DCIT, Circle-16(3), Hyderabad V. M/s. Planet Online Pvt Ltd., Secunderabad

ITA 608/HYD/2014

• Counselvise Citation: 60822514 RSA 2014
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 03-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 464/HYD/2014 ASSESSMENT YEAR: 2009-10 PLANET ONLINE PVT. LTD., SECUNDERABAD. PAN AAECS1624F ASST. COMMISSIONER OF INCOME- TAX, CIRCLE 16(3), HYDERABAD. (APPELLANT) (RESPONDENT) ITA NO. 608/HYD/2014 ASSESSMENT YEAR: 2009-10 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 16(3), HYDERABAD. PLANET ONLINE PVT. LTD., SECUNDERABAD. PAN AAECS1624F (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI P. MURALI MOHAN RAO REVENUE BY SHRI D. SUDHAKAR RAO DATE OF HEARING 01-12-2014 DATE OF PRONOUNCEMENT -01-2015 O R D E R PER SAKTIJIT DEY, J.M.: THESE CROSS APPEALS ARE AGAINST THE DIRECTIONS OF T HE DISPUTE RESOLUTION PANEL (DRP) U/S 144C(5) AND THE ASSESSME NT ORDER PASSED U/S 143(3) READ WITH SECTION 144C(13) IN CON SEQUENCE THERETO. THE APPEALS ARE PERTAINING TO AY 2009-10. 2. BRIEFLY THE FACTS ARE, ASSESSEE AN INDIAN COMPAN Y IS A WHOLLY OWNED SUBSIDIARY OF PLANET SOFT INC., USA. ASSESSEE IS ENGAGED IN 2 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSO CIATED ENTERPRISES (AE). IT PROVIDES A RANGE OF SOFTWARE DEVELOPMENT S ERVICES FOR UPGRADING/ENHANCING SOFTWARE SOLUTIONS INCLUDING PR EPARATION OF FUNCTIONAL SPECIFICATION DOCUMENTS, PREPARATION OF TECHNICAL DESIGNS, CODING, TESTING ETC. TO ITS AE, WHICH DEALS IN PROV IDING SOLUTIONS RELATING TO INSURANCE AND FINANCE INDUSTRY. ASSESSE E IS REGISTERED AS A 100% EXPORT ORIENTED UNIT (EOU) UNDER THE SOFTWAR E TECHNOLOGY PARK OF INDIA SCHEME. FOR THE AY UNDER CONSIDERATIO N, ASSESSEE FILED ITS RETURN OF INCOME ON 29/09/2009 DECLARING TOTAL INCOME OF RS.9,31,968 AFTER CLAIMING EXEMPTION U/S 10A OF THE ACT. ASSESSEE ALSO DECLARED BOOK PROFIT UNDER THE MAT PROVISIONS. AS THE TAX PAYABLE UNDER MAT PROVISIONS WAS HIGHER THAN THE TA X PAYABLE UNDER NORMAL PROVISIONS, ASSESSEE ALSO PAID TAX AS PER MA T PROVISIONS. DURING THE SCRUTINY ASSESSMENT PROCEEDING, AO HAVIN G NOTICED THAT ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS AE RESULTING IN EARNING OF REVENUE TO THE TUNE OF RS. 34,20,01,237, MADE A REFERENCE U/S 92CA TO THE TRANSFER PRICING OFFICE R (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP). IN COURSE OF PROCEEDING BEFORE TPO, ASSESSEE SUBMITTED ITS TP REPORT ALONG WITH OTHER RELATED DOCUMENTS AND BOOKS OF ACCOUNT. IN THE TP REPORT, A SSESSEE ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST AP PROPRIATE METHOD AND OPERATING PROFIT TO OPERATING COST AS PR OFIT LEVEL INDICATOR (PLI). ASSESSEE SEARCHED THE PROWESS AND CAPITAL LI NE DATA BASES WHICH YIELDED 15 COMPARABLE COMPANIES WITH AVERAGE OP/OC OF 9.34%. AS THE OP TO OC RATIO OF ASSESSEE WAS 9.50%, THE PRICE CHARGED TO AE WAS FOUND TO BE WITHIN ARMS LENGTH. THE TPO, THOUGH, ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD, BUT, HE NEVERTHELESS REJECTED THE TP REPORT OF ASSESSEE BY POINTING OUT VARIOUS DEFECTS AND DEFICIENCIES IN THEM. TPO WAS OF THE VIEW THAT NOT ONLY ASSESSEE HAS SELECTED COMPARABLES BY USING MULTIPLE YEAR DATA INSTEAD OF DATA RELATING TO THE YEAR UNDER CON SIDERATION, BUT, ASSESSEE HAS NOT GONE IN TO THE VERTICALS OF THE S OFTWARE INDUSTRY AND HAS APPLIED INAPPROPRIATE FILTERS WHICH HAS RES ULTED IN SELECTION OF 3 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. UN-COMPARABLES AS COMPARABLES. ACCORDINGLY, TPO RE JECTING THE TP REPORT OF ASSESSEE, INDEPENDENTLY UNDERTOOK A SEARC H OF DATA BASES, WHICH YIELDED THE FOLLOWING17 COMPARABLES WITH AVER AGE ARITHMETIC MEAN PLI OF 22.02%.: 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 2. BODHTREE CONSULTING LTD. 3. COMP-U-LEARN TECH INDIA LTD. 4. IGATE GLOBAL SOLUTIONS LTD. 5. INFOSYS LTD. 6. KALS INF. SYSTEM (SEG.) 7. LGS GLOBAL 8. MINDTREE LTD. (SEG.) 9. NEILSOFT LTD. 10. PERSISTENT SYS 11. RS SOFTWARE (INDIA) LD. 12. R SYSTEMS INTERNATIONAL LTD. (SEG.) 13. SASKEN COMMUNICATION TECHNOLOGIES LTD. 14. TATA ELXSI LTD. (SEG.) 15. THNINKSOFT GLOBAL 16. THIRDWARE SOLUTIONS 17. ZYLOG SYSTEMS 3. AFTER NEGATIVE WORKING CAPITAL ADJUSTMENT OF -3 .64%, ARITHMETIC MEAN PLI OF COMPARABLES WAS ENHANCED TO 25.67%. BY APPLYING THE AFORESAID ARITHMETIC MEAN PLI TO OPERATING COST, TP O DETERMINED THE ALP OF THE INTERNATIONAL TRANSACTION WITH AE AT RS. 44,35,02,901, WHICH RESULTED IN AN TP ADJUSTMENT OF RS. 6,88,46,9 79. IN PURSUANCE TO THE ORDER PASSED BY TPO, AO FRAMED A DRAFT ASSES SMENT ORDER ON 25/02/2013 BY ADDING THE TP ADJUSTMENT OF RS. 6,88, 47,971. AO ALSO MADE ADJUSTMENT TO THE DEDUCTION CLAIMED U/S 10A BY REDUCING THE COMMUNICATION CHARGES FROM EXPORT TURNOVER, AS A RE SULT OF WHICH DEDUCTION CLAIMED U/S 10A WAS REDUCED BY AN AMOUNT OF RS. 10,67,970. AS A RESULT. THE TAXABLE INCOME WAS DETE RMINED AT RS. 7,08,46,971. ASSESSEE OBJECTED TO THE DRAFT ASSESSM ENT ORDER BEFORE DRP BY RAISING VARIOUS GROUNDS BOTH ON TRANSFER PRI CING ISSUES AS WELL AS ON THE COMPUTATION OF DEDUCTION U/S 10A. 4 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 4. THE DRP IN ITS DIRECTIONS DATED 29/11/2013 REJEC TED ALL CONTENTIONS OF ASSESSEE WITH REGARD TO TP ISSUES. HOWEVER, AS FAR AS ISSUE RELATING TO CLAIM OF DEDUCTION U/S 10A, TH E DRP ALLOWED ASSESSEES CLAIM BY DIRECTING AO TO REDUCE THE COMM UNICATION CHARGES BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVE R WHILE COMPUTING THE DEDUCTION U/S 10A. IN TERMS WITH THE DIRECTION OF THE DRP, AO FINALIZED THE ASSESSMENT U/S 143(3) READ WITH SECTI ON 92CA(3) AND SECTION 144C VIDE ORDER DATED 26/12/2013. 5. BEING AGGRIEVED WITH THE DIRECTIONS OF THE DRP, BOTH THE ASSESSEE AS WELL AS REVENUE ARE BEFORE US. ITA NO. 464/HYD/14 BY ASSESSEE 6. THOUGH ASSESSEE IN THE MEMORANDUM OF APPEAL HAS RAISED 14 GROUNDS BUT AT THE TIME OF HEARING, ASSESSEE HAS SU BMITTED MODIFIED GROUNDS (TERMED AS ADDITIONAL GROUNDS) RAISING VARI OUS ISSUES ON TRANSFER PRICING ADJUSTMENT. IN GROUND NOS. 20 TO 28, ASSESSEE HAS OBJECTED TO SELECTION OF CERTAIN COMPARABLES BY TPO AND CONFIRMED BY DRP, WHICH WE PROPOSE TO TAKE UP FIRST. THE COM PARABLES OBJECTED TO BY ASSESSEE ARE AS UNDER: S.NO. NAME OF THE COMPARABLE 1 PERSISTENT SYSTEMS PVT. LTD. 2 R. SYSTEMS INTERNATIONAL LTD. (SEG.) 3 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 4 THINKSOFT GLOBAL SERVICES LTD. 5 THIRDWARE SOLUTIONS LTD. 6 ZYLOG SYSTEMS LTD. 7 BODHTREE CONSULTING LTD. 8 COMP-U-LEARN GLOBAL TECH INDIA LTD. 9 IGATE GLOBAL SOLUTIONS LTD. 10 INFOSYS LTD. 11 KALS INFORMATION SYSTEMS LTD. 12 TATA ELXSI LTD. (SEG.) 5 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 7. THE SUBMISSIONS OF THE LEARNED AR IN BRIEF IN R ESPECT OF EACH THE AFORESAID COMPARABLES AS SUBMITTED IN A TABULAR FORM ARE AS UNDER: S.NO. NAME OF THE COMPARABLE REASONS FOR REJECTIONS 1 BODHTREE CONSULTING LTD. IT IS ENGAGED IN THE BUSINESS OF SOFTWARE PRODUCTS. 2 COMP-U-LEARN GLOBAL TECH INDIA LTD. IT IS FUNCTIONALLY DIFFERENT AS ENGAGED IN SOFTWARE PRODUCT DEVELOPMENT. 3 INFOSYS LTD. IT IS FUNCTIONALLY DIFFERENT COMPANY 4 KALS INFORMATION SYSYTEMS (SEG.) FUNCTIONALLY DISSIMILAR COMPARED TO ASSESSEE AS CORE AREA OF BUSINESS INCLUDES THE DEVELOPMENT, MANUFACTURE AND SALES & MARKETING OF PRINTERS, COMPUTERS, LCD PROJECTORS AND COLOR TVS AND HIGH PROFIT MAKING COMPANY. 5 TATA ELXSI LTD. (SEG.) THE COMPARABLE IS FUNCTION ALLY DIFFERENT AND NO SEGMENT REVENUE. 6. PERSISTENT SYSTEMS PVT. LTD. COMPANY IS ENGAGED PREDOMINANTLY IN OUTSOURCE SOFTWARE PRODUCT DEVELOPMENT AND PRODUCT DESIGNING. NO SEGMENTAL DATA IS AVAILABLE. 7. R SYSTEMS INTERNATIONAL LTD. (SEG.) FINANCIAL YEAR ENDS ON 31 ST DECEMBER AND NOT ON 31 ST MARCH 8 THINKSOFT GLOBAL SERVICES LTD. DIFFERENCE IN FUNCTIONALITY COMPARE TO ASSESSEE COMPANY, PRODUCT BASED COMPANY. PROVIDING TESTING SERVICES AND THIS IS ONLY ONE PHASE OF SDLC, WHICH ARE NOT COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICES. 9 THIRDWARE SOLUTIONS LTD. FUNCTIONALLY DISSIMILAR WAS INTO PRODUCT DEVELOPMENT AND PURCHASE/SALE OF LICENCES ALSO. SEGMENTAL DETAILS FOR SALES IS AVAILABLE BUT NO EXPENDITURE BIFURCATION IS AVAILABLE. THEREFORE, OPERATING MARGIN FOR SOFTWARE SERVICES CANNOT BE DETERMINED. 10 IGATE GLOBAL SOLUTIONS LTD. COMPANY HAVING HUGE TURNOVER WHICH IS MORE THAN 200 CRORES ABOUT 20 TIMES THE TURNOVER OF THE APPELLANT COMPANY. COMPANY IS GIANT COMPANY HAVING PRESENCE IN VARIOUS COUNTRIES AND CHARGES 6 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. PREMIUM PRICING. FURTHER, THE COMPANY IS HAVING VARIOUS INTANGIBLES IN ITS NAME. FURTHER, COMPANY IS HAVING CLOSING STOCK OF RAW MATERIALS. 11 ZYLOG SYSTEMS LTD. COMPANY HAS MADE ACQUISITIONS DURING THE FINANCIAL YEAR UNDER CONSIDERATION WHICH HAS INCREASED ITS REVENUE. 12 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) FUNCTIONALLY DISSIMILAR COMPARED TO THE ASSESSEE AS HAVING PRODUCT SALES AND IS A PROVIDER OF TELECOMMUNICATION SOFTWARE SERVICES AND PRODUCTS TO NETWORK EQUIPMENT MANUFACTURERS, MOBILE TERMINAL VENDORS AND SEMICONDUCTOR COMPANIES AROUND THE WORLD. OFFERS COMBINATION OF R&D CONSULTANCY, WIRELESS SOFTWARE PRODUCTS AND SOFTWARE SERVICES. WORKS WITH NETWORK OEMS, SEMICONDUCTOR VENDORS, TERMINAL DEVICE OEMS AND OPERATORS ACROSS THE WORLD. NO SEGMENT DATA AVAILABLE. 8. THE LEARNED AR SUBMITTED THAT DIFFERENT BENCHES OF ITAT INCLUDING THE HYDERABAD BENCHES FROM TIME TO TIME A ND FOR DIFFERENT ASSESSMENT YEARS INCLUDING THE ASST. YEAR UNDER CON SIDERATION HAVE CONSIDERED COMPARABILITY OF THE AFORESAID COMPANIES WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND HELD THESE COMPANI ES NOT TO BE COMPARABLE. IN SUPPORT OF SUCH CONTENTION, THE LD. AR RELIED UPON THE FOLLOWING DECISIONS: 1. M/S 3DPLM SOFTWARE SOLUTIONS LTD. VS. DCIT, IT(T P) NO. 1303/BANG/2012. 2. ACIT VS. HAPAG LYOYD GLOBAL SERVICES (TS 47 ITAT 2013 (MUM) TP) 3. TRIOLOGY E BUSINESS V. DCIT, (TS 748 ITAT 2012 ( BANG) TP) 4. INTOTO SOFTWARE PVT. LTD. VS. DCIT (TS 141 ITAT 2013 (HYD) TP) 5. NTT DATA INDIA ENTERPRISES APPLICATIONS SERVICE S PVT. LTD. VS. ACIT (TS 293 ITAT 2013 (HYD) TP) 7 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 6. AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. DCIT (TS 265 ITAT 2013 (DEL) TP) 7. NETHAWK NETWORKS INDIA P. LTD. ITAT, MUMBAI, IT A NO. 7633/M/2012. 8. KENEXA TECHNOLOGIES P. LTD., ITAT, HYD IN ITA NO . 243/HYD/2014. 9. DCIT VS. HELLSOFT INDIA P. LTD. (TS 59 ITAT 2013 (HYD) TP) 10. CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LD. DELH I HIGH COURT, ITA NO. 1204/2011. 11. CES PVT. LTD. VS. DCIT, HYDERABAD ITAT, ITA NO. 1445/HYD/2010. 12. M/S TRIOLOGY E BUSINESS SOFTWARE INDIA PVT. LTD . VS. DCIT, ITA NO. 1054/BANG/2011 13. AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. DCIT, I TA NO. 6485/DEL/2012. 14. VIRTUSA INDIA PVT. LTD. VIDE ITA NO. 1962/HYD/2 011. 9. THE LEARNED DR, ON THE OTHER HAND, JUSTIFIED THE SELECTION OF THE COMPARABLES OBJECTED TO BY ASSESSEE. 10. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF DEPARTMENTAL AUTHORITIES AS WELL AS O THER MATERIALS ON RECORD. WE HAVE ALSO APPLIED OUR MIND TO THE CASE L AWS CITED BY THE PARTIES. 10.1 AS FAR AS COMPARABLES AT SL. NOS. 1 TO 5 ARE CONCERNED, THE ISSUES ARE MORE OR LESS COVERED BY DECISIONS OF THE COORDINATE BENCHES FOR THE SELF-SAME AY I.E. 2009-10. IN CASE OF M/S CISCO SYSTEMS (INDIA) PVT. LTD. VS. DCIT, IT(TP) NO. 130/ BANG/14 DATED 14/08/14, THE COORDINATE BENCH AFTER EXAMINING IN D ETAIL, EXCLUDED BODHTREE CONSULTING LTD., INFOSYS LTD., KALS INFORM ATION SYSTEMS AND TATA ELXSI LTD. (SEG.) THE RELEVANT OBSERVATIONS OF THE ITAT, 8 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. BANGALORE BENCH IN RESPECT TO EACH OF THE AFORESAID COMPANIES ARE REPRODUCED HEREUNDER FOR THE SAKE OF CLARITY: 26.1 BODHTREE CONSULTING LTD.:- AS FAR AS THIS COMP ANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES CHOSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLU DED BY THE ASSESSEE. THE ASSESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSESSEES NOTICE THAT THIS COMPA NY IS NOT BEING CONSIDERED AS A COMPARABLE COMPANY IN THE CAS E OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGH T TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIB UNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CA SE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMB AI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SER VICES (I) P. LTD., ITA NO.4547/MUM/2012. IN THE AFORESAID DECISI ONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTIN G LTD. IS IN THE BUSINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED I N PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANC Y AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST TECHN OLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUN AL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RE LATION TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PR ESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANC ES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COM PANY IS CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSUL TING 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 SAID COMPANY IS A SO FTWARE PRODUCT COMPANY AND NOT A SOFTWARE DEVELOPMENT SERVICES COM PANY. 26.2 INFOSYS LTD.:- AS FAR AS THIS COMPANY IS CONCE RNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CON SIDERED TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVICES, AS THIS COMPANY OWNS SIGNIFICANT INTANGIBLES AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IN THIS REGARD, WE FIND THAT THE BANGALOR E BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TDPLM SOFTWARE SOL UTIONS LTD. V. DCIT, ITA NO.1303/BANG/2012, BY ORDER DATED 28.1 1.2013 WITH REGARD TO THIS COMPARABLE HAS HELD AS FOLLOWS: - 11.0 INFOSYS TECHNOLOGIES LTD. 9 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEF ORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS O F TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASP ECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELO PMENT SEGMENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTIO N TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO UBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A M ARKET LEADER IN SOFTWARE DEVELOPMENT ACTIVITIES, WHEREAS THE ASSESSEE IS MERELY A SOFTWARE SERVICE PROVIDER OPER ATING ITS BUSINESS IN INDIA AND DOES NOT POSSESS EITHER A NY BRAND VALUE OR OWN ANY INTANGIBLE OR INTELLECTUAL P ROPERTY RIGHTS (IPRS). IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT :- (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE C ASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT B E COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WH O DOES NOT OWN ANY INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS SUBMITTED THAT THIS DECISION IS APPLICABLE TO THE ASSESSEE'S CASE, AS THE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INF OSYS TECHNOLOGIES LTD. CANNOT BE COMPARABLE TO THE ASSES SEE; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN TH E CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.38 56 (DEL)/2010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNO LOGIES LTD. BEING A GIANT COMPANY AND MARKET LEADER ASSUMI NG ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSI DERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDERS ASSUMING LI MITED RISK ; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA ; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOFT WARE PRODUCTS AND THE BREAK UP OF SUCH REVENUES IS NOT AVAILABLE ; 10 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR RESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQUISITION OF IPRS IN AUTOLAY, A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMA NCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORISE D REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFO SYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPANIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERE LY ON THE BASIS OF SCALE OF OPERATIONS AND THE BRAND ATTR IBUTABLE PROFIT MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTM ENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMP ANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE AS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTION ALLY DIS-SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HEN CE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. WE ARE INCLINED TO CONCUR WITH THE ARGUMENT PUT FOR TH BY THE ASSESSEE THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PROD UCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM S OFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. THE DECISION RENDERED AS AFORESAID PERTAINS TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSE E THAT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO RE MAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREV AILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNE D. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXCLUDED FROM T HE LIST OF COMPARABLE COMPANIES. 11 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 26.3 KALS INFORMATION SYSTEMS LTD.:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPARABLE TO A PURE SOFTWAR E DEVELOPMENT SERVICES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TRILOGY E-BUSINESS SOF TWARE INDIA PVT. LTD. (SUPRA). THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVE NUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCT S. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THI S COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS AL SO SUBMITTED THAT AS PER THE ANNUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE C ASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXT RACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARAB LE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND I S NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDE D BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRAC T ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDIN G OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE AS PECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOU LD BE REJECTED AS A COMPARABLE. 12 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PU BLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN TH E SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFER RED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELO PING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT T HE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDE D AS A COMPARABLE. 26.4 TATA ELXSI LTD.:- AS FAR AS THIS COMPANY IS CO NCERNED, IT IS NOT IN DISPUTE BEFORE US THAT IN ASSESSEES OWN CAS E FOR THE A.Y. 2007-08, THIS COMPANY WAS NOT REGARDED AS A CO MPARABLE IN ITS SOFTWARE DEVELOPMENT SERVICES SEGMENT IN ITA NO.1076/BANG/2011, ORDER DATED 29.3.2013. FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. THE LEARNED CHARTERED ACCOUNTANT PLEADED THAT O UT OF THE SIX COMPARABLES SHORTLISTED ABOVE AS COMPARABLE S BASED ON THE TURNOVER FILTER, THE FOLLOWING TWO COM PANIES, NAMELY (I) TATA ELXSI LTD; AND (II) M/S. FLEXTRONIC S SOFTWARE SYSTEMS LTD., DESERVE TO BE ELIMINATED FOR THE FOLLOWING REASONS : (I) TATA ELXSI LTD., : THE COMPANY OPERATES IN THE SEGMENTS OF SOFTWARE DEVELOPMENT SERVICES WHICH COMPRISES OF EMBEDDED PRODUCT DESIGN SERVICES, INDUSTRIAL DESIGN AND ENGINEERING SERVICES AND VISU AL COMPUTING LABS AND SYSTEM INTEGRATION SERVICES SEGM ENT. THERE IS NO SUB-SERVICES BREAK UP/INFORMATION PROVI DED IN THE ANNUAL REPORT OR THE DATABASES BASED ON WHICH T HE MARGIN FROM SOFTWARE SERVICES ACTIVITY ONLY COULD B E COMPUTED. THE COMPANY HAS ALSO IN ITS RESPONSE TO T HE NOTICE U/S.133(6) STATED THAT IT CANNOT BE CONSIDER ED AS COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY BECAUSE OF ITS COMPLEX NATURE. HENCE, TATA ELXSI LT D., IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 13 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. (II) FLEXTRONICS SOFTWARE SYSTEMS LTD. : THE LEARNE D TPO HAS CONSIDERED THIS COMPANY AS A COMPARABLE BASED O N 133(6) REPLY WHEREIN THIS COMPANY REFLECTED ITS SOF TWARE DEVELOPMENT SERVICES REVENUES TO BE MORE THAN 75% O F THE 'SOFTWARE PRODUCTS AND SERVICES' SEGMENT REVENU ES. FLEXTRONICS HAS A HYBRID REVENUE MODEL AND HENCE SH OULD BE REJECTED AS FUNCTIONALLY DIFFERENT. BASED ON THE INFORMATION PROVIDED UNDER 'REVENUE RECOGNITION' IN ITS ANNUAL REPORT, IT CAN BE INFERRED THAT THE SOFTWARE SERVICES REVENUES ARE EARNED ON A HYBRID REVENUE MODEL, AND THE SAME IS NOT SIMILAR TO THE REGULAR MODELS ADOPTED B Y OTHER SOFTWARE SERVICE PROVIDERS. THE LEARNED REPRESENTATIVE PLEADED THAT A REGULAR SOFTWARE SERV ICES PROVIDER COULD NOT BE COMPARED TO A COMPANY HAVING SUCH A UNIQUE REVENUE MODEL, WHEREIN THE REVENUES O F THE COMPANY FROM SOFTWARE/PRODUCT DEVELOPMENT SERVI CES DEPENDS ON THE SUCCESS OF THE PRODUCTS SOLD BY ITS CLIENTS IN THE MARKETPLACE. HENCE, IT WOULD BE INAPPROPRIAT E TO COMPARE THE BUSINESS OPERATIONS OF THE ASSESSEE WIT H THAT OF A COMPANY FOLLOWING HYBRID BUSINESS MODEL COMPRISING OF ROYALTY INCOME AS WELL AS REGULAR SOF TWARE SERVICES INCOME, FOR WHICH REVENUE BREAK-UP IS NOT AVAILABLE. HE FINALLY SUBMITTED THAT THIS WAS A GOO D REASON TO EXCLUDE THIS COMPANY ALSO FROM THE LIST O F COMPARABLES. 20. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ORDER OF THE LOWER AUTHORITIES REGARDING THE INCLUS ION OF TATA ELXSI AND FLEXTRONICS SOFTWARE SYSTEMS LTD., I N THE LIST OF COMPARABLES. HE REITERATED THE CONTENTS OF PARA 14.2.25 OF THE TPO'S ORDER. HE ALSO READ OUT THE FO LLOWING PORTION FROM THE TPO'S ORDER : 'THUS AS STATED ABOVE BY THE COMPANY, THE FOLLOWING FACTS EMERGE : 1. THE COMPANY'S SOFTWARE DEVELOPMENT AND SERVICES SEGMENT CONSTITUTES THREE SUB-SEGMENTS I) PRODUCT DESIGN SERVICES; II) ENGINEERING DESIGN SERVICES AND III) VISUAL COMPUTING LABS. 2. THE PRODUCT DESIGN SERVICES SUB-SEGMENT IS INTO EMBEDDED SOFTWARE DEVELOPMENT. THUS THIS SEGMENT IS INTO SOFTWARE DEVELOPMENT SERVICES. 3. THE CONTRIBUTION OF THE EMBEDDED SERVICES SEGMENT IS TO THE TUNE OF RS.230 CRORES IN THE TOTA L SEGMENT REVENUE OF RS.263 CRORES. EVEN IF WE CONSIDER THE OTHER TWO SUB-SEGMENTS PERTAIN TO IT ENABLED SERVICES, THE 87.45% (75%) OF THE 14 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. SEGMENT'S REVENUES IS FROM SOFTWARE DEVELOPMENT SERVICES. 4. THIS SEGMENT QUALIFIES ALL THE FILTERS APPLIED B Y THE TPO.' REGARDING FLEXTRONICS SOFTWARE SYSTEMS, THE FOLLOWI NG EXTRACT FROM PAGE 143 OF TPO'S ORDER WAS READ OUT B Y HIM AS HIS SUBMISSIONS : 'IT IS VERY PERTINENT TO MENTION HERE THAT THE COMPANY WAS CONSIDERED BY THE TAXPAYER AS A COMPARABLE FOR THE PRECEDING ASSESSMENT YEAR I.E., AY 2006-07. WHEN THE SAME WAS ACCEPTED BY THE TPO AS A COMPARABLE, THE SAME WAS NOT OBJECTED TO IT BY THE TAXPAYER. AS THE FACTS MENTIONED BY TH E TAXPAYER ARE THE SAME AND THESE WERE THERE IN THE EARLIER FY 2005-06, THERE IS NO REASON WHY THE TAXPAYER IS OBJECTING TO IT. HOW THE COMPANY IS FUNCTIONALLY SIMILAR IN THE EARLIER FY 2005-06 BUT THE SAME IS NOT FUNCTIONALLY SIMILAR FOR THE SUBSEQUENT FY 2006-07 EVEN WHEN NO FACTS HAVE BEEN CHANGED FROM THE PRECEDING YEAR. THUS THE TAXPAYER IS ARGUING AGAINST THIS COMPARABLE AS THE COMPANY WAS NOT CONSIDERED AS A COMPARABLE BY THE TAXPAYER FOR THE PRESENT FY 2006-07.' 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE FACTS AND MATERIALS ON RECORD. AFTER CONSIDERIN G THE SUBMISSIONS, WE FIND THAT TATA ELXSI AND FLEXTRONIC S ARE FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE AN D HENCE THEY DESERVE TO BE DELETED FROM THE LIST OF SIX COMPARABLES AND HENCE THERE REMAINS ONLY FOUR COMPANIES AS COMPARABLES, AS LISTED BELOW: 26.5. FOLLOWING THE AFORESAID DECISION OF THE TRIBU NAL, WE HOLD THAT M/S.TATA ELXSI LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. 10.2 ITAT, HYDERABAD BENCH FOLLOWING THE AFORESAID DECISION OF THE ITAT, BANGALORE BENCH ALSO EXCLUDED THESE FOUR COMP ANIES IN CASE OF M/S KENEXA TECHNOLOGIES PVT. LTD. VS. DCIT IN IT A NO. 243/HYD/2014 DT. 14/11/2014. RESPECTFULLY FOLLOWING THE DECISIONS OF THE ITAT, WE DIRECT AO/TPO TO EXCLUDE THESE FOUR CO MPANIES. AS FAR AS COMP-U LEARN GLOBAL TECH INDIA LTD. IS CONCERNED , ITAT, HYDERABAD BENCH IN CASE OF M/S KENEXA TECHNOLOGIES PVT. LTD. VS. DCIT (SUPRA) OBSERVED AS UNDER: 15 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 39. THE ASSESSEE SUBMITTED BEFORE THE DRP THAT COM P-U- LEARN TECH INDIA LTD. WAS ENGAGED IN THE DEVELOPMEN T OF NEW SOFTWARE (PRODUCT DEVELOPMENT) (PAGE 7 OF THE ANNU AL REPORT) IN ITES CALL CENTRE AND BPO SERVICES (PAGE 11 OF AN NUAL REPORT). IT WAS FURTHER SUBMITTED THAT SCHEDULE XII I OF THE ANNUAL REPORT SHOWS SOFTWARE DEVELOPMENT EXPENDITUR E AT ONLY 25% OF THE TOTAL EXPENDITURE. THE TPO EXTRACTED THE 133(6) NOTICE AND HELD THAT THE COMPANY HAS NIL ONSITE REV ENUE AND SATISFIED ALL THE FILTERS APPLIED BY THE TPO. WE AR E OF THE OPINION THAT SOME MORE ANALYSIS HAS TO BE DONE AND WE DIRECT THE TPO TO LOOK INTO THE FINANCIAL STATEMENT OF THE COMPANY AND ALSO PROVIDE AN OPPORTUNITY TO THE ASSESSEE TO SUBM IT RELEVANT DETAILS TO SUBSTANTIATE ITS CLAIM THAT COMP-U-LEARN TECH INDIA LTD. IS NOT A COMPARABLE COMPANY. CONSISTENT WITH THE VIEW EXPRESSED BY THE COORDINAT E BENCH, WE ALSO REMIT THE ISSUE OF COMPARABILITY OF THIS COMPANY TO AO/TPO WITH SIMILAR DIRECTIONS. 10.3 AS FAR AS PERSISTENT SYSTEMS PVT. LTD. IS CONC ERNED, IT IS THE CONTENTION OF THE LEARNED AR THAT THIS COMPANY CANN OT BE A COMPARABLE AS IT IS ENGAGED IN DEVELOPMENT OF SOFTW ARE PRODUCT AND PRODUCT DESIGNING. ON A PERUSAL OF THE EXTRACTS OF ANNUAL REPORT OF THIS COMPANY FOR THE FY 2008-09 SUBMITTED BY LD. AR , IT IS NOTICED THAT THE COMPANY HAS CLAIMED THAT IT WAS FORMED MA INLY TO PROVIDE SOFTWARE DEVELOPMENT SERVICES. HOWEVER, THE P&L ACC OUNT FOR THE YEAR ENDED 31/03/2009, A COPY OF WHICH HAS BEEN SUB MITTED BEFORE US, INDICATES THAT IT HAS SHOWN INCOME FROM SALE O F SOFTWARE SERVICES AS WELL AS PRODUCTS. THEREFORE, UNLESS SEGMENTAL DE TAILS ARE AVAILABLE, THE COMPANY CANNOT BE TREATED AS COMPARA BLE. MOREOVER, IN CASE OF M/S 3DPLM SOFTWARE SOLUTIONS LTD. VS. DC IT, IT(TP) NO. 1303/BANG/2012, THE ITAT BANGALORE BENCH HELD AS UN DER: WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LT D., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN S ERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVIC ES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSE E, THE SEGMENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFO RE, FOLLOWING THE PRINCIPLE ENUNCIATED IN THE DECISION OF THE MUM BAI TRIBUNAL 16 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. L TD. (SUPRA) THAT IN THE ABSENCE OF SEGMENTAL DETAILS / INFORMAT ION A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABIL ITY ANALYSIS, WE HOLD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. THOUGH, THE AFORESAID FINDING OF THE COORDINATE BEN CH RELATES TO THE AY 2008-09, BUT, IN OUR VIEW, IT WILL ALSO EQUALLY APPLY TO AY UNDER CONSIDERATION AS FACTS ARE IDENTICAL. THEREFORE, R ESPECTFULLY FOLLOWING THE VIEW EXPRESSED BY THE COORDINATE BENCH, WE EXCL UDE THIS COMPANY AS COMPARABLE. 10.4 WITH REGARD TO R SYSTEMS INTERNATIONAL LTD., I T IS THE CONTENTION OF THE ASSESSEE THAT THE COMPANY CANNOT BE SELECTED AS A COMPARABLE AS IT HAS A DIFFERENT FINANCIAL YEAR END ING THAN ASSESSEE. AS CAN BE SEEN FROM THE P&L ACCOUNT STATEMENT OF R SYSTEMS INTERNATIONAL LTD. FOR THE AY 2008-09, A COPY OF WH ICH HAS BEEN PLACED BEFORE US BY LD. AR, THE COMPANY FOLLOWS 31 ST DECEMBER AS ITS YEAR ENDING WHEREAS ASSESSEE IS HAVING ITS YEAR END ING ON 31 ST MARCH. THE ITAT MUMBAI BENCH IN CASE OF ACIT VS. HA PAG LLOYD GLOBAL SERVICES PVT. LTD. ITA NO. 8499/MUM/10 HAVIN G FOUND THAT THIS COMPANY HAS A DIFFERENT FINANCIAL YEAR ENDING THAN ASSESSEE, OBSERVED AS UNDER: 7.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED T HAT UNLESS THE FINANCIAL YEAR-END OF A COMPARABLE CASE MATCHES WITH THAT OF THE ASSESSEE, IT CANNOT BE CONSIDERED AS COMPARABLE BECAUSE THE FIGURES OF DIFFERENT FINANCI AL YEAR ENDINGS ARE DISTORTED. HE RELIED ON AN ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN CASE OF SANDSTONE A DVISORS (P) LTD. VS. ACIT, [2013] 32 TAXMANN.COM 216, THE T RIBUNAL AFTER CONSIDERING THE PRESCRIPTION OF RULE 10B(4) A ND AN ANOTHER CASE OF PUNE BENCH OF THE TRIBUNAL IN HONEYWELL AUT OMATION INDIA LTD. VS. DCIT (IT APPEAL NO. 4(PN) OF 2008, D ATED 11/02/2009) HAS HELD THAT IT IS MANDATORY FOR THE P URPOSES OF COMPARING THE DATA OF AN UNCONTROLLED TRANSACTION W ITH AN INTERNATIONAL TRANSACTION THAT THE SAME MUST RELATE TO THE FINANCIAL YEAR ENDING SIMILAR TO THAT OF THE ASSESS EE. THE LD. DR CONTENDED THAT SINCE THE CASE OF CMC LTD HAS A DIFF ERENT FINANCIAL YEAR ENDING VIS--VIS THAT OF THE ASSESSE E, THE SAME 17 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. OUGHT TO HAVE BEEN EXCLUDED. NO CONTRARY PRECEDENT WAS BROUGHT TO OUR NOTICE BY THE LEARNED AR. IN FACT, T HE ARGUMENT ADVANCED BY THE LD. DR IN THIS REGARD WAS NOT SERIO USLY CHALLENGED BY THE LD. AR. RESPECTFULLY FOLLOWING TH E PRECEDENT, WE HOLD THAT THIS CASE SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. AS FACTS ARE IDENTICAL RESPECTFULLY FOLLOWING THE A FORESAID OBSERVATION OF THE COORDINATE BENCH, WE EXCLUDE THIS COMPANY FR OM COMPARABILITY ANALYSIS. 10.5 AS FAR AS THINK SOFT GLOBAL SERVICES LTD. IS C ONCERNED, ASSESSEE HAS OBJECTED TO INCLUSION OF THE AFORESAID COMPANY ON THE REASONING THAT IT IS FUNCTIONALLY DIFFERENT AS IT I S A PRODUCT BASED COMPANY AND PROVIDES TESTING SERVICES. ON A PERUSA L OF THE ANNUAL REPORT OF THIS COMPANY, EXTRACT OF WHICH WAS SUBMIT TED BEFORE US, IT IS SEEN THAT THE COMPANY IS PREDOMINANTLY INTO SOFTWAR E TESTING. IN CASE OF TRIOLOGY E BUSINESS VS. DCIT, ITA NO. 1054/BANG/ 11, DTD. 23/11/12 IT HAS BEEN HELD BY COORDINATE BENCH THAT SOFTWARE TESTING SERVICES CANNOT BE EQUATED WITH SOFTWARE DEVELOPMEN T SERVICES. THEREFORE, WE FIND MERIT IN THE CONTENTION OF LD. A R. ACCORDINGLY, WE HOLD THAT THIS COMPANY CANNOT BE TREATED AS COMPARA BLE TO ASSESSEE. 10.6 AS FAR AS THIRDWARE SOLUTIONS IS CONCERNED, A SSESSEE HAS SOUGHT EXCLUSION OF THE AFORESAID COMPANY BECAUSE I T IS INTO PRODUCT DEVELOPMENT AND PURCHASE AND SALE OF LICENCES. IT IS FURTHER CONTENTION OF ASSESSEE THAT THOUGH SEGMENTAL DETAIL S FOR SALES IS AVAILABLE BUT NO EXPENDITURE BIFURCATION IS AVAILAB LE, WHICH MAKES IT IMPOSSIBLE TO CORRECTLY DETERMINE THE OPERATING MAR GIN OF SOFTWARE SERVICES. ON A PERUSAL OF THE BREAK-UP OF SALES OF THIS COMPANY AS ON 31 ST MARCH, 2009, THE CONTENTION OF ASSESSEE APPEARS TO BE CORRECT. FURTHER, ITAT BANGALORE BENCH IN CASE OF 3DPLM SOFT WARE SOLUTIONS LTD. VS. DCIT (SUPRA), HAS HELD AS UNDER: 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE 18 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. MATERIAL ON RECORD THAT THE COMPANY IS ENGAGED IN P RODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, THE SEGMENTAL PROFIT AND LOS S ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVEL OPMENT ARE NOT GIVEN SEPARATELY. FURTHER, AS POINTED OUT BY TH E LEARNED AUTHORISED REPRESENTATIVE, THE PUNE BENCH OF THE TR IBUNAL IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (SUPRA) HAS DIRECTED THAT SINCE THE INCOME OF THIS COMPANY INCL UDES INCOME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABLE FOR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON H AND, THE ASSESSEE IS RENDERING SOFTWARE DEVELOPMENT SERVICES . IN THIS FACTUAL VIEW OF THE MATTER AND FOLLOWING THE AFORE CITED DECISION OF THE PUNE TRIBUNAL (SUPRA), WE DIRECT THAT THIS C OMPANY BE OMITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. 10.7 THE LD. DR HAS NOT BROUGHT ANY MATERIAL TO OUR NOTICE TO DEMONSTRATE THAT THE AFORESAID FINDING OF THE COOR DINATE BENCH WILL NOT BE APPLICABLE TO AY UNDER CONSIDERATION. THEREF ORE, FOLLOWING THE VIEW EXPRESSED BY THE ITAT BANGALORE BENCH, WE EXCL UDE THIS COMPANY FROM THE LIST OF COMPARABLES. 10.8 AS FAR AS I-GATE GLOBAL SOLUTIONS LTD. IS CONC ERNED, IT IS THE CONTENTION OF LD. AR THAT THE COMPANY IS HAVING HUG E TURNOVER OF MORE THAN RS. 900 CRORES, AND IS A RELATIVELY BIG COMPAN Y HAVING PRESENCE IN VARIOUS COUNTRIES AND ENJOYS PREMIUM PRICING. HE HAS FURTHER SUBMITTED THAT THE COMPANY OWNS VARIOUS INTANGIBLES IN ITS NAME AND IS HAVING CLOSING STOCK OF RAW MATERIALS WHICH SIGN IFY THAT IT IS INTO DEVELOPMENT OF PRODUCT. WE HAVE CONSIDERED THE SUBM ISSIONS OF THE PARTIES. ON A PERUSAL OF THE P&L ACCOUNT OF THIS CO MPANY FOR THE YEAR ENDED MARCH 2009, A COPY OF WHICH IS SUBMITTED BY L D. AR, IT IS SEEN THAT THE COMPANY HAS CLAIMED EXPENSES TOWARDS RAW MATERIALS, STORES AND SPARES. THEREFORE, IT NEEDS TO BE EXAMIN ED IN DETAIL WHETHER ASSESSEES CLAIM THAT THE COMPANY IS INTO P RODUCT DEVELOPMENT IS CORRECT. AS RELEVANT INFORMATIONS RE QUIRED FOR COMING TO A DEFINITE CONCLUSION ARE NOT BEFORE US, WE ARE INCLINED TO REMIT THE ISSUE OF COMPARABILITY OF THIS COMPANY TO AO/TPO FO R CONSIDERING AFRESH. FURTHER, WE MAY OBSERVE THAT IN CASE OF TRI OLOGY E BUSINESS 19 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. (SUPRA) THIS COMPANY HAS BEEN EXCLUDED ON THE BASI S OF HIGH TURNOVER. THEREFORE, THIS ASPECT IS ALSO REQUIRED T O BE EXAMINED BY AO/TPO WHILE DECIDING COMPARABILITY OF THIS COMPANY . 10.9 AS FAR AS ZYLOG SYSTEMS LTD. IS CONCERNED, IT IS THE CONTENTION OF THE LD. AR THAT DURING THE YEAR COMPANY HAS MADE ACQUISITIONS WHICH COULD BE HAVING AN IMPACT OVER THE FINANCIALS OF THE COMPANY AS THE REVENUE HAS SUBSTANTIALLY INCREASED COMPARED TO THE PRECEDING YEAR. ON A PERUSAL OF THE EXTRACT OF ANNUAL REPORT FOR THE FY 2008-09 OF THIS COMPANY, WHICH WERE PLACED BEFORE US BY LEA RNED AR, IT IS SEEN THAT DURING THE FY 2008-09, THE COMPANY HAS AC QUIRED FAIR FAX CONSULTING INC. AND DUCONT FZ LLC THROUGH ITS WHOLL Y OWNED SUBSIDIARY ZYLOGBV LTD.. THE COMPANY ITSELF HAS ADM ITTED IN THE ANNUAL REPORT THAT BENEFITS FROM SUCH ACQUISITION I NCLUDE ACCESS TO NEW CLIENTS, NEW GEOGRAPHICAL AREAS AND NEW SERVICE OFFERINGS AS WELL AS AN INCREASE IN PER CAPITA REVENUE. FROM TH E EXTRACTS OF THE ANNUAL REPORT, IT IS SEEN THAT THERE IS SUBSTANTIAL INCREASE IN REVENUE IN THE IMPUGNED AY COMPARED TO THE PRECEDING AY. T HEREFORE, CONSIDERING THE FACT THAT THE ACQUISITIONS MADE BY THE COMPANY DURING THE RELEVANT FY COULD HAVE IMPACTED THE REVENUE EAR NING AND PROFITABILITY OF THE COMPANY, IT WILL NOT BE SAFE T O TREAT THE AFORESAID COMPANY AS A COMPARABLE. ACCORDINGLY, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 10.10 AS FAR AS SASKEN COMMUNICATION TECHNOLOGIES LTD IS CONCERNED, THE MAIN THRUST OF THE LEARNED ARS CONT ENTION IS THE COMPANY IS ALSO DEVELOPING PRODUCTS AND SEGMENTAL D ETAILS ARE NOT AVAILABLE RELATING TO COSTS. ON A PERUSAL OF THE EX TRACTS OF ANNUAL REPORT OF THE AFORESAID COMPANY SUBMITTED BEFORE US BY LD. AR IT IS SEEN THAT THE COMPANY IS INVOLVED IN PROVIDING SOFT WARE DEVELOPMENT SERVICES AS WELL AS DEVELOPMENT OF SOFTWARE PRODUCT S ALSO. FROM THE BREAKUP OF REVENUE EARNED DURING THE RELEVANT FY, I T IS SEEN THAT AS AGAINST REVENUE OF RS. 40531.20 LAKHS EARNED FROM S OFTWARE 20 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. DEVELOPMENT SERVICES, RS. 6146.43 LAKHS WERE FROM S OFTWARE PRODUCTS. THOUGH, IT APPEARS THAT SUBSTANTIAL REVE NUE IS EARNED FROM SOFTWARE DEVELOPMENT SERVICES, HOWEVER, THE COST RE LATING TO EARNING OF SUCH REVENUE HAS TO BE TAKEN INTO ACCOUNT. IT IS THE CONTENTION OF THE ASSESSEE THAT SEGMENTAL DETAILS OF COST IS NOT AVAILABLE FROM THE ANNUAL REPORT. SINCE THE ENTIRE ANNUAL REPORT HAS N OT BEEN PLACED BEFORE US, WE ARE NOT IN A POSITION TO GIVE A CONCL USIVE FINDING IN THIS REGARD. WE, THEREFORE, REMIT THE ISSUE RELATING TO COMPARABILITY OF THIS COMPANY FOR FRESH ADJUDICATION BY THE AO/TPO. HOWE VER, WE MAKE IT CLEAR THAT UNLESS SEGMENTAL DETAILS OF COST ARE AVA ILABLE, IT WILL BE BETTER TO IGNORE THIS COMPANY. 11. THE AO/TPO IS DIRECTED TO RE-COMPUTE THE ALP IN TERMS WITH THE DIRECTION HEREINABOVE. 12. GROUND NO. 14 READS AS UNDER: LD. TPO/DRP/AO ERRED IN TREATING THE DEFERRED REVEN UE EXPENDITURE AS OPERATING COST WITHOUT APPRECIATING THE FACT THAT THE SAID EXPENDITURE IS NOT INCURRED IN CONNECTION WITH THE EXPORT EARNINGS. 13. IN COURSE OF PROCEEDING BEFORE TPO, ASSESSEE SU BMITTED THAT THE OPERATING COSTS ALSO INCLUDE AMORTIZATION OF DE FERRED REVENUE EXPENSES TO THE TUNE OF RS. 1,19,01,104, WHICH NEED S TO BE EXCLUDED AS IT CANNOT BE CONSIDERED TO BE OPERATIONAL EXPE NDITURE. TPO HOWEVER REJECTED ASSESSEES CLAIM WITH THE OBSERVAT ION THAT AS THE ANNUAL REPORT DOES NOT CONTAIN ANY ENTRY TO SUPPORT ASSESSEES CLAIM, THE EXPENDITURE CANNOT BE TREATED AS NON-OPERATIONA L. THOUGH, ASSESSEE OBJECTED TO SUCH FINDING OF TPO BEFORE DRP , BUT, THE DRP DID NOT FIND ANY MERIT IN THE CONTENTIONS OF ASSESS EE. THE DRP OBSERVED THAT THE P&L ACCOUNT CLEARLY INDICATES THA T ASSESSEE DEBITED AMOUNT OF RS. 1,19,01,104 TOWARDS AMORTIZA TION OF INTANGIBLE ASSETS BY CONSIDERING THE SAME TO BE NON-OPERATIONA L. THE DRP OBSERVED, INTANGIBLE ASSETS ARE DEVELOPED AS A RES ULT OF NORMAL 21 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. BUSINESS OPERATIONS AND, THEREFORE, THEY NEED TO BE TREATED AS OPERATIONAL. ACCORDINGLY, THEY REJECTED THE CLAIM O F ASSESSEE. 14. BEFORE US, THE LD. AR MORE OR LESS REITERATING THE SUBMISSIONS MADE BEFORE THE DEPARTMENTAL AUTHORITIES, SUBMITTED THAT EVERY EXPENDITURE DEBITED TO THE P&L ACCOUNT CANNOT BE CO NSIDERED AS OPERATIONAL. THE LD. AR SUBMITTED THAT DURING FY 20 02-03, ASSESSEE HAD UNDERTAKEN DEVELOPMENT OF CERTAIN SOFTWARE WHIC H WAS SPREAD OVER MORE THAN ONE FY. AS DEVELOPMENT WAS SPREAD OV ER SEVERAL YEARS THE COMPANY DECIDED TO CAPITALIZE ALL THE COS T THAT WERE INCURRED ON THE SOFTWARE DEVELOPMENT. FOLLOWING THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLE AND RELEVANT ACCOUNTI NG STANDARD 1/5 TH OF THE CAPITALIZED EXPENDITURE COST WAS AMORTIZED E VERY YEAR. IT WAS SUBMITTED THAT AMORTIZATION COMMENCED FROM THE YEAR IN WHICH THE DEVELOPMENT OF SOFTWARE WAS COMPLETED AND SOLD. THU S, IT WAS SUBMITTED BY LD. AR THAT THE DEFERRED REVENUE EXPEN DITURE SHOULD NOT HAVE BEEN CONSIDERED AS PART OF OPERATING COST AS I T IS NOT INCURRED IN CONNECTION WITH EXPORT EARNINGS. 15. THE LEARNED DR, ON THE OTHER HAND, RELIED ON TH E ORDERS OF THE TPO AND DRP. 16. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIALS ON RECORD. WE AGREE WITH THE SUBMISSIONS OF THE LD. AR THAT EVERY EXPENDITURE DEBITED TO THE P&L ACCOUNT CANNOT BE CO NSIDERED AS OPERATIONAL IN NATURE. FROM THE OBSERVATIONS MADE B Y TPO, IT APPEARS, HE HAS REJECTED ASSESSEES CLAIM ONLY FOR THE REASON THAT NO SUCH ENTRIES WERE FOUND IN THE ANNUAL REPORT. THE T PO HAS NOT PROPERLY EXAMINED THE NATURE OF EXPENDITURE. HOWEVE R, AT THE SAME TIME, ASSESSEE HAS TO DEMONSTRATE THAT SUCH EXPENDI TURE WAS NOT CLAIMED IN ANY PRECEDING ASSESSMENT YEARS. THEREFO RE, CONSIDERING THE FACTS OF THE CASE, WE ARE INCLINED TO REMIT THI S ISSUE BACK TO THE 22 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. FILE OF AO/TPO FOR DECIDING THE ISSUE AFRESH AFTER PROVIDING REASONABLE OPPORTUNITY OF HEARING TO ASSESSEE. THI S GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 17. IN GROUND NO. 15, ASSESSEE HAS RAISED THE NON-E XCLUSION OF A REASONABLE AMOUNT OF EMPLOYEE COST FROM THE OPERATI NG COST WHILE CALCULATING THE OPERATING MARGIN. 18. IT WAS CONTENDED BY ASSESSEE BEFORE DRP THAT IT MAINTAINS EXCESS CAPACITY STAFF OF ABOUT 10%. THE EXCESS CAPA CITY DOES NOT GENERATE ANY REVENUE ON A REGULAR BASIS BUT IS USEF UL ONLY WHEN ADDITIONAL WORK FLOWS IN OR IN CASE OF UNFORESEEN S TAFF ATTRITION. ASSESSEE STATED THAT IT HAS TO MAINTAIN EXCESS STAF F CAPACITY AS IT CANNOT QUICKLY HIRE PEOPLE WITH REQUIRED SKILLS, KN OWLEDGE AND EXPERIENCE. IN THIS REGARD ASSESSEE ALSO RELIED UPO N A DECISION OF THE ITAT DELHI BENCH IN CASE OF DCIT VS. VERTEX CUSTOME R SERVICE INDIA P. LTD., 126 TTJ 184. THE DRP REJECTED ASSESSEES C ONTENTION BY OBSERVING THAT IT IS A COMMON PRACTICE TO MAINTAIN EXCESS STAFF CAPACITY IN THIS FIELD. THE DRP OBSERVED THAT UNLES S THE ASSESSEE KEEPS EXCESS STAFF IT HAS TO ENGAGE PERSONS ON CONT RACT BASIS BY PAYING HIGHER WAGES. IT WAS OBSERVED THAT THE EXPEN DITURE ON EXCESS STAFF CAPABILITY IS NOT AN EXTRAORDINARY AND NOT OF NON-RECURRING NATURE, HENCE, IT CANNOT BE EXCLUDED KEEPING IN VIE W THE OECD GUIDELINES. FURTHER, THE DRP OBSERVED THAT ASSESSEE HAS ALSO NOT PRODUCED ANY DOCUMENTARY EVIDENCE TO SUPPORT ITS CL AIM. ACCORDINGLY, THEY REJECTED THE CLAIM OF ASSESSEE. 19. BEFORE US, LD. AR SUBMITTED THAT THE INCREASE I N EMPLOYEE COST IS MUCH MORE IN TERMS WITH INCREASE OF REVENUE. LD. AR SUBMITTED THAT WHILE INCREASE IN REVENUE IS TO THE TUNE OF ON LY 23.52%, SALARY PAID DURING THE YEAR INCREASED FROM 9 CRORES TO 23. 3 CRORES, HENCE, SUITABLE ADJUSTMENT FROM OPERATING COST HAS TO BE G IVEN ON ACCOUNT OF SALARIES. 23 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 20. HAVING HEARD THE PARTIES AND PERUSED THE MATERI ALS ON RECORD, WE ARE OF THE VIEW THAT THE MATTER REQUIRES RE-EXAM INATION BY AO/TPO AFTER VERIFYING THE CAUSE FOR QUANTUM JUMP OF SALAR Y IN THE IMPUGNED AY. IF IT IS FOUND THAT PART OF THE EMPLOYEE COST I S NON-OPERATIONAL, THEN, SUITABLE ADJUSTMENT MAY BE GIVEN FROM THE OPE RATING COST. THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 21. GROUND NO. 16 AND 17 ARE ON RISK ADJUSTMENT AN D NEGATIVE WORKING CAPITAL ADJUSTMENT. 22. WHILE COMPUTING THE ALP, TPO DID NOT ALLOW ANY RISK ADJUSTMENT. BEFORE THE DRP, ASSESSEE RAISING THE IS SUE OF RISK ADJUSTMENT, SUBMITTED THAT THOUGH THE TPO EXAMINED THE RISK ASSUMED BY ASSESSEE AND ITS AE, BUT, HE IGNORED TO MAKE NECESSARY ADJUSTMENT TOWARDS RISK. HOWEVER, THE DRP OBSERVED THAT THOUGH, TPO VIDE HIS SHOW CAUSE NOTICE DATED 09/10/2012 HAS CALLED UPON ASSESSEE TO SUBMIT THE CALCULATION OF RISK, BUT, AS SESSEE IN ITS REPLY DATED 06/11/12, DID NOT FURNISH ANY SUCH CALCULATIO N. FURTHER, THE DRP OBSERVED THAT ASSESSEE THOUGH EXPLAINED THE RISK AS SUMED BY IT AND THE AE, BUT, IT DID NOT QUANTIFY HOW EACH TYPE OF R ISK OR THE DIFFERENCE IN EACH RISK AFFECT THE PROFITABILITY OF EACH OF THE COMPARABLE COMPANIES BASED ON THE DATA FOR FY 2008-09. ULTIMAT ELY, THE DRP REJECTED ASSESSEES CLAIM FOR RISK ADJUSTMENT. 23. AS FAR AS WORKING CAPITAL ADJUSTMENT IS CONCERN ED, TPO WHILE COMPUTING THE ALP MADE NEGATIVE WORKING CAPITAL ADJUSTMENT OF (-)3.64% WHICH ENHANCED THE ARMS LENGTH MARGIN OF THE COMPARABLE COMPANIES TO 25.67%. BEFORE THE DRP WHILE OBJECTING TO NEGATIVE WORKING CAPITAL ADJUSTMENT MADE BY TPO, IT WAS SUBM ITTED BY ASSESSEE THAT THE TPO CONSIDERED THE CLOSING BALANC ES OF TRADE RECEIVABLES AND TRADE PAYABLES INSTEAD OF AVERAGE B ALANCES CURRENT ASSETS AND LIABILITIES. ASSESSEE SUBMITTED, THE TPO OUGHT TO HAVE 24 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. CONSIDERED ENTIRE CURRENT ASSETS AND LIABILITIES WI THOUT RESTRICTING HIMSELF TO TRADE RECEIVABLES AND PAYABLES. THE DRP HOWEVER DID NOT FIND MERIT IN THE OBJECTIONS OF ASSESSEE. THE DRP O BSERVED THAT THERE IS NO UNIFORMITY WHEN DEFINITION OF ITEMS RECEIVABL ES AND PAYABLES IS CONCERNED, AS DEBTORS INVENTORIES AND CREDITORS ARE CATEGORIZED DIFFERENTLY IN DIFFERENT COMPANIES. THE DRP ALSO OB SERVED THAT NEITHER BEFORE THE PANEL NOR BEFORE TPO ASSESSEE HAS EXPLAI NED THE POSSIBILITY OF EXACT RESULT IN VIEW OF THE AMBIGUIT Y POINTED OUT BY TPO. IT WAS OBSERVED BY DRP, THE BENEFIT CAN BE GIVEN ON LY IN SITUATIONS WHERE THERE IS A GREATER CHANCE OF INCREASING THE C OMPARABILITY LEVELS OF ASSESSEE. HOWEVER, SINCE ASSESSEE DID NOT EXPLAI N THE CHANCE OF INCREASING THE COMPARABILITY LEVEL, ITS CONTENTION CANNOT BE ACCEPTED. ACCORDINGLY, DRP REJECTED THE CLAIM OF ASSESSEE. 24. THE LD. AR SUBMITTED BEFORE US, ASSESSEE FUNCTI ONS UNDER A LIMITED RISK ENVIRONMENT WITH ALMOST ALL THE RISK B EING ASSUMED BY ITS AE. IT WAS SUBMITTED, ASSESSEE BEARS LIMITED BUSINE SS RISKS COMPARED TO INDEPENDENT COMPARABLE COMPANIES DUE T O THE NATURE OF ITS REVENUE MODEL AS IT IS GUARANTEED PROFITS IN P ROVISION OF SOFTWARE DEVELOPMENT SERVICES. HOWEVER, INDEPENDENT COMPANIE S HAVE TO BEAR THE VAGARIES OF THE ECONOMIC AND BUSINESS FACTORS T HAT ARE PREVAILING IN THE INDUSTRY, HENCE, COULD EITHER INCUR LOSSES O R EARN PROFITS BASED ON THE MARKET CONDITIONS. IT WAS SUBMITTED, AS PER RULE 10B(1)(E)(III) AN ADJUSTMENT SHOULD BE MADE TO THE PROFIT MARGIN O F INDEPENDENT COMPARABLE COMPANIES TO TAKE INTO ACCOUNT THE DIFFE RENCES IN FUNCTIONS AND RISKS. HE SUBMITTED, THE OECD TRANSFE R PRICING GUIDELINES ALSO RECOGNIZE ADJUSTMENTS TO BE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN CONTROLLED AND UNCONTROLLED SIT UATION THAT WOULD SIGNIFICANTLY AFFECT THE PRICE CHARGED OR RETURN RE QUIRED BY INDEPENDENT ENTERPRISES. ACCORDINGLY, CONTROLLED AN D UNCONTROLLED TRANSACTIONS ARE COMPARABLE ONLY IF ADJUSTMENT WITH RESPECT TO SIGNIFICANT DIFFERENCES BETWEEN THEM IN TERMS OF RI SKS ASSUMED IS MADE. LD. AR RELIED UPON A DECISION OF THE ITAT BAN GALORE BENCH 25 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. WHEREIN RISK ADJUSTMENT OF 6.75% WAS ALLOWED. HE SU BMITTED, BENEFIT OF AT LEAST 3% MAY BE GIVEN TO ASSESSEE AS RISK ADJ USTMENT. AS FAR AS NEGATIVE WORKING CAPITAL IS CONCERNED, LD. AR REITE RATED SUBMISSIONS MADE BEFORE DRP. 25. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE OR DER OF TPO AND DRP ON THIS ISSUE. 26. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES A ND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIALS ON RECORD. IT IS EVIDENT FROM THE ORDERS OF TPO AND DR P AS WELL AS MATERIALS ON RECORD THAT NEITHER IN ITS TP STUDY NO R BEFORE THE TPO AND DRP, ASSESSEE HAS SUBMITTED ANY COMPUTATION MAD E ON A SCIENTIFIC BASIS TOWARDS RISK ADJUSTMENT. THOUGH B ENEFIT OF RISK ADJUSTMENT CAN BE GIVEN IN AN APPROPRIATE CASE, BUT , IT HAS TO BE ON THE BASIS OF FACTS AND EVIDENCE AND CANNOT BE GRA NTED IN A ROUTINE MANNER. THOUGH, IT MAY BE TRUE, IN CASE OF A CAPTIV E SERVICE PROVIDER AE TAKES ALL MAJOR RISKS. BUT, AT THE SAME TIME ASS ESSEE ALSO BEARS SINGLE CUSTOMER RISK, AS IN THE EVENT OF ANY LOSS O R DAMAGE TO THE BUSINESS OF AE ASSESSEE IS ALSO LIKELY TO SUFFER. M OREOVER, ASSESSEE HAS TO DEMONSTRATE RISK ASSUMED BY EACH OF THE COMP ARABLE COMPANIES VIS--VIS THE ASSESSEE. THE BASIS FOR ADJ USTMENT TOWARDS RISK MUST COME FROM ASSESSEES SIDE. AS ASSESSEE HA S NOT PROPERLY ESTABLISHED ITS CASE EITHER BEFORE THE TPO OR DRP B Y BRINGING FACTS AND MATERIALS ON RECORD, WE ARE INCLINED TO REMIT T HIS ISSUE BACK TO THE FILE OF AO/TPO FOR DECIDING AFRESH AFTER AFFORD ING AN OPPORTUNITY OF BEING HEARD TO ASSESSEE. WHILE DOING SO, AO/TPO MUS T ALSO EXAMINE ASSESSEES CLAIM IN RESPECT OF WORKING CAPITAL ADJU STMENT. GROUND NO. 16 & 17 ARE ALLOWED FOR STATISTICAL PURPOSES. 27. IN COURSE OF HEARING, LD. AR SUBMITTED BEFORE U S THAT THE TPO HAS NOT EXCLUDED THE DOMESTIC SALES WHILE COMPUTING THE ALP. WE MAKE IT CLEAR THAT FOR DETERMINING THE ALP, AO HAS TO CONSIDER THE 26 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. CONTROLLED TRANSACTIONS I.E. THE INTERNATIONAL TRAN SACTION ENTERED INTO BY ASSESSEE WITH ITS AE ALONE. IN VIEW OF THE ABOVE , WE DIRECT THE AO/TPO TO DETERMINE THE ALP AFRESH KEEPING IN VIEW OUR DIRECTIONS HEREINABOVE AND AFTER EXTENDING REASONABLE OPPORTUN ITY OF BEING HEARD TO ASSESSEE. 28. WE HAVE CONFINED OUR FINDINGS TO THE GROUNDS/IS SUES SPECIFICALLY ARGUED BEFORE US BY LD. AR. AS LD. AR HAS NOT ARGUED THE OTHER GROUNDS RAISED BY ASSESSEE IN THE MEMORANDUM OF APPEAL AS WELL AS IN ADDITIONAL GROUNDS, THEY ARE TREATED AS NOT PRESSED, HENCE, DISMISSED. 29. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. ITA NO. 608/HYD/14 BY THE DEPARTMENT 30. THE ONLY ISSUE IN THE DEPARTMENTS APPEAL IS IN RESPECT OF DIRECTION OF THE DRP TO EXCLUDE COMMUNICATION CHARG ES, INSURANCE, ETC. FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURN OVER WHILE COMPUTING DEDUCTION U/S 10A. 31. HAVING HEARD THE PARTIES, WE ARE OF THE VIEW TH AT THE DIRECTIONS OF LD. DRP CANNOT BE DISTURBED. AS CAN BE SEEN FRO M THE DECISIONS REFERRED TO BY LD. DRP IN PARA 9.2 OF ITS ORDER, TH E ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE. IN VIEW OF THE AFORE SAID, WE UPHOLD THE ORDER OF LD. DRP ON THIS ISSUE AND DISMISS THE GROU NDS RAISED BY THE DEPARTMENT. 32. IN THE RESULT, DEPARTMENTS APPEAL IS DISMISSED . 27 ITA NO. 464 & 608/HYD/2014 PLANET ONLINE PVT. LTD. 33. TO SUM UP, ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF THE DEPARTMENT IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 30/01/2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 30 TH JANUARY, 2015 KV COPY TO:- 1) PLANT ONLINE PVT. LTD., 1-8-271, 272 & 273, 6 TH FLOOR, ASHOKA BHOOPAL CHAMBERS, SARDAR PATEL ROAD, SECUNDERABAD 500 003. 2) ACIT, CIRCLE 16(3), HYDERABAD 500 004. 3) DRP, HYDERABAD 4) TPO-II, 6 TH FLOOR, IT TOWERS, 10-2-3, AC GUARDS, HYD-004. 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.