M/s eBizNet Solutions Private Limited, Hyderabad V. Asst.Commissioner of Income Tax, Circle-17(1), Hyderabad

ITA 1863/Hyd/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 1225 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 14-11-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Transfer pricing; International transaction; Question of law
• Section: 271(1)(c); 143(3); 115JB; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A , HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1863/ HYD/ 2017 ASSESSMENT YEAR: 20 2013 - 14 M/S. EBIZNET SOLUTIONS PRIVATE LIMITED, Q - 1, A - 1, 10 TH FLOOR, HITECH CITY, MADHAPUR, HYDERABAD 500 081. PAN: AACCE 1963 F VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 7(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY: SRI P. MURALI MOHAN RAO REVENUE BY: SRI J. SIRI KUMAR, DR DATE OF HEARING: 01.10 .2018 DATE OF PRONOUNCEMENT: 28 . 1 1 .2018 ORDER PER SMT. P. MADHAVI DEVI, J.M.: THIS IS ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2013 - 14 AGAINST THE FINAL ASSESSMENT ORDER DATED 28.09.2017 PASSED U/S 143(3) R.W.S 92CA(3) AND 144C(13)OF THE ACT. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - EACH OF THE GROUNDS OF APPEAL IS MUTUALLY EXCLU SIVE OF, INDEPENDENT AND WITHOUT PREJUDICE TO OTHER. BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICER (AO), LEARNED TRANSFER PRICING OFFICER (TPO) AND THE HONOURABLE DISPUTE RESOLUTION PANEL (DRP) 1. ERRED IN MAKING ALP ADDITION OF RS.30,50,969/ - TOWARDS SOFTWARE DEVELOPMENT SERVICES WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS ADOPTED INTERNAL TNMM AS MOST APPROPRIATE METHOD (M A M) AND 2 FOUND THAT THE PLI OF THE ASSESSEE IS HIGHER THAN THE AVE RAGE PLI OF THE COMPARABLE COMPANIES. 1.1 ERRED IN ENHANCING THE ADDITION FROM RS.17,90,227/ - TO RS.30,50,969/ - WHICH IS NOT IN ACCORDANCE WITH THE PROVISIONS OF ACT. 1.2 ERRED IN INCORRECTLY CALCULATING THE AVERAGE MARGIN OF THE COMPARABLES SELECTED B Y TPO TO 19.17% AFTER EXCLUDING TATA ELXSI LTD AND KALS INFORMATION SYSTEMS LIMITED. 1.3 ERRED IN REJECTING THE TP DOCUMENTATION, BENCHMARKING ANALYSIS AND ECONOMIC ANALYSIS SUBMITTED BY THE ASSESSEE BY SHOWING INAPPROPRIATE REASONS AND NOT SUPPORTED BY ANY MATERIAL EVIDENCE. 1.3.A ERRED IN REJECTING THE ECONOMIC ANALYSIS MADE BY THE ASSESSEE WITHOUT ASCRIBING ANY COGENT REASON FOR SUCH REJECTION DURING THE YEAR. 1.3.B OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE HAS PREPARED TP DOCUMENTATION IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES. 1.4 ERRED IN MAKING ALP ADJUSTMENT OF RS.30,50,969/ - IN RESPECT OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES (SDS) BY REJECTING THE INTERNAL TRANSACTIONAL NET MARGIN METHOD (TNMM) ADOPTE D BY THE ASSESSEE WHEREIN THE PROFIT LEVEL INDICATOR (PLI) OF TRANSACTION WITH AE AND NON AE WAS COMPARED AND ACCORDINGLY THE BE CHM ARKING ANALYSIS WAS PERFORMED BY ASSESSEE. 1.4.A. ERRED IN NOT COMPLYING WITH THE RULE 10B(1)(E)(I ) OF THE RULES, AS PER WHICH THE OPERATING MARGIN HAS TO BE CALCULATED ONLY IN RESPECT OF TRANSACTIONS ENTERED WITH AE. 1.4.B. ERRED IN REJECTING THE INTERNAL TNMM METHOD ADOPTED BY THE ASSESSEE ON THE GROUND THAT ASSESSEE HAS NOT PROVIDED THE COST AUDIT REPORT AND SEGMENTAL AUDIT REPORT BY STATING THAT THE EXPENDITURE IS ALLOCATED BASED MERELY ON ASSUMPTION. L.4.C. OUGHT TO HAVE APPRECIATED THE FACT THAT THE SEGMENTAL DETAILS HAVE BEEN AUDITED AND APPORTIONMENT OF COST IS MADE BETWEEN AE'S AND NON AE'S ON ACTUAL BASIS. L.4.D. OUGHT TO HAVE ACCEPTED THE INTERNAL TNMM ADOPTED BY ASSESSEE, WHEREIN THE NET OPERATING MARGIN W.R.T AE TRANSACTIONS ARE COMPARED WITH THAT OF NON AE TRANSACTIONS. 1.4.E. OUGHT TO HAVE FOLLOWED RULE 10B(3) OF INCOME TAX RULES, 1962 WHEREIN IT IS STATED THAT INTERNAL COMPARABLES HAVE TO BE GIVEN PREFERENCE AS PRICE CHARGED BY ASSESSEE FOR CONTROLLED TRANSACTIONS WITH AES CAN BE COMPARED WITH SIMILAR UNCONTROLLED TRANSACTIONS WITH THIRD PARTIES. L.4.F. OUGHT TO HAVE APPRECIATED THE FACT THAT AS PER RULE 10B(1)(E)(II) OF IT RULES, IF, SEGMENTAL DETAILS ARE AVAILABLE, THEN, INTERNAL TNMM HAS TO BE PREFERRED OVER ALL OTHER METHODS INCLUDING EXTERNAL TNMM. 3 1.4.G. OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE GOT AUDITED THE SEGMENTAL DETAILS BY A QUALIFIED CHARTERED ACCOUNTANT, HENCE ARE RELIABLE AND SHALL BE CONSIDERED. 1.5 ERRED IN ADOPTING THE ASSESSEE'S OVERALL LEVEL MARGIN INSTEAD OF COMPARING TRANSACTION LEVEL MARGIN AS PLI FOR COMPARING WITH THE AVERAGE PLI OF THE E XTERNAL COMPARABLES. I L.5.A OUGHT TO HAVE FOLLOWED RULE 10B(1)(E) OF THE TRANSFER PRICING RULES WHICH PROVIDES THAT, THE NET MARGIN OF THE ASSESSEE UNDER TNMM SHOULD BE CALCULATED ONLY IN RESPECT OF TRANSACTIONS ENTERED WITH THE AE. L.5.B OUGHT TO HAV E FOLLOWED RULE 10B(3) OF THE INCOME TAX RULES, 1962, WHICH PROVIDES THAT, WHILE CALCULATING THE ALP OF THE TRANSACTIONS ENTERED WITH AES, THE COST WHICH ARE DIRECTLY RELATED TO THE TRANSACTIONS SHOULD BE CONSIDERED. 1.6 ERRED IN CALCULATING THE PLI (OP/ OC) OF THE ASSESSEE AT 9.14% INSTEAD OF CORRECT PLI (OP/OC) OF 27.37%. 1.6.A.ERRED IN NOT EXCLUDING INTEREST OF RS.7,19,501/ - , PREOPERATIVE EXPENSE OF RS. 6,503/ - BEING NON - OPERATING COST AND EMPLOYEE COST ON ACCOUNT OF EXCESS CAPACITY OF RS. 72,83,464/ - BEING EXTRA ORDINARY IN NATURE, THEREBY NON - OPERATING COST. 1.6.B.OUGHT TO HAVE APPRECIATED THE FACT THAT THE EMPLOYEE COST OF RS.72,83,464/ IS ON ACCOUNT OF EXCESS CAPACITY RECRUITMENT AND NOT ON ACCOUNT OF LESS UTILISATION OF EMPLOYEE CAPACITY. HENC E IT BEING EXTRA ORDINARY IN NATURE NEED NOT BE CONSIDERED FOR CALCULATING THE OPERATING MARGIN OF THE ASSESSEE. 1.6.C. OUGHT TO HAVE APPRECIATED THE FACT THAT THE INTEREST COST OF RS.7,19,501/ - AND PREOPERATIVE EXPENSES OF RS.6,503/ - ARE NON OPERATING COST AND HENCE CANNOT BE CONSIDERED FOR CALCULATING THE OPERATING MARGIN OF THE ASSESSEE. 1.6.D.ERRED IN NOT PROVIDING RISK ADJUSTMENT TO ASSESSEE WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS HAVING A SINGLE CUSTOMER. 1.6.E. OUGHT TO HAVE APPRECIATED THAT THE RISK ADJUSTMENT IS TO BE PROVIDED AS THE ASSESSEE IS FUNCTIONING AS A LIMITED RISK SERVIC E PROVIDER WHILE THE COMPARABLE COMPANIES ARE ASSUMED TO BE EXPOSED TO SIGNIFICANT DEGREE OF RISK. 1.7 ERRED IN INCORRECTLY APPLYING FILTERS DUE TO WHICH THE INAPPROPRIATE COMPANIES ARE SELECTED AS COMPARABLES. 1.7.A.ERRED IN FOLLOWING THE CHERRY PICKI NG APPROACH IN SELECTION OF COMPARABLES WHICH IS AGAINST THE PROVISIONS OF THE ACT AND CANNOT BE ACCEPTED. 1.7A.ERRED IN INCLUDING CONSULTANCY IN THE BASIC INDUSTRY FILTER. 4 1. 8 ERRED IN SELECTING 8 COMPANIES AS COMPARABLES OUT OF WHICH THE FOLLOWING 6 COMPANIES ARE NOT TRUE COMPARABLES TO THE ASSESSEE. 1. 8 .A. ERRED IN SELECTING RS SOFTWARE (INDIA) LTD. AS A COMPARABLE WITHOUT APPRECIATING THE FACT THAT THE SAME IS FUNCTIONALLY DISSIMILAR, HAS A TURNOVER OF MORE THAN RS. 2 00 CRORES AND WHOSE PROFITS ARE AFFECTED BECAUSE OF EXTRAORDINARY EVENTS OCCURRED IN THE RELEVANT FINANCIAL YEAR. 1 .8 .B.ERRED IN SELECTING MINDTREE LTD. AS A COMPARABLE WITHOUT APPRECIATING THE FACT THAT THE SAME IS FUNCTIONALLY DISSIMILAR, HAS A TURNOVE R OF MORE THAN RS. 200 CRORES, AND IS ENGAGED IN VARIOUS BUSINESSES OF WHICH SEGMENTAL DETAILS ARE UNAVAILABLE. THE TPO HAS ALSO ERRED IN INCORRECTLY CALCULATING THE OPERATING MARGIN OF THE COMPARABLE COMPANY. 1. 8 .C. ERRED IN SELECTING CG - VAK SOFTWARE & EXPORTS LTD. AS A COMPARABLE WITHOUT APPRECIATING THE FACT THAT THE SAME IF FUNCTIONALLY DISSIMILAR. 1. 8 .D.ERRED IN SELECTING PERSISTENT SYSTEMS LTD. AS A COMPARABLE WITHOUT APPRECIATING THE FACT THAT THE SAME IS FUNCTIONALLY DISSIMILAR, HAS A TURNOVER O F MORE THAN RS.200 CRORES, IS A GIGANTIC COMPANY HAVING SUPER NORMAL PROFITS AND IS ENGAGED IN VARIOUS BUSINESSES OF WHICH SEGMENTAL DETAILS ARE UNAVAILABLE. 1.8.E. ERRED IN SELECTING INFOBEANS TECHNOLOGIES AS A COMPARABLE WITHOUT APPRECIATING THE FACT T HAT THE SAME IF FUNCTIONALLY DISSIMILAR, AND IS ENGAGED IN VARIOUS BUSINESSES OF WHICH SEGMENTAL DETAILS ARE UNAVAILABLE. 1.8.F. ERRED IN SELECTING L& T INFOTECH LTD. AS A COMPARABLE WITHOUT APPRECIATING THE FACT THAT THE SAME IF FUNCTIONALLY DISSIMILAR, HAS A TURNOVER OF MORE THAN RS. 200 CRORES., IS A GIGANTIC COMPANY HAVING SUPER NORMAL PROFITS, AND IS ENGAGED IN VARIOUS BUSINESSES SEGMENTAL DETAILS OF WHICH ARE UNAVAILABLE. 1.9 ERRED IN REJECTING TATA ELXSI AS A COMPARABLE BY STATING THAT THE SAME I S FUNCTIONALLY DISSIMILAR TO THE ASSESSEE WITHOUT APPRECIATING THE FACT THAT ASSESSEE HAS NOT OBJECTED FOR EXCLUSION OF THE COMPANY AS COMPARABLE. 1.LO . WITHOUT PREJUDICE TO ABOVE, THE TPO OUGHT TO HAVE REJECTED THE COMPANIES, 1. MINDTREE LTD, 2.CG - VAK S OFTWARE & EXPORTS LTD, 3. PERSISTENT SYSTEMS LTD, 4. INFOBEANS TECHNOLOGIES, 5. L& T INFOTECH LTD FROM THE FINAL LIST DUE TO THE ABOVE REASONS MENTIONED AND HAS COMPARED 2 COMPANIES( CTIL LIMITED AND RS SOFTWARE (INDIA) LIMITED) AVERAGE PLI WITH THE ASSESS EE. 1.LO.A. THE AVERAGE PLI OF THE BALANCE 2 COMPANIES AFTER ELIMINATION OF 5 COMPANIES IS 1.92% WHICH IS LOWER THAN THE ASSESSEE'S PLI OF 9.14%. HENCE, NO ALP ADJUSTMENT IS REQUIRED TO BE MADE IN THE PRESENT CASE. 1.11 ERRED IN CONSIDERING PBDD AS NON - OPERATING IN NATURE FOR THE PURPOSE OF COMPUTING OPERATING PROFIT MARGINS OF THE COMPARABLE 5 COMPANIES PROPOSED. HOWEVER, THE LD. TPO HAS NOT PROVIDED ANY PLAUSIBLE REASON FOR CONSIDERING THE SAID ITEM AS NON - OPERATING IN THE NOTICE 1.12 ERRED IN OBTAINING INFORMATION UL S 133(6) OF THE ACT AND NOT USING THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. 2. ERRED IN INITIATING PENALTY PROCEEDINGS UL S. 271(1)(C) OF THE INCOME TAX ACT. ADDITIONAL GROUNDS OF APPEAL 2. T HEREAFTER, VIDE LETTER DATED 18.09.2018, THE ASSESSEE HAS FILED THE FOLLOWING ADDITIONAL GROUNDS OF APPEAL: - WITHOUT PREJUDICE TO THE GROUNDS NO. 1 TO 2 FILED ON 14.11.2017, HEREWITH WE SUBMIT: EACH OF THE GROUNDS OF APPEAL IS MUTUALLY EXCLUSIVE, INDEPE NDENT AND WITHOUT PREJUDICE TO OTHER. 3. WE WOULD LIKE TO SUBMIT THAT AS PER THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT OF INDIA IN THE CASE OF NATIONAL THERMAL POWER CO. LTD VS. CIT (1998) 229 ITR 383 (SC) THE IT AT HAS JURISDICTION TO EXAMINE THE QUESTION OF LAW WHICH THOUGH NOT AROSE BEFORE THE LOWER AUTHORITIES BUT AROSE BEFORE THE IT AT FOR THE FIRST TIME. 4. THE LD.TPO / A.O / DRP OUGHT TO HAVE ALLOWED UNDER UTILISATION OF CAPACITY ADJUSTMENT AS THERE IS A DIFFERENCE IN LEVEL OF CAPACITY UTILI ZATION OF ASSESSEE AND LEVEL OF CAPACITY UTILIZATION OF COMPARABLES. ACCORDINGLY, ADJUSTMENT WOULD BE REQUIRED TO BE MADE TO PROFIT MARGIN OF COMPARABLE ON ACCOUNT OF DIFFERENCE IN CAPACITY UTILIZATION IN TERMS OF RULE 10 - B (L)(E)(III) 5. THE LD.TPO / A.O. / DRP OUGHT TO HAVE APPRECIATED THAT THE EXCESS CAPACITY COST IS NON OPERATING COST IN NATURE BECAUSE IT DOES NOT GENERATE ANY REVENUE ON A REGULAR BASIS AND THE ASSESSEE HAS TO MAINTAIN EXCESS STAFF CAPACITY AS COMPANY CANNOT QUICKLY HIRE PEOPLE WITH REQUIRED SKILLS, KNOWLEDGE AND EXPERIENCE. 6. THE LD.TPO / A.O. / DRP ERRED IN NOT APPRECIATING THE FACT THAT THE COMPARABLE COMPANIES DO NOT BEAR ANY IDLE COSTS IN TERMS OF EXCESS STAFF CAPACITY COSTS WHEREAS THE ASSESSEE COMPANY INCURS SIGNIFICANT IDLE EMPLOYEE COST. 7. THE LD.TPO / A.O. / DRP ERRED IN NOT EXCLUDING THE LARSEN AND TUOBRO INFOTECH LTD, FROM THE FINAL SET OF COMPARABLES, SINCE IT IS FUNCTIONALLY DISSIMILAR, HAS HIGH TURNOVER & NO SEGMENTAL INFORMATION IS AVAILABLE. 8. THE LD.TPO / A.O . / DRP ERRED IN NOT EXCLUDING THE PERSISTENT SYSTEMS LTD, FROM THE FINAL SET OF COMPARABLES, ALTHOUGH IT IS FUNCTIONALLY DISSIMILAR, ENGAGED IN SOFTWARE PRODUCT DEVELOPMENT, NO SEGMENTAL INFORMATION IS AVAILABLE. 6 9. THE LD.TPO / A.O. / DRP ERRED IN NOT EXCLUDING INFOBEANS TECHNOLOGIES LTD FROM THE FINAL SET OF COMPARABLES AS IT IS FUNCTIONALLY DISSIMILAR I.E. INTO DEVELOPMENT - OF SOFTWARE PRODUCT. 10. THE LD.TPO / A.O. / DRP ERRED IN NOT EXCLUDING RS SOFTWARE INDIA LTD FROM THE FINAL SET OF COMPARABLES, SINCE IT IS HAS HUGE ONSITE EXPENSES AND IS FUNCTIONALLY DISSIMILAR. 11. THE LD.TPO / A.O. / DRP ERRED IN NOT EXCLUDING CG - VAK SOFTWARE & EXPORTS LIMITED FROM THE FINAL SET OF COMPARABLES, SINCE IT IS FUNCTIONALLY DISSIMILAR. 12. THE ASSESSEE MAY ADD, ALTER OR MODIFY ANY OTHER POINT TO THE GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE - CO MPANY, ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICE, FILED ITS RETURN OF INCOME FOR THE A.Y. 2013 - 14 ON 30.09.2013 DECLARING NIL INCOME UNDER THE NORMAL PROVISIONS OF THE I.T. ACT, 1961 AND A BOOK PROFIT OF RS. 39,37,350/ - U/S 115JB OF THE ACT . DURING THE ASSESSM ENT PROCEEDINGS U/S 143(3) OF THE ACT, A.O. OBSERVED THAT THE ASSESSEE HAS ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS AE FOR PROVIDING SOFTWARE DEVELOPMENT SERVICES. THEREFORE, THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION WAS REFERRED TO THE TPO U/S 92CA OF THE ACT. THE TPO PASSED ORDER VIDE PROCEEDINGS F.NO. M/S. EBIZNET SOLUTIONS PVT LTD DATED 31.10.2016 AND A RECTIFI CATION ORDER WAS ALSO PASSED ON 26.11.2016. IN THE SAID ORDER, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT U/S 92CA(3) OF THE ACT TO THE TUNE OF RS. 17,90,237/ - . IN ACCORDANCE WITH THE SAME, DRAFT ASSESSMENT ORDER WAS PROPOSED AGAINST WHICH THE ASSESSEE PRE FERRED ITS OBJECTIONS TO THE DRP. THE DRP GRA N TED PARTIAL RELIEF TO THE ASSESSEE AND THEREAFTER , IN ACCORDANCE WITH THE SAME , A.O. PASSED THE FINAL ASSESSMENT ORDER AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 7 4. LEARNED COUNSEL FOR THE ASSESSEE HAS FILED A CHART BEFORE US, GIVING DETAILS OF THE CALCULATION OF THE PLI OF THE ASSESSEE. HE SUBMITTED THAT THE ASSESSEE HAD BOTH AE AND NON - AE SEGMENTS AND THE ASSESSEE HAD TAKEN ONLY THE AE SEGMENT AND ACCORDING TO THE AUDITED SEGMENTAL RESULTS , THE ASSESS EES MARGIN FROM THE AE SEGMENT WAS 21.07% , WHEREAS THE TPO ARRIVED AT A MARGIN OF 9.14%. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE WHERE THE AUDITED SEGMENTAL RESULTS ARE AVAILABLE, A.O. IS BOUND TO CONSIDER THE SAME AND THAT , IN CASE OF THE ASSESSE E, IF THE SAID RESULTS ARE ADOPTED, THE ASSESSEES MARGIN WOULD FALL WITHIN (+) OR ( - ) 3% OF THE AVERAGE MARGIN OF THE COMPARABLES COMPUTED BY THE TPO AND THEREFORE, THERE WOULD BE NO ADJUSTMENT REQUIRED TO BE MADE. HE THEREFORE, SOUGHT A DIRECTION TO THE A. O. TO CONSIDER ONLY THE AUDITED SEGMENTAL MARGINS OF THE ASSESSEE. IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: - (I) M/S. CURA TECHNOLOGIES VS. DCIT (ITA NO.301/HYD/2017, ORDER DATED 11.05.2018) AND (II) KENEXA TECHNOLOGIES PRIVA TE LIMITED VS. DCIT (37 ITR(T) 306). 5. LEARNED DEPARTMENTAL REPRESENTATIVE WAS ALSO HEARD. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE IS HAVING BOTH THE AE AND NON - AE SEGMENTS AND THEREFORE, AS FAR AS IN TERNATIONAL TRANSACTIONS ARE CONCERNED, ONLY THE TRANSACTIONS WITH AE ARE TO BE CONSIDERED FOR ALP. ACCORDING TO THE ASSESSEES OWN CALCULATION, THE OPERATING MARGIN COST OF AE TRANSACTIONS , AFTER REDUCING ONLY THE EMPLOYEE BENEFIT EXPENSES , WAS 77 .24% WHEREAS AFTER REDUCING THE ADMINISTRATIVE EXPENSES , IT HAS COME DOWN TO 21.07% AND THE AGGREGATING OPERATING MARGIN WITH THE AE AND NON - AE TRANSACTIONS IS 9.17%. WE FIND THAT THE A.O. AND THE DRP HAVE HELD THAT THE ASSESSEES AUDITED SEGMENTAL RESU LT S CANNOT BE 8 ACCEPTED, BECAUSE THE ADMINISTRATIVE EXPENSES HAV E NOT BEEN CONSIDERED BY THE ASSESSEE FOR COMPUTING ITS OPERATING MARGIN . W E FIND THAT THIS FINDING OF BOTH THE AUTHORITIES BELOW IS ERRONEOUS. IN VIEW OF THE SAME, WE DEEM IT FIT AND PROPER TO REMIT THE ISSUE TO THE FILE OF THE A.O. / TPO FOR VERIFICATION OF THIS ISSUE AND TO CONSIDER ONLY THE AUDITED SEGMENTAL RESULTS OF THE ASSESSEES AE TRANSACTION AND IF IT IS FOUND THAT THE ADMINISTRATIVE EXPENSES ALSO HAVE BEEN CONSIDERED IN COMPUTING THE AE RESULTS PROPERLY , THEN, SINCE THE MARGIN OF THE ASSESSEE FALLS WITHIN (+) OR ( - ) 5% OF THE AVERAGE MARGIN OF THE COMPARABLE COMPANIES, NO ADJUSTMENT WOULD BE REQUIRED. A.O. / TPO ARE DIRECTED ACCORDINGLY. 7. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 28 TH NOVEMBER , 2018. SD/ - SD/ - (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 28 TH NO VEMBER , 2018 OKK COPY TO: - 1) P. MURALI & CO., CHARTERED ACCOUNTANTS,6 - 3 - 655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD - 500082. 2) ACIT, CIRCLE - 17(1), HYDERABAD. 3) DCIT (TP) - 3, HYDERABAD. 4) DRP - 1, BANGALORE. 5) THE DR, ITAT, HYDERABAD 6) GUARD FILE