Appeal Details
Counselvise Citation
[2013] 120 COUNSELVISE.COM (IT) 0641 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 4 month(s) 26 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
22-02-2013
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
04-10-2012
Assessment Year
2007-2008
Appeal Filed On
26-09-2011
Judgement Text
PAGE 1 OF 23 IT(TP)A NO.845/BA NG/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER IT(TP)A NO.845/BANG/2011 (ASSESSMENT YEAR 2007-08) M/S DELMIA SOLUTIONS PVT. LTD., 680, 8 TH MAIN, JP NAGAR 2 ND PHASE, BANGALORE-560 078. PA NO.AABCD 0394C VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 28.01.2013 DATE OF PRONOUNCEMENT : 22.02.2013 APPELLANT BY : SHRI K P KUMAR, SR. COUNSEL RESPONDENT BY : SHRI FARHAT HUSSAIN QU RESHI, CIT (DR-II), ITAT ORD ER PER GEORGE GEORGE K : THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE COMP ANY, IS DIRECTED AGAINST THE ORDER OF ASSESSMENT PASSED UND ER SECTION 143(3) RWS 144C OF THE ACT DATED 28/7/2011. THE RELEVANT ASSES SMENT YEAR IS 2007-08. 2. THE SOLITARY ISSUE THAT ARISES FOR OUR CONSIDERA TION PERTAINS TO THE TRANSFER PRICING ADJUSTMENT OF RS.3,25,82,272/- MADE BY THE TRANSFER PRICING OFFICER (TPO). 3. BRIEFLY STATED, THE FACTS ARE AS FOLLOWS:- PAGE 2 OF 23 IT(TP)A NO.845/BA NG/2011 2 THE ASSESSEE IS A SUBSIDIARY OF SOMERO ENTERPRISE INC., MAURITIUS, WHICH IS IN TURN A SUBSIDIARY OF DELMIA C ORPORATION, USA, A SUBSIDIARY OF DASSAULT SYSTEMES, FRANCE. THE ASSESS EE IS A CAPTIVE SERVICE PROVIDER AND IS ENGAGED IN THE BUSINESS OF RENDERIN G SOFTWARE SERVICES FOR PRODUCT DEVELOPMENT TO DELMIA CORP, USA AND OTHER R ELATED SERVICES TO ITS ASSOCIATED ENTERPRISES. DURING THE FINANCIAL YE AR 2006-07 RELEVANT TO THE ASSESSMENT YEAR 2007-08, THE ASSESSEE HAD THE FO LLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. RECEIPTS RS. SOFTWARE DEVELOPMENT AND CONSULTANCY 27,38,62,943/- REIMBURSEMENT OF EXPENSES 3,15,42,899/- PAYMENTS RS. REIMBURSEMENT OF EXPENSES 35,52,104/- 3.1 THE ASSESSEE COMPANY, IN ORDER TO JUSTIFY ITS T RANSFER PRICING STUDY, HAD ADOPTED TRANSACTION NET MARGIN METHOD (TN MM) AS THE MOST APPROPRIATE METHOD AND SELECTED 17 COMPANIES AS COM PARABLES. THE OPERATING/NET MARGIN OF THE ASSESSEE WAS ARRIVED AT 11.81%. WITH REFERENCE TO THE COMPARABLE COMPANIES, THE DATA FOR THE YEARS 2005, 2006 AND 2007 WAS TAKEN AND THE ARITHMETICAL MEAN OF THE NET MARG IN WAS ARRIVED AT 10.86%. THEREFORE, ACCORDING TO THE ASSESSEE COMPA NY, SINCE ITS MARGIN WAS AT 11.81% AND THAT OF THE COMPARABLES BEING AT 10.8 6% THE PRICE AT WHICH THE ASSESSEE HAD ENTERED WITH ITS AE WAS AT ARMS LE NGTH PRICE (ALP). 3.1.1 THE DETAILS OF THE NET MARGIN ON COST EARNED BY THE ASSESSEE COMPANY, THE COMPARABLES SELECTED BY THE ASSESSEE AN D THE ARITHMETICAL PAGE 3 OF 23 IT(TP)A NO.845/BA NG/2011 3 MEAN OF THE COMPARABLE COMPANIES, IN THE ASSESSEES TP STUDY, ARE AS FOLLOWS:- OPERATING INCOME RS.27,68,28,114/- OPERATING EXPENSES RS.24,75,84,314/- OPERATING PROFIT (OP. INCOME OP. EXPENSES) RS.2,9 2,43,800/- OPERATING/NET MARGIN (OP/TC) 11.81% SL. NO NAME OF THE COMPANY 2005 2006 2007 AVERAGE 1 AKSHAY SOFTWARE TECHNOLOGIES LIMITED 7.68% 7.07% NA 7.38% 2 BRELSINFOTECH LIMITED 2.46% NA NA 2.46% 3 DYNACONS SYSTEMS 2.83% 3.17% NA 3.00% 4 MELSTARINFOTECH -9.06% 1.39% NA -3.84% 5 ORIENTATION INFORMATION TECHNOLOGY LIMITED 15.37% -16.66% NA -0.65% 6 QUINTEGRA SOLUTION LIMITED 12.81% 14.95% NA 13.88% 7 RS SOFTWARE (INDIA) LIMITED 8.08% 15.69% 13.55 % 14.44% 8 RANKLIN SOLUTION 5.80% 7.55% NA 6.68% 9 SIP TECHNOLOGY & EXPORTS LIMITED NA 21.99% NA 21.99% 10 SANKHYA INFOTECH LIMITED 27.33% 25.81% NA 26.77% 11 SHREE TULSI ONLINE.COM LIMITED 1.75% 2.82% NA 2.29% 12 SYSTEMLOGIC SOLUTIONS LIMITED 26.52% 3.94% NA 28.73% 13 TUTIS TECHNOLOGIES LIMITED 7.28% 10.85% NA 9.07% 14 V & K SOFTECH LIMITED 16.33% 1.49% NA 8.91% 15 VJIL CONSULTING LIMITED 8.26% 9.86% NA 9.06% 16 VISUALSOFT TECHNOLOGIES LIMITED 16.10% 13.29% NA 14.70% 17 BODHTREE CONSULTING LIMITED 26.47% 17.18% NA 21. 83% ARITHMETIC MEAN 11.03% 10.46% 13.55% 10.86% PAGE 4 OF 23 IT(TP)A NO.845/BA NG/2011 4 3.1.2 WHEN THE MATTER WAS REFERRED TO THE TPO, THE TPO UNDERTOOK HIS OWN STUDY AND ACCEPTED CERTAIN FILTERS ADOPTED BY THE ASSESSEE COMPANY. THE METHODOLOGY ADOPTED BY THE TPO WAS THE SAME AS TH AT OF THE ASSESSEE, NAMELY, TNMM. TWENTY-SIX COMPANIES WERE SELECTED AS COMPARABLES BY THE TPO AND THE ARITHMETICAL MEAN OF THE COMPARABLES WA S FIXED AT 25.14%. AFTER PROVIDING FOR THE WORKING CAPITAL ADJUSTMENT, THE ARITHMETICAL MEAN ARRIVED AT BY TPO WAS AT 25.07%. BY ADOPTING 25.07% OF ALP OF THE OPERATING COST, THE ADJUSTMENT WAS MADE UNDER SECTI ON 92CA OF THE ACT AMOUNTING TO RS.3,25,82,272/-. THE COMPARABLES SEL ECTED BY THE TPO, THEIR ARITHMETICAL MEAN, THE COMPUTATION OF THE ALP AND T HE ADJUSTMENT MADE ARE AS FOLLOWS:- SL. NO. NAME OF THE COMPANY UNADJUSTED WC ADJUSTED 1 ACCEL TRANSMATIC LTD.(SEGMENT) 21.11 22.04 2 AVANI CIMCOM TECHNOLOGIES LTD 52.59 53.16 3 CELESTIAL LABS LTD. 58.35 56.26 4 DATAMATICS LTD 1.38 1.22 5 E-ZEST SOLUTIONS LTD. 36.12 37.99 6 FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEGMENT) 25.31 26.96 7 GEOMETRIC LTD. (SEGMENT) 10.71 11.48 8 HELIO & MATHESON INFORMATION TECHNOLOGY LTD. 36.63 36.38 9 IGATE GLOBAL SOLUTIONS LTD 7.49 7.47 10 INFOSYS TECHNOLOGIES LTD 40.30 40.92 11 ISHIR INFOTECH LTD. 30.12 32.34 12 KALS INFORMATION SYSTEMS LTD. 30.55 25.33 13 LGS GLOBAL LTD. 15.75 17.06 14 LUCID SOFTWARE LTD 19.37 18.94 15 MEDIA SOFT SOLUTIONS PVT. LTD 3.66 3.42 16 MEGASOFT LTD 60.23 53.30 17 MINDTREE LTD 16.90 17.25 18 PERSISTENT SYSTEMS LTD 24.52 25.34 19 QUINTEGRA SOLUTIONS LTD 12.56 11.09 20 R S SOFTWARE (INDIA) LTD 13.47 15.01 PAGE 5 OF 23 IT(TP)A NO.845/BA NG/2011 5 21 R SYSTEMS INTERNATIONAL LTD(SEGMENT) 15.07 15.13 22 SASKEN COMMUNICATION TECHNOLOGIES LTD(SEGMENT) 22.17 22.99 23 S I P TECHNOLOGIES & EXPORTS LTD 13.90 12.58 24 TATA ELXSI LTD (SEGMENT) 26.51 28.10 25 THIRDWARE SOLUTIONS LTD. (SEGMENT) 25.12 23.42 26 WIPRO LTD (SEGMENT) 33.65 36.46 ARITHMETIC MEAN 25.14 25.07 ARMS LENGTH MEAN MARGIN 25.14 LESS: WORKING CAPITAL ADJUSTMENT 0.07 ADJUSTED MEAN MARGIN OF THE COMPARABLES 25.07 OPERATING COST 24,68,94,579 ARMS LENGTH MARGIN 25.07% OF OPERATING COST ARMS LENGTH PRICE (ALP)125.07% OF OPERATING COST 30 ,87,91,050 PRICE RECEIVED 27,62,08,778 SHORT FALL BEING ADJUSTMENT U/S. 92CA 3,25,82,272 3.1.3 THE COMPUTATION MADE BY THE TPO, WHICH WAS AF FIRMED BY THE DRP, WAS INCORPORATED IN THE ASSESSMENT ORDER. 3.1.4 AGGRIEVED BY THE ASSESSMENT ORDER DATED 28/7/ 2011, THE ASSESSEE HAS RAISED BROADLY THE FOLLOWING ISSUES BEF ORE US:- TPOS ACTION IN REJECTING THE USE OF MULTIPLE YEAR CONTEMPORANEOUS DATA DUE TO NON-AVAILABILITY OF CURR ENT YEAR DATA IN PUBLIC DOMAIN AT THE TIME OF TP STUDY IS ERR ONEOUS. TPOS ACTION IN TAKING RECOURSE TO SECTION 133(6) T HAT TOO WITHOUT GIVING AN OPPORTUNITY OF CROSS-EXAMINATION T O THE ASSESSEE IS ERRONEOUS. TPOS ACTION IN APPLYING THE FILTER OF RELATED PARTY TRANSACTIONS >25% IS AGAINST THE REASONABLE LIMIT OF 15% FIXED B Y THE HONBLE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER COM PRIVATE LIMITED. TPOS ACTION IN NOT APPLYING AN UPPER LIMIT TO THE S ALES TURNOVER IS AGAINST THE LAW LAID DOWN BY THE HONBLE TRIBUNAL IN THE CASE PAGE 6 OF 23 IT(TP)A NO.845/BA NG/2011 6 OF GENISYS INTEGRATING SYSTEMS INDIA LIMITED AND TRILOGY E- BUSINESS SOFTWARE INDIA PVT. LTD. TPOS ACTION IN SELECTING COMPARABLES WITH ABNORMAL LY HIGH MARGIN IS AGAINST THE RULING OF THE HONBLE TRIBUNA L IN THE CASE OF SAP LABS INDIA PRIVATE LIMITED. TPOS ACTION IN SELECTING FUNCTIONALLY DISSIMILAR CO MPARABLES IS AGAINST THE RULING OF THE HONBLE TRIBUNAL IN THE C ASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LIMITED AND TRILOGY E- BUSINESS SOFTWARE INDIA PVT. LTD. TPO ERRED IN APPLYING THE FILTER OF ONSITE TURNOVER > 75% TO REJECT OTHERWISE COMPARABLE COMPANIES IS BAD IN LAW . TPO ERRED IN REDUCING A SUM OF RS.6,19,336/-, WHICH REPRESENTS PROFIT ON SALE OF ASSETS, FROM OPERATING INCOME IN COMPUTING THE NET MARGIN OF THE APPELLANT ALTHOUGH THE APPELLANT ITSELF HAD NOT INCLUDED THE SAME IN THE OPERATING INCOME. 3.2 THE LEARNED SENIOR COUNSEL SHRI K P KUMAR HAS FILED WRITTEN SUBMISSIONS. THE CONTENT OF THE SAME IS SUMMARIZED BELOW:- C1 SUBMISSIONS REGARDING OPERATING INCOME AND NE T MARGIN AS COMPUTED BY THE TPO: THE COMPUTATION OF NET MARGIN ON COST AS COMPUTED I N THE TP REPORT AND BY THE TPO IS AS UNDER: AS PER TP REPORT AS PER TPO OPERATING INCOME RS.27,68,28,114/- RS.27,62,08,778 /- OPERATING EXPENSES RS.24,75,84,314/- RS.24,68,94,57 9/- OPERATING PROFIT (OP. INCOME OP. EXPENSES) RS.2,92,43,800/- RS.2,93,14,199/- OPERATING/NET MARGIN (OP/TC) 11.81% 11.87% IN ARRIVING AT THE MARGIN AS COMPUTED ABOVE, THE TP O MADE A REDUCTION OF RS. 6,19,336/- TO THE OPERATING INCOME OF RS.27,68, 28,114/- (AS CONSIDERED BY THE ASSESSEE) ON THE GROUND THAT THE SAID INCOME PERTAINED TO PROFIT ON SALE OF ASSETS WHICH WOULD NOT FORM PART OF OPERATI NG INCOME. HOWEVER, THE PAGE 7 OF 23 IT(TP)A NO.845/BA NG/2011 7 ASSESSEE, WHILE COMPUTING THE MARGIN IN ITS TP REPO RT, HAD ITSELF, IN THE FIRST PLACE NOT INCLUDED THE SAID AMOUNT OF RS.6,19,336/- IN ARRIVING AT THE OPERATING INCOME OF RS.27,68,28,114/-. REFERENCE MA Y BE MADE TO THE P&L A/C ENDED 31.03.2007 (PAGE 935 OF PAPER BOOK) WHERE INCOME FROM SALES IS AT RS.27,68,28,114/-. THIS EXCLUDES OTHER INCOM E OF RS.7,54,385/-. SCHEDULE 10 TO THE P & L A/C (AT PAGE 940 OF THE PA PERBOOK) SHOWS THAT PROFIT OF RS.6,19,336/- FROM SALE OF ASSETS IS PART OF OTHER INCOME WHICH WAS NEVER INCLUDED IN THE OPERATING INCOME. THEREFO RE, THE REDUCTION MADE BY THE TPO IS UNWARRANTED. INSOFAR AS OPERATING EXPE NSES IS CONCERNED, THE EXPENSES AS COMPUTED BY THE TPO IS ACCEPTED COMPUTATION OF NET MARGIN ON COST IF THE ABOVE SUBM ISSION IS ACCEPTED: OPERATING INCOME RS.27,68,28,114/- OPERATING EXPENSES RS.24,68,94,579/- OPERATING PROFIT (OP. INCOME OP. EXPENSES) RS.2,99,33,535/- OPERATING/NET MARGIN (OP/TC) 12.12% C2 SUBMISSION ON THE COMPARABLES SELECTED BY THE TPO RELYING ON THE DECISIONS OF THIS HONBLE TRIBUNAL IN THE CASES OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD ., TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD., AND 24/7 CUSTOMER COM PRIVATE LTD., THE APPELLANT SEEKS REJE CTION OF 14 OF THE 26 COMPARABLES SELECTED BY THE TPO. TH E FOLLOWING WOULD BE THE ACCEPT / REJECT MATRIX IF TH E APPELLANTS SUBMISSION IS ACCEPTED. PAGE 8 OF 23 IT(TP)A NO.845/BA NG/2011 8 IT WAS SUBMITTED THAT THE 8 COMPARABLES ARE TO BE R EJECTED FROM THE TPOS LIST ON ACCOUNT OF THE TURNOVER FILTER. THE LEARNE D AR RELIES ON THE FOLLOWING ORDERS OF THE TRIBUNAL FOR THE ABOVE PROPOSITION:- I) M/S. KODIAK NETWORKS (I) PVT. LTD V. ACIT ITA NO.1413/BANG/2010; II) M/S. GENESIS MICROCHIP (I) PVT. LTD V. DCIT ITA NO.1254/BANG/2010; III) M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD V. DCIT ITA NO.1054/BANG/2011 DATED 23.11.2012. IT WAS, FURTHER, SUBMITTED THAT 5 COMPANIES ARE TO BE EXCLUDED ON ACCOUNT OF FUNCTIONAL DISSIMILARITY. FOR THE ABOVE ARGUMENT , THE LEARNED SR. COUNSEL RELIED ON THE ORDERS OF THE TRIBUNAL IN THE CASE OF (I) M/S. TRILOGY E- BUSINESS SOFTWARE INDIA PVT. LTD.; (II) MUMBAI TRIB UNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LIMITED. LAST LY IT WAS SUBMITTED THAT ISHIR INFOTECH LTD. (THE COMPARABLE OF THE TPO) ALS O SHOULD BE REJECTED SINCE IT WAS HAVING RELATED TRANSACTION EXCEEDING 1 5% OF THE TOTAL TURNOVER AND FOR THIS CONTENTION, RELIANCE WAS PLACED ON THE ORDER OF THE BANGALORE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER COM PRIVATE L TD. (ITA NO.227/BANG/2010 DATED 9/11/2012). IN CONCLUSION, IT WAS ARGUED BY THE LEARNED SR. COUNSEL THAT THE ARITHMETIC MEAN OF 12 REMAINING OF THE 26 COMPARABLES WOULD BE 16.92 AFTER PROVIDING FOR WORK ING CAPITAL ADJUSTMENT AND THAT OF THE ASSESSEE BEING AT 12.12%, THE SAME WOULD BE WITHIN THE RANGE OF +/-5% OF THE ASSESSEES NET MARGIN AND THU S, NO TRANSFER PRICING ADJUSTMENT IS REQUIRED AND, THEREFORE, THE TP ADJUS TMENT MADE BY THE TPO IS LIABLE TO BE SET ASIDE. PAGE 9 OF 23 IT(TP)A NO.845/BA NG/2011 9 3.2.1 ON THE OTHER HAND, THE LEARNED D R HAD SUPPOR TED THE FINDINGS OF THE AUTHORITIES BELOW. IT WAS, FURTHER , SUBMITTED THAT THE LEARNED TPO HAD ANALYZED THE VARIOUS FACTORS, AS REC ORDED IN HIS ORDER U/S 92CA OF THE ACT, TO ARRIVE AT A CONCLUSION THAT THE ASSESSEES INTERNATIONAL TRANSACTIONS HAD RESULTED IN AN ADJUSTMENT TO THE E XTENT OF RS.3,25,82,272/- WHICH HAS BEEN DULY SUSTAINED BY THE DRP IN ITS DIRECTIONS U/S 144C OF THE ACT. IT WAS, THEREFORE, PLEADED TH AT THERE WAS NO INFIRMITY IN THE ORDER OF THE AO WARRANTING ANY INTERFERENCE O F THIS BENCH. 3.2.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE MATERIALS ON RECORD. BEFORE WE PROCEED TO CONSIDE R THE ISSUES, IT IS TO BE MENTIONED THAT THE LINE OF BUSINESS OF THE ASSESSEE IN THIS CASE AND THAT OF THREE CASE LAWS (TRILOGY, TELECORDIA & 24/7 CUSTOMER ) ARE SIMILAR, NAMELY, DEVELOPMENT OF SOFTWARE AND THE SIZE/TURNOVER WAS A LSO SIMILAR TO THAT OF THE ASSESSEE IN THE INSTANT CASE. MOREOVER, THE AS SESSMENT YEAR 2007-08 WAS SUBJECT MATTER OF CONSIDERATION IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. AND TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. AND THE COMPARABLES SELECTED BY THE TPO IN THOSE CASES A RE IDENTICAL TO THAT OF THE INSTANT CASE. NOW WE SHALL PROCEED TO DISPOSE OF THE ISSUES AS UNDER:- (I) TURNOVER FILTER 3.3 THE TPO HAD, WHILE SELECTING THE ABOVE 26 COMP ARABLES, APPLIED A LOWER TURNOVER FILTER OF RS.1 CRORE BUT P REFERRED NOT TO APPLY ANY UPPER TURNOVER LIMIT. THE SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR IN COMPARABILITY. THE ICAI TP GUIDANCE NOTE HAS OBSERV ED THAT THE TRANSACTION ENTERED INTO BY A RS.1000 CRORES COMPANY CANNOT BE COMPARED PAGE 10 OF 23 IT(TP)A NO.845/B ANG/2011 10 WITH THE TRANSACTION ENTERED INTO BY A RS.10 CRORES COMPANY AND THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPAN IES AND RELATED ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. THE TP OS RANGE HAD RESULTED IN SELECTION OF COMPANIES AS COMPARABLE SUCH AS INF OSYS WHICH WAS 277 TIMES BIGGER THAN THAT OF THE ASSESSEE. THE BANGALORE BE NCH OF THE TRIBUNAL IN THE CASE OF M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT ITA NO.1231/BANG/2010 RELYING ON DUN AND BRADSTREET S ANALYSIS HAD HELD THAT TURNOVER RANGE OF RS.1 CRORE TO 200 CRORES IS APPROPRIATE. THE SAID PROPOSITION HAS FOLLOWED BY THE EARLIER BENCHES OF THIS TRIBUNAL IN THE FOLLOWING CASES: (I) M/S. KODIAK NETWORKS (I) PVT. LTD V. ACIT ITA NO. 1413/BANG/2010; (II) M/S GENESIS MICROCHIP (I) PVT. LTD. DCIT ITA NO.1 254/BANG/2010; (III) ELECTRONIC FOR IMAGING INDIA PVT. LTD ITA NO.1171 /BANG/2010; & (IV) M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LTD. V. DCIT ITA NO.1054/BANG/2011 DATED 23.11.2012. 3.3.1 IN THE CASE OF M/S.GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT (SUPRA), RELYING ON DUN AND BRADST REET, HAS OBSERVED AS UNDER: 9. .WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, W E ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE A N UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS AN OTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENT ION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SI ZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A PO SITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMER S. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WH O ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOU LD PAGE 11 OF 23 IT(TP)A NO.845/B ANG/2011 11 COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHI CH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUD ED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON T HE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REAS ONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE H OLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1 CRORE TO 200 CR ORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSE SSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF RS.1.00 TO 20 0 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR T HE PURPOSE OF MAKING TP STUDY. 3.3.2 THE ABOVE VIEW HAS BEEN FOLLOWED IN THE RECEN T ORDER OF THE TRIBUNAL IN THE CASE OF TRILOGY E BUSINESS (SUP RA). THE RELEVANT FINDINGS OF THE TRIBUNAL ARE EXTRACTED AS UNDER: 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHO OSING THE COMPARABLES. THE ASSESSEES TURNOVER IS RS.47,46,66,638. IT WOULD THEREFORE FALL WITHIN TH E CATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD . V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOW N IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ. PAGE 12 OF 23 IT(TP)A NO.845/B ANG/2011 12 TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 C RORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES.. 3.3.3 IN VIEW OF THE ABOVE SAID REASONING AND THE ORDERS OF THE BENCHES OF BANGALORE TRIBUNAL CITED SUPRA, THE FOLL OWING 8 COMPANIES WILL HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES SELECTED BY THE TPO, NAMELY: FLEXTRONICS SOFTWARE SYSTEMS LIMITED; IGATE GLOBAL SOLUTIONS LIMITED; MINDTREE LIMITED; PERSISTENT SYSTEMS LIMITED; SASKEN COMMUNICATION TECHNOLOGIES LIMITED; TATA ELXSI LIMITED; WIPRO LIMITED; & INFOSYS TECHNOLOGIES LIMITED. IT IS ORDERED ACCORDINGLY. (II) FUNCTIONAL DISSIMILARITY 3.4 WE SHALL NOW DEAL WITH THE IMPROPER SELECTION OF COMPARABLES BY THE TPO FOR THE REASONS THAT THEY WERE FUNCTIONALLY DIFFERENT. A. ACCEL TRANSMATIC LTD. (SEG): THE SELECTION OF THIS COMPANY AS COMPARABLE BY THE TP O WAS DULY CONSIDERED BY THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS AND THE REASON RECORDED IN ITS FINDING IS EXTRACTED AS UNDER: PAGE 13 OF 23 IT(TP)A NO.845/B ANG/2011 13 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFO RESAID COMPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (S UPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE LD . COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS CO MPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENG AGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPT ING THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, W E HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. B. AVANI CIMCON TECHNOLOGIES LTD: THE SELECTION OF THIS COMPANY AS COMPARABLE BY THE TPO WAS REJECTED BY THE EARLIER BENCH OF THE TRIBUNAL IN TRILOGY E-BUSINESS FOR THE REASONS THAT- 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. TH E REASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COM PANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECI SION OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOG IES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSE SSEE TO REJECT THIS COMPANY AS A COMPARABLE. C. CELESTIAL LABS. LTD: THIS COMPANY WAS ALSO SELECTED BY THE TPO AS COMPARAB LE. HOWEVER, ON DUE CONSIDERATION OF THE ISSUE, THE EARLIER BENCH OF TH IS TRIBUNAL IN TRILOGY E- BUSINESS HAD OPINED THAT THIS COMPANY CANNOT BE AS C OMPARABLE ON THE GROUND THAT PAGE 14 OF 23 IT(TP)A NO.845/B ANG/2011 14 45. .. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISS IONS MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THE RE IS NO CLEAR BASIS ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTW ARE DEVELOPMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY OUGHT NOT TO HAVE BEE N CONSIDERED AS COMPARABLE. D. KALS INFORMATION SYSTEM LTD (SEG): INCIDENTALLY, THE SELECTION OF THIS COMPANY AS COMP ARABLE BY THE TPO WAS REJECTED BY THE TRIBUNAL IN THE CASE O F TRILOGY E-BUSINESS ON THE PREMISE THAT THE INFORMATION OBTAINED BY THE TPO BY ISSUANCE OF NOTICE U/S 133(6) OF THE ACT WAS NOT, HOWEVER, AVAI LABLE IN PUBLIC DOMAIN. THE REASONS RECORDED, FOR APPRECIATION OF FACTS, AR E EXTRACTED HEREUNDER: 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) O F THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN P UBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPAN Y AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6 .2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFE RRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMB AI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOP ING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE . PAGE 15 OF 23 IT(TP)A NO.845/B ANG/2011 15 3.4.1 IN CONFORMITY WITH THE FINDINGS OF THE COORD INATE BENCH OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS, WE A RE OF THE CONSIDERED VIEW THAT (I) ACCEL TRANSMATIC LTD (SEG); (II) AVANI CIM CON TECHNOLOGIES LTD; (III) CELESTIAL LABS. LTD., & (IV) KALS INFORMATION SYSTEM S LTD (SEG) CANNOT QUALIFY AS COMPARABLES IN THE CASE OF THE ASSESSEE U NDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. E) LUCID SOFTWARE LIMITED 3.4.2. THE ABOVE COMPANY HAS BEEN REJECTED AS COMPA RABLE IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) . THE SUBMISSIONS AND THE FINDING OF THE HONBLE MUMBAI TRIBUNAL IS REPRODUCE D BELOW:- 7.2 LUCID SOFTWARE LIMITED: IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY, BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALS O INVOLVED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HAS TRIED TO DISTINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMENT EXPENDITURE IN THIS CASE IS ARO UND 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 RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6), THE COMPAN Y HAS DESCRIBED ITS BUSINESS AS SOFTWARE DEVELOPMENT COMP ANY OR PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. THI S INFORMATION ITSELF IS VERY VAGUE AS THE SEGMENTAL DE TAILS OF OPERATING REVENUE HAS NOT BEEN MADE AVAILABLE TO EXAMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWARE PRODUCT AND SALE OF SOFTWARE SERVICE AND DEVELOPMEN T. LOOKING TO THE FACT THAT IT HAS DEVELOPED A SOFTWAR E PRODUCT NAMED AS MUULAM WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODUCT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS--VIS THE CAP ITAL PAGE 16 OF 23 IT(TP)A NO.845/B ANG/2011 16 EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENTIAL TH AT THE CHARACTERISTICS AND THE FUNCTIONS ARE BY AND LARGE S IMILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STU DY CAN BE MADE WITH FEWEST AND MOST RELIABLE ADJUSTMEN T. IF A COMPANY HAS EMPLOYED HEAVY CAPITAL IN DEVELOPMENT OF A PRODUCT THEN PROFITABILITY IN THE SALE OF PRODU CT WOULD BE ENTIRELY DIFFERENT FROM THE COMPANY, WHO IS INVOLVED IN SERVE SECTOR. THEREFORE, THIS COMPANY C ANNOT BE TREATED AS HAVING SAME FUNCTION AND PROFITABILIT Y RATIO. IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFORMATION ABOUT THE SEGMENTAL DETAILS AS TO HOW M UCH IS THE SALE OF PRODUCT AND HOW MUCH IS FROM THE SER VICES, THEREFORE, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS FOR DETERMINING ARMS LENGTH PR ICE IN THE CASE OF THE ASSESSEE. 3.4.3 THE OBJECTIONS RAISED BY THE ASSESSEE FOR IN CLUSION OF LUCID SOFTWARE LTD. AS A COMPARABLE IS PLACED AT PAGES 24 4 TO 248 OF THE PAPER BOOK FILED BY THE ASSESSEE. WE FIND IDENTICAL OBJEC TION HAS BEEN RAISED AGAINST THE INCLUSION OF LUCID SOFTWARE IN THE CASE OF TELCORDIA TECHNOLOGIES. SINCE THE FACTS AND THE ASSESSMENT YEA R ARE IDENTICAL, FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA), WE DIRECT THE ASSESSING OFFICER/TPO NOT TO INCLUDE LUCID SOFTWARE LIMITED AS A COMPARABLE. 3.4.4 AFTER EXCLUDING FROM THE TPOS LIST OF COMPA RABLES, THE COMPANIES HAVING TURNOVER EXCEEDING RS.200 CRORES A ND FIVE COMPANIES WHICH ARE FUNCTIONAL DISSIMILAR TO THAT OF THE ASSE SSEE, THE FOLLOWING THIRTEEN COMPANIES IN TPO LIST ARE RETAINED AS COMP ARABLES:- PAGE 17 OF 23 IT(TP)A NO.845/B ANG/2011 17 SL. NO. NAME OF THE COMPANY 1. DATAMATICS LIMITED 2. E ZEST SOLUTIONS LIMITED 3. GEOMETRIC LTD. (SEG) 4. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 5. ISHIR INFOTECH LTD 6. LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 7. MEDIASOFT SOLUTIONS PVT. LTD 8. MEGASOFT LTD (SEG) 9. QUINTEGRA SOLUTIONS LTD 10. R S SOFTWARE (INDIA) LTD 11. R SYSTEMS INTERNATIONAL LTD (SEG) 12. SIP TECHNOLOGIES & EXPORTS LTD 13. THIRDWARE SOLUTIONS LTD (SEG) 3.4.5. THE ABOVE COMPANIES HAVE BEEN RETAINED AS CO MPARABLES IN CONFORMITY WITH THE FINDINGS OF THE EARLIER BENCH IN THE CASES OF TRILOGY E- BUSINESS AND TELCORDIA TECHNOLOGIES PVT. LTD . (SUPRA). (F) MEGASOFT : IT IS TO BE NOTED THAT IN THE CASE OF TRILOGY E-BUS INESS, THE TRIBUNAL TURNED DOWN THE PLEA OF THE ASSESSEE T HAT M/S. MEGASOFT LTD SHOULD BE REJECTED AS COMPARABLE. HOWEVER, THE TRIBUNAL ACCEPTED THE ALTERNATIVE SUBMISSION OF THE ASSESSEE THAT THE SEGMENTAL PROFIT MARGIN IS TO BE RECKONED WITH INSTEAD OF ENTITY LEV EL MARGIN AND HELD THAT THE PROFIT MARGIN OF 23.11% WHICH IS THE MARGIN OF THE SOFTWARE SERVICE SEGMENT BE TAKEN FOR COMPARABILITY. THE DISCUSSION AND THE FINDINGS OF THE BENCH WITH REGARD TO THE ACCEPTANCE OF THE ALTERNATIVE PAGE 18 OF 23 IT(TP)A NO.845/B ANG/2011 18 SUBMISSION OF THE ASSESSEE TO ADOPT THE SEGMENTAL M ARGIN OF 23.11% ARE REPRODUCED BELOW: 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT ALL THI S COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGMENTAL MARGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SEGMENT) ALONE SHOULD BE CONSIDERE D FOR COMPARABILITY. ON THE ABOVE SUBMISSION, WE FIND TH AT THE TPO CONSIDERED THE SEGMENTAL MARGIN (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GEOMETRIC, KALS INF O SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND TATA ELXSI. BEFORE DRP THE ASSESSEE POINTED OUT THAT TH E SEGMENTAL MARGIN OF 23.11% ALONE SHOULD BE TAKEN FO R COMPARABILITY. THE DRP HAS NOT GIVEN ANY SPECIFIC FI NDING ON THE ABOVE PLEA OF THE ASSESSEE. PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHICH THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ., BLUEA LLY DIVISION AND XIUS-BCGI DIVISION. XIUS-BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPANY DEVELOPS PACKAG ED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PRODUCTS ARE SOLD AS PACKAGED PRODU CTS TO CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZE D PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FIT I NTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWA RE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (SOFTWARE DEVELOPED) WOULD CONSTIT UTE PACKAGED PRODUCT AND AROUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES REL ATED TO TRAVELLING, BOARDING AND LODGING EXPENSE. BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED (WHICH WAS AKIN TO SOFT WARE DEVELOPMENT) INTERNALLY AND THAT THE PORTION OF THE PAGE 19 OF 23 IT(TP)A NO.845/B ANG/2011 19 REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% OF THE OVERALL REVE NUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HAVING DRAWN THE ABOVE CONCLUSION, THE T PO DID NOT BOTHER TO QUANTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUCT DEVELOPMENT AND SOFTWARE DEVELOPMENT SERVICE BUT ADOPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TERMS OF RULE 10B(3)(B) OF THE RULES, AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 38. NEITHER THE TPO NOR THE DRP HAVE NOTICED THAT THERE IS BOUND TO BE A DIFFERENCE BETWEEN THE ASSESSEE AND MEGASOFT AND THE PROFIT ARISING TO THE MEGASOFT AS A RESULT OF THE EXISTENCE OF THE SOFTWA RE PRODUCT SEGMENT AND NO FINDING HAS BEEN GIVEN THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FOR THIS REASON, WE ARE INCLINED TO HOLD THAT THE P ROFIT MARGIN OF 23.11% WHICH IS THE MARGIN OF THE SOFTWAR E SERVICE SEGMENT BE TAKEN FOR COMPARABILITY... 3.4.6 IN CONFORMITY WITH THE FINDINGS OF THE EARLIER BENCH (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE TPO WAS JUSTIFIED IN PAGE 20 OF 23 IT(TP)A NO.845/B ANG/2011 20 SELECTING M/S. MEGASOFT LTD AS COMPARABLE. HOWEVER , THE AO/TPO IS DIRECTED TO TAKE SEGMENTAL MARGINS OF 23.11% FOR CO MPARABILITY. IT IS ORDERED ACCORDINGLY. (III) RELATED PARTY TRANSACTION: 3.5 ISHIR INFOTECH LIMITED : THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF ISHIR INFOTECH LIMITED AS A COMPARABLE BEING RELATED PARTY TRANSACTION IN EXCESS OF 15% OF TOTAL SALES/REVENUE . THE TPO HAD SET A LIMIT OF 25% ON THE RELATED PARTY TRANSACTION. ACCORDING TO THE ASSESSEE, THE RECENT ORDER OF THE TRIBUNAL IN THE CASE OF 24/7 CU STOMER COM PRIVATE LTD. HAD HELD THAT IF COMPARABLE COMPANY HAS RELATED PART Y TRANSACTION EXCEEDED 15% OF THE TOTAL SALES/REVENUE, THE SAME SHOULD NOT BE COMPARABLE. 3.5.1 THE LEARNED DR PRESENT WAS DULY HEARD. 3.5.2 THE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER CO M PRIVATE LTD. HAD HELD THAT IF THE RELATED PARTY TRANSACTION EXCEEDED 15% OF THE TOTAL SALES/REVENUE, THE SAME CANNOT BE TAKEN AS A COMPAR ABLE. THE RELEVANT CONTENTION THAT WAS RAISED AND THE FINDING OF THE T RIBUNAL READ AS FOLLOWS:- 13.0 RELATED PARTY TRANSACTIONS IN RESPECT OF THE GROUND RAISED AT S. NO.1 REGARDIN G ACCEPTANCE OF COMPARABLE COMPANIES HAVING RELATED P ARTY TRANSACTIONS AS PROPOSED BY THE TPO, THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE TRANSFER PRICING REGULATIONS DO NOT STIPULATE ANY MINIMUM LIMIT OF RE LATED PARTY TRANSACTIONS WHICH FORM THE THRESHOLD FOR EXCLUSION AS A COMPARABLE. IN THIS REGARD, THE LEA RNED COUNSEL FOR THE ASSESSEE OBJECTED TO THE TPOS SETT ING A PAGE 21 OF 23 IT(TP)A NO.845/B ANG/2011 21 LIMIT OF 25% ON RELATED PARTY TRANSACTIONS. HE OBJE CTED TO THE INCLUSION OF COMPARABLES BEING RELATED PARTY TRANSACTIONS IN EXCESS OF 15% OF SALES/REVENUE. IN SUPPORT OF THIS PROPOSITION, THE LEARNED COUNSEL FO R THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HON BLE BENCH OF THE ITAT, DELHI IN THE CASE OF SONY INDIA ( P) LTD. REPORTED IN 2008-TIOL-439-ITAT-DELJI DT.23.12.2008. THE LEARNED COUNSEL FOR THE ASSESSE E DREW OUR ATTENTION TO PARA 115.3 OF THE ORDER WHERE IN THE TRIBUNAL HAS HELD THAT .WE ARE FURTHER OF THE VIEW THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED IF ITS RELATED PARTY TRANSACTIONS DO NOT EXCEED 10 TO 15% OF TOTAL REVENUE. WITHIN THE ABOVE LIMIT, TRANSACTIONS CANNOT BE HELD TO BE SIGNIFICANT TO INFLUENCE THE PROFITABILITY OF THE COMPARABLES. FOR THE PURPOSE OF COMPARISON WHAT IS TO BE JUDGED IS THE IMPACT OF THE RELATED PARTY TRANSACTIONS VIS- -VIS SALES AND NOT PROFIT SINCE PROFIT OF AN ENTERPRISE IS INFLUENCED BY LARGE NUMBER OF OTHER FACTORS . RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD. (SUPRA), THE ASSESSING OFFICER/TPO ARE DIRECTED TO EXCLUDE AFTER DUE VERIFICATION THOSE COMPARABLES FROM THE LIST WITH R ELATED PARTY TRANSACTIONS OR CONTROLLED TRANSACTIONS IN EXC ESS OF 15% OF TOTAL REVENUES FOR THE FINANCIAL YEAR 2003-04 . 3.5.3 FOLLOWING THE COORDINATE BENCH ORDER OF THE TRIBUNAL IN THE CASE CITED SUPRA, WE DIRECT THE ASSESSING OFFICER/T PO TO EXCLUDE, AFTER DUE VERIFICATION, THOSE COMPARABLES FROM THE LIST W ITH THE RELATED PARTY TRANSACTIONS OR CONTROLLED TRANSACTIONS IN EXCESS O F 15% OF THE TOTAL REVENUE FOR THE FINANCIAL YEAR 2006-07. IT IS TO B E MENTIONED HERE, PAGE 22 OF 23 IT(TP)A NO.845/B ANG/2011 22 GEOMETRIC LTD. IS ALSO TO BE REMOVED FROM THE COMPA RABLE LIST, SINCE THAT COMPANY WAS HAVING RPT AT 19.98% (GOING BY ASSESSEES OWN CALCULATION), HOWEVER, NO ARGUMENT WAS RAISED FOR ITS EXCLUSION B Y THE ASSESSEE, PROBABLY, ON ACCOUNT OF LOW MARGIN OF GEOMETRIC LTD. IV) CALCULATION OF OPERATING INCOME AND NET MARGIN 3.6 THE TPO HAD MADE A REDUCTION OF RS.6,19,336/- TO THE OPERATING INCOME OF RS.27,68,28,114/- (AS CONSIDERE D BY THE ASSESSEE) ON THE GROUND THAT THE SAID INCOME PERTAINS TO PROFIT AND SALE OF ASSET, WHICH WOULD NOT FORM PART OF THE OPERATING INCOME. ACCOR DING TO THE ASSESSEE, IN THE TP STUDY, WHILE ARRIVING AT THE OPERATING INCOME OF RS.27,68,28,114/-, THE ASSESSEE HAD SPECIFICALLY EXCLUDED FURTHER INCOM E AMOUNTING TO RS.7,54,385/-, WHICH INCLUDES A SUM OF RS.6,19,336/ - (SCHEDULE 10 TO THE P&L ACCOUNT). THEREFORE, IT WAS CONTENDED, REDUCTI ON MADE BY THE TPO IS UNWARRANTED. IF RS.6,19,336/- IS NOT EXCLUDED, THE OPERATING/NET MARGIN OF THE ASSESSEE WOULD BE AT 12.2% INSTEAD OF 11.87% FI XED BY THE TPO. 3.6.1 THE LEARNED DR PRESENT WAS DULY HEARD. 3.6.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE MATERIALS ON RECORD. THE TPO IS DIRECTED TO VERIFY THE CLAIM MADE BY THE ASSESSEE WHETHER A SUM OF RS.6,19,336/- IS ALREADY EXCLUDED AND THEREAFTER, ARRIVED AT THE OPERATING INCOME OF RS.27,68,28,114/-. IF T HE OPERATING INCOME IS ARRIVED AT AFTER EXCLUDING RS.6,19,336/- BY THE ASSE SSEE IN TP STUDY, THEN NO FURTHER REDUCTION OF THE SAID AMOUNT IS WARRANTE D. HENCE, THIS ISSUE IS RESTORED TO THE FILE OF ASSESSING OFFICER/TPO FOR V ERIFICATION AND NECESSARY ACTION, IF REQUIRED. IT IS ORDERED ACCORD INGLY. PAGE 23 OF 23 IT(TP)A NO.845/B ANG/2011 23 3.7 IT IS TO BE NOTED THAT NO SUBMISSIONS/ARGUMENT S WERE RAISED IN THE COURSE OF HEARING WITH REGARD TO OTHER ISSUES O F TP ADJUSTMENT, APART FROM THE ABOVE DISCUSSED ISSUES. HENCE, THE ISSUE RELATED TO REJECTION OF USE OF NON-CONTEMPORANEOUS DATA, THE TPOS ACTION I N TAKING RECOURSE UNDER SECTION 133(6) WITHOUT GIVING AN OPPORTUNITY OF CROS S EXAMINATION TO THE ASSESSEE, FILTER OF ONSITE TURNOVER >75% ETC. ARE N OT CONSIDERED/ ADJUDICATED. 3.7.1 IN CONCLUSION, THE ASSESSING OFFICER/TPO IS DIRECTED TO WORK OUT THE ALP OF THE ASSESSEE IN ACCORDANCE WITH THE DIRECTIONS OF THIS BENCH (SUPRA) AND IF FOUND THAT THE DIFFERENTIAL IN THE M ARGIN OF THE ASSESSEE AND THE COMPARABLES IS BEYOND 5% BANDWIDTH RECOGNIZED IN PROVISO TO SECTION 92C(2) OF THE ACT, THEN ADJUSTMENT IS REQUIRED TO B E MADE TO THE REPORTED VALUE OF THE ASSESSEES TRANSACTION WITH ITS AE. IT IS ORDERED ACCORDINGLY. 4. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED AS INDICATED ABOVE. THE ORDER IS PRONOUNCED ON THE 22 ND DAY OF FEBRUARY, 2013 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE C IT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BAN GALORE.
