Adaptec (India) Private Limited, Hyderabad V. ACIT, Circle 1(1), Hyderabad

ITA 206/HYD/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87461 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 02-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 11-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Keywords: Transfer pricing; International transaction; Working capital adjustments; Initiation of penalty proceedings
• Section: 143(3); 234B; 133(6); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO. 206/HYD/2014 ASSESSMENT YEAR 2009-2010 ADAPTEC (INDIA) P. LTD., HYDERABAD. PAN AAECS9578G VS. THE ACIT, CIRCLE 1(1) HYDERABAD. (APPLICANT) (RESPONDENT) FOR ASSESSEE : MR. RAVI BHARADWAJ & MR. MITHILESH SAI FOR REVENUE : MR. D. SUDHAKAR RAO DATE OF HEARING : 02.02.2015 DATE OF PRONOUNCEMENT : 25.03.2015 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY ASSESSEE IS AGAINST THE ORDER OF A.O. UNDER SECTION 143(3) READ WITH SECTION 144C(1) OF THE INCOME TAX ACT, 1961 CONSEQUENT TO THE DIRECTIONS O F THE DRP, HYDERABAD DATED 27.11.2013. 2. ASSESSEE HAS RAISED 11 GROUNDS OUT OF WHICH GROUND NOS. 1 TO 4, ON VARIOUS ISSUES OF T.P. DOCUM ENTATION, USE OF MULTIPLE YEAR DATA, USE OF ADDITIONAL FILTER S, INFORMATION OBTAINED UNDER SECTION 133(6) ARE NOT PRESSED, THER EFORE, GROUND NOS. 1 TO 4 NEED NOT BE ADJUDICATED. GROUND NO.5 PERTAINS TO SELECTION OF COMPARABLES BY TPO IN WHIC H ASSESSEE IS OBJECTING TO 6 COMPARABLES SELECTED BY THE TPO. GROUND NO.6 PERTAIN TO REJECTION OF ASSESSEES COMPARABLES OF FOUR COMPANIES AND THIS GROUND IS NOT PRESSED IN THE COU RSE OF ARGUMENTS. GROUND NOS. 7 AND 8 PERTAINS TO ADJUSTME NT FOR 2 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. RISK DIFFERENCE AND NEGATIVE WORKING CAPITAL ADJUST MENT. GROUND NO.9 IS LEGAL ISSUE WITH REFERENCE TO APPLIC ATION OF PROVISO TO SECTION 92C(2). GROUND NO.10 PERTAINS TO INTEREST UNDER SECTION 234B WHICH IS MANDATORY AND CONSEQUEN TIAL IN NATURE AND NO ADJUDICATION IS REQUIRED. GROUND NO.1 1 PERTAINS TO INITIATION OF PENALTY PROCEEDINGS WHICH IS PREMA TURE IN NATURE. 3. WE HAVE HEARD THE LD. COUNSEL AND LEARNED D.R. LD. COUNSEL FAIRLY ADMITTED THAT IF GROUND NOS. 5, 7 AND 8 ARE DECIDED OTHER GROUNDS NEED NOT BE CONSIDERED. 4. BRIEFLY STATED, ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE, DESIGN AND DEVELOPMENT AND TE STING IN THE FIELD OF STORAGE SOLUTIONS. IT FILED ITS RETURN OF INCOME DECLARING INCOME OF RS.89,51,330. SINCE ASSESSEE IS FUNCTIONING AS ITES PROVIDER TO ITS A.E. ON COST + 10% MARGIN BASIS, ITS INTERNATIONAL TRANSACTIONS ARE REFERRED TO THE TPO AND AFTER ADOPTING VARIOUS FILTERS AND ANALYSING TH E DATA AVAILABLE IN THE DOMAIN, SELECTED 17 COMPANIES AS C OMPARABLE COMPANIES, THEREBY ARRIVING AT AN ARITHMETIC MEAN O F 25.26% AND PROPOSED A SUM OF RS.63,53,365 AS AN ADJUSTMENT UNDER SECTION 92C(3) OF THE I.T. ACT. ASSESSEE HAS TURNOV ER OF RS.5.88 CRORES AND ITS OPERATING COST WAS AT RS.5.21 CRORES . ASSESSEE HAS RAISED VARIOUS OBJECTIONS BEFORE THE DRP ON THE PROPOSED ADDITION WHICH WERE REJECTED BY THE DRP IN ITS ORDE R. 5. BEFORE US, LD. COUNSEL SUBMITTED DETAILED ARGUMENTS WITH REFERENCE TO SELECTION OF VARIOUS CO MPANIES WHICH ARE NOT COMPARABLE TO THE ASSESSEES BUSINESS OPERATIONS. LD. COUNSEL ALSO MADE REFERENCE TO COOR DINATE BENCH DECISION IN THE CASE OF CISCO SYSTEMS INDIA P . LTD., ITA.NO.271/BANG/2014 FOR A.Y. 2009-2010 AND THE DEC ISION OF 3 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. KENEXA TECHNOLOGIES P. LTD., VS. DCIT, HYDERABAD (2 015) 37 ITR (TRIB) 306 (HYD.) FOR PROPOSITION OF VARIOUS CO MPARABLES. HE ALSO MADE SUBMISSIONS WITH REFERENCE TO NEGATIVE WORKING CAPITAL ADJUSTMENTS AND RELIED ON THE DECISIONS OF THE DRP IN THE CASE OF MARKET TOOLS RESEARCH P. LTD., FOR A.Y. 2010-2011 DATED 26.09.2014 AND M/S. MEGA SYSTEMS WORLDWIDE IN DIA P. LTD., FOR A.Y. 2010-2011 DATED 26.09.2014. THE LD. COUNSEL ALSO FURTHER SUBMITTED THAT IF CONTENTION OF NEGATI VE WORKING CAPITAL ADJUSTMENTS IS ACCEPTED, THE ISSUE OF RISK ANALYSIS WILL BECOME ACADEMIC. IN REPLY, LEARNED D.R. RELIED ON T HE DETAILED ORDER OF THE TPO AND DRP FOR INCLUSION OF VARIOUS C OMPANIES WHICH ARE OBJECTED TO BY THE ASSESSEE. 6. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE DOCUMENTS PLACED ON RECORD. THERE IS NO DISPUTE WIT H REFERENCE TO THE FACT THAT ASSESSEE CAN BE CATEGORI SED AS ITES COMPANY AND ITS TURNOVER IS ONLY RS.5.88 CRORES. TH E TPO AFTER ADOPTING VARIOUS FILTERS, WHICH WERE NOT OBJECTED B Y THE ASSESSEE IN THESE PROCEEDINGS, SELECTED FOLLOWING 1 7 COMPANIES AS COMPARABLES. SL. NO. NAME OF THE COMPANY T.P. ORDER (UNADJUSTED) 1. AKSHAY SOFTWARE TECHNOLOGIES LTD., 12.41% 2. LGS GLOBAL 20.51% 3. MINDTREE LIMITED (SEGMENTAL) 5.56% 4. NEILSOFT LTD., 9.05% 5. PERSISTENT SYSTEMS LTD., 18.49% 6. R S SOFTWARE (INDIA) LTD., 9.99% 7. R SYSTEMS INTERNATIONAL LTD., (SEGMENTAL) 17.53% 8. SASKEN COMMUNICATION TECHNOLOGIES 17.30% 9. THINKSOFT GLOBAL 20.80% 10. THIRDWARE SOLUTIONS 22.28% 11. ZYLOG SYSTEMS LTD., 15.00% 12. BODHTREE CONSULTING LTD., 68.43% 13. COMP-U-LEARN TECH INDIA LT.D, 28.00% 14. I GATE GLOBAL SOLUTIONS LTD., 21.97% 4 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. 15. INFOSYS TECHNOLOGIES LTD., 41.34% 16. KALS INFORMATION SYSTEMS (SEGMENTAL) 23.11% 17. TATA ELXSI LTD., (SEGMENTAL) 22.82% 7. ASSESSEE HAS NO OBJECTION FOR ADOPTION OF COMPANIES SL.NO. 1 TO 11. ASSESSEE HAS OBJECTION FO R THE FOLLOWING SIX COMPANIES ( SL NO 12 TO 17) AND ITS O BJECTIONS AND FINDINGS ARE AS UNDER : 1. BODHTREE CONSULTING LTD., A. TPO SELECTED THIS COMPANY STATING THAT THERE I S NOTHING AVAILABLE IN THE ANNUAL REPORT TO SHOW ANY PECULIAR ECONOMIC CIRCUMSTANCE IN THE COMPANY DUE TO WHICH T HERE IS A HIGH MARGIN. TPO FURTHER CONSIDERED THAT IN COMPARA BILITY ANALYSIS LOSS OR SO-CALLED HIGHER MARGIN IS NOT A D ETERMINING FACTOR UNLESS THERE ARE ANY PECULIAR ECONOMIC CIRCU MSTANCES. B. ASSESSEES OBJECTIONS ARE THAT BODHTREE CONSUL TING LTD., IS FUNCTIONALLY DIFFERENT. FROM THE 133(6) EX TRACT PROVIDED IN THE T.P. ORDER ITSELF, IT IS EVIDENT THAT THE CO MPANY IS INTO A WIDE ARRAY OF BUSINESS ACTIVITIES INCLUDING OFF-SHO RING DATA MANAGEMENT, OPEN AND END TO END WEB SOLUTIONS, DATA WAREHOUSING WHICH DO NOT FALL INTO ANY VERTICAL OF SOFTWARE SERVICES. IT IS PERTINENT TO NOTE THAT THE COMPANY HAD PROVIDED SEGMENTAL INFORMATION FOR A.Y. 2006-07. THE ABNORMA L VARIATION IN MARGIN OF THE COMPANY OF 68.63% VIS-- VIS 19.14% FOR THE PREVIOUS YEAR CLEARLY EVIDENCES THE EXCEPTI ONAL OPERATIONS. C. IN SUPPORT OF ITS CONTENTION, ASSESSEE R ELIED ON THE ORDER OF ITAT BANGALORE TRIBUNAL IN THE CASE OF CIS CO SYSTEMS (INDIA) P. LTD., ITA.NO.271/BANG/2014 DATED 14.08.2 014 FOR A.Y. 2009-2010 WHEREIN THIS COMPANY HAS BEEN ANALYS ED AND 5 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. REJECTED AS A COMPARABLE. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER : 26.1 BODHTREE CONSULTING LTD.:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES CHOSEN BY THE ASSESSEE, THIS COMPANY WA S ALSO INCLUDED BY THE ASSESSEE. THE ASSESSEE, HOWEVE R, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSE SSEES NOTICE THAT THIS COMPANY IS NOT BEING CONSIDERED AS A COMPARABLE COMPANY IN THE CASE OF COMPANIES RENDERI NG SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CA SE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P. LTD., ITA NO.4547/MUM/20 12. IN THE AFORESAID DECISIONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN THE BUSINE SS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST TECHN OLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. IT WAS AFFI RMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDEN TICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN A Y 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENC H OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSULTING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS , THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COM PANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BA SIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOWN THAT THE SAI D COMPANY IS A SOFTWARE PRODUCT COMPANY AND NOT A SOFTWARE DEVELOPMENT SERVICES COMPANY. RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISIO N, WE HOLD THAT THIS COMPANY CANNOT BE REGARDED AS A COMPARABL E. AO IS DIRECTED TO EXCLUDE THE SAME. 6 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. 2. COMP-U-LEARN TECH INDIA LTD., A. TPO SELECTED THIS COMPANY BASED ON REPLY TO 133(6) NOTICE THAT THIS COMPANY IS PREDOMINANTLY IN TO SOFTWARE DEVELOPMENT ACTIVITIES. THE INCOME FROM SOFTWARE DE VELOPMENT OF THIS COMPANY WORKED OUT TO 95% OF TOTAL REVENUE. B. ASSESSEES OBJECTIONS ARE THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT. AS PER PAGE 5 OF THE ANNUAL REPORT OF THIS COMPANY IT IS ENGAGED IN PROVIDING IT ENABLED SERVI CES, CALL CENTER AND BPO SERVICES. THE COMPANY EARNS REVENUE FROM LICENSES, SOFTWARE PRODUCTS, COURSEWARE MATERIALS. IT IS FURTHER POINTED BY ASSESSEE THAT THE LEARNED TPO HAS NOT PR OVIDED THE COPY OF 133(6) RESPONSE OBTAINED. C. THIS COMPANY AS COMPARABLE WAS CONSIDERED IN COORDINATE BENCH DECISION IN THE CASE OF KENEXA TEC HNOLOGIES P. LTD., VS. DCIT, HYDERABAD (2015) 37 ITR (TRIB) 3 06 (HYD.) WHEREIN THE TRIBUNAL HAS HELD AS UNDER : 38. WITH RESPECT TO COMP-U-LEARN TECH INDIA LTD., THE ASSESSEE SUBMITTED THAT THIS COMPANY IS FUNCTIONALL Y DISSIMILAR AND DIVERSIFIED IN SERVICES. FURTHER IT WAS SUBMITTED BY LEARNED COUNSEL THAT THE SOFTWARE DEVELOPMENT EXPENDITURE IS ONLY 25% OF THE TOTAL EXPENDITURE. IT WAS SUBMITTED THAT THE TPO RELIED O N THE INFORMATION OBTAINED FROM THE COMPANY UNDER SECTION 133(6) NOTICE AND HELD IT TO BE PREDOMINANTLY ENGAG ED IN SOFTWARE DEVELOPMENT SERVICES. 39. THE ASSESSEE SUBMITTED BEFORE THE DRP THAT COMP - U-LEARN TECH INDIA LTD., WAS ENGAGED IN THE DEVELOP MENT OF NEW SOFTWARE (PRODUCT DEVELOPMENT) (PAGE 7 OF TH E ANNUAL REPORT) IN INFORMATION TECHNOLOGY ENABLED SE RVICES CALL CENTER AND BUSINESS PROCESS OUTSOURCING SERVIC ES (PAGE 11 OF ANNUAL REPORT). IT WAS FURTHER SUBMITTE D THAT SCHEDULE XIII OF THE ANNUAL REPORT SHOWS SOFTWARE DEVELOPMENT EXPENDITURE AT ONLY 25% OF THE TOTAL EXPENDITURE. THE TPO EXTRACTED THE 133(6) NOTICE AN D HELD 7 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. THAT THE COMPANY HAS NIL ONSIDE REVENUE AND SATISFI ED ALL THE FILTERS APPLIED BY THE TPO. WE ARE OF THE OPINI ON THAT SOME MORE ANALYSIS HAS TO BE DONE AND WE DIRECT THE TPO TO LOOK INTO THE FINANCIAL STATEMENT OF THE COMPANY AND ALSO PROVIDE AN OPPORTUNITY TO THE ASSESSEE TO SUBM IT RELEVANT DETAILS TO SUBSTANTIATE ITS CLAIM THAT COM P-U- LEARN TECH INDIA LTD., IS NOT A COMPARABLE COMPANY. RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISI ON CITED (SUPRA), WE RESTORE ANALYSIS OF THIS COMPANY TO THE FILE OF TPO WHO SHOULD LOOK INTO THE FINANCIAL STATEMENTS O F THE COMPANY AND RE-EXAMINE WHETHER THE COMPANY CAN BE CONSIDERED AS A COMPARABLE COMPANY. ASSESSEE SHOULD BE GIVEN DUE OPPORTUNITY TO SUBMIT RELEVANT DETAILS TO SUBSTANTIATE ITS CLAIM. WITH THESE DIRECTIONS, ANAL YSIS OF THIS COMPANY IS RESTORED TO THE FILE OF TPO. 3. I-GATE GLOBAL SOLUTIONS LTD., A. TPO SELECTED THIS COMPANY AS PER RESPONSE TO NOTICE U/S.133(6), THE COMPANYS INCOME FROM SOFTWA RE WORKS OUT TO 90% OF TOTAL REVENUE. B. ASSESSEES OBJECTIONS ARE THAT THIS COMPANY I S FUNCTIONALLY DIFFERENT. THE COMPANY HAS 3 SEGMENTS VIZ., IT, ITES AND CONTRACT CENTRE SERVICES. THE SEGMENTAL IN FORMATION IS NOT AVAILABLE IN THE PUBLIC DOMAIN. THE COMPANY IN THE ANNUAL REPORT HAS CLASSIFIED ITSELF AS AN ITES COMP ANY. IT IS FURTHER SUBMITTED THAT LEARNED TPO HAS NOT PROVIDED THE COPY OF 133(6) RESPONSE OBTAINED. C. WE HAVE EXAMINED THE CONTENTION OF THE ASSESSE E AND NOTICED THAT THIS COMPANY HAS NOT BEEN OBJECTED TO BY ANY OTHER ASSESSEES SO FAR ANALYSED BY THE ITAT IN ANY OF THE ORDERS SO FAR ISSUED FOR THIS ASSESSMENT YEAR. LD. COUNSEL ALSO 8 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. COULD NOT BRING ANYTHING ON RECORD THAT THIS COMPAN Y WAS REJECTED IN ANY OF THE ORDERS ON THE ISSUE FOR THIS ASSESSMENT YEAR. AS SEEN FROM THE PART OF THE BALANCE SHEET PL ACED ON RECORD, COMPANY HAS THREE DIFFERENT SEGMENTS. DETA ILS OF SEGMENTAL INFORMATION ADOPTED BY TPO ARE NOT AVAILA BLE. EVEN THOUGH THE COMPANY ITSELF CLASSIFIED THAT ITES COMP ANY, BEING SIMILAR TO ASSESSEE COMPANY, ASSESSEES OBJECTION I S THAT THE INFORMATION OBTAINED BY THE TPO WAS NOT PROVIDED TO THE ASSESSEE. IN VIEW OF THIS, WE, IN THE INTEREST OF J USTICE RESTORE THE MATTER TO THE FILE OF THE A.O. TO EXAMINE AFRES H. THE SEGMENTAL INFORMATION PERTAINING TO ITES OBTAINED B Y THE TPO SHOULD BE PROVIDED TO THE ASSESSEE FOR ITS OBJECTIO NS AND THEN RE-CONSIDER THE ISSUE WHETHER THE SAME IS COMPARABL E OR NOT. WITH THESE DIRECTIONS, THE ISSUE IS RESTORED TO THE FILE OF TPO FOR FRESH EXAMINATION, BY GIVING DUE OPPORTUNITY TO THE ASSESSEE. 4. INFOSYS TECHNOLOGIES LTD., A. TPO SELECTED THIS COMPANY STATING THAT ASSESSE E ITSELF CONSIDERED THIS COMPANY AS COMPARABLE IN THE T.P. STUDY. THE ASSESSEE HAS NOT FURNISHED ANY ECONOMIC RATIONALE TO SAY HIGHER TURNOVER COMPANIES OR COMPANIES WITH BRAND VALUE HAVE EARNED BETTER MARGINS THAN LOW TURNOVER COMPANIES. FOR EXAMPLE, ST MICRO ELECTRONICS; AND S YMANTEE SOFTWARE SOLUTONS P. LTD., THE TPO FURTHER POINTED OUT THAT INFOSYS ITSELF IS NOT SURE OF THE COMPUTATION OF BR AND VALUE AND WANTS TO USE THESE ONLY TO INITIATE ACADEMIC DISCUS SIONS. FURTHER BRAND MAY BRING MORE REVENUES BUT NOT NECES SARILY HIGHER MARGINS. B. ASSESSEES OBJECTIONS ARE THAT INFOSYS LIMITED HAS BRAND VALUE. INFOSYS COMMANDS A PREMIUM IN THE PRIC ING OF ITS PRODUCTS AND SERVICES DUE TO ITS GOODWILL, REPUTATI ON AND 9 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. BRAND VALUE AND HENCE CANNOT BE CONSIDERED AS COMPA RABLE TO RISK MITIGATED CONTRACT SERVICE PROVIDERS. DUE TO S CALE OF OPERATIONS, INFOSYS ENJOYS ECONOMIES OF SCALE IN LO WER COST OF INFRASTRUCTURAL FACILITIES AND EMPLOYEES. IT IS FUR THER SUBMITTED THAT THESE COMPANIES ARE ENGAGED IN DIVERSIFIED ACT IVITIES INCLUDING PRODUCTS, CONSULTANCY AND SOLUTIONS UNLIK E ADAPTEC INDIA. INFOSYS DERIVES MORE THAN 49.30% OF ITS REVE NUE FROM ONSITE OPERATIONS. IN SUPPORT OF ITS CONTENTION, AS SESSEE RELIED ON THE DECISION OF BANGALORE TRIBUNAL ORDER IN THE CASE OF CISCO SYSTEMS (INDIA) P. LTD., ITA.NO.271/BANG/2014 DATED 14.08.2014 FOR A.Y. 2009-2010 WHEREIN THIS COMPANY HAS BEEN ANALYSED AND REJECTED AS A COMPARABLE BY THE B ANGALORE TRIBUNAL. THE RELEVANT OBSERVATIONS OF THE BANGALOR E TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) P. LTD., ARE A S UNDER : 26.2 INFOSYS LTD.:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED TO BE FUNCTIONALLY DIFFERENT FR OM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVI CES, AS THIS COMPANY OWNS SIGNIFICANT INTANGIBLES AND HA S HUGE REVENUES FROM SOFTWARE PRODUCTS. IN THIS REGAR D, WE FIND THAT THE BANGALORE BENCH OF THE TRIBUNAL IN TH E CASE OF M/S. TDPLM SOFTWARE SOLUTIONS LTD. V. DCIT, ITA NO.1303/BANG/2012, BY ORDER DATED 28.11.2013 WITH REGARD TO THIS COMPARABLE HAS HELD AS FOLLOWS:- 11.0 INFOSYS TECHNOLOGIES LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUS ION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUN DS OF TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE AS SESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTATIVE DREW OU R 10 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. ATTENTION TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO SUBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A MARKET LEADER IN SOFTWARE DEVELOPMENT ACTI VITIES, WHEREAS THE ASSESSEE IS MERELY A SOFTWARE SERVICE PROVIDER OPERATING ITS BUSINESS IN INDIA AND DOES N OT POSSESS EITHER ANY BRAND VALUE OR OWN ANY INTANGIBL E OR INTELLECTUAL PROPERTY RIGHTS (IPRS). IT WAS ALSO SU BMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT :- (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE C ASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT B E COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS SUBMITTED THAT THIS DECISION IS APPLICABLE TO THE ASSESSEE'S CASE, AS THE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INF OSYS TECHNOLOGIES LTD. CANNOT BE COMPARABLE TO THE ASSES SEE ; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN TH E CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856 (DEL)/2010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNO LOGIES LTD. BEING A GIANT COMPANY AND MARKET LEADER ASSUMI NG ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSI DERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDERS ASSUMING LI MITED RISK ; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA ; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOFT WARE PRODUCTS AND THE BREAK UP OF SUCH REVENUES IS NOT AVAILABLE ; (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR RESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQUISITION OF IPRS IN AUTOLAY, A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMA NCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, T HE LEARNED AUTHORISED REPRESENTATIVE PLEADED THAT, THI S COMPANY I.E. INFOSYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPANIES. 11 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERE LY ON THE BASIS OF SCALE OF OPERATIONS AND THE BRAND ATTR IBUTABLE PROFIT MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTM ENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMP ANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RE CORD. WE FIND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT FROM THE ASS ESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERE D IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE T O THIS YEAR ALSO. WE ARE INCLINED TO CONCUR WITH THE ARGUM ENT PUT FORTH BY THE ASSESSEE THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICA NT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PROD UCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM S OFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. THE DECISION RENDERED AS AFORESAID PERTAINS TO A.Y. 2008- 09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PR ESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUM STANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARAB LE COMPANY IS CONCERNED. RESPECTFULLY FOLLOWING THE DE CISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INF OSYS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISIO N, WE HOLD THAT THIS COMPANY CANNOT BE REGARDED AS A COMPARABL E. AO IS DIRECTED TO EXCLUDE THE SAME. 5. KALS INFORMATION SYSTEMS (SEGMENTAL) A. TPO SELECTED THIS COMPANY STATING THAT THIS COMPANY IN ITS RESPONSE TO 133(6) NOTICE CLEARLY ST ATED THAT 12 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. THEIR BUSINESS MAY BE CLASSIFIED AS A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. IN MANY CASES, THE CO MPANY USES ITS OWN LIBRARY OF PRODUCTS AND PREPARES CUSTO MIZED SOFTWARE. B. ASSESSEES OBJECTIONS ARE THAT THIS COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRO DUCTS AND NO BREAK-UP OF REVENUE IS PROVIDED. FURTHER, THE CO MPANY HAS INVENTORY OF -34% OF REVENUE, CLEARLY EVIDENCING TH AT THE COMPANY HAS SIGNIFICANT REVENUE FROM PRODUCTS (I.E. , IN EXCESS OF 25%). THIS COMPANY IS FUNCTIONALLY DIFFERENT AS IT IS ENGAGED IN TWO SEGMENTS (I) DEVELOPMENT OF SOFTWARE AND SOF TWARE PRODUCTS (II) TRAINING SERVICES. IN SUPPORT OF ITS CONTENTION, THE LD. COUNSEL RELIED ON THE FOLLOWING DECISIONS : (I) CISCO SYSTEMS (INDIA) P. LTD., ITA.NO.271/BANG/2014 (II) BINDVIEW INDIA P. LTD., ITA.NO.1386/PN/2010 (III) VIRTUSA (INDIA) P. LTD., ITA.1962/HNYD/2011 (IV) INTOTO SOFTWARE INDIA P. LTD., ITA.NO.1196/HYD/2010 (V) CONEXANT SYSTEMS INDIA P. LTD., ITA.NO.1429/HYD/2010 AND 1978/HYD/2011. (VI) BEARING POINT BUSINESS CONSULTING P. LTD., ITA.NO.1124/BANG/2011 (VII) CSR INDIA P. LTD., ITA.NO.1119/BANG/2011 (VIII) FIRST ADVANTAGE ITA.NO.1086/BANG/2012. C. FROM THE PERUSAL OF THE ABOVE DECISIONS O F COORDINATE BENCHES OF THE TRIBUNAL, WE FIND THAT THIS COMPANY (KALS INFORMATION SYSTEMS LTD.,) HAS BEEN ANALYSED AND RE JECTED AS A COMPARABLE. BANGALORE BENCH OF TRIBUNAL IN THE CAS E OF CISCO SYSTEMS (INDIA) P. LTD., ITA.NO.271/BANG/2014 DATED 14.08.2014 - A.Y. 2009-2010 HAS ANALYSED AS UNDER : 13 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. 26.3 KALS INFORMATION SYSTEMS LTD.:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEF ORE US THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPAR ABLE TO A PURE SOFTWARE DEVELOPMENT SERVICES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRI BUNAL:- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVE NUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCT S. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THI S COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS AL SO SUBMITTED THAT AS PER THE ANNUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DECISION OF THE ITAT IN THE C ASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE A S FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARAB LE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND I S NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDE D BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRAC T ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDIN G OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOU LD BE REJECTED AS A COMPARABLE. 14 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PU BLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN TH E SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFER RED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BE NCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT T HE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISIO N, WE HOLD THAT THIS COMPANY CANNOT BE REGARDED AS A COMPARABL E. AO IS DIRECTED TO EXCLUDE THE SAME. 6. TATA ELXSI LTD., (SEGMENTAL) A. TPO SELECTED THIS COMPANY STATING THAT THE COMPANYS REVENUE FROM SOFTWARE DEVELOPMENT SEGMENT IS 90.42% OF THE TOTAL TURNOVER. B. ASSESSEES OBJECTIONS ARE THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT. IN THE RESPONSE TO NOTICE I SSUED UNDER SECTION 133(6) OF THE ACT FOR EARLIER YEAR, THIS CO MPANY HAS CLEARLY STATED THAT IT CANNOT BE CONSIDERED AS COMP ARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY, DUE TO ITS COM PLEX NATURE OF ITS BUSINESS. THIS COMPANY HAS BEEN ANALY SED AND REJECTED AS A COMPARABLE BY THE BANGALORE TRIBUNAL IN THE CASE OF CISCO SYSTEMS (INDIA) P. LTD., ITA.NO.271/BANG/2 014 A.Y. 15 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. 2009-2010. ASSESSEE FURTHER RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF ITS CONTENTION. (I) VIRTUSA (INDIA) P. LTD., ITA.1962/HYD/2011 (II) CONEXANT SYSTEM INDIA P. LTD., ITA.NO.1978/HYD/2011. (III) TRILOGY E BUSINESS SERVICES SOFTWARE LTD., VS. DCIT ITA.NO.1054/BANG/2011 AND (IV) TELCORDIA TECHNOLOGIES INDIA P. LTD., ITA.NO.7821/MUM/2011. C. FROM THE PERUSAL OF THE ABOVE DECISIONS OF COORDINATE BENCHES OF THE TRIBUNAL, WE FIND THAT THIS COMPANY (TATA ELXSI LTD.,) HAS BEEN ANALYSED AND REJECTED AS A COMPARAB LE. BANGALORE BENCH OF TRIBUNAL IN THE CASE OF CISCO SY STEMS (INDIA) P. LTD., ITA.NO.271/BANG/2014 DATED 14.08.2 014 A.Y. 2009-2010 HAS ANALYSED AS UNDER : 26.4 TATA ELXSI LTD.:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT IN A SSESSEES OWN CASE FOR THE A.Y. 2007-08, THIS COMPANY WAS NOT REGARDED AS A COMPARABLE IN ITS SOFTWARE DEVELOPMEN T SERVICES SEGMENT IN ITA NO.1076/BANG/2011, ORDER DATED 29.3.2013. FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. THE LEARNED CHARTERED ACCOUNTANT PLEADED THAT OUT OF THE SIX COMPARABLES SHORTLISTED ABOVE AS COMPARA BLES BASED ON THE TURNOVER FILTER, THE FOLLOWING TWO COM PANIES, NAMELY (I) TATA ELXSI LTD; AND (II) M/S. FLEXTRONIC S SOFTWARE SYSTEMS LTD., DESERVE TO BE ELIMINATED FOR THE FOLLOWING REASONS : (I) TATA ELXSI LTD., : THE COMPANY OPERATES IN THE SEGMENTS OF SOFTWARE DEVELOPMENT SERVICES WHICH COMPRISES OF EMBEDDED PRODUCT DESIGN SERVICES, INDUSTRIAL DESIGN AND ENGINEERING SERVICES AND VISU AL COMPUTING LABS AND SYSTEM INTEGRATION SERVICES SEGM ENT. THERE IS NO SUB-SERVICES BREAK UP/INFORMATION PROVI DED IN THE ANNUAL REPORT OR THE DATABASES BASED ON WHICH T HE MARGIN FROM SOFTWARE SERVICES ACTIVITY ONLY COULD B E 16 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. COMPUTED. THE COMPANY HAS ALSO IN ITS RESPONSE TO T HE NOTICE U/S.133(6) STATED THAT IT CANNOT BE CONSIDER ED AS COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY BECAUSE OF ITS COMPLEX NATURE. HENCE, TATA ELXSI LT D., IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. (II) FLEXTRONICS SOFTWARE SYSTEMS LTD. : THE LEARN ED TPO HAS CONSIDERED THIS COMPANY AS A COMPARABLE BAS ED ON 133(6) REPLY WHEREIN THIS COMPANY REFLECTED ITS SOFTWARE DEVELOPMENT SERVICES REVENUES TO BE MORE T HAN 75% OF THE 'SOFTWARE PRODUCTS AND SERVICES' SEGMENT REVENUES. FLEXTRONICS HAS A HYBRID REVENUE MODEL AN D HENCE SHOULD BE REJECTED AS FUNCTIONALLY DIFFERENT. BASED ON THE INFORMATION PROVIDED UNDER 'REVENUE RECOGNIT ION' IN ITS ANNUAL REPORT, IT CAN BE INFERRED THAT THE S OFTWARE SERVICES REVENUES ARE EARNED ON A HYBRID REVENUE MO DEL, AND THE SAME IS NOT SIMILAR TO THE REGULAR MODELS A DOPTED BY OTHER SOFTWARE SERVICE PROVIDERS. THE LEARNED REPRESENTATIVE PLEADED THAT A REGULAR SOFTWARE SERV ICES PROVIDER COULD NOT BE COMPARED TO A COMPANY HAVING SUCH A UNIQUE REVENUE MODEL, WHEREIN THE REVENUES OF THE COMPANY FROM SOFTWARE/PRODUCT DEVELOPMENT SERVICES DEPENDS ON THE SUCCESS OF THE PRODUCTS SOLD BY ITS CLIENTS IN THE MARKETPLACE. HENCE, IT WOULD BE INAPPROPRIAT E TO COMPARE THE BUSINESS OPERATIONS OF THE ASSESSEE WIT H THAT OF A COMPANY FOLLOWING HYBRID BUSINESS MODEL COMPRISING OF ROYALTY INCOME AS WELL AS REGULAR SOF TWARE SERVICES INCOME, FOR WHICH REVENUE BREAK-UP IS NOT AVAILABLE. HE FINALLY SUBMITTED THAT THIS WAS A GOO D REASON TO EXCLUDE THIS COMPANY ALSO FROM THE LIST O F COMPARABLES. 20. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ORDER OF THE LOWER AUTHORITIES REGARDING THE INCLUS ION OF TATA ELXSI AND FLEXTRONICS SOFTWARE SYSTEMS LTD., I N THE LIST OF COMPARABLES. HE REITERATED THE CONTENTS OF PARA 14.2.25 OF THE TPO'S ORDER. HE ALSO READ OUT THE FO LLOWING PORTION FROM THE TPO'S ORDER : 'THUS AS STATED ABOVE BY THE COMPANY, THE FOLLOWING FACTS EMERGE : 1. THE COMPANY'S SOFTWARE DEVELOPMENT AND SERVICES SEGMENT CONSTITUTES THREE SUB- SEGMENTS I) PRODUCT DESIGN SERVICES; II) ENGINEERING DESIGN SERVICES AND III) VISUAL COMPUTING LABS. 17 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. 2. THE PRODUCT DESIGN SERVICES SUB-SEGMENT IS INTO EMBEDDED SOFTWARE DEVELOPMENT. THUS THIS SEGMENT IS INTO SOFTWARE DEVELOPMENT SERVICES. 3. THE CONTRIBUTION OF THE EMBEDDED SERVICES SEGMENT IS TO THE TUNE OF RS.230 CRORES IN THE TOTAL SEGMENT REVENUE OF RS.263 CRORES. EVEN IF WE CONSIDER THE OTHER TWO SUB-SEGMENTS PERTAIN TO IT ENABLED SERVICES, THE 87.45% (75%) OF THE SEGMENT'S REVENUES IS FROM SOFTWARE DEVELOPMENT SERVICES. 4. THE SEGMENT QUALIFIES ALL THE FILTERS APPLIED BY THE TPO.' REGARDING FLEXTRONICS SOFTWARE SYSTEMS, THE FOLLOWI NG EXTRACT FROM PAGE 143 OF TPO'S ORDER WAS READ OUT B Y HIM AS HIS SUBMISSIONS : 'IT IS VERY PERTINENT TO MENTION HERE THAT THE COMPANY WAS CONSIDERED BY THE TAXPAYER AS A COMPARABLE FOR THE PRECEDING ASSESSMENT YEAR I.E., AY 2006-07. WHEN THE SAME WAS ACCEPTED BY THE TPO AS A COMPARABLE, THE SAME WAS NOT OBJECTED TO IT BY THE TAXPAYER. AS THE FACTS MENTIONED BY THE TAXPAYER ARE THE SAME AND THESE WERE THERE IN THE EARLIER FY 2005-06, THERE IS NO REASON WHY THE TAXPAYER IS OBJECTING TO IT. HOW THE COMPANY IS FUNCTIONALLY SIMILAR IN THE EARLIER FY 2005-06 BUT THE SAME IS NOT FUNCTIONALLY SIMILAR FOR THE SUBSEQUENT FY 2006-07 EVEN WHEN NO FACTS HAVE BEEN CHANGED FROM THE PRECEDING YEAR. THUS THE TAXPAYER IS ARGUING AGAINST THIS COMPARABLE AS THE COMPANY WAS NOT CONSIDERED AS A COMPARABLE BY THE TAXPAYER FOR THE PRESENT FY 2006-07.' 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THE FACTS AND MATERIALS ON RECORD. AFTER CONSIDERING THE SUBMISSIONS, WE FIND THAT TATA ELXS I AND FLEXTRONICS ARE FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE AND HENCE THEY DESERVE TO BE DELETED FROM THE LIST OF SIX COMPARABLES AND HENCE THERE REMAINS ONL Y FOUR COMPANIES AS COMPARABLES, AS LISTED BELOW: 26.5. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, WE HOLD THAT M/S.TATA ELXSI LTD. SHOULD N OT BE REGARDED AS A COMPARABLE. 18 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISIO N, WE HOLD THAT THIS COMPANY CANNOT BE REGARDED AS A COMPARABL E. AO IS DIRECTED TO EXCLUDE THE SAME. 8. GROUND NO.7 PERTAIN TO RISK ANALYSIS. EVEN THOU GH IT WAS SUBMITTED THAT THIS GROUND BECOMES ACADEMIC, WE ARE OF THE OPINION THAT THE FINDING IS REQUIRED ON THIS GR OUND. IN THE CASE OF KENEXA TECHNOLOGIES P. LTD., VS. DCIT, HYDE RABAD (2015) 37 ITR (TRIB) 306 (HYD.), THE ISSUE WAS ANAL YSED VIDE PLACITUM 47 AT PAGE 331 (SUPRA) WHICH IS AS UNDER : 47. WITH RESPECT TO GROUND NO.2.8, THE ASSESSEE HA S SOUGHT FOR RISK ADJUSTMENT DUE TO DIFFERENCE IN RIS K PROFILE OF THE ASSESSEE AND THE COMPARABLE CASES SELECTED. WE RELY ON THE DECISION IN THE CASE OF EXCELLENCE DATA RESEARCH VS. ITO (ITA.NO.159/HYD/2014) FOR THE A.Y. 2009-10 WHEREIN IT HAS BEEN HELD AS FOLLOWS : 21. WITH REFERENCE TO GROUND NO.2.5 ON RISK PROFILE, LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE A.O./DRP HAVE NOT CONSIDERED THE RISK PROFILE OF THE ASSESSEE AND NECESSARY ADJUSTMENTS HAVE NOT BEEN MADE IN ORDER TO MITIGATE THE DIFFERENCES BETWEEN THE ASSESSEES RISK PROFILE AND THE COMPARABLES SELECTED BY THE TPO. THE ASSESSEE CONTENDS THAT ADJUSTMENT OF 1%, WHICH WAS GRANTED BY THE COORDINATE BENCH IN THE CASE OF DCIT VS. HELLOSOFT INDIA P. LTD., ITA.NO.645/HYD/ 2009 (2013) 23 ITR (TRIB)1 (HYD), SHOULD HAVE BEEN ALLOWED. EVEN THOUGH IT WAS CONTENDED THAT THE COORDINATE BENCH ORDER IN THAT BEHALF IS BINDING ON THE A.O., WE ARE NOT INCLINED TO AGREE WITH THAT CONTENTION, AS RISK PROFILE OF EACH ASSESSEE DIFFER S DEPENDING ON ITS OWN BUSINESS ACTIVITY WHEN COMPARED TO THAT OF THE COMPARABLE COMPANY, AND IN EACH CASE SEPARATE RISK PROFILE HAS TO BE ANALYSED IN FAR ANALYSIS. THEREFORE, ALLOWING DEDUCTION OF 1% TOWARDS RISK PROFILE UNIFORMLY CANNOT BE ADOPTED AS A NORM. FURTHER, THIS ASPECT REQUIRES TO BE RE-EXAMINED BY THE TPO. THEREFORE, AFTER EXCLUDING THE ABOVE COMPANIES, IF ANY ADJUSTMENT IS REQUIRED TO BE MADE, THE A.O. IS DIRECTED TO CONSIDER THE RISK PROFILE AND ALLOW 19 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. NECESSARY DEDUCTION, BASED ON THE FACTS OF EACH COMPARABLE CASE. 9. FOLLOWING THE DECISION IN THE CASE OF KENEXA TECHNOLOGIES P. LTD., VS. DCIT, HYDERABAD (SUPRA), WE REMIT THE ISSUE TO THE TPO TO CONSIDER THE RISK PROFILE O F THE ASSESSEE. WE DIRECT THE TPO TO ALLOW NECESSARY DEDU CTIONS FOR RISK ADJUSTMENT, AFTER FINALISING THE LIST OF COMPA RABLES AS DIRECTED BY US. 10. GROUND NO.8 PERTAINS TO THE ISSUE OF NEGATIVE WORKING CAPITAL. AS BRIEFLY STATED ABOVE, AFTER ARR IVING AT THE ARITHMETIC MEAN OF ALL COMPARABLES AT 22.03%, THE A .O. WORKED OUT NEGATIVE WORKING CAPITAL ADJUSTMENT OF 3 .22% THEREBY, MAKING ARMS LENGTH PRICE AT 25.25%. EVEN T HOUGH, DRP REFUSED TO INTERFERE WITH THE OBJECTIONS OF THE ASSESSEE IN ITS ORDER, WE WERE INFORMED THAT DRP HAS DIRECTED T HE TPO/A.O. NOT TO MAKE ANY NEGATIVE WORKING CAPITAL ADJUSTMENT IN SOME OF THE CASES IN THE NEXT ASSESSM ENT YEAR, IN THE CASES OF MARKET TOOLS RESEARCH P. LTD., AND MEGA SYSTEMS WORLDWIDE INDIA P. LTD., ASSESSEE PLACED ON RECORD COPIES OF ORDERS OF DRP. IN THAT DRP CONSIDERED THE ISSUE AND DIRECTED THE TPO AS UNDER : 14. GROUND NO.11 : NEGATIVE WORKING CAPITAL ADJUSTMENT MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT WITHOUT APPRECIATING THE FACT THAT THE COMPANY DOES NOT BEAR ANY WORKING CAPITAL RISKS. ON THIS ISSUE, THE ASSESSEE SUBMITTED AS UNDER : THE LEARNED TPO DETERMINED THE ALP FOR THE INTERNA TIONAL TRANSACTIONS WITH A.ES BY MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT FOR THE DIFFERENCES IN WORKING C APITAL BETWEEN THE ASSESSEE AND THE COMPANIES CONSIDERED A S COMPARABLES. THE ASSESSEE DOES NOT AGREE WITH THE LEARNED TPO AS : 20 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. THE COMPANY DOES NOT BEAR ANY WORKING CAPITAL RISK SINCE IT IS BEEN FULLY FUNDED BY ITS A.E. FROM ITS INCEPTION AND HAS NO WORKING CAPITAL CONTINGENCIES. THE COMPANY HAS NEVER TAKEN ANY LOANS TILL DATE FRO M THE DATE OF INCORPORATION NOR HAS INCURRED ANY EXPE NSE FOR MEETING THE WORKING CAPITAL REQUIREMENT. WE HAVE GONE THROUGH THE SUBMISSIONS AND THE ORDER OF THE TPO. THE ASSESSEE PLEADED THAT THE DRP HAS ACCEDED SUCH A PLEA IN SOME OTHER CASE. ON EXAMINATION, WE FIND THAT THE DRP, HYDERABAD IN THE CASE OF CORDYS SOFTWARE INDIA P. LTD., FOR A.Y. 200 8-09 IN ITS DIRECTIONS DATED 03.08.2012 HAS GIVEN A FIND ING AS UNDER : 7.7. 4 THUS, WORKING CAPITAL ADJUSTMENT IS MADE FO R THE TIME VALUE OF MONEY LOST WHEN CREDIT TIME IS PROVIDED TO THE CUSTOMERS. THE APPLICANT IS NOT AN ENTREPRENEUR BUT A CAPTIVE SERVICE PROVIDER. ITS EN TIRE FUNDING NEEDS ARE PROVIDED BY THE A.E. THIS BEING S O, THE APPLICANT DOES NOT STAND TO LOSE ANYTHING AS IT IS COMPENSATED ON A TOTAL COST PLUS BASIS. THE TPO PROBABLY WAS CARRIED AWAY BY THE LARGE AMOUNT OF RECEIVABLES APPEARING IN THE BOOKS OF THE APPLICANT . BUT THE APPLICANT IS RUNNING ITS BUSINESS WITHOUT A NY WORKING CAPITAL RISK WHILE COMPARABLE COMPANIES HAV E SUCH A RISK FOR THEM. IF AT ALL ANY WORKING CAPITAL ADJUSTMENT IS TO BE MADE TO T HIS SITUATION, ONLY A POSITIVE ADJUSTMENT HAS TO BE MADE TO THE COMPARABL ES SO THAT THEY ARE BROUGHT ON PAR WITH THE APPLICANT. IN VIEW OF THE SAME, THE PANEL DIRECTS THAT NEGATIVE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SHALL NOT BE MADE. IN VIEW OF THE ABOVE, THE PANEL DIRECTS THAT NEGATI VE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SHALL NOT BE MADE. 11. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION TH AT ASSESSEES CASE BEING SIMILAR, THERE IS NO NEED FOR MAKING ANY NEGATIVE WORKING CAPITAL ADJUSTMENT WHEN ASSESSEE D OES NOT CARRY ANY WORKING CAPITAL RISK. IN FACT, TPO SHOULD HAVE DONE NECESSARY WORKING CAPITAL ADJUSTMENT TO THE PROFITS OF THE SELECTED COMPARABLES SO AS TO MAKE THEM COMPARABLE TO THE 21 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYDERABAD. ASSESSEE. IN VIEW OF THIS, WE DIRECT THE TPO NOT TO MAKE NEGATIVE WORKING CAPITAL ADJUSTMENT. 12. TPO IS DIRECTED TO EXAMINE THE COMPAR ABILITY OF THE TWO COMPANIES DIRECTED ABOVE AND DELETE REST OF THE COMPANIES AS OBJECTED BY THE ASSESSEE AND RE-WORKOU T THE ARITHMETIC MEAN. HE SHOULD ALSO CONSIDER THE PROVIS O TO SECTION 92C(2) AS PER LAW. FOR THIS PURPOSE THE ORD ERS TO THAT EXTENT ARE SET ASIDE FOR RE- DOING THE SAME AS PER FACTS AND PROVISIONS OF LAW. 13. WITH THESE DIRECTIONS, ASSESSEES APPEAL IS CONSIDERED AS PARTLY ALLOWED FOR STATISTICAL PURPOS ES. ORDER PRONOUNCED IN OPEN COURT O N 25.03.2015. SD/- SD/- (SAKJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMB ER HYDERABAD, DATED 25 TH MARCH, 2015 VBP/- COPY TO : 1. ADAPTEC (INDIA) P. LTD., 5-9-93, FLAT NO.204, 2 ND FLOOR, SHAKTHI SAI COMPLEX, CHAPEL ROAD, ABIDS, HYDERABAD 500 00 2. 2. THE ACIT, CIRCLE 1(1), AAYAKAR BHAVAN, BASHEERBA GH, HYDERABAD. 3. DISPUTES RESOLUTION PANEL (DRP), 2 ND FLOOR, INCOME TAX TOWERS, 10-2-3, A.C. GUARDS, HYDERABAD 500 004. 4. CIT-IV/MEMBER, DRP, HYDERABAD. 5. DIRECTOR OF INCOME TAX (T.P.)/MEMBER, DRP, HYDER ABAD. 6. DEPUTY COMMISSIONER OF INCOME TAX, TRANSFER PRIC ING, 6 TH FLOOR, B-BLOCK, INCOME TAX TOWERS, 10-2-3, A.C. GUARDS, HY DERABAD 500 004. 7. D.R. ITAT B BENCH, HYDERABAD. 8. GUARD FILE