FCG Software Services (India) Private Limited, Bangalore V. ITO, Bangalore

ITA 994/BANG/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5508 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 24-01-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 03-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BIJOY KUMAR PANDA
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Revenue expenditure
• Section: 92C; 143(3); 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT(TP)A NO. 994/BANG/2011 ASSESSMENT YEAR : 2007-08 M/S. FCG SOFTWARE SERVICES (INDIA) PVT. LTD., (NOW MERGED WITH COMPUTER SCIENCES CORPORATION INDIA PRIVATE LTD.,) 2 ND & 3 RD FLOORS, 3, SJR IPARK, EPIP ZONE I, WHITEFIELD ROAD, BENGALURU-560 066. PAN : AABCP5094K VS. INCOME TAX OFFICER, WARD 11(2), BENGALURU. APPELLANT RESPONDENT ASSESSEE BY : SHRI. VIKRAM VIJAYARAGHAVAN, ADVOCATE REVENUE BY : SHRI. BIJOY KUMAR PANDA, CIT-DR DATE OF HEARING : 24.01.2017 DATE OF PRONOUNCEMENT : 21.04.2017 O R D E R PER INTURI RAMA RAO, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ASSESSMENT ORDER DATED 12.09.2011 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE IT(TP)A NO. 994/BANG/2011 PAGE 2 OF 26 INCOME TAX ACT, FOR THE ASSESSMENT YEAR 2007-08. T HE APPELLANT RAISED THE FOLLOWING GROUNDS: IT(TP)A NO. 994/BANG/2011 PAGE 3 OF 26 9. THE LEARNED AO AND HONORABLE DRP HAVE ERRED, IN LAW AND IN FACTS, BY APPLYING THE TURNOVER < RS 1 CRORE AS A C OMPARABILITY CRITERION. 10. THE LEARNED AO AND HONORABLE DRP HAVE ERRED, IN LAW AND IN FACTS, BY REJECTING CERTAIN COMPARABLE COMPANIES ID ENTIFIED BY THE ASSESSEE AS HAVING ECONOMIC PERFORMANCE CONTRARY TO THE INDUSTRY BEHAVIOUR (E.G. COMPANIES WHICH SHOWED A D IMINISHING REVENUE TREND). 11. THE LEARNED AO AND HONORABLE DRP ERRED, IN LAW AND IN FACTS, BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE ASSESSEE USI NG EMPLOYEE COST GREATER THAN 25% OF THE TOTAL REVENUES AS A CO MPARABILITY CRITERION. 12. THE LEARNED AO AND HONORABLE DRP ERRED, IN LAW AND IN FACTS, BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED B Y THE ASSESSEE USING ONSITE REVENUES GREATER THAN 75% OF THE EXPOR T REVENUES AS A COMPARABILITY CRITERION. 13. THE LEARNED AO AND HONORABLE DRP ERRED, IN LAW AND IN FACTS, BY NOT TAKING INTO CONSIDERATION FOREIGN EXC HANGE FLUCTUATION GAIN/ LOSS IN COMPUTING THE OPERATING M ARGIN OF THE ASSESSEE AS WELL AS THE COMPARABLE COMPANIES. 14. THE LEARNED AO AND HONORABLE DRP ERRED, IN LAW AND FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFEREN CES IN THE RISK PROFILE OF THE ASSESSEE VIS--VIS THE COMPARABLES. 15. THE LEARNED AO AND HONORABLE DRP ERRED, IN LAW AND FACTS, IN COMPUTING THE ALP WITHOUT GIVING BENEFIT OF +/- 5 P ERCENT UNDER THE PROVISO TO SECTION 92C OF THE ACT. 16. THE LEARNED AO AND HONORABLE DRP HAVE ERRED, IN LAW AND IN FACTS, BY WRONGLY COMPUTING THE OPERATING MARGINS OF SOME OF THE COMPARABLE COMPANIES IDENTIFIED IN THE TP ORDER. IT(TP)A NO. 994/BANG/2011 PAGE 4 OF 26 17. THE LEARNED AD AND HONORABLE DRP HAVE ERRE D, IN LAW AND IN FACTS, BY IGNORING THE FACT THAT SINCE THE ASSESSEE IS AVA ILING TAX HOLIDAY U/S 10A OF THE ACT, THERE IS NO MOTIVE OR REASON TO SHI FT PROFITS OUT OF INDIA, CURBING WHICH IS THE BASIC INTENTION OF INTR ODUCING THE TRANSFER PRICING PROVISIONS 18. THE LEARNED AD AND HONORABLE DRIP HAVE ERRED IN CONSIDERING REIMBURSEMENT RECEIVED AS OPERATING INCOME/ OPERATI NG COST FOR THE PURPOSE OF COMPUTING THE VALUE OF TRANSFER PRIC ING ADJUSTMENT. GROUNDS OF OBJECTION RELATING TO CORPORATE TAX MATT ERS 19. IN COMPUTING THE DEDUCTION UNDER SECTION 10A/10B OF THE ACT, A THE LEARNED AO HAS ERRED IN EXCLUDING TELECOMMUNICATION EXPENDITURE OF INR1,02,13,858 INCURRED IN CONNECTION WITH THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA FROM THE EXPORT TURNOVER OF UNITS CLAIMING DEDUCTION UNDER SECTION 10A/10B WHEN SUCH ITEMS WERE NOT, IN THE FIRST PLACE, INCLUDED IN THE EXPORT TURNOVER OF THE SAID UNITS B. WITHOUT PREJUDICE TO GROUND (A) ABOVE, THE LEARNED AO HAS ERRED IN EXCLUDING TELECOMMUNICATION EXPENDITURE INCURRED IN CONNECTION WITH THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA FROM THE EXPORT TURNOVER OF UNITS CLAIMING DEDUCTION UNDER SECTION 10A/10B TO THE EXTENT OF THE EXPENDITURE INCURRED IN INDIAN RUPEES . C WITHOUT PREJUDICE TO GROUND (A) AND (B) ABOVE, TH E LEARNED AO HAS ERRED IN HOLDING THAT WHILE TELECOMMUNICATION EXPENDITURE INCURRED IN CONNECTION WITH THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA SHOULD BE EXCLUDED FROM EXPORT TURNOVER OF UNITS CLAIMING DEDUCTION UNDER SECTION 10A/ 10B, BUT NOT FROM TOTAL TURNOVER OF THE SAID UNITS. 20. IN COMPUTING THE DEDUCTION UNDER SECTION 10A/10 B OF THE ACT, A. THE LEARNED AO HAS ERRED IN EXCLUDING EXPENDITUR E INCURRED IN FOREIGN CURRENCY AMOUNTING TO INR 23,730 FROM THE EXPORT TURNOVER OF UNITS CLAIMING DEDUCTION UNDER SECTION 10A/10B, WHEN SUCH ITEMS WERE NOT, IN THE FIRST PLACE. INCLUDED IN THE EXPOR T TURNOVER OF THE SAID UNITS. IT(TP)A NO. 994/BANG/2011 PAGE 5 OF 26 B. WITHOUT PREJUDICE TO GROUND (A) ABOVE, THE LEARN ED AO HAS ERRED IN TREATING EXPENDITURE IN FOREIGN CURRENCY AS EXPENDITURE INCURRED FOR PROVIDING TECHNICAL SERVICES' OUTSIDE INDIA WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND NOT TECHNICAL SERVICES. C. WITHOUT PREJUDICE TO GROUND (A) AND (B) ABOVE, T HE LEARNED AO HAS ERRED IN HOLDING THAT EXPENSES INCURRED IN FOREIGN CURRENCY SHOULD BE EXCLUDED FROM EXPORT TURNOVER OF UNITS CLAIMING DEDUCTION UNDER SECTION 10A/10B, BUT NOT FROM TOTAL TURNOVER OF THE SAID UNITS. 21. THE LEARNED AO HAS ERRED IN COMPUTING INTEREST UNDER SECTION 234B OF THE ACT ON THE ASSESSED INCOME SINCE THE ADDITIO N TO THE RETURNED INCOME ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IS ONLY A NOTIONAL INCOME AND NOT ACTUAL EARNED INCOME. 22. THE LEARNED AO HAS ERRED IN COMPUTING INTEREST UNDER SECTION 234C` ON ASSESSED INCOME SINCE THE SAME IS TO BE CO MPUTED ONLY ON THE RETURNED INCOME. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE APPEL LANT IS A COMPANY DULY INCORPORATED UNDER THE COMPANIES ACT, 1956. I T IS A WHOLLY OWNED SUBSIDIARY OF FCG SOFTWARE SERVICES INC., (US A). IT IS ENGAGED IN THE SOFTWARE DEVELOPMENT AND DESIGN ACTIVITIES F OR ITS AE COMPANY. THE RETURN OF INCOME FOR THE AY 2007-08 WAS FILED O N 31.10.2007 DECLARING INCOME OF RS.2,17,040/-. THE ASSESSEE CO MPANY ALSO REPORTED THE FOLLOWING INTERNATIONAL TRANSACTION: IT(TP)A NO. 994/BANG/2011 PAGE 6 OF 26 3. THE ASSESSEE COMPANY SOUGHT TO JUSTIFY THE CONSI DERATION RECEIVED FOR THE INTERNATIONAL TRANSACTION ENTERED WITH ITS AE TO BE AT ARMS LENGTH. THE ASSESSEE COMPANY SUBMITTED THE T RANSFER PRICING STUDY REPORT ADOPTING OPERATING PROFIT/OPERATING CO ST (OP/OC) AS A PROFIT LEVEL INDICATOR FOR THE TRANSFER PRICING STU DY. THE ASSESSEE COMPANY APPLIED TRANSACTIONAL NET MARGIN METHOD (TN MM), WHICH WAS CONSIDERED AS THE MOST APPROPRIATE METHOD FOR T HE PURPOSE OF BENCH MARKING THE INTERNATIONAL TRANSACTION. THE A SSESSEE COMPANYS PROFIT MARGIN WAS COMPUTED AT 13.21% AND THE ASSESS EE COMPANY CLAIMED THAT THE SAME WAS COMPARABLE WITH OTHER COM PANIES RENDERING SOFTWARE DEVELOPMENT ACTIVITIES. FOR THE PURPOSE O F TRANSFER PRICING STUDY, THE ASSESSEE COMPANY HAD CHOSEN 18 COMPARABL E ENTITIES AND AVERAGE OPERATING MARGIN OF THE SAID COMPARABLES WA S COMPUTED AT 13%. ACCORDING TO THE ASSESSEE COMPANY, ITS PLI IS HIGHER THAN THE ARITHMETIC MEAN OF COMPARABLE ENTITIES. HENCE IT W AS CLAIMED THAT THE TRANSACTION WITH ITS AE ARE AT ARMS LENGTH. THE ASSESSEE COMPANY HAD CHOSEN THE FOLLOWING 18 ENTITIES AS COMPARABLES WHOSE PROFIT MARGIN WAS COMPUTED AT 13%: 1. BODHTREE CONSULTING LTD., 2. FCS SOFTWARE SOLUTIONS LTD., 3. GOLDSTONE TECHNOLOGIES LTD., 4. LARSEN & TOURBRO INFOTECH LTD., 5. MELSTAR INFORMATION TECHNOLOGY LTD., 6. ORIENT INFORMATION TECHNO LOGY LTD., 7. POWERSOFT GLOBALSOLUTIONS LTD., 8. SIP TECHNOLOGIES & EXPORTS LTD., 9. SONATA SOFTWARE LTD., 10. SYNETAIROS TECHNOLOGIES LTD., 11. TRIDENT INFO-TECH CORPN LTD., IT(TP)A NO. 994/BANG/2011 PAGE 7 OF 26 12. VJIL CONSULTING LTD., 13. AKSHAY SOFTWARE TECHNOLOGIES LTD., 14. CAMBRIDGE TECHNOLOGY ENTERPRISE LTD., 15. ICRA TECHNO ANALYTICS LTD., 16. MINDTREE CONSULTING LTD., 17. COMPUTECH INTERNATIONAL LTD., 18. KARTURI NETWORKS LTD THE AO REFERRED THE MATTER TO TPO FOR THE PURPOSE O F BENCH MARKING THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSES SEE COMPANY WITH ITS AE. THE TPO, BY ORDER DATED 19.10.2010, COMPUTED T HE TRANSFER PRICING ADJUSTMENT AT RS.7,98,19,873/-. THE TPO RE JECTED THE BENCH MARKING ANALYSIS CARRIED OUT BY THE APPELLANT IN IT S TRANSFER PRICING STUDY REPORT. HOWEVER, THE TPO ADOPTED THE TNMM AN D PROCEEDED TO IDENTIFY THE DIFFERENT SET OF COMPARABLE ENTITIES F OR THE PURPOSE OF DETERMINING THE ALP. WHILE DOING SO, THE LEARNED T PO APPLIED THE FOLLOWING FILTERS. IT(TP)A NO. 994/BANG/2011 PAGE 8 OF 26 4. THE TPO REJECTED 16 COMPARABLES SELECTED BY THE ASSESSEE COMPANY AND IDENTIFIED 24 NEW COMPARABLE ENTITIES T HEREBY ACCEPTING 2 ENTITIES SELECTED BY THE ASSESSEE COMPANY I.E., M /S. SIP TECHNOLOGIES AND EXPORTS LTD., AND M/S. MINDTREE CONSULTING LTD. THE TPO FINALLY SELECTED THE FOLLOWING COMPANIES: 1. ACCEL TRANSMATICS LTD., (SEG.) 2. AVANI CIMCON TECHNOLOGIES LTD., 3. CELESTIAL LABS LTD., 4. DATAMATICS LTD., 5. E-ZEST SOLUTIONS LTD., 6. FLEXTRONICS SOFTWARE SYSTEMS LTD., (SEG.) 7. GEOMETRIC LTD., (SEG.) 8. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., 9. IGATE GLOBAL SOLUTIONS LTD., (SEG.) 10. INFOSYS TECHNOLOGIES LTD., 11. ISHIR INFOTECH LTD., 12. KALS INFOSYSTEMS LTD., 13. LANCO GLOBAL SYSTEMS LTD., 14. LUCID SOFTWARE LTD., 15. MEDIASOFT SOLUTIONS (P) LTD., 16. MEGASOFT LTD., 17. MINDTREE CONSULTING LTD., 18. PERSISTENT SYSTEMS LTD., 19. QUINTEGRA SOLUTIONS LTD., 20. R S SOFTWARE (INDIA) LTD., 21. R SYSTEMS INTERNATIONAL LTD., (SEG.) 22. S I P TECHNOLOIGES AND EXPORTS LTD., 23. SASKEN COMMUNICATION TECHNOLOGIES LTD., 24. TATA ELXSI LTD., (SEG.) 25. THIRDWARE SOLUTIONS LTD., 26. WIPRO LTD., 5. THE TPO COMPUTED AVERAGE PROFIT MARGIN OF THE CO MPARABLES FINALLY AT 25.154% AFTER ADJUSTING WORKING CAPITAL ADJUSTMENT AT 0.08% AND ARITHMETIC MEAN OF PLI OF THE COMPARABLE WAS DE TERMINED AT IT(TP)A NO. 994/BANG/2011 PAGE 9 OF 26 25.05%. ON THE ABOVE SAID BASIS, THE TPO COMPUTED THE TRANSFER PRICING ADJUSTMENT AS FOLLOWS: 6. THE AO PASSED THE DRAFT ASSESSMENT ORDER DATED 2 7.12.2010. THE DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 143 (3) R.W.S. 144C(1) OF THE ACT INCORPORATING THE ABOVE TP ADJUSTMENT AN D REDUCING THE BENEFIT UNDER SECTION 10A BY REDUCING THE TOTAL COS T EXPENDITURE, TRAVEL EXPENDITURE FROM EXPORT TURNOVER ALONE. 7. BEING AGGRIEVED, THE ASSESSEE COMPANY FILED OBJE CTION BEFORE THE DRP. THE DRP HAS CONFIRMED THE ORDER OF THE LE ARNED TPO WITHOUT GIVING ANY RELIEF TO THE ASSESSEE COMPANY. THE AO PASSED THE FINAL ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(13), DATED 12.09.2011 INCORPORATING THE TP ADJUSTMENT OF RS.7, 98,19,873/-. BEING AGGRIEVED, THE APPELLANT IS IN APPEAL BEFORE US. 8. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY CONTENDED THAT THE LEARNED TPO HAS INCLUDED 14 COM PARABLES WHICH ARE FUNCTIONALLY DISSIMILAR WITH THAT OF THE ASSESS EE COMPANY. IN THIS CONNECTION, HE CONTENDED THAT THE FOLLOWING COMPANI ES ARE FUNCTIONALLY DISSIMILAR AND PLACED RELIANCE ON THE COO RDINATE BENCHS IT(TP)A NO. 994/BANG/2011 PAGE 10 OF 26 DECISION IN THE CASE OF M/S. MAGMA DESIGN AUTOMATION INDIA PVT. LTD., IN ITA NO. 1241(BANG)2011 AND M/S.NXP SEMICONDUCTORS INDIA PVT. LTD. IN IT(TP)A NO.1174/BANG/2011. 1. ACCEL TRANSMATICS LIMITED (SEG.) 2. AVANI CIMCON TECHNOLOGIES LIMITED 3. CELESTIAL LABS LTD., 4. E-ZEST SOLUTIONS LIMITED 5. FLEXTRONICS SOFTWARE SYSTEMS LIMITED (SEG.) 6. HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED 7. INFOSYS TECHNOLOGIES LIMITED 8. ISHIR INFOTECH LIMITED 9. KALS INFOSYSTEMS LIMITED 10. LUCID SOFTWARE LIMITED 11. PERSISTENT SYSTEMS LIMITED 12. TATA ELXSI LIMITED (SEG.) 13. THIRDWARE SOLUTIONS LIMITED 14. WIPRO LIMITED 9. ON THE OTHER HAND, THE LEARNED CIT-DR PLACED REL IANCE ON THE ORDERS OF THE TPO. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE ISSUE OF COMPARABILITY OF THESE COMPAN IES HAD COME UP BEFORE THE COORDINATE BENCH IN THE CASE OF M/S.NXP SEMICONDUCTORS INDIA PVT. LTD., WHEREIN IT WAS HELD AS UNDER: ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOPMEN T SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TA XMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THA T ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RE LEVANT IT(TP)A NO. 994/BANG/2011 PAGE 11 OF 26 OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THA T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDE R. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASS ET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM TH E ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFI CER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIS T OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. AVANI CIMCON TECHNOLOGIES LTD. 39. AS FAR AS THIS COMPANY IS CONCERNED, THE PLEA OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY DIFFEREN T FROM THE ASSESSEE. BASED ON THE INFORMATION AVAILABLE IN TH E COMPANYS WEBSITE, WHICH REVEALS THAT THIS COMPANY HAS DEVELO PED A SOFTWARE PRODUCT BY NAME DXCHANGE, IT WAS SUBMITTED THAT T HIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SALES APAR T FROM RENDERING OF SOFTWARE SERVICES AND THEREFORE IS FUN CTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT T HE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISION IN THE CASE OF TELC ORDIA TECHNOLOGIES PVT. LTD. V. ACIT ITA NO.7821/MUM/2011 WHEREIN TH E TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPAN Y HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSE NCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERE D AS COMPARABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWA RE DEVELOPMENT SERVICES ONLY AND IT WAS HELD AS FOLLOW S:- IT(TP)A NO. 994/BANG/2011 PAGE 12 OF 26 7.8 AVANI CINCOM TECHNOLOGIES LTD. (AVANI CINCOM ) : HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPE RATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PRO FIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATI ON FOR COMPARING THE CASE THAT OF ASSESSEE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNA BLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE P ARTY. LEARNED CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETAILS OF PERCENTAG E OF EXPORT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INT O CONSIDERATION FOR COMPARABILITY ANALYSIS. IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS COM PANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS. THE FOLLOWING FIGURES WERE PLACED BEFORE US:- PARTICULARS FYS 05-06 06-07 07-08 08-09 OPERATING REVENUE 21761611 35477523 29342809 280398 51 OPERATING EXPNS. 16417661 23249646 23359186 3110894 9 OPERATING PROFIT 5343950 12227877 5983623 (3069098) OPERATING MARGIN 32.55% 52.59% 25.62% - 9.87% CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVELOPMENT COMP ANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- I. IN THE DIRECTORS REPORT (PAGE 20 OF PB-IL), IT IS STATED THAT THE COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR IN-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2AB) OF THE INCOME TAX ACT. II. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UNDER DEFERRED REVENUE EXPENDITURE (PAGE 31 OF PB-II), IT IS MENTIONED THAT, EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AND THE SAM E HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALLMENTS FROM THE YEAR IN WHICH IT IS INCURRED. AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO T HE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE (PAGE 30 OF PB-II). THIS AMOUNTS TO NEARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SOFT WARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D ACTIVITIES IS BAD IN LAW. IT(TP)A NO. 994/BANG/2011 PAGE 13 OF 26 E-ZEST SOLUTIONS LTD. 14.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMP ARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. THE TPO HAD REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE ON T HE GROUND THAT AS PER THE INFORMATION RECEIVED IN RESPONSE TO NOTICE UNDER SE CTION 133(6) OF THE ACT, THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES AND SATISFIES ALL THE FILTERS. 14.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPA RABLES ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT TO THE ASSESSEE. IT IS SU BMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGA GED IN E-BUSINESS CONSULTING SERVICES, CONSISTING OF WEB STRATEGY SE RVICES, I T DESIGN SERVICES AND IN TECHNOLOGY CONSULTING SERVICES INCLUDING PRO DUCT DEVELOPMENT CONSULTING SERVICES. THESE SERVICES, THE LEARNED AU THORISED REPRESENTATIVE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORISED AS KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES. IT IS FURTHER SUBMITT ED THAT THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA IN ITS ANNUAL REPORT. THE L EARNED AUTHORISED REPRESENTATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAIN DETAILED DESCRIPTIVE INFORMATION ON THE BUS INESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAILS AVAILABLE O N THE COMPANYS WEBSITE WHICH SHOULD BE CONSIDERED WHILE EVALUATING THE COM PANYS FUNCTIONAL PROFILE. IT IS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPR ESENTATIVE THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CONSIDERED A S COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES AND RELIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P) LTD. IN ITA NO.1961(HYD)/2011 DT.23.11.2012 AND PRAYED THAT IN VIEW OF THE ABOVE REASONS, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., O UGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 14.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S BY THE TPO. 14.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLYCONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE RECORD THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARBALES ONLY ON THE BASI S OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE NOTICE UNDER SECTIO N 133(6) OF THE ACT. IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVICES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVICES PERFORMED BY THIS COMP ANY ARE SIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSE SSEE. FROM THE DETAILS ON RECORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOF TWARE DEVELOPMENT SERVICES, THIS COMPANY I.E. E-ZEST SOLUTIONS LTD., IS RENDERI NG PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BEEN HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CAPITAL I-Q INFORMATION SYSTEMS (INDIA) (P) LTD. SUPRA) THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD T HAT THIS COMPANY, I.E. E-ZEST IT(TP)A NO. 994/BANG/2011 PAGE 14 OF 26 SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABL ES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O. /TPO IS ACCORDINGLY DIRECTED. FLEXTRONICS SOFTWARE SYSTEMS LTD., ITA NO : 7821/MUM/2011 M/S TELCORDIA TECHNOLOGIES I NDIA P. LTD 6.6 LEARNED AR SUBMITTED THAT THIS COMPANY IS ALSO INVO LVED IN DEVELOPMENT OF SOFTWARE PRODUCT AND PROVIDING SOFTWARE CONSULTING SERVICE FOR THE USE IN TELECOMMUNICATION INDUSTRIES AND ALSO SALES TELECOM MUNICATION EQUIPMENTS. BESIDES THIS, 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 DO MAIN, WHICH REVEALED THAT SERVICES CONSTITUTE ALMOST 90% OF ITS SALES AN D 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. HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED 16. THE NEXT POINT MADE OUT BY THE ASSESSEE IS WIT H REGARD TO THE INCLUSION OF ITEMS AT (9) AND (11) NAMELY HELIOS & MATHESON INFO RMATION TECHNOLOGY LTD., AND KALS INFORMATION SOLUTIONS LTD. (SEG). THE PRIM ARY PLEA RAISED BY THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESAID T WO COMPANIES FROM THE LIST OF COMPARABLES IS TO BE EFFECT THAT THEY ARE FUNCTIONA LLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM AND SU BSTANCE, THE PLEA SET UP BY THE ASSESSEE IS THAT BOTH THE AFORESAID CONCERNS ARE EN GAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIF FERENT FROM THE SERVICES UNDERTAKEN BY THE ASSESSEE IN ITS IT-SERVICES SEGME NT. 17. AS PER THE DISCUSSION IN PARA 6.3.2. OF THE ORD ER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYSTEMS LTD ., IS TO THE EFFECT THAT THE SAID CONCERNS APPLICATION SOFTWARE SEGMENT IS ENGA GED IN THE DEVELOPMENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO T HE ASSESSEE COMPANY. THE SAID CONCERN IS ENGAGED IN TWO SEGMENTS NAMELY APPL ICATION SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATION SOFTW ARE SEGMENT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS E NGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASSESSEE IS THAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F.Y. 2006-07 REVEALS THAT THE APPLICATI ON SOFTWARE SEGMENT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCT S AND SOFTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO IN ITS WRITTEN SUBMISSIONS, COPY OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 420.3 TO 420.4. TH E ASSESSEE FURTHER POINTED OUT THAT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTWARE SERV ICES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPLICATION SOFTWARE S EGMENT OF THE SAID CONCERN IT(TP)A NO. 994/BANG/2011 PAGE 15 OF 26 FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEE S IT-SERVICES SEGMENT. THE TPO HOWEVER, NOTICED THAT THOUGH THE APPLICATION SO FTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED IN SELLING OF SOME OF THE SO FTWARE PRODUCTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PRODUCTS AS THERE WERE NO COST OF PURCHASES DEBITE D IN THE PROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED THAT THE QUANTUM OF REVENUE FROM SALE OF PRODUCTS WAS NOT AVAILABLE AS PER THE FINANCIAL STA TEMENTS OF THE SAID CONCERN, BUT AS THE BASIC FUNCTION OF THE SAID CONCERN WAS S OFTWARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEES SEGMENT OF IT- SERVICES. 18. BEFORE US, APART FROM REITERATING THE POINTS RA ISED BEFORE THE TPO AND THE DRP, THE LD. COUNSEL SUBMITTED THAT IN THE IMMEDIAT ELY PRECEEDING ASSESSMENT YEAR OF 2006-07, THE SAID CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALLY INCOMPARABLE. FOR THE SAID PURPOSE, OU R REFERENCE HAS BEEN INVITED TO PAGES 421 TO 542 OF THE PAPER BOOK, WHICH IS THE COPY OF THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE FOR THE A.Y. 2006- 07, AND IN PARTICULAR, ATTENTION WAS INVITED TO PAGE 454 WHERE THE ACCEPT REJECT MATRIX UNDERTAKEN BY THE ASSESSEE REFLECTED KALS INFORMATION SOLUTIONS L TD. (SEG) AS FUNCTIONALLY INCOMPARABLE. THE LD. COUNSEL POINTED OUT THAT THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER A.Y. 2006-07 AND THEREFORE, THERE WAS NO JUSTIFICATION FOR THE TPO TO CONSIDER THE SAID CONC ERN AS FUNCTIONALLY COMPARABLE IN THE INSTANT ASSESSMENT YEAR. 19. IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE SAID CONCERN H AS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN THE IM MEDIATELY PRECEDING ASSESSMENT YEAR AND IN THE PRESENT YEAR ALSO, ON TH E BASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTEN SUBMISSIONS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID C ONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTI NCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGME NT. AT THE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVE NUE AND NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDERS OF THE LOWER AU THORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAID CONCERN H AS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRECEDING YEAR. THEREFORE, HAVING REGARD TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTL Y ASSERTED THAT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARA BLE TO THE ASSESSEES SEGMENT OF IT SERVICES. 20. WITH REGARD TO THE INCLUSION OF HELIOS & MATHES ON INFORMATION TECHNOLOGY LTD., THE ASSESSEE HAS RAISED SIMILAR ARGUMENTS AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG). WE HAVE PERUSED T HE RELEVANT PARA OF THE ORDER OF THE TPO I.E., 6.3.21, IN TERMS OF WHICH TH E SAID CONCERN HAS BEEN INCLUDED AS A COMPARABLE CONCERN. THE ASSESSEE POIN TED OUT THAT AS IN THE CASE OF KALS INFORMATION SOLUTIONS LTD. (SEG), IN THE IN STANT CASE ALSO FOR A.Y. 2006- 07 THE SAID CONCERN WAS FOUND FUNCTIONALLY INCOMPAR ABLE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND THE SAID POSITION WAS NO T DISTURBED BY THE TPO. THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY, PLA CED AT PAGE 432 OF THE PAPER BOOK HAS BEEN POINTED OUT IN SUPPORT. CONSIDERED IN THE AFORESAID LIGHT, ON THE IT(TP)A NO. 994/BANG/2011 PAGE 16 OF 26 BASIS OF THE DISCUSSION IN RELATION TO KALS INFORMA TION SOLUTIONS LTD. (SEG), IN THE INSTANT CASE ALSO WE FIND THAT THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 12. (4) INFOSYS TECHNOLOGIES LTD. 12.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY I N THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND ATTRIBUTABLE PROF IT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE AS SESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELE VANT IN THE SOFTWARE DEVELOPMENT SEGMENT. 12.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IN THIS CONTEXT HAS CITED VARIOUS PORTIONS OF THE ANNUAL REPORT OF THIS COMPANY TO THIS EFFECT WHICH IS AS UNDER :- (I) THE COMPANY HAS AN INTELLECTUAL PROPERTY (IP) CELL TO GUIDE ITS EMPLOYEES TO LEVERAGE THE POWER OF IP FOR THEIR GROWTH. IN 2008 , THIS COMPANY GENERATED OVER 102 INVENTION DISCLOSURES AND FILED AN AGGREGA TE 10 PATENTS IN INDIA AND THE USA. TILL DATE THIS COMPANY HAS FILED AN AGGRE GATE OF 119 PATENT APPLICATIONS (PENDING) IN INDIA AND USA OUT OF WHIC H 2 HAVE BEEN GRANTED IN THE US. (II) THIS COMPANY HAS SUBSTANTIAL REVENUES FROM SO FTWARE PRODUCTS AND THE BREAK-UP OF THE SOFTWARE PRODUCT REVENUES IS NOT AV AILABLE. (III) THIS COMPANY HAS INCURRED HUGE RESEARCH AND D EVELOPMENT EXPENDITURE TO THE TUNE OF APPROXIMATELY RS.200 CRORES. (IV) THIS COMPANY HAS A REVENUE SHARING AGREEMENT TOWARDS ACQUISITION OF IPR IN AUTOLAY, A COMMERCIAL SOFTWARE PRODUCT USED IN D ESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. (V) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLO WING JUDICIAL DECISIONS :- (A) ITAT, DELHI BENCH DECISION IN THE CASE OF AGNIT Y INDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.3856/DEL/2010) AND (B) TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (ITA NO.1054/BANG/2011) 12.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE AS SESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARAB ILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE OPERATING MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF TH IS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 12.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT TH E ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS C OMPANY IS FUNCTIONALLY DIS- SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HENCE I S NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE T O THIS YEAR ALSO. THE ARGUMENT PUT FORTH BY ASSESSEE'S IS THAT INFOSYS TE CHNOLOGIES LTD IS NOT IT(TP)A NO. 994/BANG/2011 PAGE 17 OF 26 FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICANT I NTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN T HAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE O MITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. ISHIR INFOTECH LIMITED AS REGARDS ISHIR INFOTECH LTD., THE TRIBUNAL HAS C ONSIDERED THE DECISION OF THE TRIBUNAL IN THE CASE OF 24/7 CO. PVT. LTD TO HO LD THAT ISHIR INFOTECH IS ALSO OUT-SOURCING ITS WORK AND, THEREFORE, HAS NOT SATISFIED THE 25% EMPLOYEE COST FILTER AND THUS HAS TO BE EXCLUDED FR OM THE LIST OF COMPARABLES. AS THE FACTS OF THE CASE BEFORE US AR E SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH, WE HOLD THAT THESE TWO COMPANIES ARE ALSO TO BE EXCLUDED. (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTE NTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED I N PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOF TWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST F AILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DEC ISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WA S REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOL LOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATI ON SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWA RE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. IT(TP)A NO. 994/BANG/2011 PAGE 18 OF 26 BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. LUCID SOFTWARE LIMITED ITA NO : 7821/MUM/2011 M/S TELCORDIA TECHNOLOGIES I NDIA P. LTD 6.2 THE CONTENTION OF THE LEARNED AR IS THAT, THE LUCID SOF TWARE COMPANY THOUGH DESCRIBED AS SOFTWARE DEVELOPMENT COMPANY, IS MAINL Y DEALING IN SELLING OF SOFTWARE PRODUCTS, WHICH IS REFLECTED IN THE WEB SITE OF THE SAID COMPANY AND DEVELOPS A SOFTWARE PRODUCT CALLED 'MULUAM', WH ICH IS USED IN CIVIL ENGINEERING STRUCTURES. HE SUBMITTED THAT AS PER TH E 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 ASSESSEE'S NATURE OF ACTIVITIES WHIC H IS PURELY 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 CAS E. ALTERNATIVELY, HE SUBMITTED THAT THE TPO HAS WRONGLY IGNORED, DEPRECI ATION AND AMORTISATION OF THE SOFTWARE DEVELOPMENT EXPENSES A ND 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 11,507,896 11,507,896 ADMINISTRATIVE EXPENSES INTEREST (3,99,799) - FOREIGN EXCHANGE FLUCTUATION (134, 783) (134, 783) DEPRECIATION NOT CONSIDERED 995,484 AMORTISATION OF SOFTWARE NOT CONSIDERED 1,866,703 DEVELOPMENT EXPENSES TOTAL OPERATING EXPENSES 1,09,73,224 14,235,300 OPERATING PROFIT 60,18,854 2,756,778 ITA NO : 7 821/MUM/2011 M/S TELCORDIA TECHNOLOGIES INDIA P. LTD OPERATING MARK UP ON COST 54.85% 19.37% THUS, IF THESE EXPENSES ARE CONSIDERED THEN OPERATI NG PROFIT WILL COME DOWN TO 19.37%. 17. PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A CO MPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMP ARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESI GNING AND ANALYTIC IT(TP)A NO. 994/BANG/2011 PAGE 19 OF 26 SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NOT AVAILABLE. THE TPO REJECTED THE ASSESSEE'S OBJECTIO NS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPANY FOR FINANCIAL YEA R 2007-08, IT IS MAINLY A SOFTWARE DEVELOPMENT COMPANY AND AS PER THE DETAILS FURNISHED IN REPLY TO THE NOTICE UNDER SECTION 133(6) OF THE ACT, SOFTWARE DE VELOPMENT CONSTITUTES 96% OF ITS REVENUES. IN THIS VIEW OF THE MATTER, THE ASSES SING OFFICER INCLUDED THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IN THE LIST O F COMPARABLES AS IT QUALIFIED THE FUNCTIONALITY CRITERION. 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCL USION OF THIS COMPANY AS A COMPARABLE SUBMITTING THAT THIS COMPANY IS FUNCTION ALLY DIFFERENT AND ALSO THAT THERE ARE SEVERAL OTHER FACTORS ON WHICH THIS COMPA NY CANNOT BE TAKEN AS A COMPARABLE. IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT : (I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING S ERVICES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. (II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FO R F.Y. 2007-08 INDICATES THAT THIS COMPANY, IS PREDOMINANTLY ENGAGED IN OUT SOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES FOR INDEPENDENT SOFTWARE VEND ORS AND ENTERPRISES. (III) WEBSITE EXTRACTS INDICATE THAT THIS COMPANY I S IN THE BUSINESS OF PRODUCT DESIGN SERVICES. (IV) THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORD IA TECHNOLOGIES INDIA PVT. LTD.(SUPRA) WHILE DISCUSSING THE COMPARABILITY OF A NOTHER COMPANY, NAMELY LUCID SOFTWARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGMENTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR CO MPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRE SENTLY UNDER CONSIDERATION, WHICH IS INTO PRODUCT DEVELOPMENT AND PRODUCT DESIG N SERVICES AND FOR WHICH THE SEGMENTAL DATA IS NOT AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. BE OMITTED FRO M THE LIST OF COMPARABLES. 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORT THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF CO MPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHILE THE ASSESSEE IS A SOFTWARE DE VELOPMENT SERVICES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSEE, THE SEG MENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUN CIATED IN THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOG IES INDIA PVT. LTD. (SUPRA) THAT IN THE ABSENCE OF SEGMENTAL DETAILS / INFORMAT ION A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS, WE H OLD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM TH E SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY . 14.0 (6) TATA ELXSI LTD. 14.1 THIS COMPANY WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES ON SEVERAL COUNTS LIKE, FUNCTIONAL DIS- SIMILARITY, SIGNIFICANT R&D IT(TP)A NO. 994/BANG/2011 PAGE 20 OF 26 ACTIVITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER , REJECTED THE CONTENTION PUT FORTH BY THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. THIRDWARE SOLUTIONS LTD. (SEGMENT) 15.1 THIS COMPANY WAS PROPOSED FOR INCLUSION IN THE LIST OF COMPARABLES BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE I NCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES ON THE GROUND THAT ITS TURN OVER WAS IN EXCESS OF RS.500 CRORES. BEFORE US, THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASON THAT APART FROM SOFTWAR E DEVELOPMENT SERVICES, IT IS IN THE BUSINESS OF PRODUCT DEVELOPMENT AND TRADING IN SOFTWARE AND GIVING LICENSES FOR USE OF SOFTWARE. IN THIS REGARD, THE L EARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT :- (I) THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENCES AND SUBSCRIPTION. IT HAS BEEN POIN TED OUT FROM THE ANNUAL REPORT THAT THE COMPANY HAS NOT PROVIDED ANY SEPARA TE SEGMENTAL PROFIT AND LOSS ACCOUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT SERVICES. (II) IN THE CASE OF E-GAIN COMMUNICATIONS PVT. LTD. (2008-TII-04-ITAT-PUNE- TP), THE TRIBUNAL HAS DIRECTED THAT THIS COMPANY BE OMITTED AS A COMPARABLE FOR SOFTWARE SERVICE PROVIDERS, AS ITS INCOME INCLU DES INCOME FROM SALE OF LICENCES WHICH HAS INCREASED THE MARGINS OF THE COM PANY. THE LEARNED A.R. PRAYED THAT IN THE LIGHT OF THE AB OVE FACTS AND IN VIEW OF THE AFORE CITED DECISION OF THE TRIBUNAL (SUPRA), THIS COMPANY OUGHT TO BE OMITTED FROM THE LIST OF COMPARABLES. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE MATERIA L ON RECORD THAT THE COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOWEVER, THE SEGMENTAL PROFIT AND LOS S ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT ARE NO T GIVEN SEPARATELY. FURTHER, AS POINTED OUT BY THE LEARNED AUTHORISED R EPRESENTATIVE, THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF E-GAIN COMMUNI CATIONS PVT. LTD. (SUPRA) HAS DIRECTED THAT SINCE THE INCOME OF THIS COMPANY INCLUDES INCOME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABLE F OR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFT WARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE MATTER AND FOLLOWING THE A FORE CITED DECISION OF THE PUNE TRIBUNAL (SUPRA), WE DIRECT THAT THIS COMPANY BE OM ITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN T HE CASE ON HAND. WIPRO LIMITED 13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY T HE TPO. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES OR SEVERAL GROUNDS LIKE FUNCTIONAL DIS- SIMILARITY, BRAND VALUE, SIZE, ETC. THE TPO, HOWEVER, BRUSHED ASIDE THE OBJECTION S OF THE ASSESSEE AND INCLUDED THIS COMPANY IN THE SET OF COMPARABLES. IT(TP)A NO. 994/BANG/2011 PAGE 21 OF 26 13.2 BEFORE US, THE ASSESSEE CONTENDED THAT THIS CO MPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE FOR SEVERAL REASONS, WHI CH ARE AS UNDER : (I) THIS COMPANY OWNS SIGNIFICANT INTANGIBLES IN TH E NATURE OF CUSTOMER RELATED INTANGIBLES AND TECHNOLOGY RELATED INTANGIBLES AND QUOTED EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY IN THE SUBMISSIONS MA DE. (II) THE TPO HAD ADOPTED THE CONSOLIDATED FINANCIA L STATEMENTS FOR COMPARABILITY PURPOSES AND FOR COMPUTING THE MARGIN S, WHICH CONTRADICTS THE TPOS OWN FILTER OF REJECTING COMPANIES WITH CONSOL IDATED FINANCIAL STATEMENTS. 13.3. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE SET OF COMPARABLES. 13.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD. WE FIND MERIT IN THE CONTE NTIONS OF THE ASSESSEE FOR EXCLUSION OF THIS COMPANY FROM THE SET OF COMPARABL ES. IT IS SEEN THAT THIS COMPANY IS ENGAGED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMENT SERVICES. THERE IS NO INFORMATION ON T HE SEGMENTAL BIFURCATION OF REVENUE FROM SALE OF PRODUCT AND SOF TWARE SERVICES. THE TPO APPEARS TO HAVE ADOPTED THIS COMPANY AS A COMPA RABLE WITHOUT DEMONSTRATING HOW THE COMPANY SATISFIES THE SOFTWAR E DEVELOPMENT SALES 75% OF THE TOTAL REVENUE FILTER ADOPTED BY HIM. AN OTHER MAJOR FLAW IN THE COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO IS T HAT HE ADOPTED COMPARISON OF THE CONSOLIDATED FINANCIAL STATEMENTS OF WIPRO WITH THE STAND ALONE FINANCIALS OF THE ASSESSEE; WHICH IS NO T AN APPROPRIATE COMPARISON. 13.4.2 WE ALSO FIND THAT THIS COMPANY OWNS INTELLE CTUAL PROPERTY IN THE FORM OF REGISTERED PATENTS AND SEVERAL PENDING APPLICATIONS FOR GRANT OF PATENTS. IN THIS REGARD, THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (ITA NO.227/BANG/201 0) HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY SUCH INTANGIB LE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. AS THE ASSESSEE IN THE CASE ON HAND DOES NOT OWN ANY INTANGIBLES, FOLLOWING THE A FORESAID DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL I.E. 24/7 CUSTOME R.COM PVT. LTD. (SUPRA), WE HOLD THAT THIS COMPANY CANNOT BE CONSID ERED AS A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSI NG OFFICER/TPO TO OMIT THIS COMPANY FROM THE SET OF COMPARABLE COMPANIES I N THE CASE ON HAND FOR THE YEAR UNDER CONSIDERATION. 11. THE LEARNED CIT-DR HAD NOT BROUGHT ANY EVIDENCE ON RECORD CONTROVERTING THE ABOVE FINDINGS OF THE TRIBUNAL. IN THE CIRCUMSTANCES, WE HOLD THAT THESE COMPANIES CANNOT BE INCLUDED IN THE LIST OF THE COMPARABLES WITH THAT OF THE ASSESSEE COMPANY. THE REFORE, WE DIRECT THE AO/TPO TO EXCLUDE THESE COMPANIES FROM THE LIST OF COMPARABLES. IT(TP)A NO. 994/BANG/2011 PAGE 22 OF 26 12. THE ASSESSEE COMPANY ALSO SOUGHT THE INCLUSION OF INDIUM SOFTWARE (INDIA) LIMITED. IT IS SUBMITTED THAT THI S COMPANY WAS REJECTED BY TPO BY HOLDING THAT IT FAILS THE FOREIG N EXCHANGE FILTER OF MORE THAN 25% AND IT PASSES THROUGH ALL OTHER FILTE RS APPLIED BY THE TPO. IT IS SUBMITTED THAT THE FOREIGN EXCHANGE EAR NING OF THE COMPANY IS 31.74% AND THEREFORE IT PASSES THROUGH THE FOREI GN EXCHANGE FILTER ALSO. THEREFORE, THIS COMPANY ALSO SHOULD BE INCLU DED IN THE LIST OF THE COMPARABLES AND RELIANCE WAS PLACED ON THE DECISION OF M/S.NXP SEMICONDUCTORS INDIA PVT. LTD. 13. WE HEARD THE RIVAL SUBMISSION AND PERUSED THE M ATERIAL ON RECORD. THE ISSUE OF COMPARABILITY OF M/S. INDIUM SOFTWARE (INDIA) LIMITED HAD COME UP BEFORE THE COORDINATE BENCH IN THE CASE OF M/S. NXP SEMICONDUCTORS INDIA PVT. LTD., WHEREIN TH E HONBLE TRIBUNAL HAS HELD AS FOLLOWS: 32. INDIUM SOFTWARE (INDIA) LIMITED:- BEFORE THE TPO THE ASSESSEE SOUGHT TO INCLUDE THE A FORESAID COMPANY AS A COMPARABLE COMPANY. THE TPO REJECTED THE PLEA OF T HE ASSESSEE ON THE GROUND THAT AS PER SCHEDULE 12 & 13 OF THE PROFIT AND LOSS ACCOUNT OUT OF THE TOTAL OPERATING REVENUES OF RS.649,14.48,000 REVENUE FROM SOFTWARE TESTING AND TRAINING SERVICES WERE RS.539,39,82,000 AND RS.8,93,88,000 R ESPECTIVELY. THE TPO THEREFORE CONCLUDED THAT THIS COMPANY WAS GENERATIN G REVENUES MAINLY FROM TESTING SERVICES WHICH ARE NOT IN THE NATURE OF SOF TWARE DEVELOPMENT SERVICES AS RENDER BY OTHER SOFTWARE DEVELOPMENT COMPANIES. TH IS COMPANY DOES NOT WRITE ANY CODE. THAT THIS COMPANY TESTS THE SOFTWARE PRO DUCTS, GENERATE BUG REPORTS AND COORDINATE WITH SOFTWARE PRODUCT DEVELOERS USING TE STING TOOLS. SUCH SERVICES ARE SPECIFLISED SERVICES IN THE NATURE OF SOFTWARE QUAL ITY ASSURANCE(QA)/TESTING. SUCH SERVICE PROVIDES MERELY ENSURE THAT THE APPLICATION S/PRODUCTS OF THIRD PARTY VENDORS MEET CUSTOMER SPECIFICATIONS AND EXPECTED S ERVICE LEVELS. ACCORDING TO THE TPO THE ABOVE SERVICES WERE NOT IN THE NATURE O F SOFTWARE DEVELOPMENT SERVICES AND THEREFORE THE AFORESAID COMPANY CANNOT BE CONSIDERED AS A COMPARABLE COMPANY. 14. THE LEARNED COUNSEL FOR THE ASSESSEE COMPANY HA D NOT BROUGHT ANY EVIDENCE CONTROVERTING THE ABOVE FINDINGS. THE REFORE, RESPECTFULLY IT(TP)A NO. 994/BANG/2011 PAGE 23 OF 26 FOLLOWING THE DECISION OF THE COORDINATE BENCH, WE DIRECT THE AO/TPO TO INCLUDE THIS COMPANY IN THE FINAL LIST OF COMPAR ABLES. 15. THE NEXT GROUND OF APPEAL RELATES TO THE REIMBU RSEMENT OF EXPENDITURE, NOT TO BE TREATED AS PART OF OPERATING COST AS WELL OPERATING REVENUE. IT IS THE CONTENTION OF THE ASSESSEE COMP ANY THAT THE REIMBURSEMENT OF EXPENDITURE WAS ROUTED THROUGH BAL ANCE SHEET AND THEREFORE CANNOT BE ROUTED THROUGH PROFIT AND LOSS ACCOUNT AS THERE WAS NO SERVICE OR PROFIT ELEMENT INVOLVED AND THEREFORE THE SAME SHOULD NOT BE TREATED EITHER AS PART OF OPERATING COST OR PART OF OPERATING REVENUE, HE PLACED RELIANCE ON THE DECISION OF THE HONBLE C OORDINATE BENCH IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 200 6-07 AND 2008-09. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. RESPECTIVELY FOLLOWING THE DECISION IN THE EARLIER ORDERS, WE REMAND BACK THIS ISSUE TO THE FILE OF THE AO TO EXA MINE THE ISSUE WHETHER ANY PROFIT ELEMENT IS INVOLVED IN THE REIM BURSEMENT OF THIS TRANSACTION OR NOT AND IS IN THE NATURE OF PURE REI MBURSEMENT OF EXPENDITURE. 16. THE NEXT GROUND OF APPEAL CHALLENGES THAT THE F OREIGN EXCHANGE GAIN/LOSS SHOULD BE TREATED AS OPERATING IN NATURE FOR THE PURPOSE OF COMPUTING THE OPERATING MARGIN, AS THE SAME IS IN R ELATION TO THE SALE PROCEEDS OF THE ASSESSEE COMPANY AND RELIANCE IN TH IS REGARD WAS PLACED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. FIESERV INDIA PVT. LTD., ITA NO.17/2016. NOW T HE LAW IS SETTLED THAT THE EXCHANGE GAIN/LOSS ARISES ON ACCOUNT OF RE ALIZING OF SALES, PAYMENT TO SUPPLIERS SHOULD BE TREATED AS PART OF O PERATING REVENUE/OPERATING COST. HOWEVER, NOTHING IS SHOWN TO US TO IT(TP)A NO. 994/BANG/2011 PAGE 24 OF 26 DEMONSTRATE THAT THE FOREIGN EXCHANGE LOSS IS ON AC COUNT OF REVENUE ITEMS I.E., ON ACCOUNT OF PURCHASE OF REVENUE ITEMS AND THEREFORE, WE REMAND THIS ISSUE BACK TO THE FILE OF AO/TPO TO EXA MINE WHETHER THE LOSS IS ARISING ON ACCOUNT OF REVENUE ITEMS, IF SO, TO TREAT IT AS A PART OF THE OPERATING COST FOR THE PURPOSE OF COMPUTING THE OPERATING MARGINS OF THE COMPANY. 17. THE OTHER GROUND OF APPEAL RELATES TO NOT GIVIN G BENEFIT OF THE RISK ADJUSTMENT. THE LEARNED DR SUBMITTED THAT IN THE LIGHT OF THE DECISION OF THE COORDINATE BENCH IN THE CASE OF GEM SOLUTIONS PVT. LTD., THE ASSESSEE IS NOT ENTITLED TO ANY RISK ADJU STMENT. THE DECISION OF THE HONBLE COORDINATE BENCH IS AS UNDER: IT(TP)A NO. 994/BANG/2011 PAGE 25 OF 26 18. IN THE LIGHT OF THE DECISION OF THE COORDINATE BENCH, THE ASSESSEE IS NOT ENTITLED TO ANY BENEFIT OF RISK ADJUSTMENT. 19. THE NEXT GROUND OF APPEAL RELATES TO THE CORPOR ATE TAX DEDUCTION UNDER SECTION 10A & 10B. THE ISSUE RAISED IN THE A BOVE GROUND OF APPEAL IS COVERED IN FAVOUR OF THE ASSESSEE COMPANY BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA E LXSI 349 ITR 98. 20. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF APRIL, 2017. SD/- SD/- (SUNIL KUMAR YADAV) (INTURI RAMA RAO) JUDICIAL MEMBER A CCOUNTANT MEMBER BANGALORE. DATED: 21 ST APRIL, 2017. /NSHYLU/ IT(TP)A NO. 994/BANG/2011 PAGE 26 OF 26 COPY TO: 1. APPELLANTS 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.