Netscout Systems India Private Limited, Pune V. Deputy Commissioner of Income-Tax, Pune

ITA 741/PUN/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 2573 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 7 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 30-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Set aside; Audi alteram partem
• Section: 143(3); 201; 13; 153

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C , PUNE VIRTUAL COURT BEFORE SH RI R.S. SYAL, VICE PRESIDENT AND SH RI S.S. VISWANETHRA RAVI , J UDICIAL MEMBER I TA NO. 741 /PUN/201 7 / ASSESSMENT YEAR : 20 1 2 - 1 3 NETSCOUT SYSTEMS INDIA PRIVA TE LIMITED, 7 TH FLOOR, BAJAJ BRANDVIEW, OLD PUNE - MUMBAI ROAD, WAKADEWADI, SHIVAJINAGAR, PUNE 411003 PAN: AA BCN2736Q VS. D CIT, CIRCLE 1( 2 ) , PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE TAKES EXCEPTION TO THE FINAL ASSESSMENT ORDER DATED 2 7 - 0 1 - 201 7 PAS SED BY THE ASSESSING OFFICER U/S 143(3) R.W.S. 144C(13) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) IN RELATION TO THE ASSESSMENT YEAR 20 1 2 - 1 3 . 2. THE ONLY DISPUTE RAISED HERE IN IS AGAINST TRANSFER PRICING ADDITION OF RS.1,33,75,076 MADE BY THE ASSESSING OFFICER IN THE A SSESSEE BY SHRI KISHOR PHADKE RE VENUE BY SHRI RAJARSHI DWIVEDY, CIT DATE OF HEARING 2 5 - 1 1 - 2020 DATE OF PRONOUNCEMENT 27 - 1 1 - 2020 ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 2 INTERNATIONAL TRANSACTION OF `RENDERING OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES . 3 . THE FACTUAL MAT R IX OF THE CASE IS THAT THE ASSESSEE IS A N INDIAN PRIVATE LIMITED COMPANY, A 100% SUBSIDIARY OF NETSCOUT SYSTEMS I NC . USA. IT IS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES AND SUPPORT SERVICES EXCLUSIVELY FOR ITS PARENT COMPANY. R ETURN WAS FILED DECLARING TOTAL INCOME OF RS.2,51,85,090. THE ASSESSEE REPORTED THREE INTERNATIONAL TRANSACTIONS IN FORM NO.3CEB. THE ASSESSING OFFICER ( AO ) MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARM'S LENGTH PRICE ( HE REINAFTER REFERRED TO AS ` ALP ' ) OF INTERNATIONAL TRANSACTIONS. THE DISPUTE IN THE EXTANT APPEAL IS ONLY QUA THE INTERNATIONAL TRANSACTION OF R ENDERING OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES WITH TRANSACTED VALUE OF RS.15,29,56,672. THE ASSESSEE F OLLOWED THE TRANSACTIONAL NET MARGINAL METHOD (TNMM) AS MOST APPROPRIATE METHOD WITH ITS PROFIT LEVEL INDI CATOR (PLI) OF OPERATING PROFIT /TOTAL COST (OP/TC) COMPUTED AT 16.57%. THE ASSESSEE SELECTED CERTAIN COMPARABLES TO DEMONSTRAT E THAT THE INTERNATIONA L TRANSACTION WAS AT ALP. THE ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 3 TPO MADE CERTAIN ALTERATIONS TO THE COMPARABLES SELECTED BY THE ASSESSEE AND ALSO TO THE PROFIT MARGIN OF SOME OF THE COMPARABLES. HE S HORTLISTED NINE COMPARABLE S WITH THE IR MEAN PROFIT MARGIN AT 28.18% , WHICH WAS TAKEN AS B ENCHMARK . IN THIS WAY , THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.1,53,44,587. THE AO NOTIFIED THE DRAFT ORDER ON 23 - 03 - 2016 PROPOSING TRANSFER PRICING ADDITION OF THIS MAGNITUDE . THE ASSESSEE RAISED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL ( HEREINAFTER REFERRED TO AS `THE DRP ). ON GIVING EFFECT TO THE DIRECTIONS GIVEN BY THE DRP ON 25 - 11 - 2016, THE AO PASSED THE IMPUGNED ORDER MAKING TRANSFER PRICING ADDITION OF RS.1,33,75,076/ - . AGGRIEVED THEREBY, THE ASSESSEE IS IN APPEAL BEFORE THE TRI BUNAL. 4. WE HAVE HEARD BOTH THE SIDES THROUGH VIRTUAL COURT AND SCANNED THROUGH THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON EITHER APPLICATION OF THE TNMM AS MOST APPROPRIATE METHOD OR ADOPTION OF PLI OF THE ASSESSEE OF OP/TC AT 16.57%. THOUG H THE TPO MADE CERTAIN INCLUSIONS IN AND EXCLUSIONS FROM THE LIST OF COMPARABLES MADE BY THE ASSESSEE, THE LD. AR IN THE PRESENT APPEAL ASSAIL ED THE FINAL ASSESSMENT ORDER ONLY ON THREE ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 4 COUNTS: INCL USION OF CYBERMATE INFOTEK LTD. AND WRONG COMPUTATION OF P LI OF ACROPETAL TECHNOLOGIES LTD. AND COMP - U - LEARN TECH INDIA LIMITED (CTIL) . AS SUCH, WE WILL LIMIT OURSELVES ONLY TO THE DETERMINATION OF THESE THREE ISSUES. ( I ) CYBERMATE INFOTEK LTD. 5. THE TPO PROPOSED TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLES , WHICH WA S OBJECTED TO BY THE ASSESSEE , INTER ALIA, ON THE GROUND THAT IT HAD DEVELOPED ITS OWN 38 SOFTWARE PRODUCTS. THE TPO DID NOT FIND ANY MERIT IN THE ASSESSEES CONTENTION AND FINALLY INCLUDED THIS COMPANY IN THE COMPARABLES. THE DRP FOLLOWED SUIT A ND DID NOT ALLOW ANY SUCCO U R TO THE ASSESSEE ON THIS COUNT. 6. BEFORE EXAMINING THE COMPARABILITY OR OTHERWISE OF THIS COMPANY, IT IS SINE QUA NON TO FIRST DETERMINE THE NATURE OF SERVICES RENDERED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE . IN THIS RE GARD, THE LD. AR CONTENDED THAT THE ASSESSEE CARRIED OUT SOFTWARE AND SUPPORT SERVICES FOR ITS PARENT COMPANY ON AN EXCLUSIVE BASIS AT A FIXED MARKUP. SUCH SERVICES RANGED FROM ASSISTING THE PARENT COMPANY IN SOFTWARE DEVELOPMENT BY CODING SOME OF THE PAR TS OF ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 5 THE OVERALL SOFTWARE TO BE FINALLY DEVELOPED BY ITS PAR ENT. IN ADDITION, THE ASSESSEE ALSO RENDERED SUPPORT SERVICES. ON A P OINTED QUERY, THE LD. AR SUBMITTED THAT NO AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISE FOR RENDITION OF SUCH SERVICES. IT WAS , HOWEVER, PUT FORTH THAT THE NATURE OF SERVICES RENDERED BY THE ASSESSEE HAS NOT BEEN DISPUTED BY THE AUTHORITIES BELOW. THE LD. DR ALSO DID NOT DISPUTE THE NATURE OF SERVICES RENDERED BY THE ASSESSEE. WE FIND FROM THE ORDER OF TPO THAT HE HAS PROCEEDED TO DETERMINE THE ALP BY CONSIDERING THE NATURE OF SERVICES RENDERED BY THE ASSESSEE AS TH OSE OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES. TO CLARIFY THE THINGS FURTHER, WE HAVE ALSO EXAMINED A NNUAL ACCOUNTS OF THE ASSES SEE, WHOSE COPY HAS BEEN PLACED IN THE PAPER BOOK. IT CAN BE SEEN FROM THE ASSESSEES B ALANCE SHEET THAT NO I NTANGIBLE ASSETS APPEAR IN IT , WHICH EXHIBITS THAT THE ASSEESSEE DID NOT HAVE ITS OWN DEVELOPED SOFTWARE PRODUCTS AVAILABLE FOR COMMERCIAL EXPLOIT ATION. NOTE NO.19 O N F INANCIAL STATEMENTS INDICATE S THAT THE ASSESSEE COMPANY OBTAIN ED CERTAIN FIXED ASSETS ON LOAN OR FREE OF COST FROM NETSCOUT SYSTEMS INC, USA IN THE NATURE OF COMPUTER HARDWARE AND OTHER EQUIPMENTS ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 6 WHICH WERE NOT INCLUDED IN THE FIXED ASSETS SINCE THEIR OWNERSHIP VESTED WITH NETSCOUT SYSTEMS INC, USA. IT CAN BE FURTHER SEEN FROM THE ASSESSEES BALANCE SHEET THAT THE FIGURE OF C APITAL WORK - IN - PROGRESS IN TH E CURRENT/PRECEDING YEAR IS NIL , WHICH SHOWS THAT THE ASSESSEE WAS WORKING EXCLUS IVELY FOR ITS ASSOCIATED ENTERPRISE AND INVOICING THE WORK COMPLETED ON REGULAR BASIS WITHOUT ANY NEED TO HOLD ITS OWN CAPITAL W ORK - IN - PROGRESS. IT IS FURTHER APPARENT FROM THE C URRENT ASSETS OF THE ASSESSEE COMPANY THAT THERE IS NO OPENING OR CLOSING INV ENTOR Y NOR ANY QUANTITATIVE INFORMATION, WHICH EVIDENCES THAT THE ASSE SSEE IS NOT A SOFTWARE PRODUCT COMPANY HAVING ANY SOFTWARE IN STOCK. WITH THE ABOVE ANALYSIS OF THE ASSESSEES BALANCE SHEET AND OTHER RELEVANT DETAILS , WE NOW PROCEED TO DETERMINE WHETH ER OR NOT CYBERMAT E INFOTEK LIMITED IS COMPARABLE? 7. WE HAVE GONE THROUGH THE A NNUAL REPORT OF CYBERMATE INFOTEK LIMITED, WHOSE COPY IS AVAILABLE AT PAGE 459 ONWARDS OF THE PAPER BOOK. THE DIRECTORS REPORT S TATES UNDER THE OVERVIEW OF OPERATIONS THAT IT IS ENGAGED IN THE BUSINESS OF PROVIDING CUSTOM BUILT SOFTWARE DEVELOPMENT, PRODUCT DEVELOPMENT AND IT ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 7 SERVICES TO CUSTOMERS IN DOMESTIC AND OVERSEAS LOCATIONS . IT HAS FURTHER BEEN NOTED ON PAGE 10 OF THE R EPORT THAT THE COMPANY HAS TWO WHOLLY OWNED SUBSIDIARIES. PAGE 13 OF THE R EPORT INDICATES THAT APART FROM HEALSOFT YOUR COMPANY HAS ABOUT 38 PRODUCTS OUT OF WHICH THE FOLLOWING 12 PRODUCTS ARE RECEIVING HIGHER TRACTION . PAGE 17 OF THE A NNUAL REPORT INDICATES THE RESEARCH AND DEVELOPMENT ACTIVI T IES CARRIED OUT BY THIS COMPANY OF NEW PRODUCTS FEATURES FOR EXISTING PRODUCTS. . ON A CAREFUL ANALYSIS OF THE A NNUAL REPORT OF THIS COMPANY, IT IS DIVULGED THAT THIS COMPANY , APART FROM RENDERING IT SERVICES , IS ALSO A PRODUCT COMPANY HAVING AROUND 38 PRODUCTS OF ITS OWN . THE PRODUCTS ARE DEVELOPED WITH EXTENSIVE R&D ACTIVITY CARRIED OUT BY IT. THIS VIEW IS FRUCTIFIED FROM THE BALANCE SHEET OF THIS COMPANY INDICAT ING INVENTORIES O F RS.26.78 CRORE AT THE END OF THE YEAR WITH CORRESPONDING FIGURE OF RS. 30.28 CRORE AT THE BEGINNING OF THE YEAR . FURTHER, THE FIGURE OF C APITAL WORK - IN - PROGRESS OF THIS COMPANY AT THE END OF THE YEAR STAND S AT RS.36.7 3 CRORE. IN ADDITION, TH IS COMPANY HAS ITS OWN INTANGIBLE ASSETS WORTH RS.4.95 CRORE AT THE END OF THE YEAR. S EGMENTAL REPORTING OF THIS COMPANY ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 8 GIVEN AT PAGE 41 OF THE R EPORT RECORDS THAT THE ENTIRE OPERATIONS OF THE COMPANY RELATE ONLY TO ONE SEGMENT I.E. COMPUTER SEGMENT . THIS DECIPHERS THAT ALBEIT THE COMPANY IS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT S ERVICES AS WELL BUT IT HAS A MIXED BAG OF FINANCIAL STATEMENTS COMPRISING RESULTS NOT ONLY OF SOFTWARE DEVELOPMENT SERVICES BUT ALSO SOFTWARE PRODUCTS DEALT WITH BY IT. T HERE IS NO INFORMATION AVAILABLE ON RECORD TO DEMONSTRATE THE REVENUE FROM SOFTWARE D EVELOPMENT SERVICES AND CORRESPONDING OPERATING COSTS , WHICH PART OF ITS ACTIVITY IS ANALOGOUS TO THE OPERATI ONS CARRIED OUT BY THE ASSESSEE - COMPANY . IN THE ABSENCE OF SUCH A VITAL INFORMATION, CYBERMATE INFOTEK LIMITED CANNOT BE CONSIDERED , ON AN ENTITY LEVEL, AS COMPARABLE TO THE ASSESSEE COMPANY. WE, THEREFORE, DIRECT TO EXCLUDE CYBERMATE INFOTEK LIMITED FROM THE LIST OF COMPARABLES. (II) ACROPETAL TECHNOLOGIES LIMITED (SEGMENTAL) 8. IN SOFAR AS THIS COMPANY IS CONCERNED, THERE IS NO DISPUTE ON ITS IN CLUSION IN THE FINAL TALLY OF COMPARABLES. THE ONLY POINT OF DIFFERENCE IS THE COMPUTATION OF ITS PLI FOR THE PURPOSES OF WORKING OUT THE MEAN PLI OF ALL THE COMPARABLES . THE ASSESSEE ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 9 WORKED OUT PLI OF THIS COMPANY ON SEGMENT BASIS AT 4.66%. THE T PO DET ERMINED ITS PLI AT 29.62%. IN THE OBJECTIONS BEFORE THE DRP, THE ASSESSEE CONTENDED THAT THE TPO MADE A WRONG COMPUTATION. THE DRP IN PARA 8.2 OF ITS DIRECTIONS ACCEPTED THE CONTENTION OF THE ASSESSEE . IT DIRECTED THE ADOPTION OF SEGMENTAL OPERATING PRO FIT OF ACROPETAL TECHNOLOGIES LIMITED AT RS. 11.83 CRORE AND THEN RE - COMPUTE THE PLI OF THIS COMPANY ACCORDINGLY. FOR G IVING EFFECT TO THE DIRECTIONS GIVEN BY THE DRP, THE AO REQUESTED THE TPO TO QUANTIFY THEIR IMPLICATIONS . IN RESPONSE, THE TPO , VIDE HIS LETTER DATED 05 - 01 - 2017 , RECOMPUTED OP/OC OF ACROPETAL TECHNOLOGIES LIMITED AT 20.44%. THE AO WHILE PASSING THE FINAL ASSESSMENT ORDER HAS REPRODUCED THE LETTER RECEIVED FROM THE TPO. THAT IS HOW , THE AO INCLUDED ACROPETAL TECHNOLOGIES LIMITED IN THE LIS T OF COMPARABLES BY TAKING ITS PROFIT MARGIN AT 20.44%. AGGRIEVED THEREBY, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 9. COMPARABILITY OR OTHERWISE OF ACROPETAL TECHNOLOGIES LIMITED IS NOT IN DISPUTE. THE QUARREL IS ONLY O N THE COMPUTATION OF ITS PLI . AS AGAINST THE ASSESSEES DETERMINATION OF OP/TC OF ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 10 THIS COMPANY AT 4.66%, THE TPO INITIALLY WORKED OUT IT AT 29.62%. THE DRP FOUND CERTAIN MISTAKES IN THE COMPUTATION DONE BY THE TPO WHICH HAVE BEEN HIGHLIGHTED IN PARA 8.2 OF ITS DIRECTIONS. AFTER TA KING NOTE OF THE MISTAKES COMMITTED BY THE TPO, THE DRP HELD THAT THE TPO HAS WRONGLY CALCULATED THE SEGMENTAL OPERATING PROFIT TO BE AT RS.32.5 CRORES, AS AGAINST THE CORRECT SEGMENTAL OPERATING PROFIT OF RS.11.83 CRORES. THE TPO IS THEREFORE, DIRECTED TO ADOPT SEGMENTAL OPERATING PROFIT OF THE COMPARABLE COMPANY ACROPETAL TECHNOLOGIES LIMITED AT RS.11.83 CRORE AND RE - COMPUTE THE PLI OF THIS COMPANY ACCORDINGLY . DESPITE THE CLEAR - CUT DIRECTIONS GIVEN BY THE DRP TO CONSIDER OPERATING PROFIT OF ACROPETAL TECHNOL OGIES LIMITED AT RS.11.83 CRORE , THE AO IN HIS FINAL ASSESSMENT ORDER TOOK THE AMOUNT OF THE OPERATING PROFIT AT RS.22,26,89,120 AND THUS, WORKED OUT ENHANCED OP/OC AT 20.44%. FROM THE ABOVE EXT RACTED PORTION OF THE DIRECTION GIVEN BY THE DRP IN THIS REGARD, IT IS VIVID THAT THE DRP ITSELF WORKED OUT THE AMOUNT OF OPERATING PROFIT OF ACROPETAL TECHNOLOGIES LIMITED AT RS.11.83 CRORE AND DIRECTED THE TPO TO ADOPT THIS FIGURE FOR RECOMPUTING ITS PLI. T HE AO/TPO ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 11 OVERLOOKED SUCH A CLEAR - CUT DIRECTION AND RECOMPUTED THE OPERATING PROFIT AT RS.22.26 CRORES. 10 . SECTION 144C(13) OF T HE ACT PROVIDES THAT: U PON RECEIPT OF THE DIRECTIONS ISSUED UNDER SUB - SECTION (5), THE ASSESSING OFFICER SHALL, IN CONFORMITY WITH THE DIRECTIONS, COMPLETE, NOTWITHSTAND ING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 153 OR SECTION 153B , THE ASSESSMENT WITHOUT PROVIDING ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE, WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED. . SUB - SECTION ( 13 ) IN UNAMBIGUOUS TERMS MANDATES THAT THE AO, UPON RECEIPT OF THE DIRECTIONS FROM THE DRP, SHALL COMPLETE THE ASSESSMENT IN CONFORMITY WITH THE DIRE CTIONS . THERE IS NO CHOICE WITH THE AO TO FOLLOW OR NOT TO FOLLOW THE DIRECTION RENDERED BY THE DRP U/S 144C(5). SUCH A DIRECTION IS BINDING IN NATURE UPON THE AO , WHO IS SUPPOSED TO FOLLOW THE SAME IN LETTER AND SPIRIT. SINCE IN THE INSTANT CASE , THE DRP CATEGORICALLY DIRECTED TO INCLUDE THE AMOUNT OF OPERATING PROFIT OF ACROPETAL TECHNOLOGIES LIMITED AT RS.11.83 CRORE, IN OUR CONSIDERED OPINION, THE AO / TPO WENT ON A W RONG PREMISE IN TINKERING WITH SUCH A FIGURE AND SUBSTITUTING IT WITH A ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 12 DIFFERENT F IGURE. IN VIEW OF THE FACT THAT THE AO WAS BOU ND BY THE DIRECTIONS OF THE DRP, WE VACATE THE IMPUGNED ORDER TO THIS EXTENT IN SUBSTITUTING THE AMOUNT OF OPERATING PROFIT OF ACROPETAL TECHNOLOGIES LIMITED AT RS.22.26 CRORES , WHICH IS HEREBY ORDERED T O BE A DOPTED AS RS.11.83 CRORE AS WAS DIRECTED BY THE DRP. ( II ) COMP - U - LEARN TECH INDIA LIMITED (CTIL) 11 . THE ASSESSEE SELECTED THIS COMPANY AS COMPARABLE. THE TPO EXCLUDED IT BY RECORDING ON PAGE 14 OF HIS ORDER THAT THE COMPANY IS IN BPO SECTOR AND SEGMENTAL ANAL YSIS IS NOT AVAILABLE AND THEN ON PAGE 26 BY FINDING IT TO BE FUNCTIONALLY DIFFERENT. THE ASSESSEE RAISED OBJECTION BEFORE THE DRP AGAINST EXCLUSION OF THIS COMPANY BY THE TPO, WHICH , IN TURN, FOUND IT TO BE COMPARABLE ON STANDALONE BASIS. THE AO/ TPO WER E DIRECTED TO INCLUDE COMP - U - LEARN TECH INDIA LIMITED IN THE SET OF COMPARABLES SUBJECT TO SATISFACTION OF OTHER FILTERS APPLIED BY HIM. WHILE GIVING EFFECT TO THE DIRECTIONS GIVEN BY THE DRP, THE AO IN THE FINAL ASSESSMENT ORDER AGAIN EXCLUDED IT BY OPIN ING THAT IT WAS NOT SATISFYING THE E MPLOYEES COST TO SALES FILTER. ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 13 12 . HAVING HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE DRP IN NO UNCERTAIN TERMS HELD IN PARA 7.20 OF ITS DIRECTIONS THAT IN VIEW OF THE ABOVE DISCUSSION, THE COMPANY, ON STANDALONE BASIS, IS HELD TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. HENCE, THE AO / TPO IS DIRECTED TO INCLUDE COMP - U - LEARN TECH INDIA LIMITED IN THE SET OF COMPARABLES, SUBJECT TO SATISFACTION OF OTHER FILTERS BY HIM . THE AO WHILE PASSING THE FINAL ASSESSMENT ORDER DID NOT INCLUDE THIS COMPANY BY OBSERVING THAT IT WAS NOT SATISFYING THE E MPLOYEES COST TO SALES FILTER, WHICH IN THE CASE OF ASSESSEE STOOD AT 62.29%. ON A CAREFUL ANALYSIS OF THE FINDING GIVEN IN PA RA 7.20 OF THE DIRECTIONS GIVEN BY THE DRP, WHICH IS BINDING ON THE AO IN TERMS OF SECTION 144C(13) OF THE ACT, IT IS CLEAR THAT COMP - U - LEARN TECH INDIA LIMITED WAS HELD TO BE FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY ON STANDALONE BASIS. THUS, THE FUNCTIONAL SIMILARITY BETWEEN THE ASSESSEE AND COMP - U - LEARN TECH INDIA LIMITED ON STANDALONE BASIS WENT BEYOND ANY FURTHER VERIFICATION AT THE AOS END. IT IS THE LAST SENTENCE OF THE DIRECTIONS AT PARA 7.20 OF THE DRP, WHICH HAS CREATED CONFUSION I N THE MIND OF THE ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 14 AO. IN FACT, T HE AO/ TPO W ERE DIRECTED TO INCLUDE COMP - U - LEARN TECH INDIA LIMITED IN THE SET OF COMPARABLES SUBJECT TO SATISFACTION OF OTHER FILTERS APPLIED BY HIM. IT IS ON MIS INTERPRETATION OF THIS PART OF THE DIRECTION THAT THE AO PROCEEDE D TO APPLY THE FILTER OF E MPLOYEES COST TO SALES IN REACHING THE CONCLUSION THAT TH IS COMPANY WAS NOT COMPARABLE, WHICH IN OUR CONSIDERED OPINION CANNOT BE A PPROVED. 13 . THERE ARE TWO REASONS. THE FIRST IS T O UNDERSTAND THE NATURE OF THE DIRECTION OF THE DRP ABOUT S ATISFY ING OTHER FILTERS APPLIED BY AO/TPO . IT WAS A COMPARABLE CHOSEN BY THE ASSESSEE, WHICH WAS EXCLUDED BY THE TPO ON ACCOUNT OF FUNCTIONAL DISSIMILARITY. SINCE THE COMPANY WAS HELD TO BE FUNCTIONALLY DISSIMILAR, THERE WAS NO OCCASION FOR THE TPO TO APPLY OTHER FILTERS FOR THE PURPOSES OF INCLUSION IN THE LIST OF COMPARABLES. IT GOES WITHOUT SAYING THAT ONLY WHEN THE FUNCTIONAL SIMILARITY IS ESTABLISHED THAT THE TURN OF APPLYING OTHER FILTERS COME. IF A COMPANY IS HELD TO BE FUNCTIONAL DIFFERE NT AT THE THRESHOLD , THERE CAN BE NO QUESTION OF TESTING THE COMPARABILITY ON THE BASIS OF OTHER FILTERS. ONCE THE DRP HELD THE COMPANY TO BE FUNCTIONALLY SIMILAR, THE LEFTOVER EXERCISE OF THE ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 15 TPO OF APPLYING THE FILTERS , WAS TO BE CARRIED OUT BY THE TPO . THE NATURAL COROLLARY IS THAT ONLY THOSE FILTERS, WHICH WERE APPLIED BY THE TPO AT THE TIME OF PASSING THE ORDER U/S 92CA(3) OF THE ACT, COULD HAVE BEEN CONSIDERED ANENT TO THIS COMPANY AT THE TIME OF GIVING EFFECT TO THE DIRECTIONS GIVEN BY THE DRP. 1 4 . WE HAVE EXAMINED THE FILTERS APPLIED BY THE TPO THAT HAVE BEEN RECORDED IN THE SHOW CAUSE NOTICE DATED 04 - 12 - 2015 ISSUED BY THE TPO, A COPY OF WHICH IS AVAILABLE ON PAGE 182 ONWARDS OF PAPER BOOK. PARA 4.2 DISCUSSES THE DETERMINATION OF ALP BY THE A SSESSEE IN ITS TP STU DY REPORT. PARA 5 DEALING WITH THE S ELECTION OF COMPARABLES ALSO STIPULATES THE FILTERS APPLIED BY THE ASSESSEE TO ACCEPT OR REJECT A COMPANY AS COMPARABLE. A SUMMARY OF S EARCH STRATEGY ON PROWESS HAS BEEN GIVEN THROUGH 9 STEPS, NONE OF WHICH TALKS OF E MPLOYEES COST TO SALES FILTER. THEN , A SUMMARY OF SEARCH STRATEGY ON CAPITALINEPLUS HAS BEEN GIVEN IN 10 STEPS, AGAIN NONE OF WHICH TAKES NOTE OF E MPLOYEES COST TO SALES FILTER. PARA 10 OF THE SHOW CAUSE NOTICE REFERS TO THE FILTERS A DOPTED BY THE TPO. T HERE ARE 8 FILTERS UNDER PROWESS DATABASE, NONE OF WHICH NOTIFIES E MPLOYEES COST TO SALES FILTER. THEN THERE ARE 8 FILTERS EACH UNDER ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 16 CAPITALINEPLUS DATABASE AND ACE DATABASE . A GAIN THERE IS NO REFERENCE TO ANY E MPLOYEES COST TO SALES FILTER. THUS, IT IS ESTABLISHED THAT NEITHER THE ASSESSEE NOR THE TPO APPLIED THE E MPLOYEES COST TO SALES FILTER IN ACCEPTING OR REJECTING THE COMPARABLES. ONCE THIS FILTER WAS NOT APPLIED DURING THE COURSE OF PROCEEDINGS CULMINATING INTO THE PASSING OF THE ORDER U/S 92CA(3) OF THE ACT , IT WAS IMPERMISSIBLE TO THE TPO TO DEVI SE A NEW FILTER AT THE TIME OF GIVING EFFECT TO THE DIRECTIONS GIVEN BY THE DRP , ULTIMATELY LEADING TO OVERTURN ING THE DIRECTION FINDING COMP - U - LEARN TECH INDIA LIMITED AS COMPARABLE ON FUNCTIONAL BASIS. 15 . THE SECOND REASON IS LEGAL UNSUSTAINABILITY OF THE ARGUMENT OF THE LD. DR THAT THE DIRECTION GIVEN BY THE DRP AS TO THE SATISFACTION OF OTHER FILTERS TO BE APPLIED BY THE AO/TPO SHOULD NOT BE READ AS CONFINED TO THE FILTERS INI TIALLY CONSIDERED BY THE TPO, BUT BE UNDERSTOOD AS EXTENDING TO THE NEW FILTERS ALSO , AS HAS BEEN DONE BY THE AO/TPO IN THIS CASE. 16 . WE ARE UNABLE TO ACCORD IMPRIMATUR TO SUCH A PROPOSITION. IT IS AXIOMATIC THAT PURSUANT TO ANY DIRECTION RENDERED BY THE DRP, THE MATTER COMES BACK TO THE AO FOR GIVING EFFECT TO THE SAME. ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 17 INSOFAR AS THE DIRECTIONS RELATING TO THE TRANSFER PRICING ADJUSTMENTS ARE CONCERNED, THE AO REQUESTS THE TPO FOR DOING THE NEEDFUL. THE TPO, WITHOUT GIVING ANY FURTHER OPPORTUNITY OF HEARING TO THE ASSESSEE, GIVES EFFECT TO SUCH DIRECTIONS AND RECOMPUTES THE ALP OF THE INTERNATIONAL TRANSACTIONS AND SENDS HIS REPORT TO THE AO DETERMINING THE AMOUNT OF TRANSFER PRICING ADJUSTMENT, IF ANY. THEREAFTER, THE AO PASSES THE FINAL ASSESSMENT O RDER GIVING EFFECT TO THE DIRECTIONS OF THE DRP. IN THIS ROUND OF PROCEEDINGS, THE ASSESSEE IS NOT REQUIRED TO BE AFFORDED ANY FURTHER OPPORTUNITY OF HEARING EITHER BY THE TPO OR THE AO AS HAS BEEN SPECIFICALLY ENUMERATED IN SECTION 144C(13) REQUIRING COMP LETION OF THE ASSESSMENT `WITHOUT PROVIDING ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THERE IS A RATIONALE BEHIND SUCH A MANDATE OF SUB - SECTION (13), WHI CH ON A HARMONIOUS CONSTRUCTION COMPLIMENTS THE MANDATE OF SUB - SECTION (8) OF SECTION 1 44C OF THE ACT DEFINING THE SCOPE OF DIRECTIONS TO BE GIVEN BY THE DRP. SUB - SECTION (8) EXPLICITLY PROVIDES THAT THE DRP MAY CONFIRM, REDUCE OR ENHANCE THE VARIATIONS PROPOSED IN DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 18 UNDER SUB - SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT ORDER . THERE IS NO AMBIGUITY IN THE LANGUAGE OF THE PROVISION IN UNMISTAKABLY STATING THAT THE DRP CAN SUO MOTU CONFIRM, REDUCE OR ENHANCE THE VARIATIONS PROPOS ED IN DRAFT ORDER BUT NOT DIRECT THE AO/TPO TO MAKE ANY FURTHER ENQUIRY BEFORE PASSING THE ASSESSMENT ORDER GIVING EFFECT TO ITS DIRECTIONS. IN OTHER WORDS, A FRESH EXERCISE OF THE ASSESSMENT BY THE AO, AT THE INSTANCE OF THE DRP REMANDING THE MATTER, IS PROHIBITED. THE RAISON DETRE FOR CURBING SUCH A POWER OF THE DRP IS TO CURTAIL INITIATING THE ENTIRE PROCESS ALL OVER AGAIN BY WHICH THE AO MAY HAVE TO NOTIFY THE DRAFT ORDER PURSUANT TO THE TPOS FRESH DETERMINATION OF THE ISSUE GIVING EFFECT TO THE DIRE CTION AND ONCE AGAIN THE MATTER COMING UP BEFORE THE DRP AND THEN THE PASSING OF THE FINAL ASSESSMENT ORDER. ESSENCE OF THE PROVISION IS THAT THE DRP SHOULD DO ITSELF WHATEVER IT WANTS TO DO WITH THE MATTERS CONCERNING WITH THE ASSESSMENT, THAT IS, CONFIRM , REDUCE OR ENHANCE THE VARIATIONS BUT SHOULD NOT DIRECT THE AO/TPO TO RE - EVALUATE THE CASE THEREBY CAUSING PREJUDICE TO THE ASSESSEE. IF FRESH ISSUES ARE ALLOWED TO BE RAKED UP WHILE GIVING EFFECT TO THE DIRECTIONS OF THE ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 19 DRP, OBVIOUSLY, WITHOUT GIVING OP PORTUNITY OF HEARING TO THE ASSESSEE AS PER THE MANDATE OF SUB - SECTION (13), IT WILL LEAD TO SERIOUS IMPAIRMENT OF THE RULE OF AUDI ALTERAM PARTEM . 17 . ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE DRP WAS CONSCIOUS OF THE PURVIEW OF ITS POWER U/S 144C(8). THAT IS WHY IT DIRECTED `SATISFACTION OF OTHER FILTERS APPLIED BY HIM. SUCH DIRECTION REFERS TO PAST TENSE QUA THE APPLICATION OF FILTERS AND DID NOT EMPOWER THE AO/TPO TO RESORT TO NEW FILTERS, A COURSE OF ACTION WHICH WOULD NOT HAVE SATISFIED THE COMMAND OF SUB - SECTION (8). WE, ERGO, HOLD THAT THE DIRECTION OF THE DRP IS CLEAR THAT CTIL LTD WAS FUNCTIONALLY COMPARABLE BUT ITS INCLUSION WAS LEFT TO BE DECIDED ON THE BASIS OF THE FILTERS ALREADY APPLIED BY THE TPO. SINCE THE FILTER OF E MPLOYEE COST TO SALES WAS NOT APPLIED BY THE TPO AT THE TIME OF PASSING HIS ORDER U/S 92CA(3) OF THE ACT, WE HOLD THAT THE AO/TPO WERE NOT JUSTIFIED IN APPLYING IT AND EX CONSEQUENTI JEOPARDISING THE DIRECTION OF THE DRP THAT FOUND CTIL LTD. TO BE FUNCTION ALLY COMPARABLE. THIS COMPANY IS ERGO DIRECTED TO BE INCLUDED IN THE LIST OF COMPARABLES. ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 20 1 8 . WE THEREFORE, SET ASIDE THE ORDER AND REMIT THE MATTER TO THE FILE OF THE AO FOR A FRESH DETERMINATION OF ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF ` R ENDERING OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES IN THE LIGHT OF OUR OBSERVATIONS ON THE THREE COMPANIES DISCUSSED ABOVE. NEEDLESS TO S AY , THE ASSESSEE WILL BE PROVIDED AN OPPORTUNITY OF BEING HEARD. 19 . IN THE RESULT, THE APPEAL IS ALLOWED FOR S TATISTICAL PURPOSES . ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH NOVEM BER , 2020 . SD/ - SD/ - ( S.S.VISWANETHRA RAVI ) ( R.S.SYAL ) JUDICIAL MEMBER VICE PRESIDENT PU NE ; DATED : 27 TH NOVEM BER , 2020 GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE DRP - 3 , MUMBAI 4 . 5. THE CONCE RNED CIT , PUNE , , C / DR C , ITAT, PUNE 6 . / GUARD FILE / BY ORDER, / / TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE ITA NO . 741 /PUN/ 20 1 7 NETSCOUT SYSTEMS INDIA PVT. LTD. 21 DATE 1. DRAFT DICTATED ON 2 5 - 1 1 - 2020 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 2 6 - 1 1 - 2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *