TNS India Pvt. Ltd., Hyd, Hyderabad V. ACIT, Circle-2(3), Hyderabad

ITA 1927/HYD/2011

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6280 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 1 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 18-10-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 16-11-2011
• Court: TRIBUNAL
• Department Lawyers: P CHANDRA SEKHAR
• Assessee Lawyers: SUVIBHA NOLKHA ARS
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; International transaction; Capital expenditure
• Section: 133(6); 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 1927/HYD/2011 ASSESSMENT YEAR: 2007-08 TNS INDIA PRIVATE LIMITED, HYDERABAD [PAN: AABCN2278F] VS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-2(3), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI DEEPAK CHOPRA & MS. SUVIBHA NOLKHA, ARS FOR REVENUE : SHRI P. CHANDRA SEKHAR, DR DATE OF HEARING : 18-10-2016 DATE OF PRONOUNCEMENT : 06-01-2017 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER PASSED U/S.143(3) R.W.S. 92CA(3) R.W.S. 144C (13) OF THE INCOME TAX ACT (ACT). ASSESSEE HAS RAISED VARI OUS ISSUES WITH REFERENCE TO TRANSFER PRICING ADJUSTMENTS AS WELL AS CORPORATE ISSUES. 2. BRIEFLY STATED, ASSESSEE IS ENGAGED IN RENDERING MARKET RESEARCH AND RELATED BACK OFFICE SERVICES FOR DOMES TIC AND INTERNATIONAL CLIENTS. THE COMPANY WAS INCORPORATED IN 1992 AND HAS OFFSHORE RESEARCH SERVICE CENTRE [ORSC] REGISTER ED WITH I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 2 -: SOFTWARE TECHNOLOGY PARKS OF INDIA AND PROVIDES ITE S TO ITS GROUP COMPANIES. FOR AY. 2007-08, ASSESSEE FILED ITS RETUR N OF INCOME DISCLOSING NET INCOME OF RS. 9,01,92,405/- AFTER CLAI MING DEDUCTION U/S. 10A OF THE ACT IN RESPECT OF THE PROFITS FROM ITS O RSC UNIT. SINCE ASSESSEE HAS ITS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE [AE] TO THE TUNE OF RS. 59,79,99 ,396/- WHICH INCLUDES BOTH RECEIPTS AND EXPENSES AND REIMBURSEMENTS , THE MATTER WAS REFERRED TO THE TRANSFER PRICING OFFICER [T PO] FOR DETERMINING ARMS LENGTH PRICE [ALP] OF ITS TRANSACTIO NS. THE TPO VIDE HIS ORDER DT. 29-10-2010, HAS REJECTED ASSESSEE S COMPARABLES AND MADE FRESH SEARCH AND ARRIVED AT 27 COMPARABLE C OMPANIES HAVING ARITHMETIC MEAN OF 30.21% AFTER PROVIDING NEG ATIVE WORKING CAPITAL ADJUSTMENT OF (-)0.21, THE ARITHMETIC MEA N WAS ARRIVED AT 30.42%. ON A TOTAL OPERATING COST INCLUDING REIMBURSEMENT OF EXPENSES OF RS. 95,24,16,536/-, THE ALP SALES WERE DETERMINED AT RS. 1,24,21,41,646/- AND THE ADJUS TMENT PROPOSED WAS AT RS. 17,08,62,793/-. ON THE BASIS OF THE TPOS REPORT, AO HAS FINALISED THE DRAFT ASSESSMENT ORDER. 2.1. ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RES OLUTION PANEL [DRP]. DRP, HYDERABAD VIDE ITS ORDER DT. NIL H AS ACCEPTED ASSESSEES OBJECTIONS WITH REFERENCE TO MANAGEMENT FE E AND LICENSE FEE PAYMENTS AND ALSO DIRECTED TO DELETE TWO COMPANIE S FROM ITS LIST OF COMPARABLES. THE DRP ALSO DIRECTED TO ALLOW DEPRECIATION ON THE LICENSE FEE PAYMENTS TREATED AS CAPITAL IN NATURE . CONSEQUENT TO THE ABOVE DIRECTIONS OF THE DRP, AO HAS FINALISED TH E ASSESSMENT ORDER, IN WHICH THE ASSESSED INCOME WAS D ETERMINED AT 29,55,15,904/-. ASSESSEE IS AGGRIEVED ON THIS ORD ER AND RAISED AS MANY AS 22 GROUNDS AND ONE ADDITIONAL GROUND. IN THE COURSE I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 3 -: OF PRESENT PROCEEDING, ASSESSEE HAS PLACED ON RECORD THAT THEY DO NOT WISH TO PRESS GROUND NOS. 6, 7, 9, 11, 12 & 14. 3. WE HAVE HEARD LD. COUNSEL AND LD. DR IN DETAIL A ND PERUSED THE PAPER BOOK PLACED ON RECORD. THE GROUND -WISE ISSUES ARE DECIDED AS UNDER: 4. GROUND NO. 1: REJECTION OF TRANSFER PRICING (TP) DO CUMENTATION MAINTAINED: REJECTING THE TP DOCUMENTATION MAINTAINED BY THE AP PELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ W ITH THE INCOME TAX RULES, 1962 (RULES) AND MAKING AN ADJUST MENT OF RS. 14,94,53,910 IN RELATION TO THE FOLLOWING INTER NATIONAL TRANSACTIONS WITH ITS AES. PROVISION OF MARKET RESEARCH SERVICES AND BACK-OFFI CE PROCESSING SERVICES RS. 8,02,37,594; PAYMENT OF GROUP OVERHEAD AND REGIONAL OVERHEAD ALL OCATION COSTS RS. 4,39,80,890; AND PAYMENT OF LICENSE FEES RS. 2,52,35,426 4.1. THIS GROUND IS WITH REFERENCE TO TREATING THE MAR KET RESEARCH SERVICES AND OVERHEAD ALLOCATION COST AND LI CENSE FEE AT NIL. IT WAS FAIRLY ADMITTED THAT THE DRP HAS GIVEN RELI EF ON THIS ISSUE VIDE ITS GROUND NO. 2, THEREFORE, THE ISSUE DOES NOT SURVIVE. ACCORDINGLY, THIS GROUND IS REJECTED. HOWEVER, THE D RPS DIRECTION TO RE-WORK OUT THE MARGIN OF ASSESSEE BY EXCLUDING THE ABOVE AMOUNTS SHOULD BE KEPT IN MIND BY THE AO/TPO WHILE W ORKING OUT THE ALP. 5. GROUND NO. 2: NON CONSIDERATION OF INTERNAL UNCONTR OLLED TRANSACTIONS NOT CONSIDERING INTERNAL UNCONTROLLED COMPARABLE TR ANSACTIONS OF THE APPELLANT FOR DETERMINATION OF ALP OF THE IN TERNATIONAL TRANSACTIONS WITH AES; I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 4 -: 5.1. THIS GROUND IS NOT PRESSED AT THE TIME OF ARGUMEN TS. 6. GROUND NO. 3: DETERMINATION OF ADJUSTMENT DETERMINING THE TP ADJUSTMENT ON TRANSACTIONS WITH NON-AES 6.1. THIS GROUND PERTAINS TO THE ISSUE OF DETERMINA TION OF TP ADJUSTMENT ON NON-AE TRANSACTIONS AS WELL. ASSESSEE F ILED THE SEGMENTAL PROFITS PERTAINING TO ORSC DIVISION AND MARKET RESEARCH DIVISION AND SUBMITTED THAT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S. 10A, SEPARATE ACCOUNTS WERE MAINTAINED AND THEREFORE, TPOS CONTENTION THAT UNDER TNMM, ADJUSTMENT HAS TO BE MADE ON ENTIRE TURNOVER IS NOT CORRECT. 6.2. THIS ISSUE HAS TO BE CONSIDERED IN FAVOUR OF ASSESSEE AND AO/TPO IS DIRECTED TO MAKE ADJUSTMENTS ONLY TO THE EXTENT OF TRANSACTIONS WITH AE AND EXCLUDE THE ADJUSTMENT ON THE TRANSACTIONS WITH NON-AES. THIS ISSUE IS ALREADY DEC IDED IN FAVOUR OF ASSESSEE IN ASSESSEES OWN CASES IN EARLIER YEAR S AND LATER YEARS. AO/TPO IS DIRECTED ACCORDINGLY. GROUND IS CONSIDER ED ALLOWED. 7. GROUND NO. 4: MARGIN COMPUTATION OF THE APPELLANT U NDER TNMM NON CONSIDERATION OF WORK-IN-PROGRESS (WIP) MOVEMEN T FOR THE COMPUTATION OF THE OPERATING MARGIN OF THE APPELLAN T; 7.1. THIS GROUND PERTAINS TO COMPUTATION OF MARGIN UNDER TNMM. IT WAS SUBMITTED THAT THE WIP MOVEMENT FOR THE COMPUTATION OF OPERATING MARGIN OF ASSESSEE WAS NOT CON SIDERED BY THE TPO. SINCE THIS ISSUE IS REQUIRED TO BE EXAMINED BY THE TPO, WE DIRECT THE AO/TPO TO EXAMINE THIS ISSUE AND WORK OUT THE CORRECT MARGIN. GROUND IS ALLOWED FOR STATISTICAL PUR POSES. I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 5 -: 8. GROUND NO. 5: INCORRECT COMPUTATION OF WORKING CAPI TAL ADJUSTMENT COMPUTING THE WORKING CAPITAL ADJUSTMENT, BY CONSID ERING THE TOTAL RECEIVABLES AND PAYABLES (INCLUDING THIRD PAR TY TRANSACTIONS) OF THE APPELLANT AND MAKING A NEGATIV E WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN OF THE CO MPANIES SELECTED; 8.1. THIS GROUND PERTAINS TO INCORRECT COMPUTATION OF WORKING CAPITAL ADJUSTMENT. IT WAS SUBMITTED THAT WORKING CAPITAL ADJUSTMENT WAS WRONGLY CONSIDERED BY CONSIDERING THE TO TAL RECEIVABLES AND ARRIVALS INCLUDING THIRD PARTY TRANS ACTIONS AND MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT. AO/TPO I S DIRECTED TO EXAMINE THIS ISSUE AND WORK OUT THE WORKING CAPITAL ADJUSTMENT AFRESH, AS CERTAIN COMPARABLE COMPANIES ARE BEING CO NSIDERED SEPARATELY. IN CASE THE WORKING CAPITAL ADJUSTMENT COM ES NEGATIVE, AO/TPO IS DIRECTED NOT TO MAKE ANY NEGATIVE WORKING CAP ITAL ADJUSTMENT AS THE SAME IS NOT APPROVED IN VARIOUS CO-OR DINATE BENCH DECISIONS. THE CO-ORDINATE BENCH OF ITAT IN TH E CASE OF ADAPTEC (INDIA) P. LTD., VS. ACIT IN ITA. NO. 206/HYD /2014 (AY 2009-10) DT. 25-03-2015, HAS DECIDED THE ISSUE OF NEG ATIVE WORKING CAPITAL AS UNDER: 10. GROUND NO.8 PERTAINS TO THE ISSUE OF NEGATIVE W ORKING CAPITAL. AS BRIEFLY STATED ABOVE, AFTER ARRIVING AT THE ARITHME TIC MEAN OF ALL COMPARABLES AT 22.03%, THE A.O. WORKED OUT NEGATIVE WORKING CAPITAL ADJUSTMENT OF 3.22% THEREBY, MAKING ARMS LENGTH PRI CE AT 25.25%. EVEN THOUGH, DRP REFUSED TO INTERFERE WITH THE OBJECTION S OF THE ASSESSEE IN ITS ORDER, WE WERE INFORMED THAT DRP HAS DIRECTED THE T PO/A.O. NOT TO MAKE ANY NEGATIVE WORKING CAPITAL ADJUSTMENT IN SOME OF THE CASES IN THE NEXT ASSESSMENT YEAR, IN THE CASES OF MARKET TOOLS RESEA RCH P. LTD., AND MEGA SYSTEMS WORLDWIDE INDIA P. LTD., ASSESSEE PLACED ON RECORD COPIES OF ORDERS OF DRP. IN THAT DRP CONSIDERED THE ISSUE AND DIRECTED THE TPO AS UNDER : '14. GROUND NO.11 : NEGATIVE WORKING CAPITAL ADJUST MENT - MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT WITHOUT APPRECIATING THE F ACT THAT THE COMPANY DOES NOT BEAR ANY WORKING CAPITAL RISKS. ON THIS ISSUE, THE AS SESSEE SUBMITTED AS UNDER : I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 6 -: 'THE LEARNED TPO DETERMINED THE ALP FOR THE INTERNA TIONAL TRANSACTIONS WITH A.ES BY MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT FOR TH E DIFFERENCES IN WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPANIES CONSIDERED A S COMPARABLES. THE ASSESSEE DOES NOT AGREE WITH THE LEARNED TPO AS : THE COMPANY DOES NOT BEAR ANY WORKING CAPITAL RIS K SINCE IT IS BEEN FULLY FUNDED BY IT'S A.E. FROM ITS INCEPTION AND HAS NO WORKING CAPITAL CONTINGENCIES. THE COMPANY HAS NEVER TAKEN ANY LOANS TILL DATE F ROM THE DATE OF INCORPORATION NOR HAS INCURRED ANY EXPENSE FOR MEETING THE WORKING CA PITAL REQUIREMENT.' WE HAVE GONE THROUGH THE SUBMISSIONS AND THE ORDER OF THE TPO. THE ASSESSEE PLEADED THAT THE DRP HAS ACCEDED SUCH A PL EA IN SOME OTHER CASE. ON EXAMINATION, WE FIND THAT THE DRP, HYDERAB AD IN THE CASE OF CORDYS SOFTWARE INDIA P. LTD., FOR A.Y. 2008-09 IN ITS DIRECTIONS DATED 03.08.2012 HAS GIVEN A FINDING AS UNDER : '7.7. 4 THUS, WORKING CAPITAL ADJUSTMENT IS MADE FOR THE TIME VALUE OF MONEY LOST WHEN CREDIT TIME IS PROVIDED TO THE CUSTOMERS. THE APP LICANT IS NOT AN ENTREPRENEUR BUT A CAPTIVE SERVICE PROVIDER. ITS ENTIRE FUNDING NEEDS ARE PROVIDED BY THE A.E. THIS BEING SO, THE APPLICANT DOES NOT STAND TO LOSE ANYTHI NG AS IT IS COMPENSATED ON A TOTAL COST PLUS BASIS. THE TPO PROBABLY WAS CARRIED AWAY B Y THE LARGE AMOUNT OF RECEIVABLES APPEARING IN THE BOOKS OF THE APPLICANT. BUT THE APPLICANT IS RUNNING ITS BUSINESS WITHOUT ANY WORKING CAPITAL RISK WHILE COMPA RABLE COMPANIES HAVE SUCH A RISK FOR THEM. IF AT ALL ANY WORKING CAPITAL ADJUSTM ENT IS TO BE MADE TO T HIS SITUATION, ONLY A POSITIVE ADJUSTMENT HAS TO BE MADE TO THE COMP ARABLES SO THAT THEY ARE BROUGHT ON PAR WITH THE APPLICANT. IN VIEW OF THE SAM E, THE PANEL DIRECTS THAT NEGATIVE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MAR GIN OF THE COMPARABLES SHALL NOT BE MADE.' IN VIEW OF THE ABOVE, THE PANEL DIRECTS THAT NEGATIV E WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SHALL NOT BE MADE.' 11. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THA T ASSESSEE'S CASE BEING SIMILAR, THERE IS NO NEED FOR MAKING ANY NEGATIVE W ORKING CAPITAL ADJUSTMENT WHEN ASSESSEE DOES NOT CARRY ANY WORKING CAPITAL RISK. IN FACT, TPO SHOULD HAVE DONE NECESSARY WORKING CAPITA L ADJUSTMENT TO THE PROFITS OF THE SELECTED COMPARABLES SO AS TO MAKE T HEM COMPARABLE TO THE ASSESSEE. IN VIEW OF THIS, WE DIRECT THE TPO NOT TO MAKE NEGATIVE WORKING CAPITAL ADJUSTMENT. 8.2. RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDI NATE BENCH, WE DIRECT THE AO/TPO NOT TO MAKE NEGATIVE WORKI NG CAPITAL ADJUSTMENT. I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 7 -: 9 . GROUND NO. 8: INFORMATION OBTAINED UNDER SECTION 13 3(6) USING INFORMATION/DOCUMENTS WHICH ARE NOT AVAILABLE IN PUBLIC DOMAIN BY EXERCISING POWERS UNDER SECTION (U /S) 133(6) OF THE ACT; 9.1. THIS GROUND PERTAINS TO OBTAINING INFORMATION U/ S. 133(6) WHICH WAS CONSIDERED ALONG WITH GROUND NO. 10 . 10. GROUND NO. 10: SELECTION OF COMPARABLES NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSIS A ND INTERALIA SELECTING THE FOLLOWING COMPANIES AS COMP ARABLE TO THE SERVICES OF THE APPELLANT: A) ACCENTIA TECHNOLOGIES LTD B) ACCURATE DATA CONVERTORS PVT LTD C) ASIT C MEHTA FINANCIAL SERVICES LTD (SEG) D) BODHTREE CONSULTING LTD E) ECLERX SERVICES LTD F) HCL COMNET SYSTEMS & SERVICES LTD (SEG) G) INFORMED TECHNOLOGIES INDIA LTD H) INFOSYS BPO LTD I) ISERVICES INDIA PVT LTD J) MOLD TEK TECHNOLOGIES LTD (SEG) K) VISHAL INFORMATION TECHNOLOGIES LTD; AND L) WIPRO LTD (SEG) 10.1. IN THIS GROUND, ASSESSEE IS OBJECTING TO VARIO US COMPARABLES SELECTED BY THE TPO. THE FINAL SELECTION OF THE COMPARABLES AFTER THE DRPS ORDER IS AS UNDER: I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 8 -: SL. NO. NAME OF THE COMPANY TP ORDER & DRP DIRECTION (UNADJUSTED MARGIN) 1. A DITYA BIRLA MINACS WORLDWIDE LTD (TRANSWORKS INFORMATION SERVICES LTD) 1 1 . 98 % 2. ALLSEC TECHNOLOGIES LTD 27 . 31 % 3. APEX KNOWLEDGE SOLUTIONS PVT LTD 12.83% 4. APOLLO HEALTH STREET LTD - 13.55% 5. CALIBER POINT BUSINESS SOLUTIONS LTD 21.26% 6. COSMIC GLOBAL LTD 12.40% 7. DATAMATICS FINANCIAL SERVICES LTD (SEG) 5.07% 8. FLEXTRON ICS SOFTWARE SYSTEMS LTD (SEG) 8.62% 9. GENESYS INTL CORP LTD (SEG) 13.35% 10. ICRA TECHNO ANALYTICS LTD (SEG) 12.24% 11. NITTANY OUTSOURCING SERVICES PVT LTD 11.50% 12. R SYSTEMS INTERNATIONAL LTD (SEG) 20.18% 13. SPANCO TELESYSTEMS & SOLUTIONS LTD ( SEG) 25.81% 14. ACCENTIA TECHNOLOGIES LTD (SEG) 30.61% 15. ACCURATE DATA CONVERTORS PVT LTD 50.68% 16. ASIT C MEHTA FINANCIAL SERVICES LTD (SEG) 24.21% 17. BODHTREE CONSULTING LTD (SEG) 29.58% 18. ECLERX SERVICES LTD 89.33% 19. HCL COMNET SYSTEMS & S ERVICES LTD (SEG) 44.99% 20. INFORMED TECHNOLOGIES INDIA LTD 35.56% 21. INFOSYS BPO LTD 28.78% 22. ISERVICES INDIA PVT LTD 49.47% 23. MOLD TEK TECHNOLOGIES LTD (SEG) 113.49% 24. VISHAL INFORMATION TECHNOLOGIES LTD 51.19% 25. WIPRO LTD (SEG) 29.70% 10.2. THERE IS NO OBJECTION WITH REFERENCE TO COMPAR ABLES SELECTED AT ITEMS 1 TO 13. THE OBJECTION IS WITH REFER ENCE TO COMPARABLES AT 14 TO 25. IT WAS SUBMITTED THAT MANY OF THE COMPARABLES WERE ALREADY EXCLUDED BY THE DECISIONS IN HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., VS. ACIT IN ITA NO. 1826/HYD/2011 (AY. 2007-08) DT. 24-10-2014 AND C3I S UPPORT SERVICES P. LTD. VS. ACIT IN ITA.NO.2183/HYD/2011 ( AY. 2007-08) DT. 28-05-2014 WHICH ASSESSEE HAS RELIED ON. WITH RE FERENCE TO COMPARABLES AT 15, 20 AND 22, ACCURATE DATA CONVERTORS PVT LTD., I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 9 -: INFORMED TECHNOLOGIES INDIA LTD., AND ISERVICES INDI A PVT LTD., IT WAS FAIRLY ADMITTED THAT THESE THREE COMPARABLES WERE RE MITTED TO THE AO FOR EXAMINATION. HOWEVER, ASSESSEE IS OBJECTIN G THAT THE INFORMATION OBTAINED U/S. 133(6) AND NOT AVAILABLE I N PUBLIC DOMAIN COULD NOT BE USED. 10.3. AFTER CONSIDERING THE SUBMISSIONS, WE ARE OF THE OPINION THAT THESE COMPARABLES WERE ALREADY CONSIDERED EXTENSI VELY IN THE CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD. , VS. ACIT IN ITA NO. 1826/HYD/2011 (AY. 2007-08) DT. 24-10-2014 ( SUPRA) AND SOME OF THEM ARE EXCLUDED AND SOME OF THEM ARE REMITTED TO AO FOR FRESH EXAMINATION. THE ORDER IN HSBC ELECTRONIC DATA PROCESSING INDIA P. LTD., VS. ACIT IN ITA NO. 1826/H YD/2011 (AY. 2007-08) DT. 24-10-2014 (SUPRA) IS AS UNDER: 1. ACCENTIA TECHNOLOGIES LIMITED 6.1.1. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE OBJECTING TO THE AFORESAID COMPANY BEING TREATED AS COMPARABLE S UBMITTED THAT THE AFORESAID COMPANY IS FUNCTIONALLY DIFFERENT FROM TH E ASSESSEE AS MORE THAN 64% OF THE OPERATING COST OF THE COMPANY IS TO WARDS OVERSEAS BUSINESS EXPENSES. THE COMPANY RECEIVES SUBSTANTIAL REVENUE FROM ON- SITE SERVICES WHICH IS MORE THAN 75%, HENCE CANNOT BE CONSIDERED AS COMPARABLE ON ACCOUNT OF DIFFERENCES IN GEOGRAPHICA L LOCATIONS OF THE SERVICES. IT WAS SUBMITTED THAT THE EMPLOYEE COST O F COMPANY IS ONLY 14% OF ITS REVENUE. IT WAS FURTHER SUBMITTED THAT THE U NAUDITED 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 YEA R UNDER DISPUTE, IT WAS AN EXCEPTIONAL YEAR IMPACTING THE PROFITABILITY OF THE COMPANY. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE OF T HE ASSESSEE REFERRED TO THE ANNUAL REPORT OF ACCENTIA TECHNOLOGIES LIMITED IN THE PAPER BOOK. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE A LSO RELIED UPON THE DECISIONS OF INCOME-TAX APPELLATE TRIBUNAL, HYDERAB AD BENCH IN CASE OF AVINEON INDIA P. LTD., ITA.NO.1989/HYD/2011 DATED 3 1.10.2013, ZAVATA INDIA P. LTD., HYDERABAD VS. DCIT, CIRCLE 3(3), HYD ERABAD ITA.NO.1781/HYD/2011 DATED 07.06.2013 AND M/S. CAPI TAL IQ I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 10 -: INFORMATION SYSTEMS INDIA PVT. LTD., HYDERABAD VS. DCIT (INT. TAXATION), HYDERABAD (ITA NO.1961/HYD/2011 DATED 23.11.2012. 6.1.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON T HE OTHER HAND, SUBMITTED THAT THERE IS NO REASON TO EXCLUDE THE AF ORESAID COMPANY AS THE TPO HAS GIVEN JUSTIFIABLE REASONS FOR TREATING IT A S A COMPARABLE COMPANY. 6.1.3 WE HAVE HEARD THE CONTENTIONS OF THE PARTIES WITH REGARD TO THE AFORESAID COMPANY AND PERUSED THE MATERIAL ON RECOR D. FROM THE FACTS AND MATERIAL AVAILABLE ON RECORD, IT IS SEEN THAT T WO COMPANIES VIZ., IRIDIUM TECHNOLOGIES AND GEOSOFT TECHNOLOGIES AMALG AMATED WITH M/S. ACCENTIA TECHNOLOGIES LIMITED WHICH RESULTED IN A H IGHER PROFIT FOR THE COMPANY DURING THE YEAR. IN CASE OF CAPITAL IQ INFO RMATION SYSTEMS INDIA PVT. LTD., THE CO-ORDINATE BENCH OF THIS TRIBUNAL W HILE CONSIDERING THE ASSESSEES OBJECTION WITH REGARD TO THE AFORESAID C OMPANY HELD IN THE FOLLOWING MANNER:- 10. IT IS THE SUBMISSION OF THE ASSESSEE THAT THIS C OMPANY CANNOT BE TREATED AS A COMPARABLE BECAUSE OF UN-COMPARABLE FINANCIAL RESUL TS ARISING OUT OF AMALGAMATION IN THE COMPANY. IN THIS REGARD, THE ASSESSEE HAS RELIED UPON THE ORDER OF THE DRP FOR THE ASSESSMENT YEAR 2008-09 IN ASSESSEES OWN CASE. IT IS SEEN THAT THE DRP WHILE CONSIDERING SIMILAR OBJECTION PLACED BY THE ASSESSEE IN THE CASE OF ANOTHER COMPANY, VIZ. MOLD TEK TECHNOLOGIES LTD., IN THE PROCEEDINGS R ELATING TO THE ASSESSMENT YEAR 2008-09, HAS OBSERVED IN THE FOLLOWING MANNER- 17.5. IN ADDITION TO THE ABOVE, THE DIRECTORS REP ORT OF THE COMPANY FOR THE FY 2007-08 REVEALED THE MERGER AND THE DEMERGER. A COMPANY KNO WN AS TECHMEN TOOLS PVT. LTD. HAD AMALGAMATED WITH MOLD-TEK TECHNOLOGIES LTD. WIT H EFFECT FORM 1ST OCTOBER, 2006. THERE WAS A DE-MERGER OF PLASTIC DIVISION OF THE CO MPANY AND THE RESULTING COMPANY IS KNOWN AS MOLDTEK PLASTICS LIMITED. THE DE-MERGER FR OM THE MOLDTEK TECHNOLOGIES TOOK PLACE WITH EFFECT FROM 1ST APRIL, 2007. THE MERGER AND THE DE-MERGER NEEDED THE APPROVAL OF THE HONBLE HIGH COURT OF ANDHRA PRADES H AND ALSO THE APPROVAL OF THE SHAREHOLDERS. THE SHAREHOLDERS OF THE COMPANY GAVE 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 25TH JULY, 2008. SUBSEQ UENTLY, THE ACCOUNTS OF MOLDTEK TECHNOLOGIES FOR FY 2007-08 WERE REVISED. ON A PERU SAL OF THE ANNUAL REPORT IT IS NOTICED THAT TECKMEN TOOLS PVT. LTD. AND THE PLASTIC DIVISI ON OF THE COMPANY WERE DEMERGED AND THE RESULTING COMPANY WAS NAMED AS MOLDTEK PLAS TICS LTD. THE KPO BUSINESS REMAINED WITH THE COMPANY. A PERUSAL OF THE ANNUAL REPORT REVEALED THAT TO GIVE EFFECT TO THE MERGER AND DEMERGER, THE FINANCIAL STATEMENT S WERE REVISED AND RESTATED AFTER SIX MONTHS FORM THE END OF THE FINANCIAL YEAR 31.3. 2008. THE ASSESSEE FILED FORM NO.21 UNDER THE COMPANIES ACT WITH THE REGISTRAR OF COMPA NIES ON 26TH AUGUST, 2008. THUS THE EFFECTIVE DATE OF THE SCHEME OF MERGER AND DEME RGER WAS 26TH AUGUST, 2008. THE ANNUAL REPORT SUPPORTED THE ARGUMENT OF THE ASSESSE E THAT THERE WERE MERGER AND DEMERGER IN THE FINANCIAL YEAR AND IT WAS AN EXCEPT IONAL YEAR OF PERFORMANCE AS FINANCIAL STATEMENTS WERE REVISED BY THIS COMPANY M UCH AFTER THE CLOSURE OF THE I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 11 -: PREVIOUS YEAR. THE PANEL AGREES WITH THE CONTENTION OF THE ASSESSEE THAT IT IS AN EXCEPTIONAL YEAR HAVING SIGNIFICANT IMPACT ON THE P ROFITABILITY 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 EVENT LIKE MERGER AND DE-MERGER WILL HAVE AN EFFECT ON THE PROFITABILITY OF THE COMPANY IN THE FINANCIAL YEAR IN WHICH SUCH EVENT TAKES PLACE. IT IS THE CONTENTION OF THE ASSESSEE THAT IN CASE OF THE AFORESAID COMPANY, THERE 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 THE AMALGAMATION IN FACT HAS TAKEN PLACE, THEN THE AFORESAID COMPARABLE HAS TO BE EXCLUDED. 6.1.4 AS CAN BE SEEN FROM THE ORDER OF THE CO-ORDIN ATE BENCH, THE AFORESAID COMPANY WAS EXCLUDED SINCE EX-ORDINARY EVENTS LIKE MERGER AND DEMERGER HAD TAKEN DURING THE RELEVANT FINANCIAL YE AR WHICH MUST HAVE IMPACTED THE FINANCIAL RESULTS OF THE COMPANY. THAT BESIDES THE HIGH VOLUME OF ON-SITE OPERATION OF ACCENTIA TECHNOLOGIE S LIMITED ALSO MAKES IT FUNCTIONALLY DISSIMILAR TO THE ASSESSEE. THESE FACT S ARE NOT CONSIDERED EITHER BY THE TPO OR BY THE DRP. WE THEREFORE REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER WHO SHALL VERIFY THE FACT WHE THER MERGER HAS TAKEN PLACE DURING THE YEAR AND IF IT FOUND SO, THEN THE AFORESAID COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE AS SESSING OFFICER SHOULD ALSO PROPERLY CONSIDER ASSESSEES SUBMISSIONS WITH REGARD TO FUNCTIONAL DIFFERENCE ALSO. 2. ACCURATE DATA CONVERTORS PRIVATE LTD. 6.2.1. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE OBJECTING TO THE AFORESAID COMPANY BEING TREATED AS COMPARABLE S UBMITTED THAT THIS COMPANY WAS NOT IDENTIFIED IN THE SEARCH PROCESS EI THER BY THE ASSESSEE OR BY THE TPO. IT WAS SUBMITTED THAT NO OPPORTUNITY WAS GIVEN TO THE ASSESSEE TO EXAMINE WHETHER THESE COMPANIES ARE COM PARABLE TO THE ASSESSEE. IT WAS SUBMITTED THAT THE TPO RELYING UPO N UNAUDITED INFORMATION HAS TREATED THE AFORESAID COMPANY AS CO MPARABLE ONLY BECAUSE THE HIGH MARGIN OF PROFIT SHOWN AT 50.15%. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE ALSO RELI ED UPON THE ORDER OF THE COORDINATE BENCH DECISION OF THE DELHI TRIBUNAL IN THE CASE OF ACIT VS. M/S. TOSHIBA INDIA P. LTD., 2010-TII-14-ITAT-DEL-T. P. 6.2.2. THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWE VER 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 NO T INITIALLY SELECTED AS A COMPARABLE BY THE TPO. SUBSEQUENTLY, THE TPO CONDUC TED SEARCH IN THE DATA BASES FOR FINDING ADDITIONAL COMPARABLE BY APP LYING 25% EMPLOYEE I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 12 -: COST FILTER. AFTER EXAMINING THE INFORMATION OBTAIN ED FROM THE COMPANY U/S 133(6) OF THE ACT THE TPO TREATED IT AS COMPARABLE BY OBSERVING THAT THE COMPANY IS ENGAGED IN IT ENABLED SERVICES AND QUALI FIES ALL THE FILTERS ADOPTED BY THE TPO. IT IS VERY MUCH CLEAR FROM THE ORDER OF THE ASSESSING OFFICER THAT THE ASSESSEE WAS NOT GIVEN ANY OPPORTU NITY/INFORMATION TO EXAMINE THE COMPARABILITY OF THE AFORESAID COMPANY. THOUGH THE TPO IS EMPOWERED UNDER THE PROVISIONS OF THE ACT TO OBTAIN INFORMATION WITH REGARD TO SELECTION OF COMPARABLES, HOWEVER BEFORE UTILISING THE INFORMATION OBTAINED, HE HAS TO GIVE FAIR OPPORTUNI TY TO THE ASSESSEE TO HAVE ITS SAY IN THE MATTER. THE DRP HAS ALSO OVER-L OOKED THIS ASPECT. ANOTHER IMPORTANT ASPECT IS THE COMPANY HAS SHOWN P ROFIT OF 50.15% WHICH MAY HAVE WEIGHED WITH THE ASSESSING OFFICER F OR ACCEPTING THIS COMPANY AS COMPARABLE. BE THAT AS IT MAY SINCE THE TPO HAS NOT GIVEN ANY OPPORTUNITY TO THE ASSESSEE TO RAISE ITS OBJECT IONS WITH REGARD TO THE AFORESAID COMPANY, WE ARE INCLINED TO REMIT THIS IS SUE TO THE FILE OF THE ASSESSING OFFICER WHO SHALL DECIDE THE ACCEPTABILIT Y OR OTHERWISE OF THE COMPANY AS COMPARABLE AFTER CONSIDERING THE ASSESSE E S OBJECTIONS. 3. ASIT C MEHTA FINANCIAL SERVICES LTD. (SEG). 6.3.1. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE OBJECTING TO THE AFORESAID COMPANY BEING SELECTED AS COMPARABLE SUBMITTED THAT THE EMPLOYEE COST OF THE COMPANY IS ONLY 24.78% OF ITS REVENUE COMPARED TO ASSESSEES 56%. THE LEARNED AUTHORISED REPRESENTATI VE OF THE ASSESSEE FURTHER SUBMITTED THAT IN MANY OTHER CASES FOR ASST . YEAR 2008-09 THE DRP HAS EXCLUDED THIS COMPANY FROM THE LIST OF COMPARAB LES. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE ALSO RELI ED UPON THE DECISIONS OF INCOME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN A SSESSEES OWN CASE ITA.NO.1624/HYD/10 AND S.A.NO.210/HYD/2012 DATED 28 .06.2013, AVINEON INDIA P. LTD., ITA.NO.1989/HYD/2011 DATED 3 1.10.2013 AND ZAVATA INDIA P. LTD., HYDERABAD VS. DCIT, CIRCLE 3( 3), HYDERABAD ITA.NO.1781/HYD/2011 DATED 07.06.2013. 6.3.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON T HE OTHER HAND, SUPPORTED THE ORDERS OF THE REVENUE AUTHORITIES. 6.3.3 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PAR TIES AND PERUSED THE MATERIAL ON RECORD. FROM THE INFORMATION OBTAINED U /S 133(6) OF THE ACT BY THE TPO, IT IS SEEN 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 FACTS AND TH E CIRCUMSTANCES, WE DIRECT THE EXCLUSION OF THE AFORESAID COMPANY FROM THE LIST OF COMPARABLES. I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 13 -: 4. BODHTREE CONSULTING LIMITED:- 6.4.1 WITH REGARD TO THE AFORESAID COMPANY, THE LEA RNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE C OMPANY IS FUNCTIONALLY DIFFERENT AS IT IS INTO SOFTWARE SERVICES AND PROVI DE SERVICES USING THE DEVELOPED PRODUCTS. IT WAS FURTHER SUBMITTED THAT I N 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 INVOLVES A N ELEMENT OF SOFTWARE DEVELOPMENT. THE COMPANY IS ALSO ENGAGED IN PROVIDI NG E-PAPER SOLUTIONS. IT WAS FURTHER SUBMITTED THAT THE ANNUAL REPORT OF THE COMPANY ALSO REVEALS THAT IT HAS ONLY SOFTWARE DEVELOPMENT SEGME NT. IT WAS FURTHER SUBMITTED THAT THE COMPANY HAS UNDERGONE RE-ORGANIS ATION AND CROSS BOOKING OF EXPENSES UNLIKE PREVIOUS YEAR WHICH HAS IMPACTED THE PROFITABILITY. IT WAS SUBMITTED THAT UN-AUDITED SEG MENTAL INFORMATION HAS BEEN USED TO COMPUTE MARGINS WHICH MAY NOT BE AUTHE NTIC. 6.4.2 WE HAVE HEARD RIVAL SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIAL ON RECORD. FROM THE ANNUAL REPORT OF THE A FORESAID COMPANY AS SUBMITTED IN THE PAPER BOOK, IT IS SEEN THAT THE SA ID COMPANY EARNS ITS REVENUE FROM SOFTWARE DEVELOPMENT. THEREFORE, AS IT APPEARS THE AFORESAID COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE . THIS FACT WAS NOT PROPERLY CONSIDERED EITHER BY THE TPO OR DRP. WE TH EREFORE REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WH O SHALL CONSIDER THE ACCEPTABILITY OR OTHERWISE OF THE COMPANY AFTER PRO PERLY CONSIDERING THE OBJECTIONS OF THE ASSESSEE. 5. ECLERX SERVICES LIMITED:- 6.5.1 OBJECTING TO THE AFORESAID COMPANY BEING TREA TED AS COMPARABLE, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE S UBMITTED THAT THE COMPANY IS ENGAGED IN PROVIDING KNOWLEDGE PROCESS O UTSOURCING (KPO). IT WAS SUBMITTED THAT THE ASSESSEE IS PROVIDING DATA A NALYTICS, OPERATIONS MANAGEMENT AND AUDIT RECONCILIATION. IT WAS SUBMITT ED THAT BESIDES BEING FUNCTIONALLY DIFFERENT FROM THE ASSESSEE, THE AFORE SAID COMPANY HAS SHOWN EXTRAORDINARILY HIGH PROFIT AT 88.11% HENCE C ANNOT BE TREATED AS COMPARABLE. IN SUPPORT OF SUCH CONTENTION, THE LEAR NED AUTHORISED REPRESENTATIVE OF THE ASSESSEE RELIED UPON THE DECI SIONS OF CO-ORDINATE BENCH OF HYDERABAD TRIBUNAL IN CASES OF AVINEON IND IA P. LTD., ITA.NO.1989/HYD/2011 DATED 31.10.2013, ZAVATA INDIA P. LTD., HYDERABAD VS. DCIT, CIRCLE 3(3), HYDERABAD ITA.NO.1 781/HYD/2011 DATED 07.06.2013, M/S. CAPITAL IQ INFORMATION SYSTE MS INDIA PVT. LTD., HYDERABAD VS. DCIT (INT.TAXATION), HYDERABAD (ITA N O.1961/HYD/2011 DATED 23.11.2012 AND ALSO SPECIAL BENCH DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) P. LTD ., MUMBAI VS. ACIT, CIRCLE 6(3), MUMBAI DATED 07.03.2014. I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 14 -: 6.5.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWEV ER SUPPORTED THE ORDERS OF THE REVENUE AUTHORITIES WITH REGARD TO TH E AFORESAID COMPANY. 6.5.3 WE HAVE HEARD RIVAL SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIAL ON RECORD. IT IS SEEN THAT IN CASE OF CAPI TAL IQ INFORMATION SYSTEMS (SUPRA), THE CO-ORDINATE 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 COMPAN Y IS FUNCTIONALLY DIFFERENT BEING ENGAGED IN PROVIDING KPO SERVICES B UT IT HAS ALSO SHOWN EXTRAORDINARY HIGH PROFITS. FOLLOWING THE AFORESAID DECISION OF CO-ORDINATE BENCH OF TRIBUNAL IN CASE OF CAPITAL IQ INFORMATION SYSTEMS, WE HOLD THAT THIS COMPANY CANNOT BE TREATED AS COMPARABLE. 7. INFORMED TECHNOLOGIES INDIA LIMITED AND 9. ISERVICES INDIA PRIVATE LTD:- 6.6.1 OBJECTING TO THE AFORESAID COMPANIES BEING TR EATED AS COMPARABLES, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE SUBMITTED THAT BOTH THE COMPANIES HAVE EXCEPTIONAL YEAR OF OPERATION. W ITH REGARD TO INFORMED TECHNOLOGIES INDIA LIMITED, IT WAS SUBMITTED THAT T HE COMPANY HAD SHOWN OPERATING LOSSES OF (-)72.98% AND (-) 43.96% IN THE FINANCIAL YEAR 2004-05 AND 2005-06, WHEREAS DURING THE YEAR UNDER DISPUTE, IT HAS SHOWN OPERATING MARGIN OF 35.56% WHICH INDICATES THAT THI S HAS BEEN AN YEAR OF EXCEPTIONAL OPERATIONS. SO FAR AS I-SERVICES INDIA PRIVATE LTD., IS CONCERNED, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE MARGIN OF THE COMPANY IS MORE TH AN ONE AND HALF TIMES THE ARITHMETIC MEAN OF THE COMPARABLE COMPANIES SEL ECTED BY THE TPO. IT WAS FURTHER SUBMITTED THAT THE COMPANY IS A PRIVATE LIMITED COMPANY WITH NO INFORMATION FOR THE PRIOR AND FUTURE YEARS TO EV ALUATE TREND IS AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE HAS RELIED ON THE ORDER OF THE COORDINATE BENCH OF DELHI TRIBUNAL IN THE CASE OF A CTIS 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 HOWEV ER STRONGLY SUPPORTING THE ORDERS OF THE REVENUE AUTHORITIES SU BMITTED THAT THE ASSESSEE HAS NOT RAISED ANY OBJECTION WITH REGARD T O THE AFORESAID COMPANIES BEING TREATED AS COMPARABLE EITHER BEFORE THE TPO OR BEFORE THE DRP. HENCE, ASSESSEES CONTENTION SHOULD NOT BE ENT ERTAINED. 6.6.3 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PAR TIES WITH REGARD TO THE AFORESAID TWO COMPANIES AND PERUSED THE MATERIA L ON RECORD. ON GOING THROUGH THE ORDERS OF THE TPO AS WELL AS DRP, WE FI ND 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 BE FORE THE TPO OR BEFORE THE DRP IN RESPECT OF AFORESAID COMPANIES. HOWEVER NEITHER THE TPO NOR I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 15 -: DRP HAS EXAMINED WHY THIS YEAR THE COMPANY HAS EXCE PTIONAL PROFITS. WHETHER DUE TO MERGERS OR ANY EVENTS OR HAPPENINGS THE PROFIT WAS EXCEPTIONAL REQUIRE VERIFICATION. THE 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 CONSIDER THE OBJ ECTIONS OF ASSESSEE AND DECIDE THE ISSUE AFRESH. 10. MOLD-TEK TECHNOLOGIES LIMITED:- 6.7.1 OBJECTING TO THE AFORESAID COMPANY BEING TREA TED AS COMPARABLE, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE S UBMITTED THAT DURING THE YEAR, THE COMPANY HAS SHOWN SUPER NORMAL PROFIT OF 117.29% COMPARED TO THE ASSESSEE AS WELL AS OTHER COMPARABL E COMPANIES. IT WAS FURTHER SUBMITTED THAT APART FROM HAVING EXTRAORDIN ARILY HIGH PROFIT MOLD- TEK IS ALSO FUNCTIONALLY DIFFERENT AS IT IS ENGAGED IN PROVIDING STRUCTURAL ENGINEERING CONSULTING SERVICES UNDER THE KPO DIVIS ION. IT WAS SUBMITTED THAT M/S MOLD TEK IS PROVIDING HIGHLY TECHNICAL AND SPECIALISED ENGINEERING SERVICES AND USE OF INFORMATION TECHNOL OGY IS ONLY INCIDENTAL. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE SUBMITTED THAT THE INCOME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH CONS IDERING THESE ASPECTS HAS HELD M/S MOLD TEK IS NOT TO BE TREATED AS COMPARABLE IN CASE OF M/S CAPITAL IQ INFORMATION SYSTEMS PVT. LTD. (SU PRA). THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE FURTHER S UBMITTED THAT EVEN IN ASSESSEES OWN CASE FOR ASST. YEAR 2008-09, THE DRP HAS DIRECTED FOR EXCLUSION 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 BENCH OF HYDERABA D TRIBUNAL IN CASES OF AVINEON INDIA P. LTD., ITA.NO.1989/HYD/2011 DATE D 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. T AXATION), HYDERABAD (ITA NO.1961/HYD/2011 DATED 23.11.2012 AND ALSO SPE CIAL BENCH DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF MAER SK GLOBAL CENTRES (INDIA) P. LTD., MUMBAI VS. ACIT, CIRCLE 6(3), MUMB AI DATED 07.03.2014. 6.7.2. THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWE VER 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 AFORESAID COMPANY BEIN G TREATED AS COMPARABLE. AS CAN BE SEEN FROM THE FACTS ON RECORD M/S MOLD-TEK DURING THE YEAR HAD SHOWN EXTRAORDINARILY HIGH PROFIT OF 1 17%. THE ACTIVITIES OF M/S MOLD-TEK IS ALSO FOUND TO BE FUNCTIONALLY DIFFE RENT AS IT IS ENGAGED IN PROVIDING HIGHLY TECHNICAL ENGINEERING CONSULTANCY SERVICES. IN CASE OF CAPITAL IQ INFORMATION SYSTEMS (SUPRA) THE CO-ORDIN ATE BENCH OF THE TRIBUNAL HELD AS UNDER:- I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 16 -: 13. ON CAREFUL CONSIDERATION OF THE SUBMISSIONS OF THE ASSESSEE WE FIND THAT THE DRP, AS ALREADY STATED EARLIER, IN THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2008-09 HAS ACCEPTED THE ASSESSEES CONTENTION THAT THIS COMPANY CANNOT BE TREATED AS COMPARABLE BECAUSE OF EXCEPTIONAL FINANCIAL RESULT DUE TO MERG ER/DE-MERGER. IN VIEW OF THE AFORESAID, WE ACCEPT THE ASSESSEES CONTENTION THAT T HIS COMPANY CANNOT BE TREATED AS COMPARABLE. THAT APART, IT IS ALSO A FACT THAT THIS CO MPANY HAS SHOWN SUPER NORMAL PROFIT WORKING OUT TO 113%. THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI BENCH IN THE CASE OF TEVA INDIA PVT. LTD.(SUPRA) HAS OBSERVED THA T COMPANIES SHOWING SUPERNORMAL PROFIT CANNOT BE TREATED AS COMPARABLE. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THAT CASE ARE EXTRACTED HEREUNDER FOR CONVENIENCE 32. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND A LSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT ALTHOUGH A DE TAIL SUBMISSION WAS MADE ON BEHALF OF THE ASSESSEE BEFORE THE LEARNED CIT(A) ON THE BASIS OF FAR ANALYSIS TO SHOW THAT THE SELECTION OF M/S. VIMTA LABS AS COMPARABLE I S NOT JUSTIFIED, THE LEARNED CIT(A) HAS NOT ACCEPTED THE STAND OF THE ASSESSEE ON THE ISS UE WITHOUT GIVING ANY COGENT OR CONVINCING REASONS. IN ITS RECENT DECISION RENDERED IN THE CASE OF ADOBE SYSTEMS INDIA PVT. LTD. (ITA NO.5043/DEL/2000 DTD. 21.01.2011) + (2011-TII-13-ITAT-DEL-TP), DELHI BENCH OF ITAT HAS HELD THAT EXCLUSION OF COMPARABLES SHO WING SUPERNORMAL PROFITS AS COMPARED TO OTHER COMPARABLE IS FULLY JUSTIFIED. WE , THEREFORE SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE A.O. WITH A DIRECTION TO DECIDE THE SAME AFRESH AFTER TAKING INTO CONSIDERATION THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE LEARNED CIT(A) AND K EEPING IN VIEW THE DELHI BENCH OF ITA IN THE CASE OF ABODE SYSTEMS INDIA PVT. LTD. (SU PRA). IN THIS VIEW OF THE MATTER, WE ACCEPT THE CONTENTIONS 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 SHOWN EXTR AORDINARILY HIGH PROFIT. IT IS ALSO A FACT THAT THE DRP IN ASSESSEE S CASE FOR ASST. YEAR 2008- 09 HAS DIRECTED FOR REMOVAL OF THE AFORESAID COMPAN Y FROM THE LIST OF COMPARABLES. THEREFORE, FOLLOWING THE DECISION OF C O-ORDINATE BENCH IN CASE OF CAPITAL IQ (SUPRA), WE DIRECT THE ASSESSING OFFICER TO EXCLUDE M/S MOLD-TEK TECHNOLOGIES LIMITED FROM THE LIST OF COMP ARABLES. 11. VISHAL INFORMATION TECHNOLOGIES LTD. 6.8.1 OBJECTING TO THE AFORESAID COMPANY BEING SELE CTED AS COMPARABLE BY THE TPO, THE LEARNED AUTHORISED REPRESENTATIVE OF T HE ASSESSEE SUBMITTED BEFORE US THAT THE AFORESAID COMPANY IS NOT ONLY FU NCTIONALLY DIFFERENT ON ACCOUNT OF EMPLOYEE COST FILTER AS THE EMPLOYEE COS T OF THE COMPANY IS ONLY 2% OF ITS REVENUE, BUT IT ALSO HAS HUGE VENDOR PAYM ENT FOR DATA ENTRY WHICH IS INDICATIVE OF THE FACT THAT IT DOES NOT PR OVIDE IT ENABLED SERVICES BY ITSELF BUT OUTSOURCES THE WORK WITH A THIRD PART Y VENDOR. IT WAS SUBMITTED THAT THE DRP IN ASSESSEES OWN CASE FOR A Y 2008-09 HAS REJECTED THIS COMPANY AS COMPARABLES. THE LEARNED A UTHORISED I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 17 -: REPRESENTATIVE OF THE ASSESSEE ALSO RELIED UPON THE OBSERVATION MADE BY THE 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 ASSESSEE RELIED UP ON THE DECISIONS OF CO- ORDINATE BENCH OF HYDERABAD TRIBUNAL IN CASES OF AV INEON 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.1 781/HYD/2011 DATED 07.06.2013, M/S. CAPITAL IQ INFORMATION SYSTE MS 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 HOWEV ER SUPPORTED THE ORDERS OF THE DRP AND TPO. 6.8.3 WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL ON RECORD. IN CASE OF CAPITAL IQ INFORMATION SYSTEMS ( INDIA) PVT. LTD.,(SUPRA) THE CO-ORDINATE BENCH AFTER CONSIDERING THE OBJECTI ONS OF THE ASSESSEE IN RESPECT OF THE AFORESAID COMPANY HELD IN THE FOLLOW ING MANNER :- 17. AFTER CONSIDERING THE SUBMISSIONS OF THE LEARNE D AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, WE FIND THAT THE DRP, IN THE PROCEEDING S FOR THE ASSESSMENT YEAR 2008-09 IN ASSESSEES OWN CASE, AFTER TAKING NOTE OF THE CO MPOSITION OF THE VENDOR PAYMENTS OF CORAL HUB FOR THE LAST THREE YEARS, AND THE FACT THAT IT HAS ALSO COMMENCED A NEW LINE OF BUSINESS OF PRINTING ON DEMAND(POD), WHEREIN IT PRINTS UPON CLIENTS REQUEST, CONCLUDED AS FOLLOWS- 18.4. IN VIEW OF THIS MAJOR DIFFERENCE IN FUNCTION ALITY AND THE BUSINESS MODEL, THIS PANEL IS OF THE VIEW THAT CORAL HUB IS NOT A SUITABLE C OMPARABLE TO THE TAXPAYER AND HENCE NEEDS TO BE DROPPED FORM THE FINAL LIST OF COMPARAB LES. IN CASE OF ACIT V/S. M/S. MAERSK GLOBAL SERVICE CEN TRE (SUPRA), THE ITAT MUMBAI BENCH HAS ALSO DIRECTED FOR EXCLUSION OF THE AFORESAID COMPANY, BY OBSERVING IN THE FOLLOWING MANNER- INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMITED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICED FR OM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERATIONS BY ITSELF, IN OUR CON SIDERED 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 GLOBAL SERVICE CENTRE, (SUPRA), WE ACCEPT THAT THIS COMPANY 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 OUTSOURCED CONSIDER ABLE PORTION OF ITS BUSINESS TO THIRD PARTY VENDOR. HENCE, IT CANNOT B E CONSIDERED AS A COMPARABLE. THAT BESIDES THE DRP IN ASSESSEES OWN CASE FOR ASST. YEAR I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 18 -: 2008-09 HAS HELD THAT THIS COMPANY CANNOT BE TREATE D AS A COMPARABLE. THEREFORE, CONSIDERING THE AFORESAID FACT, WE ARE O F THE VIEW THAT M/S VISHAL INFORMATION TECHNOLOGY LTD., CANNOT BE TAKEN AS A COMPARABLE AND DIRECT FOR EXCLUDING THE SAME FROM THE LIST OF COMP ARABLES. 6. HCL COMNET SYSTEMS & SERVICES LIMITED, 8. INFOSYS BPO LIMITED AND 12. WIPRO LIMITED:- 6.9.1 OBJECTING TO THE AFORESAID COMPANIES BEING TR EATED AS COMPARABLES, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE SUBMITTED THAT HCL COMNET SYSTEM IS FUNCTIONALLY DIFFERENT AS IT IS EN GAGED IN THE BUSINESS OF PROVIDING TELECOMMUNICATION AND REMOTE INFRASTRUCTU RE MANAGEMENT SERVICES. SO FAR AS INFOSYS BPO IS CONCERNED, IT WA S SUBMITTED THAT THIS COMPANY CANNOT BE COMPARED WITH THE ASSESSEE AS THE RE IS DIFFERENCES IN FUNCTIONS, RISKS AND ASSETS PROFILE. IT WAS SUBMITT ED THAT INFOSYS BRAND HAS A PREMIUM AND HENCE CANNOT BE CONSIDERED AS COM PARABLES TO RISK MITIGATED CONTRACT SERVICE PROVIDER WHICH DO NOT OW N OR TAKE RISKS TO DEVELOP INTANGIBLES. IT WAS FURTHER SUBMITTED THAT WIPRO LIMITED IS ALSO FUNCTIONALLY DIFFERENT AS THE COMPANY OWNS SIGNIFIC ANT INTANGIBLES AND HENCE ENJOYS PREMIUM PRICING. IT WAS SUBMITTED THAT 28% OF THE BPO REVENUE IS FROM PRODUCT ENGINEERING SERVICES. IT WA S FURTHER SUBMITTED THAT, MANUALLY CORRECTED AND UNAUDITED DATA FROM IT S TP REPORT HAS BEEN CONSIDERED WHICH CANNOT BE SAID TO BE AUTHENTIC. IN SUPPORT OF HIS CONTENTION FOR EXCLUDING THE AFORESAID THREE COMPAN IES AS COMPARABLES, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE RELIED UPON THE DECISION OF CAPITAL IQ INFORMATION SYSTEMS INDIA P. LTD. VS. ADDL. CIT, CIRCLE 1(2), HYDERABAD (ITA NO.124/HYD/2014 AND ITA.NO.170/HYD/2014 DATED 31.07.2014. 6.9.2 WE HAVE HEARD RIVAL SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIAL ON RECORD. IT IS NOT DISPUTED THAT THESE T HREE COMPANIES ARE HAVING HUGE TURNOVERS LIKE THAT OF ASSESSEE DURING THE YEAR. THEREFORE TURNOVER FILTER AS CONSIDERED IN OTHER CASES DOES N OT APPLY HERE. HOWEVER AS SUBMITTED THE FUNCTIONAL PROFILE OF COMPANIES AS SUCH IS DIFFERENT. BUT, IF THE BPO DIVISION IS SIMILAR TO ASSESSEE THE SAME CAN BE CONSIDERED AFTER PROPER FAR ANALYSIS. THEREFORE WE ARE OF THE OPINIO N THAT TPO/AO CAN RECONSIDER THE COMPARABLES AFTER GIVING DUE OPPORTU NITY TO ASSESS AND FAIRLY ANALYZING ITS OBJECTIONS. IN CASE THE DATA ( SEGMENTAL OR UNIT) IS INCOMPLETE OR FUNCTIONAL PROFILE ETC ARE DIFFERENT AO/TPO SHOULD EXCLUDE THE SAME. WITH THESE OBSERVATIONS THE ISSUE OF SELE CTION OF THESE COMPANIES AS COMPARABLES IS RESTORED TO TPO/AO TO D O THE NEEDFUL. 7. IN GROUND NO 10 ASSESSEE IS SEEKING ADJUSTMENT F OR DIFFERENCES IN FUNCTIONS AND RISKS UNDERTAKEN. WITH REFERENCE TO T HE RISK ADJUSTMENT, IT WAS THE SUBMISSION OF THE ASSESSEE THAT ASSESSEE FU NCTIONED UNDER A LIMITED RISK ENVIRONMENT WITH MOST OF THE RISKS BEI NG ASSUMED BY ITS AES I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 19 -: AND COMPARABLES SELECTED FOR ANALYSIS INCLUDE COMPA NIES WHICH HAVE FAIRLY DIVERSIFIED AREAS OF SPECIALISATION, BEARING RISKS AKIN TO ANY THIRD PARTY INDEPENDENT SERVICE PROVIDER. SINCE ASSESSEE IS OPERATING IN A RISK MITIGATED ENVIRONMENT VIS--VIS THE COMPARABLE COMP ANIES PERFORMING ENTREPRENEURIAL RISK TAKING FUNCTIONS, THE ASSESSEE SEEKS ADJUSTMENT FOR THE RISK BEING TAKEN BY THE COMPARABLE, WHOSE PROFI T WOULD BE MORE DEPENDENT ON THE RISK INVOLVED. SINCE THE ASSESSEE DOES NOT BEAR ANY RISK OF INCURRING LOSSES AND SINCE COMPARABLE COMPANIES WORK IN THE MARKET ENVIRONMENT, THE MARGINS EARNED BY THE COMPARABLE C OMPANIES WOULD BE COMPARATIVELY MORE TO REFLECT THE HIGHER LEVEL OF F UNCTIONS AND RISKS. IT WAS FURTHER SUBMITTED THAT IN THE TP DOCUMENTATION SUBM ITTED BY THE ASSESSEE, NO RISK ADJUSTMENT WAS MADE AS COMPARABLE SELECTED WERE WITHIN THE ARMS LENGTH RANGE. THE ASSESSEE RELIED ON A HOST O F CASES TO SUBMIT THAT ADJUSTMENT NEEDS TO BE MADE TO THE MARGINS OF THE C OMPARABLES TO ELIMINATE DIFFERENCE ON ACCOUNT OF DIFFERENT FUNCTI ONS, ASSETS AND RISKS. 7.1. TO THE EXTENT OF PRINCIPLES INVOLVED, WE AGREE WITH THE ASSESSEES SUBMISSIONS THAT SOME OF THE COMPARABLES MAY BE UND ERTAKING MARKET RISKS/ENTREPRENEURIAL RISKS, WHICH ARE NOT THERE IN THE CASE OF THE ASSESSEE. HOWEVER, THE ISSUE BOILS DOWN TO QUANTIFI CATION OF SUCH ADJUSTMENT. IN THE WRITTEN SUBMISSIONS, THE ASSESSE E BASED ON THE DECISION OF THE ITAT BANGALORE IN THE CASE OF PHILI PS SOFTWARE CENTRE PRIVATE LTD. VS. ACIT (119 TTJ 721)(BANG), WHICH PR OVIDED 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 WOR KING WAS NOT ACCEPTED BY THE ITAT MUMBAI BENCH IN THE CASE OF WILLIS PROC ESSING SERVICES INDIA PRIVATE LTD. VS. DCIT, VIDE ITS ORDER DATED 17.12.2 012 IN ITA NO.8772/MUM/2010 FOR ASSESSMENT YEAR 2006-07. THIS ADJUSTMENT OF 4.5% CANNOT BE CONSIDERED BASED ON PRIME LENDING RA TE, WHICH CANNOT BE CONSIDERED AS A MARKET RISK ADOPTED. HOWEVER, THE A SSESSEE IS RELYING ON TWO MORE CASES OF THE COORDINATE BENCHES IN THE CAS E OF SONY INDIA LTD. (114 ITD 448)-DEL, WHEREIN THE TRIBUNAL DETERMINED THE RISK ADJUSTMENT AT 20% OF THE ALP FOR A RISK MITIGATED DISTRIBUTOR. IT ALSO RELIED ON THE DECISION OF THE DELHI BENCH IN THE CASE OF ROLLS RO YCE PLC V/S. DCIT (90 SOT 42), WHEREIN IT WAS DETERMINED AT 35% OF THE CO MPANYS PROFITABILITY ALLOCATED TOWARDS MARKETING ACTIVITIES. THEREFORE, IT WAS SUBMITTED THAT SINCE ASSESSEE DOES NOT HAVE ANY MARKETING ACTIVITI ES, A 35% ADJUSTMENT IS WARRANTED FOR THE DIFFERENCE IN RISKS. IT ALSO S UBMITS THAT RISK ADJUSTMENT CAN ALSO BE COMPUTED UNDER THE CAPITAL A SSET PRICING MODEL (CAPM)/SHARPE MODEL FOR RISK ADJUSTMENTS. IN THE PR EVIOUS 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 GI VING ANY DIRECTION WITH REFERENCE TO THE RISK ADJUSTMENT AND AMOUNT OF RISK ADJUSTMENT REQUIRED, RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFF ICER TO RE-EXAMINE THIS ADJUSTMENT ISSUE AFRESH, AFTER CONSIDERING THE ASSE SSEES SUBMISSIONS AND DECIDE THE ISSUE IN ACCORDANCE WITH THE PRINCIP LES ON THE SUBJECT. I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 20 -: 10.4. SINCE THE ABOVE COMPARABLES WERE ALREADY CONS IDERED IN THE CO-ORDINATE BENCH DECISION, WE DIRECT THE AO/T PO TO EXAMINE THE INCLUSION OF ITEMS AT 15, 20 AND 22 AS DI RECTED ABOVE IN THE ABOVE CASE AND EXCLUDE THE OTHER COMPARABLES LI STED AT 14, 16 TO 19, 21, 23 TO 25. WE DIRECT ACCORDINGLY. 11. GROUND NO. 13: ADJUSTMENT FOR RISK DIFFERENCES NOT ADJUSTING THE NET MARGINS OF THE COMPARABLE COM PANIES TAKING INTO ACCOUNT THE FUNCTIONAL AND RISK DIFFERE NCES BETWEEN THE INTERNATIONAL TRANSACTION OF THE APPELL ANT AND THE COMPARABLE TRANSACTIONS IN ACCORDANCE WITH THE PROV ISIONS OF RULE 10B(1)(E); 11.1. WITH REFERENCE TO RISK ADJUSTMENT, IT WAS FAIRLY ADMITTED THAT AFTER EXCLUSION OF CERTAIN COMPARABLES, ASSESSEES MARGIN IS WITHIN THE ALP, THEREFORE, THIS GROUND BECOMES ACADEM IC. SIMILARLY, GROUND NO. 15 ALSO BECOMES ACADEMIC. AC CORDINGLY, THESE ARE TREATED AS WITHDRAWN. 12. GROUND NO. 16: APPLICABILITY OF PROVISO TO SECTION 92C(2): NOT ALLOWING THE OPTION UNDER THE PROVISO TO SECTIO N 92C(2) OF THE ACT IN LIMITING THE ADJUSTMENT AT A VARIATION O F 5 PERCENT TO THE ARMS LENGTH PRICE: 12.1. THIS GROUND PERTAINS TO APPLICABILITY OF PRO VISO TO SECTION 92C(2). EVEN THOUGH ASSESSEE HAS ASKED FOR D EDUCTION OF 5% AS A STANDARD DEDUCTION, THE SAME CANNOT BE ALLOWED. HOWEVER, AO/TPO IS DIRECTED TO KEEP IN MIND THE PROVI SO TO SECTION 92C(2) WHILE ARRIVING AT THE ALP ADJUSTMENT. WITH THE SE DIRECTIONS, GROUND IS CONSIDERED ALLOWED FOR STATISTICA L PURPOSES. I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 21 -: CORPORATE MATTERS: 13. DEDUCTION U/S. 10A: GROUND NO. 17: DENYING THE DEDUCTION U/S. 10A OF T HE ACT TO THE OFFSHORE RESEARCH SERVICE CENTRE (ORSC) UNIT BY CONCLUDING T HAT THE ORSC UNIT HAS BEEN FORMED BY RECONSTRUCTION OF THE EXISTING BUSIN ESS: GROUND NO. 18: WITHOUT PREJUDICE TO GROUND 17, ASSU MING THAT THE ORSC UNIT HAS BEEN FORMED BY RECONSTRUCTION OF EXISTING BUSINESS, IN NON- CONSIDERING THE APPELLANTS SUBMISSION TO TREAT THE SAME AS CONVERSION OF DOMESTIC TARIFF AREA (DTA) UNIT INTO STPI UNIT AND ALLOWING THE DEDUCTION U/S. 10A OF THE ACT, FOR THE UNEXPIRED PERIOD OF YE ARS: 13.1. THESE GROUNDS PERTAIN TO THE ISSUE OF DEDUCTION U/S. 10A OF THE ACT ON THE ORSC UNIT. AO HAS CONSIDERED THAT ORSC UNIT HAS BEEN FORMED BY RE-CONSTRUCTION OF EXISTING B USINESS. ASSESSEE ALSO RAISED ADDITIONAL GROUND NO. 1 WITH RE FERENCE TO ADDITIONAL CLAIM. AO REJECTED THE EXEMPTION CLAIMED U /S. 10A IN RESPECT OF ORSC UNIT BY HOLDING THAT AS THE AFORESAID UNIT HAVE BEEN SET UP BY SPLITTING UP/RECONSTRUCTION OF THE EXISTING BUSINESS, THE EXEMPTION CLAIMED CANNOT BE GRANTED. ASSESSEE OBJE CTED TO THE DENIAL OF EXEMPTION BEFORE THE DRP. DRP EXTRACTED THE SUBMISSIONS IN ITS ORDER HOWEVER, HAS UPHELD THE AOS CONTENTIONS STATING THAT THE ISSUE WAS NOT FREE FROM DOUBT AND HAS APPROVED THE AOS ACTION AS THE APPEALS ARE PENDING ON THE ISSU E. 13.2. LD. COUNSEL WHILE STATING THAT ORSC UNIT HAS COME UP AFRESH IN FINANCIAL YEAR 2004 AND CLAIMED THE DEDUCTI ON FOR THE FIRST TIME IN AY. 2006-07, HOWEVER, SUBMITTED THAT THE AO IN AY. 2008-09 HAS PASSED A DETAILED ORDER U/S. 154 STATING THAT ORSC UNIT WHICH IS NOT ELIGIBLE FOR DEDUCTION AS THE ELIGIBI LITY U/S. 10A HAS GOT EXPIRED BY AY. 2004-05 ITSELF AND THE DEDUCTIO N IN AY. I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 22 -: 2008-09 WAS NOT ALLOWABLE TO ASSESSEE. THE ISSUE IS BEING CONTESTED. IT WAS SUBMITTED THAT ASSESSEE WAS ELIGIBLE F OR DEDUCTION ON THE NEW ORSC UNIT WHICH WAS APPROVED AS S TPI AND THEREFORE, THE CLAIM IS ENTIRELY DIFFERENT THAN THAT OF E ARLIER ONE. 13.3. LD. DR REFERRING TO THE ORDER OF THE ITAT IN AY . 2006-07 IN ITA NO. 108/HYD/2011 DT. 27-06-2014 SUBMITTED THAT IT AT HAS GIVEN FINDING THAT ORSC IS NOT A NEW UNIT BUT IS ELIGIB LE FOR UN- ALLOWED PORTION OF THE DEDUCTION U/S. 10A WHICH WAS AN ALTERNATE CONTENTION OF ASSESSEE. 13.4. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PE RUSED THE ORDER ON RECORD. AS FAR AS THE UNIT OF ORSC IS CO NCERNED IN AY. 2006-07 ITAT IN ITA NO. 108/HYD/2011 DT. 27-06-2014 HAS HELD AS UNDER: 8. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD AS WELL AS THE ORDERS OF THE DRP ON THIS ISSUE. SO FAR AS THE FIRST CONTENTION OF THE ASSESSEE THAT ORSC IS A NEW UNIT, WE ARE UNABLE TO ACCEPT SUCH CONTENTION IN VIEW OF THE SPECIFIC FIND ING OF THE AO, WHICH HAS NOT BEEN CONTROVERTED BY THE ASSESSEE BY BRINGING S UFFICIENT MATERIAL TO SUBSTANTIATE ITS CLAIM. HOWEVER, SO FAR AS ALTERNAT IVE CONTENTION OF THE ASSESSEE FOR ALLOWING CLAIM OF DEDUCTION U/S 10A OF THE ACT DUE TO CONVERSION FROM DTA UNIT TO STPI UNIT, WE FIND FORC E IN SUCH CONTENTION OF THE LEARNED AR. IT IS NOT IN DISPUTE THAT ORSC UNIT IS RECOGNIZED AS A STPI UNIT. ON PERUSAL OF THE ORDER PASSED BY THE DRP FOR THE AY 2008-09, IT IS SEEN THAT IN PARA 12 OF THE SAID ORDER, THE DRP HAS HELD THAT WHEN ORSC UNIT IS CONVERTED FROM DOMESTIC TARIFF AREA TO STPI UNIT, IT IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT FOR THE REMAINING PERI OD OUT OF 10 CONSECUTIVE ASSESSMENT YEARS STARTING FROM THE YEAR IN WHICH IT WAS APPROVED AS STPI UNIT. IN VIEW OF SUCH FINDING OF T HE DRP FOR THE AY 2008- 09, WE DIRECT THE AO TO ALLOW DEDUCTION U/S 10A OF THE ACT FOR THE IMPUGNED ASSESSMENT YEAR ALSO. 8.1 THE ASSESSEE HAS RAISED ONE MORE ADDITIONAL GRO UND AT THE TIME OF HEARING BEFORE US WHICH IS AS UNDER: I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 23 -: 'WITH REFERENCE TO GROUND NO. 18 AND 19, WE REQUEST THE HON'BLE TRIBUNAL TO DIRECT THE LEARNED AO TO CONSIDER THE APPELLANT'S REVISED CL AIM IN RESPECT OF DEDUCTION U/S 10A OF THE ACT MADE DURING THE ASSESSMENT PROCEEDINGS .' 8.2 IN THIS CONTEXT, LEARNED AR HAS REFERRED TO THE WORKING OF COMPUTATION U/S 10A DEDUCTION AS CONTAINED IN REPLY DATED 17/12 /2005 BEFORE THE ADDITIONAL COMMISSIONER OF INCOME-TAX, A COPY OF WH ICH IS PLACED AT PAGE 119 OF THE PAPER BOOK. 8.3 CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, WE REMIT THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO LOOK INTO TH IS ASPECT AND TAKE A DECISION IN THE MATTER AFTER VERIFYING THE CLAIM OF THE ASSESSEE AND AFTER GIVING DUE OPPORTUNITY OF HEARING IN THE MATTER TO THE ASSESSEE. 13.5. AO/TPO IS DIRECTED TO EXAMINE THE ISSUE IN THE LIGHT OF THE FACTS AND IF ANY UN-AVAILED PORTION WAS AVAILABLE FOR STPI UNIT, THE DEDUCTION WILL BE ALLOWED. ACCORDINGLY, THIS ISSU E IS RESTORED TO THE FILE OF THE AO TO EXAMINE IN THE LIGHT OF THE DIRECTIO NS GIVEN IN THE ABOVE ORDER IN AY. 2006-07. GROUNDS ARE CONSIDER ED ALLOWED FOR STATISTICAL PURPOSES. 14. GROUND NO. 19: CAPITALISATION OF LICENSE FEES DISALLOWANCE THE LICENSE FEES OF RS. 34,23,815 BY C ONSIDERING THE SAME CAPITAL IN NATURE 14.1. THIS GROUND PERTAINS TO THE DISALLOWANCE OF LI CENSE FEES OF RS. 34,23,815/- BY CONSIDERING THE SAME AS CAPITAL IN NATURE. 14.2. IT WAS SUBMITTED THAT THIS ISSUE IS COVERED BY THE DIRECTIONS OF THE ITAT IN THE CASE OF M/S. TNS INDIA PVT. LTD., VS. DCIT (AY. 2008-09) IN ITA NO. 1875/HYD/2012 DT. 17-0 4-2015 VIDE PARAS 21 TO 23. THE DECISION OF THE CO-ORDINATE BENCH IS AS UNDER: I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 24 -: 21. THE ISSUE RAISED IN GROUND NO. 17 IS WITH REGA RD TO TREATING THE SOFTWARE LICENCE FEE PAID AS CAPITAL EXPENDITURE AN D ALLOWING DEPRECIATION @ 25%. 22. BRIEFLY THE FACTS ARE, DURING THE ASSESSMENT PR OCEEDING, AO NOTICED THAT IN THE PROFIT & LOSS A/C, ASSESSEE HAS DEBITED AN AMOUNT OF RS. 2,21,29,855 TOWARDS COMPUTER MAINTENANCE CHARGES. F ROM THE BREAK-UP SUBMITTED BY ASSESSEE, IT WAS NOTICED BY AO THAT AS SESSEE HAS CLAIMED AN AMOUNT OF RS. 1,00,99,916 ON ACCOUNT OF LICENCE FEE. AO ASKED ASSESSEE TO EXPLAIN WHY THE EXPENDITURE CLAIMED SHO ULD NOT BE DISALLOWED AS IT IS IN THE NATURE OF CAPITAL EXPEND ITURE. THOUGH ASSESSEE OBJECTED TO SUCH VIEW OF AO, BUT, AO REJECTING THE OBJECTIONS OF ASSESSEE DISALLOWED THE EXPENDITURE CLAIMED AND ADDED THE AM OUNT OF RS. 1,00,99,916 BY TREATING IT AS CAPITAL EXPENDITURE. ASSESSEE OBJECTED TO THE ADDITION MADE BEFORE DRP. LD. DRP, THOUGH, UPHE LD AO'S DECISION THAT THE EXPENDITURE INCURRED IS CAPITAL IN NATURE, BUT, DIRECTED AO TO ALLOW DEPRECIATION AT APPROPRIATE RATE. THE AO WHILE COMP LETING FINAL ASSESSMENT IN PURSUANCE TO THE DIRECTIONS OF LD. DR P, ALLOWED DEPRECIATION @ 25% ON THE SOFTWARE LICENCE FEE BY MENTIONING THA T IT FALLS IN THE BLOCK OF INTANGIBLE ASSETS. 23. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. IT IS VERY MUCH EVIDENT FROM R ECORD THAT THE SOFTWARE LICENCE FEE HAS BEEN PAID TOWARDS OPERATION AS WELL AS APPLICATION SOFTWARE. THAT BEING THE CASE, THE RATE OF DEPRECIA TION APPLICABLE IS 60% (AS APPLICABLE TO COMPUTER) AND NOT 25% AS ALLOWED BY AO. MOREOVER, THIS ISSUE IS MORE OR LESS COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF THE COORDINATE BENCH IN ASSESSEE'S OWN CASE FOR THE AY 2009-10. THE COORDINATE BENCH IN ITA NO. 604/HYD/14 WHILE DECIDI NG THE ISSUE HELD AS UNDER: 37. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE DECISIONS RELIED UPON BY LD. A R. AS FAR AS ASSESSEE'S CLAIM THAT THE EXPENDITURE CLAIMED HAS TO BE TREATED AS REVENUE EXP ENDITURE, WE ARE OF THE VIEW THAT AS PER THE ITAT SPECIAL BENCH DECISIONS IN CASE OF A MWAY INDIA LTD. VS. DCIT (SUPRA), WHETHER A PARTICULAR EXPENDITURE IN RELATION TO ACQUI SITION OF SOFTWARE WILL BE REVENUE OR CAPITAL, CANNOT BE DECIDED BY EITHER THE OWNERSHIP TEST OR ENDURING BENEFIT TEST. THE FUNCTIONAL TEST HAS ALSO TO BE APPLIED. ITAT SPECIA L BENCH WENT ON TO LAY DOWN CERTAIN TESTS FOR DECIDING WHETHER THE EXPENDITURE INCURRED H AS TO BE TREATED AS REVENUE OR CAPITAL. IN THE PRESENT CASE, ASSESSEE HAS NOT BROUGHT ANY MATERIAL ON RECORD TO ESTABLISH THAT BY APPLYING THE FUNCTIONAL TEST, THE EXP ENDITURE CAN BE SAID TO BE OF A REVENUE NATURE. MOREOVER, AFTER 01/04/2003 COMPUTER SOFTWARE HAS BEEN SPECIFICALLY BROUGHT INTO THE SCHEDULE AT PAR WITH COMPUTER AS FAR A S ELIGIBILITY OF DEPRECIATION IS CONCERNED. THEREFORE, AFTER 01/04/2003, COMPUTER SOF TWARE IN THE NATURE OF APPLICATION SOFTWARE AND NOT MERE LICENCE FOR RENEW AL HAVE TO BE TREATED AS CAPITAL ASSETS ELIGIBLE FOR DEPRECIATION AT THE SAME RATE AS OF COMPUTER. THEREFORE, EXPENDITURE INCURRED FOR ACQUIRING SUCH ASSET WILL B E CAPITAL EXPENDITURE. HOWEVER, WE I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 25 -: ACCEPT LD. AR'S ALTERNATIVE CONTENTION THAT DEPRECIAT ION SHOULD BE ALLOWED AT 60%. AS PER THE NEW APPENDIX APPLICABLE FROM AY 2006-07, DE PRECIATION ON COMPUTER AND COMPUTER SOFTWARE IS TO BE ALLOWED AT 60%. AS AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SHOW THAT COMPUTER SOFTWARE ACQUIRED BY ASS ESSEE IS NOT IN THE NATURE OF SOFTWARE AS MENTIONED IN THE APPENDIX, IN OUR VIEW, AO IS NOT JUSTIFIED IN ALLOWING DEPRECIATION AT 25%. WE, THEREFORE, DIRECT AO TO ALL OW DEPRECIATION ON THE COMPUTER SOFTWARE AT 60%. THIS GROUND IS PARTLY ALLOWED. IN VIEW OF THE ABOVE, WE DIRECT AO TO ALLOW DEPRECI ATION @ 60% ON THE SOFTWARE LICENCE FEE. THIS GROUND IS PARTLY ALLOWED . 14.3. IN VIEW OF THAT, WE UPHOLD THE DIRECTION OF THE D RP TO TREAT THE AMOUNT AS CAPITAL IN NATURE TO ALLOW THE DEPRE CIATION. HOWEVER, THE RATE OF DEPRECIATION IS TO BE DETERMINED AT 60%. WITH THE ABOVE DIRECTIONS, THE GROUND IS CONSIDERED PARTLY A LLOWED. 15. GROUND NO. 20: ADJUSTMENT OF REFUND ADJUSTING AN AMOUNT OF RS. 51,96,176 BEING REFUND I SSUED U/S. 143(1) IN THE ORDER WHILE COMPUTING THE TAX PA YABLE, WHEREAS THE APPELLANT HAS NOT RECEIVED ANY SUCH REF UND 15.1. THIS GROUND PERTAINS TO ADJUSTMENT OF REFUND OF RS. 51,96,176/- BEING REFUND ISSUED U/S. 143(1) WHICH A SSESSEE STATES THAT IT HAS NOT RECEIVED. THIS MATTER IS TO BE VERIFIED BY THE AO AND ACCORDINGLY, AO IS DIRECTED TO VERIFY AND GIVE PROPE R CREDIT TO THE AMOUNTS PAID AS WELL AS REFUNDED TO THE ASSESSEE IN TH E CONSEQUENTIAL ORDER. WITH THESE DIRECTIONS, GROUND IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH JANUARY, 2017 SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMB ER HYDERABAD, DATED 6 TH JANUARY, 2017 TNMM I.T.A. NO. 1927/HYD/2011 TNS INDIA PRIVATE LIMITED :- 26 -: COPY TO : 1. TNS INDIA PRIVATE LIMITED, 2 ND FLOOR, SHREE PRASHANTHI SAI TOWERS, PLOT NO. 68, H.NO. 8-2-248, SREE NAGARJ UNA CO-OPERATIVE HOUSING SOCIETY, PANJAGUTTA, HYDERABAD . 2. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-2(3 ), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATI ON, INCOME TAX TOWERS, HYDERABAD. 5. THE ADDL. COMMISSIONER OF INCOME TAX (TRANSFER P RICING), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.