Nomura Research Institute Financial Technologies India Pvt. Ltd., Kolkata V. DCIT, CIR-2(1), KOLKATA, Kolkata

ITA 590/KOL/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1334 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 22-12-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 12-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA
• Assessee Lawyers: J P KHAITAN
• Keywords: Related party transaction; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Earning of tax free income; Working capital adjustments; Bad and doubtful debts
• Section: 143(3); 14A; 115JB; 133(6); 10B; 37; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM & SHRI M.BA LAGANESH, AM] I.T.A NO. 587/KOL/201 5 ASSESSMENT YEAR : 2010-1 1 D.C.I.T., CIRCLE-2(2) -VS.- M/S.NOMURA RESEAR CH INSTITUTE & KOLKATA FINANCIAL TECHNOLOGIES PVT.LTD.KOLKATA [PAN : AADCA 8967 A] (APPELLANT) (RESPONDENT) I.T.A NO. 590/KOL/2015 ASSESSMENT YEAR : 2010-1 1 M/S. NOMURA RESEARCH INSTITUTE & -VS- D.C.I.T., C IRCLE-2(2), FINANCIAL TECHNOLOGIES PVT.LTD. KOLKATA KOLKATA [PAN : AADCA 8967 A] (APPELLANT) (RESPONDENT) FOR THE DEPARTMENT : SHRI G.MALLIKARJUNA, CIT(D R) FOR THE ASSESSEE : SHRI J.P.KHAITAN, AR DATE OF HEARING : 19.09.2017. DATE OF PRONOUNCEMENT : 04.10.2017. ORDER PER N.V.VASUDEVAN, JM I.T.A.NO.590/KOL/2015 IS AN APPEAL BY THE ASSESSEE WHILE ITA NO.587/KOL2015 IS AN APPEAL BY THE REVENUE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER PASSED BY D.C.I.T., CENTRAL-2 (1), KOLKATA DATED 18.02.2015 U /S 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (ACT.) 2. THE ASSESSEE IN ITS APPEAL HAS FILED REVISED G ROUNDS OF APPEAL. GROUNDS NO.1 TO 16 OF THE REVISED GROUNDS OF APPEAL FILED BY THE ASSES SEE READ AS FOLLOWS :- 2 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 2 TECHNICAL ISSUES 1. FOR THAT THE ASSESSING OFFICER ERRED IN NOT GIVI NG FULL EFFECT TO THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL RP UNDER SECTI ON 144C(5) OF THE ACT THEREBY VIOLATING SECTION 144C(13) THE ACT BY: A. NOT INCLUDING AKSHAY SOFTWARE TECHNOLOGIES LTD. IN THE FINAL SET OF COMPARABLES B. NOT EXCLUDING INTEREST INCOME IN THE CASES KULIZ A TECHNOLOGIES PVT. LTD. AND INTEQ SOFTWARE LTD. 2. FOR THAT THE ASSESSING OFFICER ERRED IN ASSESSIN G THE TOTAL INCOME OF THE APPELLANT AT RS. 1,91,03,939/- AS AGAINST THE TOTAL INCOME OF RS. 40,62,622 COMPUTED BY THE APPELLANT UNDER THE NORMAL PROVISIO NS OF THE ACT. 3. FOR THAT THE AUTHORITIES BELOW ERRED IN REJECTIN G THE TRANSFER PRICING DOCUMENTATION MAINTAINED BY THE APPELLANT IN ACCORD ANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962 ('RULE S') AND IN MAKING AN ADJUSTMENT OF RS. 14,741,337/- TO THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE. 4. FOR THAT THE TRANSFER PRICING OFFICER ERRED IN N OT PROVIDING THE DETAILED SEARCH PROCESS FOR SELECTING HIS OWN SET OF COMPANIES WHIC H HE CONSIDERED AS COMPARABLES DURING THE TRANSFER PRICING PROCEEDINGS AND ALSO ERRED IN CONDUCTING FRESH SEARCH AND ECONOMIC ANALYSIS. 5. FOR THAT THE AUTHORITIES BELOW ERRED IN REJECTIN G THE USE OF MULTIPLE YEAR DATA DESPITE THE APPELLANT DEMONSTRATING THE CIRCUMSTANC ES WARRANTING USE THEREOF. REJECTION AND INCLUSION OF COMPARABLE COMPANIES 6. FOR THAT THE AUTHORITIES BELOW ERRED IN INCLUDIN G E-INFOCHIPS BANGALORE LIMITED AND LNTEQ SOFTWARE LIMITED IN THE [MAL SET OF COMPA RABLES ALTHOUGH THEY ARE SECRET COMPARABLES FOR WHICH NO DATA WAS OTHERWISE AVAILAB LE, THEY ARE NOT FUNCTIONALLY COMPARABLE AND ALSO HAVE SUPERNORMAL OPERATING MARG IN. 7. FOR THAT THE AUTHORITIES BELOW ERRED IN INCLUDIN G INFINITE DATA SYSTEMS PVT. LTD. (MERGED) IN THE FINAL SET OF COMPARABLE ALTHOUGH IT IS NOT FUNCTIONALLY COMPARABLE AND HAS A SUPERNORMAL OPERATING MARGIN. 3 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 3 8. FOR THAT THE AUTHORITIES BELOW ERRED IN INCLUDIN G (A) THIRDWARE SOLUTIONS LIMITED AND (B) COMP-U-LEARN TECH INDIA LTD IN THE FINAL SET OF COMPARABLES ALTHOUGH THEY ARE NOT FUNCTIONALLY COMPARABLE. 9. FOR THAT THE AUTHORITIES BELOW ERRED IN SELECTIN G KULIZA TECHNOLOGIES PRIVATE LTD IN THE FINAL SET OF COMPARABLES, A SECRET COMPA RABLE FOR WHICH NO DATA IS OTHERWISE AVAILABLE AND IN ANY EVENT IN CONSIDERING THE BAD DEBT OF THE SAID COMPANY AS A NON-OPERATING EXPENSE FOR THE PURPOSE OF COMPUTING OPERATING MARGIN. 10. FOR THAT THE AUTHORITIES BELOW ERRED IN EXCLUDI NG CG- V AK SOFTWARE EXPORTS LIMITED FROM THE SET OF CORN PARABLES BY ERRONEOUSL Y CONSIDERING IT AS A CONSISTENT LOSS-MAKING COMPANY. 11. FOR THAT THE AUTHORITIES BELOW ERRED IN REJECTI NG GOLDSTONE TECHNOLOGIES LIMITED ERRONEOUSLY CONSIDERING IT TO BE FUNCTIONAL LY DIFFERENT. 12. FOR THAT THE AUTHORITIES BELOW ERRED IN REJECTI NG R S SOFTWARE (INDIA) LIMITED AND ZYLOG SYSTEMS LIMITED FROM SET OF COMPARABLES B Y APPLYING AMP FILTER OF MORE THAN 5 PERCENT. 13. FOR THAT THE AUTHORITIES BELOW ERRED IN REJECTI NG HELIOS AND MATHESON INFORMATION TECHNOLOGY LIMITED FROM THE SET OF COMP ARABLES ON THE GROUND OF ITS HAVING DIFFERENT FINANCIAL YEAR ENDING FROM THAT OF THE APPELLANT. 14. FOR THAT THE AUTHORITIES BELOW ERRED IN REJECTI NG MINDTREE LIMITED AND QUINTEGRA SOLUTIONS LIMITED ON THE GROUND OF THEIR HAVING AN EXCEPTIONAL YEAR OF OPERATION DUE TO MERGER/ACQUISITION. ECONOMIC ADJUSTMENTS 15. FOR THAT THE AUTHORITIES BELOW ERRED IN NOT ADJ USTING THE NET MARGINS BY FAILING TO CONSIDER THE WORKING CAPITAL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPANIES TREATED AS COMPARABLES. 16. FOR THAT THE AUTHORITIES BELOW ERRED IN NOT ADJ USTING THE NET MARGINS OF THE COMPANIES TREATED AS COMPARABLE BY FAILING TO CONSI DER THE FUNCTIONAL AND RISK DIFFERENCES IN ACCORDANCE WITH THE PROVISIONS OF RU LE 10B(1)(E). 3. THE AFORESAID REVISED GROUNDS OF APPEAL CAN B E CONVENIENTLY DECIDED TOGETHER WITH THE GROUNDS RAISED BY THE REVENUE WHICH READ AS FOL LOWS :- 4 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 4 1. WHETHER ON THE BASIS OF FACTS AND IN CIRCUMSTAN CES OF THE INSTANT CASE, THE LD. DRP, KOLKATA HAS ERRED IN DIRECTING TO ALLOW FOREIG N EXCHANGE LOSS AS NON- OPERATING INCOME FOR THE PURPOSE OF COMPUTATION OF PROFIT LEVEL INDICATORS (PLI) OF THE COMPARABLES WITHOUT APPRECIATING THE FACTS IN C ASE TO CASE BASIS AS TO WHETHER SUCH LOSS HAS ARISEN IN THE NORMAL COURSE OF BUSINE SS AND NOT RESULTED FROM SPECULATIVE TRANSACTION OR OTHERWISE. 2. WHETHER ON THE BASIS OF FACTS AND IN CIRCUMSTANC ES OF THE INSTANT CASE, THE LD. DRP, KOLKATA HAS ERRED IN DIRECTING TO ALLOW BAD DE BTS AS NON-OPERATING INCOME FOR THE PURPOSE OF COMPUTATION OF PROFIT LEVEL INDI CATORS (PLI) OF THE COMPARABLES WITHOUT APPRECIATING THE FACTS IN CASE TO CASE BASI S AS TO WHETHER BAD DEBTS HAS ARISEN IN THE NORMAL COURSE OF BUSINESS AND NOT RES ULTED FROM SPECULATIVE TRANSACTION OR OTHERWISE. 3. THE APPELLANT CRAVES LEAVE TO AMEND, MODIFY OR A LTER ANY GROUNDS OF APPEAL DURING THE COURSE OF HEARING OF THIS CASE. 4. THE AFORESAID GROUNDS OF APPEAL ARE WITH REF ERENCE TO THE DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF AN INTERNATIONAL T AXATION BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES (AE). THE ASSESSEE IS A COMP ANY. IT IS ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES. THE ASS ESSEE RENDERS SERVICES TO ANSHIN SOFTWARE CORPORATION, USA INCORPORATED AS A COMPANY UNDER THE LAWS OF CALIFORNIA, USA. IN FACT THE ASSESSEE IS A CAPTIVE SERVICE FOR ANSHIN SOFTWARE CORPORATION, USA. IT IS NOT IN DISPUTE THAT THE ASSESSEE AND ANSHIN SOFT WARE CORPORATION, USA ARE ASSOCIATED ENTERPRISES BECAUSE OF COMMON SHARE HOLDING IN BOTH THE COMPANIES BY SHRI ARNAB DEBNATH AND MISS MAUSUMI .DEBNATH. THE ASSESSEE REC EIVED A SUM OF RS.13,37,18,400/- FOR RENDERING SOFTWARE DEVELOPMEN T SERVICES TO ANSHIN SOFTWARE CORPORATION, USA. UNDER THE PROVISION OF SECTION 9 2 OF THE ACT, ANY INCOME ARISING OUT OF AN INTERNATIONAL TAXATION HAS TO BE COMPUTED HAV ING REGARD TO THE ARMS LENGTH PRICE. UNDER SECTION 92F(II) OF THE ACT ARMS LENGTH PRICE MEANS A PRICE WHICH WOULD BE CHARGED BETWEEN PERSONS IF THEY ARE NOT ASSOCIATED ENTERPRISES AND THERE ARE NO UNCONTROLLED CONDITIONS PREVAILING WITH REFERENCE T O THE TRANSACTIONS. IT IS NOT IN DISPUTE THAT THE PROVISION OF SECTION 92 OF THE ACT ARE APP LICABLE IN RESPECT OF THE TRANSACTIONS OF 5 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 5 RENDERING SERVICES OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES AND THEREFORE THE PROVISION OF SECTION 92 OF THE ACT ARE APPLICABLE. 5. TO JUSTIFY THE PRICE RECEIVED BY THE ASSESSEE A S ONE AT ARMS LENGTH, THE ASSESSEE FILED A TRANSFER PRICING ANALYSIS IN WHICH THE ASSESSEE A DOPTED OPERATING PROFIT TO OPERATING COST (OP/OC) AS PROFIT LEVEL INDICATOR(PLI). THE OP ERATING PROFIT TO OPERATING COST OF THE ASSESSEE WAS DETERMINED AT 21.64%. THE ASSESSEE AD OPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DE TERMINING THE ARMS LENGTH PRICE. THE ASSESSEE ON AN ANALYSIS OF SIMILAR COMPANIES, W HO ARE ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES, IDENTIFIED 21 COMPAN IES AS COMPARABLE WITH THE ASSESSEE. THE ASSESSEE TOOK THE WEIGHTED AVERAGE OF OPERATING PROFIT TO OPERATING COST OF THE 21 COMPARABLE COMPANIES SO SELECTED FOR THRE E FINANCIAL YEARS, VIZ., 2007-08, 2008-09 AND 2009-10. BY DOING SO THE ASSESSEE ARRIV ED AT AN AVERAGE OP/OC I.E., ARITHMETIC MEAN OF 6.54% OF 21 COMPARABLE COMPANIE S. SINCE THE ASSESSEES OPERATING PROFIT/OPERATING COST WAS 21.64%, THE ASSESSEE CLA IMED THAT THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES WAS AT ARMS LENGTH. THE PROF IT MARGIN OF THE COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE IN ITS TRANSFER PR ICING STUDY IS AS FOLLOWS :- 6 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 6 6. THE AO MADE A REFERENCE U/S 92CA (1) OF THE ACT TO THE TRANSFER PRICING OFFICER FOR DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES . THE TPO VIDE ITS ORDER DATED 30.01.2014 PASSED 92CA(3) OF THE ACT, FIRSTLY ACCEP TED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD OF DET ERMINING ARMS LENGTH PRICE OF THE INTERNATIONAL TAXATION. HE HOWEVER, REJECTED TH E ACTION OF THE ASSEESSEE IN ADOPTING THE WEIGHTED AVERAGE OF THREE FINANCIAL YEARS OPERA TING PROFIT TO OPERATING COST TO ARRIVE AT THE PROFIT MARGINS (ARITHMETIC MEAN) OF THE COMP ARABLE COMPANIES. HE HELD THAT MULTIPLE YEAR DATA CANNOT BE USED FOR COMPARISON PU RPOSE AND IT WAS ONLY THE DATA OF THE RELEVANT PREVIOUS YEAR THAT HAS TO BE USED IN A RRIVING AT THE ARITHMETIC MEAN OF PROFIT MARGIN OF THE COMPARABLE COMPANIES. THE TPO THEREAF TER REJECTED 20 OUT OF 21 COMPANIES CHOSEN BY THE ASSESSEE I.E., EXCEPT THE C OMPANY GLOBAL SERVICES LTD., CHOSEN BY THE ASSESSEE IN ITS TRANSFER PRICING ANALYSIS, A LL OTHER COMPANIES CHOSEN AS COMPARABLE COMPANIES BY THE ASSESSEE WERE REJECTED AS NOT COMPARABLE WITH THE BUSINESS PROFILE OF THE ASSESSEE. THE TPO ON HIS OW N IDENTIFIED EIGHT MORE COMPANIES AS COMPARABLE COMPANIES OF THE ASSESSEE AND ARRIVED AT THE OPERATING PROFIT TO OPERATING COST OF THESE COMPANIES AND DETERMINED THE ARMS LEN GTH PRICE OF THE INTERNATIONAL TAXATION AS FOLLOWS :- (QUOTE FROM AOS ORDER) 19. THE LIST OF FINAL COMPARABLES SELECTED BY THE TPO, ALONG WITH THE MARGINS IS AS FOLLOWS : 7 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 7 20. THEREFORE THE CALCULATION OF THE ADJUSTMENT IN THE CASE OF THE ASSESSEE IS AS FOLLOWS : 21. SINCE THE ADJUSTMENT IS LESS THAN +/-5% LIMIT, IN VIEW OF THE FACTS OF THE CASE, UPPER ADJUSTMENT IS PROPOSED TO BE MADE TO THE TOTAL INCO ME OF THE ASSESSEE. 22. IT IS HEREBY CLARIFIED THAT THE FINDINGS AND DI SCUSSIONS MADE IN THIS ORDER ARE APPLICABLE ONLY IN RESPECT TO REFERENCE RECEIVED FO R A.V 2010-11 AND SHALL APPLY ACCORDINGLY. (TOTAL UPWARD ADJUSTMENTIN RESPECT OF MARKET SUPPORT SERVICE: RS 2,15,52,333/-) 8 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 8 7. AGGRIEVED BY THE DETERMINATION OF THE ARMS L ENGTH PRICE BY THE APO AS ABOVE THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLU TION PANEL (DRP). THE DRP GAVE RELIEF TO THE ASSESSEE BY DIRECTING THE TPO TO CONS IDER FOREIGN EXCHANGE GAIN AS PART OF THE OPERATING INCOME WHILE COMPUTING OPERATING PRO FIT/OPERATING COST. SIMILARLY THE DRP ALSO DIRECTED THAT THE BAD DEBTS WRITTEN OFF SH OULD ALSO BE CONSIDERED AS AN OPERATING EXPENDITURE WHILE ARRIVING AT THE PROFIT LEVEL INDICATOR OF THE COMPARABLE AND ARRIVED AT THE OPERATING PROFIT/OPERATING COST OF T HE COMPARABLES. IN RESPECT OF THE FORESAID TWO DIRECTIONS OF THE DRP, WHICH WAS INCOR PORATED BY THE AO IN THE IMPUGNED ORDER, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL IN ITS APPEAL. AGGRIEVED BY THE ACTION OF THE DRP IN NOT REJECTING THE COMPARABLES CHOSEN BY THE TPO AND ALSO EXCLUDING SOME OF THE COMPARABLES CHOSEN BY THE ASSESSEE IN I TS TP ANALYSIS AND NOT ALLOWING THE WORKING CAPITAL ADJUSTMENT AND OTHER RISK ADJUSTMEN T AND NOT EXCLUDING INTEREST INCOME WHILE COMPUTING THE OPERATING PROFIT/OPERATING COST OF COMPARABLES VZ., KULIZA TECHNOLOGIES LTD. AND INTEQ SOFWARE PVT. LTD., THE ASSESSEE HAS RAISED GROUNDS NO.1 TO 16 BEFORE THE TRIBUNAL. WE WILL DEAL WITH ALL THE G ROUNDS IN SERIATIM IN THE FOLLOWING PARAGRAPHS. 8. AS FAR AS GROUND NO.1(A) RAISED BY THE ASSES SEE IN ITS APPEAL IS CONCERNED, THE ASSESSEE IS AGGRIEVED BY THE ACTION OF DRP/AO IN NO T INCLUDING AKSHAY SOFTWARE TECHNOLOGIES LTD., IN THE FINAL LIST OF COMPARABLES CHOSEN BY THE TPO. WE HAVE ALREADY SEEN THAT THE ASSESSEE HAD CHOSEN A SET OF 21 COMPA RABLE COMPANIES AND ADOPTED THE AVERAGE OF THOSE COMPANIES OPERATING PROFIT /OPERAT ING COST TO ARRIVE AT THE ARITHMETIC MEAN OF THE COMPARABLE COMPANIES. ONE SUCH COMPANY CHOSEN BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY WAS AKSHAY SOFTWARE TECHNOLO GIES LTD.. THE TPO WAS OF THE VIEW THAT THE AFORESAID COMPANY CANNOT BE CONSIDERE D AS A COMPARABLE COMPANY FOR THE REASON THAT THE RELATED PARTY TRANSACTION CARRIED O UT BY THIS COMPANY DURING THE RELEVANT FINANCIAL YEAR AND OTHER DATA AVAILABLE FOR THE PUR POSE OF CARRYING OUT COMPARABILITY ANALYSIS PROPERLY, WAS INSUFFICIENT. 9 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 9 9. BEFORE THE DRP THE ASSESSEE DEMONSTRATED THE EX ISTENCE OF ALL THE RELEVANT DATA SO FAR AS THIS COMPARABLE COMPANY CHOSEN BY THE ASSESS EE IS CONCERNED. THE DRP WAS CONVINCED WITH THE ARGUMENTS OF THE ASSESSEE AND AT PAGE 19 OF ITS ORDER DIRECTED THE TPO TO CONSIDER THE AFORESAID COMPANY AS A COMPARAB LE COMPANY. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TPO :- THE SAME ARE BEING CONSIDERED IN RESPECT OF AKASH SOFTWARE TECHNOLOGIES LTD. THE AO HAS NOT GIVEN DETAILED REASONS FOR HOLDING T HAT THIS COMPANY WAS FUNCTIONALLY NON-COMPARABLE. IT IS SEEN FROM ITS AN NUAL REPORT THAT THIS COMPANY HAS REVENUE PRIMARILY FROM SOFTWARE SERVICES AND ON LY .07% REVENUE IS EARNED FROM SALE OF PRODUCTS. FURTHER THIS COMPANY HAS BEE N TAKEN AS COMPARABLE IN THE CASE OF SDS AND HAS SIMILAR ACTIVITIES TO THAT OF E -INFOCHIPS PVT. LTD WHICH HAS BEEN TAKEN BY THE TPO AS COMPARABLE. THE TPO IS ACC ORDINGLY DIRECTED TO INCLUDE THIS COMPANY AS A COMPARABLE PROVIDED IT QUALIFIES ALL OTHER FILTERS ADOPTED BY THE TPO. 10. IT CAN BE SEEN FROM THE AFORESAID DIRECTION S OF THE DRP THAT INSTEAD OF MENTIONING AKSHAY SOFTWARE TECHNOLOGIES LTD., THE DRP HAS GIVE N A DIFFERENT NAME AKASH SOFTWARE TECHNOLOGIES LTD. FOR THIS REASON THE AO IN THE ORDER GIVING EFFECT TO THE DIRECTIONS OF THE DRP HAD NOT CONSIDERED AKSHAY SOF TWARE TECHNOLOGIES LTD., AS A COMPARABLE COMPANY. THE ASSESSEE FILED AN APPLICATI ON U/S 154 OF THE ACT DATED 13.05.2015 BEFORE DRP POINTING OUT THIS APPARENT ER ROR. THE DRP HAS HOWEVER NOT ACTED ON THIS APPLICATION. THE LD. DR SUBMITTED THE FUNCTIONAL PROFILE OF THIS COMPANY HAS NOT BEEN CONSIDERED BY DRP. WE ARE OF THE VIEW THAT THE DRP HAS CONSIDERED THE FUNCTIONAL PROFILE. BESIDES THIS THE ISSUE IS NOT W ITH REGARD TO THE COMPARABILITY OF FUNCTIONAL PROFILE OF THE ASSESSEE AND AKSHAY SOFTW ARE TECHNOLOGIES LTD. THE ISSUE IS WHETHER AKSHAY SOFTWARE TECHNOLOGIES LTD HAS BEEN W RONGLY MENTIONED AS AKASH SOFTWARE TECHNOLOGIES LTD., IN THE DIRECTIONS OF DR P. ON A READING OF THE ORDER OF THE DRP AND THE CONTENTIONS OF THE ASSESSEE, IT IS CLEA R THAT DRP HAS WRONGLY MENTIONED THE NAME OF AKSHAY SOFTWARE TECHNOLOGIES LTD., AS AKASH SOFTWARE TECHNOLOGIES LTD. THEREFORE GROUND NO.1(A) RAISED BY THE ASSESSEE IS ALLOWED AND THE AO IS DIRECTED TO 10 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 10 CONSIDER AKSHAY SOFTWARE TECHNOLOGIES LTD AS A COMP ARABLE COMPANY IN THE FINAL SET OF COMPARABLES. 11. AS FAR AS GROUND NO.1(B) RAISED BY THE ASSE SSEE IS CONCERNED, THE SAME RELATES TO INCLUDING INTEREST INCOME OF COMPARABLE COMPANIES K ULIZA TECHNOLOGIES LTD., AND INTEQ SOFTWARE LTD., WHILE WORKING OUT THE OPERATING PROF IT/OPERATING COST OF THESE COMPARABLE COMPANIES. AS FAR AS THIS OBJECTION IS C ONCERNED THE DRP DEALT WITH THE SAME IN PAGE 29 OF ITS ORDER AT PARA 8.2 AS FOLLOWS :- 8.2. THIS ISSUE HAS BEEN CONSIDERED. THE TPO IS D IRECTED TO CONSIDER FOREIGN EXCHANGE GAINS AS OPERATING INCOME. HOWEVER ONE TIM E OR EXTRA-ORDINARY EXPENSES LIKE EXTRA ORDINARY BAD DEBT LIKE IN THE CASE OF KU LIZA TECHNOLOGIES PVT. LTD. NEEDS TO BE EXCLUDED THEREFORE THE ACTION OF THE TP O TO THIS EXTENT IS UPHELD. THE CONTENTION OF THE ASSESSEE REGARDING INTEREST INCOM E AS NON-OPERATING IS FOUND TO BE NOT CORRECT THEREFORE THE OBJECTION OF THE ASSES SEE IS ACCEPTED. THE TPO IS ACCORDINGLY DIRECTED TO RECOMPUTE THE PLI OF KULIZA TECHNOLOGIES PVT. LTD FOLLOWING THESE DIRECTIONS. 12. A READING OF THE ORDER OF THE DRP CLEARLY S HOWS THAT THE DRP HAS AGREED WITH THE CONTENTION OF THE ASSESSEE THAT INTEREST INCOME IS NOT AN OPERATING INCOME BUT THE USE OF THE WORD NOT CORRECT AND THE USE OF THE WORDS TH EREFORE THE OBJECTION OF THE ASSESSEE IS ACCEPTED SHOWS THAT THERE IS CONTRADICTION. ON THE ISSUE WHETHER INTEREST INCOME CAN BE CONSIDERED AS PART OF OPERATING PROFIT, WE FIND THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF MARUBENI INDIA PVT. LTD. VS DIT IN IT N O.1042 OF 2011 JUDGMENT DATED 25.04.2013 HAS HELD THAT INTEREST INCOME EARNED FRO M INVESTMENTS ON SURPLUS FUNDS WHICH ARE NOT REQUIRED IMMEDIATELY FOR THE BUSINESS OF THE ASSESSEE CANNOT BE CONSIDERED TO BE PART OF ITS OPERATING INCOME. APAR T FROM THE ABOVE IT IS ALSO SEEN THAT AT PAGE 8 PARA 5.2, THE TPO HIMSELF IN THE LAST SENTEN CE HAS SET OUT WHAT ARE NOT OPERATING INCOME AND HAS GIVEN SOME EXAMPLES. ONE SUCH EXAMP LE OF INCOME WHICH IS NOT OPERATING IN NATURE AS SET OUT BY THE TPO HIMSELF I S INTEREST INCOME. IT THUS APPEARS THAT EVEN THE TPO ACCEPTED THE FACT THAT THE INTEREST IN COME IN QUESTION CANNOT FORM PART OF 11 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 11 THE OPERATING INCOME OF THE ASSESSEE FOR THE PURPOS E OF WORKING OPERATING PROFIT TO OPERATING COST. KEEPING IN MIND, THE ABOVE CIRCUMST ANCES AND THE JUDICIAL PRECEDENT SET OUT ABOVE, WE ARE OF THE VIEW THAT THE INTEREST INC OME IN QUESTION SHOULD BE EXCLUDED WHILE WORKING OUT OPERATING PROFIT TO OPERATING COS T OF THE AFORESAID TWO COMPARABLE COMPANIES KULIZA TECHNOLOGIES PVT. LTD., AND INTEQ SOFTWARE LTD. THIS FINDING IS WITHOUT PREJUDICE TO THE COMPARABILITY OF INTEQ SOF TWARE LTD., WHICH IS CHALLENGED BY THE ASSESSEE IN GR.NO.6 BEFORE US. 13. GROUNDS NO.2 AND 3 RAISED BY THE ASSESSEE ARE GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 14. GROUND NO.4 WAS NOT PRESSED BY THE LD. COUNS EL FOR THE ASSESEE. 15. AS FAR AS GROUND NO.5 IS CONCERNED, THE ADM ITTED POSITION OF LAW IS THAT MULTIPLE DATA CANNOT BE USED IN THE TRANSFER PRICING ANALYSI S AS PER THE LAW AS IT STOOD AT THE RELEVANT POINT OF TIME IN A.Y.2010-11. RULE 10B(4) OF THE INCOME TAX RULES, 1962 (RULES) PROVIDES THAT THE DATA TO BE USED IN ANALYS ING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANS ACTION HAS BEEN ENTERED INTO. THIS BEING THE ADMITTED POSITION, WE ARE OF THE VIEW THA T THERE IS NO MERIT IN GROUND NO.5 RAISED BY THE ASSESSEE AND WE HOLD THAT FOR THE PUR POSE OF COMPARABILITY, MULTIPLE YEAR DATA I.E., THE WEIGHTED AVERAGE OF THREE FINANCIAL YEARS OF THE COMPARABLE COMPANIES CANNOT BE USED IN TP ANALYSIS AS PER THE LAWS THAT EXISTED FOR AY 2010-11. 16. AS FAR AS GROUND NO.6 RAISED BY THE ASSESSEE IS CONCERNED, THE SAME IS WITH REGARD TO THE ACTION OF THE TPO AND THE DRP IN ACCEPTING E -INFOCHIPS BANGALORE LIMITED AND INTEQ SOFTWARE LIMITED AS COMPARABLE COMPANIES WITH THAT OF THE ASSESSEE. AS FAR AS THE AFORESAID COMPANIES ARE CONCERNED THE FACTS ARE THA T ADMITTEDLY THE INFORMATION 12 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 12 REGARDING THE FINANCIAL STATEMENT OF THESE TWO COMP ANIES WERE NOT AVAILABLE IN THE PUBLIC DOMAIN AND THE AO OBTAINED THE DETAILS ABOUT THE FINANCIAL RESULTS OF THESE TWO COMPANIES BY ISSUING NOTICES U/S 133(6) OF THE ACT TO THESE TWO COMPANIES. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT E-INFOCHIPS BANGALORE LIMITED WAS NOT CONSIDERED AS A COMPARABL E COMPANY BY THE HONBLE ITAT IN THE CASE OF ANOTHER SOFTWARE DEVELOPMENT SERVICE S COMPANY SUCH AS THE ASSESSEE AND THAT ORDER OF THE TRIBUNAL IS ALSO IN RELATION TO A .Y.2010-11. OUR ATTENTION WAS DRAWN TO THE DECISION OF ITAT, KOLKATA IN THE CASE OF LAB VA NTAGE SOLUTION PVT. LTD., IN ITA NO.1051/KOL/2015 IN PARA 8.2. ORDER DATED 19.10.201 6 WHEREIN THE TRIBUNAL HELD THAT THIS COMPANY CANNOT BE COMPARED WITH A SOFTWARE S ERVICE PROVIDER AS THIS COMPANY WAS INTO BOTH THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES (IT) AS WELL AS PROVIDING INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) AND ALSO FOR THE REASON THAT SEGMENTAL DETAILS OF IT AND ITES WERE NOT AVAILABLE . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- 8.3. EXCLUSION OF INFINITE DATE SYSTEMS PVT. LTD. (MERGED) WE FIND THAT THIS COMPANY HAD REPORTED NCP OF 88.2 5%. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT. HE NCE, COMPARABLE SHOULD ALSO BE IN THE COMPANIES ENGAGED IN THE SIMILAR SECTION. WE FIND THAT THIS COMPANY IS HAVING A DIFFERENT BUSINESS MODEL AND ENGAGED IN PR OVIDING ENTIRE GAMUT OF SOLUTIONS COMPRISING OF TECHNICAL CONSULTING, DESIG N AND DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEM INTEGRATION, IMPLEMENTATION, TE STING AND INFRASTRUCTURE MANAGEMENT SERVICES. WE FIND FROM THE PAPER BOOK TH AT THE REVENUE IS PRIMARILY DERIVED FROM TECHNICAL SUPPORT AND INFRASTRUCTURE M ANAGEMENT SERVICES. WE FIND THAT INFINITE DATE SYSTEMS PVT. LTD. COMMENCED ITS OPERATION ON 1 ST JANUARY, 2009 AND AS PER SEGMENT REPORTING DISCLOSURE, THE COMPAN YS OPERATIONS PREDOMINANTLY RELATE TO PROVIDING SOFTWARE TECHNICAL CONSULTANCY SERVICES TO ITS SOLE CUSTOMER FUJITSU SERVICES LIMITED. FURTHER, AS PER THE ANNUA L REPORT OF 2009, AT PAGE 1, IT IS STATED THAT THE HOLDING COMPANY M/S INFINITE COMPUT ER SOLUTIONS ((INDIA) LIMITED SIGNED AN AGREEMENT (BUILD, OPERATE AND TRANSFER BOT MODEL) WITH FUJITSU SERVICES LIMITED TO SET UP GLOBAL DELIVERY CENTERS IN INDIA TO PROVIDE OFFSHORE DELIVERY CAPABILITIES TO FUJITSU & FUJITSUS ASSOCI ATED COMPANIES. WE FIND THAT THESE FACTS HAVE ALSO BEEN ACKNOWLEDGED BY THE LD. TPO AT PAGE 77 OF HIS ORDER. THE LD. AR STATED THAT IT WOULD BE WORTHWHILE TO NO TE THAT INFINITE DATE SYSTEMS PVT. LTD. COMPLETED ITS THREE YEARS CONTRACT WITH FUJITSU, POST WHICH, THE BUSINESS 13 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 13 WAS TRANSFERRED TO FUJITSU AND THUS THE COMPANY HAS BEEN MERGED WITH ITS HOLDING COMPANY- INFINITE COMPUTER SOLUTIONS (INDIA) LTD. D URING THE FINANCIAL YEAR 2011- 12. WE ARE INCLINED TO AGREE WITH THE SUBMISSIONS O F THE LD. AR THAT THIS COMPARABLE INFINITE DATE SYSTEMS PVT. LTD. WAS CREA TED FOR PURPOSE OF TRANSFER OF BUSINESS. HENCE, THE NATURE OF SERVICES AND BUSINES S MODEL OF ASSESSEE COMPANY AND COMPARABLE COMPANY ARE ENTIRELY DIFFERENT. APAR T FROM THIS, WE ALSO FIND THAT THERE EXIST ABNORMAL CIRCUMSTANCES IN THE SAID COMP ARABLE. DURING THE LAST 3 YEARS, VARIATIONS IN MARGINS EARNED SHOW AN ABNORMA L CIRCUMSTANCES LEADING TO HUGE FLUCTUATIONS AND SUPERNORMAL PROFIT, THE MARGI N EARNED BY INFINITE IS 88.25% WHICH IS ABNORMALLY HIGH. IT WAS ARGUED THAT SUCH C OMPANIES WHICH ARE MAKING MORE THAN TWICE THE ARITHMETICAL MEAN MARGIN AS COM PARED BY THE LD. TPO SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. AR REFERRE D TO PAGE 591 OF THE PAPER BOOK WHERE THE DETAILS OF THE FLUCTUATION IN THE RE VENUE, PROFIT AND MARGINS HAS BEEN PROVIDED. IT IS TRUE THAT WHERE COMPANY IN WHI CH EXTRAORDINARY EVENTS HAD TAKEN PLACE DURING THE YEAR LIKE MAJOR ACQUISITIONS WHICH HAD IMPACT ON PROFITS OF COMPANY, IT COULD NOT BE SELECTED AS COMPARABLE TO ASSESSEE ENGAGED IN SOFTWARE DEVELOPMENT. WE PLACE RELIANCE IN THIS REGARD ON TH E DECISION OF HYDERABAD TRIBUNAL IN THE CASE OF EXCELLANCE DATA RESEARCH (P ) LTD. VS. ACIT REPORTED IN [2016] 74 TAXMANN.COM 13 (HYD TRIB) DATED 12.09.201 6 FOR ASST YEAR 2010-11, WHEREIN IT WAS HELD THAT: 8. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THE DRP HAS DIRECTED THE AO TO CONSIDER WHETHER THE EXTRA ORDINARY EVENT OF AMALGAMATION DURING THE YEAR IS FOUND TO HAVE AN IM PACT ON THE PROFITS OF THE COMPANY. WE FIND THAT INSTEAD OF CARRYING OUT THE EXERCISE, THE AO HAS SIMPLY FOLLOWED THE ORDER OF THE TPO IN HOLDING THAT THE F ACT OF AMALGAMATION ON THE MARGIN OF THE SAID COMPANY HAS NO EFFECT ON THE MA RGIN OF THE SAID COMPANY. THIS, IN OUR OPINION, IS NOT A CORRECT APPROACH OF THE AO . WHERE A DIRECTION HAS BEEN GIVEN BY THE DRP TO FOLLOW A CERTAIN PROCEDURES, TH E AO HAS SIMPLY FOLLOWED THE TPO ORDER. THEREFORE, ORDER OF THE AO ON THIS ISSUE NEEDS TO BE SET ASIDE. IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P) LTD. (2015) 64 TAXMANN.COM 442 (HYD.- TRIB), WHICH IS ALSO ENGAGED IN RENDERING OF ITES T O ITS AES, THE TRIBUNAL HAS TAKEN NOTE OF THE SAME AT PARA 9.1. AND 9.3 OF ITS ORDER. THEREFORE, THE DECISION OF THE TRIBUNAL IN THE SAID CASE IS APPLICABLE TO THE CASE ON HAND, MORE PARTICULARLY SINCE THE COMPARABLES ADOPTED BY THE TPO IN THE SAI D CASE ARE THE SAME IN THE ASSESSEES CASE ALSO. IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P) LTD. (SUPRA) AT PAGE 20, PARA 18, THE TRIBUNAL HAS HELD AS UNDER: 18. AS REGARDS M/S ACCENTIA TECHNOLOGIES LTD., IS CONCERNED, WE FIND THAT THE DRP HAS DIRECTED TO EXCLUDE THIS COMPANY BY PLACIN G RELIANCE UPON THE ORDER OF THE ITAT IN THE ASSESSEES OWN CASE FOR THE A.Y. 20 09-10 BY HOLDING THAT THIS COMPANY OPERATES IN A DIFFERENT BUSINESS STRATEGY O F ACQUIRING COMPANIES FOR 14 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 14 INORGANIC GROWTH AS ITS STRATEGY AND CONSIDERING TH E PROFIT MARGINS OF THE COMPANY AND INSUFFICIENT SEGMENTAL DATA, HELD THAT HIS COMPANY CANNOT BE SELECTED AS A COMPARABLE. IT WAS ALSO HELD BY THE D RP THAT ON THE VERY SAME REASON OF ACQUISITION OF VARIOUS COMPANIES, BEING A N EXTRAORDINARY EVENT, IT HAD AN IMPACT ON THE PROFIT OF THE COMPANY AND THE SAID COMPANY WAS DIRECTED TO BE EXCLUDED. 18.1.FOR THE RELEVANT A.Y. 2010-11, THE LD. COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE INFORMATION AVAILABLE ON ACCEN TIA TECHNOLOGIES LTD. TO DEMONSTRATE THAT THE SAID COMPANY IS NOT DIVERSIFIE D KNOWLEDGE PROCESS OUTSOURCING ACTIVITIES. IT IS SEEN THERE FROM THAT THE SAID COMPANY IS INVOLVED IN HEALTHCARE DOCUMENTATION AS WELL AS RECEIVABLES, MA NAGEMENT SERVICES INCLUDING INSTALLATION AND MAINTENANCE OF ALL SOFTW ARE, HARDWARE AND BAND WIDTH INFRASTRUCTURE REQUIRED FOR THE SAME, DEPLOYMENT OF MAN POWER AND SERVICE DELIVERY IN ALL THESE AREAS. IT IS ALSO SEEN THAT I T IS ENGAGED IN LEGAL PROCESS OUTSOURCING. FROM SCHEDULE-IV SHOWING THE FIXED ASS ETS OF THE ASSESSEE, IT IS ALSO SEEN THAT THE SAID COMPANY OWNS GOODWILL/BRAND/IPRS (INTELLECTUAL PROPERTY RIGHTS). FROM THE NOTES TO THE ACCOUNTS, IT IS ALSO SEEN THAT A SUBSIDIARY OF THE COMPANY ASSCENT INFOSERVE PVT. LTD., HAS BEEN AMALG AMATED WITH THE COMPANY CONSEQUENT TO WHICH, ASSETS AND LIABILITIES OF THE ERSTWHILE COMPANY WERE TRANSFERRED AND VESTED IN THE COMPANY W.E.F. 1 ST APRIL, 2008 AND THE SCHEME HAS BEEN GIVEN EFFECT TO IN THE ACCOUNTS OF THE YEAR. T HEREFORE, IT IS CLEAR THAT THERE IS AN EXTRAORDINARY EVEN IN THE CASE OF ACCENTIA TECHN OLOGIES LTD., DURING THE RELEVANT FINANCIAL YEAR PARTICULARLY SINCE THE APPR OVAL OF AMALGAMATION HAS BEEN GIVEN BY THE HONBLE HIGH COURT OF MUMBAI VIDE ORDE RS DATED 21 ST AUGUST, 2009 AND BY THE HONBLE KARNATAKA HIGH COURT VIDE ORDERS DATED 6 TH FEBRUARY, 2010. THIS EVENT WOULD DEFINITELY HAVE AN EFFECT ON THE P ROFIT MARGINS OF THE SAID COMPANY AND THEREFORE, HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES AS RIGHTLY DONE BY THE DRP. THEREFORE, WE DO NOT SEE A NY REASON TO INTERFERE WITH THE ORDER OF THE DRP ON THIS COMPANY ALSO. ACCORDIN GLY, GROUND NO. 3 OF THE REVENUE IS DISMISSED. SINCE, THE ORDER OF THE TRIBUNAL IN THE CASE OF HYU NDAI MOTORS INDIA ENGG. (P) LTD. (SUPRA) FOR THE SAME A.Y., WE DIRECT THE AO/TP O TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 11. TCS E-SERVE INTERNATIONAL LTD. AS REGARDS THE COMPARABILITY OF THIS COMPANY WITH THE ASSESSEE, THE LEARNED COUNSEL FOR THE ASSE SSEE SUBMITTED THAT THE TCS INTERNATIONAL ALSO PROVIDES SOFTWARE TESTING, VERIF ICATION AND VALIDATION WHICH ARE DIFFERENT FROM ITES SERVICES PROVIDERS BY THE A SSESSEE. IT IS ALSO SUBMITTED THAT THE SEGMENTAL INFORMATION OF TCS INTERNATIONAL ARE NOT AVAILABLE IN THE ANNUAL REPORT. THE EXCEPTIONAL CIRCUMSTANCES OF THE COMPANY REPORTED IN ANNUAL REPORT SUCH AS ACQUISITION OF INDIA BASED CAPTIVE B USINESS OUTSOURCING ARM, 15 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 15 RESULTING IN ACQUISITION OF AN AGGREGATE AMOUNT OF $ 2.5 BILLION OVER A PERIOD OF 9.5 YEARS AND ITS IMPACT ON THE FINANCIAL IMPLICATI ONS OF THE COMPANY ALSO BROUGHT TO OUR NOTICE. IT IS SUBMITTED THAT THESE P ECULIAR CIRCUMSTANCES HAVE BEEN CONSIDERED BY THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P) LTD. (SUPRA) FOR EXCLUSION O F THE LIST OF COMPARABLES. RESPECTFULLY FOLLOWING THE DECISION OF THE BENCH, T HESE TWO COMPARABLES TCS E- SERVE INTERNATIONAL LTD. AND TCS E-SERVE LTD. DIREC TED TO BE EXCLUDED. IN VIEW OF THE AFORESAID FINDINGS AND JUDICIAL PREC EDENT RELIED UPON, WE HOLD THAT THE COMPARABLE CHOSEN BY LD. TPO I.E. INFINITE DATA SYSTEMS PVT. LTD. (MERGED) IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE COMPA NY. 17. FOLLOWING THE AFORESAID DECISION OF THE TRI BUNAL WE ARE OF THE VIEW THAT E- INFOCHIPS BANGALORE LTD., SHOULD BE EXCLUDED FROM T HE LIST OF COMPARABLE COMPANIES WHILE WORKING OUT THE ARITHMETIC MEAN OF THE COMPAR ABLE COMPANIES. 18. AS FAR AS INTEQ SOFTWARE LIMITED IS CONCERNE D, THE PLEA OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT INFORMATION REGARDING THIS COMPAN Y WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AND THE TPO HAD OBTAINED THE FINANCIAL RESUL TS BY ISSUING OF A NOTICE U/S 133(6) OF THE ACT. IN THE PROCEEDINGS BEFORE DRP, ON REQUE ST BY THE ASSESSEE THE TPO SHARED SOME OF THE DETAILS THAT HE RECEIVED FROM THE AFORE SAID COMPANY. THE DETAILS SO OBTAINED ARE AT PAGES 613 TO 617 OF THE PAPER BOOK VOL.II FILED BY THE ASESSEE. THE INFORMATION SHARED SHOWS THAT INTEQ SOFTWARE LIMITE D IS NOT PURELY SOFTWARE DEVELOPMENT SERVICE COMPANY AND PROVIDES BESIDES SO FTWARE DEVELOPMENT, CONSULTANCY SERVICES, DATA WAREHOUSING, EDI SERVICES BESIDES HE ALTH CARE BPO. THE FINANCIAL DETAILS OF THIS COMPANY WHICH WAS SHRED BY THE TPO IN THE COURSE OF PROCEEDINGS BEFORE DRP, IS AT PAGES 269 TO 297 OF THE ASSESSEE S PAPER BOOK. COPY OF PROFIT AND LOSS ACCOUNT WAS NOT GIVEN TO THE ASSESSEE. HOWEVER SCHE DULE FORMING PART OF THE PROFIT AND LOSS ACCOUNT HAS BEEN FURNISHED. THE BALANCE SHEET HAS BEEN FURNISHED. THE TPO IN HIS ORDER HAS WORKED OUT OPERATING PROFIT TO OPERATING COST OF THIS COMPANY AT 49.94%. ON WHAT BASIS THIS WAS WORKED OUT IS NOT SPELT OUT IN THE ORDER OF DRP EXCEPT FOR A REFERENCE TO THE INFORMATION RECEIVED IN RESPONSE T O THE NOTICE U/S 133(6) OF THE ACT. IT 16 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 16 IS NOTICED FROM THE INFORMATION PROVIDED BY THE AO TO THE ASSESSEE IN THE FORM OF SCHEDULE FORMING PART OF THE PROFIT AND LOSS ACCOUN T THAT A SUM OF RS.66,56,873/- BEING OTHER INCOME COMPRISING OF INTEREST, FOREIGN EXCHAN GE GAIN ETC HAS BEEN CONSIDERED PART OF THE OPERATING PROFIT. AS WE HAVE ALREADY SEEN TH AT THIS COMPANY HAS DIFFERENT SEGMENTS AND NO SEGMENTAL DATA HAS BEEN PROVIDED BY THE TPO TO THE ASSESSEE. IN THESE CIRCUMSTANCES WE ARE OF THE VIEW THAT IT WOULD BE S AFE TO EXCLUDE INTEQ SOFTWARE PVT. LTD FROM THE LIST OF COMPARABLES. THE PROCESS OF C OMPUTATION OF ARMS LENGTH PRICE INVOLVES COMPARABILITY OF PROFIT MARGINS OF SIMILA R TRANSACTIONS BY UNRELATED PARTIES AND THEREFORE CORRECT AND RELIABLE DATA SHOULD BE T HE BASIS ON WHICH SUCH COMPARABILITY EXERCISE SHOULD BE CARRIED OUT. WHEN THERE IS AN ELEMENT OF DOUBT ON A PARTICULAR DATA BASED ON WHICH COMPARABILITY ANALYSIS IS CARRIED OU T, IT WOULD BE SAFE NOT TO ACT ON SUCH DATA. WE DO NOT WISH TO GO INTO THE QUESTION WHETHE R THE TPO CAN RELY ON SECRET COMPARABLES. ON THE FACTS AVAILABLE ON RECORD IT TR ANSPIRES THAT NO RELIABLE DATA HAVE BEEN BROUGHT ON RECORD TO SUBSTANTIATE THE MARGIN O F 49.91% DETERMINED BY THE TPO FOR THIS COMPANY. IN THESE CIRCUMSTANCES WE DIRECT THAT INTEQ SOFTWARE PVT. LIMITED BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIE S TO BE ADOPTED BY THE TPO FOR ARRIVING AT THE AVERAGE MARGIN OF COMPARABLE COMPAN IES. 19. AS FAR AS GR.NO.7 CHALLENGING THE INCLUSION OF M/S.INFINITE DATA SYSTEMS PVT.LTD. (SINCE MERGED) IN THE FINAL SET OF COMPARABLES FOR THE PURPOSE OF DETERMINING THE ARITHMETIC MEAN OF COMPARABLE COMPANIES, THE PLEA O F THE ASSESSEE IS THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE AND ALSO FOR THE REASON THAT THIS COMPANY HAS EARNED SUPERNORMAL OPE RATING MARGIN. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE BROUGH T TO OUR NOTICE A DECISION OF THE ITAT KOLKATA TRIBUNAL IN THE CASE OF M/S.LABVANTAGE SOLUTION PVT.LTD., VS. DCIT ITA NO.617/KOL/2015 ORDER DATED 19.10.2016. THE ASSESS EE IN THAT CASE WAS ALSO A COMPANY ENGAGED IN THE BUSINESS OF RENDERING SOFTWA RE DEVELOPMENT SERVICES. THE TRIBUNAL HELD THAT INFINITE DATA SYSTEMS PVT.LTD., IS NOT FUNCTIONALLY COMPARABLE WITH A 17 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 17 COMPANY RENDERING SOFTWARE DEVELOPMENT SERVICES. T HE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL. INFINITE DATA SYSTEMS PVT LTD (MERGED) THE ID AR ARGUED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE AND IT IS HAVING A DIFFERENT BUSINESS MODEL. THE CO MPANY IS ENGAGED IN PROVIDING ENTIRE GAMUT OF SOLUTIONS COMPRISING OF TECHNICAL C ONSULTING, DESIGN AND DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEM INTEGR ATION, IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES. FURTHER IT IS STATED FROM THE RECORDS THAT THE REVENUE IS PRIMARILY DRIVEN FROM TECHNICAL SUPP ORT AND INFRASTRUCTURE IN MANAGEMENT SERVICES. FURTHER, AS PER THE ANNUAL REP ORT OF 2009, AT PAGE 1, IT IS STATED THAT THE HOLDING COMPANY M/S INFINITE COMPUT ER SOLUTIONS (INDIA) LIMITED SIGNED AN AGREEMENT (BUILD, OPERATE AND TRANSFER MO DEL) WITH FUJITSU SERVICES LIMITED TO SET UP GLOBAL DELIVERY CENTERS IN INDIA TO PROVIDE OFFSHORE DELIVERY CAPABILITIES TO FUJITSU & FUJITSU'S ASSOCIATED COMP ANIES. INFINITE DATA SYSTEMS COMMENCED ITS OPERATIONS ON 1 ST JANUARY 2009 AND A S PER SEGMENT REPORTING DISCLOSURE. THE COMPANY'S OPERATIONS PREDOMINANTLY RELATE TO PROVIDING SOFTWARE TECHNICAL CONSULTANCY SERVICES TO ITS SOLE CUSTOMER FUJITSU SERVICES LIMITED. THE ID AR ARGUED THAT THESE FACTS HAVE ALSO BEEN ACKNOWLED GED BY THE LD. TPO AT PAGE 77 .OF. HIS ORDER. ALSO, IT WOULD BE WORTHWHILE TO NOT E THAT INFINITE DATA SYSTEMS PVT LTD COMPLETED I THREE YEARS CONTRACT WITH FUJITSU, POST WHICH, THE BUSINESS WAS TRANSFERRED TO FUJITSU AND THUS THE COMPANY HAS BEE N MERGED WITH ITS HOLDING COMPANY - INFINITE COMPUTER SOLUTIONS (INDIA) LTD D URING THE FINANCIAL YEAR 2011- 12. THE ID AR ARGUED THAT THE ASSESSEE COMPANY IS A SER VICE PROVIDER IN AREA OF SOFTWARE DEVELOPMENT WHEREAS THE COMPARABLE COMPANY INFINITE DATA SYSTEMS PVT LTD W CREATED FOR PURPOSES OF TRANSFER OF BUSINESS. THE SERVICES AND BUSINESS MODEL OF ASSESSEE COMPANY AND COMPARABLE COMPANY IS ENTIR ELY DIFFERENT. HE ALSO ARGUED THAT THERE E ABNORMAL CIRCUMSTANCES IN THE SAID COM PARABLE. DURING THE LAST 3 YEARS, VARIATION M MARGINS EARNED SHOWS AN ABNORMAL CIRCUMSTANCES LEADING TO HUGE FLUCTUATION AN SUPERNORMAL PROFIT, THE MARGIN EARNED BY INFINITE IS 88.25% WHICH IS ABNORMALLY HIS . SUCH COMPANIES WHICH ARE MAKING MORE THAN TWICE THE ARITHMETICAL MEAN MARGIN COMPUTED BY THE ID TPO SHO ULD NOT BE CONSIDERED AS COMPARABLE. THE LD AR REFERRED T PAGE 591 OF THE PA PER BOOK WHERE THE DETAILS OF THE FLUCTUATION IN THE REVENUE, PROFIT AN MARGINS H AS BEEN PROVIDED. ACCORDINGLY, HE PRAYED FOR REJECTION OF THIS COMPARABLE. 20. THE AFORESAID REASONING OF THE TRIBUNAL WHI CH DECISION WAS ALSO RENDERED IN A CASE RELATING TO AY 2010-11 WILL EQUALLY APPLY TO T HE CASE OF THE ASSESSEE IN THIS APPEAL 18 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 18 ALSO AS THE FUNCTIONAL PROFILE OF THE ASSESSEE AND THAT OF THE ASSESSEE IN THE DECISION CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE O NE AND THE SAME. WE THEREFORE DIRECT THAT M/S.INFINITE DATA SYSTEMS PVT.LTD., BE EXCLUDE D FROM THE LIST OF COMPARABLE CHOSEN BY THE TPO. GR.NO.7 RAISED BY THE ASSESSEE IS ACCO RDINGLY ALLOWED. 21. AS FAR AS GR.NO.8 RAISED BY THE ASSESSEE SEEKING EXCLUSION OF THIRDWARE SOLUTIONS LTD., AND COM-U-LEARN TECH INDIA LTD., IN THE FINAL SET OF COMPARABLES CHOSEN BY THE TPO IS CONCERNED, THE PLEA OF THE ASS ESSEE IS THAT THESE COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESS EE. IT IS THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS IN SOFTWARE CONSULTANCY, APPLICATIO N DEVELOPMENT SERVICES, APPLICATION MANAGEMENT SUPPORT SERVICES, ENTERPRISE APPLICATION SPACE. OUR ATTENTION WAS DRAWN TO THIS COMPANIES WEBSITE EXTRACT COPIES OF WHICH ARE AT PAGE 612 OF VOL-II PAPER BOOK FILED BY THE ASSESSEE. OUR ATTENTION WAS ALSO DRAW N TO THE EXTRACT OF THIS COMPANIES FINANCIALS AT PAGE 607 PAPER BOOK-II WHEREIN THE FA CT THAT IT IS DEVELOPING SOFTWARE PRODUCTS FROM JULY, 2009 AND THAT THE PRODUCTS WILL BE AVAILABLE FOR SALE TO THE CUSTOMERS DURING THE FINANCIAL YEAR 2010-11 IS CLEA RLY SPELT OUT. OUR ATTENTION WAS ALSO DRAWN TO THE FACT THAT IN THE PROFIT AND LOSS ACCOU NT THERE IS REFERENCE TO INCOME FROM SALE OF LICENSES WHICH IS NOT THE CASE NORMALLY IN THE CASE OF COMPANIES PROVIDING SOFTWARE DEVELOPMENT SERVICES. FINALLY IT WAS SUBM ITTED THAT THE SEGMENTAL INFORMATION OF THESE COMPANIES IS NOT AVAILABLE AS THE PRIMARY SEGMENT IS BASED ON GEOGRAPHICAL AREA. OUR ATTENTION WAS ALSO DRAWN TO SEVERAL CASE S DECIDED BY VARIOUS BENCHES OF THE TRIBUNAL ON THE COMPARABILITY OF THIS COMPANY WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. WE DEEM IT APPROPRI ATE TO MAKE MENTION OF ONLYH ONE SUCH DECISION RENDERED BY THE ITAT AHMEDABAD BENCH IN THE CASE OF I-MANY SOFTWARE PRIVATE LTD. IT (TP) 222/AHD/2015 ORDER DATED 27.10 .2016 WHICH IS IN RELATION TO AY 2010-11 AND RENDERED IN THE CONTEXT OF A SOFTWARE D EVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. 19 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 19 22. WE HAVE CONSIDERED THE SUBMISSIONS OF TH E LEARNED COUNSEL FOR THE ASSESSEE AS WELL AS THE LEARNED DR WHO RELIED ON THE DIRECTIONS OF THE DRP. WE FIND THAT IN THE CASE OF I-MANY SOFTWARE PVT.LTD., (SUPRA) COMPARABI LITY OF THIS COMPANY WITH A SOFTWARE DEVELOPMENT SERVICES COMPANY SUCH AS THE A SSESSEE WAS CONSIDERED AND IT WAS HELD THAT THIS COMPANY IS NOT A GOOD COMPARABLE. T HE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL ON RECORD. SOLITARY' GRIEVANCE OF THE ASSESSEE THROUGH THIS GR OUND IS AGAINST THE ORDER OF ID. ORP FOR APPROVING THE SELECTION OF COMPARABLE NAMEL Y THIRDWARE SOLUTION LTD. BY TPO. WE OBSERVE THAT ASSESSEE IS ENGAGED IN THE BUS INESS OF PROVIDING SOFTWARE DEVELOPMENT EVOLUTION AND PRODUCTION OF COMPUTER SO FTWARE. ASSESSEE ALSO HAS NOT OUTSOURCED ITS BUSINESS ACTIVITIES TO THIRD PARTY A ND OPERATES ON THE INSTRUCTIONS OF ITS ASSOCIATE ENTERPRISE. WE FURTHER OBSERVE THAT A SSESSEE HAS REFERRED AND RELIED ON VARIOUS DECISIONS OF CO-ORDINATE BENCH WHEREIN I T HAS BEEN HELD THAT THIRDWARE SOLUTION IS NOT A GOOD COMPARABLE FOR THE PURPOSE O F T.P. ADJUSTMENT WITH REGARD TO THE ASSESSEE ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. WE OBSERVE THAT CO-ORDINATE BENCH DELHI IN THE CASE OF ION TRADING INDIA PRIVATE LTD. VS. ITO IN ITA NO.1 035/0EL/2015 FOR ASST. YEAR 2010-11 HAS HE LD AS UNDER :- '56. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THE FUNCTIONS OF THIRDWARE ARE IN ACCOUNT WITH THE ASSESSEE WHICH ONLY PROVIDES SOFTWARE DEVELOPMENT IN THE FINANCE D OMAIN AS PER THE INSTRUCTION OF ITS AE. ALSO, THIRDWARE HAS INCURRED EXPENSES TOWARDS IMPORT OF SOFTWARE SERVICES, EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THE ASSESSEE. SINCE IT IS ALSO ENGAGED IN OU TSOURCING ITS ACTIVITIES AS IT HAS INCURRED EXPENSES TOWARDS IMPORTS OF SOFTWAR E SERVICES, EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THE APPELLA NT COMPANY. HENCE, IT IS FUNCTIONALLY NOT COMPARABLE AND CANNOT BE TREATE D AS A COMPARABLE TO ASSESSEE. WE ORDER ACCORDINGLY. ' 11. WE FURTHER OBSERVE THAT THE CO-ORDINATE BENCH, OELI IN THE CASE OF SUN LIFE INDIA SERVICE CENTRE PVT. LTD. VS. DCIT (ITA NO.579 9/0E1/2012 FOR AY 2008-09 HAS HELD AS UNDER :- '21. WE HOVE PERUSED THE ANNUAL REPORT OF THIS COMP ANY WHICH IS AVAILABLE ON PAGES 100 ONWARDS OF THE PAPER BOOK. T HE PROFIT & LOSS ACCOUNT OF THIS COMPANY IS AT PAGE 107, WHICH SHOWS 'SALES & OTHER 20 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 20 INCOME'. BIFURCATION OF 'SALES ' IS AVAILABLE AS PE R SCHEDULE 12, WHICH COMPRISES OF 'SALE OF LICENCE' AMOUNTING TO RS.39.1 6 LAC, 'SOFTWARE SERVICES' AMOUNTING TO RS.7.67 CRORE, 'EXPORT FROM SEZ UNIT' AMOUNTING TO RS.26,39 CRARE, 'EXPORT FROM STPI UNIT' AMOUNTING T O RS.16.88 CRARE AND 'REVENUE FROM SUBSCRIPTION' AMOUNTING TO RS.92.93 L AC. THESE TIQURES INDICATE THAT APART FROM THE REVENUE FROM 'SOFTWARE SERVICES' WHICH IS ONLY TO THE TUNE OF RS.7.67 CRORE, THIS COMPANY EARNED T OTAL GRASS REVENUE FROM 'SALES' TO THE TUNE OF RS.52,27 CRORE INCLUDING FRO M EXPORT FROM SEZLSTPI UNITS. WHEN WE CONSIDER THE FIGURES OF THIS COMPANY ON AN ENTITY LEVEL AS HAVE BEEN ADOPTED BY THE TPO FOR COMPARISON, IT BEC OMES VIVID THAT IT CEASES TO BE COMPARABLE WITH THE ASSESSEE'S 'SOFTWA RE DEVELOPMENT AND MAINTENANCE SUPPORT SERVICES' SEGMENT. THE REASON H ARDLY NEEDS ANY HIGHLIGHTING, BEING THE INCOME OF THIS COMPANY ALSO LARGELY INCLUDING, REVENUES FROM EXPORTS FROM SEZLSTPI UNITS APART FRO M SALE OF LICENCE. THESE DISTINGUISHING FEATURES MAKE THIS COMPANY AS NON COMPARABLE. WE, THEREFORE, ORDER FOR THE REMOVAL OF THIS COMPANY FR OM THE LIST OF COMPARABLES. ' (EMPHASIS SUPPLIED BY US) 12. FURTHER THE CO-ORDINATE BENCH DELHI IN THE CASE OF AVAYA INDIA (P) LTD VS. ADDL.CIT (ITA NO. 5528/0E1.L2011) HAS OBSERVED THAT THIRDWARE SOLUTIONS HAS MADE INCOME FROM SALE OF LICENCE TO THE TUNE OF MOR E THAN RS.1 CRORE, WHICH MEANS THE COMPANY IS INTO PRODUCTION OF SOFTWARE PRODUCTS AND THEREFORE, FUNCTIONALLY DIFFERENT FROM CONTRACT SOFTWARE DEVELOPER ASSESSEE . THE RELEVANT EXTRACT OF THE DECISION IS REPRODUCED BELOW'- '12. 1 ... (XXV) ... WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. A PERUSAL OF THE ANNUAL REPORT 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, WH ICH MEANS THE COMPANY IS INTO PRODUCTION OF SOFTWARE PRODUCTS WHICH APPAR ENTLY CANNOT BE A COMPARABLE TO ASSESSEE DEALING WITH CONTRACT SOFTWA RE DEVELOPMENT AND NOT INTO SALE OF ANY PRODUCT. THEREFORE, WE DIRECT TPO/AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES.' (EMPHASIS SUPPLIED BY US) 13. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-O RDINATE BENCH REFERRED ABOVE IN PARA 1 0,11 & 12, WE FIND THAT THE SAME ARE SQUAREL Y APPLICABLE TO THE FACTS OF THE ASSESSEE TO THE EXTENT THAT ASSESSEE IS ALSO ENGAGE D IN SOFTWARE DEVELOPMENT VALUATION OF PRODUCTION WORKS OF COMPUTER SOFTWARE AND OPERATES MAINLY ON THE INSTRUCTIONS OF ITS ASSOCIATE ENTERPRISES WHEREAS T HE IMPUGNED COMPARABLE THIRDWARE SOLUTION IS ADDITIONALLY ALSO IN THE BUSI NESS OF ENTERPRISES WHEREAS THE 21 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 21 IMPUGNED COMPARABLE THIRDWARE SOLUTION IS ADDITONAL LY ALSO IN THE BUSINESS OF TRADING OF SOFTWARE OUTSOURCES IT ACTIVITIES. WE AR E, THEREFORE, OF THE. VIEW THAT THIRDWARE SOLUTION IS NOT A FIT COMPARABLE IN THE C ASE OF ASSESSEE FOR THE PURPOSE OF MAKING T.P. ADJUSTMENT. WE ALLOW THIS GROUND OF ASSESSEE. 23. RESPECTFULLY FOLLOWING THE AFORESAID DECIS ION, WE DIRECT EXCLUSION OF THIRDWARE SOLUTION AS A COMPARABLE BY THE TPO FOR ARRIVING AT ARITHMETIC MEAN OF COMPARABLE COMPANIES. 24. AS FAR AS THE COMPANY COMP U-LEARN TECH IND IA LTD., IS CONCERNED, IT WAS THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS MORE INTO SOFTWARE PRODUCTS AS WELL AS BPO SERVICES BESIDES R & D ACTIVITIES IN PHARMACEUTICAL SECTOR AND THAT NO SEGMENTAL DETAILS OF THIS COMPANY ARE AVAILABLE. IT WAS BROUGHT TO O UR NOTICE THAT THE ITAT HYDERABAD BENCH IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA PV T.LTD. VS. ACIT ITA NO.1758/HYD/2014 IN RELATION TO AY 2010-11 BY ORDER DATED 16.10.2015 HELD THAT THIS COMPANY IS NOT COMPARABLE WITH A SOFTWARE DEVELOPME NT SERVICES COMPANY SUCH AS THE ASSESSEE. 25. WE HAVE CONSIDERED THE SUBMISSION AND WE F IND THAT IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA PVT.LTD. (SUPRA), A COMPANY ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES SUCH AS THE ASSESSEE, THE HYDE RABAD BENCH HELD THAT THIS COMPANY IS NOT COMPARABLE WITH A SOFTWARE DEVELOPME NT SERVICES COMPANY. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS: 9.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE A RE OF THE OPINION THAT ON THE BASIS OF INFORMATION AVAILABLE, COMP-U-LEARN TECH I NDIA LTD., CANNOT BE SELECTED AS A FUNCTIONALLY COMPARABLE COMPANY AS IT HAS DIVE RSIFIED ACTIVITIES. ONLY IF THERE ARE SEGMENTAL REPORTS PERTAINING TO SOFTWARE DEVELO PMENT SERVICES, THEN ONLY THE COMPANY CAN BE TAKEN AS COMPARABLE COMPANY. IN THE ABSENCE OF SUCH INFORMATION, IT IS VERY DIFFICULT TO HOLD THAT THE SELECTED COMPANY IS COMPARABLE TO ASSESSEE-COMPANY. THERE IS NO INFORMATION ABOUT THE SEGMENTAL PROFITS. WHAT THAT COMPANY HAS REPORTED IN ITS ANNUAL REPORT IS 'INCOM E FROM SOFTWARE DEVELOPMENT' WHICH CANNOT BE EQUATED AS 'INCOME FROM SERVICES'. THE SOFTWARE DEVELOPMENT MAY INCLUDE SALE OF PRODUCTS. IN THE ABSENCE OF SEGMENT AL INFORMATION, THIS CASE CANNOT BE SELECTED AS COMPARABLE. HOWEVER, WHETHER TPO COU LD OBTAIN ANY SEGMENTAL 22 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 22 INFORMATION IS NOT KNOWN TO US. WE ARE OF THE OPINI ON THAT TPO SHOULD EXAMINE WHETHER THERE ARE ANY SEGMENTAL INFORMATION WHICH C AN BE OBTAINED FROM THE COMPANY OR AVAILABLE IN THE PUBLIC DOMAIN SO AS TO COMPARE ASSESSEE'S SOFTWARE DEVELOPMENT SERVICES WITH THAT OF SOFTWARE DEVELOPM ENT SERVICES OF COMP-U-LEARN TECH INDIA LTD. THEREFORE, WE :- 10 -: I.T.A. NOS. 1758 & 1936/HYD/14 PEGASYSTEMS WORLDWIDE INDIA PVT. LTD., ARE OF THE O PINION THAT THE ISSUE OF SELECTION OF THIS COMPANY IS A COMPARABLE SHOULD BE RESTORED TO THE FILE OF AO/TPO TO EXAMINE THE AVAILABLE DATA IN PUBLIC DOMAIN/OR O BTAINING INFORMATION U/S. 133(6) OF THE ACT FOR SEGMENTAL INFORMATION PERTAIN ING TO SOFTWARE DEVELOPMENT SERVICES AND THEN DECIDE AFTER GIVING DUE OPPORTUNI TY TO ASSESSEE WHETHER THE SAID COMPANY CAN BE SELECTED AS COMPARABLE. FOR THE TIME BEING, ASSESSEE'S OBJECTIONS ARE CONSIDERED VALID AND ISSUE IS RESTORED TO THE F ILE OF AO FOR UNDERTAKING ANALYSIS AFRESH AS FAR AS THIS COMPANY IS CONCERNED. 26. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL, WE DIRECT THE TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES FOR THE P URPOSE OF DETERMINING ALP. 27. AS FAR AS GR.NO.9 RAISED BY THE ASSESSEE IS CONCERNED, THE CHALLENGE TO INCLUDING KULIZA TECHNOLOGIES PVT.LTD. AS A COMPARABLE COMPAN Y WAS NOT SERIOUSLY CONTESTED AND THEREFORE THE SAME IS DIRECTED TO BE RETAINED AS A COMPARABLE. THE ASSESSEE HAS HOWEVER POINTED OUT THAT THE OP/OC OF THIS COMPANY HAS BEEN WRONGLY CALCULATED BY THE TPO BY CONSIDERING THE BAD DEBTS OF THIS COMPAN Y AS PART OF THE NON-OPERATING PROFIT OF THE ASSESSEE. IN THIS REGARD, WE HAVE NO TICED THAT THE TPO IN HIS ORDER AT PAGE- 8 PARAGRAPH 5.2 HAS OBSERVED THAT CERTAIN ITEMS OF INCOME AND EXPENSES ARE NON- OPERATIONAL INCOME OR EXPENDITURE AND WILL NOT BE C ONSIDERED FOR CALCULATING OP/OC PROFIT MARGIN. ONE OF THE ITEM OF EXPENDITURE SET OUT THEREIN TO BE ADDED TO THE INCOME (BECAUSE IT IS NON-OPERATIONAL) IS PROVISIONS OTHER THAN PROVISION FOR BAD DEBTS. THEREFORE PROVISION FOR BAD DEBTS WAS ADMITTED BY T HE TPO TO BE CONSIDERED FOR ARRIVING AT THE OPERATING PROFIT OF THE ASSESSEE. APART FROM THE ABOVE, WE FIND FROM THE DETAILS OF THE PROVISION FOR BAD DEBTS THAT THE ASS ESSEE DEVELOPED SOFTWARE FOR ITS CLIENT AND THE QUALITY WAS NOT UPTO THE MARK OWING TO BUGS IN THE SOFTWARE AND THEREFORE IT WAS DECIDED NOT TO PRESS FOR PAYMENT BY THE CUSTOMER AN D THE SUM RECEIVABLE WAS WRITTEN 23 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 23 OFF. THUS IT WAS VERY MUCH PART OF THE OPERATING E XPENSE OF THE COMPANY WHICH WILL GO TO REDUCE THE OPERATING PROFIT OF THE ASSESSEE. BE SIDES THE ABOVE, THE ITAT AHMEDBAD BENCH IN THE CASE OF I-MANY SOFTWARE PRIVATE LTD. ( SUPRA) FOR AY 2010-11, WHO IS ALSO A SOFTWARE DEVELOPMENT SERVICE PROVIDER LIKE THE AS SESSEE, HAS TAKEN NOTE OF THE VIEW OF THE DRP IN THAT CASE, WHEREIN THE DRP HELD THAT BAD DEBTS WRITTEN OFF SHOULD GO TO REDUCE THE OPERATING INCOME OF THAT ASSESSEE AS IT WAS MORE IN THE NATURE OF REGULAR BUSINESS EXPENDITURE. THE TRIBUNAL ACCORDINGLY DIR ECTED THE TPO TO INCLUDE BAD DEBTS AS EXPENDITURE WHILE WORKING OPERATING INCOME OF THE C OMPARABLE COMPANY KULIZA TECHNOLOGIES PVT.LTD. RESPECTFULLY FOLLOWING THE S AID DECISION, WE HOLD THAT IN COMPUTING THE OPERATING PROFIT OF KULIZA TECHNOLOGI ES PVT.LTD., THE AO SHOULD REDUCE THE BAD DEBTS WRITTEN OFF FROM THE OPERATING INCOME . WE HOLD AND DIRECT ACCORDINGLY. THUS GR.NO.9 IS PARTLY ALLOWED. 28. AS FAR AS GR.NO.10 IS CONCERNED, THE PLEA O F THE ASSESSEE IS THAT CG-VAK SOFTWARE EXPORTS LTD., IS A GOOD COMPARABLE COMPANY FOR THE PURPOSE OF DETERMINING ALP OF THE ASSESSEE AND WAS WRONGLY EXCLUDED BY THE TPO AND DRP ON THE GROUND THAT IT WAS A CONSISTENTLY LOSS MAKING COMPANY. IN THIS REGARD, THE TPO HAS GIVEN THE FOLLOWING REASONS FOR NOT REGARDING THIS COMPANY AS COMPARABLE. 14.2. CG-VAK SOFTWARE AND EXPORTS LIMITED THE OBJECTION OF THE ASSESSEE IN RESPECT OF REJE CTION OF THIS ENTITY IS ON ACCOUNT OF THE FACT THAT THIS ENTITY AND MADE PR OFITS IN THE PERIOD CORRESPONDING TO F.Y. 2008-09 AND CORRESPONDINGLY IT DID NOT HAVE PERSISTENT LOSSES FOR THE LAST THREE YEARS; INCLUDING THE YEAR UNDER CONSIDERATION . IN THIS REGARD, IT IS SEEN THAT THE ANALYSIS IN RESPECT OF THIS COMPARABLE WAS MADE IN THE TRANSFER PRICING ORDER FOR THE ASSESSEE FOR LAST YEAR, IN RESPECT OF THE MARGINS O F THIS ENTITY AND THE SAME IS REPRODUCED BELOW: REVENUE IN LAKHS PROFIT IN LAKHS PROFIT MARGIN MAR-05 397.86 14.15 3.56% MAR-06 422.31 3.79 0.90% MAR-07 425.92 20.5 4.81% MAR-08 508.97 -10.22 -2.01% MAR-09 637.29 -15 -2.35% MAR-10 511.5 -73.44 -14.36% 24 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 24 MAR-11 569.89 -21.09 -3.70% MAR-12 639.79 -114.73 -17.93% FROM PERUSAL OF THE ABOVE ANALYSIS, IT CAN BE SEEN THAT THE COMPANY HAS STATED MAKING LOSSES IN THE YEAR ENDING MARCH 2008, A TREN D WHICH CONTINUES FOR SUBSEQUENT YEARS AND IS BEING CONTINUED TILL DATE. THIS CLEARLY IMPLY THAT IN THE PERIOD UNDER CONSIDERATION ALSO THE CONDITIONS WERE SUCH THAT THE ENTITY MAY BE ON THE VERGE OF CLOSURE, UNDER UTILIZATION OF ASSETS OR HUMAN RESOURCES WHICH HAVE BEEN CREATED/RECRUITED EARLIER. MOST OF THESE EXCEP TIONAL CIRCUMSTANCES ARE NOT QUANTIFIABLE SO AS TO SEE THE EFFECT ON THEIR PROFI TABILITY BASED ON THE DATE AVAILABLE IN THE PUBLIC DOMAIN. AS REASONABLE ADJUSTMENTS CAN NOT BE MADE TO ACCOUNT FOR THESE DIFFERENCES IN EXCEPTIONAL CIRCUMSTANCES LIKE GROSS UNDER UTILISATION OF ASSETS/ RESOURCES AND OTHERS, THE ENTITY WITH SUCH A PROFIL E IS REQUIRED TO BE EXCLUDED. CONSEQUENTLY, IT WAS NOT CONSIDERED AS COMPARABLE. IT CAN BE SEEN THAT THE DIFFERENCE IS ON ACCOUNT OF LOSS CALCULATED BY THE TPO FOR FY 2008-09 AT PROFIT CALCULATED BY THE ASSESSEE. IN THIS REGARD, THE RELEVANT SEGMENTAL ACCOUNT, AS AVAILABLE IN THE ANNUAL REPOR T IS REPRODUCED BELOW: IT IS SEEN THAT THE TPO HAS CONSIDERED THE DATA, AS AVAILABLE IN THE SEGMENTAL ACCOUNTS PROVIDED IN THE ANNUAL REPORT. THE CALCULATION OF T HE ASSESSEE IS AS FOLLOWS: 25 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 25 IT CAN BE SEEN THAT THE ASSESSEE HAS CONSIDERED AN AMOUNT OF RS. 50,64,576/- OUT OF TOTAL AMOUNT OF RS. 57,48,817/- AS ALLOCABLE TO THI S SEGMENT, WHICH HAS LEAD TO THE CONVERSION OF NEGATIVE PLI TO POSITIVE. THE DETAILS OF THIS EXPENDITURE, AS EXTRACTED FROM THE ANNUAL REPORT IS AS GIVEN BELOW: 26 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 26 FROM THE ABOVE IT BECOMES CLEAR THAT THE ASSESSEE HAS CONSIDERED FOREX GAIN AS PART OF OPERATING INCOME, WHICH IS INCORRECT, AS DETAILED I N THE ORDER BELOW. CONSEQUENTLY, THE MARGIN OF THIS COMPANY IN FY 2008-09 IS ALSO NE GATIVE AND THIS COMPANY IS THEREFORE, A PERSISTENT LOSS MAKER. SINCE, IT IS A PERSISTENT LOSS MAKER, IT HAS BEEN RIGHTLY REJECTED BY THE TPO. INCIDENTALLY THIS FILT ER IS USED BY THE ASSESSEE ALSO. AS FAR AS THE OBJECTION OF THE ASSESSEE IN RESPECT OF THE OBSERVATIONS MADE BY THE TP IN SHOW CAUSE NOTICE IS CONCERNED, IT IS PERTAINING TO NOTE THAT THE TPO HAS NOT MADE A DEFINITE STATEMENT THAT THE ENTITY IS ON THE VERGE OF CLOSURE. IN VIEW OF THE PERSISTENT NATURE OF LOSSES, THERE ARE ABNORMAL CIRCUMSTANCES IN THIS COMPANY FOR WHICH REASONABLY ACCURATE ADJUSTMENT CANT BE MADE, AS REQUIRED UND ER RULE 10B(3). THE TPO MERELY IDENTIFIED MANY SUCH FACTORS WHICH COULD HAVE LEAD TO SUCH PERSISTENT LOSSES IN THE COMPANY. ON THE BASIS OF THE ABOVE, THE REJECTION OF THIS CO MPANY BY THE TPO IS CORRECT. 29. BEFORE THE DRP THE PRINCIPAL CONTENTION OF THE ASSESSEE WAS THAT THE TPO ACCEPTED THIS COMPANY AS FUNCTIONALLY COMPARABLE BU T EXCLUDED ONLY FOR THE REASON THAT IT WAS CONSISTENTLY MAKING LOSSES. THE ASSESSEE HA D SUBMITTED BEFORE THE TPO THAT THIS COMPANY EARNED OPERATING MARGIN OF 5.29% IN AY 200 9-10 FROM ITS SOFTWARE SERVICES SEGMENT. HENCE THE BASIS ASSUMPTION OF THE TPO THA T THIS COMPANY WAS CONSISTENTLY LOSS MAKING COMPANY WAS INCORRECT. ANOTHER SUBMISS ION WAS THAT WHEN THE ASSESSEE CONDUCTED THE TP STUDY THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN WAS ONLY FINANCIAL INFORMATION UPTO TO FY 2009-10 RELEVANT T O AY 2010-11. THE TPO IN THE IMPUGNED ORDER HAS TAKEN NOTE OF FINANCIAL RESULTS FOR THE SUBSEQUENT YEARS ALSO, WHICH WAS NOT CORRECT. THE CASE OF THE ASSESSEE WAS THAT , IF THE RESULTS OF THE SOFTWARE DEVELOPMENT SEGMENT OF THIS COMPANY, IS CONSIDERED AND IF FOREIGN EXCHANGE GAIN/LOSS IS CONSIDERED AS PART OF THE OPERATING PROFIT THAN THIS COMPANYS PROFIT MARGIN FOR FY 2008-09 WOULD BE 5.29%. THE DRP HOWEVER UPHELD TH E ORDER OF THE TPO OBSERVING THAT THIS COMPANY WAS A CONSISTENT LOSS MAKING COMP ANY. 30. BEFORE THE TRIBUNAL THE SUBMISSION OF THE L EARNED COUNSEL FOR THE ASSESSEE UPON FOR REITERATING SUBMISSION MADE BEFORE DRP WAS THAT THE DRP IN PAGE-29 OF ITS DIRECTION WHILE WORKING OUT THE MARGINS OF ANOTHER COMPARABLE COMPANY KULIZA 27 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 27 TECHNOLOGIES PVT. LTD., HAS ACCEPTED FOREIGN EXCHAN GE GAIN TO BE PART OF THE OPERATING PROFITS. IT WAS SUBMITTED THAT FOREIGN EXCHANGE GA IN ARISING OUT OF TRANSACTIONS OF RENDERING SOFTWARE DEVELOPMENT SERVICES SHOULD BE C ONSIDERED AS PART OF THE OPERATING PROFIT AND THE LAW IN THIS REGARD IS WELL SETTLED. REFERENCE WAS MADE TO SEVERAL JUDICIAL PRONOUNCEMENTS IN THIS REGARD ESPECIALLY THE DECISI ON OF THE BANGALORE ITAT IN THE CASE OF SAP LABS (P) LTD. VS. ACIT 44 SOT 156 (BANG.) WH EREIN IT WAS HELD THAT FOREIGN EXCHANGE GAIN SHOULD BE INCLUDED WHILE COMPUTING OP ERATING MARGIN OF COMPARABLES AS WELL AS THAT OF THE ASSESSEE FOR THE PURPOSE OF COM PARISON OF MARGINS WHILE DETERMINING ALP. THE LEARNED DR RELIED ON THE ORDER OF THE TPO . 31. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. FROM A PERUSAL OF THE ORDER OF THE TPO IT IS CLEAR THAT THE CLAIM OF THE ASSESSEE THAT THI S COMPANYS OPERATING PROFIT TO OPERATING COST OF THE SOFTWARE DEVELOPMENT SERVICES SEGMENT F OR AY 2009-10, IF EXPENSES ARE ALLOCATED ON THE BASIS OF REVENUES, IS 5.29%. THI S CHART IS EXTRACTED BY THE TPO IN PAGE-50 OF HIS ORDER ( AND ALSO IN PARAGRAPH 27 OF THIS ORDER) AND EVEN THE TPO DOES NOT DISPUTE THIS PLEA OF THE ASSESSEE. THE TPO HAS HOW EVER PROCEEDED ON THE BASIS THAT FOREIGN EXCHANGE GAIN SHOULD NOT BE REGARDED AS PAR T OF THE OPERATING PROFIT. SUCH APPROACH OF THE TPO HAS NOT BEEN ACCEPTED BY THE D RP IN ITS ORDER WHILE DEALING WITH THE COMPARABLE COMPANY KULIZA TECHNOLOGIES PVT.LTD. THEREFORE IT APPEARS THAT THE PLEA OF THE ASSESSEE THAT THE BASIS ASSUMPTION OF T HE TPO AND DRP ON THE COMPARABILITY OF THIS COMPANY THAT IT IS A CONSISTE NT LOSS MAKING COMPANY IS ERRONEOUS AND THEREFORE THEIR ORDERS ARE SET ASIDE. HOWEVER, THE QUESTION STILL REMAINS AS TO WHETHER THE ALLOCATION OF EXPENSES AND THE ATTRIBUT ION OF THE FOREIGN EXCHANGE GAIN TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE CO MPARABLE COMPANY CG-VAK SOFTWARE AND EXPORTS LTD., HAS NOT BEEN CONSIDERED BY THE TPO OR DRP. FURTHER IT HAS ALSO TO BE SEEN AS TO WHAT WERE THE REASONS FOR THE LOSSES IN THE CASE OF THIS COMPARABLE COMPANY. IF ALL THESE FACTORS ARE CONSIDERED AND D UE ADJUSTMENT CAN BE GIVEN TO THE OPERATING MARGINS OF THIS COMPANY, THAN THE SAME SH OULD BE CONSIDERED AS COMPARABLE 28 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 28 COMPANY AND ADDED TO THE LIST OF COMPARABLES FOR DE TERMINING ARITHMETIC MEAN OF PROFITS OF COMPARABLE COMPANIES. THE TPO IS DIREC TED TO CONSIDER THE COMPARABILITY OF THIS COMPANY AFRESH IN THE LIGHT OF THE AFORESAID OBSERVATIONS AND ALS O TAKING NOTE OF DECISION RENDERED ON THIS ASPECT BY TRIBUNALS AND H ONBLE HIGH COURTS IF ANY. 32. AS FAR AS GR.NO.11 RAISED BY THE ASSESSEE I S CONCERNED, IT PROJECTS THE GRIEVANCE OF THE ASSESSEE IN REJECTING GOLDSTONE TECHNOLOGIES LTD., AS A COMPARABLE COMPANY ON THE GROUND THAT IT IS FUNCTIONALLY NOT COMPARABLE. ON THE COMPARABILITY OF THIS COMPANY WITH A SOFTWARE DEVELOPMENT SERVICES COMPANY SUCH A S THE ASSESSEE, WE FIND THAT THE TPO HAS REJECTED THIS COMPANY AS A COMPARABLE COMPA NY FOR THE REASON THAT THIS COMPANY WAS NOT A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER AS THERE WERE EXPENSES RELATING TO MEDIA AND THEREFORE THIS COMPANY WAS CO NSIDERED AS ALSO IN THE BUSINESS OF MEDIA SERVICES. THE ABSENCE OF SEGMENTAL DATA WAS ALSO GIVEN AS A REASON FOR NOT REGARDING THIS COMPANY AS A COMPANY IN SOFTWARE DEV ELOPMENT SERVICE SECTOR. THE DRP ALSO ACCEPTED THE STAND OF THE TPO. 33. BEFORE US THE LEARNED COUNSEL FOR THE ASSE SSEE DREW OUR ATTENTION TO PAGES 754, 759, 763 AND 764 OF PAPER BOOK VOL-II FILED BY THE ASSESSEE AS ALSO PAGES 159 AND 209 OF PAPER BOOK VOL.-I FILED BY THE ASSESSEE. PERU SAL OF THESE DOCUMENTS SHOWS THAT THE INCOME AS PER THE PROFIT AND LOSS ACCOUNT AS ON 31. 3.2010 OF THIS COMPANY WAS RS.24,04,76,948 OUT OF WHICH INCOME FROM RENDERING SOFTWARE SERVICES WAS 23,18,69,452/-. OUT OF THE INCOME FROM SOFTWARE SE RVICES, INCOME FROM EXPORT OF SOFTWARE IS RS.20,75,99,979/-. THUS THIS COMPANY S ATISFIES THE TEST OF BEING A PREDOMINANT SOFTWARE SERVICE EXPORTER SUCH AS THE A SSESSEE. THE RELATED PARTY TRANSACTION OF THIS COMPANY IS 10.71% WHICH IS WELL BELOW THE 15% MARK. IF RELATED PARTY TRANSACTIONS ARE MORE THAN 15% THAN THE COMPA NY WILL BE EXCLUDED FROM COMPARABILITY FOR THE REASON THAT THE OPERATING PRO FITS MIGHT BE IMPACTED BY REASON OF RELATED PARTY TRANSACTIONS. THAT IS NOT THE CASE W ITH THIS COMPANY AS THE RPT IS LESS THAN 29 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 29 15%. THEREFORE THERE APPEARS TO BE NO VALID REASON FOR NOT REGARDING THIS COMPANY AS A COMPARABLE COMPANY. THE TPO IS DIRECTED TO REGARD THIS COMPANY AS COMPARABLE COMPANY IN THE FINAL LIST OF COMPARABLE COMPANIES F OR THE PURPOSE OF ARRIVING AT THE ARITHMETIC MEAN OF PROFIT MARGINS OF COMPARABLE COM PANIES. 34. AS FAR AS GRD.NO.12 RAISED BY THE ASSESSEE IS CONCERNED, THE SAME IS IN RELATION TO THE GRIEVANCE OF THE ASSESSEE IN NOT CONSIDERING R. S.SOFTWARE (INDIA) LTD., AND ZYLOG SYSTEMS LTD., AS COMPARABLE COMPANIES BY THE TPO AN D THE DRP. THE REASON WHY THESE TWO COMPANIES WERE NOT REGARDED AS COMPARABLE COMPANIES BY THE TPO (UPHELD BY DRP) WAS THAT THE RATIO OF EXPENDITURE ON ADVERT ISING, MARKETING AND SALES PROMOTION WAS MORE THAN 5% OF THE REVENUE. THE RAT IONALE FOR APPLYING THIS FILTER IS SET OUT BY THE TPO IN HIS ORDER AS FOLLOWS: 7. COMPANIES WITH THE RATIO OF ADVERTISING SPEND B EING MORE THAN 5% OF THE REVENUES WERE REJECTED. IN THE FAR ANALYSIS PROVIDED BY YOU, IT IS SUBMITTE D THAT THE ASSESSEE DID NOT MARKET ITS SERVICES TO THE END CUSTOMERS AS IT ONLY PROVIDE SOFTWARE DEVELOPMENT SERVICES TO THE ASSOCIATE ENTERPRISE. IT IS FURTHER STATED THAT SINCE IT IS A CAPTIVE SERVICE PROVIDER AND PROVIDES SERVICES ONLY TO THE ASSOCIATE ENTERPRISE NO MARKET RISK IS BEING BORNE BY IT. CONSEQUENTLY, IT IS CLEA R THAT THE ENTITIES WHICH ARE ENGAGED IN SUCH ADDITIONAL FUNCTION WOULD BE IN COM PARABLE TO YOU. THEREFORE, THE TPO HAS REJECTED THOSE ENTITIES WHOSE ADVERTISING S PEND WAS MORE THAN 5% OF THE REVENUES. IN ORDER TO DETERMINE THE ADVERTISING SPE ND THE EXPENDITURE INCURRED AND SHOWN IN PROWESS DATABASE UNDER ADVERTISING, MARKET ING AND DISTRIBUTION EXPENSES WERE CONSOLIDATED AND THE SAME WAS UTILISED. IT MUS T BE MENTIONED THAT THIS FILTER WAS APPLIED BY YOU LOST YEAR BUT THE SOME HAS NOT B EEN APPLIED IN THIS YEAR. 35. THE DRP UPHELD THE STAND OF THE TPO. THE S UBMISSION OF THE ASSESSEE BEFORE THE DRP AND THE DRPS DECISION ON SUCH SUBMISSION W AS AS FOLLOWS: D) REJECTING COMPANIES WITH THE RATIO OF SUM OF AD VERTISING, MARKETING & DISTRIBUTION EXPENSES TO SALES MORE THAN 5% THE ASSESSEE WISHES TO SUBMIT THAT THE FILTER APPLI ED BY THE LD. TPO IS NOT APPROPRIATE DUE TO FOLLOWING REASONS : 30 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 30 FOR DIFFERENCE IN ACTIVITIES INCLUDING ADVERTISING/ MARKETING, THE ASSESSEE HAS REQUESTED FOR NECESSARY MARKET RISK ADJUSTMENTS (PL EASE REFER TO GROUND NO.10 BELOW) THE TPO HAS NOT ARGUED THAT COMPARABLE COMPANIES AR E FUNCTIONALLY DIFFERENT. HENCE, REJECTING THE COMPARABLE COMPANIES BY PUTTIN G ADDITIONAL FILTER IS NOT JUSTIFIED. ADDITIONAL FILTER REDUCES THE NUMBER OF COMPARABLES AVAILABLE WHICH ARE OTHERWISE FUNCTIONALLY COMPARABLE. THE OECD GUIDELINES 2010 WHICH ACKNOWLEDGES THE NEE D FOR BROADENING THE SEARCH CRITERIA TO ACCOMMODATE FOR THE LIMITATIONS IN AVAILABLE COMPARABLES. THE RELEVANT EXTRACT FROM THE OECD GULDEL.NCS 2010 IS AS FOLLOWS: '3.38. THE IDENTIFICATION OF POTENTIAL COMPARABLES HAS TO BE MADE WITH THE OBJECTIVE OF FINDING THE MOST RELIABLE DATA, RE COGNISING THAT THEY WILL NOT ALWAYS BE PERFECT. FOR INSTANCE, INDEPENDENT TR ANSACTIONS MAY BE SCARCE IN CERTAIN MARKETS AND INDUSTRIES. A PRAGMAT IC SOLUTION MAY NEED TO BE FOUND, ON A CASE-BY-CASE BASIS, SUCH AS BROAD ENING THE SEARCH AND USING INFORMATION ON UNCONTROLLED TRANSACTIONS TAKI NG PLACE IN THE SAME INDUSTRY AND E COMPARABLE GEOGRAPHICAL MARKET, BUT. PERFORMED BY THIRD PARTIES THAT MAY HAVE DIFFERENT BUSINESS STRATEGIES , BUSINESS: MODELS OR OTHER SLIGHTLY DIFFERENT ECONOMIC CIRCUMSTANCES; IN FORMATION ON UNCONTROLLED TRANSACTIONS TAKING PLACE IN THE SAME INDUSTRY BUT IN OTHER GEOGRAPHICAL MARKETS; OR INFORMATION ON UNCONTROLLE D TRANSACTIONS TAKING PLACE IN THE SAME GEOGRAPHICAL MARKET BUT IN OTHER INDUSTRIES, ' THE ABOVE RECOMMENDATION UNDER THE OECD GUIDELINE S 2010 IS ALSO SUPPORTED BY THE ADVANCE PRICING AGREEMENT PROGRAM TRAOINING MANUAL OF USA WHICH RECOGNIZES THE NEED TO RELAX THE COMPARABILITY CRIT ERIA IN ORDER- TO ARRIVE AT A WIDER SET OF COMPANIES: IN THE CASE OF ACTIS ADVISERS PVT LTD (ITA NO. 52 77 /DEL/2011) IT WAS HELD THAT COMPARABLES, WHICH ARE OTHERWISE SIMILAR, SHALL NOT BE REJECTED MERELY ON THE GROUND THAT COMPARABLES WHO HAD INCURRED HIGH MARKE TING AND ADVERTISING EXPENDITURE ARE FUNCTIONALLY DIFFERENT. GIVEN THE ABOVE, WE SUBMIT THAT LD. TPO HAS WRONGLY REJECTED OUR OUR COMPARABLES RS SOFTWARE (INDIA) LTD AND ZYLOG SYSTE MS LTD BY APPLYING THIS FILTER. FURTHER, WE SUBMIT THAT THE CLEAR BREAKUP OF MARKET ING AND SELLING EXPENSES IS NOT PROVIDED FOR THESE COMPARABLES IN THEIR ANNUAL REPO RTS. THE LD. TPO HAS CONSIDERED THE PROPORTION OF 5% ON SALES. IT IS PER TINENT TO NOTE THAT SELLING 31 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 31 EXPENSES DOES NOT ALWAYS MEAN ADVERTISING AND MARKE TING EXPENSES, HENCE IN THE ABSENCE OF REQUIRED DETAILS, THE FILTER CANNOT BE A PPLIED IN GENERALITY. DECISION : 5.2. SOFTWARE INDUSTRY IS MANPOWER INTENSIVE AND SIGNIFICANT PART OF THEIR EXPENSES RELATE TO SALARIES AND BONUS. ON AN AVERA GE, SALARY COST COMPRISES 24% TO 42% OF THE REVENUE IN THE CASE OF SOFTWARE SERVICE PROVIDERS. AS P.ER THE DATA IN PROWESS DATABASE, THE AVERAGE EMPLOYEE COST WORKS O UT TO ABOUT 39'% ON SALES. THIS BEING SO, LOW EXPENDITURE ON SALARY/ ERNPLOVE E RCO ST IS AN INDICATION THAT THE COMPANY IS EITHER INTO FURTHER OUTSOURCING OF WORK OR IS IN PRODUCT DEVELOPMENT / TRADING. THEREFORE, WE ARE OF THE OPINION THAT THE FIITER OF 25% OF SALES AS MINIMUM SALARY EXPENSES USED BY THE TPO IS FAIR AND APPROPR IATE. PERSISTENTLY LOSS MAKING COMPANIES OR COMPANIES WITH DECLINING REVENUE MAY H AVE SOME EXCEPTIONAL CIRCUMSTANCES AND UNIQUE FACTORS CONTRIBUTING TO SU CH RESULTS THAT MAKE THEM NOT SUITABLE FOR COMPARABILITY ANALYSIS. MOREOVER', THE FINANCIAL RESULTS OF COMPARABLE COMPANIES SHOULD BE OF THE SAME PERIOD AS THAT OF T HE ASSESSEE I.E. APRIL TO MARCH, AS THAT ONLY ENABLE PROPER COMPARISON BETWEEN THEM. IN RESPECT OF REJECTION OF COMPANIES HAVING RATIO OF ADVERTISING, MARKETING AN D DISTRIBUTION EXPENSES TO SALES MORE THAN 5%. NORMALLY A COMPANY HAVING HIGH RATIO OF THESE EXPENSES WOULD BE ENGAGED IN SELLING OF PRODUCTS ON A SUBSTANTIAL SCA LE. OBVIOUSLY SUCH A COMPANY WOULD NOT BE FUNCTIONLLY SIMILAR TO A SOFTWARE SERV ICES PROVIDING COMPANY LIKE THE ASSESSEE. THEREFORE, THE TPO WAS JUSTIFIED IN APPLY ING THIS FILTER AS WELL. THE TPO WAS ALSO JUSTIFIED IN APPLYING FILTER FOR REJECTING COMPANIES WHERE EXPORT EARNING WAS 75% OF THE SALES AS THIS CRITERIA HAS BEEN APPL IED BY THE TPO RESULTING SUFFICIENT NUMBER OF COMPARABLES THEREFORE THERE WA S NO REASON FOR FURTHER RELAXATION. THEREFORE, THE OBJECTION RAISED BY THE ASSESSEE IN RESPECT OF THESE FILTERS CANNOT BE UPHELD. IN VIEW OF THE ABOVE DISCUSSION, THE OBJECTIONS RAISED BY THE ASSESSEE AGAINST THE REJECTION OF ITS TP STUDY BY T HE TPO AND USE OF NEW QUANTITATIVE AND QUALITATIVE FILTERS USED BY THE TP O DO NOT STAND THE ANALYSIS OF MERITS AND THEREFORE, REJECTED. ACTION OF THE TPO I S UPHELD. 36. THE LEARNED COUNSEL FOR THE ASSESSEE DID NO T DISPUTE THE PROPOSITION THAT THE FILTER OF REJECTING COMPANIES WITH THE RATIO OF ADVERTISIN G SPEND BEING MORE THAN 5% OF THE REVENUES BY THE TPO AND DRP. HIS LIMITED SUBMISSIO N WAS THE ASSESSEE WILL NOT SATISFY THE TEST OF ITS AMP BEING MORE THAN 5% OF T HE REVENUES, IF CORRECT AMP EXPENSES ARE TAKEN. IN THIS REGARD THE LEARNED COU NSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE SPECIAL BENCH OF ITAT DELHI IN THE CASE OF LG ELECTRONICS INDIA PVT.LTD., ITA NO.5140/DEL/2011 HAS TAKEN THE VIEW T HAT SALES EXPENSES ARE NOT PART OF 32 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 32 THE ADVERTISING, MARKETING AND SALES PROMOTION. OU R ATTENTION WAS DRAWN TO THE FOLLOWING OBSERVATIONS OF THE SPECIAL BENCH: 18.3. HAVING HEARD THE RIVAL SUBMISSIONS ON THIS I SSUE, WE FIND THAT THE AMP EXPENSES REFER ONLY TO ADVERTISEMENT, MARKETING AN D PUBLICITY EXPENSES. A DIVIDER NEEDS TO BE PLACED BETWEEN THE EXPENSES FOR THE PRO MOTION OF SALES ON ONE HAND AND EXPENSES IN CONNECTION WITH THE SALES ON THE OT HER. BOTH THESE EXPENSES ARE REQUIRED TO BE KEPT IN DIFFERENT COMPARTMENTS. WHIL E EXPENSES FOR THE PROMOTION OF SALES DIRECTLY LEAD TO BRAND BUILDING, THE EXPENSES DIRECTLY IN CONNECTION WITH SALES ARE ONLY SALES SPECIFIC. 18.4. SUB-SECTION (3A) OF SEC. 37, BEFORE ITS OMISS ION, PROVIDED THAT WHERE THE EXPENSES INCURRED BY THE ASSESSEE ON ANYONE OR MORE OF THE ITEMS SPECIFIED IN SEC. 37(3B) EXCEED ONE LAC OF RUPEES, THEN TWENTY PERCEN T OF SUCH EXCESS SHALL NOT BE ALLOWED AS DEDUCTION IN COMPUTING THE INCOME CHARGE ABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. CLAUSE (I) OF SUB-SEC. (3B) REFERRED TO 'ADVERTISEMENT, PUBLICITY AND SALES PROMOTION'. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. KHETU RAM BISHAMBAR DA SS [(2008) 166 TAXMAN 273 (DEL.)], HAS HELD THAT BONUS PAID TO DEALERS IS NOT IN THE NATURE OF SALES PROMOTION EXPENSES AND HENCE THE PROVISIONS OF SEC. 37(3A) CA NNOT BE APPLIED TO IT. THE HON'BLE CALCUTTA HIGH COURT IN CFT VS. THE STATESMA N LTD. [(1992) 198 FTR 582 (CAL.)] HAS ENUNCIATED THAT THE EXPENSES INCURRED B Y WAY OF COMMISSION PAID TO SALES AGENT DO NOT ATTRACT DISALLOWANCE UNDER SUB-S ECTIONS (3A) & (3B) OF SEC. 37. THE HON'BLE M.P. HIGH COURT IN THE CASE OF CFT VS. MOHD. FSHAQUE GULAM [(1998) 232 ITR 869 (MP)] HAS HELD THAT THE DEALER'S COMMIS SION AND SALES AGENT COMMISSION ETC. CANNOT BE BROUGHT WITHIN THE PURVIE W OF ADVERTISEMENT, PUBLICITY AND SALES PROMOTION EXPENSES, AS REFERRED TO IN SEC . 37. 18.5. WE DO NOT FIND ANY FORCE IN THE CONTENTION OF THE LEARNED DR MADE IN THIS REGARD. THE LOGIC IN THE EXERCISE OF FINDING OUT TH E AMP EXPENSES TOWARDS CREATION OF MARKETING INTANGIBLES FOR THE FOREIGN AE STARTS WITH THE EXPENSES WHICH ARE OTHERWISE IN THE NATURE OF ADVERTISEMENT, MARKETING AND PROMOTION. IF AN EXPENDITURE ITSELF IS NOT IN THE NATURE OF ADVERTIS ING, MARKETING OR PROMOTION, THAT OUGHT TO BE EXCLUDED AT THE VERY OUTSET. WE, THEREF ORE, REJECT THIS CONTENTION RAISED BY THE LEARNED DR. 18.6 . AS WE ARE PRESENTLY CONSIDERING THE TERM 'ADVERTI SEMENT MARKETING AND PROMOTION EXPENSES', WHICH IS ANALOGOUS TO, IF NOT LESSER IN SCOPE THAN THE TERM 'ADVERTISEMENT, PUBLICITY AND SALES PROMOTION' AS E MPLOYED IN THE ERSTWHILE SUB- SEC. (3B) OF SEC.37, ALL THE JUDGMENTS RENDERED IN THE CONTEXT OF SUB-SEC. (3A) & (3B) OF SEC. 37 WILL SQUARELY APPLY TO THE INTERPRE TATION OF THE SCOPE OF AMP EXPENSES. WE, THEREFORE, HOLD THAT THE EXPENSES IN CONNECTION WITH THE SALES 33 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 33 WHICH DO NOT LEAD TO BRAND PROMOTION CANNOT BE WITH IN THE AMBIT OF 'ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES' F OR DETERMINING THE COST/VALUE OF THE INTERNAL TRANSACTION. 37. IT WAS SUBMITTED THAT IF SALES EXPENSES ARE EXCLUDED THAN THE PERCENTAGE OF AMP EXPENSES TO REVENUE WILL BE BELOW 5% AND THERE WOUL D BE NO REASON TO EXCLUDE THIS COMPANY AS COMPARABLE COMPANY. IT WAS SUBMITTED TH AT THE FACT THAT THIS COMPANY IS OTHERWISE COMPARABLE FUNCTIONALLY IS NOT DISPUTED B Y THE TPO. IT WAS PRAYED THAT THE ISSUE MAY BE SET ASIDE FOR THE PURPOSE OF ASCERTAIN ING THE QUANTUM OF AMP TO REVENUE AFTER EXCLUDING SALES EXPENSES AND IF THE COMPARABL E COMPANIES PASS THE TEST, THEN THEY SHOULD BE INCLUDED IN THE LIST OF COMPARABLE COMPAN IES. THE LEARNED DR RELIED ON THE ORDER OF THE TPO/DRP. 38. WE HAVE GIVEN A CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS AND ARE OF THE VIEW THAT THE PRAYER MADE BY THE LEARNED COUNSEL FO R THE ASSESSEE FOR A REMAND TO THE TPO/AO FOR THE PURPOSE OF ASCERTAINING THE QUANTUM OF AMP TO REVENUE AFTER EXCLUDING SALES EXPENSES AND IF THE COMPARABLE COMP ANIES PASS THE TEST, THEN THEY SHOULD BE INCLUDED IN THE LIST OF COMPARABLE COMPAN IES, IS ACCEPTABLE. AS RIGHTLY CONTENDED BY HIM SALES EXPENSES SHOULD BE EXCLUDED WHILE ARRIVING AT THE AMP EXPENSES AND ONLY THEREAFTER THE SAME SHOULD BE COM PARED WITH THE REVENUES BEFORE APPLYING THE FILTER OF 5% AMP EXPENSES TO SALES. W E DIRECT THE TPO TO ASCERTAIN THIS ASPECT AFTER AFFORDING ASSESSEE OPPORTUNITY OF BEIN G HEARD AND DECIDE THE ISSUE AS PER THE DIRECTIONS GIVEN ABOVE. 39. AS FAR AS GR.NO.13 IS CONCERNED, THE GRIEVA NCE OF THE ASSESSEE IS THAT HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD., OUGHT NOT TO HAVE BEEN EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES BY THE TPO AND DRP. THE TP O AND DRP REJECTED THIS COMPANY AS NOT COMPARABLE BECAUSE IT HAD DIFFERENT FINANCIAL YEAR ENDING FOR PREPARATION OF THEIR FINANCIAL STATEMENTS AND THE P ERIOD OF PROFIT MARGINS EARNED BY THESE 34 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 34 TWO COMPANIES THEREFORE CANNOT BE COMPARED WITH THE ASSESSEES PROFIT MARGIN WHICH WOULD BE FOR A DIFFERENT PERIOD. THE ARGUMENT OF T HE REVENUE IS THAT CHANGE OF FINANCIAL YEAR WILL HAVE EFFECT BECAUSE OF THE BUSINESS CYCLE AND MARKET AND OTHER ECONOMIC CONDITIONS. THE ARGUMENT OF THE ASSESSEE IS THAT I F THOSE FACTORS ARE SAME FOR THE PERIOD FOR WHICH PROFIT MARGINS ARE COMPARED THAN THERE SH OULD BE NO OBJECTION BECAUSE OTHERWISE THESE TWO COMPANIES ARE FUNCTIONALLY COMP ARABLE. WE ARE OF THE VIEW THAT THE MIDDLE PATH TO BE ADOPTED WOULD BE TO CULL OUT THE RESULTS OF THE COMPARABLE COMPANIES FOR THE FINANCIAL YEAR OF THE ASSESSEE, I F IT IS POSSIBLE AND THEN MAKE A COMPARISON OF THE PROFIT MARGINS. IF SUCH AUTHENTI C DATA FOR CULLING OUT THE PROFIT MARGINS ARE NOT AVAILABLE, THEN IT WOULD BE SAFE TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES. WITH THESE OBSERVATIONS THE COMPARABILITY OF THIS COMPANY IS SET ASIDE TO THE TPO/AO FOR ADJUDICATION AFRESH AFT ER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 40. AS FAR AS GR.NO.14 RAISED BY THE ASSESSEE I S CONCERNED, THE SAME PROJECTS THE GRIEVANCE OF THE ASSESSEE IN THE ACTION OF THE TPO AND DRP IN REJECTING MINDTREE LTD., AND QUINTEGRA SOLUTIONS LTD., FROM THE LIST OF COMP ARABLE COMPANIES ON THE GROUND THAT THERE WERE EXCEPTIONAL CIRCUMSTANCES THAT PREVAILED IN THE AFFAIRS OF THESE TWO COMPANIES DURING THE RELEVANT FINANCIAL YEAR THE RE SULTS OF WHICH WERE TAKEN UP FOR COMPARISON. IT IS UNDISPUTED THAT MINTREE LTD., AM ALGAMATED WITH AZTEC SOFTWARE LTD., DURING THE PREVIOUS YEAR AND DUE TO THIS FACTOR ACC URATE ADJUSTMENT CANNOT BE GIVEN TO THE OPERATING MARGINS BY ELIMINATING FACTORS WHICH WOULD CONTRIBUTE TO LOW OR HIGH PROFIT MARGINS. IN THE CASE OF QUINTEGRA SOLUTIONS LTD., THIS COMPANY ACQUIRED SOME OTHER COMPANIES AND THE REAL OPERATING MARGINS OF T HESE TWO COMPANIES COULD NOT BE ARRIVED AT AFTER GIVING APPROPRIATE ADJUSTMENTS. I N SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT WOULD BE SAFE TO EXCLUDE THESE TWO COM PANIES FROM THE LIST OF COMPARABLE COMPANIES. WE THEREFORE CONFIRM THE ORDER OF THE D RP ON THIS ISSUE. 35 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 35 41. AS FAR AS GR.NO.15 AND 16 ARE CONCERNED, TH EY PROJECT THE GRIEVANCE OF THE ASSESSEE IN THE ACTION OF THE TPO AND DRP IN NOT AL LOWING ADJUSTMENTS TO THE ARITHMETIC MEAN OF PROFITS OF THE FINAL COMPARABLE COMPANIES TOWARDS WORKING CAPITAL AND OTHER RISKS WHICH ACCORDING TO THE ASSESSEE ARE REQUIRED TO BE GIVEN UNDER THE PROVISIONS OF RULE 10B(1)( E) OF THE INCOME TAX RUL ES, 1962 (RULES). 42. THE DRP DEALT WITH THIS ISSUE AS FOLLOWS: DECISION : 10.2 THE ISSUE HAS BEEN CONSIDERED. THE ASSESSEE HA S OBJECTED TO TPO NOT ALLOWING WORKING 'CAPITAL ADJUSTMENT TO THE MARGINS OF THE COMPARABLES AS WELL AS IN ITS OWN CASE THE- CLAIM OF WORKING CAPITAL ADJUS TMENT IS NOT AUTOMATIC THE ISSUE OF WORKING CAPITAL IS RELEVANT WHEN THERE IS A SITU ATION OF INVENTORY REMAINING TIDE UP OR RECEIVABLES BEING HELD UP OR DELAY HOWEVER TH IS SITUATIONS WOULD NOT BE VERY RELEVANT TO THE SERVICE PROVIDERS LIKE THE ASSESSEE . WHILE CALCULATING THE OPERATING PROFIT MARGIN, THE FINANCIAL EXPENSES AND FINANCIAL INCOME IS REMOVED. THUS, THE EFFECT OF WORKING CAPITAL / LOANS ARE NEGATED WHILE CALCULATING THE OPM AND THE SAID BALANCE SHEET ITEM DOES NOT HAVE ANY EFFECT ON THE PROFIT AND LOSS ACCOUNT. IN VIEW OF THE ABOVE THE DECISION OF THE TPO IN NOT AL LOWING WORKING CAPITAL ADJUSTMENT IS UPHELD. 43. BEFORE US THE LEARNED COUNSEL FOR THE ASSE SEE HAS FILED A DECISION OF THE ITAT BANGALORE IN THE CASE OF UNISYS INDIA (P) LTD. VS. DCIT (2015) 60 TAXMANN.COM26 (BANG.-TRIB.). ON THE NEED FOR ALLOWING WORKING ADJ USTMENT IN DETERMINING ALP , THE ITAT MUMBAI IN THE CASE OF CAPGEMINI INDIA P. LTD. V. ASSISTANT COMMISSIONER OF INCOME TAX (2013)27ITR (TRIB) 74 MUM., HELD AS FOLL OWS: 35. THE ISSUE WAS TAKEN BEFORE DRP BEFORE WHOM IT WAS POINTED OUT THAT THE ITAT IN ITS OWN CASE IN 2007-08 HAS ALLOWED THE WOR KING CAPITAL CAPGEMINI INDIA PRIVATE LIMITED IT(TP) A 540/MUM/2014 ADJUSTM ENT. THE DRP SIMPLY SUSTAINED THE ORDER OF THE AO ON THE ISSUE, WITHOUT REFERRING TO THE DECISION OF THE ITAT IN ITS OWN CASE. 36. BEFORE US, ON THE ISSUE OF WORKING CAPITAL ADJU STMENT, THE AR SUBMITTED THAT THE ITAT IN ITS ORDER HAD OBSERVED, 'THE ASSESSEE H AS ALSO REQUESTED FOR WORKING 36 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 36 CAPITAL ADJUSTMENT. THE CASE OF THE ASSESSEE IS THA T WORKING CAPITAL DOES HAVE AN IMPACT ON THE PROFITABILITY OF THE COMPANY AND MORE ACCOUNTS RECEIVABLE IN CASE OF A COMPANY WOULD MEAN RELATIVELY LOWER PROFIT. TH EREFORE, THE COMPANIES COULD BE CONSIDERED AS FULLY COMPARABLE IF THEY HOL D THE SAME LEVEL OF ACCOUNT RECEIVABLE AND ACCOUNT PAYABLE. THE TPO HAS, HOWEVE R, REJECTED THE CLAIM OF WORKING CAPITAL ADJUSTMENT WHICH HAS BEEN UPHELD BY THE DRP. THE REASON GIVEN BY THE AUTHORITIES BELOW IS THAT THE ASSESSEE HAD N OT MADE ANY CLAIM FOR WORKING CAPITAL ADJUSTMENT IN ITS TP STUDY AND THAT IT IS N OT POSSIBLE TO MAKE ACCURATE ADJUSTMENT ON THIS ACCOUNT AS IT IS DIFFICULT TO FI ND THE ACCOUNT RECEIVABLE/PAYABLE AT DIFFERENT POINTS OF TIME DURING THE YEAR. THE ID . SR. COUNSEL HAS REFERRED OEC D GUIDELINES AS PER WHICH IF THE ACCOUNT RECEIVABLE /PAYABLE ON THE LAST DATE DO NOT GIVE A REPRESENTATIVE LEVEL OF WORKING CAPITAL FOR THE WHOLE YEAR, AVERAGE MAY BE USED IF IT REFLECTS THE BETTER LEVEL OF WORK ING CAPITAL OVER THE YEAR. IN OUR VIEW, WORKING CAPITAL ADJUSTMENTS ARE REQUIRED TO B E MADE BECAUSE THESE DO IMP AC T THE PROFITABILITY OF THE COMP ANY. RULE 10B (2 )( D) AL SO PROVIDES THAT THE COMPARABILITY HAS TO BE JUDGED WITH RESPECT TO VARI OUS FACTORS INCLUDING THE MARKET CONDITIONS, GEOGRAPHICAL CONDITIONS, COST OF LABOUR AND CAPITAL IN THE MARKET. ACCOUNTS RECEIVABLE/PAYABLE EFFECT THE COST OF WORKING CAPITAL. A COMPANY WHICH HAS A SUBSTANTIAL AMOUNT BLOCKED WITH THE DEBTORS FOR A LONG PERIOD CANNOT BE FULLY COMPARABLE TO THE CASE WHICH IS ABLE TO RECOVER THE DEBT PROMPTLY. IN OUR VIEW, THE AVERAGE OF OPENING AND C LOSING BALANCE IN THE ACCOUNT RECEIVABLE/PAYABLE FOR THE RELEVANT YEAR MAY BE ADO PTED WHICH MAY BROADLY GIVE THE REPRESENTATIVE LEVEL OF WORKING CAPITAL OVER TH E YEAR. EVEN IF THERE IS SOME DIFFERENCE WITH RESPECT TO THE REPRESENTATIVE LEVEL , IT WILL NOT EFFECT THE COMPARABILITY AS THE SAME METHOD WILL BE APPLIED TO ALL CASES. WORKING CAPITAL ADJUSTMENT CANNOT BE DENIED TO THE ASSESSEE ONLY ON THE GROUND THAT THE ASSESSEE HAD NOT MADE ANY CLAIM IN THE TP STUDY IF IT IS POS SIBLE TO MAKE SUCH ADJUSTMENT. 44. RESPECTFULLY FOLLOWING THE AFORESAID RULING, WE DIRECT THE TPO TO MAKE ADJUSTMENTS ON ACCOUNT OF WORKING CAPITAL TO THE PR OFIT MARGIN OF THE ASSESSEE AS WELL AS THE COMPARABLES AND ALLOW ADJUSTMENTS IN ACCORDA NCE WITH LAW, AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE MAY ALSO ADD THAT THE DRP IN ASSESSEES OWN CASE FOR AY 2012-13 IN ITS ORDER DAT ED 22.9.2016 ALLOWED CLAIM OF THE ASSESSEE FOR ADJUSTMENT ON ACCOUNT OF WORKING CAPIT AL. A COPY OF THE SAID ORDER IS ALSO PLACED ON RECORD. 37 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 37 45. AS FAR AS THE PLEA OF THE ASSESSEE MADE IN GROUND NO.16 FOR ALLOWING ADJUSTMENT TOWARDS OTHER RISK IS CONCERNED, THE CLAIM OF THE A SSESSEE IN THIS REGARD WAS REJECTED BY THE TPO FOR THE FOLLOWING REASONS: 18.10 THE SUMMARY OF RISK ANALYSIS FOR THE ASSESSE E CAN BE MADE AS FOLLOWS: THE ASSESSEE IS TOTALLY DEPENDENT ON THE AE FOR B USINESS. THUS THE ASSESSEE TAKES THE RISKS ASSOCIATED WITH HEAVY DEPENDENCE ON A SIN GLE CUSTOMER. IN COMMON BUSINESS PARLANCE IT IS KNOWN AS 'SINGLE CUSTOMER R ISK'. THE ASSESSEE IS NOT COMPENSATED ANY AMOUNT FOR TE RMINATION OF AGREEMENT EVEN IF IT IS TERMINATED WITHOUT ANY CAUSE. NO INDEPENDENT ENTERPRISE WOULD LIKE TO AGREE FOR A TERMINATION CLAUSE WITHOUT COMPENSATION IF IT IS TERMINATED WITHOUT ANY CAUSE. THE AE IS EXPOSED TO THE MARKET RISK AND ANY FLUC TUATION IN THE BUSINESS CONDITIONS OF THE AE AFFECT THE CONTRACTUAL TERMS B ETWEEN THE AE AND THE ASSESSEE. THUS EVEN IF INDEPENDENT COMPARABLES UNDERTAKE SOME RISK, THE ASSESSEE ALSO HAD TO UNDERTAKE RISKS LIKE SINGLE CUSTOMER RISK, POLIT ICAL RISK, ETC WHICH ARE NOT INCURRED BY THE COMPARABLE COMPANIES AND HENCE THE RISKS ARE EVENED OUT. THE INDEPENDENT ENTREPRENEUR HAS TO INCUR EXPENDI TURE ON MARKETING, ETC. WHICH IS DEBITED TO THE PROFIT AND LOSS ACCOUNT. BUT, IT IS ALWAYS NOT NECESSARY THAT THESE RISKS REFLECTED IN THE MARKETING, SALES PROMOTION E XPENSES WILL AUTOMATICALLY BE COMPENSATED BY INCREASE IN SALES OR HIGHER MARGINS. FOR EXAMPLE, INCREASED MARKETING EFFORTS IN SOME SEGMENTS OF EXPORT MARKET MAY NOT YIELD RESULTS FOR AN IT ENABLED SERVICE COMPANY AND THEREBY THERE MAY BE A LOSS ON THIS MARKETING EFFORT WHICH MAY BRING DOWN THE OVERALL PROFITABILI TY RATHER THAN INCREASE THE PROFITABILITY. THUS IF UNDERTAKING THE MARKET RISK ETC. HELPS IN EARNING ANY EXTRA MARGIN, THE BENEFIT IS MORE THAN SET OFF BY THE COR RESPONDING EXPENDITURE. THE SAME APPLIES TO CREDIT RISK UNDERTAKEN. THERE ARE MANY STUDIES CONDUCTED ON THE RISK REDU CTION STRATEGIES FOLLOWED BY MNCS BY SHIFTING THEIR PRODUCTION FACILITIES TO OTH ER COUNTRIES BASED MAINLY ON COST FACTORS. BY OUTSOURCING TO INDIA, THE OVERALL COST OF PRODUCTION OF GOODS OR SERVICES BY THE AE GETS REDUCED WHICH IN TURN INCREASES THE COMPETITIV ENESS OF THE AE IN THE MARKET. THUS THE ASSESSEE IS NOT COMPENSATED FOR THE REDUCT ION OF RISK ATTRIBUTABLE TO THE OPERATIONS CARRIED ON BY THE ASSESSEE IN INDIA. 38 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 38 THE RISK PROFILE OF THE COMPARABLES SELECTED BY T HE ASSESSEE, ACCEPTABLE TO THE ASSESSEE AND THOSE SELECTED BY THE TPO BUT NOT ACCE PTABLE TO THE ASSESSEE IS SIMILAR. IT IS INCORRECT TO SAY THAT HIGHER THE RISK, THE HIGHER IS THE MARGIN THOUGH IT IS TRUE THAT HIGHER RISK EXPECTS A HIGHER MARGIN. THUS REA LIZATION OF RISK IS DIFFERENT FROM EXPECTED RETURN BASED ON RISK UNDERTAKEN. THE ASSESSEE'S SINGLE CUSTOMER RISK AND POLITICAL / COUNTRY RISK MORE THAN OFFSETS ANY OTHER RISK DIFFERENTIAL BETWEEN THE ASSESSEE AN D THE COMPARABLE COMPANIES. DIFFERENT COMPARABLES CAN HAVE DIFFERENT RISK PRO FILES AND DIFFERENT PROFIT MARGINS. THE PROVISO TO SEC. 92C(2) OF THE ACT PROV IDES FOR ADOPTING ARITHMETICAL MEAN OF THE DIFFERENT PRICES THIS PROVISION NEUTRAL IZES THE EFFECT OF DIFFERENCE IN THE RISK PROFILE, IF ANY BETWEEN THE ASSESSEE AND T HE COMPARABLES AS REALIZED RISK MAY PULL DOWN THE PROFITABILITY BELOW THE RISK FREE RETURN. IT IS NOT SUFFICIENT TO MERELY SPELL OUT RISKS. B UT, IT HAS TO BE SHOWN WHICH RISK WAS ACTUALLY UNDERTAKEN BY THE COMPARABLES AND TO WHAT EXTENT IT AFFECTED THE PROFITABILITY. THE. ASSESSEE HAS NOT DONE SO. 18.11 IN VIEW OF THE ABOVE DISCUSSION THERE IS NO MERIT IN THE CLAIM OF ASSESSEE FOR RISK ADJUSTMENT AND THE SAME IS REJECTED . IT MAY NOT BE OUT OF PLACE TO MENTION HERE THAT IT HAS BEEN HELD, IN DIFFERENT JUDICIAL D ECISION THAT THE RISK ADJUSTMENT CAN'T BE GRANTED AS A RULE. SOME OF SUCH JUDGMENTS ARE: I. AS THE 'A' FAILED TO BRING ANY EVIDENCE OF RECOR D TO SHOW THAT THERE WAS ANY DIFFERENCE IN RISK PROFILES OF COMPARABLE COMPANIES AND SINCE THE 'A' FAILED TO FILE THE DETAILS EXHIBITING RISK BORNE BY COMPARABLES, N O RISK ADJUSTMENT CAN BE GIVEN, EVEN ON AD HOC BASIS.- MARUBENI INDIA PVT LTD (2011 -TII-36-ITAT-DEL-TP) II. UNLESS IT IS SHOWN THAT DIFFERENCE IN FUNCTION AND RISK LEADS TO INFLATION OR DEFLATION OF FINANCIAL RESULTS, RISK ADJUSTMENTS NE ED NOT BE GRANTED AS A RULE. ASSESSEE COULD NOT SHOW HOW SUCH RISK DIFFERENCE AF FECTED THE RESULTS OF THE COMPARABLES. ASSESSEE COULD NOT QUANTIFY THESE DIFF ERENCES FOR EACH COMPARABLE.- SYMANTEC SOFTWARE SOLUTIONS PVT LTD(2011-TII-60-ITA T-MUM-TP) III. THERE ARE SEVERAL FACTORS SUCH AS MARKET RISKS , WHICH AFFECT THE RESULTS OF THE COMPANY. THESE FACTORS MAKE IT IMPRACTICABLE TO FIN D OUT EXACT DUPLICATE OF THE ASSESSEE AS COMPARABLE. SOME VARIATION IS BOUND TO EXIST. THE TPO HAD IDENTIFIED COMPARABLES WHOSE FUNCTIONS WERE SIMILAR TO THE ASS ESSEE BY APPLYING QUANTITATIVE AND QUALITATIVE FILTERS TO ELIMINATE DIFFERENCES BE TWEEN THE ASSESSEE AND THE 39 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 39 COMPARABLE TO NEUTRALIZE THE RISK FACTORS. THE ASSE SSEE'S ARGUMENT THAT IT IS A 'IOW END PERFORMER' OPERATING IN 'RISK-FREE ENVIRONMENT' AND THAT SUITABLE ADJUSTMENT SHOULD BE MADE IS NOT ACCEPTABLE;- DCIT VS. DELOITT E CONSULTING INDIA PVT. LIMITED (ITAT HYDERABAD) 18.12 TAKING ALL THESE FACTS ENTIRELY INTO ACCOUNT, THE ASSESSEE IS NOT ENTITLED FOR ANY RISK ADJUSTMENT. 46. ON OBJECTION OF THE ASSESSEE ON THE ABOVE CONC LUSION OF THE TPO IN HIS ORDER, THE DRP UPHELD THE ACTION OF THE TPO, FOR THE FOLLOWING REASONS: DECISION: 11.2. THE CLAIM OF THE ASSESSEE FOR RISK ADJUSTMENT HAS BEEN CONSIDERED. WHILE AS PER THE RULES, ADJUSTMENT SHOULD BE PROVIDED FOR EA CH FUNCTION AND DIFFERENCE OF THE RISK IDENTIFIED. NEEDLESS TO SAY AS MENTIONED I N OECD TP GUIDELINES, THE EXERCISE REQUIRES JUDGMENT AND IT IS PRACTICALLY NO T POSSIBLE TO QUANTIFY THE DIFFERENCE IN EXACT NUMERIC TERMS AND WOULD HAVE TO BE BASED ON MOST RELIABLE METHODS/ESTIMATES. WHAT IS TO BE APPRECIATED IS WHE THER AN INDEPENDENT ENTERPRISE WOULD AGREE FOR SUCH ADJUSTMENT TO THE PRICE IN THE FACTS AND CIRCUMSTANCES SURROUNDING THE TRANSACTION. IT HAS BEEN HELD IN S YMANTECH SOFTWARE SOLUTIONS PVT. LTD. 2011-TII-16-MUM-TP UNLESS IT HAS SHOWN THE DIF FERENCE IN FUNCTION LEADS TO INFLATION AND DEFLATION OF FINANCIAL RESULTS, RISK ADJUSTMENT NEED NOT BE GRANTED AS A RULE. THE A.O. HAS CONDUCTED THE DETAILED ANALYSIS OF THE ASSESSEE IN PARA 18.10 OF HIS ORDER THEREFORE CONSIDERING THE SAME AND THE AB OVE IT IS HELD THAT THE ASSESSEE IS NOT ENTITLED TO ANY RISK ASSESSMENT NOR HAS THE ASS ESSEE GIVEN DETAILS OR QUANTIFICATION OF THE RISK ASSESSMENT ITS OBJECTION S CANNOT BE ACCEPTED AND THE ACTION OF THE A.O. IS UPHELD. 47. THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACE D ON RELIANCE ON SEVERAL DECISIONS RENDERED ON THE ISSUE OF RISK ADJUSTMENT TO BE GIVE N AND THE SAME ARE IN CLPB VOL-I. 48. WE HAVE CONSIDERED THE SUBMISSIONS AND THE DECISIONS IN THIS REGARD CITED BEFORE US IN WHICH IT HAS BEEN HELD THAT APPROPRIATE ADJUS TMENTS HAVE TO BE GIVEN FOR VARIOUS RISKS, SUCH AS THE ONE CLAIMED BY THE ASSESSEE IN T HE PRESENT CASE. THE FOLLOWING ARE THE DECISIONS IN SUPPORT OF SUCH PROPOSITION: 40 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 40 1. HYUNDAI MOTORS INDIA ENGINEERING PVT. LTD. VS. THE ITO, WARD-2(2), (I.T.A. NO. 1850/HYD/2012) 2. M/S 3DPLM SOFTWARE SOLUTIONS LTD. VS. DCIT, CIRCLE -11(1), BANGALORE (I.T.(T.P.) A. NO. 1303/BANG/2012) 3. M/S HELLOSOFT INDIA PVT. LTD. VS. DCIT, CIRCLE-2(2) , (I.T.A. NO. 645/HYD/2009) 4. M/S MOTOROLA SOLUTIONS INDIA PVT. LTD. VS. ACIT (I. T.A. NO. 5637/DEL/2011) 5. M/S SONY INDIA (P) LIMITED, APPELLANT VS. DEPUTY CO MMISSIONER OF INCOME TAX, RESPONDENT, AND VICE VERSA 6. PHILIPS SOFTWARE CENTER PRIVATE LIMITED VS. ACIT (1 19 TTJ 721) 49. IT CANNOT BE SAID AS A RULE THAT NO RISK AD JUSTMENT CAN BE GIVEN. IT CAN ALSO NOT BE SAID THAT THE RISK ADJUSTMENT SHOULD BE GIVEN IN AL L CASES. IT DEPENDS ON FACTS AND CIRCUMSTANCES OF EACH CASE. AS FAR AS THE PRESENT C ASE IS CONCERNED THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER AND DEPENDENT ON ITS ASSOC IATE ENTERPRISES AND THEREFORE THERE IS A SINGLE CUSTOMER RISK. BESIDES THE ABOVE THE ASSES SEE HAS ALSO HIGHLIGHTED SEVERAL OTHER RISK FACTORS. IN THE DECISIONS CITED BY THE LD. CO UNSEL FOR THE ASSESSEE, TRIBUNAL HAS TAKEN THE VIEW ADJUSTMENT TOWARDS THE RISK FACTORS SHOULD BE GIVEN. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO SET ASIDE THE ORDER OF THE DRP ON THIS ISSUE AND REMAND THE QUESTION OF ALLOWING RISK ADJUSTMENT TO THE AO FOR FRESH CONSIDERATION. THIS GROUND NO.16 IS THUS TREATED AS ALLOWED FOR STATIST ICAL PURPOSES. 50. AS FAR AS GROUNDS OF APPEAL RAISED BY THE R EVENUE ARE CONCERNED WHILE DEALING WITH THE GROUNDS OF APPEAL OF THE ASSESSEE WE HAVE ALREADY HELD THAT FOREIGN EXCHANGE LOSS OR GAIN WILL BE CONSIDERED AS PART OF THE OPER ATING PROFITS OF THE ASSESSEE. IF THEY RELATE TO AND ARISE OUT OF THE BUSINESS OF THE ASSE SSEE AND IN PARTICULAR THE TRANSACTIONS IN RELATION TO WHICH THE ARMS LENGTH PRICE IS DETERMIN ED. IN THE PRESENT CASE THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER AND SOFTWARE DEVELOPMENT IS THE ONLY ACTIVITY OF THE ASSESSEE AND THEREFORE INCOME ARISING OUT OF FOREIGN EXCHANG E GAIN OR LOSS HAS TO BE REGARDED AS PART OF THE OPERATING INCOME OF THE ASSESSEE. 41 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 41 51. AS FAR AS GROUND NO.2 RAISED BY THE REVENU E IS CONCERNED IN THE PRESENT CASE AS WE HAVE ALREADY SEEN THAT THOUGH THE NOMENCLATURE U SED BY THE ASSESSEE WAS BAD DEBTS THE REALITY IS THAT THE AMOUNT WRITTEN OFF AS BAD D EBTS IS LIKE SALES RETURN, WHERE CUSTOMERS HAVE NOT PAID FOR SOFTWARE DEVELOPMENT BE CAUSE THEY DID NOT FIND SOFTWARE DUE TO EXISTENCE OF BUGS. IT HAS A DIRECT NEXUS WIT H THE BUSINESS AND TRANSACTION FOR WHICH THE ARMS LENGTH PRICE IS TO BE DETERMINED, TH EREFORE THE SAME HAS TO BE CONSIDERED AS PART OF OPERATING EXPENSE FOR THE PURPOSE OF DET ERMINING THE PROFIT MARGIN. WE THEREFORE DO NOT FIND ANY MERITS IN THE GROUNDS RAI SED BY THE REVENUE. 52. GROUND NO.17 RAISED BY THE ASSESSEE READS AS FOLLOWS :- 17. FOR THAT THE AUTHORITIES BELOW ERRED IN DISAL LOWING A SUM OF RS.2,99,979/- UNDER SECTION 14A OF THE ACT READ WIT H RULE 8D(2)(III) OF THE RULES. 53. AS FAR AS GROUND NO. 17 RAISED BY THE ASSE SSEE IS CONCERNED, THE ISSUE IS WITH REGARD TO DISALLOWANCE OF EXPENSES INCURRED EARNING EXEMPT INCOME. THE DISALLOWANCE WAS MADE BY THE AO BY INVOKING THE PROVISION OF SEC TION 14A OF THE ACT. THE CLAIM OF THE ASSESSEE WAS THAT THE ASSESSEE RECEIVED AS DIVI DEND OF ONLY A SUM OF RS.33,79,674/- WHICH WAS NOT CHARGEABLE TO TAX UNDER THE ACT AND E XEMPT. THE ASSESSEE COMPUTED THE DISALLOWANCE OF EXPENSES INCURRED FOR EARNING TAX F REE INCOME IN TERMS OF SEC.14A OF THE ACT OF A SUM OF RS.1,12,895/- BEING 10% OF SALA RY AND ALLOWANCES TO THE FINANCE AND ADMINISTRATIVE STAFF. ACCORDING TO THE ASSESSEE THI S WAS ONLY EXPENDITURE WHICH CAN BE ATTRIBUTABLE FOR EARNING TAX FREE INCOME. THE AO HO WEVER INVOKED THE PROVISION OF RULE 8D(2)(III) OF THE RULES AND MADE DISALLOWANCE OF RS .4,12,874/- BUT RESTRICTED THE DISALLOWANCE OF RS.2,99,979/- (4,12,874 1,12,895) SINCE THE ASSESSEE HAS ALREADY DISALLOWED RS.1,12,895/-. 54. ON OBJECTION BY THE ASSESSEE BEFORE DRP THE DRP CONFIRMED THE ACTION OF THE AO. 42 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 42 55. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE C OMPUTATION OF DISALLOWANCE U/S 14A OF THE ACT WAS DONE BY THE ASSESSEE BY ATTRIBUTING 10% OF THE SALARY AND ALLOWANCES OF THE FINANCE AND ADMINISTRATIVE STAFF. THIS DISALLOW ANCE WAS MADE HAVING REGARD TO THE BOOKS OF ACCOUNTS OF THE ASSESSEE. THIS DISALLOWANC E MADE BY THE ASSESSEE HAS TAKEN CARE OF THE ACTIVITIES OF THE ASSESSEE AND THE PROB ABLE TIME THAT NEEDS TO BE SPENT FOR MANAGING THE INVESTMENTS WHICH ARE LIKELY TO BE TAX FREE INCOME. NEITHER THE AO NOR THE DRP HAVE FOUND FAULT WITH THIS CALCULATION MADE BY THE ASSESSEE. THE PROVISION OF RULE 8D(1) AS ALSO THE PROVISION OF SECTION 14A(2) OF THE ACT MANDATE DISALLOWANCE IN ACCORDANCE WITH RULE 8D(2) OF THE RULES, ONLY WHERE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THE AO IS NOT SATISFIED WITH THE CORR ECTNESS OF THE CLAIM OF THE ASSESSEE REGARDING EXPENDITURE INCURRED TO EARN TAX FREE INC OME. IN THE ABSENCE OF ANY REASON IN GIVEN FOR REJECTING THE CLAIM OF THE ASSESSEE, WE HOLD THAT DISALLOWANCE U/S 14A OF THE ACT SHOULD BE RESTRICTED ONLY TO THE SUM OF RS.1,12 ,895/- AS DISALLOWED BY THE ASSESSEE IN ITS COMPUTATION. THUS GROUND NO. 17 RAISED BY T HE ASSESSEE IS ALLOWED. 56. GROUND NO.18 RAISED BY THE ASSESSEE READS AS FOLLOWS :- 18. FOR THAT THE ASSESSING OFFICER ERRED IN ADDIN G BACK DEPRECIATION OF RS.42,58,767 AS PER THE APPELLANTS BOOKS OF ACCOUN T AND IN GRANTING DEDUCTION OF DEPRECIATION AS PER RULES OF RS.34,05, 607/-. 57. AS FAR AS GROUND NO.18 RAISED BY THE ASSESS EE IS CONCERNED, WHILE COMPUTING THE BOOK PROFITS U/S 115JB OF THE ACT, THE AO IS NOT EM POWERED TO MAKE ANY ADJUSTMENT WHICH IS NOT PERMITTED BY THE EXPLANATION BELOW SEC TION 115JB OF THE ACT. THE DEPRECIATION TO BE ALLOWED WHILE WORKING THE BOOK P ROFITS IS ALWAYS AS PER THE COMPANIES ACT AND THE DEPRECIATION SHOULD NOT BE RE DUCED AS IS DONE IN THE NORMAL ASSESSMENTS BY SUBSTITUTING THE DEPRECIATION CLAIME D UNDER THE COMPANIES ACT BY THE DEPRECIATION ALLOWABLE UNDER THE ACT. THE ACTION OF THE AO IS PER SE UNSUSTAINABLE AND THE AO IS DIRECTED TO DEDUCT DEPRECIATION ONLY AS P ER THE COMPANIES ACT AS DONE BY THE ASSESSEE IN ITS COMPUTATION OF BOOK PROFITS FOR THE PURPOSE OF SEC.115JB OF THE ACT. 43 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 43 58. GROUND NO.19 RAISED BY THE ASSESSEE READS AS FOLLOWS :- 19. FOR THAT THE ASSESSING OFFICER ERRED IN ADDIN G BACK RS.2,99,979 UNDER SECTION 14A OF THE ACT READ WITH RULE 8D(2)(I II) OF THE RULES WHILE COMPUTING BOOK PROFITS. 59. AS FAR AS GROUND NO.19 IS CONCERNED WHILE DECIDING GROUND NO.17 RAISED BY THE ASSESSEE WE HAVE ALSO HELD THAT THE COMPUTATION OF DISALLOWANCE U/S 14A OF THE ACT AS MADE BY THE ASSESSEE HAS TO BE ACCEPTED. THEREFORE GROUND NO.19 DOES NOT REQUIRE ANY SEPARATE CONSIDERATION. 60. IN THE RESULT THE APPEAL OF THE ASSESSEE I S PARTLY ALLOWED AND THE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 04.10.2017. SD/- SD/- [M.BALAGANESH] [ N.V.VASU DEVAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 04.10.2017. [RG PS] COPY OF THE ORDER FORWARDED TO: 1. M/S. NOMURA RESEARCH INSTITUTE & FINANCIAL TECHN OLOGIES PVT. LTD, 2. D.C.I.T., CIRCLE-2(2), KOLKATA. 3. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PR IVATE SECRETARY HEAD OF OFFICE/ D.D.O., ITAT, KOLKATA BENCHE S 44 ITA NOS.587&590/KOL/2015 M/S. NOM URA RESEARCH INSTITUTE & FINANCIAL TECHNOLOGIES PVT . LTD. A.YR.2010-11 44