ADP Private Limited, Hyderabad V. DCIT, Circle1(1), Hyderabad

ITA 1711/HYD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98865 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 2 month(s) 20 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: 2007-2008
• Appeal Filed On: 03-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VALLURI SRINIVAS
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; Initiation of penalty proceedings; Bad and doubtful debts; Unabsorbed depreciation
• Section: 143(3); 80HHC; 234B; 80IB; 133(6); 263

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. 1711/HYD/2011 ASSESSMENT YEAR: 2007-08 ADP PRIVATE L IMI T E D , HYDERABAD [PAN: AAACW2655C] VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : M S . SUVIBHA N O LKHA , A R FOR REVENUE : MR . VALLURI SRINIVAS , CIT - D R DATE OF HEARING : 1 9 - 1 0 - 201 5 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. 92CA OF THE INCOME TAX ACT [ACT] CONSEQUENT TO THE DIRECTIONS ISSUED BY DISPUTE RESO LUTION PANEL [DRP], HYDERABAD U/S 144C OF THE ACT. ASSESSEE HAS RAISED AS MANY AS 17 GROUNDS IN THE CONCISE/MODIFIED GROUNDS FILED BEFORE THE TRIBUNAL. GROUND NOS. 1 TO 12 PERTAINS TO TRAN SFER PRICING ISSUES. GROUND NO. 13 TO 15 PERTAINS TO CORPORATE ISSUES. GROUND NO. 16 PERTAINS TO INTEREST U/S. 234B AND 234C, WHE REAS GROUND I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 2 -: NO. 17 IS LITTLE PREMATURE FOR CONSIDERATION NOW AS ASSESSEE IS CHALLENGING THE INITIATION OF PENALTY PROCEEDINGS. 2. WE HAVE HEARD THE COUNSEL FOR ASSESSEE AND LD.C IT-DR IN DETAIL AND PERUSED THE PAPER BOOK PLACED ON RECO RD ALONG WITH SUMMARY OF CHARTS AND SUBMISSIONS. 2.1. BRIEFLY STATED, ASSESSEE IS ENGAGED IN TH E BUSINESS OF COMPUTER SOFTWARE DEVELOPMENT AND ITS RELATED SERVI CES TO ITS ASSOCIATED ENTERPRISE (AE). SINCE ASSESSEE HAS INT ERNATIONAL TRANSACTIONS WITH THE AE, THE MATTER WAS REFERRED T O TRANSFER PRICING OFFICER (TPO), HYDERABAD U/S. 92CA OF THE A CT. THE TPO PASSED ORDER U/S. 92CA(3) ON 31-08-2010. AFTER THE ABOVE ORDER BY TPO, AO ISSUED DRAFT ASSESSMENT ORDER ON 15-12-2 010. ASSESSEE FILED OBJECTIONS BEFORE THE DRP AND THE DR P VIDE ITS ORDER DT. 09-08-2011, GAVE DIRECTIONS U/S. 144C(5) OF THE ACT. CONSEQUENT TO AO PASSED ORDER ON 25-08-2011, WHICH IS THE SUBJECT MATTER OF PRESENT APPEAL. TRANSFER PRICING MATTERS: 3. EVEN THOUGH ASSESSEE WAS ENGAGED IN SOFTWARE DEVELOPMENT AS WELL AS IT ENABLED SERVICES UP TO AY . 2006-07, DURING THE YEAR, ASSESSEE INVOLVED ONLY IN SOFTWARE DEVELOPMENT SERVICES. THE ACTIVITIES OF ASSESSEE RELATE TO ONL Y ONE SEGMENT I.E., SOFTWARE DEVELOPMENT. IT HAS REPORTED OPERATING RE VENUE OF RS. 167.19 CRORES AND AN OPERATING COST OF RS. 149.35 C RORES. THE OPERATING PROFIT BY ASSESSEE IS RS. 70.84 CRORES AN D THE OPERATING PROFITS TO COST RATIO EXCLUDING INTEREST, LOSS ON E XCHANGE FLUCTUATIONS AND SALE OF ASSETS WAS REPORTED AT 11. 94%. IN THE TP I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 3 -: DOCUMENT, ASSESSEE SELECTED A SET OF 43 COMPARABLES WITH WEIGHTED AVERAGE MARGIN OF 13.12% ON OPERATING COST. THE TP O HAS UNDERTAKEN FRESH SEARCH AND HAS SELECTED 26 COMPARA BLES IN HIS STUDY AND ARRIVED AT ARITHMETIC MEAN PLI AT 25.14%. SINCE HE HAS WORKED OUT A WORKING CAPITAL ADJUSTMENT OF 2.30%, A DJUSTED ARITHMETIC MEAN WAS ARRIVED AT 22.84%. TREATING TH IS AS MARGIN FOR THE PURPOSE OF DETERMINING ARMS LENGTH PRICE ( ALP) ON OPERATING COST, THE TPO PROPOSED TP ADJUSTMENT OF R S. 20,09,31,663/- IN HIS ORDER. CONSEQUENT TO THE OBJ ECTIONS FILED BY ASSESSEE, THE DRP IN ITS ORDER HAS, EXCLUDED ONE CO MPANY M/S. CELESTIAL LABS LTD, DIRECTED THE AO TO WORK OUT THE ARMS LENGTH PRICE/ARMS LENGTH MARGIN AND GIVE EFFECT TO THE OR DER. ASSESSEE IS AGGRIEVED. 4. IT WAS SUBMITTED THAT ASSESSEE IS MAINLY CONTES TING EXCLUSION OF CERTAIN COMPARABLES AND INCLUSION OF C ERTAIN OTHER COMPANIES REJECTED BY THE TPO AND ALL OTHER GROUNDS RAISED BECOMES ACADEMIC. IN THE MODIFIED/CONCISE GROUNDS OF APPEAL, GROUND NOS. 1 TO 6, 9, 10 AND 11 HAVE ACCORDINGLY B ECAME ACADEMIC IN NATURE. GROUND NO. 7 IS WITH REFERENCE TO INCLUSION OF ELEVEN COMPARABLE COMPANIES WHEREAS GROUND NO. 8 PE RTAINS TO SEVEN COMPANIES WHICH ASSESSEE WANT TO INCLUDE THEM , WHICH WERE NOT ACCEPTED BY THE TPO. 5. THE COMPANIES WHICH ARE NOT OBJECTED TO BY ASSE SSEE ARE AS UNDER: SL. NO. NAME OF THE COMPANY TPO/DRP ORDER (WC ADJUSTED) 1. DATAMATICS LTD -1.00% 2. E-ZEST SOLUTIONS LTD 35.77% 3. GEOMETRIC LTD (SEG) 9.26% 4. IGATE GLOBAL SOLUTIONS LTD 5.25% I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 4 -: 5. LANCO GLOBAL SYSTEMS LTD 14.82% 6. MEDIA SOFT SOLUTIONS LTD 1.20% 7. MIND TREE CONSULTING LTD (SEG) 15.02% 8. PERSISTENT SYSTEMS LTD 23.11% 9. QUINTEGRA SOLUTIONS LTD 8.88% 10. R S SOFTWARE (INDIA) LTD 12.79% 11. R SYSTEMS INTERNATIONAL LTD (SEG) 12.90% 12. S I P TECHNOLOGIES AND EXPORTS LTD 1035% 13. SASKEN COMMUNICATION TECH LTD (SEG) 20.75% 14. THIRDWARE SOLUTIONS LTD (SEG) 21.20% 6. ASSESSEES OBJECTIONS/ GROUNDS PERTAIN TO FOLLO WING COMPANIES SERIALLY NUMBERED FROM 15 TO 25 IN THE CH ART, WHICH ARE AS UNDER: SL. NO. NAME OF THE COMPANY TPO/DRP ORDER (WC ADJUSTED) 15. AVANI CIMCON TECHNOLOGIES LTD 50.93% 16. INFOSYS TECHNOLOGIES LTD 38.69% 17. ISHIR INFOTECH LTD 30.11% 18. LUCID SOFTWARE LTD 16.71% 19. MEGA SOFT LTD 51.07% 20. TATA ELXSI LTD (SEG) 25.86% 21. WIPRO LTD (SEG) 34.20% 22. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 24.73% 23. HELIOS & MATHESON INFORMATION TECH LTD 34.14% 24. ACCEL TRANSMATICS LTD 19.79% 25. KALS INFORMATION SYSTEMS LTD 23.10% COMPARABLES TO BE INCLUDED BUT REJECTED BY TPO 26. AZTECSOFT LTD FAILS RPT FILTER 27. BIRLA TECHNOLOGIES LTD FAILS RPT FILTER 28. INDIUM SOFTWARE INDIA LTD FUNCTIONALLY DIFFERENT 29. LARSEN & TOUBRO INFOTECH LTD RESPONSE TO NOTICE U/S. 133(6) NOT RECEIVED 30. PSI DATA SYSTEMS LTD (SEG) FAILS RPT FILTER 31. VMF SOFTECH LTD FAILS EMPLOYEE COST FILTER I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 5 -: 7. AT THE OUTSET, LD. COUNSEL AS WELL AS THE DR FA IRLY ADMITTED THAT MOST OF THESE COMPANIES ARE ALREADY C ONSIDERED AND REJECTED IN THE CO-ORDINATE BENCH DECISION IN THE C ASE OF M/S. UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT. LTD ., IN ITA NO. 1658/HYD/2011 DT. 24-09-2015 AND ALSO OTHER DECISIONS OF THE CO-ORDINATE BENCHES IN THE CASE OF SUMTOTAL SYSTEMS INDIA P. LTD., INVENSYS DEVELOPMENT CENTRE INDIA PRIVATE LIMITED E TC. 8. THE DRP ITSELF VIDE PARA-II IN PAGE 2 OF THE OR DER STATED THAT THE CASE OF ASSESSEE WAS HEARD ALONG WITH INVE NSYS DEVELOPMENT CENTRE INDIA PRIVATE LIMITED, ADAPTEC I NDIA PVT. LTD., SUMTOTAL SYSTEMS INDIA PVT. LTD., AND UNITED ONLINE SOFTWARE DEVELOPMENT INDIA PVT. LTD. SINCE THE FACTS ARE SIMILAR AND COMMON ISSUES ARE INVOLVED, THE DRP HAS BUNCHED THE M AND HEARD TOGETHER AND DECIDED THE MATTER VIDE THEIR SE PARATE ORDERS. SINCE FACTS ARE SIMILAR TO THE FACTS IN M/S. UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT. LTD., IN ITA NO. 1658/HYD/ 2011 DT. 24-09-2015 (SUPRA), WE DO NOT HAVE TO RE ADJUDICATE RESPECTIVE COMPARABLE COMPANIES, WHICH ARE ALREADY CONSIDERED AND DECIDED. FOR THE SAKE OF RECORD, RELEVANT PORTION OF THE ORD ER IN THE CASE OF M/S. UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT . LTD., IN ITA NO. 1658/HYD/2011 IS GIVEN AS UNDER: 16. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD, INCLU DING THE PAPER- BOOKS AND DETAILED FILED BY ASSESSEE. IT HAS BEEN BROUGHT TO OUR NOTICE BY THE LEARNED COUNSEL FOR ASSESSEE, AND NOT DISPUTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, THAT IN ASSESS EES OWN CASE FOR THE ASSESSMENT YEAR 2006-07, THE ISSUE RELATING TO COMPARABLE NATURE OF THREE OF THE COMPANIES NAMED IN THE ORIG INAL GROUND, VIZ. MEGASOFT LTD., INFOSYS TECHNOLOGIES LTD. AND TATA E LXSI LTD.(SEG)., AND TWO OUT OF THE FOUR COMPANIES NAMED IN THE ADDI TIONAL GROUND, VIZ. ACCEL TRANSMATIC (SEG) AND KALIS INFORMATION S YSTEMS LTD. (SEG.) HAS COME UP FOR CONSIDERATION BEFORE THE TRI BUNAL IN ITA NO.1500/HYD/2010, AND THIS TRIBUNAL. I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 6 -: 17. HOWEVER, WE FIND THAT THE ISSUE RELATING TO COM PARABLE NATURE OF NINE OUT OF ABOVE ELEVEN COMPANIES (COMPA NIES IN ORIGINAL GROUNDS AS WELL AS ADDITIONAL GROUNDS TAKEN TOGETHE R), VIZ. OTHER THAN FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) AND H ELIOS & MATHESON INFORMATION TECH. LTD. HAS COME UP FOR CON SIDERATION BEFORE THIS TRIBUNAL FOR ASSESSMENT YEAR 2007-08 IT SELF, IN THE CASE OF SUMTOTAL SYSTEMS INDIA P. LTD., HYDERABAD IN ITA NO.1710/HYD/2011, WHEREIN THE TRIBUNAL VIDE ITS ORD ER DATED 9.5.2014 HAS ACCEPTED THE CONTENTIONS FOR EXCLUSION OF THESE NINE COMPANIES UNDER CONSIDERATION BEFORE IT. RELEVANT P ORTION OF THE SAID ORDER OF THE TRIBUNAL, BEING PARA 7 THEREOF, R EADS AS UNDER- 7. EACH OF THESE COMPARABLES IN DISPUTE, CHALLENG ED IN GROUND NO 7 WAS CONSIDERED AS UNDER: AVANI CIMCON TECHNOLOGIES LIMITED : 7.1. ASSESSEE HAS BASICALLY SOUGHT EXCLUSION OF ABOVE COMPANY ON TWO GROUNDS, FIRSTLY, THIS COMPANY HAS REVENUE F ROM BOTH PRODUCT AND SOFTWARE SERVICES AND SEGMENT-WISE DATA IS NOT AVAILABLE AND SECONDLY, IT IS CONTENDED THAT THE COMPANY HAS SHOWN SUPER NORMAL PROFIT OF 52.59% AGAINST AVERAG E MARGIN OF OTHER COMPARABLES. IT IS VERY MUCH EVIDENT FROM TH E TP ORDER THAT ASSESSEE HAS BEEN CATEGORISED AS A SOFTWARE DEVELOP MENT SERVICE PROVIDER. COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF VIRTUSA (INDIA) PVT. LTD. (ITA NO. 1962/HYD/2011 DATED 30/0 8/2013) AFTER FOLLOWING SOME OTHER DECISIONS OF THE TRIBUNAL HAS HELD THIS COMPANY CANNOT BE TREATED AS COMPARABLE AS THIS COM PANY IS ALSO INTO PRODUCT DEVELOPMENT. AS SEGMENTAL DETAILS OF O PERATING INCOME OF SOFTWARE DEVELOPMENT SERVICES AND SALE OF SOFTWA RE PRODUCTS ARE NOT AVAILABLE, IT COULD NOT BE ASCERTAINED WHETHER THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR CO MPARING WITH ASSESSEE. AS THE AFORESAID DECISION OF THE COORDINA TE BENCH PERTAINED TO THE SAME ASSESSMENT YEAR I.E. A.Y. 200 7-08, FOLLOWING THE SAME, WE HOLD THAT THIS COMPANY CANNOT BE TREAT ED AS COMPARABLE TO ASSESSEE. OTHER CASES CONSIDERED THE SAME COMPARABLE AND REJECTED ARE AS UNDER: A) M/S. FOURSOFT LIMITED (ITA.NO.1903/H/2011) B) M/S. CONEXANT SYSTEM INDIA P. LTD. ITA.1978/H2011 C) INTOTO SOFTWARE INDIA P. LTD. ITA.2102/H/2010 D) TELCORDIA TECHNOLOGIES INDIA P. LTD. ITA.7821/MUM/2 011 E) TRIOLOGY E-BUSINESS SOLUTIONS ITA.NO.1054/BANG /201 1 F) BEARING POINT BUSINESS ITA.NO.1124/BANG/2011 G) LG SOFT INDIA PVT. LTD. ITA.NO.1121/BANG/2011 H) TRANSWITCH INDIA P. LTD. ITA.NO.948/BANG/2011 I) MERCEDES BENZ RESEARCH & DEVELOPMENT ITA.NO.1222/BANG/2011 I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 7 -: J) CSR INDIA P. LTD. ITA.NO.1119/BANG/2011 K) FIRST ADVANTAGE ITA.NO.1086/BANG/2012 L) HCL EAI SERVICES LTD. ITA.NO.1348/BANG/2011 WE THEREFORE DIRECT THE ASSESSING OFFICER /TPO TO E XCLUDE THIS WHILE COMPUTING ALP. INFOSYS TECHNOLOGIES LTD., : 7.2 OBJECTING TO THE AFORESAID COMPANY BEING TREAT ED AS COMPARABLE, LEARNED AR SUBMITTED THAT THE COMPANY CANNOT BE CONSIDERED TO BE COMPARABLE TO A CAPTIVE SERVICE P ROVIDER LIKE ASSESSEE, NOT ONLY BECAUSE OF THE QUANTUM OF REVENU E EARNED BY THEM BUT ALSO ON ACCOUNT OF VARIOUS OTHER FACTORS. IT WAS SUBMITTED THAT THE COMPANY COMMAND A PREMIUM IN THE PRICING O F THEIR PRODUCTS AND SERVICES DUE TO THE GOODWILL, REPUTATI ON AND BRAND VALUE. IT WAS SUBMITTED THAT DUE TO SCALE OF OPERAT ION IT NOT ONLY ENJOY ECONOMIES OF SCALE IN THE LOWER COST OF INFRA STRUCTURE FACILITIES AND EMPLOYEES BUT ALSO EARNING PROFIT. IT WAS SUBM ITTED THAT THE COMPANY HAS DIVERSIFIED ACTIVITIES INCLUDING PRODUC TS, CONSULTANCY AND SOLUTIONS. COMPANY OWN INTANGIBLES AND ASSUME C ONSIDERABLE RISK WHICH RESULTS IN EARNING HIGHER PROFITS. IN S UPPORT OF SUCH CONTENTION THE LD. AR RELIED UPON A NUMBER OF DECIS IONS, COPIES OF WHICH ARE PLACED IN THE PAPER BOOK. 7.2.1. THE LEARNED DR STRONGLY CONTESTING THE CONTE NTIONS OF ASSESSEE SUBMITTED THAT SO FAR AS INFOSYS TECHNOLOG IES IS CONCERNED, ASSESSEE ITSELF HAS SELECTED THE SAID COMPANY IN TH E TP DOCUMENTATION. THEREFORE, ASSESSEE CANNOT AGAIN OB JECT TO THE TPO SELECTING THE SAID COMPANY AS COMPARABLE. HE FURTHE R SUBMITTED THAT ONLY BECAUSE THE COMPANY HAS BRAND VALUE AND I S BIG IN SIZE, IT CANNOT BE TREATED AS UNCOMPARABLE TO ASSESSEE. 7.2.2. IN REJOINDER, THE LD. AR SUBMITTED THAT ASSE SSEE SELECTED INFOSYS ON THE BASIS OF THREE YEARS DATA, WHEREAS T PO HAS CONSIDERED ONLY CURRENT YEAR DATA. THE LEARNED AR F URTHER SUBMITTED THAT IF ASSESSEE HAS MISTAKENLY SELECTED A COMPARABLE, IT CANNOT BE ESTOPPED FROM OBJECTING TO THE SELECTION OF THAT COMPARABLE IN PROCEEDINGS BEFORE HIGHER FORUM. IN THIS CONTEXT, THE LEARNED AR RELIED UPON THE INCOME-TAX APPELLATE TRI BUNAL SPECIAL BENCH DECISION IN CASE OF QUARK SYSTEMS, 4 ITR (TRI B) 606. 7.2.3. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PA RTIES AND PERUSED THE MATERIALS ON RECORD. ON CONSIDERING T HE SAME, WE ARE OF THE VIEW THAT THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO ASSESSEE DUE TO VARIOUS FACTORS SUCH AS ITS SIZE , TURNOVER, BRAND VALUE, SCALE OF OPERATION, DIVERSIFIED ACTIVITIES A ND OWNING OF INTANGIBLES. AS CAN BE SEEN FROM THE TP ORDER, TH E TURNOVERS OF I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 8 -: INFOSYS TECHNOLOGIES LIMITED DURING THE YEAR UNDER CONSIDERATION ARE RS.13,149 CRORES AS AGAINST RS. 42 CRORES OF AS SESSEE. THOUGH IT IS A FACT THAT ASSESSEE IN THE TP DOCUMENTATION, HA S SELECTED INFOSYS TECHNOLOGIES LTD. AS COMPARABLE BUT THAT C ANNOT PREVENT ASSESSEE FROM OBJECTING TO THE AFORESAID COMPANY BE ING SELECTED AS COMPARABLE, IF THERE ARE VALID REASONS FOR DOING SO . IN THIS CONTEXT, THE CONTENTION OF THE LEARNED AR THAT ASSESSEE HAS SELECTED INFOSYS LIMITED ON THE BASIS OF THREE YEARS FINANCIAL DATA, WHEREAS THE TPO CONSIDERED ONLY THE CURRENT YEAR DATA ALSO NEEDS TO BE APPRECIATED. THEREFORE, CONSIDERING THE ENORMITY OF TURNOVER OF THE COMPANY AS WELL AS OTHER RELEVANT FACTORS, THE AFORESAID COMP ANY CANNOT BE TREATED AS COMPARABLE TO ASSESSEE IN ANY MANNER. T HIS VIEW OF OURS IS ALSO IN TUNE WITH THE VIEW EXPRESSED BY DIFFEREN T BENCHES OF THIS TRIBUNAL AS STATED BELOW AS WELL AS THAT OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOG IES PVT. LTD.,[2013] 85 CCH 146. A) M/S. FOURSOFT LIMITED (ITA.NO.1903/H/2011) B) M/S. CONEXANT SYSTEM INDIA P. LTD. ITA.1978/H2011 C) M/S. VIRTUSA (I) P. LTD. ITA.NO.1962/HYD/2011 D) TELCORDIA TECHNOLOGIES INDIA P. LTD. ITA.7821/MUM/2 011 E) TRIOLOGY E-BUSINESS SOLUTIONS ITA.NO.1054/BANG/2011 F) ADAPTEC (INDIA) P. LTD. VS. DCIT ITA.NO.1801/HYD/20 09 G) TRINITY ADVANCED SOFTWARE LABS P. LTD. VS. ACIT ITA.NO.1129/HYD/2005 WE THEREFORE DIRECT THE ASSESSING OFFICER /TPO TO E XCLUDE THIS WHILE COMPUTING ALP. ISHIR INFOTECH LTD 7.3. SO FAR AS THIS COMPANY IS CONCERNED, ASSESSEE HAS SOUGHT EXCLUSION OF THE AFORESAID COMPANY ON THE G ROUND THAT THIS COMPANY FAILS EMPLOYEE COST FILTER AS ITS EMPLOYEE COST WAS ONLY 3.96%. IN THIS CONTEXT, THE LEARNED AR HAS RELIE D UPON THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN C ASE OF M/S VIRTUSA (INDIA) PVT. LTD. (SUPRA). ON A PERUSAL OF THE ORD ER PASSED IN CASE OF M/S VIRTUSA (INDIA) PVT. LTD.((SUPRA)), WE FIND THAT THE CO- ORDINATE BENCH HAS HELD THAT ISHIR INFOTECH LIMITED CANNOT BE TREATED AS COMPARABLE AS IT DOES NOT QUALIFY THE EM PLOYEE COST FILTER AS WELL AS RPT FILTER. THIS VIEW OF OURS IS ALSO IN TUNE WITH THE VIEW EXPRESSED BY DIFFERENT BENCHES OF THIS TRIBUNAL AS STATED BELOW : A) M/S. FOURSOFT LIMITED (ITA.NO.1903/H/2011) B) INTOTO SOFTWARE INDIA P. LTD. ITA.2102/H/2010 C) LG SOFT INDIA P. LTD. ITA.1121/BANG/2011 D) TRANSWITCH INDIA P. LTD. ITA.948/BANG/2011 I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 9 -: F) MERCEDES BENZ RESEARCH & DEVELOPMENT ITA.NO.1222/BANG/2011 G) CSR INDIA P. LTD. ITA.NO.1119/BANG/2011 H) FIRST ADVANTAGE ITA.NO.1086/BANG/2012 I) HCL EAI SERVICES LTD. ITA.NO.1348/BANG/2011. RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS OF T HE CO-ORDINATE BENCH, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLU DE THIS COMPANY FROM THE LIST OF COMPARABLES. LUCID SOFTWARE LIMITED : 7.4. THE MAIN OBJECTION OF ASSESSEE WITH REGARD TO THE AFORESAID COMPANY IS THAT IT EARNS REVENUE BOTH FROM PRODUCT DEVELOPMENT AS WELL AS SOFTWARE SERVICES FOR WHICH SEGMENTAL DATA IS NOT AVAILABLE. IN SUPPORT OF SUCH CONTENTION, TH E LEARNED AR HAS RELIED UPON THE DECISION OF CO-ORDINATE BENCH IN TH E CASE M/S VIRTUSA (INDIA) PVT. LTD. (SUPRA). ON PERUSAL OF THE ORDER PASSED IN CASE OF M/S VIRTUSA (INDIA) PVT. LTD. (SUPRA), IT IS SEEN T HAT THE CO-ORDINATE BENCH HAS EXCLUDED THE AFORESAID COMPANY ACCEPTING ASSESSEES CONTENTION THAT SEGMENTAL DATA IN RESPECT OF SALE O F PRODUCTS AND SOFTWARE SERVICES ARE NOT AVAILABLE. FURTHER FOLLOW ING CASES ALSO CONSIDERED THE ABOVE COMPANY AND EXCLUDED THE SAME ON SAME REASON. A) M/S. FOURSOFT LIMITED (ITA.NO.1903/H/2011) B) INTOTO SOFTWARE INDIA P. LTD. ITA.2102/H/2010 C) TELCORDIA TECHNOLOGIES INDIA P. LTD. ITA.NO.7821/MU M/2011 C) LG SOFT INDIA P. LTD. ITA.1121/BANG/2011 D) TRANSWITCH INDIA P. LTD. ITA.948/BANG/2011 F) MERCEDES BENZ RESEARCH & DEVELOPMENT ITA.NO.1222/BANG/2011 G) CSR INDIA P. LTD. ITA.NO.1119/BANG/2011 H) FIRST ADVANTAGE ITA.NO.1086/BANG/2012 I) HCL EAI SERVICES LTD. ITA.NO.1348/BANG/2011. FOLLOWING THE AFORESAID DECISIONS OF THE COORDINATE BENCHES, WE DIRECT EXCLUSION OF THE AFORESAID COMPANY FROM LIST OF COMPARABLES. MEGASOFT LIMITED : 7.5. THE MAIN OBJECTION OF ASSESSEE WITH REGARD TO THE AFORESAID COMPANY IS THAT THIS IS PREDOMINANTLY A P RODUCT DEVELOPMENT COMPANY AND MARGIN FROM SOFTWARE DEVELO PMENT SERVICES IS 23.11%. AS CAN BE SEEN, IN CASE OF M/ S VIRTUSA (INDIA) PVT. LTD. (SUPRA), THE CO-ORDINATE BENCH OF THE TRI BUNAL WHILE I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 10 - : CONSIDERING ASSESSEES OBJECTION WITH REGARD TO THE AFORESAID COMPANY HAD DIRECTED THE ASSESSING OFFICER/TPO TO T AKE ONLY SEGMENTAL MARGIN OF THIS COMPANY FOR COMPUTING ALP. SIMILAR VIEW WAS ALSO EXPRESSED IN THE FOLLOWING CASES : A) M/S. FOURSOFT LIMITED (ITA.NO.1903/H/2011) B) M/S. CONEXANT SYSTEM INDIA P. LTD. ITA.NO.1978/HYD/ 2011 C) INTOTO SOFTWARE INDIA P. LTD. ITA.2102/H/2010 D) TRIOLOGY E-BUSINESS SOLUTIONS ITA.NO.1054/BANG/2011 E) TELCORDIA TECHNOLOGIES INDIA P. LTD. ITA.NO.7821/MUM/2011 F) BEARING POINT BUSINESS ITA.NO.1124/BANG/2011 G) LG SOFT INDIA P. LTD. ITA.1121/BANG/2011 H) TRANSWITCH INDIA P. LTD. ITA.948/BANG/2011 I) MERCEDES BENZ RESEARCH & DEVELOPMENT ITA.NO.1222/BANG/2011 J) CSR INDIA P. LTD. ITA.NO.1119/BANG/2011 K) FIRST ADVANTAGE ITA.NO.1086/BANG/2012 L) HCL EAI SERVICES LTD. ITA.NO.1348/BANG/2011. RESPECTFULLY FOLLOWING THE AFORESAID ORDERS OF CO-O RDINATE BENCHES, WE DIRECT THE ASSESSING OFFICER /TPO TO CONSIDER ON LY THE SEGMENTAL MARGIN OF THIS COMPANY FOR THE RELEVANT ASSESSMENT YEAR FOR COMPUTING ALP. TATA ELXSI LIMITED : 7.6. ASSESSEE HAS SOUGHT EXCLUSION OF THE AFORE SAID COMPANY BY PLACING RELIANCE UPON THE INFORMATION FU RNISHED BY SAID COMPANY U/S 133(6) WHEREIN THE SAID COMPANY HA S ADMITTED THAT IT CANNOT BE TREATED AS COMPARABLE WITH ANY OT HER SOFTWARE SERVICE PROVIDER DUE TO COMPLEX NATURE OF ITS BUSIN ESS. HOWEVER, WHILE THE TPO SELECTED THE AFORESAID COMPANY BY HOL DING THAT THE SERVICES PROVIDED ARE AKIN TO SOFTWARE DEVELOPMENT SERVICES, THE DRP, DID NOT COMMENT ON THE COMPARABILITY OF THIS C OMPANY. THE LEARNED AR SUBMITTED THAT COMPARABILITY OF THE AFOR ESAID COMPANY WAS CONSIDERED AND ANALYSED BY DIFFERENT BENCHES OF THE ITAT AND THE AFORESAID COMPANY WAS REJECTED AS COMPARABLE TO THE SOFTWARE SERVICES PROVIDER. FOR SUCH CONTENTION, THE LEARNED AR RELIED UPON THE FOLLOWING DECISIONS: A) TELCORDIA TECHNOLOGIES INDIA P. LTD. ITA.NO.7821/MU M/2011 B) TRIOLOGY E BUSINESS SOLUTIONS, ITA NO. 1054/BANG/2011. C) M/S. FOURSOFT LIMITED (ITA.NO.1903/H/2011) D) M/S. VIRTUSA (I) P. LTD. ITA.NO.1962/HYD/2011 I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 11 - : E) M/S. CONEXANT SYSTEM INDIA P. LTD. ITA.NO.1978/HYD/ 2011. 7.6.1. THE LEARNED DR, ON THE OTHER HAND, SUPPORTE D THE ORDERS OF THE AO/TPO AND DRP IN THIS REGARD AND REF ERRED TO THE OBSERVATIONS MADE BY THE TPO IN HIS ORDER. 7.6.2. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE P ARTIES AND PERUSED THE MATERIAL ON RECORD. IN CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011, THE ITAT MUMBAI BENCH WHILE CONSIDERING THE COMPARABILITY OF THE AFORESAID COMPANY WITH SOFTWARE SERVICES PROVIDER H ELD AS UNDER: 7.7 FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODU CT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERE NT FROM ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELO PED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABO VE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE N OT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FRO M PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST O F COMPARABLE PARTIES. FOLLOWING THE DECISION OF THE ITAT MUMBAI BENCH AS AFORESAID AND ALSO CONSIDERING THE FACT THAT THE CO MPANY ITSELF IN THE INFORMATION PROVIDED IN RESPONSE TO T HE NOTICE ISSUED U/S 133(6) OF THE ACT HAS ADMITTED THAT IT C ANNOT BE CONSIDERED AS COMPARABLE WITH OTHER ASSESSEES, WE D IRECT EXCLUSION OF THE AFORESAID COMPANY FROM THE LIST OF COMPARABLES WHILE DETERMINING ALP. WIPRO LIMITED : 7.7. WHILE OBJECTING TO THE AFORESAID COMPANY BEIN G TREATED AS COMPARABLE, THE LEARNED AR SUBMITTED THAT THE TP O ONLY ON CONSIDERING SEGMENTAL DETAILS SUBMITTED BY THE SAID COMPANY FOR IT SERVICES, IN RESPONSE TO NOTICE ISSUED U/S 133(6), HAS CONSIDERED IT AS A COMPARABLE. IT WAS SUBMITTED THAT THE AFORESAID C OMPANY IS A DIVERSIFIED COMPANY AND DISCLOSES SEGMENTAL INFORMA TION FOR IT SERVICES AND PRODUCTS AS ONE SEGMENT IN ITS ANNUAL REPORT. IT WAS SUBMITTED THAT THE TPO HAS NOT PROVIDED ANY OTHER D OCUMENTS I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 12 - : EXCEPTING SEGMENTAL INFORMATION OBTAINED FROM TP RE PORT OF WIPRO, WHICH IS UNAUDITED, MANUALLY CORRECTED AND UNVERIFI ED. IT WAS SUBMITTED THAT WIPRO IS ALSO CONSIDERED TO BE A GIA NT IN ITS FIELD ASSUMING ALL THE RISKS AND CANNOT BE COMPARED TO CA PTIVE SERVICE PROVIDER LIKE ASSESSEE. TO SUPPORT HIS CONTENTIONS WITH REGARD TO NON-COMPARABILITY OF THE SAID COMPANY, HE RELIED UP ON THE FOLLOWING DECISIONS : A) TELCORDIA TECHNOLOGIES INDIA P. LTD. ITA.NO.7821/MU M/2011 B) TRINITI ADVANCES SOFTWARE P. LTD., ITA NO. 1129/H/2005. C) M/S. FOURSOFT LIMITED (ITA.NO.1903/H/2011) D) M/S. VIRTUSA (I) P. LTD. ITA.NO.1962/HYD/2011 E) M/S. CONEXANT SYSTEM INDIA P. LTD. ITA.NO.1978/HYD/ 2011. F) ADAPTEC (I) P. L.TD. ITA.NO.1801/HYD/2011. 7.7.1. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDERS OF THE DRP AS WELL AS TPO SO FAR AS THE SELECTION OF T HE AFORESAID COMPANY AS COMPARABLE WHILE DETERMINING ALP. 7.7.2. WE HAVE HEARD THE SUBMISSIONS OF THE P ARTIES AND PERUSED THE MATERIAL ON RECORD. T HE ITAT MUMBAI BENCH IN CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011, WHILE CONSIDERING THE OBJECTION OF A SSESSEE FOR TREATING THE AFORESAID COMPANY AS COMPARABLE H ELD AS FOLLOWS: 7.5 THIS COMPANY IS ALSO A GLOBAL IT COMPANY HAVIN G VARIETIES OF SERVICE AND PRODUCTS AND LOOKING TO TH E MAGNITUDE OF ITS OPERATIONS, SALES AND EXPENSES, TH E SAME CANNOT BE TAKEN INTO CONSIDERATION FOR COMPARABILITY ANALYSIS. MOREOVER, 67% OF ITS SALES RELATES TO ITS PRODUCT WHICH ARE SOLD ON PREMIUM RESULTING INTO HIGHER PROFITABILITY, THEREFORE, CAN NOT BE COMPARED WITH ASSESSEE COMPANY AT ALL. THERE ARE SEVERAL JUDGMENTS OF ITAT WHICH HAVE BEEN REFERRED IN PARA 6.5 ABOVE, THAT WIPRO CANNOT BE TAKEN AS COMPARABLE CASE FOR COMPARABLE CASE WITH THE COMPANY LIKE ASSESSEE. IN VIEW OF THESE FACTS AND T HE REASONING GIVEN IN THE CASE OF INFOSYS, WE HOLD THA T WIPRO ALSO CANNOT BE CONSIDERED AS A COMPARABILITY ANALYSIS, HENCE, WOULD NOT BE INCLUDED IN THE LIST OF THE COMPARABLE ENTITIES AS IDENTIFIED BY THE TPO. 7.7.3. AS CAN BE SEEN FROM THE FACTS AND MATERIALS ON RECORD DURING THE YEAR UNDER CONSIDERATION, THE SEGMENTAL TURNOVE R OF THE WIPRO LTD. IS 9616.09 CRORES. THEREFORE, CONSIDERING THE TURNOVER, BRAND VALUE AS WELL AS OTHER DYNAMICS OF WIPRO LTD., IT C OMES IN THE SAME I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 13 - : CATEGORY AS INFOSYS AND CERTAINLY CANNOT BE COMPARE D WITH ASSESSEE. THEREFORE, FOLLOWING OUR REASONING IN CAS E OF INFOSYS TECHNOLOGIES LTD. AND OTHER COORDINATE BENCH DECISI ONS, WE HOLD THAT WIPRO LTD. CANNOT BE TREATED AS COMPARABLE WIT H ASSESSEE. ACCEL TRANSMATIC LTD. : 7.8. WITH REGARD TO THIS COMPANY, THE COMPLAIN T OF ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAP GEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONT ENTION OF ASSESSEE THAT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARA BLE. THE RELEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. ASSESSEE SUBMI TTED 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 MANUFAC TURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICK ET VENDING SYSTEM. (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENTRE F OR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOL OGIES, OUTSOURCED PRODUCT DEVELOPMENT. (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS)- TRA INING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYS TEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/ CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 7.8.1. ON CAREFUL PERUSAL OF THE BUSINESS ACTIVIT IES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH ASSESSEE THAT THE C OMPANY WAS FUNCTIONALLY DIFFERENT FROM ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICE S FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. IT DIRECTED THE ASSESSING O FFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. A SIMILAR VIEW WAS TAKEN I N THE FOLLOWING CASES : A) M/S. CONEXANT SYSTEM INDIA P. LTD. ITA.NO.1978/HYD/ 2011. B) INTOTO SOFTWARE INDIA P. LTD. ITA.2102/H/2010 C) BEARING POINT BUSINESS ITA.NO.1124/BANG/2011 D) LG SOFT INDIA P. LTD. ITA.1121/BANG/2011 I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 14 - : E) TRANSWITCH INDIA P. LTD. ITA.948/BANG/2011 F) MERCEDES BENZ RESEARCH & DEVELOPMENT ITA.NO.1222/BANG/2011 G) CSR INDIA P. LTD. ITA.NO.1119/BANG/2011 H) HCL EAI SERVICES LTD. ITA.NO.1348/BANG/2011. RESPECTFULLY FOLLOWING THE DECISIONS OF THE COORDIN ATE BENCHES OF THE TRIBUNAL, WE DIRECT THAT THIS COMPANY SHOULD BE EXC LUDED FROM THE LIST OF COMPARABLES. KALS INFORMATION SYSTEM LIMITED : 7.9. AS FAR AS KALS INFORMATION SYSTEM LIMITED IS CONCERNED, LEARNED COUNSEL FOR ASSESSEE SUBMITTED THAT IT IS F UNCTIONALLY DIFFERENT FROM ASSESSEE. IN SUPPORT OF HIS CONTENTION, THE LEARNED COUNSEL FOR ASSESSEE RELIED UPON THE DECISION OF THE BANGALORE TRIBUNAL IN THE CASE M/S. TRILOGY E- BUSINESS SOFTWARE INDIA PRIVATE LIMITED (SUPRA) WHE REIN AT PARAS 46 AND 47 OF ITS ORDER, THE TRIBUNAL HAS DISCUSSED THE FUNCTIONA L DISSIMILARITY WITH ASSESSEE THEREIN AND HAS DIRECTED THAT THE COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. SIMILARLY, THE TRIBUNAL AT BANGALORE I N THE CASE OF M/S. HCL EAI SERVICES LTD. VS. DCIT IT(TP) A. NO. 1348/ BANG /2011 AT PARA 17 AT PAGES 24 TO 26 OF ITS ORDER HAS DISCUSSED AT LENGTH THE REASONS FOR NOT CONSIDERING THE SAID COMPANY AS COMPARABLE TO SOFTW ARE DEVELOPMENT SERVICES COMPANY. THE RELEVANT PORTION OF THE ORDER IS REPRO DUCED HEREUNDER : (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTE NTION OF ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BE SIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPAN Y IS ENGAGED IN PROVIDING TRAINING. IT WAS ALSO SUBMITTE D 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% OF THE SOFTWARE SERVICES REV ENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DEC ISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMI TED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT O F IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIE S. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPAR ABLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 15 - : PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY T O ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T EN ABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPM ENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE N OT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE I N PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF T HIS COMPANY AS HIGHLIGHTED BY ASSESSEE IN ITS LETTER DA TED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECI SION REFERRED TO BY THE LEARNED COUNSEL FOR ASSESSEE, TH E MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAIN LY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF ASSESSEE THAT THIS COMPANY IS NO T COMPARABLE. 7.9.1. WE FIND THAT BOTH M/S. HCL EAI SERVICES LTD . ITA.NO.1348/BANG/2011 AS WELL AS M/S. TRILOGY E-BUS INESS SOLUTIONS ITA.NO.1054/BANG/2011 ARE INTO SOFTWARE DEVELOPMENT SERVICES TO ITS PARENT COMPANIES. ASSESSEE IS ALSO INTO SIMILAR TYPE OF AC TIVITY. THEREFORE, THE DECISION TAKEN IN M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LIMITED AS WELL AS M/S. HCL EAI SERVICES LTD. TO EXCLUDE KALS INFORMATION SYSTEMS LTD. APPLIES TO THE FACTS OF THE CASE BEFORE US ALS O. SIMILAR VIEW HAS BEEN EXPRESSED BY THE COORDINATE BENCH OF THE TRIBUNAL I N THE FOLLOWING CASES : A) M/S. CONEXANT SYSTEM INDIA P. LTD. ITA.NO.1978/HYD/ 2011. B) INTOTO SOFTWARE INDIA P. LTD. ITA.2102/H/2010 C) BEARING POINT BUSINESS ITA.NO.1124/BANG/2011 D) LG SOFT INDIA P. LTD. ITA.1121/BANG/2011 E) TRANSWITCH INDIA P. LTD. ITA.948/BANG/2011 I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 16 - : F) CSR INDIA P. LTD. ITA.NO.1119/BANG/2011 G) FIRST ADVANTAGE ITA.NO.1086/BANG/2012 THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE COORDINATE BENCHES (SUPRA), WE DIRECT THE ASSESSING OFFICER/TPO TO EXC LUDE THE COMPANY FROM THE LIST OF COMPARABLES. 18. SIMILARLY, AS CONTENDED BY THE LEARNED COUNSEL FOR ASSESSEE COMPARABLE NATURE OF FLEXTRONICS SOFTWARE SYSTEMS LTD.(SEG) AND HELIO & MATHESON INFORMATION TECH LT D., HAS BEEN REJECTED BY COORDINATE BENCH OF THE TRIBUNAL IN TH E CASE OF M/S. AXSYS HEATHCARE LTD. VIDE ORDER DATED 28.5.2014 IN ITA NO.2076/HYD/2011 FOR THE ASSESSMENT YEAR 2007-08, F OR THE FOLLOWING REASONS- 14. AFTER HEARING RIVAL CONTENTIONS, WE AGREE THAT THE FOLLOWING COMPARABLES WERE EXCLUDED BY THE COORDINATE BENCHES CONSIDERING THE SIMILAR FACTS AND ARGUMENTS RAISED BEFORE US: ........................... 3. HIGH TURNOVER- FUNCTIONALLY DISSIMILAR: 6. FLEXITRONICS SOFTWARE LIMITED : ' AS FAR AS FLEXITRONICS SOFTWARE LIMITED IS CONCER NED, WE FIND THAT AT PAGE 90 OF HIS ORDER, THE TPO HAS ALSO OBSERVED THAT THE SAID COMPANY HAS INCURRED EXPENDITURE FOR SELLING OF PRO DUCTS AND HAS INCURRED R & D EXPENDITURE FOR DEVELOPMENT OF THE P RODUCTS. THE ABOVE FACTS CLEARLY DEMONSTRATE THAT THERE IS FUNCT IONAL DISSIMILARITY BETWEEN ASSESSEE AND THESE COMPANIES AND WITHOUT MA KING ADJUSTMENT FOR THE DISSIMILARITIES BROUGHT OUT BY T HE TPO HIMSELF, THESE COMPANIES CANNOT BE TAKEN AS COMPARABLE COMPA NIES. THE METHOD ADOPTED BY THE TPO TO ALLOCATE EXPENDITURE P ROPORTIONATELY TO THE SOFTWARE DEVELOPMENT SERVICES AND SOFTWARE P RODUCT ACTIVITY CANNOT BE SAID TO BE CORRECT AND REASONABLE. WHEREV ER, THE ASSESSING OFFICER/TPO CANNOT MAKE SUITABLE ADJUSTME NT TO THE FINANCIAL RESULTS OF THE COMPARABLE COMPANIES WITH ASSESSEE- COMPANY TO BRING THEM ON PAR WITH ASSESSEE, THESE C OMPANIES ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THEREF ORE, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE FROM THE LIST OF COMPARABLES.' . 14. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD TH IS COMPARABLE IS OBJECTED ON THE REASON OF LOW EMPLOYE E COST OF 1.36%. THUS IT FAILS THE EMPLOYEE COST FILTER. THER EFORE, NOT COMPARABLE. ASSESSEE RELIED ON THE JUDGMENT OF MENT OR GRAPHICS P. LTD. VS. DCIT 109 ITD 101 (DEL.) WITH REFERENCE TO THIS COMPARABLE. 15. AFTER CONSIDERING THE CONTENTIONS, WE ARE OF THE OPINION THAT THESE 14 COMPARABLES ARE REQUIRED TO BE EXCLUDED BY THE TPO. RESPECTFULLY FOLLOWING THE DECISIONS OF THE COORDINATE BENCHES O F THE TRIBUNAL, WE DIRECT THAT THESE COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES AS ASSESSEE TURNOVER IS ONLY 2.18 CRORE S AND EMPLOYEE COST IS MORE. MANY OF THE COMPANIES ARE ALSO FOUND TO BE NOT FUNCTIONALLY I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 17 - : SIMILAR. THE VARIOUS FILTERS AND REASONS ACCEPTED I N OTHER CASES DO APPLY TO ASSESSEE AS TPO SELECTED SAME 26 COMPARABLES IN ALL THE CASES RELIED ON AND DECIDED EARLIER IN VARIOUS CASES. 9. FURTHER, AS PER THE CHART FURNISHED BEFORE US, SIMILAR VIEW HAS BEEN TAKEN BY THE CO-ORDINATE BENCHES OF T HE TRIBUNAL IN SIMILAR MATTERS, WHEREIN COMPARABLE NATURE OF ABOVE ELEVEN COMPANIES HAS COME UP FOR CONSIDERATION, SUCH AS- (A) M/S. AXSYS HEALTHCARE LTD. (ITA NO.2076/HYD/2011) (B) M/S.VIRTUSA (I) P. LTD. (ITA NO.1962/HYD/2011) (C) M/S. CONTEXANT SYSTEM INDIA PVT. LTD. (ITA NOS.1978/HYD/2011) (D) INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO.2102/HYD/20 10) (E) TRIOLOGYE BUSINESS SOLUTIONS (ITA NO.1054/BANG/2011 ) (F) TELCORDIA TECHNOLOGIES INDIA PVT. LTD. (ITA NO.7821/MUM/2011) (G) LG SOFT INDIA PVT. LTD. (ITA NO.1121/BANG/2011) (H) TRANSWITCH INDIA PVT. LTD. (ITA NO.948/BANG/2011) (I) MERCEDES BENZ RESEARCH & DEVELOPMENT (ITA NO.1222/BANG- -/2011) (J) CSR INDIA PVT. LTD. (ITA NO.1119/BANG/2011) (K) FIRST ADVANTAGE (ITA NO.1086/BANG/2012) (L) HCL EAI SERVICES LTD. (ITA NO.1348/BANG/2011) (M) ADAPTEC (INDIA ) PVT. LTD.(ITA NO.1801/HYD/2011) 10. RESPECTFULLY FOLLOWING THE CONSISTENT VIEW TAK EN BY THE TRIBUNAL WITH REGARD TO COMPARABLE NATURE OF THE AB OVE COMPANIES IN SIMILAR MATTERS AND MORE PARTICULARLY THE DECISI ON OF THE TRIBUNAL IN THE CASE OF SUMTOTAL SYSTEMS INDIA PVT. LTD., IN ITA NO. 1710/HYD/2011 WHICH WAS IN TURN RELIED ON BY THE ABOVE SAID CASE BY THE CO-ORDINATE BENCH, WE ALLOW GROUND NO. 7 OF ASSESSEE I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 18 - : AND DIRECT THE AO TO EXCLUDE 10 COMPANIES FROM THE SCOPE OF COMPARABLE ANALYSIS. AS FAR AS MEGA SOFT LTD., IS CONCERNED, THE TPO IS DIRECTED TO CONSIDER ONLY THE SEGMENTAL MARG IN OF THIS COMPANY FOR THE RELEVANT ASSESSMENT YEAR FOR COMPUT ING THE ALP. ON THESE DIRECTIONS, THE GROUND IS CONSIDERED PARTL Y ALLOWED. 11. THE NEXT EFFECTIVE GRIEVANCE OF ASSESSEE THAT SURVIVES FOR CONSIDERATION RAISED IN THIS APPEAL, AS NOTED ABOVE , RELATES TO THE EXCLUSION OF THE FOLLOWING COMPARABLE COMPANIES SEL ECTED BY ASSESSEE, BUT REJECTED BY THE TPO/DRP- (A) AZTECSOFT LIMITED (B) BIRLA TECHNOLOGIES LIMITED (C) GOLDSTONE TECHNOLOGIES LIMITED (D) INDIUM SOFTWARE INDIA LIMITED (E) LARSEN & TOUBRO INFOTECH LIMITED (F) PSI DATA SYSTEMS LIMITED (SEG.) (G) V M F SOFTECH LIMITED ASSESSEE HAS NOT PRESSED THE ISSUE WITH REFERENCE T O M/S. GOLDSTONE TECHNOLOGIES LTD. ACCORDINGLY, WE EXCLUD E THE SAME FROM CONSIDERATION. 12. WE FIND THAT THE ISSUE OF THESE COMPANIES WHET HER THEY ARE COMPARABLE OR NOT HAS COME UP FOR CONSIDERATION FOR THE SAME ASSESSMENT YEAR IN THE CASE OF SUMTOTAL SYSTEMS IND IA PVT. LTD., IN ITA NO. 1710/HYD/2011 WHEREIN TRIBUNAL VIDE ITS ORDER DT. 09-05- 2014 HAS REJECTED THE CONTENTIONS OF ASSESSEE FOR INCLUS ION OF SIX COMPANIES UNDER CONSIDERATION BEFORE IT. SIMILAR V IEW WAS ALSO TAKEN IN THE CASE OF M/S. UNITED ONLINE SOFTWARE DE VELOPMENT I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 19 - : (INDIA) PVT. LTD., IN ITA NO. 1658/HYD/2011 DT. 24- 09-2015 (SUPRA). RELEVANT PORTION OF THE SAID ORDER OF THE TRIBUNAL IN THE CASE OF SUMTOTAL SYSTEMS INDIA PVT. LTD., IN ITA NO . 1710/HYD/2011 (SUPRA) IS EXTRACTED AS UNDER: 8. IN GROUND NO. 8, ASSESSEE HAS CHALLENGED THE A CTION OF THE TPO IN REJECTING CERTAIN COMPARABLES SELECTED BY ASSESS EE, WHICH ARE AS UNDER: 1. AZTEC SOFT LTD. 2. BIRLA TECHNOLOGIES LTD. 3. INDIUM SOFTWARE INDIA LTD. 4. LARSEN & TOUBRO INFOTECH. 5. PSI DATA SYSTEMS LTD. (SEG) 6. VMF SOFTECH LTD. 8.1. WITH REFERENCE TO INCLUSION OF THESE COMPARABL ES, ASSESSEES CONTENTIONS ARE THAT RELATED PARTY TRANSACTIONS IN THE CASE OF AZTEK AND BIRLA TECHNOLOGIES ARE WITHIN THE FILTERS APPLI ED BY THE TPO AND WITH REFERENCE TO INDIUM SOFTWARE P. LTD. AND L & T INFOTECH, THEY ARE FUNCTIONALLY SIMILAR. IT WAS THE SUBMISSION BY THE LD. COUNSEL THAT THEY ARE NOT FUNCTIONALLY DIFFERENT AND TPO SH OULD HAVE CONSIDERED SEGMENTALS FROM THE DETAILS FURNISHED BY ASSESSEE. IN THE CASE OF L & T INFOTECH., EVEN THOUGH INFORMATIO N WAS NOT RECEIVED UNDER SECTION 133(6), IT WAS THE SUBMISSIO N THAT THIS COMPANY ALSO SHOULD BE CONSIDERED AS THE COMPARABLE . AS FAR AS PSI DATA SYSTEMS LTD. ARE CONCERNED, THE TPO IS REJ ECTED THE COMPARISON ON THE RELATED PARTY TRANSACTIONS FILTER . IT WAS THE SUBMISSION THAT RPT WAS WORKED OUT BY INCLUDING REI MBURSEMENT TRANSACTIONS. WITH REFERENCE TO VMF SOFT TECH, THE TPO HAS REJECTED IT AS THERE ARE NO FOREIGN EXCHANGE EARNINGS, WHERE AS, IT WAS THE SUBMISSION THAT ASSESSEE HAS 93% OF FOREIGN EXCHANG E REVENUES. IT WAS THE SUBMISSION THAT ABOVE COMPANIES ARE TO BE S ELECTED AS COMPARABLES. 8.2. AFTER CONSIDERING THE SUBMISSIONS, WE ARE OF T HE OPINION THAT PROPER CASE WAS NOT MADE OUT FOR INCLUSION OF THE A BOVE COMPARABLES. ONCE TPO AND DRP FORMS THAT THESE COMP ARABLES ARE NOT FUNCTIONALLY SIMILAR TO ASSESSEE ON THE BASIS O F VARIOUS FILTERS ADOPTED BY THE TPO, IT WOULD BE BETTER IF THE MATTE R IS LEFT LIKE THAT RATHER THAN ORDERING FRESH ENQUIRY. WE ALSO NOTICED THAT THESE COMPANIES HAVE RELATED PARTY TRANSACTIONS AND THERE FORE, MAY NOT JUSTIFY ON VARIOUS FILTERS ADOPTED. AS FAR AS INDIU M SOFTWARE INDIA LTD. THERE IS A FINDING THAT THIS COMPANY IS FUNCTI ONALLY DIFFERENT. L & T INFOTECH ALSO FOUND TO BE FUNCTIONALLY DIFFEREN T. MOREOVER, IT HAS MORE THAN RS.600 CRORES TURNOVER AND MAY FAIL ON TU RNOVER FILTER, I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 20 - : EVEN THOUGH TURNOVER FILTER WAS NOT APPLIED IN THIS CASE. WHEN SPECIFIC 133(6) NOTICE WAS ISSUED, THAT ASSESSEE HA S NOT TO RESPONDED AND THEREFORE, TPO WAS NOT IN A POSITION TO INCLUDE THE ABOVE CASE IN THE ABSENCE OF SEGMENTAL DATA. PSI DA TA SYSTEMS ALSO IN OUR VIEW NEED NOT BE CONSIDERED AS IT HAS R ELATED PARTY TRANSACTIONS. IT REQUIRES ANALYSIS OF SEGMENTAL DAT A TO NOTICE WHETHER IT HAS RELATED PARTY TRANSACTIONS. EVEN WIT H REFERENCE TO SOFTWARE DEVELOPMENT SERVICES, SINCE THERE IS ALREA DY A FINDING BY THE TPO ON THIS ISSUE, WE ARE OF THE OPINION THAT T HERE IS NO NEED TO CONSIDER THE ABOVE COMPARABLE AT THIS STAGE. SO FAR AS THE VMF SOFTWARE LTD. IS CONCERNED, EVEN THOUGH THIS COMPAN Y MAY BE INCLUDABLE ON THE BASIS OF FOREIGN EXCHANGE EARNING S BEING 93% OF THE REVENUE, IT WAS REJECTED IN THE CASE OF VIRTUSA INDIA P. LTD. ITA.NO.1962/HYD/2011, WHEREIN IT WAS RECORDED THAT THERE WAS A SPECIFIC FINDING THAT AFTER ENQUIRY BEING CONDUCTED , IT WAS FOUND THAT COMPANY WAS TAKEN UP BY ONE KELTON SECTOR P. LTD. A ND INSPITE OF BEING CALLED, THE COMPANY WAS FAILED TO PRODUCE ITS CASH BOOK LEDGER PARTICULARS OF SALARY PAID ETC. HENCE, GENU INENESS OF THE COMPANY AND ITS ACTIVITIES ARE DOUBTED. THIS FINDIN G HAS NOT BEEN CONTROVERTED BY ASSESSEE IN THAT CASE. CONSIDERING THE FACTS, THE COORDINATE BENCH FELT THAT THE AFORESAID COMPANY HA S BEEN RIGHTLY REJECTED AS COMPARABLE. SINCE SAME FACTS EXISTS WE ARE ALSO OF THE OPINION THAT THE AFORESAID COMPANY HAS BEEN RIGHTLY REJECTED, AS COMPARABLE, EVEN THOUGH ON A DIFFERENT FILTER APPLI ED BY THE TPO. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT THERE IS NO NEED TO CONSIDER ANY OF THE COMPARABLES, ALREADY REJECTED B Y THE TPO/DRO FOR THE REASONS STATED ABOVE. RESPECTFULLY FOLLOWING THE ABOVE, WE ARE OF THE OP INION THAT ASSESSEE HAS NOT MADE OUT A PROPER CASE FOR INCLUSI ON OF THE ABOVE COMPARABLES. ACCORDINGLY, WE REJECT GROUND NO. 8 R AISED BY ASSESSEE. 13. GROUND NO. 12 PERTAINS TO INCLUSION OF REIMBUR SABLE COST AS OPERATING COST BY THE TPO. IT WAS FAIRLY S UBMITTED THAT THIS ISSUE WAS ALSO COVERED BY THE CO-ORDINATE BENCH DEC ISION IN ASSESSEES OWN CASE FOR AY. 2005-06 IN ITA NO. 471/ HYD/2011 DT. 26-08-2015, WHEREIN THE ISSUE WAS CONSIDERED AND DE CIDED AS UNDER: I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 21 - : 23. THE NEXT ISSUE WHIC H ARISES FOR CONSIDE RATION AS RAISED IN GROUND NO.12 IS WITH REGARD TO INCLUSIO N OF REIMBURSEMENT COST OF RS. 6,55,57,576 IN THE OPERAT ING COST FOR THE PURPOSE OF DETERMINING ALP OF SO FTWARE DEVELOPME NT SERVICES SE GMENT. 24. LD.AR SUBMITTED BE FORE US, THE TPO WH ILE DE T ERMININ G THE ALP OF THE SO FTWARE DE VELOPMENT SERVICES SE GMENT HAS INCLUDED THE RE IMBURSEMENT COST OF RS. 6,55,57,576 BEING THE COST OF T RAVE L AND S T A Y OF PERSONNEL TO ASSESSEE. LD.AR SUBMITTED, THERE BEING NO PRO FIT ELEMENT IN SUCH REIMBURSE MENT COST, IT SHOULD NOT HAVE BEEN INCLUDED IN THE OC. IN SUPPORT OF SUCH CONTENTION, LD . AR RELIED UPON THE DECISION OF THE IT AT, HYDERABAD BENCH IN C ASE OF M/S. H SBC ELECTRONIC DATA P RO CESS INDIA LTD. VS. DC IT , IT A NO. 1624 / HYD /2010, DT. 28/06/2013. 25. THE LD. DR SUBMITTED BE FORE US, IF THE REIMBURSEMENT COST ACCORDIN G TO THE TRIBUNAL CANNOT FORM PART OF THE OC, THEN, THE TPO MAY BE DIRECTED TO DETERMINE THE ALP OF REIMBURSEMENT COST SEPARATELY. 26. WE HAVE CONSIDERE D THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ITAT, HYD. BENCH IN CASE OF HSBC ELECTRONIC DATA PROCESS IN DIA LTD. VS.DCIT IN ITA 1624/HYD/10, DATED 28/06/13, WH ILE DEALIN G WITH IDENTICAL ISSUE HELD AS UNDER: 20. A F T E R CONSIDERING THE RIVAL SUBMISSIONS AND FOLLOWING THE PRINCIPLES L A I D DOWN IN THE DECISIONS OF THE T R I BUN A L C I T E D ABOVE, WE ARE OF THE OPINION T H A T R E I MBUR S E M E N T COSTS S HOU L D BE EXCLUDED AS THEY DO NOT INVOLVE ANY F UN C T I ON S TO BE PERFORMED SO AS TO C ON S I D E R I T FOR PROFITABILITY PURPOSES. I N THE CASE OF FOUR S O F T L T D . S UPR A , HYDERABAD BENCH OF THE T R I BUN A L C ON S I D E R E D T H I S I SS U E AND H E L D AS UND E R : 15. WE HAVE C ON S I D E R E D THE RIVAL SUBMISSIONS AND PERUSED THE M A T E R I A L ON RECORD. FI R S T , WE WILL TAKE UP THE I SS U E R E L A T I NG TO THE ADJUSTMENTS MADE BY T H E A SS E SS I NG OFFICER IN RESPECT OF THE I N T E RN A T I ON A L T R A N S A C T I ON S W I T H I T S A SS O C I A T E D E N T E RPR I S E S IN THE SOFTWARE D E V E L OPM E N T SERVICES. I T IS THE C ON T E N T I ON OF THE ASSESSEE THAT BAD DEBTS I N C URR E D BY THE ASSESSEE COMPANY ARE I N RESPECT OF T R A N S A C T I ON S, WHICH ARE NOT R E L A T E D TO A SS O C I A T E D E N T E RPR I S E S . T H I S C ON T E N T I ON OF THE ASSESSEE HAS NOT I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 22 - : BEEN CONTROVERTED BY THE R E V E NU E BY BRINGING ANY M A T E R I A L ON RECORD BEFORE US. I T IS THE C ON T E N T I ON OF THE L E A RN E D C OUN S E L FOR THE ASSESSEE THAT SUCH BAD DEBTS CANNOT BE TAKE N I N T O ACCOUNT FOR C OMPU T I NG THE M A RG I N OF THE ASSESSEE FROM THE T R A N S A C T I ON S W I T H T H E A SS O C I A T E D E N T E RPR I S E S IN RESPECT OF SOFTWARE D E V E L OPM E N T SERVICES. T H E L E A RN E D C OUN S E L FOR THE ASSESSEE HAS A L S O FILED BEFORE US A C OMP A R A T I V E C H A R T EXPLAINING THE C OMPU T A T I ON OF NET M A RG I N , EXCLUDING THE BAD DEBTS AND C L E A R L Y DEMONSTRATED BEFORE US THAT IF THE BAD D E B T S / R E I MBUR S E M E N T S ARE E X C L UD E D FOR THE PURPOSE OF C OMPU T I NG THE M A RG I N S ON THE T R A N S A C T I ON S R E L A T I NG TO THE A SS O C I A T E D E N T E RPR I S E S, THE NET M A RG I N COMES TO 19.07%, WHICH IS W E LL C OMP A R A B L E W I T H THE ARMS L E NG T H M A RG I N OF 19% D E T E RM I N E D BY THE T R A N S F E R PRICING OFFICER. I N OUR C ON S I D E R E D VIEW, FOR C OMPU T I NG THE NET M A RG I N OF THE ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING, ONLY THE COST R E L A T E D TO THE T R A N S A C T I ON W I T H THE A SS O C I A T E D E N T E RPR I S E S HAS TO BE C ON S I D E R E D A ND ACCORDINGLY, WE APPROVE THAT S E GM E N T A L FINANCIALS IS TO BE C ON S I D E R E D FOR T H E PURPOSE OF ARRIVING AT THE NET M A RG I N ON THE I N T E RN A T I ON A L T R A N S A C T I ON W I T H THE ASSESSEE'S E N T E RPR I S E IN RESPECT OF SOFTWARE D E V E L OPM E N T SERVICES. I N T H A T PROCESS, BAD D E B T S / R E I MBUR S E M E N T S HAS TO BE EXCLUDED AND S E GM E N T A L PROFITABILITY HAS TO BE ADOPTED. WE FIND SUPPORT IN T H I S B E H A L F FROM V A R I OU S DECISIONS OF THE T R I BUN A L R E LI E D UPON BY THE L E A RN E D C OUN S E L FOR T H E ASSESSEE DULY FILING COPIES THEREOF IN THE PAPERBOOK, WHICH HAVE BEEN NO T E D H E R E I N A BO V E . T H A T B E I NG SO, THE TPO S HOU L D HAVE D E T E RM I N E D THE ARMS L E NG T H PRICE FOR THE I N T E RN A T I ON A L T R A N S A C T I ON S W I T H A SS O C I A T E D E N T E RPR I S E S C ON S I D E R I NG ONLY THE OP E R A T I NG COST A LL O C A B L E TO THE A SS O C I A T E D E N T E RPR I S E S SEGMENT. S I N C E THE A SS E SS I NG OFFICER HAD NO O CC A S I ON TO VERIFY THE VERACITY OF THE S E GM E N T A L FINANCIALS PREPARED BY THE ASSESSEE COMPANY, FOR LIMITED PURPOSE, WE D I R E C T THE A SS E SS I NG OFFICER TO VERIFY THE S E GM E N T A L FINANCIALS PREPARED BY THE ASSESSEE COMPANY AND ADOPT THE SAME FOR ARRIVING AT THE NET M A RG I N ON T H E I N T E RN A T I ON A L T R A N S A C T I ON W I T H AES IN RESPECT OF SOFTWARE D E V E L OPM E N T SERVICES. WE D I R E C T A CC ORD I NG L Y . R E S P E C T F U LL Y FOLLOWING THE SAME, WE D I R E C T THE ASSESSING OFFICER/ T P O T O EXCLUDE THE R E I MBUR S E M E N T COSTS WHILE WORKING OUT THE OP E R A T I NG COSTS. T H I S GROUND IS C ON S I D E R E D A LL O W E D . I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 23 - : FACTS BEIN G MATERIALLY SAME, F OLLOWIN G THE VIE W EXPRESS ED BY THE COORDINATE BENC H HEREINABOVE, WE HOLD THAT REIMBURSE MENT COST SHOULD BE EXCLUDED FROM THE OC FOR DETERMINING A L P . A S FAR AS THE CONTENTION OF LD. DR THAT TPO MAY BE DIREC TED TO DETERMINE THE ALP OF THE REIMBURSEMENT COST ON STANDALONE BASIS, WE A RE UNABLE TO ACCEPT THE SAME AS THE SAME DOES NOT ARISE OUT EIT HER FROM THE ORDER OF TPO OR LD. C IT(A). SINCE, WH ILE CONS IDERING ASSESSEES APPE AL WE HA VE TO RESTRICT OURSELVES TO THE GROUNDS RAISED BY AS SESSEE, THIS ISSUE RAISED BY LD. DR IS LE FT OPEN TO BE DECIDED IN AN APPROPRIATE CAS E. IN VIE W OF THE A FORESAID, WE DIRECT A.O./T PO TO COMPUTE ALP A FRESH KEEPING IN VIEW OU R DIRECTIONS HEREINABO VE. 14. IN VIEW OF THE CO-ORDINATE BENCH DECISION IN A SSESSEES OWN CASE, WE DIRECT THE TPO TO EXCLUDE THE REIMBURS EMENT COST FROM THE OPERATING COST FOR DETERMINING THE ALP. CORPORATE MATTERS: 15. BESIDES THE ABOVE GROUND RAISED ON THE TP ISSU ES, ASSESSEE HAS RAISED GROUND NOS. 13 TO 16 ON OTHER C ORPORATE MATTERS. GROUND NO. 13 PERTAINS TO THE ACTION OF T HE AO IN REDUCING THE COMMUNICATION CHARGES OF RS. 1,18,40,0 77/- FROM THE EXPORT TURNOVER ALONE, CONSIDERING IT AS ATTRIBUTAB LE TO DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND FURTHER NOT RED UCING THE SAME FROM TOTAL TURNOVER. 16. THIS GROUND IS ALSO DECIDED BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR THE AY. 2008-09 IN ITA NO. 1724/HYD/2012 DT. 22-03-2013 WHEREIN FOLLOWING THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GEMPLUS JE WELLERY [330 ITR 175] AND ORDER OF SPECIAL BENCH OF THE ITAT IN THE CASE OF ITO VS. SAK SOFT LIMITED [121 TTJ 865], AO WAS DIRECTED TO EXCLUDE THE I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 24 - : COMMUNICATION CHARGES FROM BOTH EXPORT TURNOVER AS WELL AS TOTAL TURNOVER, THE DECISION OF THE CO-ORDINATE BENCH IS AS UNDER: 4. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. WE HAVE ALSO APPLIED OUR MIND TO THE DECISIONS CITED BEFORE US. AFTER GOING THROUGH THE DECISIONS , WE FIND THAT THE ISSUE RAISED IN THE GROUNDS IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE. THE HON'BLE BOMBAY HIGH COURT IN THE CAS E OF M/S. GEM JEWELLERY LIMITED (330 ITR 175) AND THE ITAT CHENNA I SPECIAL BENCH IN CASE OF ITO VS. SAK SOFT LIMITED (121 TTJ 865) HAVE HELD THAT WHILE COMPUTING THE DEDUCTION U/S. 10A OF THE ACT, TELECOMMUNICATION CHARGES HAVE TO BE REDUCED FROM T HE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. IN VIEW OF THE RATIO LAID DOWN AS AFORESAID, WE DIRECT THE AO TO RE-COMPUTE DEDUCTION U/S. 10A AFTER REDUCING COMMUNICATION CHARGES BOTH FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. ACCORDINGLY, WE ALLOW THE GROUND RAISED BY THE ASSESSEE. 17. IN VIEW OF THE RATIO LAID DOWN AS ABOVE, WE DI RECT THE AO TO RE-COMPUTE THE REDUCTION U/S. 10A AFTER REDUCING THE COMMUNICATION CHARGES BOTH FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. ACCORDINGLY, WE ALLOW GROUND NO. 1 3 RAISED BY ASSESSEE. 18. GROUND NO. 14 PERTAINS TO REDUCTION OF FOREIGN EXCHANGE GAIN OF RS. 21,41,915/- FROM BUSINESS PROF ITS WHILE COMPUTING DEDUCTION U/S. 10A. AO TREATED THE ABOVE AMOUNT AS PART OF OTHER INCOME AND REDUCE THE SAME FROM PROFI TS OF THE BUSINESS OF ASSESSEE. BEFORE THE DRP, ASSESSEE REL IED ON VARIOUS CASE LAW TO CONTEND THAT FOREIGN EXCHANGE GAIN WAS ON ACCOUNT OF FLUCTUATION QUA EXPORT BUSINESS; IS ELIGIBLE FOR EXEMPTION U/S. 10A. DRP HOWEVER, WITHOUT GIVING A FINDING WHETHER THE FOREIGN EXCHANGE GAIN IS OUT EXPORT BUSINESS OR NOT, HOWEVE R, REJECTED ON THE REASON THAT THE DECISION OF THE ITAT IN THE CAS E OF M/S. INTELLE GROUP ASIA PVT. LTD., WAS CONTESTED BEFORE THE HON' BLE HIGH COURT AND ALSO RELIED ON OTHER CASE LAW WHICH ARE GIVEN I N THE CONTEXT OF I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 25 - : SECTION 80IB (LIBERTY INDIA VS. CIT) [317 ITR 218] SECTION 80HHC (CIT VS. SHAH ORIGINALS) [327 ITR 19]. 19. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE AR E CONSIDERED THAT THIS ISSUE IS NO LONGER RES INTEGRA. IN THE CASE OF ITO VS. BANYAN LIMITED [310 ITR (AT) 384] THIRD MEMBER DECISION, IT WAS HELD THAT THE FOREIGN EXCHANGE GAIN ON ACCOU NT OF FLUCTUATION QUA EXPORT BUSINESS IS ELIGIBLE FOR EXEMPTION U/S. 10B. SINCE THE FOREIGN EXCHANGE GAIN IS ON ACCOUNT OF FL UCTUATION ON FOREIGN EXCHANGE RECEIVED FOR THE SERVICES RENDERED BY ASSESSEE, THIS HAS TO BE TREATED AS PROFITS OF BUSINESS FOR COMPUTING THE REDUCTION U/S. 10A. WE ARE ALSO FORTIFIED WITH THE VIEW TAKEN BY THE CO-ORDINATE BENCH IN THE CASE OF M/S. HSBC ELEC TRONIC DATA PROCESSING INDIA LTD., HYDERABAD IN ITA NO. 1624/HY D/2010 DT. 28-06-2013. AO IS DIRECTED TO TREAT ACCORDINGLY. THE GROUND IS CONSIDERED ALLOWED. 20. GROUND NO. 15 PERTAINS TO THE DECISION OF THE AO/DRP IN NOT SETTING OFF THE CARRIED FORWARD UN-ABSORBED DEPRECIATION OF RS. 64,20,841/-, BUSINESS LOSS OF RS. 16,77,212/- R ELATING TO NON- STPI BUSINESS. EVEN THOUGH DRP HAS DIRECTED THE AO TO ASCERTAIN THE UNABSORBED DEPRECIATION OF EARLIER YEARS CARRIE D FORWARD AND ALLOW THE SAME IN ACCORDANCE WITH LAW, THE DRP, HOW EVER, DID NOT ACCEPT THE ASSESSEES CONTENTIONS WITH REFERENCE TO THE LOSS CARRIED FORWARD AS THE DECISION OF THE CO-ORDINATE BENCH AT CHENNAI IN THE CASE OF SCIENTIFIC ALTLANTA INDIA TECHNOLOGY PVT. L TD., VS. ACIT WAS APPEALED BEFORE THE HON'BLE HIGH COURT. THE AO, HO WEVER, HAS NOT ALLOWED EVEN THE UNABSORBED DEPRECIATION. HENCE, THE GROUND RAISED BY ASSESSEE. I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 26 - : 21. IT WAS SUBMITTED THAT CO-ORDINATE BENCH IN ASS ESSEES OWN CASE IN AY. 2008-09 IN ITA NO. 1724/HYD/2012 HA S CONSIDERED THE ISSUE AND DIRECTED THE AO TO ALLOW T HE BENEFIT OF CARRIED FORWARD LOSS AND UN-ABSORBED DEPRECIATION, AFTER DECIDING THE ISSUE IN THE CONSEQUENTIAL ORDERS TO BE PASSED IN PURSUANT TO THE DIRECTIONS OF ITAT IN AY. 2005-06. THE DIRECTIO N OF THE ITAT IS AS UNDER: 12. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. UNDISPUTEDLY, THE ITAT VIDE IT S ORDER DATED 18- 5-2012 PASSED IN ITA NO. 1646/HYD/10 FOR ASSESSMENT YEAR 2005- 06 HAS HELD THAT THE LOSS OF NON STPI UNIT CANNOT B E SET OFF AGAINST THE INCOME OF STPI UNIT AVAILING DEDUCTION U/S. 10A . THEREFORE, THE DIRECTION OF THE CIT GIVEN IN THE ORDER PASSED BY H IM U/S. 263 OF THE ACT FOR THE ASSESSMENT YEAR 2005-06 TO THE EFFECT T HAT THE DEDUCTION U/S. 10A FOR THE STPI UNIT HAS TO BE COMPUTED AFTER SETTING OFF OF THE LOSSES OF OTHER DIVISIONS WAS REVERSED BY THE ITAT. IN OTHER WORDS, THE ITAT ALLOWED THE CLAIM WITH REGARD TO SET OFF A ND CARRY FORWARD OF LOSS. IT IS THE CONTENTION OF THE LEARNED AR TH AT IF THE DIRECTION OF THE ITAT IS CARRIED OUT THEN THE ASSESSEE WILL GET THE BENEFIT OF CARRY FORWARD OF LOSS AND ASSESSEES CLAIM OF SET OFF OF BROUGHT FORWARD LOSSES FOR THE IMPUGNED ASSESSMENT YEAR HAS TO BE A LLOWED. CONSIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, WHO DEEM IT JUST AND PROPER TO REMIT THE MATTER TO THE FILE OF THE AO WHO SHALL TAKE A DECISION ON THE ISSUE AFTER THE CONSEQ UENTIAL ORDER IS PASSED IN PURSUANCE TO THE DIRECTIONS OF THE ITAT I N 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 PURPOSES. NOT ONLY THE ABOVE, EVEN ON THE PRINCIPLES OF LAW, THE ISSUE WAS DECIDED IN FAVAOUR OF ASSESSEE IN THE CASE OF CIT V S. YOKOGAWA INDIA LTD., BY THE HON'BLE HIGH COURT OF KARNATAKA REPORTED IN [341 ITR 385], WHEREIN IT WAS HELD THAT EXEMPTION U/S. 1 0A HAS TO BE ALLOWED WITHOUT SETTING OF BROUGHT FORWARD UNABSORB ED LOSSES AND DEPRECIATION FROM EARLIER ASSESSMENT YEAR, IN THE C ASE OF NON-STP UNITS. APPLYING THE PRINCIPLES THEREIN, THE UN-ABS ORBED LOSSES AND DEPRECIATION IN THE CASE OF NON-STP UNITS ARE TO BE SEPARATELY I.T.A. NO. 1711/HYD/2011 ADP PRIVATE LIMITED :- 27 - : CONSIDERED AND AO IS DIRECTED TO ALLOW THE SAME WIT H REFERENCE TO INCOME OF NON-STPI UNITS. SIMILAR VIEW IS ALSO UPH ELD BY THE JURISDICTIONAL HIGH COURT IN ITTA NOS. 360/2011, 40 7/2010, 279/2012, 361/2011 AND 362/2011 DT. 20-08-2013. IN VIEW OF THIS, AO IS DIRECTED TO EXAMINE THE PAST RECORD AND ALLOW THE BENEFIT TO ASSESSEE AFTER GIVING DUE OPPORTUNITY TO ASSESSEE. WITH THIS, THE GROUND RAISED BY ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 22. GROUND NO. 16 IS IMPOSITION OF INTEREST U/S. 2 34B AND 234C WHICH ARE BASICALLY CONSEQUENTIAL, BUT AO IS D IRECTED TO GIVE AN OPPORTUNITY TO ASSESSEE FOR ITS OBJECTIONS, BEFO RE LEVYING ANY INTEREST IN THE CONSEQUENTIAL ORDERS. WITH THIS, G ROUND IS ALLOWED FOR STATISTICAL PURPOSES. 23. 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. 1711/HYD/2011 ADP PRIVATE LIMITED :- 28 - : COPY TO : 1. ADP PRIVATE LIMITED, 6-3-1091/C/1, FORTUNE, RAJBHAVAN ROAD, 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, HYDERABAD. 5. THE ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICING), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.