Oakton Global Technology Services Centre (India) Pvt.Ltd., Hyd, Hyderabad V. ACIT, Circle-16(2), Hyderabad, Hyderabad

ITA 434/HYD/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6358 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-07-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 17-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KPC RAO
• Assessee Lawyers: RAVI BHARDWAJ
• Keywords: Transfer pricing; Search and seizure; International transaction
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 434/HYD/2015 ASSESSMENT YEAR: 2010-11 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PVT. LTD., HYDERABAD. PAN AAACO 8824H VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 16(2), 6 TH FLOOR, AAYAKAR BHAVAN, HYDERABAD 500 004. (ASSESSEE) (RESPONDENT) ASSESSEE BY : SHRI RAVI BHARDWAJ REVENUE BY : SHRI K.P.C. RAO DATE OF HEARING 21-07-2016 DATE OF PRONOUNCEMENT 05-08-2016 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST T HE ORDER PASSED U/S 143(3) R.W.S. 92CA(3) R.W.S.144C(5) OF T HE INCOME TAX ACT, 1961 (IN SHORT ACT) DATED 02/10/02/2015 RELA TING TO AY 2010-11. 2. BRIEF FACTS OF THE CASE ARE, M/S OAKTON GLOBAL TECHNOLOGY SERVICE CENTRE (INDIA) P. LTD., THE GROUP PROVIDES RANGE OF CONSULTING AND IT SERVICES CENTRED ON BUSINESS OPERATIONS AND SYSTEMS AND COVERS BUSINESS CONSULTING, IT STRATEGY, PLANNING S ERVICES, DELIVERY SERVICES IN SOLUTION DESIGN, CUSTOM SOFTWARE DEVELO PMENT, PACKAGED SOFTWARE IMPLEMENTATION, INFORMATION MANAGEMENT AND SYSTEM INTEGRATION SOLUTIONS. THE TAXPAYER CATERS TO SOFTW ARE DEVELOPMENT AND SUPPORT FOR ITS A.E. IT ALSO PROVIDES ON ONGOI NG MAINTENANCE AND SUPPORT SERVICES. 2 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. 2.1 DURING THE RELEVANT PY, AS PER THE 3CEB REPORT/ TP DOCUMENT, THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE REFL ECTED AS UNDER: A.E. NATURE OF TRANSACTION AMOUNT (RS.) OAKTON SERVICES PTY LTD. PROVISION OF SOFTWARE DEVELOPMENT SERVICES 14,49,13,409 OAKTON LTD. REIMBURSEMENT OF EXPENSES PAID 45,70,800 14,94,84,209 2.2 THE TAXPAYER HAS CARRIED OUT THE ECONOMIC ANALY SIS AND HAS SUMMARIZED IT AS UNDER: NATURE OF INTERNATIONAL TRANSACTION AMOUNT MAM PLI MARGIN OF TAXPAYER MARGIN OF COMPARABLES PROVISION OF SOFTWARE DEVELOPMENT SERVICES 14,49,13,409 TNMM OP/ OC 13.41 11.88 REIMBURSE- MENT OF EXPENSES PAID 45,70,800 NA NA NA NA 2.3 THE TAXPAYER HAS CARRIED OUT THE ECONOMIC ANALY SIS IN SEARCH FOR COMPARABLES AT PAGES 27 TO 39 OF THE TP DOCUMEN TATION. THE TAXPAYER HAS USED PROWESS AND CAPITALINE PLUS DATA BASE IN SEARCH FOR COMPARABLE COMPANIES. FOR THE SOFTWARE DEVELOPM ENT SERVICES, AFTER APPLYING CERTAIN FILTERS, THE TAXPAYER USING TNMM AS MAM HAS SHORT-LISTED 14 COMPARABLES WITH ARITHMETIC MEAN PL I (OP/OC) WAS COMPUTED AT 11.88% AS AGAINST THE PLI OF 13.41% OF ITS OWN. FOR THE TRANSACTIONS RELATING TO REIMBURSEMENT OF EXPENSES PAID, NO TP STUDY HAS BEEN CARRIED OUT. ACCORDINGLY, THE TAXPAYER HOL DS THAT THE TRANSACTIONS ARE WITHIN THE ARMS LENGTH. 3 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. 2.4 FINANCIAL RESULTS FOR THE AY 2010-11 ARE AS UND ER: DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 14,49,13,410/- OPERATING COST 12,83,29,116/- OPERATING PROFIT 1,65,84,294/- OP/OR (%) 11.44 OP/OC (%) 12.92 2.5 TPO NOTICED THAT THE COMPANY HAD THE FOLLOWING TRANSACTION, WHICH WAS REPORTED IN FORM 3CEB BUT NO BENCH MARKIN G ANALYSIS HAS BEEN DONE IN THE TP STUDY: A.E. NATURE OF TRANSACTION AMOUNT (RS.) OAKTON SERVICES PTY LTD. RECEIVABLES 4,21,14,253 2.6 ON GOING THROUGH THE TP DOCUMENT, THE TPO NOTED THAT THE METHOD OF THE SEARCH PROCESS SUFFERS FROM DEFECTS W HICH RESULTED IN SELECTION OF INAPPROPRIATE COMPARABLES AND REJECTIO N OF COMPANIES THAT ARE APPROPRIATE COMPARABLES. HE, THEREFORE, RE JECTED THE TP DOCUMENT AND AN INDEPENDENT ANALYSIS HAS BEEN MADE BY AGGREGATING ALL THE TRANSACTIONS UNDER TNMM. 2.7 THE FINAL COMPARABLES SELECTED BY TRANSFER PRIC ING OFFICER (TPO) WITH OP TO OC ARE AS UNDER: SL.NO. NAME OF THE COMPANY OP TO TOTAL COST 1. ACCELYA KALE SOLUTIONS LTD. 28.42 2. AVANI CIMCON TECHNOLOGIES LTE. 3.39 3. CAT TECHNOLOGIES LTD. 13.04 4. COMP-U-LEARN TECH INDIA LTD. 19.96 5. E-INFOCHIPS BANGALORE LTD. 72.32 6. EVOK TECH 18.61 7. E-ZEST SOLUTIONS LTD. 22.1 8. INFOSYS TECHNOLOGY LTD. 45.44 9. KALS INFORMATION SYSTEMS LTD. (SEG) 34.41 10. KULIZA TECH. 25.92 4 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. 11. L&T INFOTECH LTD. 21.2 12. MINDTREE LTD. (SEG.) 20.47 13. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 11.37 14. RS SOFTWARE (INDIA) LTD. 9.88 15. SASKEN COMMUNICATION TECHNOLOGIES LTD. 25.23 16. TATA ELXSI LTD. (SEG.) 18.02 17. THINKSOFT GLOBAL SERVICES LTD. 11.22 18. ZYLOG SYSTEMS LTD. 18.62 19. PERSISTENT SYSTEMS LTD. 31.57 2.8 ASSESSEE HAS SELECTED TRANSACTION NET MARGIN ME THOD (TNMM) AS THE MOST APPROPRIATE METHOD AND ALSO APPLIED MUL TIPLE YEAR DATA TO SELECT THE COMPARABLES. IT HAD SELECTED 14 COMPARAB LES. THOUGH, TPO HAS ACCEPTED THE TNMM AS THE MOST APPROPRIATE M ETHOD, HE REJECTED THE TP STUDY OF ASSESSEE AND HAS MADE FRES H TP STUDY WITH DATA FOR THE FY 2010-11. TPO HAD SELECTED THE ABOVE 19 COMPARABLES. 2.9 AFTER COMPARING THE AVERAGE MARGINS OF THE COMP ARABLES TO THE FINANCIALS OF THE ASSESSEE, THE TPO COMPUTED THE AD JUSTED ARMS LENGTH MARGIN AS UNDER: DESCRIPTION AMOUNT ARMS LENGTH MARGIN 22.69% LESS: WCA 0.92% ADJUSTED ARMS LENGTH MARGIN 21.77 OPERATION COST (OC) 12,83,29,116 ADJUSTED ARMS LENGTH MARGIN (%) (AALM) 21.77% ARMS LENGTH PRICE = (100+AALM)*OC 15,62,66,365 PRICE RECEIVED (OR) 14,49,13,410 ADJUSTMENT U/S 92CA 1,13,52,955 5 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. 2.10 ACCORDINGLY, THE TPO WHO PASSED AN ORDER U/S 9 2CA(3) OF THE ACT ON 24/09/2013, RECOMMENDED ADJUSTMENT OF RS. 1, 13,52,955/-. THE SAME WAS INCORPORATED BY THE AO IN THE DRAFT AS SESSMENT ORDER. ASSESSEE PREFERRED A PETITION BEFORE THE DISPUTE RE SOLUTION PANEL (DR) RAISING VARIOUS OBJECTIONS. 3. DRP HAS GIVEN PARTIAL RELIEF TO THE ASSESSEE AS UNDER: 3.1 THE DRP HAS ELIMINATED THE COMPANIES M/S INFOSY S TECHNOLOGIES LTD. AND L&T INFOTECH LTD. AS COMPARAB LES, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THAT TH ESE TWO COMPANIES SHOULD NOT BE INCLUDED IN VIEW OF THEIR B RAND VALUE AND HIGH TURNOVER AS WELL AS RELYING ON THE DECISION OF THE ITAT TO EXCLUDE THESE COMPANIES. 3.2 CONSIDERING THE ABOVE FINDINGS OF DRP, THE AO H AS REDUCED THE ADJUSTMENT U/S 92CA TO RS. 88,62,356/-. 4. AGGRIEVED WITH THE ABOVE ORDER, ASSESSEE IS IN A PPEAL BEFORE US. 5. THE ASSESSEE HAS RAISED 10 GROUNDS OF APPEAL, OU T OF WHICH THE ASSESSEE PRESSED GROUND NO. 5 AND GROUND NO. 9, THE REFORE, THE OTHER GROUNDS ARE DISMISSED AS NOT PRESSED. THE GR OUND NOS. 5 & 9 READ AS UNDER: GROUND NO. 5. NOT UNDERTAKING AN OBJECTIVE AND CONSISTENT COMPARATIVE ANALYSIS AND INTER-ALIA SELECTING THE FOLLOWING COMPANIES AS COMPARABLE TO THE SERVICES OF THE ASS ESSEE: A) E INFOCHIPS BANGALORE LTD., B) KALS INFO SYSTEMS LTD., AND C) TATA ELXSI LTD. (SEG.) GROUND NO. 9. IMPUTING INTEREST ON AMOUNT RECEIVAB LE FROM AES IN RESPECT OF SERVICES TO AES, BY: A) NOT APPRECIATING THE FACT THAT RECEIVABLES FROM AES ARE ON ACCOUNT OF SERVICES RENDERED AND DOES NOT FALL IN T O THE DEFINITION OF INTERNATIONAL TRANSACTIONS. 6 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. B) NOT APPRECIATING THAT THE RETROSPECTIVE AMENDME NT TO THE DEFINITION OF INTERNATIONAL TRANSACTION DOES NOT APPLY TO THE FACTS AND CIRCUMSTANCES OF THE TRANSACTION, AND C) NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYS IS AND DETERMINING THE REASONABLE CREDIT PERIOD FOR SALES AT 30 DAYS. 9. THE LD. AR OBJECTED TO THE SELECTION OF FOLLOWIN G COMPARABLES BY THE TPO. THEREFORE, WE WILL DEAL WITH EACH OF TH E COMPANY THAT WAS OBJECTED BY THE ASSESSEE. 1. E INFOCHIPS BANGALORE LTD., 1.1 OBJECTING TO THE AFORESAID COMPANY AS COMPARABL E, THE AR OF THE ASSESSEE SUBMITTED THAT THE SAID COMPANY IS FUN CTIONALLY DIFFERENT AND SEGMENTAL INFORMATION IS NOT AVAILABLE. HE SUBM ITTED THE ITAT HAS REJECTED THIS COMPANY IN THE FOLLOWING CASES: 1. PEGASYSTEMS WORLDWIDE INDIA PVT. LTD., ITA NO. 1758/HYD/2014, AY 2010-11. 2. CNO IT SERVICES (INDIA) PVT. LTD., ITA NO. 336/ HYD/2015, AY 2010-11. 3. ALLSCRIPTS (INDIA) PVT. LTD., ITA NO. 771/AHD/2 014 AY 2009-10 1.2 LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES AND SUBMITTED AS UNDER: I) THAT THE COMPANY IS ENGAGED IN DEVELOPMENT OF S OFTWARE (ANNEXURE TO DIRECTORS REPORT. HENCE IT IS NOT FUN CTIONALLY DIFFERENT.) II) AS PER SCHEDULE 7 & 8 OF P&L A/C, THE INCOME DERIVED IS FROM SOFTWARE SERVICES. III) IN NOTES TO ACCOUNTS, IT WAS MENTIONED AS REV ENUE FROM SOFTWARE DEVELOPMENT. IV) HENCE THIS COMPANY CANNOT BE REJECTED AS COMPA RABLE. 1.3. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD. WE FIND THAT THE COORDINA TE BENCH IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA PVT. LTD. (SUPR A) HELD AS UNDER: 8.3. AFTER CONSIDERING THE RIVAL CONTENTIONS AND P ERUSING THE ANNUAL REPORTS PLACED ON RECORD, WE ARE OF THE OPINION THAT THIS COMPANY CAN NOT 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 CA PTIVE SERVICE PROVIDER, THE ABOVE 7 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. COMPANY CANNOT BE CONSIDERED AS COMPARABLE ON FUNCT IONAL BASIS. NOT ONLY THAT, AS POINTED OUT, SEGMENTAL I.T.A. NOS. 1758 & 1936/HYD/ 14 PEGASYSTEMS WORLDWIDE INDIA PVT. LTD., :- 7 -: INFORMATION PERTAINING TO THE AB OVE COMPANY IS NOT AVAILABLE. AS SEEN FROM THE TP ORDERS, DOCUMENTS PLACED ON RECORD, TPO RELIED ON LATER YEARS ANNUAL REPORT IN EXTRACTING THE INFORMATION. VARIATION IN PROFITA BILITY OVER THE YEARS ALONE CANNOT BE A REASON TO EXCLUDE THE COMPANY FROM COMPARABILITY AN ALYSIS BUT AS RIGHTLY POINTED, THE ABSENCE OF SEGMENTAL INFORMATION, HOW MUCH PROFIT E ARNED WAS ON THE SOFTWARE DEVELOPMENT OR ITES CANNOT BE EXAMINED. IN THE ABSE NCE OF CLARITY ON OPERATIONAL DETAILS AND COMPARABLE COMPANY HAVING DIVERSIFIED ACTIVITIE S, WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE CHOSEN AS A COMPARABLE COMPANY IN ASSESSEES CASE IN THIS ASSESSMENT YEAR. WE ARE ALSO AWARE OF THE DECISION OF THE CO-ORDINATE BENCH GIVEN IN EARLIER ASSESSMENT YEAR ON THE REASON THAT SEGMENTA L REPORTING WAS NOT AVAILABLE. BE THAT AS IT MAY, SINCE THE SAID COMPANY IS FUNCTIONA LLY DIFFERENT FROM ASSESSEES ACTIVITIES AND IN THE ABSENCE OF SEGMENTAL INFORMATION, WE DIR ECT AO/TPO TO EXCLUDE THE ABOVE WHILE WORKING OUT THE COMPARABILITY ANALYSIS. WE UP HOLD THE PLEA OF ASSESSEE IN THIS REGARD. 1.4 IN THE CASE OF ALLSCRIPTS (INDIA) PVT. LTD. (SU PRA), THE COORDINATE BENCH OF ITAT, AHMEDABAD HELD AS UNDER: 10.BEFORE US, REVENUE HAS NOT BROUGHT ANY CONTRARY BINDING DECISION IN ITS SUPPORT. WITH RESPECT TO E-INFOCHIP BANGALORE LTD., WE FIND THAT IN THE ANNUAL ACCOUNTS OF THE COMPANY, WITH RESPECT TO THE SEGMENT INFORMATION IT IS STATED THAT THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENT AND I.T E NABLED SERVICES WHICH IS CONSIDERED THE ONLY REPORTABLE BUSINESS SEGMENT AS PER ACCOUNT ING STANDARD AS-17 SEGMENT REPORTING PRESCRIBED IN COMPANIES (ACCOUNTING STAN DARD) RULES, 2006. WE THUS FIND THAT NO SEGMENTAL INFORMATION IS AVAILABLE. WITH RE SPECT TO E-INFOCHIP LTD. ASSESSEE HAD RAIDED OBJECTION AGAINST ITS INCLUSION TO WHICH TPO IN THE ORDER HAD DIRECTED TO VERIFY THE FACTS AND IT WAS HELD THAT IT CANNOT BE INCLUDED ON THE BASIS OF DIMINISHING OF REVENUES SO LONG IT WAS A NOT A CONSISTENT LOSS MAKING COMPA NY. CONSIDERING THE AFORESAID FACTS, WE ARE OF THE VIEW THAT THE AFORESAID TWO COMPANIES NEEDS TO BE EXCLUDED WHILE WORKING OUT THE COMPARABILITY ANALYSIS AND THEREFORE UPHOLD THE PLEA OF THE ASSESSEE IN EXCLUDING THE MARGINS OF THE AFORESAID 2 COMPANIES. WE THEREF ORE DEEM IT FIT TO RESTORE THE ISSUE BACK TO THE FILE OF A.O/TPO, WHO AFTER EXCLUDING TH E AFORESAID 2 COMPANIES REWORK THE ADDITION AS PER FACTS AND LAW. NEEDLESS TO STATE TH AT A.O/TPO SHALL GRANT ADEQUATE OPPORTUNITY OF HEARING TO THE ITA NO 771/AHD/2014 . A.Y. 2009-2010 13 ASSESSEE. THE ISSUE OF RESPECT TO DETERMINATION OF ALP IS THUS SE T ASIDE TO THE FILE OF A.O/TPO AND THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS THUS ALL OWED FOR STATISTICAL PURPOSES. 1.5 IN VIEW OF THE ABOVE, IN LINE WITH THE DECISION S OF THE VARIOUS BENCHES OF THIS TRIBUNAL, WE HOLD THAT THIS COMPANY IS TO BE OMITTED FROM THE LIST OF COMPARABLE COMPANIES. WITH REGARD TO DR SUBMISSIONS, HE STRONGLY SUBMITTED THAT IN THE CASE OF M/S VIRTUSA INDIA (SUPRA), THE MATTER WAS REMITTED BACK TO THE AO, IN THIS CASE ALSO, IT SHOULD BE REMITTED. WE OBSERVE THAT THE OB SERVATIONS OF THE COORDINATE BENCH ALSO THAT WHEN THE SEGMENTAL DATA IS NOT AVAILABLE, 8 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. WE CANNOT KEEP THE COMPANY AS COMPARABLE. IN THE PR ESENT CASE ALSO, THERE IS NO SEGMENTAL DATA AVAILABLE ON RECOR D. HENCE, WE DO NOT FIND MERITS IN THE SUBMISSIONS OF THE DR. 2. KALS INFORMATION SYSTEMS LTD., 2.1 OBJECTING TO THE AFORESAID COMPANY AS COMPARABL E, THE AR OF THE ASSESSEE SUBMITTED THAT THE SAID COMPANY IS FUN CTIONALLY DIFFERENT AND DEALING WITH SOFTWARE PRODUCTS. HE SUBMITTED TH AT THE ITAT HAS REJECTED THIS COMPANY IN THE FOLLOWING CASES: 1. PEGASYSTEMS WORLDWIDE INDIA PVT. LTD., ITA NO. 1758/HYD/2014, AY 2010-11. 2. CNO IT SERVICES (INDIA) PVT. LTD., ITA NO. 336/ HYD/2015, AY 2010-11. 3. PLANET ONLINE PVT. LTD., ITA NO. 464/HYD/2014, AY 2009-10. 2.2 LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES AND SUBMITTED AS UNDER: I) AS PER PG. 22 OF ANNUAL REPORT, THE COMPANY IS ENGAGED IN THE BUSINESS OF COMPUTER SOFTWARE. HENCE, IT IS NO T FUNCTIONALLY DIFFERENT. II) AS PER SEGMENTAL INFORMATION, PAGE 23 OF ANNUA L REPORT, REVENUE IS EARNED FROM APPLICATION SOFTWARE AND TR AINING. III) AS PER AGE 21 OF ANNUAL REPORT, THE INVENTORI ES ARE IN THE NATURE OF COMPUTER SPARES AND NOT PRODUCTS. IV) HENCE, THIS COMPANY CANNOT BE REJECTED AS A CO MPARABLE. 2.3 CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD. WE FIND THAT THE COORDINA TE BENCH IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA PVT. LTD. (SUPR A) HELD AS UNDER: 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 ASSESSEE, THE COMPANY CLASSIFIE D ITSELF AS THE COMPANY ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION. THE COMPANY CONSISTING OF STPI UNIT ENGAGED IN DEVELOPMENT OF S OFTWARE AND SOFTWARE PRODUCTS AND A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTWARE PRO FESSIONALS ON ON-LINE PROJECTS. THIS INDICATES THAT COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND PRODUCTS AND ITS INVENTORY ALSO INDICATES THAT ASSESSEE HAS BEEN USI NG ITS READYMADE LIBRARIES FOR SALES. 9 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. THIS COMPANY WAS REJECTED IN EARLIER YEAR ON FUNCTI ONAL ANALYSIS BY ITAT IN THE CASE OF PLANET ONLINE PVT. LTD., IN ITA NO. 464/HYD/2014 WH ERE IN IT WAS HELD THAT COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS. SINCE ITS ANNUAL REPORT STATES THE SAME FACTS IN THIS ASSESSMENT YEAR ALSO, WE ARE OF THE O PINION THAT THE COMPANY CANNOT BE SELECTED AS A COMPARABLE AS IT WAS ENGAGED IN DEVEL OPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. ACCORDINGLY, ASSESSEES OBJECTIONS ARE AC CEPTED AND AO IS DIRECTED TO EXCLUDE THE COMPANY. 2.4 IN THE CASE OF PLANET ONLINE PVT. LTD. (SUPRA), THE COORDINATE BENCH HELD AS FOLLOWS: 26.3 KALS INFORMATION SYSTEMS LTD.:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSID ERED AS NOT COMPARABLE TO A PURE SOFTWARE DEVELOPMENT SERVICES COMPANY BY THE BANGAL ORE 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 I NFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE AS SESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOF TWARE 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 REPOT, THE SA LARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNALS DEC ISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT O F IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE A S FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OB JECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WI TH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPA NY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABL E TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITT ED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO E STABLISH 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 FRO M THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON A LL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEM S LIMITED SHOULD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSION S ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS 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 HI GHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN TH E 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 MAIN LY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSES SEE THAT THIS COMPANY IS NOT 10 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. COMPARABLE. FOLLOWING THE AFORESAID DECISION OF TH E TRIBUNAL, WE HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. 2.5 IN VIEW OF THE ABOVE, IN LINE WITH THE DECISION S OF THE VARIOUS BENCHES OF THIS TRIBUNAL, WE HOLD THAT THIS COMPANY IS TO BE OMITTED FROM THE LIST OF COMPARABLE COMPANIES. 3. TATA ELXSI LTD. (SEG.) 3.1 OBJECTING TO THE AFORESAID COMPANY AS COMPARABL E, THE LD. AR SUBMITTED THAT THIS COMPANYS BUSINESS IS OF COMPLE X NATURE, FUNCTIONALLY DIFFERENT AND SEGMENTAL INFORMATION IS NOT AVAILABLE. HE SUBMITTED THAT THE ITAT HAS REJECTED THIS COMPANY I N THE FOLLOWING CASES: 1. PEGASYSTEMS WORLDWIDE INDIA PVT. LTD., ITA NO. 1758/HYD/2014, AY 2010-11. 2. CNO IT SERVICES (INDIA) PVT. LTD., ITA NO. 336/ HYD/2015, AY 2010-11. 3. PLANET ONLINE PVT. LTD., ITA NO. 464/HYD/2014, AY 2009-10. 3.2 LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES AND SUBMITTED AS UNDER: I)THE COMPANY HAS TWO SEGMENTS INCLUDING SOFTWARE DEVELOPMENT SERVICES, WHICH FORMS 89.52% OF TOTAL REVENUES. II) IN RESPONSE TO NOTICE U/S 133(6) THE COMPANY H AS MERELY STATED THAT IT IS ENGAGED IN SDS. III) THIS COMPANY WAS CONSIDERED AS COMPARABLE IN THE AY 2008-09, WHICH THE DRP HAS UPHELD. IV) HENCE, THIS COMPANY CANNOT BE REJECTED AS A CO MPARABLE. 3.3 CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD. WE FIND THAT THE COORDINA TE BENCH IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA PVT. LTD. (SUPR A) HELD AS UNDER: 12.1. IT WAS THE OBJECTION OF ASSESSEE THAT ABOVE COMPANY IS PREDOMINANTLY INTO PRODUCT DESIGN SERVICES, INNOVATION DESIGN ENGINEER ING AND VISUAL COMPUTING LABS DIVISION WHICH ARE SPECIALIZED SERVICES. HE REFERRE D TO THE ORDER OF ITAT IN AY. 2009-10 IN THE CASE OF PLANET ONLINE PVT. LTD., IN ITA NO. 464 /HYD/2014 (SUPRA), WHEREIN THIS 11 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. 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 MAR GIN FROM SOFTWARE SERVICES ACTIVITY ONLY CAN BE COMPUTED IS ALSO NOT AVAILABLE. MOREOVE R, THE COMPANY ITSELF HAS INDICATED THAT IT CANNOT BE COMPARED WITH ANY OTHER SOFTWARE SERVICE COMPANY BECAUSE OF ITS COMPLEX NATURE. SIMILAR VIEW WAS TAKEN BY MANY OF T HE CO-ORDINATE BENCHES IN EARLIER YEARS THAT TATA ELXSI LTD., CANNOT BE SELECTED AS C OMPARABLE COMPANY. CONSISTENT WITH THE ABOVE VIEW, WE ARE OF THE OPINION THAT A COMPAN Y LIKE TATA ELXSI LTD., WHICH HAS COMPLEX ACTIVITIES AND SEGMENTAL INFORMATION OF WHI CH IS NOT AVAILABLE CANNOT BE SELECTED AS COMPARABLE COMPANY TO ASSESSEE. MOREOVE R, AS SEEN FROM THE TURNOVER AS REPORTED BY TPO ITSELF, IT WAS MANY TIMES ASSESSEE S TURNOVER AND THEREFORE CANNOT BE EXACTLY CONSIDERED AS A SIMILAR COMPANY UNLESS THE NATURE OF ACTIVITY, THE INCOMES ARE ANALYSED IN DETAIL. SINCE NO SEGMENTAL DATA IS AVAI LABLE, CONSIDERING THE SOFTWARE DEVELOPMENT SERVICES AS A SEGMENT BY TPO CANNOT BE CONSIDERED AS SEGMENTAL DATA, UNLESS THE SERVICES RENDERED BY THAT COMPANY ARE SI MILAR TO THE SERVICES RENDERED BY ASSESSEE. IN VIEW OF THIS, WE ARE OF THE OPINION TH AT THIS COMPANY CANNOT BE SELECTED AS COMPARABLE. AO IS DIRECTED TO EXCLUDE THE SAME. 3.4 IN THE CASE OF PLANET ONLINE PVT. LTD. (SUPRA), THE COORDINATE BENCH HELD AS FOLLOWS: 26.4 TATA ELXSI LTD.:- AS FAR AS THIS COMPANY IS C ONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT IN ASSESSEES OWN CASE FOR THE A.Y. 2007-08, T HIS COMPANY WAS NOT REGARDED AS A COMPARABLE IN ITS SOFTWARE DEVELOPMENT SERVICES SEG MENT IN ITA NO.1076/BANG/2011, ORDER DATED 29.3.2013. FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. THE LEARN ED CHARTERED ACCOUNTANT PLEADED THAT OUT OF THE SIX COMPARABLES SHORTLISTED ABOVE AS COMPARABLES BASED ON THE TURNOVER FILTER, THE FOLLOWING TWO COMPANIES, NAMEL Y (I) TATA ELXSI LTD; AND (II) M/S. FLEXTRONICS SOFTWARE SYSTEMS LTD., DESERVE TO BE EL IMINATED FOR THE FOLLOWING REASONS : (I) TATA ELXSI LTD., : THE COMPANY OPERATES IN THE SEGM ENTS OF SOFTWARE DEVELOPMENT SERVICES WHICH COMPRISES OF EMBEDDED PRODUCT DESIGN SERVICES, INDUSTRIAL DESIGN AND ENGINEERING SERVICES AND VISUAL COMPUTING LABS AND SYSTEM INTEGRATION SERVICES SEGMENT. THERE IS NO SUB-SERVICES BREAK UP/INFORMATION PROVI DED IN THE ANNUAL REPORT OR THE DATABASES BASED ON WHICH THE MARGIN FROM SOFTWARE S ERVICES ACTIVITY ONLY COULD BE COMPUTED. THE COMPANY HAS ALSO IN ITS RESPONSE TO T HE NOTICE U/S.133(6) STATED THAT IT CANNOT BE CONSIDERED AS COMPARABLE TO ANY OTHER SOF TWARE SERVICES COMPANY BECAUSE OF ITS COMPLEX NATURE. HENCE, TATA ELXSI LTD., IS TO B E EXCLUDED FROM THE LIST OF COMPARABLES. 3.5 IN VIEW OF THE ABOVE, IN LINE WITH THE DECISION OF THE VARIOUS BENCHES OF THIS TRIBUNAL, WE DIRECT THE AO TO EXCLU DE THIS COMPANY AS COMPARABLE. 4. WE THEREFORE DIRECT THE ASSESSING OFFICER /TPO T O DETERMINE THE ALP KEEPING IN VIEW OF OUR DIRECTIONS GIVEN HER EINABOVE AND IF ON SUCH DETERMINATION THE PRICE CHARGED BY THE ASSE SSEE FOR ITS 12 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. INTERNATIONAL TRANSACTION IS FOUND TO BE WITHIN THE ARMS LENGTH THEN NO ADJUSTMENT IS REQUIRED TO BE MADE. 5. WITH REGARD TO GROUND NO. 9 RAISED BY THE ASSESS EE, THE TPO HAS OBSERVED THAT THE ASSESSEE HAS RECEIVED THE AMO UNTS AFTER THE CREDIT PERIOD, WHICH IS NOT SPECIFIED. HE PROPOSED TO CHARGE INTEREST @ 12% P.A. AFTER ALLOWING A CREDIT PERIOD OF 30 DAY S TO WHICH ASSESSEE DID NOT FILE ANY OBJECTIONS. HE OBSERVED T HAT IN ANY ARMS LENGTH SITUATION ANY INDEPENDENT PARTY WOULD LIKE T O RECEIVE ITS FUNDS WITHIN THE CREDIT PERIOD ALLOWED, AND IF NOT, WOULD NORMALLY CHARGE INTEREST. ACCORDINGLY, TPO ADDED A SUM OF RS. 3,50, 132/- AS ALP ADJUSTMENTS. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE THE DRP. THE DRP HAS CONSIDERED THE SUBMISSIONS OF THE ASSES SEE AND GIVEN PARTIAL RELIEF BY DIRECTING TPO TO ADOPT LIBOR + 25 0 BPS INSTEAD OF 12%. 6. AGGRIEVED WITH THE ABOVE, ASSESSEE PREFERRED APP EAL BEFORE US AND AR OF THE ASSESSEE SUBMITTED THAT ASSESSEE HAS BEEN FULLY FUNDED BY THE AE SINCE ITS INCEPTION, FOR ALL ITS W ORKING CAPITAL REQUIREMENTS. THE ASSESSEE BEING CAPTIVE DEVELOPER, COMPLETELY DEPENDENT ON THE AE IN FUNCTIONALLY AS WELL AS FINA NCIALLY. MOREOVER, HE SUBMITTED A WORKING OF AVERAGE DEBTORS RATIO OF 18 COMPANIES, WHICH COMES TO 112 DAYS, WHEREAS THE ASSESSEES RAT IO IS 79, WHICH IS MUCH BELOW COMPARED TO THE INDUSTRY. FURTHER, HE SUBMITTED THAT TPO HAS ASSUMED THE RATIO AND HE HAS NOT ADOPTED AN Y SCIENTIFIC METHOD FOR ARRIVING AT THE ALP. 7. LD. DR RELIED ON THE ORDERS OF TPO AND DRP. 8. CONSIDERED THE SUBMISSIONS OF BOTH THE COUNSELS AND MATERIAL FACTS ON RECORD. IT IS A FACT THAT THE ASSESSEE IS A CAPTIVE DEVELOPER, FUNCTIONS ON THE DIRECTIONS OF AE AND DEPENDS ON AE ON FUNCTIONALLY AND FINANCIALLY. THE BUSINESS RUNS ON THE MUTUAL AG REEMENT. UNLESS THERE IS MUTUAL AGREEMENT ON THE TERMS OF PAYMENT OR ANY BENCH MARK AVAILABLE IN THE INDUSTRY, WHICH CAN BE CONSID ERED. REVENUE 13 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. AUTHORITIES CANNOT PRESUME UNLESS THERE IS ANY WRIT TEN AGREEMENT OR AGREED TERMS IN THE INDUSTRY OR ANY COMPARABLES AVA ILABLE ON THE RECORD. WE FIND THAT THE ASSESSEE HAS ALLOWED THE C REDIT PERIOD OF 79 DAYS WHICH IS MUCH BELOW THE INDUSTRY AVERAGE OF 11 2 DAYS AS SUBMITTED BY THE LD. AR. THE SAME WAS NOT DISPUTED BY THE LD. DR. IN OUR CONSIDERED VIEW, THE CREDIT PERIOD EXTENDED BY THE ASSESSEE TO ITS AE IS REASONABLE PARTICULARLY WHEN THERE IS NO BENC H MARK AVAILABLE. ACCORDINGLY, THIS GROUND IS ALLOWED. 9. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 5 TH AUGUST, 2016. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAH MAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 5 TH AUGUST, 2016 KV COPY TO:- 1) M/S OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (I NDIA) PVT. LTD., PLOT NO. 499, ROAD NO. 36, JUBILEE HILLS, HYDER ABAD 500 033. 2) ACIT, CIRCLE 16(2), 6 TH FLOOR, AAYAKAR BHAVAN, HYD. 500 004. 3) DRP, HYDERABAD 4. CIT, INTERNATIONAL TAXATION, INCOME TAX TOWERS, 10-2-3, AC GUARDS, HYDERABAD 500 004. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 14 ITA NO. 434 /HYD/2015 OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PV T. LTD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER