M/s. Avineon India Private Ltd, Hyderabad V. DCIT, Circle-1(1), Hyderabad

ITA 1989/HYD/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4843 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 02-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: K NEERAJA; K PRADEEP
• Keywords: Related party transaction; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Question of law; Unabsorbed depreciation
• Section: 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1989/HYD/2011 ASSESSMENT YEAR : 2007-08 M/S AVINEON INDIA PVT. LTD., HYDERABAD PAN: AAACN7323G VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 1(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : MR. K. PRADEEP & MS. K. NEERAJA REVENUE BY : SHRI P. SOMA SEKHAR REDDY DATE OF HEARING : 19-09-2013 DATE OF PRONOUNCEMENT : 31-10-2013 O R D E R PER B. RAMAKOTAIAH, A.M.: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE DCIT, CIRCLE 1(1) PASSED U/S 143(3) READ WITH SECTION 92CA AND SECTION 144C OF THE IT ACT, CONSEQUENT TO THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL (DRP), HYDER ABAD. 2. ASSESSEE HAS ORIGINALLY RAISED GROUNDS OF APPEAL RUNNING TO 10 ALONG WITH APPEAL MEMO AND VIDE LETTER DATED 02-11- 2012 AMENDED GROUNDS AND FILED DETAILED AMENDED GROUNDS RUNNING TO 8 IN NUMBER. VIDE PETITION UNDER RULE 11 OF IT RULES, ASSESSEE P RAYED FOR ADMISSION OF ADDITIONAL GROUND WITH REFERENCE TO WO RKING CAPITAL ADJUSTMENTS. GROUND NO. 8 IS A SUMMARY OF OTHER 7 G ROUNDS AND 2 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. STATES THAT SUCH OTHER GROUNDS THAT MAY BE ADVANCED AT THE TIME OF HEARING. ASSESSEES COUNSEL FILED WRITTEN SUBMISSI ONS IN WHICH SOME OF THE COMPARABLES CONTESTED IN THE GROUNDS ARE NOT PRESSED AND COMPARABLES WERE CONTESTEDED WITHOUT THERE BEING AN Y GROUND. GROUNDS ARE CONSIDERED BASED ON THE WRITTEN SUBMISS IONS AS WELL AS AMENDED GROUNDS RAISED BY ASSESSEE AND ALSO ON THE BASIS OF PAPER BOOKS FILED IN THIS REGARD. 3. WE HAVE HEARD THE LEARNED COUNSEL AND THE LEARNE D DR IN DETAIL. 4. BRIEFLY STATED, ASSESSEE IS A COMPANY REGISTERED IN INDIA AND IS ENGAGED IN THE BUSINESS OF INFORMATION TECHNOLOGY, ENGINEERING AND GIS SERVICES. ASSESSEE FILED ITS RETURN OF INCOME F OR AY 2007-08 ON 30-10-2007 DECLARING GROSS PROFIT ORIGINALLY AT RS. 1,77,13,278/- AND CLAIMING EXEMPTION U/S 10A ON THE ABOVE BUSINESS IN COME AND OFFERING OTHER INCOME AT RS. 1,45,963/- TO TAX. DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE FILED REVISED COMP UTATION ALONG WITH REVISED FORM 56F CLAIMING DEDUCTION AT RS. 2,0 1,58,456/-, WHICH WAS ACCEPTED BY THE AO BUT THE EXEMPTION WAS RESTRI CTED TO THE GROSS TOTAL INCOME AVAILABLE UNDER THE HEAD BUSINESS. I N THE COURSE OF ASSESSMENT PROCEEDINGS, AS ASSESSEE HAS TRANSACTION S WITH ITS ASSOCIATED ENTERPRISE (AE), TRANSACTIONS WERE REFER RED TO TPO FOR ANALYZING THE ARMS LENGTH PRICE OF TRANSACTIONS. A SSESSEE REPORTED INTERNATIONAL TRANSACTIONS IN FOUR CATEGORIES, NAME LY, A) PROVISION OF INFORMATION TECHNOLOGY ENABLED SERVICES, B) PROVISI ON FOR GIS, C) PROVISION FOR ENGINEERING SERVICES, AND D) REIMBURS EMENT OF EXPENSES. THERE IS NO DISPUTE WITH REFERENCE TO THE METHOD ADOPTED BY ASSESSEE I.E. TRANSACTION NET MARGIN METHOD (TNM M). PROFIT LEVEL INDICATOR (PLI) BY THE ASSESSEE WAS OPERATING PROFI T BY TOTAL COST (OP/TC). ASSESSEE REPORTED THE MARGIN FOR THE FY 20 06-07 AS UNDER: 3 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. DESCRIPTION WITH AE WITH NON AE TOTAL OPERATING REVENUE 9,40,92,833 6,96,05,178 16,36,98,011 OPERATING COST 7,98,11,709 6,80,03,741 14,78,15,451 OPERATING PROFIT (PBIT) 1,42,81,123 16,01,427 1,58,82,560 OPERATING PROFIT TO COST RATIO 17.89% 2.35% 10.74% ASSESSEE FILED TRANSFER PRICING REPORT AND FORM 3CE B BENCHMARKING ITS TRANSACTIONS. ASSESSEE SELECTED 22 COMPANIES AS COMPARABLE COMPANIES WHILE BENCHMARKING ITS TRANSACTIONS. DURI NG THE TP PROCEEDINGS, ASSESSEE SUGGESTED ADDITIONAL FILTERS IN ADDITION TO THE FILTERS ALREADY ADOPTED IN ITS OWN STUDY, BUT, THE TPO REJECTED SOME OF THE FILTERS ADOPTED BY ASSESSEE AND FINALLY CONS IDERED THE DATA. ASSESSEE ACCEPTED FINAL ANALYSIS ADOPTED BY THE TPO WITH A REQUEST THAT CONTEMPORANEOUS DATA ALONG WITH EARLIER TWO YE ARS DATA SHOULD ALSO BE CONSIDERED. HOWEVER, THE TPO DID NOT AGREE AND CONSIDERED ONLY THE DATA FOR THE RELEVANT ASSESSMENT YEAR. ASS ESSEE, HOWEVER, OBJECTED TO THE THRESHOLD LIMIT ADOPTED FOR THE FIL TERS SUCH AS RELATED PARTY TRANSACTIONS AND EMPLOYEE COST. THESE FILT ERS WERE ALSO NOT CONSIDERED BY THE TPO. ONE OF THE OBJECTION RAISED BY ASSESSEE BEFORE THE TPO WAS THAT ASSESSEE IS FOLLOWING BUSIN ESS PROCESS OUTSOURCING (BPO) AND SOME OF THE COMPARABLE COMPAN IES ARE IN THE KNOWLEDGE PROCESS OUTSOURCING (KPO), THEREFORE, THO SE COMPARABLES SHOULD BE EXCLUDED. FINALLY, THE TPO SELECTED 27 CO MPANIES AS COMPARABLES. OUT OF 22 COMPANIES SELECTED BY ASSESS EE AT THE TIME OF TP STUDY AND TWO COMPANIES ADDITIONALLY SUGGESTE D BY ASSESSEE, THE TPO ACCEPTED 9 COMPARABLE COMPANIES AND REJECTE D BALANCE COMPANIES. 5. BEFORE US, ASSESSEE HAS NOT RAISED GROUNDS WITH REFERENCE TO COMPARABLES REJECTED BY THE TPO, THEREFORE, TO THAT EXTENT THE MATTERS GOT CONCLUDED. IN ADDITION TO THE 9 COMPANI ES OUT OF 4 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. ASSESSEES CHOICE, TPO SELECTED ANOTHER 18 COMPANIE S AS COMPARABLE COMPANIES AND FINALLY ARRIVED AT ARITHME TICAL MEAN PLI AT 30.21% AND SUGGESTED AN ADJUSTMENT OF RS. 2,78,56,1 95/- ON THE ENTIRE TURNOVER OF ASSESSEE. ASSESSEE OBJECTED BEFO RE THE DRP ABOUT ADOPTING ENTIRE TURNOVER FOR BENCHMARKING AS AGAINS T TURNOVER PERTAINING TO AE TRANSACTIONS AND FURTHER OBJECTED TO VARIOUS COMPARABLES. THE DRP IN THE ORDER REJECTED VARIOUS OBJECTIONS RAISED BY ASSESSEE BUT ONLY ACCEPTED ABOUT ONE COMPARABLE IN THE CASE OF MAPLE E SOLUTIONS LTD, WHICH WAS DIRECTED TO BE EXC LUDED. CONSEQUENTLY, THE AO WHILE GIVING EFFECT TO THE ORD ER OF THE DRP REWORKED OUT THE ARITHMETIC MEAN PLI AT 30.06% THER EBY MAKING AN ADDITION OF RS. 2,76,28,627/- BEING ADJUSTMENT RECO MMENDED AND CONFIRMED BY THE DRP. 6. ASSESSEE IN ITS ORIGINAL GROUNDS HAS CONTESTED T HE AMOUNT OF RS. 2,78,56,195/- BUT IN THE AMENDED GROUNDS CONTES TED THE AMOUNT OF RS. 2,77,75,000/-. THIS AMOUNT IS TAXABLE INCOME , WHICH INCLUDED OTHER INCOME RETURNED BY ASSESSEE. THE ACTUAL ADDIT ION MADE, WHICH SHOULD HAVE BEEN CORRECTLY CONTESTED BY ASSESSEE IS ONLY RS. 2,76,28,627/-, THEREFORE, THIS AMOUNT IS ONLY CONS IDERED. WHILE ARRIVING AT THE ADJUSTED ARITHMETIC MEAN PLI, TPO A LLOWED WORKING CAPITAL ADJUSTMENT AT 1.38%. ASSESSEE OBJECTED TO T HE WORKING CAPITAL ADJUSTMENT WHEREIN THE TPO EXCLUDED THE ADVANCE REC EIVED FROM CUSTOMERS THEREBY AFFECTING THE PERCENTAGE OF RELIE F. THIS OBJECTION WAS REJECTED BY THE DRP. SINCE THE ORIGINAL GROUND WAS NOT RAISED ON WORKING CAPITAL ADJUSTMENT, ASSESSEE FILED THE ADDI TIONAL GROUND, WHICH IS AS UNDER: THE LD. TPO FAILED TO MAKE APPROPRIATE CALCULATION OF WORKING CAPITAL ADJUSTMENT BY IGNORING THE AMOUNT OF ADVANC E FROM CUSTOMERS AS ON 31 ST MARCH 2007 AND ALSO AS ON 31 ST MARCH 2006 AND THEREBY IS NOT JUSTIFIED IN DENYING THE AP PROPRIATE WORKING CAPITAL ADJUSTMENT. 5 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. WHILE ALLOWING DEDUCTION U/S 10A, AO SET OFF LOSSES IN ENGINEERING UNIT AGAINST PROFITS OF ELIGIBLE UNITS WHICH RESUL TED IN DENYING LOSSES OF RS. 24,45,178/- ELIGIBLE TO BE SET OFF AND CARRI ED FORWARD. ASSESSEE HAS RAISED THIS ISSUE AS ONE OF THE GROUND. 7. BEFORE US, THE LEARNED COUNSEL SUMMARIZED THE OB JECTIONS RAISED IN VARIOUS GROUNDS AS UNDER: A) REJECTING THE CONTEMPORANEOUS DATA AND UNDERTAKI NG FRESH COMPARABLE. B) IGNORING SEGMENT WISE DATA PROVIDED BY ASSESSEE C) WRONGLY APPLYING ALP AT ENTITY LEVEL INSTEAD OF RESTRICTING TO TRANSACTIONS WITH AES. D) SELECTION OF WRONG COMPARABLES BY THE TPO E) USING A HIGHER THRESHOLD FOR RELATED PARTY TRANS ACTIONS F) EMPLOYEE COST FILTER, AND G) IMPROPER CALCULATION OF WORKING CAPITAL ADJUSTME NT 8. UNDER THESE HEADS, AR SUBMITTED DETAILED SUBMISS IONS AS UNDER: A) REJECTING THE CONTEMPORANEOUS DATA AND UNDERTAKING FRESH COMPARABLE.( GROUND 3(I) ). 1. THE LEARNED COUNSEL SUBMITTED THAT THE TPO USED THE COMPARABLE DATA WHICH WAS NOT AVAILABLE TO ASSESSEE AT THE TIME OF PREPARING THE TP DOCUMENTATION WHICH IS AGAINST THE PRINCIPLE OF NATURAL JUSTICE AND FURTHER THE INFORMATION OBTAINE D BY THE TPO IS NOT FREELY AVAILABLE IN THE PUBLIC DOMAIN. IT WAS SUBMI TTED THAT THE TPO SHOULD HAVE GIVEN AN OPPORTUNITY TO ASSESSEE TO RE- PREPARE THE TP DOCUMENTATION CONSIDERING THE DATA AVAILABLE AT THE TIME OF ASSESSMENT PROCEEDINGS. 6 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. 2. AFTER CONSIDERING RIVAL CONTENTIONS, PROCEEDINGS BEFORE THE TPO AS WELL AS DRP AND PAPER BOOK FILED BEFORE US, WE A RE NOT CONVINCED WITH THE OBJECTION RAISED BY ASSESSEE. EVEN THOUGH RELEVANT DATA WAS NOT AVAILABLE AT THE TIME OF PREPARING TP DOCUMENTA TION, THE TRIBUNAL UNIFORMLY IS HOLDING THAT COMPARABLE DATA AVAILABLE AT THE TIME OF ANALYSIS BY THE TPO SHOULD ALSO BE USED PROVIDED IN FORMATION AVAILABLE WITH EITHER IN THE PUBLIC DOMAIN OR SPECI FICALLY OBTAINED BY THE TPO WAS MADE AVAILABLE TO ASSESSEE FOR ITS OBJE CTIONS, IF ANY. SINCE TPO HAS GIVEN ENOUGH OPPORTUNITY TO ASSESSEE, WE DO NOT FIND ANY MERIT IN THE CONTENTIONS RAISED. THERE IS NO NE CESSITY FOR RE- PREPARING THE TP DOCUMENTATION, WHICH HAS ALREADY B EEN FURNISHED TO THE TPO AT THE TIME OF FILING RETURN AS EXERCISE OF VERIFYING ARMS LENGTH PRICE IS WITH THE TPO AND IN THE PROCEEDINGS BEFORE THE TPO ENOUGH OPPORTUNITY WAS GIVEN TO ASSESSEE. IN FACT, ASSESSEE ALSO SUGGESTED FRESH COMPARABLES AND THE COMPARABLES REJ ECTED BY THE TPO OUT OF THE SELECTED COMPANIES OF ASSESSEE WERE ALSO ACCEPTED. IN VIEW OF THIS FACTUAL POSITION, WE DO NOT FIND AN Y MERIT IN THE CONTENTION ON THIS ISSUE. ACCORDINGLY, GROUND NO. 3 (I) STANDS REJECTED. B) SEGMENT WISE DATA ( GROUND NOS. 3(II) & 3(V): A) IT WAS SUBMITTED THAT ASSESSEE COMPANY HAS THREE BUSINESS VERTICALS, NAMELY, A) GIS SERVICES STPI UNIT, B) SOFTWARE SERVICES NON STPI UNIT AND ENGINEERING SERVICES STPI UNI T, AND THE OPERATING PERFORMANCE OF THE SAID THREE UNITS IS AS UNDER: PARTICULARS GE SERVICES SOFTWARE SERVICES ENGINEERING SERVICES AE TOTAL AE TOTAL AE TOTAL OPERATING INCOME 87297078 87593978 948046 4709526 5847709 71394507 OPERATING EXPENSES 72528291 72774961 1917122 9523519 5366297 65516970 PROFIT 14768787 14819016 (969076) (4813993) 481411 5877537 MARGIN ON COSTS% 20.36 20.36 (50.55) (50.55) 8.97 8.97 7 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. B) IT WAS FURTHER SUBMITTED THAT BOOKS OF ACCOUNTS ARE MAINTAINED WITH EACH UNIT AS A SEPARATE PROFIT CENTRE AND THE COMMON EXPENSES ARE ALLOCATED ON THE BASIS OF REVENUE. (PB-284) C) FURTHER, IT WAS SUBMITTED THAT THE ABOVE SEGME NTATION IS THE BASIS FOR CLAIMING SECTION 10A RELIEF AND THE SAME IS CERTIFIED BY A CA AND WAS SUBMITTED FOR THE CONSIDERATION OF TPO. IT WAS SUBMITTED THAT AROUND 90% OF THE AE TRANSACTIONS WERE FROM GIS SEG MENT WHICH EARNED AN OPERATING MARGIN OF 20.36%. THE TPO AS WE LL AS DRP HAVE IGNORED THIS FUNDAMENTAL FACT AND HAVE ERRED IN NOT CONSIDERING THIS ASPECT OF THE ECONOMIC SUBSTANCE OF THE COMPANY. TH E REASON FOR REJECTION OF SEGMENT AS STATED BY THE TPO IS THAT T HESE WERE NOT AUDITED. IT MAY BE NOTED THAT THE REQUIREMENT UNDER COMPANIES ACT FOR DISCLOSURE OF SEPARATE SEGMENT ARISES ONLY IN T ERMS OF AS-17. IF THE SEGMENTS ARE FUNCTIONALLY SAME AND DO NOT MEET THRESHOLD LIMIT THE SAME ARE CONSIDERED AS ONE SEGMENT WHICH IN FAC T IS THE CASE WITH ASSESSEE. THE BOOKS WERE AUDITED AND THERE IS ONLY ONE SEGMENT IN ACCORDANCE WITH AS-17. THE TPO HAS REJE CTED THE SEGMENT RESULTS SHOWN ABOVE MERELY ON THIS GROUND, WITHOUT LOOKING AT THE DETAILS AND RECONCILIATION WITH TRIAL BALANC E THAT WAS SUBMITTED. D)THE LEARNED COUNSEL RELIED ON THE DECISION OF DEL HI BENCH OF ITAT IN THE CASE OF BENETTON INDIA PVT. LTD. VS. ITO [20 12-TII-05-ITAT- DEL-TP) TO SUBMIT THAT WHEN ASSESSEE IS IN DIFFEREN T SEGMENTS ONLY THE SEGMENTAL PROFITS SHOULD BE ARRIVED AT AND THAT CAN ONLY BE BENCHMARKED INDEPENDENT OF EACH OTHER. HE ALSO RELI ED ON THE DECISION OF COORDINATE BENCH OF MUMBAI ITAT IN THE CASE OF HINDUJA VENTURES LTD. VS. ACIT, TS-212-ITAT-2012 (MUM.) E) THE LEARNED DR, HOWEVER, SUBMITTED THAT THE SEGM ENTAL DATA IS NOT AUDITED AND AS PER THE ANNUAL REPORT THERE IS NO SE GMENTAL REPORTS, 8 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. THEREFORE, ALLOCATION OF EXPENDITURE AND PROFITS AR RIVED AT BY ASSESSEE CANNOT BE RELIED UPON. F) AFTER CONSIDERING RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT ASSESSEE HAS A VALID GROUND ON THIS ISSUE. FIRST OF ALL, AS SEEN FROM THE ORDER OF THE AO, THE AO WHILE CONSIDERING DEDUC TION U/S 10A HIMSELF CATEGORISED THE PROFITS EARNED BY VARIOUS U NITS, AS UNDER: GIS DIVISION RS. 1,64,45,398 IT DIVISION (-) RS. 47,97,187 ENGINEERING DIVISION RS. 60,62,067 TOTAL RS. 1,77,13,278 ============= THIS INDICATES THAT ASSESSEES COMPUTATION OF PROFI TS ON DIFFERENT UNITS, TWO UNITS BEING ELIGIBLE UNITS I.E. GIS AND ENGINEERING DIVISION AND ONE NON-ELIGIBLE UNIT OF IT DIVISION ARE AVAIL ABLE SEPARATELY AND THE AO HAS NEITHER RAISED ANY OBJECTION ON THE PROF IT COMPUTATION NOR MADE ANY ADJUSTMENTS TO THE WORKING GIVEN BY ASSESS EE. EVEN THOUGH ASSESSEES ENTIRE BUSINESS ACTIVITY IS COMIN G UNDER ONE SEGMENT UNDER COMPANY LAW, BUT FOR THE PURPOSE OF T RANSFER PRICING THESE ACTIVITIES ARE ENTIRELY DIFFERENT. AS HELD BY THE COORDINATE BENCH IN THE CASE OF BENETTON INDIA PVT. LTD. (SUPRA) EAC H ACTIVITY HAS DIFFERENT FACTORS IN RESPECT OF SOURCE, IDENTIFICAT ION OF VENDORS, MERCHANDISE, DESIGNS QUALITY CONTROL, HANDLING, ETC . THE FAR ANALYSIS IN EACH OF THE ACTIVITY WILL HAVE DISTINCT AND SEPA RATE CONSIDERATIONS. WHEN THERE ARE DIFFERENT SEGMENTAL ACTIVITIES, WHIC H ARE INDEPENDENT OF EACH OTHER, THEY ARE REQUIRED TO BE ANALYSED TRA NSACTION TO TRANSACTION BASIS AND NOT BY COMBINING ALL ACTIVITI ES. THEREFORE, TPO/AO SHOULD HAVE CONSIDERED GIS SERVICES, ENGINEE RING SERVICES AND SOFTWARE SERVICES SEPARATELY FOR BENCHMARKING S HOULD NOT HAVE COMBINED ALL OF THEM INTO ONE. COMING TO BUSINESS V ERTICALS, ASSESSEE HAD VERY MEAGER NON-AE TRANSACTIONS IN GIS SERVICES ( A MEAGER RS. 2.96 LAKHS) WHEN COMPARED TO TOTAL TURNO VER OF RS. 8.76 9 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. CRORES. SO FAR AS IN ENGINEERING SERVICES, OUT OF R S. 7.14 CRORES OF TURNOVER, THE AE TRANSACTIONS ARE ONLY 58.47 LAKHS. LIKEWISE IN SOFTWARE SERVICES ALSO, AE TRANSACTIONS ARE 9.48 LA KHS AGAINST TOTAL OF RS. 47.09 LAKHS. THE TPO/AO SHOULD HAVE ANALYSED SE PARATE ACTIVITIES AND SHOULD HAVE BENCHMARKED SEPARATELY. ONE OBJECTION, WHICH CAN BE RAISED IN THIS REGARD IS THAT ASSESSEE ITSELF HAS BENCHMARKED TRANSACTIONS COMBINING ALL THE THREE T RANSACTIONS IN TP REPORT. HOWEVER, WHEN THIS WAS BROUGHT TO THE NOTIC E OF TPO AND PARTICULARLY WHEN SEGMENTAL REPORTS ARE AVAILABLE O N THE BASIS OF CLAIMS MADE U/S 10A, THE TPO SHOULD HAVE TAKEN THEM INTO CONSIDERATION. THE TPO AS WELL AS DRP HAVE IGNORED THIS FUNDAMENTAL FACT AND HAVE ERRED IN NOT CONSIDERING THIS ASPECT OF THE ECONOMIC SUBSTANCE OF THE TRANSACTIONS. THE REQUIR EMENT UNDER COMPANIES ACT FOR DISCLOSURE OF SEPARATE SEGMENT AR ISES ONLY IN TERMS OF AS-17, BUT, UNDER THE TP PROVISIONS, THE S EGMENTS ARE FUNCTIONALLY DIFFERENT AND THEY DO NOT MEET THRESHO LD LIMITS. ACCORDINGLY, THIS OBJECTION OF ASSESSEE IS TO BE UP HELD. C) TPO WRONGLY APPLIED ALP AT ENTITY LEVEL INSTEAD OF RESTRICTING TO TRANSACTIONS WITH AES GROUNDNO.3(III): A) IT WAS SUBMITTED THAT ITS OPERATIONAL MARGIN IND ICATED THAT TRANSACTIONS WITH AE RESULTED IN OPERATING PROFIT T O COST RATIO OF 17.89% AND WITH NON-AE AT 2.35% AND TOTAL OPERATING PROFIT TO COST IS AT 10.74%. IT IS FURTHER SUBMITTED THAT THE TPO MAD E THE ADDITION ON THE BASIS OF OVERALL PROFIT OF 10.74% IN STEAD OF C ONSIDERING THE MARGIN OF 17.89% SUBMITTED BY ASSESSEE FROM AE. THI S HAS RESULTED IN MAKING ADDITION WITH REFERENCE TO THE TRANSACTIO N WITH NON-AE ALSO AND IT WAS SUBMITTED THAT IT RESULTED IN ADDITION O F RS. 1,80,04,041/- ON THE NON-AE TRANSACTIONS, WHICH ARE ALMOST ON PAR WITH AE TRANSACTIONS. THE LEARNED COUNSEL BROUGHT OUT THE F ACTS TO OUR NOTICE AND SUBMITTED THAT SEGMENTAL DATA AS PROVIDED FOR T HE CLAIM OF SECTION 10A IS AVAILABLE WITH AO, WHICH ARE DULY SI GNED BY CA. IT WAS 10 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. FURTHER SUBMITTED THAT TPO AS WELL AS DRP REJECTED THIS ON THE REASON THAT SEGMENT-WISE DATA IS UNAUDITED AND CANNOT BE R ELIED, IN A WAY OF VIOLATING OF PRINCIPLES OF NATURAL JUSTICE. B) THE LEARNED DR, HOWEVER, RELIED ON THE CONTENTI ONS RAISED BY THE TPO AND DRP AND SUBMITTED THAT SEGMENT-WISE DET AILS ARE NOT AVAILABLE, THEREFORE, THEY DO NOT HAVE ANY OPTION B UT TO ADOPT ENTERPRISE PROFIT ALONE. C) IN THE REJOINDER, THE LEARNED COUNSEL REFERRING TO THE OBJECTIONS MADE BEFORE DRP SUBMITTED THAT DRP ALSO NOTED THAT THERE IS STRONG MERIT IN THE CLAIM OF ASSESSEE BUT,REJECTED THE SAM E THAT THE ISSUE IS PENDING BEFORE VARIOUS APPELLATE-FORA AND, HENCE, N OT REACHED FINALITY. IN VIEW OF THIS, IT WAS SUBMITTED THAT AD JUSTMENT SHOULD BE MADE ONLY WITH REFERENCE TO AE TRANSACTIONS AND NOT ON THE ENTIRE BUSINESS TURNOVER. D) AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT ASSESSEE HAS MERIT IN ITS CONTENTIONS. IN FACT, ASS ESSEE HAS SUFFERED LOSSES IN SOFTWARE SERVICES WHERE THE AE TRANSACTIO NS ARE LESS AS STATED EARLIER. LIKE-WISE, ASSESSEE ALSO HAD VERY M EAGER AE TRANSACTIONS IN ENGINEERING SERVICES AND THERE ARE SEPARATE PROFITS WHICH WERE ALREADY ARRIVED AT AND ACCEPTED BY AO IN THE ORDER ITSELF AS DISCUSSED EARLIER WHILE ACCEPTING SEGMENTAL DATA . WHEN PROFIT MARGINS OF DIFFERENT UNITS ARE AVAILABLE SEPARATELY , WE ARE NOT IN A POSITION TO UNDERSTAND AS TO WHY TPO AND DRP SHOULD ADOPT TOTAL PROFIT AT 10.74%, WHICH INCLUDED NON-AE TRANSACTION S ON WHICH ACCORDING TO ASSESSEE, PROFIT MARGIN WAS LESS. BE T HAT AS IT MAY, SINCE SEGMENTED PROFITS ARE AVAILABLE AND PROFITS A RE SEPARATELY COMPUTED UNDER THE PROVISIONS OF SECTION 10A, IT IS NOT DIFFICULT TO ARRIVE AT THE CORRECT PROFIT MARGIN ON COST, ON THE BASIS OF INFORMATION AVAILABLE ON RECORD AND MAKING THE ADDITION ACCORDI NGLY. 11 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. E) HOWEVER, AS SEEN FROM THE DETAILS PLACED IN THE WRITTEN SUBMISSIONS, ASSESSEE HAS ARRIVED AT MARGINAL COST AT 20.36% IN SEGMENT WISE DATA WHEREAS IN THE SEPARATE COMPUTATI ON FOR AE AND NON-AE TRANSACTIONS, PROFIT WAS ARRIVED AT 17.9%. T HESE AMOUNTS ARE TO BE RECONCILED WITH REFERENCE TO TURNOVERS AND E XPENSES CLAIMED FOR THE PURPOSE OF DEDUCTION U/S 10A FROM GIS SERVI CES AND ENGINEERING SERVICES. SINCE SEPARATE SEGMENTED DATA IS AVAILABLE BY WAY OF CAS CERTIFICATE UNDER THE PROVISIONS OF SEC TION 10A, THE AO CAN RECONCILE THESE AMOUNTS AND ARRIVE AT CORRECT P ROFIT MARGINS AND MAKE THE ADJUSTMENTS THEREON. THEREFORE, WE UPHOLD THE OBJECTIONS RAISED BY ASSESSEE AND DIRECT THE AO TO RE-WORKOUT THE ADDITION, IF ANY, ONLY WITH REFERENCE TO AE TRANSACTIONS AND NOT ON NON-AE TRANSACTIONS. F) IN THE CASE OF DCIT VS. FIRESTONE INTERNATIONAL, 712-ITAT-2012 (MUM), THE COORDINATE BENCH HELD AS FOLLOWS: .SINCE THE ARMS LENGTH PRICE HAS TO BE DETERMIN ED ONLY WITH REFERENCE TO THE INTERNATIONAL TRANSACTIONS, WHATEVER BE THE METHOD FOLLOWED OR ADOPTED FOR ARRIVING AT THE ALP , THE ALP CAN ONLY BE CONSIDERED ON THE VALUE INTERNATIONAL TRAN SACTIONS ALONE AND NOT ON THE ENTIRE TURNOVER OF ASSESSEE. IF THI S SORT OF ADJUSTMENT IS PERMITTED THIS WILL RESULT IN INCREA SING THE PROFIT OF ASSESSEE ON THE ENTIRE NON-AE SALES ALSO, WHICH IS NOT ACCORDING TO THE PROVISIONS OF TRANSFER PRICING MA NDATED BY THE ACT FOR THE IMPUGNED ASSESSMENT YEAR. G) SIMILAR DECISION WAS ALSO TAKEN IN OTHER CASES R ELIED UPON BY THE LEARNED COUNSEL AS UNDER: I) GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. ( ITA NO. 1231/BANG/2010) II) DCIT VS STARLITE (40 SOT 421 (MUM) III) DCIT VS. ANKIT DIAMONDS (43 SOT 523 (MUM). H) RESPECTFULLY FOLLOWING THE DECISIONS OF THE COOR DINATE BENCH, WE DIRECT THE AO/TPO TO RE-WORKOUT THE ADDITION ACCORD INGLY. 12 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. D) SELECTION OF WRONG COMPARABLES BY THE TPO GROUND NO 3(IV), 3(VIII) AND 4: A) IN THE WRITTEN SUBMISSIONS, ASSESSEE HOWEVER LIM ITED ITS OBJECTIONS TO THE FOLLOWING COMPANIES: B) THE DETAILS OF SUMMARY OF ARGUMENTS ARE AS UNDER : S NO COMPARABLE ISSUE JUSTIFICATION 1 ACCENTIA TECHNOLOGIES LTD EXTRAORDINARY EVENT OF AMALGAMATION CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. VS. DCIT (INTL TAXATION, HYD.) & ZAVATA INDIA PVT. LTD., (TS-156-ITAT-2013 (HYD) 2 ECLERX SERVICES LTD SUPERNORMAL PROFITS AND HIGH END KPO MARKET TOOLS RESEARCH PVT. LTD. VS. ACIT (TS-35- ITAT-2013 (HYD.) & ZAVATA INDIA PVT. LTD., (TS-156- ITAT-2013 (HYD) 3 MOLD TEK TECHNOLOGIES LTD EXTRAORDINARY EVENT OF AMALGAMATION/ MERGER, FAILS EMPLOYEE COST FILTER AND HAS SUPERNORMAL PROFITS CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. VS. DCIT (INTL TAXATION, HYD.) & ZAVATA INDIA PVT. LTD., (TS-156-ITAT-2013 (HYD) 4 VISHAL INFORMATION TECHNOLOGIES LTD. EXTREMELY LOW EMPLOYEE COST (FAILS EMPLOYEE COST FILTER) BRIGADE GLOBAL SERVICES PVT. LTD. VS. IT) (TS-730- ITAT-2012(HYD) & ZAVATA INDIA PVT. LTD., (TS-156- ITAT-2013 (HYD) 1. ACCENTIA TECHNOLOGIES LTD 2. ECLERX SERVICES LTD 3. MOLD TEK TECHNOLOGIES LTD 4.VISHAL INFORMATION TECHNOLOGIES LTD. 5. HCL COMNET SYSTEMS & SERVICES LTD. 6. INFOSYS BPO LTD. 7. WIPRO LIMITED 8. ASIT C MEHTA FINANCIAL SERVICES LTD. 9. TRITON CORPORATION 13 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. 5 6 7 HCL COMNET SYSTEMS & SERVICES LTD. INFOSYS BPO LTD. WIPRO LIMITED HIGH TURNOVER COMPANIES AND GIANTS IN INDUSTRY PATNI TELECOM SOLUTIONS PVT. LTD. VS. ACIT, HYDERABAD (TS-102-ITAT- 2013 (HYD) & ZAVATA INDIA PVT. LTD., (TS-156-ITAT- 2013 (HYD) 8 ASIT C MEHTA FINANCIAL SERVICES LTD. FUNCTIONALLY DIFFERENT COMPANY AND RPT > 10% FUNCTIONALLY DIFFERENT COMPANY NOT COMPARABLE WITH THE BUSINESS OF ASSESSEE & ZAVATA INDIA PVT. LTD., (TS-156-ITAT- 2013 (HYD) 9 TRITON CORPORATION COMPARABLE INDICTED FOR MONEY LAUNDERING OFFENCES. DIRECTIONS OF DRP C) THE LEARNED DR, HOWEVER, RELIED ON THE ORDER S OF TPO AND THE DRP AND EXPLAINED THAT THESE COMPARABLES ARE SELECT ED AFTER DUE ANALYSIS AND NOTHING SHOULD BE EXCLUDED. D) WE HAVE CONSIDERED AND EXAMINED VARIOUS COM PARABLES SELECTED AS WELL AS PERUSED VARIOUS ORDERS OF THE C OORDINATE BENCHES ON THE ISSUE. IT IS TRUE THAT IN THE TRANSFER PRICI NG ANALYSIS COMPARABILITY IS AT THE HEART OF TRANSFER PRICING A NALYSIS. THE FOUNDATION FOR COMPARABILITY ANALYSIS IS THE NEED F OR A COMPARISON BETWEEN CONDITIONS MADE OR IMPOSED BETWEEN AE AND T HOSE WHICH WILL BE MADE BETWEEN INDEPENDENT ENTERPRISES. AS PE R THE PROVISIONS, FAR ANALYSIS IS MUST. AS PER RULE 10B IF THERE ARE ANY DIFFERENCES BETWEEN COMPARABLES, RELEVANT TRANSACTIONS SHOULD B E TAKEN AND DIFFERENCES TO BE ADJUSTED TO ARRIVE AT THE ALP FOR THE REASON THAT AFTER TAKING NUMBER OF COMPANIES AS COMPARABLES, TH E TPO SHOULD ALLOW ADJUSTMENTS TOWARDS DIFFERENCES IN DEPRECIATI ON, DIFFERENCES IN RISK PERCEPTIBILITY, OF WORKING CAPITAL ADJUSTMENT S, ETC DEPENDING ON THE FACTS OF THE CASE. BUT SELECTING A COMPANY, WHI CH IS NOT COMPARABLE AT ALL OR WHICH AFFECTS COMPARISON DUE T O UNUSUAL 14 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. FEATURES CANNOT BE TAKEN AS A COMPARABLE COMPANY. A SSESSEES OBJECTION IS WITH REFERENCE TO SUCH COMPANIES, WHIC H ARE SELECTED BY THE TPO AS COMPARABLE BUT IN FACT THERE ARE CERTAIN EXTRAORDINARY EVENTS OR DIFFERENT BUSINESS MODELS, WHICH MAKE IT UNCOMPARABLE. NOW COMING TO THE COMPANIES OBJECTED BY ASSESSEE, T HE ANALYSIS IS AS UNDER: 1) ACCENTIA TECHNOLOGIES LTD. THE LEARNED COUNSEL SUBMITTED THAT DURING THE FY 2 006-07 AN EXTRA ORDINARY EVENT OF AMALGAMATION OCCURRED IN DECEMBER 2006, AS A PART OF THE EXPANSION PLAN, THE SAID COMPANY TOOK O VER A MUMBAI LISTED COMPANY NAMED HITECH ENTERTAINMENT LTD. THRO UGH OPEN OFFER, WHICH IN TURN TOOK OVER GEOSOFT AND IRIDIUM. WE FI ND THAT THE SAID FACT OF AMALGAMATION WAS BROUGHT TO THE NOTICE OF T HE DRP, BUT THE DRP PREFERRED TO NOT CONSIDER THIS ASPECT. IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. VS DY DCIT FO R AY 2007-08, ON WHICH RELIANCE PLACED BY ASSESSEE, THE COORDINATE B ENCH RULED IN THE CASE OF THIS COMPARABLE AS UNDER: 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 PROFITABIL ITY OF THE COMPANY IN THE FY IN WHICH SUCH EVENT TAKES PLACE. IT IS THE CONTENTION OF THE ASSESSEE THAT IN CASE OF THE AFOR ESAID COMPANY, THERE IS AMALGAMATION IN DECEMBER, 2006, W HICH 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 COMPARA BLE HAS TO BE EXCLUDED. ASSESSEE PLACED RELIANCE ON THE DECISION OF COORDIN ATE IN THE CASE OF ZAVATA INDIA PVT. LTD (SUPRA) WHEREIN ALSO SIMILAR DECISION WAS TAKEN THAT THE SAID COMPANY SHOULD BE EXCLUDED FROM THE L IST OF COMPARABLES. IN VIEW OF THE ABOVE, WE DIRECT THE AO /TPO TO EXCLUDE THE SAID COMPANY AS COMPARABLE FROM THE LIST OF COM PARABLES. 15 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. 2) ECLERX SERVICES LTD. WE FIND THAT THE PLI FOR ECLREX SERVICES LTD FOR THE AY 2007-08 IS 89.33% AND IS IN THE BUSINESS OF HIGH END KPO. AS R ULED BY THE COORDINATE BENCH IN THE CASE OF CAPITAL IQ SYSTEMS (INDIA) PVT. LTD. (SUPRA), SUPERNORMAL PROFIT COMPANIES MUST BE EXCLU DED FOR DETERMINATION OF ALP. IN THE CASE OF MARKET TOOLS RESEARCH PVT. LTD. VS. ACIT, 35-ITAT-2013 (HYD), ON WHICH RELIANCE WAS PLACED BY ASSESSEE, THE COORDINATE BENCH HELD AS FOLLOWS: WE FIND THAT COMPARABILITY OF THIS COMPANY HAS BEEN DEALT WITH IN DETAIL IN THE CASE OF CAPITAL IQ INFORMATION SYS TEMS (INDIA) PVT. LTD. VS. DCIT ITA NO. 1961/H/2011 DT. 23-11-12 FOR THE AY 2007-08 AT PARA 14 & 15 THEY HAVE HELD THAT ECLERX SERVICES LTD. CANNOT BE TAKEN INTO ACCOUNT IN VIEW OF THEIR EXTRA ORDINARY PROFITS AND THAT COMPANY WAS ENGAGED WITH KNOWLEDGE PROCESS OUTSOURCING BUSINESS WHICH IS DISTINCT AND DIFFEREN T FROM THE LINE OF NATURE OF ACTIVITIES OF THE ASSESSEE. HENCE THIS COMPANY SHOULD BE EXCLUDED WHILE DETERMINING ALP EVEN IN THE CASE OF ZAVATA INDIA PVT. LTD. VS. DCIT (SUPRA), ON WHICH ASSESSEE RELIED, SIMILAR VIEW WAS TAKEN. RESPECTFUL LY FOLLOWING THE SAID DECISIONS OF THE COORDINATE BENCH, WE DIRECT THE AO/TPO TO EXCLUDE THE SAID COMPANY WHILE DETERMINING ALP. 3) MOLD TEK TECHNOLOGIES LTD. WE FIND THAT THERE IS MERGER IN THE COMPANY AND A LSO FAILS EMPLOYEE FILTER COST. WE FIND THAT IN THE CASE OF CAPITAL I Q INFORMATION SYSTEMS INDIA PVT. LTD. (SUPRA), FOR THE AY 2007-08, THE CO ORDINATE BENCH OF ITAT, HYDERABAD HELD AS UNDER: THE ASSESSEE HAS OBJECTED FOR THIS COMPANY BEING TA KEN AS COMPARABLE MAINLY ON THE GROUND THAT SINCE THERE IS A MERGER FROM 1 ST OCTOBER, 2006, THE FINANCIAL RESULTS OF THE COMPAN Y CANNOT BE TAKEN AS A COMPARABLE. THE ASSESSEE, RELY ING UPON THE OBSERVATIONS OF THE DRP, IN THE CASE OF THIS PA RTICULAR COMPANY, IN THE PROCEEDING FOR THE AY 2008-09, WHIC H HAS BEEN EXTRACTED IN PARA 10 HEREINABOVE, HAS SUBMITTED THA T THE ASSESSMENT YEAR UNDER DISPUTE ALSO, IS AN EXCEPTION AL YEAR OF 16 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. PERFORMANCE AS THERE IS IMPACT OF AMALGAMATION OF A COMPANY, NAMELY, TECHMAN TOOLS P. LTD., WITH EFFECT FROM 1 ST OCTOBER, 2006 AND THE CONCERNED COMPANY ALSO REVISED ITS FIN ANCIAL STATEMENT, AFTER CLOSURE OF THE PREVIOUS YEAR. IT H AS BEEN SUBMITTED BY THE AR FOR THE ASSESSEE THAT THE AMALG AMATION WAS ALSO APPROVED BY THE SHAREHOLDERS ON 25-01-2008 AND THE HIGH COURT HAS ALSO APPROVED THE SAME ON 25-07-2008 . IN THIS CONTEXT, THE ASSESSEE RELIED UPON THE ANNUAL REPORT OF THE COMPANY FOR THE FY 2007-08. THE ASSESSEE HAS FURTHE R SUBMITTED THAT THE ACTIVITY OF THE COMPANY IS ALSO FUNCTIONALLY DIFFERENT SINCE IT IS ENGAGED IN PROVIDING HIGH END ENGINEERING CONSULTING SERVICES AND STRUCTURAL ENGINEERING CONS ULTING SERVICES, WHICH ARE IN THE NATURE OF KNOWLEDGE PROC ESS OUTSOURCING (KPO) SERVICE. THE AR FOR THE ASSESSEE HAS SUBMITTED THAT THE AFORESAID COMPANY IS PROVIDING H IGHLY TECHNICAL AND SPECIALIZED ENGINEERING SERVICES, AND USE OF INFORMATION TECHNOLOGY IS ONLY INCIDENTAL. LASTLY, IT HAS BEEN SUBMITTED THAT THE COMPANY WAS HAVING SUPERNORMAL P ROFIT AT 113%. THEREFORE, IT CANNOT BE TAKEN AS A COMPARABLE . THE EMPLOYEE COST OF THE MOLD TEK TECHNOLOGIES LTD. DURING THE AY 2007-08 IS MERE 7.6% OF SALES AND WHEN THIS FACT W AS BROUGHT TO THE NOTICE OF THE TPO AND DRP BY ASSESSEE, THEY DID NOT CONSIDER THE SAME. THIS INDICATES THAT PART OF JOB WAS OUTSOURCE D. FOLLOWING THE SAID COORDINATE BENCH DECISION, WE DIRECT THE AO/TP O TO EXCLUDE THE SAID COMPANY FROM THE LIST OF COMPARABLES WHILE DET ERMINING ALP. 4) VISHAL INFORMATION TECHNOLOGIES LTD. WE FIND THAT EMPLOYEE COST OF THE SAID COMPANY FOR THE AY 2007- 08 IS MERE 2% AS AGAINST 49% IN THE CASE OF ASSESSE E AND THE INDUSTRY AVERAGE OF 30 TO 40%, AS THE EMPLOYEES CO ST FORMS MAJOR COST BASE IN ITES COMPANIES. THEREFORE, THE SAID A DOPTS DIFFERENT METHODS OF RENDERING SERVICES AND IS NOT AKIN TO TH E BUSINESS RELATING TO ASSESSEE AND HENCE, WE DIRECT THE AO/TPO TO EXCL UDE THE SAID COMPANY FROM THE LIST OF COMPARABLES WHILE DETERMIN ING ALP. CORDINATE BENCHES IN THE CASE OF BRIGADE GLOBAL SER VICES PVT. LTD., VS. ITO, (TS-73ITAT-2012(HYD) AND ZAVATA INDIA PVT . LTD. (SUPRA) HELD A SIMILAR VIEW TO EXCLUDE. 17 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. 5. HCL COMNET SYSTEMS & SERVICES LTD. 6. INFOSYS BPO LTD. 7. WIPRO LTD. ASSESSE RELYING ON THE FOLLOWING DECISIONS OF THE COORDINATE BENCH, SUBMITTED TO EXCLUDE THE SAID COMPANIES FROM THE LIST OF COMPARABLES ON THE GROUND THAT THE SAID COMPANIES T URNOVER IS MANY TIMES MORE AS COMPARED TO THAT OF ASSESSEE. 1. PATNI TELECOM SOLUTIONS PVT. LTD. VS. ACIT, HYDE RABAD (TS- 102-ITAT-2013 (HYD) 2. ZAVATA INDIA PVT. LTD. VS. DCIT (TS 156 ITAT 201 3) WE FIND THAT IN THE CASE OF PATNI TELECOM SOLUTION S PVT. LTD., THE COORDINATE BENCH EXCLUDED THE HIGH TURNOVER COMPANI ES. THEREFORE, THERE IS JUSTIFICATION IN THE CLAIM. HOWEVER, WE AR E NOT ABLE TO EXAMINE WHETHER THERE ARE ANY COMPANIES ACCEPTED BY ASSESSEE WITH LOWER TURN OVER WHEN COMPARED TO ASSESSEES TURNOVE R. THE NORM SHOULD BE UNIFORM. THEREFORE, WE DIRECT THE AO/TPO TO EXCLUDE THE SAID COMPANIES FROM THE LIST OF COMPARABLES ONLY IF THERE ARE NO COMPANIES WITH SIMILAR RATIO OF LOWER TURN OVER, IN THE OTHER ACCEPTED COMPARABLES, WHILE DETERMINING ALP. AO IS DIRECTED TO EXAMINE THIS AND DECIDE ACCORDINGLY. 8. ASIT C MEHTA FINANCIAL SERVICES LTD. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE RECORD, IT IS OBSERVED THAT THE TPO HAD INCLUDED THE SAID COMPANY WHICH WAS ALSO ENGAGED IN PORTFOLIO MANAGEMENT SERVICES AND INVEST MENT ACTIVITIES AND SUCH SERVICES CANNOT BE COMPARED TO ASSESSEE AS BOTH ARE IN DIVERGENT SECTORS. IN THIS CONNECTION, WE REFER TO RULE 10B(2), WHICH IS AS UNDER: ..THE COMPARABILITY OF AN INTERNATIONAL TRANSACT ION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFER ENCE TO THE FOLLOWING, NAMELY: A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRA NSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION. 18 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. B).. C).. D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH TH E RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. THE LEARNED TPO HAD CONSIDERED THE SAID COMPANY IN SPITE OF THE RELATED PARTIES EXCEEDING 15% OF THE TURNOVER. ASSE SSEE SUBMITTED SAID COMPANY HAS RPT OF 15.72%. THE CO-ORDINATE BEN CH IN THE CASE OF LG SOFT INDIA PVT. LTD. VS. DCIT, BANGALORE [I T(TP)A NO. 1121/BANG/2011, AY 2007-08] AND 24/7 CUSTOMER. COM PVT. LTD. VS. DCIT, BANGALORE [ITA NO. 227/BANG/2010] HAS CON SIDERED SIMILAR FACTS AND EXCLUDED THE SAME. THEREFORE, WE DIRECT THE AO/TPO TO EXCLUDE THE SAID COMPANY FROM THE LIST OF COMPARABL ES WHILE DETERMINING ALP. 9. TRITON CORPORATION WE FIND THAT THE DRP IN ITS ORDER HAD DIRECTED THE TPO TO REMOVE THE SAID COMPANY FROM THE COMPARABLE LIST AS THERE WAS MERGER/ ACQUISITION OF MAPLE E SOLUTIONS BY TRITON. DRP CON CLUDED THAT BOTH SHOULD BE EXCLUDED. HOWEVER, THE SAME WAS NOT MENTI ONED IN FINAL CONCLUSION AND ONLY MAPLE WAS DIRECTED TO BE EXCLUD ED. THEREFORE, WE DIRECT THE AO/TPO TO EXCLUDE THE SAID COMPANY TR ITON ALSO FROM THE LIST OF COMPARABLES WHILE DETERMINING ALP. 9. IN VIEW OF THE ABOVE DISCUSSION, THE TPO IS DIRE CTED TO WORK OUT THE AVERAGE ARITHMETIC MEAN OF PLI, SUBJECT TO VERIFICATION ON TURNOVER FILTER OF COMPARABLES AT PARA 8 (D) - 5,6, 7 ABOVE. 10. ASSESSEE CONTESTED AS A GENERAL PRINCIPLE ABOUT HIGHER THRESHOLD FOR RELATED PARTY TRANSACTIONS, EMPLOYEE COST FILTER AS STATED 19 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. ABOVE IN ITEMS (E) & (F). WHILE WE ARE NOT OBJECTIN G TO THE CONTENTIONS PER SE, THERE IS NO NEED TO SEPARATELY ADJUDICATE O N THESE FILTERS AS ASSESSEES OBJECTION WITH REFERENCE TO OTHER COMPAR ABLES SELECTED BY THE TPO HAVE ALREADY BEEN ADDRESSED IN THE ABOVE GR OUNDS. THEREFORE, GIVING ANY FINDING ON THESE OBJECTIONS W ILL ONLY BE ACADEMIC IN NATURE, AS THE SPECIFIC OBJECTIONS TO T HE COMPARABLES WERE ALREADY DEALT WITH. HENCE, THESE TWO OBJECTION S RAISED BY ASSESSEE IN GROUND NO. 3(VI) AND 3(VII) ARE CONSIDE RED ACADEMIC IN NATURE AND ACCORDINGLY REJECTED. ADDITIONAL GROUND 11. THE ADDITIONAL GROUND RAISED BY ASSESSEE IS WIT H REFERENCE TO IMPROPER CALCULATION OF WORKING CAPITAL ADJUSTMENT BY THE TPO. 12. IT WAS THE CONTENTION THAT THE TPO BY NOT TAKIN G INTO CONSIDERATION THE AMOUNT OF ADVANCES FROM CUSTOMER S AS ON 31-03- 2007 AS ALSO ON 31-03-2006 DID NOT CALCULATE THE AD JUSTMENT CORRECTLY. ASSESSEE PRAYED FOR INCLUSION OF ADVANCE FROM CUSTOMERS UNDER TRADE PAYABLES FOR CALCULATION OF WORKING CAP ITAL ADJUSTMENT. IT WAS SUBMITTED THAT IF THE ACCOUNT PAYABLES OF ASSES SEE WAS CONSIDERED ON 31-03-2007 AND 31-03-2006 (BOTH OF TR ADE PAYABLES) WORKING CAPITAL ADJUSTMENT WOULD BE 3.30% AS AGAINS T 1.38% PERCENT. ASSESSEE FURNISHED DETAILED WORKING OF THE CAPITAL ADJUSTMENT AFTER CONSIDERING ADVANCES BY WAY OF ANNEXURE. IT WAS FUR THER SUBMITTED THAT IN THE CASE OF M/S BEARING POINT BUSINESS CON SULTING PVT. LTD. VS. DCIT IN ITA NO. 1124/BANG/2011, FOR AY 2007-08 DATED 21-12- 2012, THE COORDINATE BENCH REMITTED THE ISSUE TO TH E FILE OF TPO TO VERIFY THE FACTS ONCE AGAIN AND CONSIDER THE TRADE PAYABLE FOR COMPUTATION OF WORKING CAPITAL ADJUSTMENT. 20 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. 13. THE LEARNED DR, HOWEVER, CONTESTED THAT THIS WA S ALREADY CONSIDERED BY THE TPO AND, THEREFORE, NO FURTHER AD JUSTMENT IS REQUIRED. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RECORD. EVEN THOUGH ASSESSEE HAS RAISED THIS ADDITI ONAL GROUND, THE SAME WAS ALSO MADE AS AN OBJECTION BEFORE THE DRP A ND THE DRP DID DISCUSS IT IN PAGE 19 OF THE ORDER AND REJECTED THE CONTENTION ON THE REASON THAT BIFURCATION OF DEBTORS AND CREDITORS T O COMPUTE WORKING CAPITAL ADJUSTMENT BECOMES MEANINGLESS EXERCISE. I T IS FURTHER OPINED THAT IN THE ABSENCE OF COGENT REASONS, THERE IS NO CASE FOR REWORKING THE WORKING CAPITAL ADJUSTMENT. WE ARE NO T IN AGREEMENT WITH THE OPINION OF THE DRP. ASSESSEE CONTENDS THAT TRADE PRACTICE OF ADVANCES AND SUBSEQUENT ADJUSTMENT OF THESE ADVANCE S AGAINST INVOICES RAISED, BEING CAPTIVE SERVICE PROVIDER HAS A BEARING ON PROFIT MARGIN, THEREFORE, WORKING CAPITAL REQUIREMENT SHOU LD BE TAKEN CARE OF BY WAY OF ADJUSTMENTS. WHETHER SIMILAR CONDITION S EXIST FOR OTHER COMPARABLES REQUIRE EXAMINATION AND ADJUSTMENT TOWA RDS WORKING CAPITAL. BEFORE US, THE AR FURNISHED DETAILED ANNEX URE MAKING WORKING CAPITAL ADJUSTMENT TO JUSTIFY 3.30% SOUGHT BY ASSESSEE AS AGAINST 1.38% GIVEN THE TPO. SIMILAR ISSUE WAS DISC USSED IN THE CASE OF BEARING POINT BUSINESS CONSULTANCY PVT. LTD . (SUPRA) AND THE COORDINATE BENCH RESTORED TO THE FILE OF TPO VIDE P ARA 5.4.2 . SINCE WORKING CAPITAL ADJUSTMENT REQUIRE VERIFICATION BY THE TPO, IN THE INTEREST OF JUSTICE, WE RESTORE THE ISSUE TO THE FI LE OF TPO WITH A DIRECTION TO EXAMINE THE VERACITY OF ASSESSEES CLA IM AND TAKE PROPER DECISION IN CORRECTLY COMPUTING THE WORKING CAPITAL ADJUSTMENT. WITH THESE DIRECTIONS THIS ADDITIONAL GROUND IS CONSIDER ED ALLOWED FOR STATISTICAL PURPOSES. 21 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. 15. THE AO/TPO IS DIRECTED TO EXCLUDE COMPARABLE S AND DETERMINE THE ALP BY RESTRICTING TO THE INTERNATIONAL TRANSAC TIONS WITH AES ONLY AND WHILE DOING SO, CONSIDER SEGMENTAL PROFITS, BAS ED ON THE REPORTS SUBMITTED FOR CLAIMING U/S 10A OF THE ACT. AFTER A RRIVING THE ARITHMETIC MEAN OF PLI, IF ANY FURTHER ADJUSTMENT TOWARDS WORK ING CAPITAL IS REQUIRED, THE SAME MAY BE CONSIDERED AFTER VERIFICA TION AS DIRECTED ABOVE. IF REQUIRED, THE TPO OR AO CAN SEEK INFORMAT ION FROM THE ASSESSEE AND DECIDE ACCORDINGLY. 16. THE OTHER GROUND RAISED IS WITH REFERENCE TO SE TTING OFF OF BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION BEFORE GIVING EFFECT TO DEDUCTION U/S 10A 17. AS BRIEFLY STATED ABOVE, THE AO HAS SET OFF OF LOSSES OF RS. 47,97,187/- OF NON 10A UNIT BEFORE PROVIDING DEDUC TION U/S 10A. IT WAS THE CONTENTION THAT DEDUCTION U/S 10A IS UNDERT AKING SPECIFIC AND SHOULD BE COMPUTED WITHOUT CONSIDERING LOSSES OF TH E OTHER UNITS. IT WAS SUBMITTED THAT THIS CONTENTION IS SUPPORTED BY THE JUDGMENT OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD., 341 ITR 385 (KAR.). THE LEARNED COUNSEL ALSO RELIED ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF M /S GENISYS INTEGRATING SYSTEM (INDIA) PVT. LTD. IN ITA NO. 908 /BANG/11, FOR AY 2007-08, DATED 29-01-2013. THE LEARNED DR, HOWEVER, RELIED ON THE ORDERS OF THE AO. 18. WE HAVE CONSIDERED RIVAL CONTENTIONS AND PERUSE D MATERIAL ON RECORD. THE HONBLE KARNATAKA HIGH IN THE CASE CITE D SUPRA HAD CATEGORICALLY HELD THAT DEDUCTION U/S SECTION 10A OF THE ACT IS TO BE ALLOWED PRIOR TO SETTING OFF OF LOSSES OF NON ELIGI BLE UNITS. THE RELEVANT FINDING OF THE HONBLE KARNATAKA HIGH COUR T AT PARAS 18 & 19 AND 29 TO 31, ARE AS UNDER: 22 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. '18. IT IS AFTER THE DEDUCTION UNDER CHAPTER VI-A T HAT THE TOTAL INCOME OF AN ASSESSEE IS ARRIVED AT. CHAPTE R VI- A DEDUCTIONS ARE THE LAST STAGE OF GIVING EFFECT T O ALL TYPES OF DEDUCTIONS PERMISSIBLE UNDER THE ACT. AT THE END OF THIS EXERCISE, THE TOTAL INCOME IS ARRIVED AT. TOTAL INCOME IS THUS, A FIGURE ARRIVED AT AFTER GIVING EF FECT TO ALL DEDUCTIONS UNDER THE ACT. THERE CANNOT BE ANY F URTHER DEDUCTION FROM THE TOTAL INCOME AS THE TOTAL INCOME IS ITSELF ARRIVED AT AFTER ALL DEDUCTIONS. 19. FROM THE AFORESAID DISCUSSION IT IS CLEAR THAT THE INCOME OF 10A UNIT HAS TO BE EXCLUDED BEFORE ARRIVING AT THE GROSS TOTAL INCOME OF THE ASSESSEE. THE INCOME OF LOA UNIT HAS TO BE DEDUCTED AT SOURCE ITSELF AND NOT AFTER COMPUTING THE GROSS TOTAL INCOME. THE TOTAL INCOME USED IN THE PROVISIONS OF SECTION 10A IN THIS CONTEXT MEANS THE GLOBAL INCOME OF THE ASSESSEE AND NOT THE TOTAL INC OME AS DEFINED IN SECTION 2(45). HENCE, THE INCOME ELIGIBLE FOR EXEMPTION U/S 10A WOULD NOT ENTER INTO COMPUTATION AS THE SAME HAS TO BE DEDUCTED AT SOURCE LEVEL. 29. AFTER MAKING ALL SUCH COMPUTATION THE ASSESSEE WOUL D BE ENTITLED TO THE BENEFIT OF SET OFF OR CARRY FORW ARD OF LOSS AS PROVIDED U/S 72 OF THE ACT. THAT IS THE BENEFIT WHICH IS GIVEN TO THE ASSESSEE UNDER THE ACT IRRESPECTIVE OF THE NATURE OF BUSINESS WHICH HE IS CARRYING ON. THE SAI D BENEFIT IS AVAILABLE EVEN TO UNDERTAKINGS U/S 1 0B OF THE ACT. THE EXPRESSION 'DEDUCTION OF SUCH PROFITS AND GAINS AS DERIVED BY AN UNDERTAKING SHALL BE ALLOWED FROM THE TOTAL I NCOME OF THE ASSESSEE': HAS TO BE UNDERSTOOD IN THE CONTEXT WITH WHICH THE SAID PROVISION IS INSERTED IN CHAPTER III OF THE ACT. SUB-SECTION (4) OF SECTION 10A CLARIFIES THIS POSITION. IT PROVIDES THAT THE PROFITS DERIVED FROM EXPORT OF AR TICLES OR THINGS FROM COMPUTER SOFTWARE SHALL BE THE AMOUNT W HICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTA KING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT O F SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO TH E TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAK ING. THEREFORE, IT IS CLEAR THAT THOUGH THE ASSESSEE MAY BE HAVING MORE THAN ONE UNDERTAKING FOR THE PURPOSE OF SECTION 10A IT IS THE PROFIT DERIVED FROM EXPORT OF ARTICLE S OR THINGS OR COMPUTER SOFTWARE FROM THE BUSINESS OF THE UNDER TAKING ALONE THAT HAS TO BE TAKEN INTO CONSIDERATION AND S UCH PROFIT IS NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE AS SESSEE. IT IS ONLY AFTER THE DEDUCTION OF THE SAID PROFITS AND GAINS, THE INCOME OF THE ASSESSEE HAS TO BE COMPUTED. 23 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. 30. THE PROVISIONS OF THIS SUB-SECTION WILL APPLY E VEN IN THE CASE WHERE AN ASSESSEE HAS OPTED OUT OF SECTION 10A BY EXERCISING HIS OPTION UNDER SUB-SECTION (8). AS DISCUSSED, IT IS PERMISSIBLE FOR AN ASSESSEE TO OPT IN AND OPT OU T OF SECTION 10A. IN THE YEAR WHEN THE ASSESSEE HAS OPTE D OUT, THE NORMAL PROVISIONS OF THE ACT WOULD APPLY. THE P ROFITS DERIVED BY HIM FROM THE STP UNDERTAKING WOULD SUFFE R TAX IN THE NORMAL COURSE SUBJECT TO VARIOUS PROVISIONS OF THE ACT INCLUDING THOSE OF CHAPTER VI-A. IF IN SUCH A YEAR, THE ASSESSEE HAS SUFFERED LOSSES, SUCH LOSSES WOULD BE SUBJECT TO INTER SOURCE AND INTER HEAD SET OFF THE BALANCE IF ANY THEREAFTER CAN BE CARRIED FORWARD, FOR BEING SET OF F AGAINST PROFITS OF THE SUBSEQUENT ASSESSMENT YEARS IN THE N ORMAL COURSE. UNABSORBED DEPRECIATION ALSO MERITS A SIMIL AR TREATMENT. 31. AS THE INCOME OF 10A UNIT HAS TO BE EXCLUDED AT SOURCE ITSELF BEFORE ARRIVING AT THE GROSS TOTAL INCOME, T HE LOSS OF NON 10A UNIT CANNOT BE SET OFF AGAINST THE INCOME O F 10A UNIT U/S 72. THE LOSS INCURRED BY THE ASSESSEE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION HA S TO BE SET OFF AGAINST THE PROFITS AND GAINS IF ANY, OF AN Y BUSINESS OR PROFESSION CARRIED ON BY SUCH ASSESSEE. THEREFOR E AS THE PROFITS AND GAINS UNDER SECTION 10A IS NOT BE INCLU DED IN' THE INCOME OF THE ASSESSEE AT ALL, THE QUESTION OF SETTING OFF THE LOSS OF THE ASSESSEE OF ANY PROFITS AND GAINS O F BUSINESS AGAINST SUCH PROFITS AND GAINS OF THE UNDE RTAKING WOULD NOT ARISE. SIMILARLY, AS PER SECTION 72(2), UNABSORBED BUSINESS LOSS IS TO BE FIRST SET OFF AND THEREAFTER UNABSORBED DEPRECIATION TREATED AS CURRENT YEARS DEPRECIATION U/S 32(2) IS TO BE SET OFF AS DEDUCTION U/S 10A HAS TO BE EXC LUDED FROM THE TOTAL INCOME OF THE ASSESSEE, THE QUESTION OF UNABSORBED BUSINESS LOSS BEING SET OFF AGAINST SUCH PROFIT AND GAINS OF THE UNDERTAKING WOULD NOT ARISE. IN TH AT VIEW OF THE MATTER, THE APPROACH OF THE ASSESSING AUTHORITY WAS QUITE CONTRARY TO THE AFORESAID STATUTORY PROVISION S AND THE APPELLATE COMMISSIONER AS WELL AS THE TRIBUNAL WERE FULLY JUSTIFIED IN SETTING ASIDE THE SAID ASSESSMENT ORDE R AND GRANTING THE BENEFIT OF SECTION 10A TO BE ASSESSEE. HENCE, THE MAIN SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSES SEES AND AGAINST THE REVENUE'. 19. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF TH E HONBLE KARNATAKA HIGH COURT AND ALSO FOLLOWING THE DECISIO N OF COORDINATE BENCH IN THE CASE OF M/S GENISYS INTEGRATING SYST EM (INDIA) PVT. 24 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. LTD. IN ITA NO. 908/BANG/11, FOR AY 2007-08, DATED 29-01-2013, WE HOLD THAT DEDUCTION U/S 10A OF THE ACT HAS TO BE CO MPUTED PRIOR TO SETTING OF LOSSES OF OTHER INDUSTRIAL UNITS. ACCORD INGLY, GROUND OF ASSESSEE IS CONSIDERED AS ALLOWED. THE AO IS DIRECT ED TO REWORK OUT THE COMPUTATION OF INCOME ACCORDINGLY. 20. IN THE RESULT, APPEAL OF ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 31 ST DAY OF OCTOBER13 SD/- SD/- (SAKTIJIT DEY) (B. R AMAKOTAIAH) JUDICIAL MEMBER ACCOUNT ANT MEMBER HYDERABAD, DATED: 31 ST OCTOBER, 2013. KV COPY TO:- 1) M/S AVINEON INDIA PVT. LTD., CYBER GATEWAY, B LOCK 1A, 1 ST FLOOR, HITECH CITY, MADHAPUR, HYDERABAD 500 081 2) DCIT, CIRCLE 1(1), HYDERABAD. 3) DRP, HYDERABAD. 4) TPO CONCERNED 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A .T., HYDERABAD. 25 ITA NO. 1989/HYD/2011 M/S AVINEON LTD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER