Appeal Details
Counselvise Citation
[2015] 121 COUNSELVISE.COM (IT) 2274 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 6 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
21-10-2015
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Assessment Year
2009-2010
Appeal Filed On
28-03-2014
Judgement Text
] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , , ' # BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.550/PN/2014 '% % / ASSESSMENT YEAR : 2009-10 SYNECHRON TECHNOLOGIES PVT. LTD., IT TOWERS, MIDC, KNOWLEDGE PARK, KHARADI IT PARK, PUNE 411 014 PAN NO. AAICS2894R . / APPELLANT V/S JCIT, RANGE-6, PUNE . / RESPONDENT . / ITA NO.605/PN/2014 '% % / ASSESSMENT YEAR : 2009-10 ACIT, CIRCLE-6, PUNE . / APPELLANT V/S SYNECHRON TECHNOLOGIES PVT. LTD., IT TOWERS, MIDC, KNOWLEDGE PARK, KHARADI IT PARK, PUNE 411 014 PAN NO. AAICS2894R . / RESPONDENT / ASSESSEE BY : MR. M.P. LOHIA AND MR. RAJENDRA AGIWAL / RESPONDENT BY : MR. A.K.MODI, CIT-DR / DATE OF HEARING :24.07.2015 / DATE OF PRONOUNCEMENT: 21.10.2015 2 ITA NO.550 AND 605/PN/2014 / ORDER PER R.K. PANDA, AM : ITA NO. 550/PN/2014 FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 30-01-2014 PASSED U/S.143(3) R .W.S. 144C(13) BY THE AO. ITA NO.605/PN/2014 HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF THE DRP, PUNE PASSED ON 1 8-12-2013. FOR THE SAKE OF CONVENIENCE, BOTH THE APPEALS WERE HEAR D TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.550/PN/2014 (BY ASSESSEE) : 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE S YNECHRON TECHNOLOGIES PVT. LTD. (IN SHORT STPL) IS A COMPANY REGIS TERED UNDER THE INDIAN COMPANIES ACT, 1956 HAVING ITS REGISTERE D OFFICE AT PUNE. THE ASSESSEE IS A SUBSIDIARY OF SYNECHRON HOLDIN G INC. WHICH IS A BVI REGISTERED COMPANY THE ASSESSEE COMPAN Y IS ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO IT S GROUP ENTITIES PRIMARILY TO SYNECHRON INC, USA. THE ASSESSEE IS A UNIT REGISTERED UNDER THE STP AND SEZ SEGMENT OF THE GOVER NMENT OF INDIA. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 29-09- 2009 DECLARING TAXABLE INCOME OF RS.53,55,290/- AFTER CLAIMING DEDUCTION OF RS.14,94,62,448/- U/S.10A AND RS.48,93,785/- U/ S. 10AA OF THE I.T. ACT, 1961. 3. THE AO MADE A REFERENCE U/S.92CA(1) OF THE I.T. ACT TO THE TPO FOR DETERMINING THE ALP WITH REFERENCE TO THE TRANS ACTIONS REPORTED IN FORM 3CEB FILED BY THE ASSESSEE. FROM THE V ARIOUS DOCUMENTS FILED BY THE ASSESSEE DURING THE TP ASSESSMEN T 3 ITA NO.550 AND 605/PN/2014 PROCEEDINGS THE TPO NOTED THAT THE ASSESSEE COMPANY HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES. S R . NO. NATURE OF INTERNATIONAL TRANSACTION AMOUNT (INR) METHOD USED 1 SOFTWARE DEVELOPMENT INCOME 983,919,006 TNMM 2 INTEREST RECEIVABLE ON WORKING CAPITAL 10,563 CUP 3 EXPENSES ALLOCATED BY USA COMPANY 102,321,061 TNMM 4 RECOVERY OF EXPENSES 1,423,509 5 INVESTMENT IN SHARE CAPITAL 5,273,908 TOTAL 1,109,012,188 4. HE NOTED THAT THE ALP OF THE ABOVE INTERNATIONAL TRA NSACTION WITH THE AES HAS BEEN DETERMINED BY APPLYING TNM METHO D STATING TO BE THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRC UMSTANCES OF THE CASE AND AGGREGATING THEM AS SOFTWARE DEVELOPMEN T SERVICES. THE OPERATING PROFIT (PBIT) TO OPERATING COST RATIO HAS BE EN TAKEN AS THE PLI IN TNMM ANALYSIS. AS PER THE ANALYSIS IN THE TP DOCUMENT THE PLI OF THE ASSESSEE HAS BEEN ARRIVED AT 11.89% WHE REAS THE AVERAGE PLI OF THE COMPARABLES HAS BEEN ARRIVED AT 8% USING 3 YEARS DATA AND 6.17% USING DATA FOR F.Y. 2008-09 ONLY. T HE ASSESSEE COMPANY SELECTED 27 COMPANIES AS COMPARABLES ON THE BASIS OF THE SEARCH CONDUCTED IN THE PUBLIC DATABASES, I.E. PROWESS. THE TPO FURTHER NOTED THAT IN THE TP REPORT FURNISHED B Y THE ASSESSEE THE ASSESSEE HAS BEEN TAKEN AS THE TESTED PARTY AND CHARACTERIZED AS SOFTWARE DEVELOPER. IT WAS EXPLAINED BE FORE THE TPO THAT SINCE THE PLI OF THE ASSESSEE IS HIGHER THAN THE AVERAGE PLI OF COMPARABLE COMPANIES, THE INTERNATIONAL TRANSACTION WITH THE AES IS AT ARMS LENGTH. 5. THE TPO ACCEPTED THE ANALYSIS CARRIED OUT BY THE A SSESSEE USING TNM METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS OF 4 ITA NO.550 AND 605/PN/2014 PROVISION OF SOFTWARE DEVELOPMENT. HE, HOWEVER, REJECTED T HE ECONOMIC ANALYSIS UNDERTAKEN BY THE ASSESSEE AND COND UCTED A FRESH ECONOMIC ANALYSIS. THE TPO CONSIDERED SINGLE YEAR FIN ANCIAL DATA FOR A.Y. 2009-10 AS AVAILABLE AT THE TIME OF TP ASSESS MENT FOR THE ANALYSIS. THE TPO REJECTED CERTAIN COMPARABLE COMP ANIES AND ACCEPTED CERTAIN OTHER COMPARABLE COMPANIES AND IDENTIFIED A SET OF 6 COMPANIES AS COMPARABLE. THE ARITHMETIC PLI OF THE REV ISED SET OF COMPARABLE COMPANIES WORKED OUT TO 27.24%, THE DETAILS OF WHICH ARE AS UNDER: S R . NO. NAME OF THE COMPARABLE PLI MARGIN (OP/OC)% PLI AFTER WORKING CAPITAL ADJUSTMENT 1 KALS INFORMATION TECHNOLOGY 41.38 44.02 2 THINKSOFT GLOBAL SERVICE LIMITED 19.02 21.90 3 BODHTREE CONSULTING LIMITED 62.28 66.39 4 GOLDSTONE TECHNOLOGIES LTD. 4.18 10.06 5 MINDTREE LTD. 5.56 9.91 6 PERSISTENT SYSTEMS LTD. 12.52 11.14 ARITHMETICAL MEAN (144.94/6) 24.16% 27.24% (163.42/6) 6. ACCORDINGLY, THE TPO PASSED THE ORDER ON 29-01-201 3 U/S.92CA OF THE ACT MAKING AN ADJUSTMENT OF RS.14,78,08,145/-. 7. THE AO ISSUED THE DRAFT ASSESSMENT ORDER ON 22-03-2 012 PROPOSING THE FOLLOWING ADJUSTMENT : (A) TP ADJUSTMENT OF RS.14,78,08,145/- MADE TO THE INTERN ATIONAL TRANSACTIONS AS PROPOSED BY THE TPO. (B) RS.12,37,76,000/- ADDED TO THE TOTAL INCOME ON ACCOU NT OF MISMATCH OF TAX DEDUCTED AT SOURCE BY WIPRO LTD. AS PER RETURN OF INCOME AND FORM 26AS FOR F.Y. 2007-08. (C) RS.24,72,181/- ADDITION TO BOOK PROFITS U/S.115JB OF T HE ACT ON ACCOUNT OF STOCK APPRECIATION RIGHTS (SAR) BEING IN THE NATURE OF UNASCERTAINED LIABILITY. (D) RS.40,64,46,059/- (RS.40,04,21,145/- FOR STP UNIT AND RS.60,24,914/- FOR SEZ UNIT) ADDED TO THE TOTAL INCO ME WITH RESPECT TO DEBIT NOTE RAISED BY SYNECHRON INC. OF STPL. THE SAME HAS BEEN 5 ITA NO.550 AND 605/PN/2014 ADDED TO PROFITS OF THE BUSINESS OF THE UNIT AND TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S.10A AND 10AA OF THE ACT RESPE CTIVELY. (E) RS.1,73,45,367/- ADJUSTED IN EXPORT TURNOVER WHILE C OMPUTING DEDUCTION U/S.10A OF THE I.T. ACT. 8. ACCORDINGLY, THE TOTAL INCOME OF THE ASSESSEE WAS ENH ANCED TO RS.34,54,77,162/-. 9. THE ASSESSEE FILED OBJECTIONS AGAINST THE DRAFT ASSESSM ENT ORDER BEFORE DRP. THE DRP VIDE ORDER DATED 18-12-2013 GAVE THE FOLLOWING DIRECTIONS TO THE AO: TRANSFER PRICING DIRECTED THE AO TO EXCLUDE R S SOFTWARE INDIA LIMIT ED; DIRECTED THE AO TO INCLUDE ICRA TECHNO ANALYTICS LIM ITED, QUINTEGRA SOLUTIONS LIMITED, AKSHAY SOFTWARE TECHNOLOGIES AND CG -VAK SOFTWARE AND EXPORTS LIMITED; CONFIRMED AO'S DECISION TO INCLUDE KALS INFORMATION T ECHNOLOGIES LIMITED AND BODHTREE CONSULTING LIMITED; CONFIRMED EXCLUSION OF INDIUM SOFTWARE (INDIA) LIMIT ED TVS INFOTECH LIMITED; AND ALLOWED WORKING CAPITAL ADJUSTMENT; CORPORATE TAX WITH RESPECT TO THE PROPOSED ADDITION OF RS. 12,37,076 MADE BY THE AO ON ACCOUNT OF TDS MISMATCH, THE DRP DIRECTED THE AO TO CARRY OUT VERIFICATION AND THEN PASS THE NECESSARY RECTIFICATION ORDER; WITH RESPECT TO THE PROPOSED ADDITION OF RS. 24,72,181 TO BOOK PROFITS ON ACCOUNT OF STOCK APPRECIATION RIGHTS ('SAR'), THE DRP CONFIRMED THE ADDITION MADE BY THE AO; THE ADJUSTMENT OF RS. 40,64,46,059 MADE IN THE COMPU TATION OF DEDUCTION U/S 10A AND 10AA OF THE ACT BY THE AO ON A CCOUNT OF DEBT NOTES TO BE DELETED CONSIDERING THE FACT THAT SAME WAS DONE WITHOUT ANY EVIDENCE TO SUPPORT THE SAME; AND WITH RESPECT TO ADDITION OF RS. 1,73,45,367 ON ACCOUN T OF BAD DEBTS, REDUCED ONLY FROM EXPORT TURNOVER WITHOUT REDUCING THE SAME ON TOTAL TURNOVER, THE DRP DIRECTED THAT THE AO SHOULD REDUCE THE SAME FROM TOTAL TURNOVER AS WELL APPLYING THE PARITY PRINCIPLE . OTHER THAN ABOVE, THE DRP AGREED WITH THE VIEWS OF T HE AO/ TPO AND REJECTED THE CONTENTIONS RAISED BY THE ASSESSEE. 6 ITA NO.550 AND 605/PN/2014 10. PURSUANT TO THE DIRECTIONS GIVEN BY THE DRP THE AO TOOK THE FINAL SET OF COMPARABLE COMPANIES IN THE ASSESSMENT ORDER, THE DETAILS OF WHICH ARE AS UNDER : SR.NO. NAME OF THE COMPANY ADJUSTED OPERATING PROFIT MARGINS AS PER FINAL ORDER 1 KALS INFORMATION SYSTEMS LTD. (SEGMENTAL) 41.38 2 THINKSOFT GLOBAL SERVICE LIMITED 19.94 3 BODHTREE CONSULTING LIMITED 70.51 4 GOLDSTONE TECHNOLOGIES LIMITED 7.54 5 MINDTREE LIMITED 5.56 6 PERSISTENT SYSTEMS LIMITED 19.03 7 AKSHAY SOFTWARE TECHNOLOGIES LIMITED 14.80 8 CG - VAK SOFTWARE AND EXPORTS LIMITED (SEGMENTAL) 5.68 9 ICRA TECHNO ANALYTICS LIMITED 14.73 10 QUINTEGRA SOLUTIONS LIMITED 2.97 ARITHMETIC MEAN 20.21% ACCORDINGLY, THE AO MADE A TP ADJUSTMENT OF RS.7,86,03,511 /- IN THE FINAL ASSESSMENT ORDER WITH REGARD TO THE INTERNATION AL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT. 11. HOWEVER, THE AO DELETED THE FOLLOWING ADDITIONS PROPOSED IN THE DRAFT ASSESSMENT ORDER : RS. 40,64,46,059 (RS. 40,04,21,145 FOR STP UNIT AND R S. 60,24,914 FOR SEZ UNIT) ADDED TO TOTAL INCOME WITH RESPECT TO DEB IT NOTE RAISED BY SYNECHRON, INC ON STPL. RS.1,73,45,367 ADJUSTED IN 'EXPORT TURNOVER' WHILE C OMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. 12. FURTHER, THE FOLLOWING ADDITIONS MADE IN THE DRAFT ORDER WERE CONFIRMED BY THE AO IN THE FINAL ASSESSMENT ORDER. RS. 12,37,076 ADDED TO TOTAL INCOME ON ACCOUNT OF MI SMATCH OF TAX DEDUCTED AT SOURCE BY WIPRO LIMITED AS PER ROI AND F ORM 26AS FOR FY 2007-08. THE SAID ADDITION WAS MADE WITHOUT GRANTING AN OPPORTUNITY TO THE APPELLANT TO FURNISH SUPPORTING EVIDENCE AS EXP LAINED IN PARA 7 ABOVE. RS. 24,72,181 ADDITION TO BOOK PROFITS U/S 115JB OF T HE ACT ON ACCOUNT OF STOCK 7 ITA NO.550 AND 605/PN/2014 13. AGGRIEVED WITH SUCH ORDER OF THE AO THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 14. ALTHOUGH THE ASSESSEE HAS TAKEN 14 GROUNDS IN THE APPEAL, HOWEVER, THE LD. COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING DID NOT PRESS GROUNDS OF APPEAL NO. 1,2,3,4,6,7,8,9,10. THE LD. DEPARTMENTAL REPRESENTATIVE HAS NO OBJECTION FOR THE SA ME. ACCORDINGLY, THE ABOVE GROUNDS ARE DISMISSED AS NOT PRESSED. 15. SIMILARLY, THE LD. COUNSEL FOR THE ASSESSEE ALSO DID NOT PRESS GROUND OF APPEAL NO.13 RELATING TO INITIATION OF PENALTY PROCE EDINGS U/S.271(1)(C) OF THE I.T. ACT BEING PREMATURE. HE ALSO DID NO T PRESS GROUND OF APPEAL NO.14 CHALLENGING LEVY OF INTEREST U/S.234B OF THE I.T. ACT BEING CONSEQUENTIAL. ACCORDINGLY, THE ABOVE GROU NDS ARE ALSO DISMISSED AS NOT PRESSED. THUS, THE GROUNDS THAT HAS SURVIVED FOR OUR ADJUDICATION ARE GROUNDS OF APPEAL NO. 5, 11 AND 12 WHICH ARE AS UNDER : 5. ACCEPTING CERTAIN ADDITIONAL COMPANIES AS COMPAR ABLE TO THE APPELLANT ON AN ADHOC BASIS. ERRED ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW BY ACCEPTING CERTAIN ADDITIONAL COMPANIES AS COMPARABLE TO THE APP ELLANT ON AN ADHOC BASIS. 11. ADDITION TO TOTAL INCOME ON ACCOUNT OF MISMATCH OF TAXES DEDUCTED AT SOURCE (TDS) AMOUNT. ERRED IN FACTS BY MAKING AN ADJUSTMENT OF RS.12,37,07 6/- TO THE TOTAL INCOME ON ACCOUNT OF MISMATCH OF TDS AMOUNT CLAIMED BY THE APPELLANT IN ITS RETURN OF INCOME WITH THE TDS REFLE CTED IN FORM 26AS OF THE APPELLANT. 12. ADDITION MADE TO BOOK PROFITS ON ACCOUNT OF PROV ISION MADE FOR STOCK APPRECIATION RIGHTS (SAR). ERRED IN FACTS AND IN LAW IN CONCLUDING THAT PROVISIO N FOR SAR MADE BY THE APPELLANT IS TOWARDS UNASCERTAINED LIABILITY AND SH OULD BE ADDED BACK WHILE COMPUTING BOOK PROFITS TAXABLE UNDER MINI MUM ALTERNATE TAX (MAT) PROVISIONS (I.E. AS PER EXPLANATION 1(C) OF SECTION 115JB OF THE ACT). 8 ITA NO.550 AND 605/PN/2014 16. THE ASSESSEE HAS TAKEN AN ADDITIONAL GROUND WHICH RE ADS AS UNDER : ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW, THE HONBLE DRP AND CONSEQUENTLY THE LD.AO HAVE : 15. ADDITION OF TRANSFER PRICING ADJUSTMENT OF RS.7,8 6,03,511/- AND MISMATCH OF TDS OF RS.12,37,076/- TO THE BOOK PROFITS. ERRED IN FACTS AND IN LAW, IN ADDING THE TRANSFER PRI CING ADJUSTMENT OF RS.7,86,03,511/- AND ADDITION OF MISMATCH OF TDS OF R S.12,37,076/- TO THE NET PROFIT AND LOSS ACCOUNT WHILE COMPUTING BOOK PROFITS TAXABLE UNDER MINIMUM ALTERNATE TAX (MAT), I.E. U/S.115JB O F THE ACT. 17. AFTER HEARING BOTH THE SIDES AND CONSIDERING THAT THE ADDITIONAL GROUND IS PURELY LEGAL IN NATURE AND THE FACTS A RE ALREADY ON RECORD, THEREFORE, FOLLOWING THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF NTPC VS. CIT REPORTED IN 229 ITR 3 83, JUTE CORPORATION INDIA LTD. REPORTED IN 187 ITR 688 AND THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF AHMEDABAD ELEC TRICITY COMPANY LTD. REPORTED IN 199 ITR 351 THE ADDITIONAL GROU ND RAISED BY THE ASSESSEE IS ADMITTED FOR ADJUDICATION. 18. SO FAR AS GROUND OF APPEAL NO.5 IS CONCERNED THE GRIEV ANCE OF THE ASSESSEE IS REGARDING ACCEPTANCE OF CERTAIN ADDITIONA L COMPANIES AS COMPARABLE TO THE ASSESSEE ON ADHOC BASIS. 19. SO FAR AS BODHTREE CONSULTING LTD. IS CONCERNED THE L D. COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS PER MANAGEM ENT DISCUSSION ANALYSIS OF BODHTREE FOR F.Y. 2008-09, THE COMPA NY OPERATES AS A SOFTWARE SOLUTION COMPANY AND IS ENGAGED IN PROVIDING OPEN AND END TO END WEB SOLUTIONS, OFF-SHORING D ATA MANAGEMENT, DATA WAREHOUSING, SOFTWARE CONSULTANCY, DESIGN AND DEVELOPMENT OF SOLUTIONS USING THE LATEST TECHNOLOGY. CONS IDERING THE FACT THAT IT HAS BOTH SOLUTIONS AS WELL AS SERVICE OFFER INGS AND 9 ITA NO.550 AND 605/PN/2014 NO REVENUE BREAKUP IS AVAILABLE, THE SAME SHOULD BE REJEC TED ON THE BASIS OF BEING FUNCTIONALLY DIFFERENT. FURTHER, IT HAS EA RNED SUPER NORMAL PROFIT DURING THE YEAR AND THEREFORE SHOULD BE REJECTED BEING UNREPRESENTATIVE OF INDUSTRY MARGINS. 20. REFERRING TO THE FOLLOWING DECISIONS THE LD. COUNSEL FOR T HE ASSESSEE SUBMITTED THAT BODHTREE CONSULTING LIMITED WHER E MARGIN IS 70.51% SHOULD BE REJECTED BEING FUNCTIONALLY DIFFERENT AS SOFTWARE SOLUTION COMPANY : 1. ADAPTEC INDIA PVT. LTD. ITA NO.206/HYD/2014 ORDER DATED 25-03- 2015 2. CISCO SYSTEMS INDIA PVT. LTD. IT/TP(A) NO.271/BANG/2 014 ORDER DATED 14-08-2014 3. SOFTTEK INDIA PVT. LTD. IT/TP(A) NO.222/BANG/2014 ORDER DATED 31- 10-2014 4. M/S. YODLEE INFOTECH PVT. LTD. IT/TP(A) NO.108/BAN G/2014 ORDER DATED 12-12-2014 5. BARCLAYS TECHNOLOGY CENTRE INDIA PVT. LTD. ITA NO. 2279/PN/2012 ORDER DATED 28-01-2015 6. NETHAWK NETWORKS INDIA PVT. LTD. VS ITO ITA NO.7633 /MUM/2012 ORDER DATED 06-11-2013 7. ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. ITA N O.58/HYD/2010 ORDER DATED 20-03-2015 8. TIBCO SOFTWARE INDIA PVT. LTD. ITA NO.94/PN/2014 ORDER DATED 10- 04-2015 9. PTC SOFTWARE INDIA PVT. LTD. ITA NO.336/PN/2014 O RDER DATED 31- 10-2014 10. ACTIS ADVISERS PVT. LTD. VS. DCIT ITA NO.5277/DEL/20 11 ORDER DATED 12-10-2012 21. SO FAR AS KALS INFORMATION SYSTEMS LTD. IS CONCERNED THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ABOVE C OMPANY IS ALSO FUNCTIONALLY DIFFERENT. HE SUBMITTED THAT ON REVIEW OF T HE ANNUAL REPORT OF KALS FOR THE YEAR ENDED 31-03-2009 IT CAN BE OBSERVED THAT THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. THE INVENTORIES UNDER THE SCHED ULES TO THE FINANCIAL STATEMENT ON PAGE 16 OF THE ANNUAL REPORT DISCLO SED SOFTWARE DEVELOPMENT AS INVENTORY. IT IS TO BE NOTED TH AT A PURE 10 ITA NO.550 AND 605/PN/2014 SOFTWARE SERVICE PROVIDER WOULD NOT BE ABLE TO DISCLOSE SU CH DETAILS AS IT DOES NOT CARRY ANY SUCH INVENTORY. REFERRING TO T HE BACKGROUND UNDER THE SCHEDULES TO THE FINANCIAL STATEMEN TS ON PAGE 18 OF THE ANNUAL REPORT HE SUBMITTED THAT IT CLEARL Y STATES THAT THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SO FTWARE PRODUCTS SINCE ITS INCEPTION. THE COMPANY CONSISTING OF S TPI UNIT ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS AND A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTWARE PROFESSIONA LS ON ONLINE PROJECTS. 22. SIMILARLY THE REVENUE RECOGNITION UNDER THE NOTES TO THE FINANCIAL STATEMENTS ON PAGE 18 OF THE ANNUAL REPORT CLEAR LY STATES THAT THE COMPANY DERIVES ITS REVENUES PRIMARILY FROM SOFT WARE SERVICES. THE SEGMENTAL INFORMATION PROVIDED IN THE NOTES ON ACCOUNTS ON PAGE 19 OF THE ANNUAL REPORT PROVIDES THE BREAKUP OF REVENUE FROM TWO SEGMENTS, I.E. APPLICATION SOFTWARE AND TRA INING. HE SUBMITTED THAT IN VIEW OF THE ABOVE, KALS IS ENGAGED I N BOTH SALE OF SOFTWARE AND PRODUCTS WHEREAS THE ASSESSEE IS E NGAGED SOLELY IN SOFTWARE DEVELOPMENT AND HENCE KALS SHOULD NO T BE CONSIDERED AS COMPARABLE. FOR THE ABOVE PROPOSITION, THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS : 1. APPROVA SYSTEMS PVT. LTD. ITA NO.1788/PN/2013 ORDER DATED 13-01- 2015 2. PTC SOFTWARE INDIA PVT. LTD. ITA NO.336/PN/2014 O RDER DATED 31- 10-2014 3. TIBCO SOFTWARE INDIA PVT. LTD. ITA NO.94/PN/2014 ORDER DATED 10- 04-2015 4. BARCLAYS TECHNOLOGY CENTRE INDIA PVT. LTD. ITA NO. 2279/PN/2012 ORDER DATED 28-01-2015 5. M/S. SYMPHONY SERVICES PUNE PVT. LTD. VS. ITO ITA NO .257/PN/2013 ORDER DATED 30-04-2014 6. CISCO SYSTEMS INDIA PVT. LTD. IT/TP(A) NO.271/BANG/2 014 ORDER DATED 14-08-2014 7. BINDVIEW INDIA PVT. LTD. ITA NO.1386/PN/2010 ORDE R DATED 30-11- 2011 11 ITA NO.550 AND 605/PN/2014 8. M/S. SUNGARD SOLUTIONS INDIA PVT. LTD. ITA NO.1670/ PN/2011 ORDER DATED 30-01-2015 9. CURAM SOFTWARE INTERNATIONAL PVT. LTD. VS. ITO ITA NO.1280/BANG/2012 ORDER DATED 31-07-2013 10. M/S. YAHOO SOFTWARE DEVELOPMENT INDIA PVT. LTD. IT A NO.1129/BANG/2010 ORDER DATED 31-12-2014 11. 3DLPM SOFTWARE SOLUTIONS LTD. VS. DCIT IT/TP(A) NO.1303/BANG/2012 ORDER DATED 28-11-2013 12. INTEVA PRODUCTS INDIA PVT. LTD. IT/TP(A) NO.1354/B ANG/2012 ORDER DATED 11-04-2014 13. M/S. CYPRESS SEMICONDUCTOR TECHNOLOGY INDIA PVT. LTD. - IT/TP(A) NO.1167/BANG/2010 ORDER DATED 27-03-2015 14. M/S. PRANA STUDIOS PVT. LTD. ITA NO.2077/MUM/2014 O RDER DATED 16-01-2015 15. ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. ITA N O.58/HYD/2010 ORDER DATED 20-03-2015 HE SUBMITTED THAT IF THE ABOVE 2 COMPANIES ARE DELETED FROM THE COMPARABLES THE ARITHMETIC MEAN COMES TO 11.28% AND THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE WILL BE AT ARMS LENGTH. 23. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND REFERRED TO THE FINDINGS GIVEN BY THE DRP AT PARA 26.25 O F THE ORDER. HE SUBMITTED THAT THE DRP FOLLOWING ITS EARLIER STAND IN THE PRECEEDING YEAR HAS HELD THAT KALS INFORMATION SYSTEMS L TD. (KALS) IS COMPARABLE WITH THE ASSESSEE. FURTHER, THE FUNCTIONS A ND MARGIN OF KALS INFORMATION SYSTEMS LTD. ARE CLOSELY SIMILAR. REFERRING TO THE ORDER OF THE DRP HE SUBMITTED THAT THE HONBLE DRP HAS GIVEN COGENT REASONS FOLLOWING VARIOUS CASE DECISIO NS AND THE DRAFT SAFE HARBOUR RULES RELEASED BY CBDT WHILE CONSID ERING KALS INFORMATION SYSTEMS LTD. AS NOT COMPARABLE. HE ACCO RDINGLY SUBMITTED THAT KALS CANNOT BE CONSIDERED AS A COMPARABLE. 24. SO FAR AS BODHTREE CONSULTING LTD. IS CONCERNED HE S UBMITTED THAT THE TRIBUNAL ON THE BASIS OF THE ANNUAL REPORT OF BO DHTREE CONSULTING LTD. CAME TO A CONCLUSION THAT IT IS NOT CORREC T TO STATE 12 ITA NO.550 AND 605/PN/2014 THAT COMPANY IS ALSO INTO ITES AS CONTENDED BY THE ASS ESSEE. THEY HAVE ALSO CONSIDERED THE ARGUMENT OF THE ASSESSEE THA T IT HAS EARNED SUPER PROFIT OF 62.29%. RELYING ON VARIOUS DECISION S THE HONBLE DRP CAME TO THE CONCLUSION THAT BODHTREE CONSU LTING LTD. IS A COMPARABLE COMPANY. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE TPO/DRP BEING IN ACCORDANCE WITH LAW SHOULD BE UPH ELD AND THE GROUND RAISED BY THE ASSESSEE TO EXCLUDE THE ABOVE 2 COMPANIES AS COMPARABLE BE DISMISSED. 25. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. THE ONLY DISPUTE TO BE DECIDED IN THIS GROUND OF APPEAL IS REGARDING THE EXCLUSION OF BODHT REE CONSULTING LTD. AND KALS INFORMATION SYSTEMS LTD. FROM TH E LIST OF COMPARABLES FOR CALCULATING THE ARITHMETIC MEAN. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT KALS SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES SINCE IT IS FUNCTIONA LLY DIFFERENT AS SOFTWARE PRODUCT COMPANY. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE KALS IS ENGAGED IN THE DEVELOPM ENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION. FURTH ER, IN ITS FINANCIAL STATEMENTS KALS HAS DISCLOSED SOFTWARE DEVELOPMEN T, HAS INVENTORY AND IT DERIVES ITS REVENUE PRIMARILY FROM SO FTWARE SERVICES AND SOFTWARE PRODUCTS. HOWEVER, THE ASSESSEE COMPANY IS ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO IT S GROUP ENTITIES AND THEREFORE KALS CANNOT BE CONSIDERED AS COM PARABLE SINCE ITS FUNCTIONS ARE DIFFERENT FROM THAT OF THE ASSESSEE COMPANY. 13 ITA NO.550 AND 605/PN/2014 26. WE FIND MERIT IN THE ABOVE SUBMISSIONS OF THE LD. COUN SEL FOR THE ASSESSEE. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF APPROVA SYSTEMS PVT. LTD. (SUPRA) HAS OBSERVED AS UNDER : 18. SO FAR AS THE GROUNDS RAISED BY THE REVENUE ARE C ONCERNED, WE FIND THE SAME RELATES TO EXCLUSION OF KALS INFORMATION SYSTEM LTD. FROM THE LIST OF COMPARABLE COMPANIES BY THE LD.CIT(A). 19. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND CIT( A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND TH E PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD ., (SUPRA) FOR A.Y. 2006-07 HAS HELD THAT THE SAID COMPANY IS ENGAGED IN D EVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. SIMILARL Y, THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BITWISE SOLUTION S PVT. LTD. (SUPRA) HAS ALSO HELD THAT KALS INFORMATION SYSTEM LTD., CANNOT BE CONSIDERED AS COMPARABLE. SIMILAR VIEW HAS BEEN TAKEN BY THE VA RIOUS OTHER BENCHES OF THE TRIBUNAL, THE DETAILS OF WHICH ARE GIV EN ABOVE BELOW : 1. SYMPHONY SERVICES PUNE PVT. LTD. VS. ITO ITA NO.257/PN/2013 2. PTC SOFTWARE (INDIA) PVT. LTD., - ITA NO.1605/PN/20 11 3. TOLUNA INDIA PVT. LTD. VS. ACIT ITA NO.5645/DEL//2 011 4. UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD., VS. ACIT ITA NO.6312/DEL/2012 5. M/S. HCL EAI SERVICES LTD. VS. DCIT IT(TP) A.NO.1348/BANG/2011 6. INTOTO SOFTWARE INDIA PVT. LTD. VS. ACIT ITA NO.1196/HYD/2010 19.1 SINCE THE LD.CIT(A) FOLLOWING THE DECISION OF T HE PUNE BENCH OF THE TRIBUNAL HAS REJECTED KALS INFORMATION SYSTEM LTD. HOLDING THE SAME TO BE FUNCTIONALLY DIFFERENT, THEREFORE, IN ABSE NCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE, WE FIND NO INFIRMIT Y IN THE ORDER OF THE CIT(A). ACCORDINGLY, THE SAME IS UPHELD AND THE GROU NDS RAISED BY THE REVENUE ARE ACCORDINGLY DISMISSED. 27. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF PTC SOFTWARE INDIA PVT. LTD. (SUPRA) AT PARA 27 AND 28 HAS OB SERVED AS UNDER : 26. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST ISSUE RAISED BY THE ASSESSEE IS IN RELATION TO THE ADJ USTMENT OF 14 ITA NO.550 AND 605/PN/2014 RS.9,86,70,915/- IN IT SERVICES SEGMENT. THE TPO ON A FRESH SEARCH HAD SELECTED THE FOLLOWING COMPARABLES:- S.NO. NAME OF THE COMPANY PLI PLI AFTER WC ADJ. 1 FCS SOFTWARE SOLUTIONS LTD. 15.49 14.41 4 AKSHAY SOFTWARE TECHNOLOGY 8.19 10.56 5 KALS INFORMATION SYSTEMS LTD. (SEG.) 41.91 43.20 6 BODHTREE CONSULTING LTD. 68.35 69.25 7 LGS GLOBAL LTD. 18.03 15.03 8 GOLDSTONE TECHNOLOGIES LTD. 4.15 7.07 AVERAGE 26.25 27. THE ASSESSEE IS AGGRIEVED BY THE INCLUSION OF ITEM A T SR NO.5 KALS INFORMATION SYSTEMS LTD. (SEG). IT IS THE CASE OF T HE ASSESSEE THAT THE SAID COMPANY WAS INCLUDED BY THE TPO IN ITS STUDY R ELATING TO ASSESSMENT YEAR 2007-08 AND THE TRIBUNAL IN ASSESSEE'S OWN C ASE IN ITA NO.1605/PN/2011 RELATING TO ASSESSMENT YEAR 2007-0 8 VIDE ORDER DATED 30.04.2013 HAD HELD THE SAID COMPANY TO BE NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. THE RELEVANT FINDING OF THE TRIBUNAL VIDE PARA 19 IS AS UNDER: '19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY T HE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE SAID CONCERN (KALS INFORMATION SYSTEMS LTD.) HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN THE IMMEDI ATELY PRECEDING ASSESSMENT YEAR AND IN THE PRESENT YEAR ALSO, O N THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTE N SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS INT ER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE D ISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSS ION EMERGING FROM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAID CONCERN HA S UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRE CEDING YEAR. THEREFORE, HAVING REGARD TO THE FACTUAL ASPECT S BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERTED THAT THE APP LICATION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEE'S SEGMENT OF IT SERVICES.' 28. IN THE YEAR UNDER CONSIDERATION ALSO, THE SAID C OMPANY KALS INFORMATION SYSTEMS LTD. IS ENGAGED IN THE SALE OF SOFTW ARE PRODUCTS, WHICH IS APPARENT FROM THE FINANCIAL STATEMENTS AND NO TES TO ACCOUNTS FILED BY THE ASSESSEE AT PAGES 479 TO 489 OF THE PAPER B OOK. THE SAID COMPANY BEING NOT FUNCTIONALLY COMPARABLE IN VIEW O F THE FACTUAL ASPECTS REFERRED TO BY THE ASSESSEE AND IN VIEW OF FINDIN G OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007-08, WE HOLD THAT THE APPLICATION OF SOFTWARE SEGMENT OF THE SAID C ONCERN WAS NOT COMPARABLE TO THE ASSESSEE'S SEGMENT OF IT SERVICES. 15 ITA NO.550 AND 605/PN/2014 28. SIMILARLY, THE PUNE BENCH OF THE TRIBUNAL IN THE CASE O F BARCLAYS TECHNOLOGY CENTRE INDIA PVT. LTD. (SUPRA) HAS OBS ERVED AS UNDER : 18. THIRDLY, ASSESSEE HAS CONTENDED THAT THE CONCERN M/ S. KALS INFORMATION SYSTEMS LTD. BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. ON THIS ASPECT ALSO, THE CASE SET UP BY THE ASSESSEE IS THAT THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SYMPHONY SERVICES PUNE PVT. LTD. (SUPRA) FULLY COVERS THE CONTROVERSY. IN THE CASE OF SYMPHONY SERVICES (SUPRA), M/S. KALS INFO RMATION SYSTEMS LTD. WAS EXCLUDED FROM THE LIST OF COMPARABLES O N THE GROUND THAT THE SAID CONCERN WAS INVOLVED NOT ONLY IN THE AC TIVITY OF PROVIDING OF SOFTWARE DEVELOPMENT SERVICES BUT ALSO IN SELLING OF SOFTWARE PRODUCTS. SYMPHONY SERVICES PUNE PVT. LTD. WAS ONLY E NGAGED IN PROVIDING SOFTWARE SERVICES. IN THE CASE OF SYMPHONY S ERVICES PUNE PVT. LTD. (SUPRA) AS WELL AS IN THE PRESENT CASE ALSO, TH E TPO DID NOT ACCEPT THE PLEA FOR EXCLUSION OF KALS INFORMATION SY STEM LTD. PRIMARILY ON THE GROUND THAT THE FINANCIAL STATEMENT S OF THE SAID CONCERN DID NOT REFLECT ANY SALE OF SOFTWARE PRODUCTS. QUITE CLEARLY THE STAND OF THE REVENUE IN THE PRESENT CASE AS WELL IN THE CASE OF SYMPHONY SERVICES PUNE PVT. LTD. (SUPRA) IS SIMILAR. I T IS ALSO QUITE CLEAR THAT THE NATURE OF SERVICE BEING RENDERED BY T HE ASSESSEE AND SYMPHONY SERVICES PUNE PVT. LTD. (SUPRA) ARE SIMILAR, NAMELY RENDERING OF SOFTWARE DEVELOPMENT SERVICES TO ITS AFFIL IATES. THE FOLLOWING DISCUSSION IN THE ORDER OF THE TRIBUNAL IN C ASE OF SYMPHONY SERVICES DATED 30-04-2014 (SUPRA) BRINGS OUT THE SALIE NT FEATURES OF THE CONTROVERSY : 13. THE SECOND POINT RAISED BY THE ASSESSEE IS WITH REGAR D TO THE ADOPTION OF KALS INFORMATION SYSTEMS LIMITED AS A COMPA RABLE CONCERN WHILE BENCHMARKING THE INTERNATIONAL TRANSAC TIONS OF THE ASSESSEE. BEFORE THE TPO, ASSESSEE SUBMITTED THAT THE SAID CO NCERN BE EXCLUDED FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DISSIMILARITIES. THE RELEVANT DISCUSSION IN THIS REGARD IS CONTAINED IN PARA 6.1 OF THE ORDER OF THE TPO. THE PLEA OF THE A SSESSEE WAS THAT THE SAID CONCERN WAS ENGAGED IN SELLING OF SOFTWARE PRODUC TS, NAMELY, VIRTUAL INSURE, LA. VISION, CMSS, E-DMS AND ERP 'SHIN E', ETC., WHICH ARE ALL SPECIALISED SOFTWARE PRODUCTS DEVELOPED FOR THE RESPECTIVE SECTORS. FOR THE INSTANCE, VIRTUAL INSURE WAS SAID TO BE A WEB BASED SOLUTION THAT WAS USEFUL IN THE INSURANCE SECTOR; LA VISI ON WAS AN E- COMMERCE BASED APPLICATION IN THE FIELD OF INTRA-ORG ANIZATIONAL COMMUNICATIONS, ETC.; AND, CMSS WAS A SOFTWARE FOR CONSULTANTS/AGENTS TO MANAGE THEIR CUSTOMERS PRE AND POST SALES. ON THIS BASIS, IT WAS SOUGHT TO BE MADE OUT THAT THE ASSESSEE W AS FUNCTIONALLY DIFFERENT INASMUCH IT WAS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT AND OTHER RELATED SERVICES TO ITS ASSOCIATED ENTERPRISES AS WELL AS TO THE NON-ASSOCIATED ENTERPRISES A ND, WAS NOT INVOLVED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS. THE TPO DID NOT ACCEPT THE PLEA OF THE ASSESSEE FOR THE REASON THAT THE ANNUAL REPORT OF THE SAID CONCERN DID NOT REFLECT ABOUT SAL E OF SOFTWARE PRODUCTS AFTER DEVELOPMENT AND THEREFORE, ACCORDING TO HIM, IT WAS NOT FUNCTIONALLY DIFFERENT. 16 ITA NO.550 AND 605/PN/2014 14. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS V EHEMENTLY POINTED OUT THAT THE PLEA OF THE ASSESSEE HAS BEEN REJEC TED BY THE INCOME-TAX AUTHORITIES WITHOUT ANY JUSTIFIABLE REASONS, AS EVEN ON THE BASIS OF THE INFORMATION AVAILABLE IN THE PUBLIC DOMA IN IT IS QUITE EVIDENT THAT KALS INFORMATION SYSTEM LIMITED WAS A CON CERN WHICH WAS DEVELOPING AND SELLING SOFTWARE PRODUCTS, WHICH WA S AN ACTIVITY QUITE DISTINCT FROM THE ACTIVITY OF SOFTWARE DEVELOPM ENT UNDERTAKEN BY THE ASSESSEE. IN THE COURSE OF HEARING, THE LEARNED COUN SEL HAS FURNISHED THE PRINTS OUT FROM THE ANNUAL REPORT OF KA LS INFORMATION SYSTEMS LTD. WHEREIN VARIOUS SOFTWARE PRODUCTS SOLD BY TH E SAID CONCERN HAVE BEEN DETAILED, WHICH ACCORDING TO HIM, SUPPORTS THE PLEA OF THE ASSESSEE THAT THE SAID CONCERN WAS FUNCTIONALLY DI FFERENT. APART THEREFROM, THE LEARNED COUNSEL HAS REFERRED TO THE DE CISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. VS. DCIT VIDE ITA NO.1386/PN/2010 DATED 30.11.2011, WHICH WA S ALSO A CONCERN ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SER VICES FOR ITS PARENT COMPANY. THE ACTION OF THE TPO OF SELECTING K ALS INFORMATION SYSTEMS LIMITED AS A COMPARABLE CONCERN WHILE APPLYING THE TNM METHOD WAS REJECTED BY THE TRIBUNAL ON THE BASIS THAT THE SAID CONCERN WAS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SAL E, WHICH WAS FUNCTIONALLY DISSIMILAR TO THE SOFTWARE DEVELOPMENT SER VICES UNDERTAKEN BY THE BINDVIEW INDIA PVT. LTD. (SUPRA). THE LEARNED COUNSEL POINTED OUT THAT THE SAID DECISION IS FULLY APP LICABLE TO THE FACTS OF THE PRESENT CASE INASMUCH AS SIMILAR FUNCTIONS WERE U NDERTAKEN BY BINDVIEW INDIA PVT. LTD. AND THEREFORE KALS INFORMAT ION SYSTEMS LIMITED IS LIABLE TO BE EXCLUDED FROM THE LISTS OF COM PARABLES. 15. A REFERENCE HAS ALSO BEEN MADE TO THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S 3DPLM SOFTWA RE SOLUTIONS LTD. VS. DCIT VIDE IT(TP)A NO.1303/BANG/2012 DATED 2 8.11.2013 WHEREIN ALSO THE SAID CONCERN, NAMELY, KALS INFORMATIO N SYSTEMS LIMITED WAS NOT CONSIDERED AS A COMPARABLE ON ACCOUNT OF FUNCTIONAL DISSIMILARITIES. THE LEARNED COUNSEL POINTED OUT THAT M /S 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) WAS ALSO A CONCERN ENGA GED IN THE PROVISION OF SOFTWARE DEVELOPMENT AND OTHER RELATED SE RVICES, WHICH IS SIMILAR TO THE FUNCTIONS UNDERTAKEN BY THE ASSESSEE. IT W AS POINTED OUT THAT THE FUNCTIONS OF KALS INFORMATION SYSTEMS LIMITED CONSIDERED BY THE BANGALORE BENCH OF THE TRIBUNAL IS FOR THE SAME ASSESSMENT YEAR AS IS IN THE PRESENT CASE AND THEREFORE THE SAID DECISION A LSO SQUARELY APPLIES TO THE FACTS OF THE PRESENT CASE. 16. THE LEARNED CIT-DR HAS DEFENDED THE POSITION OF T HE TPO BY RELYING ON THE DISCUSSION IN THE ORDER OF THE TPO, WHI CH WE HAVE ALREADY ADVERTED TO IN THE EARLIER PART OF THIS ORDE R, AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THE PRECEDENTS BY WAY OF THE DECISION OF THE PUNE BEN CH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. (SUP RA) AND THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN T HE CASE OF M/S 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) RELIED UPON BY THE ASSESSEE SQUARELY COVER THE CONTROVERSY RELATING TO KALS INFORM ATION SYSTEMS LIMITED. IN THE AFORESAID TWO PRECEDENTS, THE SAID CON CERN HAS BEEN SOUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DISSIMILARITIES. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) HAS CO NSIDERED THE 17 ITA NO.550 AND 605/PN/2014 FUNCTIONS UNDERTAKEN BY THE SAID CONCERN DURING THE P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION BE FORE US, AND IT HAS BEEN FOUND THAT THE SAID CONCERN WAS ENGAGED IN TH E BUSINESS OF DEVELOPING AND SELLING SOFTWARE PRODUCTS AND WAS NOT P URELY OR MAINLY A SOFTWARE SERVICE PROVIDER. THERE IS NO DISPUTE TO THE FACT POSITION THAT THE APPELLANT BEFORE US HAS UNDERTAKEN MAINLY SOF TWARE DEVELOPMENT SERVICES FOR ITS ASSOCIATED ENTERPRISES AND TH E NON- ASSOCIATED ENTERPRISES AND THAT SUCH ACTIVITY IS QUITE DI STINCT FROM THE DEVELOPING AND SELLING OF SOFTWARE PRODUCTS. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. (SUP RA) HAS ALSO FOUND THE SAID CONCERN TO BE FUNCTIONALLY DISSIMILAR FROM A CONCERN WHICH WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERV ICES, WHICH IS THE CASE BEFORE US. THOUGH, THE DECISION OF THE TRIB UNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. (SUPRA) RELATES TO THE ASSESSMEN T YEAR 2006- 07 WHEREAS THE PRESENT CASE OF THE ASSESSEE IS FOR ASSESSMENT Y EAR 2008-09 YET THERE IS NO MATERIAL ON RECORD TO SUGGEST THAT THE ACTIVITIES CARRIED OUT BY KALS INFORMATION SYSTEMS LIMITED IN THE CURRENT ASSESSMENT YEAR ARE DIFFERENT FROM THOSE NOTED BY THE TR IBUNAL IN THE CASE OF BINDVIEW INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT Y EAR 2006-07. 18. CONSIDERING THE AFORESAID DISCUSSION, IN OUR VIEW, T HE CONCERN I.E. KALS INFORMATION SYSTEMS LIMITED IS LIABLE TO BE EXCLUD ED FROM THE LIST OF COMPARABLES FOR THE PURPOSES OF BENCHMARKING INTERN ATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT SERVIC ES. WE HOLD SO. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS. 19. FOLLOWING AFORESAID PRECEDENT, AS THE FACTS AND CI RCUMSTANCES IN THE PRESENT CASE ARE SIMILAR, WE DIRECT THAT M/S. KA LS INFORMATION SYSTEMS LTD., BE EXCLUDED FROM THE FINAL SET OF COMPAR ABLES. 29. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF TIBCO S OFTWARE INDIA PVT. LTD. (SUPRA) HAS OBSERVED AS UNDER : 17. BY WAY OF GROUND OF APPEAL NO.4.2, THE PLEA OF THE ASSESSEE IS FOR EXCLUSION OF M/S KALS INFORMATION SYSTEMS LTD. (APPLICA TION SOFTWARE SEGMENT) FROM THE FINAL SET OF COMPARABLES. ON THIS ASP ECT, THE PRIMARY PLEA OF THE ASSESSEE IS THAT THE SAID CONCERN IS FUNCTIONA LLY DIFFERENT FROM THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE IN ITS SE GMENT OF PROVISION OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES IN ASMUCH AS THE SAID CONCERN IS ENGAGED IN DEVELOPMENT AND SALE O F SOFTWARE PRODUCTS AND SUCH ACTIVITY IS QUITE DIFFERENT FROM T HAT OF THE ASSESSEE. WE FIND THAT THE AFORESAID PLEA OF THE ASSESSEE HAS BEEN CONSISTENTLY RAISED BEFORE THE LOWER AUTHORITIES. THE TPO HAS INCLU DED THE SAID CONCERN IN THE FINAL SET OF COMPARABLES PRIMARILY ON THE GROUND THAT THE SAID CONCERN WAS INCLUDED BY HIM IN THE FINAL SET OF COMPARABLES IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2008-09. 18. IT WAS A COMMON POINT BETWEEN THE PARTIES THAT SO FAR AS THE KALS INFORMATION SYSTEMS LTD. (APPLICATION SOFTWARE SEGME NT) IS CONCERNED, THE SAID CONCERN WAS FOUND TO BE INCOMPARA BLE BY THE TRIBUNAL IN ITS ORDER DATED 11.02.2015 (SUPRA) IN ASS ESSEE'S OWN CASE FOR ASSESSMENT YEAR 2008-09 ON THE GROUND THAT IT WAS FU NCTIONALLY DIFFERENT. IT WAS ALSO A COMMON POINT BETWEEN THE PAR TIES THAT THE FACTS 18 ITA NO.550 AND 605/PN/2014 AND CIRCUMSTANCES IN THIS YEAR REMAIN THE SAME AND THER EFORE IN VIEW OF THE PRECEDENT IN THE ASSESSEE'S OWN CASE, THE SAID CONC ERN IS LIABLE TO BE EXCLUDED. 19. APART FROM THE AFORESAID, IN THE COURSE OF HEARIN G, THE LD. REPRESENTATIVE ALSO POINTED OUT THAT FOR THE VERY SAME ASSESSMENT YEAR 2009- 10, THE SAID CONCERN HAS BEEN FOUND TO BE INCOMPARABLE TO A CONCERN RENDERING SOFTWARE DEVELOPMENT SERVICES IN T HE CASE OF PTC SOFTWARE (INDIA) PVT. LTD. VS. DCIT VIDE ITA NO.336/ PN/2014 DATED 31.10.2014. 20. IN THIS CONTEXT, THE FOLLOWING DISCUSSION IN THE OR DER OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2008-09 DATED 11.02.2015 (SUPRA) IS RELEVANT :- '10. THE FIRST PLEA OF THE ASSESSEE IS WITH RESPECT TO M/S KALS INFORMATION SYSTEM, (APPLICATIONS SOFTWARE SEGMENT), A CONCERN WHICH HAS BEEN INCLUDED AS A COMPARABLE BY THE TPO FOR THE PURPOSES OF COMPARABILITY ANALYSIS. ACCORDING TO THE ASSESSEE, THE I NCLUSION OF SAID CONCERN AS A COMPARABLE IS WRONG BECAUSE THE SAID CONC ERN IS FUNCTIONALLY DIFFERENT FROM THE ACTIVITIES UNDERTAKE N BY THE ASSESSEE IN ITS SEGMENT OF PROVISION OF SOFTWARE DEVELOPMENT AND DE SIGN SERVICES. AS PER THE ASSESSEE, THE SAID CONCERN IS ENGAGED IN DEVELO PMENT AND SALE OF SOFTWARE PRODUCTS AND SUCH ACTIVITY IS QUITE DIF FERENT FROM THAT OF THE ASSESSEE WHICH RELATES TO RENDERING OF SOFTWARE DE VELOPMENT SERVICES FOR ITS CUSTOMERS. BEFORE THE TPO, ASSESSEE REFERRE D TO AN EXTRACT FROM THE ANNUAL REPORT OF THE SAID CONCERN F OR THE FINANCIAL YEAR 2007-08 TO POINT OUT THAT THE SOFTWARE DEVELOPM ENT EXPENDITURE WAS REPORTED BY THE SAID CONCERN AS AN ELEMENT OF INV ENTORY, WHICH ACCORDING TO THE ASSESSEE DEMONSTRATED THAT THE SAID CON CERN WAS A PRODUCT COMPANY AND NOT A SOFTWARE SERVICES COMPANY. I T WAS ALSO POINTED OUT ON THE BASIS OF THE WEBSITE OF THE SAID CO NCERN THAT IT WAS OWNING SOFTWARE PRODUCTS LIKE VIRTUAL INSURE, IA VISION , CMSS, DOCUFLO (DOCUMENT MANAGEMENT SYSTEM) TO SUPPORT ITS PLEA THAT THE SAID CONCERN WAS INTO DEVELOPMENT AND SALE OF SOFTWARE PROD UCTS. IT WAS ALSO POINTED OUT BEFORE THE TPO THAT THE SAID CONCERN WAS ALSO ENGAGED IN RENDERING TRAINING SERVICES AND ALTHOUGH T HE TPO HAD USED THE SEGMENTAL INFORMATION OF APPLICATION SOFTWARE ONL Y BUT THE SEGMENTAL DATA PUBLISHED BY THE SAID CONCERN WAS ERRON EOUS AND ACCORDINGLY IT WAS UNRELIABLE. THE TPO HOWEVER DID N OT FIND ANY WEIGHT IN THE ARGUMENTS OF THE ASSESSEE AND NOTED THAT T HERE WAS NO MATERIAL TO SAY THAT THE SAID CONCERN WAS ACTUAL EARNI NG REVENUES FROM THE SALE OF ANY PROPRIETARY PRODUCTS AND ACCORDING TO HIM IT IS NOT UNCOMMON FOR EVEN A SOFTWARE DEVELOPMENT SERVICE PROV IDER TO CALL THEIR 'SERVICES' AS 'PRODUCT', THUS SUCH COMPANIES CONTIN UE TO BE SERVICE PROVIDERS. THE DRP HAS ALSO AFFIRMED THE STAND O F THE TPO, AGAINST WHICH ASSESSEE IS IN APPEAL BEFORE US. 11. ON THIS ASPECT, THE LEARNED COUNSEL FOR THE ASSESSEE H AS REITERATED THE SUBMISSIONS PUT-FORTH BEFORE THE LOWER AUTHORITIES B Y POINTING OUT THAT THE APPLICATIONS SOFTWARE SEGMENT OF THE SAID CON CERN WAS INTO DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS, WHICH IS AN ACTIVITY DISTINCT FROM PROVIDING SOFTWARE DEVELOPMENT SERVICES U NDERTAKEN BY THE ASSESSEE. OUR ATTENTION HAS BEEN DRAWN TO PAGES 1086 AND 1087 AND PAGES 1092 TO 1096 OF THE PAPER BOOK WHEREIN ARE PLACED RELEVANT EXTRACTS OF THE ANNUAL REPORT OF THE SAID CONCERN FO R FINANCIAL YEAR 19 ITA NO.550 AND 605/PN/2014 2007-08 AND THE WEBSITE EXTRACT RESPECTIVELY TO SUPPO RT THE PLEAS RAISED BEFORE THE LOWER AUTHORITIES. IT HAS ALSO BEEN P OINTED OUT THAT THE ACTIVITIES OF SAID CONCERN WERE CONSIDERED BY THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW INDIA P. LTD. VIDE ITA NO.1386/PN/2010 ORDER DATED 30.11.2011, WHEREIN IT HAS BEEN HELD THAT THE SAID CONCERN WAS FUNCTIONALLY DIFFERENT FRO M A SOFTWARE DEVELOPMENT SERVICE PROVIDER. A REFERENCE HAS ALSO BEE N MADE TO THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN T HE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. VIDE ITA NO.1054/B ANG/2011 ORDER DATED 23.11.2012, WHEREIN ALSO SAID CONCERN WAS HELD TO BE NOT COMPARABLE TO A SOFTWARE DEVELOPMENT SERVICE PROVIDER . 12. ON THE OTHER HAND, THE LEARNED CIT-DR HAS REITE RATED THE STAND OF THE LOWER AUTHORITIES BY POINTING OUT THAT MERE OWNE RSHIP OF SOFTWARE PRODUCTS WOULD NOT MAKE A CONCERN FUNCTIONALLY NON-C OMPARABLE TO A SOFTWARE DEVELOPMENT SERVICE PROVIDER, WHO DID NOT OW N ANY SOFTWARE PRODUCT. ACCORDING TO HIM, SUCH DIFFERENCE IS NOT A M ATERIAL DIFFERENCE CONTEMPLATED UNDER THE TNM METHOD FOR THE PURPOSES OF COMPARABILITY ANALYSIS. APART THEREFROM, IT HAS BEEN P OINTED OUT THAT THE SAID CONCERN VIDE A COMMUNICATION DATED 13.01.20 09 ADDRESSED TO THE ADDL.CIT (TP), HYDERABAD CONFIRMED THAT ITS CORE BUSINESS WAS THAT OF SOFTWARE DEVELOPMENT SERVICE PROVIDER. FURTHER, AC CORDING TO THE LEARNED CIT-DR EVEN THE ERROR IN THE SEGMENTAL REPOR TING BY THE SAID CONCERN WOULD NOT ALTER THE BIGGER PICTURE THAT IT WAS DERIVING INCOME MAINLY FROM SOFTWARE DEVELOPMENT SERVICE. ACCORDINGLY , INCLUSION OF THE SAID CONCERN IN THE FINAL SET OF COMPARABLES IS SOUG HT TO BE DEFENDED. 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. THE PERTINENT POINT RAISED BY THE ASSESSEE IS THAT THE SAID CONCERN IS F UNCTIONALLY NOT COMPARABLE TO THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE ON ACCOUNT PROVISION OF SOFTWARE DEVELOPMENT SERVICES. THE SERVICES RENDERED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE UNDER THE HEADING 'PROVISION OF SOFTWARE DEVELOPMENT SERVICES' INCLUDE DEVELOPMENT OF SOFTWARE IN ACCORDANCE WITH THE DESIGNS, PRODUCTION ORDERS, PLANS, PROCESS SPECIFICATIONS, AND PRODUCTION SCHEDULES, ETC. SUPPLIED BY THE ASSOCIATED ENTERPRISE. ASSESSEE IS REMUNERATED ON A COST PLU S MARKUP (15%) BASIS FOR THE SERVICES PROVIDED TO THE ASSOCIATED E NTERPRISE. NOTABLY, THE OWNERSHIP OF THE PRODUCT DEVELOPED LIES WITH THE ASSOCIATED ENTERPRISE. THE OWNERSHIP OF ANY DOCUMENTATI ON OR KNOW- HOW AND ANY OTHER PROPRIETARY INFORMATION RECEIVED FROM THE ASSOCIATED ENTERPRISE FOR THE PURPOSE OF RENDERING OF SE RVICES TO THE ASSOCIATED ENTERPRISE ARE ALSO THE PROPERTY OF THE ASSOCI ATED ENTERPRISE. EVEN ANY IMPROVEMENTS MADE BY THE ASSESSEE TO EITHER OF THE AFORESAID ITEMS DURING THE COURSE OF PROVIDING SERV ICES ARE ALSO TO BE SOLELY OWNED BY THE ASSOCIATED ENTERPRISE. THUS, THE ASSESSEE HAS BEEN CORRECTLY UNDERSTOOD TO BE A MERE SOFTWARE DEVEL OPMENT SERVICE PROVIDER. 14. WITH RESPECT TO KALS INFORMATION SYSTEM LTD. (APPL ICATIONS SOFTWARE SEGMENT), THE POINT RAISED BY THE ASSESSEE IS TH AT THIS CONCERN IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND NOT PURELY/MAINLY IN SOFTWARE DEVELOPMENT SERVICES. IN THI S CONNECTION, THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA P. LTD. (SUPRA) HELD THAT THE SAID COM PANY WAS DEVELOPING SOFTWARE PRODUCTS AND WAS NOT PURELY/ MAINL Y A SOFTWARE 20 ITA NO.550 AND 605/PN/2014 DEVELOPMENT SERVICE PROVIDER. ACCORDINGLY, THE BANGA LORE BENCH OF THE TRIBUNAL HELD THAT THE SAID CONCERN WAS NOT COMPARAB LE TO THE ASSESSEE BEFORE THEM, WHICH WAS UNDERTAKING ACTIVITIES SIM ILAR TO THE CASE BEFORE US, NAMELY, SOFTWARE DEVELOPMENT SERVICES. I N-FACT, THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BINDVIEW I NDIA P. LTD. (SUPRA) ALSO CONSIDERED A SOMEWHAT SIMILAR SITUATION AND , FOUND M/S KALS INFORMATION SYSTEM LTD. (APPLICATIONS SOFTWARE SE GMENT) TO BE INCOMPARABLE TO A CONCERN WHICH WAS PROVIDING SOFTWAR E DEVELOPMENT SERVICES, AS IS THE CASE OF THE ASSESSEE BEFORE US. MOREOVER, THE MATERIAL RELIED UPON BY THE ASSESSEE BEFORE THE LOWER A UTHORITIES, COPIES OF WHICH HAVE ALSO BEEN PLACED IN THE PAPER BO OK FILED BEFORE US, SUPPORTS THE ASSERTIONS OF THE ASSESSEE THAT THE SAID CON CERN IS ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCT, ETC., WHICH IS DISTINCT FROM THE SOFTWARE DEVELOPMENT SERVICES RENDERE D BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE. THUS, WE ARE INCLINE D TO UPHOLD THE PLEA OF THE ASSESSEE THAT THE M/S KALS INFORMATION S YSTEM LTD. (APPLICATIONS SOFTWARE SEGMENT) IS FUNCTIONALLY INCOMP ARABLE TO THE ASSESSEE. 15. THE ATTEMPT BY THE LEARNED CIT-DR TO SUPPORT THE STAND OF THE TPO ON THE BASIS OF A COMMUNICATION RECEIVED BY ADDL.CIT (TP), HYDERABAD REGARDING KALS INFORMATION SYSTEM LTD., IN OUR VIEW, IS UNTENABLE. OSTENSIBLY, SUCH AN INFORMATION WAS NOT AVAILABLE IN PU BLIC DOMAIN AND THEREFORE IT COULD NOT HAVE BEEN IN THE REALM O F CONSIDERATION BY THE TPO AND MOREOVER, WE FIND THAT THE SAID ASSERTION IS QUITE CONTRARY TO THE INFORMATION AVAILABLE IN PUBLIC DOMAIN, NAME LY, THE ANNUAL REPORT, AND THE WEBSITE EXTRACT OF THE SAID CONCERN, WHICH HAVE BEEN PERTINENTLY REFERRED TO BY THE ASSESSEE. 16. FOR THE AFORESAID REASONS, WE UPHOLD THE PLEA OF T HE ASSESSEE FOR EXCLUSION OF M/S KALS INFORMATION SYSTEM LTD. (APPLICAT IONS SOFTWARE SEGMENT) FROM THE FINAL SET OF COMPARABLES FOR THE PU RPOSES OF COMPARABILITY ANALYSIS.' 21. FOLLOWING THE AFORESAID PRECEDENT, WE DIRECT THE INCOME-TAX AUTHORITIES TO EXCLUDE M/S KALS INFORMATION SYSTEMS LTD . (APPLICATION SOFTWARE SEGMENT) FROM THE FINAL SET OF COMPARABLES. THUS, ON GROUND OF APPEAL NO.4.2 ASSESSEE SUCCEEDS. 30. FURTHER THE VARIOUS DECISIONS RELIED ON BY THE LD. C OUNSEL FOR THE ASSESSEE SUPPORT THE CASE OF THE ASSESSEE WHE REIN KALS HAS BEEN EXCLUDED FROM THE LIST OF COMPARABLES ON THE GRO UND THAT THIS COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODU CTS AND NOT PURELY OR MAINLY IN SOFTWARE DEVELOPMENT SERVICES. I N VIEW OF THE ABOVE, WE HOLD THAT KALS SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. WE HOLD SO. 21 ITA NO.550 AND 605/PN/2014 31. SO FAR AS EXCLUSION OF BODHTREE CONSULTING LTD. IS CONC ERNED IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE T HAT BODHTREE CONSULTING LTD SHOULD BE REJECTED FROM THE LIST OF COMPARABLES SINCE IT IS FUNCTIONALLY DIFFERENT AND MAINLY INTO PRODUCT ENGINEERING SERVICES, ANALYTICS, DATA WAREHOUSING, CLOUD COMPUTING, ENTERPRISE SERVICES. FURTHER, THE COMPANY HAS EARNED SUPER NORMAL PROFITS AND IT IS AN EXCEPTIONAL YEAR OF OPERA TION. THEREFORE, BODHTREE CONSULTING LTD. ALSO SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. WE FIND THE PUNE BENCH OF THE TR IBUNAL IN THE CASE OF BARCLAYS TECHNOLOGIES INDIA PVT. LTD. (SUPRA) AT PARA 22 TO 24 OF THE ORDER HAS OBSERVED AS UNDER : 22. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS WITH RESPECT TO BODHTREE CONSULTING LIMITED. THE PLEA OF THE ASSESSEE IS THAT THE SAID CONCERN IS ENGAGED IN THE SALE OF SOFTWA RE PRODUCTS, APART FROM CONSIDERING SOFTWARE SERVICES, AND THAT NO SEGMENTA L DATA IS AVAILABLE IN THIS CONTEXT; THUS, IT IS FUNCTIONALLY N OT COMPARABLE WITH THE ASSESSEES ACTIVITIES. IN THIS REGARD, WE HAVE PERUSED THE DISCUSSION MADE BY OUR COORDINATE BENCH IN THE CASE OF NETHAWK NETWORKS INDIA PVT. LTD. (SUPRA) WHEREIN THE SAID CONC ERN HAS BEEN FOUND TO BE NOT EXCLUSIVELY ENGAGED IN RENDERING SOFT WARE DEVELOPMENT SERVICES. THE RELEVANT DISCUSSION IN THE CA SE OF NETHAWK NETWORKS INDIA PVT. LTD. (SUPRA) IS AS UNDER : C. BODHTREE CONSULTING LIMITED 21. ON THIS COMPARABLE, CASE OF THE ASSESSEE IS TH AT THE COMPANY IS NOT A GOOD COMPARABLE IN VIEW OF THE SOFTWARE PRODU CTS PRODUCED BY THE COMPANY. AS SUCH, NO SEGMENTAL DATA IS ADEQUATELY AVAILABLE TOO. ACCORDINGLY, WE DISMISS THE ARGUMENT OF THE LD. DR IN THIS REGARD. EX CONSEQUENTI, THE AO/TPO IS DIRECTED TO EXCLUDE THE SAME FROM THE LIST OF FINAL COMPARABLES FOR WORKING OUT THE ARITHMETIC ME AN. 22. ON THE OTHER HAND, LD DR FILED A COPY OF THE FI NANCIAL STATEMENT AND ARGUED VEHEMENTLY STATING THAT THIS COMPANY IS NOT ENGAGED IN THE SOFTWARE PRODUCTS. IN THIS REGARD, LD DR RELIED ON THE NOTE NO.3, RELATING TO THE RELATING TO THE REVENUE RECOMMENDATION IN SC HEDULE 12, NOTE NO.5 RELATING TO THE SEGMENTAL INFORMATION ETC TO MENTIO N THAT THE COMPANY IS ENGAGED IN THE SOFTWARE DEVELOPMENT ONLY. HOWEVER, THE ASSESSEE ARGUED VEHEMENTLY STATING THAT THIS COMPANY IS ENGAGED IN THE SOFTWARE BASED PRODUCTS. FURTHER, LD COUNSEL MENTIONED THAT THE SA ID COMPANY WAS ALREADY EXAMINED AND WAS HELD AS PRODUCT BASED COMP ANY BY THE TPO IN THE TP STUDY OF OTHER CASE AND THE TPO CANNOT TAKE DIFFERENT STAND IN THIS CASE. IN THIS REGARD, WE HAVE PERUSED THE PARA 29 O F THE ORDER OF THE TRIBUNAL IN THE CASE OF M/S. WILLS PROCESSING SERVI CES (I) P LTD (SUPRA) 22 ITA NO.550 AND 605/PN/2014 WHEREIN IT WAS MENTIONED THAT THE TPO DESCRIBED THI S COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE PRODUCTS, NOT T HE SOFTWARE DEVELOPMENT SERVICES. RELEVANT PORTIONS FROM THE SA ID PARA 29 OF THE ORDER OF THE TRIBUNAL IS REPRODUCED HERE UNDER: '29.1 THE LD. SR. COUNSEL FOR THE ASSESSEE HAS SUBM ITTED THAT THIS COMPANY IS ENGAGED IN THE SOFTWARE PRODUCTS. HE HAS REFERRED THE TPO ORDER AND SUBMITTED THAT IN THE PROFILE OF THE COMP ARABLES SELECTED BY THE TPO ITSELF HAS MENTIONED THE BUSINESS OF THE AS SESSEE IS IN SOFTWARE PRODUCTS. THE ID AR HAS REFERRED THE OBJECTIONS RAI SED BY THE ASSESSEE BEFORE THE TPO AT PAGE 286 OF THE PAPER BOOK AND SU BMITTED THAT THE ASSESSEE BROUGHT THIS FACT THAT THIS COMPANY IS ENG AGED IN PROVIDING OPEN AND END TO END WEB SOLUTIONS, SOFTWARE CONSULT ANCY, DESIGN AND DEVELOPMENT OF SOFTWARE, USING THE LATEST TECHNOLOG IES. FURTHER, THE COMPANY HAS IDENTIFIED ONLY ONE SEGMENT I.E SOFTWAR E DEVELOPMENT. THEREFORE, THE ID AR HAS SUBMITTED THAT THIS COMPAN Y IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE AND CONSEQUENTLY SHOUL D BE EXCLUDED FROM THE COMPARABLES. 29.2 ON THE OTHER HAND, THE ID DR HAS FILED THE INF ORMATION COLLECTED U/S 133(6) OF THE I T ACT AND SUBMITTED THAT AS PER THI S INFORMATION, THIS COMPANY HAS REVENUE FROM ITES ACTIVITY TO THE EXTEN T OF RS. 2,94,85,528/-. THEREFORE, THIS COMPANY IS A GOOD CO MPARABLE HAVING FUNCTIONAL SIMILARITY. 29.3......... 30. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WE LL AS THE RELEVANT MATERIAL ON RECORD. THE DETAILS FILED BY THE ID DR BEFORE US HAS BEEN OBTAINED BY THE TPO AT HYDERABAD AND NOT BY THE TPO OF THE ASSESSEE IN THE PRESENT CASE. IT IS STATED IN THE LETTER DATED 5.2.2010 WRITTEN BY THE CHARTERED ACCOUNTANT OF BODHTREE CONSULTING LTD TO THE TPO HYDERABAD THAT THE COMPANY IS PROVIDING DATA CLEANING SERVICE S TO CLIENTS FOR WHOM IT HAD DEVELOPED THE SOFTWARE APPLICATION.........' 23. CONSIDERING THE ABOVE, WE ARE OF THE OPINION TH AT BODHTREE CONSULTING LIMITED IS NOT ENGAGED IN THE SOFTWARE D EVELOPMENT SERVICES AND THERE IS NO SEGMENTAL DATA COMPARABLE. THEREFOR E, THE FAR ANALYSIS GOES AGAINST THE TPO/AO. 23. THERE IS NO MATERIAL PLACED BEFORE US WHICH WOULD REQUIRE US TO DEVIATE FROM THE CONCLUSION DRAWN BY THE MUMBAI BENC H OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS INDIA PVT. LTD. (SUPRA) IN THE CONTEXT OF THE EXCLUSION OF BODHTREE CONSULTING LTD. FROM THE FINAL SET OF COMPARABLES. MOREOVER, THE BANGALORE BENCH OF TH E TRIBUNAL IN THE CASE OF MINDTECK INDIA LTD. (SUPRA) ALSO CONSIDERED THE EFFICACY OF INCLUSION OF BODHTREE CONSULTING LTD. ON THE BASIS OF C OMPARABILITY ANALYSIS IN THE CASE OF AN ASSESSEE WHICH WAS ENGAGED IN SI MILAR ACTIVITIES AS THE APPELLANT BEFORE US. THE FOLLOWING DISCUSSION IN THE CASE OF MINDTECK INDIA LTD. (SUPRA) IS WORTHY OF NOTIC E : I. BODHTREE CONSULTING LTD. : AS FAR AS THIS COMPANY IS CONCERNED, THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THIS COMPANY MADE EXTRA ORDINARY PROFITS DURING THE PREVIOUS YEAR. OUR ATTENTION WA S DRAWN TO THE FACT THAT THE OPERATING PROFIT/OPERATING COST OF THIS CO MPANY JUMPED FROM 23 ITA NO.550 AND 605/PN/2014 17% FOR F.Y. 2007-08 TO 56% IN F.Y. 2008-09. IT DI PPED IN F.Y.2009-10 TO 40% AND IN F.Y.2010-11 IT BECAME (-) 2% AND 5% IN F .Y.2011-12 AND FINALLY TOUCHED (-) 9% IN F.Y.2012-13. OUR ATTENTI ON WAS DRAWN TO THE FACT THAT THE SPECIAL BENCH OF THE TRIBUNAL, MUMBAI , IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) P. LTD., IN ITA NO.74 66/M/2012, DT.07-03- 2014 FOR A.Y. 2008-09 HAD AN OCCASION TO CONSIDER T HE QUESTION AS TO WHETHER COMPANIES HAVING ABNORMAL PROFITS SHOULD BE EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH TOOK THE VIEW THAT I T HAS TO BE SHOWN THAT THE HIGH PROFIT MARGIN DOES NOT REFLECT THE NO RMAL BUSINESS CONDITIONS AND ONLY IN SUCH CIRCUMSTANCES, HIGH PRO FIT MARGIN COMPANIES CAN BE EXCLUDED. OUR ATTENTION WAS DRAWN TO THE DR PS OBSERVATION IN ITS ORDER ON THE ISSUE WHICH IS AS FOLLOWS : BODHTREE : THE ASSESSEE HAS OBJECTED TO SELECTION OF THIS ENTI TY ON THE BASIS OF THE FOLLOWING OBJECTIONS : THE ENTITY HAS FLUCTUATING MARGINS. THE COMPANY IS MORE OF A PRODUCT COMPANY RATHER THA N SOFTWARE SERVICE COMPANY. THE PANEL HAS CONSIDERED THE OBJECTIONS OF THE ASSE SSEE. INSOFAR AS THE CONTENTION REGARDING THE REJECTION OF THIS ENTITY O N THE BASIS OF FLUCTUATING MARGIN IS CONCERNED. IN ORDER TO APPRE CIATE THE COMPATIBILITY OR OTHERWISE OF THIS ENTITY, IT IS IM PORTANT TO FIRST NOTE THAT THE INDIAN SOFTWARE INDUSTRY USES TWO DIFFERENT MOD ELS FOR REVENUE RECOGNITION. THE FIRST IS THE TIME AND MATERIAL (T &M) CONTRACTS MODEL IN WHICH CUSTOMER ARE BILLED ON THE BASIS OF HOURS WORKED BY THE EMPLOYEES OF SUPPLIER SOFTWARE COMPANIES. HOURLY R ATES ARE AGREED ON BY BOTH PARTIES AND ARE APPLIED TO THE TOTAL HOURS WORKED TO ARRIVE AT THE REVENUE THAT IS TO BE RECOGNIZED. THE SECOND IS TH E FIXED PRICE PROJECT MODEL, THE TOTAL CONTRACT PRICE IS AGREED UPON BETW EEN THE PARTIES. BILLING MAY BE DONE EITHER AT THE END OF THE CONTRA CT OR OVER THE PERIOD OF THE CONTRACT ON THE BASIS OF THE AGREED MILESTONE F OR BILLING. IN THIS RESPECT, THE BASIS OF REVENUE RECOGNITION BY THIS E NTITY CAN BE SEEN FROM THE ANNUAL REPORT AS BELOW : 3. REVENUE RECOGNITION : REVENUE FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BAS ED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS. FROM PERUSAL OF THE ABOVE, IT IS SEEN THAT THIS ENT ITY IS ENGAGED IN BUILDING REVENUES THROUGH FIXED PRICE PRODUCT MODE. AS IS A NATURAL COROLLARY IN SUCH TYPE OF REVENUE RECOGNITION, SOME PART OF THE EXPENDITURE MAY BE BOOKED IN ONE YEAR FOR WHICH THE REVENUE MAY HAVE BEEN RECOGNIZED IN THE EARLIER OR SUBSEQUENT YEAR. THEREFORE, IT IS BUT NATURAL THAT THERE IS SOME FLUCTUATION IN THE PROFI TABILITY MARGIN OF SUCH ENTITY. MERELY BECAUSE OF SUCH FLUCTUATION, AN ENT ITY ENGAGED IN THE DEVELOPMENT OF SOFTWARE, BEING FUNCTIONALLY COMPARA BLE TO THE ASSESSEE, CANNOT BE REJECTED ONLY ON THIS GROUND. 14. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR A TTENTION TO THE FACT THAT BODHTREE CONSULTING ADMITTEDLY FOLLOWS A FIXED PRICE PROJECT MODEL WHEREBY REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE AND BILLED TO CLIENTS. IN SUCH BUSINES S MODEL EXPENDITURE FOR 24 ITA NO.550 AND 605/PN/2014 DEVELOPING SOFTWARE WOULD BE BILLED IN AN EARLIER Y EAR BUT THE REVENUE WOULD BE RECOGNIZED IN A SUBSEQUENT YEAR. IT WAS H IS SUBMISSION THAT THIS FACT IS RECOGNIZED BY THE DRP IN ITS ORDER. A CCORDING TO HIM THIS CIRCUMSTANCE WOULD BE SUFFICIENT TO SHOW THAT THE M ARGIN REFLECTED OF THIS COMPANY DOES NOT REFLECT THE NORMAL BUSINESS C ONDITION. 15. THE LEARNED DR PLACED RELIANCE ON THE REASON GI VEN BY THE DRP IN ITS ORDER. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENTRES (SUPR A) HAD AN OCCASION TO DEAL WITH THE QUESTION AS TO WHETHER HIGHER PROFIT MARGIN MAKING COMPANIES SHOULD BE EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH AFTER CONSIDERING SEVERAL ASPECTS HELD IN PARA 88 OF ITS ORDER THAT THE POTENTIAL COMPARABLE COMPANIES CANNOT BE EXCLUDED MERELY ON T HE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. THE SPECIAL BENCH HELD THAT IN SUCH CASES IT WOULD REQUIRE FURTHER INVESTIGATION TO ASCERTAIN THE REASON FOR UNUSUALLY HIGH PROFIT AND IN ORDER TO ESTABLISH WHE THER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COMPARABLE OR NOT . IN THE LIGHT OF THE AFORESAID DECISION OF THE SPECIAL BENCH AND IN VIEW OF THE ADMITTED POSITION THAT THE ASSESSEE FOLLOWS FIXED PRICE PROJ ECT MODEL WHERE REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BA SED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS, THERE IS A POSSIBI LITY OF THE EXPENDITURE IN RELATION TO THE REVENUE BEING BOOKED IN THE EARLIER YEAR. THE RESULTS OF BODHTREE FROM F.Y.2003 TO 2008 EXCLUDING F.Y.2007 A S GIVEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WERE ALSO PERUSED. PERUSAL OF THE SAME SHOWS, THAT THERE HAS BEEN A CONSISTENT CHANGE IN T HE OPERATING MARGINS. THE CHART FILED BY THE ASSESSEE IN THIS REGARD IS G IVEN AS AN ANNEXURE TO THIS ORDER. IT APPEARS TO US THAT THE REVENUE RECO GNITIONS METHOD FOLLOWED BY THE ASSESSEE IS THE REASON FOR THE DRAS TIC VARIATION IN THE PROFIT MARGINS OF THIS COMPANY. IN THE GIVEN CIRCU MSTANCES, WE ARE OF THE VIEW THAT IT WOULD BE SAFE TO EXCLUDE BODHTREE CONS ULTING FROM THE FINAL LIST OF COMPARABLES CHOSEN BY THE ASSESSEE. WE HOL D AND DIRECT ACCORDINGLY. 24. THOUGH THE AFORESAID DISCUSSION BY THE BANGALORE BE NCH OF THE TRIBUNAL IS IN RELATION TO THE ASSESSMENT YEAR 2009-10, BUT THE INFERENCES DRAWN WITH REGARD TO THE VARIATIONS IN THE PROFIT MARGINS OF THE SAID CONCERN FOR DIFFERENT YEARS IS RELEVANT IN TH E PRESENT CONTEXT ALSO. FURTHERMORE, THE TRIBUNAL ALSO ANALYSED AND FOU ND THAT THE SAID CONCERN WAS FOLLOWING FIXED PRICE PROJECT METHOD WHE REBY REVENUE FROM SOFTWARE DEVELOPMENT SERVICES WAS BEING RECOGNIZED BASED ON THE SOFTWARE DEVELOPED AND BILLED TO THE CLIENTS. IN SUCH A BUSINESS MODEL, THE POSSIBILITY OF THE EXPENDITURE NOT BEING B OOKED ON THE BASIS OF THE MATCHING PRINCIPLE CANNOT BE RULED OUT, WHIC H WOULD IMPART FLUCTUATION IN THE MARGINS OVER THE YEARS. IN CONTRA ST, IN THE PRESENT CASE, THE REVENUE IS BEING RECOGNIZED BASED ON THE COST PLUS MARKUP BASIS. CLEARLY, THE REVENUE RECOGNITION MODEL OF BOD HTREE CONSULTING LTD. IS QUITE DIFFERENT FROM THE MODEL BEING PURSUED BY ASSESSEE AND SUCH DISTINCTION PREVAILED WITH THE BANGALORE BENCH O F THE TRIBUNAL IN THE CASE OF MINDTECK INDIA LTD. (SUPRA) TO EXCLUDE BO DHTREE CONSULTING LTD. FROM THE LIST OF COMPARABLES. CONSIDERING SUCH DI FFERENCE, IN OUR VIEW, ASSESSEE IS JUSTIFIED IN ASSERTING THAT THE SAID CONCE RN BE EXCLUDED FROM THE LIST OF COMPARABLES. WE HOLD SO. 25 ITA NO.550 AND 605/PN/2014 32. WE FIND THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CA SE OF ADAPTEC INDIA PVT. LTD. (SUPRA) AT PARA 21 TO 23 OF THE ORDER HAS OBSERVED AS UNDER : 1. BODHTREE CONSULTING LTD., A. TPO SELECTED THIS COMPANY STATING THAT THERE IS NOTH ING AVAILABLE IN THE ANNUAL REPORT TO SHOW ANY PECULIAR ECONOMIC CIRC UMSTANCE IN THE COMPANY DUE TO WHICH THERE IS A HIGH MARGIN. TPO FUR THER CONSIDERED THAT IN COMPARABILITY ANALYSIS LOSS OR SO-CALLED HIGHER MARGIN IS NOT A DETERMINING FACTOR UNLESS THERE ARE ANY PECULIAR ECON OMIC CIRCUMSTANCES. B. ASSESSEE'S OBJECTIONS ARE THAT BODHTREE CONSULTING LTD. , IS FUNCTIONALLY DIFFERENT. FROM THE 133(6) EXTRACT PRO VIDED IN THE T.P. ORDER ITSELF, IT IS EVIDENT THAT THE COMPANY IS INTO A WIDE ARRAY OF BUSINESS ACTIVITIES INCLUDING OFF-SHORING DATA MANAGEMEN T, OPEN AND END TO END WEB SOLUTIONS, DATA WAREHOUSING WHICH DO NO T FALL INTO ANY VERTICAL OF SOFTWARE SERVICES. IT IS PERTINENT TO NOTE THAT THE COMPANY HAD PROVIDED SEGMENTAL INFORMATION FOR A.Y. 2006-07. THE ABNORMAL VARIATION IN MARGIN OF THE COMPANY OF 68.63% VIS-- VIS 19.14% FOR THE PREVIOUS YEAR CLEARLY EVIDENCES THE EXCEPTIONAL OPERA TIONS. C. IN SUPPORT OF ITS CONTENTION, ASSESSEE RELIED ON THE O RDER OF ITAT BANGALORE TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) P. LTD., ITA.NO.271/BANG/2014 DATED 14.08.2014 FOR A.Y. 2009 -2010 WHEREIN THIS COMPANY HAS BEEN ANALYSED AND REJECTED AS A COMPAR ABLE. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER : '26.1 BODHTREE CONSULTING LTD.:- AS FAR AS THIS COMPAN Y IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES CH OSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASSESSEE. THE ASSESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSESSEE'S NOTICE THAT THIS COMPANY IS NOT BEING CONSIDERE D AS A COMPARABLE COMPANY IN THE CASE OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL F OR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V . ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CASE , THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMBAI BENCH O F THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P. LTD., IT A NO.4547/MUM/2012. IN THE AFORESAID DECISIONS, THE TRIB UNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN TH E BUSINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPM ENT OF SOFTWARE USING LATEST TECHNOLOGY. THE DECISION RENDERE D BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. IT WAS AF FIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCU MSTANCES IN THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AN D CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE C OMPANY IS CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE MU MBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSULTING LTD. CANNOT BE 26 ITA NO.550 AND 605/PN/2014 REGARDED AS A COMPARABLE. IN THIS REGARDS, THE FACT TH AT THE ASSESSEE HAD ITSELF PROPOSED THIS COMPANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOWN THAT THE SA ID COMPANY IS A SOFTWARE PRODUCT COMPANY AND NOT A SOFTWARE DEVELOPME NT SERVICES COMPANY.' RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISION, WE HOLD THAT THIS COMPANY CANNOT BE REGARDED AS A COMPARABLE. AO IS DIR ECTED TO EXCLUDE THE SAME. 33. WE FIND THE BANGALORE BENCH OF THE TRIBUNAL IN THE C ASE OF CISCO SYSTEMS INDIA PVT. LTD. (SUPRA) AT PARA 26.1 OF THE O RDER HAS OBSERVED AS UNDER : 26.1 BODHTREE CONSULTING LTD. AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES CH OSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASSESSEE. THE ASSESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO BE ASSESSEES NOTICE THAT THIS COMPANY IS NOT BEING CONSIDERED AS A COMPARABLE COMPANY IN THE CASE OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V S. ITO, ITA NO.7633/MUM/2012, ORDER DATED 06-11-2013. IN THIS C ASE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P . LTD., ITA NO.4547/MUM/2012. IN THE AFORESAID DECISIONS, THE TRI BUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN TH E BUSINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPM ENT OF SOFTWARE USING LATEST TECHNOLOGY. THE DECISION RENDERE D BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. IT WAS A FFIRMED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES I N THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CI RCUMSTANCES AS IT PREVAILED IN A.Y. 08-09 AS FAR AS THIS COMPARABLE COMP ANY IS CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE M UMBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSULTING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS, THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COMPANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOWN THAT THE SA ID COMPANY IS A SOFTWARE PRODUCT COMPANY AND NOT A SOFTWARE DEVELOPME NT SERVICES COMPANY. 34. WE FIND THE BANGALORE BENCH OF THE TRIBUNAL IN THE CA SE OF SOFTTEK INDIA PVT. LTD. (SUPRA) WHILE HOLDING THAT BODHTREE CONSULTING LTD IS NOT COMPARABLE COMPANY HAS OBSERVED AS UNDER: 27 ITA NO.550 AND 605/PN/2014 4.2 ONE OF THE COMPANIES, WHICH HAS BEEN TAKEN AS A C OMPARABLE BY THE TPO, IS M/S. BODHTREE CONSULTING LTD., THE NET MARGIN OF WHICH IS 62.23%. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS THE ASSESSEE WAS ONLY INTO SOFTWARE DEVELOPMENT WHEREAS M/S. BODHTREE CONSULTING L TD., WAS ALSO INTO SOFTWARE PRODUCT DEVELOPMENT. HE SUBMITTED T HAT THIS ISSUE HAD BEEN CONSIDERED BY VARIOUS BENCHES OF THIS TRIBUNAL SUCH AS A BENCH OF THE TRIBUNAL IN IT(TP)NO.271/BANG/2014 DAT ED 14-8-2014 IN THE CASE OF M/S.CISCO SYSTEMS (INDIA) PVT. LTD., VS. DCIT FOR THE VERY SAME ASSESSMENT, YEAR I.E. 2009-10 AND IT WAS HELD THAT M /S.BODHTREE CONSULTING LTD IS IN THE BUSINESS OF SOFTWARE PRODUCTS AND ALSO WAS ENGAGED IN PROVIDING OPEN AND END TO END WEB SOLUTIO NS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST TECHNOLOGY. THUS THE TRIBUNAL HAS HELD THAT M/S.BODHTR EE CONSULTING LTD, CANNOT BE REGARDED AS THE COMPARABLE SINCE THE A SSESSEE THEREIN WAS ONLY A SOFTWARE DEVELOPMENT SERVICES COMPANY. THE L EARNED COUNSEL FOR THE ASSESSEE HAS ALSO PLACED RELIANCE UPON TH E DECISION OF THE 'B' OF THE TRIBUNAL IN IT(TP)A NO.70/BANG/2014 DATED 21-8-2014 IN THE CASE OF MINDTECK(INDIA)L.TD. VS. DCIT WHEREIN FOR THE VERY SAME ASSESSMENT YEAR 2009-10, THE TRIBUNAL HAS CONSIDERED THE FACT THAT THE PROFIT MARGIN OF THE SAID COMPANY WAS FLUCTUATING ABNORMALLY BETWEEN FINANCIAL YEARS 2003-04 AND 2009-10 BECAUSE O F THE REVENUE RECOGNITION MODEL FOLLOWED BY IT AND THAT IT WOULD BE SAFE TO EXCLUDE M/S.BODHTREE CONSULTING LTD, FROM THE FINAL LIST OF CO MPARABLES CHOSEN BY THE ASSESSEE. THUS, ACCORDING TO THE LEARNED CO UNSEL FOR THE ASSESSEE, THE FACTS OF THE CASE BEFORE US BEING SIMILAR, M/ S. BODHTREE CONSULTING LTD. HAS TO BE EXCLUDED FROM THE LIST OF CO MPARABLES IN THE ASSESSEES CASE ALSO. THE LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 4.3 HAVING REGARD TO THE CONTENTIONS OF THE RIVAL PA RTIES AND ALSO THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE IS O NLY A SOFTWARE SERVICES COMPANY WHEREAS M/S. BODHTREE CONSULTING LTD., IS ALSO INTO THE BUSINESS OF SOFTWARE PRODUCT DEVELOPMENT AND SEGMENT ED DATA IS NOT AVAILABLE IN THE PUBLIC DOMAIN. THEREFORE, WE ARE SATISFIED THAT IT IS FUNCTIONALLY DIFFERENT AND CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE-COMPANY. AS REGARDS REVENUE RECOGNITION MOD EL OF THE ASSESSEE AND M/S. BODHTREE CONSULTING LTD., ARE CONCERNED , SINCE THE RELEVANT MATERIAL TO DETERMINE THE REVENUE MODEL OF THE ASSESSEE HEREIN IS NOT AVAILABLE ON RECORD, WE ARE NOT INCLIN ED TO GIVEN ANY FINDING ON THIS ISSUE. THEREFORE, WE DIRECT THE AO TO EXCLUDE M/S. BODHTREE CONSULTING LTD., FROM THE LIST OF COMPARABLE S AS IT IS FUNCTIONALLY DIFFERENT. 35. SIMILARLY THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF TIBCO SOFTWARE INDIA PVT. LTD. (SUPRA) HAS OBSERVED AS UNDER : 46. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S. OSTENSIBLY, THE CONTROVERSY AS TO WHETHER ABNORMAL PROFIT-MAKING CONCERNS OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES OR NOT, H AS BEEN A SUBJECT MATTER OF CONSIDERATION BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE 28 ITA NO.550 AND 605/PN/2014 CASE OF MAERSK GLOBAL CENTRES (INDIA) PRIVATE LTD. VS. ACIT VIDE ITA NO.7466/MUM/2012 DATED 07.03.2014. THE RELEVANT OBSE RVATIONS OF THE SPECIAL BENCH ARE AS UNDER:- 'IN GENERALITY, WE ARE OF THE VIEW THAT THE ANSWER TO THIS QUESTION WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE INASM UCH AS POTENTIAL COMPARABLE EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD TRIGGER FURTHER INVESTIGATION IN ORDER TO ESTABLISH WH ETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS TO WHETHER EARNING OF HIGH PROFIT REFLECTS A NORMA L BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITIONS PREVAILING IN THE RELEVANT YEAR. THE PROFIT MARGIN EARNED BY SUCH ENTITY IN THE IMMEDIATELY PRECEDING YEAR/S MAY ALSO BE TAKEN INTO CONSIDERATION TO FIND OUT WHETHER THE HIGH PROFIT MA RGIN REPRESENTS THE NORMAL BUSINESS TREND. THE FAR ANALYSIS IN SUCH CASE M AY BE REVIEWED TO ENSURE THAT THE POTENTIAL COMPARABLE EAR NING HIGH PROFIT SATISFIES THE COMPARABILITY CONDITIONS. IF IT IS FOUND ON SUCH INVESTIGATION THAT THE HIGH MARGIN PROFIT MAKING COM PANY DOES NOT SATISFY THE COMPARABILITY ANALYSIS AND OR THE HIGH PROF IT MARGIN EARNED BY IT DOES NOT REFLECT THE NORMAL BUSINESS CONDITION, W E ARE OF THE VIEW THAT THE HIGH PROFIT MARGIN MAKING ENTITY SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. OTHERWISE, THE ENTITY SATISFYING THE COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT MARGIN REFLECTING NORMAL BUSINESS CONDITION SHOULD NOT BE REJECTED SOLELY ON THE BASIS OF SUCH ABNORMAL HIGH PROFIT MARGIN.' 47. IN TERMS OF THE AFORESAID DISCUSSION BY THE SPECIAL BENCH, IT IS CLEAR THAT A CONCERN WHICH HAS EARNED ABNORMALLY HIGH PROF IT MARGIN CANNOT BE EXCLUDED STRAIGHTAWAY BUT IT WOULD REQUIRE FURTHE R INVESTIGATIONS TO ASCERTAIN THE REASONS FOR THE HIGH PROFIT MARGIN. IT W OULD BE NECESSARY TO ASCERTAIN AS TO WHETHER THE HIGH PROFIT MARGINS REF LECT A NORMAL BUSINESS PHENOMENON OR WHETHER IT IS A RESULT OF CERTAI N ABNORMAL CONDITIONS PREVAILING IN A PARTICULAR YEAR. IN ORDER TO DO SO, THE PROFIT MARGINS EARNED BY SUCH A CONCERN IN THE PROXIMATE PRE CEDING AND SUCCEEDING YEARS WOULD BE REQUIRED TO BE CONSIDERED. I N THIS BACKGROUND OF THE MATTER, ASSESSEE HAS FURNISHED BEFORE US THE OPERATING MARGIN TRENDS OF THE SAID CONCERN OVER SIX F INANCIAL YEARS I.E. FOR THREE PRECEDING YEARS, CURRENT YEAR AND THE TWO SUCCEEDING FINANCIAL YEARS. ON THE BASIS OF AFORESAID TABULATION, IT IS SOUGHT TO BE POINTED OUT THAT THERE EXISTS WIDE FLUCTUATION IN PRO FIT MARGINS WHICH OSTENSIBLY DOES NOT REFLECT A NORMAL BUSINESS PHENOMENON . WE FIND THAT THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. MINDTECK (INDIA) LTD. (SUPRA) CONSIDERED A SIMILAR PLEA WITH RE SPECT TO THE EXCLUSION OF BODHTREE CONSULTING LTD. ON THE GROUND O F IT BEING A ABNORMALLY HIGH PROFIT MAKING CONCERN. THE ASSESSMENT Y EAR BEFORE THE BANGALORE BENCH WAS 2009-10, WHICH IS ALSO THE YE AR BEFORE US. THE OPERATIVE PART OF THE ORDER OF THE BANGALORE BE NCH READS AS UNDER:- '16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE SPECI AL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENTRES (SUPRA) H AD AN OCCASION TO DEAL WITH THE QUESTION AS TO WHETHER HIGH PROFIT M ARGIN MAKING COMPANIES SHOULD BE EXCLUDED AS A COMPARABLE. THE SPEC IAL BENCH AFTER CONSIDERING SEVERAL ASPECTS HELD IN PARA 88 OF IT S ORDER THAT THE 29 ITA NO.550 AND 605/PN/2014 POTENTIAL COMPARABLE COMPANIES CANNOT BE EXCLUDED ME RELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. THE SPECIAL BENCH HELD THAT IN SUCH CASES IT WOULD REQ UIRE FURTHER INVESTIGATION TO ASCERTAIN THE REASONS FOR UNUSUALLY HI GH PROFIT AND IN ORDER TO ESTABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COMPARABLE OR NOT. IN THE LIGHT OF THE AFOR ESAID DECISION OF THE SPECIAL BENCH AND IN VIEW OF THE ADMITTED POSITION T HAT THE ASSESSEE FOLLOWS FIXED PRICE PROJECT MODEL WHERE REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS, THERE IS A POSSIBILITY OF THE EXPENDITURE IN RELATION TO THE REVENUE BEING BOOKED IN THE EARLIER YEAR. THE RESULT S OF BODHTREE FROM FY 2003 TO 2008 EXCLUDING FY 2007 AS GIVEN BY THE LE ARNED COUNSEL FOR THE ASSESSEE WERE ALSO PERUSED. PERUSAL OF THE SAME SHOWS, TH AT THERE HAS BEEN A CONSISTENT CHANGE IN THE OPERATING MARGINS. THE CHART FILED BY THE ASSESSEE IN THIS REGARD IS GIVEN AS AN ANNEXURE TO THIS ORDER. IT APPEARS TO US THAT THE REVENUE RECOGNITION METHOD FOL LOWED BY THE ASSESSEE IS THE REASON FOR THE DRASTIC VARIATION IN THE PR OFIT MARGINS OF THIS COMPANY. IN THE GIVEN CIRCUMSTANCES, WE ARE OF TH E VIEW THAT IT WOULD BE SAFE TO EXCLUDE BODHTREE CONSULTING FROM THE FINAL LIST OF COMPARABLES CHOSEN BY THE ASSESSEE. WE HOLD AND DIRECT AC CORDINGLY.' 48. THE AFORESAID DISCUSSION OF THE BANGALORE BENCH OF THE TRIBUNAL SHOWS THAT THE ASSESSEE IS JUSTIFIED IN ASCERTAINING THAT M ARGINS OF THE SAID CONCERN FOR THE YEAR UNDER CONSIDERATION DOES NOT REFLECT A NORMAL BUSINESS TREND AND THEREFORE THE INCLUSION OF TH E SAID CONCERN IN THE FINAL SET OF COMPARABLES WOULD NOT LEND CREDIB ILITY TO THE COMPARABILITY ANALYSIS. THE BANGALORE BENCH IN THE CA SE OF MINDTECK (INDIA) LTD. (SUPRA) NOTED THAT THE REVENUE RECOGNIT ION METHOD FOLLOWED BY THE SAID CONCERN WAS, THE REASON FOR THE D RASTIC VARIATION IN PROFIT MARGINS OF BOTDTREE CONSULTING LTD., AND TH US UPHELD ITS EXCLUSION FROM THE FINAL SET OF COMPARABLES. 49. HOWEVER, THE PLEA RAISED BY THE LD. CIT-DR IS THA T THE SAID CONCERN WAS INITIALLY INCLUDED BY THE ASSESSEE IN ITS TRANSFER PR ICING STUDY AS A COMPARABLE AND THEREFORE ASSESSEE CANNOT SEEK ITS EXCLUSIO N AT THIS STAGE. THIS ASPECT OF THE CONTROVERSY HAS BEEN CONSIDERED BY THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF Q LOGIC (INDIA) PVT. LTD. (SUPRA) IN THE FOLLOWING WORDS :- '16. IN SO FAR AS THE PLEA RAISED BY THE LEARNED CIT-D R TO THE EFFECT THAT THE SAID CONCERN WAS INITIALLY INCLUDED BY THE ASSESSEE I N ITS TRANSFER PRICING STUDY AS A COMPARABLE IS CONCERNED, THE APPEL LANT'S REPRESENTATIVE POINTED OUT THAT IN THE TRANSFER PRICI NG STUDY, ASSESSEE HAD CARRIED OUT THE COMPARABILITY ANALYSIS BY ADOPTIN G MULTIPLE YEAR'S DATA OF THE COMPARABLES WHICH HAD OFF-SET THE WIDE FL UCTUATIONS. HOWEVER, THE TPO HAS DIS-AGREED WITH THE ASSESSEE ON TH E ADOPTION OF MULTIPLE YEAR'S FINANCIAL DATA OF THE COMPARABLES AND INSTEAD, HE HAS CARRIED OUT THE COMPARABILITY ANALYSIS AFTER ADOPTING SINGLE YEAR DATA OF THE COMPARABLES RELATABLE TO THE PERIOD UNDER CON SIDERATION. IT HAS ALSO BEEN SUBMITTED THAT THE CHANDIGARH SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. QUARK SYSTEMS PRIVATE LTD. (ITA NO.100, 105/CHD/2009) (CHD) HAS HELD THAT IF SOME INCONSISTENCY IN A COMPARABLE EXISTS, THEN IT SHOULD BE REMOVED FROM THE FINAL LIST OF COMPARABLES NOTWITHSTANDING THE FACT THAT ASSESSEE HAD IN ITIALLY CONSIDERED IT AS A COMPARABLE. 30 ITA NO.550 AND 605/PN/2014 17. IN OUR CONSIDERED OPINION, THE PLEA OF THE ASSESSEE FOR EXCLUSION OF BODHTREE CONSULTING LTD. FROM THE FINAL LIST OF COMPA RABLES CANNOT BE SHUT OUT MERELY BECAUSE THE SAID COMPARABLE HAS BEEN A DOPTED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY. SO HOWEVER, THE A FORESAID PROPOSITION IS NOT AN ABSOLUTE PROPOSITION. IN OTHER WO RDS, IT WOULD BE IMPERATIVE FOR THE ASSESSEE TO JUSTIFY EXCLUSION OF A CON CERN FROM THE LIST OF COMPARABLES IF IN THE INITIAL TRANSFER PRICIN G STUDY UNDERTAKEN BY IT, SUCH A CONCERN HAS BEEN ADOPTED AS A COMPARABLE . IN THE PRESENT SITUATION, CASE HAS BEEN SET UP BY THE ASSESSEE FOR EXCLU SION OF BODHTREE CONSULTING LTD ON THE GROUND THAT THE PROFI T MARGINS OF THE SAID CONCERN ARE FLUCTUATING WIDELY AND ARE ABNORMAL LY HIGH FOR THE PERIOD UNDER CONSIDERATION. OSTENSIBLY, THE FINANCIAL DATA OF THE SUCCEEDING YEARS WHICH HAS BEEN PRESSED INTO SERVICE BY T HE ASSESSEE TO DEMONSTRATE ABNORMAL PROFIT TRENDS OF THE SAID CONC ERN WAS NOT AVAILABLE WITH THE ASSESSEE AT THE TIME OF CARRYING OUT ITS TRANSFER PRICING STUDY. THEREFORE, HAVING REGARD TO THE FACT S AND CIRCUMSTANCES OF THE PRESENT CASE, IN OUR VIEW, ASSESSEE HAS JUSTIFIABLY DEMONSTRATED THAT THE CONCERN M/S. BODHTREE CONSULTING LTD. IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, EVEN THOUGH THE SAI D CONCERN WAS CONSIDERED AS A COMPARABLE INITIALLY IN ITS TRANSFER PR ICING STUDY. THEREFORE, ON THIS ASPECT, WE CONCLUDE BY HOLDING THA T THE CONCERN, M/S. BODHTREE CONSULTING LTD. BE EXCLUDED FROM THE FI NAL LIST OF COMPARABLES FOR CARRYING OUT THE COMPARABILITY ANALY SIS. WE HOLD SO.' 50. FOLLOWING THE AFORESAID PRECEDENT, WE THEREFORE UPHOLD ASSESSEE'S PLEA FOR EXCLUSION OF BODHTREE CONSULTING LTD. FROM T HE FINAL SET OF COMPARABLES, EVEN THOUGH THE SAID CONCERN WAS CONSIDERE D AS A COMPARABLE INITIALLY BY THE ASSESSEE IN ITS TRANSFER PRIC ING STUDY. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS. 36. VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE IN THE PAPER BOOK ALSO SUPPORT THE CASE OF TH E ASSESSEE WHERE IT HAS BEEN HELD THAT BODHTREE CONSULTING LTD. CAN NOT BE REGARDED AS COMPARABLE SINCE IT IS IN THE BUSINESS OF SOFTW ARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN AND END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN AND DEVELOPMENT OF SOFTWARE USING LATEST TECHNOLOGY. IN VIEW OF THE VARIOUS D ECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE AND THE C ONSISTENT VIEW OF THE VARIOUS BENCHES OF THE TRIBUNAL WE HOLD THAT B ODHTREE CONSULTING LTD. SHOULD BE REJECTED FROM THE LIST OF COMPAR ABLES BEING A FUNCTIONALLY DIFFERENT COMPANY FROM THAT OF THE ASSESSEE. 31 ITA NO.550 AND 605/PN/2014 37. IN VIEW OF THE ABOVE DISCUSSION, WE HOLD THAT BODHTRE E CONSULTING LTD. ALSO SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES AND THE GROUND RAISED BY THE ASSESSEE THA T BODHTREE CONSULTING LTD. AND KALS INFORMATION SYSTEMS LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES IS ACCEPTED. 38. GROUND OF APPEAL NO.11 RELATES TO ADDITION TO TOTAL INCOME ON ACCOUNT OF MISMATCH OF TAX DEDUCTED AT SOURCE. 39. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO MADE AN ADDITION AMOUNTING TO RS.12,37,76,000/- TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF MISMATCH OF TDS ON THE GROUND TH AT THE ASSESSEE FAILED TO PRODUCE ANY DOCUMENTARY EVIDENCE IN S UPPORT OF ITS CLAIM. BEFORE DRP IT WAS SUBMITTED THAT DURING THE ASS ESSMENT PROCEEDINGS THE ISSUE REGARDING TDS MISMATCH CAME UP FOR DISCUSSION AT THE TIME OF CLOSURE OF THE ASSESSMENT PROCE EDINGS. IN VIEW OF TIME CONSTRAINT, THE ASSESSEE COULD NOT FURNISH DETAILED INFORMATION REGARDING THE MISMATCH. REQUISITE DETAILS WERE FILED BEFORE THE DRP BASED ON WHICH THE DRP DIRECTED THE AO TO VERIFY THE CLAIM OF THE ASSESSEE AND GIVE DUE CREDIT THEREAFTER. HOWEVER, THE AO DENIED TO ACCEPT THE ADDITIONAL EVIDENCE TO SUPP ORT THE CLAIM OF THE ASSESSEE AND DID NOT TAKE THE SAME ON RECO RD AND PASSED THE FINAL ORDER. 40. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSES SEE THAT SINCE THE ASSESSEE DID NOT GOT A REASONABLE OPPORTUNITY TO FILE DOCUMENTS FOR VERIFICATION OF THE ABOVE AS PER THE DIRECTIO NS GIVEN BY THE DRP THE ASSESSEE IS FILING THESE DOCUMENTS TO SUP PORT ITS CLAIM. 32 ITA NO.550 AND 605/PN/2014 41. WE FIND SOME FORCE IN THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE. SINCE DURING THE ASSESSMENT PROCEEDINGS THE ASSESSEE WAS NOT GIVEN SUFFICIENT OPPORTU NITY DUE TO LACK OF TIME FOR RECONCILING THE TDS MADE DURING THE YEA R AND SINCE THE DRP HAS ALSO DIRECTED THE AO TO VERIFY THE DO CUMENTS, THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT IN THE IN TEREST OF JUSTICE THE ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO RECONC ILE THE SAME AND ONLY AFTER DUE RECONCILIATION IF THERE IS ANY DIFFERE NCE THE SAME HAS TO BE ADDED. WE ACCORDINGLY RESTORE THE ISSU E TO THE FILE OF THE AO WITH A DIRECTION TO GIVE ONE MORE OPPORTUNITY T O THE ASSESSEE TO SUBSTANTIATE WITH EVIDENCE TO THE SATISFACTIO N OF THE AO REGARDING THE MISMATCH OF TDS AND DECIDE THE ISSUE AS PE R FACT AND LAW. WE HOLD AND DIRECT ACCORDINGLY. THUS, GROUND OF APPEAL NO.11 BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 42. IN GROUND OF APPEAL NO.12 THE ASSESSEE HAS CHALLENG ED THE ADDITION MADE TO BOOK PROFIT ON ACCOUNT OF PROVISIONS FOR STOCK APPRECIATION RIGHTS (SAR). 43. FACTS OF THE CASE, IN BRIEF, ARE THAT WHILE COMPUTING T HE BOOK PROFIT UNDER PROVISIONS OF SECTION 115JB THE AO MADE AN AD DITION OF RS.24,72,181/- ON ACCOUNT OF PROVISION FOR STOCK APPRECIA TION RIGHTS HOLDING THE SAME TO BE IN THE NATURE OF UNASCERTA INED LIABILITY. BEFORE THE DRP IT WAS STATED THAT ASSESSEE HAS ADOPTED BLACKSCHOLES MODEL TO ESTIMATE THE FAIR VALUE OF SAR FOR THE PURPOSE OF MAKING A PROVISION FOR STOCK TO BE ISSUED TO IT S ELIGIBLE EMPLOYEES. IT WAS SUBMITTED THAT STPL HAS COMPLIED WITH T HE REQUIREMENTS LAID DOWN UNDER THE GUIDANCE NOTE ISSUED BY ICAI. METHOD AND ASSUMPTIONS USED TO ESTIMATE THE FAIR MARKET VALUE OF 33 ITA NO.550 AND 605/PN/2014 THE OPTIONS HAS BEEN HIGHLIGHTED IN THE FINANCIALS. VARIOUS DECISIONS WERE ALSO BROUGHT TO THE NOTICE OF THE DRP. HO WEVER, THEY HAVE REJECTED THE CLAIM OF THE ASSESSEE. 44. REFERRING TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. VS. CIT REPORTED IN 314 ITR 62 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE HONBLE SUPREME COURT IN THE SAID DECISION HAS HELD THAT A PROVIS ION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHEN (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF PAST EVENT (B) IT IS PRO BABLE THAT AN OUTFLOW WILL BE REQUIRED TO SETTLE THE OBLIGATION AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. I F THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. I T WAS ACCORDINGLY HELD IN THAT CASE THAT PROVISION MADE FOR WA RRANTY IN RESPECT OF SOPHISTICATED GOODS WHICH WERE MANUFACTURED IN THE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED AND SOLD, WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS U/S.37. 45. REFERRING TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT REPORTED IN 255 ITR 273 HE SUBMITTED THAT THE HONBLE SUPREME COURT IN THE SAID DE CISION HAS HELD THAT WHILE ASSESSING A COMPANY FOR INCOME-TAX U/S.115 J, THE CORRECTNESS OF THE PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE AND CERTIFIED BY STATUTORY AUDITORS OF THE COMPANY HAS H AVING BEEN PREPARED IN ACCORDANCE WITH THE REQUIREMENTS OF PARTS 2 AND 3 OF SCHEDULE 6 OF THE COMPANIES ACT, CANNOT BE EXAMINED BY T HE AO. THE AO DOES NOT HAVE THE JURISDICTION TO GO BEYOND THE NET PROFIT 34 ITA NO.550 AND 605/PN/2014 SHOWN IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTE NT PROVIDED IN THE EXPLANATION 2 TO SECTION 115J. HE ACCORDINGLY SUB MITTED THAT THE AO WAS NOT JUSTIFIED IN MAKING THE ADDITION TO TH E BOOK PROFITS ON ACCOUNT OF PROVISIONS MADE FOR STOCK APPRECIAT ION RIGHTS. REFERRING TO THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BICON LTD. VS. DCIT (LTU) REPORTED IN 144 ITD 21 (BANGALORE) (SB) HE SUBMITTED THAT THE SPECIAL BENCH IN THE SAID DECISION HAS HELD THAT DISCOUNT ON ISSUE OF EMPLOYEES STO CK OPTION IS ALLOWABLE AS DEDUCTION FROM THE TOTAL INCOME AND IS AN ASCERTAINED LIABILITY. 46. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUBMITTED THAT THE DRP AFTER CONSIDERING THE DECISION OF H ONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. (SUPRA) HAS HELD THAT THE COMPANYS SHARES ARE NOT LISTE D AND FAIR MARKET VALUE OF THE SHARES OF THE ASSESSEE COMPANY IS B ASED ON GOOD FAITH OF MANAGEMENT. THE DOCUMENT FURNISHED BY THE ASSESSEE DOES NOT SAY THAT FAIR MARKET VALUE WILL BE DETE RMINED BY SUCH AND SUCH METHOD. FURTHER VALUATION ITSELF IS A SUBJE CTIVE OPINION AND CANNOT BE CONSIDERED AS A SCIENTIFIC ONE, WHEN INDIVIDUALS HAVE FINAL SAY TO MODIFY VALUATION ARRIVED AT BY A NY ACADEMIC APPROACH. FURTHER, FAIR MARKET VALUE OF ANY ASSE T IS CONTINGENT ON SO MANY EVENTS THAT NO METHOD, HOWEVER SCIENTIFIC CAN REASONABLY ESTIMATE THE SAME. HE ACCORDINGLY SUBM ITTED THAT THE AO HAS CORRECTLY CONSIDERED THE COST OF STOCK APP RECIATION RIGHTS AS AN ESTIMATE AND ADDED THE SAME FOR THE PURPO SE OF CALCULATING THE BOOK PROFIT FOR THE PURPOSE OF MAT. 35 ITA NO.550 AND 605/PN/2014 47. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO/TPO/DRP AND THE PA PER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS RELIED ON BY BOTH THE SIDES. WE FIND THE AO IN THE INSTANT CASE MADE AN ADDITION OF RS.24,22,181/- TO BO OK PROFITS ON ACCOUNT OF SAR ON THE GROUND THAT THE SAME IS IN THE NATURE OF UNASCERTAINED LIABILITY AS CONFIRMED BY THE DIRECT ION GIVEN BY THE DRP. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IT HAS ESTIMATED THE FAIR VALUE OF SARS ON SCIENTIFIC BASIS FOR THE PURPOSE OF MAKING A PROVISION FOR SAR ISSUED TO ITS ELIGIBLE EMPLOYEES. IT HAS ALSO COMPLIED WITH THE GUIDANCE N OTE ISSUED BY ICAI AND THE METHOD AND ASSUMPTIONS USED TO ESTIMATE THE FAIR VALUE OF THE ASSETS. IN OUR OPINION, THE MATTER R EQUIRES REVISIT TO THE FILE OF THE AO FOR DECIDING THE ISSUE AFRESH IN THE LIGHT OF THE LATEST DECISION OF THE HONBLE SUPREME COURT AND H ONBLE BOMBAY HIGH COURT ON THE ISSUE OF DETERMINATION OF MINIMUM ALTERNATE TAX PAYABLE ON BOOK PROFITS. THE AO SHALL ALSO KE EP IN MIND THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF BICON LTD. (SUPRA) WHICH WAS NOT CITED BEFORE DRP ALTHOUG H THE SAME WAS AVAILABLE AT THAT TIME. HE SHALL EXAMINE THE FACTS OF THAT CASE WITH THE FACTS OF THE CASE OF THE ASSESSEE. THE AO SHALL GIVE DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND DEC IDE THE ISSUE AFRESH IN THE LIGHT OF THE RECENT DECISIONS ON THIS IS SUE. WE HOLD AND DIRECT ACCORDINGLY. THIS GROUND BY THE ASSESSE E IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 48. SO FAR AS THE ADDITIONAL GROUND OF THE ASSESSEE IS CO NCERNED, THE SAME RELATES TO ADDITION OF TRANSFER PRICING ADJUSTMEN T OF 36 ITA NO.550 AND 605/PN/2014 RS.7,86,03,511/- AND MISMATCH OF TDS AMOUNTING TO RS.12,37,076/- TO THE BOOK PROFITS. 49. AFTER HEARING BOTH THE SIDES, WE FIND THE AO IN THE FINA L ORDER MADE CERTAIN ADDITIONS ON ACCOUNT OF TRANSFER PRICING ADJU STMENTS FOR INTERNATIONAL TRANSACTIONS RELATING TO PROVISION OF SOFTWA RE DEVELOPMENT SERVICES AMOUNTING TO RS.7,86,03,511/- AND ON ACCOUNT OF MISMATCH OF TDS AMOUNTING TO RS.12,37,076/- DUR ING THE YEAR UNDER CONSIDERATION. THE SAME ADJUSTMENT HA S ALSO BEEN ADDED TO NET PROFITS FOR THE PURPOSE OF COMPUTING BOOK P ROFIT U/S.115JB OF THE ACT FOR THE PURPOSE OF CALCULATION OF MAT. 50. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSES SEE THAT EXPLANATION TO SECTION 115JB DEFINES THE TERM BOOK PROFITS TO INCLUDE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR. FURTHER, THE ADDITIONS MADE BY T HE AO WOULD NOT FALL UNDER SUB-CLAUSE (A) TO (J) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT. FOR THE ABOVE PROPOSITION THE LD. CO UNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT REPORTED IN 255 ITR 273. 51. AFTER HEARING BOTH THE SIDES, WE ARE OF THE CONSIDERED OPINION THAT THE MATTER HAS TO GO BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN THE LIGHT OF OUR FINDINGS GIVEN IN GROUND OF AP PEAL NO.12 WHERE WE HAVE RESTORED THE ISSUE RELATING TO BOOK PROFIT ON ACCOUNT OF PROVISION MADE FOR STOCK APPRECIATION RIGHTS. T HE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY A LLOWED FOR STATISTICAL PURPOSES. 37 ITA NO.550 AND 605/PN/2014 ITA NO.605/PN/2014 (BY REVENUE) : 52. GROUND OF APPEAL NO.1 BY THE REVENUE READS AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP ERRED IN HOLDING THAT THE REIMBURSEMENTS OF EXPEN SES ARE TO BE CONSIDERED IN CALCULATING THE PERCENTAGE OF RPT TRAN SACTION. 53. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IN ITS TP STUDY REPORT HAS CONSIDERED ICRA TECHNO ANALYTICS LTD . AS COMPARABLE COMPANY. THE ASSESSEE HAD CLAIMED THAT RELAT ED PARTY TRANSACTIONS (RPT) ARE LESS THAN 25%. HOWEVER, THE TPO NOTED THAT WHILE CONSIDERING THE RPT TRANSACTIONS THE ASSESSEE HAS EXCLUDED REIMBURSEMENT OF EXPENSES AND REMUNERATION TO DIRECTORS FROM RPT TO ARRIVE AT THE RPT PERCENTAGE. THE TPO WAS NOT CONVINCED WITH THE ARGUMENTS OF THE ASSESSEE THAT REIMB URSEMENT OF EXPENSES AND REMUNERATION TO DIRECTORS SHOULD BE EXC LUDED FROM THE RPT TO ARRIVE AT THE RPT PERCENTAGE. SINCE AFTER INCLUDING THE SAME THE RPT EXCEEDS 25% THE TPO HELD THAT THIS COMPA NY IS NOT COMPARABLE. THE DRP HOWEVER REJECTED THE ABOVE CONTE NTION OF THE TPO AND HELD THAT REIMBURSEMENT OF EXPENSES SHOULD BE E XCLUDED FROM THE RPT TO ARRIVE AT THE RPT PERCENTAGE. THEY HE LD THAT IF REIMBURSEMENT OF EXPENSES OF RS.1,15,93,000/- IS EXCLUDED TH EN THE RPT PERCENTAGE WOULD FALL BELOW 25%. ACCORDINGLY, THE DRP DIRECTED THE AO TO INCLUDE THIS COMPANY IN THE LIST OF COMP ARABLE COMPANIES. AGGRIEVED WITH SUCH ORDER OF DRP THE REVENU E IS IN APPEAL BEFORE US. 54. THE LD. DEPARTMENTAL REPRESENTATIVE HEAVILY RELIED ON THE ORDER OF THE AO. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND WHILE SUPPORTING THE ORDER OF THE DRP SUBMITTED TH AT THE REMUNERATION TO THE DIRECTOR BY NO STRETCH OF IMAGINATIO N BE 38 ITA NO.550 AND 605/PN/2014 INFERRED TO HAVING ANY INFLUENCE ON THE OPERATING PROFIT MAR GINS OF THE COMPANY SO AS TO RENDER IT INCOMPARABLE. HE ACCORD INGLY SUBMITTED THAT THE GROUND RAISED BY THE REVENUE SHOULD BE DISMISSED. 55. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE TPO/AO/DRP AND THE PA PER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND THE TOTAL SALES OF I CRA TECHNO ANALYTICS LTD. IS RS.11,15,37,000/- (PAPER BOOK PAGE S 333- VOL-I). IF THE REIMBURSEMENT OF EXPENSES OF RS.1,15,93,000 /- IS INCLUDED TO THE PROFESSIONAL FEES OF RS.1,50,71,000/- THE RPT TO SALES COMES TO 23.91% WHICH IS STILL BELOW 25%. WE THEREFOR E FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT EVEN IF REIMBURSEMENT OF EXPENSES IS INCLUDED THE RPT/SALES REMAIN BELOW 25%. THEREFORE, ICRA TECHNO ANALYTICS LTD. C ANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES. THIS GROUND BY T HE REVENUE IS ACCORDINGLY DISMISSED. 56. GROUNDS OF APPEAL NO.2 BY THE REVENUE READS AS UNDER : 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP ERRED IN ALLOWING FRESH SEARCH TO THE ASSESSEE AFTER ISSUE OF SCN. 57. FACTS, IN BRIEF, ARE THAT THE ASSESSEE DURING THE COUR SE OF ASSESSMENT PROCEEDINGS HAS GIVEN THE FOLLOWING 4 COMPANIE S STATING THAT THEY CAN ALSO BE TAKEN AS COMPARABLES : S.NO. NAME OF THE COMPANY OPERATING MARGIN AS A PERCENTAGE OF OPERATING COST FOR F.Y. 2008-09 1 AKSHAY SOFTWARE TECHNOLOGIES LTD. 12.41% 2 CG - VAK SOFTWARE & EXPORTS LTD. (SEGMENTAL) 5.47% 3 INDIUM SOFTWARE (INDIA) LIMITED - 9.33% 4 TVS INFOTECH LTD. - 13.53% 39 ITA NO.550 AND 605/PN/2014 THIS WAS GIVEN TO THE TPO VIDE LETTER DATED 06-12-2012 A COPY OF WHICH IS PLACED IN THE PAPER BOOK PAGES 221 TO 261. HOW EVER, THE TPO DID NOT CONSIDER ANY OF THESE COMPANIES. 58. BEFORE DRP THE ASSESSEE SUBMITTED THAT THE ASSESSE E IDENTIFIED CERTAIN OTHER COMPANIES WHICH ARE FUNCTIONALLY COMPARABLE TO THE ASSESSEE. THESE COMPANIES CLEAR ALL TH E FILTERS APPLIED BY THE TPO. ALTHOUGH ALL THE INFORMATION PERTAINING T O THESE COMPANIES WERE MADE AVAILABLE TO THE TPO DURING ASSESSMENT PROCEEDINGS, HOWEVER, THE ORDER OF THE TPO IS SILENT ON THIS ISSUE. 59. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND THE VARIOUS SUBMISSIONS MADE BEFORE THEM THE DRP DIRECTED TH E TPO/AO TO CONSIDER AKSHAY SOFTWARE TECHNOLOGIES AND C.S- VAK SOFTWARE EXPORTS LTD. IN THE LIST OF COMPARABLE COMPANIES. 60. AGGRIEVED WITH SUCH ORDER OF THE DRP THE REVENUE IS IN APPEAL BEFORE US. 61. AFTER HEARING BOTH THE SIDES WE FIND NO INFIRMITY IN THE O RDER OF THE DRP ON THIS ISSUE. WE FIND THE TPO HAD INCLUDED CER TAIN COMPANIES OTHER THAN THE COMPANIES SELECTED BY THE ASS ESSEE FOR THE PURPOSE OF COMPARABLE COMPANIES. WHEN THE ASSESSEE GAVE THE LIST OF CERTAIN OTHER COMPANIES WHICH FULFIL THE FILTERS APPLIED BY THE TPO, THE ORDER OF THE TPO ON THIS ISSUE IS SILENT. THEREFOR E, WHEN THE DRP AFTER CONSIDERING THE FULL DETAILS EXCLUDED 2 COMPAN IES AND DIRECTED THE TPO TO INCLUDE THE 2 COMPANIES NAMELY, AKSH AY SOFTWARE TECHNOLOGIES AND C.S.-VAK SOFTWARE EXPORTS LTD. AS COMPARABLE COMPANIES, THEREFORE, IN ABSENCE OF ANY CONTRAR Y 40 ITA NO.550 AND 605/PN/2014 MATERIAL BROUGHT TO OUR NOTICE BY THE LD. DEPARTMENTAL REPRESENTATIVE WE FIND NO INFIRMITY IN THE ORDER OF THE DR P ON THIS ISSUE. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE ON THIS ISSUE IS DISMISSED. 62. GROUND OF APPEAL NO.3 BY THE REVENUE READS AS UNDER : 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP ERRED IN DELETING THE ADDITION TO TOTAL TURNOVE R. 63. FACTS, IN BRIEF, ARE THAT THE AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT ASSESSEE HAD NOT RECEIVED FOREIG N REMITTANCE REVENUE OF RS.40,04,21,145/- AS IT WAS ADJUSTED AGAINST THE DEBIT NOTE RAISED BY THE SYNECHRON INC, USA ON THE ASSESSEE. ON BEING QUESTIONED BY THE AO IT WAS EXPLAINED BY THE AS SESSEE THAT SYNECHRON INC, USA RAISED THE DEBIT NOTE ON 31-03 -2009 FOR US DOLLAR 78,59,100 BECAUSE THE ASSESSEE HAD OVER BILLED SYNECHRON INC, USA. 64. HOWEVER, THE AO WAS NOT SATISFIED AND RECOMPUTED THE DEDUCTION U/S.10A AND 10AA BY DISREGARDING THE DEBIT NOT ES AMOUNTING TO RS.40,04,21,145/- FOR STP UNIT AND RS.60,24,914 /- FOR SEZ UNIT. BEFORE THE DRP THE ASSESSEE FURNISHED CER TAIN ADDITIONAL EVIDENCES SUCH AS AUDITED FINANCIAL STATEMENT OF SYNECHRON INC, USA AND CERTIFICATE OF AUDITOR SHOWING SPLIT OF REVENUE INTO ONSITE AND OFFSHORE AND DETAILED RECONCILIATION TABLE OF OFFSHORE REVENUE ALONG WITH COPIES OF FEW INVOICES RAISED BY SYNECHRON INC, USA ON ITS END CUSTOMERS ON SAMPLE BASIS . IT WAS EXPLAINED THAT THE DEBIT NOTE OF RS.40,64,46,059/- WERE RAIS ED BY SYNECHRON INC, USA ON THE ASSESSEE ON ACCOUNT OF THE ERRONEOUS INVOICE SHOWN BY THE ASSESSEE DURING THE YEAR. HOWEVER , THE SAME 41 ITA NO.550 AND 605/PN/2014 DOES NOT FALL PART OF THE ASSESSEES REVENUE. THE SAID AMOUNT WAS NEVER EARNED OR REALISED BY THE ASSESSEE, HENCE IT DOES NOT REPRESENT THE ASSESSEES REVENUE INCOME. VARIOUS DECIS IONS WERE ALSO RELIED UPON. 65. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE DRP DIRECTED THE AO TO DELETE THE ADDITION OF RS.40,64,46,059/-. THE RELEVANT OBSERVATION OF THE DRP FROM PARA 2.10.9 TO 2.10.13 READ AS UNDER : 2.10.9 WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BOTH THE SIDES. WE HAVE PERUSED THE FACTS AND EXPLANATION OF TH E ASSESSEE. WE ARE IN AGREEMENT WITH THE LEARNED AO THAT THE ASSESSEE S EXPLANATION ON ERROR IS NOT CONVINCING. THE LEARNED AO IS ALSO CO RRECT IN HER OBSERVATION THAT IF ON-SITE RESOURCES ARE ERRONEOUSLY TA GGED AS CLAIMED BY THE ASSESSEE, THEN THERE WOULD BE SHORT BILLING TO TH E END USER. HOWEVER, ACCORDING TO US, THESE SHORTCOMINGS WOULD NOT LEAD TO THE ADDITION TO INCOME FOR THE FOLLOWING REASONS. 2.10.10 FIRSTLY, THE ASSESSEE STATES THAT CERTAIN INCOME I S NOT EARNED BY IT. THIS IS ALSO STATED THAT ITS AE, WHICH IS DIFFERENT LEGAL ENTITY LOCATED IN OTHER COUNTRY. THE LEARNED AOS C ASE IS THAT SUCH INCOME WAS INDEED EARNED BY THE ASSESSEE. IN OTHER WORD S, THE LEARNED AO STATED THAT THE STATEMENT MADE BY BOTH THE LEGAL ENTITIES IS INCORRECT. IT IS OBVIOUS THAT FOR COMING TO SUCH AN EM PHATIC CONCLUSION, ONE SHOULD ALSO HAVE POSITIVE EVIDENCE OF THE ASSESSEE HAV ING EARNED INCOME. IT IS NOT POSSIBLE TO TAX THE ASSESSEE MERELY ON T HE GROUND THAT IT DID NOT FURNISH PRIMARY DOCUMENTS IN SUPPORT OF SERV ICES RENDERED BY IT OR FURNISHED UNCONVINCING EXPLANATION FOR THE DEBIT NOTE AGAINST THE STATEMENT MADE BY THE TWO COMPANIES. 2.10.11 SECONDLY, ACCORDING TO US, THE ASSESSEE IS NOT SEE KING A DEDUCTION OF THE TURNOVER 40.65 CR FROM THE TOTAL T URNOVER, ALTHOUGH TECHNICALLY IT APPEARS SO. IN SUBSTANCE, THE ASSESSEE DENI ES HAVING EARNED INCOME OF RS.40.64 CR. IN THESE CIRCUMSTANCES, THE ONUS IS ON THE REVENUE TO PROVE THAT THE ASSESSMENT HAS INDEED EARN ED INCOME OF RS.40.65 CR AND THE ASSESSEE DOES NOT TO ESTABLISH ITS CASE F OR DEDUCTION. ACCORDING TO US, THE ASSESSEE HAS FURNISHED CE RTAIN EXPLANATION IN SUPPORT OF DEBIT NOTE AND THEREAFTER ONUS HAS SHIFTED TO THE DEPARTMENT. THE DEPARTMENT HAS TO PROVE WITH EV IDENCE THAT THE EXPLANATION OFFERED BY THE ASSESSEE WAS INCORRECT, PROVI NG THAT EXPLANATION IS ILLOGICAL IS NOT SUFFICIENT FOR MAKING ADDITION TO INCOME. THEREFORE, ACCORDING TO US, AT THIS STAGE, IT IS NOT OP EN TO MAKE THE ADDITION MERELY ON THE BASIS OF THE ASSESSEE NOT FURNISHI NG SUPPORTING DETAILS OR NOT FURNISHING CONVINCING EXPLANATION. 42 ITA NO.550 AND 605/PN/2014 2.10.12 THIRDLY, IT IS A FACT THAT THE SERVICES WERE R ENDERED. HOWEVER, THE DISPUTE IS ON WORTH OF THE SERVICES RENDE RED. ACCORDING TO THE LEARNED AO, THE SERVICES WERE RENDERED WORTH R S.122.84 CR WHEREAS ACCORDING TO THE ASSESSEE, IT WAS WORTH RS.82.8 CR . ACCORDING TO THE BUSINESS MODEL OF THE ASSESSEE, SYNECHRON INC RENDE RS SERVICES TO THE CUSTOMERS BY GETTING IT OUTSOURCE TO THE ASSESSEE I N INDIA. THEREFORE, TO CONCLUDE THAT EXCESS BILLING WAS NOT DON E OR VALUATION OF SERVICES RENDERED WAS INDEED RS.122.84 CR, THE LEARNED AO COULD HAVE UNDERTAKEN EXERCISE OF COMPARING INVOICES RAISED BY THE ASSESSEE WITH THE INVOICES IN TURN RAISED BY SYNECHRON INC ON END-C USTOMERS. THE LEARNED AOS CASE WOULD BE PROVED IF ACCORDING TO THI S EXERCISE, IT IS FOUND THAT SYNECHRON INC HAS ALSO BILLED MORE THAN RS. 122 CRORE TO THE END-CUSTOMERS. OR THE LEARNED AO COULD HAVE RECORDED STATEMENT OF CONCERNED PERSONS ON THE BASIS OF DEBIT NOTE TO PROVE H ER CASE. HOWEVER, THE LEARNED AO HAS NOT UNDERTAKEN ANY SUCH E XERCISE OR ANY OTHER ENQUIRY WHICH WOULD LEAD TO CONCLUSION THAT TH E ASSESSEE HAS INDEED EARN RS.122.84 CR. 2.10.13 IN VIEW OF THE ABOVE, WE ARE OF THE VIEW TH AT ADDITION IS BASED MORE ON LOGIC RATHER THAN ON EVIDENCE AGAINST T HE ASSESSEE. LOGIC HOEVER STRONG CANNOT SUBSTITUTE EVIDENCE. WITHO UT EVIDENCE, IT IS NOT POSSIBLE TO STATE THAT TWO COMPANIES HAVE MADE INCO RRECT STATEMENT. ACCORDINGLY, IN VIEW OF THE ABOVE DISCUSSIO N, WE CONSIDER THAT THE ADDITION IS UNJUSTIFIED. ACCORDINGLY, WE DE LETE THE ADDITION OF RS.40,64,46,059/-. 66. AGGRIEVED WITH SUCH ORDER OF THE DRP THE REVENUE IS IN APPEAL BEFORE US. 67. AFTER HEARING BOTH THE SIDES WE FIND NO INFIRMITY IN THE O RDER OF THE DRP. THE FINDING GIVEN BY THE DRP THAT THE ONUS T O PROVE THAT THE INCOME IS EARNED BY THE STPL IN INDIA INSTEAD OF SYNECHRON INC, USA IS ON THE DEPARTMENT AND THE SAME SHOULD BE SUBSTANTIATED BY WAY OF A POSITIVE EVIDENCE COULD NOT BE CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. F URTHER, THEY HAVE ALSO GIVEN A FINDING THAT THE ASSESSEE IS NOT S EEKING DEDUCTION OF THE TURNOVER OF RS.40.64 CRORES FROM THE TO TAL TURNOVER BUT IN SUBSTANCE DENYING THAT IT HAS EARNED THE SAID INC OME. THE DEPARTMENT HAS TO PROVE WITH EVIDENCE THAT THE EXPLANA TION GIVEN BY THE ASSESSEE IS ILLOGICAL, INCORRECT AND INSUFFICIENT FOR MAK ING SUCH ADDITION TO INCOME. THE LD. DEPARTMENTAL REPRESENTATIVE ALSO 43 ITA NO.550 AND 605/PN/2014 COULD NOT CONTROVERT THE ABOVE OBSERVATION. WE FIND TH E AO HAS NOT PROVIDED ANY EVIDENCE OF ANY EXERCISE OR ENQUIRY WHICH WO ULD LEAD TO THE CONCLUSION THAT THE ASSESSEE HAD RENDERED SERV ICES HIGHER THAN WHAT IT HAS CLAIMED. IN VIEW OF THE ABOVE AND IN VIE W OF THE DETAILED REASONING GIVEN BY THE DRP AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE BY THE LD. DEPARTMENTAL REPRESENTATIVE WE FIND NO INFIRMITY IN THE ORDER OF THE DRP ON THIS ISSUE. THE GROUND RAISED BY THE REVENUE IS ACCORDINGLY DISMISSED. 68. GROUND OF APPEAL NO.4 BY THE REVENUE READS AS UNDER : 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP ERRED IN DIRECTING THE ASSESSING OFFICER TO REDUCE BAD DEBTS FROM TOTAL TURNOVER. 69. FACTS, IN BRIEF, ARE THAT THE AO DURING THE DRAFT ASSES SMENT PROCEEDINGS MADE AN ADJUSTMENT TO THE EXPORT TURNOVE R AMOUNTING TO RS.1,73,45,367/- BEING BAD DEBTS WRITTEN OFF WITH RESPECT TO SALES OF SOFTWARE SERVICES RENDERED DURING THE YEAR. BEFO RE THE DRP THE ASSESSEE SUBMITTED THAT THE AO MAY BE DIRECTED TO ADJUST THE AMOUNT OF BAD DEBTS RS.1,73,45,367/- FROM THE TOTAL TURNO VER ALSO WHILE COMPUTING DEDUCTION U/S.10A. 70. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE DRP HELD THAT IF AN AMOUNT IS REDUCED FROM THE EXPORT TURNOV ER THEN THE SAME HAS TO BE REDUCED FROM THE TOTAL TURNOVER AS WELL. THE DRP HELD THAT THE COURTS ARE REPEATEDLY HOLDING THAT IF COMP ONENT OF INCOME IS NOT CONSIDERED IN COMPUTING EXPORT TURNOVER, T HEN THE SAME IS REQUIRED TO BE EXCLUDED FROM THE TOTAL TURNOVER AS WELL. ACCORDINGLY, THE DRP DIRECTED THE AO TO REDUCE RS.1,73,45 ,367/- FROM THE TOTAL TURNOVER AS WELL TO COMPUTE DEDUCTION U/S.10A. 44 ITA NO.550 AND 605/PN/2014 71. AGGRIEVED WITH SUCH ORDER OF THE DRP THE REVENUE IS IN APPEAL BEFORE US. 72. AFTER HEARING BOTH THE SIDES, WE FIND NO INFIRMITY IN THE O RDER OF THE DRP IN HOLDING THAT IF AN AMOUNT IS REDUCED FROM THE EXPORT TURNOVER THEN THE SAME HAS TO BE REDUCED FROM THE TO TAL TURNOVER AS WELL. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY INDIA LTD. REPORTED IN 330 ITR 175 HAS OBSERVED THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN DEFINED AT ALL BY THE PARLIAMENT FOR THE PURPOSE OF SECTION 10A. H OWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY THE PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUEN T PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISION WHICH WOULD LEAD T O AN ABSURDITY MUST BE AVOIDED. FOLLOWING THE ABOVE ANALOGY, WE ARE OF THE CONSIDERED OPINION THAT IF A COMPONENT OF INCOME IS NO T CONSIDERED IN COMPUTING EXPORT TURNOVER THEN THE SAME IS REQUIRED TO BE EXCLUDED FROM THE TOTAL TURNOVER AS WELL. ACCORDING LY, WE UPHOLD THE ORDER OF THE DRP ON THIS ISSUE AND THE GROUN D RAISED BY THE REVENUE IS DISMISSED. 73. GROUNDS OF APPEAL NO.5 AND 6 BY THE REVENUE BEING GE NERAL IN NATURE ARE DISMISSED. 45 ITA NO.550 AND 605/PN/2014 74. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PART LY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21-10-2015. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER IQ.KS PUNE ; # DATED : 21 ST OCTOBER, 2015. LRH'K ( )'+ , / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. DRP, PUNE 4. 5. ' *, *, IQ.KS / DR, ITAT, B PUNE; / GUARD FILE. / BY ORDER , ' //TRUE COPY// / * / SR. PRIVATE SECRETARY *, IQ.KS / ITAT, PUNE
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