Appeal details
Counselvise Citation
[2017] 130 COUNSELVISE.COM (IT) 6199 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 26 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
31-01-2017
Appeal Filed By
Assessee
Bench Allotted
B
Next Hearing Date
06-09-2016
Assessment Year
2010-2011
Appeal Filed On
05-01-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. ASST. YEAR APPELLANT RESPONDENT 1921/HYD/14 2010-11 THE INCOME TAX OFFICER, WARD-2(1) HYDERABAD M/S. INTOTO SOFTWARE (INDIA) PRIVATE LIMITED HYDERABAD [PAN: AAACI7205G] 25/HYD/15 2010-11 M/S. INTOTO SOFTWARE (INDIA) PRIVATE LIMITED HYDERABAD [PAN: AAACI7205G] THE INCOME TAX OFFICER, WARD-2(1) HYDERABAD FOR REVENUE : SMT. G. APARNA RAO, CIT-DR FOR ASSESSEE : SHRI ABHISHEK MURALI, AR DATE OF HEARING : 19-12-2016 DATE OF PRONOUNCEMENT : 31-01-2017 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE ARE CROSS-APPEALS BY ASSESSEE AND REVENUE AGA INST THE ORDER OF THE ASSESSING OFFICER (AO) U/S. 143(3) R.W. S. 144C OF THE INCOME TAX ACT [ACT] CONSEQUENT TO THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL [DRP], HYDERABAD, DATED 29- 09-2014. ASSESSEE IS AGGRIEVED ON THE TRANSFER PRICING ADJUSTM ENTS MADE AND REVENUE IS ALSO AGGRIEVED ON SOME OF THE EXCLUSI ONS OF COMPARABLES BY THE DRP AND WORKING OF DEDUCTION U/S. 10A OF THE ACT. I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 2 - : 2. BRIEFLY STATED, ASSESSEE PROVIDES SOFTWARE DEVELO PMENT SERVICES TO ITS ASSOCIATED ENTERPRISE [AE], INTOTO LLC I N THE AREAS OF NETWORK SECURITY AND EMBEDDED SYSTEMS. IT IS A CAPTI VE RISK FREE SERVICE PROVIDER AND ONLY UNDERTAKES DEVELOPMENT (COD ING OF EMBEDDED SOFTWARE). INTOTO LLC, USA HOLDS 99.82% OF SHARES IN M/S. INTOTO SOFTWARE INDIA PVT. LTD. THIS UNIT IS ALSO REGISTERED WITH THE SOFTWARE TECHNOLOGY PARKS OF INDIA. DURING THE YEAR, IT HAS RECEIVED OPERATING RECEIPTS TO THE EXTENT OF RS. 29. 13 CRORES AND RETURNED INCOME OF RS. 67,34,480/- AFTER CLAIMING DEDUCTION U/S. 10A AMOUNTING TO RS. 3,92,54,019/-. AS ASSESSEE S TRANSACTIONS ARE WITH ITS AE ALONE, THE TRANSFER PRICIN G OFFICER [TPO] REFERRED THE CASE U/S. 92CA(1) OF THE ACT FOR DE TERMINATION OF ARMS LENGTH PRICE [ALP] FOR THE YEAR. THE TPO AFTER CONSIDERING ASSESSEES TP STUDY REJECTED THE SAME STATING THAT ASSE SSEE HAS USED INAPPROPRIATE FILTERS AND ALSO MULTIPLE YEAR DA TA AND UNDERTOOK THE EXERCISE AFRESH. TPO HAS SELECTED 18 COMPANIES AS COMPARABLE COMPANIES HAVING AN ADJUSTED MARGIN OF 23 .30% AFTER PROVIDING NEGATIVE WORKING CAPITAL ADJUSTMENT. BASED O N THE ABOVE ON AN OPERATING COST OF RS.25,83,03,352/-, THE ALP WAS ARRIVED AT RS. 31,84,88,033/-. AS THE PRICE RECEIVED WAS LESS THAN THAT, TPO PROPOSED AN ADJUSTMENT U/S. 92CA AT RS. 2,71,8 2,139/-. CONSEQUENT TO THE ABOVE ORDER DT. 24-09-2013, THE AO IS SUED DRAFT ASSESSMENT ORDER ON 30-12-2013. ASSESSEE PREFERRED OBJECTIONS BEFORE THE DRP WHICH AFTER CONSIDERING VARIOUS OBJECTI ONS, ACCEPTED THAT TWO COMPARABLE COMPANIES I.E., INFOSYS TECHNOLOGY LTD., AND KALS INFORMATION SYSTEMS LTD (SEG) ARE NOT COM PARABLE TO ASSESSEE FUNCTIONALLY. THEREFORE, OUT OF THE 18 COMPA NIES SELECTED BY THE TPO AS COMPARABLES, THE FINAL LIST AFTER THE DRP DIRECTIONS, HAS ONLY 16 COMPANIES WHOSE ADJUSTED MARGIN WAS ARRI VED AT I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 3 - : 21.91%. THE DRP ALSO DIRECTED THAT COMMUNICATION EXPE NSES TO AN EXTENT OF RS. 22,28,977/- REDUCED FROM EXPORT TURNO VER WHILE CALCULATING DEDUCTION U/S. 10A SHOULD ALSO BE REDUCE D FROM THE TOTAL TURNOVER AND DIRECTED THE AO TO RE-COMPUTE THE DEDUC TION U/S. 10A. REVENUE IS AGGRIEVED ON THE ABOVE TWO DIR ECTIONS OF THE DRP IN FAVOUR OF ASSESSEE, WHEREAS ASSESSEE IS AGGR IEVED ON THE ADJUSTMENTS SO MADE U/S. 92CA REJECTING VARIOUS OBJECTI ONS RAISED BY IT BEFORE AUTHORITIES. 3. THE FINAL LIST OF COMPARABLES AFTER THE DRP ORDER IS AS UNDER: SL. NO. COMPANY NAME ADJUSTED MARGIN (IN %) 1. AVANI CIMCON TECHNOLOGIES LTD 5.00 2. CAT TECHNOLOGIES LTD 8.80 3 . COMP - U - LEARN TECH INDIA LTD 16.83 4. E - INFOCHIPS BANGALORE LTD 69.08 5. EVOK TECH 21.76 6. E - ZEST SOLUTIONS LTD 23.80 7. KULIZA TECH 27.15 8. L&T INFOTECH LTD 23.53 9. MINDTREE LTD (SEG) 21.32 10. PERSISTENT SYSTEMS & SOLUTIONS LTD 11.74 11. R S SOFTWARE (INDIA) LTD 13.18 12. SASKEN COMMUNICATION TECHNOLOGIES LTD 27.68 13. TATA ELXSI LTD (SEG) 18.36 14. THINKSOFT GLOBAL SERVICES LTD 11.59 15. ZYLOG SYSTEMS LTD 1 7.61 16. PERSISTENT SYSTEMS LTD 33.07 4. ASSESSEE IN ITS APPEAL HAS RAISED 13 GROUNDS AND ONE ADDITIONAL GROUND ON THE NEGATIVE WORKING CAPITAL ADJU STMENT MADE BY THE TPO. GROUND NOS. 1, 2, 3 & 13 ARE GENER AL IN NATURE WHICH DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 4 - : 5. GROUND NO. 4 IS PERTAINING TO ADJUSTMENT OF FOREIG N EXCHANGE LOSS AS OPERATING IN NATURE WHILE COMPUTING NET MARGIN OF ASSESSEE UNDER TRANSACTIONAL NET MARGIN METHOD [TNM M]. HOWEVER, THIS GROUND IS NOT PRESSED AS THE FOREIGN EX CHANGE LOSS/GAIN ARISING OUT OF ASSESSEES OPERATING TRANSACT IONS FOREIGN EXCHANGE LOSS/GAINS ARE CONSIDERED AS PART OF OPERATI NG MARGINS IN VARIOUS OTHER CASES. ACCORDINGLY, THIS GROUND IS REJ ECTED. 6. GROUND NO. 5 PERTAINS TO SELECTION OF COMPARABLE COMPANIES. OUT OF THE 16 COMPANIES WHICH FINALLY SEL ECTED BY THE AO/TPO AS COMPARABLE COMPANIES, THREE COMPANIES I.E ., SR. NO. 9. MINDTREE LTD (SEG); SR. NO. 11. R S SOFTWARE (INDIA) LTD; SR. NO. 14 THINKSOFT GLOBAL SERVICES LTD., ARE ASSESSEES OWN SE LECTIONS IN ITS TP STUDY AND ACCORDINGLY HAS NO OBJECTION FOR INCLUSI ON OF THE ABOVE COMPANIES. IN ADDITION, ASSESSEE IS ALSO NOT OBJECTING TO COMPANIES LISTED AT : 1. AVANI CIMCON TECHNOLOGIES LTD., 2. CAT TECHNOLOGIES LTD., 5. EVOK TECH 6. E-ZEST SOLUTIONS LTD., 7. KULIZA TECH 10.PERSISTENT SYSTEMS & SOLUTIONS LTD., 13.TATA ELXSI LTD (SEG) 15.ZYLOG SYSTEMS LTD., 7. ASSESSEE HAS OBJECTED TO THE FOLLOWING COMPARABLES IN GROUND NO. 5: I. SR.NO. 3. COMP-U-LEARN TECH INDIA LTD., II. SR.NO. 4. E-INFOCHIPS BANGALORE LTD., I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 5 - : III. SR.NO. 12. SASKEN COMMUNICATION TECHNOLOGIES LTD., IV. SR.NO. 16. PERSISTENT SYSTEMS LTD., 7.1. DURING THE COURSE OF ARGUMENTS EVEN THOUGH ASSES SEE HAS OBJECTED TO MINDTREE LTD (SEG), L&T INFOTECH LTD. IN THE GROUND, ASSESSEES COUNSEL HAS NOT PRESSED THESE COM PANIES, ACCORDINGLY, THE GROUND RAISED TO THAT EXTENT OBJECTING T O THE ABOVE TWO COMPANIES ARE CONSIDERED AS WITHDRAWN. ASSESSEE IS MAINLY OBJECTING TO FOUR COMPANIES E-INFOCHIPS BANGALORE LTD ., SASKEN COMMUNICATION TECHNOLOGIES LTD., PERSISTENT SYSTEMS & S OLUTIONS LTD. AND COMP-U-LEARN TECH INDIA LTD., 8. WE HAVE CONSIDERED THE OBJECTIONS FROM THE LD. COU NSEL AND ALSO FROM THE LD.DR AND ANALYSED THE FOLLOWING CO MPANIES: 8.1.1. E-INFOCHIPS BANGALORE LTD: ASSESSEES OBJECTION IS THAT SEGMENTAL DATA IS NOT AVAIL ABLE AND THERE IS SHIFT OF FOCUS FROM SOFTWARE DEVELOPMENT TO CO NSULTANCY. IT WAS STATED THAT THIS COMPANY WAS EXCLUDED IN THE FOLLOWI NG DECISIONS OF THE ITAT: A) D.E. INDIA SOFTWARE PVT. LTD., (AY.2010-11) IN ITA NO . 304/HYD/2015; B) PEGASYSTEMS WORLDWIDE INDIA PVT. LTD., (AY.2010-11) IN ITA NO.1758/HYD/2014 & ITA NO. 1936/HYD/2014 (AY.2010-1 1); C) ALLSCRIPTS (INDIA) PVT. LTD IN ITA NO. 771/AHD/2014 (A Y.2009- 10); I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 6 - : 8.1.2. THE CO-ORDINATE BENCH IN THE CASE OF D.E. IND IA SOFTWARE PVT. LTD., (AY.2010-11) IN ITA NO. 304/HYD/2 015 (SUPRA) HAS EXCLUDED THE SAID COMPANY BY STATING AS UNDER: E INFOCHIPS BANGALORE LTD., : 8. THIS COMPANY IS SELECTED BY TPO EVEN THOUGH ASSE SSEE OBJECTED TO THE SAME (VIDE PAGE 34 AND 35 OF THE ORDER OF TPO). ASS ESSEE OBJECTED THAT THE INFORMATION FOR FY. 2009-10 WAS NOT AVAILABLE I N PUBLIC DOMAIN. IT WAS FURTHER CONTENDED THAT COMPANY IS FUNCTIONALLY DIFFERENT AND IS HAVING TWO DIFFERENT SEGMENTS I.E., SOFTWARE DEVELO PMENT SERVICES AND ITES. COMPANY OFFERS BROAD PORTFOLIO OF SERVICES CO MPRISING NEW PRODUCTS, PRODUCT DEVELOPMENT, PRODUCT SUSTENANCE A ND MAINTENANCE, PRODUCT QUALITATIVE ANALYSIS (QA) AND INDEPENDENT T ESTING HARDWARE AND SOFTWARE DESIGN ETC. TPO DID NOT ACCEPT ASSESSEES DOCUMENTS BY REFERRING TO THE SCHEDULES LIKE RESEARCH AND DEVELO PMENT, INVENTORIES, SALES AND OTHER INCOMES. HE ALSO REPORTED THAT COMP ANY IN THE NOTES TO THE ACCOUNTS HAS STATED THAT IT IS ENGAGED IN THE D EVELOPMENT AND MAINTENANCE OF COMPUTER SOFTWARE. THE PRODUCTION AN D SALES OF SOFTWARE CANNOT BE EXPRESSED IN ANY GENERIC UNIT. THUS, TPO REJECTED ASSESSEES OBJECTIONS AND RETAINED IT AS A COMPARABLE. DRP ALS O AGREED WITH TPO. 8.1. IT WAS CONTENDED THAT AO RELIED ON THE ANNUAL REPORT OF FY. 2010-11 AND USED THE INFORMATION APPLICABLE TO FY. 2009-10 FROM THAT REPORT, AS THE INFORMATION FOR FY. 2009-10 WAS NOT AVAILABLE I N PUBLIC DOMAIN. IT IS ALSO SUBMITTED THAT THIS COMPANY WAS NEVER SELECTED EITHER BY TPO IN EARLIER YEAR OR IN LATER YEAR. IT WAS ALSO SUBMITTE D THAT PROFITABILITY VARIES FROM YEAR TO YEAR AND IN THIS YEAR, THERE WAS ARBNO RMALLY VERY HIGH MARGIN, THE REASONS OF WHICH COULD NOT BE ANALYSED IN THE ABSENCE OF ANNUAL REPORT. IT WAS FURTHER CONTENDED THAT SEGMEN TAL INFORMATION WAS NOT AVAILABLE. ON THE ARGUMENT THAT THE SAID COMPAN Y IS PROVIDING BOTH SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES LD. CO UNSEL PLACED THE DISCLOSURES IN ANNUAL REPORT OF FY. 2008-09 AND ANN UAL REPORT OF FY. 2009-10 TO SUBMIT THAT THE COMPANY IS PRIMARILY ENG AGED IN SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES AND HAS REPORTE D BOTH OF THEM AS ONE SEGMENT. THEREFORE, COMPANY IS NOT COMPARABLE W ITH ASSESSEES ON FUNCTIONAL ANALYSIS. IT WAS FURTHER SUBMITTED THAT COMPANY HAS MERGED IN 2012 WITH ANOTHER COMPANY AND IT WILL BE DIFFICULT TO OBTAIN FURTHER INFORMATION/SEGMENTAL INFORMATION ABOUT THE COMPANY NOW. IN VIEW OF ITS FLUCTUATING PROFITS OVER THE YEARS, THIS COMPANY WA S NOT SELECTED AS A COMPARABLE EARLIER OR IN LATER YEARS BY REVENUE. SI NCE THE DISCLOSURE IN ANNUAL REPORT IS COMMON, ASSESSEE RELIED ON THE DEC ISION OF AHMADABAD BENCH OF ITAT IN THE CASE OF ALL SCRIPS (INDIA) PRI VATE LTD., IN ITA NO. 771/AHD/2014 FOR AY. 2009-10, WHEREIN THIS COMPARAB LE WAS REJECTED ON THE BASIS OF LACK OF SEGMENTAL INFORMATION. ASSE SSEE RELIED ON PARA 10 OF THE CO-ORDINATE BENCH ORDER, WHICH IS AS UNDER: I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 7 - : PARA 10 WITH RESPECT TO E-INFOCHIP BANGALORE LT D., WE FIND THAT IN THE ANNUAL ACCOUNTS OF THE COMPANY, WITH RESPECT TO THE SEGMENT INFORMATION IT IS STATED THAT THE COMPANY IS PRIMAR ILY ENGAGED IN SOFTWARE DEVELOPMENT AND I.T ENABLED SERVICES WHICH IS CONSIDERED THE ONLY REPORTABLE BUSINESS SEGMENT AS PER ACCOUNT ING STANDARD AS-17 SEGMENT REPORTING PRESCRIBED IN COMPANIES ( ACCOUNTING STANDARD) RULES, 2006. WE THUS FIND THAT NO SEGMENT AL INFORMATION IS AVAILABLE ..CONSIDERING THE AFORESAID FA CTS, WE ARE OF THE VIEW THAT THE AFORESAID TWO COMPANIES NE EDS TO BE EXCLUDED WHILE WORKING OUT THE COMPARABILITY ANALYS IS AND THEREFORE UPHOLD THE PLEA OF THE ASSESSEE IN EXCLUDING THE MA RGINS OF THE AFORESAID 2 COMPANIES. 8.2. LD. DR, HOWEVER, REFERRED TO THE EXTRACTS MADE BY TPO IN THE ORDER TO SUBMIT THAT ASSESSEE IS A COMPARABLE COMPANY WITH T HAT OF ASSESSEE. 8.3. AFTER CONSIDERING THE RIVAL CONTENTIONS AND PE RUSING THE ANNUAL REPORTS PLACED ON RECORD, WE ARE OF THE OPINION THA T THIS COMPANY CANNOT BE SELECTED AS COMPARABLE COMPANY FOR TP ANALYSIS. FIRST OF ALL, THIS COMPANY IS ENGAGED IN BOTH SOFTWARE DEVELOPMENT AS WELL AS ITES. ASSESSEE BEING ONLY CAPTIVE SERVICE PROVIDER, THE A BOVE COMPANY CANNOT BE CONSIDERED AS COMPARABLE ON FUNCTIONAL BASIS. NO T ONLY THAT, AS POINTED OUT, SEGMENTAL INFORMATION PERTAINING TO TH E ABOVE COMPANY IS NOT AVAILABLE. AS SEEN FROM THE TP ORDERS, DOCUMENT S PLACED ON RECORD, TPO RELIED ON LATER YEARS ANNUAL REPORT IN EXTRACT ING THE INFORMATION. VARIATION IN PROFITABILITY OVER THE YEARS ALONE CAN NOT BE A REASON TO EXCLUDE THE COMPANY FROM COMPARABILITY ANALYSIS BUT AS RIGHTLY POINTED, THE ABSENCE OF SEGMENTAL INFORMATION, HOW MUCH PROF IT EARNED WAS ON THE SOFTWARE DEVELOPMENT OR ITES CANNOT BE EXAMINED . IN THE ABSENCE OF CLARITY ON OPERATIONAL DETAILS AND COMPARABLE COMPA NY HAVING DIVERSIFIED ACTIVITIES, WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE CHOSEN AS A COMPARABLE COMPANY IN ASSESSEES CASE IN THIS ASSES SMENT YEAR. WE ARE ALSO AWARE OF THE DECISION OF THE CO-ORDINATE BENCH GIVEN IN EARLIER ASSESSMENT YEAR ON THE REASON THAT SEGMENTAL REPORT ING WAS NOT AVAILABLE. BE THAT AS IT MAY, SINCE THE SAID COMPAN Y IS FUNCTIONALLY DIFFERENT FROM ASSESSEES ACTIVITIES AND IN THE ABS ENCE OF SEGMENTAL INFORMATION, WE DIRECT AO/TPO TO EXCLUDE THE ABOVE WHILE WORKING OUT THE COMPARABILITY ANALYSIS. WE UPHOLD THE PLEA OF A SSESSEE IN THIS REGARD. 8.1.3. RESPECTFULLY FOLLOWING THE SAME, AO/TPO IS DIRECTED TO EXCLUDE THE SAID COMPANY FROM THE LIST OF COMPARABLES AS IT WAS NOT FUNCTIONALLY SIMILAR. I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 8 - : 8.2.1. SASKEN COMMUNICATION TECHNOLOGIES LTD: THE OBJECTION OF ASSESSEE IS THAT IT IS FUNCTIONALLY DIF FERENT AND IT OUTSOURCES ITS BUSINESS AND THERE IS PRESENCE OF INTAN GIBLE ASSETS ALSO, MOREOVER, THE SAID COMPANY ALSO HAS VERY HIGH TURNOVER, ONE COMPARED TO ASSESSEES TURNOVER. IT WAS SUBMITTED THAT THI S COMPANY WAS EXCLUDED BY THE CO-ORDINATE BENCHES IN THE FOLLOWING CASES: A) D.E. INDIA SOFTWARE PVT. LTD., (AY.2010-11) IN ITA NO . 304/HYD/2015; B) TRIDENT MICROSYSTEMS INDIA PRIVATE LIMITED (AY.2010-11) IN ITA NO. 192/BANG/2015; 8.2.2. THE CO-ORDINATE BENCH IN THE CASE OF D.E. IND IA SOFTWARE PVT. LTD., (AY.2010-11) IN ITA NO. 304/HYD/2 015 (SUPRA) HAS EXCLUDED THE SAID COMPANY BY STATING AS UNDER: SASKEN COMMUNICATION TECHNOLOGIES LTD: 13. THIS COMPARABLE WAS NOT OBJECTED TO EITHER BEFO RE TPO OR BEFORE DRP. OBJECTIONS WERE RAISED BEFORE US ON THE COMPAR ABILITY OF THIS COMPANY ON THE REASON THAT THIS COMPANY IS HAVING P RODUCT SALES AND ALSO A PROVIDER OF TELECOMMUNICATION SOFTWARE SERVI CES. SINCE THERE IS NO BREAK-UP OF COST AVAILABLE, ASSESSEE SUBMITS THAT T HEY HAVE DIFFICULTY IN COMPARING THE SAID COMPANY ON FAR ANALYSIS. ASSESSE E ALSO RELIES ON THE DECISION OF ITAT IN THE CASE OF PLANET ONLINE PVT. LTD., IN ITA NO. 464/HYD/2014 (SUPRA), WHEREIN THE ITAT REMITTED THE ISSUE TO COMPARABILITY OF THIS COMPANY FOR FRESH ADJUDICATIO N BY AO/TPO IN AN EARLIER YEAR. CONSIDERING THE VIEW TAKEN EARLIER, S INCE AO/TPO DID NOT HAVE THE OPPORTUNITY TO ANALYSE THE OBJECTIONS OF A SSESSEE AS THEY HAVE NOT OBJECTED EARLIER, WE ARE OF THE OPINION THAT IN CLUSION OF THIS COMPANY AS COMPARABLE COMPANY IS TO BE ANALYSED AFRESH BY T AKING THE OBJECTIONS FROM ASSESSEE AND THEN AFTER DUE ANALYSIS, TPO SHOU LD CONSIDER WHETHER THE SAME CAN BE INCLUDED AS A COMPARABLE COMPANY. T HEREFORE, WITHOUT EXPRESSING ANY OPINION OR FINDING IN THIS REGARD, W E REMIT THE ISSUE RELATING COMPARABILITY OF THIS COMPANY FOR FRESH AD JUDICATION BY TPO. I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 9 - : 8.2.3. IN THE CASE OF TRIDENT (SUPRA) THE COORDINATE BENCH HAS UPHELD THE EXCLUSION OF THE SAID COMPANY B Y DRP ON TURN OVER BASIS. RESPECTFULLY FOLLOWING THE ABOVE, WE DIRECT THE AO/TPO TO RE EXAMINE THE ABOVE COMPANY KEEPING THE AB OVE ISSUES IN MIND AND EXCLUDE IF ANY OF THE ISSUES IE. HIGH TURNOVER OR FUNCTIONAL DISSIMILARITY APPLY TO THE FACTS OF THE CASE OF ASSESSEE. 8.3.1. PERSISTENT SYSTEMS LTD: ASSESSEES OBJECTION IS THAT THIS COMPANY IS FUNCTIONA LLY DIFFERENT AND ALSO INTO SOFTWARE PRODUCTS. AS CAN BE SEEN FROM PAGE NO. 173 OF THE PAPER BOOK, SEGMENTAL DETAILS ARE NOT AVAILABLE. IT ALSO HAS HIGH TURNOVER TO AN EXTENT OF R S. 509 CRORES (CONSIDERED BY TPO IN ANNEXURE 1(II) AT SL. NO 17), AS AGAINST RS. 29.53 CRORES OF ASSESSEE. IT WAS EXCLUDED BY THE CO- ORDINATE BENCH IN THE FOLLOWING CASES: A) INTOTO SOFTWARE INDIA PVT. LTD., (AY.2008-09) IN ITA N O. 1810/HYD/2010; B) TRIDENT MICROSYSTEMS INDIA PRIVATE LIMITED (AY.2010-11) IN ITA NO.192/BANG/2015; C) TORY HARRIS BUSINESS SOLUTIONS PRIVATE LTD (AY.2009-1 0) IN ITA NO.113/BANG/2014; 8.3.2. APART FROM HIGH TURNOVER, THIS COMPANY IS ALS O INTO SOFTWARE PRODUCTS AND IS FUNCTIONALLY DIFFERENT. AS CONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF TRIDENT MICROS YSTEMS INDIA PRIVATE LIMITED (AY.2010-11) IN ITA NO.192/BANG/2015 (SUPRA), WHEREIN IT WAS HELD AS UNDER: 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RUL ES FOR DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 92C:- I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 10 -: '10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION S HALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE M ETHOD, IN THE FOLLOWING MANNER, NAMELY :-- (A)....... TO (D)........ (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH,-- (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLO YED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT B ASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE (II) ARISING IN COMPARABLE UNCONTROLLED TRAN SACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE I NTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEE N THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB- CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIO NAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY:-- (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT AS SETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERM S ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IM PLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVI DED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH T HE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LO CATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, C OSTS OF LABOUR AND CAPITAL I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 11 -: IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LE VEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF-- (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ON HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING M ORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRA NSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED.' 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF T HE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPARED WITH IN TERNATIONAL TRANSACTION HAVING REGARD TO THE FACTORS SET OUT THEREIN. BEFOR E US THERE IS NO DISPUTE THAT THE TNMM IS THE MOST APPROPRIATE METHOD FOR DE TERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. THE DISPUTES ARE WIT H REGARD TO THE COMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF L AW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS R EFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOWN THE PRINC IPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COM PARABLES. THE ASSESSEE'S TURNOVER IS RS. 47,46,66,638. IT WOULD THEREFORE FA LL WITHIN THE CATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEM S (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVI NG TURNOVER OF MORE THAN 200 CRORES HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOWN IN SEVERAL IT(TP)A NO.192/BANG/2015 DECIS IONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE. APPLYING THOSE TE STS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ., TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 12 -: (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES.' 14. THE AFORESAID DECISION CLEARLY SETS OUT THE REA SON WITH REFERENCE TO RULE 10B(2) OF THE RULES WHICH PROVIDES THAT UNCONT ROLLED TRANSACTION HAS TO BE COMPARED WITH INTERNATIONAL TRANSACTION HAVIN G REGARD TO THE FACTORS SET OUT THEREIN. RESPECTFULLY FOLLOWING THE AFORESA ID DECISION OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), WE UPHOLD DECISION OF THE CIT(A), TO EXCLUDE THE AF ORESAID COMPANIES FROM THE LIST OF COMPARABLE COMPANIES ON THE BASIS OF TU RNOVER AND SIZE. THE AO IS DIRECTED TO COMPUTE THE ARITHMETIC MEAN BY EXCLU DING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. BESIDES THE ABOVE, THE BANGALORE BENCHES OF THE TRIBUNAL HAVE BEING TAKING A CONSIST ENT VIEW AS LAID DOWN IN THE AFORESAID DECISION. WE ARE THEREFORE OF THE VIEW THAT THERE IS NO MERIT IN THIS APPEAL BY THE REVENUE. ACCORDINGLY TH E SAME IS DISMISSED. 8.3.3. APART FROM THAT, AS SEEN FROM THE STATEMENTS AND ACCOUNTS PLACED ON RECORD AT PAGES 794-982, THE SALE O F PRODUCTS IS CLEARLY STATED. THE FOREIGN EXCHANGE EARNINGS ON S ALE OF PRODUCTS IS CLEARLY STATED AT 4686.19 RS. MILLION IN NOTES TO ACC OUNTS AT ITEM 15. THUS THE COMPANY IS FUNCTIONALLY DIFFERENT. IN V IEW OF THAT, WE DIRECT THE AO/TPO TO EXCLUDE THE ABOVE COMPANY. THIS G ROUND IS CONSIDERED PARTLY ALLOWED. 8.4.1. COMP-U-LEARN TECH INDIA LTD: ASSESSEE IS OBJECTING TO THIS COMPANY STATING THAT IT IS F UNCTIONALLY DIFFERENT, THERE ARE EXTRAORDINARY EVENTS DURING THE YE AR AND FLUCTUATING REVENUES. LD. COUNSEL RELIED ON THE DECI SIONS OF KENEXA TECHNOLOGIES PRIVATE LIMITED (ITA NO. 243/HYD /2014) (AY.2009-10) AND INVENSYS DEVELOPMENT CENTRE INDIA PR IVATE LIMITED (ITA NO. 383/HYD/2014). THE DECISION OF KEN EXA TECHNOLOGIES PRIVATE LIMITED (SUPRA) IS FOR AY. 200 9-10 WHICH DOES NOT APPLY TO THE FACTS FOR THIS ASSESSMENT YEAR AY. 200 9-10. LIKE- WISE, THE OTHER DECISION ALSO. WE HAVE PERUSED THE AN NUAL REPORTS I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 13 -: PLACED IN THE PAPER BOOK FROM PG. NOS. 407 TO 506. AS SEEN FROM THE ANNUAL REPORT, THE RECEIPTS ARE FROM SOFTWARE DEVEL OPMENT SERVICES ONLY AND THERE ARE NO SALE OF PRODUCTS. TH E EXTRAORDINARY EVENTS REFERRED TO PERTAIN TO INVESTMENT IN OTHER COMPANIE S WHICH HAS NO BEARING ON THE P&L A/C. FLUCTUATING REVENUES C ANNOT BE A REASON TO EXCLUDE COMPANIES UNLESS BUSINESS PROFILE IS ENTIRELY DIFFERENT. AS WE DO NOT SEE ANY REASON TO EXCLUDE THE SAME AND AS THE LD. COUNSEL FAIRLY ADMITTED THAT THIS COMPANY WAS NO T EXCLUDED/NOT OBJECTED IN OTHER SIMILARLY PLACED COMPAN IES IN DECIDED CASES FOR THIS ASSESSMENT YEAR, WE AGREE WITH THE DECISION OF THE TPO/DRP. THE GROUND TO THAT EXTENT IS REJECTED. 8.5. THE GROUND NO. 5 IS CONSIDERED PARTLY ALLOWED. 9. GROUND NO.6 IS PERTAINING TO TREATING PROVISION FOR BAD AND DOUBTFUL DEBTS AS NON-OPERATING EXPENSES FOR THE P URPOSE OF MARGIN COMPUTATION OF COMPARABLE COMPANIES AS SELECTED BY THE TPO. EVEN THOUGH DRP REJECTED THE OBJECTION OF ASSESS EE ON COMPUTATION OF MARGINS, ASSESSEE IS RELYING ON THE CO -ORDINATE BENCH DECISION IN THE CASE OF M/S. KENEXA TECHNOLOGI ES PVT. LTD., VS. DCIT IN ITA NO. 243/HYD/2014 DT. 14-11-2014, WHE REIN IT WAS HELD AS UNDER: 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 EXPENDITURE. 41. WE PLACE RELIANCE ON THE DECISION OF ITAT DELHI BENCH IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT, ITA NO. 1189/DEL/200 5, 819/DEL/2007 AND 820/DEL/2007. THE RELEVANT PORTION IS EXTRACTED BEL OW: I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 14 -: '106.2 THUS, CREATION OF UNPAID LIABILITY AND ITS W RITE BACK IS A NORMAL INCIDENT OF A BUSINESS OPERAT ION WHICH IS CARRIED EVERYWHERE IN ACCOUNTS TO HAVE TRUE PICTURE OF PROF ITS OF THE RELEVANT PERIOD. HAVING REGARD TO STATUTORY PROVISIONS, IT CANNOT BE SAID THAT PROVISIONS OR WRITING BACK OF LIABILITY IS 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 BUSINESS. THEREFORE ON FACTS WE DO NOT SEE ANY JUSTIFICATION FOR EXCLUDIN G PROVISIONS WRITTEN BACK IN THE PROFIT AND LOSS ACCOUNT AS NOT FORMING PART OF THE OPERATING PROFIT OF THE TAXPAYER. ACCOR DINGLY CLAIM OF THE TAXPAYER IS ACCEPTED. 107. THE NEXT ITEM RELATES TO BALANCES WRITTEN BACK . IN OUR CONSIDERED OPINION, FINDING GIVEN IN RESPE CT OF PROVISIONS WRITTEN BACK IS EQUALLY APPLICABLE TO BALANCES WRITTEN BACK MORE PARTICULARLY WHEN LD. CIT(A) HAS NOT GIVEN AN Y SEPARATE FINDING AND THE TRANSFER PRICING OFFICER HAS SAID NOTHING SPECI FICALLY ON THIS ITEM. THE BALANCES WRITTEN BACK SHO ULD ALSO BE TREATED AS PART OF OPERATING PROFIT. WE DIRECT ACCORDINGLY.' 42. WE ARE OF THE VIEW THAT IN THE INSTANT CASE BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS ARE PART OF THE OPERATING EX PENSES AND WE DIRECT THE TPO TO RE-COMPUTE THE MARGINS OF COMPARABLE COM PANIES BY INCLUDING BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS AS OPERATING EXPENSES FOR THE PURPOSE OF COMPUTING PROFIT AND LOSS OF COM PARABLE COMPANIES. 9.1. IN VIEW OF THE CO-ORDINATE BENCH DECISION, WE D IRECT THE AO/TPO TO EXAMINE THE OBJECTIONS OF ASSESSEE AND RE-CO MPUTE THE MARGINS CONSIDERING THE PROVISION FOR BAD AND DOUBTF UL DEBTS AS OPERATING EXPENSES. THIS GROUND IS CONSIDERED ALLOW ED. 10. GROUND NO. 7 PERTAINS TO REJECTION OF CERTAIN COMPARABLE COMPANIES SELECTED BY ASSESSEE. A) AKSHAY SOFTWARE TECHNOLOGIES LTD., B) LGS GLOBAL LTD., C) R SYSTEMS INTERNATIONAL LTD., D) QUINEGRA SOLUTIONS LTD., E) ALLGO EMBEDDED SYSTEMS PRIVATE LTD., AND F) LUCID SOFTWARE LTD., I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 15 -: 10.1. EVEN THOUGH LD. COUNSEL ARGUED THAT THESE COMPAN IES ARE TO BE INCLUDED, IT WAS FAIRLY ADMITTED THAT THE ABOV E COMPANIES WERE REJECTED IN VARIOUS CO-ORDINATE BENCH DECISIONS FOR THE SAME YEAR AND ACCORDINGLY, HE HAS NOT SERIOUSLY CONTESTED THE ISSUE. FURTHER, IT WAS ALSO POINTED OUT THAT THIS GROUND BECOMES ACADEMIC, IF ASSESSEES OBJECTIONS ON THE COMPARABLE COMPANIES IN GROUND NO.5 ARE ACCEPTED. CONSIDERING THE SUBMISSIO NS ON THE ABOVE AND ALSO THE FACT THAT THESE COMPANIES ARE NOT SEL ECTED IN ANY OF THE OTHER CO-ORDINATE BENCH DECISIONS, WE REJEC T THIS GROUND. 11. GROUND NO.8 PERTAINING TO USE OF FILTERS, GROU ND NO.9 PERTAINING TO MULTIPLE YEAR DATA AND GROUND NO.10 PER TAINING TO THE ADJUSTMENT FOR RISK DIFFERENCES ARE NOT PRESSED IN THE COURSE OF ARGUMENTS. 12. GROUND NO.11 PERTAINS TO ARMS LENGTH RANGE OF 5% . AO/TPO IS DIRECTED TO KEEP IN MIND THE PROVISO TO SEC TION 92C(2) OF THE ACT WHILE MAKING THE ADJUSTMENT IF ANY, AFTER RE- WORKING THE PROFIT MARGINS ON THE COMPARABLE COMPANIES. THIS GRO UND IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 13. GROUND NO.12 PERTAINS TO CONSEQUENTIAL EFFECT TO BE GIVEN TO MAT CREDIT TO ASSESSEE. AO/TPO IS DIRECTED TO KEEP THE ABOVE IN MIND WHILE GIVING EFFECT TO THE CONSEQUENTIAL ORDER. THIS GROUND IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 14. GROUND NO.14 IS RAISED AS AN ADDITIONAL GROUN D STATING THAT TPO/DRP HAS ERRED IN MAKING A NEGATIVE WORKING CA PITAL I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 16 -: ADJUSTMENT OF (-)0.61% WHILE COMPUTING THE ADJUSTMENT U/S. 92CA. IT WAS THE SUBMISSION THAT NEGATIVE WORKING CAPITAL ADJUSTMENT WAS NOT ALLOWED IN VARIOUS DECISIONS AND RE LIED ON THE DECISION OF ADAPTEC (INDIA) P. LTD., VS. ACIT IN IT A NO. 206/HYD/2014, DT. 25-03-2015, IN THE ABOVE REFERRED CASE. 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 FACT THAT THE COMPANY DOES NOT BEA R ANY WORKING CAPITAL RISKS. ON THIS ISSUE, THE ASS ESSEE SUBMITTED AS UNDER : THE LEARNED TPO DETERMINED THE ALP FOR THE INTERNA TIONAL TRANSACTIONS WITH A.ES BY MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT FOR TH E DIFFERENCES IN WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPANIES CONSIDERED A S COMPARABLES. THE ASSESSEE DOES NOT AGREE WITH THE LEARNED TPO AS : THE COMPANY DOES NOT BEAR ANY WORKING CAPITAL RIS K SINCE IT IS BEEN FULLY FUNDED BY ITS 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. 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 FO R THE TIME VALUE OF MONEY LOST WHEN CREDIT TIME IS PROVIDED TO THE CUSTOMERS. THE APPLI CANT IS NOT AN ENTREPRENEUR BUT A CAPTIVE SERVICE PROVIDER. ITS ENTIRE FUNDING NEEDS ARE PROVIDED BY THE A.E. THIS BEING SO, I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 17 -: THE APPLICANT DOES NOT STAND TO LOSE ANYTHING AS IT IS COMPENSATED ON A TOTAL COST PLUS BASIS. THE TPO PROBABLY WAS CARRIED AWAY BY THE LAR GE AMOUNT OF RECEIVABLES APPEARING IN THE BOOKS OF THE APPLICANT. BUT THE AP PLICANT IS RUNNING ITS BUSINESS WITHOUT ANY WORKING CAPITAL RISK WHILE COMPARABLE COMPANIES HAVE SUCH A RISK FOR THEM. IF AT ALL ANY WORKING CAPITAL ADJUSTMENT IS TO BE MADE TO T H IS SITUATION, ONLY A POSITIVE ADJUSTMENT HAS TO BE MADE TO THE COMPARABLES SO THA T THEY ARE BROUGHT ON PAR WITH THE APPLICANT. IN VIEW OF THE SAME, THE PANEL DIRECTS T HAT NEGATIVE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COM PARABLES SHALL NOT BE MADE. IN VIEW OF THE ABOVE, THE PANEL DIRECTS THAT NEGATI VE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SHALL NOT BE MADE. 11. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THA T ASSESSEES CASE BEING SIMILAR, THERE IS NO NEED FOR MAKING ANY NEGA TIVE WORKING 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 21 ITA.NO.206/HYD/2014 ADAPTEC (INDIA) P. LTD., HYD ERABAD. ASSESSEE. IN VIEW OF THIS, WE DIRECT THE TPO NOT TO MAKE NEGA TIVE WORKING CAPITAL ADJUSTMENT. 14.1. ACCORDINGLY, WE DIRECT THE TPO NOT TO MAKE ANY NEGATIVE WORKING CAPITAL ADJUSTMENT. 15. IN THE RESULT, APPEAL OF ASSESSEE IS CONSIDERED PARTLY ALLOWED FOR STATISTICAL PURPOSES. REVENUES APPEAL IN ITA NO. 1921/HYD/2014: 16. REVENUE HAS RAISED FOUR GROUNDS, OUT OF WHICH G ROUND NOS. 1 & 4 ARE GENERAL IN NATURE. 17. GROUND NO.2 PERTAINS TO EXCLUSION OF INFOSYS TECHNOLOGY LTD., AND KALS INFORMATION SYSTEMS LTD., (SE G). ON THE BASIS OF THE OBJECTIONS RAISED BY ASSESSEE, DRP HAS EXCLUDED THE ABOVE TWO COMPANIES STATING AS UNDER: 33. WITH REGARD TO THE THIRTEENTH GROUND REGARDING INCLUSION OF INFOSYS TECHNOLOGIES LIMITED ('INFOSYS' OR 'THE COM PANY') AS COMPARABLE, I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 18 -: ASSESSEE EXPRESSED THAT INFOSYS TECHNOLOGIES LIMITE D HAS TO BE REJECTED BASED ON THE PRESENCE OF THE BRAND, THE IMPACT OF B RAND ON PROFITS EARNING ETC. THE SUBMISSIONS OF ASSESSEE ARE AS UNDER.: 'THE ASSESSEE HAD SUBMITTED IN RESPONSE TO THE SHOW CAUSE NOTICES ISSUED BY THE LEARNED TPO, THAT INFO SYS HAS SALES TURNOVER OF RS..21,206 CRORE (REF PAGE 39 AR 2010) FOR THE FY 2009-10 AND HENCE SHOULD BE REJECTED AS IT IS HAVING A TURNOVER OF MORE THAN 720 TIMES OF THE ASSESSEE. THE ASSESSEE HAS SUBMITTED TO THE LEARNED TPO THAT INFOSYS HAS IDENTIFIED THE PRESENCE OF BRAND IN ITS SERVICES/ PRODUCTS AND HAS PERFORMED A BRAND VALUATION EXERCISE TO DETERMI NE THE VALUE OF PROFITS EARNED BY INFOSYS THAT CAN BE ATTRIBUTED TO THE 'INFOSYS' BRAND, THE ASSESSEE BEING A CAPTIVE SERVI CE PROVIDER CANNOT BE COMPARED TO COMPANIES WHICH H OLD SIGNIFICANT BRAND VALUE AS SUCH COMPANIES WILL BE RECEIVING A P REMIUM IN THE MARKET BECAUSE OF THE EXISTENCE OF TH E BRAND. WITHOUT PREJUDICE THE ABOVE ARGUMENT THAT INFOSYS H AS TO BE REJECTED, THE ASSESSEE SUBMITTED THAT IF T HE LEARNED TPO WISHES TO CONSIDER INFOSYS AS A COMPARABLE, THE BRAND RELA TED PROFITS AS DISCLOSED IN THE ANNUAL REPORT SHOUL D BE EXCLUDED IN DETERMINING THE PROFITABILITY OF THE COMPANY FOR TR ANSFER PRICING PURPOSES. PLEASE REFER TO SECTION 6 OF ANNEXURE A OF THE SUBM ISSION TO THE LEARNED TPO DATED AUGUST 7, 2013. THE LEARNED TPO IN THE FINAL ORDER HAS COMMENTED TH E FOLLOWING ON SELECTION OF INFOSYS AS A COMPARABLE : THE LEARNED TPO IN THE FINAL ORDER HAS ACCEPTED T HE FACT THAT INFOSYS HAS BRAND BUT HAS ARGUED THAT BRAND ONLY IMPROVES THE VOLUME BUT DOES NOT MATERIALLY IMPACT THE PROFI TABILITY. 34. WE HAVE GONE THROUGH THE SUBMISSIONS AND THE OR DER OF THE AO. THE GROUNDS RAISED BEFORE US WERE THE SAME GROUNDS RAIS ED BEFORE THE TPO. RESPECTFULLY FOLLOWING VARIOUS DECISIONS OF THE HON 'BLE ITAT, THIS PANEL AND EARLIER PANEL DECIDED THAT INFOSYS TECHNOLOGIES LIMITED SHALL NOT BE TAKEN AS COMPARABLE AND ON THE SAME LINES WE DIRECT THE TPO / AO TO EXCLUDE INFOSYS TECHNOLOGIES LIMITED, AS A COMPARAB LE. 35. WITH REGARD TO THE FOURTEENTH GROUND REGARDING INCLUSION OF KALS INFORMATION SYSTEMS LIMITED ('KALS' OR 'THE COMPANY ') AS COMPARABLE, ASSESSEE EXPRESSED THAT IT IS PREDOMINANTLY A PRODU CT COMPANY AND SHOULD BE REJECTED, AS THE COMPANY IS NOT FUNCTIONA LLY COMPARABLE TO THE ASSESSEE. THE SUBMISSIONS OF ASSESSEE ARE AS UNDER. : IN RESPONSE TO THE SHOW CAUSE NOTICES ISSUED BY THE TRANSFER PRICING OFFICER ('LEARNED TPO''), THE ASSESSEE SUBMITTED THAT KALS INFORMATION SYSTEMS IS PRIMARILY A SOFTWARE PRODUCT COMPANY. THIS IS EVIDENT FROM THE INFORMATION PROVIDED IN THE COMPANY WEBSITE [WWW.KALSINFO.COM] REGARDING THE PRODUCTS O FFERED BY THE COMPANY. THE SEGMENTAL INFORMATION PROVIDED IN THE ANNUAL REPORT OF KALS INFORMATION SYSTEMS IS INCONSISTENT WITH THE P&L FOR FY 2009-10. WITHOUT PREJUDICE TO THE ABOVE CONTENTION OF THE AS SESSEE THAT KALS IS FUNCTIONALLY DISSIMILAR. EVEN IF IT IS SELECTED, ENTITY LEVEL MA RGIN SHOULD BE TAKEN FOR COMPARISON. I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 19 -: PLEASE REFER TO THE DETAILED SUBMISSION (SECTION 7 OF ANNEXURE A) DATED 07 AUGUST, 2013 MADE TO THE LEARNED TPO. THE LEARNED TPO HAS WRONGLY INTERPRETED THE REPLY P ROVIDED BY KALS INFORMATION SYSTEMS IN RESPONSE TO THE NOTICE ISSUED U/S 133(6) OF THE ACT IN THE PRECEDING YEARS AND CONCLUDED THAT THE COMPANY IS A PURE SOFTWARE DEVEL OPMENT SERVICE PROVIDER, AND IN MANY CASES THE COMPANY USES ITS OWN LIBRARY OF PROD UCTS AND PREPARES CUSTOMIZED SOFTWARE. FURTHER STATED THAT THE COMPANY HAS GOT S UBSTANTIAL INVENTORY AND ALSO SUCH INVENTORY IS IN THE NATURE OF COMPUTER SPARES AND N OT PRODUCTS AS CONTEMPLATED BY THE TAXPAYER. 36. WE HAVE GONE THROUGH THE SUBMISSIONS AND THE OR DER OF THE AO. THE GROUNDS RAISED BEFORE US WERE THE SAME GROUNDS RAIS ED BEFORE THE TPO. BEFORE THIS PANEL THE ASSESSEE SUBMITTED THAT IN IT S OWN EASE FOR AY 2005- 06 AND 2007-08, THE HON'BLE ITAT VIDE ORDER IN ITA NO. 1196/HYD/2010 AND ITA NO.2102/HYD/2011, DATED 24.05.2013 EXCLUDED THIS COMPARABLE STATING AS UNDER: '36. WE FIND THAT BOTH M/S. HCL EAI SERVICES LTD. A S WELL AS M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LIMITED ARE INTO SOFTWARE DE VELOPMENT SERVICES TO ITS PARENT COMPANIES. THE ASSESSEE IS ALSO INTO SIMILAR TYPE O F ACTIVITY. THEREFORE, THE DECISION TAKEN IN M/S. TRILOGY E- BUSINESS SOFTWARE INDIA PR IVATE LIMITED AS WELL AS M/S. HCL EAI SERVICES LTD. TO EXCLUDE LUCID SOFTWARE AND KAL S INFORMATION SYSTEMS LTD. APPLIES TO THE FACTS OF THE CASE BEFORE US ALSO. THEREFORE, RE SPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCHES (SUPRA), WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE TWO COMPANIES ALSO FROM THE LIST OF COMPARABLES. RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE ITAT REFERRED ABOVE WE DIRECT THE TPO/AO TO EXCLUDE KALS INFORMATION SYSTE M LTD., AS A COMPARABLE. 17.1. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP WHICH HAS RIGHTLY CONSIDERED THAT THESE COMPANI ES ARE FUNCTIONALLY NOT COMPARABLE. THIS GROUND IS DISMISS ED. 18. GROUND NO.3 PERTAINS TO EXCLUSION OF TELECOMMUNICATION CHARGES FROM BOTH TOTAL TURNOVER AN D EXPORT TURNOVER. 18.1. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES ON THE ISSUE AND PERUSED THE MATERIALS ON RECORD. THIS I SSUE IS I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 20 -: SQUARELY COVERED BY THE DECISION OF THE HONBLE BOMBA Y HIGH COURT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY INDIA LTD., [330 ITR 175] (BOM) AND ALSO SPECIAL BENCH DECISION OF THE ITAT, C HENNAI IN THE CASE OF ITO VS. SAK SOFT LTD. [313 ITR (AT) 353] WHER EIN IT HAS BEEN HELD THAT COMMUNICATION CHARGES ETC., ATTRIBUTABLE TO THE D ELIVERY OF THE COMPUTER SOFTWARE OUTSIDE INDIA WHICH ARE TO BE REDUCED FROM THE EXPORT TURNOVER SHOULD BE REDUCED FROM THE TOTAL TURNOVER AS WELL, WHILE COMPUTING THE DEDUCTION U/S. 10A. THER EFORE, FOLLOWING THE RATIO LAID DOWN IN THE AFORESAID CASES, WE APPROVE THE DIRECTION OF DRP TO THE AO TO REDUCE THE AMOUNT FROM THE EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER, WHILE COMPUTI NG THE DEDUCTION U/S. 10A OF THE I.T. ACT. THIS GROUND IS ACC ORDINGLY REJECTED. 19. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. 20. TO SUM UP, APPEAL OF ASSESSEE IS CONSIDERED PA RTLY ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY, 2017 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 31 ST JANUARY, 2017 TNMM I.T.A. NOS. 1921/HYD/14 & 25/HYD/2015 INTOTO SOFTWARE (INDIA) PVT. LTD., :- 21 -: COPY TO : 1. INTOTO SOFTWARE (INDIA) PRIVATE LIMITED, HYDERAB AD; C/O. Y. RAGHURAM, CHARTERED ACCOUNTANT, #118, H.NO. 8-3-833/118, KAMALAPURI COLONY PHASE 1, SRINAGAR COLONY, HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-2(1), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. DIRECTOR OF INCOME TAX (IT & TP), HYDERABAD. 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICI NG), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.
