Kanexa Technologies Private Limited, Hyderabad V. Dy.CIT, Circle-2(1),., Hyderabad

ITA 243/HYD/2014

• Counselvise Citation: 24322514 RSA 2014
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 17-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: H SRINIVASULU
• Keywords: Related party transaction; Capital asset; Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts; Capital receipt
• Section: 92C; 143(3); 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 243/HYD/2014 ASSESSMENT YEAR 2009-10 M/S. KENEXA TECHNOLOGIES PVT. LTD., HYDERABAD PAN: AACCK1647A VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2(1) HYDERABAD APPELLANT BY: SRI H. SRINIVASULU RESPONDENT BY: SRI P. SOMA SEKHAR REDDY DATE OF HEARING: 28.08.2014 DATE OF PRONOUNCEMENT: 14.11.2014 O R D E R O R D E R O R D E R O R D E R PER ASHA VIJAYARAGHAVAN, JM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2(1), HYD ERABAD DATED 05.12.2013 FOR ASSESSMENT YEAR 2009-10. 2. FACTS OF THE CASE ARE THAT M/S. KENEXA TECHNOLOGIES PVT. LTD., THE ASSESSEE, PROVIDES SOFTWARE AND SERVICES TO ITS ASSOCIATED ENTERPRISE (AE) WHICH INCLUDES SOFTWARE DEVELOPMENT , RESEARCH, MODIFICATION, REUSE, RE-ENGINEERING, MAINTENANCE, C ODING ETC. THE TAXPAYER IS A WHOLLY OWNED SUBSIDIARY OF KENEXA TEC HNOLOGIES INC., USA. FOR THE IMPUGNED ASSESSMENT YEAR I.E., 2009 -10, THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.9.2009 DECLARING I NCOME OF RS. 32,58,320 UNDER NORMAL PROVISIONS OF INCOME-TAX ACT , 1961 AFTER CLAIMING DEDUCTION U/S. 10A OF THE ACT. THE CASE W AS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) U/S. 92C(1) WITH PRI OR APPROVAL OF CIT- II. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OF FICER/TPO THAT THE ASSESSEE CARRIED OUT THE ECONOMIC ANALYSIS AND HAS SUMMARISED IT AS UNDER: IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 2 SR. NO. NATURE OF INTERNATIONAL TRANSACTION MAM PLI MARGIN OF TAXPAYER MARGIN OF COMPARE- ABLES 1. SOFTWARE DEVELOPMENT, SOFTWARE SUPPORT AND RELATED SERVICES. TNMM OP/TC 25.34% 9.80% 3. IT WAS SUBMITTED THAT AFTER APPLYING CERTAIN FILTER S, THE ASSESSEE HAS SHORT-LISTED AROUND 13 COMPARABLES, AR ITHMETIC MEAN PLI (OP/TC) WAS COMPUTED AT 9.80% S AGAINST THE PLI OF THE TAXPAYER AT 25.34%. ACCORDINGLY, IT WAS STATED THAT THE TRANSA CTIONS PERTAINING TO PURCHASE AND SALE ARE AT ARM'S LENGTH. THEREFORE, NO ADJUSTMENT IS PROPOSED TO THE TRANSACTIONS PERTAINING TO OPERATIO NS. 4. FURTHER IT WAS SUBMITTED THAT AS PER THE AUDITED ST ATEMENT OF ACCOUNTS THE FINANCIALS OF THE ASSESSEE ARE AS UNDE R: DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 42,69,56,940 OPERATING COST 40,01,48,084 OPERATING PROFIT 2,68,08,856 OP/OR (%) 6.28 OP/OC (%) 6.70 5. THE TPO REJECTED THE TRANSFER PRICING (TP) STUDY OF THE ASSESSEE ON THE FOLLOWING GROUNDS: 'IN THE CASE OF TAX PAYER, THE TPO IS MAINLY CONCER NED REGARDING WHETHER THE INFORMATION OR DATA USED IN T HE COMPUTATION OF THE ARM'S LENGTH PRICE IS RELIABLE O R CORRECT. IT IS CLEAR FROM THE PROVISIONS OF SEC. 9 2C(3)(C) READ WITH SEC. 92CA THAT ON THE BASIS OF MATERIAL O R INFORMATION OR DOCUMENTS IN THE POSSESSION OF TPO, IF HE IS OF THE OPINION THAT THE INFORMATION OR DATA U SED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELI ABLE OR CORRECT, THE TPO MAY PROCEED TO DETERMINE THE ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS IN ACCORDANCE WITH SEC. 92C(1) AND 92C (2) ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM. TO SUM UP, THE FOLLOWING DEFECTS HAVE BEEN FOUND IN THE TP ANALYSI S CARRIED ON BY THE TAX PAYER: 1. AS PER RULE 10B(4), IT IS MANDATORY TO THE USE THE CURRENT FINANCIAL YEAR DATA I.E., THE FINANCIAL YEA R IN WHICH THE INTERNATIONAL TRANSACTIONS TOOK PLACE (FY 2008-09) BUT THE TAXPAYER DID NOT USE DATA FOR THE FY 2008-09 (I.E. ENDING WITH MARCH 31, 2009). IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 3 2. THE TAXPAYER HAS USED THE EARLIER YEAR DATA PERTAINING TO THE FYS 2006-07 AND 2007-08 BUT NO REASONS WERE GIVEN AS TO HOW THE EARLIER YEAR DATA HAS INFLUENCE OVER THE PRICE EITHER OF THE TAXPAYER OR OF THE COMPARABLE SO TO ATTRACT THE PROVISO TO RULE 10B(4). 3. THE TAXPAYER SELECTED COMPANIES SUCH AS SAGARSOFT (INDIA) LTD AND SIP TECHNOLOGIES & EXPORTS LTD WHICH HAVE CONSISTENT DECLINE IN SALES AND ARE PERSISTENTLY LOSS MAKING. 4. AS DISCUSSED ABOVE, MOST OF THE TAXPAYER'S COMPARABLES DO NOT STAND SCRUTINY OF FAR ANALYSIS. 5. SOME COMPANIES THOUGH QUALIFY ALL THE FILTERS APPLIED BY THE TAX PAYER BASED ON THE DATA PERTAINING TO THE FY 2008-09, HAVE NOT BEEN SELECTED. IN VIEW OF THE ABOVE DEFECTS AND OTHERS, THE INFORMATION AS WELL AS THE DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE AND CORREC T. THE PROVISIONS OF S. 92C(3)(C) ARE INVOKED AND THE TP DOCUMENT IS REJECTED.' 6. ON REJECTING THE TRANSFER PRICING (TP) STUDY OF THE ASSESSEE, A FRESH TP STUDY WAS CARRIED OUT BY THE TPO WITH THE FOLLOWING FILTERS: 1. COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2008-09 WERE EXCLUDED. 2. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE INCOME < RS. L CR. WERE EXCLUDED. 3. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES WERE EXCLUDED. 4. COMPANIES WHO HAVE EXPORT SALES LESS THAN 75% OF THE SAFES WERE EXCLUDED. 5. COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM THE TAXPAYER WERE EXCLUDED. 6. COMPANIES THAT ARE HAVING PECULIAR ECONOMIC CIRCUMSTANCES WERE EXCLUDED. 7. THE TPO SHARED INFORMATION OBTAINED U/S. 133(6) FRO M THE COMPARABLE COMPANIES WITH THE ASSESSEE AND ON THIS BASIS REJECTED CLAIM OF THE ASSESSEE THAT THE COMPARABLE DATA USED WAS NOT IN IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 4 PUBLIC DOMAIN. THE TPO FURTHER REJECTED THE CLAIMS OF THE ASSESSEE FOR WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT. THE TPO ALSO REJECTED THE SEGMENTAL ACCOUNTS (AE AND NON-AE SEGM ENTS) OF THE ASSESSEE WHILE COMPUTING MARGINS. THE TPO ALSO HEL D A NUMBER OF ITEMS OF INCOME OF THE ASSESSEE TO BE NON-OPERATIVE IN NATURE SUCH AS INTEREST, DIVIDEND, PROVISIONS NO LONGER WRITTEN BA CK, GAIN ON SALE OF ASSETS, INCOME FROM INVESTMENT, GAIN ON RE-VALUATIO N OF ASSETS, OTHER INCOMES PERTAINING TO OPERATIONS AND EXCLUDED THE S AME FROM OPERATING REVENUE AS WELL AS HELD A NUMBER OF EXPEN DITURES TO BE NON-RELATED TO OPERATIONS AND EXCLUDED THE SAME FRO M OPERATING EXPENSES. THE TPO ALSO HELD THAT THE FOREIGN EXCHA NGE LOSS WHICH THE ASSESSEE HAD CLAIMED AS NON-OPERATIVE TO BE RELATED TO OPERATIONS AND INCLUDED IT IN THE CALCULATIONS OF THE ASSESSEE PROFIT LEVEL INDICATOR (PLI). 8. THE TPO REJECTED THE ASSESSEE'S REQUEST TO REMOVE C ERTAIN COMPARABLES AND ADD NEW ONES AND ALSO REJECTED THE ADDITIONAL FILTERS PROPOSED BY THE ASSESSEE. THE TPO ARRIVED AT A FINAL LIST OF COMPARABLES AS UNDER: S. NO. COMPANY NAME OP/OC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 12.41 2. BODHTREE CONSULTING LTD. 68.43 3. COMP-U-LEARN TECH INDIA LTD. 28.00 4. IGATE GLOBAL SOLUTIONS LTD. 21.97 5. INFOSYS LTD. 41.34 6. KALS INF. SYSTEMS (SEG) 23.11 7. LGS GLOBAL 20.51 8. MINDTREE LTD. (SEG) 5.56 9. NEILSOFT LTD. 9.05 10. PERSISTENT SYS 18.49 11. RS SOFTWARE (INDIA) LTD. 9.99 12. R SYSTEMS INTERNATIONAL LTD. (SEG) 17.53 13. SASKEN COMMUNICATION TECHNOLOGIES LTD. 17.30 14. TATA ELEXI LTD. (SEG) 22.82 15. THINKSOFT GLOBAL 20.80 16. THIRDWARE SOLUTIONS 22.28 17. ZYLOG SYSTEMS LTD. 15.00 9. TNMM WAS CHOSEN AS THE MOST APPROPRIATE METHOD BOTH BY THE ASSESSEE AND THE TPO. FURTHER, THE ASSESSEE WA S CHOSEN AS THE TESTED PARTY AND CONTEMPORANEOUS DATA WAS USED BY T HE TPO I.E., IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 5 FY 2008-09 WITH THE PLI BEING CHOSEN AS OPERATING P ROFIT/OPERATING COST (OP/OC). THE TPO CONCLUDED BY CALCULATING THE ALP OF THE ASSESSEE'S TRANSACTIONS AS FOLLOWS: DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 48,83,00,780 OPERATING COST 40,01,48,144 OPERATING PROFIT 8,81,52,636 OP/OR (%) 18.05 OP/OC (%) 22.03 ARMS'S LENGTH PRICE 48,83,00,780 LESS: PRICE RECEIVED 42,69,56,940 ADJUSTMENTS 6,13,43,840 10. THUS, THE ARM'S LENGTH PRICE OF THE ASSESSEE IS RS. 48,83,00,780 AND THE SHORTFALL OF RS. 6,13,43,840 IS TREATED AS ADJUSTMENT U/S. 92CA OF THE ACT AND THE TOTAL INCOME OF THE ASSESSEE WIL L BE ENHANCED ACCORDINGLY U/S. 92CA(3) OF THE ACT. THUS, THE TPO PASSED THE ORDER U/S. 92CA(3) DATED 22.1.2013 LEVYING TP ADJUSTMENTS U/S. 92CA OF THE ACT OF RS. 6,13,43,840. 11. PURSUANT TO TPO'S ORDER DATED 22.1.2013 THE ASSESSI NG OFFICER PASSED THE ORDER DATED 19.3.2013 U/S. 143(3) R.W.S. 92CA(3) OF THE ACT HAVING ARRIVED AT A TOTAL INCOME OF RS. 6,46,02,160 . THE ASSESSING OFFICER MADE ADJUSTMENTS AS PROPOSED BY THE TPO AND ACCEPTED BY THE ASSESSING OFFICER AT RS. 6,13,43,840 TOWARDS AD JUSTMENT OF ALP. 12. THE ASSESSEE-COMPANY STRONGLY OBJECTED TO THE DRAFT ASSESSMENT ORDER AND FILED OBJECTIONS TO THE DRAFT ASSESSMENT ORDER PASSED U/S. 153(3) R.W.S. 144C(1) OF THE ACT BEFORE THE DRP. THE DRP CONSIDERED EACH OF THE GROUNDS OF THE ASSESSEE CONS ISTING OF 23 GROUNDS AND CONCLUDED AS FOLLOWS: 'BASED ON THE ABOVE DISCUSSION, THE DIRECTIONS OF T HE PANEL AS PER THE PROVISIONS OF S. 144C(5) OF THE ACT IS AS F OLLOW: ALL THE OBJECTIONS OF THE ASSESSEE ARE REJECTED. ' 13. AGGRIEVED, THE ASSESSEE FILED THE PRESENT APPEAL BE FORE THIS TRIBUNAL BY RAISING THE FOLLOWING GROUNDS OF APPEAL : IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 6 1. THAT THE ORDER OF THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2( I), HYDERABAD (HEREINAFTER REFERRED TO AS 'AO') IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS 'DRP'), HYDERABAD IN SO FAR AS IT IS PREJUDICIAL TO THE APPELLANT, IS CONTRARY TO LAW, FACTS AND CIRCUMSTAN CES OF THE CASE. 2. TRANSFER PRICING ADJUSTMENTS 2.1. GENERAL GROUNDS 2.1.1 THE ASSESSMENT ORDER PASSED BY THE AO UNDER SECTION 143(3) READ WITH SECTION 144C AND READ WITH THE ORDER PASSED BY THE LEARNED TRANSFER PRICING OFFICE R (HEREINAFTER REFERRED TO AS 'TPO'), UNDER SECTION 92CA(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') IS BAD IN LAW AND VOID AB - INITIO. 2.1.2 THAT THE DRP / AO ERRED BY NOT ACCEPTING THE PRICE OF INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES OF RS. 42,69,56,940 SHOWN BY T HE APPELLANT AND DETERMINING THE ARM'S LENGTH PRICE (HEREINAFTER REFERRED TO AS 'ALP') AT RS. 48,83,00, 780 AND THEREBY MAKING TRANSFER PRICING ADJUSTMENT OF R S. 6,13,43,840 TO THE TOTAL INCOME OF THE APPELLANT. 2.1.3 THAT THE DRP / AO ERRED IN REJECTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX AC T, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') READ W ITH THE INCOME-TAX RULES, 1962 (HEREINAFTER REFERRED TO AS 'THE RULES') AND CONSEQUENTLY MAKING ADJUSTMENT UNDER SECTION 92CA OF THE ACT TO THE TOTAL INCOME OF THE APPELLANT. 2.2 SEGMENTAL INFORMATION SHOULD BE CONSIDERED 2.2.1 BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO / TPO ERRED IN NOT CONSIDERING THE SEGMENTAL DETAILS PROVIDED BY THE APPELLANT AND REJECTING THE SEGMENTAL DATA IN RELAT ION TO AE & NON-AE SEGMENTS. 2.2.2 BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO/ TPO ERRED IN NOT CONSIDERING THE SEPARATE BOOKS OF ACCOUNT MAINTAINE D 2.2.3 BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO/ TPO ERRED IN ADOPTIN G IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 7 THE ENTITY LEVEL APPROACH WITHOUT CONSIDERING THE FUNCTIONAL DISSIMILARITY AMONG THE BUSINESS SEGMENT S OF THE APPELLANT FOR THE TRANSFER PRICING ANALYSIS. 2.2.4 BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO / TPO ERRED IN CONSIDERING THE TOTAL OPERATING COST UNDER THE SOFT WARE DEVELOPMENT SERVICES SEGMENT BY INCORRECTLY ASSUMIN G THAT THE NON-AE SEGMENT DID NOT ENTAIL ANY WORTHWHILE OR SUBSTANTIAL EXPENDITURE. 2.3 INCORRECT COMPUTATION OF MARGIN OF APPELLANT 2.3.1 BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO ERRED IN CONFIRMING T HE ACTION OF THE TPO IN CONSIDERING THE FOREIGN EXCHAN GE LOSS AS OPERATING THOUGH THE LOSS IS MAINLY DUE TO THE RE-INSTATEMENT OF BALANCES AT THE YEAR END AND DID NOT PERTAIN TO THE OPERATIONS OF THE APPELLANT. 2.3.2 WITHOUT PREJUDICE TO GROUND NO. 2.3.1, BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO / TPO ERRED BY TREATING THE FOREI GN EXCHANGE LOSS ON RE-INSTATEMENT OF THE ADVANCES RECEIVED FROM THE AE AS OPERATING THOUGH THE SAME I S CONSIDERED AS AN EXTRAORDINARY EVENT FOR GRANTING T HE WORKING CAPITAL ADJUSTMENT. 2.4 GRANT OF WORKING CAPITAL ADJUSTMENT 2.4.1 BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO/DRP/TPO ERRED IN NOT GRANTING THE WORKING CAPITAL ADJUSTMENT TO THE NET PROFIT MARGINS OF THE COMPARABLE COMPANIES AS PROVIDED UNDER RULE IOB(L)(E) READ WITH RULE 10B(2)(B). 2.4.2 BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED DRP / AO / TPO ERRED I N NOT ALLOWING WORKING CAPITAL ADJUSTMENT TO THE MARGINS OF THE COMPARABLE COMPANIES BY IGNORING THE FACT THAT THE APPELLANT IS A CAPTIVE SERVICE PROVID ER AND FURNISHED THE QUANTUM OF WORKING CAPITAL ADJUSTMENT. 2.5 FILTERS 2.5.1 THE LEARNED AO/ DRP ERRED IN CONFIRMING THE TPO'S STAND IN ADOPTING THE FOLLOWING FILTERS FOR SELECTION OF COMPARABLE COMPANIES, WHICH HAVE BEEN OBJECTED TO BY THE APPELLANT: IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 8 2.5.1.1 REJECTION OF COMPARABLE COMPANIES WHICH HAVE ONSITE REVENUES GREATER THAN 75% OF THE EXPORT REVENUES. 2.5.1.2. REJECTION OF COMPARABLE COMPANIES WHICH HAVE MORE THAN 25% RELATED PARTY TRANSACTIONS OF TH E TOTAL OPERATING INCOME. 2.5.1.3. REJECTION OF COMPARABLE COMPANIES WHICH HAVE DIMINISHING REVENUE /PERSISTENT LOSSES FOR THE PERIOD UNDER CONSIDERATION. 2.5.2 THE LEARNED AO/DRP ERRED IN CONFIRMING THE TPO'S STAND IN NOT CORRECTLY APPLYING THE FOLLOWING FILTERS FOR SELECTION OF COMPARABLE COMPANIES, WHIC H HAVE BEEN OBJECTED BY THE APPELLANT: 2.5.2.1 REJECTION OF COMPANIES WITH EMPLOYEE COST LESS THAN 25% OF THE TOTAL TURNOVER. 2.5.2.2 REJECTION OF COMPANIES HAVING EXPORT SALES LESS THAN 75% OF THE TOTAL SALES. 2.5.3 THE LEARNED AO/DRP ERRED IN CONFIRMING THE TPO'S STAND OF REJECTION OF KEY FILTERS APPLIED BY THE APPELLANT. 2.6 COMPARABLES 2.6.1 THE LEARNED AO/DRP ERRED IN CONFIRMING TPO'S SELECTION OF BODHTREE CONSULTING LIMITED AS A COMPARABLE COMPANY EVEN THOUGH IT FAILS THE TPO'S OWN FILTER OF REJECTION OF COMPANIES HAVING SOFTWAR E DEVELOPMENT SERVICE INCOME LESS THAN 75% OF THE TOT AL OPERATING REVENUES. 2.6.2 THE LEARNED AO/DRP ERRED IN CONFIRMING THE TPO'S SELECTION OF THE FOLLOWING FUNCTIONALLY DISSI MILAR COMPARABLE COMPANIES WITHOUT PROPER REASONS: 2.6.2.1 COMP-U-LEARN TECH INDIA LIMITED 2.6.2.2 INFOSYS TECHNOLOGIES LIMITED 2.6.2.3 'KALS INFORMATION SYSTEMS LIMITED 2.6.3 THE LEARNED AO/DRP ERRED IN ACCEPTING THE INCORRECT MARGINS OF THE FOLLOWING COMPARABLE COMPANIES AS COMPUTED BY THE TPO, WHILE DETERMINING THE ALP: 2.6.3.1 IGATE GLOBAL SOLUTIONS LTD 2.6.3.2 PERSISTENT SYSTEMS LIMITED 2.6.3.3 SASKEN COMMUNICATION TECHNOLOGIES LTD. IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 9 2.6.4 THE LEARNED AO/DRP ERRED IN CONFIRMING THE TPO'S STAND IN CONSIDERING PROVISION FOR BAD AND DOUBTFUL DEBTS AND BAD DEBTS AS NON-OPERATING EXPENSES FOR THE PURPOSE OF MARGIN COMPUTATION OF T HE COMPARABLE COMPANIES. 2.6.5 THE LEARNED AO/ DRP ERRED IN CONFIRMING THE TPO'S STAND OF REJECTING THE FOLLOWING COMPARABLE COMPANIES SELECTED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY BY INADVERTENTLY APPLYING THE EMPLOYE E COST FILTER: 2.6.5.1 CG-VAK SOFTWARE & EXPORTS LTD. 2.6.5.2 PRITHVI INFORMATION SOLUTIONS LIMITED 2.7 USE OF MULTIPLE YEAR DATA 2.7.1 THE LEARNED AO/DRP ERRED IN REJECTING THE MULTIPLE YEAR ANALYSIS FOR COMPUTING THE OPERATING MARGINS EARNED BY THE ALLEGED COMPARABLE COMPANIES. 2.8 RISK PROFILE FOR CAPTIVE SERVICE PROVIDER 2.8.1 THE LEARNED AO / DRP / TPO OUGHT TO HAVE APPRECIATED THAT MARGINS EARNED BY THE APPELLANT (BEING A CAPTIVE SERVICE PROVIDER) WERE REFLECTIVE OF THE FUNCTIONS PERFORMED AND PROPORTIONATE WITH THE RISK S ASSUMED WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE SOFTWARE DEVELOPMENT SERVICES BUSINESS OF THE APPELLANT. 2.8.2 THE LEARNED AO/DRP/TPO ERRED IN DISREGARDING THE DIFFERENCES IN RISK PROFILE OF THE APPELLANT AND THE ALLEGED COMPARABLE COMPANIES SELECTED BY HIM, BY NOT ALLOWING THE RISK ADJUSTMEN T CLAIMED BY THE APPELLANT 2.8.3 WITHOUT PREJUDICE TO GROUND NO. 2.8.2, THE LEARNED AO/DRP ERRED IN NOT GRANTING AN ADJUSTMENT OF I PER CENT WHICH WAS GRANTED BY THE JURISDICTION AL TRIBUNAL IN CASE OF HELLOSOFT INDIA PRIVATE LIMITED (ITA NO. 645/HYD/2009), WHICH IS BINDING ON THE LEARNED AO / DRP/TPO. 3. THE LEARNED DRP ERRED IN LAW AND ON FACTS BY SUMMARILY REJECTING THE APPELLANT'S OBJECTIONS AND DISREGARDING THE MATERIAL PLACED ON RECORD THEREBY NOT FOLLOWING THE PROCEDURE LAID DOWN U/S 144C(5), 144C (6) & 144C(7) OF THE ACT. IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 10 4. THE LEARNED AO ERRED IN GRANTING CREDIT IN RESPECT OF TAXES DEDUCTED AT SOURCE ('TDS') ONLY TO THE EXTENT OF RS. 18,66,654 AS AGAINST RS. 18,94,969 CL AIMED IN THE RETURN OF INCOME. 5. THE LEARNED AO/ DRP ERRED IN COMPUTATION OF INTEREST LIABILITY UNDER SECTIONS 234B AND 234C. 14. WE HAVE HEARD BOTH PARTIES. 15. GROUND NO. 1 AND 2.1 WHICH CONSISTS OF GROUND NOS. 2.1.1 UP TO 2.1.3 ARE GENERAL GROUNDS AND HENCE NEED NOT BE ADJ UDICATED. ACCORDINGLY, THESE GROUNDS ARE DISMISSED BEING GENE RAL IN NATURE. 16. GROUND NO. 2.2 IS WITH REGARD TO THE ISSUE OF SEGME NTAL INFORMATION TO BE CONSIDERED WHILE COMPUTING MARGIN OF THE ASSESSEE IN ITS TP STUDY. THE ASSESSEE HAD PROVIDED SERVICE S TO BOTH AES AND NON AES AND STATED THAT IT MAINTAINED SEPARATE BOOK S IN RELATION TO THESE SEGMENTS. ALSO THE ASSESSEE PROVIDED SEGMENTA L DATA OF AE AND NON-AE SEGMENTS FOR ITS TP STUDY. THE TPO REJECTE D THE SEGMENTAL INFORMATION WITH THE FOLLOWING OBSERVATIONS: 'THE TAXPAYER HAS PROVIDED THE SEGMENTAL INFORMATION IN ITS TP STUDY. HOWEVER, SUCH SEGMENTAL INFORMATION IS NOT AVAILABLE IN THE PUBLISHED ANNUAL REPORT. THEREFORE, THE MANNER IN WHICH THE COSTS HAVE BEEN ALLOCATED IS NOT KNOWN. UNAUDITED INFORMATION CANNOT BE TAKEN AS A BASIS TO COMPUTE THE PROFITABILITY OF THE SEGMENTS FOR TRANSFER PRICE ANALYSIS AS THE SAME IS UNRELIABLE. IT IS ALSO NOT KNOWN WHETHER THE TAXPAYER HAS MAINTAINED COST AUDIT REPORT OR NOT. EVEN OTHERWISE, IN THE ALLOCATION OF REVENUE AND EXPENSES, STILL A LOT OF ASSUMPTIONS AND PRESUMPTIONS ARE MADE IN ADDITION TO THE COST RECORDS IF ANY MAINTAINED. WHEN WE ARE UNABLE TO ARRIVE AT SEGMENTAL FINANCIALS WITHOUT GIVING ROOM FOR ANY AMBIGUITY, THEN IT IS BETTER TO GO WITH THE ENTERPRISE LEVEL MARGINS FOR THE PURPOSE OF ALP DETERMINATION UNDER THE TNMM METHOD. AT THIS JUNCTURE, IT IS ALSO NOT POSSIBLE FOR THE DEPARTMENT TO GO INTO THE MERITS OF ALLOCATION OF EACH AND EVERY TRANSACTION AND THEREBY EVALUATE WHETHER THE COST AUDIT REPORT IF ANY, REFLECTS ACCURATE PROFIT MARGINS OF THE SEGMENTS IN THE BUSINESS OF THE ASSESSEE.' IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 11 17. THE TPO ON REJECTING ASSESSEE'S SEGMENTAL INFORMAT ION HAS CONSIDERED ONLY SOFTWARE DEVELOPMENT SERVICES (SDS) INCOME OF THE ASSESSEE WHILE TAKING THE ENTIRE EXPENDITURE OF THE ASSESSEE INCLUDING NON-AE SEGMENT FOR COMPUTING ITS MARGIN. THE ASSES SEE BEFORE THE DRP RAISED GROUND NO. 13 FOR CONSIDERING ITS SEGMEN TAL DATA WHICH THE DRP DISMISSED AS FOLLOWS: 'WE HAVE GONE THROUGH THE SUBMISSIONS AND ORDER OF THE TPO. THE GROUNDS RAISED BEFORE US WERE THE SAM E GROUNDS RAISED BEFORE THE TPO. WE FIND THAT THE TP O HAD GIVEN VALID REASONS FOR COUNTERING THE ARGUMENT OF THE ASSESSEE IN THE TP ORDER. THE TPO HAS RIGHTL Y TAKEN THE REVENUES PERTAINING TO AE SEGMENT AND SINCE THE SEGMENTAL RESULTS ARE NOT AVAILABLE IN TH E AUDITED FINANCIALS, THE TPO CONSIDERED THE EXPENDITURE ON THE PRO-RATA BASIS. THIS PANEL AND THE EARLIER PANEL HAVE UPHELD THE ACTION OF THE TPO IN SIMILAR OTHER CASES AND ACCORDINGLY, WE DECLINE TO INTERFERE ON THIS GROUND.' 18. IN 3I INFOTECH LTD. VS. ITO IN ITA NO. 21/MDS/2013 DATED 7.5.2013, THE ITAT CHENNAI BENCH HELD THAT SEGMENTA L INFORMATION PROVIDED MUST BE TAKEN AND ONLY THE AE TRANSACTIONS OUGHT TO BE CONSIDERED, UNLESS IT WAS SHOWN BY THE TPO/DRP THAT THERE WERE SPECIFIC ISSUES WITH THE SAME. THE ITAT CHENNAI BE NCH HELD AS FOLLOWS: '29. WE, THUS, FIND THAT THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN NOT EXCLUDING PROFIT OR LOSS IN RESPECT OF DOMESTIC TRANSACTIONS FOR DETERMINING THE PROFIT DECLARED BY THE ASSESSEE IN RESPECT OF AE TRANSACTIONS. THEY WERE NOT JUSTIFIED IN ADOPTING THE PROFIT LEVEL ACHIEVED BY THE ASSESSEE IN RESPECT OF ALL ITS TRANSACTIONS INCLUDING DOMEST IC TRANSACTIONS AS THE PROFIT LEVEL DECLARED IN RESPEC T OF AE TRANSACTIONS. FURTHER, WE FIND THAT THE ASSESSEE HAD FURNISHED SEPARATELY ITS WORKING OF THE PROFIT DECLARED BY IT IN RESPECT OF ITS AE TRANSACTIONS BEFORE THE TPO AS WELL AS BEFORE THE DRP. THE LOWER AUTHORITIES COULD NOT POINT OUT ANY SPECIFIC DEFECT IN THE SAID WORKING OF THE ASSESSEE. AS PER THE SAID WORKING OF THE ASSESSEE, THE ASSESSEE CLAIMED TO HAVE EARNED A PROFIT LEVEL OF 34.17% OF THE COST IN RESPECT OF AE TRANSACTIONS . BEFORE US ALSO, THE LD. CIT/DR COULD NOT POINT OUT ANY SPECIFIC DEFECT IN THIS WORKING OF THE ASSESSEE . THE ONLY ARGUMENT OF THE DEPARTMENT IS THAT THE IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 12 SEGMENT-WISE WORKING MADE BY THE ASSESSEE IS NOT AUDITED. IN OUR CONSIDERED VIEW, THERE IS NO LEGAL REQUIREMENT THAT THE SEGMENT-WISE WORKING SUBMITTED BEFORE THE TPO SHOULD BE AUDITED BY THE ASSESSEE'S CA. MOREOVER, IT IS NOT OPEN TO THE REVENUE TO REJECT THE WORKING PREPARED BY THE ASSESSEE WITHOUT POINTING OUT ANY ERROR THEREIN. IN ABSENCE OF ANY ERROR BEING POINTED OUT IN THE WORKING SHOWN BY THE ASSESSEE WHEREIN IT HAS CLAIMED THAT IT HAS ACHIEVED A PROFIT LEVEL OF 34.17% OF THE COST IN RESPECT OF TRANSACTIONS WITH AE, WE HAVE NO OPTION BUT TO ACCEPT THE SAME. ON THE ABOVE FACTS, IN VIEW OF THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL QUOTED ABOVE, WE FIND THAT THE RATE OF PROFIT ACHIEVED IN OTHER COMPARABLE CASES ARE TO BE COMPARED WITH PROFIT LEVEL DECLARED BY THE ASSESSEE IN RESPECT OF ITS AE TRANSACTIONS AFTER EXCLUDING DOMESTIC TRANSACTIONS. THEREFORE, ON COMPARING THE SAME, WE FIND THAT THE PROFIT LEVEL DECLARED BY THE ASSESSEE IN RESPECT OF ITS AE TRANSACTIONS IS MORE THAN THE PROFIT LEVEL IN RESPECT OF COMPARABLE CASES FOUND BY THE TPO. IN THE ABOVE CIRCUMSTANCES, IN OUR CONSIDERED VIEW, THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN MAKING ADDITION TO THE INCOME OF THE ASSESSEE. WE, THEREFORE, DELETE THE ADDITION OF RS. 5,23,19,210/- AND ALLOW THE GROUND OF APPEAL OF THE ASSESSEE.' 19. FURTHER, THE CO-ORDINATE BENCH IN THE CASE OF FOUR SOFT LTD. VS. DCIT IN ITA NO. 1495/HYD/2010 DATED 9 TH SEPTEMBER HELD THAT ONLY AE SEGMENT TRANSACTIONS SHOULD BE CONSIDERED WHILE COMPUTING THE PLI. IN THAT CASE BAD DEBTS INCURRED BY THE ASSESS EE WERE IN RESPECT OF TRANSACTIONS WITH AE. 20. IN THE ABOVE CASE THE HYDERABAD BENCH OF THE ITAT H ELD AS FOLLOWS: '15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. FIRST, WE WILL TAKE UP THE ISSUE RELATING TO THE ADJUSTMENTS MADE BY THE ASSESSING OFFICER IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES IN THE SOFTWARE DEVELOPMENT SERVICES. IT IS THE CONTENTION OF THE ASSESSEE THAT BAD DEBTS INCURRED BY THE ASSESSE E COMPANY ARE IN RESPECT OF TRANSACTIONS, WHICH ARE N OT RELATED TO ASSOCIATED ENTERPRISES. THIS CONTENTION OF THE IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 13 ASSESSEE HAS NOT BEEN CONTROVERTED BY THE REVENUE B Y BRINGING ANY MATERIAL ON RECORD BEFORE US. IT IS TH E CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT SUCH BAD DEBTS CANNOT BE TAKEN INTO ACCOUNT FOR COMPUTING THE MARGIN OF THE ASSESSEE FROM THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES IN RES PECT OF SOFTWARE DEVELOPMENT SERVICES. THE LEARNED COUNS EL FOR THE ASSESSEE HAS ALSO FILED BEFORE US A COMPARA TIVE CHART EXPLAINING THE COMPUTATION OF NET MARGIN, EXCLUDING THE BAD DEBTS AND CLEARLY DEMONSTRATED BEFORE US THAT IF THE BAD DEBTS/REIMBURSEMENTS ARE EXCLUDED FOR THE PURPOSE OF COMPUTING THE MARGINS O N THE TRANSACTIONS RELATING TO THE ASSOCIATED ENTERPR ISES, THE NET MARGIN COMES TO 19.07%, WHICH IS WELL COMPARABLE WITH THE ARMS LENGTH MARGIN OF 19% DETERMINED BY THE TRANSFER PRICING OFFICER. IN OUR CONSIDERED VIEW, FOR COMPUTING THE NET MARGIN OF TH E ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING, ONLY THE COST RELATED TO THE TRANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE CONSIDERED AND ACCORDINGLY, W E APPROVE THAT SEGMENTAL FINANCIALS IS TO BE CONSIDER ED FOR THE PURPOSE OF ARRIVING AT THE NET MARGIN ON TH E INTERNATIONAL TRANSACTION WITH THE ASSESSEES ENTER PRISE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. IN THA T PROCESS, BAD DEBTS/REIMBURSEMENTS HAS TO BE EXCLUDE D AND SEGMENTAL PROFITABILITY HAS TO BE ADOPTED. WE FIND SUPPORT IN THIS BEHALF FROM VARIOUS DECISIONS OF THE TRIBUNAL RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE DULY FILING COPIES THEREOF IN THE PAPER-BO OK, WHICH HAVE BEEN NOTED HEREINABOVE. THAT BEING SO, THE TPO SHOULD HAVE DETERMINED THE ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS WITH ASSOC IATED ENTERPRISES CONSIDERING ONLY THE OPERATING COST ALLOCABLE TO THE ASSOCIATED ENTERPRISES SEGMENT. SI NCE THE ASSESSING OFFICER HAD NO OCCASION TO VERIFY THE VERACITY OF THE SEGMENTAL FINANCIALS PREPARED BY TH E ASSESSEE COMPANY, FOR LIMITED PURPOSE, WE DIRECT TH E ASSESSING OFFICER TO VERIFY THE SEGMENTAL FINANCIAL S PREPARED BY THE ASSESSEE COMPANY AND ADOPT THE SAME FOR ARRIVING AT THE NET MARGIN ON THE INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. WE DIRECT ACCORDINGL Y.' 21. THIS RATIO WAS APPROVED IN THE ORDER OF BRIGADE GLO BAL SERVICES PVT. LTD. IN ITA NO. 988/HYD/2011 DATED 26 .11.2012. 22. IN VIEW OF THE DECISIONS CITED ABOVE, WE SEND BACK THIS ISSUE TO THE TPO TO VERIFY WHETHER THE ASSESSEE HAD MAINTAIN ED SEPARATE BOOKS OF ACCOUNT WHICH WERE AUDITED BY STATUTORY AU DITORS OF THE IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 14 SOFTWARE DEVELOPMENT SERVICES AND, IF SO, THE TPO I S DIRECTED TO CONSIDER THE AUDITED SEGMENTAL INFORMATION AND USE ONLY THE AE SEGMENT FOR COMPUTING THE ASSESSEE'S PLI. 23. WITH RESPECT TO GROUND NO. 2.3, WITH REGARD TO INCO RRECT COMPUTATION OF MARGIN OF ASSESSEE, THE FACTS ARE TH AT FOREIGN EXCHANGE LOSS HAS BEEN CONSIDERED AS OPERATING LOSS BY THE TPO AND UPHELD BY THE DRP. IT WAS SUBMITTED BY THE LEARNED COUNSEL THAT THE LOSS HAS OCCURRED AS PART AND PARCEL OF NORMAL BUS INESS OPERATIONS OF THE ASSESSEE AND THE LEARNED COUNSEL RELIED ON THE DECISION OF TEVA INDIA (P) LTD. VS. DCIT, 44 SOT 105 (MUM). 24. WE ARE OF THE OPINION THAT THE ASSESSEE'S CASE IS D ISTINGUISHABLE AS THE DECISION RELIED ON BY THE LEARNED COUNSEL VI Z., TEVA INDIA (P) LTD. (SUPRA) DEALT WITH FOREIGN EXCHANGE GAIN ON LO AN RELATING TO ACQUISITION OF CAPITAL ASSET IN INDIA WHICH WAS TRE ATED AS ADDITION BY THE ASSESSING OFFICER AND CAPITAL RECEIPT BY THE CI T(A) AND THE FACTS IN THE INSTANT CASE ARE DIFFERENT. 25. THE CO-ORDINATE BENCH OF THE TRIBUNAL IN CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. VS. DCIT, IN IT A NO. 1961/HYD/2011 DATED 23.11.2012 HAS HELD AS FOLLOWS: 'THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA P. LTD. (SUPRA), WHILE CONSIDERING A DISPUTE OF SIMILAR NATURE, OBSERVED AS FOLLOWS- 'THE FOREIGN EXCHANGE FLUCTUATION GAINS IS NOTHING BUT AN INTEGRAL PART OF THE SALES PROCEEDS OF AN ASSESS EE CARRYING ON EXPORT BUSINESS. THE COURTS AND TRIBUNA LS HAVE HELD THAT FOREIGN EXCHANGE FLUCTUATION GAINS FORM PART OF THE SALE PROCEEDS OF EXPORTER-ASSESSEE . THE FOREIGN EXCHANGE FLUCTUATIONS INCOME CANNOT BE EXCLUDED FROM THE COMPUTATION OF THE OPERATING MARGIN OF THE ASSESSEE COMPANY.......' FOLLOWING THE AFORESAID DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL , THE HYDERABAD BENCH OF THE TRIBUNAL HELD IN THE CASE OF FOUR SOFT LTD. (SUPRA) IN THE FOLLOWING MANNER- IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 15 '16. WITH REGARD TO THE EXCLUSION OF GAIN ON ACCOUN T OF FOREIGN EXCHANGE FLUCTUATION WHILE COMPUTING THE NE T MARGIN, AS CLAIMED BY THE ASSESSEE, WE FIND THAT TH E EXCHANGE FLUCTUATION GAINS ARISE OUT OF SEVERAL FAC TORS, FOR INSTANCE, REALISATION OF EXPORT PROCEEDS AT HIG HER RATE, IMPORT DUES PAYABLE AT LOWER RATE. SINCE THE GAIN OR LOSS ON ACCOUNT OF EXCHANGE RATE FLUCTUATIO N ARISES IN THE NORMAL COURSE OF BUSINESS TRANSACTION , THE SAME SHOULD BE CONSIDERED WHILE COMPUTING THE NET MARGIN FOR THE INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES OF THE ASSESSEE. OUR VIEW IN THIS BEHALF IS FORT I FIED BY THE DECISIONS OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA LTD. SUPRA AND BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF DEUTSCHE BANK A.G. V/S. D. CIT REPORTED IN 86 ITD 431......' RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS OF T HE TRIBUNAL, AND CONSIDERING THE CONTENTION OF THE ASSESSEE THAT FOR THE ASSESSMENT YEAR 2008-09 FOREI GN EXCHANGE FLUCTUATION GAIN/LOSS HAS BEEN CONSIDERED AS OPERATING MARGIN WHILE COMPUTING THE MARGIN OF COMPARABLE COMPANIES, WE HOLD THAT EVEN FOR THE YEAR UNDER APPEAL ALSO THE SAME PRINCIPLE SHOULD BE APPLIED, AND WHILE COMPUTING THE MARGIN FOR DETERMINING THE ALP FOR THE ASSESSMENT YEAR UNDER APPEAL, THE FOREIGN EXCHANGE GAIN/LOSS HAS TO BE TA KEN AS PART OF THE OPERATING MARGIN. ... ' 26. WE, THEREFORE, ARE OF THE OPINION THAT FOREIGN EXCH ANGE LOSS IN CASE OF PROVIDING SERVICES TO AES IS TO BE CONSIDER ED AS OPERATIVE IN NATURE AND HENCE IS TO BE INCLUDED IN THE PLI CALCU LATION OF THE ASSESSEE. HOWEVER, WE NOTE THAT BEFORE US THE LEAR NED COUNSEL SUBMITTED THAT A PORTION OF THE FOREIGN EXCHANGE LO SS IS ATTRIBUTABLE TO NON-AE TRANSACTIONS AND FURTHERMORE, A PORTION O F THE SAID FOREIGN EXCHANGE LOSS PERTAINS TO ADVANCES WHICH ARE NON-OP ERATIVE IN NATURE. WE, THEREFORE, REMIT THIS ISSUE BACK TO TH E FILE OF THE TPO WITH A DIRECTION THAT ONLY FOREIGN EXCHANGE LOSS AT TRIBUTABLE TO AE TRANSACTION SHOULD BE CONSIDERED AND ALSO THAT ONLY THAT PORTION OF LOSS WHICH IS OPERATIVE IN NATURE IS TO BE INCLUDED IN THE PLI CALCULATION. THE ASSESSING OFFICER SHALL RE-WORK T HE SAME AFTER PROVIDING SUFFICIENT OPPORTUNITY TO THE ASSESSEE IN SUBSTANTIATING ITS CLAIM. IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 16 27. WITH RESPECT TO GROUND NO. 2.4, WITH REGARD TO GRAN T OF WORKING CAPITAL ADJUSTMENT, WE RELY ON THE DECISION OF DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS. DCIT, ITA NO. 120/PN/2011, DATED 4.1.2012, WHEREIN IT HAS BEEN HELD AS FOLLOW S: 'WE HAVE SO FAR ANALYSED RULE 10B(1)(E) ON ONE SIDE AND OTHER SUB-RULES IN THE CONTEXT OF TNMM AND WE HAVE ANALYSED THE NEED FOR ELIMINATION OF THE DIFFERENCE, IF ANY, IN THE COMPARABLE UNCONTROLLED TRANSACTIONS WHICH MATERIALLY AFFECT THE PROFIT MAR GIN IN THE OPEN MARKET.' 28. HENCE IN THE INSTANT CASE, WE ARE OF THE OPINION TH AT APPROPRIATE WORKING CAPITAL ADJUSTMENT IS REQUIRED TO THE MARGINS OF COMPARABLE UNCONTROLLED TRANSACTIONS TO GENERATE CR EDIBLE COMPARABLE DATA ON TRANSACTIONAL NET MARGINS SINCE THE TNMM IS APPLIED. HENCE WE SET ASIDE THIS ISSUE TO THE TPO WITH A DIRECTION TO ALLOW REQUISITE ADJUSTMENTS ON ACCOUNT OF THE IMPUG NED 'WORKING CAPITAL' WHILE DETERMINING THE MARGINS OF COMPARABL E. 29. WITH RESPECT TO GROUND NO. 2.5, WITH REGARD TO FILT ERS, THE ASSESSEE HAS OBJECTED TO THE FILTERS ADOPTED BY THE TPO SPECIFICALLY THE ONSITE REVENUES GREATER THAN 75% OF THE EXPORT REVENUES FILTER, 25% RELATED PARTY TRANSACTIONS FILTER AND DIMINISHI NG REVENUE PERSISTENT LOSSES FILTER. THE ASSESSEE HAS IN GROU ND NO. 2.5.2 HAS RAISED THE GROUND THAT THE TPO HAS NOT CORRECTLY APPLIED C ERTAIN FILTERS SUCH AS EMPLOYEES COST LESS THAN 25% OF THE TOTAL TURNOV ER AND EXPORT SALES LESS THAN 75% OF THE TURNOVER. THE ASSESSEE HAS AL SO OBJECTED TO THE FILTERS APPLIED BY THE TPO. 30. WE FIND THAT THE TPO HAS DISCUSSED ABOUT THE FILTER S IN DETAILS THEIR APPLICABILITY FROM PAGE NOS. 29 TO 41 OF THE TPO ORDER. WE FURTHER NOTE THAT THE DRP HAS ALSO SUMMARILY ACCEPT ED THE FILTERS APPLIED BY THE TPO. THEREFORE, WE DO NOT FIND ANY REASON TO DISTURB THE APPLICATION OF FILTERS AS CARRIED OUT BY THE TP O. WE, THEREFORE, DISMISS GROUND NO. 2.5.1 OF THE ASSESSEE. IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 17 31. WITH RESPECT TO GROUND NO. 2.5.2, BEING THE OBJECTI ON OF INCORRECT APPLICATION OF CERTAIN FILTERS, REJECTION OF ASSESSEE'S FILTERS BY THE TPO AND ALSO THE GENERAL GROUND OF APPEAL AGAIN ST THE ORDER OF THE TPO WITH RESPECT TO FILTERS ARE NOT ADJUDICATED AS THEY ARE GENERAL IN NATURE, SINCE WE HAVE DEALT WITH GROUND RELATING TO COMPARABILITY ANALYSIS. WE, THEREFORE, DISMISS GRO UND NO. 2.5.2 OF THE ASSESSEE HENCE GROUND NO. 2.5 OF THE ASSESSEE IS DI SMISSED. 32. WITH RESPECT TO GROUND NO. 2.6, THIS GROUND RELATES TO COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO AND G ROUND NO. 2.6.1 RELATES TO THE USE OF BODHTREE CONSULTING LTD., AS A COMPARABLE COMPANY. FOR THIS PURPOSE, WE RELY ON THE RECENT D ECISION OF BANGALORE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S . CISCO SYSTEMS (INDIA) PVT. LTD. VS. DCIT, S.P. NO. 130/BANG/2014 AND IT(TP)A NO. 271/BANG/2014 DATED 14.08.2014 WHEREIN IT WAS HELD AS UNDER: 'IN THIS REGARD, THE ID. COUNSEL FOR THE ASSESSEE H AS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. I TO, ITA NO. 7633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CASE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SER VICES (I) P. LTD., ITA NO. 4547/MUM/2012. IN THE AFORESA ID DECISIONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN THE BUSINESS OF SOFT WARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST TECHNOLOGY. TH E 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 AFF IRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FA CTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREV AILED IN A.Y. 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSULTING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS, THE FACT THAT THE ASSESSEE HAD ITS ELF PROPOSED THIS COMPANY AS COMPARABLE, IN OUR OPINION , SHOULD NOT BE THE BASIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOWN THAT THE SAID COMPANY IS A SOFTWARE PRODUC T IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 18 COMPANY AND NOT A SOFTWARE DEVELOPMENT SERVICES COMPANY.' 33. FOLLOWING THE DECISION IN THE CASE OF CISCO SYSTEMS (INDIA) PVT. LTD. (SUPRA), WE REJECT THE BODHTREE CONSULTIN G LTD., AS A COMPARABLE IN THE INSTANT CASE. HENCE GROUND NO. 2 .6.1 OF THE ASSESSEE IS ALLOWED. 34. GROUND NO. 2.6.2.. IN THIS GROUND THE ASSESSEE OBJ ECTED TO TPO SELECTION OF THREE COMPARABLE COMPANIES VIZ., C OMPU-LEARN TECH INDIA LTD., (2) INFOSYS TECHNOLOGIES LTD. AND (3) KALS INFORMATION SYSTEMS LTD., ON THE GROUND THAT THESE ARE FUNCTION ALLY DIFFERENT FROM THE ASSESSEE-COMPANY. 35. THE BANGALORE BENCH IN THE CASE OF CISCO SYSTEMS (I NDIA) PVT. LTD. (SUPRA) FOR A.Y. 2009-10 WHILE REJECTING INFOSYS SYSTEMS AS COMPARABLE HAS STATED AS FOLLOWS: '26.2 INFOSYS LTD.: AS FAR AS THIS COMPANY IS CONC ERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HA S BEEN CONSIDERED TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVICES, AS THIS COMPANY OWNS SIGNIFICANT INTANGIB LES AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IN TH IS REGARD, WE FIND THAT THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TDPLM SOFTWARE SOLUTIO NS LTD. V. DCIT, ITA NO. 1303/BANG/2012, BY ORDER DATE D 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. BEF ORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS O F TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY T HE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWAR E DEVELOPMENT SEGMENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTIO N IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 19 TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPA NY TO SUBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A MARKET LEADER IN SOFTWARE DEVELOPMENT ACTIVITIES, 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 SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT :- (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO. 227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIV E SERVICE PROVIDER WHO DOES NOT OWN ANY INTANGIBLE AN D HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS SUBMITTED THAT THIS DECISION IS APPLI CABLE TO THE ASSESSEE'S CASE, AS THE ASSESSEE DOES NOT OW N ANY INTANGIBLES AND HENCE INFOSYS TECHNOLOGIES LTD. CAN NOT BE COMPARABLE TO THE ASSESSEE; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN T HE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO. 3856 (DEL)/2010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNOLOGIES LTD. BEING A GIANT COMPANY AND MARKET LEADER ASSUMING ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSIDERED AS COMPARABLE TO CAPTIVE SERVI CE PROVIDERS ASSUMING LIMITED RISK; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOFTWARE 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 PERFORMANCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORISE D REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFO SYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPANIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 20 SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE BRAND ATTRIBUTABLE PROFIT MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFIC IENT EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTION ALLY DIS-SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HEN CE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUP RA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS Y EAR ALSO. WE ARE INCLINED TO CONCUR WITH THE ARGUMENT P UT FORTH BY THE ASSESSEE THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICA NT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAKUP OF REVEN UE FROM SOFTWARE 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 TH E PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AN D CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXCLUDED FROM T HE LIST OF COMPARABLE COMPANIES.' 36. BANGALORE BENCH IN THE CASE OF CISCO SYSTEMS (INDI A) PVT. LTD. (SUPRA) IN THE CASE OF KALS INFORMATION SYSTEM S LTD., HAS HELD AS FOLLOWS: 26.3. KALS INFORMATION SYSTEMS LTD.: AS FAR AS T HIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE U S THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPARABLE 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 TRIBUNAL: '(D) KALS INFORMATION SYSTEMS LTD. IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 21 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPORT, 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 TRIBUNAL'S DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCIT, ITA NO. ITA NO 1386/PN/10 WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: '16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES 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 COMPARABLE. 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 IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS.' BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJECTED AS A COMPARABLE. 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 IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 22 NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE, THEREFORE ACCEPT THE 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.' 37. FOLLOWING THE ABOVE DECISION IN THE CISCO SYSTEMS, WE HOLD THAT KALS INFORMATION SYSTEM SHOULD NOT BE REGARDED AS A COMPARABLE COMPANY. 38. WITH RESPECT TO COMP-U-LEARN TECH INDIA LTD., THE A SSESSEE SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DISSIMI LAR AND DIVERSIFIED IN SERVICES. FURTHER IT WAS SUBMITTED BY THE LEARN ED COUNSEL THAT THE SOFTWARE DEVELOPMENT EXPENDITURE IS ONLY 25% OF THE TOTAL EXPENDITURE. IT WAS SUBMITTED THAT THE TPO RELIED ON THE INFORMATION OBTAINED FROM THE COMPANY U/S. 133(6) N OTICE AND HELD IT TO BE PREDOMINANTLY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES. 39. THE ASSESSEE SUBMITTED BEFORE THE DRP THAT COMP-U- LEARN TECH INDIA LTD. WAS ENGAGED IN THE DEVELOPMENT OF N EW SOFTWARE (PRODUCT DEVELOPMENT) (PAGE 7 OF THE ANNUAL REPORT) IN ITES CALL CENTRE AND BPO SERVICES (PAGE 11 OF ANNUAL REPORT). IT WAS FURTHER SUBMITTED THAT SCHEDULE XIII OF THE ANNUAL REPORT S HOWS SOFTWARE DEVELOPMENT EXPENDITURE AT ONLY 25% OF THE TOTAL EX PENDITURE. THE TPO EXTRACTED THE 133(6) NOTICE AND HELD THAT THE COMPANY HAS NIL ONSITE REVENUE AND SATISFIED ALL THE FILTERS APPLIE D BY THE TPO. WE ARE OF THE OPINION THAT SOME MORE ANALYSIS HAS TO B E DONE AND WE DIRECT THE TPO TO LOOK INTO THE FINANCIAL STATEMENT OF THE COMPANY AND ALSO PROVIDE AN OPPORTUNITY TO THE ASSESSEE TO SUBMIT RELEVANT IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 23 DETAILS TO SUBSTANTIATE ITS CLAIM THAT COMP-U-LEARN TECH INDIA LTD. IS NOT A COMPARABLE COMPANY. 40. WITH RESPECT TO GROUND NO. 2.6.3 AND 2.6.4, IT WAS ARGUED BY THE LEARNED COUNSEL THAT THE TPO ERRED IN COMPUTING THE MARGINS OF COMPARABLE COMPANIES BY CONSIDERING THE PROVISION F OR BAD AND DOUBTFUL DEBTS AND BAD DEBTS AS NON-OPERATIVE EXPEN DITURE. 41. WE PLACE RELIANCE ON THE DECISION OF ITAT DELHI BEN CH IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT, ITA NO. 1189 /DEL/2005, 819/DEL/2007 AND 820/DEL/2007. THE RELEVANT PORTIO N IS EXTRACTED BELOW: '106.2 THUS, CREATION OF UNPAID LIABILITY AND ITS WRITE BACK IS A NORMAL INCIDENT OF A BUSINESS OPERATION WHICH IS CARRIED EVERYWHERE IN ACCOUNTS TO HAVE TRU E PICTURE OF PROFITS OF THE RELEVANT PERIOD. HAVING REGARD TO STATUTORY PROVISIONS, IT CANNOT BE SAID THAT PROVISIONS OR WRITING BACK OF LIABILITY I S NOT PART OF OPERATING PROFIT OR WOULD NOT BE TAKEN INTO CONSIDERATION FOR COMPUTING THE SAME. WE CAN THEREFORE MAKE A GENERAL OBSERVATION THAT AL L BUSINESS ENTERPRISES ARE MAKING AND WRITING BACK LIABILITIES AS A NORMAL INCIDENT OF OPERATING BUSIN ESS. THEREFORE ON FACTS WE DO NOT SEE ANY JUSTIFICATION FOR EXCLUDING PROVISIONS WRITTEN BACK IN THE PROFIT AND LOSS ACCOUNT AS NOT FORMING PART OF THE OPERATING PROFIT OF THE TAXPAYER. ACCORDINGLY CLAIM OF THE TAXPAYER IS ACCEPTED. 107. THE NEXT ITEM RELATES TO BALANCES WRITTEN BAC K. IN OUR CONSIDERED OPINION, FINDING GIVEN IN RESPECT OF PROVISIONS WRITTEN BACK IS EQUALLY APPLICABLE TO BALANCES WRITTEN BACK MORE PARTICULARLY WHEN LD. CIT(A) HAS NOT GIVEN ANY SEPARATE FINDING AND THE TRANSFER PRICING OFFICER HAS SAID NOTHING SPECIFICA LLY ON THIS ITEM. THE BALANCES WRITTEN BACK SHOULD ALSO BE TREATED AS PART OF OPERATING PROFIT. WE DIRECT ACCORDINGLY.' 42. WE ARE OF THE VIEW THAT IN THE INSTANT CASE BAD DEB TS AND PROVISION FOR BAD AND DOUBTFUL DEBTS ARE PART OF TH E OPERATING EXPENSES AND WE DIRECT THE TPO TO RE-COMPUTE THE MA RGINS OF IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 24 COMPARABLE COMPANIES BY INCLUDING BAD DEBTS AND PRO VISION FOR BAD AND DOUBTFUL DEBTS AS OPERATING EXPENSES FOR THE PU RPOSE OF COMPUTING PROFIT AND LOSS OF COMPARABLE COMPANIES. 43. IN GROUND NO. 2.6.5. THE ASSESSEE HAS OBJECTED TO T HE REJECTION OF COMPARABLE COMPANIES BY TPO IN THE COURSE OF APP LYING EMPLOYEE COST FILTER. THE ITAT BANGALORE BENCH IN THE CASE OF CISCO SYSTEMS INDIA PVT. LTD. HAS HELD WITH RESPECT TO CG -VAK SOLUTIONS & EXPORTS LTD. HAS HELD AS UNDER: '(II) THE SUBMISSION OF THE ID. COUNSEL FOR THE AS SESSEE WAS THAT IN THE CASE OF ASSESSEE, THIS TEST IS SATI SFIED. IN THIS REGARD OUR ATTENTION WAS DRAWN TO PAGE 818 TO 824 OF THE ASSESSEE'S PAPER BOOK WHEREIN ANNUAL REPORT OF THIS COMPANY HAS BEEN PROVIDED. ATTENTION WAS DRAWN TO THE FACT THAT IN THE PROFIT & LOSS ACC OUNT OF THE AUDITED ACCOUNTS, THE COST OF SERVICES HAS B EEN SHOWN AS AN EXPENDITURE AND IN SCHEDULE 15 TO THE NOTES TO ACCOUNTS, IT HAS BEEN ELABORATED AS FOLLOW S:- COST OF SERVICES RS. COST OF SERVICES OVERSEAS 2,77,32,337 COST OF SERVICES DOMESTIC 2,58,40,435 TRANSCRIPTION CHARGES 3,97,389 WEB DESIGNING CHARGES 1,64,602 STAFF WELFARE 11,43,144 STAFF TRAINING 3,63,496 CONTRIBUTION TO PF & ESI 15,47,906 GRATUITY 13,04,894 EX GRATIA 0 HRD EXPENSES 3,10,87 5,88,05,074 (III) IT WAS SUBMITTED BY THE ID. COUNSEL FOR THE ASSESSEE THAT THE TPO IGNORED THE CONTRIBUTION TO P F & ESI, GRATUITY AND EX GRATIA PAYMENTS AND ARRIVED AT THE EMPLOYEE COST. ACCORDING TO THE ID. COUNSEL FOR THE ASSESSEE, DOING SO WAS NOT PROPER. IF ALL THE EMPLOYEE COSTS ARE PROPERLY CONSIDERED, THEN THIS COMPANY CAN PASS THE FILTER APPLIED BY THE TPO FOR EXCLUDING IT. (IV) WE HAVE CONSIDERED THE SUBMISSION OF THE ID. COUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT P RIMA FACIE THE SUBMISSIONS OF THE ID. COUNSEL ARE ACCEPT ABLE. WE, HOWEVER, FEEL THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE TPO TO CONSIDER INCLUDING IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 25 THIS COMPANY AS A COMPARABLE AFRESH IN THE LIGHT OF THE FACTS BROUGHT TO OUR NOTICE BY THE ID. COUNSEL FOR THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY.: 44. FOLLOWING THE DECISION CITED ABOVE, WE SET ASIDE TH E ISSUE OF COMPARABILITY OF CG-VAK SOLUTIONS & EXPORTS LTD. TO THE TPO FOR CORRECT APPLICATION OF EMPLOYEE COST FILTER. 45. WITH RESPECT TO PRITHVI INFORMATION SOLUTIONS LTD., WE REMIT THE ISSUE BACK TO THE TPO FOR FRESH APPLICATION OF EMPLOYEE COST FILTER AND ONSITE REVENUE FILTER AFTER GIVING OPPORTUNITY FOR THE TO SUBMIT ITS CLAIM THAT PRITHVI INFORMATION SOLUTIONS LTD., IS A CORRECT COMPARABLE WHICH SATISFIED THE FILTERS OF THE TPO. 46. GROUND NO. 2.7 IS NOT PRESSED BY THE ASSESSEE AND T HE SAME IS DISMISSED AS NOT PRESSED. 47. WITH RESPECT TO GROUND NO. 2.8, THE ASSESSEE HAS SO UGHT FOR RISK ADJUSTMENT DUE TO DIFFERENCE IN RISK PROFILE O F THE ASSESSEE AND THE COMPARABLE CASES SELECTED. WE RELY ON THE DECI SION IN THE CASE OF EXCELLENCE DATA RESEARCH VS. ITO, ITA NO. 159/HYD/2 014 FOR A.Y. 2009-10 WHEREIN IT HAS BEEN HELD AS FOLLOWS: '21. WITH REFERENCE TO GROUND NO. 2.5 ON RISK PROFI LE, LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE ASSESSING OFFICER/DRP HAVE NOT CONSIDERED THE RISK PROFILE OF THE ASSESSEE AND NECESSARY ADJUSTMENTS H AVE NOT BEEN MADE IN ORDER TO MITIGATE THE DIFFERENCES BETWEEN THE ASSESSEE'S RISK PROFILE AND THE COMPARABLES SELECTED BY THE TPO. ASSESSEE CONTENDS THAT ADJUSTMENT OF 1%, WHICH WAS GRANTED BY THE COORDINATE BENCH IN THE CASE OF HELLOSO]T INDIA P. LTD. IN ITA 645/HYD/2009, SHOULD HAVE BEEN ALLOWED. EVEN THOUGH IT WAS CONTENDED THAT THE COORDINATE BENCH ORDER IN THAT BEHALF IS BINDING ON THE ASSESSING OF FICER, WE ARE NOT INCLINED TO AGREE WITH THAT CONTENTION, AS RISK PROFILE OF EACH ASSESSEE DIFFERS 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. THEREFO RE, ALLOWING DEDUCTION OF 1% TOWARDS RISK PROFILE UNIFO RMLY CANNOT BE ADOPTED AS A NORM. FURTHER, THIS ASPECT REQUIRES TO BE RE-EXAMINED BY THE TPO. THEREFORE, IT A NO. 243/HYD/2014 M/S. KENEXA TECHNOLOGIES PVT. LTD. =========================== 26 AFTER EXCLUDING THE ABOVE COMPANIES, IF ANY ADJUSTMENT IS REQUIRED TO BE MADE, ASSESSING OFFICE R IS DIRECTED TO CONSIDER THE RISK PROFILE AND ALLOW NECESSARY DEDUCTION, BASED ON THE FACTS OF EACH COMPARABLE CASE.' 48. FOLLOWING THE DECISION IN THE CASE OF EXCELLENCE DA TA RESEARCH (SUPRA), WE REMIT THE ISSUE TO THE TPO TO CONSIDER THE RISK PROFILE OF THE ASSESSEE. WE DIRECT THE TPO TO ALLOW NECESSARY DEDUCTIONS FOR RISK ADJUSTMENT AFTER FINALISING THE LIST OF COMPARABLES AS DIRECTED BY US. 49. GROUND NO. 4. WITH RESPECT TO GROUND NO. 4, WE REM IT THE ISSUE BACK TO THE ASSESSING OFFICER TO VERIFY AND G RANT CREDIT IN RESPECT OF TAX DEDUCTED AT SOURCE BY THE ASSESSEE. 50. GROUND NO. 5 IS CONSEQUENTIAL AND NEEDS NO ADJUDICA TION. 51. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 14 TH NOVEMBER, 2014. SD/ - (B. RAMAKOTAIAH) ACCOUNTANT MEMBER SD/ - (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER HYDERABAD, DATED THE 14 TH NOVEMBER, 2014 TPRAO COPY FORWARDED TO: 1. M/S. KENEXA TECHNOLOGIES PVT. LTD., 8 - 2 - 502/1/AG, 3 RD FLOOR, UMA AISHWARYA HOUSE, ROAD NO. 7, BANJARA HILLS, HYD ERABAD- 500 034. 2. THE DEPUTY CIT, CIRCLE - 2(1), HYDERABAD. 3. THE DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4 . THE DEPUTY CIT (TRANSFER PRICING - II), HYDERABAD. 5 . THE DR A BENCH, ITAT, HYDERABAD