M/s Mann & Hummel Filter Private Limited , Bangalore v. Deputy Commissioner of Income Tax Circle-4(1)(2), Bangalore

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES C BENCH: BANGALORE BEFORE SHRI B.R. BASKARAN ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE JUDICIAL MEMBER ITA NO. 466 /BANG/201 9 (ASSESSMENT YEAR: 20 11 - 12 ) M/S. MANN & HUMMEL FILTER PRIVATE LIMITED 2 ND FLOOR PRASAD ENCLAVE 118 119 INDUSTRIAL SUBURB 2 ND STAGE 5 TH MAIN YESHWANTPURA BANGALORE - 560 022 PAN AAECM4056D VS. DY. COMMISSIONER OF INCOME TAX CIRCLE 4(1)(2) BANGALORE. (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI T. SURYANARAYANA ADVOCATE. REVENUE BY: SHRI M. VIJAY KUMAR ADDL. CIT (D.R) DATE OF HEARING : 04.11 .2019 DATE OF PRONOUNCEMENT : 20 .11 .2019 O R D E R PER SHRI PAVAN KUMAR GADALE JM : THE ASSESSEE HAS FILED AN APPEAL AGAINST THE A SSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. 254 OF THE INCOME TAX ACT 1961 DT.28.12.2018 IN PURSUANCE TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL (DRP) ORDER DT.17.12.2018. 2 ITA NO.466/BANG/2019 2. THE A SSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : 3 ITA NO.466/BANG/2019 4 ITA NO.466/BANG/2019 5 ITA NO.466/BANG/2019 3. AT THE TIME OF HEARING THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE IS ONLY PRAYING FOR EXCLUSION OF 8 COMPARABLES AND FILED CHART AND JUDICIA L DECISIONS. THE B RIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS WHOLLY OWNED SUBSIDIARY OF MANN HUM MEL FILTER TECHNOLOGY (S.E.A ) P TE LTD. SINGAPORE AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF AND TRADING IN AIR INTAKE SYSTEMS AND FILTERS FOR AUTOMOTIVE AND HEAVY ENGINEERING INDUSTRY AND RENDERED SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) IN THE NATURE OF SERVICES USING CAD AND COMPUTER AIDED MANUFACTUR ING SOFTWARE TOOLS AND FILED THE RETURN OF INCOME FOR ASSESSMENT YEAR 2011 - 12 ON 28.09.2011 WITH A TOTAL LOSS OF RS.16 57 89 697. SUBSEQUENTLY THE ASSESSEE COMPANY FILED REVISED RETURN OF INCOME WITH A TOTAL LOSS OF RS.15 43 98 328. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECT ION 143(2) AND 142(1) OF THE ACT WERE ISSUED. IN COMPLIANCE THE LD. AR APPEARED FROM TIME TO TIME AND FURNISHED THE DETAILS. THE ASSESSING OFFICER ON PERUSAL OF THE AUDIT REPORT FORM 3CEB FOUND THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTI ONS EXCEEDING RS.15 CRORES. HENCE THE MATTER WAS REFERRED WITH THE PRIOR APPROVAL OF CIT FOR DETERMINATION OF ARMS LENGTH PRICE (ALP) TO TPO. WHEREAS T HE TPO OBSERVED THAT THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS REFERRED 6 ITA NO.466/BANG/2019 AT PARA 4 OF TPO ORDER AN D THE FINANCIAL RESULTS WITH THE OPERATING PROFIT / OPERATING COST AND OPERATING PROFIT / OPERATING REVENUE ARE READ AS UNDER : THE ASSESSEE'S MARGIN COMPUTED ON OP/OC IS 2 2 . 6 8 %. THE ASSESSES IS INTO SOFTWARE DEVELOPMENT SERVICES SEGMENT AND THE TPO FOUND THAT THE TRANSFER 7 ITA NO.466/BANG/2019 PRICING DOCUMENT CONTAINS 9 COMPARABLES ON SOFTWARE DEVELOPMENT ACTIVITIES WITH APPLIED FILTERS AND TNMM IS CONSIDERED AS MAM FURTHER ASSESSEE HAS SELECTED THE COMPARABLES ENGAGED IN THE SAME INDUSTRY VERTICALS I .E. AERO SPACE RAIL AND DEFENSE INDUSTRIES. THE TPO HAS REJECTED THE TP STUDY AND APPLIED THE FILTERS ON USAGE OF CURRENT YEAR DATA THE COMPANIES OF SOFTWARE DEVELOPMENT W I T H R E V E N U E LESS THAN RS.1 CRORE ARE EXCLUDED COMPANIES WITH SOFTWARE DEVELOPMENT SERVICES AND RELATED SERVICES IS LESS THAN 75% OF OPERATING REVENUE WERE EXCLUDED AND COMPANIES WHO HAVE MORE THAN 25% RELATED PARTY TRANSACTIONS (RPT) OF SALES COMPANIES WHO HAVE PRECEDENT LOSSES FOR THE LAST THREE YE ARS UPTO AND INCLUDING ASSESSMENT YEAR 2010 - 11 ARE EXCLUDED AND COMPANIES HAVING DIFFERENT FINANCIAL YEARS ARE EXCLUDED AND COMPANIE S HAVING A PECULIAR ECONOMIC CIRCUMSTANCES ARE EXCLUDED COMPANIES HAVING LESS THAN 75% OF EXPORT SA LES IN SOFTWARE AND WITH EMPLOYEES COST LESS THAN 25% OF TURNOVER WERE EXCLUDED AND FINALLY THE TPO HAS REJECTED THE COMPARABLES OF SOFTWARE DEVELOPMENT SERVICES SEGMENT SELECTED BY THE ASSESSEE IN PARA 6.1 AS UNDER : OUT OF THE 9 COMPARABLES SELECTED BY THE ASSESSEE TH E TPO HAS ACCEPTED ONE COMPARABLE TATA ELXSI LIMITED AND REJECTED 8 COMPARABLES. FURTHER ON APPLICATION 8 ITA NO.466/BANG/2019 OF THE SELECTE D FILTERS THE TPO HAS SELECTED 13 COMPAR A BLES AT PARA 9 AS FINAL SET OF COMPARABLES WHICH ARE AS UNDER : FURTHER THE TPO WORKED OUT WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT AND COMPUTED THE ALP OF SOFTWARE DEVELOPMENT SERVICES AT PARA 12.4 OF THE ORDER AS UNDER : 9 ITA NO.466/BANG/2019 THE TPO MADE ADJUSTMENTS ON THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO THE EXTENT OF RS.59 35 129 AND P ASSED ORDER UNDER SECTION 92CA R.W.S. 143(3) R.W.S. 144C DT.30.01.2015 . AGGRIEVED BY THE DRAFT ASSESSMENT ORDER THE ASSESSEE FILED OBJECTIONS WITH DRP IN FORM 35A WHERE AS THE DRP HAS PASSED THE ORDER CONSIDERING THE OBJECTIONS OF THE ASSESSEE THE TP ADJUSTMENT AND TPO FINDINGS VIDE ORDER DT.17.12.2015. SUBSEQUENTLY T HE ASSESSING OFFICER PASSED FINAL ASSESSMENT ORDER DT .19.01.2016 WITH TP ADJUSTMENT TO THE EXTENT OF RS.5 5 22 394. AGGRIEVED BY THE TPO ORDER THE ASSESSEE HAS FILED AN APPEAL WITH THE TRIBUNAL IN IT(TP)A NO.586/BANG/2016 WHEREAS THE TRIBUNAL REMANDED THE MATTER TO THE FILE OF DRP FOR FRESH CONSIDERATION BY WAY OF SPEAKING AND REASONED ORDER VIDE ORDER DT .8.9.2017. THE DRP AFTER CONSIDERING THE DIRECTIONS OF THE TRIBUNAL AND THE 10 ITA NO.466/BANG/2019 SUBMISSIONS OF THE ASSESSEE HAS PASSED ORDER DT.17.12.2018 PARTLY ALLOWING THE ASSESSEE'S OBJECTIONS. THE TPO IN PURSUANCE TO THE DIRECTIONS OF THE DRP PASSED THE FINAL ASSESS MENT ORDER UNDER SECTION 143(3) R.W.S. 254 ON 28.12.2018. AGGRIEVED BY THE ORDER THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4. AT THE TIME OF HEARING THE LD. AR SUBMITTED THAT THE ASSESSEE IS IN SOFTWARE DEVELOPMENT SERVICES AND HAS INTERN ATIONAL TRANSACTIONS AND THE COMPARABLES SELECTED BY THE TPO ARE TO BE EXCLUDED. THE LD. AR EMPHASIZED THAT THE COMPARABLES SELECTED BY THE TPO ARE FUNCTIONALLY DIFFERENT AND ARE TO BE EXCLUDED AND FILED CHART AND RELIED ON THE DECISION OF THE CO - ORDINA TE BENCH OF THE TRIBUNAL. CONTRA THE LD. DR SUPPORTED THE ORDERS OF THE TPO AND DRP AND FILED WRITTEN SUBMISSIONS. 5. WE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. PRIMA FACIE THE LEARNED AUTHORISED REPRESENTATIVE HAS MADE SU BMISSIONS ON 8 COMPARABLES SELECTED BY THE TPO FOR EXAMINATION AND WORKING CAPITAL ADJUSTMENT. FIRST WE SHALL DEAL WITH THE EXCLUSION OF COMPARABLES AS UNDER : (I) E - ZEST SOLUTIONS LIMITED : THIS COMPANY IS FUNCTIONALLY DIFFERENT AND H AS ON - SITE SERVICES AND SIGNIF ICANT PRESENCE OF INVENTORY AND I S FUNCTIONALLY INCOMPARABLE AND IS ENGAGED IN PRODUCT DEVELOPMENT WEB DEVELOPMENT AND KPO SERVICES AND SEGMENTAL DETAILS ARE NOT AVAILABLE. WE FOUND THAT THIS COMPARABLE WAS EXCLUDED IN THE CASE OF CO - ORDINATE BENCH DECISION APPLIED MATERIALS INDIA LIMITED VS. 11 ITA NO.466/BANG/2019 ACIT IN IT(TP)A NOS.17 & 39/BANG/2016 DT.21.09.2016 FOR THE ASSESSMENT YEAR 2011 - 12. THE TRIBUNAL HAS OBSERVED AT PAGE 17 PARA 9. 1.3 AS UNDER : 9.1.3 WE HAVE CONSIDERE D THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS RAISED OBJECTIONS AGAINST THIS COMPANY BEFORE THE DRP. HOWEVER THE DRP DID NOT ADJUDICATE THE OBJECTIONS RAISED BY THE ASSESSEE. THE DECISION OF THIS TRIBU NAL IN THE CASE OF M/S. ELECTRONICS FOR IMAGING INDIA PVT. LTD. VS. DCIT (SUPRA) RELIED UPON BY THE LEARNED AUTHORISED REPRESENTATIVE IS BASED ON TWO ASPECTS. (I) THE INFORMATION RECEIVED UNDER SECTION 133(6) OF THE ACT WAS CONSIDERED BY THE TPO WITHOUT SHARING WITH THE ASSESSEE AND (II) NATURE OF THE ACTIVITY IS KPO. IT IS PERTINENT TO NOTE THAT THE QUESTION OF BPO AND KPO IS RELEVANT ONLY IN ITES SEGMENT AND NOT FOR SOFTWARE DEVELOPMENT SERVICES SEGMENT. ON THE CONTRARY THE DECISION IN THE CASE OF T OLUNA INDIA PVT. LTD. VS. ACIT (SUPRA) PERTAINS TO THE ASSESSMENT YEAR 2007 - 08 THEREFORE THE FACTS OF THE DIFFERENT YEAR CANNOT BE APPLIED WITHOUT VERIFICATION. ACCORDINGLY WE SET ASIDE THIS ISSUE OF COMPARABILITY OF E - JUST SOLUTION LTD. TO THE RECORD OF THE ASSESSING OFFICER / TPO FOR DECIDING THE SAME AFTER VERIFICATION OF THE RELEVANT FACTS AS WELL AS CONSIDERING THE OBJECTIONS OF THE ASSESSEE. (II) ICRA TECHNO ANALYTICS LIMITED : THIS COMPANY IS FUNCTIONALLY DIFFERENT AND SIGNIFICANT RPT O F 24.81% WITH MARGIN OF 24.83% AND PREDOMINANTLY INTO SOFTWARE DEVELOPMENT SERVICES AND WHICH IS ENGAGED IN DIVERSIFIED ACTIVITIES AND NO SEGMENTAL DETAILS ARE AVAILABLE AND FURTHER CONCENTRATED IN NICHE AREA OF BUSINESS INTELLIGENCE AND ANALYTICS SPACE AND HAS REVENUE FROM LICENSING ACTIVITIE S. THE LD. AR DEMONSTRATED ANNUAL REPORT WHERE THE COMPARABLE COMPANY HAS SIGNIFICANT GROWTH IN BUSINESS INTELLIGENCE AND ANALYTICS SPACE WHICH ARE DIFFERENT FROM ACTIVITIES OF THE FUNCTIONAL PROFILE OF THE ASSESSEE AND ENGAGED IN LICENSING ACTIVITY. WE FOUND THE SAID COMPARABLE WAS EXCLUDED BY THE CO - ORDINATE BENCH OF 12 ITA NO.466/BANG/2019 THE TRIBUNAL IN THE CASE OF APPLIED MATERIALS INDIA LIMITED (SUPRA) AT PAGES 32 & 33 PARAS 17.1 & 17.2 AS UNDER : 17.1 WE HAVE HEARD THE LEARNED D.R. AS WELL AS LEARNED A.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP HAS REJECTED THIS COMPANY BY RECORDING THE FACT AS UNDER : WE EXAMINED THE ANNUAL REPORT FROM WHICH IT IS EVIDENT THAT THE ENTIRE REVENUE HAS BEEN SHOW N UNDER SERVICE SEGMENT WHICH INDICATES THAT THE REVENUE FROM SOFTWARE DEVELOPMENT CONSULTANCY LICENSING AND SUB - LICENSING ANNUAL MAINTENANCE CHARGES FOR SOFTWARE SUPPORT. WEB DEVELOPMENT AND HOSTING HAS BEEN REPORTED IN ONE SEGMENT THUS IN ABSENCE OF SEGMENTAL INFORMATION WE CONCUR WITH THE VIEW OF THE DRP IN PRECEDING YEAR AND ACCORDINGLY DIRECT THE ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM COMPARABLES. 17.2 WE FURTHER NOTE THAT THE TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) HAS CONSIDERED THE COMPARABILITY OF THIS COMPANY IN PARAS 14 TO 16 AS UNDER : (1) ICRA TECHNO ANALYTICS LTD. (SEG) 14. AT THE OUTSET WE NOTE THAT APART FROM HAVING THE RELATED PARTY REVENUE AT 20.94% OF THE TOTAL REVENUE THIS COMPANY WAS ALSO FOUND TO BE FUNCTIONALLY NOT COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE. THE DRP HAS GIVEN ITS FINDING AT PAGES 13 TO 14 AS UNDER: - HAVING HEARD THE CONTENTION ON PERUSAL OF THE ANNUAL REPORT IT IS NO TICED BY US THAT THE SEGMENTAL INFORMATION IS AVAILABLE FOR TWO SEGMENTS I.E. SERVICES AND SALES. HOWEVER IT IS EVIDENT FROM THE ANNUAL REPORT THAT THE SERVICE SEGMENT COMPRISES OF SOFTWARE DEVELOPMENT SOFTWARE CONSULTANCY ENGINEERING SERVICES WEB DE VELOPMENT WEB HOSTING ETC. FOR WHICH NO SEGMENTAL INFORMATION IS AVAILABLE AND THEREFORE THE OBJECTION OF THE ASSESSEE IS FOUND ACCEPTABLE. ACCORDINGLY ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES. 15. WE FIND THAT THE FACTS RECORDED BY THE DRP IN RESPECT OF BUSINESS ACTIVITY OF THIS COMPANY ARE NOT IN DISPUTE. THEREFORE WHEN THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES OF SOFTWARE DEVELOPMENT AND CONSULTANCY ENGINEERING SERVICES WEB DEVELOPMENT & HOSTI NG AND SUBSTANTIALLY DIVERSIFIED ITSELF INTO DOMAIN OF BUSINESS ANALYSIS AND BUSINESS PROCESS OUTSOURCING THEN THE SAME CANNOT BE REGARDED AS FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE WHO IS RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS AE. 16. IN VIEW OF THE ABOVE FACTS WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. 13 ITA NO.466/BANG/2019 NOTHING HAS BEEN BROUGHT BEFORE US TO SHOW THAT THE FACTS RECORDED BY THE DRP AS WELL AS BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL ARE NOT CORRECT. ACCORDINGLY IN VIEW OF THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) WE DO N OT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF THE DRP ON THIS ISSUE. (III) INFOSYS LIMITED : TH E COMPARABLE COMPANY IS FUNCTIONALLY DISSIMILAR AS IT IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND HAS INVENTORIES OWNERSHIP AND MARKETING INTANGIB LES AND INTELLECTUAL PROPERTY RIGHTS (IPR) WITH H IGH BRAND VALUE AND INCURRED HUGE EXPENDITURE TOWARDS R & D TO THE EXTENT OF RS. 527 CRORES AND HAS HIGH TURNOVER AND MORE THAN 50% OF REVENUE ARE FROM ON SITE SERVICES. WE FOUND THAT THE CO - ORDINATE BENC H IN THE CASE OF APPLIED MATERIALS INDIA LIMITED (SUPRA) HAS DEALT ON THIS ISSUE AT PAGE 34 PARA 18 AS UNDER AND EXCLUDED THE COMPARABLE : 18. WE HAVE HEARD THE LEARNED D.R. AS WELL AS LEARNED A.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) HAS CONSIDERED THIS ISSUE IN PARA 17 AS UNDER : (2) INFOSYS LTD. 17. THE ASSESSEE OBJECTED AGAINST THE SELECTION OF THIS COMPANY ON THE GROUND THAT THIS COMPANY HAS A BIG NAME AND BRAND VALUE AND THEREFORE IT HAS A BARGAINING POWER. IT ALSO CONTENDED THAT THE TURNOVER OF THIS COMPANY IS RS.21 140 CRORES WHICH IS 442 TIMES HIGHER THAN THE ASSESSEE. FOLLO WING THE DECISION OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DIRECTIONS OF THE DRP ON THIS ISSUE. 14 ITA NO.466/BANG/2019 (IV) M/S. L & T INFOTECH LIMITED : TH E SAID COMPARA BLE COMPANY HAS SITE REVENUES MORE THAN 50% OF TOTAL REVENUE WITH THREE DIFFERENT SEGMENTS BEING FINANCIAL SERVICES MANUFACTURING AND TELECOM AS PER THE ANNUAL REPORT OF THE COMPANY AND FURTHER NO SEGMENTAL RESULTS ARE AVAILABLE AND CANNOT BE FUNCTIONALLY COMPARABLE. THE COMPARABLE COMPANY IS A MRKET LEADER AND ON ACCOUNT OF OWNERSHIP MARKETING INTANGIBLES IPRS FOR THE PROPRIETARY SOFTWARE PRODUCTS DEVELOPED IN H OUSE AND DURING THE YEAR THE COMPA NY HAS ACQUIRED CANADIAN TRANSFER AGENCY BUSINESS WHICH HAS IMPACT ON THE PROFITABILITY OF THE COMPANY AND HAS TO BE EXCLUDED BEING DISSIMILAR TO THE ASSESSEE'S FUNCTIONAL PROFILE. WE FOUND THAT THE CO - ORDINATE BENCH OF THE HON'BLE TRIBUNAL IN THE CASE OF APPLIED MATERIALS INDIA LIMITED (SUPRA) HAS DEALT ON THE ISSUE AT PAGE 35 PARA 19 AS UNDER : 19. WE HAVE HEARD THE LEARNED D.R. AS WELL AS LEARNED D .R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP REJECTED THIS COMPANY BY RECORDING THE FACTS AT PAGE 15 AS UNDER : 15 ITA NO.466/BANG/2019 WE FURTHER FIND THAT THE COMPARABILITY OF THIS COMPANY HAS BEEN CONSIDERED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CA SE OF DCIT V S. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) IN PARAS 62 TO 65 AS UNDER : 62. THE ASSESSEE HAS RAISED OBJECTION AGAINST THIS COMPANY ON THE BASIS OF HIGH TURNOVER IN COMPARISON TO THE ASSESSEE. IT WAS ALSO CONTENDED THAT RELATED PA RTY TRANSACTION (RPT) OF THIS COMPANY IS 18.66%. THE DRP REJECTED OBJECTIONS OF THE ASSESSEE ON THE GROUND THAT TPO HAS APPLIED 25% FILTER OF RPT AND ANNUAL REPORT OF THE COMPANY DOES NOT SHOW ANY OTHER SERVICES RENDERED OTHER THAN SOFTWARE DEVELOPMENT S ERVICES PROVIDED BY THIS COMPANY. THUS THE DRP HELD THAT SOFTWARE DEVELOPMENT SEGMENT IS COMPARABLE TO THE ASSESSEE AND THEREFORE THIS COMPANY HAS TO BE RETAINED AS COMPARABLE. 63. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. AR HAS SUBMITTED THAT THIS COMPANY IS HAVING 18.66% RPT AND FURTHER THIS COMPANY EARNS REVENUE FROM BOTH SERVICES AND PRODUCTS. THUS THE LD. AR SUBMITTED THIS COMPANY IS ALSO IN THE SOFTWARE PRODUCTS AND THEREFORE CANNOT BE CONSIDERED AS GOOD COMPARABLE. HE HAS FURTHER CONTENDED THAT IN A SERIES OF DECISIONS THE TRIBUNAL HAS APPLIED 15% RPT FILTER AND SINCE THIS COMPANY IS HAVING MORE THAN 15% RPT THE SAME CANNOT BE CONSIDERED AS A GOOD COMPARABLE. 64. ON THE OTHER HAND THE LD. DR HAS SUBMITTED THAT TPO HAS APPLIED RPT FILTER OF 25% AND THEREFORE ONLY FOR THIS COMPANY THE RPT CANNOT BE REDUCED TO 15%. FURTHER THE DRP HAS EXAMINED ANNUAL REPORT OF THIS COMPANY AND FOUND THAT THIS COMPANY EARNS REVENUE FROM SOFTWARE DE VELOPMENT SERVICES AND ACCORDINGLY IS COMPARABLE. 16 ITA NO.466/BANG/2019 65. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT MATERIAL ON RECORD. WE FIND THAT IN THE NORMAL CIRCUMSTANCES THE TOLERANCE RANGE OF RPT SHOULD NOT BE MORE THAN 15%. IN THE CASE OF THE ASSESSEE THE AVAILABILITY OF THE COMPARABLE IS NOT AN ISSUE AND THEREFORE WE DO AGREE WITH THE VIEW TAKEN BY THE COORDINATE BENCHES OF THE TRIBUNAL THAT THE THRESHOLD LIMIT OF TOLERANCE RANGE SHOULD NOT EXCEED 15% AS FAR AS RPT REVENUE IS CONCERNED. THEREFORE W E DIRECT THE AO/TPO TO APPLY 15% RPT FILTER IN RESPECT OF ALL THE COMPARABLES. IN VIEW OF THE FACTS RECORDED BY THE DRP AS WELL AS THE DECISION OF THE CO - ORDINATE BENCH WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DIRECTIONS OF THE DRP. (V) PERSISTENT SYSTE MS AND SOLUTIONS LIMITED : THE COMPANY IS FUNCTIONALLY NOT COMPARABLE AS IT IS ENGAGED IN DIVERSIFIED ACTIVITIES OF RENDERING SOFTWARE DEVELOPMENT SERVICES LICENSE AND ROYALTY OF SOFTWARE PRODUCTS AND ALSO H A S ABNORMAL INCREASE IN TURNOVER FROM YEAR ON YEAR THE COMPANY IS GROWING OVER TEN TIMES THE INDUSTRY AVERAGE AND FUNCTIONALLY DISSIMILAR AND HAS INVESTED IN IPR SOLUTIONS AND CREATED SEVERAL INTELLECTUAL PROPERTIES (IP) SUCH AS CHEM LMS VIEWMOR AN D DURING THE F.Y. 2010 - 11 AND THE COMPANY EARNS 8.8% OF ITS TOTAL REVENUES RELATED TO ACTIVITIES OF IPS AND ALSO ENGAGED IN INFORMATION TECHNOLOGICAL SERVICES AND NO SEGMENTAL INFORMATION AVAILABLE. WE SUPPORT OUR VIEW RELYING ON THE DECISION OF THE CO - ORDINATE BENCH OF THE H ON'BLE TRIBUNAL IN THE CASE OF APPLIED MATERIALS INDIA LIMITED (SUPRA) HAS DEALT ON THE ISSUE AT PAGES 20 & 21 PARA 9.2.4 WHICH READ AS UNDER : 9.2. (4) PERSISTENT SYSTEMS LTD. 24. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELE VANT MATERIAL ON RECORD. THE ASSESSEE RAISED OBJECTIONS AGAINST SELECTION OF THIS COMPANY ON THE GROUND THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE AS ENGAGED IN THE PRODUCT DEVELOPMENT. THE SEGMENTAL INFORMATION FOR SERVICES AND PRODUCT IS NOT AVAI LABLE. FURTHER THE ASSESSEE HAS ALSO POINTED OUT THAT THERE WAS AN ACQUISITION AND RESTRUCTURING DURING THE YEAR UNDER CONSIDERATION. 17 ITA NO.466/BANG/2019 25. THE DRP HAS NOTED THE FACT THAT THIS COMPANY HAS REPORTED THE ENTIRE RECEIPT FROM SALES AND SOFTWARE SERVICES AND PRODUCT. THEREFORE NO SEGMENTAL INFORMATION WAS FOUND TO BE AVAILABLE FOR SALE OF SOFTWARE SERVICES AND PRODUCT. FURTHER THE DRP HAS NOTED THAT AS PER NOTE 1 OF SCHEDULE 15 THIS COMPANY IS PREDOMINANTLY ENGAGED IN OUTSOURCE SOFTWARE DEVELOPMENT SERVICE. APART FROM THE REVENUE FROM SOFTWARE SERVICES IT ALSO EARNS INCOME FROM LICENCE OF PRODUCTS ROYALTY ON SALE OF PRODUCTS INCOME FROM MAI NTENANCE CONTRACT ETC. THESE FACTS RECORDED BY THE DRP HAS NOT BEEN DISPUTED BEFORE US. 26. THEREFORE WHEN THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES AND EARNING REVENUE FROM VARIOUS ACTIVITIES INCLUDING LICENCING OF PRODUCTS ROYALTY ON SAL E OF PRODUCTS AS WELL AS INCOME FROM MAINTENANCE CONTRACT ETC. THE SAME CANNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. FURTHER THIS COMPANY ALSO EARNS INCOME FROM OUTSOURCE PRODUCT DEVELOPMENT. IN THE ABSENCE OF ANY SEGMENTAL DATA OF THIS COMPANY WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP THAT THIS COMPANY CANNOT BE COMPARED WITH THE ASSESSEE AND THE SAME IS DIRECTED TO BE EXCLUDED FROM THE SET OF COMPARABLES. WE FURTHER FIND FROM THE ANNUAL REPORT THAT THERE IS NO CHANGE IN THE ACTIVITY AND FUNCTIONS OF THESE COMPANIES DURING THE YEAR UNDER CONSIDERATION IN COMPARISON TO THE ASSESSMENT YEAR 2010 - 11. ACCORDINGLY FOLLOWING THE DECISIONS OF THE CO - ORDINATE BENCHES OF THIS TRIBUNAL (SUPRA) WE DIRECT THE A .O./TPO TO EXCLUDE THESE TWO COMPANIES FROM THE SET OF COMPARABLES. (VI) SASKEN COMMUNICATION TECHNOLOGY LIMITED : TH E COMPANY IS ENGAGED IN SOFTWARE PRODUCTS AND PRESENCE INVENTORY AND INTANGIBLE ASSETS WITH H IGH EXPENDITURE ON R & D AND NO SEGME NTAL DETAILS ARE AVAILABLE INCOME FROM SALE OF PRODUCTS AMOUNTING TO 9.4% OF TOTAL REVENUE OF SOFTWARE SERVICES INCLUDE NET WORK SERVICES. WE SUPPORT OUR VIEW BASED ON THE DECISION OF THE CO - ORDINATE BENCH OF THE HON'BLE TRIBUNAL IN THE CASE OF APPLIED MATERIALS INDIA LIMITED (SUPRA) HAS DEALT ON THE ISSUE AT PAGE 23 PARA 9.3.3 WHICH READ AS UNDER : 9.3.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF D CIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) HAS CONSIDERED THE COMPARABILITY OF THIS COMPANY IN PARAS 27 TO 29 AS UNDER : (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 27. THE ASSESSEE RAISED OBJECTION THAT THIS COMPANY HAS REVENUE FROM SOFTW ARE SERVICES SOFTWARE PRODUCTS AND OTHER SERVICES. THE DRP HAS COME TO THE CONCLUSION THAT THIS COMPANY EARNED REVENUE FROM 3 SEGMENTS. 18 ITA NO.466/BANG/2019 HOWEVER NO SEGMENTAL INFORMATION IS AVAILABLE. ACCORDINGLY THE DRP DIRECTED THE AO TO EXCLUDE THIS COMPANY FROM TH E COMPARABLES. 28. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP HAS REPRODUCED THE BREAK - UP OF REVENUE IN THE IMPUGNED ORDER AS UNDER: - AMOUNT IN RS. LAKHS __________________________________________ ___________________ _________________ YEAR ENDED YEAR ENDED MARCH 31 2010 MARCH 31 2019 _____________________________________________________________ _________________ SOFTWARE SERVICES 37 736.22 40 531.20 SOFTWARE PRODUCTS 2 041.00 6 146.43 OTHER SERVICES 372.77 1 297.05 TOTAL REVENUES 40 150.89 47 974.68 _____________________________________________________________ ________________ 29. THUS THERE IS NO DISPUTE THAT THIS COMPANY EARNS REVENUE FROM 3 SEGMENTS. HOWEVER THE SEGMENTAL OPERATING MARGINS ARE NOT AVAILABLE. THEREFORE IN THE ABSENCE OF SEGMENTAL RELEVANT DATA AND PARTICULARLY OPERATING MARGINS THIS COMPOSITE DATA CAN NOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE FOR SOFTWARE DEVELOPMENT SERVICES SEGMENT. ACCORDINGLY WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP. WE FURTHER NOTE THAT THE DRP HAS NOT ADJUDICATED THE OBJECTIONS OF THE ASSESSEE WHEREAS FOR THE ASSESSMENT YEAR 2010 - 11 THE DRP REJECTED THIS COMPANY AS COMPARABLE. ACCORDINGLY WE SET ASIDE THIS ISSUE TO RECORD OF THE A.O./TPO TO VERIFY THE RELEVANT FACTS AND COMPARE WITH THE FACTS RECORDED BY THE TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) FOR THE ASSESSMENT YEAR 2010 - 11 AND THEN DECIDE THE ISSUE AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSESSEE. (VII) TATA ELXSI LIMITED : THIS COMPANY IS FUNCTIONALLY DISSIMILAR AND ENGAGED I N PROVISION OF NICHE PRODUCTS AND DEVELOPMENT SERVICES WHICH ARE DISSIMILAR TO ASSESSEE'S SERVICES AND HAS SUBSTANTIAL R & D AND FAILED THE EXPORT REVENUE FILTER AT 75% AND HAS INCURRED AN AMOUNT OF RS.12.65 CRORES TOWARDS R & D EXPENDITURE AND I N C U R R E D SIGNIFICANT EXPENDITURE IN FOREIGN CURRENCY TO THE EXTENT OF 21.26% OF TOTAL SALES WITH HIGH TURNOVER. WE SUPPORT OUR VIEW RELYING ON DECISION OF THE CO - ORDINATE BENCH OF THE HON'BLE TRIBUNAL IN THE CASE OF APPLIED MATERIALS INDIA 19 ITA NO.466/BANG/2019 LIMITED (SUPRA) WHICH HAS DEALT ON THE ISSUE AT PAGE S 37 TO 39 PARA 20 WHICH READ AS UNDER : 20. WE HAVE HEARD THE LEARNED DEPARTMENTAL REPRESENTATIVE AS WELL AS LEARNED AUTHORISED REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP HAS REJECTE D THIS COMPANY BY DISCUSSING THE FACT AT PAGE 16 AS UNDER : WE FURTHER NOTE THAT THE DRP HAS ALSO RECORDED THE FACT THAT EXPORT REVENUE OF THIS COMPANY IS 73.30% WHICH IS LESS THAN 75% APPLIED BY THE TPO. THEREFORE THIS COMPANY DOES NOT QUALIFY THE EXP ORT EARNING FILTER APPLIED B Y THE TPO. FURTHER THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) HAS CONSIDERED THIS ISSUE IN PARAS 30 TO 33 AS UNDER : 30. THE ASSESSEE HAS RAISED OBJECTION S AGAINST THIS COMPANY ON THE GROUND THAT THE COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. THOUGH THE TPO HAS CONSIDERED THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT OF THIS COMPANY AS COMPARABLE TO THAT OF ASSESSEE HOWEVER THE ASSESSEE CONTEND ED THAT EVEN WITHIN THE SOFTWARE SEGMENT THIS COMPANY IS ENGAGED IN DIVERSE ACTIVITIES. THE ASSESSEE PLACED RELIANCE ON THE INFORMATION IN THE ANNUAL REPORT UNDER THE DIRECTORS REPORT AND SUBMITTED BEFORE THE DRP THAT EVEN UNDER THE SOFTWARE DEVELOPMENT SERVICES SEGMENT THIS COMPANY IS ENGAGED IN VARIOUS DIVERSIFIED ACTIVITIES INCLUDING PRODUCT DESIGN SERVICE INNOVATION DESIGN ENGINEERING SERVICE VISUAL COMPUTING LABS ETC. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF MUMBAI BENCH OF THE TRIB UNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT 137 ITD 1 (MUM) . 31. THE DRP FOUND THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH ASSESSEE COMPANY AS IT IS ENGAGED IN DIVERSIFIED ACTIVITIES EVEN IN THE SOFTWARE DEVELOPMENT SERVI CES. THE DRP HAS FOLLOWED THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. (SUPRA) . 32. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THIS COMP ANY EVEN IN THE SOFTWARE DEVELOPMENT SEGMENT IS 20 ITA NO.466/BANG/2019 ENGAGED IN DIVERSIFIED ACTIVITIES OF PRODUCT DESIGN SERVICES INNOVATION DESIGN ENGINEERING SERVICES VISUAL COMPUTING LABS ETC. WE FURTHER NOTE THAT IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. (SUPRA) THE MUMBAI BENCH OF THE TRIBUNAL VIDE ITS ORDER DATED 11.5.2012 IN PARA 9.7 HAS HELD AS UNDER: - 7.7 FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATE D IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS ON THESE FACTS WE ARE UNABLE TO TREAT THIS COM PANY AS FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE HENCE SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. 33. NO CONTRARY VIEW HAS BEEN BROUGHT TO OUR NOTICE REGARDING COMPARABILITY OF THIS COMPANY WI TH THAT OF A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. ACCORDINGLY IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. (SUPRA) WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDING OF THE DRP. IN VIEW OF THE FACTS RECORDED BY THE DRP AS WELL AS THE DECISION OF THE TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) WE DO NOT FIND ANY ERROR OR IL LEGALITY IN THE DIRECTIONS OF THE DRP TO EXCLUDE THIS COMPANY FORM THE SET OF COMPARABLES. WE CONSIDERING THE DISSIMILARITIES OF THE COMPARABLE COMPANIES WHICH ARE FUNCTIONALLY DIFFERENT FROM ASSESSEE'S PROFILE AND REL Y ON THE JUDICIAL DECISIONS AND D IRECT THE FOLLOWING COMPARABLES TO BE EXCLUDED BY THE TPO FROM THE FINAL LIST OF COMPARABLES SELECTED FOR DETERMINATION OF ALP. I) E - ZEST SOLUTIONS LTD. II) ICRA TECHNO ANALYTICS LIMITED III) INFOSYS LIMITED IV) LARSEN & TOUBRO INFOTECH LTD. V) PERSISTENT SYSTEMS & SOLUTIONS LTD. 21 ITA NO.466/BANG/2019 VI) SASKEN COMMUNICATION TECHNOLOGIES LTD. VII) TATA ELXSI LIMITED 6. THE LEARNED AUTHORISED REPRESENTATIVE ARGUED THAT THE WORKING CAPITAL ADJUSTMENT COMPUTED BY THE TPO AT 4.23% BUT WAS RESTRICTED TO 1.63% WITHOUT ANY BASIS. WE FOUND THAT THE TPO HAS DEALT ON THE WORKING CAPITAL ADJUSTMENT IN ORDER AT PAGE 241 TO 243 PARA 10 AND FINALLY AT PAGE 243 THE TPO HAS RESTRICTED THE WORKING CAPI TAL ADJUSTMENT AT 1.63% WHICH READ AS UNDER : 22 ITA NO.466/BANG/2019 23 ITA NO.466/BANG/2019 THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THERE IS NO CLARITY AND THE BASIS OF RATIONAL I T Y COMPUTING T HE WORKING CAPITAL ADJUSTMENT AND RESTRICTING IT TO 1.63%. THE LEARNED AUTHORISED REPRESENTATIVE SUPPORTED HIS ARGUMENT RELYING ON THE JUDICIAL DECISIONS. WE FOUND THAT THE SIMILAR ISSUE WAS DEALT BY THE CO - ORDINATE BENCH OF TRIBUNAL IN THE CASE OF ARM EMBEDDED TECHNOLOGIES PVT. 24 ITA NO.466/BANG/2019 LTD. VS. DCIT IN IT(IT)A NO.1560 & 1659/BANG/2014 DT.31.08.2015 OBSERVED AT PARA S 24 & 25 AS UNDER : 7. WE FOUND THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE ARE REALISTIC AS THE TPO HAS NOT GIVEN PROPER BASIS / FINDINGS IN RESTRICTING THE WORKING CAPITAL ADJUSTMENT TO 1.63% AND WE SUPPORT OUR VIEW ON JUDICIAL DECISIONS AND 25 ITA NO.466/BANG/2019 RESTORED THIS DI SPUTED ISSUE TO THE FILE OF TPO FOR COMPUTING ADJUSTMENT OF WORKING CAPITAL ON ACTUAL FACTS AND ALLOW THE GROUNDS OF APPEAL OF THE ASSESSEE FOR STATISTICAL PURPOSES. 8. IN THE RESULT THE ASSESSEE'S APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 2 0 T H NOVEMBER 2019. S D / - S D / - ( B.R. B ASKARAN ) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 0 .11. 2019. *REDDY GP COPY TO I) THE APPELLANT II) THE RESPONDENT III) CIT (APPEALS) IV) PR. CIT V) DR ITAT BANGALORE VI) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL BANGALORE