Cadence Design Systems (India) Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 6315/DEL/2015

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5564 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-04-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Assessment Year: 2011-2012
• Appeal Filed On: 27-11-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I(2) NEW DLEHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER I.T.A. NO. 6315/DEL/2015 ASSESSMENT YEAR: 2011-12 CADENCE DESIGN SYSTEMS (I) P. LTD. VS ASS TT. COMMISSIONER OF INCOME-TAX O FLOOR, HOTEL THE SURYA, CIRCLE -5(2), NEW DELHI. NEW FRIENDS COLONY, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: S/SHRI NAGESWAR RAO, SANDEEP S. KARHAIL, SHARANIK CHAKRABARTY, ADV RESPONDENT BY: SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING: 06.03.2018 DATE OF PRONOUNCEMENT: 02.04.2018 ORDER PER K. NARASIMHA CHARY, JM AGGRIEVED BY THE ASSESSMENT ORDER DATED 27. 10.2015 READ WITH THE DIRECTIONS DATED 31.8.2015 BY THE LEARNED DRP WHEREU NDER A SUM OF RS.17,84,42,262/- WAS ADDED TOWARDS ARMS LENGTH PR ICE ADJUSTMENT U/S 92CA OF THE ACT, ASSESSEE PREFERRED THIS APPEAL. 2 2. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE, CADEN CE DESIGN SYSTEMS (INDIA) P. LTD., IS A WHOLLY OWNED SUBSIDIARY OF CADENCE DESIGN SYSTEMS INC. AND WAS ESTABLISHED IN INDIA IN ORDER TO UNDERTAKE SOFTWARE DEVELOPMENT AND RESEARCH SERVICES, RELATED INFORMATION TECHNOLOGY, BACK OFFIC E SUPPORT SERVICE AND RELATED PRE SALES MARKETING AND POST SALES TECHNOLOGICAL SE RVICES IN INDIA. ASSESSEE PROVIDES R&D SERVICES AND ITES SERVICES FROM ITS UN IT LOCATED IN THE NOIDA SPECIAL ECONOMIC ZONE (SEZ) AND THE SOFTWARE TECHNOLOGY PARK S (STP) UNIT LOCATED IN BANGALORE. FURTHER THE IT GROUP IN INDIA PROVIDES SYSTEMS SUPPORTS TO ALL THE CADENCE OFFICES ACROSS THE WORLD. THEY DERIVE INCOM E IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE AND PRO VIDING TECHNICAL SUPPORT AND TRAINING SERVICES. ASSESSEE IS A CAPTIVE SERVI CE PROVIDER AND RISK MITIGATED ENTITY INASMUCH AS IT IS COMPENSATED ON A COST PLACE MARKUP BASIS FOR THE SERVICES RENDERED TO ITS ASSOCIATED ENTERPRISE (S).FOR THE A Y 2011-12, THE ASSESSEE FILED THE RETURN OF INCOME ON 25.11.2011 DECLARING A TOTAL IN COME OF RS.44,54,97,708/- AND DURING THE SCRUTINY LEARNED AO FOUND THAT DURING THA T YEAR THE ASSESSEE HAD THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES, AS SUCH, REFERRED THE MATTER TO THE LEARNED TRANSFER PRICING OFFICER(TPO ) U/S 92CA(1) OF THE ACT. LEARNED TPO TABULATED THE INTERNATIONAL TRANSACTION S ENTERED INTO BY THE ASSESSEE, TRANSFER PRICING APPROACH OF THE ASSESSEE FOR BENCH MARKING PURPOSE, AS FOLLOWS: S. NO . NATUREOF TRANSACTION VALUE (RS) METHOD APPLIED NO. OF COMP ARABL ES ARMS LENGTH RESULT RESULT OF ASSESSE E 1 PROVISION OF SOFTWARE 1,886,342,446 TNMM 23 12.84% 15.04% 3 RESEARCH AND DEVELOPMENT SERVICES 2 PROVISION OF IT BACK OFFICE SUPPORT SERVICES 488,122,843 TNMM 14 118.09% 15.00% 3 PROVISION OF PRE-SALES MARKETING AND POST SALES TECHNICAL SUPPORT SERVICES 406,345,339 TNMM 11 2.84% 12.12% 4 PAYMENT OF INTEREST TOWARDS FOREIGN CURRENCY LOAN 169,646 CUP 3 1.19% LIBOR 1% LIBOR 3. LEARNED TPO PROPOSED THE ADJUSTMENTS OF RS.14,10 ,06,876/- IN RESPECT OF THE IT SEGMENT AND RS.7,10,53,705/- IN RESPECT OF ITES SEGMENT PUT TOGETHER RS.21,20,60,581/-. ASSESSEE FILED OBJECTIONS BEFOR E THE LEARNED DRP AND PURSUANT TO THE DIRECTIONS GIVEN BY THE LEARNED DRP, LEARNED AO PASSED THE IMPUGNED ORDER MAKING AN ADDITION OF RS.17,84,42,262/- TOWAR DS TP ADJUSTMENT AND RS.346,434/- ON ACCOUNT OF EXPENSES CLAIMED ON WRON G ALLOCATIONS OF DIRECTORS SALARY. 4. CHALLENGING ADDITION ON ACCOUNT OF ALP ADJUSTMEN T, THE ASSESSEE IS BEFORE US IN THIS APPEAL ON AS MANY AS 16 GROUNDS. GROUNDS 1 & 2 ARE GENERAL IN NATURE AND DO NOT REQUIRE SPECIFIC ADJUDICATION AND GET CO VERED BY THE RESULT OF ADJUDICATION OF GROUNDS NO.3 TO 12. GROUNDS 3 TO 12 RELATE TO TRANSFER PRICING ISSUE IN RESPECT OF BOTH IT AND ITES SEGMENTS, WHIC H ARE CONTENTIOUS IN NATURE AND 4 THEREFORE, WE DEAL WITH THE ARGUMENTS RELATING TO T HESE TWO SEGMENTS SEPARATELY. GROUNDS 13 &14 RELATE TO THE CORPORATE TAX ISSUES. GROUND NO.15 IS AGAINST THE INITIATION OF PENALTY AND IT IS PREMATURE ONE. GROUN D NO.16 RELATES TO THE INTEREST, WHICH IS CONSEQUENTIAL IN NATURE. 5. FIRST OF ALL, WE SHALL DEAL WITH THE SOFTWARE RE SEARCH AND DEVELOPMENT SERVICES. IN THIS SEGMENT, THE ASSESSEE IS COMPENS ATED WITH COST PLUS MARK UP OF 15% AND THE ACTUAL PLI OF THE ASSESSEE IS 15.04%. ASSESSEE ENTERED INTO AN AGREEMENT WITH THE CDS FOR PROVIDING THE RESEARCH A ND DEVELOPMENT SERVICES ON 1.1.2011. THE FUNCTIONS PERFORMED AND RISKS ASSUME D BY THE ASSESSEE WITH REGARD TO THE PROVISION FOR SOFTWARE RESEARCH AND D EVELOPMENT SERVICES, AS SPELT OUT IN THE TRANSFER PRICING DOCUMENTS FORM ARE AS F OLLOWS: FUNCTIONAL ANALYSIS THE FUNCTIONS PERFORMED BY CADENCE INDIA AND CDS WI TH REGARD TO THE IDENTIFIED TRANSACTION ARE OUTLINED BELOW: IN ORDER TO UNDERSTAND THE RELATIVE VALUE OF THE PR ODUCT DEVELOPMENT WORK PERFORMED BY CADENCE INDIA, ONE NEEDS TO UNDERSTAND THE OVERALL VALUE DRIVERS OF SOFTWARE DEVELOPMENT PERFORMED BY CADENCE INDIA. CONCEPTUALIZATION OF SERVICES SOFTWARE PRODUCT LIFECYCLE ('SPL') IS GENERALLY A 3 PHASE, MULTI STEP PROCESS INVOLVING PRODUCT MANAGEMENT TEAM, MARKETING TEAM A ND PRODUCT ENGINEERING TEAM. THE 3 PHASES OF PRODUCT ENGINEERING ARE PRODU CT DEFINITION, PRODUCT DEVELOPMENT AND SERVICING. IN THE PRODUCT DEFINITION (CONCEPTUALIZATION) PHASE , A VALUE PROPOSITION AND A PRODUCT PROTOTYPE ARE DEVELOPED BASED ON CUSTOMER F EEDBACK FROM THE SERVICING PHASE, SURVEYS, COMPETITIVE ANALYSIS, THE PRODUCT L EADER'S VISION FOR FUTURE AND CDSS OVERALL VISION FOR THE PRODUCT CATEGORY. THEN, MARKETING RESEARCH IS PERFORMED TO TEST THE VALUE PROPOSITION AND THE MAR KETING FEASIBILITY OF A PRODUCT PROTOTYPE. THE PRODUCT LEADERSHIP TEAM AND PRODUCT ENGINEERS WILL WORK WITH THE MARKETING RESEARCH TEAM TO ADDRESS SOFTWARE ENGINEE RING ISSUES AND TECHNICAL FEASIBILITY. WHEN THE PROTOTYPE IS FINALIZED THE NE XT PHASE OF THE LIFECYCLE BEGINS. 5 THE SECOND PHASE IS PRODUCT DEVELOPMENT, WHICH IS A MULTI-STEP PROCESS INVOLVING DETERMINATION OF THE REQUIREMENTS, DESIGN, IMPLEMEN TATION, VERIFICATION AND RELEASE. AGAIN, EACH STAGE IS A COLLABORATIVE EFFOR T AMONG THE PRODUCT ENGINEERING TEAM, THE MARKETING TEAM AND PRODUCT MA NAGEMENT TO ENSURE THAT THE PRODUCT IS ON TRACK TO MEET THE VALUE PROPOSITI ON FRAMEWORK. PRODUCT ENGINEERING IS A GENERIC TERM TO IDENTIFY SOFTWARE ARCHITECTURE DEVELOPMENT, DESIGN, CODE DEVELOPMENT, TESTING AND VARIOUS OTHER TECHNICAL SERVICES. THE FINAL PHASE IS KNOWN AS SERVICING. IN THIS PHAS E, THE MARKETING TEAM IS RESEARCHING AND TRACKING PRODUCT AWARENESS AND PERC EPTIONS, CUSTOMER SATISFACTION DEPLOYMENT AND USER EXPERIENCE. THIS I NFORMATION IS USED BY THE PRODUCT LEADERS TO HELP DETERMINE THE C ONCEPT OF THE NEXT VERSION OF THE PRODUCT. CADENCE INDIA'S ROLE IN THE SPL THE MOST IMPORTANT ASPECT OF DETERMINING THE MARKET ABILITY AND PROFITABILITY OF A SOFTWARE PRODUCT IS THE DECISION OF 'WHAT' TO DEVELOP NEXT. THIS DECISION IS MADE AT CDS, BASED ON THE FACTORS DESCRIBED ABOVE I N THE PRODUCT DEFINITION PHASE ('PDP'). ALL OF THE WORK IN THE PDP IS PERFOR MED OUTSIDE OF INDIA. CADENCE INDIA'S ROLE IS LIMITED TO RENDERING SOFTWA RE RESEARCH AND DEVELOPMENT SERVICES TO CDS. AIL DECISIONS REGARDIN G PRODUCT DEFINITION ARE MADE BY CDS. IN PARTICULAR, ALL DECISIONS REGARDING WHICH PRODUCTS TO DEVELOP, PRODUCT DESIGN AND HOW MUCH TO INVEST IN SUCH DEVEL OPMENT ARE MADE BY THE CDS. CADENCE INDIA IS INVOLVED IN RENDERING SOFTWAR E DEVELOPMENT SERVICES AS PER THE DIRECTIONS, GUIDANCE AND BLUEPRINT PROVIDED BY CDS; ------- ' MARKETING AND BUSINESS DEVELOPMENT CDS CONCEPTUALIZES THE MARKETING STRATEGY FOR THE S ALE OF ITS PRODUCTS AND SERVICES AND UNDERTAKES FUNCTIONS SUCH AS CUSTOMER LEAD IDENTIFICATION, MARKETING AND SECURING THE ORDERS FOR THE PRODUCTS TO BE DEVELOPED. AS PART OF ITS MARKETING FUNCTION, CDS IS INVOLVED IN THE IDEN TIFICATION OF KEY PROSPECTIVE CUSTOMERS AND UNDERSTANDING THEIR REQUIREMENTS. BEING A CAPTIVE UNIT OF CDS, CADENCE INDIA DOES NOT UNDERTAKE ANY MARKETING OR BUSINESS DEVELOPMENT FUNCTIONS. REQUIREMENT ANALYSIS CDS PROVIDES THE SOFTWARE MODULE SPECIFICATIONS, IN STRUCTIONS, PRODUCT SPECIFICATIONS FOR THE SOFTWARE TO BE DEVELOPED BY CADENCE INDIA. BASED ON INSTRUCTIONS/INFORMATION PROVIDED BY CDS, THE REQUI REMENTS ARE INTERNALLY 6 ANALYZED BY CADENCE INDIA AND CONVERTED INTO FUNCTI ONS AND FEATURES OF THE INTENDED APPLICATION. UPON RECEIVING THE APPROVAL FROM CDS, CADENCE INDIA COMMENCES WORK. CODING, TESTING AND DOCUMENTATION CADENCE INDIA UNDERTAKES CODE DEVELOPMENT IN ACCORD ANCE WITH PRODUCT SPECIFICATIONS DEFINED BY CDS. THE CODE GENERATED I S SUBSEQUENTLY TESTED TO ENSURE THAT FUNCTIONS PERFORMED BY THE CODE ARE IN ACCORDANCE WITH THE PROTOCOL DESIGN AND STANDARD SPECIFICATIONS, CADENC E INDIA GENERATES AND MAKES AVAILABLE DOCUMENTATION FOR THE SOFTWARE DEVE LOPED AND TRANSFERRED. THE SOFTWARE DEVELOPED BY CADENCE INDIA IS SUBSEQUE NTLY INTEGRATED INTO THE FINAL SOFTWARE PRODUCT BY CDS AND OTHER CADENCE GRO UP ENTITIES. PROJECT MANAGEMENT ALTHOUGH THE DAY-TO-DAY MANAGEMENT OF THE PROJECT I S UNDERTAKEN BY CADENCE INDIA, CDS IS RESPONSIBLE FOR THE OVERALL PROJECT M ANAGEMENT. CADENCE INDIA'S RESPONSIBILITY IS CONFINED TO THE PROJECT MANAGEMEN T AND THE END DELIVERABLES WITH RESPECT TO THE MODULE OF THE SOFTWARE BEING DE VELOPED BY IT. CDS ALSO REGULARLY CONDUCTS MEETINGS TO ANALYZE THE PROGRESS AND MONITORS THE PROJECT PLAN. HOWEVER, THE ULTIMATE RESPONSIBILITY OF THE W ORK UNDERTAKEN BY CADENCE INDIA RESTS WITH CDS. QUALITY CONTROL, TESTING AND INTEGRATION CADENCE INDIA IS RESPONSIBLE FOR ENSURING THAT REQU ISITE QUALITY/ PERFORMANCE STANDARDS ARE COMPLIED WITH WHILE RENDERING SERVICE S. CADENCE INDIA IS RESPONSIBLE TO ENSURE THAT SERVICE S PROVIDED MEET CERTAIN QUALITY AND PERFORMANCE REQUIREMENTS AND ADHERE TO ESTABLIS HED PRESCRIBED STANDARDS. RISK ANALYSIS BRIEFLY SUMMARIZED BELOW ARE SOME OF THE KEY BUSINE SS RISKS, FACED BY CADENCE INDIA AND CDS IN RELATION TO THE SOFTWARE DEVELOPME NT SERVICES RENDERED BY CADENCE INDIA. BUSINESS/ MARKET RISK BUSINESS RISK ARISES WHEN A FIRM IS SUBJECT TO ADVE RSE SALES CONDITIONS DUE TO EITHER INCREASED COMPETITION IN THE MARKETPLACE, AD VERSE DEMAND CONDITIONS WITHIN THE MARKET, OR THE INABILITY TO DEVELOP MARK ETS OR POSITION PRODUCTS TO 7 SERVICE TARGETED CUSTOMERS. CADENCE INDIA BEARS NO BUSINESS RISK AS IT PROVIDES SOFTWARE DEVELOPMENT SERVICES ONLY TO CDS AND IS AS SURED OF A SPECIFIED RETURN ON ITS COSTS. CAPACITY UTILIZATION RISK PROVISION OF SERVICES REQUIRES SUBSTANTIAL INVESTME NT IN INFRASTRUCTURE, IN TERMS OF PREMISES, EQUIPMENT, CONNECTIVITY, ETC. THE RISK OF OPTIMAL UTILIZATION OF CAPACITY IS BORNE BY THE ENTITY MAKING THE INVESTMENT. SINCE , CADENCE INDIA IS COMPENSATED ON THE BASIS OF A FULL COST PLUS MARKUP ; IT IS ASSURED OF THE RECOVERY OF COSTS OF ANY UNDERUTILIZED / UNUTILIZED RESOURCE S AND IS NOT EXPOSED TO ANY UTILIZATION RISK. SERVICE LIABILITY RISK SERVICE LIABILITY RISK REFERS TO THE RISK ASSOCIATE D WITH THE POSSIBILITY OF FACING LEGAL ACTION FROM CUSTOMERS DUE TO DEFECTS IN THE PRODUCT S PROVIDED. CADENCE INDIA RENDERS SERVICES ONLY TO ITS ASSOCIATED ENTERPRISE AND AS PER ITS CONTRACTUAL ARRANGEMENTS WITH CDS, THIS RISK RESTS WITH CDS. CD S IS CONTRACTUALLY LIABLE TO FINAL CUSTOMERS FOR THE PRODUCTS SOLD BY IT. RE-WORKRISK RE-WORK RISK ARISES IN A SITUATION WHERE THE PRODUC T SOLD/SERVICE PROVIDED DOES NOT MEET THE REQUISITE QUALITY/DELIVERY STANDARDS A ND REQUIRES RE-WORK. CADENCE INDIA IS REIMBURSED ALL COSTS INCLUDING RE- WORK COSTS ALONG WITH A SPECIFIED MARK UP. CADENCE INDIA DOES NOT BEAR ANY RE-WORK RISK. CREDIT AND COLLECTION RISK WHEN AN ENTITY SUPPLIES PRODUCTS OR SERVICES TO A C USTOMER IN ADVANCE OF CUSTOMER PAYMENT, THE FIRM RUNS THE RISK OF DEFAULT OF SUCH PAYMENT. CADENCE INDIA DOES NOT BEAR ANY CREDIT AND COLLECTI ON RISK SINCE IT BILLS DIRECTLY TO ITS ASSOCIATED ENTERPRISE I.E. CDS, WHICH MAKES PAY MENT ON A MONTHLY BASIS OR IN ADVANCE. PAYMENT TO CADENCE INDIA IS NOT CONTINGENT UPON PAYMENT RECEIVED BY CDS FROM ITS CUSTOMERS. HOWEVER, CDS BEARS CREDIT A ND COLLECTION RISK AS IT SELLS ITS PRODUCTS TO FINAL CUSTOMERS. FOREIGN EXCHANGE RISK EXCHANGE RATE RISK RELATES TO THE POTENTIAL VARIABI LITY OF PROFITS THAT CAN ARISE BECAUSE OF CHANGES IN FOREIGN EXCHANGE RATES AND AR ISES WHENEVER THE TRANSACTING CURRENCY OF AN ENTITY IS DIFFERENT FROM ITS FUNCTIONAL CURRENCY. 8 CADENCE INDIA INVOICES CDS FOR ITS SERVICES IN USD, WHICH IS DIFFERENT FROM ITS FUNCTIONAL CURRENCY. HOWEVER, SINCE CADENCE INDIA I S REMUNERATED ON ALL ITS COSTS INCLUDING FOREIGN EXCHANGE LOSS, CADENCE INDIA DOES NOT BEAR THE FOREIGN EXCHANGE RISK IN RELATION TO TRANSACTIONS WITH CDS. CDS IS EXPOSED TO ANY FOREIGN CURRENCY RISK IN THIS CONTEXT. BRIEFLY TABULATED ARE THE KEY RISKS, BORNE BY CADEN CE INDIA AND CDS IN RELATION TO THE SOFTWARE DEVELOPMENT SERVICES PROVIDED BY CADEN CE INDIA TO CDS. 6. BASING ON THE FAR ANALYSIS THE ASSESSEE CARRIED C OMPARABILITY ANALYSIS BY PROVIDING THE TNMM AS THE MOST APPROPRIATE METHOD W ITH PLI (OP/OC) TO REACH THE FIGURE 15.04%. IN THEIR TRANSFER PRICING STUDY REPORT, THE ASSESSEE SELECTED THE FOLLOWING 23 COMPANIES WITH WEIGHTED AVERAGE BY OP/O C AT 12.84%, AND SO STATING THAT ITS MARGIN WAS AT ALP. S.NO. NAME OF THE COMPANY WEIGHTED AVERAGE OF OPERATING PROFITS ON OPERATING COSTS (%) 1 AKSHAY SOFTWARE TECHNOLOGIES LTD. 4.58% 2 ANCENT SOFTWARE INTERNATIONAL LTD. 6.83% 3 AZTECOSOFT LIMITED ( CONSOLIDATION) 6.80% 4 CALIBER POINT BUSINESS SOLUTIONS LTD. (SEGMENTAL) -0.95% 5 CAT TECHNOLOGIES LTD. 26.90% 6 CG VAK SOFTWARE & EXPORTS LTD. (SEGMENTAL) 0.31% 7 EVOKE TECHNOLOGIES P. LTD. 20.05% 8 GOLDSTONE TECHNOLOGIES LTD. 3.70% 9 HELIOS & MATHESON INFORMATION TECHNOLOGIES LTD. 1 7.22% 10 KPIT CUMMINS INFOSYSTEM LTD. (CONSOLIDATED) 12.53 % 11 LARSEN & TOUBRO INFOTECH LTD. 18.19% 12 LSG GLOBAL LTD. 14.53% 13 MAVERIC SYSTEMS LTD. 14.50% 14 MINDTREE LIMITED (SEGMENTAL) 12.08% 15 PERSISTENT SYSTEMS LTD. 23.91% 16 QUINTEGRA SOLUTIONS LTD. -0.29% 9 17 R.S. SOFTWARE (INDIA) LTD. 11.99% 18 R. SYSTEMS INTERNATIONAL LTD. (SEGMENTAL) 12.10% 19 SASKEN COMMUNICATIONS TECHNOLOGIES LTD. 22.79% 20 SAVEN TECHNOLOGIES LTD. (CONSOLIDATED SEGMENTAL) 17.52% 21 THINKSOFT GLOBAL SERVICES LTD. 11.54% 22 THIRDWARE SOLUTIONS LTD. 21.75% 23 ZYLONG SYSTEMS LTD. 16.64% ARITHMETIC MEAN 12.84% 7. HOWEVER, THE LEARNED TPO CONDUCTED A DETAILED AN ALYSIS AND SELECTED FOLLOWING 19 COMPARABLE COMPANIES AND REACHED THE A VERAGE OP/OC OF 21.47%: S.NO. COMPANY NAME OP/OC 1 ACROPETAL TECHNOLOGIES LTD. (SEGMENT) 36.69% 2 AKSHAY SOFTWARE TECHNOLOGIES LTD. 0.16% 3 CELSTREAM TECHNOLOGIES P LTD. 12.26% 4 EVOKE TECHNOLOGIES P. LTD. 8.11% 5 E-INFOCHIPS LIMITED 56.44% 6 E-ZEST SOLUTIONS LTD. 34.83% 7 INFOSYS LTD. 43.53% 8 KIREETI SOFT TECHNOLOGIES LTD. 3.63% 9 LARSEN & TOUBRO INFOTECH LTD. 18.40% 10 MINDTREE LTD. (SEGMENT) 10.74% 11 PERSISTENT SYSTEMS & SOLUTIONS LTD. (MEGED) 22.12% 12 PERSISTENT SYSTEMS LTD. 23.08% 13 R.S. SOFTWARE (INDIA ) LTD. 16.20% 14 SAKHYA INFOTECH LTD. 26.20% 15 SASKEN COMMUNICATIONS TECHNOLOGIES LTD. 24.36% 16 TATA ELXSI LTD. (SEGMENT) 13.00% 17 THIRDWARE SOLUTIONS 16.19% 18 WIPRO TECHNOLOGIES LTD. 54.42% 19 ZYLOG SYSTEMSLTD. 28.74% AVERAGE 23.64% 10 8. LEARNED DRP CONFIRMED THE SELECTION OF 19 COMPAR ABLE COMPANIES IN RESPECT OF SOFTWARE DEVELOPMENT SECTION, AND PURSUA NT TO THE DIRECTIONS OF THE LD. DRP, THE RECOMPUTATION OF ALP IS: OPERATING COST 1,641,012,105 ARMS LENGTH VALUE AT A MARGIN OF 21.47% 1,993,337, 404 PRICE RECEIVED 1,886,342,446 105% OF PRICE RECEIVED 1,980,659,568 PROPOSED ADJUSTMENT U/S 92CA 106,994,958 9. IN THIS APPEAL, AS SUBMITTED BY THE LEARNED AR, A SSESSEE IS CHALLENGING THE EXCLUSION OF FIVE COMPANIES, VIS., INFOSYS LIMITED, WIPRO TECHNOLOGY SERVICES LIMITED, ACROPERAL TECHNOLOGIES LIMITED (SEGMENTAL) , E-INFOCHIPS LIMITED AND E- ZEST SOLUTIONS LTD. AND ALSO PRAYING FOR INCLUSION O F SEVEN COMPANIES, VIZ., CG VAK SOFTWARE & EXPORTS LTD., GOLDSTONE TECHNOLOGIES LTD ., THINKSOFT GLOBAL SERVICES LTD., CAT TECHNOLOGIES LTD., LGS GLOBAL LTD., R. SY STEMS INTERNATIONAL LTD., AND BLUE STAR INFOTECH LTD. 10. NOW WE SHALL DEAL WITH THE ARGUMENTS RELATING T O THE INCLUSION OR EXCLUSION OF THESE DISPUTED COMPARABLES WITH REFERENCE TO THE DOCUMENTS AVAILABLE ON RECORD. INFOSYS LTD.: 11. ASSESSEE DISPUTES THE INCLUSION OF THIS COMPANY ON THE GROUND OF FUNCTIONAL DISSIMILARITY BY STATING THAT THIS COMPANY IS ENGAGED IN TECHNICAL CONSULTING, DESIGN, DEVELOPMENT, RE-ENGINEERING, MAINTENANCE SYS TEMS INTEGRATION, PACKAGE EVALUATION, INFRASTRUCTURE MANAGEMENT SERVICES, ETC . IT IS ALSO SUBMITTED BY 11 LEARNED AR THAT THIS COMPANY DERIVES INCOME FROM SAL E OF SOFTWARE PRODUCTS SUCH AS FINACLE ANALYZ, FLYPP, IENGAGE ETC. BESIDES HOLDIN G SIGNIFICANT INTANGIBLES INCLUDING BRAND VALUE. THIS COMPANY OPERATES AT A V ERY LARGE SCALE WITH SALES OF RS.25,385 CRORES AND EARNING SUPER NORMAL PROFITS O F ABOUT 43.53% AND ITS REVENUE COMPRISES OF MORE THAN 50% OF INCOME FROM O N SITE. 12. BEFORE THE LEARNED TPO THE ASSESSEE OBJECTED TH E INCLUSION OF THIS COMPANY ON THE GROUNDS OF FUNCTIONAL DISSIMILARITY, NON AVAI LABILITY OF SEGMENTAL INFORMATION, EARNING SUPER NORMAL PROFITS, ENGAGED IN SIGNIFICANT R&D ACTIVITIES, POSSESSING SIGNIFICANT INTANGIBLE ASSETS, HUGE BRAN D VALUE AND THE RISK PROFILE ETC. HOWEVER, LEARNED TPO, VIDE PARAGRAPH NOS.69 TO 75 O F HIS ORDER, DEALT WITH THIS ASPECT AND REJECTED THE CONTENTIONS OF THE ASSESSEE ON THE GROUNDS OF THE COMPANY BEING ENGAGED IN THE SOFTWARE DEVELOPMENT AC TIVITIES AND THE INTANGIBLE ASSETS AND BRAND HAVE NO IMPACT ON THE PROFITABILIT Y OF THIS COMPANY. HE OBSERVED THAT A BRAND MAY GENERATE REVENUE BUT WITH A COST COMPENSATING ANY EXTRA BENEFIT DERIVES FROM SUCH EFFORT. HE ALSO OB SERVED THAT THE ASSETS OWNED BY THE ASSESSEE AND INFOSYS HAVE NO BEARING ON THE PLI. 13. LEARNED DRP REFERRED TO THE DECISION IN CHRYSCAP ITAL INVESTMENT ADVISORS (INDIA) PVT LTD (ITA NO. 417/2014) (DELHI HC) AND R EJECTED THE CONTENTION OF THE ASSESSEE BASING ON THE SUPER NORMAL PROFIT SO ALSO WHILE RELYING UPON RAMPGREEN SOLUTIONS PVT. LTD. VS. COMMISSIONER OF INCOME TAX (2015) 377 ITR 0533 (DELHI) TO SAY THAT A COMPANY CANNOT BE EXCLUDED ONLY FOR THE REA SON OF EARNING HIGH PROFITS. 14. IN ADDITION TO THE REITERATION OF THE CONTENTIO NS RAISED BEFORE THE AUTHORITIES BELOW, LEARNED AR BROUGHT IT TO OUR NOT ICE THAT IN ASSESSEES OWN CASE 12 FOR AY 2009-10 IN ITA NO.2074/DEL/2014, IT WAS FOUN D THAT INFOSYS LTD. IS NOT COMPARABLE TO THE ASSESSEE. LEARNED DR PLACED RELI ANCE ON THE ORDERS OF THE AUTHORITIES BELOW AND THE REASON FOR INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 15. FINANCIALS OF INFOSYS LENDS ANY AMOUNT OF SUPPORT TO THE ARGUMENT OF THE ASSESSEE REFERRED TO ABOVE. FURTHER, VIDE PARAGRAP H NO.7 TO 7.4 IN THE ORDER IN ITA 2074/DEL/2014, A COORDINATE BENCH OF THIS TRIBU NAL CONSIDERED IN ASSESSEES OWN CASE FOR THE AY 2009-10 THE COMPARABILITY OF INF OSYS WITH THE ASSESSEE IN DETAIL, AND WHILE PLACING RELIANCE ON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES P. LTD. I N ITA NO.1204/2011 (DEL) HELD THAT INFOSYS LTD .CANNOT BE COMPARED WITH THE ASSESS EE COMPANY AND THE OBSERVATIONS OF THE BENCH NEEDS TO BE EXTRACTED HER EUNDER. (B) INFOSYS TECHNOLOGIES LIMITED (42.44%) 7. THE ASSESSEES MAIN CONTENTION FOR EXCLUSION OF INFOSYS TECHNOLOGIES LIMITED HAD BEEN THAT FIRSTLY, ITS SERVICES ARE INC OMPARABLE WITH THE ASSESSEE BECAUSE INFOSYS IS INTO TECHNICAL CONSULTANCY DESIG N, DEVELOPMENT, RE-ENGINEERING MAINTENANCE, SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND INFRASTRUCTURE MANAGEMENT SERVICES; SECONDLY, IT HA S HUGE R&D WORK FOR ITS PRODUCTS, WHICH ARE MORE THAN RS.267 CRORES, WHEREAS IN THE CASE OF THE ASSESSEE IT IS NIL; THIRDLY, INFOSYS HAS HUGE INTAN GIBLES AND BRAND VALUE IS ALSO HUGE WHEREAS IN THE CASE OF THE ASSESSEE IT IS NIL; AND LASTLY, INFOSYS IS INTO LARGE SCALE OF OPERATIONS WHICH IS EVIDENT FROM THE FACT THAT DURI NG THE YEAR IT HAD TURNOVER OF RS.20,265 CRORES, WHEREAS IN THE CASE OF THE ASSESS EE, IT IS ONLY 248.53 CRORES. THUS, THE COMPANY HAVING SUCH A HUGE TURNOVER CANNO T BE HELD TO BE COMPARABLE UNDER FAR. THE TPO AND DRP, HELD THAT REVENUE FROM SOFTWARE PRODUCTS OF INFOSYS TECHNOLOGIES LIMITED IS ONLY RS.848 CRORES OUT OF I TS OPERATING REVENUES OF RS.20,297 CRORES AND ITS REVENUE FROM SOFTWARE SERV ICES IS RS.19,416 CRORES. THUS, SOFTWARE DEVELOPMENT SERVICES OF INFOSYS TECHNOLOGI ES LIMITED CAN VERY WELL BE COMPARED WITH THAT OF THE ASSESSEE. REGARDING EXPEN DITURE ON R&D EXPENSES, THE 13 DRP OBSERVED THAT IT IS MERELY 1.3% OF THE REVENUE OF INFOSYS, WHICH CANNOT BE SAID TO BE SUBSTANTIAL. 7.1 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE, SH RI NAGESHWAR RAO, BESIDE AFORESAID CONTENTION STRONGLY RELIED UPON THE DECIS ION OF THE TRIBUNAL IN THE CASE OF FISERV INDIA (P.) LTD.(SUPRA); AND THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THECAE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.1204/2011 (DEL). 7.2 ON THE OTHER HAND, THE LD. SR. D.R., SUBMITTED THAT INFOSYS TECHNOLOGIES LIMITED HAS BEEN ASSESSEES OWN COMPARABLE IN THIS YEAR AS WELL AS IN THE EARLIER YEAR ALSO AND THE SAME WAS NOT CHALLENGED IN THE EA RLIER YEAR, THEREFORE, THE ASSESSEE CANNOT CHALLENGE THE SAME COMPARABLE IN TH IS YEAR ONCE IT HAS ACCEPTED THIS COMPARABLE IN ASSESSMENT YEAR 2008-09. IN SUPP ORT OF HIS CONTENTION, THE LD. SR. DR STRONGLY RELIED UPON THE DECISION OF THE TR IBUNAL IN THE CASE OF CAPGEMINI INDIA PVT. LTD. VS. ACIT 7861/MUM/2011 AND THE DECI SION OF E-VALUESERVE.COM PVT. LTD. VS. ITO IN ITA NO.4001/DEL/2013. THUS, IN FOSYS TECHNOLOGIES LIMITED HAS RIGHTLY BEEN TAKEN AS A COMPARABLE BY THE TPO. 7.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER AS WELL AS MATERIAL REF RRED TO BEFORE US. FIRST OF ALL, INFOSYS TECHNOLOGIES LIMITED IS A GIANT ENTERPRISE WITH TUR NOVER OF MORE THAN RS.20,264 CRORES. ITS EXPENDITURE ON R&D WAS RS. 267 CRORES A ND IT HAS HUGE BRAND VALUE AND SIGNIFICANT INTANGIBLE ASSETS, WHICH HAVE BEEN VALUED AT APPROXIMATELY RS.1,34,478 CRORES. IF THESE ASSETS ARE TO BE COMPA RED WITH THOSE OF THE ASSESSEE, IT CAN BE SEEN THAT IT HAS NIL EXPENDITURE ON R&D AND NO SIGNIFICANT INTANGIBLE ASSET. ON THIS GROUND ALONE, VARIOUS BENCHES OF THE TRIBUNAL HAVE HELD THAT INFOSYS TECHNOLOGIES LIMITED CANNOT BE COMPARED WIT H SMALL SOFTWARE COMPANIES, WHO ARE INTO CONTRACT SOFTWARE DEVELOPMENT SERVICES . A COMPANY LIKE INFOSYS WITH MEGA OPERATIONS AND HAVING SIGNIFICANT ASSETS AND B RAND VALUE AND FULL-FLEDGED RISK TAKING ENTREPRENEUR DEVELOPING AND SELLING PRO PRIETARY PRODUCTS CANNOT BE HELD TO BE COMPARABLE WITH THE CAPTIVE SERVICE AND CONTRACT SOFTWARE DEVELOPMENT COMPANIES AS THE COMPARABILITY ANALYSIS FAILS ON ALL THE FACTORS OF FAR. THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA) MADE A COMPARATIVE CHART WHILE DEALING WITH SIMILAR COMPARATIVE ANALYSIS, WHICH FOR SAKE OF READY REFER ENCE IS REPRODUCED HEREUNDER:- 14 INFOSYS TECHNOLOGIES LTD. ASSESSEE BASIC PARTICULAR RISK PROFILE: OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100 PERCENT SERVICES ARE PROVIDED TO AES NATURE OF SERVICES: DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE-ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. CONTRACT SOFTWARE DEVELOPMENT SERVICES TURNOVER: 20,264 CRORES 209.83 CRORES OWNERSHIP BRANDED/ PROPRIETARY PRODUCTS: DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT. ALSO THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE 'FINACLE') ONSITE V. OFFSHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E. SERVICES PERFORMED AT THE CUSTOMER'S LOCATION OVERSEAS) AND OFFSHORE (50,20 PER CENT) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E. REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SAL ES PROMOTION AND BRAND BUILDING: RS.80 CRORES. RS. NIL (AS THE 1 PERCENT SERVICES ARE PROVIDED TO AES) EXPENDITURE ON RESEARCH AND DEVELOPMENT RS.236 CRORES RS.NIL OTHER 100 PER CENT OFFSHORE (FROM INDIA) 15 7.4 IF WE APPLY THE AFORESAID COMPARATIVE CRITERIA AS LAID DOWN BY JURISDICTIONAL HIGH COURT, WE FIND THAT THE SAME WOULD BE APPLICABLE ON THE FACTS OF THE PRESENT CASE ALSO AND, THEREFORE, RESPECTFULLY FOLLOWING THE JUDGMENT O F THE HON'BLE DELHI HIGH COURT (SUPRA), WE HOLD THAT INFOSYS TECHNOLOGIES LIMITED CA NNOT BE COMPARED WITH THE ASSESSEE-COMPANY, WHICH IS OPERATING AT MINIMAL RISK AND IS A CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER. ACCORDINGLY, WE DIRECT THE TPO TO EXCLUDE INFOSYS TECHNOLOGIES LIMITED FROM THE COMPARABLE LIST. 16. ON A PERUSAL OF THE ANNUAL REPORT OF THE COMPAN Y AND ALSO THE ABOVE OBSERVATION OF A COORDINATE BENCH OF THIS TRIBUNAL IN THE ORDER IN ITA NO.1204/2011 (DEL) WE ARE SATISFIED WITH THE ARGUME NT OF THE LD. AR THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSES SEE. FURTHER, NO CHANGE OF CIRCUMSTANCES IS BROUGHT TO OUR NOTICE COMPELLING U S TO TAKE A DIFFERENT VIEW FROM THE ONE TAKEN IN ASSESSEES OWN CASE ON THE COMPARA BILITY OF INFOSYS WITH ASSESSEE. WE, THEREFORE, WHILE RESPECTFULLY FOLLOWI NG THE RATIO OF THE COORDINATE BENCH EXTRACTED (SUPRA) HOLD THAT THE INFOSYS TECHNO LOGIES HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. LEARNED AO IS DIRECT ED SO. WIPRO TECHNOLOGIES SERVICES (P) LTD.: 17. ASSESSEE OBJECTED THE INCLUSION OF THIS COMPANY ON THE GROUND OF DRAWING HUGE REVENUES FROM THE SERVICE OF CITI GROUP COMPAN IES, FUNCTIONAL DISSIMILARITY, NON AVAILABILITY OF SEGMENTAL INFORMATION AND EARNIN G SUPER NORMAL PROFITS. HOWEVER, LEARNED TPO BRUSHED ASIDE THE CONTENTION O F THE ASSESSEE STATING THAT EARNING OF SUPER NORMAL PROFITS WAS MADE POSSIBLE B Y THE WIPRO DUE TO THE COMMERCIAL EFFICIENCY GAINED BY THEM. 18. LEARNED DRP AGAIN PLACED RELIANCE ON CHRIS CAPI TAL (SUPRA) AND RAMP GREEN (SUPRA). HE OBSERVED THAT INASMUCH AS BOTH WIPRO A ND ASSESSEE ARE ENGAGED IN THE DEVELOPMENT OF SOFTWARE AND SOFTWARE SERVICES, THEY ARE FUNCTIONALLY SIMILAR 16 AND EARNING OF SUPER NORMAL PROFITS IS OF NO CONSEQ UENCE IN RESPECT OF THEIR COMPARABILITY. 19. IT IS THE ARGUMENT OF THE LEARNED AR THAT WIPRO EARNS ITS ENTIRE INCOME FROM SERVICES RENDERED TO CITI GROUP OF COMPANIES. ACCORDING TO HIM, THE WIPRO IS ENGAGED IN IT SOFTWARE SOLUTIONS/MAINTENANCE AND TECHNOLOGY INFRASTRUCTURE SOFTWARE SERVICES. SEGMENTAL INFORMATION PROVIDED IN ITS ANNUALS IS INSUFFICIENT. WIPRO WITH ITS PROFIT RATE OF 54.42% EARNS SUPER NO RMAL PROFITS. HE PLACED RELIANCE ON THE DECISIONS OF THE COORDINATE BENCHES OF THIS TRIBUNAL IN ORANGE BUSINESS SERVICES INDIA SOLUTIONS P. LTD. VS DCIT I N ITA NO.869/DEL/2016 AND NESS TECHNOLOGIES (INDIA) P. LTD. VS DCIT IN ITA NO.696/ MUM/2016 AND ANR. 20. LEARNED DR SUBMITTED THAT IN NESS INDIA TECHNOL OGIES P. LTD. THE MUMBAI TRIBUNAL FOLLOWED THE DECISION OF DELHI BENCH IN TH E CASE OF SAXO INDIA P. LTD. VS ACIT, ITA NO.6148/DEL/2015 ORDER DATED 5 TH FEBRUARY, 2016 AND SUCH DECISION IN SAXO RELATES TO SOME OTHER EARLIER YEAR, AS SUCH, WI THOUT ADVERTING TO THE CHANGES THAT HAVE TAKEN PLACE SUBSEQUENT TO THAT ASSESSMENT YEAR, IT IS NOT PROPER TO FOLLOW THE SAME. HE FURTHER SUBMITTED THAT THOUGH THE WIPRO TECHNOLOGIES SERVICES P. LTD. WAS A SUBSIDIARY OF THE CITI TECHNO LOGIES SERVICES LTD., SUBSEQUENTLY, BY WAY OF AGREEMENT DATED 21.1.2009 WIP RO LTD. ACQUIRED ALL THE INTEREST OF CITI GROUP, AS SUCH, THE ASSESSEE CANNO T COMPLAIN BASING ON THE RELATED PARTY FILTER. 21. PER CONTRA, IT IS THE SUBMISSION OF THE LD. AR THAT AS PER THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN, WIPRO TECHNOLOGIES SERVICES LTD. WAS INCORPORATED AS CITI TECHNOLOGIES SERVICES LTD., A SUBSIDIARY OF CITICORP. BANKING CORPORATION SUBSEQUENTLY, THOUGH ALL THE SHARES OF THE COMPANY WA S PURCHASED BY WIPRO LTD., 17 UNDER A LONG TERM AGREEMENT DATED 21.1.2009 WIPRO S IGNED A MASTER SERVICE AGREEMENT WITH THE CITI GROUP INC. FOR A DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANC E SERVICE FOR SIX YEARS PROVIDING DELIVERY OF AT LEAST $500 MILLION IN SERVI CE REVENUE OVER THIS PERIOD. THIS FACT CANNOT BE IGNORED. NEXTLY, HE SUBMITTED THAT T HOUGH THE LEARNED DR ARGUED THAT THE MUMBAI TRIBUNAL IN NESS TECHNOLOGIES (SUPR A) HAS NOT PROPERLY FOLLOWED THE DECISION IN SAXO (SUPRA) WHICH RELATES TO EARLI ER YEARS, IT CANNOT BE DENIED THAT FOR AY 2011-12 THE DELHI TRIBUNAL IN ORANGE BUSINES S SERVICE SOLUTIONS, UNDER VERY SIMILAR CIRCUMSTANCES FOUND THAT WIPRO TECHNOLOGIES SERVICES IS NOT A GOOD COMPARABLE INASMUCH AS THIS COMPANY IS A SUBSIDIARY TO WIPRO LTD. AND THE ENTIRE REVENUE DURING THE YEAR IS COVERED BY A MASTER SERVI CE AGREEMENT ENTERED INTO BY BREAK THROUGH WITH CITI GROUP SERVICES. 22. WE HAVE GONE THROUGH THE MATERIAL AVAILABLE BEF ORE US. FROM PAGE NO.294 OF THE PAPER BOOK WHICH CONSISTS OF THE SUBMISSIONS OF THE ASSESSEE BEFORE THE LD. TPO, THE ASSESSEE BROUGHT TO THE NOTICE OF TPO THAT IN THE ANNUAL REPORT OF THE WIPRO TECHNOLOGIES SERVICES LTD. IT WAS MENTIONED T HAT WIPRO SIGNED A MASTER SERVICE AGREEMENT WITH CITI GROUP INC. FOR DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES LTD. AND APPLICATION OF MAINTENANCE SERVIC E FOR A PERIOD OF SIX YEAR UNDER THE AGREEMENT DATED 21.1.2009. THIS FACT COULD NOT BE REFUTED BY THE REVENUE. 23. IN ORANGE BUSINESS SERVICE SOLUTIONS CASE IN IT A NO 869/DEL/2016, UNDER VERY SIMILAR CIRCUMSTANCES FOUND THAT WIPRO TECHNOLO GIES SERVICES IS NOT A GOOD COMPARABLE INASMUCH AS THIS COMPANY IS A SUBSIDIARY TO WIPRO LTD. AND THE ENTIRE REVENUE DURING THE YEAR IS COVERED BY A MASTER SERVI CE AGREEMENT ENTERED INTO BY BREAK THROUGH WITH CITI GROUP SERVICES. FURTHER, VI DE SCHEDULE NO.18.9 IT IS CLEARLY 18 STATED THAT THIS COMPANY IS ENGAGED IN PROVIDING SOF TWARE RELATED SUPPORT SERVICES PRIMARILY INFORMATION TECHNOLOGY SOFTWARE SO LUTIONS/MAINTENANCE AND TECHNOLOGY INFRASTRUCTURE SUPPORT SERVICE TO CITI GR OUP ENTITIES GLOBALLY AND IT IS CONSIDERED AS ONE SEGMENT. 24. WE, THEREFORE, FIND NO REASON NOT TO BELIEVE TH AT THE ENTIRE REVENUES OF THIS WIPRO TECHNOLOGY SERVICES LTD. ARE COVERED DURING TH E YEAR BY THE MASTER SERVICE AGREEMENT BETWEEN WIPRO LTD. AND CITI GROUP INC. F OR THIS REASON, WE DO NOT AGREE WITH THE AUTHORITIES BELOW THAT THIS IS A GOO D COMPARABLE TO THE ASSESSEE. LEARNED AO IS DIRECTED TO DELETE THIS COMPANY FROM T HE LIST OF COMPARABLES. ACROPETAL TECHNOLOGIES LTD. (SEGMENTAL): 25. ASSESSEE OBJECTED THIS COMPANY TO BE IN THE LIST OF COMPARABLES MAINLY ON THE GROUND THAT THIS COMPANY EMPLOYEES COST IS LESS T HAN 25% OF THE TOTAL COST AND ALSO THAT THIS COMPANY IS ENGAGED IN SIGNIFICANT R &D ACTIVITIES AND INCURRING SIGNIFICANT ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES AS A PERCENTAGE OF SALE. LEARNED TPO OBSERVED THAT THERE APPEARS TO B E MERELY A DIFFERENCE IN CLASSIFICATION OF EXPENSES IN THE ANNUAL REPORT FOR FY 2010-11, AND IF WE LOOK AT FIGURES FOR THE FY 2011-12 IN THE ANNUAL REPORT, TH E EXPENSES ON SALARY AND WAGES ARE CORRECTLY CLASSIFIED, AND, AS SUCH, THIS IS A GO OD COMPARABLE AS IT HAS ALSO ENGAGED IN OFFSHORE MODEL OF WORK AS THAT OF THE AS SESSEE. 26. LD. DRP HELD THAT THIS COMPANY IS IN SOFTWARE DE VELOPMENT, PASSED THE EMPLOYEE COST FILTER, THERE IS NO EVIDENCE OF INCREA SE IN MARGIN PROFIT ON ACCOUNT OF CREATION OF INCUBATION BUSINESS UNIT, AS PER WEB SITE THE COMPANY STARTED AS ENGINEERING DESIGN SERVICES AND EXPANDED ITS FORAY O F SERVICES TO ADD SOFTWARE SERVICE CAPABILITIES AND AS PER PAGE 53 OF ANNUAL R EPORT, SEGMENT WISE BREAKUP OF 19 THE REVENUE IS ALSO AVAILABLE. FOR THESE REASONS, LD. DRP RECORDED THAT IT IS A GOOD COMPARABLE. 27. LD. AR BROUGHT TO OUR NOTICE THAT THE SALARIES AND CONSULTANCY CHARGES INCLUDING BONUS INCURRED BY ACROPETAL WAS RS.13.51 C RORES WHEREAS THE TECHNICAL SUB CONTRACT EXPENSE WAS RS.55.77 CRORES WHICH ACC OUNTS FOR ONLY 13.74% AND ACCORDINGLY IT DOES NOT PASS THROUGH THE FILTER PROP OSED BY THE LD. TPO. 28. LD. DR JUSTIFIED THE ORDERS OF THE AUTHORITIES BELOW BASING ON THE OBSERVATIONS OF THE LD. TPO AND CONSIDERED BY THE LE ARNED DRP TO THE EFFECT THAT IT IS ONLY A MATTER OF DIFFERENCE IN CLASSIFICATION OF EXPENSE AND THE FINANCIALS OF SUBSEQUENT YEARS RATIFY THE SAME 29. PER CONTRA, LD. AR SUBMITTED THAT WHEN THE MATT ER RELATES TO THE FY 2010- 11 AND THE ANNUAL REPORT IS AVAILABLE IN THE PUBLIC DOMAIN, THE AUDITED REPORTS OF THIS YEAR ARE TO BE CONSIDERED BUT NOT THE FINANCIAL S OF THE NEXT YEAR. 30. ON A PERUSAL OF PAGE NO.45 & 46 OF THE ANNUAL R EPORT OF ACROPETAL, WE FIND THAT THE SUBMISSION OF THE LD. AR IS JUSTIFIED. WE , THEREFORE, DIRECT THE LD. AO TO VERIFY THE EMPLOYEE COST PERCENTAGE TO THE TOTAL COS T AND IF IT DOES NOT PASS THE FILTER, TO EXCLUDE THE SAME. 20 E-INFOCHIPS LIMITED: 31. ASSESSEE RESISTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES MAINLY CONTENDING THAT THE COMPANYS REVENUE FROM SOF TWARE DEVELOPMENT SERVICES IS LESS THAN 75% OF ITS OPERATING REVENUE AND ALSO THAT IT IS ENGAGED INTO DIVERSIFIED ACTIVITIES AS COULD BE SEEN FROM THE AN NUAL REPORT OF THIS COMPANY. EARNING OF SUPER NORMAL PROFITS WAS ALSO CONTENDED BEFORE THE LD. TPO. HOWEVER, LD. TPO OBSERVED THAT THE ASSESSEE IS ALSO ENGAGED IN SEMANTICS, UNDER TWO HEADS OF INCOME I.E. INCOME FROM SOFTWARE DEVELOPMENT AND INCOME FROM IT SERVICES WHICH PUT TOGETHER AMOUNTS TO 86% OF THE TOTAL INCO ME, AS SUCH THE ASSESSEE CANNOT INSIST ON CONSIDERING THE INCOME ONLY FROM SO FTWARE DEVELOPMENT. HE FURTHER OBSERVED THAT THE OTHER ACTIVITIES ARE OF V ERY SMALL VOLUME AND INTEGRALLY CONNECTED WITH THE FUNCTION OF PROVIDING SOFTWARE S ERVICES. 32. LD. DRP OBSERVED THAT THE REVENUE FROM SOFTWARE SERVICES OF THIS COMPANY IS AS HIGH AS 85% OF TOTAL RECEIPTS AND THERE WAS N O EARNING FROM SALE OF SOFTWARE PRODUCTS. ONLY A SMALL COMPONENT OF EARNING IS FROM HARDWARE. FOLLOWING CHRYS CAPITAL CASE (SUPRA) HE HELD THAT WHEN THE COMPANIE S ARE OTHERWISE COMPARABLES, EARNING OF SUPER NORMAL PROFIT IS NOT A GROUND TO R EJECT THE COMPANY. 33. IT IS THE ARGUMENT OF THE LD. AR THAT THE LD TP O VIDE PARAGRAPH NO.16(I) OF ORDER SELECTED ONE OF THE FILTERS AS COMPANIES WHO HAVE EXPORT SALES LESS THAN 75% OF THE SALES FROM THE SOFTWARE DEVELOPMENT ARE EXCLUDED, BUT E-INFOCHIP LTD. HAS GOT THE RATIO OF SERVICE REVENUE TO TOTAL OPERATING REVENUE AT 73.38% ONLY. HE FURTHER SUBMITTED THAT THE SIGNIFICANT ACC OUNTING POLICY OF THIS COMPANY VIDE ITEM NO.5 AT PAGE 43 OF ITS ANNUAL REPORT SHOW S THAT THE COMPANY IS ENGAGED IN THE SOFTWARE DEVELOPMENT AND IT ENABLE SERVICES AND PRODUCTS WHICH ARE 21 CONSIDERED THE ONLY REPORTABLE SEGMENT AND, FOR WANT OF SEGMENTAL DATA RELATING TO SOFTWARE DEVELOPMENT THIS COMPANY IS NOT EVEN COM PARABLE. RELIANCE IS PLACED ON THE DECISION IN MUMBAI TRIBUNAL IN NESS T ECHNOLOGIES (SUPRA). 34. LD. DR SUBMITTED THAT AS COULD BE SEEN FROM THE SCHEDULED INCOME AT PAGE NO.144 OF THE ANNUAL REPORT PAPER BOOK REVENUE FROM SOFTWARE DEVELOPMENT, HARDWARE MAINTENANCE AND INFORMATION TECHNOLOGY CONS ULTANCY ARE PART OF THE INFORMATION TECHNOLOGY SERVICES AND IT ACCOUNTS FOR 86% OF THE REVENUE. HE FURTHER SUBMITTED THAT EVEN THE ASSESSEE IS HAVING INCOME FROM SOFTWARE DEVELOPMENT AND ITES SERVICES. HE SUBMITTED THAT FOR ALL PRACTICAL PURPOSES THIS COMPANY HAS ONLY ONE SEGMENT THAT IS SOFTWARE DEVELOP MENT AND THE REVENUE FROM THIS IS ABOUT 86%, SATISFYING THE FILTER. 35. WE HAVE GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY FOR FY 2010-11 AND FOUND THAT THE REVENUE FROM SOFTWARE DEVELOPMEN T WAS 19, 21, 09, 661/-, REVENUE FROM HARDWARE MAINTENANCE WAS RS. 3,92,48,5 62/-AND REVENUE FROM INFORMATION TECHNOLOGY CONSULTANCY WAS RS. 2,90,26,02 8/-. LD. DR ASKS AS TO CLUB ALL THESE ITEMS OF REVENUE UNDER THE HEAD REVENUE F ROM INFORMATION TECHNOLOGY SERVICES. WE FIND IT DIFFICULT TO ACCEPT THIS PLEA OF THE LD. DR AND TO HOLD THAT THE INFORMATION TECHNOLOGY CONSULTANCY SERVICE ALSO FALLS UNDER THE HEAD SOFTWARE DEVELOPMENT SO AS TO BUNDLE IT UNDER THAT HEAD. 36. IN RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT ON THE ASPECT OF EMPLOYEE COST IT WAS HELD AS UNDER:- 38. ...EVEN VISHAL COULD NOT BE CONSIDERED AS A COM PARABLE, AS ADMITTEDLY, ITS BUSINESS MODEL WAS COMPLETELY DIFFERENT. ADMITTEDLY , VISHALS EXPENDITURE ON EMPLOYMENT COST DURING THE RELEVANT PERIOD WAS A SM ALL FRACTION OF THE PROPORTIONATE COST INCURRED BY THE ASSESSEE, APPARE NTLY, FOR THE REASON THAT MOST 22 OF ITS WORK WAS OUTSOURCED TO OTHER VENDORS/SERVICE PROVIDERS. THE DRP AND THE TRIBUNAL ERRED IN BRUSHING ASIDE THIS VITAL DIFFERE NCE BY OBSERVING THAT OUTSOURCING WAS COMMON IN ITES INDUSTRY AND THE SAME WOULD NOT HAVE A BEARING ON PROFITABILITY. PLAINLY, A BUSINESS MODEL WHERE SERV ICES ARE RENDERED BY EMPLOYING OWN EMPLOYEES AND USING ONES OWN INFRASTRUCTURE WOU LD HAVE A DIFFERENT COST STRUCTURE AS COMPARED TO A BUSINESS MODEL WHERE SER VICES ARE OUTSOURCED. THERE WAS NO MATERIAL FOR THE TRIBUNAL TO CONCLUDE THAT T HE OUTSOURCING OF SERVICES BY VISHAL WOULD HAVE NO BEARING ON THE PROFITABILITY O F THE SAID ENTITY.' 37. IN NESS TECHNOLOGIES (INDIA) PRIVATE LIMITED CA SE (SUPRA) THIS ASPECT WAS ARGUED BEFORE THE MUMBAI TRIBUNAL. HAVING CONSIDERE D THE RIVAL CONTENTIONS IN THE LIGHT OF THE ANNUAL REPORT OF THIS COMPANY AND A LSO THE DECISION OF A COORDINATE BENCH OF DELHI TRIBUNAL IN THE CASE OF S AXO INDIA PRIVATE LIMITED, IT WAS HELD THAT THIS COMPANY IS NOT A GOOD COMPARABLE AND DESERVES TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES UNDER TAKEN BY THE ASSESSEE. RELEVANT PORTION OF THIS DIVISION NEEDS TO BE EXTRA CTED HEREUNDER FOR CULLING OUT THE RATIO:- '9.5 IN OUR CONSIDERED OPINION, QUALITATIVELY SPEAK ING, THE ACTIVITIES UNDERTAKEN BY M/S.E-INFOCHIPS LIMITED ARE NOT COMPARABLE TO THE P URE SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN BY THE ASSESSEE AS A CAPTIVE SE RVICE PROVIDER TO ITS ASSOCIATED ENTERPRISES. FACTUALLY, IT IS ALSO EMERGING THAT TH ERE IS NO SEGMENTAL BREAK-UP AVAILABLE WITH RESPECT TO THE PRODUCTION AND SALE O F SOFTWARE PRODUCTS UNDERTAKEN BY THE SAID CONCERN, WHICH IS AN ASPECT INCOMPARABLE TO THE ACTIVITIES OF THE ASSESSEE. FOR THE SAID REASONS, WE DO NOT FI ND ANY JUSTIFICATION FOR INCLUSION OF THE SAID CONCERN AND THE SAME IS HEREBY DIRECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES.' 38. FOR SIMILAR REASONS STATED ABOVE WE ARE OF THE CONSIDERED OPINION THAT INSOFAR AS THE ASSESSEE IS A CAPTIVE SOFTWARE DEVEL OPMENT SERVICE PROVIDER, M/S M/S.E-INFOCHIPS LIMITED IS NOT A GOOD COMPARABLE AND WHILE UPHOLDING THE ST AND 23 OF THE ASSESSEE, WE DIRECT THE LIBRARY EVER TO DELE TE THIS FROM THE LIST OF COMPARABLES. E-ZEST SOLUTIONS LTD. 39. ASSESSEE OBJECTED THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES MAINLY ON THE GROUND THAT THIS COMPANY IS ENGAGED INT O DIVERSIFIED RANGE OF SOFTWARE ACTIVITIES AND ITS ANNUAL REPORT SHOWS THA T THIS COMPANY IS AN SEI-CMMI LEVEL III AND ISO 9001:2008 CERTIFIED PRODUCT ENGIN EERING AND SOFTWARE DEVELOPMENT COMPANY, HAVING SPECIAL EXPERTISE IN EME RGING TECHNOLOGIES SUCH AS CLOUD, SAAS, BUSINESS INTELLIGENCE AND MOBILITY, AND PREDICATE IT HAS BEEN SERVING CLIENTS IN MORE THAN EIGHT INDUSTRIES ACROSS THE GL OBE WITH OVER 2000 SOFTWARE PROFESSIONALS ON-BOARD. THE PRODUCT ENGINEERING SER VICES/OUTSOURCED PRODUCT DEVELOPMENT SERVICES OF THIS COMPANY INCLUDE THE PRO DUCT DESIGN AND DEVELOPMENT, PRODUCT FEATURE ENHANCEMENT, PRODUCT P LATFORM MIGRATION, SOFTWARE PRODUCT TESTING, PRODUCT MAINTENANCE AND S UPPORT, PRODUCT RELEASE AND LICENSE MANAGEMENT, SAAS/SOA SERVICES, WEB 2.0 SERV ICES ETC ; ENTERPRISE APPLICATION DEVELOPMENT SERVICES INCLUDE CUSTOMER R ELATIONSHIP MANAGEMENT, ENTERPRISE RESOURCE PLANNING, BUSINESS INTELLIGENCE , KNOWLEDGE MANAGEMENT, ENTERPRISE APPLICATION INTEGRATION, CONSULTING ETC; ID SERVICES INCLUDE GLOBAL ON- SITE/OFFSHORE SOFTWARE DEVELOPMENT, CUSTOM SOFTWARE DEVELOPMENT/BESPOKE SOFTWARE DEVELOPMENT, INDEPENDENT SOFTWARE TESTING, RIA/AJAX APPLICATION DEVELOPMENT ETC AND TECHNOLOGY EXPERTISE OF THIS COM PANY INCLUDES THE TECHNOLOGY COMPETENCY CENTERS IN RELATION TO MICROSOF T COMPETENCY CENTRE, SUN JAVA COMPETENCY CENTRE, OPEN SOURCE COMPETENCY CENTRE , CLOUD COMPUTING PRACTICE, MOBILITY PRACTICE AND BI PRACTICE. 24 40. LD. TPO OBSERVED THAT AN INDEPENDENT ENTERPRISE THAT HAS TO SURVIVE ON ITS OWN WILL MAKE EFFORTS TO HAVE DIFFERENT CUSTOMERS, I.E., UNLIKE THE ASSESSEE WHICH ACTUALLY FACES A SINGLE CUSTOMER RISK. HE FURTHER OB SERVED THAT THE ASSESSEE HAS NOT RECOGNIZED WITH THIS RISK IN ITS RISK METRICS. HE, THEREFORE, USING HIS COMPANY AS A COMPARABLE. 41. LD. DRP CONSIDERED ALL THE SUBMISSIONS OF THE A SSESSEE IN DETAIL BUT HELD THAT THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICE, AS SUCH IS A VALID COMPARABLE TO THE TAXPAYER. 42. IT IS THE SUBMISSION OF THE LD. AR THAT PAGE NO . 39 OF THE ANNUAL REPORT OF THIS COMPANY UNDER THE HEADING, SHOWS AN ENTRY RELATI NG TO INCREASE/(DECREASE) IN STOCK. FURTHER, AT PAGE NO. 42 OF THE ANNUAL REP ORT WHITE SCHEDULE 7 INVENTORY IS THERE IS AN ENTRY WORK IN PROCESS. UNDER THE SIGN IFICANT ACCOUNTING POLICIES OF IDENTITY I AT PAGE NO. 48 OF THE ANNUAL REPORT, IT IS MENTIONED THAT VALUATION OF INVENTORIES: INVENTORIES ARE ACCOUNTED FOR AT COST, AUTOMATICALLY REALIZABLE VALUE, WHICHEVER IS LESS. LD. AR SUBMITTED THAT THE INVE NTORY IS NOT A FEATURE TO BE SEEN IN SOFTWARE DEVELOPMENT INDUSTRY. BASING ON THE SEA SUBMITTED THAT THE BUSINESS MODEL OF THE ASSESSEE IS QUITE DIFFERENT FROM THAT OF THE E-ZEST AND SOLUTIONS LTD. 43. PER CONTRA, LD. DR SUBMITS THAT IN THE ENTIRE A NNUAL REPORT OF THIS COMPANY THERE IS NO MENTION OF ANY SALE OF ANY PRODUCT AND T HE ENTIRE REVENUES OF THIS COMPANY OR ONLY FROM SERVICE. HE THEREFORE SUBMITTED THAT THERE IS NOTHING IN THE ANNUAL REPORT TO SUGGEST THAT THIS COMPANY IS INVOLV ED IN ANY PRODUCTS OF SALE THEREOF AND TO HOLD THAT THE BUSINESS MODEL OF THES E TWO COMPANIES IS DIFFERENT. 44. THE COMPARABILITY OF THIS COMPANY THIS COMPANY WIT H THE CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER LIKE THE TAXPAYER IN TH IS CASE HAS BEEN CONSIDERED 25 BY A COORDINATE BENCH OF THIS TRIBUNAL IN RELATION T O THE ASSESSMENT YEAR 2011-12, IN DETAIL IN THE CASE OF M/S SYMANTIC SOFTWARE AND S ERVICES INDIA PRIVATE LIMITED VERSUS DCIT, IN ITA NO. 614/DEL/2016 AND THE OBSERV ATIONS OF THE TRIBUNAL ARE VERY MUCH RELEVANT FOR THE PURPOSE OF THIS CASE ALSO . WHILE PARAGRAPH NUMBER 8 A COORDINATE BENCH OF THIS TRIBUNAL HELD AS FOLLOWS:- 8. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERI AL ON RECORD AND JUDICIAL DECISIONS. THE COMPARABLES COMPANY IS ENGAGED IN PR ODUCT ENGINEERING SERVICES IN THE NATURE OF HIGH END KNOWLEDGE PROCESS OUTSOUR CING AND ALSO IN PRODUCT ENGINEERING SOFTWARE DEVELOPMENT COMPANY HAVING EXP ERTISE IN EMERGING TECHNOLOGIES CLOUD SAAS, BUSINESS INTELLIGENCE AND MOBILITY FOR MORE THAN 10 YEARS AND SERVING 8 INDUSTRIES ACROSS THE GLOBE WITH OVER 200 SOFTWARE PROFESSIONALS. WHEREAS, THE ASSESSEE COMPANY IS IN THE SOFTWARE DE VELOPMENT AND ALSO ITES SERVICES AND CANNOT BE CONSIDERED AS THE FUNCTIONAL LY COMPARABLE AND WE RELY ON THE DECISION OF BANGALORE TRIBUNAL IN THE CASE OF 3 DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) AT PARA 14.4: ' 14. E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMP ARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS FUNCTIONALLY DIFFERENT FR OM THE ASSESSEE. THE TPO HAD REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUND THAT AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDE R SECTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMEN T SERVICES AND SATISFIES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPA RABLES ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT TO THE ASSESSEE. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGA GED IN 'E-BUSINESS CONSULTING SERVICES', CONSISTING OF WEB STRATEGY SE RVICES, I T DESIGN SERVICES AND IN TECHNOLOGY CONSULTING SERVICES INCLUDING PRO DUCT DEVELOPMENT CONSULTING SERVICES. THESE SERVICES, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTS OURCING ('KPO') SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT P ROVIDED SEGMENTAL DATA IN ITS ANNUAL REPORT. THE LEARNED AUTHORISED REPRESENT ATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN D ETAILED DESCRIPTIVE 26 INFORMATION ON THE BUSINESS OF THE COMPANY, THE ASS ESSEE PLACES RELIANCE ON THE DETAILS AVAILABLE ON THE COMPANY'S WEBSITE WHIC H SHOULD BE CONSIDERED WHILE EVALUATING THE COMPANY'S 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-ORDI NATE 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 LTD., OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D 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 ON LY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE N OTICE UNDER SECTION 133(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVICES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER T HE SERVICES PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON RECORD, WE FIND T HAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY I. E. E-ZEST SOLUTIONS 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 CAPI TAL I-Q INFORMATION SYSTEMS (INDIA) (P) LTD. SUPRA) THAT KPO SERVICES ARE NOT C OMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARAB LE. FOLLOWING THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS C OMPANY, 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 I S 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 THE LI ST OF THE COMPARABLES. 45. IT IS CLEAR FROM THE ABOVE THAT THE E-ZEST SOLU TIONS LTD IS A RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH-END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF CAPABLE SERVICES AND ON THE GROUND I S NOT COMPARABLE WITH A COMPANY WHICH IS INTO SOFTWARE DEVELOPMENT SERVICES. THOUGH THE LD. DR STATED 27 THAT IN THE ENTIRE ANNUAL REPORT THERE IS NO MENTIO N AS TO THE SALE OF ANY PRODUCT AND ENTIRE INCOME IS FROM SERVICE, THERE IS NO EXPL ANATION FORTHCOMING BEFORE US JUSTIFYING THE ENTRIES AT PAGE NO. 39,42 AND 48 OF T HE ANNUAL REPORT ON THE ASPECT OF INVENTORIES. 46. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND MORE PARTICULARLY IN VIEW OF THE PROFILE OF THE EASIEST S OLUTIONS AS COULD BE FOUND IN THE ANNUAL REPORT OF THIS COMPANY IN DETAIL, WHERE OF TH E CONSIDERED OPINION THAT THIS COMPANY IS RENDERING BROAD PORTFOLIO OF SERVICES INC LUDING PRODUCT ENGINEERING AND SOFTWARE DEVELOPMENT. IT HAS A SPECIAL EXPERTIS E IN EMERGING TECHNOLOGIES SUCH AS CLOUD, SAAS, BUSINESS INTELLIGENCE AND MOBI LITY ETC AND IT ALSO HOLDS AND MAINTAINS INVENTORY. FOR THESE REASONS AS HAS BEEN HELD IN M/S SYMANTEC SOFTWARE AND SERVICES INDIA PRIVATE LIMITED CASE (S UPRA), WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT SERVICES, E-Z EST SOLUTIONS LTD IS ENGAGED IN PRODUCT ENGINEERING SERVICES IN THE NATURE OF HIGH END KNOWLEDGE PROCESS OUTSOURCING AND ALSO IN PRODUCT ENGINEERING SOFTWAR E DEVELOPMENT COMPANY HAVING EXPERTISE IN EMERGING TECHNOLOGIES CLOUD SAA S, BUSINESS INTELLIGENCE AND MOBILITY FOR MORE THAN 10 YEARS AND SERVING 8 INDUSTR IES ACROSS THE GLOBE WITH OVER 200 SOFTWARE PROFESSIONALS AND ON THAT GROUND IT IS NOT A COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF SOFTW ARE DEVELOPMENT SERVICE. WE ACCORDINGLY DIRECT THE LIBRARY EVER TO EXCLUDE THIS C OMPANY FROM THE LIST OF COMPARABLES. 47. NOW WE SHALL EXAMINE THE QUESTION OF INCLUSION OF SEVEN COMPANIES, VIZ., CG VAK SOFTWARE & EXPORTS LTD., GOLDSTONE TECHNOLOG IES LTD., THINKSOFT GLOBAL SERVICES LTD. CAT TECHNOLOGIES LTD., LGS GLOBAL LTD ., R. SYSTEMS INTERNATIONAL LTD., 28 AND BLUE STAR INFOTECH LTD. AT THE OUTSET LD. AR RE PORTED THAT THE BLUE STAR INFOTECH LTD IS NOT PRESSED. RECORDING THE SAME WE DIRECT THE CONTINUANCE OF EXCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES . 48. IN RESPECT OF CG VAK SOFTWARE AND EXPORTS LTD A ND R SYSTEMS INTERNATIONAL LTD, IT IS THE SUBMISSION ON BEHALF OF THE ASSESSEE THAT IN RESPECT OF AY 2009-10 THESE TWO COMPANIES WERE ORDERED TO BE INCLUDED BY A COORDINATE BENCH OF THIS TRIBUNAL IN ITA NO. 2074/DEL/2014, WHILE FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN CHRYSCAPITAL INVESTMENT ADVISERS INDIA PRIVATE LIMITED(SUPRA) , AND M/S MERCER CONSULTING INDIA PR IVATE LIMITED(SUPRA). 49. CG VAK SOFTWARE AND EXPORT LTD IS EXCLUDED BY TH E LD. TPO ON THE GROUND THAT IT DOES NOT PASS THE EMPLOYEE COST FILTER. IT W AS SUBMITTED BEFORE THE LD. TPO THAT THE LINE-ITEM COST OF SERVICES SHOULD BE TAK EN AS EMPLOYEE COST, BUT THE LD. TPO STATED THAT IF SUCH A COURSE OF ACTION IS ADOPT ED, THIS WILL BE A PURPORT; WHEREAS THE PRINCIPLES OF COMPARABILITY UNDER THE I NCOME TAX RULES MAKE IT CLEAR THAT IF COMPARABILITY CANNOT BE SET UP EVEN BETWEEN THE TESTED PARTY AND THE POTENTIAL COMPARABLE, IT SHOULD NOT BE USED AS A CO MPARABLE. HE FURTHER STATED THAT THERE IS NO NEED TO FORCE AN ENTITY INTO THE SE T OF COMPARABLES, EVEN IN THE OPTIONS OF DEPENDABLE DATA, AS THERE ARE SUFFICIENT GOOD COMPARABLES. 50. WHILE ACCORDING TO THE LD. TPO THIS COMPANY HAS NOT PASSED THROUGH THE EMPLOYEE COST FILTER, LD. DRP RECORDED THAT THIS COM PANY DOES NOT PASS THE TURNOVER FILTER, AND ALTOGETHER DIFFERENT CRITERIA TESTED BY THE LD. DRP. 51. IT IS THE SUBMISSION OF THE ASSESSEE THAT THE R EVENUE FROM SOFTWARE SERVICES IS MORE THAN 5 CRORES OF RUPEES AND THE COMPANY PASS ES THE EMPLOYEE COST FILTER WITH THE 69.45%. IT IS FURTHER SUBMITTED THAT THERE IS NO CHANGE IN BUSINESS MODEL 29 FROM THE EARLIER YEARS. IN RESPECT OF AY 2009-10 THE TRIBUNAL INCLUDED THIS COMPANY IN THE SET OF COMPARABLES WHEREAS FOR THE AY 2010-11 LD. DRP ACCEPTED THIS COMPANY. HE, THEREFORE, SUBMITS THAT IN ALL FAI RNESS THIS COMPANY SHOULD HAVE BEEN INCLUDED IN THE SET OF COMPARABLES. 52. WE HAVE PERUSED THE ANNUAL REPORT OF THIS COMPA NY. AT PAGE NO. 19 THEREOF UNDER THE HEAD EXPENDITURE THE COST OF SERV ICE IS NOTED. EXCEPT THIS, WE WILL NOT FIND ANY EXPENDITURE RELATING TO THE EMPLOYE E COST WHETHER IT IS CALLED SALARIES AND WAGES SO ON AND SO FORTH. THERE IS NO DISPUTE THAT THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICE. FURTHER TH E REVENUE FROM SOFTWARE DEVELOPMENT, SERVICES AND PRODUCTS IS RS. 6,29,80,6 50/-WHICH INCLUDES RS. 5,24,54,418/- FROM OFFSHORE SOFTWARE SERVICES. FOR AY 2009-10, IN THE ORDER OF THE TRIBUNAL VIDE PARAGRAPH NO. 18 IT IS NOTED THAT FOR SUCH ASSESSMENT YEAR THE TPO AND DRP REJECTED THIS COMPANY ON THE GROUND THAT IT DOES NOT FULFILL THE TURNOVER CRITERIA OF RS. 5 CRORE AND AFTER CONSIDERING THE F INANCIALS OF THIS COMPANY THE TRIBUNAL REJECTED VERSION THAT THIS COMPANY CANNOT B E HELD TO BE INCOMPARABLE SIMPLY ON THE GROUND OF NO TURNOVER, UNLESS IT IS DE MONSTRATED THAT THE ASSETS AND THE RISKS ARE COMPLETELY DIFFERENT AND NON-INCOMPARA BLE. NO EMPLOYEE COST FILTER IS REFERRED TO IN THIS ORDER. HOWEVER ON A READING OF THE PROFIT AND LOSS ACCOUNT OF THIS COMPANY INCORPORATED AT PAGE NO. 19 OF ITS ANNU AL REPORT WE ARE OF THE CONSIDERED OPINION THAT THE COST OF SERVICES REPRES ENTS THE COST OF EMPLOYEE ONLY. FURTHER THE REVENUE FROM OFFSHORE SOFTWARE SERVICES IS MORE THAN 5 CRORES. IN THE CIRCUMSTANCES THIS FACTS NEED TO BE VERIFIED AT THE END OF THE AO AND IF THIS COMPANY PASSES THE EMPLOYEE COST FILTER IT HAS TO BE INCLUDED IN THE LIST OF COMPARABLES. IF THE ASSETS AND RISKS ARE COMPARABLE , AS IS HELD BY THE HONBLE JURISDICTIONAL HIGH COURT IN CHRYSTCAPITAL INVESTME NT ADVISERS INDIA PRIVATE LIMITED 30 (SUPRA) AND S&P CAPITAL IQ (INDIA) (P) LTD VERSUS D CIT (2016) 72 TAXMANN.COM 236, LOW TURNOVER IS NOT A GROUND TO REJECT THIS COMPANY. WE, THEREFORE, DIRECT THE LD. TPO TO CONSIDER THE COST OF SERVICES INCURRED BY THI S COMPANY AS THE EMPLOYEE COST, AND VERIFY WHETHER IT PASSES THE EMPLOYEE COST FILTER. IN CASE THIS PASSES THE EMPLOYEE COST FILTER ON TREATING THE COST OF SERVICE S AS EMPLOYEE COST, LD. TPO WILL INCLUDE THE SAME IN THE LIST OF COMPARABLES. 53. IN RESPECT OF R SYSTEMS INTERNATIONAL LTD, LD. T PO RECORDED THAT ONE OF THE REASONS FOR REJECTION OF THIS COMPANY IS THAT IT HAS A YEAR ENDING OTHER THAN MARCH. LD. DRP RECORDED THAT THE ASSESSEE COMPANY IS HAVING FINANCIAL YEAR COVERING THE PERIOD BETWEEN 01/04/2009 2 31/03/2010 AND A VALID COMPARISON CAN BE MADE ONLY IF THE COMPARABLE COMPANIES TO HAV E THE SAME FINANCIAL YEAR. ON THIS GROUND LD. DRP ALSO REJECTED HIS COMPANY FRO M THE LIST OF COMPARABLES. 54. IT IS SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE QUARTERLY FINANCIAL STATEMENTS FOR FINANCIAL YEAR 2010-11 ARE AVAILABLE. IT IS FURTHER BROUGHT TO OUR NOTICE THAT FOR AY 2010-11 THIS COMPANY IS DIRECTED TO BE INCLUDED VIDE ORDERS IN ITA NO. 380/DEL/2015. IT IS THEREFORE CLEAR THAT IN RESPECT OF ASSESSMENT YEARS 2009-10 AND 2010-11 THIS COMPANY FINDS A PLACE IN TH E LIST OF COMPARABLES, SUGGESTING THAT THIS COMPANY IS FUNCTIONALITY SIMILAR AND IS OTHERWISE COMPARABLE WITH THE ASSESSEE, BUT FOR WANT OF THE FINANCIAL ST ATEMENTS FOR THE ENTIRE PERIOD OF FINANCIAL YEAR 2010-11. NOW IT IS SUBMITTED THAT THE QUARTERLY FINANCIAL STATEMENTS ARE AVAILABLE FOR FY 2010-11. IN THESE CIRCUMSTANCE S, WE DIRECT THE LD. TPO TO CONSIDER THE QUARTERLY FINANCIAL STATEMENTS FOR FY 2 010-11 FOR THE PURPOSE OF INCLUSION ARE OTHERWISE OF THIS COMPANY. 31 GOLDSTONE TECHNOLOGIES LTD 55. ASSESSEE CONTENDS THAT THIS COMPANY IS FUNCTIONA LLY COMPARABLE AS IS ENGAGED ONLY IN SOFTWARE DEVELOPMENT ACTIVITIES. IT IS BROUGHT TO OUR NOTICE THAT FIRE AY 2010-11 THIS COMPANY WAS ACCEPTED AS A GOOD COMPARABLE BY THE LD. DRP. LD. ADR PLACED RELIANCE ON THE ORDERS OF THE AUTHOR ITIES BELOW. 56. WE HAVE GONE THROUGH THE ORDER DATED 11/11/2014 PASSED BY THE LD. DRP IN ASSESSEES OWN CASE FOR AY 2010-11 AND FOUND FRO M PARA NO. 48 THEREOF THAT THE LD. DRP RECORDED THAT THIS COMPANY IS INTO IT SE RVICES, SOFTWARE DEVELOPMENT AND ITES SERVICES SECTOR WHICH IS ALSO THE DOMAIN O F THE TAXPAYER AS CAN BE SEEN FROM THE PROFILE OF THE TAXPAYER MENTIONED IN PARA 2 OF THE ORDER. IT IS NOT THE CASE OF THE REVENUE THAT THERE IS ANY CHANGE IN THE BUSINESS MODEL OF THE ASSESSEE FROM THE EARLIER YEARS NOR ARE ANY CIRCUMSTA NCES BROUGHT TO OUR NOTICE WHICH RENDER THIS COMPANY WHICH WAS COMPARABLE FOR T HE EARLIER YEAR AS NON- COMPARABLE FOR THIS YEAR. WE, THEREFORE, IN VIEW OF THE REASONING GIVEN BY THE LD. DRP FOR THE EARLIER YEAR, HOLD THAT THIS COMPANY IS A GOOD COMPARABLE, AND ACCORDINGLY DIRECT THE LD. TPO TO INCLUDE THIS COMPA NY IN THE FINAL LIST OF COMPARABLES TO BENCHMARK THE INTERNATIONAL TRANSACT ION OF SOFTWARE DEVELOPMENT SERVICES. THINK SOFT GLOBAL SERVICES LTD 57. AS COULD BE SEEN FROM THE ORDER OF THE LD. TPO THIS COMPANY WAS REJECTED FOR FAILING THE EXPORT EARNINGS FILTER AND THE ASSE SSEE CHALLENGED BEFORE THE LD. TPO BASING ON THE CONSOLIDATED FINANCIALS. LD. DRP OBSERVED THAT IN RESPECT OF THIS COMPANY REVENUE FROM SOFTWARE TESTING ON-TIME-AND-MA TERIAL CONTRACTS IS RECOGNIZED BASED ON SOFTWARE TESTED AND BILLED TO C LIENTS AS PER THE TERMS OF 32 SPECIFIC CONTRACTS. ON FIXED-PRICE CONTRACTS, REVEN UE IS RECOGNIZED ON THE PROPORTIONATE COMPLETION METHOD ON THE BASIS OF THE WORK COMPLETED. REVENUE FROM SOFTWARE TESTING INCLUDES REIMBURSEMENT OF EXP ENSES BILLED AS PER THE TERMS OF CONTRACTS. HOWEVER, THE TAXPAYER COMPANY IS ENGAGE D IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT AND MAINTENANCE SERV ICES THE ASSESSEE IS NOT FUNCTIONALLY COMPARABLE WITH M/S THINKSOFT GLOBAL SE RVICES LTD. LD. DRP HELD THAT THIS COMPANY FAILED THE EXPORT TURNOVER FILTER. 58. IT IS ARGUED ON BEHALF OF THE ASSESSEE THAT THI NKSOFTS EXPORTS WERE 87.44% OF SALES AND THIS COMPANY IS OTHERWISE FUNCTIONALLY C OMPARABLE BECAUSE SOFTWARE TESTING IS PART OF SOFTWARE DEVELOPMENT LIFE-CYCLE. LD. DR PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 59. IT IS SUBMITTED ON BEHALF OF THE ASSESSEE THAT IN ASSESSEES OWN CASE FOR AY 2010-11 LD. TPO ACCEPTED THIS COMPANY IS A GOOD COMP ARABLE AND THERE IS NO CHANGE IN THE BUSINESS MODEL OF THE COMPARABLE AS C OMPARED TO THE ASSESSEE IN THE RELEVANT YEAR. THIS FACT IS NOT CONTROVERTED BY T HE REVENUE. WHEN ITS NOT EXPLAINED BEFORE US AS TO HOW A GOOD COMPARABLE IN THE PREVIOUS YEAR HAS BECOME NON-COMPARABLE IN THIS YEAR, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE REVENUE THAT THIS COMPANY IS NOT A GOOD COMPARAB LE. FURTHER BASING ON THE ANNUAL REPORT OF THIS COMPANY, WE FIND THAT THE EXPO RT SALES OF THIS COMPANY RS.55,92,43,389/-, DOMESTIC SALES ARE RS. 5,38,83,4 29/-. IT THEREFORE APPEARS THAT THE PERCENTAGE OF THE EXPORT SALES TO THE TOTAL OPE RATING REVENUE IS ABOUT 87.44% AND THEREBY THIS COMPANY PASSES THE EXPORT FILTER. AS A MATTER OF FACT, THIS POINT WAS ARGUED BEFORE THE LD. DRP. HOWEVER, LD. DRP DID NOT TOUCH THIS POINT IN THE 33 DISCUSSION BUT STATED THAT THIS COMPANY IS FUNCTIONA LLY DIFFERENT INASMUCH AS IT IS INTO SOFTWARE TESTING SERVICES. 60. BE THAT AS IT MAY, THERE IS NO DISPUTE THAT THIS COMPANY WAS ACCEPTED BY THE LD. TPO IN TAXPAYERS OWN CASE FOR THE IMMEDIATE LY PRECEDING YEAR AND NO CHANGE OF CIRCUMSTANCES EITHER IN THE BUSINESS MODE L OF THE ASSESSEE OR THAT OF THE COMPARABLE ARE BROUGHT TO OUR NOTICE. THIS SUGG ESTS THE FUNCTIONAL COMPARABILITY OF THE COMPANY TO THAT OF THE TAXPAYER. WE, THEREFORE, DIRECT THE LD. TPO TO VERIFY THE EXPORT SALES VIS-A-VIS THE TOT AL OPERATING REVENUE FROM THE ANNUAL REPORT OF THIS COMPANY AND TO INCLUDE IT IN T HE LIST OF COMPARABLES IF IT PASSES THE EXPORT EARNINGS FILTER. CAT TECHNOLOGIES LTD 61. LD. TPO REJECTED THIS COMPANY ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT AND HAS RPT IN EXCESS OF 25% OF SALES. LD. TPO RECO RDED THAT THIS COMPANY IS INVOLVED IN A VARIETY OF SERVICES AND IN THE ABSENCE OF PROPER SEGMENTAL ACCOUNTS THE SAME CANNOT BE TREATED AS A SUITABLE COMPARABLE . FURTHER THE TAXPAYER HAS TAKEN EXTRACTS FROM THE CONSOLIDATED ANNUAL REPORT RATHER THAN THE STANDALONE ANNUAL REPORT RELIED UPON BY THE TPO. 62. LD. DRP OBSERVED THAT AS PER THE AUDIT REPORT T HE COMPANYS EXCLUSIVE BUSINESS IS MEDICAL TRANSCRIPTION, TRAINING SOFTWAR E DEVELOPMENT AND CONSULTING SERVICES AS SUCH THIS IS THE ONLY REPORTABLE SEGMENT . ON THIS GROUND LD. DRP REFUSED TO INTERFERE WITH THE ORDER OF THE LD. TPO. 63. IT IS ARGUED ON BEHALF OF THE ASSESSEE THAT THI S COMPANY ALSO PROVIDES SOFTWARE DEVELOPMENT CONSULTING SERVICES AND THERE ARE NO EQUITY TRANSACTIONS. IT 34 IS FURTHER SUBMITTED BY THE LD. AR THAT THIS COMPANY IS ACCEPTED BY THE TPO IN ASSESSEES OWN CASE IN AY 2010-11 AND THERE IS NO C HANGE IN THE BUSINESS MODEL OF THE COMPARABLE OR THE ASSESSEE FROM THE PREVIOUS YEAR. REVENUE DID NOT CONTRADICT THIS STATEMENT MADE ON BEHALF OF THE ASS ESSEE. IN THE ABSENCE OF ANY PROPER EXPLORATION AS TO HOW A GOOD COMPARABLE IN T HE PREVIOUS YEAR HAS BECOME A BAD COMPARABLE IN THIS YEAR, WE FIND IT DIFFICULT TO SUSTAIN THE OPENION OF THE AUTHORITIES BELOW. HOWEVER WHETHER OR NOT THIS COMP ANY PASSES THE RPT FILTER IS A QUESTION OF FACT AND THE GRIEVANCE OF THE ASSESSEE BEFORE THE LD. DRP WAS THAT THE ASSESSEES REBUTTAL OF PASSING OF THE RPT FILTER HA S NOT BEEN COUNTERED BY THE LD. TPO IN THE IMPUGNED ORDER. AS COULD BE SEEN FROM TH E ORDER OF THE TPO, THOUGH IT IS STATED THAT THE COMPANY IS HAVING RPT IN EXCESS O F 25%, TPO DID NOT ADVERT TO THE FINANCIAL OF THIS COMPANY. SO ALSO THE DRP. WE, THEREFORE, REMAND THIS MATTER TO THE FILE OF THE TPO TO CONSIDER THE REBUTTAL OF THE ASSESSEE THAT REFERS TO THE FINANCIALS OF THIS COMPANY AND TO REACH A FRESH CONC LUSION ON THE ASPECT OF THIS CAT TECHNOLOGIES LTD PASSING OR NOT THE RPT FILTER. LGS GLOBAL LTD. 64. LD. TPO REJECTED THIS COMPANY ON THE GROUND THAT IT FAILED THE EMPLOYEE COST FILTER, STATING THAT DATA RELATING TO EMPLOYEE COST IS NOT AVAILABLE TO FURTHER ANALYZE. LD. DRP SUSTAINED THE SAME. IT IS AN UNDIS PUTED FACT THAT THE TPO ACCEPTED LGS GLOBAL LTD AS A GOOD COMPARABLE IN RES PECT OF THE ASSESSMENT YEAR 2010-11 AND IT IS SUBMITTED BY THE LD. AR THAT IN TH E ABSENCE OF ANY MATERIAL TO THE CONTRARY, WE HOLD THAT THIS LGS GLOBAL COMPANY I S FUNCTIONALLY COMPARABLE TO THE ASSESSEE. HOWEVER, THE ASPECT OF EMPLOYEE COST F ILTER HAS TO BE CONSIDERED. 35 65. IT IS ARGUED ON BEHALF OF THE ASSESSEE THAT THE EMPLOYEE COST OF LGS GLOBAL LTD IS 91.41% OF THE TOTAL COSTS. IT IS ARGUED THAT THE LD. TPO RELIED ON THE TERMINOLOGY USED IN THE PROFIT AND LOSS ACCOUNT PUR CHASE AND PERSONAL COST TO HOLD THAT IT INDICATES A COMBINATION OF TWO EXPENSE S, NAMELY, PURCHASE AND PERSONAL COST, BUT WHILE DOING SO THE LD. TPO FAI LED TO APPRECIATE THAT THIS TERMINOLOGY HAS BEEN USED FOR EMPLOYEE RELATED COST S ONLY AS THERE ARE NO DEALINGS OF TANGIBLE ITEMS IN THIS COMPANY. IT IS FU RTHER SUBMITTED THAT THIS FACT IS ALSO EVIDENT FROM THE FACT THAT THE LGS GLOBAL DOE S NOT HAVE ANY INVENTORY OF STOCK IN TRADE OF GOODS ARE REVENUE FROM SALE OF SU CH PURPORTED PURCHASED ITEMS. THIS IS A VERIFIABLE FACT. LD. TPO HAS TO VERIFY WHE THER THERE IS ANY INVENTORY OR STOCK IN TRADE OF GOODS OR REVENUE FROM THE SALE OF SUCH PURPORTED ITEMS, IN THE ABSENCE OF WHICH IT IS REASONABLE TO BELIEVE THAT T HE EXPENSE UNDER THE HEAD PURCHASE AND PERSONAL COST WOULD AMOUNT ONLY EMPLO YEE RELATED COST. WE, THEREFORE, SET ASIDE THIS ISSUE TO THE TPO TO CAST THE ABOVE VERIFICATION AND TO TREAT THE PURCHASE AND PERSONNEL CAST AS THE EMPLOYE E RELATED COST IF THERE IS NO INVENTORY OR STOCK IN TRADE OF GOODS OR REVENUE FROM SALE OF SUCH PURPORTED PURCHASED ITEMS. 66. NOW TURNING TO THE TRANSFER PRICING ADJUSTMENT ON PROVISION OF IT BACK OFFICE SUPPORT SERVICE (ITES SEGMENT), ACCORDING TO THE ASSESSEE, THEY HAVE BEEN RENDERING THE SERVICES ON COST PLUS MARGIN OF 15% U NDER THE AGREEMENT WITH CDS, ACCORDING TO WHICH THE FUNCTIONS PERFORMED AND RISK S ASSUMED, WHICH ARE SUMMARIZED IN RESPECT OF THIS INTERNATIONAL TRANSAC TIONS IN THE TRANSFER PRICING STUDY, AS FOLLOWS: 36 FUNCTIONAL ANALYSIS FUNCTIONS PERFORMED BY CADENCE INDIA AND ITS ASSOCI ATED ENTERPRISE WITH REGARD TO THE IDENTIFIED TRANSACTION ARE OUTLINED B ELOW: DETERMINING THE SCOPE OF SERVICES BROAD SCOPE OF WORK TO BE UNDERTAKEN BY CADENCE IND IA IN CONNECTION WITH THE IDENTIFIED --SECTION IS OUTLINED IN A SERVICE A GREEMENT BETWEEN CADENCE INDIA AND CDS. PROVISION OF SERVICES CADENCE INDIA IS RESPONSIBLE TO PROVIDE THE AGREED SERVICES AS AND WHEN REQUESTED BY OVERSEAS ENTITIES AS PER TERMS LAID O UT IN THE AGREEMENT. QUALITY ASSURANCE THOUGH THERE IS NO PENALTY FOR A LAPSE IN QUALITY, CADENCE INDIA IS REQUIRED TO ENSURE THAT SERVICES PROVIDED ARE OF A CERTAIN REQU ISITE QUALITY AND ADHERE TO ESTABLISHED INTERNATIONAL GROUP STANDARDS. RISK ANALYSIS BRIEFLY SUMMARIZED BELOW ARE SOME OF THE KEY BUSINE SS RISKS, WHICH WOULD BE APPLICABLE TO CADENCE INDIA AND CDS IN RELATION TO THE ABOVE MENTIONED IDENTIFIED INTERNATIONAL TRANSACTION. BUSINESS RISK / MARKET RISK BUSINESS RISK ARISES WHEN A FIRM IS SUBJECT TO ADVE RSE SALES CONDITIONS DUE TO EITHER INCREASED COMPETITION IN THE MARKETPLACE, ADVERSE D EMAND CONDITIONS WITHIN THE MARKET, OR THE INABILITY TO DEVELOP MARKETS OR POSI TION PRODUCTS TO SERVICE TARGETED CUSTOMERS CADENCE INDIA BEARS NO BUSINESS RISK AS IT RENDERS IT BACK OFFICE SUPPORT SERVICES ONLY TO CDS AND IS ASSURED OF A SPECIFIED RETURN ON ITS COSTS. CDS IS EXPOSED TO OPEN MARKET CONDITIONS THAT DIREC TLY IMPACT ITS BUSINESS AND THUS IT BEARS MARKET RISK. SINCE, CADENCE INDIA IS COMPENSATED BY WAY OF AN ASSURED RETURN, THE COMPANY DOES NOT BEAR ANY BUSIN ESS RISK. CREDIT AND COLLECTION RISK CREDIT AND COLLECTION RISK ARISES WHEN AN ENTITY SU PPLIES PRODUCTS OR SERVICES TO A CUSTOMER IN ADVANCE OF CUSTOMER PAYMENT AND RUNS TH E RISK OF DEFAULT OF SUCH 37 PAYMENT. CADENCE INDIA DOES NOT BEAR ANY CREDIT AND COLLECTI ON RISK SINCE IT TRANSACTS WITH ITS ASSOCIATED ENTERPRISE I.E. CDS SERVICE LIABILITY RISK SERVICE LIABILITY RISK IS BORNE BY A COMPANY WHEN I TS SERVICE OFFERINGS FAIL TO PERFORM AT ACCEPTED OR ADVERTISED STANDARDS AND THE COMPANY IS REQUIRED TO COMPENSATE THE CUSTOMER OR UNDERTAKE DEFECT RESOLUT ION AT ITS OWN COST. CDS IS THE ULTIMATE CONTRACTING ENTITY AND THEREFOR EASSUMES THE OVERALL RESPONSIBILITY FORTHE QUALITY OF THE SERVICES RENDE RED BYCADENCE INDIA. THEREFORE, CDS BEARS THE ULTIMATE SERVICE LIABILITY RISK. UTILIZATION RISK UTILIZATION RISK RELATES TO THE POSSIBILITY OF NON- RECOVERY OF FIXED COSTS BEING INCURRED. THIS MAY HAPPEN DUE TO CIRCUMSTANCES SUCH AS LACK OF PRODUCTION, LACK OF DEMAND, INABILITY TO RECOVER PRICES, ETC. PROVISION OF SERVICES REQUIRES SUBSTANTIAL INVESTMENT IN INFRASTRUCTURE, IN TERMS OF PREMISES, EQUIPMENT, CONNECTIVITY, ETC. THE RISK OF OPTIMAL UTILIZATION OF CAPACITY IS BORN E BY THE ENTITY MAKING THE INVESTMENT. SINCE, CADENCE INDIA IS COMPENSATED ON A TOTAL COST PLUS MARK UP BASIS BY CDS, IT IS ASSURED OF THE RECOVERY OF COSTS OF ANY UNDERUTILIZ ED / UNUTILIZED RESOURCES. THUS, CADENCE INDIA IS NOT EXPOSED TO UTILIZATION RISK AN D THE SAME IS BORNE BY CDS. RE-WORK RISK RE-WORK RISK ARISES IN A SITUATION WHERE THE PRODUC T SOLD/SERVICE PROVIDED DOES NOT MEET THE REQUISITE QUALITY/DELIVERY STANDARDS AND R EQUIRES RE-WORK. IN CASE THE SERVICES PROVIDED BY CADENCE INDIA DO N OT MEET THE REQUISITE STANDARDS, THE SAME MAY REQUIRE RE-WORK; HOWEVER, S INCE CADENCE INDIA IS REIMBURSED FOR ALL COSTS INCLUDING RE-WORK COSTS AL ONG WITH A SPECIFIED MARK UP. CADENCE INDIA DOES NOT BEAR ANY RE-WORK RISK. FOREIGN EXCHANGE RISK EXCHANGE RATE RISK RELATES TO THE POTENTIAL VARIABI LITY OF PROFITS THAT CAN ARISE BECAUSE OF CHANGES IN FOREIGN EXCHANGE RATES AND AR ISES WHENEVER THE TRANSACTING CURRENCY OF AN ENTITY IS DIFFERENT FROM ITS FUNCTIO NAL CURRENCY. 38 CADENCE INDIA INVOICES CDS FOR ITS SERVICES IN USD, WHICH IS DIFFERENT FROM ITS FUNCTIONAL CURRENCY AND THUS ASSUMES THE RISK OF FO REIGN EXCHANGE FLUCTUATIONS. HOWEVER, THE COST BASE FOR MARK-UP INCLUDES ANY LOS S ARISING TO CADENCE INDIA FROM FOREIGN EXCHANGE TRANSLATIONS AND THEREFORE ULTIMAT ELY THE FOREIGN EXCHANGE RISK WOULD BE BORNE BY CDS. 67. IT IS THEREFORE, CLEAR THAT UNDER THIS SEGMENT ALSO THE ASSESSEE HAPPENS TO BE A RISK MITIGATED ENTITY. THE ASSESSEE WAS COMPEN SATED BY CDS FOR THE SERVICES RENDERED WITH A FEE WHICH IS EQUIVALENT TO THE OPER ATING EXPENSES THAT WERE INCURRED PLUS AN AMOUNT EQUIVALENT TO 15% OF THE OP ERATING EXPENSES. THE PAYMENT TERMS LAID DOWN THAT THE ASSESSEE WOULD INVO ICE CDS FOR THE SERVICES ON PERIODIC BASIS AND THE CDS WOULD PAY THE INVOICED AM OUNT WITHIN 90 DAYS THEREAFTER. IN THEIR TRANSFER PRICING STUDY, THE A SSESSEE ADOPTED THE TNMM AS THE MOST APPROPRIATE METHOD WITH OP/OC AS PLI. ASS ESSEE PROPOSED 14 COMPARABLES WITH PLI OF 18.09. S.NO. NAME OF THE COMPANY WEIGHTED AVERAGE OF OPERATING PROFITS ON OPERATING COSTS (%) 1 ACCENTIA TECHNOLOGIES LTD. 46.20% 2 ADITYA BIRLA MINACS WORLDWIDE LTD. 0.30% 3 C G VAK SOFTWARE & EXPORTS LTD. (SEGMENTAL) -2.39% 4 CALIBERPOINT BUSINESS SOLUTIONS LTD. 18.09% 5 CEPHA IMAGING P. LTD. 1.94% 6 CORAL HUB LTD. 41.04% 7 COSMIC GLOBAL LTD. 32.71% 8 FORTUNE INFOTECH LTD,. 9.95% 9 INFORMED TECHNOLOGIES INDIA LTD. 23.94% 10 INFOSYS BPO LTD. 22.53% 11 JEEVAN SOFTECH LTD. (SEGMENTAL) 46.34% 12 JINDAL INTELLICOM P. LTD. 6.39% 13 MICROGENETICS SYSTEMS LTD. 0.87% 39 14 R. SYSTEMS INTERNATIONAL LTDF. (SEGMENTAL) 5.01% ARITHMETIC MEAN 18.09% 68. HOWEVER, LEARNED TPO SELECTED THE FOLLOWING SEV EN COMPARABLES WITH AN AVERAGE PLI OF RS.31.74 AND PROPOSED AN ADJUSTMENT OF RS.7,10,53,705/-. S.NO. NAME OF THE COMPANY OP/OC 1 ACCENTIA TECHNOLOGIES LTD. 29.18% 2 E4E HEALTHCARE BUSINESS SERVICES P. LTD. 9.77% 3 ECLERX SERVICES LTD. 56.82% 4 ICRA TECHNO ANALYTICSLTD. (SEGMENT) 25.54% 5 INFOSYS BPO LTD. 17.86% 6 JINDAL INTELLICOM LTD. 13.70% 7 TCS E-SERVELTD. 69.31% AVERAGE 31.74% 69. PURSUANT TO THE DIRECTION OF THE LEARNED DRP, L D. TPO EXCLUDED THE ICRA TECHNO ANALYTICS LTD. (SEGMENT) WITH PLI OF 25.54 AN D BASING ON THE AVERAGE OF THE REMAINING SIX COMPARABLES AT 31.71 PROPOSED AN ADJUSTMENT OF RS.7,14,47,304/-. THE RECOMPUTATION OF THE ALP IS AS FOLLOWS: OPERATING COST 424,850,161 ARMS LENGTH VALUE AT A MARGIN OF 31.71% 559,570,14 7 PRICE RECEIVED 488,122,843 105% OF PRICE RECEIVED 512,528,985 PROPOSED ADJUSTMENT U/S 92CA 71,447,304 70. ON THE ASPECTS OF THESE COMPARABLES THE ASSESSE E IS CHALLENGING THE INCLUSION OF FOUR COMPARABLES, VIZ., ACCENTIA TECHN OLOGIES LTD., ECLERX SERVICES LTD., INFOSYS BPO LIMITED, TCS E-SERVE LIMITED, AND PRAYS FOR INCLUSION OF SEVEN COMPARABLES, VIZ., R. SYSTEMS INTERNATIONAL LTD., CG VAK SOFTWARE & EXPORTS LTD., 40 INFORMED TECHNOLOGIES INDIA LTD., MICROGENETICS SYST EMS LTD., MICROLAND LTD, DATAMATICS FINANCIAL SERVICES LTD., COSMIC GLOBAL L TD.: ACCENTIA TECHNOLOGIES LTD.(ATL): 71. CONTENTION OF THE ASSESSEE IS THAT THOUGH INITI ALLY THIS COMPANY HAS BEEN CHOSEN BY THEM AS A COMPARABLE IN ITS TP REPORT, SUB SEQUENTLY IT WAS REALIZED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSES SEE INASMUCH AS, ACCORDING TO THE ANNUAL REPORT VIDE PAGE NOS.5, 6, 12, 23 TO 34, THE COMPANY IS ENGAGED IN THE PROCESS OUTSOURCING (KPO) AND LEGAL PROCESS OUTSOUR CING (LPO) AND SEPARATE PROCESS FOR HRCM IS NOT AVAILABLE. 72. LD. TPO HELD THAT THIS COMPANY EARNS ITS INCOME FROM MEDICAL TRANSCRIPTION, BILLING AND COLLECTION, CODING AND FIXED DEPOSITS, THE FIRST THREE MEETING OF THE OPERATING INCOME OF THE COMPANY AND ALSO THAT THESE ACTIVITIES ARE IN THE NATURE OF DPO OR BACK OFFICE SERVICES. LEARNED DRP OBSERVE D THAT THE PROFILE OF ATL IS SIMILAR TO THE TAXPAYER AND ATL IS INTO IT ENABLED SERVICES. 73. IT IS THE ARGUMENT OF THE LEARNED AR THAT CLAUS E 5 OF THE NOTES TO THE ACCOUNTS ON SEGMENTAL INFORMATION READS THAT THE CO MPANY HAS ONLY ONE SEGMENT OF ACTIVITY, VIZ. HEALTH CARE RECEIVABLE MANAGEMENT . IT IS SO MENTIONED AT PAGE NO.53 AND 70 OF THE ANNUAL REPORT. BASING ON THE D IVERSIFIED ACTIVITIES OF THIS COMPANY AS ENUMERATED PARTICULARLY AT PAGE NOS.23 TO 34 OF THE ANNUAL REPORT, LEARNED AR ARGUED THAT THIS COMPANY IS NOT A GOOD C OMPARABLE. HE FURTHER BROUGHT IT TO OUR NOTICE THAT IN ASSESSEES OWN CAS E FOR THE ASSTT. YEARS 2009-10 AND 2010-11, THIS COMPANY WAS FOUND TO BE FUNCTIONAL LY DIFFERENT FROM THE ASSESSEE. 41 74. PER CONTRA, LEARNED DR SUBMITTED THAT ATL IS NO T A SOFTWARE DEVELOPMENT COMPANY AND AS COULD BE SEEN FROM THE FINANCIALS OF THIS COMPANY VIDE SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET AT P AGE NO.67 UNDER SCHEDULE 8 THE COMPANY EARNS ITS INCOME FROM HEALTH CARE INFORM ATION TECHNOLOGY MANAGEMENT. HE FURTHER SUBMITTED THAT AS PER THE P ROFILE OF THE ASSESSEE, IT IS NOT A TYPICAL IT ENABLED SERVICES PROVIDER CONFINING ONLY TO BACK OFFICE SUPPORT SERVICES INASMUCH AS THE ASSESSEE ALSO DEALS WITH T HE SERVICES INCLUDING, - UNIX WINDOWS ADMINISTRATION AND SUPPORT; INTERNAL HELPDESK SERVICES; APPLICATION DEVELOPMENT AND SUPPORT; WEB DEVELOPMENT AND SUPPORT; AND CUSTOMER SUPPORT 75. HE, THEREFORE, SUBMITS THAT THERE IS AN ELEMENT OF DEVELOPMENT AND SUPPORT RELATING TO SOFTWARE SERVICE IN CASE OF ASS ESSEE ALSO. HE FURTHER SUBMITTED THAT THE FUNCTIONAL ANALYSIS DEPICTED BY TH E ASSESSEE IN THEIR TP STUDY REPORT AT ITEM NO.1 OF ANNEXURE 7, TO BE FOUND AT P AGE 681 OF THE PAPER BOOK IS VERY MUCH IN AGREEMENT WITH THE ANALYSIS OF COMPARABL E COMPANIES DONE BY THE ASSESSEE AT PAGE NO.685 THEREOF, AND THE ASSESSEE C ANNOT HAVE ANY GRIEVANCE WHEN THE AUTHORITIES BELOW ACCEPTS THE SAME. 76. WE HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF THE PARTIES IN THE LIGHT OF THE RECORDS. PAGE NO.23 OF THE ANNUAL REPORT OF TH IS COMPANY CLEARLY SHOWS THAT THE ATL HAS INITIALLY VENTURED INTO ITES BUSINESS TH ROUGH GEO SOFT TECHNOLOGIES AND IT IS AT PRESENT INTO PROVIDING CONSULTANCIES T O SHARE THE KNOWLEDGE THAT ASPIRANT STARTING HEALTHCARE DOCUMENTATION UNITS IN INDIA AND SET UP ITS CONSULTANCY DIVISION TO PROVIDE END-TO-END CONSULTAN CY SERVICES TO START-UPS. IT FURTHER NEEDS THAT WITH THE INCREASING REQUIREMENTS TO MATCH WITH THE ONGOING 42 TECHNOLOGICAL CHANGES, YEARS AFTER STARTED A PROJECT DIVISION UNDER THE NAME OF IRIDIUM. WITH A FORECAST THE APPROACH, THE PRODUCT TEAM WAS ABLE TO COME UP WITH AN END-TO-END GLOBAL WORKFLOW AUTOMATION SYSTE MS THAT HELP IN THE DAY TODAY WORKFLOW. PRODUCTS LIKE IRIDIUM MEDICAL TRANSC RIPTION AUTOMATION SOFTWARE (IMTAS), IRIDIUM CERTIFIED HOME BASE IN MEDICAL TRA NSCRIPTION (ICHMT), IRIDIUM CERTIFIED MEDICAL TRANSCRIPTION (ICMT), FALCON-2000 , F1 HBPO AUTOMATION SOFTWARE, IRIDIUM REAL-TIME SCHOOL (IRD AS), IRIDIU M ACCOUNTS MANAGEMENT SYSTEM (IMS), IRIDIUM INVENTORY MANAGEMENT SYSTEM (IMS), IR IDIUM PAYROLL MANAGEMENT SYSTEMS (IP MS), IRIDIUM BUSINESS TRANSCRIPTION SYSTE M (IBD), IRIDIUM HOSPITAL MANAGEMENT SYSTEM (I.E. HMS) OR A FEW OF THE PRODUCT S THAT GOT THE WIDE ACCEPTANCE AMONGST ITS CUSTOMERS. AS A MATTER OF FA CT THE INFORMATION PROVIDED UNDER PAGE NOS. 23 TO 34 OF THE ANNUAL REPORT INSPI RES US TO BELIEVE THAT THE ASSESSEE IS NO MATCH TO THIS COMPANY IN ITS HIGH END KPO FUNCTIONS. EVEN IF WE ASSUME FOR A WHILE THAT THERE IS AN ELEMENT OF DEVE LOPMENT AND SUPPORT OF SOFTWARE SERVICE IN ASSESSEES FUNCTIONALITY, STILL THE PROPORTION OF SCALE IS VERY HUGE. 77. FURTHER, NO CHANGE OF FUNCTIONALITY OF EITHER TH E ATL OR THE ASSESSEE IS BROUGHT TO OUR NOTICE SO THAT WE CAN TAKE A DIFFERE NT VIEW FROM THE ONE TAKEN IN EARLIER YEARS. THERE IS NO DENIAL OF THE FACT IN THE EARLIER YEARS I.E. AY 2009-10 AND 2010-11 THIS COMPANY WAS HELD TO BE FUNCTIONALLY DIFF ERENT FROM THE ASSESSEE. HOWEVER, IN 2009-10, THERE WAS ACQUISITION OF OAK T ECHNOLOGIES. THE OBSERVATIONS OF THE TRIBUNAL IN RESPECT OF THIS COM PANY IN THE ORDER RELATING TO THE AY 2009-10 ARE EXTRACTED IN THE ORDER FOR THE A Y 2010-11. INDEPENDENT OF THE ACQUISITION, THE FACT STARES AT THE FACE OF THE REV ENUE AND THAT THERE IS CONSISTENT FINDING THAT ATL IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AND IN THE IMMEDIATELY 43 PRECEDING PARAGRAPHS WE ALSO FOUND SO. WE, THEREFO RE, HOLD THAT THE ATL CANNOT BE INCLUDED IN THE LIST OF COMPARABLES AND THE SAME IS DIRECTED TO BE DELETED FROM THE LIST. ECLERX SERVICES LTD.: 78. ASSESSEE OBJECTED THE INCLUSION OF THIS COMPANY ON THE GROUND OF FUNCTIONAL DISSIMILARITY. LEARNED TPO HELD THAT ECL ERX OFFERING SERVICES IN DATA ANALYTICAL AND PROCESSING WHICH IS PART AND PARCEL O F ITES SEGMENT. HE FURTHER STATED THAT THE SNAPSHOTS TAKEN FROM THE ANNUAL REP ORT PROVE THAT IT IS AN ITES COMPANY OPERATING IN THE SAME SEGMENT AS THAT OF THE ASSESSEE. LEARNED DRP FOUND THAT SO LONG AS THE SERVICES OF THESE COMPANI ES ARE ITES SERVICES, VARIANCE IN SERVICE LINES AND VERTICALS DOES NOT MATTER. H E FURTHER HELD THAT INASMUCH AS THE ASSESSEE IS AUTHORISED TO PROVIDE THE SERVICES LIKE UNIX WINDOWS ADMINISTRATION AND SUPPORT; INTERNAL HELPDESK SERVICES; APPLICATION DEVELOPMENT AND SUPPORT; WEB DEVELOPMENT AND SUPPORT; AND CUSTOMER SUPPORT, IT CANNOT BE CLASSIFIED AS A BPO AND ON THAT SCORE THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN RAMPGREEN SOLUTIONS P. LTD.VS CIT (SUPRA) HAS NO APPLICATION. 79. IT IS PLEADED ON BEHALF OF THE ASSESSEE THAT TH E FUNCTIONS OF ECLERX INVOLVES PROVIDING FINANCIAL SERVICES TO LIKE TRADE PROCESSI NG REFERENCE DATA, ACCOUNTING AND FINANCE EXPENSE MANAGEMENT ACTIVITIES AND SALE MARKETING SERVICES LIKE WEB CONTENT MANAGEMENT AND MERCHANDIZING INSTITUTION, W EB SOCIAL MEDIA ETC. AT 44 PAGE 35 OF THE ANNUAL REPORT OF THIS COMPANY IT IS S PECIFICALLY STATED THAT ECLERX HAS BECOME ONE OF INDIAS MOST KPOS TO BE APPRISED FOR AND RATED IT MATURITY LEVEL 3 OF THE PEOPLE CAPABILITY MATURITY MODEL. HE FURTHER BROUGHT TO OUR NOTICE THAT FOR AY 2009-10, IN ASSESSEES OWN CASE IT WAS FOUND THAT ECLERX SERVICES LTD. IS FUNCTIONALLY DISSIMILAR TO THE ASSESSEE. IN SO F AR AS ASSTT. YEAR 2010-11 IS CONCERNED, LD. DRP ACCEPTED THE CONTENTION OF THE A SSESSEE AND HELD AT PAGE NO.44 OF ITS ORDER THAT WHEREAS THE ASSESSEE HAS AL SO BEEN TO HIGH END SERVICES, THE DOMAIN OF ECLERX IS INTO AN ENTIRELY DIFFERENT A REA, THEREBY RENDERING ECLERX NON COMPARABLE WITH THE ASSESSEE. 80. PER CONTRA LEARNED DR SUBMITTED THAT INASMUCH A S BOTH THE ASSESSEE AND ECLERX ARE PROVIDING SIMILAR SERVICES, IT IS NOT CO VERED BY RAMPGREEN CASE (SUPRA) AND ON THIS GROUND LD. DR JUSTIFIED THE INCLUSION O F THIS COMPANY. 81. WE HAVE GONE THROUGH THE RECORD. THERE IS NO CHANGE IN THE FUNCTIONALITY OF EITHER OF THE COMPANIES FROM THE EARLIER YEARS AN D IT IS UNDISPUTABLE THAT FOR THE AY 2009-10, A COORDINATE BENCH OF THIS TRIBUNAL CONSIDERED THE CONTENTIONS ON EITHER SIDE WHICH ARE SIMILAR TO THE CONTENTIONS NOW ADVANCED BEFORE US AND REACHED A CONCLUSION THAT ECLERX IS A BEST KPO COMP ANY, OUTSOURCING SUBSTANTIAL WORK TO THIRD PARTIES DURING THAT YEAR WHEREAS THE A SSESSEE WAS PROVIDING BACK OFFICE SUPPORT SERVICES WITH THEIR OWN HUMAN RESOUR CE. ON THAT SCORE APPLYING THE RATIO OF RAMPGREEN SOLUTION (SUPRA), ECLERX WAS DIR ECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 82. FURTHER FOR AY 2010-11, VIDE ITEM NO.5 OF PARA GRAPH NO.6.9.25 AT PAGE NO.44 AND 45 LD. DRP CONSIDERED THE FUNCTIONALITY OF ECLERX SERVICES LTD. AT LENGTH AND IN DETAIL TO HELD THAT THE ECLERX OPERATES IN A N ENTIRELY DIFFERENT DOMAIN AND 45 NOT A GOOD COMPARABLE. IN THE ABSENCE OF ANY EXPLAN ATION AS TO THE NON APPLICABILITY OF THESE FINDINGS FOR THE CURRENT YEAR, WE DO NOT FIND ANY REASON NOT TO ACCEPT THE SAME OR TO TAKE A DIFFERENT VIEW. WE , THEREFORE, DIRECT THE LD. AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMP ARABLES. INFOSYS BPO LIMITED AND TCS E-SERVE LIMITED: 83. NOW COMING TO INFOSYS BPO LIMITED AND TCS E-SERV E LIMITED, THESE TWO COMPANIES ARE DISPUTED BY THE ASSESSEE ON THE GROUN D OF FUNCTIONAL DISSIMILARITY INASMUCH AS INFOSYS BPO LTD. IS PROVIDING HIGH END I NTEGRATED SERVICES FOR BUSINESS PLATFORMS, CUSTOMER SERVICES OUTSOURCING, FINANCE AND ACCOUNTING, HUMAN RESOURCES OUTSOURCING, LEGAL PROCESS OUTSOURC ING, SALES AND FULFILLMENT, SOURCING AND PROCUREMENT OUTSOURCING ETC. AND ALSO HAVING GOODWILL OF RS.227 CRORES; WHEREAS TCS E SERVICES PROVIDING TECHNICAL SERVICES IN THE NATURE OF SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SO FTWARE AT THE TIME OF IMPLEMENTATION AND DATA CENTRE MANAGEMENT ACTIVITIE S. LD. AR SUBMITTED THAT BOTH THESE COMPANIES ARE HAVING SIGNIFICANTLY LARGE SCALE OPERATIONS. 84. LD. TPO REJECTED THESE CONTENTIONS AND HELD THA T THESE TWO COMPANIES ARE ENGAGED IN PROVIDING ITES SERVICES AND, THEREFORE, ARE GOOD COMPARABLES. HE FURTHER HELD THAT HOLDING OF INTANGIBLE HAS NO EFFE CTS ON THE PROFITS. LD. DRP HELD THAT THESE COMPANIES ARE FUNCTIONALLY SIMILAR, HIGH TURNOVER HAS NO CORRELATION TO HIGH PROFITS AND WHEN THEY ARE FUNCTIONALLY SIMILAR LARGE SCALE OPERATION IS NO GROUND TO REJECT THE SAME. IN RESPECT OF TCS E-SERV ICES, HE HELD THAT THE CONTENTION OF THE ASSESSEE THAT ITS TRANSACTIONS WI TH CITI BANK GROUP ARE NOT SHOWN IN THE NOTES TO ACCOUNTS CANNOT BE ACCEPTED B ECAUSE ONCE THERE IS CHANGE 46 IN THE OWNERSHIP OF THE ERSTWHILE COMPANY, THE CITI GROUP OF COMPANIES CANNOT BE HELD TO BE RELATED TO TCS E SERVICES. 85. LD. DR BROUGHT TO OUR NOTICE THAT FOR THE AY 20 10-11, A COORDINATE BENCH OF THIS TRIBUNAL EXTENSIVELY DEALT WITH THE COMPARABILI TY OF THESE TWO COMPANIES AND REACHED A CONCLUSION THAT THESE TWO COMPANIES ARE V ALID COMPARABLES FOR THE BACK OFFICE SUPPORT TRANSACTIONS. HE SUBMITTED THA T THERE IS NO CHANGE OF FUNCTIONS OF THESE TWO COMPANIES FROM EARLIER YEARS. SO ALSO THE FUNCTIONS OF THE ASSESSEE. HE, THEREFORE, URGED TO UPHOLD THE ACTIO N OF THE LD. DRP FOR THIS YEAR. 86. IN REPLY, IT IS THE ARGUMENT OF THE LD. AR THAT THE ORDER FOR AY 2010-11 WAS PRONOUNCED ON 5.1.2018 AND THE ASSESSEE IS CARRYING THE MATTER IN APPEAL TO HIGHER FORUMS. HOWEVER, HE BROUGHT TO OUR NOTICE T HAT A COORDINATE BENCH OF THIS TRIBUNAL IN B C MANAGEMENT SERVICES P. LTD. VS DCIT , ITA 6134/DEL/2015 AND BATCH BY ORDER DATED 25.5.2017 HELD THAT 18. WE HAVE HEARD THE RIVAL SUBMISSIONS PERUSED TH E RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS THE MATERIAL PLACED ON RECORD. ONE OF THE MAIN POINTS OF DISTINCTION WHICH IS QUITE OSTENSIBLE IS THAT THE TCS E SERVE IS A SUBSIDIARY OF TATA CONSULTANCY SERVICES LTD, WHICH IS ONE OF THE LEADING AND GENTLE COMPANY IN THE WORLD AND HAS AN INHERENT ELEMENT OF VERY HIGH BRAND VALUE ASSOCIATED WITH IT. SUCH A HIGH BRAND VALUE DEFINIT ELY HAS AN IMPACT ON THE PRICING POLICY, NICHE MARKET, CONTRACTUAL TERMS, ETC. AND T HEREBY AFFECTING THE PROFIT MARGINS. ANNUAL REPORT OF THIS COMPANY REFLECTS THA T USED PAYMENTS HAVE BEEN MADE BY TCS E-SERVE TO TCS LTD FURTHER USE OF THE B RAND AS A ROYALTY. THIS FACT ITSELF SHOWS THE EFFECT OF BRAND VALUE IN THE PRICI NG MECHANISM. AND FURTHER ANALYSIS IT IS THE SAME THAT THE EMPLOYEE COST BASE IS MORE THAN 64 TIMES THAN THE ASSESSEE AND EVEN THE TURNOVER IS ALSO MORE THAN 67 TIMES AS COMPARED TO THE ASSESSEE. THIS ONLY GOES TO SUGGEST THAT ASSETS EMP LOYED BY TCS E-SERVE ALONG WITH HUGHES INTANGIBLES IN THE FORM OF BRAND VALUE DEFINITELY HAS A HUGE EFFECT IN PLI AND VITIATES THE COMPARABILITY UNDER FAR ANALYS IS WITH A COMPANY LIKE ASSESSEE WHICH IS A CAPTIVE SERVICE OF EITHER WITHO UT MUCH INTANGIBLES AND RISKS. ANOTHER IMPORTANT THING WHICH HAS BEEN POINTED OUT BY LD. COUNSEL IS THAT, THE 47 OPERATION OF TCS E-SERVE BROADLY COMPRISE OF TRAN SACTION PROCESSING AND TECHNICAL SERVICES INCLUDING SOFTWARE TESTING, VERI FICATION AND VALIDATION FOR WHICH NO SEGMENTAL BIFURCATIONS IS AVAILABLE. IN THE OPTI ONS OF SUCH VITAL INFORMATION OF THE MARGINS OF SUCH VARIED SEGMENTS IT BECOMES QUIT E DIFFICULT TO PUT SUCH COMPANY IN THE COMPARABILITY BASKET SO AS TO BENCHM ARK AND CORRECT PROFIT MARGIN. IT IS, THEREFORE, CLEAR THAT BECAUSE OF THE EMPLOYEE COST BASE OF TCS E SERVICES AT 64 TIMES AND TURNOVER AT 67 TIMES COMPARED TO THE A SSESSEE IN SUCH CASE, SUGGEST THAT THE ASSETS EMPLOYED BY TCS E-SERVE WITH HUGE INT ANGIBLE IN THE FORM OF BRAND VALUE, DEFINITELY HAS A HUGE EFFECT IN PLI AND VITIA TES THE COMPARABILITY UNDER FAR ANALYSIS WITH A COMPANY WHICH IS A CAPTIVE SERVICE PR OVIDER WITHOUT MUCH TANGIBLES AND RISKS. IT IS FURTHER POINTED OUT THA T THE OPERATIONS OF TCS E-SERVE BROADLY COMPRISE OF TRANSACTION PROCESSING AND TECHN ICAL SERVICES INCLUDING SOFTWARE TESTING, VERIFICATION AND VALIDATION, FOR WHICH NO SEGMENTAL BIFURCATION IS AVAILABLE, IN THE ABSENCE OF WHICH MARGINS OF VARIO US SEGMENTS WOULD BE DIFFICULT TO BE COMPARED. LD. AR SUBMITTED THAT THESE OBSERV ATIONS ARE APPLICABLE TO THE CASE OF THE ASSESSEE ALSO ON ALL FOURS. HE FURTHER SUBMITTED THAT THESE OBSERVATIONS OF THE TRIBUNAL ARE UPHELD BY THE HON BLE JURISDICTIONAL HIGH COURT IN PCIT VS B.C MANAGEMENT SERVICES P LTD., ITA 1064 & 1083 OF 2017, IN THE FOLLOWING MANNER:- ON A READING OF THE ORDER OF THE TRIBUNAL IN B C MA NAGEMENT CASE (SUPRA), IT IS CLEAR THAT THE TRIBUNAL DID NOT FIND THAT TCS E-SER VE IS FUNCTIONALLY DISSIMILAR TO THE B C MANAGEMENT SERVICES P LTD. (SUPRA). IN SPI TE OF THE SAME, THE TRIBUNAL RECORDED THAT THE EMPLOYEE COST BASE AT MORE THAN 64 TIMES AND THE TURNOVER AT MORE THAN 67 TIMES AS COMPARED TO THE ASSESSEE THER EIN SUGGESTS THAT THE ASSETS EMPLOYED BY THE TCS E-SERVES ALONG WITH HUGE INTANG IBLES IN THE FORM OF BRAND VALUE IMPACTED THE PLI AND VITIATED THE COMPARABILI TY UNDER FAR ANALYSIS. THE ITAT OBSERVED THAT THOUGH THERE IS A CLOSE FUNCTION AL SIMILARITY BETWEEN THAT ENTITY AND THE ASSESSEE, HOWEVER, THERE IS A CLOSE CONNECTION BETWEEN TCS E-SERVE AND TATA CONSULTANCY SERVICE LTD. WHICH WAS HIGH BR AND VALUE; THAT DISTINGUISHED 48 IT AND MARKED IT OUT FOR EXCLUSION. THE ITAT RECOR DED THAT THE BRAND VALUE ASSOCIATED WITH TCS CONSULTANCY REFLECTED IMPACTED TCS E-SERVE PROFITABILITY IN A VERY POSITIVE MANNER. THIS INFERENCE TOO IN THE O PINION OF COURT CANNOT BE TERMED AS UNREASONABLE. THE RATIONALE FOR EXCLUSIO N IS, THEREFORE, UPHELD. 87. IT IS, THEREFORE, CLEAR NOW THAT IN SPITE OF A CLOSE FUNCTIONAL SIMILARITY BETWEEN THE ASSESSEE AND THE TCS E-SERVE, IN VIEW O F THE CLOSE CONNECTION BETWEEN TVS E-SERVE AND TATA CONSULTANCY SERVICES LT D., WHICH IS A HIGH BRAND VALUE; THAT DISTINGUISHED IT AND MARKED IT OUT FOR EXCLUSION. THE RATIONALITY FOR EXCLUSION ADOPTED BY THE TRIBUNAL BASING ON THE BRA ND VALUE ASSOCIATED WITH TCS CONSULTANCY WHICH REFLECTED AN IMPACTED TCS E-SERVE PROFITABILITY IN A POSITIVE MANNER IS UPHELD BY THE HONBLE JURISDICTIONAL HIGH COURT WHICH IS BINDING ON THIS TRIBUNAL. MERELY BECAUSE THE BINDING PRECEDENT OF T HE HONBLE HIGH COURT IN THIS ORDER DATED 28.11.2017 WAS NOT BROUGHT TO THE NOTIC E OF THE TRIBUNAL WHEN IT PRONOUNCED ITS ORDER ON 5.11.2018 DOES NOT MAKE ANY DIFFERENCE ON THE BINDING NATURE OF THIS DECISION OR ITS APPLICABILITY TO THE FACTS OF THE PRESENT CASE. AS A MATTER OF LAW, HAD SUCH DECISION BEEN BROUGHT TO TH E NOTICE OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 2010-11, STILL IT W OULD HAVE BOUND THE TRIBUNAL TO FOLLOW THE SAME. IN THE CIRCUMSTANCES, WE FIND NO OPTION BUT TO FOL LOW THE BINDING PRECEDENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF B.C . MANAGEMENT SERVICES P. LTD. (SUPRA) AND TO HOLD THAT . INFOSYS BPO LIMITED AND TCS E-SERVE LIMITED ARE N OT GOOD COMPARABLES TO THE ASSESSEE AND BOTH THESE COM PANIES DESERVE TO BE DELETED FROM THE LIST OF COMPARABLES FROM BENCH MAR KING THE INTERNATIONAL TRANSACTIONS. 49 R. SYSTEMS INTERNATIONAL LTD 88. NOW COMING TO THE COMPANIES SOUGHT TO BE INCLUDED, R. SYSTEMS INTERNATIONAL LTD. WAS REJECTED BY THE LD. TPO ON AC COUNT OF DIFFERENT FINANCIAL YEAR END. HOWEVER, IT IS SUBMITTED BY THE LD. AR THAT UNDER SIMILAR CIRCUMSTANCES IN ASSESSEES OWN CASE FOR AY 2009-10, A COORDINATE BENCH OF THIS TRIBUNAL RELYING ON THE RULING OF THE HONBLE PUNJAB & HARYANA HIGH C OURT IN CIT VS MERCER CONSULTING INDIA P. LTD., ITA NO.101 OF 2015, HELD THAT IF THE AUDITED QUARTERLY RESULTS CAN BE USED TO COMPUTE MARGIN FOR THE YEAR E NDING ON MARCH 2009 THEN THE COMPANY SHOULD BE INCLUDED IN THE FINAL SET OF COMPARABLES. 89. SIMILAR IS THE SITUATION IN RESPECT OF THIS YEAR ALSO INASMUCH AS LD. TPO REJECTED ON THE GROUND OF THIS COMPANY HAVING A YEAR ENDING OTHER THAN MARCH AND LD. TPO UPHOLDING THE SAME. SINCE NO CHANGE OF THE CIRCUMSTANCES FOR THE EARLIER YEAR IS EITHER PLEADED OR PROVED BY THE REVEN UE, IN THE ABSENCE OF ANY DISPUTE ON THE FUNCTIONAL SIMILARITY OF THE COMPARAB LE AND THE ASSESSEE, WHILE RESPECTFULLY FOLLOWING THE ORDER OF A COORDINATE BEN CH IN RESPECT OF AY 2009-10, WE HOLD THAT IF THE AUDITED QUARTERLY RESULTS CAN BE USED TO COMPUTE MARGIN FOR THE YEAR ENDING ON MARCH 2011, THEN COMPANY SHOULD BE INCLUDED IN THE LIST OF COMPARABLES. WE, THEREFORE, DIRECT THE LD. TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLES SUBJECT TO THE CONDITION THAT THE AU DITED QUARTERLY RESULTS FOR THE YEAR ENDING WITH MARCH 2011 ARE AVAILABLE. CG VAK SOFTWARE & EXPORTS LTD., INFORMED TECHNOLOGIE S INDIA LTD., AND MICROGENETICS SYSTEMS LTD. 90. CG VAK SOFTWARE & EXPORTS LTD., INFORMED TECHNO LOGIES INDIA LTD., AND MICROGENETICS SYSTEMS LTD. WERE REJECTED BY THE LD. TPO ON THE BASIS OF TURNOVER FILTER AND LD. DRP CONFIRMED THE SAME. 50 91. LD. AR ARGUED THAT UNDER TNMM, DIFFERENCES IN T URNOVER ARE NEUTRALIZED AND SUCH FILTER IS NOT RELEVANT FOR THE ENTITIES OP ERATING ON COST PLUS MARK UP. HE ALSO BROUGHT TO OUR NOTICE THAT IN ASSESSEES OWN C ASE FOR AY 2009-10 (ITA NO.2074/DEL/2014) RELYING ON THE HONBLE DELHI HIGH COURT RULING IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS INDIA LTD. VS DCIT IN ITA NO.417/2014, A COORDINATE BENCH OF THIS TRIBUNAL HELD THAT CG VAK SOFTWARE & EXPORTS LTD CANNOT BE HELD TO BE INCOMPARABLE SIMPLY ON THE GROUND OF L OW TURNOVER. WE HAVE GONE THROUGH THE ORDER OF THE TRIBUNAL ON THIS ASPECT AN D VIDE PARAGRAPH NO.18.3, THE TRIBUNAL RECORDED THAT, - 18.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER. THE MAIN REASON FOR NO T INCLUDING THIS COMPANY IS THAT ITS TURNOVER IS LESS THAN RS 1 CRORE. SO FAR A S EXCLUSION OF THIS COMPARABLE ON BASIS OF TURNOVER FILTER CRITERIA OF LESS THAN RS. 1 CRORE, WE FIND THAT, FIRST OF ALL, IT WAS A COMPARABLE CHOSEN BY THE ASSESSEE AND AT THE TIME OF SELECTION PROCESS THE ASSESSEE AS STATED HAD NOT APPLIED ANY TURNOVER FIL TER FOR ACCEPTING OR REJECTING THE COMPARABLES. ONCE THE TURNOVER FILTER HAS NOT B EEN APPLIED AT THE QUANTITATIVE LEVEL THEN COMPARABILITY HAS TO BE DONE ON QUALITAT IVE LEVEL BASED ON FAR ANALYSIS. IF ON FAR ANALYSIS IT IS FOUND THAT THERE ARE DIFFE RENCES ON ACCOUNT OF EITHER ASSETS DEPLOYED, RISK ASSUMED MATERIALLY AFFECTING THE COS T OR MARGIN THEN ONLY COMPARABILITY ANALYSIS FAILS IN SUCH CASES. FURTHER , UNDER THE TNMM, THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION IS TO BE SEEN WITH REFERENCE TO FUNCTIONS PERFORMED AF TER TAKING INTO ASSETS EMPLOYED AND THE RISK ASSUMED. WHILE RECKONING THE COMPARABILITY ANALYSIS UNDER TNMM, THE MAIN EMPHASIS IS INTO NET MARGIN REALIZED ON THE TRANSACTIONS UNDERTAKEN AND NOT THE PRICE OF THE PRODUCT OR SERV ICES. THE TRANSFER PRICING RULES UNDER RULE 10B AND 10C ALSO CONTEMPLATE FOR ELIMINA TING THE MATERIAL EFFECTS AND TO MAKE REASONABLY ACCURATE ADJUSTMENT FOR ELIMINAT ING THE DIFFERENCES ON ACCOUNT OF SUCH MATERIAL EFFECTS. MERE CIRCUMSTANCE OF A COMPANY WHICH OTHERWISE CONFIRM TO THE COMPARABILITY ANALYSIS IN TERMS OF RULE 10B(2) AND (3), HUGE PROFIT OR HUGE TURNOVER IPSO FACTO DOES NOT LE AD TO ITS EXCLUSION UNLESS AND OF COURSE IT IS SHOWN THAT TURNOVER OR HUGE PROFIT IS ON ACCOUNT OF FACTOR LEADING TO A DIFFERENT RESULTS IN FAR ANALYSIS. WE FIND THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CRYSCAPITAL INVESTMENT ADVISORS INDIA PVT. LTD. VS. DCIT (SUPRA) AFTER DETAILED ANALYSIS OF RULE 10B(3), SAME PRINCIPLE HA S BEEN REITERATED THAT IF THE 51 COMPANY IS FUNCTIONALLY COMPARABLE THEN SAME CANNOT BE REJECTED ON THE BASIS OF TURNOVER. THE HONBLE HIGH COURT IN ITS VERY DETAIL ED JUDGMENT WHEREIN IT WAS REQUIRED TO ANSWER, WHETHER THE COMPARABLE CAN BE R EJECTED ON THE GROUND THAT THEY HAVE HIGH PROFIT MARGIN AS COMPARED TO THE ASS ESSEE IN TP ANALYSIS, HASALSO DEALT UPON THE TURNOVER FACTOR IN DETAIL AND REITER ATED THAT IF THE COMPANY IS FUNCTIONALLY COMPARABLE THEN SAME CANNOT BE REJECTE D ON THE BASIS OF TURNOVER. THUS, FOLLOWING THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT, WE HOLD THAT THE COMPANY CANNOT BE HELD TO BE INCOMPARABLE SIMPL Y ON THE GROUND OF LOW TURNOVER, UNLESS IT IS DEMONSTRATED THAT THE ASSETS AND RISK ARE COMPLETELY DIFFERENT AND ARE INCOMPARABLE. THUS, WE DIRECT THE TPO TO INCLUDE CG VAK SOFTWARE AND EXPORTS LTD. AS A COMPARABLE COMPANY. 92. SAME REASONING IS APPLICABLE IN RESPECT OF THES E THREE COMPANIES FOR THIS YEAR ALSO. WHILE RESPECTFULLY FOLLOWING THE RATIO LA ID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN CHRYSCAPITAL INVESTMENT ADVISORS INDIA LTD. VS DCIT(SUPRA), AND THE ABOVE OBSERVATIONS OF THE TRIB UNAL IN ASSESSEE'S OWN CASE IN THE PRECEDING YEAR, WE HOLD THAT THESE THREE COMPANI ES CANNOT BE HELD TO BE INCOMPARABLE SIMPLY ON THE GROUND OF LOW TURNOVER, S O LONG AS THERE IS NO FUNCTIONAL DISSIMILARITY. WE, THEREFORE, DIRECT THE LD. AO/TPO TO INCLUDE THESE THREE COMPANIES, VIS. CG VAK SOFTWARE & EXPORTS LTD ., INFORMED TECHNOLOGIES INDIA LTD., AND MICROGENETICS SYSTEMS LTD. IN THE LI ST OF COMPARABLES. MICROLAND LTD., DATAMATICS FINANCIAL SERVICES & CO SMIC GLOBAL LTD: 93. MICROLAND LTD. WAS REJECTED BY THE LD. TPO ON TH E GROUND THAT THIS COMPANY HAS BEEN MAKING PERSISTENT LOSSES. DATAMATICS FINA NCIAL SERVICES LTD. WAS REJECTED ON THE GROUND THAT THIS COMPANY FAILED THE SERVICE INCOME FILTER. AND COSMIC GLOBAL LTD. WAS REJECTED FOR FAILING THE EXP ORT EARNINGS FILTER. THOUGH IT IS SUBMITTED BY THE LD. AR THAT DATAMATICS AND COSMIC G LOBAL WERE ACCEPTED BY THE TPO FOR AY 2010-11 AND THERE IS NO CHANGE IN THE BU SINESS MODEL, IT IS NOT PROVED BEFORE US THAT IN SUCH AY 2010-11 ALSO THESE TWO CO MPANIES FAILED THE SERVICE 52 INCOME FILTER AND EXPORT TURNING FILTER RESPECTIVEL Y, BUT IN SPITE OF THE SAME THE LD. TPO ACCEPTED THE SAME. MERE SIMILARITY IN BUSINESS MODEL IS NOT ENOUGH TO ACCEPT THE EARLIER ORDER. IT HAS TO BE SHOWN THAT PASSING OR FAILING OF FILTERS WAS ALSO INVOLVED THERE. IN THE ABSENCE OF ANY SUCH PRO OF IT IS VERY DIFFICULT TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT SINCE THESE TWO COMPANIES WERE ACCEPTED IN THE EARLIER YEARS THEY HAVE TO BE ACCEPTED FOR THIS YE AR ALSO IRRESPECTIVE OF THE PASSING OR OTHERWISE OF THESE TWO FILTERS. 94. IN SO FAR AS MICROLAND IS CONCERNED, IT IS REJE CTED FOR MAKING PERSISTENT LOSSES. THOUGH DIMINISHING REVENUES IS NOT A GROUN D TO REJECT A COMPANY FROM THE LIST OF COMPARABLES, MAKING PERSISTENT LOSSES T AKES IT AWAY FROM THE LIST OF COMPARABLES. FOR THESE REASONS WE FIND IT DIFFICULT TO INCLUDE THESE THREE COMPANIES, VIZ. MICROLAND LTD, DATAMATICS FINANCIAL SERVICES LTD., AND COSMIC GLOBAL LTD. IN THE LIST OF COMPARABLES. 95. GROUNDS NO. 13 & 14 RELATE TO THE ALLOCATION OF DIRECTORS REMUNERATION BETWEEN STP AND NON STP UNITS, WHICH ARE ADMITTEDLY CONSIDERED AND DECIDED BY THE COORDINATE BENCHES OF THIS TRIBUNAL FOR THE AY 2008-09 IN ITA NO.29/DEL/2013 BY ORDER DATED 20.5.2016, FOR AY 2009-10 IN ITA NO.2 074/DEL/2014 AND FOR THE AY 2010-11 IN ITA 380/DEL/2015 BY ORDER DATED 5.1.2018. FOR ALL THE YEARS THE ISSUE WAS REMITTED TO THE FILE OF THE LD. AO FOR FRESH EX AMINATION AND FOR THE ASSTT. YEARS 2009-10 AND 2010-11, THE TRIBUNAL RELIED UPO N THE FOLLOWING OBSERVATIONS MADE IN ASSESSEES OWN CASE FOR THE AY 2008-09,- 14. IN SUPPORT OF THE GROUNDS I.E. GROUND NOS. 6 T O 8, THE LEARNED AR SUBMITTED THAT THE ASSESSING OFFICER HAS ERRED IN NOT CORRECT LY VERIFYING THE RECORD SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS CONTRAR Y TO DRP DIRECTIONS. HE WAS NOT JUSTIFIED IN DISALLOWING INCOME-TAX HOLIDAYS CL AIMED BY THE ASSESSEE IN RESPECT 53 OF STP UNIT HI ITS 8TH YEAR OF OPERATION. THE AUTHO RITIES BELOW HAVE ALSO ERRED IN ALLOCATING DIRECTOR'S REMUNERATIONS BETWEEN STP UNI T AND NON-STP UNITS BY IGNORING THE FACTS PLACED ON RECORD AND HOLDING THA T THE ASSESSEE INTENTIONALLY DEBITED DIRECTOR'S SALARY TO NON-STP UNITS TO REDUC E ITS TAXABLE INCOME WITHOUT APPRECIATING THE OPERATING MODEL BEING FOLLOWED BY THE ASSESSEE. THE LEARNED AR SUBMITTED THAT ASSESSEE'S STP UNIT HAS ITS OWN FINA NCE/OPERATIONAL TEAM WHICH IS RESPONSIBLE FOR THE DAY TO DAY AFFAIRS/FUNCTIONING OF THE SAID UNIT. THE DIRECTORS OF THE ASSESSEE HAVE NO ACTIVE INVOLVEMENT ON THE AFFA IRS OF STP UNITS. ALL COST RELATED STPI UNIT AND NON-STPI UNIT OF ASSESSEE WER E BEING BOOKED INTO IRRESPECTIVE UNIT AND NO APPORTIONMENT WAS REQUIRED /DONE FOR ANY OTHER COST. HE SUBMITTED FURTHER THAT ASSESSEE WAS OPERATING ON CO ST + MARK UP ARRANGEMENTS WITH ITS OVERSEAS GROUP COMPANIES. UNDER THE SAID A RRANGEMENT, THE ASSESSEE WAS ENTITLED TO RECEIVE PRE-AGREED MARK UP ON COST INCURRED BY IT. ALLOCATING COST FROM NON-STP UNIT TO STP UNIT WILL RESULT IN REDUCI NG THE COST BASED FOR THE ASSESSEE, WHICH WILL EVENTUALLY LEAD TO LOWER TAXAB LE INCOME. THUS, THE REASON PROVIDED BY THE ASSESSING OFFICER FOR MAKING THE AD JUSTMENT DOES NOT STAND CORRECT IN THE CASE OF ASSESSEE. THE LEARNED AR SUB MITTED THAT IN THE SUBSEQUENT YEARS 2009-10 AND 2010-11, THE CLAIMED DEDUCTION UN DER SEC. 1OA WAS ALLOWED. HE REFERRED PAGE NOS. THE LEARNED AR ALSO TRIED TO POINT OUT TYPOGRAPHICAL AND ARITHMETICAL ERRORS IN THE WORKING OF THE DISALLOWA NCE UNDER SEC. 10A OF THE ACT BY THE ASSESSING OFFICER AT PAGE NOS. 6 TO 8 OF THE AS SESSMENT ORDER. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXX 19. CONSIDERING THE ABOVE SUBMISSIONS, WE FIND THAT IN THE CASE OF CTT VS. WESTERN OUTDOOR INTERACTIVE (P) LTD. (SUPRA), THE H ON'BLE HIGH COURT HAS BEEN PLEASED TO HOLD THAT BENEFIT OF DEDUCTION UNDER SEC , 10A IS AVAILABLE FOR A PARTICULAR NUMBER OF YEARS ON SATISFACTION OF CERTA IN CONDITIONS UNDER PROVISIONS OF THE ACT AND UNLESS RELIEF GRANTED FOR FIRST ASSE SSMENT YEAR IN WHICH CLAIM IS MADE AND ACCEPTED, THE ASSESSING OFFICER CANNOT WIT HDRAW RELIEF FOR SUBSEQUENT YEARS, UNDISPUTEDLY, IT IS 8TH YEAR OF THE CLAIM OF DEDUCTION UNDER SEC. 1 OA OF THE ACT MADE BY THE ASSESSEE AND IT HAS BEEN ALLOWED IN EARLIER YEARS AND IN SUBSEQUENT REMAINING TWO ASSESSMENT YEARS, I.E. 200 9-10 AND 2010-11. BEFORE THE ITAT, AS DISCUSSED ABOVE, THE LEARNED AR HAS TR IED TO MEET OUT THE OBJECTIONS RAISED BY THE ASSESSING OFFICER IN MAKING THE DISAL LOWANCE OF THE CLAIMED DEDUCTION. IN BRIEF, THE SUBMISSION OF THE ASSESSEE AGAINST THE OBJECTION OF THE ASSESSING OFFICER THAT THE ASSESSEE HAS INTENTIONAL LY DEBITED DIRECTORS' SALARY TO NON-STP UNITS TO REDUCE ITS TAXABLE INCOME, THE SUB MISSION OF THE ASSESSEE REMAINED THAT THE ASSESSEE MAINTAINS ITS ACCOUNT IN A MANNER THAT COSTS RELATING TO STP AND NON-STP UNITS ARE BOOKED IN THE RESPECTI VE UNITS; MD RESPONSIBLE FOR 54 ESTABLISHING/LEADING STRATEGIC R&D PARTNERSHIP AND R&D CENTRAL OPERATIONS FUNCTIONS FOR NOIDA SITE WHERE MAJOR PORTION OFR&D WORK WAS CARRIED OUT; DIRECTOR FINANCED RESPONSIBLE FOR FINANCE AND ACCOU NTING, LEGAL, TAX AND COMPANY SECRETARIAL COMPLIANCE FUNCTIONS AT NOIDA; STP UNIT AT BANGALORE SINCE HAS ITS OWN CORE MANAGEMENT STAFF AND EACH PERSON IS RESPONSIBL E FOR THEIR AREAS, THE COST OF SUCH PERSONNEL ARE DEBITED TO THEIR UNDERTAKING ONL Y; AND APPELLANT OPERATES OWN COST PLUS MODEL, HENCE, INCREASE IN COST IN NON-STP I UNIT WILL RESULT IN INCREASE IN REVENUE AND, THEREFORE, RESULTS IN INCREASE IN TAX LIABILITY. AGAINST THE OBJECTION OF THE ASSESSING OFFICER THAT SEPARATE BOOKS OF ACCOUN T ARE NOT MAINTAINED, THE SUBMISSIONS OF THE ASSESSEE REMAINED THAT AS PER TH E PROVISIONS OF LAW, THERE IS NO REQUIREMENT OF MAINTAINING SEPARATE BOOKS OF ACCOUN T FOR A UNIT ELIGIBLE TO CLAIM DEDUCTION UNDER SEC. 10A OF THE ACT; AND THAT IT IS THE 8 YEAR OF CLAIM OF DEDUCTION UNDER SEC. IOA OF THE ACT AND THE CLAIM OF DEDUCTIO N UNDER SEC. 1OA OF THE ACT ONLY NEEDS TO BE SEEN IN FIRST YEAR. AGAINST THE OB JECTION OF THE ASSESSING OFFICER THAT ADDITIONS SHOWN IN BLOCK OF COMPUTERS IS NOT I N AGREEMENT WITH RECORDS MAINTAINED IN COMPUTERS, THE SUBMISSIONS OF THE ASS ESSEE REMAINED THAT AS PER FIXED ASSETS SCHEDULE PROVIDED TO THE ASSESSING OFF ICER TOTAL ADDITION IN COMPUTER MADE DURING FINANCIAL YEAR 2007-08 IN STP UNIT WAS RS. 32,05,095; IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER STATED THAT AS PER DETAILS PROVIDED TO HIM,ADDITION MADE IN BLOCK OF COMPUTER WAS OF RS.31 ,73,495 WHICH IS AGAINST THE FACTS ON RECORD; THE ASSESSING OFFICER COMPARED ALL EGED ADDITIONS OF RS.31,73,495 WITH DETAILS EXTRACTS FROM SAP AND WRONGLY CONCLUDE D THAT AMOUNTS DO NOT MATCH. THE LEARNED AR IN HIS ABOVE SUBMISSIONS HAS POINTED OUT AS TO HOW THE ASSESSING OFFICER HAS COMMITTED MISTAKE IN COMING T O THE CONCLUSION THAT AMOUNTS DO NOT MATCH. THE LEARNED AR SUBMITTED THAT TOTAL ADDITION MADE TO BLOCK OF COMPUTERS AS PER SAP DETAILS AFTER CORRECT ING ABOVE MISTAKES MADE BY THE ASSESSING OFFICER IS RS.32,05,095 WHICH MATCHES WITH FIXED ASSETS SCHEDULED SUBMITTED TO THE ASSESSING OFFICER DURING ASSESSMEN T PROCEEDINGS. AGAINST THE OBJECTION OF ASSESSING OFFICER THAT INVOICES RAISED IN US DOLLARS ARE NOT VERIFIABLE WITH AMOUNTS RECORDED IN BOOKS AS SOME AMOUNTS IS I N INR, THE SUBMISSION OF THE ASSESSEE REMAINED THAT ALL THE DETAILS ON ACCOUNT O F SERVICE INCOME WAS FURNISHED BEFORE THE ASSESSING OFFICER; INVOICES ARE USUALLY RAISED IN USD, HOWEVER, IF THERE IS. AN ADJUSTMENT ENTRY TO BE PASSED, SAME IS PASSE D IN INR IN THE LEDGER ACCOUNT; AND AUDIT ADJUSTMENT ENTRY WAS PASSED BY AUDITOR FO R FINANCIAL YEAR 2007-08; BONUS EXPENSES PERTAINING TO FINANCIAL YEAR 2008-09 INADVERTENTLY CONSIDERED BY CADENCE INDIA AS COST FOR FINANCIAL YEAR 2007-08 AN D AS THE ASSESSEE OPERATES ON A COST PLUS MODEL INVOICE ON SUCH COST WAS RAISED A LREADY IN FINANCIAL YEAR 2007- 08; ETC. THE GRIEVANCE OF THE ASSESSEE IN THIS REGA RD ALSO REMAINED THAT THE ASSESSING OFFICER HAS NOT FOLLOWED DRP'S DIRECTIONS . IT WAS SUBMITTED THAT AS PER DIRECTIONS ISSUED BY THE DRP, THE ASSESSING OFFICER WAS DIRECTED TO RECTIFY THE 55 DETAILS OF ACCOUNTS SUBMITTED BY THE ASSESSEE WITH REGARD TO ADDITIONS IN THE COMPUTER ACCOUNT AND DIFFERED REVENUE. KEEPING IN V IEW THESE MATERIAL SUBMISSIONS OF THE ASSESSEE, WE SET ASIDE THE MATTE R TO THE FILE OF THE ASSESSING OFFICER TO VERIFY THE ABOVE SUBMISSIONS AND DECIDE THE ISSUE AFRESH IN VIEW OF THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE O F CIT VS. WESTERN OUTDOOR INTERACTIVE PVT. LTD. (SUPRA). 96. WE, THEREFORE, RESPECTFULLY FOLLOWING THE ABOVE OBSERVATIONS OF THE TRIBUNAL IN THE IMMEDIATELY PRECEDING ASSTT. YEARS, SET ASIDE THE DIRECTION OF THE LD. DRP AND RESTORE THE ISSUE TO THE FILE OF THE LD . AO WITH SIMILAR DIRECTIONS AND TO BE DECIDED IN THE SAME MANNER. GROUND NOS. 13 & 14 ARE ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 97. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D IN PART FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS THE 2 ND DAY OF APRIL, 2018. SD/- SD/- (R.K. PANDA) (K. NARASIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 ND APRIL, 2018 VJ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT BY ORDER ASSTT. REGISTRAR, ITAT