DCIT, Bangalore V. M/s Netapp India Pvt. Ltd., Bangalore

ITA 687/BANG/2012

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 4075 (ITAT-BANGALORE)
• Duration Of Justice: 7 year(s) 9 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-02-2020
• Assessment Year: 2007-2008
• Appeal Filed On: 17-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G C SRIVASTAVA; UMASHANKAR S
• Assessee Lawyers: MUZAFFAR HUSSAIN
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Revenue expenditure; Set aside
• Section: 92C; 133(6); 13; 22

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 593/BANG/2012 ASSESSMENT YEAR : 2007 08 M/S. NETAPP INDIA PVT. LTD., (FORMERLY NETWORK APPLIANCE SYSTEMS (INDIA) PVT. LTD.,), 3 RD FLOOR, FAIR WINDS BLOCK, EGL SOFTWARE PARK, OFF INTERMEDIATE RING ROAD, BANGALORE 560 071. PAN NO : AABCN 4063 A VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(2), BANGALORE. APPELLANT RESPONDENT & IT(TP)A 687/BANG/2012 ASSESSMENT YEAR : 2007 08 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(2), 14/3, 4 TH FLOOR, RASTROTHANA BHAVAN, (OPP. RBI), NRUPATHUNGA ROAD, BANGALORE 560 001. VS. M/S. NETAPP INDIA PVT. LTD., 3 RD FLOOR, FAIR WINDS BLOCK, EGL SOFTWARE PARK, OFF INTERMEDIATE RING ROAD, BANGALORE 560 071. PAN NO : AABCN 4063 A APPELLANT RESPONDENT APPELLANT BY : SHRI. G. C. SRIVASTAVA & SHRI. UMASHANKAR, ADVOCATES RESPONDENT BY : MR. MUZAFFAR HUSSAIN, CIT DR DATE OF HEARING : 13 - 02 - 2020 DATE OF PRONOUNCEMENT : 27 - 02 - 2020 PAGE 2 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT CROSS APPEALS HAVE BEEN FILED BY ASSESSEE AS WELL AS REVENUE AGAINST ORDER DATED 06/03/2012 PASSED BY LD. CIT(A)-4, BANGALORE, FOR ASSESSMENT YEAR 2007-08. ASSESSEE PLACES RELIANCE UPON REVISED GROUND OF APPEAL FILED APPLICATION DATED 11/09/2017. FOLLOWING ARE REVISED GROUNDS OF APPEAL FILED BY ASSESSEE : ITA NO. 593/B/2012 (ASSESSEE APPEAL) PAGE 3 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 ITA NO. 687/B/2012 (REVENUE APPEAL) PAGE 4 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 BRIEF FACTS OF THE CASE ARE AS UNDER: 2. ASSESSEE FILED ITS RETURN OF INCOME ON 30/10/2007 DECLARING TOTAL INCOME OF RS.88,89,272/-. RETURN WAS PROCESSED UNDER SECTION 143 (1) OF THE ACT AND CASE WAS SELECTED FOR SCRUTINY. ACCORDINGLY, NOTICE UNDER SECTION 143 (2) WAS ISSUED ON ASSESSEE ALONG WITH NOTICE UNDER SECTION 142 (1) AND QUESTIONNAIRE. LD.AO OBSERVED THAT, ASSESSEE HAD INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERPRISES FOR MORE THAN RS.15 CRORES AND PAGE 5 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 ACCORDINGLY REFERENCE TO TRANSFER PRICING OFFICER WAS MADE FOR DETERMINING. 2.1. ON RECEIPT OF REFERENCE, TRANSFER PRICING OFFICER CALLED UPON ASSESSEE TO FILE ECONOMIC DETAILS OF INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSEE WITH ITS ASSOCIATED ENTERPRISES IN FORM 3 CEB. LD.TPO OBSERVED THAT, ASSESSEE IS A SUBSIDIARY OF NETWORK APPLIANCE SERVICE INC, USA AND COMMENCED ITS OPERATION IN OCTOBER 2000. IT WAS OBSERVED THAT, ASSESSEE UNDERTOOK TO PROVIDE SALES SUPPORT SERVICES, SOFTWARE DEVELOPMENT SERVICES AND TECHNICAL SUPPORT SERVICES. LD.TPO OBSERVED THAT, AS PER AGREEMENT WITH THE ASSOCIATED ENTERPRISES, NETWORK APPLIANCES INC., USA, ASSESSEE IS COMPENSATED ON COST +10% BASIS IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES AND TECHNICAL SUPPORT SERVICES. AS PER COMMISSION AGENCY AGREEMENT WITH AE, NETWORK APPLIANCES BV, NETHERLANDS, ASSESSEE IS COMPENSATED ON COST +5% BASIS IN RESPECT OF MARKETING SUPPORT SERVICES. 2.2. LD.TPO OBSERVED THAT, FOLLOWING WERE INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSEE: PARTICULARS RECEIVABLES (IN RUPEES) PAYABLES (IN RUPEES) PROVISION OF SOFTWARE DEVELOPMENT SERVICES 1,04,87,97,246/ - PROVISION OF SALES SUPPORT MARKETING SERVICES 16,34,02,241/ - PAYMENT OF ORACLE MAINTENANCE CHARGES 3,60,474/ - PROVISION OF TECHNICAL AND 3,04,54,765/ - PAGE 6 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 CUSTOMER SUPPORT SERVICES REIMBURSEMENT OF EXPENSES PAID 4,27,042/ - LD.TPO OBSERVED THAT, ASSESSEE USED TNMM AS MOST APPROPRIATE METHOD FOR SOFTWARE DEVELOPMENT SERVICES AND TECHNICAL AND CUSTOMER SUPPORT SERVICES (HEREINAFTER KNOWN AS ITES SERVICES) AND OP/TC AS PLI FOR COMPUTING THE MARGIN UNDER THESE SEGMENTS. ASSESSEE COMPUTED 10% TO BE ITS MARGIN FOR BOTH SEGMENTS UNDER DISPUTE. 2.3. FOR SOFTWARE DEVELOPMENT SEGMENT, ASSESSEE USED 18 COMPARABLES WITH AVERAGE MARGIN OF 13% AND 4 ITES SEGMENT ASSESSEE USED 12 COMPARABLES WITH AVERAGE MARGIN OF 12%. THUS, IT IS HELD THE PRICE TO BE AT ARMS LENGTH. LD.TPO REJECTED THE TRANSFER PRICING ANALYSIS CARRIED OUT BY ASSESSEE AS ACCORDING TO HIM IT SUFFERED CERTAIN DEFECTS. LD.TPO THUS APPLIED VARIOUS FILTERS TO REJECT COMPARABLES SELECTED BY ASSESSEE. 2.4. LD.TPO SELECTED NEW SET OF COMPARABLES UNDER BOTH SEGMENTS AS UNDER: SOFTWARE DEVELOPMENT SEGMENT SL. NO. COMPARABLES MARGIN MARGIN 1. ALLSEC TRANSMATIC LTD (SEG) 18.91% 2. AVANI CINCOM TECHNOLOGIES LTD 49.97% 3. CELESTIAL LABS LTD 53.06% 4. DATAMATICS LTD - 1.81% 5. E - ZEST SOLUTIONS LTD 34.85% PAGE 7 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 6. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 23.85% 7. GEOMETRIC LTD (SEG) 8.42% 8. HELIO AND MATHESON INFORMATION TECHNOLOGY LTD 33.23% 9. IGATE GLOBAL SOLUTIONS LTD 4.42% 10. INFOSYS TECHNOLOGIES LTD 37.76% 11 ISHIER INFOTECH LTD 29.20% 12. KALS INFORMATION SYSTEMS LTD 22.22% 13. LGS GLOBAL LTD 13.95% 14. LUCID SOFTWARE LTD 15.84% 15. MEDIASOFT SOLUTIONS LTD 0.39% 16. MEGASOFT LTD 0.12% 17. MINDTREE LTD (TP STUDY COMPARABLE) 4.16% 18. PERSISTENT SYSTEMS LTD 2.23% 19. QUINTENGRA SOLUTIONS LTD 8.04% 20. RS SOFTWARE INDIA LTD 1.93% 21. R SYSTEMS INTERNATIONAL LTD (SEG) 2.04% 22. SASKENCOMMUNICATIONS TECHNOLOGIES LTD (SEG) 9.88% 23. SIP TECHNOLOGIES AND EXPORTS LTD (TP STUDY COMPARABLE) 9.50% 24. TATA ELXSI LTD (SEG.) 4.96% 25. THIRDWARE SOLUTIONS LTD 0.32% 26. WIPRO LTD 3.27% AVERAGE MARGIN 21.95% 2.5. ITES SEGMENT SL. NO. COMPARABLES MARGIN MARGIN 1. MAPLE ESOLUTIONS LTD 29.30% 2. TRITON CORPN LTD 26.75% 3. ACCENTIA TECHNOLOGIES LTD 25.24% 4. ADITYA BIRLA MINACS WORLDWIDE LTD 10.12% PAGE 8 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 (TRANSWORKS INFORMATION SERVICES LTD) 5. ALLSEC TECHNOLOGIES LTD 24.80% 6. APPEX KNOWLEDGE SOLUTIONS LTD 12.13% 7. APOLLO HELD STREET LTD - 24.79% 8. ASIT C MEHTA FINANCIAL SERVICES LTD 21.88% 9. COSMIC GLOBAL LTD (TULSYAN TECHNOLOGIES LTD) 10.44% 10. DATAMATICS FINANCIAL SERVICES LTD (SEG) - 4.41% 11 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 5.14% 12. GENESIS INTERNATIONAL CORPORATION LTD 7.64% 13. ICRA TECHNO ANALYTICS LTD (SEG) 10.53% 14. INFOSYS BPO LTD 27.72% 15. I SERVICES INDIA LTD 47 .69% 16. R SYSTEMS INTERNATIONAL LTD (SEG) 17.40% 17. SPANCO LTD (SEG) 18.72% 18. BODHTREE CONSULTING LTD (SEG) 28.68% 19. CALIBRE POINT BUSINESS SOLUTIONS LTD 19.30% 20. ECLERX SERVICES LTD 85.27% 21. INFORMED TECHNOLOGIES LTD 33.92% 22. MOULD - TEK TECHNOLOGIES LTD 114.42% 23. VISHAL INFORMATION TECHNOLOGIES 41.44% 24. WIPRO LTD (SEG) 29.25% 25. ACCURATE DATA CONVERTERS LTD 47.27% 26. HCL COMNET LTD 43.16% 27. NITTYAN OUTSOURCING LTD 9.62% AVERAGE MARGIN 26.62% 2.6. 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.11,40,32,864/ - PAGE 9 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 ITES SEGMENT RS.46,01,438/ - AGGRIEVED BY PROPOSED ADJUSTMENT, ASSESSEE PREFERRED APPEAL BEFORE THE LD.CIT(A). LD.CIT(A) UPHELD OBJECTION REGARDING INCLUSION OF CERTAIN COMPARABLES UNDER BOTH SEGMENTS. AGAINST ORDER PASSED BY LD.CIT(A), BOTH ASSESSEE AS WELL AS REVENUE ARE IN APPEAL. 3. AT THE OUTSET LD.COUNSEL SUBMITTED THAT, IN REVISED GROUNDS OF APPEAL, ASSESSEE SEEKS EXCLUSION/INCLUSION OF FOLLOWING COMPARABLES UNDER BOTH SEGMENTS: SOFTWARE DEVELOPMENT SEGMENT COMPARABLE SOUGHT FOR EXCLUSION: AVANI CINCOMTECHNOLOGIES KALS INFORMATION SYSTEMS LTD LUCID SOFTWARE LTD E-ZEST SOLUTIONS LTD THIRDWARE SOLUTIONS LTD. PERSISTANT SYSTEMS LTD., ITES SEGMENT COMPARABLES SOUGHT FOR EXCLUSION: VISHAL INFORMATION TECHNOLOGIES LTD COMPARABLES SOUGHT FOR INCLUSION: FLEXTRONICS SOFTWARE SYSTEMS LTD 3.1. LD.COUNSEL SUBMITTED THAT, BY CONSIDERING ABOVE COMPARABLES FOR INCLUSION/EXCLUSION ASSESSEE WOULD BE WITHIN THE MARGIN OF +/-5%. HOWEVER, HE RESERVED HIS RIGHT TO ARGUE OTHER COMPARABLES IN AN APPROPRIATE SITUATION. PAGE 10 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 3.2. IN REVENUES APPEAL, FOLLOWING ARE THE COMPARABLES SOUGHT FOR INCLUSION UNDER BOTH SEGMENTS: SOFTWARE DEVELOPMENT SERVICE SEGMENT E INFOCHIPS LTD., CELESTIAL LABS LTD., INFOSYS TECHNOLOGIES LTD., FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) TATA ELXSI LTD (SEG) WIPRO LTD (SEG) ITES SEGMENT INFOSYS BPO LTD ECLERX SERVICES LTD MOLDTECH TECHNOLOGIES LTD WIPRO LTD 3.3. BEFORE WE UNDERTAKE COMPARABILITY ANALYSIS OF ABOVE COMPARABLES, IT IS SINE QUA NON TO UNDERSTAND FUNCTIONS PERFORMED, ASSETS OWNED AND RISKS ASSUMED BY ASSESSEE UNDER BOTH SEGMENTS AS OBSERVED BY LD. TPO IN ORDER PASSED UNDER SECTION 92C OF THE ACT. 3.3.1. SOFTWARE DEVELOPMENT SEGMENT FUNCTIONS PAGE 11 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 3.3.2. ITES SEGMENT FUNCTIONS THE TAXPAYER PERFORMS IT ENABLED SERVICES ON A CONTRACT BASIS TO ITS AE, NETAPP, US. AS PER THE SERVICES AGREEMENT FOR IT ENABLED SERVICES BETWEEN NETAPP INDIA AND NETAPP, USA. NETAPP INDIA WORKS COST PLUS MARK UP BASIS. PAGE 12 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 ASSETS AS IS COMMON IN THE CASE OF IT ENABLED SERVICE PROVIDER COMPANIES, THE TECHNICAL MANPOWER EMPLOYED AND TRAINED BY A COMPANY AND COMMUNICATION EQUIPMENT ARE ITS MOST IMPORTANT ASSET. TAXPAYER ALSO DEPLOYS WELL QUALIFIED WORKFORCE IN ITS BUSINESS. THE TAX PAYER ALSO OWNS COMPUTERS, SERVERS ETC WHICH ARE ESSENTIAL TO THE BUSINESS OF AN IT ENABLED COMPANY. DURING THE FINANCIAL YEAR 200506, THE ASSETS EMPLOYED BY NETAPP INDIA (AFTER DEPRECIATION) AS ON MARCH 31, 2006 ARE ALREADY DISCUSSED UNDER THE HEAD SOFTWARE DEVELOPMENT SERVICES. 3.3.3. BASED ON ABOVE FAR ANALYSIS UNDER BOTH SEGMENTS, ASSESSEE CAN BE CHARACTERISED AS CONTRACT SERVICE PROVIDER, FOR SOFTWARE DEVELOPMENT AND ITES SEGMENT, THAT ASSUMES LESS THAN NORMAL RISK ASSOCIATED WITH CARRYING OUT ITS BUSINESS. ASSESSEES APPEAL: 4. GROUND NO.1 IS GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 4.1.GROUND NO.3(I)&(IV),4,5 ARE IN RESPECT OF COMPARABLES ALLEDGED FOR EXCLUSION/INCLUSION UNDER SOFTWARE DEVELOPMENT SEGMENT AND INFORMATION TECHNOLOGIES SERVICE SEGMENT. 4.1.1. LD.COUNSEL SUBMITTED THAT, MOST OF THE COMPARABLES ALLEGED BY ASSESSEE AS WELL AS REVENUE FOR INCLUSION/EXCLUSION HAS BEEN CONSIDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200809 IN ITA.NO.881 AND CO.NO.156/B/2013 AND ASSESSMENT YEAR 200607 IN ITA NO.1480/B/2010. HE ALSO SUBMITTED THAT, ALL OTHER COMPARABLES HAVE BEEN CONSIDERED BY COORDINATE BENCH OF THIS TRIBUNAL IN M/S. MAGMA DESIGN PAGE 13 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 AUTOMATION INDIA PVT. LTD., FOR ASSESSMENT YEAR 2007 08 IN ITA NO. 1214/B/2011. 4.1.2. SOFTWARE DEVELOPMENT SEGMENT A. COMPARABLE SOUGHT FOR EXCLUSION: A) KAL S INFORMATION SYSTEMS LTD IT HAS BEEN SUBMITTED BY LD.COUNSEL THAT, THIS COMPARABLE WAS OBJECTED FOR FUNCTIONAL DISSIMILARITIES WITH ASSESSEE. HE IT HAS BEEN SUBMITTED THAT, REVENUE FROM SOFTWARE DEVELOPMENT IS MORE THAN 75% AND EARNS ITS REVENUE FROM SOFTWARE SERVICES AND PRODUCTS FOR WHICH THERE IS NO SEGMENTAL DETAILS AVAILABLE. LD. COUNSEL SUBMITTED THAT, THIS COMPANY WAS EXCLUDED BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006 07 AND 200809 (SUPRA). LD.CIT DR ON THE CONTRARY PLACED RELIANCE UPON ORDERS PASSED BY LD.CIT (A) AND SUPPORTED FOR ITS INCLUSION. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. IT IS OBSERVED THAT, BESIDES THE OBJECTIONS BY ASSESSEE, THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. FURTHER, FOR ASSESSMENT YEAR IMMEDIATELY PRECEDING YEAR UNDER CONSIDERATION THIS TRIBUNAL EXCLUDED THIS COMPANY FOR VERY SAME REASONS. REVENUE HAS NOT BROUGHT ANYTHING CONTRARY ON RECORD TO SHOW THAT THERE IS ANY CHANGE IN FINANCIALS OF THIS COMPARABLE FOR YEAR UNDER CONSIDERATION VIS-A-VIS ASSESSMENT YEAR 200607 & 2008 09. WE THEREFORE DO NOT FIND ANY REASON TO DEVIATE FROM VIEW TAKEN BY THIS TRIBUNAL IN ASSESSEES OWN CASE. PAGE 14 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 RESPECTFULLY FOLLOWING THE SAME, WE DIRECT LD. AO/TPO TO EXCLUDE THIS COMPARABLE FROM THE FINALIST. B) LUCID SOFTWARE LTD THIS COMPARABLE WAS INCLUDED BY LD.TPO AND OBJECTED BY ASSESSEE FOR ITS FUNCTIONAL DISSIMILARITIES. IT HAS BEEN SUBMITTED THAT, THIS COMPANY IS INVOLVED IN R & D WITH LEADING SCIENTIFIC INSTITUTIONS. LD.COUNSEL SUBMITTED THAT, THIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD., VS. DCIT IT(TP)A NO.1086/BANG/2011 FOR AY: 2007 08 HELD THAT, THIS COMPANY IS NOT COMPARABLE IN CASE OF SOFTWARE DEVELOPMENT SERVICES PROVIDER. THE NATURE OF SERVICES RENDERED BY ASSESSEE IN PRESENT APPEAL AND THE ASSESSEE IN CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD., (SUPRA) ARE ONE AND THE SAME. THIS FACT WOULD BE CLEAR FROM THE FACT THAT VERY SAME 26 COMPANIES WERE CHOSEN AS COMPARABLES IN CASE OF THE ASSESSEE AS WELL AS IN CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD., (SUPRA). LD.COUNSEL SUBMITTED THAT, THIS COMPANY IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE BASIS OF FINDING OF THIS TRIBUNAL IN CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD., (SUPRA) . HE SUBMITTED THAT, FACTS OF THE CASE BEFORE US ARE SIMILAR AND, THEREFORE, THE SAID DECISION IS APPLICABLE TO THE ASSESSEES CASE ALSO. THE LD.DR HOWEVER OBJECTED TO THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. ON A CAREFUL PERUSAL OF MATERIAL ON RECORD, WE FIND THAT THIS TRIBUNAL IN CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD., PAGE 15 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 (SUPRA) TOOK NOTE OF DISSIMILARITIES BETWEEN ASSESSEE THEREIN AND LUCID SOFTWARE LTD .,. AS OBSERVED THEREIN, THIS COMPANY WAS INVOLVED IN DEVELOPMENT OF SOFTWARE AS COMPARED TO CAPTIVE SOFTWARE SERVICE PROVIDER. AS THE FACTS OF THE CASE BEFORE US ARE SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH, WE HOLD THAT THESE 2 COMPANIES ARE ALSO TO BE EXCLUDED. RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNAL REFERRED TO ABOVE, WE DIRECT THE LD. AO/TPO TO EXCLUDE THIS COMPANY FROM FINAL LIST OF COMPARABLE. C) E-ZEST SOLUTIONS LTD., THIS COMPANY HAS BEEN SELECTED BY LD.TPO AND OBJECTED BY ASSESSEE ON THE GROUND THAT, IT WAS FUNCTIONALLY DIFFERENT FROM ASSESSEE. LD.TPO REJECTED CONTENTIONS OF ASSESSEE ON THE BASIS OF INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) OF THE ACT, WHEREIN IT WAS HELD THAT THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES. IT WAS THUS HELD BY LD.TPO THAT THIS COMPANY SATISFIES ALL FILTERS. LD.COUNSEL SUBMITTED THAT, THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT TO THE ASSESSEE. HE SUBMITTED THAT THIS COMPANY IS ENGAGED IN E-BUSINESS CONSULTING SERVICES, CONSISTING OF WEB STRATEGY SERVICES, I T DESIGN SERVICES AND IN TECHNOLOGY CONSULTING SERVICES INCLUDING PRODUCT DEVELOPMENT CONSULTING SERVICES, AND ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES. IT IS FURTHER SUBMITTED THAT, THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA IN ITS ANNUAL REPORT, AND DOES NOT CONTAIN DETAILED DESCRIPTIVE PAGE 16 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 INFORMATION ON THE BUSINESS OF THE COMPANY. IT IS ALSO SUBMITTED THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CONSIDERED AS COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES. IN SUPPORT OF, HE PLACED RELIANCE ON DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF HEWLETT PACKARD (I) LTD., VS. DCIT IN ITA NO. 1031/BANG/2011. ON THE CONTRARY, LD. DR SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED MATERIAL ON RECORD. IT IS SEEN FROM RECORD THAT, LD.TPO INCLUDED THIS COMPANY ON THE BASIS OF STATEMENT MADE BY THE COMPANY IN ITS REPLY TO NOTICE UNDER SECTION 133(6) OF THE ACT. IT APPEARS THAT LD.TPO DID NOT EXAMINE SERVICES RENDERED BY THIS COMPANY TO GIVE A FINDING WHETHER SERVICES PERFORMED BY THIS COMPANY ARE SIMILAR TO CAPTIVE SOFTWARE DEVELOPMENT SERVICES PERFORMED BY ASSESSEE. FROM DETAILS ON RECORD, WE FIND THAT WHILE ASSESSEE IS A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH-END TECHNICAL SERVICES WHICH COME UNDER CATEGORY OF KPO SERVICES. IT HAS BEEN HELD BY CO-ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF HEWLETT PACKARD (I) LTD., VS. DCIT (SUPRA) THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING AFORESAID DECISION, OF TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E- PAGE 17 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 ZEST SOLUTIONS LTD., BE OMITTED FROM SET OF COMPARABLES FOR PERIOD UNDER CONSIDERATION WE THEREFORE DIRECT LD. TPO TO EXCLUDE THIS COMPANY FROM FINAL LIST. D) AVANI CINCOM TECHNOLOGIES LTD., IT HAS BEEN SUBMITTED THAT, THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN COMPANYS WEBSITE, IT HAS BEEN SUBMITTED THAT, THIS COMPANY DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE. IT WAS ALSO SUBMITTED THAT, THIS COMPANY HAS REVENUE FROM SOFTWARE PRODUCT SALES, APART FROM RENDERING OF SOFTWARE SERVICES FOR WHICH SEGMENTAL INFORMATION IS NOT AVAILABLE. IT HAS THEREFORE BEEN SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM ASSESSEE. IT WAS FURTHER SUBMITTED THAT, MUMBAI BENCH OF TRIBUNAL IN CASE OF TELCORDIA TECHNOLOGIES PVT. LTD., V. ACIT IN ITA NO.7821/MUM/2011 ACCEPTED ASSESSEES CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT, IN ABSENCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPARABLE TO AN ASSESSEE WHO WAS RENDERING CAPTIVE SOFTWARE DEVELOPMENT SERVICES. LD.DR, ON THE OTHER HAND, RELIED ON ORDER OF LD.TPO. WE HAVE CONSIDERED SUBMISSIONS ADVANCED BY BOTH SIDES AND PERUSED RECORDS PLACED BEFORE US. IT WAS SUBMITTED THAT, THIS COMPANY HAS MADE UNUSUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 200607. IT IS OBSERVED THAT, OPERATING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXTRAORDINARY YEAR FOR THIS COMPANY. EVEN GROWTH OF SOFTWARE PAGE 18 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 INDUSTRY FOR PREVIOUS YEAR 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 THIS COMPANY OUGHT TO HAVE BEEN REJECTED AS A COMPARABLE. IT WAS OBSERVED BY THIS TRIBUNAL IN CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) THAT MARGIN OF THIS COMPANY IS 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS. FOLLOWING FIGURES WERE RELIED BY LD.COUNSEL, AS OBSERVED BY COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD., VS DCIT (SUPRA) :- PARTICULARS 05 - 06 06 - 07 07 - 08 08 - 09 OPERATING REVENUE 21761611 35477523 29342809 28039851 OPERATING EXPNS. 16417661 23249646 23359186 31108949 OPERATING PROFIT 5343950 12227877 5983623 (3069098) OPERATING MARGIN 32.55% 52.59% 25.62% - 9.87% IT IS ALSO BEEN SUBMITTED THAT, IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200809 THIS COMPANY WAS EXCLUDED FOR SIMILAR REASONS. REVENUE HAS NOT BEEN ABLE TO PLACE ON RECORD ANY DETAILS CONTRARY TO THE OBSERVATIONS MADE BY THIS TRIBUNAL FOR ASSESSMENT YEAR 200809 AND THEREFORE, WE DO NOT FIND ANY REASON TO DEVIATE FROM THE VIEW TAKEN THEREIN. WE, THEREFORE, DIRECT LD.TPO TO EXCLUDE THIS COMPANY FROM FINAL LIST. E) THIRDWARE SOLUTIONS LTD., THIS COMPANY WAS PROPOSED FOR INCLUSION IN THE LIST OF COMPARABLES BY LD.TPO. BEFORE LD.TPO, ASSESSEE OBJECTED TO PAGE 19 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 INCLUSION OF THIS COMPANY IN THE FINAL LIST ON THE GROUND THAT ITS TURNOVER WAS IN EXCESS OF RS.500 CRORES. BEFORE US, ASSESSEE HAS OBJECTED TO INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASON THAT, APART FROM SOFTWARE DEVELOPMENT SERVICES, IT IS IN THE BUSINESS OF PRODUCT DEVELOPMENT AND TRADING IN SOFTWARE AND GIVING LICENSES FOR USE OF SOFTWARE. IN THIS REGARD, LD.COUNSEL SUBMITTED AS UNDER:- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTION. IT HAS BEEN POINTED OUT FROM ANNUAL REPORT THAT, COMPANY HAS NOT PROVIDED ANY SEPARATE SEGMENTAL PROFIT AND LOSS ACCOUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT SERVICES. (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD., (2008-TII-04- ITAT-PUNE-TP), THE TRIBUNAL HAS DIRECTED THAT, THIS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PROVIDERS, AS ITS INCOME INCLUDES INCOME FROM SALE OF LICENCES WHICH HAS INCREASED MARGINS OF THE COMPANY. LD. AR PRAYED THAT, IN THE LIGHT OF ABOVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THIS TRIBUNAL (SUPRA) , THIS COMPANY OUGHT TO BE OMITTED. PER CONTRA, LD.CIT DR SUPPORTED ACTION OF LD.TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE MATERIAL ON RECORD THAT, COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, THE SEGMENTAL PROFIT AND LOSS ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT PAGE 20 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 DEVELOPMENT ARE NOT GIVEN SEPARATELY. FURTHER, AS POINTED OUT BY LD.COUNSEL, PUNE BENCH OF THIS TRIBUNAL IN CASE OF E-GAIN COMMUNICATIONS PVT. LTD., (SUPRA) HELD THAT SINCE INCOME OF THIS COMPANY INCLUDES INCOME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABLE FOR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE MATTER AND FOLLOWING AFORE CITED DECISION OF THE PUNE TRIBUNAL (SUPRA) , WE DIRECT THAT, THIS COMPANY BE OMITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. (F). PERSISTENT SYSTEMS LTD. LD.COUNSEL SUBMITTED THAT, THIS COMPARABLE HAS BEEN INCLUDED BY LD.TPO, HOWEVER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200809 THIS TRIBUNAL IN ITA NO.5401/DEL/2012 DIRECTED EXCLUSION OF THE SAME ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT WITH THAT OF ASSESSEE. LD.COUNSEL SUBMITTED THAT, THERE IS LACK OF SEGMENTAL ACCOUNTING IN THE FINANCIALS OF THIS COMPANY. HE ALSO SUBMITTED THAT THERE ARE NO BIFURCATIONS BETWEEN THE SERVICES RENDERED BY THIS COMPANY. THIS TRIBUNAL WHILE CONSIDERING THIS COMPARABLE FOR ASSESSMENT YEAR 2008 09(SUPRA) HAS OBSERVED THAT DURING THE RELEVANT ASSESSMENT YEAR COMPANY DEVELOPED ITS OWN SOFTWARE PRODUCTS, AND ITS REVENUE INCLUDED LICENSING OF SOFTWARE PRODUCTS. LD. CIT, DR SUBMITTED THAT THIS COMPANY IS INTO SOFTWARE SERVICES AND PRODUCTS. AND SEGMENTAL ACCOUNTING OF SOFTWARE SERVICES AND PRODUCTS ARE AVAILABLE FOR THE YEAR UNDER CONSIDERATION. PAGE 21 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 WE HAVE PERUSED THE SUBMISSIONS ON THE BASIS OF THE RECORDS. IT IS OBSERVED THAT, ASSESSEE HAS DEVELOPED SOFTWARE DURING THE YEAR, AND HAS EARNED ROYALTIES FROM SALE OF PRODUCTS. ASSESSEE HAS EARNED REVENUES FROM LICENSING OF PRODUCTS. IT IS ALSO OBSERVED FROM THE NOTES TO THE ACCOUNTS OF THIS COMPANY THAT THE SEGMENT INFORMATION HAS BEEN PROVIDED ON CONSOLIDATED FINANCIAL STATEMENTS. IT IS ALSO OBSERVED THAT ASSESSEE OWNS THE SOFTWARE DEVELOPED BY IT ON WHICH DEPRECIATION IS CLAIMED. THUS, THIS COMPANY HAS BEEN CHARACTERISED ITSELF AS ENGAGED IN PROVIDING OUTSOURCED PRODUCT DEVELOPMENT SERVICES TO INDEPENDENT SOFTWARE VENDORS AND ENTERPRISES. IT HAS BEEN CHARACTERISED TO HAVING EARNED SIGNIFICANT PORTION OF ITS REVENUES FROM EXPORT OF SOFTWARE SERVICES AND PRODUCTS. THIS FUNCTION, THE ASSETS OWNED BY THIS COMPANY AND THE RISK ASSUMED ARE NOT COMPARABLE WITH THAT OF THE PRESENT ASSESSEE AND HENCE HAS TO BE EXCLUDED FROM FINAL LIST OF COMPARABLES. ACCORDINGLY, THIS COMPARABLE IS DIRECTED TO BE EXCLUDED FROM FINALIST. 4.1.3. ITES SEGMENT COMPARABLES SOUGHT FOR EXCLUSION: A) VISHAL INFORMATION TECHNOLOGIES LTD. LD.COUNSEL SUBMITTED THAT, THIS COMPARABLE WAS OUTSOURCING ITS JOB AND THEREFORE FAILS EMPLOYEE COST FILTER IT HAS BEEN SUBMITTED THAT BUSINESS MODEL THEREFORE OF THIS COMPARABLE IS VERY DIFFERENT FROM THAT OF ASSESSEE THAT IS PROVIDING SERVICES ONLY TO ITS AES ON CONTRACT BASIS. IT HAS BEEN SUBMITTED THAT, FOR ASSESSMENT YEAR 200607 THIS COMPARABLE HAS BEEN EXCLUDED BY THIS TRIBUNAL IN PAGE 22 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 ASSESSEES OWN CASE IN IT(TP)A NO.1480/B/2010 . LD.COUNSEL SUBMITTED THAT, COPY OF DECISION IS PLACED AT PAGE 3534 OF PAPER BOOK. ON THE CONTRARY, LD.CIT DR RELIED UPON ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT FUNCTIONS PERFORMED BY THIS COMPANY IS AKIN TO ITES SERVICES RENDERED BY ASSESSEE TO ITS AE AND THEREFORE SHOULD BE RETAINED. WE HAVE HEARD SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. IT IS OBSERVED FROM ANNUAL REPORT AT PAGE 2432 OF PAPER BOOK IN SCHEDULE 15 AND 16 THAT SALARY AND WAGES EXPENDITURE OF THIS COMPANY IS ONLY 2.3% OF TOTAL REVENUE WHICH SHOWS THAT COMPANY OUTSOURCES SERVICES TO 3 RD PARTIES. FURTHER FOR ASSESSMENT YEAR IMMEDIATELY PRECEDING THE YEAR UNDER CONSIDERATION THIS TRIBUNAL EXCLUDED THIS COMPANY FOR VERY SAME REASONS. REVENUE HAS NOT BROUGHT ANYTHING CONTRARY ON RECORD TO SHOW THAT THERE IS ANY CHANGE IN FINANCIALS OF THIS COMPARABLE FOR YEAR UNDER CONSIDERATION VIS-A-VIS ASSESSMENT YEAR 2006 07. WE THEREFORE, DO NOT FIND ANY REASON TO DEVIATE FROM THE VIEW TAKEN BY THIS TRIBUNAL IN ASSESSEES OWN CASE. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT LD. AO/TPO TO EXCLUDE THIS COMPARABLE FROM THE FINALIST. 4.2. GROUND NO.6: THIS GROUND IS AGAINST NON GRANTING OF ADJUSTMENT ON ACCOUNT OF RISK PROFILE. 4.2.1. IT HAS BEEN SUBMITTED THAT ASSESSEE IS A LOW RISK BEARING COMPANY AND THEREFORE WHILE COMPUTING RISK ADJUSTMENT RISKS ASSUMED BY THE COMPARABLES FOR EARNING REVENUE IN THE PAGE 23 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 PARTICULAR SEGMENT NEEDS TO BE ANALYSED. ASSESSEE IS DIRECTED TO PROVIDE FOR NECESSARY DETAILS IN RESPECT OF ALL COMPARABLES FINALLY SELECTED. LD.AO/TPO SHALL THEN COMPUTE THE RISK AS ADJUSTMENT IN ACCORDANCE WITH LAW. 4.2.2. IN THE LIGHT OF AFORESTATED OBSERVATIONS AND DIRECTIONS, THE TRANSFER PRICING ISSUES RAISED BY ASSESSEE IS SET ASIDE TO LD.AO/TPO. LD.AO/TPO IS DIRECTED TO PASS A DETAILED ORDER BY CONSIDERING ALL THE SUBMISSIONS ADVANCED BY ASSESSEE IN RESPECT OF EACH OBJECTIONS RAISED THEREIN. LD.AO/TPO SHALL GRANTED PROPER OPPORTUNITY TO ASSESSEE OF BEING REPRESENTED AS PER LAW. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. 4.3. GROUND NO.7 IS AGAINST ERRONEOUS COMPUTATION OF WORKING CAPITAL ADJUSTED MARK-UP OF CERTAIN COMPARABLES. WE DIRECT LD.AO/TPO TO PROVIDE FOR CORRECT WORKING CAPITAL ADJUSTMENT AND TO COMPUTE MARGINES OF COMPARABLES IN ACCORDANCE WITH LAW. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. 5. REVENUE APPEAL: 5.1.GROUND NOS.1,4,9,10 ARE GENERAL IN NATURE, THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 5.2. GROUND NOS. 2-3: IT IS OBSERVED THAT REVENUE IN THEIR APPEAL HAS RAISED THE ISSUE OF 10 A DISALLOWANCE BEING DELETED BY LD.CIT(A). 5.2.1. LD.CIT DR PLACED RELIANCE UPON ORDER PASSED BY LD. AO/TPO. PAGE 24 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 5.2.2. LD.COUNSEL PLACED RELIANCE UPON DECISION OF HONBLE HIGH COURT IN CASE OF TATA ELXI & ORS VS CIT , REPORTED IN (2012) 349 ITR 98. 5.2.3. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. AT THE OUTSET, BOTH PARTIES SUBMITTED THAT, THE ISSUE NOW SQUARELY COVERED WITH THE DECISION OF HONBLE KARNATAKA HIGH COURT IN CASE OF TATA ELXSI LTD., VS CIT , REPORTED IN (2012) 349 ITR 98 , WHEREIN HONBLE COURT HELD THAT, WHAT IS REDUCED FROM EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER. IT IS OBSERVED THAT LD. CIT(A) GRANTED RELIEF TO ASSESSEE FOLLOWING THE AFORESTATED VIEW EXPRESSED BY HONBLE KARNATAKA HIGH COURT . WE DO NOT FIND ANY INFIRMITY IN THE VIEW TAKEN BY LD. CIT(A) AND SAME IS UPHELD. ACCORDINGLY, THIS GROUND RAISED BY REVENUE STANDS DISMISSED. 6. GROUND NO.6-7: 6.1. LD.CIT DR AT THE OUTSET, IN RESPECT OF TATA ELXSI LTD, WIPRO LTD, INFOSYS TECHNOLOGIES LTD, INFOSYS BPO LTD., ALLEGED FOR INCLUSION UNDER 2 SEGMENTS, PLACED RELIANCE UPON ORDERS PASSED BY AUTHORITIES BELOW. 6.2. LD.COUNSEL SUBMITTED THAT, THESE COMPARABLES HAVE BEEN EXCLUDED BY LD.CIT(A) FOR HUGE TURNOVER. HE SUBMITTED THAT, THIS TRIBUNAL HAVE BEEN CONSISTENTLY FOLLOWING TURNOVER LIMIT OF 1 TO 200 CRORES FOR A CAPTIVE SERVICE PROVIDER WHEREAS THESE COMPARABLES HAVE HUGE TURNOVERS WHICH IS MORE THAN 200 CRORES AND HENCE LD.CIT (A) WAS RIGHT IN EXCLUDING THESE COMPARABLES. PAGE 25 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 6.3. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. IT IS OBSERVED THAT, ADMITTEDLY THESE COMPARABLES HAVE HUGE TURNOVER AS COMPARED TO THAT OF ASSESSEE. LD.TPO WHILE APPLYING TURNOVER FILTER, EXCLUDED COMPARABLES LESS THAN 1 CRORE TURN OVER, WITHOUT FIXING UPPER LIMIT. AS THIS TRIBUNAL IN CASE OF A WHOLE NEW HAS BEEN CONSISTENTLY FOLLOWING THE TURNOVER LIMIT OF 1 TO 200 CRORES IN OUR VIEW THESE COMPARABLES DO NOT SATISFY THE CRITERIA. WE ALSO NOTE THAT THESE COMPARABLES HAVE BEEN EXAMINED BY THIS TRIBUNAL IN A SERIES OF DECISION AND HAS BEEN EXCLUDED FOR HAVING HUGE TURNOVERS, OWNING HUGE INTANGIBLES AND BRAND WHICH MAKES IT NOT COMPARABLE WITH A CAPTIVE SERVICE PROVIDER LIKE THAT OF ASSESSEE. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN EXCLUSION OF THESE COMPARABLES. WE, THEREFORE, DIRECT LD. AO/TPO TO EXCLUDE, WIPRO LTD, INFOSYS TECHNOLOGIES LTD., INFOSYS BPO LTD., FROM BOTH SEGMENTS. ACCORDINGLY, GROUND NO.6-7 RAISED BY REVENUE STANDS DISMISSED. 7. GROUND NO.5 ALONG WITH GROUND NO.3(II) OF ASSESSEES APPEAL: 7.1. LD.CIT DR SUBMITTED THAT, VARIOUS COMPARABLES UNDER BOTH SEGMENTS HAVE BEEN EXCLUDED BY LD.CIT(A) FOR NOT SATISFYING RPT OF 0%. HE SUBMITTED THAT, DIFFERENT RANGE OF FILTER CANNOT BE ADOPTED BY LD.CIT(A) WHEN LD.TPO APPLIED RPT FILTER BEING LESS THAN 25%. PAGE 26 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 ASSESSEE RAISED GROUND BEFORE LD.CIT(A) THAT THRESHOLD FOR RPT SHOULD BE 15% IN VIEW OF VARIOUS DECISIONS PASSED BY THIS TRIBUNAL . IT IS OBSERVED THAT, LD.CIT(A) REJECTED VARIOUS COMPARABLE FOR NOT SATISFYING THE CRITERIA OF 0% RPT. IT HAS BEEN SUBMITTED THAT LD.TPO CONSIDERED COMPARABLES WITH RPT LESS THAN 25%, WHEREAS LD.CIT(A) REJECTED COMPARABLES, THAT DO NOT SATISFY 0% RPT. IT HAS BEEN SUBMITTED THAT, VARIOUS DECISIONS OF THIS TRIBUNAL HAVE ACCEPTED COMPARABLES HAVING RPT LESS THAN 15%. IT IS NOTED THAT, IN SOFTWARE DEVELOPMENT SERVICE SEGMENT, LD.CIT(A) EXCLUDED 21 COMPARABLES FOR NOT SATISFYING 0% RPT, LEAVING BEHIND 3 COMPARABLES WHICH HAS BEEN CHALLENGED BY ASSESSEE FOR EXCLUSION BEFORE US AND HAS BEEN DEALT WITH AND EXCLUDED ON FUNCTIONAL DISSIMILARITIES IN PARAGRAPHS HEREINABOVE. WE NOTE THAT, THERE IS NO COMPARABLES LEFT FOR COMPUTING MARGIN UNDER SOFTWARE DEVELOPMENT SERVICE SEGMENT. IT IS IMPERATIVE UNDER SUCH CIRCUMSTANCES TO REVISIT REMAINING COMPARABLES EXCLUDED BY LD. CIT(A) BY APPLYING 0% RPT FILTER, UNDER SOFTWARE DEVELOPMENT SERVICE SEGMENT. WE DIRECT LD. AO/TPO TO CARRY OUT FUNCTIONAL COMPARABILITY OF REMAINING COMPARABLES IN LIGHT OF VARIOUS DECISIONS AND ALSO AS DECIDED IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING AND SUCCEEDING ASSESSMENT YEARS. WE DIRECT LD. AO/TPO TO KEEP THRESHOLD FOR RELATED PARTY TRANSACTION AT 15%. SIMILARLY, IN REGARDS TO ITES SEGMENT, LD.CIT(A) EXCLUDED 18 COMPARABLES, OUT OF WHICH FEW HAS BEEN ALLEGED FOR EXCLUSION ON FUNCTIONAL DISSIMILARITIES WHICH HAS BEEN DEALT WITH HEREIN BELOW. PAGE 27 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 WE DIRECT LD. AO/TPO TO RECONSIDER BALANCE COMPARABLES IN LIGHT OF VARIOUS DECISIONS AND ALSO AS DECIDED IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING AND SUCCEEDING ASSESSMENT YEARS. WE DIRECT LD. AO/TPO TO KEEP THRESHOLD FOR RELATED PARTY TRANSACTION AT 15%. ACCORDINGLY, THIS GROUND RAISED BY REVENUE AS WELL AS ASSESSEESTANDS ALLOWED FOR STATISTICAL PURPOSES. 8. GROUND NO.8: THESE GROUNDS ARE RAISED BY REVENUE CHALLENGING EXCLUSION OF FOLLOWING COMPARABLES UNDER BOTH SEGMENTS. 8.1. SOFTWARE DEVELOPMENT SERVICE SEGMENT A) E INFOCHIPS LTD: LD.TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. LD.COUNSEL CONTENDED THAT THIS COMPANY IS FUNCTIONAL DISSIMILAR, IN AS MUCH AS IT IS ENGAGED IN SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES AND ALSO PRODUCTS. LD.TPO INCLUDED THIS COMPANY INTO FINAL LIST AS IT HAS 2 HEADS OF INCOME BEING INCOME FROM SOFTWARE DEVELOPMENT AND INCOME FROM IT SERVICES WHICH TOGETHER AMOUNTS TO 86% OF TOTAL INCOME OF THE COMPANY. LD. TPO OPINED THAT SEGMENTAL DATA, THE OTHER ACTIVITIES ARE OF VERY SMALL VOLUME AND INTEGRALLY CONNECTED WITH FUNCTIONS OF PROVIDING SOFTWARE SERVICES. ON THE CONTRARY, LD.CIT.DR SUBMITTED THAT THERE IS NO RELATED PARTY TRANSACTION DURING THE YEAR UNDER CONSIDERATION. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH SIDES IN THE LIGHT OF RECORDS PLACED BEFORE US. PAGE 28 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 WE FIND FROM ANNUAL REPORT OF THIS COMPANY PLACED IN PAPER BOOK THAT SCHEDULE OF INCOME INDICATES ITS OPERATING REVENUE FROM SOFTWARE DEVELOPMENT, HARDWARE MAINTENANCE, INFORMATION TECHNOLOGY, CONSULTANCY ETC. THERE IS NO SEGMENTAL INFORMATION AVAILABLE AS REGARDS REVENUE FROM SALE OF PRODUCTS AND REVENUE FROM SOFTWARE DEVELOPMENT SEGMENT. AS ASSESSEE IS SIMPLY ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES AND THERE IS NO SALE OF ANY SOFTWARE PRODUCTS, THIS COMPANY, IN OUR CONSIDERED OPINION, CEASES TO BE COMPARABLE. IT IS OBVIOUS THAT FROM COMMON POOL OF INCOME FROM BOTH STREAMS OF SOFTWARE PRODUCTS AND SOFTWARE SERVICES, ONE CANNOT DEDUCE REVENUE FROM SOFTWARE SERVICES AND NO ONE KNOWS IMPACT OF REVENUE FROM PRODUCTS ON OVERALL KITTY OF PROFIT, WHICH MAY BE SIGNIFICANT. SINCE NO SEGMENTAL DATA OF THIS COMPANY IS AVAILABLE INDICATING OPERATING PROFIT FROM SOFTWARE DEVELOPMENT SERVICES, WE DIRECT LD.TPO TO EXCLUDE THIS COMPANY FROM LIST. B) CELESTIAL LABS LTD., AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF LD. COUNSEL IS THAT IT IS A RESEARCH & DEVELOPMENT COMPANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- IN THE DIRECTORS REPORT, IT IS STATED THAT THE COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR IN-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2AB) OF THE INCOME TAX ACT. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UNDER DEFERRED REVENUE EXPENDITURE, IT IS MENTIONED THAT, EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT OF NEW PRODUCTS HAS PAGE 29 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AND THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALMENTS FROM THE YEAR IN WHICH IT IS INCURRED. AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE. THIS AMOUNTS TO NEARLY 8.28% OF SALES OF THIS COMPANY. IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF THIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SOFTWARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D ACTIVITIES IS BAD IN LAW. LD.COUNSEL DREW OUR ATTENTION TO THE DIRECTORS REPORT WHICH READS AS FOLLOWS: THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TOOL CELSUITE TO DRUG DISCOVERY IN, FINDING THE LEAD MOLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT ACT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYING BIO-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE BEEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY, OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, THE COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS. THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FACILITY WOULD ALSO INCLUDE THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO PAGE 30 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY WILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA PRADESH. FURTHER, REFERENCE WAS MADE TO DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2008-09 IN WHICH COMPANY WAS EXCLUDED. ACCORDING TO LD.CIT DR, THIS COMPANY IS IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AND SHOULD BE CONSIDERED AS COMPARABLE. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. AS RIGHTLY SUBMITTED BY LD.COUNSEL, DISCOVERY IS IN RELATION TO SOFTWARE DISCOVERY OF NEW DRUGS. MOREOVER, THE COMPANY ALSO OWNS IPR. AS EXPLAINED EARLIER IT IS A DIVERSIFIED COMPANY AND THEREFORE CANNOT BE CONSIDERED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. FURTHER FOR ASSESSMENT YEAR IMMEDIATELY PRECEDING THE YEAR UNDER CONSIDERATION THIS TRIBUNAL EXCLUDED THIS COMPANY FOR VERY SAME REASONS. REVENUE HAS NOT BROUGHT ANYTHING CONTRARY ON RECORD TO SHOW THAT THERE IS ANY CHANGE IN FINANCIALS OF THIS COMPARABLE FOR YEAR UNDER CONSIDERATION VIS-A- VIS ASSESSMENT YEAR 2006-07. WE THEREFORE DO NOT FIND ANY REASON TO DEVIATE FROM THE VIEW TAKEN BY THIS TRIBUNAL IN ASSESSEES OWN CASE. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT LD. AO/TPO TO EXCLUDE THIS COMPARABLE FROM THE FINALIST. C) FLEXTRONICS SOFTWARE SYSTEMS LTD., PAGE 31 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 THIS COMPARABLE HAS BEEN SELECTED BY LD.TPO IN FINAL LIST AND EXCLUDED BY LD.CIT(A) FOR THE REASON THAT IT FAILS 0% RPT FILTER. BOTH SIDES SEEK EXCLUSION OF THIS COMPARABLE. AS WE HAVE ALREADY HELD THAT) % RPT IS NOT AN APPROPRIATE FILTER, WE REJECT THE REASONING BY LD. CIT(A) FOR ITS EXCLUSION. WE DIRECT LD. TPO TO RETAIN THIS COMPANY FROM FINAL LIST. 8.2. ITES SEGMENT A) ECLERX SERVICES LTD LD.COUNSEL SUBMITTED THAT, THIS COMPARABLE HAS BEEN REJECTED BY LD.CIT (A) AND REVENUE IS ALLEGING FOR ITS INCLUSION. LD.CIT DR SUBMITTED THAT THIS COMPANY IS IN THE BUSINESS OF ITES AND IS FUNCTIONALLY COMPARABLE WITH THAT OF ASSESSEE. IT HAS BEEN SUBMITTED THAT, THIS COMPANY PROVIDES COMPLETE END TO END SOLUTION TO ITS CLIENTS BY COMBINING PEOPLE, PROCESS THE ENGINEERING AND AUTOMATION. LD.COUNSEL SUBMITTED THAT THIS COMPANY IS DISSIMILAR TO THAT OF ASSESSEE AS IT IS ENGAGED IN THE BUSINESS OF CAPITAL MARKET, MANUFACTURE, RETAIL, TRAVEL ETC AND THEREFORE IS FUNCTIONALLY NOT COMPARABLE WITH A CAPTIVE SERVICE PROVIDER LIKE THAT OF ASSESSEE. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. IT IS OBSERVED FROM THE ANNUAL REPORT THAT THIS COMPANY IS INTO KNOWLEDGE PROCESS OUTSOURCING BY PROVIDING THAT ANALYTICS AND DATA PROCESS SOLUTIONS TO GLOBAL ENTERPRISE CLIENTS. COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF E4E BUSINESS SOLUTIONS INDIA PVT. LTD., WHEREIN IT IS HELD THAT, THIS COMPANY SUPPORTS CORE AND COMPLEX ACTIVITIES FOR ITS CLIENTS USING PROPRIETARY PROCESSES AND PAGE 32 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 SCALABLE OFFSHORE DELIVERY MODEL. IT IS ALSO BEEN OBSERVED THEREIN THAT THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITY OF PROVIDING SERVICES INCLUDING ANALYTIC SERVICES ETC AND IS NOT FUNCTIONALLY COMPARABLE WITH A SIMPLE BPO SERVICE PROVIDER. BEFORE US LD.CIT DR HAS NOT BROUGHT ON RECORD ANYTHING CONTRARY TO THE VIEW EXPRESSED BY THIS TRIBUNAL IN CASE OF E4E BUSINESS SOLUTIONS INDIA PVT. LTD., (SUPRA) . IT IS ALSO OBSERVED THAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200910 THIS COMPARABLE HAS BEEN EXCLUDED IN ITA NO. 1614 AND 1633/B/2014 . RESPECTFULLY FOLLOWING THE SAME, WE DO NOT FIND ANY REASON TO DEVIATE FROM THE VIEW TAKEN ASSESSEES OWN CASE. ACCORDINGLY, THIS COMPARABLE IS DIRECTED TO BE EXCLUDED FROM THE FINALIST. B) MOLDTECH TECHNOLOGIES LTD., LD.CIT.DR SUBMITTED THAT THIS COMPARABLE IS FUNCTIONALLY COMPARABLE WITH THAT OF ASSESSEE. WHEREAS LD.COUNSEL SUBMITTED THAT, THIS COMPANY IS INTO ENGINEERING DESIGN SERVICES AND ARE HIGH END KPO WITH SUPERNORMAL PROFITS. IT HAS BEEN SUBMITTED THAT, THE ACTIVITIES CARRIED OUT BY THIS COMPANY HAS BEEN CATEGORISED AS STRUCTURAL ENGINEERING SERVICES AND HIGH-END ENGINEERING SERVICES WHICH CANNOT BE CONSIDERED AS A COMPARABLE TO ITES SERVICES RENDERED BY ASSESSEE. FURTHER, LD.COUNSEL SUBMITTED THAT, THIS COMPARABLE UNDERWENT MERGERS/DEMERGER, DUE TO WHICH THERE HAS BEEN SUPERNORMAL PROFIT OF 113% DURING THE YEAR UNDER CONSIDERATION. PAGE 33 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. ON PERUSAL OF ANNUAL REPORT, IT IS OBSERVED THAT, THIS COMPANY HAS UNDERWENT MERGER OF TECHMEANT TOOLS PVT.LTD., AND DEMERGER OF PLASTIC PACKAGING BUSINESS WHICH IS CLEAR FROM PAGE 2378 OF PAPER BOOK. UNDOUBTEDLY, FUNCTIONS OF THIS COMPARABLE INVOLVE HIGH LEVEL OF KNOWLEDGE AND SKILL WHICH IS NOT THE CASE OF ASSESSEE BEFORE US. AS NOTED BY LD.TPO ASSESSEE IS PROVIDING CONTRACT SERVICES TO ITS ASSOCIATED ENTERPRISES THAT MAY REQUIRE TECHNICAL SUPPORT HOWEVER CAN BE TREATED AS A BACK-OFFICE SUPPORT SERVICES NOT EQUIVALENT TO KPO. ACCORDINGLY, THIS COMPARABLE IS DIRECTED TO BE EXCLUDED FROM FINALIST. IN THE RESULT APPEAL FILED BY REVENUE STANDS PARTLY ALLOWED AS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH FEBRUARY, 2020. SD/- SD/- (A. K. GARODIA) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 27 TH FEBRUARY, 2020. /MK/ PAGE 34 OF 34 IT(TP)A 593/BANG/2012 & IT(TP)A 687/BANG/2012 A. Y: 2007 08 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.