Appeal Details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 97280 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 9 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
18-09-2015
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Next Hearing Date
23-06-2015
Assessment Year
2007-2008
Appeal Filed On
25-11-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.5528/DEL./2011 (ASSESSMENT YEAR : 2007-08) AVAYA INDIA (P) LTD., VS. ADDL.CIT, RANGE 2, TOWER B, FIRST FLOOR, NEW DELHI. GLOBAL BUSINESS PARK, M.G. ROAD, GURGAON 122 002. (PAN : AAECA3592N) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PAWAN KUMAR, ADVOCATE, SHRI ROH IT TIWARI, CA AND MS. SHRUTI KHIMTA, ADVOCATE REVENUE BY : SHRI BHASKAR GOSWAMI, SENIOR DR DATE OF HEARING : 23.06.2015 DATE OF PRONOUNCEMENT : 18.09.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE, IS DI RECTED AGAINST THE ASSESSMENT ORDER DATED 07.09.2011 PASSED UNDER SECTION 143 (3) READ WITH SECTION 144C (5) OF THE INCOME-TAX ACT, 1 961 (HEREINAFTER REFERRED TO THE ACT) IN PURSUANCE TO THE DIRECTIO N OF THE DRP-I, NEW DELHI FOR THE ASSESSMENT YEAR 2007-08. 2 ITA NO.5258/DEL/2011 2. THE ASSESSEE, AVAYA INDIA PRIVATE LIMITED IS A S UBSIDIARY IN INDIA OF AVAYA INTERNATIONAL LLC. DURING THE FINAN CIAL YEAR (FY) 2006-07, THE ASSESSEE HAS PROVIDED SOFTWARE DEVELOP MENT AND BACK OFFICE SUPPORT SERVICES TO THE ASSOCIATED ENTERPRIS ES (AES) UNDER THE COST PLUS MODEL. THE ASSESSEE HAS ALSO PROVIDED MAR KETING SUPPORT SERVICES TO AVAYA INTERNATIONAL SALES LTD. THE ASSE SSEES MARKETING ACTIVITIES INCLUDE PROVIDING INFORMATION ABOUT AVAY A PRODUCTS, CUSTOMER AWARENESS, ETC. 3. THE ASSESSEE HAD CONDUCTED AN ECONOMIC ANALYSIS, AS A PART OF ITS TRANSFER PRICING (TP) DOCUMENTATION FOR FY 2006 -07, TO ESTABLISH THE ARM'S LENGTH NATURE OF INTERNATIONAL TRANSACTIO NS WITH ITS AES. DURING THE RELEVANT FY, THE ASSESSEE UNDERTOOK THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES :- PARTICULARS TRANSACTION VALUE RENDERING SOFTWARE SERVICES 79,63,36,195 PAYMENT TOWARDS BACK OFFICE SUPPORT SERVICES 2,52,31,537 RENDERING MARKETING SUPPORT SERVICES 1,51,40,548 PURCHASE OF ASSETS 2,68,39,539 REIMBURSEMENT OF EXPENSES 3,07,02,640 3 ITA NO.5258/DEL/2011 HOWEVER, IT WAS POINTED OUT BY THE LD AR, THAT TPO HAS ACCEPTED THE TRANSACTION IN RESPECT TO RENDERING MARKET SUPPORT SERVICES, PURCHASE OF ASSETS AND REIMBURSEMENT OF EXPENSES. THE DISPU TE IS ONLY IN REGARD TO RENDERING SOFTWARE SERVICES AND PAYMENT T OWARDS BACK OFFICE SUPPORT SERVICES. 4. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, THE A SSESSEE HAS ANALYZED THE SOFTWARE SERVICES AND BACK OFFICE SUPP ORT SERVICES SEGMENTS BY USING TRANSACTIONAL NET MARGIN METHOD ( TNMM) AS THE MOST APPROPRIATE METHOD. THE SUMMARY OF THE ECONOMI C ANALYSIS AS PER TP STUDY IS PROVIDED BELOW: PARTICULARS OPERATING PROFIT MARGIN (OP/TC) SOFTWARE SERVICES BACK OFFICE SUPPORT SERVICES NO. OF COMPANIES 55 22 MEAN 14.64% 12.51% ASSESSEES MARGIN 12.68% 9.71% 5. THE TPO REJECTED THE FILTERS ADOPTED BY THE ASSE SSEE IN THE TP DOCUMENTATION AND IMPOSED ADDITIONAL FILTERS FOR TH E SELECTION OF COMPARABLES. THE TPO TOOK 26 COMPANIES AS COMPARAB LES FOR 4 ITA NO.5258/DEL/2011 SOFTWARE DEVELOPMENT SERVICE AND 25 COMPARABLES FOR IT ENABLED SERVICES (ITES). 6. THE TPO ARRIVED AT THE FOLLOWING ARMS LENGTH OP ERATING PROFIT MARGIN FOR SOFTWARE AND BACK OFFICE SUPPORT SERVICE S SEGMENTS :- PARTICULARS SOFTWARE SERVICES BACK OFFICE SUPPORT SERVICES NO. OF COMPANIES 26 25 OPERATING PROFIT MARGIN 25% 30.14% ADJUSTMENT 8,70,79,955 46,98,948 7. ACCORDINGLY, THE TPO IN THE IMPUGNED ORDER, PROP OSED A TOTAL TRANSFER PRICING ADJUSTMENT OF RS.9,17,78,903/- (RS . 8,70,79,955 + RS.46,98,948). 8. THE DRP EXCLUDED BODH TREE FROM THE COMPARABLES AND ASKED TPO TO RECOMPUTE THE MARGIN OF R SYSTEMS. 9. PURSUANT TO THE DRP DIRECTIONS, THE AO PASSED TH E FINAL ASSESSMENT ORDER DATED 07.09.2011, MAKING A TRANSFE R PRICING ADJUSTMENT AMOUNTING TO RS.8,70,79,955/- TO SOFTWAR E SERVICES SEGMENT AND RS.44,11,464/- TO BACK OFFICE SUPPORT S ERVICES SEGMENT. THUS, THE TOTAL TRANSFER PRICING ADJUSTMENT MADE IN THE ASSESSEES CASE 5 ITA NO.5258/DEL/2011 WAS RS.9,14,91,419/- THEREBY ASSESSING THE TOTAL IN COME AT RS.20,03,30,080/- AS AGAINST RS.10,88,38,664/- DISC LOSED BY THE ASSESSEE IN THE RETURN OF INCOME FILED ON 18.10.200 7. 10. THE FINAL SET OF COMPARABLES IN BOTH IT SEGMENT AND ITES SEGMENT IS AS FOLLOWS :- IT SEGMENT SR.NO. COMPARABLE OP / TC 1. ACCEL TRANSMATIC LTD. (SEG.) 21.11 2. AVANI CIMCON TECHNOLOGIES LTD. 52.59 3. CELESTIAL LABS LTD. 58.35 4. DATAMATICS LTD. 1.13 5. E-ZEST SOLUTIONS LTD. 36.12 6. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 25.31 7. GEOMATRIC LTD. (SEG.) 10.71 8. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 36.63 9. IGATE GLOBAL SOLUTIONS LTD. 7.49 10. INFOSYS TECHNOLOGIES LTD. 40.3 11. ISHIR INFOTECH LTD. 30.12 12. KALS INFORMATION SYSTEMS LTD. (SEG.) 30.55 13. LGS GLOBAL LTD. (LANCO GLOBAL SOLUTIONS LTD.) 15.75 14. LUCID SOFTWARE LTD. 19.37 15. MEDIASOFT SOLUTIONS LTD. 3.66 16. MEGASOFT LTD. (SEG.) 60.23 17. MINDTREE LTD. 16.9 18. PERSISTENT SYSTEMS LTD. 24.52 19. QUINTEGRA SOLUTIONS LTD. 12.56 20. R S SOFTWARE (INDIA) LTD. 13.47 21. R SYSTEMS INTERNATIONAL LTD(SEG) 15.07 22. SASKEN COMMUNICATION TECHNOLOGIES 22.16 6 ITA NO.5258/DEL/2011 LTD. (SEG.) 23. SIP TECHNOLOGIES & EXPORTS LTD. 13.9 24. TATA ELEXI LTD. (SEG.) 26.51 25. THIRDWARE SOLUTIONS LTD. (SEG.) 25.12 26. WIPRO LTD. (SEG.) 33.65 ITES SEGMENT SR.NO. COMPARABLE OP / TC 1. ACCENTIA TECHNOLOGIES LTD. (SEG) 30.61 2. ADITYA BIRLA MINACS WORLDWIDE LIMITED (EARLIER KNOWN AS TRANSWORKS INFORMATION SERVICES LTD.) 11.98 3. ALLSEC TECHNOLOGIES LTD. 27.31 4. APEX KNOWLEDGE SOLUTIONS PVT. LTD. 12.83 5. APPOLLO HEALTHSTREET LTD. -13.55 6. ASIT C MEHTA FINANCIAL SERVICES LTD. (EARLIER KNOWN AS NUCLEUS NETSOFT & GIS LTD.) 24.21 7. CALIBER POINT BUSINESS SOLUTIONS LTD. 21.26 8. COSMIC GLOBAL LTD. 12.4 9. DATAMATICS FINANCIAL SERVICES LTD. (SEG.) 5.07 10. ECLERX SERVICES LTD. 89.33 11. FLEXTRONICS LTD. (SEG.) 8.62 12. GENESYS INTERNATIONAL CORPORATION LTD. 13.35 13. HCL COMNET SYSTEMS & SERVICES LTD. (SEG.) 44.99 14. ICRA TECHNO ANALYTICS LTD. (SEG) 12.24 15. INFORMED TECHNOLOGIES INDIA LTD. 34.32 16. INFOSYS BPO LTD. 28.78 17. ISERVICES INDIA PVT. LTD. 49.47 18. MAPLE ESOLUTIONS LTD. 34.05 19. MOLD TEK TECHNOLOGIES LTD. (SEG.) 113.49 20. R SYSTEMS INTERNATIONAL LTD (SEG) 20.18 21. SPANCO LTD. (SEG.) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTION LTD.) 25.81 22. TRITON CORP LTD. 34.93 23. VISHAL INFORMATION TECHNOLOGIES LTD. 51.19 24. WIPRO LTD. (SEG.) 29.3 7 ITA NO.5258/DEL/2011 11. AGGRIEVED BY THE ASSESSMENT ORDER PASSED BY THE AO, THE ASSESSEE FILED AN APPEAL BEFORE THE TRIBUNAL. 12. THE LD. AR IS AGGRIEVED BY THE INCLUSION OF CER TAIN COMPARABLES. SO WE WILL DEAL WITH EACH OF THE COMPARABLES. I. SOFTWARE SERVICES SEGMENT (I) ACCEL TRANSMATIC LTD. LD. AR SUBMITTED THAT ACCEL TRANSMATIC LTD. WAS CO NSIDERED IN THE CASE OF TOLUNA INDIA PRIVATE LIMITED IN ITA NO. 5645/DEL/2011 FOR AY 2007-08 ORDER DATED 26.08.2014 (HEREINAFTER REFERRED TO AS TOLUNA) WHEREIN THE TPO SELECTED ACCEL TRANSMATIC LTD. AS A COMPARABLE TO THE SAID COMPANY (TOLUNA). IN THAT C ASE, THE CO- ORDINATE BENCH APPRECIATED THE FACT THAT THE SAID C OMPANY (TOLUNA) WAS ALSO INTO SOFTWARE SERVICE SEGMENT AND REPELLED THE CONTENTION OF TOLUNA AGAINST MAKING IT A COMPARABLE AND THE COORD INATE BENCH OF THIS TRIBUNAL DIRECTED THE INCLUSION OF THE SOFTWAR E SERVICE SEGMENT OF ACCEL TRANSMATIC LTD. IN THE LIST OF COMPARABLES. HOWEVER, IN THIS CASE, THE ASSESSEE DOES NOT HAVE ANY OBJECTION IN M AKING THIS 8 ITA NO.5258/DEL/2011 COMPANY I.E, SOFTWARE SEGMENT OF ACCEL TRANSMATIC L TD. AS A COMPARABLE TO THAT OF THE ASSESSEE. (II) AVANI CIMCON TECHNOLOGIES LTD. LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE IT IS FUNCTIONALLY DIS SIMILAR AND ENGAGED IN THE IT AND RELATED SERVICES AND OWN PROD UCTS; AND THAT SEGMENTAL DATA ARE UNAVAILABLE, HOWEVER, WAS CANDID ENOUGH IN STATING THAT THIS COMPARABLE WAS CONFIRMED IN TOLUN A (SUPRA). WE FIND THAT IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WHILE REPELLING SIMILAR OBJECTIONS, HELD AS UNDER :- 17.1. THE TPO FOUND THIS COMPANY TO BE ENGAGED IN SOFTWARE DEVELOPMENT. NOTICE U/S 133(6) WAS ISSUED TO THE CO MPANY TO GET COMPLETE INFORMATION. ACCORDING TO THE TPO, THIS CO MPANY QUALIFIED ALL THE FILTERS. THE ASSESSEE ARGUED BEFO RE THE TPO THAT THIS COMPANY WAS INTO SOFTWARE PRODUCTS AND THE SEG MENTAL RESULTS WERE NOT AVAILABLE. THE TPO REJECTED SUCH CONTENTIO N BY RELYING ON THE SPECIFIC INFORMATION COLLECTED FROM THE COMP ANY U/S 133(6) WHICH DIVULGED THAT THIS COMPANY WAS A PURELY SOFTW ARE DEVELOPMENT COMPANY ENGAGED IN PROVIDING SOFTWARE D EVELOPMENT AND CONSULTING IT SERVICES TO ITS CLIENTS. THIS COM PANY WAS CONCENTRATING ON INTERNET ENABLED BUSINESS INFORMAT ION SYSTEMS IN A WIDE RANGE OF INDUSTRIES. RESULTANTLY, THIS COMPA NY WAS INCLUDED IN THE LIST OF COMPARABLES. 17.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE DESCR IPTION OF 9 ITA NO.5258/DEL/2011 BUSINESS ACTIVITY OF THIS COMPANY AS REPRODUCED ON INTERNAL PAGE 90 OF THE TPOS ORDER, THAT IT IS A PURE SOFTWARE D EVELOPMENT SERVICE PROVIDER. IN THE ABSENCE OF ANY OTHER SPECI FIC OBJECTION AGAINST THIS COMPANY, WE ARE OF THE CONSIDERED OPIN ION THAT THIS COMPANY HAS BEEN RIGHTLY INCLUDED BY THE TPO IN THE LIST OF COMPARABLES. THE ASSESSEE FAILS. WE, IN THE LIGHT OF THE AFORESAID ORDER OF THE CO-O RDINATE BENCH, ARE ALSO OF THE OPINION THAT TPO HAS RIGHTLY INCLUDED T HE SAID COMPARABLE IN THE LIST OF COMPARABLES. THEREFORE, THE OBJECTI ON OF THE ASSESSEE IS REJECTED. (III) CELESTIAL LABS LTD. LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE IT IS FUNCTIONALLY DIS SIMILAR AND ENGAGED IN THE DEVELOPMENT OF SOFTWARE TOOLS AND SO ME OF THESE TOOLS ARE UTILIZED FOR PROVISION OF PURE BIOINFORMATICS/B IOTECHNOLOGY SERVICES. ACCORDING TO HIM, THE COMPANY ALSO OWNS IPRS AND PRODUCTS ARE PROTECTED BY PATENTS. HE SUBMITTED TH AT THIS COMPARABLE WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN TH E SAID CONTENTIONS OF THE LD. AR. IN TOLUNA (SUPRA), THE CO-ORDINATE B ENCH WHILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 10 ITA NO.5258/DEL/2011 18.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY OBSERVING THAT IT WAS RENDERING MAINLY SOFTWARE DEVELOPMENT SERVICES. 18.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUA L ACCOUNTS OF THIS COMPANY, A COPY OF WHICH IS AVAILABLE ON PAGE 41 OF THE PAPER BOOK, THAT IT IS ENGAGED MAINLY IN THE DEVELOPING T HE SOFTWARE PRODUCTS IN THE SHAPE OF TOOLS ETC., WHICH ARE PROT ECTED USING THE PATENT. THIS COMPANY DEVELOPED A TOOL, CELSUITE T O DRUG DISCOVERY IN FINDING THE LEAD MOLECULES FOR DRUG DI SCOVERY. AS THIS COMPANY IS ENGAGED IN DEVELOPING SOFTWARE TOOLS AFT ER ENOUGH RESEARCH AND DEVELOPMENT ACTIVITY AND THE TOOLS SO PRODUCED BY IT ARE ITS INTELLECTUAL PROPERTY, IT CANNOT BE CONSIDE RED AS COMPARABLE TO THE ASSESSEE WHICH IS, ALSO ALBEIT IN SOFTWARE D EVELOPMENT, BUT IS DOING IT ON CONTRACT BASIS WITHOUT HAVING ANY I.P. RIGHTS IN THE SOFTWARE DEVELOPED BY IT. IT IS FURTHER RELEVANT TO NOTE THAT THIS COMPANY HAS BEEN HELD TO BE NOT COMPARABLE BY THE D ISPUTE RESOLUTION PANEL (DRP) IN ITS DIRECTIONS FOR A SUBS EQUENT YEAR, A COPY OF WHICH IS AVAILABLE ON RECORD. THUS THIS COM PANY CANT BE CONSIDERED AS FUNCTIONALLY SIMILAR TO THAT OF THE A SSESSEE. WE, THEREFORE, DIRECT TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (IV) DATAMATICS LTD. THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES. 11 ITA NO.5258/DEL/2011 (V) E-ZEST SOLUTIONS LTD. LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE IT IS FUNCTIONALLY DIS SIMILAR AND PROVIDES DIVERSIFIED SERVICES, SUCH AS, DESIGN AND DEVELOPMENT, FEATURE ENHANCEMENT, PRODUCT MODERNIZATION, OFFSHOR E SOFTWARE DEVELOPMENT, CUSTOM SOFTWARE DEVELOPMENT ETC. AND T HAT SEGMENTAL DATA ARE UNAVAILABLE. HOWEVER, THE ASSESSEE WAS CAN DID ENOUGH IN STATING THAT THIS COMPARABLE WAS CONFIRMED IN TOLUN A (SUPRA). WE FIND THAT IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WHILE REPELLING SIMILAR OBJECTIONS, HELD AS UNDER :- 20.1. THE ANNUAL REPORT OF THIS COMPANY WAS AVAILA BLE, BUT, THE FUNCTIONALITY WAS NOT CLEAR. NOTICE U/S 133(6) WAS ISSUED BY THE TPO. ON RECEIPT OF REPLY FROM THE COMPANY, IT WAS N OTICED THAT IT WAS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND, H ENCE, QUALIFIED ALL THE FILTERS APPLIED BY THE TPO. AFTER CONSIDERING THE OBJECTIONS OF THE ASSESSEE, THE TPO HELD IT TO BE I NCLUDIBLE IN THE LIST OF COMPARABLES. THE DRP UPHELD THE DRAFT ORDER ON THIS COUNT. 20.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THIS COMPANY T O BE COMPARABLE TO THAT OF THE ASSESSEE COMPANY, BECAUSE IT IS ALSO ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES TO OUTSIDERS. THE LD. AR NEEDLESSLY TRIED TO DISTINGUISH THIS COM PANY BY CONTENDING THAT THE SERVICES RENDERED BY IT WERE DI FFERENT FROM THAT OF THE ASSESSEE. WE DO NOT FIND ANY FORCE IN THIS S UBMISSION. THE COMPARABILITY OF A COMPANY IS TESTED ON VARIOUS PAR AMETERS AND A VIEW IS TAKEN AS TO ITS COMPARABILITY OR OTHERWISE BY CONSIDERING THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES. SIMPLY BECAUSE THE 12 ITA NO.5258/DEL/2011 NATURE OF SOFTWARE DEVELOPMENT SERVICES PROVIDED BY A COMPANY IS DIFFERENT FROM THOSE PROVIDED BY THE ASSESSEE, THE SAME DOES NOT BECOME INCOMPARABLE. HERE IS A CASE IN WHICH THIS C OMPANY IS ALSO PROVIDING SOFTWARE DEVELOPMENT SERVICES AS IS DONE BY THE ASSESSEE ON CONTRACT BASIS FOR OTHERS WITHOUT HAVING ANY INT ELLECTUAL PROPERTY RIGHTS IN THEM. A SMALL VARIATION IN THE N ATURE OF SERVICES DOES NOT MAKE A COMPANY INCOMPARABLE. IT IS NOT A C ASE THAT THE TPO HAS CONSIDERED A COMPANY RENDERING MANAGERIAL O R ENGINEERING SERVICES AND TREATED IT AS COMPARABLE T O THE ASSESSEE RENDERING SOFTWARE DEVELOPMENT SERVICES. MERELY BEC AUSE THE NATURE OF SERVICE RENDERED BY THIS COMPANY WITHIN T HE OVERALL SOFTWARE DEVELOPMENT SERVICES, IS NOT IDENTICAL, WI LL NOT MAKE IT INCOMPARABLE, WHEN IT IS OTHERWISE SIMILAR TO THAT OF THE ASSESSEE ON ALL OTHER SCORES. AS SUCH, WE HOLD THAT THIS COM PANY WAS RIGHTLY INCLUDED BY THE TPO IN THE LIST OF COMPARABLES. THE ASSESSEE FAILS. WE, IN THE LIGHT OF THE AFORESAID ORDER OF THE CO-O RDINATE BENCH, ARE ALSO OF THE OPINION THAT TPO HAS RIGHTLY INCLUDED T HE SAID COMPARABLE IN THE LIST OF COMPARABLES. THEREFORE, THE OBJECTI ON OF THE ASSESSEE IS REJECTED. (VI) FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE IT IS FUNCTIONALLY DIS SIMILAR AND ENGAGED INTO SIGNIFICANT R&D ACTIVITIES WHICH RESUL TED IN CREATION OF INTELLECTUAL PROPERTY RIGHTS. ACCORDING TO HIM, IT ALSO FAILS R&D FILTER AS R&D IS 4.6% OF THE SALES. HE SUBMITTED T HAT THIS COMPANY DEVELOPS PRODUCTS AND PROVIDES SOFTWARE CONSULTING SERVICES AND 13 ITA NO.5258/DEL/2011 SEGMENTAL DATA DISCLOSURE PROVIDES DATA FOR PRODUC TS AND SERVICES AS A COMPOSITE SEGMENT AND THEREFORE, NO BIFURCATION I S AVAILABLE BETWEEN THE TWO ACTIVITIES. HE ALSO SUBMITTED THAT THIS COMPANY HAS HIGH TURNOVER OF APPROX RS.848 CRORES WHICH IS 10 T IMES TO THE ASSESSEES TURNOVER. HE SUBMITTED THAT THIS COMPAR ABLE WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN THE SAID CONTEN TIONS OF THE AR. IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WHILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 21.1. THIS COMPANY WAS FINDING PLACE IN THE ACCEPT /REJECT MATRIX OF THE ASSESSEE, BUT WAS REJECTED IN THE TP STUDY R EPORT BECAUSE IT FAILED R&D SPEND FILTER. THE TPO NOTICED THAT THE PRODUCTS AND SERVICE SEGMENT OF THIS COMPANY WAS COMPARABLE TO THAT OF THE ASSESSEE. AS THE PRODUCT REVENUE WAS RS. 92.1 CRORE OUT OF THE TOTAL PRODUCT AND SERVICE SEGMENT REVENUE OF RS.847.2 CR ORE, THE TPO HELD THIS COMPANY TO BE COMPARABLE. THE ASSESSEES OBJECTION THAT THIS COMPANY HAD INCURRED HUGE R & D EXPENSES AND, HENCE, SHOULD BE IGNORED, DID NOT FIND FAVOUR WITH THE TPO . THE DRP APPROVED THE VIEW TAKEN BY THE AUTHORITIES BELOW ON THE COMPARABILITY OF THIS CASE. 21.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THIS COMPANY T O BE NOT COMPARABLE TO THAT OF THE ASSESSEE. THE REASON FOR OUR THIS DECISION IS THAT THE TPO HAS TAKEN SEGMENTAL DATA OF `PRODU CT AND SERVICE SEGMENT OF THIS COMPANY WHICH HAS PRODUCT REVENUE OF RS.92.1 CRORE. IN CONTRAST TO IT, THE INSTANT ASSESSEE IS N OT SELLING ANY SOFTWARE PRODUCTS, BUT, IS DOING THE JOB ASSIGNED T O IT ON COST PLUS BASIS. THE CONTENTION OF THE LD. DR THAT SINCE THE MAJORITY OF THE REVENUE FROM `PRODUCT AND SERVICES SEGMENT WAS FRO M THE SERVICES SEGMENT AND, HENCE, THIS COMPANY SHOULD BE CONSIDERED AS COMPARABLE, IS BEREFT OF ANY FORCE. WHEN FIGURES OF PRODUCTS AND SERVICES ARE COMBINED, IT CANNOT BE ASCERTAINED AS TO HOW MUCH 14 ITA NO.5258/DEL/2011 CONTRIBUTION WAS MADE BY THE PRODUCT DIVISION OR TH E SERVICE DIVISION TO THE OVERALL REVENUE OF THE PRODUCT AND SERVICES SEGMENT. AS THE ASSESSEE IS ADMITTEDLY NOT ENGAGED IN SELLING ITS SOFTWARE PRODUCTS, SUCH A COMPANY CANNOT BE CONSIDE RED AS COMPARABLE. IT CAN BE SEEN FROM THE ANNUAL REPORT O F THIS COMPANY, A COPY OF WHICH IS AVAILABLE ON PAGE 88 OF THE PAPE R BOOK, THAT IT CONSOLIDATED ITS EXISTING PRODUCT PORTFOLIO AND TOO K STEPS TO EXPAND INTO FURTHER TECHNOLOGIES BY INCREASING THE MOMENTU M IN KEY INITIATIVES IN WIMAX, IMS, SIP & ISS/ESS DOMAINS. T HIS COMPANY HAS ITS OWN PRODUCTS SUCH AS ASN, WIMAX, GA TEWAY PRODUCT WITH ASN LIGHT. IT IS FURTHER RELEVANT TO N OTE THAT THE YEAR ENDING OF THIS COMPANY IS NOT COINCIDING WITH THAT OF THE ASSESSEE AND IT IS NOT KNOWN AS TO HOW THE TPO HAS ADOPTED T HE RELEVANT FIGURES FOR COMPARISON. IN VIEW OF THE FOREGOING DI SCUSSION, WE HOLD THIS COMPANY TO BE NOT COMPARABLE AND DIRECT I TS EXCLUSION FROM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS . IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (VII) GEOMETRIC LIMITED (SEG.) THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. (VIII) HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE IT IS FUNCTIONALLY DIS SIMILAR AND ENGAGED INTO DIVERSIFIED BUSINESSES AND PROVIDES VA RIOUS DIVERSIFIED SERVICES LIKE BUSINESS AND TECHNOLOGY CONSULTING, A PPLICATION 15 ITA NO.5258/DEL/2011 OUTSOURCING, BPO / ITES SERVICES, PROJECT MANAGEMEN T SERVICES, PUBLIC SECTOR SERVICES, MARITIME PRACTICE SERVICES, ENTERPRISE SECURITY & PRIVACY PRACTICE SERVICES ETC. HE SUBMITTED THAT THIS COMPANY ALSO FAILS ON EMPLOYEE COST/SALES FILTER APPLIED BY THE TPO AND IT HAS HIGH A&M RATIO OF 3.52%. HE SUBMITTED THAT THIS COMPARA BLE WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN THE SA ID CONTENTIONS OF THE AR. IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WH ILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 23.1. THE TPO NOTICED FROM THE ANNUAL ACCOUNTS OF THIS COMPANY THAT IT WAS ENGAGED IN THE SOFTWARE DEVELOPMENT SER VICES AND ALSO QUALIFIED EMPLOYEE COST FILTER. THE ASSESSEE OBJECT ED TO ITS INCLUSION BY, INTER ALIA, CONTENDING THAT THE PLI O F THIS COMPANY WAS INCORRECTLY WORKED OUT BY THE TPO. CORRECTING T HIS MISTAKE IN CALCULATION PART, THE TPO HELD THIS COMPANY TO BE C OMPARABLE AND DETERMINED ITS REVISED PLI AT 36.63%. THE DRP UPHEL D THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S. 23.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUA L ACCOUNTS OF HIS COMPANY THAT IT IS ENGAGED IN RENDERING ITES BP O SERVICES, APPLICATION MANAGEMENT SERVICES, OFFSHORE DELIVERY, PROJECT MANAGEMENT SERVICES, PUBLIC SECTOR SERVICES, MARITI ME PRACTICE AND EXECUTIVE EDUCATION INFORMATION SYSTEMS, ETC. F ROM THE ABOVE NARRATION OF THE NATURE OF SERVICES RENDERED BY THI S COMPANY, IT CAN BE SEEN THAT THE SAME IS NOT AT ALL COMPARABLE TO T HAT OF THE ASSESSEE. IT CAN FURTHER BE NOTICED THAT THE TPO HA S TAKEN THE FIGURES OF THIS COMPANY WHICH REPRESENT `INCOME FRO M SOFTWARE SALES AND SERVICES. OBVIOUSLY, THE ASSESSEE IS NOT ENGAGED IN SOFTWARE SALES. IN VIEW OF OUR ABOVE DISCUSSION WHI LE DEALING WITH THE COMPARABILITY OF FLEXTRONICS SOFTWARE SYSTEMS L IMITED, WE ARE SATISFIED THAT THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE 16 ITA NO.5258/DEL/2011 AND IS, HENCE, DIRECTED TO BE EXCLUDED FROM THE LIS T OF COMPARABLES. THE ASSESSEE SUCCEEDS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (IX) IGATE GLOBAL SOLUTIONS LTD. THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. (X) INFOSYS TECHNOLOGIES LTD. LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY OWNS SIGNI FICANT SOFTWARE PRODUCTS AND IS ENGAGED INTO VARIOUS DIVERSIFIED BU SINESS OPERATIONS. ITS HIGH TURNOVER OF RS.13,149 CRORES WHICH IS 157 TIMES THE SIZE OF THE ASSESSEE. HE ALSO SUBMITTED THAT THIS COMPANY HAS SUBSTANTIAL INTANGIBLE ASSETS VALUED AT RS.89,069 CRORES WHICH INCLUDES BRAND VALUE OF RS.31,617 CRORES. IT ALSO INVOLVES IN SIG NIFICANT R&D AND HAS OWNERSHIP OF INTANGIBLES. LD. AR SUBMITTED THA T THIS COMPARABLE WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN TH E SAID CONTENTIONS 17 ITA NO.5258/DEL/2011 OF THE AR. IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WHILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 25. FROM THE NATURE OF SERVICES RENDERED BY THE AS SESSEE TO ITS AE ON A COST PLUS BASIS WITHOUT HAVING ANY INTANGIBLE ASSETS OR RETAINING ANY INTELLECTUAL PROPERTY IN THE WORK DON E BY IT, WE FIND THAT INFOSYS TECHNOLOGIES LTD., WHICH IS A GIANT CO MPANY IN TERMS OF RISK PROFILE, SCALE, NATURE OF SERVICES, REVENUE OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS, ONSITE AND OFFSHORE S ERVICES, ETC., CANNOT BE COMPARED WITH THE ASSESSEE. OUR VIEW IS F ORTIFIED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. [(2013) 219 TAXMAN 26 (DEL)] IN WHICH INFOSYS LTD. HAS BEEN HELD TO BE NOT COMPARABLE TO A COMPANY THAT WAS ENGAGED IN THE BUSINESS OF DE VELOPMENT OF SOFTWARE FOR PARENT COMPANY. WE, THEREFORE, DIRECT THE EXCLUSION OF THIS CASE FROM THE LIST OF COMPARABLES. THE ASSESSE E SUCCEEDS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (XI) ISHIR INFOTECH LTD. LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY HAS AN A&M / SALES RATIO OF APPROX. 10% WHICH CLEARLY INDICATES THAT IT ALSO ENJOYS A RETURN ON ACCOUNT OF MARKETING INTANGIBLES AND HENCE, IS NOT COMPARABLE TO THE ASSESSEE. LD. AR SUBMITTED THAT THIS COMPARABLE WA S EXCLUDED IN 18 ITA NO.5258/DEL/2011 TOLUNA (SUPRA). WE FIND FORCE IN THE SAID CONTENTI ONS OF THE AR. IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WHILE ACCEPTI NG THE CONTENTIONS OF THE AR, HELD AS UNDER :- 26.1. THE AO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY OBSERVING THAT IT QUALIFIED 25% EMPLOYEE COST FILTE R AND ALL OTHER FILTERS ON THE BASIS OF INFORMATION RECEIVED U/S 13 3(6). THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY BY CONTEN DING THAT ITS RELATED PARTY TRANSACTIONS WERE MORE THAN 15% AND E MPLOYEES COST WAS ONLY 4%. THE TPO REJECTED BOTH THE CONTENTIONS BY NOTICING THAT THE EMPLOYEES COST WAS, IN FACT, MORE THAN 25% AS WAS APPARENT FROM THE INFORMATION RECEIVED U/S 133(6) A ND, FURTHER, THE RPTS ALSO DID NOT EXCEED 25%. 26.2. HAVING HEARD BOTH THE SIDES AND PERUSED THE R ELEVANT MATERIAL ON RECORD, WE FIND THIS COMPANY TO BE COMPARABLE TO THAT OF THE ASSESSEE. THE ASSESSEES OBJECTION THAT EMPLOYEE CO ST OF THIS COMPANY WAS 4% ONLY, IS NOT CORRECT BECAUSE OF THE EXERCISE CARRIED OUT BY THE TPO INDICATING THAT THE EMPLOYEE S COST WAS MORE THAN 25%. THE LD. DR HAS TAKEN US THROUGH THE ANNUAL ACCOUNTS OF THIS COMPANY WHICH SHOW THAT SOME PART OF THE EMPLOYEES COST WAS ALSO INCLUDED IN ADMINISTRATIVE EXPENSES APART FROM DIRECT ESTABLISHMENT EXPENSES. IT CAN B E SEEN THAT THE COMPANY HAS INCLUDED PROFESSIONAL FEES OF RS.3.41 CRORE ALONG WITH DIRECTORS SALARY, ETC., UNDER THE HEAD ADMIN ISTRATIVE EXPENSES. WHEN THIS OBJECTION WAS TAKEN BY THE ASS ESSEE BEFORE THE TPO THAT THE EMPLOYEE COST WAS ONLY 4% VIEWING ONLY THE ESTABLISHMENT EXPENSES IN ISOLATION WITHOUT CONSI DERING THE EMPLOYEE COST INCLUDED UNDER THE HEAD ADMINISTRATI VE EXPENSES, THE TPO CORRECTED THE POSITION BY OBSERVING THAT TH E EMPLOYEE COST WAS MORE THAN 25% BY IMPLIEDLY INCLUDING THE PERSON NEL COST INCLUDED UNDER THE HEAD ADMINISTRATIVE EXPENSES. THE ASSESSEE DID NOT CHALLENGE THE TPOS CALCULATION BEFORE THE DRP ON THIS ISSUE. AS SUCH, IT BECOMES APPARENT THAT THERE IS N O MERIT IN THIS OBJECTION AGAIN TAKEN UP BEFORE US WHICH HAS ALREAD Y BEEN SUCCESSFULLY DEALT WITH BY THE TPO. INSOFAR AS THE ASSESSEES OBJECTION ABOUT THE RELATED PARTY TRANSACTIONS IS C ONCERNED, WE HAVE DISCUSSED THIS ISSUE THOROUGHLY WHILE DEALING WITH THE COMPARABLE CASE OF ACCEL TRANSMATICS LTD. (SUPRA) I N WHICH IT HAS 19 ITA NO.5258/DEL/2011 BEEN HELD THAT FILTER OF 25% OF RPT IS GOOD ENOUGH TO MAKE A CONTROLLED TRANSACTION AND THUS EXPUNGING IT FROM T HE LIST OF COMPARABLES, WHICH CAN ONLY BE UNCONTROLLED TRANSAC TIONS. THE LD. AR FAILED TO POINT OUT ANY FUNCTIONAL DIFFERENCE OF THIS COMPANY VIS-A-VIS THE ASSESSEE. AS SUCH, WE APPROVE THE VIE W TAKEN BY THE TPO IN INCLUDING THIS CASE IN THE LIST OF COMPARABL ES. THE ASSESSEE FAILS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (XII) KALS INFORMATION SYSTEMS LTD. (SEG.) LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY FAILS ON S OFTWARE SERVICE REVENUE FILTER AND HAS SIGNIFICANT REVENUE FROM PRO DUCT. THIS COMPANY HAS NO SEGMENTAL DETAILS AVAILABLE. LD. AR SUBMITTED THAT THIS COMPARABLE WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN THE SAID CONTENTIONS OF THE AR. IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WHILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 27.1. THE TPO OBSERVED THAT THIS COMPANY WAS ENGAG ED IN SOFTWARE DEVELOPMENT AND TRAINING. AS THE SOFTWARE PRODUCTS CONSTITUTED ONLY 3% OF ITS REVENUE AND TRAINING REV ENUE CONSTITUTED 8.56%, THE TPO HELD THAT THIS SEGMENT OF KALS INFOR MATION SYSTEMS LIMITED WAS RIGHTLY INCLUDIBLE. 20 ITA NO.5258/DEL/2011 27.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, IT IS AN ADMITTED POSI TION THAT THE TPO ADOPTED SOFTWARE DEVELOPMENT SEGMENT OF THIS COMPAN Y BY NOTICING THAT THIS SEGMENT ALSO INCLUDED REVENUES F ROM SOFTWARE PRODUCTS AND TRAINING. IN VIEW OF THE FACT THAT THE ASSESSEE IS NOT ENGAGED IN IMPARTING ANY TRAINING ON COMMERCIAL BAS IS OR SELLING ITS SOFTWARE PRODUCTS, WE HOLD THAT THE FINANCIALS OF THIS COMPANY UNDER THIS SEGMENT CANNOT BE COMPARED WITH THE ASSE SSEE. THE CONTRIBUTION BY THE SALE OF SOFTWARE PRODUCTS OR TR AINING TO THE OVERALL REVENUE OF THIS SEGMENT CANNOT BE PRECISELY ASCERTAINED TO DETERMINE THE QUESTION OF ITS COMPARABILITY. AS SUC H, THIS CASE IS DIRECTED TO BE EXCLUDED. THE ASSESSEE SUCCEEDS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (XIII) LGS GLOBAL LTD. (LANCO GLOBAL SOLUTIONS LTD. ) THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. (XIV) LUCID SOFTWARE LTD. LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY IS FUNCTIO NALLY DISSIMILAR TO THE ASSESSEE COMPANY AND THIS COMPANY IS A PRODU CT COMPANY FOCUSING ON ADVANCED NON-DESTRUCTIVE TESTING TECHNO LOGIES AND ALSO HAS DEVELOPED PROPRIETARY SOFTWARE NAMED MUUL AM. LD. AR 21 ITA NO.5258/DEL/2011 SUBMITTED THAT THIS COMPARABLE WAS EXCLUDED IN TOLU NA (SUPRA). WE FIND FORCE IN THE SAID CONTENTIONS OF THE AR. IN TO LUNA (SUPRA), THE CO- ORDINATE BENCH WHILE ACCEPTING THE CONTENTIONS OF T HE AR, HELD AS UNDER :- 29.1. THE TPO NOTICED THAT THIS COMPANY WAS A PURE SOFTWARE DEVELOPMENT SERVICES COMPANY AND DID NOT HAVE ANY R ELATED PARTY TRANSACTIONS. ON BEING CALLED UPON TO EXPLAIN AS TO WHY THIS COMPANY BE NOT TREATED AS COMPARABLE, THE ASSESSEE REPLIED THAT LUCID SOFTWARE LIMITED HAS DEVELOPED `MUULAM SOFTW ARE, THE DETAILS OF WHICH WERE COLLECTED FROM THE WEBSITE OF LUCID SOFTWARE ITSELF. IN VIEW OF SUCH DETAILS, IT WAS CONTENDED T HAT THIS COMPANY WAS A SOFTWARE PRODUCT COMPANY HAVING INTELLECTUAL PROPERTY RIGHTS. REJECTING THE ASSESSEES OBJECTIONS, THE TP O INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. 29.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, IT CAN BE SEEN THAT TH E ASSESSEE CATEGORICALLY OBJECTED BEFORE THE TPO TO THE EFFECT THAT THIS COMPANY WAS MAINLY INTO SOFTWARE PRODUCT BUSINESS H AVING LICENSE F SUCH PRODUCTS. THE TPO IGNORED THE ASSESSEES SUB MISSIONS DESPITE THE FACT THAT SUFFICIENT MATERIAL TAKEN FRO M THE WEBSITE OF THIS COMPANY WAS PLACED BEFORE HIM IN SUPPORT OF TH E CONTENTION. IT CAN BE SEEN FROM PAGE 192 OF THE PAPER BOOK, BEI NG NOTES TO THE BALANCE SHEET OF LUCID SOFTWARE LTD., THAT THIS CO MPANY DEVELOPED SOFTWARE PRODUCTS IN-HOUSE. THE EXPENDITURE SO INCU RRED ON PRODUCT DEVELOPMENT HAS BEEN DULY CAPITALIZED BY LU CID SOFTWARE LTD. THESE FACTS AMPLY BRING OUT THAT LUCID SOFTWAR E LTD. CANNOT BE CONSIDERED AS COMPARABLE. WE, THEREFORE, DIRECT THE EXCLUSION OF THIS CASE FROM THE LIST OF COMPARABLES. THE ASSESSE E SUCCEEDS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. 22 ITA NO.5258/DEL/2011 (XV) MEDIASOFT SOLUTIONS LTD. THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. (XVI) MEGASOFT LTD. (SEG.) LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY HAS UNDERG ONE SIGNIFICANT RESTRUCTURING DURING THE RELEVANT FY AND OWNS INTAN GIBLES. IT ALSO FAILED ON DIFFERENT FINANCIAL YEAR END FILTER AS AP PLIED BY THE TPO. HE SUBMITTED THAT THE JTPO SHOULD NOT HAVE CONSIDERED THE COMPANY WIDE MARGIN OF ASSESSEE SINCE THAT ALSO FACTORS INT O ITSELF THE RETURN FROM THE SALE OF SOFTWARE PRODUCTS (FORMING A PART OF THE PRODUCT DIVISION). HE SUBMITTED THAT INSTEAD THE TPO SHOUL D HAVE CONSIDERED ONLY THE CONSULTING SEGMENT OF THE COMPANY WHICH AL SO CLEARS ALL THE SEARCH FILTERS APPLIED BY THE TPO. HE SUBMITTED TH AT WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS, THE MARGIN OF 60. 23% USED BY THE TPO IS ABNORMALLY HIGH AND IN VIEW OF THE DETAILED ARGUMENTS ALREADY SUBMITTED, SUCH A COMPARABLE CANNOT BE COMPARED WIT H A COST PLUS CAPTIVE UNIT LIKE THE ASSESSEE. LD. AR SUBMITTED TH AT THIS COMPARABLE 23 ITA NO.5258/DEL/2011 WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN TH E SAID CONTENTIONS OF THE AR. IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WHILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 31.1. THE TPO, ON PERUSAL OF DATA OF THIS COMPANY AVAILABLE IN THE PROWESS AND ALSO ON CONSIDERATION OF INFORMATIO N RECEIVED U/S 133(6) OBSERVED THAT THIS COMPANY WAS ENGAGED IN SO FTWARE DEVELOPMENT SERVICES UNDER ITS CONSULTING DIVISION. THE ASSESSEE OBJECTED TO ITS INCLUSION BEFORE THE TPO ON THE GRO UND THAT THERE WAS RESTRUCTURING INASMUCH AS THERE WAS ACQUISITION OF SOME OTHER COMPANIES DURING THE YEAR. NOT CONVINCED WITH THE A SSESSEES OBJECTION, THE TPO INCLUDED THIS COMPANY IN THE LIS T OF COMPARABLES. 31.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE DIRECTORS REP ORT OF THIS COMPANY, A COPY OF WHICH IS AVAILABLE ON PAGE 193 O F THE PAPER BOOK, THAT THE FINANCIAL RESULTS FOR THE YEAR INCLU DE THE BUSINESS PERFORMANCE OF VISUAL SOFT TECHNOLOGIES LTD. W.E.F. 1 ST OCTOBER, 2006 CONSEQUENT TO THE AMALGAMATION. THE MUMBAI BEN CH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT [(2013 ) 154 TTJ (MUM) 176] HAS HELD THAT A COMPANY CANNOT BE CONSID ERED AS COMPARABLE BECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MERGERS/DEMERGERS ETC. SINCE THE FINANCIAL RESULTS OF MEGASOFT LTD. HAVE THE IMPACT OF THE MERGER OF VISUAL SOFTWARE TE CHNOLOGIES LTD., W.E.F. 1 ST OCTOBER, 2006, OBVIOUSLY, THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE. ACCORDINGLY, THIS COMPANY IS DIRECTED TO BE EXCLUDED. THE ASSESSEE SUCCEEDS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. 24 ITA NO.5258/DEL/2011 (XVII) MINDTREE LTD. THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. (XVIII) PERSISTENT SYSTEMS LTD. LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY HAS UNDERG ONE SIGNIFICANT RESTRUCTURING DURING THE RELEVANT FY AND THE COMPAN Y ALSO DERIVES ITS INCOME FROM THE SALE OF SOFTWARE SERVICES AS WELL A S PRODUCTS. LD. AR SUBMITTED THAT THIS COMPARABLE WAS EXCLUDED IN TOLU NA (SUPRA). WE FIND FORCE IN THE SAID CONTENTIONS OF THE AR. IN TO LUNA (SUPRA), THE CO- ORDINATE BENCH WHILE ACCEPTING THE CONTENTIONS OF T HE AR, HELD AS UNDER :- 33. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE HOLD THAT THIS COMP ANY ALSO CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF MERGER OF AN OTHER COMPANY INTO IT, WHICH FACT IS EVIDENT FROM PAGE 19 6 OF THE PAPER BOOK. IT CAN BE SEEN THAT A SUBSIDIARY COMPANY WAS MERGED INTO THIS COMPANY PURSUANT TO JUDGMENT OF HONBLE BOMBAY HIGH COURT W.E.F. 1.4.06. BECAUSE OF THE MERGER OF SUBSI DIARY INTO THIS COMPANY, WE HOLD THAT THE FINANCIAL POSITION OF THI S COMPANY CANNOT BE CONSTRUED AS NORMAL CAPABLE OF A GOOD COM PARISON. FOLLOWING THE MUMBAI BENCH DECISION IN PETRO ARALDI TE (P) LTD. (SUPRA), WE DIRECT THE EXCLUSION OF THIS COMPANY FR OM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS 25 ITA NO.5258/DEL/2011 IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (XIX) QUINTEGRA SOLUTIONS LTD. THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. (XX) R S SOFTWARE (INDIA) LTD. THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. (XXI) R SYSTEMS INTERNATIONAL LTD. (SEG.) THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. (XXII) SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG. ) LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY HAS UNDERG ONE SIGNIFICANT RESTRUCTURING DURING THE RELEVANT FY AND THE COMPAN Y ALSO FAILED ON 26 ITA NO.5258/DEL/2011 R&D FILTER AND ALSO OWNS OF INTANGIBLES. LD. AR SUB MITTED THAT THIS COMPARABLE WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN THE SAID CONTENTIONS OF THE AR. IN TOLUNA (SUPRA), THE CO-OR DINATE BENCH WHILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 37. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS COMP ANY ACQUIRED BOTNIA HITEC OYOY, FINLAND AND ITS TWO WHOLLY OWNED SUBSIDIARY COMPANIES DURING THE YEAR, WHICH FACT IS APPARENT F ROM THE DIRECTORS REPORT OF THIS COMPANY AVAILABLE AT PAGE 202 OF THE PAPER BOOK. FOLLOWING THE MUMBAI BENCH DECISION IN PETRO ARALDITE (P) LTD.(SUPRA), WE ORDER FOR THE EXCLUSIO N OF THIS COMPANY FROM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (XXIII)_SIP TECHNOLOGIES & EXPORTS LTD. THE ASSESSEE HAS NO OBJECTION TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. ( XXIV) TATA ELEXI LTD. (SEG.) LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY IS FUNCTIO NALLY DISSIMILAR AND ENGAGED IN THE PROVISION OF SPECIALIZED EMBEDDE D SOFTWARE 27 ITA NO.5258/DEL/2011 DEVELOPMENT SERVICES TO THE CUSTOMERS. FURTHER, HE SUBMITTED THAT THE COMPANY HAS TERMED THE SERVICES PROVIDED BY IT AS U NIQUE AND NON- REPETITIVE IN NATURE INVOLVING DEVELOPMENT OF EMBED DED SOFTWARE FOR USE BY THE CUSTOMERS. HE SUBMITTED THAT THIS COMPA NY ALSO FAILS R&D FILTER. LD. AR SUBMITTED THAT THIS COMPARABLE WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN THE SAID CONTENTIONS OF T HE AR. IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WHILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 39.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY NOTICING THAT ITS SOFTWARE DEVELOPMENT AND SERV ICES SEGMENT MATCHED WITH THE ASSESSEE. ON BEING CALLED UPON TO EXPLAIN AS TO WHY THIS COMPANY BE NOT INCLUDED IN THE LIST OF COM PARABLES, THE ASSESSEE STATED THAT THE NATURE OF ACTIVITY DONE BY THIS COMPANY WAS DIFFERENT INASMUCH AS IT WAS ENGAGED IN R&D ACT IVITIES ALSO WHICH RESULTED IN CREATION OF INTELLECTUAL PROPERTY . NOT CONVINCED WITH THE ASSESSEES SUBMISSIONS, THE TPO INCLUDED T HIS SEGMENT OF THE COMPANY IN THE LIST OF COMPARABLES. 39.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE MATERIAL ON RECORD, WE FIND FROM PAGE NO.206 OF THE PAPER BOOK, WHICH IS ANNEXURE TO THE DIRECTORS REPORT OF THIS COMPANY, THAT THE NATURE OF ITS ACTIVITY IS QUITE DISTINCT FROM T HAT OF THE ASSESSEE. IT CAN BE SEEN THAT THIS COMPANY IS INTO DEVELOPMEN T OF HARDWARE AND SOFTWARE FOR EMBEDDED PRODUCTS SUCH AS MULTI-ME DIA AND SOME OTHER ELECTRONICS, ETC. APART FROM THAT, THIS COMPA NY IS ALSO ENGAGED IN MAKING SOME PROGRAMMES DEVELOPING TECHNO LOGY INTELLECTUAL PROPERTY. AS THE NATURE OF ACTIVITY CA RRIED OUT BY THE ASSESSEE IN QUESTION IS NOWHERE CLOSE TO THAT OF TA TA ELXSI LTD., WE HOLD THAT THIS COMPANY CANNOT BE INCLUDED IN THE LI ST OF COMPARABLES. ACCORDINGLY, THIS COMPANY IS DIRECTED TO BE EXCLUDED. THE ASSESSEE SUCCEEDS. 28 ITA NO.5258/DEL/2011 IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. (XXV)_THIRDWARE SOLUTIONS LTD. (SEG.) LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY IS FUNCTIO NALLY DISSIMILAR AND DERIVES REVENUE FROM VARIOUS SOURCES SUCH AS SA LE OF LICENSE, SOFTWARE SERVICES, EXPORT FROM SEZ UNIT, REVENUE FR OM SUBSCRIPTION ETC. FURTHER, LD. AR SUBMITTED THAT THIS COMPANY I S ENGAGED IN DIVERSIFIED BUSINESS INCLUDING SOFTWARE PRODUCTS AN D NO STANDALONE FINANCIAL DATA IS AVAILABLE FOR FY 2006-07. THEREF ORE, THE LD. AR SUBMITTED THAT THIS COMPARABLE MAY BE EXCLUDED. ON THE OTHER HAND, THE LD. DR COULD NOT CONTROVERT THE FACT THAT THE SAID COMPARABLE IS NOT ENGAGED IN SALE OF LICEN SE OF SOFTWARE PRODUCTS AS POINTED OUT BY THE LD. AR. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATER IAL AVAILABLE ON RECORD. A PERUSAL OF THE ANNUAL REPOR T OF THIRDWARE SOLUTIONS LTD. REVEALS THAT THE SAID COMPANY HAS MA DE INCOME FROM 29 ITA NO.5258/DEL/2011 SALE OF LICENCE TO THE TUNE OF MORE THAN RS.1 CRORE , WHICH MEANS THE COMPANY IS INTO PRODUCTION OF SOFTWARE PRODUCTS WHI CH APPARENTLY CANNOT BE A COMPARABLE TO ASSESSEE DEALING WITH CON TRACT SOFTWARE DEVELOPMENT AND NOT INTO SALE OF ANY PRODUCT. THER EFORE, WE DIRECT TPO/AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COM PARABLES. (XXVI) WIPRO LTD. (SEG.) LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPAR ED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY IS FUNCTIO NALLY DISSIMILAR AND A PERUSAL OF THE SEGMENTAL DETAILS FOR FY 2006- 07 INDICATES THAT WIPRO HAD INCURRED EXPENSES TO THE EXTENT OF RS.63,1 3,70,75,351 TOWARDS THE COST OF GOODS SOLD. HE FURTHER SUBMITTE D THAT DURING THE FY 2006-07, THIS COMPANY HAD EARNED A MARKUP OF 33. 43% ON THE COST INCURRED IN THE IT SERVICES AND AS SUCH, ON AN APPROXIMATION, THE REVENUE EARNED BY THE COMPANY FROM THE SALE OF PROD UCTS WOULD BE RS.84,24,37,99,640. HE SUBMITTED THAT THIS COMPANY FAILS ON R&D FILTER AND SUBSTANTIAL TURNOVER AND ALSO THERE IS N O STANDALONE FINANCIAL DATA FOR FY 2006-07. LD. AR SUBMITTED THAT THIS CO MPARABLE WAS EXCLUDED IN TOLUNA (SUPRA). WE FIND FORCE IN THE SA ID CONTENTIONS OF 30 ITA NO.5258/DEL/2011 THE AR. IN TOLUNA (SUPRA), THE CO-ORDINATE BENCH WH ILE ACCEPTING THE CONTENTIONS OF THE AR, HELD AS UNDER :- 41. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE HAVE ABSOLUTELY NO DOUBT IN OUR MIND THAT THIS COMPANY CANNOT BE CONSIDERED AS COMP ARABLE TO THE ASSESSEE INASMUCH AS IT IS A GIANT COMPANY IN TERMS OF PARAMETERS DISCUSSED ABOVE WHILE DEALING WITH THE CASE OF INFO SYS LTD. THE HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY INDI A TECHNOLOGIES PVT. LTD. (SUPRA) HAS UPHELD THE EXCLU SION OF THIS COMPANY ALSO FROM THE LIST OF COMPARABLES ON THE BA SIS OF CERTAIN PARAMETERS, WHICH ARE FULLY APPLICABLE TO THE INSTA NT ASSESSEE AS WELL. IT IS, THEREFORE, DIRECTED TO EXCLUDE THIS CO MPANY FROM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS. IN THE LIGHT OF THE CO-ORDINATE BENCH FINDING, AS A FORE-STATED, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. SO, THE ASSESSEES OBJECTION IS UPHELD. II. ITES SEGMENT (I) ACCENTIA TECHNOLOGIES LTD. THE TPO REPELLED THE OBJECTIONS OF THE ASSESSEE AN D PLACED RELIANCE ON THE RESPONSE RECEIVED TO THE NOTICE ISS UED UNDER SECTION 133(6) TO HOLD THAT ACCENTIA IS COMPARABLE, DESPITE THE FACT THAT THE COMPANY ADMITTING IN WRITING THAT IT IS INTO MEDICA L TRANSCRIPTION SERVICE. ACCORDING TO LD. AR, THE TPO ERRED IN COM PARING THE MEDICAL TRANSCRIPTION SEGMENT OF ACCENTIA TO ITES S EGMENT OF 31 ITA NO.5258/DEL/2011 ASSESSEE. THE LD. AR SUBMITTED THAT ACCENTIA PROVI DES HIGH END FUNCTIONS SUCH AS KNOWLEDGE PROCESS OUTSOURCING, LE GAL PROCESS OUTSOURCING, DATA PROCESS OUTSOURCING, HIGH END SOF TWARE SERVICES DELIVERY BESIDES OFFERING SOFTWARE AS A SERVICE (S AAS) MODEL IN THE HEALTHCARE OUTSOURCING AREA. HE FURTHER SUBMITT ED THAT IT ALSO DEVELOPED SOFTWARE PRODUCTS SUCH AS BUSINESS PROCES S OUTSOURCING MANAGEMENT (BPOM) SOLUTIONS AND HEALTHDOX (HRCM S OLUTION), APART FROM IT ENABLED SERVICES. OUR ATTENTION WAS A LSO BROUGHT TO THE PERTINENT FACT THAT TPO HAS HIMSELF ADMITTED THAT A NNUAL REPORT OF THIS COMPANY IS NOT AVAILABLE SO ASSUMPTION IS THAT SEGMENTAL INFORMATION FOR ACCENTIA WAS UNAVAILABLE BEFORE THE TPO. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND HAVE GON E THROUGH THE MATERIAL AVAILABLE ON RECORD AND THE CASE-LAWS CITED BY BOTH THE PARTIES. WE FIND THAT A PERUSAL OF PAGE 279 OF APP EAL SET OF TPO ORDER DEALING WITH ACCENTIA, THE TPO HAS STATED THAT ANNU AL REPORT OF THIS FINANCIAL YEAR IS NOT AVAILABLE. HOWEVER, IN ORDER TO MAKE THIS COMPANY A COMPARABLE, THE TPO HAS RELIED ON THE REP LY OF THIS COMPANY U/S 133(6) OF THE ACT. PURSUANT TO THE NOT ICE OF TPO, 32 ITA NO.5258/DEL/2011 ACCENTIA HAD REPLIED THAT IT IS INTO MEDICAL TRANSC RIPTION AND THE TPO HAS HELD IT TO BE COMPARABLE BY STATING AS BELOW : THE COMPANY WAS NOT PART OF THE COMPANIES CONSIDER ED BY THE TAXPAYER IN THE ACCEPT/REJECT MATRIX GIVEN BY THE T AXPAYER AS APPENDIX D TO THE TP REPORT. HOWEVER, THE COMPANY S DATA IS AVAILABLE IN THE CAPITALINE DATABASE. THE ANNUAL R EPORT IS NOT AVAILABLE FOR THE FY 2006-07. 133(6) NOTICE WAS IS SUED. AS PER THE REPLY RECEIVED FORM THE COMPANY IT HAS ITES SEG MENT WHICH IS INTO MEDICAL TRANSCRIPTION SERVICES AND QUALIFIES ALL TH E FILTERS APPLIED BY THE TPO. WE FIND THAT THE TPO HAS TREATED THE MEDICAL TRANSC RIPTION SEGMENT COMPARABLE TO THAT OF THE ITES BACK OFFICE SUPPORT OF THE ASSESSEE, WHICH IS NOT CORRECT IN VIEW OF THE HONBLE JURISDI CTIONAL HIGH COURT DECISION IN RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT ( ITA 102/2015 ORDER DATED 10.08.2015) WHEREIN THE HONBLE HIGH CO URT HAS HELD AS UNDER : 33. THE SPECIAL BENCH OF THE TRIBUNAL IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA) STRUCK A DIFFERENT CORD. THE SPECIAL BENCH OF THE TRIBUNAL HELD THAT EVEN THOUGH THERE APPEARS TO BE A DIFFERENCE BETWEEN BPO AND KPO SERV ICES, THE LINE OF DIFFERENCE IS VERY THIN. THE TRIBUNAL WAS O F THE VIEW THAT THERE COULD BE A SIGNIFICANT OVERLAP IN THEIR ACTIV ITIES AND IT MAY BE DIFFICULT TO CLASSIFY SERVICES STRICTLY AS FALLI NG UNDER THE CATEGORY OF EITHER A BPO OR A KPO. THE TRIBUNAL ALS O OBSERVED THAT ONE OF THE KEY SUCCESS FACTORS OF THE BPO INDU STRY IS ITS ABILITY TO MOVE UP THE VALUE CHAIN THROUGH KPO SERV ICE OFFERING. FOR THE AFORESAID REASONS, THE SPECIAL BENCH OF THE TRIBUNAL HELD THAT ITES SERVICES COULD NOT BE BIFURCATED AS BPO A ND KPO 33 ITA NO.5258/DEL/2011 SERVICES FOR THE PURPOSE OF COMPARABILITY ANALYSIS IN THE FIRST INSTANCE. THE TRIBUNAL PROCEEDED TO HOLD THAT A REL ATIVELY EQUAL DEGREE OF COMPARABILITY CAN BE ACHIEVED BY SELECTIN G POTENTIAL COMPARABLES ON A BROAD FUNCTIONAL ANALYSIS AT ITES LEVEL AND THAT THE COMPARABLES SO SELECTED COULD BE PUT TO FURTHER TEST BY COMPARING SPECIFIC FUNCTIONS PERFORMED IN THE INTER NATIONAL TRANSACTIONS WITH UNCONTROLLED TRANSACTIONS TO ATTA IN RELATIVELY EQUAL DEGREE OF COMPARABILITY. 34. WE HAVE RESERVATIONS AS TO THE TRIBUNALS AFORE SAID VIEW IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA). AS INDICATED ABOVE, THE EXPRESSION BPO AND KPO ARE, PLAINLY, UNDERSTOOD IN THE SENSE THAT WHEREAS, BPO DOES NOT NECESSARILY INVOLVE ADVANCED SKILLS AND KNOWLEDGE; KPO, ON THE OTHER HA ND, WOULD INVOLVE EMPLOYMENT OF ADVANCED SKILLS AND KNOWLEDGE FOR PROVIDING SERVICES. THUS, THE EXPRESSION KPO IN C OMMON PARLANCE IS USED TO INDICATE AN ITES PROVIDER PROVI DING A COMPLETELY DIFFERENT NATURE OF SERVICE THAN ANY OTH ER BPO SERVICE PROVIDER. A KPO SERVICE PROVIDER WOULD ALSO BE FUNC TIONALLY DIFFERENT FROM OTHER BPO SERVICE PROVIDERS, INASMUC H AS THE RESPONSIBILITIES UNDERTAKEN, THE ACTIVITIES PERFORM ED, THE QUALITY OF RESOURCES EMPLOYED WOULD BE MATERIALLY DIFFERENT . IN THE CIRCUMSTANCES, WE ARE UNABLE TO AGREE THAT BROADLY ITES SECTOR CAN BE USED FOR SELECTING COMPARABLES WITHOUT MAKIN G A CONSCIOUS SELECTION AS TO THE QUALITY AND NATURE OF THE CONTENT OF SERVICES. RULE 10B(2)(A) OF THE INCOME TAX RULES, 1 962 MANDATES THAT THE COMPARABILITY OF CONTROLLED AND U NCONTROLLED TRANSACTIONS BE JUDGED WITH REFERENCE TO SERVICE/PR ODUCT CHARACTERISTICS. THIS FACTOR CANNOT BE UNDERMINED B Y USING A BROAD CLASSIFICATION OF ITES WHICH TAKES WITHIN ITS FOLD VARIOUS TYPES OF SERVICES WITH COMPLETELY DIFFERENT CONTENT AND VALUE. THUS, WHERE THE TESTED PARTY IS NOT A KPO SERVICE P ROVIDER, AN ENTITY RENDERING KPO SERVICES CANNOT BE CONSIDERED AS A COMPARABLE FOR THE PURPOSES OF TRANSFER PRICING ANA LYSIS. THE PERCEPTION THAT A BPO SERVICE PROVIDER MAY HAVE THE ABILITY TO MOVE UP THE VALUE CHAIN BY OFFERING KPO SERVICES CA NNOT BE A GROUND FOR ASSESSING THE TRANSACTIONS RELATING TO S ERVICES RENDERED BY THE BPO SERVICE PROVIDER BY BENCHMARKING IT WITH THE TRANSACTIONS OF KPO SERVICES PROVIDERS. THE OBJECT IS TO ASCERTAIN THE ALP OF THE SERVICE RENDERED AND NOT OF A SERVIC E (HIGHER IN VALUE CHAIN) THAT MAY POSSIBLY BE RENDERED SUBSEQUE NTLY. 34 ITA NO.5258/DEL/2011 35. AS POINTED OUT BY THE SPECIAL BENCH OF THE TRIB UNAL IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA) , THERE MAY BE CASES WHERE AN ENTITY MAY BE RENDERING A MIX OF SER VICES SOME OF WHICH MAY BE FUNCTIONALLY COMPARABLE TO A KPO WHILE OTHER SERVICES MAY NOT. IN SUCH CASES A CLASSIFICATION OF BPO AND KPO MAY NOT BE FEASIBLE. CLEARLY, NO STRAITJACKET FORMU LA CAN BE APPLIED. IN CASES WHERE THE CATEGORIZATION OF SERVI CES RENDERED CANNOT BE DEFINED WITH CERTAINTY, IT WOULD BE APPOS ITE TO EMPLOY THE BROAD FUNCTIONALITY TEST AND THEN EXCLUDE UNCON TROLLED ENTITIES, WHICH ARE FOUND TO BE MATERIALLY DISSIMIL AR IN ASPECTS AND FEATURES THAT HAVE A BEARING ON THE PROFITABILI TY OF THOSE ENTITIES. HOWEVER, WHERE THE CONTROLLED TRANSACTION S ARE CLEARLY IN THE NATURE OF LOWER-END ITES SUCH AS CALL CENTERS E TC. FOR RENDERING DATA PROCESSING NOT INVOLVING DOMAIN KNOW LEDGE, INCLUSION OF ANY KPO SERVICE PROVIDER AS A COMPARAB LE WOULD NOT BE WARRANTED AND THE TRANSFER PRICING STUDY MUS T TAKE THAT INTO ACCOUNT AT THE THRESHOLD. 36. AS POINTED OUT EARLIER, THE TRANSFER PRICING AN ALYSIS MUST SERVE THE BROAD OBJECT OF BENCHMARKING AN INTERNATI ONAL TRANSACTION FOR DETERMINING AN ALP. THE METHODOLOGY NECESSITATES THAT THE COMPARABLES MUST BE SIMILAR I N MATERIAL ASPECTS. THE COMPARABILITY MUST BE JUDGED ON FACTOR S SUCH AS PRODUCT/SERVICE CHARACTERISTICS, FUNCTIONS UNDERTAK EN, ASSETS USED, RISKS ASSUMED. THIS IS ESSENTIAL TO ENSURE THE EFFI CACY OF THE EXERCISE. THERE IS SUFFICIENT FLEXIBILITY AVAILABLE WITHIN THE STATUTORY FRAMEWORK TO ENSURE A FAIR ALP. IN THE LIGHT OF THE ABOVE, WE FIND THAT ACCENTIA IS INTO HIGH END SERVICE (KPO), WHICH CANNOT BE COMPARED WITH THE ASSESSEE. SO, WE DIRECT ITS EXCLUSION FROM THE LIST OF COMPARABLES. 35 ITA NO.5258/DEL/2011 (II) ALLSEC TECHNOLOGIES LTD. THE TPO REPELLED THE OBJECTIONS OF THE ASSESSEE AN D HELD THAT SINCE ALLSEC PASSES ALL THE FILTERS APPLIED BY THE TPO, IT SHALL BE INCLUDED IN THE FINAL SET. THE LD. AR SUBMITTED THAT ALLSEC IS A FULL FLEDGED ENTREPRENEUR THAT OPERATES IN THE OPEN MARKET UNDER COMPETITIVE CONDITIONS AND A HIGH RISK ENVIRONMENT. THE LD. AR DIRECTED OUR ATT ENTION TO THE RISK PROFILE OF ALLSEC ON PAGE 406 OF SPB. THE LD. AR F URTHER CONTENDED THAT ALLSEC UNDERTOOK SIGNIFICANT AMOUNT OF ADVERTI SING EXPENDITURE IN RELEVANT FY AND SUCH INVESTMENT MAY RESULT IN DEVEL OPMENT OF NON- ROUTINE MARKETING INTANGIBLES. THEREFORE, LD. AR SU BMITTED THAT A RETURN FOR SUCH INTANGIBLES WILL ALSO BE FACTORED I NTO THE OVERALL RETURN ACHIEVED BY THE COMPANY. THIS IS IN COMPLETE CONTRA ST WITH THE APPELLANT WHICH INCURS NIL ADVERTISING EXPENSE. TH E LD. AR ALSO SUBMITTED THAT ALLSEC HAD TRANSACTION WITH ITS RELA TED PARTIES TO THE EXTENT OF 12% OF THE TOTAL REVENUE WHICH IS IN EXCE SS OF THE 10% RPT FILTER APPLIED BY THE APPELLANT. LD. AR PLACED RELI ANCE ON PARA 56 OF THE DECISION OF MOTOROLA SOLUTIONS INDIA PRIVATE LI MITED VS DCIT (ITA NO. 5637/DEL/2011 ORDER DATED 14.08.2014). 36 ITA NO.5258/DEL/2011 WE HAVE CONSIDERED THE RIVAL SUBMISSION AND HAVE GON E THROUGH THE MATERIAL AVAILABLE ON RECORD AND THE CASE-LAWS CITED BY BOTH THE PARTIES. WE HAVE GONE THROUGH THE ANNUAL REPORT OF THE SAID COMPANY AND WE FIND THAT THE SAID COMPANY IS FUNCTIONALLY S IMILAR TO THAT OF THE ASSESSEE. THEREFORE, WE FIND THAT THE CONTENTIONS RAISED BEFORE US CANNOT BE A VALID GROUND FOR REJECTING THE SAID COM PARABLE. SO, WE UPHOLD THE DECISION OF TPO TO INCLUDE THIS COMPARAB LE IN THE LIST OF COMPARABLES. THE ASSESSEES OBJECTION IS REJECTED. (III) ASIT C MEHTA FINANCIAL SERVICES LTD. (EARLIER KNOWN AS NUCLEUS NETSOFT & GIS LTD. (IV) CALIBER POINT BUSINESS SOLUTIONS LTD. (V) HCL COMNET SYSTEMS & SERVICES LTD. (VI) INFORMED TECHNOLOGIES INDIA LTD. AS REGARDS THE AFORESAID FOUR COMPARABLES [MENTION ED AT SL.NO.(III) TO (VI)], THE LD. AR AT THE OUTSET HAD OBJECTION IN THE FILTER USED BY THE TPO OF 25% RELATED PARTY TRANSACTIONS. ACCORDING TO HIM, THE IDEAL SITUATION IS THAT THERE SHOULD BE ZERO RE LATED PARTY TRANSACTIONS, HOWEVER, THE RELATED PARTY TRANSACTIO NS SHOULD BE TAKEN 37 ITA NO.5258/DEL/2011 THE LEAST WHEN THERE ARE REASONABLE COMPARABLES AVA ILABLE BEFORE THE TPO. IN ORDER TO BUTTRESS HIS ARGUMENTS, HE CITED THE ORDER OF THE COORDINATE BENCH IN THE CASE OF MOTOROLA SOLUTIONS INDIA PRIVATE LIMITED (SUPRA) WHEREIN THE TRIBUNAL HAD ACCEPTED T HE SAID CONTENTION OF THE ASSESSEE AND HELD AS UNDER :- 56. WE ARE IN AGREEMENT WITH TPO IN PRINCIPLE THAT THIS FILTER IS APPROPRIATE TO ELIMINATE THE COMPANIES WHICH HAVE C ONTROLLED TRANSACTIONS AND THEREBY HAVE A SIGNIFICANT INFLUEN CE ON THE MARGINS EARNED. THE TPO IN HIS ORDER HAS OBSERVED THAT IN P RINCIPLE THE TAX PAYER HAS NO OBJECTION FOR APPLYING THIS FILTER. HO WEVER, ITS TWO MAIN CONTENTIONS ARE-ONE-AVAILABILITY OF RPT INFORM ATION AND SECOND THE THRESHOLD LIMIT OF 15% IN PLACE OF 25%. AT THE SAME TIME WE ALSO FIND CONSIDERABLE FORCE IN THE SUBMISS ION OF LD. COUNSEL FOR THE ASSESSEE THAT IDEALLY IF SUFFICIENT NUMBER OF 100% UNCONTROLLED COMPARABLES ARE FOUND, THEN NO COMPARA BLE HAVING RELATED PARTY TRANSACTIONS SHOULD BE CONSIDERED. WE ARE IN AGREEMENT WITH LD. COUNSEL THAT ONLY WHEN SUFFICIEN T COMPARABLES ARE NOT FOUND, THE RELATED PARTY THRESHOLD SHOULD B E RELAXED AND ITA NO. 5637/D/2011 99 ONLY GRADUALLY TO THE EXTENT THA T SUFFICIENT COMPARABLES ARE FOUND, THE LIMIT SHOULD BE RELAXED. THEREFORE, WE ACCEPT THE ASSESSEES PLEA THAT NO SACROSANCT THRES HOLD LIMIT SHOULD BE FIXED FOR THIS FILTER. LD. DRP HAS ALSO NOTED TH AT NEITHER THERE IS ANY JUDICIAL CONSENSUS ON THE NUMERICAL LIMIT NOR T HE SECTION SO PRESCRIBES. HOWEVER, THERE IS CONSENSUS ON THE EFFE CT OF RPT I.E. IT SHOULD NOT MATERIALLY AFFECT THE INTERNATIONAL TRAN SACTION. THEREFORE, CONSIDERING THE SUBMISSIONS OF BOTH THE SIDES, WE A RE OF THE OPINION THAT IF BY APPLYING THE THRESHOLD LIMIT OF 15% OF R ELATED PARTY TRANSACTION, SUFFICIENT COMPARABLES ARE AVAILABLE T HEN THERE IS NO REASON TO FURTHER EXTEND THE LIMIT TO 25%. THEREFOR E, WE DIRECT THE TPO TO TAKE INTO CONSIDERATION ONLY THOSE COMPARABL ES WHERE RELATED PARTY TRANSACTIONS ARE TO THE EXTENT OF 15% BECAUSE IT IS NOT THE CASE OF REVENUE THAT BY APPLYING THE THRESHOLD LIMIT OF 15%, IT WILL NOT GET SUFFICIENT NUMBER OF COMPARABLES. 38 ITA NO.5258/DEL/2011 IT WAS POINTED OUT BY THE LD. AR THAT THE AFORESAID COMPANIES RELATED PARTY TRANSACTIONS ARE MORE THAN 15%. WE FIND FORC E IN THE SAID CONTENTION OF THE LD. AR AND WE FIND THAT IN THIS L IST OF COMPARABLES CONSIDERED BY THE TPO, THE ASSESSEE ITSELF HAD ACCE PTED ELEVEN (11) COMPARABLES AS COMPARABLE WITH THAT OF THE ASSESSE E. IN SUCH A SCENARIO, WE ARE OF THE OPINION THAT THE TPO MAY TA KE INTO CONSIDERATION ONLY THOSE COMPARABLES WHERE RELATED PARTY TRANSACTIONS ARE TO THE EXTENT OF 15% BECAUSE IT IS NOT A CASE O F THE REVENUE THAT BY APPLYING THRESHOLD LIMIT OF 15%, IT WILL NOT GET SU FFICIENT NUMBER OF COMPARABLES. SINCE WE ARE NOT ENTERING INTO ANY OT HER GROUNDS RAISED BY THE ASSESSEE AGAINST THESE COMPANIES, THE OTHER GROUNDS ARE LEFT OPEN. (VII) ECLERX SERVICES LTD. (VIII) VISHAL INFORMATION TECHNOLOGIES LTD. AS REGARDS THE AFORESAID TWO COMPARABLES [MENTIONE D AT SL.NOS.(VII) & (VIII)], THE LD. AR AT THE OUTSET IT SELF POINTED OUT THAT ECLERX AND VISHAL ARE INTO KPO SERVICES. ACCORDING TO HIM, ALTHOUGH KPO SERVICES WERE ITES BUT THE NATURE OF THESE SERV ICES WERE 39 ITA NO.5258/DEL/2011 MATERIALLY DIFFERENT THAN THE SERVICES RENDERED BY THE ASSESSEE. IT WAS ASSERTED THAT ECLERX IS ENGAGED IN FINANCIAL SERVIC ES IN THE NATURE OF ACCOUNT RECONCILIATION, TRADE ORDER MANAGEMENT SERV ICES AND HAS BEEN RATED AS A LEADING KPO BY NELSO HALL. IT WAS CONTEN DED THAT SIMILARLY VISHAL WAS ENGAGED IN THE SERVICES OF DATA ANALYTIC S AND PROVIDING DATA PROCESSING SOLUTIONS TO SOME OF THE LARGEST BR ANDS IN THE WORLD. VISHAL TOO HAD BEEN RATED AS A LEADING KPO BY NELSO HALL. IN ADDITION, IT WAS POINTED OUT THAT WHILST THE EMPLOY EE COSTS INCURRED BY VISHAL WAS RELATIVELY LOW AND CONSTITUTED ONLY 2.30 % OF ITS TOTAL COST DURING THE RELEVANT YEAR, THE HIRE CHARGES, VENDOR PAYMENTS CONSTITUTED ALMOST 87% OF THE TOTAL COSTS. ACCORDIN G TO THE AR, THIS EVIDENCED THAT VISHALS BUSINESS MODEL WAS DIFFEREN T AND VISHAL HAD OUTSOURCED SIGNIFICANT PART OF ITS OPERATIONS. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MATERI AL AVAILABLE ON RECORD. THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA) HAS HELD AS U NDER :- 36. AS POINTED OUT EARLIER, THE TRANSFER PRICING A NALYSIS MUST SERVE THE BROAD OBJECT OF BENCHMARKING AN INTERNATI ONAL TRANSACTION FOR DETERMINING AN ALP. THE METHODOLOGY NECESSITATES THAT THE COMPARABLES MUST BE SIMILAR IN MATERIAL AS PECTS. THE COMPARABILITY MUST BE JUDGED ON FACTORS SUCH AS PRO DUCT/SERVICE 40 ITA NO.5258/DEL/2011 CHARACTERISTICS, FUNCTIONS UNDERTAKEN, ASSETS USED, RISKS ASSUMED. THIS IS ESSENTIAL TO ENSURE THE EFFICACY OF THE EXE RCISE. THERE IS SUFFICIENT FLEXIBILITY AVAILABLE WITHIN THE STATUTO RY FRAMEWORK TO ENSURE A FAIR ALP. 37. APPLYING THE AFORESAID PRINCIPLES TO THE FACTS OF THE PRESENT CASE, IT IS ONCE AGAIN CLEAR THAT BOTH VISHAL AND E CLERX COULD NOT BE TAKEN AS COMPARABLES FOR DETERMINING THE ALP. VI SHAL AND ECLERX, BOTH ARE INTO KPO SERVICES. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA) , THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THAT ECLERX IS ENGAGED IN DATA ANALYTICS, DAT A PROCESSING SERVICES, PRICING ANALYTICS, BUNDLING OPTIMIZATION, CONTENT OPERATION, SALES AND MARKETING SUPPORT, PRODUCT DAT A MANAGEMENT, REVENUE MANAGEMENT. IN ADDITION, ECLERX ALSO OFFERE D FINANCIAL SERVICES SUCH AS REAL-TIME CAPITAL MARKETS, MIDDLE AND BACK-OFFICE SUPPORT, PORTFOLIO RISK MANAGEMENT SERVICES AND VAR IOUS CRITICAL DATA MANAGEMENT SERVICES. CLEARLY, THE AFORESAID SE RVICES ARE NOT COMPARABLE WITH THE SERVICES RENDERED BY THE ASSESS EE. FURTHER, THE FUNCTIONS UNDERTAKEN (I.E. THE ACTIVITIES PERFO RMED) ARE ALSO NOT COMPARABLE WITH THE ASSESSEE. IN OUR VIEW, THE TRIB UNAL ERRED IN HOLDING THAT THE FUNCTIONS PERFORMED BY THE ASSESSE E WERE BROADLY SIMILAR TO THAT OF ECLERX OR VISHAL. THE OPERATING MARGIN OF ECLERX, THUS, COULD NOT BE INCLUDED TO ARRIVE AT AN ALP OF CONTROLLED TRANSACTIONS, WHICH WERE MATERIALLY DIFF ERENT IN ITS CONTENT AND VALUE. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA) , THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THE SAM E AND HAD, THUS, EXCLUDED ECLERX AS A COMPARABLE . IT IS FURTHER OBSERVED THAT THE COMPARABILITY OF ECLERX HAD ALSO BEEN EXAM INED BY THE HYDERABAD BENCH OF THE TRIBUNAL IN M/S CAPITAL IQ INFORMATION SYSTEMS(INDIA) (P.) LTD. V. ADDITIONAL COMMISSIONER OF INCOME- TAX (SUPRA) , WHEREIN, THE TRIBUNAL DIRECTED THE EXCLUSION OF E CLERX AS A COMPARABLE FOR THE REASON THAT IT WAS ENGAGED IN PROVIDING KPO SERVICES AND FURTHER THAT IT HAD ALSO RETURNED SUPERNORMAL PROFITS. 38. IN OUR VIEW, EVEN VISHAL COULD NOT BE CONSIDERE D AS A COMPARABLE, AS ADMITTEDLY, ITS BUSINESS MODEL WAS C OMPLETELY DIFFERENT. ADMITTEDLY, VISHALS EXPENDITURE ON EMPL OYMENT COST DURING THE RELEVANT PERIOD WAS A SMALL FRACTION OF THE PROPORTIONATE COST INCURRED BY THE ASSESSEE, APPARENTLY, FOR THE REASON THAT MOST OF ITS WORK WAS OUTSOURCED TO OTHER VENDORS/SERVICE PROVIDERS. THE DRP AND THE TRIBUNAL ERRED IN BRUSHING ASIDE THIS V ITAL DIFFERENCE BY OBSERVING THAT OUTSOURCING WAS COMMON IN ITES IN DUSTRY AND 41 ITA NO.5258/DEL/2011 THE SAME WOULD NOT HAVE A BEARING ON PROFITABILITY. PLAINLY, A BUSINESS MODEL WHERE SERVICES ARE RENDERED BY EMPLO YING OWN EMPLOYEES AND USING ONES OWN INFRASTRUCTURE WOULD HAVE A DIFFERENT COST STRUCTURE AS COMPARED TO A BUSINESS MODEL WHERE SERVICES ARE OUTSOURCED. THERE WAS NO MATERIAL FOR THE TRIBUNAL TO CONCLUDE THAT THE OUTSOURCING OF SERVICES BY VISHAL WOULD HAVE NO BEARING ON THE PROFITABILITY OF THE SAID ENTITY. IN THE LIGHT OF THE AFORESAID DECISION OF THE HONOR ABLE JURISDICTIONAL HIGH COURT IN THE CASE OF RAMPGREEN (SUPRA) WHEREIN THE IT WAS HELD THAT BOTH THESE COMPANIES CANNOT BE COMPARED WITH T HE LOW END SERVICE PROVIDER LIKE THE APPELLANT IN THIS CASE. (IX) INFOSYS BPO LTD. THE DRP REPELLED THE OBJECTIONS OF THE ASSESSEE AND CONCURRED WITH THE FINDINGS OF THE TPO AND OBSERVED THAT THE BPO SEGMENT OF INFOSYS HAS BEEN CONSIDERED WHICH PASSES ALL THE AP PLIED FILTERS. THE LD. AR CONTENDED THAT INFOSYS IS FUNCTIONALLY D ISSIMILAR AS IT PROVIDES HIGH-END INTEGRATED SERVICES BY ASSISTING ITS CLIENTS IN IMPROVING THEIR COMPETITIVE POSITIONING BY MANAGING THEIR BUSINESS PROCESSES IN ADDITION TO PROVIDING INCREASED VALUE. IT WAS FURTHER CONTENDED THAT INFOSYS BPO HAS EXTREMELY TURNOVER O F APPROX. 42 ITA NO.5258/DEL/2011 RS.649.51 CRORES WHICH RENDERS IT INCOMPARABLE TO T HE APPELLANT. IT WAS ALSO SUBMITTED THAT INFOSYS HAS A HIGH AMP SPEN D OF 6% WHICH RESULTS IN MARKETING INTANGIBLES AND IS INDICATIVE OF THE FACT THAT THE COMPARABLE HAS INCURRED SUBSTANTIAL EXPENSES ON MAR KETING. THE LD. AR IN ORDER TO BUTTRESS HIS ARGUMENT BROUGHT TO OUR NOTICE THE FOLLOWING CHART TO SHOW THAT THE INFOSYS BPO IS A G IANT COMPANY WHICH CANNOT BE COMPARED TO THAT OF THE ASSESSEE WH O IS PROVIDING LOW END SERVICE :- BASIC PARTICULARS INFOSYS BPO AVAYA INDIA RISK PROFILE OPERATES AS A FULL FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NAME OF THE SERVICES INFOSYS IS ENGAGED IN PROVIDING HIGH-END BUSINESS PROCESS MANAGEMENT SERVICES TO THE FINANCE, MANUFACTURING AND TELECOM INDUSTRY OPERATES AS A LOW-END SERVICE PROVIDER REVENUE 649.56 CRORES (TPO ORDER : PAGE NO 5 OF ANNEXURE B TO THE TP ORDER) 2.52 CRORES OWNERSHIP OF BRANDED PROPERTY INCURRED SUBSTANTIAL EXPENDITURE ON BRAND BUILDING AND ADVERTISEMENT EXPENSES TO THE TUNE OF RS. 55,93,402 NIL ONSITE V OFFSHORE INFOSYS BPO PROVIDES BOTH ONSITE AND OFFSITE SERVICES. THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E.,REMOTELY FROM INDIA) ASSETS RS.115 CRORES RS.45 CRORES 43 ITA NO.5258/DEL/2011 THE LD. AR POINTED OUT TO US THAT THE HONBLE JURIS DICTIONAL HIGH COURT IN THE CASE OF AGNITY INDIA (SUPRA) HAD TAKEN NOTICE OF THE COMPARABLE CHART AS GIVEN ABOVE TO UPHOLD THE TRIBU NAL DECISION WHEREIN THE TRIBUNAL HAS HELD THAT INFOSYS WAS A GI ANT COMPANY. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD AND THE CASE-LAWS CITED BY BOTH THE PARTIES. WE FIND THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CHRYS CAPITAL HAS REPELLED THE EXCLUSION OF COMPANIES BAS ED ON TURNOVER PROVIDED THE COMPARABLE IS FUNCTIONALLY SIMILAR. I N THIS CASE, THE SUBMISSION OF THE AR THAT THE INFOSYS BPO IS INTO H IGH END SERVICE TO FINANCIAL INDUSTRIES, MANUFACTURE AND TELECOM, SO O N THAT ACCOUNT IT SHOULD BE EXCLUDED CANNOT BE COUNTENANCED BECAUSE W E ARE NOT ABLE TO FIND ANY FUNCTIONAL DISSIMILARITY WITH THAT OF T HE ASSESSEE IN THIS CASE. SO, WE UPHOLD THE ACTION OF THE TPO TO INCLU DE THIS COMPANY AS A COMPARABLE. THE ASSESSEE FAILS. 44 ITA NO.5258/DEL/2011 (X) MAPLE ESOLUTIONS LTD. (XI) TRITON CORP LTD. MAPLE ESOLUTIONS & TRITON CORPORATION, IT IS MENTI ONED IN THE REPORT OF THE TPO THAT THE FIRST NAMED COMPANY IS C ARRYING ON THE BUSINESS OF RENDERING DATA PROCESS SERVICES AND BPO SERVICES. OBJECTION HAS BEEN RAISED THAT THE DIRECTORS OF THE COMPANY WERE INVOLVED IN A FRAUD. THIS COMPANY IS A WHOLLY OWNED SUBSIDIARY OF HARYANA FIBRES LTD., WHOSE PROMOTERS WERE INVOLVED IN FRAUD AS PER NEWSPAPER REPORT AND THE CBI REPORT. THE TPO MENTIO NED THAT ACCORDING TO CBI BULLETIN OF DECEMBER, 2008, IT WAS REPORTED THAT THE RASTOGI FAMILY CHEATED GOVERNMENT OF INDIA TO THE T UNE OF RS.54.00 CRORE IN LATE 1980S AND MID 1990S. RASTOGI BROTHERS HAD FLOATED 14 FIRMS FOR THE PURPOSE OF EXPORT OF BICYCLE PARTS TO RUSSIA AND HONG KONG. THEY WERE ARRESTED BY THE FBI AND U.K. AUTHOR ITIES AND SENTENCED TO IMPRISONMENT FOR MORE THAN 9 YEARS. HO WEVER, THE REPORT NOWHERE CONTAINS THE NAME OF THIS COMPANY. ACCORDIN G TO THE DATA AVAILABLE AT PROWESS DATA BASE, IT IS ENGAGED IN TH E BUSINESS OF CALL CENTRE ACTIVITIES; IT HAD SET UP 100% EOU AND IT HO LDS REGISTRATION 45 ITA NO.5258/DEL/2011 UNDER SECTION 10B. IN REGARD TO THE SECOND MENTIONE D COMPANY, IT WAS SUBMITTED THAT IT IS ENGAGED IN TWO ACTIVITIES I.E. , TELECOM SECTOR AND BPO SECTOR. IT IS ALSO A COMPANY OF RASTOGI GROUP A ND, THEREFORE, OTHER OBJECTIONS ARE THE SAME AS IN THE CASE OF FIR ST MENTIONED COMPANY. THE TPO MENTIONED THAT THE COMPANY IS DERI VING REVENUE FROM ITES ACTIVITIES WHICH ARE COMPARABLE TO THE BU SINESS OF THE ASSESSEE. THUS, BOTH THE COMPANIES WERE INCLUDED AS COMPARABLES. THE LD. AR ALSO CONTENDED THAT MAPLE ESOLUTIONS HA S BECOME A SUBSIDIARY OF TRITON CORP LTD AS TRITON CORP LTD AC QUIRED 100% SHARES FROM HARYANA FIBRES LTD W.E.F FROM 1ST JANUA RY, 2007. OUR ATTENTION WAS DRAWN TO PAGE NO 552 OF THE SPECIAL P APER BOOK TO THE EXTRACT OF THE ANNUAL REPORT WHICH IS ALSO REPRODUC ED BELOW :- PURSUANT TO ACQUISITION OF 100% EQUITY SHARES FORM HARYANA FIBRES LTD. BY TRITON CORP LTD., THE COMPANY HAS BE COME A SUBSIDIARY OF TRITON CORP LTD. W.E.F. 01.01.2007. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RE CORDS. THE MAIN CONTENTION OF THE LD. AR IS THAT BOTH THESE CO MPANIES ARE TAINTED BECAUSE OF INVOLVEMENT IN FINANCIAL AND ECONOMIC IR REGULARITIES WHICH HAS FORCED THE LAW ENFORCEMENT AGENCIES TO INITIATE CRIMINAL 46 ITA NO.5258/DEL/2011 PROCEEDINGS AGAINST THEM. THE TRIBUNAL HAS BEEN CO NSISTENTLY ON THE SAME GROUND HAVE BEEN DISCARDING M/S. SATYAM COMPUT ERS FROM BEING A COMPARABLE. LIKEWISE, IN THE CASE OF ITO V S. CRM INDIA (P) LTD. (ITA NO.4068/DEL/2009 ORDER DATED 30.06.2011), THE COORDINATE BENCH OF THIS TRIBUNAL HAS EXCLUDED THESE TWO COMPA RABLES BY REASONING THAT, IT WOULD BE UNSAFE TO TAKE THEIR RESULTS FOR COMPARISON OF THE PROFITABILITY OF THE ASSESSEE. WE CONCUR WITH THE SAID OPINION OF THE COORDINATE BENCH AND WE DIRECT TO EXCLUDE THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. MOREOVER, WE FIND THAT IN THE CASE OF MAPLE, THERE HAS BEEN MERGERS AND ACQUISITIONS. IN THE LIGHT OF THE AFORE SAID FACTS REGARDING ACQUISITION MADE BY THIS COMPANY, WE FIND WHERE THE RE IS AMALGAMATION AND DEMERGER, THEN THE ACCOUNTS DO NOT PORTRAY THE CORRECT PICTURE IN THE PROFITS DUE TO THE MERGING O F ACCOUNTS. SO THE FINANCIAL RESULTS CANNOT BE RELIED UPON FOR THE COM PUTATION OF PLI OF THIS COMPARABLE. SINCE THE TERMS OF AMALGAMATION IS DECIDED ON THE SCHEME OF AMALGAMATION, WHICH IS APPROVED BY THE HI GH COURT, SO NOT NECESSARILY ALL THE ITEMS OF EXPENSES AND INCOM E ARE MERGING. SO, TRUE AND CORRECT PICTURE OF PROFITABILITY CANNOT BE ASCERTAINED. 47 ITA NO.5258/DEL/2011 THEREFORE, DUE TO EXTRA ORDINARY EVENTS TAKING PLAC E IN THE INSTANT FINANCIAL YEAR OF THIS COMPANY, WE ARE OF THE OPINI ON THAT THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARA BLES. IN VIEW OF THE ABOVE, BOTH THE AFORESAID COMPANIES ARE DIRECTED TO BE EXCLUDED. (XII) MOLD TEX TECHNOLOGIES LTD. THE DRP REPELLED THE OBJECTIONS OF THE ASSESSEE AND OBSERVED THAT THE COMPANY HAS TWO DIVISIONS VIZ PLASTIC AND IT (KPO DIVISION) AND HELD THAT THE IT SEGMENT IS PERFORMING THE SAME FUNCTIONS AS THAT OF THE APPELLANT I.E. ITES. IT WAS OBSERVED THAT TH E COMPANIES WERE PERFORMING BROADLY SIMILAR FUNCTIONS AS THAT OF THE ASSESSEE. THE LD. AR CONTENDED THAT MOLDTEK IS ENGAGED IN THE BUSINESS OF RENDERING ENGINEERING SERVICES IN THE NATURE OF PRO DUCING DESIGN, DRAWINGS, DETAILED STRUCTURAL ENGINEERING DRAWINGS USING 3D AND 2D SOFTWARE. THESE SERVICES ARE HIGH - END IN NATURE A ND CANNOT BE COMPARED WITH THE LOW-END SERVICES PROVIDED BY THE ASSESSEE SUCH AS ACCOUNTING SERVICES, TRANSACTION PROCESSING, CUSTOM ER CONTACT SERVICES 48 ITA NO.5258/DEL/2011 ETC. OUR ATTENTION WAS DRAWN TO THE ANNUAL REPORT EXTRACT ON PAGE NO 557 OF THE SPB WHERE THE COMPARABLE DESCRIBES ITSEL F A KPO. THE LD. AR TOOK OUR ATTENTION TO THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PRIVATE L IMITED (ITA NO.7466/MUM/2012 ORDER DATED 07.03.2014) FOR FY 200 7-08 WHEREIN THE SPECIAL BENCH HAS ORDERED EXCLUSION OF THIS COM PANY ON THE GROUND THAT THE SAID COMPANY WAS PIONEER IN STRUCTU RAL ENGINEERING KPO SERVICES AND ITS ENTIRE BUSINESS COMPRISED OF P ROVIDING ONLY STRUCTURAL ENGINEERING SERVICES TO VARIOUS CLIENTS AND IS A LEADING PROVIDER OF ENGINEERING AND DESIGN SERVICES WITH SP ECIALIZATION IN CIVIL, STRUCTURAL AND MECHANICAL ENGINEERING SERVIC ES AND HAS A STRONG TEAM OF SKILLED RESOURCES WITH WORLD CLASS RESOURCE S AND SKILL SETS. THE SPECIAL BENCH TOOK INTO CONSIDERATION THAT THE SAID COMPANY IS INVOLVED IN PROVIDING HIGH END SERVICES TO ITS CLIE NT INVOLVING HIGHER KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD OF GRAP HIC DESIGN REPRESENTATION. THE LD. AR CONTENDED THAT AS PER T HE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF RA MPGREEN SOLUTIONS PVT. LTD. (SUPRA), THE SAID COMPANY CANNOT BE TAKEN AS A COMPARABLE 49 ITA NO.5258/DEL/2011 TO THE ASSESSEES COMPANY WHICH IS MAINLY INVOLVED IN PROVIDING LOW END SERVICES. WE HAVE HEARD BOTH THE SIDES AND HAVE GONE THROUGH THE RECORDS. WE FIND THAT THE ASSESSEE IS ENGAGED IN L OW END BPO SERVICES WHEREAS THE MOLDTEK IS INVOLVED IN HIGH SK ILLED KPO SERVICES WHICH CANNOT BE COMPARED WITH THAT OF THE ASSESSEES COMPANY AS LAID DOWN BY HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA) THERE FORE, WE DIRECT EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARAB LES. (XIII) WIPRO LTD. THE DRP REPELLED THE OBJECTIONS OF THE APPELLANT AN D OBSERVED THAT ONLY THE ITES SEGMENT OF THE COMPARABLE WAS SE LECTED FOR BENCHMARKING PURPOSES AND THERE APPEARS TO BE NO IN FIRMITY IN THE ORDER OF THE TPO. THE LD. AR SUBMITTED THAT WIPRO UNDERTOOK SEVERAL ACQUISITIONS DURING THE RELEVANT YEAR. TO SUPPORT T HE CONTENTIONS, THE LD. AR DIRECTED OUR ATTENTION TO ANNUAL REPORT PAGE 22 AND PAGE 50 ITA NO.5258/DEL/2011 NOS.61, 62 AND 62 OF THE SPB WHERE THE DETAILS OF T HESE ACQUISITIONS HAVE BEEN GIVEN IN THE ANNUAL REPORT: THE RELEVANT EXTRACTS OF THE ANNUAL REPORT HAVE BEEN REPRODUCED BELOW: ACQUISITION AND JOINT VENTURES WE HAVE CONTINUED TO PURSUE THE STRATEGY OF ACQUIRI NG BUSINESSES WHICH COMPLEMENT OUR SERVICE OFFERINGS, PROVIDE ACC ESS TO NICHE SKILL SETS AND EXPAND OUR PRESENCE IN SELECT GEOGRA PHIES. WE HAVE A DEDICATED TEAM OF PROFESSIONALS WHO IDENTIFY BUSINE SSES WHICH MEET OUR STRATEGIC REQUIREMENTS AND ARE CULTURAL FIT TO WIPRO. THE FOLLOWING BUSINESSES HAVE JOINED THE WIPRO FAMILY D URING THE YEAR : 1. US BASED QUANTECH GLOBAL SERVICES LLC AND THE INDIA BASED QUANTECH GLOBAL SERVICES LTD. FOR A CASH CONS IDERATION, WHICH INCLUDES UPFRONT PAYMENT OF APPROXIMATELY USD 2 MILLION. 2. CMANGO TRANSACTIONS CONSUMMATED IN APRIL 2006 U S BASED CMANGO INC AND INDIA BASED CMANGO INDIA PRIVA TE LIMITED FOR CASH CONSIDERATION WHICH INCLUDES UPFRONT PAYME NT OF USD 20 MN. 3. EUROPE BASED RETAIL SOLUTIONS PROVIDER, ENABLER. T HE CONSIDERATION INCLUDED UPFRONT CASH PAYMENT OF APPR OXIMATELY EUROS 41 MILLION. 4. FINLAND BASED SARAWARE OY. FOR A CASH CONSIDERATION OF APPROXIMATELY EURO 25 MILLION. 5. MIDDLE EAST AND SAARC OPERATIONS OF 3D NETWORKS AND PLANET PSG FOR A CASH CONSIDERATION OF APPROXIMATEL Y USD 23 MILLION. 6. IN OUR CONSUMER CARE AND LIGHTING BUSINESS WE ACQUI RED NORTH-WEST SWITCHES BUSINESS FROM NORTH-WEST SWITCH GEAR LTD., A COMPANY IN THE BUSINESS OF SWITCHES, SOCKETS, MCBS ETC. FOR AN UPFRONT CASH CONSIDERATION OF RS.1,022 MILLION. 51 ITA NO.5258/DEL/2011 7. IN OUR INFRASTRUCTURE ENGINEERING BUSINESS, WE ACQU IRED HYDRAUTO GROUP AB (HYDRAUTO) FOR A CASH CONSIDERA TION OF USD 31 MILLION. WE PARTNERED WITH MOTOROLA, A GLOBAL LEADER IN WIRE LESS COMMUNICATION, TO FORM A JOINT VENTURE NAMELY WMNET SERV LIMITED TO DELIVER WORLD CLASS MANAGED SERVICES TO TELECOM OPERATORS IN THE AREA OF NETWORK OPERATIONS. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE G ONE THROUGH THE PAPER BOOK AND RECORDS BEFORE US AND TH E CASE LAWS CITED BY BOTH THE PARTIES. WE FIND AT PAGE 43 OF THE ANN UAL REPORT WHICH IS REGARDING THE FUNCTIONAL PROFIT OF THE ACQUIRED COM PANIES ARE AS UNDER:- SR. NO. ACQUIRED ENTITY ACQUIRED DURING NATURE OF BUSINESS GLOBAL IT SERVICES & PRODUCTS 1 QUANTECH GLOBAL SERVICES LLC AND QUANTECH GLOBAL SERVICES (QUANTECH) JUL 06 ENGAGED IN COMPUTER AIDED DESIGN AND ENGINEERING SERVICES 2 SARAWARE OY JUN 06 ENGAGED IN PROVIDING DESIGN AND ENGINEERING SERVICES TO TELECOM COMPANIES 3 RETAILBOX BV AND SUBSIDIARIES (ENABLER) JUN 06 LEADING SPECIALIST IN THE DEVELOPMENT, IMPLEMENTATION AND SUPPORT OF IS SYSTEMS FOR RETAIL INDUSTRY 4 CMANGO INC AND SUBSIDIARIES (CMANGO) APR 06 ENGAGED IN PROVIDING BUSINESS MANAGEMENT SERVICE SOLUTIONS 5 MPOWER SOFTWARE SERVICES INC.AND ITS SUBSIDIARIES DEC. 05 ENGAGED IN PROVIDING IT SERVICES IN PAYMENTS SERVICE SECTOR 6 BVPENTE BETEILIGUNGSVERWALTUNG GMBHAND ITS SUBSIDIARIES (NEW DEC 05 ENGAGED IN SEMICONDUCTOR INTELLECTUAL PROPERTY (IP) CORES AND COMPLETE SYSTEM 52 ITA NO.5258/DEL/2011 LOGIC) ON CHIP SOLUTIONS WITH DIGITAL, ANALOG MIXED SIGNAL AND RADIO FREQUENCY (RF) DESIGN SERVICES INDIA & ASIAPAC IT SERVICES AND PRODUCTS 7 INDIA, MIDDLE EAST AND SAARC OPERATIONS OF 3D NETWORKS AND PLANET PSG NOV 06 ENGAGED IN THE BUSINESS OF COMMUNICATION SOLUTIONS THAT INCLUDE CONSULTING VOICE, DATA AND CONVERGED SOLUTIONS AND MANAGED SERVICES CONSUMER CARE & LIGHTING 8 TRADEMARK/BRAND 'NORTH- WEST' AND ASSETS OF NORTH- WEST SWITCHGEAR LIMITED MAY 06 THE COMPANY ACQUIRED A SUBSTANTIAL PORTION OF THE BUSINESS AND BRAND OF NORTH WEST SWITCHGEAR LIMITED, A MANUFACTURER AND DISTRIBUTOR OF SWITCHES, SOCKETS AND MINIATURE CIRCUIT BREAKERS OTHERS 9 HYDRAUTO GROUP AB (HYDRAUTO) NOV 06 ENGAGED IN PRODUCTION, MARKETING AND DEVELOPMENT OF CUSTOMISED HYDRAULIC CYLINDERS SOLUTION FOR MOBILE APPLICATIONS. IN THE LIGHT OF THE AFORESAID FACTS REGARDING ACQUI SITION MADE BY THIS COMPANY, WE FIND WHERE THERE IS AMALGAMATION, THEN THE ACCOUNTS DO NOT PORTRAY THE CORRECT PICTURE IN THE PROFITS D UE TO THE MERGING OF ACCOUNTS. SO THE FINANCIAL RESULTS CANNOT BE RELIE D UPON FOR THE COMPUTATION OF PLI OF THIS COMPARABLE. SINCE THE TE RMS OF AMALGAMATION IS DECIDED ON THE SCHEME OF AMALGAMATI ON, WHICH IS APPROVED BY THE HIGH COURT, SO NOT NECESSARILY ALL THE ITEMS OF EXPENSES AND INCOME ARE MERGING. SO, TRUE AND CORR ECT PICTURE OF PROFITABILITY CANNOT BE ASCERTAINED. THEREFORE, DU E TO THIS EXTRA 53 ITA NO.5258/DEL/2011 ORDINARY EVENTS TAKING PLACE IN THE INSTANT FINANCI AL YEAR OF THIS COMPANY, WE ARE OF THE OPINION THAT THIS COMPANY SH OULD BE EXCLUDED FROM THE LIST OF COMPARABLES. IT IS ORDERED ACCORD INGLY. (XIV) ADITYA BIRLA MINACS WORLDWIDE LIMITED (EARLIER KNOWN AS TRANSWORKS INFORMATION SERVICES LTD.) (XV) APEX KNOWLEDGE SOLUTIONS PVT. LTD. (XVI) APPOLLO HEALTHSTREET LTD. (XVII) COSMIC GLOBAL LTD. (XVIII) DATAMATICS FINANCIAL SERVICES LTD. (SEG.) (XIX) FLEXTRONICS LTD. (SEG.) (XX) GENESYS INTERNATIONAL CORPORATION LTD. (XXI) ICRA TECHNO ANALYTICS LTD. (SEG) (XXII) ISERVICES INDIA PVT. LTD. (XXIII) R SYSTEMS INTERNATIONAL LTD (SEG) (XXIV) SPANCO LTD. (SEG.) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTION LTD.) AS REGARDS THE AFORESAID ELEVEN (11) COMPARABLES [ MENTIONED AT SL. NOS.(XIV) TO (XXIV)] ARE CONCERNED, THE LD. AR SUBMITTED THAT THE 54 ITA NO.5258/DEL/2011 ASSESSEE HAS NO OBJECTION IN INCLUDING THE SAME IN THE LIST OF COMPARABLES. THIS DISPOSES OFF THE OBJECTIONS IN RESPECT TO COM PARABLES. RISK ADJUSTMENT 13. NOW THE ONLY GROUND REMAINING TO BE DECIDED IS THE RISK ADJUSTMENT. THE TPO REPELLED THE OBJECTIONS OF THE ASSESSEE AND OBSERVES NO RISK ADJUSTMENT SHALL BE PROVIDED AS THE SINGLE CUSTOMER RISK AND COUNTRY/POLITICAL RISK OF THE TAXPAYER COM BINED WITH ARITHMETIC MEAN PRICE CONSIDERED IN THE CASE OF COM PARABLE COMPANIES NULLIFIES THE RISK DIFFERENTIAL, IF ANY, BETWEEN THE TAXPAYER AND THE COMPARABLE INDEPENDENT ENTERPRISES. 14. THE DRP GAVE NO DIRECTIONS IN RESPECT OF THE RI SK ADJUSTMENT AND HELD THAT THE APPELLANTS OBJECTIONS WERE GENER AL IN NATURE. 15. THE LD. AR PLACED RELIANCE ON PARA 116 121 OF THE DECISION OF MOTOROLA SOLUTIONS INDIA PRIVATE LIMITED (SUPRA) WH ERE THE ISSUE WAS DISCUSSED IN DETAILS. THE RELEVANT EXTRACTS ARE REP RODUCED BELOW: 55 ITA NO.5258/DEL/2011 PARA 116.1 LD. TPO, AFTER DETAILED DISCUSSION, IN RESPECT OF VARIOUS RISKS CLAIMED BY ASSESSEE, REJECTED THE ASSESSEES CLAIM FOR FOLLOWING REASONS: 1. THE TAX PAYER HAS NOT GIVEN ANY DETAILS REGARDING T HE AUTHORITY OF THE ABOVE METHOD DESCRIBING CAPM MODEL FOR ADJUSTMENT TOWARDS RISK. IT IS NOT CLEAR WHETHER TH IS TYPE OF CALCULATION IS ACCEPTABLE IN ANY TAX JURISDICTION F OR THE PURPOSE OF RISK PREMIUM ADJUSTMENTS. ITS ACCEPTABILITY BY ANY RENOWNED AND RECOGNIZED RESEARCH INSTITUTION ACROSS THE WORLD HA S ALSO NOT BEEN SHOWN. THE MANNER IN WHICH THE RISK ADJUSTMENT IS C OMPUTED BY THE TAXPAYER IS NOT FOLLOWED BY ANY COUNTRY OR ORGANIZA TION OF INTERNATIONAL REPUTE LIKE OECD. IN FACT, EVEN THE O ECD IS RELUCTANT TO TAKE THE RISK ADJUSTMENT AS PART OF THE GUIDELIN ES AS THERE ARE DIVERGENT VIEWS ON THIS ISSUE AMONG THE MEMBER COUN TRIES OF OECD AND MANY COUNTRIES FEEL THAT THERE IS NO STRAI GHT JACKET FORMULA FOR RISK ADJUSTMENT AS IT DEPENDS ENTIRELY ON THE FACTS AND CIRCUMSTANCES OF THE CASE. THUS RISK ADJUSTMENT IS CASE SPECIFIC, FUNCTION SPECIFIC AND ALSO DEPENDS ON THE NATURE OF FUNCTIONS (INCLUDING RISKS) CARRIED OUT BY THE COMPARABLE COM PANIES. 2. THE TAX PAYER HAD NOT GIVEN ANY EVIDENCE OR ARGUMEN T REGARDING HOW THE ASSUMPTIONS OF CAPM MODEL ARE TRU E IN THE CASE OF THE AE WHEN IT IS DOING BUSINESS WITH THE TAXPAY ER. 3. THE CAPM MODEL HAS SOME WEAKNESS, THE MAIN BEING TH AT THE MODEL DOES NOT RECOGNIZE THE PRESENCE OF HUMAN CAPITAL, WHICH IS THE MAIN DRIVING SOURCE FOR REVENUES IN THE SOFT WARE SERVICE INDUSTRY. 4. THE TAXPAYER CONSIDERED ONLY LISTED COMPANIES. BUT, THERE IS A METHOD OF COMPUTATION OF SIMILAR NATURE IN THE IN DEX. THERE IS A MANNER IN WHICH UNLISTED COMPANIES BETA WOULD BE CA LCULATED. 5. WHEREVER MARKET DATA WAS NOT AVAILABLE, THE BETA IS COMPUTED BASED ON GUIDELINE COMPANIES FROM THE SMAL L CAP AND MADCAP INDICES OF BSE AND NSE. BUT, THE RISK ADJUST MENT SHOULD ALWAYS BE BASED ON THE COMPARABLES SELECTED BY THE TAXPAYER OR THE TPO AND NOT ON THE OTHER COMPANIES, WHICH ARE NOT E XAMINED AND OTHERWISE, NOT COMPARABLE FUNCTIONALLY. THUS, THE B ETA OF UNLISTED COMPANIES OR COMPANIES WHERE DATA WAS NOT AVAILABLE SHOULD BE THE AVERAGE OF THE BETA OF THE REMAINING COMPARABLE COM PANIES. 6. THE TAXPAYER IGNORED NEGATIVE RISK ADJUSTMENT IN SO ME OF THE COMPARABLE COMPANIES. THIS LOOKS ABSURD AS ANY RISK 56 ITA NO.5258/DEL/2011 UNDERTAKING ENTERPRISE MAY GET A NEGATIVE RETURN FO R THE RISK UNDERTAKEN AND IS POSSIBLE DUE TO THE ACTUAL REALIZ ATION OF RISK BRINGING DOWN THE PROFITABILITY BELOW THE RISK FREE RATE OF RETURN. THUS, ITS PROFITABILITY WOULD HAVE BEEN MORE BUT FO R THE RISK UNDERTAKEN. THUS, NEGATIVE RISK ADJUSTMENT HAS TO B E CONSIDERED AND CANNOT BE IGNORED. FOR EXAMPLE, WHEN THE INDIAN STO CK MARKETS TUMBLED IN 2007 AND 2008, THE EQUITY INVESTMENTS GI VEN A NEGATIVE RETURN EVEN THOUGH THE RISK FREE RETURN IS DECENT. SO, IT IS TO IGNORE NEGATIVE RISK ADJUSTMENT. 7. THE RISK ADJUSTMENT HAS TO BE COMPUTED BASED ON THE RISK DIFFERENTIAL IF ANY, BETWEEN THE TAXPAYER AND THE C OMPARABLE COMPANIES. HOWEVER, THE TAXPAYER IGNORED WEIGHTED C OST OF CAPITAL IN THE CASE OF TAXPAYER AND RISK OF THE TAXPAYER IN TERMS OF BETA. EFFECTIVELY, THE RISK FREE RETURN WOULD BE NULLIFIE D AS THERE IS NO DIFFERENCE BETWEEN THE TAXPAYER AND THE COMPARABLE COMPANIES AND ALSO THE TAX PAYER ASSUMED THAT ITS BETA IS ZERO, W HEREAS WHEN THE RETURN IS GUARANTEED ON SALES OR COST, THE BETA IS NOT ZERO AS THE RETURN ON CAPITAL FLUCTUATES WITH REVENUE. 8. THE TAXPAYER DID NOT CONSIDER THE DIFFERENTIAL RISK ADJUSTMENT I.E. IT DID NOT CONSIDERED THE WEIGHTED COST OF CAPITAL OF COMPARABLES TO BRING IT IN LINE WITH THE TAXPAYER. 9. THE BETA OF A CAPTIVE SOFTWARE SERVICE PROVIDER IS NOT ZERO AS THE RETURN ON CAPITAL FLUCTUATES WITH REVENUES A S THE TAXPAYER IS FOLLOWING COST PLUS METHOD ON EXPENSES. 10. AS DISCUSSED ABOVE, THE TAXPAYER BEARS SIGNIFICANT SINGLE CUSTOMER RISK AND POLITICAL/COUNTRY RISK, WHICH MAY NOT BE COMPENSATED ADEQUATELY BY PASSING ON OTHER RISKS LI KE MARKETING RISKS ETC. TO THE PARENT. FURTHER THESE RISKS ARE N OT CONSIDERED IN THE CASE OF TAXPAYER WHILE COMPUTING THE RISK ADJUSTMEN T. 11. THE TAXPAYER CONSIDERED TOTAL ASSETS INCLUDING CURR ENT ASSETS AND CURRENT LIABILITIES, BUT THE CAPM HINGES UPON R ETURN ON EQUITY OR CAPITAL EMPLOYED. THE OPERATING ASSETS ARE THE M AJOR INDICTOR OF CAPITAL EMPLOYED RATHER THAN TOTAL ASSETS. OPERATIN G ASSETS INCLUDES FIXED ASSETS, TRADE RECEIVABLES NET OF TRADE PAYABL ES. 12. THE TAX PAYER HAS ASSUMED THAT OPERATING EXPENSES O F THE COMPARABLES WOULD NOT CHANGE AFTER RISK ADJUSTMENT. BUT, AFTER GIVING EFFECT TO RISK ADJUSTMENT, THE FINANCIAL STA TEMENTS OF THE COMPARABLES SHOULD LOOK LIKE THAT OF THE TAX PAYER I.E., STRIPPING THE RISK COMPONENT. SO, THE EXPENSES PERTAINING TO THE RISK LIKE SALES 57 ITA NO.5258/DEL/2011 AND MARKETING EXPENSES, BAD DEBTS ETC. SHOULD BE R EMOVED FROM OPERATING EXPENSES AND CORRESPONDING RISK PREMIUM A DJUSTED AMOUNT HAS TO BE REDUCED FROM THE OPERATING REVENUE S. HENCE, AS PER THE ABOVE DETAILED DISCUSSION, THE CO MPUTATION OF RISK ADJUSTMENT BY THE TAXPAYER IS NOT ACCEPTABLE. THERE IS NO SCIENTIFIC BASIS FOR WORKING OUT THE TAXPAYER COMPANYS BETA O R BETA OF THE UNLISTED COMPARABLE COMPANIES. THE TAXPAYER ALTOGET HER FORGOTTEN THAT THE RISK ADJUSTMENT, IF AT ALL TO BE COMPUTED, IS TO BE COMPUTED BASED ON THE DIFFERENCE BETWEEN THE ACTUAL WEIGHTED COST OF CAPITAL OF THE COMPARABLES AND WEIGHTED COST OF CAPITAL OF THE COMPARABLE COMPANIES ASSUMING SAME LEVEL OF EQUITY IN THE TOTA L FINANCES AND RISK LEVEL AS EVIDENCED BY BETA OF THE TAXPAYER. TH IS DIFFERENTIAL IS ALTOGETHER IS IGNORED MAKING THE ENTIRE EXERCISE RE DUNDANT. ............. 118.1 WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH TH E PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE HAVE PERUSE D THE RECORD OF THE CASE. WE HAVE ALSO GONE THROUGH THE DETAILED WR ITTEN SUBMISSIONS FILED BY ASSESSEE FROM PAGES 92 TO 104 OF THE WRITTEN SUBMISSIONS THE MAIN CONTENTION OF ASSESSEE IS IN R EGARD TO ADJUSTMENT ON ACCOUNT OF MARKET RISK BY APPLYING CA PM MODEL. IN THIS REGARD LD. TPO HAS OBSERVED THAT THE SERVICES RENDERED BY THE ASSESSEE FORMS A COMPONENT WITHIN THE PRODUCTS DEVE LOPED BY THE ASSESSEE. THUS, THE ASSOCIATED ENTERPRISE INCURS MA RKETING FOR ITS PRODUCTS AND NOT ON THE SERVICES RENDERED BY THE AS SESSEE AS THEY ARE CONSIDERED IN THE PRODUCT SOLD BY THE ASSOCIATE D ENTERPRISE. THE RELATIONSHIP BETWEEN THE TAX PAYER AND ITS PARENT C OMPANY IS EXACTLY THE SAME AS THAT OF THE INDEPENDENT COMPANY AND ITS CLIENT IN THE CASE OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES. L D. TPO HAS OBSERVED THAT IT IS A FACT THAT THE INDEPENDENT ENT ERPRISES HAVE TO BEAR THE VAGARIES OF MARKET CONDITIONS. BUT SINCE T HE SOFTWARE SECTOR IS GROWING AT MORE THAN 30% CAGR (COMPOUNDED ANNUAL GROWTH RATE) FOR THE LAST 10 YEARS, IT IS NOT SHOWI NG OR AFFECTED BY ANY ADVERSE MARKET CONDITIONS. IN THE ABSENCE OF AD VERSE MARKET CONDITIONS, THE ASSESSEE HAS NOT SHOWN HOW THESE MA RKET RISKS BORNE BY THE INDEPENDENT ENTERPRISES HAD AN EFFECT ON THE PRICE AND, 58 ITA NO.5258/DEL/2011 THUS, ON THE PROFITS DURING THE F.Y. 2005-06. FROM THESE FINDINGS OF LD. TPO, IT IS EVIDENT THAT HE HIMSELF IS AGREEABLE THAT MARKET CONDITIONS DO INFLUENCE THE INDEPENDENT ENTERPRISES . LD. TPO HAS DENIED THIS ADJUSTMENT MAINLY ON THE GROUND THAT AS SOCIATED ENTERPRISE AND OTHER INDEPENDENT COMPARABLES ARE OP ERATING ON A SIMILAR MODEL I.E. ONE BY ESTABLISHING ITS SUBSIDIA RY IN LOW EMPLOYEE COST ZONE VIZ. INDIA AND THE OTHERS BY OUT SOURCING THEIR ACTIVITIES TO OTHER ENTITIES OPERATING IN INDIA. LD . TPO HAS DRAWN PARITY BETWEEN INDEPENDENT COMPARABLES AND THE ASSE SSEE ON THIS BASIS. IN OUR OPINION, THIS REASONING CANNOT BE FUL LY ACCEPTED PARTICULARLY BECAUSE IT IS NOT THAT ALL THE INDEPEN DENT COMPARABLES ARE DOING ONLY THE WORK OUTSOURCED TO THEM BY VARIO US AES. THIS IS ONLY A CONJECTURE ON THE PART OF LD. TPO. WE, THERE FORE, ARE OF THE OPINION THAT MARKET RISK, IF QUANTIFIABLE, HAS TO B E ADJUSTED IN VIEW OF RULE 10B(1)(E)(III) 16. WE FIND FORCE IN THE CONTENTION OF THE LD. AR TH AT RISK ADJUSTMENT SOUGHT BY THE ASSESSEE HAS NOT BEEN DEAL T WITH AS PER RULE 10B(1)(E)(III). THE LD. AR POINTED OUT TO THE ORDE R OF THE COORDINATE BENCH IN MOTOROLA SOLUTIONS INDIA PRIVATE LIMITED ( SUPRA) WHEREIN IN AN IDENTICAL MATTER, THE TRIBUNAL HAS GIVEN DIRECTI ON AS AFORE-STATED WHEN THE TPO REPELLED SIMILAR CONTENTION OF THE ASS ESSEE. SINCE THE RISK ADJUSTMENT SOUGHT BY THE ASSESSEE HAS ALSO BEE N TURNED DOWN BY THE TPO ON SIMILAR REASONS, IT HAS TO BE SET ASIDE AND A COMPUTATION EXERCISE AS ENVISAGED UNDER RULE 10B(1)(E)(III) NEE D TO BE DONE. THEREFORE, WE RESTORE THIS MATTER BACK TO THE FILE OF THE TPO/AO TO 59 ITA NO.5258/DEL/2011 CONSIDER THE COMPUTATION OF RISK ADJUSTMENT AS PER CAPM MODEL BY AVAILING THE SERVICES OF TECHNICAL EXPERTS. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF SEPTEMBER , 2015. SD/- SD/- (J.S. REDDY) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 18 TH DAY OF SEPTEMBER, 2015 TS COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI
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