Appeal details
Counselvise Citation
[2014] 120 COUNSELVISE.COM (IT) 7512 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 1 month(s) 19 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-12-2014
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
I
Next Hearing Date
09-12-2014
Assessment Year
2008-2009
Appeal Filed On
23-10-2012
Judgement Text
ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES I NEW DELHI BEFORE SHRI J.SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI CHANDRAMOHAN GARG, JUDICIAL MEMBER ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 PYRAMID IT CONSULTING PRIVATE VS INCOME TAX OFFICER, LIMTIED, 325, TARUN ENCLAVE, WARD 14 (4), PITAMPURA, NEW DELHI. NEW DELHI-110034 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI ASHUTOSH MOHAN RASTOGI, ADV . RESPONDENT BY: SHRI PEEYUSH JAIN, CIT, DR & YOGES H VERMA, CIT DR O R D E R PER CHANDRAMOHAN GARG, J.M. THIS APPEAL HAS BEEN PREFERRED AGAINST THE ASSESSM ENT ORDER DATED 26.9.2012 PASSED U/S 143(3) R/W SECTION 144C IN PUR SUANCE TO THE ORDER OF THE DISPUTE RESOLUTION PANEL-II, NEW DELHI DATED 20.7.2 012 PASSED U/S 144C(V) OF THE ACT. 2. IN THE BEGINNING OF THE ARGUMENT, LD. COUNSEL AP PEARING FOR THE ASSESSEE SUBMITTED THAT EXCEPT GROUND NO. 2.3 AND 2.4, THE A SSESSEE COMPANY DOES NOT WANT TO PRESS OTHER GROUNDS, THEREFORE, EXCEPT 2.3 AND 2.4, OTHER GROUNDS ARE ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 2 DISMISSED AS NOT PRESSED. THE REMAINING GROUND FOR ADJUDICATION BEFORE US READ AS UNDER:- THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, A ND IN LAW; 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSES SING OFFICER ('LD. AO') PURSUANT TO THE DIRECTIONS OF LE ARNED DISPUTE RESOLUTION PANEL ('LD. DRP') IS BAD IN LAW AND VOID AB-INITIO. 2. THE LD. TPO/LD. AO ERRED IN ENHANCING THE INCOME OF THE APPELLANT BY RS 78,53,275 HOLDING THAT THE INTERNAT IONAL TRANSACTIONS PERTAINING TO ITS CONTRACT SOFTWARE DE VELOPMENT BUSINESS SEGMENT DO NOT SATISFY THE ARM'S LENGTH PR INCIPLE ENVISAGED UNDER THE ACT AND IN DOING SO HAVE GROSSL Y ERRED IN; 2.3 INCLUDING CERTAIN 'COMPANIES THAT ARE NOT COMP ARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSE TS EMPLOYED (OR SIZE) AND RISKS ASSUMED; 2.4 INCLUDING CERTAIN COMPANIES THAT ARE FUNCTION ALLY NOT COMPARABLE TO THE APPELLANT INASMUCH AS THEY HAVE SIGNIFICANTLY HIGH TURNOVER, OWN SIGNIFICANT INTANG IBLES AND/ OR OWN AND DEVELOP SOFTWARE PRODUCTS WHEREAS THE APPEL LANT IS ONLY A SERVICE PROVIDER AS REGARDS ITS CAPTIVE CONT RACT SOFTWARE DEVELOPMENT SERVICES SEGMENT; 3. BRIEF FACTS OF THE CASE AS PER PARA 3 AT PAGE 3 OF THE DRP ORDER READ AS UNDER:- THE ASSESSEE IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT AND IT CONSULTING SERVICES. IT IS A CAP TIVE SERVICE PROVIDER AND THE ENTIRE REVENUE EARNED FROM THE SER VICES IS RECEIVED FROM ITS VARIOUS AES. DURING THE RELEVANT YEAR, THE ASSESSEE UNDERTOOK THE FOLLOWING TRANSACTIONS: ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 3 S.NO INTERNATIONAL TRANSACTION VALUE 1. CONTRACT SOFTWARE DEVELOPMENT SERVICES 7,2 4,75,317 2. STAFFING SERVICES (OR ALSO REFERRED TO AS IT 6,97,70,977 ( CONSULTING SERVICES) TOTAL VALUE OF INTERNATIONAL TRANSACTIONS 1 42,246,294 THE ASSESSEE CHARGES ITS AE ON FULL TIME EQUIVALENT BASIS (FTE) AT THE RATE OF US$ 10 PER HOUR. THERE IS NO D ISPUTE REGARDING THE DETERMINATION OF ARM'S LENGTH PRICE(A LP) OF THE STAFFING SERVICES. IN RESPECT OF CONTRACT SOFTW ARE DEVELOPMENT SERVICES, THE ASSESSEE APPLIED THE COST PLUS METHOD (CPM) TO BENCHMARK ITS INTERNATIONAL TRANSAC TIONS. HOWEVER, THE TPO REJECTED THE METHOD CHOSEN BY THE ASSESSEE AND USED TRANSACTION NET MARGIN METHOD (TNMM) FOR BENCHMARKING THE TRANSACTIONS AND DETERMINATION OF ALP. DURING THE COURSE OF HEARING BEFORE THE PANEL, THE ASSESSEE DID NOT DISPUTE THE METHOD CHOSEN BY THE TPO. I.E., TNMM. 4. DURING PROCEEDINGS BEFORE THE TPO, THE ASSESSEE HAD APPLIED COST PLUS METHOD (CPM) FOR BENCHMARKING ABOVE IMPUGNED INTERN ATIONAL TRANSACTION OF CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDING (CS D SEGMENT) IN THE TRANSFER PRICING STUDY. IN RESPONSE TO TPOS REQUEST, THE A SSESSEE UNDERTOOK A FRESH SEARCH BASED ON TRANSACTIONAL NET MARGIN METHOD (TN MM) WITHOUT PREJUDICE AND DEMONSTRATED ITS INTERNATIONAL TRANSACTIONS TO BE AT ARMS LENGTH BASED ON TNMM. THE TPO ONLY ADJUSTED THE PROFITABILITY OF T HE CSD SEGMENT ADJUSTING THE INTERNATIONAL TRANSACTION PERTAINING TO STAFFING SERVICE SEGMENT TO BE AT ARMS LENGTH. THE TPO REJECTED THE TRANSFER PRICING ANALYSIS FURNISHED BY THE ASSESSEE AND THE TPO UNDERTOOK A TOTAL ADJUSTME NT OF RS.78,76,782/- FROM CSD SEGMENT BY ARBITRARILY REJECTING THE SAME OF TH E QUANTITATIVE FILTERS ADOPTED ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 4 BY THE AO IN THE FRESH SEARCH AND ALSO IMPOSED ADDI TIONAL FILTERS FOR SELECTION OF COMPARABLES (TPO ORDER PAGE 21 AND 22). THE TPO HE LD THAT THE ARMS LENGTH PRICE ON INTERNATIONAL TRANSACTION RELATED TO CONTR ACT SOFTWARE DEVELOPMENT SERVICES WAS DETERMINED AT RS.8,03,52,100/- AS AGAI NST THE DECLARED RECEIPT BY THE ASSESSEE AMOUNTING TO RS.7,24,75,317 AND THE TP O DIRECTED THE AO TO ENHANCE THE INCOME OF THE ASSESSEE BY RS.78,76,782/ -. 5. IN PURSUANCE TO ABOVE DIRECTIONS OF THE TPO DATE D 31.10.2011, THE AO PASSED A DRAFT ASSESSMENT ORDER U/S 143(3) R/W SECT ION 144C OF THE ACT DATED 7.12.2011. THE ASSESSEE WAS AFFORDED AN OPPORTUNIT Y TO FILE ITS OBJECTIONS BEFORE DRP-II, NEW DELHI AND THE ASSESSEE FILED ITS OBJECTIONS ON 5.1.2012 TO THE DRAFT ASSESSMENT ORDER. THE DRP, AFTER CONSIDE RATION OF THE OBJECTIONS OF THE ASSESSEE, DECLINED TO INTERFERE WITH THE ACTION AND ORDER OF THE TPO AS WELL AS IN THE DRAFT ASSESSMENT ORDER AND REJECTED THE O BJECTIONS OF THE ASSESSEE BY ISSUING DIRECTIONS TO THE AO U/S 144C(5) OF THE ACT . THE AO PASSED ASSESSMENT ORDER U/S 143(3) R/W SECTION 144C OF THE ACT ON 20. 9.2012 BY ADDING THE SUM OF RS.74,18,897/- TO THE TOTAL INCOME OF THE ASSESSEE BEING THE DIFFERENCE BETWEEN THE TRANSACTION VALUE AND THE ALP AS COMPUTED BY T HE TPO. NOW, THE AGGRIEVED ASSESSEE IS BEFORE THIS TRIBUNAL WITH THE GROUNDS AS REPRODUCED HEREINABOVE. 6. WE HAVE HEARD ARGUMENTS OF BOTH THE SIDES AND CA REFULLY PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. LD. COUNSEL FO R THE ASSESSEE MAINLY ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 5 CONTENDED THAT THE DRP WAS NOT JUSTIFIED IN ACCEPTI NG THE FOLLOWING COMPANIES AS SUITABLE COMPARABLES AND ENHANCING THE INCOME OF THE ASSESSEE BY RS.78,53,275/- BY HOLDING THAT THE INTERNATIONAL TR ANSACTION PERTAINING TO ITS CONTRACT SOFTWARE DEVELOPMENT BUSINESS SEGMENT DO N OT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. 1. INFOSYS LTD. 2. KALS INFORMATION SYSTEMS LTD. (SEG) 3. AVANI CINCOM TECHNOLOGIES 4. PERSISTENT SYSTEMS LTD. 5. QUINTEGRA SOLUTION LTD. 6. TATA ELXSI (SEG) 7. LUCID SOFTWARE 7. LD. COUNSEL FURTHER CONTENDED THAT THE AFOREMENT IONED COMPANIES HAVE BEEN INCLUDED BY THE TPO/AO WHICH ARE NOT COMPARABL E TO THE ASSESSEE COMPANY IN THE TERMS OF FUNCTIONS PERFORMED/ASSETS EMPLOYED (OR SIZE) AND RISK ASSUMED. LD. COUNSEL FURTHER CONTENDED THAT THE TP O/AO ALSO ERRED IN INCLUDING AFOREMENTIONED COMPANIES WHICH ARE FUNCTI ONALLY NOT COMPARABLE TO THE ASSESSEE COMPANY INASMUCH AS THEY HAVE SIGNIFIC ANTLY HIGH TURNOVER, SIGNIFICANT INTANGIBLES AND ALSO OWN AND DEVELOP SO FTWARE PRODUCTS AND MAXIMUM COMPANIES INCUR HEAVY AMOUNT ON RESEARCH & DEVELOPMENT AND ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 6 ADVERTISEMENT WHEREIN THE ASSESSEE IS ONLY A SERVIC E PROVIDER AS REGARDS ITS CAPTIVE CONTRACT SOFTWARE DEVELOPMENT SERVICE SEGM ENT (CSD SEGMENT). 8. THE CONTENTIONS OF THE ASSESSEE COMPANY IN REGAR D TO EACH IMPUGNED AFOREMENTIONED SEVEN COMPANIES MAY BE SUMMARISED AS UNDER:- I) INFOSYS LIMITED 9. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT DUE T O DIFFERENT FUNCTIONAL PROFILE, BRANDING AND INTANGIBLES AND HIGH TURNOVER , THE INFOSYS LTD. IS A GIANT COMPANY WHICH IS NOT A SUITABLE COMPARABLE TO THE C ASE OF THE ASSESSEE. LD. COUNSEL HAS PLACED RELIANCE ON SEVERAL DECISIONS IN CLUDING DECISION OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO. 3856/2010, TELCORDIA TECHNOLOGIES INDIA PVT. LTD. IN ITA NO. 7821/MUM/2011 AND M/S IN SILICA SEMICONDUCTORS INDIA PVT. LTD. IN ITA NO. 1399(BANG)/2010. II) KALS INFORMATION SYSTEMS 10. LD. COUNSEL OF THE ASSESSEE HAS SUBMITTED TH AT THERE IS A VAST DIFFERENCE IN THE FUNCTIONAL PROFILE OF KALS INFORMATION SYSTEMS IN COMPARISON TO ASSESSEES COMPANY FUNCTIONAL PROFILE AND THE SAME WAS SPECIFI CALLY REJECTED DUE TO DIFFERENT FUNCTIONAL PROFILE (SALE OF SOFTWARE PROD UCT). LD. COUNSEL HAS PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL IN THE CAS E OF BINDVIEW INDIA P. LTD. IN ITA NO. 1386/PN/10, M/S TRILOGY E-BUSINESS IN ITA N O. 1054/BANG/2011, AND ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 7 M/S CSR INDIA LTD. VS ITO IN IT(TP)A NO. 1119/BANG/ 2011, M/S LG SOFT INDIA PVT. LTD. VS DCIT IN IT(TP)A NO.1121/BANG/201 1. III) AVANICINCOM TECHNOLOGIES 11. LD. COUNSEL OF THE ASSESSEE HAS SUBMITTED THA T AVANI CINCOM TECHNOLOGIES LIMITED HAS SPECIFICALLY REJECTED DUE TO DIFFERENT FUNCTIONAL PROFILE. LD. COUNSEL OF THE ASSESSEE HAS PLACED RE LIANCE ON THE DECISION OF M/S TRILOGY E- BUSINESS (ITA NO. 1054/BANG/2011). IV) PERSISTENT SYSTEMS PVT. LTD. 12. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT P ERSISTENT SYSTEMS LTD. ESERVES TO BE EXCLUDED BY THE SAME REASONING APPLYING THE C OMPARABLE PRINCIPLES DUE TO DIFFERENT PERSONAL PROFILE IN COMPARISON TO THE ASS ESSEE COMPANY. THE LD. COUNSEL ELABORATING ARGUMENTS FURTHER CONTENDED THA T THE ANNUAL REPORT OF THE PERSISTENT SYSTEMS LTD. CLEARLY STATES THAT THE COM PANY DEVELOPS AND OWNS SOFTWARE PRODUCTS AND ALSO EARNS REVENUE FROM LICEN SING OF SOFTWARE PRODUCTS. LD. COUNSEL PLACED RELIANCE ON THE DECISIONS OF THE COORDINATE BENCHES OF THE TRIBUNAL IN THE CASES OF BIND VIEW INDIA P. LTD. (S UPRA), TRILOGY E-BUSINESS (SUPRA) AND TELCORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) WHEREIN THIS COMPANY HAS BEEN HELD TO EXCLUDABLE FROM SUITABLE C OMPARABLES BY APPLYING COMPARABILITY PRINCIPLES. ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 8 V) QUINTEGRA SOLUTION LTD. 13. LD. COUNSEL OF THE ASSESSEE FURTHER SUBMITTE D THAT QUINTEGRA SOLUTION LTD. BE EXCLUDED DUE TO DIFFERENT FUNCTIONAL PROFILE, HI GH AD-MARKETING SPEND AND RESEARCH AND DEVELOPMENT AND SUPER NORMAL GROWTH AS COMPARED TO THE ASSESSEE COMPANY. LD. COUNSEL OF THE ASSESSEE PLACED RELIANC E ON THE DECISION OF BANGALORE TRIBUNAL IN THE CASE OF M/S 3DPLM SOFTWAR E SOLUTIONS LTD. VS DCIT IN ITA NO.1303/BANG/2012. VI) TATA ELXSI (SEG) 14. LD. COUNSEL OF THE ASSESSEE ALSO CONTENDED THAT TATA ELXSI (SEG) IS NOT A SUITABLE COMPARABLE AND THE SAME WAS SPECIFICALLY R EJECTED DUE TO DIFFERENT NATURE OF SERVICES, DIFFERENT PROFILE AND OWNERSHIP OF INTANGIBLES WITH SIGNIFICANT R&D LEADING TO DEVELOPMENT OF INTELLEC TUAL PROPERTY RIGHTS. THE LD. COUNSEL POINTED OUT THAT THE SOFTWARE DEVELOPMENT AND SERVICE SEGMENT OF TATA ELXSI INCLUDES PRODUCT DESIGN SERVICES WHICH A LSO INCLUDES DESIGN AND DEVELOPMENT OF HARDWARE & SOFTWARE, INNOVATION DESI GN ENGINEERING AND VISUAL COMPUTING I.E. ANIMATION AND SPECIAL EFFECT. THE L D. COUNSEL FURTHER ADDED THAT THESE ACTIVITIES ARE COMPLETELY DIFFERENT FROM CONT RACT SOFTWARE SERVICES PROFILE OF ASSESSEE COMPANY. TO SUPPORT ABOVE CONTENTIONS, LD. COUNSEL RELIED ON THE FOLLOWING DECISIONS:- ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 9 I) TELCORDIA TECHNOLOGIES INDIA PVT. LTD. IN ITA NO. 7 821/MUM/2011 II) M/S YODLEE INFOTECH PVT. LTD. VS ITO IN ITA NO.1397 /BANG/2010 III) M/S 3DPLM SOFTWARE SOLUTIONS LTD. VS DCIT (ITA NO.1303/BANG/2012 IV) MENTOR GRAPHICS (NOIDA) PVT. LTD. 112 TTJ 408 VII) LUCID SOFTWARE LIMITED 15. LD. COUNSEL OF THE ASSESSEE LASTLY CONTENDED TH AT LUCID SOFTWARE WAS SPECIFICALLY REJECTED AS SUITABLE COMPARABLE DUE TO DIFFERENT PERSONAL PROFILES AS THE COMPANY IS A PRODUCT COMPANY FOCUSSING ON ADVAN CED NON-DESTRUCTIVE TECHNOLOGIES AND IS ACTIVELY INVOLVED IN RESEARCH A ND DEVELOPMENT WITH LEADING SCIENTIFIC AND EDUCATIONAL INSTITUTIONS. TO SUPPOR T THIS CONTENTION, LD. COUNSEL OF THE ASSESSEE HAS PLACED RELIANCE ON THE FOLLOWIN G DECISIONS:- I) TELCORDIA TECHNOLOGIES INDIA PVT. LTD. IN ITA NO. 7 821/MUM/2011 II) VIRTUSA (INDIA) PVT. LTD. VS DCIT IN ITA NO. 1962/ HYD/2011 HYDERABAD TRIBUNAL III) M/S 3DPLM SOFTWARE SOLUTIONS LTD. VS DCIT IN ITA NO . 1303/BANG/2012 16. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY IS PRIMARILY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT AND IT CONSULTING SERVICES. LD. COUNSEL FURTHER SUBMITTED THAT DURIN G FINANCIAL YEAR 2007-08, THE ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 10 ASSESSEE WAS ALSO ENTITLED TO AVAIL BENEFITS U/S 10 A OF THE ACT AND MADE THE NECESSARY STATUTORY FILINGS WITH THE SOFTWARE TECHN OLOGY PARK OF INDIA (STPI). ON BEHALF OF THE ASSESSEE, IT WAS FURTHER SUBMITTED THAT DURING RELEVANT FINANCIAL YEAR IN RESPECT OF ITS SOFTWARE SERVICES FILING WIT HIN CSD SEGMENT, THE ASSESSEE PROVIDED CONTRACTS SERVICES TO ITS ASSOCIATED ENTER PRISE (AE) I.E. PYRAMID USA. ELABORATING THE FUNCTIONAL PROFILE OF THE ASSESSEE COMPANY, IT WAS FURTHER SUBMITTED THAT THE INITIAL CODE DESIGN AS WELL AS S PECIFICATION FOR SOFTWARE DEVELOPMENT WAS TO BE CARRIED OUT BY THE ASSESSEE A ND UNDERTAKEN AND PROVIDED BY THE AE PYRAMID USA AND THE ASSESSEE MERELY UNDER TAKES CONTRACT SOFTWARE SERVICES IN LINE WITH THE DETAILED SPECIFICATIONS P ROVIDED BY THE PYRAMID USA WHICH INCLUDE THE CONTENT ACTIVITIES, TIME SCHEDULE S, QUALITY ASSURANCE ETC. NECESSARY TO REACH EXPECTED OUTCOME/DEVELOPMENT/ASS IGNMENT. 17. REITERATING THE ASSESSEES OBJECTIONS BEFORE TH E DRP, LD. COUNSEL FURTHER CONTENDED THAT THE ASSESSEE WAS RESPONSIBLE FOR DEV ELOPMENT/CODING AND TESTING FUNCTIONS BASED ON THE FUNCTIONAL SPECIFICATIONS RE CEIVED FROM AE PYRAMID USA ON A SUB-CONTRACT BASIS. LD. COUNSEL FURTHER E LABORATED THAT OWING TO THE CAPTIVE NATURE OPERATIONS OF THE CONTRACT SOFTWARE DEVELOPMENT IN CSD SEGMENT, THE ASSESSEE DID NOT UNDERTAKE ANY SIGNIFI CANT R&D OR ADVERTISING/BRAND BUILDING AND, THEREFORE, ALSO DOE S NOT FACE ANY R&D AND MARKETING RELATED RISK. LD. COUNSEL VEHEMENTLY CON TENDED THAT THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE IN CSD SEGM ENT DURING RELEVANT ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 11 FINANCIAL YEAR WERE DULY REPORTED IN THE ACCOUNTANT S REPORT (FORM NO. 3CEB) AND FILED ALONG WITH THE ASSESSEES RETURN OF INCOM E. LD. COUNSEL SUBMITTED THAT THE ASSESSEE HAD APPLIED COST PLUS METHOD (CUP ) FOR BENCHMARKING THE ABOVE TRANSACTIONS IN THE TP STUDY BUT ON THE DIREC TIONS OF THE TPO, THE ASSESSEE UNDERTOOK A FRESH SEARCH BASED ON TRANSACTIONAL NET MARGIN METHOD (TNMM) AND THE ASSESEEE WAS ABLE TO DEMONSTRATE ITS FUNCTI ONAL TRANSACTION TO BE AT ARMS LENGTH BASED ON TNMM WITHOUT PREJUDICE TO THE BENCHMARKING METHOD. 18. LD. COUNSEL ALSO CONTENDED THAT DESPITE PROPER ANALYSIS FURNISHED BY THE ASSESSEE, THE TPO UNDERTOOK IMPUGNED ASSESSMENT FRO M CSD SEGMENT BY ARBITRARILY REJECTING SOME OF THE QUANTITATIVE FILT ERS ADOPTED BY THE ASSESSEE IN THE FRESH SEARCH AND BY IMPOSING AND ADDING UNCOMPA RABLE ADDITIONAL FILTERS IN THE FINAL SET OF COMPARABLES. LD. COUNSEL REITERATE D ITS ARGUMENTS TO THE AFOREMENTIONED SEVEN COMPARABLES AND SUBMITTED TH AT THE APPROACH OF THE TPO IN INCLUDING IMPUGNED SEVEN COMPARABLES WAS NOT JUSTIFIED AND THE DRP REJECTED THE OBJECTIONS OF THE ASSESSEE AT THE THRE SHOLD WITHOUT ANY JUSTIFIED AND COGENT GROUNDS. LD. COUNSEL FINALLY PRAYED THAT AL L SEVEN IRRELEVANT COMPARABLE DESERVE TO BE DELETED FROM THE FINAL SET OF COMPARA BLES AND ALP MAY BE BASED ON PROPER COMPARABLES. 19. REPLYING TO THE ABOVE, LD. DR SUPPORTED THE AC TION OF THE TPO, AO AND THE DRP AND SUBMITTED THAT DESPITE DIRECTIONS OF TH E TPO, THE ASSESSEE DID NOT CONDUCT FRESH SEARCH IN A PROPER MANNER AND ADOPTED IRRELEVANT FILTERS IN THE ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 12 FRESH SEARCH. LD. DR FURTHER CONTENDED THAT IN THI S SITUATION WHEN ASSESSEE IS NOT FOLLOWING THE DIRECTIONS OF THE TPO IN THE FRES H SEARCH, THEN THE TPO HAD NO OPTION BUT TO IMPOSE AND ADD COMPARABLE ADDITIONAL FILTERS TO THE FINAL SET OF COMPARABLES. THE DR HAS DRAWN OUR ATTENTION TOWARD S INTERNAL PAGE 20 TO 22 OF THE TPO ORDER DATED 31.10.11 (SUPRA) AND SUBMITTED THAT THE TPO WAS RIGHT IN DIRECTING THE AO TO ENHANCE THE INCOME OF THE ASSES SEE BY THE DIFFERENCE BETWEEN ALP (AS PER THE ASSESSEE) AND THE ALP (DERI VED BY THE TPO) OF RS. 78,76,782/-. THE DR ALSO CONTENDED THAT THE ASSESS EE IS MERELY CHALLENGING AND ALLEGING SEVEN IMPUGNED COMPARABLES WHICH WERE ADDE D BY THE TPO IN THE FINAL SET OF COMPARABLES BUT THE ASSESSEE IS NOT AB LE TO SUBSTANTIATE THAT THESE ARE NOT SUITABLE COMPARABLES AS THE FACTS AND CIRCUMSTA NCES OF EVERY CASE ARE ALWAYS DIFFERENT FROM ANOTHER CASE. THE DR ALSO CO NTENDED THAT THE ASSESSEE COULD NOT DEMONSTRATE THAT THE COMPARABLES ADOPTED AND ADDED BY THE ASSESSEE IN THE FRESH SEARCH WERE FOUND TO BE SUITABLE COMPA RABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSE E IN THE CSD SEGMENT DURING THE RELEVANT FINANCIAL YEAR. 20. ON CAREFUL CONSIDERATION OF ABOVE RIVAL SUBMISS IONS AND CONTENTIONS AND CAREFUL PERUSAL OF THE RELEVANT MATERIAL PLACED ON RECORD, AT THE OUTSET, WE NOTE THAT AS PER DRP ORDER INTERNAL PAGE 3, THE ASSESSEE IS ENGAGED IN PROVIDING CONTRACT SOFTWARE DEVELOPMENT AND IT CONSULTING SER VICES AND ASSESSEE IS A CONSULTANCY SERVICE PROVIDER AND THE ENTIRE REVENUE EARNED FROM THE SERVICES ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 13 WHICH ARE RECEIVED FROM ITS VARIOUS ASSOCIATED ENTE RPRISES (AE). AS PER THE ORDER OF THE DRP, IT IS ALSO UNDISPUTED THAT THE AS SESSEE IS A CONSULTANCY SERVICES PROVIDER AND THE ENTIRE REVENUE EARNED FRO M THE SERVICES WHICH ARE RECEIVED FROM ITS VARIOUS ASSOCIATED ENTERPRISES. AS PER THE ORDER OF THE DRP, IT IS ALSO UNDISPUTED THAT THE ASSESSEE IS A GROUP COMPANY PRIMARILY ENGAGED IN PROVIDING CONTRACT COMPUTER SOFTWARE DEVELOPMENT SE RVICES (CSD SEGMENT) AND IT SOFTWARE SERVICES AND ASSESSEE WAS ALSO ENTITLED TO AVAIL BENEFITS U/S 10A OF THE ACT AND HAD MADE NECESSARY STATUTORY FILINGS WI TH THE SOFTWARE TECHNOLOGY PARK OF INDIA (STPI). 21. FROM THE ORDER OF THE TPO, WE ALSO OBSERVE THAT THE TPO DID NOT DISPUTE THE RECEIPT OF THE ASSESSEE FROM ITS AE I.E. PYRAMI D USA RECEIVED TOWARDS STAFFING SERVICES/IT SELLING SERVICES BUT THE TPO D ID NOT ACCEPT THE RECEIPT OF THE ASSESSEE FROM ITS AE TOWARDS PRODUCTION OF CONTRACT DEVELOPMENT SERVICES (CSD SEGMENT) AT ARMS LENGTH AND AFTER FRAMING FIN AL SET OF 15 COMPARABLES, INCLUDING 7 IMPUGNED COMPARABLES, THE TPO HELD THAT THE ASSESSEES INTERNATIONAL TRANSACTION RELATED TO PROVISION OF S OFTWARE DEVELOPMENT SERVICES ARE NOT AT ARMS LENGTH AND DIRECTED THE AO TO ENHA NCE THE INCOME OF THE ASSESSEE BY THE DIFFERENT ALP (AS PER THE ASSESSEE) AND THE ALP (DERIVED BY THE TPO) AMOUNTING TO RS.78,76,782/- WHICH IS THE HEART AND SOUL OF THE DISPUTE IN THIS ASSESSEES APPEAL. ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 14 22. NOW, WE PROCEED TO ANALYSE SUITABILITY OF IMPUG NED COMPARABLES AS ADOPTED AND ADDED BY THE TPO TO THE FINAL SET OF CO MPARABLES FOR BENCHMARKING THE ALP OF THE ASSESSEES CSD SEGMENT RECEIVED FROM THIS AE I.E. PYRAMID USA. INFOSYS LTD. 23. LD. COUNSEL OF THE ASSESSEE, RELYING ON THE DEC ISION OF COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF AGNITY INDIA TECHNOL OGIES PVT. LTD. (SUPRA), TELCORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA), INS ILICA SEMICONDUCTORS (SUPRA), SUBMITTED THAT IN THE CASE OF AGNITY INDIA TECHNOL OGIES PVT. LTD. WHICH WAS ALSO A CONTRACT SOFTWARE SERVICES PROVIDING COMPAN Y, THE TRIBUNAL FOUND THAT THE TATA INFOSYS LTD. WAS NOT A SUITABLE COMPARABLE DUE TO DIFFERENT FUNCTIONAL PROFILE, SUBSTANTIAL INTANGIBLE ASSETS AND EXPENDIT URE ON ADVERTISING AND MARKETING AND DUE TO HIGH TURNOVER AND GIANT SIZE O F PROFILE. LD. DR REPLIED THAT INFOSYS LTD IS ALSO PROVIDING CONTRACT SOFTWAR E DEVELOPMENT SERVICES AND IT STAFFING SERVICES, THEREFORE, THE TPO WAS RIGHT IN ADDING THE SAME TO THE FINAL SET OF COMPARABLES. 24. IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. L TD. (SUPRA), IT WAS HELD THAT INFOSYS AND AGNITY INDIA (ASSESSEES OF THAT AP PEAL) ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. IN THE CASE O F TELCARDIA TECHNOLOGIES (SUPRA), THE ITAT MUMBAI HELD AS UNDER:- ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 15 40. MUMBAI TRIBUNAL IN CASE OF TELCORDIA TECHNOLOG IES INDIA PVT LTD [ITA NO. 7821 (MUM)/2011] HELD [REFER PGS45 - 46 OF THE COMPENDIUM OF CASE LAWS/ COMMENTARY] THE PARAMETER FOR IDENTIFYING COMPARABLE ENTITY H AS TO BE SEEN FROM THE ANGLE OF FUNCTIONS FORMED BY THE C OMPANY, SIZE OF THE COMPANY IN TERMS OF THE SALES REVENUE, STAGE OF BUSINESS CYCLE AND COMPANY'S GROWTH CYCLE. IN THE C ASE OF INFOSYS, THERE ARE HUGE INTANGIBLE ASSETS WHICH AS PER THE INFORMATION PROVIDED BY THE LEARNED AR ARE VALUED A T RS.69,552 CRORES, WHICH COMPRISES OF BRAND VALUE IT SELF AT RS.22,915 CRORES. BASED ON SUCH FUND VALUATION, THE PROFIT OF INFOSYS IS PREDOMINANTLY DUE TO ITS PREMIUM BRANDIN G. IT IS INDIA'S NO.2 SOFTWARE SERVICE EXPORTER AND THIRD IN THE WORLD AS AN IT SERVICE COMPANY. IT IS A GIANT COMPANY WHI CH IS EVIDENT FROM ITS REVENUE FUND FROM THE SALES WHICH ITSELF IS MORE THAN RS.13145 CRORES AND EXPENDITURE ON ADVERTISEMENT/SALES PROMOTION AND EXPENDITURE ON R & D IS AT RS.69 CRORES AND RS.167 CRORES RESPECTIVELY, WHEREA S IN THE CASE OF THE ASSESSEE THE REVENUE IS ONLY 10.7 CRORE S WITH NO EXPENDITURE ON ADVERTISEMENT, SALES AND PROMOTION E TC., WHICH ARE BORNE BY THE ASSOCIATED ENTERPRISES. 25. IN VIEW OF ABOVE, WE ARE OF THE CONSIDERED OP INION THAT INFOSYS IS NOT A SUITABLE COMPARABLE TO THE CASE OF THE PRESENT ASSE SSEE I.E. PYRAMID INDIA BECAUSE THERE IS A VAST DIFFERENCE BETWEEN FUNCTION AL PROFILE OF INFOSYS AND THE ASSESSEE COMPANY. WE ALSO NOTE THAT THE ASSESSEE I S ONLY PROVIDING CONTRACT SOFTWARE DEVELOPMENT SERVICES AND IT STAFFING SERVI CES AND, ON THE OTHER HAND, INFOSYS BEING A HIGH TURNOVER GIANT COMPANY HAVING A DIFFERENT FUNCTIONAL PROFILE, ALONG WITH HUGE EXPENSES ON ADVERTISING AN D MARKETING AND HAVING SUBSTANTIAL INTANGIBLE ASSETS, CANNOT BE HELD TO BE A SUITABLE COMPARABLE FOR THE ASSESSEE COMPANY WHICH IS ONLY HAVING TURNOVER OF R S.7.24 CRORE FROM THE CONTRACT SOFTWARE DEVELOPMENT SERVICES SEGMENT, HEN CE, IN OUR OPINION, INFOSYS ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 16 LTD., BEING SIGNIFICANTLY DISSIMILAR IN SIZE, SHOUL D NOT HAVE BEEN CONSIDERED AS SUITABLE COMPARABLE TO THE ASSESSEE COMPANY. KALS INFORMATION SYSTEMS 26. LD. COUNSEL OF THE ASSESSEE, PLACING RELIANCE ON THE DECISION OF BINDVIEW INDIA P. LTD. (SUPRA), M/S TRILOGY E-BUSINESS (SUPR A), M/S CSR INDIA PVT. LTD. VS ITO (SUPRA) AND M/S LG SOFT INDIA PVT. LTD. VS D CIT (SUPRA), SUBMITTED THAT ON PERUSAL OF INFORMATION PROVIDED BY KALS INFORMAT ION SYSTEM IN THE ANNUAL REPORT, IT REVEALS THAT KALS IS ENGAGED IN THE BUSI NESS OF SOFTWARE SERVICES, SOFTWARE PRODUCTS SINCE ITS INCEPTION. LD. COUNSEL FURTHER SUBMITTED THAT THE MAIN PRODUCTS OF THE COMPANY ARE SHINE- ERP SOFTWAR E, DOCUFLO- DOCUMENT MANAGEMENT SOFTWARE, DAC4CAST, LA VISION ORDER MA NAGEMENT SOFTWARE, VIRTUAL INSURE- INTEGRATED SOFTWARE FOR LIFE & GENE RAL INSURERS, ALDON APPLICATION LIFE CYCLE MANAGEMENT SOFTWARE, CONSULT ANT MANAGEMENT SALES SYSTEM ETC., THEREFORE, KALS IS NOT A SUITABLE COMP ARABLE TO THE ASSESSEE COMPANY. LD. COUNSEL ALSO POINTED OUT THAT THERE I S NO SEGMENTAL INFORMATION ABOUT THE SEGREGATION OF PROFITABILITY FROM SALE OF SOFTWARE PRODUCTS AND PROVISION OF SERVICES IS AVAILABLE IN THE ANNUAL RE PORT AND PUBLIC DOMAIN AND, HENCE, KALS SHOULD BE EXCLUDED FROM THE FINAL SET O F COMPARABLES. LD. DR FAIRLY ACCEPTED THAT BESIDES SOFTWARE DEVELOPMENT S ERVICES SEGMENT, KALS IS ALSO ENGAGED IN SOFTWARE PRODUCTS MANUFACTURING AND SELLING AND NO SEGMENTAL ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 17 INFORMATION OF PROFITABILITY FROM SALE OF PRODUCTS AND FROM PROVISION OF SERVICES IS AVAILABLE. 27. ON CAREFUL CONSIDERATION OF ABOVE AND IN THE LIGHT OF RATIO OF THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVI EW INDIA P. LTD. (SUPRA), WE OBSERVE THAT KALS INFORMATION SYSTEMS HAS BEEN FOUN D FUNCTIONALLY DIFFERENT FROM THE SOFTWARE DEVELOPMENT SERVICES PROVIDER COM PANIES AND KALS WAS REJECTED AS A SUITABLE COMPARABLE. THE RELEVANT OP ERATIVE PART OF THE SAID DECISION OF PUNE TRIBUNAL READS AS UNDER:- 'ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYST EM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH RE FERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED TH AT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODU CTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN P ROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE N OT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCE RN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS.' 28. IN VIEW OF ABOVE OBSERVATIONS OF THE COORDINATE BENCH OF THE TRIBUNAL AND FOLLOWING THE SAME, BANGALORE BENCH OF THE TRIB UNAL IN THE CASE OF M/S TRILOGY E-BUSINESS (SUPRA), ALSO HELD THAT KALS IS NOT A SUITABLE COMPARABLE AS THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND W AS NOT MERELY, PURELY OR MAINLY A SOFTWARE PROVIDER COMPANY AND, THUS, RESPE CTFULLY FOLLOWING THE ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 18 DECISION OF THE TRIBUNAL ON THE ISSUE, WE HOLD THAT THE SAME COMPANY I.E. KALS INFORMATION SYSTEMS LTD. IS NOT FOUND TO BE A SUITA BLE COMPARABLE TO THE CASE OF THE PRESENT ASSESSEE AND, HENCE, KALS IS DIRECTED T O BE OMITTED FROM THE LIST OF COMPARABLE COMPANIES ADOPTED BY THE TPO IN THE FINA L SET OF COMPARABLES. AVANI CINCOM TECHNOLOGIES 29. LD. COUNSEL FURTHER AGITATED THAT THE TPO INCLU DED AVNI CINCOM TECHNOLOGIES AS A SUITABLE COMPARABLE TO THE ASSESS EE BUT AVNI CINCOM WAS SPECIFICALLY REJECTED DUE TO ITS DIFFERENT FUNCTION AL PROFILE AS IT OWNS AND SELLS SOFTWARE PRODUCTS LIKE DECHANGE, CARMA, CENTRAL RES ERVATION SYSTEM (CRS), BIZ RULE ENGINE, COTNETNUKE TECHNOLOGY ETC.. LD. C OUNSEL FURTHER POINTED OUT THAT NO SEGMENTAL INFORMATION ON INCOME FROM PROVIS ION OF SERVICES AND SALE OF PRODUCTS IS SEPARATELY AVAILABLE AND, THEREFORE, AV ANICINCOM TECHNOLOGIES SHOULD HAVE BEEN EXCLUDED BY THE TPO FROM THE FINAL SET OF COMPARABLES. LD. DR SUPPORTED THE ACTION OF THE TPO AND SUBMITTED TH AT THE AVANICINCOM, HAVING A TURNOVER OF RS.2.93 CRORE, IS A SUITABLE C OMPARABLE TO THE ASSESSEE COMPANY HAVING A TURNOVER OF RS.7.24 CRORE. LD. DR FAIRLY ACCEPTED THAT THE AVANICINCOM OWNS AND SELLS AFOREMENTIONED SOFTWARE PRODUCTS AND NO SEGMENTAL INFORMATION IS AVAILABLE IN THE PUBLIC DO MAIN IN REGARD TO RECEIPT FROM PROVISION OF SOFTWARE SERVICES AND SALE OF SOF TWARE PRODUCTS ABOUT AVANICINCOM TECHNOLOGIES. ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 19 30. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS A ND FROM A BARE READING OF THE DECISION OF ITAT BANGALORE IN THE CASE OF M/S T RILOGY E-BUSINESS (SUPRA), WE OBSERVE THAT FOLLOWING THE DECISION OF ITAT MUMB AI IN THE CASE OF TELCORDIA TECHNOLGOIES LTD. VS ACIT(SUPRA), IT WAS HELD THAT AVANICINCOM TECHNOLOGIES EARNS REVENUE FROM SALE OF SOFTWARE PR ODUCTS AND SOFTWARE SERVICES AND IN ABSENCE OF SEGMENTAL DETAILS AND DA TA, AVANICINCOM TECHNOLOGIES CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY WHO WAS PROVIDING CONTRACT SOFTWARE DEVELOPMENT SERVICE S ONLY. THE RELEVANT OPERATIVE PART OF THE DECISION OF BANGALORE TRIBUNA L READS AS UNDER:- AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA OF T HE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. BASED ON THE INFORMATION AVAILAB LE IN THE COMPANY'S WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME 'DXCHANGE', IT WAS SUBMITTED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFT WARE SERVICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FR OM THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISION IN THE CASE OF TELCORD IA TECHNOLOGIES PVT. LTD. V. ACIT - ITA NO.7821/MUM/20 11 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEE'S CONTEN TION THAT THIS COMPANY HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANICIN COM CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY. ' 'WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMI SSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE REASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE A RE FOUND TO BE ACCEPTABLE. THE DECISION OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) AL SO SUPPORTS ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 20 THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE P LEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE.' 31. ON THE BASIS OF AFOREMENTIONED DISCUSSION, WE A RE OF THE CONSIDERED OPINION THAT THE ASSESSEE COMPANY, HAVING TURNOVER OF RS.7.24 CRORE ONLY, EARNS REVENUE FROM PROVIDING CONTRACT DEVELOPMENT SERVICE S (CSD SEGMENT), STAFFING SERVICES/IT CONSULTANCY SERVICES AND ON THE OTHER H AND, AVANICINCOM TECHNOLOGIES OWNS AND SELLS AFOREMENTIONED SOFTWARE PRODUCTS AND ALSO PROVIDES SOFTWARE DEVELOPMENT SERVICES. IN THE ABSE NCE OF SEGMENTAL INFORMATION ABOUT PROFITABILITY FROM SALE OF PRODUC TS AND PROFITABILITY FROM PROVISION OF SOFTWARE SERVICES, AVANICINCOM TECHNOL OGIES BEING A PRODUCT COMPANY CANNOT BE USED AND ADDED AS SUITABLE COMPAR ABLE FOR THE ASSESSEE COMPANY. HENCE, REASONS GIVEN BY THE LD. COUNSEL F OR THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE ARE FOUND TO B E ACCEPTABLE AND WE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT AVANICINCOM TECH NOLOGIES AS A SUITABLE COMPARABLE. WE ORDER ACCORDINGLY. PERSISTENT SYSTEMS LTD. 32. LD. COUNSEL OF THE ASSESSEE FURTHER AGITATED TH AT THE TPO INCLUDED PERSISTENT SYSTEMS LTD. AS A SUITABLE COMPARABLE IN THE FINAL SET OF COMPARABLE BUT PERSISTENT SYSTEMS LTD. HAVING TURNOVER OF RS.3 82.877 CORES WITH DIFFERENT FUNCTIONAL PROFILE IS NOT A SUITABLE COMPARABLE. R ELYING ON THE DECISIONS OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA (P) LTD. (SU PRA), M/S TRILOGY E-BUSINESS AND TELECORDIA INDIA P. LTD. (SUPRA), LD. COUNSEL S UBMITTED THAT THE ANNUAL ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 21 REPORT OF PERSISTENT SYSTEMS LTD. CLEARLY STATES TH AT THE COMPANY DEVELOPS AND OWNS SOFTWARE PRODUCTS AND EARNS REVENUE FROM LICEN SING OF SOFTWARE PRODUCTS. LD. COUNSEL FURTHER SUBMITTED THAT AS PER ANNUAL RE PORT AVAILABLE IN THE PUBLIC DOMAIN FOR FINANCIAL YEAR UNDER CONSIDERATION, THE MAIN PRODUCTS OF THE COMPANY ARE PAXPRO, CHEMLMS, VIEWMOR-MAIL DISCOVERY PLATFORM, PERSISTENT ENTERPRISE COMMUNITY PORTAL, ENTERPRISE SEARCH EXLEAD, EXPLORIMENTS, E-2GMIGRATOR-MAIL MIGRATION, DRIVERCE NTRAL, TLALOC, CLAP- CLOUD BASED LOAD TESTING AND PERFORMANCE TOOL, DEVI CE MONITORING SYSTEM (DMS) AND EMEE ETC. THE LD. COUNSEL FURTHER CONTEN DED THAT IN THE ABSENCE OF SEGMENTAL INFORMATION ABOUT PROFITABILITY FROM SALE OF PRODUCTS AND PROFITABILITY FROM PROVISION OF SERVICES, THIS COMPANY SHOULD BE EXCLUDED FROM THE FINAL SET OF COMPARABLES APPLYING COMPARABILITY PRINCIPLES EN UNCIATED IN THE AFOREMENTIONED ORDERS OF THE TRIBUNAL. 33. LD. DR, SUPPORTING THE ACTION OF THE TPO AND DR P, SUBMITTED THAT THE FACTS AND CIRCUMSTANCES OF EVERY CASE ARE DIFFERENT FROM ANOTHER, THEREFORE, ARGUMENTS OF THE ASSESSEE ARE NOT ACCEPTABLE. HOWE VER, LD. DR FAIRLY ACCEPTED THAT THE TURNOVER OF THE PERSISTENT SYSTEM LTD. IS MORE THAN RS.200 CRORE AND MORE THAN 50 TIMES OF ASSESSEES TURNOVER. 34. ON CAREFUL CONSIDERATION OF ABOVE, WE TAKE NOTE OF THE DECISION OF ITAT BANGALORE IN THE CASE OF M/S 3DPLM SOFTWARE SOLUTI ONS LTD. VS DCIT (SUPRA), WHEREIN FOLLOWING THE PRINCIPLES ENUNCIATED IN THE DECISION OF ITAT MUMBAI IN ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 22 THE CASE OF TELECORDIA TECHNOLOGIES LTD. (SUPRA), I T HAS BEEN HELD THAT PERSISTENT SYSTEM WAS ENGAGED IN THE PRODUCT DEVELOPMENT AND P RODUCT DESIGN SERVICES WHILE THE ASSESSEE OF THAT CASE/APPEAL (M/S 3DPLM S OFTWARE SOLUTIONS LTD.) WAS A SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE TRIBUNAL FURTHER HELD THAT IN ABSENCE OF SEGMENTAL DETAILS/INFORMATION ABOUT SEGR EGATED INCOME FROM BOTH THE SEGMENTS, THE COMPANY CANNOT BE TAKEN INTO ACCO UNT FOR COMPARABILITY ANALYSIS AND, THEREFORE, PERSISTENT SYSTEMS LTD. OU GHT TO HAVE BEEN OMITTED FROM THE FINAL SET OF COMPARABLE. THE RELEVANT OPERATIV E PART OF THE ORDER OF BANGALORE BENCH IN THE CASE OF 3DPLM SOFTWARE SOLUT IONS LTD. (SUPRA) READS AS UNDER:- 'WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AN D CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPME NT SERVICES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSE E, THE SEGMENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFO RE, FOLLOWING THE PRINCIPLE ENUNCIATED IN THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOG IES INDIA PVT. LTD. (SUPRA) THAT IN THE ABSENCE OF SEGMENTAL DETAILS/INFORMATION A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS, WE HOLD THAT THIS COMPA NY I.E. PERSISTENT SYSTEMS. LTD. OUGHT TO BE OMITTED FROM T HE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. 35. THUS, ON THE BASIS OF AFOREMENTIONED DISCUSSION , WE NOTE THAT PERSISTENT SYSTEM LTD., HAVING TURNOVER OF MORE THAN RS.200 CR ORE AND MORE THAN 50 TIMES OF THE PRESENT ASSESSEES TURNOVER, CANNOT BE SAID TO BE A SUITABLE COMPARABLE FOR ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 23 BENCHMARKING THE INTERNATIONAL TRANSACTION OF THE A SSESSEE COMPANY WHICH ONLY PROVIDES CONTRACT SOFTWARE DEVELOPMENT SERVICES AND STAFFING/IT CONSULTING SERVICES BECAUSE PERSISTENT SYSTEM LTD. EARNS HIGH PROFITABILITY FROM SALE OF PRODUCTS AND ALSO FROM PRODUCTION OF SOFTWARE DEVEL OPMENT SERVICES BUT IN ABSENCE OF SEGMENTAL DETAILS AND INFORMATION, THIS COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS AND WE FURT HER HOLD THAT THE TPO AS WELL AS THE DRP WERE NOT JUSTIFIED IN INCLUDING THE SAME TO THE LIST OF FINAL SET OF COMPARABLE FOR THE PURPOSE OF VALUATION OF ALP OF T HE IMPUGNED INTERNATIONAL TRANSACTION OF THE ASSESSEE COMPANY. WE DIRECT THE TPO/AO TO DELETE THE SAME FROM FINAL SET OF COMPARABLES. QUINTEGRA SOLUTIONS LTD. 36. LD. COUNSEL OF THE ASSESSEE, RELYING ON THE DEC ISION OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA P. LTD. (SUPRA), M/S TRILOGY E-BUSINESS (SUPRA) AND M/S TELECORDIA INDIA PVT. LTD. (SUPRA), SUBMITTED THAT THE TPO IN THE FINAL SET OF COMPARABLES ALSO INCLUDED QUINTEGRA SOLUTION LTD. W HICH ALSO FOUND PLACE IN THE FINAL SET OF COMPARABLES AT SL. NO. 9 IS ALSO N OT A SUITABLE COMPARABLE. LD. COUNSEL VEHEMENTLY CONTENDED THAT AS PER ANNUAL REP ORT OF THE COMPANY, QUINTEGRA DEVELOPS AND OWNS SOFTWARE PRODUCTS SUCH AS HBFX, HMIS AND EDUCAMPUS ETC. AND IN ABSENCE OF SEGMENTAL INFORMAT ION ABOUT PROFITABILITY FROM SALE OF SOFTWARE PRODUCTS AND PROFITABILITY FR OM PROVISION OF SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY CANNOT BE HELD A S A SUITABLE COMPARABLE. ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 24 LD. COUNSEL HAS ALSO DRAWN OUR ATTENTION TOWARDS PA GE NO. 461 OF THE PAPER BOOK-I OF THE ASSESSEE AND SUBMITTED THAT THE COMPA NY EXPERIENCED EXCEPTIONALLY AND ABNORMALLY HIGH GROWTH OF 514% IN THE REVENUE AND 450% IN THE PROFIT AND, HENCE, THE SAME CANNOT BE A SUITABL E COMPARABLE FOR THE ASSESSEE COMPANY BY THE SAME REASONING AND APPLYING COMPARAB ILITY PRINCIPLES ENUNCIATED IN THE AFOREMENTIONED ORDERS OF THE TRIB UNAL. 37. LD. DR REPLIED THAT IN ABSENCE OF EARLIER DATA, EXCEPTIONALLY AND ABNORMALLY HIGH GROWTH IN REVENUE AND IN PROFIT CAN NOT BE ESTIMATED. LD. DR FURTHER CONTENDED THAT QUINTEGRA SOLUTION LTD. ALSO PROVIDES CONTRACT SOFTWARE DEVELOPMENT SERVICES, THEREFORE, THE SAME WAS PROPE RLY INCLUDED IN THE FINAL SET OF COMPARABLES. 38. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS, WE OBSERVE THAT ITAT BANGALORE IN THE CASE OF M/S 3DPLM SOFTWARE SOLUTIO NS LTD. (SUPRA) HAS HELD AS UNDER:- WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS BROUGHT ON RECORD THAT THIS COMPANY I.E. QU INTEGRA SOLUTIONS LTD. IS ENGAGED IN PRODUCT ENGINEERING SE RVICES AND IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. IT IS ALSO SEEN THAT THIS COMPANY IS ALSO ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS AND H AS SUBSTANTIAL R&D ACTIVITY WHICH HAS RESULTED IN CREA TION OF ITS IPRS. HAVING APPLIED FOR TRADE MARK REGISTRATION OF ITS PRODUCTS, IT EVIDENCES THE FACT THAT THIS COMPANY O WNS INTANGIBLE ASSETS. THE CO-ORDINATE BENCH OF THIS TR IBUNAL IN THE CASE OF 2417 CUSTOMER.COM PVT. LTD. (ITA NO.227/8AN G/2010 DT.9.11.2012) HAS HELD THAT IF A COMPANY POSSESSES OR OWNS ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 25 INTANGIBLES OR IPRS, THEN IT CANNOT BE CONSIDERED A S A COMPARABLE COMPANY TO ONE THAT DOES NOT OWN INTANGI BLES AND REQUIRES TO BE OMITTED FROM THE LIST OF COMPARABLES , AS IN THE CASE ON HAND. 39. AT THE OUTSET, WE NOTE THAT THE AR HAS NOT DISP UTED THE FACT THAT QUINTEGRA SOLUTIONS LTD. EXPERIENCED EXCEPTIONAL AND ABNORMAL HIGH GROWTH IN REVENUE AND IN PROFIT DURING RELEVANT PERIOD AND THIS COMPA NY UNDERTOOK SIGNIFICANT R & D AND INCURRED HEAVY EXPENDITURE ON AD-MARKETING WH ICH WAS APPROXIMATELY 4% OF ITS TOTAL SALES. LD. DR HAS ALSO NOT DISPUTE D THE FACT THAT THE COMPANY DEVELOPS, OWNS AND SELLS THE AFOREMENTIONED SOFTWAR E PRODUCTS AND SEGMENTAL INFORMATION ABOUT PROFITABILITY FROM SALE OF SOFTWA RE PRODUCTS AND FROM SOFTWARE DEVELOPMENT SERVICES IS NOT AVAILABLE. UND ER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE CONTENTIONS OF THE LD. COUNSEL OF THE ASSESSEE ARE ACCEPTABLE BECAUSE QUNITEGRA SOLUTION LTD. IS ENGAGED IN PRODUCT ENGINEERING SERVICES AND IS NOT A PURELY SOFTWARE D EVELOPMENT SERVICE PROVIDER. AS WE HAVE ALREADY MENTIONED THAT QUINTEGRA SOLUTIO NS LTD. ENJOYED EXCEPTIONAL AND ABNORMAL HIGH GROWTH OF ABOUT FIVE TIMES IN THE REVENUE AND IN PROFIT (PLS. SEE PAGE 461 OF PAPER BOOK -I OF THE A SSESSEE). THE DR HAS ALSO NOT DISPUTED THE FACT THAT THE COMPANY UNDERTOOK SIGNIF ICANT R&D AND INCURRED HEAVY EXPENDITURE ON AD- MARKETING AND SPENT APPROX IMATELY 3.73% AND 4% OF ITS SALES RESPECTIVELY TOWARDS R&D AND AD-MARKETING . THUS, QUINTEGRA SOLUTION LTD. CANNOT BE CONSIDERED AS A SUITABLE COMPARABLE COMPANY FOR BENCHMARKING OF ALP OF THE IMPUGNED INTERNATIONAL TRANSACTIONS O F THE ASSESSEE I.E. PYRAMID ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 26 IT INDIA AS UNDISPUTEDLY, PRESENT ASSESSEE COMPANY IS PRIMARILY ENGAGED IN PROVISION OF CONTRACT SOFTWARE DEVELOPMENT SERVICES (CSD SEGMENT) AND IT STAFFING SERVICES. THEREFORE, WE ARE INCLINED TO H OLD THAT THE TPO WAS NOT JUSTIFIED IN INCLUDING QUINTEGRA AS A SUITABLE COMP ARABLE IN THE FINAL SET OF COMPARABLES AND WE HOLD THAT QUINTEGRA SOLUTION LTD . OUGHT TO HAVE BEEN OMITTED FROM THE FINAL SET OF COMPARABLES FOR THE Y EAR UNDER CONSIDERATION. WE ORDER ACCORDINGLY. TATA ELXSI (SEG) 40. LD. COUNSEL DURING THE ARGUMENTS ALSO CONTENDED THAT TATA ELXSI, HAVING TURNOVER OF RS. 342.86 CRORE WHICH IS MORE THAN 50 TIMES OF ASSESSEES TURNOVER OF RS.7.24 CRORE DURING THE FINANCIAL YEAR UNDER CO NSIDERATION, IS NOT A SUITABLE COMPARABLE FOR BENCHMARKING ALP OF THE IMPUGNED INT ERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESEE WITH ITS AE. LD. COUNSEL ALSO CONTENDED THAT TATA ELXSI INCLUDES PRODUCT DESIGN SERVICE WHICH ALSO IN CLUDE DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE AND THE ACTIVI TIES OF TATA ELXSI ARE COMPLETELY DIFFERENT FROM CONTRACT SOFTWARE DEVELOP MENT SERVICE PROVIDER ASSESSEE COMPANY WHICH ALSO DOES NOT HAVE INTANGIBL E ASSETS AND DOES NOT INCUR ANY EXPENDITURE ON R&D AND ADVERTISING AND MARKETIN G. PLACING RELIANCE ON THE VARIOUS DECISIONS OF THE TRIBUNAL, INCLUDING DE CISION OF ITAT MUMBAI IN THE CASE OF TELECORDIA TECHNOLOGIES PVT. LTD. (SUPR A), LD. COUNSEL SUBMITTED THAT TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 27 SERVICES WHICH IS ENTIRELY DIFFERENT FROM THE FUNCT IONAL PROFILE OF THE ASSESSEE AND IN ABSENCE OF SEGMENTAL DETAILS, THE SAME CANNO T BE HELD AS A SUITABLE COMPARABLE TO THE ASSESSEE COMPANY. 41. LD. COUNSEL HAS ALSO DRAWN OUR ATTENTION TOWA RDS PAPER BOOK -I OF THE ASSESSEE FROM PAGE NO. 486 TO 519 AND SUBMITTED THA T THERE IS A VAST DIFFERENCE IN THE FUNCTIONAL PROFILE OF THE ASSESSEE COMPANY A ND TATA ELXSI WHICH IS A TECHNOLOGY ARM OF TATA GROUP WHICH OWNS SEVERAL INT ELLECTUAL PROPERTY RIGHTS SUCH AS MULTIMEDIA IPS, NETWORKING IPS, SEMICONDUCT OR IPS ETC. LD. COUNSEL REFERRING TO THE ANNUAL REPORT AVAILABLE AT PAGE 48 7 OF PAPER BOOK -I SUBMITTED THAT TATA ELXSI UNDERTAKES SIGNIFICANT R&D LEADING TO DEVELOPMENT OF IPRS AND THE COMPANY ALSO HAS INTANGIBLE ASSETS WORTH RS.11. 86 CRORES AS SHOWN IN ITS BALANCE SHEET WHICH AMOUNT TO 12% OF ITS TOTAL NET FIXED ASSETS, THEREFORE, TATA ELXSI CANNOT BE HELD AS A SUITABLE COMPARABLE AND O UGHT TO HAVE BEEN REJECTED BY THE TPO DUE TO DIFFERENT NATURE OF SERVICES/IPRS /INTANGIBLES AND R&D ACTIVITY. 42. LD. DR REPLIED THAT ALTHOUGH THE TURNOVER OF TA TA ELXSI IS MORE THAN 200 CRORES AND MORE THAN 50 TIMES OF ASSESSEES TURNOVE R BUT THERE IS NO DIFFERENCE IN THE FUNCTIONAL PROFILE OF TATA ELXSI WITH THE AS SESSEE COMPANY AS BOTH ARE PROVIDING SOFTWARE DEVELOPMENT SERVICES. LD. DR SU PPORTED THE ORDER OF THE TPO AND DRP AND SUBMITTED THAT TATA ELXSI BEING AN INDIAN COMPANY WAS A ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 28 SUITABLE COMPARABLE AND THE TPO WAS JUSTIFIED IN IN CLUDING THE SAME TO THE FINAL SET OF COMPARABLES. 43. FROM CAREFUL READING OF THE DECISION OF ITAT MU MBAI IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA), WE OBSERVE THAT TATA ELXSI HAS BEEN TREATED AS NOT FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ALP OF THE ASSESSEE OF THAT APPEAL I.E. TELECORDIA TECHNOLOGIE S INDIA PVT. LTD. (SUPRA) AND THE TRIBUNAL DIRECTED TO EXCLUDE THE SAME FROM THE LIST OF COMPARABLES. THE RELEVANT OPERATIVE PART OF THE ORDER OF THE MUMBAI TRIBUNAL (SUPRA) READS AS UNDER:- MUMBAI TRIBUNAL IN CASE OF TELCORDIA TECHNOLOGIES INDIA PVT LTD [ITA NO. 7821 (MUM)/2011] [REFER PG 4 8 OF THE COMPENDIUM OF CASE LAWS/ COMMENTARY] HELD: 'FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSI ONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA EL XSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOP MENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSE SSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNE D AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVID ED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEE N NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR R EVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CO NSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATI O FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS F OR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PART IES.' 44. ON VIGILANT CONSIDERATION OF ABOVE CONTENTIONS, WE OBSERVE THAT THE LD. DR HAS NOT DISPUTED THE FACT THAT TATA ELXSI, HAVIN G TURNOVER OF MORE THAN RS. ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 29 200 CRORE AND MORE THAN 50 TIMES OF THE ASSESSEES TURNOVER, ALSO OWNS SEVERAL INTELLECTUAL PROPERTY RIGHTS AND INTANGIBLE ASSETS WORTH 11.86 CRORES WHICH ARE 12% OF ITS TOTAL NET FIXED ASSETS. THE DR HAS ALSO NOT DISPUTED THE FACT THAT THE COMPANY UNDERTOOK SIGNIFICANT R&D LEADING TO DEVELO PMENT OF VARIOUS INTELLECTUAL PROPERTY RIGHTS IN THE FIELD OF MULTIM EDIA NETWORKING AND SEMI CONDUCTORS ETC. IN THIS SITUATION, THE ASSESSEE OF THE PRESENT CASE, HAVING TURNOVER OF 7.24 CRORE WITHOUT OWNING ANY INTELLECT UAL PROPERTY RIGHTS AND INTANGIBLE ASSETS AND WITHOUT TAKING ANY R&D ACTIVI TIES, CANNOT BE HELD A SUITABLE COMPARABLE. 45. WE MAY ALSO NOTE THAT THE COMPARABILITY DOES NO T CONFINE TO THE ACTIVITIES UNDERTAKEN AS PER COMPARABILITY PRINCIPLES ENUNCIAT ED BY THE ITAT MUMBAI IN THE CASE OF TELECORDIA TECHNOLOGIES (SUPRA) AND IN THE PECULIAR FACTUM THAT THE PROPOSED COMPARABLE COMPANY HAVING MORE THAN 50 TIM ES OF ASSESSEES TURNOVER WHICH IS MORE THAN 200 CRORES SUPPORTED BY OWNERSHIP OF SEVERAL INTELLECTUAL PROPERTY RIGHTS AND INTANGIBLE ASSETS CANNOT BE HELD AS A SUITABLE COMPARABLE FOR BENCHMARKING THE ALP OF THE IMPUGNED TRANSACTIONS OF THE ASSESSEE COMPANY WHICH EARNS REVENUE OF ONLY R.S 7. 24 CRORE CONFINING ITS ACTIVITIES TO CONTRACT SOFTWARE DEVELOPMENT SERVICE S ONLY, WITHOUT HAVING ANY INTELLECTUAL PROPERTY RIGHTS AND INTANGIBLE ASSETS AND WITHOUT INCURRING ANY EXPENDITURE ON R&D. ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 30 46. ACCORDINGLY, WE ARE INCLINED TO ACCEPT THE CONT ENTION OF THE LD. COUNSEL OF THE ASSESSEE THAT TATA ELXSI IS NOT A SUITABLE C OMPARABLE AND THE SAME WAS WRONGLY INCLUDED IN THE FINAL SET OF COMPARABLES OF THE TPO AND THE DRP WAS ALSO NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE T PO IN THIS REGARD. THEREFORE, WE ORDER THAT TATA ELXSI SHOULD BE EXCLUDED FROM TH E FINAL SET OF COMPARABLES FOR THE BENCHMARKING OF ALP OF THE INTERNATIONAL TR ANSACTION WITH REGARD TO CONTRACT SOFTWARE DEVELOPMENT SERVICES (CSD SEGMENT ) OF THE ASSESSEE COMPANY. WE ORDER ACCORDINGLY. LUCID SOFTWARE 47. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT LUCI D SOFTWARE IS A PRODUCT COMPANY FOCUSSING ON ADVANCED NON DESTRUCTIVE TESTI NG (NDT) TECHNOLOGIES AND IS ACTIVELY INVOLVED IN RESEARCH AND DEVELOPMEN T WITH LEADING SCIENTIFIC AND EDUCATIONAL INSTITUTIONS. LD. COUNSEL FURTHER SUBMITTED THAT THE MAIN PRODUCTS OF THE COMPANY ARE KOVID-RT DECISION SUP PORT SYSTEM FOR NDT AND MUULAM. HE HAS DRAWN OUR ATTENTION TOWARDS PAG ES 522 TO 532 OF THE PAPER BOOK-I OF THE ASSESSEE AND SUBMITTED THAT NO SEGMEN TAL INFORMATION FOR PROFITABILITY FROM SALE OF PRODUCTS AND PROFITABILI TY FROM PROVISION OF SERVICES IS SEPARATELY AVAILABLE AND, THEREFORE, THIS COMPANY S HOULD BE EXCLUDED FROM FINAL SET OF COMPARABLES. LD. COUNSEL HAS DRAWN OUR ATTE NTION TOWARDS VARIOUS DECISIONS ON THE ISSUE INCLUDING DECISION OF ITAT, MUMBAI IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) AND SUBMITTED THAT THIS ENTITY ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 31 CANNOT BE CONSIDERED FOR COMPARABILITY ANALYSIS FOR DETERMINATION OF ALP IN THE CASE OF PRESENT ASSESSEE AS PRESENT ASSESSEE IS PUR ELY INVOLVED IN SERVICE SECTOR. 47. LD. DR REPLIED THAT LUCID SOFTWARE HAVING TURNO VER OF ONLY RS. 2.31 CRORE WITH OP/TC OF 14.61% IS A SUITABLE COMPARABLE FOR THE PRESENT ASSESSEE. HOWEVER, LD. DR HAS NOT DISPUTED THE FACT THAT LUCI D SOFTWARE IS ACTIVELY INVOLVED IN R&D AND ALSO HAS DEVELOPED A SOFTWARE P RODUCT NAMED MUULAM WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL. 48. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS A ND RIVAL CONTENTIONS, AT THE OUTSET, WE NOTE THAT ITAT, MUMBAI IN THE CASE O F TELCORDIA TECHNOLOGIES (SUPRA) HAS HELD THAT IF A COMPANY HAS EMPLOYED HEA VY CAPITAL IN DEVELOPMENT OF PRODUCT, THEN PROFITABILITY IN THE SALE OF PRODU CT WOULD BE ENTIRELY FROM THE COMPANY WHO IS INVOLVED IN SERVICE SECTOR ONLY. TH E RELEVANT OPERATIVE PART OF THIS DECISION READS THUS:- LOOKING TO THE FACT THAT IT HAS DEVELOPED A SOFTWA RE PRODUCT NAMED AS 'MUULAM' WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS-A-VIS THE CAP ITAL EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENTIAL THAT THE CH ARACTERISTICS AND THE FUNCTIONS ARE BY AND LARGE SIMILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STUDY CAN BE MAD E WITH FEWEST AND MOST RELIABLE ADJUSTMENT. IF A COMPANY H AS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN -THE SALE OF PRODUCT WOULD BE ENTI RELY DIFFERENT FROM THE COMPANY, WHO IS INVOLVED IN SERVICE SECTOR . ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 32 THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILITY RATIO. 'IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFOR MATION ABOUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE SALE OF PRODUCT AND HOW MUCH IS FROM THE SERVICES, THEREFORE, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANAL YSIS FOR DETERMINING ARMS LENGTH PRICE IN THE CASE OF THE AS SESSEE.' 49. IN OUR CONSIDERED OPINION, LUCID SOFTWARE HAS D EVELOPED A SOFTWARE PRODUCT NAMED MUULAM AND FOR THIS PURPOSE, THE CO MPANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A SPECIFIC PRODUCT, THEN PROFITABILITY IN THE SALE OF PRODUCT WOULD BE CERTAINLY HIGH IN COMPARISON TO THE COMPANY WHICH IS ONLY INVOLVED IN THE SERVICE SECTOR. WE ALSO NOTE THAT FULL INFORMATION ABOUT SEGMENTAL DETAILS ABOUT PROFITABILITY FROM SALE OF PRODUCT AND PROFITABILITY FROM PROVISION OF SOFTWARE DEVELOPMENT SERVICES IS NOT A VAILABLE SEPARATELY. THEREFORE, LUCID SOFTWARE CANNOT BE TAKEN INTO ACCO UNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ALP OF IMPUGNED INTERNATIO NAL TRANSACTIONS RELATED TO CONTRACT SOFTWARE DEVELOPMENT SERVICES OF THE PRESE NT ASSESSEE. ACCORDINGLY, WE ARE INCLINED TO HOLD THAT THE TPO GROSSLY ERRED IN INCLUDING THE LUCID SOFTWARE AS SUITABLE COMPARABLE IN THE FINAL SET OF COMPARABLES. THEREFORE, WE REACH TO A CONCLUSION THAT LUCID SOFTWARE IS NOT A SUITABLE COMPARABLE FOR THE PURPOSE OF DETERMINATION OF ALP OF THE IMPUGNED TRA NSACTION OF THE PRESENT ASSESSEE AND THIS ENTITY DESERVES TO BE DELETED FRO M THE FINAL SET OF COMPARABLES. WE ORDER ACCORDINGLY. ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 33 50. ON THE BASIS OF FOREGOING DISCUSSION, WE REACH TO A FINAL CONCLUSION THAT THE TPO WAS NOT JUSTIFIED IN INCLUDING AVANI CINCOM TEHCNOLOGIES, INFOSYS LTD., KALS INFORMATION SYSTEM LTD., PERSISTENT SYST EMS LTD., QUINTEGRA SOLUTION LTD., LUCID SOFTWARE AND TATA ELXSI (SEG) AS A SUITABLE COMPARABLE FOR THE COMPARABILITY ANALYSIS FOR THE PURPOSE OF DETER MINATION OF ALP OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE PERTAININ G TO CSD SEGMENT AS THESE COMPANIES ARE NOT A SUITABLE COMPARABLE TO THE PRES ENT ASSESSEE COMPANY IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND R ISK ASSUMED. WE ALSO HOLD THAT AFOREMENTIONED ALL SEVEN COMPANIES ARE FUNCTIO NALLY NOT COMPARABLE TO THE ASSESSEE INASMUCH AS SOME COMPANIES HAVE SIGNIFICAN TLY HIGH TURNOVER, OWN SIGNIFICANT INTANGIBLES, OWN, DEVELOP AND SELL SPEC IFIC SOFTWARE PRODUCTS AND SOME COMPANIES INCUR HEAVY EXPENDITURE ON R&D AND A D-MARKETING. ON THE OTHER HAND, THE ASSESSEE COMPANY IS ONLY A SERVICE PROVIDER COMPANY AS REGARDS ITS CAPTIVE CONTRACT SOFTWARE DEVELOPMENT S ERVICE SEGMENT AND ASSESSEE COMPANY IS NOT INCURRING NOTABLE AMOUNT ON R&D AND AD-MARKETING AND ALSO NOT HAVING ANY INTANGIBLE ASSETS AND, HENCE, ON THE BASIS OF FOREGOING DISCUSSION, WE REACH TO A CONCLUSION THAT THE TPO W AS NOT JUSTIFIED IN INCLUDING THESE SEVEN COMPANIES IN THE FINAL SET OF COMPARABL ES AND ALL THESE COMPANIES DESERVE TO BE EXCLUDED FROM THE FINAL SET OF COMPAR ABLES. WE ORDER ACCORDINGLY. FINALLY, GROUND NO. 2.3 AND 2.4 OF TH E ASSESSEE ARE ALLOWED. 51. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ITA NO. 5401/DEL/2012 ASSTT.YEAR: 2008-09 34 ORDER PRONOUNCED IN THE OPEN COURT ON 11.12.2014. SD/- SD/- (J.S. REDDY) (CHANDRAMOHA N GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 11 TH DECEMBER, 2014 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. C.I.T.(A) 4. C.I.T. 5. DR BY ORDER AS STT. REGISTRAR
