Infogain India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5870/DEL/2011

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 2541 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 05-07-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 29-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Set aside
• Section: 143(3); 133(6); 10B; 144C; 92CE; 43; 48; 73; 13; 22; 92CA; 15

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO. 5870/DEL/2011 [ASSESSMENT YEAR: 2007-08] INFOGAIN INDIA PVT LTD VS. THE DY.C.I.T I 25, JANGUPRA EXTENSION CIRCLE 11(1) NEW DELHI NEW DELHI PAN: AAACI 8748 Q [APPELLANT] [RESPONDENT] DATE OF HEARING : 12.03.2020 DATE OF PRONOUNCEMENT : 17.03.2020 ASSESSEE BY : MS. ANANYA KAPOOR, ADV SHRI SHIVANSH PANDYA, ADV REVENUE BY : SHRI SURENDER PAL, CIT- DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ORDER DATED 31.10.2011 FRAMED U/S 143(3) R.W.S 144C OF THE INCO ME TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT] PE RTAINING TO ASSESSMENT YEAR 2007-08. 2 2. THE GRIEVANCE OF THE ASSESSEE IS TWO FOLD :- 1. TP ADJUSTMENT OF RS. 5,92,11,870/-, AND 2. CORPORATE TAX ADJUSTMENT PURSUANT TO DENIAL OF D EDUCTION U/S 10B OF THE ACT AMOUNTING TO RS. 7,54,85,392/-. 3. WE WILL FIRST ADDRESS TO THE CORPORATE TAX ADJUS TMENT ON ACCOUNT OF DENIAL OF DEDUCTION U/S 10B OF THE ACT. 4. THE UNDER LYING FACTS IN THIS ISSUE ARE THAT THE ASSESSEE HAD BEEN CLAIMING DEDUCTION U/S 80HHE OF THE ACT UPTO TO ASS ESSMENT YEAR 1998-99 I.E. UPTO THE 7 TH YEAR FROM THE ESTABLISHMENT OF THE COMPANY. SUB-SECTION 1B OF THE ACT WAS INTRODUCED BY THE FIN ANCE ACT, 2000 TO SECTION 80HHE OF THE ACT W.E.F 1.4.2001 AND SIMULTA NEOUSLY, PROVISIONS OF SECTION 10A OF THE ACT WERE AMENDED TO THE EFFEC T THAT DEDUCTION WOULD BE AVAILABLE FOR 10 ASSESSMENT YEARS. THE NE W UNDERTAKINGS HAD AN OPTION NOT TO CLAIM DEDUCTION U/S 10A OF THE ACT. SINCE THE DEDUCTION WAS OPTIONAL, THE ASSESSEE CLAIMED DEDUCT ION U/S 80HHE OF THE ACT AND OPTED FOR NOT CLAIMING DEDUCTION U/S 10 A OF THE ASSESSEE ACT. IN VIEW OF THE INTRODUCTION OF SECTION (1B) TO SECTION 80HHE OF THE ACT, THE ASSESSEE SWITCHED OVER TO DEDUCTION U/ S 10B/10A OF THE ACT. 3 5. THE ASSESSING OFFICER WAS OF THE FIRM BELIEF THA T THE SWITCH OVER OF THE ASSESSEE HAS BEEN DONE WITH A SPECIFIC MOTIV E TO CLAIM EXCESS DEDUCTION AND AVOID PAYMENT OF TAXES. THE ASSESSIN G OFFICER FORMED A BELIEF THAT THE CLAIM OF THE ASSESSEE WAS NOT BONAF IDE OR GENUINE BUT HAD BEEN MADE MERELY WITH AN INTENTION TO DEFRAUD T HE REVENUE. THE ASSESSING OFFICER FOUND THAT FOR SIMILAR REASONS, D EDUCTION HAD BEEN DISALLOWED IN A.YS 2005-06 AND 2006-07 AND TAKING A LEAF OUT OF THE SAID A.YS, THE ASSESSING OFFICER DISALLOWED THE CLA IM OF DEDUCTION U/S 10B OF THE ACT 6. THE ASSESSEE RAISED OBJECTIONS BEFORE THE DRP, B UT THE SAME WERE DISMISSED. 7. WHILE DENYING THE CLAIM OF DEDUCTION, THE DRP OB SERVED THAT THE QUARREL BETWEEN THE ASSESSEE AND THE REVENUE WAS IN THE PAST ALSO AND IN A.Y 2005-06, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL AND FOR A.Y 2006-07, THE ASSESSEE IS IN APPEAL BEFORE THE T RIBUNAL. 8. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE ORDERS OF THE TRIBUNAL FOR ASSESSMENT YEAR 2 005-06 AND 2006- 07 AND POINTED OUT THAT THE TRIBUNAL HAS ALLOWED TH E CLAIM OF DEDUCTION TO THE ASSESSEE. 4 9. PER CONTRA, THE LD. DR STRONGLY SUPPORTED THE FI NDINGS OF THE DRP. 10. WE FIND FORCE IN THE CONTENTIONS OF THE LD. COU NSEL FOR THE ASSESSEE. THE CLAIM OF DEDUCTION WAS CONSIDERED BY THE TRIBUNAL IN ITA NO. 2339/DEL/2010 FOR ASSESSMENT YEAR 2005-06. THE RELEVANT FINDINGS OF THE CO-ORDINATE BENCH READ AS UNDER: 8. ON CAREFUL CONSIDERATION OF RIVAL CONTENTIONS A ND CAREFUL PERUSAL OF RECORD AND CITATIONS SUBMITTED BEFORE US , WE OBSERVE THAT THE REVENUE HAS NOT DISPUTED THIS POINT THAT T HE ASSESSEE GOT APPROVAL AS 100% EOU AS PER APPROVAL DATED 27.0 1.1997. WE FURTHER OBSERVE THAT IN THE IMPUGNED ORDER, THE COM MISSIONER OF INCOME TAX(A) HAS HELD THAT THE ASSESSING OFFICE R WAS COMPLETELY IN ERROR IN HOLDING THAT SINCE THE ASSES SEE STARTED ITS BUSINESS IN AY 1992-93, THEN THE PRESCRIBED PERIOD OF 10 YEARS FOR THE PURPOSE OF EXEMPTION U/S 10B OF THE ACT HAD COME TO AN END BY AY 2001-02. WE ALSO OBSERVE THAT THE SAID SECTION 10B ENVISAGES SETTING UP OF EXPORT ORIENTED UNDERTAKIN G WHICH IS ALTOGETHER DIFFERENT AND DISTINCT FROM SETTING UP O F A NORMAL COMMERCIAL ACTIVITY UNIT. THE ASSESSING OFFICER HAS NOT CONTROVERTED THE FACT THAT THE ASSESSEE COMPANY EST ABLISHED 100% EOU IN FY 1997-98 FOR EXPORTING OF COMPUTER SO FTWARE AND THIS FACT HAS FOUND PLACE IN THE ASSESSMENT ORD ER PARA 4.1 AND 4.2. IN VIEW OF ABOVE AND IN THE LIGHT OF DECIS IONS OF HON'BLE 5 HIGH COURT OF DELHI IN THE CASE OF LEGATO SYSTEMS I NDIA PVT. LTD. AND DECISIONS OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF EXCEL SOFTECH LTD. (SUPRA), WE ARE OF T HE FIRM OPINION THAT THE COMMISSIONER OF INCOME TAX(A) RIGH TLY GRANTED RELIEF TO THE ASSESSEE BY DIRECTING THE ASSESSING O FFICER TO GRANT EXEMPTION U/S 10B OF THE ACT FOR THE ASSESSEE . WE ARE UNABLE TO FIND ANY PERVERSITY, AMBIGUITY, PERVERSIT Y OR ANY OTHER VALID REASON TO INTERFERE WITH THE FINDINGS OF THE COMMISSIONER OF INCOME TAX(A). PER CONTRA, WE CLEARLY OBSERVE TH AT THE ASSESSING OFFICER IGNORED THIS FACT THAT THE ASSESS EE'S 100% EOU WAS ESTABLISHED IN AY 1997- 98 RELATED TO AY 19 98-99. THE ASSESSING OFFICER DENIED EXEMPTION ON SURMISES AND CONJECTURES BY TAKING HYPER TECHNICAL APPROACH. SIN CE THE ASSESSEE WAS ENTITLED TO EXEMPTION U/S 10B OF THE A CT, THEN THE PERIOD CANNOT BE SAID TO BE EXHAUSTED IN THE YEAR U NDER CONSIDERATION, HENCE WE UPHOLD THE FINDINGS OF THE COMMISSIONER OF INCOME TAX(A) IN THE IMPUGNED ORDER. ACCORDINGLY , GROUND NO.2 OF THE REVENUE IS DISMISSED. 11. SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 IN ITA NO. 5720/DEL/2010. THE RELEVANT FIN DINGS OF THE TRIBUNAL READ AS UNDER: 3. WE HAVE HEARD RIVAL ARGUMENT OF BOTH THE PARTIE S AND CAREFUL PERUSED THE RECORD PLACED BEFORE US. AT THE OUTSET LD. COUNSEL OF THE ASSESSEE FILED A COPY OF DECISION OF ITAT DELHI 6 C BENCH IN ITA NO. 2339/DEL/2010 FOR THE ASSESSME NT YEAR 2005-06 DATED 29/11/2013 AND SUBMITTED THAT THE ISS UE OF ALLOWABILITY OF DEDUCTION U/S 10B OF THE ACT HAS BE EN DECIDED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE FOR I MMEDIATELY PRECEDING ASSESSMENT YEAR TO THE YEAR UNDER CONSIDE RATION IN THIS APPEAL. THE LD. COUNSEL OF THE ASSESSEE DRAWN OUR ATTENTION TOWARDS PARAGRAPH NO. 7 & 8 WHEREIN THE C IT(A) CONCLUDED ITS FINDINGS AND OBSERVATIONS BY DIRECTIN G THE ASSESSING OFFICER TO GRANT EXEMPTION U/S 10B OF THE ACT TO THE ASSESSEE AND ITAT C BENCH, DELHI UPHOLDED THE FIN DINGS OF THE CIT(A) BY HOLDING THAT THE ASSESSEE WAS ENTITLED TO EXEMPTION U/S 10B OF THE ACT THEN THE PERIOD OF EXEMPTION STA RTED FROM ASSESSMENT YEAR 1998-99 AND CANNOT BE SAID TO BE EX HAUSTED IN THE YEAR UNDER CONSIDERATION IN THE PRESENT APPEAL I.E 2006-07. THE RELEVANT PARAGRAPH OF ITAT ORDER READ AS UNDER: - 7. FURTHER, THE CIT(A) HAS CONCLUDED ITS FINDINGS A ND OBSERVATIONS BY DIRECTING THE ASSESSING OFFICER TO GRANT EXEMPTION U/S 10B OF THE ACT TO THE ASSESSSEE WITH FOLLOWING OPERATIVE PARA OF THE IMPUGNED ORDER:- IN THE CASE OF THE ASSESSEE, NEITHER THE PERIOD OF FIVE YEARS NOR THE BLOCK PERIOD OF EIGHT YEARS EXPI RED WHEN THE AMENDMENT REPLACING THE WORD TEN FOR FI VE WAS INTRODUCED BY IT (SECOND AMENDMENT) ACT, 1998 W.E.F 1/4/1999. SINCE THE ASSESSEE WAS ENTITLED TO EXEMP TION IN THE YEAR IN WHICH AMENDMENT BECAME EFFECTIVE & OPERATIVE, THE ASSESSEE WILL BE ENTITLED TO THE EXT ENDED PERIOD OF EXEMPTION BECAUSE THE PERIOD OF FIVE YEAR S HAD 7 NOT EXHAUSTED UP TO ASSESSMENT YEAR 1999-2000. SIN CE THE RIGHT OF THE ASSESSEE WAS CONTINUING IN THE YEA R OF AMENDMENT AND WAS NOT LOST ON THE DATE WHEN THE AMENDMENT CAME INTO EXISTENCE, THE VIEW TAKEN BY TH E LD. CIT(A) CANNOT BE UPHELD. SO FAR AS THE OBJECTIONS OF THE LD. CIT(A) REGARDING CONDUCT OF THE ASSESSEE FIRM IN NOT CLAIM ING THE EXEMPTION IN EARLIER YEAR IS CONCERNED, THE APPROAC H OF THE LD. CIT(A) RAISING THIS OBJECTION, CANNOT BE LE GALLY JUSTIFIED BECAUSE IF THE ASSESSEE IS ENTITLED TO AN Y BENEFIT UNDER ANY STATUTORY PROVISION THEN THE PAST CONDUCT CANNOT BE RELEVANT PARTICULARLY WHEN REFERE NCE TO SUCH CONDUCT IS NOT MADE IN THE ACT. THE ELIGIBILI TY OF THE ASSESSEE HAS TO BE SEEN IN THE YEAR IN WHICH THE CL AIM IS PREFERRED AND IF IN EARLIER YEARS THE ASSESSEE WAIV ED HIS RIGHT THEN HE CANNOT BE STOPPED IN CLAIMING THE BEN EFIT IN THE SUBSEQUENT YEARS. THE LD. CIT(A) HAS ALSO OBSERVED THAT THE ASSESSE E DID NOT FILE DECLARATION EXERCISING OPTION PRIOR TO THE DUE DATE FOR FILING OF RETURN BUT FILED IT ALONG WITH T HE RETURN AND, THEREFORE, THE ASSESSEE IS DISQUALIFIED FROM C LAIMING EXEMPTION ON THIS GROUND ALSO. WE DO NOT FIND ANY FORCE IN SUCH OBJECTION BECAUSE THIS OBJECTION IS MERELY OF SUPER TECHNICAL NATURE. IN VIEW OF THE ABOVE, WE ARE LIA BLE TO CONCUR WITH THE FINING OF THE LD. CIT(A) AND SET AS IDE THE SAME. CONSEQUENTLY, WE ALLOW THE GROUND OF APPEAL TAKEN BY THE ASSESSEE AND DIRECT THAT THE ASSESSEE SHALL BE ENTITLED TO CLAIM EXEMPTION U/S 10B IN THE ASSESSME NT YEAR UNDER CONSIDERATION. 8 8. ON CAREFUL CONSIDERATION OF RIVAL CONTENTIONS AND CAREFUL PERUSAL OF RECORD AND CITATIONS SUBMITTED BEFORE US , WE OBSERVE THAT THE REVENUE HAS NOT DISPUTED THIS POIN T THAT THE ASSESSSEE GOT APPROVAL AS 100% EOU AS PER APPRO VAL DATED 27/1/1997. WE FURTHER OBSERVE THAT IN THE IMPUGNED ORDER, THE COMMISSIONER OF INCOME TAX (A) HAS HELD THAT THE ASSESSING OFFICER WAS COMPLETELY IN E RROR IN HOLDING THAT SINCE THE ASSESSEE STARTED ITS BUSINES S IN A.Y 1992-93 THEN THE PRESCRIBED PERIOD OF 10 YEARS FOR THE PURPOSE OF EXEMPTION U/S 10B OF THE ACT HAD COME TO AN END BY A.Y 2001-02. WE ALSO OBSERVE THAT THE SAID SECTION 10B OF THE ACT HAD COME TO AN END BY A.Y 20 01- 02. WE ALSO OBSERVE THAT THE SAID SECTION 10B ENVI SAGES SETTING UP OF EXPORT ORIENTED UNDERTAKING WHICH IS ALTOGETHER DIFFERENT AND DISTINCT FROM SETTING UP O F A NORMAL COMMERCIAL ACTIVITY UNIT. THE ASSESSING OFF ICER HAS NOT CONTROVERTED THE FACT THAT THE ASSESSEE COM PANY ESTABLISHED 100% EOU IN F.Y 1997-98 FOR EXPORTING O F COMPUTER SOFTWARE AND THIS FACT HAS FOUND PLACE IN THE ASSESSMENT ORDER PARA 4.1 AND 4.2. IN VIEW OF ABOV E AND IN THE LIGHT OF DECISIONS OF HONBLE HIGH COURT OF DEL HI IN THE CASE OF LEGATO SYSTEMS INDIA PVT. LTD AND DECISIONS OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF EXCEL SOFTECH LTD, (SUPRA), WE ARE OF THE FIRM OPINION TH AT THE COMMISSIONER OF INCOME TAX (A) RIGHTLY GRANTED RELI EF TO THE ASSESSEE BY DIRECTING THE ASSESSING OFFICER TO GRANT EXEMPTION U/S 10B OF THE ACT FOR THE ASSESSEE. WE ARE UNABLE TO FIND ANY PERVERSITY, AMBIGUITY, PERVERSIT Y OR ANY OTHER VALID REASON O INTERFERE WITH THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (A). PER CONTRA, WE CLE ARLY OBSERVE THAT THE ASSESSING OFFICER IGNORED THIS FAC T THAT THE ASSESSEES 100% EOU WAS ESTABLISHED IN A.Y 1997 -98 RELATED TO A.Y 1998-99. THE ASSESSING OFFICER DENI ED EXEMPTION ON SURMISES AND CONJECTURES BY TAKING HYP ER 9 TECHNICAL APPROACH. SINCE THE ASSESSEE WAS ENTITLE D TO EXEMPTION U/S 10B OF THE ACT, THEN THE PERIOD CANNO T BE SAID TO BE EXHAUSTED IN THE YEAR UNDER CONSIDERATIO N, HENCE WE UPHOLD THAT THE FINDINGS OF THE COMMISSION ER OF INCOME TAX (A) IN THE IMPUGNED ORDER. ACCORDINGLY, GROUND NO. 2 OF THE REVENUE IS DISMISSED. 4. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT OF ITA T C BENCH, DELHI IN ASSESSEES OWN CASE FOR THE IMMEDIA TE PRECEDING YEAR TO THE YEAR UNDER CONSIDERATION IN THIS APPEAL , WE HOLD THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSE SSEE BY THIS ORDER. HENCE, WE HOLD THAT THE AUTHORITIES BELOW W ERE NOT JUSTIFIED IN REJECTING THE CLAIM OF THE ASSESSEE FO R DEDUCTION U/S 10B OF THE ACT. FOR THE YEAR UNDER CONSIDERATI ON I.E ASSESSMENT YEAR 2006-07. IN VIEW OF ABOVE MAIN GROU ND NO. 1 TO 1.6 OF THE ASSESSEE ARE ALLOWED. 12. WE FURTHER FIND THAT THE QUARREL TRAVELLED UPTO THE HON'BLE HIGH COURT OF DELHI AND THE HON'BLE HIGH COURT IN I TA NO. 488/2014 AND 487/2014 DISMISSED THE APPEAL OF THE REVENUE. THE RELEVANT FINDINGS OF THE HON'BLE HIGH COURT READ AS UNDER: 3. IT IS NOT DISPUTED THAT THE ABOVE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY T HE DECISIONS OF THIS COURT IN COMMISSIONER OF INCOME TAX V. INFR A SOFT TECHNOLOGIES LIMITED (DECISION DATED 21ST OCTOBER 2 010 IN ITA 10 NO. 708 OF 2008) AND COMMISSIONER OF INCOME TAX V. INTERRA SOFTWARE INDIA LIMITED (2011) 238 CTR (DEL) 23. IN BOTH DECISIONS THE DEDUCTION CLAIMED WAS UNDER SECTION 1 0A OF THE ACT WHICH IS IN PARI MATERIA SECTION 10B OF THE ACT . 4. THESE APPEALS ARE ACCORDINGLY DISMISSED. 13. AS NO DISTINGUISHING DECISION HAS BEEN BROUGHT TO OUR NOTICE BY THE REVENUE, RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-ORDINATE BENCH AND HON'BLE HIGH COURT, WE DIRECT THE ASSESSI NG OFFICER TO ALLOW THE CLAIM OF DEDUCTION U/S 10B OF THE ACT. ADDITIO N OF RS. 7,54,85,392/- IS DIRECTED TO BE DELETED. GROUND NO. 2 WITH ALL I TS SUB GROUNDS IS ALLOWED. 14. WE WILL NOW ADDRESS TO THE TRANSFER PRICING ADJ USTMENTS. 15. THE UNDERLYING FACTS IN ISSUE ARE THAT THE APPE LLANT COMPANY WAS ESTABLISHED AS A BACK-END SOFTWARE SERVICES COMPANY AND WORKS MAINLY FOR ITS PARENT INFOGAIN, USA. THE APPELLANT COMPAN Y IS ALSO REGISTERED UNDER THE STP SCHEME AND HAS BEEN CLAIMING TAX U/S 10B OF THE ACT. 16. DURING THE YEAR UNDER CONSIDERATION, INTERNATIO NAL TRANSACTIONS, AS MENTIONED IN THE 92CE REPORT ARE AS UNDER: 11 PARTICULARS AMOUNT OPERATING INCOME 524,895,463 OPERATING COST 461,781,432 OPERATING PROFIT 63,114,031 OP/TC 13.77% 17. THE APPELLANT FURNISHED THE TP STUDY REPORT ALO NGWITH DOCUMENTS MAINTAINED IN THIS REGARD. THE SALIENT F EATURES OF THE TP REPORT ARE AS UNDER: 1. THE TAXPAYER COMPANY HAS BEEN SELECTED AS THE T ESTED PARTY 2. THE TAXPAYER COMPANY HAS BEEN CHARACTERIZED PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENT ERPRISES. 3. TNMM WAS SELECTED AS THE MOST APPROPRIATE METHOD . 4. THE SEARCH FOR UNCONTROLLED COMPARABLES WAS DONE USING PROWESS AND CAPITALINE DATABASE. 5. THE TAXPAYER CONSIDERED COMPANIES WHOSE YEAR END S ON DATES OTHER THAN MARCH 31. 6. THE COMPARABILITY ANALYSIS WAS DONE BASED ON THE DATA AVAILABLE IN THE PROWESS/CAPITALINE DATABASES. THE PUBLISHED 12 FINANCIAL STATEMENTS OF THE COMPANIES WERE EXAMINED WHEREVER AVAILABLE. IT IS NOT CLEAR IN HOW MANY COMPANIES DE TAILED ANALYSIS WAS DONE BY THE TAX PAYER. 18. THE APPELLANT USED THE SEARCH OF THE DATABASES, WHICH YIELDED A SET OF 44 COMPARABLES WITH AN AVERAGE PROFIT MARGIN @ 11.94% AND SINCE THE MARGIN SHOWN BY THE APPELLANT WAS 13.77%, THE I NTERNATIONAL TRANSACTIONS WERE REPORTED TO BE AT ARMS LENGTH. 19. THE TPO EXAMINED THE TP REPORT OF THE APPELLANT AND FOUND THAT THE ASSESSEE HAS NOT GONE INTO THE VERTICALS/HORIZO NTALS WITHIN THE SOFTWARE INDUSTRY IN ITS COMPARABILITY STUDY. THE TPO FURTHER EXCLUDED THOSE COMPANIES WHOSE DATA WAS NOT AVAILABLE FOR F. Y. 2006-07. THE TPO FURTHER SELECTED THOSE COMPANIES WHOSE REVENUES FROM SOFTWARE DEVELOPMENT AND RELATES SERVICES ARE MORE THAN 75% OF THE OPERATING REVENUES FOR F.Y. 2006-07. 20. THE TPO ANALYZED THE COMPARABLES CHOSEN BY THE ASSESSEE IN ITS TP REPORT. THE SPECIFIC REASONS FOR REJECTION OF T HE APPELLANTS COMPARABLES, AS REPORTED BY THE TPO ARE AS UNDER: 13 NAME OF THE COMPANY REMARKS OF THIS OFFICE 1 AKSHAY SOFTWARE TECH.LTD THE COMPANY IS A PREDOMINANTLY ONSITE COMPANY. HOWE VER, THE ANNUAL REPORT DOES NOT CONTAIN THE INFORMATION ON O NSITE REVENUE. NOTICE U/S 133(6) WAS ISSUED TO THE COMPAN Y TO SUBMIT THE ONSITE REVENUE DETAILS. AS PER THE INFOR MATION RECEIVED FROM THE COMPANY, IT FAILS ONSITE REVENUE FILTER AS ITS ENTIRE EXPORT REVENUES ARE FROM ONSITE ACTIVITIES. THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE. THE COPY OF NOTICE U/S 133(6) AND REPLY ARE ENCLOSED HEREWITH AS A SOF T COPY. 2 ASM TECHNOLOGIES LTD THE COMPANY HAS RPT OF 107.57% ON SALES AND HENCE T HE COMPANY IS NOT CONSIDERED AS A COMPARABLE 3 AZTECSOFT LTD THE COMPANY HAS RPT OF 29.96% ON SALES AND HENCE TH E COMPANY IS NOT CONSIDERED AS A COMPARABLE 4 BLUE STAR INFOTECH LTD THE COMPANY HAS RPT OF 75.53% ON SALES AND HENCE TH E COMPANY IS NOT CONSIDERED AS A COMPARABLE 5 BODHTREE CONSULTING LTD. ACCEPTABLE AS A COMPARABLE AS IT QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. THE COMPANY SUBMITTED SEGMENTAL PERTAIN ING TO SOFTWARE DEVELOPMENT SERVICES AND DATA CLEANSING SE RVICES (ITES). THE COMPANYS SOFTWARE DEVELOPMENT SEGMENT IS CONSIDERED AS A COM PARABLE 6 BT TECHNET.LTD THE COMPANY HAS EXPORT TURNOVER OF ONLY 0.64% ON SA LES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 7 CMC LTD THE COMPANY HAS EXPORT TURNOVER OF ONLY 14.05% ON S ALES. THE COMPANY HAS RPT OF 59.58% ON SALES AND HENCE THE CO MPANY IS NOT CONSIDERED AS A COMPARABLE 8 COMPUTECH INTERNATIONAL LTD NOTICE U/S 133(6) WAS ISSUED TO THE COMPANY. AS PER THE INFORMATION SUBMITTED BY THE COMPANY, THE COMPANY I S DEALING IN CUSTOMIZATION OF SOFTWARE PRODUCTS OF THIRD PART Y TO SUIT THE REQUIREMENTS OF CUSTOMERS. THUS THE COMPANY IS FUNCTIONALLY; DIFFERENT AND IS NOT CONSIDERED COMPARABLE 9 ESSEL SOFTWARE & SERVICES LTD THE FINANCIAL DETAILS OF THE COMPANY IS NOT AVA ITABLE FOR THE YEAR ENDING 31.03.2007. MOREOVER AS PER THE/REPLY R ECEIVED . FROM THE COMPANY, IT HAS STATED CLEARLY THAT IT GEN ERATES ITS PREDOMINANT REVENUES FROM E-COMMERCE WEBSITE. THUS THE COMPANY IS FUNCTIONALLY DIFFERENT AND HENCE NOT CON SIDERED AS A 10 EXENSYS SOFTWARE SOLUTIONS LTD THE COMPANY IS A SOFTWARE PRODUCT COMPANY AND HENCE REJECTED AS A COMPARABLE 11 F C S SOFTWARE SOLUTIONS LTD THE COMPANY HAS RPT OF 28.10% ON SALES AND HENCE TH E COMPANY IS NOT CONSIDERED AS A COMPARABLE 12 GEOMETRIC SOFTWARE SOLUTIONS CO.LTD ACCEPTABLE AS A COMPARABLE. 13 GOLDSTONE TECHNOLOGIES LTD THE COMPANY WAS ASKED TO CLARIFY ON EXPORT EARNINGS AS WELL AS ONSITE REVENUES. AS PER THE INFORMATION AVAILABLE I N THE ANNUAL REPORT, THE EXPORTS (IN TERMS OF FOREIGN EXCHANGE E ARNINGS) CONSTITUTE ONLY 10% OF THE REVENUES. AN PER THE INF ORMATION 14 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD ACCEPTABLE AS A COMPARABLE 15 I C S A (INDIA) LTD THE COMPANY HAS EXPORT TURNOVER OF ONLY 14.62% ON S ALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 16 INFOTECH ENTERPRISES LTD. THE COMPANY HAS RPT OF 56.89% ON SALES AND HENCE TH E COMPANY IS NOT CONSIDERED AS A COMPARABLE 17 INTERTEC COMMUNICATIONS LTD THE COMPANY HAS RPT OF 100% ON SALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 18 KALS INFORMATION SYSTEMS LTD ACCEPTABLE AS A COMPARABLE 19 KP1T CUMMINS INFOSYSTEMS LTD THE COMPANY HAS RPT OF 106.40% ON SALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 14 20 LANCO GLOBAL SYSTEMS LTD ACCEPTABLE AS A COMPARABLE. 21 MAARS SOFTWARE INTERNATIONAL LTD THE COMPANY IS NOT INTO SOFTWARE DEVELOPMENT SERVIC ES. THE COMPANY ALSO FAILS ONSITE REVENUE FILTER AND HENCE NOT CONSIDERED AS A COMPARABLE. 22 MASCON GLOBAL LTD THE COMPANY HAS RPT OF 73.62% ON SALES AND HENCE TH E COMPANY IS NOT CONSIDERED AS A COMPARABLE 23 MELSTAR INFORMATION TECHNOLOGIES LTD THE COMPANY HAS DECLINING REVENUES AND THUS IS NOT CONSIDERED AS A COMPARABLE. AS PER THE INFORMATION SUBMITTED BY THE COMPANY, THE COMPANY FAILS 75% ONSITE REVENUE FILTE R (THE COMPANY GENERATED 89% OF ITS EXPORT REVENUES FROM ONSITE ACTIVITIES) 24 NAV - PARVA TECHNOLOGIES PVT. LTD THE FINANCIAL DETAILS OF THE SAID COMPANY IS NOT AV AILABLE FOR THE F.Y 2006-07 AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 25 ORIENT INFORMATION TEHCNOLOGY LTD THE COMPANY FAILS ONSITE REVENUE FILTER OF THE TPO AND HENCE STANDS REJECTED 26 P S I DATA SYSTEMS LTD THE COMPANY HAS RPT OF 27.66% ON SALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 27 POWERSOFT GLOBAL SOLUTIONS LTD THE COMPANY DOES NOT HAVE ANY EXPORT TURNOVER AND H ENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 28 R.S.SOFTWARE(INDIA) LTD ACCEPTABLE AS A COMPARABLE 29 R SYSTEMS INTERNATIONAL LTD ACCEPTABLE AS A COMPARABLE 30 RAMCO SYSTEMS LTD THE COMPANY HAS RPT OF 63.82% ON SALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 31 SAKSOFT LTD. THE COMPANY HAS RPT OF 58.40% ON ,-SALES AND HENCE THE, COMPANY IS NOT CONSIDERED AS A COMPARABLE 32 SQL STAR INTERNATIONAL LTD THE COMPANY HAS EXPORT TURNOVER OF ONLY 10.48% ON S ALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 33 SASKEN COMMUNICATION TECH. LTD ACCEPTABLE AS A COMPARABLE 34 SHREE TULSI ONLINE.COM LTD.L THE FINANCIAL DATA OF THE SAID COMPANY IS NOT AVAIL ABLE FOR THE FINANCIAL YEAR 2006- 07. THE COMPANY WAS ASKED U/S 133(6) TO SUBMIT THE INFORMATION BUT THE SAME IS NOT SUBMITTE D AND 35 SONATA SOFTWARE LTD. THE COMPANY HAS RPT OF 29.96% ON SALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 36 SUBEX AZURE LTD. THE COMPANY HAS RPT OF 55.70% ON SALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 37 SYNERGY LOG - IN SYTEMS LTD.(NOW KNOWN AS GLOBSYN INFOTECH) AS PER INFORMATION RECEIVED FROM THE COMPANY, THE C OMPANY FAILS ONSITE REVENUE FILTER OF THE TPO AND HENCE NOT CONSIDERED AS A COMPARABLE. 38 SYNETARIO TECHNOLOGIES LTD. THE COMPANY DOES NOT ANY EXPORT TURNOVER AND HENCE THE COMPANY IS REJECTED 39 TATA ELXSI LTD. ACCEPTABLE AS A COMPARABLE 40 V & K SOFTTECH LTD. THE COMPANY DOES NOT ANY EXPORT TURNOVER AND HENCE THE COMPANY IS REJECTED 41 VMF SOFT TECH LTD. BASED ON THE INFORMATION RECEIVED FROM THE COMPANY U/S 133(6), IT IS SEEN THAT THE COMPANY IS FUNCTIONING ON JOB WORK BASIS. AS THE PREDOMINANT WORK IS OUTSOURCED, THE C OMPANY IS 42 VARNA INDUSTRIES LTD. THE COMPANY HAS EXPORT TURNOVER OF ONLY 19.18% ON S ALES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 43 VISHESH INFOTECNICS LTD. THE COMPANY HAS EXPORT TURNOVER OF ONLY 2.69% ON SA LES AND HENCE THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 15 44 VISUALSOFT TECHNOLOGIES LTD. AS PER THE INFORMATION RECEIVED, THE COMPANY FAILS ONSITE REVENUE FILTER OF THE TPO AND HENCE NOT CONSIDERED AS A COMPARABLE. 21. AFTER REJECTING THE COMPARABLES OF THE ASSESSEE , AS MENTIONED HEREINABOVE, THE FOLLOWING 21 COMPANIES HAVE BEEN P ROPOSED AS COMPARABLES BY THE TPO: SI NO NAME OF THE COMPANY 1 AVANI CIMCON TECHNOLOGIES LTD 2 BODHTREC CONSULTING LTD 3 DATAMATICS LTD 4 FLEXTRONICS SOFTWARE SYSTEMS LTD 5 GEOMETRIC LTD 6 IGATC GLOBAL SOLUTIONS LTD 7 INFOSYS TECHNOLOGIES LTD 8 KALS INFORMATION SYSTEMS LTD 9 LUCID SOFTWARE LTD 10 MEDIASOFT SOLUTIONS PVT. LTD 11 MEGASOFT LTD 12 MINDTREE LTD 13 PERSISTENT SYSTEMS LTD 14 QUINTEGRA SOLUTIONS LTD 15 R S SOFTWARE (INDIA) LTD 16 R SYSTEMS INTERNATIONAL LTD 17 SIP TECHNOLOGIES & EXPORTS LTD 18 SASKEN COMMUNICATION TECHNOLOGIES LTD 19 TVS INFOTECH LTD 20 TATA ELXSI LTD 21 WIPRO LTD 22. THE ASSESSING OFFICER FINALLY COMPUTED THE ALP AND MADE ADJUSTMENTS AS UNDER: 16 19. COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. BASED ON THIS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE TAXPA YER TO ITS AE(S) IS COMPUTED AS UNDER: ARITHMCTIC, MEAN PLI : 25.00% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) : (-1.49%) ADJ. ARITHMETIC MEAN PLI : 26.49% 23. OBJECTIONS BEFORE THE DRP WERE OF NO AVAIL. ARMS LENGTH PRICE: OPERATING COST RS.461, 781,432/- ARMS LENGTH 26.49% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) RS.584,107,333 /- 20. PRICE RECEIVED VIS-A-VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE @ 126.49% OF OPERATING COST RS.584,107,333 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.524,895,463 SHORTFALL BEING ADJUSTMENT U/S 92CA RS.59,211,870 17 24. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE VEH EMENTLY STATED THAT THE TPO HAS USED THE COMPARABLES WHICH ARE EIT HER GIANT COMPANIES HAVING HIGH BRAND VALUE LIKE INFOSYS TECH NOLOGIES LTD. AND WIPRO LTD OR ARE FUNCTIONALLY DISSIMILAR AND MANY C OMPARABLES HAVE EXTRA ORDINARY ITEMS DURING THE YEAR IN THE FORM OF MERGER AND ACQUISITION. HENCE THEY SHOULD NOT BE TAKEN AS GOOD COMPARABLES. 25. PER CONTRA, THE LD. DR STRONGLY SUPPORTED THE F INDINGS OF THE TPO AND READ THE RELEVANT PORTION OF THE TP ORDER A ND POINTED OUT THAT THE APPELLANT IS ALSO A GIANT COMPANY AND BELO NGS TO CHRIS CAPITAL GROUP. IT IS THE SAY OF THE LD. DR THAT IN FOGAIN IS ITSELF A BIG BRAND VALUE AND MERGERS AND ACQUISITIONS IS AN ONGO ING PROCESS AND THE APPELLANT ITSELF HAS ACQUIRED BLUE STAR INFOTEC H LTD AND SYNETARIO TECHNOLOGY AND THEREFORE, THE MBA CANNOT BE A BASIS FOR EXCLUDING THE COMPARABLES. 26. IN HER REJOINDER, THE LD. COUNSEL FOR THE ASSES SEE POINTED OUT THAT ACQUISITION OF CHRIS CAPITAL GROUP TOOK PLACE IN 2015 AND THE SAME IS WITH M & A OF BLUE STAR INFOTECH LIMITED AN D SYNETARIO TECHNOLOGY. IT IS THE SAY OF THE LD. COUNSEL FOR T HE ASSESSEE THAT 18 ANYTHING THAT HAPPENED AFTER A DECADE CANNOT INFLUE NCE THE INTERNATIONAL TRANSACTION FOR THE YEAR UNDER CONSID ERATION. 27. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW. BEFORE PROCEEDING FURTHER, LET U S UNDERSTAND THE BUSINESS PROFILE OF THE ASSESSEE WHICH IS AS UNDER: SOFTWARE SERVICES ASSOCIATED ENTERPRISES ARE IN THE BUSINESS OF CARRY ING OUT SOFTWARE DEVELOPMENT PROJECTS FOR THEIR CLIENTS ON A CONTRACTUAL BASIS. WORK IN RESPECT OF THESE PROJECTS IS OUTSOUR CED IN FULL OR IN PART TO INFOGAIN INDIA AT THE DISCRETION OF ASSOCIA TED ENTERPRISES, IN ACCORDANCE WITH TERMS OF THE SERVICE AGREEMENT. THE SOFTWARE SERVICES PROVIDED BY INFOGAIN INDIA, B ROADLY FALLS IN THE FOLLOWING 5 CATEGORIES: CUSTOMER RELATIONSHIP MANAGEMENT; APPLICATION MANAGEMENT; PRODUCT ENGINEERING; ENTERPRISE INTEGRATION; AND BUSINESS INTELLIGENCE . T RELATED STAFFING SERVICES INFOGAIN INDIA PROVIDES IT RELATED STAFFING SERVICE S TO ASSOCIATED 19 ENTERPRISES THROUGH THEIR RESOURCING GROUP (RG). RG IDENTIFIES CANDIDATES EITHER FRONT ITS NON EMPLOYEES OR FROM O UTSIDE, IN ACCORDANCE WITH SPECIFICATIONS PROVIDED BY ASSOCIAT ED ENTERPRISES AND THEREAFTER FACILITATES HIRING OF SUCH CANDID A' EG BY ASSOCIATED ENTERPRISES ADDS.\V,IA!!Y. INFOGAIN INDIA MAY AT TI MES EQUIP RECRUITED PERSONNEL WITLI ADDITIONAL SKILL SETS AT THE INSTANCE OF ASSOCIATED ENTERPRISES. RG ALSO HANDLES THE INTERNA L/ LOCAL REQUIREMENTS OF LNFOGAIN INDIA. EVEN THOUGH THE RECRUITMENT SERVICES PROVIDED BY LN FOGAIN INDIA HAVE INCREASED DURING THE FINANCIAL YEAR 2006-07, T HEY STILL CONSTITUTE LESS THAN 1 PERCENT OF THE ENTIRE REVENU E AND ALMOST THE ENTIRE REVENUE HAS BEEN EARNED FROM SOFTWARE SERVIC ES. 28. KEEPING IN MIND THE AFOREMENTIONED BUSINESS PRO FILE OF THE ASSESSEE, WE WILL NOW CONSIDER THE EXCLUSION OF THE COMPARABLES AS CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE BEFOR E US. 1. INFOSYS TECHNOLOGIES LTD AND WIPRO LTD 29. THE ANNUAL REPORT OF BOTH THESE COMPANIES, WHIC H ARE AVAILABLE ON RECORD, SHOW THAT THESE COMPANIES ARE HIGH BRAND VALUE HAVING INTANGIBLES WHEREAS THE ASSESSEE DOES NOT HA VE ANY INTANGIBLES. INFOSYS TECHNOLOGIES LTD IS FUNCTIONA LLY DISSIMILAR AS IT 20 OFFERS SOFTWARE PRODUCTS TO BANKING INDUSTRY AND TH ERE ARE NO SEGMENTAL DETAILS. WIPRO LTD IS ENGAGED IN PROVIDI NG A VARIETY OF SERVICES, SUCH AS, IT SERVICES, PRODUCT ENGINEERING SERVICES, TECHNOLOGY INFRASTRUCTURE SERVICES, BPO SERVICES, C ONSULTING SERVICES, ETC. INFOSYS HAS SIGNIFICANT R & D ACTIVITIES AND IS ALSO ENGAGED IN CSR ACTIVITIES, KNOWLEDGE MANAGEMENT AND RESEARCH A ND KNOWLEDGE ABSORPTION. WIPRO ALSO HAS SIGNIFICANT R & ACTIVITI ES. 30. FOR SIMILAR REASONS, THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF M/S ORACLE [OFSS] BPO SERVICES PVT LTD ITA 124/2 018 HAS EXCLUDED SUCH GIANT COMPANIES. THE RELEVANT FINDINGS OF THE HON'BLE HIGH COURT READ AS UNDER: AS TO THE EXCLUSION OF M/S WIPRO LIMITED, HERE TOO , THE COURT IS OF THE OPINION THAT THE BRAND VALUE OF AN ENTITY HAS A SIGNIFICANT ROLE IN ITS ABILITY TO GARNER PROFITS A ND NEGOTIATE CONTRACTS. THUS, WHILE CONSIDERING THE COMPARABLES, THE LIKELIHOOD OF PROFITS DERIVED OR ATTRIBUTABLE TO TH E BRAND HAVING REGARD TO THE CONSISTENCY OF THE QUALITY OF SERVICE S THAT AN ENTITY IS ABLE TO OFFER WOULD BE RELEVANT; ALTHOUGH FUNCTIONALLY, THE TWO ENTITIES MAY BE SIMILAR IN TERMS OF THE SER VICES OR PRODUCTS THEY OFFER, BRAND DOES PLAY ITS OWN ROLE I N PRICE OR COST DETERMINATION. IF THIS SINGULAR ASPECT IS KEPT IN M IND, THE ITATS APPROACH CANNOT BE FAULTED WITH. 21 31. THE SPECIAL LEAVE PETITION FILED BY THE REVENUE WAS DISMISSED BY THE HON'BLE SUPREME COURT VIDE ORDER DATED 30.11 .2018 IN SLP [CIVIL] DIARY NO. 32469/2018. 32. ONCE AGAIN, THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF M/S AVAYA INDIA PVT LTD ITA NO. 532/2019 ORDER DATED 24 .07.2019 HAS HELD AS UNDER: 18. ON THE ASPECT OF EXCLUSION OF COMPARABLES THAT HAVE A HIGH ECONOMIC UPSCALE VIZ., INFOSYS, TCS AND WIPRO, PART ICULAR REFERENCE MAY BE MADE TO THE DECISION OF THIS COURT IN PCIT V. BC MANAGEMENT SERVICES PVT. LTD. (SUPRA) WHERE A PA RTICULAR REFERENCE WAS MADE TO TCS E-SERVE AS UNDER: '13. ...THE THIRD COMPARABLE THAT THE AO/TPO EXCLUD ED IS TCS E-SERVE. THE ITAT OBSERVED THAT THOUGH THERE IS A C LOSE FUNCTIONAL SIMILARITY BETWEEN THAT ENTITY AND THE A SSESSEE, HOWEVER, THERE IS A CLOSE CONNECTION BETWEEN TCS E- SERVE AND TATA CONSULTANCY SERVICE LTD. WHICH WAS HIGH BRAND VALUE: THAT DISTINGUISHED IT AND MARKED IT OUT FOR EXCLUSION. T HE ITAT RECORDED THAT THE BRAND VALUE ASSOCIATED WITH TCS C ONSULTANCY REFLECTED IMPACTED TCS E-SERVE PROFITABILITY IN A V ERY POSITIVE MANNER. THIS INFERENCE TOO IN THE OPINION OF COURT, CANNOT BE TERMED AS UNREASONABLE. THE RATIONALE FOR EXCLUSION IS THEREFORE UPHELD.' 22 19. THE SAME DECISION ALSO NOTED THAT ONE REASON FO R EXCLUSION WAS THE 'UNAVAILABILITY OF THE SEGMENTAL DATA' FOR THE ABOVE COMPARABLE. 20. IN M/S. ORACLE (OFSS) BPO SERVICES PVT. LTD. (D ECISION DATED 5TH FEBRUARY 2018 IN ITA 124 OF 2018) WHILE U PHOLDING THE EXCLUSION OF M/S.WIPRO LTD. FROM THE LIST OF CO MPARABLES IT WAS NOTED THAT THE ITAT TOOK INTO ACCOUNT THE RELAT ED PARTY TRANSACTIONS (RPT ).THE FILTER ADOPTED WAS TO EXCLUDE COMPARABLES WITH UNRELATED PARTY TRANSACTIONS EQUAL TO OR IN EXCESS OF 75% OF THEIR BUSINESS. THE ITAT DID THAT ON THE BASIS THAT WIPRO LTD. HAD A SIGNIFICANT BRAND PRESENCE IN THE MARKET AND COULD, THEREFORE, NOT BE DEEMED TO BE A COMPARA BLE ENTITY. THIS COURT EXPLAINED THE RPT FILTER AS UNDER: 'THE RPT FILTER, IS RELEVANT AND FITS IN WITH THE O VERALL SCHEME OF A TRANSFER PRICING STUDY WHICH IS PREMISED PRIMA RILY ON COMPARING LIGHT ENTITIES HAVING SIMILAR IF NOT IDEN TICAL FUNCTIONS. THEREFORE, IF A PARTICULAR ENTITY PREDOMINANTLY HAS TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISE - IN EXCESS OF A CERT AIN THRESHOLD PERCENTAGE, ITS PROFIT MAKING CAPACITY MAY RESULTED IN A DISTORTED PICTURE, EITHER WAY.' 21. A REFERENCE MAY NEXT BE MADE TO THE DECISION IN THE PRINCIPAL COMMISSIONER OF INCOME TAX-3 V. EVALUESER VE SEZ (GURGAON) PVT. LTD . (SUPRA) WHERE A REFERENCE IS MADE TO THE EARLIER DECISION TO THE BC MANAGEMENT SERVICES PVT. LTD. (SUPRA). THIS DECISION DEALT WITH THE EXCLUSION OF THREE SPECIFIC 23 COMPARABLES, WHICH HAVE ALSO INVOLVED IN THE PRESEN T CASE NAMELY M/S.TCS E-SERVE LTD., M/S.TCS E-SERVE INTERNATIONAL LTD. AND M/S. INFOSYS BPO LTD. THIS COURT UPHELD THE EXCLUSI ON OF ALL THREE COMPARABLES AND IN PARTICULAR SINCE THE ENTIT IES HAD 'A HIGH BRAND VALUE AND THEREFORE WERE ABLE TO COMMAND GREATER PROFITS; BESIDES THEY OPERATED ON ECONOMIC UPSCALE. ' 33. IN LIGHT OF THE AFOREMENTIONED JUDICIAL DECISIO NS OF THE HON'BLE SUPREME COURT AND HON'BLE HIGH COURTS, WE DIRECT TH E ASSESSING OFFICER/TPO TO EXCLUDE INFOSYS TECHNOLOGIES LTD AND WIPRO LTD. FROM THE FINAL SET OF COMPARABLES. TATA ELXSI LTD 34. WE FIND THAT THE TPO HAS TAKEN THE SOFTWARE DEV ELOPMENT AND SERVICES SEGMENT FOR COMPARISON. HOWEVER, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY THAT THIS SEGMENT IS BIFURCA TED INTO THREE SUB-SEGMENTS:- - EMBEDDED PRODUCT DESIGN SERVICES - INDUSTRIAL DESIGN AND ENGINEERING SERVICES - VISUAL COMPUTING LABS. 24 35. IN OUR CONSIDERED OPINION, THESE SERVICES ARE N OT COMPARABLE TO THE ASSESSEE. FOR SIMILAR REASONS, THE CO-ORDINATE BENCH IN THE CASE OF GLOBAL LOGIC INDIA PVT LTD IN ITA NO. 5809/DEL/2 011 HAS EXCLUDED THIS COMPANY FROM THE FINAL SET OF COMPARABLES. TH E RELEVANT FINDINGS READ AS UNDER: 28. THE TPO CONSIDERED THIS COMPANY AS COMPARABLE DESPITE 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 DEVELOPMEN T AND SERVICES SEGMENT WHICH, IN TURN, CONSISTS OF THREE SUB- SEGMENTS, NAMELY, EMBEDDED PRODUCT DESIGN SERVICES (DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE), INDUSTRI AL DESIGN AND ENGINEERING (MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN) AND ANIMATION AND VISUAL EFFECTS. SINCE TH IS COMPANY OFFERS INTEGRATED HARDWARE AND PACKAGED SOFTWARE SO LUTIONS, 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 SOLUTIONS INDIA PVT. LTD., HAS TREATED THIS COMPANY AS NOT COMPARABLE. WE ALSO ORDER ACCORDINGLY. 25 36. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. MEGASOFT LTD 37. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH IS YEAR WAS OF EXTRAORDINARY EVENTS AS THERE HAVE BEEN ACQUISITION S IN THIS YEAR. THE ANNUAL REPORT FURTHER SHOWS THAT THERE WAS AMAL GAMATION OF VISUALSOFT TECHNOLOGIES LTD. MOREOVER, WE FIND THA T 35% OF THE REVENUE IS FROM SALE OF SOFTWARE PRODUCTS AND THERE ARE NO SEGMENTAL DETAILS. 38. THE CO-ORDINATE BENCH IN THE CASE OF TATA MCGRA W HILL EDUCATION PVT LTD ITA NO. 5857/DEL/2011, FOR SIMILA R REASONS, HAS DIRECTED FOR EXCLUSION OF THIS COMPANY FROM THE FIN AL SET OF COMPARABLES. THE RELEVANT FINDINGS READ AS UNDER: 15.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. THE LD. AR ARGUED FOR ITS REMOVAL ON THE BASIS OF C ERTAIN ACQUISITIONS DONE BY THIS COMPANY DURING THE YEAR. 26 15.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE NOTES TO ACCOUNTS IN THE ANNUAL REPORT OF THIS COMPANY THAT THERE WAS , IN FACT, AMALGAMATION OF VISUALSOFT TECHNOLOGIES LTD. NOTE N O. 25 WITH THE CAPTION 'AMALGAMATION OF VISUALSOFT TECHNOLOGIE S LTD. WITH THE COMPANY' READS THAT: 'THE PRIOR YEAR COMPARATIV ES INCLUDE EFFECT OF AMALGAMATION OF VISUALSOFT TECHNOLOGIES L TD. ('VISUALSOFT') WITH THE COMPANY W.E.F. ITA NO.5857/DEL/2011 1ST OCTOBER, 2006. THE ASSETS, LIABILITIES, RIGHTS AND OBLIGATIONS OF VISUALSOFT H AVE BEEN RECORDED AT THEIR RESPECTIVE FAIR VALUES UNDER THE PURCHASE METHOD OF ACCOUNTING FOR AMALGAMATION.' 15.3. THE M UMBAI BENCH OF THE TRIBUNAL IN PETRO-AROLDITE (P) LTD VS. DCIT, (2013) 154 TTJ (MUM.) 176 HAS HELD THAT A COMPANY CANNOT B E CONSIDERED AS COMPARABLE BECAUSE OF EXCEPTIONAL FIN ANCIAL RESULTS DUE TO MERGERS/DEMERGERS ETC. SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI BENCHES OF THE TRIBUNAL IN SEVER AL CASES INCLUDING TOLUNA INDIA PVT. LTD. VS. ACIT (ITA NO. 564/D/2013). IT IS PATENT THAT THE MERGERS/DEMERGERS LARGELY INF LUENCE THE PROFITABILITY OF A COMPANY DURING THE YEAR OF HAPPE NING OF SUCH EVENT, WHICH MAKES IT INCOMPARABLE. AS THERE HAVE B EEN ACQUISITIONS BY MEGASOFT LTD., DURING THE YEAR IN Q UESTION AND THE FINANCIAL RESULTS OF THE ERSTWHILE COMPANY STAN D INCLUDED IN THE OVERALL PROFITABILITY OF THIS COMPANY, RESPECTF ULLY FOLLOWING THE PRECEDENTS, WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. 27 39. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. PERSISTENT SYSTEMS 40. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH ERE HAVE BEEN ACQUISITIONS IN THIS YEAR PURSUANT TO THE SANCTION FROM THE HON'BLE BOMBAY HIGH COURT FOR AMALGAMATION OF CONTROL/NET I NDIA PVT LTD EFFECTIVE FROM 1.4.2006, PURSUANT TO WHICH ALL THE ASSETS, LIABILITIES AND LOSSES OF CONTROL/NET ARE MERGED WITH THE ASSET S, LIABILITIES AND RESERVES OF THE COMPANY. FURTHER, WE FIND THAT THI S COMPANY IS ENGAGED IN THE SALE OF SOFTWARE PRODUCTS WHICH MAKE S IT FUNCTIONALLY DISSIMILAR. FOR SIMILAR REASONS, THE CO-ORDINATE B ENCH IN THE CASE OF TATA MCGRAWI HILL EDUCATION PVT LTD [SUPRA], HAS DI RECTED FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COM PARABLES. THE RELEVANT FINDINGS READ AS UNDER: 16.1. HERE AGAIN, WE FIND THAT THERE HAVE BEEN CER TAIN ACQUISITIONS WHICH IS EVIDENT FROM THE ANNUAL REPOR T OF THIS COMPANY, THAT IS AVAILABLE ON PAGE 781 OF THE PAPER BOOK. NOTE NO. 6 STATES THAT : `THE COMPANY RECEIVED SANCTION FROM THE BOMBAY HIGH COURT, MUMBAI AND BOMBAY HIGH COURT, GO A BENCH 28 FOR AMALGAMATION OF CONTROLNET (INDIA) PVT. LTD. (C ONTROLNET) EFFECTIVE FROM APRIL 1, 2006. PURSUANT TO THIS, ALL ASSETS, LIABILITIES AND LOSSES OF CONTROLNET ARE MERGED WIT H THE ASSETS, LIABILITIES AND RESERVES OF THE COMPANY WITH EFFECT FROM APRIL 1, 2006 BY FOLLOWING 'POOLING OF INTEREST METHOD' AS P RESCRIBED IN ACCOUNTING STANDARD 14 (AS-14) AS ISSUED BY THE INS TITUTE OF CHARTERED ACCOUNTANTS OF INDIA.' THUS, THE ACQUISIT ION TOOK PLACE IN THIS COMPANY DURING THE RELEVANT TO THE AS SESSMENT YEAR UNDER CONSIDERATION. FOLLOWING THE REASONS GIVEN AB OVE WHILE DISCUSSING THE CASE OF MEGASOFT LTD., WE ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. 41. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF COMPARABLES. SASKEN COMMUNICATION TECHNOLOGIES LTD 42. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH IS COMPANY IS ENGAGED IN THE SALE OF SOFTWARE PRODUCTS AND TECHNO LOGY LICENSING AND BUSINESS OF SOFTWARE SERVICES WITH NO SEGMENTAL RESULTS WHICH MAKE THIS COMPANY FUNCTIONALLY DISSIMILAR. FOR SIM ILAR REASONS, THE CO-ORDINATE BENCH IN THE CASE OF TATA MCGRAW HILL E DUCATION PVT LTD 29 [SUPRA] HAS DIRECTED FOR EXCLUSION OF THIS COMPANY. THE RELEVANT FINDINGS READ AS UNDER: 17.1. HERE AGAIN, WE FIND THAT THE FINANCIAL RESUL TS OF THIS COMPANY STAND DISTORTED DUE TO CERTAIN ACQUISITIONS MADE BY IT DURING THE RELEVANT YEAR. IT IS EVIDENT FROM THE AN NUAL REPORT OF THIS COMPANY, WHICH IS AVAILABLE ON PAGE 868 AND 92 4 OF THE PAPER BOOK. IT HAS BEEN CATEGORICALLY MENTIONED IN ITS ANNUAL REPORT THAT DURING THE YEAR THIS COMPANY ACQUIRED B OTNIA HITECH OY, FINLAND AND ITS TWO WHOLLY OWNED SUBSIDIARIES. IT HAS ALSO BEEN STATED IN THE SAME PARA THAT DURING THE YEAR T HE COMPANY ALSO SUCCESSFULLY COMPLETED THREE MERGERS, NAMELY, SASKEN NETWORK SYSTEMS LTD., AND INTEGRATED SOFTTECH SOLUT IONS PVT. LTD., THE TWO INDIAN BASED WHOLLY OWNED SUBSIDIARIE S WHICH MERGED WITH THE ASSESSEE. IT ALSO TRANSPIRES FROM T HIS ANNUAL REPORT THAT THE COMPANIES GETTING MERGED WITH THE A SSESSEE COMPANY ALSO PROVIDED SOFTWARE SERVICES FOCUSED ON TELECOM OPERATING SYSTEMS. THUS, IT IS ABUNDANTLY PATENT TH AT THE SEGMENTAL RESULTS TAKEN BY THE TPO OF THIS COMPANY HAVE BEEN INFLUENCED BY THE MERGERS AND ACQUISITIONS TAKEN PL ACE DURING THE YEAR, THEREBY MAKING SUCH FINANCIAL RESULTS AS INCOMPARABLE. FOLLOWING ITA NO.5857/DEL/2011 THE REASON GIVEN ABO VE, WE ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LI ST OF COMPARABLES. 30 43. CONSIDERING THE BUSINESS PROFILE OF THIS COMPAN Y, IN THE LIGHT OF JUDICIAL DECISIONS REFERRED TO HEREINABOVE, WE DIRE CT FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. CELESTIAL LABS LTD 44. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH IS COMPANY IS INTO MANUFACTURING AND SUPPLY OF MEDICINES AND IS A LSO ENGAGED IN BIOPHARMA AND BIOTECH MANUFACTURING AND CUSTOMIZED IT SOLUTIONS, MANUFACTURE OF DRUGS, CLINICAL TRIALS AND CONTRACT RESEARCH ACTIVITIES. THIS COMPANY IS ALSO INTO CLONING AND PURIFICATION AND INDUSTRIAL BIOTECHNOLOGY AREA AND MANUFACTURING ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE. FOR THESE REASONS, THE CO-ORDIN ATE BENCH IN THE CASE OF TATA MCGRAW HILL EDUCATION PVT LTD [SUPRA] HAS DIRECTED FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COM PARABLES. THE RELEVANT FINDINGS READ AS UNDER: 9.1. THE TPO OBSERVED THAT THIS COMPANY IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES. NOTICE U/S 133(6) OF THE ACT WAS ISSUED. AS PER THE REPLY RECEIVED FR OM THE COMPANY, THE TPO NOTED THAT: 'IT IS MAINLY A SOFTWA RE DEVELOPMENT COMPANY' QUALIFYING ALL THE FILTERS. HE , THEREFORE, INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. 31 9.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THIS COMPAN Y IS NOT ONLY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES, BUT ALSO INTO THE SOFTWARE PRODUCTS. IT IS NOTICEABLE FROM T HE TPO'S ORDER PAGE 73 THAT THE ASSESSEE ITA NO.5857/DEL/201 1 OBJECTED TO THE INCLUSION OF THIS COMPANY BY STATIN G THAT IT DEVELOPED A NEW DRUG DESIGN TOOL 'ELSUITE' TO DRUG DISCOVERY IN FINDING THE LEAD MOLECULES FOR DRUG DISCOVERY AND P ROTECTED THE IPR BY FILING UNDER THE COPYRIGHT/ PATENT ACT . IT CAN BE NOTICED FROM THE ANNUAL REPORT OF THE COMPANY, WHICH IS AVA ILABLE IN THE PAPER BOOK, THAT THERE IS A REFERENCE TO THE DEVELO PMENT OF A DENOVO DRUG DESIGN TOOL 'CELSUITE', WHICH IS A REVE NUE GENERATING ACTIVITY. WHEN WE EXAMINE THE TURNOVER OF THIS COMP ANY WITH THE NARRATION GIVEN ON PAGE 24 OF THE ANNUAL REPORT , IT CAN BE SEEN THAT THE SAME COMPRISES: 'BIO-INFORMATICS SERV ICES, DATA WAREHOUSING AND MANNING, SOFTWARE DEVELOPMENT, PROD UCTS AND SERVICES.' IT IS MANIFEST FROM THE ANNUAL REPORT OF THIS COMPANY THAT THE SAME CANNOT BE CONSIDERED AS COMPARABLE ON ENTITY LEVEL WHEN IT HAS DEALT NOT ONLY WITH SOFTWARE PROD UCTS, BUT HAS ALSO ENGAGED ITSELF INTO SOFTWARE DEVELOPMENT AND A LSO RENDERING SERVICES. IN COMPARISON WITH THAT, THE ASSESSEE COM PANY IS SIMPLY PROVIDING SOFTWARE NON- DEVELOPMENT SERVICES TO ITS AES. AS SUCH, THIS COMPANY CANNOT BE CONSIDERED AS COMPA RABLE. WE, THEREFORE, DIRECT TO REMOVE THE NAME OF THIS COMPAN Y FROM THE LIST OF COMPARABLES. 32 45. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. FLEXTRONICS SOFTWARE SYSTEMS LTD 46. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH IS COMPANY IS AN END-TO-END PROVIDER OF COMMUNICATION PRODUCTS, S ERVICES AND SOLUTIONS TO NETWORK EQUIPMENT PROVIDERS, HANDSET M ANUFACTURERS, SERVICE PROVIDERS AND BUSINESS PROCESS OUTSOURCING SECTORS. THIS COMPANY ALSO SUPPLIES BOTH PRODUCTS AND SERVICES TO ITS CUSTOMERS AND IS ENGAGED IN SELLING PRODUCTS WHICH MAKES IT F UNCTIONALLY DISSIMILAR FROM THE ASSESSEE. FOR THESE REASONS, THE CO-ORDINATE BENCH IN THE CASE OF TATA MCGRAW HILL EDUCATION PVT LTD [SUPRA] HAS DIRECTED FOR EXCLUSION OF THIS COMPANY FROM THE FIN AL SET OF COMPARABLES. THE RELEVANT FINDINGS READ AS UNDER: FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 10.1. THE TPO INCLUDED THIS COMPANY WITH OPERATING PROFIT RATIO O F 25.31%, IN THE LIST OF COMPARABLES DESPITE THE ASSESSEE'S CONT ENTION THAT IT IS A SOFTWARE PRODUCTS COMPANY AS WELL AS A SERVICE PROVIDER. 10.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, IT CAN BE SEEN FROM TH E ANNUAL REPORT OF THIS COMPANY THAT IT IS AN END-TO-END PRO VIDER OF 33 COMMUNICATION PRODUCTS, SERVICES AND SOLUTIONS TO N ETWORK EQUIPMENT PROVIDERS, HANDSET MANUFACTURERS, SERVICE PROVIDERS AND BUSINESS PROCESS OUTSOURCING SECTORS. FROM THE NOTES TO THE FINANCIAL STATEMENTS OF THIS COMPANY, IT CAN BE OBSERVED THAT: 'THE ACTIVITIES OF THE COMPANY INCLUDE DEVELO PMENT OF PACKAGE SOFTWARE, PROVIDING SOFTWARE CONSULTING SER VICES AND OTHER ANCILLARY PRODUCTS AND SERVICES, PRIMARILY FO R USE IN THE TELECOMMUNICATIONS INDUSTRY.' IN VIEW OF THE FACT T HAT IT IS A SOFTWARE PRODUCTS COMPANY AND IS ALSO PROVIDING SOF TWARE DEVELOPMENT SERVICES, EVEN THE SEGMENTAL RESULTS OF SOFTWARE DEVELOPMENT SERVICES CANNOT BE EQUATED WITH THE ACT IVITIES UNDERTAKEN BY THE ASSESSEE FOR ITS ITA NO.5857/DEL/ 2011 AES. WE, THEREFORE, ORDER TO EXCLUDE THIS COMPANY FROM T HE LIST OF COMPARABLES. 47. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. THIRDWARE SOLUTIONS LTD 48. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH IS COMPANY DERIVES REVENUE FROM VARIOUS SOURCES SUCH AS SALE O F LICENSE, SOFTWARE SERVICES, EXPORT FROM SEZ UNIT, REVENUE FR OM SUBSCRIPTION, 34 ETC. WHICH MAKES THIS COMPANY FUNCTIONALLY DISSIMIL AR FROM THE APPELLANT COMPANY. THOUGH THIS COMPANY IS ENGAGED IN DIVERSIFIED BUSINESS INCLUDING SOFTWARE PRODUCTS BUT NO SEGMENT AL INFORMATION IS AVAILABLE IN THE ANNUAL REPORT. THE CO-ORDINATE BE NCH, FOR SIMILAR REASONS MENTIONED HEREINABOVE, HAS DIRECTED FOR EXC LUSION OF THIS COMPANY. THE RELEVANT FINDINGS READ AS UNDER: LD. AR CONTENDED THAT THIS COMPANY CANNOT BE COMPA RED WITH THE ASSESSEE COMPANY BECAUSE THE COMPANY IS FUNCTIO NALLY DISSIMILAR AND DERIVES REVENUE FROM VARIOUS SOURCES SUCH AS SALE OF LICENSE, SOFTWARE SERVICES, EXPORT FROM SEZ UNIT , REVENUE FROM SUBSCRIPTION ETC. FURTHER, LD. AR SUBMITTED T HAT THIS COMPANY IS ENGAGED IN DIVERSIFIED BUSINESS INCLUDIN G SOFTWARE PRODUCTS AND NO STANDALONE FINANCIAL DATA IS AVAILA BLE FOR FY 2006-07. THEREFORE, THE LD. AR SUBMITTED THAT THIS COMPARABLE MAY BE EXCLUDED. ON THE OTHER HAND, THE LD. DR COULD NOT CONTROVERT THE FACT THAT THE SAID COMPARABLE IS NOT ENGAGED IN SAL E OF LICENSE OF SOFTWARE PRODUCTS AS POINTED OUT BY THE LD. AR. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. A PERUSAL OF THE ANNUAL REPOR T OF THIRDWARE SOLUTIONS LTD. REVEALS THAT THE SAID COMPANY HAS MA DE INCOME FROM SALE OF LICENCE TO THE TUNE OF MORE THAN RS.1 CRORE, WHICH MEANS THE COMPANY IS INTO PRODUCTION OF SOFTWARE PR ODUCTS 35 WHICH APPARENTLY CANNOT BE A COMPARABLE TO ASSESSEE DEALING WITH CONTRACT SOFTWARE DEVELOPMENT AND NOT INTO SAL E OF ANY PRODUCT. THEREFORE, WE DIRECT TPO/AO TO EXCLUDE TH IS COMPANY FROM THE LIST OF COMPARABLES. 49. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. KALS INFOMATION SYSTEMS LTD 50. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH IS COMPANY IS ENGAGED IN TRAINING AND SOFTWARE PRODUCTS SINCE ITS INCEPTION. THE ANNUAL REPORT SHOWS THAT STPI UNIT ENGAGED IN DEVEL OPMENT OF SOFTWARE AND SOFTWARE PRODUCTS AND A TRAINING CENTR E ENGAGED IN TRAINING OF SOFTWARE PROFESSIONALS ON ONLINE PROJEC TS, WHICH MAKES THIS COMPANY FUNCTIONALLY DISSIMILAR FROM THE APPEL LANT COMPANY. FOR SIMILAR REASONS, THE CO-ORDINATE BENCH IN THE CASE OF TATA MCGRAW HILL EDUCATION PVT LTD [SUPRA] HAS DIRECTED FOR EXC LUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. THE REL EVANT FINDINGS READ AS UNDER: 36 13.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY OBSERVING THAT ITS OPERATIONS WERE IN SOFTWARE P RODUCTS, SOFTWARE SERVICES AND TRAINING. INFORMATION U/S 133 (6) OF THE ACT WAS CALLED FROM THIS COMPANY, WHICH HAS BEEN RE PRODUCED ON PAGE 94 OF THE TPO'S ORDER. FROM SUCH SUBMISSIONS, THE TPO INFERRED THAT THE SOFTWARE PRODUCTS CONSTITUTED ONL Y 3% OF ITS REVENUES AND TRAINING CONSTITUTED ONLY 8.56%, THERE BY LEAVING AROUND 88% OF THE TOTAL REVENUES TO THE SOFTWARE SE RVICES. THAT IS HOW, THE ASSESSEE'S OBJECTIONS WERE REPELLED AND THIS COMPANY WAS CONSIDERED AS COMPARABLE. 13.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ENTIR E PREMISE OF THE TPO'S INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES IS THAT THE SOFTWARE PRODUCTS CONSTITUTE ONLY 3% OF IT S REVENUE. THIS INFERENCE HAS BEEN DRAWN ON THE BASIS OF THE I NFORMATION SUPPLIED BY THIS COMPANY STATING: 'THE USE OF READYMADE OBJECT LABORATORIES IS ONLY T O THE TUNE OF ABOUT (0.33 TO 3) % IN THE YEAR 2005-06 AND 2006-07. ' WE FAIL TO COMPREHEND AS TO HOW THE ABOV E LINE CONVEYS THAT THE SOFTWARE PRODUCTS' REVENUE STANDS AT 3%. WHAT HAS BEEN WRITTEN IS THAT THE COMPANY'S USE THE READYMADE OBJECT LABORATORIES IS ONLY TO THE TUNE OF MAXIMUM 3%. BY NO IMAGINATION T HIS CAN BE CONSTRUED AS REVENUES FROM SOFTWARE PRODUCTS . WHEN WE PERUSE THE ANNUAL REPORT OF THIS COMPANY, 37 WHICH IS AVAILABLE IN THE PAPER BOOK, IT CAN BE SEE N THAT THERE IS NO SUCH MENTION OF SOFTWARE PRODUCT'S REVE NUE LIMITED TO 3%. ON THE CONTRARY, IT HAS BEEN MENTION ED IN THE NOTES TO THE FINANCIAL STATEMENT THAT: 'THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION.' THE COMPANY CONSISTING OF STPI UNIT ENGAGED SOFTWARE PRODUCTS A ND IN DEVELOPMENT OF SOFTWARE IS ALSO UNDERTAKING TRAI NING ACTIVITY OF SOFTWARE PROFESSIONALS ON ONLINE PROJEC TS. NOT ONLY THE REVENUES OF THE SEGMENT CONSIDERED BY THE TPO ALSO INCLUDE THE REVENUE FROM SOFTWARE PRODUCTS, BUT ALSO FROM TRAINING IMPARTED ON COMMER CIAL BASIS. WHEN WE CONSIDER THE ASSESSEE'S FUNCTIONAL PROFILE, THE ONLY IRRESISTIBLE CONCLUSION WHICH CAN BE DRAWN IS THAT IT IS NOT A ITA NO.5857/DEL/2011 COMPARABLE COMPANY. ACCORDINGLY, THIS COMPANY IS ORDERED TO BE EXPUNGED FROM THE SET OF COMPARABLES. 51. WE, ACCORDINGLY, DIRECT THE ASSESSING OFFICER/T PO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. E-ZEST SOLUTIONS LTD 52. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT IT IS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVICES. FOR SIMIL AR REASONS, THE 38 CO-ORDINATE BENCH IN THE CASE OF MERITOR LVS INDIA [P] LTD ITA NO. 1231/BANG/011 HAS DIRECTED FOR EXCLUSION OF THIS CO MPANY FROM THE FINAL SET OF COMPARABLES. THE RELEVANT FINDINGS RE AD AS UNDER: 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMP ARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE TPO H AD REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUND THAT AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDE R SECTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND SATISFIES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FR OM THE LIST OF COMPARABLES ON THE IT(TP)A.1231/BANG/2011 PAGE - 13 GROUND THAT IT IS FUNCTIONALLY DIFFERENT TO THE ASSESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN 'E-BUSINESS CONSULTING SERVICES', CONSIS TING OF WEB STRATEGY SERVICES, I T DESIGN SERVICES AND IN TECHN OLOGY CONSULTING SERVICES INCLUDING PRODUCT DEVELOPMENT C ONSULTING SERVICES. THESE SERVICES, THE LEARNED AUTHORISED RE PRESENTATIVE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCING ('KPO') SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA I N ITS ANNUAL 39 REPORT. THE LEARNED AUTHORISED REPRESENTATIVE SUBMI TS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CON TAIN DETAILED DESCRIPTIVE INFORMATION ON THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAILS AVAILAB LE ON THE COMPANY'S WEBSITE WHICH SHOULD BE CONSIDERED WHILE EVALUATING THE COMPANY'S FUNCTIONAL PROFILE. IT IS ALSO SUBMIT TED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THE REFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CO NSIDERED AS COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES AND RE LIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE O F CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961 (HYD)/2011 DT.23.11.2012 AND PRAYED THAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., OUGHT TO BE OMI TTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLYCONSIDERED THE MATERIAL ON RECORD. IT IS S EEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN TH E LIST OF COMPARBALES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE S ERVICES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER T HE SERVICES 40 PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWA RE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. FRO M THE DETAILS ON RECORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY I.E. E- ZEST SOLUTIONS LTD., IS RENDERING PRODUCT DEVELOPMENT SE RVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CA TEGORY OF KPO SERVICES. IT HAS BEEN HELD BY THE CO-ORDINATE B ENCH OF THIS TRIBUNAL IN THE CASE OF CAPITAL I- Q INFORMATIONSYS TEMS (INDIA) (P) LTD. SUPRA) THAT KPO SERVICES ARE NOT COMPARABL E TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT IT(TP)A.1231/BANG/2011 PAGE - 14 COMPARABLE. FOLLOW ING THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS C OMPANY, I.E. E- ZEST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMP ARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED.' 53. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. 41 AVANI CIMCON TECHNOLOGIES LTD 54. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH IS COMPANY DERIVES REVENUE FROM BOTH SOFTWARE DEVELOPMENT SERV ICES AND SALE OF SOFTWARE PRODUCTS [D EXCHANGE] WITHOUT ANY SEGMENTA L DETAILS WHICH MAKES THIS COMPANY FUNCTIONALLY DISSIMILAR. FOR SI MILAR REASONS, THE CO-ORDINATE BENCH IN THE CASE OF GLOBAL LOGIC INDIA PVT LTD [SUPRA] HAS EXCLUDED THIS COMPANY FROM THE FINAL SET OF COMPARA BLES. THE RELEVANT FINDINGS READ AS UNDER: 9. THE TPO OBSERVED ON PAGE 89 OF HIS ORDER THAT T HIS COMPANY IS ALSO A SOFTWARE DEVELOPMENT AND CONSULTI NG COMPANY. IN HIS OPINION, ALL THE FILTERS APPLIED BY HIM WERE FULFILLED AND, AS SUCH, THIS COMPANY WAS LIABLE TO BE CONSIDERED AS C OMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY BEFORE THE DRP BY CONTENDING THAT NOT ONLY THE TURNOVER OF THIS COMPANY WAS MUCH LOWER, BUT ALSO THE PROFITS WERE E XTREMELY HIGH. REJECTING THE ASSESSEES CONTENTIONS, THE DR P 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 PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER, BUT, IS UTIL IZING ITS OWN SOFTWARES IN RENDERING SUCH SERVICES. THE TRIBUNAL IN MOTOROLA 42 SOLUTIONS INDIA PVT. LTD., HAS HELD THIS COMPANY TO BE INCOMPARABLE BY ACCEPTING THE ASSESSEES CONTENTION THAT THE HIGH OPERATING MARGINS OF THIS COMPANY WERE ON ACCO UNT OF DIFFERENCE IN ITS ASSET BASE. IT IS FURTHER RELEVA NT TO NOTE THAT THIS COMPANY, APART FROM RENDERING SOFTWARE DEVELOP MENT SERVICES, IS ALSO ENGAGED INTO THE SALE OF SOFTWARE PRODUCTS AND THE ACCOUNTS MAINTAINED BY IT ARE ON ENTITY LEVEL W ITHOUT THERE BEING ANY SEGREGATION FOR SOFTWARE DEVELOPMENT SEGM ENT. AS THE 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 FROM SALE OF SOFTWARE PRODUCTS INTO THE OVER ALL PROFITABILITY OF THIS COMPANY. NEITHER SEPARATE PR OFITS ARE AVAILABLE, NOR THERE IS ANY MEASURE PROVIDED FOR SE GREGATING PROFIT ON SALE OF SOFTWARE PRODUCTS FROM THE OVERAL L PROFIT OF THIS COMPANY FOR FINDING OUT A COMPARABLE SEGMENT S IMILAR WITH THAT OF THE ASSESSEE COMPANY. AS THE PROFITS OF THE SOFTWARE DEVELOPMENT PORTION CANNOT BE ASCERTAINED, WE HOLD THAT IT CANNOT BE CONSIDERED AS COMPARABLE ON ENTITY LEVEL. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. 55. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. 43 HELIOS MATHESON INFORMATION TECHNOLOGY LTD 56. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT RE VENUE IS FROM SOFTWARE SALES AND SERVICES. THIS COMPANY IS ENGAG ED IN ITES BPO SERVICES, OFFSHORE DELIVERY, PROJECT MANAGEMENT SER VICES, PUBLIC SECTOR SERVICES, MARITIME PRACTICES AND EXECUTIVE EDUCATIO N INFORMATION SYSTEMS. NO SEGMENTAL DETAILS ARE AVAILABLE. THER E BEING REVENUE FROM SOFTWARE SALES AND SERVICES, MAKES THIS COMPAN Y FUNCTIONALLY DISSIMILAR FROM THAT OF THE ASSESSEE. FOR SIMILAR REASONS, THE CO- ORDINATE BENCH IN THE CASE OF GLOBAL LOGIC INDIA PV T LTD [SUPRA] HAS EXCLUDED THIS COMPANY FROM THE FINAL SET OF COMPARA BLES. THE RELEVANT FINDINGS READ AS UNDER: 15. THE TPO CONSIDERED THIS COMPANY AS COMPARABLE BY 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, APPLICAT ION MANAGEMENT SERVICES, OFFSHORE DELIVERY, PROJECT MAN AGEMENT SERVICES, PUBLIC SECTOR SERVICES, MARITIME PRACTICE S AND EXECUTIVE EDUCATION INFORMATION SYSTEM, ETC. THE AB OVE DESCRIPTION OF THE NATURE OF WORKS CARRIED OUT BY T HIS COMPANY MANIFESTS THAT THE CHARACTER OF SERVICES PROVIDED B Y THE ASSESSEE COMPANY CANNOT AT ALL BE CONSIDERED AS COM PARABLE WITH THIS COMPANY. SIMILAR VIEW HAS BEEN TAKEN BY THE T RIBUNAL IN THE 44 CASE OF TOLUNA INDIA PVT. LTD. (SUPRA). FOLLOWING THE SAME, WE DIRECT IT TO BE CONSIDERED AS NOT COMPARABLE. 57. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. ISHIR INFOTECH LTD 58. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT TH IS COMPANY IS ENGAGED IN OUTSOURCING WORK AND IS HAVING HEAVY OUT SOURCING ACTIVITIES AS WELL AS HAVING DIFFERENT BUSINESS MODEL. THE HO N'BLE HIGH COURT OF DELHI IN THE CASE OF RAMPGREEN SOLUTIONS PVT LTD 37 7 ITR 533 HAS HELD THAT A COMPANY CANNOT BE TAKEN AS A COMPARABLE WHIC H HAS A DIFFERENT BUSINESS MODEL. THE RELEVANT FINDINGS OF THE HON'B LE HIGH COURT READ AS UNDER: 38. IN OUR VIEW, EVEN VISHAL COULD NOT BE CONSIDER ED AS A COMPARABLE, AS ADMITTEDLY, ITS BUSINESS MODEL WAS C OMPLETELY DIFFERENT. ADMITTEDLY, VISHALS EXPENDITURE ON EMPL OYMENT COST DURING THE RELEVANT PERIOD WAS A SMALL FRACTION OF THE PROPORTIONATE COST INCURRED BY THE ASSESSEE, APPARE NTLY, FOR THE REASON THAT MOST OF ITS WORK WAS OUTSOURCED TO OTHE R 45 VENDORS/SERVICE PROVIDERS. THE DRP AND THE TRIBUNAL ERRED IN BRUSHING ASIDE THIS VITAL DIFFERENCE BY OBSERVING T HAT OUTSOURCING WAS COMMON IN ITES INDUSTRY AND THE SAM E WOULD NOT HAVE A BEARING ON PROFITABILITY. PLAINLY, A BUS INESS MODEL WHERE SERVICES ARE RENDERED BY EMPLOYING OWN EMPLOY EES AND USING ONES OWN INFRASTRUCTURE WOULD HAVE A DIFFERE NT COST STRUCTURE AS COMPARED TO A BUSINESS MODEL WHERE SER VICES ARE OUTSOURCED. THERE WAS NO MATERIAL FOR THE TRIBUNAL TO CONCLUDE THAT THE OUTSOURCING OF SERVICES BY VISHAL WOULD HA VE NO BEARING ON THE PROFITABILITY OF THE SAID ENTITY. 59. IN LIGHT OF THE ABOVE, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF COMPARAB LES. 60. IT WOULD NOT BE OUT OF PLACE TO MENTION HERE TH AT THE CLAIM OF REVENUE THAT BROAD FUNCTIONALITY IS SUFFICIENT TO F IND THE COMPARABLE ENTITY THOUGH THE TNMM METHOD ALLOWS BROAD FLEXIBIL ITY TOLERANCE IN THE SELECTION OF COMPARABLES DOES NOT HOLD ANY WATE R IN THE LIGHT OF THE OBSERVATIONS OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF AVENUE ASIA ADVISORS PVT LTD 398 ITR 120 WHEREIN TH E HON'BLE HIGH COURT HAS HELD AS UNDER: 46 19. THE FIRST AND THE FOREMOST ISSUE THAT ARISES I N THIS CASE IS WITH RESPECT TO THE APPLICABILITY OF TESTS LAID DOW N IN RAMPGREEN SOLUTIONS (SUPRA), WHICH WAS RENDERED ON 10TH AUGUS T, 2015. THIS DECISION HAS CLEARLY LAID DOWN THE VARIOUS PRI NCIPLES ON THE BASIS OF WHICH DETERMINATION OF COMPARABLES NEEDS T O BE UNDERTAKEN WHILE FIXING THE ALP AND THE MARGIN THAT NEEDS TO BE ASSIGNED. THIS COURT HAD SPECIFICALLY REJECTED THE PROPOSITION THAT BROAD FUNCTIONALITY IS SUFFICIENT TO FIND THE COMPARABLE ENTITY THOUGH THE TNMM METHOD ALLOWS BROAD FLEXIBIL ITY TOLERANCE IN THE SELECTION OF COMPARABLES. THIS PRO POSITION HAVING BEEN REJECTED, THE COURT IN RAMPGREEN SOLUTI ONS (SUPRA) HELD AS UNDER: '43. IN OUR VIEW, THE AFORESAID APPROACH WOULD NOT BE APPOSITE. IN SO FAR AS IDENTIFYING COMPARABLE TRANSACTIONS/EN TITIES IS CONCERNED, THE SAME WOULD NOT DIFFER IRRESPECTIVE O F THE TRANSFER PRICING METHOD ADOPTED. IN OTHER WORDS, TH E COMPARABLE TRANSACTIONS/ENTITIES MUST BE SELECTED O N THE BASIS OF SIMILARITY WITH THE CONTROLLED TRANSACTION ENTIT Y. COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSA CTIONS HAS TO BE JUDGED, INTER ALIA, WITH REFERENCE TO COMPARABIL ITY FACTORS AS INDICATED UNDER RULE 10B(2) OF THE INCOME TAX RULES , 1962. COMPARABILITY ANALYSIS BY THE TRANSACTIONAL NET MAR GIN METHOD MAY BE LESS SENSITIVE TO CERTAIN DISSIMILARITIES BE TWEEN THE TESTED PARTY AND THE COMPARABLES. HOWEVER, THAT CAN NOT BE THE CONSIDERATION FOR DILUTING THE STANDARDS OF SELECTI NG COMPARABLE TRANSACTIONS/ENTITIES. A HIGHER PRODUCT AND FUNCTIO NAL SIMILARITY 47 WOULD STRENGTHEN THE EFFICACY OF THE METHOD IN ASCE RTAINING A RELIABLE ARM'S LENGTH PRICE. THEREFORE, AS FAR AS P OSSIBLE, THE COMPARABLES MUST BE SELECTED KEEPING IN VIEW THE CO MPARABILITY FACTORS AS SPECIFIED. WIDE DEVIATIONS IN PROFIT LEV EL INDICATOR MUST TRIGGER FURTHER INVESTIGATIONS/ANALYSIS. 44. CONSIDERATION FOR A TRANSACTION WOULD REFLECT T HE FUNCTIONS PERFORMED, THE SIGNIFICANT ACTIVITIES UNDERTAKEN, T HE ASSETS OR RESOURCES USED/CONSUMED, THE RISKS ASSUMED. THUS, C OMPARISON OF ACTIVITIES UNDERTAKEN /FUNCTIONS PERFORMED IS IM PORTANT FOR DETERMINING THE COMPARABILITY BETWEEN CONTROLLED AN D UNCONTROLLED TRANSACTIONS/ENTITY. IT WOULD NOT BE A PPOSITE TO IGNORE FUNCTIONAL DISSIMILARITY ONLY FOR THE REASON S THAT ITS IMPACT MAY BE REDUCED ON ACCOUNT OF USING ARITHMETI CAL MEAN OF THE PROFIT LEVEL INDICATOR.' THE PRINCIPLE GOVERNING THE IDENTIFICATION OF COMP ARABLE TRANSACTIONS WOULD BE THE SAME, IRRESPECTIVE OF WHI CHEVER TRANSFER PRICING METHOD IS ADOPTED. 20. A PERUSAL OF THE ABOVE DECISION REVEALS THAT TH E FOLLOWING STEPS OUGHT TO BE UNDERTAKEN IN IDENTIFICATION OF C OMPARABLE TRANSACTIONS/ENTITIES. COMPARABLE TRANSACTIONS MUST BE SELECTED ON THE BA SIS OF A SIMILARITY WITH THE CONTROLLED TRANSACTION/ENTITY. 48 RULE 10B (2) OF THE INCOME TAX RULES, 1962 OUGHT T O BE BORNE IN MIND WHILE CHOOSING THE FACTORS OF COMPARABILITY IN RESPECT OF UNCONTROLLED TRANSACTIONS. WIDE DEVIATION IN THE PROFIT LEVEL INDICATOR ('PLI ') WOULD REQUIRE FURTHER INVESTIGATION/ANALYSIS. EVEN WHILE ADOPTING THE TNMM METHOD, THE STANDARD FOR SELECTION OF THE COMP ARABLE TRANSACTIONS/ENTITLES CANNOT BE DILUTED. FOR COMPARISON OF TRANSACTIONS, FACTORS SUCH AS TH E NATURE OF CAPITAL, RESOURCES USED, THE RISKS ASSUMED, ETC. OU GHT TO BE CONSIDERED. BROADLY, THEREFORE, THE DICTUM BY THIS COURT WAS TH AT THOUGH IN THE TNMM METHOD THERE IS SUFFICIENT TOLERANCE, MERE BROAD FUNCTIONALITY IS BY ITSELF INSUFFICIENT. QUESTION (I) 21. IN THE BACKDROP OF THE PRINCIPLES LAID DOWN IN RAMPGREEN SOLUTIONS (SUPRA) AND THE ANALYSIS OF THE ITAT'S OR DER WITH RESPECT TO EACH OF THE COMPARABLES DISPUTED BY THE ASSESSEE, IS AS FOLLOWS: (I) SUMEDHA FISCAL SERVICES LIMITED - IN THE CASE O F SUMEDHA, THE ITAT CLEARLY ACKNOWLEDGED THAT IF IT HAD HANDLE D MANAGEMENT OF RIGHTS ISSUES AND THE REVENUE FROM SU CH SERVICE WAS SUBSTANTIAL, THEN THE SERVICES PROVIDED BY SUME DHA WOULD BE DISSIMILAR TO THAT OF THE ASSESSEE. HOWEVER, HAV ING HELD SO, 49 THE ITAT RESTORED THE MATTER TO THE TPO TO AGAIN EX AMINE WHETHER THE REVENUE OF SUMEDHA WAS SUBSTANTIAL FROM HANDLING THE SAID SERVICES OF RIGHTS ISSUES AND WITH A DIREC TION TO EXCLUDE IT IF THE TPO FOUND IT IN THE AFFIRMATIVE. SUCH AN APPROACH OF THE ITAT IS NOT IN ACCORDANCE WITH THE PRINCIPLES L AID DOWN IN RAMPGREEN SOLUTIONS (SUPRA). THE ITAT'S FINDINGS AC KNOWLEDGE THAT SUMEDHA MAY NOT BE FUNCTIONALLY SIMILAR TO THE ASSESSEE, AS ADMITTEDLY, THE ASSESSEE DOES NOT RENDER SERVICE S RELATING TO RIGHTS ISSUES. STARTING THE ENTIRE EXERCISE OF COMP ARABILITY ANALYSIS FROM THE STAGE OF THE TPO WOULD RESULT IN AN UNENDING CYCLE OF PROCEEDINGS ESPECIALLY WHEN THE RELEVANT M ATERIAL IN THE FORM OF ANNUAL REPORTS ETC. WAS AVAILABLE ON THE RE CORD. THE ITAT OUGHT TO ITSELF HAVE DETERMINED WHETHER SUMEDH A IS TO BE RETAINED AT ALL IN VIEW OF ITS OWN FINDINGS. REM ANDING THE ISSUE TO THE TPO WAS AN INCORRECT APPROACH. (II) BRESCON ADVISORS LIMITED - IN THE CASE OF BRES CON, THE ITAT ANALYSED THE ANNUAL REPORTS AND NOTICED THAT THE IN COME OF BRESCON IS FROM FEE BASED FINANCIAL SERVICES, FROM DEBT RESOLUTION AND DEBT SYNDICATION. BRESCON ALSO EARNE D REVENUE FROM SALE OF INVESTMENTS. THE ITAT HAS EQUATED `ADV ISORY SERVICES RELATED TO DEBT FINANCING' WITH `FINANCIAL SERVICES FROM DEBT RESOLUTION AND DEBT SYNDICATION'. THESE TWO AR E NOT IDENTICAL SERVICES. WHEREAS THE FORMER IS ADVISORY IN NATURE, THE LATTER IS EXECUTORY IN NATURE. WHILE THERE COULD BE SOME OVERLAP BETWEEN THE FORMER AND LATTER, THE MATTER REQUIRES DEEPER ANALYSIS AND EXAMINATION. 50 (III) LADDERUP CORPORATION LIMITED - THE ITAT NOTIC ED THAT LADDERUP HAD SHOWN OPERATIONAL INCOME FROM FINANCIA L AND MANAGEMENT CONSULTANCY SERVICES AS ALSO FEE BASED A CTIVITIES SUCH AS 'DEBT SYNDICATION, IPO ADVISORY, PRIVATE EQ UITY PLACEMENT, MERGER AND ACQUISITIONS, CORPORATE RESTR UCTURING AND A HOST OF OTHER CORPORATE ADVISORY SERVICES.' T HE ITAT, THEREAFTER, SIMPLY HELD THAT LADDERUP HAD SIMILAR F UNCTIONS AS THAT OF THE ASSESSEE AND WAS A COMPARABLE THAT DESE RVED TO BE RETAINED. 22. BROADLY, IT APPEARS THAT THE ITAT HAS GONE ON T HE USAGE OF SEVERAL TERMS SUCH AS DEBT SYNDICATION, DEBT FINANC ING, IPO ADVISORY, CORPORATE RESTRUCTURING, MERGERS, ACQUISI TIONS ETC, APPEARING IN THE ANNUAL REPORTS OF THE COMPARABLE T O HOLD THAT THE ASSESSEE AND THE SAID COMPARABLES PERFORM SIMIL AR FUNCTIONS. THE ANALYSIS AT SUCH A BROAD LEVEL, BASE D UPON THE APPEARANCE OF SUCH SIMILAR TERMINOLOGIES, DOES NOT BY ITSELF MAKE THE FUNCTIONS SIMILAR IN NATURE. 23. THE ARGUMENT OF THE ASSESSEE APPEARS TO BE THAT WHILE THE ASSESSEE WAS MERELY ADVISING ON THESE ISSUES AND PR OVIDING ADVISORY SERVICES TO ITS AE, THESE THREE COMPARABLE S APPEAR TO BE ACTUALLY INVOLVED IN THE PROVIDING OF SERVICES R ELATING TO DEBT RESTRUCTURING, DEBT FINANCING, ISSUANCE OF IPOS, ME RGERS AND DE- MERGERS, ETC. THERE IS A DIFFERENCE BETWEEN GIVING ADVICE ON THESE MATTERS AND ACTUALLY UNDERTAKING THE SAID SER VICES. A SIMILAR ILLUSTRATION, IN THE CONTEXT OF LITIGATION, WOULD BE THE 51 DIFFERENCE BETWEEN GIVING ADVICE ON WHAT TO ARGUE I N COURT AND ACTUALLY ARGUING THE MATTER IN THE COURT. THIS DIFF ERENCE NEEDS TO BE BORNE IN MIND AND THE MERE APPEARANCE OF SIMI LAR SOUNDING WORDS DOES NOT BY ITSELF CONSTITUTE SIMILAR FUNCTIO NS. FURTHER, AS LAID DOWN IN RAMPGREEN SOLUTIONS (SUPRA), ALL THESE THREE COMPANIES DEMONSTRATED A WIDE DEVIATION IN THE PERC ENTAGE OF MARGINS. THUS, IT REQUIRES A DEEPER ANALYSIS TO DET ERMINE AS TO WHETHER THEY WERE IN FACT COMPARABLES TO BE RETAINE D FOR THE PURPOSE OF FIXING THE ALP. 24. INSOFAR AS THE ARGUMENT OF MR. CHAUDHARY REGARD ING THE TREND OF ASSESSEES TO CHALLENGE THE INCLUSION OF CO MPARABLES WHICH SHOW A HIGHER PERCENTAGE MARGIN, IS CONCERNED , THE SAME CANNOT BE FAULTED WITH IN AS MUCH AS EVERY ASSESSEE IS ENTITLED TO MAKE SUBMISSIONS AS TO THE SELECTION OF COMPARAB LES AND CHOOSE WHAT IS ADVANTAGEOUS TO IT. SO LONG AS THE S AME CAN STAND THE TEST OF LEGAL SCRUTINY, IT CANNOT BE HELD THAT SUCH CHALLENGES ARE NOT MAINTAINABLE. 25. IN THIS BACKDROP, WHEN SUB-ADVISORY AGREEMENT D ATED 1ST JULY, 2006 ALONG WITH THE ADDENDUM THERETO, IS EXAM INED, THE SERVICES OF THE ASSESSEE CANNOT BE TERMED AS THAT O F MERCHANT BANKING THOUGH THERE MAY BE SOME OVERLAP IN THE ADV ISORY SEGMENT OF THE SERVICES PROVIDED BY MERCHANT BANKER S. IN VIEW OF THE SERVICES RENDERED BY THE ASSESSEE, QUESTION (I) IS ANSWERED IN THE NEGATIVE I.E. IN FAVOUR OF THE ASSE SSEE AND AGAINST THE REVENUE. 52 QUESTION (II) 26. IN VIEW OF THE ABOVE DISCUSSION ON THE VARIOUS COMPARABLES, THE FINDINGS OF THE ITAT IN RESPECT OF SUMEDHA, BRE SCON AND LADDERUP ARE SET ASIDE. WE HAVE BEEN INFORMED BY TH E LEARNED COUNSEL FOR THE PARTIES THAT SUBSEQUENT TO THE ORDE R OF THE ITAT, THE TPO PASSED AN ORDER WHICH RESULTED IN A F INAL ASSESSMENT ORDER BEING PASSED BY THE AO. THE MATTER IS CURRENTLY PENDING IN APPEAL, BY THE ASSESSEE, BEFOR E THE CIT (A). ALL THOSE CONSEQUENTIAL ORDERS WOULD NOT SURVI VE IN VIEW OF THE PRESENT ORDER. 27. IN ORDER TO NOT BROOK ANY FURTHER DELAY, THIS M ATTER MAY BE PLACED BEFORE THE CIT (A) TO CONSIDER AS TO WHETHER THESE THREE COMPANIES CAN BE HELD TO BE COMPARABLES IN TH E LIGHT OF OBSERVATIONS MADE IN RAMPGREEN SOLUTIONS (SUPRA) AN D IN THIS ORDER. THE CIT (A) WOULD, THEREAFTER, PASS A COMPRE HENSIVE ORDER AND DETERMINE THE ALP FOR THE INTERNATIONAL T RANSACTIONS. QUESTION (II) IS ANSWERED IN THE AFFIRMATIVE I.E. I N FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 61. GROUND NO. 1 WITH ALL ITS SUB GROUNDS IS ALLOWE D. 53 62. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A NO. 5870/DEL/2011 IS ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 17.03. 2020. SD/- SD/- [ SUCHITRA KAMBLE] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 17 TH MARCH, 2020. VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT ASST. REGISTRAR 4. CIT(A) ITAT, NEW DELHI 5. DR 54 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