Appeal details
Counselvise Citation
[2016] 132 COUNSELVISE.COM (IT) 7161 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 6 month(s) 20 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
13-07-2016
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I2
Next Hearing Date
19-04-2016
Assessment Year
2008-2009
Appeal Filed On
23-12-2014
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH.L.P.SAHU, ACCOUNTANT MEMBER I.T.A .NO.-6918/DE L/2014 (ASSESSMENT YEAR-2008- 09) VIRAGE LOGIC INTERNATIONAL- INDIA BRANCH OFFICE (NOW KNOWN AS SYNOPSYS (INDIA) PRIVATE LIMITED) A-36, SECTOR-64, NOIDA, UTTER PRADESH-201307. PAN-AABCV8275E (APPELLANT) VS JOINT DIRECTOR OF INCOME TAX, CIRCLE 2(2), INTERNATIONAL TAXATION, NEW DELHI. (RESPONDENT) APPELLANT BY SHRI ROHIT TIWARI, CA RESPONDENT BY SHRI A.M. GOVIL, CIT(DR) DATE OF HEARING 19.04.2016 DATE OF PRONOUNCEMENT 13.07.2016 ORDER PER DIVA SINGH, JUDICIAL MEMBER THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE A SSAILING THE CORRECTNESS OF THE ORDER DATED 21.10.2014 OF CI T(A)-XXIX, NEW DELHI PERTAINING TO 2008-09 ASSESSMENT YEAR ON VARIOUS GROUNDS. HOWEVER AT THE TIME OF HEARING, THE LD. AR SUBMITTED THAT HE IS UNDER INSTRUCTIONS ONLY TO ARGUE GROUND NOS.-2.7, 2.9 AND 2.10 AND THE REMAINING GROUNDS MAY BE DISMISSED AS NOT PRESSED. IN VIEW THEREOF, WE REPRODUCE HEREUNDER ONLY THE GROUNDS WHICH THE ASSESSEE WANTS TO AGITATE: ITA NO. 6918/DEL/2014 PAGE 2 OF 35 2. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN PART IALLY CONFIRMING THE ADJUSTMENT OF RS.2,07,75,061/- COMPU TED BY THE LEARNED ASSESSING OFFICER (LD.AO) IN THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT), BY HOLDING THAT T HE INTERNATIONAL RELATED PARTY TRANSACTION OF THE APPE LLANT WITH RESPECT TO THE PROVISION OF SOFTWARE DEVELOPME NT SERVICES DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN DOING SO THE LD.CIT(A) HAS ERRED:- ............................... 2.7. BY INCLUDING CERTAIN COMPANIES IN THE FINAL SE T OF COMPARABLES WHICH ARE NOT COMPARABLE TO THE APPELLA NT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND R ISKS ASSUMED; 2.9 BY DENYING THE BENEFIT OF A WORKING CAPITAL ADJ USTMENT WHILE COMPUTING THE ALP AND THEREBY DISREGARDING TH E LAW, INTERNATIONAL GUIDANCE AND JUDICIAL PRECEDENTS IN THIS REGARD; 2.10 BY IGNORING THE BUSINESS/COMMERCIAL REALITY TH AT SINCE THE APPELLANT (VIS-A-VIS ITS SOFTWARE DEVELOPMENT SERVI CES) IS REMUNERATED ON AN ARMS LENGTH COST PLUS BASIS, UNDERTAKES MINIMAL BUSINESS RISKS AS AGAINST COMPAR ABLE COMPANIES THAT ARE FULL-FLEDGED RISK TAKING ENTREPR ENEURS, AND BY NOT ALLOWING A RISK ADJUSTMENT TO THE APPELL ANT ON ACCOUNT OF THIS FACT. 2. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION RETURN ED AN INCOME OF RS.47,11,359/-. IN COMPUTING SUCH INCOME , A SUM OF RS.1,54,91,436/- WAS CLAIMED AS A DEDUCTION U/S 10A OF THE INCOME TAX ACT, 1961. THE SAID RETURN WAS SUBJECTE D TO SCRUTINY ASSESSMENT. CONSIDERING THE DISCLOSURE OF INTERNAT IONAL TRANSACTION IN ITS FORM 3CEB, THE TPO PROPOSED CERT AIN ADDITIONS BY WAY OF ADJUSTMENTS. THESE WERE CHALL ENGED IN APPEAL BEFORE THE CIT(A) AND LEAD TO THE PASSING OF THE IMPUGNED ORDER UNDER CHALLENGE IN THE PRESENT PROCEEDINGS. ITA NO. 6918/DEL/2014 PAGE 3 OF 35 2.1. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESS EE M/S VIRAGE LOGIC INTERNATIONAL A COMPANY INCORPORATED I N USA IS A 100% SUBSIDIARY OF VIRAGE LOGIC CORPORATION WHICH I S STATED TO BE A MARKET LEADER IN PROVIDING ADVANCED EMBEDDED MEMO RY INTELLECTUAL PROPERTY (HEREINAFTER REFERRED TO AS AP) FOR THE DESIGN OF COMPLEX INTEGRATED CIRCUITS. THE ASSESSE E HAS BEEN OPERATING IN INDIA THROUGH A BRANCH OFFICE AND IS I N THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE. THE SOFTWARE DEVELOPED BY THE BRANCH OFFICE IN INDIA IS INTEGRATED WITH SOFTW ARE DEVELOPED BY THE PARENT ENTITY. 2.2. AS PER THE TRANSFER PRICING REPORT ACCEPTED BY THE TPO THE PRODUCTS DELIVERED BY VIRAGE GROUP CONSIST OF VARIO US SOFTWARE TOOLS ALONG WITH SUPPORTING FILES THAT CONTAIN DESI GN DATA FOR CREATING THE REQUISITE SILICON IP (MEMORY OR LOGIC ELEMENTS). IT IS CLAIMED THAT THE ENGINEERING SITE AT INDIA SINCE IN CEPTION HAS BEEN WORKING ON THE FOLLOWING ACTIVITIES RELATED TO THE IP PRODUCTS AND PLATFORMS OFFERED:- SOFTWARE DEVELOPMENT IN C, C++ AND TCL/TK ON OUR EMBEDDED-IT RANGE OF SOFTWARE TOOLS. DEVELOPMENT OF PROGRAMS AND FILES THAT CONSTITUTE OUR MEMORY COMPILERS OF LOGIC LIBRARIES. - EDA VIEWS IN TCL/TK PROGRAMMING LANGUAGE. - PROGRAMMING FILES IN ASSESSEE'S PROPRIETARY FORMA T THAT DESCRIBES THE PHYSICAL, FUNCTIONAL AND TIMING BEHAVIOR OF THE M EMORY OR LOGIC ELEMENTS. ITA NO. 6918/DEL/2014 PAGE 4 OF 35 2.3. THESE FILES IT IS CLAIMED ARE DEVELOPED ON UNIX O PERATING SYSTEMS ON SUN PLATFORMS OR IN THE WINDOWS NT ENVIR ONMENT AND THEREAFTER THE CREATED FILES ARE SHIPPED OVERSE AS ELECTRONICALLY VIA INTERNET. 2.4. THE NATURE OF ACTIVITIES THAT LEAD TO THE CREATING OF THE ABOVE-MENTIONED ITEMS HAVE BEEN CHARACTERIZED AS: SOFTWARE DEVELOPMENT WHICH INCLUDES, ELECTRONIC D ESIGN AUTOMATION. ENGINEERING DESIGN SERVICES AND OTHER FUNCTIONS T O SUPPORT THE ABOVE DISCIPLINES (IT. QA. DOCUMENTATION. ETC). 2.5. IT HAS BEEN SUBMITTED THAT THE EXPORT INVOICES A RE RAISED AT COST (INCLUDING BOTH DIRECT AND INDIRECT COSTS) PLU S MARKUP OF 15% ON THE DIRECT AND INDIRECT COSTS INCURRED BY IT FOR THE SOFTWARE DEVELOPMENT ACTIVITY. 2.6. AS PER ITS REPORTING IN FORM NO.3CEB THE ASSESS EE IN THE YEAR UNDER CONSIDERATION UNDERTOOK THE FOLLOWING IN TERNATIONAL TRANSACTIONS WITH ITS AES:- NAME OF INTERNATIONAL TRANSACTION VALUE OF INTERNATIONAL TRANSACTION (INR) PROVISION OF SOFTWARE DEVELOPMENT SERVICES 180,582,716 2.7. FOR THE PURPOSES OF COMPARABILITY ANALYSIS THE ASS ESSEE IN ITS TP STUDY SELECTED TNMM AS THE MOST APPROPRIATE METHOD AND OPERATING PROFIT / TOTAL COST (OP/TC) AS THE PROFIT LEVEL INDICATOR ITA NO. 6918/DEL/2014 PAGE 5 OF 35 (PLI). BENCHMARKING ANALYSIS WAS MADE USING MULTIPL E YEAR DATA AND 13 COMPARABLES WERE SELECTED. THE TRANSACTION W AS CLAIMED TO BE AT ARMS LENGTH AS THE AVERAGE OP/TC OF THE 1 3 COMPARABLES AT 4.07% WAS LOWER THAN 6.95% OP/TC MAR GIN OF THE ASSESSEE. 3. THE USE OF MULTIPLE YEAR DATA RESORTED TO BY THE AS SESSEE WAS OBJECTED TO BY THE TPO. HE WAS OF THE VIEW THA T IN THE ABSENCE OF ANY JUSTIFICATION FOR MULTIPLE YEAR DAT A THE RESORT TO THE SAME WAS IN VIOLATION OF RULE 10B(4) OF THE IN COME TAX RULES, 1962. THE FILTERS SELECTED BY THE ASSESSEE ALSO DID NOT MEET WITH THE APPROVAL OF THE TPO FOR REASONS SET O UT IN HIS ORDER. SINCE THESE ARE NOT AN ISSUE IN THE PRESENT PROCEEDINGS DISCUSSION THEREON IS CONSIDERED NOT RELEVANT. 3.1. FOR THE PURPOSES OF THE PRESENT PROCEEDINGS IT WOU LD BE SUFFICIENT TO REFER THAT AFTER REVISING THE FILTERS AND DIRECTING THE USE OF SINGLE YEAR THE ASSESSEE WAS DIRECTED TO CON DUCT A FRESH SEARCH. 3.2. ACCEPTING 5 OF THE 7 COMPARABLES OFFERED BY THE AS SESSEE IN THE FRESH SEARCH, THE TPO INCLUDED CERTAIN OTHER CO MPARABLES WHICH WERE THROWN UP IN THE FRESH SEARCH OVER-RULIN G THE OBJECTIONS POSED BY THE ASSESSEE. THUS, CONSIDERIN G THE 16 COMPARABLES SO ADOPTED WHOSE AVERAGE OP/TC MARGIN OF 19.26% ITA NO. 6918/DEL/2014 PAGE 6 OF 35 COMPARED WITH 6.95% OF THE ASSESSEE WAS CONSIDERED TO BE HIGHER JUSTIFYING THE PROPOSAL OF AN ADJUSTMENT OF RS.2,07 ,75,061/-. 4. THE PROPOSED ADDITIONS OF THE TPO LEAD TO THE PASS ING OF THE ORDER U/S 143(3) BY THE AO. THIS ORDER WAS CHALLE NGED IN APPEAL BEFORE THE LD. CIT(A) WHO GRANTED PART RELIEF TO TH E ASSESSEE BY DIRECTING THE EXCLUSION OF ONE COMPARABLE I.E INFOS YS TECHNOLOGIES LEADING TO THE RETENTION OF THE FOLLOWING 15 COMPAR ABLES:- SL.NO. NAME OP/TC (%) 1. ADITYA BIRLA MINACS IT SERVICES LTD. 7.73% 2. ADITYA BIRLA MINACS TECHNOLOGIES LTD. 6.04% 3. AKSHAY SOFTWARE TECHNOLOGIES LTD. 7.37% 4. QUINTEGRA SOLUTIONS LTD. 19.33% 5. RS SOFTWARE INDIA LTD. 6.30% 6. ACROPETAL TECHNOLGIES LTD. 40.03% 7. BODHTREE CONSULTING LTD. 19.14% 8. SAGARSOFT INDIA LTD. 12.18% 9. I GATE GLOBAL SOLUTIONS LTD. 14.77% 10. KALS INFORMTION SYSTEMS LTD. (SEGMENTAL) 41.94% 11. LUCID SOFTWARE LTD. 16.50% 12. MINDTREE LTD. (SEG.) 16.41% 13. PERSISTENT SYSTEMS LTD. 27.70% 14. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEGMENTAL) 13.44% 15. TATA ELXSI LTD. (SOFTWARE DEVELOPMENT AND SERVICES SEGMENT) 18.97% MEAN OP/TC 17.86% 4.1. STILL, AGGRIEVED, THE ASSESSEE IS BEFORE ITAT SEEKI NG THE EXCLUSION OF THE FOLLOWING 7 COMPARABLES:- 1. PERSISTENT SYSTEMS LTD. 2. BODHTREE CONSULTING LTD. 3. KALS INFORMATION SYSTEMS (SEG.) 4. I GATE GLOBAL SOLUTIONS LTD. 5. TATA ELXSI LTD. 6. LUCID SOFTWARE LTD. 7. ACROPETAL TECHNOLOGIES LTD. ITA NO. 6918/DEL/2014 PAGE 7 OF 35 5. IN THE SAID FACTUAL BACKGROUND THE LD.AR INVITING ATTENTION TO THE GRIEVANCE OF THE TAX PAYER SUBMITTED THAT TH E EXCLUSION OF THE COMPARABLES IS SOUGHT ON THE BASIS OF FACTS AND JUDICIAL PRECEDENT QUA EACH OF THESE COMPARABLES. PERSISTENT SYSTEMS LTD. 5.1. THE EXCLUSION OF PERSISTENT SYSTEMS LTD IT WAS SUBMITTED WAS SOUGHT ON THE GROUND THAT IT IS FUNCTIONALLY DI FFERENT. THE SAID COMPANY IT WAS SUBMITTED DERIVES ITS INCOME FROM THE SALE OF SOFTWARE SERVICES AS WELL AS PRODUCTS. THE ANNUA L REPORT OF THE SAID COMPANY IT WAS SUBMITTED DOES NOT PROVIDE ANY FURTHER BREAK-UP OF INCOME INTO PRODUCTS AND SERVICES. ACC ORDINGLY REFERRING TO PAGES 154, 200, 204, 218 & 226 OF THE ANNUAL REPORT COMPENDIUM IT WAS SUBMITTED THAT THE COMPANY CANNOT BE TREATED AS FUNCTIONALLY COMPARABLE TO THE ASSESSEE. 5.2. DURING THE YEAR UNDER CONSIDERATION IT WAS FURTHER SUBMITTED THAT THERE HAD BEEN SEVERAL SIGNIFICANT E VENTS NAMELY PERSISTENT SYSTEM LTD. FORMED A WHOLLY OWNED SUBSID IARY IN SINGAPORE; ACQUIRED PHYSICAL ASSETS AND HUMAN RESOU RCES OF ANOTHER COMPANY. THE COMPANY HAD ALSO CONVERTED IT SELF INTO A PUBLIC COMPANY (EVIDENT FROM PAGES 156, 166, 168 OF ANNUAL REPORT). ALL THESE FACTS IT WAS SUBMITTED HAVE BEE N CONSISTENTLY ARGUED BEFORE THE TAX AUTHORITIES. BY WAY OF THE S YNOPSIS, WE ITA NO. 6918/DEL/2014 PAGE 8 OF 35 FIND RELIANCE HAS BEEN PLACED ON THE FOLLOWING JUDI CIAL PRECEDENT HOWEVER, HOW THESE DECISIONS WERE RELEVANT HAS NOT BEEN ARGUED:- (I) FCG SOFTWARE SERVICES INDIA P. LTD. VS ITO [201 4] 51 TAXMANN.COM 75 (BANG-TRIB.); (II) LG SOFT INDIA P.LTD. VS DY.CIT [2014] 48 TAXMA NN.COM 237 (BANG-TRIB.). BODHTREE CONSULTING LTD. 5.3. THE EXCLUSION OF BODHTREE CONSULTING LTD., IT WAS SUBMITTED IS JUSTIFIED ON THE GROUND THAT THE SAID COMPARABLE OVER THE YEARS HAS SHOWN HIGH VOLATILE MARGINS RAN GING FROM - 4.10% IN 2010-11 FINANCIAL TO 64.04% IN 2008-09 FIN ANCIAL YEAR AND 19.14% IN THE YEAR UNDER CONSIDERATION. THE FO LLOWING CHART DEMONSTRATING THE DEGREE OF FLUCTUATION WAS RELIED UPON:- 5.3.1. ACCORDINGLY RELYING UPON THE PRECEDENT LAID DOWN IN THE ORDER DATED 31.05.2013 IN NAVISITE INDIA PRIVATE LIMITED IN ITA NO.5329/DEL/2012, IT WAS SUBMITTED THAT THE TPO MAY BE DIRECTED TO EXAMINE AND ADDRESS THE ABNORMAL FACTOR S THAT CAUSE HIGH VOLATILITY MARGIN AND MAKE NECESSARY ADJUSTMEN TS. FINANCIAL YEAR MARGIN % AGE 2004-05 25.24% 2005-06 14.66% 2006 - 07 33.20% 2007-08 19.14% 2008-09 64.04% 2009 - 10 34.39% 2010-11 -4.10% ITA NO. 6918/DEL/2014 PAGE 9 OF 35 5.3.2. WITHOUT PREJUDICE TO THE MAIN ARGUMENT, IT WAS ALSO SUBMITTED THAT THE COMPANY HAD DIVERSE OPERATIONS A S IT PROVIDES OPEN AND END-TO-END WEB SOLUTIONS, OFF SHORING DATA MANAGEMENT, DATA WAREHOUSING, SOFTWARE CONSULTANCY. THUS, WHEN COMPARED WITH THE ASSESSEES FUNCTION BODHTREE CONSULTING LTD. IN CONTRAST HAD DIVERSE OPERATION AS THE ASSES SEE WAS ONLY ENGAGED IN CONTRACT SOFTWARE DEVELOPMENT SERVICES. ACCORDINGLY RELYING UPON NETHAWK NETWORKS INDIA PRIVATE LIMITED IN ITA NO.7633/MUM/2012, COPY PLACED AT PAGES 50-51 OF CAS E LAWS PAPER BOOK ITS EXCLUSION WAS SOUGHT. THE SAID PRAY ER WAS ALSO STATED TO BE SUPPORTED BY M/S SAPIENT CORPORATION P VT. LTD. (ITA NO.5263/DEL/2010); M/S ADOBE SYSTEMS INDIA PVT.LTD. 138 TTJ 122; M/S TELECORDIA TECHNOLOGIES INDIA PVT.LTD. (IT A NO.7821/MUM/2011); AND M/S FIRST ADVANTAGE OFFSHORE SERVICES PVT.LTD. (ITA NO.1252/BANG/2010). 5.3.3. NON-AVAILABILITY OF THE SEGMENTAL DETAILS, IT WAS SUBMITTED WAS FURTHER UNDER-MINED BY THE INCLUSION OF THE SAI D COMPARABLE. FURTHER ITS REVENUE RECOGNITION SYSTEM SUBSTANTIALLY DIFFERED AS THE INCOME FROM SOFTWARE DEVELOPMENT IS ACCOUNTED FOR ON THE BASIS OF SOFTWARE DEVELOPED AN D BILLED TO CLIENTS ON ACCEPTANCE. THE DECISIONS RENDERED BY T HE ITAT IN THE CASE OF CIENA INDIA PRIVATE LIMITED VS ITO IN ITA ITA NO. 6918/DEL/2014 PAGE 10 OF 35 NO.1453/DEL/2014 AND M/S MINDTECK (INDIA) PRIVATE LIMITED VS DICT [IT(TP)] NO.70/BANG/2014 WERE RELIED UPON FOR THE PROPOSITION THAT THE COMPANY SHOULD BE EXCLUDED AS ITS REVENUE RECOGNITION POLICY WAS ON A DIFFERENT BASIS. KALS INFORMATION SYSTEMS (SEG.) 5.4. THE EXCLUSION OF KALS INFORMATION SYSTEMS (SEG.) WAS SOUGHT ON THE GROUND THAT IT WAS FUNCTIONALLY DIFFE RENT. REFERRING TO THE INFORMATION PROVIDED IN THE ANNUAL REPORT IT WAS SUBMITTED THAT THE COMPANY IS ENGAGED IN THE BUSINE SS OF SOFTWARE SERVICES AND SOFTWARE PRODUCTS WHICH WERE FUNCTIONALLY DIFFERENT. THE ABSENCE OF SEGMENTAL DATA, IT WAS S UBMITTED TAKES THE SAID COMPARABLE OUTSIDE THE PURVIEW OF ACCEPTAB LE COMPARABLES. BINDVIEW INDIA P.LTD. VS DCIT [2013] 145 ITD 436/34 TAXMANN.COM 164 (PUNE.-TRIB) WAS RELIED UPON FOR THE PROPOSITION THAT THE SAID COMPARABLE HAS BEEN HELD TO BE DIFFERENT FROM A SOFTWARE DEVELOPMENT COMPANY. INC OME FROM SOFTWARE DEVELOPED IT WAS SUBMITTED HAS BEEN ACCOUN TED FOR ON THE BASIS OF SOFTWARE DEVELOPED AND BILLED TO ITS C LIENTS ON ACCEPTANCE THUS FINANCIAL INFORMATION WAS STATED TO BE UNRELIABLE. RELIANCE WAS PLACED ON CIENNA INDIA PVT. LTD. VS ITO (ITA NO.1453/DEL/2014) AND MINDTECK INDIA LTD. VS ITO [2015] 63 TAXMANN.COM 105 (BANGLORE-TRIB.). ITA NO. 6918/DEL/2014 PAGE 11 OF 35 I GATE GLOBAL SOLUTIONS LTD. 5.5. THE EXCLUSION OF I GATE GLOBAL SOLUTIONS LTD. WAS SOUGHT ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT. TH E COMPANYS OPERATIONS IT WAS STATED RELATE TO PROVIDING INFORM ATION TECHNOLOGY (IT) SERVICES, CONTACT CENTER SERVICES AND IT ENABLED SERVICES. THE COMPANY IT WAS SUBMITTED HAD DIVERSIF IED BUSINESSES AND THIS FACT IT WAS SUBMITTED WOULD BE EVIDENT FROM ITS ANNUAL REPORT ATTACHED. 5.5.1. IT WAS ALSO SUBMITTED THAT ITS EXCLUSION WAS ALSO J USTIFIED ON THE GROUND THAT IN THE YEAR UNDER CONSIDERATION EXTRAORDINARY CIRCUMSTANCES PREVAILED IN THE CASE OF THIS COMPARA BLE ON ACCOUNT OF MERGER. THIS FACT IT WAS SUBMITTED WOUL D BE EVIDENT FROM PAPER BOOK PAGE 38 AND 46 OF THE ANNUAL REPORT COMPENDIUM:- SUBSIDIARIES AND JOINT VENTURES I GATE TECHNOLOGY SERVICES PVT. LTD. (ITS), AN ERS TWHILE WHOLLY OWNED SUBSIDIARY OF THE COMPANY WAS MERGED WITH THE COMPANY FOLLOWING THE APPROVAL OF THE SCHEME OF AMA LGAMATION BY THE SHAREHOLDERS OF BOTH THE COMPANIES AND THE H ONORABLE HIGH COURT OF KARNATAKA. THE HONORABLE HIGH COURT OF KARNATAKA PASSED ITS FINAL ORDER ON JULY 27, 2007. YOUR COMPANY TERMINATED ITS JOINT VENTURE AGREEMENT WITH SOFTWARE AG, GERMANY AND SOLD ITS 49% HOLDING OF 7,84,000 SHARES IN SOFTWARE AG (INDIA) PRIVATE LIMI TED TO SOFTWARE AG, GERMANY. 3. MERGER OF I GATE TECHNOLGOY SERVICES PVT.LTD. A. DURING THE YEAR THE SCHEME OF AMALGAMATION OF IGS AND I GATE TECHNOLOGY SERVICES PRIVATE LIMITED, WHOLLY OWNED SUBSIDIARY OF THE COMPANY WERE APPROVE D BY THE HONORABLE HIGH COURT OF KARNATKA. THESE ITA NO. 6918/DEL/2014 PAGE 12 OF 35 FINANCIAL STATEMENTS INCLUDE THE EFFECT OF AMALGAMA TION OF I GATE TECHNOLOGY SERVICES PRIVATE LIMITED UNDER TH E POOLING OF INTEREST METHOD PRESCRIBED BY AS-14 IS SUED BY ICAI PER APPROVAL GRANTED BY THE HIGH COURT. B. I GATE TECHNOLOGY SERVICES PRIVATE LIMITED BEING WHOLLY OWNED SUBSIDIARY OF THE COMPANY, THE ENTIRE SHARE CAPITAL OF I GATE TECHNOLOGY SERVICES PRIVATE LIMITED STANDS CANCELLED AND EXTINGUISHED FROM THE EFFECTIVE DATE. TATA ELXSI LTD. 5.6. EXCLUSION OF TATA ELXSI LTD. AS A COMPARABLE IT WAS SUBMITTED IS SOUGHT ON THE GROUND THAT THE ANNUAL REPORT AS PER ANNUAL REPORT COMPENDIUM AT PAPER BOOK PAGE 30 AND THE WEBSITE OF THE COMPANY DISCLOSE THAT REVENUE IN TH E SOFTWARE DEVELOPMENT AND SERVICES SEGMENT COMPRISES OF THE FOLLOWING THREE ACTIVITIES:- PRODUCT DESIGN SERVICES ( DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE); INNOVATION DESIGN ENGINEERING (MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN); AND VISUAL COMPUTING LABS DESIGN (ANIMATION AND SPECIAL EFFECTS). 5.6.1. RELIANCE WAS PLACED ON THE TELCORDIA TECHNOLOGIES INDIA PRIVATE LIMITED (PAGE 99 OF THE PAPER BOOK) WHEREIN THE MUMBAI BENCH OF THE TRIBUNAL HAS REJECTED THE SAID COMPARABLE FOR BENCHMARKING SOFTWARE DEVELOPMENT SERVICES. LUCID SOFTWARE LTD 5.7. THE EXCLUSION OF LUCID SOFTWARE LTD WAS SOUGHT ON THE GROUND THAT THE SAID COMPANY WAS A PRODUCT COMPANY FOCUSING ON ADVANCED NON-DESTRUCTIVE TESTING (NDT) TECHNOLOG IES. THE ITA NO. 6918/DEL/2014 PAGE 13 OF 35 COMPANY IT WAS SUBMITTED WAS ACTIVELY INVOLVED IN T HE RESEARCH & DEVELOPMENT ACTIVITIES WITH LEADING SCIENTIFIC AN D EDUCATIONAL INSTITUTIONS AS SUCH IT COULD NOT BE CONSIDERING TO BE A COMPARABLE. RELIANCE WAS PLACED UPON ITO, BANGALORE VS INFINERA INDIA LTD [2016] 67 TAXMANN.COM 8 (BANGLO RE-TRIB.) WHEREIN LUCID SOFTWARE LTD. HAS BEEN HELD TO BE NON -COMPARABLE TO A COMPANY PROVIDING SOFTWARE DEVELOPMENT SERVICE S. ACROPETAL TECHNOLOGIES LTD 5.8. THE EXCLUSION OF ACROPETAL TECHNOLOGIES LTD WAS SOUGHT ON THE GROUND THAT IT FAILED EMPLOYEE COST FILTER A S ITS RATIO OF 8.33% WAS LESS THAN THE 25% ADOPTED BY THE TPO HIMS ELF. THE EXCLUSION OF THIS COMPARABLE IT WAS SUBMITTED IS SU PPORTED BY THE DECISION OF BP INDIA SERVICES PRIVATE LTD VS AC IT, CIRCLE-8(1), MUMBAI (2015) 55 TAXMANN.COM 150 (MUMBAI TRIB.) A ND MARKET TOOLS RESEARCH PRIVATE LIMITED (ITA NO.1811/ HYD/2012, (TS)-294-ITAT-2013 (HYD)-TPQ, ITAT, HYDERABAD). 6. BEFORE ADVANCING SPECIFIC ARGUMENTS QUA EACH OF TH E COMPARABLES ADDRESSED BY THE ASSESSEE, THE LD.SR.DR DREW ATTENTION TO THE FACTS ON RECORD. INVITING ATTENTIO N TO THE MATERIAL ON RECORD IT WAS SUBMITTED THAT THE ASSESSEES MAR GIN WAS 6.95% AS PER ITS OWN TP STUDY. TNMM HAS BEEN SELECT ED AS THE MOST APPROPRIATE METHOD BY THE ASSESSEE WHICH HAS N OT BEEN ITA NO. 6918/DEL/2014 PAGE 14 OF 35 DISPUTED BY THE REVENUE. IT WAS HIS SUBMISSION THAT TNMM PRESUPPOSES BROAD FAR COMPARABILITY AND IT IS AN AC CEPTED POSITION THAT IT IS IMPOSSIBLE TO FIND AN EXACT IDE NTICAL OR A NEAR IDENTICAL COMPARABLE. THUS AS LONG AS BROAD COMPARA BILITY IS ESTABLISHED THEN IN A METHOD LIKE TNMM THE EXCLUSIO N OF COMPARABLES CANNOT BE SOUGHT ON THE GROUNDS OF MI NOR DIFFERENCES. THUS THE ASSESSEE CANNOT NOW BE ALLOWE D TO SELECTIVELY PICK AND CHOOSE FROM THE LIST OF COMPAR ABLE COMPANIES ON THE BASIS OF MINOR DIFFERENCE. 6.1. THE ISSUES OF COMPARABILITY IT WAS SUBMITTED CANNO T BE DECIDED SUMMARILY ON THE BASIS OF PRECEDENT AS THE FACTS OF EACH CASE ON RECORD NEED TO BE ADDRESSED. THE ISSUES IT WAS SUBMITTED CAN BE DECIDED ON THE FACTS ALONE. IT WAS ALSO HIS SUBMISSION THAT IT IS NECESSARY TO APPRECIATE THE FACT THAT TH E FILTERS APPLIED BY THE TPO HAVE NOT BEEN ASSAILED BY THE ASSESSEE A ND IN THE ABSENCE OF ANY OBJECTIONS ON THE FILTERS APPLIED I T CAN BE SAFELY SAID THAT THE FILTERS HAVE BEEN ACCEPTED BY THE ASS ESSEE. IN THE SAID BACKGROUND, IT WAS HIS SUBMISSION THAT IT NEED S TO BE APPRECIATED THAT THESE VERY OBJECTIONS OF THE ASSES SEE FOR EXCLUDING THESE COMPARABLES HAVE ALREADY BEEN CONSI DERED BY THE TPO. THE SAID FINDING OF THE TPO IT WAS SUBMIT TED HAS BEEN UPHELD BY THE CIT(A) CONSIDERING MORE OR LESS SIMI LAR ARGUMENTS ITA NO. 6918/DEL/2014 PAGE 15 OF 35 AS HAVE BEEN ADVANCED BEFORE THE ITAT. ACCORDINGLY IT WAS HIS SUBMISSION THAT IN THESE FACTS AND CIRCUMSTANCES TH E ASSESSEE NEEDS TO SHOW WHAT IS WRONG WITH THE CONCLUSION ARR IVED AT INSTEAD OF REPEATING THE VERY SAME ARGUMENTS. IN T HE PRESENT APPEAL, IT WAS HIS SUBMISSION THAT THE REVENUE WOUL D BE HEAVILY RELYING UPON THESE FINDINGS OF THE CIT(A) AND THE T PO. 6.2. ATTENTION WAS INVITED TO INTERNAL PAGES 10 TO 12 W HERE THE TPO CONVEYS HIS VIEWS QUA THESE COMPARABLES AND REQ UIRES THE ASSESSEE TO ADDRESS THEM. INVITING FURTHER ATTENTIO N TO INTERNAL PAGES 21 TO 23 IT WAS SUBMITTED THAT THE VERY SAME ARGUMENTS HAVE BEEN CONSIDERED AND REJECTED THESE GIVING SPEC IFIC REASONS WHICH REMAIN UNASSAILED. HEAVY RELIANCE WAS PLACED ON THE SAME. FOR READY-REFERENCE, THE SAME ARE REPRODUCED HEREUNDER:- 4. THE ASSESSEE HAS RAISED OBJECTIONS AGAINST CERT AIN COMPARABLES. THESE SPECIFIC OBJECTIONS ARE DISCUSS ED BELOW. 4.1. PERSISTENT SYSTEM LTD. THE ASSESSEE HAS CLAIMED THAT THE COMPANY IS ENGAGE D IN SALE OF SOFTWARE PRODUCTS. THE ASSESSEE HAS ALS O CLAIMED THAT THE COMPANY OWNS VARIOUS IP RIGHTS. THE ANNUAL REPORT OF THE COMPANY SHOWS THERE IS NO EXPENSE ON ACCOUNT OF SOFTWARE PRODUCT DEVELOPMENT. THE CONCLUSION THAT ONE CAN REACH IS THAT EITHER THE REVENUE FORM SOFTWARE PRODUCT IS TOO LESS OR ABSENT COMPLETELY. IF IT WOULD HAVE BEEN SUBSTANTIAL, THE COMPANY WOULD HAVE MAINTAINED SEGMENTAL ACCOUNTS. THEREFORE, ON THIS ACCOUNT THI S COMPANY CANNOT BE REJECTED IP RIGHTS, NO SUCH MATTER IS EVI DENT FROM THE ANNUAL REPORT. THAT APART, DURING THE COURSE OF THESE PROCEEDINGS, IT WAS BROUGHT TO THE NOTICE OF THE AR , THAT ONE PATENT THAT HAD BEEN REGISTERED BY THE PARENT COMPANY IN USA HAD ORIGINATED FROM INDIA. THEREFOR E, ITA NO. 6918/DEL/2014 PAGE 16 OF 35 THERE IS NO CASE TO REJECT PERSISTENT SYSTEMS AS A COMPARABLE. 4.2. LUCID SOFTWARE THE ASSESSEE HAS RAISED AN OBJECTION THAT THERE IS SOME DEVIATION IN THE ACCOUNTING POLICY FOLLOWED BY THE COMPANY. I AM AFRAID, THAT THIS IS A RATHER LAME E XCUSE. THERE POINT RAISED BY THE ASSESSEE DOES NOT SHOW TH AT THERE IS ANY FUNCTIONAL DIFFERENCE BETWEEN IT AND THIS COMPA NY. THE ASSESSEE HAD NOT EVEN RAISED THIS ISSUE WHILE REJEC TING THIS COMPANY AT THE TIME OF PREPARING ITS TP STUDY. THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THAT THE SO-CALLED DIFFER ENCE IN ACCOUNTING IS CAUSING ANY ABNORMALITY IN THE RESULT S OF THIS COMPANY. THIS SHALL BE USED AS A COMPARABLE. 4.3. KALS INFORMATION SYSTEMS LTD. THE ASSESSEE HAS CLAIMED THAT THE COMPANY IS ENGAG ED IN SOFTWARE DEVELOPMENT AND SALE OF SOFTWARE PRODUC TS. THE ASSESSEE APPEARS TO HAVE OVERLOOKED THE FACT THAT SEGMENTAL RESULTS ARE BEING USED IN THIS CASE. ON THE ISSUE OF IP RIGHTS, THE MATTER HAS BEEN DISCUSSED EARLIER AND IT HAS BEEN SHOWN THAT THE ASSESSEE IS ALSO THE POINT OF ORIGIN OF PATENTS REGISTERED IN THE USA. THIS COMPANY CAN BE VERY WELL USED AS A COMPARABLE. 4.4. I-GATE GLOBAL SOLUTIONS LTD THE ASSESSEE HAS OBJECTED TO THIS COMPANY ON THE GR OUND THAT IT IS ENGAGED IN IT SERVICES AND PROCESS CONSU LTING. THE AUDIT REPORT OF THE COMPANY WHILE DEALING WITH THE ISSUE OF REVENUE RECOGNITION MENTIONS AS BELOW 4. REVENUE RECOGNITION (DISCLOSURE AS PER AS 9 'REVENUE RECOGNITION' ISSUE D BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA) THE CONTRACTS BETWEEN THE COMPANY AND ITS CUSTOMERS ARE EITHER TIME AND MATERIAL CONTRACTS, FIXED PRICE CON TRACTS OR OTHER CONTRACTS LIKE TRANSACTION FEES, MONTHLY COMMITMENT ETC., WITH AMOUNTS TO BE BILLED UPON COMPLETION OF AGREED MILE STONES OR APPLICATION MAINTENANCE OUTSOURCING CONTRACTS WITH AMOUNTS TO BE BILLED PERIODICALLY. (I) TIME AND MATERIAL CONTRACTS REVENUES FROM TIME AND MATERIAL SERVICES ARE RECOGN IZED AS THE RESPECTIVE SERVICES ARE PROVIDED, ITA NO. 6918/DEL/2014 PAGE 17 OF 35 (II) FIXED PRICE, MILESTONE BASED CONTRACTS REVENUE FROM FIXED-PRICE DEVELOPMENT CONTRACTS ARE RECOGNIZED USING THE PERCENTAGE OF COMPLETION METHOD, UNDER WH ICH THE CONTRACT PERFORMANCE IS DETERMINED BY RELATING THE ACTUAL WORK PERFORMED TO DATE TO THE ESTIMATED TOTAL WORK FOR E ACH CONTRACT. ANY ANTICIPATED LOSSES EXPECTED UPON CONTRACT COMPL ETION ARE RECOGNIZED IMMEDIATELY. CHANGES IN JOB PERFORMANCE, CONDITIONS AND ESTIMATED PROFITABILITY MAY RESULT I N. REVISIONS AND CORRESPONDING REVENUES AND COSTS ARE RECOGNIZED IN THE PERIOD IN WHICH THE CHANGES ARE IDENTIFIED. (III) OTHER CONTRACTS REVENUE FROM CONTRACTS WITH AMOUNTS TO BE BILLED ON MONTHLY BASIS IS RECOGNIZED ON RENDERING OF SERVICES AS PER THE TERMS OF THE CONTRACTS. REVENUE FROM UNIT PRICED CONTRACTS I S RECOGNIZED ON RENDERING OF THE SERVICES AS PER THE TERMS OF TH E CONTRACTS. UNBILLED RECEIVABLES REPRESENT AMOUNTS RECOGNIZED A S REVENUES FOR THE PERIODS PRESENTED BASED ON SERVICES PERFORM ED IN ACCORDANCE WITH THE TERMS OF CONTRACTS THAT WILL BE BILLED IN SUBSEQUENT PERIODS. DEFERRED REVENUE REPRESENTS AMO UNTS BILLED IN EXCESS OF REVENUE EARNED FOR WHICH RELATE D SERVICES ARE EXPECTED TO BE PERFORMED IN THE NEXT OPERATION CYCL E. IT CAN BE SEEN THAT THE ASSESSEE IS ENGAGED IN CONT RACTS THAT ARE IN THE NATURE OF DEVELOPMENT CONTRACTS, THEREFO RE, THERE IS NO PROBLEM IN THE USE OF THIS COMPANY AS A COMPARAB LE. WHATEVER BE THE 'PLETHORA OF ACTIVITIES' THAT THE A SSESSES CLAIMS THAT THIS COMPANY IS CARRYING OUT, THEY ARE ALL IN THE DOMAIN OF SOFTWARE DEVELOPMENT. THAT IS ABSOLUTELY CLEAR FROM THE ANNUAL REPORT. THIS COMPANY CAN BE USED AS A COMPARABLE. 4.5. ACROPETAL TECHNOLOGIES LTD. THE ASSESSEE HAS OBJECTED TO THIS COMPANY ON THE G ROUND THAT THE EMPLOYEE COST IS LESS THAN 25%. THE ANNUAL REPORT SHOWS THAT THE EXPENDITURE UNDER THE HEAD EMPLOYEE RELATED AND ON SITE DEVELOPMENT EXPENSES IS 80.22% OF THE TOTAL EXPENSES. THE ASSESSEE MUST APPRECIATE THAT ONSITE DEVELOPMENT EXPENSE IS ALSO A PERSONNEL COST AND MU ST BE RECKONED FOR THE ANALYSIS. (EMPHASIS PROVIDED) 6.3. ADDRESSING FIRST PERSISTENT SYSTEMS LTD., ATTENTION WAS INVITED TO THE REASONS SET OUT IN PARA 4.2 OF HIS O RDER WHICH WERE RE-ITERATED BY THE CIT(A AT PAGE 23 OF HIS ORDER. I T WAS HIS SUBMISSION THAT THE ANNUAL REPORT OF THE SAID COMPA RABLE RELIED ITA NO. 6918/DEL/2014 PAGE 18 OF 35 UPON BY THE ASSESSEE FOR EXCLUSION OF THE SAID COMP ARABLE HAS ALREADY BEEN TAKEN INTO CONSIDERATION BY THE TPO AN D FOR THE REASON BROUGHT OUT IN HIS ORDER AND THE OBJECTION H AS BEEN OVER- RULED BY A SPEAKING ORDER. ACCORDINGLY IT WAS HIS SUBMISSION THAT THE PRAYER OF THE ASSESSEE SHOULD NOT BE ACCEP TED. 6.4. ADDRESSING THE ARGUMENTS SEEKING THE EXCLUSION OF KALS INFORMATION SYSTEM LTD. THE REASONS SET OUT IN PARA 4.3 OF THE TPS ORDER WERE RELIED UPON. ATTENTION WAS ALSO IN VITED TO PAGE 23 SUB PARA H (III) OF THE SAME TO RE-ITERATE THAT SINCE SEGMENTALS WERE USED THE ARGUMENT OF THE ASSESSEE CANNOT BE AC CEPTED RELYING ON JUDICIAL PRECEDENT WHERE SEGMENTAL MAY N OT HAVE BEEN CONSIDERED. 6.5. FOR RETAINING I GATE GLOBAL SOLUTIONS LTD. AS A COMPARABLE IT WAS SUBMITTED THAT IN THE ABSENCE OF ANY FUNCTIO NAL DISSIMILARITY BEING POINTED OUT FOR THE REASONS SET OUT IN PARA H (IV) OF THE CIT(A) ITS RETENTION WAS SOUGHT. IT WA S ALSO HIS ARGUMENT THAT THE SOME OF THE ARGUMENTS ADVANCED FO R ITS EXCLUSION RELIES ON NEW FACTS WHICH HAVE NOT BEEN C ANVASSED BEFORE THE TPO OR THE CIT(A) AND THUS WHAT IS THE I MPACT ON THE PROFITABILITY OF THAT COMPARABLE OF THESE FACTS HAS NOT BEEN ADDRESSED. ITA NO. 6918/DEL/2014 PAGE 19 OF 35 6.6. ADDRESSING THE PRAYER FOR RETAINING TATA ELXSI LTD. AS A COMPARABLE IT WAS SUBMITTED THAT THERE IS NOTHING IN THE ANNUAL REPORTS WHICH JUSTIFIES ITS EXCLUSION. THE ARGUMENT THAT THE SAID COMPANY WAS ENGAGED IN NICHE SERVICES WERE NOT ASSA ILED. 6.7. THE RETENTION OF LUCID SOFTWARE LTD WAS JUSTIFIED ON THE GROUND THAT THERE WAS NO FUNCTIONAL DISSIMILARITY A ND IN FACT IT IS A GOOD COMPARABLE AS CONSIDERED BY THE TPO AND THE CIT(A). THE ARGUMENT THAT THERE IS A DEVIATION IN THE ACCOUNTIN G POLICY, IT WAS SUBMITTED WAS CONSIDERED BY THE TPO AND REJECTE D. IT WAS HIS SUBMISSION THAT IT WAS FOR THE ASSESSEE TO SHOW THE SO-CALLED DIFFERENCE IN ACCOUNTING WHICH WAS STATED TO BE CAU SING ANY ABNORMALITY AND DESPITE AN OPPORTUNITY NOTHING HAS BEEN SHOWN BY THE ASSESSEE. HEAVY RELIANCE WAS PLACED ON THE PARA 4.2 OF THE TPOS ORDER AND PAGE 23 PARA H (II) OF THE CIT( A)S ORDER AND PAGE 136 OF THE PAPER BOOK OF ANNUAL REPORT COMPEND IUM FILED BY THE ASSESSEE. 6.8. ACCROPETAL TECHNOLOGIES LTD . IT WAS SUBMITTED DESERVES TO BE RETAINED AS A COMPARABLES AS THE ARGUMENT OF THE ASSESSEE THAT IT FAILED THE EMPLOYEE COST FILTER IS INCORREC T ON FACTS AS DISCUSSED BY THE TPO IN PARA 4.5 OF HIS ORDER, IT W AS HIS SUBMISSION THAT THE ANNUAL REPORT OF THE SAID COMPA RABLE DISCLOSED THAT THE EXPENDITURE UNDER THE HEAD EMPL OYEE HEAD ITA NO. 6918/DEL/2014 PAGE 20 OF 35 EXPENDITURE CONSIDERING THE ON-SITE DEVELOPMENT EX PENSES WAS 80.22% OF THE TOTAL EXPENSES. THIS FINDING OF FACT IT WAS SUBMITTED IS AVAILABLE ON RECORD AND HAS NOT BEEN ASSAILED OR DISTINGUISHED BY THE ASSESSEE. 6.9. BODHTREE CONSULTING LTD.:- THE PRAYER FOR EXCLUSION WAS OBJECTED TO ON THE GROUND THAT NO SUCH PRAYER HAD B EEN MADE BEFORE THE TPO OR THE CIT(A). IT WAS ALSO HIS SUBM ISSION THAT IF AT ALL IT WAS TO BE CONSIDERED AT THIS STAGE THEN IT S HOULD BE RESTORED BACK. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. BEFORE, WE ADDRESS EACH OF THE COMPARABLES SPECIFICALLY, WE PROPOSE TO FIRST ADDRESS THE BROAD PRINCIPLES ADDRESSED BY THE LD.CIT DR IN REGARD TO THE SELECTI ON OF COMPARABLES IN TNMM. CONSIDERING THE SAME, WE ARE OF THE VIEW THAT THE LD.CIT DR IS CORRECT IN HIS ARGUMENT THAT THE ISSUE OF COMPARABILITY SHOULD BE DECIDED ON THE BASIS OF FAC TS ON RECORD AND NOT ON PRECEDENTS AS THERE CANNOT BE AN EXACT I DENTICAL COMPARABLE AND INFACT A PERFECT NEAR IDENTICAL COMP ARABLE COMPANY IS A RARITY AND GENERALLY CAN BE SAID TO B E A VIRTUALLY IMPOSSIBLE CONDITION INCAPABLE OF BEING FULLY FULFI LLED. WE ARE OF THE VIEW THAT IT IS FOR THIS VERY PURPOSE THAT TNMM AS A METHOD IS OFTEN RESORTED TO. THE MINOR DIFFERENCE IF ANY ARE ADDRESSED BY ITA NO. 6918/DEL/2014 PAGE 21 OF 35 COMPARING NET PROFITABILITY OF THE COMPARABLES. TH US BROAD COMPARABILITY OF A FAIRLY LARGE NUMBER OF COMPARABL E COMPANIES CAN FURTHER ENSURE THAT MINOR VARIATIONS IF ANY AR E OFFSET BY TAKING A FAIRLY LARGE SAMPLE. ANY MAJOR IMPACT OF THEIR FAR ON THEIR NET PROFITABILITY IF STILL SO WARRANTED ON FA CTS CAN BE ADDRESSED BY CARRYING OUT APPROPRIATE ADJUSTMENTS T HE NEED FOR WHICH HAS TO BE DEMONSTRATED ON THE BASIS OF RECORD SO AS TO BRING THEIR FAR IN ALIGNMENT WITH THAT OF THE TEST ED PARTY I.E. THE ASSESSEE. THE PRAYER FOR EXCLUSION OF A COMPARABLE WITHOUT EVEN CARING TO ESTABLISH HOW THE FACTS OF THE CASE AT HA ND ARE IDENTICAL TO THE FACTS OF THE TESTED PART IN THE PRECEDENT CA NNOT BE ACCEPTED. THE FACTS OF THE CASE AT HAND AND THAT O F THE PRECEDENT CITED MUST ALSO MATCH ON THE SAME HIGH STANDARDS OF STRICT COMPARABILITY AS INSISTED UPON FOR IN THE CASE OF C OMPARABLE COMPANIES VIS-A-VIS THE TESTED PARTY. THE TENDENCY TO BLINDLY CITE DECISIONS GALORE WITHOUT EVEN CARING TO BRING OUT HOW THE MATERIAL FACTS ARE PARI MATERIA WHICH WOULD CONVEY USEFUL AND CONTEMPORARY ECONOMIC INFORMATION DOES NOT HELP ANY ONES CASE. HAVING SO OBSERVED, WE FIND THAT THIS FUNDAMENTAL EXERCISE WHICH IS THE FOUNDATION ON WHICH THE CASE FOR EITHE R SIDE IS TO BE BUILD IS UNFORTUNATELY AN EXERCISE WHICH IS ATTEMPT ED WITHOUT ADEQUATE CARE AND ATTENTION EITHER BY THE TAX PAYER S OR BY THE TAX ITA NO. 6918/DEL/2014 PAGE 22 OF 35 AUTHORITIES WHO BOTH RUSH THROUGH THIS FUNDAMENTAL EXERCISE AT THE INITIAL STAGES IN UNDUE HASTE SATISFIED EASILY AS LONG AS THEIR RESPECTIVE STAND APPEARS TO BE REFLECTED. THE SELE CTION WHEN CHALLENGED AT THE APPELLATE STAGE OFTEN RESULTS IN A SITUATION WHERE THE ENTIRE EDIFICE CRUMBLES DESPITE A VALIANT PATCH WORK ATTEMPT TO UPHOLD THE EDIFICE AND THE ENTIRE SELEC TION PROCESS OFFERED AND CONSIDERED STANDS WIPED OUT. THOUGH, W E NOTE THAT THE TAX PAYER AT THE STAGE OF THE TP STUDY NO DOUBT MAY BE HANDICAPPED BY THE INSUFFICIENCY OF DATA IN THE PUB LIC DOMAIN AS IT MAY NOT BE SUFFICIENTLY ROBUST AND READILY AVAIL ABLE COMPLETELY. REVERTING TO THE FACTS OF THE PRESENT CASE, WE NOTE THAT THE YEAR UNDER CONSIDERATION IS 2008-09 AY AND AN ARGUMENT M AY BE CAPABLE OF BEING ADVANCED THAT DUE TO LACK OF EXPOS URE, EXPERTISE AND EXPERIENCE OF THE LITIGANTS ON THE ISSUE THERE MAY BE JUSTIFIABLE REASONS FOR THE INADEQUACIES IN THE TP STUDY AND THE TP REPORT. ADDRESSING THE DEPARTMENTAL STAND, WE AG REE THAT IN A TNMM METHODOLOGY IDENTICAL FAR ANALYSIS CANNOT BE I NSISTED UPON AND THE METHOD IS INFACT RESORTED TO WHEN THE COMPLETE DATA IS NOT AVAILABLE. IN THAT CASE THE IMPACT ON THE NET PROFITABILITY OF THE MINOR VARIATIONS IN THE COMPAR ABLE COMPANIES SO SELECTED IS CONSIDERED CAPABLE OF TOLERATING MIN OR VARIATIONS IN THE FAR ANALYSIS OF THE COMPARABLES. THE SELECTION OF THIS ITA NO. 6918/DEL/2014 PAGE 23 OF 35 METHOD IS RESORTED TO FOR THIS VERY PURPOSE AND THE METHOD IS ROBUST ENOUGH TO TOLERATE THE VARIATIONS IF ANY. T HE RULES MOREOVER PERMIT ADJUSTMENTS IN THE COMPARABLES SELE CTED IF IT CAN BE DEMONSTRATED THAT THESE WOULD IMPACT THE PRO FITABILITY OF THE COMPARABLE SELECTED. 7.1. EXAMINING THE OTHER ARGUMENT ADVANCED BY THE LD.C IT DR WHO HAS OBJECTED THAT IN THE ABSENCE OF CHALLENGE T O THE FILTER APPLIED THE ASSESSEE CANNOT OBJECT TO THE INCLUSION OF A COMPARABLE THROWN UP APPLYING THE FILTER. WE FIND THAT THE ARGUMENT IS MISPLACED. THE OBJECTION TO THE EXCLUS ION OF A COMPARABLE CANNOT BE OUSTED ON THE STRENGTH OF THE ARGUMENT THAT FILTER HAS BEEN ACCEPTED. WE FIND THAT THIS S IMPLISTIC ARGUMENT OF THE REVENUE CANNOT BE ACCEPTED. WE HOL D THAT THE ASSESSEE HAVING ACCEPTED THE FILTERS IS FULLY WITHI N ITS RIGHT TO INSIST UPON THE EXCLUSION OF A COMPARABLE WHICH HAS REMAINED IN THE LIST OF COMPARABLES ACCEPTED IF SUBSEQUENT INFO RMATION/DATA AVAILABLE IN THE PUBLIC DOMAIN SHOWS THAT THE SAID COMPARABLE ON THE BASIS OF NEW CONTEMPORARY ECONOMIC DATA BEIN G AVAILABLE THE COMPARABLE BECOMES INCOMPARABLE AS ITS VERY PROFITABILITY IS IMPACTED BY ITS PECULIAR MIX OF ITS FUNCTIONALIT Y OR ASSET BASE OR RISK ANALYSIS. NEITHER THE ACCEPTANCE NOR THE R ETENTION OR FOR THAT MATTER LACK OF OBJECTION AT THE FIRST INSTANCE MAKES AN ITA NO. 6918/DEL/2014 PAGE 24 OF 35 INCOMPARABLE A COMPARABLE. THE ISSUE IS JUDICIALLY WELL-SETTLED BY NOW AND WE ARE STRONGLY OF THE VIEW THAT A COMPA RABLE CANNOT BE FOISTED UPON AN ASSESSEE MERELY BECAUSE IT WAS PROPOSED BY THE ASSESSEE, OR WAS NOT OBJECTED TO BY THE ASSESSE E IN THE EARLIER YEARS OR AT THE INITIAL STAGES IN THE YEAR UNDER CO NSIDERATION. THERE MAY BE MANY REASONS FOR NOT OBJECTING TO RETE NTION OF A COMPARABLE IN A PARTICULAR YEAR; THERE MAY NOT BE A NY SIGNIFICANT IMPACT; THE FACTS OR LAW MAY NOT BE FULLY KNOWN OR THERE IS A MATERIAL CHANGE IN FACTS QUA THE COMPARABLE IN SUBS EQUENT YEAR WHICH SHOWS THAT ITS RETENTION WAS FUNDAMENTALLY MI SCONCEIVED AND ILL INFORMED. THE REASONS MAY BE MANY AND IT I S NOT POSSIBLE TO VISUALISE THE MULTIFARIOUS POSSIBLE OPTIONS IN T HE EVER CHANGING DYNAMICS OF THE REALITY WHERE THE COMPANIE S EXIST AND FUNCTION. HOWEVER, ONCE INCLUSION OF A COMPARABLE IS CHALLENGED THEN ITS COMPARABILITY MUST BE ESTABLISHED ON THE B ASIS OF FACTS AVAILABLE FOR THE YEAR UNDER CONSIDERATION EVEN IF THE FACTS COME TO LIGHT SUBSEQUENTLY. THE COMPARABLE CANNOT BE AL LOWED TO REMAIN INCLUDED ON ACCOUNT OF A MISTAKE OF THE PART IES. IF CHALLENGED ITS JUSTIFICATION HAS TO BE DEMONSTRATED . ACCORDINGLY THE ARGUMENT THAT FILTERS NOT HAVING BEEN CHALLENG ED ACT AS AN ESTOPPEL TO THE ASSESSEE CANNOT BE ACCEPTED. WE SE E NO BAR TO THE PRAYER OF THE ASSESSEE TO ARGUE FOR THE EXCLUSI ON OF A ITA NO. 6918/DEL/2014 PAGE 25 OF 35 COMPARABLE IF FACTS WARRANTING SUCH A PRAYER CAN BE DEMONSTRATED BY THE TAX PAYER. THE TRIBUNAL BEING THE FINAL FACT FINDING BODY AS CONCEIVED BY THE STATUTE PERMITS TH E TAX PAYER TO DEMONSTRATE IF SO CONSIDERED FIT BY THE TAX PAYER T O PLEAD FOR THE EXCLUSION OF A COMPARABLE ON THE BASIS OF ROBUST FA CTS AND EVIDENCES WHICH MAY DEMONSTRATE THAT THE COMPARABL E WAS WRONGLY OFFERED OR ACCEPTED AT THE INITIAL STAGES. THUS, WE FIND NO BAR TO THE TAX PAYER FOR PLEADING FOR EXCLUSION OF A COMPARABLE WITHOUT CHALLENGING THE FILTERS. EVEN OTHERWISE SE LECTION OF COMPARABLE IS ONE OF THE STEPS FOR IDENTIFYING A CO MPARABLE TO TAILOR THE SEARCH FOR THE PURPOSES OF DETERMINING W HETHER ADJUSTMENT IN ARMS LENGTH PRICE OF THE INTERNATION AL TRANSACTION UNDERTAKEN BY THE ASSESSEE IS WARRANTED. 7.2. THE NEXT STEP IS TO ESTABLISH A FUNCTIONAL COMPARA BILITY OF THE COMPANIES THROWN UP IN THE SEARCH. DURING THIS PROCESS THE COMPANIES WHOSE PECULIAR MIX OF FAR MAY DIRECTLY IM PACT ITS PROFITABILITY MAY BE EXCLUDED IF THEY ARE SEEN TO B E CONSIDERED INCOMPARABLE. THUS WHEREVER IT CAN BE SHOWN THAT TH E FUNCTIONALITY WAS NOT ESTABLISHED OR THE NECESSARY DETAILS QUA ITS ASSET BASE OR RISK ANALYSIS OR ANY EXTRA ORDINARY E VENT IN THE PERIOD UNDER CONSIDERATION CREATED SITUATIONS WHERE THE COMPARABILITY OF THE COMPANY WAS TAINTED AS IMPACTI NG ITS NET ITA NO. 6918/DEL/2014 PAGE 26 OF 35 PROFITABILITY THEN THE EXCLUSION OF THE COMPARABLE CAN BE REQUESTED. THEREAFTER, IF THE FACTS ARE FOUND SUPP ORTING THE PRAYER THEN THE COMPARABLE CAN STILL BE EXCLUDED FO R VALID REASONS JUSTIFYING ITS EXCLUSION BASED ON EVIDENCE DULY RECORDED AND FORMING PART OF THE REASONING DESPITE THE FILTE RS NOT HAVING BEEN CHALLENGED. WE SEE NO SUCH BAR FOR THE ASSESS EE CONTEMPLATED UNDER LAW. 7.3. ADDRESSING THE SPECIFIC COMPARABLES WHOSE EXCLUSIO N IS SOUGHT, CONSIDERING THE FACTS, ARGUMENTS AND POSITI ON OF LAW, WE HOLD:- (A) PERSISTENT SYSTEMS WE FIND THAT EXCLUSION OF THE SAID COMPARABLE ON T HE GROUND THAT IT IS FUNCTIONALLY DIFFERENT AS IT DERIVES INC OME FROM SOFTWARE SERVICES AND PRODUCTS IN THE FACE OF THE CONSISTENT FINDING ON RECORD THAT IN THE YEAR UNDER CONSIDERATION NO EXPE NSES HAVE BEEN BOOKED FOR SOFTWARE PRODUCT DEVELOPMENT AND TH US THE COMPARABLE IS MAINLY IN THE BUSINESS OF SOFTWARE DE VELOPMENT ACTIVITY REMAINING UNASSAILED ON RECORD HAS NOT BEE N ASSAILED. THUS THE SAID GROUND FOR EXCLUSION OF THE COMPARABL E IN THE PECULIAR FACTS OF THE PRESENT CASE, IS REJECTED. T HE ASSESSEE HAS ALSO PLEADED EXTRAORDINARY EVENTS IN THE YEAR UNDER CONSIDERATION FOR THE FIRST TIME BEFORE THE ITAT. HOWEVER, HOW T HESE EVENTS ITA NO. 6918/DEL/2014 PAGE 27 OF 35 IMPACT NET PROFITABILITY OF THE SAID COMPARABLE IN THE YEAR UNDER CONSIDERATION HAS NOT BEEN DEMONSTRATED. ACCORDING LY, CONSIDERING THE PRAYER AND THE ARGUMENTS WE DEEM IT APPROPRIATE TO RESTORE THE ISSUE BACK TO THE TPO IN ORDER TO DE MONSTRATE ITS CLAIM ON THE BASIS OF FACTS AND EVIDENCES. (B) BODHTREE CONSULTING LTD . WE FIND THAT THE EXCLUSION OF THE SAID COMPARABLE WAS NOT ASSAILED BY THE ASSESSEE EITHER BEFORE THE TPO NOR BEFORE THE CIT(A). WE FURTHER FIND THAT THE ASSESSEE RELYING U PON THE PRECEDENT OF ITA NO.5329/DEL/2012 IN THE CASE OF NAVISITE INDIA PVT. LTD. HAS REQUESTED FOR REMAND TO THE TPO TO EXAMINE THE ABNORMAL FACTORS RESPONSIBLE FOR THE HIGH VOLAT ILITY IN THE MARGINS OF THE SAID COMPARABLE AND MAKE NECESSARY ADJUSTMENTS, IF SO WARRANTED. WE FIND THAT IN THE ABSENCE OF DISCUSSION ON THE ISSUE BY THE TAX AUTHORITIES AS T HE ISSUE WAS NOT AGITATED BY THE ASSESSEE AND CONSIDERING THE RE QUEST OF THE LD.CIT DR THAT THE ISSUE MAY IN THE CIRCUMSTANCE BE RESTORED, WE DIRECT ACCORDINGLY. THE ISSUE IS RESTORED THE T PO AFRESH FOLLOWING THE PRECEDENT CITED. (C) KALS INFORMATION SYSTEMS LTD. ITA NO. 6918/DEL/2014 PAGE 28 OF 35 WE FIND THAT THE ARGUMENTS OF THE ASSESSEE THAT TH E SAID COMPARABLE WAS DISTINGUISHABLE AS THE SAID COMPANY APART FROM SOFTWARE SERVICES ALSO HAD SOFTWARE PRODUCTS CANNOT BE ACCEPTED. THE ASSESSEE HAS FAILED TO ADDRESS/REBUT THE CONSIS TENT FINDING ON RECORD THAT SEGMENTAL DATA HAS BEEN USED. NO AR GUMENTS CONTROVERTING THIS FACT HAVE BEEN ADVANCED. NO FAC T CONTRARY TO THIS FINDING HAS BEEN REFERRED TO. THE LD.AR INVIT ING ATTENTION TO COPY OF SCHEDULE 16 OF THE SAID COMPANY FROM THE COPY OF ITS ANNUAL ACCOUNTS SO AS TO SUBMIT THAT ITS REVENUE RE COGNITION SYSTEM IS DIFFERENT AND FOLLOWING LEGAL PRECEDENT T HE COMPARABLE SHOULD BE EXCLUDED. WE FIND THAT NOTHING HAS BEEN PLACED ON RECORD TO DEMONSTRATE HOW THE IMPACT ON THE NET PRO FITABILITY OF THE ASSESSEES SEGMENT FOLLOWING THE REVENUE RECOGN ITION STATED TO BE DIFFERENT FROM THE ASSESSEE. THE EXERCISE AD DRESSING THE IMPACT OF THE REVENUE RECOGNITION SYSTEM ALLEGEDLY DIFFERENT FROM THE ASSESSEE ON THE SEGMENTAL NET PROFITABILITY OF THE COMPARABLE HAS TO BE ESTABLISHED AS MERE RELIANCE ON PRECEDENT WITHOUT ADDRESSING THE FACTS IS OF NO RELEVANCE. RELIANCE ON PRECEDENT WHERE SEGMENTAL WERE EITHER NOT USED OR AVAILABLE A PPLIED WOULD BE OF NO HELP. WITHOUT ADDRESSING AND DEMONSTRATIN G AN IMPACT OF REVENUE RECOGNITION POLICIES VIS-A-VIS SEGMENTAL DETAILS OF A COMPARABLE WILL NOT PER SE TAKE THE SAID COMPARABLE OUT OF THE ITA NO. 6918/DEL/2014 PAGE 29 OF 35 ACCEPTED LIST OF COMPARABLES. THE ISSUE IS RESTORE D TO THE TPO FOR THIS NECESSARY EXERCISE. THE ASSESSEE MAY PLACE NE CESSARY FACTS IN SUPPORT OF ITS PRAYER. (D) I.GATE GLOBAL SOLUTIONS LTD. WE FIND THAT FOR EXCLUSION OF THE SAID COMPARABLE THE ASSESSEE HAS PLACED ON RECORD COPY OF DIRECTORS REP ORT IN SUPPORT OF THE ARGUMENT THAT EXTRA-ORDINARY EVENTS PREVAILED JUSTIFYING ITS EXCLUSION. IT HAS BEEN ARGUED THAT NOT ONLY I GATE TECHNOLOGY SERVICES PVT. LTD. (ITS), AN ERSTWHILE WHOLLY OWNED SUBSIDIARY OF I GATE GLOBAL SOLUTIONS MERGED WITH I T ALSO TERMINATED ITS JOINT VENTURE AGREEMENT WITH SOFTWAR E AG, GERMANY AND SOLD ITS 49% HOLDING OF 7,84,000 SHARES IN SOFTWARE AG (INDIA) PVT.LTD. TO SOFTWARE AG, GERMANY CONSEQU ENTLY THE PROMOTERS I.E. I GATE CORPORATION AND I GATE INC. ( PROMOTERS) SOUGHT VOLUNTARY DELISTING OF THE EQUITY SHARES OF THE COMPANY. FURTHER THE MEMBERS OF THE COMPANY, IN THE EXTRAORD INARY GENERAL MEETING HELD ON NOVEMBER 13, 2007, ACCORDED THEIR CONSENT FOR VOLUNTARY DELISTING OF SHARES FROM THE INDIAN STOCK EXCHANGES AND THE EMPLOYEES WERE GIVEN AN OPPORTUNI TY TO PARTICIPATE IN THE STOCK OPTION PLAN OF I GATE CORP ORATION (HOLDING COMPANY) OR TO ACCEPT THE CASH SETTLEMENT OFFERED T O THEM. THUS ON THE BASIS OF THESE FACTS PLEADING PREVALENCE OF EXTRA ORDINARY ITA NO. 6918/DEL/2014 PAGE 30 OF 35 EVENTS EXCLUSION OF THE SAID COMPARABLE HAS BEEN SO UGHT RELYING ON PRECEDENT LAID DOWN IN VARIOUS CASES. WHEREVER THE ASSESSEE IS ABLE TO DEMONSTRATE IMPACT AS NET PROFITABILITY IN TNMM THE COMPARABLE HAS TO BE EXCLUDED. PREVALENCE OF EXTRA ORDINARY EVENT CAN BE ONE FACTOR WHICH MAY IMPACT NET PROFIT ABILITY. HOWEVER, MERE EXISTENCE OF EXTRA ORDINARY EVENT BY ITSELF CANNOT BE SAID TO BE A GROUND FOR EXCLUSION OF A COMPARABL E. HOW THE EVENTS SET OUT IN THE DIRECTORS REPORT IMPACTED THE NET PROFITABILITY OF THE SAID COMPARABLE HAS TO BE ESTA BLISHED AND HAS NOT BEEN ADDRESSED ON FACTS. WE FURTHER FIND THAT THE REVENUE HAS ALSO ARGUED THAT EVEN EXISTENCE OF EXTRA ORDINA RY EVENTS ITSELF WAS NOT CANVASSED BEFORE THE TAX AUTHORITIES. ACCO RDINGLY, IN VIEW OF THIS FACTUAL DEFICIENCY THE ISSUE IS RESTOR ED BACK TO THE TPO. THE ASSESSEES DIRECTED TO SUPPORT ITS CLAIM FOR EXCLUSION OF THE SAID COMPARABLE ON THE GROUNDS OF EXTRA ORDINAR Y EVENT IMPACTING THE NET PROFITABILITY OF THE SAID COMPAN Y SO AS TO JUSTIFY ITS EXCLUSION. (E) TATA ELXSI WE FIND THAT AS PER JUDICIAL PRECEDENT LAID DOWN B Y A CO- ORDINATE BENCH IN THE CASE OF TELECORDIA TECHNOLOGIES PVT.LTD. VS ACIT [2012] 22 TAXMANN.COM 96 (MUM) QUA THE SOFTWARE DEVELOPMENT RELATED SERVICES SEGMENT TATA ELXSI HAS BEEN HELD TO ITA NO. 6918/DEL/2014 PAGE 31 OF 35 BE ENGAGED IN DEVELOPMENT OF A NICHE PRODUCT JUSTIF YING ITS CAPACITY TO BARGAIN FOR HIGHER PRICE. ON A PERUSAL OF THE COPY OF ANNUAL REPORTS OF THIS COMPANY PLACED AT PAGES 286 TO 353 OF THE ANNUAL REPORT COMPENDIUM, WE FIND THAT THE FACT S JUSTIFYING ITS EXCLUSION CONTINUE TO REMAIN ON RECORD AS THE V ERY NATURE OF ITS ACTIVITIES AND CUSTOMERS TOWARDS WHICH IT IS FO CUSED SHOWS THAT THE SAID COMPARABLE CANNOT BE SAID TO BE A COM PARABLE FOR THE ASSESSEE WHO IS NOT EXISTING IN A NICHE AREA EN GAGED IN DEVELOPMENT OF NICHE PRODUCTS AND SERVICES. ACCORD INGLY THE PRAYER FOR THE EXCLUSION OF THIS COMPARABLE ON FACT S IS JUSTIFIED. (F) LUCID SOFTWARE LTD. CONSIDERING THE ARGUMENTS AND THE FACTS AL ONGWITH THE PRECEDENT RELIED UPON, WE FIND THAT THE EXCLUSION O F THE SAID COMPARABLE HAS BEEN SOUGHT ON THE GROUNDS OF FUNCTI ONAL IMCOMPARABILITY AS THE SAID COMPANY IS STATED TO BE ACTIVELY INVOLVED IN LEADING SCIENTIFIC AND EDUCATIONAL INST ITUTIONS; IS INVOLVED IN R& D ACTIVITIES. THE SAID ARGUMENT ON FACTS HAS BEEN FAULTED BY THE REVENUE. THE CLEAR RECITAL IN THE N OTES ON ACCOUNTS IN SCHEDULE M AT PAPER BOOK PAGE 141 RELIED UPON IT IS SEEN CLEARLY SHOWS THAT THERE IS NO SOFTWARE PRODUC T EXPENDITURE. FURTHER PAPER BOOK PAGE 136 SCHEDULE G RELIED UPON BY THE REVENUE ALSO DOES NOT SUPPORT ON FACTS THE PRECEDEN T RELIED UPON ITA NO. 6918/DEL/2014 PAGE 32 OF 35 BY THE ASSESSEE. THE FOLLOWING CLEAR RECITAL HEAVIL Y RELIED UPON BY THE LD.CIT DR STANDS NON REBUTTED ON RECORD ON BEHA LF OF THE ASSESSEE:- 1.4.1. SOFTWARE PRODUCT DEVELOPMENT EXPENDITURE SOFTWARE PRODUCTS DEVELOPED IN HOUSE ARE VALUED O N THE BASIS OF COSTS DIRECTLY ATTRIBUTABLE TO THE DEVELOP MENT OF SUCH SOFTWARE. IN RESPECT OF EACH OF THE PRODUCT SO DEV ELOPED, THE TOTAL EXPENDITURE GETS AMORTISED OVER A PERIOD OF T HIRTY SIX MONTHS FROM THE LAUNCH DATE. THE UN-AMORTISED PROD UCT DEVELOPMENT EXPENDITURE IS SHOWN UNDER ASSETS TILL IT IS FULLY WRITTEN OFF. DURING THE YEAR THERE IS NO SUCH EXPENDITURE INCURRED. (EMPHASIS PROVIDED) ACCORDINGLY, WE FIND THAT ON FACTS THE PRAYER OF TH E ASSESSEE HAS NO MERIT. IN THE LIGHT OF THE FACTS ON RECORD AS BROUGHT OUT ABOVE, THE EXCLUSION OF THE SAID COMPARABLE PRAYED ON THIS GROUND IS REJECTED. (G) ACROPETAL TECHNOLOGIES:- THE EXCLUSION OF THE SAID COMPARABLE HAS BEEN SOUGH T ON THE GROUND THAT IT FAILS THE EMPLOYEE COST FILTER O F 8.33% AND JUDICIAL PRECEDENT AS LAID DOWN IN BP INDIA SERVICES P.LTD. VS ACIT [2015] 55 TAXMANN.COM 150 (MUM.) HAS BEEN RELIED UPON FOR ITS EXCLUSION. WE FIND THAT IN THE FACE O F THE CLEAR AND CONSISTENT FINDINGS ON RECORD THAT EMPLOYEE RELATED COSTS AND ON SITE EXPENSES IS 80.22% OF THE TOTAL EXPENSES THE P RECEDENT RELIED UPON IS OF NO VALUE AND DISTINGUISHABLE ON F ACTS. IN THE ABSENCE OF ANY REBUTTAL ON THIS FACT, THE PRAYER OF THE ASSESSEE IS ITA NO. 6918/DEL/2014 PAGE 33 OF 35 REJECTED AS IN THE FACTS AS THEY STAND, WE FIND NO IMPEDIMENT TO THE RETENTION OF THIS COMPARABLE. 8. ADDRESSING GROUND NOS. 2.9 AND 2.10, THE LD. AR HA S SUBMITTED THAT SINCE THESE WERE THE INITIAL YEARS W HEN THE ISSUES WERE BEING DEVELOPED, CONSIDERED AND UNDERSTOOD ACC ORDINGLY FOR WORKING CAPITAL ADJUSTMENTS AND RISK ADJUSTMENTS IN THE COMPARABLES THE ISSUES MAY BE RESTORED TO THE TPO. INVITING ATTENTION TO PAGE 19 OF THE IMPUGNED ORDER PARA 9.1 0.1, IT WAS SUBMITTED THAT IT IS NOT A CASE WHERE THE ISSUES HA D BEEN GIVEN UP BY THE ASSESSEE AS THE FOLLOWING SUBMISSIONS QUA WORKING CAPITAL WERE ADVANCED ON BEHALF OF THE ASSESSEE:- 9.10. (J) DENYING THE APPELLANT THE BENEFIT OF WORK ING CAPITAL ADJUSTMENT 9.10.1. THE APPELLANT SUBMITTED THAT WORKING CAPITA L ADJUSTMENT IS AN ADJUSTMENT FOR THE OPPORTUNITY COS T OF CAPITAL FOR INVESTMENTS MADE IN WORKING CAPITAL. INVESTMEN TS IN WORKING CAPITAL (I.E. INVENTORIES, ACCOUNTS RECEIVA BLE/DEBTORS AND ACCOUNTS PAYABLE/CREDITORS) REQUIRE CAPITAL AND OPERATING ASSETS, AND AN UNCONTROLLED ENTITY IS EXPECTED TO E ARN A MARKET RATE OF RETURN ON THE REQUIRED CAPITAL INDEPENDENT OF THE SERVICES THAT IT PROVIDES. HOWEVER, THE AMOUNT OF CAPITAL R EQUIRED TO SUPPORT THESE SERVICES VARIES GREATLY, BECAUSE THE LEVEL OF INVENTORIES, DEBTORS AND CREDITORS MEASURED AS A PE RCENTAGE OF THE TOTAL COST VARIES. THERE IS AN EFFECT ON PROFI TS FROM INVESTING IN DIFFERENT LEVELS OF WORKING CAPITAL DUE TO DIFFE RENCES REFLECTED IN CASH COLLECTION CYCLE. SUCH DIFFERENCES IN COLLE CTION CYCLE IMPLY DIFFERENCES IN CREDITS GRANTED TO CUSTOMERS AND SUC H A CREDIT FUNCTION IS AKIN TO AN ADDITIONAL SERVICE FOR WHICH MARKETS ARE WILLING TO PAY. THE APPELLANT RECEIVES PAYMENTS FO R SERVICES IN A STIPULATED PERIOD OF TIME FROM ITS AE AND HENCE ENJ OYS A FAVOURABLE WORKING CAPITAL POSITION. ACCORDINGLY, A WORKING CAPITAL ADJUSTMENT VIS-A-VIS THE COMPARABLE IS ESSE NTIAL IN THE INSTANT CASE. ITA NO. 6918/DEL/2014 PAGE 34 OF 35 8.1. QUA THE BENEFIT OF RISK ADJUSTMENT, IT WAS SUBMITT ED THAT THE ASSESSEE HAD ADVANCED THE FOLLOWING ARGUMENTS B EFORE THE CIT(A):- 9.11. (K) DENYING THE APPELLANT THE BENEFIT OF RISK ADJUSTMENT THE KEY ARGUMENTS OF THE APPELLANT IN RELATION TO THE RISK ADJUSTMENT ARE SUMMARIZED AS FOLLOWS:- - SEVERAL TRIBUNAL RULINGS (MENTOR, E-GAIN AND SONY T RIBUNAL RULINGS AMONGST OTHERS) AND OECD TP GUIDELINES HAVE UNDERSCORED THE NEED FOR RISK ADJUSTMENT. - RISK ADJUSTMENT CANNOT BE DENIED TO THE APPELLANT M ERELY BECAUSE IT FACES SINGLE CUSTOMER RISK. THIS MAY BE THE MORE PRONOUNCED FACTOR IN THE CASE OF THE APPELLANT, HOW EVER, FOR INDEPENDENT ENTERPRISES IT COULD BE FACTORS SUCH AS MAJORITY OF THE BUSINESS EMANATING FROM A SINGLE MARKET, SUC H AS THE US. IN FACT, MOST INDIAN SOFTWARE SERVICES COMPANI ES CONSIDER THIS AS A MAJOR RISK AREA WITH REGARD TO T HREAT TO CONTINUITY OF BUSINESS. RELIANCE IN THIS CASE IS A LSO PLACED INT HE RECENT RULING OF M/S INTELLIGENT TECHNOLOGIES IN DIA PVT. LTD. VS ITO (ITA NO.1237 (BANG.)/2010). 8.2. THE ISSUES AGITATED IT WAS SUBMITTED HAVE BEEN DIS MISSED IN A SUMMARY MANNER. RELYING UPON THE PRECEDENT AS LA ID DOWN BY THE DECISION OF MOTOROLA SOLUTIONS, IT WAS HIS SUBM ISSION THAT THE ISSUES MAY BE RESTORED. THE SAID SUBMISSIONS WERE N OT OPPOSED BY THE LD. SR.DR. 9. CONSIDERING THE SUBMISSION ADVANCED AND THE PRECED ENT RELIED UPON IN VIEW OF THE ABOVE, WE ARE OF THE VIE W THAT IT WOULD BE APPROPRIATE IN THE PECULIAR FACTS AND CIRCUMSTAN CES RESTORE THE ISSUE BACK TO THE TPO. WHILE SO RESTORING IT I S MADE CLEAR THAT THE ONUS FOR PROVIDING THE RELEVANT DATA WARRA NTING RISK AND CAPITAL ADJUSTMENTS IF ANY IN THE COMPARABLES HAS T O BE PROVIDED ITA NO. 6918/DEL/2014 PAGE 35 OF 35 BY THE ASSESSEE. THE TPO THEREAFTER CONSIDERING TH E SAME SHALL PASS A SPEAKING ORDER IN ACCORDANCE WITH LAW GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD IN CASE ANY ADVERSE CONCLUSIONS ARE SOUGHT TO BE DRAWN. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON13 TH OF JULY, 2016. SD/- SD/- (L.P.SAHU) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIA L MEMBER *VEENA/ AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI
