ITO, Ward-2(3), Hyderabad, Hyderabad V. Hyundai Motor India Engineering Pvt.Ltd., Hyd, R.R.Dist

ITA 216/HYD/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5920 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 27-09-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 25-02-2016
• Court: TRIBUNAL
• Department Lawyers: S V S S PRASAD
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts; Revised return; Unabsorbed depreciation; Revenue expenditure
• Section: 92C; 143(3); 234B; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. ASST. YEAR APPELLANT RESPONDENT 128/HYD/2016 2011 - 12 HYUNDAI MOTOR INDIA ENGINEERING PRIVATE LIMITED, HYDERABAD [PAN: AABCH7867C] THE INCOME TAX OFFICER, WARD-2(3), HYDERABAD 216/HYD/2016 2011 - 12 THE INCOME TAX OFFICER, WARD-2(3), HYDERABAD HYUNDAI MOTOR INDIA ENGINEERING PRIVATE LIMITED, HYDERABAD [PAN: AABCH7867C] FOR ASSESSEE : SHRI K. R. VASUDEVAN, AR FOR REVENUE : SHRI S.V.S.S. PRASAD, CIT-DR DATE OF HEARING : 27-09-2016 DATE OF PRONOUNCEMENT : 21-12-2016 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE ARE CROSS-APPEALS BY ASSESSEE AND REVENUE AGA INST THE ORDER(S) OF THE ASSESSING OFFICER (AO) U/S. 143(3) R.W.S. 92CA(4) R.W.S. 144C OF THE INCOME TAX ACT [ACT]. 2. BRIEFLY STATED, ASSESSEE HYUNDAI MOTOR INDIA ENGINEERING PRIVATE LIMITED WAS INCORPORATED IN NOVEM BER, 2006 AS A SUBSIDIARY OF HYUNDAI MOTOR INDIA LTD., UNDER TH E COMPANIES ACT, 1956. ASSESSEE IS A 100% EXPORT ORIENTED UNIT AN D IS REGISTERED UNDER THE SOFTWARE TECHNOLOGY PARKS OF IN DIA (STPI) I.T.A. NOS.128 & 216 /HYD/2016 :- 2 -: SCHEME OF THE MINISTRY OF INFORMATION TECHNOLOGY, GOVE RNMENT OF INDIA. HYUNDAI MOTOR INDIA LTD., ITAELF IS A SUBSIDI ARY OF HYUNDAI MOTOR COMPANY, KOREA [ASSOCIATED ENTERPRISE (AE)] 2.1. ASSESSEE IS INVOLVED IN PROVIDING SUPPORT SERV ICES IN CONNECTION WITH CAE/CAD MODELING AND ITERATIVE SIMULATI ON. IT RECEIVES THE BASIC DESIGN FROM ITS GROUP COMPANY WITH RESPECT TO CAD MODELING AND MAKES A 3D CAD MODELING DATA OF VEH ICLE COMPONENTS USING CAD SOFTWARE TOOLS. ASSESSEE IS A R OUTING SUPPORT SERVICE PROVIDER AND IT ASSUMES LESS THAN NORM AL RISK ASSOCIATED WITH CARRYING OUT SUCH BUSINESS. THE INTERNA TIONAL TRANSACTIONS REPORTED BY ASSESSEE ARE AS UNDER S.NO. NAME OF THE ASSOCIATED ENTERPRISE NATURE OF THE INTERNATIONAL TRANSACTIONS AMOUNT IN RS. 1. HYUNDAI MOTOR COMPANY, KOREA ENGINEERING/CONSULTING ENGINEERING SERVICES/ IT ENABLED SERVICES (ITES) 43,57,37,674 2. KIA M OTOR CORPORATION, KOREA 20,52,60,386 3. HYUNDAI AUTOEVER CORPORATION, KOREA PURCHASE OF COMPUTERS 2,64,56,224 PURCHASE OF SECURITY EQUIPMENT 64,667 ANNUAL LICENSE FEE FOR SOFTWARE 98,95,527 PURCHASE OF COMPUTER SOFTWARE 23,07,715 REIMBURSE MENT OF EXPENSES 11,08,347 4. HYUNDAI MOTOR COMPANY, KOREA REIMBURSEMENT OF EXPENSES 2,72,10,590 3. ASSESSEE HAS SELECTED SEVEN COMPANIES AS COMPAR ABLES IN ITS TRANSFER PRICING DOCUMENTATION WHOSE ARITHMETIC M EAN WAS ARRIVED AT 7.35% AS AGAINST THE MARGIN OF ASSESSEE AT 9.02%. AS ASSESSEE HAS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIA TED I.T.A. NOS.128 & 216 /HYD/2016 :- 3 -: ENTERPRISE [AE], A REFERENCE U/S. 92CA WAS MADE TO THE TRANSFER PRICING OFFICER [TPO] FOR DETERMINING ARMS LENGTH P RICE [ALP]. THE TPO VIDE HIS ORDER DT. 30-09-2015 DETERMINED THE ADJU STMENT IN ALP AT RS. 11,92,51,438/-. IN DOING SO, THE TPO REJEC TED ASSESSEES TP STUDY AND HAS SELECTED HIS OWN FILTERS AND AFTER I SSUING SHOW CAUSE NOTICE TO ASSESSEE, HAS SELECTED THIRTEEN COMPAR ABLE COMPANIES WHOSE ARITHMETIC MEAN WAS DETERMINED AT 25.7 3%. AFTER PROVIDING THE WORKING CAPITAL ADJUSTMENT, THE ADJ USTED ARITHMETIC MEAN WAS DETERMINED AT 24.32%. ON THE OPERATI NG COST OF RS. 65.81 CRORES, THE SAID ADJUSTMENT WAS PROPOSED. THE COMPARABLES SELECTED BY THE TPO AND THE MARGINS ARE A S UNDER: S.NO COMPANY NAME UNADJUSTED MARGINS AY. 2011-12 (%) 1. ACCENTIA TECHNOLOGIES LTD., 29.29 2. ACROPETAL TECHNOLOGIES LIMITED 15.57 3. COSMIC GLOBAL LIMITED 9.81 4. CROSSDOMAIN SOLUTIONS PVT. LTD., 25.04 5. E4E HEALTHCARE 16.60 6. ECLERX SERVICES LTD., 69.78 7. INFORMED TECHNOLOGIES LTD., 9.24 8. INFOSYS BPO 18.85 9. JEEVAN SCIENTIFIC TECHNOLOGIES LTD., 28.93 10. JINDAL INTELLICOME LTD., 13.54 11. MASTIFF TECH PVT LTD., 21.78 12. MICROGENTIC SYSTEMS LTD., -0.22% 13. TCS E-SERVE LTD., 76.28 ARITHMETIC MEAN 25.73 4. ACCORDINGLY, A DRAFT ASSESSMENT ORDER WAS MADE. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, ASSESSEE APPR OACHED THE DISPUTE RESOLUTION PANEL [DRP]-1, BANGALORE AND DRP VIDE ITS ORDER DT. 03-11-2015, DIRECTED TO DETERMINE THE ALP AC CORDING TO ITS DIRECTIONS. THE DRP HAS EXCLUDED CERTAIN COMPARAB LES LIKE INFOSYS BPO, ACROPETAL TECHNOLOGIES LTD., JEEVAN SCIENTIFIC I.T.A. NOS.128 & 216 /HYD/2016 :- 4 -: TECHNOLOGIES LTD., E4E HEALTHCARE, TCS E-SERVE LTD., AND MASTIFF TECH PVT LTD. IT ALSO GAVE CERTAIN OTHER DIRECTIONS. RE VISED ALP ADDITION WAS DETERMINED AT RS. 10,39,16,986/- AND AS SESSMENT ORDER HAS BEEN PASSED ACCORDINGLY. ASSESSEE IS AGG RIEVED ON THE ABOVE SAID TP ADJUSTMENT AND ALSO ON TWO OTHER CORPOR ATE ISSUES, WHEREAS REVENUE IS AGGRIEVED ON THE DIRECTIONS OF THE DRP EXCLUDING CERTAIN COMPARABLES. 5. THESE ISSUES WERE DISCUSSED IN DETAIL IN THIS ORD ER, AFTER CONSIDERING THE ARGUMENTS OF THE LD. COUNSEL FOR ASSE SSEE AND LD. CIT-DR AND ALSO PERUSING THE WRITTEN SUBMISSIONS PLACE D BY ASSESSEE AND REVENUE. IT IS TO BE PLACED ON RECORD TH AT ON COMPLETION OF HEARING ON 27-09-2016, LD. CIT-DR WANTE D TO FILE WRITTEN SUBMISSIONS FOR WHICH TIME WAS PERMITTED UP TO 0 5-10- 2016. HOWEVER, VIDE LETTER DT. 04-10-2016, THE OFFICE OF THE CIT-DR SOUGHT FURTHER TIME OF ANOTHER TWO WEEKS TO FURNISH, WHE REAS THE JCIT(TP) WANTED TIME UP TO SECOND WEEK OF NOVEMBER, 20 16. FINALLY, THE WRITTEN SUBMISSIONS SUBMITTED BY ITO, WARD -2(3) / DCIT, TPO-2 WERE PLACED ON RECORD WITH A COVERING LE TTER DT. 11-11- 2016. IN THE WRITTEN SUBMISSIONS, THE OFFICERS HAVE R EITERATED THEIR SUBMISSIONS AS CONSIDERED BY THE TPO AND THE DRP ONLY . ASSESSEES APPEAL IN ITA NO. 128/HYD/2016: 6. AGGRIEVED ON THE ORDERS OF THE DRP/TPO, ASSESSEE HAS RAISED VARIOUS GROUNDS RUNNING FROM 1 TO 20 AND AN A DDITIONAL GROUND GROUND NO. 16A ON WORKING CAPITAL ADJUSTMENT W HICH HAS ARISEN CONSEQUENT TO THE DIRECTIONS OF THE DRP IN THE FIN AL ORDER. I.T.A. NOS.128 & 216 /HYD/2016 :- 5 -: 7. LD. COUNSEL AT THE TIME OF ARGUMENTS HAS SUBMITTED THAT GROUND NOS. 1, 2, 3 & 20 ARE GENERAL IN NATURE AL ONG WITH GROUND NOS. 13 TO 15. GROUND NO. 16 PERTAINS TO ADJUS TMENT OF (+/-) 5% AS PROVIDED IN SECOND PROVISO TO SECTION 92C (1) OF THE ACT. GROUND NOS. 17 TO 19 PERTAINS TO CORPORATE ISSUES. TRANSFER PRICING ISSUES : 8. THE TP ISSUES ARE COVERED FROM GROUND NO. 4 TO 12 AND ADDITIONAL GROUND NO. 16A WHICH ARE CONSIDERED AS UN DER: GROUND NO. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE AO/DRP ERRED IN CONSIDERING THE UPFRONT FE E AMOUNTING TO RS. 6,31,227 PAID FOR OBTAINING THE LOAN FOR CAPITAL PU RPOSE AS A PART OF OPERATING COST, WHILE COMPUTING THE NET MARGIN OF T HE APPELLANT UNDER TRANSACTIONAL NET MARGIN METHOD ('TNMM'). 8.1. THE FACTS LEADING TO THE ABOVE IS THAT THE TPO HAS CONSIDERED OTHER FINANCE CHARGES OF RS. 6,31,227/- A S OPERATING COST. IT WAS CONTENDED THAT THESE CHARGES ARE IN THE NATU RE OF UP- FRONT FEES FOR OBTAINING LOAN WHICH WAS USED FOR CAPI TAL PURPOSES HENCE, THE SAME SHOULD NOT BE CONSIDERED AS OPERATING IN NATURE. THE DRP HAS DIRECTED THE AO TO VERIFY FROM THE COMPUTATI ON OF TOTAL INCOME AS TO WHETHER THE ABOVE EXPENSES HAVE BEEN DISALLOWED TREATING THE SAME AS CAPITAL IN NATURE AND IF SO, DIRECTING THE AO TO REDUCE THE SAME FROM THE OPERATING C OST. THE DRP ALSO DIRECTED THAT IF IT IS CLAIMED AND ALLOWED AS REVENUE EXPENDITURE, IT HAS TO BE CONSIDERED AS PART OF OPERATI NG COST. 8.2. AFTER CONSIDERING THE SUBMISSIONS BY ASSESSEE A ND REVENUE, WE ARE OF THE OPINION THAT THERE IS NO NEED TO INTERFERE I.T.A. NOS.128 & 216 /HYD/2016 :- 6 -: WITH THE DIRECTIONS OF THE DRP ON THE ISSUE. WHETHER TH E UP-FRONT FEES PAID IS PART OF THE OPERATING COST OR NOT IS A FAC TUAL MATTER TO BE VERIFIED AND THEREFORE, THE GROUND DOES NOT DESERVE ANY MERIT AT THIS END. ACCORDINGLY, THE SAME IS REJECTED. GROUND NO.5. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE AO/DRP ERRED IN ACCEPTING THE FOLLOWING CO MPARABLE COMPANIES AS SELECTED BY THE TPO: A) ACCENTIA TECHNOLOGIES LIMITED; B) ECLERX SERVICES LIMITED; AND C) CROSSDOMAIN SOLUTIONS PRIVATE LIMITED. GROUND NO. 6 . THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE AO/DRP ERRED IN NOT FOLLOWING THE ORDER OF HON'BLE INCOME TAX APPELLATE TRIBUNAL IN APPELLANT'S OWN CASE FOR AY 2 008-09, AY 2009-10 AND AY 2010-11. 9. ASSESSEE IS CONTESTING THE SELECTION OF THE FOLLOWIN G THREE COMPANIES: I) ACCENTIA TECHNOLOGIES LIMITED; II) ECLERX SERVICES LIMITED; AND III) CROSS DOMAIN SOLUTIONS PRIVATE LIMITED. 9.1. ASSESSEE HAS OBJECTED TO THE ABOVE COMPANIES STATI NG THAT THEY ARE FUNCTIONALLY DIFFERENT BUT DRP HAS REJECTE D THEM. 9.2. LD. COUNSEL SUBMITTED THAT EACH OF THE COMPANY CANNOT BE SELECTED FOR THE FOLLOWING REASONS: I) ACCENTIA TECHNOLOGIES LIMITED ; 9.3. IT WAS SUBMITTED THAT ACCENTIA TECHNOLOGIES LIMITED CANNOT BE CONSIDERED AS A COMPARABLE BASED ON THE FUN CTIONAL DISSIMILARITY AS THE SAID COMPANY IS INTO DIVERSIFIED OUTSOURCING SERVICES. IT HAS RELIED ON ANNUAL REPORT FOR AY. 201 0-11 SHOWING I.T.A. NOS.128 & 216 /HYD/2016 :- 7 -: THAT ASSESSEE IS HAVING MULTI LOCATION, DIVERSIFIED KNO WLEDGE PROCESS OUTSOURCING COMPANY AND ALSO IT HAS PRODUCTS S UCH AS INSTAKARE AND INSTAWEB WHICH MAKES THE COMPANY A PRODUCT BASED COMPANY AS WELL. NOT ONLY THAT, IT WAS ALSO SUB MITTED THAT THERE WAS NO SEGMENTAL INFORMATION PROVIDED BY THE ACC ENTIA TECHNOLOGIES LIMITED IN ITS ANNUAL REPORT AND MARGIN CALCULATED WAS DONE AT OVER ALL ENTITY LEVEL, WHEREAS IT WAS INVO LVED IN VARIOUS ACTIVITIES LIKE MEDICAL TRANSCRIPTION, BILLING AND COLL ECTIONS AND INCOME FROM CODING ETC. IT WAS ALSO FURTHER SUBMITTED TH AT THERE ARE EXTRAORDINARY EVENTS DURING THE YEAR LIKE ACQUIRIN G COMPANIES IN USA SUCH AS GSR PHYSICIANS BILLING SERVICES INC , GSR SYSTEMS INC AND DENMED INC. IT WAS ALSO SUBMITTED THAT THE SAID COMPANY HAS SHOWN ABNORMAL GROWTH PATTERN DUE TO ACQUISITION AN D IS A SUPER NORMAL PROFIT COMPANY. IT ALSO HAS INTELLECTUAL PROPERTY RIGHTS AND ACCORDINGLY, FUNCTIONALLY DIFFERENT FROM A SSESSEE- COMPANY. 9.4. IT WAS SUBMITTED THAT IN THE CASE OF EXEVO INDIA PV T. LTD., VS. ITO IN ITA NO.907/DEL/2016 (AY.2011-12) DT. 25-07- 2016, THE ABOVE SAID COMPANY WAS EXCLUDED FROM THE IT ES CATEGORY. LIKE-WISE, IT IS ALSO EXCLUDED IN ORANGE B USINESS SERVICES FOR AY. 2011-12 ON ACCOUNT OF FUNCTIONAL DIF FERENCES, GOOD WILL AND EXTRAORDINARY EVENTS. IT WAS FURTHER SUBMITTED THAT THE ABOVE COMPANY WAS ALSO REJECTED IN ASSESSEES OWN C ASE FOR AY. 2008-09 TO 2010-11. 9.5. LD. DR, HOWEVER, RELIED ON THE ORDERS OF THE T PO AND DRP TO SUBMIT THAT COMPANY IS A COMPARABLE ONE. I.T.A. NOS.128 & 216 /HYD/2016 :- 8 -: 9.6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PER USED THE DETAILS PLACED ON RECORD. THERE IS JUSTIFICATION IN ASSESSEES CONTENTIONS AS THE ABOVE SAID COMPANY IS INVOLVED IN MULTIFARIOUS ACTIVITIES INCLUDING PRODUCTS AND IPR RIGHTS. CONSEQU ENTLY, IT CANNOT BE CONSIDERED AS FUNCTIONALLY SIMILAR TO ASSES SEE-COMPANY WHICH IS CATEGORISED AS A KPO COMPANY, BEING IN ENGI NEERING BUSINESS PROCESS SERVICES. THE CO-ORDINATE BENCH IN THE CASE OF EXEVO INDIA PVT. LTD., VS. ITO IN ITA NO.907/DEL/2016 (AY.2011- 12) DT. 25-07-2016 (SUPRA) HAS CONSIDERED THIS COMPAR ABLE AND EXCLUDED BY STATING AS UNDER: ACCENTIA TECHNOLOGIES LTD. 4.1. LD.TPO CONSIDERED THIS AS A COMPARABLE. ASSESS EE OBJECTS TO THE COMPATIBILITY OF THIS COMPANY IS DUE TO FUNCTIONAL INCOMPATIBILITY. LD.AR SUBMITTED THAT THIS COMPANY WAS HAVING SUPERNORMAL PROFIT AND IS ENGAGED IN PROVIDING KPO SERVICES WHICH IS DISTINCT FROM THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE BEFORE US. HE HAS PLACED RELIANCE UPON THE DECISION OF COORDINATE BENCHES OF THIS TRIBUNAL IN THE CASE OF M/S.CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD . VS. DCIT IN ITA NO. 1961/H/2011 AND SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD., IN ITA NO. 1316/BANG/2012, WHEREIN THE DISSIMILARITIES BET WEEN KPO SERVICES AND BPO SERVICE HAS BEEN DRAWN UP. HE FURTHER CONTE NDED SIMILAR VIEW HAS BEEN UPHELD BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD., VS. CIT IN ITA 10 2/2015. 6.2. LD. DR, HOWEVER, REFERRED TO EXTRACTS FROM THE LD.TPO'S ORDER TO SUBMIT THAT ACCENTIA TECHNOLOGIES LTD. IS COMPARABLE WITH ASSESSEE. THE LD. DR RELIED UPON ORDER DATED 27.04.2015 PASSED BY HON'BL E DELHI HIGH COURT IN THE CASE OF CHRIS CAPITAL INVESTMENT VERSUS DCIT RE PORTED IN I.T.A.NO. NO.417/2014, WHEREIN HON'BLE DELHI HIGH COURT HAS H ELD THAT: '.... THE MERE FACT THAT AN ENTITY MAKES HIGH / EXTREME LY HIGH PROFITS / LOSSES DOES NOT IPSO FACTO, LEAD TO ITS EXCLUSION FROM THE LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINATION OF ALP. IN SUCH CIRCUMSTANC ES ENQUIRY UNDER RULE 10B(3) OUGHT TO BE CARRIED OUT, TO DETERMINE AS TO W HETHER THE MATERIAL DIFFERENCES BETWEEN THE ASSESSEE AND THE SAID ENTITY CAN BE ELIMINATED. UNLESS SUCH DIFFERENCES CANNOT BE ELIMINATED, THE ENTITY SHOU LD BE INCLUDED AS A COMPARABLE.' I.T.A. NOS.128 & 216 /HYD/2016 :- 9 -: 6.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PU RSUING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT FUNCTIONALLY, THIS COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS FOR HEALTHCARE. IT IS SUBMITTED BY THE LD.AR THAT ACCENTIA TECHNOLOGIES LTD IS ENGAGED INT O DIVERSIFIED ACTIVITIES SUCH AS KNOWLEDGE PROCESS OUTSOURCING(KPO), LEGAL P ROCESS OUTSOURCING(LPO), DATA PROCESS OUTSOURCING(DPO), HI GH END SOFTWARE SERVICES. IT IS SUBMITTED BY THE LD.AR THAT SEGMENT AL INFORMATION IN RESPECT OF THIS COMPANY IS NOT AVAILABLE. WE FIND THAT THE LD. TPO HAD ADOPTED THIS COMPANY AS A COMPARABLE AS THE LD. TPO IS OF T HE VIEW THAT THE SERVICES RENDERED BY THIS COMPARABLE ARE IN THE NAT URE OF BPO OR BACK OFFICE SERVICES AND THAT NOTHING HE IS EARNED FROM SALE OF PRODUCTS. WE HAVE PERUSED THE ANNUAL REPORTS OF THIS COMPANY AND HAVE OBSERVED THAT ACCENTIA OWNED A BRAND AND GOODWILL ON ACCOUNT OF ACQUISITION/AMALGAMATION OF A DEFENDANT IN FORCE. F URTHER IT IS OBSERVED THAT THIS COMPANY IS PROVIDING SERVICES IN THE FIEL D OF MEDICAL TRANSCRIPTION BILLING AND COLLECTIONS INCOME FROM CODING ETC FOR WHICH COMPLETE SEGMENTAL INFORMATION ARE NOT AVAILABLE. IN OUR CONSIDERED OPINION THIS COMPANY IS FUNCTIONA LLY DISSIMILAR TO THAT OF THE ASSESSEE. ACCORDINGLY WE DIRECT THE LD. TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. ACCORDINGLY, RESPECTFULLY FOLLOWING THE ABOVE, WE DI RECT THE AO/TPO TO EXCLUDE THE ABOVE COMPANY FROM THE LIST OF COMPARABLES. II) ECLERX SERVICES LIMITED ; 9.7. IT WAS SUBMITTED THAT THIS COMPANY IS A KNOWLEDGE PROCESS OUTSOURCING COMPANY AND AS PER THE ANNUAL RE PORT OF THE COMPANY, IT IS ENGAGED IN THE PROVISION OF SERVICES I N BUSINESS UNITS OF FINANCIAL SERVICES AND SALE AND MARKETING SU PPORT. IT WAS ALSO FURTHER SUBMITTED THAT THERE WAS AN EXTRAORDINARY EV ENTS AS A SUBSIDIARY COMPANY OF ECLERX SERVICES LIMITED WAS WO UND-UP. IT HAS SUPER NORMAL PROFITS DURING THE YEAR AND CANNOT B E COMPARED TO ASSESSEE-COMPANY. IT WAS FURTHER SUBMITTED THAT THIS CO MPANY WAS REJECTED IN ASSESSEES OWN CASE FOR AY. 2008-09 TO 2010-11 ON I.T.A. NOS.128 & 216 /HYD/2016 :- 10 -: FUNCTIONALLY DISSIMILAR AND PECULIAR ECONOMIC CIRCU MSTANCES. LD. COUNSEL RELIED ON THE ORDERS IN EARLIER YEAR. 9.8. WE HAVE PERUSED THE RIVAL CONTENTIONS AND THE DOCUMENTS PLACED ON RECORD. ASSESSEE RAISED THE SIMI LAR CONTENTIONS BEFORE THE DRP AND DRP VIDE IT ORDER IN PG. 12 HAS CONSIDERED AS UNDER: HAVING CONSIDERED THE SUBMISSION, WE ARE OF THE VI EW THAT THE ENGINEERING DESIGN SERVICES PROVIDED BY THE ASSESSE E IS COMPARABLE TO THE SERVICES PROVIDED BY THE ABOVE COMPANY. FURTHER, I N THE SAFE HARBOR GUIDELINES ISSUED BY THE CBDT, ENGINEERING DESIGN S ERVICES HAVE BEEN CONSIDERED UNDER KPO. FURTHER, THE OBJECTION IN RE GARD TO THE EXCLUSION OF THE COMPANY DUE TO HIGH PROFIT IS NOT FOUND ACCEPTA BLE DUE TO THE DETAILED REASONS GIVEN IN PARAGRAPH 2.6 OF THIS ORDER. THER E IS NO EXTRAORDINARY EVENT HAVE BEEN POINTED OUT BY THE ASSESSEE SIMILAR TO THE EARLIER YEARS IN WHICH THE HON'BLE ITAT DIRECTED TO EXCLUDE THE COMP ANY DUE TO SUCH EVENT. FURTHER, IT APPEARS TO US THAT THE HIGH END FUNCTIO N OF THE COMPANY WERE NOT BROUGHT TO THE NOTICE OF THE HON'BLE ITAT, WHIC H RESULTED IN EXCLUSION OF THE ABOVE COMPANY. ACCORDINGLY, CONSIDERING THE FU NCTION OF THE ASSESSEE, WE ARE OF THE VIEW THAT THERE IS NO INFIRMITY IN IN CLUSION OF THE ABOVE COMPANY IN COMPARABLES. 9.9. WE NOTICE THAT THIS COMPANY IS CATEGORISED AS KP O COMPANY AND THE SERVICES ARE SIMILAR BEING PROVIDED TO THE SERVICES BEING PROVIDED BY THE ABOVE COMPANY. FURTHER, AS SEE N FROM THE SO CALLED EXTRAORDINARY EVENT, IT IS NOTICED THAT THE SAID COMPANY HAS WOUND-UP A SUBSIDIARY COMPANY W.E.F. 29-03-2011. SINCE IT HAS NOT ACQUIRED THE COMPANY WHOSE TURNOVER IS INCLUDE D IN ASSESSEE-COMPANY BUT ONLY WOUND-UP A DORMANT COMPANY, WE ARE OF THE OPINION THAT IT DOES NOT HAVE ANY BEARING ON ASS ESSEES OPERATING RESULTS. SUPER NORMAL PROFITS CANNOT BE A BA SIS FOR EXCLUSION OF A COMPANY AND SINCE THE DRP HAS CONSIDE RED THE OBJECTIONS, WE AGREE WITH THE FINDINGS OF DRP. EVEN THOUGH THE COMPANY WAS EXCLUDED IN EARLIER YEAR, WE ARE OF THE OPINION THAT I.T.A. NOS.128 & 216 /HYD/2016 :- 11 -: EACH YEAR IS TO BE CONSIDERED SEPARATELY ON THE BASI S OF THE FACTS AND IN TP MATTERS THE FACTS WILL VARY FROM YEAR TO YEAR . ACCORDINGLY, WE ARE OF THE OPINION THAT THIS COMPANY C ANNOT BE EXCLUDED. TO THAT EXTENT, THE GROUND RAISED BY ASSESSE E IS REJECTED. III) CROSSDOMAIN SOLUTIONS PRIVATE LIMITED: 9.10. WITH REFERENCE TO THIS COMPANY, IT WAS SUBMITTED TH AT THE COMPANY IS FUNCTIONALLY DISSIMILAR AS IT HAS A DIV ERSIFIED KNOWLEDGE PROCESS OUTSOURCING COMPANY PROVIDING SERV ICES IN INSURANCE, HEALTH CARE, HR AND ACCOUNTING DOMAINS. COMPANY ALSO OFFERS BUSINESS EXCELLENCE MARKET RESEARCH AND DATA ANALYTICS AND IT SERVICES. IT WAS ALSO SUBMITTED THAT THE COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT ACTIVITIES. IT WAS ALS O SUBMITTED THAT IN ASSESSEES OWN CASE IN AY. 2008-09, THIS COMP ANY WAS REJECTED BY THE ITAT DUE TO THE FACT THAT IT HAS DIVERSIF IED ACTIVITY AND FURTHER, SEGMENTAL INFORMATION WAS NOT AVAILABLE. IT WAS ALSO CONTENDED THAT THE MARGIN CALCULATED BY THE TPO IS INCORR ECT AND FURNISHED A REVISED COMPUTATION. THE ISSUE WAS WHETH ER THE BAD DEBTS WERE NON-OPERATING EXPENSES AND TPO HAS NOT FOLL OWED THE GUIDELINES ON THE ISSUE. 9.11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PE RUSED THE DOCUMENTS PLACED ON RECORD. ASSESSEE HAS RAISED THE SAME OBJECTIONS BEFORE DRP WHICH GAVE A FINDING THAT THE EN GINEERING DESIGN SERVICES BEING RENDERED BY ASSESSEE ARE AKIN TO KPO SERVICES OF THE ABOVE COMPANY. IT FURTHER CONSIDERED THAT FUNCTIONAL COMPARABILITY NEED TO BE DECIDED ON THE BA SIS OF THE INFORMATION AVAILABLE IN THE ANNUAL REPORT AND NOT BAS ED ON THE I.T.A. NOS.128 & 216 /HYD/2016 :- 12 -: WEBSITE INFORMATION WHICH MAY VARY AND MAY NOT BE REL IABLE. IT WAS FURTHER NOTED THAT IN THE CASE OF M/S. EXCELLENCE DATA RESEARCH PVT. LTD., IN ITA NO. 159/HYD/2015, THE ITAT REJECTED THE OBJECTION OF ASSESSEE FOR EXCLUSION OF ABOVE COMPANY NOTING THAT THE ANNUAL REPORT REFERS ONLY SERVICE AND IS IN THE PA Y ROLL SERVICE ACTIVITY. THUS, STATING DRP REJECTED ASSESSEES OBJEC TIONS. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE SAID OBJECTIO NS AS THE VERY BASIS OF THE CONTENTIONS ARE BASED ON THE WEBSITE INFO RMATION BUT NOT ON THE ANNUAL REPORT. HOWEVER, THE DRP HAS DIREC TED THE TPO TO VERIFY THE MARGIN WHICH ASSESSEE SUBMITS THAT HAS NO T BEEN CONSIDERED. THEREFORE, WHILE RETAINING THE COMPANY AS A COMPARABLE ONE, WE DIRECT THE AO/TPO TO EXAMINE THE CO NTENTIONS WITH REFERENCE TO MARGIN COMPUTATION OF THE ABOVE SAID COMPANY AFTER GIVING DUE OPPORTUNITY TO ASSESSEE TO MAKE SUBM ISSIONS. THIS ISSUE IS CONSIDERED PARTLY ALLOWED. 9.12. IN THE RESULT, GROUNDS ARE CONSIDERED PARTLY AL LOWED. GROUND NO. 7 . THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE AO/DRP ERRED IN CONFIRMING THE TPO'S STAND OF TREATING THE PROVISION FOR BAD AND DOUBTFUL DEBTS AND BAD DEBTS WRITTEN OFF AS NON- OPERATING EXPENSES FOR THE PURPOSE OF MARGIN COMPUT ATION OF COMPARABLE COMPANIES AS SELECTED BY TPO. 10. THIS GROUND PERTAINS TO THE ISSUE OF PROVISION F OR BAD AND DOUBTFUL DEBTS AND BAD DEBTS WRITTEN OFF WHICH SHOU LD BE CONSIDERED AS OPERATING IN NATURE WHILE COMPUTING THE MARGIN OF COMPARABLE COMPANIES. THIS IS A GENERAL GROUND PER TAINING TO COMPUTATION OF MARGIN OF THE COMPARABLE COMPANIES. I T WAS THE SUBMISSION THAT THE PROVISION FOR BAD AND DOUBTFUL DE BTS AND BAD DEBTS WRITTEN OFF ARE PART OF ITS OPERATING EXPENDITURE A S AN ENTITY I.T.A. NOS.128 & 216 /HYD/2016 :- 13 -: UNDERTAKES MARKETING AND CREATES A CUSTOMER BASE FOR I TSELF. SOME OF THEM FAIL TO MAKE THE PAYMENT DUE TO WHICH THE PR OVISION IS CREATED IN THE BOOKS OF ACCOUNT. SINCE THIS PROVI SION IS IN RELATION TO THE SERVICES RENDERED, THIS EXPENDITURE IS AN OPERATIONAL EXPENDITURE. IT WAS SUBMITTED THAT THIS CONTENTION, EVEN THO UGH WAS ACCEPTED BY THE DRP IN ITS VARIOUS FINDINGS, THE TPO HAS NOT ACTED UPON THE SAME. 10.1. AFTER CONSIDERING ASSESSEES OBJECTIONS AND PE RUSING THE ORDERS OF THE DRP, WE ARE OF THE OPINION THAT THE DRP HAS CORRECTLY DIRECTED THE TPO WITH REFERENCE TO THE ABOVE ISSUE. TH E DIRECTIONS OF THE DRP ARE AS UNDER: HAVING CONSIDERED THE SUBMISSIONS, IN OUR VIEW PRO VISION FOR BAD & DOUBTFUL DEBTS IS NOT MADE IN ALL THE CASES AND F URTHER, THE PROVISION IS NOT AN ASCERTAINED LIABILITY. THEREFORE, THERE IS NO DEBATE HERE AS TO WHETHER THE PROVISIONS FOR BAD DEBTS IS OPERATING IN NATURE OR NOT? AS PER THE ACT, IT IS PERMITTED TO BE DEBITED TO THE E XPENSES. THE ISSUE HERE IS WHILE CONSIDERING COMPARATIVE ANALYSIS FOR TP PURPO SE, THE PROVISION OF THIS SORT, WHICH HAS NEXUS TO THE PERFORMANCE OF TH E ASSESSEE FOR THE PREVIOUS YEARS, IF ALLOWED TO REMAIN DEBITED TO THE BOOKS OF THE RELEVANT FY, CREATES COMPLICATIONS WHEN CONSIDERED FOR COMPA RATIVE ANALYSIS AND CREATES DISTORTIONS. THIS PROVISION AS THE NAME SU GGESTS IS A PROVISION AND ALLOWED TO BE TREATED AS BAD BY THE ASSESSEE PE R ITS OWN ASSESSMENT AND IT MAY BE REALIZABLE SUBSEQUENTLY AND REVERSED. THIS RELATES TO THE SALES ACCOUNTED IN THE EARLIER YEARS. ESSENTIALLY, THIS PROVISIONS REFERS TO THE PAST PERFORMANCE OF THE COMPANY. EVEN OTHERWIS E, FOR THE COMPARABILITY ANALYSIS, IF SUCH PROVISIONS ARE EXCL UDED FROM THE TESTED PARTIES AS WELL AS THE COMPARABLES, THE ERROR IN TH E MARGINS OF THE RELEVANT YEAR ARE TAKEN CARE OF. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE APPROACH OF THE TPO. HOWEVER, IT IS NOTICED BY US THAT IN THE CASE OF JINDAL INTELLICOM LTD., ON PERUSAL OF THE ANNUAL REPORT OF THE COMPAN Y, IT IS NOTICED THAT THE TPO HAS NOT REDUCED THE PROVISION FOR BAD & DOUBTFU L DEBTS OF RS. 79,35,297/- FROM THE OPERATING COST. CONSIDERING T HE SAME, WE DIRECT THE AO TO REWORK THE MARGIN OF THE ABOVE COMPANY. I.T.A. NOS.128 & 216 /HYD/2016 :- 14 -: WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DIRECTIO NS OF THE DRP. HOWEVER, TPO IS DIRECTED TO RE-WORKOUT THE M ARGINS CONSIDERING THAT ANNUAL REPORT OF EACH OF THE COMPANI ES WHICH ARE BEING OBJECTED TO BY ASSESSEE. AO/TPO IS DIRECTED AC CORDINGLY. THE GROUND IS CONSIDERED ALLOWED. GROUND NO. 8 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE AO/DRP ERRED IN EXCLUDING THE FOLLOWING CO MPANIES, VIZ., A. E4E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED ; B. MASTIFF TECH PRIVATE LIMITED. GROUND NO. 9 . THAT THE AO/DRP ERRED IN EXCLUDING THE COMPANIES WITHOUT PROVIDING ANY SHOW CAUSE NOTICE OR A REASON ABLE OPPORTUNITY OF BEING HEARD TO THE APPELLANT, COMPLETELY DISREGARDI NG THE PROVISIONS OF THE ACT AND IN UTTER DISREGARD TO THE PRINCIPLES OF NAT URAL JUSTICE. GROUND NO. 10 . THAT THE AO/DRP ERRED IN EXCLUDING THE COMPANIES NOT OBJECTED, WHEN THE AO/TPO HAD ALREADY EXAMINED AND DECIDED THE ISSUES BASED ON THE FACTS AND MATERIAL AVAILABLE ON RECORD. 11. AS CAN BE SEEN FROM THE GROUNDS, THE TWO COMPANI ES ARE EXCLUDED BY THE DRP, EVEN THOUGH THESE ARE NOT OBJE CTED TO BY ASSESSEE AND REVENUE ALSO HAS RAISED OBJECTIONS IN TH EIR GROUNDS. CONSIDERING THAT TPO HAS INCLUDED THEM AS COMPARABLE COMPANIES AND ASSESSEE HAS NOT OBJECTED TO THEM AND ALSO ON THE FACT THAT REVENUE IS RAISING THE GROUND ON THE ISSUE BEFORE US, WE ARE OF THE OPINION THAT DRP HAS WRONGLY EXCLUDED THE ABOVE TWO C OMPANIES ON THE REASON OF INCONSISTENCY IN ACCOUNTING AND HUG E VARIATION IN THE MARGIN DUE TO UNCERTAINTY OF THE RECEIVABLES. THES E CANNOT BE CONSIDERED AS A VALID REASON FOR EXCLUDING THE COMP ANY WHEN ALL OTHER FILTERS HAVE BEEN COMPARED AND ACCEPTED BY THE TPO. IN VIEW OF THIS, WE MODIFY THE ORDER OF THE DRP AND DIRECT THE A O/TPO TO CONSIDER THESE COMPANIES AS COMPARABLE COMPANIES. H OWEVER, IF I.T.A. NOS.128 & 216 /HYD/2016 :- 15 -: THERE IS ANY OBJECTION WITH REFERENCE TO THE MARGINS A S CONSIDERED IN GROUND NO. 7 WITH REFERENCE TO INCLUSION OF BAD A ND DOUBTFUL DEBTS/BAD DEBTS WRITTEN OFF, THE TPO IS DIRECTED TO WORK OUT THE CORRECT MARGIN AFTER GIVING DUE OPPORTUNITY TO ASSESSE E. GROUNDS OF ASSESSEE ARE ALLOWED. GROUND NO. 11. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE OR IN LAW, AO/DRP ERRED IN CONFIRMING THE REJECTION OF FOLLOWI NG COMPARABLE COMPANIES, AS REJECTED BY THE TPO: A) MICROLAND LIMITED; B) R SYSTEMS INTERNATIONAL LIMITED; C) ACCUSPEED ENGINEERING LIMITED; AND D) CSS TECHNOLOGY LIMITED. 12. THIS GROUND PERTAINS TO REJECTION OF COMPARABLES SELECTED/PROPOSED BY ASSESSEE. IN THIS GROUND, ASSE SSEE IS REQUESTING FOR INCLUSION OF THE FOLLOWING FOUR COMPA NIES SELECTED BY IT. I. MICROLAND LIMITED; II. R SYSTEMS INTERNATIONAL LIMITED; III. ACCUSPEED ENGINEERING LIMITED; AND IV. CSS TECHNOLOGY LIMITED. THE DETAILED SUBMISSIONS ARE AS UNDER: I. MICROLAND LIMITED ; 12.1. IT WAS SUBMITTED THAT MICROLAND LIMITED IS FUNCTION ALLY COMPARABLE TO THAT OF ASSESSEE. IT QUALIFIES QUANTITATI VE FILTERS APPLIED BY THE TPO INCLUDING DIFFERENT FINANCIAL YEAR ENDING FILTERS. IT WAS ALSO SUBMITTED THAT TPO HIMSELF HAS CHOSEN THE C OMPANY FOR AY. 2009-10. IT PROVES THAT THE COMPANY SATISFIED TH E PERSISTENT I.T.A. NOS.128 & 216 /HYD/2016 :- 16 -: LOSS MAKING FILTER APPLIED BY THE TPO. HENCE, OUGHT TO HAVE ACCEPTED. 12.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT DRP HAS CORRECTLY GAVE A FINDING THAT THIS COMPANY IS NOT COMPARABLE TO ASSESSEE-COMPANY. THE FINDINGS OF THE DRP ARE AS UNDER: HAVING CONSIDERED THE SUBMISSION, ON PERUSAL OF TH E ANNUAL REPORT, IT IS NOTICED FROM SEGMENT REPORTING THAT THE REVEN UE FROM IT ENABLED SERVICE SEGMENT IS RS. 2,73,94,000/- AS AGAINST THE REVENUE FROM INFRASTRUCTURE MANAGEMENT SERVICES OF RS. 26,12,95, 000/- AND THEREFORE, THE COMPANY FAILS THE REVENUE EARNING FILTER APPLIE D BY THE TPO. FURTHER, IT IS ALSO NOTICED THAT THE COMPANY IS ENGAGED IN I T INFRASTRUCTURE MANAGEMENT SERVICES AND TAKES SUPPORT SERVICES WHIC H ARE NOT COMPARABLE WITH THE FUNCTION OF THE ASSESSEE COMPAN Y AND THEREFORE, THE ABOVE COMPANY IN OUR VIEW CANNOT BE RETAINED AS A C OMPARABLE. SINCE THE TURNOVER IS VERY SMALL IN THE IT ENABLED SE RVICES AGREEMENT, WE AFFIRM THE FINDINGS OF THE DRP AND REJEC T THE ASSESSEES CONTENTIONS. II. R SYSTEMS INTERNATIONAL LIMITED ; 12.3. IT WAS SUBMITTED THAT THIS COMPANY WAS SELECTED B Y THE TPO IN THE EARLIER YEAR AND HENCE, THIS COMPANY SHOUL D BE SELECTED AS COMPARABLE. IT WAS FURTHER SUBMITTED THAT TPO EXCLUDE D THE COMPANY ON THE BASIS OF DIFFERENT FINANCIAL YEAR END ING WHICH WAS UPHELD BY THE DRP. IT WAS CONTENDED THAT IF THE COMPANY IS HAVING FINANCIAL YEAR, DATA AVAILABLE IN THE PUBLIC FORUM CAN BE ADJUSTED FOR THE FINANCIAL YEAR ENDING 31-03-2011. T HEN, THIS COMPANY CAN BE CONSIDERED AS A COMPARABLE. ASSESSE E RELIED ON THE CO-ORDINATE BENCH DECISION IN THE CASE OF TECHBOOK S INTERNATIONAL PRIVATE LIMITED (ITA NO. 240/DEL/2015) AND ALSO THE I.T.A. NOS.128 & 216 /HYD/2016 :- 17 -: DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MCKINSEY KNOWELDGE CENTRE INDIA PVT. LTD., IN ITA NO. 217/2014 DT. 27-03-2015 FOR THE PROPOSITION THAT IF FROM THE AVA ILABLE DATA ON RECORD, THE RESULTS FOR THE FINANCIAL YEAR CAN REAS ONABLY BE EXTRAPOLATED THEN, THE COMPARABLE CANNOT BE EXCLUDED SO LELY ON THE GROUND THAT COMPARABLES HAVE DIFFERENT FINANCIAL Y EAR ENDINGS. 12.4. SINCE THE OBJECTION OF ASSESSEE IS VALID, WE D IRECT THE AO/TPO TO EXAMINE AFRESH THIS COMPARABLE AND TO VERIF Y WHETHER THE COMPARABLES SATISFY OTHER FILTERS, THEN SELECT THE COMPANY AS COMPARABLE. AO/TPO IS DIRECTED ACCORDINGLY. III. ACCUSPEED ENGINEERING LIMITED ; 12.5. IT WAS SUBMITTED THAT ACCUSPEED ENGINEERING LIM ITED IS ENGAGED IN THE PROVISION OF ENGINEERING CONSULTANCY S ERVICES WHICH WERE FUNCTIONALLY COMPARABLE TO THE APPELLANT. IT WAS SUBMITTED THAT THE COMPANY IS ENGAGED IN DESIGN AND DETAILED ENGI NEERING FOR INSTRUMENTATION FOR VARIOUS PROJECTS AND RELIED ON THE ANNUAL REPORT FOR THE YEAR ENDING 2009-10. THE DRP HOWEVER, NOTICED THAT THIS COMPANY HAS ONLY EMPLOYEE COST OF 1.98 CRORES W HICH IS LESS THAN 25% AND THUS FAILS THE EMPLOYEE COST FILTER. IT RE LIED ON THE CO-ORDINATE BENCH DECISION IN THE CASE OF NAVISITA IN DIA PVT. LTD., IN ITA NO. 5329/DEL/2012. THE DRP ALSO RELIED ON T HE JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIO NS PVT LIMITED VS. CIT IN ITA NO 102/2015 DT 10-08-2015 TO COME TO A FINDING THAT ASSESSEE IS NOT A COMPARABLE COMPANY. W E ALSO NOTICE THAT THE SAID COMPANY IS FUNCTIONALLY DIFFERENT. AS S EEN FROM P & L ACCOUNT, REVENUES INCLUDE SALES AND SERVICES. CONS EQUENTLY, IN THE ABSCNE OF ANY SEGMENTAL INFORMATION, IT CANNOT BE C ONCLUDED I.T.A. NOS.128 & 216 /HYD/2016 :- 18 -: THAT THE SAID COMPANY IS COMPARABLE COMPANY TO ASSESS EE WHICH IS IN ITES PROVIDING ENGINEERING SERVICES. WE ARE OF THE OPINION THAT THE TPO/DRP HAS RIGHTLY EXCLUDED THE COMPANY AS FUNCTI ONALLY DISSIMILAR. ASSESSEES CONTENTIONS ARE REJECTED. IV. CSS TECHNOLOGY LIMITED: 12.6. WITH REFERENCE TO THIS COMPANY, IT WAS SUBMITTED TH AT CSS TECHNOLOGY LIMITED IS ENGAGED IN PROVISION OF IN FORMATION TECHNOLOGY ENABLED SERVICES WHICH IS FUNCTIONALLY C OMPARABLE TO ASSESSEE. IT WAS NOTICED FROM THE ORDER OF THE DRP THA T THE SAID COMPANY FAILS EXPORT EARNING FILTER AS THE EXPORT TURNO VER WAS 91.41 LAKHS AS AGAINST DOMESTIC TURNOVER OF RS. 13.33 CRORES. WE DO NOT SEE ANY REASON TO DIFFER FROM THE FINDINGS OF THE DRP. ACCORDINGLY, WE ARE OF THE OPINION THAT TPO/DRP HAS RI GHTLY EXCLUDED THE ABOVE COMPANY. IN THE RESULT, THE GROUND IS PARTLY ALLOWED. 13. GROUND NO. 12 PERTAINS TO THE ISSUE OF ADJUSTMENT WHICH SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTIO NS. THE GROUND IS AS UNDER: GROUND NO. 12 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE O R IN LAW, AO/DRP HAS ERRED IN MAKING THE ADJUSTMENT BY CONSID ERING TOTAL REVENUE OF THE COMPANY WITHOUT APPRECIATING THAT THE TRANSF ER PRICING ADJUSTMENT SHOULD BE RESTRICTED ONLY TO THE VALUE OF INTERNATI ONAL TRANSACTIONS WITH THE AE. 13.1. IT WAS SUBMITTED THAT THE ADJUSTMENT SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTION AND ASSESSEE HAS FURNISHED THE SEGMENTAL REPORT REPORTING TO THE TPO. AS SESSEE RELIED ON THE FOLLOWING CASE LAW: I.T.A. NOS.128 & 216 /HYD/2016 :- 19 -: I. SAVEN TECHNOLOGIES LTD. VS. ACIT (ITA NO. 1456/HYD/ 2010); II. DCIT VS. M/S. FIRESTONE INTERNATIONAL (P) LTD (ITA NO 4520/MUM/2011); AND III. DCIT VS. M/S. FEDERAL MOGUL BEARING INDIA LTD (ITA NO. 1255/MUM/2014; 13.2. IN PRINCIPLE, WE AGREE WITH ASSESSEES CONTENTI ONS THAT THE ALP ADJUSTMENT SHOULD ONLY BE RESTRICTED TO INTERNATI ONAL TRANSACTIONS AND NOT TO THE ENTIRE TURNOVER OF ASSESSEE. HOWEVER, THIS REQUIRES VERIFICATION BY THE AO/TPO. THEREFORE, WE DIRECT THE AO/TPO TO VERIFY AND RESTRICT THE ADJUSTMENT ONLY TO THE INTERNATIONAL TRANSACTIONS. GROUND IS CONSIDERED ALLOW ED FOR STATISTICAL PURPOSES. WORKING CAPITAL ADJUSTMENT GROUND NO. 16A : THE APPELLANT SUBMITS THAT NEGATIVE WORKING CAPITAL ADJUSTMENT, IF ANY, RESULTING FROM THE EXCLUSION OR INCLUSION OF THE COMPANIES MENTIONED IN GROUNDS NO 5, 6, 7, 8, 9, 10 AND 11, SHOULD NOT BE MADE WHILE COMPUTING THE ARM'S LENGTH MARGIN UND ER THE PROVISIONS OF THE INCOME-TAX ACT, 1961. 14. THIS IS AN ADDITIONAL GROUND RAISED BY ASSESSEE CONSEQUENT TO THE ORDERS OF THE DRP. EVEN THOUGH TPO HAS GIVEN POSITIVE WORKING CAPITAL ADJUSTMENT, CONSEQUENT TO DRP OR DER EXCLUDING CERTAIN COMPARABLE SELECTED, THE ADJUSTMENT R ESULTED IN NEGATIVE WORKING. THIS GROUND BEING LEGAL IN NATURE W AS ADMITTED. IT WAS SUBMITTED THAT NEGATIVE WORKING CAPITAL ADJUSTMENT SH OULD NOT BE MADE IN ITS CASE, AS ASSESSEE IS FULLY FUNDED BY THE AO AND DOES NOT BEAR ANY WORKING CAPITAL RISK. ASSESSEE SUB MITS THAT THE NEGATIVE WORKING CAPITAL ADJUSTMENT CANNOT BE MADE IN THE CASE OF CAPTIVE SERVICES PROVIDER. RELIANCE WAS PLACED ON T HE DECISION OF THE ITAT HYDERABAD BENCH IN THE CASE OF ADAPTEC (INDIA ) P. LTD., I.T.A. NOS.128 & 216 /HYD/2016 :- 20 -: VS. ACIT IN ITA NO. 206/HYD/2014 (AY. 2009-10) DT. 2 5-03-2015 WHEREIN IT WAS HELD THAT NEGATIVE WORKING CAPITAL ADJUSTM ENT SHOULD NOT BE MADE IN THE CASE OF CAPTIVE SERVICE PROV IDER. 14.1. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT ASSESSEE HAS A VALID GROUND. IN THE CAS E OF ADAPTEC (INDIA) P. LTD., VS. ACIT IN ITA NO. 206/HYD/2014 (A Y. 2009-10) DT. 25-03-2015 (SUPRA), THE CO-ORDINATE BENCH HAS CON SIDERED THE ISSUE OF NEGATIVE WORKING CAPITAL AND HELD AS UNDER: 10. GROUND NO.8 PERTAINS TO THE ISSUE OF NEGATIVE WORKING CAPITAL. AS BRIEFLY STATED ABOVE, AFTER ARRIVING AT THE ARIT HMETIC MEAN OF ALL COMPARABLES AT 22.03%, THE A.O. WORKED OUT NEGATIVE WORKING CAPITAL ADJUSTMENT OF 3.22% THEREBY, MAKING ARMS LENGTH PRI CE AT 25.25%. EVEN THOUGH, DRP REFUSED TO INTERFERE WITH THE OBJECTION S OF THE ASSESSEE IN ITS ORDER, WE WERE INFORMED THAT DRP HAS DIRECTED THE T PO/A.O. NOT TO MAKE ANY NEGATIVE WORKING CAPITAL ADJUSTMENT IN SOME OF THE CASES IN THE NEXT ASSESSMENT YEAR, IN THE CASES OF MARKET TOOLS RESEA RCH P. LTD., AND MEGA SYSTEMS WORLDWIDE INDIA P. LTD., ASSESSEE PLACED ON RECORD COPIES OF ORDERS OF DRP. IN THAT DRP CONSIDERED THE ISSUE AND DIRECTED THE TPO AS UNDER : '14. GROUND NO.11 : NEGATIVE WORKING CAPITAL ADJUST MENT - MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT WITHOUT APPRECIATING THE F ACT THAT THE COMPANY DOES NOT BEAR ANY WORKING CAPITAL RISKS. ON THIS ISS UE, THE ASSESSEE SUBMITTED AS UNDER : 'THE LEARNED TPO DETERMINED THE ALP FOR THE INTERNATIO NAL TRANSACTIONS WITH A.ES BY MAKING A NEGATIVE WORKING CAPITAL ADJUSTMEN T FOR THE DIFFERENCES IN WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPANIE S CONSIDERED AS COMPARABLES. THE ASSESSEE DOES NOT AGREE WITH THE LEAR NED TPO AS : THE COMPANY DOES NOT BEAR ANY WORKING CAPITAL RIS K SINCE IT IS BEEN FULLY FUNDED BY IT'S A.E. FROM ITS INCEPTION AND HAS NO W ORKING CAPITAL CONTINGENCIES. THE COMPANY HAS NEVER TAKEN ANY LOANS TILL DATE F ROM THE DATE OF INCORPORATION NOR HAS INCURRED ANY EXPENSE FOR MEET ING THE WORKING CAPITAL REQUIREMENT.' I.T.A. NOS.128 & 216 /HYD/2016 :- 21 -: WE HAVE GONE THROUGH THE SUBMISSIONS AND THE ORDER OF THE TPO. THE ASSESSEE PLEADED THAT THE DRP HAS ACCEDED SUCH A PL EA IN SOME OTHER CASE. ON EXAMINATION, WE FIND THAT THE DRP, HYDERAB AD IN THE CASE OF CORDYS SOFTWARE INDIA P. LTD., FOR A.Y. 2008-09 IN ITS DIRECTIONS DATED 03.08.2012 HAS GIVEN A FINDING AS UNDER : '7.7. 4 THUS, WORKING CAPITAL ADJUSTMENT IS MADE FOR THE TIME VALUE OF MONEY LOST WHEN CREDIT TIME IS PROVIDED TO THE CUSTOMERS. THE APPLICANT IS NOT AN ENTREPRENEUR BUT A CAPTIVE SERVICE PROVIDER. ITS EN TIRE FUNDING NEEDS ARE PROVIDED BY THE A.E. THIS BEING SO, THE APPLICANT DOES NOT STAND TO LOSE ANYTHING AS IT IS COMPENSATED ON A TOTAL COST PLUS B ASIS. THE TPO PROBABLY WAS CARRIED AWAY BY THE LARGE AMOUNT OF RECEIVABLES APP EARING IN THE BOOKS OF THE APPLICANT. BUT THE APPLICANT IS RUNNING ITS BUSINES S WITHOUT ANY WORKING CAPITAL RISK WHILE COMPARABLE COMPANIES HAVE SUCH A R ISK FOR THEM. IF AT ALL ANY WORKING CAPITAL ADJUSTMENT IS TO BE MADE TO T HIS SI TUATION, ONLY A POSITIVE ADJUSTMENT HAS TO BE MADE TO THE COMPARABLES SO THAT T HEY ARE BROUGHT ON PAR WITH THE APPLICANT. IN VIEW OF THE SAME, THE PANEL DIRE CTS 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 NEGATIVE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPA RABLES SHALL NOT BE MADE.' 11. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THA T ASSESSEE'S CASE BEING SIMILAR, THERE IS NO NEED FOR MAKING ANY NEGATIVE W ORKING CAPITAL ADJUSTMENT WHEN ASSESSEE DOES NOT CARRY ANY WORKING CAPITAL RISK. IN FACT, TPO SHOULD HAVE DONE NECESSARY WORKING CAPITA L ADJUSTMENT TO THE PROFITS OF THE SELECTED COMPARABLES SO AS TO MAKE T HEM COMPARABLE TO THE ASSESSEE. IN VIEW OF THIS, WE DIRECT THE TPO NO T TO MAKE NEGATIVE WORKING CAPITAL ADJUSTMENT. RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DECISION , WE DIRECT THE AO/TPO NOT TO MAKE ANY NEGATIVE WORKING CAP ITAL ADJUSTMENT. SINCE SOME OF THE COMPARABLES ARE EXCLUDE D AND SOME ARE DIRECTED TO BE VERIFIED/ INCLUDED, THE TPO/ AO IS DIRECTED TO WORK OUT THE ADJUSTMENT AFRESH. CORPORATE ISSUES : 15. GROUND NO. 17 PERTAINS TO THE ISSUE OF NON-SETTIN G OFF OF UNABSORBED DEPRECIATION. THE GROUND IS AS UNDER: I.T.A. NOS.128 & 216 /HYD/2016 :- 22 -: GROUND NO. 17. THE AO ERRED BY NOT SETTING OFF THE UNABSORVED DEPRECIATION OF AY 2008-09 AND AY 2010-11 AMOUNTING TO RS. 83,16,472 AVAILABLE FOR SET OFF UNDER SECTION 32 OF THE ACT F ROM THE CURRENT YEAR'S TAXABLE INCOME UNDER REGULAR PROVISIONS OF THE ACT AS COMPUTED IN THE ASSESSMENT ORDER DATED 28 DECEMBER 2015. 15.1. IT WAS SUBMITTED THAT EVEN THOUGH THE DRP HAS DIREC TED THE AO TO VERIFY THE RECORD AND ALLOW THE SET-OFF OF DEPRECATION, THE AO HAS NOT FOLLOWED THE DIRECTIONS. LD. DR HOWEVER, S UBMITTED THAT THIS IS A MATTER OF VERIFICATION OF RECORD. 15.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT AO HAS NOT FOLLOWED THE DIRECTIONS OF THE DR P. DRP VIDE PARA 3 IN PAGE 26 HAS CLEARLY DIRECTED THE AO T O VERIFY THE RECORDS AND CONSIDER THE SUBMISSIONS MADE IN ACCORDA NCE WITH THE PROVISIONS OF THE ACT. AO IN THE ORDER ITSELF HAS STATED THAT ASSESSEE FILED REVISED RETURN OF INCOME ON 30-03-201 3 REVISING THE TOTAL INCOME TO RS. 18,18,817/- AFTER SET-OFF OF UNABS ORBED DEPRECIATION OF EARLIER YEARS. HOWEVER, WHILE COMPU TING THE INCOME, HE HAS NOT STARTED FROM THE INCOME RETURNED, BUT HAS STARTED FROM INCOME FROM PROFITS AND GAINS OF BUSINESS AND ADDED INCOME FROM OTHER SOURCES AND THE ARMS LENGTH ADJUSTME NT IGNORING THE SET-OFF OF UNABSORBED DEPRECIATION. WE DIRECT THE AO/TPO TO FOLLOW THE DIRECTIONS OF THE DRP AND ALLOW TH E UNABSORBED DEPRECIATION AS PER THE PROVISIONS OF THE A CT. GROUND IS ACCORDINGLY CONSIDERED ALLOWED. 16. GROUND NOS. 18 & 19 PERTAINING TO LEVY OF INTERE ST U/S. 234A, 234B & 234D. THE GROUNDS ARE AS UNDER: I.T.A. NOS.128 & 216 /HYD/2016 :- 23 -: GROUND NO. 18: THE AO HAS ERRONEOUSLY LEVIED INTEREST UNDER SECTI ON 234A THOUGH THE ASSESSEE HAS FILED ITS RETURN OF IN COME WITHIN DUE DATE SPECIFIED IN SECTION 139(1) OF THE ACT. GROUND NO.19 : THAT THE CONSEQUENTIAL EFFECT SHOULD BE GIVEN TO THE LIABILITY OF INTEREST UNDER SECTION 234B AND 234D. 16.1. THIS BEING CONSEQUENTIAL, WE DIRECT THE AO TO FO LLOW THE PROVISIONS OF THE ACT, PRINCIPLES OF LAW ON THE BAS IS OF THE TOTAL INCOME COMPUTED AFTER GIVING EFFECT TO THIS ORDER. GRO UNDS ARE ACCORDINGLY CONSIDERED ALLOWED. 17. IN THE RESULT, THIS APPEAL OF ASSESSEE IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. REVENUES APPEAL IN ITA NO. 216/HYD/2016 : 18. THIS APPEAL IS AGAINST THE ORDER OF THE DRP IN W HICH THE FOLLOWING THREE GROUNDS ARE RAISED: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE HON'BLE DRP WAS JUSTIFIED IN REJECTING COMPANIES ON THE GRO UND OF FUNCTIONAL DIFFERENCE WHEN THE TAXPAYER HAS NOT CONSIDERED THE VERTICALS & HORIZONTALS (CATEGORIZING COMPARABLES. THE TPO HAS ALSO NOT GONE INTO THE VERTICALS/HORIZONTALS OF THE COMPARABLES. THE DRP FAILED TO CONSIDER THAT THE MAIN SEARCH STRATEGY OF THE TAXPAYER AS WELL AS THE TPO HAS BEEN TO IDENTIFY THE COMPANIES WHICH ARE ENGAGED IN THE ITE S. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE HON'BLE DRP WAS JUSTIFIED IN REJECTING INFOSYS BPO ON GROUN D OF HIGH TURNOVER HENCE, IT DOES NOT INFLUENCE THE NET MARGINS OF THE COMPANY. 3. FORWARD CONTRACTS ARE PART AND PARCEL OF OPERATI ONS OF THE COMPANY AND GAIN OR LOSS ARISING OUT OF THE SAME IS OPERATIONS IN NATURE HENCE, IT DOES NOT INFLUENCE PROFIT ORIGIN. THUS T HE DRP ERRED IN ITS DECISION OF FORWARD CONTRACTS INFLUENCE THE PROFIT MARGIN OF THE COMPANY. I.T.A. NOS.128 & 216 /HYD/2016 :- 24 -: 18.1. AS CAN BE SEEN FROM THE ABOVE GROUNDS, THEY AR E NOT VERY CLEAR ON WHAT COMPARABLES THE ISSUES ARE RAISED BUT THE ONLY COMPARABLE WHICH WAS SPECIFICALLY MENTIONED IN GROUN D NO. 2 IS WITH REFERENCE TO THE INFOSYS BPO LTD. 18.2. WE WERE INFORMED BY THE LD. DR THAT THE GROUND NO. 3 PERTAINS TO THE TWO COMPARABLES WHICH ARE CONTESTED IN THE GROUND NOS. 8, 9 AND 10 (HEREIN ABOVE IN ASSESSEES APPEAL ) WHICH WERE EXCLUDED BY THE DRP, WHEN NEITHER TPO NOR ASSESSEE OB JECTED TO THEIR INCLUSION. SINCE THE GROUND RAISED IN ASSESSEE S APPEAL AT GROUND NOS. 8, 9 10 COVERS THE GROUND NO. 3 IN REVEN UES APPEAL AND SINCE THOSE GROUNDS WERE ALLOWED, WE TREAT THIS CON TENTION OF REVENUE ALSO AS ALLOWED. 18.3. COMING TO GROUND NO. 1, THERE IS NO SPECIFIC OBJECTION WITH REFERENCE TO COMPANIES WHICH ARE REJECTED AND A CCEPTED ON THE PRINCIPLES THAT TPO HAS NOT GONE INTO THE VERTICALS & HORIZONTALS OF THE COMPARABLES. EVEN THOUGH THE SAID CONCEPTUAL C ONTENTION MAY BE CORRECT GENERALLY, BUT AS SEEN FROM THE ORDER OF THE DRP, THEY HAVE VERY CLEARLY SPECIFIED WHY A PARTICULAR COM PANY IS NOT FUNCTIONALLY COMPARABLE. WE DO NOT SEE ANY REASON TO INTERFERE WITH SUCH FINDINGS. THUS THE ISSUE DOES NOT ARISE FROM THE ORDER OF DRP. ACCORDINGLY, GROUND NO. 1 IS REJECTED. 18.4. COMING TO GROUND NO. 2, WE NOTICE THAT DRP HAS EXCLUDED BOTH INFOSYS BPO LTD., AS WELL AS TCS E-SERVE LTD. REVENUE IS OBJECTING ONLY ONE, INFOSYS BPO THAT IT WAS WRONGLY EXCLUDED ON THE GROUND OF HIGH TURNOVER AS IT DOES NOT INFLUENCE THE NET MARGINS OF THE COMPANY. HOWEVER, THERE ARE OTH ER REASONS I.T.A. NOS.128 & 216 /HYD/2016 :- 25 -: ALSO ON WHICH THE DRP HAS EXCLUDED THE ABOVE COMPANY . THE DRPS ORDER WITH REFERENCE TO INFOSYS BPO LTD., IS AS UNDER: 2.13 GROUND OF OBJECTION 13 INFOSYS BPO LIMITED (INFOSYS OR THE COMPANY) HA S TO BE REJECTED BASED ON THE PRESENCE OF THE BRAND THEREBY WARRANTING ADJ USTMENTS ARE REQUIRED TO ELIMINATE THE IMPACT OF BRAND ON PROFITS EARNED. SINCE IT MIGHT NOT BE POSSIBLE, INFOSYS IS TO BE REJECTED AS A COMPARABLE . INFOSYS BPO LIMITED (INFOSYS OR THE COMPANY) HA S TO BE REJECTED BASED ON THE FACT THAT IT IS AN OVERSIZED COMPANY AS COMP ARED TO THE TESTED PARTY. THE LEARNED TPO ERRED BY NOT REJECTING INFOSYS AS C OMPARABLE, AS EXCLUSION OF INFOSYS AS COMPARABLE IS UPHELD BY JUR ISDICTIONAL ITAT IN ASSESSEE OWN CASE (ITAT NO.255/HYD/2014 &ITA.NO.185 0/HYD/2012) FOR AY 2009-10 AND AY 2008-09. IT IS SUBMITTED THAT THE COMPANY SHOULD BE EXCLUDED DUE TO THE FOLLOWING REASONS :- FUNCTIONAL DISSIMILARITY - NICHE AREAS THAT INFOSYS SPO IS BACKED BY INFOSYS TECHNOLOGIES LIMITED WHICH SUPPORTS INFOSYS SPO TO OFFER AN INTEGRATED IT-BPO DELIVERY MODEL DESIGNED FOR 'ONE STOP SHOP' SOLUTION MODEL WHICH H ELPS MANAGING THE ENTIRE OUTSOURCING OPERATIONAL CHAIN OF IT AND PROC ESS MANAGEMENT SERVICES. INFOSYS BPO'S BUSINESS SERVICE CENTRE PER FORMS THE BACK OFFICE FUNCTIONS FOR DISPERSED BUSINESS UNITS AND LOCATION S. A PICTORIAL PRESENTATION OF BACK OFFICE FUNCTIONS IS DISPLAYED BELOW: PRESENCE OF BRAND THAT WHILE CONSIDERING INFOSYS BPO AS A COMPARABLE COMPANY, DUE CONSIDERATION SHOULD BE GIVEN TO THE FACT THAT INFO SYS SPA POSSESSES BRAND VALUE WHICH WILL TEND TO INFLUENCE THE PRICING POLI CY AND THEREBY DIRECTLY IMPACTING THE MARGINS EARNED BY INFOSYS SPA. AS SEEN FROM AN EXTRACT OF THE SCHEDULE 200200 (SEL LING AND MARKETING EXPENSES) TO THE PROFIT & LOSS A/C OF THE ANNUAL RE PORT FOR THE FY 2010-11 OF INFOSYS SPA, INDICATES THAT IT IS DISTINGUISHED FROM THE ASSESSEE DUE TO THE PRESENCE OF BRAND AND ITS ASSOCIATED VALUE. IT IS ALSO SUBMITTED THAT INFOSYS SPA HAS IDENTIFIE D THE PRESENCE OF BRAND IN ITS SERVICES/ PRODUCTS AND HAS GOODWILL AS A PAR T OF ITS FIXED ASSETS - I.T.A. NOS.128 & 216 /HYD/2016 :- 26 -: SCHEDULE 100600. FOLLOWING IS AN EXTRACT WHICH PROV IDES EVIDENCE TO THE FACT STATED ABOVE. IT IS ALSO SUBMITTED THAT :- INFOSYS BPO, BEING A SUBSIDIARY OF LNFOSYS LIMITE D, HAS AN ELEMENT OF BRAND VALUE ASSOCIATED WITH IT. THIS CAN BE FURTHER CONFIRMED BY THE PRESENCE OF BRAND RELATED EXPENSES INCURRED BY INFO SYS BPO. PRESENCE OF A BRAND IS LIKELY TO COMMAND PREMIUM PRICES THAT THE CUSTOMERS ARE WILLING TO PAY FOR THE BRANDED SERVIC ES/PRODUCTS. THE ASSESSEE WISHES TO HUMBLY SUBMIT THAT THE ASSES SEE DOES NOT HAVE ANY BRAND ASSOCIATED WITH IT. HENCE THE ASSESSEE SU BMITS THAT INFOSYS SPA CANNOT BE COMPARABLE TO THE ASSESSEE. RATIO OF SUM OF ADVERTISING AND MARKETING EXPENSES TO SALES GREATER THAN 3% THE LEARNED TPO HAS FAILED TO APPRECIATE THE MARKET ING EXPENSES FILTER. SINCE INFOSYS BPO SPENDS 8.40% OF ITS SALES IN ADVE RTISEMENT, THIS HAS GENERATED SIGNIFICANT REVENUE AND CREATION OF BRAND VALUE FOR INFOSYS SPA AS THERE IS A HIGH DEGREE OF CORRELATION BETWEEN AD VERTISING AND SALES. SIZE OF THE COMPARABLE THE LEARNED TPO HAS FAILED TO APPRECIATE THE FACT T HAT THE ITES INDUSTRY IS CLEARLY DEMARCATED BASED ON SIZE AND THAT ASSESSEE CANNOT BE COMPARED TO COMPANIES HAVING SALES DISPROPORTIONATE TO THE S ALES GENERATED BY THE ASSESSEE. IF ONE WERE TO LOOK AT THE TURNOVER/SIZE OF THE 13 COMPARABLE COMPANIES SELECTED BY THE LEARNED, TPO AND PLOT IT ON A SCATTERED DIAGRAM, THEN ONE COULD NOTICE THAT BOTH INFOSYS IS A CLEAR OUTLIER. THE SCATTERED DIAGRAM OF THE 13 COMPARABLE COMPANIES IS PRESENTED BELOW: THE ASSESSEE RELIED ON THE DECISION OF THE HON'BLE I TAT, HYDERABAD IN ASSESSEE'S OWN CASE FOR A.Y. 2009-10 IN WHICH THE H ON'BLE ITAT HELD THAT 'WE ARE IN AGREEMENT WITH THE CONTENTIONS OF THE CO MPARABILITY ON TURNOVER RATIO OF ASSESSEE WITH THIS COMPANY ON THE GROUND T HAT ASSESSEE'S TURNOVER IS ABOUT RS.15.79 CRORES, AS AGAINST TURNO VER OF RS.1016 CRORES OF THE INFOSYS. WE ARE ALSO OF THE VIEW THAT OTHER CONTENTIONS WITH REGARD TO THE BRAND VALUE AND BRAND BUILDING EXERCISE, HAV ING HUGE ASSET BASE, CAN BE CONSIDERED TO ARRIVE AT THE CONCLUSION THAT INFOSYS BPO IS FUNCTIONALLY NOT SIMILAR TO THAT OF ASSESSEE. INFOS YS BPO STANDS ON ITS OWN AS AN EXCLUSIVE BPO OF THE INFOSYS TECHNOLOGIES AND IN EARLIER YEARS, GENERALLY INFOSYS BPO IS EXCLUDED IN MANY OF THE CA SES. CONSIDERING THESE ASPECTS, WE ARE OF THE OPINION THAT EVEN THOUGH THE PROFITS OF THE INFOSYS BPO LTD. IS REASONABLE AND NO SUPER PROFITS ARE EAR NED, BECAUSE OF ITS BIG I.T.A. NOS.128 & 216 /HYD/2016 :- 27 -: BRAND VALUE THIS COMPANY HAS TO BE EXCLUDED ON THE GROUNDS OF FUNCTIONAL DISSIMILARITY ON FAR ANALYSIS. THEREFORE, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY.' THE HON'BLE I TAT HAS TAKEN SIMILAR VIEW IN A.Y. 2008-09 ALSO. HAVING CONSIDERED THE SUBMISSION, EVEN THOUGH WE AR E IN AGREEMENT OF THE EXCLUSION OF THE ABOVE COMPANY, DUE TO TURNOVER , HOWEVER, RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE ITAT ON FUNCT IONAL DIFFERENCES, INCLUDING THE INFLUENCE OF THE BRAND VALUE ON THE M ARGINS, WE DIRECT THE A.O. TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARAB LES. 18.5. IN VIEW OF THE DETAILED REASONS GIVEN BY THE DR P IN EXCLUDING THE COMPANY, NOT ONLY ON THE BASIS OF THE H IGH TURNOVER BUT ALSO WITH REFERENCE TO THE BRAND VALUE ETC., WE DO N OT SEE ANY REASON TO INTERFERE WITH THE FINDINGS OF THE DRP. IN FA CT THE GROUND RAISED IS NOT COVERING ALL THE ISSUES ON WHICH THE D RP HAS REJECTED THE ABOVE SAID COMPANY. IN VIEW OF THIS, WE DO NOT FI ND ANY MERIT IN CONSIDERING THE REVENUES GROUND. ACCORDINGLY, GROUND 2 IS REJECTED. 19. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWED. 20. TO SUM-UP, ASSESSEES APPEAL IS PARTLY ALLOWED F OR STATISTICAL PURPOSES AND REVENUES APPEAL IS PARTLY ALLOWED. IF STAY ORDERS ARE PENDING IF ANY, THEY ARE DEEMED TO HAVE BEEN VACATED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DECEMBER, 2016 SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMB ER HYDERABAD, DATED 21 ST DECEMBER, 2016 TNMM I.T.A. NOS.128 & 216 /HYD/2016 :- 28 -: COPY TO : 1. HYUNDAI MOTOR INDIA ENGINEERING PRIVATE LIMITED, SURVEY NO. 5/2 & 5/3, OPPOSITE HITEC CITY RAILWAY STATION (MMTS), HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-2(3), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATI ON, INCOME TAX TOWERS, HYDERABAD. 5. THE ADDL. COMMISSIONER OF INCOME TAX (TRANSFER P RICING), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.