TELCORDIA TECHNOLOGIES INDIA P.LTD, MUMBAI V. ASST CIT CIR 3(3), MUMBAI

ITA 7821/MUM/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62321 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 20-03-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 18-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: BIPIN PAWAR
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E , MUMBAI BEFORE : SHRI P. M. JA GTAP, ACCOUNTANT MEMBER & SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.7821 /MUM/2011 ASSESSMENT YEAR: 2007-2008 TELCORDIA TECHNOLOGIES INDIA P. LTD., 93B MITTAL COURT, NARIMAN POINT, MUMBAI-4010 021. PAN NO.AACCT3013B ACIT, CIR 3(3), MUMBAI. APPELLANT VS. RESPONDENT APPELLANT BY : MR. BIPIN PAWAR RESPONDENT BY : MR. AJIT KUMAR JAIN DATE OF HEARING : 20 TH MARCH 2012 DATE OF PRONOUNCEMENT : 11 TH MAY 2012 O R D E R PER AMIT SHUKLA (J.M.) : THE PRESENT APPEAL IS DIRECT ED AGAINST THE ORDER DATED 19-10- 2011, PASSED BY THE ASSISTANT COMMI SSIONER OF INCOME TAX, CIRCLE 3(3), MUMBAI UNDER SECTION 143(3) READ WITH SECTION 144C(13) FOR THE ASSESSMENT YEAR 2007-2008. IN THE VARIOUS GROUNDS OF APPEAL, THE ASSESSEE HAS RAISED FOLLOWING ISSUES :- I. ADJUSTMENT OF INTERNATIONAL TRANSACTIONS OF FEES FOR SOFTWARE DEVELOPMENT AND RELATED SERVICES AT ` .88,49,974/-: II) THE APPLICATION OF DEPRECIA TION @60% ON UPS INSTEAD OF 15%; III) COMPUTATION OF INTEREST LIABILITY FOR SUM OF ` .46,825/- UNDER SECTION 234 C. ITA NO : 7821/MUM/2011 2 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD FIRST ISSUE IS WITH REGARD TO ADJUSTMENT OF INTERNATIONAL TRANSACTIONS OF FEES FOR SO FTWARE DEVELOPMENT AND RELATED SERVICES AT ` .88,49,974/-. 2. THE FACTUAL MATRIX RELATING TO FIRST ISSUE IS THAT THE ASSESSEE WHICH IS TELCORDIA TECHNOLOGIES IN DIA PVT. LTD., IS WHOLLY OWNED SUBSIDIARY OF TELCORDIA TECHNOLOGIES INC. USA, WHICH IS MAINLY ENGAGED IN PROVIDING VARIOUS KINDS OF SOFTWARE AND SERVICES FOR INTERNET PROTOCOL, WIRE LINE, MOBILITY AND CABLE NETWORKS, HELPING VARIOUS COMMUNICATIONS COMPANIES. THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF MARKETING PRODUCTS AND TECHNICAL SUPPORT SERVICES AND SOFTWARE DEVELOPMENT RELATED SERVICES IN INDIA. FOR PROVIDING THE SAID SERVICES, THE ASSESSEE EARNED A COMPENSATION WHICH EQUALLED TO ITS TOTAL OPERATING CO ST OF PROVIDING THE SERVICES PLUS A MARK-UP OF 15%. LOOKING TO THE NATUR E OF ITS WORKING, THE ASSESSEE COMPANY CAN BE TERMED AS CAPTIVE SERVICE PROVIDER HAVING LEAST COMPLEX OPERATIONS AND FOR LESSER SHARE OF RISKS. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE COM PANYS INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATE ENTERPRISES (AES) WERE AS FOLLOWS :- SL.NO. DESCRIPTION OF THE TRANSACTIONS AMOUNT(RS.) 1. IMPORT OF CAPITAL GOODS 1,88,85,183 2. FEES FOR MARKETING SERVICES 5,36,48,151 3. FEES FOR TECHNICAL SUPPORT SERVICES 6,68,54,541 4. FEES FOR SOFTWARE DEVELOPMENT AND RELATED SERVICES 10,47,45,490 5. REIMBURSEMENT OF EXPENSES 2,90,83,299 6. RECOVERY OF EXPENSES 3,17,66,999 ITA NO : 7821/MUM/2011 3 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD 2.1 FOR ESTABLISHING THE ARMS LENGTH PRICE RELATING TO SOFTWARE DEVELOPMENT AND RELATED SERVICES, THE ASSESSEE IN THE TP STUDY OF THE RELEVANT FINANCIAL YEAR ADOPTED THE TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE MET HOD. AS PER THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE, IT HAD IDENTIFIED 18 COMPARABLE COMPANIES ENGAGED IN THE SOFTWARE DEVELOPMENT SE RVICES AND THE OPERATING PROFIT MARGIN WORKED OUT IN THE FOLLOWING MANNER :- NATURE OF INTERNATIONAL TRANSACTIONS MOST A PPROPRIATE METHOD PROFIT LEVEL INDICATOR TELCORDIA INDIAS PRICE/ OPERATING MARGIN COMPARABLE S PRICE/ OPERATING MARGIN MARKETING SERVICES TRANSACTION NET MARGIN METHOD (TNMM) RETURN ON TOTAL COSTS 13.27% 11.52% TECHNICAL SUPPORT TNMM RETURN ON TOTAL COSTS 9.90% 5.65% SOFTWARE DEVELOPMENT AND RELATED SERVICES TNMM RETURN ON TOTAL COSTS 15% 12.67% 3. THE ASSESSING OFFICER REFERRED THE MATTER OF DETERMINING THE ARMS LENGTH PRICE (ALP) TO THE TRANS FER PRICING OFFICER (TPO). DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, THE TPO REJECTED THE COMPARABLES ADOPTED BY THE ASSE SSEE COMPANY AND DIRECTED TO SUBMIT MARGIN OF COMPARABLE COMPANIES USING ONLY THE RELEVANT YEARS DATA. BASED ON THAT, THE ASSESSEE SU BMITTED RESULTS OF THE COMPARABLE COMPANIES USING FINANCIAL YEAR 2006-2 007 DATA. THE ARITHMETIC MEAN OF SUCH COMPARABLE ENTITIES WORK ED OUT AT 10.67% AS AGAINST 15% SHOWN BY THE ASSESSEE. THE TPO TH IS TIME AGAIN NOT SATISFIED OF THE ITA NO : 7821/MUM/2011 4 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD COMPARABLE COMPANIES ADOPTED BY THE ASSESSEE CONDUCTED A FRESH COMPARABILITY ANALYSIS AND SELECTED 28 COMPANIES WHICH ALSO INCLUDED THREE COMMON COMPANIES ALSO IDENTIFIED BY THE ASSESSEE. THE ARITHMETIC MEAN OF THE 28 COMPANIES WAS ARRIVED AT 27.96%. BASED ON THIS, THE ADJUSTMENT TO ALP VALUE WORKED OUT TO `. 11,65,46,468/- BY THE TPO AS AGAINST THE ALP OF `. 10,47,45,490/- SHOWN BY THE ASSESSEE IN ITS ACCOUNT. THUS, THE DIFFERENCE OF `. 1,18,00,978/- WAS PROPOSED BY THE ASSESSING OFFICER TO BE ADDED TO THE ASSESSEES INCOME. 4. AGGRIEVED BY THE SAID PROPO SAL, THE ASSESSEE APPROACHED THE DRP (DISPUTES RESOLUTION PANEL) AND FILED ITS OBJECTIONS. THE DRP MOSTLY REJECTED THE OBJECTIONS OF THE ASSESSEE AND DIRECTED THE TPO TO VERIFY THE COMPARABLES IN RES PECT OF THREE ENTITIES NAMELY, BODHTREE CONSULTING LTD. (SEG.), HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. AND TVS INFOTECH LTD.. THE OTHER COMPANIES AND THE RESULT OF OPERATING PROFIT MARGINS WERE CONFIR MED BY THE DRP. AFTER GIVING EFFECT TO THE DRPS DIRECTIONS TO THE COMPARABLES, THE ASSESSING OFFICER FINALLY TOOK THE ARITHMETIC MEAN OF 27 COMPARABLES WHICH WORKED OUT TO 24.72%. BASED ON THIS, THE ARMS LENGTH PRICE FOR INTERNATIONAL TRANSACTION FROM THE AES WAS DETERMINED AFTER MAKING ADJUSTMENT OF `. 88,49,974/-, WHICH WAS ADDED TO T HE INCOME OF THE ASSESSEE. AGAINST THIS ADDITION, THE ASSESSEE HAS COME BEFORE US, IN THIS APPEAL. ITA NO : 7821/MUM/2011 5 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD 5. LEARNED AR APPEARING ON BEHALF OF TH E ASSESSEE SUBMITTED THAT OUT OF 27 COMPARABLE COMPANIES, 19 OF SUCH ENTITIES ARE NOT CONTESTED AND THE PERCENTAGE OF OPERATING PROFIT SHOWN BY THEM ARE ACCEPTED. HOWEVER, FOR THE BALANCE 8 COMPANI ES, THE LEARNED AR SUBMITTED HIS EXHAUSTIVE OBJECTIONS AS TO WHY SU CH COMPARABLE CANNOT BE TAKEN INTO CONSIDERATION. BASED ON SUCH OBJECTIONS, THE LEARNED AR FINALLY ANALYZED THE ARITHMETIC MEAN OF ALL THE COMPARABLES AT 18.38% AS AGAINST 15%, DECLARED BY THE ASSE SSEE IN THE FOLLOWING MANNER :- SL. NO. NAME OF COMPANY OPERATING PROFIT/ TOTAL COST RATIO (FY 2006-07) AS PER DRP OPERATING PROFIT/ TOTAL COST RATIO (FY 2006-07) AS PER ASSESSEE 1. ACCEL TANSMATIC LTD.(SEGMENT) 21.11% 21.11% 2. DATAMATICS LTD. 7.27% 7.27% 3. E-ZEST SOLUTIONS LTD 36.12% 36.12% 4. GEOMETRIC LTD.(SEG) 10.71% 10.71% 5. IGATE GLOBAL SOLUTION LTD. 7.49% 7.49% 6. ISHIR INFOTECH LTD 30.12% 30.12% 7. LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 15.75% 15.75% 8. MEDIASOFT SOLUTIONS LTD 3.66% 3.66% 9. MEGASOFT LTD(SEG) 23.11% 23.11% 10. MINDTREE LTD 16.90% 16.90% 11. PERSISTENT SYSTEMS LTD 24.52% 24.52% 12. QUINTEGRA SOLUTIONS LTD 12.56% 12.56% 13. RS SOFTWARE(IND.)LTD 13.47% 13.47% 14. S ASKEN COMMUNICATION T ECHNOLOGIES LTD (SEG) 22.16% 22.16% 15. SIP TECHNOLOGIES & EXPORTS LTD 13.90% 13.90 ITA NO : 7821/MUM/2011 6 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD 16. THIRDWARE SOLUTIONS LTD 25.12% 25.12% 17. HELIOS & MATHESON INFORMATION TECH. LTD. 36.33% 36.33% 18. KALS INFORMATION SYSTEMS LTD (SEGMENT 30.55% 30.55% 19. B ODHTREE CONSULTING LTD 9.61% 9.61% 20. RSYSTEMS INTERNATIONAL LTD (SEGMENT) 15.07% 7.00% 21. LUCID SOFTWARE LTD 54.85% -- 22. CELESTIAL LABS LTD 58.35% -- 23. INFOSYS TECHNOLOGIES LTD 40.30% -- 24. WIPRO LTD.(SEGMENT) 33.65% -- 25. FLEXTRONICS SOFTWARE SYSTEMS LTD.(SEGMENT 25.31% -- 26. TATA ELXSI LTD(SEGMENT) 26.51% -- 27. AVANI CIMCON TECHNOLOGIES LTD. 52.59% -- ARITHMETIC MEAN MARGIN OF COMPARABLES 24.72% 18.38% ASSESSEES MARGIN 15.00% SL.NO.20 TO 27 HAVE BEEN OBJECTED TO BY THE ASSESSEE . 6 . WE NOW PROCEED TO DEAL WITH THE OBJECTIONS OF THE LEARNED AR WITH REGARD TO THE AFORESAID 8 COMPARABLE ENTITIES AND ALSO THE OBJECTIONS OF THE LEARNED CIT DR. (I) R SYSTEMS INTERNATIONAL LTD (SEGMENT) : 6.1 THIS ENTITY HAS BEEN ACCEPTED TO BE TAKEN FOR COMPARABLE ANALYSIS, HOWEVER, THE LEARNED AR HAS OBJECTED TO THE OPERATING PROFIT OF 15.07% AS TAKEN BY THE TPO AS NOT CORRECT AND SUBMITTED THAT IT SHOULD BE TAKEN AT 7% ON THE GROUND THAT, PROVISION FOR DOUBTFUL DEBT, ITA NO : 7821/MUM/2011 7 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD AND DOUBTFUL ADVANCES ARE PART OF NORMAL BUSINESS OPERATION AND IT SHOULD NOT BE REDUCED FROM THE OPER ATING EXPENSES AS DONE BY THE TPO AND IF THIS IS ADDED TO THE OPER ATING COST THEN THE WORKING WOULD BE AS FOLLOWS :- PARTICULARS AS PER TPO AS PER APPELLANT SEGMENT OPERATING REVENUES (A) 112,01,72,651 112,01,72,651 SEGMENT DIRECT EXPENSES (B) 100,75,62,812 100,75,62,812 APPORTIONED COMMON EXPENSES (C 3,93,34,570 3,93,34,570 LESS : PROPORTIONATE NON- OPERATING EXPENSE (D) PROVISION FOR DOUBTFUL DEBTS : RS.5,08,06,788 PROVISION FOR DOUBTFUL ADVANCES: RS.3,39,47,774 7,33,93,613 SEG.OPERATING EXPENSES (E=B+C-D) 97,35,03,769 104,68,97,382 SEG. OPERATING PROFIT (F=A-E) 14,66,68,882 7,32,75,269 OPERATING PROFIT TO TOTAL COST (F/E) 15.07% 7.00% THE LEARNED AR ALSO OBJECTED THAT T HE FIGURE OF DOUBTFUL DEBTS TAKEN AT `. 5,08,06,788/- SEEMS TO BE, PRIMA FACIE , WRONG BECAUSE AS PER THE BALANCE SHEET OF THE SAID COMPANY THE FIGURE OF DOUBTFUL DEBTS IS `. 4,49,82,345/-. IN SUPPORT OF THIS, HE DREW OUR ATTENTION TO PAGE 137 OF THE PAPER BOOK. ON THE OTHER HAND, LEARNED DR SUBMITTED THAT DEBTS AND ADVANCES CANNOT BE PART OF OPER ATING EXPENSES AND CONSEQUENTLY OPERATING PROFIT, HENCE, THEY HAVE BEEN RIGHTLY EX CLUDED BY THE TPO. (II) LUCID SOFTWARE LIMITED : ITA NO : 7821/MUM/2011 8 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD 6.2 THE CONTENTION OF THE LEARNED AR IS THAT, THE LUCID SOFTWARE COMPANY THOUGH DESCRIBED AS SOFTWARE DEVELOPMENT COMPANY, IS MAINLY DEALING IN SELLING OF SOFTWARE PRODUCTS, WHICH IS REFLECTED IN THE WEBSITE OF THE SAID COMPANY AND DEVELOPS A SOFTWARE PRODUCT CALLED MULUAM, WHICH IS USED IN CIVIL ENGI NEERING STRUCTURES. HE SUBMITTED THAT AS PER THE DETAILS GIVEN, THE COMPANY HAS EMPLOYED THE CAPITAL OF `. 1,18,57,145/-, OUT OF WHICH THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF WAS `. 47,14,783/-, WHICH COMES TO 39. 76% OF THE CAPITAL. THE SAID PARTY IS A PRODUCT SOFTWARE COMPANY, DIFFERENT FROM ASSESSEES NATURE OF ACTIVITIES WHICH IS PUR ELY ENGAGED IN SOFTWARE SERVICES. THE SOFTWARE PRODUCT COMPANY IS DIFFERENT FROM SOFTWARE DEVELOPMENT COMPANY AS THE MARGIN OF PROFIT IN SALE OF PRODUCT IS VERY HIGH, HENCE, IT CANNOT BE TAKEN AS A COMPARABLE CASE. ALTERNATIVELY, HE SUBMITTED THAT THE TPO HAS WRONGLY IGNORED, DEPRECIATION AND AMORTISATION OF THE SOFTWARE DEVELOPMENT EXPENSES AND EXCLUDED THE INTEREST FROM THE OPERATING PROFIT. THE ANALYSIS OF THE OPERATING PROFIT VIS--VIS THE ANALYSIS OF TPO WAS GIVEN AS UNDER :- PARTICULARS AS PER TPO AS PER APPELLANT OPERATING REVENUE 16,992,078 16,992,078 LESS : SOFTWARE SERVICES AND ADMINISTRATIVE EXPENSES 11,507,896 11,507,896 INTEREST (3,99,799) - FOREIGN EXCHANGE FLUCTUATION (134, 783) (134, 783) DEPRECIATION NOT CONSIDERED 995,484 A MORTISATION OF SOFTWARE DEVELOPMENT EXPENSES NOT CONSIDERED 1,866,703 TOTAL OPERATING EXPENSES 1,09,73,224 14,235,300 OPERATING PROFIT 60,18,854 2,756,778 ITA NO : 7821/MUM/2011 9 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD OPERATING MARK UP ON COST 54.85% 19.37% THUS, IF THESE EXPENSES ARE CONS IDERED THEN OPERATING PROFIT WILL COME DOWN TO 19.37%. (III) CELESTIAL LABS LTD. : 6.3 LEARNED AR SUBMITTED THAT THIS COMPANY IS MAINLY ENGAGED FOR DEVELOPMENT OF PRODUCTS IN THE FIELD OF BIO-TECHNOLOGY, PHARMACEUTICALS AND HEALTHCARE INDUSTRIES. IT DEVELOPS HIGH-END TOOLS THROUGH R & D TEAM FOR DRUG DISCOVERY . HE OBJECTED THAT THIS COMPANY CANNOT BE CONSIDERED AS A COM PARABLE FOR BENCH-MAKING AS ITS FUNCTIONS ARE DIFFERENT FROM THE ASSE SSEE WHICH IS INTO PURELY SOFTWARE SERVICES. ON THE OTHER HAND, LEARNED CIT DR PROVIDED US THE EXTRACT OF ANNUAL REPORT OF THE COMPANY AS F OUND IN THE PUBLIC DOMAIN, WHEREIN THE PROFIT-LOSS ACCOUNT REVEALS THAT THE INCOME FROM SALE OF SERVICE WAS `. 13,62,00,676/- WHEREAS THE SALE ON PRODUCTS WAS ONLY `. 50,75,000/- ON 31 ST MARCH, 2007, WHEREAS ON 31-3-2006, THERE WAS NO INCOME FROM PRODUCTS. THUS, ITS MAIN OPERATIONS WAS FOR SERVICES AND IS A PERFECT COMPARABLE FOR BENCH MARKING. (IV) INFOSYS TECHNOLOGIES LTD (INFOSYS). : 6.4 LEARNED AR STRONGLY OBJECTED TO INCLUDE THE AFORESAID ENTITY AS COMPARABLE PARTY ON THE GROUND THAT INFOSYS IS A VERY LARGE COMPANY AND IS OPERATING AS A FULL-FLEDGED ENTERPRISE AS COMPARED TO THE ASSESSEE, WHICH IS A CAPTIVE SE RVICE PROVIDER AND OPERATING AT A MINIMAL RISK. BASED ON THE ANNUAL REPORT OF THE INFOSYS, HE SUBMITTED ITA NO : 7821/MUM/2011 10 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD THAT IT HAS SUBSTANTIAL INTANGIBLE ASSETS WHICH HAVE BEEN VALUED BY THE COMPANY AT `. 69,552 CRORES WHICH COMPRISES OF BRAND VALUE ITSELF AT `. 22,915 CRORES. IT IS A NO.2 SOFTWARE SERVICE EXPORTER HAVING SUBSTANTIAL INVESTMENTS IN INTANGIBLES, ECONOMIC VALUE ADDED AND HAS A HIGH FOCUS ON R&D. ITS OPERATING REVENUE GOES ON A STAGGERING FIGURE AND IT OWNS PRODUCTS WHICH ARE SOLD ON PREMIUM ALL OVER THE WORLD. A COMPARISON OF FUNCTION AND PROFILE HAS BEEN GIVEN TO DEMONSTRATE THAT IT IS NOT COMPARABL E AT ALL IN THE FOLLOWING MANNER :- BASIC/ PARTICULAR INFOSYS TECHNOLOGY LIMITED APPELLANT RISK PROFILE OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATES AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AE NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE-ENGINEERING AND MAINTENANCE, SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. SOFTWARE DEVELOPMENT SERVICES REVENUE RS.13145 CRORES RS.10.47 CRORES OWNERSHIP OF BRANDED/PROPRIE TARY PRODUCTS. DEVELOPS/OWNS PROPRIETARY PRODUCT LIKE FINACLE. ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS REVENUE FROM SALE OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) AS PER THE ANNUAL REPORT OF THE COMPANY, IT HAS INTANGIBLES ASSETS WORTH APPROX., RS.89,069 CRORES FOR THE PERIOD ENDED MARCH 31, 2007 N.A. EXPENDITURE ON A DVERTISING/SALE S PROMOTION AND BRAND BUILDING RS.69 CRORES RS. NIL (AS THE 100% SERVICES ARE TO AE) EXPENDITURE ON RESEARCH & DEVELOPMENT RS.167 CRORES RS.NIL HE ALSO RELIED UPON THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF AGNITY INDIA TECHNOLOGIES PRIV ATE LIMITED, PASSED IN ITA ITA NO : 7821/MUM/2011 11 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD NO.3856/DELHI/2010) , WHEREIN THE ITAT HAS EXCLUDED INFOSYS TECHNOLOGIES LIMITED FOR THE PUR POSE OF COMPARABILITY ANALYSIS ON SIMILAR FACTS. ON THE OTHER HAND, LEARNED DR S UBMITTED THAT INTANGIBLE AND R& D ARE INDEPENDENT OF REVENUE AND DO NOT MAKE ANY DIFFERENCE IN PROFIT LEVEL INDICATION AS INFOSYS IS ALSO INVOLVED IN PROVIDING SERVICES AND THEREFORE, IT CAN BE TA KEN UP FOR COMPARABILITY ANALYSIS. (V) WIPRO LTD.-IT SERVICES SEGMENT(WIPRO) : 6.5 IN THE CASE OF WIPRO ALSO LEARNED AR REITERATED THE SAME ARGUMENT AS ABOVE AND STATED THAT IT IS ALSO A GLOBAL IT COMPANY HAVING VARIETIES OF SERVICE AND PR ODUCTS AND LOOKING TO THE MAGNITUDE OF ITS OPERATIONS, SALES AND EXPENSES , THE SAME CANNOT BE TAKEN INTO CONSIDERATION FOR COMPARISON. FU RTHER, HE POINTED OUT THAT AROUND 67% OF ITS SALES RELATES TO PRODUCTS, AND, THEREFORE, IT CANNOT BE COMPARED WITH THE ASSESSEE AT ALL. HE ALSO RELIED UPON THE DECISION OF THE ITAT MUMBAI IN THE CASE OF MAERSK GLOBAL SERVICE CENTERS (INDIA) P.LTD. VS. ACIT (2011-TII-133-ITAT-MUM-TP) AND ALSO THE DECISION OF THE ITAT HYDERABAD BENCH IN THE CASE OF DELOITTE CONSULTING INDIA PVT. LTD. VS. DCIT, REPORTED IN 61-DT R-101-HYD, THAT WIPRO CANNOT BE TAKEN FOR COMPARABILITY ANALYSIS WI TH THE COMPANIES LIKE ASSESSEE. LEARNED CIT DR REITERATED THE SAME ARGUMENTS AS GIVEN IN THE CASE OF INFOSYS. (VI) FLEXTRONICS SOFTWARE SYSTEMS LTD. : ITA NO : 7821/MUM/2011 12 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD 6.6 LEARNED AR SUBMITTED THAT THIS COMPANY IS ALSO INVOLVED IN DEVELOPMENT OF SOFTWARE PRODUCT AND PROVIDING SOFTWARE CONSULTING SERVICE FOR THE USE IN TELECOMMUNICATION INDUSTRIES AND ALSO SALES TELECOMMUNICATION EQUIPMENTS. BESIDES TH IS, IT IS PROVIDING SERVICES OF BUSINESS OUTSOURCING (BPO). BEING PRODUCT AND SERVICE COMPANY, IT CANNOT BE TAKEN AS COMPARABLE. ON THE OTHER HAND, LEARNED CIT DR SUBMITTED A COPY OF PROFIT AND LOSS ACCOUNT OF THE COMPANY, OBTAINED FROM THE PUBLIC DOMAIN, WHICH REVEALED THAT SERVICES CONSTI TUTE ALMOST 90% OF ITS SALES AND PRODUCT SALES IS ONLY 10%, HENCE, TPO HAS RIGHTLY TAKEN THE SAID COMPANY FOR COMPARABILITY ANALYSIS AND THE CONTENTION OF THE ASSESSEE SHOULD BE REJECTED. (VII) TATA ELXSI LIMITED : 6.7 LEARNED AR SUBMITTED THAT THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY TATA ELXSI ARE FO R PRODUCT DEVELOPMENT SERVICES, INNOVATION DESIGN, ENGINEERING AND VISUAL COMPUTING LABS, WHICH IS DIFFERENT FROM WHAT THE ASSESSEE COMPANY IS MOSTLY INVOLVED. HE STRONGLY CONTENDED THAT THE INNOVATI ON DESIGN AND VISUAL COMPUTING LABS ARE ENTIRELY NOT COMPARABLE. TH E COMPANY IS INVOLVED IN PRODUCT DESIGN AND ENGINEERING FOR AUTOMOTIV E, CONSUMER GOODS, ELECTRONIC AND VISUAL COMPUTING LABS AND UNDERTAKES CONTENT DEVELOPMENT AND ANIMATION SERVICES FOR GRAPHICS AND SOFTWARE ANIMATION AND IMAGE/VIDEO EDITING. HE ALSO DREW OUR ATTENTION TO THE RELEVANT EXTRACT OF THE COMPANYS REPLY WHICH WAS GIVEN TO THE TPO IN RESPONSE TO ITA NO : 7821/MUM/2011 13 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD NOTICE UNDER SECTION 133 (6) THAT ITS ACTI VITIES IS INTO VERY NICHE AND SPECIALIZED ACTIVITIES AND DO NOT HAVE ANY COMPARABLE COMPANY, WHICH IS OPERATING IN THE AREA IN WHICH THE SAID COMPANY OPERATES. THUS, THIS COMPANY CANNOT BE IN CLUDED IN COMPARABILITY ANALYSIS. LEARNED DR ON THE OTHER HAND, SUBMITTED THAT ULTIMATELY THE SAID COMPANY IS ONLY INVOLVED IN T HE SOFTWARE DEVELOPMENT SERVICES, HENCE, IT IS A FIT CASE FOR COMPARISON. (VIII) AVANI CINCOM TECHNOLOGIES LTD.(AVANI CINCOM). : 6.8 LEARNED AR SUBMITTED THAT THIS COMPANY IS ALSO A PRODUCT COMPANY AND OWNS SPECIFIED PRODU CTS AND CANNOT BE COMPARED WITH THE ASSESSEES COMPANY. HE FURTHER SUBMITTED THAT SEGMENTAL DETAILS OF OPERATING INCOME OF IT SERVIC ES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDED. LEARNED CIT DR POINTED OUT THAT ITS EARNING IS MOSTLY FROM SOFTWARE EXPORTS AND IS A SOFTWARE COMPANY AND THE COMPANY ITSELF CLAIMS THAT IT IS SOFTWARE SERVICES PROVIDER, AND THEREFORE, THE SAME SHOULD BE INCLUDED FOR COMPARATIVE ANALYSIS. DECISION ON FIRST ISSUE : 7 . WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS OF THE PARTIES AND ALSO GONE THROUGH THE MATERIAL AS HAVE BEEN RELIED UPON AND THE FINDINGS GIVEN IN THE IMPUGNED OR DERS. THERE IS NO DISPUTE THAT HERE IN THIS CASE MOST APPROPRIATE METHOD FOR DETERMINING ARMS ITA NO : 7821/MUM/2011 14 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD LENGTH PRICE IS TRANSACTIONAL NET MARGIN METHOD (TNMM), WHEREIN THE ARMS LENGTH PRICE IS DETERMINED BY COMPARING THE OPERATING PROFIT RELATIVE TO AN APPROPRIATE BASE I.E. COST, SALES, ASSETS OF THE TESTED PARTIES WITH THE OPERATING PROFIT OF AN UNCONTROLLED PARTY ENGAGED IN COMPARABLE TRANSACTIONS. THERE IS NO Q UARREL AT THIS STAGE THAT OUT OF 27 TESTED PARTIES SELECTED BY THE TPO FOR COMPARABILITY ANALYSIS, 19 ENTITIES HAVE NOT BEEN OBJECTED TO BY THE LEARNED AR. ONLY 8 PARTIES WHICH ARE APPEARING FROM SL.NO.20 TO 27 AS GIVEN IN TABLE AT PARA 5 OF THIS ORDER, HAVE BEEN DISPUTED BY TH E AR BEFORE US. SO, WE HAVE TO EXAMINE AS TO WHETHER THESE ENTIT IES CAN BE TAKEN FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE OF THE ASSESSEE. WE, THEREFORE, PROCEED TO ANALYZE EACH AND EVERY COMPARABLES AS HAVE BEEN OBJECTED TO BY THE LEARNED AR. 7.1 R SYSTEMS INTERNATIONAL LTD (SEGMENT) : SO FAR AS INCLUSION OF THIS EN TITY FOR COMPARABILITY ANALYSIS, THE LEARNED AR HAS ACCEPTED THE SAME. HOWEVER, HE IS DISPUTING THE WORKING OF THE OPERATING PROFIT AS DONE BY THE TPO. HIS MAIN CONTENTION IS THAT T HE PROVISION FOR DOUBTFUL DEBTS AND PROVISION FOR DOUBTFUL ADVANCES ARE PART OF THE OPERATING EXPENSES AND SHOULD BE DEDUCTED WHILE WORKING OUT THE OPERAT ING PROFIT FROM THE OPERATING REVENUE. WE ARE UNABLE TO AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE PROVISION FOR DOUBTFU L DEBTS AND PROVISION FOR DOUBTFUL ADVANCES ARE PART OF THE OPERATING EXPENSES. THE OPERATING EXPENSES ARE THE EXPENSES WHICH ARE INCURRED TO EARN OPERATIONAL INCOME AND, ITA NO : 7821/MUM/2011 15 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD THUS, THE EXPENSES WHICH HAVE DIRE CT NEXUS WITH THE REVENUE HAS TO BE CONSIDERED AS OPERATIONAL EX PENSES. THE DOUBTFUL ADVANCES AND DOUBTFUL DEBTS CANNOT BE CONSIDERED AS NORMAL EXPENSES AS THEY ARE DEPENDENT UPON NUMBER OF FACTORS IN RELATION TO THE TRADE/BUSINESS TRANSACTIONS. ACCRETION OF A DEBT AND WRITE OFF DEPENDS UPON THE WISDOM OF THE BUSINESS ENTERPRIS E WITH REGARD TO TIMING OF ITS IDENTIFICATION AND CLAIM AS EXPENDI TURE. SIMILARLY, DOUBTFUL ADVANCES, THE VERY NATURE OF IT, SIGNIFIES THAT IT HAS NOT BEEN INCURRED IN THE NORMAL COURSE OF BUSINESS OPERATI ONS. THE NATURE OF ADVANCE DEPENDS UPON THE TRANSACTIONS BETWEEN THE TWO PARTIES AND ITS TREATMENT TO BE DOUBTFUL AGAIN DEPENDS UPON THE WISDOM OF THE BUSINESS ENTERPRISE AND VARIOUS OTHER FACTORS WHICH REQUI RES SCRUTINY. THE VERY NATURE OF DOUBTFUL DEBTS AND DOUBTFUL ADVANCES ARE THAT IT IS NOT PECULIAR TO ALL THE BUSINESS TRANSACTIONS AND, HENCE, CANNOT BE CONSIDERED AS NORMAL AND DIRECT OPERATING EXPENSES. WHILE WORKING OUT THE OPERATING PROFIT, ONLY ITEMS OF RECEIPTS AND EXPENDITURE, WHICH HAVE DIRECT RELATION FOR DETERMINING THE PROFIT HAS TO BE TAK EN INTO ACCOUNT. OPERATING PROFIT HAS TO BE SEEN IN A COMPARABLE TRANSACTION UNDER COMPARABLE CIRCUMSTANCES. THE PROFIT LEVEL INDICATORS ARE DERIVED FROM UNCONTROLLED PARTY ENGAGED IN SIMILAR BUSINESS ACTIVITY UNDER SIMILAR CIRCUMSTANCES WHICH IS THE MEASURE OF ARMS LENGTH RESULT. IF THE ASSESSEES BUSINESS TRANSACTIONS DO NOT HAVE ACCRETION OF DOUBTFUL DEBTS AND DOUBTFUL ADVANCES, SUCH AN ADJUSTMENT HAS TO BE MADE IN THE COMPARABILITY ANALYSIS OF THE COMPARABLE PARTY TO DETERMINE THE ITA NO : 7821/MUM/2011 16 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD ARMS LENGTH PRICE. THUS, BOT H THESE EXPENSES HAVE BEEN RIGHTLY EXCLUDED BY THE TPO TO WORK OUT THE OPERATING PROFIT OF THE COMPARABLE PARTY AND ACCORDINGLY THE OPERATING PROFIT RATIO OF THE SAID ENTITY HAS BEEN RIGHTLY TAKEN BY THE TPO. IN THE RESULT, R SYSTEMS INTERNATIONAL LTD (SEGMENT) HAS BEEN RIGHTLY INCLUDED IN THE LIST OF ENTITIES FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. HOWEVE R, THE DISCREPANCY IN THE FIGURES OF PROVISION OF DOUBTFUL ADVANCES AND PROVISION FOR DOUBTFUL DEBTS AS POINTED OUT BY LD. A.R., NEEDS VERIFICATION WHICH TPO IS REQUIRED TO LOOK INTO AND EXAMINE THE SAME. 7.2 LUCID SOFTWARE LIMITED : IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY, BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALSO INVOLVED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HAS TRIED TO DISTINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMEN T EXPENDITURE IN THIS CASE IS AROUND 39% OF THE CAPITAL EMPLOYED BY THE SAID COMPANY, AND, THEREFORE, SUCH A COMPANY CANNOT BE CONSIDERED AS TESTED PARTY. EVEN AS PER THE INFORMATION RECEIV ED IN RESPONSE TO NOTICE UNDER SECTION 133(6), THE COMPANY HAS DESCRIBED ITS BUSINESS AS SOFTWARE DEVELOPMENT COMPANY OR PURE SOFTWAR E DEVELOPMENT SERVICE PROVIDER. THIS INFORMATION ITSELF IS VERY VAGUE AS THE SEGMENTAL DETAILS OF OPERATING REVENUE HAS NOT BEEN MADE AV AILABLE TO EXAMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWAR E PRODUCT AND SALE OF SOFTWARE SERVICE ITA NO : 7821/MUM/2011 17 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD AND DEVELOPMENT. LOOKING TO THE FACT THAT IT HAS DEVELOPED A SOFTWARE PRODUCT NAMED AS MUULAM WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS-A-VIS THE CAPITAL EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPAR ABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENTIAL THAT THE CHARACTERISTICS AND THE FUNC TIONS ARE BY AND LARGE SI MILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STUDY CAN BE MADE WITH FEWEST AND MOST RELIABLE ADJUSTMENT. IF A COMPANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN THE SALE OF PRODUCT WOULD BE ENTIRELY DIFFERENT FR OM THE COMPANY, WHO IS INVOLVED IN SERVICE SECTOR. THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILITY RATIO. IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFORMATION ABOUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE SALE OF PRODUCT AND HOW MUCH IS FROM THE SERVICES, THEREFOR E, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. 7.3 CELESTIAL LABS LTD. : REGARDING THIS COMPANY THE LEAR NED AR SUBMITTED THAT THIS COMPANY IS ALSO ENGAGED IN DEVELOPMENT OF PRODUCTS IN THE FIELD OF BIO-TECHNOLOGY, PHARMACEUTICAL E TC. HOWEVER, LEARNED CIT DR HAS CONTRADICTED THE CONTENTION OF THE AR BY PROVIDING BEFOR E US THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT AS SESSMENT YEAR, WHICH SHOWS THAT ITA NO : 7821/MUM/2011 18 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD INCOME FROM SALE OF SERVICES IS TO THE EXTENT OF RS.13,62,00,676/-, WHEREAS SALE FROM PRODUCTS IS ONLY RS.50,75,000/-. THUS, MORE THAN 95% OF THE REVENUE IS FROM SERV ICES AND THEREFORE, NOT MUCH ADJUSTMENTS ARE REQUIRED FOR COMPARING THE PROFIT RATIO. ACCORDINGLY, THE CONTENTION OF THE LEARNED AR IS REJECTED THAT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE CASE. IN VIEW OF THE INFORMATION PROVIDED BY THE LEARNED CIT DR OBTAINED FROM THE PUBLIC DOMAIN, WE HOLD THAT THE CELESTIAL LABS LIMITED IS A GOOD COMPARABLE CASE, WHOSE OPERATING PROFIT CAN BE TAKEN FOR COMPARABILITY ANALYSIS IN DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO INCLUDE THIS COMPANY FOR COMPARABILITY ANALYSIS. 7.4 INFOSYS TECHNOLOGIES LTD. : THE PARAMETER FOR IDENTIFYING CO MPARABLE ENTITY HAS TO BE SEEN FROM THE ANGLE OF FUNCTIONS FORMED BY THE COMPANY, SIZE OF THE COMPANY IN TERMS OF THE SALES RE VENUE, STAGE OF BUSINESS CYCLE AND COMPANYS GROWTH CYCLE. IN THE CASE OF INFOSYS, THERE ARE HUGE INTANGIBLE ASSETS WHICH AS PER THE INFORMATION PROVIDED BY THE LEARNED AR ARE VALUED AT `. 69,552 CRORES, WHICH COMPRISES OF BRAND VALUE ITSELF AT `. 22,915 CRORES. BASED ON SUCH FUND VALUATION, THE PROFIT OF INFOSYS IS PREDOMINANTLY DUE TO ITS PR EMIUM BRANDING. IT IS INDIAS NO.2 SOFTWARE SERVICE EXPORTER AND THIRD IN THE WORLD AS AN IT SERVICE COMPANY. IT IS A GIANT COMPANY WHICH IS EVIDENT FROM ITS REVENUE FUND ITA NO : 7821/MUM/2011 19 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD FROM THE SALES WHICH ITSELF IS MORE THAN `. 13145 CRORES AND EXPENDITURE ON ADVERTISEMENT/SALES PROMOTION AND EXPENDITURE ON R & D IS AT `. 69 CRORES AND ` .167 CRORES RESPECTIVELY , WHEREAS IN THE CASE OF THE ASSESSEE THE REV ENUE IS ONLY 10.7 CRORES WITH NO EXPENDITURE ON ADVERTISEMENT, SALES AND PROMOTION ETC., WHICH ARE BORNE BY THE ASSOCIATED ENTERPRISES. EVEN FROM THE TEST OF FAR IE. FUNCTION PERFORMED, ASSETS EMPLOYED AND RI SK ASSUMED, COM PARABILITY ANALYSIS MISERABLY FAILS IN THIS CASE. THE CO MPARISON OF FUNCTION AND PROFILE AS HAS BEEN REPRODUCED IN PARA 6(IV) ABOVE, MOSTLY SHOWS THAT THE PROFIT LEVEL INDICATORS IN RELATION TO RETURN OF COST, RETURN OF SALES AND RETURN OF ASSETS ARE HUGE BETWEEN INFOSYS AND THE ASSESSEE COMPANY AND THEREFORE, THE INFOSYS CANNOT BE TREATED AS COMPARABLE ENTITY FOR MAKING COMPARABILITY ANALYSIS WI TH THE ASSESS EE COMPANY. THE COMPARABILITY OF INFOSYS TECHNOLOGY OF THE COMPANY AS THAT OF AN ASSESSEE HAS BEEN DEALT WITH ITAT DELHI BENCH IN THE CASE OF AGNITY INDIA TECHNOLOGIES PRIVATE LIMITED (ITA NO.3856/DELHI/2010) , WHEREIN IT WAS HELD THAT INFOSYS IS A GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHER PROFIT AND CANNOT BE COMPARED WITH THE COMPANY WHICH IS A CAPTIVE UNIT OF ITS PARENT COMPANY ASSUMING ONLY LIMITED CURREN CY RISK. IN VIEW OF THE ABOVE FINDING, WE HOLD THAT THE INFOSYS CANNOT BE TAKEN AS A COMPARABLE FOR DETERMINING THE ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. 7.5 WIPRO LTD.-IT SERVI CES SEGMENT(WIPRO) : ITA NO : 7821/MUM/2011 20 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD THIS COMPANY IS ALSO A GLOBAL IT COMPANY HAVING VARIETIES OF SERVICE AND PRODUCTS AND LOOKING TO THE MAGNITUDE OF ITS OPERATIONS, SALES AND EXPENSES, THE SAME CANNOT BE TAKEN INTO CONSIDERATION FOR COMPARABILITY ANALYSIS. MOREOVER, 67% OF ITS SALES RELATES TO ITS PRODUCT WHICH ARE SOLD ON PREMIUM RESULTING INTO HIGHER PROFITABILITY, THEREFORE, CANNOT BE COMPARED WITH THE ASSESSEE COMPANY AT ALL. THERE ARE SEVERAL JUDGMENTS OF ITAT WHICH HAVE BEEN REFERRED IN PARA 6.5 ABOVE, THAT WIPRO CANNOT BE TA KEN AS COMPARABLE CASE FOR COMPARABLE CASE WITH THE COMPANY LIKE ASSESSEE. IN VIEW OF THESE FACTS AND THE REASONING GIVEN IN THE CASE OF INFOSYS, WE HOLD THAT WIPRO ALSO CANNOT BE CONSIDERED AS A COMPARABILITY ANALYSIS, HENCE, WOULD NOT BE INCLUDED IN THE LIST OF THE COMPARABLE ENTITIES AS IDENTIFIED BY THE TPO. 7.6. FLEXTRONICS SOFTWARE SYSTEMS LTD .: AS PER THE STATEMENT OF THE L EARNED AR, THIS COMPANY IS ALSO INVOLVED IN THE DEVELOPMENT OF T HE SOFTWARE PRODUCT AND IS ALSO INVOLVED IN BPO SERVICES, BESIDES JO INT SOFTWARE CONSULTANCIES FOR THE USE IN TELECOMMUNICATION INDUSTRIES. THUS, BEING PRODUCT AND SERVICE COMPANY, IT CANNOT BE TAKEN AS COM PARABLE. HOWEVER, THE LEARNED CIT DR HAS AMPLY CONTROVERTED THE SAID CONTENTION OF THE LEARNED AR BY SUBMITTING BEFORE US A COPY OF PR OFIT AND LOSS ACCOUNT OF THE COMPANY FOR THE RELEVANT ASSESSMENT YEAR, OBTAINED FROM THE PUBLIC DOMAIN. ITA NO : 7821/MUM/2011 21 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD FROM THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE SAID COMPANY, IT IS SEEN THAT THE REV ENUE SALES FROM SERV ICES CONSTITUTES ALMOST 90% AND THE PRODUCT SALES IS ONLY 10%. THUS, IN THIS CASE ALSO NOT MUCH ADJUSTMENT IS REQUIRED TO BE MADE FOR TAKING THE PROFIT RATIO FOR COMPARING IT WITH THE ASSESSEE IN DETERMINING THE ARMS LENGTH PRICE. IN VIEW OF THE ABOVE, WE HOLD THAT TPO HAS RIGHTLY INCLUDED THE SAID COMPANY AS COMPARABLE CASE WHICH CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE PROFIT RATIO. 7.7 TATA ELXSI LIMITED .: FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEV ELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY AR E DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE AR E UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. 7.8 AVANI CINCOMTECHNOLOGIES LTD.(AVANI CINCOM) : ITA NO : 7821/MUM/2011 22 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD HERE IN THIS CASE ALSO THE SEGM ENTAL DETAILS OF OPERATING INCOME OF IT SERVICES AND SALE OF SOFTW ARE PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PROFIT RATI O OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESSEE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY T HE TPO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT AS CO MPARABLE PARTY. LEARNED CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOW EVER, THE DETAILS OF PERCENTAGE OF EXPORT OF PRODUCTS OR SERVICES HAV E NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERATION FOR COMPARABILITY ANALYSIS. 8. FURTHER THE LEARNED AR ALSO SUBMITTED THAT THE BENEFIT UNDER SECTION 92 C (2) FOR +/- 5% RANGE SHOULD BE GIVEN AND IF ADJUSTMENT AS PER THE ASSESSEE IS MADE THEN THE SAME WOULD FALL WITHIN THE 5% RANGE. 9. IN VIEW OF OUR FINDING OF EACH AND EVERY EIGHT COMPARABLE CASE, WHICH ARE IN DISPUTE BEFORE US, WE DIRECT THE ASSESSING OFFICER TO DETERMINE THE PROFIT RATIO AFTER TAKING THE ARITHMETIC MEAN OF ALL THE FINAL TESTED PARTIES (I.E. A FTER EXCLUDING FIVE ENTITIES AS DISCUSSED ABOVE) AND DETERMINE THE ARMS LENGTH PRICE OF THE ASSESSEE COMPANY FOR INTERNATIONAL TRANSACTIONS. FURTHER AF TER ARRIVING AT THE ARITHMETIC MEAN THE TPO WILL EXAMINE WHETHER +/- RANGE OF 5% IS APPLICABLE OR NOT AND ITA NO : 7821/MUM/2011 23 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD WILL DECIDE THIS ASPECT IN ACCORDANC E WITH THE PROVISION OF SECTION 92 C(2). 10 . ACCORDINGLY, THE FIRST ISSUE IS PARTLY ALLOWED AS PER DIRECTION GIVEN ABOVE . SECOND ISSUE IS IN REGARD TO APPLICATION OF DEPRECIATION @60% ON UPS INSTEAD OF 15 % AS CLAIMED BY THE ASSESSEE . 11. THE FACTUAL MATRIX RELEVANT FOR THIS ISSUE IS THAT THE ASSESSEE DURING THE RELEVANT FINANCIAL YEAR HAD PURCHASED UPS OF 120 KVA + 40 KVA FOR THE PURPOSE OF USING THE SAME FOR THE UNIT WHICH WAS ELIGIBLE FOR EXEMPTION UNDER SECTION 10A, FOR VARIOUS OFFICE ITEMS, DATA CENTER EQUIPMENTS, NETWORKING EQUIPMENTS, COMPUTERS ROUTERS , SWITCHES, EMERGENCY LIGHTS, IT INFRASTRUC TURE AND VARIOUS OTHER OFFICE EQUIPMENTS. THE ASSESSEE ACCORDINGLY MADE A CLAIM FOR DEPRECIATION @ 15% ON UPS INSTEAD OF 60%. HOWEVE R, IN THE OBJECTION FILED BEFORE THE DRP, THE SAME WAS REJECTED AND THE DRP DIRECTED THAT THE CLAIM OF DEPRECIATION FOR 10A UNIT SHOULD BE ALLOWED AT 60% WHICH AS A RESULT HAS ENHANCED THE TOTAL CLAIM OF DEPRECIATION AMOUNTS TO `. 1,38,17,680/-. THUS, REDUCING THE PROFIT OF UNIT COVERED UNDER SECTION 10A, INSTEAD OF DEPRECIATION CLAIMED AT `. 1,31,91,053/- AND NON 10A OF ` .7,26,627/-. THUS, AS PER T HE DIRECTION OF THE DRP, THE CLAIM OF DEPRECIATION OF THE ASSESSEE WAS ENHANCED FROM `. 1,25,12,235/- TO `. 1,38,17,680/-. THE LEARNED AR RELIED UPON THE ITA NO : 7821/MUM/2011 24 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD DECISION OF ITAT DELHI BENCH IN THE CASE OF NESTLE INDIA LIMITED VS. DCIT, REPORTED IN (2007) 111 TTJ 498 , THAT THE DEPRECIATION OF RATE OF UPS SHOULD BE TAKEN AT 15%. HE RE FERRED TO VARIOUS DETAILS OF USAGE OF UPS AS GIVEN IN PAPER BOOK AT PAGE 245 TO 252. ON THE OTHER HAND, LEARNED CIT DR RELIED UPON THE FINDINGS GIVEN BY THE DRP. 12 . WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND ALSO THE FINDING GIVEN IN THE IMPUGNED ORDERS. FROM THE DETAILS AND MATERIAL PLACED ON RECORD, IT IS SEEN THAT THE UPS HAVE BEEN USED FOR VARIOUS KINDS OF OFFICE EQUIPMENTS AND PLANT AND MACHINERY. THIS ISSUE HAS BEEN DISCUSSED AND DEALT WITH BY THE ITAT DELHI BENCH IN THE CASE OF NESTLE INDIA LTD (SUPRA) , WHEREIN FOLLOWING FINDINGS HAVE BEEN GIVEN WITH REGARD TO DEPRECIATION OF CO MPUTER AND DEPRECIATION OF UPS :- THE EXPRESSION COMPUTER HAS NOT BEEN DEFINED IN THE ACT. HOWEVER, IT HAS BEEN DEFINED BY S.2(1)(I) OF THE INFORMATION TECHNOLOGY ACT, 2000. AS PER THE SAID ACT, COMPUTER MEANS ANY ELECTRONIC, MAGNET, OPTICAL OR OTHER HIGH SPEED DATA PROCESSING DEVICE OR SYSTEM WHICH PERFORMS LOGICAL, ARITHMETIC AND MEMORY FUNCTIONS BY MANIPULA TION OF ELECTRONICS OR MAGNETIC OR OPTICAL IMPULSES AND INCLUDE ALL INPUT-OUTPUT PROCESSING, STORAGE, COMPUTER SOFTWARE OR CO MMUNICATION FACILITIES WHICH ARE CONNECTED OR RELATED TO THE COMPUTER IN A COMPUTER SYSTEM OR COMPUTER NETWORK .WHEREAS THE UPS, IS DEFI NED BY WEBOPEDIA COMPUTER DICTIONARY, STANDS FOR UNINTERRUPT IBLE POWER SUPPLY. THUS, THE UPS MAINLY ENSURES UNINTERRUPT ED POWER SUPPLY TO COMPUTER NETWORK AND ALSO REGULATED THE FLOW OF POWER TO AVOID ANY KIND OF DAMAGE TO THE COMPUTER NETWORK. IT IS, THUS, A SOURCE OF ITA NO : 7821/MUM/2011 25 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD ALTERNATIVE SUPPLY OF POWER TO THE COMPUTER AND APPLYING THE FUNCTIONAL TEST ALSO, IT IS A PART OF POWER SUPPLY SYSTEM AND NOT THE COMPUTER SYSTEM. THE UPS IS ALSO NOT INBUILT IN T HE COMPUTER AS A BATTERY IN THE LAPTOP TO MAKE IT AN INTEGRAL PART OF THE COMPUTER SYSTEM. IT MERELY GIVES EXTERNAL AID TO THE COMPUTER SYSTEM BY ENSURING THE UNINTERRUPTED POWER SUPPLY IN EMERGENCY AND IN REGULATING THE FLOW OF POWER. IT IS WORTHWHILE TO NOTE HERE THAT THE COMPUTER SYSTEM CAN FUNCTION INDEPENDENTLY WITHOUT THE UPS AND EVEN THE UPS GENERALLY CAN BE USED TO ENSURE UNINTERRUPTED POWER SUPPLY TO OTHER EQUIPMENTS BESIDES COMPUTER. IT IS, THUS, NOT THE INTEGRAL PART OF THE COMPUTER SYSTEM LIKE PRINTER AND SCANNER, WHICH BEING OUTPUT DEVISES OF THE COMPUTER SYSTEM ARE ITS INTEGRAL PART RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE HOLD THAT THE UPS WHICH HAS BEEN USED FOR THE OFFICE EQUIPMENTS AND PLANTS AND MACHINERY, THE DEPRECIATION IS TO BE ALLOWED AT THE RATE OF 15%, SUBJECT TO VERIFICATION OF THESE DETA ILS BY THE ASSESSING OFFICER AS HAVE BEEN GIVEN BEFORE US. ACCORDINGLY, THIS ISSUE IS ALLOWED IN FAVOUR OF THE ASSESSEE, SUBJECT TO THE DIRECTIONS GIVEN ABOVE . THIRD ISSUE IS WITH REGARD TO COMPUTATION OF INTEREST LIABILITY FOR SUM OF `. 46,825/- UNDER SECTION 234C . 13. THE RELEVANT FACTS ARE THAT THE ASSESSEE FILED HIS RETURN OF INCOME AT `. 1,29,76,433/- WHICH RESULTED INTO TAX LIABILITY OF `. 43,67,867/-. THIS TAX LIABILITY WAS FU LLY COVERED BY THE ADVANCE TAX OF ITA NO : 7821/MUM/2011 26 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD `. 45,76,000/- AND TDS OF `. 7,199/-. AS PER THE PR OVISIONS OF SECTION 234 C WHICH READS AS UNDER :- (I) THE ADVANCE TAX PAID BY THE COMPANY ON ITS CURRENT INCOME ON OR BEFORE THE 15 TH DAY OF JUNE IS LESS THAN FIFTEEN PER CENT OF THE TAX DUE ON THE RETURNED INCOME OR THE AMOUNT OF SUCH ADVANCE TAX PAID ON OR BEFORE THE 15 TH DAY OF SEPTEMBER IS LESS THAN FORTY-FIVE PER CENT OF THE TAX DUE ON THE RETURNED INCOME OR THE AMOUNT OF SUCH ADVANCE TAX PAID ON OR BEFORE THE 15 TH DAY OF DECEMBER IS LESS THAN SEVENTY-FI VE PER CENT OF THE TAX DUE ON THE RETURNED INCOME , THEN, THE COMPANY SHALL BE LIABLE TO PAY SIMPLE INTEREST AT THE RATE OF ONE PER CENT PER MONTH FOR A PERIOD OF THREE MONTHS ON THE AMOUNT OF THE S HORTFALL FROM FIFTEEN PER CENT OR FORTY-FIVE PER CENT OR SEVENTY-FI VE PER CENT, AS THE CASE MAY BE, OF THE TAX DUE ON THE RETURNED INCOME; IF THE ADVANCE TAX IS LESS THAN FIFT EEN PER CENT OF THE TAX DUE ON THE RETURNED INCOME, FOR EVERY QUARTER, THE INTEREST UNDER SECTION 234C WOULD BE PAYABLE AT SIMPLE INTEREST @1% PER MONTH. AS PER THE EXPLANATION TO SECTION 234C, TAX DUE ON THE RETURNED INCOME MEANS THE TAX CHARGEABLE ON THE TOTAL INCOME DECLARED IN THE RETURN OF INCOME FURNISHED BY THE ASSESSEE, AS REDUC ED BY THE AMOUNT OF TAX DEDUCTIBLE OR COLLECTIBLE AT SOURCE. THE FOLLOWING DETAILS OF ADVANCE TAX PAYMENT HAS BEEN PLACED ON RECORD :- DUE DATE AMOUNT DUE AMOUNT PAID CUMULATIVE ADV TAX PAID % (RS) DATE (RS.) (RS.) (A) (B) (C) (D) (E) (F) 15-JUN-06 15% 6,55,180 14- JUN-06 9,80,000 9,80,000 15-SEP-06 45% 19,65,540 14-S EP-06 15,24,000 25,04,000 15-DEC-06 75% 32,75,900 13-DE C-06 14,36,000 39,40,000 ITA NO : 7821/MUM/2011 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD 27 15-MAR-07 100% 43,67,867 14-MAR-07 6,36,000 45,76,000 45,76,000 14 . FROM THE ABOVE, IT IS AMPLY CLEAR THAT THERE IS NO SHORTFALL IN ANY OF THE QUARTERS AND, THEREFORE, NO INTEREST LIABILITY UNDER SECTION234C CAN BE FASTENED UPON THE ASSESSEE. ACCORD INGLY, THE INTEREST LEVIED AT `. 46,825/- UNDER SECTION 234C IS DELETED. 15 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED ON THIS 11 TH DAY OF MAY, 2012. SD/- SD/- ( P.M.JAGTAP ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT: 11 TH MAY, 2012 COPY FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE C.I.T. 4. CIT (A) 5. THE DR, B - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI PKM