Force 10 Networks India Private Limited, Bangalore V. DCIT, Bangalore

ITA 685/BANG/2015

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5005 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-04-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 05-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Business income; Transfer pricing; International transaction; Bad and doubtful debts; TDS
• Section: 92C; 143(3); 234B; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BENGALURU BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER IT (TP) A NO. 685 /BANG/201 5 (ASSESSMENT YEAR: 2010-11) M/S. FORCE 10 NETWORKS INDIA PVT. LTD. (MERGED WITH DELL INTERNATIONAL SERVICES INDIA PVT. LTD.,) DIVYASHREE GREENS III FLOOR, SURVEY NO.12/1, 12/2A, CHALLAGHATTA VILLAGE, VARTHUR HOBLI, BENGALURU-560 071. PAN:AAACF 8609 B VS. APPELLANT DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 3(1)(1), BENGALURU. RESPONDENT APPELLANT BY : SHRI K.R.VASUDEVAN, ADVOCATE. RESPONDENT BY : SHRI C.H.SUNDAR RAO, CIT(DR) DATE OF HEARING: 23/ 0 4 /2019 DATE OF PRONOUNCEMENT: 15/ 0 5 /2019 O R D E R PER PAVAN KUMAR GADALE, JM : THE ASSESSEE HAS FILED THE APPEAL AGAINST THE ASSES SMENT ORDER U/S 143(3) R.W.S. 144C DATED 20/02/2015 PASSE D IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTE RESOLUTI ON PANEL (DRP) DATED 18/12/2014. IT(TP)A NO.685/BANG/2015 PAGE 2 OF 16 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. TRANSFER PRICING 1. THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX (T RANSFER PRICING-IV), BANGALORE ('TRANSFER PRICING OFFICER' OR 'LEARNED TPO') GROSSLY ERRED IN DETERMINING AN ADJUSTMENT U/S 92CA OF THE INCOME- TAX ACT, 1961 TO THE ARM'S LENGTH PRICE ('ALP') OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES (''AES') WITH RESPECT TO THE INFORMATIO N TECHNOLOGY ENABLED SERVICES ('ITES'). 2. THE APPELLANT AGGRIEVED BY THE LEARNED TPO ORDER FURTHER APPEALED BEFORE THE DISPUTE RESOLUTION PANEL ('DRP' ) AGAINST THE TPO ORDER AND SUBSEQUENTLY, THE LEARNED ASSESSI NG OFFICER ('LEARNED AO') ISSUED THE FINAL ASSESSMENT ORDER WITH A TRANSFER PRICING ('TP') ADJUSTMENT OF INR 2,18,00 ,000/-. 3 THE LEARNED AO/LEARNED TPO ERRED IN REJECTING THE TP DOCUMENTATION MAINTAINED BY THE APPELLANT BY INVOKI NG PROVISIONS OF SUB-SECTION (3) OF 92C OF THE ACT CON TENDING THAT THE INFORMATION OR DATA USED IN THE COMPUTATION OF THE ALP IS NOT RELIABLE OR CORRECT. THE LEARNED AO/ LEARNED TP O HAS GROSSLY ERRED THEREFORE IN 3.A REJECTING COMPARABILITY ANALYSIS CARRIED IN T HE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMPARABILITY ANALYSIS BY INTRODUCING VARIOUS FILTERS IN DETERMINING THE ALP. 3.B REJECTING COMPANIES THAT ARE FUNCTIONALLY C OMPARABLE TO THE APPELLANT WHILE PERFORMING THE COMPARABILITY ANALYS IS. SPECIFICALLY, THE FOLLOWING COMPANIES OUGHT TO HAVE BEEN INCLUDED AS COMPARABLE: CRAZY INFOTECH LIMITED 3.C INCLUDING COMPANIES THAT DO NOT SATISFY THE TEST OF COMPARABILITY. SPECIFICALLY, THE FOLLOWING COMPANIES SELECTED AS F UNCTIONALLY COMPARABLE BY THE LEARNED AO / LEARNED TPO OUGHT TO HAVE BEEN REJECTED: KALS INFORMATION SYSTEMS LIMITED ICRA TECHNO ANALYTICS LIMITED TAKSHEEL SOLUTIONS LIMITED FCS SOFTWARE SOLUTIONS LIMITED SPRY RESOURCES INDIA PRIVATE LIMITED 4. THE LEARNED AO / LEARNED TPO ERRED IN NOT CONSID ERING THE MULTIPLE YEAR / PRIOR YEAR FINANCIAL DATA OF COMPAR ABLE COMPANIES WHILE DETERMINING THE ALP. 5. THE LEARNED AO / LEARNED TPO ERRED IN APPLICATIO N OF DIFFERENT FINANCIAL YEAR ENDING FILTER. 6. THE LEARNED AO / LEARNED TPO ERRED IN USING DATA AS AT THE TIME OF ASSESSMENT PROCEEDINGS, INSTEAD OF THAT AVA ILABLE AS ON THE DATE OF PREPARING THE TP DOCUMENTATION FOR C OMPARABLE IT(TP)A NO.685/BANG/2015 PAGE 3 OF 16 COMPANIES WHILE DETERMINING ALP. 7. THE LEARNED AO / LEARNED TPO ERRED IN APPLICATIO N OF EMPLOYEE COST FILTER OF 25%. 8. THE LEARNED AO / LEARNED TPO, WHILE GIVING WORKI NG CAPITAL ADJUSTMENT, ERRED IN COMPUTING THE SAME ADJUSTMENT. 9. THE LEARNED AO / LEARNED TPO ERRED IN NOT CONSID ERING THE PROVISION FOR BAD AND DOUBTFUL DEBTS AS OPERATING I N NATURE. 10. THE LEARNED AO / LEARNED TPO ERRED IN IGNORING THE LIMITED RISK NATURE OF THE CONTRACTUAL SERVICES PROVIDED BY THE APPELLANT AND IN NOT PROVIDING AN APPROPRIATE ADJUS TMENT TOWARDS THE RISK DIFFERENTIAL. EVEN WHEN THE FULL-F LEDGED ENTREPRENEURIAL COMPANIES ARE SELECTED AS COMPARABL E COMPANIES. II. CORPORATE TAX 1. RE-COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. THE LEARNED AO HAS ERRED IN RE-COMPUTING THE DEDUCT ION UNDER SECTION 10A BY REDUCING TRAVELLING EXPENDITURE IN F OREIGN CURRENCY FROM BOTH EXPORT TURNOVER AND TOTAL TURNOV ER OF THE UNDERTAKING WITHOUT APPRECIATING THAT THE SAME IS N OT SPECIFICALLY INCURRED FOR PROVIDING TECHNICAL SERVI CES OUTSIDE INDIA. 2. SHORT CREDIT OF TAX DEDUCTED AT SOURCE THE LEARNED AO HAS ERRED IN GRANTING CREDIT FOR TDS OF RS.1,140 INSTEAD OF RS.16,691 CLAIMED BY THE COMPANY. 3. INTEREST UNDER SECTION 234A OF THE ACT THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234A OF THE ACT AMOUNTING TO RS.43,957 WITHOUT CONSIDERING THE FACT THAT THE APPELLANT HAD FILED ITS RETURN WITHIN THE EXTEN DED DUE DATE. 4. INTEREST UNDER SECTION 234B OF THE ACT THE LEVY OF INTEREST UNDER SECTION 234B OF THE ACT IS CONSEQUENTIAL IN NATURE. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, RESCIND A ND MODIFY THE GROUNDS PROVIDED HEREIN ABOVE OR PRODUCE FURTHER DO CUMENTS, FACTS AND EVIDENCE BEFORE OR DURING THE COURSE OF HEARING OF THIS APPEAL. FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE RA ISED AT THE TIME OF HEARING, IT IS PRAYED THAT NECESSARY RELIEF MAY BE PROVIDED.1 IT(TP)A NO.685/BANG/2015 PAGE 4 OF 16 3. THE GROUNDS OF APPEAL NO.1, 2 AND 3(A) ARE GENER AL IN NATURE AND DO NOT REQUIRE ADJUDICATION. GROUND NO. 3(B) AND (C) IS THE PRAYER FOR INCLUSION AND EXCLUSION OF CO MPARABLES AND GROUND NOS.4 TO 10 ARE GENERAL AND CONSEQUENTIAL. IN THE CORPORATE GROUNDS, THE LEARNED AR HAS NOT PRESSED T HE GROUND NOS.1 AND 2 AND WHEREAS GROUND NOS.3 AND 4 IN REGAR D TO LEVY OF INTEREST U/S 234A AND 234B ARE CONSEQUENTIAL. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING SUPPORT SERVIC ES LIKE SOFTWARE TESTING, SOFTWARE ENHANCEMENTS, BUG FIXING , BUG TESTING, DEBUGGING AND OTHER INTERNET-BASED APPLICA TIONS FOR NETWORKING EQUIPMENTS LIKE SWITCHES AND ROUTERS FOR HIGH PERFORMANCE CLUSTER COMPUTING THE PROJECTS. THE AS SESSEE HAS FILED THE RETURN OF INCOME ELECTRONICALLY ON 11/10/ 2010 WITH TOTAL INCOME OF RS.8,22,500/- UNDER NORMAL PROVISIO NS OF THE OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT] AND B OOK PROFITS OF RS.1,70,28,286/- UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT. THE RETURN OF INCOME WAS PROCESSED U/S 14 3(1) OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT]. THE ASS ESSEE HAS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (AE) AS UNDER: IT(TP)A NO.685/BANG/2015 PAGE 5 OF 16 SL. NO. DESCRIPTION OF THE TRANSACTION AMOUNT (IN RS.) 1 PROVISION OF SOFTWARE DEVELOPMENT SERVICES 19,15,66,438 2 PROVISION OF MARKETING SUPPORT SERVICES 67,78,145 3 REIMBURSEMENT OF DIRECTORS REMUNERATION RECEIVED 2,00,000 4 REIMBURSEMENT OF EXPENSES PAID 30,64,849 TOTAL 20,16,09,432 5. ON REFERENCE TO THE TRANSFER PRICING OFFICER (TPO), THE TPO DEALT ON THE PROFILE OF THE COMPANY AND FUNCTIO NS PERFORMED BY THE ASSESSEE. THE ASSESSEE HAS ENTERE D INTO INTERNATIONAL TRANSACTIONS WITH ITS AE AND HAS ADOP TED TNMM AS THE MOST APPROPRIATE METHOD (MAM) FOR ITS IT ENABLE D SERVICES AND THE ASSESSEE-COMPANY ADOPTED OPERATING PROFIT T O OPERATING COST (OP/OC) AS PROFIT LEVEL INDICATOR FO R THE TRANSFERRING PRICING STUDY. THE ASSESSEE-COMPANY EARNED MARGIN OF 9.47% FOR SOFTWARE DEVELOPMENT SERVICES A ND HAS SELECTED 16 COMPARABLES WITH SPECIFIC CRITERIA AND FILTER REFERRED AT PAGE 7.2 OF THE TPOS ORDER. THE TPO HAS ANALYZ ED THE COMPARABLES SELECTED BY THE ASSESSEE-COMPANY AT PAR A.7.4 AND APPLIED THE FILTERS. THE TPO REJECTED THE ASSE SSEES TRANSFER PRICING STUDY AND APPLIED FILTERS REFERRED AT PARA.8 OF THE ORDER AS UNDER: 1 ALL INDUSTRIES - SERVICES - IT 2 FINANCIALS NOT AVAILABLE 3 SALES ABOVE 1 CRORE TO 200 CRORE 4 (TRADING+RENTAL)/SALES)*100<30% SELECTED 5 CONSECUTIVE LOSSES WERE REJECTED 6 RPT IS MORE THAN 25% WERE REJECTED IT(TP)A NO.685/BANG/2015 PAGE 6 OF 16 7 EXPORT TURNOVER ABOVE 75% ARE SELECTED 8 FUNCTIONALLY DISSIMILAR THE TPO HAS CONSIDERED 20 COMPARABLE COMPANIES AND THE ARITHMETIC AVERAGE OF OPERATING PROFIT MARGIN IS CO MPUTED AT 25.46%. THE TPO MADE ANALYSIS AND GAVE REASONS FOR REJECTING THE TRANSFER PRICING DOCUMENTS: SL.NO NAME OF THE COMP COMPANY MARGIN (%) 1 MANIPAL DIGITAL SYSTEMS PVT. LTD. 22.05 2 KALS INFORMATION SYSTEM LTD 36.25 3 SPRY RESOURCES INDIA PVT LTD 33.01 4 ICRA TECHNO ANALYTICS LTD 28.89 5 CTIL(COMP-U-LEARNTECH INDIA LTD) 16.94 6 TAKSHEEL SOLUTIONS LTD 41.92 7 THINKSOFT GLOBAL SERVICES LTD 17.27 8 NUCLEUS SOFTWARE EXPORTS LTD 20.59 9 R.S.SOFTWARE (INDIA) LTD 10.59 10 FCS SOFTWARE SOLUTIONS LTD 49.12 11 ACCELYA KALE CONSULTANTS LTD 21.11 12 TECNOTREE CONVERGENCE LTD 33.39 13 VIRINCHI TECH LTD 21.13 14 15 PERSISTENT SYSTEMS LTD. 15.40 EXENSIS SOFTWARE SOLUTIONS LTD 31.99 16 PENTA MEDIA GRAPHICS LTD 39.72 17 FIRST OBJECT TECHNOLOGIES LTD. 21.91 18 TANLA SOLUTIONS LTD. 14.05 19 AFTEK LIMITED 30.26 20 TELEDATA MARINE SOLUTIONS LTD. 18.79 AVERAGE 25.46 AND AFTER TEST CHECKING SELECTED 9 COMPARABLES AND THE AVERAGE ARITHMETIC MEAN BEING AT 25.90% AS UNDER: IT(TP)A NO.685/BANG/2015 PAGE 7 OF 16 SL.NO NAME OF THE COMP COMPANY MARGIN(%) 1 AKSHAY SOFTWARE TECH LTD (-)0.91 2 KALS INFORMATION SYSTEM LTD 36.25 3 SPRY RESOURCES INDIA PVT LTD 33.01 4 ICRA TECHNO ANALYTICS LTD 28.89 5 CTIL(COMP-U-LEARN TECH INDIA LTD) 16.94 6 TAKSHEEL SOLUTIONS LTD 41.92 7 THINKSOFT GLOBAL SERVICES LTD 17.27 8 R.S.SOFTWARE (INDIA) LTD 10.59 9 FCS SOFTWARE SOLUTIONS LTD 49.12 AVERAGE 25.90 THE TPO DEALT ON THE USAGE OF MULTIPLE YEAR DATA AN D COMPUTED THE AVERAGE PROFIT MARGIN OF THE COMPARABLES IN RES PECT OF SOFTWARE DEVELOPMENT SERVICES AND GAVE THE WORKING CAPITAL ADJUSTMENT AND DETERMINED THE ARMS LENGTH PRICE (A LP) WITH ADJUSTMENT OF RS.2.18 CRORES WHICH IS AS UNDER: ALP CALCULATION: VALUE OF TRANSACTION WITH AE = 19.16 CR. MARGIN OF THE ASSESSEE COMPANY = 13.04% MARGIN OF THE COMPARABLE COMPANIES = 25.90% IF COST MARKUP (%) SALE 100 13.04 113.04 100 25.90 125.90 ALP OF THE TRANSACTION = 19.16X125.90/113.04 = 21.3 4 CR. + 5% RANGE = RS.22.40 CR. COME TO RS.20.27 CR. ADJUSTMENT REQUIRED = RS.2.18 CRORE THE TPO PASSED THE ORDER U/S 92CA(3) DATED 7/1/2014 . THE AO PASSED THE DRAFT ASSESSMENT ORDER WITH TRANSFER PRICING ADJUSTMENTS AND OTHER ADDITIONS U/S 10A AND ASSESSE D THE IT(TP)A NO.685/BANG/2015 PAGE 8 OF 16 INCOME AT RS.2,27,91,617/- VIDE ORDER U/S 143(3) R. W.S. 92CA AND 144C DATED 23/1/2014. 6. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE ASS ESSEE FILED OBJECTIONS BEFORE THE DISPUTE REDRESSAL PANEL (DRP) THE DRP UPHELD THE VALIDITY AND REFERENCE TO THE TPO AN D PASSED ORDER ON 18/12/2014. THE AO PASSED THE FINAL ASSES SMENT ORDER U/S 143(3) R.W.S. 144C DATED 20/02/2015. 7. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS FILED A N APPEAL BEFORE THE TRIBUNAL. AT THE TIME OF HEARING, LEARN ED AR SUBMITTED THAT THE COMPARABLE M/S.CRAZY INFOTECH LT D., SELECTED BY THE ASSESSEE BUT WAS EXCLUDED BY THE T PO AS IT IS ENGAGED IN HARDWARE AND TRAINING. WHEREAS THE LEARN ED AR RELIED ON THE ANNUAL REPORT AT PAGE 255 OF THE PAPE R BOOK WHERE SEGMENTAL INFORMATION IS PROVIDED WITH COMPUT ER HARDWARE AND SOFTWARE DEVELOPMENT AND IT TRAINING A ND SEGMENTAL RESULTS ARE AVAILABLE. WHEREAS THE LEARNE D DR EMPHASIZED THAT THE TPO HAS EXCLUDED FOR VALID REAS ONS AND THERE IS A NEGATIVE SEGMENTAL RESULTS AND ENGAGED I N SOFTWARE DEVELOPMENT AND THE LEARNED AR PRAYED FOR INCLUSION OF THIS COMPANY. 8. THE LEARNED AR FURTHER SUBMITTED FOR EXCLUS ION OF KALS INFORMATION SYSTEMS LTD. BECAUSE IT IS FUNCTIONALLY DIFFERENT PREDOMINANTLY A PRODUCT COMPANY AND SEGMENTAL INFOR MATION IT(TP)A NO.685/BANG/2015 PAGE 9 OF 16 IS NOT AVAILABLE. THE LEARNED AR SUPPORTED HIS STAN D RELYING ON THE TRIBUNAL DECISION IN THE CASE OF SELLA SYNERGY INDIA PVT. LTD. VS. DCIT(2016) 75 TAXMANN.COM 286 (CHENNAI TRIB). 8.1 SIMILARLY, THE LEARNED AR ALSO PRAYED FOR EXCLUSION OF ICRA TECHNO ANALYTICS LTD., AS IT IS FUNCTIONALLY D IFFERENT AND PROVIDES DIVERSIFIED SERVICES AND SEGMENTAL DATA BR EAK-UP IS NOT AVAILABLE AND RELIED ON THE TRIBUNAL DECISION I N SELLA SYNERGY INDIA PVT. LTD. (SUPRA). 8.2 THE LEARNED AR ARGUED FOR EXCLUSION OF COMPA RABLE COMPANY M/S.TAKSHEEL SOLUTIONS LTD.., THE COMPANY P ROVIDES DIVERSIFIED SERVICES WITHOUT SEGMENTAL BREAK-UP AND FAILS EMPLOYEE COST FILTER AND RELIED ON ITAT DECISION IN DCIT VS. WABCO TVS LTD. IN ITA NO.883/MDS/2015 & CO NO.51/MDS/2015. 8.3 THE LEARNED AR PRAYED THAT FCS SOFTWA RE SOLUTIONS LTD., IS FUNCTIONALLY DIFFERENT AND DIVERSIFIED WIT HOUT SEGMENTAL BREAK-UP AND REFERRED TO ANNUAL REPORT AND RELIED O N THE DECISION OF TIBCO SOFTWARE INDIA PVT. LTD. VS. DCIT IN IT(TP)A NO.276 & 334/PUNE/2015 WHERE SEGMENTAL DETAILS ARE AVAILABLE. 8.4 FINALLY, LEARNED AR PRAYED THAT SPRY RESOUR CES INDIA PVT.LTD., IS FUNCTIONALLY DIFFERENT AND IS ENGAGED IN DIVERSIFIED IT(TP)A NO.685/BANG/2015 PAGE 10 OF 16 SERVICES AND SEGMENTAL DATA IS NOT AVAILABLE AS AGA INST LOW-END SERVICES OF THE ASSESSEE AND RELIED ON SELLA SYNERGY INDIA PVT. LTD. (SUPRA) FOR EXCLUSION. 9. CONTRA, THE LEARNED DR ARGUED THAT CRAZY INF OTECH LTD., CANNOT BE INCLUDED AND REFERRED TO ANNUAL REPORT PL ACED AT PAGE 251 OF THE PAPER BOOK WHERE EXPORT TURN OVER I S NIL WHEREAS 75% OF THE REVENUE IS FROM OTHER OPERATIONS AND PRAYED FOR NOT INCLUDING THIS COMPANY. IN RESPECT OF INCLUSION OF COMPARABLES KALS INFORMATION SYSTEMS LTD., THE L EARNED DR REFERRED TO PAGE 251 AND IT IS FUNCTIONALLY DIFFERE NT. SIMILARLY, ICRA TECHNO ANALYTICS LTD., HAS WEB BUSINESS AND IT TALLIES WITH ASSESSEES FUNCTIONAL PROFILE AND HAS TO BE INCLUDE D. IN RESPECT OF TAKSHEEL SOLUTIONS, THE OPERATING EXPENSES ARE O N HIGHER SIDE AND IT HAS TO BE EXAMINED IN COMPARISON WITH A SSESSEES PRODUCT. SIMILARLY, LEARNED DR VEHEMENTLY ARGUED TH AT TPO HAS CORRECTLY EXCLUDED FCS SOFTWARE (INDIA) LTD., AND S PRY RESOURCES INDIA LTD., FROM THE LIST OF COMPARABLES AND PRAYED FOR DISMISSING OF THE ASSESSEES APPEAL. 10. WE HEARD THE RIVAL SUBMISSIONS AND PERUS ED MATERIAL ON RECORD. PRIMA FACIE, IN RESPECT OF INCLUSION OF M/S.CRAZY INFOTECH LTD., AFTER CONSIDERING THE TPOS OBSERVAT ION AND THE DRP FINDING, M/S.CRAZY INFOTECH LTD., IS IN DIFFERE NT LINE OF BUSINESS AS THE CURRENT BUSINESS OPERATIONS ARE OF SALE OF IT(TP)A NO.685/BANG/2015 PAGE 11 OF 16 COMPUTER HARDWARE AND ERP SOFTWARE DEVELOPMENT, IT EDUCATION AND TRAINING AND IN JOB PORTAL FOR PLACEM ENT AND RETIREMENT AND CANNOT BE INCLUDED AND ACCORDINGLY W E CONFIRM THE ACTION OF TPO IN EXCLUDING THE COMPARABLE. 10.1 WHEREAS IN RESPECT OF EXCLUSION OF M/S.KALS INFORMATION SYSTEMS LTD., AND M/S.SPRY RESOURCES INDIA PVT. LTD ., WE FOUND THESE COMPANIES ARE FUNCTIONALLY DIFFERENT AND NO S EGMENTAL DATA BREAK-UP AND PRIMARILY A SOFTWARE PRODUCT COMP ANY AND EVIDENT FROM THE ANNUAL REPORTS AND HOLDS NEARLY 26 % OF ITS REVENUE IN THE FORM OF INVENTORY AND TPO HAS IGNORE D THE FACT REPORTED IN THE AUDITED STATEMENT AND THE COMPANY I S FULL- FLEDGED SOFTWARE PRODUCT DEVELOPMENT COMPANY AND PR OVIDES IMPLEMENTATION AND MAINTENANCE OF SOFTWARE PRODUCTS . WE SUPPORT OUR VIEW RELYING ON THE DECISION OF THE CHE NNAI BENCH OF TRIBUNAL IN THE CASE OF SELLA SYNERGY INDIA PVT. LTD. (SUPRA): 7.3 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERI AL ON RECORD AND JUDICIAL DECISIONS CITED. IN KALS INFORM ATION SYSTEMS LTD, THE MARGIN WORKED OUT BY THE LD. TPO BEING 36. 25. THE CONTENTION THAT THIS COMPANY IS CREATING AND PROVID ING 3D ANIMATION SOFTWARE CONTENT AS A CAPTIVE SERVICE PRO VIDER TO ITS ASSOCIATED ENTERPRISE. THE COMPANY IS PROVIDING SOF TWARE DEVELOPMENT ACTIVITIES AND QUALITY ASSURANCES SERVI CES TO ITS ASSOCIATED ENTERPRISE ON AN EXCLUSIVE BASIS AND ALS O PROVIDES SOFTWARE MAINTENANCE SUPPORT FUNCTIONS LIKE DOCUMEN TATION OF THE PROGRAMMED CODE, IT INTEGRATION AND CONFIGURATI ON MANAGEMENT TO ITS ASSOCIATED ENTERPRISE AND IT IS A PRODUCE DEVELOPMENT COMPANY AND RELIED ON THE JUDICIAL DECISIONS IKANOS COMMUNICATION INDIA (P.) LTD. ( SUPRA ), CNO IT SERVICES (INDIA) (P.) LTD. ( SUPRA ), LIONBRIDGE TECHNOLOGIES (P.) LTD. ( SUPRA ), OBOPAY MOBILE TECHNOLOGY INDIA (P.) LTD. ( SUPRA ), PAREXEL INTERNATIONAL (INDIA) (P.) IT(TP)A NO.685/BANG/2015 PAGE 12 OF 16 LTD. ( SUPRA ), PEGASYSTEMS WORLDWIDE INDIA (P.) LTD. ( SUPRA ) - LEXREPORTED AND PRANA STUDIOS (P.) LTD. ( SUPRA ). 7.4 THE COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY AS THE COMPANY IS IN PROVIDING 3D ANIMATION AS CAPTIVE SERVICE PROVIDER AND ALSO PROVIDE SOFTWARE DEVELOPM ENT ACTIVITIES AND SEGMENTAL INFORMATION IS NOT AVAILAB LE. HENCE, WE ACCEPT THE CONTENTION OF THE LD. AUTHORISED REPRESE NTATIVE AND THIS COMPANY IS EXCLUDED FROM THE COMPARABLES AND W E DIRECT THE LD. TPO TO EXCLUDE THIS COMPANY FROM COMPARABLE S. IN VIEW OF THE ABOVE FACTS AND DETAILS AND RATIO OF JUDGMENT, WE DIRECT THE TPO TO EXCLUDE THE COMPARABLE. 10.2 IN RESPECT OF COMPARABLE COMPANY M/S.SPRY R ESOURCES, INDIA PVT. LTD., WHICH IS IN SOFTWARE CONSULTANCY, PRODUCT SALE AND HAS PROVISION OF SOFTWARE SERVICES AND ALSO IMP ART COMPUTER TRAINING ENTREPRENEUR RESOURCES, PLANNING AND PROVISION OF ERP SOLUTION TO ITS CUSTOMERS AND NO C LARITY ON REVENUE RECOGNITION FROM THE ANNUAL REPORT AND WE F OUND THE CHENNAI BENCH OF TRIBUNAL IN THE CASE OF SELLA SYNERGY INDIA PVT. LTD. (SUPRA) HAS OBSERVED AS UNDER: 6.6 IN SPRY RESOURCES INDIA PVT. LTD THE LD. TPO WORKED OUT MARGIN AT 22.37. THE COMPANY WOULD UNDERTAKE MAINTE NANCE PROJECTS FOR THE DEVELOPMENT PROJECTS CONCLUDED IN THE PREVIOUS YEAR. COMPANY TO FOCUS ON E-GOVERNANCE. HOWEVER, PR OFIT AND LOSS ACCOUNT DOES NOT SHOW ANY REVENUE FROM MAINTEN ANCE PROJECTS. AS PER REVENUE RECOGNITION POLICY, THE CO MPANY HAS REVENUE FROM SALE OF SOFTWARE. HOWEVER, NO FURTHER SEGMENTAL IS AVAILABLE TO SHOW SALE OF SOFTWARE. HENCE, THE FINA NCIAL STATEMENTS ARE NOT RELIABLE. 6.7 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD. AS PER THE ANNUAL REPORT OF THE COMPANY, TH E COMPANY HAS EARNED REVENUE FROM SOFTWARE CONSULTANCY AND SA LE OF SOFTWARE PRODUCTS AND THERE IS NO BREAKUP OF REVENU E SEGMENT IT(TP)A NO.685/BANG/2015 PAGE 13 OF 16 WISE BETWEEN SOFTWARE PRODUCTS AND SOFTWARE SERVICE S. THE OPERATING INCOME @16% FROM WORK IN PROGRESS AND THE SOFTWARE CONSULTANCY AND PRODUCTS FUNCTIONS DIFFER FROM SOFT WARE DEVELOPMENT ACTIVITIES CARRIED OUT BY THE ASSESSEE. SINCE THERE IS NO SEGMENTAL INCOME AND COMPANY IS NOT FUNCTIONALLY IN COMPARABLES, WE ARE INCLINED TO ACCEPT THE CONTENTI ON OF THE LD. AUTHORISED REPRESENTATIVE AND COMPANY SHOULD BE EXC LUDED FROM THE COMPARABLES. ACCORDINGLY, WE DIRECT THE LD . TPO TO EXCLUDE THE COMPANY FROM COMPARABLES. CONSIDERING THE CIRCUMSTANCES AND THE INFORMATION A ND THE DECISION, WE DIRECT THE TPO/AO TO EXCLUDE THE COMPA RABLE FROM THE LIST OF COMPARABLES FOR DETERMINATION OF ALP. 10.3 WHEREAS IN THE MATTER OF COMPARABLE COMPAN Y M/S. ICRA TECHNO ANALYTICS LTD., WHERE THE COMPANY IS EN GAGED IN PROVISION OF VARIETY OF SERVICES BEING SOFTWARE PRO DUCTS, CONSULTANCY, ENGINEERING SERVICES, WEB SERVICES AND DIVERSIFIED INTO DOMAIN OF BUSINESS ANALYTICS AND BUSINESS PROC ESS OUTSOURCING AND NO SEGMENTAL DATA AVAILABLE AND ALS O IN KPO SERVICES AND THE CHENNAI BENCH OF TRIBUNAL HELD IN THE CASE OF SELLA SYNERGY INDIA PVT. LTD. (SUPRA) AS UNDER: 7.8 WE ON PERUSAL FOUND THAT THE SAID COMPARABLE C OMPANY ICRA IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT & C ONSULTANCY, ENGINEERING AND DIVERSIFIED INTO DOMAIN OF BUSINESS ANALYTICS AND BUSINESS PROCESSING OUTSOURCING AND EARNED ITS REVENUE FROM SOFTWARE DEVELOPMENT, CONSULTANCY, LICENSING, SUB- LICENSING AND OTHERS. AS PER THE ANNUAL REPORT, THE REVENUE RECOGNITION FROM SALE IS RECOGNIZED AS AND WHEN DEL IVERY OF BRANDED SOFTWARE IS MADE BOOKED AT NET TRADE DISCOU NT AND IN RESPECT OF DEVELOPMENT AND CONSULTANCY, LICENSING A ND SUB- LICENSING FEE. THE REVENUE IS RECOGNIZED TO THE EXT ENT OF SERVICES ARE PERFORMED. HOWEVER, THERE IS NO BREAKUP OF REVE NUE DEVELOPMENT SOFTWARE DEVELOPMENT SERVICES AND OTHER SERVICES. THE ASSESSEE COMPANY HAS NOT DISCLOSED SEPARATE SEG MENTS FOR ASCERTAINING PROFITABILITY AND ALSO CANNOT BE REGAR DED FOR THE IT(TP)A NO.685/BANG/2015 PAGE 14 OF 16 PURPOSE OF TNM ANALYSIS. WE ARE OF THE OPINION THAT THE SAID COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARA BLES AND WE DIRECT THE LD. TPO TO EXCLUDE. ACCORDINGLY, WE DIRECT THE TPO TO EXCLUDE THIS COMP ARABLE. 10.4 WHEREAS IN THE CASE OF M/S TAKSHEEL SOLUTIO NS, AS POINTED OUT BY THE LEARNED DR THE MATTER HAS TO BE RE-LOOKED AND EXAMINED AS IT IS MAINLY ENGAGED IN SOFTWARE DE VELOPMENT, COMMUNITY SERVICES, SOFTWARE PRODUCTS AND PROVISION OF INTANGIBLE ASSETS IN THE BOOKS AND SEGMENTAL INFOR MATION IS NOT AVAILABLE AND EMPLOYEE COST TO TOTAL SALES IS 2.53% AND FAILS EMPLOYEE COST FILTER. ACCORDINGLY, WE SET ASI DE THIS COMPARABLE COMPANY TO THE FILE OF THE TPO/AO TO VER IFY AND EXAMINE THE OPERATIONS OF THE COMPANY. 10.5 LASTLY, WE FIND THAT THE LEARNED ARS CONTE NTION THAT M/S.FCS SOLUTIONS WHICH IS FUNCTIONALLY DIFFERENT A ND MAINLY INTO E-LEARNING SOLUTIONS AND MANAGES STRATEGIC BUS INESS UNIT OF IT COMMUNITY, EDUCATION AND INFORMATION MANAGEME NT AND FURTHER ALLOCATED MORE THAN 20% OF TIME OF SENIOR A ND SKILLED PROFESSIONAL TO RESEARCH AND DEVELOPMENT AND SUPPOR T OUR VIEW RELYING ON THE DECISION OF THE PUNE BENCH OF TRIBUN AL IN THE CASE OF TIBCO SOFTWARE INDIA (P) LTD., VS. DY.CIT [2017] 78 TAXMANN.COM 261 (PUNE-TRIB.) AT PARA.39 WHICH IS AS UNDER: IT(TP)A NO.685/BANG/2015 PAGE 15 OF 16 39. THE REVENUE IS IN APPEAL BEFORE US NOT ONL Y AGAINST EXCLUSION OF INFOSYS LTD., BUT ALSO AGAINST EXCLUSION OF FCS SOFTWARE LTD., WE FIND NO MERIT I N THE SAID PLEA OF THE REVENUE AS THE PRODUCT COMPANIES ARE FUNCTIONALLY NOT COMPARABLE TO THE CONCERNS ENGAGED IN PROVIDING SOFTWARE SERVICES TO ITS ASSOCIATE ENTERPRISES. ACCORDINGLY, WE UPHOLD THE ORDER OF DRP FOR EXCLUDING FCS SOFTWARE LTD., AND INFOSYS LTD. AND DIRECT THE TPO TO EXCLUDE THE COMPARABLE COMPAN Y. WE ORDER ACCORDINGLY. 11. GROUND NOS.3 AND 4 ARE IN REGARD TO CHARGING OF INTEREST U/S 234A AND 234B WHICH IS CONSEQUENTIAL AND THE LE ARNED AR HAS NOT ARGUED ANY OTHER GROUNDS OF APPEAL AND PART LY ALLOW THE GROUNDS OF APPEAL FOR STATISTICAL PURPOSES. 12. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH MAY, 2019. SD/- SD/- (B.R. BASKARAN) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : BENGALURU DATE : 31/05/2019 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)- 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE IT(TP)A NO.685/BANG/2015 PAGE 16 OF 16 BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE TRIBUNAL BANGALORE