Tektronix (India) Pvt Ltd , Bangalore V. Deputy Commissioner of Income Tax Circle-7(1)(1), Bangalore

ITA 673/BANG/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 2748 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-05-2020
• Assessment Year: 2007-2008
• Appeal Filed On: 24-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Keywords: Reopening of assessment; Depreciation; Transfer pricing; International transaction; Tangible material; Revenue expenditure; Reassessment proceedings
• Section: 92C; 143(3); 234B; 14A; 40(a)(ia); 133(6); 144C; 274; 64; 13; 119; 22; 32; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI. A. K. GARODIA, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A 673/BANG/2017 ASSESSMENT YEAR : 2007 08 M/S TEKTRONIX (INDIA) PVT. LTD., (FORMERLY KNOWN AS TEKTRONIX ENGINEERING DEVELOPMENT (INDIA) PVT. LTD.,) SURVEY NO. 16, SALARPURIA PREMIA, KADUBEESANA HALLI, VARTHUR HOBLI, SARJAPUR OUTER RING ROAD, BANGALORE 560 013. PAN NO : AAACT 7289 F VS. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 7 (1) (1), ROOM NO. 240, 2 ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BANGALORE 560 095. APPELLANT RESPONDENT APPELLANT BY : SHRI SHARATH RAO, CA RESPONDENT BY : MR. MUZAFFAR HUSSAIN, CIT DR DATE OF HEARING : 10-02-2020 DATE OF PRONOUNCEMENT : 17-03-2020 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST F INAL ASSESSMENT ORDER DATED 20/01/2017 PASSED BY LD.DCIT CIRCLE 7 (1) (1), BANGALORE UNDER SECTION 143 (3) READ WITH SECTION 147 AND PAGE 2 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 SECTION 144C (13) OF THE ACT ON FOLLOWING REVISED G ROUNDS OF APPEAL: 1. GENERAL GROUNDS AGAINST THE FINAL ASSESSMENT ORD ER: 1.1 THE FINAL ASSESSMENT ORDER ('FAO') DATED JANUAR Y 20, 2017 (SERVED ON JANUARY 25, 2017) PASSED BY THE LEA RNED ASSESSING OFFICER ('AO') UNDER SECTION 143(3) READ WITH SECTION 147 AND SECTION 144C(13) OF THE INCOME- TAX ACT, 19 61 ('ACT') IS NOT IN ACCORDANCE WITH THE LAW AND IS CONTRARY TO T HE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 2. REOPENING OF ASSESSMENT: 2.1 THE HONOURABLE DISPUTE RESOLUTION PANEL ('DRP') ERRED IN UPHOLDING THE REASSESSMENT PROCEEDINGS INITIATED UN DER SECTION 147 OF THE ACT WITHOUT APPRECIATING THAT NO 'FRESH TANGIBLE MATERIAL' WAS AVAILABLE WITH THE AO FOR FORMING A B ELIEF THAT THE APPELLANT NOT MADE FULL AND TRUE DISCLOSURE OF MATE RIAL FACTS LEADING TO INCOME ESCAPING ASSESSMENT. 2.2 THE DRP ERRED IN UPHOLDING THE NOTICE ISSUED BY THE AO UNDER SECTION 148 OF THE ACT TO INITIATE THE REASSE SSMENT PROCEEDINGS WITHOUT APPRECIATING THAT THE SAID NOTI CE WAS ISSUED BY THE AO BEYOND FOUR YEARS FROM THE END OF THE ASSESSMENT YEAR ('AY') EVEN WHEN THERE WAS NO FAILU RE ON THE PART OF THE APPELLANT TO 'FULLY AND TRULY' DISCLOSE ALL MATERIAL FACTS RELEVANT FOR ASSESSMENT. 2.3 THE DRP ERRED IN LAW AND ON FACTS IN HOLDING TH AT INFORMATION AVAILABLE IN THE COURSE OF INITIAL REAS SESSMENT PROCEEDINGS WHICH WERE RENDERED VOID CAN BE USED TO INITIATE SUBSEQUENT REASSESSMENT PROCEEDINGS. 3. TRANSFER PRICING GROUNDS: 3.1 THE TPO HAS ERRED IN COMPLETING THE TRANSFER P RICING ASSESSMENT WITHOUT PROVIDING AN OPPORTUNITY OF BEIN G HEARD TO THE APPELLANT BY SIMPLY RELYING ON THE EARLIER ORDE R PASSED BY THE TPO DATED JANUARY 29, 2013 WHICH ITSELF WAS QUA SHED BY THE DRP VIDE ITS DIRECTIONS DATED NOVEMBER 18, 2013 . 3.2 THE DRP AND THE TPO / AG HAVE ERRED IN FACT AN D IN LAW IN MAKING AN ADJUSTMENT OF RS 17,302,490 TO THE ARM'S LENGTH PRICE ('ALP') OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES ('AE') IN THE SOFTW ARE DEVELOPMENT ('SWD') SEGMENT. 3.3 THE DRP AND AG HAVE ERRED IN UPHOLDING THE ACT ION OF THE LEARNED TPO IN REJECTING THE TP STUDY AND MODIFYING THE FILTERS PAGE 3 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 ADOPTED BY THE APPELLANT AND ADOPTING ADDITIONAL FI LTERS FOR UNDERTAKING A NEW SEARCH AND ARRIVING AT A FRESH SE T OF COMPARABLES. 3.4 THE DRP HAS ERRED IN UPHOLDING THE ACTION OF TH E LEARNED TPO IN FINALIZING THE TP ORDER WITH THE FOLLOWING C OMPANIES AS COMPARABLE TO THE APPELLANT DESPITE SUCH COMPANIES BEING FUNCTIONALLY DIFFERENT TO THE APPELLANT AND/OR FAIL TO MEET THE LEGALLY ACCEPTABLE CRITERIA FOR COMPARABILITY: 1. AVANI CIMCON TECHNOLOGIES LIMITED 2. CELESTIAL LABS LIMITED 3. E ZEST SOLUTIONS LIMITED 4. INFOSYS TECHNOLOGIES LTD 5. KALS INFORMATION SYSTEMS LIMITED (SEG) 6. PERSISTENT SYSTEMS LIMITED 7. QUINTEGRA SOLUTIONS LIMITED 8. TATA ELXSI LIMITED (SEG) 9. WIPRO LIMITED (SEG) 10. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 11. ISHIR INFOTECH LIMITED 12. MEGASOFT LIMITED 13. THIRDWARE SOLUTIONS LIMITED 3.5 WITHOUT PREJUDICE THAT MEGASOFT LIMITED IS FUNC TIONALLY DIFFERENT TO THE APPELLANT AND / OR FAILS TO MEET T HE LEGALLY ACCEPTABLE CRITERIA FOR COMPARABILITY, THE DRP AND TPO ERRED IN NOT APPRECIATING THAT ONLY SEGMENTAL MARGIN (23.11 PERCENT) OUGHT TO BE CONSIDERED FOR COMPARABILITY. 3.6 THE DRP AND AG / TPO HAVE ERRED IN LAW AND ON FACTS IN NOT GRANTING AN APPROPRIATE WORKING CAPITAL ADJUSTM ENT TO THE MARGINS OF THE COMPARABLE COMPANIES, BASED ON THE C OMPUTATION PROVIDED BY THE APPELLANT. 3.7 THE AO / TPO HAVE ALSO ERRED IN CONSIDERING THE PRIME LENDING RATE ('PLR') AT 10.25 PERCENT THAT WAS APPL ICABLE FOR FY 2005-06 WITHOUT APPRECIATING THAT THE PLR RATE FOR THE SUBJECT FY 2006-07 WHICH WAS 12.50 PERCENT (THE BENCHMARK P LR WAS BETWEEN 12.25 PERCENT AND 12.75 PERCENT). 3.8 THE AO / TPO HAVE FURTHER ERRED IN DISCOUNTING THE PLR TO ITS PRESENT VALUE (9.30 PERCENT AS PER THE TPO'S CA LCULATIONS) PAGE 4 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 WITHOUT APPRECIATING THAT THE AVERAGE PAYABLES AND RECEIVABLES WERE TAKEN BY THE TPO HIMSELF FOR THE CALCULATIONS. 4. DISALLOWANCE OF DEPRECIATION UNDER SECTION 40(A) (IA) OF THE ACT 4.1 THE DRP AND AO HAVE ERRED IN LAW AND ON FACTS IN DISALLOWING RS 26,24,742 ON ACCOUNT OF DEPRECIATION CLAIMED ON PURCHASE OF SOFTWARE PRODUCTS UNDER SECTION 40(A)(I A) OF THE ACT WITHOUT APPRECIATING THAT THE APPELLANT ON ITS OWN HAD DISALLOWED THE SOFTWARE EXPENDITURE WHILE ARRIVING AT THE TAXABLE INCOME SINCE THE SAME WAS CAPITAL IN NATURE .. 4.2 WITHOUT PREJUDICE TO THE ABOVE GROUND, THE DRP AND AO HAVE ERRED IN LAW AND ON FACTS IN DISALLOWING THE D EPRECIATION CLAIMED ON PURCHASE OF SOFTWARE PRODUCTS UNDER SECT ION 40(A)(IA) OF THE ACT WITHOUT APPRECIATING THAT DISALLOWANCE U NDER SECTION 40(A)(IA) CAN BE MADE ONLY ON REVENUE EXPENDITURE A ND CANNOT BE EXTENDED TO DEPRECIATION ON SOFTWARE CAPITALISED . 4.3 WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE DR P AND THE AO HAVE ERRED IN LAW AND ON FACTS IN DISALLOWING EXCES S DEPRECIATION OF RS 4,34,119 WITHOUT APPRECIATING TH AT THE UNDERLYING SOFTWARE PURCHASES AMOUNTING TO RS 14,47 ,062 WERE ACQUIRED AND PUT TO USE FOR LESS THAN 180 DAYS AND THEREBY THE DEPRECIATION CLAIM WAS RESTRICTED TO THE EFFECTIVE RATE OF DEPRECIATION TO 30 PERCENT (50 PERCENT OF 60 PERCEN T DEPRECIATION RATE). 5. DISALLOWANCE UNDER SECTION 14A OF THE ACT 5.1 THE DRP AND THE AO HAVE ERRED IN LAW IN DISALL OWING AN AMOUNT OF RS 2,03,335 UNDER SECTION 14A OF THE ACT WITHOUT APPRECIATING THAT THE INVESTMENTS WERE MADE IN SUBS IDIARY COMPANY IN THE PAST YEARS AND THAT THERE WAS NO FRE SH INVESTMENTS MADE DURING THE YEAR AND THAT THE APPEL LANT HAD NOT INCURRED ANY EXPENDITURE FOR EARNING THE DIVIDE ND INCOME FROM THE INVESTMENTS; 5.2 THE DRP HAS ERRED IN LAW AND ON FACTS IN HOLDI NG THAT THE APPELLANT HAS TO MAINTAIN SEPARATE BOOKS OF ACCOUNT S FOR INVESTMENTS MADE, INCOME FROM WHICH IS NOT INCLUDIB LE IN THE TOTAL INCOME OF THE APPELLANT WITHOUT APPRECIATING THAT NO SUCH ONUS IS CAST UPON THE ASSESSEE UNDER THE PROVISIONS OF SECTION 14A OF THE ACT. 6. BROUGHT FORWARD LOSSES NOT GRANTED 6.1 THE AO HAS ERRED IN LAW AND ON FACTS IN NOT GI VING EFFECT TO THE DIRECTIONS OF THE DRP BY NOT GRANTING THE SET-O FF OF BROUGHT FORWARD DEPRECIATION ALLOWANCE OF RS.34,46,195/- CL AIMED BY THE APPELLANT IN THE RETURN OF INCOME ('ROL') FOR T HE AY 2007-08. PAGE 5 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 7. OTHER CONSEQUENTIAL GROUNDS 7.1 THE LEARNED AO HAS ERRED IN LAW AND ON FACTS I N DETERMINING THE TAX LIABILITY BY MAKING THE AFOREME NTIONED ADDITIONS AND COMPUTING INTEREST UNDER SECTION 234B OF THE ACT; 7.2 THE LEARNED AG HAS ERRED IN LAW AND ON FACTS B Y LEVYING HIGHER AMOUNT OF INTEREST UNDER SECTION 234C OF THE ACT AS COMPARED TO THE INTEREST LEVIED AS PER THE ROI; AND 7.3 THE LEARNED AO HAS ERRED IN LAW AND ON FACTS BY INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 READ WITH 274 OF THE ACT. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. ASSESSEE FILED ITS RETURN OF INCOME ON 30/10/2007 D ECLARING TOTAL INCOME OF RS.88,89,272/-. RETURN WAS PROCESSE D UNDER SECTION 143 (1) OF THE ACT AND CASE WAS SELECTED FO R SCRUTINY. ACCORDINGLY, NOTICE UNDER SECTION 143 (2) WAS ISSUE D TO ASSESSEE ALONG WITH NOTICE UNDER SECTION 142 (1) AND QUESTIO NNAIRE. LD.AO OBSERVED THAT, ASSESSEE HAD INTERNATIONAL TRANSACTI ON WITH ASSOCIATED ENTERPRISES FOR MORE THAN RS.15 CRORES A ND ACCORDINGLY REFERENCE TO TRANSFER PRICING OFFICER W AS MADE FOR DETERMINING. 2.1. ON RECEIPT OF REFERENCE, TRANSFER PRICING OFFICER C ALLED UPON ASSESSEE TO FILE ECONOMIC DETAILS OF INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSEE WITH ITS ASSOCIATED ENTERP RISES IN FORM 3 CEB. LD.TPO OBSERVED THAT, ASSESSEE IS A SUBSIDIAR Y OF TEKTRONIX INC USA AND PROVIDER SERVICES TO TEKTRONIX INC USA AND TEKTRONIX INTERNATIONAL SALES GMBH SWITZERLAND. IT WAS OBSERVED THAT, ASSESSEE UNDERTOOK TO PROVIDE SALES SUPPORT SERVICES, SOFTWARE DEVELOPMENT SERVICES AS A CONTRA CT SOFTWARE DEVELOPMENT SERVICES PROVIDER. LD. TPO OBSERVED THA T, AS PER AGREEMENT WITH THE ASSOCIATED ENTERPRISES, NETWORK APPLIANCES PAGE 6 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 INC., USA, ASSESSEE IS COMPENSATED ON COST +10% BAS IS IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. 2.2. LD.TPO OBSERVED THAT, FOLLOWING WERE INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSEE: PARTICULARS OF INTERNATIONAL TRANSACTIONS AMOUNT (IN RUPEES) RECEIPTS FOR SOFTWARE DEVELOPMENT SERVICES 22,88,46,170/- RECOVERIES (RECEIVED) 54,39,231/- REIMBURSEMENT OF EXPENSES (PAID) 46,71,173/- 2.3 LD.TPO OBSERVED THAT, ASSESSEE USED TNMM AS MOST APPROPRIATE METHOD FOR SOFTWARE DEVELOPMENT SERVICE S AND OP/OC AS PLI FOR COMPUTING THE MARGIN UNDER THESE S EGMENTS. ASSESSEE COMPUTED ITS MARGIN AT 14.43% FOR SOFTWARE DEVELOPMENT SERVICE SEGMENT. ASSESSEE USED 12 COMPA RABLES WITH AVERAGE MARGIN OF 12.15% THUS, IT IS HELD TH E PRICE TO BE AT ARMS LENGTH. LD.TPO REJECTED THE TRANSFER PRICING ANALYSIS CARRIED OUT BY ASSESSEE AS ACCORDING TO HIM IT SUFF ERED CERTAIN DEFECTS. LD.TPO APPLIED VARIOUS FILTERS TO REJECT C OMPARABLES SELECTED BY ASSESSEE. 2.4. LD.TPO SELECTED NEW SET OF 26 COMPARABLES WITH AVER AGE MARGINE OF 25.14% AS UNDER: SOFTWARE DEVELOPMENT SEGMENT SL. NO. COMPARABLES MARGIN MARGIN 1. ALLSEC TRANSMATIC LTD (SEG) 21.11% 2. AVANI CINCOM TECHNOLOGIES LTD 52.59% PAGE 7 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 3. CELESTIAL LABS LTD 58.35% 4. DATAMATICS LTD 1.38% 5. E-ZEST SOLUTIONS LTD 36.12% 6. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 25.31% 7. GEOMETRIC LTD (SEG) 10.71% 8. HELIO AND MATHESON INFORMATION TECHNOLOGY LTD 36.63% 9. IGATE GLOBAL SOLUTIONS LTD 7.49 % 10. INFOSYS TECHNOLOGIES LTD 40.30% 11 ISHIER INFOTECH LTD 30.12% 12. KALS INFORMATION SYSTEMS LTD 30.55% 13. LGS GLOBAL LTD 15.75% 14. LUCID SOFTWARE LTD 19.37% 15. MEDIASOFT SOLUTIONS LTD 3.66 % 16. MEGASOFT LTD 60.23% 17. MINDTREE LTD 16.90% 18. PERSISTENT SYSTEMS LTD 24.52% 19. QUINTENGRA SOLUTIONS LTD 12.56% 20. RS SOFTWARE (INDIA) LTD 13.47% 21. R SYSTEMS INTERNATIONAL LTD (SEG) 15.07% 22. SASKENCOMMUNICATIONS TECHNOLOGIES LTD (SEG) 22.16% 23. SIP TECHNOLOGIES AND EXPORTS LTD 13.90% 24. TATA ELXSI LTD (SEG.) 26.51% 25. THIRDWARE SOLUTIONS LTD 25.12 % 26. WIPRO LTD 33.65 % AVERAGE MARGIN 25.14% PAGE 8 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 2.5. LD.TPO THUS COMPUTED PROPOSED ADJUSTMENT BEING DIFFERENCE BETWEEN THE MARGINS TOWARDS ARMS LENGTH PRICE OF THE TRANSACTIONS AS UNDER: PARTICULARS PROPOSED ADJUSTMENT SOFTWARE DEVELOPMENT SERVICE SEGMENT RS. 1,73,02,49 0/- 2.6. AGGRIEVED BY PROPOSED ADJUSTMENT, ASSESSEE PREFERR ED OBJECTIONS BEFORE DRP. DRP IGNORING VARIOUS OBJECTI ONS RAISED BY ASSESSEE REGARDING FUNCTIONAL DISSIMILARITIES OF CO MPARABLES, UPHELD FINAL SET OF COMPARABLES SELECTED BY LD.TPO AGAINST DIRECTIONS OF DRP, LD. AO PASSED IMPUGNED O RDER MAKING ADDITION IN THE HANDS OF ASSESSEE. 2.7. AGGRIEVED BY FINAL ASSESSMENT ORDER PASSED, ASSESS EE IS IN APPEAL BEFORE US NOW. 3. LD.AR SUBMITTED THAT GROUND NO.1 ARE GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 4. HE SUBMITTED THAT GROUND NO.2 IS CHALLENGING THE REOPENING WHICH IS NOT PRESSED AT THE INSTRUCTIONS OF ASSESSE E. 5. ACCORDINGLY THIS GROUND STANDS DISMISSED AS NOT PRESSED. GROUND NO.3 IS IN RESPECT OF TRANS-APPRISING ADDITION. AT THE OUTSET, LD.AR SUBMITTED THAT, IN REVISED GRO UNDS OF APPEAL, ASSESSEE SEEKS EXCLUSION/INCLUSION OF FOLLO WING COMPARABLES: AVANI CINCOMTECHNOLOGIES CELESTIAL LABS LTD., E-ZEST SOLUTIONS LTD HELIOS MATHESON INFORMATION TECHNOLOGY LTD., INFOSYS TECHNOLOGIES LTD., PAGE 9 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 ISHIR INFOTECH LTD KALS INFORMATION SYSTEMS LTD MEGASOFT LTD PERSISTANT SYSTEMS LTD., TATA ELXSI LTD (SEG) THIRDWARE SOLUTIONS LTD. WIPRO LTD (SEG) 5.1 BEFORE WE UNDERTAKE COMPARABILITY ANALYSIS OF ABOV E COMPARABLES, IT IS SINE QUA NON TO UNDERSTAND FUNCTIONS PERFORMED, ASSETS OWNED AND RISKS ASSUMED BY ASSESS EE UNDER BOTH SEGMENTS AS OBSERVED BY LD.TPO IN ORDER PASSED UNDER SECTION 92C OF THE ACT. 5.1.1 FUNCTIONS: FUNCTIONS PERFORMED BY ASSESSEE IS AS PER THE AGREE MENT ENTERED INTO BY ASSESSEE WITH TEK INC USA AND TEKTRONIX INT ERNATIONAL SALES GMBH, SWITZERLAND (TIS) ON AN EXCLUSIVE BASIS . IN THE TP STUDY REPORT PLACED IN PAPER BOOK AT PAGE 110 IT IS OBSERVED THAT AS PER AGREEMENT ASSESSEE ASSUMES FOLLOWING RESPONS IBILITIES: PROVIDE ENGINEERING DEVELOPMENT AND SOFTWARE SERVIC ES FROM TIME TO TIME IN INDIA AS SPECIFIED BY ASSOCIATED EN TERPRISES; IDENTIFY AND RECRUIT COMPETENT QUALIFIED PROFESSION ALS FOR ITS OPERATION; ASSIGN QUALIFIED PROFESSIONALS TO PROVIDE ON-GOING ENGINEERING DEVELOPMENT AND SOFTWARE SERVICES; CARRY OUT OVERALL DIRECTION AND CONTROL OF ASSIGNED EMPLOYEES; PAGE 10 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 ENSURE THAT THE EMPLOYEES COMPLY WITH ALL TEKTRONIX POLICIES, RULES AND REGULATIONS REGARDING SECURITY AND PROTECTION OF CONFIDENTIAL INFORMATION; PROGRAM MANAGED TO PROVIDE NECESSARY CONTROL MECHAN ISMS INCLUDING MILESTONE SCHEDULES AND PERIODIC STATUS R EPORTS; AND ASSUME FULL RESPONSIBILITY RELATING TO RECRUITMENT AND COMPENSATION OF ASSIGNED EMPLOYEES. 5.1.2 ASSETS EMPLOYED: IT HAS BEEN SUBMITTED THAT ASSESSEE OWNS PRIMARY AS SETS USED FOR PROVIDING SOFTWARE SERVICES AND SOFTWARE DEVELOPMEN T SERVICES LIKE EMPLOYEES AND PLANT AND MACHINERY EQUIPMENT ET C. ALL/ANY INTELLECTUAL PROPERTY RIGHTS IN THE SOFTWARE DEVELO PED BY ASSESSEE IS PURELY OWNED BY THE ASSOCIATED ENTERPRISES. 5.1.3 RISKS ASSUMED: IN TP STUDY REPORT, IT HAS BEEN SUBMITTED THAT EXCE PT FOR LTD FINANCIAL RISK AND TECHNOLOGY OBSOLESCENCE RISK ALL OTHER MAJOR RISKS ARE BORN BY THE ASSOCIATED ENTERPRISES. ASSES SEE ALSO OWNS MANPOWER RISK AND SERVICE LEVEL QUALITY RISK AS IT HAS TO ADHERE TO THE REQUIREMENTS AND QUALIFICATIONS OF ITS ASSOCIAT ED ENTERPRISE. 5.1.4 CLASSIFICATION: BASED ON THE ABOVE FAR ANALYSIS, ASSESSEE HAS BEEN CHARACTERISED AS LIMITED RISK SERVICE PROVIDER WITH RESPECT TO SOFTWARE DEVELOPMENT SERVICES RENDERED TO ITS GROUP CONCERNS. AT THE OUTSET BOTH SIDES SUBMITTED THAT FOR ASSESSM ENT YEAR 2008-09 IN ASSESSEES OWN CASE REPORTED IN (2016) 7 5 TAXMANN.COM 276 UNDER SIMILAR AND IDENTICAL FUNCTIO NAL PROFILE, PAGE 11 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 VERY SAME SET OF COMPARABLES ALLEGED FOR EXCLUSION BY ASSESSEE HAS BEEN CONSIDERED AND EXAMINED. 5.2 WE NOTE THAT IDENTICAL SET OF 26 COMPARABLES WERE SELECTED BY LD.TPO FOR VERY SAME ASSESSMENT YEAR IN CASE OF MERITOR LVS INDIA (P)LTD ., BY THIS TRIBUNAL REPORTED IN (2015) 64 TAXMANN.COM 136 AND FIRST ADVANTAGE OFFSHORE SERVICES PVT LTD VS DCIT I N ITA (TP) NO. 1086/B/2011 . WE ALSO NOTE THAT ASSESSEE BEFORE US AND MERITOR LVS, FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD., RENDERS SOFTWARE DEVELOPMENT SERVICES TO ASSOCIATED ENTERPR ISES UNDER A CONTRACT SERVICES PROVIDER FOR VERY SAME ASSESSMENT YEAR. THIS TRIBUNAL IN THESE DECISIONS HAVE HELD FOLLOWING CO MPANIES TO BE NOT COMPARABLE FOR YEAR UNDER CONSIDERATION ON IDEN TICAL FUNCTIONS WHICH IS RISKS MITIGATED BEING A CONTRACT SERVICE PROVIDER LIKE ASSESSEE. WE REFER TO OBSERVATION MA DE BY THIS ( TRIBUNAL) IN THE CASE OF (MERITOR LVS, INDIA PVT. LTD. (SUPRA)) IN RESPECT OF FOLLOWING COMPARABLES. CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVELOPMENT COMPANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- IN THE DIRECTOR'S REPORT (PAGE 20 OF PB- IL), IT IS STATED THAT 'THE COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR I N- HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2A B) OF THE INCOME TAX ACT.' AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UNDER ' DEFERRED REVENUE EXPENDITURE' (PAGE 31 OF PB- II), IT IS MENTIONED THAT, 'EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT OF NEW PRODUCT S HAS BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AND THE SAM E HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALLMENTS FROM THE YE AR IN WHICH IT IS INCURRED.' AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO T HE PROFIT AND LOSS ACCOUNT AS 'DEFERRED REVENUE EXPENDITURE' (PAGE 30 OF PB-II). THIS AMOUNTS TO NEARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. PAGE 12 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SOFT WARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D ACTIVITIES IS BAD IN LAW. 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. V. ADDL. CIT - ITA NO.6623/MUM/2011 (FOR AY 2007-08) IN WHICH THE COMP ARABILITY OF THIS COMPANY FOR CLINICAL TRIAL RESEARCH SEGMENT. THE RE LEVANT EXTRACT OF DISCUSSION REGARDING THIS COMPANY IS AS FOLLOWS: 'THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAG E-389 OF THE PAPER BOOK WHICH IS AN EXTRACT FROM THE DIRECTORS REPORT WHICH READS AS FOLLOWS: 'THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TO OL 'CELSUITE' TO DRUG DISCOVERY IN, FINDING THE LEAD MOLECULES FOR D RUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC ( OF) RIGHT/PATENT ACT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND T ECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYING BI O-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERM A AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE BEEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPON SE IS VERY FAVORABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDUR ES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTMENT OF MIC ROBIOLOGY, OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOL OGY AREA, THE COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMENT WITH I MTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MA NUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALK ALINE PROTEASE IN INDIA AND OVERSEAS. THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FA CILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NEW CANDIDATES' DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROP OSED FACILITY WILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA P RADESH.' ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALS O IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AND SHOULD BE CONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE AS SESSEE, THE DISCOVERY IS IN RELATION TO A SOFTWARE DISCOVERY OF NEW DRUGS. M OREOVER THE COMPANY ALSO IS OWNER OF THE IPR. THERE IS HOWEVER A REFERE NCE TO DEVELOPMENT OF A MOLECULE TO TREAT CANCER USING BIO-INFORMATICS TOOL S FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. AS EXPLAINED EARLIE R IT IS A DIVERSIFIED COMPANY AND THEREFORE CANNOT BE CONSIDERED AS COMPA RABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMP T MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MAR GINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMI NATED. BY NOT RESORTING TO SUCH A PROCESS OF MAKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE THE REFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD.' 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE ABO VE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARCH IN PHARMA CEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT THIS COMPANY IS OWNER OF IPR, I T HAS SOFTWARE FOR PAGE 13 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 DISCOVERY OF NEW DRUGS AND HAS DEVELOPED MOLECULE T O TREAT CANCER. IN THE ULTIMATE ANALYSIS, THE ITAT DID NOT CONSIDER THIS C OMPANY AS A COMPARABLE IN CLINICAL TRIAL SEGMENT, FOR THE REASO N THAT THIS COMPANY HAS DIVERSE BUSINESS. IT WAS SUBMITTED THAT, HOWEVER, F ROM THE ABOVE EXTRACTS IT IS CLEAR THAT THIS COMPANY IS NOT INTO SOFTWARE DEVELOPMENT ACTIVITIES, ACCORDINGLY, THIS COMPANY SHOULD BE REJECTED AS A C OMPARABLE BEING FUNCTIONALLY DIFFERENT. 45. FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANS PIRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY WAS CLASS IFIED AS A RESEARCH AND DEVELOPMENT COMPANY. ACCORDING TO THE TPO IN AY 07-08 THIS COMPANY HAS BEEN CLASSIFIED AS SOFTWARE DEVELOPMENT SERVICE PROVIDER IN THE CAPITALINE/PROWESS DATABASE AS WELL AS IN THE A NNUAL REPORT OF THIS COMPANY. THE TPO HAS RELIED ON THE RESPONSE FROM TH IS COMPANY TO A NOTICE U/S.133(6) OF THE ACT IN WHICH IT HAS SAID T HAT IT IS IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. THE ASS ESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREAT THIS AS A COMPARABLE HA S POINTED OUT THAT THIS COMPANY PROVIDES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOINFORMATICS SERVICES AND THAT THE SEGMENTAL DATA FOR EACH ACTIV ITY IS NOT AVAILABLE AND THEREFORE THIS COMPANY SHOULD NOT BE TREATED AS COM PARABLE. BESIDES THE ABOVE, THE ASSESSEE HAS POINT OUT TO SEVERAL REFERE NCES IN THE ANNUAL REPORT FOR 31.3.2007 HIGHLIGHTING THE FACT THAT THI S COMPANY WAS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PROVIDES RELATED SOFTWAR E DEVELOPMENT SERVICES. THE TPO CALLED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPANY. THE TPO ALSO CALLED FOR DESCRIPTION OF SOF TWARE DEVELOPMENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DATED 29.3.2010 HAS GIVEN DETAILS OF EMPLOYEES WORK ING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHETHER ANY S EGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OTHER D ETAIL IN THE TPO'S ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMENT SERVICES P ERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISSUED DRAFT RED HERRING PROSPEC TUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CL INICAL RESEARCH. THE TPO WANTED TO KNOW AS TO WHETHER THE PRIMARY BUSINE SS OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN TH E ANNUAL REPORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE OF BIO P RODUCTS AND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFEREN CE TO ANY REPLY BY CELESTIAL LABS TO THE ABOVE CLARIFICATION OF THE TP O. THE TPO WITHOUT ANY BASIS HAS HOWEVER CONCLUDED THAT THE BUSINESS MENTI ONED IN THE DRHP ARE THE SERVICES OR BUSINESSES THAT WOULD BE STARTE D BY UTILIZING THE FUNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN NO WAY CONNECTED WITH BUSINESS OPERATIONS OF THE COMPANY D URING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISSION S MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICALLY/ADMITT EDLY IN CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THERE IS NO CLEAR BASIS ON WHICH THE TPO CONCLUDED THAT THIS CO MPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERV ICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY O UGHT NOT TO HAVE BEEN CONSIDERED AS COMPARABLE.' PAGE 14 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 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 D IFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED THE OBJECTIONS RAISE D BY THE ASSESSEE ON THE GROUND THAT AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, THIS COMPANY IS EN GAGED IN SOFTWARE DEVELOPMENT 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 ENGAGED IN 'E- BUSINESS CONSULTING SERVICES', CONSISTING OF WEB ST RATEGY SERVICES, I T DESIGN SERVICES AND IN TECHNOLOGY CONSULTING SERVIC ES INCLUDING PRODUCT DEVELOPMENT CONSULTING SERVICES. THESE SERVICES, TH E LEARNED AUTHORISED REPRESENTATIVE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCING ('KPO') SERVICES. IT IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA I N ITS ANNUAL REPORT. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DES CRIPTIVE INFORMATION ON THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAILS AVAILABLE ON THE COMPANY'S WEBSITE WHICH SH OULD BE CONSIDERED WHILE EVALUATING THE COMPANY'S FUNCTIONAL PROFILE. IT IS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT KPO SERV ICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THE REFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CONSIDERED A S COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES AND RELIED ON THE DE CISION OF THE CO- ORDINATE BENCH IN THE CASE OF CAPITAL IQ INFORMATIO N SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961(HYD)/2011 DT.23.11.2012 AND PRA YED THAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLUTIO NS 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 CAREFULLYCONSIDERED THE MATERIAL ON RECORD. IT IS S EEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF CO MPARBALES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS R EPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT. IT APPEARS THAT TH E TPO HAS NOT EXAMINED THE SERVICES RENDERED BY THE COMPANY TO GIVE A FIND ING WHETHER THE SERVICES PERFORMED BY THIS COMPANY ARE SIMILAR TO T HE SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. FRO M THE DETAILS ON RECORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOF TWARE DEVELOPMENT SERVICES, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICE S WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BEEN HELD BY T HE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CAPITAL I- Q INFORMATI ONSYSTEMS (INDIA) (P) LTD. PAGE 15 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 SUPRA) THAT KPO SERVICES ARE NOT COMPARABLE TO SOFT WARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWIN G THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E-Z EST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O./TPO IS ACCORDINGLY DIREC TED.' INFOSYS TECHNOLOGIES LTD. 12.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEF ORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY I N 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. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THIS CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPA NY TO THIS EFFECT WHICH IS AS UNDER:- (I) THE COMPANY HAS AN INTELLECTUAL PROPERTY (IP) CELL TO GUIDE ITS EMPLOYEES TO LEVERAGE THE POWER OF IP FOR THEIR GRO WTH. IN 2008, THIS COMPANY GENERATED OVER 102 INVENTION DISCLOSURES AND FILED AN AGGREGATE 10 PATENTS IN INDIA AND THE USA. TILL DATE THIS COMPANY HAS FILED AN AGGREGATE OF 119 PATENT A PPLICATIONS (PENDING) IN INDIA AND USA OUT OF WHICH 2 HAVE BEEN GRANTED IN THE US. (II) THIS COMPANY HAS SUBSTANTIAL REVENUES FROM SOFTWARE PRODUCTS AND THE BREAK- UP OF THE SOFTWARE PRODUCT REVENUES IS NOT AVAILABLE. (III) THIS COMPANY HAS INCURRED HUGE RESEARCH AND DEVELOP MENT EXPENDITURE TO THE TUNE OF APPROXIMATELY RS. 200 CR ORES. (IV) THIS COMPANY H AS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWAR E PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTE MS. (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLOWING JUDICIAL DECISIONS: - (A) ITAT, DELHI BENCH DECISION IN THE CASE OF AGNITY IN DIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010) AND (B) TRILOGY E- BUSINESS SOFTWARE INDIA PVT. LTD. (ITA NO.1054/BANG/2011) 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARAB ILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE OPERATING PAGE 16 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY . IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE D ECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMP ANIES. 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THI S COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HEN CE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E-B USINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS AP PLICABLE TO THIS YEAR ALSO. THE ARGUMENT PUT FORTH BY ASSESSEE'S IS THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SI GNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALS O SEEN THAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE P RODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY.' KALS INFORMATION SYSTEMS LTD. '46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTE NTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH S OFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS AL SO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT W AS ALSO SUBMITTED THAT AS PER THE ANNUAL REPOT, THE SALARY COST DEBITED UN DER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME W AS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNAL'S DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABL E WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: '16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIO NALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVEL OPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFT WARE DEVELOPMENT 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 THAT IT IS ENGAGED IN PROVIDIN G OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPM ENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCC EEDS.' BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJECTED AS A COMPARABLE. PAGE 17 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DR AWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTIC E U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFER RED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PU RELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE.' WIPRO LIMITED '13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES OR SEVERAL GROUNDS LIKE FUNCTIONAL D IS-SIMILARITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, BRUSHED ASIDE T HE OBJECTIONS OF THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SET OF CO MPARABLES. 13.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE FOR SEVERAL REASONS, WHICH ARE AS UNDER: (I) THIS COMPANY OWNS SIGNIFICANT INTANGIBLES IN THE NA TURE OF CUSTOMER RELATED INTANGIBLES AND TECHNOLOGY RELATED INTANGIBLES AND QUOTED EXTRACTS FROM THE ANNUAL REPOR T OF THIS COMPANY IN THE SUBMISSIONS MADE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCIAL STAT EMENTS FOR COMPARABILITY PURPOSES AND FOR COMPUTING THE MARGIN S, WHICH CONTRADICTS THE TPO'S OWN FILTER OF REJECTING COMPA NIES WITH CONSOLIDATED FINANCIAL STATEMENTS. 13.3. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE SET OF COMPARABLES. 13.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MERIT IN THE CONTEN TIONS OF THE ASSESSEE FOR EXCLUSION OF THIS COMPANY FROM THE SET OF COMPARABL ES. IT IS SEEN THAT THIS COMPANY IS ENGAGED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMENT SERVICES. THERE IS NO INFORMATION ON TH E SEGMENTAL BIFURCATION OF REVENUE FROM SALE OF PRODUCT AND SOF TWARE SERVICES. THE TPO APPEARS TO HAVE ADOPTED THIS COMPANY AS A COMPARABL E WITHOUT DEMONSTRATING HOW THE COMPANY SATISFIES THE SOFTWAR E DEVELOPMENT SALES 75% OF THE TOTAL REVENUE FILTER ADOPTED BY HIM. ANO THER MAJOR FLAW IN THE COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO IS TH AT HE ADOPTED COMPARISON OF THE CONSOLIDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NO T AN APPROPRIATE COMPARISON. PAGE 18 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 13.4.2 WE ALSO FIND THAT THIS COMPANY OWNS INTELLEC TUAL PROPERTY IN THE FORM OF REGISTERED PATENTS AND SEVERAL PENDING APPL ICATIONS FOR GRANT OF PATENTS. IN THIS REGARD, THE CO-ORDINATE BENCH OF T HIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (ITA NO.227/BANG/201 0) HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY SUCH INTANGIB LE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CASE ON HAND DOES NOT OWN ANY INTANGIBLES, FOLLOWIN G THE AFORESAID DECISION OF THE CO- ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT T HE ASSESSING OFFICER/TPO TO OMIT THIS COMPANY FROM THE SET OF CO MPARABLE COMPANIES IN THE CASE ON HAND FOR THE YEAR UNDER CONSIDERATION.' AVANI CIMCON TECHNOLOGIES LTD. '39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FR OM THE ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN THE COMPANY'S WEBSI TE, WHICH REVEALS THAT THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NA ME 'DXCHANGE', IT WAS SUBMITTED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFTWARE SERV ICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS FU RTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT - ITA NO.7821/MUM/20 11 WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEE'S CONTENTION THAT TH IS COMPANY HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERE D AS COMPARABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY AND IT WAS HELD AS FOLLOWS:- '7.8 AVANI CINCOM TECHNOLOGIES LTD. ('AVANI CINCOM' ): HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPE RATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEE N PROVIDED SO AS TO SEE WHETHER THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESS EE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PARTY. LEARNED CIT DR H AS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EAR NING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETAILS OF PERCENTAGE OF EXPO RT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERATION FOR COMPARABILITY ANALYSI S.' IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS COM PANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS. THE FOLLOWING FIGURES WERE PLACED BEFORE US:- PAGE 19 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 PARTICULARS FYS 05-06 06-07 07-08 08-09 OPERATING REVENUE 21761611 35477523 29342809 28039851 OPERATING EXPNS. 16417661 23249646 23359186 31108949 OPERATING PROFIT 5343950 1227877 5983623 (3069098) OPERATING MARGIN 32.55% 52.59% 25.62% -9.87% 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UNU SUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06-07. THE OPERATING REVE NUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXTRAORDINARY YEAR F OR THIS COMPANY. EVEN THE GROWTH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YE AR AS PER NASSCOM WAS 32%. THE GROWTH RATE OF THIS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW OF THE ABOVE, IT WAS ARGUED THAT T HIS COMPANY OUGHT TO HAVE BEEN REJECTED AS A COMPARABLE. 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE REASONS GIVEN BY THE ASSESSEE FOR EXC LUDING THIS COMPANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECIS ION OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACC EPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE.' HELIOS & MATHESON INFORMATION TECHNOLOGY LTD: '16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WIT H REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., AND KALS INFORMATION SOLUTIONS LTD . (SEG). THE PRIMARY PLEA RAISED BY THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESAID TWO COMPANIES FROM THE LIST OF COMPARABLES IS TO BE EFF ECT THAT THEY ARE FUNCTIONALLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE ASSESSEE IS T HAT BOTH THE AFORESAID CONCERNS ARE ENGAGED IN DEVELOPMENT AND SALE OF SOF TWARE PRODUCTS WHICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES U NDERTAKEN BY THE ASSESSEE IN ITS IT- SERVICES SEGMENT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORD ER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYSTEMS LTD ., IS TO THE EFFECT THAT THE SAID CONCERN'S APPLICATION SOFTWARE SEGMEN T IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. THE SAID CONCERN IS ENGAGED IN TW O SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AND TRAINING. AS PER T HE TPO, THE APPLICATION SOFTWARE SEGMENT IS FUNCTIONALLY COMPAR ABLE TO THE ASSESSEE AS THE SAID CONCERN IS ENGAGED IN SOFTWARE SERVICES . THE STAND OF THE ASSESSEE IS THAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F.Y. 2006-07 REVEALS THAT THE APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND SOFTW ARE SERVICES. THE PAGE 20 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRITTEN SUBMISSIONS, COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 420.3 TO 420.4. THE ASSESSEE FURTHER POINTED OUT THAT THERE WAS NO BIFURCATION A VAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSIN ESS OF SOFTWARE SERVICES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN FOR THE PURPOS ES OF COMPARABILITY WITH THE ASSESSEE'S IT-SERVICES SEGMENT. THE TPO HO WEVER, NOTICED THAT THOUGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SOFTWARE PRODUCTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADI NG OF SOFTWARE PRODUCTS AS THERE WERE NO COST OF PURCHASES DEBITED IN THE P ROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED THAT THE QUANTUM OF REVENUE F ROM SALE OF PRODUCTS WAS NOT AVAILABLE AS PER THE FINANCIAL STATEMENTS O F THE SAID CONCERN, BUT AS THE BASIC FUNCTION OF THE SAID CONCERN WAS SOFTW ARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEE'S SEGMENT OF IT-SERVICES. 18. BEFORE US, APART FROM REITERATING THE POINTS RA ISED BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMME DIATELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CONCERN WAS EV ALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALLY INCOMPARABLE. F OR THE SAID PURPOSE, OUR REFERENCE HAS BEEN INVITED TO PAGES 421 TO 542 OF THE PAPER BOOK, WHICH IS THE COPY OF THE TRANSFER PRICING STUDY UND ERTAKEN BY THE ASSESSEE FOR THE A.Y. 2006-07, AND IN PARTICULAR, A TTENTION WAS INVITED TO PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REFLECTED KALS INFORMATION SOLUTIONS LTD. (SEG) AS FUNCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER A.Y. 2006-0 7 AND THEREFORE, THERE WAS NO JUSTIFICATION FOR THE TPO TO CONSIDER THE SA ID CONCERN AS FUNCTIONALLY COMPARABLE IN THE INSTANT ASSESSMENT Y EAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE SAID CONCER N HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN THE PRESENT YEAR A LSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTEN SUBMI SSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSER TED OUT THAT THE SAID CONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGMENT. AT THE TIME OF HEARING, NEITHER I S THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCU SSION EMERGING FROM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT M ANNER THE FUNCTIONAL PROFILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRECEDING YEAR. THEREFORE, HAVING REGAR D TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTL Y ASSERTED THAT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEE'S SEGMENT OF IT SERVICES. PAGE 21 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHES ON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISED SIMILAR AR GUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG). WE HAVE P ERUSED THE RELEVANT PARA OF THE ORDER OF THE TPO I.E., 6.3.21, IN TERMS OF WHICH THE SAID CONCERN HAS BEEN INCLUDED AS A COMPARABLE CONCERN. THE ASSE SSEE POINTED OUT THAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS L TD. (SEG), IN THE INSTANT CASE ALSO FOR A.Y. 2006-07 THE SAID CONCERN WAS FOU ND FUNCTIONALLY INCOMPARABLE BY THE ASSESSEE IN ITS TRANSFER PRICIN G STUDY AND THE SAID POSITION WAS NOT DISTURBED BY THE TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY, PLACED AT PAGE 432 OF THE P APER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESAID LIGHT, ON THE BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMATION SOLU TIONS LTD. (SEG), IN THE INSTANT CASE ALSO WE FIND THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES.' PERSISTENT SYSTEMS LTD. '17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A C OMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFT WARE PRODUCT DESIGNING AND ANALYTIC SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NOT AVAILABLE. THE TPO REJECT ED THE ASSESSEE'S OBJECTIONS ON THE GROUND THAT AS PER THE ANNUAL REP ORT FOR THE COMPANY FOR FINANCIAL YEAR 2007-08, IT IS MAINLY A SOFTWARE DEVELOPMENT COMPANY AND AS PER THE DETAILS FURNISHED IN REPLY TO THE NO TICE UNDER SECTION 133(6) OF THE ACT, SOFTWARE DEVELOPMENT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF THE MATTER, THE ASSESSING OFFICER INCLUDED THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IN THE LIST OF COMPARABLES AS IT QUALIFIED THE FUNCTIONALITY CRITERION. 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCL USION OF THIS COMPANY AS A COMPARABLE SUBMITTING THAT THIS COMPANY IS FUN CTIONALLY DIFFERENT AND ALSO THAT THERE ARE SEVERAL OTHER FACTORS ON WH ICH THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. IN THIS REGARD, TH E LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT: (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING SERVI CES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAN D. (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FOR F.Y . 2007- 08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY ENGAG ED IN 'OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES' FOR INDEPENDENT SOFTWARE VENDORS AND ENTERPRISES. (III) WEBSITE EXTRACTS INDICATE THAT THIS COMPANY IS IN THE BUSINESS OF PRODUCT DESIGN SERVICES. (IV) THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA ) WHILE DISCUSSING THE COMPARABILITY OF PAGE 22 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 ANOTHER COMPANY, NAMELY LUCID SOFTWARE LTD. HAD RE NDERED A FINDING THAT IN THE ABSENCE OF SEGMENTAL INFORMATIO N, A COMPANY BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANA LYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRE SENTLY UNDER CONSIDERATION, WHICH IS INTO PRODUCT DEVELOPMENT AN D PRODUCT DES IGN SERVICES AND FOR WHICH THE SEGMENTAL DATA IS NO T AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. BE OMITTE D FROM THE LIST OF COMPARABLES. 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORT THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHILE THE A SSESSEE IS A SOFTWARE DEVELOPMENT SERVICES PROVIDER. WE FIND THA T, AS SUBMITTED BY THE ASSESSEE, THE SEGMENTAL DETAILS ARE NOT GIVEN SEPAR ATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUNCIATED IN THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. L TD. (SUPRA) THAT IN THE ABSENCE OF SEGMENTAL DETAILS/INFORMATION A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS, WE HOLD THAT TH IS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM TH E SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACC ORDINGLY. TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNCTIONAL D IS-SIMILARITY, SIGNIFICANT R&D ACTIVITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWE VER, REJECTED THE CONTENTION PUT FORTH BY THE ASSESSEE AND INCLUDED T HIS COMPANY IN THE SET OF COMPARABLES. 14.2 BEFORE US, IT WAS REITERATED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT PERFORMS A VARIETY OF FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT NAMELY ( A ) PRODUCT DESIGN SERVICES (B) INNOVATION DESIGN ENGINEERING AND (C) VISUAL COMPUTING LABS. IN THE SUBMISSIONS MADE THE ASSESSEE HAD QUOTED REL EVANT PORTIONS FROM THE ANNUAL REPORT OF THE COMPANY TO THIS EFFECT. IN VIEW OF THIS, THE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE STAND O THE TPO IN INCLUDING THIS COMPANY IN THE LI ST OF COMPARABLES. PAGE 23 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 14.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. FROM THE DETAILS ON RECORD, WE FIND THAT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODUCT DESIGNI NG SERVICES AND NOT PURELY SOFTWARE DEVELOPMENT SERVICES. THE DETAILS I N THE ANNUAL REPORT SHOW THAT THE SEGMENT 'SOFTWARE DEVELOPMENT SERVICE S' RELATES TO DESIGN SERVICES AND ARE NOT SIMILAR TO SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. 14.4.2 THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT. LTD. V ACIT (ITA NO.7821/MU M/2011) HAS HELD THAT TATA ELXSI LTD. IS NOT A SOFTWARE DEVELOPMENT SERVICE PROVIDER AND THEREFORE IT IS NOT FUNCTIONALLY COMPARABLE. IN THI S CONTEXT THE RELEVANT PORTION OF THIS ORDER IS EXTRACTED AND REPRODUCED B ELOW :- '. . . . . . . .TATA ELXSI IS ENGAGED IN DEVELOPMEN T OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFERENT FR OM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNE D AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVE NUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICE S. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY AS FIT FOR COMP ARABILITY ANALYSIS FOR DETERMINING THE ARM'S LENGTH PRICE FOR THE ASSESSEE , HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PORTION.' AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REPO RT OF THIS COMPANY PRODUCED BEFORE US, THE FACTS PERTAINING TO TATA EL XSI HAVE NOT CHANGED FROM ASSESSMENT YEAR 2007-08 TO ASSESSMENT YEAR 200 8-09. WE, THEREFORE, HOLD THAT THIS COMPANY IS NOT TO BE CONS IDERED FOR INCLUSION IN THE SET OF COMPARABLES IN THE CASE ON HAND. IT IS O RDERED ACCORDINGLY.' THIRDWARE SOLUTIONS LTD. (SEGMENT): '15.1 THIS COMPANY WAS PROPOSED FOR INCLUSION IN TH E LIST OF COMPARABLES BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED T O THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES ON THE GROUND TH AT ITS TURNOVER WAS IN EXCESS OF RS. 500 CRORES. BEFORE US, THE ASSESSEE H AS OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE R EASON THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, IT IS IN THE BUSINES S OF PRODUCT DEVELOPMENT AND TRADING IN SOFTWARE AND GIVING LICE NSES FOR USE OF SOFTWARE. IN THIS REGARD, THE LEARNED AUTHORISED RE PRESENTATIVE SUBMITTED THAT :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVE NUE FROM SALE OF LICENCES AND SUBSCRIPTION. IT HAS BEEN POINTED OUT FROM THE ANNUAL REPORT THAT THE COMPANY HAS NOT PROVIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACC OUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPME NT SERVICES. PAGE 24 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (200 8-TII-04- ITAT-PUNE- TP), THE TRIBUNAL HAS DIRECTED THAT THIS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PROVID ERS, AS ITS INCOME INCLUDES INCOME FROM SALE OF LICENCES WHICH HAS INCREASED THE MARGINS OF THE COMPANY. THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THE TRIBUNAL (SUPRA), T HIS COMPANY OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE MATERIAL ON RECORD THAT THE COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, TH E SEGMENTAL PROFIT AND LOSS ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT ARE NOT GIVEN SEPARATELY. FURTHER, AS POINTED OUT B Y THE LEARNED AUTHORISED REPRESENTATIVE, THE PUNE BENCH OF THE TR IBUNAL IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (SUPRA) HAS DIRE CTED THAT SINCE THE INCOME OF THIS COMPANY INCLUDES INCOME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABLE FOR SOFTWARE DEVELOPMEN T SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFT WARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE MATTER AND FO LLOWING THE AFORE CITED DECISION OF THE PUNE TRIBUNAL (SUPRA), WE DIRECT TH AT THIS COMPANY BE OMITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND.' 13. IN SO FAR AS MEGASOFT LTD , IS CONCERNED, FINDINGS OF THE TRIBUNAL IN THE ABOVE CASE WERE AS UNDER: MEGASOFT LTD. : 24. THIS COMPANY WAS CHOSEN AS A COMPARABLE BY THE TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE ARE TWO SEGMENTS IN T HIS COMPANY VIZ., (I) SOFTWARE DEVELOPMENT SEGMENT, AND (II) SOFTWARE PRO DUCT SEGMENT. THE ASSESSEE IS A PURE SOFTWARE SERVICES PROVIDER AND N OT A SOFTWARE PRODUCT DEVELOPER. ACCORDING TO THE ASSESSEE THERE IS NO BR EAK UP OF REVENUE BETWEEN SOFTWARE PRODUCTS AND SOFTWARE SERVICES BUS INESS ON A STANDALONE BASIS OF THIS COMPARABLE. THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHICH THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ., BLUEALLY DIVISION AND XIUS- BCGI DIVISION. XIUS-BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOF TWARE. THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CON VERGENT TELECOM INDUSTRY. THESE PRODUCTS ARE SOLD AS PACKAGED PRODU CTS TO CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZED PRODUCTS, CUS TOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PR ODUCTS TO FIT INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES U P THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 PAGE 25 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 TO 40% OF THE PRODUCT SOFTWARE WOULD CONSTITUTE PAC KAGED PRODUCT AND AROUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPAB ILITIES AND EXPENSES RELATED TO TRAVELLING, BOARDING AND LODGIN G EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO PRODUCT SOFTWARE) INTERNALLY AND THAT THE P ORTION OF THE REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUST OMIZATION WAS LESS THAN 25% OF THE OVERALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFT WARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPO'S FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. THE BA SIS ON WHICH THE TPO ARRIVED AT THE PLI OF 60.23% IS GIVEN AT PAGE-1 15 AND 116 OF THE ORDER OF THE TPO. IT IS CLEAR FROM THE PERUSAL OF T HE SAME THAT THE TPO HAS PROCEEDED TO DETERMINE THE PLI AT THE ENTITY LEVEL AND NOT ON THE BASIS OF SEGMENTAL DATA. 25. IN THE ORDER OF THE TPO, OPERATING MARGIN WAS C OMPUTED FOR THIS COMPANY AT 60.23%. IT IS THE COMPLAINT OF THE ASSES SEE THAT THE OPERATING MARGINS HAVE BEEN COMPUTED AT ENTITY LEVEL COMBININ G SOFTWARE SERVICES AND SOFTWARE PRODUCT SEGMENTS. IT WAS SUBMITTED THA T THE PRODUCT SEGMENT OF MEGASOFT IS SUBSTANTIALLY DIFFERENT FROM ITS SOFTWARE SERVICE SEGMENT. THE PRODUCT SEGMENT HAS EMPLOYEE COST OF 2 7.65% WHEREAS THE SOFTWARE SERVICE SEGMENT HAS EMPLOYEE COST OF 50%. SIMILARLY, THE PROFIT MARGIN ON COST IN PRODUCT SEGMENT IS 117.95% AND IN CASE OF SOFTWARE SERVICE SEGMENT IT IS 23.11%. BOTH THE SEGMENTS ARE SUBSTANTIALLY DIFFERENT AND THEREFORE COMPARISON AT ENTITY LEVEL IS WITHOUT BASIS AND WOULD VITIATE THE COMPARABILITY (SUBMISSIONS ON PAG E 381 TO 383 OF THE PB-I). IT WAS FURTHER SUBMITTED THAT MEGASOFT LIMIT ED HAS PROVIDED SEGMENTAL BREAK-UP BETWEEN THE SOFTWARE SERVICES SE GMENT AND SOFTWARE PRODUCT SEGMENT (PAGE 68 OF PB-II), WHICH WAS ALSO ADOPTED BY THE TPO IN HIS SHOW CAUSE NOTICE (PAGE 84 OF PB-I). THE SEGMEN TAL RESULTS I.E., RESULTS PERTAINING TO SOFTWARE SERVICES SEGMENT OF THIS COM PANY WAS: SEGMENTAL OPERATING REVENUES RS.637132544 SEGMENTAL OPERATING EXPENSES RS.577513211 OPERATING PROFIT RS.8119619333 OP/TC (PLI) 23.11% 26. IT WAS REITERATED THAT IN THE GIVEN CIRCUMSTANC ES ONLY PLI OF SOFTWARE SERVICE SEGMENT VIZ., 23.11% OUGHT TO HAVE BEEN SEL ECTED FOR COMPARISON. 27. IT WAS FURTHER SUBMITTED THAT THE LEARNED TPO I N CASE OF OTHER COMPARABLE, SIMILARLY PLACED, HAD ADOPTED THE MARGI NS OF ONLY THE SOFTWARE SERVICE SEGMENT FOR COMPARABILITY PURPOSES . CONSISTENT WITH SUCH STAND, IT WAS SUBMITTED THAT THE MARGINS OF TH E SOFTWARE SEGMENT PAGE 26 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 ONLY SHOULD BE ADOPTED IN THE CASE OF MEGASOFT ALSO , IN CONTRAST TO THE ENTITY LEVEL MARGINS. 28. COMPUTATION OF THE NET MARGIN FOR MEGA SOFT LTD . IS THEREFORE REMITTED TO THE FILE OF THE TPO TO COMPUTE THE CORRECT MARGI N BY FOLLOWING THE DIRECTION OF THE TRIBUNAL IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA PVT.LTD.' 23. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE DIRECT THE AO/TPO TO COMPUTE THE CORRECT MARGIN OF MEGA SOFT LTD., AS DIRECTED BY THE TRIBUNAL IN THE CASE OF FIRST ADVAN TAGE OFFSHORE SERVICES PVT. LTD. (SUPRA). ACCORDINGLY WE HOLD THAT MEGASOFT LTD CAN BE CONSID ERED AS A GOOD COMPARABLE AFTER SEGMENTATION AS DIRECTED IN THE AB OVE ORDER IS DONE.' 5.2.1 THERE IS NOTHING ON RECORD BROUGHT BY AUTHORITIES BELOW THAT FACTUAL OBSERVATIONS BY THIS (TRIBUNAL) IN (MERITOR LVS (SUPRA)) IS INCORRECT. IN ALL THE ABOVE COMPARABLES IT HAS BEEN OBSERVED THAT IT CANNOT BE USED AS COMPARABLES TO DETERMINE ALP OF A RISK MITIGATED, CONTRACT SERVICE PROVIDER. 5.2.2 ACCORDINGLY, FOLLOWING THE ABOVE ORDER WE DIRECT EXCLUSION OF AVANI CIMCON TECHNOLOGIES LTD, CELESTIAL LABS LT D, E-ZEST SOLUTIONS LTD, INFOSYS TECHNOLOGIES LTD, KALS INFOR MATION SYSTEMS LTD(SEG), WIPRO LTD (SEG), HELIOS & MATHES ON INFORMATION TECHNOLOGY LTD, PERSISTENT SYSTEMS LTD, TATA ELXSI LTD (SEG) AND THIRDWARE SOLUTIONS LTD. 5.2.3 IN SO FAR AS MEGASOFT SOLUTIONS LTD IS CONCERNED, WE DIRECT LD.AO/TPO TO REWORK SEGMENTAL RESULTS AND CONSIDER ITS COMPARABILITY ONLY WITH REGARD TO SOFTWARE DEVELOPM ENT SERVICES SEGMENT. 5.3 ISHIR INFOTECH LTD THIS COMPARABLE WAS INCLUDED BY LD.TPO AND OBJECTED BY ASSESSEE FOR ITS FUNCTIONAL DISSIMILARITIES. IT HA S BEEN SUBMITTED THAT, INFORMATION OF OBTAINED UNDER 133 (6) BY LD.A O IS PLACED AT PAGE 27 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 PAGE 1061-1064 OF PAPER BOOK WHEREIN THIS COMPANY I S INVOLVED IN DIVERSIFIED ACTIVITIES LIKE APPLICATION DEVELOPM ENT AND MAINTENANCE,, TESTING SERVICES, WEB DEVELOPMENT SER VICES, INTERNET BASED APPLICATION, E-COMMERCE APPLICATION, CONSULTING SERVICES. IT IS ALSO BEEN SUBMITTED THAT ALL THESE SERVICES HAVE BEEN CATEGORISED UNDER ONE SINGLE AHEAD OF SOFTWARE DEVELOPMENT SERVICES 5.4 LD.AR SUBMITTED THAT, THIS TRIBUNAL IN CASE MERITOR LVS INDIA (P)LTD., BY THIS TRIBUNAL REPORTED IN (2015) 64 TAXMANN.COM 136 FOR AY: 2007-08 HELD THAT, THIS COMPANY IS NOT COMPARABLE IN CASE OF CAPTIVE SOFTWARE DEVELOPMENT SERVICES PROVI DER LIKE ASSESSEE. 5.5 THE LD.DR HOWEVER OBJECTED TO THE EXCLUSION OF TH IS COMPANY FROM THE LIST OF COMPARABLES. 5.6 ON A CAREFUL PERUSAL OF MATERIAL ON RECORD, AND T HE REPLY RECEIVED FROM THIS COMPANY UNDER SECTION 133 (6) WE FIND THAT THIS COMPANY IS INVOLVED IN VARIOUS ACTIVITIES AS C OMPARED TO CAPTIVE SOFTWARE SERVICE PROVIDER LIKE ASSESSEE. IT IS ALSO OBSERVED THAT IN THE CASE OF MERITOR LVS INDIA PVT LTD (SUPRA) LD.TPO USED VERY SAME 26 COMPARABLES FOR COMPUTING ARMS LENGTH MARGIN OF SOFTWARE DEVELOPMENT SERVICE SEGMENT DIRECT. THIS T RIBUNAL AFTER CONSIDERING THE FUNCTIONS PERFORMED BY THIS COMPANY WAS OF THE OPINION THAT IT IS NOT COMPARABLE TO OURS CAPTIVE S OFTWARE DEVELOPMENT SERVICE PROVIDER. FOR COMING TO THIS PR EPOSITION THIS TRIBUNAL RELIED UPON DECISION OF THIS TRIBUNAL IN C ASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT LTD VS DCIT IN ITA (TP) NO. 1086/B/2011 FOR ASSESSMENT YEAR 2007-08. PAGE 28 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 RESPECTFULLY FOLLOWING DECISIONS OF THIS TRIBUNAL, WE DIRECT LD.AO/TPO TO EXCLUDE THIS COMPANY FROM THE FINAL LI ST. ACCORDINGLY GROUND NO. 3 STANDS DISPOSED OFF HEREIN ABOVE. 6. GROUND NO.4 IS IN RESPECT OF DISALLOWANCE OF DEPRECIATION UNDER SECTION 40 (A) (IA) OF THE ACT, LD.AR SUBMITS THAT THIS ISSUE STANDS COVERED BY ORDER OF THIS TRIBUNAL IN CASE OF M/S WINTAC LTD VS DCIT IN ITA NO. 834/BE/2016 FOR ASSESSMENT YEAR 2010-11 BY ORDER DATED 13/04/2017 . 6.1 PLACING RELIANCE UPON THIS DECISION LD. AR SUBMITT ED THAT ONCE ASSESSEE HAS CAPITALISED THE EXPENDITURE AND O NLY CLAIMED DEPRECIATION THAN PROVISIONS OF SECTION 40 (A) (IA) OF THE ACT CANNOT BE INVOKED FOR DISALLOWANCE OF THE CLAIM OF DEPRECIATION. LD.CIT.DR SUBMITTED THAT THE ISSUE NEEDS VERIFICATI ON IN THE LIGHT OF SUBMISSIONS MADE BY LD.AR. HES REQUESTED FOR TH E ISSUE TO BE SET-ASIDE TO LD.AO. 6.2 WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDE S IN LIGHT OF RECORDS PLACED BEFORE US. 6.3 WE HAVE ALSO REFERRED TO THE DECISION RELIED UPON BY LD.AR IN CASE OF M/S WINTAC LTD VS DCIT (SUPRA) WHEREIN THIS TRIBUNAL RELYING UPON ANOTHER DECISION OF COORDINATE BENCH DATED 26/06/2015 IN CASE OF M/S KAWASAKI MICROELECTRONICS INC VS DDIT (INTERNATIONAL TAXATION) IN IT(TP) A NO.1512/2 010 REMITTED THE ISSUE BACK TO LD.AO FOR DUE VERIFICATION. 6.4 IT IS OBSERVED THAT THIS TRIBUNAL IN RATHORE OF CAS ES HAS ANALYSED APPLICABILITY OF SECTION 40(A)(I) OF THE A CT FOR DISALLOWANCE OF DEPRECIATION ON SUCH CAPITALISED EX PENDITURE AND PAGE 29 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 HAS HELD THAT NO SECTION 40 (A) (I) OF THE ACT, CAN NOT BE APPLIED FOR CLAIM OF DEDUCTION UNDER SECTION 32 OF THE ACT. HOW EVER BY WAY OF ABUNDANT CAUTION WE DIRECT LD.AO TO VERIFY THE F ACT WHETHER ASSETS IN RESPECT OF WHICH EXPENDITURE HAS BEEN CAP ITALISED HAVE BEEN USED FOR BUSINESS OF ASSESSEE FOR A PERIOD MOR E THAN 180 DAYS. AO SHALL VERIFY ALL THESE DETAILS IN LIGHT OF ARGUMENTS ADVANCED BY LD.AR. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. 7. GROUND NO. 5 IS IN RESPECT OF DISALLOWANCE UNDER SECTION 14 A OF THE ACT. 7.1 LD.AR SUBMITTED THAT ASSESSEE DO NOT WISH TO PRES S THIS GROUND. ACCORDINGLY THIS GROUND STANDS DISMISSED AS NOT PRESSED. 8. GROUND NO. 6 IS IN RESPECT OF NON-GRANTING OF BROUGHT FORWARD LOSSES. 8.1 LD.AR AT THE OUTSET SUBMITTED THAT LD.AO WHILE PAS SING THE FINAL ASSESSMENT ORDER HAS NOT FOLLOWED THE DIRECTI ONS OF DRP. 8.2 LD. AR SEEKS DIRECTIONS TO BE ISSUED TO LD.AO. LD.CIT DR DO NOT OBJECT TO THE ISSUE RAISED HEARING . ACCORDINGLY, WE DIRECT LD.AO TO CONSIDER THE CLAIM OF ASSESSEE AS PER THE DIRECTIONS OF DRP. 9. ACCORDINGLY, THIS GROUND RAISED BY ASSESSEE STA NDS ALLOWED FOR STATISTICAL PURPOSES. GROUND NO. 7 IS CONSEQUENTIAL IN NATURE AND THEREFORE DO NOT REQUIRE ADJUDICATION. PAGE 30 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 IN THE RESULT APPEAL FILED BY ASSESSEE STANDS ALLOW ED AS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 17TH MARCH, 2020. SD/- SD/- (A. K. GARODIA) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 17 TH MARCH, 2020. /VMS/ COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL. BANGALORE. PAGE 31 OF 31 IT(TP)A 673/BANG/2017 A. Y : 2007 08 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR 11-03-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 11-03-2020 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 11-03-2020 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 11-03-2020 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -03-2020 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -03-2020 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -03-2020 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS