ACIT, circle-16(1), Hyderabad V. M/s. Ness Innovative Business Services Pvt.Ltd, Hyderabad

ITA 1775/HYD/2011

• Counselvise Citation: 177522514 RSA 2011
• Duration Of Justice: 2 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 14-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Retrospective amendment; Revenue expenditure
• Section: 92C; 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.472/HYD/2011 ASSESSMENT YEAR 2005-2006 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD PAN AAACI-8053-N VS. DCIT, CIRCLE 16(1) HYDERABAD (APPELLANT) (RESPONDENT) ITA.NO.553/HYD/2011 ASSESSMENT YEAR 2005-2006 DCIT, CIRCLE 16(1) HYDERABAD VS. NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD PAN AAACI-8053-N (APPELLANT) (RESPONDENT) ITA.NO.1775/HYD/2011 ASSESSMENT YEAR 2007-2008 ACIT, CIRCLE 16(1) HYDERABAD VS. NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD PAN AAACI-8053-N (APPELLANT) (RESPONDENT) FOR REVENUE MR. SOLGY JOSE T KOTTARAM FOR ASSESSEE MR. RAVI BHARADWAJ DATE OF HEARING 10.06.2014 DATE OF PRONOUNCEMENT 18.06.2014 ORDER PER B. RAMAKOTAIAH, A.M. THE APPEALS FOR THE A.Y. 2005-2006 ARE FILED BY T HE REVENUE AND ASSESSEE AGAINST THE ORDER OF THE CIT(A ) -III, HYDERABAD DATED 13.01.2011 AND FOR THE A.Y. 2007-08 2 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD REVENUE HAS FILED THE APPEAL AGAINST THE ORDER OF T HE CIT(A)-V, HYDERABAD DATED 04.08.2011. SINCE, COMMON ISSUES AR E INVOLVED IN THESE APPEALS, THESE ARE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER. ITA.NO.472/HYD/2011 A.Y. 2005-06 (ASSESSEES APPE AL) : 2. THE ASSESSEE HAS RAISED 16 GROUNDS IN THIS APPE AL. GROUND NOS.1 TO 13 ARE WITH REFERENCE TO TRANSFER P RICING ADJUSTMENTS. GROUND NO.14 PERTAINS TO DEDUCTION U/S . 10A WITH RESPECT TO COMMUNICATION CHARGES AND EXPENSES INCURRED IN FOREIGN CURRENCY AS ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA, WHICH HAS NOT BEEN PRESSED AND THERE FORE, GROUND NO.14 IS DISMISSED AS NOT PRESSED. GROUND NO .15 PERTAINS TO INCLUSION OF INTEREST INCOME, GAIN ON S ALE OF FIXED ASSETS AND OTHER MISCELLANEOUS RECEIPTS FROM SERVIC ES TO THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTI ON UNDER SECTION 10A OF THE ACT. GROUND NO.16 PERTAINS TO LE VY OF INTEREST UNDER SECTION 234B. 3. BRIEFLY STATED, ASSESSEE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SER VICES AND IS REGISTERED WITH SOFTWARE TECHNOLOGY PARKS OF IND IA (IN SHORT STPI) IN HYDERABAD. FOR THE A.Y. 2005-06 IT HAS FILED RETURN OF INCOME ON 27.10.2005 SHOWING INCOME OF RS.29,486 UNDER NORMAL PROVISIONS OF INCOME TAX ACT AFTER CLAIMING THE DEDUCTION OF RS.5,80,00,455 UNDER SECTION 10A OF T HE ACT. DURING THE ASSESSMENT PROCEEDINGS, WHILE VERIFYING THE CLAIM OF DEDUCTION U/S.10A OF THE ACT, THE A.O. NOTICED T HAT THE ASSESSEE HAS NOT EXCLUDED INTEREST CHARGES OF RS.1, 05,53,338, FREIGHT CHARGES OF RS.1,03,165 AND EXPENSES INCURRE D IN 3 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD FOREIGN CURRENCY OF RS.L,02,70,000 FROM THE EXPORT TURNOVER. AO EXCLUDED THEM FROM EXPORT TURNOVER. SINCE ASSESS EE HAD INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (IN SHORT AE) FOR DETERMINING THE ALP, A.O. MADE A RE FERENCE UNDER SECTION 92CA(1) OF THE ACT TO THE ADDL.CIT (T RANSFER PRICING) / TPO. IN RESPONSE TO THIS, AFTER VERIFYIN G THE DETAILS FURNISHED BY THE ASSESSEE AND CONDUCTING ENQUIRIES, THE TPO PASSED AN ORDER DATED 26.03.2008 UNDER SECTION 92CA (3) ADOPTING TNMM AS THE MOST APPROPRIATE METHOD AND DETERMINED THE ALP OF SUCH TRANSACTIONS OF RS.48,91 ,80,921 , THEREBY SUGGESTING FOR ADJUSTMENT OF RS.4,27,09,645 UNDER SEC.92CA OF THE ACT. IN CONFORMITY WITH SUCH ORDER PASSED BY THE TPO, THE A.O. ADOPTED THE ALP AND MADE THE ADDI TION OF RS.4,27,08,645 TO THE INCOME OF THE ASSESSEE TOWARD S ADJUSTMENT TO THE ALP OF SUCH INTERNATIONAL TRANSAC TIONS MADE BY THE ASSESSEE. FURTHER, WITH THE ABOVE ADDITION S AND AFTER ALLOWING DEDUCTION U/S. 10A AS COMPUTED BY TPO, THE A.O. COMPLETED THE ASSESSMENT U/S.143(3) OF THE ACT VIDE ORDER DATED 30.12.2008, DETERMINING TOTAL INCOME AT RS.5, 35,94,897. 3.1. BEING AGGRIEVED, ASSESSEE PREFERRED APPEAL BE FORE THE CIT(A) AND OBJECTED TO THE COMPUTATION OF DEDUC TION UNDER SECTION 10A AND HAS CONTESTED VARIOUS ISSUES UNDER THE TRANSFER PRICING ADJUSTMENT MADE BY THE A.O. IN THE ASSESSMENT ORDER. WILE PARTIALLY ALLOWING THE CLAIM S UNDER SEC.10A, LEARNED CIT(A) MORE OR LESS REJECTED ALL T HE GROUNDS PERTAINING TO TP ADDITION, ACCEPTED ONLY ONE COMPA NY AS NOT COMPARABLE AND DIRECTED THE TPO TO RE-DETERMINE THE ADJUSTMENT. 4. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND ALSO LEARNED D.R. IN DETAIL. LD. COUNSEL PLACED ON RECORD A 4 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD PAPER BOOK CONTAINING ABOUT 591 PAGES AND WORK SHEE TS. IN THE COURSE OF ARGUMENTS, LD. COUNSEL FOCUSED HIS AR GUMENTS TO THE SELECTION OF COMPARABLES BY THE TPO AND RISK ADJUSTMENT TO BE GIVEN TO THE ASSESSEE. 5. THE LEARNED D.R. HOWEVER, ARGUED IN DETAIL ABOU T THE SELECTION OF VARIOUS COMPARABLES BY THE TPO AND ALSO PLACED ON RECORD WRITTEN SUBMISSIONS ON THE ISSUE. AFTER CONSIDERING THE VARIOUS CONTENTIONS, WE DECIDE THE ISSUE AS UNDER. 5.1. IN THE TRANSFER PRICING ORDER, THE TPO HAS AN ALYSED VARIOUS ISSUES IN DETAIL, WORKED OUT THE OPERATING MARGINS OF VARIOUS SELECTED COMPANIES AND IDENTIFIED 17 COMPAR ABLES WHOSE ARITHMETIC MEAN OF OPERATING PROFITS TO TOTAL COST WAS ARRIVED AT 26.59%. AFTER ALLOWING WORKING CAPITAL A DJUSTMENT OF 1.94%, THE ARITHMETIC MEAN OF THE PLI WAS ARRIVED A T 24.65%. ON OPERATING COST OF RS.39.24 CRORES, ARMS LENGTH P RICE OF OPERATING COST WAS ARRIVED AT RS.48,91,80,921 AND THE SHORT- FALL WAS ARRIVED AT RS.4.27 CRORES. AS BRIEFLY STAT ED ABOVE, LD. CIT(A), HOWEVER, DELETED ONE COMPANY SATYAM TECHNO LOGIES AS NOT COMPARABLE AND ASSESSEE GOT RELIEF TO THAT E XTENT. THE FINAL LIST OF 16 CASES SELECTED BY THE TPO AFTER TH E ORDER OF THE CIT(A) ARE AS UNDER : S.NO. NAME OF THE COMPANY TP ORDER (WC ADJUSTED) 1. IGATE GLOBAL SOLUTIONS LTD. 2.50% 2. FLEXTRONICS (SEG.) 30.42% 3. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. 18.57% 4. LANCO GLOBAL SYSTEMS LTD. 10.23% 5. LARSEN & TOUBRO INFOTECH LTD. 9.26% 6. R S SOFTWARE (INDIA) LTD. 7.47% 5 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD 7. SASKEN COMMUNICATION TECHN LTD. (SEG) 14.02% 8. SASKEN NETWORK SYSTEMS LTD. 14.80% 9. VISUALSOFT TECHNOLOGIES LTD. (SEG. 20.96% 10. BODHTREE CONSULTING LTD. 23.25% 11. EXENSYS SOFTWARE SOLUTIONS LTD. 64.29% 12. SANKHYA INFOTECH LTD. 22.03% 13. FOUR SOFT LIMITED 22.23% 14. THIRDWARE SOLUTION LTD. 65.44% 15. TATA ELXSI LTD. (SEG.) 23.68% 16. INFOSYS TECHNOLOGIES LTD. 42.11% 5.2. OUT OF THE ABOVE COMPARABLES, ASSESSEE IS NOT OBJECTING TO THE COMPARABLES SELECTED BY TPO FROM I TEM 1 TO 9. THEREFORE, THERE IS NO DISPUTE WITH REFERENCE TO TH E COMPARABLES OF THE ABOVE 9 COMPANIES. THE DISPUTE A RISES FROM THE BALANCE OF 7 COMPANIES FROM SL. NO. 10 TO 16. ASSESSEE IS ALSO OBJECTING TO THE REJECTION OF TWO COMPARABLE COMPANIES ONE BIRLA TECHNOLOGIES LTD. AND OTHER VJI L CONSULTING LTD. WHICH THE TPO REJECTED ON THE REASO N THAT THEY ARE PERSISTENT LOSS MAKING/FUNCTIONALLY DIFFERENT C OMPANIES. AS FAR AS THE SELECTION OF THESE 7 COMPARABLES ARE CONCERNED, THE ASSESSEES OBJECTIONS AND REASONING GIVEN ARE C ONSIDERED AS UNDER : 1. BODHTREE CONSULTING LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHOULD BE REJECTED UNDER THE FOLLOWING TPOS FILTER S: RELATED PARTY TRANSACTIONS FILTER: AS PER SCHEDULE 4 OF THE BALANCE SHEET, THE COMPANY HAS INVESTMENTS IN PERIGON, LIC, USA AND AS PER THE RESPONSE U/S 133(6); THE COMPANY HAS EXPORT SALES TO PERIGON LIC, USA OF RS. 133.90 LAKHS, BEING 34.68% OF THE TOTAL TURNOVER. FUNCTIONALLY DIFFERENT FILTER: THE COMPANY IN ITS RESPONSE TO NOTICE U/S 133(6) HAS STATED THAT IT 6 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD PROVIDES E-PAPER SOLUTIONS, DATA CLEANSING SOFTWARE, WEBSITE DEVELOPMENT AND OTHER CUSTOMIZED SOFTWARE AND ALSO STATE THAT THE E- PAPER SOLUTIONS AND DATA CLEANSING SERVICES WOULD COME UNDER THE CATEGORY OF IT ENABLED SERVICES. 2. EXENSYS SOFTWARE SOLUTIONS LTD., THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHOULD BE REJECTED UNDER THE FOLLOWING TPO S FILTERS: A) FUNCTIONALLY DIFFERENT: THE COMPANY IS A SOFTWARE PRODUCT AND ITES COMPANY. THE COMPANY OWNS SIGNIFICANT BRAND INTANGIBLES (ALMOST 60% OF ITS NET BLOCK OF ASSETS), UNLIKE THE APPELLANT, WHICH IS A CONTRACT CAPTIVE SERVICES PROVIDER. FURTHER, VARIOUS DISCLOSURES ON THE SITE OF THE COMPANY ALSO INDICATE THAT IT IS INTO PRODUCT DEVELOPMENT. B) EXCEPTIONAL YEAR OF OPERATIONS: THERE WAS AMALGAMATION OF THE COMPANY WITH HOLOOL INDIA LTD. WITH RETROSPECTIVE EFFECT FROM APRIL 01, 2004, WHICH HAD A MATERIAL/SIGNIFICANT IMPACT ON THE RESULTS OF THE COMPANY FOR FINANCIAL YEAR ENDED MARCH 31, 2005 AND CONFIRMED BY THE COMPANY IN ITS RESPONSE TO 133(6) NOTICE. C) ERROR IN MARGIN COMPUTATION: THE LD TPO HAS EXCLUDED THE DEFERRED REVENUE EXPENDITURE WHILE COMPUTING THE NET MARGIN OF THE COMPANY. IF THE SAME IS INCLUDED, THE NET MARGIN OF THE COMPANY WOULD BE 32.68%. IT WAS SUBMITTED THAT THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED THIS COMPANY AS IT HAS SOFTWA RE PRODUCTS AND HELD AS NOT COMPARABLE TO A SERVICE PROVIDER: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2010) 7 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (ITA NO. 609/DEL/2011) - INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD. VS. DCIT (ITA NO. 27/JP/2011) - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 3. SANKHYA INFOTECH LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS EVIDENT FROM T HE FOLLOWING: VARIOUS DISCLOSURES IN THE ANNUAL REPORT AND RESPONSE TO 133(6) NOTICE INDICATES CLEARLY THAT THE COMPANY IS INTO SOFTWARE PRODUCTS (SERVICES ARE SUPPLEMENTARY TO PRODUCTS LICENSING) THE TP OFFICE HAS IN SUBSEQUENT YEAR REJECTED THIS COMPANY AS COMPARABLE RELYING ON THE SAME 133(6) RESPONSE. THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED TH IS COMPANY AS IT HAS SOFTWARE PRODUCTS : - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (ITA NO. 609/DEL/2011) - INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD. VS. DCIT (ITA NO. 27/JP/2011) - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) 8 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 4. FOURSOFT LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS EVIDENT FROM VARIOUS DISCLOSURES IN THE ANNUAL REPORT (DIRECTORS REPORT, MANAGEMENT DISCUSSION AND WEBSITE INFORMATION) INDICATES CLEARLY THAT THE COMPANY IS INTO SOFTWARE PRODUCTS. THE FOLLOWING RULINGS HAVE ANALY SED AND REJECTED THIS COMPANY AS IT HAS DERIVED INCOME FROM SOFTWARE LICENSE AND AMCS: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2010) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 5. THIRDWARE SOLUTIONS LTD.: LD. COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FOR THE FOLLOWING REASONS: AS PER REPLY TO NOTICE ISSUED U/S 133(6), THE COMPANY INFORMED THAT IT IS ENGAGED IN IMPLEMENTATION AND CUSTOMER SERVICES WHICH INCLUDE TRAINING, CUSTOMIZED DEVELOPMENT AND HELP DESK SERVICES FOR ERP SOFTWARE AND DISTRIBUTION OF PRODUCTS OF QUAD INC. AND HYPERION SOLUTIONS CORPORATION. 9 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD VARIOUS NEWS ARTICLES AVAILABLE ON THE INTERNET HTTP://WWW.HINDUONNET.COM/2001/07/11/STORI ES/0611000H.HTMSTATED THAT THE COMPANY IS A DISTRIBUTOR OF PRODUCTS; AS PER THE COMPANYS WEBSITE WWW.THIRDWARE.NET/ OURCAPABILITIES.HTM. HAS STATED THE COMPANY HAS PARTNERED WITH QAD INC TO DELIVER THE ENTIRE BUSINESS CYCLE OF MGF/PRO, A PRODUCT OF QAD INC. FROM PRE- SALES, SALES, TRAINING, CONSULTING, IMPLEMENTATION AND SUPPORT TO APPLICATION MANAGEMENT SERVICES. THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED THIS COMPANY AS IT IS INTO TRADING OF SOFTWARE LICENSES: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2010) - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (ITA NO. 609/DEL/2011) - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) - E-GAIN COMMUNICATIONS (P) LTD. VS. ITO, 23 SOT 385. 6. TATA ELXSI LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHALL BE REJECTED AS COMPARABLE SINCE IT IS A SPECIALIZED EMBEDDED SOFTWARE DEVELOPMENT COMPANY AND THIS COMPANY HAS IN FACT CLEARLY STATED IN ITS RESPONSE TO 133(6) NOTICE THAT DUE TO THE COMPLEX SEGMENTS IN WHICH THEY ARE OPERATING, IT IS NOT COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY. 10 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD THE FOLLOWING RULINGS HAVE ANALYSED THIS COMPANY AND RELYING ON THE SAME 133(6) RESPONSE, REJECTED IT AS A COMPARABLE TO SOFTWARE SERVICES PROVIDER: - CONEXANT SYSTEMS INDIA PVT. LTD. (ITA NO. 1429/HYD/2010 AND 1978/HYD/2011) - TELCORDIA TECHNOLOGIES INDIA P. LTD. (ITA NO. 7821/MUM/2011) - LOGICA PVT. LTD. (IT(TP)A NO. 1129/BANG/2011) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 7. INFOSYS TECHNOLOGIES LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES INCLUD ING PRODUCTS, CONSULTANCY & SOLUTIONS AND THIS COMPANY COMMANDS A PREMIUM IN THE PRICING OF ITS PRODUCTS A ND SERVICES DUE TO ITS GOODWILL, REPUTATION AND BRAND VALUE. FURTHER DUE TO SCALE OF OPERATIONS, INFOSYS ENJOYS ECONOMIES OF SCALE, WHICH RESULTS IN LOWER COST OF INFRASTRUCTURAL FACILITIES AND OVERHEADS. FURTHER, HE SUBMITTED THAT THE ISSUE OF COMPARABILITY OF INFOSYS TO A SMALL CAPTIVE SERVICE PROVIDER IS NO LONGER RES-INTEGRA. THE FOLLOWING CA SES HAVE SPECIFICALLY ANLAYSED IN DETAIL THE COMPARABIL ITY OF INFOSYS ON VARIOUS PARAMETERS TO A SIMILAR SIZE SOF TWARE SERVICE PROVIDER AND REJECTED IT: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2010) 11 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD - VIRTUSA INDIA PVT. LTD. VS. DCIT (ITA NO. 1962/H/2010) - PATNI TELECOM SOLUTIONS PVT. LTD. VS. ACIT (ITA NO. 1846/HYD/2012) - ADAPTEC (INDIA) PVT. LTD. VS. DCIT (ITA NO. 1801/HYD/2009) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) - TRILOGY E BUSINESS SERVICES SOFTWARE LTD. VS. DCIT (ITA NO. 1054/BANG/2011 PARA 20) - TELCORDIA TECHNOLOGIES INDIA P LTD. (ITA NO. 7821/MUM/2011 PARA 7.4) - CORDYS SOFTWARE INDIA PVT. LTD. VS. ACIT (ITA NO. 1972/H/2011) - AGNITY INDIA TECHNOLOGIES VS. ITO (ITA NO. 3856/DEL/2010) - AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. ITO (HIGH COURT DECISION ITA 1204/2011) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 6. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE RECORD INCLUDING PAPER BOOKS PLACED ON RECORD. THERE IS A MERIT IN ASSESSEES CONTENTIONS ABOUT NO N- COMPARABILITY OF VARIOUS COMPARABLE COMPANIES SELEC TED BY THE TPO. 7. AS REGARDS THE EXENSYS SOFTWARE SOLUTIONS LTD., AS SEEN FROM THE PAPER BOOK PLACED ON RECORD, THERE IS A MERGER OF HOLOOL INDIA LTD. AND IN THE DIRECTORS REPORT (PB-951), THERE IS A CLEAR MENTIO N THAT 12 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD THE COMPANYS INCOME OF RS. 737.79 LAKHS IS POSSIBL E WITH THE AMALGAMATION OF HOLOOL INDIA LTD. IT WAS FURTHER MENTIONED THAT ASSESSEE COMPANY HAS GOT BENEFIT BY ADVANCED LATEST TECHNICAL EXPERTISE ON VARIOUS TECHNOLOGY DOMAINS OF THE TRANSFEROR COMPAN Y. FURTHER, THAT COMPANY HAS CHARGED DEFERRED EXPENDITURE AND THE AMOUNT CLAIMED IN THIS YEAR IS RS. 1.22 CRORES AS AGAINST RS. 30.21 LAKHS IN EARLIER Y EAR. THIS WAS CLEARLY STATED IN NOTES THAT CLAIM WAS WIT H REFERENCE TO THE AS-14 AND ALSO DUE TO AMALGAMATION OF TWO COMPANIES. VIDE PAGE 957 OF PAPER BOOK, IT WAS SEEN THAT OUT OF GROSS ASSETS OF RS. 7.95 CRORES, B RANDS ALONE CONSIST OF RS. 5 CRORES, THEREFORE, INTANGIBL E ASSETS COMPRISING OF SUBSTANTIAL PART OF THIS COMPA NYS ASSETS. NOT ONLY IN THE CORRESPONDENCE WITH THE TP O THAT ASSESSEE EXPRESSED ITS INABILITY TO FURNISH SE PARATE ACCOUNTS FOR TWO AMALGAMATED COMPANIES BUT ALSO FURTHER IT HAS CLEARLY MENTIONED VIDE LETTER DATED 26-04- 2007 TO THE TPO THAT THERE IS A GAP IN THE EXPENDIT URE EXPECTED TO INCUR AND ACTUAL EXPENDITURE INCURRED WHICH MADE THE COMPANY RECORD HIGH OPERATING MARGIN ON COST. THESE FACTORS INDEED SUPPORT ASSESSEES CONTENTION THAT THIS EXCEPTIONAL PROFIT WITH THE FA CT OF AMALGAMATION AFFECTED OPERATING PROFIT OF THE COMPA NY AND THIS CANNOT BE TAKEN AS COMPARABLE. OTHER ISSUE S WERE ALSO ANALYSED AND ACCEPTED IN VARIOUS CASES AS RELIED UPON BY THE LEARNED COUNSEL. IN THE CASE OF INTOTO SOFTWARE INDIA PVT. LTD.,(SUPRA) THIS COMPARABLE CA SE WAS ANALYSED AND HELD AS UNDER: 13 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD 17. HAVING HEARD BOTH PARTIES AND HAVING CONSIDERED THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THERE IS NO DISPUTE THAT ASSESSEE HAS ACCEPTED THE EXENSYS SOFTWARE SOLUTIONS LIMITED AS ONE OF THE COMPARABLE COMPANIES WHEN PROPOSED BY THE TPO. HOWEVER, THE FACT THAT THERE IS AN AMALGAMATION OF TWO COMPANIES I.E., EXENSYS SOFTWARE LIMITED AND HOLOOL INDIA LIMITED, THE RESULTS OF WHICH, HAS RESULTED IN HIGH OPERATING MARGIN CANNOT BE LOST SIGHT FOR. IT HAS BEEN HELD I N MANY CASES BY THIS TRIBUNAL AS WELL AS THE HIGHER FORUMS THAT TO COMPARE A COMPANY WITH ANOTHER COMPANY, BOTH THE COMPANIES HAVE TO BE BROUGHT ON PAR WITH EACH OTHER AFTER MAKING THE NECESSARY ADJUSTMENTS WHEREVER NECESSARY AND POSSIBLE. HOWEVER, WHERE THERE ARE EXTRAORDINARY EVENTS SUCH AS THIS, THEN THOSE EVENTS HAVE TO BE TAKEN NOTE OF AND WHERE NO ADJUSTMENT CAN BE MADE ON ACCOUNT OF THIS EXTRAORDINARY EVENT, THEN SUCH COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. THE OBJECTIONS TO THIS COMPANY BY ASSESSEE ARE MADE FOR THE FIRST TIME BEFORE THE TRIBUNAL. THE TRIBUNAL BEING THE FINAL FACT FINDING AUTHORITY IS BOUND TO TAKE NOTE OF THE OBJECTIONS OF ASSESSEE. AS THE MATERIAL RELIED UPON BY THE LEARNED COUNSEL FOR ASSESSEE CLEARLY DENOTES THAT THERE IS AN EXTRAORDINARY EVENT WHICH HAS RESULTED IN THE HIGH OPERATING MARGIN OF THE COMPANY, WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER/TPO FOR RECONSIDERATION. IF IT I S FOUND THAT THERE IS AN AMALGAMATION OF EXENSYS SOFTWARE LIMITED AND HOLOOL INDIA LIMITED AND FORMED AS ONE ENTITY VIZ.,EXENSYS SOFTWARE SOLUTIONS LIMITED. DURING THE RELEVANT PREVIOUS YEA R AND THE FINANCIAL RESULT IS THE COMBINED RESULT OF THESE TWO COMPANIES, THEN, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST O F COMPARABLES. 8. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT THERE IS AN EXTRA-ORDINARY EVENT WHICH RESULTE D IN HIGH OPERATING MARGIN OF THAT COMPANY AND WE, THEREFORE, DIRECT THE AO TO EXCLUDE THIS COMPANY FR OM THE LIST OF COMPARABLES. IN THE ABOVE REFERRED CAS E OF 14 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD INTOTO SOFTWARE INDIA PVT. LTD., COMPLETE DETAILS W ERE NOT PLACED ON RECORD, THEREFORE, THE MATTER WAS SEN T TO AO FOR VERIFICATION WHEREAS IN THIS CASE ASSESSEE H AS OBJECTED EVEN BEFORE THE AO/ CIT(A), THEREFORE, THE RE IS NO NEED TO SET ASIDE THE ISSUE TO THE FILE OF THE A O FOR EXAMINATION AS WAS DONE IN THE CASE OF INTOTO SOFTWARE(SUPRA). WE ARE, THEREFORE, OF THE OPINION THAT ON THE BASIS OF FACTS PLACED ON RECORD, THE CASE OF EXENSYS SOFTWARE SOLUTIONS LTD. CANNOT BE TAKEN AS COMPARABLE. 9. SIMILARLY, THE OTHER CASES, BODHTREE CONSULTING LTD, FOUR SOFT LTD, INFOSYS,., SANKHYA INFOTECH LTD., THIRDWARE SOLUTIONS LTD, TATA ELEXI (SEG) ETC, ARE ALSO TO BE EXCLUDED AS THEY ARE CONSIDERED AND ANALYSED IN VARIOUS CASES RELIED ON ABOUT FUNCTIONA LITY AND WHY THE SAME ARE NOT COMPARABLE TO THE COMPANIE S LIKE ASSESSEE. BODHTREE CONSULTING LTD ALSO FAILS R PT FILTER AS CONTENDED. IN VIEW OF THIS, WE ARE NOT DISCUSSING ABOVE COMPARABLES IN DETAIL, BUT, SUFFIC E TO SAY THAT ASSESSEES SUBMISSIONS ARE VALID. THE AO I S DIRECTED TO EXCLUDE THE ABOVE COMPARABLES AND RE-WO RK OUT THE ARMS LENGTH MARGIN ACCORDINGLY. THE GROUND NO.8 AND ADDITIONAL GROUND RAISED BY ASSESSEE ARE CONSIDERED AS ALLOWED. 10. INCLUSION OF 2 COMPARABLES : (GROUND NO 7) 1. BIRLA TECHNOLOGIES LTD. 2. VJIL CONSULTING LIMITED 15 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD 11. THE ASSESSEE IS REQUESTING FOR INCLUSION OF TH E ABOVE COMPANIES ON THE REASON THAT TPO ERRED IN NOT SELECTING THESE COMPANIES ON EXTRANEOUS REASONS STATING THAT BIRLA TECHNOLOGIES LIMITED WAS INCURRING PERSISTENT LOSSE S. IT WAS SUBMITTED THAT COMPANY HAS OPERATING PROFITS FOR TH E FINANCIAL YEAR 2005-06 AND REFERRED TO THE NET MARGINS COMPUT ATION AS PER ANNEXURE-5 FILED BEFORE THE CIT(A). FURTHER, WI TH REFERENCE TO THE VJIL CONSULTING LIMITED, IT WAS SUBMITTED TH AT PAYMENT OF VAT DOES NOT INDICATE THAT ASSESSEE IS ENGAGED I N SALE OF COMPUTER SOFTWARE AND UNLESS THE SAME IS ANALYSED, REJECTION OF THE COMPANY JUST BECAUSE IT PAID VAT ON SALES IS NOT CORRECT. 12. HAVING CONSIDERED THE ABOVE SUBMISSIONS, WE A RE OF THE OPINION THAT INCLUSION OR EXCLUSION OF THESE COMPANIES WOULD ONLY BE ACADEMIC IN NATURE AS EXCLUSION OF 7 COMPARABLES OUT OF THE 16 SELECTED BY THE TPO WOULD RESULT IN OP/TC AT 14.25% AGAINST ASSESSEES MARGIN OF 13.89% . THE ABOVE TWO COMPANIES AVERAGE PLI IS AT 4.36%. THEREF ORE, INCLUSION OF THE ABOVE TWO, IF AT ALL, WOULD FURTHE R REDUCE THE PLI. THEREFORE, WITHOUT GOING INTO THE CONTENTIONS, WE ARE OF THE OPINION THAT EXCLUSION OF ABOVE 7 COMPANIES ITS ELF WOULD MAKE THE ASSESSEES PLI AT ARMS LENGTH WHEN COMPAR ED TO THE AVERAGE MEAN OF THE BALANCE 9 COMPARABLES. IN VIEW OF THIS, WITHOUT CONSIDERING THE CONTENTION TO INCLUDE ASSES SEE COMPARABLES WHICH ARE ACADEMIC IN NATURE, WE DIRECT THE TPO TO RE-WORKOUT BY EXCLUDING THE ABOVE 7 COMPANIES. THE OTHER GROUNDS (UPTO GROUND NO. 11) RAISED BY THE ASSESSEE ON TREATMENT OF DEFERRED REVENUE EXPENDITURE AND RISK ADJUSTMENT ALSO WOULD BECOME ACADEMIC IN NATURE, THEREFORE, TH EY ARE NOT ADJUDICATED. THE TPO/AO IS DIRECTED TO MODIFY THE O RDER 16 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD ACCORDINGLY. ASSESSEES GROUNDS 1 TO 11 ARE CONSID ERED ALLOWED. 13. GROUND NO.12 DOES NOT REQUIRE ANY ADJUDICATION IN VIEW OF AMENDMENT TO SECTION 92C WITH REFERENCE TO VARIATION OF 5%. THEREFORE, THE SAME IS REJECTED. 14. GROUND NO.13 PERTAINS TO INCLUSION OF REIMBURSEMENT TRANSACTIONS TO THE OPERATING COST. IN VIEW OF ABOVE DECISION OF EXCLUSION OF COMPARABLES, THIS IS SUE BECOMES ACADEMIC IN NATURE, THEREFORE, NOT ADJUDICATED. GRO UND NO 14 IS NOT PRESSED. 15. GROUND NO.15 IS ABOUT INCLUSION OF I NTEREST INCOME, GAIN ON SALE OF FIXED ASSETS, MISCELLANEOUS RECEIPT S AS PART OF TOTAL TURNOVER. IT WAS THE CONTENTION THAT THESE AR E NOT OPERATING INCOMES SO SHOULD NOT BE PART OF TURNOVER . AS SEEN FROM THE ORDER OF CIT(A), IT IS NOTICED THAT THE AM OUNT OF TURNOVER ADOPTED BY AO IN THE ORDER IS SAME AS THAT OF AMOUNT TAKEN BY ASSESSEES AUDITORS IN THE AUDIT REPORT SU BMITTED FOR CLAIM OF EXEMPTION U/S 10A. AO DID NOT MODIFY OR AD OPT ANY OTHER AMOUNT. THE MISTAKE IF ANY OCCURRED CAN ONLY BE WITH ASSESSEE IN THEIR AUDIT REPORT. AS IT DID NOT ARISE FROM THE ORDER OF AO, THE GROUND CAN NOT BE CONSIDERED. THE SAME I S REJECTED. 16. GROUND NO.16 PERTAINS TO LEVY OF INTEREST UNDE R SECTION 234B ON ADDITIONAL INCOME ARISING DUE TO T. P. ADJUSTMENT. A.O/TPO IS DIRECTED TO GIVE AN OPPORTUN ITY TO THE ASSESSEE, TAKE ITS OBJECTIONS AND THEN CONSIDER THE ISSUE FACTUALLY AND LEGALLY, IF INTEREST IS LEVIABLE. WIT H THESE DIRECTIONS, GROUND NO.16 IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 17 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. ITA.NO. 553/HYD/2011 A.Y. 2005-06 (REVENUE APPEA L) ITA.NO.1775/HYD/2011 A.Y. 2007-08 (REVENUES APPE AL) 18. THE ONLY GROUND RAISED BY THE REVENUE IN ITA.NO.553/HYD/2011 IS WITH RESPECT TO DIRECTION OF LD.CIT(A) TO EXCLUDE EXPENDITURE OF RS.1,05,53,338 ON COMMUNI CATION AND FREIGHT AND EXPENDITURE INCURRED IN FOREIGN CUR RENCY OF RS.1,02,70,000 FROM THE TOTAL TURNOVER FOR WORKING OUT DEDUCTION U/S.10A. SIMILARLY, GROUND NOS. 2 TO 4 IN ITA.NO.1775/HYD/2011 PERTAINS TO SIMILAR DIRECTION IN AY 2007-08. 19. A.O. RESTRICTED CLAIM OF THE ASSESS EE FOR THE REASON THAT THE DEFINITION OF EXPORT TURNOVER IN SEC. 10 A MANDATES EXCLUSION OF THE ABOVE EXPENSES. 20. AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE LD . CIT(A) AND THE LD. CIT(A) RESPECTFULLY FOLLOWING TH E COORDINATE BENCH ORDER OF THE TRIBUNAL IN THE CASE OF PATNI TE LECOM P. LTD. VS. ITO (2008) 22 SOT 26 (HYD.) HELD THAT THE EXPENDITURE INCURRED IN FOREIGN EXCHANGE AND COMMUNICATION / IN TERNET CHARGES SHOULD BE EXCLUDED FROM THE EXPORT TURNOVE R AS WELL AS FROM TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTI ON UNDER SECTION 10A OF THE ACT . 21. AGGRIEVED, REVENUE FILED THE PRESENT APPEALS. AFTER CAREFULLY CONSIDERING THE SUBMISSIONS OF THE LD. COUNSEL AND LEARNED D.R. ON THE ISSUE AND AFTER PERUSING TH E ORDERS OF THE A.O. AND CIT(A), WE DO NOT FIND ANY REASON TO INTERFERE. 18 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD SINCE, THE LD. CIT(A) ALLOWED THE CONTENTION BY FOL LOWING THE ORDER OF THE COORDINATE BENCH IN THE CASE OF PATNI TELECOM P. LTD. VS. ITO (SUPRA), WE FIND NO INFIRMITY IN THE O RDER OF THE LD. CIT(A). FURTHER, THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY 330 ITR 175 AND ALSO SPECIAL BENCH DECISI ON OF THE ITAT, CHENNAI IN THE CASE OF ITO VS. SAK SOFT LTD. 313 ITR(AT) 353 WHEREIN IT HAS BEEN HELD THAT COMMUNICATION CHA RGES ETC., ATTRIBUTABLE TO THE DELIVERY OF THE COMPUTER SOFTWA RE OUTSIDE INDIA, WHICH ARE TO BE REDUCED FROM THE EXPORT TURN OVER, SHOULD BE REDUCED FROM THE TOTAL TURNOVER AS WELL WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A. THEREFOR E, FOLLOWING THE AFORESAID RATIO LAID DOWN, WE AFFIRM THE DIRECTION TO THE A.O. TO REDUCE THE AMOUNTS FROM THE EXPORT T URNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING THE DEDUCTIO N UNDER SECTION 10A OF THE I.T. ACT. WE ACCORDINGLY DISMIS S GROUND NOS.2 TO 4 IN ITA.NO.1775/HYD/2011 AND THE SOLE GRO UND IN ITA.NO.553/HYD/2011 OF THE REVENUE. 22. IN THE RESULT, ITA.NO.1775/HYD/2011 AND ITA.NO.553/HYD/2011 OF THE REVENUE ARE DISMISSED. 23. TO SUM-UP, ITA.NO.472/HYD/2011 OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES, ITA.NO.1775/HYD/2011 AND ITA.NO.553/HYD/2011 OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH JUNE, 2014. SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMBER HYDERABAD, DATED 18 TH JUNE, 2014 VBP 19 ITA.NO.553 & 472/HYD/2011 & ITA.1775/HYD/2011 NESS INNOVATIVE BUSINESS SERVICES P. LTD., HYDERABAD COPY TO : 1. NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., 8-2 -626, RELIANCE MAJESTIC, ROAD NO.11, BANJARA HILLS, HYDERABAD 500 034. 2. INCOME TAX OFFICER, WARD 16(2), AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 3. CIT(A)-III, HYDERABAD 4. CIT(A)-V, HYDERABAD 5. CIT-IV, HYDERABAD 6. D.R. ITAT B BENCH, HYDERABAD