Global Logic India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 5809/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74000 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 21-01-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 28-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: PUNEET CHUGH
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM ITA NO.5809/DEL/2011 ASSESSMENT YEAR : 2007-08 GLOBAL LOGIC INDIA PVT. LTD., G-52, VARDHMAN CORPORATE PLAZA, NETAJI SUBHAS PLACE, NEW DELHI. PAN : AABCI2526F VS. ACIT, CIRCLE-12(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SR. ADVOCATE, SH. NEERAJ JAIN, ADVOCATE, SH. RAMIT KATYAL, SH. ABHISHEK AGARWAL, CA AND SH. PUNEET CHUGH, CA. DEPARTMENT BY : SHRI PEEYUSH JAIN, CIT, DR ORDER PER R.S.S YAL, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE ASSESSING OFFICER ON 31.10.2011 U/S 143(3) READ WITH SECTION 144C ITA NO.5809/DEL/2011 2 OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLE D THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2007-08 2. THE FIRST GROUND IS GENERAL WHICH DOES NOT REQUI RE ANY SEPARATE ADJUDICATION. 3. GROUND NO.2 WITH SEVERAL SUB-GROUNDS IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.7,03,80,590/-. 4. BRIEFLY STATED, THE FACTS RELATING TO THIS GROUN D ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF GLOBAL LOGIC, US. THIS GROUP IS ENGAGED IN PROVIDING VALUE-DRIVEN SOFTWARE PRODUCT LIFECYCLE SOLUTIONS WHICH MEET THE STRATEGIC OBJECTIVES OF ITS CLIENTS IN THE INDUSTRIES SUCH AS TELECOM & MOBILE, HEALTH CARE AND TRAVEL. THE ASSE SSEE, AN INDIAN COMPANY, IS ENGAGED IN THE PROVISION OF SOFTWARE DE VELOPMENT SERVICES AND ALSO MAINTENANCE AND REPAIR WORK, TESTING, QUAL ITY ASSURANCE AND OTHER INFORMATION TECHNOLOGY SERVICES TO ITS OVERSE AS GROUP COMPANIES. THE ASSESSEE GETS REMUNERATED BY ITS FOREIGN AE WIT H COST PLUS 15% MARK-UP. THE ASSESSEE REPORTED THE INTERNATIONAL T RANSACTION OF: PROVISION OF SOFTWARE SERVICES WORTH RS.93,64,04, 329/-. THE ITA NO.5809/DEL/2011 3 TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS EMPLOYED AS THE MOST APPROPRIATE METHOD WITH PROFIT LEVEL INDICATOR (PLI ) OF OPERATING PROFIT TO TOTAL COST (OP/TC) FOR DEMONSTRATING THAT ITS IN TERNATIONAL TRANSACTION WAS AT ARMS LENGTH PRICE (ALP). THE ASSESSEE DECL ARED ITS OPERATING PROFIT MARGIN AT 13.34%. CERTAIN COMPARABLE COMPAN IES WERE CHOSEN WITH AVERAGE OF OPERATING PROFIT MARGIN OF 14.53% T O INDICATE THAT THE ASSESSEES OPERATING PROFIT MARGIN WAS WITHIN +/- 5 % PERMISSIBLE RANGE. THE TPO, IN THE FINAL ANALYSIS, CHOSE THE FOLLOWING 26 COMPANIES AS COMPARABLE:- SL.NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/OC (%) 1. ACCEL TRANSMATIC LTD. (SEG.) 20.38 2. AVANI CIMCON TECHNOLOGIES LTD. 49.32 3. CELESTIAL LABS LTD. 54.69 4. DATAMATICS LTD. -0.14 5. E-ZEST SOLUTIONS LTD. 36.00 6. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG) 25.50 7. GEOMETRIC LTD. (SEG) 10.08 ITA NO.5809/DEL/2011 4 8. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 34.87 9. IGATE GLOBAL SOLUTIONS LTD. 6.08 10. INFOSYS TECHNOLOGIES LTD. 39.41 11. ISHIR INFOTECH LTD. 30.86 12. KALS INFORMATION SYSTEMS LTD. (SEG) 23.87 13. LGS GLOBAL LTD. (LANCO GLOBAL SOLUTIONS LTD.) 15.62 14. LUCID SOFTWARE LTD. 17.50 15. MEDIASOFT SOLUTIONS LTD. 2.05 16. MEGASOFT LTD. (SEG.) 51.74 17. MINDTREE LTD. 15.82 18. PERSISTENT SYSTEMS LTD. 23.54 19. QUINTEGRA SOLUTIONS LTD. 9.69 20. R.S. SOFTWARE (INDIA) LTD. 13.59 21. R. SYSTEMS INTERNATIONAL LTD. (SEG) 13.71 22. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 21.53 23. SIP TECHNOLOGIES & EXPORTS LTD. 11.17 24. TATA ELXSI LTD. (SEG) 26.62 25. THIRDWARE SOLUTIONS LTD. 21.97 26. WIPRO LTD. (SEG.) 34.71 ITA NO.5809/DEL/2011 5 5. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT, THE T PO DETERMINED ARITHMETIC MEAN MARGIN OF THE COMPARABLE COMPANIES AT 23.47%. THIS LED TO THE PROPOSAL FOR A TRANSFER PRICING ADJUSTME NT OF RS.7,03,80,590/-. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DISPU TE RESOLUTION PANEL (DRP). EVENTUALLY, THE AO MADE THE ABOVE-SAID ADDI TION OF RS.7.03 CRORE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. T HE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. COUNSEL FOR THE ASSESSE E SUBMITTED AT THE OUTSET THAT HE WAS OPPOSING THE INCLUSION OF A FEW COMPANIES BY THE TPO IN THE FINAL LIST OF COMPARABLES AND IF THIS CO NTENTION GETS ACCEPTED, THEN THERE WILL REMAIN NO NEED TO ARGUE OTHER ISSUE S ON MERITS. HE SUBMITTED THAT MOTOROLA SOLUTIONS INDIA PVT. LTD., AND TOLUNA INDIA PVT. LTD., ARE BOTH ENGAGED IN PROVIDING SOFTWARE DEVELO PMENT SERVICES SIMILAR TO THE ASSESSEE AND IN BOTH THESE CASES THE TPO SELECTED THE SAME 26 COMPANIES AS COMPARABLE. IT WAS SUBMITTED THAT THE TRIBUNAL HAS DECIDED THE APPEALS OF BOTH THESE ASSESSEES FOR THE SAME ASSESSMENT YEAR ITA NO.5809/DEL/2011 6 ADJUDICATING UPON THE FATE OF THE COMPARABILITY OF THESE 26 COMPANIES EITHER WAY. 7. BEFORE ADVERTING TO THE DECISION TAKEN BY THE TR IBUNAL IN THESE TWO CASES, IT IS OF FOREMOST IMPORTANCE TO FIRST ASCERT AIN THE NATURE OF BUSINESS CARRIED OUT BY THESE COMPANIES. IT IS ON LY IF THE FUNCTIONAL PROFILE OF THESE COMPANIES IS FOUND TO BE SIMILAR A ND OTHER RELEVANT FILTERS ARE ALSO SAME THAT THE QUESTION OF COMPARAB ILITY OF THESE COMPANIES CAN BE DECIDED WITH A RELATIVE EASE. FIRS TLY, WE ARE TAKING UP MOTOROLA SOLUTIONS INDIA PVT. LTD., A COPY OF ORDER IN WHOSE CASE IS AVAILABLE AT PAGES 308 ONWARDS OF THE PAPER BOOK. THE FUNCTIONAL PROFILE OF MOTOROLA SOLUTIONS INDIA PVT. LTD., WHIC H IS A LEADING SUPPLIER OF MOBILE PHONES AND EQUIPMENTS OF MOBILE BROADBAND AND AUTOMOBILE NETWORKS, HAS BEEN SET OUT BY THE TRIBUNAL IN ITS O RDER DATED 14.8.2014. IT IS MANIFEST FROM PARA 3 OF THE ORDER THAT THIS C OMPANY UNDERTOOK FOUR TYPES OF INTERNATIONAL TRANSACTIONS, VIZ., (A) PROV ISION OF SOFTWARE DEVELOPMENT SERVICE; (B) PROVISION OF ADMINISTRATIV E AND MARKET SUPPORT SERVICES; (C) DISTRIBUTION OF TELECOM EQUIPMENTS AN D HANDSETS; AND (D) ITA NO.5809/DEL/2011 7 REIMBURSEMENT OF EXPENSES FROM GROUP COMPANIES. SE GMENTAL RESULTS WERE DECLARED BY THIS COMPANY AND WE ARE BASICALLY CONCERNED WITH THE FIRST SEGMENT, NAMELY, PROVISION OF SOFTWARE DEVEL OPMENT SERVICES, WHICH PRIMA FACIE APPEARS TO BE MATCHING WITH THE ASSESSEES BUSINESS . PARA 32.1 OF THE ORDER INDICATES THAT THIS COMPANY IN THE SOFTWARE DEVELOPMENT SEGMENT PERFORMED ACTIVITIES RELATING TO SOFTWARE DEVELOPMENT/CODING RELATING TO PARTY CONTROL AND DO CUMENTATION, TESTING, IMPLEMENTATION AND MAINTENANCE. THIS COMPANY ALSO, LIKE THE ASSESSEE COMPANY, IS A CAPTIVE SERVICE PROVIDER IN SO FAR AS THIS SEGMENT IS CONCERNED. NOW, WE TURN TO THE FUNCTIONAL PROFILE OF TOLUNA INDIA PVT. LTD., A COPY OF ORDER PASSED IN WHOSE CASE IS AVAIL ABLE AT PAGE 1416 ONWARDS OF THE PAPER BOOK. IT CAN BE SEEN FROM PAR A 3 OF THE ORDER THAT THIS COMPANY IS ALSO ENGAGED IN THE BUSINESS OF SOF TWARE DEVELOPMENT AND PROVIDING RELATED SERVICES TO ITS GROUP CONCERN S. THIS ASSESSEE WAS ALSO COMPENSATED BY ITS AES AT A MARK-UP OF 15% ON COSTS INCURRED. THIS COMPANY ALSO DOES NOT OWN ANY INTANGIBLES AND CONDUCTS NO RESEARCH AND DEVELOPMENT ACTIVITIES, LIKE THE INSTA NT ASSESSEE. THE TRIBUNAL RECORDED IN PARA 8 OF ITS ORDER THAT THIS COMPANY IS NOT ONLY A ITA NO.5809/DEL/2011 8 SOFTWARE SERVICE PROVIDER, BUT ALSO A SOFTWARE DEVE LOPER. SINCE INCOME FROM PROVIDING SOFTWARE SERVICES AND SOFTWARE DEVEL OPMENT WAS IN A COMMON POOL, THE TRIBUNAL CONSIDERED THE COMPANIES ENGAGED EITHER IN SOFTWARE DEVELOPMENT OR PROVIDING SOFTWARE SERVICE OR DOING BOTH AS FUNCTIONALLY COMPARABLE BY EXCLUDING ONLY THOSE COM PANIES WHICH WERE ENGAGED AS NON-CONTRACT SOFTWARE DEVELOPERS HAVING INTELLECTUAL PROPERTY RIGHTS OVER THE PRODUCTS DEVELOPED BY THEM . 8. HAVING SEEN THE FUNCTIONAL PROFILE OF THESE C OMPANIES, IN COMPARISON WITH THAT OF THE ASSESSEE, IT CAN BE CON CLUDED THAT THE ASSESSEE IS ALSO WORKING AS A CAPTIVE SOFTWARE DEVE LOPER AND ALSO PROVIDING SOFTWARE SERVICES. OUR THIS CONCLUSION F OLLOWS FROM THE FUNCTIONAL PROFILE OF THE ASSESSEE COMPANY WHICH PR OVIDES NOT ONLY FOR SOFTWARE DEVELOPMENT, BUT ALSO FOR MAINTENANCE AND REPAIR WORK AND OTHER IT SERVICES. THE LD. DR WAS ALSO FAIR ENOUGH TO ACCEPT THAT THERE IS NO DIFFERENCE IN THE FUNCTIONAL PROFILE OF THE ASSE SSEE ON THE ONE HAND AND MOTOROLA AND TOLUNA ON THE OTHER. UNDER SUCH C IRCUMSTANCES, WE ARE PROCEEDING WITH THE PREMISE THAT THE NATURE OF ACTIVITY DONE BY THE ITA NO.5809/DEL/2011 9 ASSESSEE IS SIMILAR TO THAT OF THESE TWO COMPANIES. IF A PARTICULAR COMPANY HAS BEEN HELD TO BE NOT COMPARABLE IN THE O RDERS PASSED BY THE TRIBUNAL IN ANY OF THESE TWO COMPANIES AND THE FILT ER ON THE BASIS OF WHICH THE TRIBUNAL EXCLUDED SUCH COMPANIES FROM THE LIST OF COMPARABLES OF THESE TWO COMPANIES, CONTINUES TO RE MAIN THE SAME FOR THE ASSESSEE COMPANY AS WELL, WE WILL EXCLUDE SUCH COMPANY BY ADOPTING THE SAME REASONS AS HAVE BEEN GIVEN BY THE TRIBUNAL IN THE RESPECTIVE ORDERS PASSED IN THESE TWO CASES. WE WI LL ESPOUSE ONE BY ONE THE COMPANIES WHICH HAVE BEEN CONTESTED BY THE LD. AR IN THE PRESENT APPEAL. (I) AVANI CIMCON TECHNOLOGIES LTD . 9. THE TPO OBSERVED ON PAGE 89 OF HIS ORDER THAT TH IS COMPANY IS ALSO A SOFTWARE DEVELOPMENT AND CONSULTING COMPANY. IN HIS OPINION, ALL THE FILTERS APPLIED BY HIM WERE FULFILLED AND, AS S UCH, THIS COMPANY WAS LIABLE TO BE CONSIDERED AS COMPARABLE. THE ASSESSE E OBJECTED TO THE INCLUSION OF THIS COMPANY BEFORE THE DRP BY CONTEND ING THAT NOT ONLY THE TURNOVER OF THIS COMPANY WAS MUCH LOWER, BUT AL SO THE PROFITS WERE ITA NO.5809/DEL/2011 10 EXTREMELY HIGH. REJECTING THE ASSESSEES CONTENTIO NS, THE DRP UPHELD THE TPOS VIEW ON THE INCLUSION OF THIS COMPANY IN THE FINAL SET OF COMPARABLES. 10. IT CAN BE SEEN FROM THE ANNUAL ACCOUNTS OF THIS COMPANY, A COPY OF WHICH IS AVAILABLE ON RECORD, THAT ALBEIT IT IS A P URE SOFTWARE DEVELOPMENT SERVICE PROVIDER, BUT, IS UTILIZING ITS OWN SOFTWARES IN RENDERING SUCH SERVICES. THE TRIBUNAL IN MOTOROLA SOLUTIONS INDIA PVT. LTD., HAS HELD THIS COMPANY TO BE INCOMPARABLE BY A CCEPTING THE ASSESSEES CONTENTION THAT THE HIGH OPERATING MARGI NS OF THIS COMPANY WERE ON ACCOUNT OF DIFFERENCE IN ITS ASSET BASE. I T IS FURTHER RELEVANT TO NOTE THAT THIS COMPANY, APART FROM RENDERING SOFTWA RE DEVELOPMENT SERVICES, IS ALSO ENGAGED INTO THE SALE OF SOFTWARE PRODUCTS AND THE ACCOUNTS MAINTAINED BY IT ARE ON ENTITY LEVEL WITHO UT THERE BEING ANY SEGREGATION FOR SOFTWARE DEVELOPMENT SEGMENT. AS T HE TPO HAS CONSIDERED THE ENTITY LEVEL FIGURES OF THIS COMPANY FOR MAKING A COMPARISON WITH THE ASSESSEE COMPANY, SUCH A COURSE OF ACTION CANNOT BE PERMITTED BECAUSE OF THE INCLUSION OF PROFIT FRO M SALE OF SOFTWARE ITA NO.5809/DEL/2011 11 PRODUCTS INTO THE OVERALL PROFITABILITY OF THIS COM PANY. NEITHER SEPARATE PROFITS ARE AVAILABLE, NOR THERE IS ANY MEASURE PRO VIDED FOR SEGREGATING PROFIT ON SALE OF SOFTWARE PRODUCTS FROM THE OVERAL L PROFIT OF THIS COMPANY FOR FINDING OUT A COMPARABLE SEGMENT SIMILA R WITH THAT OF THE ASSESSEE COMPANY. AS THE PROFITS OF THE SOFTWARE DE VELOPMENT PORTION CANNOT BE ASCERTAINED, WE HOLD THAT IT CANNOT BE CO NSIDERED AS COMPARABLE ON ENTITY LEVEL. WE, THEREFORE, ORDER F OR THE EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. (II) CELESTIAL BIO LABS LTD . 11. THE TPO OBSERVED THAT THIS COMPANY WAS CATEGORI ZED AS SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE ASSESSEE OBJECTE D TO THE INCLUSION OF THIS COMPANY ON THE GROUND THAT IT WAS NOT ONLY INT O THE BUSINESS OF SOFTWARE DEVELOPMENT, BUT ALSO INTO SOFTWARE PRODUC TS AND NO SEGMENT- WISE BREAK-UP OF THE PROFITS WAS AVAILABLE. IT WAS ALSO SUBMITTED THAT THIS COMPANY WAS DEVELOPING BIOTECHNOLOGY PRODUCTS AND PROVIDING RELATED RESEARCH AND DEVELOPMENT SERVICES. NOT CON VINCED WITH THE ITA NO.5809/DEL/2011 12 ASSESSEES SUBMISSIONS, THE TPO INCLUDED THIS COMPA NY IN THE LIST OF COMPARABLES. THE DRP AFFIRMED THE OPINION OF THE T PO ON THIS SCORE. 12. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT THIS COMPANY IS INVOLVED IN THE MANUFACTURE AND SUPPLY OF A WIDE RANGE OF AYURVEDIC AND ALLOPATHIC MEDICINES. THIS COMPANY ALSO UNDERT AKES CONTRACT RESEARCH AND DEVELOPMENT. IT IS MAINLY ENGAGED IN A BIO-PHARMA AND BIOTECH MANUFACTURING AND CUSTOMIZED IT SOLUTIONS, MANUFACTURE OF DRUGS, CLINICAL TRIALS AND CONTRACT RESEARCH ACTIVI TIES. THIS COMPANY ALSO OWNS IPRS IN RESPECT OF BIOTECHNOLOGY. NO SEGMENTAL INFORMATION OF THIS COMPANY IS AVAILABLE SO AS TO FIND OUT THE OPERATIN G PROFITS FROM THE SOFTWARE DEVELOPMENT SEGMENT. IN OUR CONSIDERED OP INION, THERE CAN BE NO COMPARISON WITH THE OVERALL ENTITY LEVEL FUNCTIO NS OF THIS COMPANY WITH THAT OF THE ASSESSEE. THE TRIBUNAL IN BOTH TH E CASES, NAMELY, MOTOROLA SOLUTIONS INDIA PVT. LTD., AND TOLUNA INDI A PVT. LTD., HAS DIRECTED TO EXCLUDE THIS COMPANY FROM THE ROLL OF C OMPARABLES. RESPECTFULLY FOLLOWING THE PRECEDENT, WE DIRECT NOT TO TREAT THIS COMPANY AS COMPARABLE. ITA NO.5809/DEL/2011 13 (III) FLEXTRONICS SOFTWARE SYSTEMS LTD . 13. THE TPO OBSERVED THIS COMPANY QUALIFIED ALL THE FILTERS APPLIED BY HIM. HE NOTICED THAT THE PRODUCTS AND SERVICE SEGM ENT OF THIS COMPANY TO BE COMPARABLE INASMUCH AS PRODUCT REVENUE CONSTI TUTED ONLY 10.87% OF THE TOTAL SEGMENTAL REVENUE AT RS.847.2 CRORE. THIS PERCENTAGE WAS FOUND TO BE NOT MATERIAL. NO RELIEF WAS ALLOWED BY THE DRP ON THIS ISSUE. 14. IT CAN BE NOTICED THAT THE PRODUCT AND SERVICE SEGMENT OF THIS COMPANY, WHICH HAS BEEN CONSIDERED BY THE TPO FOR T HE PURPOSES OF INCLUSION IN THE LIST OF COMPARABLES COMPRISES INCO ME FROM BOTH THE STREAMS, NAMELY, SOFTWARE PRODUCTS AS WELL AS SOFTW ARE SERVICES. WHAT IS THE IMPACT OF THE SOFTWARE PRODUCTS ON THE OVERA LL PROFITABILITY OF THIS COMPANY UNDER THIS SEGMENT CANNOT BE ASCERTAINED. AS THE ASSESSEE IS SIMPLY ENGAGED IN PROVIDING SOFTWARE RELATED SERVIC ES AND IS NOT INTO SALE OF SOFTWARE PRODUCTS, THIS COMPANY CANNOT BE C ONSIDERED AS COMPARABLE. SIMILAR VIEW HAS BEEN TAKEN BY THE TRI BUNAL IN THE CASE OF ITA NO.5809/DEL/2011 14 TOLUNA INDIA PVT. LTD. (SUPRA). THIS COMPANY IS, T HEREFORE, DIRECTED TO BE TREATED AS INCOMPARABLE. (IV) HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD . 15. THE TPO CONSIDERED THIS COMPANY AS COMPARABLE B Y OBSERVING THAT IT WAS INTO THE SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEES OBJECTIONS WERE REPELLED. 16. WE FIND FROM THE ANNUAL ACCOUNTS OF THIS COMPAN Y THAT IT IS ENGAGED IN RENDERING ITES BPO SERVICES, APPLICATION MANAGEMENT SERVICES, OFFSHORE DELIVERY, PROJECT MANAGEMENT SER VICES, PUBLIC SECTOR SERVICES, MARITIME PRACTICES AND EXECUTIVE EDUCATIO N INFORMATION SYSTEM, ETC. THE ABOVE DESCRIPTION OF THE NATURE OF WORKS CARRIED OUT BY THIS COMPANY MANIFESTS THAT THE CHARACTER OF SERVIC ES PROVIDED BY THE ASSESSEE COMPANY CANNOT AT ALL BE CONSIDERED AS COM PARABLE WITH THIS COMPANY. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUN AL IN THE CASE OF TOLUNA INDIA PVT. LTD. (SUPRA). FOLLOWING THE SAME , WE DIRECT IT TO BE CONSIDERED AS NOT COMPARABLE. ITA NO.5809/DEL/2011 15 (V) INFOSYS LTD . 17. THE TPO INCLUDED THIS COMPANY DESPITE THE ASSES SEES OBJECTIONS THAT IT WAS A VERY HIGH TURNOVER COMPANY WITH FUNCT IONAL DISSIMILARITY. 18. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE REN DERED SERVICES TO ITS AES WITHOUT THE ASSISTANCE OF ITS INTANGIBLE ASSETS OR BY RETAINING ANY RIGHTS IN INTELLECTUAL PROPERTY IN THE WORK DONE BY IT. IN CONTRAST TO THAT, INFOSYS LTD. IS A GIANT COMPANY IN TERMS OF RISK PR OFILE, SCALE, NATURE OF SERVICES, REVENUE OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS, ON SITE AND OFFSHORE SERVICES, ETC. THIS COMPANY CANNOT BE CON SIDERED A COMPARABLE. OUR VIEW IS FORTIFIED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (2013) 219 TAXMANN 29 (DEL) IN WHICH INFOSYS TECHNOLOGIES LTD., HAS BEEN HELD TO BE NOT COMPARABLE WITH A COMPANY ENGA GED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE FOR ITS PARENT COMPANY. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF TOLUNA IN DIA PVT. LTD. FOLLOWING THE ABOVE PRECEDENTS, WE DIRECT NOT TO CO NSIDER THIS COMPANY AS A COMPARABLE. ITA NO.5809/DEL/2011 16 (VI) KALS INFORMATION SYSTEMS LTD. 19. THE TPO TREATED THIS COMPANY AS COMPARABLE DESP ITE THE ASSESSEES OBJECTIONS THAT ITS OPERATIONS EXTENDED TO SOFTWARE PRODUCTS, SOFTWARE SERVICES AND TRAINING AND, FURTHER, NO BRE AK UP OF THESE THREE WAS AVAILABLE. 20. IT CAN BE OBSERVED THAT THE REVENUES OF THIS CO MPANY UNDER THE SEGMENT TAKEN BY THE TPO INCLUDE NOT ONLY SOFTWARE DEVELOPMENT SERVICES, BUT ALSO TRAINING. SINCE THE ASSESSEE IS ONLY ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES WITHOUT CAR RYING OUT ANY SPECIFIC COMMERCIAL TRAINING ACTIVITY, WE FAIL TO A PPRECIATE AS TO HOW THIS COMPANY ON A SEGMENTAL LEVEL, CONSISTING OF REVENU ES FROM BOTH SOFTWARE DEVELOPMENT AND TRAINING, CAN BE CONSIDERE D AS COMPARABLE. UNLESS THE SPLIT OF THESE TWO SUB-SEGMENTS IS AVAIL ABLE, THE INCLUSION OF THE OVERALL SEGMENT COMPRISING REVENUES FROM TRAINI NG AS WELL, CANNOT BE JUSTIFIED. SIMILAR VIEW HAS BEEN TAKEN BY THE T RIBUNAL IN THE CASE OF MOTOROLA SOLUTIONS INDIA PVT. LTD. (SUPRA) AND TOLU NA INDIA PVT. LTD. (SUPRA). ITA NO.5809/DEL/2011 17 (VII) LUCID SOFTWARE LTD . 21. THE TPO INCLUDED THIS COMPANY DESPITE THE ASSES SEES OBJECTIONS BY NOTICING THAT IT WAS INTO PURE SOFTWARE DEVELOPM ENT AND DID NOT HAVE ANY REVENUE FROM SALE OF PRODUCTS/LICENCES. 22. IT CAN BE SEEN FROM THE ANNUAL REPORT THAT TH IS COMPANY IS VALUING THE SOFTWARE PRODUCTS DEVELOPED IN-HOUSE ON THE BAS IS OF COSTS DIRECTLY ATTRIBUTABLE TO THE DEVELOPMENT OF SOFTWARE AND IN RESPECT OF EACH OF THE PRODUCTS SO DEVELOPED, IT IS AMORTIZING TOTAL EXPEN DITURE OVER A PERIOD OF 36 MONTHS FROM THE LAUNCH DATA. THIS IS A DIFFEREN T AND UNIQUE METHOD OF AMORTIZING COST OVER A PERIOD OF THREE YEARS, WH ICH IS NOT SPECIFIC TO THE ASSESSEE. IT CAN BE FURTHER OBSERVED FROM THE W EBSITE OF THIS COMPANY THAT IT IS A PROVIDER OF LEADING SOFTWARE PRODUCTS AND SERVICES BOTH. THE ABOVE DISCUSSED FACTORS MAKE THIS COMPANY INCOMPARA BLE TO THE ASSESSEE COMPANY. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNA L IN THE CASE OF TOLUNA INDIA PVT. LTD. (SUPRA). WE DIRECT NOT TO T REAT THIS COMPANY AS COMPARABLE. ITA NO.5809/DEL/2011 18 (VIII) MEGASOFT LTD . 23. THE TPO INCLUDED THIS COMPANY IN THE LIST OF CO MPARABLES BY OBSERVING THAT ITS CONSULTING DIVISION WAS INTO SOF TWARE DEVELOPMENT SERVICES AND, HENCE, QUALIFIED ALL THE FILTERS APPL IED BY HIM. THE OBJECTION OF THE ASSESSEE THAT THIS COMPANY WAS ALS O A SOFTWARE PRODUCT RATHER THAN A PURE SOFTWARE SERVICE PROVIDER, WAS H ELD TO BE NOT MATERIAL. 24. IT CAN BE OBSERVED FROM THE TPOS ORDER ITSELF THAT THE MAJOR REVENUE OF THIS SEGMENT OF THE COMPANY IS FROM CUST OMIZATION WHICH IS IN THE NATURE OF SOFTWARE DEVELOPMENT SERVICES AND THAT THE COMPANYS INTERNAL PACKAGED SOFTWARE PRODUCTS CONSTITUTE 35% OF THE REVENUES OF THIS DIVISION. WHEN THE TPO HIMSELF IS ADMITTING T HAT THE TOTAL REVENUE UNDER THIS SEGMENT OF MEGASOFT LTD. COMPRISES 35% F ROM THE SALE OF SOFTWARE PRODUCTS, WE FAIL TO COMPREHEND AS TO HOW THIS SEGMENT OF THE COMPANY CAN BE CONSIDERED AS COMPARABLE WITH THE AS SESSEE COMPANY, WHICH IS NOT INTO SELLING ANY SOFTWARE PRODUCTS BUT IS A CAPTIVE SOFTWARE DEVELOPER. WE, THEREFORE, ORDER TO TREAT THIS COMP ANY AS INCOMPARABLE. ITA NO.5809/DEL/2011 19 SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF TOLUNA INDIA PVT. LTD. (SUPRA). (IX) PERSISTENT SYSTEMS LTD . 25. THE TPO INCLUDED THIS COMPANY IN THE LIST OF CO MPARABLES DESPITE THE ASSESSEES OBJECTIONS. 26. WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY THAT THERE HAVE BEEN SOME MERGERS DURING THE YEAR IN QUESTION. THE VERY FACT OF MERGER OR ACQUISITION OR DEMERGER ETC., BEING AN EXTRAORDI NARY EVENT, MAKES A COMPANY INCOMPARABLE WITH THE OTHER FUNCTIONALLY SI MILAR COMPANIES. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF TOLUNA INDIA PVT. LTD., IN REJECTING THIS COMPANY FROM THE LIST OF COMPARABLES. WE ORDER ACCORDINGLY. (X) SASKEN COMMUNICATIONS LTD . 27. HERE AGAIN, WE FIND THAT IN THIS YEAR, THERE WE RE ACQUISITIONS AND MERGERS. THE TRIBUNAL IN THE CASE OF TOLUNA INDIA PVT. LTD., HAS ALSO ITA NO.5809/DEL/2011 20 DIRECTED THE EXCLUSION OF THIS COMPANY ON THE SAME BASIS. FOLLOWING THE SAME, WE DIRECT NOT TO TREAT THIS COMPANY AS COMPAR ABLE. (XI) TATA ELXSI LTD. 28. THE TPO CONSIDERED THIS COMPANY AS COMPARABLE D ESPITE THE ASSESSEES OBJECTIONS. 29. WE FIND THAT THIS COMPANY HAS TWO MAIN SEGMENTS , NAMELY, SOFTWARE DEVELOPMENT AND SERVICES AND SYSTEM INTEGR ATION SERVICES. THE TPO HAS ADOPTED SOFTWARE DEVELOPMENT AND SERVI CES SEGMENT WHICH, IN TURN, CONSISTS OF THREE SUB-SEGMENTS, NAM ELY, EMBEDDED PRODUCT DESIGN SERVICES (DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE), INDUSTRIAL DESIGN AND ENGINEERING (MECHA NICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN) AND ANIMATION AND VISUA L EFFECTS. SINCE THIS COMPANY OFFERS INTEGRATED HARDWARE AND PACKAGED SOF TWARE SOLUTIONS, THE SAME CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY WHICH IS SIMPLY PROVIDING SOFTWARE RELATED SERVICES . THE TRIBUNAL IN THE CASE OF TOLUNA INDIA PVT. LTD., AND MOTOROLA SOLUTI ONS INDIA PVT. LTD., HAS TREATED THIS COMPANY AS NOT COMPARABLE. WE ALS O ORDER ACCORDINGLY. ITA NO.5809/DEL/2011 21 (XII) WIPRO LTD. 30. THE TPO TREATED THIS COMPANY AS COMPARABLE REGA RDLESS OF THE ASSESSEES OBJECTIONS ABOUT THE MAGNITUDE AND FUNCT IONAL DISSIMILARITIES OF THIS COMPANY. 31. WE AGREE WITH THE VIEW POINT OF THE ASSESSEE TH AT WIPRO LTD., IS A GIANT COMPANY IN TERMS OF RISK PROFILE, NATURE OF S ERVICES, OWNERSHIP OF PROPRIETARY PRODUCTS, ON SITE AND OFFSHORE SERVICES , ETC. THE HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD., (SUPRA) HAS ALSO APPROVED THE EXCLUSION OF THIS COM PANY FROM THE LIST OF COMPARABLES ON THE BASIS OF CERTAIN PARAMETERS WHIC H ARE FULLY MET WITH IN THE CONTEXT OF THE INSTANT ASSESSEE AS WELL. TH E TRIBUNAL IN THE CASE OF MOTOROLA SOLUTIONS INDIA PVT. LTD., AND TOLUNA INDI A PVT. LTD., HAS ALSO DIRECTED THE EXCLUSION OF THIS COMPANY FROM THE LIS T OF COMPARABLES. WE ORDER ACCORDINGLY. 32. THE LD. AR SUBMITTED THAT IF THE ABOVE COMPANIE S ARE REMOVED FROM THE FINAL LIST OF COMPARABLES, THEN, THERE WIL L REMAIN NO SCOPE FOR ANY ADDITION ON ACCOUNT OF TP ADJUSTMENT AND THERE WILL BE NO NEED TO ITA NO.5809/DEL/2011 22 ASSAIL OTHER POINTS. WE FIND THAT ALL THE ABOVE C OMPANIES HAVE BEEN EXCLUDED BY THE TRIBUNAL IN TOLUNA INDIA PVT. LTD. AND/OR MOTOROLA SOLUTIONS INDIA PVT. LTD. AS IT IS AN ADMITTED POS ITION THAT THE FUNCTIONAL PROFILE OF BOTH THESE COMPANIES EITHER ON ENTITY OR SEGMENT LEVEL IS SIMILAR TO THAT OF THE ASSESSEE COMPANY, WE PRONOUN CED ON THE CONCLUSION OF HEARING ABOUT THE EXCLUSION OF THESE COMPANIES FROM THE LIST OF COMPARABLES. AS SUCH, NO FURTHER ARGUMENTS WERE ADVANCED BY THE LD. AR. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND SEND THE MATTER BACK TO THE AO/TPO FOR A FRESH COMP UTATION OF ALP OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASS ESSEE IN CONFORMITY WITH OUR ABOVE DECISION. NEEDLESS TO SAY, THE ASSE SSEE WILL BE AFFORDED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH ADJUDICATION. 33. THE ONLY OTHER GROUND WHICH SURVIVES FOR OUR CONSIDERATION IS AGAINST THE REDUCTION OF 100% COMMUNICATION EXPENSE S FROM THE EXPORT TURNOVER FOR THE PURPOSES OF COMPUTATION IN TERMS O F CLAUSE (IV) OF EXPLANATION 2 TO SECTION 10A. ITA NO.5809/DEL/2011 23 34. THE FACTUAL MATRIX APROPOS THIS GROUND IS THAT THE ASSESSEE CLAIMED DEDUCTION U/S 10A. CONSIDERING THE PURVIEW OF EXP ORT TURNOVER AS GIVEN IN EXPLANATION 2(IV) TO SECTION 10A, THE AO H ELD THAT THE FREIGHT, TELECOMMUNICATION CHARGES AND INSURANCE ATTRIBUTABL E TO THE DELIVERY OF THE GOODS AND EXPENSES INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA WERE LIABLE TO BE DEDUCTED. ON PERUSAL OF DETAILS FILED BY THE ASSESSEE, HE NOTICED THAT T HE ASSESSEE INCURRED POSTAGE AND COURIER, INTERNET EXPENSES TO THE TUNE OF RS.77.71 LAC AND TELEPHONE EXPENSES AMOUNTING TO RS.1.39 CRORE FOR T HE DELIVERY OF GOODS. THE ASSESSEES CONTENTION THAT 20% OF USE O F TELEPHONE AND INTERNET SHOULD BE ATTRIBUTED TO THE DELIVERY OF SO FTWARE, WAS REJECTED. THAT IS HOW THE BENEFIT OF DEDUCTION U/S 10A WAS WO RKED OUT BY REDUCING COMMUNICATION EXPENSES AMOUNTING TO RS.43. 44 LAC BOTH FROM THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVE R. THE ASSESSEE IS AGGRIEVED AGAINST NOT ALLOWING PROPER RELIEF IN RES PECT OF INTERNET EXPENSES. ITA NO.5809/DEL/2011 24 35. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND AFT ER PERUSING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT SIM ILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR AY 2006-07. THE ASSESSEES CONTENTION ON THIS ISSUE H AS BEEN REJECTED BY THE TRIBUNAL THEREBY AFFIRMING THE VIEW OF THE AO. IN THE ABSENCE OF ANY DISTINGUISHING FACT RELEVANT TO THE YEAR IN QUESTIO N, RESPECTFULLY FOLLOWING THE PRECEDENT, WE UPHOLD THE IMPUGNED ORD ER ON THIS ISSUE. THIS GROUND FAILS. 36. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT O N 22.01.2015. SD/- SD/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 22 ND JANUARY, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.