M/s. Adaptech (India) P. Ltd, Hyderabad V. The ITO Ward - 1(2), Hyderabad

ITA 481/HYD/2011

• Counselvise Citation: 48122514 RSA 2011
• Duration Of Justice: 3 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 24-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: RAVI BHARADWAJ MITHILESH SAI
• Keywords: Transfer pricing; International transaction; Revenue expenditure
• Section: 92C; 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 481/HYD/2011 ASSESSMENT YEAR : 2005-06 M/S ADAPTECH INDIA (P) LTD., HYDERABAD PAN AAECS9578G INCOME TAX OFFICER, WARD - 1(2), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI RAVI BHARADWAJ/ MITHILESH SAI REVENUE BY SHRI D. SUDHAKAR RAO DATE OF HEARING 10-11-2014 DATE OF PRONOUNCEMENT -11-2014 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST OR DER DATED 11/01/12 PASSED BY THE COMMISSIONER OF INCOME-TAX( A)-III, HYDERABAD, FOR THE ASSESSMENT YEAR 2005-06. 2. BRIEFLY THE FACTS ARE, ASSESSEE IS A WHOLLY OWNE D SUBSIDIARY OF ITS OVERSEAS HOLDING COMPANY ADAPTEC INC, USA (HERE INAFTER REFERRED TO AS ASSOCIATED ENTERPRISES [AE] ). ASSESSEE IS BA SICALLY ENGAGED IN PROVIDING SOFTWARE DESIGN AND DEVELOPMENT AND TESTI NG SERVICES IN THE AREAS OF HIGH PERFORMANCE MEMORY AND MEMORY INT ENSIVE LOGIC PRODUCTS. AS ASSESSEE EXCLUSIVELY PROVIDES SUCH SER VICES TO ITS AE OR OTHER COMPANIES WITHIN THE GROUP, IT CAN BE CONSIDE RED TO BE A CAPTIVE SERVICE PROVIDER. ASSESSEE IS REGISTERED AS 100% EOU UNDER THE STPI SCHEME OF GOVT. OF INDIA. AS PER THE TERMS OF AGREEMENT 2 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. WITH AE, ASSESSEE IS REMUNERATED AT COST PLUS 14% MARK UP FOR RENDERING SERVICES TO ITS AE. DURING THE AY UNDER D ISPUTE, ASSESSEE EARNED REVENUE OF RS. 16,52,99,464 FROM THE SERVICE S RENDERED TOWARDS SOFTWARE DESIGN AND SOFTWARE DEVELOPMENT TO ITS AE. ASSESSEE ALSO RECEIVED REIMBURSEMENT OF EXPENSES AC TUALLY INCURRED AMOUNTING TO RS. 45,35,095. FOR THE IMPUGNED AY, AS SESSEE FILED ITS RETURN OF INCOME ON 01/11/2005 DECLARING NIL INCO ME AFTER CLAIMING EXEMPTION U/S 10A OF THE ACT OF RS. 144,37,018. 3. DURING THE SCRUTINY ASSESSMENT PROCEEDING, AO NO TICING THAT REVENUE EARNED FROM INTERNATIONAL TRANSACTION HAS E XCEEDED RS. 5 CRORE MADE A REFERENCE TO THE ADDL. CIT, INTERNATIO NAL TAXATION (HEREINAFTER REFERRED TO AS TRANSFER PRICING OFFICE R (TPO) ) IN TERMS WITH THE PROVISIONS CONTAINED U/S 92CA OF THE ACT, FOR ANALYZING ARMS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTION WIT H AE. IN COURSE OF PROCEEDING BEFORE TPO, ASSESSEE SUBMITTED ITS TP ST UDY REPORT CARRIED OUT THROUGH AN EXTERNAL AGENCY FOR BENCH MA RKING THE PRICE RECEIVED FROM INTERNATIONAL TRANSACTION WITH AE. FO R ESTABLISHING THAT THE PRICE CHARGED IS WITHIN ARMS LENGTH, FAR ANAL YSIS WAS UNDERTAKEN BY CATEGORIZING ASSESSEE AS A RISK MITIG ATED SERVICE PROVIDER AND CONSIDERING IT AS TESTED PARTY. TRANS ACTION NET MARGIN METHOD (TNMM) WAS CHOSEN AS MOST APPROPRIATE METHOD AND OPERATING PROFIT TO OPERATING COST WAS CHOSEN AS PR OFIT LEVEL INDICATOR (PLI) BY APPLYING CERTAIN FILTERS. A SEARCH WAS MA DE IN THE DATA BASES FOR SELECTING COMPARABLE COMPANIES, WHICH RES ULTED IN SELECTION OF 87 COMPANIES AS COMPARABLES WITH AN AV ERAGE PROFIT MARGIN OF 13% ON COST AND AFTER ADJUSTMENT OF WORKI NG CAPITAL, AVERAGE MARGIN OF COMPARABLE COMPANIES WAS WORKED O UT AT 10% ON COST AS AGAINST OPERATING MARGIN OF 16.46% OF ASSES SEE, HENCE, THE PRICE CHARGED WAS FOUND TO BE WITHIN ARMS LENGTH R EQUIRING NO ADJUSTMENT. FURTHER IN COURSE OF PROCEEDING BEFORE TPO, IN RESPONSE TO THE QUERY RAISED, ASSESSEE SELECTED 12 COMPANIES AS COMPARABLES 3 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. OUT OF 87 ORIGINALLY SELECTED IN THE TP STUDY HAVIN G AVERAGE MARGIN OF 16.98% ON COST. THE COMPANIES FINALLY SELECTED BY A SSESSEE ARE: S.NO. NAME OF THE COMPANY OP/TC% 1. BLUE STAR INFOTECH LTD. 12.93% 2. GEBBS INFOTECH LTD. 16.52% 3. GOLDSTONE TECHNOLOGIES LTD. 4.65% 4. INFOSYS TECHNOLOGIES LTD. 43.87% 5. KPIT CUMMINS INFOSYSTEMS LTD. 13.42% 6. LARSEN & TOUBRO INFOTECH LTD. 10.59% 7. ORIENT INFORMATION TECHNOLOGY LTD. 14.90% 8. QUITEGRA SOLUTIONS LTD. 6.93% 9. RS SOFTWARE (INDIA) LTD. 7.92% 10. SATYAM COMPUTERS SERVICES LTD. 28.79% 11. VJIL CONSULTING LTD. 6.68% 12. VMF SOFTECH LTD. 36.51% ARITHMETIC MEAN 16.98% 4. TPO AFTER ANALYZING THE TP STUDY AS WELL AS OTHE R MATERIAL AVAILABLE ON RECORD, THOUGH, ACCEPTED TNMM AS MOST APPROPRIATE METHOD AND OPERATING PROFIT TO OPERATING COST AS PL I, HOWEVER, HE REJECTED THE TP STUDY OF ASSESSEE BY OBSERVING THAT ASSESSEE WAS NOT CONSISTENT IN ITS APPROACH AND KEPT CHANGING C OMPARABLES. HE FURTHER OBSERVED THAT WHILE ACCEPTING/REJECTING COM PARABLES, ASSESSEE HAS NOT ADHERED TO VERTICALS OF SOFTWARE INDUSTRY AND HAS SELECTED COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT IRRESPECTIVE OF THE VERTICALS OF SOFTWARE. FURTHER, TPO NOTED THAT WHILE CONSIDERING THE COMPARABLE COMPANIES ASSESSEE HAS NOT RESTRICTE D ITSELF TO THE DATA RELATING TO THE FY 2004-05 ALONE, BUT, HAS CON SIDERED MULTIPLE YEAR DATA. THUS, THE TPO POINTING OUT VARIOUS DEFE CTS AND DEFICIENCIES IN THE TP STUDY, WHICH ACCORDING TO TH E TPO MADE THE TP STUDY UNRELIABLE, REJECTED THE SAME. AFTER REJECTIN G THE TP STUDY, TPO APPLYING CERTAIN FILTERS ADOPTED BY ASSESSEE IN ADD ITION TO CERTAIN ADDITIONAL FILTERS CHOSEN BY HIM CONDUCTED A FRESH SEARCH IN THE DATA BASES FOR SELECTION OF COMPARABLES. TPO ALSO EXERCI SING HIS POWER U/S 133(6) OBTAINED INFORMATION FROM CERTAIN COMPAR ABLE COMPANIES. SEARCH PROCESS ADOPTED BY TPO RESULTED IN SELECTION OF 17 4 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. COMPANIES AS COMPARABLE WITH AN AVERAGE MARGIN OF 2 6.59% COMPANIES SELECTED BY TPO ARE AS UNDER: S.NO. NAME OF THE COMPANY OP/TC% 1. GATE GLOBAL SOLUTIONS LTD. 1.64% 2. FLEXTRONICS (SEG.) 29.33% 3. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. 17.59% 4. LANCO GLOBAL SYSTEMS LTD. 9.31% 5. LARSEN & TOUBRO INFOTECH LTD. 8.34% 6. RS SOFTWARE (INDIA) LTD. 6.56% 7. SASKEN COMMUNICATION TECHN LTD. (SEG.) 13.05% 8. SASKEN NETWORK SYSTEMS LTD. 13.84% 9. VISUALSOFT TECHNOLOGIES LTD. (SEG) 19.95% 10. BODHTREE CONSULTING LTD. 22.21% 11. EXENSYS SOFTWARE SOLUTIONS LTD. 52.94% 12. SANKYA INFOTECH LTD. 21.00% 13. FOURSOFT LTD. 21.21% 14. THIRDWARE SOLUTIONS LTD. 64.07% 15. TATA ELXSI LTD. (SEG) 22.63% 16. INFOSYS TECHNOLOGIES LTD. 40.87% 17. SATYAM COMPUTERS SERVICES LTD. 28.79% 5. AFTER GIVING ALLOWANCE FOR WORKING CAPITAL ADJUS TMENT OF 2.98%, TPO ARRIVED AT THE ADJUSTED ARITHMETIC MEAN PLI OF 23.61% . BY APPLYING THE ADJUSTED ARITHMETIC MEAN PLI TO THE OP ERATING COST OF RS. 14,19,32,358, ALP WAS DETERMINED AT RS. 17,54,42,58 7. AS THE PRICE CHARGED BY ASSESSEE TO ITS AE WAS RS. 16,52,99,464, SHORTFALL OF RS. 1,01,43,123 WAS TREATED AS TRANSFER PRICING ADJUSTM ENT U/S 92C OF THE ACT. ACCORDINGLY, TPO PASSED THE ORDER. IN TERMS WI TH THE ORDER PASSED BY TPO, AO COMPLETED ASSESSMENT U/S 143(3) O F THE ACT VIDE ORDER DATED 29/12/2008 BY MAKING ADDITION OF TRANSF ER PRICING ADJUSTMENT OF RS. 1,01,43,123. THOUGH AO ALSO MADE SOME OTHER ADDITIONS/DISALLOWANCES AS THEY ARE NOT SUBJECT MAT TER OF APPEAL BEFORE US, IT IS NOT NECESSARY TO DEAL WITH THEM. A GAINST THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, ASS ESSEE PREFERRED APPEAL BEFORE LD. CIT(A). 6. IN COURSE OF APPEAL BEFORE LD. CIT(A), THOUGH, A SSESSEE MADE VARIOUS ARGUMENTS CHALLENGING THE DETERMINATION OF ALP AND THE 5 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. ADJUSTMENT MADE U/S 92CA, BUT, LD. CIT(A) REJECTED ALL CONTENTIONS OF ASSESSEE, EXCEPT SELECTION OF ONE COMPARABLE I.E. S ATYAM COMPUTERS AND SERVICES LTD., WHICH LD. CIT(A) EXCLUDED FROM T HE LIST OF COMPARABLES, AS A RESULT, SHORTFALL WAS REDUCED TO RS. 98,87,645, WHICH LD. CIT(A) DIRECTED THE AO TO ADD TOWARDS TRA NSFER PRICING ADJUSTMENT U/S 92CA OF THE ACT. BEING AGGRIEVED OF THE RODER OF LD. CIT(A), ASSESSEE IS BEFORE US. 7. THOUGH IN THE MEMORANDUM OF APPEAL, ASSESSEE HAS RAISED 13 GROUNDS, BUT, AT THE TIME OF HEARING, LD. AR CONFIN ED HIS ARGUMENT TO GROUND NO. 8 ALONE RELATING TO SELECTION OF UNCOMPA RABLES AS COMPARABLES. IN VIEW OF THIS, REST OF GROUNDS ARE D ISMISSED AS NOT PRESSED. 8. OUT OF THE COMPANIES RETAINED BY LD. CIT(A), IN GROUND NO. 8 ASSESSEE HAS CHALLENGED SELECTION OF FOLLOWING COMP ANIES AS COMPARABLES: 1. EXENSYS SOFTWARE SOLUTIONS LTD. 2. SANKYA INFOTECH LTD. 3. FOUR SOFT LTD. 4. BODHTREE CONSULTING LTD. 5. TATA ELXSI LTD., AND 6. THIRDWARE SOLUTIONS LTD. 9. OBJECTING TO SELECTION OF EXENSYS SOFTWARE SOLU TIONS LTD., LEARNED AR SUBMITTED BEFORE US, THE COMPANY BEING F UNCTIONALLY DIFFERENT CANNOT BE A COMPARABLE TO ASSESSEE UNDER ANY CIRCUMSTANCES. LD. AR SUBMITTED THAT THE COMPANY OW NS SIGNIFICANT BRAND INTANGIBLES, WHICH SHOW THAT IT IS INTO PRODU CT DEVELOPMENT. HE FURTHER SUBMITTED THAT SO FAR AS THIS COMPANY IS CO NCERNED, IT IS EXCEPTIONAL YEAR OF OPERATION AS THERE WAS AMALGAMA TION OF THE COMPANY WITH HOLOOL INDIA LD., WITH RETROSPECTIVE E FFECT FROM 01/04/2004, WHICH HAD A MATERIAL/SIGNIFICANT IMPACT ON THE PROFITS OF 6 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. THE COMPANY FOR AY 2004-05. LD. AR ALSO BROUGHT TO OUR NOTICE THAT THERE IS AN ERROR IN COMPUTATION OF MARGIN AS TPO H AS EXCLUDED DEFERRED REVENUE EXPENDITURE IS INCLUDED THE NET MA RGIN OF COMPANY WOULD BE 32.68%. IN SUPPORT OF HIS CONTENTION THAT THE AFORESAID COMPANY CANNOT BE A COMPARABLE TO ASSESSEE, LEARNED AR RELIED ON THE FOLLOWING DECISIONS: 1. NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., ITA NO. 472/HYD/2014 . 2. INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LOD., I TA NO. 1256/H/2010. 3. COLT TECHNOLOGY, ITA NO. 609/DEL/2011. 4. SONATA SOFTWARE, ITA NO. 3514/MUM/2010 5. INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD., 2 7/JP/2011. 10. OBJECTING TO SANKHYA INFOTEC LTD., LD. AR SUBM ITTED THAT IT IS FUNCTIONALLY DIFFERENT AS IT IS INVOLVED IN DEVELOP MENT AND DISTRIBUTION OF PRODUCTS, WHICH IS CLEARLY REVEALED FROM WEBSITE OF THE COMPANY. FURTHER, ELABORATING, IT WAS SUBMITTED THAT AS PER COMPANYS WEBSITE, THE AFORESAID COMPANY HAS PARTNERED WITH QUAD INC. TO DELIVER THE ENTIRE BUSINESS OF MGF/PRO PRODUCT OF QUAD INC. FRO M PRE-SALES, TRAINING, IMPLEMENTATION AND SUPPORT OF APPLICATION MANAGEMENT SERVICES. IN SUPPORT OF HIS CONTENTION FOR REJECTIN G THE AFORESAID COMPANY, LEARNED AR RELIED ON THE FOLLOWING DECISIO NS: 1. NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., ITA NO. 472/HYD/2014 . 2. INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LOD., I TA NO. 1256/H/2010. 3. HELLO SOFT INDIA, ITA NO. 645/HYD/2009. 4. COLT TECHNOLOGY, ITA NO. 609/DEL/2011. 5. SONATA SOFTWARE, ITA NO. 3514/MUM/2010 6. INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD., 2 7/JP/2011. 7 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. 11. OBJECTING TO BODHTREE CONSULTING LTD., LEARNED AR SUBMITTED THAT FROM THE INFORMATION OBTAINED U/S 133(6), IT I S AS PER SCHEDULE IV OF BALANCE SHEET, THE COMPANY HAS INVESTMENTS IN PERIGION, LIC, USA AND HAS MADE EXPORT SALES TO PERIGION LIC, USA OF RS. 133.90 LAKHS, WHICH WORKS OUT TO 34.68% OF THE TOTAL TURNO VER. HENCE, THIS COMPANY FAILS TO RPT FILTER OF MORE THAN 25% ADOPTE D BY TPO. IN SUPPORT OF SUCH CONTENTION, LEARNED AR RELIED ON TH E FOLLOWING DECISIONS: 1. NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., ITA NO. 472/HYD/2014 . 2. INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LOD., I TA NO. 1256/H/2010. 12. OBJECTING TO TATA ELXSI LTD., , LD. AR SUBMITTE D, THIS COMPANY CANNOT BE A COMPARABLE TO ASSESSEE BASING ON THE IN FORMATION OBTAINED IN RESPECT TO SECTION 133(6). IT WAS SUBMI TTED THAT IN THE INFORMATION SUBMITTED, THE AFORESAID COMPANY HAS IN DICATED THAT IT IS A SPECIALIZED EMBEDDED SOFTWARE DEVELOPMENT COMPANY AND DUE TO THE COMPLEX SEGMENTS IN WHICH THEY ARE OPERATING, I T IS NOT COMPARABLE TO ANY OTHER SOFTWARE DEVELOPMENT INDUST RY. IN SUPPORT OF SUCH CONTENTION, LD. AR SUBMITTED THAT THIS COMPANY HAS BEEN REJECTED BY DIFFERENT BENCHES OF THIS TRIBUNAL IN T HE FOLLOWING CASES: 1. NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., ITA NO. 472/HYD/2014 . 2. INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LOD., I TA NO. 1256/H/2010. 13. OBJECTING TO THIRDWARE SOLUTION LTD., LD. AR SU BMITTED THAT IT CANNOT BE COMPARED TO ASSESSEE, AS IT IS INVOLVED I N NOT ONLY IN DEVELOPMENT OF PRODUCT, BUT, ALSO IS ENGAGED IN DIS TRIBUTION ACTIVITY LIKE IMPLEMENTATION AND CUSTOMERS SERVICES, WHICH I NCLUDE TRAINING, 8 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. CUSTOMIZED DEVELOPMENT AND HELP DESK SERVICES FOR E RP SOFTWARE. IN SUPPORT OF SUCH CONTENTION, LD. AR RELIED ON THE FO LLOWING DECISIONS: 1. NESS INNOVATIVE BUSINESS SERVICES PVT. LTD., ITA NO. 472/HYD/2014 . 2. INVENSYS DEVELOPMENT CENTRE (INDIA) PVT. LOD., I TA NO. 1256/H/2010. 14. THE LEARNED DR, HOWEVER, SUBMITTED THAT TPO AFT ER UNDERTAKING OBJECTIVE ANALYSIS HAVING SELECTED COMPARABLES, THE Y CANNOT BE EXCLUDED. 15. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES ALONG WITH MATERIALS SUBMITTED BEFORE US IN THE FORM OF PAPER BOOK AND RECORD. HEREINAFTER, WE RECORD OUR FINDING ON EACH OF THE C OMPANIES OBJECTED BY ASSESSEE. 15A. EXENSYS SOFTWARE SOLUTIONS: I) IT IS EVIDENT FROM THE MATERIALS PLACED IN THE P APER BOOK THAT THERE IS MERGER OF HOLOOL LTD. AS A RESULT OF WHICH THE COMPANYS INCOME FOR THE YEAR UNDER CONSIDERATION WAS RS. 737 .79 LAKHS. CONSIDERING THESE ASPECTS, COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF INVENSYS DEVELOPMENT CENTRE(SUPRA) EXCLUDED THE COMPANY AFTER FOLLOWING ANOTHER COORDINATE BENCH DECISION IN CASE OF INTOTO SOFTWARE INDIA PVT. LTD. THE OBSERVATIONS MADE BY T HE COORDINATE BENCH IS EXTRACTED HEREUNDER: 11. AS REGARDS THE EXENSYS SOFTWARE SOLUTIONS LTD. , AS SEEN FROM THE PAPER BOOK PLACED ON RECORD, THERE IS A ME RGER OF HOLOOL INDIA LTD. AND IN THE DIRECTORS REPORT (PB- 951), THERE IS A CLEAR MENTION THAT THE COMPANYS INCOME OF RS. 737. 79 LAKHS IS POSSIBLE WITH THE AMALGAMATION OF HOLOOL INDIA LTD. IT WAS FURTHER MENTIONED THAT ASSESSEE COMPANY HAS GOT BEN EFIT BY ADVANCED LATEST TECHNICAL EXPERTISE ON VARIOUS TECH NOLOGY DOMAINS OF THE TRANSFEROR COMPANY. FURTHER, THAT CO MPANY HAS CHARGED DEFERRED EXPENDITURE AND THE AMOUNT CLAIMED IN THIS YEAR IS RS. 1.22 CRORES AS AGAINST RS. 30.21 LAKHS IN EARLIER 9 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. YEAR. THIS WAS CLEARLY STATED IN NOTES THAT CLAIM W AS WITH REFERENCE 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 ALONE CO NSIST OF RS. 5 CRORES, THEREFORE, INTANGIBLE ASSETS COMPRISING O F SUBSTANTIAL PART OF THIS COMPANYS ASSETS. NOT ONLY IN THE CORR ESPONDENCE WITH THE TPO THAT ASSESSEE EXPRESSED ITS INABILITY TO FURNISH SEPARATE ACCOUNTS FOR TWO AMALGAMATED COMPANIES BUT ALSO FURTHER IT HAS CLEARLY MENTIONED VIDE LETTER DATED 26-04-2007 TO THE TPO THAT THERE IS A GAP IN THE EXPENDITURE EXPE CTED TO INCUR AND ACTUAL EXPENDITURE INCURRED WHICH MADE THE COMP ANY RECORD HIGH OPERATING MARGIN ON COST. THESE FACTORS INDEED SUPPORT ASSESSEES CONTENTION THAT THIS EXCEPTIONAL PROFIT WITH THE FACT OF AMALGAMATION EFFECTED OPERATING PROFIT OF THE COMPANY AND THIS CANNOT BE TAKEN AS COMPARABLE. OTH ER ISSUES WERE ALSO ANALYSED AND ACCEPTED IN VARIOUS CASES AS RELIED UPON BY THE LEARNED COUNSEL. IN THE CASE OF INTOTO SOFTWARE INDIA PVT. LTD.,(SUPRA) THIS COMPARABLE CASE WAS AN ALYSED 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 SOFTWARE SOLUTIONS LIMITED AS ONE OF THE COMPARABLE COMPANIES WHEN PROPOSED BY THE TPO. HOWEVER, THE FA CT THAT THERE IS AN AMALGAMATION OF TWO COMPANIES I.E. , EXENSYS SOFTWARE LIMITED AND HOLOOL INDIA LIMITED, THE RESULTS OF WHICH, HAS RESULTED IN HIGH OPERATING MA RGIN CANNOT BE LOST SIGHT FOR. IT HAS BEEN HELD IN MANY CASES BY THIS TRIBUNAL AS WELL AS THE HIGHER FORUMS THAT TO COMPARE A COMPANY WITH ANOTHER COMPANY, BOTH THE COMPANIES HAVE TO BE BROUGHT ON PAR WITH EACH OTHER AFTER MAKING THE NECESSARY ADJUSTMENTS WHEREVER NECESSARY AND POSSIBLE. HOWEVER, WHERE THERE ARE EXTRAORDINARY EVENTS SUCH AS THIS, THEN THOSE EVENT S HAVE TO BE TAKEN NOTE OF AND WHERE NO ADJUSTMENT CAN BE MADE ON ACCOUNT OF THIS EXTRAORDINARY EVENT, THEN SUCH 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 T HERE IS AN EXTRAORDINARY EVENT WHICH HAS RESULTED IN THE HIGH OPERATING MARGIN OF THE COMPANY, WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE TO THE FILE OF THE ASSE SSING OFFICER/TPO FOR RECONSIDERATION. IF IT IS FOUND THA T THERE IS AN AMALGAMATION OF EXENSYS SOFTWARE LIMITED AND HOL OOL INDIA LIMITED AND FORMED AS ONE ENTITY VIZ.,EXENSYS 10 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. 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 OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST O F COMPARABLES. 12. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THA T THERE IS AN EXTRA-ORDINARY EVENT WHICH RESULTED IN HIGH OPERATI NG MARGIN OF THAT COMPANY AND WE, THEREFORE, DIRECT THE AO TO EX CLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. IN THE ABOVE REFERRED CASE OF INTOTO SOFTWARE INDIA PVT. LTD., COMPLETE D ETAILS WERE NOT PLACED ON RECORD, THEREFORE, THE MATTER WAS SEN T TO AO FOR VERIFICATION WHEREAS IN THIS CASE ASSESSEE HAS OBJE CTED EVEN BEFORE THE AO/ CIT(A), THEREFORE, THERE IS NO NEED TO SET ASIDE 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. II) AS THERE IS AN EXTRAORDINARY EVENT DURING THE Y EAR IMPACTING THE PROFITABILITY, FOLLOWING THE DECISIONS OF COORDINAT E BENCHES, NOTED ABOVE, AO IS DIRECTED TO EXCLUDE THE ABOVE COMPARA BLE AND RE-WORK OUT THE ARMS LENGTH MARGIN ACCORDINGLY. 15B. SANKHYA INFOTECH AND FOUR SOFT LTD., I) AFTER CONSIDERING THE SUBMISSIONS OF THE PARTIES AND PERUSING THE MATERIALS ON RECORD, WE ARE OF THE VIEW THAT TH ESE TWO COMPANIES CANNOT BE COMPARABLE TO A PURELY SOFTWARE DEVELOPME NT COMPANY LIKE THE ASSESSEE AS THEY ARE INTO DEVELOPMENT OF PRODUC TS. FOR THE VERY SAME REASON, DIFFERENT BENCHES OF THE ITAT, INCLUDI NG THE HYDERABAD BENCHES, IN DECISIONS CITED BY LD. AR, HAVE EXCLUDE D THESE TWO COMPANIES. FOLLOWING THE CONSISTENT VIEW OF THIS TR IBUNAL, WE ALSO DIRECT THE AO/TPO TO EXCLUDE THESE TWO COMPANIES FR OM THE LIST OF COMPARABLES. 11 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. 15C. THIRDWARE SOLUTIONS LTD., I) ON A PERUSAL OF THE ORDER PASSED BY THE CO-ORDIN ATE BENCH IN CASE OF INTOTO SOFTWARE INDIA PVT. LTD. (SUPRA), IT IS TO BE NOTED THAT THOUGH THE CO-ORDINATE BENCH OBSERVED THAT THERE AR E SOFTWARE PRODUCTS THAT THE COMPANY INVOICED DURING THE FY AN D THE FINANCIAL RESULTS ARE IN RESPECT OF SERVICES ONLY BUT STILL I T HELD THAT THOUGH THERE IS NO SALE OF SOFTWARE PRODUCTS DURING THE YEAR BUT THE SAID COMPANY MIGHT HAVE INCURRED EXPENDITURE TOWARDS DEVELOPMENT OF SOFTWARE PRODUCTS. THE CO-ORDINATE BENCH ON THAT BASIS DIRE CTED THE AO/TPO TO EXCLUDE THIRDWARE SOLUTIONS LTD. FROM LIST OF CO MPARABLES. THE SAME VIEW HAS ALSO BEEN EXPRESSED BY THE DELHI BENC H OF THE ITAT IN THE CASE OF COLT TECHNOLOGY SERVICES INDIA PVT. LTD . (SUPRA) AND IN CASE OF SONATA SOFTWARE (SUPRA). RESPECTFULLY FOLL OWING THE DECISIONS OF THE CO-ORDINATE BENCHES, AS NOTED ABOVE, WE DIRE CT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANY FROM THE LIST OF COMP ARABLES. 15D. BODHTREE CONSULTING LTD. I) WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES A ND PERUSED THE MATERIALS ON RECORD. THE GROUND ON WHICH THE L EARNED AR SEEKS FOR EXCLUSION OF THE AFORESAID COMPANY IS, ITS RELA TED PARTY TRANSACTION AS A PERCENTAGE TO THE TOTAL REVENUE IS 34.68% WHIC H IS MORE THAN THE ACCEPT/REJECT MATRIX OF MORE THAN 25% FIXED BY THE TPO. IT IS TO BE NOTED THAT IN FINAL FILTERS ADOPTED BY THE TPO IN P ARA 8.6 OF HIS ORDER HE HIMSELF HAS EXCLUDED COMPANIES HAVING RPT OF MOR E THAN 25%. WE, THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO EXAMINE THIS ASPECT AND EXCLUDE IT FROM THE LIST OF COMPARABLES IF ASSESSEE'S CONTENTION IS FOUND TO BE CORRECT. 12 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. 15E. TATA ELXSI LTD. I) WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S. FROM THE INFORMATIONS AVAILABLE ON RECORD IT IS EVIDENT THAT , THE AFORESAID COMPANY ITSELF ACKNOWLEDGES THAT IT IS A SPECIALIZE D EMBEDDED SOFTWARE DEVELOPMENT SERVICE PROVIDER, HENCE, CANNO T BE COMPARED WITH ANY OTHER SOFTWARE DEVELOPMENT COMPANY. THE CO MPANY ALSO INFORMED, BECAUSE OF SPECIALIZATION AND DIVERSE NAT URE OF ITS BUSINESS, IT IS VERY DIFFICULT TO SCALE UP ITS OPER ATIONS. CONSIDERING THE AFORESAID FACTUAL ASPECTS, COORDINATE BENCHES OF TH IS TRIBUNAL, INCLUDING THE HYDERABAD BENCHES, IN THE DECISIONS C ITED BY LD. AR HAVE HELD THIS COMPANY NOT TO BE A COMPARABLE TO A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER LIKE THE PRESENT ASSES SEE. RESPECTFULLY FOLLOWING THE CONSISTENT VIEW OF THE ITAT IN RESPEC T OF THE AFORESAID COMPANY, WE DIRECT AO/TPO TO EXCLUDE IT FROM LIST O F COMPARABLES. 16. WE DIRECT AO/TPO TO RECOMPUTE ALP IN TERMS WITH OUR DIRECTION HEREINABOVE AFTER ALLOWING ADJUSTMENT ON WORKING CA PITAL. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 26/11/2014. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 26 TH NOVEMBER, 2014 KV 13 ITA NO. 481/HYD/2011 M/S ADAPTECH INDIA (P) LTD. COPY TO:- 1) M/S ADAPTECH (INDIA) PVT. LTD., S-9-93, FLAT NO . 204, 2 ND FLOOR, SHAKTI SAI COMPLEX, CHAPEL ROAD, ABIDS, HYDERA BAD 500 001. 2) ITO, WARD 1(2), HYDERABAD 3) CIT(A)-III, HYDERABAD 4) CIT-I, HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.