Virtusa (India) Private Limited, Hyderabad V. DCIT, Circle-3(3), Hyderabad

ITA 1962/HYD/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69764 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 24-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHRR M RAVINDRA SAI
• Assessee Lawyers: MITHLESH; RAVI BHARDWAJ
• Keywords: Related party transaction; Transfer pricing; International transaction; Benefit of exemption
• Section: 143(3); 133(6); 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1962/HYD/2011 ASSESSMENT YEAR : 2007-08 VIRTUSA (INDIA) PVT. LTD., APPELLANT HYDERABAD. (PAN AABCV4077E) VS. DY. COMMISSIONER OF INCOME-TAX, RESPONDENT CIRCLE 3(3), HYDERABAD. APPELLANT BY : SHRI RAVI BHARDWAJ & SHRI MITHLESH RESPONDENT BY : SHRR M. RAVINDRA SAI DATE OF HEARING : 24/06/2013 DATE OF PRONOUNCEMENT : 30/08/2013 ORDER PER SAKTIJIT DEY, J.M.: ASSESSEES APPEAL IS DIRECTED AGAINST THE ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SECTIO N 144C OF THE ACT ON THE DIRECTION OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER CALLED DRP), HYDERA BAD PERTAINING TO THE ASSESSMENT YEAR 2007-08. 2. BRIEFLY, THE FACTS ARE, THE ASSESSEE IS WHOLLY O WNED SUBSIDIARY OF VIRTUSA CORPORATION OF USA AND PART O F THE VIRTUSA GROUP. IT PROVIDES SOFTWARE DEVELOPMENT SER VICES TO ITS GROUP COMPANIES. THE ASSESSEE IS A 100% EXPO RT ORIENTED UNIT REGISTERED UNDER SOFTWARE TECHNOLOGY PARK ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 2 OF INDIA (STPI) SCHEME. FOR THE ASSESSMENT YEAR UND ER DISPUTE. THE ASSESSEE FILED ITS RETURN OF INCOME DE CLARING TOTAL INCOME OF RS. 45,79,591/- AFTER CLAIMING DEDU CTION U/S 10A OF THE ACT IN RESPECT OF THE PROFITS OF ITS STPI UNIT LOCATED IN HYDERABAD AND CHENNAI. INITIALLY TH E RETURN WAS PROCESSED U/S 143(1) OF THE ACT. SUBSEQUENTLY, HOWEVER, THE ASSESSEES CASE WAS SELE CTED FOR SCRUTINY AND IN COURSE OF SCRUTINY ASSESSMENT PROCEEDING, THE ASSESSING OFFICER NOTICING THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS ASSOCIATES ENTERPRISES (AE), A REFERENCE WAS MA DE BY HIM TO THE ADDL. COMMISSIONER OF INCOME-TAX (TRANSF ER PRICING), (HEREINAFTER CALLED TPO),HYDERABAD FOR DETERMINING ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION WITH ITS AE. THE ASSESSEE DURING THE YE AR REPORTED THE FOLLOWING RECEIPTS EARNED FROM INTERNA TIONAL TRANSACTION WITH ITS AE: I) PROVISION OF SOFTWARE DEVELOPMENT SERVICES 186,96,89,012 II) REIMBURSEMENT OF EXPENSES TO AE 62,71,9 42 III) REIMBURSEMENT OF EXPENSES BY AE 4,42,63,54 5 3. IN COURSE OF THE PROCEEDING BEFORE THE TPO, THE ASSESSEE SUBMITTED TP STUDY CONDUCTED BY M/S ERNST & YOUNG, CAS., AFTER UNDERTAKING A DETAILED ANALYSIS FOR DETERMINING THE FUNCTIONS, ASSETS AND RISKS UTILIZE D BY THE ASSESSEE AND ITS AE IN RESPECT OF INTERNATIONAL TRANSACTIONS BETWEEN THEM. AS PER THE FUNCTIONAL ANALYSIS IN THE TP STUDY THE ASSESSEE WAS CATEGORIS ED AS RISK MITIGATED CONTRACT SERVICES PROVIDER. TRANSACT ION NET MARGIN METHOD (TNMM) WAS ADOPTED AS MOST APPROPRIA TE METHOD FOR DETERMINING ALP. SEARCH WAS CONDUCTED IN THE PROWESS AND CAPITALINE DATA BASES TO SELECT ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 3 COMPARABLE COMPANIES BY SELECTING THE OPERATING MAR GIN I.E. OPERATING PROFIT TO OPERATING COST AS PROFIT L EVEL INDICATOR. THE ASSESSEE CONSIDERED THE FINANCIAL RE SULTS FOR THE PERIOD ENDING BETWEEN 1 ST APRIL, 2004 TO 30/06/2007. THE AFORESAID SEARCH PROCESS YIELDED A SET OF 28 COMPARABLES WITH A WEIGHTED AVERAGE PROFIT MA RGIN OF 14.64% ON OPERATING COST. SINCE THE ASSESSEES N ET MARGIN DURING THE YEAR WAS FOUND TO BE WITHIN ARMS LENGTH NO ADJUSTMENT WAS REQUIRED TO BE MADE. THE T PO, HOWEVER, REJECTED THE TP STUDY OF THE ASSESSEE, BRO ADLY CITING THE FOLLOWING REASONS: I) THE ASSESSEE HAS USED MULTIPLE YEAR DATA INSTEAD OF USING THE CURRENT YEAR DATA. II) OVERWHELMING NUMBER OF COMPANIES WERE ELIMINATED BY THE TAX PAYER BY NOT APPLYING QUANTITATIVE FILTERS BUT BY APPLYING THE SO CALLED QUALITATIVE FILTERS. III) THE ASSESSEE COULD NOT HAVE DETERMINED ABOUT THE NATURE OF BUSINESS AND QUALITY OF THE SERVICES RENDERED BY THE COMPANY WITHOUT GOING INTO FINANCIAL RESULTS OR MAKING OTHER ENQUIRIES. IV) SELECTION/REJECTION OF COMPARABLES ON THE BASIS OF QUALITATIVE FILTER OF FUNCTIONALLY DIFFERENT CRI TERIA IS NOT OBJECTIVE AND UNIFORM. V) THERE IS A COMPLETE DISCONNECT BETWEEN SEARCH FOR COMPARABLES AND THE COMPARABILITY ANALYSIS. VI) THE ASSESSEE HAS CONSIDERED THE COMPANIES AS COMPARABLES, WHICH HAVE RELATED PARTY TRANSACTIONS OF MORE THAN 25% OF THE OPERATING REVENUE. VII) THE ASSESSEE HAS CONSIDERED COMPANIES, WHICH ARE PREDOMINANTLY ON SITE COMPANIES RENDERING ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 4 SERVICES AT THE SITE OR CLIENT OR THROUGH THIRD PAR TIES LOCATED OUTSIDE INDIA. VIII) THE ASSESSEE HAS CONSIDERED COMPANIES AS COMPARABLES EVEN THOUGH THEY ARE FUNCTIONALLY DISSIMILAR. 4. HE, THEREFORE, CAME TO A CONCLUSION THAT TP STUD Y SUBMITTED BY THE ASSESSEE IS NOT RELIABLE AND, THER EFORE, HAS TO BE REJECTED. AFTER REJECTING THE TP STUDY, T HE ASSESSING OFFICER UNDERTOOK FRESH SEARCH IN THE DAT A BASES FOR SELECTING COMPARABLES. WHILE DOING SO, T HE TPO APPLIED CERTAIN ADDITIONAL FILTERS AND IN THIS PROCESS SELECTED 26 COMPANIES AS COMPARABLES, WITH AVERAGE ARITHMETIC MEAN PLI OF 25.14% AND AFTER MAKING WORK ING CAPITAL ADJUSTMENT OF 0.82% ARRIVED AT ADJUSTED ARITHMETIC MEAN PLI OF 24.32% BY APPLYING THE AFORE SAID ARITHMETIC MEAN PLI OF 24.32% TO THE OPERATING COST OF RS. 166,29,22,973/- DETERMINED ARMS LENGTH PRICE A T RS. 206,73,45,840/-. THE PRICE CHARGED BY THE ASSESSEE FOR ITS INTERNATIONAL TRANSACTIONS BEING SHOWN AT RS. 193,29,17,969/- (INCLUDING THE REIMBURSEMENT OF EXPENSES BY AE), THE SHORTFALL OF RS. 13,44,27,871/ - WAS TREATED AS TP STUDY ADJUSTMENT U/S 92CA OF THE ACT. IN PURSUANCE TO THE ORDER PASSED BY THE TPO PROPOSING THE AFORESAID TP ADJUSTMENT, THE AP PASSED A DRAFT ASSESSMENT ORDER INCORPORATING TP ADJUSTMENT OF RS. 13,44,27,871/-. APART FROM ADDING TP ADJUSTMENT, TH E ASSESSING OFFICER ALSO REDUCED THE COMMUNICATION CHARGES FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10 OF THE ACT AND ALSO MADE SOME OTHE R DISALLOWANCES. ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 5 5. BEING AGGRIEVED OF THE DRAFT ASSESSMENT ORDER, T HE ASSESSEE RAISED THE OBJECTIONS BEFORE THE DRP. 6. THE DRP, HOWEVER, REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE WITH REGARD TO SELECTION OF COMPARABLE S MADE BY THE TPO EXCEPTING IN THE CASE OF ONE OF THE COMPANY SELECTED AS COMPARABLE, NAMELY, CELESTIA L LABS, WHICH DRP DIRECTED TO BE EXCLUDED FOR DETERMI NING THE ALP. AS A RESULT OF SUCH ORDER OF THE DRP, THE DRAFT ASSESSMENT WAS MADE FINAL. 7. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFOR E US. 8. SO FAR AS THE TRANSFER PRICING ISSUES ARE CONCER NED, THE ASSESSEE HAS RAISED ALTOGETHER 12 GROUNDS. AT T HE OUTSET, THE LEARNED AR SUBMITTED BEFORE US THAT THE ASSESSEE DOES NOT WANT TO PRESS GROUND NOS. 1,2,3,4,5,6,9, 10 & 11. IN VIEW OF THE AFORESAID SUBMISSIONS OF THE LEARNED AR, THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 9. IN GROUND NO. 7, THE ASSESSEE HAS RAISED OBJECTI ON WITH REGARD TO SELECTION OF CERTAIN COMPANIES AS COMPARABLES BY THE TPO AND SOUGHT FOR THEIR EXCLUSI ON. HEREIN BELOW WE WILL DEAL WITH THE CONTENTIONS OF T HE PARTIES WITH REGARD TO ACCEPTABILITY OR OTHERWISE O F THE COMPANIES OBJECTED TO BY THE ASSESSEE TO BE TREATED AS COMPARABLE AND RECORD OUR FINDING IN RESPECT OF EAC H OF THESE COMPANIES. 1. AVANI CIMCON TECHNOLOGIES LTD. 1.1 THE LEARNED AR OBJECTING TO THE AFORESAID COMPA NY TO BE TREATED AS COMPARABLE, SUBMITTED THAT THE SAI D COMPANY IS NOT ONLY FUNCTIONALLY DIFFERENT AS IT IS EARNING REVENUES FROM PRODUCTS ALSO BUT THAT BESIDE S, IT HAS SHOWN HIGH MARGIN, WHICH CANNOT BE COMPARED TO THE ASSESSEE. THE LEARNED AR REFERRING TO THE ORDER PASSED BY THE TPO SUBMITTED THAT THE TPO HAS HIMSEL F CATEGORISED THE ASSESSEE AS A PURELY SOFTWARE SERVI CE PROVIDER AND HAS DISCUSSED THE DIFFERENCE BETWEEN A SOFTWARE PRODUCT COMPANY AND SOFTWARE DEVELOPMENT PROVIDER. THE LEARNED AR FURTHER SUBMITTED THAT THE INFORMATION AVAILABLE IN THE COMPANYS WEBSITE ALSO REVEAL THAT THE COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME D EXCHAGE. HENCE, THE COMPANY BEING FUNCTIONALLY DIFFERENT CANNOT BE SELECTED AS A COMPARABLE. IN SUPPORT OF SUCH CONTENTION, THE LEAR NED AR RELIED UPON A NUMBER OF DECISIONS OF THE COORDIN ATE BENCHES OF THIS TRIBUNAL WHEREIN THE AFORESAID COMP ANY HAS BEEN CONSIDERED TO BE NOT A COMPARABLE AS IT IS INTO PRODUCT DEVELOPMENT ALSO. THE DECISIONS RELIED UPON BY THE AR ARE AS UNDER: 1. INTOTO SOFTWARE INDIA PVT. LTD., ITA NO. 1196,1197/HYD/10. 2. TRIOLOGY E BUSINESS SOLUTIONS, ITA NO. 1054/BANG/2011. 3. TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011. 4. BEARING POINT BUSINESS, ITA NO. 1124/BANG/2011. 5. LG SOFT INDIA PVT. LTD., ITA NO. 1121/BANG/2011 6. TRANSWITCH INDIA PVT. LTD., ITA NO. 948/BANG/2011. 7. MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD., ITA NO. 1222/BANG/2011. ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 7 8. CSR INDIA PVT. LTD., ITA NO. 1119/BANG/2011. 9. FIRST ADVANTAGE, ITA NO. 1086/BANG/2012 10. HCL EAI SERVICES LTD., ITA NO. 1348/BAG/2011. 1.2 THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT BOTH THE TPO AND DRP HAVING ACCEPTED THE AFORESAID COMPANY AS A COMPARABLE AFTER OBJECTIVELY CONSIDERI NG CONTENTIONS RAISED BY THE ASSESSEE, THERE IS NO REA SON TO EXCLUDE IT. 1.3 WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIAL ON RECORD WITH REGARD TO THE AFORESAID COMPANY BEING TREATED AS COMPARABLE. THE FACT THAT THIS COMPANY IS EARNING REVENUE FROM PROD UCT DEVELOPMENT ALSO HAS NOT BEEN CONTROVERTED BY THE LEARNED DR. THE ITAT, MUMBAI BENCH IN CASE OF TELCORDIA TECHNOLOGIES INDIA PVT LTD. VS. ACIT (SUP RA) WHILE CONSIDERING THE OBJECTIONS RAISED WITH REGARD TO THE AFORESAID COMPANY HELD AS UNDER: HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPE RATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARI NG THE CASE THAT OF ASSESSEE. IN ABSENCE OF ANY KIND OF DE TAILS PROVIDED BY THE TPO, WE ARE UNABLE TO PERSUADE OURS ELVES TO INCLUDE IT AS COMPARABLE PARTY. LEARNED CIT DR HAS PROVIDED A COPY OF PROFIT LOSS ACCOUNT WHICH SHOWS THAT MAIN LY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETA ILS OF PERCENTAGE OF EXPORT OF PRODUCTS OR SERVICES HAVE N OT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERATION FOR COMPARABILITY ANALYSIS. IT WAS ALSO HIGHLIGHTED THAT THE MARGIN OF THIS COM PANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS. THE FOLLOWING FIGURES WERE PLACED BEFORE U S:- PARTICULARS FYS 05-06 06-07 07-08 08-09 ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 8 OPERATING REVENUE 21761611 35477523 29342809 280 39851 OPERATING EXPNS. 16417661 23249646 23359186 311 08949 OPERATING PROFIT 5343950 12227877 5983623 (3069098) OPERATING MARGIN 32.55% 52.59% 25.6 2% - 9.87% 1.4 THE ITAT, HYDERABAD BENCH FOLLOWING THE AFORESA ID DECISION OF THE MUMBAI BENCH ALSO HELD IN CASE OF INTOTO SOFTWARE INDIA PVT. LTD. IN ITA NO. 1196/HYD /10 AND OTHERS VIDE ORDER DATED 24/05/13 THAT THE AFORESAID COMPANY SINCE IS INVOLVED IN SOFTWARE PRO DUCT DEVELOPMENT CANNOT BE TREATED AS COMPARABLE WITH COMPANIES WHICH ARE PROVIDING ONLY SOFTWARE DEVELOPMENT SERVICES AND DIRECTED EXCLUSION OF THE SAID COMPANY. IN VIEW OF THE AFORESAID DECISION OF THE COORDINATE BENCH, WE DIRECT THE ASSESSING OFFICER/T PO TO EXCLUDE THE AFORESAID COMPANY FROM THE LIST OF COMPARABLES WHILE DETERMINING THE ALP. 2. INFOSYS TECHNOLOGIES LTD. 2.1 THE LEARNED AR OBJECTING TO THE AFORESAID COMPA NY BEING TREATED AS COMPARABLE, SUBMITTED THAT NOT ONL Y THE TURNOVER OF THE COMPANY AT RS. 13,149/- CRORE IS HUGE AS COMPARED TO THE ASSESSEE BUT IT IS A GIANT COMPANY IN THE FIELD ASSUMING ALL RISKS AND IS ALSO FUNCTIONALLY DIFFERENT. IT WAS SUBMITTED THAT THE B RAND INFOSYS COMMANDS A PREMIUM IN THE PRICING OF ITS PRODUCTS AND SERVICES DUE TO ITS GOODWILL, REPUTATI ON AND BRAND VALUE AND ALSO ENGAGED IN DIVERSIFIED ACTIVITIES INCLUDING PRODUCTS, CONSULTANCY AND SOLU TIONS. IT WAS SUBMITTED THAT DUE TO SCALE OF OPERATIONS, ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 9 INFOSYS ENJOYS ECONOMIES OF SCALE, WHICH RESULTS IN LOWER COST OF INFRASTRUCTURAL FACILITIES AND OVERHE ADS. THEREFORE, THE COMPARABILITY OF ASSESSEE, WHICH IS ONLY CAPTIVE SERVICES PROVIDER TO SUCH A COMPANY CANNOT BE MADE. IT WAS SUBMITTED THAT VARIOUS BENCHES OF THE TRIBUNAL HAVE DECLARED INFOSYS AS NOT COMPARABLE ON VARIOUS PARAMETERS TO A CAPTIVE SERVICES PROVIDER A ND HAVE DIRECTED FOR EXCLUSION OF THE SAID COMPANY. TH E AR RELIED ON THE FOLLOWING CASES: 1. INTOTO SOFTWARE INDIA PVT. LTD., ITA NO. 1196,1197/HYD/10. 2. TRIOLOGY E BUSINESS SOLUTIONS, ITA NO. 1054/BANG/2011. 3. TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011. 4. PATNI TELECOM SOLUTIONS PVT. LTD., ITA NO. 1846/ H/12. 5. ADAPTEC (INDIA) PVT. LTD. DCIT, ITA NO. 1801/H/ 2009 6. CORDYS SOFTWARE INDIA PVT. LTD. VS. ACIT, ITA NO . 1972/H/11. 7. TRINITY ADVANCED SOFTWARE LABS PVT. LTD. VS. ACI T, ITA NO. 1129/H/2005. 8. DCIT VS. DELOITTE CONSULTING INDIA (P) LTD., 46 SOT 379 (MUM.) 9. AGNITY INDIA TECHNOLOGIES VS. ITO, ITA NO. 3856/ DEL/10 10. GENESIS INTEGRATING SYSTEMS INDIA P. LTD., ITA NO. 1231/BANG/2010. 10. BRIGADE GLOBAL SERVICES PVT. LTD., ITA NO. 1449 /H/10. 11. FROST & SULLIVAN INDIA PVT. LTD., 50 SOT 517 (M UM.) 2.2 THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE DRP AND TPO IN SO FAR AS SELECTION OF THE AF ORESAID COMPANY AS COMPARABLE. 2.3 WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIAL ON RECORD. THE ISSUE OF COMPARABILITY OF INFOSYS TO COMPANIES WHICH ARE MERELY CAPTIVE SERVICE PROVIDER IS NO LONGER RES INTEGRA AS DIFFERENT BENCHES OF THE TRIB UNAL HAVE HELD THAT INFOSYS BEING A GIANT COMPANY AND INTO DI VERSIFIED ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 10 ACTIVITIES CANNOT BE TREATED AS COMPARABLE. IN A R ECENT DECISION IN CASE OF INTOTO SOFTWARE INDIA PVT. LTD., (SUPRA), THE HYDERABAD BENCH WHILE CONSIDERING THE COMPARABILITY OF INFOSYS TECHNOLOGIES LTD HELD AS FOLLOWS: 20. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT INFOSYS TECHNOLOGIES LTD., THOUGH, IS INTO THE SIMI LAR BUSINESS OF THE ASSESSEE AS SOFTWARE DEVELOPMENT, CANNOT BE CONSIDERED AS A COMPARABLE TO ANY OTHER COMPANIES W HICH ARE ALSO INVOLVED IN SIMILAR ACTIVITIES. IT IS NOT ONLY A GIANT COMPANY BUT IS ALSO ENGAGED IN DEVELOPMENT OF VARIO US NICHE PRODUCTS. IT CANNOT BE COMPARED TO THE ASSESSEE IN ANY MANNER. SIMILAR DIRECTIONS HAVE BEEN GIVEN BY THE T RIBUNAL AT DELHI AND HYDERABAD BENCHES IN THE CASES CITED (SUP RA). 21. IN THE RESULT, WE DIRECT THE ASSESSING OFFICER /TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE S. 2.4 THE HONBLE DELHI HIGH COURT IN A RECENT DECISI ON DTD. 10 TH JULY, 2007 IN CASE OF CIT VS. AGNITY INDIA TECHNOLO GIES PVT. LTD., ITA NO. 1204/2011, AFFIRMED THE ORDER OF ITAT , DELHI BENCH HOLDING THAT BIG COMPANIES LIKE INFOSYS TECHN OLOGIES LTD. CANNOT BE TREATED AS COMPARABLE. FOLLOWING THE RATI O LAID DOWN AS ABOVE, WE DIRECT THE EXCLUSION OF THE AFORESAID COMPANY FROM THE LIST OF COMPARABLES FOR DETERMINING ALP. 3. ISHIR INFOTECH PVT. LTD. 3.1 THE LEARNED AR OBJECTING TO THE AFORESAID COMPA NY BEING TREATED AS COMPARABLE, SUBMITTED BEFORE US THAT THE AFORESAID COMPANY FAILS THE EMPLOYEE COST FILTER APPLIED BY T HE TPO AS THE EMPLOYEE COST OF THE COMPANY IS LESS THAN 25%, WHIC H IS THE BENCH MARK ADOPTED BY THE TPO. IT WAS FURTHER SUBMI TTED THAT WHILE EMPLOYEE COST AS A PERCENTAGE OF OPERATING RE VENUE OF ISHIR INFOTEC PVT. LTD. IS ONLY 3.96% WHERE AS THE ASSESSEES ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 11 EMPLOYEE COST IS 61.23%, IN SUPPORT OF SUCH CONTENT ION, THE LEARNED AR RELIED ON THE FOLLOWING DECISIONS: 1. INTOTO SOFTWARE INDIA PVT. LTD., ITA NO. 1196,1197/HYD/10. 2. LG SOFT INDIA PVT. LTD., ITA NO. 1121/BANG/11 3. TRANSWITCH INDIA PVT. LTD., ITA NO. 948/BANG/11 4. MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT LTD., ITA NO. 1222/BANG/11. 5. CSR INDIA PVT. LTD., ITA NO. 1119/BANG/11. 6. FIRST ADVANTAGE, ITA NO. 1086/BANG/12 7. HCL EAI SERVICES LTD., ITA NO. 1348/BANG/11 3.2 THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE DRP & TPO. 3.3 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. AS IT CAN BE SE EN, THE ITAT HYDERABAD BENCH WHILE CONSIDERING IDENTICA L ISSUE OF THE AFORESAID COMPANY BEING TREATED AS COMPARABLE IN CASE OF INTOTO SOFTWARE (SUPRA) FOUND IT TO BE NOT A COMPARABLE COMPANY AS IT HAS FAILED BOT H ON ACCOUNT OF EMPLOYEE COST FILTER AS WELL AS RELAT ED PARTY TRANSACTION FILTER AND DIRECTED TO BE EXCLUDE D THIS COMPANY FROM THE LIST OF COMPARABLES. FOLLOWING THE AFORESAID DECISION OF THE COORDINATE BENCH, WE ALSO DIRECT EXCLUSION OF THE AFORESAID COMPANY FROM THE LIST OF COMPARABLES WHILE DETERMINING THE ALP. 4. LUCID SOFTWARE LTD. 4.1 OBJECTING TO THE AFORESAID COMPANY BEING TREATE D AS COMPARABLE, THE LEARNED AR SUBMITTED THAT THE AFORE SAID COMPANY CANNOT BE TREATED AS COMPARABLE AS IT HAS R EVENUE FROM PRODUCTS ALSO. IT WAS FURTHER SUBMITTED THAT S EGMENTAL FINANCIALS OF THE COMPANY ARE ALSO NOT AVAILABLE. I N SUPPORT OF ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 12 SUCH CONTENTION, THE LEARNED AR RELIED ON THE FOLLO WING DECISIONS OF COORDINATE BENCHES OF THE TRIBUNAL. 1. INTOTO SOFTWARE INDIA PVT. LTD., ITA NO. 1196,1197/HYD/10. 2. LG SOFT INDIA PVT. LTD., ITA NO. 1121/BANG/11 3. TRANSWITCH INDIA PVT. LTD., ITA NO. 948/BANG/11 4. MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT LTD., ITA NO. 1222/BANG/11. 5. CSR INDIA PVT. LTD., ITA NO. 1119/BANG/11. 6. FIRST ADVANTAGE, ITA NO. 1086/BANG/12 7. HCL EAI SERVICES LTD., ITA NO. 1348/BANG/11 8. TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011. 4.2 THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE DRP AS WELL AS TPO. 4.3 WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIALS ON RECORD. ON PERUSAL OF THE ORDER PASSED BY THE COORDINATE BENCH IN CASE OF INT OTO SOFTWARE (SUPRA), IT IS TO BE SEEN THAT THIS BENCH OF THE TRIBUNAL FOLLOWING TWO OTHER DECISIONS OF THE TRIBU NAL HELD AS UNDER: 36. WE FIND THAT BOTH M/S. HCL EAI SERVICES LTD. A S WELL AS M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIV ATE LIMITED ARE INTO SOFTWARE DEVELOPMENT SERVICES TO I TS PARENT COMPANIES. THE ASSESSEE IS ALSO INTO SIMILAR TYPE O F ACTIVITY. THEREFORE, THE DECISION TAKEN IN M/S. TRILOGY E-BUS INESS SOFTWARE INDIA PRIVATE LIMITED AS WELL AS M/S. HCL EAI SERVICES LTD. TO EXCLUDE LUCID SOFTWARE AND KALS IN FORMATION SYSTEMS LTD. APPLIES TO THE FACTS OF THE CASE BEFOR E US ALSO. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE COORDINATE BENCHES (SUPRA), WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE TWO COMPANIES ALSO FRO M THE LIST OF COMPARABLES. 4.4 RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE COORDINATE BENCH IN CASE OF INTOTO SOFTWARE (SUPRA) , WE DIRECT ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 13 THE AO/TPO TO EXCLUDE THE AFORESAID COMPANY FROM TH E LIST OF COMPARABLES WHILE DETERMINING THE ALP. 5. MEGASOFT LTD. 5.1 WHILE OBJECTING TO THE AFORESAID COMPANY BEING TREATED AS COMPARABLE, THE LEARNED AR SUBMITTED BEFORE US THAT THE SAID COMPANY DOES NOT SATISFY CERTAIN FILTERS APPLIED BY THE TPO HIMSELF. IT WAS SUBMITTED THAT THE ONSITE REVENUE O F THE COMPANY IS RS. 75.26 CRORES WHEREAS THE REVENUE OF THE SERVICES DIVISION (BLUEALLY DIVISION) IS RS. 63.71 CRORES. ONSITE REVENUES ARE SIGNIFICANTLY ATTRIBUTABLE TO SERVICES DIVISION OF THE COMPANY, HENCE, SERVICES SEGMENT FAILS 75% ONSITE R EVENUE FILTER APPLIED BY THE TPO. IT WAS FURTHER SUBMITTED THAT AS OTHERWISE MEGA SOFT LTD IS ALSO FUNCTIONALLY DIFFER ENT AS MEGASOFT XIUS DIVISION IS A PRODUCT DIVISION AND RE VENUE OF XIUS DIVISION INCLUDES SALE OF HARDWARE EMBEDDED WI TH CUSTOMIZED SOFTWARE, SALE OF LICENSE, REVENUE SHARI NG IN UPFRONT MOBILE USAGE, UPFRONT FEE FOR PRODUCTION INSTALLATI ON ETC. IT WAS FURTHER SUBMITTED THAT THE TPO HAS CONSIDERED ENTIT Y WISE DATA OF MEGASOFT FOR CALCULATION OF OPERATING MARGIN, IN STEAD OF CONSIDERING THE DATA OF ONLY BLUEALLY DIVISION, WHI CH PROVIDES SERVICES ONLY. IT WAS SUBMITTED THAT DIFFERENT BENC HES OF THE TRIBUNAL WHILE CONSIDERING IDENTICAL ISSUE HAVE HEL D THAT SEGMENTAL MARGIN OF THE SERVICES SEGMENT SHOULD ONL Y BE CONSIDERED AS COMPARABLE TO A SOFTWARE SERVICES PRO VIDER. FOR SUCH CONTENTIONS, THE LEARNED AR RELIED ON THE FOLL OWING DECISIONS: 1. INTOTO SOFTWARE INDIA PVT. LTD., ITA NO. 1196,1197/HYD/10. 2. LG SOFT INDIA PVT. LTD., ITA NO. 1121/BANG/11 3. TRANSWITCH INDIA PVT. LTD., ITA NO. 948/BANG/11 ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 14 4. MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT LTD., ITA NO. 1222/BANG/11. 5. CSR INDIA PVT. LTD., ITA NO. 1119/BANG/11. 6. FIRST ADVANTAGE, ITA NO. 1086/BANG/12 7. HCL EAI SERVICES LTD., ITA NO. 1348/BANG/11 8. TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011. 9. TRIOLOGY E BUSINESS SOLUTIONS, ITA NO. 1054/BANG/2011. 10. BEARING POINT BUSINESS, ITA NO. 1124/BANG/2011. 5.2 THE LEARNED DR, ON THE OTHER HAND, REFERRING TO THE DISCUSSIONS MADE BY THE TPO WITH REGARD TO THE AFORESAID CONTENTION SUBMITTED THAT THE AFORESAID COMPANY HAS BEEN SELECTED AS A COMPARABLE ON THE BASIS OF WELL FOUNDED REASON, HENCE, THERE IS NO RE ASON TO ENTERTAIN THE OBJECTIONS RAISED BY THE ASSESSEE 5.3 WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIALS ON RECORD. IN CASE OF INTOTO SOFTWARE (SUPRA), THE ITAT HYDERABAD BENCH AFTER FOLLOWING THE DECISION OF THE M /S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LIMITED VS. DCIT IN ITA.NO.1054/BANG/2011 DIRECTED THE AO/TPO TO TAKE O NLY SEGMENTAL MARGIN OF THE COMPANY FOR THE RELEVANT PR EVIOUS YEAR INTO CONSIDERATION TO COMPUTE ALP. RESPECTFULLY FOL LOWING THE AFORESAID DECISION OF THE COORDINATE BENCH IN CASE OF INTOTO SOFTWARE, WE ALSO DIRECT THE AO/TPO TO TAKE ONLY SE GMENTAL MARGIN OF MEGASOFT LTD IN THE RELEVANT PREVIOUS YEA R INTO CONSIDERATION WHILE COMPUTING ALP OF THE ASSESSEE. 6. TATA ELXI LTD. 6.1 WHILE OBJECTING TO THE AFORESAID COMPANY BEING TREATED AS COMPARABLE, THE LEARNED AR SUBMITTED BEFORE US THAT IN RESPONSE TO THE NOTICE ISSUED U/S 133(6) OF THE ACT , THE ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 15 AFORESAID COMPANY HAS CLEARLY STATED THAT IT CANNOT BE CONSIDERED AS COMPARABLE TO ANY OTHER SOFTWARE COMP ANY DUE TO COMPLEX NATURE OF ITS BUSINESS. HOWEVER, WHILE T HE TPO SELECTED THE AFORESAID COMPANY BY HOLDING THAT THE SERVICES PROVIDED ARE AKIN TO SOFTWARE DEVELOPMENT SERVICES, THE DRP, DID NOT COMMENT ON THE COMPARABILITY OF THIS COMPAN Y. THE LEARNED AR SUBMITTED THAT COMPARABILITY OF THE AFOR ESAID COMPANY WAS CONSIDERED AND ANALYSED BY DIFFERENT BE NCHES OF THE ITAT AND THE AFORESAID COMPANY WAS REJECTED AS COMPARABLE TO THE SOFTWARE SERVICES PROVIDER. FOR S UCH CONTENTION, THE LEARNED AR RELIED UPON THE FOLLOWIN G DECISIONS: 1. TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011. 2. TRIOLOGY E BUSINESS SOLUTIONS, ITA NO. 1054/BANG/2011. 6.2 THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE AO/TPO AND DRP IN THIS REGARD AND REFERRED T O THE OBSERVATIONS MADE BY THE TPO IN HIS ORDER. 6.3 WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. IN CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011 , THE ITAT MUMBAI BENCH WHILE CONSIDERING THE COMPARABILITY OF THE AFORESAID COMPANY WITH SOFTWAR E SERVICES PROVIDER HELD AS UNDER: 7.7 FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODU CT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT F ROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF T HE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FRO M THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. E VEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BE EN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPA RABLE ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 16 PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT A ND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TR EAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMIN ING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD B E EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. 6.4 FOLLOWING THE DECISION OF THE ITAT MUMBAI BENCH AS AFORESAID AND ALSO CONSIDERING THE FACT THAT THE COMPANY ITSELF INFORMATION PROVIDED IN RESPONSE TO THE NOTICE ISSUED U/S 133(6) OF THE ACT HAS ADMITTED TH AT IT CANNOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSE E, WE DIRECT EXCLUSION OF THE AFORESAID COMPANY FROM T HE LIST OF COMPARABLES WHILE DETERMINING ALP. 7. WIPRO LTD. 7.1 WHILE OBJECTING TO THE AFORESAID COMPANY BEING TREATED AS COMPARABLE, THE LEARNED AR SUBMITTED THAT THE TPO O NLY ON CONSIDERING SEGMENTAL DETAILS SUBMITTED BY THE SAID COMPANY FOR IT SERVICES, IN RESPONSE TO NOTICE ISSUED U/S 1 33(6), HAS CONSIDERED IT AS A COMPARABLE. IT WAS SUBMITTED THA T THE AFORESAID COMPANY IS A DIVERSIFIED COMPANY AND DIS CLOSES SEGMENTAL INFORMATION FOR IT SERVICES AND PRODUCTS AS ONE SEGMENT IN ITS ANNUAL REPORT. IT WAS SUBMITTED THAT THE TPO HAS NOT PROVIDED ANY OTHER DOCUMENTS EXCEPTING SEGMENTA L INFORMATION OBTAINED FROM TP REPORT OF WIPRO, WHICH IS UNAUDITED, MANUALLY CORRECTED AND UNVERIFIED. IT WA S SUBMITTED THAT WIPRO IS ALSO CONSIDERED TO BE A GIANT IN ITS FIELD ASSUMING ALL THE RISKS AND CANNOT BE COMPARED TO CAPTIVE SER VICE PROVIDER LIKE THE ASSESSEE. TO SUPPORT HIS CONTENTIONS WITH REGARD TO NON-COMPARABILITY OF THE SAID COMPANY, HE RELIED UP ON THE FOLLOWING DECISIONS: 1. TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011. ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 17 2. TRINITI ADVANCES SOFTWARE P. LTD., ITA NO . 1129/H/2005. 7.2 THE LEARNED DR ON THE OTHER HAND SUPPORTED TH E ORDERS OF THE DRP AS WELL AS TPO SO FAR AS THE SELECTION OF T HE AFORESAID COMPANY AS COMPARABLE WHILE DETERMINING ALP. 7.3 WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. T HE ITAT MUMBAI BENCH IN CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO. 7821/MUM/2011, WHILE CONSIDERING THE OBJECTION OF T HE ASSESSEE FOR TREATING THE AFORESAID COMPANY AS COMPARABLE HELD AS FOLLOWS: 7.5 THIS COMPANY IS ALSO A GLOBAL IT COMPANY HAVING VAR IETIES OF SERVICE AND PRODUCTS AND LOOKING TO THE MAGNITUDE O F ITS OPERATIONS, SALES AND EXPENSES, THE SAME CANNOT BE TAKEN INTO CONSIDE RATION FOR COMPARABILITY ANALYSIS. MOREOVER, 67% OF ITS SALES RELATES TO ITS PRODUCT WHICH ARE SOLD ON PREMIUM RESULTING INTO HIGHER PRO FITABILITY, THEREFORE, CANNOT BE COMPARED WITH THE ASSESSEE COMPANY AT ALL . THERE ARE SEVERAL JUDGMENTS OF ITAT WHICH HAVE BEEN REFERRED IN PARA 6.5 ABOVE, THAT WIPRO CANNOT BE TAKEN AS COMPARABLE CASE FOR COMPARABLE C ASE WITH THE COMPANY LIKE ASSESSEE. IN VIEW OF THESE FACTS AND T HE REASONING GIVEN IN THE CASE OF INFOSYS, WE HOLD THAT WIPRO ALSO CANNOT BE CONSIDERED AS A COMPARABILITY ANALYSIS, HENCE, WOULD NOT BE INCLUDE D IN THE LIST OF THE COMPARABLE ENTITIES AS IDENTIFIED BY THE TPO. 7.4 AS CAN BE SEEN FROM THE FACTS AND MATERIALS ON RECORD DURING THE YEAR UNDER CONSIDERATION, THE SEGMENTAL TURNOVER OF THE WIPRO LTD. IS 9616.09 CRORES. THEREFORE, CONSID ERING THE TURNOVER, BRAND VALUE AS WELL AS OTHER DYNAMICS OF WIPRO LTD., IT COMES IN THE SAME CATEGORY AS INFOSYS AND CERTAI NLY CANNOT BE COMPARED WITH THE ASSESSEE. THEREFORE, FOLLOWING OUR REASONING IN CASE OF INFOSYS TECHNOLOGIES LTD. WE H OLD THAT WIPRO LTD. CANNOT BE TREATED AS COMPARABLE WITH THE ASSESSEE. 10. IN GROUND NO. 8, THE ASSESSEE HAS CHALLENGED TH E ACTION OF THE TPO IN REJECTING CERTAIN COMPARABLES SELECTED B Y THE ASSESSEE, WHICH ARE AS UNDER: 1. AZTEC SOFT LTD. 2. BIRLA TECHNOLOGIES LTD. 3. INDIUM SOFTWARE INDIA LTD. 4. LARSEN & TOUBRO INFOTECH. 5. PSI DATA SYSTEMS LTD. (SEG) 6. VMF SOFTECH LTD. 11. THE LEARNED AR CHALLENGING REJECTION OF THE AFO RESAID COMPARABLES SELECTED BY THE ASSESSEE IN THE TP STUD Y BY THE DRP/TPO SUBMITTED THAT THE CRITERIA ADOPTED BY THE TPO WHILE REJECTING AFORESAID COMPARABLES SELECTED BY THE ASS ESSEE IS NOT VALID AS HE HAS NOT FOLLOWED A UNIFORM AND CONSISTE NT APPROACH WHILE APPLYING FILTERS. 12. THE LEARNED DR, ON THE OTHER HAND SUBMITTED THA T THE TPO AFTER APPROPRIATELY APPLYING FILTERS HAVING FOUND T HE COMPANIES AS SELECTED BY THE ASSESSEE TO HAVE FAILED COMPARABILI TY ANALYSIS REJECTED THEM. THEREFORE, REJECTION OF THE COMPANIE S IS JUSTIFIED. 13. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIALS ON RECORD. ON PERUSAL OF THE ORDER OF THE DRP ON THIS ISSUE IT IS TO BE SEEN THAT SO FAR AS THE VMF SOFTECH LTD. IS CONCERNED, THE DRP HAS RECORDED A SPECIFIC FINDING THAT AFTER ENQUIRY BEING CONDUCTED, IT WAS FOUND THAT THE COMP ANY WAS TAKEN UP BY ONE KELTON SECURITY PVT. LTD. AND IN SP ITE OF BEING CALLED UPON THE COMPANY FAILED TO PRODUCE ITS CASH BOOK, LEDGER, EXPORTS, PARTICULARS OF SALARIES PAID, ETC., HENCE, GENUINENESS OF THE COMPANY AND ITS ACTIVITIES ARE DOUBTFUL. THIS F INDING HAS NOT BEEN CONTROVERTED BY THE ASSESSEE. CONSIDERING THE AFORESAID ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 19 FINDING OF THE DRP, WE ARE OF THE VIEW THAT THE AFO RESAID COMPANY HAS BEEN RIGHTLY REJECTED AS COMPARABLE. 14. HOWEVER, SO FAR AS, OTHER COMPANIES ARE CONCERN ED, WHICH WERE SELECTED AS COMPARABLES BY THE ASSESSEE, WE FI ND THAT THE DRP HA NOT OBJECTIVELY CONSIDERED THE CONTENTIONS O F THE ASSESSEE IN THIS REGARD. WE, THEREFORE, RESTORE THE MATTER B ACK TO THE FILE OF THE AO/TPO TO CONSIDER THE COMPARABILITY OF THE AFORESAID COMPANIES AFTER GIVING DUE OPPORTUNITY OF HEARING T O THE ASSESSEE AND CONSIDERING ALL ASPECTS OF THE MATTER. 15. IN GROUND NO. 12, THE ASSESSEE CHALLENGED THE A CTION OF THE TPO IN ADDING THE AMOUNT OF RS. 4,42,63,545/- BEING REIMBURSEMENT RECEIVED FROM THE AE WITH OPERATING C OST FOR DETERMINING ALP. THE TPO WHILE DETERMINING THE ALP OF THE ASSESSEE HAS ALSO INCLUDED THE AMOUNT OF RS. 4,42,6 3,545/- CLAIMED TO BE THE REIMBURSEMENT RECEIVED BY THE ASS ESSEE FROM ITS AE. THE TPO OBSERVED THAT SINCE THE EXPENDITURE WAS INCURRED ON BEHALF OF THE PARENT COMPANY AND ASSESSEE RECEIV ED MONEY BACK, HENCE, THE EXPENDITURE IS CONNECTED TO THE BU SINESS SERVICES AND SHOULD FORM PART OF THE TURNOVER. HE, THEREFORE, WAS OF THE VIEW THAT THE AMOUNT SHOULD BE TREATED AS PA RT OF EXPORT TURNOVER AND TOTAL TURNOVER. THE DRP WHILE UPHOLDIN G THE FINDING OF THE TPO TO THE EXTENT THAT REIMBURSEMENT SHOULD FORM PART OF EXPORT TURNOVER, HOWEVER, DIRECTED THE AO TO VERIFY WHETHER FOREIGN EXCHANGE RECEIVED IS WITHIN THE STIPULATED TIME AS PER SECTION 10A OF THE ACT AND IF IT IS FOUND TO HAVE B EEN RECEIVED WITHIN THE STIPULATED TIME AFTER GETTING FIRC AND C A CERTIFICATE, IT CAN BE INCLUDED AS PART OF EXPORT TURNOVER. 16. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT IN CAS E OF M/S LG ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 20 SOFT INDIA PVT. LTD. VS. DCIT IN IT(TP)A NO. 1121/B ANG/2011, ORDER DATED 20/02/213, WHILE CONSIDERING IDENTICAL ISSUE, THE BANGALORE BENCH OF TRIBUNAL HELD AS FOLLOWS: 4.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. WE HAVE NOTICED THAT THE DETAI LS OF REIMBURSEMENT EXPENSES ARE GIVEN AT PAGE 334 OF THE PAPER BOOK FILED BY THE ASSESSEE. THE BREAK-UP OF THE SAI D EXPENSES ARE NOT GIVEN IN DETAIL AND IT IS NOT CLEA R WHETHER IT IS THE REIMBURSEMENT OF EXPENSES INCURRED ON BEHALF OF THE AE. SINCE THE ISSUE IS NOT CLEAR AND THERE IS NO DE TAILED DISCUSSION OF THE BREAK-UP OF EXPENSES, WE DEEM IT FIT AND PROPER TO REMIT THE ISSUE TO THE FILE OF THE AO/TPO FOR DETAILED VERIFICATION. WE MAKE IT CLEAR THAT IF THE RECEIPTS ARE MERE RECOVERY OF EXPENSES WITHOUT ANY SERVICE T HEN THE SAME SHOULD NOT BE ADDED BACK TO THE COST BASE FOR THE PURPOSE OF MARK-UP. IT IS ORDERED ACCORDINGLY. 17. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE COORDINATE BENCH IN CASE OF M/S LG SOFT INDIA PVT. LTD. (SUPRA), WE ALSO DIRECT THE AO TO VERIFY WHETHER THESE RECEI PTS ARE MERE RECOVERY OF EXPENSES WITHOUT ANY SERVICES. IF IT IS FOUND TO BE SO, THEN THE SAME SHOULD NOT BE ADDED BACK TO THE COST BASE. 18. IN AFORESAID VIEW OF THE MATTER, WE DIRECT THE AO/TPO TO RECOMPUTED THE ALP KEEPING IN VIEW OUR DIRECTIONS M ADE HEREINABOVE. 19. GROUND NOS. 13 TO 21 ARE RELATING TO CORPORATE TAX ISSUES. 20. THE LEARNED AR SUBMITTED BEFORE US THAT ON INST RUCTION FROM THE ASSESSEE, HE DOES NOT WANT TO PRESS GROUND NOS. 15,18,20 & 21, THEREFORE, THE SAME ARE DISMISSED AS NOT PRESSE D. 21. IN GROUND NOS. 13 & 14, THE ASSESSEE HAS CHALLE NGED THE DECISION OF DRP IN NOT ALLOWING DEDUCTION U/S 10A O F THE ACT IN RESPECT OF CHENNAI UNIT. ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 21 22. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE AO DID NOT ALLOW BENEFIT U/S 10A OF THE ACT ON THE CHENNAI UNI T OF THE ASSESSEE BY HOLDING THAT BOTH HYDERABAD AND CHENNAI UNITS ARE RENDERING SAME SERVICES TO SAME CUSTOMERS AND IT WA S FOUND THAT CHENNAI UNIT IS FORMED BY TRANSFER OF EXISTING BUSI NESS AT HYDERABAD. THE AO FURTHER NOTED THAT LOSSES SUFFERE D BY CHENNAI UNIT UP TO 2005-06 WAS NOT ASCERTAINABLE, HENCE, TH ERE WAS A DIFFICULTY IN COMPUTATION OF 10A BENEFIT. IT WAS FU RTHER HELD THAT AS THE CHENNAI UNIT WAS FORMED ON RECONSTRUCTION/SP LITTING UP OF BUSINESS ALREADY IN EXISTENCE, BENEFIT U/S 10A CANN OT BE GRANTED. THE DRP WHILE DEALING WITH THE ISSUE OF DIVERSION O F BUSINESS AND SPLITTING OF BUSINESS AT HYDERABAD UNIT FOR FORMING ANOTHER UNIT AT CHENNAI, CONSIDERED THE ORDER OF CIT(A) FOR THE AY 2006-07 ON IDENTICAL ISSUE HOLDING THAT NEW UNIT AT CHENNAI CA NNOT BE TREATED AS SEPARATE AND INDEPENDENT UNIT BECAUSE THE SAME B USINESS IS CARRIED OUT. THOUGH THE DRP AGREED THAT CHENNAI UN IT IS NOT FORMED BY RECONSTRUCTION OF HYDERABAD UNIT, HOWEVER , IT HELD THAT THE UNITS AT CHENNAI AND HYDERABAD ARE NOT TWO DIST INCT AND INDEPENDENT UNITS. THE DRP HOWEVER DIRECTED THAT 1 0A BENEFIT TO BE GIVEN ON THE COMBINED PROFITS OF CHENNAI AND HYD ERABAD UNITS. 23. THE LEARNED AR HAS SUBMITTED BEFORE US THAT CHE NNAI AND HYDERABAD UNITS SHOULD BE CONSIDERED AS TWO DISTINC T AND SEPARATE UNITS FOR BENEFIT U/S 10A. IT WAS SUBMITTE D THAT BENEFIT U/S 10A HAS TO BE GRANTED SEPARATELY FOR BOTH THE U NITS AS EACH OF THE UNIT HAS SEPARATE SOURCE OF INCOME. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AR RELIED ON THE DECISION O F ITAT, HYDERABAD IN ASSESSEES OWN CASE FOR AY 2006-07 IN ITA NO. 268/HYD/2011 AND ITA NO. 482/HYD/11 VIDE ORDER DATE D 24/08/2012. THE COORDINATE BENCH WHILE CONSIDERING THE ISSUE AS TO WHETHER CHENNAI AND HYDERABAD UNITS ARE SAME UNI T OR TWO ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 22 DISTINCT AND SEPARATE UNITS SO AS TO ENTITLE EACH O F THEM FOR THE BENEFIT OF SECTION 10A OF THE ACT, HAS HELD AS UNDE R: 15. WE UNDERSTOOD THE DIVERGENCE IN THE OPINIONS O F BOTH THE PARTIES TO THE LITIGATION. IT IS AN UNDISPUTED FACT THAT DISTINCT CAPITAL WAS INVESTED IN CREATING A NEW UNI T AT CHENNAI, WITHOUT COMPRISING THE EMPLOYEES STRENGTH OF THE HYDERABAD UNIT, CHENNAI UNIT ALSO STARTED RAISING I TS EMPLOYEES FROM 44 IN NUMBER IN MARCH, 2004 TO 1035 IN MARCH 2008, AND THUS THE GROWTH OF NUMBER OF EMPLOY EES IS PHENOMENAL BY THE END OF MARCH, 2008. THERE IS NO RELOCATION OF TRANSFER OF PLANT AND MACHINERY IN AN Y FORM FROM HYDERABAD UNIT TO CHENNAI UNIT. SO, THIS BEING THE STRENGTH OF THE NEW UNIT, SO FAR AS THE INFRASTRUCT URAL MATTERS ARE CONCERNED, WE ALSO EXAMINED THE OTHER A REAS OF BUSINESS ACTIVITY OF THE ASSESSEE, TO FIND OUT IF T HE CHENNAI UNIT CUT INTO THE BUSINESS OF THE HYDERABAD UNIT. I N THIS REGARD, WE HAVE PERUSED THE BUSINESS ACTIVITIES OF THE ASSESSEE BOTH OF CHENNAI UNIT AND HYDERABAD UNIT A ND FIND THAT THE NATURE OF SERVICES RENDERED BY THE ASSESSE E THROUGH BOTH THESE UNITS ARE CLASSIFIED INTO THREE CATEGORIES, (1) BPM, (2)ECM AND (3) DATA WAREHOUSING. SO FAR AS THE DATA WAREHOUSING/BUSINESS INTELLIGENCE IS CONCERNED , THE CHENNAI UNIT ALONE RENDERS THIS SERVICE. THIS DATA WAREHOUSING/INTELLIGENCE PROVIDES AN ECO SYSTEM TO TRANSFORM RAW DATA INTO ACTIONABLE INFORMATION, THU S FACILITATING STRATEGIC AND TECHNOLOGICAL AND OPERAT IONAL DECISION MAKING. THE CHENNAI UNIT ADDRESSES TO THE SE CHALLENGES BY OFFERING HOLISTIC, BUSINESS AND RESUL T ORIENTED APPROACH OF THE CUSTOMER. THESE HYPER SPECIALISED S ERVICES OF THE CHENNAI UNIT WERE NOT PROPERLY APPRECIATED BY THE REVENUE AUTHORITIES, WHO WERE MERELY CARRIED AWAY B Y THE COMMON SERVICE AGREEMENT FOR COMING TO THE CONCLUSI ON THAT THE BUSINESS OF BOTH THE UNITS ARE SAME. BUT, THE FACT IS THAT THE SERVICES OF BOTH THE UNITS ARE DISTINCT AN D SEPARABLE. THEREFORE, FROM THE INFRASTRUCTURE POINT OF VIEW WHICH INVOLVES LAND AND BUILDING, PLANT AND MACHINE RY AND EMPLOYEES, ETC., AS WELL ASFROM THE BUSINESS PROCESSES/ACTIVITIES POINT OF VIEW, BOTH THE UNITS ARE SEPARATE AND DISTINCT WITH DIFFERENT OBJECTS AND CH ALLENGES OF THE CLIENTS. THUS, COMMONNESS OF THE PROJECTS/SERVI CES SHOULD NOT BE THE BASIS OF REJECTION OF CLAIM OF EX EMPTION IN PRINCIPLE. AS SUCH, THE SERVICES OF BOTH THE UNITS ARE DIFFERENT, FOR DIFFERENT PURPOSES AND THUS, THE CON CLUSIONS OF THE ASSESSING OFFICER AND CIT(A) ARE NOT AS PER THE LAW IN FORCE. RELEVANT DECISIONS ARE DISCUSSED IN THE PREC EDING PARAGRAPHS. IN OUR OPINION, THE REVENUE HAS STEPPED INTO ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 23 WRONG DECISION MAKING AREA, WHILE DENYING EXEMPTION UNDER S.10A OF THE ACT IN RESPECT OF THE PROJECTS OF CHEN NAI UNIT. FURTHER, WE ALSO EXAMINED THE AVAILABLE JUDICIAL PRONOUNCEMENT ON THE SUBJECT. IT IS A SETTLED ISSU E THAT EXISTENCE OF SOME OLD EMPLOYEES IN THE NEW UNDERTAK ING IS NOT A DISQUALIFICATION FOR GRANTING EXEMPTION BENEF IT TO THE ASSESSEE UNDER S.10A OF THE ACT AS LONG AS LARGER CHUNCK OF HR DEPARTMENT HAS NOT MOVED TO THE NEW UNIT FROM TH E OLD ONE. SO LONG AS BOTH THE UNITS ARE EXISTING AND DOI NG THE DECLARED BUSINESS AND ARE NOT FORMED OUT OF THE EX ISTING BUSINESS, THE ASSESSEE MUST NOT BE DENIED THE BENEF ITS OF S.10A OF THE ACT. IT IS ALSO SETTLED POSITION THAT THE OLD AS WELL AS NEW UNIT ENGAGED IN THE SAME BUSINESS WITH IDENTICAL PRODUCT SHALL NOT CONTRIBUTE TO THE DENIA L OF THE BENEFICIAL EXEMPTION TO THE ASSESSEE. 16. THEREFORE, THE REVENUES OBJECTIONS THAT SIMILA R AGREEMENTS, COMMON SERVICES, INDUCTION OR MIGRATION OF FEW EMPLOYEES OF THE HYDERABAD UNIT INTO THE CHENNAI UN IT, ARE NOT ADEQUATE ENOUGH TO DENY THE EXEMPTION BENEFITS TO ASSESSEE IN VIEW OF THE CASE-LAWS RELIED UPON AND D ISCUSSED IN THE PRECEDING PARAGRAPHS OF THIS ORDER. 17. IN PRINCIPLE, THE UNDERTAKING IS NOT ENTITLED T O THE BENEFITS OF THE PROVISIONS OF SECTION 10A OF THE AC T IF THE SAME IS FORMED BY THE SPLITTING UP OR THE RECONSTRU CTION OF BUSINESS ALREADY IN EXISTENCE AND WHEN THE SAME IS NOT FORMED BY THE TRANSFER OF PLANT OR MACHINERY PREVIO USLY USED FOR ANY PURPOSE TO A NEW BUSINESS. THERE IS NO ISS UE ABOUT THE TRANSFER OF THE PLANT OR MACHINERY FROM HYDERAB AD TO CHENNAI UNIT AND THEREFORE, THIS LIMB OF THE PROVIS IONS IS UNQUESTIONED BY THE REVENUE. THE OBJECTIONS OF THE REVENUE REVOLVE AROUND EXISTENCE OF SIMILAR AGREEMENTS/SIMI LAR SERVICES AND MIGRATION OF SOME OF THE EMPLOYEES TO THE CHENNAI UNIT. THESE ISSUES HAVE BEEN ALREADY ATTEND ED TO BY US IN THE PRECEDING PARAGRAPHS AND DESCRIBED HOW T HESE OBJECTIONS IN THIS CASE ARE NOT SUSTAINABLE BY US. IT IS NOT THE CASE OF THE REVENUE THAT THE DATABASE WAREHOUSI NG RELATED SERVICES RENDERED BY THE ASSESSEE TO THE PRINCIPLE/CLIENTS ARE NOT DIFFERENT FROM THOSE SERV ICES RENDERED BY THE HYDERABAD UNIT. IN THE LIGHT OF THE ABOVE DISCUSSION, WE HOLD THAT THE REVENUE AUTHORITIES AR E NOT JUSTIFIED IN DENYING THE BENEFIT UNDER S.10A OF THE ACT TO THE ASSESSEE, TREATING THE CHENNAI UNIT AS HAVING BEEN CREATED MERELY BY SPLITTING UP, OR RECONSTRUCTION OF THE HY DERABAD UNIT OF THE ASSESSEE. ACCORDINGLY, GROUNDS NO.1 TO 4 OF THE ASSESSEE IN THIS APPEAL ARE ALLOWED. ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 24 24. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON THE ORDERS OF TPO AND DRP. 25. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES ON THIS ISSUE. AS CAN BE SEEN FROM THE ORDER OF THE DRP, TH OUGH THEY HAVE ACCEPTED THE FACT THAT THE CHENNAI UNIT IS NOT FORMED BY RECONSTRUCTION OF THE HYDERABAD UNIT, BUT, THEY ULT IMATELY HELD THAT CHENNAI UNIT AND HYDERABAD UNIT ARE NOT TWO DI STINCT AND INDEPENDENT UNITS. HOWEVER, ON PERUSAL OF THE AFORE SAID ORDER OF THE COORDINATE BENCH, WE FIND THAT THE ISSUE IN DIS PUTE HAS BEEN SET AT REST AND DECIDED IN FAVOUR OF THE ASSESSEE. THEREFORE, FOLLOWING THE DECISION OF THE COORDINATE BENCH, WE ALLOW THE GROUND OF THE ASSESSEE AND DIRECT THE AO TO ALLOW B ENEFIT U/S 10A OF THE ACT TO THE CHENNAI UNIT. 26. THE NEXT ISSUE RAISED IN GROUND NOS. 16 & 17 IS WITH REGARD TO REJECTION OF REIMBURSEMENT OF EXPENSES TO VIRTUS A CORPORATION, USA OF AN AMOUNT OF RS. 62,71,942/- FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. 27. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES ON THIS ISSUE AND PERUSED THE MATERIALS ON RECORD. THE ISSU E STANDS SQUARELY COVERED BY THE DECISION OF THE HONBLE MUM BAI HIGH COURT IN CASE OF GEMPLUS JEWELLERY, 330 ITR 175 AN D THE SPECIAL BENCH DECISION OF ITAT, CHENNAI IN CASE OF ITO VS. SAKSOFT LTD (313 ITR AT 353) WHEREIN IT HAS BEEN HELD THAT IF C OMMUNICATION CHARGES, INSURANCE CHARGES AND REIMBURSEMENT OF EXP ENSES ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE O UTSIDE INDIA, ARE TO BE REDUCED FROM THE EXPORT TURNOVER THEN THE SAME SHOULD AS WELL BE REDUCED FROM TOTAL TURNOVER WHILE COMPUT ING DEDUCTION U/S 10A OF THE ACT. THEREFORE, FOLLOWING THE AFORES AID RATIO LAID ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 25 DOWN IN THE SAID DECISIONS, WE DIRECT THE AO TO RED UCE THE AMOUNT OF RS. 62,71,942/- BOTH FROM THE EXPORT TURN OVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. ACCORDINGLY, THIS GROUND IS ALLOWED. 28. IN GROUND NO. 19, THE ASSESSEE HAS CHALLENGED T HE ADDITION OF AN AMOUNT OF RS. 11,91,214/- BEING REIMBURSEMENT EXPENSES RECEIVED FROM VIRTUSA PVT LTD., SRILANKA TO THE EXP ORT TURNOVER. 29. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIALS ON RECORD. IT IS THE CONTENTION OF TH E LEARNED AR THAT THE FOREIGN INWARD REMITTANCE CERTIFICATE (FIR C) TOWARDS THE AMOUNT OF RS. 11,91,214/- WAS RECEIVED WITHIN THE S TIPULATED TIME AND THE AO WITHOUT PROPERLY FOLLOWING THE DIR ECTION OF THE DRP HAS ADDED THE AMOUNT. AFTER CONSIDERING THE SUB MISSIONS OF THE ASSESSEE, WE DIRECT THE AO TO VERIFY THIS ISSUE AND IF IT IS FOUND THAT THE FIRC IS WITHIN STIPULATED TIME, THEN THE AMOUNT OF RS. 11,91,214/- CANNOT BE ADDED TO THE INCOME OF TH E ASSESSEE. THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 30. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT SD/- SD/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMB ER HYDERABAD, DATED: 30 TH AUGUST, 2013. KV ITA NO. 1962/HYD/2011 VIRTUSA (INDIA) PVT. LTD. 26 COPY TO:- 1) VIRTUSA (INDIA) PVT. LTD., 6-3-1192, BLOCK A, 3 RD FLOOR, MY HOME TYCOON, BEGUMPET, HYDERABAD 500 016. 2) DCIT, CIRCLE 3(3), 7 TH FLOOR, B BLOCK, IT TOWERS, AC GUARDS, HYDERABAD 500 004. 3) DRP, HYDERABAD. 4) ADDL. CIT (TP), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T ., HYDERABAD.