HSBC Electronic Data Processing India Private Limited, Hyderabad V. The Asst. CIT, Circle 2(2), Hyderabad

ITA 1647/HYD/2012

• Counselvise Citation: 164722514 RSA 2012
• Duration Of Justice: 1 year(s) 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 05-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Keywords: Related party transaction; Capital asset; Business income; Transfer pricing; International transaction; Services rendered outside India; Working capital adjustments; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3); 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1647/HYD/2012 ASSESSMENT YEAR 2008-2009 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD 500 081. PAN AAACH8235M VS. THE ACIT, CIRCLE 2(2) HYDERABAD 500 004. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. RAJAN VORA FOR RESPONDENT : MR. D. SUDHAKAR RAO DATE OF HEARING : 03.09.2014 DATE OF PRONOUNCEMENT : 24.10.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL IS PREFERRED BY ASSESSEE AGAINST THE ORDER OF AO DATED 20-09-2012 PASSED UNDER SEC 143(3 ) READ WITH SEC.144COF THE IT ACT 1961 CONSEQUENT TO THE D IRECTIONS OF DISPUTES RESOLUTION PANEL, HYDERABAD DATED 30.08 .2012 FOR THE A.Y. 2008-09. 2. BRIEFLY STATED, HSBC ELECTRONIC DATA PROCESSIN G INDIA PRIVATE LIMITED (HEREAFTER REFERRED TO AS ' HDPI ') IS A WHOLLY OWNED SUBSIDIARY OF HSBC HOLDINGS PLC (TOGET HER WITH ITS ASSOCIATES REFERRED TO AS 'HSBC GROUP'), ONE OF THE LEADING BANKING AND FINANCIAL SERVICES ORGANISATIONS IN THE WORLD. HDPI PROVIDES A RANGE OF BACK OFFICE SERVICES INCLU DING CONTACT CENTRE, DATA ENTRY, DATA PROCESSING AND RELATED SER VICES (TOGETHER REFERRED TO AS 'BPO SERVICES') TO ITS GROUP 2 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. COMPANIES/ASSOCIATED ENTERPRISES ('AE') ACROSS THE GLOBE. THE ASSEESSEE'S SERVICE CENTRES ARE REGISTERED AS A 100 % EXPORT ORIENTED UNIT UNDER THE SOFTWARE TECHNOLOGY PARKS O F INDIA (STPI') SCHEME. ASSESSEE HAS ALSO ESTABLISHED A BRANCH IN T HE UK TO FACILITATE THE IDENTIFICATION AND EFFECTIVE M IGRATION OF WORK TO INDIA FROM AES. THE ASSESSEE RENDERS SERVICES AS A CAPTIVE CONTRACT SERVICE PROVIDER AND IS REMUNERATE D ON A COST PLUS MARK-UP BASIS FOR PROVIDING THE SERVICES TO IT S AES. ASSESSEE HAD FILED RETURN OF INCOME FOR THE ASSESSM ENT YEAR 2008-09 ON SEPTEMBER 25, 2008 DISCLOSING A TAXABLE INCOME OF RS.65,76,218 AFTER CLAIMING DEDUCTION U/S 10A OF THE INCOME TAX ACT, 1961 IN RESPECT OF THE PROFITS FROM EXPORT OF SERVICES FROM THE STPI UNITS AND ADMITTING A TAXABLE INCOME OF RS.107,48,10,745 UNDER MAT. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, T HE ACIT CIRCLE-2(2) (HEREIN AFTER REFERRED AS 'ASSESSING OFFICER' OR 'AO') SELECTED THE CASE FOR SCRUTINY ASSESSMENT AND ISSUE D A NOTICE U/S 143(2) OF THE ACT, AND FURTHER MADE A RE FERENCE U/S 92CA(1) OF THE ACT TO THE LEARNED ADDITIONAL COMMIS SIONER OF INCOME-TAX (TRANSFER PRICING) (HEREIN AFTER REFERRE D AS 'TRANSFER PRICING OFFICER' OR 'TPO') FOR DETERMINATION OF ARM'S LENGTH PRICE (,ALP') OF THE INTERNATIONAL TRANSACTIONS WITH AES. 4. THE INTERNATIONAL TRANSACTIONS OF ASSEESSEE WI TH AES DURING THE YEAR ARE AS UNDER : PROVISION OF BPO SERVICES RS.1249,63,10,000; REIMBURSEMENTS TO AES RS.61,02,49,716; REIMBURSEMENTS BY AES RS.26,67,67,677; PAYMENT OF BANK CHARGES RS.50,85,988; PAYMENT OF GUARANTEE COMMISSION RS.15,174; AND INTEREST RECEIVED ON FIXED DEPOSITS RS.72,64,021. 3 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. FOR THE PURPOSE OF ESTABLISHING THE ALP OF ITS INTE RNATIONAL TRANSACTION WITH AE, THE ASSESSEE HAD UNDERTAKEN A TRANSFER PRICING STUDY, CARRIED OUT BY AN INDEPENDENT EXTERN AL CONSULTANT, IN ACCORDANCE WITH THE PROVISIONS OF TH E ACT, READ WITH THE INCOME-TAX RULES, 1962 ('RULES'). A DETAIL ED ANALYSIS WAS UNDERTAKEN TO DETERMINE THE FUNCTIONS PERFORMED , RISKS ASSUMED AND ASSETS UTILIZED BY THE ASSESSEE AND ITS AES IN RESPECT OF THE INTERNATIONAL TRANSACTIONS BETWEEN T HEM. BASED ON THE TRANSFER PRICING STUDY, IT WAS CCONCLUDED TH AT THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH AES ARE AT ARM'S LENGTH. 5. THE KEY FEATURES OF THE TRANSFER PRICING ('TP') STUDY UNDERTAKEN IN RESPECT OF INTERNATIONAL RELATING TO PROVISION OF BPO SERVICES ARE SUMMARISED BELOW : AS PER THE FUNCTIONAL ANALYSIS, ASSESSEE WAS CATEGORISED AS A RISK MITIGATED CONTRACT SERVICE PROVIDER AND SELECTED AS THE TESTED PARTY ; TRANSACTION NET MARGIN METHOD ('TNMM') WAS DETERMINED AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP ; THE SEARCH WAS CONDUCTED ON PROWESS DATABASE AND CAPITALINE DATABASE TO SELECT COMPARABLE COMPANIES ('COMPARABLES'); OPERATING MARGIN I.E. OPERATING PROFIT/OPERATING CO ST WAS SELECTED AS THE PROFIT LEVEL INDICATOR (PLI') FOR THE PURPOSE OF DETERMINING ALP; GIVEN THE NATURE OF THE INTERNATIONAL TRANSACTION UNDER REVIEW, ECONOMIC CONDITIONS, DIFFERENCES IN BUSINESS OR PRODUCT LIFE CYCLES AND OTHER SIMILAR FACTORS AND ALSO THE FACT THAT AUDITED FINANCIAL DA TA FOR THE AY 2007-08 WAS NOT AVAILABLE IN ALL CASES, FINANCIAL DATA OF AY 2006-07 AND AY 2005-06 WAS ALSO CONSIDERED, ALONG WITH INTERIM/UNAUDITED 4 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. RESULTS FOR AY 2007-08; THE ECONOMIC ANALYSIS YIELDED A SET OF 7 COMPARABLE S WITH WEIGHTED AVERAGE ARITHMETIC MEAN OF 13.30 %. THERE WERE FUNCTIONAL AND RISK DIFFERENCES BETWEEN THE ASSESSEE AND THE COMPARABLES. HOWEVER, NO ADJUSTMENTS WERE UNDERTAKEN IN THE TP REPORT, SINCE , THE ASSESSEES NET MARGIN FROM THE PROVISION OF SERVICES TO ITS AES (13.30%) DURING THE YEAR WAS WITHIN THE ARM'S LENGTH RANGE DETERMINED. 6. THERE WERE SERIES OF SUBMISSIONS MADE BY AS SESSEE BEFORE THE TPO IN RESPONSE TO THE NOTICES, TO JUSTI FY THE ARM'S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIONS. WH ILE THE TPO ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD AND TH E PLI (OPERATING PROFIT/OPERATING COST) ADOPTED THEREIN, HE REJECTED THE ECONOMIC ANALYSIS UNDERTAKEN BY ASSESSEE IN THE TP DOCUMENTATION INTER ALIA STATING THAT THE MULTIPLE YEAR DATA HAS BEEN USED AND THE COMPARABILITY ANALYSIS IS DEF ECTIVE. TPO CONDUCTED A FRESH SEARCH ON THE DATABASES (I.E., PR OWESS AND CAPITALINE) DURING THE ASSESSMENT PROCEEDINGS. TPO USED POWERS U/S 133(6) OF THE ACT TO OBTAIN SELECTIVE IN FORMATION FROM CERTAIN COMPANIES AND USED THE SAME FOR DETERM INING THE ALP. TPO APPLIED THE FOLLOWING ADDITIONAL FILTERS F OR COMPARATIVE ANALYSIS: A) REJECTION OF COMPANIES HAVING DIFFERENT FINANCIAL Y EAR; B) REJECTION OF COMPANIES HAVING DIMINISHING REVENUES FILTER/PERSISTENT LOSS MAKING; C) REJECTION OF COMPANIES HAVING RELATED PARTY TRANSACTIONS IN EXCESS OF 25% OF REVENUE ; AND D) REJECTION OF COMPANIES HAVING FOREIGN EXCHANGE EARNINGS LESS THAN 25% OF REVENUE. 5 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 7. THE TPO HAS SELECTED 20 COMPANIES AS CO MPARABLES WITH AVERAGE MARGIN OF 29.26% AFTER MAKING A NEGATI VE WORKING CAPITAL ADJUSTMENT OF 0.10%. TPO ALSO ADDED THE REIMBURSEMENT RELATED TO TRAVEL COSTS RECEIVED BY A SSESSEE TO THE OPERATING COST FOR DETERMINATION OF ALP. ACCORD INGLY, TPO MADE THE TP ADJUSTMENT OF RS.87,70,17,393 TO THE PR ICE RECEIVED BY ASSESSEE FOR THE SERVICES RENDERED TO I TS AES. AO ADOPTED THE SAME IN HIS DRAFT ASSESSMENT ORDER U/S 143(3) READ WITH 144C( 1) OF THE ACT ('DRAFT ORDER') DATED : NOVEMBER 24, 2011 PROPOSING ADDITIONS TO THE TOTAL INCOME. F URTHER AO REDUCED FOREIGN EXCHANGE GAIN OF RS 20,29,39,202 FR OM BUSINESS PROFITS AND COMMUNICATION CHARGES OF RS 1, 38,24,765 FROM THE EXPORT TURNOVER, FOR THE PURPOSE OF COMPUT ING DEDUCTION U/S. 10A IN APPLYING THE PRESCRIBED FORMU LA. 8. ASSESSEE FILED ITS OBJECTIONS WITH THE DRP ON THE ADDITIONS PROPOSED BY AO IN THE DRAFT ORDER. AS PE R THE DIRECTIONS ISSUED DRP HAS PRINCIPALLY AGREED WITH T HE APPROACH ADOPTED AND CONTENTIONS OF THE TPO/AO AND HAS UPHELD THE DRAFT ORDER ON ALL ISSUES EXCEPT FOR PRO VIDING RELIEF ON TWO COMPARABLES OBJECTED BY ASSESSEE. AGGRIEVED BY THE AO/DRP ORDER, ASSESSEE HAS PREFERRED APPEAL BEFORE THE TRIBUNAL. 9. WE HAVE HEARD THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI RAJAN VORA AND THE LEARNED DEPARTMEN TAL REPRESENTATIVE SRI D. SUDHAKAR RAO IN DETAIL. THE ASSESSEE HAS PLACED PAPER-BOOK 1 CONTAINING PAGES 1 TO 401 AND PAPER BOOK 2 CONTAINING PAGES 402 TO 600. THE ASSESSEE IS AGGRIEVED IN GROUNDS NO.1 TO 12 ON THE TP ADJUSTMEN TS MADE. IN ADDITION TO THE TP ADJUSTMENTS, THERE ARE OTHER ISSUES ON 6 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. THE CORPORATE TAX MATTERS WHICH ARE CONSIDERED IN T HE COURSE OF THIS ORDER. 10. EVEN THOUGH ASSESSEE HAS RAISED VARIOU S OBJECTIONS ON THE REJECTION OF ITS TRANSFER PRICING DOCUMENTATION, REJECTION OF MULTIPLE YEAR DATA, OBT AINING INFORMATION UNDER S.133(6), USE OF ADDITIONAL FILTE RS, ETC., THE ARGUMENTS ARE CONFINED TO SELECTION OF COMPARABLES AND RISK ADJUSTMENT. IN THE COURSE OF ARGUMENTS, THE LEARNE D COUNSEL FAIRLY RESTRICTED HIS ARGUMENTS TO ONLY COMPARABLES SELECTED BY THE TPO. EVEN THOUGH COMPARABLES SELECTED BY ASSESS EE BUT REJECTED BY THE TPO WERE ALSO CONTESTED IN GROUND 8 , THE SAME WAS NOT PRESSED IN THE COURSE OF ARGUMENTS. 11. IN MAKING THE T.P. ADJUSTMENT, THE TPO SELECTE D 20 COMPANIES AND ARRIVED AT AN AVERAGE PLI OF 29.26 % (OP/OC). AFTER GIVING WORKING CAPITAL ADJUSTMENTS, IT WAS DETERMINED AT 24.12%. OUT OF THE 20 COMPARABLES SEL ECTED BY THE TPO, THE DRP HOWEVER ACCEPTED THE ASSESSEES OB JECTIONS AND EXCLUDED TWO COMPARABLES AT ITEM NO.6 AND ITEM NO.17 I.E., CORAL HUB (VISHAL INFO.) AND MOLD TEK. THE AS SESSEE IS OBJECTING TO SOME OF THE COMPARABLES IN THE FINAL L IST OF 18 COMPARABLES AFTER THE DRP ORDER. THE LIST OF 18 CO MPARABLE COMPANIES AS FINALLY SELECTED ARE AS UNDER : S.NO. COMPANY PLI 1. ACCENTIA TECHNOLOGIES LTD. 43.62% 2. ACROPETAL TECHNOLOGIES LTD. (SEG) 31.77% 3. ADITYA BIRLA MINACS WORLD WISE LTD -5.76% 4. ASIT C MEHTA FINANCIAL SERVICES LTD 10.31% 5. CALIBER POINT BUSINESS SOLUTIONS LTD. (SEG) 10.0 9% 6. COSMIC GLOBAL LTD., 27.26% 7. CROSSDOMAIN SOLUTIONS P. LTD. 29.15% 8. DATAMATICS FINANCIAL SERVICES (BPO) DIV. 36.40% 7 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 9. E4E HEALTH CARE SOLUTIONS(EARLIER KNOWN AS NITTANY OUTSOURCING SERVICES P. LTD.,) 17.60% 10. ECLERX SERVICES LTD 68.55% 11. GENESYS INTERNATIONAL CORPORATION LTD 48.21% 12. HCL COMNET SYSTEMS & SERVICES LTD. (SEG.) 33.50 % 13. ICRA ONLINE LTD. (SEG.) 11.04% 14. INFOSYS BPO LTD., 21.78% 15. I-SERVICES INDIA PVT. LTD. 11.20% 16. R SYSTEMS INTERNATIONAL LTD. (SEG.) 5.99% 17. SPANCO LTD. (SEG.) 6.42% 18. WIPRO BPO 40.43% 12. WE HAVE HEARD SUBMISSIONS OF BOTH THE PARTIES. THE LEARNED COUNSEL GAVE DETAILED CHART ON EACH OF THE COMPANIES THAT WERE CONSIDERED AS COMPARABLE BY THE TPO AND HAS ALSO EXPLAINED AS TO WHY SOME OF THOSE COMP ANIES CANNOT BE CONSIDERED AS COMPARABLES. HE MAINLY RELI ED ON THE COORDINATE BENCH DECISIONS IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. 38 TAXMAN.COM 5 (BANG) DATED 14.08.2013 WHICH IN TURN, HAS RELIED ON THE I TAT, HYDERABAD A BENCH DECISION IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA P. LTD. 32 TAXMAN.COM 21 DATED NOVEMBER 23, 2012. LEARNED COUNSEL ALSO RELIED ON T HE DECISION OF ITAT, HYDERABAD B BENCH IN THE CASE O F ZAVATA INDIA P. LTD. VS. DCIT, HYDERABAD REPORTED AT 35 TA XMAN.COM 423 DATED 07.06.2013. 13. THE LEARNED D.R. ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO AND DIRECTIONS OF THE DRP WHEREIN THE DRP HAS GIVEN REASONS AS TO WHY THE OBJECTIONS OF THE A SSESSEE TO THE COMPARABLES PROPOSED BY THE TPO SHOULD NOT BE A CCEPTED. 14. THE OBJECTION IS WITH REFERENCE TO SELECTI ON OF COMPARABLES BY THE TPO WITH REFERENCE TO THE FOLLOW ING COMPANIES- 8 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. ACCENTIA TECHNOLOGIES LTD. (SEG.) 14.1.1 THIS WAS CONSIDERED AS A COMPARABLE BY THE TPO AND LISTED AT SL.NO.1 OF THE COMPARABLE COMPANI ES CHOSEN BY THE TPO. THE LD. COUNSEL FOR THE ASSESSEE DREW O UR ATTENTION TO THE FACT THAT THERE ARE EXTRA ORDINARY EVENTS THAT OCCURRED DURING THE PREVIOUS YEAR IN THIS COMPANY. OUR ATTENTION WAS DRAWN TO THE ANNUAL REPORT OF THIS CO MPANY FOR THE A.Y. 2007-08 WHEREIN THE FACT THAT THIS COMPANY HAD ACQUIRED THUNGA SOFTWARE PVT. LTD., GSR PHYSICIANS BILLING SERVICES INC., GSR SYSTEMS INC. AND DENMED INC. WAS MENTIONED. OUR ATTENTION WAS ALSO DRAWN TO THE DECI SION OF THE HYDERABAD ITAT BENCH IN THE CASE OF HYUNDAI MOTORS INDIA ENGINEERING P. LTD., HYDERABAD VS. ITO, WARD 2(2), HYDERABAD ITA.NO.1850/HYD/2012 DATED 21.02.2014 AND ORDER OF COORDINATE BENCH OF BANGALORE TRIBUNAL IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA P. LTD., BANGALO RE VS. ITO, WARD 12(2), BANGALORE IT(T.P.)A.NO.1316/BANG/2 012 DATED 14.08.2013. OUR ATTENTION WAS ALSO DRAWN TO T HE DECISION OF THE HYDERABAD ITAT BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA ITA NO.1316/BANG/2012 PVT . LTD. V. DCIT [ 2013] 32 TAXMAN.COM 21 (HYD. TRIB). IN TH E AFORESAID DECISION, THE HYDERABAD BENCH OF THE TRIBUNAL HAD T O DEAL WITH A CASE OF DETERMINATION OF ALP IN THE CASE OF AN ASSESSEE WHO WAS PROVIDING ITES BUSINESS SUPPORT SERVICES FO R THE A.Y. 2007-08. THE TPO HAD CONSIDERED ACCENTIA TECHNOLOGI ES LTD. AS A COMPARABLE. THE DRP HOWEVER HELD THAT THE SAID COMPANY CANNOT BE COMPARED AS A COMPARABLE OWING TO EXTRA O RDINARY EVENTS THAT TOOK PLACE DURING THE PREVIOUS YEAR. TH E TRIBUNAL UPHELD THE ORDER OF THE DRP OBSERVING AS FOLLOWS :- 9 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 'I. ACCENTIA TECHNOLOGIES LTD. 10. IT IS THE SUBMISSION OF THE ASSESSEE THAT THIS COMPANY CANNOT BE TREATED AS A COMPARABLE BECAUSE OF UNCOMPARABLE FINANCIAL RESULTS ARISING OUT OF AMALGAMATION IN THE COMPANY. IN THIS REGARD, THE ASSESSEE HAS RELIED UPON THE ORDER OF THE DRP FOR T HE ASSESSMENT YEAR 2008-09 IN ASSESSEE'S OWN CASE. IT IS SEEN THAT THE DRP WHILE CONSIDERING SIMILAR OBJECTI ON PLACED BY THE ASSESSEE IN THE CASE OF ANOTHER COMPA NY, VIZ. MOLD TEK TECHNOLOGIES LTD., IN THE PROCEEDINGS RELATING TO THE ASSESSMENT YEAR 2008-09, HAS OBSERV ED IN THE FOLLOWING MANNER- '17.5. IN ADDITION TO THE ABOVE, THE DIRECTOR'S REP ORT OF THE COMPANY FOR THE FY 2007-08 REVEALED THE MERGER AND THE DEMERGER. A COMPANY KNOWN AS TECHMEN TOOLS PVT. LTD . HAD AMALGAMATED WITH MOLD-TEK TECHNOLOGIES LTD. WIT H EFFECT FORM 1ST OCTOBER, 2006. THERE WAS A DE- MERG ER OF PLASTIC DIVISION OF THE COMPANY AND THE RESULTING C OMPANY IS KNOWN AS MOLDTEK PLASTICS LIMITED. THE DE-MERGER FROM THE MOLDTEK TECHNOLOGIES TOOK PLACE WITH EFFECT FRO M 1ST APRIL, 2007. THE MERGER AND THE DE- MERGER NEEDED T HE APPROVAL OF THE HON'BLE HIGH COURT OF ANDHRA PRADES H AND ALSO THE APPROVAL OF THE SHAREHOLDERS. THE SHAREHOLDERS OF THE COMPANY GAVE APPROVAL FOR THE M ERGER AND THE DE-MERGER ON 25.01.2008 AND THE HON'BLE HIG H COURT OF ANDHRA PRADESH HAD APPROVED THE MERGER AND DE-MERGER ON 25TH JULY, 2008. SUBSEQUENTLY, THE ITA NO.1316/BANG/2012 ACCOUNTS OF MOLDTEK TECHNOLOGIES FOR FY 2007-08 WERE REVISED. ON A PERUSAL OF THE AN NUAL REPORT IT IS NOTICED THAT TECKMEN TOOLS PVT. LTD. A ND THE PLASTIC DIVISION OF THE COMPANY WERE DEMERGED AND T HE RESULTING COMPANY WAS NAMED AS MOLDTEK PLASTICS LTD . THE KPO BUSINESS REMAINED WITH THE COMPANY. A PERUS AL OF THE ANNUAL REPORT REVEALED THAT TO GIVE EFFECT T O THE MERGER AND DEMERGER, THE FINANCIAL STATEMENTS WERE REVISED AND RESTATED AFTER SIX MONTHS FORM THE END OF THE FINANCIAL YEAR 31.3. 2008. THE ASSESSEE FILED FORM NO.21 UNDER THE COMPANIES ACT WITH THE REGISTRAR OF COMPA NIES ON 26TH AUGUST, 2008. THUS THE EFFECTIVE DATE OF TH E SCHEME OF MERGER AND DEMERGER WAS 26TH AUGUST, 2008 . THE ANNUAL REPORT SUPPORTED THE ARGUMENT OF THE ASSESSEE THAT THERE WERE MERGER AND DEMERGER IN THE FINANCIAL YEAR AND IT WAS AN EXCEPTIONAL YEAR OF PERFORMANCE AS FINANCIAL STATEMENTS WERE REVISED BY THIS COMPANY MUCH AFTER THE CLOSURE OF THE PREVIOUS YEAR . THE 10 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. PANEL AGREES WITH THE CONTENTION OF THE ASSESSEE TH AT IT IS AN EXCEPTIONAL YEAR HAVING SIGNIFICANT IMPACT ON TH E PROFITABILITY ARISING OUT OF MERGER AND DEMERGER.' 11. ON CAREFUL CONSIDERATION OF THE MATTER, WE ALSO AGREE WITH THE AFORESAID VIEW OF THE DRP THAT EXTRA-ORDIN ARY EVENT LIKE MERGER AND DE-MERGER WILL HAVE AN EFFECT ON THE PROFITABILITY OF THE COMPANY IN THE FINANCIAL YEAR IN WHICH SUCH EVENT TAKES PLACE. IT IS THE CONTENTION OF THE ASSESSEE THAT IN CASE OF THE AFORESAID COMPANY, THERE IS AMALGAMATION IN DECEMBER, 2006, WHICH HAS IMPACTED THE FINANCIAL RESULT. THIS FACT HAS TO BE VERIFIED BY THE TPO. IF IT IS FOUND UPON SUCH VERIFICATION THAT THE AMALGAMATION IN FACT AHS TAKEN PLACE, THEN THE AFOR ESAID COMPARABLE HAS TO BE EXCLUDED.' 14.1.2 WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD . COUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT THE RATIO LAID DOWN BY THE HYDERABAD BENCH OF THE ITAT IS SQUARELY APPLICABLE TO THE PRESENT CASE ALSO. SIMILAR VIEW W AS ALSO TAKEN IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA(P) LTD (SUPRA) BY THE BANGALORE BENCH. IT IS CLEAR THA T DURING THE PREVIOUS YEAR THERE WERE EXTRA ORDINARY EVENTS THAT TOOK PLACE IN THIS COMPANY WHICH WARRANTS EXCLUSION OF THIS CO MPANY AS A COMPARABLE. WE THEREFORE HOLD THAT THIS COMPANY C ANNOT BE CONSIDERED AS A COMPARABLE. ACROPETAL TECHNOLOGIES LTD. (SEG.) 14.2.1 THIS COMPANY IS LISTED AT SL.NO.2 OF THE COMPARABLES CHOSEN BY THE TPO. AS FAR AS THIS COMPANY IS CONCER NED, THE OBJECTION OF THE ASSESSEE IS THAT THIS COMPANY IS N OT FUNCTIONALLY COMPARABLE. THE ASSESSEE IS A BPO COMP ANY THAT PROVIDES CAD/ CAE SERVICES. AS FAR AS ACROPETAL TEC HNOLOGIES LTD. IS CONCERNED, THIS COMPANY DOES THE BUSINESS O F EXPORT OF SOFTWARE SERVICES. IT IS ALSO SEEN FROM THE SEGMENT AL REVENUE OF THIS COMPANY (NOTE 15 TO THE NOTES ON ACCOUNTS TO A NNUAL REPORT FOR 07-08) THAT IT DERIVES INCOME FROM ENGIN EERING 11 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. DESIGN SERVICES AND SOFTWARE DEVELOPMENT SERVICES. IT IS ALSO PERTINENT TO POINT OUT THAT BEFORE THE TPO, THE ASS ESSEE RAISED AN OBJECTION THAT THIS COMPANY PERFORMS DIFFERENT F UNCTIONS AND MAINLY ENGAGED IN THE AREA OF SOFTWARE DEVELOPM ENT SERVICES AND ENGINEERING DESIGN SERVICES. THE TPO I N HIS ORDER HAS OBSERVED THAT THE SERVICES RENDERED BY THIS COM PANY FALL IN THE DEFINITION OF ITES. 14.2.2 WE HAVE CONSIDERED THE SUBMISSIONS OF T HE LEARNED COUNSEL FOR THE ASSESSEE. LD COUNSEL SUBMISSION WAS THAT THIS COMPANY WAS EXCLUDED IN THE CASE OF SYMPHONY MARKET ING SOLUTIONS INDIA(P) LTD (SUPRA) BY THE BANGALORE BEN CH, SO THE SAME REQUIRE EXCLUSION. IN THE ABOVE CASE IT WAS CO NSIDERED LIKE THIS: 13. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LEARN ED COUNSEL FOR THE ASSESSEE. ON A PERUSAL OF THE NOTE NO.15 OF NOTES TO ACCOUNTS WHICH GIVES SEGMENTAL REVENUE OF THIS COMPANY, IT IS CLEAR THAT THE MAJOR SOURCE OF INCOM E FOR THIS COMPANY IS FROM PROVIDING ENGINEERING DESIGN SERVIC E AND INFORMATION TECHNOLOGY SERVICES. THE FUNCTIONS PERF ORMED BY THE ENGINEERING DESIGN SERVICES SEGMENT OF THE COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO THE ITES/BPO FUNCTIONS PERFORMED BY THE ASSESSEE. THE PERFORMANCE OF ENGINEERING DESIGN SERVICES IS REGAR DED AS PROVIDING HIGH END SERVICES AMONG THE BPO WHICH REQ UIRES HIGH SKILL WHEREAS THE SERVICES PERFORMED BY THE AS SESSEE ARE ROUTINE LOW END ITES FUNCTIONS. WE THEREFORE HO LD THAT THIS COMPANY COULD NOT HAVE BEEN SELECTED AS A COMPARABLE, ESPECIALLY WHEN IT PERFORMS ENGINEERING DESIGN SERVICES WHICH ONLY A KNOWLEDGE PROCESS OUTSOURCING [KPO] WOULD DO AND NOT A BUSINESS PROCE SS OUTSOURCING [BPO]. AS CAN BE SEEN ABOVE, SAID COMPANY WAS EXCLUDED ON THE DIFFERENTIATION OF HIGH END SERVICES BEING PROVIDED BY THIS COMPANY. ASSESSEE DOES NOT PROVIDE HIGH END SERVICE S AS SUBMITTED. THEREFORE WE ARE OF THE OPINION THAT FUN CTIONS OF 12 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. ASSESSEE ARE NOT SIMILAR TO THE ABOVE COMPANY. WE D IRECT THE TPO/AO TO EXCLUDE THIS COMPANY. COSMIC GLOBAL LTD., 14.3.1 THIS COMPANY IS SHOWN AT SL.NO.7 OF THE L IST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. THIS COMPA RABLE WITH OPERATING PROFITS BY TOTAL COST AFTER ADJUSTME NTS OF WORKING CAPITAL WAS SHOWN AT 26.51% BY THE TPO. ASS ESSEE OBJECTED TO THE COMPARABLE ON THE REASON THAT IT FA ILS EMPLOYEE COST FILTER. THE EMPLOYEE COST SHOWN WAS AT RS.1.17 CRORES WHICH IS 19.96% OF THE OPERATING REVENUE OF RS.5.87 CRORES. IT WAS SUBMITTED BY THE LEARNED COUNSEL THAT EMPLOYEES COST FILTER DETERMINED BY THE TPO WAS BETWEEN 45% TO 60% WHEREAS, THIS COMPANY HAS ONLY 19.96% AS EMPLOYEE C OST. ACCORDINGLY, THIS COMPANY IS NOT A COMPARABLE COMPA NY AS IT MAY BE OUTSOURCING THE WORK. 14.3.2 THE LEARNED D.R. HOWEVER, SUBMITTED THAT ASSESSEE HAS ACCEPTED THE SAME IN THE TPO PROCEEDIN GS. THEREFORE, SHOULD NOT BE EXCLUDED NOW. 14.3.3 WHILE THERE WAS NO OBJECTION FOR ASSESSEE OB JECTING TO THE COMPARABLE EVEN AT A LATER STAGE WHEN IT COM ES TO KNOW OF NEW FACTS, WHAT WE NOTICED IS THAT THE ASSESSEE S OBJECTIONS BEFORE THE DRP HAVE NOT BEEN ADDRESSED BY THE DRP. IT IS FOR THE TPO TO DETERMINE WHETHER THIS COMPANY FALLS WIT HIN THE FILTERS AS ADOPTED BY THE TPO HIMSELF. IF THE COMPA NY FAILS THE EMPLOYEE COST FILTER, THEN THE SAME CANNOT BE ACCEP TED AS A COMPARABLE COMPANY. IN ORDER TO EXAMINE THIS ASPECT , WE ARE OF THE OPINION THAT SELECTION OF THIS COMPARABLE IS TO BE RESTORED TO THE FILE OF THE TPO FOR FRESH EXAMINATI ON, AFTER 13 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. GIVING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. THE ISSUE IS RESTORED TO THE FILE OF THE TPO. ECLERX SERVICES LTD. (SEG.) : 14.4.1 THIS COMPANY IS LISTED AT SL.NO.11 IN THE L IST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. IT IS THE S TAND OF THE ASSESSEE THAT THIS COMPANY OFFERS SOLUTIONS THA T INCLUDE DATA ANALYTICS, OPERATIONS MANAGEMENT, AUDITS AND RECONCILIATION AND THEREFORE HAS TO BE CLASSIFIED A S HIGH END KPO. IN SUPPORT OF THE STAND OF THE ASSESSEE, EXTRA CTS FROM THE ANNUAL REPORT OF THIS COMPANY HAVE BEEN POINTED OUT . IT HAS FURTHER BEEN SUBMITTED THAT EXTRA ORDINARY EVENTS A ND PECULIAR CIRCUMSTANCES PREVAIL IN THE CASE OF THE ASSESSEE I N AS MUCH AS THIS COMPANY ACQUIRED A UK BASED COMPANY WHICH H AS SIGNIFICANTLY CONTRIBUTED TO THE INCREASE IN THE CU STOMER AND REVENUE BASE OF THE COMPANY. OUR ATTENTION WAS ALSO DRAWN TO THE DECISION OF THE HYDERABAD ITAT BENCH IN THE CAS E OF HYUNDAI MOTORS INDIA ENGINEERING P. LTD., HYDERABAD VS. ITO, WARD 2(2), HYDERABAD ITA.NO.1850/HYD/2012 DATED 21.02.2014, M/S. MARKET TOOLS RESEARCH P. LTD., HYD ERABAD VS. DCIT, CIRCLE 16(2), HYDERABAD ITA.NO.1811/HYD/2 012 DATED 24.10.2013, COGNIZANT TECHNOLOGY SERVICES P. LTD., HYDERABAD VS. ACIT, CIRCLE 1(2), HYDERABAD ITA.NOS. 2106 & 1864/HYD/2011 DATED 22 ND MAY, 2013 AND ALSO SPECIAL BENCH DECISION OF MUMBAI TRIBUNAL IN THE CASE OF MAERSK G LOBAL CENTERS (INDIA) P. LTD., MUMBAI VS. ACIT, CIRCLE 6( 3), MUMBAI ITA.NO.7466/MUM/2012 DATED 07.03.2014 . THIS TRIBUNAL IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PV T. LTD. (SUPRA) HAD AN OCCASION TO DEAL WITH COMPARABILITY OF THIS COMPANY IN THE CASE OF AN ITES COMPANY SUCH AS THE ASSESSEE AND THE TRIBUNAL HELD AS FOLLOWS:- 14 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. '14. THE ASSESSEE HAS OBJECTED FOR THIS COMPANY BEI NG TAKEN AS COMPARABLE MAINLY ON THE GROUND THAT IT WA S HAVING A SUPERNORMAL PROFIT OF 89%, AND AS SUCH IT CANNOT BE TAKEN AS A COMPARABLE IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE M/S. TEVA INDIA LTD. (SUPRA). THAT APART, RELYING UPON THE ANNUAL R EPORT OF THE COMPANY, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE HAS CONTENDED THAT THAT THE CONCERNED COMPANY IS ENGAGED IN PROVIDING KNOWLEDGE PROCESS OUTSOURCING(KPO) SERVICES. 15. ON CONSIDERING THE OBJECTIONS OF THE ASSESSEE I N RELATION TO THIS COMPANY, WE ACCEPT THE CONTENTION OF THE ASSESSEE THAT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE BOTH FOR THE REASONS THAT IT WAS HAVING SUPERNORMAL PROFIT AND IT IS ENGAGED IN PROVIDING K PO SERVICES, WHICH IS DISTINCT FROM THE NATURE OF SERV ICES PROVIDED BY THE ASSESSEE.' 14.4.2 WE ARE OF THE VIEW THAT IN THE LIGHT OF THE DECISION OF THE HYDERABAD BENCH REFERRED TO ABOVE, THIS COMP ANY CANNOT BE REGARDED AS A COMPARABLE FOR THE REASON T HAT IT WAS HAVING EXTRAORDINARY EVENT AND SUPER NORMAL PROFITS . SIMILAR VIEW WAS ALSO TAKEN IN THE CASE OF SYMPHONY MARKET ING SOLUTIONS INDIA(P) LTD (SUPRA) BY THE BANGALORE BEN CH. GENESYS INTERNATIONAL CORPORATION LTD. 14.5 THIS COMPANY IS LISTED AT SL. NO.12 IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS T HIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE AND THA T IT HAS A DIFFERENT EMPLOYEE SKILL SET AND THAT THIS COMPANY PERFORMS R&D SERVICES AND ALSO OWNS INTANGIBLES. THIS COMPAN Y IS A GEOSPATIAL SERVICES CONTENT PROVIDER SPECIALISING I N LAND BASED TECHNOLOGIES. FROM THE NOTES TO ACCOUNTS OF THIS CO MPANY, IT IS SEEN THAT THIS COMPANY IS ENGAGED IN PROVIDING GEOG RAPHICAL INFORMATION SERVICES COMPRISING OF PHOTOGRAMMETRY, REMOTE SENSING CARTOGRAPHY, DATA CONVERSION RELATED COMPUT ER BASED 15 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. SERVICES AND OTHER RELATED SERVICES. FURTHER THE BU SINESS OF THIS COMPANY REQUIRES SKILLED MANPOWER AND SCIENTIS TS, CIVIL ENGINEERS, ETC. BESIDES THE ABOVE, THIS COMPANY ALS O CARRIES OUT R&D SERVICES AND OWN INTANGIBLES. THE AFORESA ID FACTS, IN OUR VIEW, WILL TAKE THIS COMPANY OUT OF THE LIST OF COMPARABLES. SIMILAR VIEW WAS ALSO TAKEN IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA(P) LTD (SUPRA) BY THE BAN GALORE BENCH. THE DECISION OF THE HYDERABAD ITAT BENCH IN THE CASE OF HYUNDAI MOTORS INDIA ENGINEERING P. LTD., HYDERA BAD VS. ITO, WARD 2(2), HYDERABAD ITA.NO.1850/HYD/2012 DATE D 21.02.2014 IS ALSO SIMILAR. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THIS COMPANY CANNOT BE REGARDED AS A COMP ARABLE AND DESERVES TO BE EXCLUDED FROM THE LIST OF COMPAR ABLES. HCL COMNET SYSTEMS & SERVICES LTD., (SEG.) WIPRO LIMITED. 14.6.1 THE ABOVE TWO COMPANIES ARE LISTED AT SL.NO. 13 AND 20. OBJECTING TO THE AFORESAID COMPANIES BEING TREATED AS COMPARABLES, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT HCL COMNET SYSTEM IS FUNCTI ONALLY DIFFERENT AS IT IS ENGAGED IN THE BUSINESS OF PROVI DING TELECOMMUNICATION AND REMOTE INFRASTRUCTURE MANAGEM ENT SERVICES. IT WAS FURTHER SUBMITTED THAT WIPRO LIMIT ED IS ALSO FUNCTIONALLY DIFFERENT AS THE COMPANY OWNS SIGNIFIC ANT INTANGIBLES AND HENCE ENJOYS PREMIUM PRICING. IT W AS SUBMITTED THAT 28% OF THE BPO REVENUE IS FROM PRODUCT ENGINEERING SERVICES. IT WAS FURTHER SUBMITTED THAT , MANUALLY CORRECTED AND UNAUDITED DATA FROM ITS TP REPORT HAS BEEN CONSIDERED WHICH CANNOT BE SAID TO BE AUTHENTIC. IN SUPPORT OF HIS CONTENTION FOR EXCLUDING THE AFORESAID TWO COMP ANIES AS COMPARABLES, THE LEARNED AUTHORISED REPRESENTATIVE OF THE 16 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. ASSESSEE RELIED UPON THE DECISIONS OF CAPITAL IQ IN FORMATION SYSTEMS INDIA P. LTD., HYDERABAD VS. ADDL. CIT, CIR CLE 1(2), HYDERABAD ITA.NO.124/HYD/2014 AND ITA.NO.170/HYD/ 2 014 DATED 31.07.2014. 14.6.2. WE HAVE HEARD RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIAL ON RECORD. IT IS NOT DISP UTED THAT THESE COMPANIES ARE HAVING HUGE TURNOVERS LIKE THAT OF ASSESSEE DURING THE YEAR. THEREFORE TURNOVER FILTER AS CONSIDERED IN OTHER CASES DOES NOT APPLY HERE. HOWE VER AS SUBMITTED THE FUNCTIONAL PROFILE OF COMPANIES AS SU CH IS DIFFERENT. BUT, IF THE BPO DIVISION IS SIMILAR TO A SSESSEE THE SAME CAN BE CONSIDERED AFTER PROPER FAR ANALYSIS. T HEREFORE WE ARE OF THE OPINION THAT TPO/AO CAN RECONSIDER TH E COMPARABLES AFTER GIVING DUE OPPORTUNITY TO ASSESS AND FAIRLY ANALYZING ITS OBJECTIONS. IN CASE THE DATA (SEGMENT AL OR UNIT) IS INCOMPLETE OR FUNCTIONAL PROFILE ETC ARE DIFFERENT AO/TPO SHOULD EXCLUDE THE SAME. WITH THESE OBSERVATIONS TH E ISSUE OF SELECTION OF THESE COMPANIES AS COMPARABLES IS REST ORED TO TPO/AO TO DO THE NEEDFUL. 15. IN GROUND NO 10 ASSESSEE IS SEEKING ADJUST MENT FOR DIFFERENCES IN FUNCTIONS AND RISKS UNDERTAKEN. WITH REFERENCE TO THE RISK ADJUSTMENT, IT WAS THE SUBMIS SION OF THE ASSESSEE THAT ASSESSEE FUNCTIONED UNDER A LIMITED R ISK ENVIRONMENT WITH MOST OF THE RISKS BEING ASSUMED B Y ITS AES AND COMPARABLES SELECTED FOR ANALYSIS INCLUDE COM PANIES WHICH HAVE FAIRLY DIVERSIFIED AREAS OF SPECIALISATI ON, BEARING RISKS AKIN TO ANY THIRD PARTY INDEPENDENT SERVICE PROVIDER. SINCE ASSESSEE IS OPERATING IN A RISK MITIGATED ENV IRONMENT VIS--VIS THE COMPARABLE COMPANIES PERFORMING ENTREPRENEURIAL RISK TAKING FUNCTIONS, THE ASSESSEE SEEKS 17 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. ADJUSTMENT FOR THE RISK BEING TAKEN BY THE COMPARAB LE, WHOSE PROFIT WOULD BE MORE DEPENDENT ON THE RISK INVOLVED . SINCE THE ASSESSEE DOES NOT BEAR ANY RISK OF INCURRING LOSSES AND SINCE COMPARABLE COMPANIES WORK IN THE MARKET ENVIRONMENT , THE MARGINS EARNED BY THE COMPARABLE COMPANIES WOULD BE COMPARATIVELY MORE TO REFLECT THE HIGHER LEVEL OF F UNCTIONS AND RISKS. IT WAS FURTHER SUBMITTED THAT IN THE TP DOC UMENTATION SUBMITTED BY THE ASSESSEE, NO RISK ADJUSTMENT WAS M ADE AS COMPARABLE SELECTED WERE WITHIN THE ARMS LENGTH RA NGE. THE ASSESSEE RELIED ON A HOST OF CASES TO SUBMIT THAT A DJUSTMENT NEEDS TO BE MADE TO THE MARGINS OF THE COMPARABLES TO ELIMINATE DIFFERENCE ON ACCOUNT OF DIFFERENT FUNCTI ONS, ASSETS AND RISKS. 15.1. TO THE EXTENT OF PRINCIPLES INVOLVED, WE AG REE WITH THE ASSESSEES SUBMISSIONS THAT SOME OF THE COMPARA BLES MAY BE UNDERTAKING MARKET RISKS/ENTREPRENEURIAL RISKS, WHICH ARE NOT THERE IN THE CASE OF THE ASSESSEE. HOWEVER, TH E ISSUE BOILS DOWN TO QUANTIFICATION OF SUCH ADJUSTMENT. IN THE WRITTEN SUBMISSIONS, THE ASSESSEE BASED ON THE DECISION OF THE ITAT BANGALORE IN THE CASE OF PHILIPS SOFTWARE CENTRE PR IVATE LTD. VS. ACIT (119 TTJ 721)(BANG), WHICH PROVIDED FOR 4. 5% OF THE RISK ADJUSTMENT AS THE DIFFERENCE BETWEEN THE AVERA GE PRIME LENDING RATE AND AVERAGE BANK RATE, AS THE BASIS. SINCE THIS WORKING WAS NOT ACCEPTED BY THE ITAT MUMBAI BENCH I N THE CASE OF WILLIS PROCESSING SERVICES INDIA PRIVATE LT D. VS. DCIT, VIDE ITS ORDER DATED 17.12.2012 IN ITA NO.8772/MUM/ 2010 FOR ASSESSMENT YEAR 2006-07, THIS ADJUSTMENT OF 4.5% CA NNOT 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 18 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. CASE OF SONY INDIA LTD. (114 ITD 448)-DEL, WHEREIN THE TRIBUNAL DETERMINED THE RISK ADJUSTMENT AT 20% OF T HE ALP FOR A RISK MITIGATED DISTRIBUTOR. IT ALSO RELIED ON TH E DECISION OF THE DELHI BENCH IN THE CASE OF ROLLS ROYCE PLC V/S. DCIT (90 SOT 42), WHEREIN IT WAS DETERMINED AT 35% OF THE C OMPANYS PROFITABILITY ALLOCATED TOWARDS MARKETING ACTIVITI ES. THEREFORE, IT WAS SUBMITTED THAT SINCE ASSESSEE DOES NOT HAVE ANY MARKETING ACTIVITIES, A 35% ADJUSTMENT IS WARRANTED FOR THE DIFFERENCE IN RISKS. IT ALSO SUBMITS THAT RISK AD JUSTMENT CAN ALSO BE COMPUTED UNDER THE CAPITAL ASSET PRICING MODEL(CAPM)/ SHARPE MODEL FOR RISK ADJUSTMENTS. IN THE PREVIOUS YEAR ALSO MATTER WAS RESTORED TO TPO/AO IN ASSESSEES OWN CASE. SINCE THE APPLICATION OF THE ABOVE DECISIONS AND FACTS HEREIN ARE TO BE EXAMINED VIS --VIS THE ASSESSEES BUSINESS MODEL, WE, WITHOUT GIVING ANY D IRECTION WITH REFERENCE TO THE RISK ADJUSTMENT AND AMOUNT OF RISK ADJUSTMENT REQUIRED, RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO RE-EXAMINE THIS ADJUSTMENT IS SUE AFRESH, AFTER CONSIDERING THE ASSESSEES SUBMISSIONS AND DE CIDE THE ISSUE IN ACCORDANCE WITH THE PRINCIPLES ON THE SUBJ ECT. 16. GROUND NO.12, IN TP ISSUES, IS WITH REFERENCE TO INCLUSION OF REIMBURSEMENT TRANSACTIONS AS PART OF OPERATIONAL COST. IT WAS SUBMITTED THAT THE ASSESSEE HAS PAID CERTAIN AMOUNTS TOWARDS TRAVEL, AIR FARE AND SITE EXPENSES RELATING TO EMPLOYEES OF AE TRAVELLING TO INDIA FOR BUSINESS PU RPOSES. SIMILARLY, THE AES ALSO PAY CERTAIN EXPENSES OF THE ASSESSEE WHICH WERE REIMBURSED TO THE AE. IT WAS THE SUBMIS SION OF THE ASSESSEE THAT THESE AMOUNTS WERE ADJUSTED AT COST, WITHOUT MARK UP AS THE ASSESSEE OR AE PAID THE AMO UNT ON BEHALF OF THE OTHER FOR ADMINISTRATIVE CONVENIENCE AND NO 19 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. SIGNIFICANT ADDITIONAL FUNCTIONS ARE BEING PERFORME D IN THESE TRANSACTIONS. EVEN THOUGH THESE TRANSACTIONS ARE CO NSIDERED AS INTERNATIONAL TRANSACTIONS FOR THE PURPOSES OF T P, SINCE THERE IS NO MARK UP ON THESE REIMBURSEMENTS, IT WAS THE SUBMISSION THAT TPO FAILED TO APPRECIATE THAT THESE TRANSACTIONS ARE TO BE EXCLUDED FOR WORKING OUT THE OPERATIVE COSTS/OPERATIVE MARGINS, AND IT IS THE REQUEST THAT THE AMOUNTS OF REIMBURSEMENT SHOULD BE EXCLUDED FOR THI S PURPOSE. ASSESSEE RELIED ON THE DECISION OF THE DEL HI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V/S. CHEIL COMMUNI CATIONS INDIA P. LTD. (2010 TII 60 ITAT DEL TP) AND THE COO RDINATE BENCH DECISION OF THE TRIBUNAL IN THE CASE OF FOUR SOFT LTD. V/S. DCIT (ITA NO.1495/HYD/2010)(142 TTJ 358). 16.1 AFTER CONSIDERING THE RIVAL SUBMISSIONS AND FOLLOWING THE PRINCIPLES LAID DOWN IN THE DECISIONS OF THE TRIBUNAL CITED ABOVE, WE ARE OF THE OPINION THAT RE IMBURSEMENT COSTS SHOULD BE EXCLUDED AS THEY DO NOT INVOLVE AN Y FUNCTIONS TO BE PERFORMED SO AS TO CONSIDER IT FOR PROFITABIL ITY PURPOSES. IN THE CASE OF FOUR SOFT LTD. SUPRA, HYDERABAD BENC H OF THE TRIBUNAL CONSIDERED THIS ISSUE AND HELD AS UNDER- 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. FIRST, WE WILL TAKE UP THE ISSUE RELATING TO THE ADJUSTMENTS MADE BY THE ASSESSING O FFICER IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES IN THE SOFTWARE DEVELOPMENT SERVICES. I T IS THE CONTENTION OF THE ASSESSEE THAT BAD DEBTS INCURRED BY THE ASSESSEE COMPANY ARE IN RESPECT OF TRANSACTIONS, WH ICH ARE NOT RELATED TO ASSOCIATED ENTERPRISES. THIS CONTENT ION OF THE ASSESSEE HAS NOT BEEN CONTROVERTED BY THE REVENUE B Y BRINGING ANY MATERIAL ON RECORD BEFORE US. IT IS TH E CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT SUCH B AD DEBTS CANNOT BE TAKEN INTO ACCOUNT FOR COMPUTING THE MARG IN OF THE ASSESSEE FROM THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES IN RESPECT OF SOFTWARE DEVELOPMENT SERV ICES. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED BEF ORE US A 20 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. COMPARATIVE CHART EXPLAINING THE COMPUTATION OF NET MARGIN, EXCLUDING THE BAD DEBTS AND CLEARLY DEMONSTRATED BE FORE US THAT IF THE BAD DEBTS/REIMBURSEMENTS ARE EXCLUDED F OR THE PURPOSE OF COMPUTING THE MARGINS ON THE TRANSACTION S RELATING TO THE ASSOCIATED ENTERPRISES, THE NET MAR GIN COMES TO 19.07%, WHICH IS WELL COMPARABLE WITH THE ARMS L ENGTH MARGIN OF 19% DETERMINED BY THE TRANSFER PRICING OF FICER. IN OUR CONSIDERED VIEW, FOR COMPUTING THE NET MARGIN O F THE ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING, ONLY THE COST RELATED TO THE TRANSACTION WITH THE ASSOCIATED ENTE RPRISES HAS TO BE CONSIDERED AND ACCORDINGLY, WE APPROVE TH AT SEGMENTAL FINANCIALS IS TO BE CONSIDERED FOR THE PU RPOSE OF ARRIVING AT THE NET MARGIN ON THE INTERNATIONAL TRA NSACTION WITH THE ASSESSEE'S ENTERPRISE IN RESPECT OF SOFTWA RE DEVELOPMENT SERVICES. IN THAT PROCESS, BAD DEBTS/ REIMBURSEMENTS HAS TO BE EXCLUDED AND SEGMENTAL PROFITABILITY HAS TO BE ADOPTED. WE FIND SUPPORT IN THIS BEHALF FROM VARIOUS DECISIONS OF THE TRIBUNAL RELIE D UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE DULY FILING CO PIES THEREOF IN THE PAPER-BOOK, WHICH HAVE BEEN NOTED HEREINABOVE. THAT BEING SO, THE TPO SHOULD HAVE DET ERMINED THE ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSAC TIONS WITH ASSOCIATED ENTERPRISES CONSIDERING ONLY THE OPERATI NG COST ALLOCABLE TO THE ASSOCIATED ENTERPRISES SEGMENT. SI NCE THE ASSESSING OFFICER HAD NO OCCASION TO VERIFY THE VER ACITY OF THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPA NY, FOR LIMITED PURPOSE, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPA NY AND ADOPT THE SAME FOR ARRIVING AT THE NET MARGIN O N THE INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF SO FTWARE DEVELOPMENT SERVICES. WE DIRECT ACCORDINGLY. SIMILAR VIEW WAS ALSO TAKEN IN ASSESSEE OWN CASE IN AY 2006- 07. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER /TPO TO EXCLUDE THE REIMBURSEMENT COSTS WHI LE WORKING OUT THE OPERATING COSTS. THIS GROUND IS CON SIDERED ALLOWED. 17. IN AFORESAID VIEW OF THE MATTER, WE DIRECT THE ASSESSING OFFICER TO DETERMINE THE ALP KEEPING IN V IEW THE DIRECTIONS GIVEN BY US HEREINBEFORE IN RESPECT OF E ACH OF THE 21 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. COMPARABLES SPECIFICALLY OBJECTED TO BY THE ASSESSE E. ASSESSEES GROUNDS 1 TO 12 ARE PARTLY ALLOWED. 18. SOME OF THE LEGAL ISSUES RAISED IN THE GROUNDS ON THIS TP ISSUE ARE NOT AGITATED BEFORE US, AS EXCLU SION OF SOME OF THE COMPARABLES ONLY WERE CONTESTED AND BY EXCL UDING THEM, THE PLI DETERMINED FROM THE REST OF THE COMP ARABLES MAY FALL WITHIN PERMISSIBLE RANGE AS PER PROVISO T O S.92C(2). SOME OF THE ISSUES ALSO BECOME ACADEMIC IN NATURE, IF THE ULTIMATE ALP DETERMINED IS WITHIN THE PERMISSIBLE RANGE OF THE ASSESSEES PLI. HOWEVER, THIS ASPECT CANNOT BE EX AMINED BY US, AS THE TPO WAS DIRECTED TO VERIFY OTHER ADJUST MENTS REQUIRED, AND THEREFORE, WE HOLD THAT IT IS PREMA TURE TO CONSIDER THE GROUNDS RAISED IN THIS BEHALF. THE A SSESSING OFFICER /TPO IS DIRECTED TO GIVE EFFECT TO THE PROV ISIONS OF S.92C, AFTER DECIDING THE PLI AND ALP AND THEN ARRI VE AT PROPER CONCLUSION. NEEDLESS TO SAY, THE ASSESSING OFFICER /TPO WILL ALLOW A REASONABLE OPPORTUNITY OF BEING H EARD TO THE ASSESSEE IN THE FRESH PROCEEDINGS. CORPORATE MATTERS. 19. GROUND NO.14 - RE-CHARACTERISATION OF FOREI GN EXCHANGE GAIN : DURING THE YEAR, THE ASSESSEE HAS FOREIGN EXCHANGE GAIN OF RS. 20,29,39,202 ON ACCOUNT OF FOR EIGN EXCHANGE FLUCTUATIONS ACCOUNTED IN ACCORDANCE WITH THE ACCOUNTING STANDARD -11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND TREATED AS BUSINESS INCOME OF UNIT. AO WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT ALLOWED LESSER DEDUCTION BY REDUCING FOREIGN EXCHANGE GAIN FROM THE PROFITS OF THE BUSINESS. DRP IN RESPECT OF THE OBJECTIONS ON COMPUTATION OF 10A HAS HELD THAT THOUGH THEY AGREE WITH 22 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. ASSESSEE'S POSITIONS, RELIEF IS NOT PROVIDED SO AS TO PROVIDE OPPORTUNITY TO THE AO TO KEEP THE ISSUE ALIVE. 19.1. THE ISSUE IS NO LONGER RES INTEGRA AND THE HON'BLE SPECIAL BENCH IN CASE OF ITO VS BANYAN CHEMICALS P. LTD., (2009) 310 ITR (AT) 384 (AHMEDABAD) H AS HELD THAT FOREIGN EXCHANGE GAIN ON ACCOUNT OF FLUCTUATION QUA EXPORTS BUSINESS IS ELIGIBLE FOR EXEMPTION U/S 10B. CO ORDINATE BENC H AT HYDERABAD TRIBUNAL IN ASSESSEE'S OWN CASE FOR AY 20 06-07 HELD AS FOLLOWS: '27. SINCE THIS ISSUE IS NO LONGER RES INTEGRA AND SINCE FOREIGN EXCHANGE GAIN IS ON ACCOUNT OF FLUCTUATIONS OF THE FOREIGN EXCHANGE RECEIVED FOR THE SERVICES RENDERED BY THE ASSESSEE, THIS HAS TO BE TREATED AS BUSINESS INCOME AND IT HAS TO HE CONSIDERED AS PROFITS OF THE BUSINESS FOR COMPUTING THE DEDUCTION UNDER S.10A OF THE ACT. THE ASSESSING OFFICER IS DIRECTED TO TREAT ACCORDINGLY. THE GROUND IS CON SIDERED AS ALLOWED. ' THE FACTS BEING SIMILAR, WE DIRECT AO TO TREAT FORE IGN EXCHANGE GAIN AS BUSINESS INCOME AND ALLOW THE DEDUCTION ACC ORDINGLY. GROUND 14 IS ALLOWED. 20. IN GROUND NO.15, ASSESSEE HAS CHALLENGED TH E REDUCTION OF COMMUNICATION CHARGES OF RS.1,38,24,76 5 FROM THE EXPORT TURNOVER WITHOUT REDUCING IT FROM THE TO TAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. 20.1. WE HAVE HEARD SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE IS SQUAR ELY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF HONB LE BOMBAY HIGH COURT IN CASE OF CIT VS. GEM PLUS JEWELLERY LT D (330 ITR 175) AND THE DECISION OF INCOME-TAX APPELLATE TRIB UNAL, CHENNAI SPECIAL BENCH IN CASE OF ITO VS. SAK SOFT L IMITED (313 ITR 353 (AT)]. IN FACT, THE DRP THOUGH ACCEPTS SUC H POSITION 23 ITA.NO.1647/HYD/2012 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. BUT HAS DECIDED THE ISSUE AGAINST THE ASSESSEE ONLY TO GIVE AN OPPORTUNITY TO THE DEPARTMENT TO PURSUE THE SAME. THEREFORE, FOLLOWING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY (SUPRA) AND OF T HE INCOME- TAX APPELLATE TRIBUNAL, CHENNAI SPECIAL BENCH IN CA SE OF ITO VS. SAK SOFT LIMITED (SUPRA), WE DIRECT THE ASSESSI NG OFFICER TO REDUCE COMMUNICATION CHARGES BOTH FROM THE EXPORT T URNOVER AS WELL AS THE TOTAL TURNOVER FOR COMPUTING EXEMPTI ON U/S 10A OF THE ACT. THIS GROUND NO 15 OF THE ASSESSEE IS A LLOWED. 21. IN GROUND NOS. 13 , THE ASSESSEE HAS CHALLENGED LEVY OF INTEREST U/S 234B OF THE ACT. THE ISSUES R AISED IN THIS GROUND BEING CONSEQUENTIAL TO THE FINAL DETERMINATI ON OF INCOME , THIS GROUND HAS BECOME INFRUCTUOUS, HENCE DISMISSED . 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24.10.2014 . SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 24 TH OCTOBER, 2014 VBP/- COPY TO 1. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., P LOT NO.8, SURVEY NO.64, HITECH CITY, HYDERABAD 081. 2. THE ACIT, CIRCLE 2(2), I.T. TOWERS, MASAB TANK, 8 TH FLOOR, HYDERABAD 500 004. 3. DISPUTES RESOLUTION PANEL, HYDERABAD 4. DIT, INTERNATIONAL TAXATION, BANGALORE. 5. D.R. ITAT B BENCH, HYDERABAD.