G.E. Veerabhadrappa, Vice President. - By this stay application, the assessee requests the Tribunal to stay the following demand raised for the assessment year 2006-07 :—

2. For the assessment year 2006-07, the assessee filed a return of income on 31-11-2006, clearing loss of Rs. 22,64,57,900. The assessment was completed vide order dated 27-4-2010 passed under section 143(3) read with section 144C of the Income-tax Act, 1961, assessing the total income of the assessee at Rs. 59,68,20,270, inter alia making the following additions and disallowances :

(i)addition of Rs. 45,15,21,255 on account of international transactions

(ii)Disallowances of set-off of losses of STPI units amounting to Rs. 22,65,96,783

(iii)disallowance of travelling expenses to the tune of Rs. 14,07,18,569.

3. The entire demand that is disputed is the result of above three additions and disallowances. The major dispute is in relation to addition in respect of international transactions. The assessee is engaged in the business of software development and related services. It entered into the following international transactions with the associated enterprise :—

(i)Software development and related services provided to Birlasoft Inc., USA amounting to Rs. 121,48,10,711.

(ii)Software Development and related services provided to Birlasoft (UK) Limited amounting to Rs. 12,79,66,629

4. The assessee, for the purpose of determining the arm’s length price of the international transactions, applied TNMM on the basis of internal comparison. Since the operating profit margin (OP/OC %) earned from rendering software development and related services to associated enterprises computed at -0.47 per cent was higher than operating profit margin (OP/OC %) earned from rendering software development and related services to unrelated parties computed at -6.89 per cent, the international transactions were considered to be at arm’s length applying Transactional Net Margin Method (TNMM).

5. The Assessing Officer/TPO rejected the internal benchmarking due to the reason that the applicant has drawn the segments artificially for the purpose of transfer pricing study report and chat the nature of services provided in both related party business and unrelated party business is exactly the same and so closely linked or continuous that they cannot be evaluated on a separate basis.

6. The Assessing Officer/TPO identified third party external comparables (after removing Satyam Computers as directed by the Dispute Resolution Panel (DRP) with average operating profit margin (OP/OC per cent) of 17.42 per cent and computed an adjustment of Rs. 45,15,21,255 on account of the alleged difference in the arm’s length price of the international transactions. The assessee contended that rejection of segmented comparability by the Assessing Officer was not fair and proper as according to him operating profit margin submitted by the assessee is fully verifiable. It was contended by the assessee that though the services rendered to associated enterprises and to unrelated parties are of the same class, the parties involved in the transactions are different i.e., transactions are to be classified separately as undertaken with associated enterprises and with unrelated parties due to varying degree of risks involved, thereby warranting bench marking of international transaction on segmental basis for related and unrelated parties. It was submitted that the international transactions of software development and related services provided to the associated enterprise are to be regarded as being at arm’s length even while applying TNMM with reference to such internal comparables. The assessee also took various other contentions without prejudice to this main contention which did not find favour with the Assessing Officer. Against the draft ord