Clear2pay India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 594/DEL/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5689 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 27-07-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 02-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY KUMAR YADAV SENIOR
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Onus to prove; Capital expenditure
• Section: 234B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.2788/DEL./2017 (ASSESSMENT YEAR : 2011-12) M/S. CLEAR 2 PAY INDIA PVT. LTD., VS. ITO, WARD 6 (2), (EARLIER KNOWN AS NEW DELHI. ISIS INFOTECH SOLUTIONS PVT. LTD.) HOUSE NO.WZ-4A, NANGLI JALIB B 1, JANAKPURI, NEW DELHI 110 002. (PAN : AABCI3023R) ITA NO.2744/DEL./2017 (ASSESSMENT YEAR : 2011-12) ITO, WARD 6 (2), VS. M/S. CLEAR 2 PAY INDIA PVT. L TD., NEW DELHI. (EARLIER KNOWN AS ISIS INFOTECH SOLUTIONS PVT. LTD.) HOUSE NO.WZ-4A, NANGLI JALIB B 1, JANAKPURI, NEW DELHI 110 002. (PAN : AABCI3023R) ITA NO.594/DEL./2017 (ASSESSMENT YEAR : 2012-13) M/S. CLEAR 2 PAY INDIA PVT. LTD., VS. DCIT, CIRCLE 10 (2), (EARLIER KNOWN AS NEW DELHI. ISIS INFOTECH SOLUTIONS PVT. LTD.) HOUSE NO.WZ-4A, NANGLI JALIB B 1, JANAKPURI, NEW DELHI 110 002. (PAN : AABCI3023R) (APPELLANT) (RESPONDENT) ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 2 ASSESSEE BY : SHRI MANONEET DALAL, AR SHRI YISHU GOEL, AR SHRI CHIRAG AGGARWAL, CA REVENUE BY : SHRI SANJAY KUMAR YADAV, SENIOR DR DATE OF HEARING : 29.05.2018 DATE OF ORDER : 22.06.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : PRESENT CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE BEING DISPOSED OF BY WAY OF CONSOLIDATE D ORDER TO AVOID REPETITION OF DISCUSSION. 2. APPELLANT, M/S. CLEAR 2 PAY INDIA PVT. LTD. (FOR SHORT THE TAXPAYER), BY FILING THE PRESENT APPEAL (ITA NO.27 88/DEL/2017 AY 2011-12) SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 08.04.2015, PASSED BY THE AO UNDER SECTION 144C REA D WITH SECTION 143 (3) OF THE INCOME-TAX ACT, 1961 (FOR SH ORT THE ACT) QUA THE ASSESSMENT YEAR 2011-12 IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. CIT (A)/TPO ON THE GROUNDS INTER ALIA THAT :- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ORDER PASSED BY THE LEARNED ASSESSING OFFICER ('LD. AO') IS BAD IN LAW AND VOID AB-INITIO. 2. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE LD. AO SUFFERS FROM JURIS DICTIONAL ERROR AS THE LD. AO DID NOT RECORD ANY REASONS IN A SSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO TH E LD. TRANSFER PRICING OFFICER ('LD. TPO') FOR COMPUTATION OF THE ARM'S LENGTH ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 3 PRICE, AS IS REQUIRED UNDER SECTION 92CA (1) OF THE INCOME TAX ACT, 1961 ('ACT'). 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/ HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) ('CIT(A)') ERRED IN MAKING AN ADDITION TO THE RETURNED INCOME OF THE APPELLANT BY RE-COMPUTING TH E ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDE R SECTION 92 OF THE ACT. 4. THE LD. AO/ LD. TPO/ CIT(A) ERRED IN NOT ACCEPTI NG THE QUANTITATIVE FILTERS SELECTED BY THE APPELLANT IN I TS TRANSFER PRICING DOCUMENTATION/ FRESH SEARCH AND HAS INSTEAD APPLIED HIS OWN ADDITIONAL/ QUANTITATIVE FILTERS WHICH LACKED V ALID AND SUFFICIENT REASONING. 5. THE LD. AO/ LD. TPO/ CIT(A) ERRED IN REJECTING T HE COMPARABLE COMPANIES SET ADOPTED BY THE APPELLANT I N ITS TRANSFER PRICING DOCUMENTATION/ FRESH SEARCH. 6. THE LD. AO/ LD. TPO/ CIT(A) ERRED IN ACCEPTING COMPANIES WHICH WERE FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISK PR OFILE. 7. THE LD. AO/ LD. TPO/ CIT(A) ERRED IN NOT PROVIDI NG THE BENEFIT OF ECONOMIC ADJUSTMENT ON ACCOUNT OF DIFFER ENCE IN WORKING CAPITAL POSITION OF APPELLANT VIS-A-VIS COM PARABLE COMPANIES, IN ARRIVING AT THE ARM'S LENGTH MARGIN. 8. THE LD. AO/ LD. TPO/ CIT(A) ERRED IN NOT PROVIDI NG THE BENEFIT OF ECONOMIC ADJUSTMENT ON ACCOUNT OF DIFFER ENCE IN RISK PROFILE OF APPELLANT VIS-A-VIS THE COMPARABLE COMPA NIES, IN ARRIVING AT THE ARM'S LENGTH MEAN MARGIN. 9. THE LD. AO/ LD. TPO/ CIT(A) ERRED IN COMPUTING T HE MARGINS OF COMPARABLE COMPANIES SELECTED BY HIM. 10. THE LD. AO / LD. TPO/ CIT(A) ERRED IN DISREGARD ING THE MULTIPLE YEAR DATA SELECTED BY THE APPELLANT IN THE TP DOCUMENTATION AND IN SELECTING THE CURRENT YEAR (I. E. FINANCIAL YEAR 2010-11) DATA FOR COMPARABILITY DESPITE THE FA CT THAT AT THE TIME OF COMPARISON DONE BY THE APPELLANT, THE COMPL ETE DATA FOR FINANCIAL YEAR 2010-11 WAS NOT AVAILABLE WITHIN THE PUBLIC DOMAIN. 11. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PRO CEEDINGS U/S ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 4 271(1) (C) OF THE ACT MECHANICALLY AND WITHOUT RECO RDING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION. 12. THE LD. AO ERRED IN FACTS AND IN LAW IN CHARGIN G AND COMPUTING INTEREST UNDER SECTION 2348 AND 234C OF T HE ACT. 3. APPELLANT, INCOME-TAX OFFICER, WARD 6 (2), NEW D ELHI (FOR SHORT THE REVENUE), BY FILING THE PRESENT APPEAL (ITA NO.2744/DEL/2017 AY 2011-12) SOUGHT TO SET ASIDE TH E IMPUGNED ORDER DATED 08.04.2015, PASSED BY THE AO UNDER SECT ION 144C READ WITH SECTION 143 (3) OF THE INCOME-TAX ACT, 1961 (F OR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2011-12 IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. CIT (A)/TPO ON THE GROUNDS INTER ALIA THAT:- 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD. CIT (A) HAS ERRED IN REJECTING THE COMPARABLE VIZ. 1. LARSEN TURBO INFOTECH LTD. 2. PERSISTENT SY STEMS LTD, 3.SASKEN COMMUNICATION TECHNOLOGIES LTD., 4. ZYLOG SYSTEMS LTD., 5. WIPRO TECHNOLOGIES LTD., 6. INFOSYS LTD. B Y IGNORING THE FACTS AND WITHOUT PASSING A SPEAKING ORDER. 4. APPELLANT, M/S. CLEAR 2 PAY INDIA PVT. LTD. (FOR SHORT THE TAXPAYER), BY FILING THE PRESENT APPEAL (ITA NO.59 4/DEL/2017 AY 2012-13) SOUGHT TO SET ASIDE THE IMPUGNED ORDER DAT ED 30.11.2016, PASSED BY THE AO UNDER SECTION 144C READ WITH SECTI ON 143 (3) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2012-13 IN CONSONANCE WITH THE ORDERS PASSED B Y THE LD. CIT (A)/TPO ON THE GROUNDS INTER ALIA THAT :- ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 5 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE ORDER PASSED BY THE LEARNED ASSESSING OFFICER ('LD. AO') IS BAD IN LAW AND VOID AB-INITIO. 2. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE LD. AO SUFFERS FROM JURIS DICTIONAL ERROR AS THE LD. AO DID NOT RECORD ANY REASONS IN A SSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO TH E LD. TRANSFER PRICING OFFICER ('LD. TPO') FOR COMPUTATION OF THE ARM'S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, 1961 ('ACT'). 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/ LD. DISPUTE RESOLUTION PANEL ( 'LD. DRP') ERRED IN MAKING AN ADDITION OF INR 14,938,052 TO TH E RETURNED INCOME OF THE APPELLANT BY RE-COMPUTING THE ARM'S L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER SECTION 92 OF THE ACT. 4. THE LD. AO/ LD. TPO/ LD. DRP ERRED IN NOT ACCEPT ING THE QUANTITATIVE FILTERS SELECTED BY THE APPELLANT IN I TS TRANSFER PRICING DOCUMENTATION/ FRESH SEARCH AND HAS INSTEAD APPLIED HIS OWN ADDITIONAL/ QUANTITATIVE FILTERS WHICH LACKED V ALID AND SUFFICIENT REASONING. 5. THE LD. AO/ LD. TPO/ LD. DRP ERRED IN REJECTING THE COMPARABLE COMPANIES SET ADOPTED BY THE APPELLANT I N ITS TRANSFER PRICING DOCUMENTATION / FRESH SEARCH. 6. THE LD. AO/ LD. TPO/ LD. DRP ERRED IN ACCEPTING COMPANIES WHICH WERE FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISK PR OFILE. 7. THE LD. AO/ LD. TPO/ LD. DRP ERRED IN NOT PROVID ING THE BENEFIT OF ECONOMIC ADJUSTMENT ON ACCOUNT OF DIFFER ENCE IN RISK PROFILE IN ARRIVING AT THE ARM'S LENGTH MEAN MARGIN . 8. THE LD. AO/ LD. TPO ERRED IN DISREGARDING THE MU LTIPLE YEAR DATA SELECTED BY THE APPELLANT IN THE TP DOCUM ENTATION AND IN SELECTING THE CURRENT YEAR (I.E. FINANCIAL YEAR 2011-12) DATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF COMPARISON DONE BY THE APPELLANT, THE COMPLETE DATA FOR FINANCIAL Y EAR 2011-12 WAS NOT AVAILABLE WITHIN THE PUBLIC DOMAIN. 9. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PRO CEEDINGS U/S 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RECOR DING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION. ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 6 10. THE LD. AO ERRED IN FACTS AND IN LAW IN CHARGIN G AND COMPUTING INTEREST UNDER SECTION 234B AND 234C OF T HE ACT. 5. BRIEFLY STATED THE FACTS NECESSARY TO ADJUDICATE THE ISSUES IN CONTROVERSY ARE : M/S. CLEAR 2 PAY INDIA (P) LTD. IS WHOLLY OWNED SUBSIDIARY OF ISTS WORLDWIDE INC., US (ISTS US), RE GISTERED AS SOFTWARE TECHNOLOGY PARK UNIT (STPI) UNDER SOFTWARE TECHNOLOGIES PARK SCHEME OF GOVERNMENT OF INDIA. T HE TAXPAYER IS ENGAGED IN PROVIDING ROUTINE SOFTWARE DEVELOPMEN T AND GETTING SERVICES TO ISTS AND IS ALSO PROVIDING SERVICES TO UNRELATED PARTIES CUSTOMERS OVERSEAS. DURING THE YEAR UNDER ASSESSME NT, THE TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTIONS WI TH ITS ASSOCIATED ENTERPRISES (AE) AS UNDER :- SL.NO. NATURE OF TRANSACTIONS VALUE RS. 1 PROVISION OF SOFTWARE DEVELOPMENT SERVICES 150818592 6. THE TAXPAYER IN ITS TP ANALYSIS APPLIED TRANSACT IONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD (MA M) WITH OPERATING PROFIT / OPERATING COST (OP/OC) AS P ROFIT LEVEL INDICATOR (PLI) AND USED MULTIPLE YEARS DATA IN ORD ER TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS. THE TAXPAYER COMPU TED ITS OWN ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 7 OP/OC AT 8.30% AS AGAINST 7.21% OF THE COMPARABLE C OMPANY AND FOUND ITS INTERNATIONAL TRANSACTIONS AT ARMS LENGT H. 7. TPO REJECTED THE TP ANALYSIS MADE BY THE TAXPAYE R BEING BASED ON MULTIPLE YEARS DATA AND COMPARABLE BEING N OT PROPER ONE. TPO FINALLY SELECTED 17 COMPARABLES WITH OP/OC AT 2 0.28% AND THEREBY PROPOSED THE TP ADJUSTMENT AT RS.1,63,95,97 9/-. 8. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. C IT (A) BY FILING THE APPEAL WHO HAS PARTLY ALLOWED THE APPEAL FILED BY THE TAXPAYER BY REJECTING THE COMPARABLES VIZ. (I) LARS EN & TOUBRO INFOTECH LTD., (II) PERSISTENT SYSTEMS LTD., (III) SASKEN COMMUNICATION TECHNOLOGIES LTD., (IV) ZYLOG SYSTEMS LTD., (V) WIPRO TECHNOLOGIES LTD., AND (VI) INFOSYS LTD. SELE CTED BY THE TPO. FEELING AGGRIEVED, BOTH THE TAXPAYER AS WELL AS THE REVENUE HAVE COME UP WITH CROSS APPEALS QUA AY 2011-12 CHAL LENGING THE COMPARABLES SELECTED BY THE TPO AS WELL AS REJECTED BY LD. CIT (A). 9. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 8 10. OUT OF 23 COMPARABLES CHOSEN BY THE TAXPAYER FO R BENCHMARKING ITS INTERNATIONAL TRANSACTIONS, THE LD . TPO RETAINED 9 COMPARABLES AND INTRODUCED 8 NEW COMPARABLES AND HA S FINALLY SELECTED THE COMPARABLES AS UNDER :- SL.NO. COMPANY LONG NAME OP/OC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 0.16% 2. CELSTREAM TECHNOLOGIES PVT. LTD. 12.26% 3. EVOKE TECHNOLOGIES PVT. LTD. 8.11% 4. IGATE GLOBAL SOLUTIONS LTD. 23.71% 5. INFOSYS LTD. 43.53% 6. KIRTEETI SOFT TECHNOLOGIES LTD. 3.63% 7. LARSEN & TOUBRO INFOTECH LTD. 18.40% 8. MINDTREE LTD. (SEGMENT) 10.74% 9. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 22.12% 10. PERSISTENT SYSTEMS LTD. 23.08% 11. R.S. SOFTWARE (INDIA) LTD. 16.20% 12. SANKHYA INFOTECH LIMITED 26.20% 13. SASKEN COMMUNICATION TECHNOLOGIES LTD. 24.36% 14. TATA ELXSI LTD. (SEGMENT) 13.00% 15. THIRDWARE SOLUTIONS 16.19% 16. WIPRO TECHNOLOGIES LTD. 54.42% 17. ZYLOG SYSTEMS LTD. 28.74% AVERAGE 20.28% 11. AO ON THE BASIS OF HIS TP ANALYSIS COMPUTED THE PLI OF COMPARABLES AT 20.28% AS AGAINST 8.3% OF THE TAXPAY ER AND THEREBY PROPOSED THE TP ADJUSTMENT OF RS.1,63,95,979/-. 12. UNDISPUTEDLY, THE TAXPAYER HAS ENTERED INTO ONL Y ONE TRANSACTION RELATING TO PROVISION OF SOFTWARE DEVEL OPMENT SERVICES TO ITS AE. TPO HAS ALSO NOT DISPUTED TNMM AS THE M AM WITH OP/OC AS PLI ADOPTED BY THE TAXPAYER. IT IS ALSO N OT IN DISPUTE ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 9 THAT THE LD. CIT (A) WITHOUT DISTURBING THE METHOD HAS REJECTED 6 COMPARABLES VIZ. (I) LARSEN & TOUBRO INFOTECH LTD., (II) PERSISTENT SYSTEMS LTD., (III) SASKEN COMMUNICATION TECHNOLOGI ES LTD., (IV) ZYLOG SYSTEMS LTD., (V) WIPRO TECHNOLOGIES LTD., AN D (VI) INFOSYS LTD. AS COMPARABLES. 13. LD. AR FOR THE TAXPAYER IN ORDER TO CUT SHORT T HE CONTROVERSY SOUGHT EXCLUSION OF PERSISTENT SYSTEMS LTD., SANKHY A INFOTECH LTD. AND E-ZEST SOLUTIONS. THE TAXPAYER ALSO SOUGHT WOR KING CAPITAL ADJUSTMENT AND CORRECT COMPUTATION OF THE MARGINS. AT THE SAME TIME, LD. DR SOUGHT INCLUSION OF 6 COMPARABLES VIZ. (I) LARSEN & TOUBRO INFOTECH LTD., (II) PERSISTENT SYSTEMS LTD., (III) SASKEN COMMUNICATION TECHNOLOGIES LTD., (IV) ZYLOG SYSTEMS LTD., (V) WIPRO TECHNOLOGIES LTD., AND (VI) INFOSYS LTD. REJE CTED BY THE LD. CIT (A) IN AY 2011-12. WE WOULD LIKE TO EXAMINE TH E COMPARABILITY OF EACH COMPARABLE SOUGHT TO BE EXCLU DED AND INCLUDED BY THE TAXPAYER AS WELL AS REVENUE ONE BY ONE. TAXPAYERS APPEAL (ITA NO.2788/DEL/2017 FOR AY 2011-12) GROUNDS NO.1, 2, 3, 4 & 5 14. GROUNDS NO.1, 2, 3, 4 & ARE DISMISSED HAVING NOT BEEN PRESSED DURING THE COURSE OF ARGUMENTS. ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 10 GROUNDS NO.6 & 7 COMPARABLES SOUGHT TO BE EXCLUDED BY THE TAXPAYER PERSISTENT SYSTEMS AND SOLUTIONS LTD. (PERSISTENT) 15. THE TAXPAYER RAISED OBJECTIONS BEFORE TPO AS TO THE INCLUSION OF PERSISTENT AS A COMPARABLE ON GROUND O F FUNCTIONAL DISSIMILARITY, IT BEING ENGAGED IN DEVELOPMENT OF N EW PRODUCT FOR WHICH PERSISTENT CARRIES OUT RESEARCH AND DEVELOPME NT ACTIVITIES. PERUSAL OF ANNUAL REPORT OF PERSISTENT, AVAILABLE A T PAGES 472 & 473 OF PAPER BOOK-I, CATEGORICALLY PROVES THAT PERSISTE NT IS A GLOBAL COMPANY SPECIALIZING IN SOFTWARE PRODUCT DEVELOPMEN T SERVICES AND HAVE PARTNERED CLOSELY WITH THE WORLDS LARGEST TECHNOLOGY BRANDS, INNOVATIVE ENTERPRISES AND PIONEERING START -UPS TO PROVIDE END TO END PRODUCT DEVELOPMENT SERVICES. 16. PERSISTENT IS CONSTANTLY INNOVATING NEW TECHNOL OGY SOLUTIONS THAT ARE FOCUSED ON THE FOUR KEY BUILDING BLOCKS OF THEIR IP PORTFOLIO, CLOUD COMPUTING, BI & ANALYTICS, COLLABO RATION AND MOBILITY. PERSISTENT HAS ALSO CUSTOMIZED END TO EN D SOLUTIONS AS PER THEIR SPECIFIC REQUIREMENT. PERUSAL OF PROFIT & LOSS ACCOUNT, AVAILABLE AT PAGE 495 OF PAPER BOOK I, SHOWS THAT PERSISTENT HAS ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 11 SALE OF SOFTWARE SERVICES AND PRODUCTS WITH NO SEGM ENTAL DATA. THE LD. DR FOR THE REVENUE CONTENDED THAT THE TAXPAYER HAS FAILED TO POINT OUT AS TO WHICH PRODUCT HAS BEEN DEVELOPED. BUT THIS CONTENTION IS NOT TENABLE IN THE FACE OF THE P&L AC COUNT WHICH SHOWS THE INCOME JOINTLY FROM SALE OF SOFTWARE SERV ICES AND PRODUCT. 17. COORDINATE BENCH OF THE TRIBUNAL IN CASE OF ALCATEL LUCENT INDIA LTD. VS. DCIT IN ITA NO.6856/DEL/2015 FOR AY 2011-12 ORDERED TO EXCLUDE PERSISTENT BEING A PRODUCT COMPA NY HAVING HUGE INTANGIBLES AS A COMPARABLE WITH ROUTINE SOFTW ARE DEVELOPMENT SERVICES PROVIDER. 18. IN VIEW OF THE FACTS NARRATED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT PERSISTENT BEING A PRODUCT DEVELOPMENT CO MPANY AND INTO DIVERSIFIED SERVICES HAVING NO SEGMENTAL INFOR MATION IS NOT A VALID COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER, SO WE ORDER TO EXCLUD E THE SAME FROM THE FINAL SET OF COMPARABLES. SANKHYA INFOTECH LTD. (SANKHYA) 19. THE TAXPAYER RAISED OBJECTIONS BEFORE THE LD. C IT (A) FOR INCLUSION OF SANKHYA ON GROUND OF FUNCTIONAL DISSIM ILARITY FOR THE ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 12 YEAR ENDING MARCH 31, 2011, AVAILABLE AT PAGE 510 O F THE PAPER BOOK II, SHOWS THAT SANKHYA IS A LEADING SIMULATI ON AND TRAINING SOLUTIONS COMPANY. SANKHYA PROVIDES END TO END SIM ULATION SOLUTIONS WHICH ARE CUSTOMIZED TO THE END USER AND THE COMPANY HAS DEVELOPED CUSTOMIZABLE PRODUCTS FOR IMPARTING T RAINING WHICH CAN CATER TO ANY INDUSTRY. THE ANNUAL REPORT FURTHE R SHOWS THAT SANKHIYA HAS INHOUSE RESEARCH AND DEVELOPMENT CENTR E INVOLVED IN DEVELOPMENT ACTIVITIES FOR NEW PRODUCTS IN THE FIEL D OF SIMULATIONS AND TRAINING AND SPEND RS.321.12 LAKHS ON RESEARCH AND DEVELOPMENT. 20. MOREOVER, SEGMENTAL REPORTING OF SANKHYA , AVAI LABLE AT PAGE 525, SHOWS THAT IT DOES NOT HAVE COMPLETE SEGM ENTAL FINANCIALS. SO, WHEN WE EXAMINE THE FUNCTIONAL PRO FILE OF SANKHYA, IT IS INCOMPARABLE TO THE TAXPAYER WHICH I S A ROUTINE SOFTWARE DEVELOPMENT SERVICES PROVIDER. 21. COORDINATE BENCH OF THE TRIBUNAL EXAMINED THE COMPARABILITY OF SANKHYA IN ALCATEL LUCENT INDIA LTD. (SUPRA) HAS ORDERED TO EXCLUDE THE SAME AS A COMPARABLE VIS--V IS ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER. 22. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT SANKHYA BEING INTO DIVERSIFIED SERVICES ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 13 PROVIDING CUSTOMIZED SERVICES TO END USERS AND HAS DEVELOPED CUSTOMIZED PRODUCTS FOR IMPARTING TRAINING AND HAVI NG ITS OWN RESEARCH AND DEVELOPMENT CENTRE CANNOT BE A VALID C OMPARABLE VIS- -VIS THE TAXPAYER WHICH IS A ROUTINE SOFTWARE DEVE LOPMENT SERVICE PROVIDER. E-ZEST SOLUTIONS (E-ZEST) 23. THE TAXPAYER CHALLENGED E-ZEST AS A COMPARABLE BEFORE LD. CIT (A) ON GROUND OF FUNCTIONAL INCOMPARABLE. WHEN WE PERUSE ANNUAL REPORT OF E-ZEST, AVAILABLE AT PAGE 737 OF P APER BOOK-I, IT IS INTO DIVERSIFIED KIND OF ACTIVITIES VIZ. PRODUCT EN GINEERING SERVICES / OUTSOURCED PRODUCT DEVELOPMENT SERVICES, ENTERPRI SE APPLICATION DEVELOPMENT, IT SERVICES, INDUSTRIES SO LUTIONS AND TECHNOLOGY EXPERTISE. FURTHERMORE, WHEN WE EXAMINE THE SEGMENT REPORTING OF E-ZEST, AVAILABLE AT PAGE 781 OF THE PAPER BOOK, IT IS MENTIONED THAT IT HAS ONLY ONE REPORTAB LE SEGMENT. SO, IN THE FACE OF DIVERSIFIED KIND OF ACTIVITIES BEING CARRIED OUT BY E- ZEST, IT IS NOT A VALID COMPARABLE VIS--VIS THE TA XPAYER WHICH IS A ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER. 24. COORDINATE BENCH OF THE TRIBUNAL IN M/S. SYMANTEC SOFTWARE AND SERVICES INDIA PVT. LTD. VS. DCIT IN I TA ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 14 NO.614/DEL/2016 FOR AY 2011-12 EXAMINED COMPARABILITY OF THE TAXPAYER WITH ROUTINE SOFTWARE SERVICE PROVIDER AND ORDERED TO EXCLUDE THE SAME ON THE GROUND THAT IT IS PROVIDING HIGH END TECHNICAL SERVICES AND AS SUCH, IS A KPO AND NOT A SOFTWARE DEVELOPMENT COMPANY. SO, IN VIEW OF THE MATTER, WE ORDER TO EXCLUDE E-ZEST FROM FINAL SET OF COMPARABLES. WORKING CAPITAL ADJUSTMENT ISSUE 25. THE TPO HAS DENIED THE WORKING CAPITAL ADJUSTME NT TO THE TAXPAYER ON THE GROUND THAT THE TAXPAYER HAS NOT SP ECIFICALLY SOUGHT WORKING CAPITAL ADJUSTMENT BUT HAS STATED THAT THER E ARE DIFFERENCES BETWEEN ITSELF AND THE COMPARABLES USED BY THE TPO ON THE GROUND THAT THE LEVEL OF INVENTORIES, DEBTORS AND CREDITOR S VARIES AS PERCENTAGE OF TOTAL COST. TPO ALSO MENTIONED THAT THE TAXPAYER HAS FAILED TO DISCHARGE THE PRIMARY ONUS TO PROVE THE N EED FOR SUCH COMPARABILITY EXERCISE, HENCE REJECTED THE CLAIM OF THE TAXPAYER FOR WORKING CAPITAL ADJUSTMENT. 26. THE TAXPAYER HAS FILED DETAILED WORKING CAPITAL COMPUTATION, AVAILABLE AT PAGE 190 OF THE PAPER BOOK, AND HAS AL SO FILED SUBMISSIONS ON WORKING CAPITAL ADJUSTMENT AS PER OE CD GUIDELINES. IT IS ALSO AN UNCONTROVERTED FACT THAT THE WORKING ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 15 CAPITAL ADJUSTMENT HAS BEEN ALLOWED TO THE TAXPAYER BY THE TPO IN AY 2012-13 AND BUSINESS MODEL OF THE TAXPAYER HAS N OT UNDERGONE ANY CHANGE. IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE IS REQUIRED TO BE SENT BACK TO AO/TP O TO DECIDE ALLOWABILITY OF WORKING CAPITAL ADJUSTMENT IN VIEW OF THE SETTLED PRINCIPLE OF LAW APPLIED BY THE REVENUE ITSELF IN T AXPAYERS OWN CASE FOR AY 2012-13 AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER. GROUND NO.8 27. GROUND NO.8 IS DISMISSED HAVING NOT BEEN PRESSE D DURING THE COURSE OF ARGUMENTS. GROUND NO.9 28. THE TAXPAYER BY RAISING SPECIFIC GROUND CONTEND ED THAT AO/TPO/CIT(A) HAVE ERRED IN COMPUTING CORRECT MARGI NS OF THE COMPARABLES. WE ARE OF THE CONSIDERED VIEW THAT WH EN THE TAXPAYER HAS ARGUED ITS CASE ON THE BASIS OF FACTS AND FIGURES BROUGHT ON RECORD BY WAY OF EVIDENCE AS WELL AS SUB MISSIONS, AO/TPO IS REQUIRED TO COMPUTE THE CORRECT MARGIN. SO, THIS ISSUE IS REMANDED BACK TO THE AO/TPO TO COMPUTE THE CORRE CT MARGIN TO BE CONSISTENT WITH DIRECTIONS ISSUED BY THE LD. DRP IN TAXPAYERS ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 16 OWN CASE FOR AY 2012-13 AS THERE IS NO CHANGE IN TH E BUSINESS MODEL OF THE TAXPAYER. SO, GROUND NO.9 IS DETERMIN ED IN FAVOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. GROUND NO.10 29. GROUND NO.10 IS DISMISSED HAVING NOT BEEN PRESS ED DURING THE COURSE OF ARGUMENTS. GROUNDS NO.11 & 12 30. GROUNDS NO.11 & 12 BEING CONSEQUENTIAL IN NATURE NE ED NO SPECIFIC FINDINGS. REVENUES APPEAL (ITA NO.2744/DEL/2017 FOR AY 2011-12) 31. THE REVENUE BY FILING CROSS APPEAL CHALLENGED R EJECTION OF COMPARABLES VIZ. (I) LARSEN & TOUBRO INFOTECH LTD., (II) PERSISTENT SYSTEMS LTD., (III) SASKEN COMMUNICATION TECHNOLOGI ES LTD., (IV) ZYLOG SYSTEMS LTD., (V) WIPRO TECHNOLOGIES LTD., AN D (VI) INFOSYS LTD. BY THE LD. CIT (A) FOR BENCHMARKING THE INTERN ATIONAL TRANSACTIONS. WE WOULD DISCUSS THE COMPARABILITY O F AFORESAID COMPARABLES BY ONE BY ONE. ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 17 INFOSYS LTD. (INFOSYS) 32. THE LD. DR CHALLENGING THE IMPUGNED ORDER SOUGH T INCLUSION OF INFOSYS, EXCLUDED BY LD. CIT (A), ON THE GROUND THAT HIGH TURNOVER CANNOT BE A GROUND FOR EXCLUSION AND RELIE D UPON CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. VERSUS DCIT (2015) 376 ITR 183 (DEL). LD. DR ALSO RELIED UPON THE ORDER PASSED BY THE TPO. 33. HOWEVER, THE TAXPAYER HAD CHALLENGED INCLUSION OF INFOSYS BY THE TPO ON GROUNDS OF FUNCTIONAL DISSIMILARITY; NON-AVAILABILITY OF SEGMENTAL INFORMATION; INFOSYS IS A GIANT COMPAN Y HAVING HIGH BRAND VALUE; HAVING ITS OWN RESEARCH AND DEVELOPMEN T CENTRE; AND IT IS A FULL-FLEDGED RISK BEARING COMPANY. 34. PERUSAL OF PROFIT & LOSS ACCOUNT OF THE TAXPAYE R, AVAILABLE AT PAGE 393 OF THE PAPER BOOK, SHOWS THAT THE TAXPAYER HAS NEVER BEEN INTO DEVELOPMENT OF PRODUCT RATHER A PURE SOFTWARE DEVELOPMENT AND OTHER SERVICES PROVIDER AS THE ENTIRE INCOME IS FROM SDOS. 35. SUITABILITY OF INFOSYS VIS--VIS A CAPTIVE SOFT WARE SERVICE PROVIDER HAS BEEN EXAMINED BY THE HONBLE DELHI HIG H COURT IN CASE CITED AS CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (2013 ) ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 18 36 TAXMANN.COM 289 (DELHI) AND FOUND TO BE AN INVALID COMPARABLE BY RETURNING FOLLOWING FINDINGS : 5. THE TRIBUNAL HAS OBSERVED THAT THE ASSESSEE WAS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., AS INFOS YS TECHNOLOGIES LTD. WAS A LARGE AND BIGGER COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE AND, THEREFORE, THE PROFITS EARNED CANNOT BE A BENCH MARKED OR EQUATED WITH THE RESPONDENT, T O DETERMINE THE RESULTS DECLARED BY THE RESPONDENT-ASSESSEE. IN PARAGRAPH 3.3 THE TRIBUNAL HAS REFERRED TO THE DIFFERENCE BETWEEN THE RESPONDENT-ASSESSEE AND INFOSYS TECHNOLOGIES LTD. F OR THE SAKE OF CONVENIENCE, WE ARE REPRODUCING THE SAME: BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY INDIA RISK PROFILE OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES. REVENUE RS.9, 028 CRORES RS.16.09 CRORES OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT, ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 19 FLAGSHIP BANKING PRODUCT SUITE FINACLE ) ONSITE VS. OFFSHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E., SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20%) (REFER PAGE 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E., REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SALES PROMOTION AND BRAND BUILDING RS.61 CRORES RS. NIL (AS THE 100% SERVICES ARE PROVIDE TO AES) EXPENDITURE ON RESEARCH & DEVELOPMENT RS. 102 CRORES RS. NIL OTHER 100% OFFSHORE (FROM INDIA) 6. LEARNED COUNSEL FOR THE REVENUE HAS SUBMITTED TH AT THE TRIBUNAL AFTER RECORDING THE AFORESAID TABLE HAS NO T AFFIRMED OR GIVEN ANY FINDING ON THE DIFFERENCES. THIS IS PARTL Y CORRECT AS THE TRIBUNAL HAS STATED THAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASO N LATTER WAS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWAR E AND IT ASSUMED ALL RISKS LEADING TO HIGHER PROFITS, WHEREA S THE RESPONDENT-ASSESSEE WAS A CAPTIVE UNIT OF THE PAREN T COMPANY AND ASSUMED ONLY A LIMITED RISK. IT HAS ALSO STATE D THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARED WITH THE RESPO NDENT- ASSESSEE AS SEEN FROM THE FINANCIAL DATA ETC. TO TH E TWO COMPANIES MENTIONED EARLIER IN THE ORDER I.E. THE CHART. IN T HE GROUNDS OF APPEAL THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT OR DENY THE DATA AND DIFFERENCES MENTIONED IN THE TABULATED FOR M. THE CHART HAS NOT BEEN CONTROVERTED. 7. LEARNED COUNSEL FOR THE APPELLANT REVENUE DURING THE COURSE OF HEARING, DREW OUR ATTENTION TO THE ORDER PASSED BY THE ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 20 TPO AND IT IS POINTED OUT THAT BASED UPON THE FIGUR ES AND DATA MADE AVAILABLE, THE TPO HAD TREATED A THIRD COMPANY AS COMPARABLE WHEN THE WAGE AND SALE RATIO WAS BETWEEN 30% TO 60%. BY APPLYING THIS FILTER, SEVERAL COMPANIES WE RE EXCLUDED. THIS IS CORRECT AS IT IS RECORDED IN PARA 3.1.2 OF THE ORDER PASSED BY THE TPO. TPO, AS NOTED ABOVE, HOWEVER HAD TAKEN THREE COMPANIES, NAMELY, SATYAM COMPUTER SERVICE LTD., L& T INFOTECH LTD. AND INFOSYS TECHNOLOGIES AS COMPARABL E TO WORK OUT THE MEAN. 8. IT IS A COMMON CASE THAT SATYAM COMPUTER SERVICE S LTD. SHOULD NOT BE TAKEN INTO CONSIDERATION. THE TRIBUNA L FOR VALID AND GOOD REASONS HAS POINTED OUT THAT INFOSYS TECHN OLOGIES LTD. CANNOT BE TAKEN AS A COMPARABLE IN THE PRESENT CASE . THIS LEAVES L&T INFOTECH LTD. WHICH GIVES US THE FIGURE OF 11.1 1 %, WHICH IS LESS THAN THE FIGURE OF 17% MARGIN AS DECLARED BY T HE RESPONDENT-ASSESSEE. THIS IS THE FINDING RECORDED BY THE TRIBUNAL. THE TRIBUNAL IN THE IMPUGNED ORDER HAS ALSO OBSERVE D THAT THE ASSESSEE HAD FURNISHED DETAILS OF WORKABLES IN RESP ECT OF 23 COMPANIES AND THE MEAN OF THE COMPARABLES WORKED OU T TO 10%, AS AGAINST THE MARGIN OF 17% SHOWN BY THE ASSESSEE. DETAILS OF THESE COMPANIES ARE MENTIONED IN PARA 5 OF THE IMPU GNED ORDER. 36. SO, WE ARE OF THE CONSIDERED VIEW THAT KEEPING IN VIEW THE FUNCTIONAL DISSIMILARITY, SCALE OF OPERATION, HIGH BRAND VALUE IMPACTING PROFIT, HAVING OWN RESEARCH AND DEVELOPME NT CENTRE WITH CAPITAL EXPENDITURE OF RS.5 TO RS.7 CRORES AND REVE NUE EXPENDITURE OF RS.570 CRORES, CREATING HUGE INTANGIBLES FOR THE COMPANY AND THE FACT THAT INFOSYS IS A FULL-FLEDGED RISK BEARIN G COMPANY, HENCE CANNOT BE A VALID COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTINE CAPTIVE SOFTWARE SERVICE PROVIDER WORKING O N MINIMAL RISK HAVING NO BRAND VALUE NOR HAVING ANY RESEARCH AND D EVELOPMENT ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 21 CENTRE TO PRODUCE ITS OWN INTANGIBLES. SO, LD. CIT (A) HAS RIGHTLY EXCLUDED INFOSYS FROM THE FINAL SET OF COMPARABLES. WIPRO TECHNOLOGIES LTD. (WIPRO) 37. THE LD. DR CHALLENGED THE INCLUSION OF WIPRO BY LD. CIT (A) ON THE GROUND THAT ABNORMALLY HIGH MARGIN AND ASSUM ING ENTREPRENEURIAL RISK AND MARKETING RISK CANNOT BE A GROUND TO EXCLUDE ANY COMPARABLE AND IN SUCH CIRCUMSTANCES, O NLY CAPTIVE SUBSIDIARIES CAN BE USED AS COMPARABLES WHICH IS NO T POSSIBLE AND RELIED UPON FINDINGS RETURNED BY TPO. 38. HOWEVER, ON THE OTHER HAND, LD. AR FOR THE TAXP AYER SUPPORTED THE ORDER PASSED BY THE LD. CIT (A) ON TH E GROUND THAT THE WIPRO IS FUNCTIONALLY NOT COMPARABLE BEING INTO TECHNOLOGY INFRASTRUCTURE; SUPPORT PRODUCTS; AND SOFTWARE RELA TED SUPPORT SERVICES ACTIVITIES; THAT WIPRO HAS GENERATED ENTIR E REVENUE PURSUANT TO THE MASTER SERVICE AGREEMENT BETWEEN WI PRO AND CITI GROUP SERVICES; THAT WIPRO HAS HUGE SCALE OF OPERAT ION AND WITHOUT PREJUDICE, CORRECT MARGIN AT 52.09% INSTEAD OF 54.4 2% BE TAKEN; AND RELIED UPON AGILIS INFORMATION TECHNOLOGIES PVT. LTD. VS. ITO ITA NO.1063/DEL/2016 . ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 22 39. COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS AGILIS INFORMATION TECHNOLOGIES LTD. (SUPRA) EXAMINED THE COMPARABILITY OF WIPRO VIS--VIS AGILIS, ROUTINE SO FTWARE SERVICE PROVIDER AND ORDERED TO EXCLUDE THE SAME ON GROUND OF FUNCTIONAL DISSIMILARITY BEING A SOFTWARE PRODUCT COMPANY HAVI NG LAUNCHED ITS PRODUCT IN THE NAME OF FLOW FOR THE RETAIL SE CTOR USERS IN 2012, WHICH IS OUTCOME OF RESEARCH AND DEVELOPMENT. 40. KEEPING IN VIEW THE FUNCTIONAL DISSIMILARITY OF WIPRO VIS-- VIS TAXPAYER, AND THE FACT THAT WIPRO HAS GENERATED ITS ENTIRE REVENUE PURSUANT TO THE MASTER SERVICE AGREEMENT HA VING ITS HUGE SCALE OF OPERATION AS COMPARED TO TAXPAYER AND THE FACT THAT THE TAXPAYER IS A ROUTINE CAPTIVE SERVICE PROVIDER, THE LD. CIT (A) HAS RIGHTLY EXCLUDED WIPRO AS A COMPARABLE FROM FINAL S ET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS. SASKEN COMMUNICATION TECHNOLOGIES (SASKEN) 41. THE LD.DR CHALLENGED EXCLUSION OF SASKEN BY LD. CIT (A) FOR THE REASON THAT THE TAXPAYER HAS SIGNIFICANT INTANG IBLES AND RESEARCH AND DEVELOPMENT ACTIVITIES, LD.DR CONTENDED THAT TH E SASKEN IS HAVING NO INCOME FROM SALE OF LICENCE AND DREW OUR ATTENTION TOWARDS PAGE 324 OF THE PAPER BOOK. HOWEVER, WHEN W E EXAMINE ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 23 DIRECTORS REPORT AVAILABLE AT PAGE 300 OF THE ANNU AL REPORT OF SASKEN, THE CONTENTION RAISED BY LD. DR IS NOT SUST AINABLE. OPERATIVE PART OF THE DIRECTORS REPORT IS EXTRACTE D AS UNDER :- ON THE HARDWARE SIDE WE WILL LEVERAGE OUR EXTENSIV E UNDERSTANDING AND KNOWLEDGE OF THIS OEMS ECOSYSTEM AND CAPITALIZE ON THE DELIVERY CENTERS IN EUROPEAN UNIO N AND CHINA REGIONS. THIS GEOGRAPHICAL SPREAD ENABLES A COST E FFICIENT SERVICE MIX TO SERVICE OPPORTUNITIES IN RF / ANTENNA DESIGN . THE COMBINATION OF OUR HARDWARE AND SOFTWARE KNOWLEDGE GIVES US A COMPETITIVE EDGE. SASKEN KEY DIFFERENTIATORS : SOME OF THE UNIQUE CAPABILITIES OF SASKEN INCLUDE I TS ABILITIES TO TAKE A LEADERSHIP POSITION IN : ANDROID SOFTWARE PLATFORM SERVICES FULL PHONE (DEVICE) DESIGN SERVICES INTELLECTUAL PROPERTY (IP) LED SERVICES OPERATOR SPECIFIC SERVICES 42. SO, ON THE BASIS OF FUNCTIONAL DISSIMILARITY AL ONE, SASKEN IS NOT A VALID COMPARABLE VIS--VIS THE TAXPAYER. MOR EOVER, ITS SEGMENTAL FINANCIALS ARE NOT AVAILABLE AND IT IS HA VING SIGNIFICANT INTANGIBLES AND RESEARCH AND DEVELOPMENT ACTIVITIES . SO, LD. CIT (A) HAS RIGHTLY EXCLUDED SASKEN FROM THE FINAL SET OF COMPARABLES. ZYLOG SYSTEMS LTD. (ZYLOG) 43. THE LD. DR CHALLENGED THE EXCLUSION OF ZYLOG BY LD. CIT (A0 BY RELYING UPON THE TP ORDER AND DREW OUR ATTENTION TO PAGE 685 OF ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 24 THE ANNUAL REPORT OF THE PAPER BOOK 1, WHEREIN RE VENUE RECOGNITION IS GIVEN AS UNDER :- THE COMPANY DERIVES ITS REVENUES PRIMARILY FROM SO FTWARE DEVELOPMENT SERVICES / CONSULTANCY SERVICES, PROJEC TS AND E- GOVERNANCE PROJECTS. REVENUE FROM SOFTWARE SERVICES AND PROJECTS COMPRIS E INCOME FROM TIME-AND-MATERIAL CONTRACTS, FIXED PRICE/FIXED TIME CONTRACTS, TECHNICAL SERVICES AND ANNUAL MAINTENANC E CONTRACTS. REVENUE FROM TIME-AND-MATERIAL CONTRACTS IS RECOGNI ZED ON THE BASIS OF MAN HOURS SPENT AND MATERIALS UTILIZED FOR THE DEVELOPMENT OF SOFTWARE AND BILLABLE IN ACCORDANCE WITH THE TERMS OF THE CONTRACTS WITH CLIENTS. REVENUE FROM F IXED PRICE/FIXE TIME CONTRACTS ARE RECOGNIZED AS PER THE PROPORTION ATE COMPLETION METHOD. REVENUE FROM TECHNICAL SERVICE FOR SOFTWARE APPLICATION IS RECOGNIZED ON COMPLETION OF THE SERVICE. 44. WHEN WE EXAMINE THE AFORESAID RECOGNITION IN TH E LIGHT OF THE PROFIT & LOSS ACCOUNT, AVAILABLE AT PAGE 649 OF THE PAPER BOOK, ZYLOG IS HAVING INCOME FROM SOFTWARE DEVELOPMENT SE RVICES AND PRODUCT WITH NO SEGMENTAL FINANCIALS AVAILABLE. SI MILARLY, PAGE 665 OF THE ANNUAL REPORT SHOWS THAT ZYLOG OPERATES IN IT SERVICES, THERE IS NO OTHER BUSINESS SEGMENT. HOWEVER, AROUN D 98% OF THE REVENUE ACCRUES IN USA AND CONSEQUENTLY, THERE IS N O OTHER REPORTABLE GEOGRAPHICAL SEGMENT. 45. FURTHERMORE, WHEN WE EXAMINE STRENGTH OF ZYLOG EXPLAINED AT PAGE 625 OF THE PAPER BOOK, IT IS GIVEN AS UNDER :- ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 25 OUR STRENGTHS WE BELIEVE THE FOLLOWING ASPECTS OF OUR BUSINESS HE LP OUR CUSTOMERS ADDRESS THE CHALLENGES POSED BY TODAY'S BUSINESS AN D INFORMATION TECHNOLOGY ENVIRONMENT. > SOLUTIONS BASED CUSTOMER ENTRY APPROACH ZSL'S FORTE IS EVOLVING IT SERVICES AND CONSULTING INTO BUSINESS SOLUTIONS TO MEET THE NEEDS AND GOALS OF CLIENTS, L EVERAGING ACCUMULATED KNOWLEDGE OF SUBJECT MATTER EXPERTS AND BEST PRACTICES IN NUMEROUS FIELDS. WE EMPOWER THE BUSINESSES IN SEVER AL DOMAINS BY INTEGRATING OUR BEST PRACTICES IN BOTH-BUSINESS AND TECHNOLOGY THROUGH OUR RAPID APPLICATION FRAMEWORKS AND LATEST TECHNOLOGIES TO CREATE REAL SOLUTIONS. WHEN YOUR BUSINESS DEPEND S ON LEVERAGING THE RIGHT TECHNOLOGY AT THE RIGHT BUDGET, ZSL'S PORTFOL IO OF PROVEN APPLICATIONS CAN TAKE YOU WHERE YOU NEED TO GO, IN BUDGET AND ON TIME. THE COMPANY OFFERS VALUE TO 2UR CUSTOMERS AND MARKE T PLACE THROUGH VALUE-ADDED RESEARCH AND DEVELOPMENT, PRODUCT ENGIN EERING, AND PRODUCT LIFECYCLE MANAGEMENT (PLM) SOLUTIONS FROM C ONCEPTUALIZATION, PROTOTYPING, DEVELOPMENT, INTEGRATION WITH ENTERPRI SE APPLICATIONS, MIGRATION, PORTING, PERFORMANCE TUNING, APPLICATION UPGRADE, TESTING AND MAINTENANCE. THE COMPANY'S BUSINESS APPLICATIONS ARE CREATED WIT H LEADING INDUSTRY EXPERTS AND EXPERIENCED DEVELOPERS TO HELP PROPEL L EGACY SYSTEMS AND PROCESSES TO FULLY LEVERAGE THE CURRENT MARKET TECH NOLOGY. E-WASTE & COMPLIANCE FRAMEWORK(MANUFACTURING] VESALIUS - HIS [PHARMA] PHOENIX, M-BANKING , M- WALLET[BFSI] SMART CARD SOLUTIONS (RTO, HEALTHCARE, AGRICULTURE) ,E-POLICE SYSTEM (E-GOVERNANCE] WI5, FIELD FORCE AUTOMATION [TELECOM] E-ENABLEMENT [RETAIL] 46. ZYLOG HAS BEEN ORDERED TO BE EXCLUDED BY THE CO ORDINATE BENCH OF THE TRIBUNAL IN ALCATEL LUCENT INDIA LTD. VS. DCIT (SUPRA) WHEREIN IT IS HELD THAT, .IN THE CASE OF CIT II HYDERABAD VS. INTOTO SOFTWARE INDIA P. LTD. (ITA NO .233 OF 2014), HAS HELD THAT SOFTWARE PRODUCT COMPANIES OWN ING ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 26 INTANGIBLES COULD NOT BE COMPARED WITH THE SOFTWARE DEVELOPMENT SERVICES PROVIDER. 47. SO, ALL THESE FACTS GO TO PROVE THAT ZYLOG IS I NTO DIVERSIFIED BUSINESS ACTIVITIES WITH NO SEGMENTAL FINANCIALS AN D IS ALSO INTO RESEARCH AND DEVELOPMENT ACTIVITIES, PRODUCT ENGINE ERING AND END TO END PRODUCT LIFE SCALE MANAGEMENT SOLUTIONS, ETC . AND AS SUCH, CANNOT BE A VALID COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTINE CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVID ER, HENCE LD. CIT (A) HAS RIGHTLY EXCLUDED ZYLOG AS COMPARABLE. LARSEN & TOUBRO INFOTECH LIMITED (L&T) 48. THE LD. DR FOR THE REVENUE CHALLENGED THE EXCLU SION OF L&T BY THE LD. CIT (A) ON THE GROUND THAT NO INCOME FROM LICENCE OF PRODUCT HAS BEEN SHOWN RATHER 100% INCOME IS FRO M THE SOFTWARE EXPORT. HOWEVER, WHEN WE EXAMINE PROFIT & LOSS ACCOUNT OF L&T AT PAGE 238 OF THE PAPER BOOK-1, L&T HAS SHO WN THIS ENTIRE INCOME FROM SOFTWARE DEVELOPMENT SERVICES AN D PRODUCTS. HOWEVER, COMPLETE SEGMENTAL FINANCIALS ARE NOT AVAI LABLE. FURTHERMORE, THE TAXPAYER IS HAVING INTANGIBLES OF RS.37,78,99,720/- DURING THE YEAR UNDER ASSESSMENT AS AGAINST NIL INTANGIBLES WITH THE TAXPAYER. SO, IN THESE CIRCUM STANCES, L&T ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 27 CANNOT BE A VALID COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTINE CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVID ER AND LD. CIT (A) HAS RIGHTLY EXCLUDED THE SAME. PERSISTENT SYSTEMS LTD. (PERSISTENT) 49. THE LD. DR CHALLENGED THE EXCLUSION OF PERSISTE NT BY CONTENDING THAT NO INCOME FROM LICENCE OF PRODUCT H AS BEEN SHOWN RATHER 100% INCOME IS FROM THE SOFTWARE EXPORT. H OWEVER, WHEN WE EXAMINE REVENUE RECOGNITION OF PERSISTENT, AVAIL ABLE AT PAGE 542 OF THE ANNUAL REPORT OF PAPER BOOK 1, REVENUE FROM LICENSING OF PRODUCT IS RECOGNISED ON DELIVERY OF PRODUCT, RE VENUE FROM ROYALTY IS RECOGNISED ON SALE OF PRODUCTS, PRODUCTS IN ACCORDANCE WITH THE TERMS OF RELEVANT AGREEMENTS. SO, IN THES E CIRCUMSTANCES, THE CONTENTION OF THE LD. DR IS NOT SUSTAINABLE. M OREOVER, WHEN THE PERSISTENT IS ENGAGED IN SOFTWARE PRODUCT DEVEL OPMENT AND DEVELOPMENT OF END TO END SOLUTION QUA SOFTWARE SER VICES, ITS BUSINESS PROFILE IS DISSIMILAR, WHICH CANNOT BE TAK EN AS A COMPARABLE IN THE ABSENCE OF SEGMENTAL FINANCIALS. FURTHERMORE, PERSISTENT OWNS SIGNIFICANT INTANGIBLES AS AGAINST THE TAXPAYER WHICH HAS NIL INTANGIBLES. KEEPING IN VIEW THE AFO RESAID FACTS, THE ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 28 LD. CIT (A) HAS RIGHTLY EXCLUDED PERSISTENT FROM TH E FINAL SET OF COMPARABLES. TAXPAYERS APPEAL (ITA NO.594/DEL/2017 FOR AY 2012-13) 50. AT THE VERY OUTSET, IT IS FAIRLY CONCEDED BY LD . ARS FOR THE PARTIES TO THE PRESENT APPEAL THAT THERE IS NO CHAN GE IN THE BUSINESS MODEL OF THE TAXPAYER SINCE AY 2011-12 AND DURING T HE YEAR UNDER ASSESSMENT ALSO, THE TAXPAYER HAS BEEN PROVIDING SO FTWARE DEVELOPMENT SERVICES TO ITS AE. DURING THE YEAR UN DER ASSESSMENT, THE TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS AE AS UNDER :- SL. NO. NATURE OF INTERNATIONAL TRANSACTIONS AMOUNT (RS.) 1. PROVISION OF SOFTWARE DEVELOPMENT SERVICES 263,580,063 2. REIMBURSEMENT OF EXPENSES BY AES 491,117 51. THERE IS NO DISPUTE REGARDING REIMBURSEMENT OF EXPENSES BY THE AES. THE ONLY DISPUTE IS QUA TRANSACTIONS RELA TING TO PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES. THE TAXPAYER BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WITH OP/OC AS PROFIT LEVEL INDICATOR (PLI) SELECTED 25 COMPARABLES WITH THREE YEARS WEIG HTED AVERAGE MARGIN OF THE COMPARABLE COMPANY AT 7.92% AS AGAINS T TAXPAYERS NET MARGIN AT 9.59% FOR BENCHMARKING THE INTERNATIO NAL ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 29 TRANSACTIONS AND FOUND THE SAME AT ARMS LENGTH. D URING THE ASSESSMENT PROCEEDINGS, THE TAXPAYER FILED FRESH SE ARCH AND UPDATED MARGIN OF COMPARABLE COMPANIES AT 7.77% AS AGAINST ITS OWN MARGIN OF 9.95% AND AGAIN FOUND ITS INTERNATION AL TRANSACTIONS AT ARMS LENGTH. 52. TPO ACCEPTED THE TNMM AS THE MAM WITH OP/OC AS PLI TO BENCHMARK THE INTERNATIONAL TRANSACTION BUT USED CURRENT YEAR DATA TO COMPUTE THE MARGIN OF COMPARABLES. TPO REJ ECTED 16 COMPARABLE COMPANIES OUT OF 25 CHOSEN BY THE TAXPAY ER AND IDENTIFIED SIX ADDITIONAL COMPANIES AND FINALLY SEL ECTED 15 COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS HAVING ADJUSTED MARGIN OF PLI OF COMPARABLE AT 16.5 3% WHICH ARE AS UNDER :- SL.NO. COMPANY LONG NAME WC ADJUSTED OP/OC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 8.51% 2. CIGNITI TECH 6.68% 3. CELSTREAM TECHNOLOGIES PVT. LTD. 10.88% 4. EVOKE TECH 11.81% 5. INFOSYS LTD. 41.04% 6. THIRDWARE SOLUTION LTD. (OVERSEAS SEGMENT) 10.59% 7. TATA ELXSI LTD. (SEGMENT) 13.89% 8. ZYLOG SYSTEMS LTD. 28.84% 9. LUCID SOFTWARE LTD. 10.54% 10. PERSISTENT SYSTEMS LTD. 26.13% 11. R.S. SOFTWARE (INDIA) LTD. 15.61% 12. LARSEN & TOUBRO INFOTECH LTD. 23.13% 13. SANKHYA INFOTECH LIMITED 3.79% 14. SPRY RESOURCES PVT. LTD. 18.12% AVERAGE 16.53% ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 30 53. ON THE BASIS OF TP ANALYSIS, TPO COMPUTED THE A LP OF INTERNATIONAL TRANSACTIONS RELATING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES AS UNDER :- OPERATIONAL COST 240,961,423 ARMS LENGTH PRICE AT A MARGIN OF 16.53% 280,792,34 6 PRICE RECEIVED 264,071,180 105% OF PRICE RECEIVED 277,272,739 TOTAL ADJUSTMENT U/S 92CA 16,721,166 54. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. CIT (A) BY WAY OF FILING THE APPEAL WHO HAS DISPOSED OF THE OB JECTIONS. AFTER DIRECTIONS OF THE LD. DRP, FOLLOWING COMPARABLES HA VE BEEN FINALLY SELECTED TO BENCHMARK THE INTERNATIONAL TRANSACTION S WHICH ARE AS UNDER :- SR.NO. NAME OF THE COMPANY AS PER TPO ORDER DRP DIRECTIONS 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 8.51% 8.87% 2. CELSTREAM TECHNOLOGIES PVT. LTD. 10.88% 10.68% 3. CIGNITI TECHNOLOGIES LTD. 6.68% 5.97% 4. EVOKE TECHNOLOGIES LTD. 11.81% 11.90% 5. INFOSYS LTD. 41.04% 40.55% 6. LARSEN & TOUBRO INFOTECH LTD. 23.13% 22.45% 7. LUCID SOFTWARE LTD. 10.54% 12.49% 8. MINDTREE LTD. (SEGMENT) 18.34% 13.66% 9. PERSISTENT SYSTEMS LTD. 26.13% 24.88% 10. SANKHYA INFOTECH LIMITED 3.79% -0.08% 11. R.S. SOFTWARE (INDIA) LTD. 15.61% 15.69% 12. SPRY RESOURCES PVT. LTD. 18.12% 19.96% 13. THIRDWARE SOLUTION LTD. 10.59% 9.84% (SEGMENT) 14. TATA ELXSI LTD. 13.89% 12.33% 15. ZYLOG SYSTEMS LTD. 28.84% 27.72% AVERAGE 16.53% 15.79% ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 31 PURSUANT TO THE DIRECTIONS ISSUED BY LD. DRP, ALP O F THE INTERNATIONAL TRANSACTIONS HAVE BEEN COMPUTED AS UN DER :- PARTICULAR AMOUNT OPERATING COST 24,09,61,423 ARMS LENGTH PRICE AT A MARGIN OF 15.79% 27,90,09,2 32 PRICE RECEIVED 26,40,71,180 105% OF PRICE RECEIVED 27,72,74,739 ADJUSTMENT U/S 92CA 1,49,38,052 FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 55. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE S OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 56. LD. AR FOR THE TAXPAYER IN ORDER TO CUT SHORT T HE CONTROVERSY SOUGHT EXCLUSION OF (I) INFOSYS LTD., (II) ZYLOG SY STEMS LTD., (III) PERSISTENT SYSTEMS LTD., AND (IV) LARSEN & TOUBRO INFOTECH LTD.. WE WOULD LIKE TO EXAMINE THE COMPARABILITY OF EACH COMPARABLE SOUGHT TO BE EXCLUDED BY THE TAXPAYER ONE BY ONE. INFOSYS LTD. (INFOSYS) 57. THE TAXPAYER HAD CHALLENGED INCLUSION OF INFOSY S BY THE TPO ON GROUNDS OF FUNCTIONAL DISSIMILARITY; NON-AVA ILABILITY OF SEGMENTAL INFORMATION; INFOSYS IS A GIANT COMPANY H AVING HIGH ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 32 BRAND VALUE; HAVING ITS OWN RESEARCH AND DEVELOPMEN T CENTRE; AND IT IS A FULL-FLEDGED RISK BEARING COMPANY. 58. WHEN WE EXAMINE THE CONTENTIONS RAISED BY THE T AXPAYER SUITABILITY OF INFOSYS VIS--VIS A CAPTIVE SOFTWARE SERVICE PROVIDER HAS BEEN EXAMINED BY THE HONBLE DELHI HIGH COURT I N CASE CITED AS CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (2013 ) 36 TAXMANN.COM 289 (DELHI) AND FOUND TO BE AN INVALID COMPARABLE BY RETURNING THE FINDINGS, WHICH ARE REPRODUCED IN THE PRECEDING PARA 35 OF THIS ORDER. 59. PERUSAL OF PROFIT & LOSS ACCOUNT OF THE TAXPAYE R SHOWS THAT THE TAXPAYER HAS NEVER BEEN INTO DEVELOPMENT OF PRO DUCT RATHER A PURE SOFTWARE DEVELOPMENT AND OTHER SERVICES PROVID ER AS THE ENTIRE INCOME IS FROM SDOS. 60. SO, WE ARE OF THE CONSIDERED VIEW THAT KEEPING IN VIEW THE FUNCTIONAL DISSIMILARITY, SCALE OF OPERATION, HIGH BRAND VALUE IMPACTING PROFIT, HAVING OWN RESEARCH AND DEVELOPME NT CENTRE WITH CAPITAL EXPENDITURE OF RS.5 TO RS.7 CRORES AND REVE NUE EXPENDITURE OF RS.570 CRORES, CREATING HUGE INTANGIBLES FOR THE COMPANY AND THE FACT THAT INFOSYS IS A FULL-FLEDGED RISK BEARIN G COMPANY, HENCE CANNOT BE A VALID COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTINE CAPTIVE SOFTWARE SERVICE PROVIDER WORKING O N MINIMAL RISK ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 33 HAVING NO BRAND VALUE NOR HAVING ANY RESEARCH AND D EVELOPMENT CENTRE TO PRODUCE ITS OWN INTANGIBLES. SO WE ORDER TO EXCLUDE INFOSYS FROM THE FINAL SET OF COMPARABLES. ZYLOG SYSTEMS LIMITED (ZYLOG) 61. ZYLOG IS ENGAGED IN PRODUCT DEVELOPMENT ALONG W ITH SOFTWARE DEVELOPMENT SERVICES OF WHICH IT HAS REVEN UE OF 38%. AT THE SAME TIME, SEGMENTAL INFORMATION IS NOT AVAILA BLE. FURTHERMORE, ZYLOG FAILS THE EXPORT SALES FILTER AP PLIED BY THE TPO AS IT HAS MERELY 18.87% REVENUE FROM THE EXPORT SAL ES AS AGAINST EXPORT SALES/TOTAL SALES BENCHMARK OF 75% DETERMINE D BY THE TPO. 62. THE LD. DR FOR THE REVENUE CHALLENGING THE EXCL USION OF ZYLOG DREW OUR ATTENTION TO REVENUE RECOGNITION GIV EN IN ANNUAL REPORT OF THE ZYLOG, AVAILABLE AT PAGE 57 TO 578 OF THE PAPER BOOK. 63. WHEN WE EXAMINE THE REVENUE RECOGNITION IN THE LIGHT OF THE PROFIT & LOSS ACCOUNT, ZYLOG IS HAVING INCOME FROM SOFTWARE DEVELOPMENT SERVICES AND PRODUCT WITH NO SEGMENTAL FINANCIALS AVAILABLE. SIMILARLY, ANNUAL REPORT SHOWS THAT ZYL OG OPERATES IN IT SERVICES, THERE IS NO OTHER BUSINESS SEGMENT. HOWE VER, AROUND 98% OF THE REVENUE ACCRUES IN USA AND CONSEQUENTLY, THERE IS NO ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 34 OTHER REPORTABLE GEOGRAPHICAL SEGMENT. FURTHERMORE , WE HAVE EXAMINED STRENGTH OF ZYLOG AS EXPLAINED IN THE ANNU AL REPORT. 64. ZYLOG HAS BEEN ORDERED TO BE EXCLUDED BY THE CO ORDINATE BENCH OF THE TRIBUNAL IN ALCATEL LUCENT INDIA LTD. VS. DCIT (SUPRA) BY RELYING UPON THE CASE OF CIT II HYDERABAD VS. INTOTO SOFTWARE INDIA P. LTD. (ITA NO.233 OF 2014) WHEREIN ZYLOG WAS EXCLUDED AS INVALID COMPARABLE VIS--VIS SOFTWARE R OUTINE DEVELOPMENT SERVICE PROVIDER BY OBSERVING THAT, SOFTWARE PRODUCT COMPANIES OWNING INTANGIBLES COULD NOT BE C OMPARED WITH THE SOFTWARE DEVELOPMENT SERVICES PROVIDER. 65. SO, ALL THESE FACTS GO TO PROVE THAT ZYLOG IS I NTO DIVERSIFIED BUSINESS ACTIVITIES WITH NO SEGMENTAL FINANCIALS AN D IS ALSO INTO RESEARCH AND DEVELOPMENT ACTIVITIES, PRODUCT ENGINE ERING AND END TO END PRODUCT LIFE SCALE MANAGEMENT SOLUTIONS, ETC . AND AS SUCH, CANNOT BE A VALID COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTINE CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVID ER. SO, W ORDER TO EXCLUDE ZYLOG FROM THE FINAL SET OF COMPAR ABLES. PERSISTENT SYSTEMS LTD. (PERSISTENT) 66. PERSISTENT IS FUNCTIONALLY NOT COMPARABLE BEING ENGAGED IN PRODUCT DEVELOPMENT ALONG WITH SOFTWARE DEVELOPMENT SERVICES. ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 35 PERSISTENT HAS UNDERGONE EXTRA ORDINARY EVENTS DURI NG THE YEAR UNDER ASSESSMENT AS IT HAS AMALGAMATED WITH PERSIST ENT EBUSINESS SOLUTIONS LTD. AND PERSISTENT SYSTEMS AND SOLUTIONS LTD. W.E.F. 01.04.2011, AS PER DETAIL GIVEN AT PAGE 212 OF THE PAPER BOOK. SO, DUE TO MERGER AND DEMERGER FINANCIAL RESULTS OF THE COMPANY HAVE CERTAINLY BEEN IMPACTED. 67. PERSISTENT HAS SIGNIFICANT INTANGIBLES OF RS.38 5 CRORES COMPRISING OF SOFTWARE AND ACQUIRED RIGHTS WHICH IS 14% OF THE NET FIXED ASSETS WHEREAS THE TAXPAYER DOES NOT OWN ANY INTANGIBLES. PERSISTENT IS ALSO INCURRING SIGNIFICANT EXPENDITUR E ON RESEARCH AND DEVELOPMENT TO THE TUNE OF RS.44.72 CRORES AS AGAIN ST NIL EXPENSES OF THE TAXPAYER ON SUCH RESEARCH AND DEVELOPMENT AC TIVITIES. 68. PERSISTENT HAS BEEN ORDERED TO BE EXCLUDED IN ALCATEL LUCENT INDIA LTD. VS. DCIT (SUPRA) ON THE AFORESAID GROUND THAT IT IS A PRODUCT COMPANY HAVING NO SEGMENTAL FINANCIALS AND HAS UNDERGONE EXTRA ORDINARY EVENTS IMPACTING PROFIT. SO, IN VIEW OF THE MATTER, WE ORDER TO EXCLUDE PERSISTENT FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS. LARSEN & TOUBRO INFOTECH LTD. (L&T) 69. IS FUNCTIONALLY DISSIMILAR BEING PRODUCT DEVELO PMENT COMPANY. PERUSAL OF THE ANNUAL REPORT, AVAILABLE A T PAGES 561 TO ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 36 564 OF THE PAPER BOOK, SHOWS THAT L&T IS INTO SALE OF SOFTWARE PRODUCT, SUCH AS, UNITRAX AND ACCURUSI WHICH FACT H AS BEEN BROUGHT TO THE NOTICE OF THE TPO AS WELL AS DRP BY THE TAXPAYER IN ITS TP STUDY, AVAILABLE AT PAGE 206 OF THE PAPER BO OK. 70. L&T IS ALSO DEVELOPING NEW TECHNOLOGY ESPECIALL Y THE CLOUD, MOBILITY, SOCIAL AND BIG DATA ANALYTICS ARE IMPACTI NG SERVICE PROVIDERS WHO ARE RENEWING HOW INDUSTRY VERTICALS A ND CUSTOMER SEGMENTS WILL ADJUST THEMSELVES TO THE CHANGING TEC HNOLOGY LANDSCAPE. FURTHERMORE, L&T IS HAVING A HUGE BRAND VALUE IMPACTING ITS PROFIT VIS--VIS THE TAXPAYER WHICH I S A ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER. 71. LARSEN HAS BEEN ORDERED TO BE EXCLUDED BY THE C OORDINATE BENCH OF THE TRIBUNAL IN ALCATEL LUCENT INDIA LTD. VS. DCIT (SUPRA) BY HOLDING AS UNDER :- (IV) LARSEN AND TURBRO INFOTECH LTD. THE LD. AR H AS SUBMITTED THAT L&T OPERATES IN SOFTWARE DEVELOPMENT SERVICES AND EARNS REVENUE FROM LICENSING OF PRODUCTS AND HE NCE IS FUNCTIONALLY DISSIMILAR. THE ITAT DELHI BENCH IN SA XO INDIA P. LTD. (ITA NO.6148/DEL/2015), HAS HELD THAT L&T CANN OT BE TAKEN AS A COMPARABLE TO A SOFTWARE DEVELOPMENT COMPANY. THE HONBLE HIGH COURT OF ANDHRA PRADESH IN THE CASE OF CIT II HYDERABAD VS. INTOTO SOFTWARE INDIA P. LTD. (ITA NO . 233 OF 2014), HAS HELD THAT SOFTWARE PRODUCT COMPANIES OWN ING INTANGIBLES COULD NOT BE COMPARED WITH THE SOFTWARE DEVELOPMENT SERVICES PROVIDER. RESPECTFULLY FOLLOWING THE RATIO OF THESE DECISIONS, WE DIRECT THE TPO TO EXCLUDE THIS COMPAN Y FROM THE FINAL LIST OF COMPARABLE. ITA NO.2788/DEL./2017 ITA NO.2744/DEL./2017 ITA NO.594/DEL./2017 37 72. SO, IN VIEW OF THE MATTER, WE ORDER TO EXCLUDE LARSEN FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE I NTERNATIONAL TRANSACTIONS. 73. RESULTANTLY, THE APPEAL FILED BY THE ASSESSEE ( ITA NO.2788/DEL./2017 FOR AY 2011-12) IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL FILED BY THE RE VENUE (ITA NO.2744/DEL/2017 FOR AY 2011-12 IS DISMISSED. THE APPEAL FILED BY THE ASSESSEE FOR AY 2012-13 BEING ITA NO.594/DEL /2017 IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS DAY 22 ND OF JUNE, 2018. SD/- SD/- (R.K. PANDA) (KULDIP SI NGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF JUNE, 2018 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.