DCIT, CHENNAI V. Sella Synergy India Pvt Ltd., CHENNAI

ITA 557/CHNY/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8566 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 21-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 17-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PARMINDER KAUR
• Keywords: Business income; Transfer pricing; Double taxation relief; International transaction; Capital receipt
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . ! ' , #'$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO.398/MDS/2015 # % &% / ASSESSMENT YEAR : 2010-2011 M/S. SELLA SYNERGY INDIA PVT. LTD, ELNET SOFTWARE CITY, TS-140, RAJIV GANDHI SALAI, TARAMANI, CHENNAI 600 113. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1) CHENNAI. ./ I.T.A. NO.557/MDS/2015 & C.O.NO.45/MDS/2015 # % &% / ASSESSMENT YEAR : 2010-2011 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1) CHENNAI. VS. M/S. SELLA SYNERGY INDIA PVT. LTD, ELNET SOFTWARE CITY, TS-140, RAJIV GANDHI SALAI, TARAMANI, CHENNAI 600 113. [PAN AACCS 9750N] ./ I.T.A. NO.417/MDS/2015 BANCA SELLA S.P.A- CHENNAI THE DE PUTY COMMISSIONER OF INCOME BRANCH (IT DIVISION) T AX, ELNET SOFTWARE CITY, INTERNATIONAL TAXATION II(2) TS-140, RAJIV GANDHI SALAI, VS. CHEN NAI. TARAMANI, CHENNAI 600 113. [PAN AANCS 8126M] ( / APPELLANT) ( /RESPONDENT) ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 2 -: ASSESSEE BY : SHRI. PERCY PARDIWALLA, DEPARTMENT BY : SMT. PARMINDER KAUR, CIT. ! ' ( / DATE OF HEARING : 21-06-2016 )*& ' ( / DATE OF PRONOUNCEMENT : 15-09-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE CROSS-APPEALS FILED BY THE ASSESSEE AND REVEN UE AND CROSS OBJECTION FILED BY THE ASSESSEE RESPECTIVELY ARE DIRECTED AGAINST ORDER PASSED U/S.143(3) R.W.S. 144C (13), 92CA(3) DATED 21.01.2015, AND 250 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT). SINCE THE ISSUE IN THESE APPEALS AND CROSS OBJECTIONS ARE COMMON IN NATURE, THESE APPEALS ARE CLUBBED, HEARD TOGETHER, AND DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE, FIRST, WE TAKE UP REVENUE APPEAL IN I TA NO.557/MDS/2015 OF ASSESSMENT YEAR 2010-2011 FOR AD JUDICATION. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL:- 2.1 THE DRP HAS DIRECTED THE AO TO ASSESS THE ENT IRE SALE CONSIDERATION OF RS.49,98,97,967/- AS DETERMIN ED BY THE TPO UNDER THE HEAD CAPITAL GAIN AS PER THE PROVISIONS OF SEC SOB OF THE ACT INSTEAD OF 'BUSINE SS INCOME' ASSESSED BY AO. 2.2. THE DRP HAS NOT VERIFIED THE FACTS OF THE CASE THAT OF AS PER COPY OF BUSINESS TRANSFER AGREEMENT, IT IS F OUND THAT WHAT IS BEING TRANSFERRED BY THE ASSESSEE IS T HE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 3 -: BUSINESS A SUCH ALONG WITH EVEN THE WORKING PERSONN EL ALSO. ASSESSEE HAS TREATED ITS PERSONNEL AS ASSETS. PERSONNEL CANNOT BE TREATED AS 'ASSETS' AS DEFINED AS PER THE PROVISION OF SECTION 2( 14) OF IT ACT. 2.3. THE LEARNED DRP FAILS TO NOTE THAT IN THE VALU ATION AT THE TIME OF TRANSFER, PERSONNEL HAVE BEEN VALUED SEPARATELY, WHICH IS CLEARLY IN CONTRAVENTION TO TH E PROVISIONS OF THE SECTION 2(42C). THE STAND TAKEN B Y THE ASSESSEE ITSELF IS CONTRADICTORY BECAUSE ON ONE HAN D IT TREATS PERSONNEL AS ASSETS AND ON THE OTHER HAND IT VALUATES THEM SEPARATELY. HENCE THIS TRANSACTION CA NNOT BE CONSIDER SIMPLY AS A SLUMP SALE AS PER THE PROVI SIONS OF SECTION 5OB OF IT ACT 1961 2.4 THE LEARNED DRP HELD THAT THERE WAS NO 'ELEMENT OF NON-COMPETITION IN THE TRANSACTION' WHICH WAS NOT ACCEPTABLE AS PER THE AGREEMENT IT IS SEEN THAT THE ASSESSEE IS TRANSFERRING THE RIGHT, TITLE AND INTER EST IN THE BUSINESS FOREVER TO THE ITS ASSOCIATED ENTERPRISE. FROM THE ABOVE IT IS VERY CLEAR THAT THE ASSESSEE IS FOREGOING ITS RIGHT TO CONDUCT BUSINESS IN THAT SPECIFIED LINE OF BUSINESS. HENCE THERE IS AN ELEMENT OF NON-COMPETITION AND THE NON-COMPETE FEES IS TO TAXABLE IN THE HAND SO OF THE RECIPIENT OF SUCH INCOME WITH EFFECT FROM 01.04 .2013 U/S 28(VA) OF THE IT ACT 1961. 2.5 THE DRP HAS FAILED TO NOTE THAT THE ASSESSING O FFICER HAD CLEARLY ESTABLISHED WITH DETAILED REASONING IN THE ASSESSMENT ORDER. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY IS IN BUSINESS OF SOFTWARE DEVELOPMENT FILED RETURN OF INCOME ON 04.09.2010 WITH TOTAL INCOME OF B14,52,43,615/- AND THE RETURN OF INCOME WAS PROCESSED U/S.143(1) OF THE ACT ON 04.09 .2010. SUBSEQUENTLY, THE CASE FOR SELECTED FOR SCRUTINY A ND NOTICE U/S.142(1) ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 4 -: AND 143(2) OF THE ACT WERE ISSUED. IN COMPLIANCE TO NOTICES, THE LD. AUTHORISED REPRESENTATIVE OF ASSESSEE APPEARED FROM TIME TO TIME AND FILED INFORMATION AND LD. ASSESSING OFFICER VERIFIE D INFORMATION SUBMITTED. THE LD. ASSESSING OFFICER FOUND THAT AS SESSEE COMPANY ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ASSOCI ATE ENTERPRISE WERE VALUE EXCEEDS B15 CRORES AND THE LD. TPO RELIED ON THE ARMS LENGTH PRICE (ALP) AS MENTIONED IN FORM NO.3CEB AND PASSE D ORDER U/S.92CA OF THE ACT WITH UPWARD ADJUSTMENT OF B39,84,34,513 /- TOWARDS ASSOCIATE ENTERPRISE SALES AND THE BUSINESS VALUE T RANSFERRED TO THE ASSOCIATED ENTERPRISE. THE LD. ASSESSING OFFICER MADE OTHER ADDITIONS AND PASSED DRAFT ASSESSMENT ORDER U/S.143(3) R.W.S . 144C(1) OF THE ACT DATED 28.03.2014. SUBSEQUENTLY, ASSESSEE FILED OBJECTIONS IN FORM 35A ALONGWITH RELEVANT ANNEXURES OBJECTING TO THE PROPOSED OBJECTIONS MADE IN THE DRAFT ASSESSMENT ORDER BEFOR E DISPUTE RESOLUTION PANEL. THE LD. DISPUTE RESOLUTION PANEL CONSIDERED THE SUBMISSIONS, OBJECTIONS AND FINDINGS OF THE LD. ASS ESSING OFFICER AND LD. TPO AND PASSED ORDER DATED 06.01.2015 AND THE LD. ASSESSING OFFICER PASSED ORDER U/SEC. 143(3) R.W.S. 144C(13) 92CA(3) OF THE ACT WITH ADDITIONS ON 21.01.2015. 3.1 ON THE FIRST OBJECTION OF ADJUSTMENT OF B49,98, 97,967/- U/SEC. 92CA OF THE ACT IN RESPECT OF SALE OF BUSINE SS AS GOING CONCERN. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 5 -: THE ASSESSEE FILED OBJECTIONS BUT LD. DISPUTE RESOL UTION PANEL CONSIDERED THE INFORMATION DETERMINED VALUE OF BUSI NESS AND SALE CONSIDERATION FOR TRANSFERRING THE BUSINESS AS GOIN G CONCERN OF ASSOCIATED ENTERPRISE AS DETERMINED BY THE LD. TPO AS REASONABLE AND UPHELD THE SAME. 3.2 IN RESPECT OF SECOND OBJECTION OF B2,10,13,546/ - ON ACCOUNT OF SALES TO ASSOCIATED ENTERPRISES, THE LD. DISPUTE RESOLUTION PANEL FOUND THAT ACTION OF THE LD. TPO JUSTIFYING THE UPW ARD ADJUSTMENT AS ASSESSEES INTERNATIONAL TRANSACTIONS OF SALES TOWA RDS ASSOCIATED ENTERPRISE AT B21,18,54,204/- AS AGAINST B19,08,40, 658/- AND UPHELD THE ACTION OF THE LD. TPO ON SALE TO ASSOCIATED EN TERPRISE. 3.3 ON THIRD OBJECTION, THE GAINS OF TRANSFER SALE OF BUSINESS WERE THE LD. ASSESSING OFFICER TREATED AS BUSINESS INCOME WERE THE CONTENTION OF THE ASSESSEE BEING CAPITAL GAINS AND THE LD. DISPUTE RESOLUTION PANEL RELYING ON THE VALUE DETERMINED BY THE LD. TPO WERE ENTIRE SALE CONSIDERATION B49,98,97,967/- WAS ASSES SED UNDER CAPITAL GAINS U/S.50B OF THE ACT AND OBJECTIONS OF THE ASS ESSEE WERE FAVOURED. 3.4 THE LD. ASSESSING OFFICER MADE ADDITION TOWARDS ASSOCIATED ENTERPRISE SALES B2,10,13,546/- AS COMPUTED BY THE LD. TPO VIDE ORDER ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 6 -: DATED 28.01.2014 AND FURTHER AS DEALT IN PARA 3.3 ABOVE AS THE PER DIRECTIONS OF THE LD. DRP, THE LD. ASSESSING OFFIC ER CONSIDERED THE ENTIRE SALE CONSIDERATION OF B49,98,97,967/- ASSES SED UNDER THE HEAD CAPITAL GAINS AS PER THE PROVISIONS AND MADE AN ADD ITION OF B37,74,20,967/- AND PASSED ORDER U/S.143(3) R.W.S. 92CA(3) OF THE ACT DATED 17.12.2014. AGGRIEVED BY THE DIRECTIONS OF L D. DRP AND THE ORDER OF ASSESSING OFFICER, THE REVENUE HAS FILED A N APPEAL BEFORE TRIBUNAL. 3.5 THE MAIN CONTENTION OF THE REVENUE BEING THAT T HE LD. ASSESSING OFFICER WAS CORRECT IN TREATING THE SALE CONSIDERATION AS BUSINESS INCOME INSTEAD OF TAXABLE UNDER THE HEAD CAPITAL GAINS. THE LD. DRP HAS NOT VERIFIED THE AGREEMENTS WERE BUSINE SS IS TRANSFERRED ALONGWITH WORKING STRUCTURE AND THE TRANSACTION CAN NOT BE CONSIDERED AS SLUMP SALE. THE LD. DRP HAS OVERLOOKED THE FACTS AND MENTIONED THAT THERE IS NO ELEMENT OF NON COMPETITION IN THE TRANSACTION. BUT THE ASSESSEE COMPNY IS TRANSFERRING THE RIGHTS, TIT LE AND INTEREST IN THE BUSINESS TO THE ASSOCIATED ENTERPRISE AND IT IS A C LEAR CASE THE ASSESSEE IS FORGOING ITS RIGHT TO CONDUCT BUSINESS IN SUCH SPECIFIED LINE AND THE AMOUNT PAID TAKES THE CHARACTERISTIC OF NON COMPETE FEE IS TAXABLE IN THE HANDS OF THE RECIPIENT. FURTHER, NO N COMPETE FEES IS MADE TAXABLE FROM THE ASSESSMENT YEAR 2003-2004 U/S .28(VA) OF THE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 7 -: ACT WHEREAS TRANSFER OF SOFTWARE UNDERTAKING BEING TREATED AS NON COMPETE FEE AND THEREFORE THE ORDER OF THE LD. ASSE SSING OFFICER RELIED ON DRP BE SET ASIDE AND TREAT THE SALE CONSIDERATI ON UNDER THE HEAD INCOME FROM BUSINESS. 3.6 CONTRA, THE LD. AUTHORISED REPRESENTATIVE OF AS SESSEE CONTESTED THE GROUNDS AND SUBMITTED THAT THE SUBMIS SIONS OF THE LD. DEPARTMENTAL REPRESENTATIVE TO TREAT THE TRANSACTI ONS AS NON COMPETE FEE IS WITHOUT ANY BASIS AND CHARGED TO INCOME FRO M BUSINESS. THE LD. ASSESSING OFFICER SHOULD HAVE CONSIDERED THE M ODE OF TRANSACTIONS AS TRANSFER. THE AMOUNT RECEIVED IS A SLUMP SALE A MOUNT PURSUANT TO TAKEOVER OF SOFTWARE UNDERTAKING BY BANCA SELLA S.P .A. CHENNAI BRANCH. THE LD. DRP CONSIDERED THE SLUMP SALE AM OUNT PAID IS NOT IN THE NATURE OF COMPETE FEE BUT DIFFERENTIAL LOSS OR COMPENSATION LOST BY THE ASSESSEE COMPANY IN PROFIT EARNING CAPACITY. T HE LD. AUTHORISED REPRESENTATIVE RELIED ON THE ORDER OF THE LD. DRP WHICH HAS CONSIDERED THE FACTS AND OBJECTIONS AND DIRECTED TH E LD. ASSESSING OFFICER TO TREAT THE ENTIRE SALE CONSIDERATION B49, 98,97,967/- UNDER THE HEAD CAPITAL GAINS HELD AT PARA 3.3.2 OF ORDER AS U NDER:- 3.3.2 THE ABOVE CONCLUSION OF THE ASSESSING OFFICER IS NOT CORRECT, FOR TWO REASONS. FIRSTLY, THERE WERE NO CLAUSES OF 'NON- COMPETITION' IN THE AGREEMENT OF TRANSFER OF THE BUSINESS AS A GOING CONCERN. IN THE ABSENCE OF ANY SUCH EXPLICIT CLAUSES, IT IS NOT ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 8 -: PROPER TO CONCLUDE THAT THERE WAS AN ELEMENT OF NON-COMPETITION IN CONSIDERATION. SECONDLY, ALMOST THE ENTIRE BUSINESS OF THE ASSESSEE IS FROM ITS AE (HOLDING COMPANY). AS MENTIONED IN THE EARLIER PARAGRAPHS, THE ASSESSEE IS A CAPTIVE SOFTWARE DEVELOPER FOR ITS AE. THE AE HAS 99.99% SHARE HOLDING IN THE ASSESSEE COMPANY. THE PRESENT SALE OF THE BUSINESS AS A GOING CONCERN WAS TO THE INDIAN BRANCH OF THE AE ONLY. WHEN THE ASSESSEE HAS TRANSFERRED ITS ENTIRE BUSINESS WITH 'STOCK-LOCK-BARREL' TO ANOTHER CONCERN WHERE THE HOLDING COMPANY IS DIRECTLY INTERESTED, THE ASSESSEE CAN NO LONGER CARRY ON THE BUSINESS, AS IT HAS NEITHER ANY INFRASTRUCTURE FACILITY (AFTER THE TRANSFER) NOR HAS THE DECISION MAKING POWER TO DO SO. IN SUCH A CASE, THE PRESENCE OR ABSENCE OF NON-COMPETITION WILL NOT ARISE. THEREFORE, IN OUR OPINION, THERE WAS NO ELEMENT OF NON- COMPETITIVENESS IN THE PRESENT TRANSACTION OF THE SALE OF BUSINESS TO THE AE. THEREFORE, THE ASSESSING OFFICER IS DIRECTED TO ASSESS THE ENTIRE SALE CONSIDERATION OF RS.49,98,97,967 J -, AS DETERMINED BY THE TPO, UNDER THE HEAD CAPITAL GAINS AS PER THE PROVISIONS OF SEC.50B OF THE ACT. THE ASSESSEE SUCCEEDS IN ITS OBJECTIONS IN THIS REGARD. THE LD. AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT NO CONSIDERATION IS ATTRIBUTABLE TO NON COMPETE FEE IF NOT AGREED BETWEEN PARTIES AND PRAYED FOR DISMISSING THE APPEAL. 3.7. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MA TERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE CONTENTIO N OF THE LD. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 9 -: DEPARTMENTAL REPRESENTATIVE THAT THE AMOUNT PAID I N THE TRANSFER OF THE BUSINESS OF THE ASSESSEE IS IN THE NATURE OF N ON COMPETE FEE AND TO BE TAXED AS REVENUE RECEIPT AND TAXABLE AS BUSI NESS INCOME. ON PERUSAL OF THE AGREEMENTS AND THE ASSESSMENT ORDER, THE TRANSACTION ENTERED BY THE ASSESSEE COMPANY WHICH WAS INCORPORA TED IN THE YEAR 1996 AND THE ASSESSEE COMPANY IS PRIMARILY ENGAGED FOR PROVISION OF SOFTWARE DEVELOPMENT SERVICES IN FINANCIAL AND BANK ING DOMAIN FOR THEIR EXCLUSIVE DEPLOYMENT AND PRODUCTION FOR SELLA GROUP COMPANIES. WHEREAS SHAREHOLDING OF THE ASSESSEE COMPANY 99. 99% IS HELD BY SELLA HOLDINGS NETHERLANDS BEING OUTSIDE INDIA AND FURTHER SELLA HOLDINGS NETHERLANDS SHARES ARE HELD 100% BY BANCA SELLA HOLDING S.P.A. ITALY. THE ASSESSEE HAS ENTERED INTO INTERN ATIONAL TRANSACTIONS WITH HIS ASSOCIATED ENTERPRISE. THE ASSESSEE CONSI DERING THE BUSINESS MODULE AND TERMS OF AGREEMENTS HAS TRANSFERRED SOF TWARE UNDERTAKING TO COMPANY BANCA SELLA S.P.A. CHENNAI BRANCH FOR A VALUABLE CONSIDERATION OF B12,24,77,000/- ASSOCI ATED ENTERPRISE ON TRANSFER OF BUSINESS AND TREATED AS CAPITAL GAINS AND WAS OFFERED TO TAX SEPARATELY UNDER CAPITAL GAINS AND DISCLOSED I N SCHEDULE 15 OF NOTES OF ACCOUNTING. ON REFERENCE TO THE LD. TPO, THE LD. TPO WAS MADE UPWARD ADJUSTMENT TOWARDS BUSINESS VALUE TO TH E EXTENT OF B37,74,20,967/-. ON PERUSAL OF THE TERMS AND PROVI SIONS OF SOFTWARE AND BUSINESS TRANSFER AGREEMENTS REFERRED BY THE LD . ASSESSING OFFICER ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 10 -: IN THE DRAFT ASSESSMENT ORDER AND AGREEMENT OF SALE THE CONSIDERATION PAYABLE, PRIME FACIE IS SLUMP SALE AND SUCH TRANS ACTIONS CANNOT BE CONSIDERED AS A NON COMPETE FEE CHARGEABLE TO TAX. FURTHER, THE AMENDMENT OF SEC. 28(VA) OF THE ACT WAS MADE TO TAX THE NON COMPETE FEE RECEIVED FROM ASSESSMENT YEAR 2003-04. THEREFORE THE PROVISION OF NON COMPETE FEE TERMINOLOGY CANNOT BE ACCEPTED AND WE DISMISS THE GROUND OF THE REVENUE AND UPHELD THE FI NDINGS OF THE LD. DRP IN TREATING AS INCOME FROM CAPITAL GAINS. 3.8 IN THE RESULT, THE APPEAL OF THE REVENUE IN IT A NO.557/MDS/2015 OF ASSESSMENT 2010-2011 IS DISMISSE D. 4. C.O.NO.45/MDS/2015 IN ITA NO.557/MDS/2015:- THE ASSESSEE HAS FILED THE CROSS OBJECTION AND RAISED THE FOLLOWING GROUNDS:- 1 THE LEARNED AO/TPO/DRP OUGHT TO HAVE APPRECIATED THAT THE CUSTOMER OF THE ASSESSEE HAD DECIDED TO CARRY ON BUSINESS BY ITSELF THROUGH ITS BRANCH AND HAS IN EFFECT STOPPED GIVING WORK TO THE ASSESS EE AND IN SUCH CIRCUMSTANCES THE AMOUNT PAID BY THE CUSTOM ER WAS TOWARDS COMPENSATION FOR IMPAIRMENT OF THE PROF IT MAKING APPARATUS AND IS A CAPITAL RECEIPT NOT SUBJECT TO TAX IN THE HANDS OF THE APPELLANT 2 THE AO/TPO/DRP OUGHT TO HAVE APPRECIATED THAT WHEN THE AMOUNT RECEIVED IS NOT TAXABLE IN THE HAND S OF THE APPELLANT PROVISIONS OF TP ARE NOT APPLICABLE. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 11 -: 3. IN ANY EVENT, THE LEARNED AO/TPO/DRP OUGHT TO HAVE APPRECIATED THAT THE NORMAL VALUATION METHODS FOR TRANSFER OF BUSINESS WERE NOT APPLICABLE TO THE FAC TS OF THE CASE. 4. WITHOUT PREJUDICE, THE TPO ALSO FAILED TO APPREC IATE THAT 'VALUATION' AS A METHOD TO DETERMINE ALP STOOD SQUARELY COVERED UNDER RULE 1 DAB WHICH WAS NOT IN FORCE DURING THE RELEVANT ASSESSMENT YEAR AND THEREFORE C OULD NOT HAVE FORMED THE BASIS FOR A TRANSFER PRICING ADJUSTMENT. 4.1 THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THA T THE ASSESSEE COMPANY HAS DECIDED TO TRANSFER SOFTWARE S ERVICE UNDERTAKING OWNED IN INDIA. THE ASSESSEE ON TRANSF ER OF SUCH SOFTWARE UNDERTAKING THE CONSIDERATION CONSTITUTED CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE. THE COMPENSATION PAI D FOR LOSS OF IMPAIRMENT OF PROFIT IS A CAPITAL RECEIPT NOT SUBJ ECTED TO TAX IN THE HANDS OF THE ASSESSEE AND THE AMOUNT IS NOT TAXABLE AND ALSO TRANSFER PRICING PROVISIONS ARE NOT ATTRACTED. FU RTHER, THE ASSESSEE WAS A DEDICATED SOFTWARE SERVICES PROVIDER FOR THE GBS GROUP. THE ASSESSEE HAD ENTERED INTO A MASTER SERVICES AGREEME NT WITH SELLA SERVIZI BANCARI S.C.P.A ('SSB'), THE SHARED SERVICE S ENTITY OF THE GBS GROUP, FOR THE PROVISION OF THE SOFTWARE DEVELOPMEN T AND RELATED SUPPORT SERVICES TO THE GBS GROUP. THE SOFTWARE SE RVICES OPERATIONS OF THE ASSESSEE RELATED TO APPLICATION D EVELOPMENT AND MAINTENANCE OF SOFTWARE USED BY GBS GROUP, BASED ON ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 12 -: REQUIREMENTS PROVIDED BY THE GROUP. THE SOFTWARE SE RVICES DEVELOPMENT WAS DONE ON THE PROPRIETARY FRAMEWORK D EVELOPED BY GBS ON WHICH ALL OF THE GROUP'S BANKING APPLICATION RUN; AND IS EXCLUSIVELY USED BY THE GROUP. HENCE, THERE WAS A C LEAR DISTINCTION BETWEEN A ROUTINE SOFTWARE DEVELOPMENT COMPANY THAT WOULD TYPICALLY PROVIDE ITS SERVICES TO A BROAD CUSTOMER- BASE AND THE ASSESSEE, ALSO PERFORMED SOFTWARE DEVELOPMENT FUNC TIONS EXCLUSIVELY FOR A SINGLE CUSTOMER - VIZ. SSB . IN THE PREVIOUS YEAR 2009-2010, AS A PART OF A REORGANIZATION EXERCISE, ASSESSEE'S CUSTOMER (I.E. SSB) DECIDED TO UNDERTAKE THE SOFTWA RE DEVELOPMENT ACTIVITY UNDER ITS OWN UMBRELLA. CONSEQUENTLY, THE SOFTWARE SERVICES UNDERTAKING OF THE ASSESSEE - INCLUDING AL L ASSETS, LIABILITIES AND EMPLOYEES - WERE TAKEN OVER BY SSB WITH EFFECT FROM FEBRUARY 14, 2010. THE STATUS OF THE ASSESSEE WAS THEREBY RE DUCED TO THAT OF A SHELL COMPANY. THE AFORESAID TRANSACTION WAS E NTERED WITH AN ASSOCIATED ENTERPRISE, BASED ON BUSINESS TRANSFER AGREEMENT DRAWN-UP TO EFFECTUATE THE TRANSITION OF THE SOFTW ARE UNDERTAKING TO SSB, FOR THE PURPOSE OF REGULATORY AND TAX COMP LIANCES. FURTHER, THERE WERE NO COMPARABLE INSTANCES OF SIMI LAR TRANSACTIONS, A VALUATION STUDY WAS COMMISSIONED TO ENSURE THAT THE CONSIDERATION FOR GIVING-UP THE SOFTWARE UNDERTAKIN G IS IN ACCORDANCE WITH ARM'S LENGTH PRINCIPLE. FURTHER, WITHOUT PREJUDICE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 13 -: TO THE GROUNDS RAISED IN ITS APPEAL, IT IS SUBMITTE D THAT BY TAKING- OVER ASSESSEE'S SOFTWARE UNDERTAKING AND CARRYING O UT THE SOFTWARE SERVICES ON ITS OWN, THE ASSESSEE'S CUSTOMER (I.E. SSB), HAD EFFECTIVELY STOPPED GIVING WORK TO THE ASSESSEE. TH E TRANSACTION HAD THE EFFECT OF IMPAIRING THE PROFIT-MAKING APPAR ATUS OF THE ASSESSEE, AND THE HONORABLE DRP HAS ALSO SPECIFICAL LY NOTED THE AFORESAID FACTS AT 3.1.3. IT IS ALSO IMPORTANT TO MENTION HERE THAT THE ASSESSEE HAS SOLD ITS ENTIRE BUSINESS AS A GOING CONCERN, I.E. WITH STOCK- LOCK- BARREL. THE ASSESS EE IS NOT HAVING ANY OTHER BUSINESS ACTIVITIES OR ANY OTHER ESTABLISHMENTS. HENCE, AFTER THE SALE OF THE ABOVE BUSINESS AS A GOING CONCERN, THE ASSESSEE HAS BECOME A SHELL COMPANY WITH NO ASSETS /IIABILITIES LEFT. IN OTHER WORDS, THE PRESENT SALE OF THE ASSESSEE'S BUSINESS AS A GOING CONCERN IS ALMOST EQUIVALENT TO THE TAKEOVER OF A COMPANY BY ANOTHER COMPANY. AS MENTIONED THE ASSESSEE IS A CAPTIVE SOFTWARE DEV ELOPER FOR ITS AE. THE AE HAS 99.99% SHARE HOLDING IN THE ASSESSEE COMPANY. THE PRESENT SALE OF THE BUSINESS AS A GOIN G CONCERN WAS TO THE INDIAN BRANCH OF THE AE ONLY. WH EN THE ASSESSEE HAS TRANSFERRED ITS ENTIRE BUSINESS WITH ' STOCK-LOCK- BARREL' TO ANOTHER CONCERN WHERE THE HOLDING COMPAN Y IS DIRECTLY INTERESTED, THE ASSESSEE CAN NO LONGER CAR RY ON THE BUSINESS, AS IT HAS NEITHER ANY INFRASTRUCTURE FACI LITY (AFTER ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 14 -: THE TRANSFER) NOR HAS THE DECISION MAKING POWER TO DO SO. IN SUCH CASE THE CONSIDERATION RECEIVED REPRESENTED A COMPENSATI ON FOR LOSS OF THE PROFIT-MAKING APPARATUS OF THE ASSE SSEE. THE LD. DRP HAS MADE CATEGORICAL OBSERVATIONS AS UNDER:- IF ANY PRUDENT PERSON WANTS TO SELL HIS BUSINESS, H E EXPECTS A SUITABLE COMPENSATION FOR THE SOURCE AS WELL AS THE ANNUAL REVENUE FROM THE SAID SOURCE. THIS IS BASED ON A SIMPLE DISPLACEMENT THEORY OR REPLACEMENT THEORY OF THE SOURCE. IN THE PRESENT C ASE, THE SOURCE OF REVENUE IS THE EXISTING BUSINESS AND THE EXPECTED REVENUE IS B4.72 CRORES PER ANNUM. IF THIS BUSINESS IS TRANSFERRED OUT, THE ASSESSEE WILL BE LOSING ITS 'REVENUE EARNING SOURCE' AND IN ITS PLACE, A 'NEW REVENUE EARNING ASSET WILL COME INTO EXISTENCE, WHICH IS IN THE FORM OF CASH (THE SALE CONSIDERATION). IN LIGHT OF THE CATEGORICAL AND ACCURATE FINDINGS R ECORDED BY THE HONORABLE DRP THAT THE TRANSACTION HAD RESULTED IN LOSS OF PROFIT- EARNING SOURCE, IT IS SUBMITTED THAT THE RECEIPT FR OM THE TRANSACTION WOULD CONSTITUTE A 'CAPITAL RECEIPT' IN ASSESSEE'S HANDS, NOT SUBJECT TO TAX. THE LD. AR SUPPORTED HIS CASE AND RELIED ON THE DECISION OF TRIBUNAL OF MUMBAI IN THE CASE OF 3I INFOTECH [ITAT NOS. 3354/MUM/2010 & OTHERS, 3I INFOTECH LIMITED]. WHEREAS 3I INFOTECH, A SUBSIDIARY OF ICLCI BANK WAS ENGAGED IN PROVIDING BACK-OFFICE SUPPORT SERVICES EXCLUSIVELY TO THE BANK. FOR PROVI DING SUCH SERVICES, 3I INFOTECH HAD PUT IN PLACE ADEQUATE RESOURCES IN TERMS OF IT ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 15 -: INFRASTRUCTURE, SOFTWARE, MANPOWER ETC. IN THE YEAR 2002, THE BANK DECIDED TO CARRY ON THESE ACTIVITIES INDEPENDENTLY AND TOOK-OVER THE SENIOR PERSONNEL OF 3I INFOTECH HANDLING THE BACK-O FFICE OPERATIONS. A SUM OF RS. 15 CRORES WAS PAID AS COMPENSATION FOR LOSS OF BUSINESS/ FUTURE EARNINGS. THE SAID COM PENSATION WAS TREATED AS CAPITAL RECEIPT BY 3ILNFOTECH ON THE GRO UND THAT THE COMPENSATION WAS FOR LOSS OF A SOURCE OF INCOME AND HAD AFFECTED THE PROFIT-MAKING STRUCTURE OF THE COMPANY. THE DEPARTM ENT CHALLENGED THE STAND OF THE ASSESSEE ON THE GROUND THAT THERE WAS NO TRANSFER OF ASSETS WHICH AS NORMALLY THE CASE IN SUCH TYPE OF B USINESS TRANSFERS . FURTHER, T HE CIT(A) NOTED THAT THE ASSESSEE WAS CARRYING ON B ACK- OFFICE AND SOFTWARE DEVELOPMENT ACTIVITY AND PURSUA NT TO TERMINATION OF THE CONTRACT WITH ITS CUSTOMER ICLCI BANK FOR BACK- OFFICE OPERATIONS, THE ASSESSEE HAD CLOSED THE BACK-OFFICE BUSINESS AND DI D NOT ENTER INTO CONTRACT FOR SIMILAR SERVICES WITH ANY OTHER CUSTOM ER. IN EFFECT, THE ASSESSEE HAD GIVEN UP ONE SOURCE OF INCOME COMPLETE LY AND THE COMPENSATION RECEIVED WAS HELD TO BE A CAPITAL RECE IPT. THE STAND OF CIT(A) WAS ALSO UPHELD BY THE HONORABLE ITAT REL YING ON THE RULING OF THE HONORABLE SUPREME COURT IN THE CASE OF KETTL EWELL BULLEN & CO. VS CIT [1965 AIR 65](SC) AND IT IS ALSO SUBMITTED THAT THE AFORESAID RULING IS SQUARELY APPLICABLE TO THE ASSESSEE'S CAS E. FURTHER, IN LIGHT OF THE DEPARTMENT CONTENTION IN THE AFORESAID RULING T HAT THE ENTIRE BUSINESS SHOULD HAVE BEEN TRANSFERRED, IT IS SUBMIT TED THAT THE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 16 -: ASSESSEE'S CASE STOOD ON AN EVEN BETTER FOOTING INA SMUCH THAT THE ENTIRE UNDERTAKING LOCK-STOCK-BARREL WAS TAKEN OVER BY THE CUSTOMER, AS ALSO NOTED BY THE HONORABLE DRP. THE FINDING OF THE DRP AS READ IN CONJUNCTION WITH THE PRINCIPLES CONCLUDE THAT TH E SUM RECEIVED BY THE ASSESSEE CONSTITUTED A 'CAPITAL RECEIPT' IN ITS HAN DS. THE JURISDICTIONAL HIGH COURT RULING IN THE CASE OF CIT VS. T.I.&M SAL ES LTD [259 ITR 116- MADRAS HC], WHICH WAS RENDERED ON SIMILAR FACTS, AL THOUGH RELATING TO TRANSFER OF A DISTRIBUTORSHIP BUSINESS. THE ASSESS EE COMPANY ALSO WISHES TO PLACE RELIANCE ON THE FOLLOWING RULINGS O F THE SUPREME COURT WHICH ORIGINALLY LAID DOWN THE PRINCIPLES RELATING TO TREATMENT OF SUM RECEIVED ON IMPAIRMENT OF A SOURCE OF BUSINESS: KETTLEWELL BULLEN & CO. VS CIT [1965 AIR 65](SC); CITVS VAZIR SULTAN & SONS [361TR 175](SC); CIT VS SHAW WALLACE & CO [LR 59 LA 206](SC); CIT VS MAHESHWARI DEVI JUTE MILLS [57 ITR 36](SC) AND THE TRANSFER PRICING PROVISIONS COME INTO PLAY ONLY WHEN AN ASSESSEE IS IN RECEIPT OF INCOME OR CLAIMS AN EXPEN SE IN RELATION TO A TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS A E. IN THE GIVEN CASE, SINCE THE RECEIPT FROM THE TRANSACTION RELATING TO TRANSFER OF SOFTWARE BUSINESS UNDERTAKING CONSTITUTED A 'CAPITAL RECEIPT ' IN THE HANDS OF THE ASSESSEE, NOT LIABLE TO BE TAXED AND TRANSFER PRICI NG PROVISIONS WERE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 17 -: NOT APPLICABLE TO ASSESSEE'S CASE. 4.2 CONTRA, LD. DEPARTMENTAL REPRESENTATIVE HAS OB JECTED TO THE CROSS-OBJECTIONS AND OPPOSED THAT THE PROVISIONS OF TRANSFER PRICING ARE APPLICABLE EVEN TO THE TRANSACTIONS IN INDIA IR RESPECTIVE OF THE FACT THAT THE ARMS LENGTH PRICE COVERED U/S. RULE 10AB I S APPLICABLE TO RELEVANT ASSESSMENT YEAR AND VEHEMENTLY OPPOSED TO THE GROUNDS. 4.3 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. AUTHO RISED REPRESENTATIVE CONTENTION THAT THE TRANSFER OF UNDERTAKING HAS RE SULTED IN LOSS AND IS NOT SUBJECTED TO TAX. ON PERUSAL OF THE SUBMISSION S, THE CONSIDERATION RECEIVED IS IN THE NATURE OF COMPENSATION AND NOT S UBJECTED TO INCOME TAX CANNOT BE ACCEPTED AS HELD BY US IN REVENUE APP EAL AND THE AMOUNT IS TAXABLE. WE FIND THAT THE ASSESSEE HAS T RANSFERRED ITS BUSINESS OPERATIONS IN INDIA TO BANCA SELLA S.P.A. HAVING ITS BRANCH IN INDIA. WHEREAS THE LD. TPO CONSIDERED THE PROVISIO NS ARE APPLICABLE ONLY TO THE INTERNATIONAL TRANSACTIONS AND THE VAL UATION METHOD IS APPLIED. WE PERUSED THE PROVISIONS OF RULE 10AB AS UNDER:- FOR THE PURPOSES OF CLAUSE ( F ) OF SUB-SECTION (1) OF SECTION 92C, THE OTHER METHOD FOR DETERMINATION OF THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIO NAL ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 18 -: TRANSACTION [ OR A SPECIFIED DOMESTIC TRANSACTION ] SHALL BE ANY METHOD WHICH TAKES INTO ACCOUNT THE PRICE WHICH HAS BEEN CHARGED OR PAID, OR WOULD HAVE BEEN CHARGED OR PAID, FOR THE SAME OR SIMILAR UNCONTROLL ED TRANSACTION, WITH OR BETWEEN NON-ASSOCIATED ENTERPRISES, UNDER SIMILAR CIRCUMSTANCES, CONSIDERI NG ALL THE RELEVANT FACTS. WE ALSO RELY ON DECISION OF DCIT VS. IJM (INDIA) INFRASTRUCTURE LTD IN ITA NO.43/HYD/2014, DATED 29.04.2014 HELD AS UNDER :- ITAT HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD, THE ISSUE IN DISPUTE IS IDENTIC AL AS CONSIDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2008-09 REPORTED IN 147 ITD 437 WHEREIN THE TRIBUNAL HELD AS FOLLOWS: PE SHOULD BE TREAD AS RESIDENT IN INDIA. MOREOVER, UNDER THE PROVISIONS OF DTAA WITH MALAYSIA, PE IS TREATED AS A SEPARATE LEG AL ENTITY, INDEPENDENT OF ITS FOREIGN PRINCIPAL ENTERPRISE. FURTHER, ARTICLE 24 OF THE DTAA CONTAINS A NON- DISCRIMINATION PROVISION. IT PROHIBITS A CONTRACTIN G STATE FROM MAKING ANY DISCRIMINATION IN THE MATTER OF TAXATION BETWEEN ITS OWN NATIONAL AND NATIONAL-OF THE- OTHER CONTRACTING STATE, WHO ARE PLACED-IN SIMILAR CIRCUMSTANCES. IN OTHER WORDS, A CONTRACTING STATE IS OBLIGED TO PROVIDE THE SAME TAX -TREATMENT TO A NATIONAL ON THE OTHER CONTRACTING STATE AS IT WOULD GIVE TO ITS OWN NATIONALS. ARTICLE 3(H) OF THE DTAA DEFINES THE TERM 'NATIONAL' TO INCLUDE BOTH-NATURAL PERSONS AND ARTIFICIAL PERSONS, SUCH AS COMPANIES, ETC. THEREFO RE, PE SHOULD BE TREATED AS RESIDENT IN INDIA INASMUCH AS THE BUSINESS PROFITS ATTRIBUTABLE TO PE ARE TAXABLE IN INDIA AND ALL BUSINESS DECISIONS RELATING TO PE ARE ENTERED AND CONCLUDED IN INDIA. IN OTHER WORDS, THE CONTROL AND MANAGEMENT OF THE AFFAIRS OF PE ARE SITUATED IN INDIA, THE PE SHOULD BE TREATED AS RESI DENT IN INDIA, TREATING PE OTHERWISE AMOUNTS TO VIOLATIO N OF ARTICLE 24.JOINT VENTURE FORMED BY ASSESSEE WERE RESIDENT IN INDIA. IN THE PRESENT CASE, ALL THE DEC ISIONS RELATING TO THE AFFAIRS OF THE JOINT VENTURE ARE TAKEN IN INDIA AND THE BUSINESS IS EXECUTED IN INDIA THROUGH A JOINT VENTURE AGREEMENT IN INDIA. INDISPUTABLY, JOINT VENTURES ARE RESIDENTS IN INDIA. EVER OTHERWISE, CL AUSE 3 OF ARTICLE 4 OF MALAYSIA PROVIDES THAT A PERSON WHICH INCLUDES AOPS ALSO SHALL BE DEEMED TO BE RESIDENTS OF THE STATE IN WHICH ITS PLACE OF EFFECTIVE MANAGEMENT IS SITUATED. ON PERUSAL OF THE JOINT VENTURE AGREEMENTS, IT CAN BE SEEN THE, ALL THE DECISIONS RELATING TO T HE JOINT VENTURE ARE TAKEN IN INDIA AND, THEREFORE, THE JVS ARE TO BE TREATED AS 'RESIDENTS' ONLY. TRANSFER PRICING ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 19 -: REGULATION NOT APPLICABLE. FURTHER IN THE PRESENT C ASE THE TRANSACTIONS ARE BETWEEN TWO RESIDENT PARTIES A S OUTLINED AT PARAS 3.18 AND 3.19 OF THIS ORDER. THERE IS NO POSSIBILITY OF SHIFTING OF PROFITS OUTSIDE INDIA ON EROSION OF COUNTRY'S TAX BASE. THEREFORE, ITS TRANSACTIONS WITH AES ARE OUTSIDE THE PURVIEW OF THE TRANSFER PRICING REGULATIONS. THIS PE IS ASSESSED T O INCOME-TAX IN INDIA IN THE STATUS OF FOREIGN COMPANY IN RESPECT OF ITS BUSINESS PROFITS. NO SHIFTING OF PROFITS OUTSIDE INDIA OR EROSION OF TAXES IN INDIA IS INVOLVED, THAT IS, THERE IS NO MOTIVE TO SHIFT THE PROFITS OR EVADE THE TAXES IN INDIA INASMUCH AS ITS BUSINESS PROFITS ARE TAXABLE AS SEPARATE ENTITY IN INDIA. THE PRIMARY CONDITION FOR ATTRACTING TRANSFER PRICING PROVISION S IS THAT THERE SHOULD BE A TRANSACTION BETWEEN TWO OR MORE AES IN TERMS OF SECTION 92A(1) AND 92A(2) OF THE ACT. AFTER CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND THE FINDINGS OF THE DRP, WE ARE OF THE OPINION THAT THE TRANSACTIONS TAKEN PIECE ARE WITH DOMESTIC ENTERPRISES AND AT LEAST ONE AMONG THE AES ARE NOT NON-RESIDENT . BOTH THE ASSESSEE AND OTHER PARTIES WHICH WHOM THE ASSESSEE ENTERED INTO TRANSACTIONS ARE THE RESIDENT S FOR THE PURPOSE OF INDIAN TAXATION. ANY TRANSACTION BETWEEN THEM WILL NOT CONSTITUTE AN INTERNATIONAL TRANSACTION. THE TRANSACTIONS BETWEEN THE ASSESSEE AND IJMIS DO NOT FALL UNDER SECTION 92B(2) OF THE ACT AND SAME IS THE POSITION IN CASE OF OTHER ENTITIES WITH WHOM ASSESSEE CARRIED ON THE IMPUGNED TRANSACTIONS. IN ITAT'S OPINION, THE ARGUMENT OF THE IS DEVOID OF MERIT. ACCORDINGLY, THE LEGAL GROUND RAISED BY THE ASSESSEE IS ALLOWED. IN SUPPORT OF THE CLAIM OF THE ASSESSEE THAT THE B USINESS TRANSFER ARE NOT COVERED UNDER RULE 10AB. THE LD. AUTHORISED RE PRESENTATIVE FILED A PREAMBLE OF LEGISLATURE INTENT AND JUDICIAL DECIS IONS. WE FOUND FROM THE DECISIONS THAT THE PROVISIONS OF RULE 10AB ARE EFFECTIVE FROM ASSESSMENT YEAR 2012-2013. THEREFORE, THE ACTION OF THE TPO IRRESPECTIVE OF THE FACT THAT OBJECTIONS HAVE BEEN FILED IS NOT JUSTIFIED IN MAKING THE AFORESAID ADJUSTMENT AND WE DIRECT THE T PO TO ELIMINATE THE UPWARD ADJUSTMENT ON BUSINESS VALUE TRANSFERRED TO THE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 20 -: ASSOCIATED ENTERPRISE AS THE PROVISIONS OF DETERMIN ING ARMS LENGTH PRICE ARE NOT COVERED UNDER RULE 10AB AND ACCORDING LY, WE PARTLY ALLOW THE CROSS OBJECTIONS FILED BY THE ASSESSEE. 4.4 IN THE RESULT, THE CROSS OBJECTION NO.45/MDS/20 15 FILED BY THE ASSESSEE IS PARTLY ALLOWED. 5. ITA NO.398/MDS/2015 OF ASSESSMENT YEAR 2010-2011 (ASSESSEE APPEAL):- 5.1 THE ASSESSEES MAIN GROUND RELATING TO THE TP O ADJUSTMENT ON SALE OF SOFTWARE SERVICES BUSINESS TO THE ASSOCI ATED ENTERPRISE. THE LD. DRP CONFIRMED THE TP ADJUSTMENT IN RESPECT OF BUSINESS TRANSFERRED BY THE ASSESSEE TO THE ASSOCIATED ENTER PRISE. THIS SOFTWARE SERVICES REMAINED IN INDIA BEFORE THE TRANSFER AND AFTER TRANSFER AND BOTH TRANSFER TOOK PLACE WITHIN INDIA AND THERE IS NO EVASION OF TAX AND TPO PROVISION ARE NOT APPLICABLE. THE DRP UPHELD THE LD. TPO ACTION WITHOUT CONSIDERING THE OBJECTIONS WERE THE ASSESSE E BUSINESS WAS VALUED BY ASSESSEES INDEPENDENT EXPERT VALUER WERE THE FIGURE WERE SUBSTITUTED WITH TRANSFER PRICING OFFICER. THE ME THOD OF VALUE ADOPTED BY EXPERTS DCF METHOD AND NAV METHOD IS ONE OF THE ACCEPTABLE VALUATION METHOD AND THE SAME WAS REJECT ED AND DCF ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 21 -: VALUATION WAS APPLIED. THE DCF VALUATION EXTENDED TO EIGHT YEARS FROM FOUR YEARS ADOPTED BY THE EXPERT VALUERS AND A LSO GROWTH RATE PROJECTION ADOPTED BY THE EXPERTS VALUERS ESTIMATED SPECIFICALLY FOR ASSESSEES LINE OF BUSINESS AND THE RISK-FREE RATE OF 4.5% FOR DCF METHOD FOR INCORRECTLY DISCOUNTED AND PRAYED FOR SE T ASIDE THE VALUE ADOPTED BY THE LD. TPO WHICH IS NOT APPLICABLE. 5.2 ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESE NTATIVE RELIED ON THE ORDERS OF TPO AND DRP DIRECTIONS AND SUPPORTED WITH JUDICIAL DECISIONS. 5.3 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS CITED. IN RESPECT OF TPO ADJUSTMENTS ON SALE OF SOFTWARE SERVICES BUSINESS, THE LD. TPO DOE S NOT HAVE POWERS TO MAKE UPWARD ADJUSTMENT AND WE HAVE DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE IN CROSS APPEAL IN PARA 4.3. ACCOR DINGLY, WE ALLOW THE GROUND OF THE ASSESSEE. 6. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT T HE LD. TPO HAS MADE ADJUSTMENT ON CONSIDERATION RECEIVED FROM PROVISION OF SOFTWARE SERVICES BY THE ASSESSEE. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 22 -: 6.1 THE ASSESSEE HAS APPLIED THE TNMM ANALYSIS WHER EAS THE LD. TPO HAS REJECTED IT AND SUBSTITUTED WITH OWN ANALY SIS. THE LD. TPO HAS ERRONEOUSLY MADE SOME COMPARABLES BY APPLYING A RBITRARY AND INCORRECT FILTERS AND ALSO LD. TPO ERRED IN NOT CON SIDERING THE FOREIGN EXCHANGE LOSS AS AN OPERATIONAL ITEM WHILE COMPUTI NG TNM METHOD. FURTHER, THE LD. TPO HAS NOT COMPUTED PROPER MARGI N AND WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT. THE LD. TP O ALSO ERRED IN NOT CONSIDERING LEVY OF 5% AS PROVIDED IN PROVISO U/SEC . 92C(2) WHILE DETERMINING ARMS LENGTH PRICE AND PRAYED TO INCLUDE COMPARABLES AND OTHER ISSUES. 6.2 CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RE LIED ON THE ORDERS OF THE TPO AND DRP AND VEHEMENTLY OPPOSED TO THE GROUNDS. 6.3 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE COMPARABLES OBTAIN BY THE ASSESSEE AND LD. TPO HAS BEEN CONSIDERED. THE ASSESSEE FILED A CHART ALONGWITH CO MPARABLES TO BE EXCLUDED AND INCLUDED IN DETERMINING ARMS LENGTH PR ICE. THE LD. TPO WHILE DETERMING THE ARMS LENGTH PRICE HAS CONSIDER ED THE FOLLOWING COMPARABLES. 1. KALS INFORMATION SYSTEMS LTD 2. SP RY RESOURCES INDIA PVT. LTD, 3. ICRA TECHNO ANALYTICS LTD 4. CTIL LIMI TED, 5. TAKSHEEL SOLUTIONS LIMITED, 6. THINKSOFT GLOBAL SERVICES LTD . 7, ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 23 -: PERSISTENT SYSTEMS & SOLUTIONS LTD, 8. VRINCHI TEC HNOLOGIES LTD, 9. FCS SOFTWARE SOLUTIONS LTD AND 10. ASKHAY SOFTWARE TECHNOLOGIES. SUBSEQUENTLY, THE ASSESSEE FILED OBJECTION BEFORE L D. DRP AND LD. DRP CONSIDERED THE COMPARABLES AS DETERMINED BY TPO. B EFORE US, THE ASSESSEE COMPANY WANTS TO INCLUDE QUINTEGRA SOLUTIO NS LTD AND CG- VAK SOFTWARE & EXPORT LTD. IN KALS INFORMATION SYSTEMS LTD, THE MARGIN WORKED OUT BY THE LD. TPO IS 27.54 AND THE CONTENTION OF ASSESSEE THAT THE SAID COMPANY IS CREATING AND PRO VIDING 3D ANIMATION SOFTWARE CONTENT AS A CAPTIVE SERVICE PRO VIDER TO ITS ASSOCIATED ENTERPRISE. THE COMPANY IS ALSO PROVID ING SOFTWARE DEVELOPMENT ACTIVITIES AND QUALITY ASSURANCES SERVI CES TO ITS ASSOCIATED ENTERPRISE ON AN EXCLUSIVE BASIS AND ALSO PROVIDES SOFTWARE MAINTENANCE SUPPORT FUNCTIONS LIKE DOCUMENTATION OF THE PROGRAMMED CODE, IT INTEGRATION AND CONFIGURATION MANAGEMENT T O ITS ASSOCIATED ENTERPRISE AND IT IS A PRODUCT DEVELOPMENT COMPANY. THEREFORE SHOLD BE REJECTED AS COMPARABLE AND RELIED ON THE JUDICIA L DECISIONS IKANOS COMMUNICATION INDIA P. LTD IN ITA NO./137/BANG/2015 , CNO IT SERVICES (INDIA) P. LTD IN ITA NO.336/HYD/2015, M/ S. LIONBRIDGE TECHNOLOGIES P. LTD IN ITA NO.7415/MUM/2014, OBOPAY MOBILE TECHNOLOGY INDIA P. LTD (46 ITR(T) 42, PAREXEL INT ERNATIONAL (INDIA) P. LTD (66 TAXMANN.COM 150), PEGASYSTEMS WORLDWIDE IND IA (P) LTD LEXREPORTED AND PRANA STUDIOS PVT. LTD IN ITA NO.20 77/MUM/2014. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 24 -: 6.4 THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDERS OF LOWER AUTHORITIES. 6.5 WE HEARD THE RIVAL SUBMISSION, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS. THE COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY AS THE COMPANY I S IN PROVIDING 3D ANIMATION AS CAPTIVE SERVICE PROVIDER AND ALSO PROVIDE SOFTWARE DEVELOPMENT ACTIVITIES AND SEGMENTAL INFORMATION IS NOT AVAILABLE. HENCE, WE ACCEPT THE CONTENTION OF THE LD. AUTHORIS ED REPRESENTATIVE AND THIS COMPANY IS EXCLUDED FROM THE COMPARABLES AND WE DIRECT THE LD. TPO TO EXCLUDE THIS COMPANY FROM COMPARABLES. 6.6 IN SPRY RESOURCES INDIA PVT. LTD THE LD. TPO WO RKED OUT MARGIN AT 22.37. THE COMPANY WOULD UNDERTAKE MAI NTENANCE PROJECTS FOR THE DEVELOPMENT PROJECTS CONCLUDED IN THE PREVIOUS YEAR. COMPANY TO FOCUS ON E-GOVERNANCE. HOWEVER, PROFIT A ND LOSS ACCOUNT DOES NOT SHOW ANY REVENUE FROM MAINTENANCE PROJECTS . AS PER REVENUE RECOGNITION POLICY, THE COMPANY HAS REVENUE FROM SALE OF SOFTWARE. HOWEVER, NO FURTHER SEGMENTAL IS AVAILABL E TO SHOW SALE OF SOFTWARE. HENCE, THE FINANCIAL STATEMENTS ARE NOT R ELIABLE. 6.7 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD. AS PER THE ANNUAL REPORT OF THE COMPANY, TH E COMPANY HAS ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 25 -: EARNED REVENUE FROM SOFTWARE CONSULTANCY AND SALE O F SOFTWARE PRODUCTS AND THERE IS NO BREAKUP OF REVENUE SEGMENT WISE BETWEEN SOFTWARE PRODUCTS AND SOFTWARE SERVICES. THE OPER ATING INCOME @16% FROM WORK IN PROGRESS AND THE SOFTWARE CONSULT ANCY AND PRODUCTS FUNCTIONS DIFFER FROM SOFTWARE DEVELOPMENT ACTIVITIES CARRIED OUT BY THE ASSESSEE. SINCE THERE IS NO SEGMENTAL I NCOME AND COMPANY IS NOT FUNCTIONALLY IN COMPARABLES, WE ARE INCLINED TO ACCEPT THE CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE AND COMPANY SHOULD BE EXCLUDED FROM THE COMPARABLES. ACCORDING LY, WE DIRECT THE LD. TPO TO EXCLUDE THE COMPANY FROM COMPARABLES. 6.8 IN ICRA TECHNO ANALYTICS LTD, THE LD. TPO WORK ED OUT MARGIN AT 25.79. THE COMPANY IS ENGAGED IN DIVERSE ACTIVITIES SUCH, AS INCOME FROM SALES SOFTWARE DEVELOPMENT & CONSULTANCY, LICENSING & SUB-LICENSING FEE, WEB DEVELOPMENT AND HOSTING. HOW EVER, NO SEGMENTAL DATA IS AVAILABLE WITHIN THE BROAD HEAD O F SERVICES AND RELIED ON THE JUDICIAL DECISIONS OF IKANOS COMMUNI CATION INDIA P. LTD IN ITA NO./137/BANG/2015 AND OBOPAY MOBILE TECHNOLO GY INDIA P. LTD (46 ITR(T) 42. 6.9 WE ON PERUSAL FOUND THAT THE SAID COMPARABLE C OMPANY ICRA IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT & C ONSULTANCY, ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 26 -: ENGINEERING AND DIVERSIFIED INTO DOMAIN OF BUSINESS ANALYTICS AND BUSINESS PROCESSING OUTSOURCING AND EARNED ITS REVE NUE FROM SOFTWARE DEVELOPMENT, CONSULTANCY, LICENSING, SUB-LICENSING AND OTHERS. AS PER THE ANNUAL REPORT, THE REVENUE RECOGNITION FROM SAL E IS RECOGNIZED AS AND WHEN DELIVERY OF BRANDED SOFTWARE IS MADE BOOK ED AT NET TRADE DISCOUNT AND IN RESPECT OF DEVELOPMENT AND CONSULT ANCY, LICENSING AND SUB-LICENSING FEE. THE REVENUE IS RECOGNIZED TO TH E EXTENT OF SERVICES ARE PERFORMED. HOWEVER, THERE IS NO BREAKUP OF RE VENUE DEVELOPMENT SOFTWARE DEVELOPMENT SERVICES AND OTHER SERVICES. THE ASSESSEE COMPANY HAS NOT DISCLOSED SEPARATE SEGMENT S FOR ASCERTAINING PROFITABILITY AND ALSO CANNOT BE REGAR DED FOR THE PURPOSE OF TNM ANALYSIS. WE ARE OF THE OPINION THAT THE S AID COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES AND WE DIR ECT THE LD. TPO TO EXCLUDE. 6.10 IN THE CASE OF TAKSHEEL SOLUTIONS LIMITED, THE LD. TPO WORKED OUT MARGIN AT 30.72 AND THE TPO HIMSELF SO UGHT TO REJECT COMPARABLE COMPANIES WHICH EARNED REVENUES FROM PRE DOMINATELY ONSITE SERVICES RS SOFTWARE IS REJECTED BASED ON TH E ONSITE REVENUE FILTER. EVEN TAKSHEEL SOLUTIONS LIMITED EARNS SIGNIFICANT MARGINS FROM ON SITE SERVICES. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 27 -: 6.11 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE M ATERIAL ON RECORD. WE FOUND THAT THE COMPARABLE COMPANY HAVING COMPRESSIVE IT SOLUTIONS BY PROVIDING SOFTWARE DEVELOPMENT SERV ICES FOR THE ENTERPRISES ENGAGED IN FINANCIAL SERVICES. THE AR GUMENTS OF THE LD. AUTHORISED REPRESENTATIVE THAT IT HAS SIGNIFICANT O NSITE REVENUE AND SEGMENTAL COMPARABLES. WE REJECT FOR EXCLUDING COM PARABLES AND THE ASSESSEE DOES NOT SUCCEED ON THIS GROUND. 6.12 IN THE CASE OF FCS SOFTWARE SOLUTIONS LTD, THE LD. TPO WORKED OUT MARGIN AFTER PROVIDING FOR WORKING CAPIT AL AT 41.64 AND IT IS ALSO FUNCTIONALLY DIFFERENT IN PROVIDING ITES SER VICES WHICH ARE NOT AKIN TO SOFTWARE DEVELOPMENT SERVICES; AND NO SEGM ENTAL DATA AVAILABLE IN THE FINANCIAL STATEMENTS OF THE COMPAN Y AND RELIED ON THE JUDICIAL DECISIONS OF TIBCO SOFTWARE (INDIA) P.LTD IN ITA NO.94/PN/2014, BARCLAYS TECHNOLOGIES CENTRE INDIA P VT. LTD IN ITA NO.2279/PN/2012 AND EMPTORIS TECHNOLOGIES INDIA PVT . LTD IN ITA NO.436/PN/2013. 6.13 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MA TERIAL ON RECORD. THE COMPARABLE COMPANY SHOULD HAVE SIMILAR SERVICES AND ACTIVITY OF THE ASSESSEE WHEREAS THE COMPARABLE COM PANY IS THE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 28 -: BUSINESS OF IT CONSULTING EDUCATION BASED ON INTER NET AND INFRASTRUCTURE MANAGEMENT WORKING ON REMOTE NET MAN AGEMENT DATA BACKUP AS PER ANNUAL REPORT PRODUCED. OUT OF THE A BOVE BROAD CATEGORY OF SERVICES LINES THE TRANSACTION CAN BE C OMPARABLE ONLY WITH IT SERVICES COMPARABLES AND THE COMPANY DERIVES ON LY 42% OF REVENUE FROM THE IT CONSULTING. THEREFORE, THE COMP ANY HAS NOT PROVIDED SEGMENT TO ASCERTAIN ACCURATE PROFITABILIT Y OF SERVICE LINES. CONSIDERING THE APPARENT FACTS, WE DIRECT THE LD. T PO TO COMPARE THE COMPARABLE COMPANY TO THE EXTENT OF SEGMENT REPORTI NG OF ONLY IT CONSULTING AND WE REMIT THE ISSUE TO THE LD. TPO. 6.14 IN THE CASE OF QUINTEGRA SOLUTIONS LTD THE ASS ESSEE HAS MARGIN OF (9.42) AND WAS REJECTED ON THE BASIS THA T THERE IS PERSISTENT LOSS. HOWEVER, THE SAME IS NOT FACTUALLY CORRECT A ND THE LD. AUTHORISED REPRESENTATIVE RELIED ON THE JUDICIAL DECISIONS OF GOLDMAN SACHS (INDIA) SECURITIES PVT. LTD IN ITA NO.7724/MUM/2011 , BRIGADE GLOBAL SERVICES P. LTD 28 ITR (TRIB) 411 AND BOBST INDIA P . LTD 63 TAXMANN.COM 339. 6.15 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MA TERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE COMPARAB LE COMPANY WAS REJECTED AS IT IS PERSISTENT LOSS FILTER AND HAVING ACCUMULATED LOSS AND THIS LOSS WAS INCURRED DUE TO TAKEOVER OF SOME COMP ANIES AND DUE TO ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 29 -: THE TAKEOVER AND MERGER WITH FOREIGN COMPANY BEING A EXCEPTIONAL YEAR CANNOT BE COMPARABLE. BUT THE HONBLE HIGH CO URT IN THE CASE OF CIT VS. GOLDMAN SACHS (INDIA) SECURITIES PVT LTD IN ITA NO.2222 OF 2013 REFERRED AT PAGE 4 OF ORDER WHERE THE QUESTION OF LOSS MAKING UNIT CANNOT BE USED A S A COMPARABLE FOR DETERMININ G ARMS LENGTH PRICE WHEREAS LOSS MAKING UNIT IS LOSS DUE TO OTHER FACTOR CANNOT BE TREATED AS INCOMPARABLE AND ALSO SUPPORTED WITH TR IBUNAL DECISIONS. CONSIDERING THE HIGH COURT DECISION, WE ARE INCLINE D TO DIRECT THE LD. TPO TO INCLUDE THE SAID COMPANY AS COMPARABLE. 6.16 IN THE CASE OF CG-VAK SOFTWARE & EXPORTS LTD , THE ASSESSEE HAS INCLUDED WITH MARGIN (9.96) REJECTED ON THE BA SIS THAT THERE IS PERSISTENT LOSSES. HOWEVER, THE SAME IS NOT FACTUA LLY CORRECT. IMMEDIATELY PRECEDING THE YEAR, THE COMPANY HAD EAR NED SEGMENTAL PROFITS AND RELIED ON JUDICIAL DECISIONS OF NESS TE CHNOLOGIES (INDIA) PVT. LTD IN ITA NO.943/2015 AND GOLDMAN SACHS (INDIA) SE CURITIES PVT. LTD IN ITA NO.7724/MUM/2011. 6.17 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MA TERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. TPO H AS WRONGLY EXCLUDED SAID COMPARABLES COMPANY AS A PERSISTENT LOSS MAKIN G COMPANY. WHEREAS THE SAID COMPANY HAS EARNED NET PROFIT BOTH IN PRECEDING ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 30 -: AND SUBSEQUENT YEAR. BUT THE COMPARABLE TURNOVER T O BE CURRENT FINANCIAL YEAR IS LESS THAN B1 CRORES IS RESPECT OF INCOME FROM SOFTWARE DEVELOPMENT, PRODUCT AND SERVICES OF DOMESTIC REGIO N AS AGAINST THE TURNOVER OF ASSESSEE COMPANY B22.71 CRORES. ACCORD INGLY, IN OUR OPINION TURNOVER IS SMALL COMPARED TO ASSESSEES CO MPANY AND THE COMPARABLE IS REJECTED. 6.18 THE LD. AUTHORISED REPRESENTATIVE HAS ARGUED THE ABOVE SAID GROUNDS BEFORE US IN RESPECT OF OTHER GROUNDS RAISED BY THE ASSESSEE IN APPEAL WITH REFERENCE TO TP ISSUE ARE O NLY CONSEQUENTIAL. 6.19 IN THE RESULT, THE APPEAL OF THE ASSESSEE IN I TA NO.398/MDS/2015 IS PARTLY ALLOWED FOR STATISTICAL P URPOSE. 7. NOW, WE TAKE UP ITA NO.417/MDS/2015 OF ASSESSMEN T YEAR 2010-2011 FOR ADJUDICATION :- THE BRIEF FACTS OF TH E CASE ARE THAT THE ASSESSEE COMPANY IS A 127 YEAR OLD GROUP COMPRISING OF 19 COMPANIES, ACTIVE IN MANY DIFFERENT GEOGRAPHICAL AR EAS AND OFFERING A WIDE RANGE OF BANKING AND FINANCIAL PRODUCTS AND SE RVICES RELATING TO BANKING, SAVINGS MANAGEMENT AND STOCK BROKERAGE, IN SURANCE, CORPORATE FINANCE LEASING, CONSUMER FINANCE. RANCA SELLA SPA (FORMERLY KNOWN AS SELLA SERVIZI BANCARI S,C,P,A) W AS SETUP IN FEBRUARY 2010 AS AN OFFSHORE DEVELOPMENT CENTRE OF BANCA SELLA ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 31 -: THROUQB A BUSINESS TRANSFER ARRANGEMENT FROM SELLA SYNERGY INDIA PRIVATE LIMITED (SELLA INDIA) BANCA SELLA S,P A (BS E INDIA OR THE COMPANY OR THE ASSESSEE) WAS SET UP PRIMARILY FOR P ROVIDING SOFTWARE DEVELOPMENT, SUPPORT AND MAINTENANCE SERVICES IN FI NANCIAL AND BANKING DOMAIN FOR EXCLUSIVE DEPLOYMENT AND PRODUCT ION BY BANCA SELLA. THE ASSESSEE COMPANY IS ASSESSED TO TAX, FOR THE AY 2010-11, BSE INDIA FILED A RETURN OF INCOME ON 04 SEPTEMBER 2010 DECLARING A TOTAL INCOME OF B30,39,894/-. AND PAID A TAX OF B12 ,52,437/-. A NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED TO THE A SSESSEE COMPANY FOR INITIATION OF ASSESSMENT PROCEEDINGS. DURING T HE COURSE OF THE ASSESSMENT PROCEEDINGS THE INFORMATION CALLED FOR W AS DULV FURNISHED BY THE ASSESSEE. REFERENCE WAS MADE BY THE AO TO TH E TRANSFER PRICING OFFICER ('TPO') UNDER SECTION 92CA OF THE A CT IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WITH ITS ASSOCIATED ENTERPRISES (AES) DETAILS REQUESTED BY T HE LEARNED TPO WERE DULY SUBMITTED SHOW CAUSE NOTICE (WAS ISSUED T O THE ASSESSEE AND THE ASSESSEE FILED DETAILED SUBMISSION AS A REP LY TO THE SAID NOTICE ON 22ND DECEMBER 2013. THE LEARNED TPO PASSED THE T RANSFER PRICING ORDER DATED 22 JANUARY 2014 . BASED ON THE LEARNED TPO'S ORDER THE LD. ASSESSING OFFICER PASSED THE DRAFT ASSESSMENT O RDER DATED 31 MARCH 2014 WHICH WAS RECEIVED BY ASSESSEE ON 02 AP RIL 2014 AND LD. ASSESSING OFFICER MADE ADDITIONS TO THE INCOME OF T HE ASSESSEE ON ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 32 -: ACCOUNT OF TRANSFER PRICING ADJUSTMENT PROPOSED BY THE LD. TPO. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPE AL BEFORE THE TRIBUNAL. 7.1 BEFORE US, THE LD. AUTHORISED REPRESENTATIVE MA DE A SUBMISSIONS THAT THE LD. TP ADJUSTMENT MADE BY THE LD. TPO UPHELD BY THE DRP B31,12,718/- PROVIDED TO THE ASSOCIATED ENT ERPRISE REJECTED WITHOUT ANY REASONING IRRESPECTIVE OF THE FACT THAT ASSESSEE APPLIED TRANSACTION NET MARGIN (TNM) WHEREAS IT WAS SUBSTI TUTED WITH OWN ANALYSIS. THE LD. TPO IGNORED THAT THE ASSESSEE BEI NG FIRST YEAR OF OPERATION THE ASSESSEE OPERATED ONLY FOR ONE AND HALF MONTHS WHEREAS MARGIN OF COMPARABLE BASED ON FULL YEAR OF OPERATION WHICH CANNOT BE ACCEPTED. THE LD. TOP ERRED IN SELECTION OF COMPARABLES WERE SUM OF THE COMPARABLES ARE ON DIFFERENT FOOTIN G AND SEGMENT AND WORKING CONDITIONS. FURTHER THE LD. TPO REJECTE D THE COMPARABLES WITHOUT ANY PROPER REASONING AND ALSO TPO ERRED IN ADOPTING WORKING CAPITAL ADJUSTMENT MARGINS IN RESPECT OF TRANSFEROR OF THE BUSINESS SELLA SYNERGY INDIA P. LTD DESPITE FOLLOWING SEARCH METHODOLOGY AS COMPARABLES FOR TNMM ANALYSIS AND ALSO THE LD. TPO FURTHER ERRED IN LEVY OF 5% AS PROVIDED IN PROVISION FOR CALCULATING ARMS LENGTH PRICE OF 5% DEDUCTION. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 33 -: 7.2 ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESE NTATIVE RELIED ON THE LD. TPO ORDER AND SUPPORTED THE INCLU SIVE COMPARABLES AND OPPOSED TO THE EXCLUSIVE COMPARABLES. 7.3 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS CITED. IN KALS INF ORMATION SYSTEMS LTD, THE MARGIN WORKED OUT BY THE LD. TPO BEING 36.25. T HE CONTENTION THAT THIS COMPANY IS CREATING AND PROVIDING 3D ANI MATION SOFTWARE CONTENT AS A CAPTIVE SERVICE PROVIDER TO ITS ASSOCI ATED ENTERPRISE. THE COMPANY IS PROVIDING SOFTWARE DEVELOPMENT ACTIVITIE S AND QUALITY ASSURANCES SERVICES TO ITS ASSOCIATED ENTERPRISE ON AN EXCLUSIVE BASIS AND ALSO PROVIDES SOFTWARE MAINTENANCE SUPPORT FUNC TIONS LIKE DOCUMENTATION OF THE PROGRAMMED CODE, IT INTEGRATIO N AND CONFIGURATION MANAGEMENT TO ITS ASSOCIATED ENTERPRI SE AND IT IS A PRODUCE DEVELOPMENT COMPANY AND RELIED ON THE JUDIC IAL DECISIONS IKANOS COMMUNICATION INDIA P. LTD IN ITA NO./137/BA NG/2015, CNO IT SERVICES (INDIA) P. LTD IN ITA NO.336/HYD/2015, M/S. LIONBRIDGE TECHNOLOGIES P. LTD IN ITA NO.7415/MUM/2014, OBOPAY MOBILE TECHNOLOGY INDIA P. LTD (46 ITR(T) 42, PAREXEL INT ERNATIONAL (INDIA) P. LTD (66 TAXMANN.COM 150), PEGASYSTEMS WORLDWIDE IND IA (P) LTD LEXREPORTED AND PRANA STUDIOS PVT. LTD IN ITA NO.20 77/MUM/2014. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 34 -: 7.4 THE COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY AS THE COMPANY IS IN PROVIDING 3D ANIMATION AS CAPTIVE SERVICE PROVIDER AND ALSO PROVIDE SOFTWARE DEVELOPMENT ACTIVITIES AND SEGMENTAL INFORMATION IS NOT AVAILAB LE. HENCE, WE ACCEPT THE CONTENTION OF THE LD. AUTHORISED REPRESE NTATIVE AND THIS COMPANY IS EXCLUDED FROM THE COMPARABLES AND WE DI RECT THE LD. TPO TO EXCLUDE THIS COMPANY FROM COMPARABLES. 7.5 IN SPRY RESOURCES INDIA PVT. LTD THE LD. TPO WO RKED OUT MARGIN AT 33.00. THE COMPANY WOULD BE UNDERTAKEN MAINTENANCE PROJECTS FOR THE DEVELOPMENT PROJECTS CONCLUDED IN THE PREVIOUS YEAR. COMPANY TO FOCUS ON E-GOVERNANCE. HOWEVER, PROFIT A ND LOSS ACCOUNT DOES NOT SHOW ANY REVENUE FROM MAINTENANCE PROJECTS . AS PER REVENUE RECOGNITION POLICY, THE COMPANY HAS REVENUE FROM SALE OF SOFTWARE. HOWEVER, NO FURTHER SEGMENTAL IS AVAILABL E TO SHOW SALE OF SOFTWARE. HENCE, THE FINANCIAL STATEMENTS ARE NOT R ELIABLE. 7.6 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD. AS PER THE ANNUAL REPORT OF THE COMPANY, TH E COMPANY HAS EARNED REVENUE FROM SOFTWARE CONSULTANCY AND SALE O F SOFTWARE PRODUCTS AND THERE IS NO BREAKUP OF REVENUE SEGMENT WISE BETWEEN ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 35 -: SOFTWARE PRODUCTS AND SOFTWARE SERVICES. THE OPER ATING INCOME @16% FROM WORK IN PROGRESS AND THE SOFTWARE CONSULT ANCY AND PRODUCTS FUNCTIONS DIFFER FROM SOFTWARE DEVELOPMENT ACTIVITIES CARRIED OUT BY THE ASSESSEE. SINCE THERE IS NO SEGMENTAL I NCOME AND COMPANY IS NOT FUNCTIONALLY IN COMPARABLES, WE ARE INCLINED TO ACCEPT THE CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE AND COMPANY SHOULD BE EXCLUDED FROM THE COMPARABLES. ACCORDING LY, WE DIRECT THE LD. TPO TO EXCLUDE THE COMPANY FROM COMPARABLES. 7.7 IN ICRA TECHNO ANALYTICS LTD, THE LD. TPO WORKE D OUT MARGIN AT 28.90. THE COMPANY IS ENGAGED IN DIVERSE ACTIVIT IES SUCH, AS INCOME FROM SALES SOFTWARE DEVELOPMENT & CONSULTANCY, LICENSING & SUB-LICENSING FEE, WEB DEVELOPMENT AND HOSTING. HOW EVER, NO SEGMENTAL DATA IS AVAILABLE WITHIN THE BROAD HEAD O F SERVICES AND RELIED ON THE JUDICIAL DECISIONS OF IKANOS COMMUNI CATION INDIA P. LTD IN ITA NO./137/BANG/2015 AND OBOPAY MOBILE TECHNOLO GY INDIA P. LTD (46 ITR(T) 42. IN THE CASE OF CTIL LIMITED, THE LD. TPO WORKED OUT MARGIN AT 17.03. 7.8 WE ON PERUSAL FOUND THAT THE SAID COMPARABLE C OMPANY ICRA IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT & C ONSULTANCY, ENGINEERING AND DIVERSIFIED INTO DOMAIN OF BUSINESS ANALYTICS AND BUSINESS PROCESSING OUTSOURCING AND EARNED ITS REVE NUE FROM SOFTWARE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 36 -: DEVELOPMENT, CONSULTANCY, LICENSING, SUB-LICENSING AND OTHERS. AS PER THE ANNUAL REPORT, THE REVENUE RECOGNITION FROM SAL E IS RECOGNIZED AS AND WHEN DELIVERY OF BRANDED SOFTWARE IS MADE BOOK ED AT NET TRADE DISCOUNT AND IN RESPECT OF DEVELOPMENT AND CONSULT ANCY, LICENSING AND SUB-LICENSING FEE. THE REVENUE IS RECOGNIZED TO TH E EXTENT OF SERVICES ARE PERFORMED. HOWEVER, THERE IS NO BREAKUP OF RE VENUE DEVELOPMENT SOFTWARE DEVELOPMENT SERVICES AND OTHER SERVICES. THE ASSESSEE COMPANY HAS NOT DISCLOSED SEPARATE SEGMENT S FOR ASCERTAINING PROFITABILITY AND ALSO CANNOT BE REGAR DED FOR THE PURPOSE OF TNM ANALYSIS. WE ARE OF THE OPINION THAT THE S AID COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES AND WE DIR ECT THE LD. TPO TO EXCLUDE. 7.9 IN THE CASE OF TAKSHEEL SOLUTIONS LIMITED, TH E LD. TPO WORKED OUT MARGIN AT 41.87 AND THE TPO HIMSELF SO UGHT TO REJECT COMPARABLE COMPANIES WHICH EARNED REVENUES FROM PRE DOMINATELY ONSITE SERVICES RS SOFTWARE IS REJECTED BASED ON TH E ONSITE REVENUE FILTER. EVEN TAKSHEEL SOLUTIONS LIMITED EARNS SIGNIFICANT MARGINS FROM ONSITE SERVICES. 7.10 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE M ATERIAL ON RECORD. WE FOUND THAT THE COMPARABLE COMPANY HAVING COMPRESSIVE IT SOLUTIONS BY PROVIDING SOFTWARE DEVELOPMENT SERV ICES FOR THE ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 37 -: ENTERPRISES ENGAGED IN FINANCIAL SERVICES. THE AR GUMENTS OF THE LD. AUTHORISED REPRESENTATIVE THAT IT HAS SIGNIFICANT O NSITE REVENUE AND SEGMENTAL COMPARABLES. WE REJECT FOR EXCLUDING COM PARABLES AND THE ASSESSEE DOES NOT SUCCEED ON THIS GROUND. 7.11 IN THE CASE OF FCS SOFTWARE SOLUTIONS LTD, TH E LD. TPO WORKED OUT MARGIN AFTER PROVIDING FOR WORKING CAPIT AL IS 49.99. THE FUNCTIONALLY DIFFERENT - PROVIDING ITES SERVICES WH ICH ARE NOT AKIN TO SOFTWARE DEVELOPMENT SERVICES; AND NO SEGMENTAL DA TA AVAILABLE IN THE FINANCIAL STATEMENTS OF THE COMPANY AND RELIED ON THE JUDICIAL DECISIONS OF TIBCO SOFTWARE (INDIA) P.LTD IN ITA NO.94/PN/2014, BARCLAYS TECHNOLOGIES CENTRE INDIA PVT. LTD IN ITA NO.2279/PN/2012 AND EMPTORIS TECHNOLOGIES INDIA PVT. LTD IN ITA NO. 436/PN/2013 . 7.12 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MA TERIAL ON RECORD. THE COMPARABLE COMPANY SHOULD HAVE SIMILAR SERVICES AND ACTIVITY OF THE ASSESSEE WHEREAS THE COMPARABLE COM PANY IS THE BUSINESS OF IT CONSULTING EDUCATION BASED ON INTER NET AND INFRASTRUCTURE MANAGEMENT WORKING ON REMOTE NET MAN AGEMENT DATA BACKUP AS PER ANNUAL REPORT PRODUCED. OUT OF THE A BOVE BROAD CATEGORY OF SERVICES LINES THE TRANSACTION CAN BE C OMPARABLE ONLY WITH IT SERVICES COMPARABLES AND THE COMPANY DERIVES ON LY 42% OF REVENUE FROM THE IT CONSULTING. THEREFORE, THE COMP ANY HAS NOT ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 38 -: PROVIDED SEGMENT TO ASCERTAIN ACCURATE PROFITABILIT Y OF SERVICE LINES. CONSIDERING THE APPARENT FACTS, WE DIRECT THE LD. T PO TO COMPARE THE COMPARABLE COMPANY TO THE EXTENT OF SEGMENT REPORTI NG OF ONLY IT CONSULTING AND WE REMIT THE ISSUE TO THE LD. TPO. 7.13 IN THE CASE OF QUINTEGRA SOLUTIONS LTD THE AS SESSEE HAS MARGIN (9.42) AND WAS REJECTED ON THE BASIS THAT T HERE IS PERSISTENT LOSS. HOWEVER, THE SAME IS NOT FACTUALLY CORRECT A ND RELIED ON THE JUDICIAL DECISIONS OF GOLDMAN SACHS (INDIA) SECURITIES PVT. LTD IN ITA NO.7724/MUM/2011, BRIGADE GLOBAL SERVICES P. LTD 2 8 ITR (TRIB) 411 AND BOBST INDIA P. LTD 63 TAXMANN.COM 33 9 7.14 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MA TERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE COMPARAB LE COMPANY WAS REJECTED AS IT IS PERSISTENT LOSS FILTER AND HAVING ACCUMULATED LOSS AND THIS LOSS WAS INCURRED DUE TO TAKEOVER OF SOME COMP ANIES AND DUE TO THE TAKEOVER AND MERGER WITH FOREIGN COMPANY BEING A EXCEPTIONAL YEAR CANNOT BE COMPARABLE. BUT THE HONBLE HIGH CO URT IN THE CASE OF CIT VS. GOLDMAN SACHS (INDIA) SECURITIES PVT LTD IN ITA NO.2222 OF 2013 REFERRED AT PAGE 4 OF ORDER WHERE THE QUESTION OF LOSS MAKING UNIT CANNOT BE USED A S A COMPARABLE FOR DETERMININ G ARMS LENGTH PRICE WHEREAS LOSS MAKING UNIT IS LOSS DUE TO OTHE R FACTOR CANNOT BE TREATED AS UNCOMPARABLE AND ALSO SUPPORTED WITH TR IBUNAL ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 39 -: DECISIONS. CONSIDERING THE HIGH COURT DECISION, WE ARE INCLINED TO DIRECT THE LD. TPO TO INCLUDE THE SAID COMPANY AS C OMPARABLE. 7.15 IN THE CASE OF CG-VAK SOFTWARE & EXPORTS LTD, THE ASSESSEE HAS INCLUDED 9.96 REJECTED ON THE BASIS THAT THERE IS PERSISTENT LOSSES. HOWEVER, THE SAME IS NOT FACTUALLY CORRECT. IMMEDIA TELY PRECEDING THE YEAR, THE COMPANY HAD EARNED SEGMENTAL PROFITS AND RELIED ON JUDICIAL DECISIONS OF NESS TECHNOLOGIES (INDIA) PVT. LTD IN ITA NO.943/2015 AND GOLDMAN SACHS (INDIA) SECURITIES PVT. LTD IN IT A NO.7724/MUM/2011. 7.16 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MA TERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. TPO H AS WRONGLY EXCLUDED SAID COMPARABLES COMPANY AS A PERSISTENT LOSS MAKIN G COMPANY. WHEREAS THE SAID COMPANY HAS EARNED NET PROFITS BOT H IN PRECEDING AND SUBSEQUENT YEAR. BUT THE COMPARABLE TURNOVER T O BE CURRENT FINANCIAL YEAR IS LESS THAN B1 CRORES IS RESPECT OF INCOME FROM SOFTWARE DEVELOPMENT, PRODUCT AND SERVICES OF DOMESTIC REGIO N AS AGAINST THE TURNOVER OF ASSESSEE COMPANY. ACCORDINGLY, IN OUR OPINION TURNOVER IS SMALL COMPARED TO ASSESSEES COMPANY AND THE COMPAR ABLE IS REJECTED. ITA NOS.398, 417, 557/MDS/15 AND C.O.NO.45/MDS/2015 :- 40 -: 7.17 THE LD. AUTHORISED REPRESENTATIVE HAS ARGUED THE ABOVE SAID GROUNDS BEFORE US IN RESPECT OF OTHER GROUNDS RAISED BY THE ASSESSEE IN APPEAL WITH REFERENCE TO TP ISSUE ARE O NLY CONSEQUENTIAL. 7.18 IN THE RESULT, THE APPEAL OF THE ASSESSEE IN I TA NO.417/MDS/2015 IS PARTLY ALLOWED FOR STATISTICAL P URPOSE. 8. IN THE RESULT, THE ASSESSEES APPEAL IN ITA NO.39 8 & 417/MDS/2015 OF ASSESSMENT YEAR ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE, THE REVENUE APPEAL IN ITA NO.557/MDS/2015 IS DISMISSED AND CROSS OBJECTION NO.45/MDS/2015 FILED BY THE AS SESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THURSDAY, THE 15 TH DAY OF SEPTEMBER, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ' ) (G. PAVAN KUMAR) / JUDICIAL MEMBER / CHENNAI , / DATED: 15.09.2016 KV - ' .#(/0 10&( / COPY TO: 1 . 23 / APPELLANT 3. ! 4( () / CIT(A) 5. 0 78 .#(# / DR 2. .923 / RESPONDENT 4. ! 4( / CIT 6. 8% : / GF