Transwitch India Private Limited, Bangalore V. DCIT, Bangalore

ITA 948/BANG/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0678 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 25-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: FARHAT HUSSAIN QURESHI CITII
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92C; 143(3); 234B; 133(6)

Judgement Text

PAGE 1 OF 23 IT(TP)A N O.948/BANG/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.948/BANG/2011 (ASSESSMENT YEAR 2007-08) M/S TRANSWITCH INDIA PRIVATE LIMITED, (FORMERLY KNOWN AS CENTILLIUM INDIA PRIVATE LIMITED), NO.3, SALARPURIA CITADEL, FIRST FLOOR, ADUGODI, HOSUR ROAD, BANGALORE-560 030. PA NO. AAACL 3009 P VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(2), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 13.03.2013 DATE OF PRONOUNCEMENT : 28.03.2013 APPELLANT BY : SHRI CHAVALI NARAYAN, C. A. RESPONDENT BY : SHRI FARHAT HUSSAIN QURESH I, CIT-II ORD ER PER GEORGE GEORGE K : THIS APPEAL, AT THE INSTANCE OF THE ASSES SEE COMPANY, IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER UNDER SECTION 143(3) R. W. S. 144C OF THE ACT DATED 23.8.2011. THE RELEVAN T ASSESSMENT YEAR IS 2007-08. 2. CENTILLUM INDIA PVT. LTD. MERGED WI TH TRANSWITCH INDIA PVT. LTD. (HEREINAFTER REFERRED TO AS ASSESSEE COMPANY). T RANSWITCH INDIA PVT. LTD. (ASSESSEE) IS A CAPITAL SERVICE PROVIDER ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENT ERPRISES (AE). FOR THE PAGE 2 OF 23 IT(TP)A N O.948/BANG/2011 2 ABOVE SERVICES, THE ASSESSEE IS REMUNERATED ON A CO ST PLUS 14 PERCENT MARKUP BASIS BY CENTILLIUM US (AE). DURING THE YEA R UNDER CONSIDERATION, THE ASSESSEE HAD INTERNATIONAL TRANSACTION WITH ITS AE TO THE TUNE OF RS.29,67,31,922/-. ACCORDINGLY, THE ASSESSING OFFI CER REFERRED THE CASE TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE THE ARMS LENGTH PRICE (ALP). THE TPO, AFTER EXAMINING THE DETAILS FURNIS HED BY THE ASSESSEE, PASSED AN ORDER UNDER SECTION 92CA OF THE ACT DATED 27.8.2010, BY MAKING AN ADJUSTMENT OF RS.2,76,72,297/- IN RESPECT OF SOF TWARE DEVELOPMENT SERVICES. THE ASSESSING OFFICER THEREAFTER PASSED A DRAFT ASSESSMENT ORDER ON 18.11.2010, ASSESSING THE TOTAL INCOME OF THE ASSESSEE AT RS.3,12,46,899/-. IN THE DRAFT ASSESSMENT ORDER, T HE FOLLOWING ADDITIONS WERE MADE WHILE COMPUTING THE TOTAL INCOME OF THE A SSESSEE: (A) ADJUSTMENT TO ARMS LENGTH PRICE TO THE TUNE OF RS. 2,76,72,297/- WITH REFERENCE TO TPOS ORDER IN RESPECT OF INTERNATIONA L TRANSACTION DEALT BY THE ASSESSEE WITH ITS AE; & (B) THE REDUCTION OF THE AMOUNT OF RS.17,32,230/- BEING THE LEASE LINE CHARGES, RS.4,29,869/- BEING THE BROADBAND CHARGES, RS.78,26,397/- TOWARDS THE FOREIGN TRAVEL EXPENSES AND RS.80,115/- TOWARDS THE INSURANCE EXPENSES WHICH DIRECTLY ATTRIBUTABLE TO T HE EXPORT OF SOFTWARE WERE EXCLUDED FROM THE EXPORT TURNOVER ONL Y AND THE DEDUCTION U/S 10A WAS RECOMPUTED, ACCORDING TO WHIC H, THE ADDITION WAS ARRIVED AT RS.14,39,586/-. 3. AGGRIEVED, THE ASSESSEE APPROACHED THE DISPUTE RESOLUTION PANEL (DRP) FOR RELIEF. THE DRP HAD, AFTER TAKING INTO A CCOUNT THE CONTENTIONS PUT-FORTH BY THE ASSESSEE AND ALSO FOR THE REASONS RECORDED IN ITS DIRECTIONS UNDER SECTION 144C OF THE ACT DATED 16.8 .2011, CONFIRMED THE ORDERS OF THE TPO AND THE ASSESSING OFFICER. THERE AFTER, ASSESSING OFFICER HAD PASSED THE FINAL ORDER U/S 143(3) R. W. S. 144C OF THE ACT ON 23.8.2011 DULY INCORPORATING THE DIRECTIONS OF THE DRP. PAGE 3 OF 23 IT(TP)A N O.948/BANG/2011 3 4. AGGRIEVED BY THE FINAL ORDER OF THE ASS ESSING OFFICER (SUPRA), THE ASSESSEE HAS COME UP WITH THE PRESENT APPEAL BEFORE US, RAISING FIFTEEN GROUNDS. 4.1. GROUND NOS.1 AND 4 ARE GENERAL IN NATURE AND NO SPECIFIC ADJUDICATION IS CALLED FOR AND, HENCE, THE SAME ARE DISMISSED. 4.1.1. GROUND NO.14, WITH REGARD TO CHARGING OF INTEREST U/S 234B OF THE ACT, WE WOULD LIKE TO MAKE IT CLEAR THAT LEVY OF IN TEREST U/S 234B OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE AND, THUS, THIS PART OF THE GROUND IS DISMISSED. HOWEVER, CHARGING OF INTEREST U/S 234D OF THE ACT, IT IS CLARIFIED THAT THE AO WAS WITHIN HIS REALM TO CHARGE INTEREST U/S 234D OF THE ACT, IN VIEW OF THE FINDING OF THE HONBLE TRIBUNAL, DELHI SPECIAL BENCH IN THE CASE OF ITO, W 11(1), NEW DELHI V. M/S. EKTA PROMOTERS P VT. LTD ITAT, DELHI S.B REPORTED IN (2008)-305 ITR (AT) 1(DEL)(SB). 4.1.2. GROUND NO.15 IS REGARDING THE INITIATIO N OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. THE CHALLENGE TO INITIATION OF PENALTY PROCEEDING IS PREMATURE AND, HENCE, THIS GROUND IS ALSO DISMISSED. GROUND NOS. 2 AND 3 IS WITH REGARD TO RE-COMPUTATION OF DE DUCTION UNDER SECTION 10A OF THE ACT. GROUND NOS.5 TO 13 IS REGARDING TRA NSFER PRICING ISSUE. WE SHALL NOW TAKE UP THE ISSUES ARGUED BY THE LEARNED COUNSEL FOR THE ASSESSEE FOR ADJUDICATION CHRONOLOGICALLY AS UNDER: I. 10A DEDUCTION (GROUND NO.2 & 3) : 5. THE ASSESSING OFFICER HAD RE-COMPUTED THE DEDUCT ION UNDER SECTION 10A OF THE ACT BY HOLDING THAT THE COMMUNICATION EX PENSES (I.E., THE LEASE LINE CHARGES, BROADBAND CHARGES, FOREIGN TRAVEL EXP ENSES AND INSURANCE EXPENSES) ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA PAGE 4 OF 23 IT(TP)A N O.948/BANG/2011 4 SHOULD BE REDUCED FROM THE EXPORT TURNOVER WHILE CO MPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. IN GROUND NO.2 RAISE D, THE ASSESSEE SUBMITTED THAT THE ABOVE SAID EXPENSES SHOULD NOT B E REDUCED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SEC TION 10A OF THE ACT. ALTERNATIVELY, IN GROUND NO.3, IT WAS SUBMITTED THA T IF THE ABOVE EXPENSES ARE REDUCED FROM THE EXPORT TURNOVER, AN EQUAL AMOU NT ALSO BE REDUCED FROM THE TOTAL TURNOVER FOR COMPUTING DEDUCTION UND ER SECTION 10A OF THE ACT. THE ALTERNATIVE SUBMISSION, ACCORDING TO THE LEARNED AR, IS SQUARELY COVERED BY THE RULING OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V TATA ELXSI LTD. (2012) 349 ITR 98 (KAR.). 5.1. THE LEARNED DR WAS UNABLE TO CONTROVERT THE S UBMISSIONS MADE BY THE LEARNED AR. 5.2. WE HAVE HEARD THE RIVAL SUBMISSION S AND PERUSED THE MATERIALS ON RECORD. THE HONBLE JURISDICTIONAL HIGH COURT, IN THE CASE CITED SUPRA, HAD HELD THAT WHEN THE EXPENSES ARE REDUCED FROM TH E EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER IN ORDER TO MAINTAIN PARITY BETWEEN THE NUMERATOR AND THE DENOMINATOR. IN THE LIGHT OF THE ABOVE JUDGMENT, WE DIRECT THE ASSESSING OFFICER TO REDUCE THE SAID SUM FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE C OMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. IT IS ORDERED ACCORDINGLY. IN THE RESULT, GROUND NO.3 IS ALLOWED. SINCE WE HAVE DECIDED THE ALTERN ATE PLEA OF THE ASSESSEE, FOLLOWING THE JUDGMENT OF THE HONBLE JURISDICTIONA L HIGH COURT CITED SUPRA, WE ARE NOT ADJUDICATING GROUND NO.2 REFERRED ABOVE. PAGE 5 OF 23 IT(TP)A N O.948/BANG/2011 5 II. TRANSFER PRICING (GROUND NOS.5 TO 13) 6. AS STATED EARLIER, THE ASSESSEES REPORTED VALU E OF THE INTERNATIONAL TRANSACTION WITH ITS AE DURING THE AS SESSMENT YEAR 2007-08 WAS AT RS.29,67,31,922/-. THE ASSESSEE, IN ITS TRAN SFER PRICING STUDY, HAD ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF THE ABOVE SAID INTER NATIONAL TRANSACTION. THE COMPARABILITY ANALYSIS WAS DONE BASED ON THE DA TA AVAILABLE IN THE PROWESS/ CAPITAL LINE DATA-BASES. THE ASSESSEE IN ITS TP STUDY HAD SELECTED 28 COMPANIES AS COMPARABLES. THE ASSESSEE HAD UNDER TAKEN TO DETERMINE THE FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSETS U TILIZED IN RESPECT OF THE TRANSACTIONS UNDERTAKEN BY IT WITH ITS AE. AFTER E CONOMIC ANALYSIS FOR THE DETERMINATION OF THE ALP WAS UNDERTAKEN AND BASED O N THE TRANSFER PRICING STUDY, THE ASSESSE TREATED ITS INTERNATIONAL TRANSA CTION WITH ITS AE IS WITHIN THE ARMS LENGTH RANGE. THE NET MARGIN ON COST EAR NED BY THE ASSESSEE, THE COMPARABLES SELECTED BY THE ASSESSEE AND THEIR ARIT HMETIC MEAN ARE AS FOLLOWS:- NET MARGIN ON COST EARNED BY THE A SSESSEE PARTICULARS AMOUNT (INR) REVENUE SERVICE INCOME 296,731,922 FOREIGN EXCHANGE GAIN 58,046 TOTAL OPERATING REVENUE 296,789,968 EXPENDITURE PERSONNEL EXPENSES 184,825,121 ADMINISTRATIVE AND GENERAL EXPENSES 58,143,243 DEPRECIATION 18,855,833 TOTAL OPERATING EXPENDITURE 261,824,197 OPERATING PROFIT/ OPERATING COST 13.35% PAGE 6 OF 23 IT(TP)A N O.948/BANG/2011 6 COMPARABLES SELECTED BY THE ASSESSEEAND THEIR ARITH METIC MEAN SL. NO. NAME OF THE COMPANY OPERATI NG MARGINS (%) 1 AKSHAY SOFTWARE TECHNOLOGIES LIMITED 7.64% 2 AZTECSOFT LIMITED (FORMERLY KNOWN AS AZTECH SOFTWARE & TECHNOLOGY SERVICES LIMITED 18.42% 3 FOUR SOFT LIMITED 22.27% 4 GEBBSINFOTECH LIMITED 16.52% 5 GENESYS INTERNATIONAL CORPN. LIMITED -11.24% 6 GOLDSTONE TECHNOLOGIES LIMITED 3.79% 7 HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED 35.17% 8 INFOSYS TECHNOLOGIES LIMITED 41.04% 9 KPIT CUMMINS INFOSYSTEMS LIMITED 13.30% 10 LANCO GLOBAL SYSTEMS LIMITED 6.73% 11 LARSEN & TOUBRO INFOTECH LIMITED 11.03% 12 MAARS SOFTWARE INTERNATIONAL LIMITED 17.12% 13 MELSTAR INFORMATION TECHNOLOGIES LIMITED 1.30% 14 MINDTREE CONSULTING LIMITED 16.60% 15 ORIENT INFORMATION TECHNOLOGY LIMITED 2.68% 16 QUINTEGRA SOLUTIONS LIMITED 11.93% 17 R S SOFTWARE (INDIA) LIMITED 12.19% 18 S I P TECHNOLOGIES AND EXPORTS LIMITED 25.25% 19 SASKEN COMMUNICATION TECHNOLOGIES LIMITED 17.71% 20 SASKEN NETWORK SYSTEMS LIMITED 16.19% 21 SATYAM COMPUTERS SERVICES LIMITED 29.27% 22 TVS INFOTECH LIMITED -4.81% 23 TRANSWORLDINFOTECH LIMITED 26.34% 24 TYCHE INDUSTRIES LIMITED 10.62% 25 VJIL CONSULTING LIMITED 6.26% 26 VMF SOFTECH LIMITED 18.39% 27 VISUALSOFT TECHNOLOGIES LIMITED 18.73% 28 ZYLOG SYSTEMS LIMITED 16.32% ARITHMETIC MEAN 14.53% PAGE 7 OF 23 IT(TP)A N O.948/BANG/2011 7 6.1 THE TPO HAD CONSIDERED THE TNMM, AS SELECTED BY THE ASSESSEE, AS THE MOST APPROPRIATE METHOD IN THE FAC TS AND CIRCUMSTANCES OF THE CASE. HOWEVER, THE TPO REJECTED THE ANALYSIS C ARRIED OUT BY THE ASSESSEE AND CONDUCTED A FRESH ECONOMIC ANALYSIS BY SELECTING 26 COMPARABLES. THE TPO ACCEPTED 8 COMPANIES OUT OF A SSSESSEES LIST OF COMPARABLES AND REJECTED THE OTHER TWENTY COMPANIES . THEREAFTER, THE ADJUSTED NET MARGIN OF THE COMPARABLE COMPANIES (AF TER PROVIDING FOR THE WORKING CAPITAL ADJUSTMENT OF 1.55%) WAS WORKED AT 23.59% ON OPERATING COST. THE NET MARGIN OF THE ASSESSEE WAS DETERMINE D AT 13.04% ON OPERATING COST BY THE TPO (AS AGAINST 13.35% DETERM INED BY THE ASSESSEE CONSIDERING THE FOREIGN EXCHANGE GAINS AS OPERATING ITEM). ACCORDINGLY, THE TPO MADE AN ADJUSTMENT OF RS.2,76,72,297/- TO THE I NTERNATIONAL TRANSACTION OF THE ASSESSEE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. THE COMPARABLES SELECTED BY THE TPO AND THEIR ARITH METIC MEAN AND COMPUTATION OF ARMS LENGTH PRICE BY THE TPO ARE AS UNDER:- COMPARABLES SELECTED BY THE TPO AND THEIR ARITHMETIC MEAN SL. NO. COMPANY NAME OPERATING MARGINS (%) 1 ACCEL TRANSMATIC LIMITED 21.11% 2 AVANI CIMEON TECHNOLOGIES LIMITED 52.59% 3 CELESTIAL LABS LIMITED 58.35% 4 DATAMATICS LIMITED 1.38% 5 E-ZEST SOLUTIONS LIMITED 36.12% 6 FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 25.31% 7 GEOMETRICS LIMITED (SEG.) 10.71% 8 HELIOS & METHESON TECHNOLOGY LIMITED 36.63% 9 IGATE GLOBAL SOLUTIONS LIMITED 7.49% 10 INFOSYS TECHNOLOGIES LIMITED 40.30% 11 ISHIR INFOTECH LIMITED 30.12% 12 KALS INFORMATION SYSTEMS LTD. (SEG.) 30.55% PAGE 8 OF 23 IT(TP)A N O.948/BANG/2011 8 SL. NO. COMPANY NAME OPERATING MARGINS (%) 13 LGS GLOBAL LIMITED (LANCO GLOBAL SOLUTIONS LIMITED) 15.75% 14 LUCID SOFTWARE LIMITED 19.37% 15 MEDIASOFT SOLUTIONS LIMITED 3.66% 16 MEGASOFT LIMITED 60.23% 17 MINDTREE LIMITED 16.90% 18 PERSISTENT SYSTEMS LIMITED 24.52% 19 QUINTEGRA SOLUTIONS LIMITED 12.56% 20 R S SOFTWARE INTERNATIONAL LIMITED 13.47% 21 R SYSTEMS INTERNATIONAL LTD. (SEG.) 15.07% 22 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 22.16% 23 SIP TECHNOLOGIES & EXPORTS LTD. 13.90% 24 TATA ELXI LTD.(SEG) 26.51% 25 THIRDWARE SOLUTIONS LIMITED 25.12% 26 WIPRO LIMITED (SEG.) 33.65% ARITHMETIC MEAN 25.14% COMPUTATION OF THE ARMS LENGTH PRICE BY THE TPO ARMS LENGTH ARITHMETIC MARGIN (A) 25.14% LESS: WORKING CAPITAL ADJUSTMENT (B) 1.55% ADJUSTED MEAN MARGIN OF THE COMPARABLES (C) 23.59% OPERATING COST (D) 26,24,84,197 ARMS LENGTH PRICE (E = D* [100%+C]) 32,44,04,219 PRICE CHARGED IN INTERNATIONAL TRANSACTION (F) 29,6 7,31,922 SHORTFALL BEING ADJUSTMENT U/S 92CA (G = E-F) 2,76,72,297 6.2. THE ADJUSTMENT MADE BY THE TPO WAS AFFIRMED BY THE DRP AND THE SAME WAS INCORPORATED IN THE FINAL ASSESSMENT O RDER BY THE ASSESSING OFFICER. THIS HAS BEEN OBJECTED TO BY THE ASSESSEE. 6.3 IT WAS SUBMITTED BY THE LEARNED AR THAT THE ASSESSEES MARGIN WOULD BE WITHIN THE PARAMETERS, IF CERTAIN COMPARAB LE ARE EXCLUDED BY FOLLOWING THE REASONING OF THE ORDERS OF THE TRIBUN AL; NAMELY, PAGE 9 OF 23 IT(TP)A N O.948/BANG/2011 9 M/S GENESIS MICROCHIP (I) PRIVATE LIMITED - ITA NO. 1254/BANG/2010; TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. ITA NO. 1054/BANG/2011 DATED 23.11.2012; MERCEDES BENZ RESEARCH DEVELOPMENT INDIA PRIVATE LT D. (IT(TP)A NO.1222/BANG/2011 DATED 22.2.2013. I) TURNER FILTER & FUNCTIONAL DISSIMILARITY 6.4. IT WAS SUBMITTED THAT THE 8 COMPARABLES ARE T O BE REJECTED FROM THE TPOS LIST ON ACCOUNT OF THE TURN OVER FILTER. THE LEARNED AR RELIES ON THE FOLLOWING ORDERS OF THE TRIBUNAL F OR THE ABOVE PROPOSITION:- I) ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 (ITA NO.1354/BANG/2010 DATED 29.2.2012). 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 4 COMPANIES ARE TO BE EXCLUDED ON ACCOUNT OF FUNCTIONAL DISSIMILARITY. FOR THE ABOVE ARGUMEN T, THE LEARNED AR RELIED ON THE ORDERS OF THE TRIBUNAL IN THE CASES OF M/S. TRI LOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. AND MERCEDES BENZ RESEARCH DEVELOPM ENT INDIA PRIVATE LTD. (SUPRA). IT WAS SUBMITTED THAT ISHIR INFOTECH LTD. (THE COMPARABLE OF THE TPO) IS TO BE REJECTED SINCE IT FAILS EMPLOYEES COS T FILTER OF 25% OF REVENUE AND FOR THIS CONTENTION, RELIANCE WAS PLACED ON THE RECENT ORDER OF THE BANGALORE TRIBUNAL IN THE CASE OF MERCEDES BENZ RES EARCH DEVELOPMENT INDIA PRIVATE LTD. (IT(TP)A NO.1222/BANG/2011 DATED 22.2.2013 (SUPRA). IT WAS, FURTHER, SUBMITTED THAT LUCID SOFTWARE SHOULD ALSO BE REJECTED AS COMPARABLE ON ACCOUNT OF FUNCTIONAL DISSIMILARITY B ASED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH DEVE LOPMENT INDIA PRIVATE LTD. IN THE CASE OF MEGASOFT LIMITED, IT WAS SUBMI TTED THAT THE OPERATING MARGIN IS TO BE TAKEN AT 23.11% (SEGMENTAL MARGIN) FOLLOWING THE FINDINGS IN PAGE 10 OF 23 IT(TP)A NO.948/BANG/2011 10 THE CASE OF TRILOGY E-BUSINESS. IN CONCLUSION, IT WAS ARGUED BY THE LEARNED AR THAT THE ARITHMETIC MEAN OF 12 REMAINING OF THE 26 COMPARABLES WOULD BE 10.44% AFTER PROVIDING FOR WORKING CAPITAL ADJUS TMENT AND FACTORING IN RISK ADJUSTMENT. SINCE THE ASSESSEES OPERATING MA RGIN IS AT 13.35% (AFTER CONSIDERING FOREIGN EXCHANGE GAINS), THE SAME WOULD BE WITHIN THE RANGE OF +/-5% OF THE ASSESSEES NET MARGIN AND THUS, NO TRA NSFER PRICING ADJUSTMENT IS REQUIRED AND, THEREFORE, THE TP ADJUSTMENT MADE BY THE TPO IS LIABLE TO BE SET ASIDE. 6.4.1. ON THE OTHER HAND, THE LEARNED DR HAD SUPPO RTED THE FINDINGS OF THE TRANSFER PRICING OFFICER AND THE DRP ON THES E ISSUES. 6.5 WE HAVE HEARD THE RIVAL SUBMISSION S AND PERUSED THE MATERIALS ON RECORD. BEFORE WE PROCEED TO CONSIDER THE ISSU ES, IT IS TO BE MENTIONED THAT THE LINE OF BUSINESS OF THE ASSESSEE IN THIS C ASE AND THAT OF TWO CASE LAWS (TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. & MERCEDES BENZ RESEARCH DEVELOPMENT INDIA PRIVATE LTD.) ARE SIMILAR, NAMELY , DEVELOPMENT OF SOFTWARE AND THE SIZE/TURNOVER WAS ALSO SIMILAR TO THAT OF THE ASSESSEE IN THE INSTANT CASE. MOREOVER, THE ASSESSMENT YEAR 20 07-08 WAS SUBJECT MATTER OF CONSIDERATION IN THE CASE OF TRILOGY E-BU SINESS SOFTWARE INDIA PVT. LTD. AND MERCEDES BENZ RESEARCH DEVELOPMENT IN DIA PRIVATE LTD. AND THE COMPARABLES SELECTED BY THE TPO IN THOSE CASES ARE IDENTICAL TO THAT OF THE INSTANT CASE. NOW WE SHALL PROCEED TO DISPOSE OF THE ISSUES ARGUED AS UNDER:- (I) TURNOVER FILTER 6.5.1. THE TPO HAD, WHILE SELECTING THE ABOVE 26 CO MPARABLES, APPLIED A LOWER TURNOVER FILTER OF RS.1 CRORE BUT P REFERRED NOT TO APPLY ANY PAGE 11 OF 23 IT(TP)A NO.948/BANG/2011 11 UPPER TURNOVER LIMIT. THE SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR IN COMPARABILITY. THE ICAI TP GUIDANCE NOTE HAS OBSER VED THAT THE TRANSACTION ENTERED INTO BY A RS.1000 CRORES COMPAN Y CANNOT BE COMPARED 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 T POS 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 BEEN FOLLOWED IN VARIOUS ORDERS OF THIS TRIBUNAL IN THE FOLLOWING CASES: (I) ASSESSEES OWN CASE FOR AY 2006-07 ITA NO.1354/BA NG/2010 DATED 29.2.2012; (II) M/S GENESIS MICROCHIP (I) PVT. LTD. DCIT ITA NO.1 254/BANG/2010; (III) ELECTRONICS FOR IMAGING INDIA PVT. LTD ITA NO.117 1/BANG/2010; & (IV) M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LTD. V. DCIT ITA NO.1054/BANG/2011 DATED 23.11.2012. 6.5.2. IN THE CASE OF M/S GENISYS INTEGRATING SYSTE MS (INDIA) PVT. LTD. V. DCIT (SUPRA), RELYING ON DUN AND BRADS TREET, IT HAS BEEN 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 IDENTIF YING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY W OULD BE IN A PAGE 12 OF 23 IT(TP)A NO.948/BANG/2011 12 POSITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEE S WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NO T HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COM E DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIO US BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MA KING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SAL ES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET IS MORE SUITABLE AND REASON ABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS .1 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE A ND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.1 5 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200 C RORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 6.5.3. THE ABOVE VIEW HAS BEEN FOLLOWED IN THE RECE NT ORDER OF THE TRIBUNAL IN THE CASE OF TRILOGY E BUSINESS (SU PRA). 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 AS SESSEE CLEARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FI LTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSEES TURNOVER IS RS.47,46,66,638. IT WOULD T HEREFORE FALL WITHIN THE CATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DO WN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LT D. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAV ING TURNOVER OF MORE THAN 200 CRORES HAVE TO BE ELIMINA TED FROM THE LIST OF COMPARABLES AS LAID DOWN IN SEVERA L DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE AS SESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY T HE TPO VIZ. PAGE 13 OF 23 IT(TP)A NO.948/BANG/2011 13 TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CR ORES (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. 13149.00CR ORES.. 6.5.4. 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 COMPARABLE S ELECTED BY THE TPO, NAMELY: FLEXTRONICS SOFTWARE SYSTEMS LIMITED; IGATE GLOBAL SOLUTIONS LIMITED; INFOSYS TECHNOLOGIES LIMITED. MINDTREE LIMITED; PERSISTENT SYSTEMS LIMITED; SASKEN COMMUNICATION TECHNOLOGIES LIMITED; TATA ELXSI LIMITED;& WIPRO LIMITED IT IS ORDERED ACCORDINGLY. (II) FUNCTIONAL DISSIMILARITY 6.6. WE SHALL NOW DEAL WITH THE IMPROPER SELECTION OF COMPARABLE BY THE TPO FOR THE REASONS THAT THEY WER E FUNCTIONALLY DIFFERENT. A. ACCELTRANSMATIC LTD. (SEG): 6.6.1. THE SELECTION OF THIS COMPANY AS COMPARABLE BY THE TPO 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 14 OF 23 IT(TP)A NO.948/BANG/2011 14 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID CO MPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE A SSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECI SION REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTE D THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSES SEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, W E HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARA BLES. B. AVANI CIMCON TECHNOLOGIES LTD: 6.6.2. THE SELECTION OF THIS COMPANY AS COMPARABLE BY THE TPO WAS REJECTED BY THE EARLIER BENCH OF THE TRIBUNAL I N TRILOGY E-BUSINESS FOR THE REASONS THAT- 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE ACCEPTED. THE REASONS GIVEN BY THE ASSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE A RE FOUND TO BE ACCEPTABLE. THE DECISION OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE. C. CELESTIAL LABS. LTD: 6.6.3. THIS COMPANY WAS ALSO SELECTED BY THE TPO AS COMPARABLE. HOWEVER, ON DUE CONSIDERATION OF THE ISSUE, THE EAR LIER BENCH OF THIS TRIBUNAL IN TRILOGY E-BUSINESS HAD OPINED THAT THIS COMPANY CANNOT BE AS COMPARABLE ON THE GROUND THAT 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 MANUF ACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THERE IS NO CLEAR BASI S ON WHICH PAGE 15 OF 23 IT(TP)A NO.948/BANG/2011 15 THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN T HE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. WE THE REFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY O UGHT NOT TO HAVE BEEN CONSIDERED AS COMPARABLE. D. KALS INFORMATION SYSTEM LTD (SEG): 6.6.4. INCIDENTALLY, THE SELECTION OF THIS COMPANY AS COMPARABLE BY THE TPO WAS REJECTED BY THE TRIBUNAL IN THE CASE OF 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 T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAI NED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF T HIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRE D TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVI CE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT T HIS COMPANY IS NOT COMPARABLE. 6.6.5. IN CONFORMITY WITH THE FINDINGS OF THE COORD INATE BENCH OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS, WE ARE OF THE CONSIDERED VIEW THAT (I) ACCEL TRANSMATIC LTD (SEG); (II) AVANI CIM CON TECHNOLOGIES LTD; (III) CELESTIAL LABS. LTD., & (IV) KALS INFORMATION SYSTE MS LTD (SEG) CANNOT QUALIFY AS COMPARABLES IN THE CASE OF THE ASSESSEE UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. PAGE 16 OF 23 IT(TP)A NO.948/BANG/2011 16 E) LUCID SOFTWARE LIMITED 6.6.6. THE ABOVE COMPANY HAS BEEN REJECTED AS COMP ARABLE IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT AND THE RECENT ORDER OF THE TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH DEVE LOPMENT INDIA PRIVATE LTD. THE SUBMISSIONS AND THE FINDING OF THE HONBL E MUMBAI TRIBUNAL IN ITA NO.7821/MUMBAI/2011 DATED 11.5.2012 IS REPRODUCED B ELOW:- 7.2 LUCID SOFTWARE LIMITED: IT HAS BEEN SUBMITTED BEFORE US THAT THIS COMPANY, BESIDES DOING SOFTWARE DEVELOPMENT SERVICES, IS ALSO INVOLV ED IN DEVELOPMENT OF SOFTWARE PRODUCT. THE LEARNED AR HA S TRIED TO DISTINGUISH BY POINTING OUT THAT PRODUCT DEVELOPMEN T EXPENDITURE IN THIS CASE IS AROUND 39% OF THE CAPIT AL EMPLOYED BY THE SAID COMPANY, AND, THEREFORE, SUCH A COMPANY CANNOT BE CONSIDERED AS TESTED PARTY. EVEN AS PER THE INFORM ATION RECEIVED IN RESPONSE TO NOTICE UNDER SECTION 133(6) , THE COMPANY HAS DESCRIBED ITS BUSINESS AS SOFTWARE DEVE LOPMENT COMPANY OR PURE SOFTWARE DEVELOPMENT SERVICE PROVID ER. THIS INFORMATION ITSELF IS VERY VAGUE AS THE SEGMENTAL D ETAILS OF OPERATING REVENUE HAS NOT BEEN MADE AVAILABLE TO EX AMINE HOW MUCH IS THE RATIO OF SALE FROM SOFTWARE PRODUCT AND SALE OF SOFTWARE SERVICE AND DEVELOPMENT. LOOKING TO THE F ACT THAT IT HAS DEVELOPED A SOFTWARE PRODUCT NAMED AS MUULAM WHICH IS USED FOR CIVIL ENGINEERING STRUCTURES AND THE PRODU CT DEVELOPMENT EXPENDITURE ITSELF IS SUBSTANTIAL VIS- -VIS THE CAPITAL EMPLOYED BY THE SAID COMPANY, THIS CRITERIA FOR BEING TAKEN AS COMPARABLE PARTY, GETS VITIATED. FOR THE PURPOSE OF COMPARABILITY ANALYSIS, IT IS ESSENTIAL THAT THE CH ARACTERISTICS AND THE FUNCTIONS ARE BY AND LARGE SIMILAR AS THAT OF THE ASSESSEE COMPANY AND T.P. ANALYSIS/STUDY CAN BE MAD E 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 ENTIR ELY DIFFERENT FROM THE COMPANY, WHO IS INVOLVED IN SERVE SECTOR. THEREFORE, THIS COMPANY CANNOT BE TREATED AS HAVING SAME FUNCT ION AND PROFITABILITY RATIO. PAGE 17 OF 23 IT(TP)A NO.948/BANG/2011 17 IN OUR VIEW, DUE TO NON-AVAILABILITY OF FULL INFOR MATION ABOUT THE SEGMENTAL DETAILS AS TO HOW MUCH IS THE S ALE OF PRODUCT AND HOW MUCH IS FROM THE SERVICES, THEREFOR E, THIS ENTITY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILI TY ANALYSIS FOR DETERMINING ARMS LENGTH PRICE IN THE CASE OF TH E ASSESSEE. 6.6.7. THE OBJECTIONS RAISED BY THE ASSESSEE FOR I NCLUSION OF LUCID SOFTWARE LTD. AS A COMPARABLE BY THE TPO IS PLACED AT PAGES 782 TO 793 OF THE PAPER BOOK-III FILED BY THE ASSESSEE. WE FIND IDENTICAL OBJECTION HAS BEEN RAISED AGAINST THE INCLUSION OF LUCID SOFTWARE IN CASE OF TELCORDIA TECHNOLOGIES. SINCE THE FACTS AND THE ASSESSMENT YE AR 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. 6.6.8. AFTER EXCLUDING FROM THE TPOS LIST OF COMP ARABLES, 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:- 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. ISHIRINFOTECH 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) PAGE 18 OF 23 IT(TP)A NO.948/BANG/2011 18 6.6.9. THE ABOVE COMPANIES HAVE BEEN RETAINED AS CO MPARABLES IN CONFORMITY WITH THE FINDINGS OF THE EARLIER BENCHES IN THE CASES OF TRILOGY E-BUSINESS, TELCORDIA TECHNOLOGIES PVT. LTD. AND ME RCEDES BENZ RESEARCH DEVELOPMENT INDIA PRIVATE LTD. (SUPRA). (F) MEGASOFTLIMITED : 6.7. IT IS TO BE NOTED THAT IN THE CASE OF TRILOGY E-BUSINESS, THE TRIBUNAL TURNED DOWN THE PLEA OF THE ASSESSEE T HAT M/S. MEGASOFT LTD SHOULD BE REJECTED AS COMPARABLE. HOWEVER, THE TRI BUNAL ACCEPTED THE ALTERNATIVE SUBMISSION OF THE ASSESSEE THAT THE SEG MENTAL PROFIT MARGIN IS TO BE RECKONED WITH INSTEAD OF ENTITY LEVEL MARGIN AND HELD THAT THE PROFIT MARGIN OF 23.11% WHICH IS THE MARGIN OF THE SOFTWAR E SERVICE SEGMENT BE TAKEN FOR COMPARABILITY. THE DISCUSSION AND THE FI NDINGS OF THE BENCH WITH REGARD TO THE ACCEPTANCE OF THE ALTERNATIVE SUBMISS ION OF THE ASSESSEE TO ADOPT THE SEGMENTAL MARGIN OF 23.11% ARE REPRODUCED BELOW: 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT AL L THIS COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGM ENTAL MARGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SEGMENT) ALONE SHOULD BE CONSIDERED FOR COMPARABILI TY. ON THE ABOVE SUBMISSION, WE FIND THAT THE TPO CONSIDERED T HE SEGMENTAL MARGIN (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GEOMETRIC, KALS INFO SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND TATA ELXSI. BEFORE DRP THE ASSES SEE POINTED OUT THAT THE SEGMENTAL MARGIN OF 23.11% ALO NE SHOULD BE TAKEN FOR COMPARABILITY. THE DRP HAS NOT GIVEN ANY SPECIFIC FINDING 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 EXP LAINED THAT IT HAS TWO DIVISIONS VIZ., BLUEALLY DIVISION AND XI US-BCGI DIVISION. XIUS-BCGI DIVISION DOES THE BUSINESS OF P RODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPANY DEVEL OPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT T ELECOM INDUSTRY. THESE PRODUCTS ARE SOLD AS PACKAGED PROD UCTS TO PAGE 19 OF 23 IT(TP)A NO.948/BANG/2011 19 CUSTOMERS. WHILE IMPLEMENTING THESE STANDARDIZED P RODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PROD UCTS OR RECONFIGURE PRODUCTS TO FIT INTO THEIR BUSINESS ENV IRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZI NG THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (SOFTWARE DEVELOPED) WOULD CONSTITUTE PACKAGED PRODUCT AND AROUND 50% TO 60% WOULD CONSTI TUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRA VELLING, BOARDING AND LODGING EXPENSE. BASED ON THE ABOVE R EPLY, THE TPO PROCEEDED TO HOLD THAT THE COMPARABLE COMPANY W AS MAINLY INTO CUSTOMIZATION OF SOFTWARE PRODUCTS DEVELOPED ( WHICH WAS AKIN TO SOFTWARE DEVELOPMENT) INTERNALLY AND THAT T HE PORTION OF THE REVENUE FROM DEVELOPMENT OF SOFTWARE SOLD AND U SED FOR CUSTOMIZATION WAS LESS THAN 25% OF THE OVERALL REVE NUES. THE TPO THEREFORE HELD THAT LESS THAN 25% OF THE REVENU ES OF THE COMPARABLE ARE FROM SOFTWARE PRODUCTS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HAVIN G DRAWN THE ABOVE CONCLUSION, THE TPO DID NOT BOTHER TO QUA NTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUC T DEVELOPMENT AND SOFTWARE DEVELOPMENT SERVICE BUT AD OPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TER MS 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 TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING F ROM, SUCH 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 ASSES SEE AND MEGASOFT AND THE PROFIT ARISING TO THE MEGASOFT AS A RESULT OF THE EXISTENCE OF THE SOFTWARE PRODUCT SEGMENT AN D NO FINDING HAS BEEN GIVEN THAT REASONABLY ACCURATE ADJ USTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SU CH DIFFERENCES. FOR THIS REASON, WE ARE INCLINED TO HOLD THAT PAGE 20 OF 23 IT(TP)A NO.948/BANG/2011 20 THE PROFIT MARGIN OF 23.11% WHICH IS THE MARGIN OF THE SOFTWARE SERVICE SEGMENT BE TAKEN FOR COMPARABILITY ... 6.7.1. IN CONFORMITY WITH THE FINDINGS OF THE EARL IER BENCH IN THE CASE OF TRIOLOGY E-BUSINESS (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE TPO WAS JUSTIFIED IN SELECTING M/S. MEGASOFT LTD AS COMPARABLE. HOWEVER, THE AO/TPO IS DIRECTED TO TAKE SEGMENTAL MARGINS OF 23.11% FOR COMPARABILITY. IT IS ORDERED ACCORDINGLY. ISHIR INFOTECH LIMITED : 6.8. THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF ISHIR INFOTECH LIMITED AS COMPARABLE, SINCE THAT COMPANY FAILS EMP LOYEES COST FILTER OF 25% REVENUE. ACCORDING TO THE LEARNED AR, ISHIR IN FOTECH LTD, THE EMPLOYEE COST AS A PERCENTAGE OF REVENUE IS ONLY 3. 96%. IT WAS SUBMITTED BY THE LEARNED AR THAT THE TPO ON RESPONSE OBTAINED UNDER SECTION 133(6) CONSIDERED PROFESSIONAL FEE PAID AS PART OF EMPLO YEES COST OF ISHIR INFOTECH LTD. IT WAS STATED THAT PROFESSIONAL FEE PAID IS PAYMENT MADE TO EXTERNAL THIRD PARTIES FOR THE PERFORMANCE OF THEIR SERVICES ON COMPANYS BEHALF AND NOT SALARY PAID TO THE EMPLOYEES OF THE ORGANIZATION. THE LEARNED COUNSEL PLACED RELIANCE ON THE ORDER OF BAN GALORE TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH DEVELOPMENT INDIA PR IVATE LTD. (SUPRA) IN SUPPORT OF HIS CONTENTION. 6.8.1. THE LEARNED DR PRESENT WAS DULY HEARD. 6.8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE MATERIALS ON RECORD. THE BANGALORE TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH DEVELOPMENT INDIA PRIVATE LTD. (SUPRA) HAS RESTORED THE ISSUE TO THE FILE OF ASSESSING OFFICER/TPO FOR FRESH CONSIDERATION. THE RELEVANT FINDING OF THE PAGE 21 OF 23 IT(TP)A NO.948/BANG/2011 21 TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH DEVE LOPMENT INDIA PRIVATE LTD. READS AS FOLLOWS:- 5.7.2. (ON PAGE 28) WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE BANGALORE TRIBUNAL IN THE CASE OF 24X7 CUSTOMER.COM PVT. LTD. (SUPRA) EXCLUDED VISHAL INFO RMATION TECHNOLOGIES FROM THE LIST OF COMPARABLES FOR THE R EASON THAT THE COMPANY WAS OUTSOURCING MOST OF ITS WORK (PAGE 22 OF 24/7 CUSTOMER.COM PVT. LTD.). IN THE LIGHT OF ABOVE ORD ER OF THE TRIBUNAL, THE ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER/TPO TO EXAMINE WHETHER PROFESSIONAL FEES PA ID AMOUNTING TO RS.3,41,09,398/- IN THE CASE OF ISHIR INFO TECH IS FOR THE WORK OUTSOURCED. IF THE SAID AMOUNT IS PAI D FOR THE WORK OUTSOURCED, ISHIR INFOTECH WILL NOT QUALIFY 25 % EMPLOYEE COST FILTER AS SALARY PAID, EXCLUDING THE PROFESSIONAL FEE PAI D IS ONLY RS.17,48,310/- COMPARED TO OPERATING REVENUE O F RS.7,42,09,887/-. IT IS ORDERED ACCORDINGLY. 6.8.3. SINCE THE FACTS AND THE ASSESSMENT YEARS AR E IDENTICAL, IN CONFORMITY WITH THE ABOVE ORDER OF THE TRIBUNAL IN THE CASE OF MERCEDES BENZ RESEARCH DEVELOPMENT INDIA PRIVATE LTD., WE DI RECT THE ASSESSING OFFICER/TPO TO RE-EXAMINE WHETHER ISHIR INFOTECH LT D. SHOULD BE INCLUDED IN THE LIST OF COMPARABLES. 7. IT WAS THE CONTENTION OF THE LEARNED COUNSEL FO R THE ASSESSEE THAT AFTER EXCLUDING EIGHT COMPANIES ON ACCOUNT OF TURNOVER FILTER AND SIX COMPANIES ON FUNCTIONAL DISSIMILARITY, THE ASSESSEE S MARGIN WOULD BE WITHIN THE RANGE OF +/-5% OF MARGIN OF FOLLOWING 12 COMPAN IES RETAINED AS COMPARABLES. PAGE 22 OF 23 IT(TP)A NO.948/BANG/2011 22 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. LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 6. MEDIASOFT SOLUTIONS PVT. LTD 7. MEGASOFT LTD (SEG) 8. QUINTEGRA SOLUTIONS LTD 9. R S SOFTWARE (INDIA) LTD 10. R SYSTEMS INTERNATIONAL LTD (SEG) 11. SIP TECHNOLOGIES & EXPORTS LTD 12. THIRDWARE SOLUTIONS LTD (SEG) 7.1 IN THE LIGHT OF THE ABOVE, THE ASSESSEES ARGU MENT TO PROVIDE FOR RISK ADJUSTMENT OF 20% AND TO CONSIDER FOREX GA IN AS OPERATING IN NATURE IS NOT ADJUDICATED. IT IS TO BE MENTIONED THAT APA RT FROM THE ABOVE ISSUES DISCUSSED, NO ARGUMENTS WERE RAISED BY THE LEARNED AR WITH REFERENCE TO TP ADJUSTMENTS, HENCE, GROUNDS RELATING TO FRESH ECONO MIC ANALYSIS UNDERTAKEN BY THE TPO, USE OF INFORMATION UNDER SECTION 133(6) , USE OF DATA FOR F.Y. 2006-07 ONLY IS ERRONEOUS ETC. ARE NOT ADJUDICATED/ CONSIDERED. 7.2. IN CONCLUSION, THE ASSESSING OFFICER/TPO IS D IRECTED 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 COMPARABLE IS BEYOND 5% BANDWIDTH RECOGNIZED IN PROVISO TO SECTION 92C (2) OF THE ACT, THEN ADJUSTMENT IS REQUIRED TO BE M ADE TO THE REPORTED VALUE OF THE ASSESSEES TRANSACTION WITH ITS AE. IT IS OR DERED ACCORDINGLY. PAGE 23 OF 23 IT(TP)A NO.948/BANG/2011 23 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AS INDICATED ABOVE. THE ORDER IS PRONOUNCED ON THE 28 TH DAY OF MARCH, 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 CIT CONCERNE D. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BAN GALORE.