DCIT, New Delhi V. M/s Microfoft India (R&D) Pvt. Ltd, New Delhi

ITA 691/DEL/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0822 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 08-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: PARTH S
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Question of law
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA NO.1479/DEL/2016 ASSESSMENT YEAR : 2011-12 MICROSOFT INDIA (R&D) PVT. LTD., 807, NEW DELHI HOUSE, BARAKHAMBA ROAD, NEW DELHI. PAN: AABCM6358F VS. DCIT, CIRCLE-16(2), NEW DELHI. ITA NO.691/DEL/2016 ASSESSMENT YEAR : 2011-12 DCIT, CIRCLE-16(2), NEW DELHI. VS. MICROSOFT INDIA (R&D) PVT. LTD., 807, NEW DELHI HOUSE, BARAKHAMBA ROAD, NEW DELHI. PAN: AABCM6358F (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, SHRI SANDEEP S. KARHAIL & PARTH, ADVOCATES DEPARTMENT BY : SHRI SANJAY I BARA, CIT, DR ITA NOS.1479 & 691/DEL/2016 2 DATE OF HEARING : 10.09.2018 DATE OF PRONOUNCEMENT : 14.09.2018 ORDER PER R.S. SYAL, VP: THESE CROSS APPEALS - ONE FILED BY THE ASSESSEE AN D THE OTHER BY THE REVENUE ARISE OUT OF THE FINAL ASSESSMENT ORDER PAS SED BY THE ASSESSING OFFICER (A.O.) U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATIO N TO THE ASSESSMENT YEAR 2011-12. 2. AT THE OUTSET, IT IS RELEVANT TO MENTION THAT WH EN THE APPEAL OF THE ASSESSEE CAME UP FOR HEARING BEFORE THE TRIBUNAL ON 05.06.2018, IT RAISED AN ADDITIONAL GROUND CONTENDING THAT THE TRANSFER P RICING ADJUSTMENTS MADE BY THE TPO ARE BAD IN LAW, INTER ALIA , FOR THE RAISON DETRE THAT THE TP DOCUMENTATION PREPARED BY THE ASSESSEE WAS NOT REJE CTED BY THE OFFICER. VIDE INTERIM ORDER DATED 23.07.2018, A COPY PLACED ON RECORD, THE TRIBUNAL REJECTED THE ASSESSEES CONTENTION BY CHIEFLY OBSER VING THAT THE TP STUDY MADE AVAILABLE BY THE ASSESSEE WAS FOUND TO BE NOT FULLY IN COMPLIANCE WITH THE PROVISIONS OF THE ACT AND RULES AND FURTHE R THE EXCLUSION OF SOME ITA NOS.1479 & 691/DEL/2016 3 COMPARABLES AND OTHER ADJUSTMENTS MADE BY THE TPO T ANTAMOUNT TO ITS IMPLIED REJECTION. THIS IS HOW, THE APPEAL IS NOW BEING TAKEN UP FOR FINAL DISPOSAL ON ALL OTHER GROUNDS. PROVISION OF SOFTWARE DEVELOPMENT SERVICES (HYDERAB AD UNIT) 3. THE FIRST ISSUE RAISED BY THE ASSESSEE IN ITS AP PEAL IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.197,23,68,765/- MADE BY THE ASSESSING OFFICER (A O) IN THE INTERNATIONAL TRANSACTION OF ` PROVISION OF SOFTWARE DEVELOPMENT SERVICES. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE WAS SET UP IN INDIA IN MAY, 1998 AND IS A SUBSIDIARY OF MICROSOFT IRELAND RESEARCH LTD., IRELAND (99.99% SHAREHOLDING) WITH THE ULTIMATE PAR ENT COMPANY, MICROSOFT CORPORATION, USA. THE ASSESSEE IS ENGAGED , INTER ALIA, IN RENDERING SOFTWARE DEVELOPMENT SERVICES AND INFORMA TION TECHNOLOGY ENABLED SERVICES (ITES). THE ASSESSEE FILED AUDIT R EPORT IN FORM NO. 3CEB DECLARING SIX INTERNATIONAL TRANSACTIONS. THE AO REFERRED THE MATTER OF DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS TO THE TRANSFER PRICING OFFICER (TPO). THE INTERNATIONAL ITA NOS.1479 & 691/DEL/2016 4 TRANSACTION INSTANTLY UNDER CONSIDERATION IS PROVI SION OF SOFTWARE DEVELOPMENT SERVICES (HYDERABAD UNIT) WITH TRANSAC TED VALUE OF RS.1072,06,63,928/-. THE ASSESSEE WAS COMPENSATED BY ITS AE FOR SUCH SERVICES AT COST PLUS 15%. THE ASSESSEE EMPLOYED TH E TRANSACTIONAL NET MARGIN METHOD (TNMM) WITH THE PROFIT LEVEL INDICATO R (PLI) OF OPERATING PROFIT TO OPERATING COST (OP/OC) FOR DEMONSTRATING THAT THE INTERNATIONAL TRANSACTION WAS AT ALP. AS THE ASSESSEES PLI AT 1 4.34% WAS SHOWN TO BE BETTER THAN 9.50% OF COMPARABLES, ON THE BASIS OF M ULTIPLE YEAR DATA, THE ASSESSEE CLAIMED THAT THIS INTERNATIONAL TRANSACTIO N WAS AT ALP. 5. THE ASSESSEE CONTENDED DURING THE COURSE OF P ROCEEDINGS BEFORE THE TPO THAT ITS INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES PRIMARILY INCLUDED TWO THINGS, VIZ., CONTRACT SOFTW ARE DEVELOPMENT SERVICES AND INTERNAL INFORMATION TECHNOLOGY SUPPORT. THE A SSESSEE EXPLAINED THAT IT WAS ENGAGED IN WRITING AND TESTING CODES UNDER THE DIRECTION OF MS CORPORATION, USA REQUIRING COMPARATIVELY LOW LEVE L OF EXPERTISE AND SKILLS. IT WAS FURTHER EXPLAINED THAT SUCH SERVICE S WERE RENDERED ONLY FOR CERTAIN FUNCTIONS OR MODULES WITHIN A PRODUCT AND N OT FOR THE WHOLE PRODUCT, WHICH ACTIVITY, IN TURN, WAS DONE BY MS CO RPORATION IN US. THE ITA NOS.1479 & 691/DEL/2016 5 ASSESSEE STILL FURTHER STATED THAT THERE WERE A COU PLE OF MINOR PRODUCTS, LIKE BIZTALK AND DATA PROTECTION MANAGER (DPM), FOR WHIC H IT PROVIDED SIGNIFICANTLY MORE PRODUCT ENGINEERING AND DESIGN W ORK SERVICES. IN PERFORMING SUCH PRODUCT ENGINEERING SERVICES, THE A SSESSEE CLAIMED THAT IT DID NOT DEAL WITH ANY OTHER ASPECT OF PRODUCT DEVEL OPMENT, SUCH AS, MARKET RESEARCH NOR DID IT MAKE ANY DECISION REGARDING WHI CH PRODUCTS WERE TO BE DEVELOPED. IT WAS EXPLAINED THAT THE ULTIMATE HOLD ING COMPANY, NAMELY, MS CORPORATION, USA, GENERATES REVENUE BY DEVELOPIN G, MANUFACTURING AND SUPPORTING A WIDE RANGE OF SOFTWARE PRODUCTS AN D SERVICES FOR DIFFERENT TYPES OF COMPUTING DEVICES AND IN ORDER TO MAKE SUC H PRODUCTS, THE ASSESSEE AND OTHER MS AFFILIATES PERFORM R&D ACTIVI TY IN A VERY LIMITED WAY AROUND THE WORLD UNDER THE OVERALL GUIDANCE OF MS CORPORATION, USA. THE ASSESSEE EXPLAINED THE SOFTWARE PRODUCT LIFE C YCLE COMPRISING OF THREE PHASES, NAMELY, PRODUCT DEFINITION, PRODUCT ENGINEE RING AND SERVICING. UNDER THE PRODUCT DEFINITION (CONCEPTUALIZATION PHA SE), A VALUE PROPOSITION AND A PRODUCT PROTOTYPES ARE DEVELOPED BASED ON CUSTOMER FEEDBACK ETC. THEN, MARKETING RESEARCH IS PERFORME D TO TEST THE VALUE PROPOSITION AND THE MARKETING FEASIBILITY OF A PROD UCT PROTOTYPE, WHICH ITA NOS.1479 & 691/DEL/2016 6 CLOSES THE FIRST PHASE. THIS PHASE WAS STATED TO B E PERFORMED ENTIRELY IN US BY MS CORP EXCEPT FOR A VERY LIMITED ROLE BEING PLA YED BY THE ASSESSEE IN INDIA. IN THE SECOND PHASE OF PROJECT ENGINEERING WHICH IS A FIVE-STEP PROCESS INVOLVING DETERMINATION OF THE REQUIREMENTS , DESIGN, IMPLEMENTATION, VERIFICATION AND RELEASE, THE ASSES SEE SUBMITTED THAT THE BULK OF THIS ACTIVITY TAKES PLACE IN THE US AT MS C ORP. AND THE ASSESSEE HAS A LIMITED INPUT INTO THE DESIGN OF THE PRODUCT. TH E FINAL PHASE OF SERVICING WAS STATED TO BE PERFORMED IN THE US BY MS CORP. I N THE ENTIRE SOFTWARE PRODUCT LIFECYCLE, THE ASSESSEE SUBMITTED THAT IT P ROVIDED LIMITED SERVICES TO MS CORPORATION AND THAT TOO UNDER THEIR DIRECTIONS. THE ASSESSEE ALSO STATED TO HAVE PROVIDED SOFTWARE DEVELOPMENT SERVIC ES TO MICROSOFT, USA, BY DEVELOPING SOFTWARE APPLICATIONS EXCLUSIVELY FOR MS CORP. GROUPS INTERNAL USE. THE TPO ANALYZED THE ASSESSEES CONT ENTIONS IN THE HUE OF MATERIAL BEFORE HIM AND OPINED THAT THE ASSESSEE WA S NOT A ROUTINE SOFTWARE DEVELOPER, BUT, WAS ENGAGED IN RENDERING HIGH QUALI TY SOFTWARE ENGINEERING SERVICES TO MS CORP. AND THUS CONTRIBUTED POSITIVEL Y TO ULTIMATE PRODUCTS DEVELOPED AND RELEASED BY THE LATTER. HE FURTHER H ELD THAT EVEN THOUGH THE OVERALL WORK WAS TO BE SUPERVISED BY FOREIGN AE, BU T, THE WORK ASSIGNED TO ITA NOS.1479 & 691/DEL/2016 7 THE ASSESSEE WAS TO BE DONE ON ITS OWN BY ITS TEAM OF EXPERTS HAVING 1376 PERSONS. CONSIDERING THE FACT THAT THE ASSESSEE WA S REMUNERATED ON COST PLUS 15%, THE TPO HELD THAT THE SAME WAS NOT AT ALP AS THE MICROSOFT USA, TO WHOM SERVICES WERE RENDERED AND WERE IN THE NATURE OF CONTRIBUTIONS TO THE PRODUCTS BEING INTEGRATED THER E, EARNED MARGIN RANGING BETWEEN 60 TO 70% OF THE COST. HE FURTHER DID NOT APPROVE THE ASSESSEES APPLICATION OF WEIGHTED MARGIN OF COMPARABLES. OUT OF 27 COMPANIES CHOSEN BY THE ASSESSEE AS COMPARABLE LISTED ON PAGE S 56 ONWARDS OF THE TPOS ORDER, HE RETAINED ONLY ONE COMPANY, NAMELY, M/S PERSISTENT SYSTEMS LTD. AND CHOSE THREE NEW COMPANIES, NAMELY, INFOSYS TECHNOLOGIES, E-INFOCHIPS BANGALORE AND WIPRO TECHN OLOGY SERVICES LTD. AFTER FINDING OUT THE CURRENT YEARS MARGIN OF THES E COMPARABLES, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.201,21,9 6,582/-. THE ASSESSEE ASSAILED THE CORRECTNESS OF THE DRAFT ORDER PASSED BY THE A.O., INCORPORATING THE TPOS VIEW POINT, BEFORE THE DISPUTE RESOLUTION PANEL (DRP) WHICH DIRECTED TO RECOMPUTE THE PROFIT MARGIN OF THE COMP ARABLES. ON GIVING EFFECT TO THE DIRECTIONS OF THE DRP, THE TPO PROPOS ED FRESH TRANSFER PRICING ADJUSTMENT OF RS.197,23,68,765/- IN THE INTERNATION AL TRANSACTION OF ITA NOS.1479 & 691/DEL/2016 8 PROVISION OF SOFTWARE DEVELOPMENT SERVICES, FOR WHI CH THE ADDITION CAME TO BE MADE IN THE FINAL ASSESSMENT ORDER. THE ASSESSE E IS AGGRIEVED BY THE ADDITION. 6. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE EMPLOYED THE TNMM AS THE MOST APPROPRIATE METHOD WITH THE PLI OF OP/OC FOR BENCHMARKING THE INTERNAT IONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES. UNLIKE SOM E EARLIER YEARS, THE TPO DID NOT DISPUTE THE APPLICATION OF THE TNMM AS THE MOST APPROPRIATE METHOD, NOR DID HE DISPUTE THE PLI. THE ASSESSEE HA S PRIMARILY CHALLENGED THE INCLUSION OF ALL THE COMPANIES AND ALSO THE EXC LUSION OF SOME OF ITS SELECTED COMPANIES BY THE TPO IN/FROM THE FINAL LIS T OF COMPARABLES. 7. COMPARABILITY OF COMPANIES CAN BE GAUGED ONLY AFTER FULLY ASCERTAINING THE FUNCTIONAL PROFILE OF THE ASSESSEE IN RESPECT O F THE INTERNATIONAL TRANSACTION UNDER CHALLENGE. THUS, THE FIRST AND T HE FOREMOST TASK AT OUR END IS TO IDENTIFY THE NATURE OF ACTUAL SERVICES RENDER ED BY THE ASSESSEE TO MICROSOFT, USA UNDER THIS INTERNATIONAL TRANSACTION . THE ASSESSEES MAIN PLANK OF SUBMISSIONS BEFORE THE TPO WAS THAT IT PRO VIDED LIMITED SERVICES ITA NOS.1479 & 691/DEL/2016 9 TO MS CORP., USA IN THE PRODUCT DEVELOPMENT CYCLE, WHICH ACTIVITY WAS WHOLLY SUPERVISED BY MS CORP., USA AND DONE IN DIFF ERENT COUNTRIES AND THE ASSESSEE WAS SIMPLY INVOLVED IN CREATING SOME F EATURES WITHIN THE OVERALL PRODUCT, WHICH MADE IT AN ORDINARY CAPTIVE LOW PROFILE SOFTWARE DEVELOPER. ON THE OTHER HAND, THE CASE OF THE REVEN UE IS THAT THE ASSESSEE IS ENGAGED IN PROVIDING HIGH END SOFTWARE DEVELOPMENT SERVICES INVOLVING INNOVATIONS AND THE SAME ARE IN THE CONTEXT OF PROD UCTS TO BE LAUNCHED IN FUTURE AND SUCH SERVICES RESULT IN CREATION OF INTA NGIBLES, WHICH ARE DISTINCT FROM A ROUTINE SOFTWARE DEVELOPMENT. 8. IN THIS REGARD, WE FIRST ADVERT TO THE VERS ION OF THE ASSESSEE ON ITS NATURE OF SERVICES RENDERED, AS RECORDED IN THE TP DOCUMENTATION AND STATED BEFORE THE TPO. THE TPO ON PAGE 43 OF HIS OR DER HAS REPRODUCED PARTS OF THE ASSESSEES TP STUDY REPORT DESCRIBING THE FUNCTIONS CARRIED OUT BY IT AS : (I) DOING THE CONTRACT SOFTWARE DEVELOPM ENT SERVICES REFERRING TO THE SOFTWARE DEVELOPMENT PHASE OF THE SOFTWARE DEVE LOPMENT LIFECYCLE, WHICH PRIMARILY INVOLVES WRITING AND TESTING CODES UNDER THE DIRECTION OF MS CORP.; (II) DOING ONLY SUCH FUNCTIONS OR MODULES WITHIN A PRODUCT AS DESIRED AND NOT FOR THE WHOLE PRODUCT, WHICH, IN TU RN, WAS ASSEMBLED BY ITA NOS.1479 & 691/DEL/2016 10 MS CORP. IN USA; (III) PERFORMING SOFTWARE DEVELOPM ENT SERVICES FOR MICROSOFT IT INCLUDING DEVELOPMENT OF SOFTWARE APPL ICATIONS EXCLUSIVELY FOR MS CORP. GROUPS INTERNAL USE, THAT IS CSS BUSI NESS INTELLIGENCE - APPLICATION TO HELP CSS BUSINESS WORLDWIDE TO COLLE CT AND REPORT THE INFORMATION FOR DECISION MAKING; VL FY11 MS CORP QU OTE APPLICATIONS TO HELP MANAGE CUSTOMER QUERIES FOR QUOTES/PRICING FOR MS CORP PRODUCTS; OPS FY11 ORDER MANAGEMENT APPLICATIONS TO HELP MA NAGE CUSTOMER ORDERS FOR MS-CORP PRODUCTS; INCENTIVE COMP APPLI CATIONS TO MANAGE SALES AND MARKETING TEAMS INCENTIVES FOR THE TARGET S ACHIEVED; OPS FY11 OS PRSS PIDNEXT APPLICATIONS TO BUILD NEXT GENE RATION PRODUCT KEY SERIES FOR MS CORP PRODUCTS; GLOBAL SALES EXPERIENC E (GSX) CRM APPLICATION FOR MS CORP SALES AND MARKETING EFFORTS ; HEADCOUNT APPLICATIONS FOR MAINTAINING HEADCOUNT DETAILS FOR FULL TIME EMPLOYEES (FTES) AND VENDOR RESOURCES; EAS ENHANCEMENT PO RTFOLIO OF APPLICATIONS FOR ENHANCEMENTS ON SAP CUSTOMIZATION FOR MICROSOFT (MS CORP) BUSINESS REQUIREMENTS; VL FY11 VOLUME LICENSI NG SOFTWARE (VLSC) LICENSING APPLICATION FOR MS CORP PRODUCT SALES. THEREAFTER, THE TPO HAS NOTED IN PARA 2.4 ON PAGE 45 OF HIS ORDER T HAT THE TP STUDY ITA NOS.1479 & 691/DEL/2016 11 ACKNOWLEDGED THAT THE ASSESSEE PARTICIPATED IN THE PRODUCT DEFINITION PROCESS FOR SUBSEQUENT VERSIONS OF MINOR PRODUCTS L IKE BIZTALK FOR WHICH THE INITIAL PRODUCT DEFINITION WAS PRODUCED BY MS C ORP. (PAGE 13 OF TP STUDY REPORT); THE ASSESSEE IS RESPONSIBLE FOR DESI GN, IMPLEMENTATION AND VERIFICATION OF CODE FOR MINOR PRODUCTS LIKE BIZTAL K AND DPM (DATA PROTECTION MANAGER) (PAGE 14 OF THE TP STUDY REPORT ); PRODUCT DEFINITION IS PERFORMED OUTSIDE INDIA WITH THE EXCEPTION OF SOME INCUBATION PROJECTS TARGETING EMERGING MARKETS (PAGE 15 OF THE TP STUDY REPORT); THE ASSESSEE IS CREATING TEN INCH LANGUAGE TOOLS WHICH ARE AVAIL ABLE FOR FREE FOR DOWNLOAD FROM MICROSOFT (PAGE 15 FOOTNOTE OF THE TP STUDY). THE TPO HAS RECORDED IN PARA 2.8 ON PAGE 46 OF HIS ORDER THAT T HE PATENTS WERE CREATED BY THE ASSESSEE IN INDIA IN RESPECT OF THE WORK DONE B Y IT, WHICH WERE REGISTERED IN USA. THIS FACT, IN THE OPINION OF THE TPO, ABUNDANTLY ESTABLISHED THAT THE ASSESSEE IS RENDERING HIGH-END SOFTWARE DEVELOPMENT SERVICES, WHICH ARE UNIQUE AND QUITE DIFFERENT FROM NORMAL SOFTWARE ACTIVITIES. 9. THE LD. AR HEAVILY RELIED ON INTERVIEWS OF CERTA IN EMPLOYEES OF THE ASSESSEE-COMPANY CONDUCTED BY THE ADVANCE PRICING A GREEMENT (APA) ITA NOS.1479 & 691/DEL/2016 12 AUTHORITIES IN SEPTEMBER, 2013 TO BUTTRESS HIS POI NT THAT THE ASSESSEE WAS PROVIDING ROUTINE SOFTWARE DEVELOPMENT SERVICES OF CODING AND TESTING AND THAT TOO, UNDER THE DIRECT SUPERVISION OF MICROSOFT , USA, AND FURTHER SUCH SERVICES WERE OF LITTLE CONSEQUENCE IN THE OVERALL MS PRODUCTS. IT WAS SUBMITTED THAT IN THESE INTERVIEWS ALL THE OFFICIAL S CATEGORICALLY STATED THAT THE DIRECTION FOR DOING THE WORK CAME FROM MS, USA AND THE EXECUTION WAS DONE STRICTLY ACCORDING TO SUCH DIRECTIONS. A V IEW WAS CANVASSED THAT THESE STATEMENTS GRAPHICALLY DIVULGED THAT THE ASSE SSEE IS NOT INVOLVED IN ANY R&D ACTIVITY. 10. HAVING GONE THROUGH THE RELEVANT PARTS OF SO ME OF THE INTERVIEWS, WHOSE COPIES HAVE BEEN PLACED ON RECORD BY THE ASSE SSEE, IT CAN BE SEEN THAT THE FIRST INTERVIEW WAS OF SHRI RAJIV KUMAR, W ITH THE DESIGNATION OF GENERAL MANAGER OFFICE GROUP, IDC, HYDERABAD. IN RESPONSE TO QUESTION NO.1, HE SUBMITTED TO BE RESPONSIBLE FOR FOUR ENGINEERING TEAMS AT INDIA DEVELOPMENT CENTRE (IDC), HYDERABAD, WORKING ON SOME FEATURES OF WORD WEB APP E.G., PAGE NUMBERS AND ANNOTATIONS (HE ADER AND FOOTER). AS REGARDS VISIO, HE STATED THAT HIS TEAM IS SUPPOR TING NEW FEATURES FOR THE NEXT OFFICE VERSION OF OFFICE. FOR GRAPHICS, HE SUB MITTED THAT HIS TEAM WAS ITA NOS.1479 & 691/DEL/2016 13 SUPPORTING PICTURE, TABLE, SMART ART USED IN VARIOU S OFFICE PRODUCTS FOR THE NEXT RELEASE. NEXT IS THE INTERVIEW OF SHRI TANUJ VOHRA WITH DESIGNATION OF GENERAL MANAGER, DEVELOPMENT, MSIT, HYDERABAD. IN RESPONSE TO QUESTION NO.1, HE SUBMITTED THAT AS A GENERAL MANAG ER, DEVELOPMENT DIVISION, HE IS RESPONSIBLE FOR ENGINEERING DELIVERY OF IT SOLUTIONS AND SERVICES USED BY MS FOR INTERNAL CONSUMPTION, WHICH INCLUDE PACKAGED AND CUSTOM APPLICATIONS DEVELOPED USING MICROSOFT AND T HIRD PARTY SOFTWARE SUCH AS SAP, INFRAGISTICS ETC. IN RESPONSE TO QUES TION NO.6, HE ADMITTED TO BE WORKING CLOSELY WITH OTHER ENGINEERING LEADERS I N REDMOND, USA. FOR THE WORK ASSIGNED TO THE ASSESSEE, HE STATED TO BE WRITING THE FUNCTIONAL SPECIFICATIONS DOCUMENTS. NEXT IS THE INTERVIEW OF SHRI AMIT CHATTERJEE WITH DESIGNATION OF MANAGING DIRECTOR AND GENERAL M ANAGER DEVELOPER TOOLS AND WINDOWS AZURE. IN RESPONSE TO QUESTION N O. 1, HE STATED TO BE INVOLVED, ALONG WITH HIS TEAM, IN TWO FEATURE AREAS IN ENGINEERING ORGANIZATION , THE FIRST ONE, BEING, THE VISUAL STUDIO PRODUCT LINE OF MICROSOFT WHICH IS A PART OF DEVELOPER DIVISION AT MICROSOFT AND THE SECOND, BEING, AZURE PRODUCT LINE. AZURE IS A DIS TRIBUTED OPERATING SYSTEM FOR THE MICROSOFT CLOUD OFFERING, SIMILAR TO THE DE DICATED OPERATING SYSTEM ITA NOS.1479 & 691/DEL/2016 14 FOR WINDOWS DESKTOP. NEXT IS THE INTERVIEW OF SHRI ANIL BHANSALI WITH DESIGNATION OF GENERAL MANAGER, WINDOWS SERVER AND SYSTEM CENTRE, IDC, HYDERABAD. HE, ALONG WITH HIS TEAM, STATED TO BE I NVOLVED IN WINSE CHARTER, WINDOWS ENGINEERING GROUP SERVER. IN RESP ONSE TO QUESTION NO. 2 ABOUT THE WORK FLOW IN RESPECT OF EACH AREA OF ITS ACTIVITY, HE STATED THAT THE SAME WOULD BE SUBMITTED LATER. THERE IS NOTHING ON RECORD TO SUBSTANTIATE THAT ANYTHING WAS SUBMITTED LATER. IN RESPONSE TO Q UESTION NO. 6, HE STATED THAT THE IDC TEAM WORKS ON DIFFERENT FEATURES IN DI FFERENT WINDOWS VERSIONS E.G., WINDOWS STORE WORK GOING BACK TO RED MOND AND THE IDC TEAM WORKING ON SOMETHING TOTALLY DIFFERENT FOR THE NEXT VERSION OF WINDOWS. IN RESPONSE TO QUESTION NO. 8 ABOUT THE D EGREE OF FUNCTIONAL AUTONOMY, HE STATED THAT: ONCE I HAVE THE FEATURE OR SUB-FEATURE TASK ASSIGNED TO ME, I WOULD HAVE AUTONOMY TO ENGINEER/E XECUTE ON THIS (AS LONG AS IT IS INDEPENDENT) . NEXT IS THE INTERVIEW OF MR. NITIN CHANDEL WITH THE DESIGNATION OF PARTNER ENGINEERING MANAGER, BING AD S TEAM, BANGALORE. IN RESPONSE TO QUESTION NO.1, HE STATED THAT AS A P ARTNER ENGINEERING MANAGER, BING ADS TEAM HAVE CARRIED OUT THREE FUNCTIONS, NAM ELY, DEVELOPMENT, TEST AND PM. IN RESPONSE TO QUESTION NO.3(E), HE STATED THAT ITA NOS.1479 & 691/DEL/2016 15 THEY SOMETIMES USE VENDORS (SUCH AS INFOSYS) TO DO SOME WORK. A COMMON THREAD RUNNING THROUGH ALL THE INTERVIEWS IS THAT T HEY ADMITTED THAT THE WORK WAS ASSIGNED TO THEM BY MS, USA WHICH IS ONLY A FEA TURE OF THE OVERALL PRODUCT AND NOT THE PRODUCT IN ITSELF AND FURTHER T HAT THE WORK WAS DONE BY THEM FOR MS, USA AND THE SAME WAS PERFORMED AS PER THE INSTRUCTIONS OF MICROSOFT, USA. A FURTHER COMMON FEATURE EMERGING FROM ALL THE INTERVIEWS CONDUCTED BY THE APA AUTHORITIES IS THAT THEY WERE USING PROCESS TOOLS (CUSTOMISED SOFTWARE, READYMADE TEMPL ATES AND GUIDELINES, ETC.) PROVIDED BY MICROSOFT USA, IN THE EXECUTION OF WORK, ALBEIT AT NO COST. IT IS PALPABLE FROM THE ABOVE INTERVIEWS THAT THE GENERAL MANAGER, DEVELOPMENT, MSIT, HYDERABAD AGREED THAT HE WAS RES PONSIBLE FOR ENGINEERING DELIVERY OF IT SOLUTIONS; THE GENERAL MANAGER, WINDOWS SERVER AND SYSTEM CENTRE, IDC, HYDERABAD FAILED TO SUBMIT THE WORK FLOW IN RESPECT OF EACH AREA OF ITS ACTIVITY AND ALSO AD MITTED THAT ONCE A FEATURE OR SUB-FEATURE TASK IS ASSIGNED TO HIM, HE WOULD H AVE AUTONOMY TO ENGINEER/EXECUTE IT; AND THE PARTNER ENGINEERING MANAGER, BING ADS TEAM, BANGALORE ADMITTED THAT BING ADS TEAM HAVE CARRIED OUT THREE FUNCTIONS, NAMELY, DEVELOPMENT, TEST AND PM. WE FURTHER FIND THAT THE ABOVE ITA NOS.1479 & 691/DEL/2016 16 STATEMENTS, ON WHICH THE LD. AR HAS HEAVILY BANKED UPON, ARE INCONCLUSIVE OF THEIR FATE AT THIS STAGE INASMUCH AS THESE WERE RECORDED BY THE APA AUTHORITIES IN SEPTEMBER, 2013 AND, ON A SPECIFIC Q UERY, THE LD. AR SUBMITTED THAT NO DECISION OF APA HAS COME SO FAR. THUS, IT IS PATENT THAT IT IS ONLY ONE SIDE OF THE STORY AND TILL DATE, THE CO NSEQUENCES OF THESE STATEMENTS IN THE OVERALL SCENARIO, ARE YET NOT AV AILABLE BY WAY OF ANY ORDER BY THE APA AS TO WHETHER THESE WERE ACCEPTED OR ANY FURTHER INVESTIGATION WAS CARRIED OUT WHICH EITHER CORROBOR ATED THE SAME OR TRANSPIRED ANYTHING ELSE. 11. WHEN WE CONSIDER THE VERSION GIVEN IN THE I NTERVIEWS BY THESE PEOPLE THAT THEY WERE NOT AT ALL INVOLVED IN CONCEP TUALIZATION, WE FIND THE SAME TO BE RUNNING CONTRARY TO THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE TPO, WHICH HAVE BEEN CAPTURED ON PAGE 42 OF HIS ORDER BY MEANS OF A TABLE IN WHICH THE ASSESSEE HAS CATEGORICALLY ADMIT TED THAT IT IS INVOLVED IN CONCEPTUALIZATION AND SCOPING OF PROJECT WORK INCLU DING DEFINING FUNCTIONS SPECIFICATIONS THOUGH IN A VERY LIMITED WAY. DESPI TE SPECIFIC REQUISITION MADE BY THE TPO TO GIVE DATA AS TO HOW ITS ROLE WAS LIMITED OR VERY LIMITED ITA NOS.1479 & 691/DEL/2016 17 IN PRODUCT CONCEPTUALIZATION, THE ASSESSEE DID NOT SUBMIT ANY MATERIAL/EVIDENCE. A FINDING TO THIS EFFECT HAS BE EN RECORDED ON PAGE 44 OF TPOS ORDER. AGAIN, IT HAS BEEN RECORDED ON PAGE 4 5 OF THE ORDER THAT THOUGH THE ASSESSEE CLAIMED IN PARENT-SUBSIDIARY AG REEMENT (PSA) DATED 01.07.2003 THAT IT UNDERTOOK THE ACTIVITY OF RESEAR CH AND DEVELOPMENT WORK AS REQUESTED AND APPROVED IN WRITING BY MS CORPORAT ION FROM TIME TO TIME, BUT, NO SUCH EVIDENCE WAS FURNISHED BY THE ASSESSEE DESPITE BEING SPECIFICALLY ASKED TO DO SO VIDE LETTER NO.543 DATE D 15.12.2014. THEREAFTER, IT HAS BEEN NOTED BY THE TPO IN PARA 2.5 OF THE SHO W CAUSE NOTICE, WHICH HAS BEEN REPRODUCED IN HIS ORDER, THAT THOUGH THE ASSESSEE ADMITTED IN ITS TP STUDY REPORT THAT IT HAD A VARYING ROLE TO PLAY IN ALL THE THREE PHASES, NAMELY, PRODUCT DEFINITION, PRODUCT DEVELOPMENT AND PRODUCT SERVICING, BUT NO ELABORATION OF THE DEGREE OF ROLE PLAYED WAS DONE BY THE ASSESSEE. 12. NOTWITHSTANDING THE ABOVE INTERVIEWS, THE ASSESSEE ITSELF SUMMARIZED ITS ROLE BEFORE THE TPO IN DIFFERENT STA GES OF THE SOFTWARE PRODUCT LIFECYCLE BY MEANS OF A TABLE, WHICH HAS BE EN REPRODUCED ON PAGE 42 OF THE TPOS ORDER, READING AS UNDER :- ITA NOS.1479 & 691/DEL/2016 18 TYPE OF FUNCTIONS MIRPL MS CORP. CONCEPTUALISATION AND SCOPING OF PROJECT WORK INCLUDING DEFINING FUNCTIONAL SPECIFICATIONS VERY LIMITED YES PROJECT EXECUTION YES SUBJECT TO SUPERVISION BY MS CORP. YES CODING, TESTING AND DOCUMENTATION YES, AS PER THE DIRECTIONS OF MS CORP. YES QUALITY ASSURANCE YES, BUT NO ECONOMIC BURDEN OF QUALITY FAILURE YES SALES AND MARKETING NO YES (IN RESPECT OF INTEGRATED FINAL PRODUCT) 13. THIS TABLE ENUMERATES FIVE FUNCTIONS, OUT OF WHICH FIRST FOUR RELATE TO SOFTWARE DEVELOPMENT, WHILST THE LAST ONE IS CON CERNED WITH MARKETING. ADMITTEDLY, THE SALES AND MARKETING ACTIVITY OF THE MS PRODUCTS HAS NO RELEVANCE WITH THE RENDERING OF SOFTWARE DEVELOPMEN T SERVICES. OUT OF THE REMAINING FOUR RELEVANT FUNCTIONS, THE FIRST ONE IS CONCEPTUALIZATION AND SCOPING OF PROJECT WORK INCLUDING DEFINING FUNCTION AL SPECIFICATIONS. AGAINST THE ASSESSEES ROLE IN THIS FUNCTION, IT HA S BEEN MENTIONED AS VERY LIMITED. IN THE SECOND AND THIRD FUNCTIONS OF PRO JECT EXECUTION AND ITA NOS.1479 & 691/DEL/2016 19 CODING, TESTING AND DOCUMENTATION, THE ASSESSEES ROLE HAS BEEN MENTIONED AS YES, SUBJECT TO SUPERVISION/DIRECTION S BY/OF MS CORP. IN THE FOURTH FUNCTION, NAMELY, `QUALITY ASSURANCE, T HE ASSESSEES ROLE HAS BEEN GIVEN AS YES (BUT, NO ECONOMIC BURDEN OF QUAL ITY FAILURE). FROM THE ABOVE TABLE, IT IS MANIFEST THAT THE ASSESSEE HAS C ATEGORICALLY ADMITTED BEFORE THE TPO THAT IT WAS INVOLVED, TO SOME EXTENT , IN CONCEPTUALIZATION OF PROJECT WORK, PROJECT EXECUTION, CODING, TESTING & DOCUMENTATION AND QUALITY ASSURANCE. THE TPO HAS REPEATEDLY NOTED TH AT THOUGH THE ASSESSEE ADMITTED IN ITS TRANSFER PRICING STUDY REPORT TO BE INVOLVED IN DEVELOPMENT OF SOFTWARE ETC., : `BUT IT DOES NOT GIVE ANY DATA AS TO HOW IT IS CONS TRUED THAT THE ROLE IN PRODUCT CONCEPTUALIZATION IS LIMIT ED OR VERY LIMITED. SIMILAR IS THE POSITION REGARDING THE OTHER FUNCTIO NS, SUCH AS, PROJECT EXECUTION AND CODING, TESTING AND DOCUMENTATION, I N WHICH, AGAIN, THE ASSESSEE ADMITTED TO HAVE A LIMITED ROLE TO PLAY, B UT DID NOT SPELL OUT SUCH ROLE BEFORE THE TPO. 14. THE ASSESSEE ALSO ACKNOWLEDGED IN ITS TP ST UDY REPORT, AS HAS BEEN EXTRACTED IN PARA 2.8 ON PAGE 46 OF THE TPOS ORDER , THAT IT IS INVOLVED IN THE DEVELOPMENT OF VARIOUS PRODUCTS AND ` IS RESPONSIBLE FOR DESIGN ITA NOS.1479 & 691/DEL/2016 20 IMPLEMENTATION AND VERIFICATION OF SOME PRODUCTS LI KE BIZTALK AND DPM ; IS `ALSO INVOLVED IN PRODUCT DEFINITION PHASE OF SOME INCUBATION PROJECT, LIKE DEVELOPMENT OF VARIOUS INDIC LANGUAGE TRANSLATORS ; AND IS `ALSO INVOLVED IN THE CREATION OF WINDOW VISTA . DESPITE THE ABOVE AVERMENTS IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE NOT ONLY TOOK A CONTRARY STAND BEFORE THE TPO BY TRIVIALIZING IT S ROLE AS RESTRICTED ONLY TO CODING AND TESTING OF SOME FEATURES OF THE MICROSOF T PRODUCTS BUT ALSO FAILED TO SUBSTANTIATE THE SAME. 15. WITH A VIEW TO GIVE ONE MORE CHANCE TO THE ASSESSEE TO SUBSTANTIATE ITS VERSION ABOUT THE NATURE OF WORK CARRIED OUT IN THIS INTERNATIONAL TRANSACTION, THE BENCH REQUIRED THE LD. AR TO PRODU CE PRIMARY EVIDENCE OF THE WORK ACTUALLY DONE WITH THE HELP OF REQUISITION AND DISPOSAL REGISTERS ETC. DIVULGING THE DATE WHEN A PARTICULAR WORK WAS ASSIGNED TO IT, HOW MANY DAYS IT TOOK IN DOING THE SAME, HOW MANY MAN-HOURS WENT INTO ITS DOING, WHAT WAS THE FINAL OUTPUT AND WHEN WAS IT SENT TO THE AE. THE LD. AR REFUSED TO SHARE ANY SUCH PRIMARY DATA AND HARPED O N THE INTERVIEWS CONDUCTED BY THE APA AUTHORITIES, WHOSE RELEVANCE AT THIS JUNCTURE HAS BEEN DISCUSSED SUPRA . IT IS APPARENT THAT THE ASSESSEE WAS NOT ONLY OBL IGED ITA NOS.1479 & 691/DEL/2016 21 TO BUT HAS, IN FACT, MAINTAINED SUCH COMPLETE RECOR DS. WE HAVE EXTRACTED INFRA THE RELEVANT PARTS OF THE PSA BETWEEN THE ASSESSEE AND MICROSOFT, USA, WHICH CLEARLY PROVIDE THAT THE ` SUBSIDIARY (I.E. THE ASSESSEE) HEREBY AGREES TO UNDERTAKE SUCH RESEARCH AND DEVELOPMENT W ORK AS REQUESTED AND APPROVED IN WRITING BY MSFT ( I.E. MICROSOFT, USA) FROM TIME TO TIME. THIS SHOWS THAT NOT ONLY THE REQUEST FOR THE WORK H AS TO COME FROM MICROSOFT, USA IN WRITING, BUT THE WORK DONE HAS AL SO TO BE APPROVED IN WRITING, WHICH AUTOMATICALLY IMPLIES THE MAINTENANC E OF ALL SUCH PRIMARY RECORDS. THE FACT THAT THE ASSESSEE HAS, IN FACT, M AINTAINED SUCH PRIMARY RECORDS IS FAIRLY BORNE OUT FROM ITS OWN SUBMISSION BEFORE THE TPO AS REPRODUCED ON PAGE 42 OF HIS ORDER THAT :`FURTHERMO RE, MIRPL (I.E. THE ASSESSEE) IS RESPONSIBLE FOR GENERATING AND MAINTAINING APPRO PRIATE DOCUMENTATION IN CONNECTION WITH THE SERVICES REND ERED TO MS CORP. THE MANAGING DIRECTOR OF THE ASSESSEE-COMPANY, SHRI AMI T CHATTERJEE, ALSO ADMITTED IN HIS INTERVIEW TO THE APA AUTHORITIES IN RESPONSE TO QUESTION NO.8 THAT : MY REPORTS GO TO REDMOND TWICE A YEAR AND THERE IS REGULAR INTERACTION WITH THE REDMOND TEAM AT SEVERAL LEVELS AND ALONG THE WAY REVIEW OF IDC WORK AND CROSS CORRECTION BY REDMOND IS DONE. IT IS THUS ITA NOS.1479 & 691/DEL/2016 22 CLEAR BEYOND ANY SHADOW OF DOUBT THAT THE ASSESSEE MAINTAINED ALL THE RELEVANT PRIMARY RECORDS, BUT DID NOT PRODUCE THE S AME BEFORE THE AUTHORITIES. THE ASSESSEE IS SIMPLY TRYING TO MARGI NALIZE ITS ROLE TO A BARE MINIMUM BY A LIP SERVICE CONTRARY TO WHAT HAS BEEN STATED IN THE TP STUDY AND SUBMITTED BEFORE THE TPO BY WAY OF A CHART, AS HAS BEEN DISCUSSED ABOVE. 16. ADMITTEDLY, THE ASSESSEE DID NOT CARRY OUT THE ENTIRE WORK OF THE MS PRODUCTS AT ITS OWN. OUT OF THE WORK ASSIGNED, IT SUB-CONTRACTED SOME OF THE WORK TO THE INDIAN PARTIES, FOR WHICH IT MADE A PAYMENT OF RS.158 CRORE DURING THE YEAR. SUCH PAYMENT IS DIVIDED INTO TWO PARTS, VIZ., RS.126.75 CRORE TOWARDS APPLICATION & DEVELOPMENT AND RS.31.7 0 CRORE TOWARDS PRODUCT DEVELOPMENT. THE LD. AR WAS DIRECTED TO PRO DUCE CONTRACTS ENTERED INTO WITH ALL THE THIRD PARTIES FOR WHICH S UCH A SUM OF RS.158 CRORE WAS PAID SO AS TO JUDGE THE OVERALL NATURE OF THE W ORK DONE BY THE ASSESSEE. OUT OF 12 CONTRACTS UNDER `APPLICATION & DEVELOPMEN T, THE ASSESSEE HAS FILED COPY OF AGREEMENTS ONLY WITH ONE PARTY, THAT IS, ACCENTURE SERVICES PRIVATE LIMITED. OUT OF 33 CONTRACTS UNDER `PRODUCT DEVELOPMENT, THE ASSESSEE HAS FILED COPIES WITH THREE PARTIES ONLY. THUS OUR ATTEMPT TO FIND ITA NOS.1479 & 691/DEL/2016 23 OUT THE OVERALL NATURE OF WORK DONE BY THE ASSESSEE WITH THE AID OF SUB- CONTRACTORS HAS ALSO NOT FRUCTIFIED. 17. THE LD. AR TRIED TO JUSTIFY HIS STAND OF N OT SHARING THE PRIMARY EVIDENCE BY STATING THAT THE EXAMINATION OF SUCH A N EVIDENCE WAS NOT WARRANTED AS THE INTERVIEWS DONE BY THE APA AUTHORI TIES GAVE ENOUGH HINTS ABOUT THE WORK DONE. SUCH A SUBMISSION THAT THE AUT HORITIES SHOULD DECIDE THE NATURE OF WORK DONE WITHOUT LOOKING INTO PRIMAR Y EVIDENCE OF THE ACTUAL WORK DONE IS NOT ONLY STRANGE BUT TOTALLY OUT OF PL ACE. HOW AN ASSESSMENT IS TO BE DONE FALLS IN THE EXCLUSIVE DOMAIN OF THE AUT HORITIES. THE ASSESSEE CANNOT BE ALLOWED TO DICTATE TO THE AUTHORITIES AS TO THE NATURE OF EVIDENCE TO BE EXAMINED AND THE EXTENT OF SUCH AN EXAMINATION F OR DETERMINING THE ISSUES WHICH ARE OF IMMENSE IMPORTANCE IN THE ASSES SMENT. IT IS THE SOLE PREROGATIVE OF THE AUTHORITIES TO DECIDE THE COURSE OF ACTION AND THE NATURE OF EVIDENCE TO BE EXAMINED FOR ENABLING THEM TO COM PLETE THE ASSESSMENT, AS LONG AS THEIR REQUIREMENTS DO NOT BREACH THE LEV EL OF REASONABLENESS AND RELEVANCE. ITA NOS.1479 & 691/DEL/2016 24 18. REVERTING TO THE POINT, THE ISSUE IS THE EXAMINATION OF COMPARABLES, WHICH CANT BE DECIDED UNLESS THE ASSESSEES FUNCTI ONAL PROFILE IS FULLY UNDERSTOOD. EXAMINATION OF PRIMARY EVIDENCE OF THE WORK DONE BY THE ASSESSEE FOR THIS PURPOSE IS CRITICAL, WITHOUT WHIC H THE EXERCISE OF COMPARABILITY CANNOT BE UNDERTAKEN PROPERLY. IN NO RMAL CIRCUMSTANCES, WE WOULD HAVE UPHELD THE DRAWING OF AN ADVERSE INFEREN CE AGAINST THE ASSESSEE BECAUSE OF ITS UNWILLINGNESS TO SHARE THE DESIRED P RIMARY INFORMATION. SINCE THE ISSUE BEFORE US IS CRUCIAL AND HAS AN IMPACT IN OTHER YEARS AS WELL, WE, WITH THE HELP OF BOTH THE PARTIES, DELVED INTO OTHE R MATERIAL AVAILABLE ON RECORD TO EXTRACT THE TRUE NATURE OF WORK DONE BY THE ASSESSEE. IN THIS COURSE OF ACTION, WE FIRST EXAMINED THE PSA DATED 1 .7.2003 ENTERED INTO BY THE ASSESSEE WITH MICROSOFT CORPORATION, USA, FOR RENDERING RESEARCH AND DEVELOPMENT SERVICES, A COPY OF WHICH HAS BEEN PL ACED ON RECORD. CLAUSE 2 OF THE AGREEMENT, WITH THE CAPTION RESEARCH AND D EVELOPMENT, READS AS UNDER : - `2. RESEARCH AND DEVELOPMENT SUBSIDIARY (I.E. THE ASSESSEE) HEREBY AGREES TO UN DERTAKE SUCH RESEARCH AND DEVELOPMENT WORK AS REQUESTED AND APPROVED IN WRITING BY MSFT ( I.E. MICROSOFT, USA) FROM TIME TO TIME. ITA NOS.1479 & 691/DEL/2016 25 SUBSIDIARY MAY SUBCONTRACT WITH THIRD PARTIES TO PE RFORM SOME OR ALL OF SUCH WORK UPON MSFT APPROVAL. IN THE EVENT THAT MSFT CONTRACTS DIRECTLY WITH VENDORS IN COUNTRY, MSFT MA Y REQUEST THE SUBSIDIARY TO PROVIDE ASSISTANCE WITH REGARD TO SUC H CONTRACTS. 19. CLAUSE 4 OF THE AGREEMENT WITH THE CAPTION `FEES: PAYMENT TERMS STATES THAT: `IN CONSIDERATION OF SUBSIDIARYS RESEARCH AND DEVELOPMENT ACTIVITIES UNDER ARTICLE 2 OF THE AGREEMENT, MSFT SHALL PAY S UBSIDIARY A FEE EQUAL TO ONE HUNDRED AND FIFTEEN PERCENT (115%) OF SUBSIDIARYS ACTUAL EXPENSES. 20. CLAUSE 5 OF THE PSA, WHICH IS CENTRAL FOR OUR PURPOSE, STATES THAT THE INTELLECTUAL PROPERTY IN RESPECT OF RESEARCH WORK D ONE BY THE ASSESSEE SHALL VEST IN MICROSOFT, USA, RELEVANT PARTS OF WHICH REA D AS UNDER : - 5. INTELLECTUAL PROPERTY MATTERS 5.1 RESEARCH AND DEVELOPMENT. SUBSIDIARY AGREES THAT A NY AND ALL DEVELOPMENTS MADE BY IT OR UNDER SUBSIDIARY S DIRECTION, IN CONNECTION WITH THE PERFORMING OF RESEARCH AND D EVELOPMENT WORK FOR MSFT SHALL BE OWNED BY MSFT IN THEIR ENTIR ETY. SUCH DEVELOPMENTS SHALL (TO THE EXTENT POSSIBLE) BE DEEM ED WORKS MADE FOR HIRE CREATED BY SUBSIDIARY FOR MSFT PURSU ANT TO 17 USC SECTION 102(B). ALL COPYRIGHTS (TO THE EXTENT (IF AT ALL) NOT ALREADY OWNED BY MSFT AS WORKS MADE FOR HIRE), PAT ENTS AND OTHER PROPRIETARY RIGHTS IN SUCH DEVELOPMENTS SHALL BE AND ARE HEREBY TRANSFERRED, SOLD, CONVEYED AND ASSIGNED TO MSFT. TO ITA NOS.1479 & 691/DEL/2016 26 THE MAXIMUM EXTENT PERMITTED BY LAW, SUBSIDIARY HER EBY ASSIGNS TO MSFT AND WAIVES AND AGREES NEVER TO ASSERT ANY A ND ALL MORAL RIGHTS, INCLUDING NEIGHBORING RIGHTS, IN SUCH DEVEL OPMENTS. SUBSIDIARY SHALL ITSELF, AND SHALL REQUIRE ALL INDI VIDUALS OR ENTITIES WORKING WITH SUBSIDIARY IN CONNECTION WITH THE PERFORMING OF RESEARCH AND DEVELOPMENT WORK FOR MSFT TO EXECUTE AND DELIVER SUCH INSTRUMENTS AND TAKE SUCH OTHER ACTION AS MAY BE REQUIRED TO CARRY OUT THE TRANSFER, SALE, ASSIGNMENT OR WAIV ER OF COPYRIGHT, PATENT AND OTHER PROPRIETARY RIGHTS CONTEMPLATED BY THIS SECTION 5.1. ANY DOCUMENTS, MAGNETICALLY, OPTICALLY OR OTH ERWISE ENCODED MEDIA, OR OTHER MATERIALS CREATED BY SUBSID IARY, OR UNDER SUBSIDIARYS DIRECTION, IN PERFORMING RESEARCH AND DEVELOPMENT WORK FOR MSFT SHALL BE OWNED BY MSFT IN THEIR ENTIRETY. 5.2 OTHER RESEARCH AND DEVELOPMENT, INCLUDING WITHO UT LIMITATION, LOCALIZATION, CONSULTING AND TRAINING. AS FURTHER CONSIDERATION FOR THE RIGHTS GRANTED TO SUBSIDIARY BY MSFT PURSUANT TO THIS AGREEMENT, SUBSIDIARY HEREBY ACKNO WLEDGES MSFT OWNERSHIP OF ALL COPYRIGHTS, PATENTS AND OTHER PROPRIETARY RIGHTS IN: (I) ANY DEVELOPMENT WORK PERFORMED BY SUBSIDIARY WHETHER OR NOT IT RELATES TO MSFT PRODUCTS AND SERVICES, IRRES PECTIVE OF WHETHER SUCH WORK WAS APPROVED AND PAID FOR BY MSFT PURSUANT TO THE FOREGOING. ; AND (II) ANY WORK, MATERIALS OR INFORMATION ACQUIRED BY SUBSIDIARY IRRESPECTIVE OF WHETHER THE ACQUISITION OF SUCH WOR K, MATERIALS OR INFORMATION WAS APPROVED BY MSFT. ITA NOS.1479 & 691/DEL/2016 27 21. A CLOSE READING OF CLAUSE 2 IN JUXTAPOSITI ON TO CLAUSE 5 OF THE PSA DIVULGES THREE THINGS, VIZ., FIRST, THAT THE ASSES SEE AGREED TO UNDERTAKE RESEARCH AND DEVELOPMENT WORK , TWO, IT IS SUCH RESEARCH AND DEVELOPMENT WORK WHICH IS REQUESTED AND ALSO APPROVED IN WRITING BY MICROSOFT, USA AND THREE, THAT THE INTELLECTUAL PROPERTY RIGHTS IN RESPECT OF SUCH R&D WORK DONE BY THE ASSESSEE OR OUTSOURCED TO SUB-CONTRACTO RS IN INDIA, SHALL BE OWNED BY MICROSOFT, USA. 22. THE PSA CONTINUED AS SUCH. IT APPEARS THAT SOME INCOME-TAX ASSESSMENTS OF THE ASSESSEE WERE DONE TAKING AN UNF AVOURABLE VIEW BY THE DEPARTMENT. TO GET RID OF SUCH A VIEW, THE ASSESSE E ENTERED INTO AN AMENDMENT AND RESTATED PSA ON 1.1.2009 W.R.E.F 1.7. 2003. THE PREAMBLE CLAUSE OF SUCH AN AGREEMENT ACKNOWLEDGES THAT : `W HEREAS, AS A RESULT OF MISINTERPRETATION BY THE INDIAN TAX AUTHORITIES OF THE PARENT SUBSIDIARY AGREEMENT , THE PARTIES WISH TO EXPRESSLY MAKE THEIR ORIGINAL INTENT KNOWN. THROUGH THIS AGREEMENT, CLAUSES 2 AND 5 OF THE ORIG INAL PSA STOOD SUBSTITUTED AS UNDER : - `2. RESEARCH AND DEVELOPMENT SUBSIDIARY HEREBY AGREES TO UNDERTAKE SUCH RESEARCH AND DEVELOPMENT WORK AS REQUESTED AND APPROVED IN WRITI NG BY MSFT ITA NOS.1479 & 691/DEL/2016 28 FROM TIME TO TIME. SUBSIDIARY MAY SUBCONTRACT WITH THIRD PARTIES TO PERFORM SOME OR ALL OF SUCH WORK UPON MSFTS APP ROVAL. IN THE EVENT THAT MSFT CONTRACTS DIRECTLY WITH VENDORS IN COUNTRY, MSFT MAY REQUEST THE SUBSIDIARY TO PROVIDE ASSISTAN CE WITH REGARD TO SUCH CONTRACTS. SUBSIDIARYS RESPONSIBILITIES ARE LIMITED TO BEST EFFORTS TO DEVELOP CODE OR OTHERWISE COMPLE TE THE PROJECT, NOT USE IP NOT OWNED BY MSFT, AND DELIVER PER PROJE CT SPECIFICATIONS AS PROVIDED BY MSFT. 5. INTELLECTUAL PROPERTY MATTERS RESEARCH AND DEVELOPMENT . SUBSIDIARY AGREES THAT ANY AND ALL DEVELOPMENTS MADE BY IT OR UNDER SUBSIDIARYS D IRECTION, IN CONNECTION WITH THE PERFORMING OF RESEARCH AND DEVE LOPMENT WORK FOR MSFT SHALL BE OWNED BY MSFT IN THEIR ENTIRETY. SUCH DEVELOPMENTS SHALL (TO THE EXTENT POSSIBLE) BE DEEM ED WORKS MADE FOR HIRE CREATED BY SUBSIDIARY FOR MSFT PURSU ANT TO 17 U.S.C. SECTION 102(B). ALL COPYRIGHTS (TO THE EXTE NT (IF AT ALL) NOT ALREADY OWNED BY MSFT AS WORKS MADE FOR HIRE), PAT ENTS AND OTHER PROPRIETARY RIGHTS IN SUCH DEVELOPMENTS SHALL BE AND ARE HEREBY TRANSFERRED, SOLD, CONVEYED AND ASSIGNED TO MSFT. TO THE MAXIMUM EXTENT PERMITTED BY LAW, SUBSIDIARY HEREBY ASSIGNS TO MSFT AND WAIVES AND AGREES NEVER TO ASSERT ANY AND ALL MORAL RIGHTS, INCLUDING NEIGHBORING RIGHTS, IN SUCH DEVEL OPMENTS. SUBSIDIARY SHALL ITSELF, AND SHALL REQUIRE ALL INDI VIDUALS OR ENTITIES WORKING WITH SUBSIDIARY IN CONNECTION WITH THE PER FORMING OF RESEARCH AND DEVELOPMENT WORK FOR MSFT TO EXECUTE A ND DELIVER SUCH INSTRUMENTS AND TAKE SUCH OTHER ACTION AS MAY BE REQUIRED TO CARRY OUT THE TRANSFER, SALE, ASSIGNMENT OR WAIVER OF COPYRIGHT, PATENT AND OTHER PROPRIETARY RIGHTS CONTEMPLATED BY THIS SECTION 5.1. ANY DOCUMENTS, MAGNETICALLY, OPTICALLY OR OTH ERWISE ENCODED MEDIA, OR OTHER MATERIALS CREATED BY SUBSID IARY, OR UNDER ITA NOS.1479 & 691/DEL/2016 29 SUBSIDIARYS DIRECTION, IN PERFORMING RESEARCH AND DEVELOPMENT WORK FOR MSFT SHALL BE OWNED BY MSFT IN THEIR ENTIR ETY. MSFT OWNS ALL RIGHTS TO COVERED INTANGIBLES, TAKES ALL R ISK OF SUCCESSFULLY MARKETING SUCH COVERED INTANGIBLES, AN D TAKES ALL RISKS NOT OTHERWISE HEREIN EXPRESSLY TAKEN BY SUBSI DIARY. 23. A CONJOINT READING OF THE REVISED CLAUSES 2 AND 5 OF THE AMENDED PSA ALSO ACKNOWLEDGES THREE THINGS, THAT IS, THE AS SESSEE AGREED TO UNDERTAKE RESEARCH AND DEVELOPMENT WORK; R&D IS OF SUCH A WORK WHICH IS REQUESTED AND APPROVED IN WRITING BY MICROSOFT, USA; AND THE ASSESSEE AGREED THAT THE OUTPUT OF THE PERFORMANCE OF R&D WO RK DONE BY THE ASSESSEE OR UNDER ITS DIRECTION, SHALL BE OWNED BY MICROSOFT, USA. THE INTENTION BEHIND THE AMENDED AND RESTATED PSA IS T O CLARIFY THAT THE ASSESSEE SHALL WORK AS PER THE SPECIFICATIONS PROVI DED BY MICROSOFT, USA. HOWEVER, THE SCOPE OF THE ASSESSEES R&D ACTIVITIES , EVEN UNDER THE AMENDED PSA, IS NOT RESTRICTED TO DEVELOPING CODE S ONLY, BUT ALSO TO COMPLETE THE PROJECT ASSIGNED TO IT BY MICROSOFT, U SA, AS IS CLEARLY BORNE OUT FROM THE LANGUAGE OF CLAUSE 2 OF THE AMENDED PS A, WHICH STIPULATES THAT THE ASSESSES RESPONSIBILITIES ARE LIMITED TO BEST EFFORTS TO DEVELOP CODE OR OTHERWISE COMPLETE THE PROJECT. IT IS, THEREFORE, UTTERLY CLEAR THAT THE ASSESSEE UNDERTOOK TO DO RESEARCH AND DEVELOPMENT W ORK AND THE ITA NOS.1479 & 691/DEL/2016 30 UNSUBSTANTIATED CONTENTION OF THE ASSESSEE THAT IT WAS ONLY ENGAGED IN TESTING AND CODING AT A LOWER LEVEL, STANDS NOWHERE . IT IS MORE SO IN THE LIGHT OF THE AMENDED PSA, WHICH CATEGORICALLY SETS OUT THAT ITS WORK WILL NOT BE CONFINED TO DEVELOPING CODE BUT ALSO OTHERWI SE COMPLETING THE PROJECT ASSIGNED TO IT BY MICROSOFT, USA. 24. THE ASSESSEE CONTINUED TO CARRY ON FULL-FL EDGED RESEARCH WORK ALBEIT IN RESPECT OF A PART OF THE OVERALL MICROSOFT PRODU CT, WHICH IS FURTHER ESTABLISHED FROM THE FACT THAT THE PATENTS REGISTER ED IN USA FOR WORK DONE IN INDIA AMOUNTED TO 113 IN NUMBER OVER A PERIOD OF FIVE YEARS WITH 6 PATENTS IN 2008, 16 IN 2009, 22 IN 2010, 33 IN 2011 AND 36 IN 2012. WE HAVE RANDOMLY GONE THROUGH ABSTRACTS OF SOME INVENT IONS DONE BY THE ASSESSEE IN INDIA WHICH WERE REGISTERED IN THE USA FOR PATENTS. THE FIRST ONE IS DATED 11.06.2013 WHICH IS EXTRACTING TOPICA LLY RELATED KEY WORDS FROM RELATED DOCUMENTS. ABSTRACT OF THIS WORK HAS BEEN GIVEN AS:- KEYWORD EXTRACTION TECHNIQUE EMBODIMENTS ARE PRESE NTED WHICH EXTRACT TOPICALLY RELATED KEYWORDS FROM A SET OF TOPICALLY RELATED DOCUMENTS. IN ONE GENERAL EMBODIMENT, THIS KEYWORD EXTRACTION INVOLVE S FIRST ACCESSING A SET OF TOPICALLY RELATED DOCUMENTS. A NUMBER OF CANDIDA TE KEYWORDS ARE THEN IDENTIFIED FROM THE SET OF RELATED DOCUMENTS. A WEI GHTED KEYWORD CANDIDATE-DOCUMENT MATRIX IS FORMED USING THESE CAN DIDATE KEYWORDS, AND IT IS PARTITIONED INTO MULTIPLE GROUPS OF KEYWORD C ANDIDATES. DENSE CLUSTERS OF KEYWORD CANDIDATES WHOSE DENSITY EXCEEDS A PRESC RIBED DENSITY THRESHOLD ARE THEN IDENTIFIED IN EACH OF THE GROUPS OF KEYWORD CANDIDATES. ITA NOS.1479 & 691/DEL/2016 31 FINALLY, THE KEYWORD CANDIDATES ASSOCIATED WITH EAC H DENSE CLUSTER ARE DESIGNATED AS TOPICALLY RELATED KEYWORDS. 25. ANOTHER CREATION OF INTELLECTUAL PROPERTY BY TH E ASSESSEE IN INDIA WHICH HAS BEEN PATENTED IN USA ON 08.01.2013 IS R ESOURCE ALLOCATION FRAMEWORK FOR WIRELESS OR WIRED NETWORK. ABSTRACT OF THIS WORK IS AS UNDER:- A RESOURCE ALLOCATION FRAMEWORK FOR WIRELESS/WIRED NETWORKS IS DESCRIBED. IN AN EMBODIMENT, METHODS OF END HOST BA SED TRAFFIC MANAGEMENT ARE DESCRIBED WHICH OPERATE SEPARATELY F ROM THE UNDERLYING ACCESS CONTROL PROTOCOL WITHIN THE NETWORK (E.G. WI RELESS MAC PROTOCOL OR TCP). THE RATE LIMITS FOR EACH FLOW ARE SET BASE D ON PER-FLOW WEIGHTS, WHICH MAY BE USER SPECIFIED, AND BASED ON AN ESTIMATE OF THE UTILIZATION OF THE SHARED RESOURCE AND THE RATE LIM ITS ARE ADJUSTED PERIODICALLY SO THAT THE RESOURCE IS NOT UNDERUTILI ZED OR SATURATED. SOME EMBODIMENTS COMPUTE A VIRTUAL CAPACITY OF THE RESOU RCE WHICH IS ADJUSTED TO OPTIMIZE THE VALUE OF THE UTILIZATION A ND THEN THE VIRTUAL CAPACITY IS SHARED BETWEEN FLOWS ACCORDING TO THE P ER-FLOW WEIGHTS. METHODS FOR ESTIMATING THE UTILIZATION OF A WIRELES S NETWORK AND THE CAPACITY OF A BROADBAND ACCESS LINK ARE ALSO DESCRI BED. 26. STILL ANOTHER INTELLECTUAL PROPERTY DEVELOPED B Y THE ASSESSEE, WHICH GOT PATENTED IN USA ON 18.02.2014 IS `IDENTIF YING TOPICALLY RELATED PHRASES IN A BROWSING SEQUENCE. ABSTRACT OF THIS WORK IS AS UNDER:- BROWSING SEQUENCE PHRASE IDENTIFICATION TECHNIQUE EMBODIMENTS ARE PRESENTED THAT GENERALLY EXTRACT TOPICALLY-RELATED PHRASES FROM THE PAGES VISITED BY A USER IN A BROWSING SESSION. THE TOPICA LLY-RELATED PHRASES CAN BE USED FOR A VARIETY OF PURPOSES, INCLUDING AI DING A USER IN RE- FINDING PREVIOUSLY VISITED SITES. THIS PHRASE IDENT IFICATION TASK IS PERFORMED BY CONSIDERING NOT JUST THE PAGES OF A US ER'S BROWSING SEQUENCE INDIVIDUALLY, BUT ALSO PAGES VISITED IMMED IATELY BEFORE AND IMMEDIATELY AFTER EACH PAGE. IN THIS WAY, PHRASES F OUND IN A PAGE CAN BE ITA NOS.1479 & 691/DEL/2016 32 ANALYZED IN THE CONTEXT IN WHICH THE PAGE WAS VIEWE D, RATHER THAN IN ISOLATION. THE IDENTIFIED PHRASES ARE FURTHER FILTE RED BY PICKING THOSE THAT APPEAR ON A PRE-POPULATED TOPIC LIST, AND THEN CLUSTERING TO FIND THE MOST INFORMATIVE ONES. 27. IN THE SAME WAY, THERE ARE TOTAL 113 INVENT IONS CARRIED OUT BY THE ASSESSEE, WHICH WERE REGISTERED IN THE USA. THIS SP EAKS VOLUMES OF THE LEVEL OF WORK DONE BY THE ASSESSEE IN INDIA CULMINA TING INTO THE CREATION OF INTELLECTUAL PROPERTIES AT ITS END. IT IS SIMPLE AN D PLAIN THAT IN ORDER TO BE ELIGIBLE FOR PATENT, THERE HAS TO BE FIRST SOME INV ENTION AND FURTHER SUCH INVENTION MUST MEET SEVERAL CRITERIA TO GET PATENT PROTECTION, SUCH AS, THE INVENTION MUST CONSIST OF PATENTABLE SUBJECT MATTER ; IT MUST BE NEW (NOVEL); IT MUST INVOLVE INVENTIVE STEPS. A SIMPLE TESTING A ND CODING DOES NOT RESULT INTO AN INVENTION, MUCH LESS ITS PATENTABILITY. TH E FACT THAT 113 PATENTABLE INVENTIONS WERE DONE BY THE ASSESSEE IN INDIA BY IT S SOFTWARE DEVELOPMENT WORK, WHICH WERE REGISTERED IN THE USA, LEAVES NO R OOM FOR DOUBT THAT IT IS UNDOUBTEDLY ENGAGED IN RESEARCH ACTIVITIES AND IS S IGNIFICANTLY DIFFERENT FROM A ROUTINE SOFTWARE DEVELOPER. 28. THE ASSESSEE HAS HARPED ON ITS ROLE AS L IMITED TO PROVIDING SERVICES IN RELATION TO CERTAIN FUNCTIONS OR MODULES WITHIN A PRODUCT AND NOT FOR THE WHOLE PRODUCT ITSELF WHICH, IN TURN, IS ASSEMBLED B Y MS CORPORATION IN ITA NOS.1479 & 691/DEL/2016 33 REDMOND, USA. THE ULTIMATE PRODUCTS MADE BY MICROS OFT, USA, INVOLVE SEVERAL SOFTWARE, SOME OF WHICH ARE DEVELOPED BY I TS AES IN DIFFERENT PARTS OF THE WORLD INCLUDING THE ASSESSEE. EVEN THOUGH I NTEGRATION OF ALL THE SOFTWARE DEVELOPED IN SEVERAL COUNTRIES IS DONE IN THE USA, THAT DOES NOT MEAN THAT THE RESEARCH WORK DONE BY THE ASSESSEE OR FOR THAT MATTER BY AES IN THE OTHER COUNTRIES, CEASES TO BE A RESEARCH WOR K IN ITSELF. IN SUCH CIRCUMSTANCES, IT CANNOT BE SAID THAT RESEARCH WORK IS DONE EXCLUSIVELY BY MICROSOFT, USA, WHICH IS BRINGING TOGETHER THE RESE ARCH WORK DONE BY SEVERAL ENTITIES. IN FACT, ALL THE ENTITIES CONTRIB UTING TO THE BRINGING OUT OF A NEW PRODUCT OR A NEW VERSION OF THE EXISTING PRODUC T BY MEANS OF INVENTIONS, ARE DOING RESEARCH WORK. THE ASSESSEE CANNOT BE COMPARED WITH A RUN-OF-THE-MILL SOFTWARE DEVELOPER AS HAS BE EN UNSUCCESSFULLY ATTEMPTED BY THE LD. AR. AU CONTRAIRE, IT IS INVOLVED IN THE DEVELOPMENT OF MICROSOFT PRODUCTS, THOUGH AS AN ORGAN AND IN A LIM ITED WAY, BUT, WITHIN THE SCOPE OF WORK ASSIGNED, IT IS UNDERTAKING RESEARCH AND DEVELOPMENT AND CREATING INTANGIBLES, WHICH ARE EVEN PATENTED. 29. A GREAT DEAL OF EMPHASIS WAS LAID BY THE LD. AR ON THE FACT THAT THE ASSESSEE WAS COMPENSATED AT COST PLUS 15% IRRESPECT IVE OF ITS SUCCESS OR ITA NOS.1479 & 691/DEL/2016 34 FAILURE IN THE WORK ASSIGNED. IN OUR CONSIDERED OP INION, THIS MANNER OF QUANTIFICATION OF REMUNERATION SIMPLY SHOWS THE DEG REE OF LOW RISK WHICH THE ASSESEE IS BEARING AND DOES NOT IN ANY WAY, UND ERMINE THE NATURE OF WORK CARRIED ON. WHAT IS CRUCIAL AT THIS JUNCTURE I S TO FIND OUT THE NATURE OF WORK DONE BY THE ASSESSEE AND NOT THE MODE OF COMPE NSATION. 30. WE HAVE NOTICED ABOVE THAT THE PARENT-SU BSIDIARY AGREEMENT AND THE RESTATED PSA CLEARLY INDICATE THAT THE NATURE O F WORK DONE BY THE ASSESSEE IS THAT OF RESEARCH AND DEVELOPMENT IN THE OVERALL MICROSOFT PRODUCTS ALBEIT TO A LIMITED EXTENT. IT IS FURTHER CLEAR FROM THE S AME AGREEMENTS THAT THE WORK DONE BY THE ASSESSEE WOULD RESULT INTO CREATION OF INTANGIBLES, WHICH WOULD VEST IN MICROSOFT, USA. T HE FACT THAT THE ASSESSEE CARRIED OUT RESEARCH OF SIZEABLE NATURE IN RENDERING SOFTWARE DEVELOPMENT SERVICES ALSO GETS ESTABLISHED, INTER ALIA, BY THE CREATION OF INTELLECTUAL PROPERTIES IN INDIA WHICH HAVE BEEN RE GISTERED AS PATENTS IN THE USA. THESE TWO SIGNIFICANT FACTORS, VIZ., CLAUSES OF THE PSA REQUIRING THE ASSESSEE TO UNDERTAKE RESEARCH AND DEVELOPMENT AND ACTUAL CREATION OF INTELLECTUAL PROPERTY IN INDIA PATENTED IN THE USA, COUPLED WITH THE SHYNESS OF THE ASSESSEE IN FURNISHING THE PRIMARY E VIDENCE OF THE REQUISITION ITA NOS.1479 & 691/DEL/2016 35 OF WORK BY MICROSOFT USA AND THE FINAL OUTPUT ETC. BEFORE THE TPO AND ALSO THE TRIBUNAL AMPLY PROVE THAT THE SUBMISSIONS MADE BY SOME OF THE COMPANYS OFFICERS BEFORE APA AUTHORITIES OF NOT BE ING INVOLVED IN ANY RESEARCH WORK, DO NOT MERIT ACCEPTANCE. TAKING A HO LISTIC VIEW OF THE MATTER, WE HAVE ABSOLUTELY NO DOUBT IN OUR MIND THA T THE ASSESSEE IS PROVIDING RESEARCH AND DEVELOPMENT SOFTWARE SERVICE S TO MICROSOFT, USA. 31. AT THIS STAGE, IT IS IMPERATIVE TO NOTE CIRC ULAR NO. 3/2013 DATED 26.03.2013 WHICH LAYS DOWN CERTAIN GUIDELINES FOR I DENTIFYING IF A DEVELOPMENT CENTRE IN INDIA IS A CONTRACT R&D SERVI CE PROVIDER WITH INSIGNIFICANT RISK. IT SETS OUT THE FOLLOWING GUIDE LINES FOR TAKING A DECISION ON THE POINT : - THE CBDT HAS CAREFULLY CONSIDERED THE MATTER AND LAYS DOWN THE FOLLOWING GUIDELINES FOR IDENTIFYING THE DEVELOPMEN T CENTRE AS A CONTRACT R&D SERVICE PROVIDER WITH INSIGNIFICANT RI SK. 1. FOREIGN PRINCIPAL PERFORMS MOST OF THE ECONOMICALL Y SIGNIFICANT FUNCTIONS INVOLVED IN RESEARCH OR PRODU CT DEVELOPMENT CYCLE EITHER THROUGH ITS OWN EMPLOYEES OR THROUGH I TS ASSOCIATED ENTERPRISES WHILE THE INDIAN DEVELOPMENT CENTRE CAR RIES OUT THE WORK ASSIGNED TO IT BY THE FOREIGN PRINCIPAL. ECONOMICAL LY SIGNIFICANT FUNCTIONS WOULD INCLUDE CRITICAL FUNCTIONS SUCH AS CONCEPTUALIZATION AND DESIGN OF THE PRODUCT AND PROVIDING THE STRATEG IC DIRECTION AND FRAMEWORK; 2. THE FOREIGN PRINCIPAL OR ITS ASSOCIATED ENTERPRISE (S) PROVIDES ITA NOS.1479 & 691/DEL/2016 36 FUNDS/CAPITAL AND OTHER ECONOMICALLY SIGNIFICANT AS SETS INCLUDING INTANGIBLES FOR RESEARCH OR PRODUCT DEVELOPMENT. TH E FOREIGN PRINCIPAL OR ITS ASSOCIATED ENTERPRISE(S) ALSO PROVIDES A REM UNERATION TO THE INDIAN DEVELOPMENT CENTRE FOR THE WORK CARRIED OUT BY THE LATTER; 3. THE INDIAN DEVELOPMENT CENTRE WORKS UNDER THE DIRE CT SUPERVISION OF THE FOREIGN PRINCIPAL OR ITS ASSOCIA TED ENTERPRISE WHICH HAS NOT ONLY THE CAPABILITY TO CONTROL OR SUPERVISE BUT ALSO ACTUALLY CONTROLS OR SUPERVISES RESEARCH OR PRODUCT DEVELOPM ENT THROUGH ITS STRATEGIC DECISIONS TO PERFORM CORE FUNCTIONS AS WE LL AS MONITOR ACTIVITIES ON REGULAR BASIS; 4. THE INDIAN DEVELOPMENT CENTRE DOES NOT ASSUME OR H AS NO ECONOMICALLY SIGNIFICANT REALIZED RISKS. IF A CONTR ACT SHOWS THAT THE FOREIGN PRINCIPAL IS OBLIGATED TO CONTROL THE RISK BUT THE CONDUCT SHOWS THAT THE INDIAN DEVELOPMENT CENTRE IS DOING SO, THE N THE CONTRACTUAL TERMS ARE NOT THE FINAL DETERMINANT OF ACTUAL ACTIV ITIES; 5. IN THE CASE OF A FOREIGN PRINCIPAL BEING LOCATED IN A COUNTRY/TERRITORY WIDELY PERCEIVED AS A LOW OR NO T AX JURISDICTION, IT WILL BE PRESUMED THAT THE FOREIGN PRINCIPAL IS NOT CONTROLLING THE RISK. HOWEVER, THE INDIAN DEVELOPMENT CENTRE MAY REBUT TH IS PRESUMPTION TO THE SATISFACTION OF THE REVENUE AUTHORITIES. LOW TAX JURISDICTION SHALL MEAN ANY COUNTRY OR TERRITORY NOTIFIED IN THIS BEHA LF UNDER SECTION 94A OF THE ACT OR ANY OTHER COUNTRY OR TERRITORY THAT M AY BE NOTIFIED FOR THE PURPOSE OF CHAPTER X OF THE ACT; 6. INDIAN DEVELOPMENT CENTRE HAS NO OWNERSHIP RIGHT ( LEGAL OR ECONOMIC) ON THE OUTCOME OF THE RESEARCH WHICH VEST S WITH THE FOREIGN PRINCIPAL AND THAT THIS IS EVIDENT FROM THE CONTRAC T AS WELL AS FROM THE CONDUCT OF THE PARTIES. THE ASSESSING OFFICER OR THE TRANSFER PRICING OFFIC ER, AS THE CASE MAY BE, SHALL HAVE REGARD TO THE GUIDELINES ABOVE AND S HALL TAKE A DECISION BASED ON THE TOTALITY OF THE FACTS AND CIRCUMSTANCE S OF THE CASE. IN DOING SO, THE ASSESSING OFFICER OR THE TRANSFER PRI CING OFFICER, AS THE CASE MAY BE, SHALL BE GUIDED BY THE CONDUCT OF THE PARTIES AND NOT MERELY BY THE TERMS OF THE CONTRACT. ITA NOS.1479 & 691/DEL/2016 37 32. THE LD. AR CONTENDED THAT THE GUIDELINES LAID D OWN IN THE CIRCULAR ARE NOT FINAL INASMUCH AS IT IS FURTHER PROVIDED THEREI N THAT THE ABOVE GUIDELINES SHOULD BE SEEN ON THE TOTALITY OF FACTS AND CIRCUMS TANCES AND THE TPO SHALL BE GUIDED BY THE CONDUCT OF THE PARTIES AND NOT MER ELY BY THE TERMS OF THE CONTRACT. THE LD. AR ALSO REFERRED TO FIRST, SECOND AND FOURTH REPORTS OF THE RANGACHARY COMMITTEE DATED 14.09.2012, 13.10.2012 A ND 05.12.2012 RESPECTIVELY, CONSTITUTED TO REVIEW TAXATION OF DE VELOPMENT CENTRES AND IT SECTOR FOR ACCENTUATING THE FEATURES OF CAPTIVE R& D DEVELOPMENT CENTRES IN INDIA. 33. WE HAVE GONE THROUGH THE SALIENT FEATURES GIVEN IN THESE REPORTS OF THE COMMITTEE. IT IS PURSUANT TO SUCH REPORTS THAT THE CBDT CAME OUT WITH THE ABOVE CIRCULAR SPECIFYING THE GUIDELINES FOR ID ENTIFYING IF A DEVELOPMENT CENTRE IN INDIA CAN BE TERMED AS A CONT RACT R&D SERVICE PROVIDER. THE RECOMMENDATIONS OF THE COMMITTEE, TO THE EXTENT OF INCORPORATION IN THE CIRCULAR, SHOULD BE CONSIDERE D TO HAVE BEEN ACCEPTED BY THE GOVERNMENT. IN THAT VIEW OF THE MATTER, IT IS VIVID THAT GUIDELINES LAID DOWN IN THE CIRCULAR, THOUGH NOT CONCLUSIVE, B UT ARE OF SOME RELEVANCE IN DECIDING IF A PARTICULAR DEVELOPMENT CENTRE IN I NDIA IS A CONTRACT R&D ITA NOS.1479 & 691/DEL/2016 38 SERVICE PROVIDER. ON TESTING THE FACTS OF THE CASE ON THE TOUCHSTONE OF THE CIRCULAR, IT IS MANIFESTED THAT THE ASSESSEE IS SAT ISFYING ALL THE INGREDIENTS EXCEPT THE ONE GIVEN AT SL. NO. 5 WHICH IS NOT APPL ICABLE TO THE FACTS OF THE INSTANT CASE SINCE MICROSOFT, USA IS NOT LOCATED IN A COUNTRY PERCEIVED AS A LOW TAX OR NO TAX JURISDICTION. IT CAN BE SEEN T HAT MICROSOFT, USA IS PERFORMING MOST OF THE ECONOMICALLY SIGNIFICANT FUN CTIONS INVOLVED IN RESEARCH OR PRODUCT DEVELOPMENT CYCLE, WHILE THE AS SESSEE AS AN INDIAN DEVELOPMENT CENTRE CARRIES OUT THE WORK ASSIGNED TO IT BY THE FOREIGN PRINCIPAL (SR. NO. 1). MICROSOFT, USA IS REMUNERATI NG THE ASSESSEE WITH COST PLUS 15% FOR THE WORK CARRIED OUT BY IT AND IS ALS O PROVIDING ITS INTANGIBLES IN THE SHAPE OF PROCESS TOOLS (CUSTOMIS ED SOFTWARE, READYMADE TEMPLATES AND GUIDELINES, ETC.) TO THE ASSESSEE FOR DOING THE WORK (SR. NO. 2). THE ASSESSEE IS WORKING UNDER THE DIRECT SUPERV ISION OF MICROSOFT, USA, WHICH IS ACTUALLY CONTROLLING OR SUPERVISING RESEAR CH OR PRODUCT DEVELOPMENT THROUGH ITS STRATEGIC DECISIONS AND ALS O MONITORING ACTIVITIES ON REGULAR BASIS (SR. NO. 3). THE ASSESSEE IN INDIA DOES NOT ASSUME OR HAS NO ECONOMICALLY SIGNIFICANT REALIZED RISKS (SR. NO. 4) . THE ASSESSEE HAS NO OWNERSHIP RIGHT (LEGAL OR ECONOMIC) ON THE OUTCOME OF THE RESEARCH WHICH ITA NOS.1479 & 691/DEL/2016 39 VESTS WITH MICROSOFT, USA, AND THAT THIS IS EVIDEN T FROM THE CONTRACT AS WELL AS FROM THE CONDUCT OF THE PARTIES (SR. NO. 6) . 34. WE AGREE WITH THE CONTENTION OF THE LD. A R THAT ACTUAL CONDUCT OF THE ASSESSEE IS ALSO SIGNIFICANT IN TAKING A DECISI ON ON THE POINT, RATHER THAN GOING WHOLLY WITH THE TERMS OF THE AGREEMENT WHICH, IN THE EXTANT CASE, PROVIDE THAT THE ASSESSEE SHALL WORK AS A R&D SERV ICE PROVIDER. WE HAVE FAIRLY NOTICED SUPRA THAT IT IS NOT ONLY THE TERMS OF THE PSA, BUT ALSO THE ACTUAL CONDUCT OF THE ASSESSEE, WHICH PROVES, WITHO UT AN IOTA OF DOUBT, THAT IT IS A CONTRACT R&D SERVICE PROVIDER INASMUCH AS E CONOMICALLY SIGNIFICANT FUNCTIONS INVOLVED IN RESEARCH OR PRODUCT DEVELOPME NT CYCLE ARE TAKEN CARE OF BY MICROSOFT USA WHICH ALSO SUPPLIES OTHER INTAN GIBLES FOR RESEARCH OR PRODUCT DEVELOPMENT AND THE ASSESSEE WORKS UNDER TH E DIRECT SUPERVISION OF MS, USA WITHOUT HAVING ANY ECONOMICALLY SIGNIFICANT RISK AND FURTHER HAVING NO OWNERSHIP RIGHT ON THE OUTCOME OF THE RES EARCH, WHICH VEST WITH THE MS, USA. 35. IT IS FURTHER INTERESTING TO NOTE THAT THE A SSESSEE VIDE ITS LETTER DATED 12.01.2015, COPY PLACED ON PAGE 664 ONWARDS OF THE PAPER BOOK, IMPRESSED ITA NOS.1479 & 691/DEL/2016 40 UPON THE TPO THAT IT: MUST BE CHARACTERIZED AS A CONTRACT R&D SERVICE PROVIDER BEARING INSIGNIFICANT RISKS .. WE RE-CONFIRM THAT THE FUNCTIONAL PROFILE OF THE ASSESSEE HAS REMAINED UNC HANGED FROM PAST YEAR AND THE ASSESSEE CONTINUES TO BE A DEVELOPMENT CENT RE UNDERTAKING CONTRACT R&D ACTIVITIES WITH INSIGNIFICANT RISK AS PER CIRCU LAR 6/2013. THE ABOVE DISCUSSION BRINGS US TO AN IRRESISTIBLE C ONCLUSION THAT THE ASSESSEE IS A CONTRACT R&D SERVICE PROVIDER. 36. HAVING SEEN THE NATURE OF WORK DONE BY TH E ASSESSEE, WE NOW PROCEED TO EXAMINE THE COMPANIES CHALLENGED BEFORE US. FIRST OF ALL, WE TAKE UP THE EXCLUSIONS SOUGHT BY THE ASSESSEE FROM THE LIST OF COMPARABLES FINALIZED BY THE TPO. IN FACT, THE TPO SHORTLISTED FOUR COMPANIES, INCLUDING PERSISTENT SYSTEMS LTD., WHICH WAS ASSESS EES COMPARABLE. THE ASSESSEE HAS ASSAILED THE INCLUSION OF ALL THE FOUR INCLUDING ITS OWN COMPARABLE. WE WILL DEAL WITH ALL OF THEM IN SERIAT IM. (I) E-INFOCHIPS BANGALORE LIMITED . 37. THE TPO PROPOSED TO INCLUDE THIS COMPANY. THE ASSESSEE OBJECTED TO THE SAME BY CONTENDING THAT IT WAS FUNCTIONALLY DIFFERENT AND FAILED THE ITA NOS.1479 & 691/DEL/2016 41 SERVICE INCOME FILTER ALONG WITH DIVERSIFIED OPERAT IONS AND NON-AVAILABILITY OF SEGMENTAL DATA. THE TPO REJECTED SUCH CONTENTIO NS BY NOTICING THAT THE ASSESSEE AS WELL AS E-INFOCHIPS BANGALORE LTD., WER E ENGAGED IN THE DEVELOPMENT OF SOFTWARE. HE, THEREFORE, INCLUDED I T IN THE LIST OF COMPARABLES, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. 38. HAVING HEARD BOTH THE SIDES AND PERUSED TH E RELEVANT MATERIAL ON RECORD, IT IS OBSERVED FROM THE ANNUAL REPORT OF TH IS COMPANY FOR THE YEAR ENDING 31.03.2011, A COPY OF WHICH HAS BEEN PLACED ON RECORD, THAT ITS INCOME FROM SOFTWARE SERVICES AS RECORDED IN THE PR OFIT & LOSS ACCOUNT IS RS.45.11 CRORE. A DETAIL OF SUCH INCOME IS GIVEN A S PER ANNEXURE-7 WHICH REVEALS INCOME FROM SOFTWARE SERVICES AT RS.27.98 C RORE AND CONSULTANCY CHARGES AT RS.17.12 CRORE. SEGMENTAL INFORMATION H AS BEEN GIVEN IN THE NOTE NO. 11 WHICH STATES THAT: THE COMPANY IS PRIM ARILY ENGAGED IN SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES. EXC EPT FOR SEPARATE REVENUES, THERE IS NO SEGMENTAL INFORMATION OF E-IN FOCHIPS BANGALORE LTD., IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES AND IT ENABLED SERVICES. THE SEGMENT OF THE ASSESSEE UNDER CONSIDERATION IS SOFT WARE DEVELOPMENT ITA NOS.1479 & 691/DEL/2016 42 SERVICES. IT HAS GOT A SEPARATE SEGMENT OF IT ENA BLED SERVICES, WHICH IS INTERNATIONAL TRANSACTION NO. 3 GIVEN IN FORM NO.3C EB WITH TRANSACTED VALUE OF RS.323.46 CRORE, APART FROM THE VALUE OF INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES UND ER CONSIDERATION AT RS.1072.06 CRORE. IN THIS VIEW OF THE MATTER, IT BE COMES CLEAR THAT E- INFOCHIPS BANGALORE LTD., HAVING REVENUES FROM SOFT WARE SERVICES AND IT ENABLED SERVICES IN A COMMON POOL, CANNOT BE COMPAR ED WITH THE ASSESSEES ONLY REVENUES FROM SOFTWARE DEVELOPMENT SERVICES UN DER CONSIDERATION. WE, THEREFORE, ORDER TO EXCLUDE THIS COMPANY FROM T HE LIST OF COMPARABLES. (II) INFOSYS TECHNOLOGY LTD . 39. THE SECOND COMPANY UNDER CHALLENGE IS INFOS YS TECHNOLOGY LTD., WHICH WAS INCLUDED BY THE TPO IN THE FINAL TALLY OF COMPARABLES. THE ASSESSEE OBJECTED TO SUCH INCLUSION BY CONTENDING, INTER ALIA , THAT IT IS ENGAGED IN NOTEWORTHY R&D ACTIVITIES APART FROM HAV ING SIGNIFICANT INTANGIBLE ASSETS AND EXCEPTIONALLY HIGH TURNOVER. THE ASSESSEE ALSO SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY NOT COM PARABLE AS IT IS ALSO HAVING REVENUES FROM SOFTWARE PRODUCTS. THE ASSESS EES OBJECTIONS HAVE BEEN RECORDED ON PAGES 80-82 OF THE TPOS ORDER. N OT CONVINCED, THE TPO ITA NOS.1479 & 691/DEL/2016 43 HELD THIS COMPANY TO BE COMPARABLE, WHICH HAS BEEN ASSAILED IN THE IMPUGNED ORDER. 40. HAVING HEARD BOTH THE SIDES AND PERUSED TH E RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMP ANY, A COPY OF WHICH IS AVAILABLE ON PAGES 1653 ONWARDS OF THE PAPER BOOK, THAT THIS COMPANY IS ALSO ENGAGED IN EARNING REVENUE FROM LICENSING OF S OFTWARE PRODUCTS. THIS FACT HAS ALSO BEEN RECORDED IN THE TPOS ORDER NOTI NG THAT THE REVENUE FROM SOFTWARE PRODUCTS STANDS AT RS.1,285/- CRORE. THIS REVENUE HAS BEEN GENERATED FROM ITS PRODUCT FINACLE, REFERENCE TO WHICH HAS BEEN MADE ON PAGE 8 OF THE DIRECTORS REPORT. THE EXTENT OF PROF IT FROM SOFTWARE SERVICES, IN THE OVERALL KITTY OF PROFITS FROM SOFTWARE SERVI CES AND SOFTWARE PRODUCTS, CANNOT BE SEPARATED BECAUSE OF THE MERGED EXPENSES. IN VIEW OF THE FACT THAT THE TOTAL PROFIT OF THIS COMPANY INCLUDES PROF IT FROM SOFTWARE DEVELOPMENT SERVICES AS WELL AS SOFTWARE PRODUCTS A ND THERE IS NO SEPARATE PROFIT AVAILABLE OF THE SOFTWARE DEVELOPMENT SERVIC ES, WE ARE UNABLE TO COUNTENANCE THE COMPARABILITY OF THIS COMPANY AS T HE ASSESSEE IS NOT ENGAGED IN LICENSING OF ANY SOFTWARE PRODUCTS. WE, THEREFORE, ORDER TO EXCLUDE INFOSYS TECHNOLOGIES LTD. FROM THE LIST OF COMPARABLES. ITA NOS.1479 & 691/DEL/2016 44 (III) PERSISTENT SYSTEMS LTD . 41. THOUGH THIS COMPANY WAS INCLUDED BY THE A SSESSEE IN ITS LIST OF COMPARABLES, THE SAME HAS STILL BEEN CHALLENGED BEF ORE US. THE LD. AR CONTENDED THAT THIS COMPANY WAS ERRONEOUSLY INCLUDE D IN THE LIST OF COMPARABLES AS IT IS ALSO A PRODUCT COMPANY WHICH I S APPARENT FROM THE ANNUAL REPORT OF THIS COMPANY. 42. THE LD. DR RAISED A PRELIMINARY OBJECTION TO THE EFFECT THAT ONCE A COMPANY HAS BEEN CONSIDERED BY THE ASSESSEE AS COMP ARABLE IN ITS TP DOCUMENTATION AND THE SAME HAS BEEN ACCEPTED BY THE TPO, THE SAME CANNOT BE CHALLENGED IN THE FURTHER APPELLATE PROCE EDINGS. HE RELIED ON THE IMPUGNED ORDER TO CONTEND THAT THIS COMPANY WAS RIG HTLY OFFERED BY THE ASSESSEE IN THE LIST OF COMPARABLES AND, HENCE, THE SAME SHOULD NOT BE EXCLUDED. 43. WE ARE DISINCLINED TO SUSTAIN THE PRELIMINA RY OBJECTION TAKEN BY THE LD. DR THAT THE ASSESSEE SHOULD BE ESTOPPED FRO M TAKING A STAND CONTRARY TO THE ONE WHICH WAS TAKEN AT THE STAGE OF THE TP S TUDY OR DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO. IT GOES WITHOUT SAYI NG THAT THE OBJECT OF ITA NOS.1479 & 691/DEL/2016 45 ASSESSMENT IS TO DETERMINE THE INCOME IN RESPECT OF WHICH AN ASSESSEE IS RIGHTLY CHARGEABLE TO TAX. AS AN INCOME NOT ORIGINA LLY OFFERED FOR TAXATION, IF OTHERWISE CHARGEABLE, IS REQUIRED TO BE INCLUDED IN THE TOTAL INCOME, IN THE SAME BREATH, ANY INCOME WRONGLY INCLUDED IN THE TOTAL INCOME, WHICH IS OTHERWISE NOT CHARGEABLE, SHOULD BE EXCLUDED. THERE CAN BE NO ESTOPPEL AGAINST THE PROVISIONS OF THE ACT. EXTENDING THIS P ROPOSITION FURTHER IN THE CONTEXT OF THE TRANSFER PRICING, IT TRANSPIRES THAT IF AN ASSESSEE FAILS TO REPORT AN OTHERWISE COMPARABLE COMPANY, THEN THE TPO IS OB LIGED TO INCLUDE THE SAME IN THE LIST OF COMPARABLES, AND IN THE SAME MA NNER, IF THE ASSESSEE WRONGLY REPORTED AN INCOMPARABLE COMPANY AS COMPAR ABLE IN ITS TP STUDY AND THEN LATER ON REALIZES AND CLAIMS THAT IT SHOUL D BE EXCLUDED, THERE SHOULD BE NOTHING TO PROHIBIT IT FROM CLAIMING SO, PROVIDED THE COMPANY SO ORIGINALLY REPORTED AS COMPARABLE IS, IN FACT, NOT COMPARABLE. SIMPLY BECAUSE A COMPANY WAS WRONGLY CHOSEN BY THE ASSESSE E AS COMPARABLE, CANNOT TIE ITS HANDS FROM CONTENDING BEFORE THE TRI BUNAL THAT SUCH A COMPANY WAS WRONGLY CONSIDERED AS COMPARABLE WHICH IS, IN FACT, NOT. THERE IS NO QUALITATIVE DIFFERENCE BETWEEN A SITUAT ION WHERE AN ASSESSEE CLAIMS THAT A WRONG COMPANY INADVERTENTLY INCLUDED FOR THE PURPOSE OF ITA NOS.1479 & 691/DEL/2016 46 COMPARISON SHOULD BE EXCLUDED AND THE SITUATION IN WHICH THE REVENUE DOES NOT ACCEPT A PARTICULAR COMPANY CHOSEN BY THE ASSESSEE AS COMPARABLE. THE UNDERLYING OBJECT OF THE ENTIRE EXERCISE IS TO DETERMINE THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. SIMPLY BECA USE A COMPANY WAS WRONGLY CONSIDERED BY THE ASSESSEE AS COMPARABLE, C ANNOT, ACT AS A DETERRENT FROM CHALLENGING BEFORE THE TRIBUNAL THE FACT THAT THIS COMPANY IS, IN FACT, NOT COMPARABLE. THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ (CHD) (SB) 1 HAS HELD THAT A COMPANY WHICH WAS INCLUDED BY THE ASSESSEE AND ALSO BY THE TPO IN THE LIST OF COMPARABLES AT THE TIME OF COMPUTING ALP, C AN BE EXCLUDED BY THE TRIBUNAL, IF THE ASSESSEE PROVES THAT THE SAME WAS WRONGLY INCLUDED. SIMILAR VIEW HAS BEEN UPHELD BY THE HON'BLE DELHI H IGH COURT IN XCHANGING TECHNOLOGY SERVICES INDIA PVT LTD [TS-446 -HC-2016(DEL)- TP]. THE HONBLE BOMBAY HIGH COURT IN TATA POWER SOLAR SYSTEMS LTD [TS-1007-HC-2016(BOM)-TP] AND THE HONBLE PUNJAB & HARYANA HIGH COURT IN CIT VS. MERCER CONSULTING (INDIA) P. LTD. (2017) 39 0 ITR 615 (P&H) HAVE ALSO APPROVED SIMILAR VIEW. IN VIEW OF THE F OREGOING ITA NOS.1479 & 691/DEL/2016 47 DISCUSSION, WE DO NOT FIND ANY SUBSTANCE IN THE PRE LIMINARY OBJECTION TAKEN BY THE LD. DR. 44. COMING TO THE COMPARABILITY OR OTHERWIS E OF THIS COMPANY, WE FIND FROM ITS PROFIT & LOSS ACCOUNT THAT ITS INCOME FROM SALE OF SOFTWARE SERVICES AND PRODUCTS STANDS AT RS.6,101.27 MILLIO NS. PRODUCT REVENUE IS 7.2% OF THE TOTAL REVENUE. THUS, IT IS ESTABLISHED THAT THIS COMPANY IS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES AS WELL AS SALE OF SOFTWARE PRODUCTS. EVEN THOUGH THE PERCENTAGE OF S OFTWARE PRODUCTS IN THE TOTAL REVENUE IS LESS, YET, THE SAME CEASES TO BE C OMPARABLE AS THERE IS NO PRECISE INFORMATION ABOUT THE CONTRIBUTION MADE BY THE INCOME FROM SALE OF SOFTWARE TO THE TOTAL INCOME OF THE COMPANY. IN TH E ABSENCE OF ANY SEGMENTAL INFORMATION PROVIDED BY THE COMPANY IN RE SPECT OF SOFTWARE SERVICES, WE CANNOT APPROVE THE INCLUSION OF THIS C OMPANY IN THE LIST OF COMPARABLES. THE SAME IS DIRECTED TO BE EXCLUDED. (IV) WIPRO TECHNOLOGY SERVICES LTD . 45. THE TPO PROPOSED TO INCLUDE THIS COMPANY I N THE LIST OF COMPARABLES DESPITE THE ASSESSEES OBJECTION THAT I T HAS MORE RELATED PARTY TRANSACTIONS. AFTER GOING THROUGH THE ANNUAL REPOR T OF THIS COMPANY, IT IS ITA NOS.1479 & 691/DEL/2016 48 NOTICED THAT IT WAS EARLIER CITI TECHNOLOGIES LTD. ON 21.1.2009, WIPRO LTD. SIGNED A MASTER AGREEMENT WITH CITI GROUP INC., FOR DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES FOR A PERIOD OF SIX YEARS, WHICH ALSO INCL UDES THE YEAR UNDER CONSIDERATION. THIS SHOWS THAT INCOME FROM SOFTWARE DEVELOPMENT SUPPORT AND MAINTENANCE SERVICES WAS EARNED BY WIPRO TECHNO LOGY SERVICES LTD., FROM CITI GROUP INC., BY MEANS OF MASTER SERVICE AG REEMENT ENTERED INTO BETWEEN WIPRO LTD., ITS PARENT COMPANY AND CITI GRO UP INC., A THIRD PERSON. 46. RULE 10B(1)(E)(II) PROVIDES THAT IT IS THE NET PROFIT MARGIN REALIZED FROM A COMPARABLE UNCONTROLLED TRANSACTION, WHICH I S CONSIDERED FOR THE PURPOSES OF BENCHMARKING. THE EPITOME OF `COMPARAB LE UNCONTROLLED TRANSACTION IS THAT THE COMPANIES OR TRANSACTIONS, IN ORDER TO FALL WITHIN THE AMBIT OF SUB-CLAUSE (II) OF RULE 10B(1)(E), SH OULD BE BOTH COMPARABLE AS WELL AS UNCONTROLLED. `UNCONTROLLED TRANSACTION HAS BEEN DEFINED IN RULE 10A(A) TO MEAN: A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATED ENTERPRISES , WHETHER RESIDENT OR NON-RESIDENT. THIS SHOWS TH AT IN ORDER TO BE CALLED AS AN UNCONTROLLED TRANSACTIO N, IT IS ESSENTIAL THAT THE ITA NOS.1479 & 691/DEL/2016 49 SAME SHOULD BE BETWEEN THE ENTERPRISES OTHER THAN T HE ASSOCIATED ENTERPRISES. SECTION 92B(2) PROVIDES THAT: `A TRANS ACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED E NTERPRISE SHALL, FOR THE PURPOSES OF SUB-SECTION (1), BE DEEMED TO BE A TRAN SACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH O THER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON A ND THE ASSOCIATED ENTERPRISE. ON GOING THROUGH THE PRESCRIPTION OF SUB-SECTION (2) OF SECTION 92B, IT IS CLEARLY BORNE OUT THAT A TRANSACTION WIT H A NON-AE SHALL BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO AES IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSAC TION BETWEEN THE THIRD PERSON AND THE AE OR THE TERMS OF THE RELEVANT TRAN SACTION ARE DETERMINED IN SUBSTANCE BETWEEN THE THIRD PERSON AND THE AE. WHEN WE CONSIDER SECTION 92B(2) IN COMBINATION WITH RULE 10A(A), IT FOLLOWS THAT THE TRANSACTION BETWEEN NON-AES SHALL BE CONSTRUED AS A TRANSACTION BETWEEN TWO AES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE R ELEVANT TRANSACTION BETWEEN THIRD PERSON AND THE AE. IF SUCH AN AGREEMENT EXIS TS, THE THIRD PERSON IS ITA NOS.1479 & 691/DEL/2016 50 ALSO CONSIDERED AS AN AE AND THE TRANSACTION WITH S UCH THIRD PERSON BECOMES INTERNATIONAL TRANSACTION WITHIN THE MEANIN G OF SECTION 92B. ONCE THERE IS A TRANSACTION BETWEEN TWO ASSOCIATED ENTER PRISES, IT CEASES TO BE AN UNCONTROLLED TRANSACTION AND, THEREBY, GOES OUT OF RECKONING UNDER RULE 10B(1)(E)(II). 47. COMING BACK TO THE FACTS OF THIS COMPANY, W E FIND THAT WIPRO TECHNOLOGY SERVICES LTD. EARNED A REVENUE FROM MAST ER SERVICES AGREEMENT WITH CITIGROUP INC. FOR THE DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES. THIS AGREEMENT WAS, IN FACT, EXECUTED BETWEEN THE A SSESSEES AE, WIPRO LTD., AND CITIGROUP INC., A THIRD PERSON. THIS UNFO LDS THAT THE TRANSACTION OF EARNING REVENUE FROM SOFTWARE DEVELOPMENT SUPPORT A ND MAINTENANCE SERVICES BY WIPRO TECHNOLOGY SERVICES LTD., IS AN I NTERNATIONAL TRANSACTION BECAUSE OF THE APPLICATION OF SECTION 92B(2) I.E., THERE EXISTS A PRIOR AGREEMENT IN RELATION TO SUCH TRANSACTION BETWEEN C ITIGROUP INC. (THIRD PERSON) AND WIPRO LTD. (ASSOCIATED ENTERPRISE). I N THE LIGHT OF THIS STRUCTURE OF TRANSACTION, IT CEASES TO BE UNCONTROL LED TRANSACTION AND, HENCE, WIPRO TECHNOLOGY SERVICES LTD., DISQUALIFIES TO BEC OME A COMPARABLE UNCONTROLLED TRANSACTION FOR THE PURPOSES OF INCLUS ION IN THE FINAL LIST OF ITA NOS.1479 & 691/DEL/2016 51 COMPARABLES UNDER RULE 10B(1)(E)(II). WE, THEREFOR E, DIRECT REMOVAL OF THIS COMPANY FROM THE LIST OF COMPARABLES. SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SAXO INDIA (P) LTD. (2016) 67 TAXMANN.COM 155 (DELHI-TRIB.) . THIS ORDER OF THE TRIBUNAL STANDS AFFIRMED BY THE HON'BLE DELHI HIGH COURT VIDE ITS J UDGMENT DATED 28.09.2016 IN ITA NO.682/2016, C.M. APPL.35744-3574 6/2016 BY HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FROM THE TRIBUNAL ORDER. 48. NOW, WE TAKE UP THE COMPANIES ASSAILED BEF ORE US WHICH WERE INCLUDED BY THE ASSESSEE IN THE LIST OF COMPARABLES , BUT, EXCLUDED BY THE TPO. IN ALL, THE ASSESSEE SELECTED 27 COMPANIES IN CLUDING M/S PERSISTENT SYSTEMS & SOLUTIONS LTD., WHICH GOT ACCEPTED AT THE HANDS OF THE TPO BUT EXCLUDED BY US HEREINABOVE, ON A CHALLENGE MADE BY THE ASSESSEE. OUT OF THE REMAINING 26 COMPANIES, THE ASSESSEE HAS CHALLE NGED THE EXCLUSION OF 12 COMPANIES BY THE TPO FROM THE LIST OF COMPARABLE S, WHICH WE WILL TAKE UP ONE BY ONE FOR CONSIDERATION AND DECISION. ITA NOS.1479 & 691/DEL/2016 52 (I) AKSHAY SOFTWARE TECHNOLOGIES LTD . 49. THE ASSESSEE INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES WHICH WAS EXCLUDED BY THE TPO BY NOTING ON PAGE 56 OF HIS ORDER THAT IT WAS NOT INVOLVED IN RENDERING HIGH-END SOFTWARE SERVICES. HE FURTHER NOTICED ON PAGE 68 THAT IT WAS A ROUTINE SOFTWARE TRADER AND W AS NOT ENGAGED IN RENDERING ANY HIGH-END SOFTWARE SERVICES OR CONTRAC T RESEARCH AND DEVELOPMENT, AS THE ASSESSEE WAS DOING. NO RELIEF WAS ALLOWED BY THE DRP. 50. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE DIRECTORS REPORT OF THIS COMPANY, WHOSE COPY HAS BEEN PLACED ON RECORD BY THE LD. AR, THAT IT I S ALSO ENGAGED IN SALE OF PRODUCTS, WHICH FACT GETS REFLECTED FROM THE FIRS T ITEM, BEING `INCOME FROM SOFTWARE SERVICES AND PRODUCTS UNDER POINT 1(I), T HAT IS, `FINANCIAL RESULTS. PAGE 5 OF THE ANNUAL REPORT, BEING, ANNEX URE TO THE REPORT OF BOARD OF DIRECTORS RECORDS THAT: THE COMPANY IS A SERVICE PROVIDER AND THEREFORE HAS NOT SET UP A FORMAL RESEARCH AND DEVE LOPMENT UNIT. PAGE 15 OF THE ANNUAL REPORT IS A COPY OF ITS PROFIT & LOSS ACCOUNT, WHICH SHOWS INCOME FROM OPERATIONS AS INCOME FROM SOFTWARE SER VICES AND PRODUCTS AT ITA NOS.1479 & 691/DEL/2016 53 RS.11,47,22,327/-. THUS IT BECOMES APPARENT THAT T HIS COMPANY, UNLIKE THE ASSESSEE, IS NOT ONLY NOT ENGAGED IN RENDERING RESE ARCH AND DEVELOPMENT SERVICES, BUT IS ALSO IN THE SALE OF PRODUCTS, THUS LOSING THE COMPARABILITY. THE REASONING GIVEN ABOVE FOR EXCLUSION OF INFOSYS TECHNOLOGY LTD. AND PERSISTENT SYSTEMS LTD., AS THOSE ALSO BEING PRODUC T COMPANIES, APPLIES WITH FULL FORCE TO THE EXCLUSION OF THIS COMPANY AS WELL. 51. THE LD. AR SUBMITTED THAT INCOME FROM PRODU CTS OF THIS COMPANY WAS SEPARABLE INASMUCH AS THE FIGURES OF OPENING ST OCK, PURCHASES AND SALE OF PRODUCTS WERE SEPARATELY GIVEN IN THE ANNUAL REP ORT. HE, HOWEVER, COULD NOT POINT OUT THE AMOUNT OF OTHER OPERATING EXPENSE S SEPARATELY, INCLUDED IN THE OVERALL OPERATING EXPENSES, CONNECTED WITH SALE OF SUCH PRODUCTS, SO AS TO ENABLE THE COMPUTATION OF OPERATING PROFIT FROM THE SALE OF PRODUCTS. ADMITTEDLY, THIS COMPANY HAS NO SEPARATE SEGMENT FO R ITS PRODUCTS BUSINESS. FIGURE OF OTHER OPERATING EXPENSES IN REL ATION TO PRODUCTS, NATURALLY, CANNOT BE DEDUCED IN THE ABSENCE OF ANY SEGMENTAL INFORMATION AVAILABLE IN THE FINANCIALS OF THIS COMPANY. IN VI EW OF THE FOREGOING REASONS, IT BECOMES LUCID THAT NEITHER THE AMOUNT O F OTHER OPERATING EXPENSES OF THE `SOFTWARE DEVELOPMENT SERVICES IS AVAILABLE NOR IT CAN BE ITA NOS.1479 & 691/DEL/2016 54 SEPARATELY COMPUTED, THEREBY MAKING IT IMPOSSIBLE T O COMPUTE THE AMOUNT OF OPERATING PROFITS FROM SUCH SOFTWARE DEVELOPMENT SERVICES, WHICH IS A NECESSARY INGREDIENT UNDER THE TNMM. WE, THEREFORE, UPHOLD THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. (II) BLUE STAR INFOTECH LTD. (CONSOLIDATED) 52. THE TPO EXCLUDED THIS COMPANY BY OBSERVI NG ON PAGE 56 OF HIS ORDER THAT IT WAS NOT INVOLVED IN RENDERING HIGH-EN D SERVICES AND, FURTHER, IT WAS NOT INTO RESEARCH AND DEVELOPMENT AS RECORDED O N PAGE 69 OF HIS ORDER. 53. WE HAVE GONE THROUGH THE ANNUAL REPORT OF T HIS COMPANY, A COPY OF WHICH HAS BEEN PLACED ON RECORD BY THE LD. AR. PRO FIT & LOSS ACCOUNT OF THIS COMPANY IS PLACED AT PAGE 91 OF THE PAPER BOOK , WHICH SHOWS SALES AND SOFTWARE SERVICES INCOME ON THE INCOME SIDE. S CHEDULE-J, BEING, SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO THE FI NANCIAL STATEMENTS PROVIDES UNDER THE HEAD REVENUE RECOGNITION THAT: REVENUE FROM SALE OF TRADED SOFTWARE LICENCES AND TRADED HARDWARE IS RECOGNIZED ON DELIVERY TO THE CUSTOMER. THIS MAKES IT APPARENT THAT, APART FROM RENDERING SOFTWARE SERVICES, THIS COMPANY IS ALSO INTO SOFTWARE PRODUC TS AND HARDWARE. THE DIRECTORS REPORT OF THIS COMPANY CLEARLY SETS OUT UNDER THE HEADING ITA NOS.1479 & 691/DEL/2016 55 RESEARCH AND DEVELOPMENT THAT: THE COMPANY IS PR EDOMINANTLY A SERVICE PROVIDER AND, THEREFORE, HAS NOT SET UP A F ORMAL RESEARCH AND DEVELOPMENT UNIT. IT THUS TRANSPIRES THAT THIS COM PANY CANNOT BE CONSIDERED AS COMPARABLE AS APART FROM BEING A PROD UCT COMPANY AND DEALING IN HARDWARE ALSO, IT IS ALSO NOT PROVIDING ANY R&D SERVICES. THE VIEW TAKEN BY THE AUTHORITIES IS, THUS UPHELD. (III) CALIBER POINT BUSINESS SOLUTIONS LTD. (OTHERS SEGME NT). 54. THE TPO HELD THIS COMPANY TO BE NOT COMPARA BLE BY NOTING ON PAGE 56 OF HIS ORDER THAT IT WAS NOT RENDERING ANY HIGH- END SOFTWARE SERVICES. HE FURTHER HELD ON PAGE 69 THAT THIS COMPANY WAS CARRY ING BPO SERVICES. 55. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D GOING THROUGH THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH HA S BEEN PLACED BY THE LD. AR ON RECORD, IT CAN BE SEEN FROM SCHEDULE-12, BEIN G, SIGNIFICANT ACCOUNTING POLICIES AND NOTES FORMING PART OF ACCOU NTS THAT UNDER THE HEAD REVENUE RECOGNITION, IT HAS BEEN MENTIONED T HAT: THE COMPANYS REVENUE FROM PROCESS OUTSOURCING AND SOFTWARE SUPPORT AND RELATED ACTIVITIES ARISE FROM UNIT PRICED CONTRACTS, TIME B ASED CONTRACTS AND FIXED PRICE PROJECTS. UNLIKE THE ASSESSEE, THIS COMPANY IS NOT RENDERING ANY ITA NOS.1479 & 691/DEL/2016 56 RESEARCH AND DEVELOPMENT SOFTWARE SERVICES TO ITS A ES. ON THE CONTRARY, IT IS ALSO PROVIDING BPO SERVICES, WHICH MAKE IT NON-C OMPARABLE WITH THE SEGMENT OF THE ASSESSEE-COMPANY UNDER CONSIDERATION . WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE AUTHORITIES ON THE EX CLUSION OF THIS COMPANY. (IV) CAT TECHNOLOGIES LTD . 56. THE TPO EXCLUDED THIS COMPANY BY OBSERVING O N PAGE 57 OF HIS ORDER THAT IT WAS NOT PROVIDING ANY HIGH-END SOFTWA RE SERVICES. HE NOTICED FROM THE ANNUAL REPORT OF THIS COMPANY THAT ITS EXC LUSIVE BUSINESS WAS MEDICAL TRANSCRIPTION, TRAINING, SOFTWARE DEVELOPME NT AND CONSULTING SERVICES AND BOTH WERE CONSIDERED AS A SINGLE SEGME NT. HE, THEREFORE, HELD THIS COMPANY AS NOT COMPARABLE. 57. WE HAVE EXAMINED THE ANNUAL REPORT OF THIS COMPANY WHICH IS AVAILABLE IN THE PAPER BOOK. A COPY OF ITS INCOME STATEMENT ON STAND-ALONE BASIS IS AVAILABLE ON PAGE 177 OF THE PAPER BOOK, W HICH SHOWS OPERATING REVENUE AT RS.7.34 CRORE. BREAK-UP OF SUCH REVENUE IS GIVEN ON PAGE 178. REVENUE FROM SOFTWARE DEVELOPMENT STANDS AT RS.3.04 CRORE, WHILE THE REVENUE FROM IT CONSULTANCY IS TO THE TUNE OF RS.4. 29 CRORE. BOTH THE STREAMS OF REVENUE ARE POOLED. IT HAS BEEN MENTIONE D UNDER THE HEAD ITA NOS.1479 & 691/DEL/2016 57 `SEGMENT REPORTING THAT : `THE COMPANYS EXCLUSIVE BUSINESS IS MEDICAL TRANSCRIPTION, TRAINING SOFTWARE DEVELOPMENT AND CO NSULTING SERVICES AS SUCH THIS IS THE ONLY REPORTABLE SEGMENT AS PER ACCOUNTING STANDARD 17 ON SEGMENT REPORTING ISSUED BY THE ICAI. MEDICAL T RANSCRIPTION IS OBVIOUSLY A PART OF BPO SERVICES, FALLING WITHIN TH E AMBIT OF IT ENABLED SERVICES. AS THE ASSESSEE UNDER THIS SEGMENT IS REN DERING ONLY SOFTWARE DEVELOPMENT SERVICES, WHICH ARE EXCLUSIVE OF ITES, FOLLOWING THE VIEW TAKEN ABOVE FOR THE EXCLUSION OF E-INFOCHIPS BANGAL ORE ABOVE, WE HOLD THAT THIS COMPANY WAS RIGHTLY EXCLUDED. (V) CG-VAK SOFTWARE & EXPORTS LTD . 58. THE TPO EXCLUDED THIS COMPANY BY NOTING ON PAGE 57 OF HIS ORDER THAT IT WAS NOT INVOLVED IN RENDERING ANY HIGH-END SOFTWARE SERVICES AND, FURTHER, RECORDED ON PAGE 70 OF HIS ORDER THAT IT W AS A PERSISTENT LOSS MAKING COMPANY, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 59. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED FROM PAGE 70 OF THE TPOS ORDER THAT AS PER PROWESS DATA BASE, PROFIT BEFORE INTEREST AND T AXES OF THE SOFTWARE ITA NOS.1479 & 691/DEL/2016 58 SEGMENT OF THIS COMPANY IS IN NEGATIVE FOR THE FINA NCIAL YEARS 2007-08 TO 2010-11. FOR THE FINANCIAL YEAR 2007-08, THERE IS LOSS OF (-) 0.10%, FOR THE F.Y. 2008-09, THERE IS LOSS OF (-) 0.15%, FOR THE F .Y. 2009-10, THERE IS LOSS OF (-) 0.73% AND FOR THE F.Y. 2010-11, THERE IS LO SS OF (-) 0.21%. THE ASSESSEE TRIED TO MAKE OUT A CASE BEFORE THE TPO TH AT HIS CALCULATION OF MARGIN WAS NOT CORRECT BY ADVANCING ITS OWN CALCULA TION WHICH HAS BEEN SET OUT AT PAGE 71 OF THE TPOS ORDER. IT IS APPARENT EVEN FROM SUCH CALCULATION THAT FROM THE YEAR ENDING 31.03.2008 TO YEAR ENDING 31.03.2011, THERE ARE PERSISTENT LOSSES AT (-) 2.01%, (-)2.35%, (-) 14.36 % AND (-) 3.70% RESPECTIVELY. IN VIEW OF THE FACT THAT THIS COMPAN Y IS A PERSISTENT LOSS MAKING COMPANY IN THE RELEVANT SEGMENT, THE SAME CE ASES TO BE COMPARABLE. EVEN OTHERWISE ALSO, THIS COMPANY IS NOT FUNCTIONALLY SIMILAR AS HAS BEEN NOTED BY THE TPO ON PAGE 57 OF HIS ORD ER THAT IT IS NOT ENGAGED IN RENDERING HIGH-END SERVICES. THE LD. AR COULD NO T DRAW OUR ATTENTION TOWARDS ANYTHING FROM THE ANNUAL REPORT THAT THIS C OMPANY UNDER THE RELEVANT SEGMENT WAS ALSO RENDERING ANY SOFTWARE RE SEARCH AND DEVELOPMENT SERVICES. WE, THEREFORE, UPHOLD THE IMP UGNED ORDER IN REMOVING THIS COMPANY FROM THE LIST OF COMPARABLES. ITA NOS.1479 & 691/DEL/2016 59 (VI) EVOKE TECHNOLOGIES PVT. LTD . 60. THE ASSESSEE INCLUDED THIS COMPANY, WHICH G OT EXCLUDED BY THE TPO BY OBSERVING ON PAGE 57 OF HIS ORDER THAT IT WAS NO T ENGAGED INTO ANY RESEARCH AND DEVELOPMENT, AS WAS THE ASSESSEE DOIN G. THE LD. AR FAIRLY ADMITTED THAT THIS COMPANY IS NOT INTO RENDERING RE SEARCH AND DEVELOPMENT SERVICES. HE, HOWEVER, MAINTAINED THAT RENDERING O R NOT RENDERING OF RESEARCH AND DEVELOPMENT SOFTWARE SERVICES CANNOT B E A CRITERION TO DETERMINE THE COMPARABILITY OF A SOFTWARE COMPANY. IN OUR CONSIDERED OPINION, THIS ARGUMENT IS FAR-FETCHED INASMUCH AS A COMPANY WHICH IS PROVIDING RESEARCH AND DEVELOPMENT SOFTWARE SERVICE S CANNOT BE COMPARED WITH A ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDE R NOT RENDERING SUCH R&D SERVICES BECAUSE OF GLARING DIFFERENCES IN THE NATURE OF WORK, TYPE OF SKILL REQUIRED ALONG WITH SEVERAL OTHER FACTORS. AS THIS COMPANY IS, ADMITTEDLY, NOT ENGAGED IN RENDERING ANY RESEARCH A ND DEVELOPMENT SERVICES, THE SAME CANNOT BE CONSIDERED AS COMPARAB LE WITH THE ASSESSEE COMPANY. WE, THEREFORE, AFFIRM THE VIEW TAKEN BY TH E LOWER AUTHORITIES ON THIS SCORE. ITA NOS.1479 & 691/DEL/2016 60 (VII) LGS GLOBAL LTD. 61. THE TPO HELD THIS COMPANY TO BE NOT COMPARA BLE BY NOTING ON PAGE 58 OF HIS ORDER THAT IT WAS NOT RENDERING ANY HIGH- END SOFTWARE SERVICES. THE TPO FURTHER NOTICED ON PAGE 75 OF HIS ORDER THA T THIS COMPANY WAS PROVIDING ROUTINE IT ENABLED SERVICES AND NOT ANY R ESEARCH AND DEVELOPMENT SERVICES. 62. HAVING GONE THROUGH THE ANNUAL REPORT OF TH IS COMPANY, WE FIND FROM ITS DIRECTORS REPORT THAT IT IS TALKING OF CE RTAIN RESEARCH AND DEVELOPMENT TO BE UNDERTAKEN IN FUTURE , WHICH IS MERELY A GOAL OR VISION. AS, ADMITTEDLY, THIS COMPANY IS NOT RENDERING ANY R ESEARCH AND DEVELOPMENT SERVICES AND IS A SIMPLE SOFTWARE SERVI CE PROVIDER, WE APPROVE THE EXCLUSION OF THIS COMPANY FROM THE TALLY OF COM PARABLES. (VIII) MAVERIC SYSTEMS LTD . 63. THE TPO EXCLUDED THIS COMPANY BY MAINLY OBS ERVING ON PAGE 58 OF HIS ORDER THAT IT WAS NOT INVOLVED IN RENDERING HIG H-END SOFTWARE SERVICES, AGAINST WHICH THE ASSESSEE HAS APPROACHED THE TRIBU NAL. ITA NOS.1479 & 691/DEL/2016 61 64. WE HAVE EXAMINED THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH IS AVAILABLE ON RECORD. IT CAN BE SEEN FROM SUCH ANNUAL REPORT THAT IT IS ENGAGED IN RENDERING ROUTINE SOFTWARE DEVELOPMEN T SERVICES AND NOT RESEARCH AND DEVELOPMENT SOFTWARE SERVICES. THOUGH THIS COMPANY CARRIED OUT SOME RESEARCH AND DEVELOPMENT, AS IS APPARENT F ROM ITS DIRECTORS REPORT, BUT, THE RESEARCH AND DEVELOPMENT WAS DONE FOR CREATION OF TOOLS AND FRAMEWORKS THAT HELP DESIGN BETTER TEST UMBREL LA AND EXECUTE FASTER (AUTOMATE) UMBRELLA. THERE IS NO INCOME FR OM RENDERING RESEARCH AND DEVELOPMENT SERVICES AS AGAINST ITS OPERATING I NCOME OF RS.56.90 CRORE. ON THE OTHER HAND, THERE IS ONLY A SPEND OF RS.45.6 3 LAC ON RESEARCH AND DEVELOPMENT. SINCE R&D ACTIVITY DONE BY THIS COMP ANY IS MEANT FOR ITS OWN USE AND IT HAS NOT EARNED ANY REVENUE FROM REND ERING R&D SERVICES, WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS C OMPARABLE WITH THE ASSESSEE, WHICH IS ENGAGED IN PROVIDING R&D SOFTW ARE SERVICES TO ITS AE UNDER THE CURRENT SEGMENT. FOLLOWING THE VIEW TAKE N HEREINABOVE ON SIMILAR LINES, WE APPROVE THE IMPUGNED ORDER ON EXC LUDING THIS COMPANY FROM THE LIST OF COMPARABLES. ITA NOS.1479 & 691/DEL/2016 62 (IX) MINDTREE LTD. (IT SERVICE SEGMENT) 65. THE TPO HELD THIS COMPANY TO BE NOT COMPARA BLE BY OBSERVING ON PAGE 58 OF HIS ORDER THAT IT WAS NOT INVOLVED IN RE NDERING ANY HIGH-END SOFTWARE SERVICES. 66. WE HAVE EXAMINED THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH HAS BEEN PLACED ON RECORD. ANNEXURE TO THE D IRECTORS' REPORT PROVIDES UNDER THE HEAD RESEARCH AND DEVELOPMENT THAT THIS: COMPANY HAS A DEDICATED BUSINESS UNIT FOR RESEARCH AND DEVE LOPMENT WHICH OFFERS INNOVATIVE SOLUTIONS TO CLIENTS AND ALSO FOSTERS R& D WITHIN ALL BUSINESS UNITS TO CREATE INTELLECTUAL PROPERTY IN THE FORM O F RE-USABLE COMPONENTS, FRAMEWORKS, ETC., WHICH HELP DRIVE CORRECT PRODUCTI VITY. ON NEXT PAGE OF THE ANNEXURE TO THE DIRECTORS REPORT, A LIST OF PATENTS REGISTERED EITHER IN INDIA OR THE USA HAS BEEN APPENDED, WHICH ARE 19 IN NUMBER. PROFIT & LOSS OF THIS COMPANY SHOWS INCOME FROM SOFTWARE DE VELOPMENT AT RS.15,090 MILLION. THIS COMPANY HAS THREE SUB-SEGM ENTS WHICH ARE COVERED WITHIN THE OVERALL INCOME FROM SOFTWARE DE VELOPMENT. DETAILS OF SUCH SUB-SEGMENTS ARE GIVEN ON PAGE 32 OF THE ANNUA L REPORT, WHICH ITA NOS.1479 & 691/DEL/2016 63 MAINLY COMPRISE REVENUE FROM IT SERVICES AT RS.8,78 3 MILLION; FROM PRODUCT ENGINEERING SERVICES AT RS.5653 MILLION; AN D FROM WIRELESS SERVICES AT RS.654 MILLION. OBVIOUSLY, `WIRELESS SE RVICES CANNOT BE CONSIDERED AS A PART OF RESEARCH AND DEVELOPMENT SO FTWARE SERVICES PROVIDED BY THIS COMPANY. THE ASSESSEE HAS ALSO CON SIDERED ONLY IT SERVICE SEGMENT OF THIS COMPANY AS COMPARABLE WITH THE EXCL USION OF `WIRELESS SERVICES. ALL THE PARAMETERS, NAMELY, RENDERING OF RESEARCH AND DEVELOPMENT SOFTWARE SERVICES AND ALSO PRODUCT ENGI NEERING SERVICES TO ITS CUSTOMERS LEADING TO THE CREATION OF PATENTS, MAKE THIS COMPANY FULLY COMPARABLE TO THE EXTENT IT EARNED REVENUES FROM IT SERVICES AND PRODUCT ENGINEERING SERVICES, FOR WHICH SEGMENTAL INFORMATI ON IS AVAILABLE. WE, THEREFORE, DIRECT THE TPO TO EXAMINE THE PLI OF THI S COMPANY FROM THE IT SERVICES AND PRODUCT ENGINEERING SERVICES AND THEN TREAT THE SAME AS COMPARABLE WITH THE SEGMENT OF THE ASSESSEE UNDER C ONSIDERATION FOR THE PURPOSES OF BENCHMARKING. THE IMPUGNED ORDER IS O VERTURNED TO THIS EXTENT. ITA NOS.1479 & 691/DEL/2016 64 (X) R.S. SOFTWARE (INDIA) LTD . 67. THE TPO EXCLUDED THIS COMPANY BY NOTING ON PAGE 58 OF HIS ORDER THAT IT WAS NOT INVOLVED IN ANY HIGH-END SOFTWARE S ERVICES AND, FURTHER, ON PAGE 76 THAT IT WAS NOT INTO ANY RESEARCH AND DEVEL OPMENT. 68. WE HAVE EXAMINED THE ANNUAL REPORT OF THIS COMPANY. INCOME FROM SOFTWARE DEVELOPMENT HAS BEEN SHOWN IN THE PROFIT & LOSS ACCOUNT, WHOSE COPY IS AVAILABLE ON PAGE 823 OF THE PAPER BOOK. T HE LD. AR COULD NOT POINT OUT ANYWHERE FROM THE ANNUAL REPORT THAT THIS COMPANY IS ENGAGED IN RENDERING R&D SOFTWARE SERVICES. SINCE IT WAS A CO MPARABLE CHOSEN BY THE ASSESSEE, THE ONUS IS ON IT TO SHOW THE COMPARABILI TY. THE SAME BEING NOT INVOLVED IN RENDERING ANY R&D SOFTWARE DEVELOPMENT SERVICES BECOMES FUNCTIONALLY DIFFERENT AND HENCE CANNOT BE CONSIDER ED AS COMPARABLE. IT IS THEREFORE, HELD TO HAVE BEEN RIGHTLY EXCLUDED. (XI) R. SYSTEMS INTERNATIONAL LTD. (SEGMENT) 69. THE ASSESSEE INCLUDED THE `SOFTWARE DEVELO PMENT & CUSTOMISATION SERVICES SEGMENT OF THE COMPANY IN THE LIST OF COM PARABLES. THE TPO EXCLUDED THE SAME BY NOTICING ON PAGE 58 OF HIS ORD ER THAT IT WAS NOT INVOLVED IN HIGH-END SOFTWARE SERVICES. THEN, ON P AGE 76, THE TPO ALSO ITA NOS.1479 & 691/DEL/2016 65 NOTICED THAT THE FINANCIAL DATA OF THIS COMPANY WA S AVAILABLE FOR A PERIOD OF 12 MONTHS ENDING 31.12.2010. THAT IS HOW, HE HELD THIS COMPANY TO BE NOT INCLUDIBLE IN THE LIST OF COMPARABLES. THE ASSESSEE IS AGGRIEVED BY THIS EXCLUSION. 70. WE HAVE HEARD BOTH THE SIDES AND PERUSED TH E RELEVANT MATERIAL ON RECORD. FIRST OF ALL, WE TAKE UP THE FUNCTIONAL DI FFERENCE AS NOTICED BY THE TPO ON PAGE 58 OF HIS ORDER. WE HAVE GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH HAS BEEN PROVIDED IN THE PAPER BOOK. IT CAN BE SEEN FROM THE MESSAGE OF THE COMPANYS CHAIRMAN, WHICH IS THERE ON PAGE 13 OF THE ANNUAL REPORT THAT UNDER THE HEADING `OUR BUSINESS, IT HAS BEEN NARRATED THAT ITS : `CORE SERVICE OFFERINGS IN CLUDE PRODUCT ENGINEERING, SOLD UNDER OUR BRAND OF IPLM SERVICES; IT ENABLED B USINESS PROCESS OUTSOURCING (BPO) SERVICES AND CONSULTING SERVICES FOR ENTERPRISE APPLICATIONS SUCH AS BUSINESS INTELLIGENCE AND ANAL YTICS, ERP AND MOBILITY. IT HAS FURTHER BEEN MENTIONED ON THE SA ME PAGE THAT: R SYSTEMS PRODUCTS GROUP CONSISTS OF TWO UNITS. INDUS WHICH ADDRESS THE RETAIL LENDING, TELECOMMUNICATION AND INSURANCE IND USTRY AND ECNET WHICH ADDRESSES SUPPLY CHAIN, WAREHOUSING AND INVEN TORY MANAGEMENT. ITA NOS.1479 & 691/DEL/2016 66 A COPY OF THE PROFIT & LOSS ACCOUNT OF THIS COMPANY IS AVAILABLE ON INTERNAL PAGE NO. 81, WHICH SHOWS `INCOME INTO TH REE PARTS, NAMELY SALES AND SERVICE INCOME; SALE OF THIRD PARTY HARDWARE AND SOFTWARE; AND OTHER INCOME. PAGE 97 CONTAINS INFORMATION ABOUT THE SEGMENTS. FOR THE YEAR ENDING 31.12.2011, THERE ARE ONLY TWO SEGMENTS , NAMELY SOFTWARE DEVELOPMENT & CUSTOMIZATION SERVICES AND BUSINES S PROCESS OUTSOURCING. IT IS, THEREFORE, OVERT THAT INCOME FROM THE RELEVANT SEGMENT OF SOFTWARE DEVELOPMENT & CUSTOMIZATION SERVICES TAKEN BY THE ASSESSEE FOR THE PURPOSES OF COMPARISON INCLUDES SALE OF PRO DUCTS NOT ONLY OF ITS OWN BUT ALSO THOSE OF THIRD PARTIES. SINCE THE SAL E OF PRODUCTS IS ALSO INCLUDED IN THIS SEGMENT, AND THE ASSESSEE IS NOT I NTO SALE OF ITS OWN HARDWARE OR SOFTWARE AND ALSO THE SOFTWARE OF THIRD PARTIES, THIS COMPANY ON SEGMENTAL LEVEL BECOMES FUNCTIONALLY DIFFERENT A ND CEASES TO BE COMPARABLE WITH THE ASSESSEE ENGAGED IN PROVIDING O NLY RESEARCH AND DEVELOPMENT SERVICES UNDER THIS INTERNATIONAL TRANS ACTION. WE, THUS, HOLD THAT THIS COMPANY IS NOT COMPARABLE TO THE ASSESSEE COMPANY. 71. IN VIEW OF THE ABOVE FUNCTIONAL DIFFERENCE S, THERE IS NO NEED TO LOOK FOR DATA RELEVANT TO THE PERIOD 01.04.2010 TO 31.03 .2011. WE, THEREFORE, ITA NOS.1479 & 691/DEL/2016 67 APPROVE THE EXCLUSION OF THIS COMPANY ON SEGMENTAL LEVEL FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DISSIMILARITY AS NOTED BY THE TPO. (XII) SILVERLINE TECHNOLOGIES LTD. 72. THE TPO EXCLUDED THIS COMPANY BY ASSIGNING TWO REASONS. ONE HAS BEEN GIVEN ON PAGE 58 OF HIS ORDER TO THE EFFECT TH AT THIS COMPANY IS NOT INVOLVED IN HIGH-END SOFTWARE SERVICES AND THE SECO ND REASON IS GIVEN ON PAGE 76, BEING, THE NON-AVAILABILITY OF DATA FOR TH E RELEVANT FINANCIAL YEAR ENDING. 73. WE HAVE GONE THROUGH THE ANNUAL REPORT OF THE COMPANY WHOSE COPY HAS BEEN PROVIDED IN THE PAPER BOOK. IT CAN B E SEEN FROM INTERNAL PAGE 3 OF THE ANNUAL REPORT, WHICH IS A MESSAGE FR OM THE CHAIRMAN THAT THE : `COMPANYS SERVICE MANAGEMENT TEAM HAS ANNOUN CED THAT ITS SOFTWARE-AS-A-SERVICE SAAS BASED ITIL INCIDENT M ANAGEMENT SOFTWARE, ICARE, IS NOW AVAILABLE ON RESEARCH IN MOTIONS PL AYBOOK PLATFORM AS WELL AS ON WEBSITE. THIS GRAPHICALLY DEMONSTRATES THAT THE COMPANY IS ALSO ENGAGED IN SALE OF PRODUCTS LIKE ICARE, WHICH FACT BECOMES MORE GLARING FROM ITS PROFIT & LOSS ACCOUNT WHICH HAS THE FIRST ITEM UNDER THE HEAD INCOME AS SALES AND SERVICES. IT IS FURTHER PERTI NENT TO NOTE THAT THOUGH ITA NOS.1479 & 691/DEL/2016 68 THIS COMPANY IS ALSO ENGAGED IN RESEARCH AND DEVELO PMENT AS IS APPARENT FROM PAGE 9 OF ITS ANNUAL REPORT, BUT, THE : R&D A CTIVITIES INCLUDE TOOLS DEVELOPMENT WITH THE OBJECT OF DEVISING EFFICIENT M ETHODS OF PRE- PRODUCTION PHASE. THUS, THE R&D ACTIVITY CARRIED O UT BY THIS COMPANY IS MEANT FOR CREATING TOOLS FOR ITS INTERNAL USE AND I S NOT DONE AS A SERVICE TO ITS CUSTOMERS, AS THE ASSESSEE IN QUESTION IS DOING. IN VIEW OF THE FACT THAT THIS COMPANY HAS ALSO INCOME FROM SOFTWARE PRODUCTS AND IS NOT ENGAGED IN RENDERING RESEARCH AND DEVELOPMENT SOFTWARE SERVICE S, WE HOLD THAT THIS COMPANY WAS RIGHTLY EXCLUDED. 74. HAVING DEALT WITH THE INCLUSIONS OR EXCLUSI ONS CHALLENGED BY THE ASSESSEE IN THE INTERNATIONAL TRANSACTION OF PROVI SION OF SOFTWARE DEVELOPMENT SERVICES, WE, NOW TAKE UP OTHER POINTS URGED BY THE ASSESSEE IN ITS APPEAL. 75. THE LD. AR ARGUED THAT THE AUTHORITIES BELOW ERRED IN NOT GRANTING WORKING CAPITAL ADJUSTMENT. 76. IT CAN BE SEEN FROM PAGE 37 OF THE TPOS ORD ER THAT THE ASSESSEES CLAIM FOR WORKING CAPITAL ADJUSTMENT HAS BEEN DENIE D PRIMARILY ON THE ITA NOS.1479 & 691/DEL/2016 69 GROUND THAT A WORKING CAPITAL ADJUSTMENT CANNOT BE MADE AS A MATTER OF PRACTICE AND ROUTINE. NO RELIEF WAS ALLOWED BY THE DRP. 77. WE ARE NOT INCLINED TO ACCEPT THE VIEW CANV ASSED BY THE AUTHORITIES THAT THE WORKING CAPITAL ADJUSTMENT CANNOT BE ALLOW ED AS THE ASSESSEE IS IN SERVICE INDUSTRY. SUCH AN ADJUSTMENT IS RESTRICTED TO INVENTORY, TRADE RECEIVABLES AND TRADE PAYABLES. IF A COMPANY CARRI ES HIGH TRADE RECEIVABLES, IT WOULD MEAN THAT IT IS ALLOWING ITS CUSTOMERS REL ATIVELY LONGER PERIOD TO PAY THEIR DUES, WHICH WILL RESULT INTO HIGHER INTER EST COST AND THE RESULTANT LOW NET PROFIT. SIMILARLY, BY CARRYING HIGH TRADE PAYABLES, A COMPANY BENEFITS FROM A RELATIVELY LONGER PERIOD AVAILABLE TO IT FOR PAYING BACK THE DUES TO ITS SUPPLIERS, WHICH REDUCES THE INTEREST COST AND INCREASES PROFITS. IN ORDER TO NEUTRALIZE THE DIFFERENCES ON ACCOUNT O F CARRYING HIGH OR LOW INVENTORY, TRADE PAYABLES AND TRADE RECEIVABLES, AS THE CASE MAY BE, IT BECOMES EMINENT TO ALLOW WORKING CAPITAL ADJUSTMENT SO AS TO BRING THE CASE OF THE ASSESSEE AT PAR WITH THE OTHER FUNCTION ALLY COMPARABLE ENTITIES. WE, THEREFORE, AGREE IN PRINCIPLE WITH THE GRANT OF WORKING CAPITAL ADJUSTMENT. SINCE THE NECESSARY DETAILS QUA THE GRANT OF SUCH AN ADJUSTMENT HAVE NOT BEEN EXAMINED BECAUSE OF REFUSAL TO GRANT SUCH ADJUSTMENT AT THE ITA NOS.1479 & 691/DEL/2016 70 THRESHOLD, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE FIT AND PROPER TO SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND S END THE MATTER BACK TO THE FILE OF THE AO/TPO TO CARRY OUT THE WORKING CAPITAL ADJUSTMENT IN THE LIGHT OF OUR ABOVE DISCUSSION. ONCE IT IS HELD THAT SUCH AN ADJUSTMENT IS PERMISSIBLE, THEN IT SHOULD BE CARRIED OUT WHETHER IT FAVOURS OR DISFAVORS THE ASSESSEE. IT GOES WITHOUT SAYING THAT THE ASSES SEE WILL BE ALLOWED AN OPPORTUNITY OF HEARING IN SUCH FRESH DETERMINATION OF THE WORKING CAPITAL ADJUSTMENT, IF ANY. 78. THE ONLY OTHER POINT URGED BY THE LD. AR UND ER THIS INTERNATIONAL TRANSACTION IS WITH REFERENCE TO THE COMPUTATION OF THE ASSESSEES OWN PLI. IN THIS REGARD, IT WAS SUBMITTED THAT RENTAL INCOME EARNED BY IT TO THE TUNE OF RS.17,22,16,198/- WAS CONSIDERED AS NON-OPERATIN G INCOME. HOWEVER, THE ASSESSEE INADVERTENTLY DID NOT EXCLUDE THE CORR ESPONDING EXPENSES RELATING TO SUCH RENTAL INCOME FROM THE TOTAL OPERA TING EXPENSES. IT WAS SHOWN THAT THE TPO HIMSELF, FOR THE ASSESSMENT YEAR 2014-15, ALLOWED DEDUCTION OF SUCH EXPENSES FROM TOTAL OPERATING EXP ENSES FOR THE PURPOSE OF COMPUTATION OF THE ALP. IT WAS FURTHER POINTED OUT THAT THE DRP DIRECTED THE TPO IN RELATION TO THE ASSESSMENT YEAR 2012-13 FOR ALLOWING ITA NOS.1479 & 691/DEL/2016 71 DEDUCTION OF EXPENSES CONCERNING THE RENTAL INCOME FROM TOTAL OPERATING EXPENSES. 79. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, IT IS SEEN THAT THE ASSESSEE DID EARN RENTA L INCOME AMOUNTING TO RS.17,22,16,198/- APART FROM INCOME FROM OPERATION S AS CHARGES TOWARDS SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES. ONCE RENTAL INCOME HAS BEEN TREATED AS NON-OPERATING QUA THE INTERNATIONAL TRANSACTIONS, AS A SEQUITUR, THE CORRESPONDING EXPENSES INCURRED IN RE LATION TO EARNING OF SUCH RENTAL INCOME ARE ALSO REQUIRED TO BE REMOVED FROM TOTAL OPERATING EXPENSES FOR THE PURPOSES OF COMPUTATION OF ALP OF THE INTERNATIONAL TRANSACTIONS. WE, THEREFORE, DIRECT THE TPO/A.O. TO EXAMINE THE AMOUNT OF EXPENSES INCURRED IN RELATION TO EARNING OF RENTAL INCOME AND REDUCE SUCH AMOUNT FROM THE TOTAL AMOUNT OF OPERATING EXPENSES TO BE BIFURCATED IN ALL SOURCES OF REVENUES FROM OPERATIONS. PROVISION OF I.T. ENABLED SERVICES (BANGALORE UNI T)] 80. THE NEXT INTERNATIONAL TRANSACTION UNDER CH ALLENGE IS PROVISION OF IT ENABLED SERVICES WITH THE TRANSACTED VALUE OF RS.3 23,46,26,948/-. THE ASSESSEE ADOPTED TNMM AS THE MOST APPROPRIATE METHO D WITH THE PLI OF ITA NOS.1479 & 691/DEL/2016 72 OP/OC FOR BENCHMARKING THIS INTERNATIONAL TRANSACTI ON. IT SELECTED 17 COMPANIES AS COMPARABLE WITH AVERAGE PLI, ON MULTIP LE YEAR BASIS, AT 4.63%. THE ASSESSEE COMPUTED ITS OWN PLI AT 15.39% . ON THIS BASIS, IT WAS CLAIMED THAT THE INTERNATIONAL TRANSACTION WAS AT ALP. THE TPO MADE CERTAIN EXCLUSIONS AND INCLUSIONS FROM/TO THE LIST OF COMPARABLES DRAWN BY THE ASSESSEE. IN ALL, 8 COMPANIES WERE SHORTLISTED WITH AVERAGE PLI OF 29.57%. THIS LED TO PROPOSING TRANSFER PRICING ADJU STMENT OF RS.39,67,65,085/-. THE A.O. PASSED THE DRAFT ORDER ACCORDINGLY. THE ASSESSEE CARRIED THE MATTER BEFORE THE DRP, WHICH D IRECTED TO EXCLUDE E- CLERX SERVICES PVT. LTD. FROM THE LIST OF COMPARABL ES. GIVING EFFECT TO THE DIRECTION GIVEN BY THE DRP, THE TPO RECOMPUTED REVI SED TRANSFER PRICING ADJUSTMENT AT RS.28,73,66,004/-. THE ASSESSING OFF ICER PASSED THE FINAL ORDER MAKING TRANSFER PRICING ADDITION AT THIS LEVE L. THE ASSESSEE HAS ASSAILED THE TRANSFER PRICING ADDITION BEFORE THE T RIBUNAL. 81. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS CHALLENGED THE INCLUSION/ EXCLUSION OF CERTAIN COMPANIES FROM/TO THE FINAL TALLY DRAWN BY THE TPO. BEFORE ADVERTING TO THE COMPARABILITY ANALYSIS, IT IS SINE QUA NON TO EXAMINE THE FUNCTIONAL ITA NOS.1479 & 691/DEL/2016 73 PROFILE OF THE ASSESSEE UNDER THE INTERNATIONAL TRA NSACTION OF PROVISION OF IT ENABLED SERVICES. IT IS SEEN FROM THE TPOS O RDER THAT THE ASSESSEE ENTERED INTO A PRODUCT SUPPORT SERVICES AGREEMENT D ATED 01.07.2002 WITH MS CORPORATION TO PROVIDE IT ENABLED SERVICES AND S UCH SERVICES WERE RENDERED THROUGH THE ESTABLISHMENT OF GLOBAL SUPPOR T CENTRE (INDIA GSC) IN BANGALORE. IT IS FURTHER NOTICED FROM THE TPOS ORDER THAT ITES RENDERED BY THE ASSESSEE ARE A PART OF THE CUSTOMER SUPPORT SERVICES ARM OF THE MICROSOFT GROUP, WHICH SUPPORTS A WIDE ARRAY OF CUS TOMER SEGMENTS, FROM INDIVIDUAL HOME USERS TO CORPORATE USERS. WE HAVE ALSO GONE THROUGH THE ASSESSEES TRANSFER PRICING STUDY REPORT, WHICH ALS O THROWS SOME LIGHT ON THE NATURE OF SERVICES PROVIDED UNDER THIS INTERNAT IONAL TRANSACTION. IT IS BORNE OUT FROM PAGE 59 OF THE TP STUDY REPORT THAT THE ASSESSEES TEAM IN INDIA TRACKS THE CALLS MADE BY THE CUSTOMERS AND RO UTES THEM TO THE RELEVANT SUPPORT TEAM. THESE TEAMS, ON RECEIVING CALLS FROM THE CUSTOMERS, UNDERSTAND THEIR REQUIREMENTS, VERIFY THE SERVICE C ONTRACTS OF THE CUSTOMERS AND PREPARE THE SUPPORT REQUESTS AND FORWARD THE SA ME TO THE RIGHT SUPPORT TEAMS. THE SUPPORT REQUESTS PREPARED IS SERVICED B Y INDIA GSCS SUPPORT ENGINEER AS A PART OF ITS PRODUCT SUPPORT SERVICES. IN CASE ANY SPECIFIC ITA NOS.1479 & 691/DEL/2016 74 SUPPORT REQUEST IS NOT RESOLVED BY THE SUPPORT ENGI NEERS AT INDIA GSC, THE SAME IS ESCALATED TO SPECIFIC ESCALATION QUEUES AND HANDLED BY THE ESCALATION TEAMS BASED ELSEWHERE IN THE WORLD. IN CERTAIN CASES, THE TEAM AT INDIA GSC ACTS AS ESCALATION TEAM AND HANDLES THE C ASES ESCALATED BY OTHER TEAMS. WE HAVE ALSO GONE THROUGH THE PRODUCT SUPPO RT SERVICE AGREEMENT (PSSA) EFFECTIVE FROM 01.07.2002 BETWEEN THE ASSESS EE AND MICROSOFT CORPORATION, USA. THIS AGREEMENT PROVIDES THAT THE ASSESSEE SHALL PROVIDE PRODUCT SUPPORT SERVICES, WHICH TERM HAS BEEN DEFINED IN CLAUSE II OF THE AGREEMENT AS UNDER :- II. PRODUCT SUPPORT SERVICES MSFT HEREBY ENGAGES SUBSIDIARY (I.E. THE ASSESSEE) TO RENDER PRODUCT SUPPORT SERVICES SPECIFIED BELOW THROUGHOUT THE TERM OF THI S AGREEMENT. THE PRODUCT SUPPORT SERVICES SHALL INCLUDE STANDARD MSFT PRODUC T SUPPORT SERVICES FOR PRODUCTS WHICH ARE GENERALLY MADE AVAILABLE TO END USERS IN THE TERRITORY AND SHALL INCLUDE REQUESTS FOR SUPPORT ORIGINATING FROM WITHIN THE TERRITORY. PRODUCT SUPPORT SERVICES INCLUDE PHONE, EMAIL, WEB- BASED AND ONSITE SUPPORT FOR ALL MSFT PRODUCTS. PRODUCT SUPPORT SERVICES IN CLUDE ALL RETAIL PRODUCT WARRANTY SUPPORT IN THE AREAS OF INSTALLATIONS, SET UP AND USAGE FUNCTIONALITIES AND EXCLUDES PLANNING, DESIGN AND PROGRAMMING. 82. WE HAVE ALSO GONE THROUGH THE INTERVIEW OF SH RI THOMAS PAYYAPALLI WITH DESIGNATION GENERAL MANAGER, INDIA GLOBAL TECH NICAL SUPPORT CENTRE (I-GTSC), CONDUCTED BY THE APA AUTHORITIES, A COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK. IN RESPONSE TO QUERY ABO UT THE NATURE OF WORK ITA NOS.1479 & 691/DEL/2016 75 UNDERTAKEN, HE SUBMITTED THAT HIS TEAM WAS RESOLVIN G TECHNICAL PROBLEMS OF CUSTOMERS AND ALSO PROVIDING TECHNICAL ASSISTANCE T O MPN (MICROSOFT PARTNER NETWORK) PARTNER ECOSYSTEM. IN ANSWER TO Q UESTION NO. 2, HE STATED THAT THE SUPPORT CALLS ARE ROUTED THROUGH MI CROSOFT AND THE SYSTEMS OF VARIOUS SUPPORT CENTRES INCLUDING INDIA GTSC. ONCE THE CALL ENDS HERE, THE ENGINEERS INTERACT WITH THE CUSTOMER, UNDERSTAND TH E ROOT CAUSE OF THE PROBLEM AND PROVIDE A RESOLUTION. HE FURTHER ANSWER ED TO QUESTION NO.12 THAT MS CORPORATION PROVIDES PROCESS TOOLS WITH THE HELP OF WHICH THE ASSESSEE RENDERS SERVICES TO ITS CUSTOMERS. FROM TH E ABOVE DISCUSSION, IT IS CLEAR THAT UNLIKE THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES, THERE IS NO CONFLICT IN THE VERSION OF NATURE OF SERVICES AS GIVEN IN TP DOCUMENTATION, PSSA AGREEME NT AND THE INTERVIEWS DONE BY APA AUTHORITIES. THERE IS COMPLE TE UNISON IN ALL OF THEM ABOUT THE NATURE OF SERVICES RENDERED UNDER TH IS INTERNATIONAL TRANSACTION, BEING THAT OF RECEIVING CALLS AND RESOLVING TECHNICAL PROBLEMS OF THE CUSTOMERS OF MICROSOFT CORPORATION. WITH TH E ABOVE UNDERSTANDING OF THE NATURE OF WORK DONE BY THE ASSESSEE IN THIS SEGMENT, WE NOW PROCEED TO EXAMINE THE COMPARABILITY OF THE COMPANIES CHALL ENGED BEFORE US. ITA NOS.1479 & 691/DEL/2016 76 FIRST OF ALL, WE TAKE COMPANIES INCLUDED BY THE TPO , WHICH THE ASSESSEE HAS CONTESTED AS NOT COMPARABLE. (I) ACCENTIA TECHNOLOGIES LTD . 83. THE TPO TREATED THIS COMPANY AS COMPARABLE D ESPITE THE ASSESSEES INITIAL INCLUSION AND LATER EXCLUSION, BY OBSERVING THAT IT IS ENGAGED IN MEDICAL TRANSCRIPTION AND INCOME FROM CODING AND BI LLING AND COLLECTION, WHICH FALLS UNDER THE OVERALL UMBRELLA OF IT ENABLE D SECTOR. THE ASSESSEE IS AGGRIEVED BY THE INCLUSION OF THIS COMPANY. 84. HAVING HEARD BOTH THE SIDES AND GONE THROUG H THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS C OMPANY, WHOSE COPY IS AVAILABLE ON PAGE 2153 ONWARDS OF THE PAPER BOOK, T HAT IT IS ENGAGED IN RENDERING KPO SERVICES. THE MANAGING DIRECTOR OF T HIS COMPANY HAS SAID IN HIS MESSAGE TO THE SHAREHOLDERS ON PAGE 6 OF THE ANNUAL REPORT THAT THE COMPANY DECIDED TO DEVELOP ITS OWN EMR (ELECTRONIC MEDICAL RECORDS) SOFTWARE RATHER THAN DEPENDING ON THIRD PARTY OFFER ING AND MARKET THE SAME ALL OVER THE US. IT HAS FURTHER BEEN MENTIONED THA T DUE TO THESE DEVELOPMENTS, THE COMPANY INVESTED LARGE AMOUNT OF FUNDS IN THE DEVELOPMENT OF EMR SOFTWARE AND SAAS MODEL MARKETIN G OF THE SAME IN ITA NOS.1479 & 691/DEL/2016 77 THE US. IT HAS STILL FURTHER BEEN MENTIONED ON PAG E 2175 OF THE PAPER BOOK THAT THIS COMPANY SUPPORTED A PRODUCT DIVISION UNDE R THE NAME OF IRIDIUM AND WITH A FOCUSED APPROACH. THE PRODUCT TEAM WAS ABLE TO COME UP WITH END-TO-END GLOBAL WORK FLOW AUTOMATION SYSTEM THAT HELP IN THE DAY-TO-DAY WORK FLOW. THE PRODUCTS LIKE IRIDIUM MEDICAL TRANS CRIPTION AUTOMATION SOFTWARE, IRIDIUM CERTIFIED HOME BASED MEDICAL TRAN SCRIPTION, IRIDIUM CERTIFIED MEDICAL TRANSCRIPTION, FALCON-2000, ETC., ARE FEW OF THE PRODUCTS WHICH HAVE BEEN ACCEPTED BY CUSTOMERS. IT HAS ALSO BEEN MENTIONED ON PAGE 2177 OF THE ANNUAL REPORT THAT: SINCE AUGUST, 2010 ACCENTIAS PRODUCTS DEVELOPMENT TEAM, ALONG WITH THEIR FUNCTIO NAL EXPERTS AND DEVELOPMENT PARTNERS HAVE BEEN INVOLVED IN THE MISS ION OF DESIGNING AND DEVELOPING A WORLD CLASS FULLY INTEGRATED MULTI-DIS CIPLINED CLOUD BASED HOST. APPLICATION WHICH INTEGRATES ALL SERVICES FROM ELECTRONIC MEDICAL RECORD (EMR) PRACTICES MANAGEMENT SYSTEM (PMS) - CODE MAPPING/SCRUBBING MEDICAL BILLING AND RECEIVABLES MANAGEMENT SYSTEM (RCM) ELECTRONIC DATA INTERCHANGE WITH I NSURANCE COMPANIES. THE ABOVE SEAMLESSLY INTEGRATED (SAAS) S YSTEM FUNCTIONS AS A ONE STOP SHOP FOR A CLINICAL PROVIDER THAT MANAGES ALL THEIR HEALTHCARE ITA NOS.1479 & 691/DEL/2016 78 DOCUMENTATION NEEDS, RECEIVABLES MANAGEMENTS NEEDS .. PROFIT & LOSS ACCOUNT OF THIS COMPANY IS AVAILABLE ON PAGE N O. 2195, FROM WHICH IT CAN BE SEEN THAT UNDER THE HEAD INCOME, THERE IS A FIRST ITEM OF SALES AND SERVICES. UNDER THE HEAD SEGMENT INFORMATION IN NOTES TO ACCOUNTS, IT HAS BEEN MENTIONED THAT: COMPANY HAS ONLY ONE SEGM ENT OF ACTIVITY, NAMELY, HEALTHCARE RECEIVABLE MANAGEMENT, THEREFO RE, SEGMENT REPORTING AS DEFINED IN AS-17 DOES NOT APPLY. FROM THE ABOVE DISCUSSION, IT TRANSPIRES THAT THIS COMPANY IS NOT ONLY EARNING IN COME FROM SALE OF SOFTWARE PRODUCTS AS WELL, BUT IS HAVING A COMMON P OOL OF INCOME BOTH FROM PRODUCTS AND SERVICES AND THERE IS NO BIFURCAT ION OF INCOME AVAILABLE FROM SALE OF PRODUCTS AND RENDERING OF SERVICES. I N THIS VIEW OF THE MATTER, IT BECOMES CLEAR THAT THIS COMPANY IS NOWHERE CLOSE TO THE EXCLUSIVE ITES SEGMENT OF THE ASSESSEE COMPANY. THE HON'BLE DELHI HIGH COURT IN PRINCIPAL CIT VS. B.C. MANAGEMENT SERVICES PVT. LTD . (2018) 403 ITR 45 (DEL), HAS HELD THAT ACCENTIA TECHNOLOGIES PVT. LTD. IS E NGAGED IN KPO SERVICES AND IS, HENCE, NOT COMPARABLE WITH A COMP ANY PROVIDING ITES. THIS DECISION HAS ALSO BEEN RENDERED FOR THE ASSESS MENT YEAR 2011-12, ITA NOS.1479 & 691/DEL/2016 79 WHICH IS UNDER CONSIDERATION IN THIS APPEAL. WE, T HEREFORE, ORDER TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. (II) ICRA TECHNO ANALYTICS (SEG) 85. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES DESPITE THE ASSESSEES OBJECTION OF FUNCTIONAL NON-COMPARAB ILITY ETC., AGAINST WHICH THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL. 86. WE HAVE GONE THROUGH THE ANNUAL REPORT OF T HIS COMPANY, A COPY OF WHICH IS AVAILABLE ON PAGE 2237 OF THE PAPER BOOK. INTERNAL PAGE 27 OF THIS ANNUAL REPORT DIVULGES THAT: THE COMPANY IS ENGAGE D IN THE SOFTWARE DEVELOPMENT AND CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT AND HOSTING AND SUBSEQUENTLY DIVERSIFYING ITSELF INTO T HE DOMAIN OF BUSINESS ANALYTICS AND BUSINESS PROCESS OUTSOURCING. UNDER THE HEAD REVENUE RECOGNITION, THIS COMPANY HAS RECORDED THAT: REVE NUE FROM SERVICES CONSISTS OF REVENUE EARNED FROM SERVICES PERFORMED FOR SOFTWARE DEVELOPMENT AND CONSULTANCY, LICENSING AND SUB-LICE NSING FEE, ANNUAL MAINTENANCE CHARGES FOR SOFTWARE SUPPORT, WEB DEVEL OPMENT AND HOSTING WHICH IS RECOGNIZED TO THE EXTENT SERVICES ARE PERF ORMED. PAGE 2284 IS A COPY OF THE PROFIT & LOSS ACCOUNT OF THIS COMPANY W HICH SHOWS OPERATING ITA NOS.1479 & 691/DEL/2016 80 REVENUE OF RS.1,58,401/- (IN THOUSANDS OF INDIAN RU PEES), BIFURCATION OF WHICH IS AVAILABLE AT PAGE 2285. IT SHOWS REVENUES FROM SALE OF GOODS AND REVENUE FROM OTHER SERVICES SEPARATELY AT RS.949/- (IN THOUSANDS OF INDIAN RUPEES) AND 1,57,452/- (IN THOUSANDS OF INDIAN RUPE ES) RESPECTIVELY. SINCE THIS COMPANY IS, ADMITTEDLY, ENGAGED IN SOFTWARE PR ODUCTS, APART FROM RENDERING ITES AND SOFTWARE DEVELOPMENT SERVICES AN D THERE IS NO SEPARATE SEGMENTAL INFORMATION, IT CANNOT BE CONSIDERED AS C OMPARABLE WITH THE ASSESSEES IT ENABLED SERVICES SEGMENT UNDER CONSID ERATION. THE HON'BLE JURISDICTIONAL HIGH COURT IN B.C. MANAGEMENT SERVICES (P) LTD. (SUPRA) HAS ALSO HELD THIS COMPANY TO BE NOT COMPARABLE WITH A COMPANY PROVIDING IT ENABLED SERVICES ONLY. WE, THEREFORE, DIRECT TO EX CLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. (III) TCS E-SERVE LTD . 87. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES DESPITE THE ASSESSEES SEVERAL OBJECTIONS ON FUNCTIONAL NON -COMPARABILITY, OWNERSHIP OF INTANGIBLES AND PAYMENT OF BRAND EQUIT Y. ITA NOS.1479 & 691/DEL/2016 81 88. HAVING GONE THROUGH THE ANNUAL REPORT OF THI S COMPANY, IT IS SEEN THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF PRO VIDING ITES/BPO SERVICES, PRIMARILY TO CITI GROUP ENTITIES GLOBALLY . IT HAS BEEN RECORDED ON PAGE 88 OF ITS ANNUAL REPORT THAT THE COMPANYS OPE RATIONS BROADLY COMPRISE TRANSACTION PROCESSING AND TECHNICAL SERVI CES. `TRANSACTION PROCESSING INCLUDES THE BROAD SPECTRUM OF ACTIVITIE S INVOLVING THE PROCESSING, COLLECTIONS, CUSTOMER CARE AND PAYMENTS IN RELATION TO THE SERVICES OFFERED BY THE CITI GROUP TO ITS CORPORATE AND RETAIL CLIENTS. TECHNICAL SERVICES INVOLVE SOFTWARE TESTING, VERIFI CATION AND VALIDATION OF SOFTWARE AT THE TIME OF IMPLEMENTATION AND DATA CEN TRE MANAGEMENT ACTIVITIES. THUS, IT IS EVIDENT THAT THE INCOME O F THIS COMPANY ALSO INCLUDES THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES, WHIC H ARE COVERED UNDER TECHNICAL SERVICES INVOLVING SOFTWARE TESTING, VE RIFICATION AND VALIDATION OF SOFTWARE. PAGES 90/97 OF THE ANNUAL REPORT DEPI CT THAT THE COMPANY HAS ONLY ONE SEGMENT NAMED AS BPO (TRANSCRIPTION PROCES SING SERVICES). SINCE THE ASSESSEE IN THE INSTANT INTERNATIONAL TRANSACTI ON IS NOT RENDERING ANY SOFTWARE DEVELOPMENT SERVICES AND THE ACTIVITIES AR E CONFINED TO RESOLVING PROBLEMS OF THE ENTERPRISE CUSTOMERS IN THE SOFTWAR E PRODUCTS, BEING ITA NOS.1479 & 691/DEL/2016 82 CATEGORIZED AS ITES, THIS COMPANY CEASES TO BE COMP ARABLE. WE, THEREFORE, ORDER TO EXCLUDE IT FROM THE LIST OF COMPARABLES. 89. NOW, WE TAKE UP THE COMPANIES CHALLENGED BY THE ASSESSEE, WHICH WERE INCLUDED BY IT, BUT, EXCLUDED BY THE TPO FROM THE LIST OF COMPARABLES. (I) MICROLAND LTD. (SEG.) 90. THE TPO EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLES DRAWN BY THE ASSESSEE ON THE GROUND THAT IT WAS INCURRING PERSISTENT OPERATING LOSSES UNDER THE RELEVANT SEGMENT CONSIDERED BY THE ASSESSEE. THE TPO HAS DRAWN A TABLE ON PAGE 25 OF HIS ORDER WHICH SHOWS T HAT THE CONCERNED SEGMENT IS SHOWING OP/TC AT (-) 12.94%, (-) 3.79% A ND (-) 19.51% IN RESPECT OF YEAR ENDING 2011, 2010 AND 2009 RESPECTI VELY. THE ASSESSEE IS AGGRIEVED BY THIS EXCLUSION. 91. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. AR CONTENDED THAT THE TPO ERRED IN CONSIDERING PERSISTENT LOSSES IN THE RELEVANT SEGMENT BY IGNORING THAT THI S COMPANY WAS NOT INTO CONSISTENT LOSSES ON ENTITY LEVEL. WE HAVE GONE TH ROUGH THE ANNUAL REPORT OF THIS COMPANY, WHOSE COPY HAS BEEN MADE AVAILABLE . ON PAGE 2524 OF THE ITA NOS.1479 & 691/DEL/2016 83 PAPER BOOK, THERE IS A MENTION OF OPERATING REVENUE OF THIS COMPANY AT RS.16,20,426/- (IN THOUSANDS OF INDIAN RS.), DESCRI BED AS REVENUE INFORMATION TECHNOLOGY CONSULTANCY. SEGMENTAL REP ORTING OF THIS COMPANY HAS BEEN GIVEN ON PAGES 2509/2510, WHICH DIVULGES THAT IT HAS REVENUES FROM `INFRASTRUCTURE MANAGEMENT SERVICES AND `IT E NABLED SERVICES. NOTE TO ACCOUNTS NO. 16 CLEARLY MENTIONS THAT: THE COMP ANY RENDERS SOFTWARE SERVICES COMPRISING OF NETWORKING AND INFRASTRUCTUR E MANAGEMENT SERVICES AND IT ENABLED SERVICES WHICH COMPRISE THE PRIMARY BASIS OF SEGMENTAL INFORMATION SET OUT IN THESE FINANCIAL STATEMENTS. IT IS, THUS, SEEN THAT THE COMPANY HAS REVENUES FROM TWO STREAMS. THOUGH THER E IS A POSITIVE INCOME FROM RENDERING OF `SOFTWARE SERVICES, THERE IS NEGATIVE OP/TC FROM THE RELEVANT SEGMENT OF `IT ENABLED SERVICES . SINCE THE ASSESSEES `IT ENABLED SERVICES SEGMENT IS UNDER CONSIDERATIO N AND THE ASSESSEE HAS ALSO CONSIDERED MICROLAND LTD. AS COMPARABLE ON SEG MENTAL BASIS, THIS SEGMENT, FETCHING PERSISTENT LOSSES, SHEDS THE CHAR ACTER OF COMPARABILITY NOTWITHSTANDING THE FACT THAT THE OTHER SEGMENT OF SOFTWARE DEVELOPMENT SERVICES IS NOT SHOWING LOSSES. HAD THERE BEEN COM PARISON BETWEEN THE COMPANYS SOFTWARE DEVELOPMENT SERVICES SEGMENT AND THE ASSESSEES ITA NOS.1479 & 691/DEL/2016 84 SOFTWARE DEVELOPMENT SEGMENT, THE QUESTION OF PERSI STENT LOSSES WOULD HAVE PALED INTO INSIGNIFICANCE. AS MICROLAND LTD. (SEG.) IS PERSISTENTLY IN LOSSES, THE SAME CANNOT BE CONSIDERED AS COMPARABLE . WE, THEREFORE, UPHOLD THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMP ARABLES. II) R. SYSTEMS INTERNATIONAL LTD. (SEG.); 92. THE ASSESSEE INCLUDED THIS COMPANY ON SEGM ENTAL LEVEL IN ITS LIST OF COMPARABLES. HOWEVER, THE TPO ELIMINATED THE SAME BY NOTING THAT IT WAS FOLLOWING DIFFERENT YEAR ENDING, NAMELY, 31 ST DECEMBER AND, HENCE, WAS NOT COMPARABLE. THE LD. AR FAIRLY ACCEPTED THAT THE AB OVE COMPANY WAS FOLLOWING CALENDAR YEAR FOR MAINTAINING ITS ACCOUNT S IN CONTRAST TO THE ASSESSEE FOLLOWING FINANCIAL YEAR ENDING 31 ST MARCH. IT WAS, HOWEVER, SUBMITTED THAT THIS COMPANY SHOULD NOT HAVE BEEN EX CLUDED FOR THIS REASON ALONE WHEN IT WAS OTHERWISE FUNCTIONALLY SIMILAR, A FACT WHICH HAS NOT BEEN DENIED BY THE TPO. THE LD. DR OPPOSED THIS CONTENT ION BY SUBMITTING THAT THE DATA FOR THE YEAR ENDING OF THIS COMPANY WAS NO T SIMILAR TO THAT OF ASSESSEE COMPANY AND HENCE IT WAS RIGHTLY EXCLUDED. ITA NOS.1479 & 691/DEL/2016 85 93. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. UNLIKE THE INTERNATIONAL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT S ERVICES, THE TPO HAS NOT DISPUTED FUNCTIONAL SIMILARITY OF THE RELEVANT SEGMENT OF THIS COMPANY WITH THE ASSESSEES INTERNATIONAL TRANSACTION OF ` PROVISION OF IT ENABLED SERVICES UNDER CONSIDERATION. HOWEVER, IT IS NOTIC ED THAT THE ASSESSEE COMPANY IS HAVING FINANCIAL YEAR COVERING THE PERIO D 1.4.2010 TO 31.3.2011. IN THAT VIEW OF THE MATTER, A VALID COM PARISON CAN BE MADE ONLY IF THE POTENTIAL COMPARABLE COMPANY HAS ALSO THE SA ME FINANCIAL YEAR. IN THIS REGARD, WE CONSIDER IT APPROPRIATE TO NOTE THE RELEVANT PART OF SUB-RULE (4) OF RULE 10B WHICH PROVIDES THAT: THE DATA TO B E USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINAN CIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAD BEEN ENTERED INTO. I T IS OBVIOUS FROM THE LANGUAGE OF SUB-RULE (4) THAT THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION CAN BE ANALYZED ONLY WITH THE DATA REL ATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BE EN ENTERED INTO. IN OTHER WORDS, IF THE TESTED PARTY HAS MARCH YEAR ENDING, T HEN, THE COMPARABLES MUST ALSO HAVE THE DATA RELATING TO THE FINANCIAL Y EAR ENDING 31 ST MARCH ITA NOS.1479 & 691/DEL/2016 86 ITSELF. IF SUCH A DATA IS NOT AVAILABLE, THEN, A C OMPANY ALBEIT FUNCTIONALLY COMPARABLE, DISQUALIFIES. ESPOUSING THE FACTS OF T HE EXTANT CASE, WE FIND THAT INSOFAR AS THE FUNCTIONAL COMPARABILITY OF THI S COMPANY ON SEGMENTAL LEVEL IS CONCERNED, THE TPO HAS NOT DISPUTED THE SA ME. THE ONLY REASON ASSIGNED FOR ITS EXCLUSION IS NON-AVAILABILITY OF D ATA FOR THE RELEVANT FINANCIAL YEAR. THE LD. AR CONTENDED THAT THOUGH TH E YEAR ENDING OF THE ABOVE COMPANY WAS DIFFERENT, YET, THE ASSESSEE WAS IN A POSITION TO PUT FORWARD THE DATA OF THE RELEVANT SEGMENT OF THIS CO MPANY FOR THE FINANCIAL YEAR 1.4.2010 TO 31.3.2011 FROM THEIR ANNUAL REPORT S ONLY. IT WAS SO STATED ON THE BASIS OF THE AVAILABILITY OF THE QUARTERLY D ATA FROM THE ANNUAL REPORTS OF THIS COMPANY, WHICH COULD, AS PER HIS OPINION, B E ADJUSTED FOR THE FINANCIAL YEAR ENDING 31.3.2011. IF THE CONTENTION OF THE ASSESSEE IS CORRECT, THAT THE RELEVANT DATA FOR THE CONCERNED FINANCIAL YEAR CAN BE DEDUCED FROM THE INFORMATION AVAILABLE FROM ITS ANNUAL REPORTS, THEN, THERE CAN BE NO OBJECTION TO THE INCLUSION OF THE RELEVANT SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES WITH THE ADJUSTED DATA FOR THE RELEV ANT FINANCIAL YEAR ITSELF. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO FOR EXAMINING THIS ASP ECT OF THE MATTER. IT IS ITA NOS.1479 & 691/DEL/2016 87 CLARIFIED THAT ONLY IF THE ASSESSEE SUCCEEDS IN PRO VIDING THE RELEVANT DATA OF THIS COMPANY FOR THE CONCERNED FINANCIAL YEAR ON TH E BASIS OF THE INFORMATION AVAILABLE FROM THE ANNUAL REPORTS ONLY, THE TPO SHOULD INCLUDE THE APPROPRIATE SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES BY CONSIDERING ITS OP/TC FOR THE FINANCIAL YEAR END ING ON 31.3.2011. IF, EVEN THOUGH ITS QUARTERLY DATA IS AVAILABLE AND CAN BE COMPILED FOR THE RELEVANT FINANCIAL YEAR, BUT THE AMOUNTS OF OPERATI NG PROFIT OR OPERATING COSTS ETC. FOR THE RELEVANT FINANCIAL YEAR ARE NOT DIRECTLY AVAILABLE WITHOUT ANY APPORTIONMENT OR TRUNCATION, THEN THIS COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE HONBLE PUNJAB & HARY ANA HIGH COURT IN CIT VS. MERCER CONSULING (INDIA) P. LTD. (2017) 390 ITR 615 (P&H) HAS APPROVED THE SIMILAR VIEW OF THE TRIBUNAL BY HOLDIN G : `THAT IF THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNA TIONAL TRANSACTION HAS BEEN ENTERED INTO IS DIRECTLY AVAILABLE FROM THE ANNUAL ACCOUNTS OF THAT COMPARABLE, THEN IT CANNOT BE HELD AS NOT PASSING T HE TEST OF SUB-RULE(4) OF RULE 10B. WE DIRECT ACCORDINGLY. ITA NOS.1479 & 691/DEL/2016 88 (II) CALIBRE POINT BUSINESS SOLUTIONS LTD. (SEG.) 94. THE TPO HELD THIS COMPANY TO BE NOT COMPAR ABLE ON THE GROUND THAT IT WAS HAVING A DIFFERENT FINANCIAL YEAR ENDING I.E ., DECEMBER. BUT FOR THAT, THE FUNCTIONAL SIMILARITY UNDER THE INSTANT SEGMENT IS NOT DISPUTED. 95. WE HAVE GONE THROUGH THE ANNUAL REPORT OF TH IS COMPANY, A COPY OF WHICH IS PLACED IN THE PAPER BOOK. ITS INCOME FROM OPERATION HAS BEEN DIVIDED INTO TWO SEGMENTS, NAMELY, BUSINESS PROCES S OUTSOURCING (BPO) AND OTHERS. ONLY THE BPO SEGMENT OF THIS COMPANY HAS BEEN CONSIDERED BY THE ASSESSEE AS COMPARABLE. THE ONLY REASON AS SIGNED BY THE TPO FOR EXCLUDING THE BPO SEGMENT OF THIS COMPANY IS THAT I TS FIGURES FOR THE YEAR ENDING 31 ST MARCH, 2011 ARE NOT AVAILABLE. BUT FOR THAT, THE F UNCTIONAL COMPARABILITY HAS NOT BEEN CHALLENGED. WE HAVE DIS CUSSED ABOVE THE CASE OF M/S R. SYSTEMS IN WHICH THE TPO MADE EXCLUSION O NLY ON THE GROUND THAT ITS YEAR ENDING WAS DIFFERENT FROM THAT OF THE ASSESSEE. THE SAME HAS BEEN DISPOSED WITH SOME DIRECTIONS. OUR OBSERVATION S MADE ABOVE IN THE CONTEXT OF M/S R. SYSTEMS APPLY TO THIS COMPANY ON SEGMENTAL LEVEL AS WELL. THE TPO IS DIRECTED TO DECIDE THE INCLUSION OR OTHERWISE OF THIS COMPANY IN THE LIGHT OF THE DISCUSSION MADE WHILE D EALING WITH M/S R. ITA NOS.1479 & 691/DEL/2016 89 SYSTEMS LTD. UNDER THE INSTANT INTERNATIONAL TRANSA CTION OF RENDERING IT ENABLED SERVICES. (III) INFORMED TECHNOLOGY; (V) MICRO GENETICS SYSTEMS LTD .; AND (VI) CG- VAK SOFTWARE AND EXPORTS LTD. (SEG.) 96. THE TPO EXCLUDED THESE COMPANIES ON THE BASI S OF TURNOVER FILTER INASMUCH THE FIRST TWO COMPANIES WERE HAVING TURNOV ER LESS THAN RS.5 CRORE AND CG-VAK SOFTWARE AND EXPORTS LTD. (SEG.) WAS HAV ING INCOME FROM BPO BUSINESS AT LESS THAN RS.1 CRORE. THIS IS THE S OLE REASON GIVEN BY THE TPO FOR THEIR EXCLUSION, WITHOUT CONTROVERTING THE FUNCTIONAL SIMILARITY OF THE ABOVE COMPANIES OR THE RELEVANT SEGMENT. NO CH ANGE WAS MADE BY THE DRP IN THE VIEWS TAKEN BY THE AO/TPO. 97. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSESSEES TUR NOVER UNDER THIS SEGMENT IS TO THE TUNE OF RS.323.46 CRORE. THE TPO EXCLUDE D THE COMPANIES WITH THE TURNOVER OF LESS THAN RS.5 CRORE. THE PRELIMI NARY QUESTION WHICH LOOMS LARGE BEFORE US IS WHETHER THE APPLICATION OF THIS FILTER IS CORRECT? IN THIS REGARD, IT IS PERTINENT TO NOTE THAT THE COMPU TATION OF ARM'S LENGTH PRICE ITA NOS.1479 & 691/DEL/2016 90 UNDER THE INDIAN TRANSFER PRICING PROVISIONS IS EMB ODIED IN SECTION 92C OF THE ACT. SUB-SECTION (1) OF THIS SECTION PROVIDES THAT THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL B E DETERMINED BY ANY OF THE GIVEN METHODS, BEING THE MOST APPROPRIATE METHOD, H AVING REGARD TO CERTAIN FACTORS. PROVISO TO SUB-SECTION (2), WHICH ASSUMES SIGNIFICANCE FOR THE PRESENT PURPOSE, STATES THAT : WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM'S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. IN CONTRAST, S OME COUNTRIES HAVE ADOPTED THE INTER-QUARTILE RANGE, WHICH IS ALSO CAL LED THE MID-SPREAD OR MIDDLE-FIFTY, INSTEAD OF ARITHMETIC MEAN OF ALL, AS USED IN INDIA. WHEN ARITHMETIC MEAN IS TAKEN OF THE ALL THE OTHERWISE C OMPARABLES COMPANIES, IT TENDS TO IRON OUT THE DIFFERENCES DUE TO HIGHER OR LOWER SIZE OF A COMPANY OR VACILLATING PROFITABILITY RATES. A COMPANY OTHER WISE FOUND TO BE FUNCTIONALLY COMPARABLE CANNOT BE EXCLUDED EITHER O N THE GROUND OF HIGHER OR LOWER PROFIT RATE OR HIGHER OR LOWER TURNOVER. T HERE IS NO MENTION IN THE LANGUAGE OF THE PROVISION FOR THE EXCLUSION OF POTE NTIAL COMPARABLE COMPANIES SIMPLY ON ACCOUNT OF HIGH OR LOW TURNOVER OR PROFIT RATE. THE SPECIAL BENCH OF THE TRIBUNAL IN MAERSK GLOBAL CENTRES (INDIA) (P.) LTD. VS. ITA NOS.1479 & 691/DEL/2016 91 ACIT (2014) 147 ITD 83 (MUM)(SB) HAS ALSO HELD THAT POTENTIAL COMPARABLES CANNOT BE EXCLUDED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGHER. THERE CAN BE NO JUSTIFIABLE REAS ON TO EXCLUDE SUCH HIGH OR LOW PROFIT COMPANIES UNLESS IT IS SHOWN THAT SUC H HIGH OR LOW PROFIT WAS DUE TO ABNORMAL FACTORS. SAME LOGIC APPLIES TO THE HIGH OR LOW TURNOVER COMPANIES ALSO. THE MERE FACT THAT A COMPANY HAS A HIGH OR LOW TURNOVER CAN BE NO REASON TO JUSTIFY ITS EXCLUSION IF IT IS OTHERWISE FUNCTIONALLY COMPARABLE. THE EXCLUSION OF COMPANIES ON SUCH A RATIONALE RUNS CONTRARY TO THE EXPRESS PROVISIONS OF THE ACT. THE HONBLE J URISDICTIONAL HIGH COURT IN CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD. VS . DCIT (2015) 376 ITR 183 (DEL) HAS ALSO LAID DOWN TO THE SAME EFFECT. WE, THEREFOR E, DIRECT TO INCLUDE INFORMED TECHNOLOGY; MICRO GENETICS SYSTEM S LTD.; AND CG-VAK SOFTWARE AND EXPORTS LTD. (SEG.) IN THE LIST OF COM PARABLES. 98. HAVING CONSIDERED THE COMPANIES CHALLENGED BY THE ASSESSEE FROM THE ANGLE OF COMPARABILITY, WE NOW TAKE UP THE ASSE SSEES CONTENTION FOR GRANT OF WORKING CAPITAL ADJUSTMENT AND ALSO ALLOWI NG REDUCTION OF EXPENSES IN RELATION TO RENTAL INCOME FROM TOTAL OP ERATING EXPENSES IN THE COMPUTATION OF ITS PLI. THE ARGUMENTS ADVANCED BY B OTH THE SIDES ON THESE ITA NOS.1479 & 691/DEL/2016 92 ISSUES REMAIN THE SAME AS WERE QUA THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES. IN F ACT, THE ARGUMENTS GIVEN EARLIER WERE ADOPTED FOR THIS INTERNATIONAL TRANSAC TION AS WELL. FOLLOWING THE VIEW TAKEN HEREINABOVE, WE DIRECT THE A.O./TPO TO A LLOW WORKING CAPITAL ADJUSTMENT AFTER DUE VERIFICATION OF THE CLAIM, WHE THER IT GOES FOR OR AGAINST IT, AND ALSO RECOMPUTE THE ASSESSEES PLI FROM THI S INTERNATIONAL TRANSACTION BY REDUCING OPERATING EXPENSES IN RELATION TO THE E ARNING OF RENTAL INCOME FROM THE OVERALL OPERATING EXPENSES TO BE BIFURCAT ED AMONGST ALL THE SOURCES OF THE REVENUES OF THE ASSESSEE FROM OPERAT IONS INCLUDING THE INSTANT INTERNATIONAL TRANSACTION. 99. THE ONLY ISSUE RAISED BY THE REVENUE IN ITS APPEAL, AS ARGUED BY THE LD. DR, IS AGAINST THE EXCLUSION OF E-CLERX SERVICE S LTD. ON THE DIRECTION OF THE DRP. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES, WHICH WAS OBJECTED TO BY THE ASSESSEE BEFORE THE DRP BY C ONTENDING THAT IT WAS FUNCTIONALLY NOT COMPARABLE AND WAS ENGAGED IN KPO ACTIVITIES. APART FROM THAT, IT WAS ALSO SUBMITTED THAT IT WAS OUTSOU RCING SUBSTANTIAL AMOUNT OF ITS WORK TO OUTSIDERS. THE DRP DID NOT APPROVE THE VIEW CANVASSED BY THE TPO. RELYING ON THE JUDGMENT OF THE HON'BLE DE LHI HIGH COURT IN THE ITA NOS.1479 & 691/DEL/2016 93 CASE OF RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT (2015) 279 CT R 441 (DEL) , THE DRP DIRECTED TO EXCLUDE THIS COMPANY FROM THE L IST OF COMPARABLES. THE REVENUE IS AGGRIEVED BY SUCH EXCLUSION. 100. WE HAVE HEARD BOTH THE SIDES AND GONE THRO UGH THE RELEVANT MATERIAL ON RECORD. THE LD. DR CONTENDED THAT THIS COMPANY OUGHT TO HAVE BEEN RETAINED IN THE LIST OF COMPARABLES AS THE ASS ESSEE WAS ALSO PROVIDING KPO SERVICES, WHICH WAS COUNTERED BY THE LD. AR. 101. WE ARE UNABLE TO APPROVE THE VIEW TAKEN BY THE LD. DR FOR THE REASON THAT UNDER THE INTERNATIONAL TRANSACTION OF PROVISION OF ITES, INSTANTLY UNDER CONSIDERATION, THE ASSESSEE COMPAN Y IS NOT RENDERING ANY KPO SERVICES. AS NOTICED ABOVE, THE NATURE OF WORK CARRIED ON BY THE ASSESSEE UNDER THIS INTERNATIONAL TRANSACTION IS TH AT OF RECEIVING COMPLAINTS FROM THE CUSTOMERS OF MICROSOFT CORPORATION AND THE N RESOLVING THEIR TECHNICAL PROBLEMS. THUS, THIS ACTIVITY CANNOT BE DESCRIBED AS KPO. THE HON'BLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS (SUPRA) , HAS HELD THAT E- CLERX, BEING ENGAGED IN KPO, CANNOT BE COMPARED WIT H A COMPANY PROVIDING BPO SERVICES. RECENTLY, THE HON'BLE DELH I HIGH COURT IN B.C. MANAGEMENT SERVICES (SUPRA), HAS ALSO REITERATED THAT E-CLERX IS NOT ITA NOS.1479 & 691/DEL/2016 94 COMPARABLE TO AN ASSESSEE PROVIDING IT ENABLED SERV ICES. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE SATISFIED THAT THE DRP WAS JUSTIFIED IN ORDERING THE EXCLUSION OF E-CLERX FROM THE LIST OF COMPARABL ES DRAWN BY THE TPO UNDER THIS SEGMENT. 102. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON THE ISSUE OF TRANSFER PRICING ADDITIONS IN THE ABOVE REFERRED TWO INTERNA TIONAL TRANSACTIONS OF `PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND `PROVISION OF IT ENABLED SERVICES AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR FRESH DETERMINATION OF THEIR ALP IN CONSONANCE WITH OUR A BOVE OBSERVATIONS/DIRECTIONS. NEEDLESS TO SAY, THE ASSE SSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 103. NOW, WE TAKE UP CORPORATE TAX GROUNDS RAIS ED BY THE ASSESSEE. 104. GROUND NO. 16 IS AGAINST THE ADDITION TOWARD S REALIZED FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AND GROUND NO. 17 IS AGAINST THE ADJUSTMENT OF RS.13,40,482/- AGAINST THE OPENING WRITTEN DOWN VALUE OF COMPUTERS TOWARDS UNREALIZED FOREIGN EXCHANGE FLUCTUATION GAI N ARISING OUT OF RE- STATEMENT OF LIABILITY U/S 43A OF THE ACT. GROUND N O.18 IS AGAINST DENIAL OF ITA NOS.1479 & 691/DEL/2016 95 DEDUCTION U/S 10A OF THE ACT IN RESPECT OF SPECIFIC ADDITIONS AMOUNTING TO RS.8,73,11,096/-. GROUND NO. 20 IS AGAINST THE TAX ABILITY OF RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. 105. THE ASSESSING OFFICER DECIDED THE ABOVE I SSUES AGAINST THE ASSESSEE. THE LD. DRP ALSO UPHELD THE VIEW TAKEN B Y THE ASSESSING OFFICER IN THE DRAFT ORDER BY NOTICING THAT SIMILAR VIEW WA S TAKEN BY IT ON THE ABOVE ISSUES IN THE IMMEDIATELY PRECEDING YEAR. 106. HAVING HEARD BOTH THE SIDES, IT IS OBSERVE D THAT THE IMMEDIATELY PRECEDING YEAR CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL. VIDE ORDER DATED 28.06.2016, THE TRIBUNAL IN ITA NO.2058/DEL/2 015, HAS RESTORED THE ABOVE ISSUES TO THE ASSESSING OFFICER FOR A FRESH D ECISION. SINCE THE ISSUES IN THE INSTANT APPEAL ARE ADMITTEDLY OF THE SIMILAR NATURE AS IN THE PRECEDING YEAR, RESPECTFULLY FOLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER ON THE ABOVE SCORES AND REMIT THE MATTER TO THE FIL E OF ASSESSING OFFICER FOR DECIDING THEM AFRESH IN ACCORDANCE WITH THE VIEW TA KEN IN SUCH IMMEDIATELY PRECEDING YEAR, AFTER ALLOWING A REASON ABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ITA NOS.1479 & 691/DEL/2016 96 107. GROUND NO. 19 IS AGAINST NOT TREATING INTERE ST INCOME OF RS.3,13,60,627/- EARNED ON FIXED DEPOSITS BY THE BA NGALORE UNDERTAKING AS ELIGIBLE FOR BENEFIT U/S 10A OF THE ACT. THE LD. AR CANDIDLY ADMITTED THAT THIS ISSUE WAS NEITHER RAISED BEFORE THE ASSESSING OFFICER OR DRP AND THE SAME BEING A LEGAL ISSUE, SHOULD BE ADMITTED BY THE TRIBUNAL. THE LD. DR OBJECTED TO THE ADMISSION OF THIS GROUND. 108. HAVING GONE THROUGH THE NATURE OF ISSUE R AISED THROUGH THIS GROUND, WE FIND THAT THIS IS A LEGAL ISSUE AND CAN BE RAISE D BEFORE THE TRIBUNAL FOR THE FIRST TIME. WE, ERGO, ADMIT THIS ISSUE FOR CON SIDERATION. 109. IN SUPPORT OF ITS CONTENTION, THE ASSESSEE HAS FILED ADDITIONAL EVIDENCE TO BRING HOME ITS POINT ABOUT THE AVAILABI LITY OF BENEFIT U/S 10A IN RESPECT OF INTEREST INCOME. SINCE THIS ISSUE HAS NO T BEEN EXAMINED BY THE AUTHORITIES BELOW AND THE ASSESSEE HAS FILED ADDITI ONAL EVIDENCE, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE IN THE FITN ESS OF THINGS IF THE ASSESSING OFFICER IS DIRECTED TO DECIDE THIS ISSUE AFRESH AS PER LAW, AFTER ALLOWING AN OPPORTUNITY OF BEING HEARD TO THE ASSES SEE. THE ASSESSEE WILL BE AT LIBERTY TO FILE ANY FRESH EVIDENCE BEFORE THE AO IN SUPPORT OF ITS CLAIM ON THIS ISSUE. ITA NOS.1479 & 691/DEL/2016 97 110. GROUND NO. 21 IS AGAINST NOT ALLOWING MAT TAX CREDIT. THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE ASSESSE ES CONTENTION AND ALLOW THE NECESSARY MAT CREDIT AS PER LAW, IF AVAILABLE. 111. GROUND NO. 23 ABOUT NOT GRANTING CREDIT FOR TDS TO THE EXTENT OF RS.1,71,729/- WAS NOT PRESSED BY THE LD. AR. THE S AME IS, THEREFORE, DISMISSED AS NOT PRESSED. 112. GROUND NOS. 23 AND 24 ABOUT CHARGING OF INT EREST ARE CONSEQUENTIAL AND ARE DISPOSED OFF ACCORDINGLY. 113. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THAT OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . THE ORDER PRONOUNCED IN THE OPEN COURT ON 14.09.201 8. SD/- SD/- [K. NARASIMHA CHARY] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 14 TH SEPTEMBER, 2018. DK ITA NOS.1479 & 691/DEL/2016 98 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.