ADP Private Limited, Hyderabad V. DCIT, Hyderabad

ITA 1560/HYD/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98862 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-10-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 10-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VALLURI SRINIVAS
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary; Scheme of amalgamation
• Section: 143(3); 92B; 133(6); 10B; 263; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 1560/HYD/2010 ASSESSMENT YEAR: 2006-07 ADP PRIVATE LIMITED, HYDERABAD [PAN: AAACW2655C] VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : MS. SUVIBHA NOLKHA, AR FOR REVENUE : MR. VALLURI SRINIVAS, CIT - DR DATE OF HEARING : 19 - 10 - 2015 DATE OF PRONOUNCEMENT : 23 - 1 2 - 2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN ASSESSEES APPEAL AGAINST THE ORDERS OF ASSESSING OFFICER (AO) U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT [ACT] CONSEQUENT TO THE DIRECTIONS GIVEN BY DISPUTE RESOL UTION PANEL [DRP], HYDERABAD ON 30-09-2010. ASSESSEE HAS RAISE D AS MANY AS 21 GROUNDS. OUT OF WHICH, GROUND NOS. 1 TO 16 PERT AINS TO TRANSFER PRICING ISSUES, GROUND NOS. 17 TO 20 PERTA INS TO CORPORATE TAX MATTERS. GROUND NO. 21 IS ON THE INITIATION OF PENALTY I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 2 -: PROCEEDINGS U/S. 271(1)(C) OF THE ACT WHICH DOES NO T REQUIRE ANY ADJUDICATION. 2. WE HAVE HEARD LD. COUNSEL AND LD. CIT-DR AND PERUSED THE CHARTS, PAPER BOOKS AND OTHER DOCUMENTS PLACED ON RECORD. 3. ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF ADP, I NC USA AND WAS SET UP TO PROVIDE IT AND IT ENABLED SERVICE S TO THE ADP GROUP. DURING THE YEAR, COMPANY HAS PROVIDED SOFTWA RE DEVELOPMENT AND IT ENABLED SERVICES FROM ITS HYDERA BAD DIVISION AND DISTRIBUTION OF SOFTWARE FROM ITS MUMBAI DIVISI ON FOR AY. 2006- 07. ASSESSEE HAD FILED RETURN OF INCOME ON 28-11-2 006 DISCLOSING NET LOSS OF RS. 2,54,96,750/- AFTER CLAIMING OF DED UCTION U/S. 10A OF THE ACT. AS THERE ARE INTERNATIONAL TRANSACTION S WITH ITS ASSOCIATED ENTERPRISE (AE), THE AO REFERRED THE MAT TER TO THE TRANSFER PRICING OFFICER (TPO). ASSESSEE HAD INTERN ATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT S ERVICES OF RS. 77,98,59,542/- AND ITES OF RS. 41,99,24,368/- TOTAL ING TO RS. 1,19,97,83,910/-. HOWEVER, SINCE ASSESSEE HAD CERTA IN REIMBURSEMENT OF EXPENSES AND OTHER ALLOCATION OF E XPENSES, THE TPO DETERMINED THE TOTAL TRANSACTIONS AT RS. 1,47,3 0,68,444/-. ASSESSEE FILED ITS REPORT IN FORM NO. 3CEB AND JUST IFIED ITS PRICE AS ARMS LENGTH. TPO HOWEVER, MADE A FRESH SEARCH OF COMPARABLES AND DETERMINED THE ARMS LENGTH PRICE (ALP) SEPARAT ELY FOR SOFTWARE DEVELOPMENT SERVICES AND IT ENABLED SERVIC ES AND IN THE BARGAIN, PROPOSING AN ADDITION OF RS. 27,32,84,534/ -. ASSESSEE PREFERRED OBJECTIONS BEFORE THE DRP WHICH WERE CONS IDERED AND MORE OR LESS REJECTED IN ALL GROUNDS, EXCEPT MODIFY ING CERTAIN ADJUSTMENTS OF REIMBURSEMENTS, CONSIDERED IN GROUND NO. 10. I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 3 -: CONSEQUENTLY, AO PASSED THE IMPUGNED ASSESSMENT ORD ER. ASSESSEE IS AGGRIEVED AND RAISED VARIOUS GROUNDS. THESE ARE CONSIDERED AS UNDER. TRANSFER PRICING MATTERS: 4. AS FAR AS TP ISSUES ARE CONCERNED, AS ALREADY S TATED, ASSESSEE HAD TWO SEGMENTS OF OPERATIONS, SOFTWARE D EVELOPMENT SERVICES AND IT ENABLED SERVICES. GROUND NOS. 1, 2 , 3, 4, 5 & 6 PERTAINS TO GENERAL OBJECTIONS ON REJECTION OF ASSE SSEES TP STUDY, USE OF MULTIPLE YEAR DATA, OBJECTIONS ON USE OF INF ORMATION OBTAINED U/S. 133(6) AND ON ADDITIONAL FILTERS WHICH WERE NOT PRESSED IN THE COURSE OF ARGUMENTS. GROUND NO. 7 & 8 PERTAINING TO ADJUSTMENT MADE IN THE SOFTWARE DEVELOPMENT FOR EXCLUSION OF CERTAIN COMPARABLES SELECTED BY TPO AND INCLUSION O F CERTAIN COMPARABLE SELECTED BY ASSESSEE BUT OBJECTED BY TPO . GROUND NO. 9 PERTAINING TO WORKING OF CORRECT OPERATING MARGIN OF IGATE GLOBAL SOLUTIONS LIMITED WAS NOT PRESSED. GROUND NOS. 10 , 11 AND 14 PERTAIN TO IT ENABLED SERVICES. GROUND NOS. 12 & 1 3 ARE NOT PRESSED. GROUND NO. 15 PERTAINS TO ADJUSTMENT FOR RISK DIFFERENCES AND GROUND NO. 16 PERTAINS TO APPLICATION OF PROVIS O TO SECTION 92C(2). THESE ISSUES/MATTERS ARE CONSIDERED SEGMEN T-WISE. A. SOFTWARE DEVELOPMENT SERVICES: 5. THE TPO MADE FINAL LIST OF 20 COMPARABLES WITH ARITHMETIC MEAN OF OPERATING PROFIT AT 20.68 AND AF TER FACTORING WORKING CAPITAL ADJUSTMENT OF 1.93%, ARMS LENGTH M ARGIN WAS DETERMINED AT 118.75% OF COST, THEREBY MAKING ADJUS TMENT OF RS. 22,42,05,156/-. THE DRP HAS CONFIRMED THE SAME. A SSESSEE VIDE I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 4 -: GROUND NO. 7, REQUESTED FOR INCLUSION OF 7 COMPARAB LES AND IN THE REVISED GROUND NO. 8, REQUESTED FOR EXCLUSION OF 5 COMPARABLES. THE COMPANIES SELECTED BY THE TPO AS COMPARABLES AN D THE DETAILS OF EXCLUSION AND INCLUSION OF COMPARABLES RAISED IN GROUNDS ARE AS UNDER: SL. NO. NAME OF THE COMPANY TPO ORDER/DRP (WC ADJUSTED) 1. AZTEC SOFTWARE & TECHNOLOGY SERVICES LD 18.23% NO OBJECTION 2. GEOMETRIC SOFTWARE 5.28% 3. BODHTREE CONSULTING LTD 14.49% 4. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 26.37% 5. IGATE GLOBAL SOLUTIONS LTD (SEG) 13.21% 6. LANCO GLOBAL SYSTEMS LTD 4.44% 7. LUCID SOFTWARE LTD., 5.03% 8. MEDIA SOFT SOLUTIONS PRIVATE LTD 3.77% 9. MINDTREE LTD (SEG) 12.98% 10. PERSISTENT SYSTEMS PRIVATE LTD 23.40% 11. R SYSTEMS INTERNATIONAL (SEG) 19.83% 12. R S SOFTWARE (INDIA) LTD 14.79% 13. SIP TECHNOLOGIES AND EXPORTS LTD 0.68% 14. SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG) 12.78% 15. SYNFOSYS BUSINESS SOLUTIONS LTD 6.93% SL. NO. NAME OF THE COMPANY TPO ORDER/DRP (WC ADJUSTED) 16. ACCEL TRANSAMATIC LTD (SEG) 41.79% OBJECTED VIDE GROUND NO. 8 17. INFOSYS TECHNOLOGIES LTD 39.17% 18. MEGASOFT LTD 43.88% 19. TATA ELXSI LTD (SEG) 27.15% 20. KALS INFORMATION SYSTEMS LTD 40.77% I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 5 -: SL. NO. NAME OF THE COMPANY 21. BIRLA TECHNOLOGIES LTD., FOR INCLUSION IN GROUND NO. 7 22. LARSEN & TOUBRO INFOTECH LTD 23. QUINTEGRA SOLUTIONS LTD 24. PSI DATA SYSTEMS LTD (SEG) 25. T V S INFOTECH LTD 26. GOLDSTONE TECHNOLOGIES LTD 27. V M F SOFTECH LTD 6. IT WAS SUBMITTED THAT THE COMPANIES WHICH ARE S OUGHT TO BE EXCLUDED VIDE GROUND NO. 8 WERE ALREADY CONSI DERED BY THE CO-ORDINATE BENCHES IN THE CASE OF UNITED ONLINE SO FTWARE DEVELOPMENT (INDIA) PVT. LTD., HYDERABAD IN ITA NO. 1500/HYD/2010, SUMTOTAL SYSTEMS INDIA P. LTD., CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD., AND OTHER CASES. BOT H PARTIES FAIRLY ADMITTED THAT EXCLUSION OF THESE COMPANIES W ERE ALREADY CONSIDERED, EVEN THOUGH LD. DR RELIED ON THE ORDERS OF THE TPO AND DRP FOR INCLUSION OF THE SAME. 7. WE FIND THAT THE COMPANIES WHICH WERE SOUGHT TO BE EXCLUDED BY ASSESSEE IN GROUND NO. 8 WERE ALREADY C ONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT. LTD., HYDERABAD IN ITA NO. 1500/HYD/2010 DT. 20-06-2014, WHEREIN THESE FIVE CO MPANIES HAVE BEEN ELABORATELY DISCUSSED WITH THE OBJECTIONS RAISED THERE ON. WE NOTICE THAT THE TPO HAS SELECTED THE SAME C OMPARABLES FOR THE SOFTWARE DEVELOPMENT SERVICES OF ASSESSEE-COMPA NY IN TUNE WITH THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT. LTD., HYDE RABAD IN ITA NO. 1500/HYD/2010 (SUPRA). FACTS BEING SIMILAR, WE ARE OF THE OPINION THAT THE DECISION OF THE CO-ORDINATE BENCH WITH REFERENCE TO THE ABOVE SAID FIVE COMPARABLES WILL EQUALLY APP LY TO ASSESSEE IN THIS SEGMENT. FOR THE SAKE OF RECORD, THE ORDER OF UNITED ONLINE I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 6 -: SOFTWARE DEVELOPMENT (INDIA) PVT. LTD., HYDERABAD I N ITA NO. 1500/HYD/2010 (SUPRA) IS EXTRACTED AS UNDER: I. ACCEL TRANSMATIC LTD. I. OBJECTING TO SELECTION OF THIS COMPANY, THE LEAR NED AR SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT. IT WAS SUBMITTED THAT DURING THE YEAR THE COMPANY HAD SOLD IP RIGHTS IN THE SOFT WARE DEVELOPED BY IT, WHICH HAS IMPACTED ITS PROFITABILITY OF THE YEAR. H ENCE, THE COMPANY NOT ONLY DOES NOT SATISFY THE 75% SERVICE REVENUE FILTE R APPLIED BY THE TPO, BUT, HAS AN EXCEPTIONAL YEAR OF OPERATIONS. IT WAS SUBMITTED THAT THE PERFORMANCE OF THE SOFTWARE SEGMENTS CLEARLY INDICA TE THAT THE COMPANY HAS INCOME FROM SALE OF PRODUCTS. THE LEARNED AR F URTHER SUBMITTED THAT THE COMPANY HAS A NEGATIVE OPERATING MARGIN OF 18.7 3% FOR FY 2004-05. FURTHER, THE LEARNED AR SUBMITTED THAT AS PER THE A NNUAL REPORT SUBMITTED BY THE COMPANY IN RESPONSE TO 133(6) RELATED PARTY TRANSACTION (RPT) ALSO FAILS THRESHOLD LIMIT APPLIED BY THE TPO HIMSELF. I N THIS REGARD, THE LEARNED AR SUBMITTED THE FOLLOWING COMPUTATION: PARTICULARS AE RENDERING OF SERVICES 56,274,970 RECEIVING OF SERVICES 10,011,622 INTEREST PAID 1,513,025 LEASE PAYMENTS 1,830,084 TOTAL RPT 69,629,701 RPT/SALES 60.60% II. IT WAS THEREFORE SUBMITTED THAT THIS COMPANY UN DER NO CIRCUMSTANCES CAN BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE, WHICH IS A PURELY SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE LEARNED AR SUBMITTED THAT ITAT, BANGALORE BENCH IN CASE OF HUAWEI TECHNOLOGIE S INDIA PVT. LTD. VS. ITO (ITA NO. 1338/BANG/2010 DATED 30/04/2013 HAS HE LD THE AFORESAID COMPANY NOT TO BE A COMPARABLE IN RESPECT OF A PURE LY SOFTWARE DEVELOPMENT SERVICE PROVIDER. FOR THE SAME REASON L D. AR SOUGHT EXCLUSION OF KALS INFOSYSTEMS LTD. HE ALSO RELIED U PON THE FOLLOWING OTHER DECISIONS: 1. TRILOGY E BUSINESS SERVICES SOFTWARE LD. VS. DCI T (ITA NO. 1054/BANG/2001. 2. CSR INDIA PVT. LTD. (TS-68-ITAT-2013(BANG.-TP) 3. INTOTO SOFTWARE INDIA PVT. LTD., (ITA NO. 1196/H YD/2010) 4. TRANSWHICH INDIA PVT. LTD. VS. DCIT (ITA NO. 948 /BANG/2011) III. THE LEARNED DR, ON THE OTHER HAND, SUPPORTING REASONING OF THE TPO AND DRP SUBMITTED THAT THERE IS NO NEED TO EXCLUDE THE ABOVE SAID COMPANY. I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 7 -: IV. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. AS CAN BE SEEN, THE TPO AT PAG E 53 OF HIS ORDER HAS CATEGORIZED THE ASSESSEE AS A PURE SOFTWARE DEVELOP MENT SERVICE PROVIDER. THE COMMENTS OF THE TPO IN THIS REGARD ARE EXTRACTE D HEREUNDER FOR THE SAKE OF CONVENIENCE: SOFTWARE PRODUCT COMPANY A COMPANY WHO DEVELOPS A SOFTWARE PRODUCT BY FOLLOW ING ALL THE STEPS INVOLVED IN CREATING SOFTWARE AS EXPLAINED ABOVE FROM DOMAIN AN ALYSIS TO TESTING. IN THIS CASE, INTELLECTUAL PROPERTY BELONGS TO THE COMPANY. THE P RODUCTS ARE SOLD GENERALLY ON LICENSE BASIS WHEREIN THE RIGHT TO USE THE SOFTWARE IS TRAN SFERRED WITHOUT GIVING THE SOURCE CODE. THESE TYPES OF COMPANIES ARE NOT SIMILAR TO THE TAX PAYER, WHO IS A PURE SERVICE PROVIDER. PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER DOES A PORTION OF THE DESCRIBED SOFTWARE DEVELOPMENT LIFE CYCLE. IT DOES NOT GENERATE ANY IN TELLECTUAL PROPERTY FOR ITS OWN. THE INTELLECTUAL PROPERTY GENERATED BELONGS TO THE CUST OMER AND NOT TO THE SERVICE PROVIDER. THE TAXPAYER FALLS IN THIS CATEGORY. THUS COMPARABL ES ARE ALSO TO BE CHOSEN FROM COMPANIES WHOSE SIGNIFICANT ACTIVITIES ( > 75% OF T HE OPERATING REVENUES) ARE IN THE NATURE OF OR RELATE TO SOFTWARE DEVELOPMENT SERVICE S. AS CAN BE SEEN FROM THE ABOVE EXTRACTED PORTION, TH E TPO HAS HIMSELF MENTIONED THAT A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER DOES NOT GENERATE ANY INTELLECTUAL PROPERTY FOR ITS OWN. HE HAS FURTHER STATED THAT, THE COMPANIES WHICH SELL THEIR PRODUCTS GENERALLY O N LICENSE BASIS WHEREIN THE RIGHT TO USE THE SOFTWARE IS TRANSFERRED WITHOU T GIVING SOURCE CODE CANNOT BE COMPARABLE TO PURE SOFTWARE DEVELOPMENT S ERVICE PROVIDER LIKE ASSESSEE. IT IS THE SPECIFIC CONTENTION OF THE LEAR NED AR THAT ACCEL TRANSMATIC LTD., HAS SOLD IP RIGHTS FOR THE SOFTWAR E DEVELOPED BY IT. FURTHER, IT IS ALSO THE CONTENTION OF THE ASSESSEE THAT THIS COMPANY FAILS THE RPT FILTER OF MORE THAN 25% APPLIED BY THE TPO HIMSELF. IN CASE OF HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO (SUPRA) , THE ITAT BANGALORE BENCH WHILE EXAMINING THE ISSUE OF COMPARABILITY OF THE AFORESAID COMPANY TO A PURELY SOFTWARE DEVELOPMENT SERVICE PR OVIDER HAS HELD AS UNDER: IN SO FAR KALS INFO SYSTEMS LTD., AND ACCEL TRANSM ATICS LTD., CHOSEN BY THE TPO AS COMPARABLES, THIS TRIBUNAL IN THE CASE OF TR ILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) HAS TAKEN A VIEW THAT THESE COMPANIES ARE NOT COMPARABLE TO THE SOFTWARE SERVICE PROVIDER COMPANIES AS THEY ARE FUNCTIONALLY DIFFERENT. THE FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TRIB UNAL IN THIS REGARD:- 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH S OFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS AL SO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS AL SO SUBMITTED THAT AS PER THE ANNUAL REPORT, THE SALARY COST DEBITED UNDE R THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS.45, 93,351. THE SAME WAS LESS THAN 25% I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 8 -: OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE. PUNE BENCH TRIBUNAL'S DECISION OF THE ITA T IN THE CASE OF BIND VIEW INDIA PRIVATE LIMITED VS. DC/, ITA NO. ITA NO 1386/PN/10 WHEREIN KALS AS COMPARABL E WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNC TIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOL LOWS: '16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARAB LES BY THE TPO IS REGARDING INCLUSION OF KA/S INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIO NALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABL E TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGA GED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INT O DEVELOPMENT OF SOFTWARE PRODUCTS, ETE. ALL THESE ASPECTS HAVE NOT B EEN FACTUALLY REBUTTED AND, IN OUR VIEW THE SAID CONCERN IS LIABL E TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPE CT, ASSESSEE SUCCEEDS. ' BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOU LD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRA WN CONCLUSIONS ON THE BASIS OF INFORMAT ION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT T HIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAI N COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CON TRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.06.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNE D COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITA T HAS HEL D THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND N OT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVI DER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF T HE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWAR E DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITTE D THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. C/T 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ACCEL TRANSMATIC SHOULD BE REJECT ED AS I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 9 -: COMPARABLE. THE RELEVANT OBSERVATIONS OF DRP AS EXT RACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: 'IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE S UBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THAT THE BUSINESS ACTIVITI ES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICK ET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENTRE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOL OGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL LT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYS TEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/ 8PO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEV ELOPMENT 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES O F ACCE/TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE T HAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSE E COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND A CC EL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEE'S CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED DRP THEREFO RE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRA NSMATIC LTD. FROM THE FINAL/IST OF COMPARABLES FOR THE PURP OSE OF DETERMINING TNMM MARGIN. ' 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MOR E THAN THE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN TOR COMPARABILITY PURPOSES. THE SUBMISSION OF THE ID. C OUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE ID. DR, ON THE OTHER HAND RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF T HE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID CO MPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE A SSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID D ECISION REFERRED TO BY THE ID. COUNSEL FOR THE ASSESSEE, HA S ACCEPTED THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 10 - : ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE ID. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. ' 13. IN VIEW OF THE AFORESAID DECISION OF THE TRIBU NAL, KALS INFO SYSTEMS LTD., AND ACCEL TRANSMATICS LTD. ARE T O BE EXCLUDED FOR THE PURPOSE OF COMPARISON WHILE DETERM INING THE ALP OF THE IMPUGNED TRANSACTION IN THIS APPEAL. IT IS ORDERED ACCORDINGLY. FACTS BEING MATERIALLY SAME AND SINCE IT PERTAINS T O THE SAME ASSESSMENT YEAR, FOLLOWING THE VIEW ADOPTED BY THE ITAT, BANGA LORE BENCH IN THE AFORESAID CASE, WE ARE ALSO OF THE VIEW THAT THIS C OMPANY CANNOT BE COMPARABLE TO THE ASSESSEE. FOR THE VERY SAME REASONS, II . KALS INFO. SYSTEMS LTD. ALSO CANNOT BE A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT T HE AO/TPO TO EXCLUDE THE AFORESAID COMPANIES FROM THE LIST OF COMPARABIL ITY ANALYSIS. III. MEGASOFT LTD. I. OBJECTING TO THE AFORESAID COMPANY BEING TREATE D AS COMPARABLE, THE LEARNED AR SUBMITTED THAT AS PER THE INFORMATIO N OBTAINED FROM THE SAID COMPANY U/S 133(6) OF THE ACT, THE ANNUAL REPO RT OF THE COMPANY CLEARLY INDICATES THAT IT IS ALSO ENGAGED IN SELLIN G OF PRODUCTS, NAMELY, XIUS SUIT OF PACKAGED PRODUCTS. IT WAS SUBMITTED TH AT SINCE SEGMENTAL FINANCIAL RESULTS IN RESPECT OF PRODUCT AND SERVICE S ARE AVAILABLE IN RESPECT OF THIS COMPANY, IF AT ALL THIS COMPANY IS TO BE TR EATED AS COMPARABLE, THE TPO MAY BE DIRECTED TO CONSIDER THE PROFIT MARGIN O F SOFTWARE DEVELOPMENT SERVICES SEGMENT ALONE WHICH IS 16.97%, IN RESPECT OF SUCH CONTENTION, THE LEARNED AR RELIED UPON THE FOLLOWING DECISIONS: 1. TRILOGY E BUSINESS SOFTWARE INDIA PVT. LTD. (ITA NO. 1054/BANG/2011) 2. LG SOFT INDIA P. LTD. (TS-64-ITAT-2013(BANG.-TP ) 3. BEARING POINT BUSINESS CONSULTING PVT. LTD. (ITA NO. 1124/BANG/2011) 4. INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HY D/2010) 5. TRANSWHICH INDIA PVT. LTD. VS. DCIT (ITA NO. 948 /BANG/2011) 6. MERCEDEZ BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD., (ITA NO. 1222/BANG/2011). 7. HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO (ITA NO. 1338/BANG/2010) II. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT THE TPO HAVING CORRECTLY CONSIDERED THE PROFIT MARGIN OF THE COMPA NY BY EXAMINING THE ANNUAL REPORT THERE IS NO NEED TO MODIFY THE ORDER OF THE TPO IN THIS REGARD. I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 11 - : III. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIALS ON RECORD. ON A CONSIDERATION OF THE CONTENTIONS RAISED BY THE AS SESSEE VIS--VIS MATERIALS ON RECORD AS WELL AS DECISIONS OF DIFFER ENT BENCHES OF THE TRIBUNAL PLACED BEFORE US, IT IS QUITE EVIDENT THAT THIS COMPANY HAS TWO SEPARATE SEGMENTS I.E. PRODUCT AND SERVICES. THEREF ORE, IF AT ALL, THE AO/TPO CONSIDERS THE AFORESAID COMPANY TO BE A COMP ARABLE, THEN, HE IS DIRECTED TO CONSIDER SOFTWARE DEVELOPMENT SERVICES SEGMENT ALONE FOR COMPARABILITY ANALYSIS. IV. INFOSYS TECHNOLOGIES LTD. I. OBJECTING TO THIS COMPANY, THE LEARNED AR SUBMI TTED THAT UNDER NO CIRCUMSTANCES, THIS COMPANY CAN BE CONSIDERED AS CO MPARABLE, TO A SMALL CAPTIVE SERVICE PROVIDER LIKE ASSESSEE. IT WAS SUBM ITTED THAT INFOSYS IS ENGAGED IN DIVERSIFIED ACTIVITIES INCLUDING PRODUCT S, CONSULTANCY & SOLUTIONS. IT COMMANDS A PREMIUM IN THE PRICING OF ITS PRODUCTS AND SERVICES DUE TO ITS GOODWILL, REPUTATION AND BRAND VALUE. FURTHER, DUE TO SCALE OF OPERATIONS, INFOSYS ENJOYS ECONOMIES OF SC ALE, WHICH RESULTS IN LOWER COST OF INFRASTRUCTURAL FACILITIES AND OVERHE ADS. FINALLY, THE LEARNED AR SUBMITTED THAT THE ISSUE OF COMPARABILITY OF INF OSYS TO A CAPTIVE SERVICE PROVIDER IS NO LONGER RES INTEGRA, DUE TO FOLLOWING DECISIONS OF THE DIFFERENT BENCHES OF THE TRIBUNAL: 1. TELCORDIA TECHNOLOGIES INDIA P. LTD. (ITA NO. 78 21/MUM/2011-PARA 7.4) 2. ADAPTEE (INDIA) PVT. LTD. VS. DCIT (ITA NO. 1801 /HYD/2009) 3. PATNI TELECOM SOLUTIONS PVT. LTD., VS. ACIT (ITA NO. 1846/HYD/2012) 4. TRILOGY E BUSINESS SERVICES SOFTWARE LTD. VS. DC IT (ITA NO. 1054/BANG/2011 PARA 20) 5. AGNITY INDIA TECHNOLOGIES VS. ITO (ITA NO. 3856/ DEL/2010) 6. AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. ITO (HIG H COURT DECISION) ITA NO. 1204/2011 7. HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. IT) (ITA NO. 1338/BANG/2010) (AY 2006-07) 8. CINCOM SYSTEMS INDIA P. LTD., VS. ACIT (ITA NO. 761/DEL/2012 (AY 2006-07) 9. ADOBE SYSTEMS INDIA PVT. LTD. (TS-320-ITAT-2011 (DEL.) 10. VIRTUSA INDIA PVT. LTD., VS. DCIT (ITA NO. 1962 /H/2011) 11. INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/H /2010) II. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE DRP & TPO. III. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIALS ON RECORD AS WELL AS DECISIONS RELIED UPON BY THE LEARNED AR. U NDISPUTEDLY, THE TPO HAS ACCEPTED THE FACT THAT THE ASSESSEE IS PURELY A SOFTWARE DEVELOPMENT SERVICE PROVIDER TO ITS AE WHEREAS INFOSYS IS NOT A CAPTIVE SERVICE PROVIDER LIKE ASSESSEE. IT IS A FACT THAT INFOSYS IS ENGAGE D IN DIVERSIFIED ACTIVITIES AND ALSO ENGAGED IN DEVELOPMENT OF PRODUCTS CONSULT ANCY AND SOLUTION. THAT APART, THE SIZE, REPUTATION AND BRAND VALUE OF INFOSYS, IN NO WAY I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 12 - : MAKES IT COMPARABLE TO A SMALL CAPTIVE SERVICE PROV IDER LIKE ASSESSEE. THEREFORE, FOLLOWING CONSISTENT VIEW OF DIFFERENT B ENCHES OF TRIBUNAL, WE EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. V. TATA ELXSI LTD. (SEG.) I. OBJECTING TO THE AFORESAID COMPANY BEING TRE ATED AS COMPARABLE, THE LEARNED AR SUBMITTED THAT THE SAID COMPANY SHALL BE REJECTED AS COMPARABLE SINCE IT IS A SPECIALIZED EMBEDDED SOFTW ARE DEVELOPMENT COMPANY. FURTHER, HE SUBMITTED THAT AS PER THE INF ORMATION OBTAINED FROM THE SAID COMPANY U/S 133(6) OF THE ACT, IT WAS STAT ED THAT DUE TO THE COMPLEX SEGMENTS IN WHICH THEY ARE OPERATING, IT IS NOT COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY. THE AR RELIED ON THE FOLLOWING PRECEDENTS IN SUPPORT OF HIS SUBMISSIONS: 1. CONEXANT SYSTEMS INDIA PT. LTD., (ITA NO. 1429/H YD/2010 AND 1978/HYD/2011) 2. TELCORDIA TECHNOLOGIES INDIA P. LD., (ITA NO. 78 21/MUM/2011) 3. LOGICA PVT. LTD. (IT(TP)A NO. 1129/BANG/2011) 4. HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. IT) (ITA NO. 1338/BANG/2010) AY 2006-07 II. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE DRP & TPO. III. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIALS ON RECORD AS WELL AS DECISIONS RELIED UPON BY THE LEARNED AR. W E FIND THAT IN CASE OF HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO (SUPRA) , ITAT BANGALORE BENCH EXCLUDED THIS COMPANY RELYING UPON THE DECISION OF ITAT, MUMBAI BENCH IN CASE OF TELCORDIA TECHNOLO GIES INDIA PVT. LTD. (SUPRA) PERTAINING TO THE SAME ASSESSMENT YEAR I.E. 2006-07. IV. FOLLOWING THE VIEW EXPRESSED BY BANGALORE AND MUMBAI BENCHES, OF THE TRIBUNAL, WHICH IS IN RELATION TO A .Y. 2006-07, WE ARE OF THE VIEW THAT TATA ELXSI LTD. IS ALSO TO BE EXCLUDED FROM THE LIST OF COMPARABLES WHILE DETERMINING THE, ALP OF T HE INTERNATIONAL TRANSACTION. 8. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE D IRECT THE TPO/AO TO EXCLUDE THE COMPANIES, ACCEL TRANSMATIC L TD., INFOSYS TECHNOLOGIES, TATA ELXSI LTD., KALS INFORMATION SYSTEMS LTD. WITH REFERENCE TO MEGASOFT LTD., IF AO/TPO CONSIDERS THE AFORESAID COMPANY TO BE A COMPARABLE ONE, THEN HE IS DIRECTED TO CONSIDER I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 13 - : SOFTWARE DEVELOPMENT SERVICES SEGMENT ALONE FOR COM PARABILITY ANALYSIS. ACCORDINGLY, GROUND IS PARTLY ALLOWED. 9. ASSESSEE HAS OBJECTED TO REJECTION OF SEVEN COM PARABLES BY THE TPO WHICH ARE LISTED ABOVE IN THE TABLE. HE REIN ALSO, THESE SEVEN COMPARABLES WERE ANALYSED BY THE CO-ORDINATE BENCH IN THE ABOVE CASE OF UNITED ONLINE SOFTWARE DEVELOPMENT (I NDIA) PVT. LTD., HYDERABAD IN ITA NO. 1500/HYD/2010 (SUPRA) AND THE DECISION OF THE CO-ORDINATE BENCH ON EACH OF COMPARABLE COMPANI ES IS AS UNDER: 5. THE ASSESSEE HAS ALSO OBJECTED TO REJECTION OF FOLLOWING COMPARABLES BY THE TPO: 1. VMF SOFTECH LTD. 2. TVS INFOTECH LTD. 3. PSI DATA SYSTEMS LTD. (SEG.) 4. LARSEN & TOUBRO INFOTECH LTD. 5. BIRLA TECHNOLOGIES LTD. 6. GOLDSTONE TECHNOLOGIES LTD. 7. QUINTEGRA SOLUTIONS LTD. 6. SO FAR AS THE VMF SOFTECH LTD. IS CONCERNED, THE LEARNED AR SUBMITTED THAT THE TPO HAS REJECTED THIS COMPANY BY APPLYING THE EMPLOYEE COST FILTER. HOWEVER, IT WAS SUBMITTED THA T THE EMPLOYEE COST OF THE COMPANY IS APPROXIMATELY 62% OF THE SALES. IN THIS CONNECTION, THE LEARNED AR REFERRED TO SCHEDULE 12 & 13 FROM THE AN NUAL REPORT OF THE COMPANY. IT WAS FURTHER SUBMITTED THAT AS PER THE I NFORMATION PROVIDED U/S 133(6) OF THE ACT, THE COMPANY HAS CLARIFIED T HAT THE MAJOR PORTION OF THE COMPANYS ACTIVITIES IS OUTSOURCING RECEIPTS FR OM CLIENTS AND NO WORK HAS BEEN OUTSOURCED BY THE COMPANY IN INDIA, BUT, H AVE RECEIVED WORKS FROM FOREIGN CLIENTS AS THEIR OUTSOURCING. 6.1 IN RESPECT OF TVS INFOTECH LTD., IT IS SUBMITTE D THAT THOUGH THE AO HAS EXCLUDED THIS COMPANY ON THE GROUND THAT IT IS A PERSISTENT LOSS MAKING COMPANY, BUT, IN REALITY IT SATISFIES RPT FI LTER OF THE TPO. IT IS FURTHER SUBMITTED THAT THE COMPANY HAS OPERATING PR OFIT FOR FY 2004-05 AS PER ITS ANNUAL REPORT. 6.2 IN RESPECT OF PSI DATA SYSTEMS LTD., IT IS SUBM ITTED THAT THE AFORESAID COMPANY HAS BEEN EXCLUDED ON THE GROUND T HAT SOFTWARE SERVICES INCLUDE SALE OF PRODUCTS DEVELOPED ON ITS OWN AND ALSO, THE COMPANY IS UNDER LOSS OVER THE YEAR. FURTHER, AS TH E COMPANY DID NOT I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 14 - : RESPOND TO NOTICE U/S 133(6), IT WAS REJECTED. IN T HIS CONTEXT, THE LEARNED AR SUBMITTED THAT THE COMPANYS SOFTWARE SERVICES S EGMENT HAS TURNOVER OF RS. 53 CRORES WHEREAS THE TPO HAS NOT BROUGHT AN Y EVIDENCE TO PROVE THAT THIS COMPANY HAS ITS OWN PRODUCT. THE FACT TH AT THE COMPANY HAS NO R&D EXPENDITURE, AS CAN BE SEEN FROM THE ANNUAL REP ORT, IS SUGGESTIVE OF THE FACT THAT IT IS NOT INVOLVED IN THE PRODUCT DEV ELOPMENT. IT WAS SUBMITTED THAT SINCE THE COMPANY HAS OPERATING PROF IT FROM SOFTWARE SERVICES SEGMENT FOR THE FY 2005-06, IT IS TO BE CO NSIDERED AS A COMPARABLE. 6.3 IN RESPECT OF L&T INFOTECH LTD., IT IS SUBMITTE D THAT THE COMPANY IS NOT INVOLVED IN PRODUCT DEVELOPMENT, HENCE, THE CON CLUSION DRAWN BY THE TPO WHILE EXCLUDING THIS COMPANY IS IMPROPER. 6.4 IN SO FAR AS BIRLA TECHNOLOGY LTD., IS CONCERNE D, IT IS THE CONTENTION OF THE LEARNED AR THAT TPO HAS WRONGLY REJECTED BY THIS COMPANY APPLYING RPT FILTER, IT IS SUBMITTED THAT THE RPT OF THIS CO MPANY IS ONLY 3.07% OF THE TOTAL REVENUE. IT IS SUBMITTED THAT TPO BY INCLUDIN G REIMBURSEMENT TRANSACTIONS HAS CALCULATED RPT. 6.5 IN RESPECT OF GOLDEN STOCK TECHNOLOGY LTD., IT IS SUBMITTED THAT TPO HAS REJECTED THIS COMPANY AS BPO SERVICE PROVIDER. THE LEARNED AR SUBMITTED THAT THE STATEMENT RELIED UPON BY THE TPO IN RESPONSE TO THE NOTICE ISSUED U/S 133(6) IS CONTRARY TO THE DISCLOS URES IN COMPANYS ANNUAL REPORT. IT WAS SUBMITTED THAT DURING THE YEA R THE COMPANY HAS INCOME FROM SOFTWARE SERVICES AND SATISFIES ALL SEL ECTION CRITERIA ADOPTED BY THE TPO, HENCE, THIS COMPANY SHOULD BE SELECTED AS COMPARABLE. 6.6 IN RESPECT OF QUINTEGRA SOLUTIONS LTD., IT IS S UBMITTED THAT THIS COMP- ANY WAS REJECTED BY THE TPO ON THE GROUND THAT IT I S PREDOMINANTLY ON SITE COMPANY, HOWEVER, AS PER THE ANNUAL REPORT OF THE C OMPANY, THE FOREIGN EXCHANGE EXPENDITURE INCURRED IS ONLY 4.25% OF THE EXPORT TURNOVER. HENCE, THERE IS NO DEFECT IN SELECTING THE AFORESAI D COMPANY AS COMPARABLE. 7. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED THA T THE TPO HAVING REJECTED THE AFORESAID COMPANIES AFTER UNDERTAKING OBJECTIVE ANALYSIS, THE ASSESSEES CONTENTIONS SHOULD NOT BE ENTERTAINED. 8. WE HAVE CONSIDERED SUBMISSIONS OF THE PARTIES IN RESPECT OF THE AFORESAID COMPANIES. AS CAN BE SEEN, BEFORE THE DRP THOUGH THE ASSESSEE HAS ADVANCED DETAILED SUBMISSIONS FOR INCLUSION OF THE AFORESAID COMPANIES, BUT, THE DRP HAS SIMPLY BRUSHED ASIDE TH E SAME WITHOUT CONSIDERING IN PROPER PERSPECTIVE. THEREFORE, IN OU R CONSIDERED VIEW ASSESSEES CONTENTION IN RESPECT OF THESE COMPANIES REQUIRES RECONSIDERATION. HOWEVER, IT IS TO BE STATED HERE T HAT SO FAR AS L&T INFOTECH LTD. IS CONCERNED, THIS COMPANY IS HAVING A HUGE TURNOVER OF 790 CRORES AND UNLIKE THE ASSESSEE IT IS NOT CAPTIVE SE RVICE PROVIDER. THEREFORE, THE REASONS FOR WHICH INFOSYS TECHNOLOGIES LTD CANN OT BE TREATED AS I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 15 - : COMPARABLE TO THE ASSESSEE ALSO EQUALLY APPLIES TO THIS COMPANY. IN THE AFORESAID CIRCUMSTANCES, EXCEPT L&T INFOTECH LTD., THE COMPARABILITY OF THE OTHER COMPANIES SELECTED BY THE ASSESSEE, BUT, REJE CTED BY THE TPO IS RESTORED BACK TO THE FILE OF THE AO/TPO FOR CONSIDE RING AFRESH AFTER AFFORDING DUE OPPORTUNITY OF BEING HEARD TO THE ASS ESSEE. RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DECISI ON, WE RESTORE THE ISSUE OF SELECTION OF COMPARABLES REJECTED BY T HE TPO EARLIER FOR FRESH CONSIDERATION EXCEPT IN THE CASE OF L&T INFOT ECH LTD., WHICH WAS REJECTED ON THE BASIS OF ITS TURNOVER. GROUND IS PARTLY ALLOWED. B. IT ENABLED SERVICES : 10. IN THIS SEGMENT, THE TPO HAS SELECTED 13 COMPA RABLES AND MADE AN ADJUSTMENT OF RS. 4,90,79,378/-. ASSES SEE WHILE ACCEPTING EIGHT COMPARABLES IS OBJECTING TO INCLUSI ON OF FIVE COMPARABLES IN REVISED GROUND NO. 11 AND REQUEST FO R INCLUSION OF FOUR COMPANIES IN GROUND NO 10 WHICH WERE REJECTED BY THE TPO. THE DETAILS OF THE COMPANIES ARE AS UNDER: SL. NO. NAME OF THE COMPANY TP ORDER/DRP DIRECTIONS (WC ADJUSTED) 1. ACE SOFTWARE EXPORTS LTD 7.13% NO OBJECTION 2. ALLSEC TECHNOLOGIES LTD 27.48% 3. APEX KNOWLEDGE SOLUTIONS PVT LTD 20.81% 4. COSMIC GLOBAL LTD 14.40% 5. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 13.06% 6. R SYSTEMS LTD (SEG) 13.36% 7. SPANCO TELESYSTEMS AND SOLUTIONS LTD (SEG) 17.99% 8. TRANSWORKS INFORMATION SERVICES LTD 18.67% I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 16 - : SL. NO. NAME OF THE COMPANY TPO ORDER/DRP (WC ADJUSTED) 9. VISHAL INFORMATION TECHNOLOGIES LTD 40.92% OBJECTED VIDE GROUND NO. 11 10. GOLDSTONE INFRATECH LTD (SEG) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD) 22.95% 11. DATAMATICS FINANCIAL SERVICES LTD (SEG) 23.95% 12. MAPLE ESOLUTIONS LTD 30.47% 13. NUCLEUS NETSOFT AND GIS (INDIA) LTD (NEW NAME IS ASTIC C MEHTA FINANCIAL SERVICES LTD 33.74% SL. NO. NAME OF THE COMPANY 14. GOLDSTONE TECHNOLOGIES LTD REQUEST VIDE GROUND NO.10. 15. GENESYS INTERNATIONAL CORPORATION LIMITED 16. QUANTUM E-SERVICES PVT LTD 17. VISUAL SOFT TECHNOLOGIES PRIVATE LIMITED (SEG) 11. AT THE OUTSET, BOTH PARTIES AGREED THAT EXCLUS ION OF THESE COMPARABLES WAS CONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA LTD., IN ITA NO. 1624/HYD/2010 AND ALSO IN THE CASE OF TNS INDIA PVT . LTD., IN ITA NO. 108/HYD/2011 (AY. 2006-07). LD. DR HOWEVER, RE LIED ON THE ORDERS OF THE TPO FOR INCLUSION OF THE SAID COMPARA BLES. 12. WE FIND THAT TPO HAS CONSIDERED THE SAME 13 COMPANIES IN THE IT ENABLED SERVICES SEGMENT AS WAS CONSIDERED IN THE CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA L TD., IN ITA NO. 1624/HYD/2010 (SUPRA) AND TNS INDIA PVT. LTD., (AY. 2006-07) (SUPRA). SINCE THE SELECTION OF THESE COMPARABLES WAS ALREADY ANALYSED AND ADJUDICATED, WE ARE OF THE OPINION THA T THE SAME DECISION WILL EQUALLY APPLY TO FACTS OF ASSESSEES CASE. FOR THE SAKE OF RECORD, THE DECISION IN THE CASE OF HSBC ELECTRO NIC DATA I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 17 - : PROCESSING INDIA LTD., IN ITA NO. 1624/HYD/2010 (SUPRA) WITH THESE FIVE COMPARABLES IS EXTRACTED AS UNDER: 8. THE FIRST OBJECTION IS WITH REFERENCE TO SELEC TION OF COMPARABLE DATA BY THE TPO WITH REFERENCE TO THE FOLLOWING FIV E COMPANIES- (A) VISHAL INFORMATION TECHNOLOGIES LTD. (B) GOLDSTONE INFRATECH LTD. (C) DATAMATIC FINANCIAL SERVICES LTD.(SEG) (D) MAPLE E-SOLUTIONS LTD. (E) NUCLEUS NETSOFT & GIS(INDIA) LTD. (NOW KNOWN AS (AS IT C. MEHTA FINANCIAL SERVICES LTD.) VISHAL INFORMATION TECHNOLOGIES LTD. 9. THE ASSESSEES OBJECTION WITH REFERENCE TO IN CLUSION OF THIS COMPARABLE IS ON THE REASON THAT THE COMPANY IS FUN CTIONALLY DIFFERENT, ALSO DOES NOT SATISFY THE FILTERS SUCH AS EMPLOYEE COST AND ON-SITE REVENUE FILTER. IT WAS SUBMITTED THAT EMPLOYEE COST FORMS A MAJOR PORTION OF THE TOTAL COST OF BPO SERVICES AND IN THE ASSESSEES CA SE EMPLOYEE COST IS 62% OF THE TOTAL COST, WHEREAS IN THE SELECTED COMPANY THE EMPLOYEE COST IS LESS THAN 2%, WHICH INDICATES THAT MOST OF THE WOR K WAS OUTSOURCED AND THE OUT-SOURCING COST WAS AT 88.64% OF THE OPERATIN G COST. IT WAS FURTHER SUBMITTED THAT THE ITAT BANGALORE IN THE CASE OF FI RST ADVANTAGE OFF- SHORE SERVICES (ITA NO.1252/BANG/2010) HAS DIRECTED TO USE EMPLOYEE TURNOVER FILTER IN A CONSISTENT MANNER FOR SELECTIO N OF COMPARABLES AND IN THE CASE OF MAERSK GLOBAL SERVICES CENTRE (INDIA) P VT. LTD. (14 ITR(TRIB) 541) THE MUMBAI BENCH OF THE TRIBUNAL HAS ANALYSED AND REJECTED THIS COMPANY AS COMPARABLE FOR THE REASON THAT IT HAS OU TSOURCED A CONSIDERABLE PORTION OF ITS BUSINESS AND IS FUNCTI ONALLY DIFFERENT. MOREOVER, IT WAS ALSO SUBMITTED THAT THE DRP IN THE LATER YEAR OF 2008-09 VIDE ITS ORDER DATED 3.8.2012 HAS REJECTED THIS COM PANY AS A COMPARABLE (NAME CHANGED TO CORAL HUB LTD.), VIDE PARA 18 OF T HE ORDER, WHEREIN ULTIMATELY, IT WAS DECIDED THAT THERE IS MAJOR DIFF ERENCE IN FUNCTIONALITY AND THE BUSINESS MODEL AND THE DRP BENCH WAS OF THE VIEW THAT CORAL HUB (FORMERLY KNOWN AS VISHAL INFORMATION TECHNOLOG Y LTD.) WAS NOT A SUITABLE COMPARABLE AND NEEDS TO BE DROPPED FROM TH E FINAL SET OF COMPARABLES. BASED ON THE ABOVE SUBMISSIONS, IT WAS SUBMITTED THAT THIS COMPANY CANNOT BE USED AS A COMPARABLE AND HAS TO B E EXCLUDED. 9.1. THE LEARNED DEPARTMENTAL REPRESENTATIVE, HOW EVER RELIED ON THE ORDERS OF THE TPO. 9.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE FIND CONSIDERABLE FORCE IN THE CONTENTIONS ADVANCED BY THE LEARNED CO UNSEL. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT MOST OF THE COST INCURRED BY THE COMPANY TAKEN AS COMPARABLE IS OUTSOURCING COST, AS CAN BE SEEN FROM I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 18 - : THE ANNUAL REPORT PLACED IN THE PAPER-BOOK AND ITAT , MUMBAI IN THE CASE OF MAERSK GLOBAL SERVICE CENTRE (SUPRA) HAS ANALYSE D AND REJECTED THIS COMPANY AS COMPARABLE, DUE TO THE REASON THAT IT HA S OUTSOURCED A CONSIDERABLE PORTION OF ITS BUSINESS AND IT IS FUNC TIONALLY DIFFERENT. THIS FACTOR WAS ALSO APPROVED BY THE DRP IN ASSESSEES O WN CASE IN THE LATER YEAR, AS CAN BE SEEN FROM THE COPY OF THE ORDER PLA CED ON RECORD, FOR ASSESSMENT YEAR 2008-09. IN VIEW OF THIS, WE DIREC T THE ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE S. GOLDSTONE INFRATECH LTD 10. THE ASSESSEES OBJECTION FOR INCLUSION OF THI S COMPARABLE IS ON THE BASIS OF THE FILTER ON FOREIGN EXCHANGE EARN INGS, DIMINISHING REVENUE FILTER AND FUNCTIONALITY, BEING RUN ON LEAS E BASIS. IT WAS SUBMITTED THAT THIS COMPANY WAS REJECTED IN THE CAS E OF STREAM INTERNATIONAL SERVICES PVT. LTD. V/S. ADIT(INTERNAT IONAL TAXATION) BY THE MUMBAI BENCH OF THE TRIBUNAL, VIDE ITS ORDER DATED 11.1.2013 IN ITA NO.8997/MUM/2010 FOR ASSESSMENT YEAR 2006-07. 10.1. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT THE BUSINESS MODEL OF THE ABOVE COMPANY IS DIF FERENT FROM THAT OF THE ASSESSEE. IN THIS CASE, THE FOREIGN EXCHANGE REVEN UE IS LESS THAN 1% OF THE TOTAL TURNOVER. THEREFORE, IT FAILS THE FILTER PROVIDED BY THE ASSESSING OFFICER, ON THE BASIS OF THE FOREIGN EXCHANGE EARNI NGS. FURTHER, THE REVENUE FROM BPO IS FAILING OVER A PERIOD OF THREE YEARS. THIS ISSUE WAS CONSIDERED BY THE COORDINATE BENCH (MUMBAI BENCH) O F THE TRIBUNAL IN THE CASE OF STREAM INTERNATIONAL SERVICES LTD.(SUPRA) W HEREIN IT WAS CONSIDERED AS UNDER- 14. THE INCLUSION OF SECOND CASE OBJECTED TO BY TH E LD. AR IS THAT OF GOLDSTONE INFRATECH LIMITED (SEG) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LIMITED). HERE IT IS RELEVANT TO NOTE THAT THE TPO, INTER ALIA, APPLIED FILTER OF COMPANIES WITH EXPORT REVENUES M ORE THAN 25% OF THE REVENUES. ANNUAL ACCOUNTS OF GOLDSTONE TELESERVICE S LIMITED INDICATE TOTAL REVENUE OF THE COMPANY AT RS. 30.89 CRORE FRO M THREE SEGMENTS, VIZ., TELECOMMUNICATION AT RS. 13.63 CRORE, BPO AT RS. 5. 02 CRORE AND INSULATOR AT RS. 12.23 CRORE. THE BREAK UP OF SUCH REVENUE OF GOLDSTONE TELESERVICES LIMITED HAS BEEN PROVIDED AT PAGE 236 OF THE PAPER BOOK. SCHEDULE FORMING PART OF THE ANNUAL ACCOUNTS OF GOL DSTONE TELESERVICES LIMITED DIVULGES EARNINGS IN FOREIGN CURRENCY AT RS . 4.24 LAKH. SUCH DETAIL IS AVAILABLE AT PAGE 239 OF THE PAPER BOOK. WHEN WE COMPARE EARNING IN FOREIGN CURRENCY AT RS. 4.24 LAKH WITH THE EARNINGS OF BPO AT RS. 5.02 CRORE OR FOR THAT PURPOSE OF THE ENTITY AS A WHOLE AT RS. 30.89 CRORE, IT BECOMES MANIFEST THAT THIS CASE DOES NOT PASS THROU GH THE FILTER ADOPTED BY THE TPO, BEING, THE COMPANIES WHOSE EXPORT REVENUE S ARE MORE THAN 25% OF THE REVENUES. I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 19 - : THEREFORE, WE ARE OF THE OPINION, THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE FOR THE PURPOSE OF DETERMINING THE ALP IN THIS CASE. WE DIRECT THE SAME TO BE EXCLUDED. DATAMATIC FINANCIAL SERVICES LTD. 11. THE ASSESSEES OBJECTION TO INCLUSION OF THIS COMPARABLE IS ON THE BASIS OF RELATED PARTY TRANSACTIONS FILTER. IT WAS SUBMITTED THAT RPT EXCEEDS 25% OF THE SALES AND THEREFORE, TO BE EXCLU DED. THE ASSESSEE RELIED ON THE DECISION OF THE COORDINATE BENCH OF T HE TRIBUNAL (MUMBAI BENCH) IN THE CASE OF STREAM INTERNATIONAL SERVICES (SUPRA), WHEREIN, WHEREIN WITH REFERENCE TO THIS COMPARABLE COMPANY, IT WAS HELD AS UNDER- 11. THE FIRST IS M/S. DATAMATICS FINANCIAL SERVICE S LIMITED. IT CAN BE OBSERVED THAT THE TPO APPLIED FILTER OF COMPANIES WITH LESS THAN 25% RELATED PARTY TRANSACTIONS. THE LEARNED COUNSEL FO R THE ASSESSEE TOOK US THROUGH THE ANNUAL ACCOUNTS OF DATAMATICS FINANCIAL SERVICES LIMITED, AND SUBMITTED THAT THE GROSS INCOME OF THIS COMPANY FOR THE YEAR ENDING ON 31.03.2006 WAS AT RS. 2.31 CRORE AS AGAINST TOTAL E XPENSES OF RS. 1.84 CRORE. REFERRING TO PAGES 319 AND 320 OF THE PAPER BOOK, OUR ATTENTION WAS DRAWN TOWARDS ANNEXURE-2 TO DEMONSTRATE THAT THE T RANSACTIONS WITH THE ASSOCIATED PARTIES WITHIN THE MEANING OF SECTION 92 A AND 92B OF THE INCOME-TAX ACT, 1961 SHOWED ONE MAJOR TRANSACTION WITH DATAMATICS LIMITED TOWARDS RE-IMBURSEMENT OF EXPENSES AT RS. 99.14 LAKH. THE LEARNED AR CONTENDED THAT THE TRANSACTIONS OF DATAM ATICS FINANCIAL SERVICES LIMITED WITH OTHER AES AMOUNTED TO RS. 14. 31 LAKH MAKING TOTAL OF TRANSACTIONS WITH THE AES AT RS. 1.13 CRORE. IT WAS SUBMITTED THAT THE PERCENTAGE OF TRANSACTION WITH RELATED PARTIES IS M UCH MORE THAN 25%, BEING, THE FILTER ADOPTED BY THE TPO HIMSELF AND HE NCE THE SAME SHOULD BE EXCLUDED. 12. IN THE OPPOSITION, THE LEARNED DEPARTMENTAL REP RESENTATIVE CONTENDED THAT THE MAJOR TRANSACTION OF RS. 99.14 LAKH OF DAT AMATICS FINANCIAL SERVICES LIMITED WITH DATAMATICS LIMITED WAS TOWARD S REIMBURSEMENT OF EXPENSES. SINCE THE REIMBURSEMENT OF EXPENSES DOES NOT INCLUDE ANY PROFIT ELEMENT, THE LD. DR URGED THAT THE SAME BE EXCLUDED . HE STATED THAT ONCE THIS TRANSACTION IS EXCLUDED, THE OTHER TRANSACTION OF RS. 14.31 LAKH ARE LESS THAN 25% OF THE TOTAL TRANSACTION WITH RELATED PART IES. 13. WE DO NOT FIND ANY FORCE IN THE CONTENTION ADVA NCED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE EXCLUSION OF TR ANSACTIONS WITH DATAMATICS LIMITED TOWARDS REIMBURSEMENT OF EXPENS ES FROM THE OVERALL TRANSACTIONS ENTERED INTO BY DATAMATICS FINANCIAL S ERVICES LTD. WITH ITS AES. SECTION 92F(V) DEFINES TRANSACTION IN THE CO NTEXT OF TRANSFER PRICING PROVISIONS TO INCLUDE AN ARRANGEMENT, UNDER STANDING OR ACTION IN CONCERT WHETHER OR NOT IT IS FORMAL OR IN WRITING O R WHETHER OR NOT IT IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDING. THE RE IS NO REFERENCE TO ANY I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 20 - : TRANSACTION HAVING NECESSARILY INCLUDING PROFIT ELE MENT OR MARK-UP SO AS TO FALL WITHIN THE DEFINITION OF TRANSACTION UNDER C HAPTER X OF THE INCOME- TAX ACT. SINCE THE TPO APPLIED FILTER OF HAVING COM PANIES WITH LESS THAN 25% RELATED PARTY TRANSACTIONS, IT IS NOT OPEN TO A RGUE THAT THE TRANSACTIONS OF REIMBURSEMENT OF EXPENSES DULY REPORTED BY DATAM ATICS FINANCIAL SERVICES LIMITED AS AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B SHOULD BE IGNORED SIMPLY BECAUSE THEY R EPRESENT REIMBURSEMENT OF EXPENSES. IF THE CONTENTION OF THE LD. DR THAT T HE REIMBURSEMENT OF EXPENSES NOT INVOLVING PROFIT ELEMENT SHOULD NOT BE CONSTRUED AS A TRANSACTION, IS TAKEN TO A LOGICAL CONCLUSION, IT W OULD MEAN THAT ALL SUCH DEALINGS WILL CEASE TO BE TRANSACTIONS FOR THE PURP OSES OF CHAPTER-X OF THE ACT. ONCE THESE DEALINGS ARE NOT CONSIDERED AS TRA NSACTIONS, THESE WILL ALSO CEASE TO BE INTERNATIONAL TRANSACTIONS, GOING OUT O F THE PURVIEW OF SECTION 92 ITSELF. OBVIOUSLY, SUCH A VIEW POINT IS CONTRARY TO THE CLEAR INTENTION AND THE LANGUAGE OF THE RELEVANT PROVISIONS. A PURE REIMBUR SEMENT OF EXPENSES BY ONE AE TO ANOTHER AE IS VERY MUCH A TRANSACTION A S PER SECTION 92F(V) AND CONSEQUENTLY IS EQUALLY AN INTERNATIONAL TRANSA CTION AS PER SECTION 92B REQUIRING CONSIDERATION AS PER SECTION 92 OF THE AC T. BE THAT AS IT MAY, THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT DEMON STRATE THE FACT THAT SUCH REIMBURSEMENT OF EXPENSES WAS WITHOUT ANY MARK UP. AS THE SO CALLED COMPARABLE CASE OF DATAMATICS FINANCIAL SERVICES LI MITED WAS INCLUDED BY THE TPO IN THE FINAL LIST OF COMPARABLES, IN OUR CONSIDERED OPINION, THE SAME IS LIABLE TO BE EXCLUDED AS IT INVOLVES RELATE D PARTY TRANSACTIONS AT MUCH HIGHER LEVEL, AS AGAINST THE FILTER ADOPTED BY THE TPO HIMSELF, BEING COMPANIES WITH LESS THAN 25% RELATED PARTY TRANSACT IONS. WE ORDER ACCORDINGLY. IN VIEW OF THE ABOVE, SINCE THIS COMPANY FAILS IN THIS FILTER ADOPTED BY THE TPO, WE DIRECT THE TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES ADOPTED. MAPLE E-SOLUTIONS LTD. 12. THE OBJECTION OF THE ASSESSEE WITH REFERENCE T O THIS COMPANY IS WITH REGARD TO THE FINANCIALS OF THE COMPANY, O N THE GROUND OF UNRELIABILITY OF DATA. IT WAS SUBMITTED THAT SELE CTION OF THIS COMPANY WAS REJECTED IN THE CASE OF CRM SERVICES INDIA PVT. LTD IN ITA NO.468/DEL/2009 AND ALSO IN THE CASE OF STREAM INTE RNATIONAL SERVICES (SUPRA). FURTHER, THE ASSESSEE ALSO RELIED ON THE D RP ORDER IN ASSESSMENT YEAR 2007-08, WITH REFERENCE TO THE ABOVE COMPANY. 12.1. WE HAVE CONSIDERED THE RIVAL SUB MISSIONS. WE AGREE WITH THE OBJECTIONS OF THE ASSESSEE. IN THE CASE OF STREAM INTERNATIONAL SERVICES P. LTD. (SUPRA), IT IS HELD WITH REFERENCE TO THIS COM PANY AS UNDER- 18. WE ARE UNABLE TO UPHOLD THE CONTENTION RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IT IS APPARENT FROM TW O ORDERS PASSED ONE BY THE DELHI BENCH AND THE OTHER BY THE HYDERABAD B ENCH OF THE TRIBUNAL I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 21 - : THAT THE CASE OF MAPLE ESOLUTIONS LIMITED HAS BEEN DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. AS THE ASSESSMENT YEA R UNDER CONSIDERATION IS 2006-2007 AND THE DELHI BENCH OF THE TRIBUNAL HAS A LSO CONSIDERED THE SAME ASSESSMENT YEAR WHILE DIRECTING THE EXCLUSION OF THE CASE OF MAPLE E SOLUTIONS LIMITED FROM THE LIST OF COMPARABLES, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE LD. DR IN THIS REGARD. IT IS MORE SO BECAUSE NO CONTRARY VIEW HAS BEEN BROUGHT BY THE LD. DR TO OUR NOTICE. RESPECTFULLY FOLLOWING THE PRECEDENTS, WE DIRECT THE EXCLUSION OF THIS CASE FR OM THE FINAL LIST OF COMPARABLES. SINCE THE DRP IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 ALSO CONSIDERED AND EXCLUDED THIS COMPANY, WE UPHOLD THE ASSESSEES OBJECTION IN THIS REGARD AND DIRECT THE ASSESSING O FFICER TO EXCLUDE THIS COMPANY FROM THE COMPARABLES ADOPTED. NUCLEUS NETSOFT & GIS(INDIA) LTD. 13. THE LAST OBJECTION WAS WITH REFERENCE TO THE A BOVE COMPANY, WHICH IS ON SIMILAR FACTS AS THAT OF VISHAL INFORMA TION TECHNOLOGIES, DISCUSSED ABOVE. IT WAS SUBMITTED THAT THIS COMPAN Y IS FUNCTIONALLY DIFFERENT AND FAILS UNDER THE EMPLOYEE COST FILTER. IT WAS FURTHER SUBMITTED THAT THERE IS A SCHEME OF AMALGAMATION OF EARLIER COMPANY BY THE ORDERS OF THE HONBLE HIGH COURT OF JUDICATURE OF BOMBAY, ON 22.2.2006 AND IN VIEW OF AMALGAMATION, THE FINANCIALS HAVE CHANGED AND THE BUSINESS MODEL ALSO CHANGED. REFERRING TO THE ANNUAL REPORT PLACED ON RECORD, IT WAS SUBMITTED THAT AS AGAINST RS.24.02 LAKHS OF EMP LOYEE COSTS FOR THE YEAR ENDING 31 ST MARCH, 2005, THE EMPLOYEE COST HAS INCREASED TO RS.132.59 LAKHS. FURTHER, THE DATA PROCESSING CHAR GES IS ALSO TO THE EXTENT OF RS.1.04 CRORES, WHICH INDICATES THAT THE ASSESSEE IS OUTSOURCING THE WORK. ACCORDINGLY, IT CANNOT BE SELECTED AS A C OMPARABLE. DUE TO AMALGAMATION DURING THE YEAR, THE ASSESSEES BUSINE SS MODEL HAS CHANGED AND BECAUSE OF EMPLOYEE COST FILTER ALSO, THIS COMPARABLE HAS TO BE EXCLUDED. 13.1 AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABL E NOT ONLY ON THE REASON OF FAILING EMPLOYEE COST FILTER, BUT ALSO DU E TO AMALGAMATION DURING THE YEAR, WHICH HAS CHANGED THE BUSINESS MODEL OF T HE COMPANY. 14. IN VIEW OF THE FOREGOING DISCUSSION, WE AGREE WITH THE ASSESSEES OBJECTION THAT THE ABOVE FIVE COMPARABLE S SHOULD BE EXCLUDED. RESPECTFULLY FOLLOWING THE SAME, WE AGREE WITH ASSE SSEES OBJECTION THAT THE ABOVE FIVE COMPARABLES SHOULD BE EXCLUDED. GROUND NO. 11 IS ACCORDINGLY CONSIDERED ALLOWED. I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 22 - : 13. GROUND NO. 10 FOR INCLUSION OF COMPARABLES REJ ECTED BY THE TPO. IT WAS FAIRLY ADMITTED THAT THESE COMPARA BLE WERE REJECTED BY THE CO-ORDINATE BENCH IN THE CASE OF TN S INDIA PVT. LTD., (AY. 2006-07) (SUPRA). THE ORDER IS AS UNDER II. REJECTION OF COMPARABLES: I) T HE ASSESSEE HAS ALSO CHALLEN GED REJECTION OF THE F O LLOWIN G COMPARABLES SELEC T ED BY IT: 1. GENESYS I N T E RNATIONAL CORP. LTD. ( S E G) 2. GOLDSTONE T ECHNOLOGIES LTD. 3. V ISUALSOFT T ECHNOLOGIES LTD. ( SEG ) 4. QUANTUM ESERVIC ES PVT. LTD. II) LEARNED AR SUBMITTED THAT GENESYS I N T ERNATIONAL CO RP. LTD. HAS BEEN REJECTED BY THE T PO ON THE GROUN D THAT COMPANY F AILS RPT F ILTER. HOWE VER, IT IS THE CONTENTION OF THE LEARNED A R THAT RPT OF THE COMPANY AS A PERC ENTAGE OF SALES IS ONLY 7.63%. IT WAS SUBM ITTED THAT T PO HAS C OMPUTED THE RPT AT 26.34% B Y INCLUDIN G REIMBURSEMENT T RAN SACTIONS WH ICH IS NOT PROPER. III) IN RESPECT OF GOLDSTONE TECHNOLOGIES LTD., IT IS CONTENDED BY THE LEARNED AR T PO HAS REJECTED THIS COMPANY B Y S T A T IN G THAT IT IS A BPO SERVICE PRO VIDER, HOWEVER , AS PE R CO MPANYS RESPONSE T O NOTICE U/S 133(6) OF THE ACT, ITS RE VENUE IS DERIV ED FROM THE EXPORT F ROM IT ES SEGMENTS AS THE COMPANY SA T IS FIES ALL THE FILTERS APPLIED BY THE T PO, IT SHOULD NOT HA VE BEEN REJECTED AS COMPARABLE. IV) SO FAR AS THE VISUAL S O F T TECHNOLOGIES LTD. AND V) QUANTUM ESOLUTIONS P VT. LTD. ARE CONCERNED, IT IS THE CONTENTION OF THE LEARNED AR THAT BOTH THESE CO MPANIES HA VE B EEN REJECTED B Y THE T PO BY APPLYING PERSISTENT LOSS MAKIN G FILTER. IT WAS SUBMITTED B Y T HE LEARNED AR THAT VISUAL S O FT TECHNOLOGIES LTD. AS A WHOLE IS NOT A LOSS MAKING COMPANY AS ON LY B PO SEGMENT IS MAKING LOSS. IT I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 23 - : WAS SUBMITTED THAT SINCE ONE OF THE SEGMENT IS LOSS MAKING , THE COMPANY SHOULD NOT BE REJECTED AS COMPARABLE. IN RESPEC T OF QUANTUM ESOLUTIONS P VT. LTD., IT IS THE CONTENTION OF THE LEARNED AR THAT FY 2005-06 BEIN G FIRST YEA R OF OPERATION OF THE COMPANY IT CANNOT BE TREATED AS PERS ISTENT LOS S MAKING COMPANY. V) T HE LEARNED DR SUPPOR T IN G THE ORDERS OF THE T PO AND DRP SUBMITTED, SINCE T POS REASONIN G F OR EXC LUSION OF THE A FORESAID COMPANIES ARE WELL FOUNDED, THERE IS NO NEED TO CONSIDER THESE COMPANIES AS COMPARAB LES. VI) W E HAVE CONSIDERE D THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. AS CAN BE SEEN FROM THE ANNUAL REPORT OF THE G ENYS IS I N T ERNA T IO NAL CORP. LTD., THIS COMPANY IS ENGAGED IN GEOSPAT ICA L AND M APPING AC TIVITIES, ENGINEERING SERVIC ES, ETC. ITS BUSINESS MODEL IS C OMPLETELY DI FFERENT FROM THE ASSESSEE AND AS SUCH IT IS FUNCTIONALLY DI FFERENT. FURTHER, WE H AVE COME ACRO SS A NUMBER OF CASES WHERE T AXPA YERS HAVE OBJEC TED TO THE A FORESAID COMPANY BEIN G TREATED AS COMPARABLE TO COMPANIES IN ITES SECTOR. THAT BEING THE CASE, WE ARE OF T HE VIE W THAT THE AFORESAID COMPANY CANNOT BE CONSIDERED AS COM PARABLE TO THE ASSESSEE COMPANY. VII) SO FAR AS GOLDSTONE TECHNOLOGIES L TD. IS CONC ERNED, THE COORDINATE BENCH IN CASE OF HSBC (SUPRA) HAS HELD T H AT AF ORESAID COMPANY BEING ENGA GED IN PRO VIDIN G CONSUL T A TION SERVICES WITH VARIOUS MIDDLE WA RE PRODUCTS IS NOT FUNCTIONALLY SIMILAR TO THE C OMPANIES IN THE IT ES SECTOR. IN VIE W OF THE A FORESAID DECISION OF THE COORDINATE BE NCH, THIS COMPANY CANNOT BE CON SIDERED AS COMPARABLE TO THE ASSESSEE. VIII) SO FAR AS THE VISUAL S O FT TECHNOLOGIES PVT LTD. AND QUANTUM E- SOLUTIONS S E RVICES PVT. LTD., A RE CONCE RNED, IT IS SEEN T HA T WHILE THE LOSS OF V ISUA L S O FT TECHNOLOGIES LTD. F OR THE YEA R UNDER C ONSIDERATION IS (-)57.63% THAT OF QUANTUM E-SOLUTIONS S ERVICE S IS (-) 14.11%. WHEN THE ASSESSE E IS OBJEC T IN G TO SUPER NORMAL PRO FIT MAKING COMPANIES BY APP LYING SAME STANDARD LOSS MAKIN G COM PANIES ALSO CANNOT BE TREATED AS COMPARABLE. HENC E, T POS DECIS ION IN RESPECT OF THESE COMPANIES CANNOT BE IN T ER FERED WITH. I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 24 - : IT IS ALSO FAIRLY ADMITTED THAT ONLY ONE COMPANY I. E., GOLDSTONE TECHNOLOGIES LTD., WAS PREFERRED BY ASSESSEE IN THE CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA LTD., IN ITA NO. 1 624/HYD/2010 (SUPRA), WHEREIN AFTER DUE ANALYSIS VIDE PARA 15, T HE INCLUSION OF GOLDSTONE TECHNOLOGIES LTD., WAS NOT ACCEPTED. IN VIEW OF THIS, WE REJECT THE ASSESSEES CONTENTIONS WITH REFERENCE TO THE ABOVE FOUR COMPANIES. GROUND RAISED IS ACCORDINGLY REJECTED 14. GROUND NO. 14 : IT WAS THE OBJECTION OF ASSESS EE THAT EXPENSES RELATING TO MUMBAI OPERATIONS OF ASSESSEE WITH NON- STP/DOMESTIC CUSTOMERS WAS INCLUDED IN THE OPERATIN G COST OF TRANSACTIONS WITH AES FOR DETERMINING THE ALP. IT WAS SUBMITTED THAT DURING THE YEAR THE TAXPAYER COMMENCED A NEW D IVISION AUDATEX, MUMBAI, FOR DISTRIBUTION OF AUDATEX SOFTWA RE OF ADP GROUP TO CUSTOMERS IN INDIA, WHICH IS OPERATIONALLY SEPARATE FROM THE BACK OFFICE BUSINESS AT HYDERABAD. THE EXPENSE S OF THAT BUSINESS INVARIABLY RELATE TO SALARIES, RENT AND T RAVEL. ASSESSEE HAS SHOWN AN INCOME OF RS. 3,27,712/- AND INCURRED AN EXPENSES OF RS. 2,42,26,510/-. ON THE REASON THAT TAXPAYER F AILED TO SUBSTANTIATE THE SAID COST WITH ANY DOCUMENTARY EVI DENCE WHICH IS VERIFIABLE, TPO ALLOCATED THE ABOVE COST IN THE SAM E RATIO OF SOFTWARE DEVELOPMENT AND ITE SERVICES. THE DRP VID E PARA 14 CONCURRED WITH THE OBSERVATIONS OF THE TPO IN ALLOC ATION OF NON- STPI EXPENSES, STATING THAT SEGMENTAL FINANCIALS WE RE NOT SHOWN IN THE AUDITED ANNUAL REPORT OF THE TAXPAYER. 15. AFTER HEARING THE RIVAL CONTENTIONS, WE ARE UN ABLE TO APPRECIATE THE ACTION OF THE TPO AND THE DECISION O F THE DRP. AS FAR AS ASSESSEES ACCOUNTS ARE CONCERNED, ASSESSEE HAS TO MAINTAIN ONLY ONE SINGLE SET OF ACCOUNTS FOR ALL ITS OPERATI ON. SINCE ASSESSEE I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 25 - : HAS SOFTWARE DEVELOPMENT DIVISION AND ITES DIVISION , FOR THE PURPOSE OF TP ANALYSIS, IT HAS FURNISHED SEGMENTAL PROFITS WHICH ARE MORE OR LESS ACCEPTED BY THE TPO, AS HE HAS CON SIDERED ANALYSIS FOR THE ABOVE TWO DIVISIONS SEPARATELY. A SSESSEE HAS SEPARATELY SHOWN THE TRANSACTIONS WITH NON-STPI UNI TS. JUST BECAUSE THE REVENUE FROM THE DIVISION IS LESS, THE EXPENDITURE CLAIMED AGAINST THAT DIVISION CANNOT, WITHOUT ANALY SIS, BE INCLUDED IN THE OTHER DIVISIONS. ASSESSEE SUBMITTED BEFORE THE DRP ALSO THAT IT HAS MAINTAINED SEPARATE BANK ACCOUNT, COPIE S OF THE INVOICES FOR EXPENSES IT IS ALSO FACT THAT THIS DI VISION IS IN MUMBAI WHEREAS THE OTHER TWO I.E., SOFTWARE DEVELOPMENT AN D ITES ARE OPERATING FROM HYDERABAD. THEREFORE, WE ARE OF THE OPINION THAT THE TPO CANNOT INCLUDE THESE EXPENDITURES IN THE TW O SEGMENTS OF OPERATIONS BEING OPERATED FROM HYDERABAD WITHOUT AN Y ANALYSIS. THEREFORE, IN THE INTEREST OF JUSTICE, WE RESTORE T HE GROUND TO THE FILE OF AO/TPO WITH A DIRECTION TO EXAMINE THE NATU RE OF EXPENDITURE AND IF THEY ARE INCURRED FOR THE PURPOS E OF AUDATEX DIVISION FOR DOMESTIC BUSINESS TRANSACTIONS AND HAS NO RELAT ION TO THE SERVICES BEING RENDERED TO AE, THEN WE DIRECT T HE AO/TPO TO EXCLUDE THE SAID EXPENDITURE FROM THE OPERATING COS T BEING WORKED OUT FOR THE TWO SEGMENTS WHILE DETERMINING ALP. WI TH THESE OBSERVATIONS, THE ISSUE IN GROUND NO. 14 IS RESTORE D TO THE FILE OF THE AO/TPO FOR EXAMINATION AND FRESH ADJUDICATION. 16. GROUND NO. 15: ASSESSEE HAS RAISED GROUND NO. 15 SEEKING FOR CONSIDERING THE FUNCTIONAL AND RISK DIF FERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS OF THE APPEALS OF AS SESSEE AND COMPARABLE TRANSACTIONS OF THE COMPARABLE COMPANIES UNDER RULE 10B (1)(E). I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 26 - : 17. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE RE STORE THE ISSUE TO THE FILE OF AO FOR FRESH ADJUDICATION IF R EQUIRED, FOLLOWING THE DIRECTIONS GIVEN IN THE CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA LTD., IN ITA NO. 1624/HYD/2010 (SUPRA), VIDE PARA 17.3 WHICH IS AS UNDER: 17.3. TO THE EXTENT OF PRINCIPLES INVOLVED, WE AGR EE WITH THE ASSESSEES SUBMISSIONS THAT SOME OF THE COMPARABLES MAY BE UNDERTAKING MARKET RISKS/ENTREPRENEURIAL RISKS, WHI CH ARE NOT THERE IN THE CASE OF THE ASSESSEE. HOWEVER, THE ISSUE BO ILS DOWN TO QUANTIFICATION OF SUCH ADJUSTMENT. IN THE WRITTEN SUBMISSIONS, THE ASSESSEE BASED ON THE DECISION OF THE ITAT BANGALOR E IN THE CASE OF PHILIPS SOFTWARE CENTRE PRIVATE LTD. VS. ACIT (119 TTJ 721)(BANG), WHICH PROVIDED FOR 4.5% OF THE RISK ADJUSTMENT AS T HE DIFFERENCE BETWEEN THE AVERAGE PRIME LENDING RATE AND AVERAGE BANK RATE, AS THE BASIS. SINCE THIS WORKING WAS NOT ACCEPTED BY THE ITAT MUMBAI BENCH IN THE CASE OF WILLIS PROCESSING SERVICES IND IA PRIVATE LTD. VS. DCIT, VIDE ITS ORDER DATED 17.12.2012 IN ITA NO.877 2/MUM/2010 FOR ASSESSMENT YEAR 2006-07. THIS ADJUSTMENT OF 4.5 % CANNOT BE CONSIDERED BASED ON PRIME LENDING RATE, WHICH CANNO T BE CONSIDERED AS A MARKET RISK ADOPTED. HOWEVER, THE A SSESSEE IS RELYING ON TWO MORE CASES OF THE COORDINATE BENCHES IN THE CASE OF SONY INDIA LTD. (114 ITD 448)-DEL, WHEREIN THE TRIB UNAL DETERMINED THE RISK ADJUSTMENT AT 20% OF THE ALP FOR A RISK MI TIGATED DISTRIBUTOR. IT ALSO RELIED ON THE DECISION OF THE DELHI BENCH IN THE CASE OF ROLLS ROYCE PLC V/S. DCIT (90 SOT 42), WHER EIN IT WAS DETERMINED AT 35% OF THE COMPANYS PROFITABILITY A LLOCATED TOWARDS MARKETING ACTIVITIES. THEREFORE, IT WAS SUBMITTED T HAT SINCE ASSESSEE DOES NOT HAVE ANY MARKETING ACTIVITIES, A 35% ADJUS TMENT IS WARRANTED FOR THE DIFFERENCE IN RISKS. IT ALSO SUB MITS THAT RISK ADJUSTMENT CAN ALSO BE COMPUTED UNDER THE CAPITAL A SSET PRICING MODEL(CAPM)/ SHARPE MODEL FOR RISK ADJUSTMENTS. SIN CE THE APPLICATION OF THE ABOVE DECISIONS AND FACTS HEREIN ARE TO BE EXAMINED VIS--VIS THE ASSESSEES BUSINESS MODEL, W E, WITHOUT GIVING ANY DIRECTION WITH REFERENCE TO THE RISK ADJ USTMENT AND AMOUNT OF RISK ADJUSTMENT REQUIRED, RESTORE THE MAT TER TO THE FILE OF THE ASSESSING OFFICER TO RE-EXAMINE THIS ADJUSTMENT ISSUE AFRESH, AFTER CONSIDERING THE ASSESSEES SUBMISSIONS AND DE CIDE THE ISSUE IN ACCORDANCE WITH THE PRINCIPLES ON THE SUBJECT. WE DIRECT THE TPO/AO TO DO ACCORDINGLY. GROUND IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 27 - : CORPORATE TAX MATTERS: 18. GROUND NO. 17: THIS GROUND IS PERTAINING TO MA KING ADJUSTMENT OF SET OFF OF NON-STPI LOSSES FROM PROFI TS ELIGIBLE FOR DEDUCTION U/S. 10A. IT WAS THE CONTENTION THAT AO ALLOWED THE SET OFF IN THE DRAFT ASSESSMENT ORDER PASSED U/S. 144C, WHEREAS IN THE FINAL ORDER PASSED U/S. 143(3), MADE THE ADJUSTMENT WHICH IS IN CONTRAVENTION OF DIRECTIONS OF THE DRP AS WELL AS T HE PRINCIPLES OF NATURAL JUSTICE. IT WAS FURTHER SUBMITTED THAT SIM ILAR ISSUE WAS CONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF ASSESSEE IN ITA NO. 1724/HYD/2012 IN AY. 2008-09 AND SIMILAR DIRECTIONS MAY BE GIVEN TO THE AO. 19. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE FI ND THAT WITHOUT GIVING AN OPPORTUNITY TO ASSESSEE, THE AO H AS UNDERTAKEN THIS ADJUSTMENT IN THE FINAL ORDER, EVEN THOUGH THE SAME WAS NOT DONE IN THE DRAFT ORDER, THEREBY DENYING THE ASSESS EE AN OPPORTUNITY IN FILING OBJECTIONS BEFORE THE DRP. T HE ACTION OF THE AO CANNOT BE APPRECIATED. FURTHER, THIS ISSUE WAS ALREADY DECIDED IN THE CO-ORDINATE BENCH DECISION IN AY. 2008-09 AS UNDER: 12. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL ON RECORD. UNDISPUTEDLY, THE ITAT VIDE IT S ORDER DATED 18- 05-2012 PASSED IN ITA NO. 1646/HYD/10 FOR ASSESSMEN T YEAR 2005-06 HAS HELD THAT THE LOSS OF NON STPI UNIT CAN NOT BE SET OFF AGAINST THE INCOME OF STPI UNIT AVAILING DEDUCTION U/S. 10A. THEREFORE, THE DIRECTION OF THE CIT GIVEN IN THE OR DER PASSED BY HIM U/S. 263 OF THE ACT FOR ASSESSMENT YEAR 2005-06 TO THE EFFECT THAT THE DEDUCTION U/S. 10A FOR THE STPI UNIT HAS TO BE COMPUTED AFTER SETTING OFF OF THE LOSSES OF OTHER DIVISIONS WAS RE VERSED BY THE ITAT. IN OTHER WORDS, THE ITAT ALLOWED THE CLAIM WITH REG ARD TO SET OFF AN CARRY FORWARD OF LOSS. IT IS THE CONTENTION OF THE LEARNED AR THAT IF THE DIRECTION OF THE ITAT IS CARRIED OUT THEN THE A SSESSEE WILL GET THE BENEFIT OF CARRY FORWARD OF LOSS AND ASSESSEES CLA IM OF SET OFF OF BROUGHT FORWARD LOSSES FOR THE IMPUGNED ASSESSMENT YEAR HAS TO BE ALLOWED. CONSIDERING THE TOTALITY OF FACTS AND CIR CUMSTANCES OF THE I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 28 - : CASE, WE DEEM IT JUST AND PROPER TO REMIT THE MATTE R TO THE FILE OF THE AO WHO SHALL TAKE A DECISION ON THE ISSUE AFTER THE CONSEQUENTIAL ORDER IS PASSED IN PURSUANCE TO THE DIRECTIONS OF T HE ITAT IN ITA NO. 1646/HYD/2010 PERTAINING TO THE ASSESSMENT YEAR 200 5-06. THE AO SHALL AFFORD AN OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE BEFORE TAKING A FINAL DECISION ON THE ISSUE. THE GROUND R AISED IS ALLOWED FOR STATISTICAL PURPOSE. IN VIEW OF THE ABOVE, WE DIRECT THE AO TO EXCLUDE T HE NON-STPI LOSSES BEING SET OFF TO PROFITS ELIGIBLE FOR DEDUCT ION U/S. 10A. THE SAME CAN BE SET OFF TO OTHER INCOMES OF ASSESSEE IF ANY. AO IS DIRECTED TO FOLLOW THE ORDERS REFERRED TO ABOVE AND DO ACCORDINGLY AFTER GIVING DUE OPPORTUNITY TO ASSESSEE. 20. GROUND NO. 18 PERTAINS TO REDUCING THE COMMUNI CATION CHARGES OF RS. 1,95,30,460/- FROM THE EXPORT TURNOV ER AND NOT REDUCING THE SAME FROM THE TOTAL TURNOVER FOR THE C OMPUTATION OF DEDUCTION U/S. 10A. 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE DECISIONS PLACED ON RECORD. WE FIND THAT THE I SSUE RAISED IN THIS GROUND IS SQUARELY COVERED IN FAVOUR OF ASSESS EE BY THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF GEMPLUS JEWELLERY [330 ITR 175] AND ORDER OF SPECIAL BENCH OF THE ITAT IN THE CASE OF ITO VS. SAK SOFT LIMITED [121 TTJ 865], WHEREIN IT WAS HELD THAT WHILE COMPUTING DEDUCTION U/S. 10A, TELEC OMMUNICATION CHARGES HAVE TO BE REDUCED FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. IN VIEW OF THE RATIO LAID DOWN AS A FORESAID, WE DIRECT THE AO TO RE-COMPUTE THE DEDUCTION U/S. 10A AFTER R EDUCING COMMUNICATION CHARGES FROM THE EXPORT TURNOVER AS W ELL AS TOTAL TURNOVER. ACCORDINGLY, WE ALLOW THE GROUND RAISED BY ASSESSEE. I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 29 - : 22. GROUND NO. 19: THIS GROUND IS WITH REFERENCE TO DISALLOWANCE OF AMOUNT OF RS. 81,41,853/- VIDE PARA 3.1 OF THE ASSESSMENT ORDER. AO NOTICED THAT ASSESSEE HAS DEB ITED AN AMOUNT OF RS. 1,16,31,219/- IN THE P&L A/C AS SOFTW ARE LICENSES WRITTEN OFF. AO GIVES A FINDING THAT THE EXPENDITU RE IS CAPITAL IN NATURE AND THEREFORE NOT ALLOWABLE AS REVENUE EXPE NDITURE. THEREAFTER, HE GIVES A FINDING THAT SOFTWARE LICENS ES ARE ELIGIBLE FOR DEPRECIATION AT 60%. THE AR ALSO IT SEEMS CONSENTE D FOR TAKING DEPRECIATION AT 60%. HOWEVER, AO DISALLOWED AN AMO UNT OF RS. 81,41,853/- BEING 50% OF ALLOWABLE DEPRECIATION AT 60%. THE WORKING HOWEVER IS NOT IN THE ORDER. THEREFORE, HO W HE DISALLOWED THE AMOUNT IN EXCESS OF 40% OR EXCESS OF 70% OUT OF THE TOTAL CLAIM COULD NOT BE UNDERSTOOD. ASSESSEE CONTENDS THAT DI SALLOWING AT 50% IS ALSO NOT CORRECT. 23. EVEN THOUGH ASSESSEE RELIED ON THE CO-ORDINATE BENCH DECISION IN THE CASE OF TNS INDIA PVT. LTD., IN ITA NO. 108/HYD/2011 (AY. 2006-07) (SUPRA), WITH REFERENCE TO RATE OF DEPRECIATION, WE FIND THAT RATE OF DEPRECIATION IS NOT IN DISPUTE. IN THE ABOVE SAID CASE, AO ALLOWED 25%, WHEREAS THE IT AT CONSIDERED AND DIRECTED TO ALLOW DEPRECIATION AT 60% ON SOFTWA RE LICENSE FEE. IN ASSESSEES CASE, AO HIMSELF HAS ACCEPTED ELIGIBL E DEPRECIATION RATE AT 60%. THEREFORE, RELIANCE ON THE CO-ORDINAT E BENCH DECISION IS NOT WARRANTED. THE DISPUTE IS WITH REFERENCE TO WORKING OF DISALLOWANCE AT RS. 81,41,853/-. SINCE THE DETAILS ARE NOT PLACED ON RECORD, ASSESSEE IS NOT AWARE HOW THE AMOUNT DIS ALLOWED WAS WORKED OUT. WE DIRECT THE AO TO GIVE AN OPPORTUNIT Y TO ASSESSEE TO EXPLAIN HOW THE AMOUNT OF DEPRECIATION WAS WORKED O UT AND EXCESS CLAIM WAS DISALLOWED. AO IS DIRECTED TO GIVE DUE O PPORTUNITY AND NECESSARY WORKING TO ASSESSEE AND THEN DECIDE THE I SSUE. FOR THIS I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 30 - : PURPOSE, THE ISSUE IN GROUND NO. 19 IS RESTORED TO THE FILE OF AO FOR FRESH WORKING OF THE DISALLOWANCE AS DIRECTED ABOVE . 24. GROUND NO. 20 PERTAINS TO WORKING OF INTEREST U/S. 234B. THIS BEING CONSEQUENTIAL, AO IS DIRECTED TO GIVE AN OPPORTUNITY TO ASSESSEE BEFORE LEVYING ANY INTEREST IN THE CONSEQUENTIAL ORDERS, WHILE IMPLEMENTING THE DIRECT IONS GIVEN ABOVE. GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 25. IN THE RESULT, APPEAL IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD DECEMBER, 2015 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 23 RD DECEMBER, 2015 TNMM I.T.A. NO. 1560/HYD/2010 ADP PRIVATE LIMITED :- 31 - : COPY TO : 1. ADP PRIVATE LIMITED, 6-3-1091/C/1, RAJBHAVAN ROA D, SOMAJIGUDA, HYDERABAD. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1( 1), AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATI ON, INCOME TAX TOWERS, HYDERABAD. 5. THE ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICING), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.