Appeal details
Counselvise Citation
47122514 RSA 2011
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 5 month(s) 4 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
26-08-2015
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
A
Next Hearing Date
22-07-2015
Assessment Year
2005-2006
Appeal Filed On
22-03-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 471/HYD/2011 ASSESSMENT YEAR: 2005-06 ADP PVT. LTD., HYDERABAD PAN AAACW2655C VS. DY. COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAVI BHARADWAJ REVENUE BY : SHRI MOHAN SINGHANIA DATE OF HEARING 22-07-2015 DATE OF PRONOUNCEMENT 26-08-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL OF ASSESSEE IS DIRECTED AGAINST ORDER D ATED 12/01/2011 OF LD. CIT(A)-III, HYD., FOR THE AY 2005 -06. 2. BRIEFLY THE FACTS ARE, ASSESSEE AN INDIAN COMPAN Y IS A SUBSIDIARY OF ADP, NETHERLANDS, BV, NETHERLANDS. AS SESSEE IS BASICALLY ENGAGED IN THE BUSINESS OF PROVIDING SOFT WARE DEVELOPMENT AND RELATED SERVICES. ASSESSEE IS A 100% EXPORTED O RIENTED UNIT (EOU). DURING THE AY UNDER CONSIDERATION, ASSESSEE PROVIDED SERVICES TO ITS ASSOCIATED ENTERPRISES (AE) IN TWO SEGMENTS I.E. SOFTWARE DEVELOPMENT SEGMENT AND INFORMATION TECHNO LOGY ENABLED SERVICES (ITES) SEGMENT ON A COST PLUS MARKUP BASIS . FOR THE AY UNDER CONSIDERATION, ASSESSEE FILED ITS RETURN OF I NCOME ON 01/11/2005 DECLARING LOSS OF RS. 1,38,41,745 AFTER CLAIMING EXEMPTION U/S 10A OF THE ACT. IN COURSE OF THE ASSESSMENT PRO CEEDING, A.O. NOTICED THAT ASSESSEE HAS ENTERED INTO INTERNATIONA L TRANSACTION WITH 2 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. ITS AE AND HAS EARNED REVENUE FROM SUCH INTERNATION AL TRANSACTIONS. IN ORDER TO DETERMINE THE ARMS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTIONS BETWEEN ASSESSEE AND ITS AE, A REFEREN CE WAS MADE TO TRANSFER PRICING OFFICER (TPO ) IN TERMS WITH SECTI ON 92CA(1) OF THE ACT. IN THE TP STUDY REPORT SUBMITTED BY ASSESSEE, TP ANALYSIS WAS DONE BY THE ASSESSEE UNDER BOTH THE SEGMENTS I.E. S OFTWARE DEVELOPMENT SERVICES AND ITES. TRANSACTIONAL NET M ARGIN METHOD (TNMM) WAS SELECTED AS MOST APPROPRIATE METHOD WITH OPERATING PROFIT TO OPERATING COST AS THE PROFIT LEVEL INDICA TOR (PLI). IN THE SEARCH PROCESS UNDERTAKEN IN DATABASES, ASSESSEE SELECTED 12 COMPANIES AS COMPARABLES IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT AND 13 COMPANIES IN ITES SEGMENT. AS THE ARITHMETIC MEA N OF THE COMPARABLE COMPANIES UNDER BOTH THE SEGMENTS WERE WITHIN THE TOLERANCE BAND OF MARGIN DECLARED BY ASSESSEE, THE PRICE CHARGED TO THE AE IN RESPECT TO THE INTERNATIONAL TRANSACTIONS UNDER BOTH THE SEGMENTS WERE CLAIMED TO BE WITHIN ARMS LENGTH. TH E TPO AFTER EXAMINING THE TP DOCUMENT OF ASSESSEE ALONG WITH OT HER RELEVANT INFORMATIONS ON RECORD THOUGH, AGREED THAT TNMM IS THE MOST APPROPRIATE METHOD WITH OP TO OC AS PLI, HOWEVER, H E WAS OF THE OPINION THAT THE METHOD/PROCESS ADOPTED BY ASSESSEE IN SELECTING COMPARABLE COMPANIES SUFFERS FROM VARIOUS DEFECTS W HICH HAS RESULTED IN SELECTION OF UNCOMPARABLES AS COMPARABL ES WHEREAS ASSESSEE HAS OMITTED COMPANIES WHICH ARE FUNCTIONAL LY SIMILAR TO ASSESSEE. HE, THEREFORE, PROCEEDED TO REJECT TP DOC UMENT OF ASSESSEE. AFTER REJECTING THE TP DOCUMENT, TPO UNDE RTOOK A FRESH SEARCH IN THE DATA BASES FOR SELECTION OF COMPARABL ES. IN THIS PROCESS, TPO ALSO CALLED FOR RELEVANT INFORMATION F ROM COMPANIES U/S 133(6) OF THE ACT AND AFTER VERIFYING THE INFORMATI ONS GATHERED BY HIM AND CONFRONTING THE SAME TO ASSESSEE, HE PROCEEDED TO DETERMINE THE ALP OF INTERNATIONAL TRANSACTION. IN THE SOFTWARE D EVELOPMENT SERVICES SEGMENT, TPO SELECTED 17 COMPANIES AS COMPARABLES W ITH AVERAGE ARITHMETIC MEAN OF 26.59%. AFTER ALLOWING WORKING C APITAL ADJUSTMENT OF 1.82%, TPO DETERMINED THE ALP OF THE SOFTWARE DE VELOPMENT 3 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. SERVICES SEGMENT AT RS. 79,12,59,892 AS AGAINST THE PRICE CHARGED BY ASSESSEE TO AE AT RS. 69,34,94,938. THE RESULTANT S HORTFALL OF RS. 9,77,64,954 WAS TREATED AS ADJUSTMENT TO BE MADE TO THE ALP U/S 92CA OF THE ACT. SIMILARLY, IN RESPECT OF ITES SEGM ENT ALSO, A.O. UNDERTOOK A SEARCH IN THE DATA BASES WHICH YIELDED 10 COMPARABLE COMPANIES WITH AVERAGE ARITHMETIC MEAN OF 23.61%. A FTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 1.17%, ALP OF THE INT ERNATIONAL TRANSACTION IN ITES SEGMENT WAS DETERMINED AT RS. 1 7,05,92,283 AS AGAINST THE PRICE CHARGES BY ASSESSEE TO AE AT RS. 15,38,62,358. THE RESULTANT SHORTFALL OF RS. 1,67,29,925 WAS TREA TED AS ADJUSTMENT TO BE MADE TO THE ALP U/S 92CA( I ) OF THE ACT. IN TERMS WITH THE ORDER PASSED BY TPO, A.O. COMPLETED THE ASSESSMENT BY INC ORPORATING THE TP ADJUSTMENTS RECOMMENDED BY TPO. BEING AGGRIEVED OF THE ADDITIONS SO MADE, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 3. BEFORE CIT(A), ASSESSEE RAISED VARIOUS GROUNDS C HALLENGING THE ADJUSTMENTS MADE TO ALP BY TPO. LD. CIT(A) AFTER CO NSIDERING THE SUBMISSIONS OF ASSESSEE, EXCLUDED SATYAM COMPUTER S ERVICES LTD. OUT OF THE COMPARABLE COMPANIES SELECTED BY TPO IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. THUS, HE UPHELD SELEC TION OF 16 COMPANIES BY TPO. AS FAR AS ITES SEGMENT IS CONCER NED, LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE, REJ ECTED ASSESSEES OBJECTION TO THREE OF THE COMPARABLES SELECTED BY T PO. THUS, AS FAR AS ITES SEGMENT IS CONCERNED, LD. CIT(A) DID NOT E NTERTAIN ANY OF THE OBJECTIONS OF ASSESSEE AS FAR AS SELECTION OF COMPA RABLES IS CONCERNED. 4. BEING AGGRIEVED OF THE ORDER OF LD. CIT(A), ASSE SSEE IS BEFORE US RAISING AS MANY AS 14 GROUNDS ON TP ISSUES. HOWE VER, AT THE TIME OF HEARING LD. AR ADVANCED HIS ARGUMENT ONLY IN RES PECT OF GROUND NOS. 7, 8, 9, 10 AND 12. IN VIEW OF THE AFORESAID, THE REST OF THE GROUNDS ON TP ISSUES, VIZ., GROUND NOS. 1, 2, 3, 4, 5, 6, 13 & 14 ARE DISMISSED AS NOT PRESSED. 4 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. 5. AS FAR AS GROUND NO. 7 AND 8 ARE CONCERNED THEY RELATE TO REJECTION/SELECTION OF COMPARABLES IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. 6. AT FIRST WE WILL TAKE UP GROUND NO. 8 ON THE ISS UE OF SELECTION OF COMPARABLES BY TPO AND AFFIRMED BY LD. CIT(A). 7. OUT OF THE 16 COMPARABLE COMPANIES REMAINING AFT ER THE ORDER OF CIT(A) IN SOFTWARE DEVELOPMENT SERVICES SEGMENT, ASSESSEE HAS OBJECTED TO SELECTION OF FOLLOWING 8 COMPARABLES. 1) BODHTREE CONSULTING LTD. 2) EXENSYS SOFTWARE SOLUTIONS LTD. 3) SANKHYA INFOTECH LTD. 4) FOURSOFT LTD. 5) THIRDWARE SOLUTIONS LTD. 6) TATA ELXSI LTD. 7) INFOSYS TECHNOLOGIES LTD 8) FLEXITRONICS LTD. 7. THE SUBMISSIONS OF THE LEARNED AR AGAINST SELEC TION OF THESE COMPARABLES, IN BRIEF, ARE AS UNDER: 1. BODHTREE CONSULTING LTD. I) THIS COMPANY SHOULD BE REJECTED ON THE BASIS OF FILTERS APPLIED BY TPO HIMSELF, WHICH ARE AS UNDER: RELATED PARTY TRANSACTIONS FILTER: AS PER SCHEDULE 4 OF THE BALANCE SHEET, THE COMPANY HAS INVESTMENTS IN PERIG ON, LIC, USA AND AS PER THE RESPONSE U/S 133(6); THE CO MPANY HAS EXPORT SALES TO PERIGON LIC, USA OF RS. 133.90 LAKHS, BEING 34.68% OF THE TOTAL TURNOVER. FUNCTIONALLY DIFFERENT FILTER: THE COMPANY IN ITS RESPONSE TO NOTICE U/S 133(6) HAS STATED THAT IT PROVIDES E-PAP ER SOLUTIONS, DATA CLEANSING SOFTWARE, WEBSITE DEVELOP MENT AND OTHER CUSTOMIZED SOFTWARE AND ALSO STATE THAT THE E -PAPER SOLUTIONS AND DATA CLEANSING SERVICES WOULD COME UN DER THE CATEGORY OF IT ENABLED SERVICES. 5 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. II) IN SUPPORT OF HIS CONTENTION, LD. AR RELIED UPO N THE FOLLOWING RULINGS: 1. INTERGRAPH CONSULTING PVT. LTD., (ITA NO. 923/HY D/2010) 2. INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LTD. (I TA NO. 1256/H/2010) 3. NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., (IT A NO. 472/HYD/2011) 2. EXENSYS SOFTWARE SOLUTIONS LTD. I) THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHOULD BE REJECTED FOR THE FOLLOWING REASONS: A) FUNCTIONALLY DIFFERENT: THE COMPANY IS A SOFTWAR E PRODUCT AND ITES COMPANY. THE COMPANY OWNS SIGNIFICANT BRAN D INTANGIBLES (ALMOST 60% OF ITS NET BLOCK OF ASSETS) , UNLIKE THE APPELLANT, WHICH IS A CONTRACT CAPTIVE SERVICES PRO VIDER. FURTHER, VARIOUS DISCLOSURES ON THE SITE OF THE COM PANY ALSO INDICATE THAT IT IS INTO PRODUCT DEVELOPMENT. B) EXCEPTIONAL YEAR OF OPERATIONS: THERE WAS AMALGA MATION OF THE COMPANY WITH HOLOOL INDIA LTD. WITH RETROSPECTI VE EFFECT FROM APRIL 01, 2004, WHICH HAD A MATERIAL/SIGNIFICA NT IMPACT ON THE RESULTS OF THE COMPANY FOR FINANCIAL YEAR EN DED MARCH 31, 2005 AND CONFIRMED BY THE COMPANY IN ITS RESPON SE TO 133(6) NOTICE. C) ERROR IN MARGIN COMPUTATION: THE LD TPO HAS EXCL UDED THE DEFERRED REVENUE EXPENDITURE WHILE COMPUTING THE NE T MARGIN OF THE COMPANY. IF THE SAME IS INCLUDED, THE NET MARGIN OF THE COMPANY WOULD BE 32.68%. II) IT WAS SUBMITTED THAT THE FOLLOWING RULINGS HAV E ANALYSED AND REJECTED THIS COMPANY AS IT HAS SOFTWARE PRODUCTS A ND HELD AS NOT COMPARABLE TO A SOFTWARE DEVELOPMENT SERVICE PROVID ER: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD /2010) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 - INTERGRAPH CONSULTING PVT. LTD., (ITA NO. 923/HY D/2010) 6 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. - NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., (IT A NO. 472/HYD/2011) 3. SANKHYA INFOTECH LTD. I) THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS EVIDENT FROM THE FOLLOWING: VARIOUS DISCLOSURES IN THE ANNUAL REPORT AND RESPO NSE TO 133(6) NOTICE INDICATES CLEARLY THAT THE COMPANY IS INTO SOFTWARE PRODUCTS (SERVICES ARE SUPPLEMENTARY TO PR ODUCTS LICENSING) THE TPO HAS IN SUBSEQUENT YEAR REJECTED THIS COMPA NY AS COMPARABLE RELYING ON THE SAME 133(6) RESPONSE. II) HE SUBMITTED, FOLLOWING RULINGS HAVE ANALYSED AND REJECTED THIS COMPANY AS IT HAS SOFTWARE PRODUCTS : - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 - INTERGRAPH CONSULTING PVT. LTD., (ITA NO. 923/HY D/2010) - NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., (IT A NO. 472/HYD/2011) 4. FOURSOFT LTD. I) THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS EVIDENT FROM VARIOUS DISCLOSURES IN TH E ANNUAL REPORT (DIRECTORS REPORT, MANAGEMENT DISCUSSION AND WEBSIT E INFORMATION) INDICATING CLEARLY THAT THE COMPANY IS INTO SOFTWAR E PRODUCTS. THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED THIS C OMPANY AS IT HAS DERIVED INCOME FROM SOFTWARE LICENSE AND AMCS: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD /2010) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 6 45/HYD/09) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 7 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. - INTERGRAPH CONSULTING PVT. LTD., (ITA NO. 923/HY D/2010) - NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., (IT A NO. 472/HYD/2011) - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD /2010) 5. THIRDWARE SOLUTIONS LTD.: I) LD. COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCT IONALLY DIFFERENT FOR THE FOLLOWING REASONS: AS PER REPLY TO NOTICE ISSUED U/S 133(6), THE COMP ANY INFORMED THAT IT IS ENGAGED IN IMPLEMENTATION AND C USTOMER SERVICES WHICH INCLUDE TRAINING, CUSTOMIZED DEVELOP MENT AND HELP DESK SERVICES FOR ERP SOFTWARE AND DISTRIBUTIO N OF PRODUCTS OF QUAD INC. AND HYPERION SOLUTIONS CORPOR ATION. VARIOUS NEWS ARTICLES AVAILABLE ON THE INTERNET HTTP://WWW.HINDUONNET.COM/2001/07/11/STORIES/061100 0H.HTM STATED THAT THE COMPANY IS A DISTRIBUTOR OF PRODUCT S; AS PER THE COMPANYS WEBSITE WWW.THIRDWARE.NET/ OURCAPABILITIES.HTM. HAS STATED THE COMPANY HAS PARTNERED WITH QAD INC TO DELIVER THE E NTIRE BUSINESS CYCLE OF MGF/PRO, A PRODUCT OF QAD INC. FR OM PRE- SALES, SALES, TRAINING, CONSULTING, IMPLEMENTATION AND SUPPORT TO APPLICATION MANAGEMENT SERVICES. II) HE SUBMITTED, THE FOLLOWING RULINGS HAVE ANALYS ED AND REJECTED THIS COMPANY AS IT IS INTO TRADING OF SOFT WARE LICENSES: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD /2010) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 - INTERGRAPH CONSULTING PVT. LTD., (ITA NO. 923/HY D/2010) - NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., (IT A NO. 472/HYD/2011) 6. TATA ELXSI LTD. 8 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. I) THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHOULD BE REJECTED AS COMPARABLE SINCE IT IS A SPECIALIZED EM BEDDED SOFTWARE DEVELOPMENT COMPANY AND THE COMPANY, IN FACT, CLEA RLY STATED IN ITS RESPONSE TO 133(6) NOTICE THAT DUE TO THE COMPLEX S EGMENTS IN WHICH THEY ARE OPERATING, IT IS NOT COMPARABLE TO ANY OTH ER SOFTWARE SERVICES COMPANY. II) HE SUBMITTED, THE FOLLOWING RULINGS HAVE ANALYS ED THIS COMPANY AND RELYING ON THE SAME 133(6) RESPONSE, REJECTED I T AS A COMPARABLE TO SOFTWARE SERVICES PROVIDER: - INTERGRAPH CONSULTING PVT. LTD., (ITA NO. 923/HY D/2010) - NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., (IT A NO. 472/HYD/2011) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 7. INFOSYS TECHNOLOGIES LTD. I) THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES INCLUDING PRODUCTS, CONSULTA NCY & SOLUTIONS AND THIS COMPANY COMMANDS A PREMIUM IN THE PRICING OF I TS PRODUCTS AND SERVICES DUE TO ITS GOODWILL, REPUTATION AND BRAND VALUE. FURTHER DUE TO SCALE OF OPERATIONS, INFOSYS ENJOYS ECONOMIES OF SCALE, WHICH RESULTS IN LOWER COST OF INFRASTRUCTURAL FACILITIES AND OVERHEADS. II) FURTHER, HE SUBMITTED THAT THE ISSUE OF COMPARA BILITY OF INFOSYS TO A SMALL CAPTIVE SERVICE PROVIDER IS NO LONGER RE S-INTEGRA. THE FOLLOWING CASES HAVE SPECIFICALLY ANLAYSED IN DETAI L THE COMPARABILITY OF INFOSYS ON VARIOUS PARAMETERS TO A SMALL SOFTWA RE SERVICE PROVIDER AND REJECTED IT: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD /2010) - PATNI TELECOM SOLUTIONS PVT. LTD. VS. ACIT (ITA N O. 1846/HYD/2012) 9 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 6 45/HYD/09) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 - INTERGRAPH CONSULTING PVT. LTD., (ITA NO. 923/HYD /2010) - NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., (IT A NO. 472/HYD/2011) 8. FLEXITRONICS LTD. I) OBJECTING TO THIS COMPANY, THE LEARNED AR SUBMIT TED THAT THE SAID COMPANY IS NOT ONLY FUNCTIONALLY DIFFERENT BUT IT CANNOT BE TREATED AS A COMPARABLE BECAUSE IT IS INTO DEVELOPMENT OF P RODUCT. IT WAS SUBMITTED THAT THE COMPANY HAS ALSO REPORTED VERY H IGH MARGIN OF PROFIT. THE LEARNED AR SUBMITTED THAT THE TPO HIMSE LF HAVING CLASSIFIED THE ASSESSEE AS PURELY SOFTWARE DEVELOPM ENT SERVICE PROVIDER, HE COULD NOT HAVE TREATED FLEXTRONICS SOF TWARE SYSTEMS LIMITED (SEG) AS A COMPARABLE AS IT IS INTO PRODUCT DEVELOPMENT. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AR RELIED U PON THE FOLLOWING RULINGS: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD /2010) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 6 45/HYD/09) 8. THE LEARNED DR, THOUGH, AGREED THAT ISSUE OF SEL ECTION OF COMPARABLES ARE COVERED BY THE DECISIONS OF ITAT RE FERRED TO BY LEARNED AR, BUT, HE NEVERTHELESS SUPPORTED THE REAS ONING OF TPO AND LEARNED CIT(A). 9. AFTER CONSIDERING THE SUBMISSIONS ON EITHER SIDE AND EXAMINING THE MATERIALS ON RECORD, WE FIND THAT THE ISSUE REL ATING TO COMPARABILITY OF AFORESAID COMPANIES OBJECTED BY AS SESSEE ARE COVERED BY VARIOUS DECISIONS OF DIFFERENT BENCHES O F THE TRIBUNAL FOR THE VERY SAME AY. IN CASE OF NESS INNOVATIVE BUSINE SS PVT. LTD. VS. DCIT IN ITA NO. 472 TO 553 AND 1175/HYD/2011, DATED 18/06/14, THE 10 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. COORDINATE BENCH REJECTED BODH TREE CONSULTING LTD. EXENSYS SOFTWARE SOLUTIONS LTD., SANKHYA INFOTECH LTD., FOURSOFT LTD ., THIRDWARE SOLUTIONS LTD. TATA ELXSI LTD. AND INFOSYS TECHNOLO GIES LTD. BY OBSERVING AS UNDER: 1. BODHTREE CONSULTING LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHO ULD BE REJECTED UNDER THE FOLLOWING TPOS FILTERS: RELATED PARTY TRANSACTIONS FILTER: AS PER SCHEDULE 4 OF THE BALANCE SHEET, THE COMPANY HAS INVESTMENTS IN PERIGON, LIC, USA AND AS PER THE RESPONSE U/S 133(6 ); THE COMPANY HAS EXPORT SALES TO PERIGON LIC, USA OF RS. 133.90 LAKHS, BEING 34.68% OF THE TOTAL TURNOVER. FUNCTIONALLY DIFFERENT FILTER: THE COMPANY IN ITS R ESPONSE TO NOTICE U/S 133(6) HAS STATED THAT IT PROVIDES E- PAPER SOLUTIONS, DATA CLEANSING SOFTWARE, WEBSITE DEVELOP MENT AND OTHER CUSTOMIZED SOFTWARE AND ALSO STATE THAT T HE E- PAPER SOLUTIONS AND DATA CLEANSING SERVICES WOULD C OME UNDER THE CATEGORY OF IT ENABLED SERVICES. 2. EXENSYS SOFTWARE SOLUTIONS LTD., THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHOULD BE REJECTED UNDER THE FOLLOWING TPOS FILTER S: D) FUNCTIONALLY DIFFERENT: THE COMPANY IS A SOFTWARE PRODUCT AND ITES COMPANY. THE COMPANY OWNS SIGNIFICANT BRAND INTANGIBLES (ALMOST 60% OF ITS NE T BLOCK OF ASSETS), UNLIKE THE APPELLANT, WHICH IS A CONTRA CT CAPTIVE SERVICES PROVIDER. FURTHER, VARIOUS DISCLOS URES ON THE SITE OF THE COMPANY ALSO INDICATE THAT IT IS INTO PRODUCT DEVELOPMENT. E) EXCEPTIONAL YEAR OF OPERATIONS: THERE WAS AMALGAMATION OF THE COMPANY WITH HOLOOL INDIA LTD. WITH RETROSPECTIVE EFFECT FROM APRIL 01, 2004, WHIC H HAD A MATERIAL/SIGNIFICANT IMPACT ON THE RESULTS OF THE COMPANY FOR FINANCIAL YEAR ENDED MARCH 31, 2005 AND CONFIRMED BY THE COMPANY IN ITS RESPONSE TO 133(6) NOTICE. 11 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. F) ERROR IN MARGIN COMPUTATION: THE LD TPO HAS EXCLUDE D THE DEFERRED REVENUE EXPENDITURE WHILE COMPUTING TH E NET MARGIN OF THE COMPANY. IF THE SAME IS INCLUDED, THE NET MARGIN OF THE COMPANY WOULD BE 32.68%. IT WAS SUBMITTED THAT THE FOLLOWING RULINGS HAVE AN ALYSED AND REJECTED THIS COMPANY AS IT HAS SOFTWARE PRODUC TS AND HELD AS NOT COMPARABLE TO A SERVICE PROVIDER: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2 010) - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (I TA NO. 609/DEL/2011) - INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD. VS. D CIT (ITA NO. 27/JP/2011) - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 3. SANKHYA INFOTECH LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS EVIDENT FROM THE FOLLOWIN G: VARIOUS DISCLOSURES IN THE ANNUAL REPORT AND RESPON SE TO 133(6) NOTICE INDICATES CLEARLY THAT THE COMPANY IS INTO SOFTWARE PRODUCTS (SERVICES ARE SUPPLEMENTARY TO PRODUCTS LICENSING) THE TP OFFICE HAS IN SUBSEQUENT YEAR REJECTED THIS COMPANY AS COMPARABLE RELYING ON THE SAME 133(6) RESPONSE. THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED TH IS COMPANY AS IT HAS SOFTWARE PRODUCTS : - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (I TA NO. 609/DEL/2011) - INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD. VS. D CIT (ITA NO. 27/JP/2011) 12 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 4. FOURSOFT LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS EVIDENT FROM V ARIOUS DISCLOSURES IN THE ANNUAL REPORT (DIRECTORS REPORT, MANAGEMENT DISCUSSION AND WEBSITE INFORMATION) INDI CATES CLEARLY THAT THE COMPANY IS INTO SOFTWARE PRODUCTS. THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED THIS C OMPANY AS IT HAS DERIVED INCOME FROM SOFTWARE LICENSE AND AMCS: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2 010) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 5. THIRDWARE SOLUTIONS LTD.: LD. COUNSEL SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FOR THE FOLLOWING REASONS: AS PER REPLY TO NOTICE ISSUED U/S 133(6), THE COMPA NY INFORMED THAT IT IS ENGAGED IN IMPLEMENTATION AND CUSTOMER SERVICES WHICH INCLUDE TRAINING, CUSTOMIZE D DEVELOPMENT AND HELP DESK SERVICES FOR ERP SOFTWARE AND DISTRIBUTION OF PRODUCTS OF QUAD INC. AND HYPER ION SOLUTIONS CORPORATION. VARIOUS NEWS ARTICLES AVAILABLE ON THE INTERNET HTTP://WWW.HINDUONNET.COM/2001/07/11/STORIES/0611 13 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. 000H.HTMSTATED THAT THE COMPANY IS A DISTRIBUTOR OF PRODUCTS; AS PER THE COMPANYS WEBSITE WWW.THIRDWARE.NET/ OURCAPABILITIES.HTM. HAS STATED THE COMPANY HAS PARTNERED WITH QAD INC TO DELIVER THE ENTIRE BUSINESS CYCLE OF MGF/PRO, A PRODUCT OF QAD INC. FROM PRE-SALES, SALES, TRAINING, CONSULTING, IMPLEMENTATION AND SUPPORT TO APPLICATION MANAGEMEN T SERVICES. THE FOLLOWING RULINGS HAVE ANALYSED AND REJECTED TH IS COMPANY AS IT IS INTO TRADING OF SOFTWARE LICENSES: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2 010) - ITO VS. COLT TECHNOLOGY SERVICES INDIA PVT. LTD. (I TA NO. 609/DEL/2011) - ACIT VS. SONATA SOFTWARE (ITA NO. 3514/MUM/2010) - E-GAIN COMMUNICATIONS (P) LTD. VS. ITO, 23 SOT 385. 6. TATA ELXSI LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY SHALL BE REJECTED AS COMPARABLE SINCE IT IS A SPECI ALIZED EMBEDDED SOFTWARE DEVELOPMENT COMPANY AND THIS COMPANY HAS IN FACT CLEARLY STATED IN ITS RESPONSE TO 133(6) NOTICE THAT DUE TO THE COMPLEX SEGMENTS IN WHICH TH EY ARE OPERATING, IT IS NOT COMPARABLE TO ANY OTHER SOFTWA RE SERVICES COMPANY. THE FOLLOWING RULINGS HAVE ANALYSED THIS COMPANY AND RELYING ON THE SAME 133(6) RESPONSE, REJECTED I T AS A COMPARABLE TO SOFTWARE SERVICES PROVIDER: - CONEXANT SYSTEMS INDIA PVT. LTD. (ITA NO. 1429/HYD/2010 AND 1978/HYD/2011) - TELCORDIA TECHNOLOGIES INDIA P. LTD. (ITA NO. 7821/MUM/2011) - LOGICA PVT. LTD. (IT(TP)A NO. 1129/BANG/2011) 14 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 7. INFOSYS TECHNOLOGIES LTD. THE LEARNED COUNSEL SUBMITTED THAT THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES INCLUDING PRODUCT S, CONSULTANCY & SOLUTIONS AND THIS COMPANY COMMANDS A PREMIUM IN THE PRICING OF ITS PRODUCTS AND SERVICES DUE TO ITS GOODWILL, REPUTATION AND BRAND VALUE. FURTHER D UE TO SCALE OF OPERATIONS, INFOSYS ENJOYS ECONOMIES OF SC ALE, WHICH RESULTS IN LOWER COST OF INFRASTRUCTURAL FACI LITIES AND OVERHEADS. FURTHER, HE SUBMITTED THAT THE ISSUE OF COMPARABILI TY OF INFOSYS TO A SMALL CAPTIVE SERVICE PROVIDER IS N O LONGER RES-INTEGRA. THE FOLLOWING CASES HAVE SPECIFICALLY ANLAYSED IN DETAIL THE COMPARABILITY OF INFOSYS ON VARIOUS P ARAMETERS TO A SIMILAR SIZE SOFTWARE SERVICE PROVIDER AND REJ ECTED IT: - INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/HYD/2 010) - VIRTUSA INDIA PVT. LTD. VS. DCIT (ITA NO. 1962/H/20 10) - PATNI TELECOM SOLUTIONS PVT. LTD. VS. ACIT (ITA NO. 1846/HYD/2012) - ADAPTEC (INDIA) PVT. LTD. VS. DCIT (ITA NO. 1801/HYD/2009) - DCIT VS. M/S HELLOSOFT INDIA PVT. LTD. (ITA NO. 645/HYD/09) - TRILOGY E BUSINESS SERVICES SOFTWARE LTD. VS. DCIT (ITA NO. 1054/BANG/2011 PARA 20) - TELCORDIA TECHNOLOGIES INDIA P LTD. (ITA NO. 7821/MUM/2011 PARA 7.4) - CORDYS SOFTWARE INDIA PVT. LTD. VS. ACIT (ITA NO. 1972/H/2011) - AGNITY INDIA TECHNOLOGIES VS. ITO (ITA NO. 3856/DEL/2010) 15 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. - AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. ITO (HIGH C OURT DECISION ITA 1204/2011) - INVENSYS DEVELOPMENT CENTRE INDIA P. LTD. IN ITA NO 1256/HYD/2010 DT.20-02-2014 6. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE RECORD INCLUDING PAPER BOOKS PLACED ON RECORD. THER E IS A MERIT IN ASSESSEES CONTENTIONS ABOUT NON-COMPARABI LITY OF VARIOUS COMPARABLE COMPANIES SELECTED BY THE TPO. 7. AS REGARDS THE EXENSYS SOFTWARE SOLUTIONS LTD., AS SEEN FROM THE PAPER BOOK PLACED ON RECORD, THERE IS A MERGER OF HOLOOL INDIA LTD. AND IN THE DIRECTORS R EPORT (PB- 951), THERE IS A CLEAR MENTION THAT THE COMPANYS I NCOME OF RS. 737.79 LAKHS IS POSSIBLE WITH THE AMALGAMATION OF HOLOOL INDIA LTD. IT WAS FURTHER MENTIONED THAT ASS ESSEE COMPANY HAS GOT BENEFIT BY ADVANCED LATEST TECHNICA L EXPERTISE ON VARIOUS TECHNOLOGY DOMAINS OF THE TRAN SFEROR COMPANY. FURTHER, THAT COMPANY HAS CHARGED DEFERRED EXPENDITURE AND THE AMOUNT CLAIMED IN THIS YEAR IS RS. 1.22 CRORES AS AGAINST RS. 30.21 LAKHS IN EARLIER Y EAR. THIS WAS CLEARLY STATED IN NOTES THAT CLAIM WAS WITH REF ERENCE TO THE AS-14 AND ALSO DUE TO AMALGAMATION OF TWO COMPANIES. VIDE PAGE 957 OF PAPER BOOK, IT WAS SEEN THAT OUT OF GROSS ASSETS OF RS. 7.95 CRORES, BRANDS ALON E CONSIST OF RS. 5 CRORES, THEREFORE, INTANGIBLE ASSETS COMPR ISING OF SUBSTANTIAL PART OF THIS COMPANYS ASSETS. NOT ONLY IN THE CORRESPONDENCE WITH THE TPO THAT ASSESSEE EXPRESSED ITS INABILITY TO FURNISH SEPARATE ACCOUNTS FOR TWO AMAL GAMATED COMPANIES BUT ALSO FURTHER IT HAS CLEARLY MENTIONE D VIDE LETTER DATED 26-04-2007 TO THE TPO THAT THERE IS A GAP IN THE EXPENDITURE EXPECTED TO INCUR AND ACTUAL EXPEND ITURE INCURRED WHICH MADE THE COMPANY RECORD HIGH OPERATI NG MARGIN ON COST. THESE FACTORS INDEED SUPPORT ASSESS EES CONTENTION THAT THIS EXCEPTIONAL PROFIT WITH THE FA CT OF AMALGAMATION AFFECTED OPERATING PROFIT OF THE COMPA NY AND THIS CANNOT BE TAKEN AS COMPARABLE. OTHER ISSUES WE RE ALSO ANALYSED AND ACCEPTED IN VARIOUS CASES AS RELIED UP ON BY THE LEARNED COUNSEL. IN THE CASE OF INTOTO SOFTWARE INDIA PVT. LTD.,(SUPRA) THIS COMPARABLE CASE WAS ANALYSED AND HELD AS UNDER: 17. HAVING HEARD BOTH PARTIES AND HAVING CONSIDERE D THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THERE IS NO DISPUTE THAT ASSESSEE HAS ACCEPTED THE EXENSYS SOFT WARE SOLUTIONS LIMITED AS ONE OF THE COMPARABLE COMPANIE S 16 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. WHEN PROPOSED BY THE TPO. HOWEVER, THE FACT THAT TH ERE IS AN AMALGAMATION OF TWO COMPANIES I.E., EXENSYS SOFT WARE LIMITED AND HOLOOL INDIA LIMITED, THE RESULTS OF WH ICH, HAS RESULTED IN HIGH OPERATING MARGIN CANNOT BE LOST SI GHT FOR. IT HAS BEEN HELD IN MANY CASES BY THIS TRIBUNAL AS WEL L AS THE HIGHER FORUMS THAT TO COMPARE A COMPANY WITH AN OTHER COMPANY, BOTH THE COMPANIES HAVE TO BE BROUGHT ON P AR WITH EACH OTHER AFTER MAKING THE NECESSARY ADJUSTME NTS WHEREVER NECESSARY AND POSSIBLE. HOWEVER, WHERE THE RE ARE EXTRAORDINARY EVENTS SUCH AS THIS, THEN THOSE EVENTS HAVE TO BE TAKEN NOTE OF AND WHERE NO ADJUSTMENT CA N BE MADE ON ACCOUNT OF THIS EXTRAORDINARY EVENT, THEN S UCH COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. THE OBJECTIONS TO THIS COMPANY BY ASSESSEE ARE MADE FOR THE FIRST TIME BEFORE THE TRIBUNAL. THE TRIBUNAL BEING THE FINAL FACT FINDING AUTHORITY IS BOUND TO TAKE NOTE OF THE OBJECTIONS OF ASSESSEE. AS THE MATERIAL RELIED UPON BY THE LEARNED COUNSEL FOR ASSESSEE CLEARLY DENOTES THAT THERE IS AN EXTRAORDINARY EVENT WHICH HAS RESULTED IN THE H IGH OPERATING MARGIN OF THE COMPANY, WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER/TPO FOR RECONSIDERATION. IF IT IS FOUND TH AT THERE IS AN AMALGAMATION OF EXENSYS SOFTWARE LIMITED AND HOL OOL INDIA LIMITED AND FORMED AS ONE ENTITY VIZ.,EXENSYS SOFTWARE SOLUTIONS LIMITED. DURING THE RELEVANT PRE VIOUS YEAR AND THE FINANCIAL RESULT IS THE COMBINED RESUL T OF THESE TWO COMPANIES, THEN, WE DIRECT THE ASSESSING OFFICE R/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE S. 8. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THA T THERE IS AN EXTRA-ORDINARY EVENT WHICH RESULTED IN HIGH OPERATING MARGIN OF THAT COMPANY AND WE, THEREFORE, DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. IN THE ABOVE REFERRED CASE OF INTOTO SOFTWARE INDIA PVT. LTD., COMPLETE DETAILS WERE NOT PLACED O N RECORD, THEREFORE, THE MATTER WAS SENT TO AO FOR VERIFICATI ON WHEREAS IN THIS CASE ASSESSEE HAS OBJECTED EVEN BEF ORE THE AO/ CIT(A), THEREFORE, THERE IS NO NEED TO SET ASID E THE ISSUE TO THE FILE OF THE AO FOR EXAMINATION AS WAS DONE IN THE CASE OF INTOTO SOFTWARE(SUPRA). WE ARE, THEREFO RE, OF THE OPINION THAT ON THE BASIS OF FACTS PLACED ON RECORD , THE CASE OF EXENSYS SOFTWARE SOLUTIONS LTD. CANNOT BE TAKEN AS COMPARABLE. 9. SIMILARLY, THE OTHER CASES, BODHTREE CONSULTING LTD, FOUR SOFT LTD, INFOSYS,., SANKHYA INFOTECH LTD ., THIRDWARE SOLUTIONS LTD, TATA ELEXI (SEG) ETC, ARE ALSO TO BE 17 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. EXCLUDED AS THEY ARE CONSIDERED AND ANALYSED IN VAR IOUS CASES RELIED ON ABOUT FUNCTIONALITY AND WHY THE SAM E ARE NOT COMPARABLE TO THE COMPANIES LIKE ASSESSEE. BODH TREE CONSULTING LTD ALSO FAILS RPT FILTER AS CONTENDED. IN VIEW OF THIS, WE ARE NOT DISCUSSING ABOVE COMPARABLES IN DE TAIL, BUT, SUFFICE TO SAY THAT ASSESSEES SUBMISSIONS ARE VALID. THE AO IS DIRECTED TO EXCLUDE THE ABOVE COMPARABLES AND RE-WORK OUT THE ARMS LENGTH MARGIN ACCORDINGLY. 10. FOLLOWING THE AFORESAID DECISION, HYDERABAD BEN CH AGAIN IN CASE OF M/S DE SOFTWARE PVT. LTD., IN ITA NO. 1302/ H/10, DATED 21/01/15 EXCLUDED ALL THESE COMPANIES FROM THE LIST OF COMPARABLES FOR THE VERY SAME AY. AS FAR AS FLEXTRONICS SOFTWAR E LTD., IS CONCERNED, THE SAME WAS ALSO DISPUTED IN CASE OF M/ S DE SHAW INDIA SOFTWARE PVT. LTD. (SUPRA). THE COORDINATE BENCH AF TER CONSIDERING THE SUBMISSIONS OF THE PARTIES DIRECTED TO EXCLUDE THIS COMPANY ALSO FROM THE LIST OF COMPARABLES:. THE OBSERVATION OF THE CO ORDINATE BENCH IN THIS REGARD IS EXTRACTED HEREUNDER: 10. AS FAR AS FLEXTRONICS SOFTWARE LIMITED IS CONC ERNED, WE FIND THAT IN CASE OF INTOTO SOFTWARE INDIA PVT. LT D., (SUPRA) THE CO-ORDINATE BENCH OF THIS TRIBUNAL HAVING FOUND IT TO BE FUNCTIONALLY DIFFERENT AS IT IS INTO PRODUCT DEVEL OPMENT HAS DIRECTED EXCLUDING IT FOR COMPARABILITY ANALYSIS. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF M/S INTOTO SOFTWARE INDIA PVT.LTD. (SUPRA) WE ALSO DIRECT THE ASSESSING OFFICER/ TPO TO EXCLUDE THIS COMPANY . IN VIEW OF THE AFORESAID, ACCEPTING THE SUBMISSIONS OF LD. AR, WE DIRECT A.O./TPO TO EXCLUDE AFORESAID COMPANIES FROM THE LIST OF COMPARABLES. THIS GROUND OF ASSESSEE IS ALLOWED. 11. IN GROUND NO. 7, ASSESSEE HAS OBJECTED TO REJEC TION OF TWO COMPARABLES NAMELY, BIRLA TECHNOLOGIES LTD. AND VJI L CONSULTING LTD. 12. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIALS ON RECORD, WE AGREE WITH THE REASONIN G OF TPO AND LD. 18 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. CIT(A) THAT THESE TWO COMPANIES CANNOT BE CONSIDERE D AS COMPARABLES TO ASSESSEE. ACCORDINGLY, UPHOLDING THE ORDER OF LD. CIT(A), WE DISMISS THE GROUND RAISED BY ASSESSEE. 13. IN GROUND NO. 10 ASSESSEE HAS OBJECTED TO SELEC TION OF CERTAIN COMPARABLES UNDER THE ITES SEGMENT. 14. OUT OF 10 COMPARABLES SELECTED BY TPO, ASSESSEE HAS OBJECTED TO FOUR COMPARABLES. THE OBJECTIONS OF ASSESSEE IN RESPECT OF THESE COMPARABLES ARE AS UNDER: 1. MAPPLE E SOLUTIONS: LD. AR SUBMITTED, THIS COMPANY CANNOT BE SELECTED A S COMPARABLE AS THE DIRECTORS OF THE COMPANY WERE INV OLVED IN FRAUD. IT WAS SUBMITTED THAT VARIOUS BENCHES OF THE TRIBUNAL FOR THIS VERY REASON HAS REJECTED THIS COMPANY FROM BEI NG TREATED AS A COMPARABLE. FURTHER, LD. AR SUBMITTED, THE FIN ANCIAL RESULTS OF THE COMPANIES ARE FOR FOUR MONTHS PERIOD ONLY. S INCE PERIOD OF OPERATION DOES NOT CORRESPOND TO THE PERIOD OF O PERATION OF ASSESSEE, IT CANNOT BE SELECTED AS A COMPARABLE, EV EN AS PER THE FILTERS ADOPTED BY TPO. IN SUPPORT OF HIS CONTE NTIONS, LD. AR RELIED UPON THE FOLLOWING DECISIONS: 1. HSBC ELECTRONIC DATA PROCESSING INDIA PVT. LTD. , ITA NO. 1623/HYD/2010, DT. 28/06/2013. 2. MARKET TOOLS RESEARCH PVT. LTD., ITA NO. 1150/HYD/2011, DT. 05/02/2014. 2. NUCLEUS NET SOFT AND GIS INDIA LTD., LD. AR SUBMITTED, THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE AS IT FAILS EMPLOYEE COST FILTER. LD. AR SUBMITTED, THE EMPLOYEE COST OF THIS COMPANY AS A PERCENTAGE O F OPERATING REVENUE IS ONLY 19.60 PERCENT. IN SUPPORT OF HIS CO NTENTIONS, LD. AR RELIED UPON THE FOLLOWING DECISIONS: 19 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. 1. HSBC ELECTRONIC DATA PROCESSING INDIA PVT. LTD. , ITA NO. 1623/HYD/2010, DT. 28/06/2013. 2. MARKET TOOLS RESEARCH PVT. LTD., ITA NO. 1150/HYD/2011, DT. 05/02/2014. 3. VISHAL INFORMATION TECHNOLOGIES LTD.: LD. AR SUBMITTED, THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE AS IT FAILS EMPLOYEE COST FILTER. HE SUB MITTED THAT THIS COMPANY WAS REJECTED BY THE ITAT IN VARIOUS CA SES. IN SUPPORT OF HIS CONTENTIONS, LD. AR RELIED UPON THE FOLLOWING DECISIONS: 1. HSBC ELECTRONIC DATA PROCESSING INDIA PVT. LTD. , ITA NO. 1623/HYD/2010, DT. 28/06/2013. 2. MARKET TOOLS RESEARCH PVT. LTD., ITA NO. 1150/HYD/2011, DT. 05/02/2014. 4. WIPRO BPO SOLUTIONS LTD. , LD. AR SUBMITTED, THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE AS IT IS FUNCTIONALLY DIFFERENT AND SIG NIFICANT INTANGIBLE IS OWNED BY IT. MOREOVER, ITAT HAS REJEC TED THIS COMPANY AS COMPARABLE IN VARIOUS CASES. IN SUPPORT OF HIS CONTENTIONS, LD. AR RELIED UPON THE FOLLOWING DECIS IONS: 1. DE SHAW INDIA SOFTWARE P. LTD., ITA NO. 1302/HY D/10, DT. 21/01/2015 2. HSBC ELECTRONIC DATA PROCESSING INDIA PVT. LTD. , ITA NO. 1623/HYD/2010, DT. 28/06/2013. 3. MARKET TOOLS RESEARCH PVT. LTD., ITA NO. 1150/HYD/2011, DT. 05/02/2014. 15. LD. DR, ON THE OTHER HAND, THOUGH AGREED THAT I SSUES RELATING TO COMPARABILITY OF THESE COMPANIES MORE O R LESS ARE COVERED BY THE DECISIONS OF THIS TRIBUNAL, BUT, NEV ERTHELESS HE SUPPORTED THE REASONING OF TPO AND LD. CIT(A) IN IN CLUDING THESE COMPANIES AS COMPARABLES. 20 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. 16. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. ON GOING THROUGH T HE DECISIONS OF THE COORDINATE BENCHES PLACED BEFORE U S BY LD. AR, WE FIND THAT THE ISSUE RELATING TO COMPARABILITY OF THESE FOUR COMPANIES HAVE BEEN SETTLED IN THESE DECISIONS. DIF FERENT BENCHES OF THE TRIBUNAL AFTER CONSIDERING RELEVANT FACTS AND MATERIALS, HAVE CONSISTENTLY HELD THAT THESE FOUR COMPANIES FOR VARIOUS REASONS ARE NOT COMPARABLE TO A CAPTIVE ITE S PROVIDER. REFERENCE IN THIS REGARD IS INVITED TO THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN CASE OF M/S HSBC ELECTRONIC DATA PROCESS INDIA LTD. VS. DCIT, ITA 16 23/HYD/10 AND OTHERS , DATED 28/06/13 FOR AY 2005-06. THE OTH ER DECISIONS CITED BY LD. AR ALSO EXPRESS SIMILAR VIEW . THEREFORE, CONSISTENT WITH THE VIEW TAKEN BY THE DIFFERENT BEN CHES OF THE TRIBUNAL INCLUDING HYDERABAD BENCHES FOR THE VERY S AME AY, WE DIRECT A.O./TPO TO EXCLUDE THESE FOUR COMPANIES, N AMELY, 1, MAPPLE E SOLUTIONS, 2. NUCLEUS NET SOFT AND GIS IND IA LTD., 3) VISHAL INFOMRATION TECHNOLOGIES LTD., AND 4) WIPRO BPO SOLUTIONS LTD., FROM THE LIST OF COMPARABLES AS FAR AS ITES SEGMENT IS CONCERNED. 17. IN GROUND NO. 9, ASSESSEE HAS OBJECTED TO REJEC TION OF CERTAIN COMPARABLES SELECTED BY IT. THOUGH IN THE G ROUNDS RAISED ASSESSEE HAS NAMED SIX COMPARABLES, BUT, AT THE TIME OF HEARING, LD. AR SUBMITTED THAT HE WOULD LIKE TO ONL Y PRESS FOR PENTASOFT TECHNOLOGIES LTD. AS REST OF THE COMPANIE S HAVE BEEN REJECTED AS COMPARABLES IN CASE OF ITES COMPANY BY THE TRIBUNAL. 18. AS FAR AS PANTASOFT TEHNOLOGIES LTD. (SEG), LD. AR SUBMITTED BEFORE US, THIS COMPANY IS A COMPARABLE T O ASSESSEE IN THE ITES SEGMENT AS ITS SATISFIES ALL THE FILTER S ADOPTED BY 21 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. TPO. IN SUPPORT OF SUCH CONTENTION, LD. AR RELIED UPON THE DECISION OF HSBC DATA PROCESSING INDIA LTD. (SUPRA) . 19. THE LD. DR SUPPORTED THE ORDER OF CIT(A) AND TP O. 20. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. IT IS SEEN THAT IN CASE OF M/S HSBC ELECTRONIC DATA PROCESSING INDIA LTD. VS. DCIT (SUPRA), THE COORDINATE BENCH WHILE CONSIDERING ASSESSEES A RGUMENT FOR INCLUSION OF THE AFORESAID COMPANY AS A COMPARABLE, HELD AS UNDER: 14. AS FAR M/S PANTASOFT TECHNOLOGIES LTD., EVEN THOUGH THE ASSESSEE INCLUDED THE SAME, NO ARGUMENT S WERE AVAILABLE FOR ITS EXCLUSION. SINCE SEGMENTAL DATA HAS TO BE EXAMINED BY THE TPO, WE DIRECT THE TPO TO EX AMINE WHETHER THERE IS ANY SEGMENTAL DATA AND IF SO, WHE THER THE COMPANY IS ELIGIBLE FOR SELECTION AS COMPARABL E. THEREFORE, THE ISSUE OF PANTASOFT TECHNOLOGY IS AL SO RESTORED TO THE FILE OF THE AO FOR FRESH CONSIDERA TION. 21. FACTS BEING MATERIALLY SAME, FOLLOWING THE AFOR ESAID DECISION OF THE COORDINATE BENCH, WE DIRECT TPO TO EXAMINE WHETHER THE COMPANY CAN BE CONSIDERED AS A COMPARAB LE TO ASSESSEE. 22. IT WILL BE PERTINENT TO MENTION HERE THAT IN CO URSE OF HEARING LD DR HAS SUBMITTED BEFORE US, IF ASSESSEE S OBJECTIONS ON THE COMPARABLES SELECTED BY TPO IS ACCEPTED, THE N, 50% OF THE COMPANIES SELECTED WOULD BE REMOVED. IN THAT EV ENT, THE REMAINING LIMITED NUMBER OF COMPANIES MAY NOT GIVE AN APPROPRIATE COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH MARGIN. HOWEVER, WE ARE UNABLE TO ACCEPT THE AFORESAID CONTENTION OF LD. DR. THE PROVISION CONTAINED UNDER RULE 10B LAYS DOWN THE MANNER AND MODE FOR DETERMINING THE A LP UNDER DIFFERENT METHOD. AS FAR AS TNMM IS CONCERNED, THE ALP HAS TO 22 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. BE DETERMINED ON THE BASIS OF THE MARGIN OF THE COM PARABLE COMPANIES. THE RULE DOES NOT PRESCRIBE THAT A PARTI CULAR NUMBER OF COMPANIES HAVE TO BE SELECTED FOR COMPARABILITY ANALYSIS. MOREOVER, THE ISSUE BEFORE US IS, WHETHER CERTAIN C OMPANIES ARE COMPARABLES TO ASSESSEE OR NOT. THEREFORE, IF T HESE PARTICULAR COMPANIES ARE NOT SUITABLE TO BE TREATED AS COMPARABLE, THEY HAVE TO BE EXCLUDED. THEREFORE, IT IS THE DUTY OF TPO TO MAKE AN ENDEAVOUR IN SELECTING COMPANIES WHICH ARE COMPARABLE TO ASSESSEE. WHILE DOING SO, THE TPO MUS T KEEP IN VIEW THE DECISIONS OF THE HIGHER APPELLATE AUTHORI TIES WITH REGARD TO COMPARABILITY OF THE COMPANIES. IN THE AF ORESAID VIEW OF THE MATTER, WE DO NOT AGREE WITH THE LD. DR FOR DIRECTING THE TPO TO UNDERTAKE A FRESH SEARCH FOR SELECTION OF CO MPARABLES. IN VIEW OF THE AFORESAID, WE DIRECT THE A.O./TPO TO DETERMINE THE ALP OF ASSESSEE AFTER KEEPING IN VIEW OUR OBSER VATIONS IN THE PRECEDING PARAGRAPHS. 23. THE NEXT ISSUE WHICH ARISES FOR CONSIDERATION A S RAISED IN GROUND NO. 12 IS WITH REGARD TO INCLUSION OF REIMBU RSEMENT COST OF RS. 6,55,57,576 IN THE OPERATING COST FOR THE PU RPOSE OF DETERMINING ALP OF SOFTWARE DEVELOPMENT SERVICES SE GMENT. 24. LD. AR SUBMITTED BEFORE US, THE TPO WHILE DETER MINING THE ALP OF THE SOFTWARE DEVELOPMENT SERVICES SEGMEN T HAS INCLUDED THE REIMBURSEMENT COST OF RS. 6,55,57,576 BEING THE COST OF TRAVEL AND STAY OF PERSONNEL TO ASSESSEE. L D. AR SUBMITTED, THERE BEING NO PROFIT ELEMENT IN SUCH RE IMBURSEMENT COST, IT SHOULD NOT HAVE BEEN INCLUDED IN THE OC. I N SUPPORT OF SUCH CONTENTION, LD. AR RELIED UPON THE DECISION OF THE ITAT, HYDERABAD BENCH IN CASE OF M/S HSBC ELECTRONIC DATA PROCESS INDIA LTD. VS. DCIT, ITA NO. 1624/HYD/2010, DT. 28/ 06/2013. 23 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. 25. THE LD. DR SUBMITTED BEFORE US, IF THE REIMBURS EMENT COST ACCORDING TO THE TRIBUNAL CANNOT FORM PART OF THE O C, THEN, THE TPO MAY BE DIRECTED TO DETERMINE THE ALP OF REIMBUR SEMENT COST SEPARATELY. 26. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. THE ITAT, HYD. BENC H IN CASE OF HSBC ELECTRONIC DATA PROCESS INDIA LTD. VS. DCIT IN ITA 1624/HYD/10, DATED 28/06/13, WHILE DEALING WITH IDE NTICAL ISSUE HELD AS UNDER: 20. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND FOL LOWING THE PRINCIPLES LAID DOWN IN THE DECISIONS OF THE TRIBUNAL CITED ABOVE, WE ARE OF THE OPINION THAT REIMBURSEMENT COSTS SHOULD BE EXCLUDED AS THEY DO NOT INVOLVE ANY FUNCTIONS TO BE PERFORMED SO AS TO CONSIDER IT FOR PROFITABI LITY PURPOSES. IN THE CASE OF FOUR SOFT LTD. SUPRA, HYDERABAD BENCH OF THE TRIBU NAL CONSIDERED THIS ISSUE AND HELD AS UNDER: 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. FIRST, WE WILL TAKE UP THE ISSUE RELATING TO THE ADJUSTMENTS MADE BY THE ASSESSING OFFICER IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES IN THE SOFTWARE DEVELOPMENT SERVICES. IT IS THE CONTENTION OF THE ASSESSEE THAT BAD DEBTS INCURRED BY THE ASSESSEE C OMPANY ARE IN RESPECT OF TRANSACTIONS, WHICH ARE NOT RELATED TO ASSOCIATED ENTERPRISES. THIS CONTENTION OF THE ASSESSEE HAS NOT BEEN CONTROVERT ED BY THE REVENUE BY BRINGING ANY MATERIAL ON RECORD BEFORE US. IT IS THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT SUCH BAD DEBTS CANNO T BE TAKEN INTO ACCOUNT FOR COMPUTING THE MARGIN OF THE ASSESSEE FROM THE TRA NSACTIONS WITH THE ASSOCIATED ENTERPRISES IN RESPECT OF SOFTWARE DEVE LOPMENT SERVICES. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED BE FORE US A COMPARATIVE CHART EXPLAINING THE COMPUTATION OF NET MARGIN, EXCLUDIN G THE BAD DEBTS AND CLEARLY DEMONSTRATED BEFORE US THAT IF THE BAD DEBTS/REIMB URSEMENTS ARE EXCLUDED FOR THE PURPOSE OF COMPUTING THE MARGINS ON THE TR ANSACTIONS RELATING TO THE ASSOCIATED ENTERPRISES, THE NET MARGIN COMES TO 19 .07%, WHICH IS WELL COMPARABLE WITH THE ARMS LENGTH MARGIN OF 19% DETE RMINED BY THE TRANSFER PRICING OFFICER. IN OUR CONSIDERED VIEW, FOR COMP UTING THE NET MARGIN OF THE ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING, ONL Y THE COST RELATED TO THE TRANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE CONSIDERED AND ACCORDINGLY, WE APPROVE THAT SEGMENTAL FINANCIALS IS TO BE CONSIDERED FOR THE PURPOSE OF ARRIVING AT THE NET MARGIN ON THE INTER NATIONAL TRANSACTION WITH THE ASSESSEE'S ENTERPRISE IN RESPECT OF SOFTWARE DEVEL OPMENT SERVICES. IN THAT PROCESS, BAD DEBTS/REIMBURSEMENTS HAS TO BE EXCLUD ED AND SEGMENTAL PROFITABILITY HAS TO BE ADOPTED. WE FIND SUPPORT I N THIS BEHALF FROM VARIOUS DECISIONS OF THE TRIBUNAL RELIED UPON BY THE LEARN ED COUNSEL FOR THE 24 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. ASSESSEE DULY FILING COPIES THEREOF IN THE PAPERBO OK, WHICH HAVE BEEN NOTED HEREINABOVE. THAT BEING SO, THE TPO SHOULD HAVE DE TERMINED THE ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS WITH ASSO CIATED ENTERPRISES CONSIDERING ONLY THE OPERATING COST ALLOCABLE TO THE ASSOCIATE D ENTERPRISES SEGMENT. SINCE THE ASSESSING OFFICER HAD NO OCCASION TO VERIFY TH E VERACITY OF THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPANY, FOR L IMITED PURPOSE, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE SEGMENTAL FINA NCIALS PREPARED BY THE ASSESSEE COMPANY AND ADOPT THE SAME FOR ARRIVING A T THE NET MARGIN ON THE INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF S OFTWARE DEVELOPMENT SERVICES. WE DIRECT ACCORDINGLY. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AS SESSING OFFICER /TPO TO EXCLUDE THE REIMBURSEMENT COSTS WHILE WORKING OUT THE OPERATING COSTS. THIS GROUND IS CONSIDERED ALLOWED. FACTS BEING MATERIALLY SAME, FOLLOWING THE VIEW EXP RESSED BY THE COORDINATE BENCH HEREINABOVE, WE HOLD THAT REIM BURSEMENT COST SHOULD BE EXCLUDED FROM THE OC FOR DETERMINING ALP. AS FAR AS THE CONTENTION OF LD. DR THAT TPO MAY BE DIR ECTED TO DETERMINE THE ALP OF THE REIMBURSEMENT COST ON STAN D ALONE BASIS, WE ARE UNABLE TO ACCEPT THE SAME AS THE SAME DOES NOT ARISE OUT EITHER FROM THE ORDER OF TPO OR LD. CIT(A ). SINCE, WHILE CONSIDERING ASSESSEES APPEAL WE HAVE TO REST RICT OURSELVES TO THE GROUNDS RAISED BY ASSESSEE, THIS I SSUE RAISED BY LD. DR IS LEFT OPEN TO BE DECIDED IN AN APPROPRI ATE CASE. IN VIEW OF THE AFORESAID, WE DIRECT A.O./TPO TO COMPUT E ALP AFRESH KEEPING IN VIEW OUR DIRECTIONS HEREINABOVE. 27. BESIDES THE ABOVE GROUNDS RAISED ON TP ISSUES, ASSESSEE HAS RAISED FEW MORE ISSUES RELATING TO COR PORATE TAX MATTERS IN GROUND NOS. 15, 16 & 17. 28. IN GROUND NO. 15 ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF FOREIGN EXCHANGE FLUCTUATION LOSS O F RS. 52,14,198. 29. IN COURSE OF THE ASSESSMENT PROCEEDING, WHEN A. O. CALLED UPON ASSESSEE TO JUSTIFY THE CLAIM OF DEDUCT ION ON 25 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION LOSS, ASSES SEE SUBMITTED THAT IT HAS INCURRED FOREIGN EXCHANGE FLU CTUATION LOSS ON ACCOUNT OF RESTATEMENT OF CURRENT ACCOUNT RECEIV ABLE AND PAYABLES IN ACCORDANCE WITH AS 11. RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF SUTLEJ VS. CIT, 116 ITR 01, IT WAS SUBMITTED BY ASSESSEE THAT LOSS INCURRED ON REVENUE ACCOUNT AS A RESULT DEVALUATION OF CURRENCY IS AN A LLOWABLE DEDUCTION. A.O. HOWEVER WAS NOT CONVINCED WITH ASS ESSEES EXPLANATION. HE OBSERVED THAT AS PER THE INFORMATIO N AVAILABLE ON RECORD, ASSESSEE HAD RECEIVED THE PAYMENTS IN FO REIGN EXCHANGE IN ADVANCE PRIOR TO EXPORT OR RAISING INVO ICE FOR IT. HOWEVER, AT THE END OF THE YEAR ASSESSEE HAS COMPUT ED THE LOSS ON ACCOUNT OF FLUCTUATION BY ADOPTING EXCHANGE RATE AS ON THAT DATE. HE, THEREFORE, INFERRED THAT LOSS CLAIME D IS PURELY A NOTIONAL LOSS, WHICH CANNOT BE ALLOWED UNDER THE P ROVISIONS OF INCOME-TAX. HE FURTHER OBSERVED THAT DETERMINATION OF ANY LOSS ON ACCOUNT OF CHANGE IN EXCHANGE RATE AS ON THE DAT E OF INVOICE AND DATE OF RECEIPT OF FOREIGN EXCHANGE MIGHT BE RE ASONABLE BUT DETERMINING LOSS AT THE END OF THE YEAR ON A NOTION AL BASIS IS UNACCEPTABLE. ACCORDINGLY, HE DISALLOWED THE AMOUNT OF RS. 52,14,198. THOUGH ASSESSEE CHALLENGED THE DISALLOWA NCE BEFORE LD. CIT(A), BUT, LD. CIT(A) ALSO CONFIRMED T HE DISALLOWANCE BY AGREEING WITH A.O. THAT THE LOSS BE ING A NOTIONAL ONE CANNOT BE ALLOWED. 30. LD. AR REITERATING THE SUBMISSIONS MADE BEFORE THE DEPARTMENTAL AUTHORITIES, SUBMITTED, LOSS ON ACCOUN T OF FOREIGN EXCHANGE FLUCTUATION BEING INTEGRALLY CONNECTED WIT H THE EXPORT OF ARTICLE OR THING, ASSESSEE IS ELIGIBLE TO CLAIM DEDUCTION OF THE LOSS ARISING ON THAT ACCOUNT. IN THIS CONTEXT, HE R ELIED UPON A DECISION OF THE ITAT, HYD BENCH IN CASE OF HSBC VS. DCIT, ITA NO. 1623/HYD/2010. 26 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. 31. THE LD. DR, ON THE OTHER HAND, SUBMITTED, THE L OSS CLAIMED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION BEING A NOTIONAL LOSS IS NOT ALLOWABLE. 32. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. AS COULD BE SEEN F ROM THE DISCUSSIONS MADE BY A.O., HE HAS DISALLOWED ASSESSE ES CLAIM OF LOSS ON FOREIGN EXCHANGE BY TREATING IT AS NOTIO NAL. HE HAS NOT SAID THAT LOSS IS NOT CONNECTED WITH ASSESSEES BUSINESS. THEREFORE, IF ASSESSEE CAN PROVE THAT LOSS ON ACCOU NT OF FOREIGN EXCHANGE FLUCTUATION WAS NOT NOTIONAL BUT ACTUALLY INCURRED SAME CANNOT BE DISALLOWED. WE, THEREFORE, REMIT THI S ISSUE TO THE AO FOR DECIDING AFRESH AFTER DUE OPPORTUNITY OF BEING HEARD TO ASSESSEE. THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 33. IN GROUND NO. 16, ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF LEAVE ENCASHMENT EXPENSES TO THE EX TENT OF RS. 94,03,525. 34. BEFORE THE FIRST APPELLATE AUTHORITY, ASSESSEE CONTENDED THAT A.O. HAS ERRED IN NOT ALLOWING LEAVE ENCASHMEN T EXPENSES OF RS. 94,03,525. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE, HELD THAT IF A.O. HAS MISSED OUT ON AL LOWING ANY CLAIM OF EXPENDITURE, IT WILL BE BETTER FOR ASSESS EE TO FILE A PETITION U/S 154 OF THE ACT, BEFORE A.O. FURTHER, L D. CIT(A) OBSERVED THAT NEITHER THERE IS ANY DISCUSSION WITH REGARD TO ASSESSEES CLAIM IN THIS REGARD IN THE ASSESSMENT O RDER NOR ASSESSEE FURNISHED ANY EVIDENCE TO INDICATE THAT SU CH CLAIM WAS MADE BY ASSESSEE BEFORE A.O. DURING THE ASSESSM ENT PROCEEDING. HE, THEREFORE, REFUSED TO ENTERTAIN THE GROUND RAISED BY ASSESSEE. 27 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. 35. LD. AR SUBMITTED BEFORE US, A.O. HAS NOT ONLY DISALLOWED DEDUCTION CLAIMED ON ACCOUNT OF LEAVE ENCASHMENT BU T HAS ALSO MADE THE ADDITION AFTER COMPUTING DEDUCTION U/S 10A OF THE ACT. LD. AR SUBMITTED, IF AT ALL, THE AMOUNT CLAIMED IS TO BE DISALLOWED, SUCH DISALLOWANCE BEING IN THE NATURE O F STATUTORY DISALLOWANCE WILL BE PART OF ASSESSEES BUSINESS IN COME, HENCE, ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. 36. THE LD. DR, ON THE OTHER HAND, SUBMITTED, AS TH ERE IS NO DISCUSSION IN THE ASSESSMENT ORDER WITH REGARD TO A FORESAID DISALLOWANCE, THE GROUND RAISED BY ASSESSEE SHOULD NOT BE ENTERTAINED. 37. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. ON CAREFUL READING OF THE IMPUGNED ASSESSMENT ORDER, WE FAILED TO LOCATE ANY DISALLOWANCE ON ACCOUNT OF LEAVE ENCASHMENT MADE BY AO. AS OBSERVED BY LD. CIT(A), THERE IS ABSOLUTELY NO MENT ION OF THIS ISSUE IN THE ASSESSMENT ORDER. THAT BEING THE CASE, WE FAIL TO UNDERSTAND HOW AND WHY THIS GROUND WAS RAISED BY AS SESSEE. WHEN THIS FACTUAL POSITION WAS POINTED OUT TO THE L D. AR, HE ALSO AGREED THAT NO SPECIFIC DISALLOWANCE HAS BEEN MADE BY AO. IN THE AFORESAID VIEW OF THE MATTER, WE FIND NO REASON TO INTERFERE WITH THE DECISION OF LD. CIT(A) ON THIS ISSUE. THE GROUND RAISED IS DISMISSED. 38. IN GROUND NO. 17, ASSESSEE HAS CHALLENGED DISAL LOWANCE OF AN AMOUNT OF RS. 58,07,421 CLAIMED TO BE EXPENDI TURE INCURRED ON PURCHASE OF SOFTWARE. 39. AS COULD BE SEEN, WHILE COMPLETING THE ASSESSME NT A.O. DISALLOWED THE AMOUNT OF RS. 58,07,421 DEBITED TO T HE P&L A/C ON ACCOUNT OF PURCHASE OF SOFTWARE. A.O. WAS OF THE VIEW THAT 28 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. THE EXPENDITURE INCURRED BEING OF CAPITAL NATURE IS NOT ALLOWABLE, HOWEVER, HE WAS OF THE VIEW THAT ASSESSE E IS ELIGIBLE TO CLAIM DEPRECIATION @ 60% ON SUCH CAPITAL EXPEND ITURE. FURTHER, ON ASSESSEES REQUEST, HE ALLOWED 50% OF T HE AMOUNT AS DEPRECIATION AS THE ASSET WAS PUT TO USE FOR A L ESSER PERIOD. THOUGH, ASSESSEE RAISED A GROUND BEFORE CIT(A) CLAI MING EXPENDITURE TO BE REVENUE, LD. CIT(A), HOWEVER, UPH ELD THE DECISION OF THE A.O. ON THE ISSUE. 40. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIAL ON RECORD, WE DO NOT FIND ANY INFIRMITY EITHER IN THE ORDER OF A.O. OR IN THE ORDER OF LD. CIT(A). AS COULD BE SEEN, ASSESSEE ITSELF, BEFORE A.O. HAD AGREED FO R ALLOWANCE OF DEPRECIATION ON THE EXPENDITURE CLAIMED ON SOFTW ARE. THAT BEING THE CASE, WE DO NOT SEE ANY REASON TO INTERFE RE WITH THE ORDER OF LD. CIT(A) ON THIS ISSUE. ACCORDINGLY, GRO UND RAISED IS DISMISSED. 41. IN GROUND NO. 18, ASSESSEE HAS CHALLENGED LEVY OF INTEREST U/S 234B OF THE ACT. 42. AT THE TIME OF HEARING, LD. AR HAS NOT ARGUED O N THIS ISSUE. IN ANY CASE OF THE MATTER, LEVY OF INTEREST U/S 234B BEING CONSEQUENTIAL AND MANDATORY, WE DO NOT FIND THE NEC ESSITY TO ENTERTAIN THIS GROUND. 43. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALL OWED. PRONOUNCED IN THE OPEN COURT ON 26 TH AUGUST, 2015 SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 26 TH AUGUST, 2015 29 ITA NO. 471/HYD/2011 M/S ADP PVT. LTD. KV COPY TO:- 1) ADP P. LTD., 6-3-1091/C/1, FORTUNE 9, RAJ BHAVA N ROAD, HYDERABAD 82 2) DCIT, CIRCLE 1(1), 4 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD 500 029 3) CIT(A), , HYDERABAD 4) CIT I, HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.
