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Vimal Gandhi, President

1. This appeal by the Taxpayer E-Gain Communication Pvt. Ltd., a nonresident company, is directed against the order of the ld. Commissioner of Income Tax (A) (CIT(A) in short), confirming addition of Rs. 1,08,62,537 on account of adjustment in the Arm's length price tinder the provisions of Section 92CA(3) of the Act for services rendered by the taxpayer to its parent company in USA.

2. The assessee company is engaged in the business of software product development and is 100% E.O.U. unit approved by Software Technology Park of India under STPI Scheme. It is also taken as leading provider of customer service and contact center software based on integrated communication platform. The taxpayer has further claimed exemption Under Section 10A of the I.T. Act. As per the audited accounts filed by the taxpayer, it has shown the total export turnover of Rs. 10,25,68,917 from which it derived profit of Rs. 46,95,254.

1. SERVICES AND SCOPE OF WORK:

1.1 Services: Subject to the provisions of this Agreement, EC agrees to accept from ECPI, & ECPL agrees to provide to EC software development services, to design, develop, create, maintain and finetune and produce a computer software or to further develop or change an existing software ("Development Services") for and on behalf of EC and which shall be defined in the "Statement of Work" thereinafter known as 'Statement(s)") issued to and accepted by ECPL. In performing its obligations under this Agreement, ECPL shall undertake the Development Services in India and on customer site on need basis.

28. Ld. DR, on the other hand, submitted that profitability of the taxpayer was to be seen on a reality of business. In the assessment year 2004-05, the explanation of the taxpayer before the TPO was different from what was staled before the ld. CIT(A). Now before the ITAT, a totally different explanation has been furnished. The parent company has suffered losses and, therefore, services by the taxpayer have been provided cost + 5% was not a tenable argument. The agreement of the taxpayer with its parent company shows that it is a software development company. Page 2 of the agreement under the title "Services and scope of work", it is clearly provided that the taxpayer is dealing in software. He emphasized that profit shown by similar software development companies was more than 15%. Ld. DR submitted that basic onus was on the taxpayer to show that transaction carried with associated enterprises (AE) were Arm's length transactions. The ld. DR supported the arm's length price determined by the TPO who, according to the DR, had determined the ALP after discussion with the taxpayer and their representative. Objections on abnormalities or extraordinary circumstances of some comparable transactions were not put before the revenue authorities. After lot of screening of the relevant data of software companies, 20 comparables were finally selected for ultimate analysis by the TPO and by the CIT(A). In making selection, the TPO had taken into account element of risk, loss suffered by companies and gave opportunity to the assessee to show as to how profit margin of 3.86% shown by the taxpayer was comparable. The assessee further could not point out any defect in the transfer pricing analysis carried out by the TPO. No reason has been furnished as to why entities having total range of Rs. 8 core to Rs. 18 crore should be selected and taken as sacrosanct. The ld. TPO has determined ALP after taking into account reliable and cogent material collected from public domain. The argument advanced here and defects in comparables stated before the Tribunal were not stated before the Assessing Officer or ld. CIT(A). The ld. DR accordingly justified the adjustment made by the Assessing Officer and upheld by the CIT(A).

39. The aforesaid guidelines lay down the same principles as are reflected in the relevant Rule 10D quoted above. 11 there are material differences, then those differences are to be considered and suitable adjustment made. The revenue authorities were in error in not making those adjustments. Now, Mr. Otswal has placed before us clinching evidence to show that the above two companies had income from other sources like interest on deposit, dividend income and income from sale of licenses, which jacked up profit margin of these companies. By no stretch of imagination, the above type of income could be included for purposes of comparison whereas the tested party was carrying business of software development. If it was not possible to work out and exclude receipts and expenditure of above category. of incomes, not relating to software development, then these companies could not be taken as comparable companies. The ld. CIT(A) did not offer any comment. We are not in a position to reject the contention of Mr. Ostwal that these companies were trading in software and were giving licenses for use of software. Thus, line of business of these companies was different from the business of the taxpayer involved exclusively in the development of software for its parent company.