Motherson Sumi Infotech & Designs Ltd., New Delhi V. ACIT, New Delhi

ITA 5801/DEL/2011

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6706 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 29-05-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 27-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction; Scheme of amalgamation
• Section: 143(3); 133(6)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI KULDIP SINGH, JUDICIAL M EMBER ITA NO. 5801/DEL/2011 [A.Y 2007-08] M/S MOTHERSON SUMI INFOTECH & DESIGN LTD VS. THE A.C.I.T. F 7, BLOCK B-1, MOHAN CO-OPERATIVE CENTRAL CIRCLE -9 INDUSTRIAL ESTATE, MATHURA ROAD NE W DELHI NEW DELHI PAN: AACCM 3199 GB (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAVI SHAR MA, ADV MS. SHRUTI KHIMTA, AR DEPARTMENT BY : SHRI SANJAY I BAR A, CIT- DR DATE OF HEARING : 16.10.2019 DATE OF PRONOUNCEMENT : 30.10.2019 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THIS APPEAL BY THE ASSESSEE IS DIRECTED TOWARDS TH E ORDER DATED 31.1.2011 FRAMED U/S 143(3) R.W.S 144C(5) OF THE IN COME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT']. 2 2. THE SOLITARY GRIEVANCE OF THE ASSESSEE READS AS UNDER: THE LD. DISPUTE RESOLUTION PANEL (DRP) AND THE LD AO (FOLLOWING DIRECTION OF THE DRP) ERRED THE ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS. 31,345,467 TO THE INCOME OF THE APPELLANT AS PROPOSED BY THE LD TPO BY HOLDING THAT THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELL ANT DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME-TAX ACT 1961 ACT. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E APPELLANT IS A JOINT VENTURE BETWEEN SUMITOMO WIRING SYSTEMS LIMIT ED, JAPAN AND THE SAMVARDHANA MOTHERSON GROUP, INDIA. THE APPELL ANT PROVIDES CUSTOMISED SOFTWARE. THE AREAS OF EXPERTISE OF THE APPELLANT SPAN ACROSS BUSINESS PROCESS AUTOMATION, CROSS FUNCTIONA L AND CROSS ENTERPRISE INTEGRATION, OPTIMIZATION OF PROCESSES. THE APPELLANT CATERS BOTH TO THE DOMESTIC AND EXPORT MARKETS FOR WHICH DIFFERENT SEGMENTS ARE MAINTAINED. THE EXPORT SALES ARE MAIN LY FROM SOFTWARE DEVELOPMENT SERVICES. 3 4. DURING THE YEAR UNDER CONSIDERATION, THE APPELLA NT UNDERTOOK THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS A SSOCIATED ENTERPRISES [AES] WHICH WERE DULY REPORTED IN THE A CCOUNTANTS REPORT IN FORM 3CEB FILED ALONGWITH RETURN OF INCOM E: I) PROVISION FOR SOFTWARE DEVELOPMENT SERVICES; II) SERVICES RECEIVED; III) REIMBURSEMENT OF EXPENSES, AND IV) PAYMENT OF INTEREST ON LOAN. 5. THE QUARREL IN THE PRESENT APPEAL IS ONLY IN RES PECT OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES. THE BENCH MARKING APPROACH OF THE APPELLANT IS TNMM, USED AS THE MOST APPROPRIATE METHOD, PLI BEING OP/ OC [TOTAL COST] FOR WHICH THE ASSESSEE US ED 16 COMPARABLES WHOSE MEAN MARGIN IS 9.66% AND SINCE TH E APPELLANTS MARK UP WAS 7.33%, THE INTERNATIONAL TRANSACTION IN RESPECT OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES WAS REPO RTED AT ARMS LENGTH PRICE. 6. IN THE TP ASSESSMENT PROCEEDINGS, THE TPO REJECT ED THE ECONOMIC ANALYSIS SUBMITTED BY THE APPELLANT AND UN DERTOOK A FRESH SEARCH USING ARBITRARY, QUANTITATIVE AND QUALITATIV E FILTERS. THE TP 4 ASSESSMENT ORDER WAS PASSED ON 29.10.2010 USING 26 COMPARABLES WITH A MEAN OP/TC MARK-UP OF 25.16% AND SINCE THE A PPELLANTS MARK UP WAS 7.33%, TP ADJUSTMENT OF 3.13 CRORES WAS MADE. THOUGH THE APPELLANT HAS USED MULTIPLE YEAR DATA FOR BENCH MARKING ITS TRANSACTION, THE TPO USED CURRENT YEARS DATA ONLY. 7. THE PROPOSED DRAFT ASSESSMENT ORDER WAS CHALLENG ED BEFORE THE DRP. THE DRP ISSUED ITS DIRECTIONS DATED 12.09.201 1 TO THE TPO CONFIRMING THE PROPOSED ADDITIONS. THE FINAL SET O F COMPARABLES TAKEN ARE AS UNDER: S. NO. TPO'S COMPARABLES MARK - UP (OP/TC)% 1 ACCEL TRANSMATIC LIMITED (SE; 20.90% 2 A VANI CIMCON TECHNOLOGIES LIMITE D 50.29% 3 CELESTIAL LABS LIMITED 58 . 35 % 4 DATAMATICS LIMITED 1.38% 5 E - ZEST SOLUTIONS LIMITED 35 - 63 % 6 FLEXTRONICS SOFTWARE SYSTEM [SEG] 25.31% 7 GEOMETRIC LIMITED (SEG.) 10.71% 8 HELIOS & MATHESON INFORMAT ION TECH LOGY LIMITED 35 - 63 % 5 9 IGATE GLOBAL SOLUTIONS LIMITED 7 - 49 % 10 INFOSYS TECHNOLOGIES LIMITED 40.30% 11 I SHIR INFOTECH LIMITED 30.12% 12 KALS INFORMATION SYSTEMS LI MITED 30 - 55 % 13 LGS GLOBAL LIMITED (LANCO G LOBAL SOLUTIONS LIMITED) 15 - 75 % 1 4 LUCID SOFTWARE LIMITED 19.37% 15 MEDIASOFT SOLUTIONS / 3.66% 16 MEGASOFT LIMIT ED 60.23% 17 MINDTREE LIMITED 16.90% 18 PERSISTENT SYSTT 24.18% 19 QUINTEGRA SOLUTITAS 12.56% 20 R S SOFTWARE (IN DIA) LIMITED 13.47% 21 R SYSTEMS IN TERMNATIONAL LIMITED [SEG] 15.07% 22 SASKEN COM MUNICATION TECHNOLOGIES LTD 22.16% 23 SIP TECHNOLOGIES & EXPORTS LIMITED 13.90% 24 TATA ELXSI LIMIT ED 26.51% 25 THIRDWARE SOLUTI ONS 25.12% 26 WIPRO LIMITED (SE G ) 33.48% AIRTHMETIC MEA N 25% LESS: WORKING CAPITAL ADJUSTMENT 0.84% ADJ. AIRTHMETIC MEA N OP/TC 24.16% 8. THE ASSESSEE CHALLENGED THE INCLUSION OF 17 COMP ARABLES. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CHALLENGED THE TWO COMPARABLES FOR WHICH INFORMATION WAS RECEIVED FROM THE COMPANIES U /S 133(6) OF THE 6 ACT AND NO OPPORTUNITY WAS GIVEN TO THE ASSESSEE TO PUT FORTH ITS ARGUMENTS AGAINST THE EXCLUSION OF THESE TWO COMPAR ABLES. 9. BEFORE PROCEEDING ANY FURTHER, LET US FIRST UNDE RSTAND THE FOLLOWING RELEVANT FILTERS ADOPTED BY THE TPO: I) SINGLE YEAR DATA I.E. F.Y. 2006-07 II) THOUGH THE ASSESSEE HAS TAKEN COMPANIES WITH RA TIO OF OTHER OPERATING INCOME TO SALES GREATER THAN 50%, T HE TPO SELECTED 75% LIMIT. ACCORDINGLY, ALL THE COMPANIES WHOSE INCOME FROM SOFTWARE DEVELOPMENT SERVICES CONSTITUT ED AT LEAST 75% OF THE TOTAL OPERATING INCOME WERE SELECT ED. III) THOUGH THE ASSESSEE HAS TAKEN COMPANIES WITH R ATIO OF R & D EXPENSES TO SALES GREATER THAN 3%, THE TPO WAS OF THE OPINION THAT THERE ARE NO STUDIES TO SHOW THAT THE R & D ACTIVITY CHANGES THE FUNCTIONALITY OF A SOFTWARE DE VELOPER. IV) COMPANIES WITH OPERATING SALES LESS THAN RS. 1 CRORE WERE ELIMINATED. 7 V) RELATED PARTY TRANSACTIONS MORE THAN 25% OF THE OPERATING REVENUES WERE EXCLUDED. 10. SINCE THE APPELLANT IS MAINLY AN EXPORT ORIENTE D SOFTWARE DEVELOPMENT PROVIDER, THE TPO APPLIED MINIMUM THRES HHOLD LIMIT OF 25% EXPORT EARNING FROM SOFTWARE DEVELOPMENT SERVIC ES WHEREIN COMPANIES WHOSE EXPORT REVENUES FROM SOFTWARE DEVEL OPMENT SERVICES ARE LESS THAN 25% OF THE OPERATING REVENUES WERE EX CLUDED. THE COMPANIES WITH DIMINISHING REVENUE FOR LAST YEARS U PTO INCLUDING F.Y. 2006-07 WERE REJECTED AS COMPARABLES. 11. KEEPING IN MIND THE AFORE-STATED RELEVANT FILTE RS ADOPTED BY THE TPO, WE WILL NOW CONSIDER THE COMPARABLES OBJECTED BY THE LD. COUNSEL FOR THE ASSESSEE BEFORE US. 12. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASS ESSEE STATED THAT THE SET OF COMPARABLES USED BY THE TPO WERE USED IN THE CASE OF MOTORALA SOLUTIONS INDIA PVT LIMITED AND THE TRIBUN AL IN ITA NO. 5637/DEL/2011 HAS EXCLUDED ALL THE COMPARABLES USED BY THE TPO. WE ARE OF THE CONSIDERED VIEW THAT EACH COMPARABLE HAS TO BE CONSIDERED ON THE FACTS OF THE CASE IN HAND, AND, THEREFORE, T HE DECISION OF THE 8 CO-ORDINATE BENCH WILL BE CONSIDERED ONLY WHEN WE F IND PARITY IN THE FACTS. I. ACCEL TRANSMATIC LIMITED (SEG) 13. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 1 TO 79 OF THE COMPENDIUM - I. AS PER ITS PROFIT AND LOSS ACC OUNT, THE NET INCOME FROM OPERATIONS IS 35,03,95.543/- WHICH INCLUDES MA NUFACTURING, SALES, TRADING SALES, MANUFACTURE AND REPAIR SERVICES, TRA INING AND EDUCATIONAL SERVICES, SOFTWARE SERVICES, DOMESTIC P LUS EXPORTS, ETC. AS PER THE SEGMENTAL REPORTING AT PAGE 48, IT CAN BE S EEN THAT THE SEGMENT RESULT FOR EXTERNAL SALES OF THE CURRENT YE AR IS RS. 967.67 LAKHS WHEN COMPARED WITH THE TOTAL INCOME FROM OPERATIONS OF RS. 35,98,82,360/-. 14. THE ASSESSEE HAS OBJECTED BECAUSE THE RPT IS 19 .29% AND SINCE THE TPO HAS ADOPTED RPT OF MORE THAN 25%, THE SAME HAS BEEN INCLUDED. THE ASSESSEE HAS RELIED UPON THE DECISIO N IN THE CASE OF SONY INDIA PVT LTD IN ITA NOS. 1189/DEL/2005, 819/D EL/2007 AND 820/DEL/2007 AND MOTOROLA SOLUTIONS [SUPRA]. BUT I N THOSE CASES, ON THE FACTS THE RPT FILTER WAS ADOPTED AT 15%. IN OU R CONSIDERED OPINION, 9 THE ACT DOES NOT PROVIDE DIRECTIONS AS TO WHAT PERC ENTAGE RPT TRANSACTION HAVE MATERIAL EFFECT ON THE OVERALL MAR GINS. IN THE DEFINITION OF THE ASSOCIATED ENTERPRISES IN SECTI ON 92A(2)(A), IT IS PROVIDED THAT ONE ENTERPRISE HOLDING 26% SHARES IN OTHER ENTERPRISE CAN BE CONSIDERED AS AN AE. SIMILARLY, U/S 40A(2B) OF THE ACT, IT IS PROVIDED THAT PERSONS HAVING SUBSTANTIAL INTEREST I S A PERSON CARRYING NOT LESS THAN 20% OF VOTING POWER IN THAT COMPANY. KEEPING THESE PROVISIONS IN MIND, WE ARE OF THE VIEW THAT THE FIL TER OF 25% APPLIED BY THE TPO IS APT. 15. ANOTHER ARGUMENT PLACED BY THE LD. COUNSEL FOR THE ASSESSEE IS THAT THIS COMPANY OWNS SOFTWARE PRODUCTS AND IS ALS O ENGAGED IN THE SALE OF SOFTWARE PRODUCTS. BUT, AS MENTIONED ELS EWHERE, SEGMENTAL REPORTING IS IN DETAIL IN THE ANNUAL REPORT OF THIS COMPANY. WE DO NOT FIND ANY REASON FOR EXCLUSION OF THIS COMPANY. THI S COMPANY WILL REMAIN IN THE FINAL SET OF COMPARABLES. II. AVANI CIMCON TECHNOLOGIES LIMITED 16. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 80 TO 96 OF THE PAPER BOOK. THE TOTAL INCOME IS SHOWN AT RS. 3 ,64,27,306/- AND 10 WHICH INCLUDES EARNING SOFTWARE EXPORT IN FOREIGN C URRENCY AMOUNTING TO RS. 3,54,77,523/- WHICH IS 97.39% OF THE TOTAL I NCOME AND HENCE PASSES THE FILTER OF 75% ADOPTED BY THE TPO. THE L D. COUNSEL FOR THE ASSESSEE STRONGLY CONTENDED THAT THIS COMPANY IS IN VOLVED IN THE PROVISION OF IT AND RELATED SERVICES AND OWNS SOFTW ARE PRODUCTS AND SEGMENTAL DETAILS ARE NOT AVAILABLE. 17. IN SO FAR AS THE SEGMENTAL DETAILS ARE CONCERNE D, WE HAVE ALREADY POINTED OUT THAT 97% OF THE REVENUE IS COMING FROM EARNING FROM SOFTWARE EXPORTS. THEREFORE, A MINISCULE % OF OTHE R RELATED INCOME WOULD DO NO DIFFERENCE. HOWEVER, WE FIND THAT THIS COMPANY OWNS SOFTWARE PRODUCTS LIKE DXCHANGE, TRAVEL SOLUTIONS, INSURANCE SOLUTION, CUSTOMER APPRECIATION AND RELATIONSHIP MANAGEMENT A PPLICATION, CONTENT MANAGEMENT SYSTEMS ETC. IN OUR CONSIDERED VIEW, OWNING SUCH SOFTWARE PRODUCTS DOES MAKE A DIFFERENCE IN TH E FUNCTIONALITY OF THIS COMPARABLE COMPANY VIS-A-VIS THE APPELLANT COM PANY. ON THE BASIS OF DISSIMILARITY, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 11 III. CELESTIAL LABS LIMITED 18. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 97 TO 124 OF THE PAPER BOOK. AS PER THE ANNUAL REPORT, THIS COMPANY, IS PRIMARILY INTO DEVELOPMENT OF SOFTWARE TOOLS AS PRO DUCTS FOR APPLICATION IN THE FIELD OF BIO TECHNOLOGY, PHARMAC EUTICALS AND HEALTH CARE. THE TOTAL INCOME AS PER THE PROFIT AND LOSS A CCOUNT IS RS. 14,12,75,776/- AND OUT OF WHICH SALES FROM SERVICES IS RS. 13,62,00,676/- WHICH IS 96.40% OF THE TOTAL INCOME. THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THIS COMPANY IS PRIMARILY INTO DEVELOPMENT OF SOFTWARE TOOLS AS PRODUCTS DOES NOT HOLD ANY WATER AS THE SALES FROM PRODUCTS IS ONLY 3.60%. 19. HAVING SAID ALL THAT, THE R & D FACILITIES OF T HIS COMPANY HAVE BEEN USED BY IT IN RELATION TO DEVELOPMENT OF SOFTW ARE FOR DISCOVERY OF NEW DRUGS. THIS COMPANY IS ENGAGED IN THE BIO-TECHN OLOGY PHARMACEUTICALS AND HEALTH CARE AND CONTRACT RESEAR CH ACTIVITIES. THIS MEANS THAT EXTENSIVE RESEARCH ACTIVITY WAS CARRIED OUT BY THIS COMPANY IN ORDER TO DEVELOP SOFTWARE FOR SPECIFIC PURPOSES WHICH ARE DISCOVERY OF NEW DRUGS. IN OUR CONSIDERED OPINION, THIS KIND OF SOFTWARE DEVELOPED SERVICES SHOULD NOT BE EQUATED WITH NORMA L SERVICE PROVIDER 12 LIKE THE APPELLANT FOR VARIOUS BUSINESS SOLUTIONS. WE, ACCORDINGLY, DO NOT FIND ANY MERIT IN THE INCLUSION OF SUCH A COMPA NY. ACCORDINGLY, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE FI NAL SET OF COMPARABLES. IV. E-ZEST SOLUTIONS LIMITED 20. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 125 - 146 OF THE PAPER BOOK. THIS COMPANY UNDERTAKES DIVERSI FIED ACTIVITY PROVIDING SERVICES SUCH AS CUSTOM SOFTWARE DEVELOPM ENT, CRM, ERP, OPEN SOURCE ERP, KNOWLEDGE MANAGEMENT CONSULTING HE ALTHCARE MANUFACTURING, MANUFACTURING SOLUTIONS, ETC. THE T OTAL INCOME AS PER THE PROFIT AND LOSS ACCOUNT IS RS. 6,30,22,252/- WH ICH INCLUDES EXPORT TURNOVER AND DOMESTIC TURNOVER. BUT NO SEGMENTAL I NFORMATION IS AVAILABLE. THE TPO HAS ALSO MENTIONED THAT FROM TH E ANNUAL REPORT AVAILABLE IN THE PUBLIC DOMAIN, FUNCTIONALITY IS NO T CLEAR AND ALSO THE RPT INFORMATION WAS NOT AVAILABLE. 21. THOUGH THE TPO REFERS TO THE REPLY RECEIVED BY HIM PURSUANT TO THE NOTICE ISSUED U/S 133(6) OF THE ACT, BUT NO DET AILS HAVE BEEN FURNISHED BY THE TPO IN RESPECT OF THE REPLY DEMONS TRATING THAT THIS 13 COMPANY PASSES ALL THE FILTERS APPLIED BY HIM. AS THE ANNUAL REPORT EXHIBITED IN THE PAPER BOOK DOES NOT CONTAIN FULL D ETAILS, THEREFORE, FOR WANT OF ADEQUATE DETAILS, THIS COMPANY CANNOT BE TA KEN AS A COMPARABLE AND THE SAME IS DIRECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. V. FLEXTRONICS SOFTWARE SYSTEM [SEG] 22. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 147 TO 209 OF THE PAPER BOOK. THE TOTAL SALE OF THIS COMPANY IS SHOWN AT RS. 7,28,60,38,887/- OUT OF WHICH SOFTWARE SERVICES SAL ES IS RS. 6,45,66,52,651/- WHICH COMES TO 88.60%. BUT THE ALA RMING FACTOR IS THAT THE PREVIOUS YEAR PERIOD HAS BEEN TAKEN ENDED ON 30.06.2006 WHEREAS THE FIGURE COMPARED IS WHEN THE PERIOD ENDE D ON 31.03.2007 WHICH MEANS THAT THE ANNUAL ACCOUNTS ARE NOT FOR A PERIOD OF 12 MONTHS. SINCE THE FINANCIALS OF THIS COMPANY IS NO T ON THE SAME PLATFORM OF THAT OF THE APPELLANT COMPANY, WE RESTO RE THIS COMPANY FOR COMPARABILITY TO THE FILE OF THE TPO. THE TPO IS DIRECTED TO CALL FOR FINANCIAL DATA TO DEMONSTRATE THAT THIS IS A GO OD COMPARABLE COMPANY. 14 VI. HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITE D 23. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 210 TO 345 OF THE PAPER BOOK. THE INCOME FROM SOFTWARE SALES AND SERVICES IS AT RS. 3,96,29,92,738/-. THE EMPLOYEE COST INCOME FRO M SOFTWARE SALES AND SERVICES IS AT 5.82% AND ON TOTAL SALES IS AROU ND 1%. THE FILTER ADOPTED BY THE TPO IS MORE THAN 25%. THEREFORE, TH IS COMPARABLE FALLS ON ITS FACE MERELY ON THE EMPLOYEE COST TO SA LES FILTER. ON THIS VERY GROUND, THIS COMPANY IS DIRECTED TO BE EXCLUDE D FROM THE FINAL SET OF COMPARABLES. VII. INFOSYS TECHNOLOGIES LIMITED 24. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 346 TO 615 OF THE PAPER BOOK. INFOSYS TECHNOLOGIES LIMITED HA S SUBSTANTIAL INTANGIBLE ASSETS AND IS A GIANT COMPANY WITH A SUB STANTIAL BRAND VALUE. INFOSYS OWNS PRODUCTS/IPR. THE TURNOVER OF THIS COMPANY IS APPROXIMATELY 700 TIMES THAN THE TURNOVER OF THE AP PELLANT COMPANY AND HAS SUBSTANTIAL INVESTMENT IN INTANGIBLES. BEI NG A GIANT COMPANY, THIS COMPANY HAS BEEN EXCLUDED IN THE CASE OF AGNIT Y INDIA 15 TECHNOLOGIES PVT LIMITED BY THE HON'BLE HIGH COURT OF DELHI IN ITA NO. 1204/2011. 25. CONSIDERING THE FUNCTIONALITY AND BRAND VALUE O F THIS COMPANY, IT CANNOT BE CONSIDERED AS A GOOD COMPARABLE AND IS DI RECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. VIII. ISHIR INFOTECH LIMITED 26. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 616 TO 634 OF THE PAPER BOOK. ITS PROFIT AND LOSS ACCOUNT SHO WS PROFESSIONAL RECEIPTS FROM EXPORT AND DOMESTIC SERVICES AT RS. 7 ,42,09,887/- WHEREAS ITS SALARY AND STAFF WELFARE EXPENSES ARE A T RS. 29,35,065/- WHICH MAKES ITS EMPLOYEES COST RATIO 3.95% WHICH IS WELL BELOW THAN THE EMPLOYEE COST FILTER OF 25% ADOPTED BY THE TPO. FOR THIS VERY REASON, THIS COMPANY FAILS TO BE A GOOD COMPARABLE AND IS DIRECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 16 IX. KALS INFORMATION SYSTEMS LIMITED 27. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 635 TO 659 OF THE PAPER BOOK. THE INCOME FROM SALES SERVICES AND TRAINING IS AT RS. 2,09,05,322/- WHICH INCLUDES INCOME FROM SOFTWA RE DEVELOPMENT EXPORT SALES OF RS. 2,00,09,937/-. THOUGH THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THIS COMPANY IS FUNCTIO NALLY DISSIMILAR AND SEGMENTAL INFORMATION IS NOT AVAILABLE, BUT FROM TH E SCHEDULE FORMING PART OF THE BALANCE SHEET, INCOME FROM SOFTWARE DEV ELOPMENT EXPORT SALES IS SEPARATELY MENTIONED ALONGWITH OTHER SEGME NTS, NAMELY, TRANSLATION AND INTERPRETATION EXPORT, INDIGENOUS AND TRAINING RECEIPTS. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT THIS COMPANY FAILS THE FILTER OF ACCEPTING COMPANIES WIT H SOFTWARE SERVICE REVENUE IN EXCESS OF 75%. 28. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTEN DED THAT THIS COMPANY HAS REVENUE BY WAY OF SALE OF PRODUCTS AND TRAINING BUT THE BREAK UP IS NOT AVAILABLE. AS PER THE INFORMATION GATHERED BY THE TPO U/S 133(6) OF THE ACT, THIS COMPANY HAS CATEGORICAL LY STATED THAT THE CORE BUSINESS IS THAT OF PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER AND REVENUE FROM DOMESTIC TRAINING ACTIVITIES IS VE RY SMALL. THE 17 REVENUE FROM SOFTWARE DEVELOPMENT SERVICES CONSTITU TES MORE THAN 88% OF THE TOTAL OPERATING REVENUE. ALL THESE FACT S WERE CONFRONTED TO THE ASSESSEE. AS NO PLAUSIBLE REPLY HAS BEEN FURNI SHED, WE DO NOT FIND ANY REASON TO EXCLUDE THIS COMPANY AND IT WILL REMA IN IN THE FINAL SET OF COMPARABLES. X. LUCID SOFTWARE LIMITED 29. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 660 TO 685 OF THE PAPER BOOK. THE PROFIT AND LOSS ACCOUNT OF THIS COMPANY SHOWS SALES REVENUE FROM INTERNATIONAL MARKET AT RS. 1,69 ,13,625/- AND FROM DOMESTIC AT RS. 78,453/-. THE SCHEDULE OF FIXED AS SETS SHOWS PRODUCT SOFTWARE WITH SUBSTANTIAL ADDITIONS DURING THE YEAR UNDER CONSIDERATION. THIS SHOWS THAT THIS COMPANY IS ENG AGED IN THE DEVELOPMENT OF PRODUCTS. AS NO SEGMENTAL INFORMATI ON IS AVAILABLE, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE FI NAL SET OF COMPARABLES. XI MEGASOFT SOLUTIONS 30. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 687 TO 761 OF THE PAPER BOOK. ITS ANNUAL REPORT SHOWS THAT PU RSUANT TO THE 18 SCHEME OF AMALGAMATION INDUS E SOLUTIONS LIMITED WI TH MEGASOFT SOLUTIONS LIMITED, AS APPROVED BY THE HON'BLE HIGH COURT OF JUDICATURE AT MADRAS, ONE SHARE OF RS. 10/- EACH OF MEGASOFT W ERE ALLOTTED TO SHARE HOLDERS OF INDUS E SOLUTIONS LIMITED IN THE R ATIO 1:1. THIS SHOWS THAT THERE WAS AN EXTRA ORDINARY EVEN DURING THE YE AR UNDER CONSIDERATION. 31. FURTHER, ITS FIXED ASSETS SCHEDULE SHOWS INTELL ECTUAL PROPERTY RIGHTS AS AN ASSET. MOREOVER, THIS COMPANYS ANNUA L ACCOUNT IS FOR THE CALENDAR YEAR WHEREAS THAT OF THE APPELLANT COMPANY IS FOR FINANCIAL YEAR. THEREFORE, THERE BEING DIFFERENT ACCOUNTING YEARS, THE FINANCIALS ARE INCOMPARABLE. WE, THEREFORE, DO NOT FIND THIS COMPANY AS GOOD COMPARABLE AND DIRECT FOR EXCLUSION OF IT FROM THE FINAL SET OF COMPARABLES. ACCORDINGLY, WE DO NOT FIND THIS COMP ANY AS A GOOD COMPARABLE AND DIRECT THE TPO TO EXCLUDE THIS COMPA NY FROM THE FINAL SET OF COMPARABLES. XII. PERSISTENT SYSTEMS PRIVATE LIMITED 32. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 762 TO 895 OF THE PAPER BOOK. IN ITS PROFIT AND LOSS ACCOUNT, SALE OF SOFTWARE 19 SERVICES AND PRODUCTS IS AT RS. 31,231/- AND IN SCH EDULE 11, BIFURCATION IS GIVEN FOR SALE OF SOFTWARE SERVICES AND PRODUCTS - EXPORT AND DOMESTIC. THOUGH SEGMENTAL INFORMATION IS PROVIDED IN THE ANNUAL REPORT, FROM WHICH SALE OF SOFTWARE SERVICES CAN BE SEPARATELY KNOWN FROM THE SALE OF PRODUCTS, BUT THE INFORMATION RECE IVED BY THE TPO U/S 133(6) OF THE ACT, THE COMPANY HAS INFORMED THAT IT S SOFTWARE PRODUCTS SALES CONSTITUTED 0.73% OF THE REVENUE WHICH MEANS THAT MORE THAN 99% OF THE REVENUE IS FROM SOFTWARE SERVICES. 33. THE LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY STA TED THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR AS IT IS ENGAGED IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES AS INVESTMENT IN INTELLECTUAL PROPERTY LED SALES. THE LD. COUNSEL FOR THE ASSESS EE FURTHER STATED THAT THIS COMPANY HAS UNDERTAKEN SIGNIFICANT RESTRUCTURI NG AND HAS VERY HIGH TURNOVER, BUT FAILED IN CONVINCING US THE IMPA CT OF THESE THINGS ON THE OVER ALL MARGIN OF THE COMPANY. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THIS COMPANY PASSES ALL THE FI LTERS AND HAS BEEN RIGHTLY TAKEN IN THE FINAL SET OF COMPARABLES. NO INTERFERENCE IS CALLED FOR. 20 XIII. R SYSTEMS INTERNATIONAL LIMITED 34. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 896 TO 1058 OF THE PAPER BOOK. THE FINANCIAL ACCOUNTS OF THIS COMPANY SHOWS THAT ITS ACCOUNTING YEAR IS CALENDAR YEAR WHEREAS THAT O F THE ASSESSEE IS FINANCIAL YEAR. WE, ACCORDINGLY, RESTORE THIS COMP ARABLE COMPANY TO THE FILE OF THE TPO. THE TPO IS DIRECTED TO USE FI NANCIAL YEAR DATA TO DEMONSTRATE THAT THIS IS A GOOD COMPARABLE. XIV. SASKEN COMMUNICATION TECHNOLOGIES LTD 35. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 1059 1228 OF THE PAPER BOOK WHICH SHOWS THAT THIS COMPANY HAS UNDERTAKEN RESTRUCTURING DURING THE YEAR UNDER CONSIDERATION B Y WAY OF MERGER WITH SASKEN NETWORK SYSTEMS LIMITED INTEGRATED SOFT ECH SOLUTIONS PRIVATE LIMITED AND BOTNIA HITECH, OY, FINLAND. TH ERE BEING AN EXTRA ORDINARY EVENT DURING THE YEAR, THEREFORE, THIS COM PANY CANNOT BE USED AS A COMPARABLE. FOR THIS REASON ONLY, THE CO MPANY IS DIRECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 21 XV. TATA ELXSI LIMITED 36. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 1229 TO 1281 OF THE PAPER BOOK. THE COMPANY OWNS SOFTWARE PRODUCTS AND IS ENGAGED INTO VARIOUS DIVERSIFIED BUSINESS OPERATION S AS COMPARED TO THE APPELLANT COMPANY WHICH IS PURE A SERVICE PROVI DER ENGAGED IN ONLY ROUTINE SOFTWARE DEVELOPMENT SERVICES. MOREOVER, T HE SEGMENTAL ACCOUNTS ARE ALSO NOT AVAILABLE WHICH MAKES IT DIFF ICULT FOR COMPARABILITY. ACCORDINGLY, WE DO NOT FIND THIS COM PANY AS A GOOD COMPARABLE AND DIRECT THE TPO TO EXCLUDE THIS COMPA NY FROM THE FINAL SET OF COMPARABLES. XVI. THIRDWARE SOLUTIONS LIMITED 37. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 1282 TO 1319 OF THE PAPER BOOK. THIS COMPANY DERIVES REVEN UE FROM VARIOUS SOURCES SUCH AS SALE OF LICENSE, SOFTWARE SERVICES, EXPORT FROM SEZ UNIT, REVENUE FROM SUBSCRIPTION, ETC. THE PROFIT A ND LOSS ACCOUNT OF THIS COMPANY SHOWS SALES AT RS. 38,21,39,652/- BUT THERE IS NO SEGMENTAL ACCOUNT THOUGH THE TPO HAS MENTIONED THAT THE INFORMATION 22 GATHERED U/S 133(6) OF THE ACT SHOWS THAT THIS COMP ANYS SOFTWARE DEVELOPMENT SEGMENT QUALIFIES ALL THE FILTERS BUT H AS NOT GIVEN ANY FINANCIAL DATE TO SUPPORT HIS CLAIM DUE TO NON AVAI LABILITY OF DATA FOR COMPARISON. WE DIRECT THE TPO TO EXCLUDE THIS COMP ANY FROM THE FINAL SET OF COMPARABLES. XVII. WIPRO LIMITED 38. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 1320 TO 1535 OF THE PAPER BOOK. THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES AND IS A GIANT GLOBAL IT SERVICES AND PR ODUCT PROVIDER. THIS COMPANY HAS HUGE BRAND VALUE AND OWNS IP. THE TURN OVER OF THIS COMPANY IS RS. 9,654 CRORES AS AGAINST RS. 19.99 CR ORES OF THE APPELLANT COMPANY. BECAUSE OF ITS GLOBAL STATUS, HIGH BRAND VALUE, OWNERSHIP OF IP AND ENGAGED IN DIVERSIFIED ACTIVITIES, IN OUR CO NSIDERED OPINION, THIS COMPANY SHOULD NOT HAVE BEEN SELECTED IN THE FINAL SET OF COMPARABLES. WE, THEREFORE, DIRECT THE TPO TO EXCL UDE THIS COMPANY FROM THE FINAL SET OF COMPARABLES. XVIII COMPUTED INTERNATIONAL LIMITED & XIX. MELSTAR INFORMATION TECHNOLOGIES LIMITED 23 39. THE ANNUAL REPORTS OF THESE COMPANIES WERE NOT AVAILABLE IN THE PUBLIC DOMAIN AND HENCE, THE TPO GATHERED INFORMATI ON BY SERVING NOTICE U/S 133(6) OF THE ACT. HOWEVER, WE FIND THA T THE INFORMATION GATHERED U/S 133(6) OF THE ACT WAS NOT CONFRONTED T O THE ASSESSEE. WE, ACCORDINGLY, RESTORE THE ISSUE OF COMPARABILITY OF THESE TWO COMPANIES TO THE FILE OF THE TPO. THE TPO IS DIREC TED TO CONFRONT THE INFORMATION GATHERED U/S 133(6) OF THE ACT AND AFTE R GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE, DECIDE THE ISSUE AFRESH. 40. BEFORE PARTING, AS MENTIONED ELSEWHERE, WE HAVE ADJUDICATED ONLY THAT GROUND WHICH HAD BEEN ARGUED BY THE LD. C OUNSEL FOR THE ASSESSEE. 41. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN I TA NO. 5801/DEL/2011 IS PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30.10 .2019. SD/- SD/- [ KULDIP SINGH] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 30 TH OCTOBER, 2019 VL/ 24 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) ASST. REGISTRAR, 5. DR ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER