Conexant Systems Pvt.Ltd., (Previously known as, Hyderabad V. ITO, War-1(2), Hyderabad

ITA 1160/HYD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78020 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 16-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: UTPAL SEN
• Keywords: Transfer pricing; International transaction
• Section: 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 1160/HYD/2011 ASSESSMENT YEAR 2005-06 M/S. CONEXANT SYSTEMS PVT. LTD., HYDERABAD PAN: AAACF2723N VS. THE INCOME TAX OFFICER WARD-1(2) HYDERABAD ASSESSEE RESPONDENT APPELLANT BY: SRI DHANESH BAFNA & SRI UTPAL SEN RESPONDENT BY: SRI SOLGY JOSE T. KOTTARAM DATE OF HEARING: 25 .0 6 .2014 DATE OF PRONOUNCEMENT: 25 .07.2014 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE CIT(A)-III, HYDERABAD DATED 28.3.2011 FOR ASSESSMENT YEAR 2005-06. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND FILED ITS RETURN OF INCOME FOR A.Y. 2005- 06 ON 30.12.2005 SHOWING INCOME OF RS. 1,83,670 AFT ER CLAIMING DEDUCTION OF RS. 96,04,588 U/S. 10A OF INC OME- TAX ACT, 1961. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT DURING THE FY 2004-0 5 IT HAD MADE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCI ATED ENTERPRISES (AES). FOR COMPUTATION OF ARM'S LENGTH PRICE (ALP) OF SUCH TRANSACTIONS, DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER MADE REFERENCE T O THE 2 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= TRANSFER PRICING OFFICER (TPO) U/S. 92CA(1) OF THE ACT. IN RESPONSE TO THIS, THE TPO AFTER MAKING NECESSARY ENQUIRIES AND VERIFICATION VIDE HIS ORDER DATED 30. 5.2008 PASSED U/S. 92CA(3) OF THE ACT DETERMINED THE ALP O F SUCH TRANSACTIONS AT RS. 7,97,32,152 AS AGAINST RS. 7,26,98,036 SHOWN BY THE ASSESSEE THEREBY SUGGESTIN G ADJUSTMENT OF RS. 70,34,116 TO THE INCOME OF THE AS SESSEE U/S. 92CA OF THE ACT. 3. LATER, IN CONFORMITY WITH SUCH ORDER PASSED BY THE TPO, THE ASSESSING OFFICER HAD MADE ADDITION OF RS. 70,34,116 TO THE INCOME OF THE ASSESSEE U/S. 92CA O F THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO HAS OBSERVED THAT THE ASSESSEE HAS RECOVERED AN AMOUNT OF RS. 9,73,317 TOWARDS RECOVERIES MADE FROM SKYWORKS SOLUTIONS INDIA PRIVATE LIMITED (SKYWORKS) . IN THIS REGARD, THE AO HAS CALLED FOR THE DETAILS OF T HE RECOVERIES ALONG WITH THE SUPPORTING DOCUMENTS. IN RESPONSE, THE ASSESSEE SUBMITTED THAT IT HAS ENTERE D INTO A LEASE AGREEMENT DATED JUNE 2, 2003 WITH VANENBURG IT PARK (THE LANDLORD) HAVING ITS REGISTERED OFFICE AT PLOT NO. 17, BUILDING D, SOFTWARE UNITS LAYOUT. MADHAPUR HYDERABAD- 500081. AS PER THE LEASE DEED DATED JUNE 2, 2003 THE ASSESSEE COMPANY HAS TAKEN 8,994 SQUARE FE ET (SFT) IN BUILDING D, 3 RD FLOOR FOR A MONTHLY RENTALS OF RS. 4,36,035 AND THE SAME WILL BE INCREASED BY 10% IN E ACH YEAR. FURTHER THE ASSESSEE SUBMITTED THAT IT HAS E NTERED INTO A LICENSE AGREEMENT DATED AUGUST 21, 2003 WITH SKYWORKS WHEREIN THE ASSESSEE COMPANY IS COLLECTING 50% OF ACTUAL EXPENDITURE INCURRED BY IT I.E. 'RENT , REIMBURSEMENTS, OPERATING EXPENSES, MAINTENANCE EXPENSES, PARKING CHARGES, TELEPHONE AND UTILITY EX PENSES 3 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= AND ALL OTHER COSTS AND EXPENSES RELATED TO THE SHA RES FACILITY AREA' FROM SKY WORKS FOR GRANTING THE RIGH T OF UTILIZATION OF 50% OF THE PREMISES TAKEN ON LEASE F ROM VANENBURG IT PARK. FURTHER SUCH AGREEMENT CAME TO A N END WITH EFFECT FROM JUNE 30, 2004. HENCE, DURING T HE RELEVANT FINANCIAL YEAR SKYWORKS OCCUPIED THE PREMI SES TAKEN BY THE ASSESSEE FROM VANENBURG IT PARK ONLY F OR THE PERIOD APRIL 2004 TO JUNE 2004. HOWEVER, THE AO CONCLUDED THAT SKYWORKS OCCUPIED THE PREMISES FROM APRIL 2004 TO SEPTEMBER 2004 (6 MONTHS) INSTEAD OF APRIL 2004 TO JUNE 2004 (3 MONTHS). 4. ON APPEAL, IT WAS SUBMITTED BEFORE THE CIT(A) THAT THE LEASE DEED DATED JUNE 2, 2003 MENTIONED IN THE FOREGOING PARAGRAPHS BETWEEN THE ASSESSEE COMPANY A ND VANENBURG IT PARK WAS AMENDED VIDE AN ADDENDUM WITH EFFECT FROM SEPTEMBER 22, 2004 TO INCLUDE LEASE OF ADDITIONAL PREMISES (BUILDING 'D' 4TH FLOOR) WHICH INTER ALIA INCLUDE REVISED MONTHLY RENTAL OF RS. 5,65,810 (FOR BUILDING D , 3 RD AND 4 TH FLOOR). FURTHER IT WAS SUBMITTED THAT DURING THE YEAR THE ASSESSEE HAD DEBITED RS. 59,19,308 TOWARDS RENT EXPENSE AND ADJUSTED RS. 9,80,397 AS RECOVERIES AGAINST THE ACTUAL EXPENDITU RE INCURRED UNDER SCHEDULE-11 AND 12 OF THE FINANCIAL STATEMENTS OF THE ASSESSEE. IT WAS POINTED OUT THAT DURING THE FINANCIAL YEAR 2004-2005 SKYWORKS HAS AVAILED T HE PREMISES/FACILITIES OF THE ASSESSEE COMPANY FOR A P ERIOD OF 3 MONTHS I.E. APRIL, MAY AND JUNE 2004 AND THE RECOVERIES OF RS. 9,73,317 FOR THE PERIOD OF 3 MONT HS FROM SKYWORKS AS DISCLOSED IN SCHEDULE 12 OF THE FINANCI AL STATEMENTS CONSISTS OF THE FOLLOWING: 4 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= PARTICULARS AMOUNT COMMUNICATION 7,535 PRINTING & STATIONARY 300 REPAIRS & MAINTENANCE 1,70,714 SECURITY SERVICES 20,127 TELEPHONE 54,401 RENT 7,20,240 TOTAL ADDITIONS 9.73.317 5. IT WAS STATED THAT THE ABOVE REPRESENTS 50% OF THE RELEVANT EXPENDITURE INCURRED BY THE ASSESSEE OVER THE CORRESPONDING PERIOD AND THE ACTUAL AMOUNT RECOVERE D FROM SKYWORKS. THE ASSESSEE SUBMITTED THAT IT HAS FURNISHED ALL RELEVANT DETAILS WITH REGARD TO THE A BOVE MENTIONED TREATMENT ADOPTED BY THE ASSESSEE. FURTHE R THE ASSESSEE ALSO FILED THE COPIES OF BILLS/INVOICE S INCURRED BY THE ASSESSEE ALONG WITH THE COPIES OF I NVOICES AND DEBIT NOTES RAISED BY THE ASSESSEE COMPANY ON SKYWORKS. HOWEVER, IT WAS SUBMITTED THAT THE ASSESS ING OFFICER OUTRIGHTLY REJECTED THE ASSESSEE'S SUBMISSI ONS AND ERRONEOUSLY ADDED BACK AN AMOUNT OF RS. 29,00,000, INSTEAD OF RS. 9,73,317, ALLEGING THAT THE SAME WAS RECOVERED FROM SKYWORKS FOR THE PERIOD OF SIX MONTH S AND TREATING THE SAME AS RENTAL INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER WHILE DISREGARDI NG THE ABOVE SUBMISSIONS MADE BY THE ASSESSEE THE ASSESSING OFFICER WAS OF THE VIEW THAT THE RECOVERI ES MADE BY THE ASSESSEE FROM SKYWORKS LIMITED WERE IN THE N ATURE OF RENTAL INCOME AND ASSESSED IT AS SUCH. 6. THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSING OFFICER, WHILE ARRIVING AT THE FIGURE OF MONTHLY RE NTAL PAYABLE BY THE ASSESSEE TO THE LANDLORD, HAS WRONGL Y CONSIDERED THE AMENDED LEASE AGREEMENT ENTERED INTO BY THE ASSESSEE AND THE LANDLORD WHICH WAS OPERATIONAL WITH 5 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= EFFECT FROM SEPTEMBER 22, 2004 WITHOUT APPRECIATING THE FACT THAT SKYWORKS HAS OCCUPIED THE SAID PREMISES A VAILED THE FACILITIES UP TO JUNE 2004 ONLY. HENCE, THE FIG URE OF MONTHLY RENTALS ARRIVED BY THE ASSESSING OFFICER AT RS. 11,460,804 IS BASED ON THE AMENDED LEASE AGREEMENT AND CONSEQUENTLY THE VIEW OF THE AO WITH REGARD TO RECO VERY AMOUNT FROM SKYWORKS COMPUTED WAS WRONG. 7. WITHOUT PREJUDICE TO THE ABOVE, ALTERNATIVELY, THE ASSESSEE ALSO SUBMITTED THAT THE AO HAS CONSIDERED THE RECOVERIES AS INCOME UNDER THE HEAD 'INCOME FROM OT HER SOURCES', THEREFORE, THE ASSESSEE REQUESTED THE CIT (A) TO DISALLOW THE ACTUAL EXPENSES INCURRED BY THE ASSESS EE ON BEHALF OF SKYWORKS UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS OR PROFESSION' AND ALLOW SUCH ACTUAL EXPENDITURE AGAINST THE INCOME CONSIDERED UNDER THE HEAD 'INCOME FROM OTHER SOURCES' AS PER THE PROVISI ONS OF SECTION 57(III) OF THE ACT. 8. FURTHER, THE ASSESSEE SUBMITTED THAT THE RENT PAID TO THE LANDLORD AND THE RECOVERIES MADE FROM SKYWOR KS ARE DIRECTLY RELATED. FURTHER, THE RENT PAID TO THE LANDLORD IS SOLELY AND EXCLUSIVELY INCURRED IN CONNECTION WI TH RECOVERIES MADE FROM SKYWORKS. THEREFORE, THE ASSES SEE PRAYED BEFORE THE CIT(A) THAT THE IN CASE THE RECOV ERIES MADE FROM SKYWORKS ARE CONSIDERED AS INCOME UNDER T HE HEAD 'INCOME FROM OTHER SOURCES', THEN THE RELEVANT EXPENDITURE NAMELY, RENT PAID TO LANDLORD NEEDS TO BE ALLOWED AS EXPENDITURE AGAINST SUCH INCOME. 9. THE CIT(A) AT PARA 17.2 OF HIS ORDER HELD AS UNDER: '17.2. ... I FIND THAT THE APPELLANT HAS NOT 6 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= COMMENTED WITH REFERENCE TO THE OBSERVATION OF THE AO MADE IN PARA 2 AT PAGE 6 OF THE ASSESSMENT ORDER, RELATING TO RECOVERY OF RS. 29,00,000/- FOR THE F.Y 2004-05 FROM THE SAID M/S. SKYWORKS SOLUTIONS P. LIMITED. THIS AMOUNT HAS BEEN CONSIDERED BY THE AO AS INCOME FROM OTHER SOURCES. HOWEVER, AS OUT OF SUCH RECOVERIES MADE FROM THAT COMPANY, A SUM OF RS. 9,73,317/- HAS BEEN ADJUSTED AGAINST RENT CLAIMED BY THE ASSESSEE IN THE P&L ACCOUNT, IN MY VIEW, THE BALANCE AMOUNT OF RS. 19,26,683/- (29,00,000 - 9,73,317), HAS TO BE CONSIDERED FOR THE PURPOSE OF TAXATION UNDER THE HEAD 'INCOME FROM OTHER SOURCES', IN THE HANDS OF THE ASSESSEE FOR THIS ASSESSMENT YEAR I.E., A.Y. 2005-06. THE AO IS DIRECTED ACCORDINGLY. 10. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUND: 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT APPEALS HAS ERRED IN CONFIRMING THE ADDITION OF RS. 19,26,683 AS ALLEGED RENTAL INCOME. 11. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT THE LEASE DEED DATED JUNE 2, 2003 BETWEEN THE ASSESSEE- COMPANY AND VANENBURG IT PARK WAS AMENDED BY AN ADDENDUM WITH EFFECT FROM SEPTEMBER, 22,2004 TO INC LUDE LEASE OF ADDITIONAL PREMISES (BUILDING 'D' 4 TH FLOOR) WHICH INTER-ALIA INCLUDED REVISED MONTHLY RENTAL OF RS. 56,65,810 AND THE ASSESSING OFFICER HAS WRONGLY CONSIDERED THE AMENDED LEASE AGREEMENT ENTERED INTO BY THE ASSESSEE AND THE LANDLORD WHICH WAS OPERATIONAL WITH EFFECT FROM SEPTEMBER 22, 2004, WITHOUT APPRECIATIN G THE FACT THAT SKYWORKS HAD OCCUPIED THE SAID PREMISES A ND AVAILED OF THE FACILITIES UP TO JUNE, 2004 ONLY. H ENCE THE FIGURE OF MONTHLY RENTALS ARRIVED AT BY THE ASSESSI NG OFFICER AT RS. 1,14,60,804 IS BASED ON THE AMENDED LEASE 7 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= AGREEMENT AND CONSEQUENTLY THE VIEW OF THE ASSESSIN G OFFICER WITH REGARD TO RECOVERY OF THE AMOUNT FROM SKYWORKS COMPUTED BY THE ASSESSING OFFICER WAS WRON G. FROM PAGE 6 OF THE ORDER OF THE ASSESSING OFFICER I T IS VERY CLEAR THAT THE ASSESSING OFFICER HAS WRONGLY STATED THAT SKYWORKS HAS AVAILED THE SAID PREMISES/FACILITIES O NLY 6 MONTHS FROM APRIL 4, 2004 TO SEPTEMBER, 2004 WHEREA S THE SKYWORKS HAS AVAILED THE PREMISES FOR A PERIOD OF 3 MONTHS ONLY I.E., DURING APRIL, MAY AND JUNE, 2004. HENCE, WE DELETE THE ADDITION OF RS. 19,26,683 DETE RMINED BY THE CIT(A) AS THE RENTAL INCOME. 12. THE NEXT ISSUE IS WITH RESPECT TO DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A ) IN RESPECT OF PAYMENT MADE TO 'BANDWIDTH' CHARGES AMOUNTING TO RS. 52,664 U/S. 40(A)(IA) OF THE INCOM E-TAX ACT, 1961. AGGRIEVED, THE ASSESSEE HAS RAISED GROU ND NO. 3 BEFORE US WHICH IS AS UNDER:' 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT APPEALS HAS ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN RESPECT OF THE PAYMENT MADE TOWARDS BANDWIDTH CHARGES AMOUNTING TO RS. 52,664 UNDER SECTION 40(A)(IA) OF THE INCOME TAX ACT, 1961. 13. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF M/S. MARKET TO OLS RESEARCH PVT. LTD. VS. DCIT IN ITA NO. 1150/HYD/201 1. THE ITAT, HYDERABAD BENCH IN THE CASE OF ACIT V/S. 8 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= USHODAYA ENTERPRISES P. LTD. (53 SOT 193) ALSO EXPR ESSED SIMILAR VIEW BY HOLDING AS UNDER:- 14. FURTHER, THE AUTHORITY FOR ADVANCING RULING HAS HELD IN THE CASE OF INTERTEK TESTING SERVICES INDIA P LTD. (307 ITR 418)( AAR) THAT THE OFFER OF A STANDARD FACILITY TO A NUMBER OF CUSTOMERS SUCH AS TELEPHONE/CELL PHONE USERS DOES NOT AMOUNT TO RENDERING ANY TECHNICAL SERVICE WITHIN THE MEANING OF THE DEFINITION OF TECHNICAL SERVICE. TECHNICAL OR CONSULTANCY SERVICE RENDERED SHOULD BE OF SUCH A NATURE THAT IT MAKES AVAILABLE THE TECHNICAL KNOWLEDGE, SKILLS ETC. MUST REMAIN WITH THE PERSON RECEIVING THE SERVICES EVEN AFTER THE PARTICULAR CONTRACT COMES TO AN END. IT IS ENOUGH THAT THE SERVICES OFFERED ARE THE PRODUCT OF INTENSE TECHNOLOGICAL EFFORT AND A LOT OF TECHNICAL KNOWLEDGE AND EXPERIENCE OF THE SERVICE PROVIDER HAVE GONE INTO IT. THE TECHNICAL KNOWLEDGE OR SKILLS OF THE PROVIDER SHOULD BE IMPARTED TO AND ABSORBED BY THE RECEIVER SO THAT THE RECEIVER CAN DEPLOY SIMILAR TECHNOLOGY OR TECHNIQUES IN THE FUTURE WITHOUT DEPENDING UPON THE PROVIDER. HENCE, WE CONFIRM THE ORDER OF THE CIT(A) THAT TAX IS NOT DEDUCTIBLE ON PAYMENT DATA CIRCUIT RENTALS AND DISMISS THE DEPARTMENTAL APPEAL ON THIS ISSUE. 15. THE NEXT ISSUE RAISED BY THE DEPARTMENT IS PAYMENT OF BAND WIDTH CHARGES: THE ASSESSING OFFICER HELD THAT PAYMENTS MADE TO VARIOUS COMPANIES TOWARDS BANDWIDTH CHARGES ARE LIABLE FOR TDS U/S 194J. HE BRUSHED ASIDE THE ASSESSEES PLEA THAT THE PAYMENTS WERE MADE OR PROVIDING FACILITIES AND NOT ANY SERVICES. IN APPEAL, THE CIT(A) ACCEPTED THE CONTENTION OF THE ASSESSEE AND HELD THAT THE PAYMENTS ARE IN THE NATURE OF RENT PAID FOR SPACE ITA NOS. 1699 TO 1701/H/2008 ITA NOS. 1706 TO 1708/H/2008 M/S USHODAYA ENTERPRISES PVT. LTD., HYDERABAD ALLOTTED IN THE TRANSPONDER AND THE SAME WILL NOT COME UNDER THE PURVIEW OF SECTION 194J. THE CIT(A) FOLLOWED THE DECISION 9 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF SKYCELL COMMUNICATIONS LTD. VS. DCIT 251 ITR 53 MAD. THE CIT(A) ALSO RELIED ON THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SOFTWARE TECHNOLOGY PARKS OF INDIA VS. ITO 3 SOT BANG. THE CIT (A) HELD THAT SECTION 194J WILL NOT BE APPLICABLE TO THE IMPUGNED PAYMENTS. 16. AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE US. 17. THE LEARNED COUNSEL FOR THE ASSESSEE SHIVA KUMAR RELIED ON THE DECISION OF THE TRIBUNAL MUMBAI BENCH IN THE CASE OF PACIFIC INTERNET (INDIA) P LTD. VS. ITO 318 ITR (AT) 0197 MUM WHEREIN IT HAS BEEN HELD THAT PAYMENT MADE FOR USING BANDWIDTH AND NETWORK OPERATION ARE NOT TECHNICAL SERVICES AND TAX NEEDED NOT BE DEDUCTED FROM SUCH PAYMENTS U/S 194J. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS NOW SETTLED THAT MERE PROVISION OF FACILITY TO USE EQUIPMENT, WHATEVER MAY BE THE SOPHISTICATION THAT WENT INTO THE CREATION OF SUCH FACILITY, IS NOT TECHNICAL SERVICE. FOLLOWING DECISION OF THE COORDINATE BENCH IN PACIFIC INTERNET (INDIA) P LTD. VS. ITO 318 ITR (AT) 0197 MUM. WE UPHOLD THE ORDER OF THE CIT(A) THAT PAYMENTS OF BANDWIDTH ARE NOT LIABLE FOR TDS UNDER SECTION 194J AND DISMISS THE DEPARTMENTAL APPEAL ON THIS ISSUE. 14. RESPECTFULLY FOLLOWING THE DECISION OF THE CO- ORDINATE BENCH, WE ARE OF THE OPINION THAT THE CIT (A) ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN RESPECT OF PAYMENT MADE TO TOW ARDS BANDWIDTH CHARGES AMOUNTING TO RS. 52,664 U/S. 40(A )(IA) OF THE ACT. WE ALLOW GROUND NO. 3 RAISED BY THE AS SESSEE. 15. THE LAST ISSUED IS WITH RESPECT TO DETERMINATION OF ARM'S LENGTH MARK-UP FOR PROVISION OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSING OFFICER. 10 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= 16. THE ASSESSEE HAD OBJECTED TO DIFFERENT COMPARABLES ADOPTED BY THE TPO FOR SELECTION OF COMPARABLES. T HE ASSESSEE HAD SUBMITTED THAT THE TPO IS NOT JUSTIFIE D IN REJECTING THE COMPARABLE COMPANIES IDENTIFIED BY IT . THE ASSESSEE HAD REFERRED TO 15 COMPANIES VIZ., PRITHVI INFORMATION SOLUTION LTD., GOLDSTONE TECHNOLOGIES L TD., IT PEOPLE (INDIA) LTD., MAARS SOFTWARE INTERNATIONAL L TD., ORIENT INFORMATION TECHNOLOGY LTD., SOFTPRO SYSTEMS LTD.,(SEG), VISHU INTERNATIONAL LTD., FEDERAL TECHN OLOGIES LTD., QUINTEGRA SOLUTIONS LTD., R SYSTEMS INTERNATI ONAL LTD.,(SEG), FCS SOFTWARE SOLUTIONS LTD., PSI DATA S YSTEMS (SEG), MELSTAR INFORMATION TECHNOLOGIES LTD., AKSHA Y SOFTWARE TECHNOLOGIES LTD., AND VJIL CONSULTING LTD . 17. THE TPO DISCUSSED THE FACTUAL POSITION IN DETAIL IN RESPECT OF EACH SUCH COMPANY AND SINCE HE WAS OF TH E OPINION THAT THESE COMPANIES HAD NOT SATISFIED ALL THE FILTERS ADOPTED BY HIM REJECTED THOSE COMPANIES. F OR DETERMINING THE ALP THE TPO SELECTED 17 COMPARABLES WHICH ARE REFERRED AT PAGE 224 OF HIS ORDER. OUT O F THOSE 17 COMPARABLES, THE ASSESSEE HAD OBJECTED TO 9 COMPARABLES BEFORE THE CIT(A) ON APPEAL AGAINST THE ORDER OF THE TPO. OUT OF THE 17 COMPANIES SELECTED BY TH E TPO EXCLUDING ONLY SATYAM COMPUTER SERVICES LTD., THE REMAINING 16 WERE SELECTED AS COMPARABLES FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO NS IN THIS CASE BY THE CIT(A). THE CIT(A) OBSERVED THAT ON THE BASIS OF FIGURES OF PROFIT MARGINS IN RESPECT OF TH OSE 16 COMPANIES UPHELD BY HIM AS COMPARABLES THE AVERAGE PROFIT MARGIN I.E., ARITHMETIC MEAN PLI COMES TO 26 .41%. 11 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE PREFERRED APPEAL AND RAISED GROUNDS NO. 4 AS UNDER: 4. THAT THE LEARNED CIT APPEALS ERRED IN DETERMINING THE ARM'S LENGTH MARK-UP FOR PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO BE 24.45% (AFTER WORKING CAPITAL ADJUSTMENT). WHILE DOING SO LEARNED CIT APPEALS GROSSLY ERRED IN: (I) REJECTING THE COMPARABILITY ANALYSIS CARRIED IN THE TP DOCUMENTATION AND IN ACCEPTING THE FRESH COMPARABILITY ANALYSIS CARRIED OUT BY LEARNED TRANSFER PRICING OFFICER ('LEARNED TPO') BASED ON APPLICATION OF ADDITIONAL FILTERS. (II) RETAINING COMPANIES IN THE COMPARABILITY ANALYSIS WHICH DO NOT SATISFY THE TEST OF COMPARABILITY. (III) REJECTING COMPANIES THAT ARE FUNCTIONALLY COMPARABLE TO THE APPELLANT. (IV) IGNORING THE LIMITED RISK NATURE OF THE CONTRACTUAL SERVICES PROVIDED BY THE APPELLANT AND IN NOT PROVIDING AN APPROPRIATE ADJUSTMENT TOWARDS THE RISK DIFFERENTIAL, EVEN WHEN FULL FLEDGED ENTREPRENEURIAL COMPANIES ARE SELECTED AS COMPARABLES; AND IN NOT GRANTING THE BENEFIT OF 5% RANGE UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT. 18. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT GROUND NOS. 4(I) AND 4(III) ARE NOT BEING PRESSED B Y HIM. HENCE THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 19. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US A CHART CONTAINING 16 COMPARABLE COMPANIE S WHICH ARE AS FOLLOWS: 12 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= SL. NO. NAME OF COMPARABLE COMPANY OP/TC AS PER CIT(A) (POST WC ADJ) (%) OP/TC AS PER ASSESSEE (POST WC ADJ) (%) 1. LANCO GLOBAL SYSTEMS LTD. 10.25 10.25 2. SASKEN COMMUNICATION TECH. LTD. 14.03 14.03 3. VISUALSOFT TECHNOLOGIES 20.95 20.95 4. BODHTREE CONSULTING LTD. 23.23 23.23 5. SANKHYA INFOTECH LTD. 22.01 22.01 6. GEOMETRIC SOFTWARE LTD. 18.57 18.57 7. RS SOFTWARE (I) LTD. 7.50 7.50 8. SASKEN NETWORKS LTD. 14.81 14.81 9. L&T INFOTECH LTD. 9.29 9.29 10. IGATE GLOBAL SERVICES LTD. 2.55 2.55 11. THIRDWARE SOLUTIONS LTD. 65.29 7 12. EXENSYS SOFTWARE SOLUTIONS LTD. 64.14 7 13. INFOSYS TECHNOLOGIES LTD. 42.03 7 14. FLEXTRONICS SOFTWARE SYSTEMS LTD. 30.38 7 15. TATA ELXSI LTD. 23.66 7 16. FOUR SOFT LTD. 22.22 7 ARITHMETIC MEAN MARGIN OF COMPARABLES 24.43 14.32 ASSESSEE'S MARGIN 13.63 20. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ITEM NO. 11 - THIRDWARE SOLUTIONS LTD., ITEM N O. 12 - EXENSYS SOFTWARE SOLUTIONS LTD., ITEM NO. 13 INFO SYS TECHNOLOGIES, ITEM NO. 14 FLEXTRONICS SOFTWARE SY STEMS LTD. AND ITEM NO. 16 FOUR SOFT LTD., HAVE TO BE R EJECTED BASED ON THE DECISION IN THE CASE OF INTOTO SOFTWA RE LTD. PVT. LTD. (ITA NO. 1196-97/HYD/2010 & 2102/HYD/2010 ). THE LEARNED COUNSEL FOR THE ASSESSEE ALSO STATED TH AT ITEM NO. 15 TATA ELXSI LTD. IS TO BE REJECTED BASED ON THE DECISION IN THE CASE OF CONNEXANT SYSTEMS INDIA PVT . LTD. VS. ITO (ITA NO. 1429/HYD/2010) (HYD). 21. THE LEARNED DR HAD OBJECTED TO THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE. WE HAVE HEAR D BOTH THE PARTIES. 22. THE CO-ORDINATE BENCH IN THE CASE OF INTOTO SOFTWARE SERVICES PVT. LTD. VS. ACIT IN ITA NO. 119 6/HYD/ 2010 & ORS. DATED 24.5.2013, HELD AS FOLLOWS: 13 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= 'EXENSYS SOFTWARE SOLUTIONS LIMITED : AS REGARDS THIS COMPANY, THE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE OPERATING PROFIT BY OPERATING COST OF THIS COMPANY IS 70.68%. HE SUBMITTED THAT THOUGH THE ASSESSEE HAS NOT OBJECTED TO THE ADOPTION OF THIS COMPANY AS COMPARABLE BEFORE THE TPO, IT HAS COME TO ITS KNOWLEDGE SUBSEQUENTLY THAT THERE IS AN EXTRAORDINARY EVENT IN THE COMPANY WHICH HAS EFFECTED THE MARGINS OF THE COMPANY FOR THE RELEVANT ASSESSMENT YEAR. HE SUBMITTED THAT DURING THE RELEVANT PREVIOUS YEAR, THE EXENSYS SOFTWARE LIMITED WAS AMALGAMATED WITH ANOTHER COMPANY BY NAME HOLOOL INDIA LIMITED AND THE OPERATING MARGIN OF 70.68% IS THE COMBINED RESULT OF THE AMALGAMATED COMPANY. THUS, ACCORDING TO HIM, THE DATA COLLECTED BY THE TPO IS NOT RELIABLE AND THEREFORE, THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. FOR THIS PURPOSE, HE HAS DRAWN OUR ATTENTION TO PAGES 526 TO 529 OF THE PAPER BOOK FILED ALONG WITH THE CHART WHEREIN WHILE GIVING INFORMATION TO THE TPO UNDER SECTION 133(6) OF THE I.T. ACT, EXENSYS SOFTWARE LIMITED HAS CLEARLY MENTIONED THAT HOLOOL INDIA LIMITED AND EXENSYS SOFTWARE LIMITED GOT AMALGAMATED W.E.F. 1.4.2004 AND ACCORDINGLY THE FINANCIAL STATEMENTS AS ON 31.3.2004 HAD BEEN COMBINED AND ACCOUNTS FOR THE FINANCIAL YEAR 2004-2005 HAD BEEN MAINTAINED AS ONE ENTITY I.E., EXENSYS SOFTWARE SOLUTIONS LIMITED. IT IS ALSO MENTIONED IN THE SAID COMMUNICATION THAT BY VIRTUE OF THE MERGER, THERE IS A GAP IN EXPENDITURE EXPECTED TO INCUR AND ACTUAL EXPENDITURE INCURRED, WHICH MAY HAVE RESULTED IN HIGH OPERATING MARGIN ON COST. THUS, ACCORDING TO HIM, THIS COMPANY IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE LEARNED DR, ON THE OTHER HAND, HAS SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE HAD NOT OBJECTED TO THE ADOPTION OF THIS COMPANY VIZ., EXENSYS SOFTWARE SOLUTIONS LIMITED BEFORE THE 14 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= TPO NOR HAS RAISED ANY GROUND OF APPEAL BEFORE THE CIT(A) ON THE ADOPTION OF THIS COMPANY. HE SUBMITTED THAT THE ASSESSEE SHOULD THEREFORE, BE PRECLUDED FROM RAISING SUCH OBJECTION AT THIS STAGE BEFORE US. HAVING HEARD BOTH PARTIES AND HAVING CONSIDERED THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THERE IS NO DISPUTE THAT THE ASSESSEE HAS ACCEPTED THE EXENSYS SOFTWARE SOLUTIONS LIMITED AS ONE OF THE COMPARABLE COMPANIES WHEN PROPOSED BY THE TPO. HOWEVER, THE FACT THAT THERE IS AN AMALGAMATION OF TWO COMPANIES I.E., EXENSYS SOFTWARE LIMITED AND HOLOOL INDIA LIMITED, THE RESULTS OF WHICH, HAS RESULTED IN HIGH OPERATING MARGIN CANNOT BE LOST SIGHT FOR. IT HAS BEEN HELD IN MANY CASES BY THIS TRIBUNAL AS WELL AS THE HIGHER FORUMS THAT TO COMPARE A COMPANY WITH ANOTHER COMPANY, BOTH THE COMPANIES HAVE TO BE BROUGHT ON PAR WITH EACH OTHER AFTER MAKING THE NECESSARY ADJUSTMENTS WHEREVER NECESSARY AND POSSIBLE. HOWEVER, WHERE THERE ARE EXTRAORDINARY EVENTS SUCH AS THIS, THEN THOSE EVENTS HAVE TO BE TAKEN NOTE OF AND WHERE NO ADJUSTMENT CAN BE MADE ON ACCOUNT OF THIS EXTRAORDINARY EVENT, THEN SUCH COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. THE OBJECTIONS TO THIS COMPANY BY THE ASSESSEE ARE MADE FOR THE FIRST TIME BEFORE THE TRIBUNAL. THE TRIBUNAL BEING THE FINAL FACT FINDING AUTHORITY IS BOUND TO TAKE NOTE OF THE OBJECTIONS OF THE ASSESSEE. AS THE MATERIAL RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE CLEARLY DENOTES THAT THERE IS AN EXTRAORDINARY EVENT WHICH HAS RESULTED IN THE HIGH OPERATING MARGIN OF THE COMPANY, WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER/TPO FOR RECONSIDERATION. IF IT IS FOUND THAT THERE IS AN AMALGAMATION OF EXENSYS SOFTWARE LIMITED AND HOLOOL INDIA LIMITED AND FORMED AS ONE ENTITY VIZ., EXENSYS SOFTWARE SOLUTIONS LIMITED. DURING THE RELEVANT PREVIOUS YEAR AND THE FINANCIAL RESULT IS THE COMBINED RESULT OF THESE TWO COMPANIES, THEN, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 15 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= INFOSYS TECHNOLOGIES LIMITED : ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE THE OPERATING MARGIN OF THIS COMPANY IS 42.83% AND IS A GIANT COMPANY WHICH IS INTO DIVERSIFIED ACTIVITIES OF SOFTWARE DEVELOPMENT. HE SUBMITTED THAT INFOSYS TECHNOLOGIES LIMITED IS NOT ONLY A GIANT COMPANY BUT IS ALSO INTO DEVELOPMENT OF NICHE PRODUCTS AND THEREFORE, CANNOT BE TAKEN AS COMPARABLE TO ANY OTHER SOFTWARE COMPANY, PARTICULARLY, A SMALL COMPANY LIKE THE ASSESSEE. HE RELIED UPON THE DECISIONS OF THE TRIBUNAL IN THE CASE OF PATNY TELECOM SOLUTIONS PVT. LTD. ITA. NO. 1846/HYD/2012, DELOITTE CONSULTING INDIA PVT. LTD. VS. DCIT ITA.1082/HYD/2010, AD- INDIA TECHNOLOGIES PVT. LTD. ITA.3856/DEL/2010 WHEREIN INFOSYS TECHNOLOGIES LTD. HAS BEEN DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT INFOSYS TECHNOLOGIES LTD., THOUGH, IS INTO THE SIMILAR BUSINESS OF THE ASSESSEE AS SOFTWARE DEVELOPMENT, CANNOT BE CONSIDERED AS A COMPARABLE TO ANY OTHER COMPANIES WHICH ARE ALSO INVOLVED IN SIMILAR ACTIVITIES. IT IS NOT ONLY A GIANT COMPANY BUT IS ALSO ENGAGED IN DEVELOPMENT OF VARIOUS NICHE PRODUCTS. IT CANNOT BE COMPARED TO THE ASSESSEE IN ANY MANNER. SIMILAR DIRECTIONS HAVE BEEN GIVEN BY THE TRIBUNAL AT DELHI AND HYDERABAD BENCHES IN THE CASES CITED (SUPRA). THE OTHER COMPANIES WHICH ARE OBJECTED TO BY THE ASSESSEE ARE FLEXTRONICS SOFTWARE LIMITED, FOURSOFT LIMITED AND THIRDWARE SOFTWARE SOLUTION LIMITED . AS FAR AS THESE THREE COMPANIES ARE CONCERNED, THE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THEY ARE INTO BOTH SOFTWARE AS WELL AS PRODUCT DEVELOPMENT. HE SUBMITTED THAT THE TPO HAS TAKEN NOTE OF THE FACT THESE COMPANIES ARE ALSO INTO PRODUCT DEVELOPMENT 16 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= 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 HAS ADOPTED THE FIGURE AS SEGMENTAL MARGIN OF THE COMPANY AND HAS TAKEN THESE COMPANIES AS COMPARABLES. HE SUBMITTED THAT BY TAKING THE PROPORTIONATE EXPENDITURE, THE CORRECT FINANCIAL RESULTS WOULD NOT EMERGE. HE SUBMITTED THAT NOTHING PREVENTED THE ASSESSING OFFICER/TPO FROM OBTAINING THE SEGMENTAL DETAILS FROM THE RESPECTIVE COMPARABLE COMPANIES BEFORE ADOPTING THEM AS COMPARABLE COMPANIES AND BEFORE TAKING THE OPERATING MARGIN FOR ARRIVING AT THE ARMS LENGTH PRICE. HE SUBMITTED THAT WHEREVER THE SEGMENTAL DETAILS ARE NOT AVAILABLE, THEN THE SAID COMPANIES SHOULD NOT BE TAKEN AS COMPARABLES. FOR THIS PURPOSE, HE PLACED RELIANCE UPON THE DECISION OF THE BANGALORE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. VS. THE DCIT IN ITA.NO.1252/BANG/2010 WHEREIN THESE COMPANIES WERE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. HAVING HEARD BOTH THE PARTIES AND HAVING GONE THROUGH THE MATERIAL ON RECORD, WE FIND THAT THE TPO AT PAGE 37 OF HIS ORDER HAS BROUGHT 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 17 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= WHICH ARE INTO BOTH THE PRODUCT DEVELOPMENT AS WELL AS SOFTWARE DEVELOPMENT SERVICE PROVIDER AS COMPARABLES UNLESS THE SEGMENTAL DETAILS ARE AVAILABLE. EVEN IF HE HAS ADOPTED THE FILTER OF MORE THAN 75% OF THE REVENUE FROM THE SOFTWARE SERVICES FOR SELECTING A COMPARABLE COMPANY, HE OUGHT TO HAVE TAKEN THE SEGMENTAL RESULTS OF THE SOFTWARE SERVICES ONLY. THE PERCENTAGE OF EXPENDITURE TOWARDS THE DEVELOPMENT OF SOFTWARE PRODUCTS MAY DIFFER FROM COMPANY TO COMPANY AND ALSO 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 HAS EXERCISED THIS POWER TO CALL FOR DETAILS WITH REGARD TO THE VARIOUS COMPANIES. AS SEEN FROM THE ANNUAL REPORT OF FOURSOFT LIMITED WHICH IS REPRODUCED AT PAGE 7 OF THE TPOS ORDER, THE SAID COMPANY HAS DERIVED INCOME FROM SOFTWARE LICENCE ALSO AND AMCS.' 23. THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO. 1429/HYD/2010 & ANR. DATED 22.3.2013 HELD A S FOLLOWS: '22. TATA ELXSI LIMITED . OBJECTING TO THE AFORESAID COMPANY AS COMPARABLES, THE LEARNED AR SUBMITTED THAT AS PER THE INFORMATION OBTAINED UNDER SECTION 133(6) OF THE ACT FROM THE AFORESAID COMPANY, THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY TATA ELXSI CAN BE BROADLY CATEGORISED AS UNDER: A) PRODUCT DEVELOPMENT SERVICES B) INNOVATION DESIGN ENGINEERING C) VISUAL COMPUTING LABS IT WAS SUBMITTED THAT THIS COMPANY BEING FUNCTIONALLY DIFFERENT, IT CANNOT BE TREATED AS COMPARABLES. THE LEARNED AR REFERRING TO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA P. LTD. VS. ACIT (ITA NO. 7821/MUM/11 DATED 11-5-2012 18 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= SUBMITTED THAT THE MUMBAI BENCH IN THE AFORESAID DECISION HAS ALSO HELD THAT TATA ELXSI IS ENGAGED IN SOFTWARE PRODUCT DEVELOPMENT. 23. THE LEARNED OR COUNTERING THE SUBMISSIONS OF THE LEARNED AR SUBMITTED THAT THE TPO HAS TAKEN THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT OF THE COMPANY AS A COMPARABLE. IT WAS FURTHER SUBMITTED THAT THOUGH THE ASSESSEE HAS OBJECTED TO TATA ELXSI BEING TREATED AS A COMPARABLE ON THE GROUND OF DIFFERENCE IN HORIZONTAL, THE ASSESSEE ITSELF HAS ALSO SELECTED COMPARABLES WHICH ARE ENGAGED IN HORIZONTAL WHICH IS COMPLETELY DIFFERENT FROM THAT OF THE ASSESSEE. 24. THE LEARNED AR IN HIS REJOINDER SUBMITTED THAT THE MATERIAL AVAILABLE ON RECORD OF THE TPO CLEARLY INDICATE THE FACT THAT TATA ELXSI IS FUNCTIONALLY DIFFERENT AS ITS SOFTWARE DEVELOPMENT SEGMENT INCLUDES MANY NON COMPARABLE ACTIVITIES SUCH AS HARDWARE DESIGN, INDUSTRIAL DESIGN AND ENGINEERING AND VISUAL COMPUTING WHICH ARE NOT COMPARABLE TO THE ACTIVITY CARRIED ON BY THE ASSESSEE. 25. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES WITH REGARD TO THE AFORESAID COMPANY. FROM THE FACTS AND MATERIALS ON RECORD AS WELL AS THE OBSERVATION MADE BY THE ITAT MUMBAI BENCH IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA P. LTD. (SUPRA) AT PARAGRAPH 7.7 OF THE ORDER IT IS APPARENT AND OBVIOUS THAT TATA ELXSI IS SEGMENTALLY DIFFERENT FROM THE ASSESSEE. WHILE TATA ELXSI HAS DIVERSIFIED ACTIVITIES, THE ASSESSEE IS PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER. HENCE, IT CANNOT BE TREATED AS A COMPARABLE AND SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES.' 24. RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF INTOTO SOFTWARE SERVICES PVT. LTD. (SUPRA) AND M/S. CONEXANT SYSTEMS PVT. LTD. (SUPRA) , WE HAVE TO EXCLUDE THE COMPARABLES AT SL. NOS. 11 TO 1 6, AS 19 ITA NO. 1160/HYD/2011 M/S. CONEXANT SYSTEMS PVT. LTD. ========================= THE FACTS OF THE CASE ARE SIMILAR TO THE ABOVE CASE S AND THE TPO SELECTED THE SAME COMPARABLE COMPANIES IN THOSE CASES ALSO. WE DIRECT THE ASSESSING OFFICER TO REW ORK OUT THE ALP ON THE REMAINING COMPARABLES IN THE LIST AN D MAKE ADJUSTMENT, IF ANY. THE ISSUE OF RISK ADJUSTM ENT MAY BECOME ACADEMIC AS WE WERE INFORMED THAT THE AL P SO DETERMINED WILL BE WITHIN THE RANGE OF PLI OF AS SESSEE COMPANY (13.63%). 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 25 TH JULY, 2014 SD/ - (B. RAMAKOTAIAH) ACCOUNTANT MEMBER SD/ - (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER HYDERABAD, DATED THE 25 TH JULY, 2014 TPRAO COPY TO: 1. M/S. CONEXANT SYSTEMS PVT. LTD. (PREVIOUSLY CONEXANT SYSTEMS INDIA PVT. LTD.), 5 TH FLOOR, PIONEER TOWERS, PLOT NO. 16, SURVEY NO. 64/2, SOFTWARE UNIT LAYOUT, MADHAPUR, HYDERABAD-500 081. 2. THE INCOME TAX OFFICER, WARD - 1(2), HYDERABAD. 3. THE CIT(A) - III, HYDERABAD. 4. THE CIT (TRANSFER PRICING), HYDERABAD. 5. THE DR, B - BENCH, ITAT, HYDERABAD.