Adaptec (India) Private Limited, Hyderabad V. ASST.CIT, Cir-1(1), Hyderabad

ITA 1758/HYD/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74751 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 06-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SOMASEKHAR REDDY
• Keywords: Transfer pricing; Business expenditure; International transaction
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1758/HYD/2012 ASSESSMENT YEAR 2008-09. ADAPTEC (INDIA) PRIVATE LIMITED, -V- ACIT, CIR-1(1), HYDERABAD. HYDERABAD . PAN:AABCK0239M (APPELLANT) (RESPONDENT) APPELLANT BY SHRI RAVI BHARADWA J RESPONDENT BY SHRI SOMASEKHAR REDD Y DATE OF HEARING 10-02-2014 DATE OF PRONOUNCEMENT 21-03-2014 ORDER PER SAKTIJIT DEY, J.M: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT ON THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP IN SHORT ) PERTAINING TO THE ASSESSMENT YEAR 2008-09. 2. GROUNDS NOS. 1 TO 11 RELATE TO TRANSFER PRICING ISSU E. 3. FACTS OF THE ISSUE, BRIEFLY STATED ARE, THE ASSESEEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DESIGN, DEVELOPMENT AND TESTING IN THE AREAS OF HIGH PERFORMANCE STORAGE SOLUTIONS. THE ASSESSEE RENDERS SOFTWAR E DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISE (AE IN SHORT) I.,E. , ADAPTEC INC, USA. 2 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD THE ASSESSEE IS REGISTERED AS 100% EXPORT ORIENTED UNIT (E OU IN SHORT) UNDER THE SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI ) SCHEME. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS.16,83,925/-- AFTER CLAIMIN G DEDUCTION U/S 10A OF THE ACT. THE ASSESSEE BEING A CAPTIVE SERVICE PROVIDER TO ITS AE IS REMUNERATED ON A COST PLUS MARK UP BASIS FOR THE SERVICES PROVIDED. DURING THE FINANCIAL YEAR 2007-08 RELEVANT TO THE ASSESSMENT Y EAR UNDER DISPUTE, THE ASSESSEE HAD DISCLOSED OPERATING REVENUE OF RS.17,65,67 ,915/- FROM INTERNATIONAL TRANSACTION WITH ITS AE. 4. DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING O FFICER MADE A REFERENCE U/S 92CA (1) OF THE ACT TO THE ADDITI ONAL. CIT (TRANSFER PRICING) I.E., TPO FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH ITS AE. FOR ESTABLISHING THE PRICE RECEIVED TOWARD S INTERNATIONAL TRANSACTION IS WITHIN THE ARMS LENGTH, THE ASSESSEE MADE A TP STUDY. ON THE BASIS OF FAR ANALYSIS, THE ASSESSEE CATEGORIZED IT AS A RISK MITIGATED CONTRACT SERVICE PROVIDER AND SELECTED ITSELF AS THE TESTED PARTY. TRANSACTIONS NET MARGIN METHOD (TNMM) WAS CHOSEN AS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP. OPERATING PROFIT/OPERATING COST WAS SE LECTED AS THE PROFIT HENCE INDICATOR (PLI). THE ASSESSEE CONDUCTED SEARCH FROM TH E DATABASE TO SELECT COMPARABLE COMPANIES AND FINALLY SELECTED 28 COMPANI ES AS COMPARABLES WITH WEIGHTED AVERAGE ARITHMETIC MEAN OF 1 4.53%. AS THE ASSESSEES NET MARGIN FROM THE PROVISION OF SERVICES TO AE AT 14.03% WAS WITHIN THE ARMS LENGTH, NO ADJUSTMENT WAS MADE IN T HE TP STUDY. 5. THE TPO, THOUGH ACCEPTED TNMM AS THE MOST APPROPRIA TE METHOD AND THE PLIOP/OC, HE NEVERTHELESS REJECTED THE TP STUDY OF THE ASSESSEE BY OBSERVING THAT MULTIPLE YEAR DATA WAS CONSIDERED WHILE SELECTING COMPARABLES AND COMPANIES ENGAGED IN SOFTWARE DEVELOPME NT HAVE BEEN TREATED AS COMPARABLES IRRESPECTIVE OF THE VERTICALS/HORI ZONTALS OF SOFTWARE 3 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD SERVICES WHICH HAS MADE THE COMPARABILITY ANALYSIS DEFECTIVE AND UNRELIABLE. AFTER REJECTING THE TP STUDY, THE TPO CONDUCTED A FRESH SEARCH IN THE DATABASE FOR SELECTING FRESH COMPARABLES. WHILE DOING SO THE TPO ALSO APPLIED CERTAIN ADDITIONAL FILTERS, ONE OF THEM BEING COMPANIES HAVING TURNOVER OF LESS THAN 1 CRORE WERE REJECTED. THE TPO A LSO BY EXERCISING POWERS U/S 133(6) OF THE ACT OBTAINED INFORMATION FROM CERTAIN COMPANIES FOR DETERMINING ALP. THE TPO FINALLY SELECTED 19 COM PANIES AS COMPARABLES WITH AVERAGE MARGIN OF 26.20% AND AFTER ALLOWING WO RKING CAPITAL ADJUSTMENTS OF 3.58% ARRIVED AT THE ADJUSTED ARITHM ETIC MEAN PLI OF 22.62% AND DETERMINED THE ALP AT RS.19,48,41,447. T HE TPO TREATED THE SHORTFALL OF RS.1,82,73,532/- AS THE TRANSFER PRICING AD JUSTMENTS U/S 92CA OF THE ACT. BASED ON THE ORDER PASSED BY THE TPO A DRAFT ASSESSMENT ORDER WAS PASSED BY THE ASSESSING OFFICER WHICH WAS CHALLENGED BY TH E ASSESSEE BEFORE THE DRP. THE DRP REJECTED THE OBJECTIONS OF TH E ASSESSEE IN RESPECT OF ALL THE COMPARABLES SELECTED BY TPO EXCEPT ONE VIZ., M/S. CELESTIAL LABS LTD. PURSUANT TO THE ORDER OF THE DRP THE ASSESSING OFF ICER PASSED THE FINAL ASSESSMENT ORDER. 6. THE LEARNED AR, AT THE TIME OF HEARING BEFORE US, WHICH WAS SUBSEQUENTLY FOLLOWED BY A SUBMISSION IN WRITING, SUBMI TTED THAT IF ASSESSEES OBJECTION WITH REGARD TO TWO OF THE COMPARABLES VIZ., INFOSYS TECHNOLOGIES LTD AND WIPRO LTD., SELECTED BY THE TPO AR E ACCEPTED THEN THE ASSESSEE WOULD NOT LIKE TO PRESS OTHER GROUNDS RAISED. EXPLAINING THE REASONS FOR EXCLUDING OF THE AFORESAID TWO COMPANIES, THE LEARNED AR SUBMITTED THAT THESE COMPANIES ARE HAVING TURNOVER OF M ORE THAN 900 TIMES THE TURNOVER OF THE ASSESSEE. THESE COMPANIES HAVE EMERGED AS MARKET LEADERS AND ARE IT GIANTS PERFORMING ADDITION AL FUNCTIONS, ASSUMING RISKS AND EMPLOYING UNIQUE INTANGIBLE ASSETS. IT WAS SUBM ITTED THE BRANDS OF THESE COMPANIES ENJOY PREMIUM PRICING AND DUE TO SCAL E OF OPERATIONS, 4 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD THESE COMPANIES ENJOY ECONOMIES OF SCALE IN LOWER COST OF IN FRASTRUCTURAL FACILITIES AND EMPLOYEES. IT WAS FURTHER SUBMITTED, THESE COMPANIES ARE ENGAGED IN DIVERSIFIED ACTIVITIES INCLUDING PRODUCTS, CON SULTANCY AND SOLUTION. IT WAS SUBMITTED THAT THE FINANCIALS OF WIPRO LTD ARE N OT AUDITED, MANUALLY CORRECTED AND ARE COLLECTED FROM TP REPORT AND HENCE CAN NOT BE RELIED UPON. THE LEARNED AR SUBMITTED THAT THE ASSESSEE IS A SERVICE P ROVIDER OPERATING IN A RISK MITIGATED ENVIRONMENT HAVING A TURNOVER OF ABOUT RS.17 CRORES AND AS SUCH CANNOT BE COMPARED WITH THESE TWO COMPANIES. IN SU PPORT OF SUCH CONTENTION, THE LEARNED AR RELIED ON THE ORDER OF TH E INCOME-TAX APPELLATE TRIBUNAL IN ITS OWN CASE FOR ASSESSMENT YEAR 2007-08 IN I TA NO.1801/HYD/09 DATED 31-1-2013 AND JUDGMENT DATED 1 0-7-2013 OF HONBLE DELHI HIGH COURT IN CASE OF CIT VS. AGNITY INDI A TECHNOLOGIES PVT. LTD.(ITA NO. 1204/HYD/2011) . 7. THE LEANED DR, ON THE OTHER HAND RELIED ON THE ORDERS OF THE DRP AS WELL AS TPO. 8. WE HAVE HEARD THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. ON A PERUSAL OF THE TRANSFER PRICING ORDER, IT IS VERY MUCH EVIDENT THAT THE ASSESSEE SP ECIFICALLY CONTENDED BEFORE THE TPO THAT IF COMPANIES HAVING TURN OVER OF LESS THAN RS.1 CRORE IS TO BE EXCLUDED, THEN APPLYING THE SAME PRI NCIPLE, COMPANIES HAVING EXTRAORDINARY HIGH TURNOVER SHOULD ALSO BE EXCL UDED FOR COMPARABILITY ANALYSIS. AS IT APPEARS, THE TPO HAS TOTALLY BRUSHED ASI DE SUCH CONTENTION OF THE ASSESSEE. WHILE THE TPO HAS EXCLUDED COMPANIES HAVING LESS THAN RS.1 CRORE TURNOVER FROM ITES SERVICES BUT HE HAS CONSIDERED COM PANIES HAVING EXTRAORDINARY HIGH TURNOVER LIKE INFOSYS TECHNOLOGIES L IMITED AND WIPRO LIMITED. AS CAN BE SEEN FROM THE TP ORDER, THE TURNO VER OF INFOSYS TECHNOLOGIES LIMITED FOR THE FINANCIAL YEAR 2007-08 IS RS.15,648 CRORE AND SEGMENTAL TURNOVER OF WIPRO LIMITED FOR THE SAME FIN ANCIAL YEAR IS 11258 5 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD CRORE AS AGAINST TURNOVER OF RS.17.65 CRORES OF THE ASSE SSEE. THEREFORE, CONSIDERING ENORMITY OF THE TURNOVER OF THESE TWO COMP ANIES, THEY CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE, BY APPLYING TH E SAME LOGIC ON WHICH TPO HAS EXCLUDED COMPANIES HAVING TURNOVER OF LESS T HAN RS.1 CRORE. THAT BESIDES THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.1801/HYD/1 1 (SUPRA) WHEREIN THE CO-ORDINATE BENCH EXCLUDED THE AFORESAID COM PANIES FOR BEING TREATED AS COMPARABLES HOLDING AS UNDER:- 9. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIALS ON RECORD. WE HAVE ALSO EXAMINED THE DEC ISIONS PLACED BEFORE US. UNDISPUTEDLY ASSESSEE IS A SERVICE PROVIDER OPERATI NG WITH LIMITED OR NO RISK AT ALL. WHEREAS BOTH INFOSYS AND WIPRO ARE CONSIDERED AS GI ANTS IN THE SECTOR OF SOFTWARE DEVELOPMENT ASSUMING ALL THE RISKS. IT IS ACCEPTED PRINCIPLE THAT MORE THE RISK MORE IS THE PROFIT. THE DYNAMICS OF THESE COMPANIE S ALSO CANNOT BE COMPARED WITH THE ASSESSEE. WHILE THE TURNOVER OF THE ASSES SEE IS ABOUT 15 CRORES ONLY, THE TURNOVERS OF INFOSYS AND WIPRO ARE RS.13149 CRORES AND RS.9616 CRORES RESPECTIVELY. WHEN THE TPO HAS APPLIED THE TURNOVE R FILTER BY EXCLUDING COMPANIES HAVING TURNOVER OF LESS THAN RS.1 CRORE, HE SHOULD HAVE APPLIED THE SAME LOGIC TO EXCLUDE COMPANIES HAVING EXTRAORDINAR ILY HIGH TURNOVER COMPARED TO THE ASSESSEE. SO FAR AS LEARNED DEPARTMENTAL REPR ESENTATIVE S CONTENTION THAT THE ASSESSEE ITSELF HAS SELECTED INFOSYS AS A COMP ARABLE IS CONCERNED, WE FIND MERIT IN THE CONTENTION OF THE LEARNED AR THAT THE TPO CANNOT ADOPT A PICK AND CHOOSE METHOD WHILE SELECTING COM PARABLES, WHEN HE HAS REJECTED THE ENTIRE TP STUDY REPORT OF THE ASSESSEE. THE CO-ORDINATE BENC H OF THE INCOME-TAX APPELLATE TRIBUNAL IN THE CASE OF CAPITAL IQ INFORMATION SYS TEMS (INDIA) PRIVATE LIMITED (SUPRA) HELD AS UNDER:- THE ASSESSEE HAS OBJECTED FOR THESE THREE COMPANIE S BEING TAKEN AS COMPARABLES MAINLY ON THE GROUND THAT THESE COMPANI ES ARE INDUSTRIAL GIANTS CONSIDERING THEIR TURNOVER COMPARED TO THAT OF THE ASSESSEE, WHOSE TURNOVER IS ONLY RS.60 CRORES. IN THIS CONTEXT, TH E ASSESSEE HAS REFERRED TO THE ANNUAL TURNOVER OF THESE THREE COMPANIES, WHICH ARE AS BELOW- 6 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD COMPANY TURNOVER (IN RS.CRORES) (1) HCL COMNET SYSTEMS & SERVICES LIMITED 260.19 (2) INFOSYS BPO LIMITED 649.57 (3) WIPRO LIMITED 939.78 IT IS THE CONTENTION OF THE ASSESSEE THAT THESE THR EE COMPANIES ARE INDUSTRIAL GIANTS IN THE AREA OF SOFTWARE DEVELOPME NT AND SINCE THESE COMPANIES ASSUME ALL RISKS, THEY EARN HIGHER AMOUNT OF REVENUE RESULTING IN HIGHER PROFIT, WHEREAS THE ASSESSEE BEING A CAPT IVE UNIT OF ITS PARENT COMPANY IN THE USA, IT OPERATES IN A RISK MITIGATED ENVIRONMENT. THEREFORE, THE MARGIN OF PROFIT IS ALSO LESS. IN T HIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE RELIED U PON THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF AGNITY INDIA TECH NOLOGIES P. LTD. V/S. ITO IN ITA NO.3856/DEL/2010 DATED 4 TH NOVEMBER, 2010 AND IN THE CASE OF TRINITI ADVANCED SOFTWARE LABS(P)LTD.(2011-TII-92- ITAT-HYD-TP). THE AUTHORISED REPRESENTATIVE FOR THE ASSESSEE FURTHER CONTENDED THAT WHEN THE TPO HAS REJECTED COMPANIES WITH TURNOVER OF LES S THAN RS.ONE CRORE, BY STATING THAT THESE COMPANIES MAY NOT BE REPRESENTIN G THE INDUSTRY TREND, BY APPLYING THE VERY SAME LOGIC, HE SHOULD NOT HAVE ALSO CONSIDERED THE COMPANIES HAVING TURNOVER OF MORE THAN RS.200 CRORE S. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSE SSEE HAS RELIED UPON THE DECISION OF THE ITAT BANGALORE BENCH IN THE CAS E OF M/S. GENESYS INTEGRATING SYSTEM(INDIA) P. LTD. (2011) 64 DTR 225 . ON CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN R ELATION TO THESE THREE COMPANIES, WE FIND THAT THE TPO HAS EXCLUDED THE CO MPANIES WHOSE TURNOVER IS LESS THAN RS.ONE CRORE, ON THE GROUND T HAT THEY MAY NOT BE 7 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD REPRESENTING THE INDUSTRY TREND. THAT VERY LOGIC A LSO APPLIES TO THE COMPANIES HAVING HIGH TURNOVER OF OVER RS.200 CRORE S AS AGAINST THE ASSESSEES TURNOVER OF ONLY RS.60 CRORES, AND THERE FORE, IT WOULD BE FAIR ENOUGH TO EXCLUDE THOSE COMPANIES ALSO. IN THE CAS E OF AGNITY INDIA TECHNOLOGIES P. LTD. (SUPRA), THE DELHI BENCH OF TH E TRIBUNAL, WHILE CONSIDERING THE COMPARABILITY WITH COMPANIES WHICH ARE MARKET LEADERS IN THEIR FIELD, AND HAVING SUBSTANTIALLY HIGH TURNOVER , OBSERVED AS FOLLOWS- 5.2. VARIOUS ARGUMENTS, AS STATED EARLIER, WERE TAKEN BEFORE THE DRP WHICH INTER-ALIA INCLUDED REJECTION OF COMPARABLE CASES ; APPLICATION OF ARBITRARY FILTER OF WAGE TO SALES RATIO; IGNORING THAT THE ASSESSEE IS A L IMITED RISK COMPANY; INCLUSION OF INFOSYS TECHNOLOGIES LTD.; AND INCLUSION OF SATYAM COMPUTERS SERVICES LTD. IN SPITE OF THE FACT THAT ITS DATA IS NOT RELIABLE AS PUBLIC LY KNOWN. ON THE BASIS OF THESE ARGUMENTS, THE DRP EXCLUDED THE CASE OF SATYAM COMPUTE RS SERVICES LTD., THEREBY REDUCING THE ARMS LENGTH MARGIN TO 25.6%. IT IS ARG UED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES L TD., THE REASON BEING THAT THE LATER IS GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AN D IT ASSUMES ALL RISKS, LEADING TO HIGHER PROFIT. ON THE OTHER HAND, THE ASSESSEE IS A CAPTIVE UNIT OF ITS PARENT COMPANY IN THE USA AND IT ASSUMES ONLY LIMITED CURRE NCY RISK. HAVING CONSIDERED THESE POINTS, WE ARE OF THE VIEW THAT THE CASE OF THE AFORESAID INFOSYS AND THE ASSESSEE ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANC IAL DATA ETC. OF THE TWO COMPANIES MENTIONED EARLIER IN THE ORDER. THEREFORE, WE ARE OF THE VIEW THAT THIS CASE IS REQUIRED TO BE EXCLUDED. SIMILAR VIEW HAS ALSO BEEN EXPRESSED BY THE HYDERAB AD BENCH OF THE TRIBUNAL IN THE CASE OF TRINITY ADVANCED LABS P. LT D. (SUPRA). IN THE CASE OF M/S. GENESYS INTEGRATING INDIA P. LTD. (SUPRA), THE BANGALORE BENCH OF THE TRIBUNAL HAS OBSERVED IN THE FOLLOWING MANNER- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERE D THE RIVAL CONTENTIONS AND ALSO THE JURIDICAL PRECEDENTS ON THE ISSUE, WE FIN D THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMP ARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING T HE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESS EE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BAR GAIN FOR THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NO T HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCIN G PROFIT MARGIN. THUS, AS HELD 8 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD BY THE VARIOUS BENCHES OF THE TRIBUNAL WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKI NG COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPAN IES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET AND NASSCOM HAS GIVEN DIFFERENT RANGES. TAKING THE IND IAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1. 00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING I N THE RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. IN VIEW OF THE AFORESAID CONSISTENT DECISIONS OF TH E TRIBUNAL, WE ACCEPT THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE THAT THE AFORESAID THREE COMPANIES CANNOT BE TREATED AS COMPARABLE, CONSIDERING THEIR SUBSTANTIALLY HIGH TURNOVER AS CO MPARED TO THAT OF THE ASSESSEE. WE ALSO AGREE THAT THE TURNOVER FILTER OF RS.1 CRORE TO RS.200 CRORE AS APPLIED BY THE ITAT BANGALORE BENCH IN THE AFORESAID DECISION, SHOULD ALSO APPLY TO THE FACTS OF THE PRESENT CASE, CONSIDERING THE ASSESSEES TURNOVER OF MERE RS.60 CRORES. WE THE REFOR4E, HOLD THAT COMPANIES HAVING TURNOVER OF RS.1 CRORE TO RS.200 C RORE ALONE CAN BE CONSIDERED AS COMPARABLE, IN THE CASE OF THE ASSESS EE. SIMILAR VIEW WAS AGAIN REITERATED BY THE INCOME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN CASE OF BRIGADE GLOBAL SERVICES PVT. LTD (SUPRA). FOLLOWING THE AFORESAID DECISIONS OF CO-ORDINATE BE NCH, WE HOLD THAT THE INFOSYS TECHNOLOGIES AND WIPRO LIMITED CANNOT BE TA KEN AS COMPARABLES IN THE CASE OF THE ASSESSEE. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE ALP AFTER EXCLUDING INFOSYS TECHNOLO GIES LIMITED AND WIPRO LIMITED AS COMPARABLES. HENCE, GROUNDS RAISED ON T HIS ISSUE ARE PARTLY ALLOWED. 9. THE HONBLE DELHI HIGH COURT IN CASE OF CIT VS. AGNITY I NDIA (SUPRA) HAS ALSO UPHELD THE VIEW OF THE INCOME-TAX APPELLATE T RIBUNAL DELHI BENCH HOLDING THAT BIG COMPANIES LIKE INFOSYS TECHNOLOGIES LIM ITED CANNOT BE CONSIDERED AS COMPARABLE TO SMALL CAPTIVE SERVICE PROVIDER S. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT AS AF ORESAID AND THE 9 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD DECISION OF THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007-08, WE HOLD THAT INFOSYS TECHNOLOGIES LIMITED AND WIPRO LIMITED CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE. WE THER EFORE DIRECT THE ASSESSING OFFICER /TPO TO COMPUTE ARMS LENGTH PRICE A FTER EXCLUDING THE AFORESAID TWO COMPANIES FROM THE LIST OF COMPARABLES. 10. IN GROUND NO.12, THE ASSESSEE HAS CHALLENGED THE REDU CTION OF COMMUNICATION CHARGES FROM EXPORT TURNOVER WITHOUT RED UCING IT FROM TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. 11. HAVING HEARD THE PARTIES, WE ARE OF THE VIEW THAT THE ISSUE IN DISPUTE IS NO MORE RES INTEGRA IN VIEW OF THE DECISION OF HONBL E BOMBAY HIGH COURT IN CIT VS. GEMPLUS JEWELLERY (INDIA) LIMITED (330 ITR 175) AND THE DECISION OF INCOME-TAX APPELLATE TRIBUNAL, CHENNAI BEN CH IN CASE OF ITO VS. SAK SOFT LIMITED (313 ITR (AT) 353). EVEN IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO.1801/HYD/11 THE CO-ORDI NATE BENCH OF THIS TRIBUNAL HAS HELD THAT COMMUNICATION CHARGES IF RED UCED FROM THE EXPORT TURNOVER IS ALSO REQUIRED TO BE REDUCED FROM TH E TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT. IN AFORESAI D VIEW OF THE MATTER, WE DIRECT THE ASSESSING OFFICER TO REDUCE COMMUNICAT ION CHARGES BOTH FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOV ER FOR COMPUTING DEDUCTION U/S 10A OF THE ACT. HENCE, THIS GROUND IS ALLO WED. 12. IN GROUND NO.13, THE ASSESSEE HAS RAISED THE ISSUE OF R EDUCTION FROM BUSINESS PROFIT, THE AMOUNT OF RS.27,20,088/- BEING RE VERSAL OF INTEREST ACCRUED WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. 13. WE HAVE HEARD THE PARTIES. IN THE DRAFT ASSESSMENT ORDER, WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT, THE ASSESSING O FFICER REDUCED AN AMOUNT OF RS.27,20,088/- FROM THE BUSINESS PROFIT WH ILE COMPUTING DEDUCTION U/S 10A. IN THE PROCEEDINGS BEFORE THE DRP, IT WAS CONTENDED BY 10 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD THE ASSESSEE THAT THE INTEREST PROVISION REVERSED PERTAINE D TO INTEREST ACCRUED BY THE ASSESSEE ON EXTERNAL COMMERCIAL BORROWINGS ( ECB) OBTAINED FROM THE PARENT COMPANY OF THE ASSESSEE. IT WAS SUBMIT TED THAT THE LOAN WAS OBTAINED IN THE FINANCIAL YEAR 2003-04 AND 2004-0 5 AND IT WAS UTILISED BY THE ASSESSEE IN SUPPORTING THE SOFTWARE DEVELOPMENT ACT IVITIES. IT WAS SUBMITTED THAT THE INTEREST EXPENSES ACCRUED ON THE LOAN HAD DIRECT NEXUS WITH THE SOFTWARE DEVELOPMENT ACTIVITIES OF THE ASSESSEE A ND WAS CLAIMED AS BUSINESS EXPENDITURE IN THE YEAR OF ACCRUAL. THE ASSESSEE CLAIM WAS HOWEVER REJECTED BY THE ASSESSING OFFICER WITH THE OBSERV ATION THAT THE GAIN DERIVED ON A LOAN TRANSACTION HAD NOTHING TO DO WITH EXPORT OF SOFTWARE. THE ASSESSING OFFICER HELD EVEN IF IT WAS A WRITE BACK ITEM, T HE NATURE OF TRANSACTION DID NOT FALL WITHIN THE AMBIT OF SOFTWARE EXPORT AND SHOULD NOT FORM PART OF PROFIT OF THE UNDERTAKING ENGAGED IN T HE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES. THE DRP AFTER CONSIDERING THE SUB MISSIONS OF THE ASSESSEE HELD AS UNDER:- THE ASSESSEE HAD UTILISED THE LOAN TAKEN FOR THE SO FTWARE DEVELOPMENT ACTIVITIES, WHICH WAS/IS PRIME BUSINESS OBJECTIVE AND ACCRUED INTEREST ON SUCH LOAN IN ITS BOOKS OF ACCOU NTS AS BUSINESS EXPENDITURE. SUBSEQUENTLY, WHEN THE ASSESSEE REVERS ED THE ACCRUAL, AS PER SECTION 41(1) OF THE ACT, SUCH REVERSAL/CESS ATION OF LIABILITY SHALL BE DEEMED TO BE THE PROFITS AND GAINS OF BUSI NESS CARRIED ON BY THE COMPANY. SECTION 10A(4) OF THE ACT CLEARLY DEF INES AS TO WHAT CONSTITUTES THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. ACCORDINGLY, FOR THE PURPOSE OF COMPUTING THE DEDUCTION, THE PROFITS OF THE BUSINES S (WHICH WOULD ALSO INCLUDE THE ELEMENT WITH REGARD TO REVERSAL OF INTEREST EXPENSE) CAN BE CONSIDERED. THE ASSESSING OFFICER IS DIRECT ED TO VERIFY THIS AND IF THE CLAIM OF THE ASSESSEE IS CORRECT, SHOULD GIVE THE BENEFIT OF SECTION 10A(4) OF THE ACT TO THE ASSESSEE. 11 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD 14. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERIALS O N RECORD AS WELL AS THE DRAFT ASSESSMENT ORDER AND THE ORDER OF THE DRP. ON PERUSAL OF THE AFORESAID OBSERVATION OF THE DRP EXTRACTED HEREINABOV E IT IS VERY MUCH CLEAR THAT THE DRP IN PRINCIPLE HAS HELD THE REVERSAL OF INT EREST ACCRUED AS PROFIT AND GAINS OF BUSINESS AND IN FACT HAS ACCEPTED THAT HELD T HAT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A, THE PROFITS OF BUSINESS WOULD ALSO INCLUDE THE ELEMENT WITH REGARD TO THE REVERSAL OF INTEREST E XPENSES AND HAS DIRECTED THE ASSESSING OFFICER TO VERIFY THIS AND ALLOW T HE BENEFIT TO THE ASSESSEE. IN THE AFORESAID FACTUAL BACK DROP, IN OUR VIEW , THE ASSESSING OFFICER WAS NOT CORRECT IN EXCLUDING THE AMOUNT OF RS.27, 20,088/- FROM THE BUSINESS PROFIT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE ACT. AS PER SECTION 144C(5) THE ASSESSING OFFICER HAS TO PASS THE ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTION OF THE DRP. W HEN THE DRP HAS HELD THAT THE REVERSAL OF INTEREST ACCRUED AMOUNTING TO RS.27 ,20,088/- WILL FORM PART OF THE BUSINESS PROFIT, THE ASSESSING OFFICER CANNOT TAKE A CONTRARY VIEW AND EXCLUDE THE SAME FOR THE PURPOSE OF COMPUTING DEDUC TION U/S 10A OF THE ACT. WE THEREFORE DIRECT THE ASSESSING OFFICER TO WORK OUT THE DEDUCTION U/S 10A OF THE ACT WITHOUT EXCLUDING THE AMOUNT OF RS.27,2 0,088/- FROM THE PROFIT OF THE ASSESSEE. 15. GROUND NOS. 14 AND 15 ARE DISMISSED AS NOT PRESSED. 16. IN THE RESULT, THE APPEAL IS ALLOWED IN PART. ORDER PRONOUNCED IN THE COURT ON 21-03-2014. S D / - (CHANDRA POOJARI) ACCOUNTANT MEMBER S D / - (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 21 ST MARCH, 2014. JMR* 12 ITA NO.1758 OF 2012 ADAPTEC INDIA PRIVATE LIMITED, HYD COPY TO:- 1) ADAPTEC (INDIA) PRIVATE LIMITED, FLAT NO.204, 2 ND FLOOR, SHAKTHI SAI COMPLEX, CHAPEL ROAD, ABIDS, HYDERABAD. 2) ACIT, CIR-1(1), AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 3) DISPUTE RESOLUTION PANEL, HYDERABAD. 4) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D.