Hackett Group (India) Limited, Hyderabad V. Dy. Commissioner of Income Tax, Circle-2(2), Hyderabad

ITA 2039/Hyd/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 1257 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 08-01-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 07-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Assessee Lawyers: RISHI HARLALKA
• Keywords: Depreciation; Transfer pricing; International transaction; Additional depreciation; Bad and doubtful debts; Notional interest
• Section: 143(3); 10B; 92

Judgement Text

ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 1 OF 16 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.2039/HYD/2017 (ASSESSMENT YEAR: 2013-14) M/S. HACKETT GROUP (INDIA) LTD, HYDERABAD PAN:AAACE9813C VS DY. COMMISSIONER OF INCOME TAX, CIRCLE 2(2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI RISHI HARLALKA FOR REVENUE : SHRI Y.V.S.T. SAI, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL AGAINST THE ASSESSMENT OR DER PASSED U/S 143(3) R.W.S. 144C(5) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 FOR THE A.Y 2013-14 DATED 28.09.2017. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY FURNISHED ITS RETURN OF INCOME FOR THE A.Y 2013-14 ON 29.11.2013 ELECTRONICALLY DECLARING A TOTAL INCOME OF RS.1,31, 69,290/-. THE RETURN WAS SELECTED FOR SCRUTINY UNDER CASS TO EXAM INE (I) INTERNATIONAL TRANSACTION IN RESPECT OF LENDING/BOR ROWING OF MONEY; AND (II) DEPRECIATION CLAIMED AT HIGHER RATE S/HIGHER ADDITIONAL DEPRECIATION CLAIMED. ACCORDINGLY, NOTI CES WERE ISSUED TO THE ASSESSEE. SINCE THE ASSESSEE HAD ENTERED INT O INTERNATIONAL DATE OF HEARING : 08.01.2019 DATE OF PRONOUNCEMENT : 15.03.2019 ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 2 OF 16 TRANSACTIONS, THE DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF THE SAID TRANSACTION WAS REFERRED TO THE TPO U/S 92 CA OF THE ACT. 3. THE TPO CONSIDERED THAT THE ASSESSEE IS PROVIDIN G SOFTWARE DEVELOPMENT AND OTHER RELATED SUPPORT SERV ICES TO ITS PARENT COMPANY FROM ITS SOFTWARE COMPANY IN HYDERAB AD. HE OBSERVED THAT THE ASSESSEE HAS ENTERED INTO TWO INT ERNATIONAL TRANSACTIONS, (I) PROVISION OF SDS TO THE TUNE OF R S.17,40,35,664/- AND (II) RECOVERY OF EXPENSES OF RS.1,29,07,441/-. FURTHER, THE TPO ALSO NOTICED THAT THE ASSESSEE HAS NOT REPORTED THE TRANSACTION OF RECEIVABLES OF RS.6,04,89,522/- EITH ER IN THE FORM 3CEB OR T.P. DOCUMENT. 4. DURING THE T.P. PROCEEDINGS, THE TPO OBSERVED TH AT THE ASSESSEE, AFTER APPLYING CERTAIN FILTERS, HAS S HORT-LISTED AROUND 10 COMPARABLES TO BENCHMARK THE SOFTWARE DEVELOPMEN T SERVICES (SDS) TRANSACTION AT 8.49% AS AGAINST THE MARGIN OF THE ASSESSEE AT 8.32% AND THEREFORE, TREATED THE TRANSACTION TO BE AT ALP. THE TPO, HOWEVER, WAS OF THE VIEW THAT THE SEARCH PROCE SS CONDUCTED BY THE ASSESSEE IS NOT IN CONFORMITY WITH THE TP RE GULATIONS AND THEREFORE, HAS RESULTED IN SELECTION OF INAPPROPRIA TE COMPARABLES. HE, THEREFORE, REJECTED THE TP DOCUMENTATION OF THE ASSESSEE AND CONDUCTED AN INDEPENDENT ANALYSIS BY AGGREGATING AL L THE TRANSACTIONS UNDER THE TNMM. THE TPO REJECTED ALL T HE COMPARABLE COMPANIES TAKEN BY THE ASSESSEE, EXCEPT FOR CG VAK SOFTWARE & EXPORTS LTD. THEREAFTER, HE PROCEEDED TO CONDUCT AN INDEPENDENT SEARCH AND ADOPTED NINE COMPANIES AS CO MPARABLES AND ARRIVED AT THE AVERAGE MARGIN OF THE SAID COMPA NIES AT 19.76% AND AFTER ALLOWING WORKING CAPITAL ADJUSTMEN T OF 2.8%, HE ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 3 OF 16 ARRIVED AT THE ALP OF 17.15% AND PROPOSED THE ADJUS TMENT U/S 92CA OF RS.1,41,89,289. 5. ACCORDINGLY, THE DRAFT ASSESSMENT ORDER WAS PASS ED, AGAINST WHICH, THE ASSESSEE PREFERRED ITS OBJECTION S BEFORE THE DRP. THE DRP, HOWEVER, CONFIRMED THE ORDER OF THE T PO AND IN ACCORDANCE WITH THE SAME, FINAL ASSESSMENT ORDER WA S PASSED AND THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE FIN AL ASSESSMENT ORDER BY RAISING THE FOLLOWING GROUNDS OF APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. ASSESSING OFFICER ('AO'), THE ID. T RANSFER PRICING OFFICER ('TPO') AND HON'BLE DISPUTE RESOLUT ION PANEL ('DRP') HAVE ERRED IN: 1. PASSING THE ORDER, WHICH IS BAD ON FACTS AND IN LAW. 2. NOT ALLOWING THE USE OF MULTIPLE YEAR DATA AS PRESCRIBED UNDER RULE 10B OF THE INCOME-TAX RULES, 1962 (THE RULES). 3. INCORRECTLY REJECTING THE APPELLANT'S TRANSFER P RICING STUDY. 4. MAKING FACTUALLY INCORRECT STATEMENTS IN TP ORDE R REGARDING FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY THE APPELLANT. 5. INCORRECTLY REJECTING THE INTERNAL TRANSACTIONAL NET MARGIN METHOD AS SUBMITTED BY THE APPELLANT. 6. ERRED IN APPLYING THE FOLLOWING FILTERS A. 75% EXPORT REVENUES AS FILTER CRITERIA B. FILTER TO ELIMINATE COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING 7. INCORRECTLY ACCEPTING COMPANIES NAMELY R S SOFTW ARE (INDIA) LIMITED, MINDTREE LIMITED (SEGMENT), LARSEN & TOUBRO INFOTECH LIMITED (SEGMENT), PERSISTENT SYSTE MS LIMITED, AND INFOBEANS TECHNOLOGIES LIMITED WHICH A RE NOT COMPARABLE TO THE APPELLANT. 8. INCORRECTLY REJECTING ACROPETAL TECHNOLOGIES LIM ITED, AKSHAY SOFTWARE TECHNOLOGIES LIMITED, CIGNITI TECHNOLOGIES LIMITED, CAT TECHNOLOGIES LIMITED, PRI SM ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 4 OF 16 INFORMATICS LIMITED, R SYSTEMS INTERNATIONAL LIMITE D, THINKSOFT GLOBAL SERVICES LIMITED, SANKHYA INFOTECH LIMITED AND SPRY RESOURCES INDIA LIMITED, BEING COMPARABLES SELECTED BY THE APPELLANT IN ITS TRANSF ER PRICING STUDY. 9 NOT ACCEPTING E-ZEST SOLUTIONS LIMITED AS ADDITIO NAL COMPANY PROPOSED BY THE APPELLANT FROM THE TPO'S SEARCH PROCESS 10. INCORRECTLY COMPUTING THE OPERATING PROFIT MARG INS OF THE COMPARABLE COMPANIES. 11. NOT GRANTING COMPARABILITY ADJUSTMENT ON ACCOUN T OF DIFFERENCES IN RISK PROFILE OF THE APPELLANT VIS-A- VIS THAT OF INDEPENDENT ENTREPRENEURIAL COMPANIES. 12. NOT GRANTING THE BENEFIT OF PROVISO TO SECTION 92C(2) OF THE ACT. 13. CONSIDERING OUTSTANDING RECEIVABLES FROM ASSOCIATED ENTITY AS A SEPARATE INTERNATIONAL TRANSACTION FOR ARM'S LENGTH BENCH MARKING ANALYSIS . 14. NOT CONSIDERING THE FACT THAT WORKING CAPITAL ADJUSTMENT TAKES INTO ACCOUNT THE DIFFERENCES BETWE EN CREDIT PERIOD OF THE APPELLANT AND COMPARABLE INDEPENDENT COMPANIES AND HENCE NO SEPARATE ADJUSTMENT IS REQUIRED FOR OUTSTANDING RECEIVABLES 15. NOT CONSIDERING THE JURISDICTIONAL TRIBUNAL RUL INGS WHICH HAVE HELD THAT A SEPARATE ADJUSTMENT FOR OUTSTANDING RECEIVABLES IS NOT WARRANTED 16. NOT CONSIDERING THE FACT THAT THE AVERAGE RECEI VABLES COLLECTION PERIOD OF THE APPELLANT IS WITHIN THE RA NGE OF AVERAGE RECEIVABLES COLLECTION PERIOD OF COMPARABLE UNCONTROLLED COMPANIES AND INDUSTRY AVERAGE. 17. NOT CONSIDERING THE FACT THAT IN THE CASE OF SO FTWARE SERVICES PROVIDED BY THE APPELLANT TO THIRD PARTIES , THE INVOICES HAVE BEEN REALISED OVER A PERIOD AS LONG A S SIX MONTHS AND HENCE THE CREDIT PERIOD ALLOWED TO ASSOCIATED ENTITY IS NOT EXCESSIVE. 18. JOT CONSIDERING LIBOR BASED RATES FOR CHARGING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES. THE APPELLANT SUBMITS THAT THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. T HE APPELLANT CRAVES LEAVE TO ADD TO OR ALTER, BY DELET ION, ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 5 OF 16 SUBSTITUTION OR OTHERWISE, THE ABOVE GROUNDS OF APP EAL AT ANY TIME BEFORE OR DURING THE HEARING OF THE APP EAL. 6. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE DOES NOT WISH TO PRESS GROUNDS 1, 2, 3, 4, 6, 11 AND 12. THEY ARE ACCORDIN GLY REJECTED AS NOT PRESSED. 7. AS REGARDS GROUND NO.5, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEES GROSS TURNOV ER WAS RS.19.00 CRORES OUT OF WHICH, THE TURNOVER OF THE INTERNATIO NAL TRANSACTION ITSELF WAS RS.17,40,35,667/- AND THE BALANCE OF THE TURNOV ER I.E. RS.1.83 CRORES WAS FROM NON-AE TRANSACTIONS. HE SUBMITTED T HAT THE NON-AE COMPANIES WERE ALSO INTO SIMILAR LINE OF BUSINESS A ND THE SERVICES RENDERED BY THE ASSESSEE TO SUCH PARTIES ARE ALSO S IMILAR. THEREFORE, HE PLEADED BEFORE THE AO TO CONSIDER THE INTERNAL TNMM AS THE MOST APPROPRIATE METHOD, BUT THE AO HAS REJECTED THE SAI D CONTENTION OF THE ASSESSEE ON THE GROUND THAT ONLY 10% OF THE TURNOVE R WAS WITH NON-AE AND THEREFORE, IT CANNOT BE CONSIDERED AS THE MOST APPROPRIATE METHOD AND ALSO ON THE GROUND THAT THE SEGMENTAL RESULTS O F THE NON-AE COMPANIES ARE NOT AUDITED AND THEREFORE, THEY CANNO T BE RELIED UPON. FOR THE PROPOSITION THAT THE SIZE OF THE COMPARABLE OR QUANTUM OF SALES WITH NON-AES ARE NOT THE CRITERIA AND THAT IT DOES NOT RENDER THE TRANSACTION INCOMPARABLE, THE LD COUNSEL PLACED REL IANCE UPON THE DECISION OF THE HONBLE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF LUMMUS TECHNOLOGY HEAT TRANSFER BV V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -3(2), NEW DELHI REPORTED IN (20 14) 42 TAXMANN.COM 342 (DELHI) TRIB. AS REGARDS THE CONTENTION THAT TH E AE AND THIRD PARTIES PROFITABILITY WORKING DO NOT REQUIRE AUDITE D FINANCIAL ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 6 OF 16 STATEMENTS, HE PLACED RELIANCE UPON THE DECISION OF THE TRIBUNAL AT DELHI IN THE CASE OF LUMMUS TECHNILOGY HEAT TRANSFE R BV (SUPRA) AND ALSO IN THE CASE OF NTT DATA GLOBAL DELIVERY SERVIC ES LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-16 (1), HYDERABA D REPORTED IN (2015) 63 TAXMANN.COM 92 HYDERABAD ITAT. 8. THE LD DR, ON THE OTHER HAND, SUBMITTED THAT THE ASSESSEE ITSELF IN ITS TP STUDY HAD NOT TAKEN THE INTERNAL T NMM AS THE MOST APPROPRIATE METHOD AND FURTHER THAT THE NON-AE TRAN SACTIONS OF THE ASSESSEE ARE WITH DOMESTIC COMPANIES, WHEREAS AE TR ANSACTIONS ARE INTERNATIONAL TRANSACTIONS AND THEREFORE, THE MARKE T CONDITIONS OF DOMESTIC AS WELL AS INTERNATIONAL ARE NOT THE SAME AND THEREFORE, THE AE AND NON-AE TRANSACTIONS CANNOT BE TREATED ON PAR WITH EACH OTHER. THEREFORE, HE SUBMITTED THAT THE INTERNAL TNMM CANN OT BE ACCEPTED. 9. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THE COORDINATE BENCH OF THE TR IBUNAL AT DELHI IN THE CASE OF LUMMUS TECHNOLOGY HEAT TRANSFER BV (SUP RA) WAS CONSIDERING THE CASE OF AN ASSESSEE WHICH HAD BOTH AE AND NON-AE TRANSACTIONS. IT IS NOT CLEAR FROM THE SAID CASE, W HETHER THE NON-AE TRANSACTIONS WERE ALSO INTERNATIONAL TRANSACTIONS. AS RIGHTLY POINTED OUT BY THE LD DR, THE MARKET CONDITIONS WOULD NOT BE TH E SAME FOR DOMESTIC AND INTERNATIONAL TRANSACTIONS AND THEREFORE, THEY CANNOT BE CONSIDERED ON PAR WITH EACH OTHER AND PARTICULARLY, IN THE CAS E BEFORE US, AS THE ASSESSEE ITSELF HAS NOT ADOPTED THE INTERNAL TNMM A S THE MOST APPROPRIATE METHOD. THEREFORE, WE DO NOT SEE ANY RE ASON TO DIRECT THE ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 7 OF 16 TPO TO ADOPT THE SAME AND THEREFORE, CONFIRM THE OR DER OF THE TPO ON THIS ISSUE. THUS, GROUND OF APPEAL NO.5 IS REJECTED . 10. AS REGARDS GROUND NO.10, IT IS THE CASE OF THE ASSESSEE THAT THERE ARE ERRORS IN COMPUTATION OF OPERATING PROFIT MARGINS OF COMPANIES SELECTED BY THE TPO AS COMPARABLES. HE SU BMITTED THAT IN THE CASE OF CG-VAK SOFTWARE EXPORTS LTD, L&T INFOTE CH AND PERSISTENT SYSTEMS LTD, THE TPO HAS NOT CONSIDERED THE PROVISI ON FOR DOUBTFUL DEBTS AS OPERATING EXPENSE AND IN THE CASE OF MINDT REE LTD, THE UNALLOCATED EXPENSES HAVE BEEN ERRONEOUSLY CONSIDER ED AS RS.62,41,60,300/- INSTEAD OF RS.96.40 CRORES. HE SU BMITTED THAT IN THE CASE OF MINDTREE LTD, THE LD DRP HAD DIRECTED THE A O TO EXAMINE THE ISSUE, BY THE AO HAS NOT DONE SO WHILE PASSING THE FINAL ASSESSMENT ORDER. 11. ON THE ISSUE OF MINDTREE LTD, THE LD DR DID NOT OBJECT TO THE REMAND OF THE ISSUE TO THE AO. WE THEREFORE, DIRECT THE AO TO FOLLOW THE DIRECTIONS OF THE DRP ON THIS ISSUE AND RECOMPUTE T HE MARGIN OF THE SAID COMPANY. 12. AS REGARDS THE PROVISION FOR BAD AND DOUBTFUL D EBTS, THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS PER THE GENERALLY ACCEPTED ACCOUNTING PROVISIONS, THE MANAGEMENT IS REQUIRED T O MAKE ESTIMATES THAT AFFECT THE REPORTED BALANCES OF ASSETS AND LIA BILITIES AS ON THE DATE OF FINANCIAL STATEMENTS AND REPORTED AMOUNTS OF INC OMES AND EXPENSES DURING THE PERIOD. HE SUBMITTED THAT A PROVISION IS RECOGNISED IF, AS A ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 8 OF 16 RESULT OF A PAST EVENT, THE COMPANY HAS A PRESENT L EGAL OBLIGATION THAT CAN BE ESTIMATED REASONABLY. HE SUBMITTED THAT THI S IS MANDATORY FOR ALL THE COMPANIES TO WHOM GAAP IS APPLICABLE AND HE NCE PROVISION FOR DOUBTFUL DEBTS CANNOT BE CONSIDERED AS NON-OPERATIN G EXPENSE. HE SUBMITTED THAT ALL THE THREE COMPANIES HAVE CONSIST ENTLY CREATED PROVISION FOR DOUBTFUL DEBTS OVER THE PAST YEARS FO LLOWING THE GAAP. IN FAVOUR OF THIS CONTENTION, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: I) ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD (ITA NOS .58/HYD/ 2014) II) TNS INDIA PVT. LTD VS DCIT (ITA NO.604/HYD/2014 ) III) DCIT VS. M/S. PALRED TECHNOLOGIES LTD (FORMERL Y FOUR SOFT LTD) (ITA NO.186/HYD/2014, 207/HYD/2014 & 268/HYD/2015). IV) M/S SUM TOTAL SYSTEMS VS. DCIT (ITA NO.255/HYD/ 2015) 13. THE LD DR, ON THE OTHER HAND, SUBMITTED THAT TH E PROVISION FOR BAD AND DOUBTFUL DEBTS CANNOT BE CONSIDERED AS OPERATING EXPENSE AS IT IS NOT UNIFORM IN THE CASE OF THE ASSESSEE AS WELL AS THE COMPARABLE COMPANIES. HE SUBMITTED THAT THE FAR ANA LYSIS REQUIRES THAT ALL THE FACTORS OF THE COMPARABILITY SHOULD BE UNIFORM AND CONSISTENT AND PROVISION OF BAD AND DOUBTFUL IS NOT A CONSISTENTLY UNIFORM FACTOR WHICH COULD BRING THE COMPANIES ON P AR. HE THEREFORE, RELIED UPON THE ORDER OF THE TPO. 14. HAVING REGARD TO THE RIVAL CONTENTION AND THE M ATERIAL ON RECORD, WE FIND THAT IN THE CASE OF ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD (SUPRA), THE COORDINATE BENCH OF THIS TRIBUNAL BY FOLLOWING THE DECISION OF THE COORDINATE BENCH IN THE CASE OF M.S KENEXA TECHNOLOGIES (P) LTD HAS HELD THAT THE PROVISION FO R BAD AND DOUBTFUL ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 9 OF 16 DEBTS IS PART OF OPERATING EXPENSES. THE TRIBUNAL H AS DIRECTED THE TPO TO ALLOW THE SAME. SIMILARLY, IN THE CASE OF TNS IN DIA PVT. LTD, THE TRIBUNAL HAS DIRECTED THE TPO THEREIN, TO TREAT THE PROVISION FOR BAD AND DOUBTFUL DEBTS AS OPERATING EXPENSES. RESPECTFU LLY FOLLOWING THE SAME, WE DIRECT THE TPO TO TREAT THE PROVISIONS OF BAD AND DOUBTFUL DEBTS IN THE CASE OF THE ASSESSEE AS WELL AS COMPAR ABLES AS PART OF THE OPERATING EXPENSES. GROUND OF APPEAL NO.10 IS ACCOR DINGLY TREATED AS PARTLY ALLOWED. 15. AS REGARDS GROUNDS OF APPEAL NOS. 13 TO 18, I.E . TREATING THE OUTSTANDING RECEIVABLES FROM ASSOCIATED ENTITY AS A SEPARATE INTERNATIONAL TRANSACTION AND BRINGING THE INTEREST THEREON TO TAX, THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AVERAGE PERIOD OF CREDIT GIVEN BY THE ASSESSEE IS 79 DAYS AS AGAINST THE COM PANIES SELECTED BY THE ASSESSEE WHEREIN THE CREDIT PERIOD IS 156 DAYS AND IN THE CASE OF COMPANIES SELECTED BY THE TPO, IT WAS 81 DAYS. HE S UBMITTED THAT THE AVERAGE PERIOD OF CREDIT IN THE I.T. INDUSTRY IS 11 4 DAYS. HE ALSO SUBMITTED THAT THE ASSESSEE IS A DEBT FREE COMPANY AND THE CREDIT TERMS IN BOTH THE AE AND NON-AE TRANSACTIONS ARE SI MILAR. THEREFORE, HE SUBMITTED THAT THE OUTSTANDING RECEIVABLES OUGHT NOT TO HAVE BEEN TREATED AS INTERNATIONAL TRANSACTION. FURTHER, HE A LSO SUBMITTED THAT THE AO, WHILE COMPUTING THE WORKING CAPITAL ADJUSTM ENT, HAS ALSO TAKEN NOTE OF THE AVERAGE OF THE PAYMENTS OF PAYABL ES AND RECEIVABLES AND THEREFORE, THE SAME CANNOT AGAIN BE TAKEN AS A SEPARATE INTERNATIONAL TRANSACTION. HE PLACED RELIANCE UPON VARIOUS CASELAW IN SUPPORT OF HIS CONTENTIONS WHICH ARE AS FOLLOWS; I) HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE I NDIA SERVICES PVT. LTD (W.P. NO.871 OF 2014) ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 10 OF 16 II) BHARATI AIRTEL LTD VS. ACIT (ITA NO.816/DEL/20 12) III) ITAT HYDERABAD IN THE CASE OF OPEN TEXT CORPOR ATION INDIA PVT. LTD VS. DCIT (ITA NO.232/HYD/2016) IV) PR.CIT VS. KUSUM HEALTHCARE PVT. LTD VS. ACIT ( ITA NO.765/2016) V) BANGALORE BENCH OF THE ITAT IN THE CASE OF TALLY SOLUTIONS VS. ACIT (ITA NO.1364/BANG/2011) 16. THE LD DR, HOWEVER, SUBMITTED THAT AS RECORDED BY THE TPO AS PER THE ASSESSEES OWN AGREEMENT, THE CREDIT PER IOD WAS ONLY 30 DAYS AND THEREFORE, THE TPO WAS RIGHT IN TREATING THE OU TSTANDING RECEIVABLES AS AN INDEPENDENT INTERNATIONAL TRANSACTION. 17. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THIS BENCH, IN A NUMBER OF CAS ES, HAS HELD THAT WHEN THE OUTSTANDING RECEIVABLES HAVE FACTORED IN C OMPUTATION OF WORKING CAPITAL ADJUSTMENT, NO SEPARATE ADJUSTMENT IS REQUIRED. FURTHER, WE ALSO FIND THAT THE AVERAGE CREDIT PERIO D OF THE COMPARABLES IS 81 DAYS, WHEREAS IN THE CASE OF THE ASSESSEE, IT IS 79 DAYS AND THEREFORE, THERE IS NO NEED FOR ANY ADJUSTMENT TOWA RDS OUTSTANDING RECEIVABLES. FURTHER, WE ALSO AGREE WITH THE CONTEN TION OF THE ASSESSEE THAT WHEN THE ASSESSEE IS NOT PAYING INTEREST ON IT S PAYABLES, ASSESSEE IS ALSO NOT JUSTIFIED IN CHARGING INTEREST ON OUTST ANDING RECEIVABLES. THEREFORE, ON ALL THESE COUNTS, THE GROUNDS OF APPE AL NOS. 13 TO 18 ARE ALLOWED. 18. AS REGARDS GROUND NO.7 IS CONCERNED, THE ASSESS EE IS SEEKING EXCLUSION OF RS SOFTWARE (INDIA) LTD, MINDT REE LTD, PERSISTENT SYSTEMS LTD, L&T INFOTECH LTD AND INFOBEANS TECHNOL OTGIES LTD, SINCE ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 11 OF 16 ACCORDING TO THE ASSESSEE, THEY ARE NOT COMPARABLE TO THE ASSESSEE. LETS THEREFORE, CONSIDER THE ASSESSEES OBJECTIONS , COMPANY-WISE: I) RS SOFTWARE INDIA LTD 18.1 THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SAID COMPANY HAS A TURNOVER OF RS.293.02 CRORES AS AGAIN ST THE ASSESSEES TURNOVER OF RS.17.04 CRORES REVENUE FROM THE INTERN ATIONAL TRANSACTION. THEREFORE, ACCORDING TO THE ASSESSEE, IT IS INCOMPA RABLE IN TERMS OF THE SCALE OF OPERATIONS AND THAT THE COMPETITORS TO THE SAID COMPANY ARE HUGE IT COMPANIES LIKE INFOSYS, WIPRO, TCS, HCL WHO SE BRAND AND MARKET REACH ARE THEIR MAJOR STRENGTHS. HE REFERRED TO THE NON-ROUTINE INTANGIBLES POSSESSED BY THE COMPANY SUCH AS PATENT S FOR MOBILE SOLUTIONS IN USA. HE SUBMITTED THAT THE DRP HAS REJ ECTED THE OBJECTIONS OF THE ASSESSEE HOLDING THAT THE COMPANI ES CANNOT BE REJECTED ONLY BECAUSE THEY HAVE HIGH TURNOVER AND T HAT THE ASSESSEE FAILED TO ESTABLISH THE MATERIAL DIFFERENCES ON MAR GIN DUE TO PRESENCE OF IPRS AND BRAND VALUE. IN SUPPORT OF HIS CONTENTION THAT THIS COMPANY IS NOT COMPARABLE, THE LD COUNSEL FOR THE ASSESSEE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: A) M/S. G.T. NEXUS SOFTWARE PVT LTD VS. DCIT IT(TP)A N O.409/BANG/2016 FOR THE AY 2011-12 B) CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD (TS 189 HC 2013 (DEL) TP (AY 2006- 07 C) ADAPTEC (INDIA) PVT. LTD (ITA NO.1758/HYD/2012 (AY 2008-09) D) NEBULAE TECHNOLOGIES PVT LTD VS. DCIT (ITA NO.2144/ HYD/2011 (AY.2007-08) E) GS RESEARCH CENTER P LTD VS. ACIT (ITA NO.411/HYD/2 015)(AY 2010-11) F) INVENSYS DEVELOPMENT CENTRE INDIA P LTD VS. DCIT (I TA NO.383/HYD/2014 (AY 2009-10). 18.2 THE LD DR, ON THE OTHER HAND, SUPPORTED THE OR DERS OF THE AUTHORITIES BELOW AND PLACED RELIANCE UPON THE DECI SION OF THE HONBLE ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 12 OF 16 DELHI HC IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P.)LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX REPORTED IN (2015) 56 TAXMANN.COM 417 (DEL.). A COPY OF THE SAID ORDER IS ALSO FILED BEF ORE US. 18.3 HAVING REGARD TO THE RIVAL CONTENTIONS, WE FIN D THAT THE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND ALSO ITS TURNOVER IS ONLY 17.04 CRORES AS AGAINST THE HUGE TURNOVER OF MORE T HAN 10 TIMES I.E. 292.02 CRORES OF R.S. SOFTWARE. THE HONBLE DELHI H IGH COURT IN THE CASE OF CIV VS. AGNITY INDIA TECHNOLOGIES (P) LTD ( SUPRA) HAS HELD THAT THE SCALE OF OPERATIONS IS AN IMPORTANT FACTOR FOR T.P. ANALYSIS. IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P .)LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX RELIED UPON BY THE LD DR , THE HONBLE HIGH COURT HAS HELD THAT THE MERE FACT THAT AN ENTITY MA KE EXTREMELY HIGH MARGIN DOES NOT IPSO FACTO LEAD TO THE EXCLUSION FR OM THE LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINATION OF ALP AS IN SUCH CIRCUMSTANCES, AN INQUIRY UNDER RULE 10B(3) OUGHT T O BE CARRIED TO DETERMINE AS TO WHETHER MATERIAL DIFFERENCES BETWEE N THE ASSESSEE AND THE COMPARABLES CAN BE ELIMINATED AND UNLESS SUCH D IFFERENCES CANNOT BE EXCLUDED, IT HAS TO BE INCLUDED AS A COMPARABLE. IN THE CASE BEFORE US, THE ASSESSEE HAS BROUGHT OUT THAT THE COMPARABL E COMPANIES HAVE HUGE TURNOVER AND ALSO HAS BROUGHT OUT THE OWNERSHI P OF NON-ROUTINE INTANGIBLES OF RS SOFTWARE INDIA LTD WHICH COULD BE A FACTOR FOR ITS HIGH TURNOVER. WE FIND THAT IN THE CASE OF M/S. GT NEXUS SOFTWARE (P) LTD IN IT(TP)A NO.409/BANG/2016, THE COORDINATE BENCH OF T HE TRIBUNAL HAS CONSIDERED THE TURNOVER FILTER OF 10 TIMES TOLERANC E RANGE OF ASSESSEES TURNOVER TO DIRECT EXCLUSION OF RS SOFTWARE INDIA L TD, MINDTREE LTD, PERSISTENT SYSTEMS LTD, INFOSYS TECHNOLOGIES LTD, L &T INFOTECH LTD AND TATA ELXSI LTD AND SASKEN COMMUNICATIONS LTD. FURTH ER, IN THE CASE ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 13 OF 16 OF M/S NEBULAE TECHNOLOGIES PVT LTD IN ITA NO.2144/ HYD/2011, THE COORDINATE BENCH OF THIS TRIBUNAL HAS CONSIDERED TH E TURNOVER, BRAND VALUE, SCALE OF OPERATIONS, DIVERSIFIED ACTIVITIES AND OWNING OF INTANGIBLE ASSETS AS RELEVANT FACTORS TO EXCLUDE THE COMPANIES . THEREFORE, RESPECTFULLY FOLLOWING THE SAID DECISION AND THE RA TIONALE GIVEN THEREIN, WE DIRECT THE TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. II) MINIDTREE LTD 18.4 THE ASSESSEES OBJECTIONS TO THIS COMPANY ARE ALMOST SIMILAR TO THE OBJECTIONS IN THE CASE OF RS SOFTWARE INDIA LTD, SUCH AS DIVERSIFIED ACTIVITIES; INCOMPARABLE SCALE OF OPERA TIONS, THE REVENUE BEING RS.1608 CRORES AND OWNERSHIP OF NON-ROUTINE I NTANGIBLES, BRANDING AND PAYMENTS ETC., AS HELD IN THE CASE OF RS SOFTWARE INDIA LTD, THIS COMPANY HAS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES DUE TO ITS HIGH TURNOVER AND ALSO OWNING OF NON-ROU TINE INTANGIBLES. III) PERSISTENT SYSTEMS LTD 18.5 AS REGARDS PERSISTENT SYSTEMS LTD, THE OBJECTI ON OF THE ASSESSEE THAT IT IS NOT ONLY FUNCTIONALLY DISSIMILA R AS IT DEVELOPS SOFTWARE PRODUCTS AND IS INVOLVED IN DIVERSIFIED OP ERATIONS, BUT IT ALSO OWNS INTANGIBLES WORTH INR 24.00 CRORES AND HAS INC OMPARABLE SCALE OF OPERATIONS WITH THE REVENUE BEING RS.990/- CRORES. THE LD DRS OBJECTIONS ARE ALMOST SIMILAR AS IN THE CASE OF RS SOFTWARE INDIA LTD AND ACCORDING TO THE DR, THE SAID COMPANIES ARE ALS O FUNCTIONALLY SIMILAR. 18.6 WE FIND THAT WE HAVE CONSIDERED THE HIGH TURNO VER FILTER AS A RELEVANT FACTOR AND IF THE TURNOVER OF THE COMPANY IN COMPARISON TO THAT OF THE RATE OF ASSESSEE, IS MORE THAN 10 TIMES TOLE RANCE RANGE, THEN IT ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 14 OF 16 HAS TO BE EXCLUDED. THEREFORE, THE AO/TPO ARE DIREC TED TO EXCLUDE THIS COMPANY ALSO FROM THE LIST OF COMPARABLES. III) INFOBEANS TECHNOLOGIES LTD 18.7 ACCORDING TO THE ASSESSEE COMPANY, IT HAS AN E XTRA ORDINARY EVENT OF DEMERGER OF THE SOFTWARE BUSINESS OF INFOBEANS SYSTEMS AND TRANSFER OF THE SAME TO INFOBEANS TECHN OLOGIES. THE TPO & DRP REJECTED THE SAID CONTENTION HOLDING THAT THE ASSESSEE HAS FAILED TO PROVE WITH ANY EVIDENCE THAT SUCH AN EVENT HAD ANY IMPACT OF THE COMPANY DURING THE RELEVANT FINANCIAL YEAR ON THE MARGIN AND ACCORDING TO THE DR, THE COMPANY IS FUNC TIONALLY COMPARABLE. 18.8 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT WHEREVER THERE IS AN EXTRA-ORDINARY EVENT, SUCH AS A MERGER/DEMERGER/ACQUISITION, THERE IS BOUND TO BE A N IMPACT ON THE MARGINS OF THE SAID COMPANY AND THEREFORE, THIS COMPANY IT OUGHT TO HAVE BEEN EXCLUDED. IN SUPPORT OF THIS CON TENTION, HE PLACED RELIANCE UPON THE DECISION OF THE TRIBUNAL A T PUNE IN THE CASE OF PUBMATIC INDIA (P) LTD VS. ACIT REPORTED IN (2018) 91 TAXMANN.COM 356 (PUNE-TRIB.). 18.9 HAVING REGARD TO THE RIVAL CONTENTIONS, WE AGR EE WITH THE CONTENTION OF THE LEARNED DR THAT THE ASSESSEE HAS TO PROVE THE IMPACT OF THE MERGER/DEMERGER OF THE SAID COMPA NY ON ITS MARGIN FOR THE RELEVANT FINANCIAL YEAR. SINCE THE A SSESSEE HAS FAILED TO PROVE THE SAME EVEN BEFORE US, WE REJECT THE ASSESSEES ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 15 OF 16 CONTENTION ON THE COMPARABILITY OF THIS COMPANY WIT H THE ASSESSEE. (IV) LARSEN & TOUBRO INFOTECH LTD 18.10 THE OBJECTIONS OF THE ASSESSEE ARE THAT THE COMPANY IS FUNCTIONALLY DISSIMILAR AND THAT IT DEVELOPS IN-HOU SE INTANGIBLES, HAS STRONG BRAND VALUE, IS INVOLVED IN DIVERSIFIED OPERATIONS WHICH INCLUDES PRODUCTS AND ALSO PERFORMS R&D ACTIVITIES. HE SUBMITTED THAT THE REVENUE OF THE L&T RANGES TO RS.3,613/- CR ORES AND THEREFORE, THE SCALE OPERATION IS INCOMPARABLE. AS WE HAVE ALREADY HELD THAT THE TURNOVER FILTER OF 10 TIMES OF THE TO LERANCE RANGE IS A RELEVANT FILTER. RESPECTFULLY FOLLOWING THE SAME, W E DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY ALSO FROM THE FINAL LIST OF COMPARABLES. GROUND OF APPEAL NO.7 IS ACCORDINGLY P ARTLY ALLOWED. 19. AS REGARDS GROUNDS OF APPEAL NO.8 & 9, WE FIND THAT THE ASSESSEE IS SEEKING INCLUSION OF THESE COMPANIE S IN THE FINAL LIST OF COMPARABLES. THE ASSESSEE HAS RELIED UPON T HE ARGUMENTS CULLED OUT IN THE CHART AND ALSO IN THE CASELAW WHI CH ARE MENTIONED IN THE CHART. WHEN A QUERY WAS RAISED BY US AS TO WHETHER EXCLUSION OF THE ABOVE 4 COMPANIES FROM THE FINAL LIST OF COMPARABLES WOULD RESULT IN ASSESSEES MARGIN FALLI NG WITHIN +_3% OF THE ASSESSEES MARGINS AND THEREFORE, IT WO ULD BE NECESSARY EVEN TO ADJUDICATE THE GROUNDS OF APPEAL, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IF THE ABOV E COMPANIES ARE EXCLUDED, THEN IT WOULD NOT REQUIRE THESE COMPA NIES TO BE INCLUDED IN THE FINAL LIST OF COMPARABLES. SINCE WE HAVE ALREADY EXCLUDED THE FOUR COMPANIES, WE DIRECT THE TPO TO R ECOMPUTE THE ALP OF THE COMPARABLES AND IF THE AVERAGE MARGIN FA LLS WITHIN ITA NO 2039 OF 2017 HACKETT GROUP INDIA LTD HYDERAB AD. PAGE 16 OF 16 +_3%, THEN NO FURTHER COMPANIES ARE TO BE TAKEN. HO WEVER, IF IT DOES NOT FALL WITHIN THE SAID RANGE, THE TPO SHALL RECONSIDER THE ASSESSEES CONTENTIONS ON COMPARABILITY OF THE COMP ANIES IN GROUND NOS. 8 & 9 AND PASS A REASONED ORDER ON THEI R COMPARABILITY AFTER GIVING THE ASSESSEE A FAIR OPPO RTUNITY OF HEARING. 20. IN THE RESULT, GROUNDS OF APPEAL NO.8 & 9 ARE T REATED AS ALLOWED FOR STATISTICAL PURPOSES. 21. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH MARCH, 2019. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 15 TH MARCH, 2019. VINODAN/SPS COPY TO: 1 M/S. HACKETT GROUP (INDIA) LTD, NO.1-55/4/RP/L1/W 1 & W2 PLOT NO.6 RAJA PRASADAMU, KONDAPUR, HYDERABAD 500084 2 DY. CIT, CIRCLE 2(2) ROOM NO.513, 5 TH FLOOR, SIGNATURE TOWERS, OPP: BOTANICAL GARDEN, KONDAPUR, HYDERABAD 500084 3 CIT -2 HYDERABAD 4 5 DRP-1, KENDRIYA SADAN,4 TH FLOOR, B&C WING, 17 TH MAIN, KORAMANGALA, BENGALURU 560034 CHIEF COMMISSIONER OF INCOME TAX (INTL. TAXATION) S OUTH ZONE, BENGALURU 6 THE DR, ITAT HYDERABAD 7 GUARD FILE BY ORDER