS ORDER, WE DIRECT THE ASSESSING OFFICER TO MODIFY THE DIRECTIONS GIVEN IN (I) & (II) ABOVE ACCORDING TO THE FOLLOWING:- IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 20 (A) IF IT IS CLAIMED THAT THE FOREIGN EXCHANGE GAIN OF RS.20,45,06,547/- IS ON CAPITAL ACCOUNT, THEN THE ALLOCATION OF GROSS FOREIGN EXCHANGE LOSS OF RS.54,13,17,857/-(INSTEAD OF NET FOREIGN EXCHANGE LOSS OF RS.33,68,11,310/-) IS REQUIRED TO BE MADE TO THE OPERATING COST OF 5 SEGMENTS IN ACCORDANCE WITH THE DIRECTIONS IN (I) ABOVE FOR MAKING ADJUSTMENT U/S 92CA AND THE DEDUCTION OF RS.20,45,06,547/- WILL BE ALLOWED INSTEAD OF RS.40,23,03,313/- (RS.25,26,39,693 + RS.14,40,19,285/- RS.56,44,335/-) IN COMPUTING THE TOTAL INCOME UNLESS IT IS ESTABLISHED THAT THE CORRESPONDING AMOUNT OF RS.40,23,03,313/- HAS BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT. (B) THE ASSESSING OFFICER IS ALSO DIRECTED TO CONSIDER THE FOREIGN EXCHANGE FLUCTUATION (LOSS OR GAIN) AS OPERATING IN NATURE WHILE COMPUTING THE MARGINS IN RESPECT OF COMPARABLES RETAINED BY THIS ORDER TO DETERMINE THE MEAN MARGIN OF THE COMPARABLES FOR THE RELEVANT SEGMENTS FOR THE PURPOSE OF ADJUSTMENT U/S 92CA OF THE INCOME-TAX ACT. 6.3 THE CONTENTION OF THE AR IS THAT FOR ASSESSMENT YEAR 2009-2010 ALSO, THE ASSESSEE HAS INCURRED FOREIGN EXCHANGE LOSS OF RS.33,68,11,257 AND THE SAME HAS BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT. THE LEARNED AR FURTHER SUBMITTED THAT IN THE COMPUTATION OF INCOME HAS REDUCED THE FOREIGN EXCHANGE IN ON CAPITAL ACCOUNT TRANSACTION (GIVEN THAT SUCH INCOME IS ALREADY INCLUDED IN THE PROFIT AND LOSS ACCOUNT) AMOUNTING TO IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 21 RS.40,23,17,330 SINCE, THE SAME IS CAPITAL IN NATURE AND NOT TAXABLE (I.E. IN RELATION TO REPAYMENT OF SHARE APPLICATION MONEY AMOUNTING TO RS.25,26,39,693 AND REPAYMENT OF FIXED ASSET/ CAPITAL CREDITORS AMOUNTING TO RS.14,96,77,637). (REFER PAGE 338 OF THE PAPER-BOOK) IN THE TP DOCUMENTATION MAINTAINED, THE APPELLANT HAD DISCLOSED AN AMOUNT OF RS.54,13,17,857 AS FOREIGN EXCHANGE LOSS AND AN AMOUNT OF RS.20,45,06,547 AS FOREIGN EXCHANGE GAIN RESULTING IN A NET FOREIGN EXCHANGE LOSS OF RS.33,68,11,257 (SAME AMOUNT AS DISCLOSED IN THE FINANCIAL STATEMENT). HOWEVER, IN THE TP DOCUMENTATION MAINTAINED, THERE WERE CERTAIN INCONSISTENCIES FROM A DISCLOSURE STANDPOINT IN RELATION TO THE FOREIGN EXCHANGE GAIN AND LOSS VIS. A. VIS. THE ACTUAL GAINS AND LOSS AS DETAILED IN THE TABLE ABOVE. (REFER PAGE NO. 445 OF THE PAPER-BOOK). THE HON'BLE DRP WHILE ANALYSING THE NATURE OF FOREIGN EXCHANGE GAINS OF THE APPELLANT, WAS OF THE OPINION THAT FOREIGN EXCHANGE GAIN OF RS.20,45,06,547 WHICH IS SHOWN IN THE TP DOCUMENTATION, IS ON THE REVENUE ACCOUNT. HOWEVER, IN RELATION TO FOREIGN EXCHANGE GAIN OF RS.40,23,17,330 WHICH IS REDUCED IN THE COMPUTATION OF INCOME, DRP WAS OF THE OPINION THERE IS NO CORRESPONDING CREDIT FOR SUCH GAINS IN THE PROFIT AND LOSS ACCOUNT AND HENCE IT DIRECTED TO AO TO NOT ALLOW REDUCTION CLAIMED BY THE APPELLANT IN ITS COMPUTATION OF INCOME IN RELATION TO SUCH AMOUNT (I.E. RS.40,23,17,330). IN THIS REGARD, THE ASSESSEE WISHES TO SUBMIT THAT, THE PROFITS BEFORE TAX (WHICH IS THE STARTING POINT OF DETERMINING TAXABLE INCOME IN THE TAX COMPUTATION OF THE ASSESSEE) HAS BEEN CAPTURED FROM THE FINANCIAL STATEMENTS. IN THIS REGARD, WE WISH TO BRING TO YOUR ATTENTION THAT IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 22 SUCH PROFITS TAKES INTO ACCOUNT THE NET FOREIGN EXCHANGE LOSS AMOUNTING TO RS.33,68,11,257, WHICH INCLUDES GAINS/LOSSES OF BOTH REVENUE AND CAPITAL ACCOUNT TRANSACTIONS (NETTED OFF - THE PARTICULARS OF WHICH HAS BEEN PROVIDED IN THE TABLE ABOVE). WHILE COMPUTING THE TAXABLE INCOME, ASSESSEE, IN LINE WITH THE PROVISIONS OF THE ACT, HAS REDUCED THE GAINS AMOUNTING TO INR 40,23,17,330 FOR BEING CAPITAL IN NATURE. OUR CONTENTION FOR CONSIDERING SUCH EXPENSES AS CAPITAL HAS BEEN PROVIDED IN BELOW. IT IS TO BE NOTED THAT OF THE EXCHANGE GAIN OF RS.14,40,32,302 ON RESTATEMENT OF CREDITORS FOR FIXED ASSETS ARE NOT TAXABLE IN VIEW OF THE DECISIONS OF SUPREME COURT DECISION IN CASE OF SUTLEJ COTTON MILLS LTD. VS. CIT (116 ITR 1) AND BOMBAY HC DECISION IN CASE OF V.S. DEMPO & CO PVT. LTD (206 ITR 291), WHICH HAS SPECIFICALLY HELD THAT GAIN/ LOSS ON ARISING ON FIXED CAPITAL ON ACCOUNT OF ALTERATION IN EXCHANGE RATE IS CAPITAL IN NATURE. FURTHER, IN CONNECTION WITH FOREIGN EXCHANGE GAIN OF RS.25,26,39,693 INCURRED ON SHARE APPLICATION MONEY, IT IS SUBMITTED THAT SAME IS CAPITAL IN NATURE, IN VIEW OF DELHI HC DECISION IN CASE OF JAGATJIT INDUSTRIES LTD (337 1TR 21), WHICH HAS HELD THAT SINCE AMOUNT RAISED THROUGH ISSUE OF EQUITY SHARES IS TO BE TREATED AS CAPITAL RECEIPT IRRESPECTIVE OF THE END USE OF THE SHARE CAPITAL AND, THEREFORE, THE GAINS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS IN RESPECT OF SHARE CAPITAL COLLECTED IN FOREIGN EXCHANGE IS CAPITAL RECEIPT. GIVEN THE ABOVE, THE ASSESSEE WISHES TO SUBMIT THAT FOREIGN EXCHANGE GAIN ON ACCOUNT OF CAPITAL ACCOUNT TRANSACTIONS AMOUNTING TO RS.40,23,17,330 WAS CLAIMED AS A REDUCTION IN THE COMPUTATION OF INCOME, AS IT IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 23 WAS ALREADY INCLUDED IN THE NET FOREIGN EXCHANGE LOSS AMOUNTING TO RS.33,68,11,257 (DEBITED TO P&L ACCOUNT). ACCORDINGLY, NON-GRANTING OF REDUCTION OF THE SAID FOREIGN EXCHANGE GAINS WOULD TANTAMOUNT TO TAXING IT WHICH IS AGAINST THE PRINCIPALS OF TAX LAWS, SINCE THE SAID AMOUNT PERTAINS TO CAPITAL ACCOUNT TRANSACTIONS. GIVEN THE ABOVE, THE ASSESSEE PRAYS BEFORE THE HON'BLE TRIBUNAL TO REVERSE THE DIRECTIONS OF THE HON'BLE DRP AND DIRECT THE AO TO ALLOW THE REDUCTION IN RESPECT OF FOREX GAIN WHICH IS CAPITAL IN NATURE AMOUNTING TO RS.40,23,03,313 WHILE COMPUTING THE TAXABLE INCOME OF THE ASSESSEE. THE HON'BLE DRP ALSO DIRECTED THAT, IF THE ASSESSEE CLAIMED ANY PART OF FOREIGN EXCHANGE GAIN AS CAPITAL IN NATURE, THEN THE SAME WOULD NEED TO BE ADDED TO THE NET FOREIGN EXCHANGE LOSS AMOUNTING TO RS.33,68,11,257 FOR THE PURPOSE OF COMPUTATION OF OPERATING MARGINS OF THE ASSESSEE (GIVEN THAT THE DRP GAVE SUO MOTA DIRECTIONS TO CONSIDER FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE). IN THIS REGARD, THE ASSESSEE WISHES TO SUBMIT THAT WHILE BIFURCATION OF FOREIGN EXCHANGE FLUCTUATION GAIN/ LOSS AS CAPITAL! REVENUE IN NATURE IS POSSIBLE IN THE CASE OF THE ASSESSEE, THE SAME WOULD NOT BE ABLE TO BE RETRIEVED IN THE CASE OF COMPARABLE COMPANIES AS THE ASSESSEE WOULD NOT BE PRIVY TO THEIR TAX COMPUTATION. ACCORDINGLY, GIVEN THAT A CONSISTENT APPROACH NEEDS TO BE ADOPTED WHILE DETERMINING THE OPERATING MARGINS IN THE CASE OF THE ASSESSEE AS WELL AS COMPARABLE COMPANIES, IT IS IMPERATIVE ON THE PART OF THE ASSESSEE / TAX AUTHORITIES TO CONSIDER THE NET FOREIGN EXCHANGE FLUCTUATION GAIN / LOSS AS OPERATING IN NATURE (GIVEN THE FACTS THAT A BIFURCATION IS NOT POSSIBLE IN THE CASE OF IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 24 COMPARABLE COMPANIES). 6.4 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE, RELIED ON THE ORDER OF THE DRP AND ALSO SUBMITTED THAT THE ISSUE MAY BE REMITTED BACK TO THE AO / TPO FOR THE PURPOSE OF QUANTIFICATION OF FOREIGN EXCHANGE LOSS THOUGH IT IS CONSIDERED AS OPERATING EXPENSES IN NATURE. 6.5 WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE ARE IN FULL AGREEMENT WITH THE FINDING OF THE LOWER AUTHORITIES. HOWEVER, THE BEFORE THE LOWER AUTHORITIES THE ASSESSEE FAILED TO FURNISH THE DETAILS WITH REGARD TO THE FOREIGN EXCHANGE GAIN / OR LOSS ALONG WITH EVIDENCES TO SUPPORT THE SAME. WE ALSO FIND THAT IDENTICAL ISSUE CAME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN IT(TP)A 271/BANG/2014 (ORDER DATED 14.08.2014), WHEREIN THE TRIBUNAL HELD AS UNDER:- 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN THE COURSE OF HEARING BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE ALSO FILED A SEGMENT WISE BREAK UP OF FOREIGN EXCHANGE FLUCTUATION GAIN, THE SAME IS GIVEN AS ANNEXURE-I TO THIS ORDER. IT CAN BE SEEN FROM THE AFORESAID CHART GIVEN BY THE ASSESSEE THAT THE TOTAL FOREIGN EXCHANGE GAIN ON ACCOUNT OF REALIZATION OF PROCEEDS FROM DEBTORS, TAKEN TO CREDITORS, INTER-COMPANY STATEMENTS ETC. WAS A SUM OF RS.179,01,08,756. OUT OF THE ABOVE, THE ASSESSEE ON HIS OWN HAS EXCLUDED FOREIGN EXCHANGE FLUCTUATION ON ACCOUNT OF ADVANCES TOWARDS SHARE CAPITAL CHARGED TO P&L ACCOUNT AND FOREIGN EXCHANGE FLUCTUATION IN THE MATTER OF PURCHASE OF FIXED ASSETS CHARGED TO P&L ACCOUNT. IT IS THUS CLEAR FROM THE CHART THAT A SUM OF RS.37,89,23,185 WHICH WAS SOUGHT TO BE ADDED AS PART OF THE OPERATING INCOME ON RENDERING SOFTWARE DEVELOPMENT SERVICES IS ONLY ON ACCOUNT OF TRANSACTIONS OF RENDERING SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS AE AND THE FOREIGN EXCHANGE FLUCTUATION AT THE TIME OF REALIZATION OF THE PAYMENT FOR IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 25 RENDERING SOFTWARE DEVELOPMENT SERVICES. IT IS THEREFORE CLEAR THAT THE FOREIGN EXCHANGE FLUCTUATION IN QUESTION HAS TO BE TREATED AS PART OF THE OPERATING INCOME OF SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE AND THE OPERATING PROFIT TO OPERATING COST HAS TO BE DETERMINED ACCORDINGLY. THE DRP HAS REFUSED TO FOLLOW THE DECISION OF ITAT BANGALORE BENCH IN THE CASE OF SAP LABS INDIA PVT. LTD. (SUPRA). IN OUR VIEW, THE DECISION RENDERED BY THE TRIBUNAL IS BINDING ON THE DRP AND THE DRP CANNOT BE HEARD TO SAY THAT THE DECISION RENDERED BY THE TRIBUNAL IS INCORRECT AND REFUSE TO FOLLOW THE SAME. IN THE GIVEN FACTS AND CIRCUMSTANCES, WE HOLD THAT THE FOREIGN EXCHANGE GAIN FROM SOFTWARE DEVELOPMENT SERVICES HAS TO BE CONSIDERED AS PART OF THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES WHILE COMPUTING THE MARGIN OF THE ASSESSEE AND ACCORDINGLY THE MARGIN OF 12.67% COMPUTED BY THE ASSESSEE IS DIRECTED TO BE ADOPTED. 6.6 BEING SO, WE REMIT THE ISSUE TO THE FILES OF THE AO /TPO WITH A DIRECTION TO THE ASSESSEE TO FURNISH THE DETAILS OF FOREIGN EXCHANGE GAIN OR LOSS. WE ALSO DIRECT THE A.O. TO DECIDE THE ISSUE IN THE LIGHT OF THE ABOVE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IN IT(TP)A NO.271/BANG/2014. IT IS ORDERED ACCORDINGLY. TRANSFER PRICING MATTERS 7. BY WAY OF THIS GROUND, THE REVENUE IS CHALLENGING EXCLUSION OF FOLLOWING FIVE COMPARABLES. ICRA TECHNO ANALYTICS LIMITED 7.1 THE LEARNED AR SUBMITTED THAT THE COMPANY IS NOT A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER, AND BASED ON THE OBSERVATION IN THE ANNUAL REPORT, THE COMPANY IS ENGAGED IN PROVIDING HOST OF OTHER SERVICES SUCH AS ENGINEERING SERVICES, WEB HOSTING AND ALSO BUSINESS PROCESS OUTSOURCING. ACCORDING TO THE AR, NO SEGMENTAL INFORMATION IS AVAILABLE AND THEREFORE, IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 26 THE COMPANY CANNOT BE RETAINED AS COMPARABLE. THE DRP HELD THAT THE SEGMENTAL INFORMATION IS AVAILABLE FOR TWO SEGMENTS I.E., SERVICES AND SALES. HOWEVER, IT IS EV IDETN FROM THE ANNUAL REPORT THAT THE SERVICE SEGMENT COMPRISES OF SOFTWARE DEVELOPMENT, SOFTWARE CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT, WEB HOSTING ETC FOR WHICH NO SEGMENTAL INFORMATION IS AVAILABLE AND THEREFORE, THE OBJECTION OF THE ASSESSEE IS FOUND ACCEPTABLE. ACCORDINGLY, THE DRP DIRECTED THE AO TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES. 7.1.1 WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THIS ISSUE WAS CONSIDERED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V. M/S.ELECTRONICS FOR IMAGING INDIA PVT. LTD. IN IT(TP)A NO.212/ BANG/ 2015 FOR ASSESSMENT YEAR 2010-2011, VIDE ORDER DATED 24.02.2016, WHEREIN THE TRIBUNAL HELD AS UNDER:- 14. AT THE OUTSET, WE NOTE THAT APART FROM HAVING THE RELATED PARTY REVENUE AT 20.94% OF THE TOTAL REVENUE, THIS COMPANY WAS ALSO FOUND TO BE FUNCTIONALLY NOT COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE. THE DRP HAS GIVEN ITS FINDING AT PAGES 13 TO 14 AS UNDER:- HAVING HEARD THE CONTENTIONS, ON PERUSAL OF THE ANNUAL REPORT, IT IS NOTICED BY US THAT THE SEGMENTAL INFORMATION IS AVAILABLE FOR TWO SEGMENTS I.E., SERVICES AND SALES. HOWEVER, IT IS EVIDENT FROM THE ANNUAL REPORT THAT THE SERVICE SEGMENT COMPRISES OF SOFTWARE DEVELOPMENT, SOFTWARE DEVELOPMENT, SOFTWARE CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT, WEB HOSTING, ETC. FOR WHICH NO SEGMENTAL INFORMATION IS AVAILABLE AND THEREFORE, THE OBJECTION OF THE ASSESSEE IS FOUND ACCEPTABLE. ACCORDINGLY, ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES. 15. WE FIND THAT THE FACTS RECORDED BY THE DRP IN RESPECT OF BUSINESS ACTIVITY OF THIS COMPANY ARE NOT IN DISPUTE. THEREFORE, WHEN THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES OF SOFTWARE DEVELOPMENT AND CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT & HOSUIGN AND SUBSTANTIALLY DIVERSIFIED ITSELF INTO DOMAIN OF BUSINESS ANALYSIS AND IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 27 BUSINESS PROCESS OUTSOURCING, THEN THE SAME CANNOT BE REGARDED AS FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE WHO IS RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS AE. 16. IN VIEW OF THE ABOVE FACTS, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. 7.1.2 IN VIEW OF THE DECISION OF THE CO-ORDINATE BENCH, CITED SUPRA, WE DIRECT THE AO/TPO TO EXCLUDE THE COMPARABLE ON SIMILAR REASONS. INFOSYS LIMITED 7.2 THE LEARNED AR SUBMITTED THAT IN ADDITION TO THE DIFFERENCE IN THE LEVEL OF FUNCTIONS, INFOSYS LIMITED OWNS PATENTS AND ALSO EARNED REVENUE FROM SOFTWARE PRODUCTS, HAS INCURRED HUGE EXPENDITURE IN R & D, OWN INTANGIBLES, HAVE THE BRAND VALUE AND THEREFORE CANNOT BE RETAINED AS COMPARABLE. THE LEARNED AR FURTHER SUBMITTED THAT THE COMPANY HAS BEEN EXCLUDED AS COMPARABLE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-2010 BY THE BANGALORE BENCHES OF THE TRIBUNAL. 7.2.1 THE DRP OBSERVED THAT THE COMPANY WAS EXCLUDED BY THE TRIBUNAL FOR THE A.Y. 2009-2010 IN ASSESSEES OWN CASE DUE TO FUNCTIONAL DIFFERENCES. IN ADDITION TO THE SAME, THE DRP OBSERVED FROM THE ANNUAL REPORT THAT ON SITE REVENUE DURING THE YEAR IS 48.7%, AND INCOME COMPRISED OF RS.20,215 CRORE FROM SOFTWARE SERVICES AND RS.925 CRORE FROM PRODUCTS. THE DRP FURTHER HELD THAT THE COMPANY INCURRED SELLING AND MARKETING EXPENSES TO THE EXTENT OF 4.6% OF TOTAL REVENUE AND ESTABLISHED A SOFTWARE ENGINEERING AND TECHNOLOGY LAB. IT HAS BEEN EMPHASIZED THAT INFOSYS BRAND IS THE MOST INTANGIBLE ASSET THE COMPANY OWN. CONSIDERING ALL THE ABOVE DIFFERENCE IN RESPECT OF WHICH NO ACCURATE ADJUSTMENT CAN BE MADE, THE DRP THUS BY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE HELD THAT THE FUNCTIONAL PROFILE OF THE COMPANY FOR THE ASSESSMENT YEAR REMAINS THE SAME. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 28 THEREFORE, THE DRP DIRECTED THE A.O. TO EXCLUDE THE INFOSYS LIMITED FROM COMPARABLES. 7.2.2 AFTER HEARING BOTH THE PARTIES AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS ISSUE ALSO CONSIDERED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN CASE OF DCIT V. M/S.ELECTRONICS FOR IMAGING INDIA PVT. LTD. IN IT(TP)A NO.212/BANG/2015 (SUPRA), WHEREIN THE TRIBUNAL HELD AS UNDER:- 19. WE HAVE HEARD THE LD.DR AS WELL AS LD.AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE NOTE THAT IN THE CASE OF AGNITY INDIA PVT. LTD. (2015) 58 TAXMANN.COM 167 (DELHI-TRIB.), THE DELHI BENCH OF THE TRIBUNAL HAS CONSIDERED THE COMPARABILITY OF THIS COMPANY AND THE FINDINGS OF THE DELHI BENCH OF THE TRIBUNAL HAS BEEN CONFIRMED BY THE HONBLE DELHI HIGH COURT. THE HONBLE DELHI HIGH COURT HAS OBSERVED THAT THIS COMPANY HAVING BRAND VALUE AS WELL AS INTANGIBLE ASSETS CANNOT BE COMPARED WITH AN ORDINARY ENTITY PROVIDE CAPTIVE SERVICE. WE FURTHER NOTE THAT THIS COMPANY PROVIDES END TO END BUSINESS SOLUTIONS THAT LEVERAGE CUTTING EDGE TECHNOLOGY THEREBY ENABLING CLIENTS TO ENHANCE BUSINESS PERFORMANCE. THIS COMPANY ALSO PROVIDES SOLUTIONS THAT SPAN THE ENTIRE SOFTWARE LIFECYCLE ENCOMPASSING TECHNICAL CONSULTING, DESIGN, DEVELOPMENT, RE-ENGINEERING, MAINTENANCE, SYSTEMS INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICE. IN ADDITION, THE COMPANY OFFERS SOFTWARE PRODUCT FOR BANKING INDUSTRY. THUS, THIS COMPANY IS ENGAGED IN DIVERSIFIED SERVICES INCLUDING DESIGN AS WELL AS TECHNICAL CONSULTANCY, CONSULTING, RE-ENGINEERING, MAINTENANCE, SYSTEMS INTEGRATION AS WELL AS PRODUCTS FRO BANKING INDUSTRY. 20. IN VIEW OF THE ABOVE FACTS THAT INFOSYS LTD. HAVING A HUGE BRAND VALUE AND INTANGIBLES AS WELL AS HAVING BARGAINING POWER, THE SAME CANNOT BE COMPARED WITH THE ASSESSEE WHO IS PROVIDING SERVICES TO ITS AE. 7.2.3 IN VIEW OF THE DECISION OF THE CO-ORDINATE BENCH, CITED SUPRA, WE DIRECT THE AO/TPO TO EXCLUDE INFOSYS LIMITED AS COMPARABLE, ON SIMILAR REASONS. KALS INFORMATION SYSTEMS LIMITED IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 29 7.3 THE LEARNED AR SUBMITTED THAT THE COMPANY IS ENGAGED IN THE SOFTWARE DEVELOPMENT SERVICES AS WELL AS SALE OF SOFTWARE PRODUCTS FOR WHICH NO SEGMENTAL INFORMATION IS AVAILABLE. THEREFORE, THE COMPANY CANNOT BE RETAINED AS COMPARABLE. IT IS ALSO BROUGHT TO OUR NOTICE THAT THE BANGALORE BENCHES OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009- 2010 HAS EXCLUDED THE ABOVE COMPANY FROM THE COMPARABLES. 7.3.1 THE LEARNED DRP OBSERVED THAT THE COMPANY WAS EXCLUDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2009-2010 DUE TO FUNCTIONAL DIFFERENCES. FURTHER, THE DRP OBSERVED THAT OTHER INCOME OF RS.21.03 LAKH WHICH MAINLY INCLUDED THE INTEREST, DIVIDEND AND OTHER INCOME HAS BEEN INCLUDED IN THE SEGMENTAL PROFIT OF SOFTWARE SEGMENT OF RS.55.53 LAKH AND THEREFORE, THE SEGMENTAL INFORMATION IS NOT RELIABLE. THEREFORE, THE DRP HELD THAT THE COMPANY CANNOT BE RETAINED AS COMPARABLE, AND DIRECTED THE A.O. TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES. 7.3.2 WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE TRIBUNAL IN THE CASE OF DCIT V. M/S.ELECTRONICS FOR IMAGING INDIA PVT. LTD (SUPRA) HAS EXCLUDED KALS INFORMATION SYSTEMS LIMITED AS COMPARABLE, BY HOLDING AS UNDER:- 23. WE HAVE HEARD THE LD.DR AS WELL AS LD.AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD.DR HAS NOT DISPUTED THE FACT THAT COMPARABILITY OF THIS COMPANY HAS BEEN EXAMINED BY THIS TRIBUNAL IN A SERIES OF DECISIONS INCLUDING IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA LTD. ITA NO.1054/BANG/2011 DATED 23.11.2012. WE FURTHER NOTE THAT IN THE BALANCE SHEET OF THIS COMPANY AS ON 31.3.2010, THERE ARE INVENTORIES OF RS.60,47,977. THEREFORE, WHEN THIS COMPANY IS IN THE BUSINESS OF SOFTWARE PRODUCTS, THE SAME CANNOT BE COMPARED WITH A PURE SOFTWARE DEVELOPMENT SERVICES PROVIDER. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED FINDINGS OF THE DRP. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 30 PERSISTENT SYSTEMS LIMITED 7.4 THE LD.DRP OBSERVED THAT THE RECEIPT OF RS.6.67 CRORE HAS BEEN SHOWN FROM SALE OF SOFTWARE SERVICES AND PRODUCTS. HOWEVER, NO SEGMENTAL INFORMATION IS AVAILABLE IN REGARD TO SOFTWARE SERVICES AND PRODUCTS SEPARATELY. THEREFORE, THE DRP WAS OF THE VIEW THAT IN ABSENCE OF SEGMENTAL INFORMATION, PERSISTENT SYSTEMS LIMITED CANNOT BE RETAINED AS COMPARABLE, AND ACCORDINGLY, THEY DIRECTED THE AO TO EXCLUDE THE SAID COMPANY FROM THE LIST OF COMPARABLES. 7.4.1 AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT PERSISTENT SYSTEMS LIMITED HAS BEEN EXCLUDED FROM THE LIST OF COMPARABLES BY THE TRIBUNAL IN THE CASE OF CGI INFORMATION SYSTEMS AND MANAGEMENT CONSULTANTS PRIVATE LIMITED V. ACIT IN IT(TP)A NO.586/BANG/2015 & 183/BANG/2017 FOR ASSESSMENT YEARS 2010-2011 AND 2012-2013 (ORDER DATED 11.04.2018) FOR THE PURPOSE OF ARRIVING AT THE ARITHMETIC MEAN OF COMPARABLE COMPANIES FOR THE PURPOSE OF COMPARISION WITH THE PROFIT MARGIN. THEREFORE, IN VIEW OF THE ORDER OF THE CO-ORDINATE BENCH OF THE TRIBUNAL (SUPRA), WE DIRECT TO EXCLUDE PERSISTENT SYSTEMS LIMITED FROM THE FINAL LIST OF COMPARABLES. TATA ELXSI LIMITED 7.5 THE LEARNED AR SUBMITTED THAT THE COMPANY OPERATES IN TWO SEGMENTS I.E., SOFTWARE DEVELOPMENT & SERVICES; AND SYSTEM INTEGRATION & SUPPORT. SOFTWARE DEVELOPMENT AND SERVICES COMPRISES OF SERVICES SUCH AS THE EMBEDDED PRODUCT DESIGN, INDUSTRIAL DESIGN SERVICES, ANIMATION AND VISUAL EFFECTS, THEREFORE, THE ABOVE COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY. THE LEARNED AR FURTHER SUBMITTED THAT THE ABOVE COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE-COMPANY. HE FURTHER IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 31 SUBMITTED THAT THIS ISSUE IS COVERED BY THE DECISION OF THE ITAT BANGALORE BENCHES FOR A.Y.2009-2010 IN ASSESSEES OWN CASE. 7.5.1 THE DRP OBSERVED FROM THE ANNUAL REPORT OF THE ABOVE COMPANY AND HELD THAT THE ABOVE COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE-COMPANY. THE DRP ALSO FOLLOWED THE DECISION OF THE ITAT BANGALORE BENCHES IN ASSESSEES OWN CASE FOR A.Y. 2009-2010. ACCORDINGLY, THE DRP DIRECTED THE A.O. TO EXCLUDE THE ABOVE COMPANY FROM THE LIST OF COMPARABLES. 7.5.2 AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT TATA ELXSI LIMITED HAS BEEN EXCLUDED FROM THE LIST OF COMPARABLES BY THE TRIBUNAL IN THE CASE OF CGI INFORMATION SYSTEMS AND MANAGEMENT CONSULTANTS PRIVATE LIMITED V. ACIT IN IT(TP)A NO.586/BANG/2015 & 183/BANG/2017 FOR ASSESSMENT YEARS 2010-2011 AND 2012-2013 (ORDER DATED 11.04.2018) FOR THE PURPOSE OF ARRIVING AT THE ARITHMETIC MEAN OF COMPARABLE COMPANIES FOR THE PURPOSE OF COMPARISION WITH THE PROFIT MARGIN. THEREFORE, IN VIEW OF THE ORDER OF THE CO-ORDINATE BENCH OF THE TRIBUNAL (SUPRA), WE DIRECT TO EXCLUDE TATA ELXSI LIMITED FROM THE FINAL LIST OF COMPARABLES. 7.5.3 IN VIEWS OF THE AFORESAID REASONINGS, WE ARE OF THE OPINION THAT THE LEARNED DRP IS JUSTIFIED IN EXCLUDING THE ABOVE FIVE COMPARABLE COMPANIES FROM THE FINAL LIST OF COMPARABLES. ACCORDINGLY, THIS GROUND OF APPEAL BY THE REVENUE IS DISMISSED. THE DEPARTMENT CHALLENGED THE EXCLUSION OF FOLLOWING COMPARABLES IN TECHNICAL SUPPORT SERVICE SEGMENTS. ACROPETAL TECHNOLOGIES LIMITED 8.1 THE LD.DRP AFTER EXAMINING THE ANNUAL REPORT OF THIS COMPANY OBSERVED FROM THE PROFIT AND LOSS ACCOUNT THAT OUT OF THE TOTAL EXPENSES OF IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 32 RS.87.26 CRORE, THE EXPENSES OF RS.55.85 CRORE INCURRED ON ONSITE DEVELOPMENT OF SOFTWARE WHICH WORKS OUT TO 64% OF THE TOTAL EXPENSES WHICH MAKES IT CLEAR THAT THE COMPANY IS PREDOMINANTLY ENGAGED IN PROVIDING SERVICES ONSITE AND THEREFORE, NOT COMPARABLE WITH THE ASSESSEE. THE DRP ALSO HELD THAT THE EMPLOYEES COST FILTER NEED TO BE APPLIED IN ITS SEGMENT ALSO, ON THAT ACCOUNT ALSO AS THE EMPLOYEES COST IS LESS THAN 25%. ACCORDINGLY, THE DRP DIRECTED THE AO TO EXCLUDE ACROPETAL TECHNOLOGIES LIMITED FROM THE LIST OF COMPARABLES. 8.1.1 AFTER HEARING BOTH SIDES, WE FIND THAT THIS ISSUE CAME FOR CONSIDERATION BEFORE THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF TESCO HINDUSTAN SERVICE CENTRE PVT. LTD. IN IT(TP)A NO.191/BANG/2015. THE TRIBUNAL VIDE ORDER DATED 25 TH JANUARY, 2017 FOR ASSESSMENT YEAR 2010-2011 HELD AS UNDER:- 13. AS REGARDS ACCENTIA TECHNOLOGIES LTD. AND ICRA ONLINE LTD. THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2008-09 HAS EXCLUDED THESE TWO COMPANIES FROM THE SET OF COMPARABLES IN PARA 5 AS UNDER : 5. THEREAFTER HE SUBMITTED THAT THE FOLLOWING COMPANIES SHOULD BE EXCLUDED ON THE BASIS OF FUNCTIONAL DISSIMILARITY AND IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE ON THE TRIBUNAL ORDER RENDERED IN THE CASE OF M/S. FLEXTRONICS TECH. (INDIA) PVT. LTD. VS. DCIT IN IT(TP)A NO.1559(B)/2012 DATED 23.10.2015, COPY AVAILABLE ON PAGE NOS.17 TO 38 OF COMPILATION OF CASE LAWS SUBMITTED BEFORE THE TRIBUNAL. A) ACCENTIAL TECH. LTD. (SEG.) B) ACROPETAL TECH. LTD. (SEG.) C) CORAL HUBS LTD. TESCO HINDUSTAN SERVICE CENTRE PVT. LTD. D) CROSSDOMAIN SOLUTIONS LTD. E) ECLERX SERVICES LTD. F) GENESYS INTERNATIONAL CORPN. LTD. G) MOLD TEK TECHNOLOGIES LTD. WE FURTHER NOTE THAT THE FUNCTIONAL COMPARABILITY HAS BEEN EXAMINED IN DETAILED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF EQUANT SOLUTIONS INDIA PVT. LTD. VS. DCIT IN IT(TP)A NO.1202/DEL/2015 AS WELL AS IN THE CASE OF ITO VS. INTERWOVEN SOFTWARE SERVICES (INDIA) PVT. LTD. IN ITA NO.461/BANG/2015. FURTHER IN THE CASE OF ACROPETAL TECHNOLOGIES LTD. (SEG.), THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KODIAK NETWORKS (INDIA) PVT. LTD. VS. DCIT IN IT(TP)A NO.1540/BANG/2012 HAS CONSIDERED THE FUNCTIONAL COMPARABILITY AND FOUND THAT THIS COMPANY IS NOT COMPARABLE WITH A CAPTIVE SERVICE PROVIDER. ACCORDINGLY WE IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 33 DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE COMPANIES FROM SET OF COMPARABLES. 8.1.2 BEING SO, THE EXCLUSION OF ACROPETAL TECHNOLOGIES LIMITED IN THE LIST OF COMPARABLES IS CONFIRMED. ECLERX SERVICES LIMITED 8.2 THE DRP OBSERVED THAT THIS COMPANY IS ENGAGED IN THE PROVISION OF IT ENABLED SERVICES WHICH ARE IN THE NATURE OF KPO. THE DRP FURTHER OBSERVED THAT THIS COMPANY IS A KNOWLEDGE PROCESS OUTSOURCING COMPANY WHICH CANNOT BE COMPARED WITH THE ROUTINE IT ENABLED SERVICES PROVIDER BY THE ASSESSEE COMPANY. THE DRP ALSO FOLLOWED THE ORDER OF THE SPECIAL BENCH OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRE (INDIA) PVT. LTD. V. ACIT [ITA NO.7466/MUM/2012, IN WHICH THE ABOVE COMPANY WAS DIRECTED TO BE EXCLUDED BY HOLDING THAT THE SAID COMPANY PROVIDES DATA ANALYTICS AND DATA PROCESS SOLUTIONS TO SOME OF THE LARGEST BRANDS IN THE WORLD AND IS RECOGNISED AS EXPERTS IN CHOSEN MARKETS-FINANCIAL SERVICES AND RETAIL AND MANUFACTURING. THESE SOFTWARE AUTOMATION TOOLS INCREASE PRODUCTIVITY, ALLOWING CUSTOMERS TO BENEFIT FROM FURTHER COST SAVING AND OUTPUT GAINS WITH BETTER CONTROL OVER QUALITY. KEEPING IN VIEW THE NATURE OF SERVICES RENDERED BY THIS COMPANY AND ITS FUNCTIONAL PROFILE, THE COMPANY IS ALSO MAINLY ENGAGED IN PROVIDING HIGHEND SERVICES INVOLVING SPECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD AND THE SAME CANNOT BE COMPARED WITH THE ASSESSEE COMPANY WHICH IS MAINLY ENGAGED IN PROVIDING LOW-END SERVICES TO THE GROUP CONCERNS. THE LD.DRP ALSO FOLLOWED THE ORDERS OF THE ITAT BANGALORE IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. V. DCIT [ITA NO.1086/BANG/2011] AND SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. V. ITO [ITA NO.1316/BANG/2012], WHEREIN ALSO THE TRIBUNAL DIRECTED THE AO TO EXCLUDE ECLERX SERVICES LIMITED FROM THE LIST OF COMPARABLES. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 34 8.2.1 AFTER HEARING BOTH SIDES, WE FIND THAT SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF TESCO HINDUSTAN SERVICE CENTRE PVT. LTD. (SUPRA), WHEREIN THE HELD AS UNDER:- 14.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT RECORD. AT THE OUT SET, WE NOTE THAT THE COMPARABILITY OF M/S ECLERX SERVICES LTD. HAS BEEN EXAMINED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA ) (P) LTD (SUPRA) IN PARA 82 AND 83 AS UNDER : 82. IN SO FAR AS M/S ECLERX SERVICES LIMITED IS CONCERNED, THE RELEVANT INFORMATION IS AVAILABLE IN THE FORM OF ANNUAL REPORT FOR FINANCIAL YEAR 2007-08 PLACED AT PAGE 166 TO 183 OF THE PAPER BOOK. A PERUSAL OF THE SAME SHOWS THAT THE SAID COMPANY PROVIDES DATA ANALYTICS AND DATA PROCESS SOLUTIONS TO SOME OF THE LARGEST BRANDS IN THE WORLD AND IS RECOGNIZED AS EXPERTS IN CHOSEN MARKETS-FINANCIAL SERVICES AND RETAIL AND MANUFACTURING. IT IS CLAIMED TO BE PROVIDING COMPLETE BUSINESS SOLUTIONS BY COMBINING PEOPLE, PROCESS IMPROVEMENT AND AUTOMATION. IT IS CLAIMED TO HAVE EMPLOYED OVER 1500 DOMAIN SPECIALISTS WORKING FOR THE CLIENTS. IT IS CLAIMED THAT ECLERX IS A DIFFERENT COMPANY WITH INDUSTRY SPECIALIZED SERVICES FOR MEETING COMPLEX CLIENT NEEDS, DATA ANALYTICS KPO SERVICE PROVIDER SPECIALIZING IN TWO BUSINESS VERTICALS - FINANCIAL SERVICES AND RETAIL AND MANUFACTURING. IT IS CLAIMED TO BE ENGAGED IN PROVIDING SOLUTIONS THAT DO NOT JUST REDUCE COST, BUT HELP THE CLIENTS INCREASE SALES AND REDUCE RISK BY ENHANCING EFFICIENCIES AND BY PROVIDING VALUABLE INSIGHTS THAT EMPOWER BETTER DECISIONS. M/S ECLERX SERVICES PVT. LTD. IS ALSO CLAIMED TO HAVE A SCALABLE DELIVERY MODEL AND SOLUTIONS OFFERED THAT INCLUDE DATA ANALYTICS, OPERATIONS MANAGEMENT, AUDITS AND RECONCILIATION, METRICS MANAGEMENT AND REPORTING SERVICES. IT ALSO PROVIDES TAILORED PROCESS OUTSOURCING AND MANAGEMENT SERVICES ALONG WITH A MULTITUDE OF DATA AGGREGATION, MINING AND MAINTENANCE SERVICES. IT IS CLAIMED THAT THE COMPANY HAS A TEAM DEDICATED TO DEVELOPING AUTOMATION TOOLS TO SUPPORT SERVICE DELIVERY. THESE SOFTWARE AUTOMATION TOOLS INCREASE PRODUCTIVITY, ALLOWING CUSTOMERS TO BENEFIT FROM FURTHER COST SAVING AND OUTPUT GAINS WITH BETTER CONTROL OVER QUALITY. KEEPING IN VIEW THE NATURE OF SERVICES RENDERED BY M/S ECLERX SERVICES PVT. LTD. AND ITS FUNCTIONAL PROFILE, WE ARE OF THE VIEW THAT THIS COMPANY IS ALSO MAINLY ENGAGED IN PROVIDING HIGH-END SERVICES INVOLVING SPECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD AND THE SAME CANNOT BE COMPARED WITH THE ASSESSEE COMPANY WHICH IS MAINLY ENGAGED IN PROVIDING LOW-END SERVICES TO THE GROUP CONCERNS. 83. FOR THE REASONS GIVEN ABOVE, WE ARE OF THE VIEW THAT IF THE FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE COMPANY FOR ITS AES ARE COMPARED WITH THE FUNCTIONAL PROFILE OF M/S ECLERX SERVICES PVT.LTD. AND MOLD-TEC TECHNOLOGIES LTD., IT IS DIFFICULT TO FIND OUT ANY RELATIVELY EQUAL DEGREE OF COMPARABILITY AND THE SAID ENTITIES CANNOT BE TAKEN AS COMPARABLES FOR THE PURPOSE OF DETERMINING ALP OF THE TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AES. WE, THEREFORE, DIRECT THAT THESE TWO ENTITIES BE EXCLUDED FROM IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 35 THE LIST OF 10 COMPARABLES FINALLY TAKEN BY THE AO/TPO AS PER THE DIRECTION OF THE DRP. 14.2 AS DISCUSSED BY THE SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA ) (P) LTD (SUPRA), THIS COMPANY PROVIDES DATA ANALYSIS, OPERATING MANAGEMENT, AUDITS, RECONCILIATION, METRICS MANAGEMENT AND OPERATING SERVICES. IT HAS TWO BUSINESS VERTICALS FINANCIAL SERVICES, RETAIL AND MANUFACTURING. IT WAS FOUND TO HAVE BEING PROVIDING COMPLETE BUSINESS SOLUTIONS IN THE NATURE OF HIGH END SERVICES. THE NATURE AND DIFFERENT FIELD OF SERVICES PROVIDED BY THIS COMPANY CLEARLY SHOW THAT IT IS NOT FUNCTIONALLY COMPARABLE WITH THE ITES. ACCORDINGLY, WE DIRECT THE TPO/AO TO EXCLUDE THIS COMPANY FROM THE SET OF COMPARABLES. 8.2.2 BEING SO, THE EXCLUSION OF ECLERX SERVICES LIMITED FROM THE LIST OF COMPARABLES IS JUSTIFIED. ICRA ONLINE LIMITED 8.3 THE LD.DRP OBSERVED THAT THE TOTAL FOREIGN CURRENCY EARNING DURING THE YEAR IS 11.14 CRORE AS AGAINST THE TOTAL SERVICE REVENUE OF 18.35 CRORE WHICH INDICATES THAT ONLY 60% REVENUE IS COMING FROM EXPORT AS AGAINST THE 100% EXPORT OF THE ASSESSEE-COMPANY. THE LD.DRP FURTHER HELD THAT 75% EXPORT EARNING FILTER NEEDS TO BE APPLIED CONSISTENTLY FOR THE ITS SEGMENT ALSO AS AGAINST THE 25% EXPORT EARNING FILTER APPLIED BY THE TPO. ACCORDINGLY THE LD.DRP HELD THAT THIS COMPANY CANNOT BE RETAINED AS COMPARABLE AND DIRECTED THE AO TO EXCLUDE ICRA ONLINE LIMITED FROM THE LIST OF COMPARABLES. 8.3.1 AFTER HEARING BOTH SIDES, WE FIND THAT SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF TESCO HINDUSTAN SERVICE CENTRE PVT. LTD. (SUPRA), WHEREIN THE HELD AS UNDER:- 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2006-07 VIDE ORDER DT.18.10.2016 IN IT(TP)A NO.1633/BANG/2012 HAS CONSIDERED THE COMPARABILITY OF THESE FOUR COMPANIES AND REJECTED THESE COMPANIES BY CONSIDERING THE RPT AT 15% AS WELL AS FUNCTIONAL COMPARABILITY. WE FIND THAT THE DRP HAS GIVEN THE DETAILS OF RPT OF ALL THE 10 COMPANIES AT PAGE 11 AND THEREFORE THE FOLLOWING THREE COMPANIES WILL BE EXCLUDED AS NOT SATISFYING THE TOLERANCE RANGE OF 15% RPT FILTER. (I) FORTUNE INFOTECH LTD. RPT 25% IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 36 (II) ICRA ONLINE LTD. RPT 19.16% (III) SUNDARAM BUSINESS SERVICES LTD. RPT 29.44% 13. AS REGARDS ACCENTIA TECHNOLOGIES LTD. AND ICRA ONLINE LTD. THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2008-09 HAS EXCLUDED THESE TWO COMPANIES FROM THE SET OF COMPARABLES IN PARA 5 AS UNDER : 5. THEREAFTER HE SUBMITTED THAT THE FOLLOWING COMPANIES SHOULD BE EXCLUDED ON THE BASIS OF FUNCTIONAL DISSIMILARITY AND IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE ON THE TRIBUNAL ORDER RENDERED IN THE CASE OF M/S. FLEXTRONICS TECH. (INDIA) PVT. LTD. VS. DCIT IN IT(TP)A NO.1559(B)/2012 DATED 23.10.2015, COPY AVAILABLE ON PAGE NOS.17 TO 38 OF COMPILATION OF CASE LAWS SUBMITTED BEFORE THE TRIBUNAL. A) ACCENTIAL TECH. LTD. (SEG.) B) ACROPETAL TECH. LTD. (SEG.) C) CORAL HUBS LTD. TESCO HINDUSTAN SERVICE CENTRE PVT. LTD. D) CROSSDOMAIN SOLUTIONS LTD. E) ECLERX SERVICES LTD. F) GENESYS INTERNATIONAL CORPN. LTD. G) MOLD TEK TECHNOLOGIES LTD. WE FURTHER NOTE THAT THE FUNCTIONAL COMPARABILITY HAS BEEN EXAMINED IN DETAILED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF EQUANT SOLUTIONS INDIA PVT. LTD. VS. DCIT IN IT(TP)A NO.1202/DEL/2015 AS WELL AS IN THE CASE OF ITO VS. INTERWOVEN SOFTWARE SERVICES (INDIA) PVT. LTD. IN ITA NO.461/BANG/2015. FURTHER IN THE CASE OF ACROPETAL TECHNOLOGIES LTD. (SEG.), THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KODIAK NETWORKS (INDIA) PVT. LTD. VS. DCIT IN IT(TP)A NO.1540/BANG/2012 HAS CONSIDERED THE FUNCTIONAL COMPARABILITY AND FOUND THAT THIS COMPANY IS NOT COMPARABLE WITH A CAPTIVE SERVICE PROVIDER. ACCORDINGLY WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE COMPANIES FROM SET OF COMPARABLES. 8.3.1 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL (SUPRA), WE CONFIRM THE EXCLUSION OF ICRA ONLINE LIMITED FROM THE LIST OF COMPARABLES. INFOSYS BPO LIMITED 8.4 THE LD.DRP OBSERVED THAT THIS COMPANY IS AN ESTABLISHED PLAYER IN THE BPO INDUSTRY AND ALSO A MARKET LEADER AND HAS TREMENDOUS BRAND VALUE ATTACHED TO IT WHICH HAS A SIGNIFICANT IMPACT ON ITS PRICING IN THE MARKET AND CONSEQUENTLY ON THE MARGINS EARNED. FURTHER, THE COMPANY HAS INCURRED HUGE SELLING AND MARKETING COST AND THIS HAS BEEN INCREASING ON A YEAR ON YEAR IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 37 BASIS. THE COMPANY HAS ALSO SPENT SIGNIFICANT AMOUNTS IN BUILDING AND RETAINING THE BRAND VALUE AND UNDERTAKING BRANDING CAMPAIGNS DURING THE YEA AND HAS ALSO WON AWARDS FOR CORPORATE BRAND BUILDING. THE LD.DRP, THUS, DIRECTED THE AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 8.4.1 AFTER HEARING BOTH SIDES, WE FIND THAT SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF TESCO HINDUSTAN SERVICE CENTRE PVT. LTD. (SUPRA), WHEREIN THE HELD AS UNDER:- 15.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE ITES SEGMENT. 15.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO SUBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A MARKET LEADER WITH BRAND VALUE, WHEREAS THE ASSESSEE IS MERELY AN ITES OPERATING ITS BUSINESS IN INDIA AND DOES NOT POSSESS EITHER ANY BRAND VALUE OR OWN ANY INTANGIBLE OR INTELLECTUAL PROPERTY RIGHTS (IPRS). IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT :- (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS SUBMITTED THAT THIS DECISION IS APPLICABLE TO THE ASSESSEE'S CASE, AS THE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARABLE TO THE ASSESSEE; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856 (DEL)/2010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNOLOGIES LTD. BEING A GIANT COMPANY AND MARKET LEADER ASSUMING ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSIDERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDERS ASSUMING LIMITED RISK ; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA ; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOFTWARE PRODUCTS AND THE BREAK UP OF SUCH REVENUES IS NOT AVAILABLE ; IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 38 (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR RESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQUISITION OF IPRS IN AUTOLAY, A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFOSYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPANIES. 15.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE BRAND ATTRIBUTABLE PROFIT MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 15.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH 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 ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. WE ARE INCLINED TO CONCUR WITH THE ARGUMENT PUT FORTH BY THE ASSESSEE THAT INFOSYS BPO LTD. IS NOT FUNCTIONALLY COMPARABLE SINCE IT HAS THE BENEFIT OF MARKET VALUE AS WELL AS BRAND VALUE. THIS COMPANY ENJOYS THE BENEFITS OF SCALE AND MARKET LEADERSHIP. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. SINCE WE HAVE DIRECTED THE A.O/TPO TO EXCLUDE THESE COMPANIES FROM THE SET OF COMPARABLES THEREFORE THE TPO IS DIRECTED TO COMPUTE THE ALP ON THE BASIS OF REMAINING COMPARABLES. 8.4.2 BEING SO, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL (SUPRA), WE DIRECT THE AO TO EXCLUDE INFOSYS BPO LIMITED, FROM THE LIST OF COMPARABLES. 9. IN THE RESULT, THIS GROUND OF APPEAL BY THE REVENUE IS DISMISSED. TECHNICAL SUPPORT SERVICES 10. THE ASSESSEE IS SEEKING EXCLUSION OF FOLLOWING COMAPRABLES:- (I) ACCENTIA TECHNOLOGIES LIMITED (II) ACROPETAL TECHNOLOGIES LIMITED (III) ECLERX SERVICES LIMITED IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 39 (IV) ICRA ONLINE LIMITED (V) INFOSYS BPO LIMITED 10.1 AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT THE ISSUE IN RESPECT OF THE ABOVE COMPARABLE COMPANIES WERE CONSIDERED BY THE TRIBUNAL IN THE CASE OF TESCO HINDUSTAN SERVICE CENTRE PVT. LTD. IN IT(TP)A NO.191/BANG/2015, WHEREIN THE TRIBUNAL VIDE ORDER DATED 25 TH JANUARY, 2017 FOR ASSESSMENT YEAR 2010-2011 DIRECTED THE AO TO EXCLUDE ALL THESE COMPANIES FROM THE LIST OF COMPARABLES. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO TO EXCLUDE ALL THESE FIVE COMPANIES FROM THE FINAL LIST OF COMPARABLES. THUS, THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED. SUNDARAM BUSINESS SERVICES LIMITED 10.2 THE LD.DRP EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLES, HOWEVER, THE LEARNED DEPARTMENTAL REPRESENTATIVE SOUGHT FOR INCLUSION OF THE SAME. AT THE TIME OF HEARING BEFORE US, THE LEARNED AR DID NOT RAISE ANY OBJECTION FOR INCLUSION OF THIS COMPARABLE IN THE LIST OF COMPARABLES. ACCORDINGLY, WE DIRECT THE A.O. TO INCLUDE SUNDARAM BUSINESS SERVICES LIMITED AS A COMPARABLE. MARKETING SALES AND SUPPORTING SERVICES 11. THE LEARNED DEPARTMENTAL REPRESENTATIVE URGED FOR INCLUSION OF THE FOLLOWING COMPARABLES:- (I) HCCA BUSINESS SERVICES PRIVATE LIMITED (II) KILLICK AGENCIES & MARKETING LIMITED HCCA BUSINESS SERVICES PRIVATE LIMITED IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 40 11.1 THE LEARNED AR SUBMITTED THAT THIS COMPANY IS ENGAGED IN HR CONSULTANCY SERVICES LIKE PAYROLL PROCESSING AND COMPENSATION STRUCTURING, HR OPERATIONS AND ADMINISTRATION, MANAGEMENT OF LABOUR AND LEGAL COMPLIANCES, REIMBURSEMENT PROCESSING, ACCOUNTING SERVICES. THE LD.DRP NOTICED THAT EXCEPT NOTE 2.14 IN THE ANNUAL REPORT THERE IS NO OTHER OBSERVATION, FROM WHICH IT CAN BE ESTABLISHED THAT THE COMPANY IS ENGAGED IN MARKETING AND SALE SERVICES, COMPARABLE TO THE ASSESSEE. THUS, DIRECTED THE AO TO EXCLUDE THE ABOVE COMPANY. 11.1.1 AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF DCIT V. ELECTRONICS FOR IMAGING INDIA PVT. LTD. IN IT(TP)A NO.212/BANG/2015 (ORDER DATED 24.02.2016), WHEREIN IT WAS HELD AS UNDER:- 41. THE ASSESSEE OBJECTED AGAINST INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES ON THE GROUND THAT THIS COMPANY IS ENGAGED IN PROVIDING PAYROLL PROCESS SERVICES AND THEREFORE IT IS FUNCTIONALLY DIFFERENT. IN SUPPORT OF ITS CONTENTION, THE ASSESSEE REFERRED TO NOTES TO THE ACCOUNTS WHEREIN THE COMPANYS OPERATIONS COMPRISE OF PAYROLL PROCESSING SERVICES IS MENTIONED AND HENCE IT IS NOT POSSIBLE TO GIVE THE QUANTITATIVE DETAILS OF SALES AND CERTAIN INFORMATION SEPARATELY. 42. THE DRP AFTER CONSIDERING THE ANNUAL REPORT NOTED THAT EXCEPT THE NOTE 2.14, THERE IS NO OTHER OBSERVATION IN THE ANNUAL REPORT FROM WHICH IT CAN BE ESTABLISHED THAT THE COMPANY IS ENGAGED IN MARKETING AND SALES SUPPORT SERVICES COMPARABLE TO THE ASSESSEE. ACCORDINGLY, THE DRP DIRECTED THE AO TO EXCLUDE THE SAID COMPANY FROM THE COMPARABLES. 43. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP HAS CONSIDERED THE FACT THAT PAYROLL PROCESSING SERVICES WAS MAIN PART OF THE OPERATIONS OF THE COMPANY AND QUANTITATIVE DETAILS OF SALES AND CERTAIN INFORMATION AS REQUIRED UNDER PART II OF SCHEDULE VI TO COMPANIES ACT WAS NOT POSSIBLE. THUS, IN THE ABSENCE OF ANY CONTRARY FACT ON RECORD BROUGHT BEFORE US, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDING OF THE DRP, WHEN THE FUNCTIONS AND BUSINESS ACTIVITY OF THIS COMPANY WAS FOUND TO BE DIFFERENT FROM MARKETING AND SALES SUPPORT SERVICES OF THE ASSESSEE. ACCORDINGLY, THE OBJECTION OF THE REVENUE IS REJECTED. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 41 11.1.2 IN VIEW OF THE FOREGOING REASONS AND RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL (SUPRA), WE DIRECT THE AO TO EXCLUDE HCCA BUSINESS SERVICES PRIVATE LIMITED FROM THE LIST OF COMPARABLES. ACCORDINGLY, THIS GROUND RAISED BY THE REVENUE IS DISMISSED. KILLICK AGENCIES & MARKETING LIMITED 11.2 THE LEARNED AR SUBMITTED THAT THE COMPANY IS ENGAGED IN THE BUSINESS OF SUPPLYING CONSTRUCTION AND EARTHMOVING MACHINERY AND IS NOT INTO MARKETING SUPPORT SERVICES. THE LD.DRP OBSERVED THAT THERE IS A BASIC FUNCTIONAL DISSIMILARITY AND DIRECTED THE AO TO EXCLUDE THIS COMPARABLE FROM THE LIST OF COMPARABLES. 11.2.1 AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF DCIT V. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA), WHEREIN IT WAS HELD AS UNDER:- 44. THE ASSESSEE OBJECTED AGAINST THIS COMPANY ON THE GROUND THAT COMMISSION/SERVICE CHARGES INCOME OF THIS COMPANY IS RS.2,19,00,000 OUT OF THE OPERATING REVENUE OF RS.3,39,00,000. THEREFORE, THE COMMISSION/ SERVICE CHARGES INCOME CONSTITUTE ABOUT 65% OF THE OPERATING REVENUE WHICH IS LESS THAN 75% OF THE OPERATING REVENUE FILTER APPLIED BY THE TPO. IN THE ABSENCE OF SEGMENTAL RESULTS, THIS COMPANY WAS SOUGHT TO BE EXCLUDED FROM THE SET OF COMPARABLES. 45. THE DRP FOUND THAT THIS COMPANY CONDUCTS BUSINESS AS AN AGENT OF THE FOREIGN PRINCIPAL AND DEAL IN MARITIME EQUIPMENTS. FURTHER, THE RECEIPTS ARE MAINLY IN THE NATURE OF COMMISSION INCOME AND SERVICE CHARGES. THEREFORE, THIS COMPANY WAS FUNCTIONALLY DISSIMILAR TO THAT OF ASSESSEE. 46. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. 47. THE LD. DR HAS SUBMITTED THAT THE TPO HAS CONSIDERED THE RELEVANT INFORMATION AS REPORTED IN THE ANNUAL REPORT OF THE COMPANY AND IT WAS FOUND THAT THIS COMPANY IS ACTING AS AN AGENT FOR VARIOUS FOREIGN PRINCIPALS FOR SALE OF DREDGERS, DREDGING EQUIPMENT AND ALSO OFFERS AFTER SALES SERVICE. THEREFORE, THIS COMPANY WAS FOUND TO BE IN THE BUSINESS OF MARKETING SUPPORT SERVICES WHICH IS SIMILAR TO THE ASSESSEE. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 42 48. ON THE OTHER HAND, THE LD. AR HAS SUBMITTED THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF CONSTRUCTION EQUIPMENTS AND EARTH MOVING MACHINERY AND IS NOT INTO MARKETING SUPPORT SERVICES. 49. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD, WE NOTE THAT IN THE PROFIT & LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION, THIS COMPANY HAS SHOWN SALES (EXPORT OF RS.1,18,00,000 AND COMMISSION/SERVICE CHARGES OF RS.2,19,00,000. THEREFORE, EXPORT INCOME REVENUE OF THIS COMPANY IS LESS THAN 75% OF THE TOTAL REVENUE, A FILTER APPLIED BY THE TPO. ONCE THE TPO HAS APPLIED A FILTER OF 75% OF EXPORT SALE, THEN THIS COMPANY WHICH FAILS THE FILTER APPLIED BY THE TPO CANNOT BE CONSIDERED AS A GOOD COMPARABLE. FURTHER, WE NOTE THAT THIS COMPANY IS ENTIRELY IN A DIFFERENT ACTIVITY WITH THAT OF THE ASSESSEE. UNDISPUTEDLY, THIS COMPANY IS ACTING AS AGENT FOR VARIOUS FOREIGN PRINCIPALS FOR SALE OF DREDGERS, DREDGING EQUIPMENT, STEERABLE RUDDER PROPULSIONS AND OTHER EQUIPMENTS AND MACHINERIES. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP AND DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE COMPARABLES. 11.2.2 RESPECTFULLY FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL (SUPRA), WE DIRECT THE A.O. TO EXCLUDE KILLICK AGENCIES & MARKETING LIMITED FROM THE LIST OF COMPARABLES. ACCORDINGLY, THIS GROUND RAISED BY THE REVENUE IS DISMISSED. MARKETING AND SALES SUPPORTING SERVICES 12. THE ASSESSEE SEEKS EXCLUSION OF ASIAN BUSINESS EXHIBITION AND CONFERENCES LIMITED FROM THE LIST OF COMPARABLES. THE LEARNED AR SUBMITTED THAT THIS COMPANY IS ENGAGED IN THE ORGANIZING OF EXHIBITIONS AND CONFERENCES. THE LEARNED DRP OBSERVED THAT THE SAID COMPANY RECEIVED INCOME IN THE NATURE OF CONSULTANCY FOR ORGANIZING EXHIBITIONS AND EVENTS. THUS, THE LD.DRP HELD THAT THERE IS NO MATERIAL DIFFERENCE IN THE ACTIVITIES OF THE ABECL TO REJECT IT AS NON-COMPARABLE. ACCORDINGLY, THE LD.DRP EXCLUDED THIS COMPARABLE. 12.1 WE FIND THAT THIS ISSUE IS CONSIDERED AND DECIDED BY THE TRIBUNAL IN THE CASE OF DCIT V. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA), WHEREIN IT WAS HELD AS UNDER:- IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 43 50. THE ASSESSEE HAS RAISED VARIOUS OBJECTIONS IN THE CO. HOWEVER, WE FIND THAT THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE IN THE MARKETING SUPPORT SEGMENT IS REGARDING ASIAN BUSINESS EXHIBITION & IT(TP)A NO.212/BANG/2015 & CO NO.94/BANG/2015 PAGE 25 OF 33 CONFERENCE LTD., A COMPARABLE SELECTED BY THE TPO AND RETAINED BY THE DRP. 51. THE ASSESSEE OBJECTED AGAINST THIS COMPANY ON THE GROUND THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS IT IS ENGAGED IN ORGANIZING EXHIBITIONS AND CONFERENCES. THE DRP DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT THIS COMPANY RECEIVED INCOME IN THE NATURE OF CONSULTANCY FOR ORGANIZING EXHIBITIONS AND EVENTS. THEREFORE THIS COMPANY IS FUNCTIONALLY SIMILAR TO THE FUNCTIONS CARRIED OUT BY THE ASSESSEE. 52. BEFORE US, THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT FUNCTIONAL COMPARABILITY OF THIS COMPANY HAS BEEN EXAMINED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF RGA SERVICES INDIA PVT. LTD. VIDE ORDER DATED 20.11.2015 IN ITA NO.22/MUM/2015 AND SUBMITTED THAT THE MUMBAI TRIBUNAL HAS HELD THAT THE OPERATION OF ORGANIZING EXHIBITION AND EVENTS IS NOT COMPARABLE WITH SUPPORT SERVICES PROVIDED BY THE ASSESSEE TO ITS AE IN RESPECT OF REINSURANCE AND ACTUARIAL ACTIVITIES. THUS, THE LD. AR HAS SUBMITTED THAT THIS COMPANY CANNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE WITH HE ASSESSEES ACTIVITY OF PROVIDING SALES AND MARKETING SERVICES TO ITS AE. 53. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AS IT IS CLEAR THAT THE ASSESSEE IS PROVIDING SALES AND MARKETING SERVICES TO ITS AE WHICH INCLUDES IDENTIFYING POTENTIAL CUSTOMERS BY CONDUCTING ROAD SHOWS, PRESENTATION AND THE LIKE, THE WORKING ALSO INCLUDES EDUCATING POTENTIAL USERS OF THE BENEFIT AND FEATURES OF THE AES RANGE OF PRODUCTS. HOWEVER, PRODUCTS FOR WHICH THE ASSESSEE IS PROVIDING SALES AND MARKETING SERVICES IS ONLY SOFTWARE/INFORMATION TECHNOLOGY PRODUCTS. THEREFORE, ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. WHICH IS MAINLY ENGAGED IN THE ORGANIZATION OF EXHIBITIONS AND EVENTS AS WELL AS CONDUCTING CONFERENCES ON BEHALF OF THE VARIOUS CLIENTS FOR THEIR VARIOUS PRODUCTS AND BUSINESSES. THE FUNCTIONS OF THIS COMPANY ARE ENTIRELY DIFFERENT FROM THE ASSESSEE WHO IS PROVIDING SALES AND MARKETING SUPPORT SERVICES TO ITS AE FOR SOFTWARE/IT PRODUCTS. THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF RGA SERVICES INDIA PVT. LTD. (SUPRA) WHILE CONSIDERING THE FUNCTIONAL COMPARABILITY OF THIS COMPANY HAS HELD AT PARAS 11 AND 12 AS UNDER:- 11. WE HAVE CONSIDERED THE SUBMISSION OF THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. ON PERUSAL OF THE ORDER PASSED BY THE TPO IT IS NOTICED THAT THE TPO WHILE DEALING WITH ASSESSEES OBJECTION WITH REGARD TO SELECTION OF ASIAN BUSINESS EXHIBITION AND CONFERENCES LIMITED AS A COMPARABLE HAS ADMITTED THAT THE NATURE OF FUNCTION PERFORMED BY THIS COMPANY IS EVENT MANAGEMENT. IT IS FURTHER RELEVANT TO OBSERVE, ON PERUSAL OF ANNUAL REPORT OF THIS COMPANY IT IS SEEN THAT AS PER DIRECTORS REPORT, THE MAIN OPERATION IS ORGANIZING EXHIBITION AND EVENTS. FURTHER, SCHEDULE 12 OF THE PROFIT AND LOSS ACCOUNT AS WELL AS NOTES TO THE ACCOUNTS REVEALS, REVENUE EARNED BY THE COMPANY IS FROM SPONSORSHIP, DELEGATES ATTENDING IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 44 CONFERENCES, EVENTS AND ENTRY FEES CHARGED FROM VISITORS FOR VISITING EXHIBITION, SALE OF STALL PLACE ETC. 12. THUS, ON OVERALL ANALYSIS OF FACTS AND MATERIALS PLACED ON RECORD IT IS VERY MUCH CLEAR THAT THE BUSINESS MODEL OF THE ASSESSEE AND ASIAN BUSINESS EXHIBITION AND CONFERENCES LIMITED ARE TOTALLY DIFFERENT. WHILE ASSESSEE UNDOUBTEDLY IS PROVIDING SUPPORT SERVICES TO ITS OVERSEAS AES, ASIAN BUSINESS EXHIBITION AND CONFERENCES LIMITED IS PRIMARILY AND FUNDAMENTALLY ENGAGED IN EVENT MANAGEMENT. THUS, UNDER NO CIRCUMSTANCES IT CAN BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE. THEREFORE, FOR THE AFORESTATED REASONS THE DRP, IN OUR VIEW, WAS JUSTIFIED IN EXCLUDING THIS COMPANY AS A COMPARABLE. AS FAR AS THE CONTENTION OF LEARNED DR THAT REASONS ON WHICH THIS COMPANY WAS EXCLUDED EQUALLY APPLIES TO OTHER COMPARABLES RETAINED BY THE DRP, WE MAY OBSERVE, SUCH ARGUMENT OF LEARNED DR IS NOT AT ALL RELEVANT AS THE ISSUE RAISED BY THE DEPARTMENT IN THE PRESENT APPEAL IS CONFINED TO EXCLUSION OF ASIAN BUSINESS EXHIBITION AND CONFERENCES LIMITED AS A COMPARABLE. AS FAR AS OBJECTION OF LEARNED DEPARTMENTAL REPRESENTATIVE THAT ASSESSEE ITSELF HAS SELECTED THIS COMPANY AS A COMPARABLE, WE MAY OBSERVE, THAT CANNOT BE THE SOLE CRITERIA TO REJECT ASSESSEES OBJECTION WITH REGARD TO SELECTION OF A COMPARABLE. AT THE TIME OF PREPARING T.P. STUDY REPORT ASSESSEE HAD SELECTED SOME COMPARABLES BY CONSIDERING MULTIPLE YEAR DATA AND INFORMATION AVAILABLE AT THE RELEVANT TIME. HOWEVER, IF SUBSEQUENTLY ON THE BASIS OF INFORMATION AVAILABLE IN PUBLIC DOMAIN IT IS FOUND ON THE BASIS OF FUNCTIONALITY OR SOME OTHER REASON A COMPANY IS NOT AT ALL COMPARABLE, ASSESSEE CANNOT BE PRECLUDED FROM OBJECTING TO SELECTION OF THE COMPANY AS A COMPARABLE. THIS LEGAL PROPOSITION IS FAIRLY WELL SETTLED BY THE DECISION IN CASE OF DCIT V/S. QUARK SYSTEMS (P) LTD. (2010)132TTJ(CHD)(SB)1 AS WELL AS DECISIONS RELIED UPON BY THE COUNSEL FOR THE ASSESSEE. IN VIEW OF THE AFORESAID, WE DO NOT FIND ANY INFIRMITY IN THE DIRECTIONS OF DRP IN EXCLUDING ASIAN BUSINESS EXHIBITION AND CONFERENCES LIMITED AS A COMPARABLE. THE GROUND RAISED IS THEREFORE DISMISSED. 54. IN VIEW OF THE ABOVE FACTS AS WELL AS DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE WITH THE ASSESSEE. 55. ACCORDINGLY, WE DIRECT THE AO/TPO TO RECOMPUTE THE ALP IN MARKETING SUPPORT SERVICES SEGMENT BY EXCLUDING ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. FROM THE COMPARABLES. 12.2 AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE DIRECT THE A.O. TO EXCLUDE ASIAN BUSINESS EXHIBITION AND CONFERENCES LIMITED FROM THE LIST OF COMPARABLES. ACCORDINGLY, THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 45 13. THE REVENUE HAS CHALLENGED THE INCLUSION OF APITCO LIMITED IN THE LIST OF COMPARABLES. 13.1 THE LEARNED DR SEEKS TO THE INCLUSION OF THIS COMPARABLE. HOWEVER, WE FIND THAT THIS COMPARABLE COMPANY WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-2010 IN IT(TP)A NO.271/BANG/2014. THE TRIBUNAL VIDE ORDER DATED 14 TH AUGUST, 2014, HELD AS UNDER:- THIS COMPANY IS ENGAGED IN THE ACTIVITIES OF SKILLS DEVELOPMENT, TOURISM RESEARCH STUDIES, MICRO ENTERPRISE DEVELOPMENT, CLUSTER DEVELOPMENT, ENERGY RELATED SERVICES, ENVIRONMENT MANAGEMENT ETC. THIS COMPANY, IN OUR VIEW, IS FUNCTIONALLY DIFFERENT AND CANNOT BE COMPARED WITH THAT OF THE ASSESSEE. 13.2 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL (SUPRA), WE DIRECT THE A.O. TO EXCLUDE APITCO LIMITED FROM THE LIST OF COMPARABLES. ACCORDINGLY, THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 14. THE NEXT GROUND IN ASSESSEES APPEAL IS FOR NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE ASSESSEE VIS- -VIS THE COMPARABLES. 14.1 AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS ISSUE WAS CONSIDERED IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-2010 IN IT(TP)A NO.271/BANG/ 2014. THE TRIBUNAL VIDE ITS ORDER DATED 14 TH AUGUST, 2014 HELD AS UNDER:- 28. THE LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTED BEFORE US THAT THE ASSESSEE HAD SOUGHT FOR RISK ADJUSTMENTS, BUT THE SAME HAS NOT BEEN CONSIDERED BY THE TPO. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO THE FOLLOWING SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES:- 17.1 THE APPELLANT FUNCTIONS UNDER A LIMITED RISK ENVIRONMENT WITH MOST OF THE RISK BEING ASSUMED BY ITS AE. THE APPELLANT BEARS LESSER LIMITED BUSINESS RISKS THAN INDEPENDENT COMPARABLE COMPANIES DUE TO THE NATURE IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 46 OF ITS REVENUE MODEL AS IT IS GUARANTEED PROFITS BY WAY OF A MARK-UP ON COSTS INCURRED, IN PROVISION OF THE SOFTWARE DEVELOPMENT SERVICES. HOWEVER, THE INDEPENDENT COMPANIES HAVE TO BEAR THE VAGARIES OF THE ECONOMIC AND BUSINESS FACTORS THAT ARE PREVAILING IN THE INDUSTRY AND THUS COULD EITHER INCUR LOSSES OR EARN PROFITS BASED ON MARKET CONDITIONS. 17.2 RULE L0B(L)(E)(III) OF THE RULES PROVIDES THAT AN ADJUSTMENT SHOULD BE MADE TO THE PROFIT MARGIN OF INDEPENDENT COMPARABLE COMPANIES TO TAKE INTO ACCOUNT THE DIFFERENCES IN FUNCTIONS AND RISKS. THE OECD TRANSFER PRICING GUIDELINES ALSO RECOGNIZE ADJUSTMENTS TO BE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN CONTROLLED AND UNCONTROLLED SITUATIONS THAT WOULD SIGNIFICANTLY AFFECT THE PRICE CHARGED OR RETURN REQUIRED BY INDEPENDENT ENTERPRISES. ACCORDINGLY, CONTROLLED AND UNCONTROLLED TRANSACTIONS ARE COMPARABLE ONLY WHEN ADJUSTMENTS WITH RESPECT TO SIGNIFICANT DIFFERENCES BETWEEN THEM IN TERMS OF RISKS ASSUMED IS MADE. 17.3 IN THE SUBMISSIONS MADE TO THE LEANED TPO, THE APPELLANT HAS COMPUTED THE ADJUSTMENT FOR THE RISK DIFFERENCE OF THE APPELLANT VIS--VIS OF THE COMPARABLE COMPANIES BY PLACING RELIANCE ON THE METHODOLOGY OF RISK ADJUSTMENT AS STATED IN THE DECISION OF THE HONBLE BANGALORE TRIBUNAL IN CASE OF PHILIPS SOFTWARE CENTRE PRIVATE LIMITED VS. ASST. COMMISSIONER OF INCOME TAX (119 TTJ 721) (2008 26S0T226) AS BELOW. AVERAGE PRIME LENDING RATE DURING FY 2008-09 (A)1 12.75 PERCENT AVERAGE BANK RATE DURING FY 2008-09 (B) 6.00 PERCENT DIFFERENCE BETWEEN THE PRIME LENDING RATE AND BANK RATE C = (A B) 6.75 PERCENT RISK ADJUSTMENT (C) 6.75 PERCENT THE RATES HAVE BEEN CONSIDERED AS PER THE DETAILS AS AVAILABLE IN THE ECONOMIC SURVEY ANALYSIS FOR 2008-09 AVERAGE BENCHMARK PLR FOR PUBLIC SECTOR BANKS WAS 12.25%- 12.75% THE AVERAGE BANK RATE EFFECTIVE SINCE APRIL 30, 2003 HAS BEEN 6% 17.4 FURTHER, THE HONBLE DELHI TRIBUNAL IN THE CASE OF SONY INDIA PVT LTD (315 ITR 150) HAS ALLOWED 20% RISK ADJUSTMENT CONSIDERING THE FACT THAT IT MAY NOT BE POSSIBLE TO QUANTIFY RISK ADJUSTMENTS. 29. THE LIMITED REQUEST OF THE LD. COUNSEL FOR THE ASSESSEE IS FOR A DIRECTION TO THE TPO TO CONSIDER THE AFORESAID SUBMISSIONS IN THE LIGHT OF JUDICIAL PRONOUNCEMENTS REFERRED TO THEREIN. ON THE ABOVE ASPECT, THE TPO IN HIS ORDER HAS REJECTED THE CLAIM OF THE ASSESSEE OBSERVING AS FOLLOWS:- 3.8 RISK ADJUSTMENT: RISK ADJUSTMENT INVOLVES TWO VITAL PRECONDITIONS. THEY ARE THAT DIFFERENCE IN RISK LEVEL EXISTS BETWEEN THE TESTED PARTY AND THE UNCONTROLLED COMPARABLES; AND THAT IT IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 47 IS POSSIBLE TO CALCULATE IN TERMS OF NUMBERS OF DIFFERENCES IN RISK SO THAT ADJUSTMENT CAN BE MADE. BUT IN CASE OF THE TAXPAYER, BOTH THE PREREQUISITES ARE MISSING. NEITHER THE DIFFERENCE IN RISK LEVEL OF THE TESTED PARTS AND UNCONTROLLED COMPARABLES HAS BEEN ESTABLISHED NOR IS IT POSSIBLE TO CONVERT THE DIFFERENCE IN RISK LEVEL, IF THERE IS ANY, INTO NUMBERS. IF THERE IS ANY DIFFERENCE, FOR AMOUNT ACADEMICALLY SPEAKING, IT RESTS IN THE REALM OF QUALITY AND NOT QUANTITY. THERE IS NO RELIABLE METHOD TO CONVERT THE QUALITATIVE DIFFERENCE INTO QUANTITATIVE DIFFERENCE AND TO MAKE ADJUSTMENT ON ACCOUNT OF RISK LEVEL. AS PER THE PROVISIONS OF RULE 10B(3), IF ANY ADJUSTMENT SHOULD BE MADE, IT SHOULD BE REASONABLY ACCURATE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. BUT IN CASE OF RISK ADJUSTMENT, NEITHER REASONABLY ACCURATE ADJUSTMENT CAN BE MADE FOR WANT OF METHOD TO DO SO NOR HAS IT BEEN ESTABLISHED THAT THERE IS A MATERIAL EFFECT THAT IS AFFECTING THE COMPARISONS DUE TO RISK LEVEL. IF THE TAXPAYER IS SUGGESTING THAT THERE EXISTS A DIFFERENCE IN THE RISK LEVEL ASSUMED BY THE TESTED PARTY AND UNCONTROLLED COMPARABLES, IT IS ACADEMIC IN NATURE AND NOT BASED ON ANY STUDY WHOSE RESULTS HAS BEEN VALIDATED. IT IS NOT OUT OF PLACE TO REITERATE THAT SINGLE CUSTOMER RISK IS A HUGE RISK WHICH THE UNCONTROLLED COMPARABLES ARE NOT ASSUMING. BY HAVING MORE CUSTOMERS, THE RISK IS SHARED OR SPREAD. IN OTHER WORDS, IF ONE CUSTOMER GOES OUT OF BUSINESS STILL THERE ARE OTHERS WHICH WILL SUSXTAIN THE BUSINESS OF THE TESTED PARTY. BUT IN CASE OF THE TAXPAYER THERE BEING ONLY ONE CLIENT, THE ENTIRE RISK IS CONCENTRATED ON ONE CLIENT, AND THEREFORE, IF THE CLIENT IS OUT OF BUSINESS THE TAXPAYER WILL ALSO BE OUT OF BUSINESS. EARLIER THE ARGUMENT GIVEN ABOUT THE COUNTRY RISK WAS THAT EU & US ARE HAVING BETTER CREDIT RATING AS COMPARED TO INDIA. THIS ARGUMENT IS NOT LONGER VALID AS THEIR CREDIT RATING IS ALSO ON A DOWNWARD TREND AND MOREOVER IN CASE OF UNCONTROLLED COMPARABLES WE ARE TAKING THE FILTER OF EXPORT SALES >75%. MOST OF THE EXPORTS OF SOFTWARE SERVICES FROM INDIA ARE PRIMARILY TO EU & US AND THEREFORE IN CASE OF UNCONTROLLED COMPARABLES ALSO THE RISK LEVEL WILL BE EQUATED. SO FAR AS THE METHODS SUGGESTED BY TAXPAYERS IN THIS REGARD ARE CONCERNED, THEY ARE STATISTICAL METHODS AVAILABLE IN STANDARD BOOKS OF STATISTICS AND FINANCIAL MANAGEMENT. A CAREFUL STUDY OF THESE METHODS WOULD SHOW THAT IN ALL OF THEM A NUMBER OF ASSUMPTIONS ARE MADE TO DRAW THE CONCLUSIONS. TRANSFER PRICING REGULATIONS IN INDIA IS AGAINST ANY ASSUMPTION IN RESPECT OF ANY ADJUSTMENT. IN SUPPORT, REFERENCE IS MADE TO RULE 10B DISCUSSED ABOVE WHICH SPEAKS OF REASONABLY ACCURATE ADJUSTMENT. IF ACCURATE ADJUSTMENT CANNOT BE MADE, THEN ALTERNATIVE IS NO ADJUSTMENT SHOULD BE MADE. THEREFORE NO RISK ADJUSTMENT IS ALLOWED. HOWEVER TPO IS NOT AGAINST ADJUSTMENT IF REASONABLE ACCURATE ADJUSTMENT CAN BE MADE AND THERE IS A METHOD TO DO SO, AS TO EVIDENT IN RESPECT OF WORKING CAPITAL ADJUSTMENT WHICH THE TPO HAS GIVEN. IF IT IS POSSIBLE. IN THE LIGHT OF ABOVE DISCUSSION, NO ADJUSTMENT ON ACCOUNT OF RISK IS ALLOWED TO THE TAXPAYER. 30. AS CAN BE SEEN FROM THE AFORESAID OBSERVATIONS OF THE TPO, THE RISK ADJUSTMENT WAS NOT ALLOWED FOR THE REASON OF ABSENCE OF PROPER BASIS OF QUANTIFICATION. NOW THAT THE ASSESSEE HAS GIVEN THE BASIS OF SUCH QUANTIFICATION, THE TPO IS DIRECTED TO CONSIDER THE SAME. 14.2 TAKING THE CONSISTENT VIEW, WE DIRECT THE AO/TPO TO GIVE PROPER RISK ADJUSTMENT AS DISCUSSED ABOVE. IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 48 15. GROUND NO.15E OF THE ASSESSEES APPEAL IS THAT THE LEARNED TPO/AO HAVE ERRED WRONGLY COMPUTING THE OPERATING MARGIN OF CYBER MEDIA RESEARCH LIMITED AT 19.52% AS AGAINST 12.88% COMPUTED BY THE ASSESSEE. 15.1 THIS ISSUE IS REMITTED TO THE AO/TPO TO RE-COMPUTE THE CORRECT MARGIN OF OPERATING MARGIN OF CYBER MEDIA RESEARCH LIMITED, IN ACCORDANCE WITH LAW. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 16. NO OTHER GROUNDS WERE PRESSED BY THE LEARNED AR BEFORE US. ACCORDINGLY, WE DISMISS THOSE GROUNDS RAISED BY THE ASSESSEE. CROSS OBJECTION : BY ASSESSEE 17. AT THE TIME OF HEARING BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS THE CROSS OBJECTION FILED BY THE ASSESSEE, HENCE, THE SAME IS DISMISSED AS NOT PRESSED. 18. IN THE RESULT, THE REVENUES APPEAL AS WELL AS ASSESSEES APPEAL ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 15 TH DAY OF APRIL, 2021. SD/- SD/- ( GEORGE GEORGE K ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE; DATED : 15 TH APRIL, 2021. DEVADAS G* IT(TP)A NO.505-508 & CO 135/BANG/2015 M/S.CISCO SYSTEMS (INDIA) PVT.LTD. 49 COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE DRP-1, BANGALORE 4. THE PR.CIT, BANGALORE. 5. THE DR, ITAT, BENGALURU. 6. GUARD FILE. ASST.REGISTRAR/ITAT, BANGALORE