Invensys Development Centre (India) P. Ltd, Hyderabad V. The ACIT Rang-2, Hyderabad

ITA 1256/HYD/2010

• Counselvise Citation: 125622514 RSA 2010
• Duration Of Justice: 3 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 11-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 28-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARITHA
• Keywords: Transfer pricing; Retrospective amendment; Revenue expenditure
• Section: 133(6); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1256/HYD/2010 ASSESSMENT YEAR 2005-2006 INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LTD. HYDERABAD. PAN AABCI-1140F VS. THE ADDL. CIT HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. KC DEVDAS FOR REVENUE : MS. HARITHA DATE OF HEARING : 10.01.2014 DATE OF PRONOUNCEMENT : 28.02.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A)-III, HYDERABAD DATED 14.07.2010. ASSESSE E HAS RAISED 11 GROUNDS, OUT OF WHICH, GROUND NOS. 1 TO 4 HAVE NOT BEEN PRESSED. ACCORDINGLY, THEY ARE TREATED AS WITH DRAWN. 2. GROUND NO.5 PERTAIN TO USE OF THE ADDITIONAL FI LTERS IN SELECTION OF COMPARABLES AND GROUND NOS. 6 TO 8 PERTAIN TO SELECTION OF COMPARABLES BY TPO / REJECTION OF COMP ARABLES SUGGESTED BY THE COMPANY. GROUND NO. 9 IS WITH REFE RENCE TO THE ISSUE OF EXCLUDING DEFERRED REVENUE EXPENSES. G ROUND NO.10 REFERS TO RISK ALLOWANCE CLAIM. GROUND NO. 1 1 PERTAINS TO VARIATION OF 5% IN DETERMINING THE ARMS LENGTH P RICE (IN SHORT ALP). 2 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD 3. BRIEFLY STATED, ASSESSEE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SER VICES AND PROVIDING QUALITY ASSURANCE AND SUPPORT SERVICES. I T IS A SUBSIDIARY OF INCLUSIVE INTERNATIONAL HOLDINGS LTD. UK. FOR THE A.Y. 2005-06 IT HAS FILED RETURN OF INCOME ON 30.10 .2005 SHOWING INCOME OF RS.1,17,27,690/- AFTER SET OFF OF BROUGHT FORWARD LOSSES. SINCE ASSESSEE HAD INTERNATIONAL TR ANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (IN SHORT AE) FOR DETERMINING THE ALP, THE A.O. MADE A REFERENCE UNDER SECTION 92 CA(1) OF THE ACT TO THE ACIT (TRANSFER PRICING) / TPO. IN RE SPONSE TO THIS, AFTER VERIFYING THE DETAILS FURNISHED BY THE ASSESSEE AND CONDUCTING ENQUIRIES, THE TPO PASSED AN ORDER DATED 28.03.2008 UNDER SECTION 92CA(3) ADOPTING TNMM AS T HE MOST APPROPRIATE METHOD AND DETERMINED THE ALP OF THE TRANSACTIONS ARISING FROM SOFTWARE DEVELOPMENT SERV ICES TO ITS AES AT RS.29,79,42,116/- AS AGAINST RS.27,55,22,944 /- SHOWN BY THE ASSESSEE. IN CONFORMITY WITH SUCH ORDER PASS ED BY THE TPO, THE A.O. ADOPTED THE ALP AND MADE THE DIFFEREN CE OF RS.2,24,19,172/- AS ADJUSTMENT TO THE RETURNED INCO ME. BEING AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE THE CIT (A) AND RAISED 8 GROUNDS. LEARNED CIT(A) MORE OR LESS REJEC TED ALL THE GROUNDS AND ACCEPTED ONLY ONE COMPANY AS NOT COMPAR ABLE AND DIRECTED THE TPO TO RE-DETERMINE THE ADJUSTMENT S. 4. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND ALSO LEARNED D.R. IN DETAIL. LD. COUNSEL PLACED ON RECORD A PAPER BOOK CONTAINING ABOUT 618 PAGES AND WORK SHEE TS. IN THE COURSE OF ARGUMENTS, LD. COUNSEL FOCUSED HIS AR GUMENTS TO THE SELECTION OF COMPARABLES BY THE TPO AND RISK ADJUSTMENT TO BE GIVEN TO THE ASSESSEE. 3 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD 5. THE LEARNED D.R. HOWEVER, ARGUED IN DETAIL ABOU T THE SELECTION OF VARIOUS COMPARABLES BY THE TPO AND ALSO PLACED ON RECORD WRITTEN SUBMISSIONS ON THE ISSUE. AFTER CONSIDERING THE VARIOUS CONTENTIONS, WE DECIDE THE ISSUE AS UNDER. 5.1. IN THE TRANSFER PRICING ORDER, THE TPO HAS AN ALYSED VARIOUS ISSUES IN DETAIL, WORKED OUT THE OPERATING MARGINS OF VARIOUS SELECTED COMPANIES AND IDENTIFIED 17 COMPAR ABLES WHOSE ARITHMETIC MEAN OF OPERATING PROFITS TO TOTAL COST WAS ARRIVED AT 26.59%. AFTER ALLOWING WORKING CAPITAL A DJUSTMENT OF 2.33%, THE ARITHMETIC MEAN OF THE PLI WAS ARRIVED A T 24.26%. ON OPERATING COST OF RS.23.97 CRORES, ARMS LENGTH P RICE OF OPERATING COST WAS ARRIVED AT RS.29,79,42,116/- AND THE SHORT- FALL WAS ARRIVED AT RS.2.24 CRORES. AS BRIEFLY STAT ED ABOVE, LD. CIT(A), HOWEVER, DELETED ONE COMPANY SATYAM TECHNO LOGIES AS NOT COMPARABLE AND ASSESSEE GOT RELIEF TO THAT E XTENT. THE FINAL LIST OF 16 CASES SELECTED AFTER THE ORDER OF THE CIT(A) ARE AS UNDER : S.NO. NAME OF THE COMPANY TP ORDER (WC ADJUSTED) 1. IGATE GLOBAL SOLUTIONS LTD. 2.11% 2. FLEXTRONICS (SEG.) 30.02% 3. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. 18.18% 4. LANCO GLOBAL SYSTEMS LTD. 9.84% 5. LARSEN & TOUBRO INFOTECH LTD. 8.87% 6. R S SOFTWARE (INDIA) LTD. 7.07% 7. SASKEN COMMUNICATION TECHN LTD. (SEG) 13.62% 8. SASKEN NETWORK SYSTEMS LTD. 14.41% 9. VISUALSOFT TECHNOLOGIES LTD. (SEG. 20.57% 10. BODHTREE CONSULTING LTD. 22.85% 11. EXENSYS SOFTWARE SOLUTIONS LTD. 63.89% 12. FOUR SOFT LIMITED 21.84% 4 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD 13. INFOSYS TECHNOLOGIES LTD. 41.71% 14. SANKHYA INFOTECH LTD. 21.63% 15. THIRDWARE SOLUTION LTD. 65.03% 16. TATA ELXSI LTD. (SEG.) 23.28% 5.2. OUT OF THE ABOVE COMPARABLES, ASSESSEE IS NOT OBJECTING TO THE COMPARABLES SELECTED BY TPO FROM I TEM 1 TO 9. THEREFORE, THERE IS NO DISPUTE WITH REFERENCE TO TH E COMPARABLES OF THE ABOVE 9 COMPANIES. THE DISPUTE A RISES FROM THE BALANCE OF 7 COMPANIES FROM SL. NO. 10 TO 16. ASSESSEE IS ALSO OBJECTING TO THE REJECTION OF TWO COMPARABLE COMPANIES ONE BIRLA TECHNOLOGIES LTD. AND OTHER VJI L CONSULTING LTD. WHICH THE TPO REJECTED ON THE REASO N THAT PERSISTENT LOSS MAKING/FUNCTIONALLY DIFFERENT. AS F AR AS THE SELECTION OF COMPARABLES ARE CONCERNED, THE ASSESSE ES OBJECTIONS AND REASONING GIVEN ARE CONSIDERED AS AS UNDER : 1. BODHTREE CONSULTING LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHOULD BE REJECTED UNDER THE FOLLOWING TPOS FILTER S: RELATED PARTLY TRANSACTIONS FILTER: AS PER SCHEDULE 4 OF THE BALANCE SHEET, THE COMPANY HAS INVESTMENTS IN PERIGON, LIC, USA AND AS PER THE RESPONSE U/S 133(6); THE COMPANY HAS EXPORT SALES TO PERIGON LIC, USA OF RS. 133.90 LAKHS, BEING 34.68% OF THE TOTAL TURNOVER. FUNCTIONALLY DIFFERENT FILTER: THE COMPANY IN ITS RESPONSE TO NOTICE U/S 133(6) HAS STATED THAT IT PROVIDES E-PAPER SOLUTIONS, DATA CLEANSING SOFTWARE, WEBSITE DEVELOPMENT AND OTHER CUSTOMIZED SOFTWARE AND ALSO STATE THAT THE E- PAPER SOLUTIONS AND DATA CLEANSING SERVICES WOULD COME UNDER THE CATEGORY OF IT ENABLED SERVICES. 5 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD 2. EXENSYS SOFTWARE SOLUTIONS LTD., THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHOULD BE REJECTED UNDER THE FOLLOWING TPO S FILTERS: A) FUNCTIONALLY DIFFERENT: THE COMPANY IS A SOFTWARE PRODUCT AND ITES COMPANY. THE COMPANY OWNS SIGNIFICANT BRAND INTANGIBLES (ALMOST 60% OF ITS NET BLOCK OF ASSETS), UNLIKE THE APPELLANT, WHICH IS A CONTRACT CAPTIVE SERVICES PROVIDER. FURTHER, VARIOUS DISCLOSURES ON THE SITE OF THE COMPANY ALSO INDICATE THAT IT IS INTO PRODUCT DEVELOPMENT. B) EXCEPTIONAL YEAR OF OPERATIONS: THERE WAS AMALGAMATION OF THE COMPANY WITH HOLOOL INDIA LTD. WITH RETROSPECTIVE EFFECT FROM APRIL 01, 2004, WHICH HAD A MATERIAL/SIGNIFICANT IMPACT ON THE RESULTS OF THE COMPANY FOR FINANCIAL YEAR ENDED MARCH 31, 2005 AND CONFIRMED BY THE COMPANY IN ITS RESPONSE TO 133(6) NOTICE. C) ERROR IN MARGIN COMPUTATION: THE LD TPO HAS EXCLUDED THE DEFERRED REVENUE EXPENDITURE WHILE COMPUTING THE NET MARGIN OF THE COMPANY. IF THE SAME IS INCLUDED, THE NET MARGIN OF THE COMPANY WOULD BE 32.68%. IT WAS SUBMITTED THAT THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED THIS COMPANY AS IT HAS SOFTWA RE PRODUCTS AND HELD AS NOT COMPARABLE TO A SERVICE PROVIDER: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2010) - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (ITA NO. 609/DEL/2011) 6 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD - INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD. VS. DCIT (ITA NO. 27/JP/2011) - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) 3. FOURSOFT LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS EVIDENT FROM VARIOUS DISCLOSURES IN THE ANNUAL REPORT (DIRECTORS REPORT, MANAGEMENT DISCUSSION AND WEBSITE INFORMATION) INDICATES CLEARLY THAT THE COMPANY IS INTO SOFTWARE PRODUCTS. THE FOLLOWING RULINGS HAVE ANALY SED AND REJECTED THIS COMPANY AS IT HAS DERIVED INCOME FROM SOFTWARE LICENSE AND AMCS: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2010) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) 4. INFOSYS TECHNOLOGIES LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES INCLUD ING PRODUCTS, CONSULTANCY & SOLUTIONS AND THIS COMPANY COMMANDS A PREMIUM IN THE PRICING OF ITS PRODUCTS A ND SERVICES DUE TO ITS GOODWILL, REPUTATION AND BRAND VALUE. FURTHER DUE TO SCALE OF OPERATIONS, INFOSYS ENJOYS ECONOMIES OF SCALE, WHICH RESULTS IN LOWER COST OF INFRASTRUCTURAL FACILITIES AND OVERHEADS. FURTHER, HE SUBMITTED THAT THE ISSUE OF COMPARABILITY OF INFOSYS TO A SMALL CAPTIVE SERVICE 7 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD PROVIDER IS NO LONGER RES-INTEGRA. THE FOLLOWING CA SES HAVE SPECIFICALLY ANLAYSED IN DETAIL THE COMPARABIL ITY OF INFOSYS ON VARIOUS PARAMETERS TO A SIMILAR SIZE SOF TWARE SERVICE PROVIDER AND REJECTED IT: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2010) - VIRTUSA INDIA PVT. LTD. VS. DCIT (ITA NO. 1962/H/2010) - PATNI TELECOM SOLUTIONS PVT. LTD. VS. ACIT (ITA NO. 1846/HYD/2012) - ADAPTEE (INDIA) PVT. LTD. VS. DCIT (ITA NO. 1801/HYD/2009) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) - TRILOGY E BUSINESS SERVICES SOFTWARE LTD. VS. DCIT (ITA NO. 1054/BANG/2011 PARA 20) - TELCORDIA TECHNOLOGIES INDIA P LTD. (ITA NO. 7821/MUM/2011 PARA 7.4) - CORDYS SOFTWARE INDIA PVT. LTD. VS. ACIT (ITA NO. 1972/H/2011) - AGNITY INDIA TECHNOLOGIES VS. ITO (ITA NO. 3856/DEL/2010) - AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. ITO (HIGH COURT DECISION ITA 1204/2011) 5. SANKHYA INFOTECH LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS EVIDENT FROM T HE FOLLOWING: 8 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD VARIOUS DISCLOSURES IN THE ANNUAL REPORT AND RESPONSE TO 133(6) NOTICE INDICATES CLEARLY THAT THE COMPANY IS INTO SOFTWARE PRODUCTS (SERVICES ARE SUPPLEMENTARY TO PRODUCTS LICENSING) THE TP OFFICE HAS IN SUBSEQUENT YEAR REJECTED THIS COMPANY AS COMPARABLE RELYING ON THE SAME 133(6) RESPONSE. THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED TH IS COMPANY AS IT HAS SOFTWARE PRODUCTS : - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (ITA NO. 609/DEL/2011) - INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD. VS. DCIT (ITA NO. 27/JP/2011) - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) 6. THIRDWARE SOLUTIONS LTD.: LD. COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FOR THE FOLLOWING REASONS: AS PER REPLY TO NOTICE ISSUED U/S 133(6), THE COMPANY INFORMED THAT IT IS ENGAGED IN IMPLEMENTATION AND CUSTOMER SERVICES WHICH INCLUDE TRAINING, CUSTOMIZED DEVELOPMENT AND HELP DESK SERVICES FOR ERP SOFTWARE AND DISTRIBUTION OF PRODUCTS OF QUAD INC. AND HYPERION SOLUTIONS CORPORATION. VARIOUS NEWS ARTICLES AVAILABLE ON THE INTERNET HTTP://WWW.HINDUONNET.COM/2001/07/11/STORI 9 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD ES/0611000H.HTMSTATED THAT THE COMPANY IS A DISTRIBUTOR OF PRODUCTS; AS PER THE COMPANYS WEBSITE WWW.THIRDWARE.NET/ OURCAPABILITIES.HTM. HAS STATED THE COMPANY HAS PARTNERED WITH QAD INC TO DELIVER THE ENTIRE BUSINESS CYCLE OF MGF/PRO, A PRODUCT OF QAD INC. FROM PRE- SALES, SALES, TRAINING, CONSULTING, IMPLEMENTATION AND SUPPORT TO APPLICATION MANAGEMENT SERVICES. THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED THIS COMPANY AS IT IS INTO TRADING OF SOFTWARE LICENSES: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2010) - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (ITA NO. 609/DEL/2011) - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) - E-GAIN COMMUNICATIONS (P) LTD. VS. ITO, 23 SOT 385. 7. TATA ELXSI LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHALL BE REJECTED AS COMPARABLE SINCE IT IS A SPECIALIZED EMBEDDED SOFTWARE DEVELOPMENT COMPANY AND THIS COMPANY HAS IN FACT CLEARLY STATED IN ITS RESPONSE TO 133(6) NOTICE THAT DUE TO THE COMPLEX SEGMENTS IN WHICH THEY ARE OPERATING, IT IS NOT COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY. THE FOLLOWING RULINGS HAVE ANALYSED THIS COMPANY AND RELYING ON THE SAME 133(6) RESPONSE, 10 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD REJECTED IT AS A COMPARABLE TO SOFTWARE SERVICES PROVIDER: - CONEXANT SYSTEMS INDIA PVT. LTD. (ITA NO. 1429/HYD/2010 AND 1978/HYD/2011) - TELCORDIA TECHNOLOGIES INDIA P. LTD. (ITA NO. 7821/MUM/2011) - LOGICA PVT. LTD. (IT(TP)A NO. 1129/BANG/2011) 8. WITH REFERENCE TO THESE COMPANIES, THE LEARNED COUNSEL REFERRING TO REPLIES GIVEN TO AP/TP O IN RESPONSE TO THE NOTICES U/S 133(6) AND THEIR ANNUAL REPORTS, WHICH ARE AVAILABLE IN ITS PAPER BOOK, SUBMITTED THAT COMPANIES ARE FUNCTIONALLY DIFFERENT AND THE OPERATIONS ARE EXCEPTIONAL AS THERE WAS A MERGE R IN THE YEAR WITH ANOTHER COMPANY WHICH HAD A MATERIAL/SIGNIFICANT IMPACT ON THE PROFIT MARGINS AND FURTHER THE COMPUTATIONS ARE ALSO WRONG AS THE DEFE RRED REVENUE EXPENDITURE, WHICH WAS CLAIMED REGULARLY ON THE BASIS OF ACCOUNTING POLICY OF THE COMPANY, WAS EXCLUDED BY THE TPO IN ARRIVING AT A DIFFERENT HIGH ER PROFIT MARGIN, WHICH IS NOT CORRECT. 9. THE LEARNED DR, HOWEVER, REFERRED TO THE DETAILED ORDER BY THE AO AND TPO WITH REFERENCE TO THE COMPARABLES. 10. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE RECORD INCLUDING PAPER BOOKS PLACED ON RECORD. THERE IS A MERIT IN ASSESSEES CONTENTIONS ABOUT NO N- COMPARABILITY OF VARIOUS COMPARABLE COMPANIES SELEC TED BY THE TPO. 11 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD 11. AS REGARDS THE EXENSYS SOFTWARE SOLUTIONS LTD., AS SEEN FROM THE PAPER BOOK PLACED ON RECORD, THERE IS A MERGER OF HOLOOL INDIA LTD. AND IN THE DIRECTORS REPORT (PB-951), THERE IS A CLEAR MENTIO N THAT THE COMPANYS INCOME OF RS. 737.79 LAKHS IS POSSIBL E WITH THE AMALGAMQATION OF HOLOOL INDIA LTD. IT WAS FURTHER MENTIONED THAT ASSESSEE COMPANY HAS GOT BENEFIT BY ADVANCED LATEST TECHNICAL EXPERTISE ON VARIOUS TECHNOLOGY DOMAINS OF THE TRANSFEROR COMPAN Y. FURTHER, THAT COMPANY HAS CHARGED DEFERRED EXPENDITURE AND THE AMOUNT CLAIMED IN THIS YEAR IS RS. 1.22 CRORES AS AGAINST RS. 30.21 LAKHS IN EARLIER Y EAR. THIS WAS CLEARLY STATED IN NOTES THAT CLAIM WAS WIT H REFERENCE TO THE AS-14 AND ALSO DUE TO AMALGAMATION OF TWO COMPANIES. VIDE PAGE 957 OF PAPER BOOK, IT WAS SEEN THAT OUT OF GROSS ASSETS OF RS. 7.95 CRORES, B RANDS ALONE CONSIST OF RS. 5 CRORES, THEREFORE, INTANGIBL E ASSETS COMPRISING OF SUBSTANTIAL PART OF THIS COMPA NYS ASSETS. NOT ONLY IN THE CORRESPONDENCE WITH THE TP O THAT ASSESSEE EXPRESSED ITS INABILITY TO FURNISH SE PARATE ACCOUNTS FOR TWO AMALGAMATED COMPANIES BUT ALSO FURTHER IT HAS CLEARLY MENTIONED VIDE LETTER DATED 26-04- 2007 TO THE TPO THAT THERE IS A GAP IN THE EXPENDIT URE EXPECTED TO INCUR AND ACTUAL EXPENDITURE INCURRED WHICH MADE THE COMPANY RECORD HIGH OPERATING MARGIN ON COST. THESE FACTORS INDEED SUPPORT ASSESSEES CONTENTION THAT THIS EXCEPTIONAL PROFIT WITH THE FA CT OF AMALGAMATION EFFECTED OPERATING PROFIT OF THE COMPA NY AND THIS CANNOT BE TAKEN AS COMPARABLE. OTHER ISSUE S WERE ALSO ANALYSED AND ACCEPTED IN VARIOUS CASES AS 12 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD RELIED UPON BY THE LEARNED COUNSEL. IN THE CASE OF INTOTO SOFTWARE INDIA PVT. LTD.,(SUPRA) THIS COMPARABLE CA SE WAS ANALYSED AND HELD AS UNDER: 17. HAVING HEARD BOTH PARTIES AND HAVING CONSIDERED THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THERE IS NO DISPUTE THAT 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 I N 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 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 ASSESSEE. AS THE MATERIAL RELIED UPON BY THE LEARNED COUNSEL FOR 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 I S 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 YEA R 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 O F COMPARABLES. 13 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD 12. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT THERE IS AN EXTRA-ORDINARY EVENT WHICH RESULTE D IN HIGH OPERATING MARGIN OF THAT COMPANY AND WE, THEREFORE, DIRECT THE AO TO EXCLUDE THIS COMPANY FR OM THE LIST OF COMPARABLES. IN THE ABOVE REFERRED CAS E OF INTOTO SOFTWARE INDIA PVT. LTD., COMPLETE DETAILS W ERE NOT PLACED ON RECORD, THEREFORE, THE MATTER WAS SEN T TO AO FOR VERIFICATION WHEREAS IN THIS CASE ASSESSEE H AS OBJECTED EVEN BEFORE THE AO/ CIT(A), THEREFORE, THE RE IS NO NEED TO SET ASIDE THE ISSUE TO THE FILE OF THE A O FOR EXAMINATION AS WAS DONE IN THE CASE OF INTOTO SOFTWARE(SUPRA). WE ARE, THEREFORE, OF THE OPINION THAT ON THE BASIS OF FACTS PLACED ON RECORD, THE CASE OF EXENSYS SOFTWARE SOLUTIONS LTD. CANNOT BE TAKEN AS COMPARABLE. 13. SIMILARLY, THE OTHER CASES, FOUR SOFT LTD, INFOSYS,., SANKHYA INFOTECH LTD., THIRDWARE SOLUTIO NS LTD, TATA ELEXI (SEG) ETC, AS MENTIONED ABOVE, ARE ALSO TO BE EXCLUDED AS THEY ARE CONSIDERED AND ANALYSED IN VARIOUS CASES RELIED ON ABOUT FUNCTIONALITY AND WHY THE SAME ARE NOT COMPARABLE TO THE COMPANIES LIKE ASSESSEE. IN VIEW OF THIS, WE ARE NOT DISCUSSING OT HER COMPARABLES IN DETAIL, BUT, SUFFICE TO SAY THAT ASSESSEES SUBMISSIONS ARE VALID. THE AO IS DIRECTE D TO EXCLUDE THE ABOVE COMPARABLE AND RE-WORK OUT THE ARMS LENGTH MARGIN ACCORDINGLY. THE GROUND NO.7 RAISED BY ASSESSEE ARE CONSIDERED AS ALLOWED. 14 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD INCLUSION OF 2 COMPARABLES : BIRLA TECHNOLOGIES LTD. VJIL CONSULTING LIMITED 14. THE ASSESSEE IS REQUESTING FOR INCLUSION OF TH E ABOVE COMPANIES ON THE REASON THAT TPO ERRED IN NOT SELECTING THESE COMPANIES OF EXTRANEOUS REASONS STATING THAT BIRLA TECHNOLOGIES LIMITED WAS INCURRING PERSISTENT LOSSE S. IT WAS SUBMITTED THAT COMPANY HAS OPERATING PROFITS FOR TH E FINANCIAL YEAR 2005-06 AND REFERRED TO THE NET MARGINS COMPUT ATION AS PER ANNEXURE-5 FILED BEFORE THE CIT(A). FURTHER, WI TH REFERENCE TO THE VJIL CONSULTING LIMITED, IT WAS SUBMITTED TH AT PAYMENT OF VAT DOES NOT INDICATE THAT ASSESSEE IS ENGAGED I N SALE OF COMPUTER SOFTWARE AND UNLESS THE SAME ANALYSED, REJ ECTION OF THE COMPANY JUST BECAUSE IT PAID VAT ON SALES IS NO T CORRECT. 15. HAVING CONSIDERED THE ABOVE SUBMISSIONS, WE AR E OF THE OPINION THAT INCLUSION OR EXCLUSION OF THESE COMPANIES WOULD ONLY BE ACADEMIC IN NATURE AS EXCLUSION OF 7 COMPARABLES OUT OF THE 16 SELECTED BY THE TPO WOULD RESULT IN OP/TC AT 13.85% AGAINST ASSESSEES MARGIN OF 14.91% . THE ABOVE TWO COMPANIES AVERAGE PLI IS AT 4.19%. THEREF ORE, INCLUSION OF THE ABOVE TWO COMPANIES IF AT ALL WOUL D FURTHER REDUCE THE PLI. THEREFORE, WITHOUT GOING INTO THE C ONTENTIONS, WE ARE OF THE OPINION THAT EXCLUSION OF ABOVE 7 COM PANIES ITSELF WOULD MAKE THE ASSESSEES PLI AT ARMS LENGTH WHEN COMPARED TO THE AVERAGE MEAN OF THE BALANCE 9 COMPARABLES. I N VIEW OF THIS, WITHOUT CONSIDERING THE CONTENTION TO INCLUDE ASSESSEE COMPARABLES WHICH ARE ACADEMIC IN NATURE, WE DIRECT THE TPO TO RE-WORKOUT BY EXCLUDING THE ABOVE 7 COMPANIES. THE OTHER GROUNDS RAISED BY THE ASSESSEE ON TREATMENT OF DEFE RRED 15 ITA.NO.1256/HYD/2010 INVENSYS DEVELOPMENT CENTRE (INDIA) P. LTD. HYDERABAD REVENUE EXPENDITURE AND RISK ADJUSTMENT ALSO WOULD BECOME ACADEMIC IN NATURE, THEREFORE, THEY ARE NOT ADJUDIC ATED. THE TPO/AO ARE DIRECTED TO MODIFY THE ORDER ACCORDINGLY . ASSESSEES GROUNDS ARE ALLOWED. 16. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH FEBRUARY, 2014. SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMBER HYDERABAD, DATE 28 TH FEBRUARY, 2014 VBP/- COPY TO : 1. INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LTD. PLOT NO.17, ORION BUILDING, BLOCK-3, 2 ND FLOOR, I.T. PARK, SOFTWARE UNITS LAYOUT, MADHAPUR, HYDERABAD 500 081. 2. ADDL. CIT, RANGE-2, I.T. TOWERS, MASAB TANK, HYD ERABAD. 3. CIT-III, HYDERABAD 4. CIT-II, HYDERABAD 5. D.R. ITAT, A BENCH, HYDERABAD.