Symantec Software and Services India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 614/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8038 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 26-10-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 15-03-2016
• Court: TRIBUNAL
• Department Lawyers: V VIVEKANANDAN
• Assessee Lawyers: ARVIND SONDE; SWAPNIL BATHA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 10AA; 133(6); 10B; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . , # $ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO. 614/MDS/2016 / ASSESSMENT YEAR : 2011-12 M/S. SYMANTEC SOFTWARE AND SERVICES INDIA PRIVATE LIMITED, 1/124, SHIVAJI GARDENS, DLF INFO CITY, BLOCK NO. 1C, 5TH FLOOR, MONLIGHT STOP, NANDAMBAKKAM POST, RAMAPURAM, MOUNT-POONAMALEE ROAD, CHENNAI, TAMIL NADU - 600 089. [PAN: AAKCS 5422K] VS. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 6(2), CHENNAI. ( / APPELLANT) ( / RESPONDENT) & ' / APPELLANT BY : SHRI ARVIND SONDE, ADVOCATE, & SHRI SWAPNIL BATHA, CA *+& ' / RESPONDENT BY : SHRI V. VIVEKANANDAN, CIT ' /DATE OF HEARING : 26.10.2016 ' /DATE OF PRONOUNCEMENT : 20.01.2017 /O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER: THE ASSESSEE HAS FILED AN APPEAL AGAINST THE ORDER OF DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -6(2) U/S. 143(3) R.W.S. :-2-: I.T.A. NO. 614/MDS/2016 92CA(4) OF THE ACT, DATED 09.02.2016 IN PURSUANCE O F THE DIRECTIONS OF DRP CHENNAI ORDER DATED 27.03.2015. 2. THE ASSESSEE HAS RAISED THE GROUND NO. 1 TO 12 P ERTAINING TO TRANSFER PRICING ADJUSTMENTS AND GROUND NO. 13 & 14 , WHERE THE LD. AO ERRED IN REDUCTION OF ENTIRE EXPENDITURE INCURRED IN FORE IGN CURRENCY INSURANCE EXPENSES FROM THE EXPORT TURNOVER WITHOUT REDUCING FROM THE TOTAL TURNOVER U/S. 10AA. HOWEVER, AT THE TIME OF HEARING THE LD. AR OF THE ASSESSEE HAS MADE ARGUMENTS IN RESPECT OF SELECTION OF COMPARABL ES BY TRANSFER PRICING OFFICER OUT OF 11 COMPARABLES SELECTED, THE LD. AR PRAYED 4 COMPARABLES TO BE EXCLUDED FOR DETERMINING THE ARMS LENGTH PRICE. 3. THE BRIEF FACTS OF THE CASE, THE ASSESSEE COMPAN Y IS SOFTWARE DEVELOPMENT AND TECHNICAL SUPPORT SERVICE PROVIDER FOR SYMANTEC GROUP COMPANIES AND OPERATES AS CONTRACT DEVELOPMENT CENT RE FOR PROVIDING SOFTWARE SERVICES TO ITS AE INCLUDING SOFTWARE CODI NG, TESTING OF DEVELOPMENT WORKS AND PROVIDING DOCUMENTATION IN RELATION TO IN DIAN WORKS. THE ASSESSEE FILED RETURN OF INCOME ELECTRONICALLY ON 29.11.2011 WITH TOTAL INCOME OF RS. 2,55,42,884/- AND THE CASE WAS SELECTED FOR SCRUTIN Y AND NOTICE U/S. 143(2) OF THE ACT WAS ISSUED. IN COMPLIANCE TO THE NOTICE TH E LD. AR OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FILED DETAILS AND WR ITTEN SUBMISSIONS AND FURNISHED CLARIFICATIONS. THE ASSESSING OFFICER IN THE ASSESSMENT PROCEEDINGS :-3-: I.T.A. NO. 614/MDS/2016 FOUND THAT THE ASSESSEE COMPANY HAS INTERNATIONAL T RANSACTIONS MORE THAN RS. 15 CRORES WITH ITS AE AND VERIFIED FORM NO. 3CE B AND FURTHER REFERRED TO TRANSFER PRICING OFFICER U/S. 92 CA(1) OF THE ACT O N 28.08.2013. THE LD. TPO CONSIDERING THE INTERNATIONAL TRANSACTIONS AND PASS ED ORDER NO. CR.S- 327/TPO-3/A.Y.2011-12 DATED 29.01.2015 WITH UPWARD ADJUSTMENT OF RS. 3,54,20,425/- TO THE VALUE OF INTERNATIONAL TRANSAC TIONS AND SUBSEQUENTLY, THE DRAFT ASSESSMENT ORDER WAS PASSED BY THE LD. AO ON 27.03.2015. THE ASSESSEE FILED OBJECTIONS IN FORM 35A BEFORE THE DR P AND THE DRP HAS CONFIRMED THE ADJUSTMENT OF TRANSFER PRICING OFFICE R AND ALSO ADDITION OF CLAIM U/S. 10A OF THE ACT. THE ASSESSEE COMPANY HA S INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISE, SYMANTE C CORPORATION USA AND IN SOFTWARE AND RESEARCH AND DEVELOPMENT SERVICES, CON SULTANCY SERVICES AND TECHNICAL SUPPORT SERVICES AND REIMBURSEMENT OF EXP ENDITURE. SIMILARLY, THE SYMANTEC CORPORATION USA OR SYMANTEC LIMITED AIR LI NE HAS INTERNATIONAL TRANSACTIONS ON REIMBURSEMENT OF EXPENDITURE TO AE. THE LD. TPO FOUND THAT THE ASSESSEE COMPANY HAS ADOPTED TNMM METHOD AS THE MOST APPROPRIATE METHOD. AND THE ASSESSEE IS ENGAGED IN PROVIDING S OFTWARE DEVELOPMENT AND TECHNICAL SUPPORT SERVICES TO ITS ASSOCIATE ENTERPR ISE AND HAS DETERMINED PLI OF 12% WITH 21 COMPARABLES AND THE AVERAGE MARGIN O F COST WORKED OUT TO 13.41%, BUT OUT OF THE 21 COMPARABLES TPO HAS CONSI DERED 12 COMPARABLES WHICH ARE AS UNDER: :-4-: I.T.A. NO. 614/MDS/2016 SL.NO NAME OF THE COMPARABLES % 01. AKSHAY SOFTWARE TECHNOLOGIES PVT. LTD., 02. ACROPETAL TECHNOLOGIES LTD. (SEG) 34.59 03. CAT TECHNOLOGIES LIMITED 10.81 04. E-ZEST SOLUTIONS LIMITED 34.83 05. VRINCHI TECHNOLOGIES LTD., 18.62 06. LARSEN & TOUBRO INFOTECH LTD., 18.01 07. PERSISTENT SYSTEMS SOLUTIONS LTD., 16.00 08. PERSISTENT SYSTEMS LTD., 25.71 09. RS SOFTWARE (INDIA) LTD., 16.36 10. SASKEN COMMUNICATION TECHNOLOGIES LTD., 28.04 11. TATA ELXI LIMITED 8.41 12. YBRANT DIGITAL LTD., 13.60 ON OBJECTIONS BEFORE THE DRP BY THE ASSESSEE, THE D RP HAS EXCLUDED ONE COMPARABLE AKSHAY SOFTWARE TECHNOLOGIES AND CONFIRM ED 11 COMPARABLES AND WAS CONSIDERED BY THE LD. TPO AND GAVE EFFECT OF EX CLUDING OF COMPARABLE AND WORKED OUT THE TRANSFER PRICING ADJUSTMENTS TO RS. 4,30,20,425/- AND THE DRP CONSIDERED 11 COMPARABLES AS PROVIDED BY THE TP O AND CONFIRMED THE ACTION OF ASSESSING OFFICER IN RESPECT OF SECTION 1 0A OF THE ACT EXPORT TURNOVER ADJUSTMENTS. :-5-: I.T.A. NO. 614/MDS/2016 4. ON APPEAL BEFORE THE TRIBUNAL, THE ASSESSEE COMP ANY WANTS TO EXCLUDE FOUR COMPARABLES FROM THE LIST OF COMPARABL ES SELECTED BY THE TPO WHICH READ AS: (I) ACROPETAL TECHNOLOGIES LTD (SEG) (II) E-ZEST SOLUTIONS LIMITED (III) PERSISTENT SYSTEMS LIMITED (IV) SASKEN COMMUNICATION TECHNOLOGIES LIMITED 5. THE LD. AR SUBMITTED THAT THE ACROPETAL TECHNOLO GIES LTD. IT IS FUNCTIONALLY NON-COMPARABLE AS IT IS ENGAGED IN SOF TWARE DEVELOPMENT SOLUTIONS, OTHER NON-COMPARABLE SERVICES AND THE SE GMENTAL INFORMATION IS NOT AVAILABLE AND SUPPORTED THAT HAS SEGMENT REVENUE ON LY IN THE ENGINEERING DESIGN SERVICE, INFORMATION TECHNOLOGY SERVICE, HEA LTH CARE AND ENGAGED IN NON-COMPARABLE BUSINESS ACTIVITIES AS IT INFRASTRUC TURE MANAGEMENT SERVICES, IT SECURITY SERVICES AND OUTSOURCED MAJORITY OF BUS INESS OPERATIONS AND THE 80% OF SALARY COST PERTAINS TO SITE DEVELOPMENT CHA RGES PAID TO TECHNICAL SUB- CONTRACTORS. THE COMPARABLE IS A CLIENT INFRASTRUC TURE FOCUS DELIVERY MODEL AND THE LD. TPO OVERLOOKED THE FACT, IT HAS ON SITE SERVICE OPERATIONS SIMILAR TO AKSHAY SOFTWARE AND RELIED ON THE JUDICIAL DECIS IONS AND PRAYED FOR EXCLUDING THE COMPARABLE. CONTRA, THE LD. DR SUBMI TTED THAT THE COMPARABLE SEGMENT INCLUDES ENGINEERING, DESIGN SERVICES, INFO RMATION TECHNOLOGY :-6-: I.T.A. NO. 614/MDS/2016 SERVICES AND HEALTH CARE AND THE SEGMENTAL INFORMAT ION FOR THE YEAR ENDING 31.03.2011 IS CONSIDERED FOR BENCH MARKING PURPOSES AND ALSO SUBMITTED SOFTWARE DEVELOPMENT WORKS ARE PERFORMED AND ADOPTE D TNMM AND THE LD. TPO HAS RIGHTLY CONSIDERED AND PRAYED FOR DISMISSIN G THE GROUND OF THE ASSESSEE. 6. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS. WE FOUND THAT THE ACROPETAL TE CHNOLOGIES LIMITED IS FUNCTIONALLY NON-COMPARABLE TO THE ASSESSEE COMPANY AS IT IS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE. WHEREAS, THE ASS ESSEE IS IN THE SOFTWARE DEVELOPMENT AND TECHNICAL SUPPORT SERVICES AND THE LD. AR RELIED ON THE DECISION OF (I) ACIT VS INTOTO SOFTWARE INDIA PRIVA TE LIMITED, ITTA NO. 233 OF 2014, (II) AT & T GLOBAL SERVICES INDIA PRIVATE LIM ITED VS. ITO, ITA NO. 1604/BANG/2012, (III) TELCORIDA TECHNOLOGIES INDIA P. LTD VS. ACIT, ITA NO 7821/MUM/2011, (IV) NESS TECHNOLOGIES (INDIA) PVT. LTD., VS. ACIT, ITA NO. 7016/MUM/2012 AND WE FIND IN MINDCREST (INDIA) PVT . LTD., VS. DCIT, ITA NO. 7289/MUM/2012, THIS COMPARABLE HAS BEEN DEALT AT PA RA 7.1 WHICH READ AS UNDER: ' 7.1. LET US NOW CONSIDER THE COMPANY'S USED AS C OMPARABLES BY THE TPO TO SEE WHETHER THEY CAN BE ACCEPTED OR NOT: :-7-: I.T.A. NO. 614/MDS/2016 1. M/S. ACROPETAL TECHNOLOGIES (SEG.) A PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY SHOW S THAT IT IS ENGAGED IN THE DEVELOPMENT OF COMPUTER SOFTWARE. TH E COMPANY HAS ALSO SHOWN INVENTORIES AS WORK-IN-PROGRESS IN I TS BALANCE SHEET AND THERE IS ALSO INCREASE/DECREASE IN INVENTORIES IN ITS PROFIT AND LOSS ACCOUNT AND UNDER THE HEAD EMPLOYEES RELATED O NSITE DEVELOPMENT CHARGES, THERE ARE ONSITE DEVELOPMENT E XPENSES AMOUNTING TO RS. 31.45 CRORES. CONSIDERING THESE FA CTS, IT CAN BE SAFELY CONCLUDED THAT THIS COMPANY HAS TOTALLY DIFF ERENT BUSINESS MODEL. IT IS ALSO SEEN THAT THIS COMPANY DOES NOT P ASS THE TEST OF 75% EXPORT TURNOVER WHICH IS USED AS A FILTER BY TH E TPO HIMSELF. THIS COMPANY WAS ALSO REJECTED BY THE TRIBUNAL IN I TA NO. 7016/M/2012 WHEREIN THE TRIBUNAL HAS HELD THAT THE RATIO OF ONSITE TO TOTAL EMPLOYEE RELATED EXPENSES OF THIS COMPANY COMES TO 86.2%K, THUS FAILING THE ONSITE FILTER. THE TRIBUNA L, BANGALORE BENCH IN ITA NO. 1316/BANG/2010 IN THE CASE OF SYMPHONY M ARKETING SOLUTIONS INDIA PVT. LTD. HAS OBSERVED THAT THE FUN CTIONS PERFORMED BY THE ENGINEERING DESIGN SERVICES SEGMENT OF THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO THE ITES/BPO FUNCTIO NS PERFORMED BY THE ASSESSEE. CONSIDERING ALL THESE FACTS IN TOT ALITY, WE DIRECT FOR THE EXCLUSION OF THIS COMPANY FROM THE FINAL LIST O F COMPARABLES. CONSIDERING THE MUMBAI TRIBUNAL DECISION AND FACTS SUBMITTED, WE DIRECT THE TPO TO EXCLUDE THE COMPANY FROM THE LIST OF COMPARA BLES. 7. THE LD. AR SUBMITTED ON SECOND COMPARABLES E-ZES T SOLUTIONS LIMITED WHICH HAS OPERATING MARGIN OF 34.83% IS FUN CTIONALLY NON-COMPARABLE TO THE ASSESSEE AS IT IS ENGAGED IN PRODUCT ENGINEE RING SERVICES WHICH ARE IN :-8-: I.T.A. NO. 614/MDS/2016 THE HIGH END KNOWLEDGE PROCESS OUTSOURCING (KPO) SE RVICES AND OUTSOURCED PRODUCT DEVELOPMENT SERVICES AND SPECIALIZATION PRO DUCT DESIGN DEVELOPMENT, PRODUCT FEATURE ENHANCEMENT AND OTHERS. THE COMPAR ABLE COMPANY E-ZEST SOLUTIONS LIMITED HAS FOCUSED IN AREAS OF CLOUD COM PUTING, MOBILITY AND BUSINESS INTELLIGENCE. THE LD. AR PLACED RELIANCE ON THE JUDICIAL DECISIONS, WHERE THE E-ZEST SOLUTIONS LIMITED COMPARABLE IS RE JECTED IN (I) 3DPLM SOFTWARE SOLUTIONS LIMITED VS DCIT, IT(TP)A NO. 130 3/BANG/2012, (II) TELELOGIC INDIA PVT. LTD., VS DCIT, IT(TP)A NO. 159 9/BANG/2012 (III) INTOTO SOFTWARE INDIA PRIVATE LIITED VS ACIT, IT(TP)A NO. 1810/HYD/2012, (IV)MERITOR LVS INDIA (P) LTD VS ACIT, IT(TP)A NO. 1231/BANG/20 11, (V) AT &T GLOBAL BUSINESS SERVICES INDIA PVT. LTD VS. ITO IT(TP)A NO . 1604/BANG/2012, (VI) INFINEON TECHNOLOGIES INDIA PVT. LTD., VS ACIT, IT( TP)A NO. 1670/BANG/2012, (VII) BARCLAYS TECHNOLOGY CENTRE INDIA PRIVATE LIMI TED VS ACIT, ITA NO. 2279/PN/2012 AND (VII) SYMPHONY SERVICES PUNE PRIVA TE LIMITED VS ITO, ITA NO. 257/PN/2013. CONTRA, THE LD. DR SUBMITTED THAT AS PER THE FINANCIAL STATEMENTS IN THE SEGMENTAL REPORTING, THE COMPANY ACTIVITIES PREDOMINANTLY REVOLVE AROUND SOFTWARE DEVELOPMENT SERVICES AND TH EIR SERVICES INCLUDES GLOBAL ONSITE OFFSHORE DEVELOPMENT, CUSTOM SOFTWARE DEVELOPMENT AND HAVE AN INDEPENDENT SOFTWARE TESTING AND APPLICATION DEV ELOPMENT AND PRAYED FOR RETENTION OF COMPARABLE. :-9-: I.T.A. NO. 614/MDS/2016 8. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS. THE COMPARABLES COMPANY IS ENG AGED IN PRODUCT ENGINEERING SERVICES IN THE NATURE OF HIGH END KNOW LEDGE PROCESS OUTSOURCING AND ALSO IN PRODUCT ENGINEERING SOFTWARE DEVELOPMEN T COMPANY HAVING EXPERTISE IN EMERGING TECHNOLOGIES CLOUD SAAS, BUSI NESS INTELLIGENCE AND MOBILITY FOR MORE THAN 10 YEARS AND SERVING 8 INDUS TRIES ACROSS THE GLOBE WITH OVER 200 SOFTWARE PROFESSIONALS. WHEREAS, THE ASSE SSEE COMPANY IS IN THE SOFTWARE DEVELOPMENT AND ALSO ITES SERVICES AND CAN NOT BE CONSIDERED AS THE FUNCTIONALLY COMPARABLE AND WE RELY ON THE DECISION OF BANGALORE TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LIMITED (SUPRA ) AT PARA 14.4: ' 14. E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A CO MPARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE IN CLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED T HE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUND THAT AS PER THE INFOR MATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND SATISF IES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTA TIVE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FR OM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY D IFFERENT TO THE ASSESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E-BUSINESS CONSULTING S ERVICES, CONSISTING OF WEB STRATEGY SERVICES, I T DESIGN SERVICES AND I N TECHNOLOGY CONSULTING SERVICES INCLUDING PRODUCT DEVELOPMENT C ONSULTING SERVICES. :-10-: I.T.A. NO. 614/MDS/2016 THESE SERVICES, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PRO CESS OUTSOURCING (KPO) SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA IN ITS ANNUAL REPORT. THE L EARNED AUTHORISED REPRESENTATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIVE INFORMATION O N THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAIL S AVAILABLE ON THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WHILE EVALUATING THE COMPANYS FUNCTIONAL PROFILE. IT IS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANI ES RENDERING KPO SERVICES OUGHT NOT TO BE CONSIDERED AS COMPARABLE T O SOFTWARE DEVELOPMENT COMPANIES AND RELIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961(HYD)/2011 DT.23.11.2012 AND PRAYED THAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLUTIONS L TD., OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESE NTATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARBALES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY I N ITS REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVICES RENDERED BY THE COMPANY TO GI VE A FINDING WHETHER THE SERVICES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE :-11-: I.T.A. NO. 614/MDS/2016 SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSE SSEE. FROM THE DETAILS ON RECORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY I.E. E-ZEST SOLU TIONS LTD., IS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT H AS BEEN HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CAPITAL I-Q INFORMATION SYSTEMS (INDIA) (P) LTD. SUPRA) THAT KP O SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE CO-ORDINAT E BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD T HAT THIS COMPANY, I.E. E-ZEST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. / TPO IS ACCORDINGLY DIRECTED.' CONSIDERING THESE FACTS AND THE DECISION OF THE TRI BUNAL, WE DIRECT THE LD. TPO TO EXCLUDE THE E-ZEST SOLUTIONS LIMITED FROM TH E LIST OF THE COMPARABLES. 9. THE LD. AR ARGUED ON THE PERSISTENT SYSTEMS WITH OPERATING MARGIN OF 25.71% IS OUTSOURCED PRODUCT DEVELOPMENT COMPANY AND IS NON- COMPARABLE TO COMPANY ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES AND ALSO HAS INCOME FROM LICENSING OF PRODUCTS AND FOCUSED ON THE TECHNOLOGY INVESTMENT. THE PROFIT AND LOSS ACCOUNT FOR YEAR E NDING 31.03.2011 DISCLOSE SALE OF SOFTWARE SERVICES AND PRODUCTS AND OTHER IN COME AND THE NATURE OF OPERATIONS BEING THE COMPANY IS PREDOMINANTLY ENGAG ED IN OUTSOURCED :-12-: I.T.A. NO. 614/MDS/2016 PRODUCT DEVELOPMENT SERVICES AND FOLLOWS BUSINESS M ODELS WHICH ARE ENTIRELY DIFFERENT FROM THE ASSESSEE BUSINESS AND RELIED ON THE DECISIONS OF (I) ALCATEL- LUCENT INDIA LTD VS. DCIT IT ANO. 6856/DEL/2015, (I I) CASHEDGE INDIA PRIVATE LIMITED, ITA NO. 279/2016, (III) CIT(1) VS CES PVT. LTD., ITTA NO 442/2014, (IV) CES PVT. LTD., VS DCIT ITA NO. 1445/HYD/2010, (V) HEWLETT-PACKARD INDIA SOFTWARE OPERATION PVT. LTD VS ACIT, IT(TP)A NO. 14 56/BANG/2010, (VI) EQUANT SOLUTION INDIA PVT. LTD. VS DCIT, ITA NO. 12 02/DEL/2015, AND (VII) 3DPLM SOFTWARE LIMITED VS DCIT, IT(TP)A NO. 1303/BA NG/2012 AND PRAYED FOR EXCLUDING THE COMPARABLE. CONTRA, THE LD. DR S UBMITTED THAT THE COMPARABLES IS ALSO ENGAGED IN DEVELOPMENT OF SOFTW ARE AND ADOPTED TNMM FOR PROJECT FUNCTIONALLY THEREFORE SHOULD BE COMPAR ABLE TO THE ASSESSEE COMPANY. 10. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS. WE FOUND THAT THE COMPANY IS E NGAGED IN PRODUCT DEVELOPMENT AND CANNOT BE COMPARABLE TO THE SOFTWAR E DEVELOPMENT SERVICES AND HAS INCOME FROM LICENSE FEE. THE REVENUE RECOG NITION POLICY IN NOTES OF ACCOUNTS AND SEGMENTAL INFORMATION IS AVAILABLE IN RESPECT OF INFRASTRUCTURE AND SYSTEMS, TELECOM AND WIRELESS, LIFE SCIENCE AND HEALTH CARE. FURTHER IT RENDERS SERVICES IN COST PLUS TO ITS ASSOCIATE ENTE RPRISE AND SAIL WITH PARTNERSHIP AND ALLIANCES, INTELLECTUAL PROPERTY LE D SOLUTIONS AND END-TO-END SOLUTIONS, STRATEGIC ACQUISITIONS AND THE FINANCIAL YEAR 2010-11 IS AN :-13-: I.T.A. NO. 614/MDS/2016 EXCEPTIONAL YEAR OF OPERATION OF PERSISTENT SYSTEMS . WE TAKE SUPPORT FROM THE DECISION OF 3DPLM SOFTWARE SOLUTIONS LIMITED AT PARA 17 PAGE 13 OF THE PAPER BOOK AS UNDER' ' 17. PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A C OMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NOT AVAILABLE. THE TPO R EJECTED THE ASSESSEE'S OBJECTIONS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPANY FOR FINANCIAL YEAR 2007-08, IT IS MAINL Y A SOFTWARE DEVELOPMENT COMPANY AND AS PER THE DETAILS FURNISHE D IN REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT, SOFTWARE DE VELOPMENT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF TH E MATTER, THE ASSESSING OFFICER INCLUDED THIS COMPANY I.E. PERSIS TENT SYSTEMS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNCTIO NALITY CRITERION. 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCLUSION O F THIS COMPANY AS A COMPARABLE SUBMITTING THAT THIS COMPANY IS FUNCTION ALLY DIFFERENT AND ALSO THAT THERE ARE SEVERAL OTHER FACTORS ON WHICH THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. IN THIS REGARD, THE LEARN ED AUTHORISED REPRESENTATIVE SUBMITTED THAT : (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING SERVI CES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. :-14-: I.T.A. NO. 614/MDS/2016 (II) (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007-08 INDICATES THAT THIS COMPANY, IS PREDOMINANT LY ENGAGED IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES FOR INDEPENDENT SOFTWARE VENDORS AND ENTE RPRISES. (III) WEBSITE EXTRACTS INDICATE THAT THIS COMPANY IS IN T HE BUSINESS OF PRODUCT DESIGN SERVICES. (IV) THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) WHILE DISCUSSI NG THE COMPARABILITY OF ANOTHER COMPANY, NAMELY LUCID SOFT WARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGME NTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRESENTLY UNDER CONSIDERATION, WHICH IS INTO PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES AND FOR WHICH THE SEGMENTAL DATA IS NOT AVAILABLE. THE LEAR NED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. BE OMITTED FRO M THE LIST OF COMPARABLES. 17.2 PER CONTRA, THE LEARNED DEPART MENTAL REPRESENTATIVE SUPPORT THE ACTION OF THE TPO IN INC LUDING THIS COMPANY IN THE LIST OF COMPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHI LE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVICES PROVIDER. WE FIND T HAT, AS SUBMITTED BY THE ASSESSEE, THE SEGMENTAL DETAILS ARE NOT GIVE N SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUNCIATED IN TH E DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOG IES INDIA PVT. LTD. :-15-: I.T.A. NO. 614/MDS/2016 (SUPRA) THAT IN THE ABSENCE OF SEGMENTAL DETAILS / INFORMATION 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 CONS IDERATION. IT IS ORDERED ACCORDINGLY. WE RELY ON THE ABOVE FACTS AND TRIBUNAL DECISION AN D WE DIRECT THE TPO TO EXCLUDE THE PERSISTENT SYSTEMS FROM THE LIST OF COM PARABLE COMPANIES. 11. THE LD. AR ARGUED THAT THE LD. TPO HAS INCLUDED SASKEN COMMUNICATIONS LIMITED WITH OPERATING MARGIN OF 28. 04%, WHEREAS IT IS FUNCTIONALLY NON-COMPARABLE AS COMPANY WAS INVOLVED IN VARIOUS MULTIMEDIA PRODUCT AND WIRELESS BROADBAND AND MOBILE VALUE ADD ED SERVICES AND THE PROFIT AND LOSS ACCOUNT REFLECT THE SALES OF SOFTWA RE SERVICES AND PRODUCT SERVICES AND OTHER SERVICES AND LD. AR RELIED ON TH E DECISION OF (I) ALCATEL- LUCENT INDIA LTD VS. DCIT, ITA NO 6856/DEL/2015, (I I) ION TRADING INDIA PRIVATE LTD. VS ITO, ITA NO. 1035/DEL/2015, (III) P EGASYSTEMS WORLDWIDE INDIA PVT. LTD., VS ACIT, ITA NO. 1758/HYD/2014, (I V) MERTITOR LVS INDIA (P) LTD. VS ACIT IT(TP)A NO. 1231/BANG/2011, PEGASYSTEM S WORLDWIDE INDIA PVT. LTD. (SUPRA) AT PAGE 12 READ AS UNDER: ' 13) SASKEN COMMUNICATION TECHNOLOGIES LTD.: 109. LD TPO NOTICED THAT THE COMPANY WAS REJECTED IN THE TP DOCUMENT ON THE GROUND THAT THE COMPANY FAILS ITS F ILTER OF BUSINESS :-16-: I.T.A. NO. 614/MDS/2016 REVIEW AND R&D TO SALES WAS MORE THAN 3%. HOWEVER, NO REASONS WERE GIVEN FOR THE BUSINESS REVIEW. 109.1 LD. TPO POINTE D OUT THAT R&D TO SALES BEING MORE THAN 3% IS NOT ACCEPTABLE FOR WHIC H DETAILED DISCUSSION HAS ALREADY BEEN MADE EARLIER. HE FURTHE R NOTICED THAT THE COMPANY HAS SOFTWARE SERVICES SEGMENT AND SEGMENTAL RESULTS ARE AVAILABLE FOR SOFTWARE SERVICES. HE FURTHER POINTED OUT THAT ON THE BASIS OF INFORMATION OBTAINED U/S 133(6), THE COMPANY QUA LIFIES ONSITE REVENUE FILTER (ONSITE REVENUES WERE TO THE EXTENT 27.27% OF ITS EXPORT REVENUES). AFTER CONSIDERING THE ASSESSEES REPLY, LD. TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. LD. COUNSEL POI NTED OUT THAT THIS COMPANY HAS INCURRED SIGNIFICANT EXPENDITURE ON RES EARCH AND DEVELOPMENT ACTIVITY THE SAME BEING 6.07% OF SALES. HE FURTHER SUBMITTED THAT THE COMPANY HAD SIGNIFICANT INTANGIB LE INASMUCH AS IT DEVELOPS SISKIN BRANDED PRODUCTS. THE COMPANY OWNS IPR FURTHER IT WAS POINTED OUT BEFORE TPO THAT DURING THE YEAR THE COMPANY HAD ACQUIRED BOTNIA HIGH TECH F. AND ITS TWO SUBSIDIARI ES AND THUS, IT HAD UNDER GONE SIGNIFICANT RESTRUCTURING. HOWEVER, LD. TPO IGNORED THESE FACTS HE RELIED ON THE FOLLOWING DECISIONS: IQ INFORMATION SYSTEM (I) PVT. LTD., ITA NO. 1961/HYD./2012 (PARA NO. 11 & 23, PAGE 25); AMERSON PROCESS MANAGEMENT INDIA PVT. LTD., ITA N O. 8118/MUM./2010 (PARA 16 PAGE 15). 110. LD. DR RELIED ON THE ORDER OF TPO AND SUBMITTE D THAT TPO CONSIDERED THE COMPANIES SOFTWARE SERVICES SEGMENT DETAILS ONLY. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE PERU SED THE RECORD OF THE CASE. :-17-: I.T.A. NO. 614/MDS/2016 111. LD. TPO HAS COMPLETELY IGNORED THE EXTRAORDINA RY BUSINESS CIRCUMSTANCES POINTED OUT BY ASSESSEE FOR WHICH NEC ESSARY ADJUSTMENT WAS REQUIRED TO BE MADE IN ACCORDANCE WITH RULE 10B (3) OF INCOME TAX RULES. HOWEVER, SINCE THIS ADJUSTMENT WAS NOT POSSI BLE, THEREFORE, THIS COMPANY SHOULD NOT HAVE BEEN INCLUDED IN THE LIST O F COMPARABLES. FURTHER, WE FIND THAT THE COMPANY OWNS IPR AND HAS BRANDED PRODUCTS WHICH ALSO DISTINGUISHES IT FROM THE ASSESSEE AND, THEREFORE, KEEPING IN VIEW THE DECISION OF HONBLE DELHI HIGH COURT IN TH E CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD.(SUPRA), WE DIRECT THE LD. TP O TO EXCLUDE THIS COMPARABLE FROM THE LIST OF COMPARABLES. IF WE FOLL OW THE COORDINATE BENCH DECISION IN THE CASE OF MOTORALA SOLUTION (IN DIA) P. LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD NEEDS TO BE EXCLUDED . HOWEVER, AS MENTIONED BY US AT PARA 24 ABOVE, WHERE THE CONTEST ED COMPARABLE FORMED PART OF ASSESSEES OWN STUDY, THEN THE AO / TPO HAS TO BE GIVEN A CHANCE FOR VERIFICATION, IN VIEW OF JUDGMEN T OF HONBLE PUN JAB & HARYANA HIGH COURT IN THE CASE OF QUARK SYSTEMS I NDIA P. LTD (SUPRA). ACCORDINGLY WE REMIT THE ISSUE OF COMPARAB ILITY OF SASKEN COMMUNICATION TECHNOLOGIES LTD BACK TO THE AO / TPO FOR CONSIDERATION AFRESH AS PER LAW. ORDERED ACCORDINGL Y. AND PRAYED FOR EXCLUDING THE COMPARABLE. CONTRA, T HE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE COMPARABLES COMPA NY IS ONE OF THE COMPARABLE SELECTED FOR TP ADJUSTMENTS FOR ITS TRAN SACTIONS WITH AE AND THE FINANCIALS ARE VERY MUCH AVAILABLE AND PRAYED FOR DISMISSING THE GROUND. :-18-: I.T.A. NO. 614/MDS/2016 12. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS. WE FOUND THE COMPANY IS FUNCTI ONALLY NON-COMPARABLE AS THEY ARE INTO MULTIMEDIA PRODUCT AND THE RESEARCH A ND DEVELOPMENT IN THE SAID YEAR IN RESPECT OF MULTIMEDIA WIRELESS BROADBA ND AND MOBILE VALUE ADDED SERVICES AND THE BREAKUP REVENUE IS NOT AVAILABLE A ND CANNOT BE CONSIDERED AS COMPARABLE AND DIRECT THE TPO TO EXCLUDE FROM TH E LIST OF COMPARABLES. SINCE, THE LD. AR HAS NOT ARGUED ANY ANOTHER GROUND S RELYING ON THE TP ISSUES BEFORE US AND ALL OTHER GROUNDS RAISED BY TH E ASSESSEE IN THIS APPEAL WITH REFERENCE TO TP ISSUES ARE DISMISSED AS INFRUC TOUS. 13. THE ASSESSEE HAS RAISED CLAIM DEDUCTION U/S. 10 AA RS. 18,01,20,312/-. THE ASSESSING OFFICER IN THE ASSES SMENT PROCEEDINGS DISCUSSED AND EXCLUDED EXPENDITURE OF FOREIGN CURRE NCY AND INSURANCE EXPENDITURE AND TELECOMMUNICATION EXPENDITURE ONLY FROM EXPORT TURNOVER WITHOUT REDUCING THE SAME FROM TOTAL TURNOVER U/S. 10AA OF THE ACT AND MADE ADDITION EXCESS CLAIM OF RS. 1,10,51,626/-. THE DR P HAS CONFIRMED THE ACTION OF ASSESSING OFFICER AND BEFORE US THE LD. AR ARGUE D THAT THE SPECIAL BENCH DECISION OF THIS TRIBUNAL IN THE CASE OF M/S. SAK S OFT LIMITED 2009 30 ITO 55 CHENNAI HAS TO BE FOLLOWED IRRESPECTIVE OF THE FACT THAT THE APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE SAID ORDER IN THE JURISDICTIONAL HIGH COURT. WE FIND THE ISSUE IS COVERED BY THE DECISION OF ASS ESSEE'S OWN CASE IN EARLIER :-19-: I.T.A. NO. 614/MDS/2016 ASSESSMENT YEAR 2010-11 ITA NO. 1289/MDS/2015, AT PARA 7 AND 8 WHICH READ AS UNDER: ' 7. THE NEXT GROUND IN THIS APPEAL IS THAT THE DRP E RRED THE AO TO EXCLUDE TO REDUCE SAME AMOUNTS WHICH HAS REDUCED FROM EXPORT TURNOVER FROM TOTAL TURNOVER ALSO FOR COMPUTING THE DEDUCTION U/S.10AA RELYING UPON THE DECISION OF THE SPECIAL BENCH OF I TAT CHENNAI IN THE CASE OF M/S.SAK SOFT LTD REPORTED IN (2009) 30 SOT 55(CHENNAI)(SB) AGAINST WHICH THE DEPARMENT FILED APPEAL U/S.260A B EFORE THE HONBLE MADRAS HIGH COURT. 8. AFTER HEARING THE LD.D.R AND PERUSING THE MATER IALS ON RECORD, IT APPEARS THAT THE LD. ASSESSING OFFICER WAS OF TH E VIEW THAT SINCE THE REVENUE WAS ON APPEAL AGAINST THE DECISION OF THE C HENNAI SPECIAL BENCH IN THE CASE OF SAK SOFT LTD., (SUPRA) BEFORE THE HONBLE MADRAS HIGH COURT, HE NEED NOT FOLLOW THAT DECISION. FURTH ER, IT IS NOT THE CASE OF THE REVENUE THAT THE JUDGMENT OF THE CHENNAI SPE CIAL BENCH IN THE CASE OF SAK SOFT LTD., (SURPA) IS STAYED BY THE MAD RAS HIGH COURT. IT IS PERTINENT TO MENTION THAT IN THE ABSENCE OF ANY STA Y GRANTED BY THE BY THE HONBLE MADRAS HIGH COURT AGAINST THE OPERATION OF THE JUDGMENT OF THE CHENNAI SPECIAL BENCH IN THE CASE OF SAK SOFT L TD., (SURPA), ALL THE LOWER JUDICIARIES BEING QUASI JUDICIAL AUTHORITIES ARE BOUND TO FOLLOW THE DECISION OF THE CHENNAI SPECIAL BENCH IN THE CASE O F SAK SOFT LTD., (SURPA). SINCE THE LD.CIT(A) HAS RIGHTLY FOLLOWED T HE DECISION OF THE DECISION OF SAK SOFT LTD., CITED SUPRA AND HELD THE ISSUES IN FAVOUR OF THE ASSESSEE. 8.1 IN THE RESULT, THE REVENUES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES.' :-20-: I.T.A. NO. 614/MDS/2016 WE RESPECTFULLY FOLLOWING THE DECISION OF THE SPECI AL BENCH, WE DIRECT THE ASSESSING OFFICER TO REDUCE THE EXPENDITURE INCURRE D IN FOREIGN EXCHANGE ARE TO BE EXCLUDED FROM BOTH EXPORT TURNOVER AND TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION U/S. 10A AND ACCORDINGLY DIRECT THE AS SESSING OFFICER. THE LD. DR RELIED ON THE LOWER AUTHORITIES OBJECTED TO THE GROUNDS. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE ALLOW ED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON FRIDAY, THE 20TH DAY OF JANUARY , 2017 AT CHENNAI. SD/- ( ' ) (CHANDRA POOJARI) $ / ACCOUNTANT MEMBER SD/ - ( . ) (G. PAVAN KUMAR) ) $ /JUDICIAL MEMBER /CHENNAI, 1 /DATED: 20TH JANUARY, 2017 JPV ' *#34 54 /COPY TO: 1. APPELLANT 2. *+& /RESPONDENT 3. 6 ( )/CIT(A) 4. 6 /CIT 5. 4 *## /DR 6. 9 /GF