AGNITY INDIA TECHNOLOGIES PVT. LTD.,NOIDA vs. DCIT, NEW DELHI

PER DIVA SINGH, JUDICIAL MEMBER

1. Avani Cincom Technologies 2. e- zest Solutions Ltd. 3. Flextronics(Aricent) 4. iGate Global Solution Ltd. 5. Infosys 6. Kals Information Systems Ltd.(seg) 7. Persistent Systems Ltd. 8. Softsol India Ltd. 9. Tata Elxsi(Seg) 10. Thirdware Solution Ltd. 11. Wipro Ltd.(Seg)

3. A perusal of the record shows that the exclusion of the above 11 comparables was requested for by the assessee on the basis of the following chart in the original round before the ITAT :-

3. Ld counsel for the assessee Shri Pawan Kumar submits as under:

Inclusion of functionally different companies and companies engaged in development of software products by the Ld. TPO/ DRP 3.1. The Appellant places reliance on the decision of the Delhi Tribunal in its own case dated November 4, 2010 in (Del)/2010 for the AY 2006-07, wherein the Tribunal has excluded software product, functionally dissimilar and full fledged risk bearing entrepreneur company (i.e. Infosys) as a comparable, in analysing the arm’s length nature of the transfer price of a captive software service provider i.e. the Appellant. ITAT in A.Y. 2006-07 excluded the above listed comparables from T.P. adjustments. This ITAT decision in the Appellant’s own case was brought to the notice of the TPO, AO & the DRP vide Objections filed under section 144C(2) of the Act. The gist of the same is as under: Reasons for Exclusion S. Company name Working capital Reasons for exclusion (non-comparability) No. Adjusted OP/ TC margin (as per the revised TPO order) 1. Avani Cincom 32.70% (1) Functionally different – product company – Technologies Ltd. owns software products like Dxchange, Travel Solutions, Insurance Solution, Customer

I.T.A .No.-6485/Del/2012 Appreciation etc. products. (2) Non availability of segmental details Rejected in Tecordia Ruling 2. e-Zest Solutions 34.01% Functionally different – Diversified businesses like Ltd. product engineering services, consulting services, enterprise solution etc. services.

5. Inffosys 43.40% (1) Dissimilar functional/ risk profile; Technologies Ltd. (2) Has advertising & marketing expenses of Rs. 730 crores (3) Ownership of branded/ proprietary products. (4) Huge R&D spend of 201 crores (5) Onsite services > 50% (6) High turnover of Rs. 15,672 crores (i.e. approx. 879 times); (7) Rejected in the recent rulings in case of Agnity India (appellant itself), Market Tools & Telcordia.

6. Kals Information 46.43% (1) Functionally different – Product company – Systems Ltd. Engaged in the business of software services and (seg) software products (2) Rejected in recent rulings in case of Trilogy & Bindview (3) Erroneous margin computation.

8. Softsol India Ltd. 25.54% (f) Functionally different – High End services/ Diversified operations; products company. (2) Non availability of segmental details. (3) Highly volatile margins. (4) Erroneous margin computation.

9. Tata Elxsi (seg) 22.86% (1) Engaged in diversified business including the software products. (2) High turnover of Rs. 343 crores i.e. approx 19 times.

I.T.A .No.-6485/Del/2012 (3) Fails the R&D filter i.e. 3.39% (4) Fails net fixed assets filter i.e. apprrox 246$ (5) Rejected in Telecordia Ruling.

10. Thirdware 24.15% (1) Functionally different – product company. Solution Ltd. (2) Non availability of segmental details.

11. Wipro Ltd. (seg) 33.77% (1) Dissimilar functional/ risk profile (2) Ownership of branded/ proprietary products. (3) High turnover of Rs. 1,12,58.4 crores (i.e. 631 times) (4) Huge R&D spend. (5) Rejected in the recent ruling in case of Market Tools, Telcordia, Maersk Global & Deloitte Consulting.

3.1. Considering the same the comparables were deleted by the ITAT holding as under:-

5.1. Thus while analysing the arm's length nature of the transfer price of a captive software service provider i.e. the Appellant, the objected comparables are to be excluded.

5.2. Respectfully following the Hon'ble Delhi High Court judgment we uphold the plea of the assessee to exclude such comparables and allow this ground I.T.A .No.-6485/Del/2012 of the assessee. TPO/AO will accordingly work out the TP adjustment in conformity of the Hon'ble Delhi High Court order.”

3.2. The correctness of this order was challenged in appeal before the Hon’ble High Court by the Revenue and the above finding was set aside. Before the Hon’ble High Court both the parties conceded that the issue has to be remanded for a fresh determination. In the said background, it was submitted by the Ld.AR that the aforesaid comparables considering the reasons advanced for their exclusion may be excluded.

S.No. Description of international transactions Amount (in Rs.) 1. Provision of software development services 178,333,635 2. Assets provided on loan/returnable basis by the AE 12,685,075 4.1. During the FY 2007-08, the assessee was stated to be engaged in providing software development services to its AEs. It was explained that the assessee carries out routine functions and assumes minimal risks associated with carrying out such business. The activity was stated to be carried out in a business which was risk- insulated. The assessee was stated to be primarily involved in the last three stages of Page 5 of 27

I.T.A .No.-6485/Del/2012 the software development life cycle i.e. coding, testing and post-production support.

These activities it was submitted were either wholly or partly sub-contracted by group companies to the assessee and the assessee also helps group companies in the customization of the software as per their client’s requirements.

4.2. The issue in the present appeal pertains to provision of software development services wherein using multiple year data the assessee selected the Transactional Net Margin Method (hereinafter referred to as “TNMM”) as the most appropriate method and took Profit Level Indicator (hereinafter referred to as “PLI”) as Operating Profit/Total Cost (hereinafter referred to as “OP/TC”) and selected 16 comparables whose average mean worked out to 12%. Considering that its own margin of 15.11% was higher than the margin of the comparables the assessee claimed that this transaction was at arm’s length.

4.3. The Transfer Pricing Officer (hereinafter referred to as “TPO”) rejected the transfer pricing study and directed a fresh search to be made using single year data as opposed to multiple year data used by the taxpayer. In the fresh search 9 comparables were offered by the assessee with an arithmetic mean of 12.01%. Retaining a few of the comparables offered by the assessee, the TPO adopted the following list of 19 comparables which included three comparables namely Bodhtree Consulting Ltd; Lanco Global Systems Ltd. and Mindtree Consulting Ltd., introduced by the tax payer:-

S.No. Company Name Unadjuste Working Capital d OP/TC Adjusted OP / TC 1. Avani Cincom Technologies 21.65% 29.92% 2. Bodhtree Consulting Ltd. 19.14% 23.89% 3. Celestial Biolabs 87.94% 86.71% 4. e- zest Solutions Ltd. 28.95% 33.15%

I.T.A .No.-6485/Del/2012

5. Flextronics(Aricent) 8.07% 10.55% 6. iGate Global Solution Ltd. 13.90% 16.39% 7. Infosys 40.41% 42.92% 8. Kals Information Systems Ltd.(seg) 41.94% 43.69% 9. Lanco Global Systems Ltd. 26.64% 29.97% 10. Mindtree Consulting Ltd. 17.51% 20.65% 11. Persistent Systems Ltd. 27.23% 31.62% 12. Quintegra Solution Ltd. 21.74% 23.03% 13. R systems International(seg) 15.30% 20.52% 14. RS. Software (India) Ltd. 7.79% 7.86% 15. Sasken Communication Technologies 13.44% 16.95% Ltd.(seg) 16. Softsol India Ltd. 42.15% 44.03% 17. Tata Elxsi(Seg) 18.97% 22.86% 18. Thirdware Solution Ltd. 18.01% 19.96% 19. Wipro Ltd.(Seg) 28.38% 33.67% Average 26.27% 29.39% 4.4. The assessee carried the issue before the Dispute Resolution Panel (hereinafter referred to as “DRP”) who directed the exclusion of Celestial Biolabs and also directed that the operating margin of Softsol Limited after excluding rental income and corresponding rental expenses for the said company be reworked. The direction of the DRP summarized by the assessee in the synopsis filed is reproduced hereunder:-

(a) “exclude one comparable (Celestial Biolabs) since it fails the TPO’s own filter of employee cost and has dissimilar functional profile. (b) rectify the operating margin of Softsol limited after excluding rental income and corresponding rental expense for this company’s margin computation. (c) included comparable companies passing all the filters applied by the TPO including those where the data has been obtained under Section 133(6) of the Income Tax Act, 1961 for the purposes of comparability analysis and (d) exclude provision for doubtful debts and foreign exchange loss or gain from mark up of comparables and then verify and recomputed operating profit margins accordingly.”

I.T.A .No.-6485/Del/2012 4.5. It has been argued that the directions of the DRP were partially carried out by the TPO. The final list of comparables which was taken into consideration having OP/TC margin of 25.34% was made the basis of the addition by way of adjustment of Rs.1,58,42,960/-. The same is reproduced hereunder for ready reference:-

S.No. Company Name Working Capital Adjusted OP / TC 1. Avani Cincom Technologies 32.70% 2. Bodhtree Consulting Ltd. 25.67% 3. e- zest Solutions Ltd. 34.01% 4. Flextronics(Aricent) 10.35% 5. iGate Global Solution Ltd. 16.46% 6. Infosys 43.40% 7. Kals Information Systems Ltd.(seg) 46.43% 8. Lanco Global Systems Ltd. 31.18% 9. Mindtree Consulting Ltd. 20.65% 10. Persistent Systems Ltd. 25.25% 11. Quintegra Solution Ltd. 22.67% 12. R systems International(seg) 17.69% 13. RS. Software (India) Ltd. 11.27% 14. Sasken Communication Technologies 12.01% Ltd.(seg) 15. Softsol India Ltd. 25.54% 16. Tata Elxsi(Seg) 22.86% 17. Thirdware Solution Ltd. 24.15% 18. Wipro Ltd.(Seg) 33.77% Arithmetic Mean 25.34%

5. The Ld. AR sought exclusion of Avani Cincom Technologies Ltd. on the ground as per its website display the company owns products like Dxchange, Travel Solutions, Insurance Solution, customer Appreciation and Relationship Management Application (CARMA), Content Management Systems etc. On its website, Avani has provided year wise milestones achieved where in it is stated that product DXchange

I.T.A .No.-6485/Del/2012 was introduced in 2006 and the improved version was available in the year 2007.

Reliance was placed on the extract annexured as Exhibit I to the submission filed before the TPO.(At pages 604-605 of the Paper Book). Accordingly, it was submitted that this company cannot be accepted as a comparable for benchmarking assessee’s international transactions pertaining to contract software development. Reliance is placed upon the decision of the Mumbai Bench of the ITAT in the case of Telecordia Technologies Pvt.Ltd. vs ACIT [2012] 22 taxmann.com 96 (Mum) placed at pages 53 to 79 of the case law paper book and the following extracts of the said decision was relied upon:-

7.8. Avani Cincom Technolgoies Ltd. (‘Avani Cincom’) “Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. 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 percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis.” (emphasis provided) 5.1. The Ld.CIT DR inviting attention to internal page 62 to 63 of the TPO submitted that information u/s 133(6) has been sought and as per the reply Avani is into pure software development company and fulfilled all the filters. Accordingly it was his prayer that the comparable be retained.

5.2. We have heard the rival submissions and perused the material available on record. We find that the order of the Mumbai Bench heavily relied upon by the I.T.A .No.-6485/Del/2012 assessee in the case of Telecordia Technologies India Pvt. Ltd (cited supra) pertains to 2007-08 AY wherein admittedly the segmentals were not provided. Accordingly, how it still impacts the conclusion to be arrived at in the present proceedings has not been addressed by the Ld.AR. No doubt in the facts of the present case apart from the fact that segmental were obtained reference has also been made by the TPO to his findings in 2007-08 AY also. However, facts for the year under consideration have also been specifically addressed. We also find that the approach adopted in the first round by the ITAT in blindly following its own decision qua this comparable in 2007-08 AY which order had been upheld by the Hon’ble High Court was faulted with by the Jurisdicitonal High Court presumably for not addressing the relevant facts. Thus, the approach of blindly following precedent without referring to the facts on record admittedly stands deprecated by the Jurisdictional High Court. In the circumstances the exercise of relying on precedence without drawing parallels is found to be of no help. In the facts of the present case, information u/s 133(6) as per record has been obtained by the TPO. The fact that it has been effectively confronted to the tax payer or is not coming out of the order. Accordingly, in these peculiar facts and circumstances we deem it appropriate to restore the issue back to the TPO to confront the information to the assessee obtained u/s 133(6) and relied upon and thereafter pass a speaking order in accordance with law.

5.3. The issue is well settled that simply because a comparable has been included or excluded in some year that action or inaction by itself in transfer pricing issues on comparability cannot constitute a precedent to be blindly followed ad infinitum.

I.T.A .No.-6485/Del/2012 Whether a particular company is a comparable or not is an exercise which has to be carried out every year in the case of an assessee considering the facts of that specific year and not blindly following the precedent which has been laid down in earlier or subsequent year. A comparable is a comparable on facts and not because a precedent makes it so. Neither can the tax payer insist that a comparable be included nor can it be insisted that it be excluded only on the ground of it having been included or excluded in some other a previous assessment year. It goes without saying that what applies to the tax payer equally applies to the Revenue. A challenge posed by either of the parties to inclusion or exclusion of a comparable has to be necessarily justified on the basis of facts available on record and not on an issue which was neither argued or considered or on facts not referred or available. The present case is a fine example of the Hon’ble High Court of not approving the practice of following precedent qua these issues as in clear unambiguous terms the approach has been deprecated as the Hon’ble High Court has not even approved the blind acceptance/rejection of comparables following the precedent available in one’s own case relying upon the settled position of earlier years which stood upheld by the Hon’ble High Court itself. Thus in view of the discussion on material facts namely whether information sought u/s 133(6) and relied upon was confronted to the assessee or not the issue is accordingly restored to the TPO in order to afford an opportunity to the taxpayer to address the same.

6.1. The Ld. CIT DR opposed the exclusion of E-Zest solutions relying upon the order dated 11.02.2016 in Headstrong Services India Private Limited vs DCIT (2016)

66 taxmann.Com 185 (Delhi – Trib). It was his argument that the said company was engaged in product engineering services and as per record and finding of the Delhi Bench of the Tribunal applicable for the very same assessment year as in the present case namely 2008-09 AY wherein considering the facts for the year under consideration it has been held that there was no inventory with the company as it was engaged in software development only. The order in Headstrong Services India Pvt. Ltd. (cited supra) it was submitted was latest in point of time as it is dated 11.02.2016.

6.2. We have heard the submissions and perused the material available on record.

We note that the finding of fact on record in the case of Headstrong Services India Pvt. Ltd. (cited supra) that E-Zest Solutions had no inventory has not been rebutted by the Ld.AR in the facts of the present case. A perusal of the TPO’s order page 63 shows that herein also the TPO has obtained information under section 133(6) and as per the reply received the company is stated to be engaged in software development services. The objections of the assessee to the information u/s 133 (6) has already been dealt with by the TPO at pages 64 and 65. No distinguishing facts or circumstances contrary to I.T.A .No.-6485/Del/2012 the order of the Co-ordinate Bench pertaining to the same assessment year on similar facts and circumstances namely Headstrong Services India Pvt. Ltd. (cited supra) has been brought to our notice by the Ld.AR. Accordingly in the facts as they stand, we find no good reason to vary the conclusion arrived at which we also find is supported by the order of the Co-ordinate Bench. The prayer of the assessee for exclusion of the said comparable is rejected. The relevant finding of the Co-ordinate Bench is reproduced hereunder:-

(iii) e-Zest Solutions 16.1. “The TPO included this company in the list of comparables after collecting information u/s 133(6) which disclosed that it was engaged in rendering software development services only. The assessee's objections about the unreliable information and non-availability of information in public domain, were rejected by the TPO.

16.2. We have heard the rival submissions and perused the Annual report of this company, which is available on page 1 onwards of the paper book. Page 6 of the Annual report, being an annexure to the Auditor's report, clearly indicates under (ii) that: 'there is no inventory with the company since it is engaged in software development.' From the balance sheet of this company, it is noticeable that there is no closing stock of any software products. Since the assessee is also engaged in rendering software development services and this company is also doing the same business, we are of the considered opinion that this company was rightly included in the list of comparables.

16.3. The Ld. AR's contention this company, being in KPO business as against the assessee's BPO business, is unsubstantiated. Neither it has been shown that the assessee is rendering BPO services nor that e-Zest is providing KPO services. We, therefore, approve the view taken by the authorities below on this issue.” 7. Exclusion of Infosys technologies Ltd was sought by the Ld.AR not only on the grounds that on identical facts and circumstances, it had been directed to be excluded in the case of the assessee itself in 2006-07 assessment year which decision had been upheld by the Hon'ble High Court but was also supported on the basis of Telecordia Technologies India Private Limited. (cited supra) It was argued that I.T.A .No.-6485/Del/2012 it operated as a full-fledged risk taking enterprise having diversified businesses in software products, consulting application, design development etc but also on the grounds that it developed and owned proprietary products like Finacle which was its flagship banking product and substantial portion of its revenues it was stated were realized from its sale and the expenditure of Rs. 730 crores on advertisement, sales, promotion and brand building it was submitted would further demonstrate that it had a brand value.

7.1. The Ld. CIT DR strongly opposed the request of the Ld. AR on the grounds that the Revenue from software products constitutes only 3.82% of the operating Revenue and thus more than 95% of its Revenues were stated to be from software development services and thus it fully qualified the TPO’s filter of more than 75% Revenues from software development services. It was his submission that the filters applied by the TPO and upheld by the DRP have not been challenged by the assessee in the present proceedings. In the facts of the present case it was submitted these peculiar facts have been brought out by the TPO in the order and in the facts as considered in the precedent these peculiar facts evidently are not available. It was his argument that even considering the argument of the assessee that it provided “end to end solution” the TPO has given a finding that in the year under consideration more than 90% of its Revenues came from maintenance or enhancement of the software and not from providing end to end solutions. Accordingly, in the facts of the present case Infosys Ltd. it was submitted needs to be retained. It was also submitted by him that the approach of blindly relying upon precedent has not been upheld by the Hon’ble High

I.T.A .No.-6485/Del/2012 Court in the facts of the present case itself. Attention was invited to the fact that the approach of the ITAT in excluding the said comparable relying upon the view taken by the ITAT in the immediately preceding assessment year which view had been upheld by the Hon’ble High Court itself the Hon’ble High Court still considering the facts remanded the issues back for fresh determination thereby making it clear that instead of following precedence specific facts need to be addressed for which purposed the issues had been remanded as the approach of the ITAT, following the precedent available in assessee’s case has not been upheld. Accordingly it was his submission that the comparable should be retained.

7.2. In reply no arguments contrary to the factual submissions made by the Ld.DR were advanced by the Ld.AR.

7.3. Having heard the rival submissions and perused the material available on record we find that in the peculiar facts and circumstances of the case where the Hon’ble High Court has not approved of the approach of the ITAT in relying upon the precedent available in assessee’s own case for the immediately preceding assessment year which precedent stood approved by the Hon’ble High Court itself, we find that the prayer of the Ld. DR that decision be made first on facts on record and thereafter precedence be considered is not only a settled legal position but in the facts of the present case following this settled position the issue has been remanded despite the fact that the Co- ordinate Bench had followed the precedence in assessee’s own case. Considering the facts and the argument, we find that in the face of the finding that the Revenue from software products constitutes only 3.82% and about 96% of the Revenues are from I.T.A .No.-6485/Del/2012 software development services and 90% of the Revenue come from maintenance or enhancement of the software and not from “end to end solutions” which finding on facts remain unrebutted on record the prayer for rejection on this ground is not maintainable. However, considering the fact that though the filter of 3% has been applied on Advertising, Marketing & distribution expenses R&D costs has not been crossed the impact of brand value on pricing may be demonstrated by the assessee as it has a potential of impacting net profitability. We are conscious that there are precedents wherein brand value has been held to be impacting the net profitability.

Thus the enquiry is relevant. Accordingly whether on facts there is an impact on net profitability of the comparable on account of its brand is directed to be considered. The assessee is directed to demonstrate its claim before the TPO.

7.5. Wipro Ltd.-IT Services Segment (‘Wipro’): “This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgements of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, we hold that Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO.” (emphasis provided) 8.1. The Ld. CIT DR relying upon internal page 80 to 91 of the TPO’s order submitted that the reasons brought out on record by the TPO for retaining the comparable have not been assailed by the assessee. In the facts of the present case it was his submission that information under section 133 (6) has been obtained by the TPO and segmentals have been applied. It was submitted that the assessee is relying upon the consolidated balance sheets and the Revenue is relying on Standalone Financial data which has been confronted to the assessee and addressed. Relying on precedent where these facts are not discussed it was submitted would be of no help.

8.2. We find considering the facts that the Ld. AR did not advance any argument assailing the fact that the Segmentals have been taken into consideration and the information obtained under section 133 (6) has been confronted to the assessee which has been relied upon by the TPO. The results taken into consideration by the Revenue evidently were not the consolidated results as canvassed by the assessee but the Page 17 of 27

I.T.A .No.-6485/Del/2012 Standalone Financial Data qua the segment. However, we find the ownership of brands has been argued, the impact on pricing of the brand value of the said company has not been examined, ownership of brands and patents, trademarks etc. is an admitted fact.

The assessee is directed to place on record facts demonstrating that the ownership of brands etc. has impacted the pricing to the extent that the net profitability of the comparable itself is impacted. The precedent where segmental were not available and standalone Financial data was not confronted would be of no help. The issue accordingly is restored for carrying out this necessary exercise.

Reliance was also placed upon the submissions made in the synopsis addressing that there are certain mathematical errors in the annual report of this company in regards to the computation of its margins.

9.1. The Ld. CIT DR relying on arguments similar to what was advanced in the case of Wipro Technology Ltd. submitted that the said comparable should be retained as information had been sought under section 133 (6) and segmental details have been taken into consideration.

9.2. We have heard the rival submissions and perused the material available on record. We find that no doubt the TPO in his order at specific pages 68 to 70 does make reference to information having been sought under section 133 (6) however the fact that it was confronted to the assessee and its reply was taken into consideration is I.T.A .No.-6485/Del/2012 not evident from the record. The argument of the assessee that reliance has been placed on evidence which is not available in public domain is of no help. The law is well-settled and needs no precedence to cite that the TPO has the power u/s 92C(3) to use information in his possession and the power to gather material under the said section which is akin to the provisions similar to the power vested with the AO in the proceedings u/s 143(3). Sub-section (7) of section 92CA empowers the TPO to utilize the same under section 133(6)/131 and any falsity in the information provided is liable for pending action. Thus the provision enables the TPO to call for information u/s 133(6). The impediment to use the same is only if it is not confronted to the assessee.

9.3. In the facts of the present case, the consistent argument of the assessee has been that segmental information is not available in the public domain thus it appears it has been confronted. The TPO has also given the finding that the software product and training constitutes 4.24% of its Revenue and crosses the 75% filter. However, whether the Standalone Financial data was considered and confronted to the assessee or not is not coming out from the record. Accordingly it cannot be said that the information was effectively communicated. It is further seen that mathematical errors in calculating the margins has also been agitated on behalf of the assessee. Accordingly in view of the procedural deficiency and the calculation errors agitated, we deem it appropriate to restore the issue back to the file of the TPO to confront the same to the assessee.

FY 2004-05 FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10 2.12% 48.62% 113.48% 25.58% 138.30% 101.73% 10.1. It was also canvassed that there is an error in the computation of the margins for which purposes the DRP had given a direction to the TPO to address the same. The said directions it was submitted has not been carried out.

10.2. The Ld. CIT DR agreed that the issue should be restored back in terms of the directions of the DRP. We find that the DRP directed the TPO to exclude rental income and corresponding rental expenses from its margins. The high volatility in the margins also may be examined. The segmental obtained may be confronted to the assessee.

Accordingly in the light of the submissions of the parties before the Bench the issue is restored back to the TPO to address the computational error and also the reasons for high volatility in the margins of the said comparable etc.

11.1. The Ld. CIT DR inviting attention to internal pages 65 of the TPO’s order submitted that herein also information had been sought under section 133 (6) which would show that 100% income of the said company had been returned only from software development segment. It was his argument that since segmental’s have been taken into consideration and it qualified all the filters applied and these have not been objected to before the ITAT. Accordingly it was correctly included.

11.2. We have further heard the rival submissions and perused the material available on record and considering the peculiar facts and circumstances of the case we are of the view that in the facts of the present case segmental have been utilized however whether these were confronted to the assessee or not is not coming out from the record especially in the face of the assessee’s objection that the company was engaged in diversified activities which casts a serious doubt on whether segmentals were confronted. Accordingly, we deem it appropriate to restore the issue back to the TPO to address this aspect. The reliance placed on decisions where segmental have been considered is not of much relevance.

Accordingly relying upon the precedent as laid down in assessee’s own case and in the I.T.A .No.-6485/Del/2012 case of Telecordia technologies India Private Limited (cited supra) it was pleaded that the said comparable company deserves to be excluded.

12.1. The Ld.CIT DR objected to the assessee’s prayer stating that all filters applied were qualified and they have not been objected to. The product Revenue it was submitted is only 12.31% and hence 75% filter is exceeded as its Revenue from services was 87.69%. Moreover, product and services segment has been considered as comparable. Relying on Chrys Capital Investment Advisors P. Ltd. vs DCIT [2015] 232 Taxman 20 (Delhi) it was submitted that presumption of high profit on high turnover cannot be a criteria to exclude an otherwise comparable company.

12.2. Having heard the submissions and perused the record, we find that in the absence of any argument rebutting that segmental were confronted and also the fact that the Revenue from services 87.69% far in excess of the bar of 75% which also remains unrebutted. We find no good reason to interfere with the finding. No precedent controverting these material facts has been cited before us to consider a contrary view. Accordingly in view of the same, the comparable is directed to be retained.

I.T.A .No.-6485/Del/2012 eMee etc. Judicial precedent as available in assessee’s own case and in the case of Telecordia Technologies India Private Limited was heavily relied upon.

13.1. The Ld. CIT DR submitted that the information under section 133 (6) was called for and segmental were available. The information was confronted to the taxpayer also and on a reading of the specific reasons brought out in the TPO’s order which stand unassailed on record it was argued that the comparable should be retained. Emphasis was also laid on the fact that in 2007-08 assessment year, the exclusion of this comparable was not insisted upon by the taxpayer. The decision in Telecordia Technologies India Pvt.Ltd.(cited supra) it was submitted did not pertain to the year under consideration 13.2. We have heard the rival submissions and perused the material available on record. We find on facts that the prayer of the tax payer for exclusion of the said comparable cannot be ousted on the ground that it was not objected to in the previous assessment year. Whether a particular comparable is accepted or rejected in a previous assessment year consciously or inadvertently by the assessee or the authorities is not the basis on which the issues can be decided. As and one challenge is posed to the inclusion or exclusion of a comparable the challenge has to be considered on the basis of facts and evidence on record for that year. It is only after the facts and evidences are taken into consideration that the relevance of applying a precedent would come into play. In the facts of the present case, we find that the revenues from the software development segment of this comparable constituted 96% and this finding of fact has not been assailed by the assessee. No judicial precedent has been relied upon wherein

I.T.A .No.-6485/Del/2012 the comparable on identical facts and circumstances was directed to be excluded by any forum in facts which stood on an identical footing. For ready reference we reproduce the same from the TPO’s order 70 and 71:-

16.8. Persistent Systems Limited “This company was not considered by the taxpayer in its IP document and it is not finding place in the accept / reject matrix of software companies enclosed as Annexure to the IP report. However, the data of the company is available in Prowess database and is finding place in the search matrix of the TPO. Annual Report is available for the FY 2007-08. It is mainly a software development service company. The company was asked information u/s 133(6) to submit the segmental / break up details regarding software products and software development services. As per the information submitted, the software development constitute 96% of revenues for the FY 2007-08 and thus qualify the functionality criterion. The company has revenues by way of products as well as software development services., In this regard, the relevant portion of the reply received from the company is reproduced below:- (ii) Software Product Company:PSL has developed a few of its own products in the area of identity management and connectors. A small part of PSL’s revenue is derived from this type of activity. The following table provides the composition of revenue from different activities for Persistent Systems Limited (on Standalone basis) confirming that approximately 95- 96% of the revenue is derived from pure software development services:- Particulars FY 2008-09 FY 2007-08 (Rs. Million) (Rs. Million) Revenue from Software Development Services 4,829.57 3,641.19 Revenue from Product Licenses 282.93 80.32 Reimbursement of Travel expenses 84.41 107.26 Total 5,196.91 3,828.77 Thus the revenues from software development services constitute 96% of the total operating revenues for the FY 2007-08. Thus it qualifies the TPO's filter of more than 75% revenues from SWD services and is considered as a comparable. The same was communicated to the taxpayer vides this office show cause notice. In its response, the taxpayer has stated that this is a product company which is not correct as evident from the above. During the year the company has revenue from software development service of Rs3641.19 Million, which constitutes 95.1% of total revenue. Thus it passed the service income filter. Hence this company retained as a comparable. However it is pertinent to mention here that the taxpayer didn't object this company as a comparable in AY 2007-08.”

I.T.A .No.-6485/Del/2012 13.3. Accordingly in the facts as they stand which remain uncontroverted, we find that the prayer of the Ld.AR has to be rejected.

“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 narrated in para 6.6 above.”

14.2. The Ld. CIT DR inviting attention to internal page 78 of the TPO’s order submitted that in the facts of the present case segmental details have been taken into consideration as such the comparable should be retained. It was also his submission that R&D filter has been addressed and it is only 3.9%. The order in Telecordia Technologies India Pvt. Ltd. (cited supra) it was pointed out is not of the same assessment year and segmentals evidently were not available there.

I.T.A .No.-6485/Del/2012 14.3. Considering the submissions of the parties and the material available on record, we find that the TPO’s order on this issue is not a speaking order as it is very cryptic in making a reference to the fact that segmental’s are available. However, whether these were confronted to the taxpayer or not is not coming out from the order. Moreover, whether the tax authorities had the benefit of Standalone Financial Data qua the segmentals and whether they were made available to the assessee is not coming out from the order. Accordingly, in the facts as they stand we deem it appropriate to address the procedural deficiencies and deem it appropriate to restore the issue back to the file of the TPO with the direction to pass a speaking order in accordance with law confronting the taxpayer with the facts taken in into consideration for arriving at a conclusion adverse to the assessee. The issue accordingly is restored.

15.1. The Ld. CIT DR inviting attention to internal page 78 of the TPO’s order at pages 78 to 80 submitted that segmental were available and shared with the assessee’s revenue from product sales was only 0.74% and from software development 97.47%.

The Annual Report it was submitted was provided to the assessee on 29.09.2011.

I.T.A .No.-6485/Del/2012 15.2. On a consideration of the submissions of parties before the Bench, we find that the TPO has given a categoric finding that the revenue from the software development segment is 97.47% and the said comparable qualifies the 75% service income filter.

The objection of the taxpayer that segmental information is not available in public domain is not of any relevance. What is relevant is has the information utilized been shared with the assessee or not and was the Standalone Financial data supporting the information looked into and made available to the assessee. Since the fact of standalone data availability and confronting the same to the assessee is not coming out from the record available it thus cannot be said that effective opportunity was provided.

Accordingly, we deem it appropriate to restore the issue back to the TPO.