Appeal Details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 98388 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 4 month(s) 16 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
12-08-2015
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
01-07-2015
Assessment Year
2009-2010
Appeal Filed On
26-03-2014
Judgement Text
ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 1 OF 44 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER & SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 683/HYD/2014 (ASSESSMENT YEAR: 2009-10) M/S. OSI SYSTEMS PVT. LTD (FORMERLY KNOWN AS ISI OPTED ELECTRONICS PVT. LTD) HYDERABAD PAN-AAACO 7463 L VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(3) HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.542/HYD/2014 (A.Y 2009-10) DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(3) HYDERABAD VS. M/S. OSI SYSTEMS PVT. LTD, (FORMERLY KNOWN AS ISI OPTED ELECTRONICS PVT. LTD), HYDERABAD PAN-AAACO 7463 L (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI AJIT TOLANI, FOR REVENUE : SHRI T. VENKATA REDDY, CIT(DR) DATE OF HEARING : 01.07.2015 DATE OF PRONOUNCEMENT : 12.08.2015 O R D E R PER SAKTIJIT DEY, J.M. THESE CROSS APPEALS BY THE ASSESSEE AND THE DEPARTMEN T ARE AGAINST THE FINAL ASSESSMENT ORDER DATED 27.01.201 4 PASSED BY THE DCIT, CIRCLE 16(3) HYDERABAD FOR A.Y 2009-10 IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PAN EL (DRP) U/S 144C(5) OF THE ACT. AT FIRST, WE WILL TAKE U P ASSESSEES APPEAL IN ITA NO.683/HYD/2014. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 2 OF 44 ITA NO.683/HYD/2014 2. BRIEFLY, FACTS ARE ASSESSEE A DOMESTIC COMPANY IS A WHOLLY OWNED SUBSIDIARY OF OSI SYSTEMS, USA. EARLIER THE COM PANY WAS KNOWN AS RAPISCAN SYSTEMS PRIVATE LTD (IN SHORT RAPIS CAN INDIA). HOWEVER, DURING THE FINANCIAL YEAR 2008-09 , TWO OTHER COMPANIES OF OSI GROUP IN INDIA VIZ., SPACELABS HEA LTHCARE SOLUTIONS PVT. LTD (IN SHORT SPACELABS) AND OSI OPTOELEC TRONICS PVT LTD (IN SHORT OSI OPTO) WERE MERGED WITH RAPISCAN I NDIA FROM 1.4.2008 AND CONSEQUENT TO SUCH MERGER, THE NAME OF THE ASSESSEE WAS CHANGED TO OSI SYSTEMS (P) LTD. IT IS ALSO PERTINENT TO MENTION HERE THAT AS PER THE ORDER OF MERGER OF THE HON'BLE ANDHRA PRADESH HIGH COURT, THE COMPANIES HAD MAINTAIN ED SEPARATE BOOKS OF ACCOUNTS FOR FINANCIAL YEAR 2008-0 9. AS COULD BE SEEN FROM THE MATERIALS ON RECORD, RAPISCAN SYSTEM S (P) LTD IS ENGAGED IN THE BUSINESS OF SOFTWARE SERVICES TO ITS AES IN THE FIELD OF SECURITY AND INSPECTION. SPACELABS HEALTHCAR E SOLUTIONS (P) LTD PROVIDES SOFTWARE DEVELOPMENT SERVICES TO ITS A ES IN THE FIELD OF MEDICAL EQUIPMENT AND SERVICES, WHEREAS OSI OPTO IS PROVIDING PURELY INFORMATION TECHNOLOGY ENABLED SERV ICES (ITES) TO ITS AES BY MAINTAINING A HELP DESK. FOR THE A.Y UND ER CONSIDERATION, ASSESSEE FILED ITS RETURN OF INCOME ON 30.09.2009 DECLARING NIL INCOME UNDER THE NORMAL PROVISIONS AND BOOK PROFIT OF RS.15,61,69,200 U/S 115JB. DURING THE ASSESSMENT PROCEEDINGS, AO NOTICING THAT ASSESSEE HAS ENTERED IN TO INTERNATIONAL TRANSACTIONS WITH ITS OVERSEAS AE MADE A R EFERENCE TO THE TRANSFER PRICING OFFICER (TPO) U/S 92CA1) OF THE ACT FOR DETERMINING ALP OF THE INTERNATIONAL TRANSACTIONS BETWEE N ASSESSEE AND THE AE. IN COURSE OF PROCEEDINGS BEFORE HIM, TPO CALLED FOR VARIOUS INFORMATIONS FROM ASSESSEE IN SUP PORT OF THE ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 3 OF 44 ARMS LENGTH MARGIN OF THE PRICE CHARGED BY IT TO ITS AE . ON EXAMINING THE TP STUDY REPORT SUBMITTED BY ASSESSEE, IT WAS NOTICED THAT AS FAR AS INTERNATIONAL TRANSACTIONS WITH A E ARE CONCERNED, ASSESSEE HAS EARNED REVENUE FROM FOLLOWI NG THREE SEGMENTS: 1.PROVISION FOR SOFTWARE DEVELOPMENT SERVICES 2.PROVISION FOR ITES 3.DISTRIBUTION OF MEDICAL EQUIPMENTS. 3. AS FAR AS SOFTWARE DEVELOPMENT SERVICES SEGMENT IS CONCERNED, IT IS AGAIN BIFURCATED INTO TWO CATEGORIES. RAPISCAN INDIA PROVIDES SOFTWARE SERVICES IN THE FIELD OF SEC URITY AND INSPECTIONS, WHEREAS SPACE LABS PROVIDES SOFTWARE SE RVICES IN THE FIELD OF MEDICAL EQUIPMENT AND SERVICES TO ITS AE. TH E FINANCIAL RESULTS OF RAPISCAN INDIA FOR THE FINANCIAL YEAR UND ER CONSIDERATION AS PER THE AUDIT REPORT ARE AS UNDER: PARTICULARS SOFTWARE DEVELOPMENT SERVICES OPERATING REVENUE/INCOME RS.8,65,09,529 OPERATING EXPENSES/COST RS.5,48,49,312 OPERATING PROFIT RS.3,16,60,217 OP ON COST 57.72% 4. ON VERIFICATION OF TP STUDY SUBMITTED BY ASSES SEE, TPO FOUND THAT FOR BENCHMARKING THE PRICE CHARGED BY RAPI SCAN INDIA TOWARDS SOFTWARE SERVICES, ANALYSIS HAS BEEN M ADE BY ADOPTING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS MO ST APPROPRIATE METHOD WITH OPERATING PROFIT TO OPERATING COS T (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI). ASSESSE E HAS UNDERTAKEN A SEARCH IN THE DATABASES WHICH HAS YIELDE D 21 ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 4 OF 44 COMPARABLES WITH ARITHMETIC MEAN PLI OF 12.31% AS AGA INST THE PLI OF ASSESSEE AT 57.72%. TO TEST THE AUTHENTICITY OF AS SESSEES CLAIM, THOUGH, THE TPO HIMSELF UNDERTOOK A SEARCH IN TH E DATABASES BY APPLYING CERTAIN FILTERS, HOWEVER, ULTIMAT ELY WHEN HE FOUND THAT THE MARGIN DECLARED BY THE ASSESSEE IS ABOVE THE MARGIN OF COMPARABLE COMPANIES, THE MARGIN SHOWN WAS ACCEPTED. 5. AS FAR AS OSI OPTO IS CONCERNED, AO ON PERUSAL OF THE TP STUDY AND 3CEB REPORT NOTICED THAT FINANCIAL RESULTS FOR THE YEAR UNDER CONSIDERATION AS UNDER: DESCRIPTION AMOUNT OPERATING REVENUE RS.1,47,13,079 OPERATING COST RS.1,31,06,056 OPERATING PROFIT RS. 16,07,023 OPERATING PROFIT TO OPERATING COST 12.26% 6. HE FURTHER NOTICED THAT ASSESSEE WHILE ANALYZING TH E PRICE CHARGED HAS ADOPTED TNNM AS THE MOST APPROPRIATE METHO D WITH OPERATING PROFIT TO OPERATING COST AS THE PLI. BY CONDUC TING A SEARCH IN THE DATABASES, ASSESSEE HAS ULTIMATELY SHOR TLISTED EIGHT COMPANIES AS COMPARABLE WITH AVERAGE PROFIT MAR GIN OF 16.45% ON COST. SINCE THE MARGIN EARNED BY THE ASSESS EE IS AT 12.26% OF OPERATING COST, THE PRICE CHARGED WAS FOUND TO BE WITHIN ARMS LENGTH. THOUGH, TPO ACCEPTED TNMM AS MO ST APPROPRIATE METHOD WITH OP/OC AS PLI, HOWEVER, HE DID NOT ACCEPT TP DOCUMENTATION OF THE ASSESSEE ON THE ITES SEGM ENT BY POINTING OUT VARIOUS DEFECTS AND DEFICIENCIES. AFTER REJECTING THE TP DOCUMENTATION, AO UNDERTOOK A SEARCH HIMSELF IN THE ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 5 OF 44 DATABASES WHICH YIELDED 12 COMPARABLE COMPANIES WITH AVERAGE ARITHMETIC MEAN OF 27.42%. THE DETAILS OF THE COMPANIES SELECTED BY THE TPO ARE AS UNDER: S.NO COMPANY NAME TOTAL OPERATING INCOME (RS.) PBIT/COST (%) 1 ACCENTIA TECH 78,73,29,230 49.40 2 ACROPETAL TECHNOLOGIES LTD (SEG.) 33,13,47,129 25.01 3 ADITYA BIRLA MINACS WORLDWIDE LTD 231,56,52,000 0.53 4 COSMIC GLOBAL LTD 7,76,39,593 48.20 5 CROSSD DOMAIN 33,76,05,000 29.38 6 ECLERX SERVICES LTD 187,98,40,000 53.34 7 INFOSYS BPO LTD 1082,30,21,283 16.90 8 JEEVAN SCIENTIFIC/ SOFTECH TECHNOLOGY LTD 1,79,46,688 16.56 9 MICROLAND LTD 144,04,72,000 2.35 10 MICROGENETIC SYSTEMS LTD 1,26,52,803 10.11 11 R SYSTEMS INTERNATIONAL LTD (SEG.) 26,54,44,558 5.77 12 GENESYS INTERNATIONAL LTD 83,17,53,876 71.50 ARITHMETIC MEAN 27.42 7. BY APPLYING THE AFORESAID ARITHMETIC MEAN PLI TO OPERATING COST OF RS.1,29,92,808, THE ALP OF THE ITES SEGMENT WAS DETERMINED AT RS.1,65,55,436. THE RESULTANT SHORTFALL O F RS.18,42,357 WAS TREATED AS ADJUSTMENT TO BE MADE U/S 92CA OF THE ACT. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 6 OF 44 8. AS FAR AS SOFTWARE DEVELOPMENT SERVICES PROVIDED BY SPACE LABS IS CONCERNED, FROM THE TP STUDY TPO FOUND THAT FOR BENCHMARKING THE PRICE CHARGED ASSESSEE HAS UNDERTAK EN AN ANALYSIS BY ADOPTING TNMM AS MOST APPROPRIATE METHOD A ND OP/OC AS THE PLI. AFTER A SEARCH IN DATABASES, ASSESS EE HAS SHORTLISTED 21 COMPARABLES WITH ARITHMETIC MEAN PLI OF 14.13% AS AGAINST ITS OWN OP/OC OF 11.16%. HENCE, PRICE CHA RGED WAS FOUND TO BE AT ARMS LENGTH REQUIRING NO FURTHER ADJUS TMENT. TPO, THOUGH ACCEPTED TNMM AS MOST APPROPRIATE METHOD A ND OP/OC AS PLI, HE HOWEVER REJECTED THE TP ANALYSIS OF THE ASSESSEE BY POINTING OUT VARIOUS DEFECTS AND DEFICIEN CIES. AFTER REJECTING THE TP STUDY TPO UNDERTOOK A SEARCH PROCESS HIMSELF WHICH RESULTED IN SELECTION OF 17 COMPANIES AS COMPAR ABLES WITH AVERAGE ARITHMETIC MEAN PLI OF 22.03%. THE DETAILS OF COMPARABLES SELECTED BY TPO ARE AS UNDER: S.NO COMPANY NAME OP/OC 1 AKSHAY SOFTWARE TECHNOLOGIES LTD 12.41 2 BODHTREE CONSULTING LTD 68.43 3 COMP-U-LEARN TECH INDIA LTD 28.00 4 IGATE GLOBAL SOLUTIONS LTD 21.97 5 INFOSYS LTD 41.34 6 KALS INF. SYSTEMS (SEG.) 23.11 7 LGS GLOBAL 20.51 8 MINDTREE LTD (SEG) 5.56 9 NEILSOFT LTD 9.05 10 PERSISTENT SYS 18.49 11 R S SOFTWARE (INDIA) LTD 9.99 12 R SYSTEMS INTERNATIONAL LTD (SEG) 17.53 ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 7 OF 44 13 SASKEN COMMUNICATION TECHNOLOGIES LTD 17.30 14 TATA ELXSI LTD (SEG) 22.82 15 THINKSOFT GLOBAL 20.80 16 THIRDWARE SOLUTIONS 22.28 17 ZYLOG SYSTEMS LTD 15.00 374.59 22.03 9. BY APPLYING THE AFORESAID ARITHMETIC MEAN PLI OF 22.03% TO THE OPERATING COST, THE ALP WAS DETERMINED AT RS.9,82, 45,901. THE RESULTANT SHORTFALL OF RS.86,00,471 WAS TREATED AS ADJUSTMENT U/S 92CA OF THE ACT. 10. AS FAR AS DISTRIBUTION SEGMENT IS CONCERNED, THO UGH ASSESSEE HAD UNDERTAKEN TP ANALYSIS BY FOLLOWING THE RE-SALE PRICE METHOD(RPM), BUT AO REJECTING THE SAME PROCEEDED TO DETERMINE THE ALP BY APPLYING THE TNNM METHOD, AS A RE SULT OF WHICH THE ARMS LENGTH OPERATING REVENUE WAS DETERMI NED BY THE TPO AT RS.5,26,24,777 AS AGAINST THE ACTUAL OPERATING COST OF RS.7,07,71,770. THE DIFFERENCE OF RS.1,81,46,922 WA S TREATED AS ADJUSTMENT U/S 92CA. THUS THE TOTAL TP ADJUSTMENT MADE BY TPO WAS TO THE TUNE OF RS.2,85,89,750. IN PURSUANCE TO THE ORDER PASSED BY THE TPO, AO PROPOSED A DRAFT ASSESSME NT ORDER INCORPORATING THE ADJUSTMENTS TO THE ALP RECOMMENDED BY THE TPO. BEING AGGRIEVED OF THE DRAFT ASSESSMENT ORDER, AS SESSEE RAISED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED AS SESSEES OBJECTIONS ON TP ADJUSTMENT WHILE GRANTING PARTIAL RELIE F ON THE ISSUE OF 10A DEDUCTIONS AND COMPUTATION UNDER MAT PRO VISIONS. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 8 OF 44 IN PURSUANCE TO THE DIRECTIONS OF THE DRP, THE IMPUGNED ASSESSMENT ORDER HAS BEEN PASSED BY THE AO. 11. ASSESSEE HAS RAISED A NUMBER OF GROUNDS, TOTALI NG TO 19, ON VARIOUS ISSUES OF TRANSFER PRICING ADJUSTMENT AS WE LL AS CORPORATE MATTERS. AT THE OUTSET, LD AR SUBMITTED BEFORE U S THAT GROUND NOS. 1 TO 5 ARE GENERAL IN NATURE, HENCE NOT P RESSED. HE ALSO SUBMITTED THAT GROUND NOS. 8 & 9 ARE ACADEMIC IN N ATURE, HENCE WOULD NOT LIKE TO PRESS THESE GROUNDS. IN VIEW O F THE ABOVE, GROUND NOS. 1 TO 5 AND 8 AND 9 ARE DISMISSED, AS NOT PRESSED. IN GROUND NOS. 6 & 7, ASSESSEE HAS RAISED THE ISSUE OF NON CONSIDERATION OF PROVISION FOR BAD AND DOUBTFUL D EBTS IN COMPUTING THE NET MARGIN UNDER THE TNNM FOR CERTAIN COMPARABLE AS WELL AS THE ISSUE OF NOT ALLOWING WORKI NG CAPITAL ADJUSTMENT. THESE ISSUES AS RAISED IN GROUND NOS. 6 & 7 WILL BE DEALT WITH IN THE LATER PART OF OUR ORDER. 12. IN GROUND NO.10 ASSESSEE HAS OBJECTED TO THE SEL ECTION OF CERTAIN COMPARABLES IN ITES SEGMENT AS UNDER: S.NO COMPANY NAME 1 INFOSYS B P O LTD 2 GENESYS INTERNATIONAL LTD 3 ECLERX SERVICES LTD 4 COSMIC GLOBAL LTD 5 ACROPETAL TECHNOLOGIES LTD (SEG.) 6 ACCENTIA TECHNOLOGIES LTD 13. IT WAS SUBMITTED BY THE LD AR, THESE COMPANIES OBJECTED TO BY THE ASSESSEE HAVE BEEN CONSIDERED AS INCOMPARABL E IN CASE OF ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 9 OF 44 OTHER ITES COMPANIES FOR VARIOUS REASONS BY DIFFEREN T BENCHES OF THE TRIBUNAL INCLUDING THE HYDERABAD BENCHES. THE LD AR SUBMITTED IF THESE COMPANIES ARE EXCLUDED, THEN ASSESSE ES MARGIN WOULD BE WITHIN THE AVERAGE MARGIN OF THE REST OF THE COMPARABLE COMPANIES. THE LD DR HOWEVER, SUPPORTING THE REASONINGS OF THE TPO AND THE DRP SUBMITTED THAT THE TPO HAVING SELECTED THE COMPARABLE COMPANIES ON AN OBJEC TIVE ANALYSIS, THERE IS NO NEED TO EXCLUDE THEM. 14. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. AS COULD BE SEEN, TH E ISSUES RELATING TO COMPARABILITY OF COMPANIES OBJECTED TO BY ASSESSEE WERE CONSIDERED BY DIFFERENT BENCHES OF THE ITAT IN C ASE OF OTHER ITES COMPANIES. IN CASE OF M/S. CAPITAL IQ INFORMATIO N SYSTEMS (INDIA) PVT. LTD VS. ADDL. CIT (ITA NO.124/HYD/2014, DATED 31.7.2014) ALL THESE COMPANIES WERE FOUND TO BE INCO MPARABLE TO A PURE ITES PROVIDER FOR THE FOLLOWING REASONS: 1) INFOSYS B P O LTD. : 16. IT WAS THE CONTENTION O F ASSESSEE THAT THIS BPO IS A GIANT IN ITS AREA AND HAS BRAND VALUE OF INFOSYS TECHNOLOGIES LIMITED. ASSESSEES MAIN CONTENTION WA S THAT IT IS NOT FUNCTIONALLY SIMILAR AND ITS TURNOVER IS MUCH MORE WHEN COMPARED TO THAT OF ASSESSEE. IT WAS ALSO CONTENDED THAT THE INFOSYS BPO HAS DONE BRAND BUILDING EXERCISE BY INCURRING LARGE AMO UNTS OF BRAND BUILDING AND ADVERTISEMENT EXPENDITURE AND UNDERTAK ING BRAND CAMPAIGNING OUTSIDE INDIA. FURTHER, IT ALSO HAS HUG E ASSET BASE AND THEREFORE, THIS COMPANY IS NOT FUNCTIONALLY COMPARA BLE TO ASSESSEE. ASSESSEE RELIED ON THE DECISION OF THE HONBLE DELH I HIGH COURT IN THE CASE OF CIT V/S. AGNITY INDIA TECHNOLOGIES PVT. LTD. (2013) 219 TAXMAN 26 (DEL), WHEREIN IT WAS HELD THAT HUGE TURN OVER COMPANIES LIKE INFOSYS AND WIPRO CANNOT BE CONSIDERED AS COMP ARABLE TO SMALLER COMPANIES LIKE ASSESSEE. 16.1 EVEN THOUGH W E ARE NOT IN AGREEMENT WITH THE CONTENTIONS OF THE COMPARABILITY ON TURNOVER RATIO OF ASSESSEE WITH THIS COMPANY ON THE GROUND T HAT ASSESSEES TURNOVER IS ABOUT RS.129.8 CRORES, WHICH AS AGAINST TURNOVER OF RS.1016 CRORES OF THE INFOSYS, ( WHICH IS ONLY ABOU T 5 TIMES) WE ARE OF THE VIEW THAT OTHER CONTENTIONS WITH REGARD TO T HE BRAND VALUE AND ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 10 OF 44 BRAND BUILDING EXERCISE, HAVING HUGE ASSET BASE, CA N BE CONSIDERED TO ARRIVE AT THE CONCLUSION THAT INFOSYS IS FUNCTIO NALLY NOT SIMILAR TO THAT OF ASSESSEE. INFOSYS BPO STANDS ON ITS OWN AS AN EXCLUSIVE BPO OF THE INFOSYS TECHNOLOGIES AND IN EARLIER YEARS, G ENERALLY INFOSYS BPO IS EXCLUDED IN MANY OF THE CASES. CONSIDERING T HESE ASPECTS, WE ARE OF THE OPINION THAT EVEN THOUGH THE PROFITS OF THE INFOSYS BPO LTD. IS REASONABLE AND NO SUPER PROFITS ARE EARNED, JUST BECAUSE OF ITS BIG BRAND VALUE, THIS COMPANY HAS TO BE EXCLUDE D ON THE GROUNDS OF FUNCTIONAL DISSIMILARITY ON FAR ANALYSIS. THEREF ORE, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY. (2) GENESYS INTERNATIONAL LTD. 17. IT WAS THE CONTE NTION THAT THIS COMPANY FUNCTIONS IN TWO HORIZONTALS, AND IS HAVING SUPER PROFITS. IT WAS FURTHER SUBMITTED THAT THIS COMPANY IS NOT ONLY IN SOFTWARE DEVELOPMENT BUT ALSO IN GEOSPATIAL SERVICES, WHICH ARE HIGHLY TECHNICAL. IT ALSO INVOLVES IN CONSULTING ACTIVITY. IT WAS THE CONTENTION THAT THIS COMPANY WAS ANALYSED BY THE COORDINATE BE NCH OF THE TRIBUNAL AT DELHI IN THE CASE OF M/S. MERCER CONSUL TING (INDIA) LTD. V/S DCIT (VIDE ORDER DATED 6TH JUNE, 2014 IN ITA NO .966/DEL/2014), WHEREIN THIS COMPANY WAS EXCLUDED IN THAT CASE. LEA RNED COUNSEL FOR ASSESSEE RELIED UPON THE FINDINGS OF THE TRIBUN AL VIDE PARAS 14.2 AND 14.3, IN THAT CASE, WHICH READ AS FOLLOWS- 14.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RIVAL MATERIALS ON RECORD. IT HAS BEEN NOTICED SUPR A THAT ASSESSEE IS BASICALLY PROVIDING VARIOUS SERVICES TO THE CUSTOMERS OF ITS AES IN RELATION TO HUMAN RESOURCES WHICH ARE MORE OR LESS CENTERED AROUND THE EMPLOYEES OF T HE PROSPECTIVE CLIENTS. WHEN WE CONSIDER THE NATURE OF SERVICES PROVIDED BY GENESYS INTERNATIONAL CORPORATION LTD., IT COMES TO THE FOREFRONT THAT THEY ARE PROVIDING FULL RANGE OF GEOSPATIAL SERVICES TO ITS CUSTOMERS. IN SIMPLE TER MS, GEOSPATIAL SERVICES MEANS THE SERVICES RELATING TO THE RELATIVE POSITION OF THINGS ON THE EARTHS SURFACE. THESE BA SICALLY INCLUDE 3D MAPPING, NAVIGATION MAPS, IMAGE PROCESSI NG, CADASTRAL MAPPING, ETC. IF WE TAKE INTO ACCOUNT THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE, BEING FINANCIAL AND RETIREMENT SECURITY, HEALTH, PRODUCTIVITY OF EMPLOY EES AND EMPLOYMENT RELATIONSHIPS AND THEN TRY TO COMPARE TH EM WITH THOSE RENDERED BY GENESYS, IT IS MANIFESTED THAT BO TH ARE TOTALLY INCOMPARABLE. 14.3. THE TPO ON PAGE 48 OF H IS ORDER HAS EXAMINED CBDT CIRCULAR SO 890 (E) DATED 26.9.20 00 WHICH PROVIDES A DETAILED LIST OF PRODUCTS OR SERVI CES THAT CAN BE COVERED UNDER THE ITES FOR THE PURPOSES OF SECTI ON 10A AND 10B OF THE ACT. IN THIS CIRCULAR, INFORMATION T ECHNOLOGY ENABLED PRODUCTS/SERVICES HAVE BEEN DIVIDED INTO FI FTEEN CATEGORIES, STARTING WITH BANK OFFICE OPERATIONS, C ALL CENTRES ETC. AND ENDING WITH WEBSITE SERVICES. FROM THE VER Y ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 11 OF 44 DESCRIPTION OF SUCH SERVICES, IT IS PALPABLE THAT E VEN THOUGH THESE FALL UNDER THE OVERALL ITES CATEGORY, BUT SOM E OF THEM ARE QUITE DIFFERENT FROM EACH OTHER. TO CITE, SERVI CE AT SL.NO. (VI) OF THIS CIRCULAR IS GEOGRAPHIC INFORMATION SY STEM SERVICES AND AT SL. NO. (VII) IS HUMAN RESOURCES S ERVICES. NO DOUBT, ALL THESE FIFTEEN CATEGORIES OF PRODUCTS/ SERVICES HAVE BEEN INCLUDED UNDER THE MAJOR HEAD OF INFORMA TION TECHNOLOGY ENABLED SERVICES (ITES), BUT MOST OF TH EM ARE QUITE DISTINGUISHABLE FROM OTHERS. IN OUR CONSIDERE D OPINION, THE FIFTEEN BROAD CATEGORIES SET OUT IN THIS CIRCUL AR CANNOT PER SE BE CLAIMED AS SIMILAR TO EACH OTHER. A CURSORY L OOK AT THESE PRODUCTS/SERVICES TRANSPIRES THAT SOME OF THEM ARE FUNCTIONALLY QUITE DIFFERENT FROM EACH OTHER. FURTH ER THE LEVEL OF INVESTMENT REQUIRED FOR PROVIDING SUCH SERVICES IS ALSO NOT CONSISTENT. IN OUR CONSIDERED OPINION, THE MERE FAC T THAT TWO SERVICES ARE PLACED UNDER THIS CATEGORY DO NOT BECO ME AUTOMATICALLY COMPARABLE. IF A CASE PROVIDING ONE C ATEGORY OF SERVICES UNDER ITES IS CLAIMED AS COMPARABLE WIT H ANOTHER IN THE CATEGORY OF SERVICE UNDER ITES AS PE R THIS CIRCULAR, THEN IT MUST BE SHOWN EX FACIE THAT IT IS BROADLY SIMILAR. ADVERTING TO THE FACTS OF THE INSTANT CASE , WE FIND THAT THE SERVICES RENDERED BY GENESYS FALL UNDER CLAUSE (VI) WITH THE HEADING GEOGRAPHICAL INFORMATION SYSTEMS SERVI CES, WHEREAS THOSE RENDERED BY THE ASSESSEE FALL PARTLY UNDER CLAUSE (VII) WITH THE HEADING HUMAN RESOURCES SERV ICES AND PARTLY UNDER CLAUSE (XI) WITH THE HEADING PAYR OLL. ON JUXTAPOSITION EXAMINATION OF THESE TWO SETS OF SERV ICES, WE FIND THAT THERE IS A VAST DIFFERENCE WHICH MAKE ONE QUITE DISTINCT FROM THE OTHER. IN VIEW OF SUCH FUNCTIONAL INCOMPARABILITY BETWEEN ASSESSEE AND GENESYS, WE HO LD THAT THIS COMPANY CANNOT BE TREATED AS COMPARABLE. WE, T HEREFORE, DIRECT TO EXCLUDE THIS CASE FROM THE LIST OF COMPAR ABLES. 17.1. ON CAREFUL CONSIDERATION OF THE MATTER, RESPE CTFULLY FOLLOWING THE ABOVE DECISION OF THE COORDINATE BENC H, WE ARE ALSO OF THE OPINION THAT THERE IS VAST DIFFERENCE B ETWEEN THE FUNCTIONS OF THE ABOVE COMPANY AND THAT OF ASSESSEE . THIS COMPANY AS SUCH, CANNOT BE TREATED AS COMPARABLE ON FAR ANALYSIS. WE THEREFORE, DIRECT THE ASSESSING OFFICE R/TPO TO EXCLUDE THIS COMPANY. (3) ECLERX SERVICES LTD. 18. THE OBJECTION OF ASSESSEE TO THIS COMPARABLE IS THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR. IT IS IN THE BU SINESS OF CONSULTANCY AND ADVISORY SERVICE AND PROVIDES ONLY ANALYTICAL DATA. IT IS ALSO INVOLVED IN QUALITY MON ITORING. IT IS THE STAND OF THE ASSESSEE THAT THIS COMPANY OFFERS SOLUTIONS ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 12 OF 44 THAT INCLUDE DATA ANALYTICS, OPERATIONS MANAGEMENT, AUDITS AND RECONCILIATION AND THEREFORE HAS TO BE CLASSIFI ED AS HIGH END KPO. IN SUPPORT OF THE STAND OF THE ASSESSEE, E XTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY HAVE BEEN PO INTED OUT. THEREFORE, THE FUNCTIONS OF THE ABOVE COMPANY ARE DISSIMILAR TO ASSESSEE, WHICH IS A CAPTIVE SERVICE PROVIDER. ON THE PRINCIPLES LAID DOWN BY THE HONBLE SPECIAL BENCH OF THE ITAT (MUMBAI) IN THE CASE OF MAERSK GLOBAL CENT RES (INDIA) PVT. LTD. V/S. ACIT (ITA NO.7466/MUM/2012 F OR ASSESSMENT YEAR 2008-09 DATED 7.3.2014) AND THE PRI NCIPLES LAID DOWN BY THE COORDINATE BENCH OF THE TRIBUNAL(D ELHI) IN THE CASE OF M/S. MERCER CONSULTING (INDIA) PVT. LTD ., (SUPRA), ASSESSEE SUBMITS THAT THIS COMPANY CANNOT BE SELECT ED AS A COMPARABLE. 18.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEV ER, SUBMITTED THAT HAVING ACCEPTED ADITYA BIRLA MINACS WORLDWIDE LTD., AS A COMPARABLE COMPANY, THIS COMPA NY SHOULD ALSO BE INCLUDED, AS OTHERWISE, BOTH THE COM PANIES SHOULD BE EXCLUDED. 18.2 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE ANNUAL REPORT AND THE OBJECTIONS OF ASSESSEE. AS SEEN FROM THE ANNUAL REPORT, THE ABOVE COMPANY IS INVOLVED IN DIV ERSE NATURE OF SERVICES AND THERE WAS NO SEGMENTAL DATA FOR DIVERSIFIED SERVICE PORT FOLIO. MOREOVER THIS COMPA NY CAN BE CONSIDERED AS KPO AND WE ARE OF THE OPINION THAT TH IS COMPANY IS NOT COMPARABLE TO ASSESSEES SERVICES. W E THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO EXCL UDE THIS COMPANY. (4) COSMIC GLOBAL LTD. 19. THE MAIN OBJECTION OF A SSESSEE WITH REFERENCE TO THE INCLUSION OF THIS COMPANY IS WITH REFERENCE TO OUTSOURCING OF ITS MAIN ACTIVITY. EVEN THOUGH THIS COMPANY IS IN ASSESSEES TP STUDY, IT HAS RAISED OB JECTION BEFORE THE TPO THAT THIS COMPANYS EMPLOYEE COST IS LESS THAN 21.30% AND MOST OF THE COST IS WITH REFERENCE TO THE OUTSOURCING CHARGES OR TRANSLATION CHARGES, AND AS SUCH THIS IS NOT A COMPARABLE COMPANY. THE TPO, THOUGH CONSID ERED THESE SUBMISSIONS, REJECTED THE SAME, ON THE REASON THAT THIS DOES NOT IMPACT THE PROFIT MARGIN OF THE COMPANY. O PPOSING THE VIEW TAKEN BY THE TPO, IT IS SUBMITTED THAT THI S COMPANY CANNOT BE SELECTED AS COMPARABLE, AS SIMILAR ISSUE WAS DISCUSSED BY THE COORDINATE BENCH OF THE TRIBUNAL(D ELHI) IN THE CASE OF MERCER CONSULTING (INDIA) P. LTD. (SUPR A), VIDE PARAS 13.2 TO 13.3 WHICH READ AS UNDER- 13.2. NOW COMING TO THE FACTUAL MATRIX OF THIS CAS E, WE FIND FROM THE MATERIAL ON RECORD THAT OUTSOURCING CHARGE S OF THIS CASE CONSTITUTE 57.31% OF THE TOTAL OPERATING COSTS . THIS DOES ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 13 OF 44 NOT APPEAR TO US TO BE A VALID REASON FOR ELIMINATI NG THIS CASE FROM THE LIST OF COMPARABLES. ON GOING THROUGH THE ANNUAL ACCOUNTS OF COSMIC GLOBAL LIMITED, A COPY OF WHICH HAS BEEN PLACED ON RECORD, WE FIND THAT ITS TOTAL REVEN UE FROM OPERATIONS ARE AT RS.7.37 CRORE DIVIDED INTO THREE SEGMENTS, NAMELY, MEDICAL TRANSCRIPTION AND CONSULTANCY SERVI CES AT RS.9.90 LACS, TRANSLATION CHARGES AT RS.6.99 CRORE AND ACCOUNTS BPO AT RS.27.76 LAC. THE LD. AR HAS MADE O UT A CASE THAT OUTSOURCING ACTIVITY CARRIED OUT BY THIS COMPANY CONSTITUTES 57% OF TOTAL EXPENSES. THE REASON FOR W HICH WE ARE NOT AGREEABLE WITH THE LD. AR IS THAT WE HAVE T O EXAMINE THE REVENUE OF THIS CASE ONLY FROM ACCOUNTS BPO SEG MENT AND NOT ON THE ENTITY LEVEL, BEING ALSO FROM MEDICA L TRANSCRIPTION AND TRANSLATION CHARGES. WHEN WE ARE EXAMINING THE RESULTS OF THIS COMPANY FROM THE ACCO UNTS BPO SEGMENT ALONE, THERE IS NO NEED TO EXAMINE THE POSITION UNDER OTHER SEGMENTS. THE ENTIRE OUTSOURCING IS CON FINED TO TRANSLATION CHARGES PAID AT RS.3.00 CRORE, WHICH IS STRICTLY IN THE REALM OF THE TRANSLATION SEGMENT, REVENUES FROM WHICH ARE TO THE TUNE OF RS.6.99 CRORE. IF THIS SEGMENT O F TRANSLATION IS NOT UNDER CONSIDERATION FOR DECIDING AS TO WHETH ER THIS CASE IS COMPARABLE OR NOT, WE CANNOT TAKE RECOURSE TO TH E FIGURES WHICH ARE RELEVANT FOR SEGMENTS OTHER THAN ACCOUNTS BPO. THUS IT IS HELD THAT THIS CASE CANNOT BE EXCLUDED O N THE STRENGTH OF OUTSOURCING ACTIVITY, WHICH IS ALIEN TO THE RELEVANT SEGMENT. 13.3. HOWEVER, WE FIND THIS CASE TO INCOMPARABLE ON THE ALTERNATIVE ARGUMENT ADVANCED BY THE LD. AR TO THE EFFECT THAT TOTAL REVENUE OF THE ACCOUNTS BPO SEGMENT OF COSMIC GLOBAL LIMITED IS VERY LOW AT RS.27.76 LACS. WE HAV E DISCUSSED THIS ASPECT ABOVE IN THE CONTEXT OF CG-VA KS CASE AND HELD THAT A CAPTIVE UNIT CANNOT BE COMPARED WIT H A GIANT CASE AND THUS EXCLUDED CG-VAK WITH TURNOVER FROM ACCOUNTS BPO SEGMENT AT RS.86.10 LACS. AS THE SEGME NTAL REVENUE OF BPO SEGMENT OF COSMIC GLOBAL LIMITED AT RS.27.76 LAC IS STILL ON MUCH LOWER SIDE, THE REASO NS GIVEN ABOVE WOULD FULLY APPLY TO HOLD COSMIC GLOBAL LIMIT ED AS INCOMPARABLE. THIS CASE IS, THEREFORE, DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IN VIEW OF THE DETAILED ANALYSIS OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE ABOVE REFERRED CASE, IN THIS CA SE ALSO WE ACCEPT THE CONTENTIONS OF ASSESSEE AND DIRECT THE A SSESSING OFFICER/TPO TO EXCLUDE THIS COMPARABLE FOR THE SAME REASONS. (5) ACROPETAL TECHNOLOGIES LTD. (SEG.) 20. THE OBJECTION OF ASSESSEE WITH REFERENCE TO THI S COMPANY IS THAT THE COMPANY IS INVOLVED IN ENGINEERING DESIGN SERVI CES AND HIGH END ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 14 OF 44 SERVICES AND HAS PRODUCTS IN ITS INVENTORY. IT IS A LSO INVOLVED IN R&D ACTIVITY AND DEVELOPING SOPHISTICATED DELIVERY SYST EM. IT WAS FURTHER SUBMITTED THAT THIS COMPANY IS NOT FUNCTIONALLY COM PARABLE AT SEGMENT LEVEL ALSO, AS ENGINEERING DESIGN SERVICES ARE HIGH END SERVICES, AS CONSIDERED IN OTHER CASES. IT IS FURTH ER SUBMITTED THAT ALLOCATION OF EXPENSES BETWEEN SEGMENTS IS NOT POSS IBLE AND DEPRECIATION WAS NOT ALLOCATED BETWEEN THE SEGMENTS . THERE ARE EXTRA-ORDINARY EVENTS WHICH IMPACT PROFIT ALSO, AS CAN BE SEEN FROM THE ANNUAL REPORTS. IT IS FURTHER SUBMITTED THAT TH IS COMPANY IS NOT SELECTED IN THE LIST OF COMPARABLES SELECTED IN THE CASE OF MERCER CONSULTING (INDIA) PVT. LTD. AND THEREFORE, SELECTI ON OF THE COMPANY BY THE TPO IN THIS CASE, WHICH IS ALSO IN SIMILAR I TES SERVICES, IS NOT PROPER. 20.1 AFTER CONSIDERING THE RIVAL CONTENTION S, WE AGREE WITH THE OBJECTIONS RAISED BY ASSESSEE. AS SEEN FROM THE ANNUAL REPORT, THIS COMPANY IS INVOLVED IN ENGINEERING DESIGN SERV ICES AND HAS PRODUCTS ALSO, WHICH MAKES IT FUNCTIONALLY NOT COMP ARABLE. EVEN AT THE SEGMENTAL LEVEL, IT PROVIDES ENGINEERING DESIGN SERVICES, WHICH WAS CONSIDERED AS HIGH END BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF HYUNDAI MOTORS INDIA ENGINEERING (SU PRA) IN EARLIER YEAR. THEREFORE, WE ARE OF THE OPINION THAT THIS CO MPANY CANNOT BE SELECTED AS A COMPARABLE. WE ACCORDINGLY DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY. (6) ACCENTIA TECHNOLOGIES LIMITED. 21. THIS COMPANY WAS OBJECTED TO BY ASSESSEE ON THE REASON OF SUPER PROFITS AS WELL AS EXTRA-ORDINARY EVENTS. IT WAS SU BMITTED THAT ACQUISITION OF OAK TECHNOLOGIES & TRANS SERVICES HA S IMPACT ON THE PROFITS OF THE COMPANY AND HAS TAKEN INORGANIC GROW TH AS STRATEGY TO INCREASE THE PROFITS BECAUSE OF THE PECULIAR ECONOM IC CIRCUMSTANCES AND BRAND VALUE. THE SAME IN THESE CIRCUMSTANCES CA NNOT BE SELECTED. IT WAS SUBMITTED THAT ASSESSEE WAS IN MED ICAL TRANSCRIPTION SERVICES. 21.1. THE DEPARTMENTAL REPRESENTATIVE HOWEVER, OBJE CTED TO THE PLEAS OF ASSESSEE STATING THAT THE EXTRAORDINARY EV ENTS OCCURRED IN EARLIER YEAR AND THEREFORE, THE SAME CANNOT BE CONS IDERED AS HAVING ANY IMPACT IN THE YEAR UNDER CONSIDERATION. 21.2 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND N OTICED THAT THIS COMPANY OPERATES IN A DIFFERENT BUSINESS STRATEGY O F ACQUIRING COMPANIES FOR INORGANIC GROWTH AS ITS STRATEGY. IN EARLIER YEARS ON THE REASON OF ACQUISITION OF VARIOUS COMPANIES, BEI NG AN EXTRAORDINARY EVENT WHICH HAD AN IMPACT ON THE PROF IT, THIS COMPANY WAS EXCLUDED. AS SUBMITTED BY THE LEARNED COUNSEL, THIS YEAR ALSO, THE ACQUISITION OF SOME COMPANIES BY THAT COMPANY M AY HAVE IMPACT ON THE PROFIT. CONSIDERING THE PROFIT MARGINS OF TH E COMPANY AND INSUFFICIENT SEGMENTAL DATA, WE ARE OF THE OPINION THAT THIS COMPANY ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 15 OF 44 CANNOT BE SELECTED AS A COMPARABLE. MOREOVER, THIS IS ALSO NOT A COMPARABLE IN THE CASE OF M/S. MERCER CONSULTING (I NDIA) P. LTD. (SUPRA), WHICH INDICATES THAT THE TPO THEREIN HAS E XCLUDED IT AT THE OUTSET. IN VIEW OF THIS, WE DIRECT THE ASSESSING OF FICER/TPO TO EXCLUDE THIS COMPARABLE, FROM THE LIST OF COMPARABL E SELECTED. 15. AS THE AFORESAID DECISION OF THE COORDINATE BENC H IS FOR VERY SAME A.Y AND FACTS ARE MATERIALLY SAME, MOREOVE R, AS THE LD DR HAS NOT BROUGHT ANY CONTRARY DECISION TO OUR NOTICE , THEREFORE, RESPECTFULLY FOLLOWING THE AFORESAID DECI SION OF COORDINATE BENCH, WE EXCLUDE THESE COMPARABLES IN ITE S SEGMENT. . 16. IN GROUND NO.11, ASSESSEE HAS OBJECTED TO REJECTI ON OF THREE COMPARABLES SELECTED BY IT. HOWEVER, AT THE TIME O F HEARING, LD AR RESTRICTED HIS SUBMISSIONS TO ONLY ONE OF THE COMPARABLE I.E. ALLSEC TECHNOLOGIES LTD AND SUBMITTED THAT REJECTION OF OTHER TWO COMPANIES ARE NOT PRESSED. IN VIEW OF THE AFORESAID, WE WILL CONSIDER ASSESSEES OBJECTION WIT H REGARD TO REJECTION OF ALLSEC TECHNOLOGIES AS COMPARABLE. THE LD AR SUBMITTED THAT THE TPO HAS REJECTED THIS COMPANY BY APPLY ING EXPORT REVENUE FILTER. THE TPO OBSERVED THAT EXPORTS ARE ONLY 19.57% OF TOTAL REVENUE. THE LD AR SUBMITTED THAT THE CONCLUSIONS DRAWN BY THE TPO IS TOTALLY WRONG AS THE E XPORT EARNINGS OF THIS COMPANY CONSIST OF 74.45% OF ITS SE RVICE REVENUE. THEREFORE, IT SATISFIES THE EXPORT REVENUE FIL TER APPLIED BY THE TPO. THE LD DR ON THE OTHER HAND REFERRING TO THE OBSERVATIONS MADE BY THE TPO AT PARA 35 OF HIS ORDER ARGUED THAT THE COMPANY HAS MADE SIGNIFICANT ACQUISITIONS DURI NG FINANCIAL YEAR 2008-09. THEREFORE, IT IS AN EXCEPTION AL YEAR OF OPERATION FOR THE COMPANY. HENCE IT HAS BEEN RIGHTLY R EJECTED AS A COMPARABLE. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 16 OF 44 17. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. AS FAR AS THIS ISSUE IS CONCERNED, IT IS TO BE NOTED FROM THE ORDER OF THE TPO T HAT HE HAS REJECTED THE COMPANY NOT ONLY BECAUSE OF NOT SATISFYING EXPORT REVENUE FILTER, BUT ALSO DUE TO THE FACT THAT THIS COMP ANY HAS MADE ACQUISITIONS DURING THE RELEVANT FINANCIAL YEAR. THOUGH, THE LD AR HAS RELIED UPON THE DECISION OF THE COORDIN ATE BENCH IN THE CASE OF M/S. CAPITAL IQ INFORMATION SYSTEMS ( INDIA). PVT. LTD. FOR INCLUDING THIS COMPANY, HOWEVER, WE FIND THAT THE VERY SAME COORDINATE BENCH WHILE CONSIDERING THE COMPARAB ILITY OF THIS COMPANY IN CASE OF TNS INDIA PVT. LTD IN ITA NO.604/HYD/2014 DATED 13.02.2014 AFTER TAKING INTO A CCOUNT THE ORDER PASSED IN CASE OF M/S. CAPITAL IQ INFORMATION SYSTEMS (INDIA ). PVT. LTD REJECTED THIS COMPANY BY HOLDING AS UNDER: 14. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF REVENU E AUTHORITIES ON THE ISSUE. ON A PERUSAL OF THE ANNUAL REPORT OF ALLSEC TECHNOLO GIES LTD., A COPY OF WHICH IS AT PAGE 442 OF THE PAPER BOOK, IT IS SEEN THAT D URING THE RELEVANT FY, IT HAS ACQUIRED A COMPANY. FURTHER, IT IS CLEAR THAT COMPA NY HAS MADE LOSSES AND IT IS NOT CLEAR WHETHER LOSS IS ON ACCOUNT OF ACQUISIT ION OR NOT. MOREOVER, THE TRIBUNAL HAS BEEN CONSISTENT IN ITS VIEW THAT A COM PANY IN THE YEAR OF ACQUISITION CANNOT BE TREATED AS A COMPARABLE. IN F ACT FOR THE SAME REASON, ASSESSEE HAS SOUGHT EXCLUSION OF ACCENTIA TECHNOLOG Y LTD. THOUGH, IT MAY BE A FACT THAT IN CASE OF MERCER CONSULTING INDIA LTD. VS. DCIT IN ITA NO. 966/DE./14 DATED 06/06/14, WHICH WAS SUBSEQUENTLY F OLLOWED IN CAPITAL IQ INFORMATION SYSTEMS (SUPRA), THE AFORESAID COMPANY HAS BEEN HELD TO BE A COMPARABLE, BUT, ON A CAREFUL ANALYSIS OF THE DECIS ION OF THE TRIBUNAL, IT BECOMES CLEAR THAT THIS COMPANY WAS HELD AS COMPARA BLE ONLY BECAUSE THE TRIBUNAL FOUND THE REASON FOR EXCLUSION OF THE COMP ANY BY APPLYING THE EXPORT REVENUE FILTER OF 75% UNACCEPTABLE. THE TRIB UNAL NEVER CONSIDERED THE ASPECT OF ACQUISITION MADE BY ALLSEC DURING THE YEA R. IN THE AFORESAID VIEW OF THE MATTER AND CONSIDERING THE FACT THAT THE ACQUIS ITION MADE BY THE COMPANY DURING THE RELEVANT FY MIGHT HAVE HAD AN IM PACT ON THE FINANCIAL RESULTS, WE DO NOT CONSIDER IT EXPEDIENT TO INTERFE RE WITH THE DECISIONS OF TPO/DRP. ACCORDINGLY, WE UPHOLD THE REJECTION OF THE AFORESAID COMPARABLE. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 17 OF 44 18. CONSIDERING THE FACT THAT THIS COMPANY WAS REJECTED BECAUSE IT HAS MADE ACQUISITION DURING THE RELEVANT FI NANCIAL YEAR, WE DO NOT CONSIDER IT APPROPRIATE TO ACCEPT THIS C OMPANY AS A COMPARABLE. THIS GROUND OF THE ASSESSEE IS THEREFO RE, DISMISSED. 19. IN GROUND NO.12, ASSESSEE HAS CHALLENGED THE DEC ISION OF THE TPO IN NOT AGGREGATING THE SOFTWARE SERVICES TRANSA CTIONS OF THE ASSESSEE FOR DETERMINING THE ALP. THE LD AR SUBMI TTED BEFORE US THAT AFTER THE MERGER OF SPACELABS WITH THE A SSESSEE COMPANY, ASSESSEE HAS CONSIDERED THE REVENUE EARNED FROM SOFTWARE DEVELOPMENT SERVICES AS A WHOLE WHILE COMPU TING ITS MARGIN. IT WAS SUBMITTED BEFORE US THAT WHILE THE MARGIN OF RAPISCAN SYSTEMS LTD IS SHOWN AT 57.27%, THAT OF SPACEL ABS IS AT 11.35%. THEREFORE, IF BOTH SPACELABS AND RAPISCAN ARE TAKEN TOGETHER THE COMBINED PROFIT MARGIN WILL COME TO 30.14%, WHICH IS MORE THAN THE MARGIN OF COMPARABLE COMPANIES SELEC TED IN SOFTWARE SEGMENT BY THE TPO AT 27.23%. THE LD AR SUBMI TTED SINCE THE COMPANY AFTER MERGER IS HAVING ONE SEGMENT AS FAR AS SOFTWARE DEVELOPMENT SERVICES IS CONCERNED, THE ENTIRE REVENUE EARNED FROM THIS SEGMENT SHOULD BE AGGREGATED FOR DET ERMINING THE ALP. THE LD DR HOWEVER, CONTESTED THE CLAIM OF THE ASSESSEE AND SUBMITTED THAT EVEN AFTER THE MERGER, SINCE SEPARATE BOOKS OF ACCOUNTS ARE MAINTAINED AND THE NATURE OF SOFTWARE DEVELOPMENT SERVICES FOR BOTH THE COMPANIES ARE DIFFER ENT, THE REVENUE EARNED FROM SOFTWARE DEVELOPMENT SERVICES CA NNOT BE AGGREGATED FOR DETERMINING THE ALP. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 18 OF 44 20. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ENTIRE PURPOSE BE HIND INTRODUCING THE TP PROVISIONS IS TO ASCERTAIN WHETHER T HE PRICE CHARGED FOR AN INTERNATIONAL TRANSACTION BETWEEN TWO R ELATED PARTIES IS AT ARMS LENGTH. FOR ACHIEVING THIS, THE CON TROLLED TRANSACTION HAS TO BE COMPARED WITH ONE OR SEVERAL UNCO NTROLLED TRANSACTIONS CARRIED IN THE SAME LINE OF BUSINESS AND WITH MORE OR LESS SIMILAR FACTS AND CIRCUMSTANCES. IT IS APPARE NT FROM THE FACTS AND MATERIALS ON RECORD, EVEN AFTER MERGER OF S PACELABS WITH RAPISCAN SYSTEMS INDIA LTD, MAINTENANCE OF ACCOU NTS IS ENTITY SPECIFIC. THOUGH, IT MAY BE A FACT THAT SOFTWARE DEVELOPMENT SERVICES IS A VERY WIDE TERM AND TAKES WIT HIN ITS AMBIT, WHOLE SOFTWARE DEVELOPMENT SERVICES, SUCH AS MEDICAL, SECURITY, BANKING, ACCOUNTANCY ETC., BUT FOR COMPARA BILITY ANALYSIS, VERTICALS OF THE SOFTWARE DEVELOPMENT INDUSTR Y HAVE TO BE LOOKED INTO. ALL TYPES OF SOFTWARE DEVELOPMENT SER VICES CANNOT BE CLUBBED TOGETHER FOR COMPARABILITY ANALYSIS, AS IN OUR VIEW, IT WILL NOT GIVE AN APPROPRIATE RESULT. AS IN ASSESSEES CASE ALSO SOFTWARE DEVELOPMENT SERVICES ARE FOR TWO DIFFERENT S ECTORS I.E. SECURITY SYSTEM AS WELL AS MEDICAL SERVICES, WE ARE NOT ABLE TO ACCEPT ASSESSEES CONTENTION THAT OPERATING PROFIT TO OPE RATING COST OF THE REVENUE EARNED FROM SOFTWARE DEVELOPMENT SERVICES SEGMENT SHOULD BE CONSIDERED AS A WHOLE FOR COMPUTING THE MARGIN OF THE ASSESSEE. MOREOVER, WHEN ASSESSEE HAS MAINTAINED ENTITY SPECIFIC A/C WITH SEGMENTAL DETAILS AND HAS AL SO CONDUCTED ANALYSIS ON THIS BASIS IN ITS TP STUDY, WE DO NOT FIND ANY REASONS TO DISTURB THE ORDER OF THE TPO AND DRP ON THIS ISSUE. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 19 OF 44 ACCORDINGLY, HAVING NOT FOUND ANY MERIT IN THE SUBMISS IONS OF THE LD AR, WE DISMISS THIS GROUND. 21. IN GROUND NO.13, ASSESSEE HAS OBJECTED TO SELECTI ON OF FOLLOWING SIX COMPARABLES: A) BODHTREE CONSULTING LTD B) COMP-U-LEARN TECH INDIA LTD C) IGATE GLOBAL SOLUTIONS LTD D) INFOSYS TECHNOLOGIES LTD E) KALS INFORMATION SYSTEMS LTD AND F) TATA ELXSI LTD. 22. THE LD AR SUBMITTED BEFORE US THAT WHILE COMP-U-L EARN TECH INDIA LTD, IGATE GLOBAL SOLUTIONS LTD, KALS INF ORMATION SYSTEMS LTD AND TATA ELXSI LTD CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE, AS THEY ARE FUNCTIONALLY D IFFERENT, INFOSYS LTD UNDER NO CIRCUMSTANCES CAN BE A COMPARAB LE TO THE ASSESSEE NOT ONLY BECAUSE OF ITS SIZE AND DIVERSIFIED ACTIVITIES, BUT ALSO BECAUSE OF PREMIUM PRICING, OWNERSHIP OVER SIGNIFICANT INTANGIBLES. THE LD AR SUBMITTED THAT THESE COMPANIES HAV E BEEN REJECTED AS COMPARABLES BY DIFFERENT BENCHES OF THE TRIBUNAL INCLUDING THE HYDERABAD BENCHES, IN A NUMBE R OF CASES FOR THE SAME A.Y, IN SUPPORT OF HIS CONTENTIONS, HE REL IED UPON THE FOLLOWING DECISIONS: I) PLANET ONLINE PVT. LTD VS. CIT (ITA NO.464/HYD/2014) II) M/S.KENEXA TECHNOLOGIES PVT LTD VS. DCIT (ITA NO.243/HYD/2014) ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 20 OF 44 III) LAM RESEARCH (INDIA) PVT. LTD VS. DCIT (ITA (TP) NO.1437/BANG/2014 DATED 30.04.2015 23. THE LD DR ON THE OTHER HAND SUPPORTED THE ORDER OF THE TPO AND THE DRP. 24. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. AS FAR AS BODH TREE CONSULTING LTD, INFOSYS LTD, KALS INFORMATION SYSTEMS LTD AND TATA E LXSI LTD ARE CONCERNED, IT IS SEEN THAT THEY HAVE BEEN REJEC TED AS COMPARABLES IN RESPECT OF SOFTWARE DEVELOPMENT SERVIC E PROVIDERS BY DIFFERENT BENCHES OF THE TRIBUNAL INCLUDING THE HY DERABAD BENCHES, FOR THE VERY SAME A.Y I.E. A.Y 2009-10. IN THIS CONTEXT, WE REFER TO THE OBSERVATIONS OF THE ITAT HYDERABAD BENC H IN THE CASE OF PLANET ONLINE PVT LTD VS. CIT IN ITA NO.464/H YD/2014 FOR A.Y 2009-10: 10.1 AS FAR AS COMPARABLES AT SL. NOS. 1 TO 5 ARE C ONCERNED, THE ISSUES ARE MORE OR LESS COVERED BY DECISIONS OF THE COORDINATE BENCHES FOR THE SELF-SAME AY I.E. 2009-10. IN CASE OF M/S CISCO SYSTEMS (INDIA) PVT. LTD. VS. DCIT, IT(TP) NO. 130/B ANG/14 DATED 14/08/14, THE COORDINATE BENCH AFTER EXAMININ G IN DETAIL, EXCLUDED BODHTREE CONSULTING LTD., INFOSYS LTD., KA LS INFORMATION SYSTEMS AND TATA ELXSI LTD. (SEG.) THE RELEVANT OBSERVATIONS OF THE ITAT, BANGALORE BENCH IN RESPEC T TO EACH OF THE AFORESAID COMPANIES ARE REPRODUCED HEREUNDER FO R THE SAKE OF CLARITY: '26.1 BODHTREE CONSULTING LTD.:- AS FAR AS THIS COM PANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLE S CHOSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASS ESSEE. THE ASSESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSESSEE'S NOTICE THAT THIS COMPANY IS NOT BEING CO NSIDERED AS A COMPARABLE COMPANY IN THE CASE OF COMPANIES RENDERI NG SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNS EL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 21 OF 44 NO.7633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CA SE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P. LTD ., ITA NO.4547/MUM/2012. IN THE AFORESAID DECISIONS, THE T RIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN THE BU SINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOP MENT OF SOFTWARE USING LATEST TECHNOLOGY. THE DECISION RENDERED BY T HE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT . LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LE ARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN TH E PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNE D. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBU NAL, WE HOLD THAT BODHTREE CONSULTING LTD. CANNOT BE REGARDED AS A CO MPARABLE. IN THIS REGARDS, THE FACT THAT THE ASSESSEE HAD ITSELF PROP OSED THIS COMPANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FA CTUALLY IT IS SHOWN THAT THE SAID COMPANY IS A SOFTWARE PRODUCT C OMPANY AND NOT A SOFTWARE DEVELOPMENT SERVICES COMPANY. 26.2 INFOSYS LTD.:- AS FAR AS THIS COMPANY IS CONCE RNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSID ERED TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY PROVIDING SIM PLE SOFTWARE DEVELOPMENT SERVICES, AS THIS COMPANY OWNS SIGNIFIC ANT INTANGIBLES AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IN TH IS REGARD, WE FIND THAT THE BANGALORE BENCH OF THE TRIBUNAL IN THE CAS E OF M/S. TDPLM SOFTWARE SOLUTIONS LTD. V. DCIT, ITA NO.1303/BANG/2 012, BY ORDER DATED 28.11.2013 WITH REGARD TO THIS COMPARABLE HAS HELD AS FOLLOWS:- '11.0 INFOSYS TECHNOLOGIES LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEF ORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY I N THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND A TTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASP ECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO SUBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTE LLECTUAL PROPERTY RIGHTS AND IS A MARKET LEADER IN SOFTWARE DEVELOPMENT ACTIVITIES, WHEREAS THE ASSESSEE IS MERELY A SOFTWA RE SERVICE PROVIDER OPERATING ITS BUSINESS IN INDIA AND DOES NOT POSSES S EITHER ANY BRAND VALUE OR OWN ANY INTANGIBLE OR INTELLECTUAL PROPERT Y RIGHTS (IPRS). IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRES ENTATIVE THAT :- ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 22 OF 44 (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE C ASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY INTANGIBLE AN D HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS S UBMITTED THAT THIS DECISION IS APPLICABLE TO THE ASSESSEE'S CASE, AS T HE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARABLE TO THE ASSESSEE; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN TH E CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856 (DEL)/2 010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNOLOGIES LTD. BEING A GIA NT COMPANY AND MARKET LEADER ASSUMING ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSIDERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDE RS ASSUMING LIMITED RISK ; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA ; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOFT WARE PRODUCTS AND THE BREAKUP OF SUCH REVENUES IS NOT AVAILABLE ; (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR R ESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQU ISITION OF IPRS IN 'AUTOLAY', A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORISE D REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFOSYS TECHNOLOGIE S LTD., BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARAB ILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE BRAND ATTRIBUTABLE PROFIT MARGINS OF THIS COMPANY HAVE NO T BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTM ENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS C OMPANY IN THE LIST OF COMPARABLE COMPANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE AS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THI S COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT FROM THE ASS ESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSES SMENT YEAR 2007- 08 IS APPLICABLE TO THIS YEAR ALSO. WE ARE INCLINED TO CONCUR WITH THE ARGUMENT PUT FORTH BY THE ASSESSEE THAT INFOSYS TEC HNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICANT I NTANGIBLE AND HAS ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 23 OF 44 HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SE EN THAT THE BREAKUP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PROD UCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY.' THE DECISION RENDERED AS AFORESAID PERTAINS TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE TH AT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDEN TICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FA R AS THIS COMPARABLE COMPANY IS CONCERNED. RESPECTFULLY FOLLO WING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 26.3 KALS INFORMATION SYSTEMS LTD.:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPARABLE TO A PURE SOFTWARE DEV ELOPMENT SERVICES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN T HE CASE OF M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- '(D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOT H SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOV E, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDI NG TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPORT, THE S ALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REV ENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REF ERENCE WAS MADE TO THE PUNE BENCH TRIBUNAL'S DECISION OF THE ITAT IN THE C ASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/ PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON A CCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIE S. THE RELEVANT EXTRACT ARE AS FOLLOWS: '16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIO NALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DE VELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABL E TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGA GED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INT O DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 24 OF 44 FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS.' BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DR AWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NO TICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE I N PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THA T IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE , THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING S OFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVI CE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE.' FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. 26.4 TATA ELXSI LTD.:- AS FAR AS THIS COMPANY IS CO NCERNED, IT IS NOT IN DISPUTE BEFORE US THAT IN ASSESSEE'S OWN CASE FOR T HE A.Y. 2007-08, THIS COMPANY WAS NOT REGARDED AS A COMPARABLE IN ITS SOF TWARE DEVELOPMENT SERVICES SEGMENT IN ITA NO.1076/BANG/20 11, ORDER DATED 29.3.2013. FOLLOWING WERE THE RELEVANT OBSERV ATIONS OF THE TRIBUNAL:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. THE LEARNED CHARTERED ACCOUNTANT PLEADED THAT O UT OF THE SIX COMPARABLES SHORTLISTED ABOVE AS COMPARABLES BASED ON THE TURNOVER FILTER, THE FOLLOWING TWO COMPANIES, NAMELY (I) TAT A ELXSI LTD; AND (II) M/S. FLEXTRONICS SOFTWARE SYSTEMS LTD., DESERVE TO BE ELIMINATED FOR THE FOLLOWING REASONS : (I) TATA ELXSI LTD., : THE COMPANY OPERATES IN THE SEGMENTS OF SOFTWARE DEVELOPMENT SERVICES WHICH COMPRISES OF EMBEDDED PR ODUCT DESIGN SERVICES, INDUSTRIAL DESIGN AND ENGINEERING SERVICE S AND VISUAL COMPUTING LABS AND SYSTEM INTEGRATION SERVICES SEGM ENT. THERE IS NO SUB-SERVICES BREAK UP/INFORMATION PROVIDED IN THE A NNUAL REPORT OR THE DATABASES BASED ON WHICH THE MARGIN FROM SOFTWARE S ERVICES ACTIVITY ONLY COULD BE COMPUTED. THE COMPANY HAS ALSO IN ITS RESPONSE TO THE NOTICE U/S.133(6) STATED THAT IT CANNOT BE CONSIDER ED AS COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY BECAUSE OF ITS COMPLEX NATURE. HENCE, TATA ELXSI LTD., IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 25 OF 44 (II) FLEXTRONICS SOFTWARE SYSTEMS LTD. : THE LEARNE D TPO HAS CONSIDERED THIS COMPANY AS A COMPARABLE BASED ON 13 3(6) REPLY WHEREIN THIS COMPANY REFLECTED ITS SOFTWARE DEVELOP MENT SERVICES REVENUES TO BE MORE THAN 75% OF THE 'SOFTWARE PRODU CTS AND SERVICES' SEGMENT REVENUES. FLEXTRONICS HAS A HYBRID REVENUE MODEL AND HENCE SHOULD BE REJECTED AS FUNCTIONALLY DIFFERENT. BASED ON THE INFORMATION PROVIDED UNDER 'REVENUE RECOGNITION' IN ITS ANNUAL REPORT, IT CAN BE INFERRED THAT THE SOFTWARE SERVICES REVENUES ARE EA RNED ON A HYBRID REVENUE MODEL, AND THE SAME IS NOT SIMILAR TO THE R EGULAR MODELS ADOPTED BY OTHER SOFTWARE SERVICE PROVIDERS. THE LE ARNED REPRESENTATIVE PLEADED THAT A REGULAR SOFTWARE SERV ICES PROVIDER COULD NOT BE COMPARED TO A COMPANY HAVING SUCH A UNIQUE R EVENUE MODEL, WHEREIN THE REVENUES OF THE COMPANY FROM SOFTWARE/P RODUCT DEVELOPMENT SERVICES DEPENDS ON THE SUCCESS OF THE PRODUCTS SOLD BY ITS CLIENTS IN THE MARKETPLACE. HENCE, IT WOULD BE INAPPROPRIATE TO COMPARE THE BUSINESS OPERATIONS OF THE ASSESSEE WIT H THAT OF A COMPANY FOLLOWING HYBRID BUSINESS MODEL COMPRISING OF ROYALTY INCOME AS WELL AS REGULAR SOFTWARE SERVICES INCOME, FOR WHICH REVENUE BREAK-UP IS NOT AVAILABLE. HE FINALLY SUBMITTED THA T THIS WAS A GOOD REASON TO EXCLUDE THIS COMPANY ALSO FROM THE LIST O F COMPARABLES. 20. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ORDER OF THE LOWER AUTHORITIES REGARDING THE INCLUSION OF TATA ELXSI A ND FLEXTRONICS SOFTWARE SYSTEMS LTD., IN THE LIST OF COMPARABLES. HE REITERATED THE CONTENTS OF PARA 14.2.25 OF THE TPO'S ORDER. HE ALS O READ OUT THE FOLLOWING PORTION FROM THE TPO'S ORDER : 'THUS AS STATED ABOVE BY THE COMPANY, THE FOLLOWING FACTS EMERGE : 1. THE COMPANY'S SOFTWARE DEVELOPMENT AND SERVICES SEGMENT CONSTITUTES THREE SUB-SEGMENTS I) PRODUCT DESIGN SE RVICES; II) ENGINEERING DESIGN SERVICES AND III) VISUAL COMPUTI NG LABS. 2. THE PRODUCT DESIGN SERVICES SUB-SEGMENT IS INTO EMBEDDED SOFTWARE DEVELOPMENT. THUS THIS SEGMENT IS INTO SOFTWARE DEV ELOPMENT SERVICES. 3. THE CONTRIBUTION OF THE EMBEDDED SERVICES SEGMEN T IS TO THE TUNE OF RS.230 CRORES IN THE TOTAL SEGMENT REVENUE OF RS.26 3 CRORES. EVEN IF WE CONSIDER THE OTHER TWO SUB-SEGMENTS PERTAIN TO I T ENABLED SERVICES, THE 87.45% (75%) OF THE SEGMENT'S REVENUES IS FROM SOFTWARE DEVELOPMENT SERVICES. 4. THIS SEGMENT QUALIFIES ALL THE FILTERS APPLIED B Y THE TPO.' REGARDING FLEXTRONICS SOFTWARE SYSTEMS, THE FOLLOWI NG EXTRACT FROM PAGE 143 OF TPO'S ORDER WAS READ OUT BY HIM AS HIS SUBMISSIONS : 'IT IS VERY PERTINENT TO MENTION HERE THAT THE COMP ANY WAS CONSIDERED BY THE TAXPAYER AS A COMPARABLE FOR THE PRECEDING A SSESSMENT YEAR I.E., AY 2006-07. WHEN THE SAME WAS ACCEPTED BY THE TPO A S A COMPARABLE, THE SAME WAS NOT OBJECTED TO IT BY THE TAXPAYER. AS THE FACTS MENTIONED BY THE TAXPAYER ARE THE SAME AND TH ESE WERE THERE IN ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 26 OF 44 THE EARLIER FY 2005-06, THERE IS NO REASON WHY THE TAXPAYER IS OBJECTING TO IT. HOW THE COMPANY IS FUNCTIONALLY SI MILAR IN THE EARLIER FY 2005-06 BUT THE SAME IS NOT FUNCTIONALLY SIMILAR FOR THE SUBSEQUENT FY 2006-07 EVEN WHEN NO FACTS HAVE BEEN CHANGED FRO M THE PRECEDING YEAR. THUS THE TAXPAYER IS ARGUING AGAINS T THIS COMPARABLE AS THE COMPANY WAS NOT CONSIDERED AS A COMPARABLE B Y THE TAXPAYER FOR THE PRESENT FY 2006-07.' 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE FACTS AND MATERIALS ON RECORD. AFTER CONSIDERING THE SUBMISSI ONS, WE FIND THAT TATA ELXSI AND FLEXTRONICS ARE FUNCTIONALLY DIFFERE NT FROM THAT OF THE ASSESSEE AND HENCE THEY DESERVE TO BE DELETED FROM THE LIST OF SIX COMPARABLES AND HENCE THERE REMAINS ONLY FOUR COMPA NIES AS COMPARABLES, AS LISTED BELOW:' 26.5. FOLLOWING THE AFORESAID DECISION OF THE TRIBU NAL, WE HOLD THAT M/S.TATA ELXSI LTD. SHOULD NOT BE REGARDED AS A COM PARABLE.' 25. THEREFORE, FOLLOWING THE DECISIONS OF THE COORDIN ATE BENCHES AS REFERRED TO ABOVE, WE EXCLUDE BODHTREE CON SULTING LTD, INFOSYS LTD, KALS INFORMATION SYSTEMS LTD AND TATA ELXSI LTD FROM THE LIST OF COMPARABLES. AS FAR AS COMP-U-LE ARN INDIA LTD IS CONCERNED, IT IS SEEN THAT IN CASE OF M/S KENEXA TECHNOLOGIES PVT. LTD VS. DCIT (ITA NO.243/HYD/2014), THE COORDINATE BENCH HELD AS UNDER: '39. THE ASSESSEE SUBMITTED BEFORE THE DRP THAT COMP -U- LEARN TECH INDIA LTD. WAS ENGAGED IN THE DEVELOPMEN T OF NEW SOFTWARE (PRODUCT DEVELOPMENT) (PAGE 7 OF THE A NNUAL REPORT) IN ITES CALL CENTRE AND BPO SERVICES (PAGE 11 OF ANNUAL REPORT). IT WAS FURTHER SUBMITTED THAT SCHED ULE XIII OF THE ANNUAL REPORT SHOWS SOFTWARE DEVELOPMENT EXPENDITURE AT ONLY 25% OF THE TOTAL EXPENDITURE. T HE TPO EXTRACTED THE 133(6) NOTICE AND HELD THAT THE COMPA NY HAS NIL ONSITE REVENUE AND SATISFIED ALL THE FILTERS APPLIE D BY THE TPO. WE ARE OF THE OPINION THAT SOME MORE ANALYSIS HAS T O BE DONE AND WE DIRECT THE TPO TO LOOK INTO THE FINANCIAL STAT EMENT OF THE COMPANY AND ALSO PROVIDE AN OPPORTUNITY TO THE ASSESSEE TO SUBMIT RELEVANT DETAILS TO SUBSTANTIATE ITS CLAI M THAT COMP- U-LEARN TECH INDIA LTD. IS NOT A COMPARABLE COMPANY .' ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 27 OF 44 26. THEREFORE, FOLLOWING THE VIEW EXPRESSED BY THE CO ORDINATE BENCH AS ABOVE, WE REMIT THIS ISSUE RELATING TO COMPAR ABILITY OF THIS COMPANY TO THE AO/TPO WITH SIMILAR DIRECTIONS. 27. AS FAR AS IGATE GLOBAL SOLUTIONS LTD IS CONCERNED, IT IS SEEN THAT WHILE CONSIDERING ASSESSEES OBJECTIONS AGAINST SE LECTION OF THIS COMPANY, THE COORDINATE BENCH IN CASE OF PLANET O NLINE PVT LTD (SUPRA) HELD AS UNDER: 10.8 AS FAR AS I-GATE GLOBAL SOLUTIONS LTD. IS CONC ERNED, IT IS THE CONTENTION OF LD. AR THAT THE COMPANY IS HAVING HUGE TURNOVER OF MORE THAN RS. 900 CRORES, AND IS A RELA TIVELY BIG COMPANY HAVING PRESENCE IN VARIOUS COUNTRIES AND EN JOYS PREMIUM PRICING. HE HAS FURTHER SUBMITTED THAT THE COMPANY OWNS VARIOUS INTANGIBLES IN ITS NAME AND IS HAVING CLOSING STOCK OF RAW MATERIALS WHICH SIGNIFY THAT IT IS INT O DEVELOPMENT OF PRODUCT. WE HAVE CONSIDERED THE SUBMISSIONS OF T HE PARTIES. ON A PERUSAL OF THE P&L ACCOUNT OF THIS COMPANY FOR T HE YEAR ENDED MARCH 2009, A COPY OF WHICH IS SUBMITTED BY L D. AR, IT IS SEEN THAT THE COMPANY HAS CLAIMED 'EXPENSES' TOWARD S RAW MATERIALS, STORES AND SPARES. THEREFORE, IT NEEDS T O BE EXAMINED IN DETAIL WHETHER ASSESSEE'S CLAIM THAT THE COMPANY IS INTO PRODUCT DEVELOPMENT IS CORRECT. AS RELEVANT INFORMA TIONS REQUIRED FOR COMING TO A DEFINITE CONCLUSION ARE NO T BEFORE US, WE ARE INCLINED TO REMIT THE ISSUE OF COMPARABILITY OF THIS COMPANY TO AO/TPO FOR CONSIDERING AFRESH. FURTHER, WE MAY OBSERVE THAT IN CASE OF TRIOLOGY E BUSINESS (SUPRA ) THIS COMPANY HAS BEEN EXCLUDED ON THE BASIS OF HIGH TURN OVER. THEREFORE, THIS ASPECT IS ALSO REQUIRED TO BE EXAMI NED BY AO/TPO WHILE DECIDING COMPARABILITY OF THIS COMPANY. 28. FOLLOWING THE AFORESAID DECISION OF THE COORDIN ATE BENCH, WE REMIT THIS ISSUE TO THE FILE OF THE AO/TPO TO EXAMINE THE ASSESSEES OBJECTIONS WITH REGARD TO THE AFORESAID COMP ANY. THUS THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 28 OF 44 29. THE NEXT ISSUE WHICH ARISES FOR CONSIDERATION AS PER GROUND NO.14 IS WITH REGARD TO REJECTION OF CERTAIN CO MPARABLES BY THE TPO. THOUGH IN THE GROUND, ASSESSEE HAS RAISE D OBJECTIONS WITH REGARD TO FOUR COMPARABLES, AT THE TIME O F HEARING, HE CONFINED HIS ARGUMENT TO TWO OF THE COMPAN IES, CG- VAK SOFTWARE EXPORTS LTD (SEG.) AND QUINTEGRA SOLUTION S LTD. THEREFORE, WE WILL ONLY CONSIDER ISSUE RELATING TO T HESE TWO COMPANIES. THE LD AR SUBMITTED BEFORE US, TPO HAS REJ ECTED CG- VAK SOFTWARE EXPORTS LTD (SEG.) BY OBSERVING THAT THE C OMPANY DOES NOT SATISFY THE EMPLOYEE COST FILTER. THE LD AR SU BMITTED, THE OBSERVATIONS MADE BY THE TPO IS TOTALLY WRONG AS TH E ANNUAL REPORT OF THE COMPANY WOULD REVEAL THAT THE EMPLOYEE COS T OF THE COMPANY IS 80.51% OF ITS TOTAL REVENUE. THE LD DR HOW EVER, JUSTIFIED THE REASONING OF THE TPO AND THE DRP. 30. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. ON A PERUSAL OF THE DISCUSSIONS MADE BY THE TPO, IT IS SEEN THAT THE TPO HAS REJECTED THIS COMPANY AS COMPARABLE BY ALLEGING THAT COMPLETE INFO RMATION IN RESPECT OF EMPLOYEE COST AND OTHER RELATED COSTS ARE N OT AVAILABLE. IF THAT IS THE CASE, THEN WE DO NOT UNDERSTAND HOW THE TPO CAN STATE THAT THE COMPANY FAILS THE EMPLOYEE COST FI LTER. IN VIEW OF THE AFORESAID, WE CONSIDER IT APPROPRIATE TO RE MIT THE COMPARABILITY OF THE AFORESAID COMPANY TO THE AO/TPO FOR CONSIDERING AFRESH AFTER DUE OPPORTUNITY OF BEING HE ARD TO THE ASSESSEE. THE TPO MUST CONSIDER ALL FACTS AND MATERIAL S BROUGHT ON RECORD BY THE ASSESSEE WHILE DECIDING THE ISSUE. AS FAR AS QUINTEGRA SOLUTIONS LTD IS CONCERNED, THE LD AR SUBMITT ED THAT THE TPO HAS REJECTED THIS COMPANY ON THE ALLEGATION TH AT IT FAILS ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 29 OF 44 THE REVENUE EXPORT FILTER OF 75%. THE LD AR REFERRING TO THE FINANCIALS OF THIS COMPANY SUBMITTED THAT THE FOREX EAR NING OF THE COMPANY IS 92% OF THE REVENUE EARNED, HENCE IT SA TISFIES MORE THAN 75% EXPORT REVENUE FILTER ADOPTED BY THE TPO. THE LD DR ON THE OTHER HAND SUBMITTED THAT THE TPOS OBSERVATION S ON THIS ISSUE BEING JUST AND PROPER IS TO BE ACCEPTED. 31. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IT IS SEEN FROM RECOR D THAT WHILE THE TPO REJECTED THIS COMPANY ALLEGING THAT THE FOREIG N EXCHANGE REVENUE EARNED BY THE COMPANY ONLY 57% OF THE TOTAL RE VENUE EARNED, ASSESSEES CLAIM IS FOREIGN EXCHANGE REVENU E EARNED BY THE COMPANY IS MORE THAN 92% OF THE TOTAL REVENUE. IN THI S CONTEXT, THE LD. AR HAS PLACED RELIANCE ON THE ANNUAL R EPORT OF THE COMPANY AS SUBMITTED IN THE PAPER BOOK. HAVING CON SIDERED THE SUBMISSIONS OF THE PARTIES, WE ARE OF THE VIEW THAT T HIS ISSUE NEEDS TO BE LOOKED INTO AFRESH BY THE TPO, IN VIEW OF THE ASSESSEES CLAIM THAT THE FOREIGN EXCHANGE EARNING OF THE COMPANY IS MORE THAN 92%. TPO MUST EXAMINE ASSESSEE S CLAIM WITH REFERENCE TO THE FACTS AND MATERIALS ON RECORD AN D DECIDE THE ISSUE WITH A REASONED ORDER AFTER GIVING OPPORTUNI TY OF BEING HEARD TO THE ASSESSEE. THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 32. IN GROUND NO. 6, ASSESSEE HAS RAISED THE ISSUE O F NON- CONSIDERATION OF PROVISION FOR BAD AND DOUBTFUL DEBTS WHILE COMPUTING THE NET MARGIN OF COMPARABLE COMPANIES UNDER TNMM. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 30 OF 44 33. BEFORE TPO, ASSESSEE WHILE OBJECTING TO SELECTION OF CERTAIN COMPARABLE COMPANIES ALSO CONTENDED THAT THE PROVISIONS FOR BAD AND DOUBTFUL DEBTS SHOULD BE CONSIDERED AS PART OF OPERATING EXPENDITURE WHILE COMPUTING MARGINS OF THE COMPARABLE COMPANIES. TPO, HOWEVER, REJECTED SUCH C ONTENTION OF ASSESSEE BY OBSERVING THAT PROVISION FOR BAD AND DOUBTFUL DEBTS CAN BE CONSIDERED AS PART OF EXPENDITURE IF SUCH EXPENSES ARE INCURRED EVERY YEAR FOR THE LAST THREE YEARS. OTHER WISE, THEY HAVE TO BE EXCLUDED FROM THE OPERATING EXPENDITURE. TH OUGH ASSESSEE OBJECTED TO SUCH ACTION OF THE TPO, BUT, THE D RP DID NOT FIND MERIT IN THE OBJECTIONS OF ASSESSEE. 34. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. WE FIND THAT COORDI NATE BENCH WHILE CONSIDERING IDENTICAL ISSUE IN CASE OF M/S KEN EXA TECHNOLOGIES PVT. LTD. VS. DCIT, ITA NO. 243/HYD/14, DATED 14/11/14 HELD AS UNDER: 41. WE PLACE RELIANCE ON THE DECISION OF ITAT DELH I BENCH IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT, ITA NO. 1189/DEL/2005, 8 19/DEL/2007 AND 820/DEL/2007. THE RELEVANT PORTION IS EXTRACTED BE LOW: '106.2 THUS, CREATION OF UNPAID LIABILITY AND ITS WRITE BACK IS A NORMAL INCIDENT OF A BUSINESS OPERATION WHICH IS CARRIED EVERYWHERE IN ACCOUNTS TO HAVE TRUE PICTURE OF PROFITS OF THE RELEVANT PERI OD. HAVING REGARD TO STATUTORY PROVISIONS, IT CANNOT BE SAID THAT PROVISIONS OR WRITING BACK OF LIABILITY IS NOT PART OF OPERATING PROFIT OR WOULD NOT BE TAKEN INT O CONSIDERATION FOR COMPUTING THE SAME. WE CAN THEREFORE MAKE A GENERA L OBSERVATION THAT ALL BUSINESS ENTERPRISES ARE MAKING AND WRITING BACK L IABILITIES AS A NORMAL INCIDENT OF OPERATING BUSINESS. THEREFORE ON FACT S WE DO NOT SEE ANY JUSTIFICATION FOR EXCLUDING PROVISIONS WRITTEN BAC K IN THE PROFIT AND LOSS ACCOUNT AS NOT FORMING PART OF THE OPERATING PROF IT OF THE TAXPAYER. ACCORDINGLY CLAIM OF THE TAXPAYER IS ACCEPTED. 107. THE NEXT ITEM RELATES TO BALANCES WRITTEN B ACK. IN OUR CONSIDERED OPINION, FINDING GIVEN IN RESPECT OF P ROVISIONS WRITTEN BACK IS EQUALLY APPLICABLE TO BALANCES WRITTEN BACK MORE P ARTICULARLY WHEN LD. CIT(A) HAS NOT GIVEN ANY SEPARATE FINDING AND THE TRANSFER PRICING OFFICER ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 31 OF 44 HAS SAID NOTHING SPECIFICALLY ON THIS ITEM. THE B ALANCES WRITTEN BACK SHOULD ALSO BE TREATED AS PART OF OPERATING PROFIT. WE D IRECT ACCORDINGLY. ' 42. WE ARE OF THE VIEW THAT IN THE INSTANT CASE BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS ARE PART OF THE OPERATING E XPENSES AND WE DIRECT THE TPO TO RE-COMPUTE THE MARGINS OF COMPARABLE COMPAN IES BY INCLUDING BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS AS OPERATING EXPENSES FOR THE PURPOSE OF COMPUTING PROFIT AND LOSS OF COMPARABLE COMPANIES. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE C OORDINATE BENCH, WE DIRECT A.O./TPO TO RECOMPUTE THE MARGINS OF TH E COMPARABLE COMPANIES BY INCLUDING THE PROVISION FOR BAD AND DOUBTFUL DEBTS AS OPERATING EXPENSES. 35. IN GROUND NO. 7, ASSESSEE HAS URGED FOR WORKING CAPITAL ADJUSTMENT. 36. AT THE TIME OF HEARING, LD. AR SUBMITTED BEFORE US, SINCE ASSESSEE DOES NOT HAVE TO TAKE MUCH RISK AS FAR AS WO RKING CAPITAL INVESTMENT IS CONCERNED, NECESSARY ADJUSTMENT I S TO BE GIVEN. HE SUBMITTED, THOUGH, WORKINGS ON WORKING CAP ITAL ADJUSTMENT WERE FURNISHED BEFORE TPO AND DRP, ASSESSE ES CLAIM HAS BEEN IGNORED/REJECTED WITHOUT PROPERLY AP PRECIATING THEM. LD. AR SUBMITTED, IN THE SUBSEQUENT AY, TPO HIMSEL F HAS ALLOWED WORKING CAPITAL ADJUSTMENT TO ASSESSEE. IN THIS CONTEXT, HE DREW OUR ATTENTION TO THE ORDER PASSED BY TPO FOR AY 2010- 11, A COPY OF WHICH IS AT PAGE 103 OF THE PAPER BOOK. THE LD. DR, HOWEVER, RELIED UPON THE ORDER OF DRP AND TPO. 37. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIES, WE DIRECT A.O./TPO TO LOOK IN TO THIS ISSUE AFRESH KEEPING IN V IEW THE ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 32 OF 44 SUBMISSIONS MADE BY ASSESSEE AS WELL AS THE WORKINGS SUBMITTED IN THIS REGARD. THE TPO MUST TAKE A DECISION ON THE ISSUE BY ASSIGNING VALID REASONS AFTER REASONABLE OP PORTUNITY OF BEING HEARD TO ASSESSEE. 38. THE NEXT ISSUE WHICH ARISES FOR CONSIDERATION AS PER GROUND NO.15 IS WITH REGARD TO REJECTION OF RESALE PR ICE METHOD (RPM) SELECTED BY THE ASSESSEE FOR DETERMINING THE A LP OF THE INTERNATIONAL TRANSACTIONS OF PURCHASE OF MEDICAL EQUIP MENT FOR DISTRIBUTION. BRIEFLY, THE FACTS RELATING TO THIS ISSUE A RE, APART FROM PROVIDING SERVICES TO ITS AE IN SOFTWARE SERV ICES AS WELL AS ITES SEGMENT, ASSESSEE IS ALSO ENGAGED IN DISTRIBUTION OF MEDICAL EQUIPMENTS MANUFACTURED BY ITS AE. ASSESSEE, WHILE BENCH MARKING ALP OF THE DISTRIBUTION SEGMENT HAS SELEC TED RPM AS THE MOST APPROPRIATE METHOD. TPO HOWEVER, DID N OT ACCEPT THE METHOD SELECTED BY THE ASSESSEE BY OBSERVING THAT TNNM IS THE MOST APPROPRIATE METHOD CONSIDERING THE NATU RE OF THE SERVICES. THOUGH ASSESSEE OBJECTED FOR ADOPTION O F TNNM AS THE MOST APPROPRIATE METHOD BUT, THE TPO WAS NOT CONVIN CED WITH THE EXPLANATIONS OF THE ASSESSEE SHOWING THE FO LLOWING REASONS: 6.2 THE RPM METHOD ADOPTED BY THE TAXPAYER WAS REJECTED AND THE TNNM WAS SELECTED AS THE MOST APPROPRIATE METHOD AND BROADLY THE FOLLOWING REASON S WERE GIVEN BY THE TPO: I) THE EQUIPMENTS SOLD BY THE TAXPAYER WERE HIGH- END, BRANDED AND TECHNOLOGICALLY ADVANCED EQUIPMENTS WHEREAS THE COMPARABLE COMPANIES WERE FUNCTIONING ON A MUCH LOWER TECHNOLOGICAL PLATFORM. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 33 OF 44 II) THE DIFFERENCE IN MARKETING EFFORTS AMONG THE COMPARABLES AS WELL AS WITH THE TAX PAYER DISTORT THE GROSS MARGINS AS THESE MARGINS ALSO INCLUDE THE MARKETING EFFORT WHICH WAS INBUILT IN THE SALE PRICE. III) THE LEVELS OF INVENTORY AND THE COST INVOLVED IN KEEPING THE INVENTORIES HAD TO BE ADJUSTED WHICH MAY NOT BE POSSIBLE BASED ON THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. IV) THE TAX PAYER AS A RESELLER POSSESSED VALUABLE MARKETING INTANGIBLES, THE RESALE PRICE MARGIN IN THE UNCONTROLLED TRANSACTION MAY UNDERESTIMATE THE PROFIT TO WHICH THE RESELLER IN THE CONTROLLED TRANSACTION WAS ENTITLED, UNLESS THE COMPARABLE UNCONTROLLED TRANSACTION INVOLVE THE SAME RESELLER OR A RESELLER WITH SIMILARLY VALUABLE MARKETING INTANGIBLES. V) THE TAX PAYER HAD THE EXCLUSIVE RIGHT TO RESELL THE MEDICAL EQUIPMENTS IN INDIA WHEREAS MOST OF THE COMPARABLE COMPANIES WERE RESELLERS WITHOUT EXCLUSIVITY. THUS MAKING ADJUSTMENTS FOR THESE DIFFERENCES BECOMES DIFFICULT IN THE CASE OF COMPARABLES ON THE BASIS OF INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. VI) THE ACCOUNTING TREATMENT OF THE TAXPAYER AND THE COMPARABLE COMPANIES IN RESPECT OF CERTAIN DIRECT EXPENSES SUCH AS DISCOUNT MAY DISTORT THE GROSS MARGIN. THE ACCOUNTING CONSISTENCY IS TO BE ENSURED 39. THUS, AFTER ADOPTING TNNM AS THE MOST APPROPRIATE METHOD, TPO PROCEEDED TO SELECT COMPARABLES. AFTER A S EARCH IN THE DATABASES, TPO SELECTED 3 COMPANIES AS COMPARABLE WITH ARITHMETIC MEAN OF 4.43% AS PER THE FOLLOWING TABLE: ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 34 OF 44 S.NO NAME OF THE COMPANY PROFIT MARGIN (OP/ OR % FOR THE FY 2008-09 1 ADVANCED MICRONIC DEVICES LTD (SEG.) 7.60 2 FRONTLINE ELECTRO MEDICAL LTD 1.14 3 HICKS THERMOMETERS (INDIA)LTD 4.56 ARITHMETIC MEAN 4.43 40. WHILE DOING SO, TPO REJECTED ONE OF THE COMPARA BLE SELECTED BY THE ASSESSEE IN THE ALTERNATIVE ANALYSIS MADE UNDER TNNM. THE COMPANY REJECTED BY THE TPO IS ASCO INDUSTRIES LTD . 41. THE LD AR SUBMITTED BEFORE US THAT THE ACTIVITY OF THE ASSESSEE IS TO IMPORT MEDICAL EQUIPMENTS AGAINST ORDER S PLACED BY CUSTOMERS AND TO SELL IT TO THEM WITHOUT ANY VALUE A DDITION. THEREFORE, THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IS RE-SALE PRICE METHOD AS THE ASSESSEE PURCHASES THE PRODUCT FROM ITS AE AND SELL IT TO THIRD PARTIES. THE LD AR SU BMITTED THAT THIS IS THE SECOND YEAR OF OPERATION OF THE ASSESSEE AS FAR AS THE DISTRIBUTION SEGMENT IS CONCERNED, THEREFORE, IT TAKES TI ME TO SETTLE DOWN. IN THESE CIRCUMSTANCES, TNNM CANNOT BE APPL IED IN THE INITIAL YEARS AS IT WILL BE DIFFICULT TO FIND COMP ARABLES, HENCE SOME ASSUMPTIONS AND PRESUMPTIONS HAVE TO BE BROUGHT I NTO THE COMPARATIVE ANALYSIS WHILE MAKING ADJUSTMENT TO THE PROFIT EARNED BY THE ASSESSEE AND THE COMPARABLE COMPANIES. THE LD AR REFERRING TO RULE 10B OF THE I.T. RULES SUBMITTED T HAT WHEN THERE IS TRANSACTION INVOLVING PURCHASE OF A PRODUCT AN D RESALE, THE MOST APPROPRIATE METHOD TO BE ADOPTED IS THE RESALE PRICE ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 35 OF 44 METHOD. IN SUPPORT OF HIS CONTENTION, LD AR RELIED UPON THE FOLLOWING DECISIONS OF THE ITAT: I) LOREAL INDIA P. LTD (ITA NO.1046/2012 BOMBAY HIGH COURT II) LOREAL INDIA PVT. LTD. ITA NO.5423/MUM/2009 III) KODAK POLYCHROME GRAPHICS (I) PVT LTD. ITA NO. 1557/MUM/2009 IV) DANISCO (INDIA) PVT.LTD- ITA NO.5291/DEL/2010 V) FRIGOGLASS INDIA PVT LTD. ITA NO.463/DEL/2013 VI) LUXOTTICA INDIA EYEWEAR PVT LTD ITA NO.1115 & 617/DEL/2014 VII) MATTEL TOYS (I) PVT. LTD ITA NO.2476/MUM/2008 VIII) NOKIA INDIA PVT. LTD. ITA NOS. 242 & 178 AND CO NO.77/DEL/2010 IX) STAR DIAMOND GROUP NV VS. DCIT ITA NO.3923/MUM/2008 X) TEKTRONIX INDIA PVT LTD . ITA NO.1334/BANG/2010 XI) TUPPERWARE INDIA PVT LTD ITA NO.2140 & 1323/DEL/2012 42. THE LD DR ON THE OTHER HAND SUBMITTED BEFORE US THAT ASSESSEE HAVING ACCEPTED THE REJECTION OF RESALE PRIC E METHOD IN A.Y 2008-09, IT CANNOT AGAIN PRESS FOR ACCEPTANCE OF R PM AS MOST APPROPRIATE METHOD. IN REJOINDER, THE LD AR SUBMITTE D THAT IN A.Y 2008-09 AS THE ASSESSEE WAS NOT HAVING ANY IN COME AND THERE WAS ONLY BROUGHT FORWARD LOSSES TO BE SET OFF HA VING NO EFFECT ON REVENUE OR TAXABILITY, ASSESSEE ACCEPTED RE JECTION OF RPM BY NOT CARRYING ON LITIGATION ANY FURTHER. HOWEV ER, THAT ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 36 OF 44 CANNOT PREVENT THE ASSESSEE FROM OBJECTING TO ADOPTION OF TNNM IN THE IMPUGNED A.Y. THE LD AR SUBMITTED THAT BOTH TPO AS WELL AS THE DRP HAVE REJECTED RPM ONLY WITH GENERAL OBSERV ATION WITHOUT PROPERLY APPRECIATING THE FACTS. 43. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. THERE IS NO DISPUTE AS FAR AS THE FACTUAL ASPECT IS CONCERNED. IT IS A FACT ON RECORD THAT ASSESSEE PURCHASES MEDICAL EQUIPMENTS FROM ITS AE AND SELLS THEM TO THIRD PARTIES IN INDIA WITHOUT MAKING ANY VALUE ADDITION TO THEM. THEREFORE, ASSESSEE IS PURELY A RESELLER OF THE PRODUCTS. THAT BEING THE CASE, THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF SUCH TRANSACTIONS, IN OUR VIEW , IS RE SALE PRICE METHOD. IN THIS CONTEXT REFERENCE CAN BE MADE TO R ULE 10B(1)(B). ON A PERUSAL OF THE SAID PROVISION, IT IS VERY MUCH CLEAR THAT THE MOST APPROPRIATE METHOD IN THIS NATURE OF TRANSACTIONS IS THE RESALE PRICE METHOD. IN THIS CONTEXT, THE DECISION OF ITAT DELHI BENCH IN CASE OF LUXOTTICA IN DIA EYEWEAR PVT LTD IN ITA NO.1115/DEL/2014 DATED 05.11.2014 REQUI RES CONSIDERATION. AS COULD BE SEEN FROM THE FACTS OF THIS CASE, ASSESSEE IS TRADING IN SUN GLASSES AND SUN GLASS FRA ME. IT PURCHASES SUCH PRODUCTS FROM AE AND SELLS THEM TO THIRD PARTIES WITHOUT ANY VALUE ADDITION. ASSESSEE IN ITS TP STUDY REPORT SUBMITTED THAT THE TNNM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. HOWEVER, ASSESSEE HAS ALSO MADE AN ALTERNATIVE ANALYSIS UNDER THE RPM. BEFORE THE TRIBUNAL , ASSESSEE TOOK A PLEA THAT RPM SHOULD BE ADOPTED AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP. DEPARTMENT CONTE STED ASSESSEES CLAIM BY CONTENDING THAT WHEN THE ASSESSEE H IMSELF ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 37 OF 44 HAS ADOPTED TNNM AS THE MOST APPROPRIATE METHOD IN ITS T P STUDY, IT CANNOT TURN AROUND AND ARGUE FOR ADOPTION OF RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD. AFTER CONSID ERING THE SUBMISSIONS OF THE PARTIES AS AFORESAID AND KEEPIN G IN VIEW THE DECISIONS OF OTHER BENCHES OF ITAT ON THE ISSUE, THE DELHI BENCH OF THE TRIBUNAL ACCEPTED ASSESSEES CLAIM FOR ADOPTING RESALE PRICE METHOD BY HOLDING AS UNDER: 10.2. COMING TO THE ARGUMENT THAT THE ASSESSEE HIMS ELF HAS ADOPTED TNMM AS THE MAM FOR ITS TRANSFER PRICING ST UDY AND HENCE IT CANNOT TURN AROUND AND ARGUE FOR ADOPTION OF RSPM AS THE MAM, WE FIND THAT THE MUMBAI BENCH OF THE TRIBU NAL IN THE CASE OF MATTEL TOYS(I) PVT.LTD. IN ITA NO.2476/MUM/ 2008 HELD AS FOLLOWS. 41. NOW COMING TO THE ARGUMENT OF THE LD.DR THAT O NCE THE ASSESSEE ITSELF HAS CHOSEN TNMM AS THE MAM IN TPR, THEN IT C ANNOT RESORT TO CHANGE ITS METHOD AT AN ASSESSMENT OR APPELLATE STA GE. IN OUR OPINION, SUCH A CONTENTION CANNOT BE UPHELD BECAUSE IF IT IS FOUND ON THE FACTS OF THE CASE THAT A PARTICULAR METHOD WILL NOT RESULT I NTO PROPER DETERMINATION OF THE ALP, THE TPO OR THE APPELLATE AUTHORITIES CAN VERY WELL HOLD THAT WHY A PARTICULAR METHOD CAN BE APPLI ED FOR GETTING PROPER DETERMINATION OF ALP OR THE ASSESSEE CAN DEMONSTRAT E A PARTICULAR METHOD TO JUSTIFY ITS ALP. THUS, EVEN IF THE ASSESS EE HAD ADOPTED TNMM AS THE MAM IN THE TP REPORT, THEN ALSO IT IS N OT PRECLUDED FROM RAISING THE CONTENTIONS/OBJECTIONS BEFORE THE TPO O R THE APPELLATE COURTS THAT SUCH A METHOD WAS NOT AN APPROPRIATE ME THOD AND IS NOT RESULTING INTO PROPER DETERMINATION OF ALP AND SOME OTHER METHOD SHOULD BE RESORTED. THE ULTIMATE AIM OF THE TP IS T O EXAMINE WHETHER THE PRICE OR THE MARGIN RISING FROM AN INTERNATIONA L TRANSACTION WITH THE RELATED PARTY IS AT ALP OR NOT. THE DETERMINATION O F APPROXIMATE ALP IS THE KEY FACTOR FOR WHICH THE MAM IS TO BE FOLLOW ED. THEREFORE, IF AT ANY STAGE OF THE PROCEEDINGS, IT IS FOUND THAT BY A DOPTING ONE OF THE PRESCRIBED METHODS OTHER THAN CHOSEN EARLIER, THE M OST APPROPRIATE ALP CAN BE DETERMINED, THE ASSESSMENT AUTHORITIES AS WE LL AS THE APPELLATE COURTS SHOULD TAKE INTO CONSIDERATION SUCH A PLEA B EFORE THEM PROVIDED, IT IS DEMONSTRATED AS TO HOW A CHANGE IN THE METHOD WILL PRODUCE BETTER OR MORE APPROPRIATE ALP ON THE FACTS OF THE CASE. A CCORDINGLY, WE REJECT THE CONTENTIONS OF THE LD.DR AND ALSO THE OB SERVATIONS OF THE AO AND THE LD.CIT(A) THAT THE ASSESSEE CANNOT RESORT T O ADOPTION OF RPM METHOD INSTEAD OF TNMM. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 38 OF 44 10.3. THE CASE OF THE ASSESSEE IS MUCH BETTER THAN THE CASE OF M/S MATTEL TOYS (I) PVT.LTD. (SUPRA) FOR THE REASON THA T THE ASSESSEE IN ITS TRANSFER PRICING REPORT HAS ALSO USED RSPM AS T HE MAM. HENCE THIS ARGUMENT OF THE REVENUE IS REJECTED. 10.4. AS THE UNDISPUTED FACT IS THAT THE FUNCTIONAL PROFILE OF THE ASSESSEE IS THAT OF A TRADER AND AS THE CHARACTERIZ ATION OF THE TRANSACTION IS PURCHASE AND SALE OF GOODS, WE HOLD THAT RSPM IS THE MAM BY APPLYING THE FOLLOWING DECISIONS OF THE CO-ORDINATE BENCH OF THE TRIBUNAL. (I) IN THE CASE OF STAR DIAM OND GROUP NV MUMBAI (ITA NO.3923/MUM/2008), IT IS HELD AS FOLLOW S: 13. THIS FINDING IN OUR HUMBLE OPINION IS WRONG FO R THE REASON THAT THE CIT(A) HAS ADOPTED THESE VERY COMPARABLES, ALONG WITH THREE OTHERS WHILE ARRIVING AT THE OPERATING MARGIN S AT PARA 7.16 OF HIS ORDER. AS THE ASSESSEE IS A TRADER, WITHOUT VAL UE ADDITION TO THE GOODS, WE FIND FORCE IN THE SUBMISSIONS OF THE ASSE SSEE THAT RESALE PRICE METHOD IS THE MOST APPROPRIATE METHOD FOR DET ERMINING THE ALV WITH RESPECT TO AE TRANSACTION. IN FACT, THE RE VENUE HAS ACCEPTED THIS METHOD IN EARLIER TWO YEARS. THE TPO IN HIS ORDER DT. 7.3.2005 FOR THE AY 2002-03 AND ORDER DT. 20.3. 2006 FOR THE AY 2003-04, HAS AGREED WITH THE COMPUTATION OF ARM S LENGTH PRICE MADE BY THE ASSESSEE UNDER THE RESALE PRICE M ETHOD. (II) IN THE CASE OF LOREAL INDIA P.LTD. VS. ITO (ITA NO.5423/MUM/2009) IT IS HELD AS FOLLOWS: 19. DURING THE COURSE OF HEARING, LD.DR ALSO SUPPO RTED THE METHOD CONSIDERED BY TPO AND REFERRED TO PARA 2.29 OF OECD PRICE GUIDELINES 2010 AS STATED HEREINABOVE. ON THE OTHER HAND, LD.AR JUSTIFIED THE RP< METHOD ADOPTED BY IT AND AL SO REFERRED TO ORDER OF TPO IN THE PRECEDING AY AS WELL AS SUCCEED ING AY TO THE AY UNDER CONSIDERATION TO SUBSTANTIATE THAT RPM IS THE MOST APPROPRIATE METHOD TO DETERMINE ALP. HE SUBMITTED T HAT THE ASSESSEE MADE ADJUSTMENT FOR MARKETING AND SELLING EXPENSES TO THE PROFITS TO MAKE IT COMPARABLE TO THE COMPARABLE COMPANIESPROFITS. WE AGREE WITH THE LD.CIT(A) THAT THERE IS NO ORDER OF PRIORITY OF METHODS TO DETERMINE ALP. RPM IS ONE OF THE STANDARD METHOD AND OECD GUIDELINES ALSO STATES THA T IN CASE OF DISTRIBUTION AND MARKETING ACTIVITIES WHEN THE GOOD S ARE PURCHASED FROM AES WHICH ARE SOLD TO UNRELATED PART IES, RPM IS THE MOST APPROPRIATE METHOD. IN THE CASE BEFORE US, THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE BUYS PRODUCTS FROM ITS AES AND SELLS TO UNRELATED PARTIES WITHOUT ANY FURTHER PROCESSING. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 39 OF 44 (III) IN THE CASE OF DANISCO (INDIA) PVT.LTD. VS. A CIT, CIRCLE 10(1), NEW DELHI (ITA NO.5291/DEL/2010), IT IS HELD AS FOLLOWS: 22. CONSIDERING THE ABOVE SUBMISSIONS WE FIND THAT THE ASSESSEE ESTABLISHED IN 1998 AS A 100% SUBSIDIARY OF DANISCO A/S DENMARK. DANISCO INDIA IS ENGAGED IN THE BUSINESS O F MANUFACTURING AND TRADING OF FOOD ADDITIVES. THE MA NUFACTURING BUSINESS IN RESPECT OF FOOD FLAVOURS AND THE TRADIN G BUSINESS IS FOR PRODUCTS FOR FALLING UNDER THE CATEGORY OF FOOD ING REDIENTS. THE MAIN GRIEVANCES OF THE ASSESSEE AGAINST THE ORDER O F THE LD.TPO UPHELD BY THE LD.DRP ARE REGARDING THEIR APPROACH I N THE MANNER IN WHICH TRANSFER PRICING ADJUSTMENT HAS BEE N MADE, THE APPROACH ADOPTED BY THE LD.TPO IN GRANTING 17 COMPA RABLE COMPANIES DENYING THE ECONOMIC ADJUSTMENT CLAIM MAD E BY THE ASSESSEE, REGARDING COMPUTATION OF MARGINS OF THE A SSESSEE, NON CONSIDERATION OF SUPPLEMENTARY TRANSACTION AND DENI AL OF ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BY THE AUTHORITIES BELOW AS WELL AS THEIR FAILURE TO EXAMI NE THE CONTENTIONS AND ARGUMENTS OF THE ASSESSEE IN THIS R EGARD. CONSIDERING THESE GRIEVANCES AS DISCUSSED HEREIN AB OVE BY US IN THE ARGUMENTS ADVANCED BY THE PARTIES/THEIR SUBMISS IONS AND HAVING GONE THROUGH THE DECISION RELIED UPON, WE FI ND SUBSTANCE IN THE SUBMISSION OF THE ASSESSE3E AND THUS WE ARE OF THE VIEW THAT IT IS A FIT CASE TO SET ASIDE THE MATTER TO THE FIL E OF THE LD.TPO FOR HIS FRESH CONSIDERATION AND DECIDE THE ISSUE AFRESH AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND DISC USSING THEIR SUBMISSIONS IN THE ORDER AND REASONS, IF ANY, FOR N OT AGREEING OR AGREEING WITH THEM. IT IS ORDERED ACCORDINGLY WITH DIRECTION TO THE LD.TPO TO: A) FIRST EXAMINE AS TO WHETHER, WAS THER E ANY VALUE ADDITION ON IMPORTED GOODS, AND IF ANSWER IS IN NEG ATIVE THEN APPLY RPM AS A MOST APPROPRIATE METHOD FOR TRADING TRANSACTIONS OF IMPORTED GOODS AND IN CONSEQUENCE EXAMINE THE AP PLICATION OF APPROPRIATE METHOD AS COMMISSION PAYMENT; (IV) FRIGOGLASS INDIA P.LTD. (ITA NO.463/DEL/2013), IT IS HELD AS FOLLOWS: WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. IN OUR CONSIDERED VIEW, ONCE A SSESSEE HAS GIVEN A METHODOLOGY FOR WORKING OF ALP ON SELECTION OF A PARTICULAR METHOD SUPPORTED BY APPROPRIATE COMPARAB LES, THE WORKING CAN BE DISLODGED BY TPO ON THE BASIS OF COG ENT REASONS AND OBJECTIVE FINDINGS. IN THIS CASE EXCEPT THEORET ICAL ASSERTIONS ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 40 OF 44 AND GENERALIZED OBSERVATIONS, NO OBJECTIVE FINDINGS HAVE BEEN GIVEN TO COME TO A REASONED CONCLUSION THAT ASSESSE E'S ADOPTION OF CPM FOR MANUFACTURING SEGMENT AND RPM FOR TRADIN G SEGMENT WAS FACTUALLY AND OBJECTIVELY NOT CORRECT. THUS THE REJECTION OF METHODS BY TPO AS ADOPTED BY ASSESSEE IS BEREFT OF ANY COGENCY AND OBJECTIVITY. THE SAME IS A WORK OF GUESSING AND CONJECTURED. SIMILARLY THE TNMM METHOD APPLIED BY THE TPO SUFFER S FROM THE SAME INHERENT ABERRATIONS AS MENTIONED ABOVE. IN TH ESE CIRCUMSTANCES WE ARE OF THE VIEW THAT ASSESSEE'S ME THODS OF CPM AND RPM RESPECTIVELY WORKED BY APPLYING APPROPRIATE COMPARABLES IS TO BE UPHELD. THUS THE ALP WORKING R ETURNED BY THE ASSESSEE IS UPHELD. THE ASSESSEE'S TP GROUNDS A RE ALLOWED.' (V) TEXTRONIC INDIA PVT.LTD. VS. DCIT (ITA NO. 1334 /BANG/2010), IT IS HELD AS FOLLOWS: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE DISP UTE IS WITH REGARD TO THE ALP IN RESPECT OF INTERNATIONAL TRANS ACTIONS WHEREBY THE ASSESSEE IMPORTS EQUIPMENT FROM ITS AE AND RESELLS THEM WITHOUT ANY VALUE ADDITION TO THE INDIAN CUSTO MERS. IN SIMILAR CIRCUMSTANCES, MUMBIA BENCH OF THE TRIBUNAL IN THE CASE OF LOREAL INDIA PVT.LTD. (SUPRA) HAS TAKEN THE VIE W THAT THE RPM WOULD BE THE MOST APPROPRIATE METHOD FOR DETERMININ G THE ALP. THE MUMBAI BENCH OF TRIBUNAL IN THIS REGARD, HAS RE FERRED TO THE OECD GUIDELINES WHEREIN A VIEW HAS BEEN EXPRESSED T HAT RPM WOULD BE THE BEST METHOD WHEN A RESALE TAKES PLACE WITHOUT ANY VALUE ADDITION TO A PRODUCT. IN THE PRESENT CASE, T HE ASSESSEE BUYS PRODUCTS FROM THE AE AND SELLS IT WITHOUT ANY VALUE ADDITION TO THE INDIAN CUSTOMERS. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE RATIO LAID DOWN BY THE MUMBAI BENCH OF THE TRIB UNAL IN THE CASE OF L 'OREAL INDIA PVT. LTD. (SUPRA) WOULD BE S QUARELY APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE. IN THAT EVENT, THE GP AS A PERCENTAGE OF SALES ARRIVED AT BY THE TPO IN A NNEXURE TO THE TPO'S ORDER INSOFAR AS TRADING ACTIVITY OF COMPARAB LES IDENTIFIED BY THE TPO AT 12.90%. THE GP AS A PERCENTAGE OF SAL ES OF THE ASSESSEE IS AT 35.6% WHICH IS MUCH ABOVE THE PERCEN TAGE OF COMPARABLES IDENTIFIED BY THE TPO. IN SUCH CIRCUMST ANCES, WE ARE OF THE VIEW THAT NO ADJUSTMENT COULD BE MADE BY WAY OF ALP. WE, THEREFORE, ACCEPT THE ALTERNATIVE PLEA OF THE ASSES SEE AND DELETE THE ADDITION MADE BY THE AO. IN VIEW OF THE ABOVE C ONCLUSION, WE ARE NOT GOING INTO THE OTHER ISSUES ON MERITS RAISE D BY THE ASSESSEE ON THE APPROACH ADOPTED BY THE TPO IN ARRI VING AT THE ALP. THUS, GROUND NOS. 2 TO 7 ARE ALLOWED. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 41 OF 44 10.5. IN VIEW OF THE ABOVE DISCUSSION, WE DIRECT TH E TPO TO ADOPT RSPM AS THE MAM IN THIS CASE. 44. ON A PERUSAL OF THE EXTRACTED PORTION FROM THE OR DER OF THE COORDINATE BENCH, IT IS VERY MUCH CLEAR THAT AFTER CONS IDERING A NUMBER OF DECISIONS ON THE VERY SAME ISSUE FROM DIFF ERENT BENCHES OF THE ITAT, IT WAS HELD THAT IN CASE OF TRANSAC TIONS RELATED TO PURCHASE AND SALE OF GOODS, RPM IS THE MOS T APPROPRIATE METHOD. THE PRINCIPLES LAID DOWN BY THE DE LHI BENCH CLEARLY APPLIES TO THE FACTS OF THE PRESENT CASE NOT ON LY BECAUSE THE ASSESSEE IS INVOLVED PURELY IN TRADING ACTIVITY, BUT ALSO IN THE TP STUDY ASSESSEE HAS ADOPTED RPM AS THE MOST APPROPRIA TE METHOD. ONLY BECAUSE IN THE PRECEDING ASSESSMENT YEAR FOR SOME REASON ASSESSEE HAS NOT CHALLENGED THE DECISION OF DRP IN UPHOLDING APPLICATION OF TNMM, ASSESSEE CANNOT BE PR EVENTED FROM OBJECTING TO ADOPTION OF TNMM IN THE IMPUGNED AS SESSMENT YEAR. IN VIEW OF THE AFORESAID, WE REMIT THE MATTER B ACK TO THE FILE OF THE AO/TPO TO EXAMINE ASSESSEES ANALYSIS UND ER THE RPM AND DECIDE THE ISSUE ACCORDINGLY AFTER DUE OPPORTUNI TY OF BEING HEARD TO THE ASSESSEE. 45. IN VIEW OF OUR DECISIONS IN GROUND NO. 15, GROU ND NO.16 HAS BECOME INFRUCTUOUS, HENCE NOT REQUIRED TO BE ADJUD ICATED. 46. AS FAR AS THE ISSUE RAISED IN GROUND NO.17 IS CO NCERNED, LD AR FAIRLY SUBMITTED THAT THE ISSUE RAISED THEREIN IS AN A RGUMENT CONNECTED WITH GROUND NO. 15 ABOVE. HENCE, THERE IS NO NEED TO ADJUDICATE THIS GROUND AS THE ISSUE WAS REMITTED TO AO IN GROUND NO. 15. ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 42 OF 44 47. IN GROUND NO.18, ASSESSEE HAS CHALLENGED THE LEV Y OF INTEREST U/S 234B OF THE ACT. CHARGING OF INTEREST U/S 23 4B BEING CONSEQUENTIAL IN NATURE, IS NOT REQUIRED TO BE AD JUDICATED UPON AT THIS STAGE. 48. IN GROUND NO.19, ASSESSEE HAS RAISED THE ISSUE O F NOT ALLOWING ENTIRE TDS CREDIT AS CLAIMED IN THE RETURN OF INCOME. AFTER CONSIDERING THE SUBMISSIONS OF THE PARTIES, WE DI RECT THE AO TO VERIFY THIS ASPECT AND DECIDE THE ISSUE AFTER DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 49. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWE D FOR STATISTICAL PURPOSES. ITA NO.542/HYD/2014 50. THE ONLY GROUND RAISED BY THE DEPARTMENT IS AS UN DER: 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHER THE DIRECTION OF THE DRP TO EXCLUDE COMMUNICATION AND INSURANCE EXPENSES FROM TOTAL TURNOVER PARTICULARLY IN ABSENCE OF DEFINITION OF T HE TERM TOTAL TURNOVER UNDER THE PROVISIONS OF SECTION 10A/ 10B OF THE ACT. 51. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. THIS ISSUE IS NO MO RE RES INTEGRA IN VIEW OF A NUMBER OF JUDGMENTS OF DIFFERENT HIGH C OURT AND DIFFERENT BENCHES OF THE TRIBUNAL INCLUDING THE S PECIAL BENCH HOLDING THAT EXPENSES RELATING TO COMMUNICATION CH ARGES & INSURANCE IF EXCLUDED FROM EXPORT TURNOVER, THEY HAV E TO BE EXCLUDED FROM TOTAL TURNOVER WHILE COMPUTING EXEMPTION S U/S ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 43 OF 44 10A/10B OF THE ACT. IN THIS CONTEXT, A REFERENCE CAN BE MADE TO THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE C ASE OF CIT VS. GEM PLUS JEWELLERY INDIA LTD AND THE DECISION OF THE ITAT CHENNAI SPECIAL BENCH IN THE CASE OF INCOME TAX OFF ICER VS. SAK SOFT INDIA LTD (121 TTJ 865). IN VIEW OF THE SETTLED P OSITION OF LAW, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDE R OF THE LD DRP ON THIS ISSUE. ACCORDINGLY, GROUND RAISED BY THE REVENUE IS DISMISSED. 52. IN THE RESULT, DEPARTMENT APPEAL IS DISMISSED. 53. TO SUM UP, ASSESSEES APPEAL IN ITA NO;683/HYD/ 2014 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE DEPARTME NTS APPEAL IN ITA NO.542/HYD/2014 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH AUGUST, 2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 12 TH AUGUST, 2015. VNODAN/SPS ITA NO.683 AND 542 OF 2014 OSI SYSTEMS PRIVATE LTD HYDERABAD PAGE 44 OF 44 COPY TO: 1. M/S. OSI SYSTEMS PVT. LTD, (FORMERLY KNOWN AS ISI OPTED ELECTRONICS PVT. LTD), 4 TH FLOOR, ORION BUILDING, VITP, MADHAPUR, HYDERABAD 2. DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(3), 6 TH FLOOR, AAYAKAR BHAVAN, HYDERABAD 3. D.R.P. HYDERABAD 4. ADD. CIT (TP) HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 17.7.15 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 20.7.15 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 21.7.15 JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT SR. PS/PS 7 FILE SENT TO BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER
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