HSBC Electronic Date Processing India Pvt.Ltd, Hyderabad V. ACIT, Circle-2(2), Hyderabad

ITA 1826/HYD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82505 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 24-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Keywords: Related party transaction; Capital asset; Business income; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Services rendered outside India; Initiation of penalty proceedings; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3); 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1826/HYD/2011 ASSESSMENT YEAR 2007-2008 HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD 500 081. PAN AAACH8235M VS. THE ACIT, CIRCLE 2(2) HYDERABAD 500 004. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. RAJAN VORA FOR RESPONDENT : MR. D. SUDHAKAR RAO DATE OF HEARING : 03.09.2014 DATE OF PRONOUNCEMENT : 24.10.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL IS PREFERRED BY ASSESSEE AGAINST THE ORDER OF AO DATED 12-10-2011PASSED UNDER SEC 143(3) READ WITH SEC.144COF THE IT ACT 1961 CONSEQUENT TO THE D IRECTIONS OF DISPUTES RESOLUTION PANEL, HYDERABAD DATED 26.09 .2011 FOR THE A.Y. 2007-08. 2. BRIEFLY STATED, HSBC ELECTRONIC DATA PROCESSING INDIA PRIVATE LIMITED (HEREAFTER REFERRED TO AS ' HDPI ') IS A WHOLLY OWNED SUBSIDIARY OF HSBC HOLDINGS PLC (TOGET HER WITH ITS ASSOCIATES REFERRED TO AS 'HSBC GROUP'), ONE OF THE LEADING BANKING AND FINANCIAL SERVICES ORGANISATIONS IN THE WORLD. HDPI PROVIDES A RANGE OF BACK OFFICE SERVICES INCLU DING CONTACT CENTRE, DATA ENTRY, DATA PROCESSING AND RELATED SER VICES (TOGETHER REFERRED TO AS 'BPO SERVICES') TO ITS GROUP 2 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. COMPANIES/ASSOCIATED ENTERPRISES ('AE') ACROSS THE GLOBE. THE ASSEESSEE'S SERVICE CENTRES ARE REGISTERED AS A 100 % EXPORT ORIENTED UNIT UNDER THE SOFTWARE TECHNOLOGY PARKS O F INDIA (STPI') SCHEME. ASSESSEE HAS ALSO ESTABLISHED A BRANCH IN T HE UK TO FACILITATE THE IDENTIFICATION AND EFFECTIVE M IGRATION OF WORK TO INDIA FROM AES. THE ASSESSEE RENDERS SERVICES AS A CAPTIVE CONTRACT SERVICE PROVIDER AND IS REMUNERATE D ON A COST PLUS MARK-UP BASIS FOR PROVIDING THE SERVICES TO IT S AES. ASSESSEE HAD FILED RETURN OF INCOME FOR THE ASSESSM ENT YEAR 2007-08 ON OCTOBER 29, 2007 DISCLOSING A TAXABLE IN COME OF RS 3,46,26,667 AFTER CLAIMING DEDUCTION U/S 10A OF THE INCOME TAX ACT, 1961 IN RESPECT OF THE PROFITS FROM EXPORT OF SERVICES FROM THE STPI UNITS. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ACIT CIRCLE-2(2) (HEREIN AFTER REFERRED AS 'ASSESSING OFFICER' OR 'AO') SELECTED THE CASE FOR SCRUTINY ASSESSMENT AND ISSUE D A NOTICE U/S 143(2) OF THE ACT, AND FURTHER MADE A RE FERENCE U/S 92CA(1) OF THE ACT TO THE LEARNED ADDITIONAL COMMIS SIONER OF INCOME-TAX (TRANSFER PRICING) (HEREIN AFTER REFERRE D AS 'TRANSFER PRICING OFFICER' OR 'TPO') FOR DETERMINATION OF ARM'S LENGTH PRICE (,ALP') OF THE INTERNATIONAL TRANSACTIONS WITH AES. 3.1 THE INTERNATIONAL TRANSACTIONS OF ASSEESSEE W ITH AES DURING THE YEAR ARE AS UNDER : PROVISION OF BPO SERVICES - RS 948,20,38,225; REIMBURSEMENTS TO AES - RS 16,02,86,194; REIMBURSEMENTS BY AES - RS 36,71,34,393; PAYMENT OF BANK CHARGES - RS 15,06,946; PAYMENT OF GUARANTEE COMMISSION - RS 5,49,391; AND INTEREST RECEIVED ON FIXED DEPOSITS - RS 3,10,24,44 4. 3 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 3.2 FOR THE PURPOSE OF ESTABLISHING THE ALP OF ITS INTERNATIONAL TRANSACTION WITH AE, THE ASSESSEE HAD UNDERTAKEN A TRANSFER PRICING STUDY, CARRIED OUT BY AN INDEPENDENT EXTERNAL CONSULTANT, IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, READ WITH THE INCOME-TAX RUL ES, 1962 ('RULES'). BASED ON THE TRANSFER PRICING STUDY, IT WAS CONCLUDED THAT THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH AES ARE AT ARM'S LENGTH. THE KEY FEATURES OF THE TRANSF ER PRICING ('TP') STUDY UNDERTAKEN IN RESPECT OF INTERNATIONAL RELATI NG TO PROVISION OF BPO SERVICES ARE SUMMARISED BELOW : AS PER THE FUNCTIONAL ANALYSIS, ASSESSEE WAS CATEGO RISED AS A RISK MITIGATED CONTRACT SERVICE PROVIDER AND SELECTED AS THE TESTED PARTY ; TRANSACTION NET MARGIN METHOD ('TNMM') WAS DETERMINED AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP ; THE SEARCH WAS CONDUCTED ON PROWESS DATABASE AND CAPITALINE DATABASE TO SELECT COMPARABLE COMPANIES ('COMPARABLES'); OPERATING MARGIN I.E. OPERATING PROFIT/OPERATING CO ST WAS SELECTED AS THE PROFIT LEVEL INDICATOR (PLI') FOR THE PURPOSE OF DETERMINING ALP; GIVEN THE NATURE OF THE INTERNATIONAL TRANSACTION U NDER REVIEW, ECONOMIC CONDITIONS, DIFFERENCES IN BUSINES S OR PRODUCT LIFE CYCLES AND OTHER SIMILAR FACTORS AND A LSO THE FACT THAT AUDITED FINANCIAL DATA FOR THE AY 2007-08 WAS NOT AVAILABLE IN ALL CASES, FINANCIAL DATA OF AY 20 06-07 AND AY 2005-06 WAS ALSO CONSIDERED, ALONG WITH INTERIM/UNAUDITED RESULTS FOR AY 2007-08; THE ECONOMIC ANALYSIS YIELDED A SET OF 22 COMPARABL ES WITH WEIGHTED AVERAGE ARITHMETIC MEAN OF 12.31 %. THERE WERE FUNCTIONAL AND RISK DIFFERENCES BETWEEN THE ASSESSEE AND THE COMPARABLES. HOWEVER, NO ADJUSTMENTS WERE UNDERTAKEN IN THE TP REPORT, SINCE , 4 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. THE ASSESSEES NET MARGIN FROM THE PROVISION OF SER VICES TO ITS AES (3.37%) DURING THE YEAR WAS WITHIN THE A RM'S LENGTH RANGE DETERMINED. 3.3 THERE WERE SERIES OF SUBMISSIONS MADE BY ASSESSEE BEFORE THE TPO IN RESPONSE TO THE NOTICES, TO JUSTI FY THE ARM'S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIONS. W HILE THE TPO ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD AND TH E PLI (OPERATING PROFIT/OPERATING COST) ADOPTED THEREIN, HE REJECTED THE ECONOMIC ANALYSIS UNDERTAKEN BY ASSESSEE IN THE TP DOCUMENTATION INTER ALIA STATING THAT THE MULTIPLE YEAR DATA HAS BEEN USED AND THE COMPARABILITY ANALYSIS IS DEF ECTIVE AND FILTERS ADOPTED BY ASSESSEE. TPO CONDUCTED A FRESH SEARCH ON THE DATABASES (I.E., PROWESS AND CAPITALINE) AND A LSO USED POWERS U/S 133(6) OF THE ACT TO OBTAIN INFORMATION FROM CERTAIN COMPANIES AND USED THE SAME FOR DETERMINING THE ALP . TPO APPLIED THE FOLLOWING ADDITIONAL FILTERS FOR COMPAR ATIVE ANALYSIS: A) REJECTION OF COMPANIES HAVING DIFFERENT FINANCIAL Y EAR; B) REJECTION OF COMPANIES HAVING DIMINISHING REVENUES FILTER/PERSISTENT LOSS MAKING; C) REJECTION OF COMPANIES HAVING RELATED PARTY TRANSACTIONS IN EXCESS OF 25% OF REVENUE ; AND D) REJECTION OF COMPANIES HAVING FOREIGN EXCHANGE EARNINGS LESS THAN 25% OF REVENUE. 3.4 TPO HAS SELECTED THE FOLLOWING 27 COMPAN IES AS COMPARABLES WITH AVERAGE MARGIN OF 30.48% AFTER MAK ING A NEGATIVE WORKING CAPITAL ADJUSTMENT OF 0.27%. 5 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 3.5. TPO ALSO ADDED THE REIMBURSEMENT RELATED TO TRAVEL COSTS RECEIVED BY ASSESSEE TO THE OPERATING COST FO R DETERMINATION OF ALP. ACCORDINGLY, THE TPO HAS MADE THE TP ADJUSTMENT OF RS.162,15,17,917 TO THE PRICE RECEIVE D BY ASSESSEE FOR THE SERVICES RENDERED TO ITS AES. IN R ESPECT OF THE TRANSACTIONS RELATING TO SHORT TERM DEPOSITS WITH H SBC BANK BRANCH, TPO HAS RE-CHARACTERISED THE TRANSACTION AS LOANS TO THE AES AND COMPUTED THE ARM'S LENGTH INTEREST RATE AT 14% AND ACCORDINGLY MADE AN ADJUSTMENT OF RS 3,84,55,35 6 TO THE INTEREST RECEIVED BY ASSESSEE. OTHER TRANSACTIONS V IZ., BANK CHARGES AND GUARANTEE FEE HAVE BEEN ACCEPTED TO BE AT ARM'S LENGTH UNDER CUP METHOD. AO ADOPTED THE SAME IN HIS DRAFT ASSESSMENT ORDER U/S 143(3) READ WITH 144C( 1) OF T HE ACT ('DRAFT ORDER') DATED DECEMBER 29, 2010 PROPOSING T HE ADDITIONS TO THE TOTAL INCOME OF THE ASSESSEE. HOWE VER WHILE CALCULATING DEDUCTION U/S 10A, AO REDUCED FOREIGN E XCHANGE GAIN OF RS 6,73,55,469 FROM BUSINESS PROFITS AND COMMUNICATION CHARGES OF RS 5,53,90,914 FROM THE EX PORT TURNOVER, IN APPLYING THE PRESCRIBED FORMULA. 3.6 ASSESSEE HAS FILED ITS OBJECTIONS WITH THE DRP ON THE ADDITIONS PROPOSED BY THE AO IN THE DRAFT ORDER . AS PER THE DIRECTIONS ISSUED THE DRP HAS PRINCIPALLY AGREE D WITH THE APPROACH ADOPTED AND CONTENTIONS OF THE LD. TPO/AO AND HAS UPHELD THE DRAFT ORDER ON ALL ISSUES EXCEPT ACCEPTI NG OBJECTIONS OF ASSESSEE ON TWO COMPARABLES AND PROVI DING RELIEF ON THE TP ADJUSTMENTS ON RE-CHARACTERISATION OF INT EREST ON SHORT TERM DEPOSITS. AO HAS PASSED THE FINAL ASSESS MENT ORDER DATED OCTOBER 12, 2011 CONSIDERING THE DIRECTIONS G IVEN BY DRP COMPUTING THE TOTAL INCOME OF ASSESSEE AT RS 170,50,55,178 AND THE TAX PAYABLE THEREON AT RS 81, 59,52,255 6 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. (INCLUDING INTEREST). AGGRIEVED BY THE AO/DRP ORDER , ASSESSEE HAS PREFERRED BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI RAJAN VORA AND THE LEARNED DEPARTMEN TAL REPRESENTATIVE SRI D SUDHAKAR RAO IN DETAIL. THE A SSESSEE HAS PLACED PAPER-BOOK A CONTAINING PAGES 1 TO232 AND PAPER BOOK B CONTAINING PAGES 233 TO 487 AND PAPER-BOOK C . THE ASSESSEE IS AGGRIEVED IN GROUNDS NO.1 TO 12 ON THE TP ADJUSTMENTS MADE. IN ADDITION TO THE TP ADJUSTMENTS , THERE ARE OTHER ISSUES ON THE CORPORATE TAX MATTERS WHICH ARE CONSIDERED IN THE COURSE OF THIS ORDER. 5. EVEN THOUGH ASSESSEE HAS RAISED VARIOUS OBJECTIONS ON THE REJECTION OF ITS TRANSFER PRICING DOCUMENTATION, REJECTION OF MULTIPLE YEAR DATA, OBT AINING INFORMATION UNDER S.133(6), USE OF ADDITIONAL FILTE RS, ETC., THE ARGUMENTS ARE CONFINED TO SELECTION OF COMPARABLES AND RISK ADJUSTMENT. IN THE COURSE OF ARGUMENTS, THE LEARNE D COUNSEL FAIRLY RESTRICTED HIS ARGUMENTS TO ONLY COMPARABLES SELECTED BY THE TPO. EVEN THOUGH COMPARABLES SELECTED BY ASSESS EE BUT REJECTED BY THE TPO WERE ALSO CONTESTED IN GROUND 8 , THE SAME WAS NOT PRESSED IN THE COURSE OF ARGUMENTS. THE FI NAL LIST OF COMPARABLES AS PER AO ORDER ARE AS UNDER S.NO. COMPANY NAME PLI 1. ACCENTIA TECHNOLOGIES LTD. (SEG.) 28.14% 2. ACCURATE DATA CONVERTORS P. LTD., 50.32% 3. ADITYA BIRLA MINACS WORLDWIDE LTD., (TRANSWORKS INFORMATION SERVICES LTD.,) 12.92% 4. ALLSEC TECHNOLOGIES LTD., 27.70% 5. APEX KNOWLEDGE SOLUTIONS P. LTD., 14.95% 6. APOLLO HEALTH STREET LTD., -9.96% 7 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 7. ASIT C. MEHTA FINANCIAL SERVICES LTD., (SEG.) (NUCLEUS NETSOFT & GIS INDIA LTD.,) 24.74% 8. BODHTREE CONSULTING LTD., (SEG.) 31.62% 9. CALIBER POINT BUSINESS SOLUTIONS LTD., 22.15% 10. COSMIC GLOBAL LTD., 13.26% 11. DATAMATICS FINANCIAL SERVICES LTD., (SEG.) 11.1 9% 12. ECLERX SERVICES LTD., 88.60% 13. FLEXTRONICS SOFTWARE SYSTEMS LTD., (SEG.) 7.93% 14. GENESYS INTL. CORP. LTD., (SEG.) 10.42% 15. HCL COMNET SYSTEMS & SERVICES LTD., (SEG.) 46.2 3% 16. ICRA TECHNO ANALYTICS LTD., (SEG.) 13.32% 17. INFORMED TECHNOLOGIES INDIA LTD., 36.89% 18. INFOSYS BPO LTD., 30.66% 19. ISERVICES INDIA P. LTD., 50.78% 20. MOLD TEK TECHNOLOGIES LTD., (SEG.) 118.04% 21. NITTANY OUTSOURCING SERVICES P. LTD., 12.41% 22. R SYSTEMS INTERNATIONAL LTD., (SEG.) 20.26% 23. SPANCO TELESYSTEMS & SOLUTIONS LTD., (SEG.) 21. 62% 24. VISHAL INFORMATION TECHNOLOGIES LTD., 44.45% 25. WIPRO LTD., (SEG.) 32.22% ARITHMETIC MEAN 30.43% 6. THE OBJECTION IS WITH REFERENCE TO SELECTION OF COMPARABLES BY THE TPO WITH REFERENCE TO THE FOLLOW ING COMPANIES- 1. ACCENTIA TECHNOLOGIES LIMITED 6.1.1. THE LEARNED AUTHORISED REPRESENTATIVE OF TH E ASSESSEE OBJECTING TO THE AFORESAID COMPANY BEING T REATED AS COMPARABLE SUBMITTED THAT THE AFORESAID COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AS MORE TH AN 64% OF THE OPERATING COST OF THE COMPANY IS TOWARDS OVERSE AS BUSINESS EXPENSES. THE COMPANY RECEIVES SUBSTANTIA L REVENUE FROM ON-SITE SERVICES WHICH IS MORE THAN 75%, HENCE CANNOT BE CONSIDERED AS COMPARABLE ON ACCOUNT OF DIFFERENCES IN GEOGRAPHICAL LOCATIONS OF THE SERVICES. IT WAS SUBM ITTED THAT THE EMPLOYEE COST OF COMPANY IS ONLY 14% OF ITS REV ENUE. IT 8 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. WAS FURTHER SUBMITTED THAT THE UNAUDITED SEGMENTAL INFORMATION OBTAINED U/S 133(6) OF THE ACT HAS BEEN USED TO COMPUTE MARGINS WHICH MAY NOT BE AUTHENTIC. IT WAS FURTHER SUBMITTED THAT DUE TO MULTIPLE ACQUISITIONS BY THE COMPANY DURING THE YEAR UNDER DISPUTE, IT WAS AN EXCEPTIONA L YEAR IMPACTING THE PROFITABILITY OF THE COMPANY. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE R EFERRED TO THE ANNUAL REPORT OF ACCENTIA TECHNOLOGIES LIMITED IN THE PAPER BOOK. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE ALSO RELIED UPON THE DECISIONS OF INCOME-T AX APPELLATE TRIBUNAL, HYDERABAD BENCH IN CASE OF AVINEON INDIA P. LTD., ITA.NO.1989/HYD/2011 DATED 31.10.2013, ZAVATA INDIA P. LTD., HYDERABAD VS. DCIT, CIRCLE 3(3), HYDERABAD ITA.NO.1781/HYD/2011 DATED 07.06.2013 AND M/S. CAP ITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD., HYDERABAD V S. DCIT (INT. TAXATION), HYDERABAD (ITA NO.1961/HYD/2011 DA TED 23.11.2012. 6.1.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUBMITTED THAT THERE IS NO REASON TO EX CLUDE THE AFORESAID COMPANY AS THE TPO HAS GIVEN JUSTIFIABLE REASONS FOR TREATING IT AS A COMPARABLE COMPANY. 6.1.3 WE HAVE HEARD THE CONTENTIONS OF THE PARTIES WITH REGARD TO THE AFORESAID COMPANY AND PERUSED THE MAT ERIAL ON RECORD. FROM THE FACTS AND MATERIAL AVAILABLE ON RECORD, IT IS SEEN THAT TWO COMPANIES VIZ., IRIDIUM TECHNOLOGIES AND GEOSOFT TECHNOLOGIES AMALGAMATED WITH M/S. ACCENTIA TECHNOLOGIES LIMITED WHICH RESULTED IN A HIGHER PR OFIT FOR THE COMPANY DURING THE YEAR. IN CASE OF CAPITAL IQ I NFORMATION SYSTEMS INDIA PVT. LTD., THE CO-ORDINATE BENCH OF T HIS TRIBUNAL 9 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. WHILE CONSIDERING THE ASSESSEES OBJECTION WITH REG ARD TO THE AFORESAID COMPANY HELD IN THE FOLLOWING MANNER:- 10. IT IS THE SUBMISSION OF THE ASSESSEE THAT THI S COMPANY CANNOT BE TREATED AS A COMPARABLE BECAUSE O F UN-COMPARABLE FINANCIAL RESULTS ARISING OUT OF AMALGAMATION IN THE COMPANY. IN THIS REGARD, THE ASSESSEE HAS RELIED UPON THE ORDER OF THE DRP FOR T HE ASSESSMENT YEAR 2008-09 IN ASSESSEES OWN CASE. IT IS SEEN THAT THE DRP WHILE CONSIDERING SIMILAR OBJECTI ON PLACED BY THE ASSESSEE IN THE CASE OF ANOTHER COMPA NY, VIZ. MOLD TEK TECHNOLOGIES LTD., IN THE PROCEEDINGS RELATING TO THE ASSESSMENT YEAR 2008-09, HAS OBSERV ED IN THE FOLLOWING MANNER- 17.5. IN ADDITION TO THE ABOVE, THE DIRECTORS REPORT OF THE COMPANY FOR THE FY 2007-08 REVEALED T HE MERGER AND THE DEMERGER. A COMPANY KNOWN AS TECHMEN TOOLS PVT. LTD. HAD AMALGAMATED WITH MOLD-T EK TECHNOLOGIES LTD. WITH EFFECT FORM 1 ST OCTOBER, 2006. THERE WAS A DE-MERGER OF PLASTIC DIVISION OF THE CO MPANY AND THE RESULTING COMPANY IS KNOWN AS MOLDTEK PLAST ICS LIMITED. THE DE-MERGER FROM THE MOLDTEK TECHNOLOGI ES TOOK PLACE WITH EFFECT FROM 1 ST APRIL, 2007. THE MERGER AND THE DE-MERGER NEEDED THE APPROVAL OF THE HONBL E HIGH COURT OF ANDHRA PRADESH AND ALSO THE APPROVAL OF THE SHAREHOLDERS. THE SHAREHOLDERS OF THE COMPANY G AVE APPROVAL FOR THE MERGER AND THE DE-MERGER ON 25.01.2008 AND THE HONBLE HIGH COURT OF ANDHRA PRADESH HAD APPROVED THE MERGER AND DE-MERGER ON 25 TH JULY, 2008. SUBSEQUENTLY, THE ACCOUNTS OF MOLDTE K TECHNOLOGIES FOR FY 2007-08 WERE REVISED. ON A PER USAL OF THE ANNUAL REPORT IT IS NOTICED THAT TECKMEN TO OLS PVT. LTD. AND THE PLASTIC DIVISION OF THE COMPANY WERE DEMERGED AND THE RESULTING COMPANY WAS NAMED AS MOLDTEK PLASTICS LTD. THE KPO BUSINESS REMAINED WI TH THE COMPANY. A PERUSAL OF THE ANNUAL REPORT REVEAL ED THAT TO GIVE EFFECT TO THE MERGER AND DEMERGER, TH E FINANCIAL STATEMENTS WERE REVISED AND RESTATED AFTE R SIX MONTHS FORM THE END OF THE FINANCIAL YEAR 31.3.2008 . THE ASSESSEE FILED FORM NO.21 UNDER THE COMPANIES A CT WITH THE REGISTRAR OF COMPANIES ON 26 TH AUGUST, 2008. THUS THE EFFECTIVE DATE OF THE SCHEME OF MERGER AND DEMERGER WAS 26 TH AUGUST, 2008. THE ANNUAL REPORT SUPPORTED THE ARGUMENT OF THE ASSESSEE THAT THERE W ERE 10 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. MERGER AND DEMERGER IN THE FINANCIAL YEAR AND IT WA S AN EXCEPTIONAL YEAR OF PERFORMANCE AS FINANCIAL STATE MENTS WERE REVISED BY THIS COMPANY MUCH AFTER THE CLOSURE OF THE PREVIOUS YEAR. THE PANEL AGREES WITH THE CONTEN TION OF THE ASSESSEE THAT IT IS AN EXCEPTIONAL YEAR HAVI NG SIGNIFICANT IMPACT ON THE PROFITABILITY ARISING OUT OF MERGER AND DEMERGER. ON CAREFUL CONSIDERATION OF THE MATTER, WE ALSO AGR EE WITH THE AFORESAID VIEW OF THE DRP THAT EXTRA-ORDINARY E VENT LIKE MERGER AND DE-MERGER WILL HAVE AN EFFECT ON TH E PROFITABILITY OF THE COMPANY IN THE FINANCIAL YEAR IN WHICH SUCH EVENT TAKES PLACE. IT IS THE CONTENTION OF TH E ASSESSEE THAT IN CASE OF THE AFORESAID COMPANY, THE RE IS AMALGAMATION IN DECEMBER, 2006, WHICH HAS IMPACTED THE FINANCIAL RESULT. THIS FACT HAS TO BE VERIFIED BY THE TPO. IF IT IS FOUND UPON SUCH VERIFICATION THAT TH E AMALGAMATION IN FACT HAS TAKEN PLACE, THEN THE AFOR ESAID COMPARABLE HAS TO BE EXCLUDED. 6.1.4 AS CAN BE SEEN FROM THE ORDER OF THE CO-ORDI NATE BENCH, THE AFORESAID COMPANY WAS EXCLUDED SINCE EX- ORDINARY EVENTS LIKE MERGER AND DEMERGER HAD TAKEN DURING TH E RELEVANT FINANCIAL YEAR WHICH MUST HAVE IMPACTED THE FINANCI AL RESULTS OF THE COMPANY. THAT BESIDES THE HIGH VOLUME OF ON- SITE OPERATION OF ACCENTIA TECHNOLOGIES LIMITED ALSO MAK ES IT FUNCTIONALLY DISSIMILAR TO THE ASSESSEE. THESE FACT S ARE NOT CONSIDERED EITHER BY THE TPO OR BY THE DRP. WE THE REFORE REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFIC ER WHO SHALL VERIFY THE FACT WHETHER MERGER HAS TAKEN PLACE DURI NG THE YEAR AND IF IT FOUND SO, THEN THE AFORESAID COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE ASSESSIN G OFFICER SHOULD ALSO PROPERLY CONSIDER ASSESSEES SUBMISSION S WITH REGARD TO FUNCTIONAL DIFFERENCE ALSO. 11 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 2. ACCURATE DATA CONVERTORS PRIVATE LTD . 6.2.1. THE LEARNED AUTHORISED REPRESENTATIVE OF TH E ASSESSEE OBJECTING TO THE AFORESAID COMPANY BEING T REATED AS COMPARABLE SUBMITTED THAT THIS COMPANY WAS NOT IDEN TIFIED IN THE SEARCH PROCESS EITHER BY THE ASSESSEE OR BY THE TPO. IT WAS SUBMITTED THAT NO OPPORTUNITY WAS GIVEN TO THE ASSE SSEE TO EXAMINE WHETHER THESE COMPANIES ARE COMPARABLE TO T HE ASSESSEE. IT WAS SUBMITTED THAT THE TPO RELYING UP ON UNAUDITED INFORMATION HAS TREATED THE AFORESAID COM PANY AS COMPARABLE ONLY BECAUSE THE HIGH MARGIN OF PROFIT S HOWN AT 50.15%. THE LEARNED AUTHORISED REPRESENTATIVE OF TH E ASSESSEE ALSO RELIED UPON THE ORDER OF THE COORDINATE BENCH DECISION OF THE DELHI TRIBUNAL IN THE CASE OF ACIT VS. M/S. TOS HIBA INDIA P. LTD., 2010-TII-14-ITAT-DEL-T.P. 6.2.2. THE LEARNED DEPARTMENTAL REPRESENTATIVE HOW EVER SUPPORTED THE ORDERS OF THE REVENUE AUTHORITIES IN SELECTING THE AFORESAID COMPANY AS COMPARABLE. 6.2.3 WE HAVE HEARD THE CONTENTIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ON A PERUSAL OF THE OBSERVATION MADE BY THE TPO OF HIS ORDER, IT IS SEEN THAT THE AFORESAID COMPANY WAS NOT INITIALLY SELECTED AS A C OMPARABLE BY THE TPO. SUBSEQUENTLY, THE TPO CONDUCTED SEARCH IN THE DATA BASES FOR FINDING ADDITIONAL COMPARABLE BY APP LYING 25% EMPLOYEE COST FILTER. AFTER EXAMINING THE INFORMATI ON OBTAINED FROM THE COMPANY U/S 133(6) OF THE ACT THE TPO TREA TED IT AS COMPARABLE BY OBSERVING THAT THE COMPANY IS ENGAGED IN IT ENABLED SERVICES AND QUALIFIES ALL THE FILTERS ADOP TED BY THE TPO. IT IS VERY MUCH CLEAR FROM THE ORDER OF THE ASSESSING 12 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. OFFICER THAT THE ASSESSEE WAS NOT GIVEN ANY OPPORTU NITY/ INFORMATION TO EXAMINE THE COMPARABILITY OF THE AFO RESAID COMPANY. THOUGH THE TPO IS EMPOWERED UNDER THE PRO VISIONS OF THE ACT TO OBTAIN INFORMATION WITH REGARD TO SEL ECTION OF COMPARABLES, HOWEVER BEFORE UTILISING THE INFORMATI ON OBTAINED, HE HAS TO GIVE FAIR OPPORTUNITY TO THE AS SESSEE TO HAVE ITS SAY IN THE MATTER. THE DRP HAS ALSO OVER-L OOKED THIS ASPECT. ANOTHER IMPORTANT ASPECT IS THE COMPANY HAS SHOWN PROFIT OF 50.15% WHICH MAY HAVE WEIGHED WITH THE AS SESSING OFFICER FOR ACCEPTING THIS COMPANY AS COMPARABLE. BE THAT AS IT MAY SINCE THE TPO HAS NOT GIVEN ANY OPPORTUNITY TO THE ASSESSEE TO RAISE ITS OBJECTIONS WITH REGARD TO THE AFORESAID COMPANY, WE ARE INCLINED TO REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WHO SHALL DECIDE THE ACCEPTABILIT Y OR OTHERWISE OF THE COMPANY AS COMPARABLE AFTER CONSID ERING THE ASSESSEE S OBJECTIONS. 3. ASIT C MEHTA FINANCIAL SERVICES LTD. (SEG). 6.3.1. THE LEARNED AUTHORISED REPRESENTATIVE OF TH E ASSESSEE OBJECTING TO THE AFORESAID COMPANY BEING S ELECTED AS COMPARABLE SUBMITTED THAT THE EMPLOYEE COST OF THE COMPANY IS ONLY 24.78% OF ITS REVENUE COMPARED TO ASSESSEE S 56%. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE F URTHER SUBMITTED THAT IN MANY OTHER CASES FOR ASST. YEAR 2008-09 THE DRP HAS EXCLUDED THIS COMPANY FROM THE LIST OF COMP ARABLES. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE ALSO RELIED UPON THE DECISIONS OF INCOME-TAX APPELLATE T RIBUNAL, HYDERABAD BENCH IN ASSESSEES OWN CASE ITA.NO.1624/ HYD/10 AND S.A.NO.210/HYD/2012 DATED 28.06.2013, AVINEON I NDIA P. LTD., ITA.NO.1989/HYD/2011 DATED 31.10.2013 AND ZAV ATA 13 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. INDIA P. LTD., HYDERABAD VS. DCIT, CIRCLE 3(3), HYD ERABAD ITA.NO.1781/HYD/2011 DATED 07.06.2013. 6.3.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE REVENUE AUT HORITIES. 6.3.3 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PA RTIES AND PERUSED THE MATERIAL ON RECORD. FROM THE INFORM ATION OBTAINED U/S 133(6) OF THE ACT BY THE TPO, IT IS SE EN THAT THE COMPANY HAS A EMPLOYEE COST OF 24.78% COMPARED TO ASSESSEES 56%. THAT BESIDES IT IS ALSO A FACT THAT THE DRP IN MANY SIMILAR CASES FOR ASST. YEAR 2008-09 HAS EXCLU DED THIS COMPANY. THEREFORE, CONSIDERING THE TOTALITY OF FA CTS AND THE CIRCUMSTANCES, WE DIRECT THE EXCLUSION OF THE AFORE SAID COMPANY FROM THE LIST OF COMPARABLES. 4. BODHTREE CONSULTING LIMITED :- 6.4.1 WITH REGARD TO THE AFORESAID COMPANY, THE LE ARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE COMPANY IS FUNCTIONALLY DIFFERENT AS IT IS INTO SOF TWARE SERVICES AND PROVIDE SERVICES USING THE DEVELOPED PRODUCTS. IT WAS FURTHER SUBMITTED THAT IN THE INFORMATION SUBMITTED IN RESPONSE TO THE LETTER ISSUED U/S 133(6) OF THE ACT , IT HAS SUBMITTED THAT THE COMPANY HAS DEVELOPED A SOFTWARE TOOL USED FOR PROVIDING DATA CLEANSING SERVICES AND IT I NVOLVES AN ELEMENT OF SOFTWARE DEVELOPMENT. THE COMPANY IS ALS O ENGAGED IN PROVIDING E-PAPER SOLUTIONS. IT WAS FURTHER SU BMITTED THAT THE ANNUAL REPORT OF THE COMPANY ALSO REVEALS THAT IT HAS ONLY SOFTWARE DEVELOPMENT SEGMENT. IT WAS FURTHER SUBMI TTED THAT THE COMPANY HAS UNDERGONE RE-ORGANISATION AND CROSS BOOKING OF EXPENSES UNLIKE PREVIOUS YEAR WHICH HAS IMPACTED THE 14 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. PROFITABILITY. IT WAS SUBMITTED THAT UN-AUDITED SEG MENTAL INFORMATION HAS BEEN USED TO COMPUTE MARGINS WHICH MAY NOT BE AUTHENTIC. 6.4.2 WE HAVE HEARD RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIAL ON RECORD. FROM THE ANNUAL REPORT OF THE AFORESAID COMPANY AS SUBMITTED IN THE PAPER BOO K, IT IS SEEN THAT THE SAID COMPANY EARNS ITS REVENUE FROM S OFTWARE DEVELOPMENT. THEREFORE, AS IT APPEARS THE AFORES AID COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. THIS FACT WAS NOT PROPERLY CONSIDERED EITHER BY THE TPO OR DRP. WE T HEREFORE REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL CONSIDER THE ACCEPTABILITY OR OTHERWISE OF TH E COMPANY AFTER PROPERLY CONSIDERING THE OBJECTIONS OF THE AS SESSEE. 5. ECLERX SERVICES LIMITED :- 6.5.1 OBJECTING TO THE AFORESAID COMPANY BEING TRE ATED AS COMPARABLE, THE LEARNED AUTHORISED REPRESENTATIV E OF THE ASSESSEE SUBMITTED THAT THE COMPANY IS ENGAGED IN P ROVIDING KNOWLEDGE PROCESS OUTSOURCING (KPO). IT WAS SUBMIT TED THAT THE ASSESSEE IS PROVIDING DATA ANALYTICS, OPERATION S MANAGEMENT AND AUDIT RECONCILIATION. IT WAS SUBMIT TED THAT BESIDES BEING FUNCTIONALLY DIFFERENT FROM THE ASSES SEE, THE AFORESAID COMPANY HAS SHOWN EXTRAORDINARILY HIGH PR OFIT AT 88.11% HENCE CANNOT BE TREATED AS COMPARABLE. IN SU PPORT OF SUCH CONTENTION, THE LEARNED AUTHORISED REPRESENTAT IVE OF THE ASSESSEE RELIED UPON THE DECISIONS OF CO-ORDINATE B ENCH OF HYDERABAD TRIBUNAL IN CASES OF AVINEON INDIA P. LTD ., ITA.NO.1989/HYD/2011 DATED 31.10.2013, ZAVATA INDIA P. LTD., HYDERABAD VS. DCIT, CIRCLE 3(3), HYDERABAD ITA.NO.1781/HYD/2011 DATED 07.06.2013, M/S. CAPITAL IQ 15 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. INFORMATION SYSTEMS INDIA PVT. LTD., HYDERABAD VS. DCIT (INT. TAXATION), HYDERABAD (ITA NO.1961/HYD/2011 DATED 23.11.2012 AND ALSO SPECIAL BENCH DECISION OF THE M UMBAI TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDI A) P. LTD., MUMBAI VS. ACIT, CIRCLE 6(3), MUMBAI DATED 07.03.20 14. 6.5.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWE VER SUPPORTED THE ORDERS OF THE REVENUE AUTHORITIES WIT H REGARD TO THE AFORESAID COMPANY. 6.5.3 WE HAVE HEARD RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIAL ON RECORD. IT IS SEEN TH AT IN CASE OF CAPITAL IQ INFORMATION SYSTEMS (SUPRA), THE CO-ORDI NATE BENCH ACCEPTED THE OBJECTION OF THE ASSESSEE WITH REGARD TO THE AFORESAID COMPANY BEING TREATED AS A COMPARABLE BY HOLDING THAT NOT ONLY THE SAID COMPANY IS FUNCTIONALLY DI FFERENT BEING ENGAGED IN PROVIDING KPO SERVICES BUT IT HAS ALSO SHOWN EXTRAORDINARY HIGH PROFITS. FOLLOWING THE AFORESAI D DECISION OF CO-ORDINATE BENCH OF TRIBUNAL IN CASE OF CAPITAL IQ INFORMATION SYSTEMS, WE HOLD THAT THIS COMPANY CANNOT BE TREAT ED AS COMPARABLE. 7. INFORMED TECHNOLOGIES INDIA LIMITED AND 9. ISERVICES INDIA PRIVATE LTD :- 6.6.1 OBJECTING TO THE AFORESAID COMPANIES BEING TREATED AS COMPARABLES, THE LEARNED AUTHORISED REPRESENTATI VE OF THE ASSESSEE SUBMITTED THAT BOTH THE COMPANIES HAVE EXC EPTIONAL YEAR OF OPERATION. WITH REGARD TO INFORMED TECHNOL OGIES INDIA LIMITED, IT WAS SUBMITTED THAT THE COMPANY HAD SHOW N OPERATING LOSSES OF (-)72.98% AND (-) 43.96% IN TH E FINANCIAL YEAR 2004-05 AND 2005-06, WHEREAS DURING THE YEAR U NDER 16 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. DISPUTE, IT HAS SHOWN OPERATING MARGIN OF 35.56% W HICH INDICATES THAT THIS HAS BEEN AN YEAR OF EXCEPTIONAL OPERATIONS. SO FAR AS I-SERVICES INDIA PRIVATE LTD., IS CONCERN ED, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE MARGIN OF THE COMPANY IS MORE THAN ONE AND HALF TIM ES THE ARITHMETIC MEAN OF THE COMPARABLE COMPANIES SELECTE D BY THE TPO. IT WAS FURTHER SUBMITTED THAT THE COMPANY IS A PRIVATE LIMITED COMPANY WITH NO INFORMATION FOR THE PRIOR A ND FUTURE YEARS TO EVALUATE TREND IS AVAILABLE. THE LEARNED A UTHORISED REPRESENTATIVE HAS RELIED ON THE ORDER OF THE COORD INATE BENCH OF DELHI TRIBUNAL IN THE CASE OF ACTIS ADVISERS P. LTD., IN ITA.NO.527/DEL/2011 FOR THE PROPOSITION THAT COMPAN IES WITH SIGNIFICANT VARIATION IN MARGINS ARE TO BE REJECTED . 6.6.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWE VER STRONGLY SUPPORTING THE ORDERS OF THE REVENUE AUTHO RITIES SUBMITTED THAT THE ASSESSEE HAS NOT RAISED ANY OBJE CTION WITH REGARD TO THE AFORESAID COMPANIES BEING TREATED AS COMPARABLE EITHER BEFORE THE TPO OR BEFORE THE DRP. HENCE, ASS ESSEES CONTENTION SHOULD NOT BE ENTERTAINED. 6.6.3 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PA RTIES WITH REGARD TO THE AFORESAID TWO COMPANIES AND PERU SED THE MATERIAL ON RECORD. ON GOING THROUGH THE ORDERS OF THE TPO AS WELL AS DRP, WE FIND THE SUBMISSIONS MADE BY THE LD . DR TO BE VALID. AS CAN BE SEEN FROM MATERIALS ON RECORD, THE ASSESSEE HAS NOT RAISED ANY OBJECTION EITHER BEFORE THE TPO OR BEFORE THE DRP IN RESPECT OF AFORESAID COMPANIES. HOWEVER NEITHER THE TPO NOR DRP HAS EXAMINED WHY THIS YEAR THE COMPANY HAS EXCEPTIONAL PROFITS. WHETHER DUE TO MERGERS OR ANY EVENTS OR HAPPENINGS THE PROFIT WAS EXCEPTIONAL REQUIRE VERIF ICATION. THE 17 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. ASSESSEE HAS ALSO NOT MADE ANY OBJECTION BEFORE THE AUTHORITIES. HENCE, WE ARE OF THE VIEW THAT THESE TWO COMPANIES ARE TO BE REEXAMINED BY TPO/AO BEFORE BEI NG SELECTED AS COMPARABLES. TPO/AO IS DIRECTED TO CONS IDER THE OBJECTIONS OF ASSESSEE AND DECIDE THE ISSUE AFRESH. 10. MOLD-TEK TECHNOLOGIES LIMITED :- 6.7.1 OBJECTING TO THE AFORESAID COMPANY BEING TRE ATED AS COMPARABLE, THE LEARNED AUTHORISED REPRESENTATIV E OF THE ASSESSEE SUBMITTED THAT DURING THE YEAR, THE COMP ANY HAS SHOWN SUPER NORMAL PROFIT OF 117.29% COMPARED TO T HE ASSESSEE AS WELL AS OTHER COMPARABLE COMPANIES. IT WAS FURTHER SUBMITTED THAT APART FROM HAVING EXTRAORDIN ARILY HIGH PROFIT MOLD-TEK IS ALSO FUNCTIONALLY DIFFERENT AS I T IS ENGAGED IN PROVIDING STRUCTURAL ENGINEERING CONSULTING SERVICE S UNDER THE KPO DIVISION. IT WAS SUBMITTED THAT M/S MOLD TEK I S PROVIDING HIGHLY TECHNICAL AND SPECIALISED ENGINEERING SERVIC ES AND USE OF INFORMATION TECHNOLOGY IS ONLY INCIDENTAL. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE INCOME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH CONS IDERING THESE ASPECTS HAS HELD M/S MOLD TEK IS NOT TO BE TR EATED AS COMPARABLE IN CASE OF M/S CAPITAL IQ INFORMATION SY STEMS PVT. LTD. (SUPRA). THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE FURTHER SUBMITTED THAT EVEN IN ASSESSEES OWN CASE FOR ASST. YEAR 2008-09, THE DRP HAS DIRECTED FOR EX CLUSION OF M/S MOLD-TEK FROM LIST OF COMPARABLES. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AUTHORISED REPRESENTATIVE O F THE ASSESSEE RELIED UPON THE DECISIONS OF CO-ORDINATE B ENCH OF HYDERABAD TRIBUNAL IN CASES OF AVINEON INDIA P. LTD ., ITA.NO.1989/HYD/2011 DATED 31.10.2013, ZAVATA INDIA P. 18 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. LTD., HYDERABAD VS. DCIT, CIRCLE 3(3), HYDERABAD ITA.NO.1781/HYD/2011 DATED 07.06.2013, M/S. CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD., HYDERABAD VS. DCIT (INT. TAXATION), HYDERABAD (ITA NO.1961/HYD/2011 DATED 23.11.2012 AND ALSO SPECIAL BENCH DECISION OF THE M UMBAI TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDI A) P. LTD., MUMBAI VS. ACIT, CIRCLE 6(3), MUMBAI DATED 07.03.20 14. 6.7.2. THE LEARNED DEPARTMENTAL REPRESENTATIVE HOW EVER SUPPORTED THE ORDERS OF THE REVENUE AUTHORITIES. 6.7.3 WE HAVE HEARD CONTENTIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD WITH REGARD TO THE A FORESAID COMPANY BEING TREATED AS COMPARABLE. AS CAN BE SEE N FROM THE FACTS ON RECORD M/S MOLD-TEK DURING THE YEAR HA D SHOWN EXTRAORDINARILY HIGH PROFIT OF 117%. THE ACTIVITIE S OF M/S MOLD- TEK IS ALSO FOUND TO BE FUNCTIONALLY DIFFERENT AS I T IS ENGAGED IN PROVIDING HIGHLY TECHNICAL ENGINEERING CONSULTANCY SERVICES. IN CASE OF CAPITAL IQ INFORMATION SYSTEMS (SUPRA) THE CO-ORDINATE BENCH OF THE TRIBUNAL HELD AS UNDER:- 13. ON CAREFUL CONSIDERATION OF THE SUBMISSIONS OF THE ASSESSEE WE FIND THAT THE DRP, AS ALREADY STATED EA RLIER, IN THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2008-09 HAS ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPAN Y CANNOT BE TREATED AS COMPARABLE BECAUSE OF EXCEPTIONAL FIN ANCIAL RESULT DUE TO MERGER/DE-MERGER. IN VIEW OF THE AFO RESAID, WE ACCEPT THE ASSESSEES CONTENTION THAT THIS COMPANY CANNOT BE TREATED AS COMPARABLE. THAT APART, IT IS ALSO A FACT THAT THIS COMPANY HAS SHOWN SUPER NORMAL PROFIT WORKING OUT TO 113%. THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI BE NCH IN THE CASE OF TEVA INDIA PVT. LTD.(SUPRA) HAS OBSERV ED THAT COMPANIES SHOWING SUPERNORMAL PROFIT CANNOT BE TREA TED AS COMPARABLE. THE RELEVANT OBSERVATIONS OF THE TRIBU NAL IN THAT CASE ARE EXTRACTED HEREUNDER FOR CONVENIENCE- 19 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 32. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDE S AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT ALTHOUGH A DETAIL SUBMISSION WAS MADE ON BEHALF OF THE ASSESSEE BEFORE THE LEARNED CIT(A) O N THE BASIS OF FAR ANALYSIS TO SHOW THAT THE SELECTION OF M/S. VIMTA LABS AS COMPARABLE IS NOT JUSTIFIED, THE LEAR NED CIT(A) HAS NOT ACCEPTED THE STAND OF THE ASSESSEE O N THE ISSUE WITHOUT GIVING ANY COGENT OR CONVINCING REASO NS. IN ITS RECENT DECISION RENDERED IN THE CASE OF ADOBE S YSTEMS INDIA PVT. LTD. (ITA NO.5043/DEL/2000 DTD. 21.01.2 011) + (2011-TII-13-ITAT-DEL-TP), DELHI BENCH OF ITAT HAS HELD THAT EXCLUSION OF COMPARABLES SHOWING SUPERNORMAL PROFITS AS COMPARED TO OTHER COMPARABLE IS FULLY JU STIFIED. WE, THEREFORE SET ASIDE THE IMPUGNED ORDER OF THE L D. CIT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE A.O. WITH A DIRECTION TO DECIDE THE SAME AFRESH AFT ER TAKING INTO CONSIDERATION THE SUBMISSIONS MADE BY T HE ASSESSEE BEFORE THE LEARNED CIT(A) AND KEEPING IN V IEW THE DELHI BENCH OF ITA IN THE CASE OF ABODE SYSTEMS INDIA PVT. LTD. (SUPRA). IN THIS VIEW OF THE MATTER, WE ACCEPT THE CONTENTIO NS OF THE ASSESSEE THAT THIS COMPANY CANNOT BE TREATED AS A COMPARABLE. AS CAN BE SEEN FROM THE AFORESAID FINDING OF THE TR IBUNAL M/S MOLD-TEK WAS NOT TREATED AS COMPARABLES AS IT HAS S HOWN EXTRAORDINARILY HIGH PROFIT. IT IS ALSO A FACT TH AT THE DRP IN ASSESSEES CASE FOR ASST. YEAR 2008-09 HAS DIRECTED FOR REMOVAL OF THE AFORESAID COMPANY FROM THE LIST OF COMPARABL ES. THEREFORE, FOLLOWING THE DECISION OF CO-ORDINATE BE NCH IN CASE OF CAPITAL IQ (SUPRA), WE DIRECT THE ASSESSING OFFI CER TO EXCLUDE M/S MOLD-TEK TECHNOLOGIES LIMITED FROM THE LIST OF COMPARABLES. 11. VISHAL INFORMATION TECHNOLOGIES LTD . 6.8.1 OBJECTING TO THE AFORESAID COMPANY BEING SE LECTED AS COMPARABLE BY THE TPO, THE LEARNED AUTHORISED 20 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. REPRESENTATIVE OF THE ASSESSEE SUBMITTED BEFORE US THAT THE AFORESAID COMPANY IS NOT ONLY FUNCTIONALLY DIFFEREN T ON ACCOUNT OF EMPLOYEE COST FILTER AS THE EMPLOYEE COST OF TH E COMPANY IS ONLY 2% OF ITS REVENUE, BUT IT ALSO HAS HUGE VENDOR PAYMENT FOR DATA ENTRY WHICH IS INDICATIVE OF THE FACT THA T IT DOES NOT PROVIDE IT ENABLED SERVICES BY ITSELF BUT OUTSOURCE S THE WORK WITH A THIRD PARTY VENDOR. IT WAS SUBMITTED THAT T HE DRP IN ASSESSEES OWN CASE FOR AY 2008-09 HAS REJECTED THI S COMPANY AS COMPARABLES. THE LEARNED AUTHORISED REPRESENTAT IVE OF THE ASSESSEE ALSO RELIED UPON THE OBSERVATION MADE BY T HE INCOME- TAX APPELLATE TRIBUNAL, HYDERABAD BENCH WITH REGARD TO AFORESAID COMPANY IN CASES OF IN SUPPORT OF SUCH CO NTENTION, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE RELIED UPON THE DECISIONS OF CO-ORDINATE BENCH OF HYDERABA D TRIBUNAL IN CASES OF AVINEON INDIA P. LTD., ITA.NO.1989/HYD/2011 DATED 31.10.2013, ZAVATA INDIA P. LTD., HYDERABAD VS. DCIT, CIRCLE 3(3), HYDERABAD ITA.NO.1781/HYD/2011 DATED 07.06.2013, M/S. CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD., HYDERABAD VS. DCIT (INT. TAXATION), HYDERABAD (ITA NO.1961/HYD/2011 DATED 23.11.2012. 6.8.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWE VER SUPPORTED THE ORDERS OF THE DRP AND TPO. 6.8.3 WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN CASE OF CAPITAL IQ INFORMA TION SYSTEMS (INDIA) PVT. LTD.,(SUPRA) THE CO-ORDINATE BENCH A FTER CONSIDERING THE OBJECTIONS OF THE ASSESSEE IN RESPE CT OF THE AFORESAID COMPANY HELD IN THE FOLLOWING MANNER :- 21 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 17. AFTER CONSIDERING THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, WE FIND THAT THE DRP, IN THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2008-09 IN ASSESSEES OWN CASE, AFTER TAKING NOTE O F THE COMPOSITION OF THE VENDOR PAYMENTS OF CORAL HUB FOR THE LAST THREE YEARS, AND THE FACT THAT IT HAS ALSO COMMENCE D A NEW LINE OF BUSINESS OF PRINTING ON DEMAND(POD), WHEREI N IT PRINTS UPON CLIENTS REQUEST, CONCLUDED AS FOLLOWS- 18.4. IN VIEW OF THIS MAJOR DIFFERENCE IN FUNCTI ONALITY AND THE BUSINESS MODEL, THIS PANEL IS OF THE VIEW T HAT CORAL HUB IS NOT A SUITABLE COMPARABLE TO THE TAX PAYER AND HENCE NEEDS TO BE DROPPED FORM THE FINAL LIST O F COMPARABLES. IN CASE OF ACIT V/S. M/S. MAERSK GLOBAL SERVICE CEN TRE (SUPRA), THE ITAT MUMBAI BENCH HAS ALSO DIRECTED FO R EXCLUSION OF THE AFORESAID COMPANY, BY OBSERVING IN THE FOLLOWING MANNER- INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMIT ED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERN ED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURCED A CONSIDERABLE PORTION OF THEI R BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERAT IONS BY ITSELF, IN OUR CONSIDERED OPINION, THESE TWO CASES WERE RIGHTLY EXCLUDED. IN VIEW OF THE OBSERVATIONS MADE BY THE DRP AS WELL AS THE DECISION OF THE ITAT MUMBAI IN THE CASE OF MAERSK G LOBAL SERVICE CENTRE, (SUPRA), WE ACCEPT THAT THIS COMPAN Y CANNOT BE TAKEN AS A COMPARABLE. AS COULD BE SEEN FROM THE FINDINGS OF THE CO-ORDINA TE BENCH, THE AFORESAID COMPANY UNLIKE THE ASSESSEE HAS OUTSO URCED CONSIDERABLE PORTION OF ITS BUSINESS TO THIRD PARTY VENDOR. HENCE, IT CANNOT BE CONSIDERED AS A COMPARABLE. THA T BESIDES THE DRP IN ASSESSEES OWN CASE FOR ASST. YEAR 2008- 09 HAS HELD THAT THIS COMPANY CANNOT BE TREATED AS A COMPARABLE . THEREFORE, CONSIDERING THE AFORESAID FACT, WE ARE OF THE VIEW 22 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. THAT M/S VISHAL INFORMATION TECHNOLOGY LTD., CANNO T BE TAKEN AS A COMPARABLE AND DIRECT FOR EXCLUDING THE SAME F ROM THE LIST OF COMPARABLES. 6. HCL COMNET SYSTEMS & SERVICES LIMITED, 8. INFOSYS BPO LIMITED AND 12. WIPRO LIMITED:- 6.9.1 OBJECTING TO THE AFORESAID COMPANIES BEING T REATED AS COMPARABLES, THE LEARNED AUTHORISED REPRESENTATI VE OF THE ASSESSEE SUBMITTED THAT HCL COMNET SYSTEM IS FUNCTI ONALLY DIFFERENT AS IT IS ENGAGED IN THE BUSINESS OF PROVI DING TELECOMMUNICATION AND REMOTE INFRASTRUCTURE MANAGEM ENT SERVICES. SO FAR AS INFOSYS BPO IS CONCERNED, IT WA S SUBMITTED THAT THIS COMPANY CANNOT BE COMPARED WITH THE ASSES SEE AS THERE IS DIFFERENCES IN FUNCTIONS, RISKS AND ASSETS PROFILE. IT WAS SUBMITTED THAT INFOSYS BRAND HAS A PREMIUM AND HENCE CANNOT BE CONSIDERED AS COMPARABLES TO RISK MITIGAT ED CONTRACT SERVICE PROVIDER WHICH DO NOT OWN OR TAKE RISKS TO DEVELOP INTANGIBLES. IT WAS FURTHER SUBMITTED THAT WIPRO LIMITED IS ALSO FUNCTIONALLY DIFFERENT AS THE COMPA NY OWNS SIGNIFICANT INTANGIBLES AND HENCE ENJOYS PREMIUM PR ICING. IT WAS SUBMITTED THAT 28% OF THE BPO REVENUE IS FROM P RODUCT ENGINEERING SERVICES. IT WAS FURTHER SUBMITTED THAT , MANUALLY CORRECTED AND UNAUDITED DATA FROM ITS TP REPORT HAS BEEN CONSIDERED WHICH CANNOT BE SAID TO BE AUTHENTIC. IN SUPPORT OF HIS CONTENTION FOR EXCLUDING THE AFORESAID THREE COMPANIES AS COMPARABLES, THE LEARNED AUTHORISED REPRESENTATI VE OF THE ASSESSEE RELIED UPON THE DECISION OF CAPITAL IQ INF ORMATION SYSTEMS INDIA P. LTD. VS. ADDL. CIT, CIRCLE 1(2), H YDERABAD (ITA 23 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. NO.124/HYD/2014 AND ITA.NO.170/HYD/2014 DATED 31.07.2014. 6.9.2 WE HAVE HEARD RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIAL ON RECORD. IT IS NOT DISP UTED THAT THESE THREE COMPANIES ARE HAVING HUGE TURNOVERS LI KE THAT OF ASSESSEE DURING THE YEAR. THEREFORE TURNOVER FILTER AS CONSIDERED IN OTHER CASES DOES NOT APPLY HERE. HOWE VER AS SUBMITTED THE FUNCTIONAL PROFILE OF COMPANIES AS SU CH IS DIFFERENT. BUT, IF THE BPO DIVISION IS SIMILAR TO A SSESSEE THE SAME CAN BE CONSIDERED AFTER PROPER FAR ANALYSIS. T HEREFORE WE ARE OF THE OPINION THAT TPO/AO CAN RECONSIDER TH E COMPARABLES AFTER GIVING DUE OPPORTUNITY TO ASSESS AND FAIRLY ANALYZING ITS OBJECTIONS. IN CASE THE DATA ( SEGMEN TAL OR UNIT) IS INCOMPLETE OR FUNCTIONAL PROFILE ETC ARE DIFFERE NT AO/TPO SHOULD EXCLUDE THE SAME. WITH THESE OBSERVATIONS TH E ISSUE OF SELECTION OF THESE COMPANIES AS COMPARABLES IS REST ORED TO TPO/AO TO DO THE NEEDFUL. 7. IN GROUND NO 10 ASSESSEE IS SEEKING ADJUSTMENT F OR DIFFERENCES IN FUNCTIONS AND RISKS UNDERTAKEN. WIT H REFERENCE TO THE RISK ADJUSTMENT, IT WAS THE SUBMISSION OF TH E ASSESSEE THAT ASSESSEE FUNCTIONED UNDER A LIMITED RISK ENVIR ONMENT WITH MOST OF THE RISKS BEING ASSUMED BY ITS AES AND COMPARABLES SELECTED FOR ANALYSIS INCLUDE COMPANI ES WHICH HAVE FAIRLY DIVERSIFIED AREAS OF SPECIALISATION, BE ARING RISKS AKIN TO ANY THIRD PARTY INDEPENDENT SERVICE PROVIDE R. SINCE ASSESSEE IS OPERATING IN A RISK MITIGATED ENVIRONME NT VIS--VIS THE COMPARABLE COMPANIES PERFORMING ENTREPRENEURIA L RISK TAKING FUNCTIONS, THE ASSESSEE SEEKS ADJUSTMENT FOR THE RISK BEING TAKEN BY THE COMPARABLE, WHOSE PROFIT WOULD B E MORE 24 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. DEPENDENT ON THE RISK INVOLVED. SINCE THE ASSESSEE DOES NOT BEAR ANY RISK OF INCURRING LOSSES AND SINCE COMPARA BLE COMPANIES WORK IN THE MARKET ENVIRONMENT, THE MARGI NS EARNED BY THE COMPARABLE COMPANIES WOULD BE COMPARA TIVELY MORE TO REFLECT THE HIGHER LEVEL OF FUNCTIONS AND R ISKS. IT WAS FURTHER SUBMITTED THAT IN THE TP DOCUMENTATION SUBM ITTED BY THE ASSESSEE, NO RISK ADJUSTMENT WAS MADE AS COMPAR ABLE SELECTED WERE WITHIN THE ARMS LENGTH RANGE. THE A SSESSEE RELIED ON A HOST OF CASES TO SUBMIT THAT ADJUSTMENT NEEDS TO BE MADE TO THE MARGINS OF THE COMPARABLES TO ELIMINATE DIFFERENCE ON ACCOUNT OF DIFFERENT FUNCTIONS, ASSETS AND RISKS . 7.1. TO THE EXTENT OF PRINCIPLES INVOLVED, WE AGR EE WITH THE ASSESSEES SUBMISSIONS THAT SOME OF THE COMPARA BLES MAY BE UNDERTAKING MARKET RISKS/ENTREPRENEURIAL RISKS, WHICH ARE NOT THERE IN THE CASE OF THE ASSESSEE. HOWEVER, TH E ISSUE BOILS DOWN TO QUANTIFICATION OF SUCH ADJUSTMENT. IN THE WRITTEN SUBMISSIONS, THE ASSESSEE BASED ON THE DECISION OF THE ITAT BANGALORE IN THE CASE OF PHILIPS SOFTWARE CENTRE PR IVATE LTD. VS. ACIT (119 TTJ 721)(BANG), WHICH PROVIDED FOR 4. 5% OF THE RISK ADJUSTMENT AS THE DIFFERENCE BETWEEN THE AVERA GE PRIME LENDING RATE AND AVERAGE BANK RATE, AS THE BASIS. SINCE THIS WORKING WAS NOT ACCEPTED BY THE ITAT MUMBAI BENCH I N THE CASE OF WILLIS PROCESSING SERVICES INDIA PRIVATE LT D. VS. DCIT, VIDE ITS ORDER DATED 17.12.2012 IN ITA NO.8772/MUM/ 2010 FOR ASSESSMENT YEAR 2006-07. THIS ADJUSTMENT OF 4.5% C ANNOT BE CONSIDERED BASED ON PRIME LENDING RATE, WHICH CANNO T BE CONSIDERED AS A MARKET RISK ADOPTED. HOWEVER, THE A SSESSEE IS RELYING ON TWO MORE CASES OF THE COORDINATE BENCHES IN THE CASE OF SONY INDIA LTD. (114 ITD 448)-DEL, WHEREIN THE TRIBUNAL DETERMINED THE RISK ADJUSTMENT AT 20% OF T HE ALP FOR 25 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. A RISK MITIGATED DISTRIBUTOR. IT ALSO RELIED ON TH E DECISION OF THE DELHI BENCH IN THE CASE OF ROLLS ROYCE PLC V/S. DCIT (90 SOT 42), WHEREIN IT WAS DETERMINED AT 35% OF THE C OMPANYS PROFITABILITY ALLOCATED TOWARDS MARKETING ACTIVITI ES. THEREFORE, IT WAS SUBMITTED THAT SINCE ASSESSEE DOES NOT HAVE ANY MARKETING ACTIVITIES, A 35% ADJUSTMENT IS WARRANTED FOR THE DIFFERENCE IN RISKS. IT ALSO SUBMITS THAT RISK AD JUSTMENT CAN ALSO BE COMPUTED UNDER THE CAPITAL ASSET PRICING MO DEL (CAPM)/SHARPE MODEL FOR RISK ADJUSTMENTS. IN THE P REVIOUS YEAR ALSO MATTER WAS RESTORED TO TPO/AO IN ASSESSEE OWN CASE. SINCE THE APPLICATION OF THE ABOVE DECISIONS AND FACTS HEREIN ARE TO BE EXAMINED VIS--VIS THE ASSESSEES BUSINESS MODEL, WE, WITHOUT GIVING ANY DIRECTION WITH REFE RENCE TO THE RISK ADJUSTMENT AND AMOUNT OF RISK ADJUSTMENT REQUI RED, RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFF ICER TO RE- EXAMINE THIS ADJUSTMENT ISSUE AFRESH, AFTER CONSIDE RING THE ASSESSEES SUBMISSIONS AND DECIDE THE ISSUE IN ACCO RDANCE WITH THE PRINCIPLES ON THE SUBJECT. 8. GROUND NO.12, IN TP ISSUES, IS WITH REFERENCE T O INCLUSION OF REIMBURSEMENT TRANSACTIONS AS PART OF OPERATIONAL COST. IT WAS SUBMITTED THAT THE ASSESSEE HAS PAID C ERTAIN AMOUNTS TOWARDS TRAVEL, AIR FARE AND SITE EXPENSES RELATING TO EMPLOYEES OF AE TRAVELLING TO INDIA FOR BUSINESS PU RPOSES. SIMILARLY, THE AES ALSO PAY CERTAIN EXPENSES OF THE ASSESSEE WHICH WERE REIMBURSED TO THE AE. IT WAS THE SUBMISS ION OF THE ASSESSEE THAT THESE AMOUNTS WERE ADJUSTED AT COST , WITHOUT MARK UP AS THE ASSESSEE OR AE PAID THE AMOUNT ON BE HALF OF THE OTHER FOR ADMINISTRATIVE CONVENIENCE AND NO SIG NIFICANT ADDITIONAL FUNCTIONS ARE BEING PERFORMED IN THESE T RANSACTIONS. EVEN THOUGH THESE TRANSACTIONS ARE CONSIDERED AS 26 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. INTERNATIONAL TRANSACTIONS FOR THE PURPOSES OF TP, SINCE THERE IS NO MARK UP ON THESE REIMBURSEMENTS, IT WAS THE SUBM ISSION THAT TPO FAILED TO APPRECIATE THAT THESE TRANSACTIO NS ARE TO BE EXCLUDED FOR WORKING OUT THE OPERATIVE COSTS/OPERAT IVE MARGINS, AND IT IS THE REQUEST THAT THE AMOUNTS OF REIMBURSEMENT SHOULD BE EXCLUDED FOR THIS PURPOSE. ASSESSEE RELIED ON THE DECISION OF THE DELHI BENCH OF THE TR IBUNAL IN THE CASE OF DCIT V/S. CHEIL COMMUNICATIONS INDIA P. LTD . (2010 TII 60 ITAT DEL TP) AND THE COORDINATE BENCH DECISI ON OF THE TRIBUNAL IN THE CASE OF FOUR SOFT LTD. V/S. DCIT ( ITA NO.1495/HYD/2010)(142 TTJ 358). 8.1 AFTER CONSIDERING THE RIVAL SUBMISSIONS AND FOLLOWING THE PRINCIPLES LAID DOWN IN THE DECISIONS OF THE TRIBUNAL CITED ABOVE, WE ARE OF THE OPINION THAT RE IMBURSEMENT COSTS SHOULD BE EXCLUDED AS THEY DO NOT INVOLVE AN Y FUNCTIONS TO BE PERFORMED SO AS TO CONSIDER IT FOR PROFITABIL ITY PURPOSES. IN THE CASE OF FOUR SOFT LTD. (SUPRA), HYDERABAD BE NCH OF THE TRIBUNAL CONSIDERED THIS ISSUE AND HELD AS UNDER- 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. FIRST, WE WILL TAKE UP THE ISSUE RELATING TO THE ADJUSTMENTS MADE BY THE ASSESSING O FFICER IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES IN THE SOFTWARE DEVELOPMENT SERVICES. I T IS THE CONTENTION OF THE ASSESSEE THAT BAD DEBTS INCURRED BY THE ASSESSEE COMPANY ARE IN RESPECT OF TRANSACTIONS, WH ICH ARE NOT RELATED TO ASSOCIATED ENTERPRISES. THIS CONTENT ION OF THE ASSESSEE HAS NOT BEEN CONTROVERTED BY THE REVENUE B Y BRINGING ANY MATERIAL ON RECORD BEFORE US. IT IS TH E CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT SUCH B AD DEBTS CANNOT BE TAKEN INTO ACCOUNT FOR COMPUTING THE MARG IN OF THE ASSESSEE FROM THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES IN RESPECT OF SOFTWARE DEVELOPMENT SERV ICES. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED BEF ORE US A COMPARATIVE CHART EXPLAINING THE COMPUTATION OF NET MARGIN, EXCLUDING THE BAD DEBTS AND CLEARLY DEMONSTRATED BE FORE US 27 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. THAT IF THE BAD DEBTS/REIMBURSEMENTS ARE EXCLUDED F OR THE PURPOSE OF COMPUTING THE MARGINS ON THE TRANSACTION S RELATING TO THE ASSOCIATED ENTERPRISES, THE NET MAR GIN COMES TO 19.07%, WHICH IS WELL COMPARABLE WITH THE ARMS L ENGTH MARGIN OF 19% DETERMINED BY THE TRANSFER PRICING OF FICER. IN OUR CONSIDERED VIEW, FOR COMPUTING THE NET MARGIN O F THE ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING, ONLY THE COST RELATED TO THE TRANSACTION WITH THE ASSOCIATED ENTE RPRISES HAS TO BE CONSIDERED AND ACCORDINGLY, WE APPROVE TH AT SEGMENTAL FINANCIALS IS TO BE CONSIDERED FOR THE PU RPOSE OF ARRIVING AT THE NET MARGIN ON THE INTERNATIONAL TRA NSACTION WITH THE ASSESSEE'S ENTERPRISE IN RESPECT OF SOFTWA RE DEVELOPMENT SERVICES. IN THAT PROCESS, BAD DEBTS/ REIMBURSEMENTS HAS TO BE EXCLUDED AND SEGMENTAL PROFITABILITY HAS TO BE ADOPTED. WE FIND SUPPORT IN THIS BEHALF FROM VARIOUS DECISIONS OF THE TRIBUNAL RELIE D UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE DULY FILING CO PIES THEREOF IN THE PAPER-BOOK, WHICH HAVE BEEN NOTED HEREINABOVE. THAT BEING SO, THE TPO SHOULD HAVE DET ERMINED THE ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSAC TIONS WITH ASSOCIATED ENTERPRISES CONSIDERING ONLY THE OPERATI NG COST ALLOCABLE TO THE ASSOCIATED ENTERPRISES SEGMENT. SI NCE THE ASSESSING OFFICER HAD NO OCCASION TO VERIFY THE VER ACITY OF THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPA NY, FOR LIMITED PURPOSE, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPA NY AND ADOPT THE SAME FOR ARRIVING AT THE NET MARGIN O N THE INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF SO FTWARE DEVELOPMENT SERVICES. WE DIRECT ACCORDINGLY. SIMILAR VIEW WAS ALSO TAKEN IN ASSESSEE OWN CASE IN AY2006- 07. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THE REIMBURSEMENT COSTS WHIL E WORKING OUT THE OPERATING COSTS. THIS GROUND IS CONSIDERED ALLOWED. 9. IN AFORESAID VIEW OF THE MATTER, WE DIRECT THE ASSESSING OFFICER TO DETERMINE THE ALP KEEPING IN V IEW THE DIRECTIONS GIVEN BY US HEREINBEFORE IN RESPECT OF E ACH OF THE COMPARABLES SPECIFICALLY OBJECTED TO BY THE ASSESSE E. ASSESSEES GROUNDS 1 TO 12 ARE PARTLY ALLOWED. 28 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 10. SOME OF THE LEGAL ISSUES RAISED IN THE GROUNDS ON THIS TP ISSUE ARE NOT AGITATED BEFORE US, AS EXCLU SION OF SOME OF THE COMPARABLES ONLY WERE CONTESTED AND BY EXCL UDING THEM, THE PLI DETERMINED FROM THE REST OF THE COMP ARABLES MAY FALL WITHIN PERMISSIBLE RANGE AS PER PROVISO T O S.92C(2). SOME OF THE ISSUES ALSO BECOME ACADEMIC IN NATURE, IF THE ULTIMATE ALP DETERMINED IS WITHIN THE PERMISSIBLE RANGE OF THE ASSESSEES PLI. HOWEVER, THIS ASPECT CANNOT BE EX AMINED BY US, AS THE TPO WAS DIRECTED TO VERIFY OTHER ADJUSTM ENTS REQUIRED, AND THEREFORE, WE HOLD THAT IT IS PREMATU RE TO CONSIDER THE GROUNDS RAISED IN THIS BEHALF. THE ASS ESSING OFFICER/TPO IS DIRECTED TO GIVE EFFECT TO THE PROVI SIONS OF S.92C, AFTER DECIDING THE PLI AND ALP AND THEN ARRIVE AT P ROPER CONCLUSION. NEEDLESS TO SAY, THE ASSESSING OFFICER /TPO WILL ALLOW A REASONABLE OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE IN THE FRESH PROCEEDINGS. CORPORATE MATTERS. 11. RE-CHARACTERISATION OF FOREIGN EXCHANGE GAIN: DURING THE YEAR, THE ASSESSEE HAS FOREIGN EXCHANGE GAIN OF RS.6,73,55,469 ON ACCOUNT OF FOREIGN EXCHANGE FLUCT UATIONS ACCOUNTED IN ACCORDANCE WITH THE ACCOUNTING STANDAR D -11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND TREATED AS BUSINESS INCOME OF UNIT. AO WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT ALLOWED LESSER DEDUCT ION BY REDUCING FOREIGN EXCHANGE GAIN FROM THE PROFITS OF THE BUSINESS. DRP IN RESPECT OF THE OBJECTIONS ON COMPUTATION OF 10A HAS HELD THAT THOUGH THEY AGREE WITH ASSESSEE 'S POSITIONS, RELIEF IS NOT PROVIDED SO AS TO PROVIDE OPP ORTUNITY TO THE AO TO KEEP THE ISSUE ALIVE. 29 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. 11.1. THE ISSUE IS NO LONGER RES INTEGRA AND THE HON'BLE SPECIAL BENCH IN CASE OF ITO VS BANYAN CHEMICALS P. LTD., (2009) 310 ITR (AT) 384 (AHMEDABAD) H AS HELD THAT FOREIGN EXCHANGE GAIN ON ACCOUNT OF FLUCTUATION QUA EXPORTS BUSINESS IS ELIGIBLE FOR EXEMPTION U/S 10B. CO ORDINATE BENC H AT HYDERABAD TRIBUNAL IN ASSESSEE'S OWN CASE FOR AY 20 06-07 HELD AS FOLLOWS: '27. SINCE THIS ISSUE IS NO LONGER RES INTEGRA AND SINCE FOREIGN EXCHANGE GAIN IS ON ACCOUNT OF FLUCTUATIONS OF THE FOREIGN EXCHANGE RECEIVED FOR THE SERVICES RENDERED BY THE ASSESSEE, THIS HAS TO BE TREATED AS BUSINESS INCOME AND IT HAS TO HE CONSIDERED AS PROFITS OF THE BUSINESS FOR COMPUTING THE DEDUCTION UNDER S.10A OF THE ACT. THE ASSESSING OFFICER IS DIRECTED TO TREAT ACCORDINGLY. THE GROUND IS CON SIDERED AS ALLOWED. ' THE FACTS BEING SIMILAR, WE DIRECT AO TO TREAT FORE IGN EXCHANGE GAIN AS BUSINESS INCOME AND ALLOW THE DEDUCTION ACC ORDINGLY. GROUND 13 IS ALLOWED. 12. IN GROUND NO.14, ASSESSEE HAS CHALLENGED TH E REDUCTION OF COMMUNICATION CHARGES OF RS.5,53,90,91 4 FROM THE EXPORT TURNOVER WITHOUT REDUCING IT FROM THE TO TAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. 12.1. WE HAVE HEARD SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE IS SQUAR ELY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF HONB LE BOMBAY HIGH COURT IN CASE OF CIT VS. GEM PLUS JEWELLERY LT D (330 ITR 175) AND THE DECISION OF INCOME-TAX APPELLATE TRIB UNAL, CHENNAI SPECIAL BENCH IN CASE OF ITO VS. SAK SOFT L IMITED (313 ITR 353 (AT)]. IN FACT, THE DRP THOUGH ACCEPTS SUC H POSITION BUT HAS DECIDED THE ISSUE AGAINST THE ASSESSEE ONLY TO GIVE AN OPPORTUNITY TO THE DEPARTMENT TO PURSUE THE SAME. THEREFORE, 30 ITA.NO.1826/HYD/2011 M/S. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., HYDERABAD. FOLLOWING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY (SUPRA) AND OF T HE INCOME- TAX APPELLATE TRIBUNAL, CHENNAI SPECIAL BENCH IN CA SE OF ITO VS. SAK SOFT LIMITED (SUPRA), WE DIRECT THE ASSESSI NG OFFICER TO REDUCE COMMUNICATION CHARGES BOTH FROM THE EXPORT T URNOVER AS WELL AS THE TOTAL TURNOVER FOR COMPUTING EXEMPTI ON U/S 10A OF THE ACT. THIS GROUND NO 14 OF THE ASSESSEE IS A LLOWED. 13. IN GROUND NOS. 15 AND 16, THE ASSESSEE HA S CHALLENGED LEVY OF INTEREST U/S 234B AND 234C OF TH E ACT AND INITIATION OF PENALTY PROCEEDINGS U/S 271(1)( C) OF THE ACT. THE ISSUES RAISED IN THESE GROUNDS BEING CONSEQUENTIAL TO THE FINAL DETERMINATION OF INCOME , THESE GROUNDS HAVE BECOME INFRUCTUOUS, HENCE DISMISSED. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24.10.20 14. SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 24 TH OCTOBER, 2014 VBP/- COPY TO 1. HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., P LOT NO.8, SURVEY NO.64, HITECH CITY, HYDERABAD 081. 2. THE ACIT, CIRCLE 2(2), I.T. TOWERS, MASAB TANK, 8 TH FLOOR, HYDERABAD 500 004. 3. DISPUTES RESOLUTION PANEL, HYDERABAD 4. DIT, INTERNATIONAL TAXATION, BANGALORE. 5. D.R. ITAT B BENCH, HYDERABAD.