SumTotal Systems India Private Limited, Hyderabad V. DCIT, Circle-3(2), Hyderabad, Hyderabad

ITA 255/HYD/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6215 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 6 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 12-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S NARASAMMA
• Assessee Lawyers: AJIT TOLANI
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Initiation of penalty proceedings; Bad and doubtful debts; Revised return
• Section: 143(3); 234B; 133(6); 10B

Judgement Text

ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 1 OF 18 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.255/HYD/2015 (ASSESSMENT YEAR: 2010-11) M/S. SUMTOTAL SYSTEMS INDIA PRIVATE LIMITED HYDERABAD PAN: AABCC 9379 C VS DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(2) HYDERABAD FOR ASSESSEE: SHRI AJIT TOLANI AND SHRI DARPAN KIRPALANI FOR REVENUE: SMT. S. NARASAMMA, CIT(DR) O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2010-11. IN TH IS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C(13) OF THE I.T. ACT IN ACCOR DANCE WITH THE DIRECTIONS OF THE DRP. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, WHICH IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT AN D SUPPORT SERVICES, FILED ITS ORIGINAL RETURN OF INCOME FOR T HE A.Y 2010-11 ON 1.10.2007 BY DECLARING AN INCOME OF RS.27,72,181 AN D A BOOK PROFIT OF RS.6,10,62,281. THE RETURN WAS SUBSEQUENT LY REVISED ON 10.09.2011 CLAIMING RS.11,24,77,537 AS A DEDUCTION U/S 10A OF THE ACT AND IN ARRIVING AT THE TAXABLE INCOME OF RS .1,17,45,161. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE AO DATE OF HEARING : 28 .07.2016 DATE OF PRONOUNCEMENT : 23.09.2016 ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 2 OF 18 OBSERVED THAT THE ASSESSEE HAS ENTERED INTO INTERNA TIONAL TRANSACTIONS WITH ITS AE FOR PROVIDING SOFTWARE DEV ELOPMENT SERVICES TO ITS AES. SINCE THE ASSESSEES TURNOVER WITH THE AES DURING THE FINANCIAL YEAR 2009-10 WAS MORE THAN RS. 15.00 CRORES, THE AO REFERRED THE MATTER TO THE TPO FOR DETERMINA TION OF THE ARMS LENGTH PRICE (ALP) OF ITS INTERNATIONAL TRANS ACTIONS. THE TPO, VIDE ORDER U/S 92CA(3) OF THE ACT DATED 31.12. 2013, DETERMINED THE ALP OF THE TRANSACTION AT RS.66,01,0 6,695 AS AGAINST THE PRICE OF RS.60,22,99,470 RECEIVED BY TH E ASSESSEE FROM THE AES AND DETERMINED THE ADJUSTMENT U/S 92CA OF THE ACT AT RS.5,78,67,225. THE AO MADE THE ADJUSTMENT OF TH E SHORTFALL AT RS.92,24,926. AO ACCORDINGLY PASSED THE DRAFT ASSES SMENT ORDER, AGGRIEVED BY WHICH, THE ASSESSEE PREFERRED ITS OBJE CTIONS BEFORE THE DRP. THE DRP, VIDE ORDER DATED 13.11.2014, DIRE CTED THE AO TO EXCLUDE TWO COMPANIES I.E. INFOSYS TECHNOLOGIES LTD AND L&T INFOTECH LTD, FROM THE LIST OF 18 COMPARABLES AND D IRECTED THE AO TO RE-WORK OUT THE ALP. CONSEQUENT TO THE DIRECTION S OF THE DRP, THE AO RE-COMPUTED THE ALP AT RS.65,21,84,748 AND T AKING INTO CONSIDERATION THE FACT THE ASSESSEE HAS OFFERED AN AMOUNT OF RS.4,84,42,265 AS VOLUNTARY TP ADDITION IN THE REVI SED RETURN, THE AO DETERMINED THE SHORTFALL AT RS.14,43,013. THEREA FTER, WHILE COMPUTING THE TAXABLE INCOME OF THE ASSESSEE, THE A O EXCLUDED TELECOMMUNICATION CHARGES ATTRIBUTING TO DELIVERY O F SOFTWARE OUTSIDE INDIA AND ALSO THE TP ADJUSTMENT MADE U/S 9 2CA OF THE ACT FOR THE PURPOSE OF THE DEDUCTION U/S 10A OF THE ACT INCLUDED. HE ACCORDINGLY DETERMINED THE TAXABLE INCOME OF THE ASSESSEE AT RS.5,32,01,336. 3. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US B Y RAISING THE FOLLOWING GROUNDS OF APPEAL: ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 3 OF 18 TRANSFER PRICING MATTERS - RELATING TO DETERMINATION OF ARM'S LENGTH PRICE (ALP') IN RESPECT OF PROVISION OF SOFTWARE SERVICES PROVIDED TO THE ASSOCIATED ENTERPRISES (AES') UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM') BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICER (' AO') / LEARNED TRANSFER PRICING OFFICER ('TPO') AND THE HON'BLE DISPUTE RESOLUTION PANEL ('ORP') ERRED IN: REJECTION OF TRANSFER PRICING DOCUMENTATION MAINTAINED 1. REJECTING THE TRANSFER PRICING DOCUMENTATION MAINTAINED BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962 ('RULES') AND MAKING ADJUSTMENT OF RS 14,43,013. REJECTION OF USE OF CONTEMPORANEOUS DATA AND MULTIPLE YEAR DATA 2. USING SINGLE YEAR DATA OF COMPANIES TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS WITHOUT CONSIDERING THE FACT THAT THE SAME WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS AND DISREGARDING THE APPELLANT'S CLAIM FOR USE OF MULTIPLE YEAR DATA FOR COMPUTING THE ARM'S LENGTH PRICE. SELECTION OF COMPARABLES 3. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSIS AND INTERALIA SELECTING THE FOLLOWING COMPANIES AS COMPARABLE TO THE SOFTWARE SERVICES OF THE APPELLANT: COMP-U-LEARN TECH INDIA LTD; E INFOCHIPS BANGALORE LTD KALS INFO SYSTEMS LTD; AND TATA ELXSI LTD (SEG.) REJECTION OF COMPARABLES ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 4 OF 18 4. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSIS AND INTERALIA REJECTING THE FOLLOWING COMPARABLE COMPANIES. * AKSHAY SOFTWARE TECHNOLOGIES LTD * CG VAK SOFTWARE AND EXPORTS LTD AND * SATYAM COMPUTERS SERVICES LTD ERROR IN MARGIN COMPUTATION 5. COMPUTATION OF NET MARGINS OF THE FOLLOWING COMPANIES SELECTED AS COMPARABLES BY EXCLUDING PROVISION FOR BAD AND DOUBTFUL DEBTS: I) CAT TECHNOLOGIES LTD; II) E-INFOCHIPS BANGALORE LTD; III)E-ZEST SOLUTIONS LTD; IV) KULIZA TECHNOLOGIES PVT LTD V) KALS INFORMATION SYSTEMS LTD (SEG); AND VI) TATA ELXSI LTD (SEG) A SKILLSOFT COMPANY ADJUSTMENT FOR RISK DIFFERENCES 6. NOT ADJUSTING THE NET MARGINS OF THE COMPARABLE COMPANIES TAKING INTO ACCOUNT THE FUNCTIONAL AND RISK DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION OF THE APPELLANT AND THE COMPARABLE COMPANIES IN ACCORDANCE WITH THE PROVISIONS OF RULE 10B(1)(E); CORPORATE TAX ISSUES 7. NOT ALLOWING DEDUCTION U/ S LOA OF THE ACT ON VOLUNTARY TP ADJUSTMENT OF RS. 4,84,42,265 OFFERED BY THE APPELLANT. 8. NOT CONSIDERING THE REVISED RETURN OF INCOME FILE D BY THE APPELLANT WHILE COMPUTING DEDUCTION U/ S LOA OF THE ACT. 9. (A) REDUCING THE INTERNET CONNECTION CHARGES OF RS. 44,28,798 FROM THE EXPORT TURNOVER, BY CONSIDERING THE SAME AS EXPENDITURE NOT FORMING PART OF EXPORT TURNOVER FOR ARRIVING AT THE DEDUCTI ON U/ S LOA OF THE ACT. (B) NOT FOLLOWING THE DIRECTIONS OF THE DRP FOR REDUCING COMMUNICATION CHARGES FROM BOTH EXPORT ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 5 OF 18 TURNOVER AND TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/ S 10A OF THE ACT. 10. NOT GRANTING THE APPELLANT AN OPPORTUNITY TO PROVIDE EXPLANATION/CLARIFICATION ON THE PROPOSED ADJUSTMENTS IN DRAFT ASSESSMENT ORDER AND THUS VIOLATED THE PRINCIPLES OF NATURAL JUSTICE. 11. IMPOSITION OF INTEREST U/ S 234B AND 234C OF THE ACT. 12. INITIATING PENALTY PROCEEDINGS U/S 271(1)( C) O F THE ACT. THE APPELLANT CRAVES, TO CONSIDER EACH OF THE ABOVE GROUNDS OF APPEAL WITHOUT PREJUDICE TO EACH OTHER AND CRAVES LEAVE TO ADD, ALTER, DELETE OR MODIFY ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. 4. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE UPON THE AVERMENTS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND ALSO ON T HE CASE LAW SUBMITTED IN THE FORM OF PAPER BOOK BEFORE US. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTH ORITIES BELOW. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE PROCEED TO DISPOSE OF THE APPEAL AS U NDER: 6. GROUND NO.1 BEING GENERAL IN NATURE, NEEDS NO ADJUDICATION. 7. GROUND NO.2 IS AGAINST THE REJECTION OF USE OF CONTEMPORARIOUS DATA AND MULTIPLE YEAR DATA. THIS G ROUND IS REJECTED AS IT HAS BEEN HELD IN A NUMBER OF CASES B Y THE COORDINATE BENCHES OF THIS TRIBUNAL THAT IT IS ONLY THE DATA PERTAINING TO THE RELEVANT FINANCIAL YEAR THAT HAS TO BE CONSIDERED ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 6 OF 18 FOR DETERMINATION OF THE ALP AND MULTIPLE DATA IS N OT TO BE CONSIDERED. 8. AS REGARDS GROUND NO.3, WE FIND THAT THE ASSESSE ES GRIEVANCE IS AGAINST THE INCLUSION OF THE FOLLOWING COMPANIES AS COMPARABLE TO THE ASSESSEE: A) COMP U-LEARN TECH INDIA LTD B) E INFOCHIPS BANGALORE LTD C) KALS INFO SYSTEMS LTD AND D) TATA ELXSI LTD (SEG.) 9. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE ASSESSEES OBJECTIONS BEFORE THE TPO AND THE DRP AGAINST THESE COMPANIES AND SUBMITTED THAT ON THE VERY SAME GROUNDS, THE COORDI NATE BENCH OF THIS TRIBUNAL IN THE CASE OF PEGA SYSTEMS WORLD WIDE (P) LTD IN ITA NO.1758/HYD/2014 VIDE ORDERS DATED 16.10.2015 F OR THE A.Y 2010-11, HAS CONSIDERED AND HELD THESE COMPANIES NO T TO BE COMPARABLE TO A SOFTWARE DEVELOPMENT SERVICES COMPA NY LIKE THE ASSESSEE. WE FIND THAT PEGA SYSTEMS WORLD WIDE (P) LTD AND THE ASSESSEE ARE BOTH ENGAGED IN SIMILAR ACTIVITIES AND THE A.Y INVOLVED IS ALSO THE SAME I.E. A.Y 2010-11. FURTHER, WE ALSO FIND THAT THE TPO ALSO HAS TAKEN THE VERY SAME COMPANIES ARE COMPARABLES IN THE CASE OF BOTH THE ASSESSEES. THER EFORE, WE ARE SATISFIED THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF PEGA SYSTEMS WORLDWIDE (P) LTD APPLIES TO THE CASE BEFOR E US AS WELL. LET US THEREFORE, NOW CONSIDER EACH OF THE COMPANIE S IN THE LIGHT OF THE ABOVE DECISION. 10. AS FAR AS COMP-U-LEARN TECH INDIA LTD IS CONCER NED, WE FIND THAT THE ASSESSEE HAD OBJECTED TO TAKING TH IS COMPANY AS COMPARABLE BEFORE THE TPO AS RECORDED AT PAGE 37 OF THE T.P. ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 7 OF 18 ORDER ON THE GROUND THAT THE SAID COMPANY IS INTO S OFTWARE PRODUCT DEVELOPMENT SERVICES. THE OBJECTIONS OF THE ASSESSEE ARE ALSO RECORDED AT PAGE 7 OF THE DRPS ORDER. IN THE CASE OF PEGA SYSTEM, THE TRIBUNAL AT PARA 9 TO 9.2 OF ITS ORDER HAS CONSIDERED AND HAS HELD THAT THE SAID COMPANY IS NOT COMPARABL E TO THE ASSESSEE THEREIN WHICH IS ALSO PROVIDING SIMILAR SE RVICES AS THE ASSESSEE HEREIN. FOR THE SAKE OF READY REFERENCE, TH E RELEVANT PARAS ARE REPRODUCED HEREUNDER: COMP-U-LEARN TECH INDIA LTD., : 9. THIS COMPANY WAS SELECTED BY TPO AS ONE OF THE COMPARABLE COMPANIES. ASSESSEE OBJECT ED STATING THAT THIS COMPANY IS ENGAGED IN TWO SEGMENTS I.E. IT ENA BLED SERVICES AND SOFTWARE PRODUCTS SOLUTIONS AS PER THE ANNUAL REPOR T AND IT HAS EXCEPTIONALLY ABNORMAL GROWTH OF PROFITS OF 160% AS AGAINST INDUSTRIAL NORM OF 13 TO 15%. IT WAS ALSO OBJECTED STATING THAT THE GROWTH IS MORE THAN 10 TIMES THE INDUSTRIAL GROWTH AND COMPANY IN ITS STANDARD FINANCIAL PERFORMANCE HAS MENTIONED TH AT IT HAS SPENT SIZEABLE AMOUNT TOWARDS R&D IN PHARMACEUTICAL SECTO R FOR THE PURPOSE OF COMING OUT WITH UNIQUE PRODUCTS AND SOLU TIONS FOR FACILITATING OPERATIONAL EFFICIENCY, EFFECTIVE INVE NTORY MANAGEMENT AND COMPLETE FINANCIAL CONTROL FOR THE SECTOR. TPO HOWEVER, CONSIDERED THE EXCEPTIONAL GROWTH WAS ONLY 1.6 TIME S COMPARED TO LAST YEAR AND NOT AN EXCEPTIONAL INCREASE. FURTHER, HE EXTRACTED SCHEDULE 12, TO COME TO A CONCLUSION THAT AS PER AN NUAL REPORT INCOME FROM SOFTWARE DEVELOPMENT WAS ABOUT RS. 14.1 1 CRORES AS AGAINST TOTAL INCOME OF RS. 14.31 CRORES. THE SOFT WARE SERVICES WORKED OUT TO 98% OF TOTAL REVENUE. HE CONCLUDED TH AT THE COMPANY IS PREDOMINANTLY SOFTWARE DEVELOPMENT SERVICES AND ACCORDINGLY COMPARABLE FOR SOFTWARE DEVELOPMENT SERVICES PROVID ER FOR THE YEAR. HE ALSO STATED THAT COMPANY CATEGORICALLY STATED TH AT IT WAS PURE SOFTWARE DEVELOPMENT SERVICES PROVIDER. HE ALSO REJ ECTED OBJECTION ON STRATEGIC ACQUISITIONS STATING THAT THE SAME DOE S NOT HAVE ANY IMPACT ON STANDALONE FINANCIALS OF ASSESSEE COMPANY . WITH REGARD TO OBJECTION ON R&D, HE CONSIDERED THAT IT WAS A GENER AL NOTE AS NO EXPENDITURE APPEARS TO HAVE BEEN BOOKED IN P&L A/C. HE WAS OF THE OPINION THAT IN MOST OF THE CASES, R&D WILL ACTUALL Y BE ACTIVITIES AIMED AT COST CUTTING AND IMPROVING ORGANIZATIONAL SET UP ETC. IN VIEW OF THE ABOVE, THE CONTENTIONS OF ASSESSEE ARE REJECTED AND COMPANY IS RETAINED AS COMPARABLE. 9.1. RELYING ON THE OBJECTIONS RAISED BEFORE DRP WH O REJECTED THE SAME, LD. COUNSEL SUBMITTED THAT THIS YEAR IS AN EX CEPTIONAL PROFIT YEAR FOR THE COMPANY AND REFERRED TO THE REPORT OF THE COMPANY FOR THE YEAR UNDER CONSIDERATION. VIDE PAGE 207 OF THE PAPER BOOK, LD. COUNSEL REFERRED TO THE STRUCTURAL INITIATIVES, WHE REIN IT WAS STATED YOUR COMPANY WAS ORIGINALLY INTO BUSINESS OF SOFTW ARE DEVELOPMENT AND EDUCATION TRAINING. DURING THE PAST TWO YEARS, OUR FOCUS WAS ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 8 OF 18 SHIFTED TO E-GOVERNANCE SOLUTIONS TO GOVERNMENT DEP ARTMENTS OF STATE AND CENTRAL GOVERNMENTS. FURTHER, AS EXPLANAT ORY STATEMENT TO SECTION 173(2) OF THE COMPANIES ACT, AT ITEM NO. 8, IT WAS REPORTED AS UNDER: AS PART OF OVERALL GROWTH STRATEGY, COMPANY HAD EXCEPTIONALLY ITS OPERATIONS IN ITS CORE ACTIVITY, SOFTWARE DEVELOPMENT, E-GOVERNANCE SOLUTIONS, IT SERVICES, IT ENABLED SER VICES ETC. IN ITEM NO. 9, IT WAS REPORTED THAT THE COMPANY PRESENTLY CARRIES ON BUSINESS OF SOFTWARE DEVELOPMENT, E-GOVERNANCE SOLUTIONS, IT AND IT ENABLED SERVICES. REFERRING TO PAGE 213 OF THE PAPER BOOK, IT WAS STATED THAT IT HAS SPENT SIZEABLE AMOUNT TOWARDS R&D IN PHARMAC EUTICAL SECTOR FOR THE PURPOSE OF COMING OUT WITH UNIQUE PRODUCTS AND SOLUTIONS FOR FACILITATING OPERATIONAL EFFICIENCY, EFFECTIVE INVE NTORY MANAGEMENT AND COMPLETE FINANCIAL CONTROL FOR THE SECTOR. HE L ATER REFERRED TO THE STRATEGIC ACQUISITIONS, ALLIANCES AND SUBSIDIARIES REPORTED IN THE ANNUAL REPORT OF THE COMPANY. REFERRING TO PG. 215, IT WAS SUBMITTED THAT R&D SECTOR WAS ESTABLISHED TO ENHANCE THE QUAL ITY OF ITS PRODUCTS. FURTHER, REFERRING TO REVENUE RECOGNITION IN SCHEDULE 14 (PAGE 219 OF THE PAPER BOOK), IT WAS SUBMITTED THAT REVENUE IN RESPECT OF BRAND LICENSE FEE IS ACCOUNTED ON EXECUT ION OF AGREEMENT. REVENUE FOR SOFTWARE DEVELOPMENT IS RECOGNIZED ON T HE BASIS OF CHARGEABLE TIME OR ACHIEVEMENT OF PRESCRIBED MILEST ONE AS RELEVANT TO EACH CONTRACT. REVENUE FROM SALE OF SOFTWARE PRO DUCTS AND COURSEWARE MATERIALS IS RECOGNIZED WHEN THE SAME HA S BEEN COMPLETED WITH THE PASSING OF TITLE OR LICENSES OR RAISING INVOICES AS THE CASE MAY BE. REFERRING TO THE ABOVE, IT WAS SU BMITTED THAT, THAT COMPANY IS IN DIVERSIFIED ACTIVITIES AND NOT EXCLUS IVELY AS SOFTWARE DEVELOPMENT SERVICE PROVIDER IN WHICH ASSESSEE IS F UNCTIONING. THEREFORE, THE COMPANY IS FUNCTIONALLY DIFFERENT. 9.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE AR E OF THE OPINION THAT ON THE BASIS OF INFORMATION AVAILABLE, COMP-U-LEARN TECH INDIA LTD., CANNOT BE SELECTED AS A FUNCTIONALLY COMPARABLE COM PANY AS IT HAS DIVERSIFIED ACTIVITIES. ONLY IF THERE ARE SEGMENTAL REPORTS PERTAINING TO SOFTWARE DEVELOPMENT SERVICES, THEN ONLY THE COMPAN Y CAN BE TAKEN AS COMPARABLE COMPANY. IN THE ABSENCE OF SUCH INFOR MATION, IT IS VERY DIFFICULT TO HOLD THAT THE SELECTED COMPANY IS COMP ARABLE TO ASSESSEE- COMPANY. THERE IS NO INFORMATION ABOUT THE SEGMENTA L PROFITS. WHAT THAT COMPANY HAS REPORTED IN ITS ANNUAL REPORT IS INCOME FROM SOFTWARE DEVELOPMENT WHICH CANNOT BE EQUATED AS I NCOME FROM SERVICES. THE SOFTWARE DEVELOPMENT MAY INCLUDE SAL E OF PRODUCTS. IN THE ABSENCE OF SEGMENTAL INFORMATION, THIS CASE CAN NOT BE SELECTED AS COMPARABLE. HOWEVER, WHETHER TPO COULD OBTAIN AN Y SEGMENTAL INFORMATION IS NOT KNOWN TO US. WE ARE OF THE OPINI ON THAT TPO SHOULD EXAMINE WHETHER THERE ARE ANY SEGMENTAL INFORMATION WHICH CAN BE OBTAINED FROM THE COMPANY OR AVAILABLE IN THE PUBLI C DOMAIN SO AS TO COMPARE ASSESSEES SOFTWARE DEVELOPMENT SERVICES WI TH THAT OF SOFTWARE DEVELOPMENT SERVICES OF COMP-U-LEARN TECH INDIA LTD. THEREFORE, WE ARE OF THE OPINION THAT THE ISSUE OF SELECTION OF THIS COMPANY IS A COMPARABLE SHOULD BE RESTORED TO THE F ILE OF AO/TPO TO EXAMINE THE AVAILABLE DATA IN PUBLIC DOMAIN/OR OBTA INING INFORMATION U/S. 133(6) OF THE ACT FOR SEGMENTAL IN FORMATION ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 9 OF 18 PERTAINING TO SOFTWARE DEVELOPMENT SERVICES AND THE N DECIDE AFTER GIVING DUE OPPORTUNITY TO ASSESSEE WHETHER THE SAID COMPANY CAN BE SELECTED AS COMPARABLE. FOR THE TIME BEING, ASSESSE ES OBJECTIONS ARE CONSIDERED VALID AND ISSUE IS RESTORED TO THE FILE OF AO FOR UNDERTAKING ANALYSIS AFRESH AS FAR AS THIS COMPANY IS CONCERNED . 11. WITH SIMILAR DIRECTIONS, THIS ISSUE IS SET ASID E TO THE FILE OF THE AO FOR UNDERTAKING FRESH ANALYSIS AND R E-CONSIDERATION IN ACCORDANCE WITH LAW. 12. AS REGARDS E-INFOCHIPS BANGALORE IS CONCERNED, WE FIND THAT THE ASSESSEES OBJECTIONS ARE RECORDED IN THE TPOS ORDER AT PAGE 39 AND AT PAGES 7 & 8 OF THE DRPS ORDER. WE F IND THAT IN THE CASE OF PEGA SYSTEMS, THIS COMPANY WAS ALSO CONSIDE RED AT PARA 8 TO 8.3. THE TRIBUNAL HAS CONSIDERED THE ISSUE AT LE NGTH AND HELD 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 DIFF ERENT AND IS HAVING TWO DIFFERENT SEGMENTS I.E., SOFTWARE DEVELOPMENT SERVI CES AND ITES. COMPANY OFFERS BROAD PORTFOLIO OF SERVICES COMPRISING NEW P RODUCTS, PRODUCT DEVELOPMENT, PRODUCT SUSTENANCE AND MAINTENANCE, PR ODUCT QUALITATIVE ANALYSIS (QA) AND INDEPENDENT TESTING HARDWARE AND SOFTWARE DESIGN ETC. TPO DID NOT ACCEPT ASSESSEES DOCUMENTS BY REFERRIN G TO THE SCHEDULES LIKE RESEARCH AND DEVELOPMENT, INVENTORIES, SALES AND OT HER INCOMES. HE ALSO REPORTED THAT COMPANY IN THE NOTES TO THE ACCOUNTS HAS STATED THAT IT IS ENGAGED IN THE DEVELOPMENT AND MAINTENANCE OF COMPU TER SOFTWARE. THE PRODUCTION AND SALES OF SOFTWARE CANNOT BE EXPRESSE D IN ANY GENERIC UNIT. THUS, TPO REJECTED ASSESSEES OBJECTIONS AND RETAIN ED IT AS A COMPARABLE. DRP ALSO 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 ANALYZED 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 ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 10 OF 18 DISCLOSURES IN ANNUAL REPORT OF FY. 2008-09 AND ANN UAL REPORT OF FY. 2009- 10 TO SUBMIT THAT THE COMPANY IS PRIMARILY ENGAGED 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. ASSESSE E RELIED ON PARA 10 OF THE CO-ORDINATE BENCH ORDER, WHICH IS AS UNDER: PARA 10 WITH RESPECT TO E-INFOCHIP BANGALORE LT D., WE FIND THAT IN THE ANNUAL ACCOUNTS OF THE COMPANY, WI TH RESPECT TO THE SEGMENT INFORMATION IT IS STATED THA T THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMEN T AND I.T ENABLED SERVICES WHICH IS CONSIDERED THE ON LY REPORTABLE BUSINESS SEGMENT AS PER ACCOUNTING STAND ARD AS-17 SEGMENT REPORTING PRESCRIBED IN COMPANIES (ACCOUNTING STANDARD) RULES, 2006. WE THUS FIND THA T NO SEGMENTAL INFORMATION IS AVAILABLE .CONSIDERING THE AFORESAID FACTS, WE ARE OF THE VIEW THAT THE AFORES AID TWO COMPANIES NEEDS TO BE EXCLUDED WHILE WORKING OUT TH E COMPARABILITY ANALYSIS AND THEREFORE UPHOLD THE PLE A OF THE ASSESSEE IN EXCLUDING THE MARGINS OF THE AFORES AID 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 THE ABOVE COMPANY IS NOT AVAILABLE. AS SEEN FROM THE TP ORDERS, DOCUMENTS PL ACED ON RECORD, TPO RELIED ON LATER YEARS ANNUAL REPORT IN EXTRACTING THE INFORMATION. VARIATION IN PROFITABILITY OVER THE YEARS ALONE CANNOT BE A R EASON TO EXCLUDE THE COMPANY FROM COMPARABILITY ANALYSIS BUT AS RIGHTLY POINTED, THE ABSENCE OF SEGMENTAL INFORMATION, HOW MUCH PROFIT EARNED WA S ON THE SOFTWARE DEVELOPMENT OR ITES CANNOT BE EXAMINED. IN THE ABSE NCE OF CLARITY ON OPERATIONAL DETAILS AND COMPARABLE COMPANY HAVING D IVERSIFIED ACTIVITIES, WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE C HOSEN 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 ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 11 OF 18 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 ASSES SEE IN THIS REGARD RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO T O EXCLUDE THE SAID COMPANY FROM THE FINAL LIST OF COMPARABLES WHI LE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. 13. AS FAR AS KALS INFORMATION SYSTEMS LTD IS CONCE RNED, WE FIND THAT THE OBJECTIONS OF THE ASSESSEE ARE REC ORDED IN PAGE 44 OF THE T.P ORDER AND AT PAGES 7 & 8 OF THE DRPS OR DER. WE FIND THAT FOR THE VERY SAME REASONS, THE TRIBUNAL HAD DI RECTED THE SAID COMPANY TO BE EXCLUDED IN THE CASE OF PEGA SYSTEMS WORLD WIDE (P) LTD CITED (SUPRA). FOR THE PURPOSE OF READY REFE RENCE, THE RELEVANT PARAS OF THE TRIBUNALS ORDER ARE REPRODUC ED HEREUNDER: KALS INFORMATION SYSTEMS LTD : 10. ASSESSEE OBJECTED TO THE ABOVE COMPANY BEFORE T PO STATING THAT THE ABOVE SAID COMPANY IS FUNCTIONALLY DIFFERENT AS IT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. IT H AS INVENTORIES EQUIVALENT TO 27% OF THE REVENUE. TPO HOWEVER REJEC TED ASSESSEES CONTENTIONS STATING THAT COMPANY CLASSIFIED ITSELF AS PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. FURTHER, EXTRACTING P AGE NO. 22 OF THE ANNUAL REPORT OF THE COMPANY, TPO OPINED THAT THE S EGMENTAL INFORMATION INDICATES THAT REVENUE IS SHOWN TO HAVE BEEN EARNED FROM APPLICATION SOFTWARE AND TRAINING. ACCORDINGLY, HE REJECTED ASSESSEES OBJECTIONS AND INCLUDED AS THE COMPARABLE COMPANY. DRP CONFIRMED THE SAME. 10.1. ASSESSEES MAIN OBJECTION BEFORE US IS ON FU NCTIONALITY OF THE COMPARABLE COMPANY. AS SEEN FROM THE ANNUAL REPORT OF 2008-09 AND 2009-10 AND COMPARATIVE STATEMENT PLACED BY ASSESSE E, THE COMPANY CLASSIFIED ITSELF AS THE COMPANY ENGAGED IN DEVELO PMENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION. THE COM PANY CONSISTING OF STPI UNIT ENGAGED IN DEVELOPMENT OF SOFTWARE AND SO FTWARE PRODUCTS AND A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTWA RE PROFESSIONALS ON ON-LINE PROJECTS. THIS INDICATES THAT COMPANY IS EN GAGED IN DEVELOPMENT OF SOFTWARE AND PRODUCTS AND ITS INVENT ORY ALSO INDICATES THAT ASSESSEE HAS BEEN USING ITS READYMADE LIBRARIE S FOR SALES. THIS COMPANY WAS REJECTED IN EARLIER YEAR ON FUNCTIONAL ANALYSIS BY ITAT IN THE CASE OF PLANET ONLINE PVT. LTD., IN ITA NO. 464 /HYD/2014 WHERE IN IT WAS HELD THAT COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS. SINCE ITS ANNUAL REPORT STATES THE SAME F ACTS IN THIS ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 12 OF 18 ASSESSMENT YEAR ALSO, WE ARE OF THE OPINION THAT TH E COMPANY CANNOT BE SELECTED AS A COMPARABLE AS IT WAS ENGAGED IN DE VELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. ACCORDINGLY, ASSESS EES OBJECTIONS ARE ACCEPTED AND AO IS DIRECTED TO EXCLUDE THE COMPANY . 14. FOR THE ABOVE REASONS, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. 15. AS REGARDS TATA ELXSI LTD, WE FIND THAT THE ASS ESSEES OBJECTIONS ARE RECORDED AT PAGE 46 OF THE T.P. ORDE R AND AT PAGE 7 OF THE DRPS ORDER. WE ALSO FIND THAT THIS COMPANY IS ALSO DIRECTED TO BE EXCLUDED IN THE CASE OF PEGA SYSTEMS WORLDWID E (P) LTD AND RELEVANT PORTION OF THE TRIBUNALS ORDER AT PARAS 1 2 TO 12.1 ARE REPRODUCED HEREUNDER: TATA ELXSI LTD (SEG): 12. BEFORE TPO, ASSESSEE CONTENDED THAT THE ABOVE S AID COMPANY IS FUNCTIONALLY DIFFERENT AS IT SPECIALIZED IN EMBEDDE D SOFTWARE DEVELOPMENT TECHNOLOGY. IT WAS ALSO OBJECTED BEFORE TPO THAT IN EARLIER YEAR THIS COMPANY HAS CLEARLY STATED THAT IT CANNOT BE COMPARED TO ANY OTHER SOFTWARE SERVICES COMPANY DUE TO COMPLEX NATU RE OF ITS BUSINESS. ASSESSEE RELIED ON THE DECISIONS OF ITAT IN THE CAS E OF CONEXANT SYSTEMS INDIA PVT. LTD. (ITA NO.1429/HYD/2010 AND 1978/HYD/ 2011) AND OTHER CASES AS STATED BY TPO IN PAGE 41 OF HIS ORDER. HOW EVER, TPO DID NOT AGREE WITH THE OBJECTIONS STATING THAT THE COMPANY HAS TWO SEGMENTS INCLUDING SOFTWARE DEVELOPMENT SERVICES AND REVENUE FROM SOFTWARE DEVELOPMENT SERVICES IS RS. 33,649 CRORES OUT OF TO TAL TURNOVER OF RS. 37,637 CRORES, WHICH IS AT 89.52%. THIS SIGNIFIED T HE FACT THAT COMPANY IS PREDOMINANTLY INTO SOFTWARE DEVELOPMENT SERVICES. T PO REJECTED THE OBJECTIONS OF ASSESSEE SO AS DRP. 12.1. IT WAS THE OBJECTION OF ASSESSEE THAT ABOVE C OMPANY IS PREDOMINANTLY INTO PRODUCT DESIGN SERVICES, INNOVAT ION DESIGN ENGINEERING AND VISUAL COMPUTING LABS DIVISION WHIC H ARE SPECIALIZED SERVICES. HE REFERRED TO THE ORDER OF ITAT IN AY. 2 009-10 IN THE CASE OF PLANET ONLINE PVT. LTD., IN ITA NO. 464/HYD/2014 (S UPRA), WHEREIN THIS COMPANY WAS REJECTED ON THE REASON THAT IT IS ENGAG ED IN MULTIPLE SEGMENTS. THERE IS NO BREAK-UP IN THE ANNUAL REPORT AND DATA ON WHICH MARGIN FROM SOFTWARE SERVICES ACTIVITY ONLY CAN BE COMPUTED IS ALSO NOT AVAILABLE. MOREOVER, THE COMPANY ITSELF HAS INDICAT ED THAT IT CANNOT BE COMPARED WITH ANY OTHER SOFTWARE SERVICE COMPANY BE CAUSE OF ITS COMPLEX NATURE. SIMILAR VIEW WAS TAKEN BY MANY OF T HE CO-ORDINATE BENCHES IN EARLIER YEARS THAT TATA ELXSI LTD., CANN OT BE SELECTED AS COMPARABLE COMPANY. CONSISTENT WITH THE ABOVE VIEW, WE ARE OF THE OPINION THAT A COMPANY LIKE TATA ELXSI LTD., WHICH HAS COMPLEX ACTIVITIES ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 13 OF 18 AND SEGMENTAL INFORMATION OF WHICH IS NOT AVAILABLE CANNOT BE SELECTED AS COMPARABLE COMPANY TO ASSESSEE. MOREOVER, AS SEE N FROM THE TURNOVER AS REPORTED BY TPO ITSELF, IT WAS MANY TIM ES ASSESSEES TURNOVER AND THEREFORE CANNOT BE EXACTLY CONSIDERED AS A SIMILAR COMPANY UNLESS THE NATURE OF ACTIVITY, THE INCOMES ARE ANALYZED IN DETAIL. SINCE NO SEGMENTAL DATA IS AVAILABLE, CONSI DERING THE SOFTWARE DEVELOPMENT SERVICES AS A SEGMENT BY TPO CANNOT BE CONSIDERED AS SEGMENTAL DATA, UNLESS THE SERVICES RENDERED BY THA T COMPANY ARE SIMILAR TO THE SERVICES RENDERED BY ASSESSEE. IN VI EW OF THIS, WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE SELECTED AS COMPARABLE. AO IS DIRECTED TO EXCLUDE THE SAME. 16. FOR THE ABOVE REASONS, WE DIRECT THE AO TO EXCLU DE THIS COMPANY ALSO FROM THE FINAL LIST OF COMPARABLES. AC CORDINGLY, GROUND OF APPEAL NO.3 IS ALLOWED. 17. AS REGARDS GROUND NO.4 AGAINST THE EXCLUSION OF THREE COMPANIES WHICH HAVE BEEN SELECTED BY THE ASSESSEE AS COMPARABLE TO THE ASSESSEE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IF GROUND OF APPEAL NO.3 IS ALLOWED THE ASSESSEES CASE WOULD FALL WITHIN (+/_) 5% OF THE MARGIN OF THE COMPARABLE COMPANIES AND THEREAFTER ADJUDICATION OF THIS GROUN D OF APPEAL WOULD BECOME ONLY ACADEMIC. SINCE WE HAVE ALREADY A LLOWED GROUND NO.3 AND DIRECTED THE EXCLUSION OF THE COMPA NIES MENTIONED THEREIN, WE DO NOT SEE ANY REASON TO ADJU DICATE THIS GROUND OF APPEAL AT THIS STAGE. THIS GROUND IS ACCO RDINGLY REJECTED. 18. AS FAR AS GROUND NO.5 IS CONCERNED, IT IS THE C ASE OF THE ASSESSEE THAT THE MARGINS OF THE COMPARABLE COM PANIES HAVE BEEN COMPUTED ERRONEOUSLY BY NOT CONSIDERING THE PR OVISION FOR BAD AND DOUBTFUL DEBTS FROM THEIR OPERATING INCOME. HE SUBMITTED THAT THE ISSUE IS COVERED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KE NEXA TECHNOLOGIES PRIVATE LTD VS. DCIT IN ITA NO.243/HYD /2014 ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 14 OF 18 WHEREIN AT PARAS 40 TO 42, THE TRIBUNAL HAS HELD TH AT THE BAD DEBTS AND THE PROVISION FOR BAD AND DOUBTFUL DEBTS ARE PART OF THE OPERATING EXPENSES AND ARE TO BE TAKEN INTO CONSIDE RATION WHILE COMPUTING THE COMPARABLE COMPANIES. FOR THE SAKE OF CONVENIENCE, THE RELEVANT PARAS ARE REPRODUCED HERE 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: '106.2 THUS, CREATION OF UNPAID LIABILITY AND ITS W RITE BACK IS A NORMAL INCIDENT OF A BUSINESS OPERATION WHICH IS CARRIED EVERYWHERE IN ACCOUNTS TO HAVE TRUE PICTURE OF PROFITS 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 CONSIDE RATION 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 ACCE PTED. 107. THE NEXT ITEM RELATES TO BALANCES WRITTEN BACK . IN OUR CONSIDERED OPINION, FINDING GIVEN IN RESPECT OF PRO VISIONS WRITTEN BACK IS EQUALLY APPLICABLE TO BALANCES WRIT TEN BACK MORE PARTICULARLY WHEN LD. CIT(A) HAS NOT GIVEN ANY SEPARATE FINDING AND THE TRANSFER PRICING OFFICER H AS SAID NOTHING SPECIFICALLY ON THIS ITEM. THE BALANCES WRI TTEN BACK SHOULD ALSO BE TREATED AS PART OF OPERATING PR OFIT. 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 ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 15 OF 18 19. RESPECTFULLY FOLLOWING THE DECISION OF THE COOR DINATE BENCH WE DIRECT THE AO TO TREAT THE PROVISIONS FOR BAD AND DOUBTFUL DEBTS OF THE COMPARABLE COMPANIES AS PART OF THEIR OPERATING EXPENSES AND TO RE-COMPUTE THE MARGINS OF THE COMPARABLE COMPANIES ACCORDINGLY. THIS GROUND OF AP PEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 20. AS REGARDS GROUND NO.6 AGAINST NOT ADJUSTING TH E NET MARGINS OF THE COMPANIES BY TAKING INTO ACCOUNT THE FUNCTIONAL AND RISK DIFFERENCES BETWEEN THE INTERNATIONAL TAXA TION OF THE ASSESSEE AND THE COMPARABLE COMPANIES, WE REJECT TH E SAME AS ADJUDICATION OF THE SAME WOULD ONLY RESULT IN AN AC ADEMIC EXERCISES CONSEQUENT TO THE ALLOWING OF GROUND NO.3 IN THE APPEAL. 21. AS REGARDS GROUNDS NO. 7 & 8 ARE CONCERNED, WE FIND THAT THEY ARE AGAINST THE NON-ALLOWING OF DEDUCTION U/S 10A OF THE ACT ON VOLUNTARY TP ADJUSTMENT OF RS.4,84,42,265 OF FERED BY THE ASSESSEE BY NOT CONSIDERING THE REVISED RETURN FILE D BY THE ASSESSEE FOR COMPUTING THE DEDUCTION U/S 10A OF THE ACT. WE FIND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSE E BY THE JUDGMENT OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF IGATE GLOBAL SOLUTIONS LTD IN ITA NO.453/2008 DATED 17.6.2014 WHEREIN THE DECISION OF THE TRIBUNAL IN ITA NOS. 24 8 & 249/BANG/2007 WAS CONFIRMED. WE FIND THAT IN THE SA ID ORDER THE TRIBUNAL HAS AT PARAS 21 TO 23 HELD AS UNDER: 21. THE LAST GRIEVANCE IS IN RESPECT OF NOT ALLOWI NG DEDUCTION UNDER SECTION 10A ON THE ADJUSTMENT MADE BY THE ASSESSEE TO THE ARM'S LENGTH PRICE. 22. IN THE INSTANT CASE, THE ASSESSEE COMPANY ENTERED INTO TRANSACTION WITH ASSOCIATED ENTERPRISE. ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 16 OF 18 THE ASSESSEE COMPANY DETERMINED ARM'S LENGTH PRICE AND ACCORDINGLY MADE ADJUSTMENT TO THE INCOME BECAUSE ARM'S LENGTH PRICE DETERMINED WAS MORE THAN THE CONSIDERATION, AT WHICH THE TRANSACTIONS WERE SHOWN IN THE BOOKS OF ACCOUNT. THE DEDUCTION UNDER SECTION 10A HAS NOT BEEN ALLOWED AS PER PROVISO TO SECTION 92C(4). AS PER THIS PROVISO, NO DEDUCTION UNDER SECTION 10A OR 10B OR UNDER CHAPTER VIA IS TO BE ALLOWED IN RESPECT OF AMOUNT O F INCOME, BY WHICH THE TOTAL INCOME OF THE ASSESSEE I S ENHANCED AFTER COMPUTATION OF INCOME UNDER THE SUB- SECTION. THE LEARNED AUTHORIZED REPRESENTATIVE DURING THE COURSE OF PROCEEDINGS HAS REFERRED TO THE WORD 'ENHANCED'. IN CASE THE INCOME IS ENHANCED, THEN DEDUCTION IS NOT PERMISSIBLE. HOWEVER, IN THE INSTANT CASE, INCOME HAS NOT BEEN ENHANCED BECAUSE THE SAME WAS ALREADY RETURNED BY THE ASSESSEE. IN THE MEMO EXPLAINING THE PROVISIONS OF FINANCE BILL, 2006, IT HAS BEEN MENTIONED AS UNDER :- [2006) 201 CTR (ST) 147: [2006) 281 ITR (ST) 196 'UNDER SUB-SECTION (4), IT HAS BEEN PROVIDED THAT ON THE BASIS OF ARM'S LENGTH PRICE SO DETERMINED, THE ASSESSING OFFICER MAY COMPUTE THE TOTAL INCOME OF A N ASSESSEE. THE FIRST PROVISO TO SUB-SECTION (4) PROV IDES THAT WHERE THE TOTAL INCOME OF THE ASSESSEE AS COMPUTED BY ASSESSING OFFICER IS HIGHER THAN THE INCOME DECLARED BY THE ASSESSEE, NO DEDUCTION UNDER SECTION 10A OR SECTION 10B OR UNDER CHAPTER VIA WILL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME, BY WHICH THE TOTAL INCOME OF THE ASSESSEE I S ENHANCED AFTER COMPUTATION OF INCOME UNDER SUB- SECTION.' 23. FROM THE MEMO EXPLAINING THE PROVISIONS OF FINANCE BILL, 2006 AS WELL AS FROM THE LITERAL MEANING OF THE WORD 'ENHANCED', IT IS CLEAR THAT IF INCOME INCREASED, AS A RESULT OF COMPUTATION OF ARM 'S LENGTH PRICE, THEN SUCH INCREASE IS NOT TO BE CONSIDERED FOR DEDUCTION UNDER SECTION 10A. IN THE INSTANT CASE, THE ASSESSEE HIMSELF HAS COMPUTED THE ARM'S LENGTH PRICES AND HAS DISCLOSED THE INCOME ON THE BASIS OF ARM'S LENGTH PRICES. IT IS NOT A CASE, WHERE THERE IS AN ENHANCEMENT OF INCOME DUE TO ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 17 OF 18 DETERMINATION OF ARM'S LENGTH PRICE. HENCE, IT IS HE LD THAT ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 10A IN RESPECT OF INCOME DECLARED IN THE RETURN OF INCOME ON THE BASIS OF COMPUTATION OF ARM 'S LENGTH PRICE. 22. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO TO ALLOW THE DEDUCTION U/S 10A OF THE ACT ON THE ALP A DJUSTMENT VOLUNTARILY OFFERED BY THE ASSESSEE. GROUNDS NO. 7 & 8 ARE ACCORDINGLY ALLOWED. 23. AS REGARDS GROUND NO.9 AGAINST THE EXCLUSION OF THE INTERNET CONNECTION CHARGES ONLY FROM THE EXPORT TU RNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT, WE DIRECT T HE AO TO EXCLUDE THEM FROM BOTH THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION U/S 10A OF THE ACT AS HELD BY THE HON'BLE KARNATAKA HIGH COURT IN THE CAS E OF TATA ELXSI LTD, REPORTED IN 349 ITR 98 (KARN.) THIS GROU ND OF APPEAL IS ACCORDINGLY ALLOWED. 24. AS REGARDS GROUND NO.10 AGAINST NOT PROVIDING OPPORTUNITY TO THE ASSESSEE TO EXPLAIN ON THE PROPO SED ADJUSTMENTS IN THE DRAFT ASSESSMENT ORDER, THE LEAR NED COUNSEL FOR THE ASSESSEE DID NOT ADVANCE ANY ARGUMENTS ON T HIS GROUND OF APPEAL. THEREFORE, THIS GROUND OF APPEAL IS REJECTE D. 25. GROUND NO.11 IS AGAINST THE LEVY OF INTEREST U/ S 234B AND 234C OF THE ACT AND IS CONSEQUENTIAL IN NATURE. THEREFORE, THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF TO THE ASSESSEE, IF ANY, WHILE GIVING EFFECT TO THIS ORDER. ITA NO 255 OF 2015SUMTOTAL SYSTEMS INDIA P LTD HYDE RABAD PAGE 18 OF 18 26. AS REGARDS GROUND NO.12 IS CONCERNED, IT IS AGA INST THE INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT, WE REJECT THE SAME AS IT IS PREMATURE. 27. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD SEPTEMBER, 2016. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 23 RD SEPTEMBER, 2016. VINODAN/SPS COPY TO: 1 M/S.SUMTOTAL SYSTEMS INDIA (P) LTD, 7 TH FLOOR, BUILDING 2B, MAXIMUS TOWERS, K.RAHEJA I.T. PARK, MADHAPUR, HYDER ABAD 500081 2 DY.CIT, CIRCLE 3(2), 7 TH FLOOR, IT TOWERS, AC GUARDS, HYDERABAD 3 DRP HYDERABAD 4 5 CIT INTERNATIONAL TAXATION, IT TOWERS, 10-2-3 AC G UARDS, HYDERABAD CIT-3 HYDERABAD 6 THE DR, ITAT HYDERABAD 7 GUARD FILE BY ORDER