DCIT, v. M/s e4e Tech Support (India) Pvt. Ltd.,,

ITA 1044/BANG/2013 | 2005-2006
Pronouncement Date: 18-10-2016 | Result: Partly Allowed

Appeal Details

RSA Number 104421114 RSA 2013
Assessee PAN AABCV1574A
Bench Bangalore
Appeal Number ITA 1044/BANG/2013
Duration Of Justice 3 year(s) 3 month(s) 17 day(s)
Appellant DCIT,
Respondent M/s e4e Tech Support (India) Pvt. Ltd.,,
Appeal Type Income Tax Appeal
Pronouncement Date 18-10-2016
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 18-10-2016
Date Of Final Hearing 22-08-2016
Next Hearing Date 22-08-2016
Assessment Year 2005-2006
Appeal Filed On 01-07-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BANGALORE BEFORE SHRI S.K.YADAV JUDICIAL MEMBER AND SHRI A. K. GARODIA ACCOUNTANT MEMBER IT (TP) A NO.1044 (BANG) 2013 (ASSESSMENT YEAR : 2005-06) THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(3) BANGALORE APPELLANT VS M/S E4E TECH SUPPORT (INDIA) PVT. LTD. MARUTHI CHAMBERS NO. 17/9B RUPENA AGRAHARA HOSUR ROAD BANGALORE - 560068 PAN: AABCV1574A RESPONDENT & C. O. NO. 6/B/2016 IN ITA NO. 1044/B/2013 ASSESSMENT YEAR 2005 06 THE DCIT CIRCLE-11(3) BANGALORE VS M/S E4E TECH SUPPORT (INDIA) PVT. LTD. MARUTHI CHAMBERS NO. 17/9B RUPENA AGRAHARA HOSUR ROAD BANGALORE - 560068 PAN: AABCV1574A (RESPONDENT) (APPELLANT) ASSESSEE BY : SHRI P. C. KHINC HA CA REVENUE BY : SHRI AR. V. SREENIVASAN JCIT DATE OF HEARING : 22-08-2016 DATE OF PRONOUNCEMENT: : 18.10-2016 O R D E R PER SHRI A.K.GARODIA AM THIS APPEAL IS FILED BY THE REVENUE AND THE C. O. I S FILED BY THE ASSESSEE AND THESE ARE DIRECTED AGAINST THE ORDER O F LEARNED CIT (A) IV BENGALURU DATED 08.04.2013 FOR A. Y. 2005 06. IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 2 2. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER; 1 . T H E O RDER OF TH E LEA RN E D C I T (A P PEA L S ) IN SO F AR AS I T I S P R EJ U D I CIA L T O T H E INT E R ES T O F R EVE NU E IS O PP OSE D TO L A W A ND T H E FACT S A N D C IR C UM S T A N C E S OF T H E CASE . 2. T H E L EA RN E D C I T (A) E RR E D IN EXC LU D IN G M / S . FI EX TR O N IC S L T D M/S. IG A T E G L O B A L SO LUTI O N S LTD M / S. IN FOSYS TEC HN O L O GY LTD M/S L&T IN F O T E C H LTD . SA T YA M CO MPUT E R S LTD . AS CO MP A R A BL E S IN TH E CA S E OF TH E TAXPAYE R H O L D IN G T H AT TH E S I ZE AND TURN OVE R OF TH E C O M PA N Y A R E DEC I D IN G FA C T O R S F O R TR E A T I N G A C O M PANY AS A CO MPARABL E. 3. T H E LD. C IT (A) E RR E D IN EXC LUDIN G TH E C O M P A R AB L E C O MP A NI E S M / S . EX EN S Y S SOF T W ARE S O L UTI O N S L TD A ND T HIRD WA R E SO LUTI O N S L TD . A S C O M PA R AB L ES IN TH E C A S E OF TH E TA X P AYE R O N TH E B AS I S OF A BN O RM A L P R O FIT WITH O UT DEF ININ G W HAT CO N S TITUTE S ABN O RM A L PR O FIT F ILT E R A ND H OW T H E S A M E I S DE T ER MIN ED A N D . 4. T H E L E ARN E D C I T (A) O N TH E FAC T S A N D CI R C UM S T A N CE S O F T H E CA SE. E R RED IN H O LDIN G THAT M / S . B O DHTR EE CO N S ULTIN G L TD A N D TA T A ELXSI L T D CA NN O T BE TA K E N A S A CO MPAR A BL ES IN TH E CASE OF TH E T AX P A Y E R . 5. FO R TH ESE AND S U C H O TH E R G R O UND S T H A T M AY BE U R G ED A T TH E TIM E O F H EA RIN G. IT I S HUMBL Y PR AYE D TH A T TH E O RD E R OF TH E C I T (A) BE R EVE R S ED A N D TH AT O F T H E ASSESS IN G O FF I CE R B E R ES T O R ED . 7. T H E A PP E L L A NT C R AVES L EAVE T O AD D T O A LT E R T O A M E N D O R DE L E T E ANY O F TH E G R O U N D S TH A T M AY B E UR GE D A T TH E TIM E O F H EA RIN G O R T H E APPE A L . IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 3 3. THE GROUNDS RAISED BY THE ASSESSEE IN C. O. ARE AS UNDER; 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - IV BANGALOR E [CI T (APPEAL S )] TO THE EXTENT PREJUDICIAL TO THE RESPONDENT IS BAD IN LAW . 2. THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMING T HE ACTION OF THE ASSESSING OFFICER (AO) IN MAKING A REFERENCE TO TRANSFER PRICING OF FICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE WITHOUT DEMONSTRATING AS TO HOW OR WHY IT WAS NECESSARY AND EXPEDIENT TO DO SO. 3. THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE AO AND TPO IN: A. PASSING THE ORDER WITHOUT DEMONSTRATING THAT THE RE SPONDENT HAD A MOTIVE OF TAX EVASION; B. RELYING UPON REPLIES RECEIVED UNDER SECTION 133(6) WITHOUT GIVING AN OPPORTUNITY TO THE RESPONDENT TO CROSS EXAMINE THE PARTIES INVOLVE D DESPITE A SPECIFIC REQUEST SO MADE; AND C. N OT APPRECIATING THAT THE CHARGING OR COMPUTATION PR O V ISION REL A TIN G T O IN CO M E U N D ER THE HEAD ' PROFIT S & GAINS OF BUSINE S S OR PROFESSION ' DO NOT REFER T O O R IN C LUD E TH E A MOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE THE A DDITION MAD E UND E R C H A PT E R X I S BAD IN LAW . 4. TH E L E ARNED CIT (APPEALS) HA S E RRED IN CONFIRMING THE ACTION O F TH E TPO IN : A. REJECTING THE TRANSFER PRICING ANALYSIS UNDERTAKEN BY THE RE S PONDENT ON UNJU S TIFI A BL E G ROUNDS AND CONDUCTING A FRE S H TRANSFER PRICING ANALYSIS ; B. ADOPTING UNJUSTIFIABLE AND INAPPROPRIATE FILTER S LIKE 75 % ONSITE R EVE NU E FILT E R F O R SE LECTING COMPARABLES AND THEREB Y REJECTING M I . S ORIENT INFORMATION TE C HNOLOG Y LTD. A ND M / S . TVS INFOTECH LTD . A S COMPARABLES THAT WERE SELECTED BY TH E R ES P O ND E NT ; C. R E JECTING M / S . MEL S TAR INFORMATION TECHNOLOGIE S LTD . A S A C O MP ARA BL E O N TH E G R O UND IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 4 TH A T IT HAD N E G A TI VE OP E R A TIN G MARGIN WITHOUT A PPRECIATING TH A T TH E C O MP A N Y I S F UNCTIONALLY S IMIL A R TO THE RESPONDENT ; AND D. REJ E CTING M / S . VJIL CONSULTING LTD . A S A COMPARABLE ON THE GROUND O F H AV IN G P E CULIAR ECONOMIC CIRCUMSTANCES ; 5. TH E L E ARNED CIT ( APPEAL S ) HA S ERR E D IN CONFIRMING THE ACTION OF TH E TPO IN: A. A DOPTING COMPANIES AS COMP A RABLES E V EN THOUGH THE Y AR E N O T COMP A R A BL E IN R ES P EC T OF F UNCTIONS PERFORMED RISK S AS SUM E D A SS ET UTILISED SI Z E TURNOV E R ETC; B. A D O PTING COMP A NIE S LIKE SANKHYA INFOTECH LTD GEOMETRIC SOFTWAR E SOLUTI O N S C O MPANY LTD AND FOURSOFT LTD . A S COMPARABL ES EVEN THOUGH TH E Y ARE NOT COMP A RABL E IN T E RMS OF FUNCTION S PERFORMED RISK S ASSUMED ASSETS UTILIZED S I Z E ETC ; C. NOT APP RE CIATING THAT APART FROM FAILING UPPER TURNOVER FIL TER FLEXTRONICS SOFTWARE I S FUNCTIONALLY DIFFERENT FROM THE RESPONDENT SATYAM COMPUTERS HAS UNRELIABLE FINANCI A L S TATEMENTS AND INFOSYS IS A LARGE SOFTWARE COMPANY H AVING BRAND VALUE AND SOFTWARE PRODUCTS AND THEREFORE THESE COMPANIES OUG HT TO BE REJECTED AS COMPARABLES ; D. NOT APPRECIATING THAT EXENSYS SOFTWARE AND THIRDWAR E SOLUTIONS ARE EVEN OTHERWI S E FUNCTIONALLY DIFFERENT FROM THE RESPONDENT AND HAVE PECULIAR ECONOMIC CIRCUMSTANCES AND THEREFORE LIABLE TO BE REJECTED A S COMPARABLES; E. ADOPTING FOURSOFT LTD AND GEOMETRIC SOFTWARE SOLUTI ONS COMPANY LTD AS COMPARABLES EVEN THOUGH THEY ARE NOT COMPARABLES AS THEIR RELATED PARTY TRANSACTION S ARE MORE THAN 15% OF OPERATING REVENUE; AND F. IN C LUDING REIMBURSEMENT OF EXPENSES RECEIVED FROM AE A S PART OF OPERATING COST AND OPERATING REVENUE WHILE COMPUTING ARM'S LENGTH PRIC E WITHOUT APPRECIATING THAT REIMBURSEMENT WAS OF EXPENSES INCURRED ON BEHALF OF AE AND REIMBURSEMENTS AT COST SHOULD BE CONSIDERED AS AT ARM'S LENGTH. IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 5 6. THE LOWER AUTHORITIES HAVE ERRED IN: A. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVEL A ND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE RESPONDENT AND THE COMPARABLE COMPANIES ; AND B. NOT CONSIDERING THAT THE RESPONDENT IS INSULATED FR OM CERTAIN RISKS AS AGAINST COMPARABLES WHICH ASSUME THESE RISKS AND THEREFORE HAVE TO BE C REDITED WITH A RISK PREMIUM ON THIS ACCOUNT ; 4. LEARNED DR OF THE REVENUE SUPPORTED THE ORDER OF AO/TPO. LEARNED AR OF THE ASSESSEE SUPPORTED THE ORDER OF C IT (A) IN RESPECT OF THE GROUNDS RAISED BY THE REVENUE. HE ALSO SUBMITTE D THAT THE REVENUE IS OBJECTING TO THE EXCLUSION OF FOLLOWING COMPARABLES AS DIRECTED BY CIT (A):- A) M/S FLEXTRONICS LTD. B) M/S IGATE GLOBAL SOLUTIONS LTD. C) M/S INFOSYS TECHNOLOGY LTD. D) M/S L & T INFOTECH LTD. E) M/S SATYAM COMPUTERS LTD. F) M/S EXENSYS SOFTWARE SOLUTIONS LTD G) M/S THIRDWARE SOLUTIONS LTD. H) M/S BODHTREE CONSULTING LTD. AND I) M/S TATA ELXSI LTD. 5. HE PLACED RELIANCE ON THE TRIBUNAL ORDER RENDERE D IN THE CASE OF ACIT VS. M/S MCAFEE SOFTWARE (INDIA) PVT. LTD. IN I T (TP)A NO.1388/BANG/2011 & 04/BANG/2012 DATED 18.03.2016 C OPY AVAILABLE ON PAGES 696 TO 716 OF THE COMPILATION OF CASE LAWS . IN PARTICULAR OUR ATTENTION WAS DRAWN TO PAGES 702 TO 712 AND IT WAS SUBMITTED THAT ALL THESE COMPARABLES ARE TO BE EXCLUDED AS PER THIS TR IBUNAL ORDER. REGARDING THE C.O. OF THE ASSESSEE HE SUBMITTED TH AT THE GROUND NO. 5 IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 6 (C) TO (F) ARE FOR EXCLUSION OF A) M/S FLEXTRONICS LTD. B) M/S INFOSYS TECHNOLOGY LTD. C) M/S EXENSYS SOFTWARE SOLUTIONS LTD D) M/S GEOMATRIC SOFTWARE SOLUTIONS LTD. AND E) M/S THIRDW ARE SOLUTIONS LTD. AND THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASS ESSEE BY THE SAME TRIBUNAL ORDER AND PAGE 711 OF COMPILATION OF CASE LAWS IS RELEVANT FOR (D) AND THE REMAINING COMPANIES I.E. A) TO C) AND E ) ARE ALREADY EXCLUDED BY CIT (A) AND REVENUE IS IN APPEAL AGAINST THEIR E XCLUSION AND IT IS ALREADY POINTED OUT THAT THESE ARE COVERED BY THIS TRIBUNAL ORDER. HE ALSO SUBMITTED THAT THE REMAINING GROUNDS OF THE C. O. A RE NOT PRESSED. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIN D THAT THE REVENUE IS DISPUTING THE DECISION OF CIT (A) FOR EX CLUSION OF 9 COMPARABLES AS NOTED ABOVE AND IN ADDITION TO THAT THE ASSESSEE IS REQUESTING FOR EXCLUSION OF ONE MORE COMPANY I.E. M /S GEOMATRIC SOFTWARE SOLUTIONS LTD. HENCE WE HAVE TO DECIDE TH E ISSUE REGARDING EXCLUSION OF 10 COMPARABLES. THE LEARNED AR OF THE ASSESSEE HAS PLACED RELIANCE ON THE TRIBUNAL ORDER RENDERED IN THE CASE OF ACIT VS. M/S MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA). FIRST WE COMPARE THE FUNCTIONAL PROFILE OF THIS COMPANY AND THAT OF THE ASSESSEE. THE ASSESSEE IS RENDERING SOFTWARE DEVELOPMENT SERVICES AS NOTED BY THE TPO ON PAGE 2 OF HIS ORDER AND AS PER PARA 3 OF THAT TRIBUNAL O RDER THAT COMPANY IS ALSO RENDERING SOFTWARE DEVELOPMENT SERVICES. HENCE IN OUR CONSIDERED OPINION IF A COMPANY IS NOT FUNCTIONALLY COMPARABL E IN THAT CASE THEN IT IS NOT FUNCTIONALLY COMPARABLE IN THE PRESENT CASE ALSO. NOW WE IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 7 REPRODUCE PARA 10 AND 11 OF THIS TRIBUNAL ORDER FRO M PAGES 701 TO 715 OF THE PAPER BOOK. THESE ARE AS UNDER:- 10. THE FINAL LIST OF 17 COMPANIES SELECTED BY TPO ARE AS UNDER: SL NO. COMPARABLES SELECTED BY TPO NCP MARGINS AS PER TPO ORDER (%) (WC-UNADJ) NCP MARGINS AS PER TPO ORDER (%) (WC ADJ) 1. BODHTREE CONSULTING LTD. 24.85 22.35 2. LANCO GLOBAL SYSTEMS LTD. 13.65 9.51 3. EXENSYS SOFTWARE SOLUTIONS LTD. 70.68 62.85 4. SANKHYA INFOTECH LTD. 27.39 21.14 5. SASKEN NETWORK SYSTEMS LTD. 16.64 14.02 6. FOUR SOFT LTD. 22.98 21.35 7. THIRDWARE SOLUTION LTD. 66.09 63.97 8. R S SOFTWARE (INDIA) LTD. 8.07 6.79 9. GEOMETRIC SOFTWARE SOLUTIONS COMPANY LTD. 20.34 17.75 10. TATA ELXSI LTD. 24.35 22.77 11. VISUALSOFT TECHNOLOGIES LTD. 23.52 20.10 12. SASKEN COMMUNICATION TECHNOLOGIES LTD. 14.42 13.24 13. IGATE GLOBAL SOLUTIONS LTD. 4.32 2.43 14. FLEXTRONICS SOFTWARE SYSTEMS LTD 32.19 29.42 15. L&T INFOTECH LTD. 10.33 8.56 16. SATYAM COMPUTER SERVICES LTD 29.44 26.94 17. INFOSYS TECHNOLOGIES LTD. 42.83 4.96 ARITHMETICAL MEAN 26.59 23.74 THE ANALYSIS OF EACH OF THE COMPARABLE COMPANY IS A S UNDER. SATYAM COMPUTERS LTD: 10.1. OUT OF THE ABOVE COMPARABLES SATYAM COMPUTER SERVICES LTD. WAS EXCLUDED BY CIT (A) ON THE BASIS OF NON-RELIABILITY OF FINANCIAL DATA. REVENUE HAS ACCEPTED THE SAME AND HAS NOT CONTESTED. SO THE S AID COMPANY HAS BEEN RIGHTLY EXCLUDED. INFOSYS TECHNOLOGIES LTD. EXENSYS SOFTWARE SOLUTIONS LTD 10.2. LD.CIT(A) HAS EXCLUDED INFOSYS AND EXENSYS ON THE BASIS OF FUNCTIONAL DISSIMILARITY AND HAVING EXTRAORDINARY EVENT DURING THE YEAR. EXENSYS WAS HAVING EXTRAORDINARY PROFITS BY WAY OF AMALGAMATION OF COMPANIES DURING THE IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 8 YEAR. INFOSYS WAS EXCLUDED HAVING DIFFERENT FUNCTI ONALITY OF PRODUCTS HAVING HIGH TURNOVER AND BRAND NAME. FOLLOWING THE DECISI ON OF AGNITY TECHNOLOGIES VS. ITO OF ITAT AS APPROVED BY THE HON'BLE DELHI HI GH COURT INFOSYS CANNOT BE CONSIDERED AS COMPARABLE. THE SAME VIEW WAS HELD B Y CO-ORDINATE BENCH IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTE MS (INDIA) PRIVATE LIMITED IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA ). SINCE THE ORDER OF LD.CIT(A) IS IN AGREEMENT WITH THE DECISION ON THES E TWO COMPARABLES BY VARIOUS CO-ORDINATE BENCHES WE UPHOLD THE SAME. BODHTREE CONSULTING LTD. : 10.3. THIS COMPANY WAS RETAINED BY LD.CIT(A) BUT AS SESSEE OBJECTS ON THE BASIS OF FUNCTIONALITY. HOWEVER AS SEEN FROM THE ORDERS OF CO-ORDINATE BENCHES IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SY STEMS (INDIA) PRIVATE LIMITED IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-20 15 (SUPRA) AS WELL AS DCIT VS. TOSHIBA EMBEDDED SOFTWARE (I) PVT. LTD. IN IT( TP)A NO. 1/BANG/2012 DT. 10- 05-2013 BODHTREE CONSULTING LTD. WAS ACCEPTED AS A COMPARABLE. HOWEVER IN THE CASE OF CORDYS SOFTWARE INDIA P. LTD. IN ITA N O. 1451/HYD/2010 DT. 13-06- 2014 (WHERE ONE OF US AM IS THE AUTHOR) HAS CONSID ERED IN DETAIL AND EXCLUDED THE SAME FOR THE FOLLOWING REASONS: 1. BODHTREE CONSULTING LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHO ULD BE REJECTED UNDER THE FOLLOWING TPOS FILTERS: RELATED PARTY TRANSACTIONS FILTER: AS PER SCHEDUL E 4 OF THE BALANCE SHEET THE COMPANY HAS INVESTMENTS IN PERIGON LIC USA AND AS PER THE RESPONSE U/S 133(6); THE COMPANY HAS EXPORT SALES TO PERIGON LIC USA OF RS. 133.90 LAKHS BEING 34.68% OF THE TOTAL TURNOVER. FUNCTIONALLY DIFFERENT FILTER: THE COMPANY IN ITS RESPONSE TO NOTICE U/S 133(6) HAS STATED THAT IT PROVIDES E-PAPER SOLUTIONS DATA CLEANSING SOFTWARE WEBSITE DEVELOPMENT AND OTHER CUSTOMIZED SOFTWARE AND ALSO STATE THAT THE E-PAPER SOLUTIONS AND DATA CLEANSING SERVICES WOULD COME UN DER THE CATEGORY OF IT ENABLED SERVICES. CONSIDERING THE ABOVE WE DIRECT THAT THE ABOVE COM PANY HAS TO BE EXCLUDED ON THE REASON OF RPT OF MORE THAN 25% AND FUNCTIONALIT Y. LANCO GLOBAL SYSTEMS LTD. : 10.4. THIS COMPANY EVEN THOUGH INCLUDED BY TPO AND HAS NOT BEEN OBJECTED TO BY ASSESSEE WAS REJECTED BY THE CIT(A) ON THE R EASON OF LOW PROFIT MARGIN. THIS IS NOT A VALID GROUND. ONLY CONTINUOUS LOSS M AKING COMPANIES ARE BEING IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 9 EXCLUDED FROM THE COMPARABILITY. IF THIS ARGUMENT WAS ACCEPTED THE HIGH PROFIT MAKING COMPANIES ARE ALSO TO BE EXCLUDED. THIS IS NOT THE PURPOSE FOR WHICH TP ANALYSIS IS BEING UNDERTAKEN. THEREFORE KEEPING T HE PRINCIPLES LAID DOWN BY THE SPECIAL BENCH OF ITAT IN THE CASE OF MAERSK GLOBAL CENTERS (INDIA) P.LTD 43 TAXMANN.COM 100 MUMBAI(SB) WE CONSIDER THE SAME AS COMPARABLE AND RETAIN IT IN THE LIST. SANKHYA INFOTECH LTD. THIRDWARE SOLUTION LTD. & TATA ELXSI LTD. : 10.5. THESE THREE COMPANIES ARE REJECTED AS COMPARA BLES ON FUNCTIONALITY IN THE CASE OF ITO VS. M/S. SUNQUEST INFORMATION SYSTE MS (INDIA) PRIVATE LIMITED IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA ) (PARAS 19-20 22-26 27- 30 RESTIVELY) AND IN THE CASE OF CORDYS SOFTWARE IN DIA P. LTD. IN ITA NO. 1451/HYD/2010 DT. 13-06-2014 (SUPRA) AT PARA NO. 13 . THE ANALYSIS BY THE CO- ORDINATE BENCHES IS AS UNDER: SANKHYA INFOTECH LIMITED (SANKHYA) 19. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT SANKHYA IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE COMPANY FOCUSES ON THE DEVELOPMENT OF NICHE PRODUCT S FOR THE TRANSPORT AND AVIATION INDUSTRY. HOWEVER SEGMENTAL INFORMATION IN RELATIO N TO THE ABOVE MENTIONED ACTIVITIES IS NOT AVAILABLE IN PUBLIC DOMAIN. THEREFORE AS SANKH YA ENGAGES ITSELF IN PRODUCTS AND SERVICES AS WELL AS SOFTWARE TRAINING IT CANNOT BE CONSIDERED AS A COMPARABLE OF THE APPELLANT. THE PRODUCTS DEVELOPED AND OWNED BY SANK HYA ARE LISTED BELOW: (1) SILICONTM TRAINING SUITE OF PRODUCTS: THE PRODU CTS ARE A COMPREHENSIVE ENTERPRISE WIDE TRAINING PLATFORM THAT COVERS THE E NTIRE SPECTRUM OF TRAINING IN A PAPERLESS ENVIRONMENT. IT COMPRISES OF FOUR PRODUCT S:- - SILICONTM LMS (TRAINING MANAGEMENT INFORMATION - SILICONTM QT (ONLINE ASSESSMENT SYSTEM) - SILICONTM LCMS (LEARNING CONTENT MANAGEMENT SYSTE M) - IRMAQTM : THIS IS AN INTEGRATED RESOURCE PLANNING MANAGEMENT TRACKING SYSTEM EXCLUSIVELY DEVELOPED FOR AIRLINE OPERATIONS. IT IS AN END-TO-END SOLUTION FOR ALL FLIGHT OPERATIONS. - SAKAI CLE : THIS IS A WIDELY USED AND POPULAR OPE N SOURCE LMS USED IN MANY LEADING EDUCATIONAL INSTITUTIONS AND CORPORATE. THE RELEVAN T EXTRACT FROM THE ANNUAL REPORT SUBSTANTIATING THAT THE COMPANY ALSO ENGAGES IN DIF FERENT ACTIVITIES IS REPRODUCED BELOW: IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 10 2. ACTIVITIES THE COMPANY AS ENGAGED IN THE BUSINESS OF DEVELOPME NT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. THE PRODUCTION OF SOFTWARE I S NOT CAPABLE OF BEING EXPRESSED IN ANY GENERIC UNIT AND HENCE 11 IS RIOT POSSIBLE T O GIVE THE INFORMATION AS REQUIRED BY CERTAIN CLAUSES OF PARAGRAPHS 3.4C AND 4 D OF PA RT II OF SCHEDULE VI OF THE COMPANIES ACT 1956. THE DELHI TRIBUNAL IN ITO V. COLT TECHNOLOGY SERVIC ES INDIA PVT. LTD. (JUDGMENT DATED 23.10.2012 IN ITA NO. 609I/DEL/2011 FOR THE ASSESSM ENT YEAR 2005-06) HAS HELD THAT THE SAID COMPANY IS NOT A COMPARABLE TO THE ASSESSE E THEREIN WHICH WAS ALSO IN THE BUSINESS OF SOFTWARE DEVELOPMENT. 20. THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE CONSIDERED. THE ACTIVITIES SET OUT ABOVE AND THE DECISION OF TH E DELHI ITAT RENDERED IN THE CONTEXT OF A SOFTWARE DEVELOPMENT COMPANY SUCH AS THE ASSES SEE MAKES IT AMPLY CLEAR THAT THIS COMPANY SANKHYA CANNOT BE REGARDED AS A COMPAR ABLE. THE SAME IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 22. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS HELD THAT THE AFORESAID TWO COMPAN IES VIZ. FOUR SOFT LTD. AND THIRDWARE SOLUTIONS LTD. ARE NOT COMPARABLE COMPANIES IN SOF TWARE DEVELOPMENT SERVICES COMPANIES. THE FOLLOWING WERE THE RELEVANT OBSERVAT IONS:- 15.4. FOURSOFT LIMITED : THIS COMPARABLE IS OBJECT ED ON THE SAME REASON AS THIS COMPANY IS INVOLVED IN PRODUCT DEVELOPMENT AND OWNS PRODUCTS NAMELY 4S ETRANS AND 4S ELOG. THESE PRODUCTS ARE USED IN SUN MICROSYSTEM S INC IN AN APPLICATION VERIFICATION KIT CERTIFIED FOR ENTERPRISES AND ASSE SSEE HAVE BEEN INVESTING CONTINUOUSLY ON PRODUCT DEVELOPMENTS. SINCE ASSESSEE IS IN THE P RODUCT DEVELOPMENT HAVING I.P. RIGHTS THE SAME IS NOT COMPARABLE. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : THIS COMPANY IS OBJECTED TO BY THE ASSESSEE ON THE REASON THAT THE SAID THIRDWARE SOFTWARE SOLUTIONS LTD. IS ENGAGED IN SALE OF SOFTW ARE LICENCE AND RELATED SERVICES AND NOT A SERVICE PROVIDER. REFERRING TO THE ANNUAL RE PORT IT WAS SUBMITTED THAT THIS COMPARABLE WAS REJECTED BY THE ITAT PUNE IN THE CA SE OF EGAIN COMMUNICATIONS LTD. THIS COMPANY HAVING REVENUE FROM PRODUCT LICENSE AN D EARNING EXTRAORDINARY PROFIT DUE TO INTANGIBLE OWNS. 15.6. THESE THREE COMPARABLE ABOVE FLEXTRONICS SOFT WARE LIMITED FOURSOFT LIMITED AND THIRDWARE SOFTWARE SOLUTION LIMITED WERE ANALYSED B Y THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF INTOTO SOFTWARE SOLUTIONS P VT. LTD. (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER : '23. THE OTHER COMPANIES WHICH ARE OBJECTED TO BY T HE ASSESSEE ARE FLEXTRONICS SOFTWARE LIMITED FOURSOFT LIMITED AND THIRDWARE SO FTWARE SOLUTION LIMITED. AS FAR IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 11 AS THESE THREE COMPANIES ARE CONCERNED THE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THEY ARE INTO BOTH S OFTWARE AS WELL AS PRODUCT DEVELOPMENT. HE SUBMITTED THAT THE TPO HAS TAKEN NO TE OF THE FACT THESE COMPANIES ARE ALSO INTO PRODUCT DEVELOPMENT BUT HAS SELECTED THESE COMPANIES AS COMPARABLES BY APPLYING THE FILTER OF MORE THAN 70% OF ITS REVENUE BEING FROM SOFTWARE DEVELOPMENT SERVICES. THE LEARNED COUNSEL SUBMITTED THAT THE FUNCTIONS OF THESE COMPANIES ARE DIFFERENT FROM THE ASSESSEE WHO WAS INTO SOLE ACTIVITY OF SOFTWARE DEVELOPMENT FOR ITS ASSOCIATED ENTERPRISE. HE SUBMITTED THAT THE TPO HAS ALLOCATED THE EXPENDITURE IN THE PROPORTION OF THE REVENUE OF THESE COMPANIES FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS AND HA S ADOPTED THE FIGURE AS SEGMENTAL MARGIN OF THE COMPANY AND HAS TAKEN THESE COMPANIES AS COMPARABLES. HE SUBMITTED THAT BY TAKING THE PROPORTIONATE EXPEN DITURE THE CORRECT FINANCIAL RESULTS WOULD NOT EMERGE. HE SUBMITTED THAT NOTHING PREVENTED THE ASSESSING OFFICER/TPO FROM OBTAINING THE SEGMENTAL DETAILS FR OM THE RESPECTIVE COMPARABLE COMPANIES BEFORE ADOPTING THEM AS COMPARABLE COMPAN IES AND BEFORE TAKING THE OPERATING MARGIN FOR ARRIVING AT THE ARMS LENGTH PR ICE. HE SUBMITTED THAT WHEREVER THE SEGMENTAL DETAILS ARE NOT AVAILABLE THEN THE S AID COMPANIES SHOULD NOT BE TAKEN AS COMPARABLES. FOR THIS PURPOSE HE PLACED R ELIANCE UPON THE DECISION OF THE BANGALORE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE O FFSHORE SERVICES PVT. LTD. VS. THE DCIT IN ITA.NO.1252/BANG/2010 WHEREIN THESE COMPANI ES WERE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 23. THE LEARNED D.R. HOWEVER SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 24. HAVING HEARD BOTH THE PARTIES AND HAVING GONE T HROUGH THE MATERIAL ON RECORD WE FIND THAT THE TPO AT PAGE 37OF HIS ORDER HAS BROUGH T OUT THE DIFFERENCES BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICES PROVIDER. THUS IT IS CLEAR THAT HE IS AWARE OF THE FUNCTIONAL DISSIMILARITY BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICE PROVIDER. HAVING TAKEN NOTE OF THE DIFFERENCE BETWEEN THE TWO FUNCTIONS THE ASSESSING OFFICER OUGHT NOT TO HAVE TAKEN THE COMPANIES WHICH ARE INTO BOTH THE PRODUCT DEVELOPMENT AS WELL AS SOFTWARE DE VELOPMENT SERVICE PROVIDER AS COMPARABLES UNLESS THE SEGMENTAL DETAILS ARE AVAILA BLE. EVEN IF HE HAS ADOPTED THE FILTER OF MORE THAN 75% OF THE REVENUE FROM THE SOF TWARE SERVICES FOR SELECTING A COMPARABLE COMPANY HE OUGHT TO HAVE TAKEN THE SEGM ENTAL RESULTS OF THE SOFTWARE SERVICES ONLY. THE PERCENTAGE OF EXPENDITURE TOWARD S THE DEVELOPMENT OF SOFTWARE PRODUCTS MAY DIFFER FROM COMPANY TO COMPANY AND ALS O IT MAY NOT BE PROPORTIONATE TO THE SALES FROM THE SALE OF SOFTWARE PRODUCTS. UNDER SECTION 133(6) OF THE I.T. ACT THE TPO HAS THE POWER TO CALL FOR THE NECESSARY DETAILS FROM THE COMPARABLE COMPANIES. IT IS SEEN THAT THE ASSESSING OFFICER/TPO AS EXERCISED THIS POWER TO CALL FOR DETAILS WITH REGARD TO THE VARIOUS COMPANIES. AS SEEN FROM THE A NNUAL REPORT OF FOURSOFT LIMITED WHICH IS REPRODUCED AT PAGE 7 OF THE TPOS ORDER T HE SAID COMPANY HAS DERIVED INCOME FROM SOFTWARE LICENCE ALSO AND AMCS. 25. AS FAR AS THIRDWARE SOFTWARE SOLUTION LIMITED I S CONCERNED WE FIND FROM THE INFORMATION FURNISHED BY THE SAID COMPANY THAT THOU GH THE SAID COMPANY IS ALSO INTO PRODUCT DEVELOPMENT THERE ARE NO SOFTWARE PRODUCTS THAT THE COMPANY INVOICED DURING THE RELEVANT FINANCIAL YEAR AND THE FINANCIAL RESUL TS ARE IN RESPECT OF SERVICES ONLY. THUS IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 12 IT IS CLEAR THAT THERE IS NO SALE OF SOFTWARE PRODU CTS DURING THE YEAR BUT THE SAID COMPANY MIGHT HAVE INCURRED EXPENDITURE TOWARDS THE DEVELOP MENT OF THE SOFTWARE PRODUCTS. 26. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CONCE RNED WE FIND THAT AT PAGE 90 OF HIS ORDER THE TPO HAS ALSO OBSERVED THAT THE SAID COMP ANY HAS INCURRED EXPENDITURE FOR SELLING OF PRODUCTS AND HAS INCURRED R & D EXPENDIT URE FOR DEVELOPMENT OF THE PRODUCTS. THE ABOVE FACTS CLEARLY DEMONSTRATE THAT THERE IS F UNCTIONAL DISSIMILARITY BETWEEN THE ASSESSEE AND THESE COMPANIES AND WITHOUT MAKING ADJ USTMENT FOR THE DISSIMILARITIES BROUGHT OUT BY THE TPO HIMSELF THESE COMPANIES CAN NOT BE TAKEN AS COMPARABLE COMPANIES. THE METHOD ADOPTED BY THE TPO TO ALLOCAT E EXPENDITURE PROPORTIONATELY TO THE SOFTWARE DEVELOPMENT SERVICES AND SOFTWARE PROD UCT ACTIVITY CANNOT BE SAID TO BE CORRECT AND REASONABLE. WHEREVER THE ASSESSING OFF ICER/TPO CANNOT MAKE SUITABLE ADJUSTMENT TO THE FINANCIAL RESULTS OF THE COMPARAB LE COMPANIES WITH THE ASSESSEE COMPANY TO BRING THEM ON PAR WITH THE ASSESSEE THE SE COMPANIES ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THEREFORE WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE THREE COMPANIES FROM THE LIST OF COMPARABLES. 27. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT TATA ELXSI LTD. A COMPARABLE COMPANY OUT OF THE 10 EXCLUDED BY THE CI T(A) BY APPLYING RPT FILTER AND WHICH GETS INCLUDED IN THE COMPARABLE COMPANIES BEC AUSE OF 15% RPT BEING ADOPTED AS THRESHOLD LIMIT FOR EXCLUDING COMPANIES FOR THE PURPOSE OF COMPARABILITY. IT WAS HIS SUBMISSION THAT THIS COMPANY WILL HOWEVER HAVE TO BE EXCLUDED AS THIS COMPANY WAS HELD TO BE NOT COMPARABLE WITH AN ASSESSEE SUCH AS THE ASSESSEE IN THE PRESENT CASE PROVIDING SOFTWARE DEVELOPMENT SERVICES BY THE ITAT HYDERABAD BENCH IN THE CASE OF CNO IT SERV ICES (INDIA) PVT. LTD. (FORMERLY KNOWN AS CONSECO DATA SERVICES (INDIA) PVT. LTD.) H YDERABAD VS. DCIT CIRCLE 1(2) HYDERABAD IN ITA.NO.1280/HYD/2010 ASSESSMENT YEAR 2005-2006 ORDER DATED 12.2.2014. 28. WE HAVE CONSIDERED HIS SUBMISSION AND FIND THAT THE ITAT HYDERABAD BENCH ON IDENTICAL FACTS HELD ON COMPARABILITY OF TATA ELXS I LTD. AS FOLLOWS: 15.7. TATA ELXSI LIMITED : THE OBJECTION OF THE A SSESSEE IS THAT TATA ELXSI OPERATING TWO SEGMENTS SYSTEM COMMUNICATION SERVIC ES AND SOFTWARE DEVELOPMENT SERVICES. THE TPO ACCEPTED THE SOFTWARE DEVELOPMENT SERVICES SEGMENT IN HIS T.P. ANALYSIS AND ASSESSEES OBJECTION IS THAT THE SOFTW ARE DEVELOPMENT SERVICES SEGMENT ITSELF COMPRISES OF THREE SUBSERVICES NAMELY (A) PR ODUCT DESIGN SERVICES (B)DESIGN ENGINEERING SERVICES AND (C) VISUAL COMPUTING LABS. IT WAS SUBMITTED THAT THESE SERVICES ARE NOT AKIN TO ASSESSEE SOFTWARE SERVICES AND SEGM ENTAL INFORMATION OF ONLY PRODUCT DESIGN SERVICES COULD HAVE BEEN ACCEPTED BY THE TPO AS A COMPARABLE BUT NOT THE ENTIRE SOFTWARE DEVELOPMENT SERVICE. SINCE COMPANY S OPERATIONS ARE FUNCTIONALLY DIFFERENT AS SUCH THE SAME IS NOT COMPARABLE. FURT HER ASSESSEE IS ALSO OBJECTING ON THE BASIS OF INTANGIBLE SCALE OF OPERATIONS. THE CO ORDINATE BENCH IN THE CASE OF INTOTO (SUPRA) CONSIDERED THE ISSUE AS UNDER IN PARA 22: '22 TATA ELXSI LIMITED : AS REGARDS THIS COMPANY T HE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE FILED BEFORE US THE REPLY O F TATA ELXSI LIMITED TO THE ADDL. CIT (TRANSFER PRICING) HYDERABAD WHEREIN THE CONCERNE D OFFICER HAS BEEN INFORMED IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 13 THAT TATA ELXSI LIMITED IS SPECIALISED EMBEDDED SOF TWARE DEVELOPMENT SERVICE PROVIDER AND THAT IT CANNOT BE COMPARED WITH ANY OT HER SOFTWARE DEVELOPMENT COMPANY. IT WAS SUBMITTED THAT BECAUSE OF THE SPECI ALISATION AND ALSO BECAUSE OF DIVERSE NATURE OF ITS BUSINESS IT IS VERY DIFFICUL T TO SCALE-UP THE OPERATIONS OF TATA ELXSI LIMITED. IN VIEW OF THIS TATA ELXSI LIMITED HAS INFORMED THAT IT IS NOT FAIR TO USE ITS FINANCIAL NUMBERS TO COMPARE IT WITH ANY OTHER COMPANY. THE COMMUNICATION DATED 25TH AUGUST 2009 TO THE TPO IS PLACED BEFORE US. AS THIS COMMUNICATION WAS NOT BEFORE THE TPO AT THE TIME OF TRANSFER PRICING ADJUSTMENT WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE ALSO TO THE FILE OF THE TPO TO RECONSIDER ADOPTING THIS COMPANY AS THE COMPARABLE IN THE LIGHT OF OBSERVATI ONS OF THIS COMPANY TO THE TPO IN THE CASE OF ANOTHER ASSESSEE. IN THE RESULT THE ASSESSING OFFICER/TPO IS DIRECTED TO RECONSIDER THE ISSUE IN ACCORDANCE WITH LAW AFT ER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. KEEPING THE ASSESSEES OBJECTIONS AND THE DECISIONS OF THE COORDINATE BENCH PRIMA FACIE WE ARE OF THE VIEW THAT TATA ELXSI LIMITED I S FUNCTIONALLY DIFFERENT AND HAS INCOMPARABLE SIZE TO THAT OF THE ASSESSEE. FURTHER WE ARE UNABLE TO VERIFY WHETHER THE SEGMENTAL PROFITS ADOPTED BY THE TPO PERTAIN TO ENT IRE SOFTWARE DEVELOPMENT SERVICES OR PERTAIN TO LIMITED SERVICE AKIN TO ASSESSEE SERV ICES. SINCE THESE ASPECTS ARE NOT CLEAR FROM THE DATA FURNISHED BEFORE US WE DIRECT THE TPO TO EXAMINE AND IN CASE THE SEGMENTAL PROFITS OF A PARTICULAR SERVICE IS NOT AV AILABLE THEN TO EXCLUDE THE TATA ELXSI LIMITED FROM THE LIST OF COMPARABLES. ACCORDINGLY THIS ISSUE IS RESTORED TO THE FILE OF TPO FOR EXAMINATION AND TO DECIDE IN ACCORDANCE WITH LA W AND FACTS AFTER AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO ASSESSEE. 29. THOUGH THE ISSUE HAS BEEN SET ASIDE TO THE AO I N THE AFORESAID DECISION THE ITAT HYDERABAD IN THE CASE OF NTT DATA INDIA ENTERPRISE APPLICATION SERVICES PVT. LTD. ITA NO.1612/HYD/2010 ORDER DATED 23.10.2013 AND IN A SU BSEQUENT RULING IN THE CASE OF INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LTD. ITA NO.1256/HYD/2010 ORDER DATED 28.2.2014 HELD THAT TATA ELXSI IS NOT FUNCTIONALLY COMPARABLE WITH THAT OF A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. 30. IN VIEW OF THE AFORESAID DECISION RENDERED ON I DENTICAL FACTS AND CIRCUMSTANCES WE ARE OF THE VIEW THAT TATA ELXSI LTD. SHOULD BE EXC LUDED FROM THE LIST OF COMPARABLE COMPANIES. 13. SIMILARLY THE OTHER CASES BODHTREE CONSULTIN G LTD FOUR SOFT LTD INFOSYS . SANKHYA INFOTECH LTD. THIRDWARE SOLUTIONS LTD TATA ELEXI (SEG) ETC ARE ALSO TO BE EXCLUDED AS THEY ARE CONSIDERED AND ANALYSED IN VARIOUS CASES RELIED ON ABOUT FUNCTIONALITY AND WHY THE SAME ARE NOT COMPARABLE TO THE COMPANIES LIKE ASSES SEE. BODHTREE CONSULTING LTD ALSO FAILS RPT FILTER AS CONTENDED. IN VIEW OF THIS WE ARE NO T DISCUSSING ABOVE COMPARABLES IN DETAIL BUT SUFFIC E TO SAY THAT ASSESSEES SUBMISSIONS ARE VALID. THE AO IS DIRECTED TO EXCLUDE THE ABOVE COMP ARABLES AND RE-WORK OUT THE ARMS LENGTH MARGIN ACCORDINGLY. THE GROUND NO.8 AND ADDI TIONAL GROUND RAISED BY ASSESSEE ARE CONSIDERED AS ALLOWED. IN VIEW OF THE ABOVE THE ABOVE THREE COMPANIES ARE TO BE EXCLUDED. IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 14 SASKEN NETWORK SYSTEMS LTD. R S SOFTWARE (INDIA) LTD. VISUALSOFT TECHNOLOGIES LTD. AND SASKEN COMMUNICATION TECHNOLOGIES LTD. 10.6 SINCE THERE IS NO OBJECTION FROM ASSESS EE AND WAS SELECTED BY TPO THE ABOVE COMPANIES ARE RETAINED. FOUR SOFT LTD. 10.7. THE OBJECTION BY ASSESSEE IS THAT THIS COMPAN Y IS A PRODUCT COMPANY. WAS ANALYSED AND ACCEPTED IN THE CASE OF ITO VS. M/ S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED IN IT(TP)A NO. 130 2/BANG/2011 DT. 11-06-2015 (SUPRA) PARA 22. IT WAS HELD THAT THE SAID COMPANY AHS DERIVED INCOME FROM SOFTWARE LICENSE AND AMCS. SINCE FUNCTIONALITY WAS ALREADY ANALYSED RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCHES ALSO THE SAME WAS TO BE EXCLUDED. I. INTOTO SOFTWARE INDIA PVT. LTD. ITA NO. 1196/H YD/2010; II. CORDYS SOFTWARE INDIA P. LTD. ITA NO. 1451/HY D/2010 GEOMETRIC SOFTWARE SOLUTIONS COMPANY LTD. : 10.8. EVEN THOUGH THIS COMPANY WAS ACCEPTED AS COMP ARABLE IN ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITE D IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA) AND CORDYS SO FTWARE INDIA P. LTD. IN ITA NO. 1451/HYD/2010 DT. 13-06-2014 (SUPRA) AND WA S NOT OBJECTED TO WE FIND THAT THE CO-ORDINATE BENCH AT BANGALORE IN THE CASE OF DCIT VS. TOSHIBA EMBEDDED SOFTWARE (I) PVT. LTD. IN IT(TP)A NO. 1/B ANG/2012 DT. 10-05-2013 HAS CONSIDERED THAT THIS IS IN PRODUCT DEVELOPMENT. WE HAVE PERUSED THE TPOS ORDER. IN PAGE 85 AND 86 OF THE ORDER THIS COMPAR ABLE WAS ANALYSED. TPO RECORDS THAT THERE ARE PRODUCT SALES TO THE EXTEN T OF 18%. SEGMENTAL PROFITS ARE NOT AVAILABLE. ON ASSUMPTIONS THIS COMPANY WA S RETAINED. WE ARE OF THE OPINION THAT BEING A PRODUCT BASED COMPANY THE SAM E IS NOT STRICTLY COMPARABLE TO A SERVICE COMPANY LIKE ASSESSEE. IN THE ABSENCE OF SEGMENTAL PROFIT OF SERVICE INCOME WE HAVE TO EXCLUDE THE SAME. FOLLOW ING THE DECISION IN THE CASE OF DCIT VS. TOSHIBA EMBEDDED SOFTWARE (I) PVT. LTD. IN IT(TP)A NO. 1/BANG/2012 DT. 10-05-2013 (SUPRA) THIS COMPANY IS ACCORDINGLY EXCLUDED. IGATE GLOBAL SOLUTIONS LTD. & L&T INFOTECH: 10.9. THESE TWO COMPANIES ARE FOUND COMPARABLE IN M ANY ORDERS OF THE CO- ORDINATE BENCHES BUT EXCLUDED ON THE BASIS OF TURN OVER FILTER OF RS. 200 CRORES LIMIT IN ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA) WE HAVE CONSIDERED THE SAME. ASSESSEES TURNOVER IS ABOUT 63 CRORES. THE TURNOVER OF IGATE GLOBAL IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 15 SOLUTIONS LTD. (SEG) IS ABOUT 405 CRORES AND L & T INFOTECH LTD IS OF 562 CRORES. THIS IS WITH THE RANGE OF TEN TIMES THE UP PER LIMIT. MOREOVER ASSESSEE COUNSEL HAS NOT PRESSED ON TURNOVER FILTER OF RS. 2 00 CRORES. THEREFORE THESE TWO ARE RETAINED. FLEXTRONICS SOFTWARE SYSTEMS LTD. : 10.10. THIS COMPANY WAS OBJECTED TO ON FUNCTION AL DISSIMILARITY. THIS WAS CONSIDERED IN ITO VS. M/S. SUNQUEST INFORMATION SYS TEMS (INDIA) PRIVATE LIMITED IN IT(TP)A NO. 1302/BANG/2011 DT. 11-06-20 15 (SUPRA) AS UNDER: 26. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CON CERNED WE FIND THAT AT PAGE 90 OF HIS ORDER THE TPO HAS ALSO OBSERVED THAT THE SAID COMP ANY HAS INCURRED EXPENDITURE FOR SELLING OF PRODUCTS AND HAS INCURRED R & D EXPENDIT URE FOR DEVELOPMENT OF THE PRODUCTS. THE ABOVE FACTS CLEARLY DEMONSTRATE THAT THERE IS F UNCTIONAL DISSIMILARITY BETWEEN THE ASSESSEE AND THESE COMPANIES AND WITHOUT MAKING ADJ USTMENT FOR THE DISSIMILARITIES BROUGHT OUT BY THE TPO HIMSELF THESE COMPANIES CAN NOT BE TAKEN AS COMPARABLE COMPANIES. THE METHOD ADOPTED BY THE TPO TO ALLOCAT E EXPENDITURE PROPORTIONATELY TO THE SOFTWARE DEVELOPMENT SERVICES AND SOFTWARE PROD UCT ACTIVITY CANNOT BE SAID TO BE CORRECT AND REASONABLE. WHEREVER THE ASSESSING OFF ICER/TPO CANNOT MAKE SUITABLE ADJUSTMENT TO THE FINANCIAL RESULTS OF THE COMPARAB LE COMPANIES WITH THE ASSESSEE COMPANY TO BRING THEM ON PAR WITH THE ASSESSEE THE SE COMPANIES ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THEREFORE WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE THREE COMPANIES FROM THE LIST OF COMPARABLES . RESPECTFULLY FOLLOWING WE EXCLUDE THE SAME. 11. THAT LEAVES US WITH ANOTHER GROUND IN REVENUES APPEAL ABOUT GRANTING DEDUCTION (+) OR (-) 5% AS A STANDARD DEDUCTION. C ONSEQUENT TO THE AMENDMENT BROUGHT OUT TO THE PROVISO TO SECTION 92C (2) THE REVENUE CONTENDS THAT THE DEDUCTION IS NOT PERMISSIBLE. IT RELIES ON CO-ORDI NATE BENCH DECISION IN ITO VS. M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE L IMITED IN IT (TP) A NO. 1302/BANG/2011 DT. 11-06-2015 (SUPRA) (AT PARA 16)] . LEARNED COUNSEL CONTENDS THAT THE STANDARD DEDUCTION WAS GRANTED CO RRECTLY AS THE AMENDMENTS WILL APPLY TO THE CASES PENDING AS ON 01-04-2009 AN D THIS ORDER WAS PASSED BY AO ON 28-11-2008. EVEN THE EXPLANATION BROUGHT IN LATER ALSO DOES NOT APPLY TO THE CASE. HE RELIED ON THE PRINCIPLES LAID DOWN IN SAP LABS INDIA PVT. LTD. VS. ACIT [6 ITR (TRIB) 81 (ITAT) (BANG)] AND DCIT VS. SYNOPSIS INDIA P. LTD. IN IT(TP)A NO. 1107 & 1093/BANG/2011 DT. 08-10-2015 IN SUPPORT. 11.1. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. TH E ORDER OF LD.CIT (A) IS IN ACCORDANCE WITH THE PROVISIONS. THE ISSUE WAS ANAL YSED BY THE CO-ORDINATE BENCH IN THE CASE OF SAP LABS INDIA PVT. LTD. VS. ACIT [6 ITR (TRIB) 81 (ITAT) (BANG)] (SUPRA) AT PARAS 61 62 63 & 64 AS UNDER: 61. THE CENTRAL BOARD OF DIRECT TAXES IN ITS CIRC ULAR NO. 5 OF 2010 DATED JUNE 3 2010 [(2010) 324 ITR (ST.) 293] HAS CLARIFIED THAT THESE NEW PROVISOS ARE EFFECTIVE FROM APRIL 1 2009 ONWARDS. IN FACT THESE PROVISOS HAVE BEEN BROUGHT INTO THE ACT BY THE FINANCE (NO.2) ACT 2009. SO IT WILL BE APPLICABL E TO THE ASSESSMENT YEAR 2009-10 AND ONWARDS. IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 16 62. IN THE PRESENT CASE THE ASSESSMENT YEAR IS 200 3-04. THEREFORE THE AMENDED PROVISO AS EXPLAINED ABOVE IS NOT APPLICABLE TO THE PRESENT CASE IN HAND. THE PROVISO APPLICABLE TO THE PRESENT CASE IS THE ONE WHICH STO OD BEFORE THE SUBSTITUTION BROUGHT IN BY THE FINANCE (NO.2) ACT 2009 WITH EFFECT FROM OC TOBER 1 2009. THE EARLIER PROVISO IS EXTRACTED BELOW: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION OF THE ASSESSEE A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SU CH ARITHMETICAL MEAN. 63. THE FIRST LIMB OF THE OLD PROVISO AND THE FIRST LIMB OF THE PRESENT PROVISO ARE REGARDING ARRIVING AT THE ARITHMETICAL MEAN WHICH I S THE SAME. THERE IS NO CHANGE WITH REGARD TO THAT. THE CHANGE IS WITH REFERENCE TO TH E SECOND LIMB. THE OLD PROVISO SAYS THAT AT THE OPTION OF THE ASSESSEE THE ASSESSEE MA Y ADOPT A PRICE DIFFERENT FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5 PER CENT OF SUCH ARITHMETICAL MEAN I.E.. THE ASSESSEE HAS AN OPTION TO CLAIM THE TAX PAYERS MARGINAL RELIEF AT 5 PER CENT WITH REFERENCE TO THE ARITHMETICAL MEAN IRRESPECTIV E OF THE RANGE OF ACTUAL DEVIATION BETWEEN THE MARGIN DISCLOSED BY THE ASSESSEE AND TH E AVERAGE MEAN MARGIN. THEREFORE IN EFFECT THIS MARGINAL RELIEF TAKES TH E CHARACTER OF A STANDARD DEDUCTION OF 5 PER CENT. FOR E.G. IN A CASE AVERAGE MEAN OF THE ARMS LENGTH PRICE DETERMINED BY THE TRANSFER PRICING OFFICER/ASSESSING OFFICER IS 20 PE R CENT AND THAT ONE DISCLOSED BY THE ASSESSEE IS 10 PER CENT. THE ASSESSEE WILL GET A S TANDARD DEDUCTION OF 5 PER CENT AND THE ASSESSEES ARMS LENGTH PRICE WILL BE INCREASED TO 15 PER CENT AND THEREAFTER THE DIFFERENCE OF 5 PER CENT BETWEEN 20 PER CENT AND 15 PER CENT ALONE SHALL BE ADDED AS ARMS LENGTH PRICE ADJUSTMENT. THIS IS THE THEME O F THE OLD PROVISO. BUT UNDER THE NEWLY SUBSTITUTED PROVISO THE MARGINAL RELIEF OF 5 PER C ENT WILL NOT ACT AS STANDARD DEDUCTION. IF THE PRICE DETERMINED BY THE AVERAGE MEAN PRICE I S 20 PER CENT AND THAT OF THE ASSESSEE IS 10 PER CENT. THEN THE DIFFERENCE OF 10 PER CENT IS MORE THAN 5 PER CENT AND THEREFORE THE ASSESSEE WILL NOT GET THE MARGINAL R ELIEF AND THE ENTIRE DIFFERENCE OF 10 PER CENT WILL BE ADDED AS THE ARMS LENGTH PRICE AD JUSTMENT. IF THE ARMS LENGTH PRICE DETERMINED BY THE TRANSFER PRICING OFFICER/ASSESSIN G OFFICER IS 15 PER CENT AND THAT OF THE ASSESSEE IS 11 PER CENT. THE DIFFERENCE OF 4 P ER CENT IS LESS THAN 5 PER CENT AND IN THAT CASE THE RATE DISCLOSED BY THE ASSESSEE AT 11 PER CENT SHALL BE TAKEN AS THE ARMS LENGTH PRICE. THIS IS THE POSITION AFTER THE AMEND MENT. 64. IN VIEW OF THE ABOVE DISCUSSION WE FIND THAT T HE SECOND LIMB OF THE PROVISO TO SECTION 92C(2) GIVEN AN OPTION TO THE ASSESSEE TO C LAIM A MARGINAL VARIANCE OF 5 PER CENT AS STANDARD DEDUCTION. THIS GROUND OF THE ASS ESSEE IS ACCEPTED AND WE HOLD THAT THIS BENEFIT OF DEDUCTION OF 5 PER CENT HAS TO BE G IVEN TO THE ASSESSEE IF THE CIRCUMSTANCES SO WARRANT. 11.2. NOT ONLY THAT THE EXPLANATION BROUGHT IN BY FINANCE ACT 2014 W.E.F. 01- 04-2015 ALSO SPECIFIES THAT THE PROVISIONS OF SECON D PROVISO SHALL ALSO BE APPLICABLE TO ALL ASSESSMENTS OR REASSESSMENTS PROC EEDINGS PENDING BEFORE THE AO AS ON THE FIRST DAY OF OCTOBER 2009. THE PRESE NT PROCEEDINGS WERE CONCLUDED BEFORE THAT DAY. SO THE SECOND PROVISO TO SECTION 92C (2) DOES NOT APPLY TO THE IMPUGNED ORDER. THE PRE-AMENDED PROVI SO AS INTERPRETED BY IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 17 VARIOUS AUTHORITIES DOES PERMIT STANDARD DEDUCTION OF (+) OR (-) 5% TO ASSESSEE. THE ORDER OF LD.CIT (A) IS CONFIRMED. THE REVENUE S GROUND IS REJECTED ACCORDINGLY. 7. WE FIND THAT OUT OF THESE 10 COMPANIES I.E. 9 CO MPANIES NOTED IN PARA 4 ABOVE AND M/S GEOMATRIC SOFTWARE SOLUTIONS L TD. THE TRIBUNAL HAS EXCLUDED EIGHT AND RETAINED TWO I.E. A) M/S IGA TE GLOBAL SOLUTIONS LTD. AND B) M/S L & T INFOTECH LTD. WE ALSO HOLD TH AT OUT OF THESE 10 COMPANIES EIGHT SHOULD BE EXCLUDED BUT THESE TWO S HOULD BE RETAINED. THE AO/TPO SHOULD WORK OUT THE ALP BY EXCLUDING THE SE 8 COMPANIES AND RETAINING THESE TWO COMPANIES OVER AND ABOVE OT HER COMPANIES RETAINED BY CIT (A) IN THE LIST OF COMPARABLES AND TP ADJUSTMENT IF ANY SHOULD BE MADE ON THAT BASIS AS PER LAW. 8. IN THE RESULT THE APPEAL OF THE REVENUE AND C.O . OF THE ASSESSEE STAND PARTLY ALLOWED FOR STATISTICAL PURPO SES IN THE TERMS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MEN TIONED ON THE CAPTION PAGE. SD/ - (SUNIL KUMAR YADAV) SD/ - (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : 18.10.2016 /DS / IT(TP)A NO.1044(B)2013 & CO NO. 6/BANG/2016 18 COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) - II BANGALORE 4 CIT 5 DR ITAT BANGALORE. 6 GUARD FILE BY ORDER AR ITAT BANGALORE