M/s Unisys India Private Limited, Bangalore V. DCIT, Bangalore

ITA 67/BANG/2015

• Counselvise Citation: 6721114 RSA 2015
• Duration Of Justice: 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 29-09-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 22-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G R REDDY
• Keywords: Depreciation; Transfer pricing; International transaction; Question of law; Scheme of amalgamation; Onus to prove; Unabsorbed depreciation
• Section: 10B; 263; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT( TP )A NO.67/BANG/2015 ASSESSMENT YEAR : 2009-10 M/S. UNISYS INDIA PRIVATE LTD., PURVA PREMIER, 135/1, RESIDENCY ROAD, BANGALORE 560 025. PAN: AAACU 1502G VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(5), BANGALORE. APPELLANT RESPONDENT IT( TP )A NO.70/BANG/2015 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(1), BANGALORE. VS. M/S. UNISYS INDIA PRIVATE LTD., PURVA PREMIER, 135/1, RESIDENCY ROAD, BANGALORE 560 025. PAN: AAACU 1502G APPELLANT RESPONDENT REVENUE BY : SHRI G.R.REDDY, CIT(DR) ASSESSEE BY : SHRI KANCHAN KAUSHAL, CA DATE OF HEARING : 29.09.2015 DATE OF PRONOUNCEMENT : 30.09.2015 IT(TP)A NOS.67 & 70/BANG/2015 PAGE 2 OF 37 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THESE ARE CROSS APPEALS BY THE REVENUE AND ASSESS EE AGAINST THE ORDER DATED 14.11.2014 OF THE CIT(APPEALS)-IV, BANG ALORE RELATING TO ASSESSMENT YEAR 2009-10. ITA 70/B/15 (REVENUES APPEAL) 2. FIRST WE SHALL TAKE UP FOR CONSIDERATION APPEAL BY THE REVENUE. GROUND NOS. 1 & 5 ARE GENERAL IN NATURE AND CALLS F OR NO SPECIFIC ADJUDICATION. 3. GROUND NO. 2 RAISED BY THE REVENUE IS WITH REGAR D TO RELATE TO COMPUTATION OF DEDUCTION U/S.10A OF THE INCOME TAX ACT, 1961 (ACT). THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DE SIGN AND DEVELOPMENT OF COMPUTER SOFTWARE. THE ASSESSEE WA S ENTITLED TO CLAIM DEDUCTION U/S. 10A OF THE ACT IN RESPECT PROFITS DE RIVED FROM DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE. WHILE COMPUTING T HE EXPORT TURNOVER FOR THE PURPOSE OF ALLOWING DEDUCTION U/S. 10A OF THE A CT, THE AO EXCLUDED TELECOMMUNICATION EXPENSES AND TRAVELLING EXPENSES INCURRED IN FOREIGN CURRENCY. 4. THE ASSESSEE SUBMITTED THAT EXPLANATION 2 TO SEC TION 10A DEFINES EXPORT TURNOVER TO MEAN CONSIDERATION IN RESPECT OF EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO INDIA BY THE IT(TP)A NOS.67 & 70/BANG/2015 PAGE 3 OF 37 ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDA NCE WITH SUB-SECTION (3), BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATIO N CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCH ANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THE ASSESSEE SUB MITTED THAT NONE OF THE ITEMS OF AFORESAID ITEMS FELL WITHIN THE DEFINITION OF EXPORT TURNOVER. ALTERNATIVELY, IT WAS SUBMITTED THAT IF THE AFORESA ID AMOUNTS ARE EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE E XCLUDED FROM THE TOTAL TURNOVER. THE AO DID NOT ACCEPT THE CLAIM OF THE A SSESSEE AND EXCLUDED THE AFORESAID ITEMS FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT. 5. THE CIT(A) ALLOWED THE ALTERNATIVE PRAYER OF THE ASSESSEE BY HOLDING THAT THE AFORESAID EXPENSES SHOULD BE EXCLU DED BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER. AGGRIEVED BY THE ORDER OF THE CIT(A) DIRECTING EXCLUSION OF THE AFORESAID ITEMS OF EXPENDITURE BOTH FROM THE EXPORT TURNOVER AND ALSO FROM THE TOTAL TU RNOVER, THE REVENUE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 6. THE ISSUE RAISED BY THE REVENUE IN GROUND NO.2 H AS NOW BEEN DECIDED BY THE HONBLE HIGH COURT OF KARNATAKA IN T HE CASE OF TATA ELXSI 349 ITR 98 (KAR) WHEREIN IT HAS BEEN HELD THAT WHATEVER IS EXCLUDED FROM EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM THE TO TAL TURNOVER. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE HIGH COURT OF KARNATAKA, WE ARE OF IT(TP)A NOS.67 & 70/BANG/2015 PAGE 4 OF 37 THE VIEW THAT GROUND NO.2 RAISED BY THE REVENUE IN ITS APPEAL IS WITHOUT ANY MERIT AND THE SAME IS ACCORDINGLY DISMISSED. 7. GROUND NO.3 RAISED BY THE REVENUE IS WITH REGAR D THE ORDER OF THE CIT(A) IN DIRECTING THE AO NOT TO SET OFF LOSS OF NON-STPI UNITS AGAINST THE PROFITS OF THE STPI UNITS WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT IN RESPECT OF THE PROFITS OF THE STPI UNITS. THE ASSE SSEE IS A COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. I T IS NOT IN DISPUTE THAT THE ASSESSEE HAD STPI UNITS WHICH WAS ENTITLED TO C LAIM DEDUCTION IN RESPECT OF ITS PROFITS U/S. 10A OF THE ACT. THE AS SESSEE ALSO HAD NON-STPI UNITS, THE INCOME OF WHICH WAS TAXABLE. ONE OF THE NON-STPI UNITS OF THE ASSESSEE HAD CARRY FORWARD LOSSES. THE STPI UNIT H AD POSITIVE INCOME ON WHICH DEDUCTION U/S.10A OF THE ACT WAS CLAIMED. THE ASSESSING OFFICER ON THE REASONING THAT THE EXEMPTION U/S. 10A IS IN THE NATURE OF A DEDUCTION, WAS OF THE VIEW THAT THE CARRY FORWARD L OSSES OF THE NON-STPI UNIT SHOULD BE SET OFF AGAINST THE PROFITS OF THE S TPI UNIT ELIGIBLE FOR DEDUCTION U/S. 10A. THE CIT(A) REVERSED THE ORDER O F THE AO AND HELD THAT THE LOSSES OF NON STPI UNITS SHOULD NOT BE SET OFF AGAINST THE ELIGIBLE PROFITS OF THE STPI UNIT WHILE ALLOWING DEDUCTION U/S.10A O F THE ACT. IN DOING SO THE CIT(A) FOLLOWED THE DECISION OF THE HONBLE KARNATA KA HIGH COURT IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD., 341 ITR 385 (K ARN.) WHEREIN IT WAS HELD THAT PROVISIONS OF SEC.10A OF THE ACT ARE IN T HE NATURE OF EXEMPTION PROVISIONS AND NOT IN THE NATURE OF DEDUCTIONS UNDE R CHAPTER VIA OF THE ACT IT(TP)A NOS.67 & 70/BANG/2015 PAGE 5 OF 37 AND THEREFORE THE PROFITS OR LOSSES OF THE SEC.10A UNIT WILL NOT ENTER THE COMPUTATION OF TOTAL INCOME OF THE ASSESSEE AT ALL. 8. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVEN UE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. THE LEARNED DR RE LIED ON THE ORDER OF THE AO AND RELIED ON THE DECISION OF THE HONBLE KARNAT AKA HIGH COURT IN THE CASE OF CIT V. HIMATSINGIKE SEIDE LTD., 286 ITR 265 (KARN.) WHEREIN IT WAS HELD THAT LOSSES OF NON STPI UNITS SHOULD BE SET OF F AGAINST PROFITS ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT . 9. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT EXEMPTION U/S. 10A IS IN THE NATURE OF EXEMPTION AND NOT A DEDUCTION A ND THEREFORE PROFITS OF 10A UNIT WILL BE OUTSIDE THE COMPUTATION OF TOTAL I NCOME AND THEREFORE THERE IS NO QUESTION OF SETTING OFF OF LOSSES OF NON-STPI UNIT. IN OTHER WORDS, IT WAS THE SUBMISSION THAT EXEMPTION U/S. 10A OF THE A CT IS NOT IN THE NATURE OF A DEDUCTION UNDER CHAPTER VI OF THE ACT AND THER EFORE SET OFF AS DONE BY THE REVENUE AUTHORITIES SHOULD NOT BE MADE. ON TH E RELIANCE PLACED BY THE LD. DRP ON THE DECISION OF HONBLE HIGH COURT OF KA RNATAKA IN THE CASE OF HIMATSINGIKE SEIDE LTD.(SUPRA) , THE LD. COUNSEL PLACED RELIANCE ON THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF DCIT V. YOKOGAWA INDIA LTD. (2010) 8 TAXMAN.COM 175 (BANG) WHEREIN T HE TRIBUNAL DISTINGUISHED THE DECISION RENDERED IN THE CASE OF HIMATSINGIKE SEIDE LTD. (SUPRA) AS FOLLOWS:- IT(TP)A NOS.67 & 70/BANG/2015 PAGE 6 OF 37 9. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. IN THE FOLLOWING DECISIONS IN A SSESSEES OWN CASE, IT HAS BEEN HELD THAT DEDUCTION UNDER SECTION 10A SHOULD BE ALLOWED IN RESPECT OF PROFITS OF THE BUSINESS OF TH E ELIGIBLE UNDERTAKING WITHOUT REDUCING THE LOSSES OF OTHER UN ITS/BROUGHT FORWARD LOSSES/UNABSORBED DEPRECIATION ALLOWANCE:- ASSTT. CIT V. YOKOGAWA INDIA LTD. [2007] 111 TTJ (BANG.) 548/ 13 SOT 470 (BANG.). YOKOGAWA INDIA LTD. V. ASSTT. CIT [IT APPEAL NO. 1157 (BANG.) OF 2007, DATED 29-8-2008]. 9.1 DEDUCTION UNDER SECTION 10A IS AVAILABLE IN RE SPECT OF EACH UNDERTAKING. THE PROVISIONS OF SECTIONS 28 TO 44D ARE TO BE APPLIED TO EACH UNDERTAKING AND NOT EACH BUSINESS. THIS IS BECAUSE, SECTION 10A IS UNDERTAKING SPECIFIC. THAT, THE SECTION IS UNDERTAKING SPECIFIC IS DISCERNIBLE FROM THE FOLLOW ING :- UNDER SUB-SECTION 1 PROFITS DERIVED BY THE UNDER TAKING FROM THE EXPORT OF ARTICLES AND THINGS QUALIFY FOR DEDUCTION; SUB-SECTION 2 PRESCRIBES CERTAIN CONDITIONS TO BE FULFILLED BY THE UNDERTAKING FOR BEING ELIGIBLE TO THE BENEFITS OF SECTION IOA; UNDER SUB-SECTION 4, IT IS PROFITS OF THE BUSINES S OF THE UNDERTAKING THAT QUALIFY FOR DEDUCTION. SIMILARLY, THE DEFINITION OF EXPORT TURNOVER REFERS TO THE SALE PR OCEEDS OF THE EXPORTS MADE BY THE UNDERTAKING; UNDER SUB-SECTION 5, AN AUDIT REPORT IS TO BE FUR NISHED IN SUPPORT OF CLAIM OF DEDUCTION. SUCH AN AUDIT REPORT IS TO BE SUBMITTED FOR EACH ELIGIBLE UNDERTAKING. 9.2 THE DECISION RELIED ON BY THE LEARNED DR MAINL Y IN THE CASE OF HIMATSINGIKE SEIDE LTD. (SUPRA) IS DISTINGU ISHABLE SINCE IN THAT CASE, THE ASSESSEE OWNED ONLY ONE 100 PER C ENT EXPORT ORIENTED UNIT. THE UNABSORBED DEPRECIATION ALLOWANC E WAS IN RELATION TO THE SAME UNIT. HOWEVER, IN THE PRESENT CASE, AS STATED EARLIER, THE RESPONDENT OPERATES THROUGH THREE UNIT S. OUT OF THE THREE UNITS, ONE UNIT WAS REGISTERED UNDER STPI SCH EME AND WAS ELIGIBLE FOR EXEMPTION UNDER SECTION 10A. THE OTHER TWO UNITS WERE NON 10A UNITS. IT WAS IN THE NON 10A UNITS, TH AT THE LOSSES IT(TP)A NOS.67 & 70/BANG/2015 PAGE 7 OF 37 WERE INCURRED. THE FACTS OF THE PRESENT CASE AND TH E FACTS BEFORE THE KARNATAKA HIGH COURT IN HIMATSINGIKE SEIDE LTD. S CASE (SUPRA) ARE DIFFERENT. SIMILAR IS THE FACTUAL SITUA TION INSOFAR AS THE ORDER OF THE TRIBUNAL IN INTELLINET TECHNOLOGIES IN DIA (P.) LTD. CASE (SUPRA). 10. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. THE ISSUE AS TO WHETHER THE PROVISIONS OF SEC.10B OF TH E ACT ARE DEDUCTION PROVISIONS OR EXEMPTION PROVISIONS WILL ASSUME GREA T IMPORTANCE. THE REASON IS THAT IF THE PROVISIONS ARE CONSIDERED AS EXEMPTION PROVISIONS THEN THEY WILL NOT ENTER THE COMPUTATION OF TOTAL INCOME AND THEREFORE THE LOSS OF THE ELIGIBLE UNIT CANNOT BE SET OFF AGAINST THE PRO FITS OF THE NON-ELIGIBLE UNIT. THIS ISSUE HAS ALREADY BEEN SETTLED BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA INDIA LTD. (SUPRA) . THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA (SUPRA) HAD TO DEAL WITH TWO SUBSTANTIAL QUESTION OF LAW. THE FIRST SUBSTANTIAL QUESTION OF LAW WAS ON THE RIGHT OF SET OFF OF LOSS OF NON-ELIGIBLE UNIT AGAINST THE PROFIT OF THE ELIGIBLE UNIT ON WHICH DEDUCTION U/S.10B WAS TO BE ALLOWED. THE HONBLE C OURT IN PARA 10 TO 20 OF ITS JUDGMENT DEALT WITH THE ISSUE. THE HONBLE COURT NOTICED THAT SEC.10- A(1) OF THE ACT (WHICH IS IN PARI MATERIA WITH SEC. 10-B OF THE ACT) READ AS FOLLOWS: 10B. SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABL ISHED UNDERTAKING IN FREE TRADE ZONE ETC.,-(1) SUBJECT TO THE PROVISIONS OF THIS SECTION, A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE A SSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT T O THE IT(TP)A NOS.67 & 70/BANG/2015 PAGE 8 OF 37 PREVIOUS-YEAR IN WHICH THE UNDER-TAKING BEGINS TO M ANUFACTURE OR PRODUCE ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSES SEE : (EMPHASIS SUPPLIED) 11. THE EXPRESSION DEDUCTION AND SHALL BE ALLOW ED FROM THE TOTAL INCOME OF THE ASSESSEE USED IN THE AFORESAID PROVI SIONS WAS CONSIDERED BY THE HONBLE HIGH COURT AND IT HELD IN PARA 13 TO 15 OF ITS JUDGMENT THAT THE EXPRESSION SHALL BE ALLOWED FROM THE TOTAL IN COME OF THE ASSESSEE DOES NOT MEAN TOTAL INCOME AS DEFINED U/S.2(45) OF THE ACT BUT THAT EXPRESSION MEANS PROFITS AND GAINS OF THE STP UNDE RTAKING AS UNDERSTOOD IN ITS COMMERCIAL SENSE OR THE TOTAL INCOME OF THE STP UNIT. THUS THE VIEW EXPRESSED IS THAT INCOME OF THE STP UNDERTAKING GET S QUARANTINED AND WILL NOT BE ALLOWED TO BE SET OFF AGAINST LOSS OF EITHER ANOTHER STP UNDERTAKING OR A NON STP UNDERTAKING. THE HONBLE COURT THEREA FTER HELD THAT THOUGH THE EXPRESSION USED IN SEC.10A WAS DEDUCTION BUT IN EFFECT IT WAS ONLY AN EXEMPTION SECTION. THESE CONCLUSIONS CLEARLY EMANA TE FROM PARA 17 OF THE HONBLE COURTS JUDGMENT. 12. THE SITUATION WITH WHICH WE ARE CONCERNED IN T HE PRESENT CASE IS A SITUATION WHERE THERE IS POSITIVE INCOME OF THE ELI GIBLE UNIT THEN THE SAME SHOULD BE ALLOWED DEDUCTION U/S.10B OF THE ACT WITH OUT SETTING OF THE LOSS OF NON-ELIGIBLE UNIT. THE HONBLE KARNATAKA HIGH COUR T IN THE CASE OF YOKOGAWA (SUPRA) WAS CONCERNED WITH SIMILAR SITUATION AS SET OUT AB OVE. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE KA RNATAKA HIGH COURT, WE IT(TP)A NOS.67 & 70/BANG/2015 PAGE 9 OF 37 ARE OF THE VIEW THAT THE CLAIM AS MADE BY THE ASSES SEE FOR CARRY FORWARD OF LOSS OF THE NON-ELIGIBLE UNIT HAD TO BE ALLOWED WIT HOUT SET OFF OF PROFITS OF THE 10A/10B UNIT. WE HOLD ACCORDINGLY AND DISMISS THE RELEVANT GROUND OF APPEAL OF THE REVENUE. 13. WE MAY ALSO OBSERVE THAT THE HONBLE KARNATAKA HIGH COURTS DECISION IN THE CASE OF HIMATASINGIKE SEIDE ( SUPRA ) HAS HELD THAT UNABSORBED DEPRECIATION (AND BUSINESS LOSS) OF SAME (S. 10A/10B) UNIT BROUGHT FORWARD FROM EARLIER YEARS HAVE TO BE SET O FF AGAINST THE PROFITS BEFORE COMPUTING EXEMPT PROFITS. THE ASSESSEE IN T HAT CASE SET UP A 100% EOU IN AY 1988-89. FOR WANT OF PROFITS IT DID NOT C LAIM BENEFITS U/S 10B IN AYS 1988-89 TO 1990-91. FROM AY 1992-93 IT CLAIMED THE SAID BENEFITS FOR A CONNECTIVE PERIOD OF 5 YEARS. IN AY 1994-95, THE ASSESSEE COMPUTED THE PROFITS OF THE EOU WITHOUT ADJUSTING THE BROUGHT FO RWARD UNABSORBED DEPRECIATION OF AY 1988-89. IT CLAIMED THAT AS S. 1 0B CONFERRED EXEMPTION FOR THE PROFITS OF THE EOU, THE SAID BROUGHT FORWAR D DEPRECIATION COULD NOT BE SET-OFF FROM THE PROFITS OF THE EOU BUT WAS AVAI LABLE TO BE SET-OFF AGAINST INCOME FROM OTHER SOURCES. IT WAS ALSO CLAIMED THAT THE PROFITS HAD TO BE COMPUTED ON A COMMERCIAL BASIS. THE AO ACCEPTED T HE CLAIM THOUGH THE CIT REVISED HIS ORDER U/S 263 AND DIRECTED THAT THE EXEMPTION BE COMPUTED AFTER SET-OFF. ON APPEAL BY THE ASSESSEE, THE TRIBU NAL REVERSED THE ORDER OF THE CIT. ON APPEAL BY THE DEPARTMENT, THE HIGH COUR T IN CIT VS. HIMATASINGIKE SEIDE LTD. 286 ITR 255 (KAR) REVERSED THE ORDER OF IT(TP)A NOS.67 & 70/BANG/2015 PAGE 10 OF 37 THE TRIBUNAL AND HELD THAT THE BROUGHT FORWARD DEPR ECIATION HAD TO BE ADJUSTED AGAINST THE PROFITS OF THE EOU BEFORE COMP UTING THE EXEMPTION ALLOWABLE U/S 10B. IN CIVIL APPEAL NO.1501 OF 200 8 DATED 19.9.2013 AGAINST THE AFORESAID DECISION OF THE HONBLE KARNA TAKA HIGH COURT, THE HONBLE SUPREME COURT OBSERVED AS FOLLOWS WHILE DIS MISSING THE APPEAL:- HAVING PERUSED THE RECORDS AND IN VIEW OF THE FACT S AND CIRCUMSTANCES OF THE CASE, WE ARE OF OPINION THAT T HE CIVIL APPEAL BEING DEVOID OF ANY MERIT DESERVES TO BE DISMISSED AND IS DISMISSED ACCORDINGLY. 14. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT T HE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S. 10A OF THE ACT IN RESPECT OF THE PROFITS OF STPI UNITS WITHOUT SETTING OFF THE LOSS OF NON-STPI UNITS. TH E RELEVANT GROUNDS OF APPEAL OF THE REVENUE ARE ACCORDINGLY DISMISSED. 15. GROUND NO.4 RAISED BY THE REVENUE WILL BE DEALT WITH WHILE DEALING WITH GROUNDS NO.1 TO 7 OF ASSESSEES APPEAL. 16. IN THE RESULT, THE APPEAL BY THE REVENUE IS DI SMISSED. IT(TP)A NO. 67/B/14 (ASSESSEES APPEAL) 17. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 18. IN GROUNDS 2 TO 7, THE ASSESSEE HAS CHALLENGED THE ACTION OF THE DRP IN CONFIRMING THE ADDITION SUGGESTED BY THE TPO BY WAY OF ADJUSTMENT IT(TP)A NOS.67 & 70/BANG/2015 PAGE 11 OF 37 OF ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATI ONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES BY THE ASSE SSEE TO ITS AE. IN GROUND NO.4 RAISED BY THE REVENUE IN ITS APPEAL, IT HAS URGED THAT THE CIT(A) ERRED IN HOLDING THAT THE SIZE AND TURNOVER OF A COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPAR ABLE COMPANY AND ON THAT REASONING EXCLUDING INFOSYS LTD., AS A COMPARA BLE COMPANY IN THE SOFTWARE DEVELOPMENT SEGMENT OF THE ASSESSEE. 19. THE FACTS IN THIS REGARD ARE AS FOLLOWS. THE ASSESSEE OR M/S.UNISYS INDIA PRIVATE LIMITED (UNISYS INDIA) W AS INCORPORATED IN INDIA ON NOVEMBER 28, 1994. ALL SHARES OF THE ASSESSEE AR E HELD BY UNISYS MAURITIUS LIMITED, WHICH IS ULTIMATELY HELD BY UNIS YS CORPN., USA. DURING FY 2005-06, UNISYS INDIA WAS ESSENTIALLY ENGAGED IN PROVIDING IT ENABLED SERVICES(ITES) AND SOFTWARE DEVELOPMENT (IT) TO ITS OVERSEAS GROUP COMPANIES. THE ASSESSEE IS ORGANIZED INTO TWO OPER ATING DIVISIONS ONE IN BANGALORE AND ONE IN MUMBAI. THE BANGALORE DIVISION PRIMARILY PROVIDES SOFTWARE AND BPO SERVICES WHILE MUMBAI DIVISION IS PRIMARILY ENGAGED IN PURCHASE AND RESALE OF UNISYS PRODUCTS AND PROVISIO N OF SUPPORT SERVICES. 20. THE INTERNATIONAL TRANSACTIONS, IN THE IT AND ITES SEGMENTS WITH ASSOCIATED ENTERPRISES (AES) REPORTED IN FORM 3CEB RELEVANT TO THIS APPEAL WERE AS FOLLOWS:- 1. SOFTWARE DEVELOPMENTS SERVICES (IT SEGMENT) RS. 85,14,82,906 2. BPO SERVICES (ITES SEGMENT) RS.129,56,97,209 IT(TP)A NOS.67 & 70/BANG/2015 PAGE 12 OF 37 21. THE DETAILS OF SEGMENTAL FINANCIALS ARE AS FOLL OWS:- DESCRIPTION SOFTWARE SERVICES RS. ITES RS. OPERATING REVENUE 85,16,22,269 129,55,58,033 OPERATING COST 77,29,72,192 114,37,06,621 OPERATING PROFIT 7,86,50,077 15,18,51,412 OP/TC 10.18% 13.28% 22. THE ISSUE RAISED BY THE ASSESSEE IN GROUNDS NO .2 TO 7 RELATES TO THE DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RE SPECT OF RECEIPTS BY THE ASSESSEE FROM ITS AE IN RESPECT OF TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES (IT) AND ITES. SOFTWARE DEVELOPMENT SERVICES (IT SEGMENT) 23. IN SUPPORT OF THE CLAIM OF THE ASSESSEE THAT THE PRICE PAID AS ABOVE WAS AT ARMS LENGTH, THE ASSESSEE FILED A TRANSFER PRICING ANALYSIS. THE ASSESSEE ADOPTED TNMM AS THE MOST APPROPRIATE METHO D. THE PROFIT LEVEL INDICATOR (PLI) CHOSEN WAS OPERATING PROFIT T O OPERATING COST. THE TPO ARRIVED AT A FINAL SET OF 11 COMPARABLES AND TH EIR OPERATING MARGINS AS FOLLOWS:- SL. NO. NAME OF THE COMPARABLE SALES (IN RS.) COST (IN RS.) MARGIN 1 KALS INFORMATION SYSTEMS LTD 2,14,04,686 1,87.93,813 L3.89% 2 AKSHAY SOFTWARE TECHNOLOGIES LTD. 12,23,21,483 11,31,49,350 8.11% 3 BODHTREE CONSULTING LTD. 16,05,75,212 9,89,56,821 62.27% 4 R S SOFTWARE (INDIA) LTD. 1,49,57,12,634 1,36,01,02,589 9.97% IT(TP)A NOS.67 & 70/BANG/2015 PAGE 13 OF 37 5 TATA ELXSI LTD. (SEGMENTAL) 3,78,43,03,000 3,14,63,15,000 20.28% 6 SASKEN COMMUNICATION TECHNOLOGIES LTD. 4,05,31,20,000 3,18,69,97,000 27.91% 7 PERSISTENT SYSTEMS LTD. 5,19,69,10,000 3,67,52,70,000 41.40% 8 ZYLOG SYSTEMS LTD. 7,34,93,51,475 6,81,69,98,160 7.81% 9 MINDTREE LTD. (SEG) 7,93,22,79,326 5,74,06,73,058 5.52% 10 LARSEN AND TOUBRO INFOTECH 19,50,83,81,374 15,64,12,76,626 24.72% 11 INFOSYS LTD. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% AVERAGE MEAN 24.32% 24. THE MARGINS OF THE ASSESSEE AS COMPUTED BY THE TPO WAS 13.70%, WHICH WAS NOT WITHIN THE (+) OR (-) 5% RANG E OF THE ARITHMETIC MEAN OF THE FINAL SET OF COMPARABLE COMPANIES CHOSE N BY THE TPO. THE TPO THEREFORE PROCEEDED TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION BY APPLYING THE ARITHMETIC MEAN OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY HIM. AFTER ALLOWING WORKING CA PITAL ADJUSTMENT, THE TPO COMPUTED THE ALP AS FOLLOWS:- ARMS LENGTH MEAN MARGIN ON COST 24.32% LESS: WORKING CAPITAL ADJUSTMENT (ANNEX.C) TO THE TPOS ORDER 1.13% ADJUSTED MARGIN 23.19% OPERATING COST 77,29,72,192 ARMS LENGTH PRICE 123.19% OF OPERATING COST 95,22,2 4,443 PRICE RECEIVED 85,16,22,269 SHORTFALL BEING ADJUSTMENT U/S 92CA 10,06,02,174 25. THE ASSESSEE FILED APPEAL BEFORE THE CIT(A) WH O HELD THAT TURNOVER WAS A RELEVANT CRITERIA IN CHOOSING COMPARABLE COMP ANIES AND ACCORDINGLY EXCLUDED INFOSYS LTD., FROM THE LIST OF COMPARABLE COMPANIES. THE IT(TP)A NOS.67 & 70/BANG/2015 PAGE 14 OF 37 REVENUE, AS WE HAVE ALREADY SEEN HAS RAISED GROUND NO.4 BEFORE THE TRIBUNAL IN ITS APPEAL AGAINST THE AFORESAID DECISI ON OF THE CIT(A). THE CIT(A) CONFIRMED THE ORDER OF THE AO/TPO IN SO FAR AS IT RELATES TO SELECTION OF COMPARABLE COMPANIES AND OTHER ASPECTS OF OBJECT IONS RAISED BY THE ASSESSEE AGAINST THE ORDER OF THE AO/TPO. AGGRIEVE D BY THE ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUN AL. 26. THE NEXT ASPECT THAT REQUIRES CONSIDERATION IS WITH REGARD TO THE COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO. AS WE HAVE ALREADY SEEN, THE ASSESSEE HAD CHOSEN A LIST OF 11 COMPARABLE COM PANIES, WHICH ARE GIVEN IN THE EARLIER PART OF THIS ORDER. ONE OF TH E COMPARABLE COMPANIES SO CHOSEN BY THE TPO WAS PERSISTENT SYSTEMS LTD., WHIC H WAS ALSO A COMPARABLE PROPOSED BY THE ASSESSEE IN ITS TP STUDY . THE ASSESSEE HOWEVER OBJECTED TO THIS COMPANY BEING CHOSEN AS A COMPARABLE COMPANY BEFORE THE TPO (AT PAGE 13 OF THE TPOS ORDER) THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT, BUT DID NOT RAISE A SPECIFI C OBJECTION BEFORE THE DRP AN ADDITIONAL GROUND WAS FILED BEFORE THE TRIBUNAL RAISING A SPECIFIC GROUND THAT PERSISTENT SYSTEMS LTD., SHOULD BE EXCLUDED FR OM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THE SAID CO MPANY IS FUNCTIONALLY DIFFERENT AND IN THIS REGARD HAS ALSO PLACED RELIAN CE ON DECISIONS OF TRIBUNALS RENDERED ON THE ISSUE OF THIS COMPANY BEI NG FUNCTIONALLY COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROV IDER SUCH AS THE ASSESSEE. THE DECISION SO RENDERED ARE AT A LATER POINT OF TIME TO THE TP STUDY CARRIED OUT BY THE ASSESSEE. IT(TP)A NOS.67 & 70/BANG/2015 PAGE 15 OF 37 27. THE LEARNED COUNSEL FOR THE ASSESSEE IN SUPPOR T OF THE ADMISSION OF ADDITIONAL GROUND PLACED RELIANCE ON THE DECISION O F THE HONBLE SPECIAL BENCH IN THE CASE OF THE ITAT CHANDIGARH BENCH IN T HE CASE OF DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207 WHEREIN IT WAS HELD THAT A TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A MISTAKE IN THE ASS ESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVIDENCE ADDUCED BY THE TA XPAYER. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE AFORESAID TWO CO MPANIES WERE HELD TO BE SOFTWARE PRODUCT COMPANIES AND THEREFORE NOT COMPAR ABLE WITH SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE I N SEVERAL DECISIONS RENDERED BY THE TRIBUNAL. THE DECISIONS RENDERED B Y THE TRIBUNAL ARE LATER IN POINT OF TIME TO THE TRANSFER PRICING STUDY UNDE RTAKEN BY THE ASSESSEE. THE ASSESSEE IS ENTITLED TO TAKE NOTE OF THE SUBSEQ UENT JUDICIAL PRONOUNCEMENT AND SEEK TO EXCLUDE A COMPANY WHICH I S FUNCTIONALLY NOT COMPARABLE WITH THAT OF THE ASSESSEE. THE LEARNED DR OPPOSED THE PRAYER FOR ADMISSION OF ADDITIONAL GROUND. HE POINTED OUT THAT THE ASSESSEE IN THEIR TRANSFER PRICING STUDY ACCEPTED THESE COMPANI ES AS COMPARABLE AND THEREFORE CANNOT NOW SEEK TO EXCLUDE THE SAID COMPA NIES. THE LEARNED DR OBJECTED TO ADMISSION OF THE ADDITIONAL GROUND OF A PPEAL. 28. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE QUESTION AS TO WHETHER THE AFORESAID TWO COMPANIES ARE COMPARABLE OR NOT WITH THE ASSESSEE C OMPANY IN TERMS OF FAR ANALYSIS, HAS TO BE DECIDED ON THE BASIS OF DAT A WHICH IS AVAILABLE IN THE PUBLIC DOMAIN I.E., PUBLISHED ANNUAL REPORT OF THESE TWO COMPANIES.. IT(TP)A NOS.67 & 70/BANG/2015 PAGE 16 OF 37 THEREFORE FACTS NECESSARY TO APPLY THE FILTER SOUGH T TO BE RELIED UPON BY THE ASSESSEE IN THE ADDITIONAL GROUND OF APPEAL ARE ALR EADY AVAILABLE ON RECORD. THEREFORE THERE CAN BE NO VALID OBJECTION TO DECIDING THE QUESTION OF APPLYING THE AFORESAID FILTER, IF OTHERWISE IT I S FOUND TO BE A VALID FILTER. ON THE QUESTION OF THE ASSESSEE HAVING CHOSEN THE A FORESAID TWO COMPANIES AS COMPARABLE AND THEREFORE CANNOT BE PER MITTED TO CHANCE ITS STAND NOW, WE ARE OF THE VIEW THAT THE DECISION OF THE SPECIAL BENCH, CHANDIGARH IN THE CASE OF QUARK SYSTEMS (SUPRA) CLEARLY SUPPORTS THE PLEA OF THE ASSESSEE. THE SPECIAL BENCH IN THE AFORESAI D DECISION IN THE CASE OF QUARK SYSTEMS (SUPRA ) HAS AFTER CONSIDERING THE OECD COMMENTARIES OBSERVED AS FOLLOWS:- 35. IN PARA 4.16 OF LATEST REPORT, THE OECD PROVI DES THE FOLLOWING GUIDELINES : 'IN PRACTICE, NEITHER COUNTRIES NOR TAXPAYERS SHOUL D MISUSE THE BURDEN OF PROOF IN THE MANNER DESCRIBED ABOVE. BECAUSE OF THE DIFFICULTIES WITH TRANSFER PR ICING ANALYSIS, IT WOULD BE APPROPRIATE FOR BOTH TAXPAYER S AND TAX ADMINISTRATIONS TO TAKE SPECIAL CARE AND TO USE RESTRAINT IN RELYING ON THE BURDEN OF PROOF IN THE COURSE OF THE EXAMINATION OF A TRANSFER PRICING CAS E. MORE PARTICULARLY, AS A MATTER OF GOOD PRACTICE THE BURDEN OF PROOF SHOULD NOT BE MISUSED BY TAX ADMINISTRATIONS OR TAXPAYERS AS A JUSTIFICATION FOR MAKING GROUNDLESS OR UNVERIFIABLE ASSERTIONS ABOUT TRANSFER PRICING. A TAX ADMINISTRATION SHOULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT ITS DETERMINATION OF TRANSFER PRICING IS CONSISTENT WIT H THE ARMS LENGTH PRINCIPLE EVEN WHERE THE BURDEN OF PRO OF IS ON THE TAXPAYER, AND THE TAXPAYERS SIMILARLY SHO ULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT THEIR TRANSFER PRICING IS CONSISTENT WITH THE ARMS LENGT H PRINCIPLE REGARDLESS OF WHERE THE BURDEN OF PROOF L IES.' IT(TP)A NOS.67 & 70/BANG/2015 PAGE 17 OF 37 36. THE AFORESAID DECISIONS AND GUIDELINES MAY NOT BE EXACTLY ON IDENTICAL FACTS BEFORE US BUT THEY EMPHA TICALLY SHOW THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A M ISTAKE IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVI DENCE ADDUCED BY THE TAXPAYER. 37. WHEN SUBSTANTIAL JUSTICE AND TECHNICAL CONSIDER ATIONS ARE PITTED AGAINST EACH OTHER, THE CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED. FOR THE OTHER SIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN INJUSTICE BEING DONE DUE TO SOME MISTAKES ON ITS PART. 38. ACCORDINGLY, ON FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OU T THAT DATAMATICS HAS WRONGLY BEEN TAKEN AS COMPARABLE. WH ILE ADMITTING ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE TO REQUIRE US TO CONSIDER WHETHER OR NOT DATAMATICS SH OULD BE INCLUDED IN THE COMPARABLE, WE MAKE NO COMMENTS ON MERIT EXCEPT OBSERVING THAT ASSESSEE FROM RECORD HAS SHOW N ITS PRIMA FACIE CASE. FURTHER CLAIM MAY BE EXAMINED BY THE AS SESSING OFFICER. THIS COURSE WE ADOPT AS OBJECTION TO THE I NCLUSION OF DATAMATICS AS COMPARABLE HAS BEEN RAISED NOW AND NO T BEFORE REVENUE AUTHORITIES. THEREFORE, WE DEEM IT FIT AND PROPER TO REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR CONSIDERATION OF CLAIM OF THE TAXPAYER AND MAKE A DE NOVO ADJUDICATI ON OF THE ARMS LENGTH PRICE AFTER PROVIDING REASONABLE OPPOR TUNITY OF BEING HEARD TO THE ASSESSEE. WE ORDER ACCORDINGLY. 29. WE ALSO FIND THAT THE COMPARABLE CHOSEN BY THE ASSESSEE HAS BEEN HELD TO BE NOT COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE IN SEVERAL DECISIONS RENDERED BY TH E TRIBUNAL, THE MAIN DECISION BEING IN THE CASE OF IT(TP) A.NO.108(BANG) 2014 ORDER DATED 12.12.2014 IN THE CASE OF YODLEE INFOTECH PVT.LTD. VS. ITO. THE DECISION RENDERED BY THE TRIBUNAL ARE LATER IN POINT OF TIME TO THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE. THE ASSESSEE IS ENTITLED TO TAKE NOTE OF THE SUBSEQUENT JUDICIAL PRONOUNCEMENT AND SEEK T O EXCLUDE A COMPANY IT(TP)A NOS.67 & 70/BANG/2015 PAGE 18 OF 37 WHICH IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF T HE ASSESSEE. EVEN IN RESPECT OF THE OTHER COMPANIES HIGH TURNOVER HAS BE EN HELD TO BE A CRITERIA TO REJECT A COMPANY AS A COMPARABLE IN THE AFORESAI D DECISION OF ITAT BANGALORE IN THE CASE OF TRILOGY E-BUSINESS SOFTWAR E INDIA PVT.LTD. (SUPRA). AS HELD BY THE SPECIAL BENCH IN THE CASE OF QUARK SYSTEMS (SUPRA) , THERE CANNOT BE ANY TAX LIABILITY ON THE BASIS OF ADMISSION AND THE DETERMINATION OF TAX LIABILITY HAS TO BE IN ACCORDA NCE WITH LAW. IN THE LIGHT OF THE AFORESAID JUDICIAL PRONOUNCEMENT, WE ARE OF THE VIEW THAT THE ADDITIONAL GROUND OF APPEAL DESERVES TO BE ADMITTED FOR ADJUDICATION. ACCORDINGLY, THE ADDITIONAL GROUND IS ADMITTED FOR ADJUDICATION. 30. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HA S FILED A CHART IN WHICH HE HAS QUESTIONED THE ACTION OF THE TPO IN INCLUDIN G/RETAINING SOME OF THE COMPARABLE CHOSEN BY THE TPO IN THE FINAL LIST OF C OMPARABLES CHOSEN BY HIM. THE ASSESSEE HAS ALSO SUBMITTED THAT SOME OF THE COMPARABLE CHOSEN BY THE ASSESSEE OUGHT NOT TO HAVE BEEN REJEC TED BY THE TPO. WE WILL DEAL WITH EACH OF SUCH COMPARABLE COMPANIES IN THE FOLLOWING PARAS. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 31. BODHTREE CONSULTING LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES C HOSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASSESSEE. THE ASS ESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSE SSEES NOTICE THAT THIS IT(TP)A NOS.67 & 70/BANG/2015 PAGE 19 OF 37 COMPANY IS NOT BEING CONSIDERED AS A COMPARABLE COM PANY IN THE CASE OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11 .2013 . IN THIS CASE, THE TRIBUNAL FOLLOWED THE DECISION RENDE RED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P. LTD., ITA NO.4547/MUM/2012 . IN THE AFORESAID DECISIONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN THE BUSINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOP MENT OF SOFTWARE USING LATEST TECHNOLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. IT WAS AFFIRMED BY THE L EARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PR ESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. FO LLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HO LD THAT BODHTREE CONSULTING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS, THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COM PANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE S AID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOW N THAT THE SAID COMPANY IT(TP)A NOS.67 & 70/BANG/2015 PAGE 20 OF 37 IS A SOFTWARE PRODUCT COMPANY AND NOT A SOFTWARE DE VELOPMENT SERVICES COMPANY. 32. INFOSYS LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSID ERED TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVICES, AS THIS COMPANY OWNS SIGNIFICANT INTANGIBLES AND HA S HUGE REVENUES FROM SOFTWARE PRODUCTS. IN THIS REGARD, WE FIND THAT TH E BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TDPLM SOFTWARE SOLUTIO NS LTD. V. DCIT, ITA NO.1303/BANG/2012, BY ORDER DATED 28.11.2013 WITH R EGARD TO THIS COMPARABLE HAS HELD AS FOLLOWS:- 11.0 INFOSYS TECHNOLOGIES LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BE FORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPA NY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND A TTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASP ECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTAT IVE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTA TIVE DREW OUR ATTENTION TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO SUBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A MARKET LEADER IN SOFTWARE DEVELOPMENT ACTIVITIES, WHEREAS THE ASSESSEE IS MER ELY A SOFTWARE SERVICE PROVIDER OPERATING ITS BUSINESS IN INDIA AN D DOES NOT POSSESS EITHER ANY BRAND VALUE OR OWN ANY INTANGIBLE OR INT ELLECTUAL PROPERTY RIGHTS (IPRS). IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT :- (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY INTANGIBLE AN D HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS S UBMITTED THAT THIS IT(TP)A NOS.67 & 70/BANG/2015 PAGE 21 OF 37 DECISION IS APPLICABLE TO THE ASSESSEE'S CASE, AS T HE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INFOSYS TECHNOLOG IES LTD. CANNOT BE COMPARABLE TO THE ASSESSEE ; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN T HE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856 (DEL)/2 010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNOLOGIES LTD. BEING A GIA NT COMPANY AND MARKET LEADER ASSUMING ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSIDERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDE RS ASSUMING LIMITED RISK ; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA ; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOF TWARE PRODUCTS AND THE BREAK UP OF SUCH REVENUES IS NOT AVAILABLE ; (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR RESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQ UISITION OF IPRS IN AUTOLAY, A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORI SED REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFO SYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPA NIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE A SSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF O PERATIONS AND THE BRAND ATTRIBUTABLE PROFIT MARGINS OF THIS COMPANY H AVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTM ENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIN D THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABL ISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT F ROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERE D IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. WE AR E INCLINED TO CONCUR WITH THE ARGUMENT PUT FORTH BY THE ASSESSEE THAT IN FOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SI GNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFT WARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMP ANIES. IT IS ORDERED ACCORDINGLY. IT(TP)A NOS.67 & 70/BANG/2015 PAGE 22 OF 37 THE DECISION RENDERED AS AFORESAID PERTAINS TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE TH AT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDEN TICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. RESPECTFULLY FOLLOWING THE D ECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXC LUDED FROM THE LIST OF COMPARABLE COMPANIES. 33. KALS INFORMATION SYSTEMS LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPARABLE TO A PURE SOFTWARE DEV ELOPMENT SERVICES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN T HE CASE OF M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGE D IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTW ARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TR IBUNALS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON A CCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPA NIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: IT(TP)A NOS.67 & 70/BANG/2015 PAGE 23 OF 37 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHI CH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF T HIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVI DER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. IT(TP)A NOS.67 & 70/BANG/2015 PAGE 24 OF 37 34. TATA ELXSI LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT IN ASSESSEES OWN CASE FOR T HE A.Y. 2007-08, THIS COMPANY WAS NOT REGARDED AS A COMPARABLE IN ITS SOF TWARE DEVELOPMENT SERVICES SEGMENT IN ITA NO.1076/BANG/2011, ORDER DATED 29.3.2013 . FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. THE LEARNED CHARTERED ACCOUNTANT PLEADED THAT O UT OF THE SIX COMPARABLES SHORTLISTED ABOVE AS COMPARABLES BASED ON THE TURNOVER FILTER, THE FOLLOWING TWO COMPANIES, NAMEL Y (I) TATA ELXSI LTD; AND (II) M/S. FLEXTRONICS SOFTWARE SYSTE MS LTD., DESERVE TO BE ELIMINATED FOR THE FOLLOWING REASONS : (I) TATA ELXSI LTD., : THE COMPANY OPERATES IN THE SEGMENTS OF SOFTWARE DEVELOPMENT SERVICES WHICH COMPRISES OF EMBEDDED PRODUCT DESIGN SERVICES, INDUSTRIAL DESIGN AND ENGINEERING SERVICES AND VISUAL COMPUTING LABS AND SYSTEM INTEGRATION SERVICES SEGMENT. THERE IS NO SUB-SERVI CES BREAK UP/INFORMATION PROVIDED IN THE ANNUAL REPORT OR THE DATABASES BASED ON WHICH THE MARGIN FROM SOFTWARE SERVICES ACTIVITY ONLY COULD BE COMPUTED. THE COMPA NY HAS ALSO IN ITS RESPONSE TO THE NOTICE U/S.133(6) S TATED THAT IT CANNOT BE CONSIDERED AS COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY BECAUSE OF ITS COMPLEX NA TURE. HENCE, TATA ELXSI LTD., IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. (II) FLEXTRONICS SOFTWARE SYSTEMS LTD. : THE LEARN ED TPO HAS CONSIDERED THIS COMPANY AS A COMPARABLE BASED ON 13 3(6) REPLY WHEREIN THIS COMPANY REFLECTED ITS SOFTWARE DEVELOP MENT SERVICES REVENUES TO BE MORE THAN 75% OF THE 'SOFTWARE PRODU CTS AND SERVICES' SEGMENT REVENUES. FLEXTRONICS HAS A HYBRI D REVENUE MODEL AND HENCE SHOULD BE REJECTED AS FUNCTIONALLY DIFFERENT. BASED ON THE INFORMATION PROVIDED UNDER 'REVENUE RE COGNITION' IN ITS ANNUAL REPORT, IT CAN BE INFERRED THAT THE S OFTWARE SERVICES REVENUES ARE EARNED ON A HYBRID REVENUE MODEL, AND THE SAME IS NOT SIMILAR TO THE REGULAR MODELS ADOPTED BY OTHER SOFTWARE IT(TP)A NOS.67 & 70/BANG/2015 PAGE 25 OF 37 SERVICE PROVIDERS. THE LEARNED REPRESENTATIVE PLEAD ED THAT A REGULAR SOFTWARE SERVICES PROVIDER COULD NOT BE COM PARED TO A COMPANY HAVING SUCH A UNIQUE REVENUE MODEL, WHEREIN THE REVENUES OF THE COMPANY FROM SOFTWARE/PRODUCT DEVEL OPMENT SERVICES DEPENDS ON THE SUCCESS OF THE PRODUCTS SOL D BY ITS CLIENTS IN THE MARKETPLACE. HENCE, IT WOULD BE INAPPROPRIAT E TO COMPARE THE BUSINESS OPERATIONS OF THE ASSESSEE WITH THAT O F A COMPANY FOLLOWING HYBRID BUSINESS MODEL COMPRISING OF ROYAL TY INCOME AS WELL AS REGULAR SOFTWARE SERVICES INCOME, FOR WHICH REVENUE BREAK-UP IS NOT AVAILABLE. HE FINALLY SUBMITTED THA T THIS WAS A GOOD REASON TO EXCLUDE THIS COMPANY ALSO FROM THE L IST OF COMPARABLES. 20. ON THE OTHER HAND, THE LEARNED DR SUPPORTED TH E ORDER OF THE LOWER AUTHORITIES REGARDING THE INCLUSION OF TA TA ELXSI AND FLEXTRONICS SOFTWARE SYSTEMS LTD., IN THE LIST OF C OMPARABLES. HE REITERATED THE CONTENTS OF PARA 14.2.25 OF THE TPO' S ORDER. HE ALSO READ OUT THE FOLLOWING PORTION FROM THE TPO'S ORDER : 'THUS AS STATED ABOVE BY THE COMPANY, THE FOLLOWING FACTS EMERGE : 1. THE COMPANY'S SOFTWARE DEVELOPMENT AND SERVICES SEGMENT CONSTITUTES THREE SUB-SEGMENTS I) PRODUCT DESIGN SERVICES; II) ENGINEERING DESIGN SERVICES AN D III) VISUAL COMPUTING LABS. 2. THE PRODUCT DESIGN SERVICES SUB-SEGMENT IS INTO EMBEDDED SOFTWARE DEVELOPMENT. THUS THIS SEGMENT IS INTO SOFTWARE DEVELOPMENT SERVICES. 3. THE CONTRIBUTION OF THE EMBEDDED SERVICES SEGMEN T IS TO THE TUNE OF RS.230 CRORES IN THE TOTAL SEGMENT REVENUE OF RS.263 CRORES. EVEN IF WE CONSIDER THE OTHER TWO SUB-SEGMENTS PERTAIN TO IT ENABLED SERVICES, THE 87.45% (75%) OF THE SEGMENT'S REVENU ES IS FROM SOFTWARE DEVELOPMENT SERVICES. 4. THIS SEGMENT QUALIFIES ALL THE FILTERS APPLIED B Y THE TPO.' REGARDING FLEXTRONICS SOFTWARE SYSTEMS, THE FOLLOWI NG EXTRACT FROM PAGE 143 OF TPO'S ORDER WAS READ OUT BY HIM AS HIS SUBMISSIONS : IT(TP)A NOS.67 & 70/BANG/2015 PAGE 26 OF 37 'IT IS VERY PERTINENT TO MENTION HERE THAT THE COMP ANY WAS CONSIDERED BY THE TAXPAYER AS A COMPARABLE FOR THE PRECEDING ASSESSMENT YEAR I.E., AY 2006-07. WHEN TH E SAME WAS ACCEPTED BY THE TPO AS A COMPARABLE, THE S AME WAS NOT OBJECTED TO IT BY THE TAXPAYER. AS THE FACT S MENTIONED BY THE TAXPAYER ARE THE SAME AND THESE WE RE THERE IN THE EARLIER FY 2005-06, THERE IS NO REASON WHY THE TAXPAYER IS OBJECTING TO IT. HOW THE COMPANY IS FUNCTIONALLY SIMILAR IN THE EARLIER FY 2005-06 BUT THE SAME IS NOT FUNCTIONALLY SIMILAR FOR THE SUBSEQUENT FY 2006-07 EVEN WHEN NO FACTS HAVE BEEN CHANGED FROM T HE PRECEDING YEAR. THUS THE TAXPAYER IS ARGUING AGAINS T THIS COMPARABLE AS THE COMPANY WAS NOT CONSIDERED AS A COMPARABLE BY THE TAXPAYER FOR THE PRESENT FY 2006- 07.' 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSID ERED THE FACTS AND MATERIALS ON RECORD. AFTER CONSIDERING TH E SUBMISSIONS, WE FIND THAT TATA ELXSI AND FLEXTRONICS ARE FUNCTIO NALLY DIFFERENT FROM THAT OF THE ASSESSEE AND HENCE THEY DESERVE TO BE DELETED FROM THE LIST OF SIX COMPARABLES AND HENCE THERE RE MAINS ONLY FOUR COMPANIES AS COMPARABLES, AS LISTED BELOW: 35. FOLLOWING THE AFORESAID DECISION OF THE TRIBUN AL, WE HOLD THAT M/S.TATA ELXSI LTD. SHOULD NOT BE REGARDED AS A COM PARABLE. 36. AS FAR AS PERSISTENT SYSTEMS LTD. , A COMPARABLE BY THE ASSESSEE IN HIS TP STUDY BUT WAS OBJECTED TO BY THE ASSESSEE BE FORE TPO AS NOT COMPARABLE, THIS TRIBUNAL IN THE CASE OF IT(TP) A.N O.108(BANG) 2014 ORDER DATED 12.12.2014 IN THE CASE OF YODLEE INFOTECH PVT .LTD. VS. ITO HELD AS FOLLOWS:- 5.12 THIS TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. VS DCIT [IT(TP)A 1303/BANG /2012 DATED 28-11-2013] HAD ALSO HELD THAT PERSISTENT SOF TWARE SYSTEMS PVT. LTD., WAS IN PRODUCT DESIGNING SERVICES AND IN TO SOFTWARE PRODUCT DEVELOPMENT. IN THE SAME DECISION IT WAS A LSO HELD THAT M/S. INFOSYS TECHNOLOGIES LTD, HAD CONSIDERABLE INT ANGIBLES LIKE IT(TP)A NOS.67 & 70/BANG/2015 PAGE 27 OF 37 IPR, AND WAS ALSO INTO SOFTWARE PRODUCT DEVELOPMENT . IT WAS ALSO HELD THAT M/S. TATA ELXSI LTD., WAS DEVELOPING NICH E PRODUCTS AND INTO PRODUCT DESIGNING SERVICES. HENCE, THESE COMPA NIES WOULD IN ANY CASE HAVE TO BE EXCLUDED FROM THE COMPARABLES B EING FUNCTIONALLY DIFFERENT. 37. FOLLOWING THE SAID DECISION, WE DIRECT THAT PE RSISTENT SYSTEMS LTD., BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPA NIES CHOSEN BY THE TPO. 38. THE AO/TPO IS DIRECTED TO COMPUTE THE ARITHMET IC MEAN OF THE PROFIT MARGINS OF THE REMAINING COMPARABLE COMPANIE S AFTER EXCLUDING THE COMPANIES FROM THE FINAL LIST OF 11 COMPARABLE COMP ANIES CHOSEN BY THE TPO AND COMPARE THE SAME WITH THE PROFIT MARGIN OF THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF SEC.92C OF THE AC T AND ALLOW -/ + 5% ADJUSTMENT UNDER THE PROVISIONS OF SEC.92C OF THE A CT, IF IT IS FOUND THAT THE ASSESSEE IS OTHERWISE ENTITLED TO SUCH BENEFIT. 39. THE NEXT SUBMISSION OF THE LEARNED COUNSEL FO R THE ASSESSEE WAS WITH REGARD TO DIRECTION OF THE CIT(A) IN RESTRICTI NG THE WORKING CAPITAL ADJUSTMENT. NOW COMING TO THE ISSUE OF WORKING CAP ITAL ADJUSTMENT, FINDINGS OF THE TPO IN THIS REGARD AS IT APPEARS AT PARA 3.7, READS AS UNDER : IT(TP)A NOS.67 & 70/BANG/2015 PAGE 28 OF 37 40. THE TPO HAD RESTRICTED THE COST OF CAPITAL TO 1 .71%. RATIONALITY FOR SUCH AN UPPER LIMIT BEING PLACED ON WORKING CAPITAL ADJUSTMENT WAS AN ISSUE WHICH HAD COME UP BEFORE THIS TRIBUNAL IN THE CASE OF M/S. RAMBUS CHIP TECHNOLOGIES (INDIA) P. LTD V. DCIT [IT(TP)A. 23/BAN/2015, DT.22.07.2015. COORDINATE BENCH HAD HELD AS UNDER AT PARA 13 AND 14 OF ITS ORDER : 13. AS REGARDS GROUND NO.3(F), LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO/TPO WHILE CONSIDERIN G THE WORKING CAPITAL ADJUSTMENT, HAS ARRIVED AT THE WORK ING CAPITAL ADJUSTMENT IN THE CASE OF THE ASSESSEE AT 5.97%, BU T WHILE GIVING EFFECT TO THE WORKING CAPITAL ADJUSTMENT, HA S RESTRICTED THE SAID ADJUSTMENT TO 1.71% IN CASE OF UNCONTROLLE D COMPARABLES SELECTED BY THE TPO. THE LEARNED COUNS EL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS NOT GIVEN A NY BASIS FOR SUCH RESTRICTION OF THE WORKING CAPITAL ADJUSTM ENT. HE SUBMITTED THAT THE CIT(A) ALSO HAS NOT APPLIED HIS MIND TO THIS ISSUE BUT HAS SUMMARILY CONFIRMED THE ORDER OF THE AO AND THEREFORE IT HAS TO BE SET ASIDE. 14. ON GOING THROUGH THE TPOS ORDER AS WELL A S ANNEXURE D REFERRED TO IN THE TRANSFER PRICING ORDER ON WORK ING CAPITAL ADJUSTMENT, WE FIND THAT THE AO HAS NOT GIVEN ANY B ASIS FOR RESTRICTING THE ADJUSTMENT TO 1.71%. IN ALL THE CA SES RELATING TO TRANSFER PRICING ADJUSTMENT, THIS TRIBUNAL HAS B EEN IT(TP)A NOS.67 & 70/BANG/2015 PAGE 29 OF 37 DIRECTING TO GIVE WORKING CAPITAL ADJUSTMENT ON ACT UAL BASIS AND THE TPO HAVING ARRIVED AT 5.97% OUGHT TO HAVE A DOPTED THE SAME INSTEAD OF RESTRICTING IT TO 1.71%. IN VI EW OF THE SAME, WE DEEM IT PROPER TO REMAND THIS ISSUE TO THE FILE OF THE AO/TPO FOR WORKING OUT THE ALP AFTER GIVING ADJUSTM ENT OF WORKING CAPITAL AS PER THE CALCULATION OF THE AO IN ANNEXURE D ANNEXED TO THE TRANSFER PRICING ORDER. THIS GROU ND OF APPEAL IS ACCORDINGLY ALLOWED. 41. ACCORDINGLY WE DIRECT THE AO / TPO TO CORRECTLY WORK OUT THE PLI OF THE FINAL COMPARABLES AFTER GIVING DUE ADJUSTMENT F OR THE WORKING CAPITAL ON ACTUAL BASIS. RELATED GROUND OF THE ASSESSEE IS TH EREFORE ALLOWED. 42. NO OTHER ARGUMENTS WERE RAISED ON THE OTHER ISS UES RAISED IN THE CONCISE GROUNDS OF APPEAL NO.2 TO 7 AND THEREFORE T HE ISSUE WITH REGARD TO DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ON OF PROVIDING SOFTWARE DEVELOPMENT SERVICES TO THE AE BY THE ASSESSEE IS D ECIDED AS SET OUT IN THE EARLIER PARAGRAPHS. ITES SEGMENT 43. AS FAR AS THE ITES SEGMENT OF THE ASSESSEE IS C ONCERNED, THE TPO AFTER REJECTING THE TP ANALYSIS DONE BY THE ASSESSE E, CHOSE A LIST OF 8 COMPARABLE COMPANIES AND THE SAME ARE AS FOLLOWS :- IT(TP)A NOS.67 & 70/BANG/2015 PAGE 30 OF 37 ITES FINAL COMPARABLES A. Y. 2009-10 SL.NO. NAME OF THE COMPANY MARGIN 1 INFOSYS B P O LTD 24.41% 2 ADITYA BIRLA MINACS WORLDWIDE LTD 23.86% MICROLAND LTD (BOTH SEGMENTS) 1.53% 4 ALLSEC TECHNOLOGIES LTD -16.63% 5 ACCENTIA TECHNOLOGIES LTD 46.40% 6 INFORMED TECHNOLOGIES INDIA LTD 22.61% 7 COSMIC GLOBAL LTD 40.61% 8 ECLERX SERVICES LTD 57.46% AVERAGE PLI 25.03% 44. AFTER ALLOWING ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL, THE TPO COMPUTED THE ALP AS FOLLOWS : 4.8.3COMPUTATION OF ARMS LENGTH PRICE : THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. PLEASE SEE ANNEXU RE B1 FOR DETAILS OF COMPUTATION OF PLI OF THE COMPARABLES. BASED ON THIS, THE ARMS LENGTH PRICE OF THE ITES SERVICES RE NDERED BY THE TAXPAYER TO ITS AE (S) IS COMPUTED AS UNDER : ARM'S LENGTH MEAN MARGIN ON COST 25.04% LESS : WORKING CAPITAL ADJUSTMENT (ANNEX.C) 0.91% ADJUSTED MARGIN 24.12% OPERATING COST 3114,37,06,62 1 ARMS LENGTH PRICE (ALP) @ 124.12% OF OPERATING COST 141,95,68,658 PRICE RECEIVED 129,55,58,033 SHORTFALL BEING ADJUSTMENT U/S.92CA 12,40,10,625 IT(TP)A NOS.67 & 70/BANG/2015 PAGE 31 OF 37 45. THE AFORESAID ADDITION MADE BY THE TPO WAS CONF IRMED BY THE CIT(A). AGGRIEVED BY THE ORDER OF THE CIT(A) THE A SSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 46. THE ASSESSEE HAS PRAYED BEFORE US FOR EXCLUSION OF CERTAIN COMPANIES FROM THE LIST OF COMPARABLES CHOSEN BY TH E TPO. THE LEARNED COUNSEL FOR THE ASSESSEE SOUGHT TO EXCLUDE THE FOLL OWING COMPANIES FROM THE LIST OF 8 COMPARABLE COMPANIES FINALLY CHOSEN B Y THE TPO IN THE ITES SEGMENT. INFOSYS BPO LTD : 47. THE COMPARABILITY OF THIS COMPANY WITH AN ITES COMPANY WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA P. LTD V. ITO (IT (TP)A NO.1316/BANG/2012 FOR AY 2008-09 ORDER DT 14.08.2013. THIS TRIBUNAL IN PARA 24 OF ITS ORDER, ON CONSIDERING THIS COMPANY AS A COMPARABLE HELD AS FOLLOWS :- 'THIS COMPANY IS LISTED AT SL. 13 IN THE LIST OF CO MPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPAN Y IS CONCERNED, IT IS THE SUBMISSION OF THE LEARNED COUN SEL FOR THE ASSESSEE THAT THIS COMPANY HAS A BRAND VALUE AND TH EREFORE THERE WOULD BE SIGNIFICANT INFLUENCE IN THE PRICING POLIC Y WHICH WILL IMPACT THE MARGINS. SCHEDULE 13 TO THE PROFIT AND LOSS ACCOUNT OF THIS COMPANY FOR THE F.Y. 2007-08 SHOWS THAT THIS C OMPANY INCURRED HUGE SELLING AND MARKETING EXPENSES. PAGE 133 OF THE ANNUAL REPORT OF THIS COMPANY FOR THE F.Y. 2007-08 SHOWS THAT THIS COMPANY REALIZING ITS BRAND VALUE HAS CHOSEN T O VALUE THE SAME ON THE BASIS OF ITS EARNINGS AND THAT OF INFOS YS. THE BRAND VALUE OF THE ASSESSEE AND INFOSYS HAS BEEN VALUED A T RS.31,863 CRORES. INFOSYS BPO, BEING A SUBSIDIARY OF INFOSYS , HAS AN IT(TP)A NOS.67 & 70/BANG/2015 PAGE 32 OF 37 ELEMENT OF BRAND VALUE ASSOCIATED WITH IT. THIS IS ALSO CLEAR FROM THE PRESENCE OF BRAND RELATED EXPENSES INCURRED BY THIS COMPANY. PRESENCE OF A BRAND COMMANDS PREMIUM PRICE AND THE CUSTOMERS WOULD BE WILLING TO PAY, FOR THE SERVICES/PRODUCTS OF THE COMPANY. INFOSYS BPO IS AN ESTABLISHED PLAYER WHO IS NOT ONLY A MARKET LEADER BUT ALSO A COMPANY EMPLOYING SHEER BR EADTH IN TERMS OF ECONOMIES OF SCALE AND DIVERSITY AND GEOGR APHICAL DISPERSION OF CUSTOMERS. THE PRESENCE OF THE AFORE SAID FACTORS WILL TAKE THIS COMPANY OUT OF THE LIST OF COMPARABL ES. WE THEREFORE ACCEPT THE CONTENTION OF THE ASSESSEE THA T THIS COMPANY CANNOT BE REGARDED AS A COMPARABLE.' 48. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNA L AND TAKING NOTE OF THE FACT THAT THE FACTS AND CIRCUMSTANCES IN THE CA SE OF THE ASSESSEE FOR THE CURRENT ASSESSMENT YEAR ARE IDENTICAL, WE DIRECT TH AT INFOSYS BPO BE EXCLUDED AS A COMPARABLE. ACCENTIA TECHNOLOGIES LTD. : 49. THE COMPARABILITY OF THIS COMPANY WAS AGAIN CON SIDERED BY THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SYMP HONY MARKETING SOLUTIONS (SUPRA) AND IT WAS HELD BY THIS TRIBUNAL AS FOLLOWS : '(1) ACCENTIA TECHNOLOGIES LTD. (SEG.) 10. THIS WAS CONSIDERED AS A COMPARABLE BY THE TPO AND LISTED AT SL.NO.1 OF THE COMPARABLE COMPANIES CHOSEN BY THE T PO. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE FACT THA T THERE ARE EXTRA ORDINARY EVENTS THAT OCCURRED DURING THE PREVIOUS Y EAR IN THIS COMPANY. OUR ATTENTION WAS DRAW TO THE ANNUAL REPOR T OF THIS IT(TP)A NOS.67 & 70/BANG/2015 PAGE 33 OF 37 COMPANY FOR THE A.Y. 2007-08 WHEREIN THE FACT THAT THIS COMPANY HAD ACQUIRED THUNGA SOFTWARE PVT. LTD., GSR PHYSICI ANS BILLING SERVICES INC., GSR SYSTEMS INC. AND DENMED INC. IS MENTIONED. OUR ATTENTION WAS ALSO DRAWN TO THE DECISION OF THE HYDERABAD ITAT BENCH IN THE CASE OF CAPITAL IQ INFORMATION SY STEMS INDIA PVT. LTD. V. DCIT [ 2013] 32 TAXMAN.COM 21 (HYD. TR IB). IN THE AFORESAID DECISION, THE HYDERABAD BENCH OF THE TRIB UNAL HAD TO DEAL WITH A CASE OF DETERMINATION OF ALP IN THE CA SE OF AN ASSESSEE WHO WAS PROVIDING ITES BUSINESS SUPPORT S ERVICES FOR THE A.Y. 2007-08. THE TPO HAD CONSIDERED ACCENTIA TECHNOLOGIES LTD. AS A COMPARABLE. THE DRP HOWEVER HELD THAT THE SAID COMPANY CANNOT BE COMPARED AS A COMPARABLE OWING TO EXTRA ORDINARY EVENTS THAT TOOK PLACE DURING THE PR EVIOUS YEAR. THE TRIBUNAL UPHELD THE ORDER OF THE DRP OBSERVING AS FOLLOWS:- I. ACCENTIA TECHNOLOGIES LTD. 10. IT IS THE SUBMISSION OF THE ASSESSEE THAT THIS COMPANY CANNOT BE TREATED AS A COMPARABLE BECAUSE OF UNCOMPARABLE FINANCIAL RESULTS ARISING OUT OF AMALGAMATION IN THE COMPANY. IN THIS REGARD, THE AS SESSEE HAS RELIED UPON THE ORDER OF THE DRP FOR THE ASSESS MENT YEAR 2008-09 IN ASSESSEE'S OWN CASE. IT IS SEEN THA T THE DRP WHILE CONSIDERING SIMILAR OBJECTION PLACED BY T HE ASSESSEE IN THE CASE OF ANOTHER COMPANY, VIZ. MOLD TEK TECHNOLOGIES LTD., IN THE PROCEEDINGS RELATING TO T HE ASSESSMENT YEAR 2008-09, HAS OBSERVED IN THE FOLLOW ING MANNER- '17.5. IN ADDITION TO THE ABOVE, THE DIRECTOR'S REP ORT OF ACCOUNTS OF MOLDTEK TECHNOLOGIES FOR FY 2007-08 WERE REVISED. ON A PERUSAL OF THE ANNUAL REPORT IT IS NOTICED THAT TECKMEN TOOLS PVT. LTD. AND THE PLASTI C DIVISION OF THE COMPANY WERE DEMERGED AND THE RESULTING COMPANY WAS NAMED AS MOLDTEK PLASTICS LTD. THE KPO BUSINESS REMAINED WITH THE COMPANY. A PERUSAL OF THE ANNUAL REPORT REVEALED THAT TO GIV E EFFECT TO THE MERGER AND DEMERGER, THE FINANCIAL STATEMENTS WERE REVISED AND RESTATED AFTER SIX MONTHS FORM THE END OF THE FINANCIAL YEAR 31.3. 200 8. THE ASSESSEE FILED FORM NO.21 UNDER THE COMPANIES ACT WITH THE REGISTRAR OF COMPANIES ON 26TH AUGUST, 2008. THUS THE EFFECTIVE DATE OF THE SCHEME OF IT(TP)A NOS.67 & 70/BANG/2015 PAGE 34 OF 37 MERGER AND DEMERGER WAS 26TH AUGUST, 2008. THE ANNUAL REPORT SUPPORTED THE ARGUMENT OF THE ASSESSEE THAT THERE WERE MERGER AND DEMERGER IN THE FINANCIAL YEAR AND IT WAS AN EXCEPTIONAL YEAR O F PERFORMANCE AS FINANCIAL STATEMENTS WERE REVISED BY THIS COMPANY MUCH AFTER THE CLOSURE OF THE PREVIOUS YEAR. THE PANEL AGREES WITH THE CONTENTION OF THE ASSESSEE THAT IT IS AN EXCEPTIONAL YEAR HAVING SIGNIFICANT IMPACT ON THE PROFITABILITY ARISING OUT OF MERGER AND DEMERGER.' 11. ON CAREFUL CONSIDERATION OF THE MATTER, WE ALSO AGREE WITH THE AFORESAID VIEW OF THE DRP THAT EXTRA-ORDIN ARY EVENT LIKE MERGER AND DE-MERGER WILL HAVE AN EFFECT ON THE PROFITABILITY OF THE COMPANY IN THE FINANCIAL YEAR IN WHICH SUCH EVENT TAKES PLACE. IT IS THE CONTENTION OF THE ASSESSEE THAT IN CASE OF THE AFORESAID COMPANY, THERE IS AMALGAMATION IN DECEMBER, 2006, WHICH HAS IMPACTED THE FINANCIAL RESULT. THIS FACT HAS TO BE VERIFIED BY THE TPO. IF IT IS FOUND UPON SUCH VERIFICATION THAT THE AMAL GAMATION IN FACT AHS TAKEN PLACE, THEN THE AFORESAID COMPARA BLE HAS TO BE EXCLUDED. 50. THE LEARNED DR HOWEVER PUT FORTH AN ARGUMENT TH AT THE CASE DECIDED BY THE TRIBUNAL WAS IN RELATION TO A.Y 2008 -09 AND THERE WAS AN AMALGAMATION DURING THE PREVIOUS YEAR RELEVANT TO A Y 2008-09 AND THEREFORE THE AFORESAID DECISION OF THE TRIBUNAL CA NNOT BE APPLIED BLINDLY. IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSE E BROUGHT TO OUR NOTICE THAT EVEN DURING THE PREVIOUS YEAR RELEVANT TO AY 2 009-10 THERE WAS AN AMALGAMATION OF ACENTIA TECHNOLOGIES LTD WITH ANOTH ER COMPANY BY NAME ASSCENT INFOSERVE PRIVATE LIMITED. THE FOLLOWING NOTES TO ACCOUNTS APPEAR IN THE ANNUAL REPORT :- IT(TP)A NOS.67 & 70/BANG/2015 PAGE 35 OF 37 '(B) NOTES TO ACCOUNTS 1. AMALGAMATION OF ASSCENT INFOSERVE PRIVATE LIMITE D WITH THE COMPANY. PURSUANT TO THE SCHEME OF AMALGAMATION OF THE ERSTW HILE ASSCENT INFOSERVE PRIVATE LIMITED (SUBSIDIARY OF THE COMPAN Y) WITH THE COMPANY AS APPROVED BY THE SHAREHOLDER IN THE COURT CONVENED MEETING HELD ON THE 25TH DAY OF APRIL, 2009 AND SUB SEQUENTLY SANCTIONED BY THE HONORABLE HIGH COURT OF JUDICATUR E AT MUMBAI VIDE ORDER DT 21ST AUGUST 2009 AND HONORABLE HIGH COURT OF KARNATAKA AT BANGALORE VIDE ORDER DT 6TH FEBRUARY 2010, THE ASSETS AND LIABILITIES OF THE ERSTWHILE COMPANY WAS TRANSFERRED AND VESTED IN THE COMPANY WITH EFFECT FROM 1ST APR, 2008 AND THE SCHEME HAS BEEN GIVEN EFFECT TO IN THE ACCOUNTS OF THE YEAR.' 51. IT APPEARS TO US THAT THE DECISION RENDERED BY THE TRIBUNAL IN THE CASE OF SYMPHONY MARKETING SOLUTIONS WOULD BE APPLI CABLE IN THE PRESENT ASSESSMENT YEAR ALSO. ACCORDINGLY, ACCENTIA TECHNO LOGY LTD IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. COSMIC GLOBAL LTD.: 52. THE LEARNED COUNSEL FOR THE ASSESSEE PRAYED FOR EXCLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT THIS COM PANY MAKES ABNORMAL PROFITS. HE WAS HOWEVER UNABLE TO FURNISH ANY EVIDENCE TO SUBSTANTIATE HIS CLAIM. ACCORDINGLY, THE PRAYER FO R REJECTION OF THIS COMPANY AS A COMPARABLE IS REJECTED. IT(TP)A NOS.67 & 70/BANG/2015 PAGE 36 OF 37 ECLERX SERVICES LTD., : 53. THE COMPARABILITY OF THIS COMPANY IN ITES SEGME NT WAS CONSIDERED BY THE SPECIAL BENCH DECISION OF THE ITAT IN THE CA SE OF MAERKS GLOBAL (SUPRA) AND THE SPECIAL BENCH IN PARA 82 AND 83 OF ITS ORDER CAME TO THE CONCLUSION THAT THIS COMPANY WAS FUNCTIONALLY DIFFE RENT AND WAS ACCORDINGLY ENGAGED IN PROVIDING HIGH END SERVICES INVOLVING SP ECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE IN ITS FIELD. FOLLOWING THE A FORESAID DECISION WE ARE OF THE VIEW THAT THIS COMPANY SHOULD BE EXCLUDED FR OM THE FINAL LIST OF COMPARABLES. 54. THE TPO IS ACCORDINGLY DIRECTED TO COMPUTE THE ALP IN THE ITES SEGMENT IN THE LIGHT OF THE DIRECTIONS GIVEN ABOVE. 55. THE TPO WHILE ALLOWING WORKING CAPITAL ADJUSTME NT HAS NOT ALLOWED WORKING CAPITAL ADJUSTMENT AS PRAYED FOR BY THE ASS ESSEE. WHILE DECIDING SIMILAR ISSUE IN THE IT SEGMENT, WE HAVE ALREADY GI VEN APPROPRIATE DIRECTIONS TO THE TPO/AO. SIMILAR DIRECTIONS WILL BE CARRIED OUT BY THE TPO/AO WHILE DETERMINING THE ALP IN THE ITES SEGMEN T ALSO. WE HOLD AND DIRECT ACCORDINGLY. 56. GROUND NO.8 IS WITH REGARD TO NOT GRANTING FULL CREDIT IN RESPECT OF TDS AND FOREIGN TAX CREDIT. THE CIT(A) DID NOT ADJ UDICATE THE RELEVANT GROUND RAISED BY THE ASSESSEE IN THIS REGARD. WE A RE OF THE VIEW THAT IF CREDIT WAS NOT GIVEN FOR THE REASON THAT THE SAME W AS NOT APPEARING IN IT(TP)A NOS.67 & 70/BANG/2015 PAGE 37 OF 37 FORM 26AS, THAN THE CBDT INSTRUCTION NO.5/2013 DATE D 8.7.2013 WHEREBY IT HAD DIRECTED ALL THE ASSESSING OFFICERS TO VERIF Y THE TDS CERTIFICATE AND NOT GO ONLY ON THE BASIS OF ENTRY IN FORM 26AS, WIL L APPLY. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIREC T THE AO TO VERIFY THE CLAIM OF ASSESSEE FOR CREDIT OF TDS AND FOREIGN TAX PAID IN LIGHT OF THE CBDT INSTRUCTION REFERRED TO ABOVE. THE AO WILL AFFORD O PPORTUNITY OF BEING HEARD TO THE ASSESSEE IN THIS REGARD. 57. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED WHILE THE APPEAL BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 30 TH SEPTEMBER, 2015. /D S/ COPY TO: 1. REVENUE 2. ASSESSEE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD F ILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.